FIRST-TIME MERCHANTS: DISCUSSION AND MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS

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

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

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

•fluctuations in market rates of interest and loan and deposit pricing, which
could negatively affect our net interest margin, asset valuations and expense
expectations;
•adverse changes in the economy, which might affect our business prospects and
could cause credit-related losses and expenses;
•the severity and duration of the COVID-19 pandemic and its impact on general
economic and financial market conditions and our business, results of
operations, and financial condition;
•adverse developments in our loan and investment portfolios;
•our participation as a lender in the PPP;
•competitive factors in the banking industry, such as the trend towards
consolidation in our market;
•changes in the banking legislation or the regulatory requirements of federal
and state agencies applicable to bank holding companies and banks like our
affiliate bank;
•acquisitions of other businesses by us and integration of such acquired
businesses;
•our ability to implement and comply with the Settlement Agreement and Agreed
Order entered into with the United States Department of Justice ("DOJ") related
to our fair lending practices;
•changes in market, economic, operational, liquidity, credit and interest rate
risks associated with our business; and
•the continued availability of earnings and excess capital sufficient for the
lawful and prudent declaration and payment of cash dividends.

As a result of these and other uncertainties, our actual future results may differ materially from the results indicated by these forward-looking statements. In addition, our past operating results do not necessarily indicate our expected future results.

CRITICAL ACCOUNTING POLICIES
Generally accepted accounting principles are complex and require us to apply
significant judgments to various accounting, reporting and disclosure matters.
We must use assumptions and estimates to apply those principles where actual
measurement is not possible or practical. For a complete discussion of our
significant accounting policies, see "Notes to the Consolidated Financial
Statements" in our Annual Report on Form 10-K for the year ended December 31,
2020. Certain policies are considered critical because they are highly dependent
upon subjective or complex judgments, assumptions and estimates. Changes in such
estimates may have a significant impact on the financial statements. The
uncertainties related to COVID-19 could cause significant changes to these
estimates compared to what was known at the time these financial statements were
prepared.

We believe there have been no significant changes during the six months ended
June 30, 2021 to the items that we disclosed as our critical accounting policies
and estimates in Management's Discussion and Analysis of Financial Condition and
Results of Operations in our Annual Report on Form 10-K for the year ended
December 31, 2020, with the exception of the adoption of Accounting Standards
Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments ("CECL") on January 1,
2021. Certain accounting policies were revised and certain accounting policy
elections were implemented, related to the adoption of CECL.


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Contents

                         PART I: FINANCIAL INFORMATION

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

                                 OF OPERATIONS

CECL replaces the previous "incurred loss" model for measuring credit losses,
which encompassed allowances for current known and inherent losses within the
portfolio, with an "expected loss" model for measuring credit losses, which
encompasses allowances for losses expected to be incurred over the life of the
portfolio. The new CECL model requires the measurement of all expected credit
losses for financial assets measured at amortized cost and certain off-balance
sheet credit exposures based on historical experiences, current conditions, and
reasonable and supportable forecasts. CECL also requires enhanced disclosures
related to the significant estimates and judgments used in estimating credit
losses, as well as credit quality and underwriting standards of an
organization's portfolio. In addition, CECL includes certain changes to the
accounting for investment securities available for sale depending on whether
management intends to sell the securities or believes that it is more likely
than not they will be required to sell. See NOTE 1. GENERAL, NOTE 3. INVESTMENT
SECURITIES and NOTE 4. LOANS AND ALLOWANCE of the Notes to Consolidated
Condensed Financial Statements of this Quarterly Report on Form 10-Q for details
of the accounting policy changes related to the adoption of CECL.
BUSINESS SUMMARY

First Merchants Corporation (the "Corporation") is a financial holding company
headquartered in Muncie, Indiana and was organized in September 1982. The
Corporation's Common Stock is traded on NASDAQ's Global Select Market System
under the symbol FRME. The Corporation has one full-service bank charter, First
Merchants Bank (the "Bank"), which opened for business in Muncie, Indiana, in
March 1893. The Bank also operates First Merchants Private Wealth Advisors (a
division of First Merchants Bank). The Bank includes 109 banking locations in
Indiana, Illinois, Ohio and Michigan. In addition to its traditional branch
network, the Corporation offers comprehensive electronic and mobile delivery
channels to its customers. The Corporation's business activities are currently
limited to one significant business segment, which is community banking.

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

COVID-19 UPDATE

The COVID-19 pandemic continued to impact the Corporation's operations during
the three and six months ended June 30, 2021. With certain states and localities
having recently experienced significant increases in the number of individuals
diagnosed with COVID-19 as variant strains of the virus have spread, uncertainty
remains about the ultimate duration of the pandemic and the timing and strength
of the economic recovery. As the pandemic has evolved, we have continued to
support our customers by providing assistance to those affected by the pandemic,
including by working with borrowers who are or may be unable to meet their
contractual payment obligations due to the effects of COVID-19 and by
originating loans under the Paycheck Protection Program ("PPP").

The CARES Act and the Paycheck Protection Program
As previously reported, the Coronavirus Aid, Relief and Economic Security Act
(the "CARES Act") was signed into law in March 2020, establishing the PPP, a
lending program administered by the Small Business Administration ("SBA") that
was intended to incentivize small businesses, eligible nonprofits and certain
others to retain their employees by providing them with loans that are fully
guaranteed by the U.S. government and subject to forgiveness if program
guidelines are met. The ability of borrowers to apply for loans under the PPP
ended on May 31, 2021, with the SBA having until June 30, 2021 to process loan
applications.

