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, 2014
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 4/25/2014
Common Stock, no par value	165,353,916

1

TABLE OF CONTENTS
Glossary of Acronyms and Abbreviations				4
PART 1. FINANCIAL INFORMATION				5
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS				5
	CONSOLIDATED BALANCE SHEETS			5
	CONSOLIDATED STATEMENTS OF INCOME			6
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME			7
	CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY			8
	CONSOLIDATED STATEMENTS OF CASH FLOWS			9
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS			10
	Note	1	Summary of Significant Accounting Policies	10
	Note	2	Business Combinations	11
	Note	3	Investment Securities	17
	Note	4	Loans	27
	Note	5	Allowance for Loan Losses	36
	Note	6	Goodwill and Other Intangible Assets	55
	Note	7	Shareholders' Equity	56
	Note	8	Segment Information	57
	Note	9	Derivatives and Hedging Activities	59
	Note	10	Benefit Plans	64
	Note	11	Fair Value Measurement	65
	Note	12	Mortgage Servicing Rights and Mortgage Servicing Activity	78
	Note	13	Contingencies and Guarantees	79
	Note	14	Changes and Reclassifications Out of Accumulated Other Comprehensive Income	83
	Note	15	Subsequent Events	84
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.				85
	Consolidated Financial Highlights			85
	Highlights of First Quarter of 2014 Performance			86
	Regulation and Supervision			89
		New Capital Rules		90
		Stress Testing		90
		Other Legislation		91
	Non-GAAP Financial Measures			91
	Results of Operations			97
		Average Tax-Equivalent Balance Sheets		97
		Net Interest Income		98
		Noninterest Income		100
		Noninterest Expense		101
		Income Taxes		101
	Line of Business Results			102
	Financial Condition			103
		Acquisitions		103
		Investment Securities		104
		Loans		106

2

TABLE OF CONTENTS
			Originated Loans	107
			Acquired Loans	108
			Covered Loans and Related Loss Share Receivable	108
		Allowance for Loan Losses and Reserve for Unfunded Commitments		108
			Allowance for Originated Loan and Lease Losses	109
			Allowance for Acquired Loan Losses	114
			Allowance for Covered Loan Losses	114
		Asset Quality (excluding acquired loans and covered assets)		115
		Deposits, Securities Sold Under Agreements to Repurchase, Wholesale Borrowings and Long-Term Debt		118
		Capital Resources		119
			Shareholders' Equity	119
			Capital Adequacy	120
	Risk Management			121
		Market Risk Management		121
		Liquidity Risk Management		123
		Operational Risk Management		124
		Critical Accounting Policies		125
		Off-Balance Sheet Arrangements		125
		Forward-Looking Statements - Safe-harbor Statement		125
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.				126
ITEM 4. CONTROLS AND PROCEDURES.				127
PART II. OTHER INFORMATION				127
	ITEM 1. LEGAL PROCEEDINGS			127
	ITEM 1A. RISK FACTORS			127
	ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			128
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES			128
	ITEM 4. MINE SAFETY DISCLOSURES			128
	ITEM 5. OTHER INFORMATION			128
	ITEM 6. EXHIBIT INDEX			129
SIGNATURES				130
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

3

The acronyms and abbreviations identified below are used in the Notes to Consolidated Financial Statements (unaudited) as well as in Management's Discussion & Analysis of Financial Condition and Results of Operations.

Acquisition Date	Citizens Republic BanCorp acquisition date of April 12, 2013	FHLB	Federal Home Loan Bank
ALCO	Asset/Liability Management Committee	FHLMC	Federal Home Loan Mortgage Corporation
ALL	Allowance for loan losses	FINRA	Financial Industry Regulatory Authority
AOCI	Accumulated other comprehensive income (loss)	FNMA	Federal National Mortgage Association
ASC	Accounting standards codification	FRAP	Fixed Rate Advantage Program
ASU	Accounting standards update	FRB	Federal Reserve Bank
Bank	FirstMerit Bank N.A.	GAAP	United States generally accepted accounting principles
Basel I	Basel Committee's 1988 Capital Accord	GSE	Government sponsored enterprise
Basel III	Basel Committee regulatory capital reforms, Third Basel Accord	ISDA	International Swaps and Derivatives Association
Basel Committee	Basel Committee on Banking Supervision	LIBOR	London Interbank Offered Rate
BHC	Bank holding company	Management	FirstMerit Corporation's Management
CCAR	Comprehensive Capital Analysis and Review	MBS	Mortgage-backed securities
CFPB	Bureau of Consumer Financial Protection	MSRs	Mortgage servicing rights
Citizens	Citizens Republic Bancorp Inc.	NYSE	New York Stock Exchange
Citizens TARP Preferred	Citizens TARP Preferred issued to the U.S. Treasury as part of the Troubled Assets Relief Program	OCC	Office of the Comptroller of the Currency
CME Group Inc.	Chicago Mercantile Exchange	OCI	Other comprehensive income (loss)
CLO	Collateralized loan obligations	OREO	Other real estate owned
CMO	Collateralized mortgage obligations	OTTI	Other-than-temporary impairment
Common Stock	Common Shares, without par value	Parent Company	FirstMerit Corporation
Corporation	FirstMerit Corporation and its Subsidiaries	Preferred Stock	5.875% Non-Cumulative Perpetual Preferred Stock, Series A
Dodd-Frank Act	Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010	ROA	Return on average assets
DTA	Deferred tax asset	ROE	Return on average equity
DTL	Deferred tax liability	SEC	United States Securities and Exchange Commission
EPS	Earnings per share	TARP	Troubled Asset Relief Program
EVE	Economic value of equity	TDR	Troubled debt restructuring
FASB	Financial Accounting Standards Board	TE	Fully taxable equivalent
FDIC	The Federal Deposit Insurance Corporation	U.S. Treasury	United States Department of the Treasury
Federal Reserve	The Board of Governors of the Federal Reserve System

4

PART 1. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

CONSOLIDATED BALANCE SHEETS
FIRSTMERIT CORPORATION AND SUBSIDARIES
(In thousands, except share data)	March 31,			December 31,			March 31,
(Unaudited, except for December 31, 2013)	2014			2013			2013
ASSETS
Cash and due from banks	$	520,976		$	571,171		$	183,430
Interest-bearing deposits in banks	438,309			346,651			163,673
Total cash and cash equivalents	959,285			917,822			347,103
Investment securities:
Held-to-maturity	3,079,620			2,935,688			665,589
Available-for-sale	3,433,171			3,273,174			3,243,835
Other investments	148,446			180,803			140,984
Loans held for sale	7,143			11,622			14,459
Loans	14,608,613			14,300,972			9,676,802
Allowance for loan losses	(145,060		)	(141,252		)	(146,788		)
Net loans	14,463,553			14,159,720			9,530,014
Premises and equipment, net	323,335			327,054			177,137
Goodwill	741,740			741,740			460,044
Intangible assets	79,819			82,755			6,055
Covered other real estate	59,848			65,234			70,267
Accrued interest receivable and other assets	1,202,701			1,216,416			616,997
Total assets	$	24,498,661		$	23,912,028		$	15,272,484
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	5,595,899		$	5,459,029		$	3,360,841
Interest-bearing	3,081,658			3,026,735			1,371,359
Savings and money market accounts	8,750,182			8,587,167			5,890,369
Certificates and other time deposits	2,383,935			2,460,670			1,303,198
Total deposits	19,811,674			19,533,601			11,925,767
Federal funds purchased and securities sold under agreements to repurchase	926,195			851,535			826,855
Wholesale borrowings	349,277			200,600			136,003
Long-term debt	324,430			324,428			249,921
Accrued taxes, expenses and other liabilities	344,119			298,970			379,088
Total liabilities	21,755,695			21,209,134			13,517,634
Shareholders' equity:
5.875% Non-Cumulative Perpetual Preferred stock, Series A, without par value: authorized 115,000 shares; 100,000 issued	100,000			100,000			100,000
Common Stock warrant	3,000			3,000			—
Common Stock, without par value; authorized 300,000,000 shares; issued: March 31, 2014 and December 31, 2013 - 170,183,540 shares; March 31, 2013 - 115,121,731 shares	127,937			127,937			127,937
Capital surplus	1,393,749			1,390,643			472,975
Accumulated other comprehensive loss	(55,504		)	(66,876		)	(24,119		)
Retained earnings	1,303,626			1,277,975			1,214,889
Treasury stock, at cost: March 31, 2014 - 5,096,157 December 31, 2013 - 5,127,332 shares; March 31, 2013 - 5,375,905 shares	(129,842		)	(129,785		)	(136,832		)
Total shareholders' equity	2,742,966			2,702,894			1,754,850
Total liabilities and shareholders' equity	$	24,498,661		$	23,912,028		$	15,272,484

See accompanying notes to the consolidated financial statements.

5

CONSOLIDATED STATEMENTS OF INCOME
FIRSTMERIT CORPORATION AND SUBSIDIARIES
(In thousands except for per share data)	Three Months Ended March 31,
(Unaudited)	2014		2013
Interest income:
Loans and loans held for sale	$	170,514	$	98,672
Investment securities:
Taxable	32,022		19,239
Tax-exempt	5,340		4,045
Total investment securities interest	37,362		23,284
Total interest income	207,876		121,956
Interest expense:
Deposits:
Interest bearing	737		318
Savings and money market accounts	5,559		5,315
Certificates and other time deposits	2,464		2,063
Securities sold under agreements to repurchase	197		313
Wholesale borrowings	1,129		850
Long-term debt	3,890		1,748
Total interest expense	13,976		10,607
Net interest income	193,900		111,349
Provision for loan losses	14,536		9,946
Net interest income after provision for loan losses	179,364		101,403
Noninterest income:
Trust department income	9,748		5,741
Service charges on deposits	16,648		12,585
Credit card fees	12,152		10,222
ATM and other service fees	5,819		3,335
Bank owned life insurance income	3,582		4,897
Investment services and insurance	3,516		2,415
Investment securities gains/(losses), net	56		(9		)
Loan sales and servicing income	3,730		7,863
Other operating income	12,019		10,343
Total noninterest income	67,270		57,392
Noninterest expense:
Salaries, wages, pension and employee benefits	89,013		57,906
Net occupancy expense	17,014		8,282
Equipment expense	11,911		7,349
Stationery, supplies and postage	4,108		2,096
Bankcard, loan processing and other costs	10,834		7,840
Professional services	5,359		5,410
Amortization of intangibles	2,936		317
FDIC insurance expense	5,971		3,526
Other operating expense	22,185		13,420
Total noninterest expense	169,331		106,146
Income before income tax expense	77,303		52,649
Income tax expense	23,848		15,303
Net income	53,455		37,346
Less: income allocated to participating shareholders	380		380
Preferred Stock dividends	1,469		930
Net income attributable to common shareholders	$	51,606	$	36,036
Net income used in diluted EPS calculation	$	51,606	$	36,036
Weighted average number of common shares outstanding - basic	165,060		109,689
Weighted average number of common shares outstanding - diluted	166,004		110,238
Basic earnings per common share	$	0.31	$	0.33
Diluted earnings per common share	$	0.31	$	0.33
Dividend per common share	$	0.16	$	0.16

See accompanying notes to the consolidated financial statements.

6

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FIRSTMERIT CORPORATION AND SUBSIDIARIES
(In thousands) (Unaudited)	Three Months Ended March 31, 2014
	Pre-tax			Tax			After-tax
Net Income	$	77,303		$	23,848		$	53,455
Other comprehensive income/(loss)
Unrealized gains and losses on securities available for sale:
Changes in unrealized securities' holding gains/(losses)	18,044			6,315			11,729
Changes in unrealized securities' holding gains/(losses) that result from securities being transferred into available-for-sale from held-to-maturity	(494		)	(173		)	(321		)
Net losses/(gains) realized on sale of securities reclassified to noninterest income	(56		)	(20		)	(36		)
Net change in unrealized gains/(losses) on securities available for sale	17,494			6,122			11,372
Total other comprehensive gains/(losses)	17,494			6,122			11,372
Comprehensive income	$	94,797		$	29,970		$	64,827

(In thousands) (Unaudited)	Three Months Ended March 31, 2013
	Pre-tax			Tax			After-tax
Net Income	$	52,649		$	15,303		$	37,346
Other comprehensive income/(loss)
Unrealized gains and losses on securities available for sale:
Changes in unrealized securities' holding gains/(losses)	(11,633		)	(4,072		)	(7,561		)
Changes in unrealized securities' holding gains/(losses) that result from securities being transferred into available-for-sale from held-to-maturity	(552		)	(193		)	(359		)
Net losses/(gains) realized on sale of securities reclassified to noninterest income	9			3			6
Net change in unrealized gains/(losses) on securities available for sale	(12,176		)	(4,262		)	(7,914		)
Total other comprehensive gains/(losses)	(12,176		)	(4,262		)	(7,914		)
Comprehensive income	$	40,473		$	11,041		$	29,432

See accompanying notes to the consolidated financial statements.

7

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FIRSTMERIT CORPORATION AND SUBSIDIARIES
(In thousands) (Unaudited)	Preferred Stock		Common Stock		Common Stock Warrant		Capital Surplus			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock			Total Shareholders' Equity
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
Other comprehensive income	—		—		—		—			(7,914		)	—			—			(7,914		)
Comprehensive income	—		—		—		—			(7,914		)	37,346			—			29,432
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		)	—
Issuance of 5.875% Non-Cumulative Perpetual Preferred Stock, Series A	100,000		—		—		(3,430		)	—			—			—			96,570
Balance at March 31, 2013	$	100,000	$	127,937	$	—	$	472,975		$	(24,119	)	$	1,214,889		$	(136,832	)	$	1,754,850
Balance at December 31, 2013	$	100,000	$	127,937	3,000		$	1,390,643		$	(66,876	)	$	1,277,975		$	(129,785	)	$	2,702,894
Net income	—		—		—		—			—			53,455			—			53,455
Other comprehensive income	—		—		—		—			11,372			—			—			11,372
Comprehensive income	—		—		—		—			11,372			53,455			—			64,827
Cash dividends - Preferred Stock	—		—		—		—			—			(1,469		)	—			(1,469		)
Cash dividends - Common Stock ($0.16 per share)	—		—		—		—			—			(26,335		)	—			(26,335		)
Nonvested (restricted) shares granted (82,241 shares)	—		—		—		(1,485		)	—			—			1,485			—
Restricted stock activity (51,066 shares)	—		—		—		419			—			—			(1,136		)	(717		)
Deferred compensation trust (1,967 decrease in shares)	—		—		—		406			—			—			(406		)	—
Share-based compensation	—		—		—		3,766			—			—			—			3,766
Balance as of March 31, 2014	$	100,000	$	127,937	$	3,000	$	1,393,749		$	(55,504	)	$	1,303,626		$	(129,842	)	$	2,742,966

See accompanying notes to the consolidated financial statements.

8

CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
(In thousands) (Unaudited)	Three Months Ended March 31,
	2014			2013
Operating Activities
Net income	$	53,455		$	37,346
Adjustments to reconcile net income to net cash provided and used by operating activities:
Provision for loan losses	14,536			9,946
Provision/(benefit) for deferred income taxes	3,081			(4,903		)
Depreciation and amortization	9,319			5,630
Benefit attributable to FDIC loss share	4,824			5,539
Accretion of acquired loans	(37,965		)	(15,511		)
Accretion of income for lease financing	(952		)	(915		)
Amortization and accretion of investment securities, net
Available for sale	1,949			3,135
Held to maturity	2,089			1,308
(Gains)/losses on sales and calls of available-for-sale investment securities, net	(56		)	9
Originations of loans held for sale	(61,109		)	(140,723		)
Proceeds from sales of loans, primarily mortgage loans sold in the secondary markets	66,904			154,143
Gains on sales of loans, net	(1,316		)	(4,196		)
Amortization of intangible assets	2,936			317
Recognition of stock compensation expense	3,766			1,972
Net decrease (increase) in other assets	6,506			(7,451		)
Net increase in other liabilities	26,800			4,047
NET CASH PROVIDED BY OPERATING ACTIVITIES	94,767			49,693
Investing Activities
Proceeds from sale of investment securities
Available for sale	7,809			25,674
Other	32,486			—
Held to maturity	2,495			—
Proceeds from prepayments, calls, and maturities of investment securities
Available for sale	112,747			173,778
Held to maturity	61,734			17,010
Purchases of investment securities
Available for sale	(245,403		)	(405,053		)
Held to maturity	(214,611		)	(61,773		)
Other	(142		)	(280		)
Net (increase)/decrease in loans and leases	(277,708		)	77,681
Purchases of premises and equipment	(16,859		)	(1,753		)
Sales of premises and equipment	11,259			135
NET CASH USED BY INVESTING ACTIVITIES	(526,193		)	(174,581		)
Financing Activities
Net increase in demand accounts	191,793			106,155
Net increase in savings and money market accounts	163,015			132,246
Net decrease in certificates and other time deposits	(76,735		)	(72,059		)
Net increase/(decrease) in securities sold under agreements to repurchase	74,660			(277,670		)
Proceeds from issuance of subordinated debt	—			247,941
Net increase/(decrease) in wholesale borrowings	148,677			(880		)
Net proceeds from issuance of preferred stock	—			96,570
Cash dividends - common	(26,335		)	(17,377		)
Cash dividends - preferred	(1,469		)	(930		)
Restricted stock activity	(717		)	(19		)
NET CASH PROVIDED BY FINANCING ACTIVITIES	472,889			213,977
Increase in cash and cash equivalents	41,463			89,089
Cash and cash equivalents at beginning of year	917,822			258,014
Cash and cash equivalents at end of year	$	959,285		$	347,103
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest expense	$	11,140		$	9,269
Federal income taxes	—			—

See accompanying notes to the consolidated financial statements.

9

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

FirstMerit Corporation and subsidiaries is a diversified financial services company headquartered in Akron, Ohio with 401 banking offices in the Ohio, Michigan, Wisconsin, Illinois and 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

Unless otherwise indicated, defined terms and abbreviations used herein have the meanings set forth in the accompanying Glossary of Acronyms and Abbreviations.

Basis of Presentation - FirstMerit Corporation is a BHC whose principal asset is the Common Stock of its wholly-owned subsidiary, FirstMerit Bank, N. A. The Parent Company’s other subsidiaries include Citizens Savings Corporation of Stark County, FirstMerit Capital Trust I, and FirstMerit Risk Management, Inc., FMT, Inc.,. All significant intercompany balances and transactions have been eliminated in consolidation.

The accounting and reporting policies of the Corporation conform to GAAP and to general practices within the financial services industry.

The Consolidated Balance Sheet at December 31, 2013 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 Management, necessary for a fair statement of the results for the interim periods presented. 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. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules of the SEC. The unaudited consolidated financial statements of the Corporation as of March 31, 2014 and 2013 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, 2013 (the “2013 Form 10-K”). There have been no significant changes in the current quarter to the Corporation’s accounting policies as disclosed in the 2013 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 Accounting Standards

FASB ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. The amendments in ASU 2014-01 do not change the existing accounting methods, but permit reporting entities to make an accounting policy election to account for their investments in qualified affordable projects using the proportional amortization method, if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in ASU 2014-01 are effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014, and should be applied retrospectively

10

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

to all periods presented. The Corporation early adopted ASU 2014-01 in the first quarter of 2014. Amortization of the initial investment cost of qualifying projects is now recorded in the provision for income taxes together with the tax credits and benefits received. Previously, the amortization was recorded as other noninterest expense. All prior period amounts have been restated to reflect the adoption of the amendment, which resulted in an offsetting decrease to other noninterest expense and increase to the provision for income taxes of approximately $1.0 million in the first quarter 2014 and $0.8 million and first quarter 2013.

Recently Issued Accounting Standards

FASB ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. ASU 2014-04 amends the guidance in ASC 310-40 by clarifying when an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. Additionally, the amendments require interim and annual disclosure of both 1) the amount of foreclosed residential real estate property held by the creditor and 2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in ASU 2014-04 are effective for annual periods, and interim period within those annual periods, beginning after December 15, 2014. The amendments can either be adopted using a modified retrospective or a prospective transition method. The adoption of this accounting guidance is not expected to have a material effect on the Corporation's financial position or results of operations.

2.     Business Combinations

The Corporation completed the merger with Citizens, a Michigan corporation with approximately $9.6 billion in assets and 219 branches, in the quarter ended June 30, 2013. All of Citizens' common shareholders received 1.37 shares of the Corporation's Common Stock in exchange for one share of Citizens' common stock, resulting in the Corporation issuing 55,468,283 shares of its Common Stock. In conjunction with the completion of the merger, the Corporation fully repurchased the $300 million of Citizens TARP Preferred plus accumulated but unpaid dividends and interest of approximately $55.4 million previously issued to the U.S. Treasury under the Capital Purchase Program. The Corporation used the net proceeds from its February 4, 2013 public offerings, which consisted of $250 million aggregate principal amount of 4.35% subordinated notes due February 4, 2023, and $100 million5.875% Non-Cumulative Perpetual Preferred Stock, Series A, to repurchase the Citizens TARP Preferred and pay all accrued, accumulated and unpaid dividends and interest. Additionally, a warrant issued by Citizens to the U.S. Treasury to purchase up to 1,757,812.5 shares of Citizens' common stock has been converted into a warrant issued by the Corporation to the U.S. Treasury to purchase 2,408,203 shares of FirstMerit Common Stock.

The Citizens transaction was accounted for using the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the Acquisition Date. Per the applicable accounting guidance for business combinations, these fair values were subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values become available.

The following table provides the purchase price calculation as of the Acquisition Date and the identifiable assets purchased and the liabilities assumed at their estimated fair value. These fair value measurements are based on third-party valuations.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

Purchase Price:
FirstMerit shares of Common Stock issued for Citizens' shares				55,468,283
Closing price per share of the Corporation's Common Stock on April 12, 2013				$	16.68
Consideration from Common Stock conversion (1.37 ratio)				925,211
Cash paid to the Treasury for Citizens' TARP Preferred				355,371
Cash paid in lieu of fractional shares to the former Citizens' shareholders				61
Consideration from the warrant issued to the Treasury for Citizens' TARP warrant				3,000
Total purchase price				$	1,283,643
Statement of Net Assets Acquired at Fair Value:
ASSETS
Cash and due from banks	$	544,380
Investment securities	3,202,575
Loans	4,617,004
Premises and equipment	138,536
Intangible assets	84,774		(a)
Accrued interest receivable and other assets	681,100
Total assets	$	9,268,369
LIABILITIES
Deposits	$	7,276,754
Borrowings	908,824
Accrued taxes, expenses, and other liabilities	80,842
Total liabilities	$	8,266,420
Net identifiable assets acquired				1,001,949
Goodwill				$	281,694

(a) Intangible assets consist of core deposit intangibles of $70.8 million and trust relationships of approximately $14.0 million. The useful lives for which the core deposit intangibles and the trust relationships are being amortized over is 15 years and 12 years, respectively.

The fair values presented in the above table reflect additional information that the Corporation obtained during the three months ended March 31, 2014, which resulted in changes to certain fair value estimates made as of the Acquisition Date. Material adjustments to acquisition date estimated fair values are recorded in the period in which the acquisition occurred and, as a result, previously recorded results have changed. After considering this additional information, the estimated fair value of other assets increased $1.1 million, and the estimated fair value of other liabilities increased $3.0 million. These revised fair value estimates resulted in a net increase to goodwill of $1.9 million to $281.7 million, which is recognized in the Consolidated Balance Sheets as of March 31, 2014. In total, goodwill has increased $7.4 million from the Acquisition Date to March 31, 2014, the end of the measurement period.

The amount of goodwill recorded reflects the increased market share and related synergies that are expected to result from the acquisition, and represents the excess purchase price over the estimated fair value of the net assets acquired. None of the goodwill is deductible for income tax purposes as the merger is accounted for as a tax-free exchange. The tax-free exchange resulted in a carryover of tax attributes and tax basis to the Corporation's subsequent income tax filings. These carryovers were comprised of DTA of $313.0 million and DTL of $51.3 million for a net DTA carryover of $261.7 million. This net DTA includes $224.8 million of net operating loss and tax credit carryovers. The carryover of these tax attributes is subject to limitation as to the tax period in which they can be used to reduce future tax payments. The amounts recorded are expected to be substantially used by 2016, however, some will continue to carryover until 2032. These tax attribute benefits

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

will also be subject to regulatory capital adjustments until fully utilized. An additional net DTA of $87.6 million was established on the Acquisition Date as a result of the purchase accounting fair value adjustments resulting in a total net DTA on the Acquisition Date of $349.3 million.

The following table summarizes the fair value of both acquired impaired and nonimpaired loans by product type as of the Acquisition Date.

(In thousands)	Acquired Impaired Loans		Acquired Nonimpaired Loans		Acquired Loans Total
Commercial
C&I	$	93,735	$	1,660,199	$	1,753,934
CRE	378,569		359,066		737,635
Construction	13,399		17,135		30,534
Total commercial	485,703		2,036,400		2,522,103
Consumer
Residential mortgages	232,291		278,404		510,695
Installment	54,108		1,165,235		1,219,343
Home equity lines	47,613		317,250		364,863
Total consumer	334,012		1,760,889		2,094,901
Total	$	819,715	$	3,797,289	$	4,617,004

The determination of estimated fair values of the acquired loans required the Corporation to make certain estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature. Based on such factors as past due status, nonaccrual status and credit risk ratings, the acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC 310-30 (acquired impaired), and loans that do not meet this criteria, which are accounted for under ASC 310-20 (acquired nonimpaired). The acquired loans were further segregated into loan pools designed to facilitate the development of expected cash flows to be used in estimating fair value. Acquired loans were segregated into pools based on characteristics such as loan type, credit risk profiles, contractual interest rate and repayment terms and market area in which originated. Expected cash flows, both principal and interest, were estimated based on key assumptions covering such factors as prepayments, default rates and severity of loss given default. These assumptions were developed using both Citizens' historical experience and the portfolio characteristics at Acquisition Date as well as available market research. The fair value estimates for acquired loans was based on the amount and timing of expected principal, interest and other cash flows, included expected prepayments, discounted at prevailing market interest rates.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

For acquired nonimpaired loans, the difference between the Acquisition Date fair value and the contractual amounts due at the Acquisition Date represents the fair value adjustment. The fair value adjustment may be a discount (or premium) to an individual loan's cost basis and is accreted (or amortized) to interest income over the loan's remaining life using the level yield method. Acquired nonimpaired loans are reported net of the unamortized fair value adjustment. The fair value adjustment for acquired nonimpaired loans as of the Acquisition Date is presented in the following table.

(In thousands)	Acquired Nonimpaired Loans
Outstanding balance	$	4,017,304
Less: Fair value adjustment	220,015
Fair value of acquired nonimpaired loans	$	3,797,289

The table below details contractually required payments, cash flows not expected to be collected and cash flows expected to be collected on acquired nonimpaired loans as of the Acquisition Date.

(In thousands)	Acquired Nonimpaired Loans
Contractually required payments including interest (a)	$	4,955,180
Less: Contractual cash flows not expected to be collected	680,664
Cash flows expected to be collected	$	4,274,516

(a) Total undiscounted amounts of all uncollected contractual principal and interest, including any fees and penalties, both past due and scheduled for the future, assuming no loss or prepayment.

