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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020
OR
☐ 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)
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 August 4, 2020, there were 54,124,467 outstanding common shares of the registrant.

1
Table of Contents
TABLE OF CONTENTS


FIRST MERCHANTS CORPORATION


 
 
Page No.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 

2
Table of Contents
GLOSSARY OF DEFINED TERMS


FIRST MERCHANTS CORPORATION


ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Bank
First Merchants Bank, a wholly-owned subsidiary of the Corporation
CARES Act
Coronavirus Aid, Relief and Economic Security Act
CET1
Common Equity Tier 1
CMT
Constant Maturity Treasury
Corporation
First Merchants Corporation
COVID-19
2019 novel coronavirus disease, which was declared a pandemic by the World Health Organization on March 11, 2020.
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
Generally Accepted Accounting Principles
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.
RSA
Restricted Stock Awards
TEFRA
Tax Equity and Fiscal Responsibility Act



3
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)


 
CONSOLIDATED CONDENSED BALANCE SHEETS


June 30,
2020

December 31,
2019

(Unaudited)

ASSETS
 

 
Cash and cash equivalents
$
229,759


$
177,201

Interest-bearing time deposits
380,021


118,263

Investment securities available for sale
1,890,593


1,790,025

Investment securities held to maturity (fair value of $941,426 and $827,566)
898,786


806,038

Loans held for sale
901


9,037

Loans, net of allowance for loan losses of $121,119 and $80,284
9,177,422


8,379,026

Premises and equipment
112,548


113,055

Federal Home Loan Bank stock
28,736


28,736

Interest receivable
57,063


48,901

Goodwill
543,918


543,918

Other intangibles
31,937


34,962

Cash surrender value of life insurance
290,715


288,206

Other real estate owned
7,367


7,527

Tax asset, deferred and receivable
13,126


12,165

Other assets
156,486


100,194

TOTAL ASSETS
$
13,819,378


$
12,457,254

LIABILITIES
 

 
Deposits:
 

 
Noninterest-bearing
$
2,260,351


$
1,736,396

Interest-bearing
8,705,637


8,103,560

Total Deposits
10,965,988


9,839,956

Borrowings:
 

 
Federal funds purchased
—


55,000

Securities sold under repurchase agreements
181,150


187,946

Federal Home Loan Bank advances
400,817


351,072

Subordinated debentures and other borrowings
285,197


138,685

Total Borrowings
867,164


732,703

Interest payable
5,587


6,754

Other liabilities
171,544


91,404

Total Liabilities
12,010,283


10,670,817

COMMITMENTS AND CONTINGENT LIABILITIES





STOCKHOLDERS' EQUITY



Cumulative Preferred Stock, $1,000 par value, $1,000 liquidation value:
 

 
Authorized - 600 shares
 

 
Issued and outstanding - 125 shares
125


125

Common Stock, $.125 stated value:
 

 
Authorized - 100,000,000 shares
 

 
Issued and outstanding - 53,795,500 and 55,368,482 shares
6,724


6,921

Additional paid-in capital
1,002,962


1,054,997

Retained earnings
735,439


696,520

Accumulated other comprehensive income
63,845


27,874

Total Stockholders' Equity
1,809,095


1,786,437

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
13,819,378


$
12,457,254



See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.

4
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)



CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
INTEREST INCOME
 
 
 
 
 
 
 
Loans receivable:
 
 
 
 
 
 
 
Taxable
$
87,312

 
$
92,824

 
$
183,964

 
$
183,305

Tax exempt
5,359

 
4,244

 
10,674

 
8,397

Investment securities:
 
 
 
 
 
 
 
Taxable
6,147

 
6,998

 
13,778

 
13,093

Tax exempt
10,019

 
7,454

 
19,354

 
14,325

Deposits with financial institutions
134

 
784

 
709

 
1,659

Federal Home Loan Bank stock
281

 
335

 
580

 
673

Total Interest Income
109,252

 
112,639

 
229,059

 
221,452

INTEREST EXPENSE
 
 
 
 
 
 
 
Deposits
12,707

 
23,087

 
34,455

 
42,681

Federal funds purchased
2

 
117

 
113

 
210

Securities sold under repurchase agreements
92

 
342

 
444

 
672

Federal Home Loan Bank advances
1,794

 
1,692

 
3,568

 
3,506

Subordinated debentures and other borrowings
1,639

 
2,123

 
3,584

 
4,239

Total Interest Expense
16,234

 
27,361

 
42,164

 
51,308

NET INTEREST INCOME
93,018

 
85,278

 
186,895

 
170,144

Provision for loan losses
21,895

 
500

 
41,647

 
1,700

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
71,123

 
84,778

 
145,248

 
168,444

OTHER INCOME
 
 
 
 
 
 
 
Service charges on deposit accounts
4,312

 
5,437

 
10,282

 
10,532

Fiduciary and wealth management fees
5,601

 
3,931

 
11,586

 
7,749

Card payment fees
6,097

 
4,829

 
12,004

 
9,655

Net gains and fees on sales of loans
3,674

 
1,736

 
7,037

 
3,031

Derivative hedge fees
1,042

 
1,487

 
2,981

 
2,268

Other customer fees
333

 
341

 
731

 
780

Increase in cash surrender value of life insurance
1,231

 
927

 
2,591

 
1,916

Gains on life insurance benefits
95

 
19

 
95

 
19

Net realized gains on sales of available for sale securities
3,068

 
1,843

 
7,680

 
2,983

Other income
1,028

 
1,064

 
1,293

 
1,394

Total Other Income
26,481

 
21,614

 
56,280

 
40,327

OTHER EXPENSES
 
 
 
 
 
 
 
Salaries and employee benefits
35,698

 
32,709

 
74,941

 
65,737

Net occupancy
5,447

 
4,469

 
11,248

 
9,496

Equipment
4,489

 
4,117

 
8,833

 
7,759

Marketing
2,092

 
2,752

 
3,535

 
3,826

Outside data processing fees
2,618

 
3,929

 
6,817

 
7,613

Printing and office supplies
279

 
334

 
666

 
649

Intangible asset amortization
1,511

 
1,520

 
3,025

 
3,048

FDIC assessments
1,472

 
678

 
2,995

 
1,385

Other real estate owned and foreclosure expenses
684

 
903

 
1,189

 
2,068

Professional and other outside services
1,553

 
2,376

 
3,811

 
4,260

Other expenses
4,146

 
3,800

 
9,100

 
8,367

Total Other Expenses
59,989

 
57,587

 
126,160

 
114,208

INCOME BEFORE INCOME TAX
37,615

 
48,805

 
75,368

 
94,563

Income tax expense
4,623

 
7,749

 
8,113

 
14,690

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
$
32,992

 
$
41,056

 
$
67,255

 
$
79,873

Per Share Data:
 
 
 
 
 
 
 
Basic Net Income Available to Common Stockholders
$
0.62

 
$
0.83

 
$
1.24

 
$
1.62

Diluted Net Income Available to Common Stockholders
$
0.62

 
$
0.83

 
$
1.24

 
$
1.61

Cash Dividends Paid
$
0.26

 
$
0.26

 
$
0.52

 
$
0.48

Average Diluted Shares Outstanding (in thousands)
53,943

 
49,550

 
54,430

 
49,545



See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.


5
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
June 30,

Six Months Ended
June 30,
 
2020
 
2019

2020

2019
Net income
$
32,992


$
41,056


$
67,255


$
79,873

Other comprehensive income (loss), net of tax:
 

 

 

 
Unrealized holding gain (loss) on securities available for sale arising during the period, net of tax of $3,335, $4,822, $11,406, and $10,402
12,545


18,140


42,909


39,130

Unrealized gain (loss) on cash flow hedges arising during the period, net of tax of $31, $148, $306, and $230
(114
)

(553
)

(1,153
)

(862
)
Reclassification adjustment for net gains included in net income, net of tax of $595, $369, $1,538, and $596
(2,242
)

(1,390
)

(5,785
)

(2,244
)
Total other comprehensive income, net of tax
10,189


16,197


35,971


36,024

Comprehensive income
$
43,181


$
57,253


$
103,226


$
115,897



See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.


6
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)



CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

 
Three Months Ended June 30, 2020
 
Preferred
 
Common Stock
 
Additional
 
 
 
Accumulated
Other
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Paid in
Capital
 
Retained
Earnings
 
Comprehensive
Income
 
Total
Balances, March 31, 2020
125

 
$
125

 
53,754,137

 
$
6,719

 
$
1,000,942

 
$
716,518

 
$
53,656

 
$
1,777,960

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
—

 
—

 
—

 
32,992

 
—

 
32,992

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
10,189

 
10,189

Cash dividends on common stock ($.26 per share)
—

 
—

 
—

 
—

 
—

 
(14,071
)
 
—

 
(14,071
)
Share-based compensation
—

 
—

 
5,259

 
1

 
1,212

 
—

 
—

 
1,213

Stock issued under employee benefit plans
—

 
—

 
11,511

 
1

 
308

 
—

 
—

 
309

Stock issued under dividend reinvestment and
stock purchase plan
—

 
—

 
15,897

 
2

 
433

 
—

 
—

 
435

Stock options exercised
—

 
—

 
9,000

 
1

 
75

 
—

 
—

 
76

Restricted shares withheld for taxes
—

 
—

 
(304
)
 
—

 
(8
)
 
—

 
—

 
(8
)
Balances, June 30, 2020
125

 
$
125

 
53,795,500

 
$
6,724

 
$
1,002,962

 
$
735,439

 
$
63,845

 
$
1,809,095



 
Three Months Ended June 30, 2019
 
Preferred
 
Common Stock
 
Additional
 
 
 
Accumulated
Other
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Paid in
Capital
 
Retained
Earnings
 
Comprehensive
Loss
 
Total
Balances, March 31, 2019
125

 
$
125

 
49,428,468

 
$
6,179

 
$
839,919

 
$
611,220

 
$
(1,595
)
 
$
1,455,848

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
—

 
—

 
—

 
41,056

 
—

 
41,056

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
16,197

 
16,197

Cash dividends on common stock ($.26 per share)
—

 
—

 
—

 
—

 
—

 
(12,914
)
 
—

 
(12,914
)
Share-based compensation
—

 
—

 
4,978

 
1

 
843

 
—

 
—

 
844

Stock issued under employee benefit plans
—

 
—

 
5,908

 
—

 
188

 
—

 
—

 
188

Stock issued under dividend reinvestment and
stock purchase plan
—

 
—

 
10,178

 
1

 
368

 
—

 
—

 
369

Stock options exercised
—

 
—

 
7,500

 
1

 
64

 
—

 
—

 
65

Restricted shares withheld for taxes
—

 
—

 
(438
)
 
—

 
(17
)
 
—

 
—

 
(17
)
Balances, June 30, 2019
125

 
$
125

 
49,456,594

 
$
6,182

 
$
841,365

 
$
639,362

 
$
14,602

 
$
1,501,636



See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.











7
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)



 
Six Months Ended June 30, 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
—

 
—

 
—

 
—

 
—

 
67,255

 
—

 
67,255

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
35,971

 
35,971

Cash dividends on common stock ($.52 per share)
—

 
—

 
—

 
—

 
—

 
(28,336
)
 
—

 
(28,336
)
Repurchases of common stock
—

 
—

 
(1,634,437
)
 
(204
)
 
(55,708
)
 
—

 
—

 
(55,912
)
Share-based compensation
—

 
—

 
8,591

 
1

 
2,432

 
—

 
—

 
2,433

Stock issued under employee benefit plans
—

 
—

 
11,511

 
1

 
308

 
—

 
—

 
309

Stock issued under dividend reinvestment and
stock purchase plan
—

 
—

 
31,607

 
4

 
859

 
—

 
—

 
863

Stock options exercised
—

 
—

 
10,050

 
1

 
82

 
—

 
—

 
83

Restricted shares withheld for taxes
—

 
—

 
(304
)
 
—

 
(8
)
 
—

 
—

 
(8
)
Balances, June 30, 2020
125

 
$
125

 
53,795,500

 
$
6,724

 
$
1,002,962

 
$
735,439

 
$
63,845

 
$
1,809,095



 
Six Months Ended June 30, 2019
 
Preferred
 
Common Stock
 
Additional
 
 
 
Accumulated
Other
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Paid in
Capital
 
Retained
Earnings
 
Comprehensive
Loss
 
Total
Balances, December 31, 2018
125

 
$
125

 
49,349,800

 
$
6,169

 
$
840,052

 
$
583,336

 
$
(21,422
)
 
$
1,408,260

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
—

 
—

 
—

 
79,873

 
—

 
79,873

Other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
36,024

 
36,024

Cash dividends on common stock ($.48 per share)
—

 
—

 
—

 
—

 
—

 
(23,847
)
 
—

 
(23,847
)
Share-based compensation
—

 
—

 
108,638

 
14

 
1,811

 
—

 
—

 
1,825

Stock issued under employee benefit plans
—

 
—

 
11,247

 
1

 
361

 
—

 
—

 
362

Stock issued under dividend reinvestment and
stock purchase plan
—

 
—

 
18,686

 
2

 
707

 
—

 
—

 
709

Stock options exercised
—

 
—

 
11,200

 
1

 
104

 
—

 
—

 
105

Restricted shares withheld or taxes
—

 
—

 
(42,977
)
 
(5
)
 
(1,670
)
 
—

 
—

 
(1,675
)
Balances, June 30, 2019
125

 
$
125

 
49,456,594

 
$
6,182

 
$
841,365

 
$
639,362

 
$
14,602

 
$
1,501,636




8
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)



CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
 
Six Months Ended June 30,
 
June 30, 2020

June 30, 2019
Cash Flow From Operating Activities:
 

 
Net income
$
67,255


$
79,873

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

 
Provision for loan losses
41,647


1,700

Depreciation and amortization
5,435


4,379

Change in deferred taxes
(18,509
)

(398
)
Share-based compensation
2,433


1,825

Loans originated for sale
(322,288
)

(183,498
)
Proceeds from sales of loans held for sale
336,583


184,667

Gains on sales of loans held for sale
(6,159
)

(2,245
)
Gains on sales of securities available for sale
(7,680
)

(2,983
)
Increase in cash surrender of life insurance
(2,591
)

(1,916
)
Gains on life insurance benefits
(95
)

(19
)
Change in interest receivable
(8,162
)

(4,269
)
Change in interest payable
(1,167
)

1,133

Other adjustments
28,006


4,759

Net cash provided by operating activities
114,708


83,008

Cash Flows from Investing Activities:
 

 
Net change in interest-bearing deposits
(261,758
)

(92,651
)
Purchases of:


 
Securities available for sale
(341,116
)

(306,291
)
Securities held to maturity
(221,711
)

(238,559
)
Proceeds from sales of securities available for sale
167,390


82,052

Proceeds from maturities of:


 
Securities available for sale
135,398


53,910

Securities held to maturity
127,380


35,185

Net change in loans
(840,804
)

(288,195
)
Proceeds from the sale of other real estate owned
592


827

Proceeds from life insurance benefits
177


633

Other adjustments
(5,190
)

(3,691
)
Net cash used in investing activities
(1,239,642
)

(756,780
)
Cash Flows from Financing Activities:
 

 
Net change in :
 

 
Demand and savings deposits
1,419,771


400,314

Certificates of deposit and other time deposits
(293,739
)

164,421

Borrowings
467,056


533,010

Repayment of borrowings
(332,595
)

(410,689
)
Cash dividends on common stock
(28,336
)

(23,847
)
Stock issued under employee benefit plans
309


362

Stock issued under dividend reinvestment and stock purchase plans
863


709

Stock options exercised
83


105

Restricted shares withheld for taxes
(8
)

(1,675
)
Repurchase of common stock
(55,912
)

—

Net cash provided by financing activities
1,177,492


662,710

Net Change in Cash and Cash Equivalents
52,558


(11,062
)
Cash and Cash Equivalents, January 1
177,201


139,247

Cash and Cash Equivalents, June 30
$
229,759


$
128,185

Additional cash flow information:
 

 
Interest paid
$
43,331


$
50,175

Income tax paid (refunded)
(300
)

11,499

Loans transferred to other real estate owned
761


314

Fixed assets transferred to other real estate owned
262

 
965

Non-cash investing activities using trade date accounting
13,115


40,618

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

 
23,384



See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.

9
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, 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 filed with the Securities and Exchange Commission. The results of operations for the three and six months ended June 30, 2020, 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 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.

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 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. 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.

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 license 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 ending 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.


10
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.

The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed:
•
The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets, and
•
The accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets.

ASU No. 2018-14 is effective for fiscal years ending after December 15, 2020, for public business entities 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 of the standard did not have a significant effect on the Corporation’s disclosures.

FASB Accounting Standards Updates No. 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement

Summary - 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 in Topic 820. Certain disclosure requirements related to transfers between Level 1 and Level 2 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 end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

In addition, the amendments eliminate "at a minimum" from the phrase “an entity shall disclose at a minimum” to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration 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.



11
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
(Unaudited)




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. Based upon factors considered in the assessment and the general uncertainty as to the full extent of the COVID-19 pandemic and its effect on economic recovery, the Corporation has determined that it is not more likely than not that the fair value of the Corporation is less than the carrying value. Therefore, the Corporation concluded goodwill was not impaired at June 30, 2020, the details of which are included in NOTE 6. GOODWILL of these Notes to Consolidated Condensed Financial Statements.

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

On March 22, 2020, a statement was issued by the Bank's banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the "Interagency Statement") that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR 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 is offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include 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. During the six months ended June 30, 2020, modifications were completed on loans having a total aggregate balance of approximately $1.1 billion, or 12.1 percent of the loan portfolio. Details of the modifications are included in NOTE 4. LOANS AND ALLOWANCE of these Notes to Consolidated Condensed Financial Statements.

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 second quarter 2020 financial statements have been prepared under the existing incurred loss model. The temporary relief applicable to the Corporation’s compliance with CECL ends on the earlier of: (1) the termination date of the national emergency concerning the COVID-19 outbreak, declared by the President of the United States on March 13, 2020, under the National Emergencies Act; or (2) December 31, 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.


12
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.

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. The temporary relief applicable to the Corporation’s compliance with CECL ends on the earlier of: (1) the termination date of the national emergency concerning the COVID-19 outbreak, declared by the President of the United States on March 13, 2020, under the National Emergencies Act; or (2) December 31, 2020.

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

Summary - The FASB issued ASU No. 2020-04 to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. LIBOR and other interbank offered rates are widely used benchmarks or reference rates in the United States and globally. Trillions of dollars in loans, derivatives, and other financial contracts reference LIBOR, the benchmark interest rate banks use to make short-term loans to each other. With global capital markets expected to move away from LIBOR and other interbank offered rates 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.


NOTE 2
ACQUISITION

MBT Financial Corp.

On September 1, 2019, the Corporation acquired 100 percent of MBT. MBT, a Michigan corporation, merged with and into the Corporation, whereupon the separate corporate existence of MBT ceased and the Corporation survived. Immediately following the merger, MBT's wholly-owned subsidiary, Monroe Bank & Trust, merged with and into 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.


13
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
(Unaudited)




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 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 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

Other assets
 
6,011

Deposits
 
(1,105,926
)
Securities sold under repurchase agreements
 
(94,760
)
Federal Home Loan Bank advances
 
(10,853
)
Other liabilities
 
(9,807
)
Net tangible assets acquired
 
114,851

Core deposit intangible
 
16,527

Goodwill
 
98,563

Purchase price
 
$
229,941



Of the total purchase price, $16,527,000 was allocated to a core deposit 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 is 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




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.

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





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)




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 amortized cost, gross unrealized gains, gross unrealized losses and approximate market 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 June 30, 2020
 
 
 
 
 
 
 
U.S. Treasury
$
598


$
2


$
—


$
600

U.S. Government-sponsored agency securities
2,385

 
68

 
—

 
2,453

State and municipal
1,026,917

 
67,439

 
138

 
1,094,218

U.S. Government-sponsored mortgage-backed securities
761,391

 
28,870

 
27

 
790,234

Corporate obligations
3,031

 
57

 
—

 
3,088

Total available for sale
1,794,322

 
96,436

 
165

 
1,890,593

Held to maturity at June 30, 2020
 
 
 
 
 
 
 
U.S. Government-sponsored agency securities
10,100

 
3

 
—

 
10,103

State and municipal
374,214

 
23,779

 
43

 
397,950

U.S. Government-sponsored mortgage-backed securities
512,972

 
18,932

 
31

 
531,873

Foreign investment
1,500

 
—

 
—

 
1,500

Total held to maturity
898,786

 
42,714

 
74

 
941,426

Total Investment Securities
$
2,693,108

 
$
139,150

 
$
239

 
$
2,832,019



 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available for sale at December 31, 2019
 
 
 
 
 
 
 
U.S. Government-sponsored agency securities
$
38,529

 
$
346

 
$
—

 
$
38,875

State and municipal
859,511

 
41,092

 
807

 
899,796

U.S. Government-sponsored mortgage-backed securities
842,349

 
10,378

 
1,404

 
851,323

Corporate obligations
31

 
—

 
—

 
31

Total available for sale
1,740,420

 
51,816

 
2,211

 
1,790,025

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

 
—

 
—

 
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




The increase in unrealized gains from December 31, 2019 to June 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.


15
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 amortized cost and fair value of available for sale and held to maturity securities at June 30, 2020 and December 31, 2019, 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 June 30,2020:
 
 
 
 
 
 
 
Due in one year or less
$
1,947

 
$
1,961

 
$
12,191

 
$
12,217

Due after one through five years
4,589

 
4,718

 
23,639

 
24,224

Due after five through ten years
49,425

 
52,485

 
95,694

 
101,354

Due after ten years
976,970

 
1,041,195

 
254,290

 
271,758

 
1,032,931

 
1,100,359

 
385,814

 
409,553

U.S. Government-sponsored mortgage-backed securities
761,391

 
790,234

 
512,972

 
531,873

Total Investment Securities
$
1,794,322

 
$
1,890,593

 
$
898,786

 
$
941,426



 
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




The carrying value of securities pledged as collateral, to secure borrowings and for other purposes, was $1,100,278,000 at June 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 June 30, 2020 compared to December 31, 2019.

The book value of securities sold under agreements to repurchase amounted to $171,346,000 at June 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 six months ended June 30, 2020 and 2019 are shown below.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Sales and Redemptions of Available for Sale Securities:
 
 
 
 
 
 
 
Gross gains
$
3,068

 
$
1,843

 
$
7,680

 
$
2,983

Gross losses
—


—


—


—




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 June 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 June 30, 2020
 

 

 

 

 

 
State and municipal
$
23,745


$
138


$
—


$
—


$
23,745


$
138

U.S. Government-sponsored mortgage-backed securities
15,239


27


—


—


15,239


27

Total Temporarily Impaired Available for Sale Securities
38,984


165


—


—


38,984


165

Temporarily Impaired Held to Maturity Securities at June 30,2020
 

 

 

 

 

 
State and municipal
2,633


43


—


—


2,633


43

U.S. Government-sponsored mortgage-backed securities
10,198


31


—


—


10,198


31

Total Temporarily Impaired Held to Maturity Securities
12,831


74


—


—


12,831


74

Total Temporarily Impaired Investment Securities
$
51,815


$
239


$
—


$
—


$
51,815


$
239


16
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


$
—


$
—


$
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


—


—


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




Certain investments in debt and equity securities are reported in the financial statements at an amount less than their historical cost as indicated in the table below.
 
June 30, 2020
 
December 31, 2019
Investments reported at less than historical cost:
 
 
 
Historical cost
$
52,054

 
$
398,172

Fair value
51,815

 
395,416

Gross unrealized losses
$
239

 
$
2,756

Percent of the Corporation's investment portfolio
1.9
%
 
15.2
%


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 June 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
  
The unrealized losses on the Corporation's investments in securities of state and political subdivisions 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 June 30, 2020. The state and municipal securities portfolio contains unrealized losses of $138,000 on thirteen securities and $43,000 on two securities in the available for sale and held to maturity portfolios, respectively. At June 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.

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 June 30, 2020. The mortgage-backed securities portfolio contains unrealized losses of $27,000 on one security in the available for sale portfolio and $31,000 on three securities in the held to maturity portfolio. All these securities are issued by a U.S. government-sponsored entity and have an implicit 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.

 

17
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 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, 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. The Corporation’s primary lending focus is small business and middle market commercial, commercial real estate 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 June 30, 2020, and December 31, 2019, were $901,000 and $9,037,000, respectively.

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

June 30, 2020

December 31, 2019
Commercial and industrial loans
$
2,898,329


$
2,109,879

Agricultural production financing and other loans to farmers
93,838


93,861

Real estate loans:



Construction
640,560


787,568

Commercial and farmland
3,239,998


3,052,698

Residential
1,145,187


1,143,217

Home equity
532,314


588,984

Individuals' loans for household and other personal expenditures
123,611


135,989

Public finance and other commercial loans
624,704


547,114

  Loans
9,298,541


8,459,310

Allowance for loan losses
(121,119
)

(80,284
)
             Net Loans
$
9,177,422


$
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 in accordance with the terms of the program. As of June 30, 2020, the Bank had funded over 5,000 PPP loans representing $882.9 million, which is net of deferred processing fees and costs of $24.6 million, and is primarily included in the commercial and industrial loan class. Under the terms of the PPP, the loans are fully guaranteed by the U.S. government. The Bank borrowed from the Paycheck Protection Program Liquidity Facility ("PPPL Facility") to supplement liquidity to fund the PPP loans. The outstanding balance of the PPPL Facility borrowings at June 30, 2020 was $166.9 million. Details of the borrowings from the PPPL Facility are included in the "LIQUIDITY" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations on this Form 10-Q.

Allowance, Credit Quality and Loan Portfolio

The original implementation date 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 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 2020 financial statements have been prepared under the existing incurred loss model. The temporary relief applicable to the Corporation’s compliance with CECL ends on the earlier of: (1) the termination date of the national emergency concerning the COVID-19 outbreak, declared by the President of the United States on March 13, 2020, under the National Emergencies Act; or (2) December 31, 2020.


18
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 the loan portfolio at June 30, 2020. The process for determining 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 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: 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.


19
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
(Unaudited)



The following tables summarize changes in the allowance for loan losses by loan segment for the three and six months ended June 30, 2020 and June 30, 2019:
 
Three Months Ended June 30, 2020
 
Commercial

Commercial
Real Estate

Consumer

Residential

Total
Allowance for loan losses:
 

 

 

 

 
Balances, March 31, 2020
$
38,431


$
37,907


$
5,752


$
17,364


$
99,454

Provision for losses
6,240


8,945


2,783


3,927


21,895

Recoveries on loans
106


107


56


48


317

Loans charged off
(99
)

(41
)

(146
)

(261
)

(547
)
Balances, June 30, 2020
$
44,678


$
46,918


$
8,445


$
21,078


$
121,119



Six Months Ended June 30, 2020
 
Commercial

Commercial
Real Estate

Consumer

Residential

Total
Allowance for loan losses:
 

 

 

 

 
Balances, December 31, 2019
$
32,902


$
28,778


$
4,035


$
14,569


$
80,284

Provision for losses
11,941


18,139


4,707


6,860


41,647

Recoveries on loans
549


225


98


118


990

Loans charged off
(714
)

(224
)

(395
)

(469
)

(1,802
)
Balances, June 30, 2020
$
44,678


$
46,918


$
8,445


$
21,078


$
121,119



Three Months Ended June 30, 2019
 
Commercial

Commercial
Real Estate

Consumer

Residential

Total
Allowance for loan losses:
 

 

 

 

 
Balances, March 31, 2019
$
33,069


$
29,434


$
4,026


$
14,373


$
80,902

Provision for losses
100


320


36


44


500

Recoveries on loans
344


778


100


212


1,434

Loans charged off
(311
)

(1,001
)

(92
)

(158
)

(1,562
)
Balances, June 30, 2019
$
33,202


$
29,531


$
4,070


$
14,471


$
81,274


 
Six Months Ended June 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
336


1,089


141


134


1,700

Recoveries on loans
886


1,023


218


312


2,439

Loans charged off
(677
)

(2,190
)

(253
)

(297
)

(3,417
)
Balances, June 30, 2019
$
33,202


$
29,531


$
4,070


$
14,471


$
81,274




The tables below show the Corporation’s allowance for loan losses and loan portfolio by loan segment as of the periods indicated.
 
June 30, 2020
 
Commercial

Commercial
Real Estate

Consumer

Residential

Total
Allowance Balances:
 

 

 

 

 
Individually evaluated for impairment
$
7,466


$
4,943


$
—


$
590


$
12,999

Collectively evaluated for impairment
37,212


41,975


8,445


20,488


108,120

Total Allowance for Loan Losses
$
44,678


$
46,918


$
8,445


$
21,078


$
121,119

Loan Balances:








 
Individually evaluated for impairment
$
15,312


$
26,512


$
3


$
3,453


$
45,280

Collectively evaluated for impairment
3,600,395


3,847,884


123,608


1,673,093


9,244,980

Loans acquired with deteriorated credit quality
1,164


6,162


—


955


8,281

Loans
$
3,616,871


$
3,880,558


$
123,611


$
1,677,501


$
9,298,541


20
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
$
—


$
231


$
—


$
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




Loans individually evaluated for impairment are comprised of commercial and consumer loans deemed impaired in accordance with ASC 310-10. This includes loans acquired with deteriorated credit quality totaling $3,783,000 with $192,000 of related allowance for loan losses at June 30, 2020 and $2,819,000 with $124,000 related allowance for loan losses at December 31, 2019.

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 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 monitors and evaluates commercial real estate loans based on collateral and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Consumer and Residential

With respect to residential loans that are secured by 1-4 family residences and 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. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment on loans secured by 1-4 family residences can 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, in management’s judgment, the collateral value and financial condition of the borrower do not justify accruing interest. 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 consecutive months of performance. Payments received on impaired accruing or delinquent loans are applied to interest income as accrued.




21
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:

June 30, 2020

December 31, 2019
Commercial and industrial loans
$
16,354


$
1,255

Agriculture production financing and other loans to farmers
—


183

Real estate loans:


 
Construction
119


977

Commercial and farmland
25,405


7,007

Residential
5,773


5,062

Home equity
2,376


1,421

Individuals' loans for household and other personal expenditures
75


44

Total
$
50,102


$
15,949




Non-accrual loans increased $34.2 million from December 31, 2019, primarily due to three relationships that were moved to non-accrual during the second quarter of 2020. Two relationships totaling $17.0 million are in the senior living sector. The third relationship totaling $14.4 million is 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 under $500,000 and consumer loans, with the exception of troubled debt restructures, are not individually evaluated for impairment.

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, 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 tables show the composition of the Corporation’s impaired loans, related allowance and interest income recognized while impaired by loan class as of the periods indicated:
 
June 30, 2020
 
Unpaid
Principal
Balance

Recorded
Investment

Related
Allowance
Impaired loans with no related allowance:
 

 


Commercial and industrial loans
$
5,024


$
5,008


$
—

Real estate Loans:





Commercial and farmland
9,675


7,602


—

Residential
75


59


—

Individuals' loans for household and other personal expenditures
3


3


—

Total
$
14,777


$
12,672


$
—

Impaired loans with related allowance:


 


Commercial and industrial loans
$
10,342


$
10,304


$
7,466

Real estate Loans:





Commercial and farmland
19,650


18,910


4,943

Residential
3,134


3,009


520

Home equity
401

 
385


70

Total
$
33,527


$
32,608


$
12,999

Total Impaired Loans
$
48,304


$
45,280


$
12,999


22
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


—

Total
$
5,139

 
$
4,357

 
$
689

Total Impaired Loans
$
15,094

 
$
11,709

 
$
689

 
Three Months Ended June 30, 2020

Six Months Ended June 30, 2020
 
Average
Recorded Investment

Interest
Income Recognized

Average
Recorded Investment

Interest
Income Recognized
Impaired loans with no related allowance:
 

 


 

 
Commercial and industrial loans
$
5,008


$
—


$
5,008


$
—

Real estate Loans:







Commercial and farmland
7,637


37


7,910


75

Residential
59


1


59


2

Individuals' loans for household and other personal expenditures
3


—


3


—

Total
$
12,707


$
38


$
12,980


$
77

Impaired loans with related allowance:


 

 

 
Commercial and industrial loans
$
10,304


$
—


$
10,304


$
—

Real estate Loans:







Commercial and farmland
18,910


—


19,156


—

Residential
3,020


19


3,032


38

Home equity
387


3


390


6

Total
$
32,621


$
22


$
32,882


$
44

Total Impaired Loans
$
45,328


$
60


$
45,862


$
121

 
Three Months Ended June 30, 2019

Six Months Ended June 30, 2019
 
Average
Recorded Investment

Interest
Income Recognized

Average
Recorded Investment

Interest
Income Recognized
Impaired loans with no related allowance:
 

 


 

 
Commercial and industrial loans
$
1,013


$
—


$
1,021


$
—

Agriculture production financing and other loans to farmers
668


—


672


—

Real estate Loans:







Construction
7,314


—


7,792


—

Commercial and farmland
7,998


39


8,187


78

Residential
38


1


38


2

Home equity
49


—


49


—

Public finance and other commercial loans
353


—


353


—

Total
$
17,433


$
40


$
18,112


$
80

Impaired loans with related allowance:







Commercial and industrial loans
$
940


$
—


$
940


$
—

Agriculture production financing and other loans to farmers
2,117


—


2,134


—

Real estate Loans:







Commercial and farmland
157


—


164


—

Residential
2,021


16


2,029


32

Home equity
351


3


352


6

Individuals' loans for household and other personal expenditures
14


—


15


—

Total
$
5,600


$
19


$
5,634


$
38

Total Impaired Loans
$
23,033


$
59


$
23,746


$
118



23
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 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 loss to assess the overall credit quality of large commercial loans. All large commercial credit grades are reviewed at a minimum of once a year for pass grade loans. Loans with grades below pass are reviewed more frequently depending on the grade. A description of the general characteristics of these grades is as follows:

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

•
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. Other characteristics may include:
 
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 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.

•
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.


24
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
(Unaudited)




The following tables summarize the credit quality of the Corporation’s loan portfolio, by loan class 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.
 
