UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

      For the fiscal year ended December 31, 2005
                                       OR
[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

      For the transition period from __________to_________

                         Commission file number 0-17071

                           FIRST MERCHANTS CORPORATION

             (Exact name of registrant as specified in its charter)

           Indiana                                               35-1544218
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

       200 East Jackson
        Muncie, Indiana                                         47305-2814
                                                                (Zip Code)
(Address of principal executive offices)

        Registrant's telephone number, including area code: (765) 747-1500

Securities registered pursuant to Section 12 (b) of the Act: None

Securities registered pursuant to Section 12 (g) of the Act:

                   Common Stock, $.125 stated value per share

                                (Title of class)

        Indicate  by  check  mark if the  registrant  is a  well-known  seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

        Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.  Yes [ ] No [X]

        Indicate  by  check mark whether the registrant(1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

        Indicate  by check  mark if disclosure of delinquent filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [X]

        Indicate  by check mark whether the  registrant  is a large  accelerated
filer,  an  accelerated  filer or a  non-accelerated  filer.  See  definition of
"accelerated  filer and large  accelerated  filer" in Rule 12b-2 of the Exchange
Act.  Large accelerated filer[ ]  Accelerated filer[X]  Non-accelerated filer[ ]

        Indicate  by check mark whether the  registrant  is a shell  company (as
defined in Rule 12b-2 of the Act). Yes [ ] No[X]

        The aggregate  market  value (not necessarily a reliable  indication  of
the  price at which  more than a limited  number of shares  would  trade) of the
voting stock held by non-affiliates of the registrant was $457,630,766 as of the
last  business day of the  registrant's  most recently  completed  second fiscal
quarter (June 30, 2005).

        As  of March 7, 2006  there  were 18,427,098 outstanding common  shares,
without par value, of the registrant.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                                    Part of Form 10-K
              Documents                          Into Which Incorporated

Portions of the Registrant's Annual        Part I (Item 1)
Report to Shareholders for the year
ended December 31, 2005                    Part II (Items 5, 6, 7, 7A, and 8)

Portions of the Registrant's               Part III (Items 10 through 14)
Definitive Proxy Statement for
Annual Meeting of Shareholders
to be held April 13, 2006

FORM 10-K TABLE OF CONTENTS

                                                                       Form 10-K
                                                                          Page
                                                                         Number

STATEMENT REGARDING FORWARD-LOOKING STATEMENTS.................................3

PART I

  Item 1 - Business............................................................4

  Item 1A- Risk Factors.......................................................23

  Item 1B- Unresolved Staff Comments..........................................26

  Item 2 - Properties.........................................................27

  Item 3 - Legal Proceedings..................................................27

  Item 4 - Submission of Matters to a Vote of Security Holders................27

  Supplemental Information - Executive Officers of the Registrant.............28

PART II

  Item 5 -  Market For the Registrant's Common Equity, Related
            Stockholder Matters and Issuer Purchases of Equity
            Securities........................................................29

  Item 6 -  Selected Financial Data...........................................30

  Item 7 -  Management's Discussion and Analysis of Financial
            Condition and Results of Operations...............................30

  Item 7A-  Quantitative and Qualitative Disclosures About Market Risk........30

  Item 8 -  Financial Statements and Supplementary Data.......................31

  Item 9 -  Changes In and Disagreements With Accountants on
            Accounting and Financial Disclosure...............................31

  Item 9A-  Controls and Procedures...........................................31

  Item 9B-  Other Information.................................................32

PART III

  Item 10- Directors and Executive Officers of the Registrant.................33

  Item 11- Executive Compensation.............................................33

  Item 12- Security Ownership of Certain Beneficial Owners
           and Management and Related Stockholder Matters.....................34

  Item 13- Certain Relationships and Related Transactions.....................34

  Item 14- Principal Accounting Fees and Services.............................34

PART IV

  Item 15- Exhibits and Financial Statement Schedules.........................35

           Signatures.........................................................37

           Exhibit Index......................................................38

                                                                       Page 2

STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

     *  statements of the Corporation's goals, intentions and expectations;

     *  statements regarding the Corporation's business plan and growth
        strategies;

     *  statements regarding the asset quality of the Corporation's loan and
        investment portfolios; and

     *  estimates of the Corporation's risks and future costs and benefits.

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

     *  fluctuations in market rates of interest and loan and deposit pricing,
        which could negatively affect the Corporation's net interest margin,
        asset valuations and expense expectations;

     *  adverse changes in the economy, which might affect the Corporation's
        business prospects and could cause credit-related losses and expenses;

     *  adverse developments in the Corporation's loan and investment
        portfolios;

     *  competitive factors in the banking industry, such as the trend towards
        consolidation in the Corporation's market;

     *  changes in the banking legislation or the regulatory requirements of
        federal and state agencies applicable to bank holding companies and
        banks like the Corporation's affiliate banks;

     *  acquisitions  of other businesses by the Corporation and integration of
        such acquired businesses;

     *  changes in market, economic, operational, liquidity, credit and interest
        rate risks  associated  with the  Corporation's business; and

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

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

                                                                       Page 3

                                     PART I

Item 1.  BUSINESS
- --------------------------------------------------------------------------------

GENERAL

     First  Merchants  Corporation  (the  "Corporation") is  a financial holding
company  headquartered in Muncie,  Indiana.  The  Corporation's  Common Stock is
traded  on  NASDAQ's  National  Market  System  under  the  symbol  FRME and was
organized in September 1982. Since its  organization,  the Corporation has grown
to include  nine  affiliate  banks with over  sixty-five  locations in seventeen
Indiana and three Ohio counties, a trust company, a multi-line insurance agency,
a reinsurance agency, and a title agency.

     The bank subsidiaries of the Corporation include the following:

       *  First Merchants Bank, National Association in Delaware and Hamilton
          counties;

       *  The Madison  Community  Bank, National  Association in Madison County;

       *  First United Bank, National Association in Henry County;

       *  United Communities  National Bank with locations in Randolph, Union,
          Fayette,  Wayne and Butler (OH) counties;

       *  The First National Bank of Portland in Jay County;

       *  Decatur Bank & Trust Company,  National Association in Adams County;

       *  Frances Slocum Bank & Trust Company,  National Association in Wabash,
          Howard, and Miami counties;

       *  Lafayette Bank and Trust Company, National Association in Tippecanoe,
          Carroll, Jasper, and White counties; and

       *  Commerce National Bank in Franklin and Hamilton counties in Ohio.

     Effective  January 1, 2006,  First United Bank,  National  Association  was
merged into First  Merchants  Bank,  National  Association,  and the name of the
continuing institution is First Merchants Bank, National Association.

     The Corporation also  operates  First Merchants Insurance Services, Inc.  a
full- service  property,  casualty,  personal  lines,  and health care insurance
agency  headquartered  in Muncie,  Indiana.  On  September  1,  2005,  Trustcorp
Financial  Services of  Greenville,  Inc.  merged with and into First  Merchants
Insurance  Services,  Inc. The  Corporation  is also the  majority  owner of the
Indiana Title  Insurance  Company LLC, a full-service  title  insurance  agency;
operates  First  Merchants  Reinsurance  Co. Ltd.,  a  reinsurance  agency;  and
wholly-owns  Merchants Trust Company,  National  Association,  a trust and asset
management services company.

     As of  December  31,  2005,  the  Corporation  had  consolidated  assets of
$3.2 billion,  consolidated deposits of $2.4 billion and stockholders' equity of
$313 million.  The  Corporation  is presently  engaged in conducting  commercial
banking  business  through the offices of its nine banking  subsidiaries.  As of
December 31, 2005, the  Corporation  and its  subsidiaries  had 1,109  full-time
equivalent employees.

     Through  its  bank subsidiaries, the Corporation  offers a  broad  range of
financial  services,  including:  accepting time,  savings and demand  deposits;
making  consumer,  commercial,  agri-business  and real estate  mortgage  loans;
renting  safe  deposit  facilities;   providing  personal  and  corporate  trust
services;  providing  full service  brokerage;  and  providing  other  corporate
services,  letters of credit and repurchase agreements.  Through various nonbank
subsidiaries,  the  Corporation  also offers  personal and  commercial  lines of
insurance and engages in the title agency business and the reinsurance of credit
life, accident, and health insurance.

     The Corporation makes its Annual Report on Form 10-K,  Quarterly Reports on
Form 10-Q,  Current Reports on Form 8-K and amendments to those reports filed or
furnished  pursuant to Section 13(a) or 15(d) of the Securities  Exchange Act of
1934,  as amended,  available on its website at  www.firstmerchants.com  without
charge, as soon as reasonably  practicable after such reports are electronically
filed with,  or furnished  to, the  Securities  and Exchange  Commission.  These
documents  can  also  be  read  and  copied  at  the   Securities  and  Exchange
Commission's Public Reference Room at 450 Fifth Street, N.W.,  Washington,  D.C.
20549.  Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further  information  on the public  reference  room.  Our SEC  filings are also
available to the public at the Securities and Exchange  Commission's web site at
http://www.sec.gov.  Additionally,  the  Corporation  will also provide  without
charge,  a copy of its Form 10-K to any shareholder by mail.  Requests should be
sent to Mr.  Brian  Edwards,  Shareholder  Relations  Officer,  First  Merchants
Corporation, P.O. Box 792, Muncie, IN 47308-0792.

                                                                       Page 4

- --------------------------------------------------------------------------------
ACQUISITION POLICY

     The Corporation anticipates that it will continue its policy of  geographic
expansion  of its  banking  business  through  the  acquisition  of banks  whose
operations  are consistent  with its community  banking  philosophy.  Management
routinely  explores  opportunities to acquire  financial  institutions and other
financial  services-related  businesses and to enter into strategic alliances to
expand the scope of its services and its customer base.

COMPETITION

     The Corporation's banking subsidiaries are  located  in  Indiana  and  Ohio
counties  where other  financial  services  companies  provide  similar  banking
services.  In  addition to the  competition  provided by the lending and deposit
gathering subsidiaries of national manufacturers, retailers, insurance companies
and investment brokers,  the banking  subsidiaries compete vigorously with other
banks, thrift  institutions,  credit unions and finance companies located within
their service areas.

                           REGULATION AND SUPERVISION

                 OF FIRST MERCHANTS CORPORATION AND SUBSIDIARIES

BANK HOLDING COMPANY REGULATION

     The  Corporation is registered as a bank holding company and has elected to
be a  financial  holding  company.  It is  subject  to the  supervision  of, and
regulation  by the Board of Governors of the Federal  Reserve  System  ("Federal
Reserve")  under the Bank  Holding  Company  Act of 1956,  as amended  (the "BHC
Act"). Bank holding companies are required to file periodic reports with and are
subject to periodic  examination by the Federal Reserve. The Federal Reserve has
issued  regulations  under the BHC Act requiring a bank holding company to serve
as a source of financial and managerial  strength to its subsidiary banks. Thus,
it is the policy of the Federal  Reserve  that  a  bank holding  company  should
stand  ready to use its  resources  to  provide  adequate  capital  funds to its
subsidiary banks during periods of financial stress or adversity.  Additionally,
under  the  Federal  Deposit  Insurance  Corporation  Improvement  Act  of  1991
("FDICIA"),  a bank holding  company is required to guarantee the  compliance of
any subsidiary bank that may become "undercapitalized" (as defined in the FDICIA
section of this Form 10-K) with the terms of any capital  restoration plan filed
by such subsidiary with its  appropriate  federal banking agency.  Under the BHC
Act, the Federal  Reserve has the authority to require a bank holding company to
terminate any activity or relinquish control of a nonbank subsidiary (other than
a nonbank  subsidiary  of a bank)  upon the  determination  that  such  activity
constitutes a serious risk to the financial stability of any bank subsidiary.

     The BHC Act requires the Corporation to obtain  the prior approval  of  the
Federal Reserve before:

1.  Acquiring  direct or indirect control or ownership of any  voting  shares of
    any bank or  bank  holding company  if,  after such  acquisition,  the  bank
    holding  company  will directly or indirectly own or control more than 5% of
    the voting shares of the bank or bank holding company.

2.  Merging or consolidating with another bank holding company; or

3.  Acquiring substantially all of the assets of any bank.

     The BHC Act generally prohibits bank holding companies that have not become
financial  holding  companies from (i) engaging in activities other than banking
or managing or controlling  banks or other  permissible  subsidiaries,  and (ii)
acquiring or retaining  direct or indirect control of any company engaged in the
activities other than those  activities  determined by the Federal Reserve to be
closely related to banking or managing or controlling banks.

     The BHC Act does not place territorial  restrictions  on  such  nonbanking-
related activities.

                                                                       Page 5

CAPITAL ADEQUACY GUIDELINES FOR BANK HOLDING COMPANIES

     The  Corporation  is   required  to  comply  with  the   Federal  Reserve's
risk-based  capital  guidelines.  These  guidelines  require a minimum  ratio of
capital to  risk-weighted  assets of 8%  (including  certain  off-balance  sheet
activities  such as  standby  letters  of  credit).  At least  half of the total
required   capital  must  be  "Tier  1  capital,"   consisting   principally  of
stockholders' equity,  noncumulative perpetual preferred stock, a limited amount
of  cumulative  perpetual  preferred  stock and minority  interest in the equity
accounts  of  consolidated  subsidiaries,   less  certain  goodwill  items.  The
remainder   may   consist  of  a  limited   amount  of   subordinate   debt  and
intermediate-term  preferred stock, certain hybrid capital instruments and other
debt securities,  cumulative  perpetual preferred stock, and a limited amount of
the general loan loss allowance.

     In addition to the risk-based capital  guidelines,  the Federal Reserve has
adopted a Tier 1  (leverage)  capital  ratio  under  which the Corporation  must
maintain a minimum level of Tier 1 capital to average total consolidated assets.
The ratio is 3% in the case of bank  holding  companies  which have the  highest
regulatory  examination ratings and are not contemplating  significant growth or
expansion.  All other bank holding companies are expected to maintain a ratio of
at least 1% to 2% above the stated minimum.

     The following are the Corporation's regulatory capital ratios as of
December  31, 2005:

                                                         Regulatory Minimum
                                      Corporation            Requirement

Tier 1 Capital:                           9.7%                  4.0%
(to risk-weighted assets)

Total Capital:                           11.7%                  8.0%

BANK REGULATION

     Each  of  the  Corporation's  bank  subsidiaries are national banks and are
supervised,  regulated  and  examined  by the Office of the  Comptroller  of the
Currency (the "OCC"). The OCC has the authority to issue cease-and-desist orders
if it determines that  activities of the bank regularly  represent an unsafe and
unsound  banking  practice  or a  violation  of  law.  Federal  law  extensively
regulates various aspects of the banking business such as reserve  requirements,
truth-in-lending  and  truth-in-savings  disclosures,  equal credit opportunity,
fair  credit  reporting,  trading  in  securities  and other  aspects of banking
operations. Current federal law also requires banks, among other things, to make
deposited funds available within specified time periods.
                                                                        Page 6

BANK CAPITAL REQUIREMENTS

     The OCC has adopted risk-based  capital ratio guidelines to which  national
banks are subject.  The guidelines  establish a framework that makes  regulatory
capital requirements more sensitive to differences in risk profiles.  Risk-based
capital  ratios are  determined by allocating  assets and specified  off-balance
sheet  commitments  to four  risk-weighted  categories,  with  higher  levels of
capital being  required for the  categories  perceived as  representing  greater
risk.

     Like  the  capital  guidelines  established  by the Federal Reserve,  these
guidelines divide a bank's capital into tiers.  Banks are required to maintain a
total risk-based  capital ratio of 8%. The OCC may, however,  set higher capital
requirements when a bank's particular  circumstances warrant. Banks experiencing
or  anticipating  significant  growth are expected to maintain  capital  ratios,
including tangible capital positions, well above the minimum levels.

     In  addition,  the OCC established guidelines prescribing a  minimum Tier 1
leverage  ratio (Tier 1 capital to adjusted  total  assets as  specified  in the
guidelines).  These guidelines provide for a minimum Tier 1 leverage ratio of 3%
for banks that meet  specified  criteria,  including  that they have the highest
regulatory rating and are not experiencing or anticipating  significant  growth.
All other banks are  required to maintain a Tier 1 leverage  ratio of 3% plus an
additional 100 to 200 basis points.

     All of the  Corporation's  affiliate  banks  exceed the risk-based  capital
guidelines of the OCC as of December 31, 2005.

     The  Federal  Reserve  and the  OCC  have   adopted  rules  to  incorporate
market  and  interest  rate  risk  components  into  their  risk-based   capital
standards.  Amendments to the  risk-based  capital  requirements,  incorporating
market  risk,  became  effective  January  1, 1998.  Under the new  market  risk
requirements,  capital  will be  allocated  to support the amount of market risk
related to a financial institution's ongoing trading activities.

FDIC IMPROVEMENT ACT OF 1991

     The   Federal  Deposit   Insurance  Corporation  Improvement  Act  of  1991
("FDICIA") requires,  among other things, federal bank regulatory authorities to
take "prompt  corrective action" with respect to banks which do not meet minimum
capital requirements. For these purposes, FDICIA establishes five capital tiers:
well  capitalized,  adequately  capitalized,   undercapitalized,   significantly
undercapitalized   and  critically   undercapitalized.   The  FDIC  has  adopted
regulations to implement the prompt corrective action provisions of FDICIA.

     "Undercapitalized"  banks  are   subject  to  growth  limitations  and  are
required to submit a capital  restoration  plan. A bank's  compliance  with such
plan is required to be guaranteed by the bank's parent  holding  company.  If an
"undercapitalized"  bank fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized. "Significantly undercapitalized" banks are
subject  to one or more  restrictions,  including  an  order by the FDIC to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total  assets and cease  receipt  of  deposits  from  correspondent  banks,  and
restrictions    on    compensation    of   executive    officers.    "Critically
undercapitalized"  institutions  may  not,  beginning  60  days  after  becoming
"critically  undercapitalized,"  make any  payment of  principal  or interest on
certain subordinated debt or extend credit for a highly leveraged transaction or
enter into any transaction outside the ordinary course of business. In addition,
"critically  undercapitalized"  institutions  are  subject to  appointment  of a
receiver or conservator.

                                                                        Page 7

FDICIA continued

     As  of  December  31, 2005,  each  bank  subsidiary  of First  Merchants is
"well  capitalized" based on the "prompt corrective action" ratios and deadlines
described above. It should be noted,  however, 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.

DEPOSIT INSURANCE

     The Corporation's affiliated banks are insured up to  regulatory  limits by
the FDIC and,  accordingly,  are  subject to deposit  insurance  assessments  to
maintain  the Bank  Insurance  Fund  (the  "BIF")  and the  Savings  Association
Insurance  Fund  ("SAIF")  administered  by  the  FDIC.  The  FDIC  has  adopted
regulations  establishing a permanent  risk-related deposit insurance assessment
system. Under this system, the FDIC places each insured bank in one of nine risk
categories  based  on  (i)  the  bank's  capitalization,  and  (ii)  supervisory
evaluations provided to the FDIC by the institution's primary federal regulator.
Each insured bank's  insurance  assessment  rate is then  determined by the risk
category in which it is classified by the FDIC.

     The  Deposit  Insurance  Funds  Act of 1996  provides for assessments to be
imposed on insured  depository  institutions with respect to deposits insured by
the BIF and the SAIF (in addition to assessments currently imposed on depository
institutions with respect to BIF- and SAIF-insured deposits) to pay for the cost
of Financing  Corporation  ("FICO")  funding.  The FICO  assessments do not vary
depending  upon  a  depository   institution's   capitalization  or  supervisory
evaluations.

DIVIDEND LIMITATIONS

     National banking  laws restrict the amount of dividends that  an  affiliate
bank may declare in a year without obtaining prior regulatory approval. National
banks are limited to the bank's retained net income (as defined) for the current
year  plus  those  for the  previous  two  years.  At  December  31,  2005,  the
Corporation's  affiliate  banks had a total of $17,060,000  retained net profits
available  for  2006  dividends  to the  Corporation  without  prior  regulatory
approval.

BROKERED DEPOSITS

     Under  FDIC  regulations,   no  FDIC-insured  depository  institution   can
accept  brokered  deposits  unless  it (i)  is  well  capitalized,  or  (ii)  is
adequately  capitalized and received a waiver from the FDIC. In addition,  these
regulations  prohibit any depository  institution  that is not well  capitalized
from (a) paying an interest  rate on deposits in excess of 76 basis  points over
certain prevailing market rates or (b) offering "pass through" deposit insurance
on certain  employee  benefit plan accounts unless it provides certain notice to
affected depositors.

INTERSTATE BANKING AND BRANCHING

     Under  the  Riegle-Neal  Interstate  Banking and  Branching  Efficiency Act
of 1994  ("Riegle-Neal")  subject  to  certain  concentration  limits,  required
regulatory  approvals and other  requirements,  (i) financial  holding companies
such as the Corporation  are  permitted  to  acquire  banks  and  bank   holding
companies  located in any state;  (ii) any bank that is a  subsidiary  of a bank
holding  company is permitted to receive  deposits,  renew time deposits,  close
loans,  service  loans and receive loan  payments as an agent for any other bank
subsidiary  of that holding  company;  and (iii) banks are  permitted to acquire
branch  offices  outside their home states by merging with  out-of-state  banks,
purchasing  branches in other states, and establishing de novo branch offices in
other states.
                                                                        Page 8

FINANCIAL SERVICES MODERNIZATION ACT

     The Gramm-Leach-Bliley Act of 1999 (the  "Financial Services  Modernization
Act")  establishes  a  comprehensive  framework  to  permit  affiliations  among
commercial  banks,  insurance  companies,  securities firms, and other financial
service  providers by revising and  expanding  the existing BHC Act.  Under this
legislation,  bank holding  companies would be permitted to conduct  essentially
unlimited  securities  and  insurance  activities  as well as  other  activities
determined by the Federal  Reserve Board to be financial in nature or related to
financial services.  As a result,  the Corporation is able to provide securities
and insurance services.  Furthermore, under this legislation, the Corporation is
able to acquire, or be acquired by, brokerage and securities firms and insurance
underwriters. In addition, the Financial Services Modernization Act broadens the
activities  that may be conducted  by national  banks  through the  formation of
financial  subsidiaries.  Finally,  the  Financial  Services  Modernization  Act
modifies the laws governing the implementation of the Community Reinvestment Act
and  addresses a variety of other legal and  regulatory  issues  affecting  both
day-to-day operations and long-term activities of financial institutions.

     A bank holding  company  may become a financial  holding company if each of
its  subsidiary  banks is well  capitalized,  is well managed and has at least a
satisfactory   rating  under  the  Community   Reinvestment  Act,  by  filing  a
declaration  that the bank holding company wishes to become a financial  holding
company. Also effective March 11, 2000, no regulatory approval is required for a
financial  holding  company to  acquire a company,  other than a bank or savings
association, engaged in activities that are financial in nature or incidental to
activities  that are financial in nature,  as determined by the Federal  Reserve
Board.  The  Federal  Reserve  Bank  of  Chicago   approved  the   Corporation's
application to become a Financial Holding Company effective September 13, 2000.

USA PATRIOT ACT

     As  part  of  the  USA  Patriot Act,  signed into law on October 26,  2001,
Congress  adopted the  International  Money  Laundering  Abatement and Financial
Anti-Terrorism  Act of 2001 (the "Act"). The Act authorizes the Secretary of the
Treasury,  in consultation with the heads of other government agencies, to adopt
special  measures  applicable  to  financial  institutions  such as banks,  bank
holding  companies,  broker-dealers  and  insurance  companies.  Among its other
provisions,  the Act requires each  financial  institution:  (i) to establish an
anti-money  laundering  program;  (ii)  to  establish  due  diligence  policies,
procedures  and  controls  that are  reasonably  designed  to detect  and report
instances of money  laundering in United  States  private  banking  accounts and
correspondent  accounts  maintained  for  non-United  States  persons  or  their
representatives; and (iii) to avoid establishing, maintaining, administering, or
managing  correspondent  accounts  in the United  States for, or on behalf of, a
foreign  shell bank that does not have a physical  presence in any  country.  In
addition,  the Act expands the circumstances under which funds in a bank account
may be forfeited and requires  covered  financial  institutions to respond under
certain  circumstances to requests for information from federal banking agencies
within 120 hours.

     Treasury  regulations  implementing  the  due  diligence  requirements were
issued in 2002. These regulations  required minimum standards to verify customer
identity,  encouraged cooperation among financial institutions,  federal banking
agencies, and law enforcement authorities regarding possible money laundering or
terrorist activities,  prohibited the anonymous use of "concentration accounts,"
and required all covered  financial  institutions to have in place an anti-money
laundering compliance program.

     The Act also amended the Bank  Holding  Company Act and the Bank Merger Act
to require the federal  banking  agencies to  consider  the  effectiveness  of a
financial  institution's  anti-money  laundering  activities  when  reviewing an
application under these acts.

                                                                       Page 9

THE SARBANES-OXLEY ACT

     The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley  Act"), which became law on
July 30,  2002,  added new legal  requirements  for public  companies  affecting
corporate governance, accounting and corporate reporting. The Sarbanes-Oxley Act
provides for, among other things:

     *  a prohibition on personal loans made or arranged by the issuer to its
        directors and executive officers (except for loans made by a bank
        subject to Regulation O);

     *  independence requirements for audit committee members;

     *  independence requirements for company auditors;

     *  certification of financial statements on Forms 10-K and 10-Q reports by
        the chief executive officer and the chief financial officer;

     *  the forfeiture by the chief executive officer and chief financial
        officer of bonuses or other incentive-based compensation and profits
        from the sale of an issuer's securities by such officers in the
        twelve month period following initial publication of any financial
        statements that later require restatement due to corporate misconduct;

     *  disclosure of off-balance sheet transactions;

     *  two-business day filing requirements for insiders filing Form 4s;

     *  disclosure of a code of ethics for financial officers and filing a
        Form 8-K for a change in or waiver of such code;

     *  the reporting of securities violations "up the ladder" by both in-house
        and outside attorneys;

     *  restrictions on the use of non-GAAP financial measures in press releases
        and SEC filings;

     *  the formation of a public accounting oversight board; and

     *  various increased criminal penalties for violations of securities laws.

     The  Sarbanes-Oxley  Act  contains  provisions  which became effective upon
enactment on July 30,  2002,including  provisions  which became  effective  from
within 30 days to one year from  enactment.  The SEC has been delegated the task
of enacting  rules to implement  various  provisions.  In addition,  each of the
national stock exchanges  developed new corporate  governance  rules,  including
rules strengthening director independence  requirements for boards, the adoption
of  corporate  governance  codes  and  charters  for the  nominating,  corporate
governance and audit committees.

ADDITIONAL MATTERS

     The Corporation and its affiliate banks are subject to the Federal  Reserve
Act,  which  restricts  financial  transactions  between  banks  and  affiliated
companies.  The statute limits credit  transactions  between  banks,  affiliated
companies and its executive officers and its affiliates.  The statute prescribes
terms and  conditions for bank  affiliate  transactions  deemed to be consistent
with safe and sound  banking  practices,  and  restricts the types of collateral
security  permitted  in  connection  with the bank's  extension  of credit to an
affiliate.  Additionally,  all transactions  with an affiliate must be  on terms
substantially  the same or at least as  favorable  to the  institution  as those
prevailing at the time for comparable transactions with non-affiliated parties.

     In addition  to  the  matters discussed above, the Corporation's  affiliate
banks are subject to  additional  regulation  of their  activities,  including a
variety of consumer protection regulations affecting their lending,  deposit and
collection  activities  and  regulations  affecting  secondary  mortgage  market
activities.

     The earnings of  financial   institutions   are  also  affected  by general
economic  conditions and prevailing  interest rates,  both domestic and foreign,
and by the monetary and fiscal policies of the United States  Government and its
various  agencies,   particularly  the  Federal  Reserve.  The  Federal  Reserve
regulates  the  supply  of  credit  in  order  to  influence   general  economic
conditions, primarily through open market operations in United States government
obligations,  varying the  discount  rate on financial  institution  borrowings,
varying  reserve  requirements  against  financial  institution  deposits,   and
restricting certain borrowings by financial institutions and their subsidiaries.
The monetary  policies of the Federal  Reserve have had a significant  effect on
the operating  results of the bank  subsidiaries in the past and are expected to
continue to do so in the future.

     Additional legislation  and administrative  actions  affecting the  banking
industry may be considered by the United States Congress, state legislatures and
various  regulatory  agencies,  including  those referred to above. It cannot be
predicted with certainty whether such legislation or administrative  action will
be  enacted  or the  extent to which the  banking  industry  in general or the
Corporation and its affiliate banks in particular would be affected.

                                                                        Page 10

STATISTICAL DATA

The following tables set forth statistical data relating the Corporation and its
subsidiaries.

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
The daily average balance sheet amounts, the related interest income or expense,
and average rates earned or paid are presented in the following table.
(Dollars in Thousands)

                                               2005                            2004                            2003
                                  ------------------------------  ------------------------------  ------------------------------
                                              Interest                        Interest                        Interest
                                   Average    Income/    Average   Average    Income/    Average   Average    Income/    Average
                                   Balance    Balance      Rate    Balance    Balance      Rate    Balance    Balance      Rate
                                  ---------  ---------  --------  ---------  ---------  --------  ---------  ---------  --------
                                                                                               
Assets:
Federal funds sold ............   $    8,385    $    264   3.1%   $    7,759    $    165   2.1%   $   44,243    $    485   1.1%
Interest-bearing deposits......       16,683         695   4.2        17,500         555   3.2         6,655          76   1.1
Federal Reserve and
  Federal Home Loan Bank stock.       23,019       1,185   5.1        22,655       1,250   5.5        13,615         649   4.8
Securities: (1)
  Taxable .......................    263,435       9,612   3.6       247,930       8,371   3.4       181,698       6,105   3.4
  Tax-exempt (3).................    162,965       9,807   6.0       141,205       9,382   6.6       136,028       9,648   7.1
                                  ----------    --------          ----------    --------          ----------    --------
    Total Securities.............    426,400      19,419   4.6       389,135      17,753   4.6       317,726      15,753   5.0
Mortgage loans held for sale.....      2,746         113   4.1         4,205         240   5.7        12,294         725   5.9
Loans: (2)
  Commercial ....................  1,569,270     105,740   6.7     1,495,195      89,108   6.0     1,387,704      82,183   5.9
  Bankers' acceptance and
    Commercial paper purchased...                                                                      4,660          61   1.3
  Real estate mortgage...........    464,426      27,334   5.9       486,377      27,969   5.8       517,376      32,100   6.2
  Installment ...................    385,097      25,248   6.6       372,817      22,636   6.1       345,084      26,167   7.6
  Tax-exempt (3).................     12,595         989   7.9        10,423         894   8.6        14,496       1,088   7.5
                                  ----------    --------          ----------    --------          ----------    --------
    Total loans .................  2,434,134     159,424   6.5     2,369,017     140,847   5.9     2,281,614     142,324   6.2
                                  ----------    --------          ----------    --------          ----------    --------
    Total earning assets.........  2,908,621     180,987   6.3     2,806,066     160,570   5.7     2,663,853     159,287   6.0
                                  ----------    --------          ----------    --------          ----------    --------
Net unrealized gain (loss) on securities
    available for sale...........     (1,217)                          4,676                           7,553
Allowance for loan losses........    (24,889)                        (26,093)                        (28,906)
Cash and due from banks..........     53,037                          63,420                          75,801
Premises and equipment ..........     38,284                          38,397                          39,069
Other assets ....................    205,628                         222,638                         202,825
                                   ---------                       ---------                       ---------
    Total assets ................ $3,179,464                      $3,109,104                      $2,960,195
                                  ==========                      ==========                      ==========
Liabilities:
Interest-bearing deposits:
    NOW accounts ................ $  395,356       2,058   0.5%   $  346,525       1,779   0.5%   $  344,933       2,015   0.6%
    Money market deposit accounts    280,508       4,899   1.7       359,359       3,219   0.9       336,669       3,360   1.0
    Savings deposits ............    319,552       2,583   0.8       297,364         992   0.3       293,119       1,376   0.5
    Certificates and other
      time deposits .............  1,149,679      36,581   3.2     1,051,092      27,854   2.7       988,957      28,107   2.8
                                  ----------    --------          ----------    --------          ----------    --------
  Total interest-bearing
    deposits.....................  2,145,095      46,121   2.2     2,054,340      33,844   1.6     1,963,678      34,858   1.8

Borrowings ......................    412,091      19,959   4.8       402,776      17,741   4.4       381,178      17,530   4.6
                                  ----------    --------          ----------    --------          ----------    --------
    Total interest-bearing
     liabilities.................  2,557,186      66,080   2.6     2,457,116      51,585   2.1     2,344,856      52,388   2.2
Noninterest-bearing deposits.....    273,657                         310,966                         293,397
Other liabilities ...............     33,096                          31,018                          28,339
                                  ----------                      ----------                      ----------
    Total liabilities............  2,863,939                       2,799,100                       2,666,592
Stockholders' equity ............    315,525                         310,004                         293,603
                                  ----------                      ----------                      ----------
    Total liabilities and
     stockholders' equity........ $3,179,464      66,080   2.3    $3,109,104      51,585   1.8    $2,960,195      52,388   2.0
                                  ==========    --------          ==========    --------          ==========    --------
    Net interest income .........               $114,907                        $108,985                        $106,899
                                                ========                        ========                        ========
    Net interest margin..........                          4.0                             3.9                             4.0
(1)     Average  balance of securities  is computed  based on the average of the
        historical amortized cost balances without the effects of the fair value
        adjustment.
(2)     Nonaccruing loans have been included in the average balances.
(3)     Tax  exempt  securities  and loans are presented on  a fully taxable
        equivalent basis, using a marginal tax  rate  of  35%  for 2005, 2004,
        and 2003..........................
                                                 $3,778                          $3,597                          $3,757
                                                 ======                          ======                          ======

                                                                        Page 11

STATISTICAL DATA (continued)
- ----------------

ANALYSIS OF CHANGES IN NET INTEREST INCOME

The following table presents net interest income  components on a tax-equivalent
basis and reflects  changes between  periods  attributable to movement in either
the  average  balance  or  average  interest  rate for both  earning  assets and
interest-bearing  liabilities.  The  volume  differences  were  computed  as the
difference in volume  between the current and prior year times the interest rate
of the  prior  year,  while the  interest  rate  changes  were  computed  as the
difference  in rate  between  the current and prior year times the volume of the
prior  year.  Volume/rate  variances  have  been  allocated  on the basis of the
absolute relationship between volume variances and rate variances.