For acquired impaired loans, the excess of cash flows expected over the estimated fair value at the Acquisition Date represents the accretable yield and is recognized as interest income using a level yield method over the remaining life of the pooled impaired loans. Each pool of acquired impaired loans is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Acquired impaired loans in pools with an accretable yield are considered to be accruing and performing even though collection of contractual payments on loans within the pool may be in doubt, because the pool is the unit of accounting and income continues to be accreted on the pool as long as expected cash flows are reasonably estimable.

Total outstanding acquired impaired loans as of the Acquisition Date were $1.1 billion. A reconciliation of the contractual required payments to the fair value of the acquired impaired loans at the Acquisition Date is as follows:

(In thousands)	Acquired Impaired Loans
Contractually required payments including interest (a)	$	1,231,172
Nonaccretable difference (b)	(279,899		)
Cash flows expected to be collected (c)	951,273
Accretable yield (d)	(131,558		)
Fair value of loans acquired	$	819,715

(a) Total undiscounted amounts of all uncollected contractual principal and interest, including any fees and penalties, both past due and scheduled for the future, assuming no loss or prepayment.

(b) The nonaccretable difference represents, as of the Acquisition Date, the amount of contractually required payments, including interest, that are not expected to be collected based on estimated credit losses and other factors, such as prepayments.

(c) Represents the estimate, at Acquisition Date, of the amount and timing of undiscounted principal, interest, and other cash flows expected to be collected. This estimate includes the effect of anticipated prepayments.

(d) The accretable yield represents the excess of cash flows expected at Acquisition Date over the estimated fair value and is recognized as interest income over the remaining life of the loan using the level yield method.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

The fair value of the investment securities acquired was approximately $3.2 billion. Management's strategy to reduce prepayment and credit risk of the acquired investment securities portfolio resulted in the sale of approximately $2.2 billion in agency MBS, agency CMO, municipal securities and private label MBS investments subsequent to the close of the acquisition. During the second quarter of 2013, Management repurchased approximately $1.5 billion of agency MBS and CMO securities in accordance with the Corporation's investment polices.

As part of the merger, the Corporation assumed Citizens' FHLB advances with a fair value of $719.3 million. On April 15, 2013, in conjunction with Management's strategy to de-leverage the acquired Citizens' balance sheet, the Corporation terminated all but two assumed FHLB advances resulting in cash outlay of $652.5 million, which approximated the fair value. The fair value of the two retained FHLB advances totaled $66.8 million and mature on May 16, 2016. FHLB advances are reflected in the line item "Federal funds purchased and securities sold under agreements to repurchase" on the Consolidated Balance Sheets.

The Corporation also assumed obligations under junior subordinated debentures at fair value in the amount of $74.5 million, payable to two unconsolidated trusts that issued trust preferred securities. The junior subordinated debentures are the sole assets of each trust. The variable interest rate junior subordinated debenture has a maturity date of June 26, 2033 and bears interest at an annual rate equal to the three-month LIBOR plus 3.10% and adjusts on a quarterly basis not to exceed 11.75%. The junior subordinated debenture is an unsecured obligation of the Corporation and is junior in right of payment to all future senior indebtedness of the Corporation. The Corporation has guaranteed that interest payments on the junior subordinated debenture made to the trust will be distributed by the trust to the holders of the trust preferred securities. The trust preferred securities of the special purpose trust are callable at par and must be redeemed in thirty years after issuance. Under the risk-based capital guidelines, the trust preferred securities currently qualify as Tier 1 capital; however, a final rule on Basel III, which became effective in January 2014, phases out trust preferred securities from qualifying as Tier 1 Capital beginning January 1, 2015, with complete elimination by January 1, 2016. The fixed 7.50% interest rate junior subordinated debenture has a maturity date of September 15, 2066 and is listed on the NYSE (NYSE symbol CTZ-PA). Interest is payable quarterly in arrears and became callable on September 15, 2011.

The Corporation also assumed long-term repurchase agreements with a fair value amount of $115.0 million. On April 15, 2013, in conjunction with Management's strategy to de-leverage the newly acquired Citizens' balance sheet, all of these these long-term repurchase agreements were terminated.

The operating results of the Corporation for the three months ended March 31, 2014 include the operating results of the acquired assets and assumed liabilities. The operations of the Wisconsin and Michigan geographic area, which primarily includes the acquired operations of Citizens, provided approximately $71.7 million in interest income, and approximately $24.0 million in net income for the three months ended March 31, 2014. These amounts are included in the Corporation's consolidated financial statements for the three months ended March 31, 2014.

Merger-related charges of $1.0 million were recorded in the Consolidated Statements of Income for the three months ended March 31, 2014. These costs were primarily composed of professional service fees.

The following table provides the unaudited pro forma information for the results of operations for the three months ended March 31,2013, as if the acquisition had occurred on January 1, 2013. These adjustments include the impact of certain purchase accounting adjustments including accretion of loan marks, which makes up the vast majority of the adjustments, followed by intangible assets amortization, investment securities

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

amortization, fixed assets depreciation and deposit accretion. In addition, $3.6 million in merger-related expenses are included in the pro forma information for the three months ended March 31,2013. The Corporation expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts. These unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined corporation that would have been achieved had the acquisition occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of operations.

	Three Months Ended
(In thousands)	March 31, 2013
Total revenue, net of interest expense	$	237,067
Net income	62,868

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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 OCI in shareholders' equity.

		March 31, 2014
(In thousands)		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available-for-sale
Debt securities
	U.S. states and political subdivisions	$	245,534	$	7,541	$	(2,095	)	$	250,980
	Residential mortgage-backed securities:
	U.S. government agencies	1,013,085		21,415		(10,506		)	1,023,994
	Commercial mortgage-backed securities:
	U.S. government agencies	87,258		36		(2,161		)	85,133
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	1,586,051		3,857		(41,804		)	1,548,104
	Non-agency	8		—		—			8
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	173,951		331		(1,813		)	172,469
	Asset-backed securities:
	Collateralized loan obligations	297,293		958		(3,692		)	294,559
	Corporate debt securities	61,610		—		(10,022		)	51,588
	Total debt securities	3,464,790		34,138		(72,093		)	3,426,835
Equity securities
	Marketable equity securities	3,055		—		—			3,055
	Non-marketable equity securities	3,281		—		—			3,281
	Total equity securities	6,336		—		—			6,336
	Total securities available for sale	$	3,471,126	$	34,138	$	(72,093	)	$	3,433,171
Securities held-to-maturity
Debt securities
	U.S. treasuries	$	4,999	$	6	$	—		$	5,005
	U.S. government agency debentures	25,000		—		(1,117		)	23,883
	U.S. states and political subdivisions	517,221		159		(7,186		)	510,194
	Residential mortgage-backed securities:
	U.S. government agencies	644,820		2,311		(8,584		)	638,547
	Commercial mortgage-backed securities:
	U.S. government agencies	56,339		32		(877		)	55,494
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	1,488,641		—		(64,734		)	1,423,907
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	249,688		138		(9,749		)	240,077
	Corporate debt securities	92,912		437		(295		)	93,054
	Total securities held to maturity	$	3,079,620	$	3,083	$	(92,542	)	$	2,990,161

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

		December 31, 2013
(In thousands)		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available-for-sale
Debt securities
	U.S. states and political subdivisions	$	258,787	$	7,376	$	(3,796	)	$	262,367
	Residential mortgage-backed securities:
	U.S. government agencies	962,687		21,662		(14,427		)	969,922
	Commercial mortgage-backed securities:
	U.S. government agencies	72,048		7		(2,488		)	69,567
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	1,566,262		4,199		(52,068		)	1,518,393
	Non-agency	9		—		—			9
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	104,152		273		(2,157		)	102,268
	Asset-backed securities
	Collateralized loan obligations	297,259		760		(4,332		)	293,687
	Corporate debt securities	61,596		—		(10,952		)	50,644
	Total debt securities	3,322,800		34,277		(90,220		)	3,266,857
Equity securities
	Marketable equity securities	3,036		—		—			3,036
	Non-marketable equity securities	3,281		—		—			3,281
	Total equity securities	6,317		—		—			6,317
	Total securities available for sale	$	3,329,117	$	34,277	$	(90,220	)	$	3,273,174
Securities held-to-maturity
Debt securities
	U.S. Treasuries	$	5,000	$	4	$	—		$	5,004
	U.S. government agencies debentures	25,000		—		(1,348		)	23,652
	U.S. states and political subdivisions	480,703		5,335		(10,459		)	475,579
	Residential mortgage-backed securities
	U.S. government agencies	569,960		1,108		(11,617		)	559,451
	Commercial mortgage-backed securities:
	U.S. government agencies	56,596		—		(1,190		)	55,406
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	1,464,732		—		(81,818		)	1,382,914
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	240,069		6		(11,052		)	229,023
	Corporate debt securities	93,628		308		(725		)	93,211
	Total securities held to maturity	$	2,935,688	$	6,761	$	(118,209	)	$	2,824,240

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

		March 31, 2013
(In thousands)		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
Equity Securities
	Marketable equity securities	3,212		—		—			3,212
	Non-marketable equity securities	—		—		—			—
	Total 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

The Corporation's U.S. states and political subdivisions portfolio is composed of general obligation bonds issued by a highly diversified number of states, cities, counties, and school districts. The amortized cost and fair value of the Corporation's portfolio of general obligation bonds are summarized by U.S. state in the tables below. As illustrated in the tables below, the aggregate fair value of the Corporation's general obligation bonds was greater than $10.0 million in eleven of the thirty-seven U.S. states in which it holds investments.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

(Dollars in thousands)	March 31, 2014
U.S. State	# of Issuers	Average Issue Size, Fair Value		Amortized Cost		Fair Value
Ohio	153	$	1,033	$	159,883	$	158,074
Michigan	171	789		135,588		134,965
Illinois	72	1,496		107,451		107,717
Wisconsin	87	683		58,635		59,428
Texas	68	779		52,807		52,941
Pennsylvania	51	969		50,579		49,428
Minnesota	42	672		27,925		28,213
Washington	30	940		28,292		28,210
New Jersey	37	744		26,844		27,518
Missouri	19	1,012		18,904		19,232
New York	22	594		13,046		13,075
Other	129	634		82,317		81,807
Total general obligation bonds	881	$	863	$	762,271	$	760,608

(Dollars in thousands)	December 31, 2013
U.S. State	# of Issuers	Average Issue Size, Fair Value		Amortized Cost		Fair Value
Ohio	154	$	1,041	$	159,674	$	160,265
Michigan	166	744		122,198		123,571
Illinois	75	1,314		96,863		98,521
Wisconsin	87	645		54,921		56,152
Texas	69	771		54,295		53,204
Pennsylvania	51	891		48,319		45,451
Minnesota	45	663		29,840		29,816
Washington	30	930		28,393		27,906
New Jersey	38	722		27,101		27,440
Missouri	20	969		19,253		19,382
New York	22	585		13,064		12,878
California	18	599		10,651		10,788
Other	115	631		74,918		72,572
Total general obligation bonds	890	$	829	$	739,490	$	737,946

(Dollars in thousands)	March 31, 2013
U.S. State	# of Issuers	Average Issue Size, Fair Value		Amortized Cost		Fair Value
Ohio	196	$	836	$	159,345	$	163,767
Illinois	87	732		61,359		63,718
Texas	75	648		47,513		48,606
Pennsylvania	60	803		47,493		48,186
Wisconsin	40	761		28,536		30,459
Minnesota	47	610		27,468		28,648
New Jersey	48	583		26,515		28,002
Michigan	32	842		26,059		26,959
Washington	27	787		20,499		21,240
Missouri	16	980		14,835		15,678
New York	23	495		11,028		11,381
California	18	566		9,720		10,194
Other	111	570		62,069		63,254
Total general obligation bonds	780	$	718	$	542,439	$	560,092

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

The Corporation owns one revenue bond with an estimated fair value of $0.6 million and an amortized cost of $0.5 million as of March 31, 2014. This bond was purchased in 1999, prior to the Corporation adopting an internal investment policy prohibiting purchases of revenue bonds. The revenue bond's maturity has been pre-refunded with U.S. treasuries. Pre-refunded municipal bonds are those that are backed by an escrow account and invested in U.S. Treasuries which is used to pay bondholders at maturity. Thus the revenue bond carries the credit risk of the U.S. Treasury.

The Corporation's investment policy states that municipal securities purchased are to be investment grade and allows for a 20% maximum portfolio concentration in municipal securities with a combined individual state to total municipal outstanding equal to or less than 25%. A municipal security is investment grade if (1) the security has a low risk of default by the obligor and (2) the full and timely payment of principal and interest is expected over the anticipated life of the instrument. The fact that a municipal security is rated by one nationally recognized credit rating agency is indicative, but not sufficient evidence, that a municipal security is investment grade. In all cases, the Corporation considers and documents within a security pre-purchase analysis factors such as capacity to pay, market and economic data, and such other factors as are available and relevant to the security or issuer. Factors to be considered in the ongoing monitoring of municipal securities and in the pre-purchase analysis include soundness of budgetary position, and sources, strength, and stability of tax or enterprise revenues. The Corporation also considers spreads to U.S. Treasuries on comparable bonds of similar credit quality, in addition to the above analysis, to assess whether municipal securities are investment grade. The Corporation performs a risk analysis for any security that is downgraded below investment grade to determine if the security should be retained or sold. This risk analysis includes, but is not limited to, discussions with the Corporation's credit department as well as third-party municipal credit analysts and review of the nationally recognized credit rating agency's analysis describing the downgrade.

The Corporation's evaluation of its municipal bond portfolio at March 31, 2014 did not uncover any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized credit rating agency.

FRB and FHLB stock constitute the majority of other investments on the Consolidated Balance Sheets.

(In thousands)	March 31, 2014		December 31, 2013		March 31, 2013
FRB stock	$	55,435	$	55,294	$	21,324
FHLB stock	92,547		125,032		119,145
Other	464		477		515
Total other investments	$	148,446	$	180,803	$	140,984

FRB and FHLB stock are 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 $3.4 billion, $3.2 billion and $2.7 billion at March 31, 2014, December 31, 2013 and March 31, 2013, 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.

21

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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,
(In thousands)	2014			2013
Realized gains	$	220		$	—
Realized losses	(164		)	(9		)
Net securities (losses)/gains	$	56		$	(9	)

Gross Unrealized Losses and Fair Value

The following table presents the gross unrealized losses and fair value of securities by length of time that individual securities had been in a continuous loss position by major categories of available-for-sale and held-to-maturity securities.

		March 31, 2014
		Less than 12 months						12 months or longer						Total
(In thousands)		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	$	32,307	$	(937	)	53	$	17,231	$	(1,158	)	29	$	49,538	$	(2,095	)
	Residential mortgage-backed securities:
	U.S. government agencies	399,152		(9,543		)	28	15,013		(963		)	3	414,165		(10,506		)
	Commercial mortgage-backed securities:
	U.S. government agencies	63,129		(1,206		)	8	16,891		(955		)	2	80,020		(2,161		)
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	966,458		(28,054		)	62	273,543		(13,750		)	18	1,240,001		(41,804		)
	Commercial collateralized mortgage-backed securities:
	U.S. Government agencies	90,804		(1,475		)	8	6,014		(338		)	2	96,818		(1,813		)
	Collateralized loan obligations:
	Nonagency	201,854		(3,692		)	28	—		—			—	201,854		(3,692		)
	Corporate debt securities	—		—			—	51,588		(10,022		)	8	51,588		(10,022		)
	Total available-for-sale securities	$	1,753,704	$	(44,907	)	187	$	380,281	$	(27,186	)	63	$	2,133,985	$	(72,093	)
Securities held-to-maturity
Debt securities
	U.S. government agency debentures	$	23,883	$	(1,117	)	1	$	—	$	—		—	$	23,883	$	(1,117	)
	U.S. states and political subdivisions	200,100		(3,913		)	326	15,544		(353		)	14	215,644		(4,266		)
	Residential mortgage-backed securities:
	U.S. government agencies	295,148		(7,471		)	16	19,730		(1,113		)	1	314,878		(8,584		)
	Commercial mortgage-backed securities:
	U.S. government agencies	50,533		(877		)	8	—		—			—	50,533		(877		)
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	865,651		(36,383		)	42	558,256		(28,350		)	27	1,423,907		(64,733		)
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	200,487		(8,507		)	18	19,459		(1,242		)	2	219,946		(9,749		)
	Corporate debt securities	62,051		(295		)	22	—		—			—	62,051		(295		)
	Total held-to-maturity securities	$	1,697,853	$	(58,563	)	433	$	612,989	$	(31,058	)	44	$	2,310,842	$	(89,621	)

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

		December 31, 2013
		Less than 12 months						12 months or longer						Total
(In thousands)		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	$	38,039	$	(1,996	)	65	$	14,157	$	(1,800	)	25	$	52,196	$	(3,796	)
	Residential mortgage-backed securities:
	U.S. government agencies	434,761		(13,109		)	35	14,890		(1,318		)	2	449,651		(14,427		)
	Commercial mortgage-backed securities:
	U.S. government agencies	33,387		(1,491		)	5	16,944		(997		)	2	50,331		(2,488		)
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	1,135,151		(44,775		)	74	100,530		(7,293		)	7	1,235,681		(52,068		)
	Nonagency	—		—			—	1		—			1	1		—
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	43,747		(2,055		)	6	2,525		(102		)	1	46,272		(2,157		)
	Collateralized loan obligations:
	Nonagency	223,458		(4,332		)	33	—		—			—	223,458		(4,332		)
	Corporate debt securities	—		—			—	50,644		(10,952		)	8	50,644		(10,952		)
	Total available-for-sale securities	$	1,908,543	$	(67,758	)	218	$	199,691	$	(22,462	)	46	$	2,108,234	$	(90,220	)
Securities held-to-maturity
	Debt securities:
	U.S. government agency debentures	$	23,652	$	(1,348	)	1	$	—	$	—		—	$	23,652	$	(1,348	)
	U.S. states and political subdivisions	222,154		(10,276		)	353	2,478		(183		)	6	224,632		(10,459		)
	Residential mortgage-backed securities:
	U.S. government agencies	422,192		(11,617		)	22	—		—			1	422,192		(11,617		)
	Commercial mortgage-backed securities:
	U.S. government agencies	48,831		(1,190		)	8	—		—			—	48,831		(1,190		)
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	1,402,172		(82,558		)	67	—		—			—	1,402,172		(82,558		)
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	189,606		(10,312		)	18	—		—			—	189,606		(10,312		)
	Corporate debt securities	64,541		(725		)	23	—		—			—	64,541		(725		)
	Total held-to-maturity securities	$	2,373,148	$	(118,026	)	492	$	2,478	$	(183	)	6	$	2,375,626	$	(118,209	)

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

		March 31, 2013
		Less than 12 months						12 months or longer						Total
(In thousands)		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	)

At least quarterly, the Corporation conducts a comprehensive security-level impairment assessment on all securities in an unrealized loss position to determine if 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 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 OCI. 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

24

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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 OCI, net of tax.

The investment securities portfolio was in a net unrealized loss position of $38.0 million at March 31, 2014, compared to a net unrealized loss of $55.9 million at December 31, 2013 and a gain position of $60.6 million at March 31, 2013. Gross unrealized losses were $72.1 million as of March 31, 2014, compared to $90.2 million at December 31, 2013, and $15.1 million at March 31, 2013. As of March 31, 2014, gross unrealized losses are concentrated within agency MBS and corporate debt securities. The fair values of the agency MBSs have been impacted by the rising interest rate environment throughout 2013 relative to when they were purchased. Corporate debt securities are 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 agency MBSs and corporate debt 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, 2014 and has recognized the total amount of the impairment in other comprehensive income, net of tax.

The Corporation also holds $294.6 million of CLOs with a gross unrealized loss position of $3.7 million as of March 31, 2014. The new Volcker regulations, as originally adopted, may affect the Corporation's ability to hold these CLOs. Management believes that its holdings of CLOs are not ownership interests in a covered fund prohibited by the Volcker regulations, and, therefore, expects to be able to hold these investments until their stated maturities with no restriction.

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, 2014. Estimated lives on MBSs may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

25

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

(Dollars in thousands)	U.S. Government agency debentures			U.S. Treasuries			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 issued			Commercial collateralized mortgage obligations - U.S. govt. agency obligations			Collateralized loan obligations			Corporate debt securities			Total			Weighted Average Yield
Securities Available for Sale
Remaining maturity:
One year or less	$	—		$	—		$	11,646		$	2,534		$	16,891		$	8,242		$	—		$	—		$	16,028		$	—		$	55,341		3.00	%
Over one year through five years	—			—			59,834			828,815			19,184			1,388,933			8			143,597			8,511			—			2,448,882			2.24	%
Over five years through ten years	—			—			147,395			192,645			49,058			150,929			—			28,872			270,020			—			838,919			2.97	%
Over ten years	—			—			32,105			—			—			—			—			—			—			51,588			83,693			2.03	%
Fair Value	$	—		$	—		$	250,980		$	1,023,994		$	85,133		$	1,548,104		$	8		$	172,469		$	294,559		$	51,588		$	3,426,835		2.42	%
Amortized Cost	$	—		$	—		$	245,534		$	1,013,085		$	87,258		$	1,586,051		$	8		$	173,951		$	297,293		$	61,610		$	3,464,790
Weighted-Average Yield	—		%	—		%	5.13		%	2.72		%	1.92		%	1.92		%	3.62		%	1.91		%	2.66		%	0.95		%	2.42		%
Weighted-Average Maturity	—			—			6.67			4.11			4.29			4.11			2.01			3.92			6.40			13.56			4.65
Securities Held to Maturity
Remaining maturity:
One year or less	$	—		$	—		$	84,288		$	—		$	6,464		$	—		$	—		$	—		$	—		$	—		$	90,752		1.55	%
Over one year through five years	—			5,005			45,655			503,761			15,047			1,223,694			—			120,440			—			93,054			2,006,656			1.86	%
Over five years through ten years	23,883			—			195,434			134,786			33,983			200,213			—			119,637			—			—			707,936			2.68	%
Over ten years	—			—			184,817			—			—			—			—			—			—			—			184,817			5.46	%
Fair Value	$	23,883		$	5,005		$	510,194		$	638,547		$	55,494		$	1,423,907		$	—		$	240,077		$	—		$	93,054		$	2,990,161		2.26	%
Amortized Cost	$	25,000		$	4,999		$	517,221		$	644,820		$	56,339		$	1,488,641		$	—		$	249,688		$	—		$	92,912		$	3,079,620
Weighted-Average Yield	1.43		%	0.26		%	4.74		%	2.18		%	2.05		%	1.60		%	—		%	2.70		%	—		%	2.20		%	2.26		%
Weighted-Average Maturity	5.58			0.83			10.39			4.95			4.88			4.39			—			5.14			—			3.79			5.25

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

4.     Loans

    Loans outstanding as of March 31, 2014, December 31, 2013 and March 31, 2013, net of unearned income, consisted of the following:

(In thousands)		March 31, 2014			December 31, 2013			March 31, 2013
Originated loans:
Commercial		$	7,083,192		$	6,648,279		$	5,888,337
Residential mortgage		555,971			529,253			451,522
Installment		1,835,522			1,727,925			1,322,795
Home equity		946,802			920,066			812,458
Credit cards		147,917			148,313			140,721
Leases		257,509			239,551			164,137
	Total originated loans (a)	10,826,913			10,213,387			8,779,970
Allowance for originated loan losses		(92,116		)	(96,484		)	(98,843		)
	Net originated loans	$	10,734,797		$	10,116,903		$	8,681,127
Acquired loans:
Commercial		$	1,562,878		$	1,725,970		$	—
Residential mortgage		446,374			470,652			—
Installment		943,354			1,004,569			—
Home equity		283,309			294,424			—
	Total acquired loans	3,235,915			3,495,615			—
Allowance for acquired loan losses		(2,974		)	(741		)	—
	Net acquired loans	$	3,232,941		$	3,494,874		$	—
Covered loans:
Commercial		$	341,267		$	375,860		$	621,188
Residential mortgage		49,411			50,679			58,627
Installment		5,531			6,162			8,081
Home equity		94,828			97,442			113,343
Loss share receivable		54,748			61,827			95,593
	Total covered loans	545,785			591,970			896,832
Allowance for covered loan losses		(49,970		)	(44,027		)	(47,945		)
	Net covered loans	$	495,815		$	547,943		$	848,887
Total loans:
Commercial		$	8,987,337		$	8,750,109		$	6,509,525
Residential mortgage		1,051,756			1,050,584			510,149
Installment		2,784,407			2,738,656			1,330,876
Home equity		1,324,939			1,311,932			925,801
Credit cards		147,917			148,313			140,721
Leases		257,509			239,551			164,137
Loss share receivable		54,748			61,827			95,593
	Total loans	14,608,613			14,300,972			9,676,802
Total allowance for loan losses		(145,060		)	(141,252		)	(146,788		)
	Total Net loans	$	14,463,553		$	14,159,720		$	9,530,014

(a) Includes acquired FirstBank loans of $29.5 million, $49.2 million and $54.1 million as of March 31, 2014, December 31, 2013 and March 31, 2013, respectively.

27

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

The following describes the distinction between originated, acquired and covered loan portfolios and certain significant accounting policies relevant to each of these portfolios.

Originated Loans

Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, and net deferred loan fees and costs. Interest income on loans is accrued over the term of the loans primarily using the "simple-interest" method based on the principal balance outstanding. Interest is not accrued on loans where collectability is uncertain. Accrued interest is presented separately in the consolidated balance sheet, except for accrued interest on credit card loans, which is included in the outstanding loan balance. Loan origination fees and certain direct costs incurred to extend credit are deferred and amortized over the term of the loan or loan commitment period as an adjustment to the related loan yield. Net deferred loan origination fees and costs amounted to $7.1 million, $6.6 million and $6.8 million at March 31, 2014, December 31, 2013 and March 31, 2013, respectively.

Acquired Loans

Acquired loans are those purchased in the Citizens acquisition (See Note 2 (Business Combinations) for further information). These loans were recorded at estimated fair value at the Acquisition Date with no carryover of the related ALL. The acquired loans were segregated between those considered to be performing (“non-impaired acquired loans”) and those with evidence of credit deterioration (“acquired impaired loans”). Acquired loans are considered impaired if there is evidence of credit deterioration and if it is probable, at acquisition, all contractually required payments will not be collected. Revolving loans, including lines of credit, are excluded from acquired impaired loan accounting.

Total outstanding acquired impaired loans as of March 31, 2014were $774.5 million. Changes in the carrying amount and accretable yield for acquired impaired loans were as follows for the three months ended March 31, 2014:    

(In thousands)	Three Months Ended March 31, 2014
Acquired Impaired Loans	Accretable Yield			Carrying Amount of Loans
Balance at beginning of period	$	136,646		$	601,000
Accretion	(11,741		)	11,741
Net reclassifications from nonaccretable to accretable	19,514			—
Payments received, net	—			(55,542		)
Disposals	(2,135		)	—
Balance at end of period	$	142,284		$	557,199

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

Covered Loans and Related Loss Share Receivable

The loans purchased in the 2010 FDIC-assisted acquisitions of George Washington and Midwest are covered by loss sharing agreements between the FDIC and the Corporation that afford the Bank significant loss protection. These covered loans were recorded at estimated fair value at the Acquisition Date with no carryover of the related ALL and are accounted for as acquired impaired loans. A loss share receivable was recorded at the Acquisition Date which represents the estimated fair value of reimbursement the Corporation expects to receive from the FDIC for incurred losses on certain covered loans. These expected reimbursements are recorded as part of covered loans.

