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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 March 31, 2021
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)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.125 stated value per shareFRMENasdaq 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 May 3, 2021, there were 54,371,549 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

ACLAllowance for Credit Losses
AmeriborThe American interbank offered rate, a potential replacement for LIBOR, is a benchmark interest rate calculated as a volume-weighted average of the daily transactions in overnight unsecured loans on the American Financial Exchange, LLC, a self-regulated electronic exchange for direct lending by American banks and financial institutions.
ASCAccounting Standards Codification
ASUAccounting Standards Update
BankFirst Merchants Bank, a wholly-owned subsidiary of the Corporation
CARES ActCoronavirus Aid, Relief and Economic Security Act
CECL
Current expected credit losses
CET1Common Equity Tier 1
CorporationFirst Merchants Corporation
COVID-192019 novel coronavirus disease, which was declared a pandemic by the World Health Organization on March 11, 2020.
Economic Impact PaymentsEconomic 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.
ESPPEmployee Stock Purchase Plan
FASBFinancial Accounting Standards Board
FDICFederal Deposit Insurance Corporation
Federal ReserveBoard of Governors of the Federal Reserve System
FHLBFederal Home Loan Bank
FOMCFederal Open Market Committee, the monetary policymaking body of the Federal Reserve System.
FTEFully taxable equivalent
GAAPU.S. Generally Accepted Accounting Principles
IRSInternal Revenue Service
OREOOther real estate owned
PPPPaycheck Protection Program, which was established by the CARES Act and implemented by the Small Business Administration to provide small business loans.
RSARestricted Stock Awards
TEFRATax 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
March 31,
2021
December 31,
2020
(Unaudited)
ASSETS  
Cash and cash equivalents$187,901 $192,896 
Interest-bearing deposits392,806 392,305 
Investment securities available for sale2,405,568 1,919,119 
Investment securities held to maturity, net of allowance for credit losses of $245 and $0 (fair value of $1,318,780 and $1,280,293)
1,295,289 1,227,668 
Loans held for sale4,430 3,966 
Loans9,318,228 9,243,174 
Less: Allowance for credit losses - loans 1
(201,082)(130,648)
Net loans9,117,146 9,112,526 
Premises and equipment109,432 111,062 
Federal Home Loan Bank stock28,736 28,736 
Interest receivable54,662 53,948 
Goodwill543,918 543,918 
Other intangibles27,618 28,975 
Cash surrender value of life insurance293,766 292,745 
Other real estate owned604 940 
Tax asset, deferred and receivable40,163 12,340 
Other assets127,027 146,066 
TOTAL ASSETS$14,629,066 $14,067,210 
LIABILITIES  
Deposits:  
Noninterest-bearing$2,494,891 $2,298,138 
Interest-bearing9,456,889 9,063,472 
Total Deposits11,951,780 11,361,610 
Borrowings:  
Securities sold under repurchase agreements185,721 177,102 
Federal Home Loan Bank advances359,337 389,430 
Subordinated debentures and other borrowings118,439 118,380 
Total Borrowings663,497 684,912 
Interest payable4,020 3,287 
Other liabilities203,913 141,756 
Total Liabilities12,823,210 12,191,565 
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, $0.125 stated value:
  
Authorized - 100,000,000 shares
  
Issued and outstanding - 53,953,723 and 53,922,359 shares
6,744 6,740 
Additional paid-in capital1,007,300 1,005,366 
Retained earnings755,877 788,578 
Accumulated other comprehensive income35,810 74,836 
Total Stockholders' Equity1,805,856 1,875,645 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$14,629,066 $14,067,210 