                                                 2005 Compared to 2004                             2004 Compared to 2003
                                               Increase (Decrease) Due To                        Increase (Decrease) Due To
                                        ----------------------------------------          ----------------------------------------

                                          Volume         Rate          Total                Volume         Rate          Total
                                          ------         ----          -----                ------         ----          -----
                                                        (Dollars in Thousands on Fully Taxable Equivalent Basis)

Interest income:
  Federal funds sold ...............     $    14       $     85      $    99               $  (577)      $    257      $  (320)
  Interest-bearing deposits ........         (27)           167          140                   229            250          479
  Federal Reserve and Federal
    Home Loan Bank stock ...........          36           (101)         (65)                  474            127          601
  Securities .......................       1,697            (31)       1,666                 3,332         (1,332)       2,000
  Mortgage loans held for sale .....         (70)           (57)        (127)                 (462)           (23)        (485)
  Loans ............................       4,027         14,677       18,704                 5,843         (6,835)        (992)
                                         --------      ---------    ---------              --------      ---------    ---------
  Totals ...........................       5,677         14,740       20,417                 8,839         (7,556)       1,283
                                         --------      ---------    ---------              --------      ---------    ---------
Interest expense:
  NOW accounts .....................         254             25          279                     9           (245)        (236)
  Money market deposit
    accounts........................        (832)         2,512        1,680                   217           (358)        (141)
  Savings deposits..................          79          1,512        1,591                    20           (404)        (384)
  Certificates and other
    time deposits...................       2,780          5,947        8,727                 1,708         (1,961)        (253)
  Borrowings........................         418          1,800        2,218                   969           (758)         211
                                         --------      ---------    ---------              --------      ---------    ---------
    Totals..........................       2,699         11,796       14,495                 2,923         (3,726)        (803)
                                         --------      ---------    ---------              --------      ---------    ---------

Change in net interest
  income (fully taxable
  equivalent basis)................      $ 2,978       $  2,944        5,922               $ 5,916       $ (3,830)       2,086
                                         ========      =========                           ========      =========

Tax equivalent adjustment
  using marginal rate
  of 35% for 2005, 2004,
 and 2003..........................                                     (182)                                              161
                                                                   ----------                                        ----------

Change in net interest
  income...........................                                $   5,740                                         $   2,247
                                                                   ==========                                        ==========

                                                                        Page 12

STATISTICAL DATA (continued)

INVESTMENT SECURITIES

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

                                                                          Gross            Gross
                                                       Amortized        Unrealized      Unrealized          Fair
                                                         Cost             Gains           Losses            Value
                                                    ----------------  ---------------  --------------  --------------
                                                                           (Dollars in Thousands)
                                                                                             
Available for sale at December 31, 2005
   U.S. Treasury ...............................      $  1,586                           $      1        $  1,585
   U.S. Government-sponsored agency securities..        83,026          $      1            1,836          81,191
   State and municipal .........................       167,095             2,159            1,131         168,123
   Mortgage-backed securities ..................       168,019               139            5,656         162,502
   Other asset-backed securities ...............             1                                                  1
   Marketable equity securities ................         9,660                                435           9,225
                                                      --------          --------         --------        --------
      Total available for sale .................       429,387             2,299            9,059         422,627
                                                      --------          --------         --------        --------

Held to maturity at December 31, 2005
   State and municipal .........................        11,609               283              412          11,480
   Mortgage-backed securities ..................            30                                                 30
                                                      --------          --------         --------        --------
      Total held to maturity ...................        11,639               283              412          11,510
                                                      --------          --------         --------        --------
      Total investment securities ..............      $441,026          $  2,582         $  9,471        $434,137
                                                      ========          ========         ========        ========

                                                                          Gross            Gross
                                                       Amortized        Unrealized      Unrealized          Fair
                                                         Cost             Gains           Losses            Value
                                                    ----------------  ---------------  --------------  --------------
                                                                           (Dollars in Thousands)
Available for sale at December 31, 2004
   U.S. Treasury ...............................      $  1,745                           $      1        $  1,744
   U.S. Government-sponsored agency securities..        65,325          $     73              332          65,066
   State and municipal .........................       150,284             5,243               82         155,445
   Mortgage-backed securities ..................       183,200               485            1,980         181,705
   Other asset-backed securities ...............            18                                                 18
   Marketable equity securities ................        12,191                 8                           12,199
                                                      --------          --------         --------        --------
      Total available for sale .................       412,763             5,809            2,395         416,177
                                                      --------          --------         --------        --------

Held to maturity at December 31, 2004
   State and municipal .........................         5,306               162                            5,468
   Mortgage-backed securities ..................            52                                                 52
                                                      --------          --------         --------        --------
      Total held to maturity ...................         5,358               162                            5,520
                                                      --------          --------         --------        --------
      Total investment securities ..............      $418,121          $  5,971         $  2,395        $421,697
                                                      ========          ========         ========        ========

                                                                        Page 13

- --------------------------------------------------------------------------------
STATISTICAL DATA (continued)

                                                                          Gross            Gross
                                                       Amortized        Unrealized      Unrealized          Fair
                                                         Cost             Gains           Losses            Value
                                                    ----------------  ---------------  --------------  --------------
                                                                           (Dollars in Thousands)
Available for sale at December 31, 2003
                                                                                             
   U.S. Treasury ...............................      $  1,498                                           $  1,498
   U.S. Government-sponsored agency securities..        38,290          $    523         $     52          38,761
   State and municipal .........................       118,794             6,932               86         125,640
   Mortgage-backed securities ..................       174,208               813            1,817         173,204
   Corporate obligations .......................           500                16                              516
   Marketable equity securities ................         9,237                 4                            9,241
                                                      --------          --------         --------        --------
      Total available for sale .................       342,527             8,288            1,955         348,860
                                                      --------          --------         --------        --------

Held to maturity at December 31, 2003
   State and municipal .........................         7,860               389                            8,249
   Mortgage-backed securities ..................            77                                                 77
                                                      --------          --------         --------        --------
      Total held to maturity ...................         7,937               389                            8,326
                                                      --------          --------         --------        --------
      Total investment securities ..............      $350,464          $  8,677         $  1,955        $357,186
                                                      ========          ========         ========        ========

                                                                               Cost
                                                    ----------------------------------------------------------
                                                         2005                  2004                  2003
                                                         ----                  ----                  ----
                                                                       (Dollars in Thousands)
                                                                                            
Federal Reserve and Federal Home Loan
   Bank stock at December 31:
Federal Reserve Bank stock ....................        $ 8,913                $ 8,814                $ 2,320
Federal Home Loan Bank stock ..................         14,287                 14,044                 13,182
                                                       -------                -------                -------
    Total .....................................        $23,200                $22,858                $15,502
                                                       =======                =======                =======

The fair value of Federal Reserve and Federal Home Loan Bank stock  approximates
cost.

There were no issuers included in our investment  security portfolio at December
31,  2005,  2004 or 2003 where the  aggregate  carrying  value of any one issuer
exceeded 10 percent of the  Corporation's  stockholders'  equity at those dates.
The term "issuer"  excludes the U.S.  Government and its sponsored  agencies and
corporations.

The maturity  distribution  (Dollars in Thousands)  and  average  yields for the
securities portfolio at December 31, 2005 were:

Securities available for sale December 31, 2005:

                                                        Within 1 Year                 1-5 Years                  5-10 Years
                                                        -------------                 ---------                  ----------
                                                    Amount        Yield*        Amount        Yield*       Amount        Yield*
                                                    ------        ------        ------        ------       ------        ------
                                                                                                         
U.S. Treasury................................      $ 1,585          4.2%
U.S. Government-sponsored agency securities..        3,093          2.5       $ 78,098         3.9%
State and Municipal..........................        8,167          5.1         90,109         4.6        $53,734          6.3%
                                                   -------                    --------                    -------
    Total....................................      $12,845          4.4%      $168,207         4.3%       $53,734          6.3%
                                                   =======                    ========                    =======

                                                                        Page 14

- --------------------------------------------------------------------------------

STATISTICAL DATA (continued)

                                                                            Marketable Equity
                                                                              and Mortgage -
                                             Due After Ten Years            Backed Securities                   Total
                                             -------------------         -----------------------                -----
                                            Amount         Yield*         Amount         Yield*          Amount        Yield*
                                            ------         ------         ------         ------          ------        ------
                                                                                                      
U.S. Treasury........................                                                                  $  1,585         4.2%
U.S. Government-sponsored
   agency securities.................                                                                    81,191         3.8
State and Municipal..................     $ 16,112           7.8%                                       168,122         5.5
Marketable equity securities.........                                  $   9,225           5.6%           9,225         5.6
Mortgage-backed securities...........                                    162,503           4.0          162,503         4.0
Other asset-backed securities........                                          1           7.0                1         7.0
                                          --------                     ---------                       --------
    Total............................     $ 16,112           7.8%      $ 171,729           4.1%        $422,627         4.6%
                                          ========                     =========                       ========

Securities held to maturity at December 31, 2005:

                                                  Within 1 Year                1-5 Years                   5-10 Years
                                                  -------------                ---------                   ----------
                                            Amount         Yield*         Amount        Yield*       Amount         Yield*
                                            ------         ------         ------        ------       ------         ------
                                                                                                    
State and municipal..................     $    733           7.9%        $ 1,943          8.1%       $  960           6.3%

                                                                             Mortgage-Backed
                                            Due After Ten Years                Securities                     Total
                                            -------------------               ------------                    -----
                                           Amount          Yield*         Amount        Yield*        Amount        Yield*
                                           ------          ------         ------        ------        ------        ------
                                                                                                    
State and municipal..................     $ 7,973            7.0%                                     $11,609         7.2%
Other asset-backed securities........                                    $    30          8.4%             30         8.4
                                          -------                        -------                      -------
     Total............................    $ 7,973            7.0%        $    30          8.4%        $11,639         7.2%
                                          =======                        =======                      =======

   *Interest yields on state and municipal securities are presented on a fully
   taxable equivalent basis using a 35% rate.

                                                                        Page 15

STATISTICAL DATA (continued)

Federal Reserve and Federal Home Loan Bank stock at December 31, 2005:

                                           (Dollars in Thousands)
                                           Amount          Yield
                                                      
Federal Reserve Bank Stock...........     $ 8,913           6.0%
Federal Home Loan Bank stock.........      14,287           4.3
                                          -------
    Total............................     $23,200           4.9%
                                          =======

The following tables show 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,
2005 and 2004:

                                                             Less than 12              12 Months or                  Total
                                                                Months                    Longer
                                                        ---------------------------------------------------------------------------
                                                                       GROSS                     GROSS                     GROSS
                                                           FAIR      UNREALIZED      FAIR      UNREALIZED      FAIR      UNREALIZED
                                                          VALUE        LOSSES       VALUE        LOSSES       VALUE        LOSSES
                                                        ---------------------------------------------------------------------------
                                                                                   (Dollars in Thousands)
                                                                                                       
Temporarily impaired investment
   securities at December 31, 2005:
U.S. Treasury ........................................  $    1,487   $       (1)                            $    1,487   $       (1)
U.S. Government-sponsored agency securities...........      31,692         (581)  $   45,466   $   (1,255)      77,158       (1,836)
State and municipal ..................................      90,905       (1,501)       2,124          (42)      93,029       (1,543)
Mortgage-backed securities ...........................      59,595       (1,511)      96,120       (4,141)     155,715       (5,652)
Marketable equity securities..........................          27           (8)       1,072         (431)       1,099         (439)
                                                        ----------   ----------   ----------   ----------   ----------   ----------
   Total temporarily impaired investment securities ..  $  183,706   $   (3,602)  $  144,782   $   (5,869)    $328,488   $   (9,471)
                                                        ==========   ==========   ==========   ==========   ==========   ==========

                                                             Less than 12              12 Months or                  Total
                                                                Months                    Longer
                                                        ---------------------------------------------------------------------------
                                                                       GROSS                     GROSS                     GROSS
                                                           FAIR      UNREALIZED      FAIR      UNREALIZED      FAIR      UNREALIZED
                                                          VALUE        LOSSES       VALUE        LOSSES       VALUE        LOSSES
                                                        ---------------------------------------------------------------------------
                                                                                   (Dollars in Thousands)
                                                                                                       
Temporarily impaired investment
   securities at December 31, 2004:
U.S. Treasury ........................................  $    1,496   $       (1)                            $    1,496   $       (1)
U.S. Government-sponsored agency securities...........      46,227         (303)  $    1,472   $      (29)      47,699         (332)
State and municipal ..................................       2,976          (20)       1,094          (62)       4,070          (82)
Mortgage-backed securities ...........................     109,213       (1,129)      27,493         (851)     136,706       (1,980)
                                                        ----------   ----------   ----------   ----------   ----------   ----------
   Total temporarily impaired investment securities ..  $  159,912   $   (1,453)  $   30,059   $     (942)    $189,971   $   (2,395)
                                                        ==========   ==========   ==========   ==========   ==========   ==========

                                                                        Page 16

STATISTICAL DATA (continued)

LOAN PORTFOLIO

TYPES OF LOANS

The loan portfolio at the dates indicated is presented below:

                                                    2005              2004              2003               2002              2001
                                                    ----              ----              ----               ----              ----
                                                                              (Dollars in Thousands)
                                                                                                             
Loans at December 31:
  Commercial and industrial loans..............  $  461,102        $  451,227        $  435,221         $  401,395        $  301,962
  Agricultural production
    financing and other loans to farmers.......      95,130            98,902            95,048             85,059            29,645
  Real estate loans:
    Construction...............................     174,783           164,738           149,865            133,896            58,316
    Commercial and farmland....................     734,865           709,163           564,578            401,561           230,233
    Residential................................     751,217           761,163           866,477            746,349           544,028
  Individuals' loans for
    household and other personal expenditures..     200,139           198,532           196,093            206,083           179,325
  Tax-exempt loans.............................       8,263             8,203            16,363             12,615             7,277
  Lease financing receivibles,
    net of unearned income ....................       8,713            11,311             7,919              5,249
  Other loans..................................      23,215            24,812            21,939             12,170             8,800
                                                 ----------        ----------        ----------         ----------        ----------
            Total loans........................  $2,457,427        $2,428,051        $2,353,503         $2,004,377        $1,359,586
                                                 ==========        ==========        ==========         ==========        ==========

Residential  Real Estate Loans Held for Sale at December 31, 2005,  2004,  2003,
2002  and  2001  were  $4,910,000,  $3,367,000,  $3,043,000,   $21,545,000,  and
$307,000.

MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES

Presented in the table below are the maturities of loans (excluding  residential
real estate,  individuals'  loans for household and other personal  expenditures
and lease financing) outstanding as of December 31, 2005. Also presented are the
amounts due after one year classified according to the sensitivity to changes in
interest rates.

                                                                               Maturing
                                                    Within              1-5               Over
                                                    1 Year             Years             5 Years            Total
                                                 --------------    ---------------    --------------     ------------
                                                                        (Dollars in Thousands)
                                                                                              
Commercial and industrial loans................  $  296,921        $ 100,558           $  63,623          $  461,102
Agricultural production financing
  and other loans to farmers...................      79,693           11,343               4,094              95,130
Real estate - Construction.....................     135,165           33,906               5,712             174,783
Real estate - Commercial and farmland..........     358,951          314,272              61,642             734,865
Tax-exempt loans...............................       1,539            1,788               4,936               8,263
Other loans....................................      12,384           10,551                 280              23,215
                                                 ----------        ---------            ---------         ----------
      Total....................................  $  884,653        $ 472,418            $140,287          $1,497,358
                                                 ==========        =========            =========         ==========

                                                                        Page 17

STATISTICAL DATA  (continued)

                                                                       Maturing
                                                  ---------------------------------------------------
                                                           1 - 5                       Over
                                                           Years                     5 Years
                                                           -----                     -------
                                                                (Dollars in Thousands)
                                                                          
Loans maturing after one year with:

  Fixed rate..............................          $     118,119               $     94,083
  Variable rate...........................                354,299                     46,204
                                                    -------------               ------------
    Total.................................          $     472,418               $    140,287
                                                    =============               ============

NONACCRUING, CONTRACTUALLY PAST DUE 90 DAYS OR MORE
OTHER THAN NONACCRUING AND RESTRUCTURED LOANS

                                                                            December 31
                                                  ---------------------------------------------------------------
                                                   2005          2004          2003          2002          2001
                                                   ----          ----          ----          ----          ----
                                                                      (Dollars in Thousands)
                                                                                           
Nonaccruing loans.........................        $10,030       $15,355       $19,453       $14,134       $6,327
Loans contractually past due 90
  days or more other than
  nonaccruing.............................          3,965         1,907         6,530         6,676        4,828
Restructured loans........................            310         2,019           641         2,508        3,511
                                                  -------       -------       -------       -------       -------
                                                  $14,305       $19,281       $26,624       $23,318       $14,666
                                                  =======       =======       =======       =======       =======

Nonaccruing loans are loans which are reclassified to a nonaccruing  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.  Interest
income on these loans is then recognized when collected.

Restructured  loans are loans for which the  contractual  interest rate has been
reduced  or  other  concessions  are  granted  to  the  borrower, because  of  a
deterioration  in the  financial  condition  of the  borrower  resulting  in the
inability of the borrower to meet the original contractual terms of the loans.

Interest income of $788,000 for the year ended December 31, 2005, was recognized
on the nonaccruing  and  restructured  loans listed in the table above,  whereas
interest income of $1,074,000  would have been  recognized  under their original
loan terms.

Potential problem loans:

Management  has  identified  certain  other  loans  totaling  $64,494,000  as of
December 31, 2005,  not included in the table above,  or the impaired loan table
in the footnotes to the consolidated financial statements, about which there are
doubts as to the borrowers' ability to comply with present repayment terms.

The  Corporation's  affiliate banks generate  commercial,  mortgage and consumer
loans from customers located primarily in north-central and east-central Indiana
and  Butler,  Franklin  and  Hamilton  counties  in Ohio.  The Banks'  loans are
generally  secured by specific  items of  collateral,  including  real property,
consumer assets, and business assets.
                                                                        Page 18

STATISTICAL DATA (continued)
- ----------------

SUMMARY OF LOAN LOSS EXPERIENCE

The following table summarizes the loan loss experience for the years indicated.

                                                    2005             2004             2003            2002            2001
                                                    ----             ----             ----            ----            ----
                                                                             (Dollars in Thousands)
                                                                                                     
Allowance for loan losses:
  Balance at January 1....................        $ 22,548         $ 25,493         $ 22,417        $ 15,141        $ 12,454

  Chargeoffs:
    Commercial and industrial(1)...........          3,763            7,455            5,023           4,711           1,688
    Real estate mortgage(3)................          2,117            1,588            2,111             800             227
    Individuals' loans for household and
      other personal expenditures,
      including other loans................          1,864            1,858            5,005           2,602           1,632
                                                  --------         --------         --------        --------        --------
      Total chargeoffs.....................          7,744           10,901           12,139           8,113           3,547
                                                  --------         --------         --------        --------        --------
  Recoveries:
    Commercial and industrial(2)...........          1,283            1,629            1,002             549             176
    Real estate mortgage(4)................            122              161              421              92              32
    Individuals' loans for household and
      other personal expenditures,
      including other loans................            625              461              588             672             365
                                                  --------         --------         --------        --------        --------
      Total recoveries.....................          2,030            2,251            2,011           1,313             573
                                                  --------         --------         --------        --------        --------

  Net chargeoffs...........................          5,714            8,650           10,128           6,800           2,974
                                                  --------         --------         --------        --------        --------
  Provisions for loan losses...............          8,354            5,705            9,477           7,174           3,576
  Allowance acquired in purchase...........                                            3,727           6,902           2,085
                                                  --------         --------         --------        --------        --------
  Balance at December 31...................        $25,188          $22,548          $25,493         $22,417         $15,141
                                                  ========         ========         ========        ========        ========

  (1)Category also includes the chargeoffs for lease financing, loans to
     financial institutions, tax-exempt loans and agricultural production
     financing and other loans to farmers.
  (2)Category also includes the recoveries for lease financing, loans to
     financial institutions, tax-exempt loans and agricultural production
     financing and other loans to farmers.
  (3)Category includes the chargeoffs for construction, commercial and farmland
     and residential real estate loans.
  (4)Category includes the recoveries for construction, commercial and farmland
     and residential real estate loans.

  Ratio of net chargeoffs during the
   period to average loans
   outstanding during the period..........           .23%             .37%             .44%             .37%             .23%

                                                                        Page 19

STATISTICAL DATA (continued)
- ----------------

The information regarding the analysis of loan loss experience on pages 9 and 10
of the First Merchants Corporation - Annual Report 2005 under the caption "ASSET
QUALITY/PROVISION   FOR  LOAN  LOSSES"  is  expressly   incorporated  herein  by
reference.

Allocation of the Allowance for Loan Losses at December 31:

Presented  below is an analysis of the  composition  of the  allowance  for loan
losses and percent of loans in each category to total loans:

                                                                    2005                             2004
                                                         -------------------------        -------------------------
                                                          Amount          Per Cent         Amount          Per Cent
                                                         --------         --------        --------         --------
                                                                           (Dollars in Thousands)
                                                                                                  
Balance at December 31:
  Commercial and industrial(1)................           $  7,430            31.0%        $ 16,821            30.9%
  Real estate mortgage(2).....................             13,149            60.5            1,916            60.6
  Individuals' loans for household and
    other personal expenditures,
    including other loans.....................              4,509             8.5            3,711             8.5
  Unallocated.................................                100             N/A              100             N/A
                                                         --------           ------        --------           ------
  Totals......................................           $ 25,188           100.0%        $ 22,548           100.0%
                                                         ========           ======        ========           ======

                                                                     2003                             2002
                                                         -------------------------         -------------------------
                                                          Amount          Per Cent         Amount          Per Cent
                                                         --------         --------        --------         --------
                                                                            (Dollars in Thousands)
Balance at December 31:
  Commercial and industrial(1)................           $ 17,517            29.9%        $ 12,405            31.8%
  Real estate mortgage(2).....................              4,441            60.8            2,875            57.3
  Individuals' loans for household and
    other personal expenditures,
    including other loans.....................              3,435             9.3            7,037            10.9
  Unallocated.................................                100             N/A              100             N/A
                                                         --------           ------        --------           ------
  Totals......................................           $ 25,493           100.0%        $ 22,417           100.0%
                                                         ========           ======        ========           ======

                                                                     2001
                                                         -------------------------
                                                          Amount          Per Cent
                                                         --------         --------
                                                           (Dollars in Thousands)
Balance at December 31:
  Commercial and industrial(1)................           $  6,884            29.2%
  Real estate mortgage(2).....................              2,655            56.9
  Individuals' loans for household and
    other personal expenditures,
    including other loans.....................              5,502            13.9
  Unallocated. .... ..........................                100            N/A
                                                         --------           ------
  Totals......................................           $ 15,141           100.0%
                                                         ========           ======

  (1) Category also includes  the allowance for  loan losses and percent of
      loans for lease financing, loans to financial institutions, tax-exempt
      loans, agricultural production financing and other loans to farmers and
      construction real estate loans.
  (2) Category includes the allowance for loan losses and percent of loans for
      commercial real estate, farmland and residential real estate loans.

At December 31, 2005, the Corporation had no concentration of loans exceeding 10
percent of total loans, which are not otherwise  disclosed.  Loan concentrations
are  considered to exist when there are amounts  loaned to a multiple  number of
borrowers engaged in similar activities,  which would cause them to be similarly
impacted by economic or other conditions.

                                                                        Page 20

STATISTICAL DATA (continued)
- ----------------

Loan Administration and Loan Loss Chargeoff Procedures

Primary  responsibility  and  accountability  for day-to-day  lending activities
rests with the  Corporation's  affiliate banks. Loan personnel at each bank have
the authority to extend credit under guidelines  approved by the bank's board of
directors.  Executive  and board  loan  committees  active at each bank serve as
vehicles for  communication  between the banks and for the pooling of knowledge,
judgment and experience of the Corporation's affiliate banks.  These  committees
provide  valuable  input to lending  personnel,  act as an  approval  body,  and
monitor the overall quality of the banks' loan portfolios.  The Corporation also
maintains a loan  grading  and review  program for its  affiliate  banks,  which
includes quarterly reviews of problem loans, delinquencies and charge-offs.  The
purpose of this program is to evaluate loan administration, credit quality, loan
documentation and the adequacy of the allowance for loan losses.

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 officer and are reported to
the Banks' Boards.  The Banks charge off loans when a determination is made that
all or a portion of a loan is  uncollectible  or as a result of  examinations by
regulators and the independent auditors.

Provision for Loan Losses

In banking,  loan losses are one of the costs of doing  business.  Although  the
Banks' management emphasize the early detection and chargeoff of loan losses, it
is inevitable  that at any time certain losses exist in the portfolio which have
not been specifically identified.  Accordingly, the provision for loan losses is
charged to earnings on an  anticipatory  basis,  and recognized  loan losses are
deducted from the allowance so established.  Over time, all net loan losses must
be charged to earnings.  During the year, an estimate of the loss experience for
the year serves as a starting point in determining the appropriate level for the
provision. However, the amount actually provided in any period may be greater or
less than net loan losses, based on management's  judgment as to the appropriate
level of the allowance for loan losses.  The  determination  of the provision in
any period is based on management's continuing review and evaluation of the loan
portfolio,  and its judgment as to the impact of current economic  conditions on
the portfolio.  The evaluation by management includes consideration of past loan
loss  experience,  changes in the  composition  of the loan  portfolio,  and the
current condition and amount of loans outstanding.

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.
Information on impaired loans is summarized below:

                                                                           2005              2004              2003
                                                                     ---------------   ---------------   ---------------
                                                                                    (Dollars in Thousands)
                                                                                                 
As of, and for the year ending December 31:
  Impaired loans with an allowance............................        $      7,540      $      7,728      $     12,725
  Impaired loans for which the discounted
    cash flows or collateral value exceeds the
    carrying value of the loan................................              44,840            41,683            32,047
                                                                      ------------      ------------      ------------

        Total impaired loans..................................        $     52,380      $     49,411      $     44,772
                                                                      ============      ============      ============

Total impaired loans as a percent of total loans..............               2.13%             2.03%             1.90%

  Allowance for impaired loans (included in the
    Corporation's allowance for loan losses)..................        $      2,824      $      1,673      $      5,728
  Average balance of impaired loans...........................              44,790            59,568            50,245
  Interest income recognized on impaired loans................               3,747             4,166             3,259
  Cash basis interest included above..........................               3,951             3,029             2,714

                                                                        Page 21

- --------------------------------------------------------------------------------
STATISTICAL DATA (continued)

DEPOSITS

The average balances,  interest income and expense and average rates on deposits
for the years  ended  December  2005,  2004 and 2003 are  presented  within  the
"Distribution of Assets,  Liabilities and Stockholders'  Equity,  Interest Rates
and Interest Differential" table on page 11 of this Form 10-K.

As of December  31,  2005,  certificates  of deposit and other time  deposits of
$100,000 or more mature as follows:

                                                                       Maturing
                                                   -------------------------------------------------
                                    3 Months            3-6              6-12            Over 12
                                    or less           Months            Months           Months             Total
                                  -------------    --------------    --------------   --------------    --------------
                                                                (Dollars in Thousands)
                                                                                            
Certificates of deposit and
  other time deposits..........     $109,317         $ 33,338           $ 41,961         $ 92,063          $276,679
Per cent.......................           40%              12%                15%              33%              100%

RETURN ON EQUITY AND ASSETS

The information regarding return on equity and assets presented on page 2 of the
First Merchants  Corporation - Annual Report 2005 under the caption "Five - Year
Summary  of  Selected  Financial  Data"  is  expressly  incorporated  herein  by
reference.

SHORT-TERM BORROWINGS

                                                                     2005                2004                2003
                                                              -----------------   -----------------   -----------------
                                                                               (Dollars in Thousands)
                                                                                                 
Balance at December 31:
  Securities sold under repurchase
    agreements (short-term portion)........                       $ 106,415           $  87,472           $  71,095
  Federal funds purchased..................                          50,000              32,550
                                                                  ---------           ---------           ---------
          Total short-term borrowings......                       $ 156,415           $ 120,022           $  71,095
                                                                  =========           =========           =========

Securities sold under repurchase  agreements are borrowings  maturing within one
year and are  secured  by U.S.  Treasury  and U.S.  Government-sponsored  agency
securities.

Pertinent information with respect to short-term borrowings is summarized below:

                                                                       2005                2004                2003
                                                                 -----------------   -----------------   -----------------
                                                                                  (Dollars in Thousands)
                                                                                                     
Weighted average interest rate on outstanding
balance at December 31:

    Securities sold under repurchase
        agreements(short-term portion)..............                   3.8%                1.8%                1.4%
    Total short-term borrowings.....................                   4.3                 1.9                 1.4

Weighted average interest rate during the year:
    Securities sold under repurchase
        agreements (short-term portion).............                   2.1%                 .8%                 .9%
    Total short-term borrowings.....................                   2.3                 1.0                  .9

Highest amount outstanding at any month end
during the year:
    Securities sold under repurchase
        agreements (short-term portion).............             $  68,198           $  37,771           $  69,396
    Total short-term borrowings.....................               144,898             120,019             113,618

Average amount outstanding during the year:
    Securities sold under repurchase
        agreements (short-term portion).............             $  77,969           $  62,702           $  51,780
    Total short-term borrowings.....................                95,447              81,194              59,719

                                                                        Page 22

ITEM 1A. RISK FACTORS
- --------------------------------------------------------------------------------

RISK FACTORS

There  are a number  of  factors,  including  those  specified  below,  that may
adversely affect the Corporation's  business,  financial results or stock price.
Additional risks that the Corporation currently does not know about or currently
views as  immaterial  may also impair the  Corporation's  business or  adversely
impact its financial results or stock price.

INDUSTRY RISK FACTORS

*  The Corporation's business and  financial results are significantly  affected
by general business and economic conditions.

The  Corporation's  business  activities  and  earnings  are affected by general
business  conditions in the United States and abroad.  These conditions  include
short-term  and  long-term   interest   rates,   inflation,   monetary   supply,
fluctuations  in both debt and equity capital  markets,  and the strength of the
United States economy and the state and local economies in which the Corporation
operates.  For example,  an economic downturn,  an increase in unemployment,  or
other events that affect household  and/or  corporate  incomes could result in a
deterioration of credit quality,  a change in the allowance for loan losses,  or
reduced  demand for loan or  fee-based  products  and  services.  Changes in the
financial  performance  and  condition  of  the  Corporation's  borrowers  could
negatively affect repayment of those borrowers'  loans. In addition,  changes in
securities  market conditions and monetary  fluctuations  could adversely affect
the  availability  and  terms of  funding  necessary  to meet the  Corporation's
liquidity needs.

*  Changes  in  the  domestic   interest  rate  environment   could  reduce  the
Corporation's net interest income.

The operations of financial  institutions  such as the Corporation are dependent
to a large  degree  on net  interest  income,  which is the  difference  between
interest income from loans and investments and interest  expense on deposits and
borrowings.  An institution's  net interest income is significantly  affected by
market rates of  interest,  which in turn are  affected by  prevailing  economic
conditions, by the fiscal and monetary policies of the federal government and by
the policies of various regulatory  agencies.  Like all financial  institutions,
the  Corporation's  balance sheet is affected by fluctuations in interest rates.
Volatility  in  interest  rates can also  result in the flow of funds  away from
financial institutions into direct investments. Direct investments, such as U.S.
Government and corporate  securities and other  investment  vehicles  (including
mutual funds) generally pay higher rates of return than financial  institutions,
because of the absence of federal insurance premiums and reserve requirements.

*  Changes in the laws,  regulations and policies  governing banks and financial
services  companies  could  alter the  Corporation's  business  environment  and
adversely affect operations.

The Board of Governors of the Federal  Reserve  System  regulates  the supply of
money and  credit  in the  United  States.  Its  fiscal  and  monetary  policies
determine  in a large  part the  Corporation's  cost of funds  for  lending  and
investing and the return that can be earned on those loans and investments, both
of which affect the  Corporation's  net interest  margin.  Federal Reserve Board
policies can also materially affect the value of financial  instruments that the
Corporation  holds,  such as  debt  securities.  The  Corporation  and its  bank
subsidiaries  are  heavily  regulated  at the  federal  and state  levels.  This
regulation is to protect  depositors,  federal  deposit  insurance funds and the
banking system as a whole. Congress and state legislatures and federal and state
agencies continually review banking laws,  regulations and policies for possible
changes.  Changes  in  statutes,   regulations  or  policies  could  affect  the
Corporation in substantial and unpredictable ways,  including limiting the types
of financial services and products that the Corporation offers and/or increasing
the ability of non-banks to offer competing financial services and products. The
Corporation  cannot predict  whether any of this potential  legislation  will be
enacted, and if enacted, the effect that it or any regulations would have on the
Corporation's financial condition or results of operations.

*  The  banking  and  financial  services  industry is highly  competitive,  and
competitive  pressures  could intensify and adversely  affect the  Corporation's
financial results.

The Corporation operates in a highly competitive industry that could become even
more  competitive  as a result  of  legislative,  regulatory  and  technological
changes and continued consolidation.  The Corporation competes with other banks,
savings and loan associations, mutual savings banks, finance companies, mortgage
banking  companies,   credit  unions  and  investment  companies.  In  addition,
technology  has lowered  barriers to entry and made it possible for non-banks to
offer  products  and  services  traditionally  provided  by  banks.  Many of the
Corporation's  competitors have fewer regulatory constraints and some have lower
cost  structures.  Also,  the  potential  need to adapt to  industry  changes in
information  technology systems, on which the Corporation and financial services
industry are highly  dependent,  could  present  operational  issues and require
capital spending.
                                                                        Page 23

*  Acts or threats of terrorism and  political or military  actions taken by the
United States or other  governments  could adversely  affect general economic or
industry conditions.

Geopolitical  conditions  may also affect the  Corporation's  earnings.  Acts or
threats or  terrorism  and  political  or military  actions  taken by the United
States or other governments in response to terrorism, or similar activity, could
adversely affect general economic or industry conditions.

CORPORATION RISK FACTORS

*  The  Corporation's  allowance  for loan  losses may not be  adequate to cover
actual losses.

The  Corporation  maintains  an  allowance  for loan  losses to provide for loan
defaults  and   non-performance.   The  allowance  for  loan  losses  represents
management's  estimate of probable  losses  inherent in the  Corporation's  loan
portfolio.  The Corporation's  allowance consists of three components:  probable
losses  estimated from  individual  reviews of specific  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.  The process for
determining  the  adequacy of the  allowance  for loan losses is critical to our
financial  results.  It requires  management to make  difficult,  subjective and
complex judgments, as a result of the need to make estimates about the effect of
matters  that  are  uncertain.   Therefore,   the  allowance  for  loan  losses,
considering  current  factors at the time,  including  economic  conditions  and
ongoing internal and external examination  processes,  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  Corporation  may  suffer  losses  in  its  loan  portfolio  despite  its
underwriting practices.

The  Corporation  seeks to mitigate the risks  inherent in its loan portfolio by
adhering to specific  underwriting  practices.  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 geographic,  industry and customer  level,  regular credit
quality  reviews and  management  reviews of large  credit  exposures  and loans
experiencing  deterioration of credit quality.  There is a continuous  review of
the loan portfolio,  including an internally  administered loan "watch" list and
an independent loan review. The evaluation takes into  consideration  identified
credit  problems,  as well as the  possibility  of losses  inherent  in the loan
portfolio  that  are  not  specifically  identified.  Although  the  Corporation
believes that its underwriting criteria are appropriate for the various kinds of
loans it makes,  the  Corporation  may incur  losses on loans due to the factors
previously discussed.