June 30, 2020
 
Commercial
Pass

Commercial
Special
Mention

Commercial Substandard

Commercial
Doubtful

Commercial Loss

Consumer Performing

Consumer
Non-Performing

Total
Commercial and industrial loans
$
2,722,071


$
87,069


$
89,189


$
—


$
—


$
—


$
—


$
2,898,329

Agriculture production financing and other loans to farmers
78,645


6,082


9,111


—


—


—


—


93,838

Real estate Loans:














 
Construction
590,889


791


20,229


—


—


28,536


115


640,560

Commercial and farmland
3,035,363


103,921


99,330


—


—


1,384


—


3,239,998

Residential
189,053


1,637


6,684


—


—


943,222


4,591


1,145,187

Home equity
20,214


—


1,342


—


—


508,457


2,301


532,314

Individuals' loans for household and other personal expenditures
—


—


—


—


—


123,524


87


123,611

Public finance and other commercial loans
624,655


49


—


—


—


—


—


624,704

Loans
$
7,260,890


$
199,549


$
225,885


$
—


$
—


$
1,605,123


$
7,094


$
9,298,541


 
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


$
—


$
—


$
—


$
—


$
2,109,879

Agriculture production financing and other loans to farmers
78,558


5,626


9,677


—


—


—


—


93,861

Real estate Loans:


 







 

 

 
Construction
749,249


1,613


1,634


—


—


35,072


—


787,568

Commercial and farmland
2,894,366


57,776


98,575


—


—


1,981


—


3,052,698

Residential
196,710


877


8,075


—


—


932,743


4,812


1,143,217

Home equity
24,211


257


682


—


—


562,507


1,327


588,984

Individuals' loans for household and other personal expenditures
—


—


—


—


—


135,944


45


135,989

Public finance and other commercial loans
547,114


—


—


—


—


—


—


547,114

Loans
$
6,447,193


$
147,328


$
190,358


$
—


$
—


$
1,668,247


$
6,184


$
8,459,310






25
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 June 30, 2020, and December 31, 2019:
 
June 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
$
2,871,366


$
9,435


$
1,038


$
136


$
16,354


$
26,963


$
2,898,329

Agriculture production financing and other loans to farmers
92,735


1,103


—


—


—


1,103


93,838

Real estate loans:










 


Construction
634,706


5,235


500


—


119


5,854


640,560

Commercial and farmland
3,172,688


18,948


18,458


4,499


25,405


67,310


3,239,998

Residential
1,136,131


2,679


329


275


5,773


9,056


1,145,187

Home equity
526,096


2,110


1,673


59


2,376


6,218


532,314

Individuals' loans for household and other personal expenditures
123,126


227


171


12


75


485


123,611

Public finance and other commercial loans
624,704


—


—


—


—


—


624,704

Loans
$
9,181,552


$
39,737


$
22,169


$
4,981


$
50,102


$
116,989


$
9,298,541

 
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


—


—


—


183


183


93,861

Real estate loans:
 

 

 

 





 
Construction
784,961


1,630


—


—


977


2,607


787,568

Commercial and farmland
3,043,318


2,324


49


—


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


—


—


—


—


—


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 loan delinquencies increased in the 30-59, 60-89 and 90 days or more past due categories during the first six months of 2020. Four relationships totaling $28.6 million, which matured in May 2020 and were in the process of renewal at June 30, 2020, were included in the $25.1 million increase in the 30-59 days past due. Three real estate secured loans, totaling $17.8 million, accounted for 69 percent of the increase in the 60-89 days and 90 days or more past due categories. These loans were either well secured, in the process of collection, or under review for a deferral.

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 TDR 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 is offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include 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. Under the applicable guidance, none of these loans were considered troubled debt restructures at June 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 on 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.

26
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 June 30, 2020

Six Months Ended June 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
$
654


$
654


3


$
654


$
654


3

Real estate loans:
 

 

 

 

 

 
Commercial and farmland
565


565


2


565


565


2

Residential
300


337


6


300


337


6

Total
$
1,519


$
1,556


11


$
1,519


$
1,556


11


Three Months Ended June 30, 2019

Six Months Ended June 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
$
171

 
$
164

 
4


$
261


$
254


5

Total
$
171

 
$
164

 
4


$
261


$
254


5




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

Three Months Ended June 30, 2020

Term
Modification

Rate
Modification

Combination

Total
Modification
Commercial and industrial loans
$
652

 
$
—

 
$
—

 
$
652

Real estate loans:
 

 

 


Commercial and farmland
565


—


—


565

Residential
—


111


223


334

Total
$
1,217


$
111


$
223


$
1,551


Six Months Ended June 30, 2020

Term
Modification

Rate
Modification

Combination

Total
Modification
Commercial and industrial loans
$
652


$
—


$
—


$
652

Real estate loans:
 

 

 


Commercial and farmland
565


—


—


565

Residential
—


111


223


334

Total
$
1,217


$
111


$
223


$
1,551


Three Months Ended June 30, 2019

Term
Modification

Rate
Modification

Combination

Total
Modification
Real estate loans:
 

 

 


Residential
$
—


$
—


$
164


$
164

Total
$
—


$
—


$
164


$
164



Six Months Ended June 30, 2019

Term
Modification

Rate
Modification

Combination

Total
Modification
Real estate loans:




 

 
Residential
$
—


$
89


$
164


$
253

Total
$
—


$
89


$
164


$
253




Commercial and industrial loans made up 42 percent of the post-modification balance of troubled debt restructured loans made in the three and six months ended June 30, 2020. 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 six months ended June 30, 2019.


27
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 the twelve months ended June 30, 2020 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 June 30, 2020

Six Months Ended June 30, 2020

Number of Loans

Recorded Balance

Number of Loans

Recorded Balance
Commercial and industrial loans
1


$
268


1


$
268

Total
1


$
268


1


$
268


Three Months Ended June 30, 2019

Six Months Ended June 30, 2019

Number of Loans

Recorded Balance

Number of Loans

Recorded Balance
Real estate loans:
 

 

 


 
Residential
1
 
$
62


1


$
62

Total
1
 
$
62


1


$
62




For potential consumer loan restructures, impairment evaluation occurs prior to modification. Any subsequent impairment is typically addressed through 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 calculation of the non-accrual and delinquency trend environmental allowance allocation. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $492,000 and $1,033,000 at June 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 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.


NOTE 5

PURCHASED CREDIT IMPAIRED LOANS

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.

The carrying amount of Purchased Credit Impaired Loans as of June 30, 2020 was $12.1 million with allowance for loan loss of $192,000. 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 June 30, 2020
 
Six Months Ended June 30, 2020
Accretable yield beginning balance
$
1,926

 
$
2,132

Additions
—

 
$
—

Accretion
(1,033
)
 
(1,418
)
Reclassification from nonaccretable
653

 
839

Disposals
—

 
(7
)
Accretable yield ending balance
$
1,546

 
$
1,546




Three Months Ended June 30, 2019

Six Months Ended June 30, 2019
Accretable yield beginning balance
$
2,064


$
2,143

Additions
—


—

Accretion
(638
)

(1,218
)
Reclassification from nonaccretable
488


989

Disposals
—


—

Accretable yield ending balance
$
1,914


$
1,914



28
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 loans acquired during the six months ended June 30, 2020 and 2019, for which it was probable that all contractually required payments would not be collected.
 
 


NOTE 6

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 acquisition on September, 1, 2019 resulted in $98,563,000 of goodwill, which includes a measurement period adjustment of $719,000. 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 June 30, 2020.

2019
Balance, January 1
$
445,355

Goodwill acquired
97,844

Measurement period adjustment
719

Balance, December 31
$
543,918




The Corporation adopted ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill, January 1, 2020 and has assessed the recent economic impact and market conditions from the COVID-19 pandemic. In the assessment, the Corporation considered factors such as: (a) our market capitalization; (b) observable market transactions and control premium multiples; (c) changes to the regulatory environment; and (d) the nature and amount of government support that has been and is expected to be provided in the future. Additionally, the Corporation considered the general uncertainty as to the full extent of the COVID-19 pandemic and its effect on economic recovery. The Corporation concluded that it is not more likely than not that the fair value of the Corporation is less than the carrying value; therefore, goodwill was not impaired at June 30, 2020.


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 MBT 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.

June 30, 2020

December 31, 2019
Gross carrying amount
$
102,396


$
85,869

Core deposit intangibles acquired
—


16,527

Accumulated amortization
(70,459
)

(67,434
)
Total core deposit intangibles
$
31,937


$
34,962




The core deposit 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 six months ended June 30, 2020 was $1,511,000 and $3,025,000, respectively, compared to $1,520,000 and $3,048,000, respectively, for the three and six months ended June 30, 2019. Estimated future amortization expense is summarized as follows:
 
Amortization Expense
2020
$
2,962

2021
5,429

2022
5,027

2023
4,827

2024
4,241

After 2024
9,451

 
$
31,937





29
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 8

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.

Cash Flow Hedges of Interest Rate Risk

The Corporation’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Corporation primarily uses interest rate swaps and interest rate caps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the payment of fixed amounts to a counterparty in exchange for the Corporation receiving variable payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. As of June 30, 2020 and December 31, 2019, the Corporation had four interest rate swaps with a notional amount of $46.0 million that were designated as cash flow hedges.

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, $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 $20.0 million of interest rate swaps were used to hedge the variable cash outflows (LIBOR-based) associated with two Federal Home Loan Bank advances. During the three and six months ended June 30, 2020 and 2019, 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 $1,046,000 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 June 30, 2020 and December 31, 2019, the notional amount of customer-facing swaps was approximately $817,463,000 and $692,287,000, respectively.  These amounts are offset with third party counterparties, as described above.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Corporation’s derivative financial instruments, as well as their classification on the Balance Sheet, as of June 30, 2020, and December 31, 2019.
 
Asset Derivatives

Liability Derivatives
 
June 30, 2020

December 31, 2019

June 30, 2020

December 31, 2019
 
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 Assets

$
—


Other Liabilities

$
2,547


Other Liabilities

$
1,444

Derivatives not designated as hedging instruments:
 

 

 

 

 

 

 

 
Interest rate contracts
Other Assets

$
84,658


Other Assets

$
27,855


Other Liabilities

$
84,658


Other Liabilities

$
27,855




30
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
(Unaudited)




The Corporation's derivative asset and derivative liability relating to interest rate contracts increased $56.8 million and $57.9 million, respectively, from December 31, 2019. The increases are primarily due to a $125.2 million increase in the related outstanding notional balance. Additionally, yield curve rates used for valuation purposes were lower at each term point as of June 30, 2020 compared to December 31, 2019. This was primarily the result of investors seeking the safety 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
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative
(Effective Portion)
Three Months Ended

Six Months Ended
June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019
Interest Rate Products
$
(145
)

$
(701
)

$
(1,459
)

$
(1,092
)



Effect of Derivative Instruments on the Income Statement

The Corporation did not recognize any gains or losses from derivative financial instruments in the Consolidated Condensed Statements of Income for the three and six months ended June 30, 2020 and 2019.

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
June 30, 2020

Three Months Ended
June 30, 2019
Interest rate contracts

Interest Expense

$
(231
)

$
(84
)
Derivatives Designated as
Hedging Instruments under
FASB ASC 815-10

Location of Gain (Loss)
Recognized Income on
Derivative

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


Six Months Ended
June 30, 2020

Six Months Ended
June 30, 2019
Interest rate contracts

Interest Expense

$
(357
)

$
(143
)



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

Credit-risk-related Contingent Features

The Corporation has agreements with certain of its derivative counterparties that contain a provision where if the Corporation fails to maintain its status as a well or adequately capitalized institution, then the Corporation could be required to terminate or fully collateralize all outstanding derivative contracts. Additionally, the Corporation has agreements with certain of its derivative counterparties that contain a provision where if the Corporation defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Corporation could also be declared in default on its derivative obligations. As of June 30, 2020, the termination value of derivatives in a net liability position related to these agreements was $87,754,000. As of June 30, 2020, the Corporation has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $80,855,000. While the Corporation did not breach any of these provisions as of June 30, 2020, if it had, the Corporation could have been required to settle its obligations under the agreements at their termination value.


NOTE 9 

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.


31
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 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 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.

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.


32
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
(Unaudited)




Interest Rate Derivative Agreements

See information regarding the Corporation’s interest rate derivative products in NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS of these Notes to Consolidated Condensed Financial Statements. The following table presents the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements fall at June 30, 2020, and December 31, 2019.
 
 
 
Fair Value Measurements Using:
June 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
$
600

 
$
—

 
$
600

 
$
—

U.S. Government-sponsored agency securities
2,453

 
—

 
2,453

 
—

State and municipal
1,094,218

 
—

 
1,091,753

 
2,465

U.S. Government-sponsored mortgage-backed securities
790,234

 
—

 
790,230

 
4

Corporate obligations
3,088

 
—

 
3,057

 
31

Interest rate swap asset
84,658

 
—

 
84,658

 
—

Interest rate swap liability
87,205

 
—

 
87,205

 
—


 
 
 
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)
Available for sale securities:
 
 
 
 
 
 
 
U.S. Government-sponsored agency securities
$
38,875


$
—


$
38,875


$
—

State and municipal
899,796

 
—

 
896,938

 
2,858

U.S. Government-sponsored mortgage-backed securities
851,323

 
—

 
851,319

 
4

Corporate obligations
31

 
—

 
—

 
31

Interest rate swap asset
27,855

 
—

 
27,855

 
—

Interest rate swap liability
29,299

 
—

 
29,299

 
—




There were no gains or losses included in earnings that were attributable to the changes in unrealized gains or losses related to assets or
liabilities held at June 30, 2020 or December 31, 2019.

Level 3 Reconciliation

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying
balance sheets using significant unobservable Level 3 inputs for the three and six months ended June 30, 2020 and 2019.
 
Available for Sale Securities
 
Three Months Ended
 
Six Months Ended
 
June 30, 2020
 
June 30, 2019
 
June 30, 2020
 
June 30, 2019
Balance at beginning of the period
$
2,528

 
$
2,936

 
$
2,892

 
$
3,328

Included in other comprehensive income
(30
)
 
37

 
(50
)
 
80

Principal payments
2

 
2

 
(342
)
 
(433
)
Ending balance
$
2,500

 
$
2,975

 
$
2,500

 
$
2,975




Transfers Between Levels

There were no transfers in or out of Level 3 for the three and six months ended June 30, 2020 and 2019.

33
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
(Unaudited)



 
 
 
 
 
 
 
 

Nonrecurring Measurements

Following is a description of valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy for June 30, 2020, and December 31, 2019.
 

 

Fair Value Measurements Using
June 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)

$
22,690


$
—


$
—


$
22,690

Other real estate owned

464


—


—


464

 
 

 

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


$
—


$
—


$
5,653

Other real estate owned

194


—


—


194


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 and 2020, 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.


34
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
(Unaudited)




Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements, other than goodwill, at June 30, 2020 and December 31, 2019.
June 30, 2020
Fair Value
 
Valuation Technique
 
Unobservable Inputs
 
Range (Weighted-Average)
State and municipal securities
$
2,465

 
Discounted cash flow
 
Maturity/Call date
 
1 month to 15 yrs

 
 
 
 
 
US Muni BQ curve
 
A- to BBB-

 
 
 
 
 
Discount rate
 
1.5% - 4%

 
 
 
 
 
Weighted-average coupon
 
3.87
%
 
 
 
 
 
 
 
 
Corporate obligations and U.S. Government-sponsored mortgage-backed securities
$
35

 
Discounted cash flow
 
Risk free rate
 
3 month LIBOR

 
 
 
 
 
plus premium for illiquidity
 
plus 200bps

 
 
 
 
 
Weighted-average coupon
 
—
%
 
 
 
 
 
 
 
 
Impaired loans (collateral dependent)
$
22,690

 
Collateral based measurements
 
Discount to reflect current market conditions and ultimate collectability
 
0% - 10%

 
 
 
 
 
Weighted-average discount by loan balance
 
10
%
 
 
 
 
 
 
 
 
Other real estate owned
$
464

 
Appraisals
 
Discount to reflect current market conditions
 
0% - 72%

 
 
 
 
 
Weighted-average discount of other real estate owned balance
 
32
%


December 31, 2019
Fair Value
 
Valuation Technique
 
Unobservable Inputs
 
Range (Weighted-Average)
State and municipal securities
$
2,858

 
Discounted cash flow
 
Maturity/Call date
 
1 month to 15 yrs

 
 
 
 
 
US Muni BQ curve
 
A- to BBB-

 
 
 
 
 
Discount rate
 
2% - 5%

 
 
 
 
 
Weighted-average coupon
 
3.92
%
 
 
 
 
 
 
 
 
Corporate obligations and U.S Government-sponsored mortgage-backed securities
$
35

 
Discounted cash flow
 
Risk free rate
 
3 month LIBOR

 
 
 
 
 
plus premium for illiquidity
 
plus 200bps

 
 
 
 
 
Weighted-average coupon
 
—
%
 
 
 
 
 
 
 
 
Impaired loans (collateral dependent)
$
5,653

 
Collateral based measurements
 
Discount to reflect current market conditions and ultimate collectability
 
0% - 10%

 
 
 
 
 
Weighted-average discount by loan balance
 
1
%
 
 
 
 
 
 
 
 
Other real estate owned
$
194

 
Appraisals
 
Discount to reflect current market conditions
 
0% - 37%

 
 
 
 
 
Weighted-average discount of other real estate owned balance
 
37
%



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.


35
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
(Unaudited)




Fair Value of Financial Instruments

The following table presents estimated fair values of the Corporation’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2020, and December 31, 2019.



June 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
$
229,759


$
229,759


$
—


$
—

Interest-bearing time deposits
380,021


380,021


—


—

Investment securities available for sale
1,890,593


—


1,888,093


2,500

Investment securities held to maturity
898,786


—


920,146


21,280

Loans held for sale
901


—


901


—

Loans
9,177,422


—


—


9,253,762

Federal Home Loan Bank stock
28,736


—


28,736


—

Interest rate swap asset
84,658


—


84,658


—

Interest receivable
57,063


—


57,063


—

Liabilities:
 

 

 

 
Deposits
$
10,965,988


$
9,566,516


$
1,395,002


$
—

Borrowings:




 

 
Securities sold under repurchase agreements
181,150


—


181,150


—

Federal Home Loan Bank advances
400,817


—


415,737


—

Subordinated debentures and other borrowings
285,197


—


276,306


—

Interest rate swap liability
87,205


—


87,205


—

Interest payable
5,587


—


5,587


—





December 31, 2019


 


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
$
177,201


$
177,201


$
—


$
—

Interest-bearing time deposits
118,263


118,263


—


—

Investment securities available for sale
1,790,025


—


1,787,132


2,893

Investment securities held to maturity
806,038


—


799,884


27,682

Loans held for sale
9,037


—


9,037


—

Loans
8,379,026


—


—


8,335,340

Federal Home Loan Bank stock
28,736


—


28,736


—

Interest rate swap asset
27,855


—


27,855


—

Interest receivable
48,901


—


48,901


—

Liabilities:
 

 

 

 
Deposits
$
9,839,956


$
8,146,745


$
1,675,202


$
—

Borrowings:
 

 

 

 
Federal funds purchased
55,000


—


55,000


—

Securities sold under repurchase agreements
187,946


—


187,801


—

Federal Home Loan Bank advances
351,072


—


352,581


—

Subordinated debentures and other borrowings
138,685


—


123,571


—

Interest rate swap liability
29,299


—


29,299


—

Interest payable
6,754


—


6,754


—





36
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 10

TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS

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

June 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
$
178,749


$
750


$
—


$
1,651


$
181,150



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


$
—


$
7,672


$
1,542


$
187,946




NOTE 11 
 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
The following table summarizes the changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, as of June 30, 2020 and 2019:
 
Accumulated Other Comprehensive Income (Loss)
 
Unrealized Gains (Losses) on Securities Available for Sale
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized Gains (Losses) on Defined Benefit Plans
 
Total
Balance at December 31, 2019
$
38,872

 
$
(1,141
)
 
$
(9,857
)
 
$
27,874

Other comprehensive income before reclassifications
42,909

 
(1,153
)
 
—

 
41,756

Amounts reclassified from accumulated other comprehensive income
(6,067
)
 
282

 
—

 
(5,785
)
Period change
36,842

 
(871
)
 
—

 
35,971

Balance at June 30, 2020
$
75,714

 
$
(2,012
)
 
$
(9,857
)
 
$
63,845

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
$
(6,343
)
 
$
(559
)
 
$
(14,520
)
 
$
(21,422
)
Other comprehensive income before reclassifications
39,130

 
(862
)
 
—

 
38,268

Amounts reclassified from accumulated other comprehensive income
(2,357
)
 
113

 
—

 
(2,244
)
Period change
36,773

 
(749
)
 
—

 
36,024

Balance at June 30, 2019
$
30,430

 
$
(1,308
)
 
$
(14,520
)
 
$
14,602




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 six months ended June 30, 2020 and 2019.
 
 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss) For the Three Months Ended June 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
 
$
3,068

 
$
1,843

 
Other income - net realized gains on sales of available for sale securities
Related income tax expense
 
(644
)
 
(387
)
 
Income tax expense
 
 
$
2,424

 
$
1,456

 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on cash flow hedges (2)
 
 
 
 
 
 
Interest rate contracts
 
$
(231
)
 
$
(84
)
 
Interest expense - subordinated debentures and term loans
Related income tax benefit
 
49

 
18

 
Income tax expense
 
 
$
(182
)
 
$
(66
)
 
 
 
 
 
 
 
 
 
Total reclassifications for the period, net of tax
 
$
2,242

 
$
1,390

 
 

37
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 Six Months Ended June 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
 
$
7,680


$
2,983


Other income - net realized gains on sales of available for sale securities
Related income tax expense
 
(1,613
)

(626
)

Income tax expense

 
$
6,067


$
2,357




 





Unrealized gains (losses) on cash flow hedges (2)
 





Interest rate contracts
 
$
(357
)

$
(143
)

Interest expense - subordinated debentures and term loans
Related income tax benefit
 
75


30


Income tax expense

 
$
(282
)

$
(113
)



 





Total reclassifications for the period, net of tax
 
$
5,785


$
2,244




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

NOTE 12

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 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.

Compensation expense related to unvested share-based awards is recorded by recognizing the unamortized grant date fair value of these awards over the remaining service periods of those awards, with no change in historical reported fair values and earnings.  Awards are valued at fair value in accordance with provisions of share-based compensation guidance and are recognized on a straight-line basis over the service periods of each award. To complete the exercise of vested stock options, RSA’s and ESPP options, the Corporation generally issues new shares from its authorized but unissued share pool. Share-based compensation for the three and six months ended June 30, 2020 was $1,214,000 and $2,433,000, respectively, compared to $844,000 and $1,825,000, respectively, for the three and six months ended June 30, 2019. 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 percent for the six months ended June 30, 2020, based on historical experience.


38
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
(Unaudited)




The following table summarizes the components of the Corporation's share-based compensation awards recorded as an expense and the income tax benefit of such awards.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Stock and ESPP Options
 
 
 
 
 
 
 
Pre-tax compensation expense
$
12

 
$
25

 
$
53

 
$
36

Income tax benefit
(29
)
 
(41
)
 
(29
)
 
(57
)
Stock and ESPP option expense, net of income taxes
$
(17
)
 
$
(16
)
 
$
24

 
$
(21
)
Restricted Stock Awards
 
 
 
 
 
 
 
Pre-tax compensation expense
$
1,202

 
$
819

 
$
2,380

 
$
1,789

Income tax benefit
(236
)
 
(186
)
 
(493
)
 
(726
)
Restricted stock awards expense, net of income taxes
$
966

 
$
633

 
$
1,887

 
$
1,063

Total Share-Based Compensation
 
 
 
 
 
 
 
Pre-tax compensation expense
$
1,214

 
$
844

 
$
2,433

 
$
1,825

Income tax benefit
(265
)
 
(227
)
 
(522
)
 
(783
)
Total share-based compensation expense, net of income taxes
$
949

 
$
617

 
$
1,911

 
$
1,042




As of June 30, 2020, unrecognized compensation expense related to RSAs was $5,595,000 and is expected to be recognized over a weighted-average period of 1.21 years. The Corporation did not have any unrecognized compensation expense related to stock options as of June 30, 2020.

Stock option activity under the Corporation's stock option plans as of June 30, 2020 and changes during the six months ended June 30, 2020, 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 June 30, 2020
49,300

 
$
14.57

 
2.32
 
$
640,876

Vested and Expected to Vest at June 30,2020
49,300

 
$
14.57

 
2.32
 
$
640,876

Exercisable at June 30, 2020
49,300

 
$
14.57

 
2.32
 
$
640,876




The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Corporation's closing stock price on the last trading day of the first six months of 2020 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their stock options on June 30, 2020.  The amount of aggregate intrinsic value will change based on the fair market value of the Corporation's common stock.

The aggregate intrinsic value of stock options exercised during the six months ended June 30, 2020 and 2019 was $197,000 and $308,000, respectively. Cash receipts of stock options exercised during this same period were $83,000 and $105,000, respectively.

The following table summarizes information on unvested RSAs outstanding as of June 30, 2020:
 
Number of Shares
 
Weighted-Average
Grant Date Fair Value
Unvested RSAs at January 1, 2020
351,048

 
$
40.67

Granted
14,657

 
$
27.00

Vested
(8,591
)
 
$
40.09

Forfeited
(525
)
 
$
40.44

Unvested RSAs at June 30, 2020
356,589

 
$
40.62




The grant date fair value of ESPP options was estimated to be approximately $12,000 at the beginning of the April 1, 2020 quarterly offering period. The ESPP options vested during the three months ending June 30, 2020, leaving no unrecognized compensation expense related to unvested ESPP options at June 30, 2020.



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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

INCOME TAX

The following table summarizes the major components creating differences between income taxes at the federal statutory and the effective tax rate recorded in the consolidated statements of income for the three and six months ended June 30, 2020 and 2019:

Three Months Ended
June 30,

Six Months Ended
June 30,
 
2020

2019

2020

2019
Reconciliation of Federal Statutory to Actual Tax Expense:
 

 

 

 
Federal statutory income tax at 21%
$
7,899


$
10,249


$
15,827


$
19,858

Tax-exempt interest income
(3,199
)

(2,403
)

(6,221
)

(4,670
)
Share-based compensation
(6
)

(41
)

(6
)

(391
)
Tax-exempt earnings and gains on life insurance
(278
)

(199
)

(564
)

(406
)
Tax credits
(89
)

(63
)

(150
)

(141
)
CARES Act - NOL carryback rate differential
—


—


(1,178
)

—

Other
296


206


405


440

Actual Tax Expense
$
4,623


$
7,749


$
8,113


$
14,690













Effective Tax Rate
12.3
%

15.9
%

10.8
%

15.5
%



NOTE 14
 
NET INCOME PER SHARE
 
Basic net income per share is computed by dividing net income by the weighted-average shares outstanding during the reporting period. Diluted net income per share is computed by dividing net income by the combination of the weighted-average shares outstanding during the reporting period and all potentially dilutive common shares. Potentially dilutive common shares include stock options and RSAs issued under the Corporation's share-based compensation plans. Potentially dilutive common shares are excluded from the computation of diluted earnings per share in the periods where the effect would be antidilutive.

The following table reconciles basic and diluted net income per share for the three and six months ended June 30, 2020 and 2019.
 
Three Months Ended June 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
$
32,992

 
53,762,913

 
$
0.62

 
$
41,056

 
49,432,167

 
$
0.83

Effect of potentially dilutive stock options and restricted stock awards
 
 
179,654

 
 
 
 
 
117,720

 
 
Diluted net income per share
$
32,992

 
53,942,567

 
$
0.62

 
$
41,056

 
49,549,887

 
$
0.83

 
Six Months Ended June 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
$
67,255

 
54,247,493

 
$
1.24

 
$
79,873

 
49,400,770

 
$
1.62

Effect of potentially dilutive stock options and restricted stock awards
 
 
182,026

 
 
 
 
 
144,382

 
 
Diluted net income per share
$
67,255

 
54,429,519

 
$
1.24

 
$
79,873

 
49,545,152

 
$
1.61




For the three and six months ended June 30, 2020 and 2019, there were no 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.

A discussion of the Bank’s Settlement Agreement and Agreed Order with the United States Department of Justice is contained in the "REGULATORY DEVELOPMENTS" section of Part I, Item 2. Management’s Discussion & Analysis of this Quarterly Report on Form 10-Q.

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Table of Contents
PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 goals, intentions and expectations;
•
statements regarding our business plan and growth strategies;
•
statements regarding the asset quality of our loan and investment portfolios; and
•
estimates of our 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. 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 six months ended June 30, 2020, 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.
 

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PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


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 127 banking locations in thirty Indiana, two Illinois, two Ohio and two Michigan counties. In addition to its traditional branch network, the Corporation offers comprehensive electronic and mobile delivery channels to its customers. The Corporation’s business activities are currently limited to one significant business segment, which is community banking.

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

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.

The Bank’s deposit accounts are insured up to the applicable limits by the Deposit Insurance Fund (the “DIF”) 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 ultimate 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 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.


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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 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 16 basis points on June 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, 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 in accordance with the terms of the program. Under the terms of the PPP, the loans are fully guaranteed by the U.S. government. As of June 30, 2020, the Bank had funded over 5,000 PPP loans representing $882.9 million, which is net of deferred processing fees and costs of $24.6 million. The weighted-average deferred processing fee on PPP loans was approximately 3.28 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 second quarter of 2020, the Corporation recognized $2.7 million in PPP loan related deferred processing fees (net of amortization of related deferred origination costs) as a yield adjustment and this amount is included in interest income on loans.

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: (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 have been set at $250,000. 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 September 30, 2020 to access funds under the PPPL Facility, unless otherwise extended by the Federal Reserve and the Department of the Treasury. The Bank borrowed from the PPPL Facility to supplement liquidity to fund the PPP loans and as of June 30, 2020 the outstanding balance of such borrowings was $166.9 million. Details of the borrowings from the PPPL Facility are included in the "LIQUIDITY" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.


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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 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 TDR 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 is offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include 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. During the six months ended June 30, 2020, modifications were completed on loans having a total aggregate balance of approximately $1.1 billion, or 12.1 percent of the loan portfolio. Details of the modifications are included in "LOAN QUALITY/PROVISION FOR LOAN LOSSES" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Optional Delay of CECL Implementation

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 Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which would have become effective for the Corporation as of January 1, 2020. 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 and second quarter 2020 financial statements have been prepared under the existing incurred loss model. The temporary relief applicable to the Corporation’s compliance with CECL ends on the earlier of: (1) the termination date of the national emergency concerning the COVID-19 outbreak, declared by the President of the United States on March 13, 2020, under the National Emergencies Act; or (2) December 31, 2020.

Regulatory Capital

CECL Model. As part of the March 27, 2020 joint statement of federal banking regulators discussed above, an interim final rule that allows 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 elect to mitigate the estimated cumulative regulatory capital effects of CECL for up to two years. This two-year delay is in addition to the three-year transition period that federal banking regulators had already made available. While the Corporation has elected to delay implementation of ASU No. 2016-13 as described above, it expects to take advantage of the additional time permitted by this interim final rule, which will largely delay the effects of CECL on its regulatory capital through December 31, 2021. Beginning on January 1, 2022, the Corporation will be required to phase 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 fully phased in by January 1, 2025. Under the interim final rule, the amount of adjustments to regulatory capital that can be deferred until the phase-in period includes both the initial impact of our adoption of CECL, and 25 percent of subsequent changes in our allowance for credit losses during each quarter following implementation of CECL until December 31, 2021.

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 June 30, 2020, risk-weighted assets included $882.9 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 permitted to assign a zero percent risk weight to PPP loans pledged to the PPPL Facility for purposes of determining risk-weighted assets and risk-based capital ratios, and to exclude such pledged PPP loans from total average assets for purposes of determining the leverage ratio. At June 30, 2020, approximately $138.4 million of average PPP loans pledged to the PPPL Facility were excluded from total assets for the leverage ratio.

RESULTS OF OPERATIONS

Executive Summary

The Corporation reported second quarter 2020 net income of $33.0 million, compared to $41.1 million during the second quarter of 2019. Diluted earnings per share for the second quarter totaled $0.62 per share, compared to $0.83 per diluted share during the same period in 2019. Year-to-date net income totaled $67.3 million, compared to $79.9 million during the same period of 2019. Diluted earnings per share for the six months ended June 30, 2020 was $1.24 per share, compared to $1.61 per share during the same period in 2019.


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Table of Contents
PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


As of June 30, 2020, total assets equaled $13.8 billion, an increase of $1.4 billion, or 10.9 percent, from December 31, 2019. The Corporation's total loan portfolio increased $831.1 million, or 9.8 percent from December 31, 2019. The Corporation originated approximately $882.9 million of PPP loans, which were primarily included in the commercial and industrial loan class. 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 and other earning assets 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 "EARNING ASSETS" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Interest-bearing time deposits increased $261.8 million from December 31, 2019 due to excess liquidity from deposit growth and an increase in wholesale funding. Additionally, total investment securities increased $193.3 million from December 31, 2019 as a portion of the excess 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 $46.7 million increase in net unrealized gains on the available for sale portfolio. The net increase in unrealized gains from December 31, 2019 to June 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 value of securities in the portfolio.

The Corporation’s allowance for loan losses totaled $121.1 million as of June 30, 2020 and equaled 1.30 percent of total loans.  The Corporation's provision expense and net charge-offs for the three months ended June 30, 2020 were $21.9 million and $230,000, respectively, compared to provision expense and net charge-offs of $500,000 and $128,000, respectively, during the same period of 2019. For the six months ended June 30, 2020, the Corporation's provision expense and net charge-offs were $41.6 million and $812,000, respectively, compared to provision expense and net charge-offs of $1.7 million and $978,000 during the same period in 2019. 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.

Non-accrual loans totaled $50.1 million, an increase of $34.2 million from December 31, 2019. The increase is primarily due to three customer relationships moving to non-accrual in the second quarter that total $31.4 million, two of which were in the senior living space and one in the university logo apparel industry. Details of the Allowance for Loan Losses and non-performing loans are discussed within the “LOAN QUALITY/PROVISION FOR LOAN LOSSES” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Corporation's other assets increased $56.3 million from December 31, 2019. The Corporation's derivative asset (recorded in other assets) and derivative liability (recorded in other liabilities) related to interest rate contracts increased $56.8 million and $57.9 million, respectively, from December 31, 2019. The increases are primarily due to a $125.2 million increase in the related outstanding notional balance. Additionally, yield curve rates used for valuation purposes were lower at each term point as of June 30, 2020 compared to December 31, 2019. This was primarily the result of investors seeking the safety of U.S. Treasuries as containment efforts related to the COVID-19 outbreak began to significantly reduce economic activity.

As of June 30, 2020, total deposits equaled $11.0 billion, an increase of $1.1 billion from December 31, 2019. The Corporation experienced increases from December 31, 2019 in demand and savings accounts of $1.0 billion and $382.0 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 $202.0 million and $91.7 million, respectively, from December 31, 2019.

Total borrowings increased $134.5 million as of June 30, 2020, compared to December 31, 2019. The Bank borrowed from the PPPL Facility to supplement liquidity to fund the PPP loans. The outstanding balance of the PPPL Facility borrowings at June 30, 2020 was $166.9 million. Additionally, Federal Home Loan Bank advances increased $49.7 million compared to December 31, 2019. Offsetting this increase, the Corporation redeemed $20.0 million of subordinated debentures. Of the redemptions, $10.0 million was for a partial redemption of debentures held 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 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 June 30, 2020 increased $80.1 million compared to December 31, 2019. The Corporation postponed the first two estimated corporate income tax payments in 2020 as allowed by the IRS, which resulted in an increase in the accrued federal income tax liability by $17.4 million when compared to December 31, 2019. The Corporation also accrued $13.1 million of trade date accounting related to investment securities purchases as of June 30, 2020, of which, there was no accrual at December 31, 2019. Additionally, as noted above, the derivative hedge liability increased $57.9 million from December 31, 2019.

The Corporation was able 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.