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


See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
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
March 31,
 20212020
INTEREST INCOME  
Loans receivable:
Taxable$85,105 $96,652 
Tax exempt5,339 5,315 
Investment securities: 
Taxable6,695 7,631 
Tax exempt12,385 9,335 
Deposits with financial institutions114 575 
Federal Home Loan Bank stock178 299 
Total Interest Income109,816 119,807 
INTEREST EXPENSE  
Deposits6,200 21,748 
Federal funds purchased2 111 
Securities sold under repurchase agreements87 352 
Federal Home Loan Bank advances1,442 1,774 
Subordinated debentures and other borrowings1,657 1,945 
Total Interest Expense9,388 25,930 
NET INTEREST INCOME100,428 93,877 
Provision for credit losses - loans 19,752 
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES100,428 74,125 
OTHER INCOME  
Service charges on deposit accounts5,264 5,970 
Fiduciary and wealth management fees6,422 5,985 
Card payment fees4,367 5,907 
Net gains and fees on sales of loans3,986 3,363 
Derivative hedge fees317 1,939 
Other customer fees368 398 
Increase in cash surrender value of life insurance1,189 1,360 
Gains on life insurance benefits147  
Net realized gains on sales of available for sale securities1,799 4,612 
Other income232 265 
Total Other Income24,091 29,799 
OTHER EXPENSES  
Salaries and employee benefits38,811 39,243 
Net occupancy6,491 5,801 
Equipment5,030 4,344 
Marketing1,124 1,443 
Outside data processing fees4,244 4,199 
Printing and office supplies283 387 
Intangible asset amortization1,357 1,514 
FDIC assessments1,368 1,523 
Other real estate owned and foreclosure expenses734 505 
Professional and other outside services2,543 2,258 
Other expenses4,113 4,954 
Total Other Expenses66,098 66,171 
INCOME BEFORE INCOME TAX58,421 37,753 
Income tax expense8,952 3,490 
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS$49,469 $34,263 
Per Share Data:  
Basic Net Income Available to Common Stockholders$0.92 $0.63 
Diluted Net Income Available to Common Stockholders$0.91 $0.62 
Cash Dividends Paid$0.26 $0.26 
Average Diluted Shares Outstanding (in thousands)54,134 54,918 


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
March 31,
20212020
Net income$49,469 $34,263 
Other comprehensive income (loss):
     Unrealized gains/losses on securities available-for-sale:
Unrealized holding gain (loss) arising during the period(47,911)38,435 
Reclassification adjustment for losses (gains) included in net income(1,799)(4,612)
Tax effect10,439 (7,102)
Net of tax(39,271)26,721 
     Unrealized gain/loss on cash flow hedges:
Unrealized holding gain (loss) arising during the period58 (1,314)
Reclassification adjustment for losses (gains) included in net income252 125 
Tax effect(65)250 
Net of tax245 (939)
      Total other comprehensive income (loss), net of tax(39,026)25,782 
Comprehensive income$10,443 $60,045 


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 March 31, 2021
PreferredCommon StockAdditionalAccumulated
Other
SharesAmountSharesAmountPaid in
Capital
Retained
Earnings
Comprehensive
Income
Total
Balances, December 31, 2020125 $125 53,922,359 $6,740 $1,005,366 $788,578 $74,836 $1,875,645 
Cumulative effect of ASC 326 adoption(68,040)(68,040)
Balance, January 1, 2021125 $125 53,922,359 $6,740 $1,005,366 1005366$720,538 $74,836 $1,807,605 
Comprehensive income:
Net income— — — — — 49,469 — 49,469 
Other comprehensive loss, net of tax — — — — — — (39,026)(39,026)
Cash dividends on common stock ($.26 per share)
— — — — — (14,130)— (14,130)
Share-based compensation— — 4,285 1 1,189 — — 1,190 
Stock issued under employee benefit plans— — 3,929 — 144 — — 144 
Stock issued under dividend reinvestment and
stock purchase plan
— — 9,117 1 442 — — 443 
Stock options exercised— — 14,300 2 169 — — 171 
Restricted shares withheld for taxes— — (267)— (10)— — (10)
Balances, March 31, 2021
125 $125 53,953,723 $6,744 $1,007,300 $755,877 $35,810 $1,805,856 


Three Months Ended March 31, 2020
PreferredCommon StockAdditionalAccumulated
Other
SharesAmountSharesAmountPaid in
Capital
Retained
Earnings
Comprehensive
Loss
Total
Balances, December 31, 2019125 $125 55,368,482 $6,921 $1,054,997 $696,520 $27,874 $1,786,437 
Comprehensive income:       
Net income— — — — — 34,263 — 34,263 
Other comprehensive income, net of tax — — — — — — 25,782 25,782 
Cash dividends on common stock ($.26 per share)
— — — — — (14,265)— (14,265)
Repurchases of common stock— — (1,634,437)(204)(55,708)— — (55,912)
Share-based compensation— — 3,332 — 1,220 — — 1,220 
Stock issued under dividend reinvestment and
stock purchase plan
— — 15,710 2 426 — — 428 
Stock options exercised— — 1,050 — 7 — — 7 
Balances, March 31. 2020
125 $125 53,754,137 $6,719 $1,000,942 $716,518 $53,656 $1,777,960 


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)


CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
 Three Months Ended
 March 31, 2021March 31, 2020
Cash Flow From Operating Activities:  
Net income$49,469 $34,263 
Adjustments to reconcile net income to net cash provided by operating activities:  
Provision for loan losses 19,752 
Depreciation and amortization2,748 2,674 
Change in deferred taxes(3,079)(7,662)
Share-based compensation1,190 1,220 
Loans originated for sale(111,558)(163,378)
Proceeds from sales of loans held for sale114,383 170,307 
Gains on sales of loans held for sale(3,289)(2,931)
Gains on sales of securities available for sale(1,799)(4,612)
Increase in cash surrender of life insurance(1,189)(1,360)
Gains on life insurance benefits(147) 
Change in interest receivable(714)1,412 
Change in interest payable733 992 
Other adjustments6,062 20,816 
Net cash provided by operating activities52,810 71,493 
Cash Flows from Investing Activities:  
Net change in interest-bearing deposits(501)(14,681)
Purchases of: 
Securities available for sale(597,901)(87,499)
Securities held to maturity(135,098)(126,759)
Proceeds from sales of securities available for sale48,016 96,558 
Proceeds from maturities of: 
Securities available for sale80,114 45,621 
Securities held to maturity66,361 49,912 
Net change in loans(72,704)(148,882)
Proceeds from the sale of other real estate owned495 303 
Proceeds from life insurance benefits315  
Other adjustments(2,285)(3,672)
Net cash used in investing activities(613,188)(189,099)
Cash Flows from Financing Activities:  
Net change in :  
Demand and savings deposits620,609 109,276 
Certificates of deposit and other time deposits(30,439)(78,748)
Borrowings8,678 180,060 
Repayment of borrowings(30,093)(72,710)
Cash dividends on common stock(14,130)(14,265)
Stock issued under employee benefit plans144  
Stock issued under dividend reinvestment and stock purchase plans443 428 
Stock options exercised171 7 
Repurchase of common stock (55,912)
Net cash provided by financing activities555,383 68,136 
Net Change in Cash and Cash Equivalents(4,995)(49,470)
Cash and Cash Equivalents, January 1192,896 177,201 
Cash and Cash Equivalents, March 31
$187,901 $127,731 
Additional cash flow information:  
Interest paid$8,655 $24,938 
Loans transferred to other real estate owned44 761 
Fixed assets transferred to other real estate owned1,167  
Non-cash investing activities using trade date accounting66,558 44,362 
ROU assets obtained in exchange for new operating lease liabilities386 79 


See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
8

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



NOTE 1 
GENERAL
Financial Statement Preparation

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

Significant Accounting Policies

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

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

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

December 31, 2020Impact of CECL AdoptionJanuary 1, 2021 Post-CECL Adoption
Assets:
Held to maturity securities1,227,668 (245)1,227,423 
Loans9,243,174 4,776 9,247,950 
Allowance for credit losses - Loans(130,648)(74,055)(204,703)
Net loans9,112,526 (69,279)9,043,247 
Tax asset, deferred and receivable12,340 21,984 34,324 
Liabilities:
Allowance for credit losses on unfunded loan commitments 20,500 20,500 
Stockholder's Equity:
Retained Earnings788,578 (68,040)720,538 
— 


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)



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

Allowance for credit losses on investment securities held to maturity ("ACL - Investments") – the ACL - Investments is a contra asset-valuation account that is deducted from the amortized cost basis of investment securities held to maturity to present the net amount expected to be collected. Investment securities held to maturity are charged off against the ACL - Investments when deemed uncollectible. Adjustments to the ACL - Investments are reported in the income statement as a component of the provision for credit loss. The Corporation measures expected credit losses on held to maturity debt securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities held to maturity from the estimate of credit losses. With regard to U.S. Government-sponsored agency and mortgage-backed securities, all these securities are issued by a U.S. government-sponsored entity and have an implicit or explicit government guarantee. With regard to securities issued by states and municipalities and other investment securities held to maturity, management considers (1) issuer bond ratings, (2) the financial condition of the issuer, (3) historical loss rates for given bond ratings, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. Historical loss rates associated with securities having similar grades as those in the Corporation's portfolio have generally not been significant. Furthermore, as of March 31, 2021, there were no past due principal and interest payments associated with these securities. An allowance for credit losses of $245,000 was recorded on the state and municipal securities classified as held to maturity based on applying the long-term historical credit loss rate, as published by Moody’s, for similarly rated securities.

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

Allowance for Credit Losses - Loans ("ACL - Loans") - the ACL - Loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans over the contractual term. Loans are charged off against the allowance when the uncollectibility of the loan is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. Adjustments to the ACL- Loans are reported in the income statement as a component of provision for credit loss. The Corporation has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses. Further information regarding the policies and methodology used to estimate the ACL - Loans is detailed in NOTE 3. LOANS AND ALLOWANCE of these Notes to Consolidated Condensed Financial Statements.

