1Q_2013

10-Q 1 a1q_2013xdoc.htm 10-Q 1Q_2013_DOC

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



X	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2013

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: 001-11267

(Exact name of registrant as specified in its charter)



Ohio		34-1339938
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
III Cascade Plaza, 7th Floor, Akron Ohio		44308
(Address of principal executive offices)		(Zip Code)

(330) 996-6300

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer þ	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨
		(Do not check if a smaller reporting company)

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

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.



Class		Outstanding as of 4/30/2013
Common Stock, no par value		165,738,117

Table of Contents

TABLE OF CONTENTS

PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
	CONSOLIDATED BALANCE SHEETS
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
	CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
	CONSOLIDATED STATEMENTS OF CASH FLOWS
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
ITEM 4. CONTROLS AND PROCEDURES.
PART II. OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 1A. RISK FACTORS
	ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 4. MINE SAFETY DISCLOSURES
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBIT INDEX
SIGNATURES
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Table of Contents

PART 1. FINANCIAL INFORMATION


ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS.



CONSOLIDATED BALANCE SHEETS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
(Dollars in thousands)	March 31,			December 31,			March 31,
(Unaudited, except for December 31, 2012)	2013			2012			2012
ASSETS
Cash and due from banks	$	183,430		$	244,223		$	188,789
Interest-bearing deposits in banks	163,673			13,791			301,196
Total cash and cash equivalents	347,103			258,014			489,985
Investment securities:
Held-to-maturity	665,589			622,121			100,840
Available-for-sale	3,243,835			2,920,971			3,491,647
Other investments	140,984			140,717			140,713
Loans held for sale	14,459			23,683			42,447
Noncovered loans:
Commercial	5,888,337			5,866,489			5,220,051
Mortgage	451,522			445,211			428,950
Installment	1,322,795			1,328,258			1,259,930
Home equity	812,458			806,078			739,548
Credit card	140,721			146,387			140,618
Leases	164,137			139,236			74,112
Total noncovered loans	8,779,970			8,731,659			7,863,209
Allowance for noncovered loan losses	(98,843		)	(98,942		)	(103,849		)
Net noncovered loans	8,681,127			8,632,717			7,759,360
Covered loans (includes loss share receivable of $95.6 million, $113.7 million and $171.1 million at March 31, 2013, December 31, 2012 and March 31, 2012, respectively)	896,832			1,019,125			1,378,150
Allowance for covered loan losses	(47,945		)	(43,255		)	(41,070		)
Net covered loans	848,887			975,870			1,337,080
Net loans	9,530,014			9,608,587			9,096,440
Premises and equipment, net	177,137			181,149			188,347
Goodwill	460,044			460,044			460,044
Intangible assets	6,055			6,373			7,756
Covered other real estate (includes loss share receivable of $.04 million, $.05 million, and $0.7 million at March 31, 2013, December 31, 2012 and March 31, 2012, respectively)	70,267			59,855			56,411
Accrued interest receivable and other assets	616,997			631,498			596,188
Total assets	$	15,272,484		$	14,913,012		$	14,670,818
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	3,360,841		$	3,338,371		$	3,136,595
Interest-bearing	1,371,359			1,287,674			1,119,102
Savings and money market accounts	5,890,369			5,758,123			5,742,547
Certificates and other time deposits	1,303,198			1,375,257			1,649,921
Total deposits	11,925,767			11,759,425			11,648,165
Federal funds purchased and securities sold under agreements to repurchase	826,855			1,104,525			928,760
Wholesale borrowings	136,003			136,883			176,611
Long-term debt	249,921			—			—
Accrued taxes, expenses and other liabilities	379,088			266,977			333,177
Total liabilities	13,517,634			13,267,810			13,086,713
Shareholders' equity:
Preferred stock, without par value: authorized and unissued 7,000,000 shares	—			—			—
Preferred stock, Series A, without par value: designated 800,000 shares; none outstanding	—			—			—
Convertible preferred stock, Series B, without par value: designated 220,000 shares; none outstanding	—			—			—
5.875% Non-Cumulative Perpetual Preferred stock, Series A, without par value: authorized 115,000 shares; 100,000 issued	100,000			—			—
Common stock, without par value; authorized 300,000,000 shares; issued: March 31, 2013, December 31, 2012 and March 31, 2012 - 115,121,731 shares	127,937			127,937			127,937
Capital surplus	472,975			475,979			484,491
Accumulated other comprehensive loss	(24,119		)	(16,205		)	(22,172		)
Retained earnings	1,214,889			1,195,850			1,144,210
Treasury stock, at cost: March 31, 2013 - 5,375,905 shares; December 31, 2012 - 5,472,915 shares; March 31, 2012 - 5,935,169 shares	(136,832		)	(138,359		)	(150,361		)
Total shareholders' equity	1,754,850			1,645,202			1,584,105
Total liabilities and shareholders' equity	$	15,272,484		$	14,913,012		$	14,670,818

Table of Contents

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FIRSTMERIT CORPORATION AND SUBSIDIARIES
(Dollars in thousands except for per share data)
(Unaudited)
	Three months ended March 31,
	2013			2012

Interest income:
Loans and loans held for sale	$	98,672		$	103,082
Investment securities:
Taxable	19,239			22,418
Tax-exempt	4,045			3,580
Total investment securities interest	23,284			25,998
Total interest income	121,956			129,080
Interest expense:
Deposits:
Interest bearing	318			247
Savings and money market accounts	5,315			5,103
Certificates and other time deposits	2,063			3,524
Securities sold under agreements to repurchase	313			268
Wholesale borrowings	850			1,151
Long-term debt	1,748			—
Total interest expense	10,607			10,293
Net interest income	111,349			118,787
Provision for noncovered loan losses	5,808			8,129
Provision for covered loan losses	4,138			5,932
Net interest income after provision for loan losses	101,403			104,726
Other income:
Trust department income	5,741			5,627
Service charges on deposits	12,585			14,409
Credit card fees	10,222			10,180
ATM and other service fees	3,335			3,790
Bank owned life insurance income	4,897			3,056
Investment services and insurance	2,415			2,247
Investment securities (losses) gains, net	(9		)	260
Loan sales and servicing income	7,863			6,691
Other operating income	10,343			5,466
Total other income	57,392			51,726
Other expenses:
Salaries, wages, pension and employee benefits	57,906			63,973
Net occupancy expense	8,282			8,592
Equipment expense	7,349			7,104
Stationery, supplies and postage	2,096			2,143
Bankcard, loan processing and other costs	7,840			7,653
Professional services	5,410			3,352
Amortization of intangibles	317			483
FDIC insurance expense	3,526			3,720
Other operating expense	14,199			16,748
Total other expenses	106,925			113,768
Income before income tax expense	51,870			42,684
Income tax expense	14,524			12,340
Net income	37,346			30,344
Other comprehensive income (loss), net of taxes:
Changes in unrealized securities' holding gains and (losses), net of taxes of ($4.3) million and $1.0 million	(7,920		)	1,884
Reclassification for realized securities' (gains) and losses, net of taxes of ($.003) million and $.09 million	6			(169		)
Total other comprehensive gain (loss), net of taxes	(7,914		)	1,715
Comprehensive income	$	29,432		$	32,059
Net income attributable to common shareholders	$	36,125		$	30,207
Net income used in diluted EPS calculation	$	36,125		$	30,207
Weighted average number of common shares outstanding - basic	109,689			109,211
Weighted average number of common shares outstanding - diluted	109,689			109,211
Basic earnings per common share	$	0.33		$	0.28
Diluted earnings per common share	$	0.33		$	0.28
Dividend per common share	$	0.16		$	0.16

The accompanying notes are an integral part of the consolidated financial statements.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Dollars in thousands) (Unaudited)	Preferred Stock		Common Stock		Capital Surplus			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock			Total Shareholders' Equity
Balance at December 31, 2011	$	—	$	127,937	$	479,882		$	(23,887	)	$	1,131,203		$	(149,182	)	$	1,565,953
Net income	—		—		—			—			30,344			—			30,344
Cash dividends - common stock ($0.16 per share)	—		—		—			—			(17,337		)	—			(17,337		)
Nonvested (restricted) shares granted (5,200 shares)	—		—		(126		)	—			—			126			—
Restricted stock activity (69,446 shares)	—		—		574			—			—			(1,313		)	(739		)
Deferred compensation trust (52,891 increase in shares)	—		—		(8		)	—			—			8			—
Share-based compensation	—		—		4,169			—			—			—			4,169
Net unrealized gains on investment securities, net of taxes	—		—		—			1,715			—			—			1,715
Balance at March 31, 2012	$	—	$	127,937	$	484,491		$	(22,172	)	$	1,144,210		$	(150,361	)	$	1,584,105
Balance at December 31, 2012	$	—	$	127,937	$	475,979		$	(16,205	)	$	1,195,850		$	(138,359	)	$	1,645,202
Net income	—		—		—			—			37,346			—			37,346
Cash dividends - preferred stock	—		—		—			—			(930		)	—			(930		)
Cash dividends - common stock ($0.16 per share)	—		—		—			—			(17,377		)	—			(17,377		)
Nonvested (restricted) shares granted (122,834 shares)	—		—		(2,270		)	—			—			2,270			—
Restricted stock activity (25,824 shares)	—		—		606			—			—			(625		)	(19		)
Deferred compensation trust (113,049 increase in shares)	—		—		118			—			—			(118		)	—
Share-based compensation	—		—		1,972			—			—			—			1,972
Issuance of 5.875% Non-Cumulative Perpetual Preferred Stock, Series A	100,000		—		(3,430		)	—			—			—			96,570
Net unrealized losses on investment securities, net of taxes	—		—		—			(7,914		)	—			—			(7,914		)
Balance as of March 31, 2013	$	100,000	$	127,937	$	472,975		$	(24,119	)	$	1,214,889		$	(136,832	)	$	1,754,850

The accompanying notes are an integral part of the consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
	Three months ended March 31,
(In thousands)	2013			2012
(Unaudited)
Operating Activities
Net income	$	37,346		$	30,344
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	9,946			14,061
Provision (benefit) for deferred income taxes	(4,903		)	2,615
Depreciation and amortization	5,630			5,692
Benefit attributable to FDIC loss share	5,539			4,899
Accretion of acquired loans	(15,511		)	(21,484		)
Accretion of income for lease financing	(915		)	(709		)
Amortization and accretion of investment securities, net
Available for sale	3,135			3,760
Held to maturity	1,308			13
Losses/(gains) on sales and calls of available-for-sale investment securities, net	9			(260		)
Originations of loans held for sale	(140,723		)	(194,576		)
Proceeds from sales of loans, primarily mortgage loans sold in the secondary markets	154,143			183,778
Gains on sales of loans, net	(4,196		)	(1,572		)
Amortization of intangible assets	317			483
Recognition of stock compensation expense	1,972			4,169
Net decrease/(increase) in other assets	(7,451		)	28,706
Net (decrease)/increase in other liabilities	4,047			(38,354		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	49,693			21,565
Investing Activities
Proceeds from sale of securities
Available for sale	25,674			94,865
Proceeds from prepayments, calls, and maturities
Available for sale	173,778			218,006
Held to maturity	17,010			1,591
Purchases of securities
Available for sale	(405,053		)	(443,434		)
Held to maturity	(61,773		)	(19,620		)
Other	(280		)	—
Net decrease (increase) in loans and leases	77,681			6,659
Purchases of premises and equipment	(1,753		)	(1,090		)
Sales of premises and equipment	135			—
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES	(174,581		)	(143,023		)
Financing Activities
Net increase in demand accounts	106,155			162,576
Net increase in savings and money market accounts	132,246			147,138
Net decrease in certificates and other time deposits	(72,059		)	(93,158		)
Net (decrease) increase in securities sold under agreements to repurchase	(277,670		)	62,495
Proceeds from issuance of subordinated debt	247,941			—
Net decrease in wholesale borrowings	(880		)	(26,851		)
Net proceeds from issuance of preferred stock	96,570			—
Cash dividends - common	(17,377		)	(17,337		)
Cash dividends - preferred	(930		)	—
Restricted stock activity	(19		)	(739		)
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES	213,977			234,124
Increase (decrease) in cash and cash equivalents	89,089			112,666
Cash and cash equivalents at beginning of year	258,014			377,319
Cash and cash equivalents at end of year	$	347,103		$	489,985
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest, net of amounts capitalized	$	6,765		$	6,788
Federal income taxes	$	—		$	—

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents

FIRSTMERIT CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Dollars in thousands)

FirstMerit Corporation and subsidiaries is a diversified financial services company headquartered in Akron, Ohio with 196 banking offices in the Ohio, Chicago, Illinois, and Western Pennsylvania areas. The Corporation provides a complete range of banking and other financial services to consumers and businesses through its core operations.

1. Summary of Significant Accounting Policies

Basis of Presentation - FirstMerit Corporation (the “Parent Company”) is a bank holding company whose principal asset is the common stock of its wholly-owned subsidiary, FirstMerit Bank, N. A. (the “Bank”). The Parent Company’s other subsidiaries include Citizens Savings Corporation of Stark County, FirstMerit Capital Trust I, FirstMerit Community Development Corporation, FirstMerit Risk Management, Inc., and FMT, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

The accounting and reporting policies of FirstMerit Corporation and its subsidiaries (the “Corporation”) conform to U.S. generally accepted accounting principles (“U.S. GAAP”) and to general practices within the financial services industry.

The consolidated balance sheet at December 31, 2012 has been derived from the audited consolidated financial statements at that date. The accompanying unaudited interim financial statements reflect all adjustments (consisting only of normally recurring adjustments) that are, in the opinion of FirstMerit Corporation’s Management (“Management”), necessary for a fair statement of the results for the interim periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules of the Securities and Exchange Commission (“SEC”). The unaudited consolidated financial statements of the Corporation as of March 31, 2013 and 2012 are not necessarily indicative of the results that may be achieved for the full fiscal year or for any future period. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”). Certain reclassifications of prior year’s amounts have been made to conform to the current year presentation. Such reclassifications had no effect on net earnings or equity.

There have been no significant changes to the Corporation’s accounting policies as disclosed in the 2012 Form 10-K.

In preparing these accompanying unaudited interim consolidated financial statements, subsequent events were evaluated through the time the consolidated financial statements were issued.

Recently Adopted and Issued Accounting Standards

FASB ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 amends the guidance in ASC 210, Balance Sheet, to require an entity to disclose information about offsetting and related arrangements to enable users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements. The amendments are effective for annual reporting periods beginning on or after January 1, 2013, with retrospective application to the disclosures of all comparative periods presented. ASU 2011-11

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FIRSTMERIT CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

did not have a significant impact on the corporations derivatives, repurchase agreements, reverse repurchase agreements, and securities lending and borrowing transactions on the consolidated financial statements. The newly required disclosures are incorporated into Note 9 (Derivatives and Hedging Activities).

FASB ASU 2012-06, Business Combinations: Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution (a consensus of the FASB Emerging Issues Task Force). ASU 2012-06 amends the guidance in ASU 805-20 on the recognition of an indemnification asset as a result of a government-assisted acquisition of a financial institution when a subsequent change in the cash flows expected to be collected on the indemnification asset occurs (as a result of a change in cash flows expected to be collected on the assets subject to indemnification). A subsequent change in the measurement of the indemnification asset is to be accounted for on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value are limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets). The amendments in ASU 2012-06 are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. The Corporation currently applies the accounting as described within ASU 2012-06; therefore, ASU 2012-06 will not have an impact on its consolidated financial statements.

FASB ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 amends the guidance on ASC 220-10, by requiring an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. The objective of the update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in ASU 2013-02 are effective prospectively for reporting periods beginning after December 15, 2012. The Corporation has incorporated this new disclosure information into Note 14 (Changes and Reclassifications Out of Accumulated Other Comprehensive Income).

2. Business Combinations

On September 12, 2012, the Corporation and Citizens Republic Bancorp, Inc. ("Citizens"), a Michigan corporation with approximately $9.6 billion in assets and 219 branches, entered into an Agreement and Plan of Merger (the "Merger Agreement").

On April 12, 2013, the Corporation completed its merger (the "Merger") with Citizens. The results of operations acquired in the Citizens transaction will be included in the Corporation's financial results beginning on April 13, 2013. The Merger will be accounted for using the purchase acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged will be recorded at estimated fair value on the acquisition date. The Corporation is in the process of determining the preliminary fair values which are subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. Any resulting goodwill will not be deductible for income tax purposes as the acquisition is accounted for as a tax-free exchange for federal income tax purposes. Additional information on the Merger with Citizens can be found in Note 15 (Subsequent Events).

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FIRSTMERIT CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

3. Investment Securities

The following tables provide the amortized cost and fair value for the major categories of held-to-maturity and available-for-sale securities. Held-to-maturity securities are carried at amortized cost, which reflects historical cost, adjusted for amortization of premiums and accretion of discounts. Available-for-sale securities are carried at fair value with net unrealized gains or losses reported on an after-tax basis as a component of other comprehensive income in shareholders' equity.



		March 31, 2013
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available-for-sale
Debt securities
	U.S. states and political subdivisions	$	249,750	$	13,646	$	(790	)	$	262,606
	Residential mortgage-backed securities:
	U.S. government agencies	1,109,905		43,084		(663		)	1,152,326
	Commercial mortgage-backed securities:
	U.S. government agencies	58,827		406		(659		)	58,574
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	1,591,341		16,292		(2,354		)	1,605,279
	Non-agency	11		—		—			11
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	108,658		2,291		(347		)	110,602
	Corporate debt securities	61,555		—		(10,330		)	51,225
	Total debt securities	3,180,047		75,719		(15,143		)	3,240,623
Marketable equity securities		3,212		—		—			3,212
	Total securities available for sale	$	3,183,259	$	75,719	$	(15,143	)	$	3,243,835
Securities held-to-maturity
Debt securities
	U.S. states and political subdivisions	$	292,689	$	5,041	$	(244	)	$	297,486
	Commercial mortgage-backed securities:
	U.S. government agencies	40,413		774		—			41,187
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	137,839		680		—			138,519
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	98,887		385		(339		)	98,933
	Corporate debt securities	95,761		1,615		—			97,376
	Total securities held to maturity	$	665,589	$	8,495	$	(583	)	$	673,501

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FIRSTMERIT CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)



		December 31, 2012
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available-for-sale
Debt securities
	U.S. states and political subdivisions	$	253,198	$	15,235	$	(229	)	$	268,204
	Residential mortgage-backed securities:
	U.S. government agencies	1,058,005		49,058		—			1,107,063
	Commercial mortgage-backed securities:
	U.S. government agencies	52,014		428		(406		)	52,036
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	1,311,501		18,180		(260		)	1,329,421
	Non-agency	11		—		—			11
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	109,260		2,221		(138		)	111,343
	Corporate debt securities	61,541		—		(11,889		)	49,652
	Total debt securities	2,845,530		85,122		(12,922		)	2,917,730
	Marketable equity securities	3,241		—		—			3,241
	Total securities available for sale	$	2,848,771	$	85,122	$	(12,922	)	$	2,920,971
Securities held-to-maturity
Debt securities
	U.S. states and political subdivisions	$	270,005	$	5,126	$	(70	)	$	275,061
	Commercial mortgage-backed securities:
	U.S. government agencies	33,165		812		—			33,977
	Residential collateralized mortgage-backed securities:								—
	U.S. government agencies	123,563		533		(16		)	124,080
	Commercial collateralized mortgage-backed securities:								—
	U.S. government agencies	98,924		772		—			99,696
	Corporate debt securities	96,464		1,521		—			97,985
	Total securities held to maturity	$	622,121	$	8,764	$	(86	)	$	630,799

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)



		March 31, 2012
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available-for-sale
Debt securities
	U.S. government agency debentures	$	35,340	$	115	$	—		$	35,455
	U.S. states and political subdivisions	365,543		21,733		(751		)	386,525
	Residential mortgage-backed securities:
	U.S. government agencies	1,401,241		53,388		(213		)	1,454,416
	Commercial mortgage-backed securities:
	U.S. government agencies	27,689		34		(60		)	27,663
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	1,226,260		25,046		(2		)	1,251,304
	Non-agency	41,741		91		—			41,832
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	147,214		675		(534		)	147,355
	Corporate debt securities	158,019		955		(15,185		)	143,789
	Total debt securities	3,403,047		102,037		(16,745		)	3,488,339
	Marketable equity securities	3,308		—		—			3,308
	Total securities available for sale	$	3,406,355	$	102,037	$	(16,745	)	$	3,491,647
Securities held-to-maturity
Debt securities
	U.S. states and political subdivisions	$	100,840	$	3,025	$	—		$	103,865
	Total securities held to maturity	$	100,840	$	3,025	$	—		$	103,865

Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) stock constitute the majority of other investments on the consolidated balance sheets.



	March 31, 2013		December 31, 2012		March 31, 2012
FRB stock	$	21,324	$	21,045	$	21,003
FHLB stock	119,145		119,145		119,145
Other	515		527		565
Total other investments	$	140,984	$	140,717	$	140,713

FRB and FHLB stock is classified as a restricted investment, carried at cost and valued based on the ultimate recoverability of par value. Cash and stock dividends received on the stock are reported as interest income. There are no identified events or changes in circumstances that may have a significant adverse effect on these investments carried at cost.

Securities with a carrying value of $2.7 billion, $1.6 billion and $1.9 billion at March 31, 2013, December 31, 2012 and March 31, 2012, respectively, were pledged to secure trust and public deposits and securities sold under agreements to repurchase and for other purposes required or permitted by law.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

Realized Gains and Losses

The following table presents the proceeds from sales of available-for-sale securities and the gross realized gains and losses on the sales of those securities that have been included in earnings as a result of those sales. Gains or losses on the sales of available-for-sale securities are recognized upon sale and are determined using the specific identification method.



	Three months ended March 31,
	2013			2012
Proceeds	$	25,674		$	94,865

Realized gains	$	—		$	260
Realized losses	(9		)	—
Net securities (losses)/gains	$	(9	)	$	260

Gross Unrealized Losses and Fair Value

The following table presents the gross unrealized losses and fair value of securities in the securities available-for-sale portfolio by length of time that individual securities in each category had been in a continuous loss position.



		March 31, 2013
		Less than 12 months						12 months or longer						Total
		Fair Value		Unrealized Losses			Number Impaired Securities	Fair Value		Unrealized Losses			Number Impaired Securities	Fair Value		Unrealized Losses
Securities available-for-sale
Debt securities
	U.S. states and political subdivisions	$	33,648	$	(790	)	51	$	—	$	—		—	$	33,648	$	(790	)
	Residential mortgage-backed securities:
	U.S. government agencies	45,345		(663		)	5	—		—			—	45,345		(663		)
	Commercial mortgage-backed securities:
	U.S. government agencies	30,799		(659		)	3	—		—			—	30,799		(659		)
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	339,462		(2,354		)	21	—		—			—	339,462		(2,354		)
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	44,219		(347		)	6	—		—			—	44,219		(347		)
	Corporate debt securities	—		—			—	51,225		(10,330		)	8	51,225		(10,330		)
	Total available-for-sale securities	$	493,473	$	(4,813	)	86	$	51,225	$	(10,330	)	8	$	544,698	$	(15,143	)
Securities held-to-maturity
Debt securities
	U.S. states and political subdivisions	$	29,823	$	(244	)	54	$	—	$	—		—	$	29,823	$	(244	)
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	$	40,892	$	(339	)	4	$	—	$	—		—	$	40,892	$	(339	)
	Total held-to-maturity securities	$	70,715	$	(583	)	58	$	—	$	—		—	$	70,715	$	(583	)

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)



		December 31, 2012
		Less than 12 months						12 months or longer						Total
		Fair Value		Unrealized Losses			Number Impaired Securities	Fair Value		Unrealized Losses			Number Impaired Securities	Fair Value		Unrealized Losses
Securities available-for-sale
Debt securities
	U.S. states and political subdivisions	$	14,110	$	(229	)	24	$	—	$	—		—	$	14,110	$	(229	)
	Residential mortgage-backed securities:
	U.S. government agencies	14		—			1	13		—			1	27		—
	Commercial mortgage-backed securities:
	U.S. government agencies	31,237		(406		)	3	—		—			—	31,237		(406		)
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	133,008		(258		)	9	389		(2		)	1	133,397		(260		)
	Non-agency	—		—			—	2		—			1	2		—
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	35,316		(138		)	4	—		—			—	35,316		(138		)
	Corporate debt securities	—		—			—	49,652		(11,889		)	8	49,652		(11,889		)
	Total available-for-sale securities	$	213,685	$	(1,031	)	41	$	50,056	$	(11,891	)	11	$	263,741	$	(12,922	)
Securities held-to-maturity
Debt securities
	U.S. states and political subdivisions	$	6,543	$	(70	)	12	$	—	$	—		—	$	6,543	$	(70	)
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	$	17,413	$	(16	)	1	$	—	$	—		—	$	17,413	$	(16	)
	Total held-to-maturity securities	$	23,956	$	(86	)	13	$	—	$	—		—	$	23,956	$	(86	)



		March 31, 2012
		Less than 12 months						12 months or longer						Total
		Fair Value		Unrealized Losses			Number Impaired Securities	Fair Value		Unrealized Losses			Number Impaired Securities	Fair Value		Unrealized Losses
Securities available-for-sale
Debt securities
	U.S. states and political subdivisions	$	26,915	$	(751	)	39	$	—	$	—		—	$	26,915	$	(751	)
	Residential mortgage-backed securities:
	U.S. government agencies	40,036		(213		)	4	—		—			—	40,036		(213		)
	Commercial mortgage-backed securities:
	U.S. government agencies	12,329		(60		)	2	—		—			—	12,329		(60		)
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	4,322		(2		)	1	—		—			—	4,322		(2		)
	Non-agency	—		—			—	2		—			1	2		—
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	64,435		(534		)	6	—		—			—	64,435		(534		)
	Corporate debt securities	33,250		(342		)	12	46,657		(14,843		)	8	79,907		(15,185		)
	Total temporarily impaired securities	$	181,287	$	(1,902	)	64	$	46,659	$	(14,843	)	9	$	227,946	(16,745		)

At least quarterly, the Corporation conducts a comprehensive security-level impairment assessment on all securities in an unrealized loss position to determine if other-than-temporary impairment ("OTTI") exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Under the current OTTI accounting model for debt securities, an OTTI loss must be recognized for a debt security in an unrealized loss position if the Corporation intends to sell the security or it is more likely than

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

not that the Corporation will be required to sell the security before recovery of its amortized cost basis. In this situation, the amount of loss recognized in income is equal to the difference between the fair value and the amortized cost basis of the security. Even if the Corporation does not expect to sell the security, the Corporation must evaluate the expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in income. The portion of the unrealized loss relating to other factors, such as liquidity conditions in the market or changes in market interest rates, is recorded in other comprehensive income. Equity securities are also evaluated to determine whether the unrealized loss is expected to be recoverable based on whether evidence exists to support a realizable value equal to or greater than the amortized cost basis. If it is probable that the Corporation will not recover the amortized cost basis, taking into consideration the estimated recovery period and its ability to hold the equity security until recovery, OTTI is recognized.

The security-level assessment is performed on each security, regardless of the classification of the security as available for sale or held to maturity. The assessments are based on the nature of the securities, the financial condition of the issuer, the extent and duration of the securities, the extent and duration of the loss and the intent and whether Management intends to sell or it is more likely than not that it will be required to sell a security before recovery of its amortized cost basis, which may be maturity. For those securities for which the assessment shows the Corporation will recover the entire cost basis, Management does not intend to sell these securities and it is not more likely than not that the Corporation will be required to sell them before the anticipated recovery of the amortized cost basis, the gross unrealized losses are recognized in other comprehensive income, net of tax.

As of March 31, 2013, gross unrealized losses are concentrated within corporate debt securities which is composed of eight, single issuer, trust preferred securities with stated maturities. Such investments are less than 2% of the fair value of the entire investment portfolio. None of the corporate issuers have deferred paying dividends on their issued trust preferred shares in which the Corporation is invested. The fair values of these investments have been impacted by the market conditions which have caused risk premiums to increase, resulting in the decline in the fair value of the trust preferred securities. Management believes the Corporation will fully recover the cost of these securities and it does not intend to sell these securities and it is not more likely than not that it will be required to sell them before the anticipated recovery of the remaining amortized cost basis, which may be maturity. As a result, Management concluded that these securities were not other-than-temporarily impaired at March 31, 2013 and has recognized the total amount of the impairment in other comprehensive income, net of tax.

Contractual Maturity of Debt Securities

The following table shows the remaining contractual maturities and contractual yields of debt securities held-to-maturity and available-for-sale as of March 31, 2013. Estimated lives on mortgage-backed securities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)



	U.S. states and political subdivisions obligations			Residential mortgage backed securities U.S. govt. agency obligations			Commercial mortgage backed securities U.S. govt. agency obligations			Residential collateralized mortgage obligations - U.S. govt. agency obligations			Residential collateralized mortgage obligations - non-U.S. govt. agency obligations			Commercial collateralized mortgage obligations - U.S. govt. agency obligations			Corporate debt securities			Total			Weighted Average Yield
Securities Available for Sale
Remaining maturity:
One year or less	$	11,950		$	2,360		$	17,976		$	27,621		$	—		$	—		$	—		$	59,907		3.58	%
Over one year through five years	37,903			1,070,345			—			1,448,836			11			81,606			—			2,638,701			2.20	%
Over five years through ten years	171,780			79,621			40,598			128,822			—			28,996			—			449,817			3.09	%
Over ten years	40,973			—			—			—			—			—			51,225			92,198			2.24	%
Fair Value	$	262,606		$	1,152,326		$	58,574		$	1,605,279		$	11		$	110,602		$	51,225		$	3,240,623		2.35	%
Amortized Cost	$	249,750		$	1,109,905		$	58,827		$	1,591,341		$	11		$	108,658		$	61,555		$	3,180,047
Weighted-Average Yield	5.14		%	2.64		%	2.14		%	1.80		%	3.41		%	1.82		%	0.99		%	2.35		%
Weighted-Average Maturity	7.67			3.60			4.53			3.72			1.52			4.81			14.52			4.25

Securities Held to Maturity
Remaining maturity:
One year or less	$	56,981		$	—		$	—		$	—		$	—		$	—		$	—		$	56,981		1.64	%
Over one year through five years	19,031			—			—			138,519			—			41,746			40,625			239,921			2.21	%
Over five years through ten years	60,079			—			41,187			—			—			57,187			56,751			215,204			3.30	%
Over ten years	161,395			—			—			—			—			—			—			161,395			5.50	%
Fair Value	$	297,486		$	—		$	41,187		$	138,519		$	—		$	98,933		$	97,376		$	673,501		3.30	%
Amortized Cost	$	292,689		$	—		$	40,413		$	137,839		$	—		$	98,887		$	95,761		$	665,589
Weighted-Average Yield	5.48		%	—		%	1.85		%	1.92		%	—		%	2.91		%	2.18		%	3.30		%
Weighted-Average Maturity	12.96			—			5.82			3.31			—			6.39			4.75			7.05

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

4. Loans

Total noncovered and covered loans outstanding as of March 31, 2013, December 31, 2012 and March 31, 2012 were as follows:



		March 31, 2013			December 31, 2012			March 31, 2012
Commercial		$	5,888,337		$	5,866,489		$	5,220,051
Residential mortgage		451,522			445,211			428,950
Installment		1,322,795			1,328,258			1,259,930
Home equity		812,458			806,078			739,548
Credit cards		140,721			146,387			140,618
Leases		164,137			139,236			74,112
	Total noncovered loans (a)	8,779,970			8,731,659			7,863,209
Allowance for noncovered loan losses		(98,843		)	(98,942		)	(103,849		)
	Net noncovered loans	8,681,127			8,632,717			7,759,360
Covered loans (b)		896,832			1,019,125			1,378,150
Allowance for covered loan losses		(47,945		)	(43,255		)	(41,070		)
	Net covered loans	848,887			975,870			1,337,080
	Net loans	$	9,530,014		$	9,608,587		$	9,096,440

(a) Includes acquired, noncovered loans of $54.1 million, $54.2 million, $99.2 million as of March 31, 2013, December 31, 2012 and March 31, 2012, respectively.