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Table of Contents
PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


NET INTEREST INCOME

Net interest income is the most significant component of our earnings, comprising 77 percent of revenues for the six months ended June 30, 2020. 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 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 three and six months ended June 30, 2020, the increase in earning assets from the same periods in 2019 was primarily attributable to the September 2019 MBT acquisition, an increase in loans as a result of $882.9 million of PPP loans and excess liquidity generated from growth in deposits and wholesale funding that was used to invest in the securities 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 second quarter of 2020, asset yields decreased 114 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 99 basis points as of March 31, 2020 to 16 basis points on June 30, 2020. Moreover, the addition of $883 million of PPP loans negatively impacted margin by 6 basis points. Interest costs decreased 76 basis points, contributing to a 38 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 1.32 percent and 2.79 percent, respectively, during the three months ended June 30, 2019, to 0.59 percent and 1.55 percent, respectively, during the same period in 2020. Net interest margin, on a tax equivalent basis, decreased to 3.19 percent for the second quarter of 2020 compared to 3.71 percent during the same period in 2019.

The Corporation recognized fair value accretion income on purchased loans, which is included in interest income, of $3.7 million, which accounted for 12 basis points of net interest margin in the second quarter of 2020. Comparatively, the Corporation recognized $2.2 million of accretion income for the second quarter of 2019, or 9 basis points of net interest margin.

In the six months ended June 30, 2020 asset yields decreased 84 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 240 basis points as of June 30, 2019 to 16 basis points on June 30, 2020. Interest costs decreased 48 basis points, contributing to a 36 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 1.26 percent and 2.76 percent, respectively, during the six months ended June 30, 2019 to 0.82 percent and 1.86 percent, respectively, during the same period in 2020. Net interest margin, on a tax equivalent basis, decreased to 3.32 percent for the six months ended June 30, 2020 compared to 3.78 percent during the same period in 2019.

The Corporation recognized fair value accretion income on purchased loans, which is included in interest income, of $7.2 million, which accounted for 12 basis points of net interest margin for the six months ended June 30, 2020. Comparatively, the Corporation recognized $4.5 million of accretion income for the six months ended June 30, 2019, or 10 basis points of net interest margin.





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Table of Contents
PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


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 June 30, 2020, and 2019.
(Dollars in Thousands)
Three Months Ended
 
June 30, 2020
 
June 30, 2019
 
Average Balance
 
Interest
 Income /
Expense
 
Average
Rate
 
Average Balance
 
Interest
 Income /
Expense
 
Average
Rate
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing time deposits
$
378,489


$
134


0.14
%

$
144,626


$
784


2.17
%
Federal Home Loan Bank stock
28,736


281


3.91


24,588


335


5.45

Investment Securities: (1)











Taxable
1,282,080


6,147


1.92


1,054,068


6,998


2.66

Tax-Exempt (2)
1,317,527


12,682


3.85


910,295


9,435


4.15

Total Investment Securities
2,599,607


18,829


2.90


1,964,363


16,433


3.35

Loans held for sale
12,630


131


4.15


11,430


127


4.44

Loans: (3)











Commercial
6,890,010


69,463


4.03


5,419,169


74,638


5.51

Real Estate Mortgage
887,257


10,122


4.56


766,528


8,686


4.53

Installment
724,165


7,596


4.20


677,133


9,373


5.54

Tax-Exempt (2)
666,548


6,784


4.07


511,055


5,372


4.20

Total Loans
9,180,610


94,096


4.10


7,385,315


98,196


5.32

Total Earning Assets
12,187,442


113,340


3.72
%

9,518,892


115,748


4.86
%
Net unrealized gain (loss) on securities available for sale
56,807







12,841





Allowance for loan losses
(106,858
)






(81,691
)




Cash and cash equivalents
303,491







130,987





Premises and equipment
113,528







91,563





Other assets
1,100,912







827,356





Total Assets
$
13,655,322







$
10,499,948





Liabilities:











Interest-bearing deposits:











Interest-bearing deposits
$
3,951,819


$
4,186


0.42
%

$
2,935,925


$
8,541


1.16
%
Money market deposits
1,673,104


1,696


0.41


1,220,020


3,509


1.15

Savings deposits
1,521,312


596


0.16


1,164,901


2,525


0.87

Certificates and other time deposits
1,498,002


6,229


1.66


1,652,203


8,512


2.06

Total Interest-bearing Deposits
8,644,237


12,707


0.59


6,973,049


23,087


1.32

Borrowings
909,258


3,527


1.55


613,446


4,274


2.79

Total Interest-bearing Liabilities
9,553,495


16,234


0.68


7,586,495


27,361


1.44

Noninterest-bearing deposits
2,145,672







1,348,410





Other liabilities
160,646







85,789





Total Liabilities
11,859,813







9,020,694





Stockholders' Equity
1,795,509







1,479,254





Total Liabilities and Stockholders' Equity
$
13,655,322


16,234





$
10,499,948


27,361




Net Interest Income (FTE)


$
97,106






$
88,387



Net Interest Spread (FTE) (4)




3.04
%





3.42
%
 











Net Interest Margin (FTE):











Interest Income (FTE) / Average Earning Assets




3.72
%





4.86
%
Interest Expense / Average Earning Assets




0.53
%





1.15
%
Net Interest Margin (FTE) (5)




3.19
%





3.71
%
 
 
 
 
 
 
 
 
 
 
 
 
(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 $4,088 and $3,109 for the three months ended June 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.

47
Table of Contents
PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(Dollars in Thousands)
Six Months Ended
 
June 30, 2020
 
June 30, 2019
 
Average Balance
 
Interest
 Income /
Expense
 
Average
Rate
 
Average Balance
 
Interest
 Income /
Expense
 
Average
Rate
Assets:
 
 
 
 
 
 
 
 
 
 
 
Federal Funds Sold
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing time deposits
$
269,174

 
$
709

 
0.53
%
 
$
145,277

 
$
1,659

 
2.28
%
Federal Reserve and Federal Home Loan Bank stock
28,736

 
580

 
4.04

 
24,588

 
673

 
5.47

Investment Securities: (1)
 
 
 
 
 
 
 
 
 
 
 
Taxable
1,325,313

 
13,778

 
2.08

 
978,654

 
13,093

 
2.68

Tax-Exempt (2)
1,263,122

 
24,499

 
3.88

 
869,914

 
18,133

 
4.17

Total Investment Securities
2,588,435

 
38,277

 
2.96

 
1,848,568

 
31,226

 
3.38

Loans held for sale
14,924

 
324

 
4.34

 
10,697

 
239

 
4.47

Loans: (3)
 
 
 
 
 
 
 
 
 
 
 
Commercial
6,562,673

 
146,415

 
4.46

 
5,364,884

 
147,394

 
5.49

Real Estate Mortgage
878,956

 
20,524

 
4.67

 
755,070

 
17,008

 
4.51

Installment
741,889

 
16,701

 
4.50

 
671,125

 
18,664

 
5.56

Tax-Exempt (2)
655,149

 
13,511

 
4.12

 
506,370

 
10,629

 
4.20

Total Loans
8,853,591

 
197,475

 
4.46

 
7,308,146

 
193,934

 
5.31

Total Earning Assets
11,739,936

 
237,041

 
4.04
%
 
9,326,579

 
227,492

 
4.88
%
Net unrealized gain on securities available for sale
52,732

 
 
 
 
 
3,963

 
 
 
 
Allowance for loan losses
(94,009
)
 
 
 
 
 
(81,301
)
 
 
 
 
Cash and cash equivalents
231,624

 
 
 
 
 
124,143

 
 
 
 
Premises and equipment
113,670

 
 
 
 
 
92,395

 
 
 
 
Other assets
1,070,327

 
 
 
 
 
825,426

 
 
 
 
Total Assets
$
13,114,280

 
 
 
 
 
$
10,291,205

 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$
3,770,530

 
$
12,461

 
0.66
%
 
$
2,813,541

 
$
15,560

 
1.11
%
Money market deposits
1,604,474

 
5,479

 
0.68

 
1,179,765

 
6,291

 
1.07

Savings deposits
1,473,183

 
2,424

 
0.33

 
1,157,852

 
4,792

 
0.83

Certificates and other time deposits
1,582,322

 
14,091

 
1.78

 
1,609,130

 
16,038

 
1.99

Total Interest-bearing Deposits
8,430,509

 
34,455

 
0.82

 
6,760,288

 
42,681

 
1.26

Borrowings
828,721

 
7,709

 
1.86

 
624,192

 
8,627

 
2.76

Total Interest-bearing Liabilities
9,259,230

 
42,164

 
0.91

 
7,384,480

 
51,308

 
1.39

Noninterest-bearing deposits
1,907,582

 
 
 
 
 
1,369,832

 
 
 
 
Other liabilities
141,505

 
 
 
 
 
82,260

 
 
 
 
Total Liabilities
11,308,317

 
 
 
 
 
8,836,572

 
 
 
 
Stockholders' Equity
1,805,963

 
 
 
 
 
1,454,633

 
 
 
 
Total Liabilities and Stockholders' Equity
$
13,114,280

 
42,164

 


 
$
10,291,205

 
51,308

 


Net Interest Income (FTE)
 
 
$
194,877

 
 
 
 
 
$
176,184

 
 
Net Interest Spread (FTE) (4)
 
 
 
 
3.13
%
 
 
 
 
 
3.49
%
 
 
 
 
 
 
 
 
 
 
 
 
Net Interest Margin (FTE):











Interest Income (FTE) / Average Earning Assets




4.04
%





4.88
%
Interest Expense / Average Earning Assets




0.72
%





1.10
%
Net Interest Margin (FTE) (5)




3.32
%





3.78
%
 
 
 
 
 
 
 
 
 
 
 
 
(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 $7,982 and $6,040 for the six months ended June 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.


48
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 $4.9 million, or 22.5 percent, in the second quarter of 2020, compared to the second quarter of 2019. The larger customer base resulting from the MBT acquisition on September 1, 2019, in addition to organic growth, resulted in an increase in customer related line items such as fiduciary and wealth management fees and card payment fees of $2.9 million in the second quarter of 2020 when compared to the same period in 2019. Additionally, the larger customer base and the low mortgage interest rate environment combined to produce an increase of $1.9 million in net gains and fees on sales of loans. Details of the Corporation's 2019 acquisition can be found in NOTE 2. ACQUISITION 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 $1.2 million in the second quarter of 2020 when compared to the same period in 2019.

These increases were partially offset by a decrease in service charges on deposit accounts of $1.1 million in the second 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 June 30, 2020.

During the first six months of 2020, non-interest income increased $16.0 million, or 39.6 percent, compared to the same period in 2019. The MBT acquisition on September 1, 2019 resulted in an increase in customer related line items such as fiduciary and wealth management fees and card payment fees of $6.2 million. Additionally, the larger customer base and the low mortgage interest rate environment combined to produce an increase of $4.0 million in net gains and fees on sales of loans. Finally, net realized gains on the sales of available for sale securities increased by $4.7 million and derivative hedge fees increased by $713,000 in the first six months of 2020 when compared to the same period in 2019.

NON-INTEREST EXPENSE

Non-interest expense increased $2.4 million, or 4.2 percent, in the second quarter of 2020, compared to the second quarter of 2019.  The acquisition of MBT was the largest contributing factor to the increase. The larger franchise and growth in our customer base resulted in increases in most non-interest expense categories with the largest increases in salaries and employee benefits, net occupancy and equipment accounting for $4.3 million of the increase. The Corporation also incurred $1.4 million of additional expense in the second quarter 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 $400,000 in net occupancy costs in response to social distancing and cleaning protocols. Finally, FDIC assessment expense increased $794,000 in the second quarter of 2020 when compared to the same period in 2019 as a result of the the Corporation's FDIC assessment changing to the calculation applicable to banks over $10 billion in total assets.

These increases were partially offset by a decrease in outside data processing fees of $1.3 million in the second quarter of 2020 compared to the same period of 2019 mainly related to sunsetting of a debit card rewards program. Additionally, the increase in marketing expense noted above from the COVID-19 related donations was offset by the fair lending settlement expense of $1.2 million incurred in the second quarter of 2019. Finally, professional and other outside services decreased $823,000 in the second quarter of 2020 when compared to the same period in 2019 primarily due to 2019 containing professional fees related to the MBT acquisition.

Non-interest expense increased $12.0 million, or 10.5 percent, in the first six 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 with the largest increases in salaries and employee benefits, net occupancy and equipment accounting for an increase of $12.0 million. Additionally, FDIC assessment expense increased $1.6 million as a result of the Corporation's FDIC assessment changing to the calculation applicable to banks over $10 billion in total assets. The Corporation also incurred $1.4 million of additional expense in the first six 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 $400,000 in net occupancy costs in response to social distancing and cleaning protocols.

The increases noted above were partially offset by a decrease in outside data processing fees of $796,000 in the first six months of 2020 when compared to the same period on 2019. While the larger franchise created by the acquisition of MBT, as well as organic growth, caused outside data processing fees to increase, the increase was more than offset by a decrease of $1.5 million related to the sunsetting of a debit rewards program. In addition, 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. Finally, other real estate owned and foreclosure expense decreased $879,000 in the first six months of 2020 when compared to the same period in 2019.

INCOME TAXES

Income tax expense for the second quarter of 2020 was $4,623,000 on pre-tax net income of $37,615,000.  For the same period in 2019, income tax expense was $7,749,000 on pre-tax net income of $48,805,000. The effective income tax rates for the second quarter of 2020 and 2019 were 12.3 percent and 15.9 percent, respectively.

Income tax expense for the six months ended June 30, 2020 was $8,113,000 on pre-tax net income of $75,368,000. For the same period in 2019, income tax expense was $14,690,000 on pre-tax net income of $94,563,000. The effective tax rates for the six months ended June 30, 2020 and 2019 were 10.8 percent and 15.5 percent, respectively.

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Table of Contents
PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The lower effective income tax rates during the three and six months ended June 30, 2020 when compared to the same period 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 will be 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 1, 2019, the Corporation acquired 100 percent of MBT. 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. Details regarding the MBT acquisition are discussed in NOTE 2. ACQUISITION 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 not exceed $75 million. On a share basis, the amount of common stock subject to the repurchase program represents 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 $75.0 million, the maximum allowable under the plan.

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.


50
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. Under Basel III, the Corporation and Bank elected to opt-out of including accumulated other comprehensive income in regulatory capital. As of June 30, 2020, 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. The Corporation's and Bank's actual and required capital ratios as of June 30, 2020 and December 31, 2019 were as follows:



Prompt Corrective Action Thresholds
 
Actual

Basel III Minimum Capital Required

Well Capitalized
June 30, 2020
Amount

Ratio

Amount

Ratio

Amount

Ratio
Total risk-based capital to risk-weighted assets











First Merchants Corporation
$
1,410,246


14.18
%

$
1,044,339


10.50
%

N/A


N/A

First Merchants Bank
1,370,061


13.73


1,047,607


10.50


$
997,721


10.00
%
Tier 1 capital to risk-weighted assets

















First Merchants Corporation
$
1,224,127


12.31
%

$
845,417


8.50
%

N/A


N/A

First Merchants Bank
1,248,942


12.52


848,062


8.50


$
798,176


8.00
%
CET1 capital to risk-weighted assets

















First Merchants Corporation
$
1,177,879


11.84
%

$
696,226


7.00
%

N/A


N/A

First Merchants Bank
1,248,942


12.52


698,404


7.00


$
648,518


6.50
%
Tier 1 capital to average assets











First Merchants Corporation
$
1,224,127


9.45
%

$
517,986


4.00
%

N/A


N/A

First Merchants Bank
1,248,942


9.66


517,075


4.00


$
646,344


5.00
%




Prompt Corrective Action Thresholds
 
Actual

Basel III Minimum Capital Required

Well Capitalized
December 31, 2019
Amount

Ratio

Amount

Ratio

Amount

Ratio
Total risk-based capital to risk-weighted assets











First Merchants Corporation
$
1,400,617


14.29
%

$
1,028,930


10.50
%

N/A


N/A

First Merchants Bank
1,267,649


12.87


1,033,926


10.50


$
984,691


10.00
%
Tier 1 capital to risk weighted assets











First Merchants Corporation
$
1,255,333


12.81
%

$
832,943


8.50
%

N/A


N/A

First Merchants Bank
1,187,365


12.06


836,988


8.50


$
787,753


8.00
%
CET1 capital to risk-weighted assets

















First Merchants Corporation
$
1,188,970


12.13
%

$
685,953


7.00
%

N/A


N/A

First Merchants Bank
1,187,365


12.06


689,284


7.00


$
640,049


6.50
%
Tier 1 capital to average assets

















First Merchants Corporation
$
1,255,333


10.54
%

$
476,383


4.00
%

N/A


N/A

First Merchants Bank
1,187,365


9.99


475,564


4.00


$
594,455


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 June 30, 2020, risk-weighted assets included $882.9 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 permitted to assign a zero percent risk weight to PPP loans pledged to the PPPL Facility for purposes of determining risk-weighted assets and the leverage ratio. At June 30, 2020, the leverage ratio included approximately $138.4 million of average PPP loans pledged to the PPPL Facility at a zero risk weight.


51
Table of Contents
PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


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

June 30, 2020

December 31, 2019
(Dollars in thousands, except per share amounts)
First Merchants Corporation

First Merchants Bank

First Merchants Corporation

First Merchants Bank
Total Risk-Based Capital







Total Stockholders' Equity (GAAP)
$
1,809,095


$
1,882,807


$
1,786,437


$
1,787,006

Adjust for Accumulated Other Comprehensive (Income) Loss (1)
(63,845
)

(66,941
)

(27,874
)

(30,495
)
Less: Preferred Stock
(125
)

(125
)

(125
)

(125
)
Add: Qualifying Capital Securities
46,248


—


66,363


—

Less: Disallowed Goodwill and Intangible Assets
(567,246
)

(566,799
)

(569,468
)

(569,021
)
Total Tier 1 Capital (Regulatory)
1,224,127


1,248,942


1,255,333


1,187,365

Qualifying Subordinated Debentures
65,000


—


65,000


—

Allowance for Loan Losses Includible in Tier 2 Capital
121,119


121,119


80,284


80,284

Total Risk-Based Capital (Regulatory)
$
1,410,246


$
1,370,061


$
1,400,617


$
1,267,649









Net Risk-Weighted Assets (Regulatory)
$
9,946,087


$
9,977,205


$
9,799,329


$
9,846,913

Average Assets (Regulatory)
$
12,949,645


$
12,926,872


$
11,909,571


$
11,889,092









Total Risk-Based Capital Ratio (Regulatory)
14.18
%

13.73
%

14.29
%

12.87
%
Tier 1 Capital to Risk-Weighted Assets
12.31
%

12.52
%

12.81
%

12.06
%
Tier 1 Capital to Average Assets
9.45
%

9.66
%

10.54
%

9.99
%








CET1 Capital Ratio







Total Tier 1 Capital (Regulatory)
$
1,224,127


$
1,248,942


$
1,255,333


$
1,187,365

Less: Qualified Capital Securities
(46,248
)

—


(66,363
)

—

CET1 Capital (Regulatory)
$
1,177,879


$
1,248,942


$
1,188,970


$
1,187,365









Net Risk-Weighted Assets (Regulatory)
$
9,946,087


$
9,977,205


$
9,799,329


$
9,846,913

CET1 Capital Ratio (Regulatory)
11.84
%

12.52
%

12.13
%

12.06
%


(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.


52
Table of Contents
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 9.31 percent at June 30, 2020, and 10.16 percent at December 31, 2019.
 
Tangible Common Equity to Tangible Assets (non-GAAP)
(Dollars in thousands, except per share amounts)
June 30, 2020
 
December 31, 2019
Total Stockholders' Equity (GAAP)
$
1,809,095

 
$
1,786,437

Less: Cumulative preferred stock (GAAP)
(125
)
 
(125
)
Less: Intangible assets (GAAP)
(575,855
)
 
(578,881
)
Tangible common equity (non-GAAP)
$
1,233,115

 
$
1,207,431

Total assets (GAAP)
$
13,819,378

 
$
12,457,254

Less: Intangible assets (GAAP)
(575,855
)
 
(578,881
)
Tangible assets (non-GAAP)
$
13,243,523

 
$
11,878,373

Stockholders' Equity to Assets (GAAP)
13.09
%
 
14.34
%
Tangible common equity to tangible assets (non-GAAP)
9.31
%
 
10.16
%
 
 
 
 




Tangible common equity (non-GAAP)
$
1,233,115


$
1,207,431

Plus: Tax Benefit of intangibles (non-GAAP)
6,597


7,257

Tangible common equity, net of tax (non-GAAP)
$
1,239,712


$
1,214,688

Common Stock outstanding
53,796


55,368

Book Value (GAAP)
$
33.63

 
$
32.26

Tangible book value - common (non-GAAP)
$
23.04


$
21.94



The following table details and reconciles tangible earnings per share, return on tangible capital and tangible assets to traditional GAAP measures for the three and six months ended June 30, 2020 and 2019.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in thousands, except per share amounts)
2020
 
2019
 
2020
 
2019
Average goodwill (GAAP)
$
543,919

 
$
445,354

 
$
543,919

 
$
445,354

Average core deposit intangible (GAAP)
32,876

 
22,226

 
33,606

 
23,018

Average deferred tax on CDI (GAAP)
(6,815
)
 
(4,565
)
 
(6,972
)
 
(4,727
)
Intangible adjustment (non-GAAP)
$
569,980

 
$
463,015

 
$
570,553

 
$
463,645

Average stockholders' equity (GAAP)
$
1,795,509

 
$
1,479,254

 
$
1,805,963

 
$
1,454,633

Average cumulative preferred stock (GAAP)
(125
)
 
(125
)
 
(125
)
 
(125
)
Intangible adjustment (non-GAAP)
(569,980
)
 
(463,015
)
 
(570,553
)
 
(463,645
)
Average tangible capital (non-GAAP)
$
1,225,404

 
$
1,016,114

 
$
1,235,285

 
$
990,863

Average assets (GAAP)
$
13,655,322

 
$
10,499,948

 
$
13,114,280

 
$
10,291,205

Intangible adjustment (non-GAAP)
(569,980
)
 
(463,015
)
 
(570,553
)
 
(463,645
)
Average tangible assets (non-GAAP)
$
13,085,342

 
$
10,036,933

 
$
12,543,727

 
$
9,827,560

Net income available to common stockholders (GAAP)
$
32,991

 
$
41,056

 
$
67,255

 
$
79,873

CDI amortization, net of tax (GAAP)
1,194

 
1,202

 
2,390

 
2,409

Tangible net income available to common stockholders (non-GAAP)
$
34,185

 
$
42,258

 
$
69,645

 
$
82,282

Per Share Data:
 
 
 
 
 
 
 
Diluted net income available to common stockholders (GAAP)
$
0.61

 
$
0.83

 
$
1.24

 
$
1.61

Diluted tangible net income available to common stockholders (non-GAAP)
$
0.63

 
$
0.85

 
$
1.28

 
$
1.66

Ratios:
 
 
 
 
 
 
 
Return on average GAAP capital (ROE)
7.35
%
 
11.10
%
 
7.45
%
 
10.98
%
Return on average tangible capital
11.16
%
 
16.64
%
 
11.28
%
 
16.61
%
Return on average assets (ROA)
0.97
%
 
1.56
%
 
1.03
%
 
1.55
%
Return on average tangible assets
1.04
%
 
1.68
%
 
1.11
%
 
1.67
%


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.


53
Table of Contents
PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


LOAN QUALITY/PROVISION FOR LOAN LOSSES

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

Loan Quality

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

At June 30, 2020, non-performing loans totaled $51.2 million, an increase of $34.4 million from December 31, 2019. Loans not accruing interest income totaled $50.1 million at June 30, 2020, an increase of $34.2 million from December 31, 2019, primarily due to three relationships that were moved to non-accrual during the second quarter of 2020. Two relationships totaling $17.0 million are in the senior living sector. The third relationship totaling $14.4 million is in the university logo sports apparel industry. The Corporation’s coverage ratio of allowance for loan losses to non-accrual loans decreased from 503.4 percent at December 31, 2019 to 241.7 percent at June 30, 2020. Troubled debt restructures totaled $1.1 million at June 30, 2020, an increase of $245,000 from December 31, 2019. See additional information regarding the allowance for loan losses in the “Provision for Loan Losses” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Other real estate owned and repossessions, totaling $7.4 million at June 30, 2020, decreased $118,000 from December 31, 2019. For other real estate owned, current appraisals are obtained to determine fair value as management continues to aggressively market these real estate assets.

Impaired loans include loans deemed impaired according to the guidance set forth in ASC 310-10. Commercial loans under $500,000 and consumer loans, with the exception of troubled debt restructures, are not individually evaluated for impairment. 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 substantially within the contractual terms of the note.  At June 30, 2020, impaired loans totaled $45.3 million, an increase of $33.6 million from the December 31, 2019 balance of $11.7 million. Also at June 30, 2020, a specific allowance for losses was not deemed necessary for impaired loans totaling $12.7 million as there were no identified losses on these credits. An allowance of $13.0 million was recorded for the remaining balance of these impaired loans totaling $32.6 million, and was included in the Corporation’s allowance for loan losses.

The Corporation's non-performing assets plus accruing loans 90-days or more delinquent and impaired loans are presented in the table below.
(Dollars in Thousands)

June 30, 2020

December 31, 2019
Non-Performing Assets:

 


 

Non-accrual loans

$
50,102


$
15,949

Renegotiated loans

1,086


841

Non-performing loans (NPL)

51,188


16,790

OREO and Repossessions

7,409


7,527

Non-performing assets (NPA)

58,597


24,317

Loans 90-days or more delinquent and still accruing

4,981


69

NPAs and loans 90-days or more delinquent

$
63,578


$
24,386

Impaired Loans

$
45,280


$
11,709



The non-accrual balances in the table above include troubled debt loan restructures totaling $1.2 million and $709,000 as of June 30, 2020 and December 31, 2019, respectively.

The composition of non-performing assets plus accruing loans 90-days or more delinquent is reflected in the following table.
(Dollars in Thousands)
June 30, 2020

December 31, 2019
Non-performing assets and loans 90-days or more delinquent:
 

 
Commercial and industrial loans
$
16,557


$
1,259

Agricultural production financing and other loans to farmers
—


183

Real estate loans:


 
Construction
6,333


7,191

Commercial and farmland
30,990


7,103

Residential
7,111


6,810

Home equity
2,458


1,795

Individuals' loans for household and other personal expenditures
87


45

Public finance and other commercial loans
42


—

Non-performing assets and loans 90-days or more delinquent:
$
63,578


$
24,386


54
Table of Contents
PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


On March 22, 2020, a statement was issued by the Bank's banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the "Interagency Statement") that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR 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 is offering short-term modifications made in response to COVID-19 borrowers who are current and otherwise not past due. These include 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 following table summarizes modifications that occurred in the period indicated:
 
Six Months Ended June 30, 2020
 
Recorded Balance
 
Number of Loans
Commercial and industrial loans
$
175,409

 
697

Agriculture production financing and other loans to farmers
329

 
5

Real estate loans:
 
 
 
Construction
35,665

 
21

Commercial and farmland
811,144

 
867

Residential
95,313

 
648

Home equity
3,081

 
66

Individuals' loans for household and other personal expenditures
3,047

 
263

Public finance and other commercial loans
45

 
1

Total
$
1,124,033

 
2,568



Approximately 95 percent of the loan balances modified were granted for commercial loan customers and the remaining modifications were granted to consumers, primarily for mortgage loans. The commercial modifications, which were concentrated in the hotel, restaurant and food service, dental and lessors of real estate industries, totaled $720 million, or 64 percent of the total modification balance.

Although 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 Losses

As noted in the "COVID-19, THE CARES ACT AND RELATED REGULATORY ACTIONS" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations, the Corporation elected to defer the adoption of 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.

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 $831.1 million from December 31, 2019 to $9.3 billion at June 30, 2020. PPP loans accounted for $882.9 million of the total loan balance at June 30, 2020. At June 30, 2020, the allowance for loan and lease losses totaled $121.1 million, which represents an increase of $21.7 million from March 31, 2020, and an increase of $40.8 million from December 31, 2019. As a percent of loans, the allowance for loan losses was 1.30 percent at June 30, 2020 compared to 1.15 percent at March 31, 2020 and 0.95 percent at December 31, 2019. When excluding PPP loans of $882.9 million, the allowance for loan losses as a percentage of total loans was 1.44 percent as of June 30, 2020. Under the terms of the PPP, the loans are fully guaranteed by the U.S. government.

The allowance was increased primarily due an increase in the national and local economic conditions qualitative factor and 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 of the virus have contributed to a significantly higher level of unemployment which has negatively impacted consumer and business spending. In addition, impairment increased primarily due to specific reserves for three relationships that were moved to non-accrual during the second quarter of 2020. Impairment of $7.4 million was recorded on one university logo sports apparel relationship and $4.9 million was recorded for two senior living industry relationships. See discussion of the impact of the COVID-19 pandemic in the “COVID-19, THE CARES ACT AND RELATED REGULATORY ACTIONS” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

55
Table of Contents
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 and six months ended June 30, 2020 was $21.9 million and $41.6 million, respectively. Comparatively, the provision for loan losses for the three months and six months ended June 30, 2019 was $500,000 and $1.7 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. Specific reserves on impaired loans increased $12.3 million from $689,000 at December 31, 2019, to $13.0 million at June 30, 2020.

Net charge-offs totaling $230,000 and $812,000, respectively, were recognized for the three and six months ended June 30, 2020. Comparatively, net charge-offs totaled $128,000 and $978,000, respectively, for the same periods in 2019. For the three and six months ended June 30, 2020, there were no individual charge-offs or recoveries greater than $500,000. For the six months ended June 30, 2019, there were two individual charge-offs greater than $500,000 that totaled $1,954,000. For the three and six months ended June 30, 2019 there was one individual recovery of $738,000. The distribution of the net charge-offs (recoveries) for the three and six months ended June 30, 2020 and 2019 are reflected in the following table:

Three Months Ended June 30,

Six Months Ended June 30,
(Dollars in Thousands)
2020

2019

2020

2019
Net charge-offs (Recoveries):
 

 

 

 
Commercial and industrial loans
$
31


$
(30
)

$
160


$
(153
)
Agricultural production financing and other loans to farmers
(38
)

(3
)

5


16

Real estate loans:




 


Construction
—


(738
)

(37
)

219

Commercial and farmland
(66
)

961


36


948

Residential
38


(26
)

31


54

Home equity
175


(28
)

320


(69
)
Individuals' loans for household and other personal expenditures
90


(8
)

297


35

Public finance and other commercial loans
—


—


—


(72
)
Total net charge-offs
$
230


$
128


$
812


$
978



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 $1.9 billion at June 30, 2020, an increase of $100.6 million, or 5.6 percent, from December 31, 2019.  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 $12.2 million at June 30, 2020. 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 funding sources.  At June 30, 2020, total borrowings from the FHLB were $400.8 million The Bank has pledged certain mortgage loans and investments to the FHLB. The total available remaining borrowing capacity from the FHLB at June 30, 2020 was $671.6 million.


56
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 June 30, 2020 are as follows:
(Dollars in Thousands)
Remaining
2020
 
2021
 
2022
 
2023
 
2024
 
2025 and
after
 
ASC 805 fair value adjustments at acquisition
 
Total
Operating leases
$
1,820


$
3,453


$
3,331


$
2,937


$
2,867


$
10,277


$
—


$
24,685

Securities sold under repurchase agreements
181,150

 
—

 
—

 
—

 
—

 
—

 
—

 
181,150

Federal Home Loan Bank advances
21,250

 
55,097

 
75,097

 
115,097

 
97

 
134,179

 
—

 
400,817

Subordinated debentures and other borrowings
—

 
—

 
166,936

 
—

 
—

 
122,012

 
(3,751
)
 
285,197

Total
$
204,220

 
$
58,550

 
$
245,364

 
$
118,034

 
$
2,964

 
$
266,468

 
$
(3,751
)
 
$
891,849



The increase in subordinated debentures and other borrowings was a result of the Bank accessing the PPPL Facility to supplement liquidity to fund PPP loans. As of June 30, 2020, the outstanding balance of such borrowings was $166.9 million and the interest rate was fixed at 35 basis points. The term of the borrowings corresponded with the PPP loans that were pledged as collateral, which were all two year loans. The maturity date of the PPPL Facility borrowings accelerated if the underlying PPP loan was to go into default and the Bank was to sell the PPP loan to the SBA in order to realize the SBA's guarantee. Additionally, the maturity date of the PPPL Facility borrowings accelerated to the extent of any loan forgiveness reimbursement received by the Bank from the SBA. The PPPL Facility borrowings carried no prepayment penalty and the Bank chose to pay back all PPPL Facility borrowings during July of 2020.
 
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.

On April 23, 2020, the Corporation redeemed $10.0 million of its subordinated debentures, with an interest rate of 4.41 percent, all of which were held by Grabill Capital Trust I ("Grabill Trust"). As a result, Grabill Trust used the proceeds from such complete redemption to concurrently redeem all of its capital securities at an aggregate principal redemption price of $10.0 million. Subsequently, Grabill Trust was dissolved.

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

Summarized credit-related financial instruments at June 30, 2020 are as follows:
(Dollars in Thousands)
June 30, 2020
Amounts of commitments:
 
Loan commitments to extend credit
$
3,147,145

Standby and commercial letters of credit
29,852

 
$
3,176,997



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 June 30, 2020, 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.

57
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.

The comparative rising 200 basis points and falling 100 basis points scenarios below, as of June 30, 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:
 

June 30, 2020
 

RISING

FALLING
Driver Rates

(200 Basis Points)

(100 Basis Points)
Prime

200

—

Federal funds

200

—

One-year CMT

200

(8
)
Three-year CMT

200

—

Five-year CMT

200

—

CD's

200

(19
)
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 June 30, 2020. 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.
 

June 30, 2020
 

 

RISING

FALLING
(Dollars in Thousands)

Base

(200 Basis Points)

(100 Basis Points)
Net interest income

$
335,261


$
357,664


$
339,228

Variance from base

 

$
22,403


$
3,966

Percent of change from base

 

6.7
%

1.2
%


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
)%



58
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 June 30, 2020 and December 31, 2019. Earning assets increased by $1.3 billion during the six months ended June 30, 2020.   

Interest-bearing time deposits and investment securities increased $261.8 million and $193.3 million, respectively, since December 31, 2019 primarily as a result of excess liquidity generated from deposit growth and additional wholesale funding during the same period. Also contributing to the increase in investment securities was a $46.7 million increase in net unrealized gains on the available for sale portfolio. The net increase in unrealized gains from December 31, 2019 to June 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 value of securities in the portfolio.

Loans and loans held for sale increased $831.1 million from December 31, 2019. The Corporation originated approximately $882.9 million of PPP loans, which were primarily included in the commercial and industrial loan class. The largest loan segments that experienced a decrease was construction real estate and home equity loans. Additional details of the changes in the Corporation's loan portfolio are discussed within NOTE 4. LOANS AND ALLOWANCE of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q.
(Dollars in Thousands)

June 30, 2020

December 31, 2019
Interest-bearing time deposits

$
380,021


$
118,263

Investment securities available for sale

1,890,593


1,790,025

Investment securities held to maturity

898,786


806,038

Loans held for sale

901


9,037

Loans

9,298,541


8,459,310

Federal Home Loan Bank stock

28,736


28,736

Total

$
12,497,578


$
11,211,409

 

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).


59
Table of Contents
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”.

60
Table of Contents
PART I: FINANCIAL INFORMATION
ITEM 4. CONTROLS AND PROCEDURES


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.


61
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)

 
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 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 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 ultimate 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.


