FIRST MERCHANTS CORP MANAGEMENT REPORT AND DISCUSSION OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)

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 the Corporation's goals, intentions and expectations;
•statements regarding the Corporation's business plan and growth strategies;
•statements regarding the asset quality of the Corporation's loan and investment
portfolios; and
•estimates of the Corporation's risks and future costs and benefits.

These forward-looking statements are subject to important risks, assumptions and uncertainties, including, among others, the following important factors that could affect the actual outcome of future events:

•our ability to achieve the expected cost savings, synergies and other
anticipated benefits from our merger transaction with Level One Bancorp, Inc.
(see BUSINESS SUMMARY below for details);
•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 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.

Due to these and other uncertainties, our actual future results may differ materially from the results indicated by these forward-looking statements. In addition, our past operating results are not necessarily indicative of our expected future results. COMPANY 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 the Nasdaq's Global Select Market System
under the symbol FRME. The Corporation conducts its banking operations through
First Merchants Bank (the "Bank"), a wholly-owned subsidiary that 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 122 banking locations in Indiana, Ohio, Michigan and Illinois. In
addition to its branch network, the Corporation offers comprehensive electronic
and mobile delivery channels to its customers. The Corporation's business
activities are currently limited to one significant business segment, which is
community banking.

Through the Bank, the Corporation offers a broad range of financial services,
including accepting time, savings and demand deposits; making consumer,
commercial, agri-business, public finance and real estate mortgage loans;
providing personal and corporate trust services; offering full-service brokerage
and private wealth management; and providing letters of credit, repurchase
agreements and other corporate services.
                                       41

————————————————– ——————————

Contents

                         PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT REPORT AND ANALYSIS OF THE FINANCIAL SITUATION AND RESULTS

                                 OF OPERATIONS

HIGHLIGHTS OF THE THIRD QUARTER 2022

•Net income available to common stockholders for the three months ended
September 30, 2022 was $63.3 million compared to $52.8 million for the three
months ended September 30, 2021 and $38.5 million for the three months ended
June 30, 2022.

•Earnings per fully diluted common share for the third quarter of 2022 totaled
$1.08 compared to $0.98 in the third quarter of 2021 and $0.63 in the second
quarter of 2022.

•Earnings per fully diluted common share for the third quarter of 2022,
excluding income on Paycheck Protection Program ("PPP") loans and
acquisition-related costs of the Level One acquisition, totaled $1.12 compared
to $0.87 in the third quarter of 2021 and $1.01 in the second quarter of 2022.
These adjusted earnings per share amounts are non-GAAP measures. For
reconciliations of GAAP measures to the corresponding non-GAAP measures, see
"NON-GAAP FINANCIAL MEASURES" within the "Results of Operations" section of this
Management's Discussion and Analysis of Financial Condition and Results of
Operations.

• Total loans increased $290.6 millionor 10.2% annualized on a linked quarterly basis, excluding the rebate of $21.7 million in PPP loans.

• Total deposits decreased $136.0 millionor 3.7% annualized on a linked quarterly basis.

• Net interest income for the third quarter of 2022 totaled $140.3 millionan augmentation of $11.6 millionor 9.0% on a linked quarterly basis.

COVID-19 UPDATE AND RELATED LEGISLATIVE MEASURES

The COVID-19 pandemic continued to impact the Corporation's operations during
the three and nine months ended September 30, 2022, but the impact appears to be
slowly receding. In the two years since the World Health Organization declared
COVID-19 a global pandemic, it has dramatically impacted global health and the
economic environment, including millions of confirmed cases and deaths, business
slowdowns or shutdowns, labor shortfalls, supply chain challenges, regulatory
challenges, and market volatility. In response, the U.S. Congress, through the
enactment of the CARES Act in March 2020, and the federal banking agencies,
through rulemaking, interpretive guidance and modifications to agency policies
and procedures, have taken a series of actions to provide emergency economic
relief measures.

The CARES Act established the PPP, which is administered by the Small Business
Administration ("SBA"), to fund payroll and operational costs of eligible
businesses, organizations and self-employed persons during the pandemic. The
Bank actively participated in assisting its customers with PPP funding during
all phases of the program. The vast majority of the Bank's PPP loans made in
2020 have two-year maturities, while the loans made in 2021 have five-year
maturities. Loans under the program earn interest at a fixed rate of 1 percent.
Through the acquisition of Level One, the Bank acquired an additional $43.5
million of PPP loans as of the acquisition date. As of September 30, 2022, the
Corporation had $11.2 million of PPP loans outstanding compared to the December
31, 2021 balance of $106.6 million. The Corporation will continue to monitor
legislative, regulatory, and supervisory developments related to the PPP.
However, it anticipates that the majority of the Bank's remaining PPP loans will
be forgiven by the SBA in accordance with the terms of the program.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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. 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. 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, 2021.

In addition to the critical accounting estimate included 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, 2021, as a result of
the Level One acquisition on April 1, 2022, the Corporation has provided below
an expanded description of its accounting practices and valuation methodologies
relative to business combinations.

Business combinations

Business combinations are accounted for under the acquisition method of
accounting. Under the acquisition method, assets and liabilities of the business
acquired are recorded at their estimated fair values as of the date of
acquisition with any excess of the cost of the acquisition over the fair value
of the net tangible and intangible assets acquired recorded as goodwill. The
Corporation uses significant estimates and assumptions to value such items,
including projected cash flows, repayment rates, default rates and losses
assuming default, discount rates and realizable collateral values. The allowance
for credit losses for PCD loans is recognized within acquisition accounting. The
allowance for credit losses for non-PCD assets is recognized as provision for
credit losses in the same period as the acquisition. Fair value adjustments are
amortized or accreted into the income statement over the estimated life of the
acquired assets or assumed liabilities. The purchase date valuations and any
subsequent adjustments determine the amount of goodwill recognized in connection
with the acquisition. The use of different assumptions could produce
significantly different valuation results, which could have a positive or
negative effect on the Corporation's results of operations.


                                       42

————————————————– ——————————

Contents

                         PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT REPORT AND ANALYSIS OF THE FINANCIAL SITUATION AND RESULTS

                                 OF OPERATIONS

The determination of fair values is based on valuations using management's
assumptions of future growth rates, future attrition, discount rate, and other
relevant factors. In addition, third party specialists are used to assist in the
development of fair values. Preliminary estimates of fair values may be adjusted
for a period of time subsequent to the acquisition date if new information is
obtained about facts and circumstances that existed as of the acquisition date
that, if known, would have affected the measurement of the amounts recognized as
of that date. Adjustments recorded during this period are recognized in the
current reporting period. The Corporation uses various valuation methodologies
to estimate the fair value of assets and liabilities, and often involves a
significant degree of judgment, particularly when liquid markets do not exist
for the particular item being valued. Changes in these factors as well as
downturns in economic or business conditions, could have a significant adverse
impact on the carrying value of assets, including goodwill and liabilities,
which could result in impairment losses affecting the financial statements.