Changes in the loss share receivable associated with covered loans for the three months endedMarch 31, 2014 and 2013, respectively, were as follows:

Loss Share Receivable	Three Months Ended March 31,
(In thousands)	2014			2013
Balance at beginning of period	$	61,827		$	113,734
Amortization	(5,863		)	(8,104		)
Increase due to impairment on covered loans	4,824			5,539
FDIC reimbursement	(5,087		)	(10,549		)
Covered loans paid in full	(953		)	(5,027		)
Balance at end of the period	$	54,748		$	95,593

Total outstanding covered impaired loans were $702.4 million and $1.0 billion as of March 31, 2014 and 2013, respectively. Changes in the carrying amount and accretable yield for covered impaired loans were as follows for the three months endedMarch 31, 2014 and 2013:

Covered Impaired Loans	Three Months Ended March 31,
	2014						2013
(In thousands)	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Balance at beginning of period	$	67,282		$	403,692		$	113,288		$	762,386
Accretion	(12,616		)	12,616			(19,514		)	19,514
Net reclassifications from non-accretable to accretable	6,057			—			10,569			—
Payments received, net	—			(51,820		)	—			(125,230		)
Disposals	2,280			—			(2,213		)	—
Balance at end of period	$	63,003		$	364,488		$	102,130		$	656,670

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

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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. Acquired and covered impaired loans are considered to be accruing and performing even though collection of contractual payments may be in doubt because income continues to be accreted on the loan pool as long as expected cash flows are reasonably estimable.

When a loan is placed on nonaccrual status, interest deemed uncollectible which had been accrued in prior years is charged against the ALL 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 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, 2014
(In thousands)													≥ 90 Days
Originated Loans	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (a)		Loans
Commercial
C&I	$	4,088	$	561	$	5,546	$	10,195	$	4,465,961	$	4,476,156	$	2,000	$	6,388
CRE	13,549		3,644		7,999		25,192		2,222,093		2,247,285		804		20,679
Construction	369		—		—		369		359,382		359,751		—		55
Leases	—		—		—		—		257,509		257,509		—		—
Consumer
Installment	9,162		2,659		3,762		15,583		1,819,939		1,835,522		3,286		3,222
Home Equity Lines	1,644		444		902		2,990		943,812		946,802		509		1,653
Credit Cards	783		438		573		1,794		146,123		147,917		262		488
Residential Mortgages	9,632		1,882		8,455		19,969		536,002		555,971		4,999		10,963
Total	$	39,227	$	9,628	$	27,237	$	76,092	$	10,750,821	$	10,826,913	$	11,860	$	43,448
Acquired Loans													≥ 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	$	776	$	720	$	4,224	$	5,720	$	705,912	$	711,632	$	170	$	241
CRE	5,356		3,639		21,995		30,990		806,886		837,876		5		1,259
Construction	—		650		—		650		12,720		13,370		—		—
Consumer
Installment	7,216		2,563		1,619		11,398		931,956		943,354		665		678
Home Equity Lines	3,606		811		3,596		8,013		275,296		283,309		1,078		1,090
Residential Mortgages	11,743		1,822		7,090		20,655		425,719		446,374		31		1,405
Total	$	28,697	$	10,205	$	38,524	$	77,426	$	3,158,489	$	3,235,915	$	1,949	$	4,673
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	$	1,744	$	—	$	11,867	$	13,611	$	51,641	$	65,252	n/a		n/a
CRE	582		449		97,596		98,627		156,966		255,593		n/a		n/a
Construction	1,008		—		16,337		17,345		3,076		20,421		n/a		n/a
Consumer
Installment	—		—		—		—		5,531		5,531		n/a		n/a
Home Equity Lines	758		538		2,093		3,389		91,439		94,828		n/a		n/a
Residential Mortgages	8,374		435		5,872		14,681		34,731		49,412		n/a		n/a
Total	$	12,466	$	1,422	$	133,765	$	147,653	$	343,384	$	491,037	n/a		n/a

^(a) Installment loans 90 days or more past due and accruing include $2.3 million of loans guaranteed by the U.S. government as of March 31, 2014.

^(b) Excludes loss share receivable of $54.7 million as of March 31, 2014.

^(c) Acquired and covered impaired loans were not classified as nonperforming assets at March 31, 2014 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 and covered impaired loans. These asset quality disclosures are, therefore, not applicable to acquired and covered impaired loans.

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As of December 31, 2013
(In thousands)													≥ 90 Days
Originated Loans	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (a)		Loans
Commercial
C&I	$	8,941	$	994	$	10,622	$	20,557	$	4,119,010	$	4,139,567	$	151	$	11,323
CRE	4,507		2,400		9,688		16,595		2,153,192		2,169,787		460		14,229
Construction	351		21		66		438		338,487		338,925		—		122
Leases	902		—		—		902		238,649		239,551		—		—
Consumer
Installment	15,433		4,050		4,462		23,945		1,703,980		1,727,925		3,735		3,681
Home Equity Lines	1,864		918		965		3,747		916,319		920,066		418		1,819
Credit Cards	729		471		735		1,935		146,378		148,313		404		558
Residential Mortgages	19,858		2,072		9,350		31,280		497,973		529,253		6,008		10,471
Total	$	52,585	$	10,926	$	35,888	$	99,399	$	10,113,988	$	10,213,387	$	11,176	$	42,203
Acquired Loans													≥ 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	$	1,295	$	862	$	3,744	$	5,901	$	788,178	$	794,079	$	40	$	795
CRE	5,603		5,281		26,366		37,250		881,395		918,645		403		651
Construction	2,675		—		—		2,675		10,571		13,246		—		—
Consumer
Installment	14,528		4,076		3,354		21,958		982,611		1,004,569		2,263		679
Home Equity Lines	4,774		1,933		3,606		10,313		284,111		294,424		1,039		1,300
Residential Mortgages	$	3,918	$	1,426	$	8,063	$	13,407	$	457,245	$	470,652	$	403	$	582
Total	$	32,793	$	13,578	$	45,133	$	91,504	$	3,404,111	$	3,495,615	$	4,148	$	4,007
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	$	836	$	1,489	$	12,957	$	15,282	$	60,955	$	76,237	n/a		n/a
CRE	2,855		3,443		103,077		109,375		164,219		273,594		n/a		n/a
Construction	2,191		1,917		20,388		24,496		1,533		26,029		n/a		n/a
Consumer
Installment	33		—		—		33		6,130		6,163		n/a		n/a
Home Equity Lines	544		1,467		1,651		3,662		93,780		97,442		n/a		n/a
Residential Mortgages	7,463		1,565		5,165		14,193		36,485		50,678		n/a		n/a
Total	$	13,922	$	9,881	$	143,238	$	167,041	$	363,102	$	530,143	n/a		n/a

(a) Installment loans 90 days or more past due and accruing include $2.1 million of loans guaranteed by the U.S. government as of December 31, 2013.

(b) Excludes loss share receivable of $61.8 million as of December 31, 2013.

(c) Acquired and covered impaired loans were not classified as nonperforming assets at December 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 and covered impaired loans. These asset quality disclosures are, therefore, not applicable to acquired and covered impaired loans.

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As of March 31, 2013
(In thousands)													≥ 90 Days
Originated Loans	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	$	3,373,236	$	3,382,624	$	—	$	8,274
CRE	2,872		3,766		11,364		18,002		2,176,986		2,194,988		1,683		15,130
Construction	—		—		1,134		1,134		309,591		310,725		1,058		439
Leases	—		—		—		—		164,137		164,137		—		—
Consumer
Installment	7,797		2,643		4,932		15,372		1,307,423		1,322,795		4,321		4,697
Home Equity Lines	1,338		496		1,311		3,145		809,313		812,458		459		2,275
Credit Cards	825		580		773		2,178		138,543		140,721		364		510
Residential Mortgages	11,375		2,732		5,921		20,028		431,494		451,522		4,508		9,484
Total	$	28,035	$	11,589	$	29,623	$	69,247	$	8,710,723	$	8,779,970	$	12,393	$	40,809
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) Covered 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 covered impaired loans. These asset quality disclosures are, therefore, not applicable to covered impaired loans.

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.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

“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.

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

As of March 31, 2014
(In thousands)
	Originated Commercial Loans
	C&I		CRE		Construction		Leases
Grade 1	$	28,610	$	240	$	299	$	8,452
Grade 2	135,574		3,797		—		3,620
Grade 3	940,937		329,377		24,731		58,397
Grade 4	3,276,975		1,823,877		332,227		179,795
Grade 5	61,507		39,245		259		6,857
Grade 6	32,553		50,749		2,235		388
Grade 7	—		—		—		—
Total	$	4,476,156	$	2,247,285	$	359,751	$	257,509
	Acquired Commercial Loans
	C&I		CRE		Construction		Leases
Grade 1	$	700	$	—	$	—	$	—
Grade 2	—		—		—		—
Grade 3	37,829		24,177		—		—
Grade 4	609,383		696,070		13,370		—
Grade 5	43,721		51,253		—		—
Grade 6	19,999		66,376		—		—
Grade 7	—		—		—		—
Total	$	711,632	$	837,876	$	13,370	$	—
	Covered Commercial Loans
	C&I		CRE		Construction		Leases
Grade 1	$	—	$	—	$	—	$	—
Grade 2	957		—		—		—
Grade 3	—		—		—		—
Grade 4	42,228		111,610		653		—
Grade 5	387		2,883		—		—
Grade 6	19,864		140,927		19,459		—
Grade 7	1,816		173		309		—
Total	$	65,252	$	255,593	$	20,421	$	—

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As of December 31, 2013
(In thousands)
	Originated Commercial Loans
	C&I		CRE		Construction		Leases
Grade 1	$	34,909	$	241	$	—	$	9,271
Grade 2	108,709		3,730		—		2,900
Grade 3	802,624		315,150		25,632		54,446
Grade 4	3,083,458		1,759,383		306,795		167,022
Grade 5	71,857		34,969		267		5,750
Grade 6	38,010		56,314		6,231		162
Grade 7	—		—		—		—
Total	$	4,139,567	$	2,169,787	$	338,925	$	239,551
	Acquired Commercial Loans
	C&I		CRE		Construction		Leases
Grade 1	$	—	$	—	$	—	$	—
Grade 2	1,741		703		—		—
Grade 3	79,634		29,224		—		—
Grade 4	643,495		722,307		13,246		—
Grade 5	46,807		93,499		—		—
Grade 6	22,402		72,912		—		—
Grade 7	—		—		—		—
Total	$	794,079	$	918,645	$	13,246	$	—
	Covered Commercial Loans
	C&I		CRE		Construction		Leases
Grade 1	$	—	$	—	$	—	$	—
Grade 2	968		—		—		—
Grade 3	—		—		—		—
Grade 4	41,115		113,863		601		—
Grade 5	427		6,219		—		—
Grade 6	31,621		153,318		23,208		—
Grade 7	2,106		194		2,220		—
Total	$	76,237	$	273,594	$	26,029	$	—

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As of March 31, 2013
(In thousands)
	Originated Commercial Loans
	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	2,404,092		1,832,892		286,093		116,314
Grade 5	63,287		46,483		1,367		4,636
Grade 6	39,295		59,710		4,022		3,318
Grade 7	—		—		—		—
Total	$	3,382,624	$	2,194,988	$	310,725	$	164,137
	Acquired Commercial Loans
	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	$	—

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 ALL is Management's estimate of the amount of probable credit losses inherent in a loan portfolio at the balance sheet date. The following describes the distinctions in methodology used to estimate the ALL of originated, acquired and covered loan portfolios as well as certain significant accounting policies relevant to each category.

Allowance for Originated Loan Losses

Management estimates credit losses based on originated 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.

The Corporation's historical loss component is the most significant of the ALL 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 ALL represents the results of migration analysis of historical net charge-offs for portfolios of loans (including groups of

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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 ALL 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.

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.

The following tables show activity in the originated ALL, by portfolio segment for the three months ended March 31, 2014 and 2013, as well as the corresponding recorded investment in originated loans at the end of the period:

As of March 31, 2014
Originated Loans		C&I			CRE			Construction			Leases			Installment			Home Equity Lines			Credit Cards			Residential Mortgages			Total
Three Months Ended
Allowance for originated loan losses, beginning balance		$	42,981		$	12,265		$	2,810		$	1,081		$	11,935		$	12,900		$	7,740		$	4,772		$	96,484
Charge-offs		(5,074		)	(79		)	—			—			(4,584		)	(1,409		)	(1,455		)	(559		)	(13,160		)
Recoveries		997			4			28			—			2,749			904			418			38			5,138
Provision for loan losses		1,271			1,195			(1,368		)	(54		)	1,504			765			148			193			3,654
Allowance for originated loan losses, ending balance		$	40,175		$	13,385		$	1,470		$	1,027		$	11,604		$	13,160		$	6,851		$	4,444		$	92,116
Ending allowance for originated loan losses balance attributable to loans:
	Individually evaluated for impairment	$	2,866		$	2,918		$	—		$	—		$	1,006		$	223		$	307		$	1,241		$	8,561
	Collectively evaluated for impairment	37,309			10,467			1,470			1,027			10,598			12,937			6,544			3,203			83,555
Total ending allowance for originated loan losses balance		$	40,175		$	13,385		$	1,470		$	1,027		$	11,604		$	13,160		$	6,851		$	4,444		$	92,116
Originated loans:
	Originated loans individually evaluated for impairment	$	7,143		$	31,576		$	404		$	—		$	25,818		$	6,931		$	1,034		$	26,198		$	99,104
	Originated loans collectively evaluated for impairment	4,469,013			2,215,709			359,347			257,509			1,809,704			939,871			146,883			529,772			10,727,808
Total ending originated loan balance		$	4,476,156		$	2,247,285		$	359,751		$	257,509		$	1,835,522		$	946,802		$	147,917		$	555,970		$	10,826,912

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

As of March 31, 2013
Originated Loans		C&I			CRE			Construction			Leases		Installment			Home Equity Lines			Credit Cards			Residential Mortgages			Total
Three Months Ended
Allowance for originated 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 originated loan losses, ending balance		$	40,427		$	18,399		$	2,741		$	1,129	$	9,151		$	14,568		$	7,069		$	5,359		$	98,843
Ending allowance for originated 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 originated loan losses balance		$	40,427		$	18,399		$	2,741		$	1,129	$	9,151		$	14,568		$	7,069		$	5,359		$	98,843
Originated loans:
	Originated loans individually evaluated for impairment	$	8,445		$	24,160		$	2,779		$	—	$	31,117		$	6,917		$	1,388		$	23,527		$	98,333
	Originated 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 originated loan balance		$	3,382,623		$	2,194,989		$	310,725		$	164,137	$	1,322,795		$	812,458		$	140,721		$	451,522		$	8,779,970

The following table presents the originated allowance for loan loss and the recorded investment as of December 31, 2013:

As of December 31, 2013
	Originated Loans	C&I		CRE		Construction		Leases		Installment		Home Equity Lines		Credit Cards		Residential Mortgages		Total
Ending allowance for originated loan losses balance attributable to loans:
	Individually evaluated for impairment	$	3,235	$	229	$	—	$	—	$	1,014	$	223	$	312	$	1,133	$	6,146
	Collectively evaluated for impairment	39,746		12,036		2,810		1,081		10,921		12,677		7,428		3,639		90,338
Total ending allowance for originated loan losses balance		$	42,981	$	12,265	$	2,810	$	1,081	$	11,935	$	12,900	$	7,740	$	4,772	$	96,484
Originated loans:
	Loans individually evaluated for impairment	$	8,053	$	20,616	$	906	$	—	$	27,285	$	6,726	$	1,112	$	23,066	$	87,764
	Loans collectively evaluated for impairment	4,131,514		2,149,171		338,019		239,551		1,700,640		913,340		147,201		506,187		10,125,623
Total ending originated loan balance		$	4,139,567	$	2,169,787	$	338,925	$	239,551	$	1,727,925	$	920,066	$	148,313	$	529,253	$	10,213,387

Allowance for Acquired Loan Losses

In accordance with the acquisition method of accounting, the Citizens' loans were recorded at their fair value as of the Acquisition Date and the prior ALL was eliminated. An ALL for nonimpaired acquired loans is estimated using a methodology similar to that used for originated loans, that is, based on a specific reserve analysis for loans individually evaluated for impairment and based on historical loss rates for loans collectively evaluated for impairment. If the computed allowance is greater than the remaining fair value

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

discount, the excess is added to the allowance through a provision for loan losses. If the computed allowance is less, no additional allowance is recognized.

Charge-offs and actual losses on an acquired loan first reduce any remaining fair value discount for that loan. Once a loan's discount is depleted, charge-offs and actual losses are applied against the ALL. During the three months ended March 31, 2014, net charge-offs of $5.6 million were recorded mainly related to consumer loans that were written off in accordance with the Corporation's credit policies based on a predetermined number of days past due. As of March 31, 2014, the computed allowance was less than the remaining fair value discount, therefore, no ALL for acquired nonimpaired loans was required.

The ALL for acquired impaired loans is determined by comparing the present value of the cash flows expected to be collected to the carrying amount for a given pool of loans. Management reforecasts the estimated cash flows expected to be collected on acquired impaired loans on a quarterly basis. If the present value of expected cash flows for a pool is less than its carrying value, impairment is recognized by an increase in the ALL and a charge to the provision for loan losses. If the present value of expected cash flows for a pool is greater than its carrying value, any previously established ALL is reversed and any remaining difference increases the accretable yield which will be taken into interest income over the remaining life of the loan pool. See Note 4 (Loans) for further information on changes in accretable yield in the current period.

The following table presents activity in the allowance for acquired impaired loan losses for the three months endedMarch 31, 2014:

Allowance for Acquired Impaired Loan Losses	Three Months Ended March 31,
(In thousands)	2014
Balance at beginning of the period	$	741
Charge-offs	—
Recoveries	—
Provision for loan losses	2,233
Balance at end of the period	$	2,974

Allowance for Covered Loan Losses

The ALL on covered loans is estimated similar to acquired loans as described above except any increase to the allowance and provision for loan losses is partially offset by an increase in the loss share receivable for the portion of the losses recoverable under the loss sharing agreements with the FDIC. Additionally, the Corporation elected to account for all covered loans as impaired except for those loans acquired with revolving privileges, which are outside the scope of impaired loan accounting, and, therefore, are accounted for as covered nonimpaired loans. As of March 31, 2014, the computed allowance was less than the remaining fair value discount, therefore, no allowance for covered nonimpaired loans was recorded.

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The following table presents activity in the allowance for covered impaired loan losses for the three months endedMarch 31, 2014 and 2013:

Allowance for Covered Impaired Loan Losses		Three Months Ended March 31,
(In thousands)		2014			2013
Balance at beginning of the period		$	44,027		$	43,255
	Provision for loan losses before benefit attributable to FDIC loss share agreements	7,879			9,677
	Benefit attributable to FDIC loss share agreements	(4,824		)	(5,539		)
Net provision for loan losses		3,055			4,138
Increase in loss share receivable		4,824			5,539
Loans charged-off		(1,936		)	(4,987		)
Balance at end of the period		$	49,970		$	47,945

During the three months ended March 31, 2014, provision for covered impaired loan losses of $7.9 million and an offsetting increase of $4.8 million in the loss share receivable resulted in the recognition of a net provision for loan losses of $3.1 million. This net provision compares to $4.1 million in the three months ended March 31, 2013.

An acquired or covered loan may be resolved either through receipt of payment (in full or in part) from the borrower, the sale of the loan to a third party, or foreclosure of the collateral. In the period of resolution of a nonimpaired loan, any remaining unamortized fair value adjustment is recognized as interest income. In the period of resolution of an impaired loan accounted for on an individual basis, the difference between the carrying amount of the loan and the proceeds received is recognized as a gain or loss within noninterest income. The majority of impaired loans are accounted for within a pool of loans which results in any difference between the proceeds received and the loan carrying amount being deferred as part of the carrying amount of the pool. The accretable amount of the pool remains unaffected from the resolution until the subsequent quarterly cash flow re-estimation. Favorable results from removal of the resolved loan from the pool increase the future accretable yield of the pool, while unfavorable results are recorded as impairment in the quarter of the cash flow re-estimation. Acquired or covered impaired loans subject to modification are not removed from a pool even if those loans would otherwise be deemed TDRs as the pool, and not the individual loan, represents the unit of account.

Credit Quality

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.

Interest income recognized on impaired loans was $0.1 million for the three months ended March 31, 2014, compared to $0.1 million for the three months ended March 31, 2013. Interest income which would have been earned in accordance with the original terms was $0.8 million for the three months ended March 31, 2014, compared to $0.7 million for the three months ended March 31, 2013.

Loan impairment 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 a TDR, regardless of

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

nonperforming status. Acquired and covered impaired loans are not considered or reported as impaired loans. Nonimpaired acquired loans that are subsequently placed on nonaccrual status are reported as impaired loans and included in the tables below. Acquired loans restructured after acquisition are not considered or reported as TDRs if the loans evidenced credit deterioration as of the date of acquisition and are accounted for in pools.

The following tables provide further detail on impaired loans individually evaluated for impairment and the associated ALL. Certain impaired loans do not have a related ALL as the valuation of these impaired loans exceeded the recorded investment.

As of March 31, 2014
Originated Loans				Unpaid				Average
		Recorded		Principal		Related		Recorded
(In thousands)		Investment		Balance		Allowance		Investment
Impaired loans with no related allowance
Commercial
	C&I	$	2,776	$	5,078	$	—	$	4,690
	CRE	21,777		20,050		—		20,196
	Construction	404		2,777		—		2,943
Consumer
	Installment	2,498		3,502		—		2,579
	Home equity line	997		1,309		—		1,004
	Credit card	42		42		—		50
	Residential mortgages	12,137		14,845		—		12,201
Subtotal		40,631		47,603		—		43,663
Impaired loans with a related allowance
Commercial
	C&I	4,367		9,022		2,866		7,406
	CRE	9,799		9,878		2,918		9,864
	Construction	—		—		—		—
Consumer
	Installment	23,320		23,409		1,006		23,548
	Home equity line	5,934		5,934		223		5,891
	Credit card	992		992		307		1,025
	Residential mortgages	14,061		14,161		1,241		14,067
Subtotal		58,473		63,396		8,561		61,801
	Total impaired loans	$	99,104	$	110,999	$	8,561	$	105,464

Note 1: These tables exclude loans fully charged off.

Note 2: The differences between the recorded investment and unpaid principal balance amounts represents partial charge offs.

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As of December 31, 2013
Originated Loans				Unpaid				Average
		Recorded		Principal		Related		Recorded
(In thousands)		Investment		Balance		Allowance		Investment
Impaired loans with no related allowance
Commercial
	C&I	$	2,503	$	6,679	$	—	$	7,256
	CRE	17,871		23,709		—		18,639
	Construction	906		1,179		—		1,035
Consumer
	Installment	2,813		3,978		—		3,338
	Home equity line	1,018		1,347		—		1,079
	Credit card	49		49		—		91
	Residential mortgages	10,250		12,778		—		10,258
Subtotal		35,410		49,719		—		41,696
Impaired loans with a related allowance
Commercial
	C&I	5,551		7,428		3,235		5,009
	CRE	2,744		2,870		229		2,836
	Construction	—		—		—		—
Consumer
	Installment	24,472		24,558		1,014		24,985
	Home equity line	5,707		5,707		223		5,874
	Credit card	1,064		1,064		312		1,238
	Residential mortgages	12,816		12,898		1,133		12,064
Subtotal		52,354		54,525		6,146		52,006
	Total impaired loans	$	87,764	$	104,244	$	6,146	$	93,702

Note 1: These tables exclude loans fully charged off.

Note 2: The differences between the recorded investment and unpaid principal balance amounts represents partial charge offs.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

As of March 31, 2013
Originated Loans				Unpaid				Average
		Recorded		Principal		Related		Recorded
(In thousands)		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

Note 1: These tables exclude loans fully charged off.

Note 2: The differences between the recorded investment and unpaid principal balance amounts represents partial charge offs.

Troubled Debt Restructurings

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. Acquired loans restructured after acquisition are not considered TDRs if the loans evidenced credit deterioration as of the Acquisition Date and are accounted for in pools.

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. Modifications of mortgages retained in portfolio are handled using

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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 FNMA and FHLMC.

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. 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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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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, 2014, December 31, 2013 and March 31, 2013.

			As of March 31, 2014
(Dollars in thousands)			Number of Loans	Recorded Investment		Unpaid Principal Balance
Originated loans
	Commercial
		C&I	40	$	5,588	$	12,546
		CRE	57	16,432		17,079
		Construction	32	2,769		2,777
		Total originated commercial	129	24,789		32,402
	Consumer
		Installment	1,434	25,818		26,911
		Home equity lines	244	6,931		7,243
		Credit card	278	1,034		1,034
		Residential mortgages	320	26,199		29,006
		Total originated consumer	2,276	59,982		64,194
Total originated loans			2,405	$	84,771	$	96,596
Acquired loans
	Commercial
		C&I	1	5		5
		CRE	1	1,695		1,687
		Total acquired commercial	2	1,700		1,692
	Consumer
		Installment	23	797		828
		Home equity lines	40	1,926		1,953
		Residential mortgages	11	758		864
		Total acquired consumer	74	3,481		3,645
Total acquired loans			76	5,181		5,337
Covered loans
	Commercial
		C&I	4	$	677	$	2,232
		CRE	25	39,939		56,485
		Construction	10	2,560		21,340
		Total covered commercial	39	43,176		80,057
	Consumer
		Home equity lines	52	6,269		6,269
		Residential mortgages	25	$	5,970	$	8,153
		Total covered consumer	77	12,239		14,422
Total covered loans			116	$	55,415	$	94,479
Total loans
	Commercial
		C&I	45	$	6,270	$	14,783
		CRE	83	58,066		75,251
		Construction	42	5,329		24,117
		Total commercial	170	69,665		114,151
	Consumer
		Installment	1,457	26,615		27,739
		Home equity lines	336	15,126		15,465
		Credit card	278	1,034		1,034
		Residential mortgages	356	32,927		38,023
		Total consumer	2,427	75,702		82,261
Total loans			2,597	$	145,367	$	196,412

Note 1: The differences between the recorded investment and unpaid principal balance amounts represents partial charge offs.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

			As of December 31, 2013
(Dollars in thousands)			Number of Loans	Recorded Investment		Unpaid Principal Balance
Originated loans
	Commercial
		C&I	35	$	4,449	$	7,660
		CRE	52	15,932		20,569
		Construction	30	905		1,179
		Total originated commercial	117	21,286		29,408
	Consumer
		Installment	1,553	27,285		28,536
		Home equity lines	231	6,725		7,054
		Credit card	307	1,113		1,113
		Residential mortgages	301	23,067		25,676
		Total originated consumer	2,392	58,190		62,379
Total originated loans			2,509	$	79,476	$	91,787
Acquired loans
	Commercial
		C&I	1	6		5
		CRE	1	1,730		1,730
		Total acquired commercial	2	1,736		1,735
	Consumer
		Installment	12	505		542
		Home equity lines	8	245		270
		Residential mortgages	7	431		502
		Total acquired consumer	27	1,181		1,314
Total acquired loans			29	2,917		3,049
Covered loans
	Commercial
		C&I	4	$	1,104	$	2,331
		CRE	24	39,995		57,008
		Construction	10	4,144		24,547
		Total covered commercial	38	45,243		83,886
	Consumer
		Home equity lines	47	5,401		5,421
		Residential Mortgages	1	$	150	$	150
		Total covered consumer	48	5,551		5,571
Total covered loans			86	$	50,794	$	89,457
Total loans
	Commercial
		C&I	40	$	5,559	$	9,996
		CRE	77	57,657		79,307
		Construction	40	5,049		25,726
		Total commercial	157	68,265		115,029
	Consumer
		Installment	1,565	27,790		29,078
		Home equity lines	286	12,371		12,745
		Credit card	307	1,113		1,113
		Residential mortgages	309	23,648		26,328
		Total consumer	2,467	64,922		69,264
Total loans			2,624	$	133,187	$	184,293

Note 1: The differences between the recorded investment and unpaid principal balance amounts represents partial charge offs.

