First Merchants Corporation - 10-Q quarterly report FY2018 Q1

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, 2018

[ ] 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)

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 and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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 [ ] (Do not check if smaller reporting company)
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, 2018, there were 49,522,136 outstanding common shares of the registrant.

Table of Contents

TABLE OF CONTENTS

FIRST MERCHANTS CORPORATION



		Page No.
Glossary of Defined Terms		3

Part I. Financial Information
Item 1.	Financial Statements:
	Consolidated Condensed Balance Sheets	4
	Consolidated Condensed Statements of Income	5
	Consolidated Condensed Statements of Comprehensive Income	6
	Consolidated Condensed Statement of Stockholders' Equity	7
	Consolidated Condensed Statements of Cash Flows	8
	Notes to Consolidated Condensed Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4.	Controls and Procedures	52

Part II. Other Information
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	54

Signatures		55

Table of Contents

GLOSSARY OF DEFINED TERMS

FIRST MERCHANTS CORPORATION



Arlington Bank	The Arlington Bank, which was acquired by the Corporation on May 19, 2017.
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
IAB	Independent Alliance Banks, Inc., which was acquired by the Corporation on July 14, 2017.
OREO	Other real estate owned
RSA	Restricted Stock Awards
TEFRA	Tax Equity and Fiscal Responsibility Act. The TEFRA disallowance reduces the amount of interest expense an entity may deduct for the purpose of carrying tax-free investment securities.

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, 2018			December 31, 2017
	(Unaudited)
ASSETS
Cash and cash equivalents	$	128,828		$	154,905
Interest-bearing time deposits	24,233			35,027
Investment securities available for sale	1,003,799			999,947
Investment securities held to maturity (fair value of $538,399 and $568,208)	540,021			560,655
Loans held for sale	4,469			7,216
Loans, net of allowance for loan losses of $76,420 and $75,032	6,825,276			6,676,167
Premises and equipment	94,741			95,852
Federal Home Loan Bank stock	24,588			23,825
Interest receivable	35,223			37,130
Goodwill	445,355			445,355
Other intangibles	29,422			31,148
Cash surrender value of life insurance	221,949			223,557
Other real estate owned	9,698			10,373
Tax asset, deferred and receivable	24,177			23,983
Other assets	61,017			42,338
TOTAL ASSETS	$	9,472,796		$	9,367,478
LIABILITIES
Deposits:
Noninterest-bearing	$	1,698,958		$	1,761,553
Interest-bearing	5,628,677			5,410,977
Total Deposits	7,327,635			7,172,530
Borrowings:
Federal funds purchased	50,000			144,038
Securities sold under repurchase agreements	138,910			136,623
Federal Home Loan Bank advances	449,419			414,377
Subordinated debentures and term loans	138,297			139,349
Total Borrowings	776,626			834,387
Interest payable	5,376			4,390
Other liabilities	50,086			52,708
Total Liabilities	8,159,723			8,064,015
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 - 49,243,096 and 49,158,238 shares	6,155			6,145
Additional paid-in capital	834,894			834,870
Retained earnings	493,624			465,231
Accumulated other comprehensive loss	(21,725		)	(2,908		)
Total Stockholders' Equity	1,313,073			1,303,463
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	9,472,796		$	9,367,478

See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.

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,
	2018		2017
INTEREST INCOME
Loans receivable:
Taxable	$	78,267	$	56,357
Tax exempt	3,596		2,333
Investment securities:
Taxable	5,096		4,308
Tax exempt	6,126		5,003
Deposits with financial institutions	131		44
Federal Home Loan Bank stock	404		189
Total Interest Income	93,620		68,234
INTEREST EXPENSE
Deposits	9,002		4,124
Federal funds purchased	380		228
Securities sold under repurchase agreements	173		88
Federal Home Loan Bank advances	2,159		978
Subordinated debentures and term loans	1,990		1,817
Total Interest Expense	13,704		7,235
NET INTEREST INCOME	79,916		60,999
Provision for loan losses	2,500		2,385
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	77,416		58,614
OTHER INCOME
Service charges on deposit accounts	4,777		4,174
Fiduciary and wealth management fees	3,416		2,640
Other customer fees	5,416		4,863
Increase in cash surrender value of life insurance	1,078		898
Gains on life insurance benefits	98
Net gains and fees on sales of loans	1,821		1,275
Net realized gains on sales of available for sale securities	1,609		598
Other income	1,346		398
Total Other Income	19,561		14,846
OTHER EXPENSES
Salaries and employee benefits	32,226		25,732
Net occupancy	4,670		4,216
Equipment	3,668		2,807
Marketing	884		565
Outside data processing fees	2,964		2,616
Printing and office supplies	334		264
Intangible asset amortization	1,726		903
FDIC assessments	719		570
Other real estate owned and foreclosure expenses	402		531
Professional and other outside services	1,541		1,734
Other expenses	4,553		3,161
Total Other Expenses	53,687		43,099
INCOME BEFORE INCOME TAX	43,290		30,361
Income tax expense	6,611		7,168
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	36,679	$	23,193
Per Share Data:
Basic Net Income Available to Common Stockholders	$	0.75	$	0.57
Diluted Net Income Available to Common Stockholders	$	0.74	$	0.56
Cash Dividends Paid	$	0.18	$	0.15
Average Diluted Shares Outstanding (in thousands)	49,428		41,221

See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.

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,
	2018			2017
Net income	$	36,679		$	23,193
Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) on securities available for sale arising during the period, net of tax of $4,191 and $5,444	(17,698		)	10,110
Unrealized gain on cash flow hedges arising during the period, net of tax of $106 and $11	644			23
Reclassification adjustment for net gains included in net income, net of tax of $302 and $115	(1,137		)	(215		)
Defined benefit pension plan amortization of prior service cost, net of tax of $32	—			(59		)
Total other comprehensive income (loss), net of tax	(18,191		)	9,859
Comprehensive income	$	18,488		$	33,052

See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.

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 Income (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 income (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.

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, 2018			March 31, 2017
Cash Flow From Operating Activities:
Net income	$	36,679		$	23,193
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	2,500			2,385
Depreciation and amortization	2,213			1,830
Change in deferred taxes	957			3,019
Share-based compensation	875			573
Loans originated for sale	(92,887		)	(46,280		)
Proceeds from sales of loans held for sale	96,973			48,903
Gains on sales of loans held for sale	(1,339		)	(956		)
Gains on sales of securities available for sale	(1,609		)	(598		)
Increase in cash surrender of life insurance	(1,078		)	(898		)
Gains on life insurance benefits	(98		)
Change in interest receivable	1,907			1,020
Change in interest payable	986			765
Other adjustments	(15,082		)	2,372
Net cash provided by operating activities	30,997			35,328
Cash Flows from Investing Activities:
Net change in interest-bearing deposits	10,794			4,020
Purchases of:
Securities available for sale	(98,113		)	(68,819		)
Securities held to maturity				(7,438		)
Proceeds from sales of securities available for sale	55,695			26,169
Proceeds from maturities of:
Securities available for sale	15,764			15,374
Securities held to maturity	20,092			18,076
Change in Federal Home Loan Bank stock	(763		)
Net change in loans	(153,893		)	(136,141		)
Proceeds from the sale of other real estate owned	820			1,228
Proceeds from life insurance benefits	2,784
Other adjustments	1,051			1,291
Net cash used in investing activities	(145,769		)	(146,240		)
Cash Flows from Financing Activities:
Net change in :
Demand and savings deposits	108,446			(1,047		)
Certificates of deposit and other time deposits	46,659			79,858
Borrowings	737,347			480,059
Repayment of borrowings	(794,004		)	(465,826		)
Cash dividends on common stock	(8,912		)	(6,191		)
Stock issued under employee benefit plans	159			114
Stock issued under dividend reinvestment and stock purchase plans	250			205
Stock options exercised	535			1,314
Stock redeemed	(1,785		)	(1,254		)
Net cash provided by financing activities	88,695			87,232
Net Change in Cash and Cash Equivalents	(26,077		)	(23,680		)
Cash and Cash Equivalents, January 1	154,905			127,927
Cash and Cash Equivalents, March 31	$	128,828		$	104,247
Additional cash flow information:
Interest paid	$	12,718		$	6,470
Income tax paid (refunded)	(257		)
Loans transferred to other real estate owned	131			680
Non-cash investing activities using trade date accounting	601			8,162

See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.

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, 2017, 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, 2017 filed with the Securities and Exchange Commission. The results of operations for the three months ended March 31, 2018, 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

ASU 2018-02 "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02") allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for the stranded tax effects caused by the revaluation of deferred taxes resulting from the newly enacted corporate tax rate in the Tax Cuts and Jobs Act. The ASU is effective in years beginning after December 15, 2018, but permits early adoption in a period for which financial statements have not yet been issued. The Corporation elected to early adopt the ASU as of January 1, 2018. The adoption of the guidance resulted in an insignificant cumulative-effect adjustment that decreased accumulated other comprehensive income (loss) and increased retained earnings in the first quarter of 2018.

ASU 2017-07 "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" ("ASU 2017-07") applies to all employers, including not-for-profit entities, that offer to their employees defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715, Compensation - Retirement Benefits. The amendments require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments also allow only the service cost component to be eligible for capitalization when applicable (e.g., as a cost of internally manufactured inventory or a self-constructed asset). The amendments are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. For other entities, the amendments are effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Corporation adopted this ASU in the first quarter of 2018 and did not have a significant impact on the Corporation’s consolidated financial statements.

ASU 2016-15 "Statement of Cash Flows (Topic 230)" ("ASU 2016-15") is intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows. ASU 2016-15 became effective for the Corporation on January 1, 2018 and did not have a significant impact on the Corporation's financial statements.

ASU 2016-01 "Financial Instruments - Overall (Subtopic 825-10): Recognition of Financial Assets and Financial Liabilities" ("ASU 2016-01") makes targeted amendments to the guidance for recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 requires equity investments, other than equity method investments, to be measured at fair value with changes in fair value recognized in net income. The ASU requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption to reclassify the cumulative change in fair value of equity securities previously recognized in accumulated other comprehensive income (loss). ASU 2016-01 became effective for the Corporation on January 1, 2018. The adoption of the guidance did not result in any cumulative effect adjustment in the first quarter of 2018. ASU 2016-01 also emphasizes the existing requirement to use exit prices to measure fair value for disclosure purposes and clarifies that entities should not make use of a practicability exception in determining the fair value of loans. Accordingly, the Corporation refined the calculation used to determine the disclosed fair value of loans held for investment as part of adopting this standard. The refined calculation did not have a significant impact on the fair value disclosures included in NOTE 9. DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES of these Notes to Consolidated Condensed Financial Statements.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

ASU 2014-09 "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09") implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 establishes a five-step model which entities must follow to recognize revenue and removes inconsistencies and weaknesses in existing guidance. The guidance does not apply to revenue associated with financial instruments, including loans and investment securities that are accounted for under other GAAP, which comprises a significant portion of our revenue stream. ASU 2014-09 became effective for the Corporation on January 1, 2018. The adoption of ASU 2014-09 did not result in a change to the accounting for any of the in-scope revenue streams; as such, no cumulative effect adjustment was recorded. Additional information related to revenue generated from contracts with customers is detailed below.

Revenue Recognition

ASU 2014-09 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 ASU 2014-09, 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 ASU 2014-09, 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.

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

ACQUISITIONS

Independent Alliance Banks, Inc.

On November 21, 2016, the Corporation purchased 495,112 shares, or 12.1 percent, of IAB's outstanding common stock from an IAB shareholder for $19.8 million, or $40.00 per share. On July 14, 2017, the Corporation acquired the remaining shares of IAB common stock. IAB, an Indiana Corporation, merged with and into the Corporation, whereupon the separate corporate existence of IAB ceased and the Corporation survived. Immediately following the merger, IAB's wholly-owned subsidiary, iAB Financial Bank, merged with and into the Bank, with the Bank continuing as the surviving bank.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

IAB was headquartered in Fort Wayne, Indiana and had 16 banking centers serving the Fort Wayne market. Pursuant to the merger agreement, each IAB shareholder received 1.653 shares of the Corporation's common stock for each outstanding share of IAB common stock held. The Corporation issued approximately 6.0 million shares of common stock. The transaction value for the remaining shares of common stock, not owned by the Corporation, was approximately $238.8 million, resulting in a total purchase price of $258.6 million. The Corporation engaged in this transaction with the expectation that it would be accretive to income and add a new market area with a demographic profile consistent with many of the current Indiana markets served by the Bank. Goodwill resulted from this transaction due to the expected synergies and economies of scale.

In the third quarter of 2017, ASC 805-10 - Business Combinations, required the Corporation to remeasure the 12.1 percent equity interest in IAB's common stock and recognize the resulting gain or loss, if any, in earnings. The remeasurement was based upon the closing price of IAB's common stock immediately prior to the acquisition announcement, and prior to the Corporation obtaining control of IAB. The trading price of IAB's common stock subsequent to the acquisition announcement included a control or acquisition premium and was not indicative of the fair value of the Corporation's pre-existing equity interest immediately prior to the acquisition announcement. The fair value of the equity interest in IAB's common stock after the remeasurement was $19.8 million. The Corporation recorded a $50,000 loss in the third quarter of 2017 as a result of the remeasurement.

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the purchase price for the IAB acquisition is detailed in the following table. If prior to the end of the one-year measurement period for finalizing the purchase price allocation, information becomes available about facts and circumstances that existed as of the acquisition date which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation retrospectively.



	Fair Value
Cash and cash equivalents	$	6,016
Interest-bearing time deposits	248,212
Investment securities	4,078
Loans held for sale	594
Loans	725,382
Premises and equipment	10,107
Federal Home Loan Bank stock	4,810
Interest receivable	3,445
Cash surrender value of life insurance	26,964
Other assets	11,780
Deposits	(862,271		)
Securities sold under repurchase agreements	(17,915		)
Federal Home Loan Bank Advances	(47,575		)
Subordinated debentures	(10,583		)
Interest payable	(1,005		)
Other liabilities	(14,472		)
Net tangible assets acquired	87,567
Other Intangible assets	17,403
Goodwill	153,636
Purchase price	$	258,606

Of the total purchase price, $17,403,000 has been allocated to other intangible assets. Approximately $13.6 million was allocated to a core deposit intangible, which will be amortized over its estimated life of 10 years. Approximately $3.8 million was allocated to a non-compete intangible, which will be amortized over its estimated life of 2 years. The remaining purchase price has been allocated to goodwill, which is not deductible for tax purposes.

Acquired loan data for IAB can be found in the table below:



	Fair Value of Acquired Loans at Acquisition Date		Gross Contractual Amounts Receivable at Acquisition Date		Best Estimate at Acquisition Date of Contractual Cash Flows Not Expected to be Collected
Acquired receivables subject to ASC 310-30	$	4,838	$	14,131	$	8,352
Acquired receivables not subject to ASC 310-30	$	720,544	$	864,613	$	9,786

Purchased loans with evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments are accounted for under ASC 310-30, Loans Acquired with Deteriorated Credit Quality. The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. The accretable portion of the fair value discount or premium is the difference between the expected cash flows and the net present value of expected cash flows, with such difference accreted into earnings over the term of the loans.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

The Arlington Bank

On May 19, 2017, the Corporation acquired 100 percent of Arlington Bank. Arlington Bank, an Ohio savings bank, merged with and into the Bank, with the Bank continuing as the surviving bank. Arlington Bank was headquartered in Columbus, Ohio and had 3 banking centers serving the Columbus, Ohio market. Pursuant to the merger agreement, each Arlington Bank shareholder received 2.7245 shares of the Corporation's common stock for each outstanding share of Arlington Bank common stock held. The Corporation issued approximately 2.1 million shares of common stock, which was valued at approximately $82.6 million. The Corporation engaged in this transaction with the expectation that it would be accretive to income and expand the existing footprint in Columbus, Ohio. Goodwill resulted from this transaction due to the expected synergies and economies of scale.