Results of operations of Level One are included in the income statement from the
date of acquisition. Details of the Corporation's acquisitions are included in
NOTE 2. ACQUISITIONS of the Notes to Consolidated Condensed Financial Statements
of this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS

The Corporation reported third quarter 2022 net income available to common
stockholders and diluted earnings per common share of $63.3 million and $1.08
per diluted share, respectively, compared to $52.8 million and $0.98 per diluted
share, respectively, during the third quarter of 2021. Net income available to
common stockholders and diluted earnings per common share for the nine months
ended September 30, 2022 was $150.4 million and $2.62 per diluted share,
respectively, compared to $157.8 million and $2.92 per diluted share during the
same period in 2021.

Earnings per fully diluted common share for the third quarter of 2022, excluding
income on PPP loans and Level One acquisition-related expenses (non-GAAP),
totaled $1.12, compared to $0.87 in the third quarter of 2021 and $1.01 in the
second quarter of 2022. Earnings per fully diluted common share for the nine
months ended September 30, 2022, excluding income on PPP loans and Level One
acquisition-related expenses (non-GAAP), totaled $3.01 compared to $2.54 for the
same period in 2021. For reconciliations of GAAP earnings per share measures to
the corresponding non-GAAP measures provided above, refer to the "NON-GAAP
FINANCIAL MEASURES" section of this Management's Discussion and Analysis of
Financial Condition and Results of Operations.

As of September 30, 2022, total assets equaled $17.7 billion, an increase of
$2.3 billion from December 31, 2021. The Corporation acquired Level One on April
1, 2022, which included $2.5 billion in assets at acquisition. Details of the
acquisition are discussed within NOTE 2. ACQUISITIONS of the Notes to
Consolidated Condensed Financial Statements of this Quarterly Report on Form
10-Q.

Cash and due from banks and interest-bearing deposits decreased from December
31, 2021 by $47.6 million and $294.6 million, respectively, as excess cash was
used to fund organic loan growth. Total investment securities decreased $229.6
million from December 31, 2021. The net unrealized gain on the Corporation's
available for sale investment securities portfolio of $75.9 million at December
31, 2021 changed to a net unrealized loss of $392.5 million as of September 30,
2022. The change to a net unrealized loss position was due to changes in
interest rates and not credit quality. Additional details of the changes in the
Corporation's investment securities portfolio are discussed within NOTE 3.
INVESTMENT SECURITIES of the Notes to Consolidated Condensed Financial
Statements of this Quarterly Report on Form 10-Q.

The Corporation's total loan portfolio grew $2.4 billion since December 31,
2021, of which, $1.6 billion was the result of the Level One acquisition. At
acquisition, Level One's loan portfolio included $43.5 million of PPP loans. As
of September 30, 2022, the Corporation's PPP loan portfolio, which included PPP
loans from Level One, were primarily in the commercial and industrial loans
class and totaled $11.2 million, a decrease of $138.8 million from the December
31, 2021 balance of $106.6 million plus the additional $43.5 million from Level
One. Excluding the decline in PPP loans and the effect of Level One's acquired
loans at acquisition date, the Corporation experienced organic loan growth of
$923.9 million, or 13.5 percent on an annualized basis since December 31, 2021.
The loan classes that experienced the largest increases from December 31, 2021
were residential real estate, commercial and industrial loans, construction real
estate, commercial real estate (owner occupied), and commercial real estate
(non-owner occupied). Agricultural land, production and other loans to farmers
was the only loan class that experienced a decrease from December 31, 2021.
Additional details of the changes in the Corporation's loans are discussed
within NOTE 4. LOANS AND ALLOWANCE of the Notes to Consolidated Condensed
Financial Statements of this Quarterly Report on Form 10-Q, and the "LOAN
QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS" section of this Management's
Discussion and Analysis of Financial Condition and Results of Operations.

The Corporation's allowance for credit losses - loans ("ACL - loans") totaled
$226.7 million as of September 30, 2022 and equaled 1.94 percent of total loans,
compared to $195.4 million and 2.11 percent of total loans at December 31,
2021.  The ACL - loans increased $16.6 million in connection with the Level One
acquisition for CECL Day 1 purchased credit deteriorated ("PCD") loans and
provision expense of $14.0 million was recorded for CECL Day 1 non- PCD loans.
Additionally, provision expense of $2.8 million was recorded for CECL Day 1
unfunded commitments, which increased other liabilities. The Corporation did not
recognize any provision expense during 2022 and 2021 other than CECL Day 1
expense. During the three and nine months ended September 30, 2022, the
Corporation recognized $427,000 and $751,000 of net recoveries, respectively,
compared to net recoveries of $197,000 and net charge-offs of $4.7 million,
respectively, in the three and nine months ended September 30, 2021. Non-accrual
loans totaled $43.5 million, an increase of $446,000 from December 31, 2021, but
when considering the non-accrual loans acquired from Level One of $9.4 million,
non-accruals decreased $9.0 million, resulting in a coverage ratio of 521.1
percent. Additional details of the Corporation's allowance methodology and asset
quality 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 within the "LOAN QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS"
section of this Management's Discussion and Analysis of Financial Condition and
Results of Operations.

                                       43

————————————————– ——————————

Contents

                         PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT REPORT AND ANALYSIS OF THE FINANCIAL SITUATION AND RESULTS

                                 OF OPERATIONS
Several additional asset categories increased from December 31, 2021 primarily
due to the acquisition of Level One, including premises and equipment of $10.7
million, FHLB stock of $9.3 million, interest receivable of $14.4 million,
goodwill of $167.2 million, other intangibles of $12.7 million and cash
surrender value of life insurance of $15.9 million.

OREO totaled $6.5 million as of September 30, 2022 and increased $5.9 million
from the December 31, 2021 balance of $558,000, primarily due to a $5.8 million
student housing property that was moved into OREO during the first quarter of
2022. A loss on this project is not expected.

The Corporation's net tax asset, deferred and receivable increased $106.5
million from December 31, 2021. The primary driver was the change from net
unrealized gains to net unrealized losses on available for sale securities noted
above, which resulted in a $98.4 million increase in the net deferred tax asset.
Additionally, the $16.2 million deferred tax asset recorded as part of the Level
One acquisition also contributed to the increase from December 31, 2021.