The Bank actively participated in assisting its customers with PPP funding
during all phases of the program. The vast majority of the Bank's PPP loans made
in 2020 have two-year maturities, while the loans made in 2021 have five-year
maturities. Loans under the program earn interest at a fixed rate of 1 percent.
As of June 30, 2021, the Bank had over 3,200 PPP loans representing $415.8
million, which is net of $12.3 million of deferred processing fee income and
costs. The weighted-average deferred processing fee on PPP loans was
approximately 3.99 percent and is recognized over the term of the loan. As of
June 30, 2021, $595.7 million of the Bank's PPP loans had been forgiven by the
SBA. The Bank anticipates that the majority of its remaining PPP loans will also
be forgiven by the SBA in accordance with the terms of the program. If a loan is
forgiven by the SBA or paid off by the borrower prior to maturity, any
unamortized portion of the fee will be recognized immediately. During the three
and six months ended June 30, 2021, the Corporation recognized interest income
on PPP loans of $1.6 million and $3.2 million, respectively, compared to $1.8
million for both the three and six months ended June 30, 2020. Additionally, PPP
loan related deferred processing fee income of $8.2 million and $15.7 million
was recorded during the three and six month ended June 30, 2021, respectively,
compared to $2.9 million for both the three and six months ended June 30, 2020.
PPP deferred processing fee income is recorded as a yield adjustment.

Loan Modifications and Troubled Debt Restructures
As previously reported, the Bank's banking regulators issued guidance in March
2020 encouraging financial institutions to work prudently with borrowers who are
or may be unable to meet their contractual payment obligations due to the
effects of COVID-19. Additionally, Section 4013 of the CARES Act had further
provided that a qualified loan modification is exempt by law from classification
as a troubled debt restructure as defined by GAAP, from the period beginning
March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days
after the date on which the national emergency concerning the COVID-19 outbreak
under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. In
accordance with that guidance, the Bank has offered short-term modifications
made in response to COVID-19 to borrowers who were current and otherwise not
past due. These included short-term, 180 days or less, modifications in the form
of payment deferrals, fee waivers, extensions of repayment terms, or other
delays in payment that are insignificant. With the enactment of the Economic Aid
to Hard-Hit Small Businesses, Nonprofits, and Venues Act, which was signed into
law as part of the Consolidated Appropriations Act, 2021 (the "CAA"), the CARES
Act was amended to, among other things, extend the expiration date for
COVID-related loan modifications exempt from troubled debt restructuring
classification until the earlier of January 1, 2022, or 60 days after the
termination of the national emergency. As of June 30, 2021, $40.3 million in
loan balances remained in deferral. Details of the modifications are included in
the "LOAN QUALITY" section of this Management's Discussion and Analysis of
Financial Condition and Results of Operations.

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Contents

                         PART I: FINANCIAL INFORMATION

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

                                 OF OPERATIONS

CECL Implementation
Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses
(Topic 326): Measurement of Credit losses on Financial Instruments ("CECL") had
an original adoption date of January 1, 2020, which included a day 1 measurement
date of January 1, 2020. Pursuant to the CARES Act, which created an optional
deferral of the CECL adoption date, and the related joint statement of federal
banking regulators (which also became effective in March 2020), and consistent
with guidance from the SEC and FASB, the Corporation elected to delay
implementation of ASU No. 2016-13, the optional deferral of which was set to
expire on December 31, 2020. However, the CAA amended the CARES Act by extending
the temporary relief from CECL compliance to the earlier of the first day of the
fiscal year that begins after the date on which the national emergency
concerning COVID-19 terminates, or January 1, 2022. The Corporation elected to
delay implementation of CECL following the approval of the CARES Act and, with
the enactment of the CAA, the Corporation elected to delay adoption of CECL to
January 1, 2021. As a result of the Corporation's election, its 2020 financial
statements have been prepared under the incurred loss model and its 2021
financial statements have been prepared under the CECL model.

Regulatory Capital
As part of a March 27, 2020 joint statement of federal banking regulators, an
interim final rule that allowed banking organizations to mitigate the effects of
the CECL accounting standard on their regulatory capital was announced. Banking
organizations could elect to mitigate the estimated cumulative regulatory
capital effects of CECL for up to two years. This two-year delay was to be in
addition to the three-year transition period that federal banking regulators had
already made available. While the CAA provided for a further extension of the
mandatory adoption of CECL to the earlier of the first day of the fiscal year
that begins after the date on which the national emergency concerning COVID-19
terminates, or January 1, 2022, the federal banking regulators have elected to
not provide a similar extension to the two year mitigation period applicable to
regulatory capital effects. Instead, the federal banking regulators require
that, in order to utilize the additional two-year delay, banking organizations
must have adopted the CECL standard no later than December 31, 2020, as required
by the CARES Act.

As discussed above, the Corporation elected to delay implementation of ASU No.
2016-13 until January 1, 2021 and, as a result, will recognize the
implementation effects of CECL on its regulatory capital over a three-year
transition period. Beginning on January 1, 2021, the Corporation phased in 25
percent of the deferred capital impact of CECL, with an additional 25 percent to
be phased in at the beginning of the following three years, resulting in the
impact being fully phased in on January 1, 2024.

RESULTS OF OPERATIONS

The Corporation reported second quarter 2021 net income of $55.6 million,
compared to $33.0 million during the second quarter of 2020. Diluted earnings
per share for the second quarter 2021 totaled $1.03 per share, compared to $0.62
per diluted share during the same period in 2020. Year-to-date net income
totaled $105.0 million, compared to $67.3 million during the same period in
2020. Diluted earnings per share for the six months ended June 30, 2021 was
$1.94 per share, compared to $1.24 per share during the same period in 2020.

