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Section 1: 10-Q (FIRST MERCHANTS CORPORATION 10-Q)

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

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019
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 state value per share
FRME
The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed  by  Section  13 or 15 (d) of the  Securities  Exchange  Act of 1934 during the preceding 12 months (or for such shorter  period that the  registrant was  required  to file such  reports),  and (2) has been subject to such filing requirements for the past 90 days. Yes [X]   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 [X]   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 [X]
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 [X]

As of April 30, 2019, there were 49,669,938 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
Bank
First Merchants Bank, a wholly-owned subsidiary of the Corporation
CET1
Common Equity Tier 1
CMT
Constant Maturity Treasury
Corporation
First Merchants Corporation
ESPP
Employee Stock Purchase Plan
FDIC
Federal Deposit Insurance Corporation
FHLB
Federal Home Loan Bank
FTE
Fully taxable equivalent
GAAP
Generally Accepted Accounting Principles
OREO
Other real estate owned
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

March 31,
2019

December 31,
2018

(Unaudited)

ASSETS
 

 
Cash and cash equivalents
$
115,878


$
139,247

Interest-bearing time deposits
70,672


36,963

Investment securities available for sale
1,247,632


1,142,195

Investment securities held to maturity (fair value of $622,635 and $489,217)
615,027


490,387

Loans held for sale
3,330


4,778

Loans, net of allowance for loan losses of $80,902 and $80,552
7,218,418


7,143,915

Premises and equipment
91,863


93,420

Federal Home Loan Bank stock
24,588


24,588

Interest receivable
40,931


40,881

Goodwill
445,355


445,355

Other intangibles
22,901


24,429

Cash surrender value of life insurance
225,928


224,939

Other real estate owned
1,877


2,179

Tax asset, deferred and receivable
16,094


23,668

Other assets
70,431


47,772

TOTAL ASSETS
$
10,210,925


$
9,884,716

LIABILITIES
 

 
Deposits:
 

 
Noninterest-bearing
$
1,381,183


$
1,447,907

Interest-bearing
6,666,615


6,306,686

Total Deposits
8,047,798


7,754,593

Borrowings:
 

 
Federal funds purchased
20,000


104,000

Securities sold under repurchase agreements
111,783


113,512

Federal Home Loan Bank advances
345,013


314,986

Subordinated debentures and term loans
138,519


138,463

Total Borrowings
615,315


670,961

Interest payable
7,313


5,607

Other liabilities
84,651


45,295

Total Liabilities
8,755,077


8,476,456

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 - 49,428,468 and 49,349,800 shares
6,179


6,169

Additional paid-in capital
839,919


840,052

Retained earnings
611,220


583,336

Accumulated other comprehensive loss
(1,595
)

(21,422
)
Total Stockholders' Equity
1,455,848


1,408,260

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
10,210,925


$
9,884,716

 

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,
 
2019
 
2018
INTEREST INCOME
 
 
 
Loans receivable:
 
 
 
Taxable
$
90,481

 
$
78,267

Tax exempt
4,153

 
3,596

Investment securities:
 
 
 
Taxable
6,095

 
5,096

Tax exempt
6,871

 
6,126

Deposits with financial institutions
875

 
131

Federal Home Loan Bank stock
338

 
404

Total Interest Income
108,813

 
93,620

INTEREST EXPENSE
 
 
 
Deposits
19,594

 
9,002

Federal funds purchased
93

 
380

Securities sold under repurchase agreements
330

 
173

Federal Home Loan Bank advances
1,814

 
2,159

Subordinated debentures and term loans
2,116

 
1,990

Total Interest Expense
23,947

 
13,704

NET INTEREST INCOME
84,866

 
79,916

Provision for loan losses
1,200

 
2,500

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
83,666

 
77,416

OTHER INCOME
 
 
 
Service charges on deposit accounts
5,095

 
4,777

Fiduciary and wealth management fees
3,818

 
3,796

Card payment fees
4,826

 
4,594

Other customer fees
439

 
442

Increase in cash surrender value of life insurance
989

 
1,078

Gains on life insurance benefits

 
98

Net gains and fees on sales of loans
1,295

 
1,821

Net realized gains on sales of available for sale securities
1,140

 
1,609

Derivative hedge income
781

 
842

Other income
330

 
504

Total Other Income
18,713

 
19,561

OTHER EXPENSES
 
 
 
Salaries and employee benefits
33,028

 
32,226

Net occupancy
5,027

 
4,670

Equipment
3,642

 
3,668

Marketing
1,074

 
884

Outside data processing fees
3,684

 
2,964

Printing and office supplies
315

 
334

Intangible asset amortization
1,528

 
1,726

FDIC assessments
707

 
719

Other real estate owned and foreclosure expenses
1,165

 
402

Professional and other outside services
1,884

 
1,541

Other expenses
4,567

 
4,553

Total Other Expenses
56,621

 
53,687

INCOME BEFORE INCOME TAX
45,758

 
43,290

Income tax expense
6,941

 
6,611

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
$
38,817

 
$
36,679

Per Share Data:
 