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the purchase price for the Arlington Bank acquisition is detailed in the following table. If prior to the end of the one-year measurement period for finalizing the purchase price allocation, information becomes available about facts and circumstances that existed as of the acquisition date which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation retrospectively.



	Fair Value
Cash and cash equivalents	$	48,532
Interest-bearing time deposits	292
Loans held for sale	7,626
Loans	224,680
Premises and equipment	1,986
Federal Home Loan Bank stock	1,091
Interest receivable	653
Other assets	1,620
Deposits	(252,783		)
Interest payable	(244		)
Other liabilities	(3,106		)
Net tangible assets acquired	30,347
Core deposit intangible	4,526
Goodwill	47,719
Purchase price	$	82,592

Of the total purchase price, $4,526,000 has been allocated to a core deposit intangible that will be amortized over its estimated life of 10 years. The remaining purchase price has been allocated to goodwill, which is not deductible for tax purposes.

Acquired loan data for Arlington Bank can be found in the table below:



	Fair Value of Acquired Loans at Acquisition Date		Gross Contractual Amounts Receivable at Acquisition Date		Best Estimate at Acquisition Date of Contractual Cash Flows Not Expected to be Collected
Acquired receivables subject to ASC 310-30	$	2,625	$	6,183	$	2,891
Acquired receivables not subject to ASC 310-30	$	222,055	$	308,857	$	2,741

Pro Forma Financial Information

The results of operations of Arlington Bank and IAB have been included in the Corporation's consolidated financial statements since the acquisition dates. The following schedule includes pro forma results for the year ended December 31, 2017, as if the Arlington Bank and IAB acquisitions occurred as of the beginning of the period presented.



	2017
Total revenue (net interest income plus other income)	$	380,324
Net income	$	95,009
Net income available to common shareholders
Earnings per share:
Basic	$	1.94
Diluted	$	1.93

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

The pro forma information includes adjustments for interest income on loans, interest expense on deposits and borrowings, premises expense for banking centers acquired and amortization of intangibles arising from the transaction and the related income tax effects. The pro forma information for the year ended December 31, 2017 includes operating revenue of $9.0 million and $21.4 million from the Arlington Bank and IAB acquisitions since the date of acquisition, respectively. Additionally, $15.4 million, net of tax, of expenses directly attributable to the Arlington Bank and IAB acquisitions were included in the year ended December 31, 2017 pro forma information. The pro forma information is presented for information purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time, nor is it intended to be a projection of future results.

NOTE 3

INVESTMENT SECURITIES

The amortized cost, gross unrealized gains, gross unrealized losses and approximate market value of the Corporation's investment securities at the dates indicated were:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale at March 31, 2018
U.S. Government-sponsored agency securities	$	6,491	$	8	$	1	$	6,498
State and municipal	510,884		6,588		7,238		510,234
U.S. Government-sponsored mortgage-backed securities	496,824		251		10,039		487,036
Corporate obligations	31						31
Total available for sale	1,014,230		6,847		17,278		1,003,799
Held to maturity at March 31, 2018
U.S. Government-sponsored agency securities	22,619				715		21,904
State and municipal	228,620		2,784		911		230,493
U.S. Government-sponsored mortgage-backed securities	287,782		988		3,762		285,008
Foreign Investments	1,000				6		994
Total held to maturity	540,021		3,772		5,394		538,399
Total Investment Securities	$	1,554,251	$	10,619	$	22,672	$	1,542,198



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale at December 31, 2017
State and municipal	$	510,852	$	16,932	$	1,091	$	526,693
U.S. Government-sponsored mortgage-backed securities	473,325		964		3,423		470,866
Corporate obligations	31						31
Equity securities	2,357						2,357
Total available for sale	986,565		17,896		4,514		999,947
Held to maturity at December 31, 2017
U.S. Government-sponsored agency securities	22,618				435		22,183
State and municipal	235,594		6,295		244		241,645
U.S. Government-sponsored mortgage-backed securities	301,443		3,341		1,404		303,380
Foreign Investment	1,000						1,000
Total held to maturity	560,655		9,636		2,083		568,208
Total Investment Securities	$	1,547,220	$	27,532	$	6,597	$	1,568,155

The amortized cost and fair value of available for sale and held to maturity securities at March 31, 2018 and December 31, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.



	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturity Distribution at March 31, 2018:
Due in one year or less	$	544	$	549	$	18,366	$	18,675
Due after one through five years	4,982		5,064		68,198		67,756
Due after five through ten years	81,890		83,630		52,976		53,437
Due after ten years	429,990		427,520		112,699		113,523
	517,406		516,763		252,239		253,391
U.S. Government-sponsored mortgage-backed securities	496,824		487,036		287,782		285,008
Total Investment Securities	$	1,014,230	$	1,003,799	$	540,021	$	538,399

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)



	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturity Distribution at December 31, 2017
Due in one year or less	$	425	$	425	$	12,015	$	12,158
Due after one through five years	5,040		5,204		76,146		76,334
Due after five through ten years	74,921		78,806		54,441		55,679
Due after ten years	430,497		442,289		116,610		120,657
	510,883		526,724		259,212		264,828
U.S. Government-sponsored mortgage-backed securities	473,325		470,866		301,443		303,380
Equity securities	2,357		2,357
Total Investment Securities	$	986,565	$	999,947	$	560,655	$	568,208

The carrying value of securities pledged as collateral, to secure borrowings and for other purposes, was $552,899,000 at March 31, 2018, and $475,999,000 at December 31, 2017 .

The book value of securities sold under agreements to repurchase amounted to $141,664,000 at March 31, 2018, and $136,639,000 at December 31, 2017.

Gross gains on the sales and redemptions of available for sale securities for the three months ended March 31, 2018 and 2017 are shown below.



	Three Months Ended March 31,
	2018		2017
Sales and Redemptions of Available for Sale Securities:
Gross gains	$	1,609	$	598
Gross losses

The following tables show the Corporation’s gross unrealized losses and fair value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position at March 31, 2018, and December 31, 2017:



	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Temporarily Impaired Available for Sale Securities at March 31, 2018
U.S. Government-sponsored agency securities	$	371	$	1					$	371	$	1
State and municipal	236,539		5,298		$	28,126	$	1,940	264,665		7,238
U.S. Government-sponsored mortgage-backed securities	385,626		6,956		65,490		3,083		451,116		10,039
Total Temporarily Impaired Available for Sale Securities	622,536		12,255		93,616		5,023		716,152		17,278
Temporarily Impaired Held to Maturity Securities at March 31, 2018
U.S. Government-sponsored agency securities	9,861		258		12,043		457		21,904		715
State and municipal	18,155		307		15,388		604		33,543		911
U.S. Government-sponsored mortgage-backed securities	177,080		2,154		40,866		1,608		217,946		3,762
Corporate Obligations	994		6						994		6
Total Temporarily Impaired Held to Maturity Securities	206,090		2,725		68,297		2,669		274,387		5,394
Total Temporarily Impaired Investment Securities	$	828,626	$	14,980	$	161,913	$	7,692	$	990,539	$	22,672



	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Temporarily Impaired Available for Sale Securities at December 31, 2017
State and municipal	$	13,296	$	198	$	35,324	$	893	$	48,620	$	1,091
U.S. Government-sponsored mortgage-backed securities	182,755		1,520		68,667		1,903		251,422		3,423
Total Temporarily Impaired Available for Sale Securities	196,051		1,718		103,991		2,796		300,042		4,514
Temporarily Impaired Held to Maturity Securities at December 31, 2017
U.S. Government-sponsored agency securities	9,988		131		12,196		304		22,184		435
State and municipal	2,430		36		15,805		208		18,235		244
U.S. Government-sponsored mortgage-backed securities	62,508		485		43,078		919		105,586		1,404
Total Temporarily Impaired Held to Maturity Securities	74,926		652		71,079		1,431		146,005		2,083
Total Temporarily Impaired Investment Securities	$	270,977	$	2,370	$	175,070	$	4,227	$	446,047	$	6,597

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Certain investments in debt and equity securities are reported in the financial statements at an amount less than their historical cost as indicated in the table below.



	March 31, 2018			December 31, 2017
Investments reported at less than historical cost:
Historical cost	$	1,013,210		$	452,644
Fair value	$	990,539		$	446,047
Percent of the Corporation's investment portfolio	64.2		%	28.6		%

Except as discussed below, management believes the decline in fair value for these securities was temporary. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income during the period the OTTI is identified.

The Corporation’s management has evaluated all securities with unrealized losses for OTTI as of March 31, 2018. The evaluations are based on the nature of the securities, the extent and duration of the loss and the intent and ability of the Corporation to hold these securities either to maturity or through the expected recovery period.

In determining the fair value of the investment securities portfolio, the Corporation utilizes a third party for portfolio accounting services, including market value input, for those securities classified as Level 1 and Level 2 in the fair value hierarchy. The Corporation has obtained an understanding of what inputs are being used by the vendor in pricing the portfolio and how the vendor classified these securities based upon these inputs. From these discussions, the Corporation’s management is comfortable that the classifications are proper. The Corporation has gained trust in the data for two reasons: (a) independent spot testing of the data is conducted by the Corporation through obtaining market quotes from various brokers on a periodic basis; and (b) actual gains or loss resulting from the sale of certain securities has proven the data to be accurate over time. Fair value of securities classified as Level 3 in the valuation hierarchy was determined using a discounted cash flow model that incorporated market estimates of interest rates and volatility in markets that have not been active.

State and Municipal and U.S. Government-Sponsored Agency Securities

The unrealized losses on the Corporation's investments in securities of state and political subdivisions and U.S. Government-Sponsored Agency securities were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at March 31, 2018. The state and municipal securities portfolio contains unrealized losses of $7,238,000 on two hundred eight securities and $911,000 on forty-six securities in the available for sale and held to maturity portfolios, respectively. The U.S. Government-Sponsored Agency securities portfolio contains unrealized losses of $1,000 on one security and $715,000 on five securities in the available for sale and held to maturity portfolios, respectively.

U.S. Government-Sponsored Mortgage-Backed Securities

The unrealized losses on the Corporation's investment in mortgage-backed securities were a result of interest rate changes. The Corporation expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at March 31, 2018. The mortgage-backed securities portfolio contains unrealized losses of $10,039,000 on one hundred one securities and $3,762,000 on seventy-six securities in the available for sale and held to maturity portfolios, respectively. All these securities are issued by a U.S. government-sponsored entity.

NOTE 4

LOANS AND ALLOWANCE

The Corporation’s primary lending focus is small business and middle market commercial, commercial real estate and residential real estate, which results in portfolio diversification. The following tables show the composition of the loan portfolio, the allowance for loan losses and credit quality characteristics by collateral classification, excluding loans held for sale. Loans held for sale as of March 31, 2018, and December 31, 2017, were $4,469,000 and $7,216,000, respectively.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

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



	March 31, 2018			December 31, 2017
Commercial and industrial loans	$	1,554,169		$	1,493,493
Agricultural production financing and other loans to farmers	98,315			121,757
Real estate loans:
Construction	590,093			612,219
Commercial and farmland	2,713,994			2,562,691
Residential	948,644			962,765
Home equity	510,545			514,021
Individuals' loans for household and other personal expenditures	88,235			86,935
Lease financing receivables, net of unearned income	2,193			2,527
Other commercial loans	395,508			394,791
Loans	$	6,901,696		$	6,751,199
Allowance for loan losses	(76,420		)	(75,032		)
Net Loans	$	6,825,276		$	6,676,167

Allowance, Credit Quality and Loan Portfolio

The Corporation maintains an allowance for loan losses to cover probable credit losses identified during its loan review process. Management believes the allowance for loan losses is adequate to cover probable losses inherent in the loan portfolio at March 31, 2018. The process for determining the adequacy of the allowance for loan losses is critical to the Corporation’s financial results. It requires management to make difficult, subjective and complex judgments to estimate the effect of uncertain matters. The allowance for loan losses considers current factors, including economic conditions and ongoing internal and external examinations, and will increase or decrease as deemed necessary to ensure it remains adequate. In addition, the allowance as a percentage of charge-offs and nonperforming loans will change at different points in time based on credit performance, portfolio mix and collateral values.

The allowance for loan losses is maintained through the provision for loan losses, which is a charge against earnings. The allowance is increased by provision expense and decreased by charge-offs less recoveries. All charge-offs are approved by the Bank's senior credit officers and in accordance with established policies. The Bank charges off a loan when a determination is made that all or a portion of the loan is uncollectable. The amount provided for loan losses in a given period may be greater than or less than net loan losses experienced during the period, and is based on management’s judgment as to the appropriate level of the allowance for loan losses. The determination of the provision amount is based on management’s ongoing review and evaluation of the loan portfolio, including an internally administered loan "watch" list and independent loan reviews. The evaluation takes into consideration identified credit problems, the possibility of losses inherent in the loan portfolio that are not specifically identified and management’s judgment as to the impact of the current environment and economic conditions on the portfolio.

The allowance consists of specific impairment reserves as required by ASC 310-10-35, a component for historical losses in accordance with ASC 450 and the consideration of current environmental factors in accordance with ASC 450. A loan is deemed impaired when, based on current information or events, it is probable that all amounts due of principal and interest according to the contractual terms of the loan agreement will not be collected.

The historical loss allocation for loans not deemed impaired according to ASC 450 is the product of the volume of loans within the non-impaired criticized and non-criticized risk grade classifications, each segmented by call code, and the historical loss factor for each respective classification and call code segment. The historical loss factors are based upon actual loss experience within each risk and call code classification. The historical look back period for non-criticized loans looks to the most recent rolling-four-quarter average and aligns with the look back period for non-impaired criticized loans. Each of the rolling four quarter periods used to obtain the average, include all charge-offs for the previous twelve-month period, therefore the historical look back period includes seven quarters. The resulting allocation is reflective of current conditions. Criticized loans are grouped based on the risk grade assigned to the loan. Loans with a special mention grade are assigned a loss factor, and loans with a classified grade but not impaired are assigned a separate loss factor. The loss factor computation for this allocation includes a segmented historical loss migration analysis of risk grades to charge-off.

In addition to the specific reserves and historical loss components of the allowance, consideration is given to various environmental factors to ensure that losses inherent in the portfolio are reflected in the allowance for loan losses. The environmental component adjusts the historical loss allocations for non-impaired loans to reflect relevant current conditions that, in management's opinion, have an impact on loss recognition. Environmental factors that management reviews in the analysis include: national and local economic trends and conditions; trends in growth in the loan portfolio and growth in higher risk areas; levels of, and trends in, delinquencies and non-accruals; experience and depth of lending management and staff; adequacy of, and adherence to, lending policies and procedures including those for underwriting; industry concentrations of credit; and adequacy of risk identification systems and controls through the internal loan review and internal audit processes.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

In conformance with ASC 805 and ASC 820, purchased loans are recorded at the acquisition date fair value. Such loans are included in the allowance to the extent a specific impairment is identified that exceeds the fair value adjustment on an impaired loan or the historical loss and environmental factor analysis indicates losses inherent in a purchased portfolio exceeds the fair value adjustment on the portion of the purchased portfolio not deemed impaired.