As of June 30, 2021, total assets equaled $14.9 billion, an increase of $855.9
million, or 6.1 percent, from December 31, 2020. A portion of the excess
liquidity created from deposit growth resulted in an increase in the
Corporation's investment in interest-bearing deposits of $46.6 million compared
to December 31, 2020. This increase was offset by a decrease in cash and cash
equivalents when compared to December 31, 2020 of $25.3 million.

The Corporation's total loan portfolio decreased $107.3 million from
December 31, 2020. As of June 30, 2021, PPP loans, which are included in the
commercial and industrial loans class, totaled $415.8 million, a decrease of
$251.3 million from the December 31, 2020 balance of $667.1 million. Other loan
classes that experienced the largest decreases from December 31, 2020 were
residential real estate and agricultural land, production and other loans to
farmers. The largest loan classes that experienced an increase from December 31,
2020 were public finance and other commercial loans and commercial real estate,
non-owner occupied. Additional details of the changes in the Corporation's loans
are discussed within NOTE 4. LOANS AND ALLOWANCE of the Notes to Consolidated
Condensed Financial Statements of this Quarterly Report on Form 10-Q, and the
"LOAN QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS" section of this
Management's Discussion and Analysis of Financial Condition and Results of
Operations.

Total investment securities increased $1.0 billion from December 31, 2020 as the
excess liquidity from deposit growth was used to invest in the bond portfolio.
Additional details of the changes in the Corporation's investment securities
portfolio are discussed within NOTE 3. INVESTMENT SECURITIES of the Notes to
Consolidated Condensed Financial Statements of this Quarterly Report on Form
10-Q.

The Corporation's allowance for credit losses - loans totaled $199.8 million as
of June 30, 2021 and equaled 2.19 percent of total loans. The Corporation
adopted the current expected credit losses ("CECL") model for calculating the
allowance for credit losses on January 1, 2021. CECL
replaces the previous "incurred loss" model for measuring credit losses, which
encompassed allowances for current known and inherent losses within the
portfolio, with an "expected loss" model for measuring credit losses, which
encompasses allowances for losses expected to be incurred over the life of the
portfolio. The new CECL model requires the measurement of all expected credit
losses for financial assets measured at amortized cost and certain off-balance
sheet credit exposures based on historical experiences, current conditions, and
reasonable and supportable forecasts. CECL also requires enhanced disclosures
related to the significant estimates and judgments used in estimating credit
losses, as well as credit quality and underwriting standards of an
organization's portfolio. The impact of the adoption was an increase to the
Allowance for Credit Losses - Loans of $74.1 million. Additional details of the
Allowance methodology are discussed within NOTE 4. LOANS AND ALLOWANCE of the
Notes to Consolidated Condensed Financial Statements of this Quarterly Report on
Form 10-Q.

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Contents

                         PART I: FINANCIAL INFORMATION

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

                                 OF OPERATIONS

The Corporation did not recognize any provision expense during the three and six
months ended June 30, 2021, compared to provision expense of $21.9 million and
$41.6 million, respectively, during the same periods of the prior year. The
provision expense taken during the three and six months ended June 30, 2020
reflected the Corporation's view of increased credit risk related to the
COVID-19 pandemic. Net charge-offs in the second quarter of 2021 were $1.3
million, compared to net charge-offs of $230,000 during the same period of 2020.
Net charge-offs in the six months ended June 30, 2021 were $4.9 million,
compared to net charge-offs of $812,000 during the same period of 2020.
Non-accrual loans totaled $57.6 million, a decrease of $3.9 million from
December 31, 2020, resulting in a coverage ratio of 347.1 percent. Additional
details of the Corporation's credit quality are discussed within the "LOAN
QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS" section of this Management's
Discussion and Analysis of Financial Condition and Results of Operations.

The Corporation's net tax asset, deferred and receivable increased $24.6 million
from December 31, 2020. As a result of the CECL adoption on January 1, 2021, the
cumulative effect of adoption resulted in a deferred tax asset of $22.0 million.
Additionally, the decrease in unrealized gains on available for sale investment
securities resulted in a $4.0 million decline in the deferred tax liability.
Both, the increase in deferred tax asset from CECL adoption and the decrease in
deferred tax liability related to unrealized gains on available for sale
investment securities, increase the net deferred tax asset.

The Corporation previously announced a banking delivery transformation strategy,
which included the consolidation of seventeen banking centers across its
footprint by April 30, 2021. As those consolidations finalized in the second
quarter of 2021, the fair value of the closed banking centers of $4.5 million
was moved from premises and equipment to assets held for sale (recorded in other
assets) while they are marketed for sale.

The Corporation's other assets decreased $10.3 million from December 31, 2020.
The Corporation's derivative asset (recorded in other assets) and derivative
liability (recorded in other liabilities) related to interest rate contracts
decreased $22.5 million and $23.0 million, respectively, from December 31, 2020.
The decreases in valuations are due to higher yield curve rates across the
entire term point spectrum. The higher interest rates are the result of more
directional certainty as to the outcome of COVID, fiscal stimulus and the demand
for goods and services from it.

As of June 30, 2021, total deposits equaled $12.2 billion, an increase of $841.8
million from December 31, 2020. The Corporation experienced increases from
December 31, 2020 in demand and savings accounts of $440.5 million and $495.8
million, respectively. A portion of the increase is due to PPP loans that have
remained on deposit, in addition to consumer Economic Impact Payments from the
IRS that have also remained on deposit. Offsetting these increases were
decreases in certificates of deposit and brokered deposits of $77.0 million and
$17.5 million, respectively, from December 31, 2020. The low interest rate
environment has resulted in customers moving funds from maturing time deposit
products into non-maturity products due to similar rates offered for both
products.