*  Because the nature of the financial  services business involves a high volume
of transactions, the Corporation faces significant operational risks.

The  Corporation  operates  in diverse  markets and relies on the ability of its
employees and systems to process a high number of transactions. Operational risk
is the risk of loss resulting from the Corporation's operations,  including, but
not  limited  to,  the risk of fraud by  employees  or  persons  outside  of the
Corporation,  the execution of unauthorized  transactions  by employees,  errors
relating to  transaction  processing  and  technology,  breaches of the internal
control  system  and  compliance  requirements  and  business  continuation  and
disaster  recovery.  This risk of loss also includes the potential legal actions
that  could  arise as a result of an  operational  deficiency  or as a result of
noncompliance with applicable regulatory  standards,  adverse business decisions
or their  implementation,  and  customer  attrition  due to  potential  negative
publicity.  In the event of a breakdown in the internal control system, improper
operation of systems or improper employee actions,  the Corporation could suffer
financial loss, face regulatory action and suffer damage to its reputation.

                                                                        Page 24

*  A natural disaster could harm the Corporation's business.

Natural  disasters  could harm the  Corporation's  operations  directly  through
interference  with  communications,  as  well  as  through  the  destruction  of
facilities and operational,  financial and management information systems. These
events could prevent the Corporation from gathering deposits,  originating loans
and processing and controlling its flow of business.

*  The  Corporation  faces  systems  failure  risks as well as  security  risks,
including "hacking" and "identity theft."

The computer  systems and network  infrastructure  the Corporation uses could be
vulnerable to unforeseen problems. Our operations are dependent upon our ability
to  protect  computer   equipment  against  damage  from  fire,  power  loss  or
telecommunication  failure. Any damage or failure that causes an interruption in
our operations  could adversely  affect our business and financial  results.  In
addition,  our  computer  systems and network  infrastructure  present  security
risks, and could be susceptible to hacking or identity theft.

*  The  Corporation  relies on dividends from its subsidiaries for its liquidity
needs.

The  Corporation  is a separate  and  distinct  legal  entity  from its bank and
non-bank  subsidiaries.  The Corporation receives  substantially all of its cash
from  dividends  paid by its  subsidiaries.  These  dividends  are the principal
source of funds to pay  dividends  on the  Corporation's  stock and interest and
principal on its debt.  Various federal and state laws and regulations limit the
amount of dividends that our bank subsidiaries may pay to the Corporation.

*  The Corporation's reported financial results depend on management's selection
of accounting methods and certain assumptions and estimates.

The  Corporation's  accounting  policies and methods are  fundamental  to how it
records and reports  its  financial  condition  and results of  operations.  The
Corporation's  management must exercise  judgment in selecting and applying many
of these accounting policies and methods, so they comply with Generally Accepted
Accounting  Principles and reflect management's judgment of the most appropriate
manner to report the  Corporation's  financial  condition  and results.  In some
cases,  management must select the accounting policy or method to apply from two
or more  alternatives,  any of which might be reasonable under the circumstances
yet might result in the  Corporation's  reporting  materially  different results
than would have been reported under a different alternative.  Certain accounting
policies are critical to presenting the  Corporation's  financial  condition and
results,  and  require  management  to make  difficult,  subjective  or  complex
judgments about matters that are uncertain.  Materially  different amounts could
be  reported  under  different  conditions  or using  different  assumptions  or
estimates.  These critical accounting  policies include:  the allowance for loan
losses;  the valuation of investment  securities;  the valuation of goodwill and
intangible  assets;  and  pension  accounting.  Because  of the  uncertainty  of
estimates  involved in these matters,  the Corporation may be required to do one
or more of the following:  significantly  increase the allowance for loan losses
and/or  sustain  loan  losses  that are  significantly  higher  than the reserve
provided;  recognize  significant  provision for  impairment  of its  investment
securities;  recognize  significant  impairment  on its goodwill and  intangible
assets; or significantly  increase its pension liability.  For more information,
refer to pages 3 through 6 of the First  Merchants  Corporation  - Annual Report
2005 under the caption "Critical Accounting Policies."

*  Changes in accounting  standards could  materially  impact the  Corporation's
financial statements.

From  time to  time,  the  Financial  Accounting  Standards  Board  changes  the
financial  accounting and reporting standards that govern the preparation of the
Corporation's financial statements. These changes can be hard to predict and can
materially  impact  how  the  Corporation  records  and  reports  its  financial
condition and results of operations.  In some cases,  the  Corporation  could be
required  to apply a new or revised  standard  retroactively,  resulting  in the
Corporation's restating prior period financial statements.

                                                                        Page 25

*  Significant  legal  actions  could  subject the  Corporation  to  substantial
uninsured liabilities.

The  Corporation  is  from  time  to  time  subject  to  claims  related  to its
operations. These claims and legal actions, including supervisory actions by the
Corporation's  regulators,  could involve large monetary  claims and significant
defense costs. To protect itself from the cost of these claims,  the Corporation
maintains  insurance  coverage in amounts and with  deductibles that it believes
are  appropriate  for  its  operations.  However,  the  Corporation's  insurance
coverage  may not cover all claims  against  the  Corporation  or continue to be
available to the Corporation at a reasonable cost. As a result,  the Corporation
may be exposed to  substantial  uninsured  liabilities,  which  could  adversely
affect the Corporation's results of operations and financial condition.

*  Negative  publicity could damage the  Corporation's  reputation and adversely
impact its business and financial results.

Reputation  risk,  or the risk to the  Corporation's  earnings  and capital from
negative  publicity,  is  inherent  in  the  Corporation's  business.   Negative
publicity  can result from the  Corporation's  actual or alleged  conduct in any
number of activities,  including  lending  practices,  corporate  governance and
acquisitions,   and  actions  taken  by  government   regulators  and  community
organizations in response to those activities.  Negative publicity can adversely
affect the  Corporation's  ability to keep and attract  customers and can expose
the  Corporation to litigation and regulatory  action.  Although the Corporation
takes steps to minimize  reputation  risk in dealing  with  customers  and other
constituencies, the Corporation is inherently exposed to this risk.

*  Acquisitions  may not produce revenue  enhancements or cost savings at levels
or  within  timeframes  originally  anticipated  and may  result  in  unforeseen
integration difficulties.

The Corporation  regularly  explores  opportunities to acquire banks,  financial
institutions,  or other financial services businesses or assets. The Corporation
cannot  predict  the  number,  size or timing  of  acquisitions.  Difficulty  in
integrating  an acquired  business or company may cause the  Corporation  not to
realize expected  revenue  increases,  cost savings,  increases in geographic or
product  presence,  and/or other projected  benefits from the  acquisition.  The
integration  could result in higher than expected deposit  attrition  (run-off),
loss of key employees,  disruption of the Corporation's business or the business
of the acquired company, or otherwise adversely affect the Corporation's ability
to  maintain   relationships   with  customers  and  employees  or  achieve  the
anticipated  benefits  of the  acquisition.  Also,  the  negative  effect of any
divestitures  required by regulatory  authorities  in  acquisitions  or business
combinations may be greater than expected.

*  The Corporation's stock price can be volatile.

The  Corporation's  stock price can fluctuate widely in response to a variety of
factors,  including:  actual  or  anticipated  variations  in the  Corporation's
quarterly operating results; recommendations by securities analysts; significant
acquisitions or business combinations; strategic partnerships, joint ventures or
capital  commitments;  operating and stock price  performance of other companies
that  investors  deem  comparable to the  Corporation;  new  technology  used or
services  offered by the  Corporation's  competitors;  news reports  relating to
trends,  concerns  and  other  issues  in the  banking  and  financial  services
industry,  and changes in government  regulations.  General market fluctuations,
industry  factors and general  economic  and  political  conditions  and events,
including  terrorist attacks,  economic  slowdowns or recessions,  interest rate
changes,  credit  loss  trends or  currency  fluctuations,  could also cause the
Corporation's stock price to decrease, regardless of the Corporation's operating
results.

ITEM 1B. UNRESOLVED STAFF COMMENTS
- --------------------------------------------------------------------------------

None.

                                                                        Page 26

ITEM 2.  PROPERTIES.
- --------------------------------------------------------------------------------

The  headquarters  of the  Corporation  and First  Merchants  are  located  in a
five-story building at 200 East Jackson Street, Muncie, Indiana. The building is
owned by First Merchants.

The Corporation's  affiliate banks conduct business through numerous  facilities
owned and leased by the respective  affiliate  banks.  Of the 65 banking offices
operated by the  Corporation's  affiliate  banks, 51 are owned by the respective
banks and 14 are leased from non-affiliated third parties.

None of the properties owned by the Corporation's affiliate banks are subject to
any major  encumbrances.  The net investment of the Corporation and subsidiaries
in real estate and equipment at December 31, 2005 was $39,417,000.

ITEM 3.  LEGAL PROCEEDINGS.
- --------------------------------------------------------------------------------

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

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

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- --------------------------------------------------------------------------------

No  matters  were  submitted  during  the  fourth  quarter  of 2005 to a vote of
security holders, through the solicitation of proxies or otherwise.

                                                                        Page 27

SUPPLEMENTAL INFORMATION - EXECUTIVE OFFICERS OF THE REGISTRANT.
- --------------------------------------------------------------------------------
The names,  ages, and positions with the Corporation and subsidiary banks of all
executive officers of the Corporation and all persons chosen to become executive
officers are listed below. The officers are elected by the Board of Directors of
the  Corporation  for a term of one (1)  year or  until  the  election  of their
successors.  There are no arrangements  between any officer and any other person
pursuant to which he was selected as an officer.

                                                                               
                                                 Offices with the Corporation                 Principal Occupation
               Name and Age                          And Subsidiary Banks                    During Past Five Years
- ------------------------------------------- ---------------------------------------- ----------------------------------------

Michael L. Cox                              President, Chief Executive Officer,      Chief Executive Officer of the Corporation
61                                          Corporation                              since April 1999; President First Merchants
                                                                                     from April 1999 to September 2000; President
                                                                                     and Chief Operating Officer, Corporation since
                                                                                     August 1998 and from May 1994 to April 1999
                                                                                     respectively; President and Chief Operating
                                                                                     Officer, First Merchants from April, 1996 to
                                                                                     April 1999; Director, Corporation and First
                                                                                     Merchants since December, 1984.

Michael C. Rechin                           Executive Vice President and Chief       Executive Vice President and Chief Operating
47                                          Operating Officer, Corporation           Officer, Corporation since November 2005;
                                                                                     Executive Vice President, Corporate Banking
                                                                                     National City Bank from 1995 to November 2005.

Mark K. Hardwick                            Executive Vice President and Chief       Executive Vice President and Chief Financial
35                                          Financial Officer, Corporation           Officer of the Corporation since December 2005;
                                                                                     Senior Vice President and Chief Financial
                                                                                     Officer from April 2002 to December 2005;
                                                                                     Corporate Controller, Corporation from November
                                                                                     1997 to April 2002.

Robert R. Connors                           Senior Vice President, Chief             Senior Vice President and Chief Information
56                                          Information Officer, Corporation         Officer of the Corporation and First Merchants
                                            and First Merchants                      since January 2006; Senior Vice President of
                                                                                     Operations and Technology, Corporation and
                                                                                     First Merchants from August 2002 to January
                                                                                     2006; Senior Vice President of Operations and
                                                                                     Compliance Officer at First Internet Bank of
                                                                                     Indiana from 1999 to 2002.

Shawn R. Blackburn                          Senior Vice President of                 Senior Vice President of Administrative
52                                          Administrative Services, Corporation     Services, Corporation since May 2005; Senior
                                                                                     National Bank Examiner, Office of Comptroller
                                                                                     of the Currency from 1978 to 2005.

Kimberly J. Ellington                      Senior Vice President and Director of     Senior Vice President and Director of Human
46                                         Human Resources, Corporation              Resources since 2004; Vice President and
                                                                                     Director of Human Resources, Corporation from
                                                                                     1999 to 2004.

Jeffrey B. Lorentson                       First Vice President and Corporate        First Vice President and Corporate Controller,
42                                         Controller, Corporation                   Corporation since March 2003; Vice President
                                                                                     and Corporate Controller, Corporation from
                                                                                     April 2002 to March 2003; Senior Manager, Ernst
                                                                                     & Young, LLP from 1998 to 2002.

                                                                        Page 28

                                     PART II

ITEM 5.     MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
- --------------------------------------------------------------------------------
The information on pages 52 and 53 of the First  Merchants  Corporation - Annual
Report  2005  under the  captions  "Annual  Meeting,  Stock  Price and  Dividend
Information"  and "Common Stock Listing",  is expressly  incorporated  herein by
reference.

The following table presents information relating to the Corporation's purchases
of its  equity  securities  during the  quarter  ended  December  31,  2005,  as
follows(1):

                                                                                              MAXIMUM NUMBER OF
                                                                   TOTAL NUMBER OF           SHARES THAT MAY YET
                        TOTAL NUMBER OF     AVERAGE PRICE      SHARES PURCHASED AS PART       BE PURCHASED UNDER
      PERIOD            SHARES PURCHASED    PAID PER SHARE     OF BOARD AUTHORIZATION(1)    BOARD AUTHORIZATION(1)
      ------            ----------------    --------------    -------------------------    -----------------------
                                                                                
October 1-31, 2005            0                   0                      0                            0
November 1-30, 2005        105,000(2)           25.60                    0                            0
December 1-31, 2005           0                   0                      0                            0

(1) On  February 8, 2005,  the  Corporation's  Board  authorized  management  to
repurchase up to 250,000 shares of the  Corporation's  Common Stock. On June 14,
2005 and  August 9, 2005,  the  Corporation's  Board  authorized  management  to
repurchase  addtional shares of the Corporation's  Common Stock,  totaling 6,500
and  243,500  shares,  respectively.  These  authorizations  were  not  publicly
announced and expire February 14, 2006. There were 138,500 remaining shares that
may yet be purchased pursuant to such authorizations as of December 31, 2005.

(2) These  shares were  purchased  in  open-market  transactions pursuant to the
Board's authorization to repurchase shares.

The following table presents information relating to securities authorized under
equity compensation plans.

                      Equity Compensation Plan Information

                                      Number of securities to    Weighted-average        Number of securities remaining
                                      be issued upon exercise    exercise price of       available for future issuance under
                                      of outstanding options,    outstanding options,    equity compensations plans (excluding
    Plan category                     warrants and rights        warrants and rights     securities reflected in first column)
    -------------                     -----------------------    --------------------    -------------------------------------
                                                                                
Equity compensation plans approved
  by stockholders                                  1,060,108     $             23.37                                400,000 (1)
Equity compensation plans not
  approved by stockholders(2)                         44,679                   21.18
                                      -----------------------    --------------------    -------------------------------------
  Total                                            1,104,787     $             23.28                                400,000 (1)
                                      =======================    ====================    =====================================

(1) This number does not include shares remaining  available for future issuance
under the 1999  Long-term  Equity  Incentive  Plan,  which was  approved  by the
Corporation's  shareholders at the 1999 annual meeting.  The aggregate number of
shares that are  available  for grants under that Plan in any  calendar  year is
equal to the sum of:  (a) 1% of the number of common  shares of the  Corporation
outstanding  as of the last day of the  preceding  calendar  year;  plus (b) the
number of shares that were available for grants, but not granted, under the Plan
in any previous  year;  but in no event will the number of shares  available for
grants in any calendar year exceed 1 1/2% of the number of common shares of the
Corporation  outstanding as of the last day of the preceding  calendar year. The
1999 Long-term Equity Incentive Plan will expire in 2009.

(2) The only plan  reflected  above that was not  approved by the  Corporation's
stockholders  relates  to  certain  First  Merchants  Corporation  Stock  Option
Agreements  ("Agreements").  These Agreements  provided for non-qualified  stock
options of the common stock of the  Corporation,  awarded between 1995 and  2002
to each director of First Merchants Bank, National Association (the "Bank") who,
on the date of the grants:  (a) were serving as a director of the Bank; (b) were
not an employee of the Corporation,  the Bank, or any of the Corporation's other
affiliated  banks  or  non-bank  subsidiaries;  and (c) were  not  serving  as a
director of the  Corporation.  The exercise price of the shares was equal to the
fair market value of the shares upon the grant of the option. Options became 100
percent vested when granted and are fully  exercisable six months after the date
of the grant, for a period of ten years.
                                                                        Page 29

ITEM 6.      SELECTED FINANCIAL DATA.
- --------------------------------------------------------------------------------

The  information  on page 2 of the First  Merchants  Corporation - Annual Report
2005 under the  caption  "Five-Year  Summary of  Selected  Financial  Data",  is
expressly incorporated herein by reference.

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS.
- --------------------------------------------------------------------------------

The  information  on pages 3 through  18 of the First  Merchants  Corporation  -
Annual Report 2005 under the caption  "Management's  Discussion  and Analysis of
Financial Condition and Results of Operations", is expressly incorporated herein
by reference.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- --------------------------------------------------------------------------------

The  information  on pages 12 through 14 of the First  Merchants  Corporation  -
Annual  Report 2005 under the  caption "Management's  Discussion and Analysis of
Financial  Condition  and Results of  Operations"  within the section  "Interest
Sensitivity and Disclosures About Market Risk", is expressly incorporated herein
by reference.

                                                                        Page 30

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- --------------------------------------------------------------------------------

Pages 19 through 51 of the First Merchants Corporation - Annual Report 2005, are
expressly incorporated herein by reference.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE.
- --------------------------------------------------------------------------------

In  connection  with its  audits  for the two most  recent  fiscal  years  ended
December  31,  2005,  there have been no  disagreements  with the  Corporation's
independent  registered  public  accounting  firm on any  matter  of  accounting
principles  or  practices,  financial  statement  disclosure  or audit  scope or
procedure, nor have there been any changes in accountants.

ITEM 9A.   CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------

At the end of the period  covered by this report (the  "Evaluation  Date"),  the
Corporation  carried  out an  evaluation,  under  the  supervision  and with the
participation of the Corporation's management, including the Corporation's Chief
Executive  Officer and Chief  Financial  Officer,  of the  effectiveness  of the
design and operation of it's disclosure controls and procedures pursuant to Rule
13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934 ("Exchange Act").
Based upon that evaluation,  the Corporation's Chief Executive Officer and Chief
Financial  Officer  concluded that, as of the Evaluation Date, the Corporation's
disclosure  controls  and  procedures  are  effective.  Disclosure  controls and
procedures  are  controls  and  procedures  that are  designed  to  ensure  that
information  required to be disclosed in Corporation  reports filed or submitted
under the Exchange Act is recorded,  processed,  summarized and reported  within
the time periods specified in the Securities and Exchange Commission's rules and
forms.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the  Corporation is responsible for  establishing  and maintaining
effective  internal  control  over  financial  reporting  as  defined   in  Rule
13a-15(f) under the Securities Exchange Act of 1934. The Corporation's  internal
control over financial reporting is designed to provide reasonable  assurance to
the  Corporation's  management and board of directors  regarding the preparation
and fair presentation of published financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not  prevent  or  detect  misstatements.  Accordingly,  even  those  systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.

Management assessed the effectiveness of the Corporation's internal control over
financial  reporting  as of  December  31,  2005.  In  making  this  assessment,
management  used the  criteria  set  forth in  "Internal  Control  -  Integrated
Framework"  issued by the  Committee of Sponsoring  Organizations  (COSO) of the
Treadway  Commission.  Based on this assessment,  management has determined that
the Corporation's  internal control over financial  reporting as of December 31,
2005 is effective based on the specified criteria.

Management's  assessment of the effectiveness of internal control over financial
reporting as of December 31, 2005 has been audited by BKD,  LLP, an  independent
registered  public  accounting  firm, as stated in their  report,  which appears
on the next page.

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

                                                                        Page 31

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Audit Committee, Board of Directors and Stockholders
First Merchants Corporation
Muncie, Indiana

We  have  audited   management's   assessment,   included  in  the  accompanying
Management's  Report on Internal  Control over Financial  Reporting,  that First
Merchants  Corporation  maintained  effective  internal  control over  financial
reporting  as of December 31, 2005,  based on criteria  established  in Internal
Control  -  Integrated   Framework   issued  by  the   Committee  of  Sponsoring
Organizations of the Treadway Commission (COSO). The Corporation's management is
responsible for maintaining  effective internal control over financial reporting
and for its assessment of the  effectiveness  of internal control over financial
reporting.   Our  responsibility  is  to  express  an  opinion  on  management's
assessment and an opinion on the  effectiveness  of the  Corporation's  internal
control over financial reporting based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain  reasonable  assurance  about whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects.  An audit includes obtaining an understanding of internal control over
financial reporting,  evaluating management's assessment, testing and evaluating
the design and operating  effectiveness  of internal control and performing such
other procedures as we consider necessary in the circumstances.  We believe that
our audit provides a reasonable basis for our opinion.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use or  disposition  of the  company's
assets that could have a material effect on the financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions  or that the degree of  compliance
with the policies or procedures may deteriorate.

In  our  opinion,  management's  assessment  that  First  Merchants  Corporation
maintained  effective  internal control over financial  reporting as of December
31,  2005,  is  fairly  stated,  in all  material  respects,  based on  criteria
established in Internal  Control - Integrated  Framework issued by the Committee
of  Sponsoring  Organizations  of the Treadway  Commission  (COSO).  Also in our
opinion,  First  Merchants  Corporation  maintained,  in all material  respects,
effective  internal  control over  financial  reporting as of December 31, 2005,
based on criteria  established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also  audited,  in accordance  with the standards of the Public  Company
Accounting   Oversight  Board  (United  States),   the  consolidated   financial
statements of First Merchants Corporation and our report dated January 27, 2006,
expressed an unqualified opinion thereon.

BKD, LLP

Indianapolis, Indiana
January 27, 2006

ITEM 9B.  OTHER INFORMATION
- --------------------------------------------------------------------------------

None

                                                                        Page 32

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- --------------------------------------------------------------------------------

The  information  in the  Corporation's  Proxy  Statement  dated  March 2,  2006
furnished to its  stockholders  in connection  with an annual meeting to be held
April 13, 2006 (the "2006 Proxy  Statement"),  under the  captions  "ELECTION OF
DIRECTORS",  "COMMITTEES OF THE BOARD" and "SECTION 16(A)  BENEFICIAL  OWNERSHIP
REPORTING  COMPLIANCE",  is  expressly  incorporated  herein by  reference.  The
information required under this item relating to executive officers is set forth
in Part I, "Supplemental  Information - Executive Officers of the Registrant" of
this  annual  report  on Form  10-K  and is  expressly  incorporated  herein  by
reference.

The Corporation has adopted a Code of Ethics that applies to its Chief Executive
Officer,  Chief  Operating  Officer,  Chief  Financial  Officer,  Controller and
Treasurer.  It is part of the  Corporation's  Code of  Business  Conduct,  which
applies to all employees and directors of the Corporation and its affiliates.  A
copy of the Code of Ethics may be obtained,  free of charge, by writing to First
Merchants Corporation at 200 East Jackson Street, Muncie, IN 47305. In addition,
the Code of Ethics is maintained  on the  Corporation's  web site,  which can be
accessed at http://www.firstmerchants.com.

ITEM 11.  EXECUTIVE COMPENSATION.
- --------------------------------------------------------------------------------

The information in the Corporation's  2006 Proxy Statement,  under the captions,
"COMPENSATION OF DIRECTORS",  "COMPENSATION OF EXECUTIVE OFFICERS",  "COMMITTEES
OF THE  BOARD-Compensation  and Human Resources Committee Interlocks and Insider
Participation"  and  "PERFORMANCE  GRAPH" is  expressly  incorporated  herein by
reference.

                                                                        Page 33

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS.
- --------------------------------------------------------------------------------

The information in the  Corporation's  2006 Proxy Statement,  under the caption,
"SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND MANAGEMENT" is expressly
incorporated  herein by  reference.  The  information  required  under this item
relating  to equity  compensation  plans is set forth in Part II, Item 5 of this
annual report on Form 10-K under the table entitled  "Equity  Compensation  Plan
Information" and is expressly incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------------------------------

The information in the  Corporation's  2006 Proxy  Statement,  under the caption
"INTEREST OF  MANAGEMENT  IN CERTAIN  TRANSACTIONS,"  is expressly  incorporated
herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
- --------------------------------------------------------------------------------

The information in the  Corporation's  2006 Proxy  Statement,  under the caption
"INDEPENDENT PUBLIC ACCOUNTANTS", is expressly incorporated herein by reference.

                                                                        Page 34

                                     PART IV

ITEM 15.  FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
- --------------------------------------------------------------------------------

                                                                          

(a) 1.      Financial Statements:
                 Independent accountants' report
                 Consolidated balance sheets at
                      December 31, 2005 and 2004
                 Consolidated statements of income,
                      years ended December 31, 2005,
                      2004 and 2003
                 Consolidated statements of comprehensive income,
                      years ended December 31, 2005, 2004 and 2003
                 Consolidated statements of stockholders' equity,
                      years ended December 31, 2005, 2004 and 2003
                 Consolidated statements of cash flows,
                      years ended December 31, 2005,
                      2004 and 2003
                 Notes to consolidated financial
                      statements

(a) 2.      Financial statement schedules:
                          All schedules are omitted because
                          they are not applicable or not required,
                          or because the required information is included in the
                          consolidated financial statements or related notes.

(a) 3.      Exhibits:

Exhibit No:                           Description of Exhibits:
- -----------                           ------------------------

    3a         First Merchants Corporation Articles of Incorporation.
               (Incorporated by reference to registrant's Form 10-Q for quarter
               ended June 30, 1999)

    3b         Bylaws of First Merchants Corporation (Incorporated by reference
               to registrant's Form 10-K for year ended December 31, 2004)

   4.1         Certificate of Trust of First Merchants Capital Trust I dated
               December 12, 2001 (3)

   4.2         Amended and Restated Trust Agreement of First Merchants Capital
               Trust I dated April 17, 2002 (3)

   4.3         Agreement as to Expenses and Liabilities dated April 17, 2002 (3)

   4.4         Cumulative Trust Preferred Security Certificate (3)

   4.5         Preferred Securities Guarantee Agreement dated April 17, 2002 (3)

   4.6         Indenture dated April 17, 2002 (3)

   4.7         First Supplemental Indenture dated April 17, 2002 (3)

   4.8         8.75% Junior Subordinated Debenture due June 30, 2002 (3)

                                                                        Page 35

ITEM 15.  FINANCIAL STATEMENT SCHEDULES AND EXHIBITS (continued)
- --------------------------------------------------------------------------------

       10a         First Merchants Corporation Senior Management Incentive
                   Compensation Program, as amended.  (Incorporated by reference
                   to the registrant's Form 10-Q for the quarter ended June 30,
                   2005)(1)

       10b         First  Merchants   Corporation  1994  Stock  Option  Plan.
                   (Incorporated by reference to registrant's Form 10-K for year
                   ended December 31, 1993)(1)

       10c         First Merchants  Corporation Change of Control Agreement, as
                   amended, with Mark K. Hardwick dated February 14, 2006.
                   (Incorporated by reference to registrant's Form 8-K filed on
                   March 9, 2006)(1)

       10d         First Merchants Corporation Change of Control Agreement with
                   Michael C. Rechin dated December 13, 2005.  (Incorporated by
                   reference to registrant's Form 8-K filed on December 19,
                   2005)(1)

       10e         First Merchants Corporation Change of Control Agreement with
                   Shawn R. Blackburn dated May 2, 2005.  (Incorporated by
                   reference to registrant's Form 8-K filed on May 4, 2005)(1)

       10f         First Merchants Corporation Change of Control Agreement with
                   Robert R. Connors dated August 26, 2002.  (Incorporated by
                   reference to registrant's Form 10-Q for quarter ended
                   September 30, 2002)(1)

       10g         First Merchants Corporation Change of Control Agreement with
                   Michael L. Cox dated February 11, 2003.  (Incorporated by
                   reference to registrant's Form 10-Q for quarter ended March
                   31, 2003)(1)

       10h         First Merchants Corporation Change of Control Agreement with
                   Kimberly J. Ellington dated January 1, 2005.(2)

       10i         First Merchants Corporation Change of Control Agreement with
                   Jeffrey B. Lorentson dated January 1, 2004.(2)

       10j         First Merchants Corporation Supplemental Executive Retirement
                   Plan and amendments  thereto.  (Incorporated by reference to
                   registrant's Form 10-K for year ended December 31, 1997)(1)

       10k         First Merchants Corporation 1999 Long-Term Equity Incentive
                   Plan, as amended.  (Incorporated by reference to registrant's
                   Form 10-Q for quarter ended September 30, 2004) (1)

       13          First Merchants Corporation - Annual Report 2005 (except
                   for the pages and information  expressly  incorporated by
                   reference in this Form 10-K, the First Merchants Corporation
                   - Annual Report 2005 is provided solely for the information
                   of the  Securities  and  Exchange Commission  and is not
                   deemed  "filed"  as part of this Form 10-K)(2)

       21          Subsidiaries of Registrant(2)

       23          Consent of Independent Registered Public Accounting Firm(2)

       24          Limited Power of Attorney(2)

       31.1        Certification of Chief Executive Officer Pursuant to Section
                   302 of the Sarbanes - Oxley Act of 2002(2)

       31.2        Certification of Chief Financial Officer Pursuant to Section
                   302 of the Sarbanes - Oxley Act of 2002(2)

       32          Certifications Pursuant to 18 U.S.C. Section 1350,
                   as Adopted Pursuant to Section 906 of
                   the Sarbanes-Oxley Act of 2002(2)

       99.1        Financial statements and independent registered public
                   accounting firm's report for First Merchants Corporation
                   Employee Stock Purchase Plan (See Exhibit 13 to this Form
                   10-K)(2)

       (1) Management contract or compensatory plan.
       (2) Filed here within.
       (3) Incorporated by reference to the registrant's Form 8-K filed on
           April 19, 2002.
                                                                       Page 36

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 16th day of March,
2006.

                                              FIRST MERCHANTS CORPORATION

                                              By /s/ Michael L.Cox
                                              -----------------------------
                                                     Michael L. Cox, President
                                                     and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
on Form  10-K  has  been  signed  by the  following  persons  on  behalf  of the
registrant and in the capacities indicated, on this 16th day of March, 2006.

/s/ Michael L. Cox                        /s/ Mark K. Hardwick
- --------------------------------------    --------------------------------------
   Michael L. Cox  President and          Mark K. Hardwick  Executive Vice
                   Chief Executive                          President and Chief
                   Officer (Principal                       Financial Officer
                   Executive Officer)                       (Principal Financial
                                                            and Principal
                                                            Accounting Officer)

/s/ Robert M. Smitson*                     /s/ Michael L. Cox
- ------------------------------------       ------------------------------------
    Robert M. Smitson       Director           Michael L. Cox          Director

/s/ Michael C. Rechin*                     /s/ Barry J. Hudson*
- ------------------------------------       ------------------------------------
    Michael C. Rechin       Director           Barry J. Hudson         Director

/s/ James F. Ault*                         /s/ Robert T. Jeffares*
- ------------------------------------       ------------------------------------
    James F. Ault           Director           Robert T. Jeffares      Director

/s/Richard A. Boehning*                    /s/ Thomas D. McAuliffe*
- ------------------------------------       ------------------------------------
   Richard A. Boehning      Director           Thomas D. McAuliffe     Director

/s/ Thomas B. Clark*                       /s/ Charles E. Schalliol*
- ------------------------------------       ------------------------------------
    Thomas B. Clark         Director           Charles E. Schalliol    Director

/s/ Roderick English*
- ------------------------------------       ------------------------------------
    Roderick English        Director           Jean L. Wojtowicz       Director

/s/ Dr. Jo Ann M. Gora*
- ------------------------------------
    Dr. Jo Ann M. Gora      Director

* By Mark K.  Hardwick  as  Attorney-in  Fact  pursuant  to a  Limited  Power of
Attorney  executed by the  directors  listed  above,  which Power of Attorney is
being filed with the Securities and Exchange Commission as an exhibit hereto.

                                                 By  /s/ Mark K. Hardwick
                                                 ------------------------------
                                                         Mark K. Hardwick
                                                         As Attorney-in-Fact
                                                         March 16, 2006

                                                                       Page 37

INDEX TO EXHIBITS
- --------------------------------------------------------------------------------

(a) 3.      Exhibits:

Exhibit No:                           Description of Exhibits:
- -----------                           ------------------------

    3a         First Merchants Corporation Articles of Incorporation.
               (Incorporated by reference to registrant's Form 10-Q for quarter
               ended June 30, 1999)

    3b         Bylaws of First Merchants Corporation (Incorporated by reference
               to registrant's Form 10-K for year ended December 31, 2004)

   4.1         Certificate of Trust of First Merchants Capital Trust I dated
               December 12, 2001 (3)

   4.2         Amended and Restated Trust Agreement of First Merchants Capital
               Trust I dated April 17, 2002 (3)

   4.3         Agreement as to Expenses and Liabilities dated April 17, 2002 (3)

   4.4         Cumulative Trust Preferred Security Certificate (3)

   4.5         Preferred Securities Guarantee Agreement dated April 17, 2002 (3)

   4.6         Indenture dated April 17, 2002 (3)

   4.7         First Supplemental Indenture dated April 17, 2002 (3)

   4.8         8.75% Junior Subordinated Debenture due June 30, 2002 (3)

       10a         First Merchants Corporation Senior Management Incentive
                   Compensation Program, as amended.  (Incorporated by reference
                   to the registrant's Form 10-Q for the quarter ended June 30,
                   2005)(1)

       10b         First  Merchants   Corporation  1994  Stock  Option  Plan.
                   (Incorporated by reference to registrant's Form 10-K for year
                   ended December 31, 1993)(1)

       10c         First Merchants  Corporation Change of Control Agreement, as
                   amended, with Mark K. Hardwick dated February 14, 2006.
                   (Incorporated by reference to registrant's Form 8-K filed on
                   March 9, 2006)(1)
                                                                        Page 38

       10d         First Merchants Corporation Change of Control Agreement with
                   Michael C. Rechin dated December 13, 2005.  (Incorporated by
                   reference to registrant's Form 8-K filed on December 19,
                   2005)(1)

       10e         First Merchants Corporation Change of Control Agreement with
                   Shawn R. Blackburn dated May 2, 2005.  (Incorporated by
                   reference to registrant's Form 8-K filed on May 4, 2005)(1)

       10f         First Merchants Corporation Change of Control Agreement with
                   Robert R. Connors dated August 26, 2002.  (Incorporated by
                   reference to registrant's Form 10-Q for quarter ended
                   September 30, 2002)(1)

       10g         First Merchants Corporation Change of Control Agreement with
                   Michael L. Cox dated February 11, 2003.  (Incorporated by
                   reference to registrant's Form 10-Q for quarter ended March
                   31, 2003)(1)

       10h         First Merchants Corporation Change of Control Agreement with
                   Kimberly J. Ellington dated January 1, 2005.(2)

       10i         First Merchants Corporation Change of Control Agreement with
                   Jeffrey B. Lorentson dated January 1, 2004.(2)

       10j         First Merchants Corporation Supplemental Executive Retirement
                   Plan and amendments  thereto.  (Incorporated by reference to
                   registrant's Form 10-K for year ended December 31, 1997)(1)

       10k         First Merchants Corporation 1999 Long-Term Equity Incentive
                   Plan, as amended.  (Incorporated by reference to registrant's
                   Form 10-Q for quarter ended September 30, 2004) (1)

       13          First Merchants Corporation - Annual Report 2005 (except
                   for the pages and information  expressly  incorporated by
                   reference in this Form 10-K, the First Merchants Corporation
                   - Annual Report 2005 is provided solely for the information
                   of the  Securities  and  Exchange Commission  and is not
                   deemed  "filed"  as part of this Form 10-K)(2)

       21          Subsidiaries of Registrant(2)

       23          Consent of Independent Registered Public Accounting Firm(2)

       24          Limited Power of Attorney(2)

       31.1        Certification of Chief Executive Officer Pursuant to Section
                   302 of the Sarbanes - Oxley Act of 2002(2)

       31.2        Certification of Chief Financial Officer Pursuant to Section
                   302 of the Sarbanes - Oxley Act of 2002(2)

       32          Certifications Pursuant to 18 U.S.C. Section 1350,
                   as Adopted Pursuant to Section 906 of
                   the Sarbanes-Oxley Act of 2002(2)

       99.1        Financial statements and independent registered public
                   accounting firm's report for First Merchants Corporation
                   Employee Stock Purchase Plan (See Exhibit 13 to this Form
                   10-K)(2)

       (1) Management contract or compensatory plan.
       (2) Filed here within.
       (3) Incorporated by reference to the registrant's Form 8-K filed on
           April 19, 2002.