(b) Includes loss share receivable of $95.6 million, $113.7 million and $171.1 million as of March 31, 2013, December 31, 2012 and March 31, 2012, respectively.

Originated loans are presented net of deferred loan origination fees and costs, which amounted to $6.8 million, $6.5 million and $6.6 million at March 31, 2013, December 31, 2012 and March 31, 2012, respectively. Acquired loans, including covered loans, are recorded at fair value as of the date of purchase with no allowance for loan loss. In 2010, the Bank acquired loans of $275.6 million in its acquisition of the First Bank branches, and $177.8 million and $1.8 billion in conjunction with the FDIC-assisted acquisitions of George Washington and Midwest, respectively. The loans that were acquired in these FDIC-assisted transactions are covered by loss sharing agreements, which afford the Bank significant loss protection. Loans covered under loss sharing agreements, including the amounts of expected reimbursements from the FDIC under these agreements, are reported as covered loans in the accompanying consolidated balance sheets.

Changes in the loss share receivable associated with covered loans for the three months ended March 31, 2013 and 2012, respectively, were as follows:



	Three Months Ended
	March 31, 2013			March 31, 2012
Balance at beginning of period	$	113,734		$	205,664
Accretion	(8,104		)	(9,657		)
Increase due to impairment	5,539			4,899
FDIC reimbursement	(10,549		)	(27,430		)
Covered loans paid in full	(5,027		)	(2,340		)
Balance at end of the period	$	95,593		$	171,136

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

Acquired Loans

All loans acquired in the First Bank acquisition were performing as of the date of acquisition. The difference between the fair value and the outstanding principal balance of the First Bank acquired loans is being accreted to interest income over the remaining term of the loans.

The Corporation has elected to account for all loans acquired in the George Washington and Midwest acquisitions under ASC 310-30 ("Acquired Impaired Loans") except for $162.6 million of acquired loans with revolving privileges, which are outside the scope of this guidance and which are being accounted for in accordance with ASC 310 ("Acquired Non-Impaired Loans"). The outstanding balance, including contractual principal, interest, fees and penalties, of all covered loans accounted for in accordance with ASC 310-30 was $1.0 billion, $1.2 billion, and $1.5 billion as of March 31, 2013, December 31, 2012 and March 31, 2012, respectively.

Over the life of the loans acquired and considered to be impaired under ASC 310-30, the Corporation evaluates the remaining contractual required payments receivable and estimates cash flows expected to be collected, considering the impact of prepayments. The excess of an acquired impaired loan's contractually required payments over the amount of its undiscounted cash flows expected to be collected is referred to as the nonaccretable difference. The nonaccretable difference, which is neither accreted into income nor recorded on our consolidated balance sheet, reflects estimated future credit losses and uncollectible contractual interest expected to be incurred over the life of the acquired impaired loan. The excess of cash flows expected to be collected over the carrying amount of the acquired impaired loans is referred to as the accretable yield. This amount is accreted into interest income over the remaining life of the acquired impaired loans or pools using the level yield method. The accretable yield is affected by changes in interest rate indices for variable rate loans, changes in prepayment speed assumptions and changes in expected principal and interest payments over the estimated lives of the acquired impaired loans.

The contractually required payments receivable represents the total undiscounted amount of all uncollected principal and interest payments. Contractually required payments receivable may increase or decrease for a variety of reasons, for example, when the contractual terms of the loan agreement are modified, when interest rates on variable rate loans change, or when principal and/or interest payments are received.

Cash flows expected to be collected on acquired impaired loans are estimated by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default, loss given default, and the amount of actual prepayments after the acquisition dates. Prepayments affect the estimated life of loans and could change the amount of interest income, and possibly principal, expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary. These adjustments are based, in part, on actual loss severities recognized for each loan type, as well as changes in the probability of default. For periods in which estimated cash flows are not reforecasted, the prior reporting period's estimated cash flows are adjusted to reflect the actual cash received and credit events that transpired during the current reporting period.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

Changes in the carrying amount and accretable yield for Acquired Impaired Loans were as follows for the three months ended March 31, 2013 and 2012:



	Three Months Ended
	March 31, 2013						March 31, 2012
	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Balance at beginning of period	$	113,288		$	762,386		$	176,736		$	1,128,978
Accretion	(19,514		)	19,514			(26,442		)	26,442
Net reclassifications from non-accretable to accretable	10,569			—			11,813			—
Payments received, net	—			(125,230		)	—			(111,901		)
Disposals	(2,213		)	—			(815		)	—
Balance at end of period	$	102,130		$	656,670		$	161,292		$	1,043,519

A reconciliation of the contractual required payments receivable to the carrying amount of Acquired Impaired Loans as of March 31, 2013 and 2012 is as follows:



	March 31, 2013			March 31, 2012
Contractual required payments receivable	$	1,040,245		$	1,515,024
Nonaccretable difference	(281,445		)	(310,213		)
Expected cash flows	758,800			1,204,811
Accretable yield	(102,130		)	(161,292		)
Carrying balance	$	656,670		$	1,043,519

Increases in expected cash flows subsequent to the acquisition are recognized prospectively through adjustment of the yield on the loans or pools over its remaining life, while decreases in expected cash flows are recognized as impairment through a provision for loan loss and an increase in the allowance for covered loan losses. The most recent quarterly evaluation of the remaining contractual required payments receivable and cash flows expected to be collected resulted in an overall improvement in the cash flow expectations as a result of positive changes in risk ratings, improvements in the underlying value of collateral dependent loans and actual cash flows received higher than expected. There were no significant changes from prior periods to key assumptions used in the most recent quarterly evaluation of cash flows expected to be collected.

The overall improvement in the cash flow expectations resulted in the reclassification from nonaccretable difference to accretable yield of $10.6 million during the three months ended March 31, 2013. These reclassifications resulted in yield adjustments on these loans and pools on a prospective basis to interest income. Improved cash flow expectations for loans or pools that were impaired during prior periods were recorded first as a reversal of previously recorded impairment and then as an increase in prospective yield when all previously recorded impairment has been recaptured. Additionally, the FDIC loss share receivable was also reduced by the guaranteed portion of the additional cash flows expected to be received through an increase in provision expense and a corresponding reduction in the prospective yield of the remaining loss share receivable.

The most recent quarterly evaluation of the remaining contractual required payments receivable and cash flows expected to be collected resulted in the decline in the cash flow expectations of certain loans and pools during the three months ended March 31, 2013. The decline in expected cash flows was recorded as provision expense of $9.7 million in the three months ended March 31, 2013 with a related increase of $5.5 million in the loss share receivable for the portion of the losses recoverable under the loss share agreements with the FDIC. This decrease in cash flows resulted in a net provision for covered loan losses of $4.1 million

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

for the three months ended March 31, 2013 compared to a net provision of $5.9 million for the three months ended March 31, 2012.

Credit Quality Disclosures

The credit quality of the Corporation's loan portfolios is assessed as a function of net credit losses, levels of nonperforming assets and delinquencies, and credit quality ratings as defined by the Corporation. These credit quality ratings are an important part of the Corporation's overall credit risk management process and evaluation of the allowance for credit losses.

Generally, loans, except for certain commercial, credit card and mortgage loans, and leases on which payments are past due for 90 days are placed on nonaccrual status, unless those loans are in the process of collection and, in Management's opinion, are fully secured. Credit card loans on which payments are past due for 120 days are placed on nonaccrual status. When a loan is placed on nonaccrual status, interest deemed uncollectible which had been accrued in prior years is charged against the allowance for loan losses and interest deemed uncollectible accrued in the current year is reversed against interest income. Interest on mortgage loans is accrued until Management deems it uncollectible based upon the specific identification method. Payments subsequently received on nonaccrual loans are generally applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable. This generally requires timely principal and interest payments for a minimum of six consecutive payment cycles. Loans are generally written off when deemed uncollectible or when they reach a predetermined number of days past due depending upon loan product, terms and other factors.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

The following tables provide a summary of loans by portfolio type, including the delinquency status of those loans that continue to accrue interest and those loans that are nonaccrual.



As of March 31, 2013
Legacy Loans													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (a)		Loans
Commercial
C&I	$	3,828	$	1,372	$	4,188	$	9,388	$	3,369,057	$	3,378,445	$	—	$	8,274
CRE	2,872		3,442		8,668		14,982		2,149,975		2,164,957		1,683		11,676
Construction	—		—		1,134		1,134		309,591		310,725		1,058		439
Leases	—		—		—		—		164,137		164,137		—		—
Consumer
Installment	7,778		2,614		4,932		15,324		1,305,753		1,321,077		4,321		4,695
Home Equity Lines	1,287		479		1,172		2,938		792,540		795,478		275		2,275
Credit Cards	825		580		773		2,178		138,543		140,721		364		510
Residential Mortgages	11,312		2,732		5,921		19,965		430,334		450,299		4,508		9,484
Total	$	27,902	$	11,219	$	26,788	$	65,909	$	8,659,930	$	8,725,839	$	12,209	$	37,353
Acquired Loans (Noncovered)													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing		Loans
Commercial
C&I	$	—	$	—	$	—	$	—	$	4,179	$	4,179	$	—	$	—
CRE	—		324		2,696		3,020		27,011		30,031		—		3,454
Consumer
Installment	19		29		—		48		1,670		1,718		—		2
Home Equity Lines	51		17		139		207		16,773		16,980		184		—
Residential Mortgages	63		—		—		63		1,160		1,223		—		—
Total	$	133	$	370	$	2,835	$	3,338	$	50,793	$	54,131	$	184	$	3,456
Covered Loans (b)													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (c)		Loans (c)
Commercial
C&I	$	1,685	$	1,038	$	21,343	$	24,066	$	87,357	$	111,423	n/a		n/a
CRE	2,617		13,964		161,256		177,837		290,125		467,962		n/a		n/a
Construction	—		—		36,157		36,157		5,646		41,803		n/a		n/a
Consumer
Installment	20		—		41		61		8,020		8,081		n/a		n/a
Home Equity Lines	1,567		119		1,881		3,567		109,776		113,343		n/a		n/a
Residential Mortgages	9,849		724		6,509		17,082		41,545		58,627		n/a		n/a
Total	$	15,738	$	15,845	$	227,187	$	258,770	$	542,469	$	801,239	n/a		n/a

(a) Installment loans 90 days or more past due and accruing include $3.5 million of loans guaranteed by the U.S. government as of March 31, 2013.

(b) Excludes loss share receivable of $95.6 million as of March 31, 2013.

(c) Acquired impaired loans were not classified as nonperforming assets at March 31, 2013 as the loans are considered to be performing under ASC 310-30. As a result interest income, through the accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all acquired impaired loans. These asset quality disclosures are, therefore, not applicable to acquired impaired loans.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)



As of December 31, 2012
Legacy Loans													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (a)		Loans
Commercial
C&I	$	3,814	$	1,788	$	3,571	$	9,173	$	3,294,527	$	3,303,700	$	104	$	5,255
CRE	4,181		4,483		8,901		17,565		2,175,967		2,193,532		382		13,018
Construction	981		—		597		1,578		333,969		335,547		—		731
Leases	6		—		—		6		139,230		139,236		—		—
Consumer
Installment	11,722		3,193		5,608		20,523		1,305,921		1,326,444		4,909		2,911
Home Equity Lines	1,584		880		1,227		3,691		784,988		788,679		475		1,557
Credit Cards	969		558		954		2,481		143,906		146,387		438		598
Residential Mortgages	13,228		2,488		5,231		20,947		423,028		443,975		3,076		9,852
Total	$	36,485	$	13,390	$	26,089	$	75,964	$	8,601,536	$	8,677,500	$	9,384	$	33,922

Acquired Loans (Noncovered)													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing		Loans
Commercial
C&I	$	—	$	198	$	—	$	198	$	2,628	$	2,826	$	—	$	—
CRE	—		47		2,634		2,681		28,203		30,884		—		2,762
Consumer
Installment	—		—		31		31		1,783		1,814		33		3
Home Equity Lines	—		—		—		—		17,399		17,399		—		—
Residential Mortgages	63		—		—		63		1,173		1,236		—		—
Total	$	63	$	245	$	2,665	$	2,973	$	51,186	$	54,159	$	33	$	2,765

Covered Loans (b)													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (c)		Loans (c)
Commercial
C&I	$	931	$	981	$	24,111	$	26,023	$	102,486	$	128,509	n/a		n/a
CRE	4,130		15,019		172,444		191,593		348,002		539,595		n/a		n/a
Construction	589		7,925		34,314		42,828		7,505		50,333		n/a		n/a
Consumer
Installment	1		65		21		87		8,102		8,189		n/a		n/a
Home Equity Lines	1,528		654		2,211		4,393		112,832		117,225		n/a		n/a
Residential Mortgages	10,005		442		7,763		18,210		43,330		61,540		n/a		n/a
Total	$	17,184	$	25,086	$	240,864	$	283,134	$	622,257	$	905,391	n/a		n/a

(a) Installment loans 90 days or more past due and accruing include $3.4 million of loans guaranteed by the U.S. government as of December 31, 2012.

(b) Excludes loss share receivable of $113.7 million as of December 31, 2012.

(c) Acquired impaired loans were not classified as nonperforming assets at December 31, 2012 as the loans are considered to be performing under ASC 310-30. As a result interest income, through the accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all acquired impaired loans. These asset quality disclosures are, therefore, not applicable to acquired impaired loans.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)



As of March 31, 2012
Legacy Loans													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (a)		Loans
Commercial
C&I	$	9,683	$	598	$	4,464	$	14,745	$	2,858,427	$	2,873,172	$	260	$	5,450
CRE	7,066		2,270		23,439		32,775		1,951,798		1,984,573		614		32,145
Construction	279		—		5,309		5,588		280,127		285,715		—		5,451
Leases	775		—		—		775		73,337		74,112		—		—
Consumer
Installment	7,979		2,226		4,380		14,585		1,243,165		1,257,750		4,141		434
Home Equity Lines	2,229		469		1,126		3,824		717,013		720,837		556		1,113
Credit Cards	913		476		809		2,198		138,420		140,618		309		522
Residential Mortgages	8,269		2,444		10,029		20,742		406,540		427,282		3,381		6,648
Total	$	37,193	$	8,483	$	49,556	$	95,232	$	7,668,827	$	7,764,059	$	9,261	$	51,763

Acquired Loans (Noncovered)													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing		Loans
Commercial
C&I	$	—	$	—	$	65	$	65	$	17,488	$	17,553	$	—	$	70
CRE	818		—		706		1,524		57,514		59,038		—		1,430
Consumer
Installment	—		14		—		14		2,166		2,180		—		—
Home Equity Lines	220		25		—		245		18,466		18,711		—		—
Residential Mortgages	—		—		—		—		1,668		1,668		—		—
Total	$	1,038	$	39	$	771	$	1,848	$	97,302	$	99,150	$	—	$	1,500

Covered Loans (b)													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (c)		Loans (c)
Commercial
C&I	$	3,736	$	105	$	28,654	$	32,495	$	149,471	$	181,966	n/a		n/a
CRE	29,417		3,318		162,963		195,698		530,405		726,103		n/a		n/a
Construction	1,695		11,688		57,628		71,011		12,208		83,219		n/a		n/a
Consumer
Installment	23		—		22		45		9,163		9,208		n/a		n/a
Home Equity Lines	1,093		1,141		260		2,494		134,003		136,497		n/a		n/a
Residential Mortgages	11,995		2,197		14,532		28,724		41,297		70,021		n/a		n/a
Total	$	47,959	$	18,449	$	264,059	$	330,467	$	876,547	$	1,207,014	n/a		n/a

(a) Installment loans 90 days or more past due and accruing include $3.3 million of loans guaranteed by the U.S. government as of March 31, 2012.

(b) Excludes loss share receivable of $171.1 million as of March 31, 2012.

(c) Acquired impaired loans were not classified as nonperforming assets at March 31, 2012 as the loans are considered to be performing under ASC 310-30. As a result interest income, through the accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all acquired impaired loans. These asset quality disclosures are, therefore, not applicable to acquired impaired loans.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

Individual commercial loans are assigned credit risk grades based on an internal assessment of conditions that affect a borrower’s ability to meet its contractual obligation under the loan agreement. The assessment process includes reviewing a borrower’s current financial information, historical payment experience, credit documentation, public information, and other information specific to each borrower. Commercial loans are reviewed on an annual, quarterly or rotational basis or as Management becomes aware of information during a borrower’s ability to fulfill its obligation. For consumer loans, Management evaluates credit quality based on the aging status of the loan as well as by payment activity, which is presented in the above tables.

The credit-risk grading process for commercial loans is summarized as follows:

“Pass” Loans (Grades 1, 2, 3, 4) are not considered a greater than normal credit risk. Generally, the borrowers have the apparent ability to satisfy obligations to the bank, and the Corporation anticipates insignificant uncollectible amounts based on its individual loan review.

“Special-Mention” Loans (Grade 5) are commercial loans that have identified potential weaknesses that deserve Management’s close attention. If left uncorrected, these potential weaknesses may result in noticeable deterioration of the repayment prospects for the asset or in the institution’s credit position.

“Substandard” Loans (Grade 6) are inadequately protected by the current financial condition and paying capacity of the obligor or by any collateral pledged. Loans so classified have a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt pursuant to the contractual principal and interest terms. Such loans are characterized by the distinct possibility that the Corporation may sustain some loss if the deficiencies are not corrected.

“Doubtful” Loans (Grade 7) have all the weaknesses inherent in those classified as substandard, with the added characteristic that existing facts, conditions, and values make collection or liquidation in full highly improbable. Such loans are currently managed separately to determine the highest recovery alternatives.

“Loss” Loans (Grade 8) are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. These loans are charged off when loss is identified.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

The following tables provide a summary of commercial loans by portfolio type and the Corporation's internal credit quality rating.



As of March 31, 2013
Legacy Loans
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	39,433	$	271	$	—	$	13,330
Grade 2	148,253		3,968		—		731
Grade 3	688,264		251,664		19,243		25,808
Grade 4	2,399,913		1,807,724		286,093		116,314
Grade 5	63,287		45,328		1,367		4,636
Grade 6	39,295		56,002		4,022		3,318
Grade 7	—		—		—		—
Total	$	3,378,445	$	2,164,957	$	310,725	$	164,137
Acquired Loans (Noncovered)
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	—	$	—	$	—	$	—
Grade 2	—		—		—		—
Grade 3	—		—		—		—
Grade 4	4,179		25,168		—		—
Grade 5	—		1,155		—		—
Grade 6	—		3,708		—		—
Grade 7	—		—		—		—
Total	$	4,179	$	30,031	$	—	$	—
Covered Loans
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	—	$	—	$	—	$	—
Grade 2	1,009		—		—		—
Grade 3	92		—		—		—
Grade 4	61,012		184,920		551		—
Grade 5	1,028		25,048		1,586		—
Grade 6	46,233		256,565		36,449		—
Grade 7	2,049		1,429		3,217		—
Total	$	111,423	$	467,962	$	41,803	$	—

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)



As of December 31, 2012
Legacy Loans
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	42,211	$	—	$	—	$	13,119
Grade 2	114,480		3,138		—		179
Grade 3	661,692		254,749		17,652		20,042
Grade 4	2,406,174		1,818,818		311,271		104,037
Grade 5	44,638		53,008		3,057		1,561
Grade 6	34,505		63,819		3,567		298
Grade 7	—		—		—		—
Total	$	3,303,700	$	2,193,532	$	335,547	$	139,236
Acquired Loans (Noncovered)
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	—	$	—	$	—	$	—
Grade 2	—		—		—		—
Grade 3	—		—		—		—
Grade 4	2,495		26,868		—		—
Grade 5	331		667		—		—
Grade 6	—		3,349		—		—
Grade 7	—		—		—		—
Total	$	2,826	$	30,884	$	—	$	—
Covered Loans
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	—	$	—	$	—	$	—
Grade 2	1,526		—		—		—
Grade 3	—		—		—		—
Grade 4	73,480		214,987		476		—
Grade 5	3,215		30,708		1,331		—
Grade 6	47,468		292,158		45,838		—
Grade 7	2,820		1,742		2,688		—
Total	$	128,509	$	539,595	$	50,333	$	—

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)



As of March 31, 2012
Legacy Loans
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	40,605	$	—	$	—	$	10,706
Grade 2	97,078		6,210		610		—
Grade 3	521,791		243,461		18,208		7,098
Grade 4	2,070,512		1,554,118		251,354		55,930
Grade 5	51,591		70,452		4,257		—
Grade 6	91,527		110,332		11,286		378
Grade 7	68		—		—		—
Total	$	2,873,172	$	1,984,573	$	285,715	$	74,112
Acquired Loans (Noncovered)
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	—	$	—	$	—	$	—
Grade 2	—		—		—		—
Grade 3	—		—		—		—
Grade 4	17,307		56,341		—		—
Grade 5	—		—		—		—
Grade 6	246		2,697		—		—
Grade 7	—		—		—		—
Total	$	17,553	$	59,038	$	—	$	—
Covered Loans
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	926	$	—	$	—	$	—
Grade 2	1,384		—		—		—
Grade 3	523		495		—		—
Grade 4	98,347		272,278		487		—
Grade 5	7,913		90,901		1,613		—
Grade 6	67,000		349,702		72,675		—
Grade 7	5,873		12,727		8,444		—
Total	$	181,966	$	726,103	$	83,219	$	—

5. Allowance for Loan Losses

The Corporation's Credit Policy Division manages credit risk by establishing common credit policies for its subsidiary bank, participating in approval of its loans, conducting reviews of loan portfolios, providing centralized consumer underwriting, collections and loan operation services, and overseeing loan workouts. The Corporation's objective is to minimize losses from its commercial lending activities and to maintain consumer losses at acceptable levels that are stable and consistent with growth and profitability objectives.

The allowance for loan losses is Management's estimate of the amount of probable credit losses inherent in the portfolio at the balance sheet date. Management estimates credit losses based on individual loans determined to be impaired and on all other loans grouped based on similar risk characteristics. Management also considers internal and external factors such as economic conditions, loan management practices, portfolio monitoring, and other risks, collectively known as qualitative factors, or Q-factors, to estimate credit losses in the loan portfolio. Q-factors are used to reflect changes in the portfolio's collectability characteristics not captured by historical loss data.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

The Corporation's historical loss component is the most significant of the allowance for loan losses components and is based on historical loss experience by credit-risk grade (for commercial loan pools) and payment status (for mortgage and consumer loan pools). The historical loss experience component of the allowance for loan losses represents the results of migration analysis of historical net charge-offs for portfolios of loans (including groups of commercial loans within each credit-risk grade and groups of consumer loans by payment status). For measuring loss exposure in a pool of loans, the historical net charge-off or migration experience is utilized to estimate expected losses to be realized from the pool of loans.

If a nonperforming, substandard loan has an outstanding balance of $0.3 million or greater or if a doubtful loan has an outstanding balance of $0.1 million or greater, as determined by the Corporation's credit-risk grading process, further analysis is performed to determine the probable loss content and assign a specific allowance to the loan, if deemed appropriate. The allowance for loan losses relating to originated loans that have become impaired is based on either expected cash flows discounted using the original effective interest rate, the observable market price, or the fair value of the collateral for certain collateral dependent loans. To the extent credit deterioration occurs on purchased loans after the date of acquisition, the Corporation records an allowance for loan losses, net of any expected reimbursement under any loss sharing agreements with the FDIC.

The activity within the allowance for noncovered loan losses, by portfolio type, for the three months ended March 31, 2013 and 2012 is shown in the following tables:



Three Months Ended March 31, 2013
	C&I			CRE			Construction			Leases		Installment			Home Equity Lines			Credit Cards			Residential Mortgages			Total
Allowance for loan losses, beginning balance	$	36,209		$	20,126		$	3,821		$	639	$	11,154		$	13,724		$	7,384		$	5,885		$	98,942
Charge-offs	(2,103		)	(53		)	(516		)	—		(4,594		)	(1,837		)	(1,403		)	(270		)	(10,776		)
Recoveries	1,055			132			58			89		2,496			483			513			43			4,869
Provision for loan losses	5,266			(1,806		)	(622		)	401		95			2,198			575			(299		)	5,808
Allowance for loan losses, ending balance	$	40,427		$	18,399		$	2,741		$	1,129	$	9,151		$	14,568		$	7,069		$	5,359		$	98,843



Three Months Ended March 31, 2012
	C&I			CRE			Construction			Leases			Installment			Home Equity Lines			Credit Cards			Residential Mortgages			Total
Allowance for loan losses, beginning balance	$	32,363		$	31,857		$	5,173		$	341		$	17,981		$	6,766		$	7,369		$	5,849		$	107,699
Charge-offs	(6,292		)	(669		)	(38		)	—			(5,238		)	(2,735		)	(1,583		)	(862		)	(17,417		)
Recoveries	350			81			263			37			3,202			840			630			35			5,438
Provision for loan losses	10,751			(3,491		)	(274		)	(44		)	(1,192		)	1,398			104			877			8,129
Allowance for loan losses, ending balance	$	37,172		$	27,778		$	5,124		$	334		$	14,753		$	6,269		$	6,520		$	5,899		$	103,849

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

The following tables present the allowance for noncovered loan losses and the recorded investment in noncovered loans, by portfolio type, based on impairment method as of March 31, 2013, December 31, 2012 and March 31, 2012.



As of March 31, 2013
		C&I		CRE		Construction		Leases		Installment		Home Equity Lines		Credit Cards		Residential Mortgages		Total
Ending allowance for noncovered loan losses balance attributable to loans:
	Individually evaluated for impairment	$	1,957	$	769	$	90	$	—	$	1,458	$	89	$	74	$	1,713	$	6,150
	Collectively evaluated for impairment	38,470		17,630		2,651		1,129		7,693		14,479		6,995		3,646		92,693
Total ending allowance for noncovered loan losses balance		$	40,427	$	18,399	$	2,741	$	1,129	$	9,151	$	14,568	$	7,069	$	5,359	$	98,843
Noncovered loans:
	Loans individually evaluated for impairment	$	8,445	$	24,160	$	2,779	$	—	$	31,117	$	6,917	$	1,388	$	23,527	$	98,333
	Loans collectively evaluated for impairment	3,374,178		2,170,829		307,946		164,137		1,291,678		805,541		139,333		427,995		8,681,637
Total ending noncovered loan balance		$	3,382,623	$	2,194,989	$	310,725	$	164,137	$	1,322,795	$	812,458	$	140,721	$	451,522	$	8,779,970



As of December 31, 2012
		C&I		CRE		Construction		Leases		Installment		Home Equity Lines		Credit Cards		Residential Mortgages		Total
Ending allowance for noncovered loan losses balance attributable to loans:
	Individually evaluated for impairment	$	577	$	913	$	105	$	—	$	1,526	$	34	$	127	$	1,722	$	5,004
	Collectively evaluated for impairment	35,632		19,213		3,716		639		9,628		13,690		7,257		4,163		93,938
Total ending allowance for noncovered loan losses balance		$	36,209	$	20,126	$	3,821	$	639	$	11,154	$	13,724	$	7,384	$	5,885	$	98,942
Noncovered loans:
	Loans individually evaluated for impairment	$	6,187	$	24,007	$	3,405	$	—	$	30,870	$	6,281	$	1,612	$	24,009	$	96,371
	Loans collectively evaluated for impairment	3,300,339		2,200,409		332,142		139,236		1,297,388		799,797		144,775		421,202		8,635,288
Total ending noncovered loan balance		$	3,306,526	$	2,224,416	$	335,547	$	139,236	$	1,328,258	$	806,078	$	146,387	$	445,211	$	8,731,659

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(Dollars in thousands)



As of March 31, 2012
		C&I		CRE		Construction		Leases		Installment		Home Equity Lines		Credit Cards		Residential Mortgages		Total
Ending allowance for noncovered loan losses balance attributable to loans:
	Individually evaluated for impairment	$	972	$	2,478	$	224	$	—	$	1,902	$	66	$	92	$	1,505	$	7,239
	Collectively evaluated for impairment	36,200		25,300		4,900		334		12,851		6,203		6,428		4,394		96,610
Total ending allowance for noncovered loan losses balance		$	37,172	$	27,778	$	5,124	$	334	$	14,753	$	6,269	$	6,520	$	5,899	$	103,849
Noncovered loans:
	Loans individually evaluated for impairment	$	6,079	$	32,112	$	8,929	$	—	$	32,378	$	5,522	$	2,060	$	18,077	$	105,157
	Loans collectively evaluated for impairment	2,884,646		2,011,499		276,786		74,112		1,227,552		734,025		138,558		410,874		7,758,052
Total ending noncovered loan balance		$	2,890,725	$	2,043,611	$	285,715	$	74,112	$	1,259,930	$	739,547	$	140,618	$	428,951	$	7,863,209

To the extent there is a decrease in the present value of cash flows from Acquired Impaired Loans after the date of acquisition, the Corporation records an allowance for loan losses, net of expected reimbursement under any loss share agreements. These expected reimbursements are recorded as part of covered loans in the accompanying consolidated balance sheets. In the three months ended March 31, 2013, the Corporation increased its allowance for covered loan losses to $47.9 million to reserve for estimated additional losses on certain Acquired Impaired Loans. The increase in the allowance was recorded by a charge to the provision for covered loan losses of $9.7 million that was partially offset by an increase of $5.5 million in the loss share receivable for the portion of the losses recoverable under the loss sharing agreements. During the three months ended March 31, 2012, provision for covered loan losses of $10.8 million was partially offset by an increase of $4.9 million in the loss share receivable resulting in an allowance for covered loan losses of $41.1 million.

To the extent credit deterioration occurs in Acquired Non-Impaired loans after the date of acquisition, the Corporation records a provision for loan losses only when the required allowance, net of any expected reimbursement under the loss sharing agreements exceeds any remaining credit discount. The allowance for losses on Acquired Nonimpaired loans, included in the allowance for noncovered covered loan losses on the consolidated balance sheets was $0.4 million, $0.3 million and $0.4 million as of March 31, 2013, December 31, 2012 and March 31, 2012, respectively.