The following tables summarize changes in the allowance for loan losses by loan segment for the three months ended March 31, 2018 and March 31, 2017:



	Three Months Ended March 31, 2018
	Commercial			Commercial Real Estate			Consumer			Residential			Finance Leases		Total
Allowance for loan losses:
Balances, December 31, 2017	$	30,418		$	27,343		$	3,732		$	13,537		$	2	$	75,032
Provision for losses	840			84			274			1,302					2,500
Recoveries on loans	119			339			89			154					701
Loans charged off	(609		)	(61		)	(199		)	(944		)			(1,813		)
Balances, March 31, 2018	$	30,768		$	27,705		$	3,896		$	14,049		$	2	$	76,420



	Three Months Ended March 31, 2017
	Commercial			Commercial Real Estate			Consumer			Residential			Finance Leases		Total
Allowance for loan losses:
Balances, December 31, 2016	$	27,696		$	23,661		$	2,923		$	11,755		$	2	$	66,037
Provision for losses	1,197			247			249			692					2,385
Recoveries on loans	366			564			101			237					1,268
Loans charged off	(735		)	(152		)	(153		)	(425		)			(1,465		)
Balances, March 31, 2017	$	28,524		$	24,320		$	3,120		$	12,259		$	2	$	68,225

The tables below show the Corporation’s allowance for loan losses and loan portfolio by loan segment as of the periods indicated. There was no related allowance for loan losses for loans acquired with deteriorated credit quality at March 31, 2018 or December 31, 2017.



	March 31, 2018
	Commercial		Commercial Real Estate		Consumer		Residential		Finance Leases		Total
Allowance Balances:
Individually evaluated for impairment	$	143	$	758			$	416			$	1,317
Collectively evaluated for impairment	30,625		26,947		$	3,896	13,633		$	2	75,103
Total Allowance for Loan Losses	$	30,768	$	27,705	$	3,896	$	14,049	$	2	$	76,420
Loan Balances:
Individually evaluated for impairment	$	2,914	$	16,501	$	11	$	2,738			$	22,164
Collectively evaluated for impairment	2,042,193		3,268,036		88,224		1,454,894		$	2,193	6,855,540
Loans acquired with deteriorated credit quality	2,885		19,550				1,557				23,992
Loans	$	2,047,992	$	3,304,087	$	88,235	$	1,459,189	$	2,193	$	6,901,696



	December 31, 2017
	Commercial		Commercial Real Estate		Consumer		Residential		Finance Leases		Total
Allowance Balances:
Individually evaluated for impairment	$	666	$	567			$	404			$	1,637
Collectively evaluated for impairment	29,752		26,776		$	3,732	13,133		$	2	73,395
Total Allowance for Loan Losses	$	30,418	$	27,343	$	3,732	$	13,537	$	2	$	75,032
Loan Balances:
Individually evaluated for impairment	$	3,345	$	17,432	$	5	$	2,429			$	23,211
Collectively evaluated for impairment	2,005,275		3,135,481		86,930		1,472,821		$	2,527	6,703,034
Loans acquired with deteriorated credit quality	1,421		21,997				1,536				24,954
Loans	$	2,010,041	$	3,174,910	$	86,935	$	1,476,786	$	2,527	$	6,751,199

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Loans individually evaluated for impairment are comprised of commercial and consumer loans deemed impaired in accordance with ASC 310-10 and include loans acquired with deteriorated credit quality totaling $289,000 and $315,000 at March 31, 2018 and December 31, 2017, respectively.

The risk characteristics of the Corporation’s material portfolio segments are as follows:

Commercial

Commercial lending is primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the tangible assets being financed such as equipment or real estate or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. Other loans may be unsecured, secured but under-collateralized or otherwise made on the basis of the enterprise value of an organization. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate

These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Management monitors and evaluates commercial real estate loans based on collateral and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Consumer and Residential

With respect to residential loans that are secured by 1-4 family residences and are typically owner occupied, the Corporation generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment on loans secured by 1-4 family residences can be impacted by changes in property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Loans are reclassified to a non-accruing status when, in management’s judgment, the collateral value and financial condition of the borrower do not justify accruing interest. When the interest accrual is discontinued, all unpaid accrued interest is reversed against earnings when considered uncollectable. Payments subsequently received on non-accrual loans are applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable, typically after a minimum of six consecutive months of performance. Payments received on impaired accruing or delinquent loans are applied to interest income as accrued.

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



	March 31, 2018		December 31, 2017
Commercial and industrial loans	$	3,238	$	3,275
Agriculture production financing and other loans to farmers	638		1,027
Real estate loans:
Construction	1,481		65
Commercial and farmland	13,944		12,951
Residential	6,765		9,444
Home equity	1,385		1,928
Individuals' loans for household and other personal expenditures	46		34
Total	$	27,497	$	28,724

Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral dependent loans. If the impaired loan is identified as collateral dependent, then the fair value method for measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value. The fair value of real estate is generally based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis. Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or some combination of, asset appraisals, accounts receivable aging reports, inventory listings and or customer financial statements. Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

The following tables show the composition of the Corporation’s impaired loans, related allowance and interest income recognized while impaired by loan class as of the periods indicated:



	March 31, 2018
	Unpaid Principal Balance		Recorded Investment		Related Allowance
Impaired loans with no related allowance:
Commercial and industrial loans	$	7,863	$	1,812
Agriculture production financing and other loans to farmers	660		640
Real estate Loans:
Commercial and farmland	16,581		14,388
Residential	1,146		790
Home equity	40		8
Individuals' loans for household and other personal expenditures	11		11
Total	$	26,301	$	17,649
Impaired loans with related allowance:
Commercial and industrial loans	$	474	$	462	$	143
Real estate Loans:
Construction	1,352		1,352		307
Commercial and farmland	823		761		451
Residential	1,697		1,636		341
Home equity	324		304		75
Total	$	4,670	$	4,515	$	1,317
Total Impaired Loans	$	30,971	$	22,164	$	1,317



	December 31, 2017
	Unpaid Principal Balance		Recorded Investment		Related Allowance
Impaired loans with no related allowance:
Commercial and industrial loans	$	7,611	$	1,536
Agriculture production financing and other loans to farmers	732		700
Real estate Loans:
Commercial and farmland	16,758		15,162
Residential	833		519
Home equity	40		8
Individuals' loans for household and other personal expenditures	5		5
Total	$	25,979	$	17,930
Impaired loans with related allowance:
Commercial and industrial loans	$	812	$	782	$	552
Agriculture production financing and other loans to farmers	357		327		114
Real estate Loans:
Commercial and farmland	2,989		2,270		567
Residential	1,616		1,572		327
Home equity	349		330		77
Total	$	6,123	$	5,281	$	1,637
Total Impaired Loans	$	32,102	$	23,211	$	1,637

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)



	Three Months Ended March 31, 2018				Three Months Ended March 31, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired loans with no related allowance:
Commercial and industrial loans	$	1,845			$	1,066
Agriculture production financing and other loans to farmers	640
Real estate Loans:
Commercial and farmland	14,450		$	48	14,963		$	80
Residential	759		6		935		1
Home equity	8				26
Individuals' loans for household and other personal expenditures	12				7
Total	$	17,714	$	54	$	16,997	$	81
Impaired loans with related allowance:
Commercial and industrial loans	$	465
Agriculture production financing and other loans to farmers					$	657
Real estate Loans:
Construction	1,352
Commercial and farmland	767				2,848
Residential	1,709		$	12	1,062		$	6
Home equity	305		2		260		2
Total	$	4,598	$	14	$	4,827	$	8
Total Impaired Loans	$	22,312	$	68	$	21,824	$	89

Impaired loans in the December 31, 2017 table do not include loans accounted for under ASC 310-30, or any other loan, unless deemed impaired in accordance with ASC 310-10.

As part of the ongoing monitoring of the credit quality of the Corporation's loan portfolio, management tracks certain credit quality indicators including trends related to: (i) the level of criticized commercial loans, (ii) net charge-offs, (iii) non-performing loans, (iv) covenant failures and (v) the general national and local economic conditions.

The Corporation utilizes a risk grading of pass, special mention, substandard, doubtful and loss to assess the overall credit quality of large commercial loans. All large commercial credit grades are reviewed at a minimum of once a year for pass grade loans. Loans with grades below pass are reviewed more frequently depending on the grade. A description of the general characteristics of these grades is as follows:


•	Pass - Loans that are considered to be of acceptable credit quality.

•

Special Mention - Loans which possess some credit deficiency or potential weakness, which deserves close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Corporation's credit position at some future date. Special mention assets are not adversely classified and do not expose the Corporation to sufficient risk to warrant adverse classification. The key distinctions of this category's classification are that it is indicative of an unwarranted level of risk; and weaknesses are considered “potential”, not “defined”, impairments to the primary source of repayment. Examples include businesses that may be suffering from inadequate management, loss of key personnel or significant customer or litigation.

•

Substandard - A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have a well-defined weakness that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Other characteristics may include:



	o	the likelihood that a loan will be paid from the primary source of repayment is uncertain or financial deterioration is underway and very close attention is warranted to ensure that the loan is collected without loss,



	o	the primary source of repayment is gone, and the Corporation is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees,



	o	loans have a distinct possibility that the Corporation will sustain some loss if deficiencies are not corrected,



	o	unusual courses of action are needed to maintain a high probability of repayment,



	o	the borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments,

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)



	o	the Corporation is forced into a subordinated or unsecured position due to flaws in documentation,



	o	loans have been restructured so that payment schedules, terms and collateral represent concessions to the borrower when compared to the normal loan terms,



	o	the Corporation is seriously contemplating foreclosure or legal action due to the apparent deterioration of the loan, and



	o	there is significant deterioration in market conditions to which the borrower is highly vulnerable.

•

Doubtful - Loans that have all of the weaknesses of those classified as Substandard. However, based on currently existing facts, conditions and values, these weaknesses make full collection of principal highly questionable and improbable. Other credit characteristics may include considerable doubt as to the quality of the secondary sources of repayment. The possibility of loss is high, but because of certain important pending factors that may strengthen the loan, loss classification is deferred until the exact status of repayment is known.


•	Loss – Loans that are considered uncollectable and of such little value that continuing to carry them as an asset is not warranted. Loans will be classified as Loss when it is neither practical not desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

The following tables summarize the credit quality of the Corporation’s loan portfolio, by loan class for the periods indicated. Consumer non-performing loans include accruing consumer loans 90 plus days delinquent and consumer non-accrual loans. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified date. Loans that evidenced deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected are included in the applicable categories below.



	March 31, 2018
	Commercial Pass		Commercial Special Mention		Commercial Substandard		Commercial Doubtful		Commercial Loss	Consumer Performing		Consumer Non-Performing		Total
Commercial and industrial loans	$	1,465,692	$	58,916	$	29,561								$	1,554,169
Agriculture production financing and other loans to farmers	57,888		16,599		23,828									98,315
Real estate Loans:
Construction	553,131		1,363		11,918					$	23,552	$	129	590,093
Commercial and farmland	2,557,293		64,356		88,312		$	1,117		2,914		2		2,713,994
Residential	179,135		5,198		5,340		31			753,126		5,814		948,644
Home equity	27,372		532		344					480,830		1,467		510,545
Individuals' loans for household and other personal expenditures										88,159		76		88,235
Lease financing receivables, net of unearned income	2,193													2,193
Other commercial loans	395,155				353									395,508
Loans	$	5,237,859	$	146,964	$	159,656	$	1,148		$	1,348,581	$	7,488	$	6,901,696



	December 31, 2017
	Commercial Pass		Commercial Special Mention		Commercial Substandard		Commercial Doubtful		Commercial Loss		Consumer Performing		Consumer Non-Performing		Total
Commercial and industrial loans	$	1,418,401	$	51,336	$	23,386	$	370							$	1,493,493
Agriculture production financing and other loans to farmers	73,800		27,502		20,018		387		$	50					121,757
Real estate Loans:
Construction	587,906		828		981						$	22,374	$	130	612,219
Commercial and farmland	2,408,329		70,074		79,769		1,536				2,980		3		2,562,691
Residential	185,725		4,376		4,209		114				759,900		8,441		962,765
Home equity	28,554		457		286						482,661		2,063		514,021
Individuals' loans for household and other personal expenditures											86,875		60		86,935
Lease financing receivables, net of unearned income	2,527														2,527
Other commercial loans	394,222				569										394,791
Loans	$	5,099,464	$	154,573	$	129,218	$	2,407	$	50	$	1,354,790	$	10,697	$	6,751,199

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

The tables below show a past due aging of the Corporation’s loan portfolio, by loan class, as of March 31, 2018, and December 31, 2017:



	March 31, 2018
	Current		30-59 Days Past Due		60-89 Days Past Due		Loans > 90 Days And Accruing		Non-Accrual		Total Past Due & Non-Accrual		Total
Commercial and industrial loans	$	1,549,330	$	1,062	$	49	$	490	$	3,238	$	4,839	$	1,554,169
Agriculture production financing and other loans to farmers	89,198		8,479						638		9,117		98,315
Real estate loans:
Construction	588,424		188						1,481		1,669		590,093
Commercial and farmland	2,693,020		5,589		1,378		63		13,944		20,974		2,713,994
Residential	938,960		2,577		305		37		6,765		9,684		948,644
Home equity	506,922		1,638		481		119		1,385		3,623		510,545
Individuals' loans for household and other personal expenditures	87,933		170		57		29		46		302		88,235
Lease financing receivables, net of unearned income	2,193												2,193
Other commercial loans	395,508												395,508
Loans	$	6,851,488	$	19,703	$	2,270	$	738	$	27,497	$	50,208	$	6,901,696



	December 31, 2017
	Current		30-59 Days Past Due		60-89 Days Past Due		Loans > 90 Days And Accruing		Non-Accrual		Total Past Due & Non-Accrual		Total
Commercial and industrial loans	$	1,487,221	$	2,967	$	30			$	3,275	$	6,272	$	1,493,493
Agriculture production financing and other loans to farmers	120,720		10						1,027		1,037		121,757
Real estate loans:
Construction	610,896		1,193				$	65	65		1,323		612,219
Commercial and farmland	2,542,048		6,923		166		603		12,951		20,643		2,562,691
Residential	948,947		4,010		308		56		9,444		13,818		962,765
Home equity	510,362		1,372		184		175		1,928		3,659		514,021
Individuals' loans for household and other personal expenditures	85,744		298		834		25		34		1,191		86,935
Lease financing receivables, net of unearned income	2,527												2,527
Other commercial loans	394,791												394,791
Loans	$	6,703,256	$	16,773	$	1,522	$	924	$	28,724	$	47,943	$	6,751,199

See the information regarding the analysis of loan loss experience in the "LOAN QUALITY/PROVISION FOR LOAN LOSSES" section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 2 of this Quarterly Report on Form 10-Q.

On occasion, borrowers experience declines in income and cash flow. As a result, these borrowers seek to reduce contractual cash outlays including debt payments. Concurrently, in an effort to preserve and protect its earning assets, specifically troubled loans, the Corporation works to maintain its relationship with certain customers who are experiencing financial difficulty by contractually modifying the borrower's debt agreement with the Corporation. In certain loan restructuring situations, the Corporation may grant a concession to a debtor experiencing financial difficulty, resulting in a trouble debt restructuring. A concession is deemed to be granted when, as a result of the restructuring, the Corporation does not expect to collect all original amounts due, including interest accrued at the original contract rate. If the payment of principal at original maturity is primarily dependent on the value of collateral, the current value of the collateral is considered in determining whether the principal will be paid.