The Corporation's other assets increased $104.1 million from December 31, 2021.
The Corporation's derivative assets (recorded in other assets) and derivative
liabilities (recorded in other liabilities) increased $58.0 million and $56.8
million, respectively, from December 31, 2021. The increase in valuations are
due to the continual increases in the FOMC's target fed funds rate and
quantitative tightening resulting in higher nominal rates and increased forward
rate expectations. Approximately $22.7 million of the increase in other assets
relates to estimated proceeds from a $5.3 million gain on life insurance
benefits recorded in the third quarter of 2022. The Corporation's investments in
community redevelopment funds also increased $13.7 million since December 31,
2021. The acquisition of Level One resulted in a right of use lease asset of
$8.9 million related to leased facilities and mortgage servicing rights of $5.6
million.

As of September 30, 2022, total deposits equaled $14.4 billion, an increase of
$1.7 billion from December 31, 2021. Deposits assumed in the Level One
acquisition were $1.9 billion as of the acquisition date. The Corporation
experienced increases from December 31, 2021 in demand, savings and certificates
and other time deposits of $100,000 or more of $830.8 million, $719.7 million
and $170.2 million, respectively. Other certificates and time deposits and
brokered deposits decreased in total by $18.4 million since December 31, 2021.

Total borrowings increased $540.3 million as of September 30, 2022, compared to
December 31, 2021. Federal funds purchased and Federal Home Loan Bank advances
increased $185.0 million and $309.7 million, respectively, compared to December
31, 2021 as the Corporation utilized liquidity sources to fund loan growth. The
Level One acquisition contributed to the increase in borrowings due to the
assumption of $160.0 million of Federal Home Loan Bank advances and $32.6
million of subordinated debentures.

The Corporation's other liabilities as of September 30, 2022 increased $27.0
million compared to December 31, 2021. As noted above, the derivative hedge
liability increased $56.8 million from December 31, 2021. At December 31, 2021,
the Corporation accrued $46.1 million of trade date accounting related to loan
and investment securities purchases, of which, the accrual at September 30, 2022
was $5.0 million. Additionally, the acquisition of Level One resulted in a lease
liability of $8.9 million at acquisition related to leased facilities.

As part of the Level One acquisition, each outstanding share of 7.5 percent
non-cumulative perpetual preferred stock, Series B, of Level One was exchanged
for one share of a newly created 7.5 percent non-cumulative perpetual preferred
stock, Series A, of the Corporation with a liquidation preference of $2,500 per
share. As a result, the Corporation issued 10,000 shares of Series A preferred
stock at the acquisition date resulting in $25.0 million of outstanding
preferred stock at September 30, 2022.

The Corporation continued to maintain all regulatory capital ratios in excess of
the regulatory definition of "well-capitalized." Details of the Stock Repurchase
Program and regulatory capital ratios are discussed within the "CAPITAL" section
of this Management's Discussion and Analysis of Financial Condition and Results
of Operations.

NON-GAAP FINANCIAL MEASURES

The Corporation's accounting and reporting policies conform to GAAP and general
practices within the banking industry. As a supplement to GAAP, the Corporation
provides non-GAAP performance measures, which management believes are useful
because they assist investors in assessing the Corporation's performance.
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. Where non-GAAP
financial measures are used, the comparable GAAP financial measure, as well as
the reconciliation to the comparable GAAP financial measure can be found in the
following tables.

Adjusted earnings per share, excluding PPP loans and acquisition-related
expenses, are meaningful non-GAAP financial measures for management, as they
provide a meaningful foundation for period-to-period and company-to-company
comparisons, which management believes will aid both investors and analysts in
analyzing our financial measures and predicting future performance. These
non-GAAP financial measures are also used by management to assess the
performance of the Corporation's business, because management does not consider
these items to be relevant to ongoing financial performance on a per share
basis.

Non-GAAP financial measures such as tangible common equity to tangible assets,
tangible earnings per share, return on average tangible assets and return on
average tangible equity 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, but do retain the effect of accumulated other comprehensive
gains (losses) in shareholder's equity. Disclosure of these measures also allows
analysts and banking regulators to assess our capital adequacy on these same
bases.
                                       44

————————————————– ——————————

Contents

                         PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT REPORT AND ANALYSIS OF THE FINANCIAL SITUATION AND RESULTS

                                 OF OPERATIONS

ADJUSTED EPS EXCLUDING PAYCHECK PROTECTION PROGRAM ("PPP") AND ACQUISITION RELATED
EXPENSES - non-GAAP
(Dollars In Thousands, Except Per Share
Amounts)

                                                           Three Months Ended                    Nine Months Ended
                                                September 30,          June 30,                       September 30,           September 30,           September 30,
                                                    2022                 2022                             2021                    2022                    2021
Net Income Available to Common Stockholders -
GAAP                                          $       63,283          $ 38,522                      $       52,770          $      150,391          $      157,798
Adjustments:
PPP loan income                                         (323)             (891)                             (8,211)                 (3,098)                (27,179)
Acquisition-related expenses                           3,417            12,549                                   -                  16,118                       -
Acquisition-related provision expense                      -            16,755                                   -                  16,755                       -
Tax on adjustment                                       (759)           (6,967)                              2,013                  (7,301)                  6,664
Adjusted Net Income Available to Common
Stockholders - non-GAAP                       $       65,618          $ 59,968                      $       46,572          $      172,865          

$137,283

Average Diluted Common Shares Outstanding (in
thousands)                                            59,339            59,308                              53,960                  57,468          

54,093

Diluted Earnings Per Common Share - GAAP      $         1.08          $   0.63                      $         0.98          $         2.62          $         2.92
Adjustments:
PPP loan income                                            -             (0.01)                              (0.15)                  (0.05)                  (0.50)
Acquisition-related expenses                            0.05              0.22                                   -                    0.27                       -
Acquisition-related provision expense                      -              0.30                                   -                    0.30                       -
Tax on adjustment                                      (0.01)            (0.13)                               0.04                   (0.13)                   0.12
Adjusted Diluted Earnings Per Common Share -
non-GAAP                                      $         1.12          $   1.01                      $         0.87          $         3.01          $         2.54



TANGIBLE COMMON EQUITY TO TANGIBLE ASSETS – non-GAAP (in thousands of dollars, except per share amounts)