The activity within the allowance for covered loan losses for the three months ended March 31, 2013 and 2012 is shown in the following table:



		Three months ended March 31,
		2013			2012
Balance at beginning of the period		$	43,255		$	36,417
	Provision for loan losses before benefit attributable to FDIC loss share agreements	9,677			10,831
	Benefit attributable to FDIC loss share agreements	(5,539		)	(4,899		)
Net provision for loan losses		4,138			5,932
Increase in indemnification asset		5,539			4,899
Loans charged-off		(4,987		)	(6,178		)
Balance at end of the period		$	47,945		$	41,070

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(Dollars in thousands)



As of March 31, 2013
				Unpaid				Average
		Recorded		Principal		Related		Recorded
		Investment		Balance		Allowance		Investment
Impaired loans with no related allowance
Commercial
	C&I	$	2,724	$	15,614	$	—	$	3,835
	CRE	19,969		27,259		—		20,681
	Construction	2,072		2,559		—		2,341
Consumer
	Installment	3,734		5,160		—		4,002
	Home equity line	1,090		1,420		—		1,172
	Credit card	58		58		—		65
	Residential mortgages	9,374		11,876		—		9,469
Subtotal		39,021		63,946		—		41,565
Impaired loans with a related allowance
Commercial
	C&I	5,721		7,578		1,957		6,143
	CRE	4,191		4,191		769		4,206
	Construction	707		707		90		712
Consumer
	Installment	27,383		27,475		1,458		27,564
	Home equity line	5,827		5,827		89		5,886
	Credit card	1,330		1,330		74		1,378
	Residential mortgages	14,153		14,242		1,713		14,168
Subtotal		59,312		61,350		6,150		60,057
	Total impaired loans	$	98,333	$	125,296	$	6,150	$	101,622

(a) These tables exclude loans fully charged off.

(b) The differences between the recorded investment and unpaid principal balance amounts represents partial charge offs.

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(Dollars in thousands)



As of December 31, 2012
				Unpaid				Average
		Recorded		Principal		Related		Recorded
		Investment		Balance		Allowance		Investment
Impaired loans with no related allowance
Commercial
	C&I	$	3,098	$	14,473	$	—	$	12,533
	CRE	19,664		26,402		—		23,911
	Construction	2,684		3,306		—		3,861
Consumer
	Installment	2,527		3,947		—		4,251
	Home equity line	642		849		—		860
	Credit card	467		467		—		568
	Residential mortgages	9,578		12,142		—		10,645
Subtotal		38,660		61,586		—		56,629
Impaired loans with a related allowance
Commercial
	C&I	3,089		4,943		577		4,231
	CRE	4,343		4,927		913		3,834
	Construction	721		721		105		730
Consumer
	Installment	28,343		28,706		1,526		29,583
	Home equity line	5,639		5,639		34		5,924
	Credit card	1,145		1,145		127		1,311
	Residential mortgages	14,431		14,520		1,722		14,537
Subtotal		57,711		60,601		5,004		60,150
	Total impaired loans	$	96,371	$	122,187	$	5,004	$	116,779

(a) These tables exclude loans fully charged off.

(b) The differences between the recorded investment and unpaid principal balance amounts represents partial charge offs.

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(Dollars in thousands)



As of March 31, 2012
				Unpaid				Average
		Recorded		Principal		Related		Recorded
		Investment		Balance		Allowance		Investment
Impaired loans with no related allowance
Commercial
	C&I	$	3,272	$	9,937	$	—	$	4,357
	CRE	25,734		36,073		—		26,449
	Construction	7,764		12,785		—		7,945
Consumer
	Installment	—		—		—		—
	Home equity line	—		—		—		—
	Credit card	223		223		—		251
	Residential mortgages	4,409		4,409		—		4,925
Subtotal		41,402		63,427		—		43,927
Impaired loans with a related allowance
Commercial
	C&I	2,807		3,206		972		2,919
	CRE	6,378		6,568		2,478		6,120
	Construction	1,165		1,165		224		1,168
Consumer
	Installment	32,378		32,378		1,901		32,504
	Home equity line	5,522		5,522		66		5,556
	Credit card	1,837		1,837		92		1,885
	Residential mortgages	13,667		13,667		1,504		13,692
Subtotal		63,754		64,343		7,237		63,844
	Total impaired loans	$	105,156	$	127,770	$	7,237	$	107,771

(a) These tables exclude loans fully charged off.

(b) The differences between the recorded investment and unpaid principal balance amounts represents partial charge offs.

Interest income recognized on impaired loans during quarters ended March 31, 2013, 2012 and 2011 was not material.

In certain circumstances, the Corporation may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near term. In most cases the modification is either a concessionary reduction in interest rate, extension of the maturity date or modification of the adjustable rate provisions of the loan that would otherwise not be considered; however, forgiveness of principal is rarely granted. Concessionary modifications are classified as TDRs unless the modification is short-term, typically less than 90 days. TDRs accrue interest if the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms for a minimum of six consecutive payment cycles after the restructuring date.

The substantial majority of the Corporation's residential mortgage TDRs involve reducing the client's loan payment through an interest rate reduction for a set period of time based on the borrower's ability to service the modified loan payment. As a result of guidance from the Office of the Comptroller of the Currency ("OCC"), in the three months ended September 30, 2012, approximately $10.6 million of consumer loans were

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

identified as troubled debt restructurings whereby the borrower's obligation to the Corporation has been discharged in bankruptcy and the borrower has not reaffirmed the debt. As of March 31, 2013 and December 31, 2012, non-reaffirmed consumer loans reported as nonaccrual were $10.0 million and $7.7 million, respectively. Modifications of mortgages retained in portfolio are handled using proprietary modification guidelines, or the FDIC's Modification Program for residential first mortgages covered by loss share agreements (agreements between the Bank and the FDIC that afford the Bank significant protection against future losses). The Corporation participates in the U.S. Treasury's Home Affordable Modification Program for originated mortgages sold to and serviced for Fannie Mae and Freddie Mac.

Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial real estate and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period. Acquired loans restructured after acquisition are not considered TDRs for purposes of the Corporation's accounting and disclosure if the loans evidenced credit deterioration as of the acquisition date and are accounted for in pools. The Corporation has modified certain loans according to provisions in loss share agreements. Losses associated with modifications on these loans, including the economic impact of interest rate reductions, are generally eligible for reimbursement under the loss share agreements.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

The following tables provide the number of loans modified in a TDR and the recorded investment and unpaid principal balance by loan portfolio as of March 31, 2013, December 31, 2012 and March 31, 2012.



			As of March 31, 2013
			Number of Loans	Recorded Investment		Unpaid Principal Balance
Noncovered loans
	Commercial
		C&I	25	$	2,627	$	7,864
		CRE	45	17,217		22,187
		Construction	31	2,779		3,266
		Total noncovered commercial	101	22,623		33,317
	Consumer
		Installment	1,840	31,117		32,635
		Home equity lines	238	6,917		7,247
		Credit card	343	1,388		1,388
		Residential mortgages	294	23,527		26,118
		Total noncovered consumer	2,715	62,949		67,388
Total noncovered loans			2,816	85,572		100,705
Covered loans
	Commercial
		C&I	3	1,723		1,958
		CRE	20	48,327		57,426
		Construction	10	6,296		26,502
		Total covered commercial	33	56,346		85,886
	Consumer
		Home equity lines	36	5,113		5,144
Total covered loans			69	$	61,459	$	91,030
Total loans			2,885	$	147,031	$	191,735

(a) The differences between the recorded investment and unpaid principal balance amounts represents partial charge offs.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)



			As of December 31, 2012
			Number of Loans	Recorded Investment		Unpaid Principal Balance
Noncovered loans
	Commercial
		C&I	24	$	2,617	$	8,044
		CRE	40	16,305		20,701
		Construction	28	2,955		3,419
		Total noncovered commercial	92	21,877		32,164
	Consumer
		Installment	1,769	30,870		32,653
		Home equity lines	226	6,281		6,488
		Credit card	389	1,612		1,612
		Residential mortgages	298	24,009		26,662
		Total noncovered consumer	2,682	62,772		67,415
Total noncovered loans			2,774	84,649		99,579
Covered loans
	Commercial
		C&I	3	1,763		1,998
		CRE	20	50,272		57,483
		Construction	10	8,171		37,547
		Total covered commercial	33	60,206		97,028
	Consumer
		Home equity lines	35	5,632		5,666
Total covered loans			68	$	65,838	$	102,694
Total loans			2,842	$	150,487	$	202,273

(a) The differences between the recorded investment and unpaid principal balance amounts represents partial charge offs.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)



			As of March 31, 2012
			Number of Loans	Recorded Investment		Unpaid Principal Balance
Noncovered loans
	Commercial
		C&I	15	$	3,388	$	6,031
		CRE	30	9,136		12,745
		Construction	27	4,593		5,250
		Total noncovered commercial	72	17,117		24,026
	Consumer
		Installment	1,506	32,378		32,378
		Home equity lines	184	5,522		5,522
		Credit card	454	2,060		2,060
		Residential mortgages	184	18,076		18,076
		Total noncovered consumer	2,328	58,036		58,036
Total noncovered loans			2,400	75,153		82,062
Covered loans
	Commercial
		C&I	12	7,662		14,877
		CRE	23	54,824		60,075
		Construction	9	13,687		33,791
		Total covered commercial	44	76,173		108,743
Total loans			2,444	$	151,326	$	190,805

(a) The differences between the recorded investment and unpaid principal balance amounts represents partial charge offs.

The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the quarters ended March 31, 2013 and 2012 were not materially different. Post-modification balances may include capitalization of unpaid accrued interest and fees associated with the modification as well as forgiveness of principal. Loans modified as TDRs during the quarters ended March 31, 2013 and 2012 did not involve the forgiveness of principal, accordingly, the Corporation did not record a charge-off at the modification date. Additionally, capitalization of any unpaid accrued interest and fees assessed to loans modified in the quarters ended March 31, 2013 and 2012 were not material to the accompanying consolidated financial statements. Specific allowances for loan losses are established for loans whose terms have been modified in a TDR. Specific reserve allocations are generally assessed prior to loans being modified in a TDR, as most of these loans migrate from the Corporation's internal watch list and have been specifically allocated for as part of the Corporation's normal loan loss provisioning methodology. At March 31, 2013, the Corporation had $0.2 million in commitments to lend additional funds to debtors owing receivables whose terms have been modified in a TDR.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

The following tables provide a summary of the delinquency status of TDRs along with the specific allowance for loan loss, by loan type, as of March 31, 2013, December 31, 2012 and March 31, 2012, including TDRs that continue to accrue interest and TDRs included in nonperforming assets.



As of March 31, 2013
	Accruing TDRs						Nonaccruing TDRs						Total		Total
	Current		Delinquent		Total		Current		Delinquent		Total		TDRs		Allowance
Noncovered loans
Commercial
C&I	$	1,580	$	—	$	1,580	$	—	$	1,047	$	1,047	$	2,627	$	293
CRE	14,441		—		14,441		991		1,785		2,776		17,217		769
Construction	1,716		707		2,423		356		—		356		2,779		90
Total noncovered commercial	17,737		707		18,444		1,347		2,832		4,179		22,623		1,152
Consumer
Installment	26,031		1,166		27,197		3,744		176		3,920		31,117		1,458
Home equity lines	5,122		240		5,362		1,329		226		1,555		6,917		89
Credit card	1,283		95		1,378		—		10		10		1,388		74
Residential mortgages	13,168		2,543		15,711		5,229		2,587		7,816		23,527		1,713
Total noncovered consumer	45,604		4,044		49,648		10,302		2,999		13,301		62,949		3,334
Total noncovered TDRs	63,341		4,751		68,092		11,649		5,831		17,480		85,572		4,486
Covered loans
C&I	984		738		1,722		—		—		—		1,722		518
CRE	5,371		42,958		48,329		—		—		—		48,329		4,701
Construction	2,482		3,813		6,295		—		—		—		6,295		1,220
Total covered commercial	8,837		47,509		56,346		—		—		—		56,346		6,439
Home equity lines	4,616		497		5,113		—		—		—		5,113		—
Total covered TDRs	$	13,453	$	48,006	$	61,459	$	—	$	—	$	—	$	61,459	$	6,439
Total TDRs	$	76,794	$	52,757	$	129,551	$	11,649	$	5,831	$	17,480	$	147,031	$	10,925

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(Dollars in thousands)



As of December 31, 2012
	Accruing TDRs						Nonaccruing TDRs						Total		Total
	Current		Delinquent		Total		Current		Delinquent		Total		TDRs		Allowance
Noncovered loans
Commercial
C&I	$	704	$	1,004	$	1,708	$	844	$	65	$	909	$	2,617	$	217
CRE	12,719		793		13,512		461		2,332		2,793		16,305		869
Construction	1,860		960		2,820		135		—		135		2,955		105
Total noncovered commercial	15,283		2,757		18,040		1,440		2,397		3,837		21,877		1,191
Consumer
Installment	27,085		1,547		28,632		2,064		174		2,238		30,870		1,526
Home equity lines	5,183		236		5,419		636		226		862		6,281		34
Credit card	1,483		118		1,601		—		11		11		1,612		127
Residential mortgages	12,510		3,413		15,923		5,196		2,890		8,086		24,009		1,722
Total noncovered consumer	46,261		5,314		51,575		7,896		3,301		11,197		62,772		3,409
Total noncovered TDRs	61,544		8,071		69,615		9,336		5,698		15,034		84,649		4,600
Covered loans
C&I	435		1,328		1,763		—		—		—		1,763		518
CRE	7,658		42,614		50,272		—		—		—		50,272		4,959
Construction	2,361		5,810		8,171		—		—		—		8,171		1,220
Total covered commercial	10,454		49,752		60,206		—		—		—		60,206		6,697
Home equity lines	5,632		—		5,632		—		—		—		5,632		—
Total covered TDRs	$	16,086	$	49,752	$	65,838	$	—	$	—	$	—	$	65,838	$	6,697
Total TDRs	$	77,630	$	57,823	$	135,453	$	9,336	$	5,698	$	15,034	$	150,487	$	11,297



As of March 31, 2012
	Accruing TDRs						Nonaccruing TDRs						Total		Total
	Current		Delinquent		Total		Current		Delinquent		Total		TDRs		Allowance
Noncovered loans
Commercial
C&I	$	1,791	$	—	$	1,791	$	—	$	1,597	$	1,597	$	3,388	$	822
CRE	3,672		510		4,182		3,152		1,802		4,954		9,136		224
Construction	4,077		—		4,077		137		379		516		4,593		224
Total noncovered commercial	9,540		510		10,050		3,289		3,778		7,067		17,117		1,270
Consumer
Installment	31,167		1,134		32,301		—		77		77		32,378		1,901
Home equity lines	4,828		387		5,215		75		232		307		5,522		66
Credit card	1,997		60		2,057		—		3		3		2,060		92
Residential mortgages	15,099		—		15,099		2,918		59		2,977		18,076		1,504
Total noncovered consumer	53,091		1,581		54,672		2,993		371		3,364		58,036		3,563
Total noncovered TDRs	62,631		2,091		64,722		6,282		4,149		10,431		75,153		4,833
Covered loans
C&I	2,405		5,257		7,662		—		—		—		7,662		1,384
CRE	36,419		18,405		54,824		—		—		—		54,824		7,720
Construction	3,835		9,852		13,687		—		—		—		13,687		1,245
Total covered TDRs	42,659		33,514		76,173		—		—		—		76,173		10,349
Total TDRs	$	105,290	$	35,605	$	140,895	$	6,282	$	4,149	$	10,431	$	151,326	$	15,182

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FIRSTMERIT CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Corporation evaluates the loan for possible further impairment. The allowance for loan losses may be increased, adjustments may be made in the allocation of the allowance for loan losses, or partial charge-offs may be taken to further write-down the carrying value of the loan.

The following table provides the number of loans modified in a TDR during the previous 12 months that subsequently defaulted during the three months ended March 31, 2013, as well as the recorded investment in these restructured loans as of March 31, 2013.



	As of March 31, 2013
	Number of Loans	Recorded Investment
Noncovered loans
Commercial
C&I	1	$	231
CRE	—	—
Construction	1	707
Total noncovered commercial	2	938
Consumer
Installment	134	2,155
Home equity lines	16	322
Credit card	17	106
Residential mortgages	—	—
Total noncovered consumer	167	2,583
Covered loans
Commercial
C&I	—	—
CRE	—	—
Construction	—	—
Total covered commercial	—	—
Total	167	$	2,583

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FIRSTMERIT CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

6. Goodwill and Other Intangible Assets

Goodwill

Goodwill totaled $460.0 million as of March 31, 2013, December 31, 2012 and March 31, 2012. Goodwill is not amortized but is evaluated for impairment on an annual basis at November 30 of each year or whenever events or changes in circumstances indicate the carrying value may not be recoverable. No events or circumstances since the November 30, 2012 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists.

Other Intangible Assets

The following tables show the gross carrying amount and the amount of accumulated amortization of intangible assets subject to amortization.



	March 31, 2013
	Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount
Core deposit intangibles	$	16,759	$	(10,848	)	$	5,911
Non-compete covenant	102		(83		)	19
Lease intangible	618		(493		)	125
	$	17,479	$	(11,424	)	$	6,055

	December 31, 2012
	Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount
Core deposit intangibles	16,759		(10,546		)	6,213
Non-compete covenant	102		(76		)	26
Lease intangible	$	618	$	(484	)	$	134
	$	17,479	$	(11,106	)	$	6,373

	March 31, 2012
	Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount
Core deposit intangibles	$	16,759	$	(9,246	)	$	7,513
Non-compete covenant	102		(70		)	32
Lease intangible	618		(407		)	211
	$	17,479	$	(9,723	)	$	7,756

Core deposit intangibles comprise the majority of the intangible asset total as of March 31, 2013. Core deposit intangibles were acquired through various acquisitions and are amortized on an accelerated basis over their useful lives of 10 years.

Amortization expense for intangible assets was $0.3 million in the three months ended March 31, 2013 and $0.5 million in the three months ended March 31, 2012. Estimated amortization expense for each of the next five years is as follows: 2013 - $0.9 million; 2014 - $1.1 million; 2015 - $1.0 million; 2016 - $0.9 million; and 2017 - $0.8 million.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

7. Earnings Per Share

The reconciliation between basic and diluted earnings per share is presented as follows:



	Three Months Ended
	March 31, 2013		March 31, 2012
Basic EPS:
Net income	$	37,346	$	30,344
Less:
Cash dividends on 5.875% non-cumulative perpetual series A, preferred stock	930		—
Income allocated to participating securities	291		137
Net income attributable to common shareholders	$	36,125	$	30,207
Average common shares outstanding	110,807		110,041
Less: participating shares included in average shares outstanding	1,118		830
Average common shares outstanding used in basic EPS	109,689		109,211
Basic net income per share	$	0.33	$	0.28

Diluted EPS:
Income used in diluted earnings per share calculation	$	36,125	$	30,207
Average common shares outstanding	110,807		110,041
Add: common stock equivalents:
Stock option plans	—		—
Less: participating shares included in average shares outstanding	1,118		830
Average common and common stock equivalent shares outstanding	109,689		109,211
Diluted net income per share	$	0.33	$	0.28

On February 4, 2013, the Corporation's 5.875% Non-Cumulative Perpetual Preferred Stock, Series A, began accruing cash dividends, with dividends payable quarterly in arrears on the 4th day of February, May, August and November, beginning May 4, 2013. Accrued cash dividends were $0.9 million for the three months ended March 31, 2013. Net income used to determine basic and diluted EPS for the three months ended March 31, 2013 were reduced by the accrued cash dividends.

For the three months ended March 31, 2013 and 2012, options to purchase 1.6 million shares and 2.3 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were antidilutive.

8. Segment Information

Management monitors the Corporation’s results by an internal performance measurement system, which provides lines of business results and key performance measures. The profitability measurement system is based on internal management methodologies designed to produce consistent results and reflect the underlying economics of the businesses. The development and application of these methodologies is a dynamic process. Accordingly, these measurement tools and assumptions may be revised periodically to reflect methodological, product, and/or management organizational changes. Further, these tools measure financial results that support the strategic objectives and internal organizational structure of the Corporation. Consequently, the information presented is not necessarily comparable with similar information for other financial institutions.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

A description of each business, selected financial performance, and the methodologies used to measure financial performance are presented below.

•

Commercial – The commercial line of business provides a full range of lending, depository, and related financial services to middle-market corporate, industrial, financial, business banking (formerly known as small business), public entities, and leasing clients. Commercial also includes personal business from commercial loan clients in coordination with the Wealth Management segment. Products and services offered include commercial term loans, revolving credit arrangements, asset-based lending, leasing, commercial mortgages, real estate construction lending, letters of credit, treasury management, government banking, international banking, merchant card and other depository products and services.

•

Retail – The retail line of business includes consumer lending and deposit gathering, residential mortgage loan origination and servicing, and branch-based small business banking (formerly known as the "micro business" line). Retail offers a variety of retail financial products and services including consumer direct and indirect installment loans, debit and credit cards, debit gift cards, residential mortgage loans, home equity loans and lines of credit, deposit products, fixed and variable annuities and ATM network services. Deposit products include checking, savings, money market accounts and certificates of deposit.

•

Wealth – The wealth line of business offers a broad array of asset management, private banking, financial planning, estate settlement and administration, credit and deposit products and services. Trust and investment services include personal trust and planning, investment management, estate settlement and administration services. Retirement plan services focus on investment management and fiduciary activities. Brokerage and insurance delivers retail mutual funds, other securities, variable and fixed annuities, personal disability and life insurance products and brokerage services. Private banking provides credit, deposit and asset management solutions for affluent clients.

•

Other – The other line of business includes activities that are not directly attributable to one of the three principal lines of business. Included in the Other category are the parent company, eliminations companies, community development operations, the treasury group, which includes the securities portfolio, wholesale funding and asset liability management activities, and the economic impact of certain assets, capital and support function not specifically identifiable with the three primary lines of business.

The accounting policies of the lines of businesses are the same as those of the Corporation described in Note 1 (Summary of Significant Accounting Policies) to the 2012 Form 10-K. Funds transfer pricing is used in the determination of net interest income by assigning a cost for funds used or credit for funds provided to assets and liabilities within each business unit. Assets and liabilities are match-funded based on their maturity, prepayment and/or repricing characteristics. As a result, the three primary lines of business are generally insulated from changes in interest rates. Changes in net interest income due to changes in rates are reported in Other by the treasury Group. Capital has been allocated on an economic risk basis. Loans and lines of credit have been allocated capital based upon their respective credit risk. Asset management holdings in the Wealth segment have been allocated capital based upon their respective market risk related to assets under management. Normal business operating risk has been allocated to each line of business by the level of noninterest expense. Mismatch between asset and liability cash flow as well as interest rate risk for mortgage servicing rights and the origination business franchise value have been allocated capital based upon their respective asset/liability management risk. The provision for loan loss is allocated based upon the actual net charge-offs of each respective line of business, adjusted for loan growth and changes in risk profile. Noninterest

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FIRSTMERIT CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

income and expenses directly attributable to a line of business are assigned to that line of business. Expenses for centrally provided services are allocated to the business line by various activity based cost formulas.

The Corporation’s business is conducted solely in the United States of America. The following tables present a summary of financial results as of and for the three month ended March 31, 2013 and March 31, 2012:



						FirstMerit
	Commercial	Retail	Wealth	Other		Consolidated
March 31, 2013	1st Qtr	1st Qtr	1st Qtr	1st Qtr		1st Qtr
OPERATIONS:
Net interest income	65,519	46,431	3,775	(4,376	)	111,349
Provision for loan losses	4,766	4,073	208	899		9,946
Other income	19,232	24,388	8,310	5,462		57,392
Other expenses	43,027	52,907	10,174	817		106,925
Net income	24,022	8,996	1,107	3,221		37,346
AVERAGES:
Assets	6,737,236	3,016,495	236,811	4,993,001		14,983,543



										FirstMerit
	Commercial		Retail		Wealth		Other			Consolidated
March 31, 2012	1st Qtr		1st Qtr		1st Qtr		1st Qtr			1st Qtr
OPERATIONS:
Net interest income	$	63,853	$	54,277	$	4,598	$	(3,941	)	$	118,787
Provision for loan losses	9,104		2,537		225		2,195			14,061
Other income	14,309		25,265		8,068		4,084			51,726
Other expenses	43,351		57,481		10,214		2,722			113,768
Net income	16,709		12,691		1,447		(503		)	30,344
AVERAGES:
Assets	6,328,473		2,910,354		236,571		5,021,539			14,496,937

9. Derivatives and Hedging Activities

The Corporation, through its mortgage banking and risk management operations, is party to various derivative instruments that are used for asset and liability management and customers' financing needs. Derivative instruments are contracts between two or more parties that have a notional amount and underlying variable, require no net investment and allow for the net settlement of positions. The notional amount serves as the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified interest rate, index or other component. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the market value of the derivative contract.

The predominant derivative and hedging activities include interest rate swaps and certain mortgage banking activities. Generally, these instruments help the Corporation manage exposure to market risk, and meet customer financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors, such as interest rates, market-driven rates and prices or other economic factors. Foreign exchange contracts are entered into to accommodate the needs of customers.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

Derivatives Designated in Hedge Relationships

The Corporation's fixed rate loans result in exposure to losses in value as interest rates change. The risk management objective for hedging fixed rate loans is to convert the fixed rate received to a floating rate. The Corporation hedges exposure to changes in the fair value of fixed rate loans through the use of swaps. For a qualifying fair value hedge, changes in the value of the derivatives that have been highly effective as hedges are recognized in current period earnings along with the corresponding changes in the fair value of the designated hedged item attributable to the risk being hedged.

Through the Corporation's Fixed Rate Advantage Program ("FRAP Program"), a customer received a fixed interest rate commercial loan and the Corporation subsequently converted that fixed rate loan to a variable rate instrument over the term of the loan by entering into an interest rate swap with a dealer counterparty. The Corporation receives a fixed rate payment from the customer on the loan and pays the equivalent amount to the dealer counterparty on the swap in exchange for a variable rate payment based on the one month London Inter-Bank Offered Rate index. These interest rate swaps are designated as fair value hedges. Through application of the "short cut method of accounting", there is an assumption that the hedges are effective. The Corporation discontinued originating interest rate swaps under the FRAP program in February 2008 and subsequently began a new interest rate swap program for commercial loan customers, termed the Back-to-Back Program. These swaps do not qualify as designated hedges; therefore, each swap is accounted for as a stand-alone derivative.

At March 31, 2013, December 31, 2012 and March 31, 2012, the notional values or contractual amounts and fair value of the Corporation's derivatives designated in hedge relationships were as follows:



	Asset Derivatives												Liability Derivatives
	March 31, 2013				December 31, 2012				March 31, 2012				March 31, 2013				December 31, 2012				March 31, 2012
	Notional/ Contract Amount		Fair Value (a)		Notional/ Contract Amount		Fair Value (a)		Notional/ Contract Amount		Fair Value (a)		Notional/ Contract Amount		Fair Value (b)		Notional/ Contract Amount		Fair Value (b)		Notional/ Contract Amount		Fair Value (b)
Interest rate swaps:
Fair value hedges	$	—	$	—	$	—	$	—	$	—	$	—	$	145,382	$	17,247	$	161,133	$	19,080	$	220,630	$	23,786

(a) Included in Other Assets on the Consolidated Balance Sheet

(b) Included in Other Liabilities on the Consolidated Balance Sheet

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FIRSTMERIT CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

Derivatives Not Designated in Hedge Relationships

As of March 31, 2013, December 31, 2012 and March 31, 2012, the notional values or contractual amounts and fair value of the Corporation's derivatives not designated in hedge relationships were as follows:



	Asset Derivatives														Liability Derivatives
	March 31, 2013					December 31, 2012					March 31, 2012				March 31, 2013				December 31, 2012				March 31, 2012
	Notional/ Contract Amount		Fair Value(a)			Notional/ Contract Amount		Fair Value(a)			Notional/ Contract Amount		Fair Value(a)		Notional/ Contract Amount		Fair Value(b)		Notional/ Contract Amount		Fair Value(b)		Notional/ Contract Amount		Fair Value(b)
Interest rate swaps	$	1,266,831	$	54,590		$	1,204,835	$	58,769		$	1,016,626	$	56,298	$	1,266,831	$	54,590	$	1,204,835	$	58,769	$	1,016,626	$	56,298
Mortgage loan commitments	214,573		4,152			168,271		4,400			247,453		3,268		—		—		—		—		—		—
Forward sales contracts	122,795		(284		)	124,017		(62		)	201,637		446		—		—		—		—		—		—
Credit contracts	—		—			—		—			—		—		40,541		—		25,225		—		17,805		—
Foreign exchange	8,063		105			6,662		62			7,969		103		8,080		96		6,026		57		8,043		90
Other	—		—			—		—			—		—		35,286		—		31,492		—		24,516		—
Total	$	1,612,262	$	58,563		$	1,503,785	$	63,169		$	1,473,685	$	60,115	$	1,350,738	$	54,686	$	1,267,578	$	58,826	$	1,066,990	$	56,388

(a) Included in Other Assets on the Consolidated Balance Sheet

(b) Included in Other Liabilities on the Consolidated Balance Sheet

Interest Rate Swaps. In 2008, the Corporation implemented the Back-to-Back Program, which is an interest rate swap program for commercial loan customers. The Back-to-Back Program provides the customer with a fixed rate loan while creating a variable rate asset for the Corporation through the customer entering into an interest rate swap with the Corporation on terms that match the loan. The Corporation offsets its risk exposure by entering into an offsetting interest rate swap with a dealer counterparty. These swaps do not qualify as designated hedges; therefore, each swap is accounted for as a standalone derivative.

Mortgage banking. In the normal course of business, the Corporation sells originated mortgage loans into the secondary mortgage loan markets. During the period of loan origination and prior to the sale of the loans in the secondary market, the Corporation has exposure to movements in interest rates associated with mortgage loans that are in the "mortgage pipeline" and the "mortgage warehouse". A pipeline loan is one in which the Corporation has entered into a written mortgage loan commitment with a potential borrower that will be held for resale. Once a mortgage loan is closed and funded, it is included within the mortgage warehouse of loans awaiting sale and delivery into the secondary market.

Written loan commitments that relate to the origination of mortgage loans that will be held for resale are considered free-standing derivatives and do not qualify for hedge accounting. Written loan commitments generally have a term of up to 60 days before the closing of the loan. The loan commitment does not bind the potential borrower to entering into the loan, nor does it guarantee that the Corporation will approve the potential borrower for the loan. Therefore, when determining fair value, the Corporation makes estimates of expected "fallout" (loan commitments not expected to close), using models which consider cumulative historical fallout rates and other factors. In addition, expected net future cash flows related to loan servicing activities are included in the fair value measurement of a written loan commitment.