The following tables summarize troubled debt restructures in the Corporation's loan portfolio that occurred during the periods indicated:



	Three Months Ended March 31, 2018
	Pre-Modification Recorded Balance		Post-Modification Recorded Balance		Number of Loans
Real estate loans:
Residential	$	214	$	222	5
Home equity	16		16		2
Individuals' loans for household and other personal expenditures	7		8		1
Total	$	237	$	246	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)



	Three Months Ended March 31, 2017
	Pre-Modification Recorded Balance		Post-Modification Recorded Balance		Number of Loans
Real estate loans:
Commercial and farmland	$	107	$	241	3
Residential	121		122		2
Home equity	122
Total	$	350	$	363	5

The following tables summarize the recorded investment of troubled debt restructures as of March 31, 2018 and 2017, by modification type, that occurred during the periods indicated:



	Three Months Ended March 31, 2018
	Term Modification		Rate Modification		Combination		Total Modification
Real estate loans:
Residential	$	38	$	74	$	106	$	218
Home equity	16		10				26
Individuals' loans for household and other personal expenditures			7				7
Total	$	54	$	91	$	106	$	251



	Three Months Ended March 31, 2017
	Term Modification	Rate Modification		Combination		Total Modification
Real estate loans:
Commercial and farmland				$	241	$	241
Residential		$	122			122
Total		$	122	$	241	$	363

Loans secured by residential real estate made up 91 percent of the post-modification balance of troubled debt restructured loans made in the three months ended March 31, 2018.

The following tables summarize troubled debt restructures that occurred during the twelve months ended March 31, 2018 and 2017, that subsequently defaulted during the period indicated and remained in default at period end. For purposes of this schedule, a loan is considered in default if it is 30 or more days past due.



	Three Months Ended March 31, 2018
	Number of Loans	Recorded Balance
Real estate loans:
Commercial and farmland	1	$	324
Residential	3	108
Total	4	$	432



	Three Months Ended March 31, 2017
	Number of Loans	Recorded Balance
Real estate loans:
Commercial and farmland	1	$	223
Total	1	$	223

For potential consumer loan restructures, impairment evaluation occurs prior to modification. Any subsequent impairment is typically addressed through the charge-off process, or may be addressed through a specific reserve. Consumer troubled debt loan restructures are generally included in the general historical allowance for loan loss at the post modification balance. Consumer non-accrual and delinquent troubled debt loan restructures are also considered in the calculation of the non-accrual and delinquency trend environmental allowance allocation. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $1,465,000 and $2,302,000 at March 31, 2018 and December 31, 2017, respectively.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Commercial troubled debt restructured loans risk graded special mention, substandard, doubtful and loss are individually evaluated for impairment under ASC 310. Any resulting specific reserves are included in the allowance for loan losses. Commercial troubled debt loan restructures 30 - 89 days delinquent are included in the calculation of the delinquency trend environmental allocation in the allowance for loan losses. With the exception of the acquired loans excluded from the allowance for loan losses, all commercial non-impaired loans, including non-accrual and 90+ day delinquents, are included in the ASC 450 loss estimate.

NOTE 5

PURCHASED CREDIT IMPAIRED LOANS

Purchased Credit Impaired Loans are included in NOTE 4. LOANS AND ALLOWANCE, in the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q. As described in NOTE 4, purchased loans are recorded at the acquisition date fair value, which could result in a fair value discount or premium. Purchased loans with evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments are accounted for under ASC 310-30, Loans Acquired with Deteriorated Credit Quality. The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. The accretable portion of the fair value discount or premium is the difference between the expected cash flows and the net present value of expected cash flows, with such difference accreted into earnings over the term of the loans.

The carrying amount of Purchased Credit Impaired Loans as of March 31, 2018 and December 31, 2017 was $24.3 million and $25.3 million, respectively; with no required allowance for loan losses. As customer cash flow expectations improve, nonaccretable yield can be reclassified to accretable yield. The accretable yield, or income expected to be collected, and reclassifications from nonaccretable, are identified in the table below.



	Three Months Ended March 31, 2018			Three Months Ended March 31, 2017
Beginning balance	$	2,890		$	3,950
Additions
Accretion	(510		)	(3,238		)
Reclassification from nonaccretable	295			2,370
Disposals
Ending balance	$	2,675		$	3,082

There were no loans acquired during the three month periods ended March 31, 2018 and 2017, for which it was probable that all contractually required payments would not be collected.

NOTE 6

GOODWILL

Goodwill is recorded on the acquisition date of an entity. During the measurement period, the Corporation may record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date. The IAB acquisition on July, 14, 2017 resulted in $153,636,000 of goodwill. The Arlington Bank acquisition on May 19, 2017 resulted in $47,719,000 of goodwill, which includes a reduction of $469,000. This reduction was recorded in the third quarter of 2017 as a measurement period adjustment. Details regarding the IAB and Arlington Bank acquisitions are discussed in NOTE 2. ACQUISITIONS of these Notes to Consolidated Condensed Financial Statements. There have been no changes in goodwill since December 31, 2017, resulting in a goodwill balance of $445,355,000 as of March 31, 2018.



	2017
Balance, January 1	$	244,000
Goodwill acquired	201,824
Measurement period adjustment	(469		)
Balance, December 31	$	445,355

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 7

OTHER INTANGIBLES

Core deposit intangibles and other intangibles are recorded on the acquisition date of an entity. During the measurement period, the Corporation may record subsequent adjustments to these intangibles for provisional amounts recorded at the acquisition date. The IAB acquisition on July 14, 2017 resulted in a core deposit intangible of $13,638,000 and other intangibles, consisting of non-compete intangibles, of $3,765,000. The Arlington Bank acquisition on May 19, 2017 resulted in a core deposit intangible of $4,526,000. Details regarding the IAB acquisition are discussed in NOTE 2. ACQUISITIONS of these Notes to Consolidated Condensed Financial Statements.

The carrying basis and accumulated amortization of recognized core deposit intangibles and other intangibles are noted below.



	March 31, 2018			December 31, 2017
Gross carrying amount	$	85,869		$	63,940
Core deposit intangibles acquired				18,164
Other intangibles acquired				3,765
Accumulated amortization	(56,447		)	(54,721		)
Total other intangibles	$	29,422		$	31,148

The core deposit intangibles and other intangibles are being amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of two to ten years. Estimated future amortization expense is summarized as follows:



	Amortization Expense
2018	$	4,993
2019	5,169
2020	3,632
2021	3,427
2022	3,325
After 2022	8,876
	$	29,422

NOTE 8

DERIVATIVE FINANCIAL INSTRUMENTS

Risk Management Objective of Using Derivatives

The Corporation is exposed to certain risks arising from both its business operations and economic conditions. The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Corporation enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Corporation’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Corporation’s known or expected cash payments principally related to certain variable-rate liabilities. The Corporation also has derivatives that are a result of a service the Corporation provides to certain qualifying customers, and, therefore, are not used to manage interest rate risk in the Corporation’s assets or liabilities. The Corporation manages a matched book with respect to its derivative instruments offered as a part of this service to its customers in order to minimize its net risk exposure resulting from such transactions.

Cash Flow Hedges of Interest Rate Risk

The Corporation’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Corporation primarily uses interest rate swaps and interest rate caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the payment of fixed amounts to a counterparty in exchange for the Corporation receiving variable payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. As of March 31, 2018 and December 31, 2017, the Corporation had five interest rate swaps with a notional amount of $56.0 million and one interest rate cap with a notional amount of $13.0 million that were designated as cash flow hedges.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.

During 2018, $26.0 million of the interest rate swaps and the $13.0 million interest rate cap were used to hedge the variable cash outflows (LIBOR-based) associated with existing trust preferred securities when the outflows converted from a fixed rate to variable rate in September of 2012. In addition, the remaining $30.0 million of interest rate swaps were used to hedge the variable cash outflows (LIBOR-based) associated with three Federal Home Loan Bank advances. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2018, and 2017, the Corporation did not recognize any ineffectiveness.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Corporation's variable-rate liabilities. During the next twelve months, the Corporation expects to reclassify $393,000 from accumulated other comprehensive income to interest expense.

Non-designated Hedges

The Corporation does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are not speculative and result from a service the Corporation provides to certain customers. The Corporation executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Corporation executes with a third party, such that the Corporation minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of March 31, 2018, the notional amount of customer-facing swaps was approximately $429,360,000. This amount is offset with third party counterparties, as described above.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Corporation’s derivative financial instruments, as well as their classification on the Balance Sheet, as of March 31, 2018, and December 31, 2017.

Asset Derivatives

Liability Derivatives

March 31, 2018

December 31, 2017

March 31, 2018

December 31, 2017

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Derivatives designated as hedging instruments:

Interest rate contracts

Other Assets

258

Other Assets

Other Liabilities

689

Other Liabilities

1,383

Derivatives not designated as hedging instruments:

Interest rate contracts

Other Assets

11,376

Other Assets

7,305

Other Liabilities

11,376

Other Liabilities

7,305

The amount of gain (loss) recognized in other comprehensive income is included in the table below for the periods indicated.



Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)
	Three Months Ended
	March 31, 2018		March 31, 2017
Interest Rate Products	$	508	$	34

Effect of Derivative Instruments on the Income Statement

The Corporation did not recognize any gains or losses from derivative financial instruments in the Income Statement for the three months ended March 31, 2018 and 2017.

The amount of gain (loss) reclassified from other comprehensive income into income is included in the table below for the periods indicated.



Derivatives Designated as Hedging Instruments under FASB ASC 815-10	Location of Gain (Loss) Recognized Income on Derivative	Amount of Gain (Loss) Reclassed from Other Comprehensive Income into Income (Effective Portion)
	Location of Gain (Loss) Recognized Income on Derivative	Three Months Ended March 31, 2018			Three Months Ended March 31, 2017
Interest rate contracts	Interest Expense	$	(170	)	$	(268	)

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

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Credit-risk-related Contingent Features

The Corporation has agreements with certain of its derivative counterparties that contain a provision where if the Corporation fails to maintain its status as a well or adequately capitalized institution, then the Corporation could be required to terminate or fully collateralize all outstanding derivative contracts. Additionally, the Corporation has agreements with certain of its derivative counterparties that contain a provision where if the Corporation defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Corporation could also be declared in default on its derivative obligations. As of March 31, 2018, the termination value of derivatives in a net liability position related to these agreements was $1,068,000. As of March 31, 2018, the Corporation has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $3,315,000. If the Corporation had breached any of these provisions at March 31, 2018, it could have been required to settle its obligations under the agreements at their termination value.

NOTE 9

DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

The Corporation used fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The accounting guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 applies only when other guidance requires or permits assets or liabilities to be measured at fair value; it does not expand the use of fair value in any new circumstances.

As defined in ASC 820, fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants. It represents an exit price at the measurement date. Market participants are buyers and sellers, who are independent, knowledgeable, and willing and able to transact in the principal (or most advantageous) market for the asset or liability being measured. Current market conditions, including imbalances between supply and demand, are considered in determining fair value. The Corporation values its assets and liabilities in the principal market where it sells the particular asset or transfers the liability with the greatest volume and level of activity. In the absence of a principal market, the valuation is based on the most advantageous market for the asset or liability (i.e., the market where the asset could be sold or the liability transferred at a price that maximizes the amount to be received for the asset or minimizes the amount to be paid to transfer the liability).

Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability. Inputs can be observable or unobservable. Observable inputs are those assumptions which market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained from a source independent of the Corporation. Unobservable inputs are assumptions based on the Corporation’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date. All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy which gives the highest ranking to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs for which there is little or no market activity (Level 3). Fair values for assets or liabilities classified as Level 2 are based on one or a combination of the following factors: (i) quoted prices for similar assets; (ii) observable inputs for the asset or liability, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Corporation considers an input to be significant if it drives 10 percent or more of the total fair value of a particular asset or liability.

RECURRING MEASUREMENTS

Assets and liabilities are considered to be measured at fair value on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly or quarterly). Recurring valuation occurs at a minimum on the measurement date. Assets and liabilities are considered to be measured at fair value on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements which require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value. The fair value of assets or liabilities transferred in or out of Level 3 is measured on the transfer date, with any additional changes in fair value subsequent to the transfer considered to be realized or unrealized gains or losses.

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying Consolidated Condensed Balance Sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Investment Securities

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. The Corporation currently has no securities classified within Level 1 of the hierarchy. Where significant observable inputs, other than Level 1 quoted prices, are available, securities are classified within Level 2 of the valuation hierarchy. Level 2 securities include government-sponsored mortgage backs and state and municipal securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include state and municipal, government-sponsored mortgage backs and corporate obligations securities. Level 3 fair value for securities was determined using a discounted cash flow model that incorporated market estimates of interest rates and volatility in markets that have not been active.

Third party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. Any investment security not valued based upon the methods above are considered Level 3.

Interest Rate Derivative Agreements

See information regarding the Corporation’s interest rate derivative products in NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS of these Notes to Consolidated Condensed Financial Statements. The following table presents the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the ASC 820-10 fair value hierarchy in which the fair value measurements fall at March 31, 2018, and December 31, 2017.



			Fair Value Measurements Using:
March 31, 2018	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities:
U.S. Government-sponsored agency securities	$	6,498		$	6,498
State and municipal	510,234			506,303		$	3,931
U.S. Government-sponsored mortgage-backed securities	487,036			487,032		4
Corporate obligations	31					31
Interest rate swap asset	11,376			11,376
Interest rate cap	258			258
Interest rate swap liability	12,065			12,065



			Fair Value Measurements Using:
December 31, 2017	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities:
State and municipal	$	526,693		$	522,750	$	3,943
U.S. Government-sponsored mortgage-backed securities	470,866			470,866
Corporate obligations	31					31
Equity securities	2,357			2,353		4
Interest rate swap asset	7,305			7,305
Interest rate cap	18			18
Interest rate swap liability	8,688			8,688

Level 3 Reconciliation

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the Consolidated Condensed Balance Sheets using significant unobservable (Level 3) inputs for the three months ended March 31, 2018 and 2017.



	Available for Sale Securities
	Three Months Ended
	March 31, 2018			March 31, 2017
Balance at beginning of the period	$	3,978		$	5,169
Included in other comprehensive income	(25		)	11
Principal payments	13			(1,901		)
Ending balance	$	3,966		$	3,279

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

There were no gains or losses for the period included in earnings that were attributable to the changes in unrealized gains or losses related to assets or liabilities held at March 31, 2018 or December 31, 2017.

Transfers Between Levels

There were no transfers in or out of Level 3 for the three months ended March 31, 2018 and 2017.

Nonrecurring Measurements

Following is a description of valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy for March 31, 2018, and December 31, 2017.



			Fair Value Measurements Using
March 31, 2018	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Impaired loans (collateral dependent)	$	7,833			$	7,833
Other real estate owned	119				119



			Fair Value Measurements Using
December 31, 2017	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Impaired loans (collateral dependent)	$	9,576			$	9,576
Other real estate owned	859				859

Impaired Loans (collateral dependent)

Loans for which it is probable that the Corporation will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value of the collateral for collateral dependent loans. If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to increase, such increase is reported as a component of the provision for loan losses. Loan losses are charged against the allowance when management believes the uncollectability of the loan is confirmed. During 2017 and 2018, certain impaired loans were partially charged off or re-evaluated. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Other Real Estate Owned

The fair value for impaired loans and other real estate owned is measured based on the value of the collateral securing those loans or real estate and is determined using several methods. The fair value of real estate is generally determined based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a discounted cash flow analysis. Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or some combination of, asset appraisals, accounts receivable aging reports, inventory listings and or customer financial statements. Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements, other than goodwill, at March 31, 2018 and December 31, 2017.