62
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 June 30, 2020.
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
April, 2020
 
—

 
$
—

 
—

 
—

May, 2020
 
—

 
$
—

 
—

 
—

June, 2020
 
304

 
$
26.16

 
—

 
—


(i) The shares repurchased were pursuant to net settlement by employees in satisfaction of income tax withholding obligations incurred through the vesting of the Corporation's restricted stock awards.


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.  MINE SAFETY DISCLOSURES

Not Applicable 

ITEM 5.  OTHER INFORMATION

a. None

b. None


63
Table of Contents

PART II: OTHER INFORMATION
ITEM 6. EXHIBITS


ITEM 6.  EXHIBITS
 
Exhibit No:
Description of Exhibits:
 
 
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
31.1
31.2
32
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (1)
101.SCH
Inline XBRL Taxonomy Extension Schema Document (1)
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document (1)
104
Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibit 101)
 
 
 
(1) Filed herewith.
 
(2) Furnished herewith.



64
Table of Contents

SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
First Merchants Corporation
 
(Registrant)
 
 
 
 
August 7, 2020
By: /s/ Michael C. Rechin
 
Michael C. Rechin
 
President and Chief Executive Officer
 
(Principal Executive Officer)
 
 
August 7, 2020
By: /s/ Mark K. Hardwick
 
Mark K. Hardwick
 
Executive Vice President,
 
Chief Financial Officer and Chief Operating Officer
 
(Principal Financial and Accounting Officer)


65
 Exhibit
 
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS

EXHIBIT-31.1

CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION
                           

I, Michael C. Rechin, President and Chief Executive Officer of First Merchants Corporation, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of First Merchants Corporation;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


August 7, 2020
By: /s/ Michael C. Rechin
Michael C. Rechin
President and Chief Executive Officer
(Principal Executive Officer)



Exhibit
 
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS

EXHIBIT-31.2

CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION
                            

I, Mark K. Hardwick, Executive Vice President, Chief Financial Officer and Chief Operating Officer of First Merchants Corporation, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of First Merchants Corporation;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


8/7/2020
By: /s/ Mark K. Hardwick
Mark K. Hardwick
Executive Vice President,
Chief Financial Officer and Chief Operating Officer
(Principal Financial and Accounting Officer)




Exhibit
 
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS

EXHIBIT-32

CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
    
In connection with the Quarterly Report of First Merchants Corporation (the “Corporation”) on Form 10-Q for the period ending June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael C. Rechin, President and Chief Executive Officer of the Corporation, do hereby certify, in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)); and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

August 7, 2020
By: /s/ Michael C. Rechin
Michael C. Rechin
President and
Chief Executive Officer
(Principal Executive Officer)

A signed copy of this written statement required by Section 906 has been provided to First Merchants Corporation and will be retained by First Merchants Corporation and furnished to the Securities and Exchange Commission or its staff upon request.






_____________________________________________________






In connection with the Quarterly Report of First Merchants Corporation (the “Corporation”) on Form 10-Q for the period ending June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark K. Hardwick, Executive Vice President, Chief Financial Officer and Chief Operating Officer of the Corporation, do hereby certify, in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)); and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

August 7, 2020
By: /s/ Mark K. Hardwick
Mark K. Hardwick
Executive Vice President,
Chief Financial Officer and Chief Operating Officer
(Principal Financial and Accounting Officer)

A signed copy of this written statement required by Section 906 has been provided to First Merchants Corporation and will be retained by First Merchants Corporation and furnished to the Securities and Exchange Commission or its staff upon request.



v3.20.2
Cover Page - shares
 6 Months Ended
Jun. 30, 2020
Aug. 04, 2020
Cover [Abstract]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Jun. 30, 2020  
Document Transition Report false  
Entity File Number 0-17071  
Entity Registrant Name FIRST MERCHANTS CORP  
Entity Incorporation, State or Country Code IN  
Entity Tax Identification Number 35-1544218  
Entity Address, Address Line One 200 East Jackson Street  
Entity Address, City or Town Muncie  
Entity Address, State or Province IN  
Entity Address, Postal Zip Code 47305-2814  
City Area Code 765  
Local Phone Number 747-1500  
Title of 12(b) Security Common Stock, $0.125 stated value per share  
Trading Symbol FRME  
Security Exchange Name NASDAQ  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   54,124,467
Entity Central Index Key 0000712534  
Current Fiscal Year End Date --12-31  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q2  
Amendment Flag false  
v3.20.2
CONSOLIDATED CONDENSED BALANCE SHEETS - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
ASSETS    
Cash and cash equivalents $ 229,759 $ 177,201
Interest-bearing time deposits 380,021 118,263
Investment securities available for sale 1,890,593 1,790,025
Investment securities held to maturity (fair value of $941,426 and $827,566) 898,786 806,038
Loans held for sale 901 9,037
Loans, net of allowance for loan losses of $121,119 and $80,284 9,177,422 8,379,026
Premises and equipment 112,548 113,055
Federal Home Loan Bank stock 28,736 28,736
Interest receivable 57,063 48,901
Goodwill 543,918 543,918
Other intangibles 31,937 34,962
Cash surrender value of life insurance 290,715 288,206
Other real estate owned 7,367 7,527
Tax asset, deferred and receivable 13,126 12,165
Other assets 156,486 100,194
TOTAL ASSETS 13,819,378 12,457,254
Deposits:    
Noninterest-bearing 2,260,351 1,736,396
Interest-bearing 8,705,637 8,103,560
Total Deposits 10,965,988 9,839,956
Borrowings:    
Federal funds purchased 0 55,000
Securities sold under repurchase agreements 181,150 187,946
Federal Home Loan Bank advances 400,817 351,072
Subordinated debentures and other borrowings 285,197 138,685
Total Borrowings 867,164 732,703
Interest payable 5,587 6,754
Other liabilities 171,544 91,404
Total Liabilities 12,010,283 10,670,817
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY    
Cumulative Preferred Stock, $1,000 par value, $1,000 liquidation value: Authorized - 600 shares; Issued and outstanding - 125 shares 125 125
Common Stock, $.125 stated value: Authorized - 100,000,000 shares; Issued and outstanding - 53,795,000 and 55,368,482 shares 6,724 6,921
Additional paid-in capital 1,002,962 1,054,997
Retained earnings 735,439 696,520
Accumulated other comprehensive income 63,845 27,874
Total Stockholders' Equity 1,809,095 1,786,437
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,819,378 $ 12,457,254
v3.20.2
CONSOLIDATED CONDENSED BALANCE SHEETS (Parenthetical) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Statement of Financial Position [Abstract]    
Investment securities held to maturity - fair value $ 941,426 $ 827,566
Loans - allowance for loan losses $ 121,119 $ 80,284
Preferred Stock, par value (in dollars per share) $ 1,000 $ 1,000
Preferred Stock, liquidation value per share (in dollars per share) $ 1,000 $ 1,000
Preferred Stock, authorized (in shares) 600 600
Preferred Stock, issued (in shares) 125 125
Preferred Stock, outstanding (in shares) 125 125
Common Stock, stated value (in dollars per share) $ 0.125 $ 0.125
Common Stock, authorized (in shares) 100,000,000 100,000,000
Common Stock, issued (in shares) 53,795,500 55,368,482
Common Stock, outstanding (in shares) 53,795,500 55,368,482
v3.20.2
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) - USD ($)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Loans receivable:        
Taxable $ 87,312 $ 92,824 $ 183,964 $ 183,305
Tax exempt 5,359 4,244 10,674 8,397
Investment securities:        
Taxable 6,147 6,998 13,778 13,093
Tax exempt 10,019 7,454 19,354 14,325
Deposits with financial institutions 134 784 709 1,659
Federal Home Loan Bank stock 281 335 580 673
Total Interest Income 109,252 112,639 229,059 221,452
INTEREST EXPENSE        
Deposits 12,707 23,087 34,455 42,681
Federal funds purchased 2 117 113 210
Securities sold under repurchase agreements 92 342 444 672
Federal Home Loan Bank advances 1,794 1,692 3,568 3,506
Subordinated debentures and other borrowings 1,639 2,123 3,584 4,239
Total Interest Expense 16,234 27,361 42,164 51,308
NET INTEREST INCOME 93,018 85,278 186,895 170,144
Provision for loan losses 21,895 500 41,647 1,700
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 71,123 84,778 145,248 168,444
OTHER INCOME        
Net gains and fees on sales of loans 3,674 1,736 7,037 3,031
Increase in cash surrender value of life insurance 1,231 927 2,591 1,916
Gains on life insurance benefits 95 19 95 19
Net realized gains on sales of available for sale securities 3,068 1,843 7,680 2,983
Other income 1,028 1,064 1,293 1,394
Total Other Income 26,481 21,614 56,280 40,327
OTHER EXPENSES        
Salaries and employee benefits 35,698 32,709 74,941 65,737
Net occupancy 5,447 4,469 11,248 9,496
Equipment 4,489 4,117 8,833 7,759
Marketing 2,092 2,752 3,535 3,826
Outside data processing fees 2,618 3,929 6,817 7,613
Printing and office supplies 279 334 666 649
Intangible asset amortization 1,511 1,520 3,025 3,048
FDIC assessments 1,472 678 2,995 1,385
Other real estate owned and foreclosure expenses 684 903 1,189 2,068
Professional and other outside services 1,553 2,376 3,811 4,260
Other expenses 4,146 3,800 9,100 8,367
Total Other Expenses 59,989 57,587 126,160 114,208
INCOME BEFORE INCOME TAX 37,615 48,805 75,368 94,563
Income tax expense 4,623 7,749 8,113 14,690
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 32,992 $ 41,056 $ 67,255 $ 79,873
Per Share Data:        
Basic Net Income Available to Common Stockholders (in dollars per share) $ 0.62 $ 0.83 $ 1.24 $ 1.62
Diluted Net Income Available to Common Stockholders (in dollars per share) 0.62 0.83 1.24 1.61
Cash Dividends Paid (in dollars per share) $ 0.26 $ 0.26 $ 0.52 $ 0.48
Average Diluted Shares Outstanding (in shares) 53,942,567 49,549,887 54,429,519 49,545,152
Service charges on deposit accounts        
OTHER INCOME        
Other income $ 4,312 $ 5,437 $ 10,282 $ 10,532
Fiduciary and wealth management fees        
OTHER INCOME        
Other income 5,601 3,931 11,586 7,749
Card payment fees        
OTHER INCOME        
Other income 6,097 4,829 12,004 9,655
Derivative hedge fees        
OTHER INCOME        
Other income 1,042 1,487 2,981 2,268
Other customer fees        
OTHER INCOME        
Other income $ 333 $ 341 $ 731 $ 780
v3.20.2
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) - USD ($)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Statement of Comprehensive Income [Abstract]        
Net income $ 32,992 $ 41,056 $ 67,255 $ 79,873
Other comprehensive income (loss), net of tax:        
Unrealized holding gain (loss) on securities available for sale arising during the period, net of tax of $3,335, $4,822, $11,406, and $10,402 12,545 18,140 42,909 39,130
Unrealized gain (loss) on cash flow hedges arising during the period, net of tax of $31, $148, $306, and $230 (114) (553) (1,153) (862)
Reclassification adjustment for net gains included in net income, net of tax of $595, $369, $1,538, and $596 (2,242) (1,390) (5,785) (2,244)
Total other comprehensive income, net of tax 10,189 16,197 35,971 36,024
Comprehensive income $ 43,181 $ 57,253 $ 103,226 $ 115,897
v3.20.2
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Parenthetical) - USD ($)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Statement of Comprehensive Income [Abstract]        
Unrealized holding gain (loss) on securities available for sale arising during the period, tax $ 3,335 $ 4,822 $ 11,406 $ 10,402
Unrealized gain (loss) on cash flow hedges arising during the period, tax (31) (148) (306) (230)
Reclassification adjustment for net losses (gains) included in net income, tax $ 595 $ 369 $ 1,538 $ 596
v3.20.2
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) - USD ($)
$ in Thousands
Total
Preferred
Common Stock
Additional Paid in Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Beginning balance (in shares) at Dec. 31, 2018   125 49,349,800      
Beginning balance at Dec. 31, 2018 $ 1,408,260 $ 125 $ 6,169 $ 840,052 $ 583,336 $ (21,422)
Comprehensive income:            
Net income 79,873       79,873  
Other comprehensive income (loss), net of tax 36,024         36,024
Cash dividends on common stock (23,847)       (23,847)  
Share-based compensation (in shares)     108,638      
Share-based compensation 1,825   $ 14 1,811    
Stock issued under employee benefit plans (in shares)     11,247      
Stock issued under employee benefit plans 362   $ 1 361    
Stock issued under dividend reinvestment and stock purchase plan (in shares)     18,686      
Stock issued under dividend reinvestment and stock purchase plan 709   $ 2 707    
Stock options exercised (in shares)     11,200      
Stock options exercised 105   $ 1 104    
Stock redeemed (in shares)     (42,977)      
Restricted shares withheld for taxes (1,675)   $ (5) (1,670)    
Ending balance (in shares) at Jun. 30, 2019   125 49,456,594      
Ending balance at Jun. 30, 2019 1,501,636 $ 125 $ 6,182 841,365 639,362 14,602
Beginning balance (in shares) at Mar. 31, 2019   125 49,428,468      
Beginning balance at Mar. 31, 2019 1,455,848 $ 125 $ 6,179 839,919 611,220 (1,595)
Comprehensive income:            
Net income 41,056       41,056  
Other comprehensive income (loss), net of tax 16,197         16,197
Cash dividends on common stock (12,914)       (12,914)  
Share-based compensation (in shares)     4,978      
Share-based compensation 844   $ 1 843    
Stock issued under employee benefit plans (in shares)     5,908      
Stock issued under employee benefit plans 188     188    
Stock issued under dividend reinvestment and stock purchase plan (in shares)     10,178      
Stock issued under dividend reinvestment and stock purchase plan 369   $ 1 368    
Stock options exercised (in shares)     7,500      
Stock options exercised 65   $ 1 64    
Stock redeemed (in shares)     (438)      
Restricted shares withheld for taxes (17)     (17)    
Ending balance (in shares) at Jun. 30, 2019   125 49,456,594      
Ending balance at Jun. 30, 2019 1,501,636 $ 125 $ 6,182 841,365 639,362 14,602
Beginning balance (in shares) at Dec. 31, 2019   125 55,368,482      
Beginning balance at Dec. 31, 2019 1,786,437 $ 125 $ 6,921 1,054,997 696,520 27,874
Comprehensive income:            
Net income 67,255       67,255  
Other comprehensive income (loss), net of tax 35,971         35,971
Cash dividends on common stock (28,336)       (28,336)  
Repurchase of common stock (in shares)     (1,634,437)      
Repurchases of common stock (55,912)   $ (204) (55,708)    
Share-based compensation (in shares)     8,591      
Share-based compensation 2,433   $ 1 2,432    
Stock issued under employee benefit plans (in shares)     11,511      
Stock issued under employee benefit plans 309   $ 1 308    
Stock issued under dividend reinvestment and stock purchase plan (in shares)     31,607      
Stock issued under dividend reinvestment and stock purchase plan $ 863   $ 4 859    
Stock options exercised (in shares) 10,050   10,050      
Stock options exercised $ 83   $ 1 82    
Stock redeemed (in shares)     (304)      
Restricted shares withheld for taxes (8)     (8)    
Ending balance (in shares) at Jun. 30, 2020   125 53,795,500      
Ending balance at Jun. 30, 2020 1,809,095 $ 125 $ 6,724 1,002,962 735,439 63,845
Beginning balance (in shares) at Mar. 31, 2020   125 53,754,137      
Beginning balance at Mar. 31, 2020 1,777,960 $ 125 $ 6,719 1,000,942 716,518 53,656
Comprehensive income:            
Net income 32,992       32,992  
Other comprehensive income (loss), net of tax 10,189         10,189
Cash dividends on common stock (14,071)       (14,071)  
Share-based compensation (in shares)     5,259      
Share-based compensation 1,213   $ 1 1,212    
Stock issued under employee benefit plans (in shares)     11,511      
Stock issued under employee benefit plans 309   $ 1 308    
Stock issued under dividend reinvestment and stock purchase plan (in shares)     15,897      
Stock issued under dividend reinvestment and stock purchase plan 435   $ 2 433    
Stock options exercised (in shares)     9,000      
Stock options exercised 76   $ 1 75    
Stock redeemed (in shares)     (304)      
Restricted shares withheld for taxes (8)     (8)    
Ending balance (in shares) at Jun. 30, 2020   125 53,795,500      
Ending balance at Jun. 30, 2020 $ 1,809,095 $ 125 $ 6,724 $ 1,002,962 $ 735,439 $ 63,845
v3.20.2
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) (Parenthetical) - $ / shares
 3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Statement of Stockholders' Equity [Abstract]        
Cash dividends on common stock (in dollars per share) $ 0.26 $ 0.26 $ 0.52 $ 0.48
v3.20.2
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)
$ in Thousands
 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Cash Flow From Operating Activities:    
Net income $ 67,255 $ 79,873
Adjustments to reconcile net income to net cash provided by operating activities:    
Provision for loan losses 41,647 1,700
Depreciation and amortization 5,435 4,379
Change in deferred taxes (18,509) (398)
Share-based compensation 2,433 1,825
Loans originated for sale (322,288) (183,498)
Proceeds from sales of loans held for sale 336,583 184,667
Gains on sales of loans held for sale (6,159) (2,245)
Gains on sales of securities available for sale (7,680) (2,983)
Increase in cash surrender of life insurance (2,591) (1,916)
Gains on life insurance benefits 95 19
Change in interest receivable (8,162) (4,269)
Change in interest payable (1,167) 1,133
Other adjustments 28,006 4,759
Net cash provided by operating activities 114,708 83,008
Cash Flows from Investing Activities:    
Net change in interest-bearing deposits (261,758) (92,651)
Purchases of:    
Securities available for sale (341,116) (306,291)
Securities held to maturity (221,711) (238,559)
Proceeds from sales of securities available for sale 167,390 82,052
Proceeds from maturities of:    
Securities available for sale 135,398 53,910
Securities held to maturity 127,380 35,185
Net change in loans (840,804) (288,195)
Proceeds from the sale of other real estate owned 592 827
Proceeds from life insurance benefits 177 633
Other adjustments (5,190) (3,691)
Net cash used in investing activities (1,239,642) (756,780)
Net change in :    
Demand and savings deposits 1,419,771 400,314
Certificates of deposit and other time deposits (293,739) 164,421
Borrowings 467,056 533,010
Repayment of borrowings (332,595) (410,689)
Cash dividends on common stock (28,336) (23,847)
Stock issued under employee benefit plans 309 362
Stock issued under dividend reinvestment and stock purchase plans 863 709
Stock options exercised 83 105
Restricted shares withheld for taxes (8) (1,675)
Repurchase of common stock (55,912) 0
Net cash provided by financing activities 1,177,492 662,710
Net Change in Cash and Cash Equivalents 52,558 (11,062)
Cash and Cash Equivalents, January 1 177,201 139,247
Cash and Cash Equivalents, June 30 229,759 128,185
Additional cash flow information:    
Interest paid 43,331 50,175
Income tax paid (refunded) (300) 11,499
Loans transferred to other real estate owned 761 314
Fixed assets transferred to other real estate owned 262 965
Non-cash investing activities using trade date accounting 13,115 40,618
ROU assets obtained in exchange for new operating lease liabilities $ 1,398 $ 23,384
v3.20.2
General
 6 Months Ended
Jun. 30, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
General
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, 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 filed with the Securities and Exchange Commission. The results of operations for the three and six months ended June 30, 2020, 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 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.

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 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. 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.

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 license 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 ending 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.


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.

The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed:
•
The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets, and
•
The accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets.

ASU No. 2018-14 is effective for fiscal years ending after December 15, 2020, for public business entities 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 of the standard did not have a significant effect on the Corporation’s disclosures.

FASB Accounting Standards Updates No. 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement

Summary - 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 in Topic 820. Certain disclosure requirements related to transfers between Level 1 and Level 2 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 end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

In addition, the amendments eliminate "at a minimum" from the phrase “an entity shall disclose at a minimum” to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration 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.



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. Based upon factors considered in the assessment and the general uncertainty as to the full extent of the COVID-19 pandemic and its effect on economic recovery, the Corporation has determined that it is not more likely than not that the fair value of the Corporation is less than the carrying value. Therefore, the Corporation concluded goodwill was not impaired at June 30, 2020, the details of which are included in NOTE 6. GOODWILL of these Notes to Consolidated Condensed Financial Statements.

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

On March 22, 2020, a statement was issued by the Bank's banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the "Interagency Statement") that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR 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 is offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include 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. During the six months ended June 30, 2020, modifications were completed on loans having a total aggregate balance of approximately $1.1 billion, or 12.1 percent of the loan portfolio. Details of the modifications are included in NOTE 4. LOANS AND ALLOWANCE of these Notes to Consolidated Condensed Financial Statements.

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 second quarter 2020 financial statements have been prepared under the existing incurred loss model. The temporary relief applicable to the Corporation’s compliance with CECL ends on the earlier of: (1) the termination date of the national emergency concerning the COVID-19 outbreak, declared by the President of the United States on March 13, 2020, under the National Emergencies Act; or (2) December 31, 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.


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.

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. The temporary relief applicable to the Corporation’s compliance with CECL ends on the earlier of: (1) the termination date of the national emergency concerning the COVID-19 outbreak, declared by the President of the United States on March 13, 2020, under the National Emergencies Act; or (2) December 31, 2020.

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

Summary - The FASB issued ASU No. 2020-04 to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. LIBOR and other interbank offered rates are widely used benchmarks or reference rates in the United States and globally. Trillions of dollars in loans, derivatives, and other financial contracts reference LIBOR, the benchmark interest rate banks use to make short-term loans to each other. With global capital markets expected to move away from LIBOR and other interbank offered rates 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.
v3.20.2
Acquisition
 6 Months Ended
Jun. 30, 2020
Business Combinations [Abstract]  
Acquisition
ACQUISITION

MBT Financial Corp.

On September 1, 2019, the Corporation acquired 100 percent of MBT. MBT, a Michigan corporation, merged with and into the Corporation, whereupon the separate corporate existence of MBT ceased and the Corporation survived. Immediately following the merger, MBT's wholly-owned subsidiary, Monroe Bank & Trust, merged with and into 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.


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 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 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

Other assets
 
6,011

Deposits
 
(1,105,926
)
Securities sold under repurchase agreements
 
(94,760
)
Federal Home Loan Bank advances
 
(10,853
)
Other liabilities
 
(9,807
)
Net tangible assets acquired
 
114,851

Core deposit intangible
 
16,527

Goodwill
 
98,563

Purchase price
 
$
229,941



Of the total purchase price, $16,527,000 was allocated to a core deposit 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 is 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




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.

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





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.
v3.20.2
Investment Securities
 6 Months Ended
Jun. 30, 2020
Investments, Debt and Equity Securities [Abstract]  
Investment Securities
INVESTMENT SECURITIES
 
The amortized cost, gross unrealized gains, gross unrealized losses and approximate market 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 June 30, 2020
 
 
 
 
 
 
 
U.S. Treasury
$
598


$
2


$
—


$
600

U.S. Government-sponsored agency securities
2,385

 
68

 
—

 
2,453

State and municipal
1,026,917

 
67,439

 
138

 
1,094,218

U.S. Government-sponsored mortgage-backed securities
761,391

 
28,870

 
27

 
790,234

Corporate obligations
3,031

 
57

 
—

 
3,088

Total available for sale
1,794,322

 
96,436

 
165

 
1,890,593

Held to maturity at June 30, 2020
 
 
 
 
 
 
 
U.S. Government-sponsored agency securities
10,100

 
3

 
—

 
10,103

State and municipal
374,214

 
23,779

 
43

 
397,950

U.S. Government-sponsored mortgage-backed securities
512,972

 
18,932

 
31

 
531,873

Foreign investment
1,500

 
—

 
—

 
1,500

Total held to maturity
898,786

 
42,714

 
74

 
941,426

Total Investment Securities
$
2,693,108

 
$
139,150

 
$
239

 
$
2,832,019



 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available for sale at December 31, 2019
 
 
 
 
 
 
 
U.S. Government-sponsored agency securities
$
38,529

 
$
346

 
$
—

 
$
38,875

State and municipal
859,511

 
41,092

 
807

 
899,796

U.S. Government-sponsored mortgage-backed securities
842,349

 
10,378

 
1,404

 
851,323

Corporate obligations
31

 
—

 
—

 
31

Total available for sale
1,740,420

 
51,816

 
2,211

 
1,790,025

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

 
—

 
—

 
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




The increase in unrealized gains from December 31, 2019 to June 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.


The amortized cost and fair value of available for sale and held to maturity securities at June 30, 2020 and December 31, 2019, 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 June 30,2020:
 
 
 
 
 
 
 
Due in one year or less
$
1,947

 
$
1,961

 
$
12,191

 
$
12,217

Due after one through five years
4,589

 
4,718

 
23,639

 
24,224

Due after five through ten years
49,425

 
52,485

 
95,694

 
101,354

Due after ten years
976,970

 
1,041,195

 
254,290

 
271,758

 
1,032,931

 
1,100,359

 
385,814

 
409,553

U.S. Government-sponsored mortgage-backed securities
761,391

 
790,234

 
512,972

 
531,873

Total Investment Securities
$
1,794,322

 
$
1,890,593

 
$
898,786

 
$
941,426



 
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




The carrying value of securities pledged as collateral, to secure borrowings and for other purposes, was $1,100,278,000 at June 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 June 30, 2020 compared to December 31, 2019.

The book value of securities sold under agreements to repurchase amounted to $171,346,000 at June 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 six months ended June 30, 2020 and 2019 are shown below.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Sales and Redemptions of Available for Sale Securities:
 
 
 
 
 
 
 
Gross gains
$
3,068

 
$
1,843

 
$
7,680

 
$
2,983

Gross losses
—


—


—


—




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 June 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 June 30, 2020
 

 

 

 

 

 
State and municipal
$
23,745


$
138


$
—


$
—


$
23,745


$
138

U.S. Government-sponsored mortgage-backed securities
15,239


27


—


—


15,239


27

Total Temporarily Impaired Available for Sale Securities
38,984


165


—


—


38,984


165

Temporarily Impaired Held to Maturity Securities at June 30,2020
 

 

 

 

 

 
State and municipal
2,633


43


—


—


2,633


43

U.S. Government-sponsored mortgage-backed securities
10,198


31


—


—


10,198


31

Total Temporarily Impaired Held to Maturity Securities
12,831


74


—


—


12,831


74

Total Temporarily Impaired Investment Securities
$
51,815


$
239


$
—


$
—


$
51,815


$
239


 
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


$
—


$
—


$
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


—


—


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




Certain investments in debt and equity securities are reported in the financial statements at an amount less than their historical cost as indicated in the table below.
 
June 30, 2020
 
December 31, 2019
Investments reported at less than historical cost:
 
 
 
Historical cost
$
52,054

 
$
398,172

Fair value
51,815

 
395,416

Gross unrealized losses
$
239

 
$
2,756

Percent of the Corporation's investment portfolio
1.9
%
 
15.2
%


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 June 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
  
The unrealized losses on the Corporation's investments in securities of state and political subdivisions 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 June 30, 2020. The state and municipal securities portfolio contains unrealized losses of $138,000 on thirteen securities and $43,000 on two securities in the available for sale and held to maturity portfolios, respectively. At June 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.

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 June 30, 2020. The mortgage-backed securities portfolio contains unrealized losses of $27,000 on one security in the available for sale portfolio and $31,000 on three securities in the held to maturity portfolio. All these securities are issued by a U.S. government-sponsored entity and have an implicit 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.
v3.20.2
Loans and Allowance
 6 Months Ended
Jun. 30, 2020
Receivables [Abstract]  
Loans and Allowance
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, 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. The Corporation’s primary lending focus is small business and middle market commercial, commercial real estate 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 June 30, 2020, and December 31, 2019, were $901,000 and $9,037,000, respectively.

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

June 30, 2020

December 31, 2019
Commercial and industrial loans
$
2,898,329


$
2,109,879

Agricultural production financing and other loans to farmers
93,838


93,861

Real estate loans:



Construction
640,560


787,568

Commercial and farmland
3,239,998


3,052,698

Residential
1,145,187


1,143,217

Home equity
532,314


588,984

Individuals' loans for household and other personal expenditures
123,611


135,989

Public finance and other commercial loans
624,704


547,114

  Loans
9,298,541


8,459,310

Allowance for loan losses
(121,119
)

(80,284
)
             Net Loans
$
9,177,422


$
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 in accordance with the terms of the program. As of June 30, 2020, the Bank had funded over 5,000 PPP loans representing $882.9 million, which is net of deferred processing fees and costs of $24.6 million, and is primarily included in the commercial and industrial loan class. Under the terms of the PPP, the loans are fully guaranteed by the U.S. government. The Bank borrowed from the Paycheck Protection Program Liquidity Facility ("PPPL Facility") to supplement liquidity to fund the PPP loans. The outstanding balance of the PPPL Facility borrowings at June 30, 2020 was $166.9 million. Details of the borrowings from the PPPL Facility are included in the "LIQUIDITY" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations on this Form 10-Q.

Allowance, Credit Quality and Loan Portfolio

The original implementation date 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 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 2020 financial statements have been prepared under the existing incurred loss model. The temporary relief applicable to the Corporation’s compliance with CECL ends on the earlier of: (1) the termination date of the national emergency concerning the COVID-19 outbreak, declared by the President of the United States on March 13, 2020, under the National Emergencies Act; or (2) December 31, 2020.


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 the loan portfolio at June 30, 2020. The process for determining 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 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: 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.

The following tables summarize changes in the allowance for loan losses by loan segment for the three and six months ended June 30, 2020 and June 30, 2019:
 
Three Months Ended June 30, 2020
 
Commercial

Commercial
Real Estate

Consumer

Residential

Total
Allowance for loan losses:
 

 

 

 

 
Balances, March 31, 2020
$
38,431


$
37,907


$
5,752


$
17,364


$
99,454

Provision for losses
6,240


8,945


2,783


3,927


21,895

Recoveries on loans
106


107


56


48


317

Loans charged off
(99
)

(41
)

(146
)

(261
)

(547
)
Balances, June 30, 2020
$
44,678


$
46,918


$
8,445


$
21,078


$
121,119



Six Months Ended June 30, 2020
 
Commercial

Commercial
Real Estate

Consumer

Residential

Total
Allowance for loan losses:
 

 

 

 

 
Balances, December 31, 2019
$
32,902


$
28,778


$
4,035


$
14,569


$
80,284

Provision for losses
11,941


18,139


4,707


6,860


41,647

Recoveries on loans
549


225


98


118


990

Loans charged off
(714
)

(224
)

(395
)

(469
)

(1,802
)
Balances, June 30, 2020
$
44,678


$
46,918


$
8,445


$
21,078


$
121,119



Three Months Ended June 30, 2019
 
Commercial

Commercial
Real Estate

Consumer

Residential

Total
Allowance for loan losses:
 

 

 

 

 
Balances, March 31, 2019
$
33,069


$
29,434


$
4,026


$
14,373


$
80,902

Provision for losses
100


320


36


44


500

Recoveries on loans
344


778


100


212


1,434

Loans charged off
(311
)

(1,001
)

(92
)

(158
)

(1,562
)
Balances, June 30, 2019
$
33,202


$
29,531


$
4,070


$
14,471


$
81,274


 
Six Months Ended June 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
336


1,089


141


134


1,700

Recoveries on loans
886


1,023


218


312


2,439

Loans charged off
(677
)

(2,190
)

(253
)

(297
)

(3,417
)
Balances, June 30, 2019
$
33,202


$
29,531


$
4,070


$
14,471


$
81,274




The tables below show the Corporation’s allowance for loan losses and loan portfolio by loan segment as of the periods indicated.
 
June 30, 2020
 
Commercial

Commercial
Real Estate

Consumer

Residential

Total
Allowance Balances:
 

 

 

 

 
Individually evaluated for impairment
$
7,466


$
4,943


$
—


$
590


$
12,999

Collectively evaluated for impairment
37,212


41,975


8,445


20,488


108,120

Total Allowance for Loan Losses
$
44,678


$
46,918


$
8,445


$
21,078


$
121,119

Loan Balances:








 
Individually evaluated for impairment
$
15,312


$
26,512


$
3


$
3,453


$
45,280

Collectively evaluated for impairment
3,600,395


3,847,884


123,608


1,673,093


9,244,980

Loans acquired with deteriorated credit quality
1,164


6,162


—


955


8,281

Loans
$
3,616,871


$
3,880,558


$
123,611


$
1,677,501


$
9,298,541


 
December 31, 2019
 
Commercial

Commercial
Real Estate

Consumer

Residential

Total
Allowance Balances:
 

 

 

 

 
Individually evaluated for impairment
$
—


$
231


$
—


$
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




Loans individually evaluated for impairment are comprised of commercial and consumer loans deemed impaired in accordance with ASC 310-10. This includes loans acquired with deteriorated credit quality totaling $3,783,000 with $192,000 of related allowance for loan losses at June 30, 2020 and $2,819,000 with $124,000 related allowance for loan losses at December 31, 2019.

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 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 monitors and evaluates commercial real estate loans based on collateral and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Consumer and Residential

With respect to residential loans that are secured by 1-4 family residences and 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. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment on loans secured by 1-4 family residences can 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, in management’s judgment, the collateral value and financial condition of the borrower do not justify accruing interest. 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 consecutive months of performance. Payments received on impaired accruing or delinquent loans are applied to interest income as accrued.




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

June 30, 2020

December 31, 2019
Commercial and industrial loans
$
16,354


$
1,255

Agriculture production financing and other loans to farmers
—


183

Real estate loans:


 
Construction
119


977

Commercial and farmland
25,405


7,007

Residential
5,773


5,062

Home equity
2,376


1,421

Individuals' loans for household and other personal expenditures
75


44

Total
$
50,102


$
15,949




Non-accrual loans increased $34.2 million from December 31, 2019, primarily due to three relationships that were moved to non-accrual during the second quarter of 2020. Two relationships totaling $17.0 million are in the senior living sector. The third relationship totaling $14.4 million is 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 under $500,000 and consumer loans, with the exception of troubled debt restructures, are not individually evaluated for impairment.