Written loan commitments in which the borrower has locked in an interest rate results in market risk to the Corporation to the extent market interest rates change from the rate quoted to the borrower. The Corporation economically hedges the risk of changing interest rates associated with its interest rate lock commitments by entering into forward sales contracts.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

The Corporation's warehouse (mortgage loans held for sale) is subject to changes in fair value, due to fluctuations in interest rates from the loan's closing date through the date of sale of the loan into the secondary market. Typically, the fair value of the warehouse declines in value when interest rates increase and rises in value when interest rates decrease. To mitigate this risk, the Corporation enters into forward sales contracts on a significant portion of the warehouse to provide an economic hedge against those changes in fair value. Mortgage loans held for sale and the forward sales contracts were recorded at fair value with ineffective changes in value recorded in current earnings as Loan sales and servicing income.

Credit contracts. Prior to implementation of the Back-to-Back Program, certain of the Corporation's commercial loan customers entered into interest rate swaps with unaffiliated dealer counterparties. The Corporation entered into swap participations with these dealer counterparties whereby the Corporation guaranteed payment in the event that the counterparty experienced a loss on the interest rate swap due to a failure to pay by the Corporation's commercial loan customer. The Corporation simultaneously entered into reimbursement agreements with the commercial loan customers obligating the customers to reimburse the Corporation for any payments it makes under the swap participations. The Corporation monitors its payment risk on its swap participations by monitoring the creditworthiness of its commercial loan customers, which is based on the normal credit review process the Corporation would have performed had it entered into these derivative instruments directly with the commercial loan customers. At March 31, 2013, the remaining terms on these swap participation agreements generally ranged from less than one year to ten years. The Corporation's maximum estimated exposure to written swap participations, as measured by projecting a maximum value of the guaranteed derivative instruments based on interest rate curve simulations and assuming 100% default by all obligors on the maximum values, was approximately $4.3 million as of March 31, 2013. The fair values of the written swap participations were not material at March 31, 2013, December 31, 2012 and March 31, 2012.

Gains and losses recognized in income on non-designated hedging instruments for the three months ended March 31, 2013 and 2012 are as follows:



Derivatives not designated as hedging instruments	Location of Gain/(Loss) Recognized in Income on Derivative	Amount of Gain / (Loss) Recognized in Income on Derivatives
		Three Months Ended
		March 31, 2013			March 31, 2012
Mortgage loan commitments	Other operating income	$	(248	)	$	(1,691	)
Forward sales contracts	Other operating income	(223		)	2,244
Foreign exchange contracts	Other operating income	(191		)	45
Other	Other operating expense	—			—
Total		$	(662	)	$	598

Counterparty Credit Risk

Like other financial instruments, derivatives contain an element of "credit risk" or the possibility that the Corporation will incur a loss because a counterparty, which may be a bank, a broker-dealer or a customer, fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. All derivative contracts may be executed only with exchanges or counterparties approved by the Corporation's Asset and Liability Committee, and only within the Corporation's Board of Directors Credit Committee approved credit exposure limits. Where contracts have been created for customers, the Corporation enters into derivatives with dealers to offset its risk exposure. To manage the credit exposure to exchanges and counterparties, the Corporation generally enters into bilateral collateral agreements using standard forms published by the International Swaps and Derivatives Association. These agreements are to include thresholds

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FIRSTMERIT CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

of credit exposure or the maximum amount of unsecured credit exposure that the Corporation is willing to assume. Beyond the threshold levels, collateral in the form of securities made available from the investment portfolio or other forms of collateral acceptable under the bilateral collateral agreements are provided. The threshold levels for each counterparty are established by the Corporation's Asset and Liability Committee. The Corporation generally posts collateral in the form of highly rated Government Agency issued bonds or MBSs. Collateral posted against derivative liabilities was $100.4 million, $96.5 million and $100.3 million as of March 31, 2013, December 31, 2012 and March 31, 2012, respectively.

Derivative assets and liabilities are recorded at fair value on the balance sheet and do not take into account the effects of master netting agreements. Master netting agreements allow the Corporation to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. The following tables illustrate the potential effect of the Corporation's derivative master netting arrangements, by type of financial instrument, on the Corporation's statement of financial position as of March 31, 2013, December 31, 2012 and March 31, 2012.



As of March 31, 2013
	Gross amounts of recognized assets		Gross amounts offset in the statement of financial position		Net amounts of assets presented in the statement of financial position		Gross amounts of financial instruments not offset in the statement of financial position					Total of gross amounts of financial instruments not offset in the statement of financial position including applicable netting agreement and fair value of collateral		Net amount

							Netting adjustment per applicable master netting agreements			Fair value of financial collateral
Derivative Assets	(i)		(ii)		(iii) = (i) - (ii)							(iv)		(v) = (iii) - (iv)
Interest rate swaps - designated	$	—	$	—	$	—	$	—		$	—	$	—	$	—
Interest rate swaps - non-designated	54,590		—		54,590		—			54,590		54,590		—
Credit contracts	—		—		—		—			—		—		—
Foreign exchange	105		—		105		(21		)	126		105		—
Total	$	54,695	$	—	$	54,695	$	(21	)	$	54,716	$	54,695	$	—

	Gross amounts of recognized liabilities		Gross amounts offset in the statement of financial position		Net amounts of liabilities presented in the statement of financial position		Gross amounts of financial instruments not offset in the statement of financial position					Total of gross amounts of financial instruments not offset in the statement of financial position including applicable netting agreement and fair value of collateral		Net amount

							Netting adjustment per applicable master netting agreements			Fair value of financial collateral
Derivative Liabilities	(i)		(ii)		(iii) = (i) - (ii)							(iv)		(v) = (iii) - (iv)
Interest rate swaps - designated	$	17,247	$	—	$	17,247	$	—		$	17,247	$	17,247	$	—
Interest rate swaps - non-designated	54,590		—		54,590		(59		)	54,649		54,590		—
Credit contracts	—		—		—		—			—		—		—
Foreign exchange	96		—		96		—			96		96		—
Total	$	71,933	$	—	$	71,933	$	(59	)	$	71,992	$	71,933	$	—

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FIRSTMERIT CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)



As of December 31, 2012
	Gross amounts of recognized assets		Gross amounts offset in the statement of financial position		Net amounts of assets presented in the statement of financial position		Gross amounts of financial instruments not offset in the statement of financial position					Total of gross amounts of financial instruments not offset in the statement of financial position including applicable netting agreement and fair value of collateral		Net amount

							Netting adjustment per applicable master netting agreements			Fair value of financial instrument collateral
Derivative assets	(i)		(ii)		(iii) = (i) - (ii)							(iv)		(v) = (iii) - (iv)
Interest rate swaps - designated	—		—		—		—			—		—		—
Interest rate swaps - non-designated	$	58,769	$	—	$	58,769	$	—		$	58,769	$	58,769	$	—
Credit contracts	—		—		—		—			—		—		—
Foreign exchange	62		—		62		—			62		62		—
Total	$	58,831	$	—	$	58,831	$	—		$	58,831	$	58,831	$	—

	Gross amounts of recognized liabilities		Gross amounts offset in the statement of financial position		Net amounts of liabilities presented in the statement of financial position		Gross amounts of financial instruments not offset in the statement of financial position					Total of gross amounts of financial instruments not offset in the statement of financial position including applicable netting agreement and fair value of collateral		Net amount

							Netting adjustment per applicable master netting agreements			Fair value of financial instrument collateral
Derivative Liabilities	(i)		(ii)		(iii) = (i) - (ii)							(iv)		(v) = (iii) - (iv)
Interest rate swaps - designated	$	19,080	$	—	$	19,080	$	—		$	19,080	$	19,080	$	—
Interest rate swaps - non-designated	58,769		—		58,769		(55		)	58,824		58,769		—
Credit contracts	—		—		—		—			—		—		—
Foreign exchange	57		—		57		(14		)	71		57		—
Total	$	77,906	$	—	$	77,906	$	(69	)	$	77,975	$	77,906	$	—

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FIRSTMERIT CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)



As of March 31, 2012
	Gross amounts of recognized assets		Gross amounts offset in the statement of financial position		Net amounts of assets presented in the statement of financial position		Gross amounts of financial instruments not offset in the statement of financial position					Total of gross amounts of financial instruments not offset in the statement of financial position including applicable netting agreement and fair value of collateral		Net amount

							Netting adjustment per applicable master netting agreements			Fair value of financial instrument collateral
Derivative assets	(i)		(ii)		(iii) = (i) - (ii)							(iv)		(v) = (iii) - (iv)
Interest rate swaps - designated	—		—		—		—			—		—		—
Interest rate swaps - non-designated	$	56,298	$	—	$	56,298	$	—		$	56,298	$	56,298	$	—
Credit contracts	—		—		—		—			—		—		—
Foreign exchange	103		—		103		—			103		103		—
Total	$	56,401	$	—	$	56,401	$	—		$	56,401	$	56,401	$	—

	Gross amounts of recognized liabilities		Gross amounts offset in the statement of financial position		Net amounts of liabilities presented in the statement of financial position		Gross amounts of financial instruments not offset in the statement of financial position					Total of gross amounts of financial instruments not offset in the statement of financial position including applicable netting agreement and fair value of collateral		Net amount

							Netting adjustment per applicable master netting agreements			Fair value of financial instrument collateral
Derivative Liabilities	(i)		(ii)		(iii) = (i) - (ii)							(iv)		(v) = (iii) - (iv)
Interest rate swaps - designated	$	23,786	$	—	$	23,786	$	—		$	23,786	$	23,786	$	—
Interest rate swaps - non-designated	56,298		—		56,298		(204		)	56,502		56,298		—
Credit contracts	—		—		—		—			—		—		—
Foreign exchange	90		—		90		(24		)	114		90		—
Total	$	80,174	$	—	$	80,174	$	(228	)	$	80,402	$	80,174	$	—

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

10. Benefit Plans

The Corporation sponsors several qualified and nonqualified pension and other postretirement plans for certain of its employees. The net periodic pension cost is based on estimated values provided by an outside actuary. The components of net periodic benefit cost are as follows:



	Pension Benefits
	Three months ended March 31,
	2013			2012
Components of Net Periodic Pension Cost
Service Cost	$	585		$	1,799
Interest Cost	2,632			2,965
Expected return on assets	(2,960		)	(3,034		)
Amortization of unrecognized prior service costs	117			97
Cumulative net loss	1,174			2,593
Net periodic pension cost	$	1,548		$	4,420



	Postretirement Benefits
	Three months ended March 31,
	2013			2012
Components of Net Periodic Postretirement Cost
Service Cost	$	25		$	19
Interest Cost	130			174
Amortization of unrecognized prior service costs	(117		)	(117		)
Cumulative net loss	67			72
Net periodic postretirement cost	$	105		$	148

Effective December 31, 2012, the qualified defined benefit pension plan was frozen resulting in no benefits accruing after December 31, 2012. Employees will have an accrued benefit which will be paid upon retirement, or for deferred vested participants, at the time they request and are eligible for their pension benefit.

The Corporation also maintains a retirement savings plan under Section 401(k) of the Internal Revenue Code of 1986, as amended, covering substantially all full-time and part-time employees beginning in the quarter following three months of continuous employment. The savings plan was approved for non-vested employees in the defined benefit pension plan and new hires as of January 1, 2007. Effective January 1, 2009, the Corporation suspended its matching contribution to the savings plan. Effective April 1, 2011, the Corporation reinstated its matching contribution at $.50 of each $1.00 up to 1% of an employee's qualifying salary. Starting January 1, 2013, the employer's matching contribution to the savings plan increased to 100% on the first 3% and then 50% on the next 2% of the employee's qualifying salary. Matching contributions vest in accordance with plan specifications.

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(Dollars in thousands)

11. Fair Value Measurement

As defined in ASC 820, Fair Value Measurements and Disclosures, fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants in the principal market or most advantageous market for the asset or liability. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, Management determines the fair value of the Corporation's assets and liabilities using valuation models or third-party pricing services. Both of these approaches rely on market-based parameters when available, such as interest rate yield curves, option volatilities and credit spreads, or unobservable inputs. Unobservable inputs may be based on Management's judgment, assumptions and estimates related to credit quality, liquidity, interest rates and other relevant inputs.

U.S. GAAP establishes a three-level valuation hierarchy for determining fair value that is based on the transparency of the inputs used in the valuation process. The inputs used in determining fair value in each of the three levels of the hierarchy, highest ranking to lowest, are as follow:


•	Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.


•	Level 2 — Significant other observable inputs other than Level 1 prices such quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.


•	Level 3 — Significant unobservable inputs that reflect a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The level in the fair value hierarchy ascribed to a fair value measurement in its entirety is based on the lowest level input that is significant to the overall fair value measurement.

Valuation adjustments, such as those pertaining to counterparty and the Corporation's own credit quality and liquidity, may be necessary to ensure that assets and liabilities are recorded at fair value. Credit valuation adjustments are made when market pricing does not accurately reflect the counterparty's credit quality. As determined by Management, liquidity valuation adjustments may be made to the fair value of certain assets to reflect the uncertainty in the pricing and trading of the instruments when Management is unable to observe recent market transactions for identical or similar instruments. Liquidity valuation adjustments are based on the following factors:


•	the amount of time since the last relevant valuation;


•	whether there is an actual trade or relevant external quote available at the measurement date; and


•	volatility associated with the primary pricing components.

Management ensures that fair value measurements are accurate and appropriate by relying upon various controls, including:


•	an independent review and approval of valuation models;


•	recurring detailed reviews of profit and loss; and


•	a validation of valuation model components against benchmark data and similar products, where possible.

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(Dollars in thousands)

Management reviews any changes to its valuation methodologies to ensure they are appropriate and justified, and refines valuation methodologies as more market-based data becomes available. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period.

Additional information regarding the Corporation's accounting policies for determining fair value is provided in Note 1 (Summary of Significant Accounting Policies) under the heading "Fair Value Measurements."

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

The following tables present the balance of assets and liabilities measured at fair value on a recurring and nonrecurring basis as of March 31, 2013, December 31, 2012 and March 31, 2012:



				Fair Value by Hierarchy
	March 31, 2013			Level 1		Level 2			Level 3
Recurring fair value measurement
Available-for-sale securities:
Money market mutual funds	$	3,212		$	3,212	$	—		$	—
U.S. States and political subdivisions	262,606			—		262,606			—
Residential mortgage-backed securities:
U.S. government agencies	1,152,326			—		1,152,326			—
Commercial mortgage-backed securities:
U.S. government agencies	58,574			—		58,574			—
Residential collateralized mortgage-backed securities:
U.S. government agencies	1,605,279			—		1,605,279			—
Non-agency	11			—		2			9
Commercial collateralized mortgage-backed securities:
U.S. government agencies	110,602			—		110,602			—
Corporate debt securities	51,225			—		—			51,225
Total available-for-sale securities	3,243,835			3,212		3,189,389			51,234
Residential loans held for sale	14,459			—		14,459			—
Derivative assets:
Interest rate swaps - fair value hedges	—			—		—			—
Interest rate swaps - nondesignated	54,590			—		54,590			—
Mortgage loan commitments	4,152			—		4,152			—
Forward sale contracts	(284		)	—		(284		)	—
Foreign exchange	105			—		105			—
Total derivative assets	58,563			—		58,563			—
Total fair value of assets (a)	$	3,316,857		$	3,212	$	3,262,411		$	51,234
Derivative liabilities:
Interest rate swaps - fair value hedges	17,247			—		17,247			—
Interest rate swaps - nondesignated	54,590			—		54,590			—
Foreign exchange	96			—		96			—
Other	—			—		—			—
Total derivative liabilities	71,933			—		71,933			—
True-up liability	12,783			—		—			12,783
Total fair value of liabilities (a)	$	84,716		$	—	$	71,933		$	12,783
Nonrecurring fair value measurement
Mortgage servicing rights (b)	$	20,223		$	—	$	—		$	20,223
Impaired loans (c)	54,382			—		—			54,382
Other property (d)	5,532			—		—			5,532
Other real estate covered by loss share (e)	16,504			—		—			16,504
Total fair value	$	96,641		$	—	$	—		$	96,641

(a) - There were no transfers between levels 1 and 2 of the fair value hierarchy during the three months ended March 31, 2013.

(b) - MSRs with a recorded investment of $21.4 million were reduced by a specific valuation allowance totaling $1.2 million to a reported carrying value of $20.1 million resulting in recognition of $1.3 million in expense included in loans sales and servicing income in the three months ended March 31, 2013.

(c) - Collateral dependent impaired loans with a recorded investment of $58.9 million were reduced by specific valuation allowance allocations totaling $4.5 million to a reported net carrying value of $54.4 million.

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(Dollars in thousands)

(d) - Amounts do not include assets held at cost at March 31, 2013. During the three months ended March 31, 2013, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $0.2 million included in noninterest expense.

(e) - Amounts do not include assets held at cost at March 31, 2013. During the three months ended March 31, 2013, the re-measurement of covered foreclosed assets at fair value subsequent to initial recognition resulted in losses $0.1 million included in noninterest expense.



				Fair Value by Hierarchy
	December 31, 2012			Level 1		Level 2			Level 3
Recurring fair value measurement
Available-for-sale securities:
Money market mutual funds	$	3,241		$	3,241	$	—		$	—
U.S. States and political subdivisions	268,204			—		268,204			—
Residential mortgage-backed securities:
U.S. government agencies	1,107,063			—		1,107,063			—
Commercial mortgage-backed securities:
U.S. government agencies	52,036			—		52,036			—
Residential collateralized mortgage-backed securities:
U.S. government agencies	1,329,421			—		1,329,421			—
Non-agency	11			—		2			9
Commercial collateralized mortgage-backed securities:
U.S. government agencies	111,343			—		111,343			—
Corporate debt securities	49,652			—		—			49,652
Total available-for-sale securities	2,920,971			3,241		2,868,069			49,661
Residential loans held for sale	23,683			—		23,683			—
Derivative assets:
Interest rate swaps - fair value hedges	—			—		—			—
Interest rate swaps - nondesignated	58,769			—		58,769			—
Mortgage loan commitments	4,400			—		4,400			—
Forward sale contracts	(62		)	—		(62		)	—
Foreign exchange	62			—		62			—
Total derivative assets	63,169			—		63,169			—
Total fair value of assets (a)	$	3,007,823		$	3,241	$	2,954,921		$	49,661
Derivative liabilities:
Interest rate swaps - fair value hedges	19,080			—		19,080			—
Interest rate swaps - nondesignated	58,769			—		58,769			—
Foreign exchange	57			—		57			—
Other	—			—		—			—
Total derivative liabilities	77,906			—		77,906			—
True-up liability	12,259			—		—			12,259
Total fair value of liabilities (a)	$	90,165		$	—	$	77,906		$	12,259
Nonrecurring fair value measurement
Mortgage servicing rights (b)	$	18,833		$	—	$	—		$	18,833
Impaired loans (c)	54,491			—		—			54,491
Other property (d)	7,540			—		—			7,540
Other real estate covered by loss share (e)	12,631			—		—			12,631
Total fair value	$	93,495		$	—	$	—		$	93,495

(a) - There were no transfers between levels 1 and 2 of the fair value hierarchy during the year ended December 31, 2012.

(b) - MSRs with a recorded investment of $21.3 million were reduced by a specific valuation allowance totaling $2.6 million to a reported carrying value of $18.8 million resulting in the recognition of an impairment charge of $1.0 million in the year ended December 31, 2012.

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(Dollars in thousands)

(c) - Collateral dependent impaired loans with a recorded investment of $57.8 million were reduced by specific valuation allowance allocations totaling $3.3 million to a reported net carrying value of $54.5 million.

(d) Amounts do not include assets held at cost at December 31, 2012. During the year ended December 31, 2012, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $2.2 million included in noninterest expense.

(e) Amounts do not include assets held at cost at December 31, 2012. During the year ended December 31, 2012, the re-measurement of covered foreclosed assets at fair value subsequent to initial recognition resulted in losses of $1.7 million included in noninterest expense.

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(Dollars in thousands)



			Fair Value by Hierarchy
	March 31, 2012		Level 1		Level 2		Level 3
Recurring fair value measurement
Available-for-sale securities:
Money market mutual funds	$	3,308	$	3,308	$	—	$	—
U.S. government agency debentures	35,455		—		35,455		—
U.S. States and political subdivisions	386,525		—		386,525		—
Residential mortgage-backed securities:
U.S. government agencies	1,454,416		—		1,454,416		—
Commercial mortgage-backed securities:
U.S. government agencies	27,663		—		27,663		—
Residential collateralized mortgage-backed securities:
U.S. government agencies	1,251,304		—		1,251,304		—
Non-agency	41,832		—		2		41,830
Commercial collateralized mortgage-backed securities:
U.S. government agencies	147,355		—		147,355		—
Corporate debt securities	143,789		—		97,132		46,657
Total available-for-sale securities	3,491,647		3,308		3,399,852		88,487
Residential loans held for sale	42,447		—		42,447		—
Derivative assets:
Interest rate swaps - fair value hedges	—		—		—		—
Interest rate swaps - nondesignated	56,298		—		56,298		—
Mortgage loan commitments	3,268		—		3,268		—
Forward sale contracts	446		—		446		—
Foreign exchange	103		—		103		—
Total derivative assets	60,115		—		60,115		—
Total fair value of assets (a)	$	3,594,209	$	3,308	$	3,502,414	$	88,487
Derivative liabilities:
Interest rate swaps - fair value hedges	23,786		—		23,786		—
Interest rate swaps - nondesignated	56,298		—		56,298		—
Foreign exchange	90		—		90		—
Other	—		—		—		—
Total derivative liabilities	80,174		—		80,174		—
True-up liability	11,725		—		—		11,725
Total fair value of liabilities (a)	$	91,899	$	—	$	80,174	$	11,725
Nonrecurring fair value measurement
Mortgage servicing rights (b)	$	18,869	$	—	$	—	$	18,869
Impaired loans (c)	60,018		—		—		60,018
Other property (d)	4,768		—		—		4,768
Other real estate covered by loss share (e)	47,765		—		—		47,765
Total fair value	$	131,420	$	—	$	—	$	131,420

(a) - There were no transfers between levels 1 and 2 of the fair value hierarchy during the three months ended March 31, 2012.

(b) - Mortgage servicing rights with a recorded investment of $20.9 million were reduced by a specific valuation allowance totaling $2.2 million to a reported carrying value of $18.8 million resulting in recognition of a recovery of $1.3 million in the three months ended March 31, 2012.

(c) - Collateral dependent impaired loans with a recorded investment of $65.2 million were reduced by specific valuation allowance allocations totaling $5.2 million to a reported net carrying value of $60.0 million.

(d) - Amounts do not include assets held at cost at March 31, 2012. During the three months ended March 31, 2012, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $0.9 million included in noninterest expense.

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(Dollars in thousands)

(e) - Amounts do not include assets held at cost at March 31, 2012. During the three months ended March 31, 2012, the re-measurement of covered foreclosed assets at fair value subsequent to initial recognition resulted in losses of $0.6 million included in noninterest expense.

The following section describes the valuation methodologies used by the Corporation to measure financial assets and liabilities at fair value. During the three months ended March 31, 2013 and 2012, there were no significant changes to the valuation techniques used by the Corporation to measure fair value.

Available-for-sale securities. When quoted prices are available in an active market, securities are valued using the quoted price and are classified as Level 1. The quoted prices are not adjusted. Level 1 instruments include money market mutual funds.

Securities are classified as Level 2 if quoted prices for identical securities are not available, and fair value is determined using pricing models by a third-party pricing service. Approximately 98% of the available-for-sale portfolio is Level 2. For the majority of available-for sale securities, the Corporation obtains fair value measurements from an independent third party pricing service. These instruments include: municipal bonds; bonds backed by the U.S. government; corporate bonds; mortgage-backed securities ("MBSs"); securities issued by the U.S. Treasury; and certain agency and corporate collateralized mortgage obligations. The independent pricing service uses industry-standard models to price U.S. Government agencies and MBSs that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Obligations of state and political subdivisions are valued using a matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. For collateralized mortgage securities, depending on the characteristics of a given tranche, a volatility driven multidimensional static model or Option-Adjusted Spread model is generally used. Substantially all assumptions used by the independent pricing service for securities classified as Level 2 are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.

Securities are classified as Level 3 when there is limited activity in the market for a particular instrument and fair value is determined by obtaining broker quotes. As of March 31, 2013, less than 2% of the available-for-sale portfolio is Level 3, which consists of single issuer trust preferred securities. These instruments are measured at unadjusted prices obtained from the independent pricing service. The independent pricing service prices these instruments through a broker quote when sufficient information, such as cash flows or other security structure or market information, is not available to produce an evaluation. Broker-quoted securities are adjusted by the independent pricing service based solely on the receipt of updated quotes from market makers or broker-dealers recognized as market participants. A list of such issues is compiled by the independent pricing service daily. For broker-quoted issues, the independent pricing service applies a zero spread relationship to the bid-side valuation, resulting in the same values for the mean and ask.

On a monthly basis, Management validates the pricing methodologies utilized by our independent pricing service to ensure the fair value determination is consistent with the applicable accounting guidance and that the investments are properly classified in the fair value hierarchy. Management substantiates the fair values determined for a sample of securities held in portfolio by reviewing the key assumptions used by the independent pricing service to value the securities and comparing the fair values to prices from other independent sources for the same and similar securities. Management analyzes variances and conducts additional research with the independent pricing service, if necessary, and takes appropriate action based on its findings.

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(Dollars in thousands)

Loans held for sale. These loans are regularly traded in active markets through programs offered by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association, and observable pricing information is available from market participants. The prices are adjusted as necessary to include any embedded servicing value in the loans and to take into consideration the specific characteristics of certain loans. These adjustments represent unobservable inputs to the valuation but are not considered significant to the fair value of the loans. Accordingly, residential real estate loans held for sale are classified as Level 2.

Impaired loans. Certain impaired collateral dependent loans are reported at fair value less costs to sell the collateral. Collateral values are estimated using Level 3 inputs, consisting of third-party appraisals or price opinions and internal adjustments necessary in the judgment of Management to reflect current market conditions and current operating results for the specific collateral. Collateral may be in the form of real estate or personal property including equipment and inventory. The vast majority of the collateral is real estate. When impaired collateral dependent loans are individually re-measured and reported at fair value of the collateral, less costs to sell, a direct loan charge off to the allowance for loan losses and/or a specific valuation allowance allocation is recorded.

Other Property. Certain other property which consists of foreclosed assets and properties securing residential and commercial loans, upon initial recognition and transfer from loans, are re-measured and reported at fair value less costs to sell to the property through a charge-off to the allowance for loan losses based on the fair value of the foreclosed assets. The fair value of a foreclosed asset, upon initial recognition, is estimated using Level 3 inputs, consisting of third party appraisals or price opinions and internal adjustments necessary in the judgment of Management to reflect current market conditions and current operating results for the specific collateral. Subsequent to foreclosure, valuations are updated periodically, and the assets may be written down further through a charge to noninterest expense.

Mortgage Servicing Rights. The Corporation carries its mortgage servicing rights at lower of cost or fair value, and, therefore, they subject to fair value measurements on a nonrecurring basis. Since sales of mortgage servicing rights tend to occur in private transactions and the precise terms and conditions of the sales are typically not readily available, there is a limited market to refer to in determining the fair value of mortgage servicing rights. As such, like other participants in the mortgage banking business, the Corporation relies primarily on a discounted cash flow model, incorporating assumptions about loan prepayment rates, discount rates, servicing costs and other economic factors, to estimate the fair value of its mortgage servicing rights. Since the valuation model uses significant unobservable inputs, the Corporation classifies mortgage servicing rights within Level 3.

The Corporation utilizes a third-party vendor to perform the modeling to estimate the fair value of its mortgage servicing rights. The Corporation reviews the estimated fair values and assumptions used by the third party in the model on a quarterly basis. The Corporation also compares the estimates of fair value and assumptions to recent market activity and against its own experience. See Note 12 (Mortgage Servicing Rights and Mortgage Servicing Activity) for further information on mortgage servicing rights valuation assumptions.

Derivatives. The Corporation's derivatives include interest rate swaps and written loan commitments and forward sales contracts related to residential mortgage loan origination activity. Valuations for interest rate swaps are derived from third-party models whose significant inputs are readily observable market parameters, primarily yield curves, with appropriate adjustments for liquidity and credit risk. These fair value measurements are classified as Level 2. The fair values of written loan commitments and forward sales contracts on the associated loans are based on quoted prices for similar loans in the secondary market, consistent with the valuation of residential mortgage loans held for sale. Expected net future cash flows related to loan servicing

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(Dollars in thousands)

activities are included in the fair value measurement of written loan commitments. A written loan commitment does not bind the potential borrower to entering into the loan, nor does it guarantee that the Corporation will approve the potential borrower for the loan. Therefore, when determining fair value, the Corporation makes estimates of expected "fallout" (interest rate locked pipeline loans not expected to close), using models, which consider cumulative historical fallout rates and other factors. Fallout can occur for a variety of reasons including falling rate environments when a borrower will abandon a fixed rate loan commitment at one lender and enter into a new lower fixed rate loan commitment at another, when a borrower is not approved as an acceptable credit by the lender or for a variety of other non-economic reasons. Fallout is not a significant input to the fair value of the written loan commitments in their entirety. These measurements are classified as Level 2.

Derivative assets are typically secured through securities with financial counterparties or cross collateralization with a borrowing customer. Derivative liabilities are typically secured through the Corporation pledging securities to financial counterparties or, in the case of a borrowing customer, by the right of setoff. The Corporation considers factors such as the likelihood of default by itself and its counterparties, right of setoff, and remaining maturities in determining the appropriate fair value adjustments. All derivative counterparties approved by the Corporation's Asset and Liability Committee are regularly reviewed, and appropriate business action is taken to adjust the exposure to certain counterparties, as necessary. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of marketable collateral securing the position. This approach used to estimate impacted exposures to counterparties is also used by the Corporation to estimate its own credit risk on derivative liability positions. To date, no material losses have been incurred due to a counterparty's inability to pay any uncollateralized position. There was no significant change in value of derivative assets and liabilities attributed to credit risk for the three months ended March 31, 2013.

True-up liability. In connection with the George Washington and Midwest acquisitions in 2010, the Bank has agreed to pay the FDIC should the estimated losses on the acquired loan portfolios as well as servicing fees earned on the acquired loan portfolios not meet thresholds as stated in the loss sharing agreements (the "true-up liability"). This contingent consideration is classified as a liability within accrued taxes, expenses and other liabilities on the consolidated balance sheets and is remeasured at fair value each reporting date until the contingency is resolved. The changes in fair value are recognized in earnings in the current period.

An expected value methodology is used as a starting point for determining the fair value of the true-up liability based on the contractual terms prescribed in the loss sharing agreements. The resulting values under both calculations are discounted over 10 years (the period defined in the loss sharing agreements) to reflect the uncertainty in the timing and payment of the true-up liability by the Bank to arrive at a net present value. The discount rate used to value the true-up liability was 2.91% and 3.56% as of March 31, 2013 and 2012, respectively. Increasing or decreasing the discount rate by one percentage point would change the liability by approximately $0.9 million as of March 31, 2013.