                                                                        Page 39

                                   EXHIBIT-10h
          First Merchants Corporation Change of Control Agreement with
                 Kimberly J. Ellington dated January 1, 2005.

                           CHANGE OF CONTROL AGREEMENT

         This Agreement is made and entered  into as of January 1, 2005,  by and
between  First  Merchants  Corporation,   an  Indiana  corporation  (hereinafter
referred to as  "Corporation"),  with its principal  office  located at 200 East
Jackson Street, Muncie, Indiana, and Kimberly J. Ellington (hereinafter referred
to as "Executive"), of Yorktown, Indiana.

         WHEREAS,  the  Corporation  considers the continuance of proficient and
experienced  management  to be essential to  protecting  and  enhancing the best
interests of the Corporation and its shareholders; and

         WHEREAS,  the Corporation  desires to assure the continued  services of
the Executive on behalf of the Corporation; and

         WHEREAS, the Corporation recognizes that if faced with a proposal for a
Change of Control, as hereinafter defined, the Executive will have a significant
role in helping the Board of Directors assess the options and advising the Board
of  Directors  on what  is in the  best  interests  of the  Corporation  and its
shareholders;  and it is necessary  for the Executive to be able to provide this
advice  and  counsel  without  being  influenced  by  the  uncertainties  of the
Executive's own situation; and

         WHEREAS,  the  Corporation  desires  to  provide  fair  and  reasonable
benefits to the Executive on the terms and subject to the  conditions  set forth
in this Agreement.

         NOW,   THEREFORE,   in   consideration  of  the  mutual  covenants  and
undertakings  herein contained and the continued  employment of the Executive by
the  Corporation as its Senior Vice  President and Director of Human  Resources,
the Corporation and the Executive,  each intending to be legally bound, covenant
and agree as follows:

                    
         1.       Term of Agreement.

         This  Agreement  shall  continue in effect  through  December 31,  2005;  provided,  however,  that
commencing  on  December  31,  2005 and each  December  31  thereafter,  the  term of this  Agreement  shall
automatically  be extended for one  additional  year  unless,  not later than October 31, 2005 or October 31
immediately  preceding any December 31 thereafter,  the  Corporation  shall have given the Executive  notice
that it does not wish to extend this  Agreement;  and provided  further,  that if a Change of Control of the
Corporation,  as defined in Section 2, shall have  occurred  during the  original or  extended  term of this
Agreement,  this Agreement  shall continue in effect for a period of not less than  twenty-four  (24) months
beyond the month in which such Change of Control occurred.

         2.       Definitions.

         For purposes of this Agreement, the following definitions shall apply:

                  A.       Cause:  "Cause" shall mean:

                           (1)      professional incompetence;

                           (2)      willful misconduct;

                           (3)      personal dishonesty;

                           (4)      breach of fiduciary duty involving personal profit;

                           (5)      intentional failure to perform stated duties;

                           (6)      willful  violation of any law,  rule or  regulation  (other than traffic
                                    violations or similar offenses) or final cease and desist orders; and

                           (7)      any intentional  material  breach of any term,  condition or covenant of
                                    this Agreement.

                  (B)      Change of Control:  "Change of Control" shall mean:

                           (1)      any  person  (as such  term is used in  Sections  13(d) and 14(d) of the
                                    Securities  Exchange  Act of 1934  ["Exchange  Act"]),  other  than  the
                                    Corporation,  is or becomes  the  Beneficial  Owner (as  defined in Rule
                                    13d-3 under the Exchange  Act)  directly or  indirectly of securities of
                                    the Corporation  representing  twenty-five  percent (25%) or more of the
                                    combined voting power of the Corporation's then outstanding securities;

                           (2)      persons  constituting  a  majority  of the  Board  of  Directors  of the
                                    Corporation  were not  directors  of the  Corporation  for at least  the
                                    twenty-four (24) preceding months;

                           (3)      the  stockholders of the Corporation  approve a merger or  consolidation
                                    of the Corporation with any other  corporation,  other than (a) a merger
                                    or  consolidation  which would  result in the voting  securities  of the
                                    Corporation   outstanding   immediately  prior  thereto   continuing  to
                                    represent  (either by remaining  outstanding or by being  converted into
                                    voting  securities  of the  surviving  entity)  more than fifty  percent
                                    (50%) of the  combined  voting  power of the  voting  securities  of the
                                    Corporation or such surviving entity outstanding  immediately after such
                                    a merger or consolidation,  or (b) a merger or consolidation effected to
                                    implement   a   recapitalization   of  the   Corporation   (or   similar
                                    transaction)  in which no person acquires fifty percent (50%) or more of
                                    the  combined  voting  power  of  the  Corporation's   then  outstanding
                                    securities; or

                           (4)      the  stockholders  of  the  Corporation   approve  a  plan  of  complete
                                    liquidation  of  the  Corporation  or  an  agreement  for  the  sale  or
                                    disposition  by  the  Corporation  of all  or  substantially  all of the
                                    Corporation's assets.

                  (C)      Date of  Termination:  "Date of  Termination"  shall mean the date  stated in the
                           Notice of  Termination  (as  hereinafter  defined)  or thirty  (30) days from the
                           date of delivery of such notice, as hereinafter defined, whichever comes first.

                  (D)      Disability:  "Disability"  shall mean the  definition of such term as used in the
                           disability  policy then in effect for the  Corporation,  and a  determination  of
                           full  disability  by the  Corporation;  provided  that in the  event  there is no
                           disability  insurance then in force,  "disability"  shall mean  incapacity due to
                           physical  or mental  illness  which will have caused the  Executive  to have been
                           unable to perform  his duties with the  Corporation  on a full time basis for one
                           hundred eighty (180) consecutive calendar days.

                  (E)      Notice of  Termination:  "Notice of  Termination"  shall  mean a written  notice,
                           communicated  to the other  parties  hereto,  which shall  indicate  the specific
                           termination   provisions  of  this  Agreement   relied  upon  and  set  forth  in
                           reasonable  detail  the facts and  circumstances  claimed  to provide a basis for
                           termination of the Executive's employment under the provisions so indicated.

                  (F)      Retirement:  "Retirement"  shall mean  termination of employment by the Executive
                           in  accordance  with  the   Corporation's   normal  retirement  policy  generally
                           applicable  to its  salaried  employees  in  effect  at the time of a  Change  of
                           Control.
         3.       Termination.

                  (A)      General.  If any of the events  described in Section 2  constituting  a Change in
                           Control of the Corporation  shall have occurred,  the Executive shall be entitled
                           to the benefits  described in Section 4 upon the  subsequent  termination  of the
                           Executive's   employment   during  the  term  of  this  Agreement,   unless  such
                           termination  is (a) because of the death or Disability of the  Executive,  (b) by
                           the  Corporation  for  Cause,  or (c) by the  Executive  other than on account of
                           Constructive Termination (as hereinafter defined).

                  (B)      If,  following  a  Change  of  Control,  the  Executive's   employment  shall  be
                           terminated for Cause,  the Corporation  shall pay him his salary through the Date
                           of  Termination  at the rate in effect on the date of the Notice of  Termination,
                           and the  Corporation  shall have no  further  obligations  under this  Agreement.
                           If,  following  a  Change  of  Control,  the  Executive's   employment  shall  be
                           terminated  as a result of death or  Disability,  compensation  to the  Executive
                           shall be made pursuant to the  Corporation's  then existing  policies on death or
                           Disability,  and the  Corporation  shall have no further  obligations  under this
                           Agreement.  If,  following a Change of Control,  the  Executive's  employment  is
                           terminated  by and at the  request of the  Executive  as a result of  Retirement,
                           compensation  to the  Executive  shall  be  made  pursuant  to the  Corporation's
                           normal  retirement policy generally  applicable to its salaried  employees at the
                           time  of the  Change  of  Control,  and the  Corporation  shall  have no  further
                           obligations under this Agreement.

                  (C)      Constructive  Termination.  The  Executive  shall be  entitled to  terminate  his
                           employment  upon the  occurrence  of  Constructive  Termination.  For purposes of
                           this Agreement,  "Constructive  Termination"  shall mean, without the Executive's
                           express  written  consent,  the  occurrence,  after a Change  of  Control  of the
                           Corporation, of any of the following circumstances:

                           (1)      the  assignment to the Executive of any duties  inconsistent  (unless in
                                    the nature of a  promotion)  with the position in the  Corporation  that
                                    the  Executive  held  immediately  prior to the Change of Control of the
                                    Corporation,  or a  significant  adverse  reduction or alteration in the
                                    nature   or   status   of   the   Executive's   position,    duties   or
                                    responsibilities  or the conditions of the  Executive's  employment from
                                    those in effect immediately prior to such Change of Control;

                           (2)      a  reduction  in  the  Executive's  annual  base  salary,  as in  effect
                                    immediately  prior to the Change of Control of the Corporation or as the
                                    same may be  adjusted  from time to time,  except  for  across-the-board
                                    salary reductions  similarly  affecting all management  personnel of the
                                    Corporation;

                            (3)     the  Corporation  requires the Executive to be relocated  anywhere other
                                    than its offices in Muncie, Indiana;

                           (4)      the  taking of any  action to  deprive  the  Executive  of any  material
                                    fringe benefit  enjoyed by him at the time of the Change of Control,  or
                                    the  failure to provide  him with the  number of paid  vacation  days to
                                    which  he is  entitled  on the  basis  of  years  of  service  with  the
                                    Corporation  and in accordance  with the  Corporation's  normal vacation
                                    policy in effect at the time of the Change of Control;

                           (5)      the  failure  to  continue  to  provide  the  Executive   with  benefits
                                    substantially  similar to those  enjoyed by the  Executive  under any of
                                    the  Corporation's  life  insurance,  medical,  health and accident,  or
                                    disability  plans in which the Executive was  participating  at the time
                                    of the  Change  of  Control  of the  Corporation,  or the  taking of any
                                    action which would directly or indirectly  materially reduce any of such
                                    benefits; or

                           (6)      the failure of the Corporation to continue this Agreement in effect,  or
                                    to obtain a  satisfactory  agreement  from any  successor  to assume and
                                    agree to perform this Agreement, as contemplated in Section 5 hereof.

         4.       Compensation Upon Termination.

         Following a Change of Control,  if his  employment  by the  Corporation  shall be terminated by the
Executive  on  account of  Constructive  Termination  or by the  Corporation  other  than for Cause,  death,
Disability,  or Retirement (by and at the request of the  Executive),  then the Executive  shall be entitled
to the benefits provided below:

                  (A)      No later than the fifth day following the Date of  Termination,  the  Corporation
                           shall  pay  to  the  Executive   his  full  base  salary   through  the  Date  of
                           Termination,  at the rate in effect at the time Notice of  Termination  is given,
                           plus all other  amounts to which the Executive is entitled  under any  incentive,
                           bonus or other  compensation  plan of the  Corporation in effect at the time such
                           payments are due;

                  (B)      In lieu of any further  salary  payments to the Executive for periods  subsequent
                           to the Date of  Termination,  no later than the fifth day  following  the Date of
                           Termination,  the  Corporation  shall pay to the  Executive a lump sum  severance
                           payment,  in  cash,  equal to two  (2.00)  times  the sum of (a) the  Executive's
                           annual base  salary  rate as in effect on the date of the Notice of  Termination,
                           and (b) the  largest  bonus  received by the  Executive  during the two (2) years
                           immediately   preceding  the  Date  of   Termination   under  the   Corporation's
                           Management Incentive Plan covering the Executive;

                  (C)      During  the  period  beginning  with  the  Executive's  Date of  Termination  and
                           continuing  until  the  earlier  of (a) the  second  anniversary  of such Date of
                           Termination,  or (b) Executive's  sixty-fifth  (65th)  birthday,  the Corporation
                           shall  arrange to provide  the  Executive  with life,  disability,  accident  and
                           health  insurance  benefits  substantially  similar to those which the  Executive
                           was receiving  immediately  prior to the Notice of Termination  and shall pay the
                           same  percentage  of the cost of such benefits as the  Corporation  was paying on
                           the Executive's behalf on the date of such Notice;

                  (D)      In lieu of shares  of  common  stock of the  Corporation  ("Corporation  Shares")
                           issuable upon the exercise of outstanding  options  ("Options"),  if any, granted
                           to the Executive  under any  Corporation  stock option plan (which  Options shall
                           be cancelled  upon the making of the payment  referred to below),  the  Executive
                           shall  receive  an amount in cash  equal to the  product of (a) the excess of the
                           higher of the  closing  price of  Corporation  Shares as  reported  on the NASDAQ
                           National  Market  System,  the  American  Stock  Exchange  or the New York  Stock
                           Exchange,  wherever listed,  on or nearest the Date of Termination or the highest
                           per share price for  Corporation  Shares  actually  paid in  connection  with any
                           Change of Control of the  Corporation,  over the per share exercise price of each
                           Option held by the Executive (whether or not then fully  exercisable),  times (b)
                           the number of Corporation Shares covered by each such Option;

                  (E)      If  the  payments  or  benefits,  if  any,  received  or to be  received  by  the
                           Executive  (whether  under this  Agreement or under any other plan,  arrangement,
                           or agreement  between the Executive  and the  Corporation),  in  connection  with
                           termination or Constructive  Termination of the Executive's  employment following
                           a Change  of  Control,  constitute  an  "excess  parachute  payment"  within  the
                           meaning of ss.280G of the Internal  Revenue Code ("Code"), the Corporation  shall
                           pay to the  Executive,  no  later  than  the  fifth  day  following  the  Date of
                           Termination,   an  additional   amount  (as   determined  by  the   Corporation's
                           independent  public  accountants) equal to the excise tax, if any, imposed on the
                           "excess parachute  payment" under ss.4999 of the Code; provided, however,  if the
                           amount  of such  excise  tax is  finally  determined  to be more or less than the
                           amount paid to the  Executive  hereunder,  the  Corporation  (or the Executive if
                           the finally  determined  amount is less than the original  amount paid) shall pay
                           the  difference  between the amount  originally  paid and the finally  determined
                           amount to the other  party no later  than the fifth day  following  the date such
                           final determination is made;

                  (F)      The  Corporation  shall  pay to the  Executive  all  reasonable  legal  fees  and
                           expenses  incurred by the  Executive as a result of such  termination  (including
                           all such fees and  expenses,  if any,  incurred in  contesting  or disputing  any
                           such  termination  or in  seeking  to obtain  or  enforce  any  right or  benefit
                           provided  by  this  Agreement),  unless  the  decision-maker  in any  proceeding,
                           contest,  or dispute arising  hereunder makes a formal finding that the Executive
                           did not have a reasonable  basis for instituting  such  proceeding,  contest,  or
                           dispute;

                  (G)      The  Corporation  shall  provide  the  Executive  with  individual  out-placement
                           services in accordance  with the general custom and practice  generally  accorded
                           to an executive of the Executive's position.

         5.       Successors; Binding Agreement.

                  (A)      The  Corporation  shall require any  successor  (whether  direct or indirect,  by
                           purchase,  merger,  consolidation  or otherwise) to all or  substantially  all of
                           the business  and/or assets of the  Corporation to expressly  assume and agree to
                           perform  this  Agreement  in the  same  manner  and to the same  extent  that the
                           Corporation  would be  required  to  perform it if no such  succession  had taken
                           place.  Failure  of the  Corporation  to obtain  such  assumption  and  agreement
                           prior to the  effectiveness  of any  such  succession  shall be a breach  of this
                           Agreement and shall entitle the Executive to  compensation  from the  Corporation
                           in the  same  amount  and on the  same  terms to  which  the  Executive  would be
                           entitled  hereunder if the  Executive  terminates  his  employment  on account of
                           Constructive  Termination  following  a Change  of  Control  of the  Corporation,
                           except that for the purposes of  implementing  the  foregoing,  the date on which
                           any such  succession  becomes  effective shall be deemed the Date of Termination.
                           As used in this Agreement,  "the Corporation"  shall mean the Corporation and any
                           successor to its business  and/or  assets as aforesaid  which  assumes and agrees
                           to perform this Agreement, by operation of law or otherwise.

                  (B)      This  Agreement  shall  inure  to  the  benefit  of  and  be  enforceable  by the
                           Executive and his personal or legal representatives,  executors,  administrators,
                           successors,  heirs,  distributees,   devisees  and  legatees.  If  the  Executive
                           should die while any amount  would  still be payable to the  Executive  hereunder
                           had  the  Executive  continued  to  live,  all  such  amounts,  unless  otherwise
                           provided  herein,  shall be paid in accordance  with the terms of this  Agreement
                           to the devisee,  legatee or other designee or, if there is no such  designee,  to
                           his estate.

         6.       Miscellaneous.

         No  provision  of this  Agreement  may be  modified,  waived  or  discharged  unless  such  waiver,
modification  or  discharge is agreed to in writing and signed by the  Executive  and such officer as may be
specifically  designated by the  Corporation.  No waiver by either party hereto at the time of any breach by
the other  party  hereto of, or  compliance  with,  any  condition  or  provision  of this  Agreement  to be
performed by such other party shall be deemed a waiver of similar or  dissimilar  provisions  or  conditions
at the same or at any  prior or  subsequent  time.  No  agreement  or  representations,  oral or  otherwise,
express or implied,  with respect to the subject  matter hereof have been made by either party which are not
expressly set forth in this Agreement.  The validity,  interpretation,  construction and performance of this
Agreement  shall be  governed by the laws of the State of Indiana  without  regard to its  conflicts  of law
principles.  All  references  to a section of the  Exchange Act or the Code shall be deemed also to refer to
any  successor  provisions  to such section.  Any payments  provided for hereunder  shall be paid net of any
applicable  withholding  required under  federal,  state or local law. The  obligations  of the  Corporation
under Section 4 shall survive the expiration of the term of this Agreement.

         7.       Validity.

          The  invalidity  or  unenforceability  of any  provision  of this  Agreement  shall not affect the
validity or  enforceability  of any other provision of this Agreement,  which shall remain in full force and
effect.

         8.       Counterparts.

         This  Agreement  may be  executed in several  counterparts,  each of which shall be deemed to be an
original, but all of which together shall constitute one and the same instrument.

         9.       Arbitration.

         Any dispute or  controversy  arising under or in connection  with this  Agreement  shall be settled
exclusively  by  arbitration,  conducted  before a panel of three (3)  arbitrators  in  Muncie,  Indiana  in
accordance with the rules of the American  Arbitration  Association then in effect.  Judgment may be entered
on the arbitrator's award in any court having jurisdiction;  provided,  however, that the Executive shall be
entitled  to seek  specific  performance  of his right to be paid until the Date of  Termination  during the
pendency of any dispute or controversy arising under or in connection with this Agreement.

         10.      Entire Agreement.

         This  Agreement  sets forth the entire  agreement  of the parties  hereto in respect of the subject
matter  contained  herein  and  supersedes  all  prior  agreements,   promises,   covenants,   arrangements,
communications,  representations  or  warranties,  whether  oral or  written,  by any  officer,  employee or
representative  of any party  hereto;  and any prior  agreement  of the  parties  hereto in  respect  of the
subject matter contained herein is hereby terminated and cancelled.

         IN WITNESS  WHEREOF,  the  Corporation  has caused  this  Agreement  to be  executed  by their duly
authorized  officers,  and the  Executive has  hereunder  subscribed  his name, as of the day and year first
above written.

"CORPORATION"                                        "EXECUTIVE"

FIRST MERCHANTS CORPORATION

By ______________________________           By ______________________________
    Michael L. Cox,                              Kimberly J. Ellington
    President & Chief Executive Officer

                                   EXHIBIT-10i
          First Merchants Corporation Change of Control Agreement with
                   Jeffrey B. Lorentson dated January 1, 2004.

                           CHANGE OF CONTROL AGREEMENT

         This  Agreement is made and entered into as of January 1, 2004,  by and
between  First  Merchants  Corporation,   an  Indiana  corporation  (hereinafter
referred to as  "Corporation"),  with its principal  office  located at 200 East
Jackson Street, Muncie,  Indiana, and Jeffrey B. Lorentson (hereinafter referred
to as "Executive"), of Fishers, Indiana.

         WHEREAS,  the  Corporation  considers the continuance of proficient and
experienced  management  to be essential to  protecting  and  enhancing the best
interests of the Corporation and its shareholders; and

         WHEREAS,  the Corporation  desires to assure the continued  services of
the Executive on behalf of the Corporation; and

         WHEREAS, the Corporation recognizes that if faced with a proposal for a
Change of Control, as hereinafter defined, the Executive will have a significant
role in helping the Board of Directors assess the options and advising the Board
of  Directors  on what  is in the  best  interests  of the  Corporation  and its
shareholders;  and it is necessary  for the Executive to be able to provide this
advice  and  counsel  without  being  influenced  by  the  uncertainties  of the
Executive's own situation; and

         WHEREAS,  the  Corporation  desires  to  provide  fair  and  reasonable
benefits to the Executive on the terms and subject to the  conditions  set forth
in this Agreement.

         NOW,   THEREFORE,   in   consideration  of  the  mutual  covenants  and
undertakings  herein contained and the continued  employment of the Executive by
the  Corporation  as its First Vice  President  and  Corporate  Controller,  the
Corporation and the Executive,  each intending to be legally bound, covenant and
agree as follows:

                     
         1.       Term of Agreement.

         This Agreement shall continue in effect through  December 31, 2004;  provided,  however,
that  commencing  on  December  31,  2004  and  each  December  31  thereafter,  the term of this
Agreement  shall  automatically  be  extended  for one  additional  year  unless,  not later than
October  31,  2004  or  October  31  immediately  preceding  any  December  31  thereafter,   the
Corporation  shall  have  given  the  Executive  notice  that it does  not  wish to  extend  this
Agreement;  and provided further,  that if a Change of Control of the Corporation,  as defined in
Section 2, shall have  occurred  during the  original or extended  term of this  Agreement,  this
Agreement shall continue in effect for a period of not less than  twenty-four  (24) months beyond
the month in which such Change of Control occurred.

         2.       Definitions.

         For purposes of this Agreement, the following definitions shall apply:

                  A.       Cause:  "Cause" shall mean:

                           (1)      professional incompetence;

                           (2)      willful misconduct;

                           (3)      personal dishonesty;

                           (4)      breach of fiduciary duty involving personal profit;

                           (5)      intentional failure to perform stated duties;

                           (6)      willful  violation of any law, rule or regulation (other than
                                    traffic  violations  or similar  offenses) or final cease and
                                    desist orders; and

                           (7)      any  intentional  material  breach of any term,  condition or
                                    covenant of this Agreement.

                  (B)      Change of Control:  "Change of Control" shall mean:

                           (1)      any person (as such term is used in Sections  13(d) and 14(d)
                                    of the  Securities  Exchange Act of 1934  ["Exchange  Act"]),
                                    other  than the  Corporation,  is or becomes  the  Beneficial
                                    Owner (as  defined  in Rule  13d-3  under the  Exchange  Act)
                                    directly  or  indirectly  of  securities  of the  Corporation
                                    representing   twenty-five  percent  (25%)  or  more  of  the
                                    combined voting power of the  Corporation's  then outstanding
                                    securities;

                           (2)      persons  constituting a majority of the Board of Directors of
                                    the Corporation  were not directors of the Corporation for at
                                    least the twenty-four (24) preceding months;

                           (3)      the  stockholders  of the  Corporation  approve  a merger  or
                                    consolidation of the Corporation with any other  corporation,
                                    other than (a) a merger or  consolidation  which would result
                                    in  the  voting  securities  of the  Corporation  outstanding
                                    immediately prior thereto  continuing to represent (either by
                                    remaining  outstanding  or by  being  converted  into  voting
                                    securities of the  surviving  entity) more than fifty percent
                                    (50%) of the combined  voting power of the voting  securities
                                    of the  Corporation  or  such  surviving  entity  outstanding
                                    immediately  after such a merger or  consolidation,  or (b) a
                                    merger   or    consolidation    effected   to   implement   a
                                    recapitalization of the Corporation (or similar  transaction)
                                    in which no person  acquires  fifty  percent (50%) or more of
                                    the  combined   voting  power  of  the   Corporation's   then
                                    outstanding securities; or

                           (4)      the  stockholders  of  the  Corporation  approve  a  plan  of
                                    complete  liquidation of the  Corporation or an agreement for
                                    the  sale  or  disposition  by  the  Corporation  of  all  or
                                    substantially all of the Corporation's assets.

                  (C)      Date of  Termination:  "Date  of  Termination"  shall  mean  the  date
                           stated in the  Notice  of  Termination  (as  hereinafter  defined)  or
                           thirty  (30)  days  from  the  date of  delivery  of such  notice,  as
                           hereinafter defined, whichever comes first.

                  (D)      Disability:  "Disability"  shall mean the  definition  of such term as
                           used in the disability policy then in effect for the Corporation,  and
                           a determination of full disability by the  Corporation;  provided that
                           in  the  event  there  is  no  disability  insurance  then  in  force,
                           "disability"  shall mean  incapacity due to physical or mental illness
                           which will have  caused the  Executive  to have been unable to perform
                           his duties with the  Corporation  on a full time basis for one hundred
                           eighty (180) consecutive calendar days.

                  (E)      Notice of Termination:  "Notice of  Termination"  shall mean a written
                           notice,   communicated  to  the  other  parties  hereto,  which  shall
                           indicate the specific termination  provisions of this Agreement relied
                           upon and set forth in  reasonable  detail the facts and  circumstances
                           claimed  to  provide  a  basis  for  termination  of  the  Executive's
                           employment under the provisions so indicated.

                  (F)      Retirement:  "Retirement"  shall mean termination of employment by the
                           Executive  in  accordance  with the  Corporation's  normal  retirement
                           policy  generally  applicable  to its salaried  employees in effect at
                           the time of a Change of Control.
         3.       Termination.

                  (A)      General.  If any of the events  described in Section 2  constituting a
                           Change  in  Control  of  the  Corporation  shall  have  occurred,  the
                           Executive  shall be entitled to the  benefits  described  in Section 4
                           upon the subsequent  termination of the Executive's  employment during
                           the term of this Agreement,  unless such termination is (a) because of
                           the death or Disability of the Executive,  (b) by the  Corporation for
                           Cause,  or (c) by the Executive  other than on account of Constructive
                           Termination (as hereinafter defined).

                  (B)      If,  following a Change of Control,  the Executive's  employment shall
                           be  terminated  for Cause,  the  Corporation  shall pay him his salary
                           through the Date of  Termination  at the rate in effect on the date of
                           the Notice of Termination,  and the Corporation  shall have no further
                           obligations  under this Agreement.  If, following a Change of Control,
                           the  Executive's  employment  shall be terminated as a result of death
                           or Disability,  compensation  to the Executive  shall be made pursuant
                           to the  Corporation's  then existing  policies on death or Disability,
                           and the  Corporation  shall  have no  further  obligations  under this
                           Agreement.   If,  following  a  Change  of  Control,  the  Executive's
                           employment  is  terminated by and at the request of the Executive as a
                           result of  Retirement,  compensation  to the  Executive  shall be made
                           pursuant  to the  Corporation's  normal  retirement  policy  generally
                           applicable  to its  salaried  employees  at the time of the  Change of
                           Control,  and the Corporation shall have no further  obligations under
                           this Agreement.

                  (C)      Constructive   Termination.   The  Executive   shall  be  entitled  to
                           terminate  his  employment   upon  the   occurrence  of   Constructive
                           Termination.   For   purposes   of   this   Agreement,   "Constructive
                           Termination"  shall mean,  without  the  Executive's  express  written
                           consent,   the   occurrence,   after  a  Change  of   Control  of  the
                           Corporation, of any of the following circumstances:

                           (1)      the  assignment to the  Executive of any duties  inconsistent
                                    (unless in the nature of a  promotion)  with the  position in
                                    the Corporation that the Executive held immediately  prior to
                                    the Change of Control of the  Corporation,  or a  significant
                                    adverse  reduction or  alteration  in the nature or status of
                                    the Executive's  position,  duties or responsibilities or the
                                    conditions  of  the  Executive's  employment  from  those  in
                                    effect immediately prior to such Change of Control;

                           (2)      a reduction  in the  Executive's  annual base  salary,  as in
                                    effect  immediately  prior to the  Change of  Control  of the
                                    Corporation  or as the  same  may be  adjusted  from  time to
                                    time,   except   for   across-the-board   salary   reductions
                                    similarly   affecting   all   management   personnel  of  the
                                    Corporation;

                            (3)     the  Corporation  requires  the  Executive  to  be  relocated
                                    anywhere other than its offices in Muncie, Indiana;

                           (4)      the  taking of any  action to deprive  the  Executive  of any
                                    material  fringe  benefit  enjoyed  by him at the time of the
                                    Change of  Control,  or the  failure to provide  him with the
                                    number of paid  vacation  days to which he is entitled on the
                                    basis  of  years  of  service  with  the  Corporation  and in
                                    accordance with the  Corporation's  normal vacation policy in
                                    effect at the time of the Change of Control;

                           (5)      the  failure  to  continue  to  provide  the  Executive  with
                                    benefits  substantially  similar  to  those  enjoyed  by  the
                                    Executive  under  any of the  Corporation's  life  insurance,
                                    medical,  health and accident,  or disability  plans in which
                                    the Executive was  participating at the time of the Change of
                                    Control  of the  Corporation,  or the  taking  of any  action
                                    which would directly or indirectly  materially  reduce any of
                                    such benefits; or

                           (6)      the failure of the  Corporation to continue this Agreement in
                                    effect,  or to  obtain  a  satisfactory  agreement  from  any
                                    successor to assume and agree to perform this  Agreement,  as
                                    contemplated in Section 5 hereof.

         4.       Compensation Upon Termination.

         Following  a  Change  of  Control,  if  his  employment  by  the  Corporation  shall  be
terminated by the Executive on account of Constructive  Termination or by the  Corporation  other
than for Cause, death, Disability,  or Retirement (by and at the request of the Executive),  then
the Executive shall be entitled to the benefits provided below:

                  (A)      No later than the fifth day  following  the Date of  Termination,  the
                           Corporation  shall pay to the Executive  his full base salary  through
                           the Date of  Termination,  at the rate in effect at the time Notice of
                           Termination  is given,  plus all other  amounts to which the Executive
                           is entitled under any incentive,  bonus or other  compensation plan of
                           the Corporation in effect at the time such payments are due;

                  (B)      In lieu of any further  salary  payments to the  Executive for periods
                           subsequent  to the Date of  Termination,  no later  than the fifth day
                           following the Date of Termination,  the  Corporation  shall pay to the
                           Executive a lump sum severance  payment,  in cash, equal to one (1.00)
                           times the sum of (a) the  Executive's  annual  base  salary rate as in
                           effect on the date of the Notice of  Termination,  and (b) the largest
                           bonus received by the Executive  during the two (2) years  immediately
                           preceding the Date of Termination under the  Corporation's  Management
                           Incentive Plan covering the Executive;

                  (C)      During the period  beginning with the Executive's  Date of Termination
                           and  continuing  until the  earlier of (a) the second  anniversary  of
                           such  Date  of  Termination,  or (b)  Executive's  sixty-fifth  (65th)
                           birthday,  the Corporation shall arrange to provide the Executive with
                           life,    disability,    accident   and   health   insurance   benefits
                           substantially  similar  to those  which the  Executive  was  receiving
                           immediately  prior to the Notice of Termination and shall pay the same
                           percentage of the cost of such benefits as the  Corporation was paying
                           on the Executive's behalf on the date of such Notice;

                  (D)      In lieu of  shares of common  stock of the  Corporation  ("Corporation
                           Shares")   issuable   upon  the   exercise  of   outstanding   options
                           ("Options"),  if any,  granted to the Executive  under any Corporation
                           stock option plan (which  Options  shall be cancelled  upon the making
                           of the payment  referred to below),  the  Executive  shall  receive an
                           amount in cash  equal to the  product  of (a) the excess of the higher
                           of the closing price of  Corporation  Shares as reported on the NASDAQ
                           National  Market  System,  the American Stock Exchange or the New York
                           Stock  Exchange,   wherever   listed,   on  or  nearest  the  Date  of
                           Termination  or the  highest per share  price for  Corporation  Shares
                           actually  paid  in  connection  with  any  Change  of  Control  of the
                           Corporation,  over the per share exercise price of each Option held by
                           the Executive (whether or not then fully  exercisable),  times (b) the
                           number of Corporation Shares covered by each such Option;

                  (E)      If the  payments or  benefits,  if any,  received or to be received by
                           the Executive  (whether  under this Agreement or under any other plan,
                           arrangement,  or agreement between the Executive and the Corporation),
                           in connection  with  termination  or  Constructive  Termination of the
                           Executive's  employment  following a Change of Control,  constitute an
                           "excess  parachute  payment" within  the  meaning  of  ss.280G of  the
                           Internal  Revenue  Code  ("Code"),  the  Corporation  shall pay to the
                           Executive,  no  later  than  the  fifth  day  following  the  Date  of
                           Termination,  an additional amount (as determined by the Corporation's
                           independent  public  accountants)  equal to the  excise  tax,  if any,
                           imposed on the "excess  parachute  payment" under ss.4999 of the Code;
                           provided,  however,  if the  amount  of  such  excise  tax is  finally
                           determined  to be more or less than the amount  paid to the  Executive
                           hereunder,   the   Corporation   (or  the  Executive  if  the  finally
                           determined  amount is less than the  original  amount  paid) shall pay
                           the  difference  between  the amount  originally  paid and the finally
                           determined  amount  to the  other  party no later  than the  fifth day
                           following the date such final determination is made;

                  (F)      The Corporation  shall pay to the Executive all reasonable  legal fees
                           and  expenses   incurred  by  the   Executive  as  a  result  of  such
                           termination  (including all such fees and expenses,  if any,  incurred
                           in  contesting  or  disputing  any such  termination  or in seeking to
                           obtain or enforce any right or benefit  provided  by this  Agreement),
                           unless  the  decision-maker  in any  proceeding,  contest,  or dispute
                           arising  hereunder  makes a formal  finding that the Executive did not
                           have a reasonable basis for instituting such proceeding,  contest,  or
                           dispute;

                  (G)      The   Corporation   shall  provide  the  Executive   with   individual
                           out-placement  services  in  accordance  with the  general  custom and
                           practice  generally  accorded  to  an  executive  of  the  Executive's
                           position.