March 31, 2018	Fair Value		Valuation Technique	Unobservable Inputs	Range (Weighted-Average)
State and municipal securities	$	3,931	Discounted cash flow	Maturity/Call date	1 month to 20 yrs
				US Muni BQ curve	A- to BBB-
				Discount rate	1% - 5%

Corporate obligations and U.S. Government-sponsored mortgage backed securities	$	35	Discounted cash flow	Risk free rate	3 month LIBOR
				plus premium for illiquidity	plus 200bps

Impaired loans (collateral dependent)	$	7,833	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	0% - 10% (1%)

Other real estate owned	$	119	Appraisals	Discount to reflect current market conditions	0% - 24% (24%)



December 31, 2017	Fair Value		Valuation Technique	Unobservable Inputs	Range (Weighted-Average)
State and municipal securities	$	3,943	Discounted cash flow	Maturity/Call date	1 month to 20 yrs
				US Muni BQ curve	A- to BBB-
				Discount rate	.69% - 5%

Corporate obligations and equity securities	$	35	Discounted cash flow	Risk free rate	3 month LIBOR
				plus premium for illiquidity	plus 200bps

Impaired loans (collateral dependent)	$	9,576	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	0% - 10% (1%)

Other real estate owned	$	859	Appraisals	Discount to reflect current market conditions	0% - 10% (2%)

The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.

State and Municipal Securities, Corporate Obligations, U.S. Government-sponsored Mortgage Backed and Equity Securities

The significant unobservable inputs used in the fair value measurement of the Corporation's state and municipal securities, corporate obligations and U.S. Government-sponsored mortgage backed securities are premiums for unrated securities and marketability discounts. Significant increases or decreases in either of those inputs in isolation would result in a significantly lower or higher fair value measurement. Generally, changes in either of those inputs will not affect the other input.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Fair Value of Financial Instruments

The following table presents estimated fair values of the Corporation’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2018, and December 31, 2017.



			March 31, 2018
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying Amount		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and cash equivalents	$	128,828	$	128,828
Interest-bearing time deposits	24,233		24,233
Investment securities available for sale	1,003,799				$	999,833	$	3,966
Investment securities held to maturity	540,021				527,253		11,146
Loans held for sale	4,469				4,469
Loans	6,825,276						6,649,237
Federal Home Loan Bank stock	24,588				24,588
Interest rate swap and cap asset	11,634				11,634
Interest receivable	35,223				35,223
Liabilities:
Deposits	$	7,327,635	$	5,849,466	$	1,450,066
Borrowings:
Federal funds purchased	50,000				50,000
Securities sold under repurchase agreements	138,910				138,770
Federal Home Loan Bank advances	449,419				443,804
Subordinated debentures and term loans	138,297				123,485
Interest rate swap liability	12,065				12,065
Interest payable	5,376				5,376



			December 31, 2017
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying Amount		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and cash equivalents	$	154,905	$	154,905
Interest-bearing time deposits	35,027		35,027
Investment securities available for sale	999,947				$	995,969	$	3,978
Investment securities held to maturity	560,655				556,305		11,903
Loans held for sale	7,216				7,216
Loans	6,676,167						6,534,877
Federal Home Loan Bank stock	23,825				23,825
Interest rate swap and cap asset	7,323				7,323
Interest receivable	37,130				37,130
Liabilities:
Deposits	$	7,172,530	$	5,741,019	$	1,406,526
Borrowings:
Federal funds purchased	144,038				144,038
Securities sold under repurchase agreements	136,623				136,562
Federal Home Loan Bank advances	414,377				361,085
Subordinated debentures and term loans	139,349				120,085
Interest rate swap liability	8,688				8,688
Interest payable	4,390				4,390

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

The following methods were used to estimate the fair value of all other financial instruments recognized in the Consolidated Condensed Balance

Sheets at amounts other than fair value.

Cash and cash equivalents: The fair value of cash and cash equivalents approximates carrying value.

Interest-bearing time deposits: The fair value of interest-bearing time deposits approximates carrying value.

Investment securities: Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted prices for similar securities. The fair values of certain Level 3 securities were estimated using discounted cash flow analyses, using interest rates currently being offered on investments with similar maturities and investment quality.

Loans held for sale: The carrying amount approximates fair value due to the short duration between origination and date of sale.

Loans: For March 31, 2018, fair values of loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. This is not comparable with the fair values disclosed for December 31, 2017, which were based on an entrance price basis. For that date, fair values of variable rate loans that reprice frequently and with no significant change in credit risk were based on carrying values. The fair values of other loans as of that date were estimated using discounted cash flow analyses which used interest rates then being offered for loans with similar terms to borrowers of similar credit quality.

Federal Home Loan Bank stock: The fair value of Federal Home Loan Bank stock is based on the price which it may be resold to the Federal Home Loan Bank.

Derivative instruments: The fair value of interest rate swaps reflects the estimated amounts that would have been received to terminate these contracts at the reporting date based upon pricing or valuation models applied to current market information. Interest rate caps are valued using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rose above the strike rate of the caps. The projected cash receipts on the caps are based on an expectation of future interest rates derived from observed market interest rate curves and volatilities.

Interest receivable and Interest payable: The fair value of interest receivable and payable approximates carrying value.

Deposits: The fair values of noninterest-bearing and interest-bearing demand accounts and savings deposits are equal to the amount payable on demand at the balance sheet date. The carrying amounts for variable rate, fixed-term certificates of deposit approximate their fair values at the balance sheet date. Fair values for fixed-rate certificates of deposit and other time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of aggregated expected monthly maturities on such time deposits.

Borrowings: The fair value of federal funds purchased approximates the carrying amount. The fair value of all other borrowings is estimated using a discounted cash flow calculation, based on current rates for similar debt.

NOTE 10

TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS

The collateral pledged for all repurchase agreements that are accounted for as secured borrowings as of March 31, 2018 and December 31, 2017 were:



	March 31, 2018
	Remaining Contractual Maturity of the Agreements
	Overnight and Continuous		Up to 30 Days		30-90 Days	Greater Than 90 Days		Total
U.S. Government-sponsored mortgage-backed securities	$	129,490	$	300		$	9,120	$	138,910



	December 31, 2017
	Remaining Contractual Maturity of the Agreements
	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater Than 90 Days		Total
U.S. Government-sponsored mortgage-backed securities	$	126,187	$	1,340	$	1,500	$	7,596	$	136,623

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 11

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, as of March 31, 2018 and 2017:



	Accumulated Other Comprehensive Income (Loss)
	Unrealized Gains (Losses) on Securities Available for Sale			Unrealized Gains (Losses) on Cash Flow Hedges			Unrealized Gains (Losses) on Defined Benefit Plans			Total
Balance at December 31, 2017	$	8,970		$	(1,125	)	$	(10,753	)	$	(2,908	)
Other comprehensive income before reclassifications	(17,698		)	644						(17,054		)
Amounts reclassified from accumulated other comprehensive income	(1,271		)	134						(1,137		)
Period change	(18,969		)	778			—			(18,191		)
Reclassification adjustment under ASU 2018-02	1,932			(242		)	(2,316		)	(626		)
Balance at March 31, 2018	$	(8,067	)	$	(589	)	$	(13,069	)	$	(21,725	)


Balance at December 31, 2016	$	1,035		$	(1,774	)	$	(12,842	)	$	(13,581	)
Other comprehensive income before reclassifications	10,110			23						10,133
Amounts reclassified from accumulated other comprehensive income	(389		)	174			(59		)	(274		)
Period change	9,721			197			(59		)	9,859
Balance at March 31, 2017	$	10,756		$	(1,577	)	$	(12,901	)	$	(3,722	)

The following tables present the reclassification adjustments out of accumulated other comprehensive income (loss) that were included in net income in the Consolidated Condensed Statements of Income for the three months ended March 31, 2018 and 2017.



	Amount Reclassified from Accumulated Other Comprehensive Income (Loss) For the Three Months Ended March 31,
Details about Accumulated Other Comprehensive Income (Loss)Components	2018			2017			Affected Line Item in the Statements of Income
Unrealized gains (losses) on available for sale securities ⁽¹⁾
Realized securities gains reclassified into income	$	1,609		$	598		Other income - net realized gains on sales of available for sale securities
Related income tax expense	(338		)	(209		)	Income tax expense
	$	1,271		$	389

Unrealized gains (losses) on cash flow hedges ⁽²⁾
Interest rate contracts	$	(170	)	$	(268	)	Interest expense - subordinated debentures and term loans
Related income tax benefit	36			94			Income tax expense
	$	(134	)	$	(174	)

Unrealized gains (losses) on defined benefit plans
Amortization of prior service costs				$	91		Other expenses - salaries and employee benefits
Related income tax expense				(32		)	Income tax expense
	$	—		$	59

Total reclassifications for the period, net of tax	$	1,137		$	274

⁽¹⁾For additional detail related to unrealized gains (losses) on available for sale securities and related amounts reclassified from accumulated other comprehensive income see NOTE 3. INVESTMENT SECURITIES of these Notes to Consolidated Condensed Financial Statements.

⁽²⁾ For additional detail related to unrealized gains (losses) on cash flow hedges and related amounts reclassified from accumulated other comprehensive income see NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS of these Notes to Consolidated Condensed Financial Statements.

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 12

SHARE-BASED COMPENSATION

Stock options and RSAs have been issued to directors, officers and other management employees under the Corporation's 1999 Long-term Equity Incentive Plan and the 2009 Long-term Equity Incentive Plan. The stock options, which have a ten year life, become 100 percent vested ranging from six months to two years and are fully exercisable when vested. Option exercise prices equal the Corporation's common stock closing price on NASDAQ on the date of grant. RSAs issued to employees and non-employee directors provide for the issuance of shares of the Corporation's common stock at no cost to the holder and generally vest after three years. The RSAs vest only if the employee is actively employed by the Corporation on the vesting date and, therefore, any unvested shares are forfeited. For non-employee directors, the RSAs vest only if the non-employee director remains as an active board member on the vesting date and, therefore, any unvested shares are forfeited. RSAs for employees and non-employee directors retired from the Corporation are either immediately vested at retirement or continue to vest after retirement, depending on the plan under which the shares were granted. Deferred Stock Units ("DSU") can be credited to non-employee directors who have elected to defer payment of compensation under the Corporation's 2008 Equity Compensation Plan for Non-employee Directors. DSUs credited are equal to the restricted shares that the non-employee director would have received under the plan. As of March 31, 2018, there were no outstanding DSUs.

The Corporation’s 2009 ESPP provides eligible employees of the Corporation and its subsidiaries an opportunity to purchase shares of common stock of the Corporation through quarterly offerings financed by payroll deductions. The price of the stock to be paid by the employees shall be equal to 85 percent of the average of the closing price of the Corporation’s common stock on each trading day during the offering period. However, in no event shall such purchase price be less than the lesser of an amount equal to 85 percent of the market price of the Corporation’s stock on the offering date or an amount equal to 85 percent of the market value on the date of purchase. Common stock purchases are made quarterly and are paid through advance payroll deductions up to a calendar year maximum of $25,000.

Compensation expense related to unvested share-based awards is recorded by recognizing the unamortized grant date fair value of these awards over the remaining service periods of those awards, with no change in historical reported fair values and earnings. Awards are valued at fair value in accordance with provisions of share-based compensation guidance and are recognized on a straight-line basis over the service periods of each award. To complete the exercise of vested stock options, RSA’s and ESPP options, the Corporation generally issues new shares from its authorized but unissued share pool. Share-based compensation for the three months ended March 31, 2018 was $875,000 compared to $573,000 for the three months ended March 31, 2017. Share-based compensation has been recognized as a component of salaries and benefits expense in the accompanying Consolidated Condensed Statements of Income.

Share-based compensation expense recognized in the Consolidated Condensed Statements of Income is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Share-based compensation guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated to be approximately 2.2 percent for the three months ended March 31, 2018, based on historical experience.

The following table summarizes the components of the Corporation's share-based compensation awards recorded as expense and the income tax benefit of such awards.



	Three Months Ended March 31,
	2018			2017
Stock and ESPP Options
Pre-tax compensation expense	$	24		$	48
Income tax benefit	(59		)	(246		)
Stock and ESPP option expense, net of income taxes	$	(35	)	$	(198	)
Restricted Stock Awards
Pre-tax compensation expense	$	851		$	525
Income tax benefit	(566		)	(710		)
Restricted stock awards expense, net of income taxes	$	285		$	(185	)
Total Share-Based Compensation
Pre-tax compensation expense	$	875		$	573
Income tax benefit	(625		)	(956		)
Total share-based compensation expense, net of income taxes	$	250		$	(383	)

As of March 31, 2018, unrecognized compensation expense related to RSAs was $5,436,000 and is expected to be recognized over a weighted-average period of 1.65 years. The Corporation did not have any unrecognized compensation expense related to stock options as of March 31, 2018.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Stock option activity under the Corporation's stock option plans as of March 31, 2018 and changes during the three months ended March 31, 2018, were as follows:



	Number of Shares		Weighted-Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2018	152,652		$	16.71
Exercised	(23,557	)	$	22.71
Cancelled	(200	)	$	28.25
Outstanding March 31, 2018	128,895		$	15.59	2.45	$	3,365,525
Vested and Expected to Vest at March 31, 2018	128,895		$	15.59	2.45	$	3,365,525
Exercisable at March 31, 2018	128,895		$	15.59	2.45	$	3,365,525

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Corporation's closing stock price on the last trading day of the first three months of 2018 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their stock options on March 31, 2018. The amount of aggregate intrinsic value will change based on the fair market value of the Corporation's common stock.

The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2018 and 2017 was $473,000 and $1,823,000, respectively. Cash receipts of stock options exercised during this same period were $535,000 and $1,314,000, respectively.

The following table summarizes information on unvested RSAs outstanding as of March 31, 2018:



	Number of Shares		Weighted-Average Grant Date Fair Value
Unvested RSAs at January 1, 2018	366,993		$	29.79
Granted	4,687		$	42.11
Vested	(93,076	)	$	22.91
Forfeited	(140	)	$	22.87
Unvested RSAs at March 31, 2018	278,464		$	32.31

The grant date fair value of ESPP options was estimated at the beginning of the January 1, 2018 quarterly offering period of approximately $24,200. The ESPP options vested during the three months ending March 31, 2018, leaving no unrecognized compensation expense related to unvested ESPP options at March 31, 2018.

NOTE 13

INCOME TAX

The following table summarizes the major components creating differences between income taxes at the federal statutory and the effective tax rate recorded in the consolidated statements of income for the three months ended March 31, 2018 and 2017:



	Three Months Ended March 31,
	2018			2017
Reconciliation of Federal Statutory to Actual Tax Expense:
Federal statutory income tax at 21% for 2018 and 35% for 2017	$	9,091		$	10,627
Tax-exempt interest income	(2,015		)	(2,549		)
Share-based compensation	(441		)	(755		)
Tax-exempt earnings and gains on life insurance	(247		)	(314		)
Tax credits	39			(106		)
Other	184			265
Actual Tax Expense	$	6,611		$	7,168

Effective Tax Rate	15.3		%	23.6		%

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 14

NET INCOME PER SHARE

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

The following table reconciles basic and diluted net income per share for the three months ended March 31, 2018 and 2017.



