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Document and Entity Information - USD ($)	12 Months Ended
Document and Entity Information - USD ($)	Dec. 31, 2011	Feb. 17, 2012	Jun. 30, 2011
Document Information [Line Items]
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	FY
Trading Symbol	FRME
Entity Registrant Name	FIRST MERCHANTS CORP
Entity Central Index Key	0000712534
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		28,896,102
Entity Public Float			$ 229,674,000

CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Dec. 31, 2011	Dec. 31, 2010
ASSETS
Cash and due from banks	$ 73,312	$ 50,844
Federal funds sold		7,463
Cash and cash equivalents	73,312	58,307
Interest-bearing time deposits	52,851	65,216
Investment securities available for sale	518,491	539,370
Investment securities held to maturity (fair value of $442,469 and $286,270)	427,909	287,427
Mortgage loans held for sale	17,864	21,469
Loans	2,713,415	2,835,683
Less: Allowance for loan losses	(70,898)	(82,977)
Net loans	2,642,517	2,752,706
Premises and equipment	51,013	52,450
Federal Reserve and Federal Home Loan Bank stock	31,270	33,884
Interest receivable	17,723	18,674
Core deposit intangibles	9,114	12,662
Goodwill	141,357	141,357
Cash surrender value of life insurance	124,329	96,731
Other real estate owned	16,289	20,927
Tax asset, deferred and receivable	36,424	45,623
Other assets	12,613	24,045
TOTAL ASSETS	4,173,076	4,170,848
Deposits:
Noninterest-bearing	646,508	583,696
Interest-bearing	2,488,147	2,685,184
Total Deposits	3,134,655	3,268,880
Borrowings:
Securities sold under repurchase agreements	156,305	109,871
Federal Home Loan Bank advances	138,095	82,684
Subordinated debentures and term loans	194,974	226,440
Total Borrowings	489,374	418,995
Interest payable	2,925	4,262
Other liabilities	31,655	24,303
Total Liabilities	3,658,609	3,716,440
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common Stock, $.125 stated value: Authorized -- 50,000,000 shares Issued and outstanding - 28,559,707 and 25,574,251 shares	3,570	3,197
Additional paid-in capital	254,874	232,503
Retained earnings	168,717	160,860
Accumulated other comprehensive loss	(3,602)	(10,157)
Total Stockholders' Equity	514,467	454,408
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	4,173,076	4,170,848
Preferred stock, Series A
STOCKHOLDERS' EQUITY
Preferred Stock		67,880
Senior Non-Cumulative Perpetual Preferred Stock
STOCKHOLDERS' EQUITY
Preferred Stock	90,783
Cumulative Preferred Stock
STOCKHOLDERS' EQUITY
Preferred Stock	$ 125	$ 125

CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Dec. 31, 2011	Dec. 31, 2010
Investment securities held to maturity, fair value	$ 442,469	$ 286,270
Common Stock, stated value	$ 0.125	$ 0.125
Common Stock, Authorized	50,000,000	50,000,000
Common Stock, shares Issued	28,559,707	25,574,251
Common Stock, shares outstanding	28,559,707	25,574,251
Preferred stock, Series A
Preferred Stock, no-par value
Preferred Stock, Authorized	500,000	500,000
Preferred Stock, Issued	0	69,600
Preferred Stock, outstanding	0	69,600
Senior Non-Cumulative Perpetual Preferred Stock
Preferred Stock, no-par value
Preferred Stock, liquidation value	$ 1,000	$ 1,000
Preferred Stock, Authorized	500,000	500,000
Preferred Stock, Issued	90,782.94	0.00
Preferred Stock, outstanding	90,782.94	0.00
Cumulative Preferred Stock
Preferred Stock, par value	$ 1,000	$ 1,000
Preferred Stock, liquidation value	$ 1,000	$ 1,000
Preferred Stock, Authorized	600	600
Preferred Stock, Issued	125	125
Preferred Stock, outstanding	125	125

CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Loans receivable:
Taxable	$ 149,716	$ 174,070	$ 205,616
Tax-exempt	528	515	1,038
Investment securities:
Taxable	19,230	12,957	12,335
Tax-exempt	10,167	10,377	9,587
Federal funds sold	3	26	118
Deposits with financial institutions	282	381	366
Federal Reserve and Federal Home Loan Bank stock	1,319	1,252	1,379
Total Interest Income	181,245	199,578	230,439
INTEREST EXPENSE
Deposits	22,281	39,876	58,391
Federal funds purchased	25	5	28
Securities sold under repurchase agreements	1,511	1,712	1,997
Federal Home Loan Bank advances	4,181	5,368	9,232
Subordinated debentures, revolving credit lines and term loans	9,892	9,048	7,445
Total Interest Expense	37,890	56,009	77,093
NET INTEREST INCOME	143,355	143,569	153,346
Provision for loan losses	22,630	46,483	122,176
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	120,725	97,086	31,170
OTHER INCOME
Service charges on deposit accounts	11,972	13,283	15,128
Fiduciary activities	7,650	7,692	7,409
Other customer fees	10,024	8,990	7,922
Commission income	5,660	6,225	6,397
Earnings on cash surrender value of life insurance	2,596	2,098	1,614
Net gains and fees on sales of loans	7,418	6,806	6,849
Net realized gains on sales of available for sale securities	2,439	3,406	11,141
Other-than-temporary impairment on available for sale securities	(2,788)	(3,049)	(11,134)
Portion of loss recognized in other comprehensive income before taxes	2,388	1,505	4,405
Net impairment losses recognized in earnings	(400)	(1,544)	(6,729)
Other income	1,761	1,588	1,470
Total Other Income	49,120	48,544	51,201
OTHER EXPENSES
Salaries and employee benefits	74,735	73,253	76,325
Net occupancy	10,118	9,935	10,250
Equipment	6,794	7,323	7,595
Marketing	2,002	1,970	2,134
Outside data processing fees	5,671	5,093	6,186
Printing and office supplies	1,242	1,259	1,419
Core deposit amortization	3,548	4,721	5,109
FDIC assessments	5,531	8,121	10,394
Other real estate owned and credit-related expenses	10,614	12,436	9,823
Other expenses	15,683	18,200	22,323
Total Other Expenses	135,938	142,311	151,558
INCOME (LOSS) BEFORE INCOME TAX	33,907	3,319	(69,187)
Income tax expense (benefit)	8,655	(3,590)	(28,424)
NET INCOME (LOSS)	25,252	6,909	(40,763)
Gain on exchange of preferred stock for trust preferred debt		11,353
Loss on Capital Purchase Program Unamortized Discount	(1,401)	(1,301)
Loss on extinguishment of trust preferred securities	(10,857)
Preferred stock dividends and discount accretion	(3,981)	(5,239)	(4,979)
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS	$ 9,013	$ 11,722	$ (45,742)
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS PER SHARE:
Basic	$ 0.34	$ 0.48	$ (2.17)
Diluted	$ 0.34	$ 0.48	$ (2.17)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Net Income (Loss)	$ 25,252	$ 6,909	$ (40,763)
Other comprehensive income (loss) net of tax:
Unrealized holding gain (loss) on securities available for sale arising during the period, net of tax of ($10,658), $106, and ($5,587)	19,793	(197)	10,376
Unrealized loss on securities transferred to held-to-maturity, net of tax of $2,864	(5,315)
Unrealized loss on securities available for sale for which a portion of an other-than-temporary impairment has been recognized in income, net of tax of $86, $539, and $1,333	160	(1,001)	(2,476)
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period, net of tax of $1,146, ($155), and $622	(2,129)	288	(933)
Reclassification adjustment for losses included in net income net of tax of $714, $652, and $1,544	(1,326)	(1,210)	(2,868)
Defined Benefit Pension Plans, net of tax of $2,492, ($526), and ($1,826)
Net Gain Arising During Period	26	156	3,043
Prior Service Cost Arising During Period	(5,722)	583	(326)
Amortization of Prior Service Cost	1,068	50	22
Other Comprehensive Income, net of tax	6,555	(1,331)	6,838
Comprehensive income (loss)	$ 31,807	$ 5,578	$ (33,925)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Parenthetical) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Unrealized holding gain (loss) on securities available for sale arising during the period, tax	$ (10,658)	$ 106	$ (5,587)
Unrealized loss on securities transferred to held-to-maturity, tax	2,864
Unrealized loss on securities available for sale for which a portion of an other-than-temporary impairment has been recognized in income, tax	86	539	1,333
Unrealized gains (losses) arising during the period, tax	1,146	(155)	622
Reclassification adjustment for losses included in net income, tax	714	652	1,544
Defined Benefit Pension Plans, tax	$ 2,492	$ (526)	$ (1,826)

Components of Accumulated Other Comprehensive Income - USD ($) $ in Thousands	Dec. 31, 2011	Dec. 31, 2010
Net unrealized gain on securities available for sale	$ 18,244	$ 5,094
Net unrealized loss on securities available for sale for which a portion of an other- than-temporary impairment has been recognized in income	(3,168)	(3,328)
Net realized gain (loss) on cash flow hedges	(1,841)	288
Defined Benefit Plans	(16,837)	(12,211)
Accumulated other comprehensive loss	$ (3,602)	$ (10,157)

- Definition

The total of net gain (loss), prior service cost (credit), and transition assets (obligations), as well as minimum pension liability if still remaining, included in accumulated other comprehensive income associated with a defined benefit pension or other postretirement plan(s) because they have yet to be recognized as components of net periodic benefit cost.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 130
-Paragraph 26
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 132R
-Paragraph 5
-Subparagraph i
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 3: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 158
-Paragraph 7
-Subparagraph c
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 4: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 220
-SubTopic 10
-Section 45
-Paragraph 11
-URI http://asc.fasb.org/extlink&oid=6920043&loc=d3e637-108580

Reference 5: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 220
-SubTopic 10
-Section 45
-Paragraph 14
-URI http://asc.fasb.org/extlink&oid=6920043&loc=d3e681-108580

Reference 6: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 220
-SubTopic 10
-Section 45
-Paragraph 13
-URI http://asc.fasb.org/extlink&oid=6920043&loc=d3e653-108580

Reference 7: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 715
-SubTopic 20
-Section 50
-Paragraph 1
-Subparagraph (i)
-URI http://asc.fasb.org/extlink&oid=6962843&loc=d3e1928-114920

+ Details

- Definition

Accumulated change in equity from transactions and other events and circumstances from non-owner sources, net of tax effect, at period end. Excludes Net Income (Loss), and accumulated changes in equity from transactions resulting from investments by owners and distributions to owners. Includes foreign currency translation items, certain pension adjustments, unrealized gains and losses on certain investments in debt and equity securities, other than temporary impairment (OTTI) losses related to factors other than credit losses on available-for-sale and held-to-maturity debt securities that an entity does not intend to sell and it is not more likely than not that the entity will be required to sell before recovery of the amortized cost basis, as well as changes in the fair value of derivatives related to the effective portion of a designated cash flow hedge.

+ References

+ Details

- Definition

Accumulated other comprehensive loss related to portion of other than temporary impairment (OTTI) due to factors other than credit losses on debt securities categorized as available-for-sale that an entity does not intend to sell and which it is not more likely than not that the entity will be required to sell before recovery of the amortized cost basis of the debt security. The amount represented by this item is net of tax, as applicable.

+ References + Details

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($) $ in Thousands	Total	Preferred	Common Stock	Additional Paid in Capital	Retained Earnings	Accumulated Other Comprehensive Income (Loss)
Beginning Balance (in shares) at Dec. 31, 2008		125	21,178,123
Comprehensive Income
Net Income (Loss)	$ (40,763)				$ (40,763)
Other Comprehensive Income, net of tax	6,838					$ 6,838
Beginning Balance at Dec. 31, 2008	395,903	$ 125	$ 2,647	$ 202,299	206,496	(15,664)
Comprehensive Income
Net Income (Loss)	(40,763)				(40,763)
Cash Dividends on Common Stock ($.04 per Share) in 2011 and 2010 and ($.47 per Share) in 2009	(9,985)				(9,985)
Cash Dividends on Preferred Stock under Capital Purchase Program	(4,269)				(4,269)
Warrants issued under Capital Purchase Program	4,245			4,245
Accretion of Discount on Preferred Stock		$ 619			(619)
Preferred Stock issued under Capital Purchase Program (in shares)		116,000
Preferred Stock issued under Capital Purchase Program	111,754	$ 111,754
Other Comprehensive Income, net of tax	6,838					6,838
Tax Benefit (Loss) from Stock Options Exercised	60			60
Share-based Compensation (in shares)			50,564
Share-based Compensation	2,294		$ 6	2,288
Stock Issued Under Employee Benefit Plans (in shares)			122,572
Stock Issued Under Employee Benefit Plans	825		$ 16	809
Stock Issued Under Dividend Reinvestment and Stock Purchase Plan (in shares)			65,015
Stock Issued Under Dividend Reinvestment and Stock Purchase Plan	527		$ 8	519
Stock Options Exercised
Stock Redeemed (in shares)			(14,059)
Stock Redeemed	(193)		$ (2)	(191)
Adjustment to issuance of stock related to acquisition (in shares)			(174,474)
Adjustment to issuance of stock related to acquisition	(3,451)		$ (22)	(3,429)
Ending Balance (in shares) at Dec. 31, 2009		116,125	21,227,741
Ending Balance at Dec. 31, 2009	463,785	$ 112,498	$ 2,653	206,600	150,860	(8,826)
Comprehensive Income
Net Income (Loss)	6,909				6,909
Other Comprehensive Income, net of tax	(1,331)					(1,331)
Net Income (Loss)	6,909				6,909
Cash Dividends on Common Stock ($.04 per Share) in 2011 and 2010 and ($.47 per Share) in 2009	(989)				(989)
Cash Dividends on Preferred Stock under Capital Purchase Program	(5,366)				(5,366)
Cumulative Preferred Stock Converted to Trust Preferred Securities (in shares)		(46,400)
Accretion of Discount on Preferred Stock		$ 606			(606)
Cumulative Preferred Stock Converted to Trust Preferred Securities	(46,400)	(46,400)
Gain on exchange of preferred stock for trust preferred debt	11,353				11,353
Other Comprehensive Income, net of tax	(1,331)					(1,331)
Loss on Capital Purchase Program Unamortized Discount	(1,301)	$ 1,301			(1,301)
Private Stock Issuance (in shares)			4,200,000
Private Stock Issuance	24,150		$ 525	23,625
Tax Benefit (Loss) from Stock Options Exercised	(50)			(50)
Share-based Compensation (in shares)			49,833
Share-based Compensation	1,750		$ 6	1,744
Stock Issued Under Employee Benefit Plans (in shares)			97,966
Stock Issued Under Employee Benefit Plans	582		$ 12	570
Stock Issued Under Dividend Reinvestment and Stock Purchase Plan (in shares)			11,545
Stock Issued Under Dividend Reinvestment and Stock Purchase Plan	91		$ 2	89
Stock Redeemed (in shares)			(12,834)
Stock Redeemed	(76)		$ (1)	(75)
Ending Balance (in shares) at Dec. 31, 2010		69,725	25,574,251
Ending Balance at Dec. 31, 2010	454,408	$ 68,005	$ 3,197	232,503	160,860	(10,157)
Comprehensive Income
Net Income (Loss)	25,252				25,252
Other Comprehensive Income, net of tax	6,555					6,555
Net Income (Loss)	25,252				25,252
Cash Dividends on Common Stock ($.04 per Share) in 2011 and 2010 and ($.47 per Share) in 2009	(1,067)				(1,067)
Cash Dividends on Preferred Stock under Capital Purchase Program	(3,662)				(3,662)
Accretion of Discount on Preferred Stock		319			(319)
Other Comprehensive Income, net of tax	6,555					6,555
Loss on Capital Purchase Program Unamortized Discount	(1,401)	$ 1,401			(1,401)
Repurchase of Capital Purchase Program Warrants	(368)			(368)
Loss on extinguishment of trust preferred securities	(10,857)				(10,857)
Equity Adjustment Related to First Merchants Reinsurance Co. LTD	(89)				(89)
Preferred Stock Redeemed under Capital Purchase Program (in shares)		(69,600)
Preferred Stock Redeemed under Capital Purchase Program	(69,600)	$ (69,600)
Preferred Stock issued under the Small Business Lending Fund (in shares)		90,783
Preferred Stock issued under the Small Business Lending Fund	90,783	$ 90,783
Private Stock Issuance (in shares)			2,822,000
Private Stock Issuance	21,165		$ 353	20,812
Share-based Compensation (in shares)			72,824
Share-based Compensation	1,315		$ 9	1,306
Stock Issued Under Employee Benefit Plans (in shares)			93,797
Stock Issued Under Employee Benefit Plans	669		$ 12	657
Stock Issued Under Dividend Reinvestment and Stock Purchase Plan (in shares)			11,073
Stock Issued Under Dividend Reinvestment and Stock Purchase Plan	89		$ 1	88
Stock Redeemed (in shares)			(14,238)
Stock Redeemed	(126)		$ (2)	(124)
Ending Balance (in shares) at Dec. 31, 2011		90,908	28,559,707
Ending Balance at Dec. 31, 2011	$ 514,467	$ 90,908	$ 3,570	$ 254,874	$ 168,717	$ (3,602)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Parenthetical) - $ / shares	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Cash Dividends on Common Stock, per Share	$ 0.04	$ 0.04	$ 0.47

CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Cash Flow From Operating Activities:
Net Income (Loss)	$ 25,252	$ 6,909	$ (40,763)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses	22,630	46,483	122,176
Depreciation and amortization	5,158	5,702	5,962
Change in deferred taxes	8,256	(1,810)	(10,858)
Share-based compensation	1,315	1,750	2,294
Tax expense (benefit) from stock options exercised		50	(60)
Mortgage loans originated for sale	(297,031)	(254,712)	(305,778)
Proceeds from sales of mortgage loans	300,636	241,279	302,037
Gains on sales of securities available for sale	(2,439)	(3,406)	(11,141)
Recognized loss on other-than-temporary-impairment	400	1,544	6,729
Change in interest receivable	951	2,144	3,158
Change in interest payable	(1,337)	(1,449)	(3,133)
Other adjustments	21,693	36,567	(53,013)
Net cash provided by operating activities	85,484	81,051	17,610
Cash Flows from Investing Activities:
Net change in interest-bearing deposits	12,365	8,809	(35,202)
Purchases of:
Securities available for sale	(200,688)	(311,465)	(385,697)
Securities held to maturity	(82,700)	(180,311)	(165,844)
Proceeds from sales of securities available for sale	75,930	117,804	309,246
Proceeds from maturities of:
Securities available for sale	60,459	65,688	134,337
Securities held to maturity	45,595	40,825	38,568
Proceeds from sales of mortgages			33,452
Change in Federal Reserve and Federal Home Loan Bank stock	2,614	4,692	(4,257)
Purchase of bank owned life insurance	(25,000)
Net change in loans	61,363	345,518	296,416
Proceeds from the sale of other real estate owned	13,612	20,641	39,595
Other adjustments	8,287	(2,348)	(2,125)
Net cash provided by (used in) investing activities	(28,163)	109,853	258,489
Net change in :
Demand and savings deposits	68,803	84,993	184,228
Certificates of deposit and other time deposits	(203,028)	(352,649)	(366,503)
Borrowings	306,535	2,382	126,587
Repayment of borrowings	(252,509)	(65,247)	(294,715)
Dividends on common stock	(1,067)	(989)	(9,985)
Dividends on preferred stock	(3,662)	(4,931)	(4,269)
Stock issued in private equity placement	21,165	24,150
Stock issued under employee benefit plans	669	582	825
Stock issued under dividend reinvestment and stock purchase plans	89	91	527
Cumulative preferred stock redeemed (CPP)	(69,600)
Repurchase of stock warrant (CPP)	(368)
Tax (expense) benefit from stock options exercised		(50)	60
Stock redeemed	(126)	(76)	(193)
Net cash used in financing activities	(42,316)	(311,744)	(247,438)
Net Change in Cash and Cash Equivalents	15,005	(120,840)	28,661
Cash and Cash Equivalents, January 1	58,307	179,147	150,486
Cash and Cash Equivalents, December 31	73,312	58,307	179,147
Additional cash flows information:
Interest paid	39,227	57,458	80,226
Income tax paid (refunded)	(2,977)	(17,674)	3,184
Exchange of preferred stock for trust preferred debt		46,400
Loans transferred to other real estate owned	14,188	$ 32,950	42,708
Cumulative Preferred Stock
Net change in :
Cumulative preferred stock issued			$ 116,000
Noncumulative Preferred Stock
Net change in :
Cumulative preferred stock issued	$ 90,783

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2011

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of First Merchants Corporation (the “Corporation”), and its wholly owned subsidiaries, First Merchants Bank, N.A. (the “Bank”), and First Merchants Insurance Services, Inc. operating as First Merchants Insurance Group (“FMIG”), conform to accounting principles generally accepted in the United States of America and reporting practices followed by the banking industry. The Bank also operates Lafayette Bank and Trust, Commerce National Bank and First Merchants Trust Company as divisions of First Merchants Bank, N.A.

During 2009, the Corporation completed two charter mergers of affiliate banks. On April 17, 2009 the merger of the Lincoln Bank charter into First Merchants Bank of Central Indiana, National Association, was completed and on September 25, 2009, the Corporation completed the merger of three of its subsidiary banks and charters into its single remaining full-service bank charter. The three merged charters were First Merchants Bank of Central Indiana, National Association, Lafayette Bank and Trust Company, National Association and Commerce National Bank. In September 2010, the consolidation of First Merchants Trust Company, National Association into First Merchants Bank, National Association, was completed.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Corporation is a financial holding company whose principal activity is the ownership and management of the Bank and operates in a single significant business segment. The Bank operates under a national bank charter and provides full banking services. As a national bank, the Bank is subject to the regulation of the Office of Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”). The OCC and the FDIC regulate or monitor virtually all areas of the Bank’s operations. The Bank must undergo regular on-site examinations by the OCC and FDIC and must submit periodic reports to both.

The Bank generates commercial, mortgage, and consumer loans and receives deposits from customers located primarily in central Indiana and Butler and Franklin counties in Ohio. The central Indiana counties served by the Bank are Adams, Brown, Carroll, Clinton, Delaware, Fayette, Hamilton, Hendricks, Henry, Howard, Jasper, Jay, Johnson, Madison, Miami, Montgomery, Morgan, Randolph, Tippecanoe, Union, Wabash, Wayne and White counties. The Bank’s loans are generally secured by specific items of collateral, including real property, consumer assets and business assets.

CONSOLIDATION

The consolidated financial statements include the accounts of the Corporation and all its subsidiaries, after elimination of all material intercompany transactions.

A brief description of current accounting practices and current valuation methodologies are presented below.

AVAILABLE FOR SALE SECURITIES are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices when available. Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. There are no securities classified within Level 1 of the hierarchy. If quoted prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include agencies, mortgage backs, state and municipal and equity 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 corporate obligations and equity securities.

Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method.

Effective April 1, 2009, the Corporation adopted new accounting guidance related to recognition and presentation of other-than-temporary impairment (ASC 320-10). Available for sale and held to maturity securities are evaluated for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities are generally evaluated for OTTI under ASC 320. However, certain purchased beneficial interest, including certain non-agency government-sponsored mortgage-backed securities, asset-backed securities and collateralized debt obligations are evaluated using the model outlined in ASC 325-10.

In determining OTTI under ASC 320, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Corporation has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether a decline exists that is other-than-temporary, involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When the Corporation does not intend to sell a debt security, and it is more likely than not, the Corporation will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors has been recognized in other comprehensive income, net of applicable income taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

If the intent is to sell or it is more likely than not that the Corporation will be required to sell the security before recovery of its amortized cost basis, less any recognized credit loss, the OTTI is recognized in earnings equal to the entire difference between the investment’s amortized cost basis, less any recognized credit loss, and its fair value at the balance sheet date.

Prior to the adoption of accounting guidance on April 1, 2009, management considered, in determining whether OTTI exists, (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. For equity securities, when the Corporation has decided to sell an impaired available for sale security and the entity does not expect the fair value of the security to fully recover before the expected time of sale, the security is deemed other-than-temporarily impaired in the period in which the decision to sell is made. The Corporation recognizes an impairment loss when the impairment is deemed other-than-temporary even if a decision to sell has not been made.

HELD TO MATURITY SECURITIES are classified as held to maturity when the Corporation has the positive intent and ability to hold the securities to maturity. Securities held to maturity are carried at amortized cost. For held to maturity debt securities, the amount of an OTTI recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

INTEREST RATE AGREEMENTS are estimated by a third party using inputs that are primarily unobservable and cannot be corroborated by observable market data and, therefore, are classified within Level 3 of the valuation hierarchy.

LOANS HELD FOR SALE are carried at the lower of aggregate cost or market. Market is determined using the aggregate method. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income based on the difference between estimated sales proceeds and aggregate cost.

LOANS held in the Corporation’s portfolio are carried at the principal amount outstanding. Certain non-accrual and substantially delinquent loans may be considered to be impaired. A loan is impaired when, based on current information or events, it is probable that the Bank will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. In applying the provisions of ASC 310, the Corporation considers its investment in one-to-four family residential loans and consumer installment loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment. Interest income is accrued on the principal balances of loans, except for installment loans with add-on interest, for which a method that approximates the level yield method is used. The accrual of interest on impaired loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed when considered uncollectable. Interest income is subsequently recognized only to the extent cash payments are received and the loan is returned to accruing status. Certain loan fees and direct costs are being deferred and amortized as an adjustment of yield on the loans.

Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate, or the fair value of collateral if the loan is collateral dependent. 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. The valuation would be considered Level 3, consisting of appraisals of underlying collateral and discounted cash flow analysis.

Loan commitments and letters-of-credit generally have short-term, variable-rate features and contain clauses which limit the Bank’s exposure to changes in customer credit quality. Accordingly, their carrying values, which are immaterial at the respective balance sheet dates, are reasonable estimates of fair value.

ALLOWANCE FOR LOAN LOSSES is maintained to absorb losses inherent in the loan portfolio and is based on ongoing, quarterly assessments of the probable losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses, which is charged against current operating results. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The Corporation’s strategy for credit risk management includes conservative credit policies and underwriting criteria for all loans, as well as an overall credit limit for each customer significantly below legal lending limits. The strategy also emphasizes diversification on a regional geographic, industry and customer level, regular credit quality reviews and management reviews of large credit exposures and loans experiencing deterioration of credit quality.

The Corporation’s methodology for assessing the appropriateness of the allowance consists of three key elements – the determination of the appropriate reserves for specifically identified loans, probable losses estimated from historical loss rates, and probable losses resulting from economic, environmental, qualitative or other deterioration above and beyond what is reflected in the first two components of the allowance.

Larger commercial loans that exhibit probable or observed credit weaknesses are subject to individual review. Where appropriate, reserves are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Corporation. Included in the review of individual loans are those that are impaired as provided in ASC 310. Any allowances for impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or fair value of the underlying collateral. The Corporation evaluates the collectability of both principal and interest when assessing the need for a loss accrual. Historical loss rates are applied to other commercial loans not subject to specific reserve allocations.

The historical allocation for commercial loans graded pass are established by loan segments using loss rates based on the Corporation’s migration analysis. This migration analysis shows the loss rates for each segment of loans based on the loan grades at the beginning of the twelve month period. This loss rate is then applied to the current portfolio of loans in each respective loan segment.

Homogenous loans, such as consumer installment and residential mortgage loans, are not individually risk graded. Reserves are established for each segment of loans using loss rates based on charge offs for the same period as the migration analysis used for commercial loans.

Historical loss allocations for commercial and consumer loans may be adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition. Factors which management considers in the analysis include the effects of the national and local economies, trends in loan growth and charge-off rates, changes in mix, concentration of loans in specific industries, asset quality trends (delinquencies, charge offs and non-accrual loans), risk management and loan administration, changes in the internal lending policies and credit standards, examination results from bank regulatory agencies and the Corporation’s internal loan review.

PENSION benefits are provided to the Corporation’s employees. Its accounting policies related to pensions and other post retirement benefits reflect the guidance in ASC 715, Compensation – Retirement Benefits. The Corporation does not consolidate the assets and liabilities associated with the pension plan. Instead, the Corporation recognizes the funded status of the plan in the balance sheet. The measurement of the funded status and the annual pension expense involves actuarial and economic assumptions. Various statistical and other factors, which attempt to anticipate future events, are used in calculating the expense and liabilities related to the plans. Key factors include assumptions on the expected rates of return on plan assets, discount rates, expected rates of salary increases and health care costs and trends. The Corporation considers market conditions, including changes in investment returns and interest rates in making these assumptions. The primary assumptions used in determining the Corporation’s pension and post retirement benefit obligations and related expenses are presented in Note 17. PENSION AND OTHER POST RETIREMENT BENEFIT PLANS, in the Notes to Consolidated Financial Statements included as Item 8 of this Annual Report on Form 10-K.

PREMISES AND EQUIPMENT is carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line and declining balance methods based on the estimated useful lives of the assets ranging from three to forty years. Maintenance and repairs are expensed as incurred, while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations.

FEDERAL RESERVE AND FEDERAL HOME LOAN BANK STOCK are required investments for institutions that are members of the Federal Reserve Bank (“FRB”) and Federal Home Loan Bank systems. The required investment in the common stock is based on a predetermined formula.

INTANGIBLE ASSETS that are subject to amortization, including core deposit intangibles, are being amortized on both the straight-line and accelerated basis over three to twenty years. Intangible assets are periodically evaluated as to the recoverability of their carrying value.

GOODWILL is maintained by applying the provisions of ASC 350. For purchase acquisitions, the Corporation is required to record the assets acquired, including identified intangible assets, and the liabilities assumed at their fair value, which in many instances involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques that may include estimates of attrition, inflation, asset growth rates or other relevant factors. In addition, the determination of the useful lives for which an intangible asset will be amortized is subjective.

Under ASC 350, Intangibles – Goodwill and Other, the Corporation is required to evaluate goodwill for impairment on an annual basis, as well as on an interim basis, if events or changes indicate that the asset may be impaired, indicating that the carrying value may not be recoverable. The Corporation has historically elected to test for goodwill impairment as of September 30 of each year. Based on the economic environment, earnings and stock price in 2011, the Corporation used a third party to evaluate goodwill for impairment as of October 1, 2011. The methodology and results of the test are further discussed in the “GOODWILL” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K. An impairment loss must be recognized for any excess of carrying value over fair value of the goodwill or the indefinite-lived intangible with subsequent reversal of the impairment loss being prohibited. The tests for impairment fair values are based on internal valuations using management’s assumptions of future growth rates, future attrition, discount rates, multiples of earnings or other relevant factors. The resulting estimated fair values could have a significant impact on the carrying values of goodwill or intangibles and could result in impairment losses being recorded in future periods.

The Corporation cannot predict the occurrence of certain future events that might adversely affect the reported value of goodwill. Such events include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the effect of the economic environment on the Corporation’s customer base, or a material negative change in its relationship with significant customers.

OTHER REAL ESTATE OWNED consists of assets acquired through, or in lieu of, loan foreclosure and are held for sale. They are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net income or expense from foreclosed assets.

DERIVATIVE INSTRUMENTS are carried at the fair value of the derivatives and 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.

As part of the asset/liability management program, the Corporation will utilize, from time to time, interest rate floors, caps or swaps to reduce its sensitivity to interest rate fluctuations. These are derivative instruments, which are recorded as assets or liabilities in the consolidated balance sheets at fair value. Changes in the fair values of derivatives are reported in the consolidated statements of operations or other comprehensive income (“OCI”) depending on the use of the derivative and whether the instrument qualifies for hedge accounting. The key criterion for the hedge accounting is that the hedged relationship must be highly effective in achieving offsetting changes in those cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis.