                                                                  September 30, 2022          December 31, 2021
Total Stockholders' Equity (GAAP)                                $        1,906,666          $       1,912,571
Less: Preferred stock (GAAP)                                                (25,125)                      (125)
Less: Intangible assets (GAAP)                                             (750,713)                  (570,860)
Tangible common equity (non-GAAP)                                $        1,130,828          $       1,341,586
Total assets (GAAP)                                              $       17,718,985          $      15,453,149
Less: Intangible assets (GAAP)                                             (750,713)                  (570,860)
Tangible assets (non-GAAP)                                       $       16,968,272          $      14,882,289
Stockholders' Equity to Assets (GAAP)                                         10.76  %                   12.38  %
Tangible common equity to tangible assets (non-GAAP)                           6.66  %                    9.01  %

Tangible common equity (non-GAAP)                                $        1,130,828          $       1,341,586
Plus: Tax benefit of intangibles (non-GAAP)                                   8,197                      4,875
Tangible common equity, net of tax (non-GAAP)                    $        1,139,025          $       1,346,461
Common Stock outstanding                                                     59,145                     53,410
Book Value (GAAP)                                                $            31.81          $           35.81
Tangible book value - common (non-GAAP)                          $            19.26          $           25.21






                                       45

————————————————– ——————————

Contents

                         PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT REPORT AND ANALYSIS OF THE FINANCIAL SITUATION AND RESULTS

                                 OF OPERATIONS


TANGIBLE EARNINGS PER SHARE, RETURN ON TANGIBLE ASSETS AND RETURN ON TANGIBLE EQUITY - non-GAAP
(Dollars in thousands, except per share
amounts)

                                                   Three Months Ended September 30,                    Nine Months Ended September 30,
                                                    2022                         2021                     2022                    2021
Average goodwill (GAAP)                     $        712,995                $    545,385          $        657,643           $    545,371
Average other intangibles (GAAP)                      39,580                      27,781                    35,500                 28,040
Average deferred tax on other intangibles
(GAAP)                                                (8,505)                     (5,314)                   (7,436)                (5,597)
Intangible adjustment (non-GAAP)            $        744,070                $    567,852          $        685,707           $    567,814
Average stockholders' equity (GAAP)         $      2,018,156                $  1,889,037          $      1,977,299           $  1,858,680
Average preferred stock (GAAP)                       (25,125)                       (125)                  (16,792)                  (125)

Intangible adjustment (non-GAAP)                    (744,070)                   (567,852)                 (685,707)              (567,814)
Average tangible capital (non-GAAP)         $      1,248,961                $  1,321,060          $      1,274,800           $  1,290,741
Average assets (GAAP)                       $     17,770,623                $ 15,006,087          $     17,012,930           $ 14,672,596
Intangible adjustment (non-GAAP)                    (744,070)                   (567,852)                 (685,707)              (567,814)
Average tangible assets (non-GAAP)          $     17,026,553                $ 14,438,235          $     16,327,223           $ 14,104,782
Net income available to common stockholders
(GAAP)                                      $         63,283                $     52,770          $        150,391           $    157,798
Other intangible amortization, net of tax
(GAAP)                                                 1,819                       1,156                     4,718                  3,384
Preferred stock dividend                                 469                           -                       938                      -
Tangible net income available to common
stockholders (non-GAAP)                     $         65,571                $     53,926          $        156,047           $    161,182
Per Share Data:
Diluted net income available to common
stockholders (GAAP)                         $           1.08                $       0.98          $           2.62           $       2.92
Diluted tangible net income available to
common stockholders (non-GAAP)              $           1.11                $       1.00          $           2.72           $       2.98

Reports :

Return on average GAAP capital (ROE)                   12.54   %                   11.17  %                  10.14   %              11.32  %
Return on average tangible capital                     20.85   %                   16.33  %                  16.22   %              16.65  %
Return on average assets (ROA)                          1.43   %                    1.41  %                   1.19   %               1.43  %
Return on average tangible assets                       1.54   %                    1.49  %                   1.27   %               1.52  %




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.
NET INTEREST INCOME

Net interest income is the most significant component of our earnings,
comprising 82 percent of revenues for the nine months ended September 30, 2022.
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 cost less than
wholesale funding sources. Factors such as general economic activity, Federal
Reserve Board monetary policy, and price volatility of competing alternative
investments, can also exert significant influence on our ability to optimize the
mix of assets and funding and the net interest income and margin.

Net interest income is the excess of interest received from earning assets over
interest paid on interest-bearing liabilities. For analytical purposes, net
interest income is also presented on an FTE basis in the tables that follow to
reflect what tax-exempt assets would need to yield in order to achieve the same
after-tax yield as a taxable asset. The federal statutory rate of 21 percent was
used for all periods, adjusted for the TEFRA interest disallowance applicable to
certain tax-exempt obligations. The FTE analysis portrays the income tax
benefits associated with tax-exempt assets and helps to facilitate a comparison
between taxable and tax-exempt assets. Management believes that it is a standard
practice in the banking industry to present net interest margin and net interest
income on a fully taxable equivalent basis. Therefore, management believes these
measures provide useful information for both management and investors by
allowing them to make peer comparisons.

In the third quarter of 2022, FTE asset yields increased 65 basis points
compared to the same period in 2021. Average earning assets for the three months
ended September 30, 2022 increased $2.8 billion compared to the same period in
2021, with loans accounting for $2.4 billion of the increase and investment
securities accounting for $708.7 million of the increase. Of the $2.8 billion
increase in average loans, $1.6 billion was attributable to the Level One
acquisition on April 1, 2022, and the remaining increase was due to organic loan
growth during the period after excluding PPP loans, which averaged approximately
$19.2 million for the three months ended September 30, 2022 compared to an
average of approximately $315.2 million for the same period of 2021. Excess
liquidity was utilized to fund $290.6 million of organic loan growth during the
three months ended September 30, 2022.
                                       46

————————————————– ——————————

Contents

                         PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT REPORT AND ANALYSIS OF THE FINANCIAL SITUATION AND RESULTS

                                 OF OPERATIONS

The increase in interest income, on an FTE basis, of $50.8 million during the
three months ended September 30, 2022 compared to the three months ended
September 30, 2021 was primarily due to an increase in average earning assets,
coupled with the FOMC's interest rate increases of 75 basis points on July 27,
2022 and 75 basis points on September 21, 2022. Approximately $7.7 billion of
the Corporation's loan portfolio, or 66 percent, is variable with 42 percent of
the portfolio repricing within one month and 52 percent repricing within three
months. Additionally, the yields on new and renewed loans increased from 3.23
percent for the three months ended September 30, 2021 to 4.96 percent for the
same period in 2022. PPP loans were recorded at an interest rate of only 1
percent, but the Corporation also recognized fee income of $277,000 during the
third quarter of 2022, compared to $7.4 million for the same period in 2021,
which is included in interest income. The Corporation recognized fair value
accretion income on purchased loans, which is included in interest income, of
$3.2 million, which accounted for 8 basis points of net interest margin in the
third quarter of 2022. Comparatively, the Corporation recognized $1.5 million of
accretion income for the third quarter of 2021, or 4 basis points of net
interest margin.