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, 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 tables show the composition of the Corporation’s impaired loans, related allowance and interest income recognized while impaired by loan class as of the periods indicated:
 
June 30, 2020
 
Unpaid
Principal
Balance

Recorded
Investment

Related
Allowance
Impaired loans with no related allowance:
 

 


Commercial and industrial loans
$
5,024


$
5,008


$
—

Real estate Loans:





Commercial and farmland
9,675


7,602


—

Residential
75


59


—

Individuals' loans for household and other personal expenditures
3


3


—

Total
$
14,777


$
12,672


$
—

Impaired loans with related allowance:


 


Commercial and industrial loans
$
10,342


$
10,304


$
7,466

Real estate Loans:





Commercial and farmland
19,650


18,910


4,943

Residential
3,134


3,009


520

Home equity
401

 
385


70

Total
$
33,527


$
32,608


$
12,999

Total Impaired Loans
$
48,304


$
45,280


$
12,999


 
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


—

Total
$
5,139

 
$
4,357

 
$
689

Total Impaired Loans
$
15,094

 
$
11,709

 
$
689

 
Three Months Ended June 30, 2020

Six Months Ended June 30, 2020
 
Average
Recorded Investment

Interest
Income Recognized

Average
Recorded Investment

Interest
Income Recognized
Impaired loans with no related allowance:
 

 


 

 
Commercial and industrial loans
$
5,008


$
—


$
5,008


$
—

Real estate Loans:







Commercial and farmland
7,637


37


7,910


75

Residential
59


1


59


2

Individuals' loans for household and other personal expenditures
3


—


3


—

Total
$
12,707


$
38


$
12,980


$
77

Impaired loans with related allowance:


 

 

 
Commercial and industrial loans
$
10,304


$
—


$
10,304


$
—

Real estate Loans:







Commercial and farmland
18,910


—


19,156


—

Residential
3,020


19


3,032


38

Home equity
387


3


390


6

Total
$
32,621


$
22


$
32,882


$
44

Total Impaired Loans
$
45,328


$
60


$
45,862


$
121

 
Three Months Ended June 30, 2019

Six Months Ended June 30, 2019
 
Average
Recorded Investment

Interest
Income Recognized

Average
Recorded Investment

Interest
Income Recognized
Impaired loans with no related allowance:
 

 


 

 
Commercial and industrial loans
$
1,013


$
—


$
1,021


$
—

Agriculture production financing and other loans to farmers
668


—


672


—

Real estate Loans:







Construction
7,314


—


7,792


—

Commercial and farmland
7,998


39


8,187


78

Residential
38


1


38


2

Home equity
49


—


49


—

Public finance and other commercial loans
353


—


353


—

Total
$
17,433


$
40


$
18,112


$
80

Impaired loans with related allowance:







Commercial and industrial loans
$
940


$
—


$
940


$
—

Agriculture production financing and other loans to farmers
2,117


—


2,134


—

Real estate Loans:







Commercial and farmland
157


—


164


—

Residential
2,021


16


2,029


32

Home equity
351


3


352


6

Individuals' loans for household and other personal expenditures
14


—


15


—

Total
$
5,600


$
19


$
5,634


$
38

Total Impaired Loans
$
23,033


$
59


$
23,746


$
118



Impaired loans in the above tables do not include loans accounted for under ASC 310-30, or any other loan, unless deemed impaired 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 loss to assess the overall credit quality of large commercial loans. All large commercial credit grades are reviewed at a minimum of once a year for pass grade loans. Loans with grades below pass are reviewed more frequently depending on the grade. A description of the general characteristics of these grades is as follows:

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

•
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. Other characteristics may include:
 
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 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.

•
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.


The following tables summarize the credit quality of the Corporation’s loan portfolio, by loan class 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.
 
June 30, 2020
 
Commercial
Pass

Commercial
Special
Mention

Commercial Substandard

Commercial
Doubtful

Commercial Loss

Consumer Performing

Consumer
Non-Performing

Total
Commercial and industrial loans
$
2,722,071


$
87,069


$
89,189


$
—


$
—


$
—


$
—


$
2,898,329

Agriculture production financing and other loans to farmers
78,645


6,082


9,111


—


—


—


—


93,838

Real estate Loans:














 
Construction
590,889


791


20,229


—


—


28,536


115


640,560

Commercial and farmland
3,035,363


103,921


99,330


—


—


1,384


—


3,239,998

Residential
189,053


1,637


6,684


—


—


943,222


4,591


1,145,187

Home equity
20,214


—


1,342


—


—


508,457


2,301


532,314

Individuals' loans for household and other personal expenditures
—


—


—


—


—


123,524


87


123,611

Public finance and other commercial loans
624,655


49


—


—


—


—


—


624,704

Loans
$
7,260,890


$
199,549


$
225,885


$
—


$
—


$
1,605,123


$
7,094


$
9,298,541


 
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


$
—


$
—


$
—


$
—


$
2,109,879

Agriculture production financing and other loans to farmers
78,558


5,626


9,677


—


—


—


—


93,861

Real estate Loans:


 







 

 

 
Construction
749,249


1,613


1,634


—


—


35,072


—


787,568

Commercial and farmland
2,894,366


57,776


98,575


—


—


1,981


—


3,052,698

Residential
196,710


877


8,075


—


—


932,743


4,812


1,143,217

Home equity
24,211


257


682


—


—


562,507


1,327


588,984

Individuals' loans for household and other personal expenditures
—


—


—


—


—


135,944


45


135,989

Public finance and other commercial loans
547,114


—


—


—


—


—


—


547,114

Loans
$
6,447,193


$
147,328


$
190,358


$
—


$
—


$
1,668,247


$
6,184


$
8,459,310






The tables below show a past due aging of the Corporation’s loan portfolio, by loan class, as of June 30, 2020, and December 31, 2019:
 
June 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
$
2,871,366


$
9,435


$
1,038


$
136


$
16,354


$
26,963


$
2,898,329

Agriculture production financing and other loans to farmers
92,735


1,103


—


—


—


1,103


93,838

Real estate loans:










 


Construction
634,706


5,235


500


—


119


5,854


640,560

Commercial and farmland
3,172,688


18,948


18,458


4,499


25,405


67,310


3,239,998

Residential
1,136,131


2,679


329


275


5,773


9,056


1,145,187

Home equity
526,096


2,110


1,673


59


2,376


6,218


532,314

Individuals' loans for household and other personal expenditures
123,126


227


171


12


75


485


123,611

Public finance and other commercial loans
624,704


—


—


—


—


—


624,704

Loans
$
9,181,552


$
39,737


$
22,169


$
4,981


$
50,102


$
116,989


$
9,298,541

 
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


—


—


—


183


183


93,861

Real estate loans:
 

 

 

 





 
Construction
784,961


1,630


—


—


977


2,607


787,568

Commercial and farmland
3,043,318


2,324


49


—


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


—


—


—


—


—


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 loan delinquencies increased in the 30-59, 60-89 and 90 days or more past due categories during the first six months of 2020. Four relationships totaling $28.6 million, which matured in May 2020 and were in the process of renewal at June 30, 2020, were included in the $25.1 million increase in the 30-59 days past due. Three real estate secured loans, totaling $17.8 million, accounted for 69 percent of the increase in the 60-89 days and 90 days or more past due categories. These loans were either well secured, in the process of collection, or under review for a deferral.

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 TDR 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 is offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include 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. Under the applicable guidance, none of these loans were considered troubled debt restructures at June 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 on 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 at the time of modification that occurred during the periods indicated:

Three Months Ended June 30, 2020

Six Months Ended June 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
$
654


$
654


3


$
654


$
654


3

Real estate loans:
 

 

 

 

 

 
Commercial and farmland
565


565


2


565


565


2

Residential
300


337


6


300


337


6

Total
$
1,519


$
1,556


11


$
1,519


$
1,556


11


Three Months Ended June 30, 2019

Six Months Ended June 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
$
171

 
$
164

 
4


$
261


$
254


5

Total
$
171

 
$
164

 
4


$
261


$
254


5




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

Three Months Ended June 30, 2020

Term
Modification

Rate
Modification

Combination

Total
Modification
Commercial and industrial loans
$
652

 
$
—

 
$
—

 
$
652

Real estate loans:
 

 

 


Commercial and farmland
565


—


—


565

Residential
—


111


223


334

Total
$
1,217


$
111


$
223


$
1,551


Six Months Ended June 30, 2020

Term
Modification

Rate
Modification

Combination

Total
Modification
Commercial and industrial loans
$
652


$
—


$
—


$
652

Real estate loans:
 

 

 


Commercial and farmland
565


—


—


565

Residential
—


111


223


334

Total
$
1,217


$
111


$
223


$
1,551


Three Months Ended June 30, 2019

Term
Modification

Rate
Modification

Combination

Total
Modification
Real estate loans:
 

 

 


Residential
$
—


$
—


$
164


$
164

Total
$
—


$
—


$
164


$
164



Six Months Ended June 30, 2019

Term
Modification

Rate
Modification

Combination

Total
Modification
Real estate loans:




 

 
Residential
$
—


$
89


$
164


$
253

Total
$
—


$
89


$
164


$
253




Commercial and industrial loans made up 42 percent of the post-modification balance of troubled debt restructured loans made in the three and six months ended June 30, 2020. 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 six months ended June 30, 2019.


The following tables summarize troubled debt restructures that occurred during the twelve months ended June 30, 2020 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 June 30, 2020

Six Months Ended June 30, 2020

Number of Loans

Recorded Balance

Number of Loans

Recorded Balance
Commercial and industrial loans
1


$
268


1


$
268

Total
1


$
268


1


$
268


Three Months Ended June 30, 2019

Six Months Ended June 30, 2019

Number of Loans

Recorded Balance

Number of Loans

Recorded Balance
Real estate loans:
 

 

 


 
Residential
1
 
$
62


1


$
62

Total
1
 
$
62


1


$
62




For potential consumer loan restructures, impairment evaluation occurs prior to modification. Any subsequent impairment is typically addressed through 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 calculation of the non-accrual and delinquency trend environmental allowance allocation. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $492,000 and $1,033,000 at June 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 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.
v3.20.2
Purchased Credit Impaired Loans
 6 Months Ended
Jun. 30, 2020
Receivables [Abstract]  
Purchased Credit Impaired Loans
PURCHASED CREDIT IMPAIRED LOANS

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.

The carrying amount of Purchased Credit Impaired Loans as of June 30, 2020 was $12.1 million with allowance for loan loss of $192,000. 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 June 30, 2020
 
Six Months Ended June 30, 2020
Accretable yield beginning balance
$
1,926

 
$
2,132

Additions
—

 
$
—

Accretion
(1,033
)
 
(1,418
)
Reclassification from nonaccretable
653

 
839

Disposals
—

 
(7
)
Accretable yield ending balance
$
1,546

 
$
1,546




Three Months Ended June 30, 2019

Six Months Ended June 30, 2019
Accretable yield beginning balance
$
2,064


$
2,143

Additions
—


—

Accretion
(638
)

(1,218
)
Reclassification from nonaccretable
488


989

Disposals
—


—

Accretable yield ending balance
$
1,914


$
1,914



There were no loans acquired during the six months ended June 30, 2020 and 2019, for which it was probable that all contractually required payments would not be collected.
 
 
v3.20.2
Goodwill
 6 Months Ended
Jun. 30, 2020
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill
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 acquisition on September, 1, 2019 resulted in $98,563,000 of goodwill, which includes a measurement period adjustment of $719,000. 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 June 30, 2020.

2019
Balance, January 1
$
445,355

Goodwill acquired
97,844

Measurement period adjustment
719

Balance, December 31
$
543,918




The Corporation adopted ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill, January 1, 2020 and has assessed the recent economic impact and market conditions from the COVID-19 pandemic. In the assessment, the Corporation considered factors such as: (a) our market capitalization; (b) observable market transactions and control premium multiples; (c) changes to the regulatory environment; and (d) the nature and amount of government support that has been and is expected to be provided in the future. Additionally, the Corporation considered the general uncertainty as to the full extent of the COVID-19 pandemic and its effect on economic recovery. The Corporation concluded that it is not more likely than not that the fair value of the Corporation is less than the carrying value; therefore, goodwill was not impaired at June 30, 2020.
v3.20.2
Core Deposit Intangibles
 6 Months Ended
Jun. 30, 2020
Goodwill and Intangible Assets Disclosure [Abstract]  
Core Deposit Intangibles
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 MBT 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.

June 30, 2020

December 31, 2019
Gross carrying amount
$
102,396


$
85,869

Core deposit intangibles acquired
—


16,527

Accumulated amortization
(70,459
)

(67,434
)
Total core deposit intangibles
$
31,937


$
34,962




The core deposit 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 six months ended June 30, 2020 was $1,511,000 and $3,025,000, respectively, compared to $1,520,000 and $3,048,000, respectively, for the three and six months ended June 30, 2019. Estimated future amortization expense is summarized as follows:
 
Amortization Expense
2020
$
2,962

2021
5,429

2022
5,027

2023
4,827

2024
4,241

After 2024
9,451

 
$
31,937
v3.20.2
Derivative Financial Instruments
 6 Months Ended
Jun. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments
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.

Cash Flow Hedges of Interest Rate Risk

The Corporation’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Corporation primarily uses interest rate swaps and interest rate caps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the payment of fixed amounts to a counterparty in exchange for the Corporation receiving variable payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. As of June 30, 2020 and December 31, 2019, the Corporation had four interest rate swaps with a notional amount of $46.0 million that were designated as cash flow hedges.

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, $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 $20.0 million of interest rate swaps were used to hedge the variable cash outflows (LIBOR-based) associated with two Federal Home Loan Bank advances. During the three and six months ended June 30, 2020 and 2019, 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 $1,046,000 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 June 30, 2020 and December 31, 2019, the notional amount of customer-facing swaps was approximately $817,463,000 and $692,287,000, respectively.  These amounts are offset with third party counterparties, as described above.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Corporation’s derivative financial instruments, as well as their classification on the Balance Sheet, as of June 30, 2020, and December 31, 2019.
 
Asset Derivatives

Liability Derivatives
 
June 30, 2020

December 31, 2019

June 30, 2020

December 31, 2019
 
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 Assets

$
—


Other Liabilities

$
2,547


Other Liabilities

$
1,444

Derivatives not designated as hedging instruments:
 

 

 

 

 

 

 

 
Interest rate contracts
Other Assets

$
84,658


Other Assets

$
27,855


Other Liabilities

$
84,658


Other Liabilities

$
27,855




The Corporation's derivative asset and derivative liability relating to interest rate contracts increased $56.8 million and $57.9 million, respectively, from December 31, 2019. The increases are primarily due to a $125.2 million increase in the related outstanding notional balance. Additionally, yield curve rates used for valuation purposes were lower at each term point as of June 30, 2020 compared to December 31, 2019. This was primarily the result of investors seeking the safety 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
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative
(Effective Portion)
Three Months Ended

Six Months Ended
June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019
Interest Rate Products
$
(145
)

$
(701
)

$
(1,459
)

$
(1,092
)



Effect of Derivative Instruments on the Income Statement

The Corporation did not recognize any gains or losses from derivative financial instruments in the Consolidated Condensed Statements of Income for the three and six months ended June 30, 2020 and 2019.

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
June 30, 2020

Three Months Ended
June 30, 2019
Interest rate contracts

Interest Expense

$
(231
)

$
(84
)
Derivatives Designated as
Hedging Instruments under
FASB ASC 815-10

Location of Gain (Loss)
Recognized Income on
Derivative

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


Six Months Ended
June 30, 2020

Six Months Ended
June 30, 2019
Interest rate contracts

Interest Expense

$
(357
)

$
(143
)



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

Credit-risk-related Contingent Features

The Corporation has agreements with certain of its derivative counterparties that contain a provision where if the Corporation fails to maintain its status as a well or adequately capitalized institution, then the Corporation could be required to terminate or fully collateralize all outstanding derivative contracts. Additionally, the Corporation has agreements with certain of its derivative counterparties that contain a provision where if the Corporation defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Corporation could also be declared in default on its derivative obligations. As of June 30, 2020, the termination value of derivatives in a net liability position related to these agreements was $87,754,000. As of June 30, 2020, the Corporation has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $80,855,000. While the Corporation did not breach any of these provisions as of June 30, 2020, if it had, the Corporation could have been required to settle its obligations under the agreements at their termination value.
v3.20.2
Disclosures About Fair Value of Assets and Liabilities
 6 Months Ended
Jun. 30, 2020
Fair Value Disclosures [Abstract]  
Disclosures About Fair Value of Assets and Liabilities
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 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.

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. DERIVATIVE FINANCIAL INSTRUMENTS of these Notes to Consolidated Condensed Financial Statements. The following table presents the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements fall at June 30, 2020, and December 31, 2019.
 
 
 
Fair Value Measurements Using:
June 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
$
600

 
$
—

 
$
600

 
$
—

U.S. Government-sponsored agency securities
2,453

 
—

 
2,453

 
—

State and municipal
1,094,218

 
—

 
1,091,753

 
2,465

U.S. Government-sponsored mortgage-backed securities
790,234

 
—

 
790,230

 
4

Corporate obligations
3,088

 
—

 
3,057

 
31

Interest rate swap asset
84,658

 
—

 
84,658

 
—

Interest rate swap liability
87,205

 
—

 
87,205

 
—


 
 
 
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)
Available for sale securities:
 
 
 
 
 
 
 
U.S. Government-sponsored agency securities
$
38,875


$
—


$
38,875


$
—

State and municipal
899,796

 
—

 
896,938

 
2,858

U.S. Government-sponsored mortgage-backed securities
851,323

 
—

 
851,319

 
4

Corporate obligations
31

 
—

 
—

 
31

Interest rate swap asset
27,855

 
—

 
27,855

 
—

Interest rate swap liability
29,299

 
—

 
29,299

 
—




There were no gains or losses included in earnings that were attributable to the changes in unrealized gains or losses related to assets or
liabilities held at June 30, 2020 or December 31, 2019.

Level 3 Reconciliation

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying
balance sheets using significant unobservable Level 3 inputs for the three and six months ended June 30, 2020 and 2019.
 
Available for Sale Securities
 
Three Months Ended
 
Six Months Ended
 
June 30, 2020
 
June 30, 2019
 
June 30, 2020
 
June 30, 2019
Balance at beginning of the period
$
2,528

 
$
2,936

 
$
2,892

 
$
3,328

Included in other comprehensive income
(30
)
 
37

 
(50
)
 
80

Principal payments
2

 
2

 
(342
)
 
(433
)
Ending balance
$
2,500

 
$
2,975

 
$
2,500

 
$
2,975




Transfers Between Levels

There were no transfers in or out of Level 3 for the three and six months ended June 30, 2020 and 2019.
 
 
 
 
 
 
 
 

Nonrecurring Measurements

Following is a description of valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy for June 30, 2020, and December 31, 2019.
 

 

Fair Value Measurements Using
June 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)

$
22,690


$
—


$
—


$
22,690

Other real estate owned

464


—


—


464

 
 

 

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


$
—


$
—


$
5,653

Other real estate owned

194


—


—


194


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 and 2020, 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.


Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements, other than goodwill, at June 30, 2020 and December 31, 2019.
June 30, 2020
Fair Value
 
Valuation Technique
 
Unobservable Inputs
 
Range (Weighted-Average)
State and municipal securities
$
2,465

 
Discounted cash flow
 
Maturity/Call date
 
1 month to 15 yrs

 
 
 
 
 
US Muni BQ curve
 
A- to BBB-

 
 
 
 
 
Discount rate
 
1.5% - 4%

 
 
 
 
 
Weighted-average coupon
 
3.87
%
 
 
 
 
 
 
 
 
Corporate obligations and U.S. Government-sponsored mortgage-backed securities
$
35

 
Discounted cash flow
 
Risk free rate
 
3 month LIBOR

 
 
 
 
 
plus premium for illiquidity
 
plus 200bps

 
 
 
 
 
Weighted-average coupon
 
—
%
 
 
 
 
 
 
 
 
Impaired loans (collateral dependent)
$
22,690

 
Collateral based measurements
 
Discount to reflect current market conditions and ultimate collectability
 
0% - 10%

 
 
 
 
 
Weighted-average discount by loan balance
 
10
%
 
 
 
 
 
 
 
 
Other real estate owned
$
464

 
Appraisals
 
Discount to reflect current market conditions
 
0% - 72%

 
 
 
 
 
Weighted-average discount of other real estate owned balance
 
32
%


December 31, 2019
Fair Value
 
Valuation Technique
 
Unobservable Inputs
 
Range (Weighted-Average)
State and municipal securities
$
2,858

 
Discounted cash flow
 
Maturity/Call date
 
1 month to 15 yrs

 
 
 
 
 
US Muni BQ curve
 
A- to BBB-

 
 
 
 
 
Discount rate
 
2% - 5%

 
 
 
 
 
Weighted-average coupon
 
3.92
%
 
 
 
 
 
 
 
 
Corporate obligations and U.S Government-sponsored mortgage-backed securities
$
35

 
Discounted cash flow
 
Risk free rate
 
3 month LIBOR

 
 
 
 
 
plus premium for illiquidity
 
plus 200bps

 
 
 
 
 
Weighted-average coupon
 
—
%
 
 
 
 
 
 
 
 
Impaired loans (collateral dependent)
$
5,653

 
Collateral based measurements
 
Discount to reflect current market conditions and ultimate collectability
 
0% - 10%

 
 
 
 
 
Weighted-average discount by loan balance
 
1
%
 
 
 
 
 
 
 
 
Other real estate owned
$
194

 
Appraisals
 
Discount to reflect current market conditions
 
0% - 37%

 
 
 
 
 
Weighted-average discount of other real estate owned balance
 
37
%



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.


Fair Value of Financial Instruments

The following table presents estimated fair values of the Corporation’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2020, and December 31, 2019.



June 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
$
229,759


$
229,759


$
—


$
—

Interest-bearing time deposits
380,021


380,021


—


—

Investment securities available for sale
1,890,593


—


1,888,093


2,500

Investment securities held to maturity
898,786


—


920,146


21,280

Loans held for sale
901


—


901


—

Loans
9,177,422


—


—


9,253,762

Federal Home Loan Bank stock
28,736


—


28,736


—

Interest rate swap asset
84,658


—


84,658


—

Interest receivable
57,063


—


57,063


—

Liabilities:
 

 

 

 
Deposits
$
10,965,988


$
9,566,516


$
1,395,002


$
—

Borrowings:




 

 
Securities sold under repurchase agreements
181,150


—


181,150


—

Federal Home Loan Bank advances
400,817


—


415,737


—

Subordinated debentures and other borrowings
285,197


—


276,306


—

Interest rate swap liability
87,205


—


87,205


—

Interest payable
5,587


—


5,587


—





December 31, 2019


 


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
$
177,201


$
177,201


$
—


$
—

Interest-bearing time deposits
118,263


118,263


—


—

Investment securities available for sale
1,790,025


—


1,787,132


2,893

Investment securities held to maturity
806,038


—


799,884


27,682

Loans held for sale
9,037


—


9,037


—

Loans
8,379,026


—


—


8,335,340

Federal Home Loan Bank stock
28,736


—


28,736


—

Interest rate swap asset
27,855


—


27,855


—

Interest receivable
48,901


—


48,901


—

Liabilities:
 

 

 

 
Deposits
$
9,839,956


$
8,146,745


$
1,675,202


$
—

Borrowings:
 

 

 

 
Federal funds purchased
55,000


—


55,000


—

Securities sold under repurchase agreements
187,946


—


187,801


—

Federal Home Loan Bank advances
351,072


—


352,581


—

Subordinated debentures and other borrowings
138,685


—


123,571


—

Interest rate swap liability
29,299


—


29,299


—

Interest payable
6,754


—


6,754


—
v3.20.2
Transfers Accounted for as Secured Borrowings
 6 Months Ended
Jun. 30, 2020
Transfers and Servicing [Abstract]  
Transfers Accounted for as Secured Borrowings
TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS

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

June 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
$
178,749


$
750


$
—


$
1,651


$
181,150



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


$
—


$
7,672


$
1,542


$
187,946
v3.20.2
Accumulated Other Comprehensive Income (Loss)
 6 Months Ended
Jun. 30, 2020
Equity [Abstract]  
Accumulated Other Comprehensive Income (Loss)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
The following table summarizes the changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, as of June 30, 2020 and 2019:
 
Accumulated Other Comprehensive Income (Loss)
 
Unrealized Gains (Losses) on Securities Available for Sale
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized Gains (Losses) on Defined Benefit Plans
 
Total
Balance at December 31, 2019
$
38,872

 
$
(1,141
)
 
$
(9,857
)
 
$
27,874

Other comprehensive income before reclassifications
42,909

 
(1,153
)
 
—

 
41,756

Amounts reclassified from accumulated other comprehensive income
(6,067
)
 
282

 
—

 
(5,785
)
Period change
36,842

 
(871
)
 
—

 
35,971

Balance at June 30, 2020
$
75,714

 
$
(2,012
)
 
$
(9,857
)
 
$
63,845

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
$
(6,343
)
 
$
(559
)
 
$
(14,520
)
 
$
(21,422
)
Other comprehensive income before reclassifications
39,130

 
(862
)
 
—

 
38,268

Amounts reclassified from accumulated other comprehensive income
(2,357
)
 
113

 
—

 
(2,244
)
Period change
36,773

 
(749
)
 
—

 
36,024

Balance at June 30, 2019
$
30,430

 
$
(1,308
)
 
$
(14,520
)
 
$
14,602




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 six months ended June 30, 2020 and 2019.
 
 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss) For the Three Months Ended June 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
 
$
3,068

 
$
1,843

 
Other income - net realized gains on sales of available for sale securities
Related income tax expense
 
(644
)
 
(387
)
 
Income tax expense
 
 
$
2,424

 
$
1,456

 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on cash flow hedges (2)
 
 
 
 
 
 
Interest rate contracts
 
$
(231
)
 
$
(84
)
 
Interest expense - subordinated debentures and term loans
Related income tax benefit
 
49

 
18

 
Income tax expense
 
 
$
(182
)
 
$
(66
)
 
 
 
 
 
 
 
 
 
Total reclassifications for the period, net of tax
 
$
2,242

 
$
1,390

 
 

 
 
 
 
 
 
 

 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss) For the Six Months Ended June 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
 
$
7,680


$
2,983


Other income - net realized gains on sales of available for sale securities
Related income tax expense
 
(1,613
)

(626
)

Income tax expense

 
$
6,067


$
2,357




 





Unrealized gains (losses) on cash flow hedges (2)
 





Interest rate contracts
 
$
(357
)

$
(143
)

Interest expense - subordinated debentures and term loans
Related income tax benefit
 
75


30


Income tax expense

 
$
(282
)

$
(113
)



 





Total reclassifications for the period, net of tax
 
$
5,785


$
2,244




(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. DERIVATIVE FINANCIAL INSTRUMENTS of these Notes to Consolidated Condensed Financial Statements.
v3.20.2
Share-Based Compensation
 6 Months Ended
Jun. 30, 2020
Share-based Payment Arrangement [Abstract]  
Share-Based Compensation
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 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.

Compensation expense related to unvested share-based awards is recorded by recognizing the unamortized grant date fair value of these awards over the remaining service periods of those awards, with no change in historical reported fair values and earnings.  Awards are valued at fair value in accordance with provisions of share-based compensation guidance and are recognized on a straight-line basis over the service periods of each award. To complete the exercise of vested stock options, RSA’s and ESPP options, the Corporation generally issues new shares from its authorized but unissued share pool. Share-based compensation for the three and six months ended June 30, 2020 was $1,214,000 and $2,433,000, respectively, compared to $844,000 and $1,825,000, respectively, for the three and six months ended June 30, 2019. 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 percent for the six months ended June 30, 2020, based on historical experience.


The following table summarizes the components of the Corporation's share-based compensation awards recorded as an expense and the income tax benefit of such awards.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Stock and ESPP Options
 
 
 
 
 
 
 
Pre-tax compensation expense
$
12

 
$
25

 
$
53

 
$
36

Income tax benefit
(29
)
 
(41
)
 
(29
)
 
(57
)
Stock and ESPP option expense, net of income taxes
$
(17
)
 
$
(16
)
 
$
24

 
$
(21
)
Restricted Stock Awards
 
 
 
 
 
 
 
Pre-tax compensation expense
$
1,202

 
$
819

 
$
2,380

 
$
1,789

Income tax benefit
(236
)
 
(186
)
 
(493
)
 
(726
)
Restricted stock awards expense, net of income taxes
$
966

 
$
633

 
$
1,887

 
$
1,063

Total Share-Based Compensation
 
 
 
 
 
 
 
Pre-tax compensation expense
$
1,214

 
$
844

 
$
2,433

 
$
1,825

Income tax benefit
(265
)
 
(227
)
 
(522
)
 
(783
)
Total share-based compensation expense, net of income taxes
$
949

 
$
617

 
$
1,911

 
$
1,042




As of June 30, 2020, unrecognized compensation expense related to RSAs was $5,595,000 and is expected to be recognized over a weighted-average period of 1.21 years. The Corporation did not have any unrecognized compensation expense related to stock options as of June 30, 2020.

Stock option activity under the Corporation's stock option plans as of June 30, 2020 and changes during the six months ended June 30, 2020, 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 June 30, 2020
49,300

 
$
14.57

 
2.32
 
$
640,876

Vested and Expected to Vest at June 30,2020
49,300

 
$
14.57

 
2.32
 
$
640,876

Exercisable at June 30, 2020
49,300

 
$
14.57

 
2.32
 
$
640,876




The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Corporation's closing stock price on the last trading day of the first six months of 2020 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their stock options on June 30, 2020.  The amount of aggregate intrinsic value will change based on the fair market value of the Corporation's common stock.

The aggregate intrinsic value of stock options exercised during the six months ended June 30, 2020 and 2019 was $197,000 and $308,000, respectively. Cash receipts of stock options exercised during this same period were $83,000 and $105,000, respectively.

The following table summarizes information on unvested RSAs outstanding as of June 30, 2020:
 
Number of Shares
 
Weighted-Average
Grant Date Fair Value
Unvested RSAs at January 1, 2020
351,048

 
$
40.67

Granted
14,657

 
$
27.00

Vested
(8,591
)
 
$
40.09

Forfeited
(525
)
 
$
40.44

Unvested RSAs at June 30, 2020
356,589

 
$
40.62




The grant date fair value of ESPP options was estimated to be approximately $12,000 at the beginning of the April 1, 2020 quarterly offering period. The ESPP options vested during the three months ending June 30, 2020, leaving no unrecognized compensation expense related to unvested ESPP options at June 30, 2020.
v3.20.2
Income Tax
 6 Months Ended
Jun. 30, 2020
Income Tax Disclosure [Abstract]  
Income Tax
INCOME TAX

The following table summarizes the major components creating differences between income taxes at the federal statutory and the effective tax rate recorded in the consolidated statements of income for the three and six months ended June 30, 2020 and 2019:

Three Months Ended
June 30,

Six Months Ended
June 30,
 
2020

2019

2020

2019
Reconciliation of Federal Statutory to Actual Tax Expense:
 

 

 

 
Federal statutory income tax at 21%
$
7,899


$
10,249


$
15,827


$
19,858

Tax-exempt interest income
(3,199
)

(2,403
)

(6,221
)

(4,670
)
Share-based compensation
(6
)

(41
)

(6
)

(391
)
Tax-exempt earnings and gains on life insurance
(278
)

(199
)

(564
)

(406
)
Tax credits
(89
)

(63
)

(150
)

(141
)
CARES Act - NOL carryback rate differential
—


—


(1,178
)

—

Other
296


206


405


440

Actual Tax Expense
$
4,623


$
7,749


$
8,113


$
14,690













Effective Tax Rate
12.3
%

15.9
%

10.8
%

15.5
%
v3.20.2
Net Income Per Share
 6 Months Ended
Jun. 30, 2020
Earnings Per Share [Abstract]  
Net Income Per Share
NET INCOME PER SHARE
 
Basic net income per share is computed by dividing net income by the weighted-average shares outstanding during the reporting period. Diluted net income per share is computed by dividing net income by the combination of the weighted-average shares outstanding during the reporting period and all potentially dilutive common shares. Potentially dilutive common shares include stock options and RSAs issued under the Corporation's share-based compensation plans. Potentially dilutive common shares are excluded from the computation of diluted earnings per share in the periods where the effect would be antidilutive.

The following table reconciles basic and diluted net income per share for the three and six months ended June 30, 2020 and 2019.
 
Three Months Ended June 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
$
32,992

 
53,762,913

 
$
0.62

 
$
41,056

 
49,432,167

 
$
0.83

Effect of potentially dilutive stock options and restricted stock awards
 
 
179,654

 
 
 
 
 
117,720

 
 
Diluted net income per share
$
32,992

 
53,942,567

 
$
0.62

 
$
41,056

 
49,549,887

 
$
0.83

 
Six Months Ended June 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
$
67,255

 
54,247,493

 
$
1.24

 
$
79,873

 
49,400,770

 
$
1.62

Effect of potentially dilutive stock options and restricted stock awards
 
 
182,026

 
 
 
 
 
144,382

 
 
Diluted net income per share
$
67,255

 
54,429,519

 
$
1.24

 
$
79,873

 
49,545,152

 
$
1.61




For the three and six months ended June 30, 2020 and 2019, there were no stock options with an option price greater than the average market price of the common shares.
v3.20.2
General Litigation and Regulatory Examinations
 6 Months Ended
Jun. 30, 2020
Commitments and Contingencies Disclosure [Abstract]  
General Litigation and Regulatory Examinations
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.

A discussion of the Bank’s Settlement Agreement and Agreed Order with the United States Department of Justice is contained in the "REGULATORY DEVELOPMENTS" section of Part I, Item 2. Management’s Discussion & Analysis of this Quarterly Report on Form 10-Q.
v3.20.2
General (Policies)
 6 Months Ended
Jun. 30, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Recent Accounting Changes Adopted in 2020 and New Accounting Pronouncements Not Yet Adopted
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 license 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 ending 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.


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.

The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed:
•
The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets, and
•
The accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets.

ASU No. 2018-14 is effective for fiscal years ending after December 15, 2020, for public business entities 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 of the standard did not have a significant effect on the Corporation’s disclosures.

FASB Accounting Standards Updates No. 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement

Summary - 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 in Topic 820. Certain disclosure requirements related to transfers between Level 1 and Level 2 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 end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

In addition, the amendments eliminate "at a minimum" from the phrase “an entity shall disclose at a minimum” to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration 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.



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. Based upon factors considered in the assessment and the general uncertainty as to the full extent of the COVID-19 pandemic and its effect on economic recovery, the Corporation has determined that it is not more likely than not that the fair value of the Corporation is less than the carrying value. Therefore, the Corporation concluded goodwill was not impaired at June 30, 2020, the details of which are included in NOTE 6. GOODWILL of these Notes to Consolidated Condensed Financial Statements.

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

On March 22, 2020, a statement was issued by the Bank's banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the "Interagency Statement") that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR 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 is offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include 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. During the six months ended June 30, 2020, modifications were completed on loans having a total aggregate balance of approximately $1.1 billion, or 12.1 percent of the loan portfolio. Details of the modifications are included in NOTE 4. LOANS AND ALLOWANCE of these Notes to Consolidated Condensed Financial Statements.

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 second quarter 2020 financial statements have been prepared under the existing incurred loss model. The temporary relief applicable to the Corporation’s compliance with CECL ends on the earlier of: (1) the termination date of the national emergency concerning the COVID-19 outbreak, declared by the President of the United States on March 13, 2020, under the National Emergencies Act; or (2) December 31, 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.


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.

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. The temporary relief applicable to the Corporation’s compliance with CECL ends on the earlier of: (1) the termination date of the national emergency concerning the COVID-19 outbreak, declared by the President of the United States on March 13, 2020, under the National Emergencies Act; or (2) December 31, 2020.

