e10vq

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED June 30, 2010


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

COMMISSION FILE NUMBER 0-10161

FIRSTMERIT CORPORATION

(Exact name of registrant as specified in its charter)


OHIO		34-1339938
(State or other jurisdiction of		(IRS Employer Identification
incorporation or organization)		Number)

III CASCADE PLAZA, 7TH FLOOR, AKRON, OHIO
44308-1103
(Address of principal executive offices)
(330) 996-6300
(Telephone Number)

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

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(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 o NO þ

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 o

As of July 30, 2010, 108,787,219 shares, without par value, were outstanding.

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 1A. RISK FACTORS
	ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 4. (REMOVED AND RESERVED)
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS
SIGNATURES
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS


(In thousands)
(Unaudited, except December 31, 2009, which is derived from the	June 30,			December 31,			June 30,
audited financial statements)	2010			2009			2009
ASSETS
Cash and due from banks	$	620,515		$	161,033		$	156,590
Investment securities
Held-to-maturity		65,160			50,686			27,549
Available-for-sale		3,068,614			2,565,264			2,546,939
Other investments		160,222			128,888			128,769
Loans held for sale		24,733			16,828			20,780
Noncovered loans:
Commercial loans		4,335,392			4,066,522			4,181,857
Mortgage loans		430,550			463,416			503,890
Installment loans		1,370,400			1,425,373			1,497,211
Home equity loans		762,288			753,112			754,110
Credit card loans		146,253			153,525			148,104
Leases		58,555			61,541			59,974

Total noncovered loans		7,103,438			6,923,489			7,145,146
Covered loans (includes loss share receivable of $311 million)		2,275,747			—			—

Total loans		9,379,185			6,923,489			7,145,146
Less: allowance for loan losses		(118,343	)		(115,092	)		(111,222	)

Net loans		9,260,842			6,808,397			7,033,924
Premises and equipment, net		169,563			125,205			127,284
Goodwill		465,648			139,598			139,245
Intangible assets		12,422			1,158			1,229
Other real estate covered by FDIC loss share		50,460			—			—
Accrued interest receivable and other assets		624,646			542,845			514,653

Total assets	$	14,522,825		$	10,539,902		$	10,696,962


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand-non-interest bearing	$	2,621,994		$	2,069,921			1,885,087
Demand-interest bearing		718,891			677,448			648,132
Savings and money market accounts		4,353,579			3,408,109			2,851,236
Certificates and other time deposits		3,820,707			1,360,318			2,066,765

Total deposits		11,515,171			7,515,796			7,451,220

Federal funds purchased and securities sold under agreements to repurchase		744,055			996,345			1,069,945
Wholesale borrowings		474,963			740,105			924,438
Accrued taxes, expenses, and other liabilities		279,917			222,029			228,712

Total liabilities		13,014,106			9,474,275			9,674,315

Commitments and contingencies
Shareholders’ equity:
Preferred stock, without par value: authorized and unissued 7,000,000 shares		—			—			—
Preferred stock, Series A, without par value: designated 800,000 shares; none outstanding		—			—			—
Convertible preferred stock, Series B, without par value: designated 220,000 shares; none outstanding		—			—			—
Common stock, without par value: authorized 300,000,000 shares; issued 115,121,731, 93,633,871 and 92,026,350 at June 30, 2010, December 31, 2009 and June 30, 2009, respectively		127,937			127,937			127,937
Capital surplus		483,958			88,573			45,674
Accumulated other comprehensive loss		(4,517	)		(25,459	)		(33,431	)
Retained earnings		1,062,792			1,043,625			1,055,283
Treasury stock, at cost, 6,335,809, 6,629,995 and 6,760,676 shares at June 30, 2010, December 31, 2009 and June 30, 2009, respectively		(161,451	)		(169,049	)		(172,816	)

Total shareholders’ equity		1,508,719			1,065,627			1,022,647

Total liabilities and shareholders’ equity	$	14,522,825		$	10,539,902		$	10,696,962