	Three Months Ended March 31,
	2018					2017
	Net Income		Weighted-Average Shares	Per Share Amount		Net Income		Weighted-Average Shares	Per Share Amount
Net income available to common stockholders	$	36,679	49,192,647	$	0.75	$	23,193	40,984,481	$	0.57
Effect of potentially dilutive stock options and restricted stock awards			235,325					236,105
Diluted net income per share	$	36,679	49,427,972	$	0.74	$	23,193	41,220,586	$	0.56

For the three months ended March 31, 2018 and 2017, there were no stock options with an option price greater than the average market price of

the common shares.

NOTE 15

IMPACT OF ACCOUNTING CHANGES

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

FASB Accounting Standards Update No. 2017-12 - Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities

Summary - The FASB has issued an Accounting Standards Update (ASU) No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The new standard is intended to improve and simplify accounting rules around hedge accounting. The ASU is effective for public companies in 2019 and private companies in 2020. Early adoption is permitted.

The new standard refines and expands hedge accounting for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes, for investors and analysts.

The new standard takes effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, for public companies and for fiscal years beginning after December 15, 2019 (and interim periods for fiscal years beginning after December 15, 2020), for private companies. Early adoption is permitted in any interim period or fiscal years before the effective date of the standard. The Corporation plans to adopt ASU 2017-12 in the first quarter of 2019.

ASU 2017-12 requires a modified retrospective transition method in which the Corporation will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. While the Corporation continues to assess all potential impacts of the standard, adoption of the standard is not expected to have a significant effect on the Corporation’s consolidated financial statements.

FASB Accounting Standards Update No. 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities

Summary - The FASB has 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 shortens the amortization period for certain callable debt securities held at a premium to the earliest call date.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Under current GAAP, entities normally amortize the premium as an adjustment of yield over the contractual life of the instrument. Stakeholders have expressed concerns with the current approach on the basis that current GAAP excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. Further, there is 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 is factored into current impairment assessments. Another issue is that the practice in the United States is to quote, price, and trade callable debt securities assuming a model that incorporates consideration of calls (also referred to as “yield-to-worst” pricing).

The ASU shortens the amortization period for certain callable debt securities held at a premium and requires the premium to be amortized to the earliest call date. However, the amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.

The amendments are effective for public business entities for annual periods beginning after December 15, 2018, including interim periods within those annual periods. For other entities, the amendments are effective for annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020. Early adoption is permitted.

Entities are required to apply the amendments on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The entity is required to provide disclosures about a change in accounting principle in the period of adoption. The Corporation plans to adopt ASU 2017-08 in the first quarter of 2019. Adoption of this ASU is not expected to have a significant effect on the Corporation’s consolidated financial statements.

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

Summary - The FASB 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 purchased vendor software and is currently in the implementation process. The implementation team meets on a regular basis to oversee activities and monitor progress. Methodologies are still being evaluated at this time so 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.

FASB Accounting Standards Update No. 2016-02 - Leases (Topic 842)

Summary - The FASB has issued its new lease accounting guidance in Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to 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 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 will no longer be provided with a source of off-balance sheet financing.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Nonpublic business entities should apply the amendments for fiscal years beginning after December 15, 2019 (i.e., January 1, 2020, for a calendar year entity), and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted for all public business entities and all nonpublic business entities upon issuance.

Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Corporation plans to adopt this ASU in the first quarter of 2019. The Corporation has an implementation team working through the provisions of ASU 2016-02, including a review of all leases (primarily operating leases related to banking centers and office space) to assess the impact on accounting, disclosures and the election of certain practical expedients. The Corporation has selected a third party software solution to assist with the accounting under the new standard. The Corporation expects a one-time adjustment to other assets and other liabilities on the consolidated balance sheet will occur during the first quarter of 2019. The magnitude of any such adjustment or the overall impact of the new standard on financial condition, results of operations and regulatory capital is being evaluated.

NOTE 16

GENERAL LITIGATION AND REGULATORY EXAMINATIONS

The Corporation is subject to claims and lawsuits that arise primarily in the ordinary course of business. Additionally, the Corporation is subject to periodic examinations by various regulatory agencies. It is the opinion of management that the disposition or ultimate resolution of such claims, lawsuits, and examinations will not have a material adverse effect on the consolidated financial position, results of operations and cash flow of the Corporation.

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

From time to time, we include forward-looking statements in our oral and written communication. We may include forward-looking statements in filings with the Securities and Exchange Commission, such as this Quarterly Report on Form 10-Q, in other written materials and in oral statements made by senior management to analysts, investors, representatives of the media and others. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of these safe harbor provisions. Forward-looking statements can often be identified by the use of words like “believe”, “continue”, “pattern”, “estimate”, “project”, “intend”, “anticipate”, “expect” and similar expressions or future or conditional verbs such as “will”, “would”, “should”, “could”, “might”, “can”, “may”, or similar expressions. These forward-looking statements include:


•	statements of our goals, intentions and expectations;


•	statements regarding our business plan and growth strategies;


•	statements regarding the asset quality of our loan and investment portfolios; and


•	estimates of our risks and future costs and benefits.

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


•	fluctuations in market rates of interest and loan and deposit pricing, which could negatively affect our net interest margin, asset valuations and expense expectations;


•	adverse changes in the economy, which might affect our business prospects and could cause credit-related losses and expenses;


•	adverse developments in our loan and investment portfolios;


•	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;


•	changes in market, economic, operational, liquidity, credit and interest rate risks associated with our business; and


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

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our anticipated future results.

CRITICAL ACCOUNTING POLICIES

Generally accepted accounting principles are complex and require us to apply significant judgments to various accounting, reporting and disclosure matters. We must use assumptions and estimates to apply those principles where actual measurement is not possible or practical. For a complete discussion of our significant accounting policies, see “Notes to the Consolidated Financial Statements” in our Annual Report on Form 10-K for the year ended December 31, 2017. 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. We have reviewed the application of these policies with the Audit Committee of our Board of Directors.

We believe there have been no significant changes during the three months ended March 31, 2018, to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2017.

BUSINESS SUMMARY

First Merchants Corporation (the “Corporation”) is a financial holding company headquartered in Muncie, Indiana and was organized in September 1982. The Corporation’s Common Stock is traded on NASDAQ’s Global Select Market System under the symbol FRME. The Corporation has one full-service bank charter, First Merchants Bank (the “Bank”), which opened for business in Muncie, Indiana, in March 1893. The Bank also operates Lafayette Bank and Trust and First Merchants Private Wealth Advisors as divisions of First Merchants Bank. The Bank includes 118 banking locations in thirty-one Indiana, two Illinois and two Ohio counties. In addition to its traditional branch network, the Corporation offers comprehensive electronic and mobile delivery channels to its customers. The Corporation’s business activities are currently limited to one significant business segment, which is community banking.

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

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Executive Summary

The Corporation reported first quarter 2018 net income of $36.7 million, compared to $23.2 million during the first quarter of 2017. Diluted earnings per share for the period totaled $.74 per share, compared to $.56 per diluted share during the same period in 2017, an increase of 32.1 percent. The increase in net income was driven by several key factors including strong core banking performance, two acquisitions that were fully integrated during the second half of 2017 and the impact of tax reform.

As of March 31, 2018, total assets equaled $9.5 billion, an increase of $105.3 million from December 31, 2017. The Corporation's total loan portfolio increased $147.8 million, or 8.7 percent annualized, from December 31, 2017. The largest loan segments that experienced increases were commercial and farmland and commercial and industrial. Additional details of the changes in the Corporation's loans and other earning assets are discussed within NOTE 4. LOANS AND ALLOWANCE, of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q, and the "EARNING ASSETS" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

The Corporation’s allowance for loan losses totaled $76.4 million as of March 31, 2018. The allowance provided 277.9 percent coverage of all non-accrual loans and 1.11 percent of total loans. The Corporation's provision expense for the three months ended March 31, 2018 was $2.5 million, an increase of $115,000 compared to the same period in 2017. Additional details are discussed within the “LOAN QUALITY/PROVISION FOR LOAN LOSSES” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

As of March 31, 2018, total deposits equaled $7.3 billion, an increase of $155 million from December 31, 2017. Total borrowings decreased $57.8 million as of March 31, 2018, compared to December 31, 2017, primarily as federal funds purchased decreased $94.0 million, offset by an increase in Federal Home Loan Bank advances of $35.0 million.

The Corporation was able to maintain all regulatory capital ratios in excess of the regulatory definition of “well-capitalized” as discussed in the “CAPITAL” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

NET INTEREST INCOME

Net interest income is the most significant component of our earnings, comprising 80 percent of revenues for the three months ended March 31, 2018. Net interest income and margin are influenced by many factors, primarily the volume and mix of earnings assets, funding sources, and interest rate fluctuations. Other factors include the level of accretion income on purchased loans, prepayment risk on mortgage and investment-related assets, and the composition and maturity of earning assets and interest-bearing liabilities. Loans typically generate more interest income than investment securities with similar maturities. Funding from customer deposits generally costs less than wholesale funding sources. Factors such as general economic activity, Federal Reserve Board monetary policy, and price volatility of competing alternative investments, can also exert significant influence on our ability to optimize the mix of assets and funding and the net interest income and margin.

Net interest income is the excess of interest received from earning assets over interest paid on interest-bearing liabilities. For analytical purposes, net interest income is also presented on an FTE basis in the table that follows to reflect what our tax-exempt assets would need to yield in order to achieve the same after-tax yield as a taxable asset. The federal statutory rate in effect of 21 percent and 35 percent were used for 2018 and 2017, respectively, adjusted for the TEFRA interest disallowance applicable to certain tax-exempt obligations. The lower effective income tax rate during the three months ended March 31, 2018 when compared to the same period in 2017 was primarily the result of the Tax Cuts and Jobs Act (TCJA) enacted on December 22, 2017. This analysis portrays the income tax benefits associated with tax-exempt assets and helps to facilitate a comparison between taxable and tax-exempt assets. Management believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully taxable equivalent basis. Therefore, management believes these measures provide useful information for both management and investors by allowing them to make peer comparisons.

For the period presented, the increase in net interest income was primarily driven by core organic loan growth and an increase in earning assets attributable to acquisitions of Arlington Bank in May 2017 and IAB in July 2017.

In the first quarter of 2018, asset yields increased 15 basis points FTE and interest costs increased 27 basis points, resulting in a 12 basis point FTE decrease in net interest spread as compared to the same period in 2017. Primarily as a result of organic loan growth and acquisitions, earning assets increased $1,888,492,000 in the first quarter of 2018 compared to the first quarter of 2017. The Corporation recognized fair value accretion income on purchased loans, which is included in interest income, of $3,158,000 and $4,293,000, respectively, for the three months ended March 31, 2018 and 2017. Net interest margin, on a tax equivalent basis, decreased to 3.92 percent for the first quarter of 2018 compared to 3.98 percent during the same period in 2017. Asset yields increased primarily as a result of the Federal Reserve's discount rate increases of 25 basis points at each of the Board's March, June and December 2017 meetings.

Additional details of the Corporation's acquisitions, remaining loan fair value discount, accretable and nonaccretable yield, and tax rate change can be found in NOTE 2. ACQUISITIONS, NOTE 5. PURCHASED CREDIT IMPAIRED LOANS, and NOTE 13. INCOME TAX of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table presents the Corporation’s average balance sheet, interest income/interest expense, and the average rate as a percent of average earning assets/liabilities for the three months ended March 31, 2018, and 2017.



(Dollars in Thousands)	Three Months Ended
	March 31, 2018							March 31, 2017
	Average Balance			Interest Income / Expense		Average Rate		Average Balance			Interest Income / Expense		Average Rate
Assets:
Interest-bearing time deposits	$	32,776		$	131	1.60	%	$	30,463		$	45	0.59	%
Federal Home Loan Bank stock	24,385			404		6.63		17,964			189		4.21
Investment Securities: ⁽¹⁾
Taxable	810,385			5,096		2.52		711,490			4,308		2.42
Tax-Exempt ⁽²⁾	736,544			7,754		4.21		586,525			7,697		5.25
Total Investment Securities	1,546,929			12,850		3.32		1,298,015			12,005		3.70
Loans held for sale	10,636			137		5.15		3,840			45		4.69
Loans: ⁽³⁾
Commercial	4,980,450			62,154		4.99		3,781,045			44,092		4.66
Real Estate Mortgage	728,725			7,999		4.39		545,148			6,121		4.49
Installment	623,429			7,977		5.12		532,128			6,098		4.58
Tax-Exempt ⁽²⁾	467,847			4,552		3.89		318,082			3,589		4.51
Total Loans	6,811,087			82,819		4.86		5,180,243			59,945		4.63
Total Earning Assets	8,415,177			96,204		4.57		6,526,685			72,184		4.42
Net unrealized gain (loss) on securities available for sale	(6,440		)					593
Allowance for loan losses	(75,851		)					(66,933		)
Cash and cash equivalents	126,484							104,017
Premises and equipment	95,525							93,018
Other assets	817,841							559,771
Total Assets	$	9,372,736						$	7,217,151
Liabilities:
Interest-bearing deposits:
Interest-bearing NOW deposits	$	1,980,141		$	2,689	0.54	%	$	1,512,839		$	838	0.22	%
Money market deposits	1,089,694			1,275		0.47		789,378			341		0.17
Savings deposits	945,940			381		0.16		776,519			156		0.08
Certificates and other time deposits	1,486,093			4,657		1.25		1,165,079			2,789		0.96
Total Interest-bearing Deposits	5,501,868			9,002		0.65		4,243,815			4,124		0.39
Borrowings	848,208			4,702		2.22		664,921			3,111		1.87
Total Interest-bearing Liabilities	6,350,076			13,704		0.86		4,908,736			7,235		0.59
Noninterest-bearing deposits	1,651,296							1,346,542
Other liabilities	62,560							47,811
Total Liabilities	8,063,932							6,303,089
Stockholders' Equity	1,308,804							914,062
Total Liabilities and Stockholders' Equity	$	9,372,736		13,704				$	7,217,151		7,235
Net Interest Income (FTE)				$	82,500						$	64,949
Net Interest Spread (FTE)						3.71	%						3.83	%

Net Interest Margin (FTE):
Interest Income (FTE) / Average Earning Assets						4.57	%						4.42	%
Interest Expense / Average Earning Assets						0.65	%						0.44	%
Net Interest Margin (FTE)						3.92	%						3.98	%

⁽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 and 35 percent for 2018 and 2017, respectively. These totals equal $2,584 and $3,950 for the three months ended March 31, 2018 and 2017, respectively.
⁽³⁾Non-accruing loans have been included in the average balances.

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NON-INTEREST INCOME

Non-interest income increased $4.7 million, or 31.8 percent, in the first quarter of 2018, compared to the first quarter of 2017. The larger customer base resulting from the Arlington Bank and IAB acquisitions, as well as organic growth, contributed to an increase in service charges on deposit accounts, fiduciary and wealth management fees, other customer fees and net gains and fees on sales of loans of $2.5 million in the first quarter of 2018 when compared to the same period in 2017. Details of the Corporation's 2017 acquisitions can be found in NOTE 2. ACQUISITIONS of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

Additionally, the first quarter of 2018 contained increases of $1.0 million and $948,000 in net realized gains on sales of available for sale securities and other income, respectively, when compared to the first quarter of 2017. The increase in other income was driven by a $555,000 increase in derivative hedge income associated with the Corporation's loan level hedge product.