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			As of March 31, 2013
(Dollars in thousands)			Number of Loans	Recorded Investment		Unpaid Principal Balance
Originated loans
	Commercial
		C&I	25	$	2,627	$	7,864
		CRE	45	17,217		22,187
		Construction	31	2,779		3,266
		Total originated 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 originated consumer	2,715	62,949		67,388
Total originated 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
	Commercial
		C&I	28	$	4,350	$	9,822
		CRE	65	65,544		79,613
		Construction	41	9,075		29,768
		Total commercial	134	78,969		119,203
	Consumer
		Installment	1,840	31,117		32,635
		Home equity lines	274	12,030		12,391
		Credit card	343	1,388		1,388
		Residential mortgages	294	23,527		26,118
		Total consumer	2,751	68,062		72,532
Total loans			2,885	$	147,031	$	191,735

Note 1: 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 three months ended March 31, 2014 and 2013 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 three months ended March 31, 2014 and 2013 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 three months ended March 31, 2014 and 2013 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.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

At March 31, 2014, the Corporation had $0.4 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

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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, 2014, December 31, 2013 and March 31, 2013, including TDRs that continue to accrue interest and TDRs included in nonperforming assets.

As of March 31, 2014
	Accruing TDRs						Nonaccruing TDRs						Total		Total
(In thousands)	Current		Delinquent		Total		Current		Delinquent		Total		TDRs		Allowance
Originated loans
Commercial
C&I	$	1,779	$	—	$	1,779	$	541	$	3,268	$	3,809	$	5,588	$	2,265
CRE	9,254		1,884		11,138		2,124		3,170		5,294		16,432		37
Construction	2,363		350		2,713		56		—		56		2,769		—
Total originated commercial	13,396		2,234		15,630		2,721		6,438		9,159		24,789		2,302
Consumer
Installment	22,757		480		23,237		2,352		229		2,581		25,818		1,006
Home equity lines	5,571		150		5,721		1,210		—		1,210		6,931		223
Credit card	930		95		1,025		—		9		9		1,034		307
Residential mortgages	14,749		2,876		17,625		4,968		3,606		8,574		26,199		1,241
Total originated consumer	44,007		3,601		47,608		8,530		3,844		12,374		59,982		2,777
Total originated TDRs	$	57,403	$	5,835	$	63,238	$	11,251	$	10,282	$	21,533	$	84,771	$	5,079
Acquired loans
Commercial
C&I	—		—		—		5		—		5		5		—
CRE	1,695		—		1,695		—		—		—		1,695		—
Total acquired commercial	1,695		—		1,695		5		—		5		1,700		—
Consumer
Installment	707		77		784		—		13		13		797		—
Home equity lines	1,322		494		1,816		110		—		110		1,926		—
Residential mortgages	758		—		758		—		—		—		758		—
Total acquired consumer	2,787		571		3,358		110		13		123		3,481		—
Total acquired TDRs	$	4,482	$	571	$	5,053	$	115	$	13	$	128	$	5,181	$	—
Covered loans
Commercial
C&I	$	300	$	377	$	677	$	—	$	—	$	—	$	677	$	12
CRE	5,035		34,904		39,939		—		—		—		39,939		3,915
Construction	682		1,878		2,560		—		—		—		2,560		68
Total covered commercial	6,017		37,159		43,176		—		—		—		43,176		3,995
Consumer
Home equity lines	5,793		140		5,933		336		—		336		6,269		—
Residential mortgages	2,584		—		2,584		1,399		1,987		3,386		5,970		—
Total covered consumer	8,377		140		8,517		1,735		1,987		3,722		12,239		—
Total covered TDRs	$	14,394	$	37,299	$	51,693	$	1,735	$	1,987	$	3,722	$	55,415	$	3,995
Total loans
Commercial
C&I	$	2,079	$	377	$	2,456	$	546	$	3,268	$	3,814	$	6,270	$	2,277
CRE	15,984		36,788		52,772		2,124		3,170		5,294		58,066		3,952
Construction	3,045		2,228		5,273		56		—		56		5,329		68
Total commercial	21,108		39,393		60,501		2,726		6,438		9,164		69,665		6,297
Consumer
Installment	23,464		557		24,021		2,352		242		2,594		26,615		1,006
Home equity lines	12,686		784		13,470		1,656		—		1,656		15,126		223
Credit card	930		95		1,025		—		9		9		1,034		307
Residential mortgages	18,091		2,876		20,967		6,367		5,593		11,960		32,927		1,241
Total consumer	55,171		4,312		59,483		10,375		5,844		16,219		75,702		2,777
Total TDRs	$	76,279	$	43,705	$	119,984	$	13,101	$	12,282	$	25,383	$	145,367	$	9,074

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

As of December 31, 2013
	Accruing TDRs						Nonaccruing TDRs						Total		Total
(In thousands)	Current		Delinquent		Total		Current		Delinquent		Total		TDRs		Allowance
Originated loans
Commercial
C&I	$	1,438	$	879	$	2,317	$	177	$	1,955	$	2,132	$	4,449	$	665
CRE	10,442		382		10,824		1,208		3,900		5,108		15,932		32
Construction	848		—		848		—		57		57		905		—
Total originated commercial	12,728		1,261		13,989		1,385		5,912		7,297		21,286		697
Consumer
Installment	23,342		1,238		24,580		2,483		222		2,705		27,285		1,014
Home equity lines	5,313		194		5,507		1,206		12		1,218		6,725		223
Credit card	1,046		66		1,112		—		1		1		1,113		312
Residential mortgages	12,276		3,327		15,603		4,360		3,104		7,464		23,067		1,133
Total originated consumer	41,977		4,825		46,802		8,049		3,339		11,388		58,190		2,682
Total originated TDRs	$	54,705	$	6,086	$	60,791	$	9,434	$	9,251	$	18,685	$	79,476	$	3,379
Acquired loans
Commercial
C&I	$	—	$	—	$	—	$	6	$	—	$	6	$	6	$	—
CRE	1,730		—		1,730		—		—		—		1,730		—
Total acquired commercial	1,730		—		1,730		6		—		6		1,736		—
Consumer
Installment	369		136		505		—		—		—		505		—
Home equity lines	182		—		182		63		—		63		245		—
Residential mortgages	245		—		245		32		154		186		431		—
Total acquired consumer	796		136		932		95		154		249		1,181		—
Total acquired TDRs	$	2,526	$	136	$	2,662	$	101	$	154	$	255	$	2,917	$	—
Covered loans
Commercial
C&I	$	362	$	742	$	1,104	$	—	$	—	$	—	$	1,104	$	—
CRE	5,259		34,736		39,995		—		—		—		39,995		3,022
Construction	698		3,446		4,144		—		—		—		4,144		800
Total covered commercial	6,319		38,924		45,243		—		—		—		45,243		3,822
Consumer
Home equity lines	5,377		24		5,401		—		—		—		5,401		—
Residential mortgages	150		—		150		—		—		—		150		—
Total covered consumer	5,527		24		5,551		—		—		—		5,551		—
Total covered TDRs	$	11,846	$	38,948	$	50,794	$	—	$	—	$	—	$	50,794	$	3,822
Commercial
C&I	$	1,800	$	1,621	$	3,421	$	183	$	1,955	$	2,138	$	5,559	$	665
CRE	17,431		35,118		52,549		1,208		3,900		5,108		57,657		3,054
Construction	1,546		3,446		4,992		—		57		57		5,049		800
Total commercial	20,777		40,185		60,962		1,391		5,912		7,303		68,265		4,519
Consumer
Installment	23,711		1,374		25,085		2,483		222		2,705		27,790		1,014
Home equity lines	10,872		218		11,090		1,269		12		1,281		12,371		223
Credit card	1,046		66		1,112		—		1		1		1,113		312
Residential mortgages	12,671		3,327		15,998		4,392		3,258		7,650		23,648		1,133
Total consumer	48,300		4,985		53,285		8,144		3,493		11,637		64,922		2,682
Total TDRs	$	69,077	$	45,170	$	114,247	$	9,535	$	9,405	$	18,940	$	133,187	$	7,201

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

As of March 31, 2013
	Accruing TDRs						Nonaccruing TDRs						Total		Total
(In thousands)	Current		Delinquent		Total		Current		Delinquent		Total		TDRs		Allowance
Originated 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 originated 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 originated consumer	45,604		4,044		49,648		10,302		2,999		13,301		62,949		3,334
Total originated TDRs	$	63,341	$	4,751	$	68,092	$	11,649	$	5,831	$	17,480	$	85,572	$	4,486
Covered loans
Commercial
C&I	$	984	$	739	$	1,723	$	—	$	—	$	—	$	1,723	$	518
CRE	5,371		42,956		48,327		—		—		—		48,327		4,701
Construction	2,482		3,814		6,296		—		—		—		6,296		1,220
Total covered commercial	8,837		47,509		56,346		—		—		—		56,346		6,439
Consumer
Home equity lines	4,616		497		5,113		—		—		—		5,113		—
Total covered TDRs	$	13,453	$	48,006	$	61,459	$	—	$	—	$	—	$	61,459	$	6,439
Total loans
Commercial
C&I	$	2,564	$	739	$	3,303	$	—	$	1,047	$	1,047	$	4,350	$	811
CRE	19,812		42,956		62,768		991		1,785		2,776		65,544		5,470
Construction	4,198		4,521		8,719		356		—		356		9,075		1,310
Total commercial	26,574		48,216		74,790		1,347		2,832		4,179		78,969		7,591
Consumer
Installment	26,031		1,166		27,197		3,744		176		3,920		31,117		1,458
Home equity lines	9,738		737		10,475		1,329		226		1,555		12,030		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 consumer	50,220		4,541		54,761		10,302		2,999		13,301		68,062		3,334
Total TDRs	$	76,794	$	52,757	$	129,551	$	11,649	$	5,831	$	17,480	$	147,031	$	10,925

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 ALL may be increased, adjustments may be made in the allocation of the ALL, or partial charge-offs may be taken to further write-down the carrying value of the loan.

On an ongoing basis, the Corporation monitors the performance of modified loans to their restructured terms.  In the event of a subsequent default, the allowance for loan losses continues to be reassessed on the basis on an individual evaluation of the loan.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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, 2014, as well as the recorded investment in these restructured loans as of March 31, 2014.

	As of March 31, 2014
(Dollars in thousands)	Number of Loans	Recorded Investment
Originated loans
Commercial
C&I	1	$	1,557
CRE	1	376
Construction	—	—
Total originated commercial	2	1,933
Consumer
Installment	—	—
Home equity lines	—	—
Credit card	3	4,839
Residential mortgages	—	—
Total originated consumer	3	$	4,839
Covered loans
Commercial
C&I	—	$	—
CRE	—	—
Construction	—	—
Total covered commercial	—	$	—
Total loans
Commercial
C&I	1	$	1,557
CRE	1	376
Construction	—	—
Total commercial	2	1,933
Consumer
Installment	—	—
Home equity lines	—	—
Credit card	3	4,839
Residential mortgages	—	—
Total consumer	3	4,839
Total	5	$	6,772

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

	As of December 31, 2013
(Dollars in thousands)	Number of Loans	Recorded Investment
Originated loans
Commercial
C&I	4	$	1,773
CRE	6	3,101
Construction	1	231
Total originated commercial	11	5,105
Consumer
Installment	17	170
Home equity lines	—	—
Credit card	33	245
Residential mortgages	1	75
Total originated consumer	51	$	490
Covered loans
Commercial
C&I	—	$	—
CRE	1	—
Construction	1	45
Total covered commercial	2	$	45
Total loans
Commercial
C&I	4	$	1,773
CRE	7	3,101
Construction	2	276
Total commercial	13	5,150
Consumer
Installment	17	170
Home equity lines	—	—
Credit card	33	245
Residential mortgages	1	75
Total consumer	51	490
Total	64	$	5,640

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

	As of March 31, 2013
(Dollars in thousands)	Number of Loans	Recorded Investment
Originated loans
Commercial
C&I	1	$	231
CRE	1	514
Construction	1	707
Total originated commercial	3	1,452
Consumer
Installment	3	8
Home equity lines	—	—
Credit card	3	21
Residential mortgages	—	—
Total originated consumer	6	$	29
Covered loans
Commercial
C&I	—	$	—
CRE	—	—
Construction	—	—
Total covered commercial	—	$	—
Total loans
Commercial
C&I	1	$	231
CRE	1	514
Construction	1	707
Total commercial	3	1,452
Consumer
Installment	3	8
Home equity lines	—	—
Credit card	3	21
Residential mortgages	—	—
Total consumer	6	29
Total	9	$	1,481

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

6.     Goodwill and Other Intangible Assets

Goodwill

Goodwill totaled $741.7 million as of March 31, 2014 and December 31, 2013 and $460.0 million as of March 31, 2013. As discussed in Note 2 (Business Combinations), during the quarter ended March 31, 2014, the Corporation obtained additional information that resulted in a change to a certain acquisition-date fair value estimate relating to the Citizens' acquisition. This purchase accounting adjustment has resulted in an increase to goodwill of approximately $1.9 million to $281.7 million that was recognized as of the Acquisition Date. Prior period amounts appropriately reflect these adjustments.

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, 2013 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, 2014
	Gross Carrying		Accumulated			Net Carrying
(In thousands)	Amount		Amortization			Amount
Core deposit intangibles	$	87,533	$	(18,352	)	$	69,181
Lease intangible	618		(529		)	89
Trust relationships	14,000		(3,451		)	10,549
	$	102,253	$	(22,434	)	$	79,819
	December 31, 2013
	Gross Carrying		Accumulated			Net Carrying
(In thousands)	Amount		Amortization			Amount
Core deposit intangibles	87,533		(16,065		)	71,468
Lease intangible	$	618	$	(520	)	$	98
Trust Relationships	$	14,000	$	(2,811	)	$	11,189
	$	102,253	$	(19,498	)	$	82,755
	March 31, 2013
	Gross Carrying		Accumulated			Net Carrying
(In thousands)	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

Core deposit intangibles comprise the majority of the intangible asset total as of March 31, 2014. As discussed in Note 2 (Business Combinations), the Corporation recorded approximately $84.8 million of intangible assets in connection with its acquisition with Citizens. These assets consist of $70.8 million in core

55

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

deposit intangibles which are being amortized on an accelerated basis over their useful lives of 15 years, and $14.0 million in trust relationship intangibles that are being amortized on an accelerated basis over their useful lives of 12 years. The remaining core deposit intangibles were acquired through various prior acquisitions and are being amortized on an accelerated basis over their useful lives of 10 years.

Amortization expense for intangible assets was $2.9 million in three months endedMarch 31, 2014, compared to $0.3 million in the three months endedMarch 31, 2013. Estimated amortization expense for each of the next five years is as follows: 2014 - $8.8 million; 2015 - $10.4 million; 2016 - $9.2 million; 2017 - $8.2 million; and 2018 - $7.3 million.

7.     Shareholders' Equity

Citizens Acquisition

As a result of the acquisition of Citizens, a warrant issued by Citizens to the U.S. Treasury to purchase shares of Citizens' common stock has been converted into a warrant issued by the Corporation to the U.S. Treasury to purchase 2,408,203 shares of FirstMerit Common Stock. Due to a dividend protection clause, which reduces the exercise price on a penny for penny basis for any dividend paid along with a corresponding increase in the amount of shares available to purchase, the U.S. Treasury can purchase up to 2,493,591 shares at an adjusted exercise price of $18.05 as of March 31,2014. Additional information about the acquisition is included in Note 2 (Business Combinations).

Preferred Stock

The Corporation has 7,000,000 shares of authorized Preferred Stock and has designated 115,000 shares of its Preferred Stock as 5.875% Non-Cumulative Perpetual Preferred Stock, Series A. On February 4, 2013, the Corporation issued 100,000 shares of its 5.875% Non-Cumulative Perpetual Preferred Stock, Series A, which began paying cash dividends on May 4, 2013, quarterly in arrears on the 4^th day of February, May, August and November.

Earnings Per Share

Basic net income per common share is calculated using the two-class method to determine income attributable to common shareholders. Net income attributable to Common Stock is then divided by the weighted-average number of Common Stock outstanding during the period.

Diluted net income per common share is calculated under the more dilutive of either the treasury method or two-class method. Adjustments to the weighted-average number of shares of Common Stock outstanding are made only when such adjustments will dilute earnings per common share. Net income attributable to Common Stock is then divided by the weighted-average number of Common Stock and Common Stock equivalents outstanding during the period.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

The reconciliation between basic and diluted EPS using the two-class method and treasury stock method is presented as follows:

	Three Months Ended March 31,
(In thousands)	2014		2013
Basic EPS:
Net income	$	53,455	$	37,346
Less:
Cash dividends on 5.875% non-cumulative perpetual series A, preferred stock	1,469		930
Income allocated to participating securities	380		380
Net income attributable to common shareholders	$	51,606	$	36,036
Weighted average Common Stock outstanding used in basic EPS	165,060		109,689
Basic net income per common share	$	0.31	$	0.33
Diluted EPS:
Net income attributable to common shareholders	$	51,606	$	36,036
Weighted average Common Stock outstanding used in basic EPS	165,060		109,689
Add: Common Stock equivalents:
Warrant and stock plans	944		549
Weighted average Common and Common Stock equivalent shares outstanding	166,004		110,238
Diluted net income per share	$	0.31	$	0.33

Common Stock equivalents consist of employee stock award plans and the common stock warrant. These common stock equivalents do not enter into the calculation of diluted EPS if the impact would be anti-dilutive, that is, increase EPS or reduce a loss per share. There were no antidilutive potential Common Stock for the three months endedMarch 31,2014 and 1.6 million antidilutive potential Common Stock for the three months endedMarch 31,2013.

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 financial management practices 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.

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, core business banking, 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

57

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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 functions 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 2013 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. In first quarter 2014, Management changed the estimate regarding the funds transfer pricing crediting rate provided on non-maturity deposits, including amounts for prior periods.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 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.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

Substantially all of the Corporation’s business is conducted in the United States of America. The following tables present a summary of financial results as of and for the three months endedMarch 31, 2014 and March 31, 2013:

											FirstMerit
	Commercial		Retail		Wealth			Other			Consolidated
March 31, 2014	QTD		QTD		QTD			QTD			QTD
OPERATIONS:
Net interest income (loss)	$	105,063	$	93,250	$	4,678		$	(9,091	)	$	193,900
Provision for loan losses	5,040		2,617		(45		)	6,924			14,536
Other income	21,306		27,035		13,464			5,465			67,270
Other expenses	61,984		95,773		12,727			(1,153		)	169,331
Net income (loss)	38,574		14,232		3,549			(2,900		)	53,455
AVERAGES:
Assets	9,072,390		5,449,856		241,618			9,380,706			24,144,570

										FirstMerit
	Commercial		Retail		Wealth		Other			Consolidated
March 31, 2013	QTD		QTD		QTD		QTD			QTD
OPERATIONS:
Net interest income (loss)	$	67,225	$	49,754	$	4,152	$	(9,782	)	$	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		38			106,146
Net income (loss)	25,131		11,156		1,352		(293		)	37,346
AVERAGES:
Assets	6,737,236		3,016,495		236,811		4,993,001			14,983,543

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 

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 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 LIBOR 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, 2014, December 31, 2013 and March 31, 2013, 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, 2014				December 31, 2013				March 31, 2013				March 31, 2014				December 31, 2013				March 31, 2013
(In thousands)	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	$	5,389	$	1	$	—	$	—	$	—	$	—	$	117,543	$	10,392	$	126,637	$	11,574	$	145,382	$	17,247

^(a) Included in "Other assets" on the Consolidated Balance Sheets

^(b) Included in "Other liabilities" on the Consolidated Balance Sheets

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

Derivatives Not Designated in Hedge Relationships

As of March 31, 2014, December 31, 2013 and March 31, 2013, 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, 2014				December 31, 2013				March 31, 2013				March 31, 2014				December 31, 2013				March 31, 2013
(In thousands)	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	$	1,603,125	$	44,672	$	1,622,525	$	46,577	$	1,266,831	$	54,590	$	1,603,125	$	44,672	$	1,622,531	$	46,577	$	1,266,831	$	54,590
Mortgage loan commitments	132,614		1,575		90,541		891		214,573		4,152		—		—		—		—		—		—
Forward sales contracts	53,404		167		40,906		384		—		—		—		—		—		—		122,795		284
Credit contracts	—		—		—		—		—		—		49,456		—		49,914		—		40,541		—
Foreign exchange	17,630		52		6,478		50		8,063		105		15,898		42		6,893		50		8,080		96
Other	—		—		—		—		—		—		61,859		—		63,813		—		35,286		—
Total	$	1,806,773	$	46,466	$	1,760,450	$	47,902	$	1,489,467	$	58,847	$	1,730,338	$	44,714	$	1,743,151	$	46,627	$	1,473,533	$	54,970

^(a) Included in "Other assets" on the Consolidated Balance Sheets

^(b) Included in "Other liabilities" on the Consolidated Balance Sheets

Interest Rate Swaps. The Corporation's Back-to-Back Program is an interest rate swap program for commercial loan customers that 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 

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, 2014, the remaining terms on these swap participation agreements generally ranged from less than one year to six 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 $2.9 million as of March 31, 2014. The fair values of the written swap participations were not material at March 31, 2014, December 31, 2013 and March 31, 2013.

Gains and losses recognized in income on non-designated hedging instruments for three months endedMarch 31, 2014 and 2013 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 (In thousands)
		Three Months Ended March 31,
		2014			2013
Mortgage loan commitments	Other operating income	$	684		$	(248	)
Forward sales contracts	Other operating income	(216		)	(223		)
Foreign exchange contracts	Other operating income	(221		)	(191		)
Other	Other operating expense	—			—
Total		$	247		$	(662	)

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 ALCO, 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 ISDA. These agreements are to include thresholds 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

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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 ALCO. The Corporation generally posts collateral in the form of highly rated Government Agency issued bonds or MBS. Collateral posted against derivative liabilities was $67.7 million, $70.5 million and $100.4 million as of March 31, 2014, December 31, 2013 and March 31, 2013, 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 the Corporation has with its financial institution counterparties. These master netting agreements allow the Corporation to settle all derivative contracts held with a single financial institution counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. Collateral, usually in the form of investment securities, is posted by the counterparty with net liability position in accordance with contract thresholds. 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, 2014, December 31, 2013 and March 31, 2013. The swap agreements the Corporation has in place with its commercial customers are not subject to enforceable master netting arrangements, and, therefore, are excluded from these tables.

	As of March 31, 2014
	Gross amounts recognized		Gross amounts offset in the consolidated balance sheet		Net amounts presented in the consolidated balance sheet		Gross amounts not offset in the consolidated balance sheet						Net amount
(In thousands)							Financial instruments (a)			Collateral (b)
Derivative Assets
Interest rate swaps - non-designated	$	2,811	$	—	$	2,811	$	(2,811	)	$	—		$	—
Foreign exchange	33		—		33		(17		)	(16		)	—
Total derivative assets	$	2,844	$	—	$	2,844	$	(2,828	)	$	(16	)	$	—
Derivative liabilities
Interest rate swaps - designated	$	10,392	$	—	$	10,392	$	—		$	(10,392	)	$	—
Interest rate swaps - non-designated	41,861		—		41,861		(2,811		)	(39,050		)	—
Foreign exchange	17		—		17		(17		)	—			—
Total derivative liabilities	$	52,270	$	—	$	52,270	$	(2,828	)	$	(49,442	)	$	—

	As of December 31, 2013
	Gross amounts recognized		Gross amounts offset in the consolidated balance sheet		Net amounts presented in the consolidated balance sheet		Gross amounts not offset in the consolidated balance sheet						Net amount
(In thousands)							Financial instruments (a)			Collateral (b)
Derivative assets
Interest rate swaps - non-designated	$	4,791	$	—	$	4,791	$	(4,791	)	$	—		$	—
Foreign exchange	4		—		4		(46		)	42			—
Total derivative assets	$	4,795	$	—	$	4,795	$	(4,837	)	$	42		$	—
Derivative liabilities
Interest rate swaps - designated	$	11,574	$	—	$	11,574	$	—		$	(11,574	)	$	—
Interest rate swaps - non-designated	41,787		—		41,787		(4,791		)	(36,996		)	—
Foreign exchange	46		—		46		(46		)	—			—
Total derivative liabilities	$	53,407	$	—	$	53,407	$	(4,837	)	$	(48,570	)	$	—

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

	As of March 31, 2013
	Gross amounts recognized		Gross amounts offset in the consolidated balance sheet		Net amounts presented in the consolidated balance sheet		Gross amounts not offset in the consolidated balance sheet						Net amount
(In thousands)							Financial instruments (a)			Collateral (b)
Derivative assets
Interest rate swaps - non-designated	$	59	$	—	$	59	$	(59	)	$	—		$	—
Foreign exchange	78		—		78		(21		)	(57		)	—
Total derivative assets	$	137	$	—	$	137	$	(80	)	$	(57	)	$	—
Derivative liabilities
Interest rate swaps - designated	$	17,247	$	—	$	17,247	$	—		$	(17,247	)	$	—
Interest rate swaps - non-designated	54,531		—		54,531		(59		)	(54,472		)	—
Foreign exchange	21		—		21		(21		)	—			—
Total derivative liabilities	$	71,799	$	—	$	71,799	$	(80	)	$	(71,719	)	$	—

^(a) For derivative assets, this includes any derivative liability fair values that could be offset in the event of counterparty default. For derivative liabilities, this includes any derivative asset fair values that could be offset in the event of counterparty default.

^(b) For derivate assets, this includes the fair value of collateral received by the Corporation from the counterparty. Securities received as collateral are not included in the Consolidated Balance Sheets unless the counterparty defaults. For derivative liabilities, this includes the fair value of securities pledged by the Corporation to the counterparty. These securities are included in the Consolidated Balance Sheets unless the Corporation defaults.