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

FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


(Unaudited)	Quarters ended					Six months ended
(In thousands except per share data)	June 30,					June 30,
	2010		2009			2010		2009
Interest income:
Interest and fees on loans, including held for sale	$	109,924	$	86,247			193,569		174,046
Investment securities
Taxable		25,602		26,659			50,472		54,954
Tax-exempt		3,288		3,253			6,627		6,515

Total investment securities interest		28,890		29,912			57,099		61,469
Total interest income		138,814		116,159			250,668		235,515

Interest expense:
Interest on deposits:
Demand-interest bearing		149		159			301		314
Savings and money market accounts		7,873		5,452			15,474		10,829
Certificates and other time deposits		9,510		15,325			15,916		33,913
Interest on securities sold under agreements to repurchase		1,404		1,211			2,531		2,210
Interest on wholesale borrowings		3,111		6,897			9,285		14,240

Total interest expense		22,047		29,044			43,507		61,506

Net interest income		116,767		87,115			207,161		174,009
Provision for loan losses		20,633		26,521			46,126		44,586

Net interest income after provision for loan losses		96,134		60,594			161,035		129,423

Other income:
Trust department income		5,574		5,438			10,855		10,228
Service charges on deposits		17,737		15,853			33,103		30,016
Credit card fees		12,242		11,668			23,800		22,752
ATM and other service fees		2,844		2,839			5,353		5,445
Bank owned life insurance income		2,886		2,985			8,538		6,000
Investment services and insurance		2,535		2,270			4,463		5,188
Investment securities gains, net		651		1,178			651		1,178
Loan sales and servicing income		2,975		3,791			6,212		6,126
Gain on George Washington acquistion		—		—			6,232		—
Gain on post medical retirement curtailment		—		—			—		9,543
Other operating income		5,765		4,823			9,093		9,557

Total other income		53,209		50,845			108,300		106,033

Other expenses:
Salaries, wages, pension and employee benefits		51,899		44,125			100,055		86,807
Net occupancy expense		7,680		5,858			14,820		12,729
Equipment expense		6,735		6,212			12,785		12,009
Stationery, supplies and postage		2,696		2,051			5,389		4,326
Bankcard, loan processing and other costs		7,663		7,862			15,481		15,704
Professional services		7,845		2,856			13,082		6,336
Amortization of intangibles		669		87			903		174
FDIC expense		4,416		8,496			8,181		11,052
Other operating expense		16,120		13,017			29,040		24,630

Total other expenses		105,723		90,564			199,736		173,767

Income before federal income tax expense		43,620		20,875			69,599		61,689
Federal income tax expense		12,127		5,380			19,342		16,760

Net income	$	31,493	$	15,495			50,257		44,929


Other comprehensive income, net of taxes
Unrealized securities’ holding gain, net of taxes	$	16,889	$	6,246			21,365		22,063
Unrealized hedging loss, net of taxes		—		—			—		(94	)
Less: reclassification adjustment for securities’ gain realized in income, net of taxes		423		766			423		766
Minimum pension liability adjustment, net of taxes		—		(277	)		—		(554	)

Total other comprehensive gain, net of taxes		16,466		5,203			20,942		20,649

Comprehensive income	$	47,959	$	20,698			71,199		65,578

Net income applicable to common shares	$	31,493	$	10,995			50,257		38,558

Net income used in diluted EPS calculation	$	31,493	$	10,995			50,257		38,558

Weighted average number of common shares outstanding — basic *		98,968		84,123			93,400		83,323

Weighted average number of common shares outstanding — diluted *		98,969		84,131			93,403		83,331

Basic earnings per share *	$	0.32	$	0.13			0.54		0.46

Diluted earnings per share *	$	0.32	$	0.13			0.54		0.46

Dividend per share	$	0.16	$	0.16			0.32		0.45


*		Average outstanding shares and per share data as of June 30, 2009 are restated to reflect the effect of stock dividends declared April 28, 2009 and August 20, 2009.