NON-INTEREST EXPENSE

Non-interest expense increased $10.6 million, or 24.6 percent, in the first quarter of 2018, compared to the first quarter of 2017. The acquisitions of Arlington Bank and IAB were the largest contributing factor to the increase. The significantly larger franchise and growth in our customer base resulted in increases in most non-interest expense categories with the largest increases in salaries and employee benefits, net occupancy, equipment, and other expenses. Additionally, intangible asset amortization increased $823,000 due to amortization related to the Arlington Bank and IAB intangibles.

Offsetting the increases noted above, the Corporation continued to experience moderate other real estate owned and foreclosure expenses as the category declined $129,000 from the same period in 2017. Likewise, the Corporation incurred $193,000 less in professional and other outside services in the first quarter of 2018.

INCOME TAXES

Income tax expense for the three months ended March 31, 2018 was $6,611,000 on pre-tax net income of $43,290,000. For the same period in 2017, income tax expense was $7,168,000 on pre-tax net income of $30,361,000. The effective income tax rate was 15.3 percent for the first quarter of 2018 and 23.6 percent for the first quarter of 2017.

The lower effective income tax rate during the three months ended March 31, 2018 when compared to the same period in 2017 was primarily the result of the Tax Cuts and Jobs Act (TCJA) enacted on December 22, 2017. Effective January 1, 2018, the TCJA made widespread changes to the U.S. tax law, including but not limited to: (1) permanently reducing the federal corporate tax rate from 35 percent to 21 percent, (2) modifying bonus depreciation to allow for full expensing of qualified property, and (3) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized.

The detailed reconciliation of federal statutory to actual tax expense is shown in NOTE 13. INCOME TAX of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

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 was effective for the Corporation on January 1, 2015. Basel III requires the Corporation and the Bank to maintain a minimum ratio of CET1 capital to risk weighted assets, as defined in the regulation. Under the new Basel III rules, in order to avoid limitations on capital distributions, including dividends, the Corporation must hold a capital conservation buffer above the adequately capitalized CET1 capital to risk-weighted assets ratio. The capital conservation buffer is being phased in from zero percent to 2.50 percent by 2019. As of January 1, 2018, the Corporation was required to hold a capital conservation buffer of 1.875 percent, which amount increases by 0.625 percent in 2019, the final year of the phase-in. Under Basel III, the Corporation and Bank elected to opt-out of including accumulated other comprehensive income in regulatory capital.

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As of March 31, 2018, the Bank met all capital adequacy requirements to be considered well capitalized. There is no threshold for well capitalized status for bank holding companies. The Corporation's and Bank's actual and required capital ratios as of March 31, 2018 and December 31, 2017 were as follows:



					Prompt Corrective Action Thresholds
	Actual				Adequately Capitalized				Well Capitalized
March 31, 2018	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total risk-based capital to risk-weighted assets
First Merchants Corporation	$	1,071,956	13.69	%	$	626,538	8.00	%	N/A		N/A
First Merchants Bank	1,040,331		13.19		631,163		8.00		$	788,954	10.00	%
Tier 1 capital to risk-weighted assets
First Merchants Corporation	$	930,536	11.88	%	$	469,904	6.00	%	N/A		N/A
First Merchants Bank	963,911		12.22		473,372		6.00		$	631,163	8.00	%
CET1 capital to risk-weighted assets
First Merchants Corporation	$	864,561	11.04	%	$	352,428	4.50	%	N/A		N/A
First Merchants Bank	963,911		12.22		355,029		4.50		$	512,820	6.50	%
Tier 1 capital to average assets
First Merchants Corporation	$	930,536	10.45	%	$	356,105	4.00	%	N/A		N/A
First Merchants Bank	963,911		10.84		355,546		4.00		$	444,432	5.00	%



					Prompt Corrective Action Thresholds
	Actual				Adequately Capitalized				Well Capitalized
December 31, 2017	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total risk-based capital to risk-weighted assets
First Merchants Corporation	$	1,048,757	13.69	%	$	612,848	8.00	%	N/A		N/A
First Merchants Bank	1,016,355		13.17		617,477		8.00		$	771,847	10.00	%
Tier 1 capital to risk weighted assets
First Merchants Corporation	$	908,725	11.86	%	$	459,636	6.00	%	N/A		N/A
First Merchants Bank	941,323		12.20		463,108		6.00		$	617,477	8.00	%
CET1 capital to risk-weighted assets
First Merchants Corporation	$	842,806	11.00	%	$	344,727	4.50	%	N/A		N/A
First Merchants Bank	941,323		12.20		347,331		4.50		$	501,700	6.50	%
Tier 1 capital to average assets
First Merchants Corporation	$	908,725	10.43	%	$	348,407	4.00	%	N/A		N/A
First Merchants Bank	941,323		10.83		347,794		4.00		$	434,742	5.00	%

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

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



	March 31, 2018						December 31, 2017
	First Merchants Corporation			First Merchants Bank			First Merchants Corporation			First Merchants Bank
Total Risk-Based Capital
Total Stockholders' Equity (GAAP)	$	1,313,073		$	1,414,109		$	1,303,463		$	1,404,303
Adjust for Accumulated Other Comprehensive (Income) Loss ⁽¹⁾	21,725			19,231			3,534			763
Less: Preferred Stock	(125		)	(125		)	(125		)	(125		)
Add: Qualifying Capital Securities	65,975						65,919
Less: Disallowed Goodwill and Intangible Assets	(467,518		)	(467,070		)	(464,066		)	(463,618		)
Less: Disallowed Deferred Tax Assets	(2,594		)	(2,234		)
Total Tier 1 Capital (Regulatory)	930,536			963,911			908,725			941,323
Qualifying Subordinated Debentures	65,000						65,000
Allowance for Loan Losses Includible in Tier 2 Capital	76,420			76,420			75,032			75,032
Total Risk-Based Capital (Regulatory)	$	1,071,956		$	1,040,331		$	1,048,757		$	1,016,355

Net Risk-Weighted Assets (Regulatory)	$	7,831,727		$	7,889,541		$	7,660,604		$	7,718,467
Average Assets	$	8,902,624		$	8,888,647		$	8,710,171		$	8,694,838

Total Risk-Based Capital Ratio (Regulatory)	13.69		%	13.19		%	13.69		%	13.17		%
Tier 1 Capital to Risk-Weighted Assets	11.88		%	12.22		%	11.86		%	12.20		%
Tier 1 Capital to Average Assets	10.45		%	10.84		%	10.43		%	10.83		%

CET1 Capital Ratio
Total Tier 1 Capital (Regulatory)	$	930,536		$	963,911		$	908,725		$	941,323
Less: Qualified Capital Securities	(65,975		)				(65,919		)
CET1 Capital (Regulatory)	$	864,561		$	963,911		$	842,806		$	941,323

Net Risk-Weighted Assets (Regulatory)	$	7,831,727		$	7,889,541		$	7,660,604		$	7,718,467
CET1 Capital Ratio (Regulatory)	11.04		%	12.22		%	11.00		%	12.20		%

⁽¹⁾ Includes net unrealized gains or losses on available for sale securities, net gains or losses on cash flow hedges, and amounts resulting from the application of the applicable accounting guidance for defined benefit and other postretirement plans.

Additionally, management believes the following tables are also meaningful when considering performance measures of the Corporation. Non-GAAP financial measures such as tangible common equity to tangible assets, return on average tangible capital and return on average tangible assets are important measures of the strength of the Corporation's capital and ability to generate earnings on tangible common equity invested by our shareholders. These non-GAAP measures provide useful supplemental information and may assist investors in analyzing the

Corporation’s financial position without regard to the effects of intangible assets and preferred stock. Disclosure of these measures also allows analysts and banking regulators to assess our capital adequacy on these same bases.

Because these measures are not defined in GAAP or federal banking regulations, they are considered non-GAAP financial measures. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Corporation had a strong capital position as evidenced by the tangible common equity to tangible assets ratio of 9.32 percent at March 31, 2018, and 9.30 percent at December 31, 2017.



	Tangible Common Equity to Tangible Assets (non-GAAP)
(Dollars in Thousands, Except Per Share Amounts)	March 31, 2018			December 31, 2017
Total Stockholders' Equity (GAAP)	$	1,313,073		$	1,303,463
Less: Cumulative preferred stock (GAAP)	(125		)	(125		)
Less: Intangible assets (GAAP)	(474,777		)	(476,503		)
Tangible common equity (non-GAAP)	$	838,171		$	826,835
Total assets (GAAP)	$	9,472,796		$	9,367,478
Less: Intangible assets (GAAP)	(474,777		)	(476,503		)
Tangible assets (non-GAAP)	$	8,998,019		$	8,890,975
Tangible common equity to tangible assets (non-GAAP)	9.32		%	9.30		%


Tangible common equity (non-GAAP)	$	838,171		$	826,835
Plus: Tax Benefit of intangibles (non-GAAP)	6,043			6,789
Tangible common equity, net of tax (non-GAAP)	$	844,214		$	833,624
Common Stock outstanding	49,243			49,158
December 31 - tangible book value - common (non-GAAP)	$	17.14		$	16.96

The following table details and reconciles tangible earnings per share, return on tangible capital and tangible assets to traditional GAAP measures for the three months ended March 31, 2018 and 2017.



	Three Months Ended March 31,
(Dollars in Thousands, Except Per Share Amounts)	2018			2017
Average goodwill (GAAP)	$	445,354		$	244,000
Average core deposit intangible (GAAP)	30,305			14,381
Average deferred tax on CDI (GAAP)	(6,225		)	(5,786		)
Intangible adjustment (non-GAAP)	$	469,434		$	252,595
Average stockholders' equity (GAAP)	$	1,308,804		$	914,062
Average cumulative preferred stock (GAAP)	(125		)	(125		)
Intangible adjustment (non-GAAP)	(469,434		)	(252,595		)
Average tangible capital (non-GAAP)	$	839,245		$	661,342
Average assets (GAAP)	$	9,372,736		$	7,217,151
Intangible adjustment (non-GAAP)	(469,434		)	(252,595		)
Average tangible assets (non-GAAP)	$	8,903,302		$	6,964,556
Net income available to common stockholders (GAAP)	$	36,679		$	23,193
CDI amortization, net of tax (GAAP)	1,364			587
Tangible net income available to common stockholders (non-GAAP)	$	38,043		$	23,780
Per Share Data:
Diluted net income available to common stockholders (GAAP)	$	0.74		$	0.56
Diluted tangible net income available to common stockholders (non-GAAP)	$	0.77		$	0.58
Ratios:
Return on average GAAP capital (ROE)	11.21		%	10.15		%
Return on average tangible capital	18.13		%	14.38		%
Return on average assets (ROA)	1.57		%	1.29		%
Return on average tangible assets	1.71		%	1.37		%

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.

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LOAN QUALITY/PROVISION FOR LOAN LOSSES

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

Loan Quality

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

At March 31, 2018, non-performing loans totaled $28,076,000, a decrease of $1,661,000 from December 31, 2017. Loans not accruing interest income totaled $27,497,000 at March 31, 2018, a decrease of $1,227,000 from December 31, 2017. The Corporation’s coverage ratio of allowance for loan losses to non-accrual loans increased from 261.2 percent at December 31, 2017 to 277.9 percent at March 31, 2018. Troubled debt restructures totaled $579,000 at March 31, 2018, a decrease of $434,000 from December 31, 2017. See additional information regarding the allowance for loan losses in the “Provision for Loan Losses” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Other real estate owned, totaling $9,698,000 at March 31, 2018, decreased $675,000 from December 31, 2017. For other real estate owned, current appraisals are obtained to determine fair value as management continues to aggressively market these real estate assets.

Impaired loans include loans deemed impaired according to the guidance set forth in ASC 310-10. Commercial loans under $250,000 and consumer loans, with the exception of troubled debt restructures, are not individually evaluated for impairment. A loan is deemed impaired when, based on current information or events, it is probable that all amounts due of principal and interest according to the contractual terms of the loan agreement will not be collected substantially within the contractual terms of the note. At March 31, 2018, impaired loans totaled $22,164,000, a decrease of $1,047,000 from the December 31, 2017 balance of $23,211,000. At March 31, 2018, a specific allowance for losses was not deemed necessary for impaired loans totaling $17,649,000 as there were no identified losses on these credits. An allowance of $1,317,000 was recorded for the remaining balance of these impaired loans totaling $4,515,000 and was included in the Corporation’s allowance for loan losses.

The Corporation's non-performing assets, which include non-accrual loans, renegotiated loans, and other real estate owned, plus accruing loans 90-days or more delinquent and impaired loans are presented in the table below.



(Dollars in Thousands)	March 31, 2018		December 31, 2017
Non-performing assets:
Non-accrual loans	$	27,497	$	28,724
Renegotiated loans	579		1,013
Non-performing loans (NPL)	28,076		29,737
Other real estate owned	9,698		10,373
Non-performing assets (NPA)	37,774		40,110
90+ days delinquent and still accruing	738		924
NPAs and 90+ days delinquent	$	38,512	$	41,034
Impaired Loans	$	22,164	$	23,211

The non-accrual balances in the table above include troubled debt loan restructures totaling $3,318,000 and $3,630,000 as of March 31, 2018 and December 31, 2017, respectively.

The composition of non-performing assets plus accruing loans 90-days or more delinquent is reflected in the following table.



(Dollars in Thousands)	March 31, 2018		December 31, 2017
Non-performing assets:
Commercial and industrial loans	$	3,728	$	3,278
Agricultural production financing and other loans to farmers	638		1,027
Real estate loans:
Construction	3,908		2,980
Commercial and farmland	20,812		20,382
Residential	7,802		11,051
Home equity	1,532		2,239
Individuals' loans for household and other personal expenditures	92		77
Non-performing assets plus 90+ days delinquent	$	38,512	$	41,034

Although the Corporation believes its underwriting and loan review procedures are appropriate for the various kinds of loans it makes, its results of operations and financial condition could be adversely affected in the event the quality of its loan portfolio declines. Deterioration in the economic environment including residential and commercial real estate values may result in increased levels of loan delinquencies and credit losses.

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Provision and Allowance for Loan Losses

The allowance for loan losses is maintained through the provision for loan losses, which is a charge against earnings. Based on management’s judgment as to the appropriate level of the allowance for loan losses, the amount provided in any period may be greater or less than net loan losses for the same period. The determination of the provision amount and the adequacy of the allowance in any period is based on management’s continuing review and evaluation of the loan portfolio, including an internally administered loan "watch" list and independent loan reviews. The evaluation also takes into consideration identified credit problems, portfolio growth, management's judgment as to the impact of current economic conditions on the portfolio and the possibility of losses inherent in the loan portfolio that are not specifically identified.

In conformance with ASC 805 and ASC 820, loans purchased after December 31, 2008 are recorded at the acquisition date fair value. Such loans are included in the allowance to the extent a specific impairment is identified that exceeds the fair value adjustment on an impaired loan. An allowance may also be necessary if the historical loss and environmental factor analysis indicates losses inherent in a purchased portfolio exceed the fair value adjustment on the portion of the purchased portfolio not deemed impaired.

At March 31, 2018, the allowance for loan losses was $76,420,000, an increase of $1,388,000 from December 31, 2017. As a percent of loans, the allowance was 1.11 percent at March 31, 2018 and December 31, 2017. The provision for loan losses for the three months ended March 31, 2018 was $2,500,000, and was primarily a result of organic loan growth during the period. Comparatively, the provision for loan losses for the three months ended March 31, 2017 was $2,385,000. Specific reserves on impaired loans decreased $320,000 from $1,637,000 at December 31, 2017, to $1,317,000 at March 31, 2018.