Derivatives that qualify for the hedge accounting treatment are designated as either: a hedge of the fair value of the recognized asset or liability or of an unrecognized firm commitment (a fair value hedge) or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge). To date, the Corporation has only entered into a cash flow hedge. For cash flow hedges, changes in the fair values of the derivative instruments are reported in OCI to the extent the hedge is effective. The gains and losses on derivative instruments that are reported in OCI are reflected in the consolidated statements of operations in the periods in which the results of operations are impacted by the variability of the cash flows of the hedged item. Generally, net interest income is increased or decreased by amounts receivable or payable with respect to the derivatives, which qualify for hedge accounting. At inception of the hedge, the Corporation establishes the method it uses for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The ineffective portion of the hedge, if any, is recognized currently in the consolidated statements of operations. The Corporation excludes the time value expiration of the hedge when measuring ineffectiveness.

The Corporation offers interest rate derivative products (e.g. interest rate swaps) to certain of its high-quality commercial borrowers. This product allows customers to enter into an agreement with the Corporation to swap their variable rate loan to a fixed rate. These derivative products are designed to reduce, eliminate or modify the risk of changes in the borrower’s interest rate or market price risk. The extension of credit incurred through the execution of these derivative products is subject to the same approvals and rigorous underwriting standards as the related traditional credit product. The Corporation limits its risk exposure to these products by entering into a mirror-image, offsetting swap agreement with a separate, well-capitalized and rated counterparty previously approved by the Credit and Asset Liability Committee. By using these interest rate swap arrangements, the Corporation is also better insulated from the interest rate risk associated with underwriting fixed-rate loans. These derivative contracts are not designated against specific assets or liabilities under ASC 815, Derivatives and Hedging, and, therefore, do not qualify for hedge accounting. The derivatives are recorded on the balance sheet at fair value and changes in fair value of both the customer and the offsetting swap agreements are recorded (and essentially offset) in non-interest income. The fair value of the derivative instruments incorporates a consideration of credit risk (in accordance with ASC 820), resulting in some volatility in earnings each period.

INCOME TAX in the consolidated statements of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. The Corporation files consolidated income tax returns with its subsidiaries.

The Corporation adopted the provisions of the ASC 740, Income Taxes, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the implementation of ASC 740, the Corporation did not identify any uncertain tax positions that it believes should be recognized in the financial statements. The tax years still subject to examination by taxing authorities are years subsequent to 2007.

STOCK OPTION AND RESTRICTED STOCK AWARD PLANS are maintained by the Corporation. The compensation costs are recognized for stock options and restricted stock awards issued to employees and directors based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. The market price of the Corporation’s common stock at the date of grant is used for restricted stock awards. Compensation expense is recognized over the appropriate service period, which is generally two or three years.

EARNINGS PER SHARE have been computed based upon the weighted average common and common equivalent shares outstanding during each 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.

CURRENT ECONOMIC CONDITIONS continue to present financial institutions with circumstances and challenges which, in some cases, have resulted in large and unanticipated declines in the fair values of investments and other assets, constraints on liquidity and capital and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans.

The accompanying financial statements have been prepared using values and information currently available to the Corporation.

Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses and capital that could negatively impact the Corporation’s ability to meet regulatory capital requirements and maintain sufficient liquidity.

RESTRICTION ON CASH AND DUE FROM BANKS

12 Months Ended

Dec. 31, 2011

RESTRICTION ON CASH AND DUE FROM BANKS

NOTE 2

RESTRICTION ON CASH AND DUE FROM BANKS

The Corporation considers all liquid investments with original maturities of three months or less to be cash equivalents. As of December 31, 2011, cash and cash equivalents is defined to include cash on hand, deposits in other institutions and federal funds sold.

Effective October 3, 2008, the FDIC’s insurance limits temporarily increased to $250,000. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was signed into law, which, in part permanently raised the standard maximum deposit insurance amount to $250,000. At December 31, 2011, the Corporation’s interest-bearing cash accounts held at other institutions exceeded federally insured limits by approximately $12,037,000. Each correspondent bank’s financial performance and market rating are reviewed on a quarterly basis to ensure the Corporation has deposits only at institutions providing minimal risk for those exceeding the federally insured limits.

On November 9, 2010, the FDIC implemented section 343 of the Dodd-Frank Act providing unlimited insurance coverage on noninterest-bearing transaction accounts. Beginning December 31, 2010, through December 31, 2012, all noninterest-bearing transaction accounts are fully insured, regardless of the balance of the account, at all FDIC-insured institutions. The Corporation’s noninterest-bearing transaction deposits at other institutions of approximately $10,320,000 are fully insured.

Additionally, the Corporation had approximately $36,963,000 at the Federal Home Loan Bank and Federal Reserve Bank, which are government-sponsored entities not insured by the FDIC.

The Corporation is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 2011, was $23,668,000.

INVESTMENT SECURITIES

12 Months Ended

Dec. 31, 2011

INVESTMENT SECURITIES

NOTE 3

INVESTMENT SECURITIES

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale at December 31, 2011
U.S. Government-sponsored agency securities	$	99	$	18			$	117
State and municipal		136,857		10,496				147,353
U.S. Government-sponsored mortgage-backed securities		358,928		10,086	$	16		368,998
Corporate Obligations		5,765				5,572		193
Equity securities		1,830						1,830
Total available for sale		503,479		20,600		5,588		518,491
Held to maturity at December 31, 2011
State and municipal		120,171		3,785				123,956
U.S. Government-sponsored mortgage-backed securities		307,738		10,775				318,513
Total held to maturity		427,909		14,560				442,469
Total Investment Securities	$	931,388	$	35,160	$	5,588	$	960,960


Available for sale at December 31, 2010
U.S. Government-sponsored agency securities	$	600	$	16			$	616
State and municipal		233,622		7,108	$	740		239,990
U.S. Government-sponsored mortgage-backed securities		293,311		4,293		2,287		295,317
Corporate Obligations		5,856				5,674		182
Equity securities		3,265						3,265
Total available for sale		536,654		11,417		8,701		539,370
Held to maturity at December 31, 2010
State and municipal		10,070		389		5		10,454
U.S. Government-sponsored mortgage-backed securities		277,357		2,064		3,605		275,816
Total held to maturity		287,427		2,453		3,610		286,270
Total Investment Securities	$	824,081	$	13,870	$	12,311	$	825,640

In August of 2011, the Corporation transferred selected state and municipal securities from available for sale to held to maturity. The cost basis of the securities was $97.3 million prior to the transfer and was increased by the $8.5 million in unrealized gains to $105.8 million. The Corporation does not intend to sell the securities; therefore, the securities were transferred to held to maturity.

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. The historical cost of these investments totaled $11,925,000 and $273,853,000 at December 31, 2011 and 2010, respectively. Total fair value of these investments was $6,339,000 and $261,542,000, which is approximately 0.7 and 31.6 percent of the Corporation's available for sale and held to maturity investment portfolio at December 31, 2011 and 2010, respectively.

Except as discussed below, management believes the declines in fair value for these securities are 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 in the period the other-than-temporary impairment (“OTTI”) is identified.

The Corporation’s management has evaluated all securities with unrealized losses for OTTI as of December 31, 2011. 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.

The current unrealized losses are primarily concentrated within trust preferred securities held by the Corporation. Such investments have an amortized cost of $5.7 million and a fair value of $163,000, which is less than 1 percent of the Corporation’s entire investment portfolio. On all but one small pool investment, the Corporation utilized Moody’s to determine their fair value.

In determining the fair value of the trust preferred securities, the Corporation utilizes a third party for portfolio accounting services, including market value input. The Corporation has obtained an understanding of what inputs are being used by the vendor in pricing the portfolio and how the vendor was classifying 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. Discount rates used in the cash flow analysis on these variable rate securities were those margins in effect at the inception of the security added to the appropriate three-month LIBOR spot rate obtained from the forward LIBOR curve used to project future principal and interest payments. These spreads ranged from .85 percent to 1.57 percent spread over LIBOR.

U.S. Government-Sponsored Mortgage-Backed Securities

The unrealized losses on the Corporation’s investment in government-sponsored 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, 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 December 31, 2011. As noted in the table above, the government-sponsored mortgage-backed securities portfolio contains unrealized losses of $16,000 on two securities in the available for sale portfolio.

Corporate Obligations

The Corporation’s unrealized losses on trust preferred securities total $5.6 million on a book value of $5.7 million. The decline in value is attributable to temporary illiquidity and the financial crisis affecting these markets coupled with the potential credit loss resulting from the adverse change in expected cash flows. Due to the illiquidity in the market, it is unlikely that the Corporation would be able to recover its investment in these securities if the Corporation sold the securities at this time. The Corporation has analyzed the cash flow characteristics of the securities and this analysis included utilizing the most recent trustee reports and any other relevant market information including announcements of deferrals or defaults of trust preferred securities. The Corporation has recognized a loss of $400,000 in 2011, equal to the credit loss, establishing a new, lower amortized cost basis. The credit loss was calculated by comparing expected discounted cash flows based on performance indicators of the underlying assets in the security to the carrying value of the investment. Because the Corporation does not intend to sell the investment and it is not more likely than not, the Corporation will be required to sell the investment before recovery of its new, lower amortized cost basis, which may be maturity, it does not consider the remainder of the investment securities, which are classified as Level 3 inputs in the fair value hierarchy, to be other-than-temporarily impaired at December 31, 2011.

Certain Losses Recognized on Investments

Certain debt securities have experienced fair value deterioration due to credit losses and other market factors. The following table provides information about debt securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income.

	Accumulated Credit Losses in 2011		Accumulated Credit Losses in 2010
Credit losses on debt securities held:
Balance, January 1	$	10,955	$	9,411
Additions related to other-than-temporary losses not previously recognized		400		1,544
Balance, December 31	$	11,355	$	10,955

The following table shows the Corporation’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2011 and 2010:

	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
	Less than 12 Months					12 Months or Longer					Total
Temporarily Impaired Investment
Securities at December 31, 2011
State and municipal
U.S. Government-sponsored mortgage-backed securities	$	6,176	$	(16	)						$	6,176	$	(16	)
Corporate obligations						$	163	$	(5,572	)		163		(5,572	)
Total Temporarily Impaired Investment Securities	$	6,176	$	(16	)	$	163	$	(5,572	)	$	6,339	$	(5,588	)

Temporarily Impaired Investment
Securities at December 31, 2010
State and municipal	$	31,796	$	(745	)						$	31,796	$	(745	)
U.S. Government-sponsored mortgage-backed securities		229,441		(5,892	)	$	154					229,595		(5,892	)
Corporate obligations							151	$	(5,674	)		151		(5,674	)
Total Temporarily Impaired Investment Securities	$	261,237	$	(6,637	)	$	305	$	(5,674	)	$	261,542	$	(12,311	)

The amortized cost and fair value of securities available for sale and held to maturity at December 31, 2011 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 December 31, 2011
Due in one year or less	$	4,384	$	4,456	$	1,835	$	1,835
Due after one through five years		12,231		12,822		4,533		4,593
Due after five through ten years		28,048		30,365		44,735		46,182
Due after ten years		98,058		100,020		69,068		71,346
	$	142,721	$	147,663	$	120,171	$	123,956

U.S. Government-sponsored mortgage-backed securities		358,928		368,998		307,738		318,513
Equity securities		1,830		1,830
Total Investment Securities	$	503,479	$	518,491	$	427,909	$	442,469

Securities with a carrying value of approximately $299,478,000, $271,091,000 and $261,691,000 were pledged at December 31, 2011, 2010 and 2009, respectively, to secure certain deposits and securities sold under repurchase agreements, and for other purposes as permitted or required by law.

Gross gains of $2,439,000, $3,636,000 and $11,158,000 in 2011, 2010 and 2009, respectively, and gross losses of $0, $230,000 and $17,000 in 2011, 2010 and 2009, respectively, were realized on sales of available for sale securities.

LOANS AND ALLOWANCE

12 Months Ended

Dec. 31, 2011

LOANS AND ALLOWANCE

NOTE 4

LOANS AND ALLOWANCE

The Corporation’s primary lending focus is small business and middle market commercial and residential real estate, auto and small consumer lending. The following tables show the composition of the loan portfolio, loan grades and the allowance for loan losses excluding loans held for sale. Residential real estate loans held for sale at December 31, 2011, and December 31, 2010, were $17,864,000 and $21,469,000, respectively.

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

	December 31,			December 31,
	2011			2010
Loans:
Commercial and industrial loans	$	532,523		$	530,322
Agricultural production financing and other loans to farmers		104,526			95,516
Real estate loans
Construction		81,780			106,615
Commercial and farm land		1,194,230			1,229,037
Residential		481,493			522,051
Home Equity		191,631			201,969
Individuals loans for household and other personal expenditures		84,172			115,295
Lease financing receivables, net of unearned income		3,555			5,157
Other loans		39,505			29,721
		2,713,415			2,835,683
Allowance for loan losses		(70,898	)		(82,977	)
Total Loans	$	2,642,517		$	2,752,706

The Corporation maintains an allowance for loan losses to cover probable credit losses identified during its loan review process. The allowance is increased by the provision for loan losses and decreased by charge offs less recoveries. All charge offs are approved by the Bank’s senior loan officers or loan committees, depending on the amount of the charge off, and are reported to the Bank’s Board of Directors. The Bank charges off loans when a determination is made that all or a portion of a loan is uncollectible. The allowance for loan losses is maintained through the provision for loan losses, which is a charge against earnings.

The amount provided for loan losses in a given period may be greater than or less than net loan losses, and is based on management’s judgment as to the appropriate level of the allowance for loan losses. The determination of the provision for loan losses in a given period is based on management’s continuing review and evaluation of the loan portfolio, including an internally administered loan "watch" list and an independent loan review. 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 current economic conditions on the portfolio.

Management believes that the allowance for loan losses is adequate to cover probable losses inherent in the loan portfolio at December 31, 2011. 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, as estimates about the effect of uncertain matters are needed. The allowance for loan losses considers current factors, including economic conditions and ongoing internal and external examination processes and will increase or decrease as deemed necessary to ensure the allowance for loan losses 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, loan mix and collateral values.

The historical loss allocation for loans not deemed impaired according to ASC 310 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, includes 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 criticized 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 help ensure that losses inherent in the portfolio are reflected in the allowance for loan losses. The environmental component adjusts the historical loss allocations for commercial and consumer 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.

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

Commercial

Commercial loans are 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 assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. 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.

Residential and Consumer

With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, the Corporation generally establishes a maximum loan-to-value ratio and requires PMI if that ratio is exceeded. Home equity loans are typically 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 can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

The following table summarizes changes in the allowance for loan losses by loan segment for the year ended December 31, 2011:

	Twelve Months Ended December 31, 2011
	Commercial			Real Estate Commercial			Consumer			Residential			Finance Leases			Total
Allowance for loan losses:
Balances, January 1	$	32,508		$	36,341		$	3,622		$	10,408		$	98		$	82,977
Provision for losses		(13,787	)		28,574			(221	)		8,166			(102	)		22,630
Recoveries on loans		8,828			2,811			942			1,176			7			13,764
Loans charged off		(9,818	)		(29,807	)		(1,441	)		(7,407	)					(48,473	)
Balances, December 31, 2011	$	17,731		$	37,919		$	2,902		$	12,343		$	3		$	70,898

The following table summarize the changes in the allowance for loan losses for the years indicated:

	2010			2009
Allowance for loan losses:
Balance, January 1	$	92,131		$	49,543
Provision for losses		46,483			122,176
Adjustment related to acquisition					2,040
Recoveries on loans		11,935			7,966
Loans charged off		(67,572	)		(89,594	)
Balance, December 31, 2010	$	82,977		$	92,131

The following tables show the Corporation’s allowance for credit losses and loan portfolio by loan segment for the years indicated:

	December 31, 2011
	Commercial		Commercial Real Estate		Consumer		Residential		Finance Leases		Total
Allowance Balances:
Individually evaluated for impairment	$	4,701	$	2,504			$	733			$	7,938
Collectively evaluated for impairment		13,030		35,415	$	2,902		11,610	$	3		62,960
Total Allowance for Loan Losses	$	17,731	$	37,919	$	2,902	$	12,343	$	3	$	70,898

Loan Balances:
Individually evaluated for impairment	$	18,793	$	51,980			$	12,546			$	83,319
Collectively evaluated for impairment		657,760		1,224,031	$	84,172		660,578	$	3,555		2,630,096
Total Loans	$	676,553	$	1,276,011	$	84,172	$	673,124	$	3,555	$	2,713,415

	December 31, 2010
	Commercial		Commercial Real Estate		Consumer		Residential		Finance Leases		Total
Allowance Balances:
Individually evaluated for impairment	$	5,726	$	7,545			$	643			$	13,914
Collectively evaluated for impairment		26,782		28,796	$	3,622		9,765	$	98		69,063
Total Allowance for Loan Losses	$	32,508	$	36,341	$	3,622	$	10,408	$	98	$	82,977

Loan Balances:
Individually evaluated for impairment	$	28,965	$	77,705			$	9,534			$	116,204
Collectively evaluated for impairment		626,594		1,257,947	$	115,295		714,486	$	5,157		2,719,479
Total Loans	$	655,559	$	1,335,652	$	115,295	$	724,020	$	5,157	$	2,835,683

Information on non-performing assets, including non-accruing, real estate owned and renegotiated loans, plus accruing loans contractually past due 90 days or more, is summarized below:

	December 31,		December 31,
	2011		2010
Non-Performing Assets:
Non-accrual loans	$	69,592	$	90,591
Renegotiated loans		14,308		7,139
Non-performing loans (NPL)		83,900		97,730
Real estate owned and repossessed assets		16,289		20,927
Non-performing assets (NPA)		100,189		118,657
90+ days delinquent and still accruing		580		1,330
NPAS & 90+ days delinquent	$	100,769	$	119,987

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. Interest previously recorded, but not deemed collectible, is reversed and charged against current income. 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 for the years indicated:

	December 31,		December 31,
	2011		2010
Commercial and Industrial	$	12,246	$	9,812
Agriculture production financing and other loans				544
Real Estate Loans:
Construction		8,990		17,164
Commercial and farm land		31,093		45,308
Residential		14,805		15,115
Home Equity		1,896		2,648
Individuals loans for household and other personal expenditures		1
Lease financing receivables, net of unearned income
Other Loans		561
Total	$	69,592	$	90,591

Impaired loans include all commercial non-accrual loans and renegotiated loans as well as substandard, doubtful and loss grade loans that were still accruing but deemed impaired according to guidance set forth in ASC 310. Also included in impaired loans are accruing commercial loans that are contractually past due 90 days or more. 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.