Total borrowings decreased $85.3 million as of June 30, 2021, compared to
December 31, 2020. Federal Home Loan Bank advances decreased $55.2 million
compared to December 31, 2020 as the Corporation utilized excess liquidity from
deposit growth to pay off maturing advances. Additionally, securities sold under
repurchase agreements decreased by $30.2 million.

The Corporation's other liabilities as of June 30, 2021 increased $103.6 million
compared to December 31, 2020. As part of the CECL adoption on January 1, 2021,
the Corporation recorded a $20.5 million allowance for credit losses on
off-balance sheet credit exposures as a liability account representing expected
credit losses over the contractual period for which the Corporation is exposed
to credit risk resulting from a contractual obligation to extend credit. The
Corporation also accrued $110.7 million of trade date accounting related to
investment securities purchases as of June 30, 2021, of which, the accrual was
$6.2 million as of December 31, 2020. Additionally, as noted above, the
derivative hedge liability decreased $23.0 million from December 31, 2020.

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

                         PART I: FINANCIAL INFORMATION

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

                                 OF OPERATIONS

NET INTEREST INCOME

Net interest income is the most significant component of our earnings,
comprising 79 percent of revenues for the six months ended June 30, 2021. Net
interest income and margin are influenced by many factors, primarily the volume
and mix of earning assets, funding sources, and interest rate fluctuations.
Other factors include the level of accretion income on purchased loans,
prepayment risk on mortgage and investment-related assets, and the composition
and maturity of earning assets and interest-bearing liabilities. Loans typically
generate more interest income than investment securities with similar
maturities. Funding from customer deposits generally cost less than wholesale
funding sources. Factors such as general economic activity, Federal Reserve
Board monetary policy, and price volatility of competing alternative
investments, can also exert significant influence on our ability to optimize the
mix of assets and funding and the net interest income and margin.

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

Net interest margin, on a tax equivalent basis, increased 3 basis points to 3.22
percent for three months ended June 30, 2021 compared to 3.19 percent for the
same period in 2020. Average earning assets for the three months ended June 30,
2021 increased $1.4 billion compared to the same period in 2020, and was
primarily attributable to an increase in investment securities and loans of $1.1
billion and $101.9 million, respectively. Since the beginning of the PPP in
April 2020, the Bank has originated over $1.2 billion of PPP loans, which
averaged $620.5 million in the second quarter of 2021. The increase in the
investment securities portfolio was the result of excess liquidity generated
from growth in deposits being used to invest in the bond portfolio.

In the second quarter of 2021, FTE asset yields decreased 23 basis points
compared to the same period in 2020. This decrease was primarily a result of the
decline in the Investment Portfolio yield of 31 basis points compared to the
same period in 2020. The PPP loans originated were recorded at an interest rate
of only 1 percent, but the Corporation also recognized fee income of $8.2
million during the second quarter of 2021, which is included in interest income.

The Corporation recognized fair value accretion income on purchased loans, which
is included in interest income, of $2.5 million, which accounted for 7 basis
points of net interest margin in the second quarter of 2021. Comparatively, the
Corporation recognized $3.7 million of accretion income for the second quarter
of 2020, or 12 basis points of net interest margin.

Interest costs decreased 33 basis points, which mitigated the decrease in asset
yields and resulted in a 10 basis point FTE increase in net interest spread as
compared to the same period in 2020. Interest costs have decreased as management
aggressively moved deposit rates down. Interest-bearing deposits and borrowing
costs for the three months ended June 30, 2021 were 0.24 percent and 1.98
percent, respectively, compared to 0.59 percent and 1.55 percent, respectively,
during the same period in 2020.

Net interest margin, on a tax equivalent basis, decreased 9 basis points to 3.23
percent for six months ended June 30, 2021 compared to 3.32 percent for the same
period in 2020. Average earning assets for the six months ended June 30, 2021
increased $1.6 billion compared to the same period in 2020, and was primarily
attributable to an increase in investment securities and loans of $922.1 million
and $406.0 million, respectively. PPP loans averaged $638.6 million in 2021. The
increase in the investment securities portfolio was the result of excess
liquidity generated from growth in deposits being used to invest in the bond
portfolio.

In the six months ended June 30, 2021, FTE asset yields decreased 53 basis
points compared to the same period in 2020. This decrease was primarily a result
of the FOMC's interest rate decreases of 50 basis points on March 3, 2020 and
100 basis points on March 16, 2020 at the Committee's special meetings related
to COVID-19, and the decline in one-month LIBOR from June 30, 2020 to June 30,
2021 of 6 basis points. Additionally, the yield of the Investment Portfolio
decreased 32 basis points compared to the same period in 2020. The PPP loans
originated were recorded at an interest rate of only 1 percent, but the
Corporation also recognized fee income of $15.7 million during the six months
ended June 30, 2021, which is included in interest income.

The Corporation recognized fair value accretion income on purchased loans, which
is included in interest income, of $4.3 million, which accounted for 7 basis
points of net interest margin in the six months ended June 30, 2021.
Comparatively, the Corporation recognized $7.2 million of accretion income for
the six months ended June 30, 2020, or 12 basis points of net interest margin.