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,
(In thousands)	2014			2013
Service Cost	$	182		$	585
Interest Cost	3,584			2,632
Expected return on assets	(4,009		)	(2,960		)
Amortization of unrecognized prior service costs	634			117
Cumulative net loss	708			1,174
Net periodic pension cost	$	1,099		$	1,548

	Postretirement Benefits
	Three Months Ended March 31,
(In thousands)	2014			2013
Service Cost	$	16		$	25
Interest Cost	164			130
Amortization of unrecognized prior service costs	(117		)	(117		)
Cumulative net loss	59			67
Net periodic postretirement cost	$	122		$	105

For further information on the Corporation's employee benefit plans, refer to Note 13 (Benefit Plans) to the consolidated financial statements in the Corporation's 2013 Form 10-K.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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.

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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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" to the 2013 Form 10-K.

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The following tables present the balance of assets and liabilities measured at fair value on a recurring and nonrecurring basis as of March 31, 2014, December 31, 2013 and March 31, 2013:

			Fair Value by Hierarchy
(In thousands)	March 31, 2014		Level 1		Level 2		Level 3
Recurring fair value measurement
Available-for-sale securities:
Marketable equity securities	$	3,055	$	3,055	$	—	$	—
Non-marketable equity securities	3,281		—		10		3,271
U.S. States and political subdivisions	250,980		—		250,980		—
Residential mortgage-backed securities:
U.S. government agencies	1,023,994		—		1,023,994		—
Commercial mortgage-backed securities:
U.S. government agencies	85,133		—		85,133		—
Residential collateralized mortgage-backed securities:
U.S. government agencies	1,548,104		—		1,548,104		—
Non-agency	8		—		1		7
Commercial collateralized mortgage-backed securities:
U.S. government agencies	172,469		—		172,469		—
Corporate debt securities	51,588		—		—		51,588
Asset-backed securities:
Collateralized loan obligations, non-agency issued	294,559		—		—		294,559
Total available for sale securities	3,433,171		3,055		3,080,691		349,425
Residential loans held for sale	7,143		—		7,143		—
Derivative assets:
Interest rate swaps - fair value hedges	1		—		1		—
Interest rate swaps - nondesignated	44,672		—		44,672		—
Mortgage loan commitments	1,575		—		1,575		—
Forward sale contracts	167		—		167		—
Foreign exchange	52		—		52		—
Total derivative assets	46,467		—		46,467		—
Total fair value of assets (a)	$	3,486,781	$	3,055	$	3,134,301	$	349,425
Derivative liabilities:
Interest rate swaps - fair value hedges	$	10,392	$	—	$	10,392	$	—
Interest rate swaps - nondesignated	44,672		—		44,672		—
Forward sales contracts	—		—		—		—
Foreign exchange	42		—		42		—
Total derivative liabilities	55,106		—		55,106		—
True-up liability	11,983		—		—		11,983
Total fair value of liabilities (a)	$	67,089	$	—	$	55,106	$	11,983
Nonrecurring fair value measurement
Mortgage servicing rights (b)	$	22,631	$	—	$	—	$	22,631
Impaired loans (c)	58,296		—		—		58,296
Other property (d)	11,568		—		—		11,568
Other real estate covered by loss share (e)	19,708		—		—		19,708
Total fair value	$	112,203	$	—	$	—	$	112,203

(a) - There were no transfers between levels 1 and 2 of the fair value hierarchy during the three months ended March 31, 2014.

(b) - MSRs with a recorded investment of $22.5 million were reduced by a specific valuation allowance totaling $0.4 million to a reported carrying value of $22.0 million resulting in recognition of $0.1 million in expense included in loans sales and servicing income in the three months ended March 31, 2014.

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(c) - Collateral dependent impaired loans with a recorded investment of $65.3 million were reduced by specific valuation allowance allocations totaling $7.0 million to a reported net carrying value of $58.3 million.

(d) - Amounts do not include assets held at cost at March 31, 2014. During the three months ended March 31, 2014, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $0.8 million included in noninterest expense.

(e) - Amounts do not include assets held at cost at March 31, 2014. During the three months ended March 31, 2014, the re-measurement of covered foreclosed assets at fair value subsequent to initial recognition resulted in losses $0.4 million included in noninterest expense.

			Fair Value by Hierarchy
(In thousands)	December 31, 2013		Level 1		Level 2		Level 3
Recurring fair value measurement
Available-for-sale securities:
Marketable equity securities	$	3,036	$	3,036	$	—	$	—
Nonmarketable equity securities	3,281		—		10		3,271
U.S. States and political subdivisions	262,367		—		262,367		—
Residential mortgage-backed securities:
U.S. government agencies	969,922		—		969,922		—
Commercial mortgage-backed securities:
U.S. government agencies	69,567		—		69,567		—
Residential collateralized mortgage-backed securities:
U.S. government agencies	1,518,393		—		1,518,393		—
Non-agency	9		—		—		9
Commercial collateralized mortgage-backed securities:
U.S. government agencies	102,268		—		102,268		—
Corporate debt securities	50,644		—		—		50,644
Asset-backed securities
Collateralized loan obligations, nonagency issued	293,687		—		—		293,687
Total available-for-sale securities	3,273,174		3,036		2,922,527		347,611
Residential loans held for sale	11,622		—		11,622		—
Derivative assets:
Interest rate swaps - nondesignated	46,577		—		46,577		—
Mortgage loan commitments	891		—		891		—
Forward sale contracts	384		—		384		—
Foreign exchange	50		—		50		—
Total derivative assets	47,902		—		47,902		—
Total fair value of assets (a)	$	3,332,698	$	3,036	$	2,982,051	$	347,611
Derivative liabilities:
Interest rate swaps - fair value hedges	$	11,574	$	—	$	11,574	$	—
Interest rate swaps - nondesignated	46,577		—		46,577		—
Foreign exchange	50		—		50		—
Total derivative liabilities	58,201		—		58,201		—
True-up liability	11,463		—		—		11,463
Total fair value of liabilities (a)	$	69,664	$	—	$	58,201	$	11,463
Nonrecurring fair value measurement
Mortgage servicing rights (b)	$	23,041	$	—	$	—	$	23,041
Impaired loans (c)	47,870		—		—		47,870
Other property (d)	10,018		—		—		10,018
Other real estate covered by loss share (e)	8,754		—		—		8,754
Total fair value	$	89,683	$	—	$	—	$	89,683

(a) - There were no transfers between levels 1, 2 or 3 of the fair value hierarchy during the year ended December 31, 2013.  

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(b) - MSRs with a recorded investment of $22.8 million were reduced by a specific valuation allowance totaling $0.3 million to a reported carrying value of $22.5 million resulting in a recovery of previously recognized expense of $2.3 million in recoveries included in loans sales and servicing income in the year ended ended December 31, 2013.

(c) - Collateral dependent impaired loans with a recorded investment of $52.6 million were reduced by specific valuation allowance allocations totaling $4.8 million to a reported net carrying value of $47.9 million.

(d) Amounts do not include assets held at cost at December 31, 2013. During the year ended December 31, 2013, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $1.4 million included in noninterest expense.

(e) Amounts do not include assets held at cost at December 31, 2013. During the year ended December 31, 2013, the re-measurement of covered foreclosed assets at fair value subsequent to initial recognition resulted in losses of $1.0 million included in noninterest expense.

			Fair Value by Hierarchy
(In thousands)	March 31, 2013		Level 1		Level 2		Level 3
Recurring fair value measurement
Available-for-sale securities:
Marketable equity securities	$	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		—
Foreign exchange	105		—		105		—
Total derivative assets	58,847		—		58,847		—
Total fair value of assets (a)	$	3,317,141	$	3,212	$	3,262,695	$	51,234
Derivative liabilities:
Interest rate swaps - fair value hedges	17,247		—		17,247		—
Interest rate swaps - nondesignated	54,590		—		54,590		—
Forward sale contracts	284		—		284		—
Foreign exchange	96		—		96		—
Total derivative liabilities	72,217		—		72,217		—
True-up liability	12,783		—		—		12,783
Total fair value of liabilities (a)	$	85,000	$	—	$	72,217	$	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) - Mortgage servicing rights 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 a recovery of $1.3 million in the three months ended March 31, 2013.

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(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.

(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 of $0.1 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, 2014 and 2013, 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 90% 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; MBS; securities issued by the U.S. Treasury; and certain agency and corporate CMO.  The independent pricing service uses industry-standard models to price U.S. Government agencies and MBS 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, 2014, less than 10% of the available-for-sale portfolio is Level 3, which consists of single issuer trust preferred securities and CLOs.

The single issuer trust preferred securities 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.

CLO are securitized products where payments from multiple middle-sized and large business loans are pooled together and segregated into different classes of bonds with payments on these bonds based on their priority within the overall deal structure. The markets for such securities are generally characterized by low trading volumes and wide bid-ask spreads, all driven by more limited market participants. Although estimated prices are generally obtained for such securities, the level of market observable assumptions used is limited in the valuation. Specifically, market assumptions regarding credit adjusted cash flows and liquidity influences on

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discount rates were difficult to observe at the individual bond level. Accordingly, the securities are currently valued by a third-party that primarily utilizes dealer or pricing service prices and, subsequently, verifies this pricing through a disciplined process to ensure proper valuations and to highlight differences in cash flow modeling or other risks to determine if the market perception of the risk of a CLO is beginning to deviate from other similar tranches.  This is done by establishing ranges for appropriate pricing yields for each CLO tranche and, using a standardized cash flow scenario, ensuring yields are consistent with expectations.

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.

Loans held for sale. These loans are regularly traded in active markets through programs offered by FHLMC and FNMA, 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 ALL 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 ALL 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.

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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 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, 2014.

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.

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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 3.46% and 2.91% as of March 31, 2014 and 2013, respectively. Increasing or decreasing the discount rate by one percentage point would change the liability by approximately $0.8 million and $0.7 million, respectively, as of March 31, 2014.

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 $21 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 $7.4 million, $7.1 million and $8.4 million as of March 31, 2014, December 31, 2013 and March 31, 2013, respectively.

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 $34.4 million) less (2) the sum of (A) 25% of the asset discount (approximately $12 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 $4.6 million, $4.3 million and $4.4 million as of March 31, 2014, December 31, 2013 and March 31, 2013, 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.

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The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2014 and 2013 are summarized as follows:

	Three Months Ended March 31,
	2014				2013
(In thousands)	Available-for-sale securities		True-up liability		Available-for-sale securities		True-up liability
Balance at beginning of period	$	347,610	$	11,463	$	49,661	$	12,259
(Gains) losses included in earnings (a)	—		520		—		524
Unrealized gains (losses) (b)	1,768		—		1,560		—
Settlements	47		—		13		—
Net transfers into (out of) Level 3	—		—		—		—
Balance at ending of period	$	349,425	$	11,983	$	51,234	$	12,783

^(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 GAAP.

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, 2014, December 31, 2013 and March 31, 2013. The aggregate fair value, contractual balance and gain or loss on loans held for sale was as follows:

(In thousands)	March 31, 2014		December 31, 2013		March 31, 2013
Aggregate fair value carrying amount	$	7,143	$	11,622	$	14,459
Aggregate unpaid principal / contractual balance	6,955		11,438		13,960
Carrying amount over aggregate unpaid principal (a)	$	188	$	184	$	499

^(a) These changes are included in "Loan sales and servicing income" in the Consolidated Statements of Income.

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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, 2014, December 31, 2013 and March 31, 2013 are shown in the tables below.

	March 31, 2014
	Carrying Amount		Fair Value
(In thousands)			Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	959,285	$	959,285	$	959,285	$	—	$	—
Available-for-sale securities	3,433,171		3,433,171		3,055		3,080,691		349,425
Held-to-maturity securities	3,079,620		2,990,161		—		2,990,161		—
Other securities	148,446		148,446		—		148,446		—
Loans held for sale	7,143		7,143		—		7,143		—
Net originated loans	10,734,797		10,621,047		—		—		10,621,047
Net acquired loans	3,232,941		3,367,024		—		—		3,367,024
Net covered loans and loss share receivable	495,815		495,815		—		—		495,815
Accrued interest receivable	64,555		64,555		—		64,555		—
Derivatives	46,467		46,467		—		46,467		—
Financial liabilities:
Deposits	$	19,811,674	$	19,810,963	$	—	$	19,810,963	$	—
Federal funds purchased and securities sold under agreements to repurchase	926,195		926,195		—		926,195		—
Wholesale borrowings	349,277		352,923		—		352,923		—
Long-term debt	324,430		330,337		—		330,337		—
Accrued interest payable	5,682		5,682		—		5,682		—
Derivatives	55,106		55,106		—		55,106		—

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	December 31, 2013
	Carrying Amount		Fair Value
(In thousands)			Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	917,822	$	917,822	$	917,822	$	—	$	—
Available-for-sale securities	3,273,174		3,273,174		3,036		2,922,527		347,611
Held-to-maturity securities	2,935,688		2,824,240		—		2,824,240		—
Other securities	180,803		180,803		—		180,803		—
Loans held for sale	11,622		11,622		—		11,622		—
Net originated loans	10,116,903		10,017,722		—		—		10,017,722
Net acquired loans	3,494,874		3,367,024		—		—		3,367,024
Net covered loans and loss share receivable	547,943		547,943		—		—		547,943
Accrued interest receivable	52,929		52,929		—		52,929		—
Derivatives	47,902		47,902		—		47,902		—
Financial liabilities:
Deposits	$	19,533,601	$	19,532,368	$	—	$	19,532,368	$	—
Federal funds purchased and securities sold under agreements to repurchase	851,535		851,535		—		851,535		—
Wholesale borrowings	200,600		204,124		—		204,124		—
Long-term debt	324,428		319,711		—		319,711		—
Accrued interest payable	9,339		9,339		—		9,339		—
Derivatives	58,201		58,201		—		58,201		—

	March 31, 2013
	Carrying Amount		Fair Value
(In thousands)			Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	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 originated 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	58,847		58,847		—		58,847		—
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	72,217		72,217		—		72,217		—

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

Cash and cash equivalents – 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 originated loans – The originated 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 acquired and covered loans – Fair values for acquired and covered loans were estimated based on a discounted projected 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 discounted projected cash flows related to the FDIC 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

77

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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.

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 endedMarch 31, 2014and2013, the Corporation sold residential mortgage loans from the held for sale portfolio with unpaid principal balances of $65.6 million and $149.9 million, respectively, and recognized pretax gains of $1.3 million and $4.2 million, respectively, which are included as a component of loan sales and servicing income.As of March 31, 2014and2013, the Corporation retained the related mortgage servicing rights on $57.1 million and $136.4 million, respectively, of the loans sold and receives servicing fees.

The Corporation serviced for third parties approximately $2.7 billion of residential mortgage loans at March 31, 2014 and $2.4 billion at March 31, 2013. For the three months ended March 31, 2014 and 2013, loan servicing fees, not including valuation changes included in loan sales and servicing income, were $1.6 million and $1.5 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,
(In thousands)	2014			2013
Balance at beginning of period	$	22,760		$	21,316
Additions	564			1,267
Amortization	(855		)	(1,205		)
Balance at end of period	22,469			21,378
Valuation allowance at beginning of period	(282		)	(2,564		)
Recoveries (Additions)	(143		)	1,330
Valuation allowance at end of period	(425		)	(1,234		)
Mortgage servicing rights, net carrying balance	$	22,044		$	20,144
Fair value at end of period	$	22,631		$	20,223

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

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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 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 endedMarch 31, 2014 and 2013.

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, 2014 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)	10.09		%
Decrease in fair value from 10% adverse change	$	753
Decrease in fair value from 25% adverse change	$	1,806
Discount rate assumption	9.91		%
Decrease in fair value from 100 basis point adverse change	$	715
Decrease in fair value from 200 basis point adverse change	$	1,383
Expected weighted-average life (in months)	100.8

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.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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 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 issued an order certifying a proposed class and the Bank and Corporation appealed the order to the Eleventh District Court of Appeals. In September 2013, the Eleventh District Court of Appeals affirmed in part and reversed in part the trial court's class certification order, and remanded the case back to the trial court for further consideration, in particular with respect to the class definition. On October 9, 2013, the Bank and Corporation filed with the Eleventh District Court of Appeals an application for reconsideration and application for consideration en banc. On November 20, 2013, the Eleventh District denied those applications. On December 4, 2013, the Bank and Corporation filed a notice of appeal with the Ohio Supreme Court, and on January 3, 2014, they filed with the Ohio Supreme Court a memorandum in support of the Court's exercising its jurisdiction and accepting the appeal. The plaintiffs filed an opposition, and, on April 24, 2014, the Ohio Supreme Court declined to accept jurisdiction.

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, relating to the proposed merger between Citizens and FirstMerit, which merger closed in April 2013. The lawsuits were consolidated under the caption In re Citizens Republic Bancorp, Inc. Shareholder Litigation, Case No. 12-99027-CK (the "Lawsuit"). The consolidated complaint in the Lawsuit alleges that the former directors of Citizens breached their fiduciary duties by failing to obtain the best available price in the merger and by not providing Citizens shareholders with all material information related to the merger, and that FirstMerit and Citizens aided and abetted those alleged breaches of fiduciary duty.  The Complaint sought declaratory and injunctive relief to prevent the consummation of the merger, rescissory damages and other equitable relief.  

The plaintiffs and defendants have entered into a settlement of the Lawsuit, and the court approved the settlement on September 20, 2013. Under the settlement, the defendants amended the joint proxy statement/prospectus relating to the merger to include certain supplemental disclosures to shareholders of Citizens and agreed to pay attorneys' fees and expenses as awarded by the court. An alleged former shareholder of Citizens objected to the settlement and has filed an appeal of the court's approval of the settlement; the settlement will not become final until that appeal has been resolved.

CRBC 401(k) Litigation

Participants in the Citizens Republic Bancorp 401(k) Plan filed a lawsuit in the United States Court for the Eastern District of Michigan in 2011, alleging that Citizens and certain of its officers and directors violated the Employee Retirement Income Security Act by offering Citizens common stock as an investment alternative in the Plan during periods when it was imprudent to do so and by failing to adequately monitor fiduciaries responsible for administering the Plan. The lawsuit, captioned Kidd v. Citizens Republic Bancorp, Inc. et al., Case No. 2:11-cv-11709, asserts claims for monetary and injunctive relief on behalf of a purported class of participants and beneficiaries in the Plan who held Citizens stock in their Plan accounts during the period from

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

April 17, 2008 to "the present." In April 2014, the court denied the defendants' motion to dismiss the second amended complaint, but stayed the action pending the outcome of a case currently before the U.S. Supreme Court.

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 (i) whether a liability has been incurred; or (ii) an estimate of the ultimate or minimum amount of such liability.

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 reserve for unfunded lending commitments at March 31, 2014, December 31, 2013 and March 31, 2013 was $7.5 million, $7.9 million and $4.9 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.

The following table shows the remaining contractual amount of each class of commitments to extend credit as of March 31, 2014, December 31, 2013 and March 31, 2013. 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.

Loan commitments
(In thousands)		March 31, 2014		December 31, 2013		March 31, 2013
	Commercial	$	3,394,877	$	3,367,625	$	2,317,997
	Consumer	2,237,324		2,179,010		1,750,913
	Total loan commitments	$	5,632,201	$	5,546,635	$	4,068,910

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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, 2014, December 31, 2013 and March 31, 2013.

Financial guarantees
(In thousands)		March 31, 2014		December 31, 2013		March 31, 2013
	Standby letters of credit	$	194,118	$	196,400	$	120,508
	Loans sold with recourse	38,072		45,082		44,672
	Total financial guarantees	$	232,190	$	241,482	$	165,180

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 $97.7 million at March 31, 2014, the remaining guarantees extend in varying amounts through 2018.

Asset Sales

The Corporation regularly sells residential mortgage loans service retained to 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, 2014, December 31, 2013 and March 31, 2013, the Corporation had sold $27.5 million, $34.6 million and $34.9 million, respectively, of outstanding residential mortgage loans to GSEs and other investors with recourse provisions. The Corporation had reserved $8.2 million, $8.7 million and $1.6 million as of March 31, 2014, December 31, 2013 and March 31, 2013, respectively, for potential losses from representation and warranty obligations and early payment default recourse provisions.

Due to prior acquisitions, as of March 31, 2014, the Corporation continued to service approximately $6.4 million in manufactured housing loans that were sold with recourse compared to $6.4 million and $8.2 million as of December 31, 2013 and March 31, 2013, respectively. As of March 31, 2014, the Corporation had reserved $1.1 million for potential losses from these manufactured housing loans, consistent with the reserve balance at December 31, 2013 and March 31, 2013.

The total reserve associated with loans sold with recourse was approximately $9.3 million, $9.9 million and $2.7 million as of March 31, 2014, December 31, 2013 and March 31, 2013, respectively, and is included in accrued taxes, expenses and other liabilities on the Consolidated Balance Sheets. 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 repurchase mix and loss severity, based

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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.

Changes in the amount of the repurchase reserve for the three months ended March 31, 2014 and 2013 are as follows:

	Three Months Ended March 31, 2014
(In thousands)	Reserve on residential mortgage loans			Reserve on manufactured housing loans		Total repurchase reserve
Balance at beginning of period	$	8,737		$	1,114	$	9,851
Net realized losses	(2,593		)	—		(2,593		)
Net increase (decrease) to reserve	2,056			3		2,059
Balance at end of period	$	8,200		$	1,117	$	9,317

	Three Months Ended March 31, 2013
(In thousands)	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

14.     Changes and Reclassifications Out of Accumulated Other Comprehensive Income

The following table presents the changes in AOCI by component of comprehensive income for the three months ended March 31, 2014 and 2013:

	Three Months Ended March 31, 2014
(In thousands)	Pre-tax			Tax			After-tax
Unrealized and realized securities gains and losses:
Balance at the beginning of the period	$	(45,072	)	$	(15,775	)	$	(29,297	)
Changes in unrealized securities' holding gains/(losses)	18,044			6,315			11,729
Changes in unrealized securities' holding gains/(losses) that result from securities being transferred into available-for-sale from held-to-maturity	(494		)	(173		)	(321		)
Net losses/(gains) realized on sale of securities reclassified to noninterest income	(56		)	(20		)	(36		)
Balance at the end of the period	(27,578		)	(9,653		)	(17,925		)
Pension plans and other postretirement benefits:
Balance at the beginning and end of the period	(57,812		)	(20,233		)	(37,579		)
Total Accumulated Other Comprehensive Income	$	(85,390	)	$	(29,886	)	$	(55,504	)

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

	Three Months Ended March 31, 2013
(In thousands)	Pre-tax			Tax			After-tax
Unrealized and realized securities gains and losses:
Balance at the beginning of the period	$	85,259		$	29,841		$	55,418
Changes in unrealized securities' holding gains/(losses)	(11,633		)	(4,072		)	(7,561		)
Changes in unrealized securities' holding gains/(losses) that result from securities being transferred into available-for-sale from held-to-maturity	(552		)	(193		)	(359		)
Net losses/(gains) realized on sale of securities reclassified to noninterest income	9			3			6
Balance at the end of the period	73,083			25,579			47,504
Pension plans and other postretirement benefits:
Balance at the beginning and end of the period	(110,188		)	(38,565		)	(71,623		)
Total Accumulated Other Comprehensive Income	$	(37,105	)	$	(12,986	)	$	(24,119	)

The following table presents current period reclassifications out of AOCI by component of comprehensive income for the three months ended March 31, 2014 and 2013:

(In thousands)	Three Months Ended March 31, 2014			Income statement line item presentation
Realized (gains)/losses on sale of securities	$	(56	)	Investment securities losses (gains), net
Tax expense (benefit) (35%)	(20		)	Income tax expense (benefit)
Reclassified amount, net of tax	$	(36	)

(In thousands)	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

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.

Figure 1. Consolidated Financial Highlights

Consolidated Financial Highlights (a)
(Unaudited)	Three Months Ended
(Dollars in thousands, except per share amounts)	March 31,			December 31,			September 30,			June 30,			March 31,
	2014			2013			2013			2013			2013
EARNINGS
Net interest income TE (b)	$	197,854		$	202,145		$	207,079		$	201,605		$	114,376
TE adjustment (b)	3,954			4,077			3,739			3,574			3,027
Provision for originated loan losses	3,654			1,552			2,523			3,151			5,808
Provision for acquired loan losses	7,827			5,515			2,033			—			—
Provision for covered loan losses	3,055			2,983			1,823			4,158			4,138
Noninterest income	67,270			72,420			71,090			69,439			57,392
Noninterest expense	169,331			178,620			210,599			188,888			106,146
Net income	53,455			57,174			40,715			48,450			37,346
Diluted EPS (d)	0.31			0.33			0.23			0.29			0.33
PERFORMANCE RATIOS
Return on average assets (ROA)	0.90		%	0.94		%	0.67		%	0.85		%	1.01		%
Return on average equity (ROE)	7.93		%	8.48		%	6.07		%	7.56		%	8.83		%
Return on average tangible common equity (e)	11.98		%	12.96		%	9.29		%	11.49		%	12.76		%
Net interest margin TE (b)	3.84		%	3.89		%	4.05		%	4.12		%	3.46		%
Efficiency ratio (e)	62.77		%	64.08		%	74.64		%	68.10		%	61.61		%
Number of full-time equivalent employees	4,521			4,570			4,666			4,619			2,767
MARKET DATA
Book value per common share	$	16.62		$	16.38		$	16.08		$	16.06		$	15.99
Tangible book value per common share (e)	11.03			10.77			10.47			10.43			10.83
Period-end common share market value	20.83			22.23			21.72			20.03			16.54
Market as a % of book	125		%	136		%	135		%	125		%	103		%
Cash dividends per common share	$	0.16		$	0.16		$	0.16		$	0.16		$	0.16
Common Stock dividend payout ratio	51.61		%	48.48		%	69.57		%	55.17		%	48.48		%
Average basic common shares	165,060			165,054			165,044			157,863			109,689
Average diluted common shares	166,004			166,097			165,874			158,390			110,238
Period end common shares	165,087			165,056			165,045			165,045			109,746
Common shares repurchased	51			17			7			168			26
Common Stock market capitalization	$	3,438,762		$	3,669,195		$	3,584,777		$	3,305,851		$	1,815,199
ASSET QUALITY (excluding acquired and covered loans) (c)
Gross charge-offs	$	13,160		$	9,913		$	8,515		$	10,969		$	10,776
Net charge-offs	8,022			3,359			2,877			3,349			5,907
Allowance for originated loan losses	92,116			96,484			98,291			98,645			98,843
Reserve for unfunded lending commitments	7,481			7,907			8,493			8,114			4,941
Nonperforming assets (NPAs)	62,711			60,883			55,426			66,177			52,231
Net charge-offs to average loans ratio	0.31		%	0.13		%	0.12		%	0.15		%	0.27		%
Allowance for originated loan losses to period-end loans	0.85		%	0.94		%	1.00		%	1.08		%	1.13		%
Allowance for credit losses to period-end loans	0.92		%	1.02		%	1.09		%	1.17		%	1.18		%
NPAs to loans and other real estate	0.58		%	0.60		%	0.57		%	0.72		%	0.59		%
Allowance for originated loan losses to nonperforming loans	212.01		%	228.62		%	276.19		%	216.97		%	242.21		%
Allowance for credit losses to nonperforming loans	229.23		%	247.35		%	300.06		%	234.82		%	254.32		%
CAPITAL & LIQUIDITY
Period-end tangible common equity to assets (e)	7.69		%	7.70		%	7.41		%	7.58		%	8.03		%
Average equity to assets	11.32		%	11.12		%	11.08		%	11.28		%	11.45		%
Average equity to total loans	19.04		%	18.81		%	18.97		%	18.95		%	17.88		%
Average total loans to deposits	73.11		%	72.84		%	72.11		%	74.04		%	81.36		%
AVERAGE BALANCES
Assets	$	24,144,570		$	24,034,846		$	24,013,594		$	22,810,702		$	14,983,543
Deposits	19,636,506			19,517,476			19,456,231			18,334,244			11,789,784
Originated loans	10,448,383			9,988,587			9,377,826			8,877,754			8,735,307
Acquired loans, including covered loans, less loss share receivable	3,907,802			4,227,693			4,652,101			4,696,740			856,875
Earning assets	20,903,863			20,593,750			20,276,825			19,609,974			13,408,789
Shareholders' equity	2,733,226			2,673,635			2,661,546			2,571,964			1,715,005
ENDING BALANCES
Assets	$	24,498,661		$	23,912,028		$	24,137,730		$	23,534,873		$	15,272,484
Deposits	19,811,674			19,533,601			19,489,533			19,119,722			11,925,767
Originated loans	10,826,913			10,213,387			9,789,139			9,132,625			8,779,970
Acquired loans, including covered loans,less loss share receivable	3,726,952			4,025,758			4,401,711			4,926,888			801,239
Goodwill	741,740			741,740			741,740			741,740			460,044
Intangible assets	79,819			82,755			85,447			88,419			6,055
Earning assets	21,715,302			21,048,910			21,297,250			20,772,749			13,905,342
Total shareholders' equity	2,742,966			2,702,894			2,654,645			2,650,909			1,754,850
NOTES:

(a) - Effective April 12, 2013, the Corporation acquired Citizens. Citizens' assets and liabilities were included in the consolidated balance sheet on the Acquisition Date at fair value. Citizens' results of operations were included in the consolidated statements of comprehensive income beginning on the Acquisition Date.