Impaired loans are measured by the present value of expected future cash flows or the fair value of the collateral of the loans, if collateral dependent. The fair value for impaired loans is measured based on the value of the collateral securing those loans and is determined using several methods. 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 valued by using the financial information such as financial statements and aging reports provided by the borrower and is discounted as considered appropriate.

The following tables show the composition of the Corporation’s commercial impaired loans by loan class as of December 31, 2011 and December 31, 2010:

	December 31,2011
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans with no related allowance:
Commercial and industrial	$	23,364	$	10,116			$	13,399	$	615
Agriculture production financing and
other loans to farmers
Real Estate Loans:
Construction		14,301		7,701				8,836
Commercial and farm land		49,242		34,571				39,032		591
Residential		7,491		6,185				6,539		20
Home equity		4,425		1,241				1,500		15
Individuals loans for household and
other personal expenditures
Lease financing receivables, net of
unearned income
Other loans		99		21				24
Total	$	98,922	$	59,835			$	69,330	$	1,241

Impaired loans with related allowance:
Commercial and industrial	$	8,691	$	8,104	$	4,142	$	8,196	$	174
Agriculture production financing and
other loans to farmers
Real Estate Loans:
Construction		961		961		321		961
Commercial and farm land		12,115		8,748		2,183		10,028		140
Residential		1,888		1,575		391		1,687		7
Home equity
Individuals loans for household and
other personal expenditures
Lease financing receivables, net of
unearned income
Other loans		579		552		559		590
Total	$	24,234	$	19,940	$	7,596	$	21,462	$	321
Total Impaired Loans	$	123,156	$	79,775	$	7,596	$	90,792	$	1,562

	December 31, 2010
	Unpaid Principal Balance		Recorded Investment		Related Allowance
Impaired loans with no related allowance:
Commercial and industrial	$	30,006	$	16,572
Agriculture production financing and
other loans to farmers		966		530
Real Estate Loans:
Construction		12,598		9,150
Commercial and farm land		64,064		43,653
Residential		7,909		5,153
Home equity		4,460		1,245
Other loans		101		14
Total	$	120,104	$	76,317

Impaired loans with related allowance:
Commercial and industrial	$	11,477	$	11,374	$	5,250
Real Estate Loans:
Construction		9,353		7,824		2,049
Commercial and farm land		17,984		17,076		5,496
Residential		2,740		2,691		465
Home equity		458		446		178
Other loans		476		476		476
Total	$	42,488	$	39,887	$	13,914
Total Impaired Loans	$	162,592	$	116,204	$	13,914

In addition to the impaired loans outlined above, the Corporation has identified $3,544,000 in non-accrual residential mortgage loans which have been deemed impaired in accordance with ASC 310. Specific reserves totaling $342,000 have been set on nine of these loans with a total principal balance of $1,104,000.

As part of the on-going 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 and (iv) 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. A special mention asset has potential weaknesses that deserve management’s 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. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan adversely impacting the future repayment ability of the borrower. 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:

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,

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,

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

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

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

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

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

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

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 the primary source of repayment is gone or there is 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 uncollectible 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 years 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.

	December 31, 2011
	Commercial Pass		Commercial Special Mention		Commercial Substandard		Commercial Doubtful		Commercial Loss	Consumer Performing		Consumer Non Performing		Total Loans
Commercial and Industrial	$	478,885	$	22,405	$	28,025	$	3,208						$	532,523
Agriculture production financing and other loans		101,289		1,582		1,655									104,526
Real Estate Loans:
Construction		47,611		3,672		22,376				$	7,762	$	359		81,780
Commercial and farm land		1,033,397		54,697		103,330		1,724			1,035		47		1,194,230
Residential		139,237		9,175		16,699		500			308,306		7,576		481,493
Home Equity		15,912		499		3,317					170,776		1,127		191,631
Individuals loans for household and other personal expenditures											84,121		51		84,172
Lease financing receivables, net of unearned income											3,555				3,555
Other Loans		38,917		15		21		552							39,505
Total	$	1,855,248	$	92,045	$	175,423	$	5,984		$	575,555	$	9,160	$	2,713,415

	December 31, 2010
	Commercial Pass		Commercial Special Mention		Commercial Substandard		Commercial Doubtful		Commercial Loss		Consumer Performing		Consumer Non Performing		Total Loans
Commercial and Industrial	$	454,305	$	19,928	$	53,199	$	2,870	$	20					$	530,322
Agriculture production financing and other loans		92,293		574		2,649										95,516
Real Estate Loans:
Construction		66,918		10,100		28,167		1,430								106,615
Commercial and farm land		1,038,861		38,676		146,213		5,287								1,229,037
Residential		144,163		9,220		18,747		1,169			$	340,932	$	7,820		522,051
Home Equity		17,913		283		2,872		524				178,470		1,907		201,969
Individuals loans for household and other personal expenditures												115,239		56		115,295
Lease financing receivables, net of unearned income		280				18						4,859				5,157
Other Loans		27,642		1,295		784										29,721
Total	$	1,842,375	$	80,076	$	252,649	$	11,280	$	20	$	639,500	$	9,783	$	2,835,683

The following tables show a past due aging of the Corporation’s loan portfolio, by loan class, for the years indicated:

	December 31, 2011
	Current		30-59 Days Past Due		60-89 Days Past Due		Loans > 90 Days And Accruing		Non- Accrual		Total Past Due & Non-Accrual		Total Loans
Commercial and Industrial	$	518,764	$	1,332	$	135	$	46	$	12,246	$	13,759	$	532,523
Agriculture production financing and other loans		104,464		62								62		104,526
Real Estate Loans:
Construction		69,305		328		3,126		31		8,990		12,475		81,780
Commercial and farm land		1,140,897		16,457		5,783				31,093		53,333		1,194,230
Residential		458,925		5,485		2,087		191		14,805		22,568		481,493
Home Equity		187,788		1,096		590		261		1,896		3,843		191,631
Individuals loans for household and other personal expenditures		82,837		1,075		208		51		1		1,335		84,172
Lease financing receivables, net of unearned income		3,555												3,555
Other Loans		38,944								561		561		39,505
Total	$	2,605,479	$	25,835	$	11,929	$	580	$	69,592	$	107,936	$	2,713,415

	December 31, 2010
	Current		30-59 Days Past Due		60-89 Days Past Due		Loans > 90 Days And Accruing		Non- Accrual		Total Past Due & Non-Accrual		Total Loans
Commercial and Industrial	$	518,683	$	1,477	$	211	$	139	$	9,812	$	11,639	$	530,322
Agriculture production financing and other loans		94,972								544		544		95,516
Real Estate Loans:
Construction		86,710		1,543		996		202		17,164		19,905		106,615
Commercial and farm land		1,171,580		6,769		5,380				45,308		57,457		1,229,037
Residential		498,066		5,261		3,363		246		15,115		23,985		522,051
Home Equity		196,276		1,825		534		686		2,648		5,693		201,969
Individuals loans for household and other personal expenditures		112,760		1,989		489		57				2,535		115,295
Lease financing receivables, net of unearned income		5,157												5,157
Other Loans		29,721												29,721
Total	$	2,713,925	$	18,864	$	10,973	$	1,330	$	90,591	$	121,758	$	2,835,683

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 7 of this Annual Report on Form 10-K.

Given recent economic conditions, borrowers of all types are experiencing declines in income and cash flow. As a result, borrowers are occasionally seeking to reduce contractual cash outlays including debt payments. Concurrently, in an effort to preserve and protect its earning assets, specifically troubled loans, the Corporation is working 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 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 restructurings that occurred during the period ended December 31, 2011:

	Pre-Modification		Post-Modification		Number
	Recorded Balance		Recorded Balance		of Loans
Commercial and Industrial	$	4,023	$	4,033		17
Agriculture production financing and other loans
Real Estate Loans:
Construction		791		726		5
Commercial and farm land		17,297		15,260		19
Residential		6,892		7,076		52
Individuals loans for household and other personal expenditures		90		94		9
Other Loans		12		12		1
Total	$	29,105	$	27,201		103

	Balance as of December 31, 2011
	Term		Rate				Total
	Modification		Modification		Combination		Modification
Commercial and Industrial	$	3,816			$	118	$	3,934
Agriculture production financing and other loans
Real Estate Loans:
Construction		581	$	125		17		723
Commercial and farm land		10,338		954		2,810		14,102
Residential		5,610		99		1,022		6,731
Home Equity		55				34		89
Individuals loans for household and other personal expenditures
Lease financing receivables, net of unearned income
Other Loans		12						12
Total	$	20,412	$	1,178	$	4,001	$	25,591

Loans secured by commercial and farm real estate made up 57 percent of the post-modification balances of the troubled debt restructured loans in the twelve months ending December 31, 2011. The second largest class of troubled debt restructurings in 2011 was residential real estate loans, including home equity, accounting for 26 percent of the total.

The following table summarizes troubled debt restructures that occurred between January 1, 2011, and December 31, 2011, that subsequently defaulted during the period:

	Twelve Months Ended
	December 31, 2011
	Number of Loans		Recorded Balance
Commercial and Industrial		3	$	471
Agriculture production financing and other loans
Real Estate Loans:
Commercial and farm land		3		1,951
Residential		7		557
Individuals loans for household and other personal expenditures		1		5
Other
Total		14	$	2,984

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 restructurings are generally included in the general historical allowance for loan loss at the post modification balance. Consumer non-accrual and delinquent troubled debt restructurings are also considered in the calculation of the non-accrual and delinquency trend environmental allowance allocation. 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 30 – 89 day delinquent troubled debt restructurings are included in the calculation of the delinquency trend environmental allowance allocation. All commercial non-impaired loans, including non-accrual and 90+ day delinquents, are included in the ASC 450 loss migration analysis.

- Definition

The entire disclosure for claims held for amounts due a company. Examples include trade accounts receivables, notes receivables, loans receivables.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Regulation S-X (SX)
-Number 210
-Section 02
-Paragraph 3, 4
-Article 5

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Regulation S-X (SX)
-Number 210
-Section 03
-Paragraph 7
-Article 9

Reference 3: http://www.xbrl.org/2003/role/presentationRef
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-Name Statement of Position (SOP)
-Number 01-6
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Reference 4: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Regulation S-X (SX)
-Number 210
-Article 4
-Section 08
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+ Details

PREMISES AND EQUIPMENT

12 Months Ended

Dec. 31, 2011

PREMISES AND EQUIPMENT

NOTE 5

PREMISES AND EQUIPMENT

	2011			2010
Cost at December 31:
Land	$	14,296		$	14,296
Buildings and Leasehold Improvements		62,317			60,736
Equipment		39,789			44,308
Total Cost		116,402			119,340
Accumulated Depreciation and Amortization		(65,389	)		(66,890	)
Net	$	51,013		$	52,450

The Corporation is committed under various noncancelable lease contracts for certain subsidiary office facilities and equipment. Total lease expense for 2011, 2010 and 2009 was $2,636,000, $2,801,000 and $2,555,000, respectively. The future minimum rental commitments required under the operating leases in effect at December 31, 2011, expiring at various dates through the year 2018 are as follows for the years ending December 31:

2012	$	2,273
2013		1,938
2014		1,740
2015		1,534
2016		1,166
After 2016		741
Total Future Minimum Obligations	$	9,392

- Definition

The entire disclosure for long-lived, physical assets that are used in the normal conduct of business to produce goods and services and not intended for resale. Examples include land, buildings, machinery and equipment, and other types of furniture and equipment including, but not limited to, office equipment, furniture and fixtures, and computer equipment and software. This disclosure may include property plant and equipment accounting policies and methodology, a schedule of property, plant and equipment gross, additions, deletions, transfers and other changes, depreciation, depletion and amortization expense, net, accumulated depreciation, depletion and amortization expense and useful lives, income statement disclosures, assets held for sale and public utility disclosures.

+ References + Details

GOODWILL

12 Months Ended

Dec. 31, 2011

GOODWILL

NOTE 6

GOODWILL

The carrying amount of goodwill at December 31, 2011 and 2010 was $141,357,000 respectively. No impairment loss was recorded in 2011 and 2010. The impact of deteriorating economic conditions has significantly impacted the banking industry in 2010 and 2011 and has impacted the financial results of the Corporation. The Corporation tested goodwill for impairment during 2010 and 2011. In both valuations, the fair value exceeded the Corporation’s carrying value; therefore, it was concluded goodwill is not impaired. For additional details related to impairment testing, see the “GOODWILL” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K.

CORE DEPOSIT AND OTHER INTANGIBLES

12 Months Ended

Dec. 31, 2011

CORE DEPOSIT AND OTHER INTANGIBLES

NOTE 7

CORE DEPOSIT AND OTHER INTANGIBLES

The carrying basis and accumulated amortization of recognized core deposit and other intangibles at December 31 were:

	2011			2010
Gross carrying amount	$	45,422		$	45,422
Accumulated amortization		(36,308	)		(32,760	)
Core Deposit and Other Intangibles	$	9,114		$	12,662

Amortization expense for the years ended December 31, 2011, 2010 and 2009, was $3,548,000, $4,721,000 and $5,109,000, respectively. Estimated amortization expense for each of the following five years is:

2012	$	1,858
2013		1,441
2014		1,437
2015		1,437
2016		1,399
After 2016		1,542
	$	9,114

DEPOSITS

12 Months Ended

Dec. 31, 2011

DEPOSITS

NOTE 8

DEPOSITS

	December 31,		December 31,
	2011		2010
Demand Deposits	$	1,438,513	$	1,362,927
Savings Deposits		757,166		763,949
Certificates and Other Time Deposits of $100,000 or more		264,787		334,748
Other Certificates and Time Deposits		551,247		661,569
Brokered Deposits		122,942		145,687
Total Deposits	$	3,134,655	$	3,268,880

Certificates and Other Time Deposits Maturing in Years Ending December 31:
2012	$	519,025
2013		274,365
2014		70,387
2015		33,814
2016		39,530
After 2016		1,855
	$	938,976

- Definition

The entire disclosure for deposit liabilities including data and tables. It may include a description of the entity's deposit liabilities, the aggregate amount of time deposits (including certificates of deposit) in denominations of $100,000 or more at the balance sheet date; the aggregate amount of any demand deposits that have been reclassified as loan balances, such as overdrafts, at the balance sheet date; deposits that are received on terms other than those in the normal course of business, the amount of accrued interest on deposit liabilities; securities, mortgage loans or other financial instruments that serve as collateral for deposits; for time deposits having a remaining term of more than one year, the aggregate amount of maturities for each of the five years following the balance sheet date; and the weighted average interest rate for all deposit liabilities held by the entity.