Interest costs decreased 55 basis points, which mitigated the decrease in asset
yields and resulted in a 2 basis point FTE increase in net interest spread as
compared to the same period in 2020. Interest costs have decreased as management
aggressively moved deposit rates down as wholesale funding rates declined.
Interest-bearing deposits and borrowing costs for the six months ended June 30,
2021 of 0.25 percent and 1.93 percent, respectively, decreased from 0.82 percent
and 1.86 percent, respectively, during the same period in 2020.
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Contents

                         PART I: FINANCIAL INFORMATION

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

                                 OF OPERATIONS

The following tables presents the Corporation's average balance sheet, interest
income/interest expense, and the average rate as a percent of average earning
assets/liabilities for the three months ended June 30, 2021, and 2020.

(Dollars in Thousands)                                                                       Three Months Ended
                                                               June 30, 2021                                                    June 30, 2020
                                                                    Interest                                                          Interest
                                                                    Income /            Average                                       Income /            Average
                                          Average Balance           Expense              Rate               Average Balance           Expense              Rate
Assets:

Interest-bearing deposits                $       545,752          $     129                0.09  %        $        378,489          $     134                0.14  %
Federal Home Loan Bank stock                      28,736                 88                1.22                     28,736                281           

3.91

Investment Securities: (1)
Taxable                                        1,732,367              7,440                1.72                  1,282,080              6,147                1.92
Tax-Exempt (2)                                 1,969,577             16,546                3.36                  1,317,527             12,682                3.85
Total Investment Securities                    3,701,944             23,986                2.59                  2,599,607             18,829                2.90
Loans held for sale                               25,039                237                3.79                     12,630                131                4.15
Loans: (3)
Commercial                                     6,953,227             70,886                4.08                  6,890,010             69,463                4.03
Real Estate Mortgage                             912,662              9,488                4.16                    887,257             10,122                4.56
Installment                                      659,515              6,391                3.88                    724,165              7,596                4.20
Tax-Exempt (2)                                   732,081              7,019                3.84                    666,548              6,784                4.07
Total Loans                                    9,282,524             94,021                4.05                  9,180,610             94,096                4.10
Total Earning Assets                          13,558,956            118,224                3.49  %              12,187,442            113,340                3.72  %
Net unrealized gain on securities
available for sale                                44,250                                                            56,807
Allowance for credit losses                     (201,051)                                                         (106,858)
Cash and cash equivalents                        171,489                                                           303,491
Premises and equipment                           107,369                                                           113,528
Other assets                                   1,077,584                                                         1,100,912
Total Assets                             $    14,758,597                                                  $     13,655,322
Liabilities:
Interest-bearing deposits:
Interest-bearing deposits                $     4,745,181          $   3,560                0.30  %        $      3,951,819          $   4,186                0.42  %
Money market deposits                          2,337,143                796                0.14                  1,673,104              1,696                0.41
Savings deposits                               1,740,233                462                0.11                  1,521,312                596                0.16
Certificates and other time deposits             812,370              1,005                0.49                  1,498,002              6,229           

1.66

Total Interest-bearing Deposits                9,634,927              5,823                0.24                  8,644,237             12,707                0.59
Borrowings                                       644,702              3,188                1.98                    909,258              3,527                1.55
Total Interest-bearing Liabilities            10,279,629              9,011                0.35                  9,553,495             16,234                0.68
Noninterest-bearing deposits                   2,490,226                                                         2,145,672
Other liabilities                                142,705                                                           160,646
Total Liabilities                             12,912,560                                                        11,859,813
Stockholders' Equity                           1,846,037                                                         1,795,509
Total Liabilities and Stockholders'
Equity                                   $    14,758,597              9,011                               $     13,655,322             16,234
Net Interest Income (FTE)                                         $ 109,213                                                         $  97,106
Net Interest Spread (FTE) (4)                                                              3.14  %                                                      

3.04%

Net Interest Margin (FTE):
Interest Income (FTE) / Average Earning
Assets                                                                                     3.49  %                                                           3.72  %
Interest Expense / Average Earning
Assets                                                                                     0.27  %                                                           0.53  %
Net Interest Margin (FTE) (5)                                                              3.22  %                                                           3.19  %

(1) Average balance of securities is computed based on the average of the historical amortized cost balances without the effects of the fair value adjustments.
Annualized amounts are computed utilizing a 30/360 day basis.
(2) Tax-exempt securities and loans are presented on a fully taxable equivalent basis, using a marginal tax rate of 21 percent for 2021 and 2020. These totals equal
$4,949 and $4,088 for the three months ended June 30, 2021 and 2020, respectively.
(3) Non-accruing loans have been
included in the average balances.
(4) Net Interest Spread (FTE) is interest income expressed as a percentage of average earning assets minus interest expense expressed as a percentage of average
interest-bearing liabilities.
(5) Net Interest Margin (FTE) is interest income expressed as a percentage of average earning assets minus interest expense expressed as a percentage of average
earning assets.



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Contents

                         PART I: FINANCIAL INFORMATION

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

                                 OF OPERATIONS

(Dollars in Thousands)                                                                        Six Months Ended
                                                               June 30, 2021                                                    June 30, 2020
                                                                    Interest                                                          Interest
                                                                    Income /            Average                                       Income /            Average
                                          Average Balance           Expense              Rate               Average Balance           Expense              Rate
Assets:

Interest-bearing deposits                $       493,791          $     243                0.10  %        $        269,174          $     709                0.53  %
Federal Home Loan Bank stock                      28,736                266                1.85                     28,736                580           