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

Summary - The FASB issued ASU No. 2020-04 to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. LIBOR and other interbank offered rates are widely used benchmarks or reference rates in the United States and globally. Trillions of dollars in loans, derivatives, and other financial contracts reference LIBOR, the benchmark interest rate banks use to make short-term loans to each other. With global capital markets expected to move away from LIBOR and other interbank offered rates 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.
v3.20.2
Acquisition (Tables)
 6 Months Ended
Jun. 30, 2020
Business Combinations [Abstract]  
Schedule of preliminary valuations of the fair value of assets acquired and liabilities assumed 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 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

Other assets
 
6,011

Deposits
 
(1,105,926
)
Securities sold under repurchase agreements
 
(94,760
)
Federal Home Loan Bank advances
 
(10,853
)
Other liabilities
 
(9,807
)
Net tangible assets acquired
 
114,851

Core deposit intangible
 
16,527

Goodwill
 
98,563

Purchase price
 
$
229,941
Schedule of acquired loan data
Acquired loan data for MBT is 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
Schedule of 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
v3.20.2
Investment Securities (Tables)
 6 Months Ended
Jun. 30, 2020
Investments, Debt and Equity Securities [Abstract]  
Schedule of amortized cost, gross unrealized gains, gross unrealized losses and approximate fair value of investment securities
The amortized cost, gross unrealized gains, gross unrealized losses and approximate market 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 June 30, 2020
 
 
 
 
 
 
 
U.S. Treasury
$
598


$
2


$
—


$
600

U.S. Government-sponsored agency securities
2,385

 
68

 
—

 
2,453

State and municipal
1,026,917

 
67,439

 
138

 
1,094,218

U.S. Government-sponsored mortgage-backed securities
761,391

 
28,870

 
27

 
790,234

Corporate obligations
3,031

 
57

 
—

 
3,088

Total available for sale
1,794,322

 
96,436

 
165

 
1,890,593

Held to maturity at June 30, 2020
 
 
 
 
 
 
 
U.S. Government-sponsored agency securities
10,100

 
3

 
—

 
10,103

State and municipal
374,214

 
23,779

 
43

 
397,950

U.S. Government-sponsored mortgage-backed securities
512,972

 
18,932

 
31

 
531,873

Foreign investment
1,500

 
—

 
—

 
1,500

Total held to maturity
898,786

 
42,714

 
74

 
941,426

Total Investment Securities
$
2,693,108

 
$
139,150

 
$
239

 
$
2,832,019



 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available for sale at December 31, 2019
 
 
 
 
 
 
 
U.S. Government-sponsored agency securities
$
38,529

 
$
346

 
$
—

 
$
38,875

State and municipal
859,511

 
41,092

 
807

 
899,796

U.S. Government-sponsored mortgage-backed securities
842,349

 
10,378

 
1,404

 
851,323

Corporate obligations
31

 
—

 
—

 
31

Total available for sale
1,740,420

 
51,816

 
2,211

 
1,790,025

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

 
—

 
—

 
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
Schedule of amortized cost and fair value of available for sale securities and held to maturity securities

The amortized cost and fair value of available for sale and held to maturity securities at June 30, 2020 and December 31, 2019, 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 June 30,2020:
 
 
 
 
 
 
 
Due in one year or less
$
1,947

 
$
1,961

 
$
12,191

 
$
12,217

Due after one through five years
4,589

 
4,718

 
23,639

 
24,224

Due after five through ten years
49,425

 
52,485

 
95,694

 
101,354

Due after ten years
976,970

 
1,041,195

 
254,290

 
271,758

 
1,032,931

 
1,100,359

 
385,814

 
409,553

U.S. Government-sponsored mortgage-backed securities
761,391

 
790,234

 
512,972

 
531,873

Total Investment Securities
$
1,794,322

 
$
1,890,593

 
$
898,786

 
$
941,426



 
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
Schedule of gross gains on sales and redemptions of available for sale securities
Gross gains on the sales and redemptions of available for sale securities for the three and six months ended June 30, 2020 and 2019 are shown below.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Sales and Redemptions of Available for Sale Securities:
 
 
 
 
 
 
 
Gross gains
$
3,068

 
$
1,843

 
$
7,680

 
$
2,983

Gross losses
—


—


—


—
Schedule of investment securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position
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 June 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 June 30, 2020
 

 

 

 

 

 
State and municipal
$
23,745


$
138


$
—


$
—


$
23,745


$
138

U.S. Government-sponsored mortgage-backed securities
15,239


27


—


—


15,239


27

Total Temporarily Impaired Available for Sale Securities
38,984


165


—


—


38,984


165

Temporarily Impaired Held to Maturity Securities at June 30,2020
 

 

 

 

 

 
State and municipal
2,633


43


—


—


2,633


43

U.S. Government-sponsored mortgage-backed securities
10,198


31


—


—


10,198


31

Total Temporarily Impaired Held to Maturity Securities
12,831


74


—


—


12,831


74

Total Temporarily Impaired Investment Securities
$
51,815


$
239


$
—


$
—


$
51,815


$
239


 
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


$
—


$
—


$
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


—


—


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
Schedule of investments in debt and equity securities reported in the financial statements at an amount less than their historical cost
Certain investments in debt and equity securities are reported in the financial statements at an amount less than their historical cost as indicated in the table below.
 
June 30, 2020
 
December 31, 2019
Investments reported at less than historical cost:
 
 
 
Historical cost
$
52,054

 
$
398,172

Fair value
51,815

 
395,416

Gross unrealized losses
$
239

 
$
2,756

Percent of the Corporation's investment portfolio
1.9
%
 
15.2
%
v3.20.2
Loans and Allowance (Tables)
 6 Months Ended
Jun. 30, 2020
Receivables [Abstract]  
Schedule of composition of loan portfolio by loan class
The following table illustrates the composition of the Corporation’s loan portfolio by loan class for the periods indicated:

June 30, 2020

December 31, 2019
Commercial and industrial loans
$
2,898,329


$
2,109,879

Agricultural production financing and other loans to farmers
93,838


93,861

Real estate loans:



Construction
640,560


787,568

Commercial and farmland
3,239,998


3,052,698

Residential
1,145,187


1,143,217

Home equity
532,314


588,984

Individuals' loans for household and other personal expenditures
123,611


135,989

Public finance and other commercial loans
624,704


547,114

  Loans
9,298,541


8,459,310

Allowance for loan losses
(121,119
)

(80,284
)
             Net Loans
$
9,177,422


$
8,379,026
Schedule of changes in allowance for loan losses
The following tables summarize changes in the allowance for loan losses by loan segment for the three and six months ended June 30, 2020 and June 30, 2019:
 
Three Months Ended June 30, 2020
 
Commercial

Commercial
Real Estate

Consumer

Residential

Total
Allowance for loan losses:
 

 

 

 

 
Balances, March 31, 2020
$
38,431


$
37,907


$
5,752


$
17,364


$
99,454

Provision for losses
6,240


8,945


2,783


3,927


21,895

Recoveries on loans
106


107


56


48


317

Loans charged off
(99
)

(41
)

(146
)

(261
)

(547
)
Balances, June 30, 2020
$
44,678


$
46,918


$
8,445


$
21,078


$
121,119



Six Months Ended June 30, 2020
 
Commercial

Commercial
Real Estate

Consumer

Residential

Total
Allowance for loan losses:
 

 

 

 

 
Balances, December 31, 2019
$
32,902


$
28,778


$
4,035


$
14,569


$
80,284

Provision for losses
11,941


18,139


4,707


6,860


41,647

Recoveries on loans
549


225


98


118


990

Loans charged off
(714
)

(224
)

(395
)

(469
)

(1,802
)
Balances, June 30, 2020
$
44,678


$
46,918


$
8,445


$
21,078


$
121,119



Three Months Ended June 30, 2019
 
Commercial

Commercial
Real Estate

Consumer

Residential

Total
Allowance for loan losses:
 

 

 

 

 
Balances, March 31, 2019
$
33,069


$
29,434


$
4,026


$
14,373


$
80,902

Provision for losses
100


320


36


44


500

Recoveries on loans
344


778


100


212


1,434

Loans charged off
(311
)

(1,001
)

(92
)

(158
)

(1,562
)
Balances, June 30, 2019
$
33,202


$
29,531


$
4,070


$
14,471


$
81,274


 
Six Months Ended June 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
336


1,089


141


134


1,700

Recoveries on loans
886


1,023


218


312


2,439

Loans charged off
(677
)

(2,190
)

(253
)

(297
)

(3,417
)
Balances, June 30, 2019
$
33,202


$
29,531


$
4,070


$
14,471


$
81,274
Schedule of allowance for credit losses and loan portfolio by loan segment
The tables below show the Corporation’s allowance for loan losses and loan portfolio by loan segment as of the periods indicated.
 
June 30, 2020
 
Commercial

Commercial
Real Estate

Consumer

Residential

Total
Allowance Balances:
 

 

 

 

 
Individually evaluated for impairment
$
7,466


$
4,943


$
—


$
590


$
12,999

Collectively evaluated for impairment
37,212


41,975


8,445


20,488


108,120

Total Allowance for Loan Losses
$
44,678


$
46,918


$
8,445


$
21,078


$
121,119

Loan Balances:








 
Individually evaluated for impairment
$
15,312


$
26,512


$
3


$
3,453


$
45,280

Collectively evaluated for impairment
3,600,395


3,847,884


123,608


1,673,093


9,244,980

Loans acquired with deteriorated credit quality
1,164


6,162


—


955


8,281

Loans
$
3,616,871


$
3,880,558


$
123,611


$
1,677,501


$
9,298,541


 
December 31, 2019
 
Commercial

Commercial
Real Estate

Consumer

Residential

Total
Allowance Balances:
 

 

 

 

 
Individually evaluated for impairment
$
—


$
231


$
—


$
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
Schedule of non-accrual loans by loan class

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

June 30, 2020

December 31, 2019
Commercial and industrial loans
$
16,354


$
1,255

Agriculture production financing and other loans to farmers
—


183

Real estate loans:


 
Construction
119


977

Commercial and farmland
25,405


7,007

Residential
5,773


5,062

Home equity
2,376


1,421

Individuals' loans for household and other personal expenditures
75


44

Total
$
50,102


$
15,949
Schedule of composition of impaired loans by loan class
The following tables show the composition of the Corporation’s impaired loans, related allowance and interest income recognized while impaired by loan class as of the periods indicated:
 
June 30, 2020
 
Unpaid
Principal
Balance

Recorded
Investment

Related
Allowance
Impaired loans with no related allowance:
 

 


Commercial and industrial loans
$
5,024


$
5,008


$
—

Real estate Loans:





Commercial and farmland
9,675


7,602


—

Residential
75


59


—

Individuals' loans for household and other personal expenditures
3


3


—

Total
$
14,777


$
12,672


$
—

Impaired loans with related allowance:


 


Commercial and industrial loans
$
10,342


$
10,304


$
7,466

Real estate Loans:





Commercial and farmland
19,650


18,910


4,943

Residential
3,134


3,009


520

Home equity
401

 
385


70

Total
$
33,527


$
32,608


$
12,999

Total Impaired Loans
$
48,304


$
45,280


$
12,999


 
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


—

Total
$
5,139

 
$
4,357

 
$
689

Total Impaired Loans
$
15,094

 
$
11,709

 
$
689

 
Three Months Ended June 30, 2020

Six Months Ended June 30, 2020
 
Average
Recorded Investment

Interest
Income Recognized

Average
Recorded Investment

Interest
Income Recognized
Impaired loans with no related allowance:
 

 


 

 
Commercial and industrial loans
$
5,008


$
—


$
5,008


$
—

Real estate Loans:







Commercial and farmland
7,637


37


7,910


75

Residential
59


1


59


2

Individuals' loans for household and other personal expenditures
3


—


3


—

Total
$
12,707


$
38


$
12,980


$
77

Impaired loans with related allowance:


 

 

 
Commercial and industrial loans
$
10,304


$
—


$
10,304


$
—

Real estate Loans:







Commercial and farmland
18,910


—


19,156


—

Residential
3,020


19


3,032


38

Home equity
387


3


390


6

Total
$
32,621


$
22


$
32,882


$
44

Total Impaired Loans
$
45,328


$
60


$
45,862


$
121

 
Three Months Ended June 30, 2019

Six Months Ended June 30, 2019
 
Average
Recorded Investment

Interest
Income Recognized

Average
Recorded Investment

Interest
Income Recognized
Impaired loans with no related allowance:
 

 


 

 
Commercial and industrial loans
$
1,013


$
—


$
1,021


$
—

Agriculture production financing and other loans to farmers
668


—


672


—

Real estate Loans:







Construction
7,314


—


7,792


—

Commercial and farmland
7,998


39


8,187


78

Residential
38


1


38


2

Home equity
49


—


49


—

Public finance and other commercial loans
353


—


353


—

Total
$
17,433


$
40


$
18,112


$
80

Impaired loans with related allowance:







Commercial and industrial loans
$
940


$
—


$
940


$
—

Agriculture production financing and other loans to farmers
2,117


—


2,134


—

Real estate Loans:







Commercial and farmland
157


—


164


—

Residential
2,021


16


2,029


32

Home equity
351


3


352


6

Individuals' loans for household and other personal expenditures
14


—


15


—

Total
$
5,600


$
19


$
5,634


$
38

Total Impaired Loans
$
23,033


$
59


$
23,746


$
118
Schedule of credit quality of loan portfolio by loan class

The following tables summarize the credit quality of the Corporation’s loan portfolio, by loan class 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.
 
June 30, 2020
 
Commercial
Pass

Commercial
Special
Mention

Commercial Substandard

Commercial
Doubtful

Commercial Loss

Consumer Performing

Consumer
Non-Performing

Total
Commercial and industrial loans
$
2,722,071


$
87,069


$
89,189


$
—


$
—


$
—


$
—


$
2,898,329

Agriculture production financing and other loans to farmers
78,645


6,082


9,111


—


—


—


—


93,838

Real estate Loans:














 
Construction
590,889


791


20,229


—


—


28,536


115


640,560

Commercial and farmland
3,035,363


103,921


99,330


—


—


1,384


—


3,239,998

Residential
189,053


1,637


6,684


—


—


943,222


4,591


1,145,187

Home equity
20,214


—


1,342


—


—


508,457


2,301


532,314

Individuals' loans for household and other personal expenditures
—


—


—


—


—


123,524


87


123,611

Public finance and other commercial loans
624,655


49


—


—


—


—


—


624,704

Loans
$
7,260,890


$
199,549


$
225,885


$
—


$
—


$
1,605,123


$
7,094


$
9,298,541


 
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


$
—


$
—


$
—


$
—


$
2,109,879

Agriculture production financing and other loans to farmers
78,558


5,626


9,677


—


—


—


—


93,861

Real estate Loans:


 







 

 

 
Construction
749,249


1,613


1,634


—


—


35,072


—


787,568

Commercial and farmland
2,894,366


57,776


98,575


—


—


1,981


—


3,052,698

Residential
196,710


877


8,075


—


—


932,743


4,812


1,143,217

Home equity
24,211


257


682


—


—


562,507


1,327


588,984

Individuals' loans for household and other personal expenditures
—


—


—


—


—


135,944


45


135,989

Public finance and other commercial loans
547,114


—


—


—


—


—


—


547,114

Loans
$
6,447,193


$
147,328


$
190,358


$
—


$
—


$
1,668,247


$
6,184


$
8,459,310
Schedule of past due aging of loan portfolio by loan class

The tables below show a past due aging of the Corporation’s loan portfolio, by loan class, as of June 30, 2020, and December 31, 2019:
 
June 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
$
2,871,366


$
9,435


$
1,038


$
136


$
16,354


$
26,963


$
2,898,329

Agriculture production financing and other loans to farmers
92,735


1,103


—


—


—


1,103


93,838

Real estate loans:










 


Construction
634,706


5,235


500


—


119


5,854


640,560

Commercial and farmland
3,172,688


18,948


18,458


4,499


25,405


67,310


3,239,998

Residential
1,136,131


2,679


329


275


5,773


9,056


1,145,187

Home equity
526,096


2,110


1,673


59


2,376


6,218


532,314

Individuals' loans for household and other personal expenditures
123,126


227


171


12


75


485


123,611

Public finance and other commercial loans
624,704


—


—


—


—


—


624,704

Loans
$
9,181,552


$
39,737


$
22,169


$
4,981


$
50,102


$
116,989


$
9,298,541

 
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


—


—


—


183


183


93,861

Real estate loans:
 

 

 

 





 
Construction
784,961


1,630


—


—


977


2,607


787,568

Commercial and farmland
3,043,318


2,324


49


—


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


—


—


—


—


—


547,114

Loans
$
8,427,414


$
14,683


$
1,195


$
69


$
15,949


$
31,896


$
8,459,310
Schedules of troubled debt restructurings

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

Three Months Ended June 30, 2020

Six Months Ended June 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
$
654


$
654


3


$
654


$
654


3

Real estate loans:
 

 

 

 

 

 
Commercial and farmland
565


565


2


565


565


2

Residential
300


337


6


300


337


6

Total
$
1,519


$
1,556


11


$
1,519


$
1,556


11


Three Months Ended June 30, 2019

Six Months Ended June 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
$
171

 
$
164

 
4


$
261


$
254


5

Total
$
171

 
$
164

 
4


$
261


$
254


5




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

Three Months Ended June 30, 2020

Term
Modification

Rate
Modification

Combination

Total
Modification
Commercial and industrial loans
$
652

 
$
—

 
$
—

 
$
652

Real estate loans:
 

 

 


Commercial and farmland
565


—


—


565

Residential
—


111


223


334

Total
$
1,217


$
111


$
223


$
1,551


Six Months Ended June 30, 2020

Term
Modification

Rate
Modification

Combination

Total
Modification
Commercial and industrial loans
$
652


$
—


$
—


$
652

Real estate loans:
 

 

 


Commercial and farmland
565


—


—


565

Residential
—


111


223


334

Total
$
1,217


$
111


$
223


$
1,551


Three Months Ended June 30, 2019

Term
Modification

Rate
Modification

Combination

Total
Modification
Real estate loans:
 

 

 


Residential
$
—


$
—


$
164


$
164

Total
$
—


$
—


$
164


$
164



Six Months Ended June 30, 2019

Term
Modification

Rate
Modification

Combination

Total
Modification
Real estate loans:




 

 
Residential
$
—


$
89


$
164


$
253

Total
$
—


$
89


$
164


$
253
Schedule of troubled debt restructurings that subsequently defaulted A loan is considered in default if it is 30-days or more past due.

Three Months Ended June 30, 2020

Six Months Ended June 30, 2020

Number of Loans

Recorded Balance

Number of Loans

Recorded Balance
Commercial and industrial loans
1


$
268


1


$
268

Total
1


$
268


1


$
268


Three Months Ended June 30, 2019

Six Months Ended June 30, 2019

Number of Loans

Recorded Balance

Number of Loans

Recorded Balance
Real estate loans:
 

 

 


 
Residential
1
 
$
62


1


$
62

Total
1
 
$
62


1


$
62
v3.20.2
Purchased Credit Impaired Loans (Tables)
 6 Months Ended
Jun. 30, 2020
Receivables [Abstract]  
Schedule of accretable yield, or income expected to be collected, and reclassifications from nonaccretable yield The accretable yield, or income expected to be collected, and reclassifications from nonaccretable, are identified in the table below.

Three Months Ended June 30, 2020
 
Six Months Ended June 30, 2020
Accretable yield beginning balance
$
1,926

 
$
2,132

Additions
—

 
$
—

Accretion
(1,033
)
 
(1,418
)
Reclassification from nonaccretable
653

 
839

Disposals
—

 
(7
)
Accretable yield ending balance
$
1,546

 
$
1,546




Three Months Ended June 30, 2019

Six Months Ended June 30, 2019
Accretable yield beginning balance
$
2,064


$
2,143

Additions
—


—

Accretion
(638
)

(1,218
)
Reclassification from nonaccretable
488


989

Disposals
—


—

Accretable yield ending balance
$
1,914


$
1,914
v3.20.2
Goodwill (Tables)
 6 Months Ended
Jun. 30, 2020
Goodwill and Intangible Assets Disclosure [Abstract]  
Schedule of goodwill

2019
Balance, January 1
$
445,355

Goodwill acquired
97,844

Measurement period adjustment
719

Balance, December 31
$
543,918
v3.20.2
Core Deposit Intangibles (Tables)
 6 Months Ended
Jun. 30, 2020
Goodwill and Intangible Assets Disclosure [Abstract]  
Schedule of core deposit
The carrying basis and accumulated amortization of recognized core deposit intangibles are noted below.

June 30, 2020

December 31, 2019
Gross carrying amount
$
102,396


$
85,869

Core deposit intangibles acquired
—


16,527

Accumulated amortization
(70,459
)

(67,434
)
Total core deposit intangibles
$
31,937


$
34,962
Schedule of estimated future amortization expense Estimated future amortization expense is summarized as follows:
 
Amortization Expense
2020
$
2,962

2021
5,429

2022
5,027

2023
4,827

2024
4,241

After 2024
9,451

 
$
31,937
v3.20.2
Derivative Financial Instruments (Tables)
 6 Months Ended
Jun. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Schedule of fair value of derivative financial instruments and their classification on Balance Sheet
The table below presents the fair value of the Corporation’s derivative financial instruments, as well as their classification on the Balance Sheet, as of June 30, 2020, and December 31, 2019.
 
Asset Derivatives

Liability Derivatives
 
June 30, 2020

December 31, 2019

June 30, 2020

December 31, 2019
 
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 Assets

$
—


Other Liabilities

$
2,547


Other Liabilities

$
1,444

Derivatives not designated as hedging instruments:
 

 

 

 

 

 

 

 
Interest rate contracts
Other Assets

$
84,658


Other Assets

$
27,855


Other Liabilities

$
84,658


Other Liabilities

$
27,855
Schedule of amount of gain (loss) recognized in other comprehensive income
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
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative
(Effective Portion)
Three Months Ended

Six Months Ended
June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019
Interest Rate Products
$
(145
)

$
(701
)

$
(1,459
)

$
(1,092
)
Schedule of derivative instruments, gain (loss) in Income Statement
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
June 30, 2020

Three Months Ended
June 30, 2019
Interest rate contracts

Interest Expense

$
(231
)

$
(84
)
Derivatives Designated as
Hedging Instruments under
FASB ASC 815-10

Location of Gain (Loss)
Recognized Income on
Derivative

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


Six Months Ended
June 30, 2020

Six Months Ended
June 30, 2019
Interest rate contracts

Interest Expense

$
(357
)

$
(143
)
v3.20.2
Disclosures About Fair Value of Assets and Liabilities (Tables)
 6 Months Ended
Jun. 30, 2020
Fair Value Disclosures [Abstract]  
Schedule of fair value measurements of assets and liabilities recognized in Consolidated Condensed Balance Sheets measured at fair value The following table presents the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements fall at June 30, 2020, and December 31, 2019.
 
 
 
Fair Value Measurements Using:
June 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
$
600

 
$
—

 
$
600

 
$
—

U.S. Government-sponsored agency securities
2,453

 
—

 
2,453

 
—

State and municipal
1,094,218

 
—

 
1,091,753

 
2,465

U.S. Government-sponsored mortgage-backed securities
790,234

 
—

 
790,230

 
4

Corporate obligations
3,088

 
—

 
3,057

 
31

Interest rate swap asset
84,658

 
—

 
84,658

 
—

Interest rate swap liability
87,205

 
—

 
87,205

 
—


 
 
 
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)
Available for sale securities:
 
 
 
 
 
 
 
U.S. Government-sponsored agency securities
$
38,875


$
—


$
38,875


$
—

State and municipal
899,796

 
—

 
896,938

 
2,858

U.S. Government-sponsored mortgage-backed securities
851,323

 
—

 
851,319

 
4

Corporate obligations
31

 
—

 
—

 
31

Interest rate swap asset
27,855

 
—

 
27,855

 
—

Interest rate swap liability
29,299

 
—

 
29,299

 
—
Schedule of reconciliation of beginning and ending balances of recurring fair value measurements recognized in Consolidated Condensed Balance Sheets using significant unobservable Level 3 inputs
The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying
balance sheets using significant unobservable Level 3 inputs for the three and six months ended June 30, 2020 and 2019.
 
Available for Sale Securities
 
Three Months Ended
 
Six Months Ended
 
June 30, 2020
 
June 30, 2019
 
June 30, 2020
 
June 30, 2019
Balance at beginning of the period
$
2,528

 
$
2,936

 
$
2,892

 
$
3,328

Included in other comprehensive income
(30
)
 
37

 
(50
)
 
80

Principal payments
2

 
2

 
(342
)
 
(433
)
Ending balance
$
2,500

 
$
2,975

 
$
2,500

 
$
2,975
Schedule of description of valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in Consolidated Condensed Balance Sheets
Following is a description of valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy for June 30, 2020, and December 31, 2019.
 

 

Fair Value Measurements Using
June 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)

$
22,690


$
—


$
—


$
22,690

Other real estate owned

464


—


—


464

 
 

 

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


$
—


$
—


$
5,653

Other real estate owned

194


—


—


194
Schedule of unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill
The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements, other than goodwill, at June 30, 2020 and December 31, 2019.
June 30, 2020
Fair Value
 
Valuation Technique
 
Unobservable Inputs
 
Range (Weighted-Average)
State and municipal securities
$
2,465

 
Discounted cash flow
 
Maturity/Call date
 
1 month to 15 yrs

 
 
 
 
 
US Muni BQ curve
 
A- to BBB-

 
 
 
 
 
Discount rate
 
1.5% - 4%

 
 
 
 
 
Weighted-average coupon
 
3.87
%
 
 
 
 
 
 
 
 
Corporate obligations and U.S. Government-sponsored mortgage-backed securities
$
35

 
Discounted cash flow
 
Risk free rate
 
3 month LIBOR

 
 
 
 
 
plus premium for illiquidity
 
plus 200bps

 
 
 
 
 
Weighted-average coupon
 
—
%
 
 
 
 
 
 
 
 
Impaired loans (collateral dependent)
$
22,690

 
Collateral based measurements
 
Discount to reflect current market conditions and ultimate collectability
 
0% - 10%

 
 
 
 
 
Weighted-average discount by loan balance
 
10
%
 
 
 
 
 
 
 
 
Other real estate owned
$
464

 
Appraisals
 
Discount to reflect current market conditions
 
0% - 72%

 
 
 
 
 
Weighted-average discount of other real estate owned balance
 
32
%


December 31, 2019
Fair Value
 
Valuation Technique
 
Unobservable Inputs
 
Range (Weighted-Average)
State and municipal securities
$
2,858

 
Discounted cash flow
 
Maturity/Call date
 
1 month to 15 yrs

 
 
 
 
 
US Muni BQ curve
 
A- to BBB-

 
 
 
 
 
Discount rate
 
2% - 5%

 
 
 
 
 
Weighted-average coupon
 
3.92
%
 
 
 
 
 
 
 
 
Corporate obligations and U.S Government-sponsored mortgage-backed securities
$
35

 
Discounted cash flow
 
Risk free rate
 
3 month LIBOR

 
 
 
 
 
plus premium for illiquidity
 
plus 200bps

 
 
 
 
 
Weighted-average coupon
 
—
%
 
 
 
 
 
 
 
 
Impaired loans (collateral dependent)
$
5,653

 
Collateral based measurements
 
Discount to reflect current market conditions and ultimate collectability
 
0% - 10%

 
 
 
 
 
Weighted-average discount by loan balance
 
1
%
 
 
 
 
 
 
 
 
Other real estate owned
$
194

 
Appraisals
 
Discount to reflect current market conditions
 
0% - 37%

 
 
 
 
 
Weighted-average discount of other real estate owned balance
 
37
%
Schedule of estimated fair values of financial instruments
The following table presents estimated fair values of the Corporation’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2020, and December 31, 2019.



June 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
$
229,759


$
229,759


$
—


$
—

Interest-bearing time deposits
380,021


380,021


—


—

Investment securities available for sale
1,890,593


—


1,888,093


2,500

Investment securities held to maturity
898,786


—


920,146


21,280

Loans held for sale
901


—


901


—

Loans
9,177,422


—


—


9,253,762

Federal Home Loan Bank stock
28,736


—


28,736


—

Interest rate swap asset
84,658


—


84,658


—

Interest receivable
57,063


—


57,063


—

Liabilities:
 

 

 

 
Deposits
$
10,965,988


$
9,566,516


$
1,395,002


$
—

Borrowings:




 

 
Securities sold under repurchase agreements
181,150


—


181,150


—

Federal Home Loan Bank advances
400,817


—


415,737


—

Subordinated debentures and other borrowings
285,197


—


276,306


—

Interest rate swap liability
87,205


—


87,205


—

Interest payable
5,587


—


5,587


—





December 31, 2019


 


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
$
177,201


$
177,201


$
—


$
—

Interest-bearing time deposits
118,263


118,263


—


—

Investment securities available for sale
1,790,025


—


1,787,132


2,893

Investment securities held to maturity
806,038


—


799,884


27,682

Loans held for sale
9,037


—


9,037


—

Loans
8,379,026


—


—


8,335,340

Federal Home Loan Bank stock
28,736


—


28,736


—

Interest rate swap asset
27,855


—


27,855


—

Interest receivable
48,901


—


48,901


—

Liabilities:
 

 

 

 
Deposits
$
9,839,956


$
8,146,745


$
1,675,202


$
—

Borrowings:
 

 

 

 
Federal funds purchased
55,000


—


55,000


—

Securities sold under repurchase agreements
187,946


—


187,801


—

Federal Home Loan Bank advances
351,072


—


352,581


—

Subordinated debentures and other borrowings
138,685


—


123,571


—

Interest rate swap liability
29,299


—


29,299


—

Interest payable
6,754


—


6,754


—
v3.20.2
Transfers Accounted for as Secured Borrowings (Tables)
 6 Months Ended
Jun. 30, 2020
Transfers and Servicing [Abstract]  
Schedule of collateral pledged for all repurchase agreements accounted for as secured borrowings
The collateral pledged for all repurchase agreements that are accounted for as secured borrowings as of June 30, 2020 and December 31, 2019 were:

June 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
$
178,749


$
750


$
—


$
1,651


$
181,150



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


$
—


$
7,672


$
1,542


$
187,946
v3.20.2
Accumulated Other Comprehensive Income (Loss) (Tables)
 6 Months Ended
Jun. 30, 2020
Equity [Abstract]  
Schedule of accumulated other comprehensive income (loss)
The following table summarizes the changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, as of June 30, 2020 and 2019:
 
Accumulated Other Comprehensive Income (Loss)
 
Unrealized Gains (Losses) on Securities Available for Sale
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized Gains (Losses) on Defined Benefit Plans
 
Total
Balance at December 31, 2019
$
38,872

 
$
(1,141
)
 
$
(9,857
)
 
$
27,874

Other comprehensive income before reclassifications
42,909

 
(1,153
)
 
—

 
41,756

Amounts reclassified from accumulated other comprehensive income
(6,067
)
 
282

 
—

 
(5,785
)
Period change
36,842

 
(871
)
 
—

 
35,971

Balance at June 30, 2020
$
75,714

 
$
(2,012
)
 
$
(9,857
)
 
$
63,845

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
$
(6,343
)
 
$
(559
)
 
$
(14,520
)
 
$
(21,422
)
Other comprehensive income before reclassifications
39,130

 
(862
)
 
—

 
38,268

Amounts reclassified from accumulated other comprehensive income
(2,357
)
 
113

 
—

 
(2,244
)
Period change
36,773

 
(749
)
 
—

 
36,024

Balance at June 30, 2019
$
30,430

 
$
(1,308
)
 
$
(14,520
)
 
$
14,602
Schedule of reclassification out of accumulated other comprehensive income (loss)
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 six months ended June 30, 2020 and 2019.
 
 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss) For the Three Months Ended June 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
 
$
3,068

 
$
1,843

 
Other income - net realized gains on sales of available for sale securities
Related income tax expense
 
(644
)
 
(387
)
 
Income tax expense
 
 
$
2,424

 
$
1,456

 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on cash flow hedges (2)
 
 
 
 
 
 
Interest rate contracts
 
$
(231
)
 
$
(84
)
 
Interest expense - subordinated debentures and term loans
Related income tax benefit
 
49

 
18

 
Income tax expense
 
 
$
(182
)
 
$
(66
)
 
 
 
 
 
 
 
 
 
Total reclassifications for the period, net of tax
 
$
2,242

 
$
1,390

 
 

 
 
 
 
 
 
 

 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss) For the Six Months Ended June 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
 
$
7,680


$
2,983


Other income - net realized gains on sales of available for sale securities
Related income tax expense
 
(1,613
)

(626
)

Income tax expense

 
$
6,067


$
2,357




 





Unrealized gains (losses) on cash flow hedges (2)
 





Interest rate contracts
 
$
(357
)

$
(143
)

Interest expense - subordinated debentures and term loans
Related income tax benefit
 
75


30


Income tax expense

 
$
(282
)

$
(113
)



 





Total reclassifications for the period, net of tax
 
$
5,785


$
2,244




(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. DERIVATIVE FINANCIAL INSTRUMENTS of these Notes to Consolidated Condensed Financial Statements.
v3.20.2
Share-Based Compensation (Tables)
 6 Months Ended
Jun. 30, 2020
Share-based Payment Arrangement [Abstract]  
Schedule of components of share-based compensation awards

The following table summarizes the components of the Corporation's share-based compensation awards recorded as an expense and the income tax benefit of such awards.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Stock and ESPP Options
 
 
 
 
 
 
 
Pre-tax compensation expense
$
12

 
$
25

 
$
53

 
$
36

Income tax benefit
(29
)
 
(41
)
 
(29
)
 
(57
)
Stock and ESPP option expense, net of income taxes
$
(17
)
 
$
(16
)
 
$
24

 
$
(21
)
Restricted Stock Awards
 
 
 
 
 
 
 
Pre-tax compensation expense
$
1,202

 
$
819

 
$
2,380

 
$
1,789

Income tax benefit
(236
)
 
(186
)
 
(493
)
 
(726
)
Restricted stock awards expense, net of income taxes
$
966

 
$
633

 
$
1,887

 
$
1,063

Total Share-Based Compensation
 
 
 
 
 
 
 
Pre-tax compensation expense
$
1,214

 
$
844

 
$
2,433

 
$
1,825

Income tax benefit
(265
)
 
(227
)
 
(522
)
 
(783
)
Total share-based compensation expense, net of income taxes
$
949

 
$
617

 
$
1,911

 
$
1,042
Schedule of stock option activity under stock option plans
Stock option activity under the Corporation's stock option plans as of June 30, 2020 and changes during the six months ended June 30, 2020, 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 June 30, 2020
49,300

 
$
14.57

 
2.32
 
$
640,876

Vested and Expected to Vest at June 30,2020
49,300

 
$
14.57

 
2.32
 
$
640,876

Exercisable at June 30, 2020
49,300

 
$
14.57

 
2.32
 
$
640,876
Schedule of Unvested RSAs outstanding
The following table summarizes information on unvested RSAs outstanding as of June 30, 2020:
 
Number of Shares
 
Weighted-Average
Grant Date Fair Value
Unvested RSAs at January 1, 2020
351,048

 
$
40.67

Granted
14,657

 
$
27.00

Vested
(8,591
)
 
$
40.09

Forfeited
(525
)
 
$
40.44

Unvested RSAs at June 30, 2020
356,589

 
$
40.62
v3.20.2
Income Tax (Tables)
 6 Months Ended
Jun. 30, 2020
Income Tax Disclosure [Abstract]  
Schedule of differences between income taxes at federal statutory tax rate and effective tax rate
The following table summarizes the major components creating differences between income taxes at the federal statutory and the effective tax rate recorded in the consolidated statements of income for the three and six months ended June 30, 2020 and 2019:

Three Months Ended
June 30,

Six Months Ended
June 30,
 
2020

2019

2020

2019
Reconciliation of Federal Statutory to Actual Tax Expense:
 

 

 

 
Federal statutory income tax at 21%
$
7,899


$
10,249


$
15,827


$
19,858

Tax-exempt interest income
(3,199
)

(2,403
)

(6,221
)

(4,670
)
Share-based compensation
(6
)

(41
)

(6
)

(391
)
Tax-exempt earnings and gains on life insurance
(278
)

(199
)

(564
)

(406
)
Tax credits
(89
)

(63
)

(150
)

(141
)
CARES Act - NOL carryback rate differential
—


—


(1,178
)

—

Other
296


206


405


440

Actual Tax Expense
$
4,623


$
7,749


$
8,113


$
14,690













Effective Tax Rate
12.3
%

15.9
%

10.8
%

15.5
%
v3.20.2
Net Income Per Share (Tables)
 6 Months Ended
Jun. 30, 2020
Earnings Per Share [Abstract]  
Schedule of basic and diluted net income per share
The following table reconciles basic and diluted net income per share for the three and six months ended June 30, 2020 and 2019.
 