+ References + Details

BORROWINGS

12 Months Ended

Dec. 31, 2011

BORROWINGS

NOTE 9

BORROWINGS

	December 31,		December 31,
	2011		2010
Securities Sold Under Repurchase Agreements	$	156,305	$	109,871
Federal Home Loan Bank Advances		138,095		82,684
Subordinated Debentures and Term Loans		194,974		226,440
Total Borrowings	$	489,374	$	418,995

Securities sold under repurchase agreements consist of obligations of the Bank to other parties. The obligations are secured by U.S. Treasury and U.S. Government-Sponsored Enterprise obligations. The maximum amount of outstanding agreements at any month-end during 2011 and 2010 totaled $162,315,000 and $117,571,000, respectively, and the average of such agreements totaled $120,415,000 and $107,573,000 during 2011 and 2010, respectively.

Included in the outstanding balance of Federal Home Loan Bank advances are $48,000,000 and $51,000,000 of putable advances as of December 31, 2011 and 2010 respectively. Maturities of securities sold under repurchase agreements; Federal Home Loan Bank advances, subordinated debentures and term loans as of December 31, 2011, are as follows:

Maturities in Years Ending December 31:	Securities Sold Under Repurchase Agreements		Federal Home Loan Bank Advances		Subordinated Debentures and Term Loans
2012	$	146,305	$	49,785	$	79,148
2013				217
2014		10,000		26,207
2015				27,000		55,000
2016				29,009
After 2016				5,877		60,826
	$	156,305	$	138,095	$	194,974

The terms of a security agreement with the FHLB require the Corporation to pledge, as collateral for advances, qualifying first mortgage loans, investment securities and multifamily loans in an amount equal to at least 155 percent of these advances depending on the type of collateral pledged. Advances, with interest rates from 0.86 to 6.81 percent, are subject to restrictions or penalties in the event of prepayment. The total available remaining borrowing capacity from the FHLB at December 31, 2011, was $94,812,000.

Subordinated Debentures and Term Loans. Five borrowings were outstanding on December 31, 2011, for $194,974,000.

●

First Merchants Capital Trust III. The Corporation entered into a junior subordinated debenture on June 30, 2010 for $47,835,000, subsequent to an Exchange Agreement with the United States Department of the Treasury (the “Treasury”) whereby the Treasury exchanged 46,400 shares of the Corporation’s Preferred Stock for 46,400 shares of trust preferred securities, issued by First Merchants Capital Trust III. The Trust used 46,400 shares of tendered preferred stock and $1.4 million in proceeds from the sale of Common Securities to the Corporation to purchase the debentures. On September 22, 2011, the Corporation redeemed the Capital Securities and Debentures pursuant to a Repurchase Letter agreement with the Treasury. For more information related to this debt repayment, see Note 15. Regulatory Capital, Equity Offering and Capital Purchase Program in the Notes to Consolidated Condensed Financial Statements of this Annual Report on Form 10-K.

●

First Merchants Capital Trust II. The subordinated debenture, entered into on July 2, 2007, for $56,702,000 will mature on September 15, 2037. The Corporation may redeem the debenture no earlier than September 15, 2012, subject to the prior approval of the Board of Governors of the Federal Reserve System, as required by law or regulation. Interest is fixed at 6.495 percent for the period from the date of issuance through September 15, 2012, and thereafter, at an annual floating rate equal to the three-month LIBOR plus 1.56 percent, reset quarterly. Interest is payable in March, June, September and December of each year. The Corporation holds all of the outstanding common securities of First Merchants Capital Trust II.

●

CNBC Statutory Trust I. As part of the March 1, 2003, acquisition of CNBC Bancorp, the Corporation assumed $4,124,000 of a junior subordinated debenture entered into on February 22, 2001. The subordinated debenture of $4,124,000 will mature on February 22, 2031. Interest is fixed at 10.2 percent and payable on February 22 and August 22 of each year. The Corporation may redeem the debenture, in whole or in part, at its option commencing February 22, 2011, at a redemption price of 105.1 percent of the outstanding principal amount and, thereafter, at a premium which declines annually. On or after February 22, 2021, the securities may be redeemed at face value with prior approval of the Board of Governors of the Federal Reserve System. The Corporation holds all of the outstanding common securities of CNBC Statutory Trust I.

●

Bank of America, N.A. The Corporation currently has a $55 million credit facility with Bank of America, N.A. comprised of (a) a term loan in the principal amount of $5 million (the “Term Loan”) and (b) a subordinated debenture in the principal amount of $50 million (the “Subordinated Debt”). Pursuant to the terms of the underlying Loan Agreement (the “Loan Agreement”), the Term Loan and the Subordinated Debt each mature on February 15, 2015. The Term Loan is secured by a pledge of all of the issued and outstanding shares of the Bank.

The Loan Agreement contains certain customary representations and warranties and financial and negative covenants. A breach of any of these covenants could result in a default under the Loan Agreement. At December 31, 2011, the Corporation failed to meet the minimum return on average total assets covenant of 0.75 percent.

The Loan Agreement provides that upon an event of default as the result of the Corporation’s failure to comply with a financial covenant, Bank of America may (a) declare the $5 million outstanding principal amount of the Term Loan immediately due and payable, (b) exercise all of its rights and remedies at law, in equity and/or pursuant to any or all collateral documents, including foreclosing on the collateral if payment of the Term Loan is not made in full, and (c) add a default rate of 3 percent per annum to the Term Loan. Because the Subordinated Debt is treated as Tier 2 capital for regulatory capital purposes, the Loan Agreement does not provide Bank of America with any right of acceleration or other remedies with regard to the Subordinated Debt upon an event of default caused by the Corporation’s breach of a financial covenant. To date, Bank of America has chosen to apply the default rate, but not to accelerate the Term Loan based on the Corporation’s failure to meet these financial covenants.

●

Temporary Liquidity Guarantee Program. On March 31, 2009, the Bank, entered into $79,000,000 of 2.625 percent Senior Notes (the “Notes”) due on March 30, 2012 through a pooled offering. Including the FDIC fee, underwriting, legal and accounting expenses, the effective rate is 3.812 percent. The Notes are guaranteed by the Federal Deposit Insurance Corporation under its Temporary Liquidity Guarantee Program and are backed by the full faith and credit of the United States. The Notes are issued by the Bank and are not an obligation of, or guaranteed by, the Corporation. In connection with the FDIC's Temporary Liquidity Guarantee Program, the Bank entered into a Master Agreement with the FDIC on January 16, 2009. The Master Agreement contains, among other things, certain terms and conditions that must be included in the governing documents for any senior debt securities issued by the Bank that is guaranteed pursuant to the FDIC's Temporary Liquidity Guarantee Program.

Subordinated Debentures and Term Loans. Six borrowings were outstanding on December 31, 2010, for $226,440,000.

●

First Merchants Capital Trust III. The Corporation entered into a junior subordinated debenture on June 30, 2010 for $47,835,000. The Corporation may redeem the debenture, in whole or in part, at its option while the Capital Securities or this Security are held by the United States Department of the Treasury in conjunction with Troubled Asset Relief Program assistance provided to the Corporation, or at any time on or after June 30, 2015, subject to the prior approval of the Board of Governors of the Federal Reserve System, as required by law or regulation. Interest is fixed at 5.00 percent for the period from the date of issuance through February 19, 2014, and thereafter, at a fixed rate of 9 percent. Interest is payable in February, May, August and November of each year. The Corporation holds all of the outstanding common securities of First Merchants Capital Trust III.

●

The Loan Agreement contains certain customary representations and warranties and financial and negative covenants. A breach of any of these covenants could result in a default under the Loan Agreement. At December 31, 2010, the Corporation failed to meet the minimum return on average total assets covenant of 0.75 percent.

●

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

+ References + Details

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

12 Months Ended

Dec. 31, 2011

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 10

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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.

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 December 31, 2011 and December 31, 2010.

Asset Derivatives

Liability Derivatives

December 31, 2011

December 31, 2010

December 31, 2011

December 31, 2010

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

424

Other Assets

1,393

Other Liabilities

2,305

Other Liabilities

Derivatives not designated as hedging instruments:

Interest rate contracts

Other Assets

5,241

Other Assets

3,718

Other Liabilities

5,492

Other Liabilities

3,876

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 this objective, 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 December 31, 2011, the Corporation had two interest rate swaps with a notional of $26 million and one interest rate cap with a notional of $13 million that were designated as cash flow hedges. As of December 31, 2010, the Corporation had one interest rate swap with a notional of $13 million and one interest rate cap with a notional of $13 million that were designated as cash flow hedges.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2011, such derivatives were used to hedge the forecasted variable cash outflows (LIBOR-based) associated with existing trust preferred securities when the outflows convert from a fixed rate to variable rate in September 2012. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the years ended December 31, 2011 and 2010, 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 does not expect to reclassify any amounts from accumulated other comprehensive income to interest.

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 December 31, 2011, the notional amount of customer-facing swaps was approximately $111,191,000. This amount is offset with third party counterparties, as described above. During the years ended December 31, 2011 and 2010, the Corporation recognized a net loss of $94,000 and $134,000, respectively, related to the changes in fair value of these swaps.

Effect of Derivative Instruments on the Income Statement

The tables below present the effect of the Corporation’s derivative financial instruments on the Income Statement for the years ended December 31, 2011 and 2010.

Derivatives in Cash Flow Hedging Relationships	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) for the twelve months ended December 31, 2011	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) for the twelve months ended December 31, 2010
Interest Rate Products	Interest Income
	Other Income		$	442
			$	442

Derivatives Not Designated as Hedging Instruments under FASB ASC 815-10	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative for the twelve months ended December 31, 2011				Amount of Gain (Loss) Recognized in Income on Derivative for the twelve months ended December 31, 2010
Interest Rate Contracts	Other income	$	(94	)		$	(134	)

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

Credit-Risk-Related Contingent Features

The Corporation has agreements with certain of its derivative counterparties that contain a provision where if the Corporation fails to maintain its status as a well/adequate capitalized institution, then the Corporation could be required to terminate or fully collateralize all outstanding derivative contracts.

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 December 31, 2011, the termination value of derivatives in a net liability position related to these agreements was $7,949,000. As of December 31, 2011, the Corporation has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $6,456,000. If the Corporation had breached any of these provisions at December 31, 2011, it could have been required to settle its obligations under the agreements at their termination value.

- Definition

The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 133
-Paragraph 45
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 2: http://www.xbrl.org/2003/role/presentationRef
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Reference 22: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 30
-Section 45
-Paragraph 1
-URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993

+ Details

FAIR VALUES OF FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2011

FAIR VALUES OF FINANCIAL INSTRUMENTS

NOTE 11

FAIR VALUES OF FINANCIAL INSTRUMENTS

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.

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

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

Investment Securities

Where quoted, market prices are available in an active market and securities are classified within Level 1 of the valuation hierarchy. There are no securities classified within Level 1 of the hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include agencies, government-sponsored mortgage backs, state and municipal and equity 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, corporate obligations and equity securities. Level 3 fair value on state and municipal, corporate obligations and equity 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.

Corporate Obligations

The pooled trust preferred securities in the portfolio fall within the scope of ASC 325-10 (formerly EITF 99-20) and include $5.7 million amortized cost, with a fair value of $163,000. These securities were rated A or better at inception, but at December 31, 2011, Moody’s ratings on these securities range from Ca to C. The issuers in these securities are primarily banks, but some of the pools do include a limited number of insurance companies. The Corporation uses an other-than-temporary impairment (“OTTI”) evaluation process to compare the present value of expected cash flows to determine whether an adverse change in cash flows has occurred. The OTTI process considers the structure and term of the collateralized debt obligation (“CDO”) and the financial condition of the underlying issuers. Specifically, the process details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the process include expected future default rates and prepayments as well as recovery assumptions on defaults and deferrals. In addition, the process is used to “stress” each CDO, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully support repayment of the Corporation’s note class. For 2011, OTTI losses were $2.8 million, of which $400,000 was recorded as expense and an unrealized gain of $2.4 million was recorded in other comprehensive income.

Interest Rate Derivative Agreements

See information regarding the Corporation’s interest rate derivative products in Note 10. DERIVATIVE FINANCIAL INSTRUMENTS, in the Notes to Consolidated Financial Statements included as Item 8 of this Annual Report on Form 10-K.

The fair value is estimated by a third party using inputs that are primarily unobservable and cannot be corroborated by observable market data and, therefore, are classified within Level 3 of the valuation hierarchy.

In 2011, approximately, $18,711,000 was transferred from Level 2 to Level 3 due to limited availability of similar securities in active markets. Additionally, the Corporation transferred $97.3 million of selected state and municipal securities from available for sale to held to maturity. These securities are valued at amortized cost and are no longer classified within the fair value hierarchy. All securities were previously classified as Level 2 in the fair value hierarchy. 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 December 31, 2011 and 2010.

				Fair Value Measurements Using
				Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs		Significant Unobservable Inputs
December 31, 2011	Fair Value			(Level 1)	(Level 2)		(Level 3)
U.S. Government-sponsored agency securities	$	117			$	117
State and municipal		147,353				126,712	$	20,641
U.S. Government-sponsored mortgage-backed securities		368,998				368,998
Corporate obligations		193						193
Equity securities		1,830				1,826		4
Interest rate swap asset		5,241						5,241
Interest rate cap		424						424
Interest rate swap liability		(7,797	)					(7,797	)

				Fair Value Measurements Using
				Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs		Significant Unobservable Inputs
December 31, 2010	Fair Value			(Level 1)	(Level 2)		(Level 3)
U.S. Government-sponsored agency securities	$	616			$	616
State and municipal		239,990				239,990
U.S. Government-sponsored mortgage-backed securities		295,317				295,317
Corporate obligations		182					$	182
Equity securities		3,265				3,261		4
Interest rate swap asset		4,002						4,002
Interest rate cap		1,109						1,109
Interest rate swap liability		(3,876	)					(3,876	)

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable Level 3 inputs for year ended December 31, 2011 and 2010.

	Year Ended
	December 31, 2011
	Available for Sale Securities			Interest Rate Swap Asset			Interest Rate Cap			Interest Rate Swap Liability
Beginning Balance	$	186		$	4,002		$	1,109		$	(3,876	)
Total realized and unrealized gains and losses
Included in net income		(400	)		3,827						(3,921	)
Included in other comprehensive income		2,029			(2,588	)		(685	)
Purchases, issuances, and settlements
Transfers in/(out) of Level 3		18,711
Principal payments		312
Ending balance	$	20,838		$	5,241		$	424		$	(7,797	)

	Year Ended
	December 31, 2010
	Available for Sale Securities			Interest Rate Swap Asset		Interest Rate Cap		Interest Rate Swap Liability
Beginning Balance	$	2,483		$	2,624			$	(2,648	)
Total realized and unrealized gains and losses
Included in net income		(1,544	)		1,094				(1,228	)
Included in other comprehensive income		(1,081	)		284	$	158
Purchases, issuances, and settlements							951
Transfers in/(out) of Level 3
Principal payments		328
Ending balance	$	186		$	4,002	$	1,109	$	(3,876	)

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 sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy for year ended December 31, 2011 and 2010.

			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs	Significant Unobservable Inputs
December 31, 2011	Fair Value		(Level 1)	(Level 2)	(Level 3)
Impaired Loans	$	22,885			$	22,885
Other real estate owned (collateral dependent)	$	7,882			$	7,882

			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs	Significant Unobservable Inputs
December 31, 2010	Fair Value		(Level 1)	(Level 2)	(Level 3)
Impaired Loans	$	45,432			$	45,432
Other real estate owned (collateral dependent)	$	6,314			$	6,314

Impaired Loans (collateral dependent) and Other Real Estate Owned

Loan impairment is reported when substantial doubt about the collectability of scheduled payments exists. Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate, or the fair value of collateral if the loan is collateral dependent. 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 2011, 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.