4.04

Investment Securities: (1)
Taxable                                        1,613,847             14,135                1.75                  1,325,313             13,778                2.08
Tax-Exempt (2)                                 1,896,643             32,223                3.40                  1,263,122             24,499                3.88
Total Investment Securities                    3,510,490             46,358                2.64                  2,588,435             38,277                2.96
Loans held for sale                               20,572                393                3.82                     14,924                324                4.34
Loans: (3)
Commercial                                     6,915,234            140,060                4.05                  6,562,673            146,415                4.46
Real Estate Mortgage                             943,830             18,774                3.98                    878,956             20,524                4.67
Installment                                      666,870             12,880                3.86                    741,889             16,701                4.50
Tax-Exempt (2)                                   713,094             13,777                3.86                    655,149             13,511                4.12
Total Loans                                    9,259,600            185,884                4.01                  8,853,591            197,475                4.46
Total Earning Assets                          13,292,617            232,751                3.51  %              11,739,936            237,041                4.04  %
Net unrealized gain on securities
available for sale                                49,922                                                            52,732
Allowance for loan losses                       (202,693)                                                          (94,009)
Cash and cash equivalents                        168,647                                                           231,624
Premises and equipment                           109,170                                                           113,670
Other assets                                   1,085,424                                                         1,070,327
Total Assets                             $    14,503,087                                                  $     13,114,280
Liabilities:
Interest-bearing deposits:
Interest-bearing deposits                $     4,681,439          $   7,269                0.31  %        $      3,770,530          $  12,461                0.66  %
Money market deposits                          2,212,425              1,631                0.15                  1,604,474              5,479                0.68
Savings deposits                               1,700,601                938                0.11                  1,473,183              2,424                0.33
Certificates and other time deposits             835,722              2,185                0.52                  1,582,322             14,091           

1.78

Total Interest-bearing Deposits                9,430,187             12,023                0.25                  8,430,509             34,455                0.82
Borrowings                                       659,826              6,376                1.93                    828,721              7,709                1.86
Total Interest-bearing Liabilities            10,090,013             18,399                0.36                  9,259,230             42,164                0.91
Noninterest-bearing deposits                   2,417,888                                                         1,907,582
Other liabilities                                151,936                                                           141,505
Total Liabilities                             12,659,837                                                        11,308,317
Stockholders' Equity                           1,843,250                                                         1,805,963
Total Liabilities and Stockholders'
Equity                                   $    14,503,087             18,399                               $     13,114,280             42,164
Net Interest Income (FTE)                                         $ 214,352                                                         $ 194,877
Net Interest Spread (FTE) (4)                                                              3.15  %                                                      

3.13%

Net Interest Margin (FTE):
Interest Income (FTE) / Average Earning
Assets                                                                                     3.51  %                                                           4.04  %
Interest Expense / Average Earning
Assets                                                                                     0.28  %                                                           0.72  %
Net Interest Margin (FTE) (5)                                                              3.23  %                                                           3.32  %

(1) Average balance of securities is computed based on the average of the historical amortized cost balances without the effects of the fair value adjustments.
Annualized amounts are computed utilizing a 30/360 day basis.
(2) Tax-exempt securities and loans are presented on a fully taxable equivalent basis, using a marginal tax rate of 21 percent for 2021 and 2020. These totals equal
$9,660 and $7,982 for the six months ended June 30, 2021 and 2020, respectively.
(3) Non-accruing loans have been
included in the average balances.
(4) Net Interest Spread (FTE) is interest income expressed as a percentage of average earning assets minus interest expense expressed as a percentage of average
interest-bearing liabilities.
(5) Net Interest Margin (FTE) is interest income expressed as a percentage of average earning assets minus interest expense expressed as a percentage of average
earning assets.



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Contents

                         PART I: FINANCIAL INFORMATION

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

                                 OF OPERATIONS

NON-INTEREST INCOME

Non-interest income totaled $30.9 million for the quarter ended June 30, 2021, a
$4.4 million, or 16.6 percent increase from the second quarter of 2020. Net
gains and fees on sales of loans totaled $8.3 million during the quarter, a $4.7
million increase over the same period last year. Strong organic activity was
enhanced by a $76.1 million portfolio mortgage loan sale that contributed a gain
of $2.9 million during the quarter. Additionally, fiduciary and wealth
management fees increased $1.9 million and service charges on deposit accounts
increased $1.3 million when compared to the same period in 2020.

These increases were partially reduced by the impact on card payment fees of the
Durbin Amendment adoption on July 1, 2020, which drove a $1.9 million decrease
in fees in the comparable period. Finally, net realized gains on the sales of
available for sale securities decreased $1.3 million in the second quarter of
2021 when compared to the same period in 2020.

During the first six months of 2021, non-interest income totaled $55.0 million,
a $1.3 million, or 2.3 percent decrease when compared to the same period in
2020. The largest decrease was in net realized gains on the sales of available
for sale securities, which declined by $4.1 during the comparable period.
Additionally, the Durbin Amendment adoption resulted in a decrease in card
payment fees of $3.5 million and the interest rate environment resulted in
derivative hedge fees being $1.7 million lower in the first six months of 2021
when compared to the same period in 2020.

These decreases were partially offset by an increases in net gains and fees on
sales of loans and fiduciary and wealth management fees of $5.3 million and $2.3
million, respectively, when compared to the same period in 2020.
NON-INTEREST EXPENSE

Non-interest expense totaled $69.3 million for the second quarter of 2021, a
$9.3 million, or 15.5 percent increase from the second quarter of 2020.
Non-interest expenses in the second quarter of 2020 were unusually low and
reflected a $2.3 million deferral of salary expense related to PPP loan
originations, a $1.1 million reduction in bonus accruals and a $1.6 million
decrease in processing fees related to the termination of a debit card rewards
program. In addition to the unusually low expenses noted in 2020, salary and
incentive expenses increased in the second quarter of 2021 based upon current
year financial results.