 
 
Basic Net Income Available to Common Stockholders
$
0.79

 
$
0.75

Diluted Net Income Available to Common Stockholders
$
0.78

 
$
0.74

Cash Dividends Paid
$
0.22

 
$
0.18

Average Diluted Shares Outstanding (in thousands)
49,541

 
49,428



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,
 
2019
 
2018
Net income
$
38,817


$
36,679

Other comprehensive income (loss), net of tax:
 

 
Unrealized holding gain (loss) on securities available for sale arising during the period, net of tax of $5,580 and $4,191
20,990


(17,698
)
Unrealized gain (loss) on cash flow hedges arising during the period, net of tax of $82 and $106
(309
)

644

Reclassification adjustment for net gains included in net income, net of tax of $227 and $302
(854
)

(1,137
)
Total other comprehensive income (loss), net of tax
19,827


(18,191
)
Comprehensive income
$
58,644


$
18,488

 

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 STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
 

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










38,817




38,817

Other comprehensive income, net of tax












19,827


19,827

Cash dividends on common stock ($.22 per share)










(10,933
)



(10,933
)
Share-based compensation




103,660


13


968






981

Stock issued under employee benefit plans




5,339


1


173






174

Stock issued under dividend reinvestment and
stock purchase plan




8,508


1


339






340

Stock options exercised




3,700




40






40

Stock redeemed




(42,539
)

(5
)

(1,653
)





(1,658
)
Balances, March 31, 2019
125


$
125


49,428,468


$
6,179


$
839,919


$
611,220


$
(1,595
)

$
1,455,848



 
Preferred
 
Common Stock
 
Additional
 
 
 
Accumulated
Other
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Paid in
Capital
 
Retained
Earnings
 
Comprehensive
Loss
 
Total
Balances, December 31, 2017
125

 
$
125

 
49,158,238

 
$
6,145

 
$
834,870

 
$
465,231

 
$
(2,908
)
 
$
1,303,463

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 
36,679

 

 
36,679

Other comprehensive loss, net of tax

 

 

 

 

 

 
(18,191
)
 
(18,191
)
Cash dividends on common stock ($.18 per share)

 

 

 

 

 
(8,912
)
 

 
(8,912
)
Reclassification adjustment under ASU 2018-02

 

 

 

 

 
626
 
(626
)
 

Share-based compensation

 

 
93,076

 
12

 
863

 

 

 
875

Stock issued under employee benefit plans

 

 
4,363

 
1

 
158

 

 

 
159

Stock issued under dividend reinvestment and
stock purchase plan

 

 
5,614

 
1

 
249

 

 

 
250

Stock options exercised

 

 
23,557

 
3

 
532

 

 

 
535

Stock redeemed

 

 
(41,752
)
 
(7
)
 
(1,778
)
 

 

 
(1,785
)
Balances, March 31, 2018
125

 
$
125

 
49,243,096

 
$
6,155

 
$
834,894

 
$
493,624

 
$
(21,725
)
 
$
1,313,073




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, 2019

March 31, 2018
Cash Flow From Operating Activities:
 

 
Net income
$
38,817


$
36,679

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

 
Provision for loan losses
1,200


2,500

Depreciation and amortization
2,209


2,213

Change in deferred taxes
740


957

Share-based compensation
981


875

Loans originated for sale
(67,596
)

(92,887
)
Proceeds from sales of loans held for sale
69,940


96,973

Gains on sales of loans held for sale
(896
)

(1,339
)
Gains on sales of securities available for sale
(1,140
)

(1,609
)
Increase in cash surrender of life insurance
(989
)

(1,078
)
Gains on life insurance benefits


(98
)
Change in interest receivable
(50
)

1,907

Change in interest payable
1,706


986

Other adjustments
7,019


(15,082
)
Net cash provided by operating activities
51,941


30,997

Cash Flows from Investing Activities:
 

 
Net change in interest-bearing deposits
(33,709
)

10,794

Purchases of:


 
Securities available for sale
(125,523
)

(98,113
)
Securities held to maturity
(138,857
)


Proceeds from sales of securities available for sale
34,107


55,695

Proceeds from maturities of:


 
Securities available for sale
25,904


15,764

Securities held to maturity
13,879


20,092

Change in Federal Home Loan Bank stock


(763
)
Net change in loans
(75,963
)

(153,893
)
Proceeds from the sale of other real estate owned
288


820

Proceeds from life insurance benefits


2,784

Other adjustments
(954
)

1,051

Net cash used in investing activities
(300,828
)