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



Impact of COVID-19

On January 30, 2020, the World Health Organization (“WHO”) announced that the outbreak of COVID-19 constituted a public health emergency of international concern. On March 11, 2020, WHO declared COVID-19 to be a global pandemic and, on March 13, 2020, the President of the United States declared the COVID-19 outbreak a national emergency. The health concerns relating to the COVID-19 outbreak and related governmental actions taken to reduce the spread of the virus have significantly impacted the global economy (including the states and local economies in which the Corporation operates), disrupted supply chains, lowered equity market valuations, and created significant volatility and disruption in financial markets. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. As a result of the shelter in place mandates in effect beginning early in the second quarter of 2020, commercial activity throughout our geographic footprint, as well as nationally, decreased significantly during 2020 and 2021. These containment measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. Although most states have reopened, albeit under limited capacities and under other social distancing restrictions, commercial activity has not returned to the levels existing prior to the outbreak of the pandemic. While multiple COVID-19 vaccines are now broadly available and vaccination rates are steadily increasing, it is too early to know how effective vaccinations will be in mitigating the adverse social and economic effects of the pandemic. Moreover, certain states and localities have recently experienced significant increases in the number of individuals diagnosed with COVID-19, which, in certain cases, is causing government officials to reinstitute activity restrictions. In addition, variant strains of the COVID-19 virus have appeared, further complicating efforts of the medical community and federal, state and local governments in response to the pandemic.

The continued impact of COVID-19 on the Corporation will depend on numerous factors and future developments that are highly uncertain and cannot be predicted with confidence. It is unknown how long the COVID-19 pandemic will last, or when restrictions on individuals and businesses will be fully lifted and businesses and their employees will be able to resume normal activities. Additional information may emerge regarding new developments with COVID-19 and additional actions may be taken by federal, state and local governments to contain COVID-19 or treat its impact. Changes in the behavior of customers, businesses and their employees as a result of COVID-19 pandemic, including social distancing practices, even after formal restrictions have been lifted and vaccination rates have increased, 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 in 2021, especially if positive cases increase and economic shutdowns continue. 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.

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

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

Recent Accounting Changes Adopted In 2021

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

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

Under the CECL model, certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, are required to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement takes place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model, which delayed recognition until it is probable a loss had been incurred.
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 Corporation developed models that satisfy the requirements of the new standard which are governed by a system of internal controls and a cross-functional working group consisting of accounting, finance, and credit administration personnel. The loan portfolio was pooled into ten loan segments with similar risk characteristics for which the probability of default/loss given default methodology was applied. The Corporation utilized a one-year economic forecast period then reverted to historical macroeconomic levels for the remaining life of the portfolio. A baseline macroeconomic scenario, along with other scenarios, were used to develop a range of estimated credit losses for which to determine the best estimate within.

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

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

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

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

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


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)



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

The ASU removes specific exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles (GAAP). It eliminates the need for an organization to analyze whether the following apply in a given period:
•    Exception to the incremental approach for intraperiod tax allocation;
•    Exceptions to accounting for basis differences when there are ownership changes in foreign investments; and
•    Exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses.

The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for:
•    Franchise taxes that are partially based on income;
•    Transactions with a government that result in a step up in the tax basis of goodwill
•    Separate financial statements of legal entities that are not subject to tax; and
•    Enacted changes in tax laws in interim periods.

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

New Accounting Pronouncements Not Yet Adopted

FASB Accounting Standards Updates - No. 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
Summary - The FASB issued ASU No. 2020-04 to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. LIBOR and other interbank offered rates are widely used benchmarks or reference rates in the United States and globally. Trillions of dollars in loans, derivatives, and other financial contracts reference LIBOR, the benchmark interest rate banks use to make short-term loans to each other. With global capital markets expected to move away from LIBOR and other interbank offered rates and move toward rates that are more observable or transaction based and less susceptible to manipulation, the FASB launched a broad project in late 2018 to address potential accounting challenges expected to arise from the transition. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period.

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

FASB Accounting Standards Updates - Accounting Standards Update No. 2021-01 - Reference Rate Reform (Topic 848): Scope
Summary - The FASB has published ASU 2021-01, Reference Rate Reform. ASU 2021-01 clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.

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

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

The amendments in this Update do not apply to contract modifications made after December 31, 2022, new hedging relationships entered into after December 31, 2022, and existing hedging relationships evaluated for effectiveness in periods after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship (including periods after December 31, 2022). The Corporation is assessing ASU 2021-01 and its impact on the Corporation's transition away from LIBOR for its loans and other financial instruments.
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Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
(Unaudited)



NOTE 2

INVESTMENT SECURITIES

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

 Amortized
Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair
Value
Available for sale at March 31, 2021    
U.S. Treasury$1,000 $ $ $1,000 
U.S. Government-sponsored agency securities11,504 40 163