Interest costs increased 42 basis points during the three months ended September
30, 2022, which partially offset the increase in asset yields and resulted in an
23 basis point FTE increase in net interest spread as compared to the same
period in 2021. Interest costs have increased during the quarter due to deposit
pricing pressure primarily in the municipal deposit space and a strategic focus
on relationship pricing. Average interest-bearing deposits for the three months
ended September 30, 2022 increased $1.3 billion compared to the same period in
2021 due to the acquisition of Level One, which included $1.2 billion of
interest-bearing deposits, and the remaining increase due to organic growth.
Average non-interest bearing deposits for the three months ended September 30,
2022 increased $916.7 million when compared to the same period in 2021 as $738.9
million were acquired from Level One, and the remaining increase due to organic
growth. Non-interest bearing deposits represented 23 percent of the
Corporation's total deposit balance as of September 30, 2022 and acts to
mitigate deposit yield increases as interest rates rise. Average borrowings
increased $394.1 million for the three months ended September 30, 2022 compared
to the same period of 2021 due to the additional $194.2 million of borrowings
acquired from Level One. Interest-bearing deposit and borrowing costs for the
three months ended September 30, 2022 were 0.60 percent and 2.52 percent,
respectively, compared to 0.23 percent and 2.02 percent, respectively, during
the same period in 2021. Total cost of funds was 76 basis points for the three
months ended September 30, 2022 compared to 34 basis points during the same
period in 2021.

Net interest margin, on an FTE basis, increased 35 basis points to 3.55 percent
for the three months ended September 30, 2022 compared to 3.20 percent for the
same period in 2021.

In the nine months ended September 30, 2022, FTE asset yields increased 17 basis
points compared to the same period in 2021. FOMC's interest rate increases of an
aggregate 300 basis points in 2022 have contributed to this increase. Average
earning assets for the nine months ended September 30, 2022 increased $2.3
billion compared to the same period in 2021, with loans accounting for $1.4
billion of the increase and investment securities accounting for $1.0 billion of
the increase. Of the $1.4 billion increase in average loans, $1.6 billion was
attributable to the Level One acquisition on April 1, 2022, and the remaining
increase was due to organic loan growth during the period after excluding PPP
loans, which averaged approximately $53.3 million for the nine months ended
September 30, 2022 compared to an average of approximately $532.1 million for
the same period of 2021. Excess liquidity was utilized to fund organic loan
growth and investment securities purchases during the nine months ended
September 30, 2022.

This increase in asset yields was primarily a result of the increase in average
earning assets coupled with the loan portfolio yield increase from 4.03 percent
for the nine months ended September 30, 2021 to 4.22 percent for the same period
in 2022, resulting in a increase of 17 basis points. PPP fee income declined
from $23.2 million during the nine months ended September 30, 2021 to $2.7
million during the nine months ended September 30, 2022, which is included in
interest income. The Corporation recognized fair value accretion income on
purchased loans, which is included in interest income, of $7.4 million, which
accounted for 6 basis points of net interest margin in the nine months ended
September 30, 2022. Comparatively, the Corporation recognized $5.8 million of
accretion income for the nine months ended September 30, 2021, or 5 basis points
of net interest margin. Additionally, investment securities that rolled off in
2021 and early 2022 were at higher yields than could be reinvested, resulting in
a decline in the investment portfolio yield for the nine month ended September
30, 2021 of 2.63 percent to a yield of 2.61 percent for the same period in 2022.

Interest costs increased 13 basis points, and partially mitigated the 17 basis
points increase in asset yields, resulting in a 4 basis point FTE increase in
net interest spread as compared to the same period in 2021. Interest-bearing
deposits and borrowing costs for the nine months ended September 30, 2022 were
0.36 percent and 2.18 percent, respectively, compared to 0.25 percent and 1.96
percent, respectively, during the same period in 2021.

Net interest margin, on a tax equivalent basis, increased 8 basis points to 3.30
percent for the nine months ended September 30, 2022 compared to 3.22 percent
for the same period in 2021.

Details of the acquisition of Level One are set out in NOTE 2. ACQUISITIONS of the Notes to the Summary Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

                                       47

————————————————– ——————————

Contents

                         PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT REPORT AND ANALYSIS OF THE FINANCIAL SITUATION AND RESULTS

                                 OF OPERATIONS

The following tables present 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 and nine months ended September 30, 2022, and
2021.

(Dollars in Thousands)                                                                        Three Months Ended
                                                             September 30, 2022                                                September 30, 2021
                                                                     Interest                                                          Interest
                                                                     Income /            Average                                       Income /            Average
                                           Average Balance           Expense              Rate               Average Balance           Expense              Rate
Assets:

Interest-bearing deposits                $        190,434          $     704                1.48  %        $        539,377          $     218                0.16  %
Federal Home Loan Bank stock                       38,089                314                3.30                     28,736                168       

2.34

Investment Securities: (1)
Taxable                                         2,091,608             10,055                1.92                  1,843,026              7,788                1.69
Tax-Exempt (2)                                  2,700,580             21,849                3.24                  2,240,409             18,309                3.27
Total Investment Securities                     4,792,188             31,904                2.66                  4,083,435             26,097                2.56
Loans held for sale                                20,039                266                5.74                     17,426                158                3.63
Loans: (3)
Commercial                                      8,177,895            103,227                5.05                  6,745,303             70,442                4.18
Real Estate Mortgage                            1,666,173             14,701                3.53                    886,469              8,142                3.67
Installment                                       813,112             10,310                5.07                    690,093              6,576                3.81
Tax-Exempt (2)                                    810,984              8,228                4.06                    750,357              7,078                3.77
Total Loans                                    11,488,203            136,732                4.76                  9,089,648             92,396                4.07
Total Earning Assets                           16,508,914            169,654                4.11  %              13,741,196            118,879                3.46  %
Total Non-Earning Assets                        1,261,709                                                         1,264,891
Total Assets                             $     17,770,623                                                  $     15,006,087
Liabilities:
Interest-bearing deposits:
Interest-bearing deposits                $      5,184,087          $   8,723                0.67  %        $      4,799,624          $   3,606                0.30  %
Money market deposits                           3,096,423              5,390                0.70                  2,459,205                764                0.12
Savings deposits                                1,978,596              1,538                0.31                  1,788,281                486                0.11
Certificates and other time deposits              857,033                993                0.46                    758,565                851       