         5.       Successors; Binding Agreement.

                  (A)      The  Corporation  shall  require  any  successor  (whether  direct  or
                           indirect, by purchase,  merger,  consolidation or otherwise) to all or
                           substantially  all of the business and/or assets of the Corporation to
                           expressly  assume  and agree to  perform  this  Agreement  in the same
                           manner and to the same extent that the  Corporation  would be required
                           to perform it if no such  succession  had taken place.  Failure of the
                           Corporation  to obtain  such  assumption  and  agreement  prior to the
                           effectiveness  of any  such  succession  shall  be a  breach  of  this
                           Agreement  and shall entitle the  Executive to  compensation  from the
                           Corporation  in the same  amount  and on the same  terms to which  the
                           Executive would be entitled hereunder if the Executive  terminates his
                           employment on account of Constructive  Termination  following a Change
                           of  Control  of the  Corporation,  except  that  for the  purposes  of
                           implementing  the  foregoing,  the date on which  any such  succession
                           becomes  effective  shall be deemed the Date of  Termination.  As used
                           in this Agreement,  "the  Corporation"  shall mean the Corporation and
                           any  successor  to its  business  and/or  assets  as  aforesaid  which
                           assumes and agrees to perform this  Agreement,  by operation of law or
                           otherwise.

                  (B)      This  Agreement  shall inure to the benefit of and be  enforceable  by
                           the  Executive and his personal or legal  representatives,  executors,
                           administrators,   successors,   heirs,   distributees,   devisees  and
                           legatees.  If the  Executive  should die while any amount  would still
                           be payable to the Executive  hereunder had the Executive  continued to
                           live, all such amounts,  unless otherwise  provided  herein,  shall be
                           paid in  accordance  with the terms of this  Agreement to the devisee,
                           legatee or other  designee  or, if there is no such  designee,  to his
                           estate.

         6.       Miscellaneous.

         No  provision  of this  Agreement  may be  modified,  waived or  discharged  unless such
waiver,  modification  or discharge is agreed to in writing and signed by the  Executive and such
officer as may be specifically  designated by the  Corporation.  No waiver by either party hereto
at the time of any breach by the other party  hereto of, or  compliance  with,  any  condition or
provision  of this  Agreement  to be  performed  by such other  party shall be deemed a waiver of
similar or dissimilar  provisions  or conditions at the same or at any prior or subsequent  time.
No agreement  or  representations,  oral or  otherwise,  express or implied,  with respect to the
subject  matter  hereof have been made by either party which are not  expressly set forth in this
Agreement.  The validity,  interpretation,  construction  and performance of this Agreement shall
be  governed  by the  laws of the  State  of  Indiana  without  regard  to its  conflicts  of law
principles.  All  references  to a section of the  Exchange  Act or the Code shall be deemed also
to refer to any  successor  provisions  to such  section.  Any payments  provided  for  hereunder
shall be paid net of any  applicable  withholding  required  under  federal,  state or local law.
The  obligations of the  Corporation  under Section 4 shall survive the expiration of the term of
this Agreement.

         7.       Validity.

          The  invalidity  or  unenforceability  of any  provision  of this  Agreement  shall not
affect the  validity or  enforceability  of any other  provision of this  Agreement,  which shall
remain in full force and effect.

         8.       Counterparts.

         This  Agreement may be executed in several  counterparts,  each of which shall be deemed
to be an original, but all of which together shall constitute one and the same instrument.

         9.       Arbitration.

         Any dispute or controversy  arising under or in connection  with this Agreement shall be
settled  exclusively  by  arbitration,  conducted  before  a panel of three  (3)  arbitrators  in
Muncie,  Indiana in accordance  with the rules of the American  Arbitration  Association  then in
effect.  Judgment  may be entered on the  arbitrator's  award in any court  having  jurisdiction;
provided,  however,  that the  Executive  shall be entitled to seek specific  performance  of his
right  to be  paid  until  the  Date  of  Termination  during  the  pendency  of any  dispute  or
controversy arising under or in connection with this Agreement.

         10.      Entire Agreement.

         This Agreement  sets forth the entire  agreement of the parties hereto in respect of the
subject  matter  contained  herein and  supersedes  all prior  agreements,  promises,  covenants,
arrangements,  communications,  representations  or warranties,  whether oral or written,  by any
officer,  employee or representative of any party hereto;  and any prior agreement of the parties
hereto in respect of the subject matter contained herein is hereby terminated and cancelled.

         IN WITNESS  WHEREOF,  the  Corporation  and the Bank have  caused this  Agreement  to be
executed by their duly  authorized  officers,  and the  Executive has  hereunder  subscribed  his
name, as of the day and year first above written.

"CORPORATION"                                        "EXECUTIVE"

FIRST MERCHANTS CORPORATION

By ______________________________           By ______________________________
    Michael L. Cox,                             Jeffrey B. Lorentson
    President & Chief Executive Officer

                                   EXHIBIT-13
                FIRST MERCHANTS CORPORATION - ANNUAL REPORT 2005

EXHIBIT 13--FIRST MERCHANTS CORPORATION - ANNUAL REPORT 2005

FINANCIAL REVIEW

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA                                   1

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                  3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                       19

CONSOLIDATED FINANCIAL STATEMENTS                                             20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                    24

ANNUAL MEETING, STOCK PRICE AND DIVIDEND INFORMATION                          52

COMMON STOCK LISTING                                                          53

FORM 10-K, FINANCIAL INFORMATION AND CODE OF ETHICS                           54

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

(in thousands, except share data)                               2005           2004           2003           2002           2001
===================================================================================================================================
                                                                                                          
Operations (3)(5)(6)
Net Interest Income
     Fully Taxable Equivalent (FTE) Basis ..............     $  114,907     $  108,986     $  106,899     $   96,599     $   66,806
Less Tax Equivalent Adjustment .........................          3,778          3,597          3,757          3,676          2,445
                                                             ----------     ----------     ----------     ----------     ----------
Net Interest Income ....................................        111,129        105,389        103,142         92,923         64,361
Provision for Loan Losses ..............................          8,354          5,705          9,477          7,174          3,576
                                                             ----------     ----------     ----------     ----------     ----------
Net Interest Income
     After Provision for Loan Losses ...................        102,775         99,684         93,665         85,749         60,785
Total Other Income .....................................         34,717         34,554         35,902         27,077         18,543
Total Other Expenses ...................................         93,957         91,642         91,279         71,009         45,195
                                                             ----------     ----------     ----------     ----------     ----------
     Income Before Income Tax Expense ..................         43,535         42,596         38,288         41,817         34,133
Income Tax Expense .....................................         13,296         13,185         10,717         13,981         11,924
                                                             ----------     ----------     ----------     ----------     ----------
Net Income .............................................     $   30,239     $   29,411     $   27,571     $   27,836     $   22,209
                                                             ==========     ==========     ==========     ==========     ==========
Per share data (1)(3)(5)(6)
Basic Net Income .......................................     $     1.64     $     1.59     $     1.51     $     1.70     $     1.63
Diluted Net Income .....................................           1.63           1.58           1.50           1.69           1.61
Cash Dividends Paid ....................................            .92            .92            .90            .86            .84
December 31 Book Value .................................          17.02          16.93          16.42          15.24          12.82
December 31 Market Value (Bid Price) ...................          26.00          28.30          25.51          21.67          21.78

Average balances (3)(5)(6)
Total Assets ...........................................     $3,179,464     $3,109,104     $2,960,195     $2,406,251     $1,689,694
Total Loans (4) ........................................      2,434,134      2,369,017      2,281,614      1,842,429      1,270,555
Total Deposits .........................................      2,418,752      2,365,306      2,257,075      1,857,053      1,331,631
Securities Sold Under Repurchase Agreements
     (long-term portion) ...............................                           181                        66,535         44,394
Total Federal Home Loan Bank Advances ..................        227,311        225,375        208,733        155,387        103,941
Total Subordinated Debentures, Revolving
      Credit Lines and Term Loans ......................        106,811         96,230         94,203         52,756          2,571
Total Stockholders' Equity .............................        315,525        310,004        293,603        237,575        166,232

Year-end balances (3)(5)(6)
Total Assets ...........................................     $3,237,079     $3,191,668     $3,076,812     $2,678,687     $1,787,035
Total Loans (4) ........................................      2,462,337      2,431,418      2,356,546      2,025,922      1,359,893
Total Deposits .........................................      2,382,576      2,408,150      2,362,101      2,036,688      1,421,251
Securities Sold Under Repurchase Agreements
      (long-term portion) ..............................                           320                        23,632         32,500
Total Federal Home Loan Bank Advances ..................        247,865        223,663        212,779        184,677        103,499
Total Subordinated Debentures, Revolving
      Credit Lines and Term Loans ......................        103,956         97,206         97,782         72,488          8,500
Total Stockholders' Equity .............................        313,396        314,603        303,965        261,129        179,128

Financial ratios (3)(5)(6)
Return on Average Assets ...............................            .95%           .95%           .93%          1.16%          1.31%
Return on Average Stockholders' Equity .................           9.58           9.49           9.39          11.72          13.36
Average Earning Assets to Total Assets .................          90.93          90.28          89.99          91.38          93.29
Allowance for Loan Losses as % of Total Loans ..........           1.02            .93           1.08           1.11           1.11
Dividend Payout Ratio ..................................          56.44          58.23          60.00          50.89          52.17
Average Stockholders' Equity to Average Assets .........           9.92           9.97           9.92           9.87           9.84
Tax Equivalent Yield on Earning Assets (2) .............           6.26           5.72           5.98           6.83           7.80
Cost of Supporting Liabilities .........................           2.29           1.84           1.97           2.44           3.56
Net Interest Margin on Earning Assets ..................           3.97           3.88           4.01           4.39           4.24

(1)  Restated for all stock dividends and stock splits.

(2)  Average earning assets include the average balance of securities classified
     as available for sale, computed based on the average of the historical
     amortized cost balances without the effects of the fair value adjustment.

(3)  Business combinations that affect the comparability of the 2005, 2004 and
     2003 information are discussed in Note 2 to the Consolidated Financial
     Statements.

(4)  Includes loans held for sale.

(5)  On April 1, 2002, the Corporation acquired 100 percent of the outstanding
     stock of Lafayette Bancorporation, the holding company of Lafayette Bank
     and Trust Company, N.A. ("Lafayette"), which is located in Lafayette,
     Indiana. Lafayette is a national chartered bank with branches located in
     central Indiana. Lafayette Bancorporation was merged into the Corporation,
     and Lafayette maintained its bank charter as a subsidiary of First
     Merchants Corporation. The Corporation issued approximately 3,057,298
     shares of its common stock at a cost of $21.30 per share and approximately
     $50,867,000 in cash to complete the transaction. As a result of the
     acquisition, the Corporation has an opportunity to increase its customer
     base and continue to increase its market share. The purchase had a recorded
     acquisition price of $115,978,000, including investments of $104,717,000;
     loans of $552,016,000; premises and equipment of $10,269,000; other assets
     of $64,074,000; deposits of $607,281,000; other liabilities of $81,762,000
     and goodwill of $57,893,000. None of the goodwill is deductible for tax
     purposes. Additionally, core deposit intangibles totaling $16,052,000 were
     recognized and are being amortized over 10 years using the 150 percent
     declining balance method. The combination was accounted for under the
     purchase method of accounting. All assets and liabilities were recorded at
     their fair values as of April 1, 2002. The purchase accounting adjustments
     are being amortized over the life of the respective asset or liability.
     Lafayette's results of operations are included in the Corporation's
     consolidated results of operations beginning April 1, 2002.

(6)  On July 1, 2001, the Corporation acquired 100 percent of the outstanding
     stock of Francor Financial, Inc., the holding company of Frances Slocum
     Bank & Trust Company, N.A. ("Frances Slocum"), which is located in Wabash,
     Indiana. Frances Slocum is a national chartered bank with branches located
     in east-central Indiana. Francor Financial, Inc. was merged into the
     Corporation, and Frances Slocum maintained its bank charter as a subsidiary
     of First Merchants Corporation. The Corporation issued 784,838 shares of
     its common stock at a cost of $19.53 per share and $14,490,985 in cash to
     complete the transaction. As a result of the acquisition, the Corporation
     has an opportunity to increase its customer base and continue to increase
     its market share. The purchase had a recorded acquisition price of
     $29,454,000, including investments of $6,348,000; loans of $134,505,000;
     premises and equipment of $4,401,000; other assets of $28,233,000; deposits
     of $150,252,000; other liabilities of $6,492,000 and goodwill of
     $7,907,000. None of the goodwill is deductible for tax purposes.
     Additionally, core deposit intangibles totaling $4,804,000 were recognized
     and are being amortized over 10 years using the 150 percent declining
     balance method. The combination was accounted for under the purchase method
     of accounting. All assets and liabilities were recorded at their fair
     values as of July 1, 2001. The purchase accounting adjustments are being
     amortized over the life of the respective asset or liability. Frances
     Slocum's results of operations are included in the Corporation's
     consolidated results of operations beginning July 1, 2001.

                                       2

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

First Merchants Corporation ("Corporation") from time to time includes
forward-looking statements in its oral and written communication. The
Corporation may include forward-looking statements in filings with the
Securities and Exchange Commission, such as Form 10-K and Form 10-Q, in other
written materials and in oral statements made by senior management to analysts,
investors, representatives of the media and others. The Corporation intends
these forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and the Corporation is including this statement for purposes of
these safe harbor provisions. Forward-looking statements can often be identified
by the use of words like "estimate," "project," "intend," "anticipate," "expect"
and similar expressions. These forward-looking statements include:

      o     statements of the Corporation's goals, intentions and expectations;

      o     statements regarding the Corporation's business plan and growth
            strategies;

      o     statements regarding the asset quality of the Corporation's loan and
            investment portfolios; and

      o     estimates of the Corporation's risks and future costs and benefits.

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

      o     fluctuations in market rates of interest and loan and deposit
            pricing, which could negatively affect the Corporation's net
            interest margin, asset valuations and expense expectations;

      o     adverse changes in the economy, which might affect the Corporation's
            business prospects and could cause credit-related losses and
            expenses;

      o     adverse developments in the Corporation's loan and investment
            portfolios;

      o     competitive factors in the banking industry, such as the trend
            towards consolidation in the Corporation's market; and

      o     changes in the banking legislation or the regulatory requirements of
            federal and state agencies applicable to bank holding companies and
            banks like the Corporation's affiliate banks.

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

CRITICAL ACCOUNTING POLICIES

Generally accepted accounting principles require management to apply significant
judgment to certain accounting, reporting and disclosure matters. Management
must use assumptions and estimates to apply those principles where actual
measurement is not possible or practical. For a complete discussion of the
Corporation's significant accounting policies, see the notes to the consolidated
financial statements and discussion throughout this Annual Report. Below is a
discussion of the Corporation's critical accounting policies. These policies are
critical because they are highly dependent upon subjective or complex judgments,
assumptions and estimates. Changes in such estimates may have a significant
impact on the

                                       3

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES continued

Corporation's financial statements. Management has reviewed the application of
these policies with the Corporation's Audit Committee.

Allowance for Loan Losses. The allowance for loan losses represents management's
estimate of probable losses inherent in the Corporation's loan portfolio. In
determining the appropriate amount of the allowance for loan losses, management
makes numerous assumptions, estimates and assessments.

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 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 allowance consists of three components: probable losses
estimated from individual reviews of specific 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 SFAS No. 114,
Accounting by Creditors for Impairment of a Loan. 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 collectibility 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.

Homogenous loans, such as consumer installment and residential mortgage loans
are not individually risk graded. Reserves are established for each pool of
loans using loss rates based on a five year average net charge-off history by
loan category.

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 the volume of loans, changes in mix, concentrations of loans in specific
industries, asset quality trends (delinquencies, charge-offs and nonaccrual
loans), risk management and loan administration, changes in the internal lending
policies and credit standards, collection practices and examination results from
bank regulatory agencies and the Corporation's internal loan review.

An unallocated reserve, primarily based on the factors noted above, is
maintained to recognize the imprecision in estimating and measuring loss when
evaluating reserves

                                       4

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES continued

for individual loans or pools of loans. Allowances on individual loans and
historical loss allocations are reviewed quarterly and adjusted as necessary
based on changing borrower and/or collateral conditions.

The Corporation's primary market areas for lending are north-central and
east-central Indiana and Columbus, Ohio. When evaluating the adequacy of
allowance, consideration is given to this regional geographic concentration and
the closely associated effect changing economic conditions have on the
Corporation's customers.

The Corporation has not substantively changed any aspect of its overall approach
in the determination of the allowance for loan losses. There have been no
material changes in assumptions or estimation techniques as compared to prior
periods that impacted the determination of the current period allowance.

Valuation of Securities. The Corporation's available-for-sale security portfolio
is reported at fair value. The fair value of a security is determined based on
quoted market prices. If quoted market prices are not available, fair value is
determined based on quoted prices of similar instruments. Available-for-sale and
held-to-maturity securities are reviewed quarterly for possible
other-than-temporary impairment. The review includes an analysis of the facts
and circumstances of each individual investment such as the length of time the
fair value has been below cost, the expectation for that security's performance,
the credit worthiness of the issuer and the Corporation's ability to hold the
security to maturity. A decline in value that is considered to be other-than
temporary is recorded as a loss within other operating income in the
consolidated statements of income.

Pension. The Corporation provides pension benefits to its employees. In
accordance with applicable accounting rules, the Corporation does not
consolidate the assets and liabilities associated with the pension plan.
Instead, the Corporation recognizes a prepaid asset for contributions the
Corporation has made to the pension plan in excess of pension expense. The
measurement of the prepaid asset and the annual pension expense involves
actuarial and economic assumptions.

The assumptions used in pension accounting relate to the expected rate of return
on plan assets, the rate of increase in salaries, the interest-crediting rate,
the discount rate, and other assumptions. See Note 16 "Employee Benefit Plans"
in the Annual Report for the specific assumptions used by the Corporation.

The annual pension expense for the Corporation is currently most sensitive to
the discount rate. Each 25 basis point reduction in the 2006 discount rate of
5.5 percent would increase the Corporation's 2006 pension expense by
approximately $93,000. In addition, each 25 basis point reduction in the 2006
expected rate of return of 7.5 percent would increase the Corporation's 2006
pension expense by approximately $97,000.

Goodwill and Intangibles. For purchase acquisitions, the Company 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

                                       5

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES continued

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.

Goodwill and indefinite-lived assets recorded must be reviewed for impairment on
an annual basis, as well as on an interim basis if events or changes indicate
that the asset might be impaired. 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.

BUSINESS SUMMARY

The Corporation is a diversified financial holding company headquartered in
Muncie, Indiana. Since its organization in 1982, the Corporation has grown to
include nine affiliate banks with over 65 locations in 17 Indiana and 3 Ohio
counties. In addition to its branch network, the Corporation's delivery channels
include ATMs, check cards, interactive voice response systems and internet
technology.

The Corporation's business activities are currently limited to one significant
business segment, which is community banking. The Corporation's financial
service affiliates include nine nationally chartered banks: First Merchants
Bank, N.A., The Madison Community Bank, N.A., First United Bank, N.A., United
Communities National Bank, First National Bank, Decatur Bank and Trust Company,
N.A., Frances Slocum Bank & Trust Company, N.A., Lafayette Bank and Trust
Company, N.A. and Commerce National Bank. Effective January 1, 2006, First
United Bank, N.A. was merged into First Merchants Bank, N.A., and the name of
the continuing institution is First Merchants Bank, N.A. The banks provide
commercial and retail banking services. In addition, the Corporation's trust
company, multi-line insurance company and title company provide trust asset
management services, retail and commercial insurance agency services and title
services, respectively.

Management believes that its mission, guiding principles and strategic
initiatives produce profitable growth for stockholders. Our vision is to satisfy
all the financial needs of our customers, help them succeed financially and be
recognized as the premier financial services company in our markets. Our primary
strategy to achieve this vision is to increase product usage and focus on
providing each customer with all of the financial products that fulfill their
needs. Our cross-sell strategy and diversified business model facilitate growth
in strong and weak economic cycles.

Management believes it is important to maintain a well controlled environment as
we continue to grow our businesses. Sound credit policies are maintained and
have resulted in declining nonperforming loans and net charge-offs as a
percentage of loans outstanding from the prior year. Interest rate and market
risks inherent in

                                       6

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BUSINESS SUMMARY continued

our asset and liability balances are managed within prudent ranges, while
ensuring adequate liquidity and funding.

RESULTS OF OPERATIONS

As of December 31, 2005 total assets equaled $3,237,079,000, an increase of
$45,411,000 from December 31, 2004. Of this amount, loans increased $30,919,000,
investments increased $12,731,000, intangibles, including goodwill, decreased
$2,451,000 and cash value of life insurance increased by $1,518,000. Details of
these changes are discussed within the "EARNING ASSETS" section of Management's
Discussion and Analysis of Financial Condition and Results of Operations.

As of December 31, 2004 total assets equaled $3,191,668,000, an increase of
$114,856,000 or 3.7 percent over 2003. Of this amount, loans increased
$74,548,000 and investments increased $64,738,000.

Net income for 2005 totaled $30,239,000, an increase of $828,000 or 2.8 percent
from 2004. Diluted earnings per share totaled $1.63, a 3.2 percent increase from
$1.58 reported for 2004. The increase was primarily attributable to an improved
net interest margin of 9 basis points as compared to 2004. However, the
improvement to net interest margin and its impact to net income was partially
mitigated by a $1,630,000 pension curtailment loss recorded during the year.
These factors and others are discussed within the respective sections of
Management's Discussion and Analysis of Financial Condition and Results of
Operations.

Net income for 2004 totaled $29,411,000, an increase of $1,840,000 or 6.7
percent. The increase was primarily attributable to loan growth and improved
credit quality. Diluted earnings per share totaled $1.58, a 5.3 percent increase
from $1.50 reported for 2003. These factors and others are discussed within the
respective sections of Management's Discussion and Analysis of Financial
Condition and Results of Operations.

Return on equity totaled 9.58 percent in 2005, 9.49 percent in 2004, and 9.39
percent in 2003. Return on assets totaled .95 percent in 2005, .95 percent in
2004, and .93 percent in 2003. Multiple factors impacting the reported financial
results are discussed within the respective sections of Management's Discussion
and Analysis of Financial Condition and Results of Operations.

                                       7

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAPITAL

The Corporation's regulatory capital continues to exceed regulatory "well
capitalized" standards. Tier I regulatory capital consists primarily of total
stockholders' equity and subordinated debentures issued to business trusts
categorized as qualifying borrowings, less non-qualifying intangible assets and
unrealized net securities gains. The Corporation's Tier I capital to average
assets ratio was 7.70 percent and 7.50 percent at December 31, 2005 and 2004,
respectively. In addition, at December 31, 2005, the Corporation had a Tier I
risk-based capital ratio of 9.66 percent and total risk-based capital ratio of
11.72 percent. Regulatory capital guidelines require a Tier I risk-based capital
ratio of 4.0 percent and a total risk-based capital ratio of 8.0 percent.

The Corporation's GAAP capital ratio, defined as total stockholders' equity to
total assets, equaled 9.68 percent as of December 31, 2005, down from 9.86
percent in 2004. When the Corporation acquires other companies for stock, GAAP
capital increases by the entire amount of the purchase price.

The Corporation's tangible capital ratio, defined as total stockholders' equity
less intangibles net of tax to total assets less intangibles net of tax, equaled
5.82 percent as of December 31, 2005 down from 5.92 percent in 2004.

Management believes that all of the above capital ratios are meaningful
measurements for evaluating the safety and soundness of the Corporation.
Additionally, management believes the following table is also meaningful when
considering performance measures of the Corporation. The table details and
reconciles tangible earnings per share, return on tangible capital and tangible
assets to traditional GAAP measures.

                                                                    December 31,
(Dollars in Thousands)                                          2005            2004
========================================================================================
                                                                       
Average Goodwill.....................................        $  112,281      $  112,281
Average Core Deposit Intangible (CDI)................            19,001          22,164
Average Deferred Tax on CDI..........................            (6,959)         (8,105)
                                                             ----------      ----------
  Intangible Adjustment..............................        $  124,323      $  126,340
                                                             ==========      ==========

Average Stockholders' Equity (GAAP Capital)..........        $  315,525      $  310,004
Intangible Adjustment................................          (124,323)       (126,340)
                                                             ----------      ----------
  Average Tangible Capital...........................        $  191,202      $  183,664
                                                             ==========      ==========

Average Assets.......................................        $3,179,464      $3,109,104
Intangible Adjustment................................          (124,323)       (126,340)
                                                             ----------      ----------
  Average Tangible Assets............................        $3,055,141      $2,982,764
                                                             ==========      ==========

Net Income...........................................        $   30,239      $   29,411
CDI Amortization, net of tax.........................             1,955           2,133
                                                             ----------      ----------
  Tangible Net Income................................        $   32,194      $   31,544
                                                             ==========      ==========

Diluted Earnings per Share...........................        $     1.63      $     1.58
Diluted Tangible Earnings per Share..................        $     1.73      $     1.69

Return on Average GAAP Capital.......................              9.58%           9.49%
Return on Average Tangible Capital...................             16.84%          17.49%

Return on Average Assets.............................              0.95%           0.95%
Return on Average Tangible Assets....................              1.05%           1.06%

                                       8

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ASSET QUALITY/PROVISION FOR LOAN LOSSES

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

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
and the determination of the adequacy of the allowance are based on a continuous
review of the loan portfolio, including an internally administered loan "watch"
list and an independent loan review. The evaluation takes into consideration
identified credit problems, as well as the possibility of losses inherent in the
loan portfolio that are not specifically identified. (See Critical Accounting
Policies)

At December 31, 2005, non-performing loans totaled $14,305,000, a decrease of
$4,976,000, as noted in the following table. Loans 90 days past due other than
non-accrual and restructured loans increased by $349,000. The amount of
non-accrual loans totaled $10,030,000 at December 31, 2005. Non-performing loans
will increase or decrease going forward due to portfolio growth, routine problem
loans recognition and resolution through collections, sales or charge-offs. The
performance of any loan can be affected by external factors, such as economic
conditions, or factors particular to a borrower, such as actions of a borrower's
management.

At December 31, 2005, impaired loans totaled $52,380,000, an increase of
$2,969,000 from year end 2004. At December 31, 2005, a specific allowance for
losses was not deemed necessary for impaired loans totaling $44,840,000, but a
specific allowance of $2,824,000 was recorded for the remaining balance of
impaired loans of $7,540,000 and is included in the Corporation's allowance for
loan losses. The average balance of impaired loans for 2005 was $44,790,000. The
increase of total impaired loans is primarily due to the increase of performing,
substandard classified loans, which comprise a portion of the Corporation's
total impaired loans. 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. For the Corporation, all performing, substandard classified loans are
included in the impaired loan total.

At December 31, 2005, the allowance for loan losses was $25,188,000, an increase
of $2,640,000 from year end 2004. As a percent of loans, the allowance was 1.02
percent at December 31, 2005 and .93 percent at December 31, 2004. Management
believes that the allowance for loan losses is adequate to cover losses inherent
in the loan portfolio at December 31, 2005. The process for determining the
adequacy of the allowance for loan losses is critical to our financial results.
It requires management to make difficult, subjective and complex judgments, as a
result of the need to make estimates about the effect of matters that are
uncertain. Therefore, the allowance for loan losses, considering current factors
at the time, including economic conditions and ongoing internal and external
examination processes, will

                                       9

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ASSET QUALITY/PROVISION FOR LOAN LOSSES continued

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 provision for loan losses in 2005 was $8,354,000, an increase of $2,649,000
from $5,705,000 in 2004. The Corporation's provision for loan losses increased
primarily due to an increase in the five-year rolling historical loan charge-off
ratio utilized within the Corporation's allowance for loan losses calculation.

The provision for loan losses in 2004 was $5,705,000, a decrease of $3,772,000
from $9,477,000 in 2003. The Corporation's allowance for loan losses reflected
decreased non-performing loans and specific reserves, resulting in decreased
provision expense in 2004.

The following table summarizes the non-accrual, contractually past due 90 days
or more other than non-accruing and restructured loans for the Corporation.

(Dollars in Thousands)                                         December 31,
                                                           2005            2004
================================================================================

Non-accrual loans ..............................         $10,030         $15,355

Loans contractually
   past due 90 days or more
   other than non-accruing .....................           3,965           1,907

Restructured loans .............................             310           2,019
                                                         -------         -------

   Total .......................................         $14,305         $19,281
                                                         =======         =======

The table below represents loan loss experience for the years indicated.

(Dollars in Thousands)                                             2005            2004            2003
========================================================================================================
                                                                                        
Allowance for loan losses:
    Balance at January 1 ..................................      $22,548         $25,493         $22,417
                                                                 -------         -------         -------
    Chargeoffs ............................................        7,744          10,901          12,139
    Recoveries ............................................        2,030           2,251           2,011
                                                                 -------         -------         -------
    Net chargeoffs ........................................        5,714           8,650          10,128
    Provision for loan losses .............................        8,354           5,705           9,477
    Allowance acquired in acquisitions.....................                                        3,727
                                                                 -------         -------         -------
    Balance at December 31 ................................      $25,188         $22,548         $25,493
                                                                 =======         =======         =======
   Ratio of net chargeoffs during the period to
     average loans outstanding during the period ..........         .23%            .37%            .44%

LIQUIDITY

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

                                       10

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY continued

The liquidity of the Corporation is dependent upon the receipt of dividends from
its bank subsidiaries, which are subject to certain regulatory limitations as
explained in Note 14 to the consolidated financial statements, and access to
other funding sources. Liquidity of the Corporation's bank subsidiaries is
derived primarily from core deposit growth, principal payments received on
loans, the sale and maturity of investment securities, net cash provided by
operating activities, and access to other funding sources.

The most stable source, of liability-funded liquidity for both the long-term and
short-term, is deposit growth and retention in the core deposit base. In
addition, the Corporation utilizes advances from the Federal Home Loan Bank
("FHLB") and a revolving line of credit with LaSalle Bank, N.A. ("LaSalle") as
funding sources. At December 31, 2005, total borrowings from the FHLB were
$247,865,000, and the outstanding balance of the LaSalle revolving line of
credit totaled $15,000,000. The Corporation's bank subsidiaries have pledged
certain mortgage loans and certain investments to the FHLB. The total available
remaining borrowing capacities from FHLB and LaSalle at December 31, 2005, were
$62,228,000 and $5,000,000, respectively.

The principal source of asset-funded liquidity is investment securities
classified as available-for-sale, the market values of which totaled
$422,627,000 at December 31, 2005. Securities classified as held-to-maturity
that are maturing within a short period of time can also be a source of
liquidity. Securities classified as held-to-maturity and that are maturing in
one year or less totaled $733,000 at December 31, 2005. In addition, other types
of assets-such as cash and due from banks, federal funds sold and securities
purchased under agreements to resell, and loans and interest-bearing deposits
with other banks maturing within one year-are sources of liquidity.

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

The Corporation provides customers with off-balance sheet credit support through
loan commitments and standby letters of credit. Summarized credit-related
financial instruments at December 31, 2005 are as follows:

                                                                 At December 31,
(Dollars in Thousands)                                                  2005
================================================================================

Amounts of commitments:
Loan commitments to extend credit ..........................        $574,384
Standby letters of credit ..................................          30,410
                                                                    --------
                                                                    $604,794
                                                                    ========

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

                                       11

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY continued

In addition to owned banking facilities, the Corporation has entered into a
number of long-term leasing arrangements to support the ongoing activities of
the Corporation. The required payments under such commitments and other
borrowing arrangements at December 31, 2005 are as follows:

                                                                                        2010
(Dollars in Thousands)               2006      2007      2008      2009       2010   and after    Total
===========================================================================================================
                                                                           
Operating leases                  $  2,055   $ 1,756   $ 1,275   $ 1,111   $  1,057   $  1,649  $  8,903
Federal funds purchased             50,000                                                        50,000
Securities sold under
  repurchase agreements            106,415                                                       106,415
Federal Home Loan Bank advances     56,335    32,495    32,839    11,382     35,192     79,622   247,865
Subordinated debentures,
  revolving credit lines and
  term loans                        15,000                                              88,956   103,956
                                  --------   -------   -------   -------   --------   --------  --------
Total                             $229,805   $34,251   $34,114   $12,493   $ 36,249   $170,227  $517,139
                                  ========   =======   =======   =======   ========   ========  ========

The Corporation has various purchase obligations for new facilities or
improvements to existing facilities. At December 31, 2005, the Corporation's
purchase obligations outstanding totaled $6,156,000.

INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK

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

It is the objective of the Corporation to monitor and manage risk exposure to
net interest income caused by changes in interest rates. It is the goal of the
Corporation's Asset/Liability function to provide optimum and stable net
interest income. To accomplish this, management uses two asset liability tools.
GAP/Interest Rate Sensitivity Reports and Net Interest Income Simulation
Modeling are both constructed, presented and monitored quarterly.

                                       12

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK continued

Management believes that the Corporation's liquidity and interest sensitivity
position at December 31, 2005, remained adequate to meet the Corporation's
primary goal of achieving optimum interest margins while avoiding undue interest
rate risk. The following table presents the Corporation's interest rate
sensitivity analysis as of December 31, 2005.