During the first six months of 2021, non-interest expense totaled $135.4
million, a $9.2 million, or 7.3 percent increase when compared to the same
period in 2020. The largest contributing factor to the current year increase is
the unusually low second quarter of 2020 expenses noted above. Salaries and
employee benefits increased by $6.3 million in the first six months of 2021 when
compared to the same period in 2020. In addition to the $3.4 million noted above
from lower 2020 expenses, the remaining increase of $2.9 million was primarily
due to higher salary and incentive expenses in the first six months of 2021 when
compared to the same period in 2020.

INCOME TAXES

Income tax expense for the second quarter of 2021 was $10,294,000 on pre-tax net
income of $65,853,000. For the same period in 2020, income tax expense was
$4,623,000 on pre-tax net income of $37,615,000. The effective income tax rates
for the second quarter of 2021 and 2020 were 15.6 percent and 12.3 percent,
respectively.

Income tax expense for the half-year ended June 30, 2021 has been $ 19,246,000 on net income before tax of $ 124,274,000. For the same period in 2020, the tax charge was $ 8,113,000 on net income before tax of $ 75,368,000. The effective tax rates for the six months ended June 30, 2021 and 2020 were 15.5% and 10.8% respectively.

The lower effective income tax rate for the comparative periods ended June 30,
2020 was driven by two factors. First, an abnormally high level of loan
provision expense as a result of the economic impact of the COVID-19 pandemic
reduced taxable income, and when coupled with an increase in tax-exempt income,
the benefit of non-taxable income increased. Secondly, the CARES Act provided
for the carryback of certain federal net operating losses to a prior period with
a rate differential between the 2020 statutory rate of 21 percent and the rate
in effect during the carryback year.

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

Stockholders' Equity
The Corporation adopted the current expected credit losses ("CECL") model for
calculating the allowance for credit losses on January 1, 2021. CECL replaces
the previous "incurred loss" model for measuring credit losses, which
encompassed allowances for current known and inherent losses within the
portfolio, with an "expected loss" model for measuring credit losses, which
encompasses allowances for losses expected to be incurred over the life of the
portfolio. As of the adoption and day one measurement date of January 1, 2021,
the Corporation recorded a one-time cumulative-effect adjustment to retained
earnings, net of income taxes, of $68.0 million. See additional details of the
Corporation's CECL adoption in NOTE 4. LOANS AND ALLOWANCE of the Notes to
Consolidated Condensed Financial Statements of this Quarterly Report on Form
10-Q.


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Contents

                         PART I: FINANCIAL INFORMATION

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

                                 OF OPERATIONS

Stock Repurchase Program
On September 3, 2019, the Board of Directors of the Corporation approved a stock
repurchase program of up to 3 million shares of the Corporation's outstanding
common stock; provided, however, that the total aggregate investment in shares
repurchased under the program was not to exceed $75 million. On a share basis,
the amount of common stock subject to the repurchase program represented
approximately 5 percent of the Corporation's outstanding shares. During the
first quarter of 2020, the Corporation repurchased 1,634,437 of its common
shares for $55.9 million at an average price of $34.21, which resulted in the
aggregate investment in share repurchases of $75.0 million, the maximum
allowable under the plan. As such, the September 2019 program terminated upon
its own terms following the repurchases.

On January 27, 2021, the Board of Directors of the Corporation approved a stock
repurchase program of up to 3,333,000 shares of the Corporation's outstanding
common stock; provided, however, that the total aggregate investment in shares
repurchased under the program may not exceed $100,000,000. On a share basis, the
amount of common stock subject to the repurchase program represents
approximately 6 percent of the Corporation's outstanding shares. The Corporation
has not made any repurchases under the January 2021 program as of June 30, 2021.

Regulatory Capital
Capital adequacy is an important indicator of financial stability and
performance. The Corporation and the Bank are subject to various regulatory
capital requirements administered by the federal banking agencies and are
assigned to a capital category. The assigned capital category is largely
determined by four ratios that are calculated according to the regulations:
total risk-based capital, tier 1 risk-based capital, CET1, and tier 1 leverage
ratios. The ratios are intended to measure capital relative to assets and credit
risk associated with those assets and off-balance sheet exposures of the entity.
The capital category assigned to an entity can also be affected by qualitative
judgments made by regulatory agencies about the risk inherent in the entity's
activities that are not part of the calculated ratios.

There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. Quantitative measures established
by regulation to ensure capital adequacy require the Bank to maintain minimum
amounts and ratios of total and tier 1 capital to risk-weighted assets, and of
tier 1 capital to average assets, or leverage ratio, all of which are calculated
as defined in the
regulations. Banks with lower capital levels are deemed to be undercapitalized,
significantly undercapitalized or critically undercapitalized, depending on
their actual levels. The appropriate federal regulatory agency may also
downgrade a bank to the next lower capital category upon a determination that
the bank is in an unsafe or unsound practice. Banks are required to monitor
closely their capital levels and to notify their appropriate regulatory agency
of any basis for a change in capital category.

Basel III was effective for the Corporation on January 1, 2015 and requires the
Corporation and the Bank to maintain the minimum capital and
leverage ratios as defined in the regulation and as illustrated in the table
below, which capital to risk-weighted asset ratios include a 2.5 percent capital
conservation buffer. Under Basel III, in order to avoid limitations on capital
distributions, including dividends, the Corporation must hold a 2.5 percent
capital conservation buffer above the adequately capitalized CET1 to
risk-weighted assets ratio (which buffer is reflected in the required ratios
below). Under Basel III, the Corporation and Bank elected to opt-out of
including accumulated other comprehensive income in regulatory capital. As of
June 30, 2021, the Bank met all capital adequacy requirements to be considered
well capitalized under the fully phased-in Basel III capital rules. There is no
threshold for well capitalized status for bank holding companies.