The fair value for impaired loans and other real estate owned is measured based on the value of the collateral securing those loans/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 cash flow analysis. Fair value on other collateral such as business assets is typically calculated by using financial information such as financial statements and aging reports provided by the borrower and is discounted as considered appropriate.

The estimated fair values of the Corporation’s financial instruments are as follows

	2011				2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets at December 31:
Cash and cash equivalents	$	73,312	$	73,312	$	58,307	$	58,307
Interest-bearing time deposits		52,851		52,851		65,216		65,216
Investment securities available for sale		518,491		518,491		539,370		539,370
Investment securities held to maturity		427,909		442,469		287,427		286,270
Mortgage loans held for sale		17,864		17,864		21,469		21,469
Loans		2,642,517		2,658,227		2,752,706		2,715,924
FRB and FHLB stock		31,270		31,270		33,884		33,884
Interest rate swap asset		5,665		5,665		5,111		5,111
Interest receivable		17,723		17,723		18,674		18,674
Liabilities at December 31:
Deposits	$	3,134,655	$	3,139,757	$	3,268,880	$	3,280,489
Borrowings:
Securities sold under repurchase agreements		156,305		157,342		109,871		110,494
FHLB Advances		138,095		141,693		82,684		87,463
Subordinated debentures and term loans		194,974		142,632		226,440		176,259
Interest rate swap liability		7,797		7,797		3,876		3,876
Interest payable		2,925		2,925		4,262		4,262

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 market prices for similar securities.

Mortgage loans held for sale: The fair value of mortgage loans held for sale approximates carrying value.

Loans: The fair value for loans is estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. See Impaired Loans above.

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

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

Derivative instruments: The fair value of interest rate swaps reflect 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.

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 borrowings is estimated using a discounted cash flow calculation, based on current rates for similar debt.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 133
-Paragraph 44A, 44B
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Reference 2: http://www.xbrl.org/2003/role/presentationRef
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Reference 5: http://www.xbrl.org/2003/role/presentationRef
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+ Details

COMMITMENTS AND CONTINGENT LIABILITIES

12 Months Ended

Dec. 31, 2011

COMMITMENTS AND CONTINGENT LIABILITIES

NOTE 12

COMMITMENTS AND CONTINGENT LIABILITIES

In the normal course of business there are outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as they do for instruments that are included in the consolidated balance sheets.

Financial instruments, whose contract amount represents credit risk as of December 31, were as follows:

	2011		2010
Amounts of commitments:
Loan commitments to extend credit	$	619,901	$	531,752
Standby letters of credit	$	28,665	$	37,713

Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies, but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.

The Corporation and subsidiaries are also subject to claims and lawsuits, which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Corporation.

- Definition

The entire disclosure for commitments and contingencies.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
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-Name FASB Interpretation (FIN)
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Reference 2: http://www.xbrl.org/2003/role/presentationRef
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+ Details

STOCKHOLDERS' EQUITY

12 Months Ended

Dec. 31, 2011

STOCKHOLDERS' EQUITY

NOTE 13

STOCKHOLDERS' EQUITY

National banking laws restrict the maximum amount of dividends that a bank may pay in any calendar year. National banks are limited to the bank’s retained net income (as defined) for the current year plus those for the previous two years. The amount at December 31, 2011, available for 2012 dividends from the Corporation’s subsidiaries (both banking and non-banking) was $14,225,000.

Total stockholders' equity for all subsidiaries at December 31, 2011, was $609,983,000 of which $595,758,000 was restricted from dividend distribution to the Corporation.

The Corporation has a Dividend Reinvestment and Stock Purchase Plan, enabling stockholders to elect to have their cash dividends on all shares held automatically reinvested in additional shares of the Corporation’s common stock. In addition, stockholders may elect to make optional cash payments up to an aggregate of $2,500 per quarter for the purchase of additional shares of common stock. The stock is credited to participant accounts at fair market value. Dividends are reinvested on a quarterly basis.

Equity Offering

On September 9, 2011, the Corporation entered into securities purchase agreements with two investors, pursuant to which the Corporation sold an aggregate of 2,822,000 shares of its common stock in exchange for gross proceeds of approximately $21.2 million. The purchase price for each share of common stock was $7.5. The common stock was issued in a direct private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder.

Preferred Stock

On February 20, 2009, the Corporation entered into a Letter Agreement (Purchase Agreement) with the Unites States Treasury (the “Treasury”), pursuant to which the Corporation sold (a) 116,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“the Series A Preferred Stock”) and (b) a warrant to purchase 991,453 shares of the Corporation’s common stock (the “Warrant”) for an aggregate purchase price of $116 million in cash.

The Preferred Stock qualified as Tier I capital and was to pay cumulative dividends at a rate of 5 percent per annum for the first five years and 9 percent per annum thereafter. The Series A Preferred Stock was non-voting except with respect to certain matters affecting the rights of the holders thereof, and was redeemable by the Corporation after three years. The Warrant had a ten year term and was immediately exercisable with an exercise price of $17.55 per share of common stock. Pursuant to the Purchase Agreement, the Treasury had agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant.

On June 30, 2010, the Corporation entered into an Exchange Agreement with the Treasury whereby the Treasury exchanged 46,400 shares of the Series A Preferred Stock for 46,400 shares of trust preferred securities, having a liquidation amount of $1,000 per share (the “Capital Securities”) issued by the Corporation’s wholly-owned subsidiary trust, First Merchants Capital Trust III, a Delaware Statutory Trust (the “Trust”). The Trust simultaneously issued 1,435 shares of the Trust’s common securities (the “Common Securities”) to the Corporation for the purchase price of $1.4 million which constituted all of the issued and outstanding common securities of the Trust. The Trust used the tendered Series A Preferred Stock and the proceeds from the sale of the Common Securities to purchase $47.8 million in aggregate principal amount of Fixed Rate Perpetual Junior Subordinated Debentures, Series A issued by the Corporation (the “Debentures”). The Capital Securities and the Debentures bore interest, payable quarterly, at a rate of five percent until February 20, 2014 when the rate increases to nine percent. The Capital Securities and Debentures were redeemable by the Corporation upon proper notice and regulatory approval (a) at any time, so long as the Capital Securities were held by the Treasury and (b) at any time after June 30, 2015, if the Capital Securities were held by a person or entity other than the Treasury. The Series A Preferred Stock, purchased from the Treasury were cancelled. Following the exchange, the Treasury continued to hold 69,600 shares of Series A Preferred Stock along with the Warrant to initially purchase up to 991,453 shares of the Corporation’s common stock. This particular exchange resulted in a gain on retirement of Preferred Stock and favorably impacting retained earnings by $10.1 million (net of deferred taxes), which was also considered as part of earnings available to common stockholders in the earnings per common share (“EPS”) computations.

On September 22, 2011, the Corporation entered into a Securities Purchase Agreement (the “Purchase Agreement”) with the Treasury, pursuant to which the Corporation issued 90,782.94 shares of the Corporation’s Senior Non-Cumulative Perpetual Preferred Stock, Series B (the “Series B Preferred Stock”), having a liquidation amount per share equal to $1,000, for a total purchase price of $90,782,940. The Purchase Agreement was entered into, and the Series B Preferred Stock was issued, pursuant to the SBLF program, a $30 billion fund established under the Small Business Jobs Act of 2010, that encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion.

Preferred Stock continued

The Series B Preferred Stock is entitled to receive non-cumulative dividends, payable quarterly, on each January 1, April 1, July 1 and October 1, beginning October 1, 2011. The Purchase Agreement defines the dividend rate as a percentage of the liquidation amount, and can fluctuate on a quarterly basis during the first ten quarters during which the Series B Preferred Stock is outstanding, based upon changes in the level of Qualified Small Business Lending (“QSBL”) by the Bank. Based upon the Bank’s level of QSBL over the baseline level calculated under the terms of the Purchase Agreement (the “Baseline”), the dividend rate for the initial dividend period has been set at 5 percent. For the second through tenth dividend periods, the dividend rate may be adjusted to between 1 percent and 5 percent per annum, to reflect the amount of change in the Bank’s level of QSBL. In addition to the dividend, in the event the Bank’s level of QSBL has not increased relative to the Baseline, at the beginning of the tenth calendar quarter, the Corporation will be subject to an additional lending incentive fee equal to 2 percent per annum. For the eleventh dividend period through the eighteenth dividend period, inclusive, and that portion of the nineteenth dividend period before, but not including, the four and one half year anniversary of the date of issuance, the dividend rate will be fixed at between 1 percent and 7 percent per annum based upon the increase in QSBL as compared to the baseline. After four and one half years from issuance, the dividend rate will increase to 9 percent.

The Series B Preferred Stock is non-voting, except in limited circumstances. In the event that the Corporation misses five dividend payments, whether or not consecutive, the holder of the Series B Preferred Stock will have the right, but not the obligation, to appoint a representative as an observer on the Corporation’s Board of Directors. In the event that the Corporation misses six dividend payments, whether or not consecutive, and if the then outstanding aggregate liquidation amount of the Series B Preferred Stock is at least $25,000,000, then the holder of the Series B Preferred Stock will have the right to designate two directors to the Board of Directors of the Corporation.

The Series B Preferred Stock may be redeemed at any time at the Corporation’s option, at a redemption price of 100 percent of the liquidation amount plus accrued but unpaid dividends to the date of redemption for the current period, subject to the approval of its federal banking regulator.

The Series B Preferred Stock was issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The Corporation has agreed to register the Series B Preferred Stock under certain circumstances set forth in Annex E to the Purchase Agreement. The Series B Preferred Stock is not subject to any contractual restrictions on transfer.

Also on September 22, 2011, the Corporation entered into and consummated two letter agreements (each, a “Repurchase Letter”) with the Treasury, pursuant to which the Corporation redeemed, out of the proceeds of the issuance of the Series B Preferred Stock in the amount of $90,782,940 and cash of $25,813,171 (of which $21,165,000 was raised through a private placement of the Corporation’s common stock on September 9, 2011) for an aggregate redemption price of $116,596,111, including accrued but unpaid dividends to the date of redemption: (i) the remaining 69,600 shares of the Corporation’s Series A Preferred Stock, and (ii) all 46,400 Capital Securities held by the Treasury ..

The foregoing summary of the terms of the Repurchase Letters is subject to, and qualified in its entirety by, the full text of the Repurchase Letters.

On November 23, 2011, the Corporation also repurchased the Warrant to purchase 991,453 shares of the Corporation’s common stock at an exercise price of $17.55 per share with an expiration date of February 20, 2019 (the “Warrant”) held by the Treasury. The Corporation was the successful bidder in a private auction for the Warrant conducted by the Treasury with a winning bid of $367,500.

- Definition

The entire disclosure for shareholders' equity, comprised of portions attributable to the parent entity and noncontrolling interest, if any, including other comprehensive income (as applicable). Including, but not limited to: (1) balances of common stock, preferred stock, additional paid-in capital, other capital and retained earnings; (2) accumulated balance for each classification of other comprehensive income and total amount of comprehensive income; (3) amount and nature of changes in separate accounts, including the number of shares authorized and outstanding, number of shares issued upon exercise and conversion, and for other comprehensive income, the adjustments for reclassifications to net income; (4) rights and privileges of each class of stock authorized; (5) basis of treasury stock, if other than cost, and amounts paid and accounting treatment for treasury stock purchased significantly in excess of market; (6) dividends paid or payable per share and in the aggregate for each class of stock for each period presented; (7) dividend restrictions and accumulated preferred dividends in arrears (in aggregate and per share amount); (8) retained earnings appropriations or restrictions, such as dividend restrictions; (9) impact of change in accounting principle, initial adoption of new accounting principle and correction of an error in previously issued financial statements; (10) shares held in trust for Employee Stock Ownership Plan (ESOP); (11) deferred compensation related to issuance of capital stock; (12) note received for issuance of stock; (13) unamortized discount on shares; (14) description, terms, and number of warrants or rights outstanding; (15) shares under subscription and subscription receivables, effective date of new retained earnings after quasi-reorganization and deficit eliminated by quasi-reorganization and, for a period of at least ten years after the effective date, the point in time from which the new retained dates; and (16) retroactive effective of subsequent change in capital structure.

+ References

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-Publisher AICPA
-Name Accounting Principles Board Opinion (APB)
-Number 12
-Paragraph 10
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Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Regulation S-X (SX)
-Number 210
-Section 04
-Article 3

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-Name Regulation S-X (SX)
-Number 210
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-Section 08
-Paragraph d

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-Name Accounting Research Bulletin (ARB)
-Number 43
-Chapter 1
-Section B
-Paragraph 7, 11A
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+ Details

REGULATORY CAPITAL

12 Months Ended

Dec. 31, 2011

REGULATORY CAPITAL

NOTE 14

REGULATORY CAPITAL

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 three ratios that are calculated according to the regulations: total risk adjusted capital, Tier 1 capital, 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.

At December 31, 2011, the management of the Corporation believes that it meets all capital adequacy requirements to which it is subject. The most recent notifications from the regulatory agencies categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, a bank must maintain a minimum total capital to risk-weighted assets, Tier I capital to risk-weighted assets and Tier I capital to average assets of 10 percent, 6 percent and 5 percent, respectively. It should be noted that a bank's capital category is determined solely for the purpose of applying the OCC's "prompt corrective action" regulations and that the capital category may not constitute an accurate representation of the Bank's overall financial condition or prospects.

Actual and required capital amounts and ratios are listed below.

	2011										2010
						Required For										Required For
	Actual					Adequate Capital					Actual					Adequate Capital
December 31,	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk-weighted Assets)
Consolidated	$	487,393		16.54	%	$	235,781		8.00	%	$	476,490		15.74	%	$	242,195		8.00	%
First Merchants		477,805		16.26			235,089		8.00			450,629		14.89			242,088		8.00

Tier I Capital (to Risk-weighted Assets)
Consolidated	$	410,132		13.92	%	$	117,890		4.00	%	$	388,090		12.82	%	$	121,098		4.00	%
First Merchants		440,909		15.00			117,545		4.00			412,654		13.64			121,044		4.00

Tier I Capital (to Average Assets)
Consolidated	$	410,132		10.17	%	$	161,350		4.00	%	$	388,090		9.50	%	$	163,352		4.00	%
First Merchants		440,909		10.96			160,848		4.00			412,654		10.14			162,790		4.00

- Definition

The entire disclosure for banks, savings institutions, and credit unions, for regulatory capital requirements imposed by the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS) or for any state imposed capital requirements, as applicable. The disclosure may include (1) a description of regulatory capital requirements (a) for capital adequacy purposes and (b) established by the prompt corrective action provisions of Section 38 of the Federal Depository Insurance Act; (2) the actual or possible material effects of noncompliance with such requirements; (3) whether the entity is in compliance with the regulatory capital requirements including (a) required and actual ratios and amounts of Tier 1 leverage, Tier 1 risk-based, and total risk-based capital, tangible capital (for savings institutions), and Tier 3 capital for market risk (for certain banks and bank holding companies), (b) factors that may significantly affect capital adequacy; (4) the prompt corrective action category in which the entity was classified as of its most recent notification; (5) whether management believes any conditions or events since notification have changed the entity's category. Also may include additional information that might be disclosed in situations where substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher AICPA
-Name Audit and Accounting Guide (AAG)
-Number AAG-DEP
-Chapter 17
-Paragraph 15, 16, 17
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-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

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+ Details

LOAN SERVICING

12 Months Ended

Dec. 31, 2011

LOAN SERVICING

NOTE 15

LOAN SERVICING

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The loans are serviced primarily for the Federal Home Loan Mortgage Corporation, and the unpaid balances totaled $136,867,000, $163,139,000 and $202,757,000 at December 31, 2011, 2010 and 2009, respectively. The amount of capitalized servicing assets is considered immaterial.

SHARE-BASED COMPENSATION

12 Months Ended

Dec. 31, 2011

SHARE-BASED COMPENSATION

NOTE 16

SHARE-BASED COMPENSATION

Stock options and restricted stock awards ("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 three 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 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. RSAs for employees retired from the Corporation are either immediately vested at retirement or continue to vest after retirement, depending on which plan the shares were granted under. Deferred stock units ("DSUs") have been 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 December 31, 2011, all outstanding DSUs have been converted to RSA’s due to director retirements.