(Dollars in Thousands)                                                             At December 31, 2005
- -----------------------------------------------------------------------------------------------------------------------------------
                                                              1-180 DAYS   181-365 DAYS     1-5 YEARS    BEYOND 5 YEARS    TOTAL
===================================================================================================================================
                                                                                                         
Rate-Sensitive Assets:
   Interest-bearing deposits ...............................   $    8,748                                               $    8,748
   Investment securities ...................................       56,711    $   47,049     $  245,520     $   84,986      434,266
   Loans ...................................................    1,057,267       310,978        888,487        205,605    2,462,337
   Federal Reserve and Federal Home Loan Bank stock ........                                    21,665          1,535       23,200
                                                               ----------    ----------     ----------     ----------   ----------
        Total rate-sensitive assets ........................    1,122,726       358,027      1,155,672        292,126    2,928,551
                                                               ----------    ----------     ----------     ----------   ----------
Rate-Sensitive Liabilities:
   Federal funds purchased .................................       50,000                                                   50,000
   Interest-bearing deposits ...............................    1,355,305       233,450        428,325         51,161    2,068,241
   Securities sold under repurchase agreements .............      106,295           120                                    106,415
   Federal Home Loan Bank advances .........................       38,500        17,835        111,908         79,622      247,865
   Subordinated debentures, revolving credit
     lines and term loans  .................................       15,000                                      88,956      103,956
                                                               ----------    ----------     ----------     ----------   ----------
        Total rate-sensitive liabilities ...................    1,565,100       251,405        540,233        219,739    2,576,477
                                                               ----------    ----------     ----------     ----------   ----------

Interest rate sensitivity gap by period ....................   $ (442,374)   $  106,622     $  615,439     $   72,387
Cumulative rate sensitivity gap ............................     (447,374)     (335,752)       279,687        352,074
Cumulative rate sensitivity gap ratio
   at December 31, 2005 ....................................         71.7%         81.5%         111.9%         113.7%
   at December 31, 2004 ....................................         81.9%         90.0%         114.3%         116.1%

The Corporation had a cumulative negative gap of $335,752,000 in the one-year
horizon at December 31, 2005, just over 10.4 percent of total assets.

The Corporation places its greatest credence in net interest income simulation
modeling. The above GAP/Interest Rate Sensitivity Report is believed by the
Corporation's management to have two major shortfalls. The GAP/Interest Rate
Sensitivity Report fails to precisely gauge how often an interest rate sensitive
product reprices, nor is it able to measure the magnitude of potential future
rate movements.

Net interest income simulation modeling, or earnings-at-risk, measures the
sensitivity of net interest income to various interest rate movements. The
Corporation's asset liability process monitors simulated net interest income
under three separate interest rate scenarios; base, rising and falling.
Estimated net interest income for each scenario is calculated over a 12-month
horizon. The immediate and parallel changes to the base case scenario used in
the model are presented below. The interest rate scenarios are used for
analytical purposes and do not necessarily represent management's view of future
market movements. Rather, these are intended to provide a measure of the degree
of volatility interest rate movements may introduce into the earnings of the
Corporation.

The base scenario is highly dependent on numerous assumptions embedded in the
model, including assumptions related to future interest rates. While the base
sensitivity analysis incorporates management's best estimate of interest rate
and balance sheet dynamics under various market rate movements, the actual
behavior and resulting earnings impact will likely differ from that projected.
For mortgage-related assets, the base simulation model captures the expected
prepayment behavior under changing interest rate environments. Assumptions and
methodologies regarding the interest rate or balance behavior of indeterminate
maturity products, e.g., savings, money market,

                                       13

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK continued

NOW and demand deposits reflect management's best estimate of expected future
behavior.

The comparative rising and falling scenarios for the period ending December 31,
2006 assume further interest rate changes in addition to the base simulation
discussed above. These changes are immediate and parallel changes to the base
case scenario. In addition, total rate movements (beginning point minus ending
point) to each of the various driver rates utilized by management in the base
simulation for the period ended December 31, 2006 are as follows:

Driver Rates                      RISING                 FALLING
================================================================================
Prime                             200 Basis Points       (200) Basis Points
Federal Funds                     200                    (200)
One-Year CMT                      200                    (200)
Two-Year CMT                      200                    (200)
Three-Year CMT                    200                    (200)
Five-Year CMT                     200                    (200)
CD's                              200                     (89)
FHLB Advances                     200                    (200)

Results for the base, rising and falling interest rate scenarios are listed
below, based upon the Corporation's rate sensitive assets and liabilities at
November 30, 2005. The net interest income shown represents cumulative net
interest income over a 12-month time horizon. Balance sheet assumptions used for
the base scenario are the same for the rising and falling simulations.

                                                   BASE     RISING     FALLING
===============================================================================
Net Interest Income (Dollars in Thousands)       $111,989  $114,930   $109,220

Variance from base                                         $  2,941   $ (2,769)

Percent of change from base                                    2.63%     (2.47)%

The comparative rising and falling scenarios for the period ended December 31,
2005 assume further interest rate changes in addition to the base simulation
discussed above. These changes are immediate and parallel changes to the base
case scenario. In addition, total rate movements (beginning point minus ending
point) to each of the various driver rates utilized by management in the base
simulation for the period ended December 31, 2005 are as follows:

Driver Rates                      RISING                FALLING
================================================================================
Prime                             200 Basis Points      (200) Basis Points
Federal Funds                     200                   (200)
One-Year CMT                      200                   (200)
Two-Year CMT                      200                   (200)
CD's                              200                    (74)
FHLB Advances                     200                   (200)

Results for the base, rising and falling interest rate scenarios are listed
below. The net interest income shown represents cumulative net interest income
over a 12-month time horizon. Balance sheet assumptions used for the base
scenario are the same for the rising and falling simulations.

                                                   BASE     RISING     FALLING
================================================================================
Net Interest Income (Dollars in Thousands)       $109,311  $117,212   $ 97,757

Variance from base                                         $  7,901   $(11,554)

Percent of change from base                                     7.2%     (10.6)%

                                       14

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EARNING ASSETS

Earnings assets increased approximately $43,397,000 during 2005 as compared to
2004. Loans grew by $30,919,000. Positive growth of commercial and industrial
loans, real estate construction and farmland real estate loans totaled
approximately $45,622,000. In addition, individuals' loans for household and
other personal expenditures grew approximately $1,607,000 during 2005. These
increases were mitigated by a decline in residential real estate loans,
agriculture loans and leases of approximately $14,773,000.

The table below reflects the earning asset mix for the years 2005 and 2004 (at
December 31).

Earning Assets
(Dollars in Thousands)                                           December 31,
===================================================================================
                                                              2005          2004
                                                           ----------    ----------
                                                                   
       Interest-bearing time deposits .................    $    8,748    $    9,343
       Investment securities available for sale .......       422,627       416,177
       Investment securities held to maturity .........        11,639         5,358
       Mortgage loans held for sale ...................         4,910         3,367
       Loans ..........................................     2,457,427     2,428,051
       Federal Reserve and Federal Home Loan Bank stock        23,200        22,858
                                                           ----------    ----------
           Total ......................................    $2,928,551    $2,885,154
                                                           ==========    ==========

DEPOSITS AND BORROWINGS

The table below reflects the level of deposits and borrowed funds (federal funds
purchased; repurchase agreements; Federal Home Loan Bank advances; subordinated
debentures, revolving credit lines and term loans) based on year-end levels at
December 31, 2005 and 2004.

(Dollars in Thousands)                                        December 31,
                                                           2005           2004
                                                        ----------    ----------
Deposits ...........................................    $2,382,576    $2,408,150
Federal funds purchased ............................        50,000        32,550
Securities sold under repurchase agreements ........       106,415        87,472
Federal Home Loan Bank advances ....................       247,865       223,663
Subordinated debentures, revolving credit lines
   and term loans ..................................       103,956        97,206
                                                        ----------    ----------
                                                        $2,890,812    $2,849,041
                                                        ==========    ==========

The Corporation has continued to leverage its capital position with Federal Home
Loan Bank advances, as well as repurchase agreements which are pledged against
acquired investment securities as collateral for the borrowings. The interest
rate risk is included as part of the Corporation's interest simulation discussed
in Management's Discussion and Analysis of Financial Condition and Results of
Operations under the headings "LIQUIDITY" and "INTEREST SENSITIVITY AND
DISCLOSURES ABOUT MARKET RISK".

NET INTEREST INCOME

Net interest income is the primary source of the Corporation's earnings. It is a
function of net interest margin and the level of average earning assets. The
following table presents the Corporation's asset yields, interest expense, and
net interest income as a percent of average earning assets for the three-year
period ending in 2005.

                                       15

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NET INTEREST INCOME continued

In 2005, asset yields increased 54 basis points (FTE) and interest cost
increased 45 basis points, resulting in a 9 basis point (FTE) increase in net
interest income as compared to 2004. The improvement in margin was primarily a
result of eight 25 basis point overnight federal funds rate increases by the
Federal Open Market Committee during this period. As a result, the Corporation's
prime lending rates increased accordingly, while offsetting deposit rate
increases were less significant.

In 2004, asset yields decreased 26 basis points (FTE) and interest cost
decreased 13 basis points, resulting in a 13 basis point (FTE) decrease in net
interest income as compared to 2003. Margins remained compressed through the
first half of 2004 as the combined first and second quarters net interest margin
equaled 3.87 percent. In June 2004, the first of five 25 basis point overnight
federal funds rate increases by the Federal Open Market Committee occurred,
helping increase the combined third and fourth quarter net interest margin to
3.90 percent. However, the net interest margin for the 2004 fourth quarter
declined to 3.85 percent. This was primarily due to the reversal of
approximately $340,000 of interest income in the fourth quarter, related to
loans placed on non-accrual status and charged-off during the quarter. In
addition, the Corporation maintained an average federal funds sold position of
approximately $60 million, which generated lower yields.

(Dollars in Thousands)                                            December 31,
                                                         2005          2004           2003
                                                         ----          ----           ----
                                                                          
Net Interest Income ..........................        $  111,129    $  105,389     $  103,142
FTE Adjustment ...............................        $    3,778    $    3,597     $    3,757

Net Interest Income
  On a Fully Taxable Equivalent Basis ........        $  114,907    $  108,986     $  106,899

Average Earning Assets .......................        $2,891,121    $2,806,776     $2,663,853

Interest Income (FTE) as a Percent
  of Average Earning Assets ..................              6.26%         5.72%          5.98%

Interest Expense as a Percent
  of Average Earning Assets ..................              2.29%         1.84%          1.97%

Net Interest Income (FTE) as a Percent
  of Average Earning Assets ..................              3.97%         3.88%          4.01%

Average earning assets include the average balance of securities classified as
available for sale, computed based on the average of the historical amortized
cost balances without the effects of the fair value adjustment. In addition,
annualized amounts are computed utilizing a 30/360 day basis.

OTHER INCOME

The Corporation offers a wide range of fee-based services. Fee schedules are
regularly reviewed by a pricing committee to ensure that the products and
services offered by the Corporation are priced to be competitive and profitable.

                                       16

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OTHER INCOME continued

Other income in 2005 amounted to $34,717,000, a .5 percent increase from 2004.
The change in other income from 2005 to 2004 was minor and primarily
attributable to fluctuations within the following other income items:

      1.    Insurance commissions increased by $733,000, due to the receipt of
            increased profit sharing payments from insurance underwriters, as
            compared to the same period in 2004.

      2.    Fees on debit cards and ATMs increased by approximately $899,000 as
            compared to the same period in 2004. This was primarily a result of
            increased card usage by customers.

      3.    Net gains and fees on sales of mortgage loans decreased by $727,000
            from the same period in 2004, as stabilizing mortgage interest rates
            caused reduced volumes of mortgage refinancing.

      4.    In 2005, sales of available for sale securities resulted in a net
            loss of $2,000; however, in 2004, sales of available for sale
            securities resulted in net gains totaling $1,188,000.

Other income in 2004 amounted to $34,554,000, a 3.8 percent decline from 2003.
The decrease of $1,348,000 is primarily attributable to the following factors:

      1.    Net gains and fees on sales of mortgage loans included in other
            income decreased by $2,759,000 due to decreased mortgage volume
            during 2004.

      2.    Life insurance proceeds included in other income was $0 for 2004
            compared to $535,000 for 2003.

      3.    Service charges on deposit accounts increased $533,000 or 4.8
            percent due to increased number of customer accounts and price
            adjustments.

      4.    Revenues from fiduciary activities increased $896,000 or 13.3
            percent due to expansion, market improvements and price adjustments.

OTHER EXPENSES

Other expenses represent non-interest operating expenses of the Corporation.
Other expenses amounted to $93,957,000 in 2005, an increase of 2.5 percent from
the prior year, or $2,315,000. A pension accounting loss, totaling approximately
$1,630,000, was recorded during the first quarter of 2005 and accounts for most
of the increase. The loss resulted from the curtailment of the accumulation of
defined benefits in the Corporation's defined benefit plan.

Other expenses amounted to $91,642,000 in 2004, an increase of 0.4 percent from
the prior year, or $363,000. The following factors account for most of the 2004
increase:

      1.    Salaries and benefit expense grew $1,995,000 or 4.0 percent, due to
            normal salary increases and additional salary cost related to the
            March 1, 2003 acquisition of Commerce National.

                                       17

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OTHER EXPENSES continued

      2.    Prepayment penalties for early prepayment of FHLB advances totaled
            $340,000 for 2003 and no such penalties were incurred during 2004.

      3.    Investment securities write-downs totaling $615,000 were incurred in
            2003, resulting from other-than-temporary losses being recognized on
            two securities. No investment security write-downs, resulting from
            other-than temporary losses, were incurred during 2004.

      4.    In 2003, the Corporation incurred $460,000 expense to fund the
            anticipation of a settlement of a claim. No such expense was
            incurred during 2004.

INCOME TAXES

Income tax expense totaled $13,296,000 for 2005, which is an increase of
$111,000 from 2004. The 2005 increase in tax expense is primarily a result of
the increase of the 2005 income before income tax, as compared to 2004.

In addition, the effective tax rates for the periods ending December 31, 2005,
2004 and 2003 were 30.5 percent, 31.0 percent and 28.0 percent, respectively.
The effective tax rate has remained lower than the federal statutory income tax
rate of 34 percent, primarily due to the Corporation's tax-exempt investment
income on securities and loans, income tax credits generated from investments in
affordable housing projects, income generated by subsidiaries domiciled in a
state with no state or local income tax, increases in tax exempt earnings from
bank-owned life insurance contracts and reduced state taxes, resulting from the
effect of state income apportionment.

INFLATION

Changing prices of goods, services and capital affect the financial position of
every business enterprise. The level of market interest rates and the price of
funds loaned or borrowed fluctuate due to changes in the rate of inflation and
various other factors, including government monetary policy.

Fluctuating interest rates affect the Corporation's net interest income, loan
volume and other operating expenses, such as employee salaries and benefits,
reflecting the effects of escalating prices, as well as increased levels of
operations and other factors. As the inflation rate increases, the purchasing
power of the dollar decreases. Those holding fixed-rate monetary assets incur a
loss, while those holding fixed-rate monetary liabilities enjoy a gain. The
nature of a financial holding company's operations is such that there will
generally be an excess of monetary assets over monetary liabilities, and, thus,
a financial holding company will tend to suffer from an increase in the rate of
inflation and benefit from a decrease.

OTHER

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

                                       18

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Audit Committee, Board of Directors and Stockholders
First Merchants Corporation
Muncie, Indiana

We have audited the accompanying consolidated balance sheets of First Merchants
Corporation as of December 31, 2005 and 2004, and the related consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 2005. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Merchants
Corporation as of December 31, 2005 and 2004, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2005, in conformity with accounting principles generally accepted in the United
States of America.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of First Merchants
Corporation's internal control over financial reporting as of December 31, 2005
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and
our report dated January 27, 2006 expressed unqualified opinions on management's
assessment and on the effectiveness of the Corporation's internal control over
financial reporting.

BKD, LLP

Indianapolis, Indiana
January 27, 2006

                                       19

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets

(in thousands, except share data)                                                                       December 31,
==============================================================================================================================
                                                                                                      2005              2004
                                                                                                             
Assets
   Cash and due from banks ...........................................................           $    70,417       $    69,960
   Interest-bearing time deposits ....................................................                 8,748             9,343
   Investment securities
      Available for sale .............................................................               422,627           416,177
      Held to maturity (fair value of $11,510 and $5,520) ............................                11,639             5,358
                                                                                                 -----------       -----------
        Total investment securities ..................................................               434,266           421,535

   Mortgage loans held for sale ......................................................                 4,910             3,367
   Loans, net of allowance for loan losses of $25,188 and $22,548 ....................             2,432,239         2,405,503
   Premises and equipment ............................................................                39,417            38,254
   Federal Reserve and Federal Home Loan Bank stock ..................................                23,200            22,858
   Interest receivable ...............................................................                19,690            17,318
   Core deposit intangibles ..........................................................                17,567            20,669
   Goodwill ..........................................................................               121,266           120,615
   Cash value of life insurance ......................................................                43,579            42,061
   Other assets ......................................................................                21,780            20,185
                                                                                                 -----------       -----------
        Total assets .................................................................           $ 3,237,079       $ 3,191,668
                                                                                                 ===========       ===========

Liabilities
   Deposits
     Noninterest-bearing .............................................................           $   314,335       $   330,685
     Interest-bearing ................................................................             2,068,241         2,077,465
                                                                                                 -----------       -----------
       Total deposits ................................................................             2,382,576         2,408,150
   Borrowings ........................................................................               508,236           440,891
   Interest payable ..................................................................                 5,874             4,411
   Other liabilities .................................................................                26,997            23,613
                                                                                                 -----------       -----------
       Total liabilities .............................................................             2,923,683         2,877,065

Commitments and Contingent Liabilities

Stockholders' equity
   Preferred stock, no-par value
      Authorized and unissued -- 500,000 shares
   Common stock, $.125 stated value
      Authorized -- 50,000,000 shares
      Issued and outstanding - 18,416,714 and 18,573,997 shares ......................                 2,302             2,322
   Additional paid-in capital ........................................................               145,682           150,862
   Retained earnings .................................................................               174,717           161,459
   Accumulated other comprehensive loss ..............................................                (9,305)              (40)
                                                                                                 -----------       -----------
        Total stockholders' equity ...................................................               313,396           314,603
                                                                                                 -----------       -----------
        Total liabilities and stockholders' equity ...................................           $ 3,237,079       $ 3,191,668
                                                                                                 ===========       ===========

See notes to consolidated financial statements.

                                       20

Consolidated Statements of Income

(in thousands, except share data)                                                                Year Ended December 31,
===================================================================================================================================
                                                                                       2005               2004               2003
                                                                                                                  
Interest income
   Loans receivable
     Taxable .............................................................           $158,436           $139,953           $141,236
     Tax exempt ..........................................................                643                581                707
   Investment securities
     Taxable .............................................................              9,612              8,371              6,105
     Tax exempt ..........................................................              6,374              6,098              6,270
   Federal funds sold ....................................................                264                165                487
   Deposits with financial institutions ..................................                695                555                 76
   Federal Reserve and Federal Home Loan Bank stock ......................              1,185              1,251                649
                                                                                     --------           --------           --------
       Total interest income .............................................            177,209            156,974            155,530
                                                                                     --------           --------           --------
Interest expense
   Deposits ..............................................................             46,121             33,844             34,858
   Securities sold under repurchase agreements ...........................              1,612                517              1,521
   Federal Home Loan Bank advances .......................................              9,777              9,777              9,439
   Subordinated debentures, revolving
     credit lines and term loans .........................................              7,432              6,784              6,161
   Other borrowings ......................................................              1,138                663                409
                                                                                     --------           --------           --------
        Total interest expense ...........................................             66,080             51,585             52,388
                                                                                     --------           --------           --------
Net interest income ......................................................            111,129            105,389            103,142
   Provision for loan losses .............................................              8,354              5,705              9,477
                                                                                     --------           --------           --------

Net interest income after provision for loan losses ......................            102,775             99,684             93,665
                                                                                     --------           --------           --------
Other income
   Fiduciary activities ..................................................              7,481              7,632              6,736
   Service charges on deposit accounts ...................................             11,298             11,638             11,105
   Other customer fees ...................................................              5,094              4,083              4,124
   Net realized gains (losses) on
     sales of available-for-sale securities ..............................                 (2)             1,188                950
   Commission income .....................................................              3,821              3,088              2,668
   Earnings on cash surrender value
     of life insurance ...................................................              1,667              1,798              1,347
   Net gains and fees on sales of loans ..................................              2,902              3,629              6,388
   Other income ..........................................................              2,456              1,498              2,584
                                                                                     --------           --------           --------
        Total other income ...............................................             34,717             34,554             35,902
                                                                                     --------           --------           --------

Other expenses
   Salaries and employee benefits ........................................             54,059             52,479             50,484
   Net occupancy expenses ................................................              5,796              5,308              4,894
   Equipment expenses ....................................................              7,562              7,665              8,073
   Marketing expenses.....................................................              2,012              1,709              1,797
   Outside data processing fees ..........................................              4,010              4,920              4,118
   Printing and office supplies ..........................................              1,369              1,580              1,706
   Core deposit amortization..............................................              3,102              3,375              3,704
   Other expenses ........................................................             16,047             14,606             16,503
                                                                                     --------           --------           --------
        Total other expenses .............................................             93,957             91,642             91,279
                                                                                     --------           --------           --------

Income before income tax .................................................             43,535             42,596             38,288
   Income tax expense ....................................................             13,296             13,185             10,717
                                                                                     --------           --------           --------
Net income ...............................................................           $ 30,239           $ 29,411           $ 27,571
                                                                                     ========           ========           ========

Net income per share:
   Basic .................................................................           $   1.64           $   1.59           $   1.51
   Diluted ...............................................................               1.63               1.58               1.50

See notes to consolidated financial statements.

                                       21

Consolidated Statements of Comprehensive Income

Year Ended December 31,
(in thousands)                                                                                2005           2004           2003
===================================================================================================================================
                                                                                                                 
Net income ............................................................................     $ 30,239       $ 29,411       $ 27,571
                                                                                             --------       --------       --------
Other comprehensive income (loss), net of tax:
  Unrealized losses on securities available for sale:
     Unrealized holding losses arising during the period,
     net of income tax benefit of $3,562, $1,199 and $1,465............................       (6,615)        (1,799)        (2,197)
     Less: Reclassification adjustment for gains (losses) included in net income,
       net of income tax (expenses) benefit of $1, $(475) and $(380)...................           (1)           713            570
  Unrealized loss on pension minimum funding liability:
     Unrealized loss arising during the period,
     net of income tax benefit of $1,767, $150 and $357 ...............................       (2,651)          (227)          (536)
                                                                                            --------       --------       --------
                                                                                              (9,265)        (2,285)        (2,231)
                                                                                            --------       --------       --------
  COMPREHENSIVE INCOME                                                                      $ 20,974       $ 27,126       $ 25,340
                                                                                            ========       ========       ========

Consolidated Statements of Stockholders' Equity

(in thousands, except share data)
- ----------------------------------------------------------------------------------------------------------------------------------
                                                        COMMON STOCK                                  ACCUMULATED OTHER
                                                   ----------------------     ADDITIONAL    RETAINED     COMPREHENSIVE
                                                      SHARES       AMOUNT   PAID-IN CAPITAL EARNINGS     INCOME (LOSS)      TOTAL
                                                   ----------     -------   --------------- --------  -----------------    -------
                                                                                                      
Balances, January 1, 2003                          16,322,748     $ 2,040      $116,503     $138,110      $   4,476        261,129
  Net income for 2003..........................                                               27,571                        27,571
  Cash dividends ($.90 per share)..............                                              (16,557)                      (16,557)
  Other comprehensive income (loss),
     net of tax ...............................                                                              (2,231)        (2,231)
  Stock issued under employee benefit plans ...        39,747           5           814                                        819
  Stock issued under dividend reinvestment
     and stock purchase plan ..................        48,168           6         1,218                                      1,224
  Stock options exercised .....................        66,513           8         1,183                                      1,191
  Stock redeemed ..............................       (17,915)         (2)         (486)                                      (488)
  Issuance of stock related to acquisition.....     1,173,996         147        31,188                                     31,335
  Five percent (5%) stock dividend.............       879,577         110          (110)
  Cash paid in lieu of fractional shares.......                                                 (28)                           (28)
                                                  -----------    --------      --------    ---------      ---------      ---------
Balances, December 31, 2003                        18,512,834       2,314       150,310      149,096          2,245        303,965
  Net income for 2004..........................                                               29,411                        29,411
  Cash dividends ($.92 per share)..............                                              (17,048)                      (17,048)
  Other comprehensive income (loss),
     net of tax ...............................                                                              (2,285)        (2,285)
  Stock issued under employee benefit plans ...        45,267           6           897                                        903
  Stock issued under dividend reinvestment
     and stock purchase plan ..................        50,799           6         1,272                                      1,278
  Stock options exercised .....................        90,338          11         1,393                                      1,404
  Stock redeemed ..............................      (193,789)        (24)       (4,702)                                    (4,726)
  Issuance of stock related to acquisition.....        68,548           9         1,692                                      1,701
                                                  -----------    --------      --------    ---------      ---------      ---------
Balances, December 31, 2004                        18,573,997       2,322       150,862     161,459             (40)       314,603
  Net income for 2005..........................                                               30,239                        30,239
  Cash dividends ($.92 per share)..............                                              (16,981)                      (16,981)
  Other comprehensive income (loss),
     net of tax ...............................                                                              (9,265)        (9,265)
  Stock issued under employee benefit plans ...        43,238           6           908                                        914
  Stock issued under dividend reinvestment
     and stock purchase plan ..................        35,565           4           929                                        933
  Stock options exercised .....................       121,750          15         2,159                                      2,174
  Stock redeemed ..............................      (374,598)        (47)       (9,611)                                    (9,658)
  Issuance of stock related to acquisition.....        16,762           2           435                                        437
                                                  -----------    --------      --------    ---------      ---------      ---------
Balances, December 31, 2005                        18,416,714    $  2,302      $145,682    $174,717       $  (9,305)     $ 313,396
                                                  ===========    ========      ========    =========      =========      =========

See notes to consolidated financial statements.

                                       22

Consolidated Statements of Cash Flows

================================================================================================================================
                                                                                             Year Ended December 31,
(in thousands, except share data)                                                  2005               2004               2003
================================================================================================================================
                                                                                                             
Operating activities:
   Net income .........................................................         $  30,239          $  29,411          $  27,571
   Adjustments to reconcile net income to
     net cash provided by operating activities:
     Provision for loan losses ........................................             8,354              5,705              9,477
     Depreciation and amortization.....................................             5,070              5,064              4,769
     Mortgage loans originated for sale ...............................           (86,122)           (83,313)          (212,243)
     Proceeds from sales of mortgage loans ............................            84,579             82,989            230,745
     Net change in
         Interest receivable ..........................................            (2,372)              (478)             1,368
         Interest payable .............................................             1,463               (269)            (1,695)
     Other adjustments ................................................             5,283                842              5,677
                                                                                ---------          ---------          ---------
         Net cash provided by operating activities ....................            46,494             39,951             65,669
                                                                                ---------          ---------          ---------

Investing activities:
   Net change in interest-bearing deposits ............................               595             (1,202)            (4,573)
   Purchases of
     Securities available for sale ....................................           (97,861)          (214,393)          (260,467)
   Proceeds from maturities of
     Securities available for sale ....................................            69,236            116,294            174,003
   Proceeds from sales of
     Securities available for sale ....................................             4,718             32,336             58,245
   Purchase of Federal Reserve and Federal Home Loan Bank stock                      (342)            (7,356)            (4,093)
   Net change in loans ................................................           (35,090)           (83,198)           (56,825)
   Net cash paid in acquisition ........................................             (213)              (201)            (7,793)
   Other adjustments ..................................................            (6,233)            (6,106)            (2,262)
                                                                                ---------          ---------          ---------
         Net cash used by investing activities.........................           (65,190)          (163,826)          (103,765)
                                                                                ---------          ---------          ---------

Cash flows from financing activities:
   Net change in
     Demand and savings deposits ......................................           (80,986)            89,008             39,400
     Certificates of deposit and other time deposits ..................            55,412            (42,959)            14,476
   Receipt of borrowings ..............................................           191,002            181,211             73,303
   Repayment of borrowings ............................................          (123,657)          (124,763)           (84,755)
   Cash dividends .....................................................           (16,981)           (17,048)           (16,557)
   Stock issued under employee benefit plans ..........................               914                903                819
   Stock issued under dividend reinvestment
     and stock purchase plan ..........................................               933              1,278              1,224
   Stock options exercised ............................................             2,174              1,404              1,191
   Stock redeemed .....................................................            (9,658)            (4,726)              (488)
   Cash paid in lieu of issuing fractional shares .....................                                                     (28)
                                                                                ---------          ---------          ---------
         Net cash provided by financing activities ....................            19,153             84,308             28,585
                                                                                ---------          ---------          ---------
Net change in cash and cash equivalents ...............................               457            (39,567)            (9,511)
Cash and cash equivalents, beginning of year ..........................            69,960            109,527            119,038
                                                                                ---------          ---------          ---------
Cash and cash equivalents, end of year ................................         $  70,417          $  69,960          $ 109,527
                                                                                =========          =========          =========
Additional cash flows information:
   Interest paid .......................................................        $  64,617          $  51,854          $  53,727
   Income tax paid .....................................................           16,775             10,501             13,952

See notes to consolidated financial statements.

                                       23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 1

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of First Merchants Corporation
("Corporation"), and its wholly owned subsidiaries, First Merchants Bank, N.A.
("First Merchants"), The Madison Community Bank, N.A. ("Madison"), First United
Bank, N.A. ("First United"), United Communities National Bank ("United
Communities"), First National Bank ("First National"), Decatur Bank and Trust
Company, N.A. ("Decatur"), Frances Slocum Bank & Trust Company, N.A. ("Frances
Slocum"), Lafayette Bank and Trust Company, N.A. ("Lafayette"), and Commerce
National Bank ("Commerce National"), (collectively the "Banks"), Merchants Trust
Company, National Association ("MTC"), First Merchants Insurance Services, Inc.
("FMIS"), First Merchants Reinsurance Company ("FMRC")and Indiana Title
Insurance Company ("ITIC"), conform to generally accepted accounting principles
and reporting practices followed by the banking industry. The more significant
of the policies are described below. Effective January 1, 2006, First United was
merged into First Merchants, and the name of the continuing institution is First
Merchants Bank, N.A.

The preparation of financial statements in conformity with generally accepted
accounting principles 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 Banks and operates in a single significant
business segment. The Banks operate under national bank charters and provide
full banking services. As national banks, the Banks are subject to the
regulation of the Office of the Comptroller of the Currency and the Federal
Deposit Insurance Corporation.

The Banks generate commercial, mortgage, and consumer loans and receive deposits
from customers located primarily in north-central and east-central Indiana and
Butler, Franklin and Hamilton counties in Ohio. The Banks' 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.

INVESTMENT SECURITIES-Debt 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. Debt
securities not classified as held to maturity are classified as available for
sale. Securities available for sale are carried at fair value with unrealized
gains and losses reported separately in accumulated other comprehensive income,
net of tax.

                                       24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 1

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued

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.

Available-for-sale and held-to-maturity securities are reviewed quarterly for
possible other-than-temporary impairment. The review includes an analysis of the
facts and circumstances of each individual investment such as the length of time
the fair value has been below cost, the expectation for that security's
performance, the credit worthiness of the issuer and the Corporation's ability
to hold the security to maturity. A decline in value that is considered to be
other-than temporary is recorded as a loss within other operating income in the
consolidated statements of income.

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 nonaccrual 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 Banks 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 Statement of Financial Accounting
Standards ("SFAS") No. 114, 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.
Certain loan fees and direct costs are being deferred and amortized as an
adjustment of yield on the loans.

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 uncollectibility of a
loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance. 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, historical losses, and
economic, environmental or qualitative factors.

                                       25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 1

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued

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 SFAS No. 114. 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
collectibility 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.

Homogenous loans, such as consumer installment and residential mortgage loans
are not individually risk graded. Reserves are established for each pool of
loans using loss rates based on a five year average net charge-off history by
loan category.

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 the volume of loans, changes in mix, concentration of loans in specific
industries, asset quality trends (delinquencies, charge-offs and nonaccrual
loans), risk management and loan administration, changes in the internal lending
policies and credit standards, collection practices and examination results from
bank regulatory agencies and the Corporation's internal loan review.

An unallocated reserve, primarily based on the factors noted above, is
maintained to recognize the imprecision in estimating and measuring loss when
evaluating reserves for individual loans or pools of loans. Allowances on
individual loans and historical loss allocations are reviewed quarterly and
adjusted as necessary based on changing borrower and/or collateral conditions.

PREMISES AND EQUIPMENT are 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. 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 ("FHLB") 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 10 years. Intangible assets are periodically evaluated as to the
recoverability of their carrying value.

                                       26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 1

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued

GOODWILL is maintained by applying the provisions of SFAS No. 142. Goodwill is
reviewed for impairment annually in accordance with this statement with any loss
recognized through the income statement, at that time.

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.

STOCK OPTIONS are granted for a fixed number of shares to employees. The
Corporation's stock-based employee compensation plans are described more fully
in Note 16. The Corporation's stock option plans are accounted for in accordance
with Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock
Issued to Employees, and related interpretations.

APB No. 25 requires compensation expense for stock options to be recognized only
if the market price of the underlying stock exceeds the exercise price on the
date of the grant. Accordingly, the Corporation recognized compensation expense
of $12,000 in 2003, related to specific grants in which the market price
exceeded the exercise price. For all remaining grants, no stock-based employee
compensation cost is reflected in net income, as options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the grant date.

During the quarter ended December 31, 2005, the Corporation accelerated the
vesting of options previously granted, and the vesting period for the 2005
grants was established so the those grants would be fully vested by year-end.
The terms of the acceleration are such that no expense will be recognized by the
Corporation on those grants, although it has reported the impact of the
acceleration in its proforma disclosures of earnings per share.

The following table illustrates the effect on net income and earnings per share
if the Corporation had applied the fair value provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.

                                                   Year Ended December 31
                                                  2005        2004       2003
                                               ---------------------------------
Net income, as reported ......................  $30,239     $29,411    $27,571
Add: Total stock-based employee compensation
   cost included in reported net income, net
   of income taxes ...........................                              12
Less: Total stock-based employee compensation
   cost determined under the fair value based
   method, net of income taxes ...............   (2,159)     (1,083)    (1,034)
                                                -------     -------    -------
Pro forma net income                            $28,080     $28,328    $26,549
                                                =======     =======    =======

Earnings per share:
   Basic - as reported .......................  $  1.64     $  1.59    $  1.51
   Basic - pro forma .........................  $  1.52     $  1.53    $  1.46
   Diluted - as reported .....................  $  1.63     $  1.58    $  1.50
   Diluted - pro forma .......................  $  1.51     $  1.52    $  1.45

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

                                       27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 2

BUSINESS COMBINATIONS

Effective September 1, 2005, the Corporation acquired Trustcorp Financial
Services of Greenville, Inc., an Ohio corporation, which was merged into FMIS, a
wholly-owned subsidiary of the Corporation. The Corporation issued 16,762 shares
of its common stock at a cost of $26.10 per share to complete the transaction.
The acquisition was deemed to be an immaterial acquisition.

Effective October 15, 2004, the Corporation acquired Mangas Agencies, Inc.,
which was merged into FMIS, a wholly-owned subsidiary of the Corporation. The
Corporation issued 68,548 shares of its common stock at a cost of $24.80 per
share to complete the transaction. The acquisition was deemed to be an
immaterial acquisition.