In accordance with the loss sharing agreements governing the Midwest acquisition, on July 15, 2020 (the “Midwest True-Up Measurement Date”), the Bank has agreed to pay to the FDIC half of the amount, if positive, calculated as: (1) 20% of the intrinsic loss estimate of the FDIC (approximately $152 million); minus (2) the sum of (A) 25% of the asset premium paid in connection with the Midwest acquisition (approximately $20 million); plus (B) 25% of the cumulative shared-loss payments (as defined below) plus (C) the cumulative servicing amount (as defined below). The fair value of the true-up liability associated with the Midwest acquisition was $8.4 million, $7.6 million and $7.4 million as of March 31, 2013, December 31, 2012 and March 31, 2012, respectively.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

In accordance with the loss sharing agreements governing the George Washington acquisition, on April 14, 2020 (the “George Washington True-Up Measurement Date”), the Bank has agreed to pay to the FDIC 50% of the excess, if any, of (1) 20% of the stated threshold (approximately $172 million) less (2) the sum of (A) 25% of the asset discount (approximately $47 million) received in connection with the George Washington acquisition plus (B) 25% of the cumulative shared-loss payments (as defined below) plus (C) the cumulative servicing amount (as defined below). The fair value of the true-up liability associated with the George Washington acquisition was $4.4 million, $4.6 million and $4.3 million as of March 31, 2013, December 31, 2012 and March 31, 2012, respectively.

For the purposes of the above calculations, cumulative shared-loss payments means: (i) the aggregate of all of the payments made or payable to the Bank under the loss sharing agreements minus (ii) the aggregate of all of the payments made or payable to the FDIC. The cumulative servicing amount means the period servicing amounts (as defined in the loss sharing agreements) for every consecutive twelve-month period prior to and ending on the Midwest and George Washington True-Up Measurement Dates. The cumulative loss share payments and cumulative service amounts components of the true-up calculations are estimated each period end based on the expected amount and timing of cash flows of the acquired loan portfolios. See Note 4 (Loans) and Note 5 (Allowance for Loan Losses) for additional information on the estimated cash flows of the acquired loan portfolios.

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarters ended March 31, 2013 and 2012 are summarized as follows:



	Three Months Ended
	March 31, 2013				March 31, 2012
	Available-for-sale securities		True-up liability		Available-for-sale securities			True-up liability
Balance at beginning of period	$	49,661	$	12,259	$	87,539		$	11,551
(Gains) losses included in earnings (a)	—		524		—			174
Unrealized gains (losses) (b)	1,560		—		2,419			—
Purchases	—		—		—			—
Sales	—		—		—			—
Settlements	13		—		(1,471		)	—
Net transfers into (out of) Level 3	—		—		—			—
Balance at ending of period	$	51,234	$	12,783	$	88,487		$	11,725

(a) Reported in other expense

(b) Reported in other comprehensive income (loss)

Fair Value Option

Residential mortgage loans held for sale are recorded at fair value under fair value option accounting guidance. The election of the fair value option aligns the accounting for these loans with the related hedges. It also eliminates the requirements of the hedge accounting under U.S. GAAP.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

Interest income on loans held for sale is accrued on the principal outstanding primarily using the “simple-interest” method. None of these loans were 90 days or more past due, nor were any on nonaccrual as of March 31, 2013, December 31, 2012 and March 31, 2012. The aggregate fair value, contractual balance and gain or loss on loans held for sale was as follows:



	March 31, 2013		December 31, 2012		March 31, 2012
Aggregate fair value carrying amount	$	14,459	$	23,683	$	42,447
Aggregate unpaid principal / contractual balance	13,960		22,765		41,542
Carrying amount over aggregate unpaid principal (a)	$	499	$	918	$	905

(a) These changes are included in loan sales and servicing income.

Disclosures about Fair Value of Financial Instruments

The carrying amount and estimated fair value of the Corporation’s financial instruments that are carried at either fair value or cost as of March 31, 2013, December 31, 2012 and March 31, 2012 are shown in the tables below.



	March 31, 2013
	Carrying Amount		Fair Value
	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	347,103	$	347,103	$	—	$	347,103	$	—
Available-for-sale securities	3,243,835		3,243,835		3,212		3,189,389		51,234
Held-to-maturity securities	665,589		673,501		—		673,501		—
Other securities	140,984		140,984		—		140,984		—
Loans held for sale	14,459		14,459		—		14,459		—
Net noncovered loans	8,681,127		8,649,899		—		—		8,649,899
Net covered loans and loss share receivable	848,887		848,887		—		—		848,887
Accrued interest receivable	43,701		43,701		—		43,701		—
Derivatives	58,563		58,563		—		58,563		—
Financial liabilities:
Deposits	$	11,925,767	$	11,931,015	$	—	$	11,931,015	$	—
Federal funds purchased and securities sold under agreements to repurchase	826,855		826,855		—		826,855		—
Wholesale borrowings	136,003		141,613		—		141,613		—
Long-term debt	249,921		259,048		—		259,048		—
Accrued interest payable	3,853		3,853		—		3,853		—
Derivatives	71,933		71,933		—		71,933		—

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)



	December 31, 2012
	Carrying Amount		Fair Value
	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	258,014	$	258,014	$	—	$	258,014	$	—
Available-for-sale securities	2,920,971		2,920,971		3,241		2,868,069		49,661
Held-to-maturity securities	622,121		630,799		—		630,799		—
Other securities	140,717		140,717		—		140,717		—
Loans held for sale	23,683		23,683		—		23,683		—
Net noncovered loans	8,632,717		8,604,872		—		—		8,604,872
Net covered loans and loss share receivable	975,870		975,870		—		—		975,870
Accrued interest receivable	40,389		40,389		—		40,389		—
Derivatives	63,169		63,169		—		63,169		—
Financial liabilities:
Deposits	$	11,759,425	$	11,765,873	$	—	$	11,765,873	$	—
Federal funds purchased and securities sold under agreements to repurchase	1,104,525		1,104,525		—		1,104,525		—
Wholesale borrowings	136,883		143,029		—		143,029		—
Long-term debt	—		—		—		—		—
Accrued interest payable	2,515		2,515		—		2,515		—
Derivatives	77,906		77,906		—		77,906		—



	March 31, 2012
	Carrying Amount		Fair Value
	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	489,985	$	489,985	$	—	$	489,985	$	—
Available for sale securities	3,491,647		3,491,647		3,308		3,399,852		88,487
Held to maturity securities	100,840		103,865		—		103,865		—
Other securities	140,713		140,713		—		140,713		—
Loans held for sale	42,447		42,447		—		42,447		—
Net noncovered loans	7,759,360		7,496,821		—		—		7,496,821
Net covered loans and loss share receivable	1,337,080		1,337,080		—		—		1,337,080
Accrued interest receivable	45,270		45,270		—		45,270		—
Derivatives	60,115		60,115		—		60,115		—
Financial liabilities:
Deposits	$	11,648,165	$	11,659,976	$	—	$	11,659,976	$	—
Federal funds purchased and securities sold under agreements to repurchase	928,760		928,760		—		928,760		—
Wholesale borrowings	176,611		184,640		—		184,640		—
Long-term debt	—		—		—		—		—
Accrued interest payable	3,350		3,350		—		3,350		—
Derivatives	80,174		80,174		—		80,174		—

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

The following methods and assumptions were used to estimate the fair values of each class of financial instrument presented:

Cash and due from banks – For these short-term instruments, the carrying amount is considered a reasonable estimate of fair value.

Investment securities – See Financial Instruments Measured at Fair Value above.

Loans held for sale – The majority of loans held for sale are residential mortgage loans which are recorded at fair value. All other loans held for sale are recorded at the lower of cost or market, less costs to sell. See Financial Instruments Measured at Fair Value above.

Net noncovered loans – The loan portfolio was segmented based on loan type and repricing characteristics. Carrying values are used to estimate fair values of variable rate loans. A discounted cash flow method was used to estimate the fair value of fixed-rate loans. Discounting was based on the contractual cash flows, and discount rates are based on the year-end yield curve plus a spread that reflects current pricing on loans with similar characteristics. If applicable, prepayment assumptions are factored into the fair value determination based on historical experience and current economic conditions.

Net covered loans and loss share receivable – Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns. The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows.

Loss share receivable – This loss sharing asset is measured separately from the related covered assets as it is not contractually embedded in the covered assets and is not transferable with the covered assets should the Bank choose to dispose of them. Fair value was estimated using projected cash flows related to the Loss Share Agreements based on the expected reimbursements for losses and the applicable loss sharing percentages. These cash flows were discounted to reflect the uncertainty of the timing and receipt from the FDIC.

Accrued interest receivable – The carrying amount is considered a reasonable estimate of fair value.

Mortgage servicing rights – See Financial Instruments Measured at Fair Value above.

Deposits – The estimated fair value of deposits with no stated maturity, which includes demand deposits, money market accounts and other savings accounts, are established at carrying value because of the customers' ability to withdraw funds immediately. A discounted cash flow method is used to estimate the fair value of fixed rate time deposits. Discounting was based on the contractual cash flows and the current rates at which similar deposits with similar remaining maturities would be issued.

Federal funds purchased and securities sold under agreements to repurchase, wholesale borrowings and long-term debt – The carrying amount of variable rate borrowings including federal funds purchased is considered to be their fair value. Quoted market prices or the discounted cash flow method was used to estimate the fair value of the Corporation's long-term debt. Discounting was based on the contractual cash flows and the current rate at which debt with similar terms could be issued.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

Accrued interest payable – The carrying amount is considered a reasonable estimate of fair value.

Derivative assets and liabilities – See Financial Instruments Measured at Fair Value above.

True-up liability – See Financial Instruments Measured at Fair Value above.

12. Mortgage Servicing Rights and Mortgage Servicing Activity

In the three months ended March 31, 2013 and 2012, the Corporation sold residential mortgage loans from the held for sale portfolio with unpaid principal balances of $149.9 million and $182.1 million, respectively, and recognized pretax gains of $4.2 million and $1.6 million, respectively, which are included as a component of loan sales and servicing income. As of March 31, 2013 and 2012, the Corporation retained the related mortgage servicing rights on $136.4 million and $178.0 million, respectively, of the loans sold and receives servicing fees.

The Corporation serviced for third parties approximately $2.4 billion of residential mortgage loans at March 31, 2013 and $2.3 billion at March 31, 2012. For the three months ended March 31, 2013 and 2012 , loan servicing fees, not including valuation changes included in loan sales and servicing income, were $1.5 million and $1.4 million, respectively.

Servicing rights are presented within other assets on the accompanying consolidated balance sheets. The retained servicing rights are initially valued at fair value. Since mortgage servicing rights do not trade in an active market with readily observable prices, the Corporation relies primarily on a discounted cash flow analysis model to estimate the fair value of its mortgage servicing rights. Additional information can be found in Note 11 (Fair Value Measurement). Mortgage servicing rights are subsequently measured using the amortization method. Accordingly, the mortgage servicing rights are amortized over the period of, and in proportion to, the estimated net servicing income and is recorded in loan sales and servicing income.

Changes in the carrying amount of mortgage servicing rights and mortgage servicing rights valuation allowance are as follows:



	Three months ended
	March 31, 2013			March 31, 2012
Balance at beginning of period	$	21,316		$	21,179
Additions	1,267			1,394
Amortization	(1,205		)	(1,627		)
Balance at end of period	21,378			20,946
Valuation allowance at beginning of period	(2,564		)	(3,539		)
Recoveries (Additions)	1,330			1,346
Valuation Allowance at end of period	(1,234		)	(2,193		)
Mortgage servicing rights, net carrying balance	$	20,144		$	18,753
Fair value at end of period	$	20,223		$	18,869

On a quarterly basis, the Corporation assesses its capitalized servicing rights for impairment based on their current fair value. For purposes of the impairment, the servicing rights are disaggregated based on loan type and interest rate which are the predominant risk characteristics of the underlying loans. A valuation allowance is established through a charge to earnings to the extent the amortized cost of the mortgage servicing rights exceeds the estimated fair value by stratification. If it is later determined that all or a portion of the

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

temporary impairment no longer exists for the stratification, the valuation is reduced through a recovery to earnings. No permanent impairment losses were written off against the allowance during the three months ended March 31, 2013 and 2012.

Key economic assumptions and the sensitivity of the current fair value of the mortgage servicing rights related to immediate 10% and 25% adverse changes in those assumptions at March 31, 2013 are presented in the following table below. These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in the fair value based on 10% variation in the prepayment speed assumption generally cannot be extrapolated because the relationship of the change in the prepayment speed assumption to the change in fair value may not be linear. Also, in the below table, the effect of a variation in the discount rate assumption on the fair value of the mortgage servicing rights is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in prepayment speed estimates could result in changes in the discount rates), which might magnify or counteract the sensitivities.



Prepayment speed assumption (annual CPR)	12.26		%
Decrease in fair value from 10% adverse change	$	789
Decrease in fair value from 25% adverse change	$	1,885
Discount rate assumption	9.64		%
Decrease in fair value from 100 basis point adverse change	$	624
Decrease in fair value from 200 basis point adverse change	$	1,206
Expected weighted-average life (in months)	92.9

13. Contingencies and Guarantees

Litigation

In the normal course of business, the Corporation and its subsidiaries are at all times subject to pending and threatened legal actions, some for which the relief or damages sought are substantial. Although the Corporation is not able to predict the outcome of such actions, after reviewing pending and threatened actions with counsel, Management believes that based on the information currently available the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the results of operations or shareholders’ equity of the Corporation. However, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the results of operations in a particular future period as the time and amount of any resolution of such actions and its relationship to the future results of operations are not known.

Reserves are established for legal claims only when losses associated with the claims are judged to be probable, and the loss can be reasonably estimated. In many lawsuits and arbitrations, including almost all of the class action lawsuits, it is not possible to determine whether a liability will be incurred or to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case a reserve will not be recognized until that time.

Overdraft Litigation

Commencing in December 2010, two separate lawsuits were filed in the Summit County Court of Common Pleas and the Lake County Court of Common Pleas against the Corporation and the Bank. The complaints were brought as putative class actions on behalf of Ohio residents who maintained a checking account at the Bank and who incurred one or more overdraft fees as a result of the alleged re-sequencing of

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

debit transactions. The lawsuit that had been filed in Summit County Court of Common Pleas was dismissed without prejudice on July 11, 2011. The remaining suit in Lake County seeks actual damages, disgorgement of overdraft fees, punitive damages, interest, injunctive relief and attorney fees. In December 2012, the trial court certified the class and the Bank and Corporation have appealed the determination.

365/360 Interest Litigation

In August 2008, a lawsuit was filed in the Cuyahoga County Court of Common Pleas against the Bank. The breach-of-contract complaint was brought as a putative class action on behalf of Ohio commercial borrowers who allegedly had the interest they owed calculated improperly by using the 365/360 method. The complaint seeks actual damages, interest, injunctive relief and attorney fees. In June 2012, the trial court certified the class and the Bank has appealed the determination.

Shareholder Derivative Litigation

In July 2012, three related shareholder derivative lawsuits were filed in the United States District Court for the Northern District of Ohio. The lawsuits name as defendants the members of the Corporation's board of directors and certain senior executives. The lawsuits are purportedly brought on behalf of the Corporation and seek a recovery for its benefit. The lawsuits generally allege that the defendants breached fiduciary duties owed to the Corporation in connection with decisions concerning executive compensation, and allege that the senior executives named as defendants were unjustly enriched by receiving excessive compensation. The lawsuits also allege that the defendants caused the Corporation to issue incomplete or misleading disclosures concerning executive compensation in its 2012 proxy statement. The complaints seek an award against the defendants of monetary damages to be paid to the Corporation, and various other forms of relief. In September 2012, the lawsuits were consolidated.

Merger Litigation

Between September 17, 2012 and October 5, 2012, alleged shareholders of Citizens filed six purported class action lawsuits in the Circuit Court of Genesee County, Michigan, which have been consolidated as In re Citizens Republic Bancorp, Inc. Shareholder Litigation, Case No. 12-99027-CK (the "Lawsuit"). The consolidated complaint (the "Complaint") names as defendants Citizens, the members of Citizens' board of directors and FirstMerit. The complaint alleges that the director defendants breached their fiduciary duties by failing to obtain the best available price in connection with the merger, by not utilizing a proper process to evaluate the merger and by agreeing to protective devices that ensured that no entity other than FirstMerit would seek to acquire Citizens. The Complaint also alleges that FirstMerit and Citizens aided and abetted those alleged breaches of fiduciary duty. The Complaint seeks declaratory and injunctive relief to prevent the consummation of the merger, rescissory damages and other equitable relief. The defendants filed a motion to dismiss the Complaint.

On February 21, 2013, the plaintiffs and defendants entered into a memorandum of understanding (the “MOU”) setting forth their agreement in principle to settle the Lawsuit. While the defendants deny the allegations made in the Complaint, they agreed to enter into the MOU to avoid the costs and disruptions of any further litigation and to permit the timely closing of the merger. The MOU sets forth the principal terms of the settlement that the parties will document in a formal settlement agreement concerning the Complaint (the “Settlement Agreement”), subject to confirmatory discovery by the plaintiffs, and describes the actions that the parties will take or refrain from taking between the date of the MOU and the date that the Settlement Agreement is finally approved.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

Pursuant to the MOU, the defendants amended the joint proxy statement/prospectus relating to the merger to include certain supplemental disclosures. The MOU also provides that the Settlement Agreement will include an injunction against proceedings in connection with the Complaint and any additional complaints concerning claims covered by the Settlement Agreement. In addition, the MOU provides that the Settlement Agreement will include a release on behalf of the plaintiffs, along with other members of the class of Citizens' shareholders certified for purposes of the Settlement Agreement, in favor of the defendants and their related parties from any claims that arose from or are related to the merger. The defendants have agreed to pay the plaintiff's attorneys' fees and expenses as awarded by the court, subject to court approval of the Settlement Agreement and the consummation of the merger.

Based on information currently available, consultation with counsel, available insurance coverage and established reserves, Management believes that the eventual outcome of all claims against the Corporation and its subsidiaries will not, individually or in the aggregate, have a material adverse effect on its consolidated financial position or results of operations. However, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the results of operations for a particular period. The Corporation has not established any reserves with respect to any of this disclosed litigation because it is not possible to determine either (i) whether a liability has been incurred or (ii) to estimate the ultimate or minimum amount of that liability or both at this time.

Commitments to Extend Credit

Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Loan commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments, and the fair value of these commitments is recorded on the consolidated balance sheets. Additional information is provided in Note 9 (Derivatives and Hedging Activities). Commitments generally are extended at the then-prevailing interest rates, 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. Loan commitments involve credit risk not reflected on the balance sheet. The Corporation mitigates exposure to credit risk with internal controls that guide how applications for credit are reviewed and approved, how credit limits are established and, when necessary, how demands for collateral are made. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Management evaluates the creditworthiness of each prospective borrower on a case-by-case basis and, when appropriate, adjusts the allowance for probable credit losses inherent in all commitments. The allowance for unfunded lending commitments at March 31, 2013, December 31, 2012 and March 31, 2012 was $4.9 million, $5.4 million, and $5.4 million, respectively. Additional information pertaining to this allowance is included in Note 5 (Allowance for Loan Losses) and under the heading "Allowance for Loan Losses and Reserve for Unfunded Lending Commitments" within Management's Discussion and Analysis of Financial Condition and Results of Operation of this report.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

The following table shows the remaining contractual amount of each class of commitments to extend credit as of March 31, 2013, December 31, 2012 and March 31, 2012. This amount represents the Corporation's maximum exposure to loss if the customer were to draw upon the full amount of the commitment and subsequently default on payment for the total amount of the then outstanding loan.



		March 31, 2013		December 31, 2012		March 31, 2012
Loan Commitments
	Commercial	$	2,317,997	$	2,431,023	$	2,534,452
	Consumer	1,750,913		1,720,518		1,624,660
	Total loan commitments	$	4,068,910	$	4,151,541	$	4,159,112

Guarantees

The Corporation is a guarantor in certain agreements with third parties. The following table shows the types of guarantees the Corporation had outstanding as of March 31, 2013, December 31, 2012 and March 31, 2012.



		March 31, 2013		December 31, 2012		March 31, 2012
Financial guarantees
	Standby letters of credit	$	120,508	$	136,202	$	132,216
	Loans sold with recourse	44,672		42,383		27,886
	Total financial guarantees	$	165,180	$	178,585	$	160,102

Standby letters of credit obligate the Corporation to pay a specified third party when a customer fails to repay an outstanding loan or debt instrument, or fails to perform some contractual nonfinancial obligation. The credit risk involved in issuing letters of credit is essentially the same as involved in extending loan facilities to customers. Collateral held varies, but may include marketable securities, equipment and real estate. Any amounts drawn under standby letters of credit are treated as loans; they bear interest and pose the same credit risk to the Corporation as a loan. Except for short-term guarantees of $55.1 million at March 31, 2013, the remaining guarantees extend in varying amounts through 2017.

Changes in the amount of the repurchase reserve for the three months ended March 31, 2013 and 2012 are as follows:



	Three months ended March 31, 2013
	Reserve on residential mortgage loans			Reserve on manufactured housing loans			Total repurchased reserve
Balance at beginning of period	$	1,500		$	1,167		$	2,667
Net realized losses	(56		)	—			(56		)
Net increase (decrease) to reserve	156			(29		)	127
Balance at end of period	$	1,600		$	1,138		$	2,738

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)



	Three months ended March 31, 2012
	Reserve on residential mortgage loans			Reserve on manufactured housing loans		Total repurchased reserve
Balance at beginning of period	$	470		$	1,273	$	1,743
Net realized losses	(206		)	—		(206		)
Net increase (decrease) to reserve	136			5		141
Balance at end of period	$	400		$	1,278	$	1,678

The total reserve associated with loans sold with recourse was approximately $2.7 million, $2.7 million and $1.7 million as of March 31, 2013, December 31, 2012 and March 31, 2012, respectively, and is included in accrued taxes, expenses and other liabilities on the consolidated balance sheet. The Corporation's reserve reflects management's best estimate of losses. The Corporation's reserving methodology uses current information about investor repurchase requests, and assumptions about defect concur rate, repurchase mix, and loss severity, based upon the Corporation's most recent loss trends. The Corporation also considers qualitative factors that may result in anticipated losses differing from historical loss trends, such as loan vintage, underwriting characteristics and macroeconomic trends.

The Corporation regularly sells residential mortgage loans service retained to government sponsored enterprises ("GSEs") as part of its mortgage banking activities. The Corporation provides customary representation and warranties to the GSEs in conjunction with these sales. These representations and warranties generally require the Corporation to repurchase assets if it is subsequently determined that a loan did not meet specified criteria, such as a documentation deficiency or rescission of mortgage insurance. If the Corporation is unable to cure or refute a repurchase request, the Corporation is generally obligated to repurchase the loan or otherwise reimburse the counterparty for losses. The Corporation also sells residential mortgage loans serviced released to other investors which contain early payment default recourse provisions. As of March 31, 2013, December 31, 2012 and March 31, 2012, the Corporation had sold $34.9 million, $32.5 million and $17.2 million, respectively, of outstanding residential mortgage loans to GSEs and other investors with recourse provisions. The Corporation had reserved $1.6 million, $1.5 million, and $0.4 million as of March 31, 2013, December 31, 2012 and March 31, 2012, respectively, for potential losses from representation and warranty obligations and early payment default recourse provisions.

Due to prior acquisitions, as of March 31, 2013, the Corporation continued to service approximately $8.2 million in manufactured housing loans that were sold with recourse compared to $8.2 million and $10.7 million as of December 31, 2012 and March 31, 2012, respectively. As of March 31, 2013, the Corporation had reserved $1.1 million for potential losses from these manufactured housing loans compared to $1.2 million and $1.3 million as of December 31, 2012 and March 31, 2012, respectively.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

14. Changes and Reclassifications Out of Accumulated Other Comprehensive Income

The following table presents the changes in accumulated other comprehensive income by component of comprehensive income for the three months ended March 31, 2013:



	Unrealized securities gains and losses			Pension and postretirement costs			Total
Balance as of January 1, 2013	$	55,418		$	(71,623	)	$	(16,205	)
Amounts recognized in other comprehensive income, net of taxes of $4.3 million	(7,920		)	—			(7,920		)
Reclassified amounts out of accumulated other comprehensive income, net of tax of $0.003 million	6			—			6
Balance as of March 31, 2013	$	47,504		$	(71,623	)	$	(24,119	)

The following table presents current period reclassifications out of accumulated other comprehensive income by component of comprehensive income for the three months ended March 31, 2013:



	Three months ended March 31, 2013			Income statement line item presentation
Realized (gains) losses on sale of securities	$	9		Investment securities losses (gains), net
Tax expense (benefit) (35%)	(3		)	Income tax expense (benefit)
Reclassified amount, net of tax	$	6

15. Subsequent Events

On April 12, 2013, the Corporation completed the Merger with Citizens which resulted in Citizens common stock being converted into the right to receive 1.37 shares of the Corporation's common stock (except that any shares of Citizens common stock that were owned by Citizens, the Corporation or any of their respective subsidiaries, other than in a fiduciary capacity, were canceled without any consideration therefor). Each outstanding option to acquire, and each outstanding equity award relating to, one share of Citizens' common stock was converted into an option to acquire, or an equity award relating to, 1.37 shares of the Corporation's common stock, as applicable. The conversion of Citizens' common stock into the Corporation's common stock resulted in the Corporation issuing approximately 55 million shares of its common stock.

Immediately following the Merger, Citizens Bank, a Michigan chartered bank and wholly owned subsidiary of Citizens, merged with and into FirstMerit Bank, N.A., a national banking association and wholly owned subsidiary of FirstMerit, with FirstMerit Bank, N.A. surviving the merger and continuing its corporate existence under the name “FirstMerit Bank, N.A.”

The Merger Agreement provided that upon completion of the Merger, the Corporation increase its board of directors by two directors. The new directorships were filled with current members of the Citizens board.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands)

dividends and interest. The Corporation's public offerings consisted of $250 million aggregate principal amount of subordinated notes due February 4, 2023 bearing interest at an annual rate of 4.35% payable semi-annually in arrears on February 4 and August 4 of each year and 4,000,000 depositary shares (each representing a 1/40th interest in a share of the Corporation's Series A Non-Cumulative Perpetual Preferred Stock) with dividends payable quarterly in arrears on the 4th day of February, May, August and November, beginning May 4, 2013, which resulted in gross proceeds of $100 million.

The following components make up the consideration for the Merger transaction: approximately $930 million in converted common stock, $355 million paid to the Treasury to purchase the Citizens TARP Preferred and approximately $3 million in a warrant issued to the Treasury to purchase the Corporation's common stock in conjunction with the purchase of the Citizens TARP Preferred.

The Citizens acquisition will be accounted for using the purchase acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged will be recorded at estimated fair value on the acquisition date. The Corporation is in the process of determining the preliminary fair values which are subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. Any resulting goodwill will not be deductible for income

tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes. The results of operations acquired in the Citizens transaction will be included in the Corporation's financial results beginning on April 13, 2013.

Management's strategy to de-leverage the newly acquired Citizens' balance sheet resulted in the Corporation repaying on April 15, 2013 approximately $591.0 million in principal of Federal Home Loan advances. Management's strategy to re-balance the investment portfolio acquired in the Citizens merger resulted in the sale of approximately $2.1 billion in agency MBS, agency CMOs, municipal securities and private label MBS investments in April 2013. Management intends on repurchasing $1.4 billion of agency MBS and CMO securities throughout the second quarter of 2013.

In preparing these financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the Securities and Exchange Commission. In accordance with applicable accounting standards, all material subsequent events have been either recognized in the financial statements or disclosed in the notes to the financial statements.

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

AVERAGE CONSOLIDATED BALANCE SHEETS (Unaudited)

Fully Tax-equivalent Interest Rates and Interest Differential



	Three months ended							Three months ended							Three months ended
	March 31, 2013							December 31, 2012							March 31, 2012
(Dollars in thousands)	Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate
ASSETS
Cash and due from banks	$	394,896						$	238,366						$	378,736
Investment securities and federal funds sold:
U.S. Treasury securities and U.S. Government agency obligations (taxable)	2,790,039			$	16,294	2.37	%	2,794,524			$	16,767	2.39	%	2,882,045			$	19,679	2.75	%
Obligations of states and political subdivisions (tax exempt)	541,014			6,595		4.94	%	510,722			6,583		5.13	%	436,804			5,864		5.40	%
Other securities and federal funds sold	366,926			2,944		3.25	%	381,569			3,429		3.58	%	371,973			2,739		2.96	%
Total investment securities and federal funds sold	3,697,979			25,833		2.83	%	3,686,815			26,779		2.89	%	3,690,822			28,282		3.08	%
Loans held for sale	14,884			144		3.92	%	20,485			199		3.86	%	26,483			283		4.30	%
Noncovered loans, covered loans and loss share receivable	9,695,926			99,006		4.14	%	9,539,393			101,288		4.22	%	9,217,879			103,156		4.50	%
Total earning assets	13,408,789			124,983		3.78	%	13,246,693			128,266		3.85	%	12,935,184			131,721		4.10	%
Total allowance for loan losses	(141,735		)					(141,270		)					(142,628		)
Other assets	1,321,593							1,358,426							1,325,645
Total assets	$	14,983,543						$	14,702,215						$	14,496,937
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	3,321,660		$	—	—	%	$	3,306,444		$	—	—	%	$	3,036,590		$	—	—
Interest-bearing	1,300,816			318		0.10	%	1,122,796			261		0.09	%	1,066,132			247		0.09	%
Savings and money market accounts	5,835,750			5,315		0.37	%	5,743,599			5,261		0.36	%	5,675,052			5,103		0.36	%
Certificates and other time deposits	1,331,558			2,063		0.63	%	1,422,246			2,287		0.64	%	1,694,247			3,524		0.84	%
Total deposits	11,789,784			7,696		0.26	%	11,595,085			7,809		0.27	%	11,472,021			8,874		0.31	%
Securities sold under agreements to repurchase	906,717			313		0.14	%	957,564			303		0.13	%	887,715			268		0.12	%
Wholesale borrowings	136,298			850		2.53	%	163,405			1,024		2.49	%	184,659			1,151		2.51	%
Long-term debt	155,506			1,748		4.56	%	—			—		—	%	—			—		—	%
Total interest-bearing liabilities	9,666,645			10,607		0.45	%	9,409,610			9,136		0.39	%	9,507,805			10,293		0.44	%
Other liabilities	280,233							350,886							371,533
Shareholders’ equity	1,715,005							1,635,275							1,581,009
Total liabilities and shareholders’ equity	$	14,983,543						$	14,702,215						$	14,496,937
Net yield on earning assets	$	13,408,789		$	114,376	3.46	%	$	13,246,693		$	119,130	3.58	%	$	12,935,184		$	121,428	3.78	%
Interest rate spread						3.34	%						3.47	%						3.66	%

Note: Interest income on tax-exempt securities and loans has been adjusted to a fully-taxable equivalent basis. Nonaccrual loans have been included in the average balances.