Three Months Ended June 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
$
32,992

 
53,762,913

 
$
0.62

 
$
41,056

 
49,432,167

 
$
0.83

Effect of potentially dilutive stock options and restricted stock awards
 
 
179,654

 
 
 
 
 
117,720

 
 
Diluted net income per share
$
32,992

 
53,942,567

 
$
0.62

 
$
41,056

 
49,549,887

 
$
0.83

 
Six Months Ended June 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
$
67,255

 
54,247,493

 
$
1.24

 
$
79,873

 
49,400,770

 
$
1.62

Effect of potentially dilutive stock options and restricted stock awards
 
 
182,026

 
 
 
 
 
144,382

 
 
Diluted net income per share
$
67,255

 
54,429,519

 
$
1.24

 
$
79,873

 
49,545,152

 
$
1.61
v3.20.2
General (Details) - USD ($)
$ in Thousands
Jan. 01, 2020
Jun. 30, 2020
Dec. 31, 2019
New Accounting Pronouncements or Change in Accounting Principle [Line Items]      
Loans   $ 9,298,541 $ 8,459,310
Estimated | One-time cumulative-effect adjustment      
New Accounting Pronouncements or Change in Accounting Principle [Line Items]      
Life of loan portfolio 4 years    
Reserve for potential losses from unfunded commitments $ 18,000    
Estimated | One-time cumulative-effect adjustment | Minimum      
New Accounting Pronouncements or Change in Accounting Principle [Line Items]      
Increase in allowance 55.00%    
Estimated | One-time cumulative-effect adjustment | Maximum      
New Accounting Pronouncements or Change in Accounting Principle [Line Items]      
Increase in allowance 65.00%    
Payment deferrals, fee waivers, extensions of repayment terms, or other      
New Accounting Pronouncements or Change in Accounting Principle [Line Items]      
Loans   $ 1,100,000  
Percent of loan portfolio modified   12.10%  
v3.20.2
Acquisition - Narrative (Details) - MBT
$ in Thousands, shares in Millions
 12 Months Ended
Sep. 01, 2019
USD ($)
bank_branch
shares
Dec. 31, 2019
USD ($)
Business Acquisition [Line Items]    
Percentage of interest acquired 100.00%  
Number of banking centers acquired | bank_branch 20  
Stock issued as part of acquisition, value $ 229,900  
Core deposit intangible 16,527  
Operating revenue   $ 19,700
Non-recurring expenses   $ 19,700
Core deposit intangibles acquired    
Business Acquisition [Line Items]    
Core deposit intangible $ 16,527  
Acquired intangible asset, expected useful life 10 years  
Common Stock    
Business Acquisition [Line Items]    
Number of shares of common stock 0.275  
Stock issued as a part of acquisition (in shares) | shares 6.4  
v3.20.2
Acquisition - Assets Acquired and Liabilities Assumed (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Sep. 01, 2019
Dec. 31, 2018
Business Acquisition [Line Items]        
Goodwill $ 543,918 $ 543,918   $ 445,355
MBT        
Business Acquisition [Line Items]        
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  
Other assets     6,011  
Deposits     (1,105,926)  
Securities sold under repurchase agreements     (94,760)  
Federal Home Loan Bank advances     (10,853)  
Other liabilities     (9,807)  
Net tangible assets acquired     114,851  
Core deposit intangible     16,527  
Goodwill     98,563  
Purchase price     $ 229,941  
v3.20.2
Acquisition - Schedule of Acquired Loan Data (Details) - MBT
$ in Thousands
Sep. 01, 2019
USD ($)
Business Acquisition [Line Items]  
Fair Value of Acquired Loans at Acquisition Date, Acquired receivables subject to ASC 310-30 $ 3,531
Gross Contractual Amounts Receivable at Acquisition Date, Acquired receivables subject to ASC 310-30 6,840
Best Estimate at Acquisition Date of Contractual Cash Flows Not Expected to be Collected, Acquired receivables subject to ASC 310-30 2,733
Fair Value of Acquired Loans at Acquisition Date, Acquired receivables not subject to ASC 310-30 729,047
Gross Contractual Amounts Receivable at Acquisition Date, Acquired receivables not subject to ASC 310-30 907,210
Best Estimate at Acquisition Date of Contractual Cash Flows Not Expected to be Collected, Acquired receivables not subject to ASC 310-30 $ 14,722
v3.20.2
Acquisition - Pro Forma Financial Information (Details) - MBT
$ / shares in Units, $ in Thousands
 12 Months Ended
Dec. 31, 2019
USD ($)
$ / shares
Business Acquisition [Line Items]  
Total revenue (net interest income plus other income) | $ $ 474,891
Net income | $ $ 161,228
Earnings per share: Basic (in dollars per share) | $ / shares $ 2.89
Earnings per share: Diluted (in dollars per share) | $ / shares $ 2.88
v3.20.2
Investment Securities - Amortized Cost and Approximate Fair Value of Securities (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Available for sale securities    
Total Investment Securities $ 1,794,322 $ 1,740,420
Gross Unrealized Gains 96,436 51,816
Gross Unrealized Losses 165 2,211
Fair Value 1,890,593 1,790,025
Held to maturity securities    
Total Investment Securities 898,786 806,038
Gross Unrealized Gains 42,714 22,073
Gross Unrealized Losses 74 545
Fair Value 941,426 827,566
Amortized Cost 2,693,108 2,546,458
Gross Unrealized Gains 139,150 73,889
Gross Unrealized Losses 239 2,756
Fair Value 2,832,019 2,617,591
U.S. Treasury    
Available for sale securities    
Total Investment Securities 598  
Gross Unrealized Gains 2  
Gross Unrealized Losses 0  
Fair Value 600  
U.S. Government-sponsored agency securities    
Available for sale securities    
Total Investment Securities 2,385 38,529
Gross Unrealized Gains 68 346
Gross Unrealized Losses 0 0
Fair Value 2,453 38,875
Held to maturity securities    
Total Investment Securities 10,100 15,619
Gross Unrealized Gains 3 1
Gross Unrealized Losses 0 37
Fair Value 10,103 15,583
State and municipal    
Available for sale securities    
Total Investment Securities 1,026,917 859,511
Gross Unrealized Gains 67,439 41,092
Gross Unrealized Losses 138 807
Fair Value 1,094,218 899,796
Held to maturity securities    
Total Investment Securities 374,214 354,115
Gross Unrealized Gains 23,779 15,151
Gross Unrealized Losses 43 107
Fair Value 397,950 369,159
U.S. Government-sponsored mortgage-backed securities    
Available for sale securities    
Total Investment Securities 761,391 842,349
Gross Unrealized Gains 28,870 10,378
Gross Unrealized Losses 27 1,404
Fair Value 790,234 851,323
Held to maturity securities    
Total Investment Securities 512,972 434,804
Gross Unrealized Gains 18,932 6,921
Gross Unrealized Losses 31 401
Fair Value 531,873 441,324
Corporate obligations    
Available for sale securities    
Total Investment Securities 3,031 31
Gross Unrealized Gains 57 0
Gross Unrealized Losses 0 0
Fair Value 3,088 31
Foreign investment    
Held to maturity securities    
Total Investment Securities 1,500 1,500
Gross Unrealized Gains 0 0
Gross Unrealized Losses 0 0
Fair Value $ 1,500 $ 1,500
v3.20.2
Investment Securities - Amortized Cost and Fair Value of Available for Sale Securities and Held to Maturity Securities by Contractual Maturity (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Amortized Cost    
Due in one year or less $ 1,947 $ 1,134
Due after one through five years 4,589 5,031
Due after five through ten years 49,425 74,745
Due after ten years 976,970 817,161
Total debt securities with a single maturity date 1,032,931 898,071
Total Investment Securities 1,794,322 1,740,420
Fair Value    
Due in one year or less 1,961 1,136
Due after one through five years 4,718 5,141
Due after five through ten years 52,485 76,920
Due after ten years 1,041,195 855,505
Total debt securities with a single maturity date 1,100,359 938,702
Total Investment Securities 1,890,593 1,790,025
Amortized Cost    
Due in one year or less 12,191 9,920
Due after one through five years 23,639 45,197
Due after five through ten years 95,694 84,153
Due after ten years 254,290 231,964
Total debt securities with a single maturity date 385,814 371,234
Total Investment Securities 898,786 806,038
Fair Value    
Due in one year or less 12,217 10,105
Due after one through five years 24,224 45,654
Due after five through ten years 101,354 88,844
Due after ten years 271,758 241,639
Total debt securities with a single maturity date 409,553 386,242
Investment securities held to maturity 941,426 827,566
U.S. Government-sponsored mortgage-backed securities    
Amortized Cost    
Without single maturity date 761,391 842,349
Total Investment Securities 761,391 842,349
Fair Value    
Without single maturity date 790,234 851,323
Total Investment Securities 790,234 851,323
Amortized Cost    
Without single maturity date 512,972 434,804
Total Investment Securities 512,972 434,804
Fair Value    
Without single maturity date 531,873 441,324
Investment securities held to maturity $ 531,873 $ 441,324
v3.20.2
Investment Securities - Narrative (Details)
$ in Thousands
Jun. 30, 2020
USD ($)
security
Dec. 31, 2019
USD ($)
Investments, Debt and Equity Securities [Abstract]    
Carrying value of securities pledged as collateral $ 1,100,278 $ 503,427
Book value of securities sold under agreements to repurchase 171,346 182,856
Schedule of Available for sale Securities and Held to maturity Securities [Line Items]    
Gross unrealized losses 165 2,211
Held-to-maturity unrealized losses 74 545
State and municipal    
Schedule of Available for sale Securities and Held to maturity Securities [Line Items]    
Gross unrealized losses $ 138 807
Number of securities in unrealized loss positions | security 13  
Held-to-maturity unrealized losses $ 43 107
Held-to-maturity, number of securities in unrealized loss positions | security 2  
U.S. Government-sponsored mortgage-backed securities    
Schedule of Available for sale Securities and Held to maturity Securities [Line Items]    
Gross unrealized losses $ 27 1,404
Number of securities in unrealized loss positions | security 1  
Held-to-maturity unrealized losses $ 31 $ 401
Held-to-maturity, number of securities in unrealized loss positions | security 3  
v3.20.2
Investment Securities - Gross Gains on Sales and Redemptions of Available for Sale Securities (Details) - USD ($)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Sales and Redemptions of Available for Sale Securities:        
Gross gains $ 3,068 $ 1,843 $ 7,680 $ 2,983
Gross losses $ 0 $ 0 $ 0 $ 0
v3.20.2
Investment Securities - Investments' Gross Unrealized Losses and Fair Value Aggregated by Investment Category and Length of Time in Continuous Unrealized Loss Position (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Fair Value    
Less than 12 Months $ 38,984 $ 203,946
12 Months or Longer 0 20,796
Total 38,984 224,742
Gross Unrealized Losses    
Less than 12 Months 165 2,133
12 Months or Longer 0 78
Total 165 2,211
Fair Value    
Less than 12 Months 12,831 150,216
12 Months or Longer 0 20,458
Total 12,831 170,674
Gross Unrealized Losses    
Less than 12 Months 74 475
12 Months or Longer 0 70
Total 74 545
Less than 12 Months, Fair Value 51,815 354,162
12 Months or Longer, Fair Value 0 41,254
Total, Fair Value 51,815 395,416
Less than 12 Months, Gross Unrealized Losses 239 2,608
12 Months or Longer, Gross Unrealized Losses 0 148
Total, Gross Unrealized Losses 239 2,756
U.S. Government-sponsored agency securities    
Fair Value    
Less than 12 Months   3,016
12 Months or Longer   12,467
Total   15,483
Gross Unrealized Losses    
Less than 12 Months   4
12 Months or Longer   33
Total   37
State and municipal    
Fair Value    
Less than 12 Months 23,745 76,273
12 Months or Longer 0 0
Total 23,745 76,273
Gross Unrealized Losses    
Less than 12 Months 138 807
12 Months or Longer 0 0
Total 138 807
Fair Value    
Less than 12 Months 2,633 22,947
12 Months or Longer 0 0
Total 2,633 22,947
Gross Unrealized Losses    
Less than 12 Months 43 107
12 Months or Longer 0 0
Total 43 107
U.S. Government-sponsored mortgage-backed securities    
Fair Value    
Less than 12 Months 15,239 127,673
12 Months or Longer 0 20,796
Total 15,239 148,469
Gross Unrealized Losses    
Less than 12 Months 27 1,326
12 Months or Longer 0 78
Total 27 1,404
Fair Value    
Less than 12 Months 10,198 124,253
12 Months or Longer 0 7,991
Total 10,198 132,244
Gross Unrealized Losses    
Less than 12 Months 31 364
12 Months or Longer 0 37
Total $ 31 $ 401
v3.20.2
Investment Securities - Investments in Debt and Equity Securities Reported Less than Historical Cost (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Schedule of Investments [Line Items]    
Fair value $ 51,815 $ 395,416
Investments reported at less than historical cost    
Schedule of Investments [Line Items]    
Historical cost 52,054 398,172
Fair value 51,815 395,416
Gross unrealized losses $ 239 $ 2,756
Percent of the Corporation's investment portfolio 1.90% 15.20%
v3.20.2
Loans and Allowance - Narrative (Details)
loan in Thousands, $ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2020
USD ($)
Jun. 30, 2019
USD ($)
Jun. 30, 2020
USD ($)
loan
Jun. 30, 2019
USD ($)
Mar. 31, 2020
USD ($)
Dec. 31, 2019
USD ($)
Mar. 31, 2019
USD ($)
Dec. 31, 2018
USD ($)
Receivables [Abstract]                
Loans held for sale $ 901   $ 901     $ 9,037    
Accounts, Notes, Loans and Financing Receivable [Line Items]                
Number of funded loans | loan     5          
Loans 9,298,541   $ 9,298,541     8,459,310    
Loans - allowance for loan losses 121,119 $ 81,274 121,119 $ 81,274 $ 99,454 80,284 $ 80,902 $ 80,552
Increase in past due loans     25,100          
PPP, CARES Act                
Accounts, Notes, Loans and Financing Receivable [Line Items]                
Loans net of deferred fees 882,900   882,900          
Deferred fees 24,600   24,600          
Residential                
Accounts, Notes, Loans and Financing Receivable [Line Items]                
Loans 1,677,501   1,677,501     1,732,201    
Loans - allowance for loan losses $ 21,078 $ 14,471 $ 21,078 $ 14,471 $ 17,364 14,569 $ 14,373 $ 14,322
Percentage of troubled debt restructured loans 42.00% 100.00% 42.00% 100.00%        
Mortgage loans with formal foreclosure proceedings $ 492   $ 492     1,033    
Loans acquired with deteriorated credit quality                
Accounts, Notes, Loans and Financing Receivable [Line Items]                
Loans 8,281   8,281     13,309    
Loans acquired with deteriorated credit quality | Commercial and consumer loan                
Accounts, Notes, Loans and Financing Receivable [Line Items]                
Loans 3,783   3,783     2,819    
Loans - allowance for loan losses 192   192     124    
Loans acquired with deteriorated credit quality | Residential                
Accounts, Notes, Loans and Financing Receivable [Line Items]                
Loans 955   955     $ 1,715    
Four relationships                
Accounts, Notes, Loans and Financing Receivable [Line Items]                
Increase in past due loans     28,600          
Three relationships                
Accounts, Notes, Loans and Financing Receivable [Line Items]                
Increase in non-accrual loans     34,200          
Three relationships | Real estate secured loan                
Accounts, Notes, Loans and Financing Receivable [Line Items]                
Increase in past due loans     $ 17,800          
Increase in non-accrual loans, percent of total     69.00%          
Two relationships | Senior living sector                
Accounts, Notes, Loans and Financing Receivable [Line Items]                
Increase in non-accrual loans     $ 17,000          
One relationships | University logo apparel sports                
Accounts, Notes, Loans and Financing Receivable [Line Items]                
Increase in non-accrual loans     14,400          
PPPL Facility                
Accounts, Notes, Loans and Financing Receivable [Line Items]                
Outstanding balance $ 166,900   $ 166,900          
v3.20.2
Loans and Allowance - Composition of Loan Portfolio by Loan Class (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Mar. 31, 2020
Dec. 31, 2019
Jun. 30, 2019
Mar. 31, 2019
Dec. 31, 2018
Accounts, Notes, Loans and Financing Receivable [Line Items]            
Loans $ 9,298,541   $ 8,459,310      
Allowance for loan losses (121,119) $ (99,454) (80,284) $ (81,274) $ (80,902) $ (80,552)
Net Loans 9,177,422   8,379,026      
Commercial and industrial loans            
Accounts, Notes, Loans and Financing Receivable [Line Items]            
Loans 2,898,329   2,109,879      
Agricultural production financing and other loans to farmers            
Accounts, Notes, Loans and Financing Receivable [Line Items]            
Loans 93,838   93,861      
Construction            
Accounts, Notes, Loans and Financing Receivable [Line Items]            
Loans 640,560   787,568      
Commercial and farmland            
Accounts, Notes, Loans and Financing Receivable [Line Items]            
Loans 3,239,998   3,052,698      
Residential            
Accounts, Notes, Loans and Financing Receivable [Line Items]            
Loans 1,145,187   1,143,217      
Allowance for loan losses (21,078) (17,364) (14,569) (14,471) (14,373) (14,322)
Home equity            
Accounts, Notes, Loans and Financing Receivable [Line Items]            
Loans 532,314   588,984      
Individuals' loans for household and other personal expenditures            
Accounts, Notes, Loans and Financing Receivable [Line Items]            
Loans 123,611   135,989      
Allowance for loan losses (8,445) $ (5,752) (4,035) $ (4,070) $ (4,026) $ (3,964)
Public finance and other commercial loans            
Accounts, Notes, Loans and Financing Receivable [Line Items]            
Loans $ 624,704   $ 547,114      
v3.20.2
Loans and Allowance - Changes in Allowance for Loan Losses by Loan Segment (Details) - USD ($)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Allowance for loan losses:        
Beginning balance $ 99,454 $ 80,902 $ 80,284 $ 80,552
Provision for losses 21,895 500 41,647 1,700
Recoveries on loans 317 1,434 990 2,439
Loans charged off (547) (1,562) (1,802) (3,417)
Ending balance 121,119 81,274 121,119 81,274
Commercial        
Allowance for loan losses:        
Beginning balance 38,431 33,069 32,902 32,657
Provision for losses 6,240 100 11,941 336
Recoveries on loans 106 344 549 886
Loans charged off (99) (311) (714) (677)
Ending balance 44,678 33,202 44,678 33,202
Commercial Real Estate        
Allowance for loan losses:        
Beginning balance 37,907 29,434 28,778 29,609
Provision for losses 8,945 320 18,139 1,089
Recoveries on loans 107 778 225 1,023
Loans charged off (41) (1,001) (224) (2,190)
Ending balance 46,918 29,531 46,918 29,531
Consumer        
Allowance for loan losses:        
Beginning balance 5,752 4,026 4,035 3,964
Provision for losses 2,783 36 4,707 141
Recoveries on loans 56 100 98 218
Loans charged off (146) (92) (395) (253)
Ending balance 8,445 4,070 8,445 4,070
Residential        
Allowance for loan losses:        
Beginning balance 17,364 14,373 14,569 14,322
Provision for losses 3,927 44 6,860 134
Recoveries on loans 48 212 118 312
Loans charged off (261) (158) (469) (297)
Ending balance $ 21,078 $ 14,471 $ 21,078 $ 14,471
v3.20.2
Loans and Allowance - Allowance for Credit Losses and Loan Portfolio by Loan Segment (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Mar. 31, 2020
Dec. 31, 2019
Jun. 30, 2019
Mar. 31, 2019
Dec. 31, 2018
Allowance Balances:            
Individually evaluated for impairment $ 12,999   $ 689      
Collectively evaluated for impairment 108,120   79,595      
Total Allowance for Loan Losses 121,119 $ 99,454 80,284 $ 81,274 $ 80,902 $ 80,552
Loan Balance [Abstract]            
Individually evaluated for impairment 45,280   11,709      
Collectively evaluated for impairment 9,244,980   8,434,292      
Loans 9,298,541   8,459,310      
Loans acquired with deteriorated credit quality            
Loan Balance [Abstract]            
Loans 8,281   13,309      
Commercial            
Allowance Balances:            
Individually evaluated for impairment 7,466   0      
Collectively evaluated for impairment 37,212   32,902      
Total Allowance for Loan Losses 44,678 38,431 32,902 33,202 33,069 32,657
Loan Balance [Abstract]            
Individually evaluated for impairment 15,312   457      
Collectively evaluated for impairment 3,600,395   2,748,681      
Loans 3,616,871   2,750,854      
Commercial | Loans acquired with deteriorated credit quality            
Loan Balance [Abstract]            
Loans 1,164   1,716      
Commercial Real Estate            
Allowance Balances:            
Individually evaluated for impairment 4,943   231      
Collectively evaluated for impairment 41,975   28,547      
Total Allowance for Loan Losses 46,918 37,907 28,778 29,531 29,434 29,609
Loan Balance [Abstract]            
Individually evaluated for impairment 26,512   8,728      
Collectively evaluated for impairment 3,847,884   3,821,660      
Loans 3,880,558   3,840,266      
Commercial Real Estate | Loans acquired with deteriorated credit quality            
Loan Balance [Abstract]            
Loans 6,162   9,878      
Consumer            
Allowance Balances:            
Individually evaluated for impairment 0   0      
Collectively evaluated for impairment 8,445   4,035      
Total Allowance for Loan Losses 8,445 5,752 4,035 4,070 4,026 3,964
Loan Balance [Abstract]            
Individually evaluated for impairment 3   4      
Collectively evaluated for impairment 123,608   135,985      
Loans 123,611   135,989      
Residential            
Allowance Balances:            
Individually evaluated for impairment 590   458      
Collectively evaluated for impairment 20,488   14,111      
Total Allowance for Loan Losses 21,078 $ 17,364 14,569 $ 14,471 $ 14,373 $ 14,322
Loan Balance [Abstract]            
Individually evaluated for impairment 3,453   2,520      
Collectively evaluated for impairment 1,673,093   1,727,966      
Loans 1,677,501   1,732,201      
Residential | Loans acquired with deteriorated credit quality            
Loan Balance [Abstract]            
Loans $ 955   $ 1,715      
v3.20.2
Loans and Allowance - Summary of Non-Accrual Loans by Loan Class (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Accounts, Notes, Loans and Financing Receivable [Line Items]    
Non-accrual loans $ 50,102 $ 15,949
Commercial and industrial loans    
Accounts, Notes, Loans and Financing Receivable [Line Items]    
Non-accrual loans 16,354 1,255
Agricultural production financing and other loans to farmers    
Accounts, Notes, Loans and Financing Receivable [Line Items]    
Non-accrual loans 0 183
Construction    
Accounts, Notes, Loans and Financing Receivable [Line Items]    
Non-accrual loans 119 977
Commercial and farmland    
Accounts, Notes, Loans and Financing Receivable [Line Items]    
Non-accrual loans 25,405 7,007
Residential    
Accounts, Notes, Loans and Financing Receivable [Line Items]    
Non-accrual loans 5,773 5,062
Home equity    
Accounts, Notes, Loans and Financing Receivable [Line Items]    
Non-accrual loans 2,376 1,421
Individuals' loans for household and other personal expenditures    
Accounts, Notes, Loans and Financing Receivable [Line Items]    
Non-accrual loans $ 75 $ 44
v3.20.2
Loans and Allowance - Composition of Impaired Loans by Loan Class (Details) - USD ($)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Dec. 31, 2019
Unpaid Principal Balance          
Impaired loans with no related allowance $ 14,777   $ 14,777   $ 9,955
Impaired loans with related allowance 33,527   33,527   5,139
Total Impaired Loans 48,304   48,304   15,094
Recorded Investment          
Impaired loans with no related allowance 12,672   12,672   7,352
Impaired loans with related allowance 32,608   32,608   4,357
Total Impaired Loans 45,280   45,280   11,709
Related Allowance 12,999   12,999   689
Average Recorded Investment          
Impaired loans with no related allowance 12,707 $ 17,433 12,980 $ 18,112  
Impaired loans with related allowance 32,621 5,600 32,882 5,634  
Total Impaired Loans 45,328 23,033 45,862 23,746  
Interest Income Recognized          
Impaired loans with no related allowance 38 40 77 80  
Impaired loans with related allowance 22 19 44 38  
Total Impaired Loans 60 59 121 118  
Commercial and industrial loans          
Unpaid Principal Balance          
Impaired loans with no related allowance 5,024   5,024   320
Impaired loans with related allowance 10,342   10,342    
Recorded Investment          
Impaired loans with no related allowance 5,008   5,008   320
Impaired loans with related allowance 10,304   10,304    
Related Allowance 7,466   7,466    
Average Recorded Investment          
Impaired loans with no related allowance 5,008 1,013 5,008 1,021  
Impaired loans with related allowance 10,304 940 10,304 940  
Interest Income Recognized          
Impaired loans with no related allowance 0 0 0 0  
Impaired loans with related allowance 0   0 0  
Agricultural production financing and other loans to farmers          
Unpaid Principal Balance          
Impaired loans with no related allowance         299
Recorded Investment          
Impaired loans with no related allowance         137
Average Recorded Investment          
Impaired loans with no related allowance   668   672  
Impaired loans with related allowance   2,117   2,134  
Interest Income Recognized          
Impaired loans with no related allowance   0   0  
Construction          
Unpaid Principal Balance          
Impaired loans with no related allowance         1,206
Recorded Investment          
Impaired loans with no related allowance         970
Average Recorded Investment          
Impaired loans with no related allowance   7,314   7,792  
Interest Income Recognized          
Impaired loans with no related allowance   0   0  
Commercial and farmland          
Unpaid Principal Balance          
Impaired loans with no related allowance 9,675   9,675   8,037
Impaired loans with related allowance 19,650   19,650   2,648
Recorded Investment          
Impaired loans with no related allowance 7,602   7,602   5,849
Impaired loans with related allowance 18,910   18,910   1,909
Related Allowance 4,943   4,943   231
Average Recorded Investment          
Impaired loans with no related allowance 7,637 7,998 7,910 8,187  
Impaired loans with related allowance 18,910 157 19,156 164  
Interest Income Recognized          
Impaired loans with no related allowance 37 39 75 78  
Impaired loans with related allowance       0  
Residential          
Unpaid Principal Balance          
Impaired loans with no related allowance 75   75   93
Impaired loans with related allowance 3,134   3,134   2,070
Recorded Investment          
Impaired loans with no related allowance 59   59   76
Impaired loans with related allowance 3,009   3,009   2,044
Related Allowance 520   520   383
Average Recorded Investment          
Impaired loans with no related allowance 59 38 59 38  
Impaired loans with related allowance 3,020 2,021 3,032 2,029  
Interest Income Recognized          
Impaired loans with no related allowance 1 1 2 2  
Impaired loans with related allowance 19 16 38 32  
Home equity          
Unpaid Principal Balance          
Impaired loans with related allowance 401   401   417
Recorded Investment          
Impaired loans with related allowance 385   385   400
Related Allowance 70   70   75
Average Recorded Investment          
Impaired loans with no related allowance   49   49  
Impaired loans with related allowance 387 351 390 352  
Interest Income Recognized          
Impaired loans with no related allowance       0  
Impaired loans with related allowance 3 3 6 6  
Individuals' loans for household and other personal expenditures          
Unpaid Principal Balance          
Impaired loans with no related allowance 3   3    
Impaired loans with related allowance         4
Recorded Investment          
Impaired loans with no related allowance 3   3    
Impaired loans with related allowance         4
Related Allowance         $ 0
Average Recorded Investment          
Impaired loans with no related allowance $ 3   3    
Impaired loans with related allowance   14   15  
Interest Income Recognized          
Impaired loans with no related allowance     $ 0    
Impaired loans with related allowance       0  
Public finance and other commercial loans          
Average Recorded Investment          
Impaired loans with no related allowance   353   353  
Interest Income Recognized          
Impaired loans with no related allowance   $ 0   $ 0  
v3.20.2
Loans and Allowance - Credit Quality of Loan Portfolio by Loan Class (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans $ 9,298,541 $ 8,459,310
Commercial and industrial loans    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 2,898,329 2,109,879
Agricultural production financing and other loans to farmers    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 93,838 93,861
Construction    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 640,560 787,568
Commercial and farmland    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 3,239,998 3,052,698
Residential    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 1,145,187 1,143,217
Home equity    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 532,314 588,984
Individuals' loans for household and other personal expenditures    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 123,611 135,989
Public finance and other commercial loans    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 624,704 547,114
Commercial Pass    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 7,260,890 6,447,193
Commercial Pass | Commercial and industrial loans    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 2,722,071 1,956,985
Commercial Pass | Agricultural production financing and other loans to farmers    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 78,645 78,558
Commercial Pass | Construction    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 590,889 749,249
Commercial Pass | Commercial and farmland    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 3,035,363 2,894,366
Commercial Pass | Residential    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 189,053 196,710
Commercial Pass | Home equity    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 20,214 24,211
Commercial Pass | Individuals' loans for household and other personal expenditures    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Pass | Public finance and other commercial loans    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 624,655 547,114
Commercial Special Mention    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 199,549 147,328
Commercial Special Mention | Commercial and industrial loans    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 87,069 81,179
Commercial Special Mention | Agricultural production financing and other loans to farmers    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 6,082 5,626
Commercial Special Mention | Construction    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 791 1,613
Commercial Special Mention | Commercial and farmland    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 103,921 57,776
Commercial Special Mention | Residential    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 1,637 877
Commercial Special Mention | Home equity    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 257
Commercial Special Mention | Individuals' loans for household and other personal expenditures    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Special Mention | Public finance and other commercial loans    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 49 0
Commercial Substandard    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 225,885 190,358
Commercial Substandard | Commercial and industrial loans    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 89,189 71,715
Commercial Substandard | Agricultural production financing and other loans to farmers    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 9,111 9,677
Commercial Substandard | Construction    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 20,229 1,634
Commercial Substandard | Commercial and farmland    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 99,330 98,575
Commercial Substandard | Residential    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 6,684 8,075
Commercial Substandard | Home equity    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 1,342 682
Commercial Substandard | Individuals' loans for household and other personal expenditures    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Substandard | Public finance and other commercial loans    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Doubtful    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Doubtful | Commercial and industrial loans    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Doubtful | Agricultural production financing and other loans to farmers    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Doubtful | Construction    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Doubtful | Commercial and farmland    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Doubtful | Residential    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Doubtful | Home equity    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Doubtful | Individuals' loans for household and other personal expenditures    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Doubtful | Public finance and other commercial loans    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Loss    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Loss | Commercial and industrial loans    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Loss | Agricultural production financing and other loans to farmers    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Loss | Construction    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Loss | Commercial and farmland    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Loss | Residential    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Loss | Home equity    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Loss | Individuals' loans for household and other personal expenditures    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Commercial Loss | Public finance and other commercial loans    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Consumer Performing    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 1,605,123 1,668,247
Consumer Performing | Commercial and industrial loans    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Consumer Performing | Agricultural production financing and other loans to farmers    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Consumer Performing | Construction    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 28,536 35,072
Consumer Performing | Commercial and farmland    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 1,384 1,981
Consumer Performing | Residential    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 943,222 932,743
Consumer Performing | Home equity    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 508,457 562,507
Consumer Performing | Individuals' loans for household and other personal expenditures    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 123,524 135,944
Consumer Performing | Public finance and other commercial loans    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Consumer Non-Performing    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 7,094 6,184
Consumer Non-Performing | Commercial and industrial loans    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Consumer Non-Performing | Agricultural production financing and other loans to farmers    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Consumer Non-Performing | Construction    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 115 0
Consumer Non-Performing | Commercial and farmland    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 0 0
Consumer Non-Performing | Residential    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 4,591 4,812
Consumer Non-Performing | Home equity    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 2,301 1,327
Consumer Non-Performing | Individuals' loans for household and other personal expenditures    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans 87 45
Consumer Non-Performing | Public finance and other commercial loans    
Financing Receivable, Credit Quality Indicator [Line Items]    
Loans $ 0 $ 0
v3.20.2
Loans and Allowance - Past Due Aging of Loan Portfolio by Loan Class (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Financing Receivable, Past Due [Line Items]    
Current $ 9,181,552 $ 8,427,414
Non-Accrual 50,102 15,949
Total Past Due & Non-Accrual 116,989 31,896
Total 9,298,541 8,459,310
Commercial and industrial loans    
Financing Receivable, Past Due [Line Items]    
Current 2,871,366 2,105,445
Non-Accrual 16,354 1,255
Total Past Due & Non-Accrual 26,963 4,434
Total 2,898,329 2,109,879
Agricultural production financing and other loans to farmers    
Financing Receivable, Past Due [Line Items]    
Current 92,735 93,678
Non-Accrual 0 183
Total Past Due & Non-Accrual 1,103 183
Total 93,838 93,861
Construction    
Financing Receivable, Past Due [Line Items]    
Current 634,706 784,961
Non-Accrual 119 977
Total Past Due & Non-Accrual 5,854 2,607
Total 640,560 787,568
Commercial and farmland    
Financing Receivable, Past Due [Line Items]    
Current 3,172,688 3,043,318
Non-Accrual 25,405 7,007
Total Past Due & Non-Accrual 67,310 9,380
Total 3,239,998 3,052,698
Residential    
Financing Receivable, Past Due [Line Items]    
Current 1,136,131 1,133,476
Non-Accrual 5,773 5,062
Total Past Due & Non-Accrual 9,056 9,741
Total 1,145,187 1,143,217
Home equity    
Financing Receivable, Past Due [Line Items]    
Current 526,096 584,023
Non-Accrual 2,376 1,421
Total Past Due & Non-Accrual 6,218 4,961
Total 532,314 588,984
Individuals' loans for household and other personal expenditures    
Financing Receivable, Past Due [Line Items]    
Current 123,126 135,399
Non-Accrual 75 44
Total Past Due & Non-Accrual 485 590
Total 123,611 135,989
Public finance and other commercial loans    
Financing Receivable, Past Due [Line Items]    
Current 624,704 547,114
Non-Accrual 0 0
Total Past Due & Non-Accrual 0  
Total 624,704 547,114
30-59 Days Past Due    
Financing Receivable, Past Due [Line Items]    
Past Due 39,737 14,683
30-59 Days Past Due | Commercial and industrial loans    
Financing Receivable, Past Due [Line Items]    
Past Due 9,435 3,039