As part of a March 27, 2020 joint statement of federal banking regulators, an
interim final rule that allowed banking organizations to mitigate the effects of
the CECL accounting standard on their regulatory capital was announced. Banking
organizations could elect to mitigate the estimated cumulative regulatory
capital effects of CECL for up to two years. This two-year delay was to be in
addition to the three-year transition period that federal banking regulators had
already made available. While the CAA provided for a further extension of the
mandatory adoption of CECL to the earlier of the first day of the fiscal year
that begins after the date on which the national emergency concerning COVID-19
terminates, or January 1, 2022, the federal banking regulators have elected to
not provide a similar extension to the two year mitigation period applicable to
regulatory capital effects. Instead, the federal banking regulators require
that, in order to utilize the additional two-year delay, banking organizations
must have adopted the CECL standard no later than December 31, 2020, as required
by the CARES Act.

The Corporation elected to delay implementation of ASU No. 2016-13 until January
1, 2021 and, as a result, will recognize the implementation effects of CECL on
its regulatory capital over a three-year transition period. Beginning on January
1, 2021, the Corporation phased in 25 percent of the deferred capital impact of
CECL, with an additional 25 percent to be phased in at the beginning of the
following three years, resulting in the impact being fully phased in on January
1, 2024.


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Contents

                         PART I: FINANCIAL INFORMATION

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

                                 OF OPERATIONS

The actual and required capital ratios of the Company and the Bank at June 30, 2021 and December 31, 2020 were as follows:

                                                                                                         Prompt Corrective Action Thresholds
                                                    Actual                        Basel III Minimum Capital Required                     Well Capitalized
June 30, 2021                            Amount                Ratio                 Amount                 Ratio                  Amount                   Ratio
Total risk-based capital to
risk-weighted assets
First Merchants Corporation          $ 1,531,522                 14.23  %       $   1,129,766                 10.50  %                       N/A                   N/A
First Merchants Bank                   1,430,762                 13.25              1,133,449                 10.50          $      1,079,475                 10.00  %
Tier 1 capital to risk-weighted
assets
First Merchants Corporation          $ 1,330,832                 12.37  %       $     914,572                  8.50  %                       N/A                   N/A
First Merchants Bank                   1,294,639                 11.99                917,554                  8.50          $        863,580                  8.00  %
CET1 capital to risk-weighted assets
First Merchants Corporation          $ 1,284,345                 11.94  %       $     753,177                  7.00  %                       N/A                   N/A
First Merchants Bank                   1,294,639                 11.99                755,633                  7.00          $        701,659                  6.50  %
Tier 1 capital to average assets
First Merchants Corporation          $ 1,330,832                  9.35  %       $     569,254                  4.00  %                       N/A                   N/A
First Merchants Bank                   1,294,639                  9.11                568,398                  4.00          $        710,497                  5.00  %


                                                                                                         Prompt Corrective Action Thresholds
                                                    Actual                        Basel III Minimum Capital Required                     Well Capitalized
December 31, 2020                        Amount                Ratio                 Amount                 Ratio                  Amount                   Ratio
Total risk-based capital to
risk-weighted assets
First Merchants Corporation          $ 1,475,551                 14.36  %       $   1,079,015                 10.50  %                       N/A                   N/A
First Merchants Bank                   1,412,805                 13.70              1,082,430                 10.50          $      1,030,886                 10.00  %
Tier 1 capital to risk weighted
assets
First Merchants Corporation          $ 1,282,070                 12.48  %       $     873,488                  8.50  %                       N/A                   N/A
First Merchants Bank                   1,283,922                 12.45                876,253                  8.50          $        824,708                  8.00  %
CET1 capital to risk-weighted assets
First Merchants Corporation          $ 1,235,702                 12.02  %       $     719,343                  7.00  %                       N/A                   N/A
First Merchants Bank                   1,283,922                 12.45                721,620                  7.00          $        670,076                  6.50  %
Tier 1 capital to average assets
First Merchants Corporation          $ 1,282,070                  9.57  %       $     536,123                  4.00  %                       N/A                   N/A
First Merchants Bank                   1,283,922                  9.59                535,279                  4.00          $        669,098                  5.00  %




On April 9, 2020, federal banking regulators issued an interim final rule to
modify the Basel III regulatory capital rules applicable to banking
organizations to allow those organizations participating in the PPP to
neutralize the regulatory capital effects of participating in the program. The
interim final rule, which became effective April 13, 2020, clarifies that PPP
loans receive a zero percent risk weight for purposes of determining
risk-weighted assets and the CET1, Tier 1 and Total Risk-Based capital ratios.
At June 30, 2021, risk-weighted assets included $415.8 million of PPP loans at a
zero risk weight. Additionally, in order to facilitate use of the PPPL Facility,
the agencies have clarified that banking organizations, including the
Corporation and the Bank, are allowed to neutralize the regulatory effects of
PPP covered loans on the risk-based capital ratios, as well as PPP covered loans
pledged under the PPPL Facility on the leverage capital ratios. At June 30, 2021
and December 31, 2020, the Corporation did not have an outstanding balance with
the PPPL Facility; therefore there were no adjustments to the leverage ratio for
PPP loans. Access to funds under the PPPL Facility terminated on July 30, 2021,
at which time the Corporation also had no outstanding balance.


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                         PART I: FINANCIAL INFORMATION

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

                                 OF OPERATIONS

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

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