(145,769
)
Cash Flows from Financing Activities:
 

 
Net change in :
 

 
Demand and savings deposits
171,543


108,446

Certificates of deposit and other time deposits
121,662


46,659

Borrowings
295,060


737,347

Repayment of borrowings
(350,710
)

(794,004
)
Cash dividends on common stock
(10,933
)

(8,912
)
Stock issued under employee benefit plans
174


159

Stock issued under dividend reinvestment and stock purchase plans
340


250

Stock options exercised
40


535

Stock redeemed
(1,658
)

(1,785
)
Net cash provided by financing activities
225,518


88,695

Net Change in Cash and Cash Equivalents
(23,369
)

(26,077
)
Cash and Cash Equivalents, January 1
139,247


154,905

Cash and Cash Equivalents, March 31
$
115,878


$
128,828

Additional cash flow information:
 

 
Interest paid
$
22,241


$
12,718

Income tax paid (refunded)


(257
)
Loans transferred to other real estate owned
260


131

Fixed assets transferred to other real estate owned
302

 

Non-cash investing activities using trade date accounting
14,579


601

ROU assets obtained in exchange for new operating lease liabilities
23,324

 



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 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, 2018, 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, 2018 filed with the Securities and Exchange Commission. The results of operations for the three months ended March 31, 2019, 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.

Recent Accounting Changes Adopted in 2019

FASB Accounting Standards Updates No. 2018-11 - Leases (Topic 842): Targeted Improvements - The FASB issued Accounting Standards Update (ASU) No. 2018-11, Leases (Topic 842): Targeted Improvements. This ASU was intended to reduce costs and ease implementation of the leases standard for financial statement preparers. ASU 2018-11 provided a new transition method and a practical expedient for separating components of a contract. ASU 2018-11 provided entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applied the new leases standard at the adoption date and recognized a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, the Corporation's reporting for the comparative periods presented in the financial statements in the period of adoption is in accordance with GAAP in Topic 840, Leases. The Corporation must provide the required Topic 840 disclosures for all periods that continue to be in accordance with Topic 840. The amendments did not change the existing disclosure requirements in Topic 840 (for example, they did not create interim disclosure requirements that the Corporation previously was not required to provide). The Corporation adopted this new transition method on January 1, 2019, but did not recognize a cumulative-effect adjustment to the opening balance of retained earnings at adoption. Lease disclosures are included in NOTE 7. LEASES, in the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q.

The amendments in ASU 2018-11 provided lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance (Topic 606) and both of the following are met:

*
The timing and pattern of transfer of the non-lease component(s) and associated lease component are the same.
*
The lease component, if accounted for separately, would be classified as an operating lease.

An entity electing this practical expedient (including an entity that accounts for the combined component entirely in Topic 606) is required to disclose certain information, by class of underlying asset, as specified in the ASU. The Corporation elected the practical expedient to not separate non-lease components from the associated lease component at adoption, which was January 1, 2019.

FASB Accounting Standards Update No. 2018-07 - Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting - The FASB issued an Accounting Standards Update (ASU) intended to reduce cost and complexity and to improve financial reporting for non-employee share-based payments. The ASU expanded the scope of Topic 718, Compensation-Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to non-employees for goods or services. Consequently, the accounting for share-based payments to non-employees and employees is substantially aligned. The ASU supersedes Subtopic 505-50, Equity-Equity-Based Payments to Non-Employees. The Corporation adopted the standard in the first quarter of 2019 and adoption of the standard did not have a significant effect on the Corporation’s consolidated 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)




FASB Accounting Standards Update No. 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities - The FASB issued Accounting Standards Update (ASU) No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The ASU shortened the amortization period for certain callable debt securities held at a premium to the earliest call date. Under previous GAAP, entities normally amortized the premium as an adjustment of yield over the contractual life of the instrument. Stakeholders expressed concerns with the approach on the basis that GAAP excluded certain callable debt securities from consideration of early repayment of principal even if the holder was certain the call would be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium was recorded as a loss in earnings. Further, there was diversity in practice (1) in the amortization period for premiums of callable debt securities, and (2) in how the potential for exercise of a call was factored into current impairment assessments. Another issue was that the practice in the United States was to quote, price, and trade callable debt securities using a model that incorporated consideration of calls (also referred to as “yield-to-worst” pricing). The ASU shortened the amortization period for certain callable debt securities held at a premium and required the premium to be amortized to the earliest call date. However, the amendments did not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.

The Corporation was required to apply the amendments on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at adoption. The Corporation adopted ASU 2017-08 on January 1, 2019 and adoption of the standard did not have a significant effect on the Corporation’s consolidated financial statements.