(b) - The interest income earned on certain earning assets is completely or partially exempt from federal and/or state income taxes. As such, these tax-exempt securities typically yield lower returns than taxable securities. To provide more meaningful comparisons of net interest margins for all earning assets, net interest income on a taxable-equivalent basis is used in

85

calculating net interest margin by increasing the interest earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under generally accepted accounting principles in the Consolidated Statements of Comprehensive Income.

(c) - Due to the impact of business combination accounting and protection of FDIC loss sharing agreements, which provide considerable protection against credit risk, acquired loans and covered assets are excluded from this table to provide for improved comparability to prior periods and better perspective into asset quality trends.

(d) - Net income used to determine diluted EPS was reduced by the cash dividends payable on the Corporation's 5.875% Non-Cumulative Perpetual Preferred Stock, Series A of approximately $1.5 million in each of the three months ended March 31, 2014, December 31, 2013, September 30, 2013 and June 30, 2013 and approximately $0.9 million in the three months ended March 31, 2013.

(e) - See Figure 2 entitled GAAP to Non-GAAP Reconciliations, which presents the computations of certain financial measures related to tangible common equity and efficiency ratios. The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period to period comparisons.

HIGHLIGHTS OF FIRST QUARTER OF 2014 PERFORMANCE

The Corporation reported first quarter 2014 net income of $53.5 million, or $0.31 per diluted share. This compares with $57.2 million, or $0.33 per diluted share, for the fourth quarter 2013 and $37.3 million, or $0.33 per diluted share, for the first quarter 2013. Included in noninterest expense for the first quarter 2014 were approximately $1.0 million of pre-tax merger related costs compared to approximately $6.0 million for the fourth quarter of 2013.

ROE and ROA for the first quarter 2014 were 7.93% and 0.90%, respectively, compared with 8.48% and 0.94%, respectively, for the fourth quarter 2013 and 8.83% and 1.01%, respectively, for the first quarter 2013.

Except as noted, the Citizens' acquisition is primarily contributing to the increases over the prior year period in the income statement and balance sheets. Citizens' results of operations are included in the reported current year to date period results since the Acquisition Date.

Net Interest Income

Net interest income on a TE basis was $197.9 million in the first quarter 2014 compared with $202.1 million in the fourth quarter 2013 and $114.4 million in the first quarter 2013.

Net interest margin was 3.84% for the first quarter 2014 compared with 3.89% for the fourth quarter 2013 and 3.46% for the first quarter 2013. First quarter 2014 net interest margin compression compared with the fourth quarter 2013 was primarily driven by declining volume in the acquired and covered loan portfolios and lower day count, partially offset by increased volume of originated loans, higher investment portfolio yields and lower deposit costs.

Average originated loans were $10.4 billion during the first quarter 2014, an increase of $459.8 million, or 4.60%, compared with the fourth quarter 2013, and an increase of $1.7 billion, or 19.61%, compared with the first quarter 2013. Average originated commercial loans increased$293.3 million, or 4.49%, compared with the prior quarter, and increased$959.7 million, or 16.38%, compared with the year ago quarter.

Average deposits were $19.6 billion during the first quarter 2014, an increase of $0.1 billion, or 0.61%, compared with the fourth quarter 2013, and an increase of $7.8 billion, or 66.56%, compared with the first quarter 2013. During the first quarter 2014, average core deposits, which exclude time deposits, increased$0.3 billion, or 1.58%, compared with the fourth quarter 2013 and increased$6.8 billion, or 64.78%, compared with the first quarter 2013. Average time deposits decreased$148.7 million, or 5.83%, and increased$1.1 billion, or 80.46%, respectively, over the prior and year-ago quarters. For the first quarter 2014, average core deposits accounted for 87.76% of total average deposits, compared with 86.93% for thefourth quarter 2013 and 88.71% for the first quarter 2013.

Average investments increased$182.9 million, or 2.90%, compared with the fourth quarter 2013 and increased$2.8 billion, or 75.35%, compared with the first quarter 2013.

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Noninterest Income

Noninterest income, excluding gains and losses on securities transactions, for the first quarter 2014 was $67.2 million, a decrease of $5.2 million, or 7.19%, from the fourth quarter 2013 and an increase of $9.8 million, or 17.10%, from the first quarter 2013. Noninterest income trends for the recent quarter reflected a slowdown in customer activity across most income categories. Severe weather conditions throughout the Corporation’s footprint factored into these trends. Included in noninterest income in the first quarter 2014 was $1.6 million of gains on covered loans paid in full, compared to $0.8 million and $5.0 million in the fourth quarter 2013 and first quarter 2013, respectively.

Noninterest income, excluding net securities gains and losses, as a percentage of net revenue for the first quarter 2014 was 25.36% compared with 26.38% for fourth quarter 2013 and 33.42% for the first quarter 2013. Net revenue is defined as net interest income, on an TE basis, plus other income, excluding gains and losses from securities sales.

Noninterest Expense

Noninterest expense for the first quarter 2014 was $169.3 million, a decrease of $9.3 million, or 5.20%, from the fourth quarter 2013 and an increase of $63.2 million, or 59.53%, from the first quarter 2013. Overall expense trends compared with the prior quarter were favorable despite higher than usual snow removal and utility costs due to the severe weather throughout the quarter and across the Corporation’s entire footprint. Included in noninterest expense in the first quarter 2014, fourth quarter 2013 and first quarter 2013 were merger related costs associated with the Citizens' acquisition of $1.0 million, $6.0 million and $3.6 million, respectively. The Corporation's efficiency ratio was 62.77% for the first quarter 2014, compared with 64.08% for the fourth quarter 2013 and 61.61% for the first quarter 2013.

The effective tax rate was 30.85% for the first quarter 2014 compared with 30.12% for the fourth quarter 2013 and 29.07% for the first quarter 2013.

The Corporation early adopted an amendment to GAAP in the first quarter 2014 related to the accounting for affordable housing projects that qualify for the low-income housing tax credit. Amortization of the initial investment cost of qualifying projects is now recorded in the provision for income taxes together with the tax credits and benefits received. Previously, the amortization was recorded as other noninterest expense. All prior period amounts have been restated to reflect the adoption of the amendment, which resulted in an offsetting decrease to other noninterest expense and increase to the provision for income taxes of approximately $1.0 million in the first quarter 2014 and $0.8 million in the fourth quarter 2013 and first quarter 2013.

Asset Quality (excluding acquired loans and covered assets)

Due to the impact of business combination accounting and protection against credit risk from FDIC loss sharing agreements, acquired loans and covered assets are excluded from the asset quality discussion to provide for improved comparability to prior periods and better perspective into asset quality trends. Acquired loans are recorded at fair value at the date of acquisition with no allowance brought forward in accordance with business combination accounting. Impaired acquired and covered loans are considered to be performing due to the application of the accretion method under the applicable accounting guidance.

Net charge-offs on originated loans totaled $8.0 million, or 0.31% of average originated loans in the first quarter 2014, compared with $3.4 million, or 0.13% of average originated loans, in the fourth quarter 2013 and

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$5.9 million, or 0.27% of average originated loans, in the first quarter 2013. Quarterly charge-offs on originated loans were elevated this quarter as a result of one commercial credit.

Nonperforming assets totaled $62.7 million at March 31, 2014, an increase of $1.8 million, or 3.00%, compared with December 31, 2013 and an increase of $10.5 million, or 20.06%, compared with March 31, 2013. Nonperforming assets at March 31, 2014 represented 0.58% of period-end originated loans plus other real estate compared with 0.60% at December 31, 2013 and 0.59% at March 31, 2013.

The allowance for originated loan losses totaled $92.1 million at March 31, 2014. At March 31, 2014, the allowance for originated loan losses was 0.85% of period-end originated loans compared with 0.94% at December 31, 2013 and 1.13% at March 31, 2013. The allowance for credit losses is the sum of the allowance for originated loan losses and the reserve for unfunded lending commitments. For comparative purposes, the allowance for credit losses was 0.92% of period end originated loans at March 31, 2014, compared with 1.02% at December 31, 2013 and 1.18% at March 31, 2013. The allowance for credit losses to nonperforming loans was 229.23% at March 31, 2014, compared with 247.35% at December 31, 2013 and 254.32% at March 31, 2013.

Balance Sheet

The Corporation’s total assets at March 31, 2014 were $24.5 billion, an increase of $586.6 million, or 2.45%, compared with December 31, 2013 and an increase of $9.2 billion, or 60.41%, compared with March 31, 2013.

Total deposits were $19.8 billion at March 31, 2014, an increase of $278.1 million, or 1.42%, from December 31, 2013 and an increase of $7.9 billion, or 66.12%, from March 31, 2013. Core deposits totaled $17.4 billion at March 31, 2014, an increase of $354.8 million, or 2.08%, from December 31, 2013 and an increase of $6.8 billion, or 64.06%, from March 31, 2013.

Shareholders’ equity was $2.7 billion as of March 31, 2014 and December 31, 2013 and $1.8 billion as of March 31, 2013. The increase from the prior year mainly reflects the addition of $928.3 million in equity from the Citizen acquisition. The Corporation maintained a strong capital position as tangible common equity to assets was 7.69% at March 31, 2014, compared with 7.70% at December 31, 2013 and 8.03% at March 31, 2013. The common cash dividend per share paid in the first quarter 2014 was $0.16.

Acquisition Update

The Citizens' acquisition was considered a business combination and accounted for under FASB Accounting Standard Codification 805, Business Combinations (ASC 805). All acquired assets and liabilities were recorded at their estimated fair values as of the date of acquisition and identifiable intangible assets were recorded at their estimated fair value. Estimated fair values are considered preliminary and, in accordance with ASC 805, are subject to change up to one year after the acquisition date. This allows for adjustments to the initial purchase entries if additional information relative to closing date fair values becomes available, and we continue to analyze our estimates of the fair values of the assets acquired and the liabilities assumed. Material adjustments to acquisition date estimated fair values are recorded in the period in which the acquisition occurred and, as a result, previously reported results are subject to change. Certain reclassifications of prior periods’ amounts may also be made to conform to the current period’s presentation and would have no effect on previously reported net income amounts.

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During the quarter ended March 31, 2014, we obtained additional information that resulted in a change to a certain Acquisition Date fair value estimate relating to the Citizens' acquisition. This purchase accounting adjustment has resulted in an increase to goodwill of approximately $1.9 million from the prior quarter and was recognized as of Acquisition Date. Prior period amounts appropriately reflect these adjustments.

REGULATION AND SUPERVISION

The United States and the banking, securities and commodities regulators, as well as fiscal and monetary authorities, have taken a number of significant actions over the past several years in response to the 2008 credit crisis. The single most important of these was the enactment of the Dodd-Frank Act in July 2010. The Dodd-Frank Act affects almost every aspect of the nation’s financial services industry, including regulation and compliance of financial institutions and systemically important nonbank financial companies, securities regulation, executive compensation, regulation of derivatives, corporate governance and consumer protection. Hundreds of implementing regulations are required, but these are only partially finished.

The preemption of certain state laws previously granted to national banking associations by the OCC under the National Bank Act have been limited, especially with respect to consumer laws. 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. The Corporation is also subject to regulation by the new CFPB. The Bureau has the power to examine the Corporation and to make and interpret the rules under the various consumer financial laws, and to enforce such laws and rules.

On July 31, 2013, a United States District Court in Washington D.C., granted summary judgment to several retailers and retail trade associations regarding their claims that the Federal Reserve had not properly evaluated and set debit card interchange fees consistent with the Durbin Amendment to the Dodd-Frank Act, and the Federal Reserve is appealing this ruling. If the Federal Reserve’s appeals fail, the Federal Reserve may be forced to revisit its interchange fees analysis and may further decrease permissible interchanges fees from those it initially determined under the Durbin Amendment, which could adversely affect our revenue from these activities.

Many aspects of the Dodd-Frank Act remain subject to intensive agency rulemaking and subsequent public comment prior to implementation, and 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.

On June 10, 2013, the Bank became subject to the Dodd-Frank Act requirements to centrally clear certain interest rate swaps. A cleared swap is subject to continuous collateralization of swap obligations, real time reporting, additional agreements and other regulatory constraints. The CME Group Inc. and LCH.Clearnet Group Ltd. are the Bank's approved clearing houses.

To the extent that the information contained with in this section 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. For additional information on regulatory developments, refer to Item 1. "Business, Regulation and Supervision" of the 2013 Form 10-K.

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New Capital Rules

In July 2013, the Federal Reserve and the OCC jointly adopted final rules effective generally on January 1, 2015 to implement the Basel III and regulatory capital changes required by the Dodd-Frank Act.

These changes will apply to the Corporation and the Bank on a consolidated basis. Among other things, the rules include new minimum risk-based and leverage capital requirements for all banking organizations and removal of references to credit ratings. Consistent with the Basel III framework, the rules include a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5%. A new capital conservation buffer of 2.5% of risk-weighted assets is being phased-in over a transition period ending December 31, 2018. The minimum ratio of tier 1 capital to risk-weighted assets is increased from 4.0% to 6.0% and all banking organizations are now subject to a 4.0% minimum leverage ratio. The required total risk-based capital ratio will not change. Failure to maintain the required common equity tier 1 capital conservation buffer will restrict or prohibit dividends, share repurchases and discretionary bonuses. The new rules provide strict eligibility criteria for regulatory capital instruments, and change the prompt corrective action scheme to reflect the new capital ratios. The final rule also changes the method for calculating risk-weighted assets in an effort to better identify riskier assets requiring higher capital cushions and to enhance risk sensitivity.

Management is evaluating the new rules and their effects on the Corporation and the Bank, but Management believes the Corporation and the Bank will remain "well-capitalized” under the new rules. The new rules generally will be effective for the Corporation and the Bank beginning January 1, 2015, and are subject to change. Other changes are being considered, especially with respect to the largest banking organizations.  For example, in October 2013, the Federal Reserve proposed new standardized minimum liquidity requirements based on a Basel Committee standard for large (at least $250 billion of assets) and internationally active banking organizations and systemically important, nonbank financial companies designated by the Financial Stability Oversight Council.  Less stringent liquidity standards will be applied to smaller banking organizations with at least $50 billion in assets. More recently, in April 2014, the FDIC, OCC and Federal Reserve adopted a final rule requiring a supplementary leverage ratio and a proposed rule to change the denominator for the supplementary leverage ratio that is applicable only to the largest, most interconnected banking organizations. These proposed rules would not apply to an institution of our size.

Stress Testing

The Dodd-Frank Act requires stress testing of bank holding companies and banks, such as the Corporation and the Bank, that have more than $10 billion but less than $50 billion of consolidated assets (“medium-sized companies”). Additional stress testing is required for banking organizations having $50 billion or more of assets. Medium-sized companies, including the Corporation and the Bank, are required to conduct annual company-run stress tests under rules the federal bank regulatory agencies issued in October 2012. The first stress tests by medium-sized companies were submitted to the regulators at the end of March 2014.

Stress tests assess the potential impact of scenarios on the consolidated earnings, balance sheet and capital of a BHC or bank over a designated planning horizon of nine quarters, taking into account the organization's current condition, risks, exposures, strategies and activities, and such factors as the regulators may request of a specific organization. The stress tests are conducted with baseline, adverse, and severely adverse economic scenarios specified by the Federal Reserve for the Corporation and by the OCC for the Bank.

The banking agencies issued Supervisory Guidance on Stress Testing for Banking Organizations With More Than $10 Billion in Total Consolidated Assets on May 17, 2012. On July 30, 2013, the federal banking agencies issued Proposed Supervisory Guidance on Implementing Dodd-Frank Act Company-Run Stress Tests

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for Banking Organizations with Total Consolidated Assets of more than $10 Billion but less than $50 Billion (the "Supervisory Guidance"), which describes supervisory expectations for stress tests by medium-sized companies. Final Supervisory Guidance was issued on March 5, 2014.

Each banking organization's board of directors and senior management are required to approve and review the policies and procedures of their stress testing processes as frequently as economic conditions or the condition of the organization may warrant, and at least annually. They are also required to consider the results of the stress test in the normal course of business, including the banking organization's capital planning (including dividends and share buybacks), assessment of capital adequacy and maintaining capital consistent with its risks and risk management practices. The results of the stress tests are provided to the applicable federal banking agencies. Public disclosure of stress test results is required beginning in 2015. The Corporation submitted its initial stress tests to the regulators in March 2014.

Other Legislation

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 Corporation's cost of doing business, limit or expand permissible activities or affect the competitive balance depending upon whether any of this potential legislation is 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.

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.

NON-GAAP FINANCIAL MEASURES

Figure 2 below presents computations of earnings (loss) and certain other financial measures that exclude certain items that are included in the financial results presented in accordance with GAAP and are therefore considered non-GAAP financial 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. These non-GAAP financial measures are also used by Management to assess the performance of the Corporation's business because Management does not consider the activities related to the adjustments to be indications of ongoing operations. 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

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Net interest income is presented on a TE basis and excludes net securities gains and losses. Net interest income-TE includes the effects of taxable-equivalent adjustments using a 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 TE enhances comparability of net interest income arising from taxable and tax exempt sources and is the preferred industry measurement of net interest income.

Total revenue is calculated as net interest income-TE plus noninterest income and excludes net securities gains or losses. Management believes that noninterest income without net securities gains or losses is more indicative of the Corporation's performance because it isolates income that is primarily client relationship and client transaction driven and is more indicative of normalized operations.

The efficiency ratio is a non-GAAP financial measure which measures productivity and is generally calculated as noninterest expense divided by total revenue-TE. The efficiency ratio removes the impact of the Corporation's intangible asset amortization from the calculation. The adjusted efficiency ratio further removes the impact of the Citizens' merger related charges. The fee income ratio is another non-GAAP financial measure calculated as noninterest income without net securities gains or losses divided by total revenue-TE. Management uses these ratios to monitor performance and believes these measures provide meaningful information to investors.

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 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 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, which was one of the calculations adopted by the regulators in July 2013, and the new Basel III rules, include a common equity Tier I capital to risk-weighted assets capital ratio. 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 including on a risk-weighted basis. Tangible common equity and Tier 1 common equity are not formally defined by GAAP, accordingly, 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 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 the risk categories. The aggregated dollar amount in each category is then multiplied by the risk weighting assigned to that category. The resulting weighted values 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 current banking regulatory requirements.

The Corporation currently calculates its risk-based capital ratios under guidelines adopted by the Federal Reserve based on the Basel I capital ratios. In December 2010, the Basel Committee released its final framework for Basel III, which will strengthen international capital and liquidity regulation and which were adopted, with modifications, in 2013. When fully phased-in, Basel III will change capital requirements and place greater emphasis on common equity. The calculations provided below are estimates, based on the

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Corporation's current understanding of the Basel III framework, the 2013 regulatory capital rules implementing Basel III in the United States, including the Corporation's reading of the requirements, and informal feedback received through the regulatory process. The Corporation's understanding of the Federal Reserve's and the OCC's July 2013 Basel III capital rules is evolving and will likely change as the Corporation gains more experience with the new regulations before these become effective on January 1, 2015. Because the Basel III rules are not formally defined by GAAP, 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.

Tangible book value per share (non-GAAP) and common equity per share (non-GAAP) are approximate measures of the Corporation's common equity and liquidation values. Management uses these values to evaluate these values to the current market value and believes these measures are useful for evaluating the performance of a business consistently, whether acquired or developed internally. These per share values are calculated by deducting preferred stock from shareholder's equity for common equity value (non-GAAP) and deducting intangible assets from the common equity value for tangible book value (non-GAAP). Both values (numerator) are then divided by period end common shares outstanding.

Return on average tangible common shareholders' equity calculates the return on average common shareholders' equity excluding goodwill and intangible assets. This measure is useful for evaluating the performance of a business consistently, whether acquired or developed internally.

        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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Figure 2. GAAP to Non-GAAP Reconciliations

(Dollars in thousands)			March 31, 2014			December 31, 2013			March 31, 2013
Tangible common equity to tangible assets at period end
	Shareholders’ equity (GAAP)		$	2,742,966		$	2,702,894		$	1,754,850
	Less:	Intangible assets	79,819			82,755			6,055
		Goodwill	741,740			741,740			460,044
		Preferred stock	100,000			100,000			100,000
	Tangible common equity (non-GAAP)		$	1,821,407		$	1,778,399		$	1,188,751
	Total assets (GAAP)		24,498,661			23,912,028			15,272,484
	Less:	Intangible assets	79,819			82,755			6,055
		Goodwill	741,740			741,740			460,044
	Tangible assets (non-GAAP)		$	23,677,102		$	23,087,533		$	14,806,385
	Tangible common equity to tangible assets ratio (non-GAAP)		7.69		%	7.70		%	8.03		%
Tier 1 common equity - Basel I
	Shareholders' equity (GAAP)		$	2,742,966		$	2,702,894		$	1,754,850
	Plus:	Net unrealized (gains) losses on available-for-sale securities	17,925			29,297			(47,504		)
		Losses recorded in AOCI related to defined benefit postretirement plans	37,579			37,579			71,623
		Trust preferred securities	74,501			74,500			—
	Less:	Goodwill	741,740			741,740			460,044
		Intangible assets	79,819			82,755			6,055
		Disallowed deferred tax asset	129,200			137,027			—
		Other adjustments	1,774			1,944			1,943
	Tier 1 capital - Basel I (regulatory)		1,920,438			1,880,804			1,310,927
	Less:	Preferred stock	100,000			100,000			100,000
		Trust preferred securities	74,501			74,500			—
	Tier 1 common equity - Basel I (non-GAAP)		$	1,745,937		$	1,706,304		$	1,210,927
	Risk-weighted assets - Basel I (regulatory)		$	16,687,071		$	16,320,833		$	10,609,418
	Tier 1 common equity ratio - Basel I (non-GAAP)		10.46		%	10.45		%	11.41		%
Tier 1 common ratio - Basel III (estimates) (1)
	Shareholders' equity (GAAP)		$	2,742,966		$	2,702,894		$	1,754,850
	Plus:	Net unrealized (gains) losses on available-for-sale securities	17,925			29,297			(47,504		)
		Defined benefit postretirement plans in accumulated other comprehensive income	37,579			37,579			71,623
		Trust preferred securities (long term debt)	—			—			—
	Less:	Non-qualifying goodwill	741,740			741,740			460,044
		Non-qualifying intangible assets	79,819			82,755			6,055
		Disallowed deferred tax asset	173,039			173,039			—
		Other adjustments	1,774			1,944			1,943
	Tier 1 capital - Basel III (regulatory)		1,802,098			1,770,292			1,310,927
	Less:	Preferred stock	100,000			100,000			100,000
	Tier 1 common equity - Basel III (regulatory)		$	1,702,098		$	1,670,292		$	1,210,927
	Risk-weighted assets - Basel III (regulatory)		$	17,445,685		$	17,114,143		$	10,609,418
	Tier 1 common equity ratio - Basel III		9.76		%	9.76		%	11.41		%

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GAAP to Non-GAAP Reconciliations, continued
(Dollars in thousands, except per share amounts)			March 31, 2014		December 31, 2013		March 31, 2013
Book value, common equity value and tangible book value, per share
	Shareholders’ equity (GAAP)		$	2,742,966	$	2,702,894	$	1,754,850
	Less:	Preferred Stock	100,000		100,000		100,000
	Common shareholders' equity		2,642,966		2,602,894		1,654,850
	Less:	Intangible assets	79,819		82,755		6,055
		Goodwill	741,740		741,740		460,044
	Tangible common equity (non-GAAP)		$	1,821,407	$	1,778,399	$	1,188,751
	Period end common shares		165,087		165,056		109,746
	Book value per share		$	16.62	$	16.38	$	15.99
	Common equity per share		16.01		15.77		15.08
	Tangible book value per common share		11.03		10.77		10.83

			Three Months Ended March 31,
(Dollars in thousands)			2014			2013
	Net income		$	53,455		$	37,346
	Adjustments to net income, net of tax (2)
	Plus:	Acquisition related expenses	628			2,340
		Branch closure costs	$	—		$	—
		Adjusted net income (non-GAAP)	$	54,083		$	39,686
	Average assets (GAAP)		$	24,144,570		$	14,983,543
	Average equity (GAAP)		2,733,226			1,715,005
	Less:	Average preferred stock	100,000			62,222
	Average common shareholders' equity (non-GAAP)		2,633,226			1,652,783
	Less:	Average intangible assets	81,253			6,199
		Average goodwill	741,739			460,044
	Average tangible common equity (non-GAAP)		$	1,810,234		$	1,186,540
	Return on average assets		0.90		%	1.01		%
	Adjusted return on average assets net of Citizens' merger related charges (non-GAAP)		0.91		%	1.07		%
	Return on average equity		7.93		%	8.83		%
	Adjusted return on average equity net of Citizens' merger related charges (non-GAAP)		8.02		%	9.38		%
	Return on average tangible common equity (non-GAAP) (3)		11.98		%	12.76		%
	Adjusted return on average tangible common equity net of Citizens' merger related charges (non-GAAP)		12.12		%	13.56		%

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GAAP to Non-GAAP Reconciliations, continued

			Three Months Ended March 31,
(Dollars in thousands)			2014			2013
	Net interest income (GAAP)		$	193,900		$	111,349
	TE Adjustment		3,954			3,027
	Net interest income - TE (non-GAAP)		197,854			114,376
	Noninterest income (GAAP)		67,270			57,392
	Adjustments to noninterest income (2)
	Less:	Securities gains (losses)	56			(9		)
		Adjusted noninterest income (non-GAAP)	67,214			57,401
	Total revenue, TE excluding securities gains (losses) (non-GAAP)		265,068			171,777
	Noninterest expense (GAAP)		169,331			106,146
	Adjustments to noninterest expense (2)
	Less:	Intangible asset amortization	2,936			317
		Acquisition related expenses	966			3,600
		Adjusted noninterest expense (non-GAAP)	$	165,429		$	102,229
	Fee income ratio (non-GAAP)		25.36		%	33.42		%
	Efficiency ratio (non-GAAP)		62.77		%	61.61		%
	Adjusted efficiency ratio net of Citizens' merger related charges (non-GAAP)		62.41		%	59.51		%

(1) The Basel III calculations of Tier 1 common equity, RWA and the Tier 1 common equity ratio are based upon Management's current interpretation of the final Basel III rules issued by the Federal Reserve in July 2013, on a fully phased in basis.