The accompaning notes are an integral part of the consoldiated financial statements.

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


												Accumulated
						Common						Other									Total
(Unaudited)	Preferred			Common		Stock			Capital			Comprehensive			Retained			Treasury			Shareholders’
(In thousands)	Stock			Stock		Warrant			Surplus			Loss			Earnings			Stock			Equity
Balance at December 31, 2008	$	—		$	127,937	$	—		$	94,802		$	(54,080	)	$	1,053,435		$	(284,251	)	$	937,843
Net income		—			—		—			—			—			44,929			—			44,929
Cash dividends — preferred stock		—			—		—			—			—			(1,789	)		—			(1,789	)
Cash dividends — common stock ($0.45 per share)		—			—		—			—			—			(36,710	)		—			(36,710	)
Options exercised (2,400 shares)		—			—		—			(18	)		—			—			58			40
Nonvested (restricted) shares granted (526,708 shares)		—			—		—			(12,911	)		—			—			12,909			(2	)
Restricted stock activity (105,521 shares)		—			—		—			241			—			—			(1,890	)		(1,649	)
Deferred compensation trust (19,089 shares)		—			—		—			180			—			—			(180	)		—
Share-based compensation		—			—		—			4,943			—			—			—			4,943
Issuance of common stock (3,267,751 shares)		—			—		—			(40,756	)		—			—			100,538			59,782
Issuance of Fixed-Rate Cumulative Perpetual Preferred Stock		120,622			—		4,582			—			—			(204	)		—			125,000
Redemption of Fixed-Rate Cumulative Perpetual Preferred Stock		(120,622	)		—		—			—			—			(4,378	)		—			(125,000	)
Repurchase of warrants		—			—		(4,582	)		(443	)		—			—			—			(5,025	)
Net unrealized gains on investment securities, net of taxes		—			—		—			—			21,297			—			—			21,297
Unrealized hedging gain, net of taxes		—			—		—			—			(94	)		—			—			(94	)
Minimum pension liability adjustment, net of taxes		—			—		—			—			(554	)		—			—			(554	)
Other		—			—		—			(364	)		—			—			—			(364	)

Balance at June 30, 2009	$	—		$	127,937	$	—		$	45,674		$	(33,431	)	$	1,055,283		$	(172,816	)	$	1,022,647


Balance at December 31, 2009	$	—		$	127,937	$	—		$	88,573		$	(25,459	)	$	1,043,625		$	(169,049	)	$	1,065,627
Net income		—			—		—			—			—			50,257			—			50,257
Cash dividends — common stock ($0.32 per share)		—			—		—			—			—			(31,090	)		—			(31,090	)
Options exercised (48,365 shares)		—			—		—			(330	)		—			—			1,156			826
Nonvested (restricted) shares granted (407,055 shares)		—			—		—			(9,917	)		—			—			9,911			(6	)
Restricted stock activity (161,234 shares)		—			—		—			1,032			—			—			(3,567	)		(2,535	)
Deferred compensation trust (2,877 shares)		—			—		—			(98	)		—			—			98			—
Share-based compensation		—			—		—			4,634			—			—			—			4,634
Issuance of common stock (21,487,860 shares)		—			—		—			400,064			—			—			—			400,064
Net unrealized gains on investment securities, net of taxes		—			—		—			—			20,942			—			—			20,942

Balance at June 30, 2010	$	—		$	127,937	$	—		$	483,958		$	(4,517	)	$	1,062,792		$	(161,451	)	$	1,508,719

