ACCOUNTING FOR CERTAIN LOANS ACQUIRED IN A PURCHASE

On February 10, 2012, First Merchants Bank, N.A. (the "Bank") assumed $113.0 million in loans as part of a Purchase and Assumption Agreement. This loan portfolio was acquired at a fair value discount of $19.2 million.

On November 12, 2013, the Corporation acquired all of the assets of CFS Bancorp, Inc. as discussed in NOTE 2. BUSINESS COMBINATIONS included in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q. The acquired assets included $639.6 million in loans which were acquired at a fair value discount of $36.5 million.

Loans acquired in the transactions described above are included in NOTE 4. LOANS AND ALLOWANCE included in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q.

As discussed in NOTE 4. LOANS AND ALLOWANCE included in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q, loans purchased after December 31, 2008 are recorded at the acquisition date fair value, which could result in a fair value discount or premium. Purchased loans with evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments are accounted under ASC 310-30, Loans Acquired with Deteriorated Credit Quality. The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable portion of the fair value discount or premium. The accretable portion of the fair value discount or premium is the difference between the expected cash flows and the net present value of expected cash flows, with such difference accreted into earnings over the term of the loans.

The following table includes the outstanding balance and carrying amount of loans acquired during the years ended December 31, 2012 and 2013, which are included in the balance sheet amounts of loans receivable at June 30, 2014 and December 31, 2013.



	June 30, 2014						December 31, 2013
	CFS		SCB		Total		CFS		SCB		Total
Commercial and industrial loans	$	78,574	$	7,637	$	86,211	$	81,303	$	8,184	$	89,487
Agricultural production financing and other loans to farmers			793		793				1,161		1,161
Real estate loans:
Construction	14,830				14,830		17,962				17,962
Commercial and farmland	285,428		19,819		305,247		311,631		23,418		335,049
Residential	157,355		7,955		165,310		166,754		9,359		176,113
Home Equity	43,745		16,795		60,540		49,042		18,236		67,278
Individuals' loans for household and other personal expenditures	1,526		173		1,699		2,360		269		2,629
Other Loans	88				88		132		407		539
Total	$	581,546	$	53,172	$	634,718	$	629,184	$	61,034	$	690,218

Carrying Amount	$	549,167	$	44,829	$	593,996	$	585,913	$	50,269	$	636,182
Allowance	365		17		382				229		229
Carrying Amount Net of Allowance	$	548,802	$	44,812	$	593,614	$	585,913	$	50,040	$	635,953

The balance of the allowance for loan losses and the corresponding provision expense for loans acquired and accounted for under ASC 310-30 was $382,000 and $229,000 at June 30, 2014 and December 31, 2013, respectively.

As customer cash flow expectations have improved, nonaccretable yield was reclassified to accretable yield. The accretable yield, or income expected to be collected, and reclassifications from nonaccretable yield, are identified in the table below.



	Three Months Ended June 30, 2014									Three Months Ended June 30, 2013
	CFS			SCB			Total			SCB
Beginning balance	$	12,411		$	5,415		$	17,826		$	4,371
Additions
Accretion	(1,731		)	(442		)	(2,173		)	(412		)
Reclassification from nonaccretable	1,543			136			1,679
Disposals	(138		)	(40		)	(178		)
Ending balance	$	12,085		$	5,069		$	17,154		$	3,959



	Six Months Ended June 30, 2014									Six Months Ended June 30, 2013
	CFS			SCB			Total			SCB
Beginning balance	$	13,435		$	5,864		$	19,299		$	5,142
Additions
Accretion	(2,886		)	(1,056		)	(3,942		)	(1,183		)
Reclassification from nonaccretable	1,781			389			2,170
Disposals	(245		)	(128		)	(373		)
Ending balance	$	12,085		$	5,069		$	17,154		$	3,959