The Corporation’s 2009 Employee Stock Purchase Plan (“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 year ended December 31, 2011, 2010, and 2009 were $1,315,000, $1,750,000, and $2,294,000, respectively, and has been recognized as a component of salaries and benefits expense in the accompanying Consolidated Statements of Operations.

The estimated fair value of the stock options granted during 2011, 2010, and 2009 was calculated using a Black-Scholes option pricing model. The following summarizes the assumptions used in the Black-Scholes model:

	2011				2010				2009
Risk-free interest rate		2.74	%			2.38	%			2.03	%
Expected price volatility		45.43	%			43.54	%			35.19	%
Dividend yield		3.65	%			4.02	%			3.72	%
Forfeiture rate		5.00	%			5.00	%			4.00	%
Weighted-average expected life, until exercise		6.91		years		6.68		years		6.57		years

The Black-Scholes model incorporates assumptions used to value share-based awards. The risk-free rate of interest, for periods equal to the expected life of the option, is based on a U.S. government instrument over a similar contractual term of the equity instrument. Expected price volatility is based on historical volatility of the Corporation’s common stock. In addition, the Corporation generally uses historical information to determine the dividend yield and weighted-average expected life of the options until exercise. Separate groups of employees that have similar historical exercise behavior with regard to option exercise timing and forfeiture rates are considered separately for valuation and attribution purposes.

Share-based compensation expense recognized in the Consolidated Statements of Operations 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 5 percent for the year months ended December 31, 2011, based on historical experience.

The following table summarizes the components of the Corporation's share-based compensation awards recorded as expense:

	Year Ended			Year Ended			Year Ended
	December 31, 2011			December 31, 2010			December 31, 2009
Stock and ESPP Options
Pre-tax compensation expense	$	237		$	632		$	832
Income tax benefit		(21	)		(71	)		(87	)
Stock and ESPP option expense, net of income taxes	$	216		$	561		$	745
Restricted Stock Awards
Pre-tax compensation expense	$	1,078		$	1,118		$	1,462
Income tax benefit		(371	)		(391	)		(501	)
Restricted stock awards expense, net of income taxes	$	707		$	727		$	961
Total Share-Based Compensation:
Pre-tax compensation expense	$	1,315		$	1,750		$	2,294
Income tax benefit		(392	)		(462	)		(588	)
Total share-based compensation expense, net of income taxes	$	923		$	1,288		$	1,706

As of December 31, 2011, unrecognized compensation expense related to stock options and RSAs totaling $57,736 and $1,212,269, respectively, is expected to be recognized over weighted-average periods of 0.59 and 1.39 years, respectively.

Stock option activity under the Corporation's stock option plans, as of December 31, 2011, and changes during the year ended December 31, 2011, were as follows:

	Number of Shares			Weighted-Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2011		1,061,429		$	23.01
Granted		52,298		$	9.14
Cancelled		(77,856	)	$	20.25
Outstanding December 31, 2011		1,035,871		$	22.57		4.37		88,425
Vested and Expected to Vest at December 31, 2011		1,035,871		$	22.57		4.37		88,425
Exercisable at December 31, 2011		955,121		$	23.82		4.00		1,350

The weighted-average grant date fair value was $3.09 for stock options granted during the year ended December 31, 2011.

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 2011 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 December 31, 2011. The amount of aggregate intrinsic value will change based on the fair market value of the Corporation's common stock. There were no stock options exercised during the year ended December 31, 2011.

The following table summarizes information on unvested RSAs outstanding as of December 31, 2011:

	Number of Shares			Weighted-Average Grant Date Fair Value
Unvested RSAs at January 1, 2011		272,737		$	12.46
Granted		144,184		$	8.90
Forfeited		(6,010	)	$	8.81
Vested		(72,824	)	$	23.24
Unvested RSAs at December 31, 2011		338,087		$	8.65

The grant date fair value of ESPP options was estimated at the beginning of the October 1, 2011, quarterly offering period of approximately $17,000. The ESPP options vested during the three months ending December 31, 2011, leaving no unrecognized compensation expense related to unvested ESPP options at December 31, 2011.

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 123R
-Paragraph 64, 65, A240
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher AICPA
-Name Statement of Position (SOP)
-Number 93-6
-Paragraph 53
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 3: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Staff Accounting Bulletin (SAB)
-Number Topic 14

Reference 4: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 505
-SubTopic 50
-Section 50
-Paragraph 1
-URI http://asc.fasb.org/extlink&oid=6406099&loc=d3e25284-112666

Reference 5: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 718
-SubTopic 10
-Section 50
-Paragraph 1
-URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5047-113901

Reference 6: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 718
-SubTopic 10
-Section 50
-Paragraph 2
-URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5070-113901

Reference 7: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 718
-SubTopic 10
-Section 50
-Paragraph 4
-URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5444-113901

Reference 8: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 718
-SubTopic 40
-Section 50
-Paragraph 1
-URI http://asc.fasb.org/extlink&oid=6418621&loc=d3e17540-113929

+ Details

PENSION AND OTHER POST RETIREMENT BENEFIT PLANS

12 Months Ended

Dec. 31, 2011

PENSION AND OTHER POST RETIREMENT BENEFIT PLANS

NOTE 17

PENSION AND OTHER POST RETIREMENT BENEFIT PLANS

The Corporation’s defined-benefit pension plans cover approximately 33 percent of the Corporation’s employees. The benefits are based primarily on years of service and employees’ pay near retirement. Contributions are intended to provide not only for benefits attributed to service-to-date, but also for those expected to be earned in the future. The Corporation also maintains post retirement benefit plans that provide health insurance benefits to retirees. The plans allow retirees to be carried under the Corporation’s health insurance plan, generally from ages 55 to 65. The retirees pay 100 percent of the premiums due for their coverage.

The table below sets forth the plans’ funded status and amounts recognized in the consolidated balance sheet at December 31, using measurement dates of December 31, 2011 and December 31, 2010.

	December 31,			December 31,
	2011			2010
Change in benefit obligation
Benefit obligation at beginning of year	$	61,422		$	57,852
Service Cost		252			342
Interest Cost		3,208			3,291
Actuarial Loss (Gain)		7,346			3,226
Benefits paid		(3,459	)		(3,289	)
Benefit obligation at end of year		68,769			61,422
Change in plan assets
Fair value of plan assets at beginning of year		63,275			60,656
Actual return on plan assets		1,726			5,419
Expected return on plan assets
Employer contributions		536			489
Benefits Paid		(3,459	)		(3,289	)
End of Year		62,078			63,275
Funded Status at End of Year	$	(6,691	)	$	1,853
Assets and Liabilities Recognized in the Balance Sheets:
Deferred Tax Asset	$	(10,928	)	$	7,419
Assets	$			$	6,938
Liabilities	$	6,691		$	5,085
Amounts Recognized in Accumulated Other Comprehensive Income Not Yet Recognized as Components of Net Periodic Benefit Cost Consist of:
Accumulated Loss	$	(16,310	)	$	(11,027	)
Prior Service Credit		(56	)		(71	)
	$	(16,366	)	$	(11,098	)

The accumulated benefit obligation for all defined benefit plans was $68,729,000 and $61,275,000 at December 31, 2011 and 2010, respectively.

Information for pension plans with an accumulated benefit obligation in excess of plan assets is included in the table below. At the end of 2010, the accumulated benefit obligation of the Retirement Pension Plan, the largest plan, was not in excess of plan assets; therefore, it was not included in the table below in 2010. At the end of 2011, the accumulated benefit obligation of the Retirement Pension Plan was in excess of plan assets, and is included in the table below for 2011.

	December 31,		December 31,
	2011		2010
Projected Benefit Obligation	$	68,769	$	5,085
Accumulated Benefit Obligation	$	68,729	$	5,085
Fair Value of Plan Assets	$	62,078

The following table shows the components of net periodic pension costs:

	December 31,			December 31,
	2011			2010
Service Cost	$	252		$	342
Interest Cost		3,208			3,291
Expected Return on Plan Assets		(4,313	)		(4,136	)
Amortization of Prior Service Costs		25			25
Amortization of Net Loss		1,129			1,026
Net Periodic Pension Cost	$	301		$	548

Other changes in plan assets and benefit obligations recognized in other comprehensive income, net of tax:

	December 31,			December 31,
	2011			2010
Net Periodic Pension Cost	$	301		$	548
Net gain (loss)		9,933			1,942
Actuarial gain (loss)		(1,129	)		(1,026	)
Amortization of prior service (cost) credit		(25	)		(25	)
Total Recognized in other Comprehensive Income		8,779			891
Total Recognized in NPPC and OCI	$	9,080		$	1,439

The estimated net loss and transition obligation for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic pension cost over the next fiscal year are:

	December 31,			December 31,
	2011			2010
Amortization of Net Loss	$	(2,319	)	$	(1,160	)
Amortization of Prior Service Cost		(25	)		(25	)
Total	$	(2,344	)	$	(1,185	)

Significant assumptions include:

	December 31,			December 31,
	2011			2010
Weighted-average Assumptions Used to Determine Benefit Obligation:
Discount Rate		4.50	%		5.40	%
Rate of Compensation Increase		4.00	%		4.00	%
Weighted-average Assumptions Used to Determine Benefit Cost:
Discount Rate		5.40	%		5.90	%
Expected Return on Plan Assets		7.00	%		7.00	%
Rate of Compensation Increase		4.00	%		3.50	%

At December 31, 2011 and December 31, 2010, the Corporation based its estimate of the expected long-term rate of return on analysis of the historical returns of the plans and current market information available. The plans’ investment strategies are to provide for preservation of capital with an emphasis on long-term growth without undue exposure to risk. The assets of the plans’ are invested in accordance with the plans’ Investment Policy Statement, subject to strict compliance with ERISA and any other applicable statutes.

The plans’ risk management practices include quarterly evaluations of investment managers, including reviews of compliance with investment manager guidelines and restrictions; ability to exceed performance objectives; adherence to the investment philosophy and style; and ability to exceed the performance of other investment managers. The evaluations are reviewed by management with appropriate follow-up and actions taken, as deemed necessary. The Investment Policy Statement generally allows investments in cash and cash equivalents, real estate, fixed income debt securities and equity securities, and specifically prohibits investments in derivatives, options, futures, private placements, short selling, non-marketable securities and purchases of non-investment grade bonds.

At December 31, 2011, the maturities of the plans’ debt securities ranged from 45 days to 10.83 years, with a weighted average maturity of 5.38 years. At December 31, 2010, the maturities of the plans’ debt securities ranged from 55 days to 12.8 years, with a weighted average maturity of 5.41 years.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as of December 31, 2011. The minimum contribution required in 2012 will likely be zero but the Corporation may decide to make a discretionary contribution during the year.

2012	$	3,810
2013		3,937
2014		4,120
2015		4,260
2016		4,249
After 2016		21,781
	$	42,157

Plan assets are re-balanced quarterly. At December 31, 2011 and 2010, plan assets by category are as follows:

	December 31, 2011						December 31, 2010
	Actual			Target			Actual			Target
Cash and cash equivalents		3.2	%		3.0	%		5.3	%		4.0	%
Equity securities		49.7			51.0			51.5			48.0
Debt securities		45.5			44.0			43.2			48.0
Alternative investments		1.6			2.0
		100.0	%		100.0	%		100.0	%		100.0	%

The First Merchants Corporation Retirement and Income Savings Plan (the “Savings Plan”), a Section 401(k) qualified defined contribution plan, was amended on March 1, 2005 to provide enhanced retirement benefits, including employer and matching contributions, for eligible employees of the Corporation and its subsidiaries. The Corporation matches employees’ contributions primarily at the rate of 50 percent for the first 6 percent of base salary contributed by participants.

Beginning in 2005, employees who have completed 1,000 hours of service and are an active employee on the last day of the year receive an additional retirement contribution after year-end. The amount of a participant’s retirement contribution varies from 2 to 7 percent of salary based upon years of service. Employees hired after January 1, 2010 do not participate in the additional retirement contribution. Full vesting occurs after five years of service. The Corporation’s expense for the Savings Plan, including the additional retirement contribution, was $2,824,000 for 2011, $2,728,000 for 2010 and $2,991,000 for 2009.

The Corporation maintains post retirement benefit plans that provide health insurance benefits to retirees. The plans allow retirees to be carried under the Corporation’s health insurance plan, generally from ages 55 to 65. The retirees pay 100 percent of the premiums due for their coverage. The accrued benefits payable under the plans totaled $4,116,000 and $4,475,000 at December 31, 2011 and 2010, respectively. Post retirement plan expense totaled $528,000, $574,000 and $705,000 for the years ending December 31, 2011, 2010 and 2009, respectively.

Pension Plan Assets

Following is a description of the valuation methodologies used for pension plan assets measured at fair value on a recurring basis, as well as the general classification of pension plan assets pursuant to the valuation hierarchy.

Where quoted market prices are available in an active market, plan assets are classified within Level 1 of the valuation hierarchy. Level 1 plan assets total $46,945,000 and include cash and cash equivalents, U.S. companies, U.S. mutual funds, international mutual funds, bond mutual funds and specialty alternative funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of plan assets with similar characteristics or discounted cash flows. Level 2 plan assets total $15,133,000 and include U.S. Government agencies, taxable municipals and corporate bonds. In certain cases where Level 1 or Level 2 inputs are not available, plan assets are classified within Level 3 of the hierarchy. There are no assets classified within Level 3 of the hierarchy at December 31, 2011.

			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
December 31, 2011	Fair Value		(Level 1)		(Level 2)		(Level 3)
Cash & cash equivalents	$	2,009	$	2,009
Equity Securities:
U.S. companies		611		611
U.S. mutual funds		26,508		26,508
International mutual funds		3,701		3,701
Debt Securities:
Bond mutual funds		13,133		13,133
U.S. Government agencies		314			$	314
Taxable municipals		7,632				7,632
Corporate bonds		7,186				7,186
Specialty alternative funds		984		984

- Definition

The entire disclosure for pension and other postretirement benefits.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 132R
-Paragraph 5
-Subparagraph a
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 132R
-Paragraph 5
-Subparagraph b
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 3: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 132R
-Paragraph 5
-Subparagraph h
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 4: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 132R
-Paragraph 5
-Subparagraph q
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 5: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 132R
-Paragraph 8
-Subparagraph m
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 6: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 106
-Paragraph 518
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 7: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 87
-Paragraph 264
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 8: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Emerging Issues Task Force (EITF)
-Number 03-2
-Paragraph 8
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 9: http://www.xbrl.org/2003/role/presentationRef
-Publisher AICPA
-Name Accounting Principles Board Opinion (APB)
-Number 30
-Paragraph 26
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 10: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name FASB Staff Position (FSP)
-Number FAS106-2
-Paragraph 20, 21, 22
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 11: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 158
-Paragraph 7, 21, 22
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 12: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 132R
-Paragraph 5, 6, 7, 8
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 13: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Implementation Guide (Q and A)
-Number FAS88
-Paragraph 63
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 14: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 715
-URI http://asc.fasb.org/topic&trid=2235017

+ Details

INCOME TAX

12 Months Ended

Dec. 31, 2011

INCOME TAX

NOTE 18

INCOME TAX

	2011			2010			2009
Income Tax Expense for the Year Ended December 31:
Currently Payable:
Federal	$	399		$	(1,780	)	$	(13,387	)
State								(4,179	)
Deferred:
Federal		8,256			(1,810	)		(15,037	)
State								4,179
Total Income Tax Expense	$	8,655		$	(3,590	)	$	(28,424	)

Reconciliation of Federal Statutory to Actual Tax Expense:
Federal Statutory Income Tax at 35%	$	11,867		$	1,162		$	(24,216	)
Tax-exempt Interest Income		(3,714	)		(3,733	)		(3,623	)
Non-deductible Interest Expense		649			421
Stock Compensation		69			150			205
Earnings on Life Insurance		(899	)		(725	)		(550	)
Tax Credits		(99	)		(116	)		(758	)
Other		782			(749	)		518
Actual Tax Expense	$	8,655		$	(3,590	)	$	(28,424	)

Tax expense applicable to security gains and losses, including unrealized losses relating to other-than-temporary impairment charges, for the years ended December 31, 2011, 2010 and 2009, was $714,000, $652,000 and $1,544,000, respectively.