On March 1, 2003, the Corporation acquired 100 percent of the outstanding stock
of CNBC Bancorp, the holding company of Commerce National and CNBC Trust I.
Commerce National is a national chartered bank located in Columbus, Ohio. CNBC
Bancorp was merged into the Corporation, and Commerce National maintained its
national charter as a wholly-owned subsidiary of the Corporation. CNBC Trust I
is also maintained as a wholly-owned subsidiary of the Corporation. The
Corporation issued approximately 1,225,242 shares of its common stock and
approximately $24,562,000 in cash to complete the transaction. As a result of
the acquisition, the Corporation will have an opportunity to increase its
customer base and continue to increase its market share. The purchase had a
recorded acquisition price of $55,729,000, including goodwill of $30,291,000
none of which is deductible for tax purposes. Additionally, core deposit
intangibles totaling $8,171,000 were recognized and are being amortized over 10
years using the 150 percent declining balance method.

The combination was accounted for under the purchase method of accounting. All
assets and liabilities were recorded at their fair values as of March 1, 2003.
The purchase accounting adjustments are being amortized over the life of the
respective asset or liability. Commerce National's results of operations are
included in the Corporation's consolidated income statement beginning March 1,
2003. The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.

        Investments.......................     $ 12,500
        Loans.............................      298,702
        Premises and equipment............        1,293
        Core deposit intangibles..........        8,171
        Goodwill..........................       30,291
        Other.............................       20,789
                                               --------
           Total assets acquired..........      371,746
                                               --------
        Deposits..........................      271,537
        Other.............................       44,480
                                               --------
           Total liabilities acquired.....      316,017
                                               --------
           Net assets acquired............     $ 55,729
                                               ========

                                       28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 2

BUSINESS COMBINATIONS continued

The following proforma disclosures, including the effect of the purchase
accounting adjustments, depict the results of operations as though the CNBC
Bancorp merger had taken place on January 1, 2003.

                                              Year Ended
                                             December 31,
                                                 2003
                                                ------

        Net Interest Income...........        $104,797

        Net Income....................          23,601

        Per Share - combined:
           Basic Net Income...........            1.28
           Diluted Net Income.........            1.27

Effective January 1, 2003, the Corporation formed MTC, a wholly-owned subsidiary
of the Corporation, through a capital contribution totaling approximately
$2,038,000. On January 1, 2003, MTC purchased the trust operations of First
Merchants, First National and Lafayette for a fair value acquisition price of
$20,687,000. MTC united the trust and asset management services of all affiliate
banks of the Corporation. All intercompany transactions related to this purchase
by MTC have been eliminated in the consolidated financial statements of the
Corporation.

NOTE 3

RESTRICTION ON CASH AND DUE FROM BANKS

The Banks are required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank. The reserve required at December 31, 2005, was
$5,394,000.

                                       29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 4

INVESTMENT SECURITIES

- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                         GROSS             GROSS
                                                                     AMORTIZED         UNREALIZED        UNREALIZED           FAIR
                                                                       COST              GAINS             LOSSES             VALUE
===================================================================================================================================
                                                                                                               
Available for sale at December 31, 2005
   U.S. Treasury ..........................................          $  1,586                            $      1          $  1,585
   U.S. Government-sponsored agency securities ............            83,026          $      1             1,836            81,191
   State and municipal ....................................           167,095             2,159             1,131           168,123
   Mortgage-backed securities .............................           168,019               139             5,656           162,502
   Other asset-backed securities ..........................                 1                                                     1
   Marketable equity securities ...........................             9,660                                 435             9,225
                                                                     --------          --------          --------          --------
      Total available for sale ............................           429,387             2,299             9,059           422,627
                                                                     --------          --------          --------          --------

Held to maturity at December 31, 2005
   State and municipal ....................................            11,609               283               412            11,480
   Mortgage-backed securities .............................                30                                                    30
                                                                     --------          --------          --------          --------
      Total held to maturity ..............................            11,639               283               412            11,510
                                                                     --------          --------          --------          --------
      Total investment securities .........................          $441,026          $  2,582          $  9,471          $434,137
                                                                     ========          ========          ========          ========

Available for sale at December 31, 2004
   U.S. Treasury ..........................................          $  1,745                            $      1          $  1,744
   U.S. Government-sponsored agency securities ............            65,325          $     73               332            65,066
   State and municipal ....................................           150,284             5,243                82           155,445
   Mortgage-backed securities .............................           183,200               485             1,980           181,705
   Other asset-backed securities ..........................                18                                                    18
   Marketable equity securities ...........................            12,191                 8                              12,199
                                                                     --------          --------          --------          --------
      Total available for sale ............................           412,763             5,809             2,395           416,177
                                                                     --------          --------          --------          --------

Held to maturity at December 31, 2004
   State and municipal ....................................             5,306               162                               5,468
   Mortgage-backed securities .............................                52                                                    52
                                                                     --------          --------          --------          --------
      Total held to maturity ..............................             5,358               162                               5,520
                                                                     --------          --------          --------          --------
      Total investment securities .........................          $418,121          $  5,971          $  2,395          $421,697
                                                                     ========          ========          ========          ========

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 $337,959,000 and $192,366,000 at December 31, 2005 and 2004,
respectively. Total fair value of these investments was $328,488,000 and
$189,971,000, which is approximately 75.7 and 45.1 percent of the Corporation's
available-for-sale and held-to-maturity investment portfolio at December 31,
2005 and 2004, respectively. These declines primarily resulted from recent
increases in market interest rates.

Based on evaluation of available evidence, including recent changes in market
interest rates, credit rating information and information obtained from
regulatory filings, 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 is identified.

                                       30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 4

INVESTMENT SECURITIES continued

The following tables show 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,
2005 and 2004:

                                                                 Less than 12            12 Months or
                                                                    Months                  Longer                   Total
                                                             -----------------------------------------------------------------------
                                                                          GROSS                    GROSS                    GROSS
                                                               FAIR     UNREALIZED      FAIR     UNREALIZED      FAIR     UNREALIZED
                                                               VALUE      LOSSES        VALUE      LOSSES        VALUE      LOSSES
                                                             -----------------------------------------------------------------------
                                                                                                         
Temporarily impaired investment
   securities at December 31, 2005:
U.S. Treasury ...........................................    $  1,487    $     (1)                             $  1,487    $     (1)
U.S. Government-sponsored agency securities .............      31,692        (581)    $ 45,466    $ (1,255)      77,158      (1,836)
State and municipal .....................................      90,905      (1,501)       2,124         (42)      93,029      (1,543)
Mortgage-backed securities ..............................      59,595      (1,511)      96,120      (4,141)     155,715      (5,652)
Marketable equity securities ............................          27          (8)       1,072        (431)       1,099        (439)
                                                             --------    --------     --------    --------     --------    --------
   Total temporarily impaired investment securities .....    $183,706    $ (3,602)    $144,782    $ (5,869)    $328,488    $ (9,471)
                                                             ========    ========     ========    ========     ========    ========

                                                                 Less than 12            12 Months or
                                                                    Months                  Longer                   Total
                                                             -----------------------------------------------------------------------
                                                                          GROSS                    GROSS                    GROSS
                                                               FAIR     UNREALIZED      FAIR     UNREALIZED      FAIR     UNREALIZED
                                                               VALUE      LOSSES        VALUE      LOSSES        VALUE      LOSSES
                                                             -----------------------------------------------------------------------
                                                                                                         
Temporarily impaired investment
   securities at December 31, 2004:
U.S. Treasury ...........................................    $  1,496    $     (1)                             $  1,496    $     (1)
U.S. Government-sponsored agency securities .............      46,227        (303)    $  1,472    $    (29)      47,699        (332)
State and municipal .....................................       2,976         (20)       1,094         (62)       4,070         (82)
Mortgage-backed securities ..............................     109,213      (1,129)      27,493        (851)     136,706      (1,980)
                                                             --------    --------     --------    --------     --------    --------
   Total temporarily impaired investment securities .....    $159,912    $ (1,453)    $ 30,059    $   (942)    $189,971    $ (2,395)
                                                             ========    ========     ========    ========     ========    ========

The amortized cost and fair value of securities available for sale and held to
maturity at December 31, 2005, 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, 2005:
  Due in one year or less..........................................        $ 12,838        $ 12,845        $    733        $    734
  Due after one through five years ................................         170,744         168,207           1,943           1,976
  Due after five through ten years ................................          52,629          53,734             960             928
  Due after ten years .............................................          15,496          16,112           7,973           7,842
                                                                           --------        --------        --------        --------
                                                                            251,707         250,898          11,609          11,480

  Mortgage-backed securities ......................................         168,019         162,503
  Other asset-backed securities ...................................               1               1              30              30
  Marketable equity securities ....................................           9,660           9,225
                                                                           --------        --------        --------        --------

    Totals ........................................................        $429,387        $422,627        $ 11,639        $ 11,510
                                                                           ========        ========        ========        ========

Securities with a carrying value of approximately $190,079,000 and $157,356,000
were pledged at December 31, 2005 and 2004 to secure certain deposits and
securities sold under repurchase agreements, and for other purposes as permitted
or required by law.

Proceeds from sales of securities available for sale during 2005, 2004 and 2003
were $4,718,000, $32,336,000, and $58,245,000. Gross gains of $28,000,
$1,502,000 and
                                       31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 4

INVESTMENT SECURITIES continued

$950,000 in 2005, 2004 and 2003, and gross losses of $30,000 and $314,000 in
2005 and 2004 were realized on those sales.

NOTE 5

LOANS AND ALLOWANCE

                                                                                   2005            2004
==========================================================================================================
                                                                                         
Loans at December 31:
  Commercial and industrial loans .........................................    $   461,102     $   451,227
  Agricultural production financing and other loans to farmers ............         95,130          98,902
  Real estate loans:
       Construction .......................................................        174,783         164,738
       Commercial and farmland ............................................        734,865         709,163
       Residential ........................................................        751,217         761,163
  Individuals' loans for household and other personal expenditures ........        200,139         198,532
  Tax-exempt loans ........................................................          8,263           8,203
  Lease financing receivables, net of unearned income .....................          8,713          11,311
  Other loans .............................................................         23,215          24,812
                                                                               -----------     -----------
                                                                                 2,457,427       2,428,051
   Allowance for loan losses ..............................................        (25,188)        (22,548)
                                                                               -----------     -----------
       Total loans ........................................................    $ 2,432,239     $ 2,405,503
                                                                               ===========     ===========

                                               2005         2004         2003
===============================================================================
Allowance for loan losses:
   Balance, January 1 ...................    $ 22,548     $ 25,493     $ 22,417
   Allowance acquired in acquisitions ...                                 3,727
   Provision for losses .................       8,354        5,705        9,477

   Recoveries on loans ..................       2,030        2,251        2,011
   Loans charged off ....................      (7,744)     (10,901)     (12,139)
                                             --------     --------     --------
   Balance, December 31 .................    $ 25,188     $ 22,548     $ 25,493
                                             ========     ========     ========

Information on nonaccruing, contractually past due 90 days or more other than
nonaccruing and restructured loans is summarized below:

                                                  2005         2004        2003
================================================================================

At December 31:
Non-accrual loans ..........................     $10,030     $15,355     $19,453

Loans contractually past due 90 days
  or more other than nonaccruing ...........       3,965       1,907       6,530

Restructured loans .........................         310       2,019         641
                                                 -------     -------     -------
     Total non-performing loans ............     $14,305     $19,281     $26,624
                                                 =======     =======     =======

Nonaccruing loans are loans which are reclassified to a nonaccruing 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. Interest
income on these loans is then recognized when collected.

Restructured loans are loans for which the contractual interest rate has been
reduced or other concessions are granted to the borrower, because of a
deterioration in the financial condition of the borrower resulting in the
inability of the borrower to meet the original contractual terms of the loans.

                                       32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 5

LOANS AND ALLOWANCE continued

Information on impaired loans is summarized below:                       2005          2004        2003
========================================================================================================
                                                                                        
As of, and for the year ending December 31:
   Impaired loans with an allowance .............................       $ 7,540      $ 7,728     $12,725
   Impaired loans for which the discounted
       cash flows or collateral value exceeds the
       carrying value of the loan ...............................        44,840       41,683      32,047
                                                                        -------      -------     -------
          Total impaired loans ..................................       $52,380      $49,411     $44,772
                                                                        =======      =======     =======
   Total impaired loans as a percent
       of total loans ...........................................          2.13%        2.03%       1.90%

   Allowance for impaired loans (included in the
       Corporation's allowance for loan losses) .................       $ 2,824      $ 1,673     $ 5,728
   Average balance of impaired loans ............................        44,790       59,568      50,245
   Interest income recognized on impaired loans .................         3,747        4,166       3,259
   Cash basis interest included above ...........................         3,951        3,029       2,714

NOTE 6

PREMISES AND EQUIPMENT

                                                          2005           2004
================================================================================
Cost at December 31:
   Land ..........................................      $  8,653       $  8,281
   Buildings and leasehold improvements ..........        43,001         40,520
   Equipment .....................................        40,155         38,852
                                                        --------       --------
       Total cost ................................        91,809         87,653
   Accumulated depreciation and amortization .....       (52,392)       (49,399)
                                                        --------       --------
       Net .......................................      $ 39,417       $ 38,254
                                                        ========       ========

The Corporation is committed under various noncancelable lease contracts for
certain subsidiary office facilities and equipment. Total lease expense for
2005, 2004 and 2003 was $2,391,000, $2,151,000 and $1,629,000, respectively. The
future minimum rental commitments required under the operating leases in effect
at December 31, 2005, expiring at various dates through the year 2016 are as
follows for the years ending December 31:

====================================================
2006  ................................        $2,055
2007  ................................         1,756
2008  ................................         1,275
2009  ................................         1,111
2010  ................................         1,057
After 2010 ...........................         1,649
                                              ------
Total future minimum obligations              $8,903
                                              ======

                                       33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 7

GOODWILL

The changes in the carrying amount of goodwill at December 31 are noted below.
No impairment loss was recorded in 2005 and 2004.

                                                      2005             2004
==============================================================================

Balance, January 1 ..............................  $ 120,615        $ 118,679
Goodwill acquired ...............................        651            1,900
Adjustments to previously
  acquired goodwill .............................                          36
                                                   ---------        ---------
Balance, December 31 ............................  $ 121,266        $ 120,615
                                                   =========        =========

NOTE 8

CORE DEPOSIT INTANGIBLES

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

                                                      2005             2004
==============================================================================

Gross carrying amount ...........................  $  31,073        $  31,073
Accumulated amortization ........................    (13,506)         (10,404)
                                                   ---------        ---------
   Core deposit intangibles .....................  $  17,567        $  20,669
                                                   =========        =========

Amortization expense for the years ended December 31, 2005, 2004 and 2003, was
$3,102,000, $3,375,000 and $3,704,000, respectively. Estimated amortization
expense for each of the following five years is:

         2006 ................................       $ 3,046
         2007 ................................         3,046
         2008 ................................         3,046
         2009 ................................         3,046
         2010 ................................         2,937
         After 2010 ..........................         2,397
                                                     -------
                                                     $17,518
                                                     =======

NOTE 9

DEPOSITS

                                                          2005           2004
================================================================================
Deposits at December 31:

   Demand deposits .............................       $  690,923     $  703,989
   Savings deposits ............................          566,212        634,132
   Certificates and other time deposits
     of $100,000 or more .......................          276,679        258,362
   Other certificates and time deposits ........          848,762        811,667
                                                       ----------     ----------
       Total deposits ..........................       $2,382,576     $2,408,150
                                                       ==========     ==========

                                       34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 9

DEPOSITS continued

=====================================================
Certificates and other time deposits maturing
in years ending December 31:

2006 .......................               $  677,656
2007 .......................                  278,882
2008 .......................                  107,440
2009 .......................                   37,568
2010 .......................                   19,122
After 2010 .................                    4,773
                                           ----------
                                           $1,125,441
                                           ==========

NOTE 10

BORROWINGS

                                                             2005         2004
================================================================================
Borrowings at December 31:
   Federal funds purchased ...........................     $ 50,000     $ 32,550
   Securities sold under repurchase agreements .......      106,415       87,472
   Federal Home Loan Bank advances ...................      247,865      223,663
   Subordinated debentures, revolving credit
     lines and term loans ............................      103,956       97,206
                                                           --------     --------
       Total borrowings ..............................     $508,236     $440,891
                                                           ========     ========

Securities sold under repurchase agreements consist of obligations of the Banks
to other parties. The obligations are secured by U.S. Treasury, U.S.
Government-sponsored agency security obligations and corporate asset-backed
securities. The maximum amount of outstanding agreements at any month-end during
2005 and 2004 totaled $106,415,000 and $87,472,000, and the average of such
agreements totaled $77,897,000 and $62,669,000 during 2005 and 2004.

Maturities of securities sold under repurchase agreements; Federal Home Loan
Bank advances; and subordinated debentures, revolving credit lines and term
loans as of December 31, 2005, are as follows:

                                                                                                   SUBORDENATED DEBENTURES
                                               SECURITIES SOLD UNDER       FEDERAL HOME LOAN       REVOLVING CREDIT LINES
                                               REPURCHASE AGREEMENTS         BANK ADVANCES              AND TERM LOANS
- --------------------------------------------------------------------------------------------------------------------------

                                                      AMOUNT                    AMOUNT                     AMOUNT
==========================================================================================================================
                                                                                                 
Maturities in years ending December 31:

      2006 ..............                           $106,415                   $ 56,335                   $ 15,000
      2007 ..............                                                        32,495
      2008 ..............                                                        32,839
      2009 ..............                                                        11,382
      2010 ..............                                                        35,192
      After 2010 ........                                                        79,622                     88,956
                                                    --------                   --------                   --------
             Total ......                           $106,415                   $247,865                   $103,956
                                                    ========                   ========                   ========

                                       35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 10

BORROWINGS continued

The terms of a security agreement with the FHLB require the Corporation to
pledge, as collateral for advances, qualifying first mortgage loans and all
otherwise unpledged investment securities in an amount equal to at least 145
percent of these advances. Advances are subject to restrictions or penalties in
the event of prepayment. The total available remaining borrowing capacity from
the FHLB at December 31, 2005, was $62,228,000.

Subordinated Debentures, Revolving Credit Lines and Term Loans. Three borrowings
were outstanding on December 31, 2005, for $103,956,000.

      o     First Merchants Capital Trust I. The subordinated debenture, entered
            into on April 12, 2002, for $54,832,000 will mature on June 20,
            2032. The Corporation may redeem the debenture no earlier than June
            30, 2007, subject to the prior approval of the Federal Reserve, as
            required by law or regulation. Interest is fixed at 8.75 percent and
            payable on March 31, June 30, September 30 and December 31 of each
            year.

      o     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 10.20 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 105.10 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.

      o     LaSalle Bank, N.A. A Loan and Subordinated Debenture Loan Agreement
            ("LaSalle Agreement") was entered into with LaSalle Bank, N.A. on
            March 25, 2003 and later amended as of March 9, 2005. The LaSalle
            Agreement includes three credit facilities:

            o     The Term Loan of $5,000,000 matures on March 7, 2012. Interest
                  is calculated at a floating rate equal to the lender's prime
                  rate or LIBOR plus 1.00 percent. The Term Loan is secured by
                  100 percent of the common stock of First Merchants. The
                  Agreement contains several restrictive covenants, including
                  the maintenance of various capital adequacy levels, asset
                  quality and profitability ratios, and certain restrictions on
                  dividends and other indebtedness.

            o     The Revolving Loan had a balance of $15,000,000 at December
                  31, 2005. Interest is payable quarterly based on LIBOR plus 1
                  percent. Principal and interest are due on or before March
                  7,2006. The total principal amount outstanding at any one time
                  may not exceed $20,000,000. The Revolving Loan is secured by
                  100 percent of the common stock of First Merchants. The
                  Agreement contains several restrictive covenants, including
                  the maintenance of various capital adequacy levels,

                                       36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 10

BORROWINGS continued

                  asset quality and profitability ratios, and certain
                  restrictions on dividends and other indebtedness.

            o     The Subordinated Debenture of $25,000,000 matures on March 7,
                  2012. Interest is calculated at a floating rate equal to, at
                  the Corporation's option, either the lender's prime rate or
                  LIBOR plus 1.50 percent. The Subordinated Debenture is treated
                  as Tier 2 Capital for regulatory capital purposes.

NOTE 11

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 $107,730,000,
$113,344,000 and $105,865,000 at December 31, 2005, 2004 and 2003. The amount of
capitalized servicing assets is considered immaterial.

NOTE  12

INCOME TAX

                                                                                          2005            2004            2003
================================================================================================================================
                                                                                                              
Income tax expense for the year ended December 31:
  Currently payable:
     Federal ................................................................          $ 14,814        $ 11,934        $  9,475
     State ..................................................................             2,231           1,772           1,569
  Deferred:
     Federal ................................................................            (3,248)           (615)           (597)
     State ..................................................................              (501)             94             270
                                                                                       --------        --------        --------
        Total income tax expense ............................................          $ 13,296        $ 13,185        $ 10,717
                                                                                       ========        ========        ========

Reconciliation of federal statutory to actual tax expense:
     Federal statutory income tax at 34% ....................................          $ 14,802        $ 14,483        $ 13,030
     Tax-exempt interest ....................................................            (2,141)         (2,098)         (2,198)
     Graduated tax rates ....................................................               345             335             289
     Effect of state income taxes ...........................................             1,132           1,178           1,213
     Earnings on life insurance .............................................              (439)           (472)           (512)
     Tax credits ............................................................              (395)           (274)           (317)
     Other ..................................................................                (8)             33            (788)
                                                                                       --------        --------        --------
        Actual tax expense .................................................           $ 13,296        $ 13,185        $ 10,717
                                                                                       ========        ========        ========

Tax expense (benefit) applicable to security gains and losses for the years
ended December 31, 2005, 2004 and 2003, was $(1,000), $475,000 and $380,000,
respectively.

                                       37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 12

INCOME TAX continued

A cumulative net deferred tax asset (liability) is included in the consolidated
balance sheets. The components of the net asset (liability) are as follows:

                                                                                           2005                 2004
======================================================================================================================
                                                                                                        
Deferred tax asset (liability) at December 31:
Assets:
   Differences in accounting for loan losses .............................               $10,609              $ 9,438
   Deferred compensation .................................................                 2,768                2,707
   Difference in accounting for pensions
     and other employee benefits .........................................                 2,707
   State income tax ......................................................                   311                  524
   Net unrealized loss on securities available for sale...................                 2,365
   Other .................................................................                   255                  222
                                                                                         -------              -------
       Total assets ......................................................                19,015               12,891
                                                                                         -------              -------
Liabilities:
   Differences in depreciation methods ...................................                 3,450                3,469
   Differences in accounting for loans and securities ....................                 6,505                8,181
   Differences in accounting for loan fees ...............................                   613                  628
   Differences in accounting for pensions
     and other employee benefits .........................................                                        339
   Net unrealized gain on securities available for sale...................                                      2,220
   Other .................................................................                 2,575                1,317
                                                                                         -------              -------
       Total liabilities .................................................                13,143               16,154
                                                                                         -------              -------
       Net deferred tax asset (liability) ................................               $ 5,872              $(3,263)
                                                                                         =======              =======

NOTE 13

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 Banks use 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:

                              2005               2004
                            --------           --------
Commitments
to extend credit            $574,384           $540,087

Standby letters
of credit                     30,410             22,024

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 Banks evaluate each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Banks upon extension of credit, is based on management's credit
evaluation. Collateral held varies, but may

                                       38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 13

COMMITMENTS AND CONTINGENT LIABILITIES continued

include accounts receivable, inventory, property and equipment, and
income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Banks 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.

NOTE 14

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.
At December 31, 2005, First National and Frances Slocum had no retained net
profits available for 2006 dividends to the Corporation. The amount at December
31, 2005, available for 2006 dividends from First Merchants, Madison, First
United, United Communities, Decatur, Lafayette, Commerce National and MTC to the
Corporation totaled $3,690,000, $5,135,000, $1,102,000, $2,484,000, $183,000,
$1,190,000, $2,439,000 and $837,000, respectively.

Total stockholders' equity for all subsidiaries at December 31, 2005, was
$417,712,000, of which $400,652,000 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.

On August 15, 2003 and August 13, 2002, the Board of Directors of the
Corporation declared a five percent (5%) stock dividend on its outstanding
common shares. The new shares were distributed on September 12, 2003 and
September 13, 2002, to holders of record on August 29, 2003 and August 30, 2002,
respectively.

                                       39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 15

REGULATORY CAPITAL

The Corporation and Banks 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, 2005, 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 Corporation and Banks
as well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Banks 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. There have been no conditions or events since that notification
that management believes have changed this categorization.

                                       40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 15

REGULATORY CAPITAL continued

Actual and required capital amounts and ratios are listed below.

                                                                  2005                                        2004
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                       REQUIRED FOR                                REQUIRED FOR
                                                     ACTUAL        ADEQUATE CAPITAL (1)          ACTUAL        ADEQUATE CAPITAL (1)
                                                AMOUNT      RATIO    AMOUNT      RATIO      AMOUNT      RATIO    AMOUNT      RATIO
===================================================================================================================================
                                                                                                     
December 31
Total Capital (1)(2)(to risk-weighted assets)
   Consolidated ......................        $285,823     11.72%  $195,449      8.00%    $275,786     11.57%  $190,736      8.00%
   First Merchants ...................          69,691     11.93     46,747      8.00       68,064     11.47     47,474      8.00
   Madison ...........................          27,386     11.82     18,542      8.00       25,496     11.36     17,962      8.00
   First United ......................           7,988     11.09      5,761      8.00        7,703     11.86      5,196      8.00
   Randolph County ...................                                                       8,847     11.58      6,111      8.00
   Union County ......................                                                      16,293     12.00     10,858      8.00
   United Communities ................          26,057     11.66     17,872      8.00
   First National ....................          10,243     11.29      7,260      8.00       10,198     11.42      7,146      8.00
   Decatur ...........................          11,597     11.75      7,895      8.00       11,419     11.62      7,862      8.00
   Frances Slocum ....................          18,907     13.52     11,188      8.00       17,491     12.93     10,825      8.00
   Lafayette .........................          74,089     11.49     51,568      8.00       71,962     11.35     50,701      8.00
   Commerce National .................          42,025     11.11     30,539      8.00       36,829     10.70     27,532      8.00

Tier I Capital (1)(2)(to risk-weighted assets)
   Consolidated ......................        $235,635      9.66%  $ 97,725      4.00%    $228,234      9.57%  $ 95,368      4.00%
   First Merchants ...................          63,550     10.88     23,374      4.00       62,310     10.50     23,737      4.00
   Madison ...........................          25,115     10.84      9,271      4.00       23,671     10.54      8,981      4.00
   First United ......................           7,237     10.05      2,880      4.00        7,100     10.93      2,598      4.00
   Randolph County ...................                                                       7,998     10.47      3,055      4.00
   Union County ......................                                                      14,596     10.75      5,429      4.00
   United Communities ................          23,711     10.61      8,936      4.00
   First National ....................           9,489     10.46      3,630      4.00        9,322     10.44      3,573      4.00
   Decatur ...........................          10,808     10.95      3,948      4.00       10,635     10.82      3,931      4.00
   Frances Slocum.....................          17,152     12.27      5,594      4.00       15,793     11.67      5,412      4.00
   Lafayette .........................          67,795     10.52     25,784      4.00       67,028     10.58     25,350      4.00
   Commerce National .................          32,350      8.55     15,270      4.00       27,648      8.03     13,766      4.00

Tier I Capital (1)(2)(to average assets)
   Consolidated ......................        $235,635      7.70%  $122,396      4.00%    $228,234      7.50%  $121,711      4.00%
   First Merchants ...................          63,550      8.28     30,701      4.00       62,310      7.78     32,024      4.00
   Madison ...........................          25,115      9.38     10,716      4.00       23,671      9.01     10,510      4.00
   First United ......................           7,237      7.83      3,696      4.00        7,100      7.68      3,700      4.00
   Randolph County ...................                                                       7,998      8.42      3,799      4.00
   Union County ......................                                                      14,596      7.47      7,814      4.00
   United Communities ................          23,711      7.93     11,953      4.00
   First National ....................           9,489      8.20      4,630      4.00        9,322      7.99      4,664      4.00
   Decatur ...........................          10,808      8.47      5,104      4.00       10,635      7.96      5,342      4.00
   Frances Slocum.....................          17,152      9.96      6,886      4.00       15,793      9.58      6,593      4.00
   Lafayette .........................          67,795      7.86     34,484      4.00       67,028      7.94     33,747      4.00
   Commerce National .................          32,350      7.41     17,641      4.00       27,648      7.01     15,785      4.00

(1)   As defined by regulatory agencies

(2)   Effective January 1, 2005, The Union County National Bank ("Union County")
      was merged into The Randolph County Bank, N.A. ("Randolph County") and the
      name of the continuing institution is United Communities National Bank
      ("United Communities").

NOTE 16

EMPLOYEE BENEFIT PLANS

The Corporation's defined-benefit pension plans cover substantially all 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.

                                       41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 16

EMPLOYEE BENEFIT PLANS continued

The table below sets forth the plans' funded status and amounts recognized in
the consolidated balance sheets at December 31, using measurement dates of
September 30, 2005 and 2004.

                                                               December 31
                                                            2005         2004
===============================================================================
Change in benefit obligation
     Benefit obligation at beginning of year .........    $ 50,358     $ 45,579
     Service cost ....................................         578        1,920
     Interest cost ...................................       2,633        2,789
     Actuarial (gain) loss ...........................        (677)       1,917
     Benefits paid ...................................      (2,116)      (1,847)
                                                          --------     --------
     Benefit obligation at end of year ...............      50,776       50,358
                                                          --------     --------
Change in plan assets
     Fair value of plan assets at beginning of year ..      39,027       33,940
     Actual return on plan assets ....................       2,978        3,080
     Benefits paid ...................................      (2,116)      (1,847)
     Employer contributions ..........................          24        3,854
                                                          --------     --------
     Fair value of plan assets at end of year ........      39,913       39,027
                                                          --------     --------
     Unfunded status .................................     (10,863)     (11,331)
     Unrecognized net actuarial loss .................      10,268       10,944
     Unrecognized prior service cost .................          62        1,697
     Unrecognized transition asset ...................                      (27)
                                                          --------     --------
     Prepaid benefit cost (liability) ................        (533)       1,283
     Additional pension liability ....................      (8,199)      (5,416)
                                                          --------     --------
     Net minimum liability ...........................    $ (8,732)    $ (4,133)
                                                          ========     ========

Amounts recognized in the balance sheets consist of:
     Prepaid benefit cost (liability) ................    $   (533)    $  1,283
     Additional pension liability ....................      (8,199)      (5,416)
     Intangible asset ................................          62        1,697
     Deferred taxes ..................................       3,255        1,487
     Accumulated other comprehensive loss ............       4,882        2,232
                                                          --------     --------
Net amount recognized ................................    $   (533)    $  1,283
                                                          ========     ========

In January 2005, the Board of Directors of the Corporation approved the
curtailment of the accumulation of defined benefits for future services provided
by certain participants in the First Merchants Corporation Retirement Pension
Plan (the "Plan"). Employees of the Corporation and certain of its subsidiaries
who are participants in the Plan were notified that, on and after March 1, 2005,
no additional pension benefits will be earned by employees who have not both
attained the age of fifty-five (55) and accrued at least ten (10) years of
"Vesting Service". As a result of this action, the Corporation incurred a
$1,630,000 pension curtailment loss to record previously unrecognized prior
service costs in accordance with SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Plans and for Termination
Benefits." This loss was recognized and recorded by the Corporation in 2005.

At December 31, 2005 and 2004, the plans' accumulated benefit obligation totaled
$48,646,000 and $43,161,000, respectively. Projected future benefit payments in
years ending December 31 are as follows:

2006  ................................        $ 2,068
2007  ................................          2,200
2008  ................................          2,269
2009  ................................          2,396
2010  ................................          2,560
2011 to 2015 .........................         15,431

                                       42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 16

EMPLOYEE BENEFIT PLANS continued

The Corporation's planned and required contributions to its defined-benefit
pension plans in 2006 total $467,000. The Corporation's required contributions
paid to its defined-benefit pension plans in 2005 totaled $24,000.

At September 30, 2005 the plans' assets were allocated 66 percent to equity
securities, 32 percent to debt securities, and 2 percent to other plan assets.
The targeted allocation for those categories of plan assets are 45 to 75
percent, 25 to 55 percent, and 0 to 10 percent, respectively.

At September 30, 2004 the plans' assets were allocated 68 percent to equity
securities, 28 percent to debt securities, and 4 percent to real estate and
other plan assets. The targeted allocation for those categories of plan assets
are 40 to 80 percent, 20 to 60 percent and 1 to 15 percent, respectively.

                                                                  2005       2004       2003
==============================================================================================
                                                                             
Pension cost includes the following components:
   Service cost-benefits earned during the year ............    $   578    $ 1,920    $ 1,564
   Interest cost on projected benefit obligation ...........      2,633      2,789      2,617
   Actual return on plan assets ............................     (2,978)    (3,080)    (3,876)
   Net amortization and deferral ...........................        (23)       614      1,617
   Pension curtailment loss ................................      1,630
                                                                -------    -------    -------
      Total pension cost  ..................................    $ 1,840    $ 2,243    $ 1,922
                                                                =======    =======    =======

                                                                  2005       2004       2003
=============================================================================================
                                                                               
Assumptions used in the accounting as of December 31 were:
      Discount rate ........................................      5.50%      6.00%      6.25%
      Rate of increase in compensation .....................      4.00%      4.00%      4.00%
      Expected long-term rate of return on assets ..........      7.50%      8.00%      8.00%

The above assumptions used to measure benefit obligations as of the plan's
measurement date were the same assumptions used to determine the net benefit
cost.

At September 30, 2005 and 2004, 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.

                                       43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 16

EMPLOYEE BENEFIT PLANS continued

At December 31, 2005, the maturities of the plans' debt securities ranged from
135 days to 12.4 years, with a weighted average maturity of 3.1 years. At
December 31, 2004, the maturities of the plans' debt securities ranged from 14
days to 6.2 years, with a weighted average maturity of 2.9 years.

The 1994 Stock Option Plan reserved 546,978 shares of Corporation common stock
for the granting of options to certain employees and non-employee directors. The
exercise price of the shares may not be less than the fair market value of the
shares upon the grant of the option. Options become 100 percent vested when
granted and are fully exercisable generally six months after the date of the
grant, for a period of ten years. No shares remain available for grant under the
1994 Plan.

The 1999 Long-term Equity Incentive Plan, which became effective as of July 1,
1999, authorizes the Corporation to grant stock-based incentive awards,
including stock options, to eligible employees of the Corporation or its
subsidiaries. The aggregate number of shares that are available for grants under
that Plan in any calendar year is equal to the sum of: (a) 1 percent of the
number of common shares of the Corporation outstanding as of the last day of the
preceding calendar year; plus (b) the number of shares that were available for
grants, but not granted, under the Plan in any previous year; but in no event
will the number of shares available for grants in any calendar year exceed 1.5
percent of the number of common shares of the Corporation outstanding as of the
last day of the preceding calendar year. Options, which have a ten year life,
become 100 percent vested ranging from three months to two years and are fully
exercisable when vested. The 1999 Long-term Equity Incentive Plan will expire in
2009.