Net charge-offs totaling $1,112,000 were recognized for the three months ended March 31, 2018. Comparatively, the same period in 2017 had net charge-offs of $197,000. For the three months ended March 31, 2018 and March 31, 2017, there were no individual charge-offs or recoveries greater than $500,000. The distribution of the net charge-offs (recoveries) for the three months ended March 31, 2018 and 2017 are reflected in the following table:



	Three Months Ended March 31,
(Dollars in Thousands)	2018			2017
Net charge-offs:
Commercial and industrial loans	$	443		$	324
Agricultural production financing and other loans to farmers	47			45
Real estate loans:
Construction	2			6
Commercial and farmland	(280		)	(418		)
Residential	450			28
Home equity	340			160
Individuals' loans for household and other personal expenditures	110			52
Total net charge-offs	$	1,112		$	197

Management continually evaluates the commercial loan portfolio by including consideration of specific borrower cash flow analysis and estimated collateral values, types and amounts on non-performing loans, past and anticipated loan loss experience, changes in the composition of the loan portfolio, and the current condition and amount of loans outstanding. The determination of the provision for loan losses in any period is based on management’s continuing review and evaluation of the loan portfolio, and its judgment as to the impact of current economic conditions on the portfolio.

LIQUIDITY

Liquidity management is the process by which the Corporation ensures that adequate liquid funds are available for the holding company and its subsidiaries. These funds are necessary in order to meet financial commitments on a timely basis. These commitments include withdrawals by depositors, funding credit obligations to borrowers, paying dividends to stockholders, paying operating expenses, funding capital expenditures, and maintaining deposit reserve requirements. Liquidity is monitored and closely managed by the asset/liability committee.

The Corporation’s liquidity is dependent upon the receipt of dividends from the Bank, which is subject to certain regulatory limitations and access to other funding sources. Liquidity of the Bank is derived primarily from core deposit growth, principal payments received on loans, the sale and maturity of investment securities, net cash provided by operating activities, and access to other funding sources.

The principal source of asset-funded liquidity is investment securities classified as available for sale, the market values of which totaled $1,003,799,000 at March 31, 2018, an increase of $3,852,000, or 0.39 percent, from December 31, 2017. Securities classified as held to maturity that are maturing within a short period of time can also be a source of liquidity. Securities classified as held to maturity and that are maturing in one year or less totaled $18,366,000 at March 31, 2018. In addition, other types of assets such as cash and interest-bearing deposits with other banks, federal funds sold and loans maturing within one year are sources of liquidity.

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The most stable source of liability-funded liquidity for both the long-term and short-term is deposit growth and retention in the core deposit base. Federal funds purchased and securities sold under agreements to repurchase are also considered a source of liquidity. In addition, FHLB advances are utilized as funding sources. At March 31, 2018, total borrowings from the FHLB were $449,419,000. The Bank has pledged certain mortgage loans and investments to the FHLB. The total available remaining borrowing capacity from the FHLB at March 31, 2018 was $468,804,000.

In the normal course of business, the Bank is a party to a number of other off-balance sheet activities that contain credit, market and operational risk that are not reflected in whole or in part in our consolidated financial statements. Such activities include: traditional off-balance sheet credit-related financial instruments, commitments under operating leases and long-term debt.

The Bank provides customers with off-balance sheet credit support through loan commitments and standby letters of credit. Summarized credit-related financial instruments at March 31, 2018 are as follows:



(Dollars in Thousands)	March 31, 2018
Amounts of commitments:
Loan commitments to extend credit	$	2,608,044
Standby and commercial letters of credit	43,170
	$	2,651,214

Since many of the commitments are expected to expire unused or be only partially used, the total amount of unused commitments in the preceding table does not necessarily represent future cash requirements.

In addition to owned banking facilities, the Corporation has entered into a number of long-term leasing arrangements to support ongoing activities. The required payments under such commitments and borrowings at March 31, 2018 are as follows:



(Dollars in Thousands)	Remaining 2018		2019		2020		2021		2022		2023		2024 and after		ASC 805 fair value adjustments at acquisition			Total
Operating leases	$	2,321	$	3,617	$	3,490	$	3,215	$	3,090	$	2,607	$	12,608				$	30,948
Federal funds purchased	50,000																	50,000
Securities sold under repurchase agreements	138,910																	138,910
Federal Home Loan Bank advances	126,433		121,713		41,273		55,000		45,000		35,000		25,000					449,419
Subordinated debentures and term loans													142,322		(4,025		)	138,297
Total	$	317,664	$	125,330	$	44,763	$	58,215	$	48,090	$	37,607	$	179,930	$	(4,025	)	$	807,574

INTEREST SENSITIVITY AND DISCLOSURE ABOUT MARKET RISK

Asset/Liability management has been an important factor in the Corporation's ability to record consistent earnings growth through periods of interest rate volatility and product deregulation. Management and the Board of Directors monitor the Corporation's liquidity and interest sensitivity positions at regular meetings to review how changes in interest rates may affect earnings. Decisions regarding investment and the pricing of loan and deposit products are made after analysis of reports designed to measure liquidity, rate sensitivity, the Corporation’s exposure to changes in net interest income given various rate scenarios and the economic and competitive environments.

It is the objective of the Corporation to monitor and manage risk exposure to net interest income caused by changes in interest rates. It is the goal of the Corporation’s Asset/Liability management function to provide optimum and stable net interest income. To accomplish this, management uses two asset liability tools. GAP/Interest Rate Sensitivity Reports and Net Interest Income Simulation Modeling are constructed, presented and monitored quarterly. Management believes that the Corporation's liquidity and interest sensitivity position at March 31, 2018, remained adequate to meet the Corporation’s primary goal of achieving optimum interest margins while avoiding undue interest rate risk.

Net interest income simulation modeling, or earnings-at-risk, measures the sensitivity of net interest income to various interest rate movements. The Corporation's asset liability process monitors simulated net interest income under three separate interest rate scenarios; base, rising and falling. Estimated net interest income for each scenario is calculated over a twelve-month horizon. The immediate and parallel changes to the base case scenario used in the model are presented below. The interest rate scenarios are used for analytical purposes and do not necessarily represent management's view of future market movements. Rather, these are intended to provide a measure of the degree of volatility interest rate movements may introduce into the earnings of the Corporation.

The base scenario is highly dependent on numerous assumptions embedded in the model, including assumptions related to future interest rates. While the base sensitivity analysis incorporates management's best estimate of interest rate and balance sheet dynamics under various market rate movements, the actual behavior and resulting earnings impact will likely differ from that projected. For certain assets, the base simulation model captures the expected prepayment behavior under changing interest rate environments. Assumptions and methodologies regarding the interest rate or balance behavior of indeterminate maturity products, such as savings, money market, interest-bearing and demand deposits, reflect management's best estimate of expected future behavior. Historical retention rate assumptions are applied to non-maturity deposits for modeling purposes.

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The comparative rising 200 basis points and falling 100 basis points scenarios below, as of March 31, 2018, assume further interest rate changes in addition to the base simulation discussed above. These changes are immediate and parallel changes to the base case scenario. In the current rate environment, many driver rates are at or near historical lows, thus total rate movements (beginning point minus ending point) to each of the various driver rates utilized by management have the following results:



	March 31, 2018
	RISING	FALLING
Driver Rates	(200 Basis Points)	(100 Basis Points)
Prime	200	(100	)
Federal funds	200	(100	)
One-year CMT	200	(100	)
Three-year CMT	200	(100	)
Five-year CMT	200	(100	)
CD's	200	(24	)
FHLB advances	200	(100	)

Results for the base, rising 200 basis points, and falling 100 basis points interest rate scenarios are listed below based upon the Corporation’s rate sensitive assets and liabilities at March 31, 2018. The net interest income shown represents cumulative net interest income over a twelve-month time horizon. Balance sheet assumptions used for the base scenario are the same for the rising and falling simulations.



	March 31, 2018
			RISING			FALLING
(Dollars in Thousands)	Base		(200 Basis Points)			(100 Basis Points)
Net interest income	$	322,741	$	350,740		$	301,114
Variance from base			$	27,999		$	(21,627	)
Percent of change from base			8.68		%	(6.70		)%

The comparative rising 200 basis points and falling 100 basis points scenarios below, as of December 31, 2017, assume further interest rate changes in addition to the base simulation discussed above. These changes are immediate and parallel changes to the base case scenario. In addition, total rate movements (beginning point minus ending point) to each of the various driver rates utilized by management in the base simulation are as follows:



	December 31, 2017
	RISING	FALLING
Driver Rates	(200 Basis Points)	(100 Basis Points)
Prime	200	(100	)
Federal funds	200	(100	)
One-year CMT	200	(100	)
Three-year CMT	200	(100	)
Five-year CMT	200	(100	)
CD's	200	(24	)
FHLB advances	200	(100	)

Results for the base, rising 200 basis points, and falling 100 basis points interest rate scenarios are listed below based upon the Corporation’s rate sensitive assets and liabilities at December 31, 2017. The net interest income shown represents cumulative net interest income over a twelve-month time horizon. Balance sheet assumptions used for the base scenario are the same for the rising and falling simulations.



	December 31, 2017
			RISING			FALLING
(Dollars in Thousands)	Base		(200 Basis Points)			(100 Basis Points)
Net interest income	$	311,466	$	336,970		$	286,477
Variance from base			$	25,504		$	(24,989	)
Percent of change from base			8.19		%	(8.02		)%

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PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EARNING ASSETS

The following table presents the earning asset mix as of March 31, 2018 and December 31, 2017. Earning assets increased by $120,937,000 during the three months ended March 31, 2018.

Loans and loans held for sale increased $147,750,000 from December 31, 2017. The largest loan segments that experienced increases were commercial and farmland and commercial and industrial. The largest loan segments that experienced decreases were agricultural production financing and other loans to farmers, construction and residential. Additional details of the changes in the Corporation's loan portfolio are discussed within NOTE 4. LOANS AND ALLOWANCE of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

Interest-bearing time deposits and investment securities decreased $10,794,000 and $16,782,000, respectively, since December 31, 2017.



(Dollars in Thousands)	March 31, 2018		December 31, 2017
Interest-bearing time deposits	$	24,233	$	35,027
Investment securities available for sale	1,003,799		999,947
Investment securities held to maturity	540,021		560,655
Loans held for sale	4,469		7,216
Loans	6,901,696		6,751,199
Federal Home Loan Bank stock	24,588		23,825
Total	$	8,498,806	$	8,377,869

OTHER

The Securities and Exchange Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including the Corporation, and that address is (http://www.sec.gov).

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PART I: FINANCIAL INFORMATION

ITEM 3. QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required under this item is included as part of Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the headings “LIQUIDITY” and “INTEREST SENSITIVITY AND DISCLOSURE ABOUT MARKET RISK”.

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PART I: FINANCIAL INFORMATION

ITEM 4. CONTROLS AND PROCEDURES

At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There have been no changes in the Corporation’s internal control over financial reporting identified in connection with the evaluation discussed above that occurred during the Corporation’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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PART II: OTHER INFORMATION

ITEM 1., ITEM 1A., ITEM 2., ITEM 3., ITEM 4. AND ITEM 5.

(table dollar amounts in thousands, except share data)

ITEM 1. LEGAL PROCEEDINGS

There are no pending legal proceedings, other than litigation incidental to the ordinary business of the Corporation or its subsidiaries, of a material nature to which the Corporation or its subsidiaries is a party or of which any of their properties are subject. Further, there are no material legal proceedings in which any director, officer, principal shareholder, or affiliate of the Corporation, or any associate of any such director, officer or principal shareholder, is a party, or has a material interest, adverse to the Corporation or any of its subsidiaries.

None of the routine legal proceedings, individually or in the aggregate, in which the Corporation or its affiliates are involved are expected to have a material adverse impact on the financial position or the results of operations of the Corporation.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors previously disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017,

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

a. None

b. None

c. Issuer Purchases of Equity Securities

The following table presents information relating to our purchases of equity securities during the three months ended March 31, 2018.



Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as part of Publicly announced Plans or Programs	Maximum Number of Shares that may yet be Purchased Under the Plans or Programs
January, 2018	4,101	$42.46
February, 2018	36,565	$42.81
March, 2018	1,086	$42.29

The shares were purchased in connection with the exercise of certain outstanding stock options and vesting of restricted stock awards.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5. OTHER INFORMATION

a. None

b. None

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PART II: OTHER INFORMATION

ITEM 6. EXHIBITS



Exhibit No:	Description of Exhibits:

3.1	First Merchants Corporation Articles of Incorporation, as amended (Incorporated by reference to registrant’s Form 8-K filed on May 2, 2017) (SEC No. 000-17071)
3.2	Bylaws of First Merchants Corporation dated August 11, 2016 (Incorporated by reference to registrant’s Form 10-K filed on March 1, 2017) (SEC No. 000-17071)
3.3	First Merchants Corporation Articles of Amendment of the Articles of Incorporation for the Series B Preferred Stock (Incorporated by reference to registrant’s Form 8-K filed on September 23, 2011) (SEC No. 000-17071)
4.1	First Merchants Corporation Amended and Restated Declaration of Trust of First Merchants Capital Trust II dated as of July 2, 2007 (Incorporated by reference to registrant's Form 8-K filed on July 3, 2007) (SEC No. 000-17071)
4.2	Indenture dated as of July 2, 2007 (Incorporated by reference to registrant's Form 8-K filed on July 3, 2007) (SEC No. 000-17071)
4.3	Guarantee Agreement dated as of July 2, 2007 (Incorporated by reference to registrant's Form 8-K filed on July 3, 2007) (SEC No. 000-17071)
4.4	Form of Capital Securities Certification of First Merchants Capital Trust II (Incorporated by reference to registrant's Form 8-K filed on July 3, 2007) (SEC No. 000-17071)
4.5	First Merchants Corporation Dividend Reinvestment and Stock Purchase Plan (Incorporated by reference to registrant’s Post-Effective Amendment No. 1 to Form S-3 filed on August 21, 2009) (SEC No. 033-45393)
4.6	Upon request, the registrant agrees to furnish supplementally to the Commission a copy of the instruments defining the rights of holders of its (a) 5.00% Fixed-to-Floating Rate Senior Notes due 2028 in the aggregate principal amount of $5 million and (b) 6.75% Fixed-to-Floating Rate Subordinated Notes due 2028 in aggregate principal amount of $65 million.
4.7	Description of Assumed Junior Subordinated Debt Securities of Independent Alliance Banks, Inc. and Agreement to Furnish Copies of Related Instruments and Documents (Incorporated by reference to registrant's Form 10-Q filed on November 9, 2017) (SEC No. 000-17071)
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 (1)
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 (1)
32	Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)
101.INS	XBRL Instance Document (2)
101.SCH	XBRL Taxonomy Extension Schema Document (2)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (2)
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (2)
101.LAB	XBRL Taxonomy Extension Label Linkbase Document (2)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (2)


	(1) Filed herewith.
	(2) Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	First Merchants Corporation
	(Registrant)


Date: May 10, 2018	By: /s/ Michael C. Rechin
	Michael C. Rechin
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: May 10, 2018	By: /s/ Mark K. Hardwick
	Mark K. Hardwick
	Executive Vice President,
	Chief Financial Officer and Chief Operating Officer
	(Principal Financial and Accounting Officer)

First Merchants Corporation - 10-Q quarterly report FY2018 Q1

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