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HIGHLIGHTS OF FIRST QUARTER 2013 PERFORMANCE

Earnings Summary

The Corporation reported first quarter 2013 net income of $37.3 million, or $0.33 per diluted share. This compares with $38.2 million, or $0.35 per diluted share, for the fourth quarter 2012 and $30.3 million, or $0.28 per diluted share, for the first quarter 2012.

Returns on average common equity (“ROE”) and average assets (“ROA”) for the first quarter 2013 were 8.83% and 1.01%, respectively, compared with 9.30% and 1.03%, respectively, for the fourth quarter 2012 and 7.72% and 0.84% for the first quarter 2012.

Net interest margin was 3.46% for the first quarter 2013 compared with 3.58% for the fourth quarter 2012 and 3.78% for the first quarter 2012. Increased borrowing costs, primarily related to the Corporation's issuance of $250 million aggregate principal amount of subordinated notes in an underwritten public offering completed on February 4, 2013, accounted for six basis points of compression during the first quarter of 2013.

Average noncovered loans during the first quarter 2013 increased $291.1 million, or 3.45%, compared with the fourth quarter 2012 and also increased $953.9 million, or 12.26%, compared with the first quarter 2012. Average noncovered commercial loans increased $259.3 million, or 4.63%, compared with the prior quarter, and increased $716.7 million, or 13.94%, compared with the year ago quarter.

Average deposits were $11.8 billion during the first quarter 2013, an increase of $194.7 million, or 1.68%, compared with the fourth quarter 2012, and an increase of $317.8 million, or 2.77%, compared with the first quarter 2012. During the first quarter 2013, average core deposits, which exclude time deposits, increased $285.4 million, or 2.81%, compared with the fourth quarter 2012 and $680.5 million, or 6.96%, compared with the first quarter 2012. Average time deposits decreased $90.7 million, or 6.38%, and decreased $362.7 million, or 21.41%, respectively, over prior and year-ago quarters. For the first quarter 2013, average core deposits accounted for 88.71% of total average deposits, compared with 87.73% for the fourth quarter 2012 and 85.23% for the first quarter 2012.

Average investments increased $11.2 million, or 0.30%, compared with the fourth quarter 2012 and increased $7.2 million, or 0.19% compared with the first quarter 2012.

Net interest income on a fully tax-equivalent (“FTE”) basis was $114.4 million in the first quarter 2013 compared with $119.1 million in the fourth quarter 2012 and $121.4 million in the first quarter 2012.

Noninterest income, excluding gains on securities transactions, for the first quarter 2013 was $57.4 million, a decrease of $1.8 million, or 3.08%, from the fourth quarter 2012 and an increase of $5.9 million, or 11.53%, from the first quarter 2012. Included in noninterest income in both the first quarter of 2013 and the fourth quarter of 2012 were $5.0 million of gains on covered loans paid in full.

Other income, net of securities gains, as a percentage of net revenue for the first quarter 2013 was 33.42% compared with 33.21% for fourth quarter 2012 and 29.77% for the first quarter 2012. Net revenue is defined as net interest income, on an FTE basis, plus other income, less gains from securities sales.

Noninterest expense for the first quarter 2013 was $106.9 million, a decrease of $5.3 million, or 4.69%, from the fourth quarter 2012 and a decrease of $6.8 million, or 6.01%, from the first quarter 2012. Included in

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noninterest expense in the first quarter of 2013 and fourth quarter of 2012 were acquisition related costs associated with the Citizens Republic Bancorp, Inc. ("Citizens") merger of $3.6 million and $2.1 million, respectively. The majority of these acquisition related costs were from professional and legal services rendered in connection with the merger. Also included in noninterest expense in the fourth quarter of 2012 was $2.3 million of fees related to the early termination of Federal Home Loan Bank advances.

During the first quarter 2013, the Corporation reported an efficiency ratio of 62.06%, compared with 62.65% for the fourth quarter 2012 and 65.52% for the first quarter 2012.

Net noncovered charge-offs totaled $5.9 million, or 0.27% of average noncovered loans in the first quarter 2013, compared with $7.1 million, or 0.34% of average noncovered loans, in the fourth quarter 2012 and $12.0 million, or 0.62% of average noncovered loans, in the first quarter 2012.

Nonperforming assets totaled $52.2 million at March 31, 2013, a increase of $2.0 million, or 4.00%, compared with December 31, 2012 and a decrease of $15.7 million, or 23.11%, compared with March 31, 2012. Nonperforming assets at March 31, 2013 represented 0.59% of period-end noncovered loans plus other real estate compared with 0.57% at December 31, 2012 and 0.86% at March 31, 2012.

The allowance for noncovered loan losses totaled $98.8 million at March 31, 2013. At March 31, 2013, the allowance for noncovered loan losses was 1.13% of period-end noncovered loans compared with 1.13% at December 31, 2012 and 1.32% at March 31, 2012. The allowance for credit losses is the sum of the allowance for noncovered loan losses and the reserve for unfunded lending commitments. For comparative purposes, the allowance for credit losses was 1.18% of period end noncovered loans at March 31, 2013, compared with 1.20% at December 31, 2012 and 1.39% at March 31, 2012. The allowance for credit losses to nonperforming loans was 254.32% at March 31, 2013, compared with 284.50% at December 31, 2012 and 205.13% at March 31, 2012.

The Corporation’s total assets at March 31, 2013 were $15.3 billion, an increase of $359.5 million, or 2.41%, compared with December 31, 2012 and an increase of $601.7 million, or 4.10%, compared with March 31, 2012.

Total deposits were $11.9 billion at March 31, 2013, an increase of $166.3 million, or 1.41%, from December 31, 2012 and an increase of $277.6 million, or 2.38%, from March 31, 2012. Core deposits totaled $10.6 billion at March 31, 2013, an increase of $238.4 million, or 2.30%, from December 31, 2012 and an increase of $624.3 million, or 6.24%, from March 31, 2012.

Shareholders’ equity was $1.8 billion as of March 31, 2013 and $1.6 billion as of December 31, 2012 and March 31, 2012. On February 4, 2013, the Corporation issued 4,000,000 depositary shares (each representing a 1/40th interest in a share of the Corporation's 5.875% Non-Cumulative Perpetual Preferred Stock, Series A) for total gross proceeds of $100 million. Dividends are payable quarterly in arrears on the 4th day of February, May, August and November, beginning May 4, 2013. As of March 31, 2013, $0.9 million of dividends were accrued and payable on May 4, 2013 and accounted for approximately a one cent reduction in diluted EPS for the three months ended March 31, 2013. The Corporation maintained a strong capital position as tangible common equity to assets was 8.03% at March 31, 2013, compared with 8.16% at December 31, 2012 and 7.86% at March 31, 2012. The common cash dividend per share paid in the first quarter 2013 was $0.16.

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Non-GAAP Financial Measures

The table below presents computations of earnings (loss) and certain other financial measures including "tangible common equity," "Tier 1 common equity", "tangible common equity to tangible assets ratio", "Basel III Tier 1 common ratio", "fee income ratio" and "efficiency ratio", all of which are non-GAAP measures. The table below also reconciles the U.S. GAAP performance measures to the corresponding non-GAAP measures. Management believes these non-GAAP financial measures enhance an investor's understanding of the business by providing a meaningful base for period-to-period comparisons, assisting in operating results analysis, and predicting future performance on the same basis as applied by Management and the Board of Directors. Management and the Board of Directors utilize these non-GAAP financial measures as follows:


•	Preparation of operating budgets


•	Monthly financial performance reporting


•	Monthly, quarterly and year-to-date assessment of the Corporation's business


•	Monthly close-out reporting of consolidated results (Management only)


•	Presentations to investors of corporate performance

Tangible common equity ratios have been a focus of some investors in analyzing the capital position of the Corporation absent the effects of intangible assets and preferred stock. Traditionally, the banking regulators have assessed bank and Bank Holding Company ("BHC") capital adequacy based on Tier 1 capital, the calculation of which is codified in federal banking regulations. In connection with the Federal Reserve's Comprehensive Capital Analysis and Review ("CCAR") process, these regulators are supplementing their assessment of the capital adequacy of a bank based on a variation of Tier 1 capital, known as Tier 1 common equity. While not codified, analysts and banking regulators have assessed the Corporation's capital adequacy using the tangible common shareholders' equity and/or the Tier 1 common equity measure. Because tangible common equity and Tier 1 common equity are not formally defined by U.S. GAAP or codified in the federal banking regulations, these measures are considered to be non-GAAP financial measures and other entities may calculate them differently than the Corporation's disclosed calculations. Since analysts and banking regulators may assess the Corporation's capital adequacy using tangible common shareholders' equity and Tier 1 common equity, Management believes that it is useful to provide investors information enabling them to assess the Corporation's capital adequacy on these same bases.

Tier 1 common equity is often expressed as a percentage of risk-weighted assets. Under the risk-based capital framework, a bank's balance sheet assets and credit equivalent amounts of off-balance sheet items are assigned to one of four broad risk categories. The aggregated dollar amount in each category is then multiplied by the risk weighting assigned to that category. The resulting weighted values from each of the four categories are added together and this sum is the risk-weighted assets total that, as adjusted, comprises the denominator of certain risk-based capital ratios. Tier 1 capital is then divided by this denominator (risk-weighted assets) to determine the Tier 1 capital ratio. Adjustments are made to Tier 1 capital to arrive at Tier 1 common equity (non-GAAP). Tier 1 common equity is also divided by the risk-weighted assets to determine the Tier 1 common equity ratio. The amounts disclosed as risk-weighted assets are calculated consistent with banking regulatory requirements.

The Corporation currently calculates its risk-based capital ratios under guidelines adopted by the Federal Reserve based on the 1988 Capital Accord ("Basel I") of the Basel Committee on Banking Supervision (the "Basel Committee"). In December 2010, the Basel Committee released its final framework for Basel III, which will strengthen international capital and liquidity regulation. When implemented by U.S. bank regulatory agencies and fully phased-in, Basel III will change capital requirements and place greater emphasis on common equity. The U.S. bank regulatory agencies have not yet adopted final regulations governing the implementation

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of Basel III. Accordingly, the calculations provided below are estimates, based on the Corporation's current understanding of the framework, including the Corporation's reading of the requirements, and informal feedback received through the regulatory process. The Corporation's understanding of the framework is evolving and will likely change as the regulations are finalized. Because the Basel III implementation regulations are not formally defined by U.S. GAAP and have not yet been finalized and codified, these measures are considered to be non-GAAP financial measures, and other entities may calculate them differently from the Corporation's disclosed calculations. Since analysts and banking regulators may assess the Corporation's capital adequacy using the Basel III framework, Management believes that it is useful to provide investors information enabling them to assess the Corporation's capital adequacy on the same basis.

The efficiency ratio (non-GAAP), which is a measure of productivity, is generally calculated as other expense divided by total revenue on a taxable equivalent basis. The fee income ratio (non-GAAP) is generally calculated as other income divided by total revenue. Management uses these ratios to monitor performance and believes these measures provide meaningful information to investors. Other expense may be presented excluding adjustments to arrive at adjusted other expense (non-GAAP), which is the numerator for the efficiency ratio. Other income may be presented excluding adjustments to arrive at adjusted other income (non-GAAP), which is the numerator for the fee income ratio. Net interest income on a taxable equivalent basis (non-GAAP) and other income are added together to arrive at total adjusted revenue (non-GAAP). Adjustments are made to arrive at adjusted total revenue (non-GAAP), which is the denominator for the fee income and efficiency ratios. It is possible that the activities related to the adjustments may recur; however, Management does not consider the activities related to the adjustments to be indications of ongoing operations.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of results as reported under GAAP. These non-GAAP measures are not necessarily comparable to similar measures that may be represented by other companies.

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GAAP to Non-GAAP Reconciliations
			March 31, 2013			March 31, 2012
			(Dollars in thousands)
Tangible common equity to tangible assets at period end
	Shareholders’ equity (GAAP)		$	1,754,850		$	1,584,105
	Less:	Intangible assets	6,055			7,756
		Goodwill	460,044			460,044
		Preferred Stock	100,000			—
	Tangible common equity (non-GAAP)		$	1,188,751		$	1,116,305
	Total assets (GAAP)		15,272,484			14,670,818
	Less:	Intangible assets	6,055			7,756
		Goodwill	460,044			460,044
	Tangible assets (non-GAAP)		$	14,806,385		$	14,203,018
	Tangible common equity to tangible assets ratio (non-GAAP)		8.03		%	7.86		%
Tier 1 common equity (1)
	Shareholders' equity (GAAP)		$	1,754,850		$	1,584,105
	Plus:	Net unrealized (gains) losses on available-for-sale securities	(47,504		)	(55,440		)
		Losses recorded in AOCI related to defined benefit postretirement plans	71,623			77,612
	Less:	Goodwill	460,044			460,044
		Intangible assets	6,055			7,756
		Disallowed servicing asset	1,943			1,771
	Tier 1 capital (regulatory)		1,310,927			1,136,706
	Less:	Preferred Stock	100,000			—
	Tier 1 common equity (non-GAAP)		$	1,210,927		$	1,136,706
	Risk-weighted assets (regulatory)		$	10,609,418		$	9,841,806
	Tier 1 common equity ratio (non-GAAP)		11.41		%	11.55		%
Basel III Tier 1 Common Ratio (2)
	Shareholders' equity (GAAP)		$	1,754,850		$	1,584,105
	Less:	Non-qualifying goodwill	460,044			460,044
		Non-qualifying intangible assets (3)	6,055			7,756
		Other adjustments (4)	1,943			1,771
	Basel III tier 1 capital (regulatory)		1,286,808			1,114,534
	Less:	Preferred Stock	$	100,000		$	—
	Basel III tier 1 common equity (regulatory)		$	1,186,808		$	1,114,534
	Basel III risk-weighted assets (regulatory) (5)		$	10,609,418		$	9,841,806
	Basel III tier 1 common equity ratio (non-GAAP)		11.19		%	11.32		%


(1)	Tier 1 common equity is a measure that is used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies. Management reviews this measure along with other measures of capital as part of its internal financial analysis.


(2)	Estimate based on June 2012 U.S. Notices of Proposed Rulemaking.


(3)	Under Basel III, regulatory capital must be reduced by purchased credit card relationship intangible assets. These assets are partially allowed in Basel I capital.


(4)	These include adjustments to other comprehensive income related to cash flow hedges, disallowed deferred tax assets, threshold deductions and other adjustments.


(5)	FirstMerit continues to develop systems and internal controls to calculate risk-weighted assets as required by Basel III. The amount included above is a reasonable approximation, based on our understanding of the requirements.

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GAAP to Non-GAAP Reconciliations, continued
			March 31, 2013			March 31, 2012
			(Dollars in thousands)
Fee Income and Efficiency Ratios
	Other expense (GAAP)		$	106,925		$	113,768
	Significant items:
	Less:	Intangible asset amortization	317			483
		Other intangible asset amortization	—			—
		Adjusted other expense (non-GAAP)	$	106,608		$	113,285
	Net interest income (FTE) (non-GAAP)		114,376			121,428
	Other income (GAAP)		57,392			51,726
	Significant Items:
		Securities gains (losses)	(9		)	260
		Adjusted other income (non-GAAP)	57,401			51,466
		Adjusted revenue (non-GAAP)	$	171,777		$	172,894
	Fee income ratio (non-GAAP)		33.42		%	29.77		%
	Efficiency ratio (non-GAAP)		62.06		%	65.52		%

RESULTS OF OPERATIONS

Net Interest Income

Net interest income, the Corporation's principal source of earnings, is the difference between interest income generated by earning assets (primarily loans and investment securities) and interest paid on interest-bearing funds (namely customer deposits, wholesale borrowings and long-term debt). Net interest income is affected by market interest rates on both earning assets and interest bearing liabilities, the level of earning assets being funded by interest bearing liabilities, noninterest-bearing liabilities, the mix of funding between interest bearing liabilities, noninterest-bearing liabilities and equity, and the growth in earning assets.

Net interest income for the three months ended March 31, 2013 was $111.3 million compared to $118.8 million for three months ended March 31, 2012. For the purpose of this remaining discussion, net interest income is presented on a FTE basis, to provide a comparison among all types of interest earning assets. That is, interest on tax-free securities and tax-exempt loans has been restated as if such interest were taxed at the statutory federal income tax rate of 35% adjusted for the non-deductible portion of interest expense incurred to acquire the tax-free assets. Net interest income presented on a FTE basis is a financial measure that is calculated and presented other than in accordance with U.S. GAAP and is widely used by financial services organizations. Therefore, Management believes these measures provide useful information for both management and investors by allowing them to make peer comparisons. The FTE adjustment was $3.0 million and $2.6 million for the quarters ended March 31, 2013 and 2012, respectively.

Net interest income presented on an FTE basis decreased $7.0 million or 5.77% to $114.4 million in the three months ended March 31, 2013 compared to $121.4 million in the same period of 2012.

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The impact of changes in the volume of interest-earning assets and interest-bearing liabilities and interest rates on net interest income is illustrated in the following table.



CHANGES IN NET INTEREST INCOME- FULLY TAX-EQUIVALENT RATE/VOLUME ANALYSIS

	Three months ended March 31,
	2013 and 2012
	Increase (Decrease) In Interest Income/Expense
	Volume			Yield/ Rate			Total
	( Dollars in thousands)
INTEREST INCOME -FTE
Investment securities and federal funds sold:
Taxable	$	(652	)	$	(2,528	)	$	(3,180	)
Tax-exempt	1,306			(575		)	731
Loans held for sale	(114		)	(25		)	(139		)
Loans	5,175			(9,325		)	(4,150		)
Total interest income -FTE	5,715			(12,453		)	(6,738		)
INTEREST EXPENSE
Interest on deposits:
Interest bearing	56			15			71
Savings and money market accounts	145			67			212
Certificates and other time deposits ("CDs")	(666		)	(795		)	(1,461		)
Securities sold under agreements to repurchase	6			39			45
Wholesale borrowings	(302		)	1			(301		)
Long-term debt	1,748			—			1,748
Total interest expense	987			(673		)	314
Net interest income - FTE	$	4,728		$	(11,780	)	$	(7,052	)

Note: Rate/volume variances are allocated on the basis of absolute value of the change in each.

The net interest margin is calculated by dividing net interest income FTE by average earning assets. As with net interest income, the net interest margin is affected by the level and mix of earning assets, the proportion of earning assets funded by non-interest bearing liabilities, and the interest rate spread. In addition, the net interest margin is impacted by changes in federal income tax rates and regulations as they affect the tax-equivalent adjustment.

The following table provides FTE net interest income and net interest margin totals for the three months ended March 31, 2013 and 2012:



	Three months ended March 31,
	2013			2012
	(Dollars in thousands)
Net interest income	$	111,349		$	118,787
Tax equivalent adjustment	3,027			2,641
Net interest income - FTE	$	114,376		121,428
Average earning assets	$	13,408,789		$	12,935,184
Net interest margin	3.46		%	3.78		%

The average yield on earning assets decreased from 4.10% in the first quarter of 2012 to 3.78% in the first quarter of 2013. Lower outstanding balances on total average earning assets in three months ended March 31, 2013 did not mitigate the decrease in average yield, which caused interest income to decrease $6.7 million from year-ago levels. Average balances for investment securities were up from the year ago quarter increasing interest income by $0.7 million, and lower rates earned on the securities decreased interest income by $3.1 million year over year. Average loans outstanding, up from the year ago quarter, increased interest income for

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the three months ended March 31, 2013 by $5.2 million and lower yields earned on loans, decreased loan interest income for three months ended March 31, 2013 by $9.3 million. Lower outstanding balances on average deposits and lower rates paid on deposits caused interest expense to decrease $1.2 million in the three months ended March 31, 2013. New long-term debt issued in the three months ended March 31, 2013 caused interest expense to increase by $1.7 million in the three months ended March 31, 2013.

The cost of funds for the year as a percentage of average earning assets remained flat at 0.08% for the three months ended March 31, 2012 and March 31, 2013.

Other Income

Excluding investment securities transactions, other income for the three months ended March 31, 2013 totaled $57.4 million, an increase of $5.9 million or 11.53% during the same period a year ago. Other income as a percentage of net revenue (FTE net interest income plus other income, less gains from securities) was 33.42% for the three months ended March 31, 2013 compared to 29.77% for the same three month period one year ago. Explanations for the most significant changes in the components of other income are discussed immediately after the following table.



	Three months ended March 31,
	2013			2012
	(In thousands)
Trust department income	$	5,741		$	5,627
Service charges on deposits	12,585			14,409
Credit card fees	10,222			10,180
ATM and other service fees	3,335			3,790
Bank owned life insurance income	4,897			3,056
Investment services and life insurance	2,415			2,247
Investment securities (losses)/gains, net	(9		)	260
Loan sales and servicing income	7,863			6,691
Other operating income	10,343			5,466
	$	57,392		$	51,726

Service charges on deposits decreased $1.8 million or 12.66% from the year ago quarter reflecting a change in customer behavior. Bank owned life insurance income increased $1.8 million or 60.24% year over year as a result of a $1.6 million death benefit received in the three months ended March 31, 2013. Loan sales and servicing income increased year over year $1.2 million or 17.52% due to higher pricing margins in the current period versus prior year. Other operating income increased $4.9 million or 89.22% from the year ago quarter as other operating income for the three months ended March 31, 2013 included $5.0 million in gains from covered loan payoffs and related income. Gains on covered loan payoffs represent the difference between the credit mark on the paid-off loans less the remaining associated indemnification asset.

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Other Expenses

Other expenses totaled $106.9 million for the three months ended March 31, 2013 compared to $113.8 million in the same three month period one year ago, a decrease of $6.8 million or 6.01% year over year.



	Three months ended March 31,
	2013		2012
	(In thousands)
Salaries and wages	$	46,391	$	45,710
Pension and employee benefits	11,515		18,263
Net occupancy expense	8,282		8,592
Equipment expense	7,349		7,104
Taxes, other than federal income taxes	1,922		1,955
Stationery, supplies and postage	2,096		2,143
Bankcard, loan processing, and other costs	7,840		7,653
Advertising	2,070		1,684
Professional services	5,410		3,352
Telephone	1,177		1,398
Amortization of intangibles	317		483
FDIC expense	3,526		3,720
Other operating expense	9,030		11,711
	$	106,925	$	113,768

Pension and employee benefit expenses were $11.5 million for three months ended March 31, 2013, a decrease of $6.7 million or 36.95% from the same three month period one year ago. Pension expense decreased $3.0 million year over year as a result of the qualified defined benefit pension plan being frozen effective December 31, 2012 resulting in no benefits accruing after December 31, 2012. Professional services expenses were $5.4 million for the three months ended March 31, 2013, an increase of $2.1 million or 61.40% over the same three month period one year ago. Included in professional services expenses for the three months ended March 31, 2013 were acquisition related costs associated with the Citizens merger of $3.1 million. Other operating expense decreased $2.7 million or 22.89% year over year.

The efficiency ratio for the first quarter of 2013 was 62.06% compared to 65.52% in the same period of 2012. Net revenue is defined as net interest income, on an FTE basis, plus other income less gains from the sales of securities.

Income Taxes

Income tax expense was $14.5 million and $12.3 million for the three months ended March 31, 2013 and 2012, respectively. The effective income tax rate for the three months ended March 31, 2013 was 28.00% compared to 28.91% for the three months ended March 31, 2012.

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LINE OF BUSINESS RESULTS

Line of business results are presented in the table below. A description of each business line, important financial performance data and the methodologies used to measure financial performance are presented in Note 8 (Segment Information) to the consolidated financial statements. The Corporation's profitability is primarily dependent on the net interest income, provision for credit losses, non-interest income and operating expenses of its commercial and retail segments as well as the asset management and trust operations of the wealth segment. The following tables present a summary of financial results as of and for the three months ended March 31, 2013 and 2012.



March 31, 2013	Commercial		Retail		Wealth		Other			FirstMerit Consolidated
OPERATIONS:
Net interest income (loss) - FTE	$	66,441	$	46,431	$	3,775	$	(2,271	)	$	114,376
Provision for loan losses	4,766		4,073		208		899			9,946
Other income	19,232		24,388		8,310		5,462			57,392
Other expenses	43,027		52,907		10,174		817			106,925
Net income (loss)	24,022		8,996		1,107		3,221			37,346
AVERAGES:
Assets	6,737,236		3,016,495		236,811		4,993,001			14,983,543
Loans (noncovered and covered)	6,677,719		2,736,949		223,234		58,024			9,695,926
Earnings assets	6,814,089		2,762,045		223,263		3,609,392			13,408,789
Deposits	3,500,846		7,416,124		744,466		128,348			11,789,784
Economic Capital	462,614		212,815		49,534		990,042			1,715,005



March 31, 2012	Commercial		Retail		Wealth		Other			FirstMerit Consolidated
OPERATIONS:
Net interest income (loss) - FTE	$	64,674	$	54,277	$	4,598	$	(2,121	)	$	121,428
Provision for loan losses	9,104		2,537		225		2,195			14,061
Other income	14,309		25,265		8,068		4,084			51,726
Other expenses	43,351		57,481		10,214		2,722			113,768
Net income (loss)	16,709		12,691		1,447		(503		)	30,344
AVERAGES:
Assets	6,328,473		2,910,354		236,571		5,021,539			14,496,937
Loans (noncovered and covered)	6,306,446		2,634,702		223,131		53,600			9,217,879
Earnings assets	6,397,111		2,670,067		223,159		3,644,847			12,935,184
Deposits	3,139,197		7,464,867		698,700		169,257			11,472,021
Economic Capital	387,073		214,265		48,106		931,565			1,581,009

The commercial segment's net income increased $7.3 million to $24.0 million for the three months ended March 31, 2013 driven by higher revenues and lower loan losses. FTE adjusted net interest income totaled $66.4 million for the three months ended March 31, 2013 compared to $64.7 million for the three months ended March 31, 2012, an increase of $1.8 million, or 2.73%. The increase was primarily attributable to an $803.4 million, or 15.69%, increase in noncovered loan balances. The strong loan growth was prevalent in all major divisions of the commercial segment. Growth in loan interest income was offset partially by lower interest income associated with acquired loans via the FDIC-assisted acquisitions, lower loan yields, and lower

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deposit income associated with the internal credit on deposits. Deposit balances grew $361.6 million or 11.5% to $3.5 billion due primarily to growth in small business deposits and government-related deposits. Provision for credit losses for the commercial segment totaled $4.8 million for the three months ended March 31, 2013 compared to $9.1 million for the three months ended March 31, 2012, a decrease of $4.3 million, or 47.65%. The continued decline in provision for loan losses reflected the results of Management's focused efforts to improve asset quality and portfolio credit metrics. Net charge-offs declined $4.8 million to $1.6 million for the three months ended March 31, 2013. The remaining provision covered substantial loan growth in noncovered loans. Non-interest income was $19.2 million for the three months ended March 31, 2013 compared to $14.3 million for the same period in 2012. The increase was primarily attributable to higher gains recognized from covered loans paid in full, coupled with growth in asset-based lending fees and international fees. Non-interest expense for the commercial segment was essentially unchanged at $43.0 million for the three months ended March 31, 2013 compared to the same period of 2012. Growth in expenses driven by the build-out of specialized banking capabilities was offset by the results of management's efficiency initiative.

The retail segment's net income decreased $3.7 million for the three months ended March 31, 2013 to $9.0 million compared to three months ended March 31, 2012. FTE adjusted net interest income totaled $46.4 million for the three months ended March 31, 2013 compared to $54.3 million for the three months ended March 31, 2012, a decrease of $7.8 million or 14.46%. The decrease was primarily attributable to a $43.6 million decrease in covered loan balances acquired via FDIC assisted acquisitions, along with lower deposit income associated with the internal credit on deposits. Deposit balances were essentially consistent with the quarterly average in 2012. Provision for credit losses totaled $4.1 million for the three months ended March 31, 2013 compared to $2.5 million for the three months ended March 31, 2012, an increase of $1.6 million. Net charge-offs declined $1.3 million to $4.3 million for the three months ended March 31, 2013. Non-interest income was $24.4 million for the three months ended March 31, 2013 compared to $25.3 million for the three months ended March 31, 2012, a decrease of $0.9 million, or 3.47%. The decrease was primarily attributable to lower service charges on deposits driven by the effects of new regulations on charges for non-sufficient funds and overdrafts, as well as the effects of the Durbin Interchange Amendment on ATM interchange fees. The fee income decline was offset partially by continued strength in mortgage fee income. Non-interest expense declined $4.5 million, or 7.96%, to $52.9 million for the three months ended March 31, 2013 compared to $57.5 million for the three months ended March 31, 2012. The decrease in expenses was primarily attributable the results of management's efficiency initiative.

The wealth segment's net income of $1.1 million for the three months ended March 31, 2013 decreased $0.3 million from the three months ended March 31, 2012. The decrease was attributable to lower deposit income associated with the internal credit on deposits, offset partially by higher trust fee income and higher income associated with investment fees and insurance. Deposit balances increased $45.8 million to $744.5 million for the three months ended March 31, 2013 compared to $698.7 for the same period of 2012.

Activities that are not directly attributable to one of the primary lines of business are included in the Other segment. Included in this category are the parent company, community development operations, treasury operations, including the securities portfolio, wholesale funding and asset liability management activities, inter-company eliminations, acquisition related expenses, and the economic impact of certain assets, capital and support functions not specifically identifiable with the three primary lines of business. The Other segment recorded net income of $3.2 million for the three months ended March 31, 2013 which was $3.7 million higher than the three months ended March 31, 2012. The improvement was attributable to lower expenses as a result of management's successful efficiency initiative, offset partially by expenses associated with the acquisition of Citizen's. Also contributing to the improvement was receipt of a death benefit in the amount of $1.6 million during the three months ended March 31, 2013.

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FINANCIAL CONDITION

Acquisitions

On September 12, 2012, the Corporation and Citizens Republic Bancorp, Inc. ("Citizens"), a Michigan corporation, with approximately $9.6 billion in assets and 219 branches entered into an Agreement and Plan of Merger (the "Merger Agreement").

On April 12, 2013, the Corporation completed its merger (the “Merger”) with Citizens which resulted in Citizens common stock being converted into the right to receive 1.37 shares of the Corporation's common stock (except that any shares of Citizens common stock that were owned by Citizens, the Corporation or any of their respective subsidiaries, other than in a fiduciary capacity, were canceled without any consideration therefor). Each outstanding option to acquire, and each outstanding equity award relating to, one share of Citizens' common stock was converted into an option to acquire, or an equity award relating to, 1.37 shares of the Corporation's common stock, as applicable. The conversion of Citizens' common stock into the Corporation's common stock resulted in the Corporation issuing approximately 55 million shares of its common stock.