The Corporation or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With a few exceptions, the Corporation is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2008.

The tax effects of temporary differences related to deferred taxes shown on the balance sheets were:

	2011			2010
Deferred Tax Asset at December 31:
Assets:
Differences in Accounting for Loan Losses	$	29,690		$	35,014
Differences in Accounting for Loan Fees		805			641
Differences in Accounting for Loans and Securities					440
Deferred Compensation		7,612			7,423
Difference in Accounting for Pensions and Other Employee Benefits		3,750
Federal & State Income Tax Loss Carryforward and Credits		12,416			14,196
Other		8,796			579
Total Assets		63,069			58,293
Liabilities:
Differences in Depreciation Methods		5,859			5,387
Differences in Accounting for Loans and Securities		42
Difference in Accounting for Pensions and Other Employee Benefits					581
State Income Tax		354			354
Net Unrealized Gain on Securities Available for Sale		8,118			951
Other		1,137			2,827
Total Liabilities		15,510			10,100
Net Deferred Tax Asset Before Valuation Allowance		47,559			48,193
Valuation allowance:
Beginning Balance		(13,258	)		(12,680	)
Increase During the Year		(2,443	)		(578	)
Ending Balance		(15,701	)		(13,258	)
Net Deferred Tax Asset	$	31,858		$	34,935

The decrease in the Corporation’s net deferred tax asset was primarily driven by significant decreases in the timing differences associated with the deductibility of the provision for loan losses and utilization of the federal net operating loss carryforward. Additionally, the deferred tax liability associated with the net unrealized gain on securities available for sale increased. Partially offsetting these changes was an increase in the deferred tax asset associated with pensions and other employee benefits.

The Corporation has recorded a valuation allowance of $15,701,000 related to deferred state taxes as it does not anticipate having future state taxable income sufficient to fully utilize the deferred state tax asset. This is primarily due to the Corporation’s current tax structure as discussed in the “INCOME TAXES” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as item 7 of this Annual Report on Form 10-K.

As of December 31, 2011, the Corporation had approximately $125,102,000 of state tax loss carryforward available to offset future franchise tax. This state loss carryforward has a full valuation allowance.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Regulation S-X (SX)
-Number 210
-Section 08
-Paragraph h
-Article 4

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 109
-Paragraph 136, 172
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 3: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 109
-Paragraph 43, 44, 45, 46, 47, 48, 49
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 4: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 10
-Section 50
-Paragraph 15
-URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319

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-Name Accounting Standards Codification
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-Section 50
-Paragraph 9
-URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319

Reference 6: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 235
-SubTopic 10
-Section S99
-Paragraph 1
-Subparagraph (SX 210.4-08.(h))
-URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690

Reference 7: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 10
-Section 50
-Paragraph 2
-URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319

Reference 8: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 10
-Section 50
-Paragraph 3
-URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319

+ Details

NET INCOME PER SHARE

12 Months Ended

Dec. 31, 2011

NET INCOME PER SHARE

NOTE 19

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 all dilutive common share equivalents, comprised of shares issuable under the Corporation’s share-based compensation plans, and the weighted-average shares outstanding during the reporting period.

Dilutive common share equivalents include the dilutive effect of in-the-money share-based awards, which are calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of share-based awards, the amount of compensation expense, if any, for future service that the Corporation has not yet recognized, and the amount of estimated tax benefits that would be recorded in additional paid-in capital when share-based awards are exercised, are assumed to be used to repurchase common stock in the current period.

	2011							2010							2009
	Net Income			Weighted-Average Shares		Per Share Amount		Net Income			Weighted-Average Shares		Per Share Amount		Net Income (Loss)			Weighted-Average Shares		Per Share Amount
Basic net income (loss) per share:	$	25,252						$	6,909						$	(40,763	)
Gain on exchange of preferred stock for trust preferred debt									11,353
Loss on CPP unamortized discount		(1,401	)						(1,301	)
Loss on extinguishment of trust preferred securities		(10,857	)
Preferred stock dividends		(3,981	)						(5,239	)						(4,979	)
Net income (loss) available to common stockholders		9,013			26,550,043	$	0.34		11,722			24,519,033	$	0.48		(45,742	)		21,116,616	$	(2.17	)
Effect of dilutive stock options and warrants					143,805							123,392
Diluted net income (loss) per share:
Net income (loss) available to common stockholders	$	9,013			26,693,848	$	0.34	$	11,722			24,642,425	$	0.48	$	(45,742	)		21,116,616	$	(2.17	)

Options to purchase 1,029,577, 1,052,994, and 1,094,383 shares of common stock with weighted average exercise prices of $22.57, $23.01, and $23.51 at December 31, 2011, 2010 and 2009 respectively, were excluded from the computation of diluted net income per share because the options exercise price was greater than the average market price of the common stock.

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

12 Months Ended

Dec. 31, 2011

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

NOTE 20

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table sets forth certain quarterly results for the years ended December 31, 2011 and 2010:

																				Average Shares Outstanding				Net Income Per Share
Quarter Ended	Interest Income		Interest Expense		Net Interest Income		Provision for Loan Losses		Net Realized Gains on Available for Sale Securities		Loss on Extinguishment of Trust Preferred Securities		Loss on CPP Unamortized Discount		Preferred Stock Dividends and Discount Accretion		Net Income (Loss) Available to Common Stockholders			Basic		Diluted		Basic			Diluted
2011:
March	$	46,366	$	10,889	$	35,477	$	5,594	$	63					$	988	$	4,473			25,605,571		25,763,378	$	0.17		$	0.17
June		45,721		9,874		35,847		5,625		825						990		4,498			25,656,826		25,782,799		0.18			0.18
September		45,085		9,234		35,851		5,556		861	$	10,857	$	1,401		868		(6,384	)		26,367,067		26,367,067		(0.25	)		(0.25	)
December		44,073		7,893		36,180		5,855		290						1,135		6,426			28,540,469		28,699,505		0.24			0.24
	$	181,245	$	37,890	$	143,355	$	22,630	$	2,039	$	10,857	$	1,401	$	3,981	$	9,013			26,550,043		26,693,848	$	0.34		$	0.34

																				Average Shares Outstanding				Net Income Per Share
Quarter Ended	Interest Income		Interest Expense		Net Interest Income		Provision for Loan Losses		Net Realized Gains (Losses) on Available for Sale Securities			Gain on Exchange of Preferred Stock for Trust Preferred Debt		Loss on CPP Unamortized Discount		Preferred Stock Dividends and Discount Accretion		Net Income Available to Common Stockholders		Basic		Diluted		Basic		Diluted
2010:
March	$	51,699	$	15,484	$	36,215	$	13,869	$	1,354						$	1,450	$	136		21,373,405		21,462,175	$	0.01	$	0.01
June		50,491		14,312		36,179		15,015		(143	)	$	11,353	$	1,301		1,443		8,266		25,523,145		25,633,452		0.35		0.35
September		49,431		13,749		35,682		10,521		(654	)						870		765		25,550,222		25,685,538		0.02		0.02
December		47,957		12,464		35,493		7,078		1,305							1,476		2,555		25,571,893		25,737,352		0.10		0.10
	$	199,578	$	56,009	$	143,569	$	46,483	$	1,862		$	11,353	$	1,301	$	5,239	$	11,722		24,519,033		24,642,425	$	0.48	$	0.48

- Definition

The entire disclosure for the quarterly financial data in the annual financial statements. The disclosure may include a tabular presentation of financial information for each fiscal quarter for the current and previous year, including revenues, gross profit, income or loss before extraordinary items and earnings per share data. It also includes an indication if the information in the note is unaudited, comments on the aggregate effect of year-end adjustments, and an explanation of matters or transactions that affect comparability or are pertinent to an understanding of the information furnished.

+ References + Details

CONDENSED FINANCIAL INFORMATION (parent company only)

12 Months Ended

Dec. 31, 2011

CONDENSED FINANCIAL INFORMATION (parent company only)

NOTE 21

CONDENSED FINANCIAL INFORMATION (parent company only)

Presented below is condensed financial information as to financial position, results of operations, and cash flows of the Corporation. As the result of merging multiple bank charters into one bank charter throughout 2009 and 2010, all but a few employees and their related expenses were moved from the parent company to the Bank beginning on January 1, 2011.

CONDENSED BALANCE SHEETS

	December 31,		December 31,
	2011		2010
Assets
Cash	$	20,654	$	31,382
Investment in Subsidiaries		611,809		570,865
Goodwill		448		448
Other Assets		8,540		8,968
Total Assets	$	641,451	$	611,663
Liabilities
Borrowings	$	115,826	$	147,188
Other Liabilities		11,158		10,067
Total Liabilities		126,984		157,255
Stockholders' Equity		514,467		454,408
Total Liabilities and Stockholders' Equity	$	641,451	$	611,663

CONDENSED STATEMENTS OF OPERATIONS

	December 31,			December 31,			December 31,
	2011			2010			2009
Income
Dividends from Subsidiaries	$	4,677		$	3,256		$	14,224
Administrative Services Fees from Subsidiaries					28,489			22,153
Other Income		(11	)		190			1,656
Total Income		4,666			31,935			38,033
Expenses
Amortization of Fair Value Adjustments
Interest Expense		7,661			6,816			5,772
Salaries and Employee Benefits		2,688			25,884			22,259
Net Occupancy and Equipment Expenses		31			6,213			5,854
Telephone Expenses		21			918			1,078
Postage and Courier Expenses		1			1,786			1,653
Other Expenses		1,501			5,382			5,901
Total Expenses		11,903			46,999			42,517

Income (Loss) Before Income Tax Benefit and Equity in Undistributed Income of Subsidiaries		(7,238	)		(15,064	)		(4,484	)
Income Tax Benefit		3,256			5,970			4,948
Income (Loss) Before Equity in Undistributed Income of Subsidiaries		(3,982	)		(9,094	)		464
Equity in Undistributed (Distributions in Excess of) Income of Subsidiaries		29,234			16,003			(41,227	)
Net Income (Loss)		25,252			6,909			(40,763	)
Gain on Exchange of Preferred Stock					11,353
Loss on CPP Unamortized Discount		(1,401	)		(1,301	)
Loss on Extinguishment of Trust Preferred Securities		(10,857	)
Preferred Stock Dividends and Discount Accretion		(3,981	)		(5,239	)		(4,979	)
Net Income (Loss) Available to Common Stockholders	$	9,013		$	11,722		$	(45,742	)

CONDENSED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2011			2010			2009
Operating Activities:
Net Income	$	25,252		$	6,909		$	(40,763	)
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Share-based Compensation		524			1,750			2,294
Tax Benefit from Share Based Compensation					50			(60	)
Distributions in Excess of (Equity in Undistributed) Income of Subsidiaries		(28,530	)		(16,003	)		41,227
Net Change in:
Other Assets		5,747			3,309			(2,315	)
Other Liabilities		1,091			(744	)		(19,866	)
Investment in Subsidiaries - Operating Activities		(6,593	)		(20	)		4,809
Net Cash Provided (Used) by Operating Activities		(2,509	)		(4,749	)		(14,674	)
Investing Activities - Investment in Subsidiaries					(12,500	)		(58,000	)
Net Cash Used in Investing Activities					(12,500	)		(58,000	)
Financing Activities:
Cash Dividends		(4,729	)		(5,920	)		(14,254	)
Borrowings
Repayment of Borrowings		(46,400	)					(20,000	)
Preferred stock issued under Capital Purchase Program								116,000
Preferred stock redemption under Capital Purchase Program		(69,600	)
Preferred stock issued under Small Business Lending Fund		90,783
Repurchase of Common Stock Warrants under Capital Purchase Program		(368	)
Common Stock Issued		21,165			24,150
Stock Issued Under Employee Benefit Plans		669			582			825
Stock Issued Under Dividend Reinvestment and Stock Purchase Plan		89			91			527
Stock Options Exercised
Tax Benefit from Share Based Compensation					(50	)		60
Stock Redeemed		(126	)		(76	)		(193	)
Other		298			198
Net Cash Provided (Used) by Financing Activities		(8,219	)		18,975			82,965
Net Change in Cash		(10,728	)		1,726			10,291
Cash, Beginning of the Year		31,382			29,656			19,365
Cash, End of Year	$	20,654		$	31,382		$	29,656

SUBSEQUENT EVENTS

12 Months Ended

Dec. 31, 2011

SUBSEQUENT EVENTS

NOTE 22

SUBSEQUENT EVENTS

On February 10, 2012, the Bank entered into an agreement with the FDIC to purchase approximately $117 million of loans and assume $136 million of deposits in Shelby County Indiana. Under the Modified Whole Bank transaction without loss share, the FDIC excluded all construction and development loans, all land loans, all non-performing loans including non-accrual, restructured and 90 days past due credits and all OREO balances. The remaining assets were purchased for a $29 million discount and the deposits were assumed at no premium.

The Bank also acquired the main office building in Shelbyville, Indiana for $1.4 million. Asset and liability balances are subject to change based on activities between the bid valuation and the purchase dates. The assets acquired and liabilities assumed are subject to internal adjustment under generally accepted accounting principles.

ACCOUNTING MATTERS

12 Months Ended

Dec. 31, 2011

ACCOUNTING MATTERS

NOTE 23

ACCOUNTING MATTERS

FASB Accounting Standards Update 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The FASB has issued Accounting Standards Update (ASU) No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments to the Codification in ASU No. 2011-12 are effective at the same time as the amendments in ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, so that entities will not be required to comply with the presentation requirements in ASU No. 2011-05 that ASU No. 2011-12 is deferring.

In order to defer only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in ASU No. 2011-12 supersede certain pending paragraphs in ASU No. 2011-05. The amendments are being made to allow the FASB time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, The Corporation will continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05.

All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. The Corporation will apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011.

FASB Accounting Standards Update 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The eligibility criteria for offsetting are different in IFRS and U.S. GAAP. Offsetting, otherwise known as netting, is the presentation of assets and liabilities as a single net amount in the statement of financial position (balance sheet). Unlike IFRS, U.S. GAAP allows companies the option to present net in their balance sheets derivatives that are subject to a legally enforceable netting arrangement with the same party where rights of set-off are only available in the event of default or bankruptcy.

To address these differences between IFRS and U.S. GAAP, in January 2011 the FASB and the IASB (the Boards) issued an exposure draft that proposed new criteria for netting that were narrower than the current conditions currently in U.S. GAAP. Nevertheless, in response to feedback from their respective stakeholders, the Boards decided to retain their existing offsetting models. Instead, the Boards have issued common disclosure requirements related to offsetting arrangements to allow investors to better compare financial statements prepared in accordance with IFRS or U.S. GAAP.

The amendments to the FASB Accounting Standards Codification in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Coinciding with the release of ASU No. 2011-11, the IASB has issued Disclosures - Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7). This amendment requires disclosures about the offsetting of financial assets and financial liabilities common to those in ASU No. 2011-11.

The Corporation is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Corporation will also provide the disclosures required by those amendments retrospectively for all comparative periods presented.

FASB Accounting Standards Update 2011-09, Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer's Participation in a Multiemployer Plan. ASU 2011-09 is intended to address concerns from various users of financial statements on the lack of transparency about an employer’s participation in a multiemployer pension plan. Users of financial statements have requested additional disclosure to increase awareness of the commitments and risks involved with participating in multiemployer pension plans. The amendments in this ASU will require additional disclosures about an employer’s participation in a multiemployer pension plan. Previously, disclosures were limited primarily to the historical contributions made to the plans.

ASU 2011-09 applies to nongovernmental entities that participate in multiemployer plans. For the Corporation, ASU 2011-09 is effective for annual periods for fiscal years ending after December 15, 2011. Early adoption is permissible for both public and nonpublic entities. ASU 2011-09 should be applied retrospectively for all prior periods presented.

FASB Accounting Standards Update 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%.

ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The Corporation is assessing the impact of ASU 2011-08 on goodwill impairment testing but does not expect an impact on its financial condition or results of operations.