(2) Management believes these adjustments increase comparability of period-to-period results and uses these measures to assess performance and believes investors may find them useful in their analysis of the Corporation. 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.

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RESULTS OF OPERATIONS

Figure 3. Average Tax-Equivalent Balance Sheets-Quarter to Date

	Three Months Ended
	March 31, 2014							December 31, 2013							March 31, 2013
(Dollars in thousands)	Average Balance			Interest (1)		Average Rate		Average Balance			Interest (1)		Average Rate		Average Balance			Interest (1)		Average Rate
ASSETS
Cash and due from banks	$	959,071						$	1,135,601						$	394,896
Investment securities and federal funds sold:
U.S. Treasury securities and U.S. Government agency obligations (taxable)	5,151,341			$	25,910	2.04	%	4,895,147			$	24,236	1.96	%	2,790,039			$	16,294	2.37	%
Obligations of states and political subdivisions (tax exempt)	739,875			8,613		4.72	%	728,408			8,609		4.69	%	541,014			6,595		4.94	%
Other securities and federal funds sold	593,362			6,112		4.18	%	678,087			6,445		3.77	%	366,926			2,944		3.25	%
Total investment securities and federal funds sold	6,484,578			40,635		2.54	%	6,301,642			39,290		2.47	%	3,697,979			25,833		2.83	%
Loans held for sale	6,804			59		3.53	%	10,248			92		3.56	%	14,884			144		3.92	%
Loans, including loss share receivable (2)	14,412,481			171,135		4.82	%	14,281,860			177,275		4.92	%	9,695,926			99,006		4.14	%
Total earning assets	20,903,863			$	211,829	4.11	%	20,593,750			$	216,657	4.17	%	13,408,789			$	124,983	3.78	%
Total allowance for loan losses	(138,891		)					(177,628		)					(141,735		)
Other assets	2,420,527							2,483,123							1,321,593
Total assets	$	24,144,570						$	24,034,846						$	14,983,543
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	5,488,751		$	—	—	%	$	5,546,316		$	—	—	%	$	3,321,660		$	—	—	%
Interest-bearing	3,045,952			737		0.10	%	2,875,375			759		0.10	%	1,300,816			318		0.10	%
Savings and money market accounts	8,698,817			5,559		0.26	%	8,544,097			6,127		0.28	%	5,835,750			5,315		0.37	%
Certificates and other time deposits	2,402,986			2,464		0.42	%	2,551,688			2,500		0.39	%	1,331,558			2,063		0.63	%
Total deposits	19,636,506			8,760		0.18	%	19,517,476			9,386		0.19	%	11,789,784			7,696		0.26	%
Securities sold under agreements to repurchase	884,065			197		0.09	%	948,959			291		0.12	%	906,717			313		0.14	%
Wholesale borrowings	276,324			1,129		1.66	%	200,622			938		1.85	%	136,298			850		2.53	%
Long-term debt	324,428			3,890		4.86	%	324,426			3,897		4.77	%	155,506			1,748		4.56	%
Total interest-bearing liabilities	15,632,572			13,976		0.36	%	15,445,167			14,512		0.37	%	9,666,645			10,607		0.45	%
Other liabilities	290,021							369,728							280,233
Shareholders’ equity	2,733,226							2,673,635							1,715,005
Total liabilities and shareholders’ equity	$	24,144,570						$	24,034,846						$	14,983,543
Net yield on earning assets	$	20,903,863		$	197,853	3.84	%	$	20,593,750		$	202,145	3.89	%	$	13,408,789		$	114,376	3.46	%
Interest rate spread						3.75	%						3.80	%						3.34	%

⁽¹⁾ Interest income includes the effects of taxable-equivalent adjustments using a federal income tax rate of 35% and, where applicable, state income taxes to increase tax-exempt interest income to a taxable-equivalent basis. The net taxable-equivalent adjustment amounts included in the above table aggregated $4.0 million, $4.1 million and $3.0 million for the three months ended March 31, 2014, December 31, 2013 and March 31, 2013, respectively.

⁽²⁾ Nonaccrual loans have been included in the average balances.

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Net Interest Income

Net interest income, the Corporation's principal source of revenue, is the difference between interest income generated by earning assets (primarily loans and investment securities) and interest expense on deposits and borrowings. Net interest income is affected by the volume, pricing, mix and maturity of earnings assets and interest-bearing liabilities; the volume and value of net free funds, such as noninterest-bearing deposits and equity capital; the use of derivative instruments to manage interest rate risk; interest rate fluctuations and competitive conditions within the marketplace; and asset quality.

To make it easier to compare results among several periods and the yields on various types of earning assets (some taxable, some not), net interest income is presented in this discussion on a TE basis. 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 nondeductible portion of interest expense incurred to acquire the tax-free assets. Net interest income presented on a TE basis is a financial measure that is calculated and presented other than in accordance with 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 net interest margin, which is an indicator of the profitability of the earning assets portfolio less cost of funding, is calculated by dividing net interest income-TE by average earning assets. As with net interest income-TE, the net interest margin is affected by the level and mix of earning assets, the proportion of earning assets funded by noninterest-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.

For the three months endedMarch 31, 2014, net interest income-TE was $197.9 million, and the net interest margin was 3.84%. These results compared to net interest income-TE of $202.1 million and net interest margin of 3.89% for three months endedDecember 31, 2013, and net interest income-TE of $114.4 million and net interest margin of 3.46% for the three months endedMarch 31, 2013.

Net interest income presented on a TE basis for the three months ended March 31, 2014increased$83.5 million or 72.99% from the three months ended March 31, 2013 and decreased$4.3 million or 2.12% from the three months endedDecember 31, 2013. The increase from the year ago quarter was predominately driven by the net accretion of the fair value adjustments on loans and certificates of deposits assumed in the Citizens' acquisition. The decrease from fourth quarter 2013 was primarily driven by declining volume in the acquired and covered loan portfolios and lower day count, partially offset by increased volume of originated loans, higher investment portfolio yields and lower deposit costs.

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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.

Figure 4. Changes in Net Interest Income Tax-Equivalent Rate/Volume Analysis

	Three Months Ended March 31,
	2014 and 2013
	Increase (Decrease) In Interest Income/Expense
(In thousands)	Volume			Yield/ Rate			Total
INTEREST INCOME-TE
Investment securities and federal funds sold:
Taxable	$	14,552		$	(1,768	)	$	12,784
Tax-exempt	2,327			(309		)	2,018
Loans held for sale	(71		)	(14		)	(85		)
Loans	54,038			18,091			72,129
Total interest income-TE	70,846			16,000			86,846
INTEREST EXPENSE
Interest on deposits:
Interest bearing	422			(3		)	419
Savings and money market accounts	2,124			(1,880		)	244
Certificates and other time deposits	1,265			(864		)	401
Securities sold under agreements to repurchase	(8		)	(108		)	(116		)
Wholesale borrowings	648			(369		)	279
Long-term debt	2,018			124			2,142
Total interest expense	6,469			(3,100		)	3,369
Net interest income-TE	$	64,377		$	19,100		$	83,477

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-TE 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 noninterest 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 in Figure 5 provides net interest income-TE and net interest margin totals for the three months ended March 31, 2014 and 2013:

Figure 5. Net Interest Income and Net Interest Margin

	Three Months Ended March 31,
(Dollars in thousands)	2014			2013
Net interest income	$	193,900		$	111,349
Tax equivalent adjustment	3,954			3,027
Net interest income-TE	197,854			114,376
Average earning assets	$	20,903,863		$	13,408,789
Net interest margin	3.84		%	3.46		%

The average yield on earning assets increased from 3.78% in the first quarter of 2013 to 4.11% in the first quarter of 2014. Average earning assets include Citizens' assets from the Acquisition Date resulting in the overall increase in total quarterly average earning assets. The net accretion of the fair value adjustments on the acquired loans and certificates of deposits resulted in an increase in average yield during the first quarter of

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2014, thereby causing interest income to increase$86.8 million from year-ago levels. Quarterly average balances for investment securities were also up from the year ago quarter increasing investment interest income by $16.9 million, while lower rates earned on the securities decreased investment interest income by $2.1 million year over year. Higher quarterly average loans outstanding, which include Citizens' loan portfolio from the Acquisition Date, increased loan interest income by $54.0 million and higher yields earned on those loans increased loan interest income by $18.1 million from year-ago levels. Outstanding balances on quarterly average deposits increased as a result of the acquisition of Citizens' deposit portfolio. The increase in average balances were partially offset by lower rates paid on deposits resulting in a net increase of $1.1 million in interest expense for the three months ended March 31, 2014. Quarterly average long-term debt issued in the first quarter of 2013 caused interest expense to increase by $2.1 million during the three months ended March 31, 2014. The cost of funds for the year as a percentage of average earning assets remained flat at approximately 0.07% for the three months ended March 31, 2014and at 0.08%for the three months endedMarch 31, 2013.

Noninterest Income

Excluding investment securities transactions, other income for the three months ended March 31, 2014 totaled $67.2 million, compared with $57.4 million in the same period one year ago. Other income as a percentage of net revenue (net interest income-TE plus other income, less securities transactions) was 25.36% for the three months ended March 31, 2014 compared to 33.42% for the same three month period one year ago Except as noted below, the Citizens acquisition is primarily contributing to the quarter over quarter increase of $9.8 million, or 17.10%, from the first quarter 2013.

Figure 6. Noninterest Income

	Three Months Ended March 31,
(In thousands)	2014		2013
Trust department income	$	9,748	$	5,741
Service charges on deposits	16,648		12,585
Credit card fees	12,152		10,222
ATM and other service fees	5,819		3,335
Bank owned life insurance income	3,582		4,897
Investment services and life insurance	3,516		2,415
Investment securities (losses)/gains, net	56		(9		)
Loan sales and servicing income	3,730		7,863
Other operating income	12,019		10,343
	$	67,270	$	57,392

Bank owned life insurance income decreased$1.3 million, or 26.85%, from the first quarter 2013 as a result of a death benefit received in the first quarter 2013.

Loan sales and servicing income decreased in the three months ended March 31, 2014 by $4.1 million, or 52.56%, compared to the three months ended March 31, 2013. The decrease was due to the rise in mortgage interest rates, slowing the flow of new volume and decreasing the net fair value of the mortgage pipeline in the three months ended March 31, 2014.

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Other operating income increased $1.7 million, or 16.20%, in the three months ended March 31, 2014 compared to the three months ended March 31, 2013. Included in other operating income for the three months ended March 31, 2014 was $1.6 million, in gains from covered loan payoffs and related income compared to $5.0 million in gains in the three months ended March 31, 2013. Gains on covered loan payoffs represent the difference between the credit mark on the paid-off loans less the remaining associated loss share receivable.

Noninterest Expenses

Other expenses for the three months ended March 31, 2014 totaled $169.3 million, compared with $106.1 million in the same period one year ago. Except as noted below, the Citizens acquisition is primarily contributing to the quarter over quarter increase of $63.2 million, or 59.53%.

Figure 7. Noninterest Expense

	Three Months Ended March 31,
(In thousands)	2014		2013
Salaries and wages	$	71,669	$	46,391
Pension and employee benefits	17,344		11,515
Net occupancy expense	17,014		8,282
Equipment expense	11,911		7,349
Taxes, other than federal income taxes	2,774		1,922
Stationery, supplies and postage	4,108		2,096
Bankcard, loan processing, and other costs	10,834		7,840
Advertising	3,516		2,070
Professional services	5,359		5,410
Telephone	2,908		1,177
Amortization of intangibles	2,936		317
FDIC expense	5,971		3,526
Other operating expense	12,987		8,251
	$	169,331	$	106,146

Total salaries and wages increased$25.3 million, or 54.49%, compared to the same year ago period. Pension and employee benefits increased$5.8 million, or 50.62%, from the same year ago period. The increases are mainly attributable to additional full time equivalent employees, incentive expense and salary increases associated with the Citizens' acquisition. The number of full time equivalent employees were 4,521 and 2,767 as of March 31, 2014 and March 31, 2013, respectively.

Income Taxes

Income tax expense was $23.8 million and $15.3 million for the three months ended March 31, 2014 and 2013, respectively. The effective income tax rate for the three months ended March 31, 2014 was 30.85% compared to 29.07% for the three months ended March 31, 2013.

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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 for the three months endedMarch 31, 2014 and 2013. Except as noted below, the Citizens' acquisition is primarily contributing to the period over period variances.

Figure 8. Line of Business Results

	Commercial		Retail		Wealth			Other			FirstMerit Consolidated
March 31, 2014	QTD		QTD		QTD			QTD			QTD
(In thousands)
OPERATIONS:
Net interest income (loss)-TE	$	106,163	$	93,250	$	4,678		$	(6,237	)	$	197,854
Provision for loan losses	5,040		2,617		(45		)	6,924			14,536
Other income	21,306		27,035		13,464			5,465			67,270
Other expenses	61,984		95,773		12,727			(1,153		)	169,331
Net income (loss)	38,574		14,232		3,549			(2,900		)	53,455
AVERAGES:
Assets	9,072,390		5,449,856		241,618			9,380,706			24,144,570
Loans	9,061,371		5,084,555		230,429			36,126			14,412,481
Earnings assets	9,308,031		5,101,740		230,429			6,263,663			20,903,863
Deposits	6,645,640		11,753,015		1,009,811			228,040			19,636,506
Economic Capital	654,922		320,090		57,784			1,700,430			2,733,226

	Commercial		Retail		Wealth		Other			FirstMerit Consolidated
March 31, 2013	QTD		QTD		QTD		QTD			QTD
(In thousands)
OPERATIONS:
Net interest income (loss)-TE	$	68,147	$	49,754	$	4,152	$	(7,677	)	$	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		38			106,146
Net income (loss)	25,131		11,156		1,352		(293		)	37,346
AVERAGES:
Assets	6,737,236		3,016,495		236,811		4,993,001			14,983,543
Loans	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

Loan growth in the loan portfolio during the three months ended March 31, 2014 resulted in an increase in the commercial segment's net income of $13.4 million to $38.6 million. TE adjusted net interest income for the commercial segment totaled $106.2 million for the three months ended March 31, 2014 compared to $68.1 million for the three months ended March 31, 2013, an increase of $38.0 million, or 55.79%. Provision for loan losses for the commercial segment was $5.0 million for the three months ended March 31, 2014 compared to

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$4.8 million for the three months ended March 31, 2013, an increase of $0.3 million. Net charge-offs increased $2.6 million to $4.2 million for the three months ended March 31, 2014. The reduction in other provision for loan losses reflected the results of Management’s focused efforts to improve asset quality and portfolio credit metrics. Noninterest income was $21.3 million for the three months ended March 31, 2014 compared to $19.2 million for the same period in 2013. Reduced gains realized on covered loans paid in full were offset with period over period increases resulting from the acquisition of Citizens. Noninterest expense for the commercial segment was $62.0 million for the three months ended March 31, 2014 compared to $43.0 million for the same period of 2013. The results of Management's efficiency initiative partially offset the increase in expense attributable to the Citizens' acquisition.

The retail segment's net income resulted in an increase of $3.1 million for the three months ended March 31, 2014 to $14.2 million compared to three months ended March 31, 2013. TE adjusted net interest income totaled $93.3 million for the three months ended March 31, 2014 compared to $49.8 million for the three months ended March 31, 2013, an increase of $43.5 million or 87.42%. Provision for loan losses totaled $2.6 million for the three months ended March 31, 2014 compared to $4.1 million for the three months ended March 31, 2013, a decrease of $1.5 million. Net charge-offs declined $0.7 million to $3.5 million for the three months ended March 31, 2014. Noninterest income was $27.0 million for the three months ended March 31, 2014 compared to $24.4 million for the three months ended March 31, 2013, an increase of $2.6 million, or 10.85%. 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 partially offset the increase in income attributable to the Citizens' acquisition. Noninterest expense increased $42.9 million, or 81.02%, to $95.8 million for the three months ended March 31, 2014 compared to $52.9 million for the three months ended March 31, 2013. The results of Management's efficiency initiative partially offset the increase in expense attributable to the Citizens' acquisition.

The wealth segment's net income resulted in an increase of $2.2 million for the three months ended March 31, 2014 to $3.5 million compared to three months ended March 31, 2013. Noninterest income-TE was $13.5 million for the three months ended March 31, 2014 compared to $8.3 million for the three months ended March 31, 2013, an increase of $5.2 million, or 62.02% attributable to greater brokerage and trust fees from the Citizens' acquisition. Noninterest expense resulted in an increase of $2.6 million, or 25.09%, to $12.7 million for the three months ended March 31, 2014 compared to $10.2 million for the three months ended March 31, 2013. The results of Management's efficiency initiative partially offset the increase in expense attributable to the Citizens' acquisition.

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 group, 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 a net loss of $2.9 million for the three months ended March 31, 2014, a decrease of

$2.6 million compared to the three months ended March 31, 2013.

FINANCIAL CONDITION

Acquisitions

On April 12, 2013, the Corporation completed the merger with Citizens, a Michigan corporation with approximately $9.6 billion in assets and 219 branches, in a stock and cash transaction. The total purchase price was approximately $1.3 billion, including 55.5 million shares of its Common Stock issued to Citizen's common shareholders at a fair value of $925.2 million and paid by the Corporation to repurchase Citizens TARP

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Preferred plus accumulated but unpaid dividends and interest of approximately $355.4 million. Additionally, a warrant issued by Citizens to the U.S. Treasury to purchase shares of Citizens' common stock was converted into a warrant with a fair value of $3.0 million issued by the Corporation to the U.S. Treasury to purchase shares of FirstMerit Common Stock. The fair value of the assets acquired, excluding goodwill, totaled $9.3 billion, and included $4.6 billion in loans and $3.2 billion of investment securities. Liabilities assumed were $8.3 billion, including $7.3 billion of deposits.

Additional information can be found in Note 2 (Business Combinations), Note 4 (Loans) and Note 6 (Goodwill and Other Intangible Assets) in the notes to the consolidated financial statements.

Investment Securities

At March 31, 2014, the carrying amount of investment securities were $6.7 billion compared to $6.4 billion at December 31, 2013 and $4.1 billion at March 31, 2013 and are comprised of the following:

Figure 9. Investment Securities

	March 31, 2014				December 31, 2013				March 31, 2013
(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair value
Available-for-sale securities (1)	$	3,471,126	$	3,433,171	$	3,329,117	$	3,273,174	$	3,183,259	$	3,243,835
Held to maturity securities (2)	3,079,620		2,990,161		2,935,688		2,824,240		665,589		673,501
Other securities (3)	148,446		148,446		180,803		180,803		140,984		140,984
Total investment securities	$	6,699,192	$	6,571,778	$	6,445,608	$	6,278,217	$	3,989,832	$	4,058,320

⁽¹⁾ Carried at fair value on the Consolidated Balance Sheets.

⁽²⁾ Carried at amortized cost on the Consolidated Balance Sheets.

⁽³⁾ Carried at amortized cost on the Consolidate Balance Sheets and consist primarily of FHLB and FRB stock.

Available-for-sale securities are held primarily for liquidity, interest rate risk management and long-term yield enhancement. The movement in the investment portfolio between available-for-sale and held to maturity after the first quarter of 2013 was a result of Management's change in intent and commitment to hold certain securities to maturity in order to reduce the impact of the price volatility on accumulated other comprehensive income and certain capital measures, taking into consideration market conditions and changes to regulatory requirements under Basel III capital standards.

The Corporation's available-for-sale investment policy is to invest in securities viewed to have low credit risk, such as U.S. Treasury securities, U.S. Government agency obligations, state and political obligations, MBS, corporate bonds, and CLOs. During the second quarter of 2013, the Bank began purchasing CLOs into its available-for-sale portfolio. Approximately $294.6 million of CLOs are held in the available-for-sale portfolio as of March 31, 2014. These securities are viewed as offering relative value compared to other investment vehicles in addition to being a floating rate asset, which is conducive to the Corporation's asset liability risk position. The new Volcker regulations, as originally adopted, may affect the Corporation's ability to hold these CLOs. Management believes that its holdings of CLOs are not ownership interests in a covered fund prohibited by the Volcker regulations, and, therefore, expects to be able to hold these investments until their stated maturities with no restriction.

The investment securities portfolio was in a net unrealized loss position of $38.0 million at March 31, 2014, compared to a net unrealized loss position of $55.9 million at December 31, 2013 and a net unrealized

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gain position of $60.6 million atMarch 31, 2013. Gross unrealized losses were $72.1 million as of March 31, 2014, compared to $90.2 million and $15.1 million at December 31, 2013andMarch 31, 2013, respectively. The gross unrealized loss positions were primarily related to mortgage-backed securities issued by government agencies and corporate bonds. The decrease in gross unrealized loss positions on temporarily impaired investment securities was primarily due to declining interest rates in the first quarter of 2014 relative to the interest rate environment when the investment securities were purchased. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility, and liquidity conditions. The fair value of investment securities generally decreases when interest rates increase and vice versa. In addition, the fair value generally decreases when credit spreads widen and vice versa.

The Corporation conducts a comprehensive security-level impairment assessment on all securities in an unrealized loss position to determine if OTTI exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Management believes the Corporation will fully recover the cost of the agency MBSs and corporate debt securities in an unrealized loss position at March 31, 2014, 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, 2014 and has recognized the total amount of the impairment in other comprehensive income, net of tax.

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.

105

Loans

Total loans held at March 31, 2014 were $14.6 billion compared to $14.2 billion at December 31, 2013 and $9.6 billion at March 31, 2013. Total loans as of March 31, 2014 include $3.2 billion in acquired loans and $491.0 million in covered loans, excluding the loss share receivable of $54.7 million. Acquired loans resulted from the acquisition of Citizens in the second quarter of 2013 (See Note 2 (Business Combinations). Covered loans resulted from the 2010 FDIC-assisted acquisitions of George Washington and Midwest. These acquired and covered loans were recorded at estimated fair value at the date of acquisition with no carryover of the related ALL. The major categories of loans outstanding are presented in the following tables, segregated into originated, acquired and covered loans.

Figure 10. Period End Loans by Product Type

	As of March 31, 2014
(In thousands)	Originated Loans			Acquired Loans (1)			Covered Loans (2)			Total Loans
Commercial	$	7,083,192		$	1,562,878		$	341,267		$	8,987,337
Residential mortgages	555,971			446,374			49,411			1,051,756
Installment	1,835,522			943,354			5,531			2,784,407
Home equity lines	946,802			283,309			94,828			1,324,939
Credit card	147,917			—			—			147,917
Leases	257,509			—			—			257,509
Subtotal	10,826,913			3,235,915			491,037			14,553,865
Loss share receivable	—			—			54,748			54,748
Total Loans	10,826,913			3,235,915			545,785			14,608,613
Allowance for loan losses	(92,116		)	(2,974		)	(49,970		)	(145,060		)
Net Loans	$	10,734,797		$	3,232,941		$	495,815		$	14,463,553

	As of December 31, 2013
(In thousands)	Originated Loans			Acquired Loans (1)			Covered Loans (2)			Total Loans
Commercial	$	6,648,279		$	1,725,970		$	375,860		$	8,750,109
Residential mortgages	529,253			470,652			50,679			1,050,584
Installment	1,727,925			1,004,569			6,162			2,738,656
Home equity lines	920,066			294,424			97,442			1,311,932
Credit card	148,313			—			—			148,313
Leases	239,551			—			—			239,551
Subtotal	10,213,387			3,495,615			530,143			14,239,145
Loss share receivable	—			—			61,827			61,827
Total Loans	10,213,387			3,495,615			591,970			14,300,972
Allowance for loan losses	(96,484		)	(741		)	(44,027		)	(141,252		)
Net Loans	$	10,116,903		$	3,494,874		$	547,943		$	14,159,720

106

	As of March 31, 2013
(In thousands)	Originated Loans			Acquired Loans (1)		Covered Loans (2)			Total Loans
Commercial	$	5,888,337		$	—	$	621,188		$	6,509,525
Residential mortgages	451,522			—		58,627			510,149
Installment	1,322,795			—		8,081			1,330,876
Home equity lines	812,458			—		113,343			925,801
Credit card	140,721			—		—			140,721
Leases	164,137			—		—			164,137
Subtotal	8,779,970			—		801,239			9,581,209
Loss share receivable	—			—		95,593			95,593
Total Loans	8,779,970			—		896,832			9,676,802
Allowance for loan losses	(98,843		)	—		(47,945		)	(146,788		)
Net Loans	$	8,681,127		$	—	$	848,887		$	9,530,014

⁽¹⁾ Loans acquired from Citizens. No allowance was brought forward in accordance with the acquisition method of accounting.

⁽²⁾ Loans which are covered by loss sharing agreements with the FDIC providing considerable protection against credit risk.

Originated Loans

Total originated loans increased from December 31, 2013by$613.5 million, or 6.01%, and increased from March 31, 2013 by $2.0 billion, or 23.31%. This increase was driven primarily by higher commercial loans, which increased 6.54%from December 31, 2013and20.29% from March 31, 2013 due to the Corporation's expansion into the Chicago, Illinois, Michigan and Wisconsin areas. The growth in commercial loans 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, 2014, leases totaled $257.5 million compared to $239.6 million and $164.1 million at December 31, 2013 and March 31, 2013, respectively, resulting in increases of $18.0 million, or 7.50%, from December 31, 2013 to March 31, 2014 and $93.4 million, or 56.89%, from March 31, 2013 to March 31, 2014.

Residential mortgage loans are originated and then sold into the secondary market or held in portfolio. Total residential mortgage loan balances increased from December 31, 2013 by $26.7 million, or 5.05%, and increased from March 31, 2013 by $104.4 million, or 23.13%, 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, 2013 by $26.7 million, or 2.91%, and increased from March 31, 2013 by $134.3 million, or 16.54%. Installment loans increased from December 31, 2013 by $107.6 million, or 6.23%, and increased from March 31, 2013 by $512.7 million, or 38.76%.

The Corporation has approximately $4.4 billion of loans secured by real estate. Approximately 87.12% of the property underlying these loans is located within the Corporation's primary market area of Ohio, Western Pennsylvania, and Chicago, Illinois.