0.45

Total Interest-bearing Deposits                11,116,139             16,644                0.60                  9,805,675              5,707                0.23
Borrowings                                      1,013,893              6,388                2.52                    619,768              3,126                2.02
Total Interest-bearing Liabilities             12,130,032             23,032                0.76                 10,425,443              8,833                0.34
Noninterest-bearing deposits                    3,461,393                                                         2,544,661
Other liabilities                                 161,042                                                           146,946
Total Liabilities                              15,752,467                                                        13,117,050
Stockholders' Equity                            2,018,156                                                         1,889,037
Total Liabilities and Stockholders'
Equity                                   $     17,770,623             23,032                               $     15,006,087              8,833
Net Interest Income (FTE)                                          $ 146,622                                                         $ 110,046
Net Interest Spread (FTE) (4)                                                               3.35  %                                                           3.12  %

Net Interest Margin (FTE):
Interest Income (FTE) / Average Earning
Assets                                                                                      4.11  %                                                           3.46  %
Interest Expense / Average Earning
Assets                                                                                      0.56  %                                                           0.26  %
Net Interest Margin (FTE) (5)                                                               3.55  %                                                           3.20  %

(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 2022 and 2021. These totals equal
$6,316 and $5,331 for the three months ended September 30, 2022 and 2021, 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

————————————————– ——————————

Contents

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


(Dollars in Thousands)                                                                        Nine Months Ended
                                                             September 30, 2022                                                September 30, 2021
                                                                     Interest                                                          Interest
                                                                     Income /            Average                                       Income /            Average
                                           Average Balance           Expense              Rate               Average Balance           Expense              Rate
Assets:

Interest-bearing deposits                $        333,818          $   1,544                0.62  %        $        509,153          $     461                0.12  %
Federal Home Loan Bank stock                       34,742                635                2.44                     28,736                434       

2.01

Investment Securities: (1)
Taxable                                         2,079,983             28,937                1.85                  1,689,697             21,923                1.73
Tax-Exempt (2)                                  2,647,547             63,732                3.21                  1,989,397             50,532                3.39
Total Investment Securities                     4,727,530             92,669                2.61                  3,679,094             72,455                2.63
Loans held for sale                                19,020                622                4.36                     19,360                551                3.79
Loans: (3)
Commercial                                      7,731,591            253,770                4.38                  6,857,968            210,502                4.09
Real Estate Mortgage                            1,350,969             35,199                3.47                    924,652             26,917                3.88
Installment                                       765,960             24,775                4.31                    674,696             19,456                3.84
Tax-Exempt (2)                                    780,410             23,030                3.93                    725,651             20,854                3.83
Total Loans                                    10,647,950            337,396                4.22                  9,202,327            278,280                4.03
Total Earning Assets                           15,744,040            432,244                3.66  %              13,419,310            351,630                3.49  %
Total Non-Earning Assets                        1,268,890                                                         1,253,286
Total Assets                             $     17,012,930                                                  $     14,672,596

Passives:

Interest-bearing deposits:
Interest-bearing deposits                $      5,195,249          $  15,699                0.40  %        $      4,721,267          $  10,875                0.31  %
Money market deposits                           2,880,603              8,392                0.39                  2,295,589              2,395                0.14
Savings deposits                                1,937,761              2,895                0.20                  1,730,149              1,424                0.11
Certificates and other time deposits              828,158              2,437                0.39                    809,721              3,036                0.50
Total Interest-bearing Deposits                10,841,771             29,423                0.36                  9,556,726             17,730                0.25
Borrowings                                        817,894             13,354                2.18                    646,326              9,502                1.96
Total Interest-bearing Liabilities             11,659,665             42,777                0.49                 10,203,052             27,232                0.36
Noninterest-bearing deposits                    3,232,925                                                         2,460,609
Other liabilities                                 143,041                                                           150,255
Total Liabilities                              15,035,631                                                        12,813,916
Stockholders' Equity                            1,977,299                                                         1,858,680
Total Liabilities and Stockholders'
Equity                                   $     17,012,930             42,777                               $     14,672,596             27,232
Net Interest Income (FTE)                                          $ 389,467                                                         $ 324,398
Net Interest Spread (FTE) (4)                                                               3.17  %                                                           3.13  %

Net Interest Margin (FTE):
Interest Income (FTE) / Average Earning
Assets                                                                                      3.66  %                                                           3.49  %
Interest Expense / Average Earning
Assets                                                                                      0.36  %                                                           0.27  %
Net Interest Margin (FTE) (5)                                                               3.30  %                                                           3.22  %

(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 2022 and 2021. These totals equal
$18,220 and $14,991 for the nine months ended September 30, 2022 and 2021, 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.




NON-INTEREST INCOME

Non-interest income totaled $29.6 million for the third quarter of 2022, a $1.1
million, or 3.9 percent, increase from the third quarter of 2021. In the third
quarter of 2022, gains on life insurance benefits of $5.3 million, increased
$4.0 million from the same period in 2021. Additionally, customer-related line
items decreased $0.2 million in the third quarter of 2022 compared to the third
quarter of 2021. The most significant decreases in customer-related line items
were in net gains and fees on sales of loans, which decreased $1.4 million due
to lower mortgage origination volume, and in derivative hedge fees, which
decreased $0.3 million due to the rising interest rate environment. Offsetting
these decreases were increases in customer-related line items of $0.9 million in
service charges on deposit accounts and $0.6 million in card payment fees, which
were primarily due to the larger customer base from the Level One acquisition on
April 1, 2022. The $1.6 million decline in other income is primarily due to a
$1.9 million write-down of an equity investment in the third quarter of 2022.
Net realized gains on sales of available for sale securities decreased $1.3
million in the third quarter of 2022 compared to the same period in 2021.