Effective April 12, 2013, the Corporation purchased the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of Citizens issued to the United States Treasury as part of the Troubled Assets Relief Program (the "Citizens TARP Preferred") in the amount of $300 million plus accumulated but unpaid dividends and interest of approximately $55.4 million. In addition, effective April 12, 2013, a warrant to purchase 1,757,812.5 shares of Citizens' common stock that had been issued to the Treasury on December 12, 2008 as part of Citizens' participation in the Treasury's Capital Purchase Program, was converted into a warrant to purchase 2,408,203 shares of FirstMerit common stock. The Corporation used the net proceeds from its February 4, 2013 public offerings to repurchase the Citizens TARP Preferred and pay all accrued, accumulated and unpaid dividends and interest. The Corporation's public offerings consisted of $250 million aggregate principal amount of subordinated notes due February 4, 2023 bearing interest at an annual rate of 4.35% payable semi-annually in arrears on February 4 and August 4 of each year and 4,000,000 depositary shares (each representing a 1/40th interest in a share of the Corporation's Series A Non-Cumulative Perpetual Preferred Stock) with dividends payable quarterly in arrears on the 4th day of February, May, August and November, beginning May 4, 2013, which resulted in gross proceeds of $100 million.

The following components make up the consideration for the merger transaction: approximately $930 million in converted common stock, $355 million paid to the Treasury to purchase the Citizens TARP Preferred and approximately $3 million in a warrant issued to the Treasury to purchase the Corporation's common stock in conjunction with the purchase of the Citizens TARP Preferred.

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value on the acquisition date. The Corporation is in the process of determining the preliminary fair values which are subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. Any resulting goodwill will not be deductible for income

tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes

Additional information can be found in Note 2 (Business Combinations) and Note 15 (Subsequent Events) in the notes to the consolidated financial statements.

Investment Securities

At March 31, 2013, total investment securities were $4.1 billion compared to $3.7 billion at December 31, 2012 and March 31, 2012. Available-for-sale securities were $3.2 billion, $2.9 billion and $3.5 billion as of March 31, 2013, December 31, 2012 and March 31, 2012, respectively. Available-for-sale securities are held primarily for liquidity, interest rate risk management and long-term yield enhancement. Accordingly, the Corporation's investment policy is to invest in securities with low credit risk, such as U.S. Treasury securities, U.S. Government agency obligations, state and political obligations, mortgage-backed securities ("MBSs") and corporate bonds. Held-to-maturity securities totaled $665.6 million at March 31, 2013 compared to $622.1 million and $100.8 million at December 31, 2012 and March 31, 2012, respectively. Available-for-sale securities increased $322.9 million from December 31, 2012 to March 31, 2013 but decreased $247.8 million from March 31, 2012 to March 31, 2013. Held-to-maturity securities increased $43.5 million and $564.7 million from December 31, 2012 to March 31, 2013 and from March 31, 2012 to March 31, 2013, respectively. This movement in the investment portfolio was in response to potential future changes in regulatory capital rules. Other investments consist primarily of FHLB and FRB stock and totaled $141.0 million at March 31, 2013, December 31, 2012 and March 31, 2012.

Net unrealized gains on the investment securities portfolio were $60.6 million at March 31, 2013, compared to $72.2 million and $85.3 million at December 31, 2012 and March 31, 2012, respectively.

The Corporation conducts a regular assessment of its investment securities to determine whether any securities are other-than-temporarily impaired. Only the credit portion of other-than-temporary impairment ("OTTI") is recognized in current earnings for those securities where there is no intent to sell or it is more likely than not the Corporation would not be required to sell the security prior to expected recovery. The remaining portion of OTTI is to be included in accumulated other comprehensive loss, net of income tax.

Gross unrealized losses of $15.1 million as of March 31, 2013, compared to $12.9 million and $16.7 million at December 31, 2012 and March 31, 2012, respectively, were concentrated within trust preferred securities held in the investment portfolio. The Corporation holds eight, single issuer, trust preferred securities. Such investments are less than 2% of the fair value of the entire investment portfolio. None of the bank issuers have deferred paying dividends on their issued trust preferred shares in which the Corporation is invested. The fair values of these investments have been impacted by market conditions, which have caused risk premiums to increase resulting in the decline in the fair value of the Corporation's trust preferred securities.

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Further detail of the composition of the securities portfolio and discussion of the results of the most recent OTTI assessment are in Note 3 (Investment Securities) in the notes to the consolidated financial statements.

Loans

Loans acquired under loss share agreements with the FDIC include the amounts of expected reimbursements from the FDIC and are presented as "covered loans" below. Loans not subject to loss share agreements are presented below as "noncovered loans". Acquired loans are initially measured at fair value as of the acquisition date. Fair value measurements include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows. Credit discounts representing the principal losses expected over the life of the loan are also a component of the initial fair value; therefore, an allowance for loan losses is not recorded at the acquisition date.

Total noncovered loans increased from December 31, 2012 by $48.3 million, or 0.55%, and increased from March 31, 2012 by $916.8 million, or 11.66%. This increase was driven primarily by higher commercial loans, which increased 0.37% from December 31, 2012 and 12.80% from March 31, 2012 due to the Corporation's expansion into the Chicago, Illinois area. This growth was also attributable to increases in asset-based lending as well as new business within the specialty lending group such as the capital markets, healthcare, and leasing lines of business. The leasing line of business has seen considerable increase in activity. As of March 31, 2013, leases totaled $164.1 million compared to $139.2 million and $74.1 million at December 31, 2012 and March 31, 2012, respectively, resulting in increases of $24.9 million, or 17.88%, from December 31, 2012 to March 31, 2013 and $90.0 million, or 121.47%, from March 31, 2012 to March 31, 2013. While the Corporation is adding new commercial loans in both its core Ohio and newer Chicago, Illinois markets, low credit line utilization by existing customers is mitigating new loan production with respect to the overall portfolio balances.

Residential mortgage loans are originated and then sold into the secondary market or held in portfolio. Low interest rates during 2012 contributed to an increase in mortgage loan originations, particularly refinancing activity. Total residential mortgage loan balances increased from December 31, 2012 by $6.3 million, or 1.42%, and increased from March 31, 2012 by $22.6 million, or 5.26%, as a larger amount of shorter maturity and adjustable rate mortgages were held in portfolio compared to the prior year.

Outstanding home equity loans increased from December 31, 2012 by $6.4 million, or 0.79%, and increased from March 31, 2012 by $72.9 million, or 9.86%. Installment loans decreased from December 31, 2012 by $5.5 million, or 0.41%, and increased from March 31, 2012 by $62.9 million, or 4.99%.

Total covered loans, including the loss share receivable, decreased from December 31, 2012 and March 31, 2012 by $122.3 million, or 12.00%, and $481.3 million, or 34.92%, respectively. The covered loan portfolio will continue to decline, through payoffs, charge-offs, termination or expiration of loss share coverage, unless the Corporation acquires additional loans subject to loss share agreements in the future.

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The following table breaks down outstanding loans by category. There is no predominant concentration of loans in any particular industry or group of industries.



	March 31, 2013			December 31, 2012			March 31, 2012
(Dollars in thousands)
Commercial	$	5,888,337		$	5,866,489		$	5,220,051
Residential mortgage	451,522			445,211			428,950
Installment	1,322,795			1,328,258			1,259,930
Home equity	812,458			806,078			739,548
Credit card	140,721			146,387			140,618
Leases	164,137			139,236			74,112
Total noncovered loans (a)	8,779,970			8,731,659			7,863,209
Less allowance for noncovered loan losses	(98,843		)	(98,942		)	(103,849		)
Net noncovered loans	8,681,127			8,632,717			7,759,360
Covered loans (b)	896,832			1,019,125			1,378,150
Less allowance for covered loan losses	(47,945		)	(43,255		)	(41,070		)
Net covered loans	848,887			975,870			1,337,080
Net loans	$	9,530,014		$	9,608,587		$	9,096,440

(a) Includes acquired, noncovered loans of $54.1 million, $54.2 million, $99.2 million as of March 31, 2013, December 31, 2012 and March 31, 2012, respectively.

(b) Includes loss share receivable of $95.6 million, $113.7 million and $171.1 million as of March 31, 2013, December 31, 2012 and March 31, 2012, respectively.

The Corporation has approximately $3.2 billion of loans secured by real estate. Approximately 86.79% of the property underlying these loans is located within the Corporation's primary market area of Ohio, Western Pennsylvania, and Chicago, Illinois.

The Corporation evaluates acquired loans for impairment in accordance with the provisions of ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). Acquired loans are considered impaired if there is evidence of credit deterioration since origination and if it is probable all contractually required payments will not be collected. Expected cash flows at the purchase date in excess of the fair value of acquired impaired loans are recorded as interest income over the life of the loans if the timing and amount of the future cash flows is reasonably estimable. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. The present value of any decreases in expected cash flows after the purchase date is recognized as a provision for loans losses net of any expected reimbursement under any loss share agreements. Revolving loans, including lines of credit and credit cards loans, and leases are excluded from acquired impaired loan accounting.

A loss share receivable is recorded at the acquisition date, which represents the estimated fair value of reimbursement the Corporation expects to receive under any loss share agreements. The fair value measurement reflects counterparty credit risk and other uncertainties. The loss share receivable continues to be measured on the same basis as the related indemnified loans. Deterioration in the credit quality of the loans (recorded as an adjustment to the allowance for covered loan losses) would immediately increase the basis of the loss share receivable, with the offset recorded through the consolidated statement of income and comprehensive income. Increases in the credit quality or cash flows of loans (reflected as an adjustment to yield and accreted into income over the remaining life of the loans) decrease the basis of the loss share receivable, with such decrease being accreted into income over 1) the same period or 2) the life of the loss share agreements, whichever is shorter. Loss assumptions used in the basis of the loss share receivable are consistent with the loss assumptions used to measure the related covered loans.

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All loans acquired in the First Bank acquisition were performing as of the date of acquisition and, therefore, the difference between the fair value and the outstanding balance of these loans is being accreted to interest income over the remaining term of the loans.

In 2010, the Bank acquired $177.8 million and $1.8 billion of loans in conjunction with the FDIC assisted acquisitions of George Washington and Midwest, respectively. All loans acquired in the George Washington and Midwest acquisitions were acquired with loss share agreements. The Corporation has elected to account for all loans acquired in the George Washington and Midwest acquisitions as impaired loans under ASC 310-30 ("Acquired Impaired Loans") except for $162.6 million of acquired loans with revolving privileges, which are outside the scope of this guidance, and which are being accounted for in accordance with ASC 310 ("Acquired Non-Impaired Loans"). Interest income, through accretion of the difference between the carrying amount of the Acquired Impaired Loans and the expected cash flows, is recognized on all Acquired Impaired Loans. The difference between the fair value of the Acquired Non-Impaired Loans and their outstanding balances is being accreted to interest income over the remaining period the revolving lines are in effect.

Allowance for Loan Losses and Reserve for Unfunded Lending Commitments

The Corporation maintains what Management believes is an adequate allowance for loan losses. The Corporation and the Bank regularly analyze the adequacy of their allowance through ongoing review of trends in risk ratings, delinquencies, nonperforming assets, charge-offs, economic conditions, and changes in the composition of the loan portfolio. Note 1 (Summary of Significant Accounting Policies) and note 5 (Allowance for Loan Losses in the notes to the consolidated financial statements provide detailed information regarding the Corporation's credit policies and practices.

The Corporation uses a vendor based loss migration model to forecast losses for commercial loans. The model creates loss estimates using twelve-month (monthly rolling) vintages and calculates cumulative three years loss rates within two different scenarios. One scenario uses five year historical performance data while the other one uses two year historical data. The calculated rate is the average cumulative expected loss of the two- and five-year data set. As a result, this approach lends more weight to the more recent performance.

Management also considers internal and external factors such as economic conditions, loan management practices, portfolio monitoring, and other risks, collectively known as qualitative factors, or Q-factors, to estimate credit losses in the loan portfolio. Q-factors are used to reflect changes in the portfolio's collectability characteristics not captured by historical loss data.

Acquired loans are recorded at acquisition date at their acquisition date fair values, and, therefore, are excluded from the calculation of loan loss reserves as of the acquisition date. To the extent there is a decrease in the present value of cash flows from Acquired Impaired Loans after the date of acquisition, the Corporation records an allowance for loan losses, net of expected reimbursement under any loss share agreements. These expected reimbursements are recorded as part of covered loans in the accompanying consolidated balance sheets. During the three months ended March 31, 2013, the Corporation increased its allowance for covered loan losses to $47.9 million to reserve for estimated additional losses on certain Acquired Impaired Loans. The increase in the allowance was recorded by a charge to the provision for covered loan losses of $9.7 million and an increase of $5.5 million in the loss share receivable for the portion of the losses recoverable under the loss share agreements. During the three months ended March 31, 2012, provision for covered loan losses of $10.8 million was partially offset by an increase of $4.9 million in the loss share receivable resulting in an allowance for covered loan losses of $41.1 million.

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For acquired loans that are not deemed impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value. Subsequent to the purchase date, the methods utilized to estimate the required allowance for loan losses for these loans is similar to originated loans, however, the Corporation records a provision for loan losses only when the required allowance, net of any expected reimbursement under any loss share agreements, exceeds any remaining credit discounts. The allowance for loan losses on Acquired Non-Impaired Loans was $0.4 million, $0.3 million and $0.4 million as of March 31, 2013, December 31, 2012 and March 31, 2012, respectively, and is included in the allowance for noncovered loan losses on the consolidated balance sheets.

At March 31, 2013, the allowance for noncovered loan losses was $98.8 million, or 1.13% of noncovered loans outstanding, compared to $98.9 million, or 1.13% and $103.8 million, or 1.32% at December 31, 2012 and March 31, 2012, respectively. The allowance equaled 242.21% of nonperforming loans at March 31, 2013 compared to 269.69% and 194.97% at December 31, 2012 and March 31, 2012. The additional reserves related to qualitative risk factors totaled $34.4 million at March 31, 2013 compared to $32.3 million and $14.5 million at December 31, 2012 and March 31, 2012, respectively. Nonperforming assets have increased by $2.0 million when compared to December 31, 2012 but decreased $15.7 million when compared to March 31, 2012, which is primarily attributable to the improving economic conditions and extensive loan work out activities.

Net charge-offs on noncovered loans were $5.9 million in the first quarter of 2013 compared to $12.0 million in 2012. As a percentage of average noncovered loans outstanding, net charge-offs equaled 0.27% in the first quarter of 2013 and 0.62% in 2012. Losses are charged against the allowance for loan losses as soon as they are identified.

The reserve for unfunded lending commitments at March 31, 2013, December 31, 2012 and March 31, 2012 was $4.9 million, $5.4 million and $5.4 million, respectively. Binding unfunded lending commitments include items such as letters of credit, financial guarantees and binding unfunded loan commitments. The allowance for credit losses, which includes both the allowance for noncovered loan losses and the reserve for unfunded lending commitments, amounted to $103.8 million, $104.4 million, and $109.3 million at March 31, 2013, December 31, 2012 and March 31, 2012, respectively.

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The following table is a summary of the allowance for credit losses.



	Three Months Ended
	March 31, 2013			December 31, 2012			March 31, 2012
(dollars in thousands)
Allowance for Noncovered Loan Losses
Allowance for loan losses-beginning of period	$	98,942		$	98,942		$	107,699
Provision for loan losses	5,808			7,116			8,129
(Less) net charge-offs	5,907			7,116			11,979
Allowance for loan losses-end of period	$	98,843		$	98,942		$	103,849
Reserve for Unfunded Lending Commitments
Balance at beginning of period	$	5,433		$	5,760		$	6,373
Provision for/(relief of) credit losses	(492		)	(327		)	(963		)
Balance at end of period	4,941			5,433			5,410
Allowance for credit losses	$	103,784		$	104,375		$	109,259
Annualized net charge-offs as a % of average noncovered loans	0.27		%	0.34		%	0.62		%
Allowance for noncovered loan losses:
As a percentage of period-end noncovered loans	1.13		%	1.13		%	1.32		%
As a percentage of nonperforming noncovered loans	242.21		%	269.69		%	194.97		%
As a multiple of annualized net charge offs	4.13			3.50			2.16
Allowance for credit losses:
As a percentage of period-end noncovered loans	1.18		%	1.20		%	1.39		%
As a percentage of nonperforming noncovered loans	254.32		%	284.50		%	205.13		%
As a multiple of annualized net charge offs	4.33			3.69			2.27

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The following tables show the overall credit quality by specific asset and risk categories of noncovered loan.



	As of March 31, 2013
	Loan Type
			CRE and						Home Equity		Credit		Residential
Allowance for Loan Losses Components:	C & I		Construction		Leases		Installment		Lines		Cards		Mortgages		Total
(In thousands)
Individually Impaired Loan Component:
Loan balance	$	8,445	$	26,939	$	—	$	31,117	$	6,917	$	1,388	$	23,527	$	98,333
Allowance	1,957		859		—		1,458		89		74		1,713		6,150
Collective Loan Impairment Components:
Credit risk-graded loans
Grade 1 loan balance	39,433		271		13,330										53,034
Grade 1 allowance	11		—		4										15
Grade 2 loan balance	148,253		3,968		731										152,952
Grade 2 allowance	117		5		1										123
Grade 3 loan balance	688,264		270,907		25,808										984,979
Grade 3 allowance	953		579		46										1,578
Grade 4 loan balance	2,404,091		2,111,995		116,314										4,632,400
Grade 4 allowance	26,212		12,150		566										38,928
Grade 5 (Special Mention) loan balance	63,287		47,277		4,636										115,200
Grade 5 allowance	5,202		1,636		193										7,031
Grade 6 (Substandard) loan balance	30,850		44,357		3,318										78,525
Grade 6 allowance	5,975		5,911		319										12,205
Grade 7 (Doubtful) loan balance	—		—		—										—
Grade 7 allowance	—		—		—										—
Consumer loans based on payment status:
Current loan balances							1,277,648		802,862		137,260		413,096		2,630,866
Current loans allowance							5,670		10,690		4,674		2,417		23,451
30 days past due loan balance							6,832		1,208		769		8,338		17,147
30 days past due allowance							514		742		541		365		2,162
60 days past due loan balance							2,379		419		541		1,781		5,120
60 days past due allowance							565		729		610		335		2,239
90+ days past due loan balance							4,819		1,052		763		4,780		11,414
90+ days past due allowance							944		2,318		1,170		529		4,961
Total loans	$	3,382,623	$	2,505,714	$	164,137	$	1,322,795	$	812,458	$	140,721	$	451,522	$	8,779,970
Total Allowance for Loan Losses	$	40,427	$	21,140	$	1,129	$	9,151	$	14,568	$	7,069	$	5,359	$	98,843

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	As of December 31, 2012
	Loan Type
			CRE and						Home Equity		Credit		Residential
Allowance for Loan Losses Components:	C & I		Construction		Leases		Installment		Lines		Cards		Mortgages		Total
(In thousands)
Individually Impaired Loan Component:
Loan balance	$	6,187	$	27,412	$	—	$	30,870	$	6,281	$	1,612	$	24,009	$	96,371
Allowance	577		1,018		—		1,526		34		127		1,722		5,004
Collective Loan Impairment Components:
Credit risk-graded loans
Grade 1 loan balance	42,211		—		13,119										55,330
Grade 1 allowance	14		—		5										19
Grade 2 loan balance	114,480		3,138		179										117,797
Grade 2 allowance	93		4		—										97
Grade 3 loan balance	661,692		272,401		20,042										954,135
Grade 3 allowance	916		711		35										1,662
Grade 4 loan balance	2,408,670		2,148,580		104,037										4,661,287
Grade 4 allowance	26,155		13,552		507										40,214
Grade 5 (Special Mention) loan balance	44,969		56,118		1,561										102,648
Grade 5 allowance	3,105		2,033		63										5,201
Grade 6 (Substandard) loan balance	28,317		52,314		298										80,929
Grade 6 allowance	5,349		6,629		29										12,007
Grade 7 (Doubtful) loan balance	—		—		—										—
Grade 7 allowance	—		—		—										—
Consumer loans based on payment status:
Current loan balances							1,278,555		796,568		142,424		406,495		2,624,042
Current loans allowance							6,596		9,766		4,815		2,617		23,794
30 days past due loan balance							10,471		1,407		922		9,928		22,728
30 days past due allowance							855		774		587		487		2,703
60 days past due loan balance							2,979		825		541		1,219		5,564
60 days past due allowance							773		1,021		540		453		2,787
90+ days past due loan balance							5,383		997		888		3,560		10,828
90+ days past due allowance							1,404		2,129		1,315		606		5,454
Total loans	$	3,306,526	$	2,559,963	$	139,236	$	1,328,258	$	806,078	$	146,387	$	445,211	$	8,731,659
Total Allowance for Loan Losses	$	36,209	$	23,947	$	639	$	11,154	$	13,724	$	7,384	$	5,885	$	98,942

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	As of March 31, 2012
	Loan Type
			CRE and						Home Equity		Credit		Residential
Allowance for Loan Losses Components:	C & I		Construction		Leases		Installment		Lines		Cards		Mortgages		Total
(In thousands)
Individually Impaired Loan Component:
Loan balance	$	6,079	$	41,041	$	—	$	32,378	$	5,522	$	2,060	$	18,077	$	105,157
Allowance	972		2,702		—		1,902		66		92		1,505		7,239
Collective Loan Impairment Components:
Credit risk-graded loans
Grade 1 loan balance	40,605		—		10,706										51,311
Grade 1 allowance	16		—		5										21
Grade 2 loan balance	97,078		6,820		—										103,898
Grade 2 allowance	90		14		—										104
Grade 3 loan balance	521,791		261,669		7,098										790,558
Grade 3 allowance	830		857		10										1,697
Grade 4 loan balance	2,087,819		1,860,227		55,930										4,003,976
Grade 4 allowance	18,326		15,473		277										34,076
Grade 5 (Special Mention) loan balance	51,591		73,740		—										125,331
Grade 5 allowance	2,413		2,908		—										5,321
Grade 6 (Substandard) loan balance	85,694		85,829		378										171,901
Grade 6 allowance	14,511		10,948		42										25,501
Grade 7 (Doubtful) loan balance	68		—		—										68
Grade 7 allowance	14		—		—										14
Consumer loans based on payment status:
Current loan balances							1,214,164		730,575		136,423		390,191		2,471,353
Current loans allowance							10,544		4,407		4,683		2,909		22,543
30 days past due loan balance							7,268		2,013		868		8,269		18,418
30 days past due allowance							803		519		460		338		2,120
60 days past due loan balance							2,020		494		458		2,444		5,416
60 days past due allowance							666		292		379		387		1,724
90+ days past due loan balance							4,100		943		809		9,970		15,822
90+ days past due allowance							838		985		906		760		3,489
Total loans	$	2,890,725	$	2,329,326	$	74,112	$	1,259,930	$	739,547	$	140,618	$	428,951	$	7,863,209
Total Allowance for Loan Losses	$	37,172	$	32,902	$	334	$	14,753	$	6,269	$	6,520	$	5,899	$	103,849

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Asset Quality

Making a loan to earn an interest spread inherently includes taking the risk of not being repaid. Successful management of credit risk requires making good underwriting decisions, carefully administering the loan portfolio and diligently collecting delinquent accounts.

The Corporation's Credit Policy Division manages credit risk by establishing common credit policies for its subsidiaries, participating in approval of their largest loans, conducting reviews of their loan portfolios, providing them with centralized consumer underwriting, collections and loan operations services, and overseeing their loan workouts.

The Corporation's objective is to minimize losses from its commercial lending activities and to maintain consumer losses at acceptable levels that are stable and consistent with growth and profitability objectives. Individual commercial loans are assigned credit risk grades based on an internal assessment of conditions that affect a borrower's ability to meet its contractual obligation under the loan agreement. The assessment process includes reviewing a borrower's current financial information, historical payment experience, credit documentation, public information, and other information specific to each borrower. Commercial loans are reviewed on an annual, quarterly or rotational basis or as Management becomes aware of information during a borrower's ability to fulfill its obligation. For consumer loans, Management evaluates credit quality based on the aging status of the loan as well as by payment activity, which is presented in the above tables.

Note 1 (Summary of Significant Accounting Policies) and note 5 (Allowance for Loan Losses) in the notes to the consolidated financial statements, provide detailed information regarding the Corporation's credit policies and practices and the credit-risk grading process for commercial loans.

Nonperforming Loans are defined as follows:


•	Nonaccrual loans on which interest is no longer accrued because its collection is doubtful.


•	Restructured loans on which, due to a borrower experiencing financial difficulties or expected to experience difficulties in the near-term, the original terms of the loan are modified to maximize the collection of amounts due.

Nonperforming Assets are defined as follows:


•	Nonaccrual loans on which interest is no longer accrued because its collection is doubtful.


•	Restructured loans on which, due to deterioration in the borrower's financial condition, the original terms have been modified in favor of the borrower or either principal or interest has been forgiven.


•	Other real estate (ORE) acquired through foreclosure in satisfaction of a loan.

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(Dollars in thousands)	March 31, 2013			December 31, 2012			March 31, 2012
Nonperforming loans:
Restructured nonaccrual noncovered loans:
Commercial loans	$	4,179		$	3,837		$	7,067
Consumer loans	13,301			11,197			3,364
Total restructured loans	17,480			15,034			10,431
Other nonaccrual noncovered loans:
Commercial loans	19,664			17,929			37,479
Consumer loans	3,665			3,724			5,353
Total nonaccrual loans	23,329			21,653			42,832
Total nonperforming noncovered loans	40,809			36,687			53,263
Other noncovered real estate	11,422			13,537			14,670
Total nonperforming noncovered assets	$	52,231		$	50,224		$	67,933
Noncovered loans past due 90 days or more accruing interest	$	12,393		$	9,417		$	9,261
Total nonperforming noncovered assets as a percentage of total noncovered loans and ORE	0.59		%	0.57		%	0.86		%

Credit quality improved throughout the three months ended March 31, 2013. Total nonperforming assets as of March 31, 2013 were $52.2 million, an increase of $2.0 million, or 4.00%, from December 31, 2012 and a decrease of $15.7 million, or 23.11%, from March 31, 2012. Total noncovered loans past due 30-89 days totaled $39.6 million at March 31, 2013, a decrease of $10.6 million, or 21.04%, from December 31, 2012 and a decrease of $7.1 million, or 15.25%, from March 31, 2012. Delinquency trends are observable in the Allowance for Loan Loss Allocation tables within this section. Commercial nonperforming noncovered loans increased $2.1 million, or 9.54%, from December 31, 2012 and decreased $20.7 million, or 46.48%, from March 31, 2012 reflecting movement of assets for disposition into other real estate along with loan payments and charge-downs. New nonperforming noncovered commercial loans have continued to decline from March 31, 2012 through March 31, 2013. Total other noncovered real estate owned decreased $2.1 million or 15.62%, from December 31, 2012 and $3.2 million, or 22.14%, from March 31, 2012 reflecting the disposition of foreclosed properties and a slow down in new foreclosures. As of March 31, 2013, other real estate includes $828.8 million of vacant land no longer considered for branch expansion.

Net charge offs within the noncovered consumer portfolio were $4.6 million for the three months ended March 31, 2013 compared to $5.7 million for the three months ended March 31, 2012. Average FICO scores on the noncovered consumer portfolio subcomponents are excellent with average scores on installment loans at 715, home equity lines at 775, residential mortgages at 752 and credit cards at 745.

Noncovered loans past due 90 days or more but still accruing interest are classified as such where the

underlying loans are both well secured (the collateral value is sufficient to cover principal and accrued interest) and are in the process of collection. At March 31, 2013, accruing noncovered loans 90 days or more past due totaled $12.4 million compared to $9.4 million and $9.3 million at December 31, 2012 and March 31, 2012, respectively. Credit card loans on which payments are past due for 120 days are placed on nonaccrual status. When a loan is placed on nonaccrual status, interest deemed uncollectible which had been accrued in prior years is charged against the allowance for loan losses and interest deemed uncollectible accrued in the current year is reversed against interest income. Interest on mortgage loans is accrued until Management deems it uncollectible based upon the specific identification method. Payments subsequently received on nonaccrual loans are generally applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable. This generally requires timely principal and interest payments for a minimum of six consecutive payment cycles. Loans are generally written off when deemed uncollectible or when they reach a predetermined number of days past due depending upon loan product, terms, and other factors.

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The following table is a nonaccrual noncovered commercial loan flow analysis:



	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2013			2012			2012			2012			2012
	(In thousands)
Nonaccrual commercial loans beginning of period	$	21,766		$	31,492		$	38,381		$	44,546		$	55,815
Credit Actions:
New	7,217			2,183			25,182			10,091			5,980
Loan and lease losses	(2,191		)	(2,670		)	(400		)	(6,675		)	(3,296		)
Charged down	(481		)	(2,555		)	(9,227		)	(266		)	(3,703		)
Return to accruing status	(179		)	—			(2,177		)	(1,247		)	(1,990		)
Payments	(2,289		)	(6,684		)	(20,267		)	(8,068		)	(8,260		)
Sales	—			—			—			—			—
Nonaccrual commercial loans end of period	$	23,843		$	21,766		$	31,492		$	38,381		$	44,546

A loan is considered to be impaired when, based on current events or information, it is probable the Corporation will be unable to collect all amounts due (principal and interest) per the contractual terms of the loan agreement. Loan impairment for all loans is measured based on either the present value of expected future cash flows discounted at the loan's effective interest rate, at the observable market price of the loan, or the fair value of the collateral for certain collateral dependent loans. Impaired loans include all nonaccrual commercial, agricultural, construction, and commercial real estate loans, and loans modified as troubled debt restructurings ("TDRs"). In certain circumstances, the Corporation may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term. In most cases the modification is either a concessionary reduction in interest rate, extension of the maturity date or modification of the adjustable rate provisions of the loan that would otherwise not be considered. Concessionary modifications are classified as TDRs unless the modification is short-term (30 to 90 days) and considered to be an insignificant delay while awaiting additional information from the borrower. All amounts due, including interest accrued at the contractual interest rate, are expected to be collected. TDRs return to accrual status once the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles. A sustained period of repayment performance would be a minimum of six consecutive payment cycles from the date of restructure.

The Corporation's TDR portfolio, excluding covered loans, totaled $85.6 million, $84.6 million, and $75.2 million as of March 31, 2013, December 31, 2012 and March 31, 2012, respectively. These TDRs are predominately composed of noncovered consumer installment loans, first and second lien residential mortgages and home equity lines of credit and represented 73.56%, 74.16% and 77.22%, respectively, of the total noncovered TDR portfolio as of March 31, 2013 and December 31, 2012 and March 31, 2012, respectively. We restructure residential mortgages in a variety of ways to help our clients remain in their homes and to mitigate the potential for additional losses. The primary restructuring methods being offered to our residential clients are reductions in interest rates and extensions in terms. Modifications of mortgages retained in portfolio are handled using proprietary modification guidelines, or the FDIC's Modification Program for residential first mortgages covered by loss share agreements. The Corporation participates in the U.S. Treasury's Home Affordable Modification Program for originated mortgages sold to and serviced for Fannie Mae and Freddie Mac.