30-59 Days Past Due | Agricultural production financing and other loans to farmers    
Financing Receivable, Past Due [Line Items]    
Past Due 1,103 0
30-59 Days Past Due | Construction    
Financing Receivable, Past Due [Line Items]    
Past Due 5,235 1,630
30-59 Days Past Due | Commercial and farmland    
Financing Receivable, Past Due [Line Items]    
Past Due 18,948 2,324
30-59 Days Past Due | Residential    
Financing Receivable, Past Due [Line Items]    
Past Due 2,679 4,290
30-59 Days Past Due | Home equity    
Financing Receivable, Past Due [Line Items]    
Past Due 2,110 2,960
30-59 Days Past Due | Individuals' loans for household and other personal expenditures    
Financing Receivable, Past Due [Line Items]    
Past Due 227 440
30-59 Days Past Due | Public finance and other commercial loans    
Financing Receivable, Past Due [Line Items]    
Past Due 0 0
60-89 Days Past Due    
Financing Receivable, Past Due [Line Items]    
Past Due 22,169 1,195
60-89 Days Past Due | Commercial and industrial loans    
Financing Receivable, Past Due [Line Items]    
Past Due 1,038 136
60-89 Days Past Due | Agricultural production financing and other loans to farmers    
Financing Receivable, Past Due [Line Items]    
Past Due 0 0
60-89 Days Past Due | Construction    
Financing Receivable, Past Due [Line Items]    
Past Due 500 0
60-89 Days Past Due | Commercial and farmland    
Financing Receivable, Past Due [Line Items]    
Past Due 18,458 49
60-89 Days Past Due | Residential    
Financing Receivable, Past Due [Line Items]    
Past Due 329 367
60-89 Days Past Due | Home equity    
Financing Receivable, Past Due [Line Items]    
Past Due 1,673 538
60-89 Days Past Due | Individuals' loans for household and other personal expenditures    
Financing Receivable, Past Due [Line Items]    
Past Due 171 105
60-89 Days Past Due | Public finance and other commercial loans    
Financing Receivable, Past Due [Line Items]    
Past Due 0 0
Loans 90 Days or More Past Due And Accruing    
Financing Receivable, Past Due [Line Items]    
Past Due 4,981 69
Loans 90 Days or More Past Due And Accruing | Commercial and industrial loans    
Financing Receivable, Past Due [Line Items]    
Past Due 136 4
Loans 90 Days or More Past Due And Accruing | Agricultural production financing and other loans to farmers    
Financing Receivable, Past Due [Line Items]    
Past Due 0 0
Loans 90 Days or More Past Due And Accruing | Construction    
Financing Receivable, Past Due [Line Items]    
Past Due 0 0
Loans 90 Days or More Past Due And Accruing | Commercial and farmland    
Financing Receivable, Past Due [Line Items]    
Past Due 4,499 0
Loans 90 Days or More Past Due And Accruing | Residential    
Financing Receivable, Past Due [Line Items]    
Past Due 275 22
Loans 90 Days or More Past Due And Accruing | Home equity    
Financing Receivable, Past Due [Line Items]    
Past Due 59 42
Loans 90 Days or More Past Due And Accruing | Individuals' loans for household and other personal expenditures    
Financing Receivable, Past Due [Line Items]    
Past Due 12 1
Loans 90 Days or More Past Due And Accruing | Public finance and other commercial loans    
Financing Receivable, Past Due [Line Items]    
Past Due $ 0 $ 0
v3.20.2
Loans and Allowance - Summary of Troubled Debt Restructurings (Details)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2020
USD ($)
loan
Jun. 30, 2019
USD ($)
loan
Jun. 30, 2020
USD ($)
loan
Jun. 30, 2019
USD ($)
loan
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Pre-Modification Recorded Balance $ 1,519 $ 171 $ 1,519 $ 261
Post-Modification Recorded Balance $ 1,556 $ 164 $ 1,556 $ 254
Number of Loans | loan 11 4 11 5
Commercial and industrial loans        
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Pre-Modification Recorded Balance $ 654   $ 654  
Post-Modification Recorded Balance $ 654   $ 654  
Number of Loans | loan 3   3  
Commercial and farmland        
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Pre-Modification Recorded Balance $ 565   $ 565  
Post-Modification Recorded Balance $ 565   $ 565  
Number of Loans | loan 2   2  
Residential        
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Pre-Modification Recorded Balance $ 300 $ 171 $ 300 $ 261
Post-Modification Recorded Balance $ 337 $ 164 $ 337 $ 254
Number of Loans | loan 6 4 6 5
v3.20.2
Loans and Allowance - Summary of Troubled Debt Restructurings by Modification Type (Details) - USD ($)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Modification $ 1,551 $ 164 $ 1,551 $ 253
Term Modification        
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Modification 1,217   1,217 0
Rate Modification        
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Modification 111   111 89
Combination        
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Modification 223 164 223 164
Commercial and industrial loans        
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Modification 652   652  
Commercial and industrial loans | Term Modification        
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Modification 652   652  
Commercial and industrial loans | Rate Modification        
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Modification 0      
Commercial and industrial loans | Combination        
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Modification 0   0  
Commercial and farmland        
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Modification 565   565  
Commercial and farmland | Term Modification        
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Modification 565   565  
Commercial and farmland | Combination        
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Modification 0   0  
Residential        
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Modification 334 164 334 253
Residential | Term Modification        
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Modification     0  
Residential | Rate Modification        
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Modification 111   111 89
Residential | Combination        
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Modification $ 223 $ 164 $ 223 $ 164
v3.20.2
Loans and Allowance - Subsequent Default (Details)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2020
USD ($)
loan
Jun. 30, 2019
USD ($)
loan
Jun. 30, 2020
USD ($)
loan
Jun. 30, 2019
USD ($)
loan
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Number of Loans | loan 1 1 1 1
Recorded Balance | $ $ 268 $ 62 $ 268 $ 62
Commercial and industrial loans        
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Number of Loans | loan 1   1  
Recorded Balance | $ $ 268   $ 268  
Residential        
Financing Receivable, Troubled Debt Restructuring [Line Items]        
Number of Loans | loan   1   1
Recorded Balance | $   $ 62   $ 62
v3.20.2
Purchased Credit Impaired Loans - Accretable Yield or Income Expected to be Collected (Details) - USD ($)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Dec. 31, 2019
Certain Loans Acquired in Transfer Not Accounted for as Debt Securities, Accretable Yield Movement Schedule [Roll Forward]          
Accretable yield beginning balance $ 1,926 $ 2,064 $ 2,132 $ 2,143  
Additions 0 0 0 0  
Accretion (1,033) (638) (1,418) (1,218)  
Reclassification from nonaccretable 653 488 839 989  
Disposals 0 0 (7) 0  
Accretable yield ending balance 1,546 $ 1,914 1,546 $ 1,914  
Loans acquired with deteriorated credit quality          
Accounts, Notes, Loans and Financing Receivable [Line Items]          
Loans acquired and accounted for under ASC 310-30, carrying amount 12,100   12,100   $ 16,100
Loans acquired and accounted for under ASC 310-30, allowance amount $ 192   $ 192   $ 124
v3.20.2
Goodwill - Narrative (Details) - USD ($)
$ in Thousands
 12 Months Ended
Dec. 31, 2019
Jun. 30, 2020
Sep. 01, 2019
Dec. 31, 2018
Goodwill [Line Items]        
Goodwill $ 543,918 $ 543,918   $ 445,355
Measurement period adjustment 719      
MBT        
Goodwill [Line Items]        
Goodwill     $ 98,563  
Measurement period adjustment $ 719      
v3.20.2
Goodwill - Schedule of Goodwill (Details)
$ in Thousands
 12 Months Ended
Dec. 31, 2019
USD ($)
Goodwill [Roll Forward]  
Balance, January 1 $ 445,355
Goodwill acquired 97,844
Measurement period adjustment 719
Balance, Period end $ 543,918
v3.20.2
Core Deposit Intangibles - Narrative (Details) - USD ($)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Sep. 01, 2019
Finite-Lived Intangible Assets [Line Items]          
Intangible asset amortization $ 1,511 $ 1,520 $ 3,025 $ 3,048  
Maximum          
Finite-Lived Intangible Assets [Line Items]          
Useful life of core deposit intangibles and other intangibles     10 years    
MBT          
Finite-Lived Intangible Assets [Line Items]          
Core deposit intangible         $ 16,527
v3.20.2
Core Deposit Intangibles - Schedule of Core Deposit and Other Intangibles (Details) - USD ($)
$ in Thousands
 6 Months Ended 12 Months Ended
Jun. 30, 2020
Dec. 31, 2019
Finite-Lived Intangible Assets [Line Items]    
Gross carrying amount $ 102,396 $ 85,869
Accumulated amortization (70,459) (67,434)
Total core deposit intangibles 31,937 34,962
Core deposit intangibles acquired    
Finite-Lived Intangible Assets [Line Items]    
Core deposit intangibles acquired $ 0 $ 16,527
v3.20.2
Core Deposit Intangibles - Estimated Future Amortization Expense (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Amortization Expense    
2020 $ 2,962  
2021 5,429  
2022 5,027  
2023 4,827  
2024 4,241  
After 2024 9,451  
Total core deposit intangibles $ 31,937 $ 34,962
v3.20.2
Derivative Financial Instruments - Narrative (Details)
$ in Thousands
 6 Months Ended
Jun. 30, 2020
USD ($)
interest_rate_swap
instrument
Dec. 31, 2019
USD ($)
interest_rate_swap
Derivative [Line Items]    
Estimated amount to be transferred from accumulated other comprehensive income to earnings $ 1,046  
Termination value of derivatives in a net liability position 87,754  
Derivative collateral posted 80,855  
Not Designated as Hedging Instrument    
Derivative [Line Items]    
Notional amount of interest rate derivatives $ 817,463 $ 692,287
Federal Home Loan Bank Advances    
Derivative [Line Items]    
Number of debt instruments held | instrument 2  
Interest rate contracts | Not Designated as Hedging Instrument    
Derivative [Line Items]    
Increase in derivative assets $ 56,800  
Increase in derivative liabilities 57,900  
Increase in outstanding notional balance $ 125,200  
Cash Flow Hedging | Interest Rate Swap    
Derivative [Line Items]    
Number of interest rate derivatives held | interest_rate_swap 4 4
Notional amount of interest rate derivatives $ 46,000 $ 46,000
Cash Flow Hedging | Interest Rate Swap | Trust Preferred Debt    
Derivative [Line Items]    
Notional amount of interest rate derivatives 26,000  
Cash Flow Hedging | Interest Rate Swap | Federal Home Loan Bank Advances    
Derivative [Line Items]    
Notional amount of interest rate derivatives $ 20,000  
v3.20.2
Derivative Financial Instruments - Fair Value of Derivative Financial Instruments and Their Classification on Balance Sheet (Details) - Interest rate contracts - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Derivatives designated as hedging instruments | Other Assets    
Derivatives, Fair Value [Line Items]    
Asset Derivatives $ 0 $ 0
Derivatives designated as hedging instruments | Other Liabilities    
Derivatives, Fair Value [Line Items]    
Liability Derivatives 2,547 1,444
Derivatives not designated as hedging instruments | Other Assets    
Derivatives, Fair Value [Line Items]    
Asset Derivatives 84,658 27,855
Derivatives not designated as hedging instruments | Other Liabilities    
Derivatives, Fair Value [Line Items]    
Liability Derivatives $ 84,658 $ 27,855
v3.20.2
Derivative Financial Instruments - Effect of Derivative Financial Instruments on Other Comprehensive Income (Details) - USD ($)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Designated as Hedging Instrument | Cash Flow Hedging | Interest Rate Products        
Derivative [Line Items]        
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion) $ (145) $ (701) $ (1,459) $ (1,092)
v3.20.2
Derivative Financial Instruments - Effect of Derivative Financial Instruments on Income Statement (Details) - USD ($)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Interest rate contracts | Derivatives designated as hedging instruments | Interest Expense        
Derivative [Line Items]        
Amount of Gain (Loss) Reclassified from Other Comprehensive Income into Income (Effective Portion) $ (231) $ (84) $ (357) $ (143)
v3.20.2
Disclosures About Fair Value of Assets and Liabilities - Fair Value Measurements of Assets and Liabilities Measured at Fair Value on Recurring Basis (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale $ 1,890,593 $ 1,790,025
Quoted Prices in Active Markets for Identical Assets (Level 1)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 0 0
Significant Other Observable Inputs (Level 2)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 1,888,093 1,787,132
Significant Unobservable Inputs (Level 3)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 2,500 2,893
Fair Value, Measurements, Recurring | Interest rate swap liability | Quoted Prices in Active Markets for Identical Assets (Level 1)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Interest rate swap liability 0 0
Fair Value, Measurements, Recurring | Interest rate swap liability | Significant Other Observable Inputs (Level 2)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Interest rate swap liability 87,205 29,299
Fair Value, Measurements, Recurring | Interest rate swap liability | Significant Unobservable Inputs (Level 3)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Interest rate swap liability 0 0
Fair Value, Measurements, Recurring | Fair Value | Interest rate swap liability    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Interest rate swap liability 87,205 29,299
U.S. Treasury    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 600  
U.S. Treasury | Fair Value, Measurements, Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 0  
U.S. Treasury | Fair Value, Measurements, Recurring | Significant Other Observable Inputs (Level 2)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 600  
U.S. Treasury | Fair Value, Measurements, Recurring | Significant Unobservable Inputs (Level 3)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 0  
U.S. Treasury | Fair Value, Measurements, Recurring | Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 600  
U.S. Government-sponsored agency securities    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 2,453 38,875
U.S. Government-sponsored agency securities | Fair Value, Measurements, Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 0 0
U.S. Government-sponsored agency securities | Fair Value, Measurements, Recurring | Significant Other Observable Inputs (Level 2)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 2,453 38,875
U.S. Government-sponsored agency securities | Fair Value, Measurements, Recurring | Significant Unobservable Inputs (Level 3)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 0 0
U.S. Government-sponsored agency securities | Fair Value, Measurements, Recurring | Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 2,453 38,875
State and municipal    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 1,094,218 899,796
State and municipal | Fair Value, Measurements, Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 0 0
State and municipal | Fair Value, Measurements, Recurring | Significant Other Observable Inputs (Level 2)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 1,091,753 896,938
State and municipal | Fair Value, Measurements, Recurring | Significant Unobservable Inputs (Level 3)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 2,465 2,858
State and municipal | Fair Value, Measurements, Recurring | Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 1,094,218 899,796
U.S. Government-sponsored mortgage-backed securities    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 790,234 851,323
U.S. Government-sponsored mortgage-backed securities | Fair Value, Measurements, Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 0 0
U.S. Government-sponsored mortgage-backed securities | Fair Value, Measurements, Recurring | Significant Other Observable Inputs (Level 2)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 790,230 851,319
U.S. Government-sponsored mortgage-backed securities | Fair Value, Measurements, Recurring | Significant Unobservable Inputs (Level 3)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 4 4
U.S. Government-sponsored mortgage-backed securities | Fair Value, Measurements, Recurring | Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 790,234 851,323
Corporate obligations    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 3,088 31
Corporate obligations | Fair Value, Measurements, Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 0 0
Corporate obligations | Fair Value, Measurements, Recurring | Significant Other Observable Inputs (Level 2)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 3,057 0
Corporate obligations | Fair Value, Measurements, Recurring | Significant Unobservable Inputs (Level 3)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 31 31
Corporate obligations | Fair Value, Measurements, Recurring | Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Investment securities available for sale 3,088 31
Interest rate swap asset | Fair Value, Measurements, Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Interest rate swap asset 0 0
Interest rate swap asset | Fair Value, Measurements, Recurring | Significant Other Observable Inputs (Level 2)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Interest rate swap asset 84,658 27,855
Interest rate swap asset | Fair Value, Measurements, Recurring | Significant Unobservable Inputs (Level 3)    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Interest rate swap asset 0 0
Interest rate swap asset | Fair Value, Measurements, Recurring | Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Interest rate swap asset $ 84,658 $ 27,855
v3.20.2
Disclosures About Fair Value of Assets and Liabilities - Reconciliation of Beginning and Ending Balances of Recurring Fair Value Measurements using Significant Unobservable Level 3 Inputs (Details) - Fair Value, Measurements, Recurring - Available for Sale Securities - USD ($)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Available for Sale Securities        
Balance at beginning of the period $ 2,528 $ 2,936 $ 2,892 $ 3,328
Included in other comprehensive income (30) 37 (50) 80
Principal payments 2 2 (342) (433)
Ending balance $ 2,500 $ 2,975 $ 2,500 $ 2,975
v3.20.2
Disclosures About Fair Value of Assets and Liabilities - Transfers Between Levels (Details) - USD ($)
 3 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Fair Value Disclosures [Abstract]    
Transfers in or out of Level 3 $ 0 $ 0
v3.20.2
Disclosures About Fair Value of Assets and Liabilities - Valuation Methodologies Used for Instruments Measured at Fair Value on Non-Recurring Basis (Details) - Fair Value, Measurements, Nonrecurring - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Impaired loans (collateral dependent)    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair Value $ 22,690 $ 5,653
Impaired loans (collateral dependent) | Quoted Prices in Active Markets for Identical Assets (Level 1)    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair Value 0 0
Impaired loans (collateral dependent) | Significant Other Observable Inputs (Level 2)    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair Value 0 0
Impaired loans (collateral dependent) | Significant Unobservable Inputs (Level 3)    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair Value 22,690 5,653
Other real estate owned    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair Value 464 194
Other real estate owned | Quoted Prices in Active Markets for Identical Assets (Level 1)    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair Value 0 0
Other real estate owned | Significant Other Observable Inputs (Level 2)    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair Value 0 0
Other real estate owned | Significant Unobservable Inputs (Level 3)    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair Value $ 464 $ 194
v3.20.2
Disclosures About Fair Value of Assets and Liabilities - Unobservable Inputs Used in Recurring and Nonrecurring Level 3 Fair Value Measurements Other Than Goodwill (Details) - Significant Unobservable Inputs (Level 3)
$ in Thousands
 6 Months Ended 12 Months Ended
Jun. 30, 2020
USD ($)
Dec. 31, 2019
USD ($)
State and municipal securities | Discounted cash flow    
Fair Value Measurement Inputs and Valuation Techniques [Line Items]    
Fair Value $ 2,465 $ 2,858
State and municipal securities | Discounted cash flow | Minimum    
Fair Value Measurement Inputs and Valuation Techniques [Line Items]    
Maturity/Call date 1 month 1 month
US Muni BQ curve A- A-
State and municipal securities | Discounted cash flow | Maximum    
Fair Value Measurement Inputs and Valuation Techniques [Line Items]    
Maturity/Call date 15 years 15 years
US Muni BQ curve BBB- BBB-
Corporate obligations and U.S. Government-sponsored mortgage-backed securities | Discounted cash flow    
Fair Value Measurement Inputs and Valuation Techniques [Line Items]    
Fair Value $ 35 $ 35
Impaired loans (collateral dependent) | Collateral based measurements    
Fair Value Measurement Inputs and Valuation Techniques [Line Items]    
Fair Value 22,690 5,653
Other real estate owned | Appraisals    
Fair Value Measurement Inputs and Valuation Techniques [Line Items]    
Fair Value $ 464 $ 194
Discount rate | State and municipal securities | Discounted cash flow | Minimum    
Fair Value Measurement Inputs and Valuation Techniques [Line Items]    
Discount rate 0.015 0.0200
Discount rate | State and municipal securities | Discounted cash flow | Maximum    
Fair Value Measurement Inputs and Valuation Techniques [Line Items]    
Discount rate 0.04 0.05
Weighted-average coupon | State and municipal securities | Discounted cash flow | Weighted Average    
Fair Value Measurement Inputs and Valuation Techniques [Line Items]    
Discount rate 0.0387 0.0392
Weighted-average coupon | Corporate obligations and U.S. Government-sponsored mortgage-backed securities | Discounted cash flow | Weighted Average    
Fair Value Measurement Inputs and Valuation Techniques [Line Items]    
Discount rate 0 0
Risk free rate | Corporate obligations and U.S. Government-sponsored mortgage-backed securities | Discounted cash flow    
Fair Value Measurement Inputs and Valuation Techniques [Line Items]    
Risk free rate 3 month LIBOR 3 month LIBOR
Plus premium for illiquidity | Corporate obligations and U.S. Government-sponsored mortgage-backed securities | Discounted cash flow    
Fair Value Measurement Inputs and Valuation Techniques [Line Items]    
Discount rate 0.0200 0.0200
Discount to reflect current market conditions and ultimate collectability | Impaired loans (collateral dependent) | Collateral based measurements | Minimum    
Fair Value Measurement Inputs and Valuation Techniques [Line Items]    
Discount to reflect current market conditions and ultimate collectability 0 0
Discount to reflect current market conditions and ultimate collectability | Impaired loans (collateral dependent) | Collateral based measurements | Maximum    
Fair Value Measurement Inputs and Valuation Techniques [Line Items]    
Discount to reflect current market conditions and ultimate collectability 0.10 0.10
Discount to reflect current market conditions and ultimate collectability | Impaired loans (collateral dependent) | Collateral based measurements | Weighted Average    
Fair Value Measurement Inputs and Valuation Techniques [Line Items]    
Discount to reflect current market conditions and ultimate collectability 0.10 0.01
Discount to reflect current market conditions | Other real estate owned | Appraisals | Minimum    
Fair Value Measurement Inputs and Valuation Techniques [Line Items]    
Other real estate owned 0 0
Discount to reflect current market conditions | Other real estate owned | Appraisals | Maximum    
Fair Value Measurement Inputs and Valuation Techniques [Line Items]    
Other real estate owned 0.72 0.37
Discount to reflect current market conditions | Other real estate owned | Appraisals | Weighted Average    
Fair Value Measurement Inputs and Valuation Techniques [Line Items]    
Other real estate owned 0.32 0.37
v3.20.2
Disclosures About Fair Value of Assets and Liabilities - Estimated Fair Values of Financial Instruments (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Assets:    
Investment securities available for sale $ 1,890,593 $ 1,790,025
Investment securities held to maturity 941,426 827,566
Loans held for sale 901 9,037
Quoted Prices in Active Markets for Identical Assets (Level 1)    
Assets:    
Cash and cash equivalents 229,759 177,201
Interest-bearing time deposits 380,021 118,263
Investment securities available for sale 0 0
Investment securities held to maturity 0 0
Loans held for sale 0 0
Loans 0 0
Federal Home Loan Bank stock 0 0
Interest rate swap asset 0 0
Interest receivable 0 0
Liabilities:    
Deposits 9,566,516 8,146,745
Borrowings:    
Federal funds purchased   0
Securities sold under repurchase agreements 0 0
Federal Home Loan Bank advances 0 0
Subordinated debentures and other borrowings 0 0
Interest rate swap liability 0 0
Interest payable 0 0
Significant Other Observable Inputs (Level 2)    
Assets:    
Cash and cash equivalents 0 0
Interest-bearing time deposits 0 0
Investment securities available for sale 1,888,093 1,787,132
Investment securities held to maturity 920,146 799,884
Loans held for sale 901 9,037
Loans 0 0
Federal Home Loan Bank stock 28,736 28,736
Interest rate swap asset 84,658 27,855
Interest receivable 57,063 48,901
Liabilities:    
Deposits 1,395,002 1,675,202
Borrowings:    
Federal funds purchased   55,000
Securities sold under repurchase agreements 181,150 187,801
Federal Home Loan Bank advances 415,737 352,581
Subordinated debentures and other borrowings 276,306 123,571
Interest rate swap liability 87,205 29,299
Interest payable 5,587 6,754
Significant Unobservable Inputs (Level 3)    
Assets:    
Cash and cash equivalents 0 0
Interest-bearing time deposits 0 0
Investment securities available for sale 2,500 2,893
Investment securities held to maturity 21,280 27,682
Loans held for sale 0 0
Loans 9,253,762 8,335,340
Federal Home Loan Bank stock 0 0
Interest rate swap asset 0 0
Interest receivable 0 0
Liabilities:    
Deposits 0 0
Borrowings:    
Federal funds purchased   0
Securities sold under repurchase agreements 0 0
Federal Home Loan Bank advances 0 0
Subordinated debentures and other borrowings 0 0
Interest rate swap liability 0 0
Interest payable 0 0
Carrying Amount    
Assets:    
Cash and cash equivalents 229,759 177,201
Interest-bearing time deposits 380,021 118,263
Investment securities available for sale 1,890,593 1,790,025
Investment securities held to maturity 898,786 806,038
Loans held for sale 901 9,037
Loans 9,177,422 8,379,026
Federal Home Loan Bank stock 28,736 28,736
Interest rate swap asset 84,658 27,855
Interest receivable 57,063 48,901
Liabilities:    
Deposits 10,965,988 9,839,956
Borrowings:    
Federal funds purchased   55,000
Securities sold under repurchase agreements 181,150 187,946
Federal Home Loan Bank advances 400,817 351,072
Subordinated debentures and other borrowings 285,197 138,685
Interest rate swap liability 87,205 29,299
Interest payable $ 5,587 $ 6,754
v3.20.2
Transfers Accounted for as Secured Borrowings (Details) - U.S. Government-sponsored mortgage-backed securities - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Assets Sold under Agreements to Repurchase [Line Items]    
Collateral pledged for all repurchase agreements accounted for as secured borrowings $ 181,150 $ 187,946
Overnight and Continuous    
Assets Sold under Agreements to Repurchase [Line Items]    
Collateral pledged for all repurchase agreements accounted for as secured borrowings 178,749 178,732
Up to 30 Days    
Assets Sold under Agreements to Repurchase [Line Items]    
Collateral pledged for all repurchase agreements accounted for as secured borrowings 750 0
30-90 Days    
Assets Sold under Agreements to Repurchase [Line Items]    
Collateral pledged for all repurchase agreements accounted for as secured borrowings 0 7,672
Greater Than 90 Days    
Assets Sold under Agreements to Repurchase [Line Items]    
Collateral pledged for all repurchase agreements accounted for as secured borrowings $ 1,651 $ 1,542
v3.20.2
Accumulated Other Comprehensive Income (Loss) - Changes in Balances of Each Component (Details) - USD ($)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Accumulated Other Comprehensive Income (Loss)        
Beginning balance $ 1,777,960 $ 1,455,848 $ 1,786,437 $ 1,408,260
Other comprehensive income before reclassifications     41,756 38,268
Amounts reclassified from accumulated other comprehensive income (2,242) (1,390) (5,785) (2,244)
Total other comprehensive income (loss), net of tax     35,971 36,024
Ending balance 1,809,095 1,501,636 1,809,095 1,501,636
Total        
Accumulated Other Comprehensive Income (Loss)        
Beginning balance 53,656 (1,595) 27,874 (21,422)
Ending balance 63,845 14,602 63,845 14,602
Unrealized Gains (Losses) on Securities Available for Sale        
Accumulated Other Comprehensive Income (Loss)        
Beginning balance     38,872 (6,343)
Other comprehensive income before reclassifications     42,909 39,130
Amounts reclassified from accumulated other comprehensive income     (6,067) (2,357)
Total other comprehensive income (loss), net of tax     36,842 36,773
Ending balance 75,714 30,430 75,714 30,430
Unrealized Gains (Losses) on Cash Flow Hedges        
Accumulated Other Comprehensive Income (Loss)        
Beginning balance     (1,141) (559)
Other comprehensive income before reclassifications     (1,153) (862)
Amounts reclassified from accumulated other comprehensive income     282 113
Total other comprehensive income (loss), net of tax     (871) (749)
Ending balance (2,012) (1,308) (2,012) (1,308)
Unrealized Gains (Losses) on Defined Benefit Plans        
Accumulated Other Comprehensive Income (Loss)        
Beginning balance     (9,857) (14,520)
Other comprehensive income before reclassifications     0 0
Amounts reclassified from accumulated other comprehensive income     0 0
Total other comprehensive income (loss), net of tax     0 0
Ending balance $ (9,857) $ (14,520) $ (9,857) $ (14,520)
v3.20.2
Accumulated Other Comprehensive Income (Loss) - Reclassifications (Details) - USD ($)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Reclassification Adjustments out of Accumulated Other Comprehensive Income [Line Items]        
Net realized gains on sales of available for sale securities $ 3,068 $ 1,843 $ 7,680 $ 2,983
Interest expense - subordinated debentures and term loans 1,639 2,123 3,584 4,239
Income tax expense (4,623) (7,749) (8,113) (14,690)
Total reclassifications for the period, net of tax 2,242 1,390 5,785 2,244
Unrealized gains (losses) on available for sale securities        
Reclassification Adjustments out of Accumulated Other Comprehensive Income [Line Items]        
Total reclassifications for the period, net of tax 2,424 1,456 6,067 2,357
Unrealized gains (losses) on cash flow hedges        
Reclassification Adjustments out of Accumulated Other Comprehensive Income [Line Items]        
Total reclassifications for the period, net of tax (182) (66) (282) (113)
Amount Reclassified from Accumulated Other Comprehensive Income (Loss) for the Period | Unrealized gains (losses) on available for sale securities        
Reclassification Adjustments out of Accumulated Other Comprehensive Income [Line Items]        
Net realized gains on sales of available for sale securities 3,068 1,843 7,680 2,983
Income tax expense (644) (387) (1,613) (626)
Amount Reclassified from Accumulated Other Comprehensive Income (Loss) for the Period | Unrealized gains (losses) on cash flow hedges        
Reclassification Adjustments out of Accumulated Other Comprehensive Income [Line Items]        
Income tax expense 49 18 75 30
Amount Reclassified from Accumulated Other Comprehensive Income (Loss) for the Period | Unrealized gains (losses) on cash flow hedges | Interest rate contracts        
Reclassification Adjustments out of Accumulated Other Comprehensive Income [Line Items]        
Interest expense - subordinated debentures and term loans $ (231) $ (84) $ (357) $ (143)
v3.20.2
Share-Based Compensation - Narrative (Details) - USD ($)
 3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Percentage of average closing price to be paid by employees     85.00%  
Maximum common stock purchases through advance payroll deductions in a calendar year     $ 25,000  
Share-based compensation $ 1,214,000 $ 844,000 $ 2,433,000 $ 1,825,000
Forfeiture rate     0.40%  
Unrecognized compensation expense related to stock options 0   $ 0  
Aggregate intrinsic value of stock options exercised     197,000 308,000
Cash receipts of stock options exercised     $ 83,000 $ 105,000
Stock Options        
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Stock option term     10 years  
Stock options vesting percentage     100.00%  
Stock Options | Minimum        
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Vested period     1 year  
Stock Options | Maximum        
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Vested period     2 years  
RSAs        
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Vested period     3 years  
Unrecognized compensation expense related to RSAs 5,595,000   $ 5,595,000  
Unrecognized compensation expense expected recognition period     1 year 2 months 15 days  
ESPP        
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Unrecognized compensation expense related to stock options 0   $ 0  
Grant date fair value of ESPP options $ 12,000      
v3.20.2
Share-Based Compensation - Components of Share-Based Compensation Awards (Details) - USD ($)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Pre-tax compensation expense $ 1,214 $ 844 $ 2,433 $ 1,825
Income tax benefit (265) (227) (522) (783)
Total share-based compensation expense, net of income taxes 949 617 1,911 1,042
Stock and ESPP Options        
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Pre-tax compensation expense 12 25 53 36
Income tax benefit (29) (41) (29) (57)
Total share-based compensation expense, net of income taxes (17) (16) 24 (21)
Restricted Stock Awards        
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Pre-tax compensation expense 1,202 819 2,380 1,789
Income tax benefit (236) (186) (493) (726)
Total share-based compensation expense, net of income taxes $ 966 $ 633 $ 1,887 $ 1,063
v3.20.2
Share-Based Compensation - Stock Option Activity under Stock Option Plans (Details) - USD ($)
 6 Months Ended
Jun. 30, 2020
Number of Shares  
Beginning balance (in shares) 59,350
Exercised (in shares) (10,050)
Ending balance (in shares) 49,300
Vested and Expected to Vest (in shares) 49,300
Exercisable (in shares) 49,300
Weighted-Average Exercise Price  
Beginning balance (in dollars per share) $ 13.51
Exercised (in dollars per share) 8.29
Ending balance (in dollars per share) 14.57
Vested and Expected to Vest (in dollars per share) 14.57
Exercisable (in dollars per share) $ 14.57
Weighted Average Remaining Contractual Term (in Years)  
Outstanding (term) 2 years 3 months 25 days
Vested and Expected to Vest (term) 2 years 3 months 25 days
Exercisable (term) 2 years 3 months 25 days
Aggregate Intrinsic Value  
Outstanding $ 640,876
Vested and Expected to Vest 640,876
Exercisable $ 640,876
v3.20.2
Share-Based Compensation - Unvested RSAs Outstanding (Details) - RSAs
 6 Months Ended
Jun. 30, 2020
$ / shares
shares
Number of Shares  
Unvested RSAs, Beginning Balance (in shares) | shares 351,048
Granted (in shares) | shares 14,657
Vested (in shares) | shares (8,591)
Forfeited (in shares) | shares (525)
Unvested RSAs, Ending Balance (in shares) | shares 356,589
Weighted-Average Grant Date Fair Value  
Unvested RSAs, Beginning Balance (in dollars per share) | $ / shares $ 40.67
Granted (in dollars per share) | $ / shares 27.00
Vested (in dollars per share) | $ / shares 40.09
Forfeited (in dollars per share) | $ / shares 40.44
Unvested RSAs, Ending Balance (in dollars per share) | $ / shares $ 40.62
v3.20.2
Income Tax (Details) - USD ($)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Reconciliation of Federal Statutory to Actual Tax Expense:        
Federal statutory income tax at 21% $ 7,899 $ 10,249 $ 15,827 $ 19,858
Tax-exempt interest income (3,199) (2,403) (6,221) (4,670)
Share-based compensation (6) (41) (6) (391)
Tax-exempt earnings and gains on life insurance (278) (199) (564) (406)
Tax credits (89) (63) (150) (141)
CARES Act - NOL carryback rate differential 0 0 (1,178) 0
Other 296 206 405 440
Actual Tax Expense $ 4,623 $ 7,749 $ 8,113 $ 14,690
Effective Tax Rate 12.30% 15.90% 10.80% 15.50%
v3.20.2
Net Income Per Share - Reconciliation of Basic and Diluted Net Income Per Share (Details) - USD ($)
$ / shares in Units, $ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Net Income        
Net income available to common stockholders $ 32,992 $ 41,056 $ 67,255 $ 79,873
Diluted net income per share $ 32,992 $ 41,056 $ 67,255 $ 79,873
Weighted-Average Shares        
Net income available to common stockholders (in shares) 53,762,913 49,432,167 54,247,493 49,400,770
Effect of potentially dilutive stock options and restricted stock awards (in shares) 179,654 117,720 182,026 144,382
Diluted net income per share (in shares) 53,942,567 49,549,887 54,429,519 49,545,152
Per Share Amount        
Net income available to common stockholders (in dollars per share) $ 0.62 $ 0.83 $ 1.24 $ 1.62
Diluted net income per share (in dollars per share) $ 0.62 $ 0.83 $ 1.24 $ 1.61
v3.20.2
Net Income Per Share - Narrative (Details) - shares
 3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Stock Options        
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]        
Stock options not included in the earnings per share calculation (in shares) 0 0 0 0