                                       49

————————————————– ——————————

Contents

                         PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT REPORT AND ANALYSIS OF THE FINANCIAL SITUATION AND RESULTS

                                 OF OPERATIONS

During the first nine months of 2022, non-interest income totaled $83.8 million,
a $0.3 million, or 0.4 percent, increase when compared to the same period of
2021. Customer-related line items increased $1.0 million in the first nine
months of 2022 compared to the same period in 2021, with the most significant
increases experienced in service charges on deposit accounts, card payment fees,
fiduciary and wealth management fees and derivative hedge fees, which totaled
$9.3 million. The only customer-related fee line item that experienced a
decrease was net gains and fees on sales of loans, which decreased $8.3 million
due to lower mortgage origination volume in the first nine months of 2022
compared to the same period in 2021, in addition to the $2.9 million gain on the
portfolio mortgage loan sale that occurred in the second quarter of 2021. Gains
on life insurance benefits of $5.8 million, increased $4.4 million from the same
period of 2021. Net realized gains on sales of available for sale securities
decreased $4.2 million in the first nine months of 2022 from the same period in
2021. Finally, a $1.9 million write-down of an equity investment in the third
quarter of 2022 primarily contributed to the $1.1 million decrease in other
income compared to the same period of 2021.

Details of the acquisition can be found in NOTE 2. ACQUISITIONS of the Notes to
Consolidated Condensed Financial Statements of this Quarterly Report on Form
10-Q.

NON-INTEREST EXPENSE

Non-interest expense totaled $96.4 million for the third quarter of 2022, a
$25.0 million, or 35.0 percent, increase from the third quarter of 2021. The
Level One acquisition led to a significantly larger franchise and customer base,
which resulted in increases in non-interest expense in all categories. Level One
operations included $7.8 million of non-interest expenses, which primarily
included $5.5 million of salaries and employee benefits and $1.0 million in net
occupancy costs. In addition to the increased non-interest expense from Level
One operations, acquisition-related expenses recorded in the third quarter of
2022 were $3.4 million and primarily included $1.5 million of core system
processing and conversion expenses, $1.2 million in salaries and employee
benefits and $368,000 of marketing expenses. In addition to the salary and
benefits expense increases related to the acquisition of Level One, merit and
incentive expense increases contributed to the overall $12.7 million increase in
salaries and benefits for the third quarter compared to the same period of 2021.
Additionally, processing expenses increased $2.0 million as loan processing
expenses increased due to organic growth and card processing expenses increased
due to card issuances for Level One customers and contactless card stock
purchases. Other expenses for the Corporation increased $2.5 million and were
driven by increased customer-related travel and entertainment expenses, higher
mortgage servicing rights amortization and increased customer-related contingent
losses. FDIC assessments have increased $1.3 million when compared to the third
quarter of 2021 as a result of a larger balance sheet from the Level One
acquisition as well as organic growth. Intangible asset amortization increased
$840,000 due to the core deposit intangible and non-compete amortization related
to the Level One acquisition.

During the first nine months of 2022, non-interest expense totaled $266.0
million, a $59.2 million, or 28.6 percent, increase when compared to the same
period in 2021. Level One acquisition-related costs in the first nine months of
2022 totaled $16.1 million, of which $7.5 million was in professional and other
outside services, $5.7 million was reflected in salaries and employee benefits,
and $2.0 million in equipment expenses and outside data processing expenses. The
acquisition-related expenses were primarily contract termination charges, core
system conversion expenses, transaction advisory services and employee retention
bonuses and severance. Additionally, $13.3 million of post-acquisition
non-interest expenses related to Level One operations were recorded during the
period, which primarily included $9.4 million in salaries and employee benefits
and $2.2 million in net occupancy expenses. In addition to the salary and
benefits expense increases related to the acquisition of Level One, merit and
incentive expense increases contributed to the overall $30.0 million increase in
salaries and employee benefits for the nine months ending September 30, 2022
compared to the same period of 2021. Increases in other expenses of $6.2 million
in the first nine months of 2022, over the comparable period in 2021, were
driven by increased customer related travel and entertainment expenses, higher
customer-related contingent losses, and increased mortgage servicing rights
amortization. As the Bank continues to grow both organically and via
acquisition, FDIC assessments have increased $3.6 million when compared to the
first nine months of 2021. Equipment and outside data processing expenses
increased $3.4 million and $2.3 million, respectively, as the Corporation's
investment in customer-facing digital solutions in 2022, such as online account
origination, resulted in increased software costs when compared to the same
period of 2021. Finally, intangible asset amortization increased $1.7 million
due to the core deposit intangible and non-compete amortization related to the
Level One acquisition.

Details of the acquisition can be found in NOTE 2. ACQUISITIONS of the Notes to
Consolidated Condensed Financial Statements of this Quarterly Report on Form
10-Q.

INCOME TAXES

Income tax expense for the third quarter of 2022 was $9.8 million on pre-tax
income of $73.5 million. For the same period in 2021, income tax expense was
$9.1 million on pre-tax income of $61.8 million. The effective income tax rates
for the third quarter of 2022 and 2021 were 13.3 percent and 14.7 percent,
respectively.

Income tax expense for the nine months ended September 30, 2022 was $20.9
million on pre-tax income of $172.3 million. For the same period in 2021, income
tax expense was $28.3 million on pre-tax income of $186.1 million. The effective
income tax rates for the nine months ended September 30, 2022 and 2021 were 12.2
percent and 15.2 percent, respectively.

The lower effective income tax rate during the three and nine months ended
September 30, 2022 when compared to the same periods in 2021 was primarily the
result of an increase in tax-exempt interest income coupled with an increase in
tax-exempt earnings and gains on life insurance, which are also non-taxable.

The detailed reconciliation of statutory and actual federal tax expense is provided in NOTE 12. INCOME TAXES of the Notes to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

                                       50

————————————————– ——————————

Contents

                         PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT REPORT AND ANALYSIS OF THE FINANCIAL SITUATION AND RESULTS

                                 OF OPERATIONS

CAPITAL CITY

Stockholders' Equity - CECL Adjustment
The Corporation adopted the current expected credit losses ("CECL") model for
calculating the allowance for credit losses on January 1, 2021. CECL replaces
the previous "incurred loss" model for measuring credit losses, which
encompassed allowances for current known and inherent losses within the
portfolio, with an "expected loss" model for measuring credit losses, which
encompasses allowances for losses expected to be incurred over the life of the
portfolio. 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, of $68.0 million.