FASB Accounting Standards Update No. 2016-02 - Leases (Topic 842) - The FASB issued new lease accounting guidance in Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). Under the new guidance, lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date:

A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and
A right-of-use ("ROU") asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees are no longer provided with a source of off-balance sheet financing.

The Corporation elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Corporation to carry forward the historical lease classification. The Corporation elected to not apply ASC 842 to short-term leases (leases with a term of 12 months or less). Leases with an initial term of 12 months or less are not recorded on the balance sheet as the Corporation expenses the lease on a straight-line basis over the lease term. The Corporation also elected the practical expedient to not separate nonlease components from lease components. Variable payments are not included as part of the consideration of a lease contract and all of the Corporation's nonlease components contain variable payments; therefore, this election will not have any impact on the ROU asset or lease liability.

The Corporation adopted this ASU on January 1, 2019 and recorded a ROU asset of $23.3 million and a lease liability of $23.8 million at adoption. Lease disclosures are included in NOTE 7. LEASES, in the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q.

Revenue Recognition

Revenue recognition guidance establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The majority of the Corporation's revenue-generating transactions are not subject to revenue recognition guidance, including revenue generated from financial instruments, such as loans, letters of credit, derivatives and investment securities, as well as revenue related to mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within the disclosures. The Corporation has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Condensed Statements of Income was not necessary. Descriptions of revenue-generating activities that are within the scope of the guidance, which are presented in our income statements are as follows:

Service charges on deposit accounts: The Corporation earns fees from its deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering and ACH fees, are recognized at the time the transaction is executed, which is the point in time the Corporation fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned monthly, representing the period which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance.

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)




Fiduciary activities: This represents monthly fees due from wealth management customers as consideration for managing the customers' assets. Wealth management and trust services include custody of assets, investment management, fees for trust services and similar fiduciary activities. These fees are primarily earned over time as the Corporation provides the contracted monthly or quarterly services and are generally assessed based on the market value of assets under management at month-end. Fees that are transaction-based are recognized at the point in time that the transaction is executed.

Investment Brokerage Fees: The Corporation earns fees from investment brokerage services provided to its customers by a third-party service provider. The Corporation receives commissions from the third-party provider on a monthly basis based upon customer activity for the month. The fees are paid to us by the third party on a monthly basis and are recognized when received.

Interchange income: The Corporation earns interchange fees from debit and credit cardholder transactions conducted through the Visa and MasterCard payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized concurrent with the transaction processing services provided to the cardholder.

Gains (Losses) on Sales of OREO: The Corporation records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Corporation finances the sale of OREO to the buyer, the Corporation assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Corporation adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.


NOTE 2
 
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 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 has 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.
*
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 plans to adopt the standard in the first quarter of 2020, but adoption of the standard is not expected to have a significant impact on the Corporation’s disclosures.


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)




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 has 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 are 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 should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is 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 plans to adopt the standard in the first quarter of 2020, but adoption of the standard is not expected to have a significant impact on the Corporation’s disclosures.

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

Summary - The FASB has 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 to earnings through the provision for loan losses. Such would 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 (i.e., January 1, 2020, for calendar year entities). Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Corporation plans to adopt this ASU in the first quarter of 2020.

The Corporation expects a one-time cumulative-effect adjustment to the allowance for loan losses will be recognized in retained earnings on the consolidated balance sheet as of the beginning of the first reporting period in which the new standard is effective, as is consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. The Corporation established an implementation team that meets on a regular basis to oversee activities and monitor progress. Third party software has been implemented and model development continues. The Corporation will test the models by running parallel and make refinements throughout the year. The magnitude of any such adjustment or the overall impact of the new standard on the financial condition or results of operations cannot yet be determined.



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)




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 March 31, 2019
 
 
 
 
 
 
 
U.S. Government-sponsored agency securities
$
33,494

 
$
210

 
$
1

 
$
33,703

State and municipal
633,617

 
18,773

 
532

 
651,858

U.S. Government-sponsored mortgage-backed securities
562,587

 
2,592

 
3,139

 
562,040

Corporate obligations
31

 

 

 
31

Total available for sale
1,229,729

 
21,575

 
3,672

 
1,247,632

Held to maturity at March 31, 2019
 
 
 
 
 
 
 
U.S. Government-sponsored agency securities
22,619

 

 
350

 
22,269

State and municipal
254,520

 
6,682

 
117

 
261,085

U.S. Government-sponsored mortgage-backed securities
336,888

 
2,630

 
1,237

 
338,281

Foreign investment
1,000

 

 

 
1,000

Total held to maturity
615,027

 
9,312

 
1,704

 
622,635

Total Investment Securities
$
1,844,756

 
$
30,887

 
$
5,376

 
$
1,870,267

 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available for sale at December 31, 2018
 
 
 
 
 
 
 
U.S. Government-sponsored agency securities
$
13,493

 
$
92