107

Acquired Loans

Acquired loans are those purchased in the Citizens' acquisition during the second quarter of 2013. The carrying amount of these loans was $3.2 billion as of March 31, 2014. These loans were recorded at estimated fair value in the amount of $4.6 billion at the Acquisition Date with no carryover of the related ALL. The acquired loans were segregated between those considered to be performing (“nonimpaired acquired loans”) and those with evidence of credit deterioration (“acquired impaired loans”). Acquired loans are considered impaired if there is evidence of credit deterioration and if it is probable, at acquisition, all contractually required payments will not be collected. Revolving loans, including lines of credit, are excluded from acquired impaired loan accounting.

For acquired nonimpaired loans, the difference between the Acquisition Date fair value and the contractual amounts due at the Acquisition Date represents the fair value adjustment. Fair value adjustments may be discounts (or premiums) to a loan's cost basis and are accreted (or amortized) to interest income over the loan's remaining life using the level yield method. Acquired nonimpaired loans are reported net of the unamortized fair value adjustment. Nonimpaired acquired loans are placed on nonaccrual status and reported as nonperforming or past due using the same criteria applied to the originated portfolio.

For acquired impaired loans, the excess of cash flows expected over the estimated fair value at the Acquisition Date represents the accretable yield and is recognized as interest income using a level yield method over the remaining life of the pooled impaired loans. Each pool of acquired impaired loans is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Acquired impaired loans in pools with an accretable yield are considered to be accruing and performing even though collection of contractual payments on loans within the pool may be in doubt, because the pool is the unit of accounting and income continues to be accreted on the pool as long as expected cash flows are reasonably estimable.

Covered Loans and Related Loss Share Receivable

The loans purchased in the 2010 FDIC-assisted acquisitions of George Washington and Midwest are covered by loss sharing agreements between the FDIC and the Corporation that afford the Bank significant loss protection. Total covered loans, including the loss share receivable, were $545.8 million as of March 31, 2014, a decrease from December 31, 2013 and March 31, 2013 of $46.2 million, or 7.80%, and $351.0 million, or 39.14%, 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.

These covered loans were recorded at estimated fair value at the date of acquisition with no carryover of the related ALL and are accounted for as acquired impaired loans as described above. A loss share receivable was recorded as of the acquisition date which represents the estimated fair value of reimbursement the Corporation expects to receive from the FDIC for incurred losses on certain covered loans. These expected reimbursements are recorded as part of covered loans.

Allowance for Loan Losses and Reserve For Unfunded Lending Commitments

108

Allowance for Originated Loan Losses

The Corporation maintains what Management believes is an adequate originated ALL. 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. See Note 1 (Summary of Significant Accounting Policies) and Note 5 (Allowance for Loan Losses) in the notes to the consolidated financial statements in this Form 10-Q for further 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.

At March 31, 2014, the allowance for originated loan losses was $92.1 million, or 0.85% of originated loans outstanding, compared to $96.5 million, or 0.94%, and $98.8 million, or 1.13%, at December 31, 2013 and March 31, 2013, respectively. The allowance equaled 212.01% of nonperforming loans at March 31, 2014 compared to 228.62% and 242.21% at December 31, 2013 and March 31, 2013. The additional reserves related to qualitative risk factors totaled $40.9 million at March 31, 2014 compared to $42.9 million and $34.4 million at December 31, 2013 and March 31, 2013, respectively. Nonperforming loans have increased by $1.2 million or 2.95% when compared to December 31, 2013 but increased by $2.6 million, or 6.47%, when compared to March 31, 2013.

Net charge-offs on originated loans were $8.0 million and 0.31% of average originated loans outstanding during the three months ended March 31, 2014 compared to $5.9 million and 0.27% of average originated loans outstanding during the three months ended March 31, 2013. Losses are charged against the ALL as soon as they are identified.

The reserve for unfunded lending commitments at March 31, 2014, December 31, 2013 and March 31, 2013 was $7.5 million, $7.9 million and $4.9 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 originated loan losses and the reserve for unfunded lending commitments, amounted to $99.6 million, $104.4 million and $103.8 million at March 31, 2014, December 31, 2013 and March 31, 2013, respectively.

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Figure 11. Summary of the Allowance for Credit Losses

	Three Months Ended March 31,
	2014			2013
(Dollars in thousands)
Allowance for Originated Loan Losses-beginning of period	$	96,484		$	98,942
Originated loans charged off:
Commercial	5,153			2,672
Mortgage	559			270
Installment	4,584			4,594
Home equity	838			1,306
Credit cards	1,455			1,403
Leases	—			—
Overdrafts	571			531
Total charge-offs	13,160			10,776
Originated Recoveries:
Commercial	1,029			1,245
Mortgage	38			43
Installment	2,738			2,469
Home equity	699			347
Credit cards	418			513
Manufactured housing	11			27
Leases	—			89
Overdrafts	205			136
Total recoveries	5,138			4,869
Originated net charge-offs	8,022			5,907
Provision for originated loan losses	3,654			5,808
Allowance for originated loan losses-end of period	$	92,116		$	98,843
Reserve for Unfunded Lending Commitments
Balance at beginning of period	$	7,907		$	5,433
Provision for/(relief of) credit losses	(426		)	(492		)
Balance at end of period	7,481			4,941
Allowance for credit losses (1)	$	99,597		$	103,784
Average originated loans outstanding	10,448,383			8,735,307
Ratio to average originated loans:
Originated net charge-offs	0.31		%	0.27		%
Provision for originated loan losses	0.14		%	0.27		%
Originated loans outstanding-end of period	10,826,913			8,779,970
Allowance for originated loan losses:
As a percentage of period-end originated loans	0.85		%	1.13		%
As a percentage of nonperforming originated loans	212.01		%	242.21		%
As a multiple of originated net charge-offs	2.83			4.13
Allowance for credit losses:
As a percentage of period-end originated loans	0.92		%	1.18		%
As a percentage of nonperforming originated loans	229.23		%	254.32		%
As a multiple of annualized net charge-offs	3.06			4.33

⁽¹⁾ The reserve for unfunded commitments is recorded in "Other liabilities" in the Consolidated Balance Sheets.

110

Figure 12. Overall Credit Quality by Specific Asset and Risk Categories of Originated Loans

	As of March 31, 2014
	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	$	7,143	$	31,980	$	—	$	25,818	$	6,931	$	1,034	$	26,198	$	99,104
Allowance	2,866		2,918		—		1,006		223		307		1,241		8,561
Collective Loan Impairment Components:
Credit risk-graded loans
Grade 1 loan balance	28,610		539		8,452										37,601
Grade 1 allowance	2		—		2										4
Grade 2 loan balance	135,574		3,797		3,620										142,991
Grade 2 allowance	89		3		3										95
Grade 3 loan balance	940,937		354,108		58,397										1,353,442
Grade 3 allowance	746		456		76										1,278
Grade 4 loan balance	3,276,466		2,147,946		179,795										5,604,207
Grade 4 allowance	27,884		7,892		662										36,438
Grade 5 (Special Mention) loan balance	61,507		38,312		6,857										106,676
Grade 5 allowance	4,734		994		260										5,988
Grade 6 (Substandard) loan balance	25,919		30,354		388										56,661
Grade 6 allowance	3,854		2,592		24										6,470
Grade 7 (Doubtful) loan balance	—		—		—										—
Grade 7 allowance	—		—		—										—
Consumer loans based on payment status:
Current loan balances							1,794,831		937,032		145,192		516,286		3,393,341
Current loans allowance							8,819		10,992		4,627		2,400		26,838
30 days past due loan balance							8,751		1,503		747		7,002		18,003
30 days past due allowance							591		714		549		218		2,072
60 days past due loan balance							2,553		440		395		1,136		4,524
60 days past due allowance							541		307		478		189		1,515
90+ days past due loan balance							3,569		896		549		5,349		10,363
90+ days past due allowance							647		924		890		396		2,857
Total loans	$	4,476,156	$	2,607,036	$	257,509	$	1,835,522	$	946,802	$	147,917	$	555,971	$	10,826,913
Total Allowance for Loan Losses	$	40,175	$	14,855	$	1,027	$	11,604	$	13,160	$	6,851	$	4,444	$	92,116

111

	As of December 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	$	8,053	$	21,522	$	—	$	27,285	$	6,726	$	1,112	$	23,066	$	87,764
Allowance	3,235		229		—		1,014		223		312		1,133		6,146
Collective Loan Impairment Components:
Credit risk-graded loans
Grade 1 loan balance	34,909		241		9,271										44,421
Grade 1 allowance	10		—		2										12
Grade 2 loan balance	108,709		3,730		2,900										115,339
Grade 2 allowance	80		3		3										86
Grade 3 loan balance	802,624		340,782		54,446										1,197,852
Grade 3 allowance	869		421		85										1,375
Grade 4 loan balance	3,083,312		2,057,357		167,022										5,307,691
Grade 4 allowance	28,114		9,255		732										38,101
Grade 5 (Special Mention) loan balance	70,978		34,687		5,750										111,415
Grade 5 allowance	5,385		1,023		246										6,654
Grade 6 (Substandard) loan balance	30,982		50,393		162										81,537
Grade 6 allowance	5,288		4,144		13										9,445
Grade 7 (Doubtful) loan balance	—		—		—										—
Grade 7 allowance	—		—		—										—
Consumer loans based on payment status:
Current loan balances							1,678,155		909,799		145,332		481,338		3,214,624
Current loans allowance							7,964		10,063		5,123		2,403		25,553
30 days past due loan balance							14,524		1,683		696		16,335		33,238
30 days past due allowance							1,044		685		541		482		2,752
60 days past due loan balance							3,729		906		449		1,276		6,360
60 days past due allowance							920		710		542		221		2,393
90+ days past due loan balance							4,232		952		724		7,238		13,146
90+ days past due allowance							993		1,219		1,222		533		3,967
Total loans	$	4,139,567	$	2,508,712	$	239,551	$	1,727,925	$	920,066	$	148,313	$	529,253	$	10,213,387
Total Allowance for Loan Losses	$	42,981	$	15,075	$	1,081	$	11,935	$	12,900	$	7,740	$	4,772	$	96,484

112

	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

113

Allowance for Acquired Loan Losses

An ALL for nonimpaired acquired loans is estimated using a methodology similar to that used for originated loans, that is, based on a specific reserve analysis for loans individually evaluated for impairment and based on historical loss rates for loans collectively evaluated for impairment. If the computed allowance is greater than the remaining fair value discount, the excess is added to the allowance through a provision for loan losses. If the computed allowance is less, no additional allowance is recognized.

Charge-offs and actual losses on an acquired loan first reduce any remaining fair value discount for that loan. Once a loan's discount is depleted, charge-offs and actual losses are applied against the ALL. During the three months ended March 31, 2014, net charge-offs of $5.6 million were recorded mainly related to consumer loans that were written off in accordance with the Corporation's credit policies based on a predetermined number of days past due. As of March 31, 2014, the computed allowance was less than the remaining fair value discount, therefore, no ALL for acquired nonimpaired loans was required.

The ALL for acquired impaired loans is determined by comparing the present value of the cash flows expected to be collected to the carrying amount for a given pool of loans. Management reforecasts the estimated cash flows expected to be collected on acquired impaired loans on a quarterly basis. Expected cash flows 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 re-forecasted, the prior reporting periods estimated cash flows are adjusted to reflect the actual cash received and credit events that transpired during the current reporting period.

Increases in expected cash flows of acquired impaired loans subsequent to 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 ALL.

If the present value of expected cash flows for a pool is less than its carrying value, impairment is recognized by an increase in the ALL and a charge to the provision for loan losses. If the present value of expected cash flows for a pool is greater than its carrying value, any previously established ALL is reversed and any remaining difference increases the accretable yield which will be taken into interest income over the remaining life of the loan pool.

During the three months ended March 31, 2014, provision for acquired impaired loan losses of $2.2 million was recognized resulting in an allowance for acquired impaired loan losses of $3.0 million as of March 31, 2014.

Allowance for Covered Loan Losses

The ALL on covered loans is estimated similar to acquired loans as described above except any increase to the allowance and provision for loan losses is partially offset by an increase in the loss share receivable for the portion of the losses recoverable under the loss sharing agreements with the FDIC. Additionally, the

114

Corporation elected to account for all covered loans as impaired except for those loans acquired with revolving privileges, which are outside the scope of impaired loan accounting, and, therefore, are accounted for as covered nonimpaired loans. As of March 31, 2014, the computed allowance was less than the remaining fair value discount, therefore, no allowance for covered nonimpaired loans was recorded.

The allowance for covered impaired for loan losses was $50.0 million, $44.0 million and $47.9 million as of March 31, 2014, December 31, 2013 and March 31, 2013, respectively. During the three months ended March 31, 2014, impairment on certain covered loans was recorded by a charge to the provision for covered loan losses of $7.9 million with a related increase of $4.8 million to the loss share receivable for the portion of the losses recoverable under the loss sharing agreements. The net provision from the impaired covered portfolio was $3.1 million in the three months ended March 31, 2014 compared to $4.1 million in the three months ended March 31, 2013.

Asset Quality (excluding acquired loans and covered assets)

Due to the impact of business combination accounting and protection against credit risk from FDIC loss sharing agreements, acquired loans and covered assets are excluded from the asset quality discussion to provide for improved comparability to prior periods and better perspective into asset quality trends. Acquired loans are recorded at fair value with no allowance brought forward in accordance with business combination accounting. Acquired and covered impaired loans with an accretable yield are considered to be accruing and performing even though collection of contractual payments on loans within the pool may be in doubt, because the pool is the unit of accounting and income continues to be accreted on the pool as long as expected cash flows are reasonably estimable.

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 in this Form 10-Q, provide detailed information regarding the Corporation's credit policies and practices and the credit-risk grading process for commercial loans.

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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 estateacquired through foreclosure in satisfaction of a loan.

Figure 13. Asset Quality

(Dollars in thousands)	March 31, 2014			December 31, 2013			March 31, 2013
Nonperforming originated loans:
Restructured nonaccrual loans:
Commercial loans	$	9,159		$	7,297		$	4,179
Consumer loans	12,374			11,388			13,301
Total restructured loans	21,533			18,685			17,480
Other nonaccrual loans:
Commercial loans	17,963			18,377			19,664
Consumer loans	3,952			5,141			3,665
Total nonaccrual loans	21,915			23,518			23,329
Total nonperforming originated loans	43,448			42,203			40,809
Other real estate, excluding covered assets	19,263			18,680			11,422
Total nonperforming assets	$	62,711		$	60,883		$	52,231
Originated loans past due 90 days or more accruing interest	$	11,860		$	11,176		$	12,393
Total nonperforming assets as a percentage of total originated loans and ORE	0.58		%	0.60		%	0.59		%

Total nonperforming assets as of March 31, 2014 were $62.7 million, an increase of $1.8 million, or 3.00%, from December 31, 2013 and an increase of $10.5 million, or 20.06%, from March 31, 2013. Total originated loans past due 30-89 days totaled $48.9 million at March 31, 2014, a decrease of $14.7 million, or 23.08%, from December 31, 2013 and an increase of $9.2 million, or 23.30%, from March 31, 2013. Delinquency trends are observable in the Allowance for Loan Loss Allocation tables within this section. Commercial nonperforming originated loans increased$1.4 million, or 5.64%, from December 31, 2013 and increased$3.3 million, or 13.75%, from March 31, 2013. Total OREO increased$0.6 million, or 3.12%, from December 31, 2013 and $7.8 million, or 68.65%, from March 31, 2013. As of March 31, 2014, other real estate includes a former banking facility that the Corporation no longer intends to use for banking purposes valued at approximately $0.8 million.

Net charge offs within the originated consumer portfolio were $3.9 million for the three months ended March 31, 2014 compared to $4.6 million for the three months ended March 31, 2013. Average FICO scores on the originated consumer portfolio subcomponents are excellent with average scores on installment loans at 749, home equity lines at 777, residential mortgages at 750 and credit cards at 771.

Originated 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, 2014, accruing originated loans 90 days or more past due totaled $11.9 million compared to $11.2 million and $12.4 million at December 31, 2013 and March 31, 2013,

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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 ALL 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.

Figure 14. Nonaccrual Originated Commercial Loan Flow Analysis

	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
(In thousands)	2014			2013			2013			2013			2013
Nonaccrual originated commercial loans beginning of period	$	25,674		$	19,140		$	28,935		$	23,843		$	21,766
Credit Actions:
New	14,334			10,527			943			15,197			7,217
Loan and lease losses	—			—			(1,223		)	(1,348		)	(2,191		)
Charged down	(5,176		)	(885		)	—			(2,639		)	(481		)
Return to accruing status	(1,088		)	(221		)	(394		)	(3,981		)	(179		)
Payments	(6,622		)	(2,887		)	(9,121		)	(2,137		)	(2,289		)
Sales	—			—			—			—			—
Nonaccrual originated commercial loans end of period	$	27,122		$	25,674		$	19,140		$	28,935		$	23,843

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 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 acquired and covered loans, totaled $84.8 million, $79.5 million and $85.6 million as of March 31, 2014, December 31, 2013 and March 31, 2013, respectively. These TDRs are predominately composed of originated consumer installment loans, first and second lien residential mortgages and home equity lines of credit and represented 70.76%, 73.22% and 73.56%, respectively, of the total originated TDR portfolio as of March 31, 2014, December 31, 2013 and March 31, 2013, 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

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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 FNMA and FHLMC.

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.

Acquired and covered 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, 2014 totaled $19.6 billion compared to $19.5 billion and $11.8 billion as of December 31, 2013 and March 31, 2013, 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.

Figure 15. Deposit Products and Respective Rates

	Three Months Ended
	March 31, 2014				December 31, 2013				March 31, 2013
(Dollars in thousands)	Average Balance		Average Rate		Average Balance		Average Rate		Average Balance		Average Rate
Noninterest-bearing	$	5,488,751	—	%	$	5,546,316	—	%	$	3,321,660	—	%
Interest-bearing	3,045,952		0.10	%	2,875,375		0.10	%	1,300,816		0.10	%
Savings and money market accounts	8,698,817		0.26	%	8,544,097		0.28	%	5,835,750		0.37	%
Certificates and other time deposits	2,402,986		0.42	%	2,551,688		0.39	%	1,331,558		0.63	%
Total customer deposits	19,636,506		0.18	%	19,517,476		0.19	%	11,789,784		0.26	%
Securities sold under agreements to repurchase	884,065		0.09	%	948,959		0.12	%	906,717		0.14	%
Wholesale borrowings	276,324		1.66	%	200,622		1.85	%	136,298		2.53	%
Long-term debt	324,428		4.86	%	324,426		4.77	%	155,506		4.56	%
Total funds	$	21,121,323	0.27	%	$	20,991,483	0.37	%	$	12,988,305	0.33	%

Average demand deposits comprised 43.46% of average deposits during the three months ended March 31, 2014 compared to 43.15% during the three months ended December 31, 2013 and 39.21% during the three months ended March 31, 2013. Savings accounts, including money market products, made up 44.30% of average deposits during the three months ended March 31, 2014 compared to 43.78% during the three months ended December 31, 2013 and 49.50% during the three months ended March 31, 2013. Certificates and other time deposits made up 12.24% of average deposits during the three months ended March 31, 2014, 13.07% during the three months ended December 31, 2013 and 11.29% during the three months ended March 31, 2013.

The average cost of deposits, securities sold under agreements to repurchase, wholesale borrowings and long-term debt was down9 basis points compared to the same period one year ago, or 20.00% for the three months ended March 31, 2014 due to a drop in interest rates.

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The following table in Figure 16 summarizes certificates and other time deposits in amounts of $100 thousand or more for the three months ended March 31, 2014 by time remaining until maturity.

Figure 16. Certificates and Other Time Deposits in increments of $100 Thousand or More

	Amount
Time until maturity:	(In thousands)
Under 3 months	$	181,698
3 to 6 months	195,177
6 to 12 months	254,916
Over 12 months	193,937
Total	$	825,728

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 $2.7 billion as of March 31, 2014, compared with $2.7 billion as of December 31, 2013 and $1.8 billion as of March 31, 2013. The Corporation's Common Stock is traded on the NYSE under the symbol FMER with 12,566 holders of record at March 31, 2014.

•At March 31, 2014 the Corporation's common equity value per common share was $16.01 based on approximately 165.1 million shares outstanding at March 31, 2014, compared to $15.77 based on approximately 165.1 million shares outstanding at December 31, 2013, and $15.08 based on approximately 109.7 million shares outstanding at March 31, 2013.

•At March 31, 2014, the Corporation's tangible book value per common share was $11.03 compared to $10.77 at December 31, 2013, and $10.83 at March 31, 2013.

•At March 31, 2014, the Corporation's book value per common share was $16.62 compared to $16.38 at December 31, 2013, and $15.99 at March 31, 2013.

•At March 31, 2014, the Corporation had approximately 5.1 million treasury shares, compared to approximately 5.1 million treasury shares at December 31, 2013 and approximately 5.4 million treasury shares at March 31, 2013. Treasury shares are typically issued as needed in connection with stock-based compensation awards and for other corporate purposes.

During the first quarter of 2014, the Corporation made a dividend payment of $0.16 per share, or $26.3 million, on its Common Stock. As of March 31, 2014, the dividend of $0.16 cents per share has an indicated annual rate of $0.64 per share. Also in the first quarter of 2014, the Corporation made a quarterly dividend payment of $1.5 million, or $14.69 per share, or $0.36725 per depositary share, on the Corporation's 5.875% Non-Cumulative Perpetual Preferred Stock, Series A.

The following table in Figure 17 shows activities that caused the change in outstanding Common Stock over the past five quarters.

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Figure 17. Changes in Common Stock Outstanding

	2014		2013		2013		2013		2013
(Shares in thousands)	1st qtr		4th qtr		3rd qtr		2nd qtr		1st qtr
Beginning of period	165,056		165,045		165,045		109,746		109,649
Issued (repurchased)	(51	)	(13	)	7		55,467		(26	)
Reissued (returned) under employee benefit plans	82		24		(7	)	(168	)	123
End of period	165,087		165,056		165,045		165,045		109,746

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 7.69% at March 31, 2014, compared with 7.70% at December 31, 2013 and 8.03% at March 31, 2013.

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 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 in 2010 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. No loans acquired in the Citizens merger are subject to loss share receivables from the FDIC.

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As of March 31, 2014, the Corporation, on a consolidated basis, as well as the Bank, exceeded the minimum capital levels of the well-capitalized category.

Figure 18. Capitalization Tables

(Dollars in thousands)	March 31, 2014				December 31, 2013				March 31, 2013
Consolidated
Total equity	$	2,742,966	11.20	%	$	2,702,894	11.30	%	$	1,754,850	11.49	%
Common equity (a)	2,642,966		10.79	%	2,602,894		10.89	%	1,654,850		10.84	%
Tangible common equity (a) (b)	1,821,407		7.69	%	1,778,399		7.70	%	1,188,751		8.03	%
Tier 1 capital (a) (b)	1,920,438		11.51	%	1,880,804		11.52	%	1,310,927		12.36	%
Total risk-based capital (a) (b)	2,322,908		13.92	%	2,279,891		13.97	%	1,693,702		15.96	%
Leverage (b)	1,920,438		8.27	%	1,880,804		8.14	%	1,310,927		9.07	%
	March 31, 2014				December 31, 2013				March 31, 2013
Bank Only
Total equity	$	2,895,511	11.83	%	$	2,859,515	11.98	%	$	1,521,149	9.97	%
Common equity (a)	2,895,511		11.83	%	2,859,515		11.98	%	1,521,149		9.97	%
Tangible common equity (a) (b)	2,073,952		8.77	%	2,036,941		8.84	%	1,055,050		7.13	%
Tier 1 capital (a) (b)	2,017,602		12.09	%	1,978,140		12.14	%	1,072,153		10.12	%
Total risk-based capital (a) (b)	2,164,993		12.97	%	2,122,124		13.02	%	1,199,763		11.32	%
Leverage (b)	2,017,602		8.71	%	1,978,140		8.58	%	1,072,153		7.43	%

^(a) See Figure 2 entitled GAAP to Non-GAAP Reconciliations,which presents the computations of certain financial measures related to tangible common equity and efficiency ratios. The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period to period comparisons.

^(b) December 31, 2013 data reflects purchase accounting adjustments which resulted in an increase to goodwill of approximately $1.9 million from that previously reported.

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 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 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

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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.

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, 2014and2013:

Figure 19. Net Interest Income Simulation Results

	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, 2014	(5.22	)%	2.16	%	4.22	%	5.95	%
March 31, 2013	(7.50	)%	3.51	%	6.41	%	8.98	%

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 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.

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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 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 EVE. 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, 2014 and 2013:

Figure 20. EVE Simulation Results

	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, 2014	(2.35	)%	(0.71	)%	(1.12	)%	(2.06	)%
March 31, 2013	(6.95	)%	1.48	%	1.36	%	0.05	%

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.

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. Core deposits comprised approximately 87.97% of total deposits at March 31, 2014. The Corporation also has available unused

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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 2014 in addition to unencumbered, or unpledged, investment securities that totaled $2.6 billion as of March 31, 2014.

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, 2014, lower cost core deposits increased by $354.8 million from the fourth quarter 2013. In the aggregate, deposits increased $278.1 million from December 31, 2013. Securities sold under agreements to repurchase increased$74.7 million from December 31, 2013. Wholesale borrowings and long-term debt had a net increase of $148.7 million from December 31, 2013. The Corporation’s loan to deposit ratio increased to 73.74% as of March 31, 2014 from 73.21% as of December 31, 2013.

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, 2014, the Bank paid $37.3 million in dividends to the Corporation. As of March 31, 2014, the Bank had an additional $142.0 million available to pay dividends without regulatory approval.

Operational Risk Management

Like all businesses, we are subject to operational risks, including, but not limited to, risks of human error, internal processes and systems that turn out to be inadequate, and external events. These events include, among other things, threats to our cybersecurity, since we rely upon information systems and the internet to conduct our business activities. We also are exposed to the costs of complying with laws, regulations and prescribed practices, which are changing rapidly and in large volumes, especially as a result of the Dodd-Frank Act and the proposal and adoption of implementing rules. Noncompliance may increase our operating costs, result in monetary losses, adversely affect our reputation and regulatory relations and our ability to implement our business plans and pursue expansion opportunities. We seek to mitigate operational risk through identification and measurement of risk, alignment of business strategies within risk guidelines, and through our system of internal controls and reporting. We regularly evaluate and seek to strengthen our system of internal controls to improve the oversight of our operational risk and compliance with applicable laws, and regulations and prescribed standards.

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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 2013 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 ALL, 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 2013 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 2013 Form 10-K. There have been no significant changes since December 31, 2013.

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 2013 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

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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 SEC. 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, FINRA, 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 ended March 31, 2014, there was no change in internal control over financial reporting, under the original Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, 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 2013 Form 10-K.

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

(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 2014 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)
Balance at December 31, 2013					396,272
January 1- January 31, 2014	11,311	$	24.65	—	396,272
February 1- February 28, 2014	5,595	21.26		—	396,272
March 1- March 31, 2014	34,160	21.60		—	396,272
Balance at March 31, 2014	51,066	$	—	—	396,272

(1) Reflects 51,066 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 2014.

(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. EXHIBITS

Exhibit
Number	Description
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, 2014 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 5, 2014

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FirstMerit Corporation

Form 10-Q

Index to Exhibits

Exhibit	Description
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, 2014 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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