The table below is a summary of the status of the Corporation's stock option
plans and changes in those plans as of and for the years ended December 31,
2005, 2004 and 2003.

Year Ended December 31,                                      2005                       2004                         2003
- ----------------------------------------------------------------------------------------------------------------------------------

                                                       WEIGHTED-AVERAGE           WEIGHTED-AVERAGE             WEIGHTED-AVERAGE
      OPTIONS                                     SHARES    EXERCISE PRICE    SHARES    EXERCISE PRICE    SHARES    EXERCISE PRICE
==================================================================================================================================
                                                                                                       
Outstanding, beginning of year .............     1,019,643      $ 22.00       951,509       $ 20.71       842,583        $ 19.89
Granted ....................................       225,970        26.58       185,170         25.60       190,714          23.46
Exercised ..................................       (96,620)       16.59       (95,899)        15.48       (69,672)         16.93
Cancelled ..................................       (44,206)       25.32       (21,137)        25.36       (12,116)         22.27
                                                 ---------                  ---------                     -------
Outstanding, end of year ...................     1,104,787      $ 23.28     1,019,643       $ 22.00       951,509        $ 20.71
                                                 =========                  =========                     =======
Options exercisable at year end ............     1,061,372                    693,560                     653,040
Weighted-average fair value of
   options granted during the year .........                    $  6.93                     $  6.98                      $  5.99

As of December 31, 2005, other information by exercise price range for option  s
outstanding and exercisable is as follows:

                                     OUTSTANDING                                                     EXERCISABLE
- ---------------------------------------------------------------------------------         -------------------------------
  EXERCISE PRICE         NUMBER     WEIGHTED-AVERAGE        WEIGHTED-AVERAGE                NUMBER       WEIGHTED-AVERAGE
      RANGE             OF SHARES    EXERCISE PRICE    REMAINING CONTRACTUAL LIFE         OF SHARES       EXERCISE PRICE
=========================================================================================================================
                                                                                                 
$ 13.89 - $21.85         369,851         $18.52                 3.6 years                   369,507             $18.52

  22.22 -  25.60         380,952          24.67                 7.2 years                   347,917              24.60

  25.90 -  26.93         353,984          26.74                 8.3 years                   343,948              26.77
                       ---------                                                          ---------
                       1,104,787         $23.28                 6.3 years                 1,061,372             $23.19
                       =========                                                          =========

                                       44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 16

EMPLOYEE BENEFIT PLANS continued

Although the Corporation has elected to follow APB No. 25, SFAS No. 123 requires
pro forma disclosures of net income and earnings per share as if the Corporation
had accounted for its employee stock options under that Statement.

The fair value of each option grant was estimated on the grant date using an
option-pricing model with the following assumptions:

                                        2005           2004           2003
                                        ----           ----           ----

Risk-free interest rates........       4.05%          4.57%          3.55%

Dividend yields.................       3.56%          3.64%          3.65%

Volatility factors of expected
    market price common stock...      30.20%         30.89%         31.29%

Weighted-average expected
    life of the options ........       8.50 years     8.50 years     8.50 years

Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this statement are shown in Note 1 to the consolidated financial statements.

The First Merchants Corporation 2004 Employee Stock Purchase Plan provides
eligible employees of the Corporation and its subsidiaries an opportunity to
purchase shares of common stock of the Corporation through annual offerings
financed by payroll deductions. A total of 400,000 shares of the Corporation's
common stock were reserved for issuance pursuant to the plan. The price of the
stock to be paid by the employees is determined by the Corporation's
compensation committee, but may not be less than 85 percent of the lesser of the
fair market value of the Corporation's common stock at the beginning or at the
end of the offering period. Common stock purchases are made annually and are
paid through advance payroll deductions of up to 20 percent of eligible
compensation. At December 31, 2005, $470,000 has been withheld from
compensation, plus interest, toward the purchase of shares after June 30, 2006,
the end of the annual offering period. Participants under the plan purchased
43,238 shares in 2005 at $21.12 per share. The fair value on the purchase date
was $24.85.

The Corporation's Employee Stock Purchase Plan is accounted for in accordance
with APB No. 25. Although the Corporation has elected to follow APB No. 25, SFAS
No. 123 requires pro forma disclosures of net income and earnings per share as
if the Corporation had accounted for the purchased shares under that statement.
The pro forma disclosures are included in Note 1 to the consolidated financial
statements and were estimated using an option pricing model with the following
assumptions for 2005, 2004 and 2003, respectively: dividend yield of 3.56, 3.64
and 3.65, percent; an expected life of one year for all years; expected
volatility of 30.20, 30.89 and 31.29 percent; and risk-free interest rates of
4.05, 4.57 and 3.55 percent. The fair value of those purchase rights granted in
2005, 2004 and 2003 was $4.90, $6.38 and $4.81 respectively.

                                       45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 16

EMPLOYEE BENEFIT PLANS continued

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. Full vesting occurs after 5 years of service. The Corporations' expense
for the Savings Plan was $2,052,000 for 2005, $660,000 for 2004, and $600,000
for 2003.

The Corporation maintains supplemental executive retirement and other
nonqualified retirement plans for the benefit of certain directors and officers.
Under the plans, the Corporation agrees to pay retirement benefits that are
actuarially determined based upon plan participants' compensation amounts and
years of service. Accrued benefits payable totaled $3,307,000 and $3,004,000 at
December 31, 2005 and 2004. Benefit plan expense was $571,000, $615,000 and
$485,000 for 2005, 2004 and 2003.

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 most of the premiums due for their coverage, with amounts paid by retirees
ranging from 70 to 100 percent of the premiums payable. The accrued benefits
payable under the plans totaled $1,084,000 and $1,022,000 at December 31, 2005
and 2004. Post-retirement plan expense totaled $120,000, $202,000 and $240,000
for the years ending December 31, 2005, 2004 and 2003.

NOTE 17

NET INCOME PER SHARE

====================================================================================================================================
Year Ended December 31,                           2005                           2004                           2003
- ------------------------------------------------------------------------------------------------------------------------------------
                                       WEIGHTED-AVERAGE    PER SHARE   WEIGHTED-AVERAGE    PER SHARE   WEIGHTED-AVERAGE   PER SHARE
                                     INCOME       SHARES    AMOUNT     INCOME    SHARES     AMOUNT    INCOME     SHARES     AMOUNT
====================================================================================================================================
                                                                                                  
Basic net income per share:
  Net income available  to
    common stockholders ..........   $30,239    18,484,832   $1.64    $29,411  18,540,451   $1.59    $27,571    18,233,855   $1.51
                                                             =====                          =====                            =====
Effect of dilutive stock options..                 110,863                        126,826                          137,575
                                     -------    ----------            -------  ----------            -------    ----------
Diluted net income per share:
  Net income available to
    common stockholders
    and assumed conversions ......   $30,239    18,595,695   $1.63    $29,411  18,667,277   $1.58    $27,571    18,371,430   $1.50
                                     =======    ==========   =====    =======  ==========   =====    =======    ==========   =====

                                       46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 17

NET INCOME PER SHARE continued

Options to purchase 214,840, 320,661 and 233,658 shares of common stock with
weighted average exercise prices of $26.81, $24.66 and $24.01 at December 31,
2005, 2004 and 2003 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.

NOTE 18

FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:

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 values are based on quoted market prices.

MORTGAGE LOANS HELD FOR SALE The fair value of mortgages held for sale
approximates carrying values.

LOANS For both short-term loans and variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values. The fair value for other loans is estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.

FEDERAL RESERVE AND FEDERAL HOME LOAN BANK STOCK The fair value of FRB and FHLB
stock is based on the price at which it may be resold to the FRB and FHLB.

INTEREST RECEIVABLE/PAYABLE The fair values of interest receivable/payable
approximate carrying values.

CASH VALUE OF LIFE INSURANCE The fair value of cash value of life insurance
approximates carrying value.

DEPOSITS The fair values of noninterest-bearing demand accounts,
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 on certificates 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, except for short-term
and

                                       47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 18

FAIR VALUES OF FINANCIAL INSTRUMENTS continued

adjustable rate borrowing arrangements. At December 31, the fair value for these
instruments approximates carrying value.

OFF-BALANCE SHEET COMMITMENTS

Loan commitments and letters-of-credit generally have short-term, variable-rate
features and contain clauses which limit the Banks' 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.

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

                                                                                   2005                             2004
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                      CARRYING            FAIR         CARRYING            FAIR
                                                                       AMOUNT             VALUE         AMOUNT             VALUE
===================================================================================================================================
                                                                                                            
Assets at December 31:
   Cash and cash equivalents ..................................      $   70,417        $   70,417     $   69,960        $   69,960
   Interest-bearing time deposits .............................           8,748             8,748          9,343             9,343
   Investment securities available for sale ...................         422,627           422,627        416,177           416,177
   Investment securities held to maturity .....................          11,639            11,510          5,358             5,520
   Mortgage loans held for sale ...............................           4,910             4,910          3,367             3,367
   Loans ......................................................       2,432,239         2,511,784      2,405,503         2,415,924
   FRB and FHLB stock .........................................          23,200            23,200         22,858            22,858
   Interest receivable ........................................          19,690            19,690         17,318            17,318
   Cash value of life insurance ...............................          43,579            43,579         42,061            42,061

Liabilities at December 31:
   Deposits ...................................................       2,382,576         2,250,494      2,408,150         2,404,595
   Borrowings:
       Federal funds purchased ................................          50,000            50,000         32,550            32,550
       Securities sold under repurchase agreements ............         106,415           106,415         87,472            85,136
       FHLB advances ..........................................         247,865           248,303        223,663           234,247
       Subordinated debentures, revolving credit
         lines and term loans .................................         103,956           115,822         97,206           105,139
   Interest payable ...........................................           5,874             5,874          4,411             4,411

NOTE 19

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:

CONDENSED BALANCE SHEETS

                                                                December 31,
                                                              2005         2004
================================================================================
Assets
   Cash ..............................................     $  2,749     $    987
   Investment securities available for sale...........        3,500        3,500
   Investment in subsidiaries ........................      404,974      401,721
   Goodwill ..........................................          448          448
   Other assets ......................................       12,259       10,039
                                                           --------     --------
      Total assets ...................................     $423,930     $416,695
                                                           ========     ========
Liabilities
   Borrowings ........................................     $103,956     $ 97,206
   Other liabilities .................................        6,578        4,886
                                                           --------     --------
      Total liabilities ..............................      110,534      102,092

Stockholders' equity .................................      313,396      314,603
                                                           --------     --------
      Total liabilities and stockholders' equity .....     $423,930     $416,695
                                                           ========     ========

                                       48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 19

CONDENSED FINANCIAL INFORMATION (parent company only) continued

CONDENSED STATEMENTS OF INCOME

                                                                                                      December 31,
                                                                                            2005            2004            2003
===================================================================================================================================
                                                                                                                
Income
  Dividends from subsidiaries ................................................           $ 30,930        $ 28,983        $ 45,445
  Administrative services fees from subsidiaries..............................             13,823          13,767          10,849
  Other income ...............................................................                644             375             472
                                                                                         --------        --------        --------
     Total income ............................................................             45,397          43,125          56,766
                                                                                         --------        --------        --------
Expenses
  Amortization of core deposit intangibles
   and fair value adjustments ................................................                 11              11              26
  Interest expense............................................................              7,432           6,785           6,463
  Salaries and employee benefits..............................................             12,500          11,240           9,531
  Net occupancy expenses......................................................              1,294           1,481           1,869
  Equipment expenses..........................................................              3,418           2,918           1,955
  Telephone expenses..........................................................              1,181           1,383           1,571
  Postage and courier expense ................................................              1,528           1,467             970
  Other expenses..............................................................              2,394           1,761           2,760
                                                                                         --------        --------        --------
     Total expenses ..........................................................             29,758          27,046          25,145
                                                                                         --------        --------        --------
Income before income tax benefit and equity in
undistributed income of subsidiaries .........................................             15,639          16,079          31,621
     Income tax benefit ......................................................              5,404           4,557           5,577
                                                                                         --------        --------        --------
Income before equity in undistributed income of subsidiaries .................             21,043          20,636          37,198

   Equity in undistributed (distributions in excess of)
    income of subsidiaries ...................................................              9,196           8,775          (9,627)
                                                                                         --------        --------        --------
Net Income ...................................................................           $ 30,239        $ 29,411        $ 27,571
                                                                                         ========        ========        ========

CONDENSED STATEMENTS OF CASH FLOWS

                                                                                  Year Ended December 31,
=====================================================================================================================
                                                                             2005             2004             2003
=====================================================================================================================
                                                                                                   
Operating activities:
   Net income ........................................................    $ 30,239         $ 29,411         $ 27,571
   Adjustments to reconcile net income to net cash
     provided by operating activities:
     Amortization ....................................................          11               11               26
     Distributions in excess of (equity in undistributed)
       income of subsidiaries ............... ........................      (9,196)          (8,775)          (9,627)
     Net change in:
        Other assets .................................................      (2,220)            (535)           2,406
        Other liabilities ............................................       1,680              461               (6)
                                                                          --------         --------         --------
           Net cash provided by operating activities .................      20,514           20,573           20,370
                                                                          --------         --------         --------
Investing activities - Investment in subsidiaries ....................      (2,884)          (2,289)         (25,858)
                                                                          --------         --------         --------
           Net cash used by investing activities .....................      (2,884)          (2,289)         (25,858)
                                                                          --------         --------         --------
Financing activities:
   Cash dividends ....................................................     (16,981)         (17,048)         (16,557)
   Borrowings.........................................................       9,833            7,251           47,594
   Repayment of borrowings ...........................................      (3,083)          (9,594)         (29,550)
   Stock issued under employee benefit plans .........................         914              903              819
   Stock issued under dividend reinvestment
     and stock purchase plan .........................................         933            1,278            1,339
   Stock options exercised ...........................................       2,174            1,404            1,191
   Stock redeemed ....................................................      (9,658)          (4,726)            (489)
   Cash paid in lieu of issuing fractional shares ....................                                           (28)
                                                                          --------         --------         --------
           Net cash provided (used) by financing activities ..........     (15,868)         (20,532)           4,319
                                                                          --------         --------         --------
Net change in cash ...................................................       1,762           (2,248)          (1,169)
Cash, beginning of year ..............................................         987            3,235            4,404
                                                                          --------         --------         --------
Cash, end of year ....................................................    $  2,749         $    987         $  3,235
                                                                          ========         ========         ========

                                       49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

NOTE 20

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table sets forth certain quarterly results for the years ended
December 31, 2005 and 2004:

- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                   AVERAGE SHARES OUTSTANDING   NET INCOME PER SHARE
   QUARTER            INTEREST    INTEREST   NET INTEREST PROVISION FOR     NET    --------------------------   --------------------
    ENDED              INCOME      EXPENSE      INCOME     LOAN LOSSES    INCOME      BASIC        DILUTED       BASIC     DILUTED
                                                                                                 
2005:
March ............   $   41,315   $  14,373  $    26,942     $  2,667    $  6,567    18,559,664    18,696,526     $ .35     $ .35
June .............       43,513      15,592       27,921        1,948       7,921    18,435,677    18,536,137       .43       .43
September.........       45,567      17,427       28,140        1,794       8,220    18,478,154    18,590,034       .45       .44
December..........       46,814      18,688       28,126        1,945       7,531    18,458,990    18,557,622       .41       .41
                     ----------   ---------- -----------     --------    --------                                 -----     -----
                     $  177,209   $  66,080  $   111,129     $  8,354    $ 30,239    18,484,832    18,595,695     $1.64     $1.63
                     ==========   ========== ===========     ========    ========                                 =====     =====
2004:
March ............   $   38,224   $  12,592  $    25,632     $  1,372    $  6,935    18,518,282    18,645,571     $ .37     $ .37
June .............       38,099      12,252       25,847        1,720       7,355    18,511,190    18,633,301       .40       .40
September.........       39,801      13,009       26,792        1,380       7,653    18,548,041    18,658,459       .41       .41
December..........       40,850      13,732       27,118        1,233       7,468    18,583,492    18,720,802       .41       .40
                     ----------   ---------- -----------     --------    --------                                 -----     -----
                     $  156,974   $  51,585  $   105,389     $  5,705    $ 29,411    18,540,451    18,667,277     $1.59     $1.58
                     ==========   ========== ===========     ========    ========                                 =====     =====

NOTE 21

ACCOUNTING MATTERS

Share-Based Compensation
In December, 2004, FASB issued an amendment to SFAS 123 (SFAS 123R), which
eliminates the ability to account for share-based compensation transactions
using Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and generally requires that such transactions be accounted for using
a fair value-based method. On April 14, 2005, the SEC amended the compliance
date for SFAS 123R from the beginning of the first interim or annual period that
begins after June 15, 2005 to the next fiscal year beginning after June 15,
2005. The Corporation adopted SFAS 123R as of January 1, 2006. The effect on the
Corporation's results of operations depends on the level of future option grants
and the calculation of the fair value of the options granted at such future
date, as well as the vesting periods provided and possible performance condition
requirements, and so cannot currently be predicted for future awards.

SFAS 123R applies to all awards granted after the effective date and to awards
modified, repurchased, or cancelled after that date. The statement establishes
standards for accounting for share-based payment transactions. Share-based
payment transactions are those in which an entity exchanges its equity
instruments for goods or services or in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of the entity's
equity instruments or that may be settled by the issuance of these equity
instruments. SFAS 123R covers a wide range of share-based compensation
arrangements including stock options, restricted share plans, performance-based
awards, share appreciation rights and employee stock purchase plans.

As of January 1, 2006, the Corporation applied SFAS 123R using the modified
prospective method. This method requires that compensation expense be recorded
for all unvested stock options and restricted stock awards over the requisite
service period (generally the vesting schedule). For liability-classified
awards, the

                                       50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)

Note 21

ACCOUNTING MATTERS continued

Corporation measures the cost of employee services received in exchange for an
award based on its current fair value; the fair value is remeasured subsequently
at each reporting date through the settlement date, and changes in fair value
are recognized as compensation cost. For equity-classified awards, the grant
date fair value is recognized in earnings over the requisite service period.

Earnings Per Share
The FASB has issued a proposed amendment to SFAS No. 128, Earnings Per Share, to
clarify guidance for mandatorily convertible instruments, the treasury stock
method, contingently issuable shares, and contracts that may be settled in cash
of shares. The primary impact on the Corporation of the proposed Statement is
the change to the treasury stock method for year-to-date diluted earnings per
share.

Currently SFAS No. 128 requires that the number of incremental shares included
in the denominator be determined by computing a year-to-date weighted average of
the number of incremental shares included in each quarterly diluted EPS
computation. Under this proposed Statement, the number of incremental shares
included in year-to-date diluted earnings per share would be computed using the
average market price of common shares for the year-to-date period, independent
of the quarterly computations. This computational change is not expected to have
a significant impact on the Corporation's diluted earnings per share.

                                       51

ANNUAL MEETING, STOCK PRICE AND DIVIDEND INFORMATION

The 2006 Annual Meeting of Stockholders
of First Merchants Corporation
will be held...

Thursday, April 13, 2006 at 3:30 p.m.

Horizon Convention Center
401 South High Street
Muncie, Indiana

STOCK INFORMATION

                                                         PRICE PER SHARE
    QUARTER                                      HIGH                              LOW                  DIVIDENDS DECLARED(1)
================================================================================================================================
                                         2005             2004          2005             2004         2005             2004
                                      --------------------------     ---------------------------    ---------------------------
                                                                                                   
First Quarter  .............          $  28.57         $  26.33      $   25.09        $   23.50     $    .23         $    .23
Second Quarter .............             26.06            25.88          23.05            22.20          .23              .23
Third Quarter ..............             27.30            25.77          24.75            22.96          .23              .23
Fourth Quarter .............             26.89            29.19          23.98            24.15          .23              .23

(1)   The Liquidity section of Management's Discussion & Analysis of Financial
      Condition and Results of Operations and Note 14 to Consolidated Financial
      Statements include discussions regarding dividend restrictions from the
      bank subsidiaries to the Corporation.

The table above lists per share prices and dividend payments during 2005 and
2004. Prices are as reported by the National Association of Securities Dealers
Automated Quotation - National Market System.

Numbers rounded to nearest cent when applicable.

                                       52

COMMON STOCK LISTING

COMMON STOCK LISTING

First Merchants Corporation common stock is traded over-the-counter on the
NASDAQ National Market System. Quotations are carried in many daily papers. The
NASDAQ symbol is FRME (Cusip #320817-10-9). At the close of business on January
31, 2006, the number of shares outstanding was 18,420,077. There were 6,061
stockholders of record on that date.

General Stockholder Inquiries

Stockholders and interested investors may obtain information about the
Corporation upon written request or by calling:

Mr. Brian Edwards
Shareholder Relations Officer
First Merchants Corporation
P. O. Box 792
Muncie, Indiana 47308-0792
765-741-7278
800-262-4261 Ext. 7278

Stock Transfer Agent and Registrar

American Stock Transfer & Trust Company
59 Maiden Lane, 1st Floor
New York, NY 10038

                                       53

FORM 10-K, FINANCIAL INFORMATION AND CODE OF ETHICS

FORM 10-K, FINANCIAL INFORMATION AND CODE OF ETHICS

The Corporation, upon request and without charge, will furnish stockholders,
security analysts and investors a copy of Form 10-K filed with the Securities
and Exchange Commission.

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

The Corporation has adopted a Code of Ethics that applies to its Chief Executive
Officer, Chief Operating Officer, Chief Financial Officer, Controller and
Treasurer. It is part of the Corporation's Code of Business Conduct, which
applies to all employees and directors of the Corporation and its affiliates. A
copy of the Code of Ethics may be obtained, free of charge, by writing to First
Merchants Corporation at 200 East Jackson Street, Muncie, IN 47305. In addition,
the Code of Ethics is maintained on the Corporation's web site, which can be
accessed at http://www.firstmerchants.com.

Please contact:
Mr. Mark Hardwick
Executive Vice President
and Chief Financial Officer

First Merchants Corporation
P. O. Box 792
Muncie, Indiana 47308-0792

765-751-1857
1-800-262-4261 Ext. 1857

                                       54

                                  EXHIBIT-21
                         SUBSIDIARIES OF THE REGISTRANT

EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT
- --------------------------------------------------------------------------------

                                                          State of
Name                                                    Incorporation
- ----                                                    -------------

First Merchants Bank, National Association (also doing
  business as First Merchants Bank of Hamilton County)......U.S.

The Madison Community Bank, National Association............U.S.

United Communities National Bank............................U.S.

The First National Bank of Portland.........................U.S.

Decatur Bank & Trust Company, National Association..........U.S.

Frances Slocum Bank & Trust Company, National Association...U.S.

Lafayette Bank and Trust Company, National Association......U.S.

Commerce National Bank......................................U.S.

First Merchants Capital Trust I.........................Delaware

First Merchants Insurance Services, Inc..................Indiana

First Merchants Reinsurance Co. Ltd.....................Providencials Turkes and
                                                        Caicos, Island

Indiana Title Insurance Company..........................Indiana

Indiana Title Insurance Company, LLC.....................Indiana

FMB Portfolio Management, Inc...........................Delaware

UCNB Portfolio Management, Inc..........................Delaware

Wabash Valley Investments, Inc............................Nevada

Wabash Valley, LLC........................................Nevada

Wabash Valley Holdings, Inc...............................Nevada

Merchants Trust Company, National Association...............U.S.

CNBC Statutory Trust I...............................Connecticut

                                   EXHIBIT-23
            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

EXHIBIT 23 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the  incorporation by reference in this Annual Report on Form 10-K
and the registration  statements on Form S-8, (File No.s 033-54065,  333-116074,
333-111374,  333-50484,  333-80119 and 333-80117) of First Merchants Corporation
(the  "Corporation")  of our reports dated January 27, 2006, on the consolidated
financial  statements of the  Corporation as of year ended December 31, 2005 and
on our audit of internal control over financial  reporting of the Corporation as
of December 31, 2005,  which  reports are included in this Annual Report on Form
10-K.

/s/ BKD, LLP

Indianapolis, Indiana
March 13, 2006

                                   EXHIBIT-24
                            LIMITED POWER OF ATTORNEY

EXHIBIT 24--LIMITED POWER OF ATTORNEY

KNOW ALL MEN BY THESE  PRESENTS that the  undersigned  directors and officers of
First  Merchants  Corporation,  an Indiana  corporation,  hereby  constitute and
appoint Mark K. Hardwick, the true and lawful agent and attorney-in-fact  of the
undersigned with full power and authority in said agent and  attorney-in-fact to
sign for the undersigned and in their respective names as directors and officers
of the  Corporation  the  Form  10-K of the  Corporation  to be  filed  with the
Securities  and Exchange  Commission,  Washington,  D.C.,  under the  Securities
Exchange Act of 1934,  as amended,  and to sign any amendment to such Form 10-K,
hereby   ratifying   and   confirming   all  acts   taken  by  such   agent  and
attorney-in-fact, as herein authorized.

Dated: February 14, 2006

/s/ Michael L. Cox                          /s/ James F. Ault
- --------------------------------------      ------------------------------------
    Michael L. Cox  President and               James F. Ault           Director
                    Chief Executive
                    Officer (Principal
                    Executive Officer)

/s/Mark K. Hardwick                         /s/ Richard A. Boehning
- --------------------------------------      ------------------------------------
   Mark K. Hardwick Executive Vice              Richard A. Boehning     Director
                    President and Chief
                    Financial Officer
                    (Principal Financial
                    and Principal
                    Accounting Officer)
                                            /s/ Thomas B. Clark
                                            ------------------------------------
                                                Thomas B. Clark         Director

                                            /s/ Michael L. Cox
                                            ------------------------------------
                                                Michael L. Cox          Director

                                            /s/ Roderick English
                                            ------------------------------------
                                                Roderick English        Director

                                            /s/ Dr. Jo Ann M. Gora
                                            ------------------------------------
                                                Dr. Jo Ann M. Gora      Director

                                            /s/ Barry J. Hudson
                                            ------------------------------------
                                                Barry J. Hudson         Director

                                            /s/ Robert T. Jaffares
                                            ------------------------------------
                                                Robert T. Jeffares      Director

                                            /s/ Thomas D. McAuliffe
                                            ------------------------------------
                                                Thomas D. McAuliffe     Director

                                            /s/ Michael C. Rechin
                                            ------------------------------------
                                                Michael C. Rechin       Director

                                            /s/ Charles E. Schalliol
                                            ------------------------------------
                                                Charles E. Schalliol    Director

                                            /s/ Robert M. Smitson
                                            ------------------------------------
                                                Robert M. Smitson       Director

                                            ------------------------------------
                                                Jean L. Wojtowicz       Director

                                  EXHIBIT-31.1

                           FIRST MERCHANTS CORPORATION

                                   FORM 10-K
                            CERTIFICATION PURSUANT TO
                                 SECTION 302 OF
                         THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION
- -------------

I, Michael L. Cox,  President  and Chief  Executive  Officer of First  Merchants
Corporation, certify that:

1.     I have reviewed this Annual Report on Form 10-K of First Merchants
       Corporation;

2.     Based on my knowledge, this report does not contain any untrue statement
       of a material fact or omit to state a material fact necessary to make the
       statements made, in light of the circumstances under which such
       statements were made, not misleading with respect to the period covered
       by this report;

3.     Based on my knowledge, the financial statements, and other financial
       information included in this report, fairly present in all material
       respects the financial condition, results of operations and cash flows of
       the registrant as of, and for, the periods presented in this report;

4.     The registrant's other certifying officer and I are responsible for
       establishing and maintaining disclosure controls and procedures (as
       defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
       control over financial reporting (as defined in the Exchange Act Rules
       13a-15(f) and 15d-15(f)) for the registrant and have:

       (a) Designed such disclosure controls and procedures, or caused such
           disclosure controls and procedures to be designed under our
           supervision, to ensure that material information relating to the
           registrant, including its consolidated subsidiaries, is made known to
           us by others within those entities, particularly during the period in
           which this report is being prepared;

       (b) Designed such internal control over financial reporting, or caused
           such internal control over financial reporting to be designed under
           our supervision, to provide reasonable assurance regarding the
           reliability of financial reporting and the preparation of financial
           statements for external purposes in accordance with generally
           accepted accounting principles;

       (c) Evaluated the effectiveness of the registrant's disclosure controls
           and procedures and presented in this report our conclusions about the
           effectiveness of the disclosure controls and procedures, as of the
           end of the period covered by this report, based on such evaluation;
           and

       (d) Disclosed in this report any change in the registrant's internal
           control over financial reporting that occurred during the
           registrant's most recent fiscal quarter (the registrant's fourth
           fiscal quarter in the case of an annual report) that has materially
           affected, or is reasonably likely to materially affect, the
           registrant's internal control over financial reporting; and

5.     The registrant's other certifying officer and I have disclosed, based on
       our most recent evaluation of internal control over financial reporting,
       to the registrant's auditors and the audit committee of the registrant's
       board or directors (or persons performing the equivalent functions):

       (a) All significant deficiencies and material weaknesses in the design or
           operation of internal control over financial reporting which are
           reasonably likely to adversely affect the registrant's ability to
           record, process, summarize and report financial information; and

       (b) Any fraud, whether or not material, that involves management or other
           employees who have a significant role in the registrant's internal
           control over financial reporting.

Date:  March 16, 2006              /s/Michael L. Cox
                                   ----------------------------------------
                                      Michael L. Cox
                                      President and Chief Executive Officer
                                      (Principal Executive Officer)

                                  EXHIBIT-31.2

                           FIRST MERCHANTS CORPORATION

                                   FORM 10-K
                            CERTIFICATION PURSUANT TO
                                 SECTION 302 OF
                         THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION
- -------------

I, Mark K. Hardwick,  Senior Vice President and Chief Financial Officer of First
Merchants Corporation, certify that:

1.     I have reviewed this Annual Report on Form 10-K of First Merchants
       Corporation;

2.     Based on my knowledge, this report does not contain any untrue statement
       of a material fact or omit to state a material fact necessary to make the
       statements made, in light of the circumstances under which such
       statements were made, not misleading with respect to the period covered
       by this report;

3.     Based on my knowledge, the financial statements, and other financial
       information included in this report, fairly present in all material
       respects the financial condition, results of operations and cash flows of
       the registrant as of, and for, the periods presented in this report;

4.     The registrant's other certifying officer and I are responsible for
       establishing and maintaining disclosure controls and procedures (as
       defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
       control over financial reporting (as defined in the Exchange Act Rules
       13a-15(f) and 15d-15(f)) for the registrant and have:

       (a) Designed such disclosure controls and procedures, or caused such
           disclosure controls and procedures to be designed under our
           supervision, to ensure that material information relating to the
           registrant, including its consolidated subsidiaries, is made known to
           us by others within those entities, particularly during the period in
           which this report is being prepared;

       (b) Designed such internal control over financial reporting, or caused
           such internal control over financial reporting to be designed under
           our supervision, to provide reasonable assurance regarding the
           reliability of financial reporting and the preparation of financial
           statements for external purposes in accordance with generally
           accepted accounting principles;

       (c) Evaluated the effectiveness of the registrant's disclosure controls
           and procedures and presented in this report our conclusions about the
           effectiveness of the disclosure controls and procedures, as of the
           end of the period covered by this report, based on such evaluation;
           and

       (d) Disclosed in this report any change in the registrant's internal
           control over financial reporting that occurred during the
           registrant's most recent fiscal quarter (the registrant's fourth
           fiscal quarter in the case of an annual report) that has materially
           affected, or is reasonably likely to materially affect, the
           registrant's internal control over financial reporting; and

5.     The registrant's other certifying officer and I have disclosed, based on
       our most recent evaluation of internal control over financial reporting,
       to the registrant's auditors and the audit committee of the registrant's
       board or directors (or persons performing the equivalent functions):

       (a) All significant deficiencies and material weaknesses in the design or
           operation of internal control over financial reporting which are
           reasonably likely to adversely affect the registrant's ability to
           record, process, summarize and report financial information; and

       (b) Any fraud, whether or not material, that involves management or other
           employees who have a significant role in the registrant's internal
           control over financial reporting.

Date:  March 16, 2006              /s/Mark K. Hardwick
                                   ----------------------------------------
                                      Mark K. Hardwick
                                      Executive Vice President and
                                      Chief Financial Officer
                                      (Principal Financial and
                                      Principal Accounting Officer)

                                  EXHIBIT-32

                           CERTIFICATIONS PURSUANT TO
                            18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In  connection  with the  annual  report  of First  Merchants  Corporation  (the
"Corporation")  on Form 10-K for the period  ending  December  31, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"), I
Michael L. Cox,  President and Chief Executive  Officer of the  Corporation,  do
hereby certify,  in accordance with 18 U.S.C.  Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:

        (1) The Report fully complies with the requirements of  section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)); and

        (2) The  information  contained  in  the  Report fairly presents, in all
material  respects,  the  financial  condition  and results of operations of the
Corporation.

Date  March 16, 2006               by /s/ Michael L. Cox
    ---------------------------       -------------------------------------
                                      Michael L. Cox
                                      President and Chief Executive Officer
                                      (Principal Executive Officer)

A  signed  copy of this  written  statement  required  by  Section  906 has been
provided to First Merchants  Corporation and will be retained by First Merchants
Corporation and furnished to the Securities and Exchange Commission or its staff
upon request.

In  connection  with the  annual  report  of First  Merchants  Corporation  (the
"Corporation")  on Form 10-K for the period  ending  December  31, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"), I
Mark K.  Hardwick,  Senior Vice  President  and Chief  Financial  Officer of the
Corporation,  do hereby certify,  in accordance with 18 U.S.C.  Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

        (1) The Report fully  complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)); and

        (2) The  information  contained  in  the  Report fairly presents, in all
material  respects,  the  financial  condition  and results of operations of the
Corporation.

Date  March 16, 2006               by /s/ Mark K. Hardwick
    ---------------------------       -------------------------------------
                                      Mark K. Hardwick
                                      Executive Vice President and
                                      Chief Financial Officer
                                      (Principal Financial and
                                      Principal Accounting Officer)

A  signed  copy of this  written  statement  required  by  Section  906 has been
provided to First Merchants  Corporation and will be retained by First Merchants
Corporation and furnished to the Securities and Exchange Commission or its staff
upon request.

                                  EXHIBIT-99.1
             INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S REPORT
          FOR FIRST MERCHANTS CORPORATION EMPLOYEE STOCK PURCHASE PLAN

EXHIBIT 99.1--FINANCIAL STATEMENTS AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING
              FIRM'S REPORT FOR FIRST MERCHANTS CORPORATION EMPLOYEE STOCK
              PURCHASE PLAN
- --------------------------------------------------------------------------------

The annual financial  statements and  independent  registered  public accounting
firm's report thereon for First  Merchants  Corporation  Employee Stock Purchase
Plan for the year ending December 31, 2005, will be filed as an amendment to the
2005 Annual Report on Form 10-K.