Preferred Stock
As part of the Level One acquisition, each outstanding share of 7.5 percent
non-cumulative perpetual preferred stock, Series B, of Level One was converted
into the right to receive one share of a newly created 7.5 percent
non-cumulative perpetual preferred stock, Series A, of First Merchants with a
liquidation preference of $2,500 per share. Likewise, each outstanding Level One
depositary share representing a 1/100th interest in a share of the Level One
preferred stock was converted into a depositary share of the Corporation
representing a 1/100th interest in a share of its newly issued preferred stock.
The Corporation issued 10,000 shares of Series A preferred stock at the
acquisition date resulting in $25.0 million of outstanding preferred stock at
September 30, 2022. During the three and nine months ended, the Corporation
declared and paid dividends of $46.88 per share (equivalent to $0.4688 per
depositary share) equal to $469,000 and $938,000, respectively. The Series A
preferred stock qualifies as Tier 1 capital for purposes of the regulatory
capital calculations.

Stock Repurchase Program
On January 27, 2021, the Board of Directors of the Corporation approved a stock
repurchase program of up to 3,333,000 shares of the Corporation's outstanding
common stock; provided, however, that the total aggregate investment in shares
repurchased under the program may not exceed $100,000,000. On a share basis, the
amount of common stock subject to the repurchase program represented
approximately 6 percent of the Corporation's outstanding shares at the time the
program became effective. During the three and nine months ended September 30,
2022 and 2021, the Corporation did not repurchase any shares of its common stock
pursuant to the repurchase program. As of September 30, 2022, the Corporation
had approximately 2.7 million shares at an aggregate value of $74.5 million
available to repurchase under the program.

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.

Basel III 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, which capital to risk-weighted asset ratios include a 2.5 percent capital
conservation buffer. Under Basel III, in order to avoid limitations on capital
distributions, including dividends, the Corporation must hold a 2.5 percent
capital conservation buffer above the adequately capitalized CET1 to
risk-weighted assets ratio (which buffer is reflected in the required ratios
below). Under Basel III, the Corporation and Bank elected to opt-out of
including accumulated other comprehensive income in regulatory capital. As of
September 30, 2022, the Bank met all capital adequacy requirements to be
considered well capitalized under the fully phased-in Basel III capital rules.
There is no threshold for well capitalized status for bank holding companies.

As part of a March 27, 2020 joint statement of federal banking regulators, an
interim final rule that allowed banking organizations to mitigate the effects of
the CECL accounting standard on their regulatory capital was announced. Banking
organizations could elect to mitigate the estimated cumulative regulatory
capital effects of CECL for up to two years. This two-year delay was to be in
addition to the three-year transition period that federal banking regulators had
already made available. While the 2021 CAA provided for a further extension of
the mandatory adoption of CECL until January 1, 2022, the federal banking
regulators elected to not provide a similar extension to the two year mitigation
period applicable to regulatory capital effects. Instead, the federal banking
regulators require that, in order to utilize the additional two-year delay,
banking organizations must have adopted the CECL standard no later than December
31, 2020, as required by the CARES Act. As a result, because implementation of
the CECL standard was delayed by the Corporation until January 1, 2021, it began
phasing in the cumulative effect of the adoption on its regulatory capital, at a
rate of 25 percent per year, over a three-year transition period that began on
January 1, 2021. Under that phase-in schedule, the cumulative effect of the
adoption will be fully reflected in regulatory capital on January 1, 2024.
                                       51

————————————————– ——————————

Contents

                         PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT REPORT AND ANALYSIS OF THE FINANCIAL SITUATION AND RESULTS

                                 OF OPERATIONS

The actual and required capital ratios of the Company and the Bank at the September 30, 2022 and December 31, 2021 were the following:

                                                                                                         Prompt Corrective Action Thresholds
                                                    Actual                        Basel III Minimum Capital Required                     Well
Capitalized
September 30, 2022                       Amount                Ratio                 Amount                 Ratio                  Amount                   Ratio
Total risk-based capital to
risk-weighted assets
First Merchants Corporation          $ 1,823,190                 12.84  %       $   1,490,625                 10.50  %                       N/A                   N/A
First Merchants Bank                   1,767,667                 12.44              1,492,462                 10.50          $      1,421,392                 10.00  %
Tier 1 capital to risk-weighted
assets
First Merchants Corporation          $ 1,501,611                 10.58  %       $   1,206,697                  8.50  %                       N/A                   N/A
First Merchants Bank                   1,588,961                 11.18              1,208,183                  8.50          $      1,137,114                  8.00  %
CET1 capital to risk-weighted assets
First Merchants Corporation          $ 1,476,611                 10.40  %       $     993,750                  7.00  %                       N/A                   N/A
First Merchants Bank                   1,588,961                 11.18                994,974                  7.00          $        923,905                  6.50  %
Tier 1 capital to average assets
First Merchants Corporation          $ 1,501,611                  8.81  %       $     682,064                  4.00  %                       N/A                   N/A
First Merchants Bank                   1,588,961                  9.33                681,024                  4.00          $        851,280                  5.00  %




                                                                                                   Prompt Corrective Action Thresholds
                                              Actual                        Basel III Minimum Capital Required                     Well Capitalized
December 31, 2021                  Amount                Ratio                 Amount                 Ratio                  Amount                   

Report

Total risk-based capital to
risk-weighted assets
First Merchants Corporation    $ 1,582,481                 13.92  %       $   1,193,840                 10.50  %                       N/A                   N/A
First Merchants Bank             1,453,358                 12.74              1,197,515                 10.50          $      1,140,490                 10.00  %
Tier 1 capital to
risk-weighted assets
First Merchants Corporation    $ 1,374,240                 12.09  %       $     966,442                  8.50  %                       N/A                   N/A
First Merchants Bank             1,309,685                 11.48                969,417                  8.50          $        912,392                  8.00  %
Common equity tier 1 capital
to risk-weighted assets
First Merchants Corporation    $ 1,327,634                 11.68  %       $     795,893                  7.00  %                       N/A                   N/A
First Merchants Bank             1,309,685                 11.48                798,343                  7.00          $        741,319                  6.50  %
Tier 1 capital to average
assets
First Merchants Corporation    $ 1,374,240                  9.30  %       $     590,758                  4.00  %                       N/A                   N/A
First Merchants Bank             1,309,685                  8.88                589,994                  4.00          $        737,493                  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, clarified that PPP
loans receive a zero percent risk weight for purposes of determining
risk-weighted assets and the CET1, Tier 1 and Total Risk-Based capital ratios.
At September 30, 2022 and December 31, 2021, risk-weighted assets included
$11.2 million and $106.6 million, respectively, of PPP loans at a zero risk
weight.

Management believes that all of the 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 common stockholders' equity and qualifying non-cumulative
perpetual preferred stock, less non-qualifying intangible assets and unrealized
net securities gains or losses.
                                       52

————————————————– ——————————

Contents

© Edgar Online, source Previews

Comments are closed.