In addition, the Corporation has also modified certain loans according to provisions in loss share agreements. Losses associated with modifications on these loans, including the economic impact of interest rate reductions, are generally eligible for reimbursement under the loss share agreements.

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Acquired loans restructured after acquisition are not considered TDRs for purposes of the Corporation's accounting and disclosure if the loans evidenced credit deterioration as of the acquisition date and are accounted for in pools.

Deposits, Securities Sold Under Agreements to Repurchase, Wholesale Borrowings and Long-term Debt

Average deposits as of March 31, 2013 totaled $11.8 billion compared to $11.6 billion and $11.5 billion as of December 31, 2012 and March 31, 2012, respectively. The Corporation has successfully executed a strategy to increase the concentration of lower cost deposits within the overall deposit mix by focusing on growth in checking, money market and savings account products with less emphasis on renewing maturing certificate of deposit accounts. In addition to efficiently funding balance sheet growth, the increased concentration in core deposit accounts generally deepens and extends the length of customer relationships.

The following table provides additional information about the Corporation's deposit products and their respective rates over the past three years.



	Three Months Ended
	March 31, 2013				December 31, 2012				March 31, 2012
	Average Balance		Average Rate		Average Balance		Average Rate		Average Balance		Average Rate
	(Dollars in thousands)
Noninterest-bearing	$	3,321,660	—	%	$	3,306,444	—	%	$	3,036,590	—	%
Interest-bearing	1,300,816		0.10	%	1,122,796		0.09	%	1,066,132		0.09	%
Savings and money market accounts	5,835,750		0.37	%	5,743,599		0.36	%	5,675,052		0.36	%
Certificates and other time deposits	1,331,558		0.63	%	1,422,246		0.64	%	1,694,247		0.84	%
Total customer deposits	11,789,784		0.26	%	11,595,085		0.27	%	11,472,021		0.31	%
Securities sold under agreements to repurchase	906,717		0.14	%	957,564		0.13	%	887,715		0.12	%
Wholesale borrowings	136,298		2.53	%	163,405		2.49	%	184,659		2.51	%
Long-term debt	155,506		4.56	%	—		—	%	—		—	%
Total funds	$	9,666,645	0.45	%	$	9,409,610	0.39	%	$	9,507,805	0.44	%

Average demand deposits comprised 39.21% of average deposits in the during the three months ended March 31, 2013 compared to 38.20% in fourth quarter of 2012 and 35.76% during the three months ended March 31, 2012. Savings accounts, including money market products, made up 49.50% of average deposits during the three months ended March 31, 2013 compared to 49.53% during the three months ended December 31, 2012 and 49.47% in during the three months ended March 31, 2012. Certificates and other time deposits made up 11.29% of average deposits during the three months ended March 31, 2013, 12.27% during the three months ended December 31, 2012 and 14.77% during the three months ended March 31, 2012.

The average cost of deposits, securities sold under agreements to repurchase, wholesale borrowings and long-term debt was up 1 basis points compared to one year ago, or 2.27% for the three months ended March 31, 2013 due to a drop in interest rates.

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The following table summarizes certificates and other time deposits in amounts of $100 thousand or more for the three months ended March 31, 2013 by time remaining until maturity.



	Amount
Time until maturity:	(In thousands)
Under 3 months	$	95,540
3 to 6 months	145,104
6 to 12 months	130,182
Over 12 months	101,089
Total	$	471,915

Capital Resources

The capital management objectives of the Corporation are to provide capital sufficient to cover the risks inherent in the Corporation's businesses, to maintain excess capital to well-capitalized standards and to assure ready access to the capital markets.

Shareholders' Equity

Shareholders' equity was $1.8 billion as of March 31, 2013, compared with $1.6 billion as of December 31, 2012 and March 31, 2012. As of March 31, 2013, the dividend of $0.16 cents per share has an indicated annual rate of $0.64 per share.

Effective April 12, 2013, the Corporation purchased the Citizens TARP Preferred issued to the United States Treasury ("Treasury") as part of the Troubled Assets Relief Program (the "Citizens TARP Preferred") in the amount of $300 million plus accumulated but unpaid dividends and interest of approximately $55.4 million. In addition, effective April 12, 2013, a warrant to purchase 1,757,812.5 shares of Citizens' common stock that had been issued to the Treasury on December 12, 2008 as part of Citizens' participation in the Treasury's Capital Purchase Program, was converted into a warrant to purchase 2,408,203 shares of FirstMerit common stock. The Corporation used the net proceeds from its February 4, 2013 public offerings to repurchase the Citizens TARP Preferred and pay all accrued, accumulated and unpaid dividends and interest. The Corporation's public offerings consisted of $250 million aggregate principal amount of subordinated notes due February 4, 2023 bearing interest at an annual rate of 4.35% payable semi-annually in arrears on February 4 and August 4 of each year and 4,000,000 depositary shares (each representing a 1/40th interest in a share of the Corporation's Series A Non-Cumulative Perpetual Preferred Stock) with dividends payable quarterly in arrears on the 4th day of February, May, August and November, beginning May 4, 2013, which resulted in gross proceeds of $100 million. The Board of Directors of the Corporation approved a dividend of $14.69 per share, or $0.36725 per depository share, on the Company's 5.87% Non-Cumulative Perpetual Preferred Stock, Series A, payable May 6, 2013, to shareholders of record as of April 19, 2013. Additional information can be found in Note 2 (Business Combinations) and Note 15 (Subsequent Events).

Capital Adequacy

Capital adequacy is an important indicator of financial stability and performance. The Corporation maintained a strong capital position with tangible common equity to assets of 8.03% at March 31, 2013, compared with 8.16% at December 31, 2012 and 7.86% at March 31, 2012.

Financial institutions are subject to a strict uniform system of capital-based regulations. Under this system, there are five different categories of capitalization, with "prompt corrective actions" and significant

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operational restrictions imposed on institutions that are capital deficient under the categories. The five categories are: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.

To be considered well capitalized an institution must have a total risk-based capital ratio of at least 10%, a Tier 1 capital ratio of at least 6%, a leverage capital ratio of at least 5%, and must not be subject to any order or directive requiring the institution to improve its capital level. An adequately capitalized institution has a total risk-based capital ratio of at least 8%, a Tier I capital ratio of at least 4% and a leverage capital ratio of at least 4%. Institutions with lower capital levels are deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized, depending on their actual capital levels. The appropriate federal regulatory agency may also downgrade an institution to the next lower capital category upon a determination that the institution is in an unsafe or unsound practice. Institutions are required to monitor closely their capital levels and to notify their appropriate regulatory agency of any basis for a change in capital category.

The George Washington and Midwest FDIC assisted acquisitions resulted in the recognition of loss share receivables from the FDIC, which represents the fair value of estimated future payments by the FDIC to the Corporation for losses on covered assets. The FDIC loss share receivables, as well as covered assets, are risk-weighted at 20% for regulatory capital requirement purposes.

As of March 31, 2013, the Corporation, on a consolidated basis, as well as FirstMerit Bank, exceeded the minimum capital levels of the well capitalized category.



	March 31, 2013				December 31, 2012				March 31, 2012
	(Dollars in thousands)
Consolidated
Total equity	$	1,754,850	11.49	%	$	1,645,202	11.03	%	$	1,584,105	10.80	%
Common equity	1,654,850		10.84	%	1,645,202		11.03	%	1,584,105		10.80	%
Tangible common equity (a)	1,188,751		8.03	%	1,178,785		8.16	%	1,116,304		7.86	%
Tier 1 capital (b)	1,310,927		12.36	%	1,193,188		11.25	%	1,136,705		11.55	%
Total risk-based capital (c)	1,693,702		15.96	%	1,325,971		12.50	%	1,260,065		12.80	%
Leverage (d)	1,310,927		9.07	%	1,193,188		8.43	%	1,136,705		8.16	%

	March 31, 2013				December 31, 2012				March 31, 2012
Bank Only
Total equity	$	1,521,149	9.97	%	$	1,487,513	9.98	%	$	1,503,320	10.26	%
Common equity	1,521,149		9.97	%	1,487,513		9.98	%	1,503,320		10.26	%
Tangible common equity (a)	1,055,050		7.13	%	1,021,096		7.07	%	1,035,519		7.30	%
Tier 1 capital (b)	1,072,153		10.12	%	1,030,585		9.73	%	1,051,301		10.71	%
Total risk-based capital (c)	1,199,763		11.32	%	1,158,312		10.93	%	1,169,762		11.91	%
Leverage (d)	1,072,153		7.43	%	1,030,585		7.29	%	1,051,301		7.50	%

a) Common equity less all intangibles; computed as a ratio to total assets less intangible assets.
b) Shareholders' equity less goodwill; computed as a ratio to risk-adjusted assets, as defined in the 1992 risk-based capital guidelines.
c) Tier 1 capital plus qualifying loan loss allowance, computed as a ratio to risk adjusted assets as defined in the 1992 risk-based capital guidelines.
d) Tier 1 capital computed as a ratio to the latest quarter's average assets less goodwill.

RISK MANAGEMENT

Market Risk Management

Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices and commodity prices, including the correlation among these factors and their volatility. When the

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value of an instrument is tied to such external factors, the holder faces “market risk.” The Corporation is primarily exposed to interest rate risk as a result of offering a wide array of financial products to its customers.

Interest rate risk management

Changes in market interest rates may result in changes in the fair market value of the Corporation’s financial instruments, cash flows, and net interest income. The Corporation seeks to achieve consistent growth in net interest income and capital while managing volatility arising from shifts in market interest rates. The Asset and Liability Committee (“ALCO”) oversees market risk management, establishing risk measures, limits, and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. According to these policies, responsibility for measuring and the management of interest rate risk resides in the Corporate Treasury function.

Interest rate risk on the Corporation’s balance sheets consists of reprice, option, and basis risks. Reprice risk results from differences in the maturity, or repricing, of asset and liability portfolios. Option risk arises from “embedded options” present in the investment portfolio and in many financial instruments such as loan prepayment options, deposit early withdrawal options, and interest rate options. These options allow customers opportunities to benefit when market interest rates change, which typically results in higher costs or lower revenue for the Corporation. Basis risk refers to the potential for changes in the underlying relationship between market rates or indices, which subsequently result in a narrowing of profit spread on an earning asset or liability. Basis risk is also present in administered rate liabilities, such as interest-bearing checking accounts, savings accounts and money market accounts where historical pricing relationships to market rates may change due to the level or directional change in market interest rates. Each of these types of risks is defined in the discussion of market risk management of the 2012 Form 10-K.

The interest rate risk position is measured and monitored using risk management tools, including earnings simulation modeling and economic value of equity sensitivity analysis, which capture both near term and long-term interest rate risk exposures. Combining the results from these separate risk measurement processes allows a reasonably comprehensive view of short-term and long-term interest rate risk in the Corporation.

Net interest income simulation analysis. Earnings simulation involves forecasting net interest earnings under a variety of scenarios including changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates. The sensitivity of net interest income to changes in interest rates is measured using numerous interest rate scenarios including shocks, gradual ramps, curve flattening, curve steepening as well as forecasts of likely interest rates scenarios. Presented below is the Corporation’s interest rate risk profile as of March 31, 2013 and 2012:



	Immediate Change in Rates and Resulting Percentage Increase/(Decrease) in Net Interest Income:
	- 100 basis points		+ 100 basis points		+ 200 basis points		+ 300 basis points
March 31, 2013	(7.50	)%	3.51	%	6.41	%	8.98	%
March 31, 2012	(7.54	)%	2.90	%	5.07	%	6.64	%

Modeling the sensitivity of net interest earnings to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. To the extent that actual performance is

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different than what was assumed, actual net interest earnings sensitivity may be different than projected. The assumptions used in the models are Management’s best estimate based on studies conducted by the ALCO department. The ALCO department uses a data-warehouse to study interest rate risk at a transactional level and uses various ad-hoc reports to refine assumptions continuously. Assumptions and methodologies regarding administered rate liabilities (e.g., savings, money market and interest-bearing checking accounts), balance trends, and repricing relationships reflect Management’s best estimate of expected behavior and these assumptions are reviewed regularly.

Economic value of equity modeling. The Corporation also has longer-term interest rate risk exposure, which may not be appropriately measured by earnings sensitivity analysis. ALCO uses economic value of equity (“EVE”) sensitivity analysis to study the impact of long-term cash flows on earnings and capital. EVE involves discounting present values of all cash flows of on balance sheet and off balance sheet items under different interest rate scenarios. The discounted present value of all cash flows represents the Corporation’s economic value of equity. The analysis requires modifying the expected cash flows in each interest rate scenario, which will impact the discounted present value. The amount of base-case measurement and its sensitivity to shifts in the yield curve allow management to measure longer-term repricing and option risk in the balance sheet. Presented below is the Corporation’s EVE profile as of March 31, 2013 and 2012:



	Immediate Change in Rates and Resulting Percentage Increase/(Decrease) in EVE:
	- 100 basis points		+ 100 basis points		+ 200 basis points		+ 300 basis points
March 31, 2013	(6.95	)%	1.48	%	1.36	%	0.05	%
March 31, 2012	(1.69	)%	0.12	%	(0.98	)%	(3.02	)%

Management reviews and takes appropriate action if this analysis indicates that the Corporation’s EVE will change by more than 5% in response to an immediate 100 basis point increase in interest rates or EVE will change by more than 15% in response to an immediate 200 basis point increase or decrease in interest rates. The Corporation is operating within these guidelines.

Management of interest rate exposure. Management uses the results of its various simulation analysis to formulate strategies to achieve a desired risk profile within the parameters of the Corporation’s capital and liquidity guidelines. Specifically, Management actively manages interest rate risk positions by using derivatives predominately in the form of interest rate swaps, which modify the interest rate characteristics of certain assets and liabilities. For more information about how the Corporation uses interest rate swaps to manage its balance sheet, see Note 9 (Derivatives and Hedging Activities) to the unaudited consolidated financial statements.

Liquidity Risk Management

Liquidity risk is the possibility of the Corporation being unable to meet current and future financial obligations in a timely manner. Liquidity is managed to ensure stable, reliable and cost-effective sources of funds to satisfy demand for credit, deposit withdrawals and investment opportunities. The Corporation considers core earnings, strong capital ratios and credit quality essential for maintaining high credit ratings, which allow the Corporation cost-effective access to market-based liquidity. The Corporation relies on a large, stable core deposit base and a diversified base of wholesale funding sources to manage liquidity risk.

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The treasury group is responsible for identifying, measuring and monitoring the Corporation’s liquidity profile. The position is evaluated daily, weekly and monthly by analyzing the composition of all funding sources, reviewing projected liquidity commitments by future month and identifying sources and uses of funds. The overall management of the Corporation’s liquidity position is also integrated into retail deposit pricing policies to ensure a stable core deposit base.

The Corporation’s primary source of liquidity is its core deposit base, raised through its retail branch system. Core deposits comprised approximately 89.07% of total deposits at March 31, 2013. The Corporation also has available unused wholesale sources of liquidity, including advances from the FHLB of Cincinnati, issuance through dealers in the capital markets and access to certificates of deposit issued through brokers. Liquidity is further enhanced by an excess reserve position that averaged greater than one half billion dollars through the first quarter of 2013 in addition to unencumbered, or unpledged, investment securities that totaled $0.9 billion as of March 31, 2013.

The treasury group also prepares a contingency funding plan that details the potential erosion of funds in the event of a systemic financial market crisis or institutional-specific stress. An example of an institution specific event would be a downgrade in the Corporation’s public credit rating by a rating agency due to factors such as deterioration in asset quality, a large charge to earnings, a decline in profitability or other financial measures, or a significant merger or acquisition. Examples of systemic events unrelated to the Corporation that could have an effect on its access to liquidity would be terrorism or war, natural disasters, political events, or the default or bankruptcy of a major corporation, mutual fund or hedge fund. Similarly, market speculation or rumors about the Corporation or the banking industry in general may adversely affect the cost and availability of normal funding sources. The liquidity contingency plan therefore outlines the process for addressing a liquidity crisis. The plan provides for an evaluation of funding sources under various market conditions. It also assigns specific roles and responsibilities for effectively managing liquidity through a problem period.

Funding Trends for the Quarter - During the three months ended March 31, 2013, lower cost core deposits increased by $238.4 million from the previous quarter. In aggregate, deposits increased $166.3 million from December 31, 2012. Securities sold under agreements to repurchase decreased $277.7 million from December 31, 2012. Wholesale borrowings and long-term debt had a net increase of $249.0 million from December 31, 2012. The Corporation issued $250 million aggregate principal amount of subordinated notes in the first quarter 2013. The Corporation’s loan to deposit ratio increased to 81.14% as of March 31, 2013 from 82.92% as of December 31, 2012.

Parent Company Liquidity - The Corporation manages its liquidity principally through dividends from the bank subsidiary. The parent company has sufficient liquidity to service its debt; support customary corporate operations and activities (including acquisitions) at a reasonable cost, in a timely manner and without adverse consequences; and pay dividends to shareholders.

During the three months ended March 31, 2013, FirstMerit Bank did not pay dividends to FirstMerit Corporation. As of March 31, 2013, FirstMerit Bank had an additional $92.0 million available to pay dividends without regulatory approval.

Recent Market and Regulatory Developments. In response to the current national and international economic recession, and in efforts to stabilize and strengthen the financial markets and banking industries, the United States Congress and governmental agencies have taken a number of significant actions over the past several years, including the passage of legislation and implementation of a number of programs. The most recent of these actions was the passage into law, on July 21, 2010, of the Dodd-Frank Wall Street Reform and

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Consumer Protection Act of 2010 (the “Dodd-Frank Act”). The Dodd-Frank Act is the most comprehensive change to banking laws and the financial regulatory environment since the Great Depression of the 1930s. The Dodd-Frank Act affects almost every aspect of the nation’s financial services industry and mandates change in several key areas, including regulation and compliance (both with respect to financial institutions and systemically important nonbank financial companies), securities regulation, executive compensation, regulation of derivatives, corporate governance, and consumer protection.

In this respect, it is noteworthy that preemptive rights heretofore granted to national banking associations by the OCC under the National Bank Act will diminish with respect to consumer financial laws and regulations. Thus, Congress has authorized states to enact their own substantive protections and to allow state attorneys general to initiate civil actions to enforce federal consumer protections. In this respect, the Corporation will be subject to regulation by a new consumer protection bureau known as the Bureau of Consumer Financial Protection (the “Bureau”) under the Board of Governors of the Federal Reserve System. The Bureau will consolidate enforcement currently undertaken by myriad financial regulatory agencies, and will have substantial power to define the rights of consumers and responsibilities of providers, including the Corporation.

In addition, and among many other legislative changes as a result of the Dodd-Frank Act that the Corporation will assess, the Corporation (1) experienced a new assessment model from the FDIC based on assets, not deposits, (2) will be subject to enhanced executive compensation and corporate governance requirements, and (3) will be able, for the first time to offer interest on business transaction and other accounts.

The extent to which the Dodd-Frank Act and initiatives thereunder will succeed in addressing the credit markets or otherwise result in an improvement in the national economy is not yet known. In addition, because most aspects of this legislation will be subject to intensive agency rulemaking and subsequent public comment prior to implementation, it is difficult to predict at this time the ultimate effect of the Dodd-Frank Act on the Corporation. It is likely, however, that the Corporation’s expenses will increase as a result of new compliance requirements.

In December 2010, the Basel Committee on Banking Supervision (the “Basel Committee”) released its final framework for strengthening international capital and liquidity regulation (“Basel III”). Minimum global liquidity standards under Basel III are meant to ensure banks maintain adequate levels of liquidity on both a short and medium to longer horizon. Expected liquidity standard implementation dates are January 1, 2015 and January 1, 2018. When implemented by the federal banking agencies and fully phased-in, Basel III will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity. When fully phased in on January 1, 2019, Basel III will require banking institutions to maintain heightened Tier 1 common equity, Tier 1 capital and total capital ratios, as well as maintaining a “capital conservation buffer.” Regulations implementing Basel III are expected to be proposed in mid-2012, with adoption of final regulations unknown. Notwithstanding its release of the Basel III framework as a final framework, the Basel Committee is considering further amendments to Basel III, including imposition of additional capital surcharges on globally systemically important financial institutions. In addition to Basel III, the Dodd-Frank Act requires or permits federal banking agencies to adopt regulations affecting capital requirements in a number of respects, including potentially more stringent capital requirements for systemically important financial institutions. Accordingly, the regulations ultimately applicable to the Corporation may differ substantially from the currently published final Basel III framework. Requirements of higher capital levels or higher levels of liquid assets could adversely impact the Corporation’s net income and return on equity.

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Various legislation affecting financial institutions and the financial industry will likely continue to be introduced in Congress, and such legislation may further change banking statutes and the operating environment of the Corporation and its subsidiaries in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending upon whether any of this potential legislation will be enacted, and if enacted, the effect that it or any implementing regulations, would have on the financial condition or results of operations of the Corporation or any of its subsidiaries. With the enactment of the Dodd-Frank Act, the nature and extent of future legislative and regulatory changes affecting financial institutions remains very unpredictable.

To the extent that the previous information describes statutory and regulatory provisions applicable to the Corporation or its subsidiaries, it is qualified in its entirety by reference to the full text of those provisions. Also, such statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies and are subject to change at any time, particularly in the current economic and regulatory environment. Any such change in statutes, regulations or regulatory policies applicable to the Corporation could have a material effect on the business of the Corporation.

Critical Accounting Policies

The Corporation’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the financial services industry in which it operates. All accounting policies are important, and all policies described in Note 1 (Summary of Significant Accounting Policies) to the consolidated financial statements of the 2012 Form 10-K provide a greater understanding of how the Corporation’s financial performance is recorded and reported.

Some accounting policies are more likely than others to have a significant effect on the Corporation’s financial results and to expose those results to potentially greater volatility. The policies require Management to exercise judgment and make certain assumptions and estimates that affect amounts reported in the financial statements. These assumptions and estimates are based on information available as of the date of the financial statements.

Management relies heavily on the use of judgment, assumptions and estimates to make a number of core decisions, including accounting for the allowance for loan losses, income taxes, derivative instruments and hedging activities, and assets and liabilities that involve valuation methodologies. A brief discussion of each of these areas appears within Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2012 Form 10-K.

Off-Balance Sheet Arrangements

A detailed discussion of the Corporation’s off-balance sheet arrangements, including interest rate swaps, forward sale contracts and mortgage loan commitments is included in Note 9 (Derivatives and Hedging Activities) to the Corporation’s unaudited consolidated financial statements included in this report and in Note 18 to the consolidated financial statements in the 2012 Form 10-K. There have been no significant changes since December 31, 2012.

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Forward-looking Safe-harbor Statement

Discussions in this report that are not statements of historical fact (including statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “project,” intend,” and “plan”) are forward-looking statements that involve risks and uncertainties. Any forward-looking statement is not a guarantee of future performance and actual future results could differ materially from those contained in forward-looking information. Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detailed from time to time in the Corporation’s filings with the Securities and Exchange Commission, including without limitation the risk factors disclosed in Item 1A, “Risk Factors,” of the 2012 Form 10-K.

Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, operational, economic and competitive uncertainties and contingencies, many of which are beyond a company’s control, and many of which, with respect to future business decisions and actions (including acquisitions and divestitures), are subject to change. Examples of uncertainties and contingencies include, among other important factors: general and local economic and business conditions; recession or other economic downturns; expectations of, and actual timing and amount of, interest rate movements, including the slope of the yield curve (which can have a significant impact on a financial services institution); market and monetary fluctuations; inflation or deflation; customer and investor responses to these conditions; the financial condition of borrowers and other counterparties; competition within and outside the financial services industry; geopolitical developments including possible terrorist activity; recent and future legislative and regulatory developments; natural disasters; effectiveness of the Corporation’s hedging practices; technology; demand for the Corporation’s product offerings; new products and services in the industries in which the Corporation operates; critical accounting estimates; the Corporation's ability to realize the synergies and benefits contemplated by the acquisition of Citizens, such as it being accretive to earnings and expanding the Corporation's geographic presence, in the time frame anticipated or at all, and those risk factors detailed in the Corporation's periodic reports and registration statements filed with the Securities and Exchange Commission. Other factors are those inherent in originating, selling and servicing loans including prepayment risks, pricing concessions, fluctuation in U.S. housing prices, fluctuation of collateral values, and changes in customer profiles. Additionally, the actions of the SEC, the FASB, the OCC, the Federal Reserve System, Financial Industry Regulatory Authority, and other regulators; regulatory and judicial proceedings and changes in laws and regulations applicable to the Corporation including the costs of complying with any such laws and regulations; and the Corporation’s success in executing its business plans and strategies, including efforts to reduce operating expenses, and managing the risks involved in the foregoing, could cause actual results to differ.

Other factors not currently anticipated may also materially and adversely affect the Corporation’s results of operations, cash flows and financial position. There can be no assurance that future results will meet expectations. While the Corporation believes that the forward-looking statements in this report are reasonable, the reader should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. The Corporation does not undertake, and expressly disclaims, any obligation to update or alter any statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

See Market Risk Section in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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ITEM 4. CONTROLS AND PROCEDURES.

Management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, has made an evaluation of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.

Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer have concluded, as of the end of the period covered by this report, that the Corporation’s disclosure controls and procedures are effective.

During the quarter covered by this report, there was no change in internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II - OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS.

In the normal course of business, the Corporation is subject to pending and threatened legal actions, including claims for material relief or damages sought are substantial. Although the Corporation is not able to predict the outcome of such actions, after reviewing pending and threatened actions with counsel, Management believes that the outcome of any or all such actions will not have a material adverse effect on the results of operations or shareholders' equity of the Corporation.

For additional information on litigation, see Note 13 (Contingencies and Guarantees) in the notes to the consolidated financial statements.


ITEM 1A.	RISK FACTORS.

There have been no material changes in our risk factors from those disclosed in the 2012 Form 10-K.


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

(a) Not applicable.

(b) Not applicable.

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(c) The following table provides information with respect to purchases the Corporation made of shares of its common stock during the first quarter of the 2013 fiscal year:



	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Maximum Number of Shares that May Yet Be Purchased Under Plans or Programs (2)
Balances as of December 31, 2012					396,272
January 1, 2013 - January 31, 2013	413	$	22.63	—	396,272
February 1, 2013 - February 28, 2013	970	18.64		—	396,272
March 1, 2013 - March 31, 2013	24,441	24.46		—	396,272
Balances as of March 31, 2013	25,824	$	24.22	—	396,272

(1)

Reflects 25,824 shares of common stock purchased as a result of either: (1) delivered by the option holder with respect to the exercise of stock options; (2) shares withheld to pay income taxes or other tax liabilities associated with vested restricted shares of common stock; or (3) shares returned upon the resignation of the restricted shareholder. No shares were purchased under the program referred to in note (2) to this table during the first quarter of 2013.


(2)	On January 19, 2006, the Board of Directors authorized the repurchase of up to 3 million shares of common stock (the “New Repurchase Plan”). The New Repurchase Plan, which has no expiration date, superseded all other repurchase programs, including that authorized by the Board of Directors on July 15, 2004.


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.

None.


ITEM 4.	MINE SAFETY DISCLOSURES.

Not Applicable.

ITEM 5. OTHER INFORMATION.

Not Applicable.

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ITEM 6.	EXHIBIT INDEX



Exhibit
Number		Description
3.1		Second Amended and Restated Articles of Incorporation of FirstMerit Corporation, as amended.
3.2		Second Amended and Restated Code of Regulations of FirstMerit Corporation as amended (incorporated by reference from Exhibit 3.2 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 filed by FirstMerit Corporation on May 10, 2010).
4.1		Subordinated Indenture, dated as of February 4, 2013, by and between FirstMerit Corporation and Wells Fargo Bank, National Association, as Trustee (incorporated by reference from Exhibit 4.1 to the Current Report on Form 8-K filed by FirstMerit Corporation on February 4, 2013).
4.2		First Supplemental Subordinated Indenture, dated as of February 4, 2013, by and between FirstMerit Corporation and Wells Fargo Bank, National Association, as Trustee (incorporated by reference from Exhibit 4.2 to the Current Report on Form 8-K filed by FirstMerit Corporation on February 4, 2013).
4.3		Specimen Certificate for 5.875% Non-Cumulative Perpetual Preferred Stock, Series A, without par value, of FirstMerit Corporation (incorporated by reference from Exhibit 4.4 to the Current Report on Form 8-K filed by FirstMerit Corporation on February 4, 2013).
4.4		Deposit Agreement, dated as of February 4, 2013, by and between FirstMerit Corporation and American Stock Transfer & Trust Company, LLC, as Depositary (incorporated by reference from Exhibit 4.3 to the Current Report on Form 8-K filed by FirstMerit Corporation on February 4, 2013).
10.1		Securities Purchase Agreement, dated as of February 19, 2013, by and among the United States Department of the Treasury, FirstMerit Corporation and Citizens Republic Bancorp, Inc. (incorporated by reference from Exhibit 10.54 to the Registration Statement on Form S-4/A filed by FirstMerit Corporation on February 21, 2013 (Registration No. 333-18521)).
10.2		First Amendment to the Amended and Restated Change in Control Termination Agreement, dated February 21, 2013, by and between FirstMerit Corporation and Paul Greig (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed by FirstMerit Corporation on February 26, 2013).
10.3		First Amendment to the Amended and Restated Change Displacement Agreement, dated February 21, 2013, by and between FirstMerit Corporation and Paul Greig (incorporated by reference from Exhibit 10.2 to the Current Report on Form 8-K filed by FirstMerit Corporation on February 26, 2013).
10.4		FirstMerit Corporation 2013 Annual Incentive Plan (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed by FirstMerit Corporation on April 5, 2013).
31.1		Rule 13a-14(a)/Section 302 Certification of Paul G. Greig, Chief Executive Officer of FirstMerit Corporation.
31.2		Rule 13a-14(a)/Section 302 Certification of Terrence E. Bichsel, Senior Executive Vice President and Chief Financial Officer of FirstMerit Corporation.
32.1		Rule 13a-14(b)/Section 906 Certification of Paul G. Greig, Chief Executive Officer of FirstMerit Corporation.
32.2		Rule 13a-14(b)/Section 906 Certification of Terrence E. Bichsel, Senior Executive Vice President and Chief Financial Officer of FirstMerit Corporation.
101.1		The following financial information from FirstMerit Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Comprehensive Income; (iii) the Consolidated Statements of Changes in Shareholders’ Equity; (iv) the Consolidated Statements of Cash Flows; and (iv) Notes to Consolidated Financial Statements.

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SIGNATURES

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



	FIRSTMERIT CORPORATION

	By:	/s/ TERRENCE E. BICHSEL
		Terrence E. Bichsel, Senior Executive Vice President and Chief Financial Officer (duly authorized officer of registrant and principal financial officer)

May 3, 2013

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