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

FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)	Six months ended
(In thousands)	June 30,
	2010			2009
Operating Activities
Net income	$	50,257		$	44,929
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		46,126			44,586
Depreciation and amortization		10,375			9,711
Accretion of acquired loans		(27,781	)		—
Accretion income for lease financing		(1,298	)		(1,753	)
Amortization of investment securities premiums, net		5,081			2,066
Post medical retirement curtailment gain		—			(9,543	)
Gain on acquisition		(6,232	)		—
Gain on sales and calls of investment securities, net		(651	)		(1,178	)
Originations of loans held for sale		(182,735	)		(295,359	)
Proceeds from sales of loans, primarily mortgage loans sold in the secondary mortgage markets		178,105			288,333
Gains on sales of loans, net		(3,275	)		(2,613	)
Amortization of intangible assets		903			174
Net change in assets and liabilities
(Increase) decrease in interest receivable		(3,825	)		2,348
Decrease in interest payable		(4,414	)		(3,763	)
Decrease (increase) in prepaid assets		2,455			(8,715	)
Increase in bank owned life insurance		(4,204	)		(6,001	)
Increase in employee pension liability		18,704			3,289
Decrease in taxes payable		(3,035	)		(15,239	)
Other increase (decreases)		(541	)		(9,281	)

NET CASH PROVIDED BY OPERATING ACTIVITIES		74,015			41,991
Investing Activities
Dispositions of investment securities:
Available-for-sale — sales		500,066			85,237
Available-for-sale — maturities		378,525			339,390
Purchases of available-for-sale investment securities		(856,728	)		(306,455	)
Net decrease in loans and leases		132,645			224,846
Purchases of premises and equipment		(12,548	)		(3,894	)
Sales of premises and equipment		—			83
Net cash acquired from acquisitions		982,132			—

NET CASH PROVIDED IN INVESTING ACTIVITIES		1,124,092			339,207
Financing Activities
Net increase in demand accounts		55,676			229,070
Net increase in savings and money market accounts		111,328			338,905
Net decrease in certificates and other time deposits		(32,417	)		(714,434	)
Net (increase) decrease in securities sold under agreements to repurchase		(975,335	)		148,555
Net decrease in wholesale borrowings		(265,142	)		(419,757	)
Net proceeds from issuance of preferred stock		—			125,000
Repurchase of preferred stock		—			(125,000	)
Repurchase of common stock warrant		—			(5,025	)
Net proceeds from issuance of common stock		400,064			59,782
Cash dividends — preferred		—			(1,789	)
Cash dividends — common		(31,090	)		(36,710	)
Purchase of treasury shares		(2,535	)		(1,649	)
Proceeds from exercise of stock options, conversion of debentures or conversion of preferred stock		826			38

NET CASH USED BY FINANCING ACTIVITIES		(738,625	)		(403,014	)

Increase (decrease) in cash and cash equivalents		459,482			(21,816	)
Cash and cash equivalents at beginning of period		161,033			178,406

Cash and cash equivalents at end of period	$	620,515		$	156,590


SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest, net of amounts capitalized	$	33,777		$	31,453

Federal income taxes	$	14,108		$	22,016


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

FirstMerit Corporation and Subsidiaries

Notes to Consolidated Financial Statements
June 30, 2010 (Unaudited) (Dollars in thousands except per share data)

1. Summary of Significant Accounting Policies

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

The accounting and reporting policies of FirstMerit Corporation and its subsidiaries (the “Corporation”) conform to generally accepted accounting principles (“GAAP”) in the United States of America and to general practices within the financial services industry. Effective July 1, 2009, the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) became the single source of authoritative nongovernmental GAAP. Other than resolving certain minor inconsistencies in current GAAP, the ASC is not intended to change GAAP, but rather to make it easier to review and research GAAP applicable to a particular transaction or specific accounting issue. Technical references to GAAP included in these Notes To Consolidated Financial Statements are provided under the new ASC structure.

The consolidated balance sheet at December 31, 2009 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 accruals) that are, in the opinion of Management, necessary for a fair statement of the results for the interim periods presented. No material subsequent events have occurred requiring recognition in the financial statements or disclosure in the notes to the financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with the rules of the Securities and Exchange Commission (“SEC”). The consolidated financial statements of the Corporation as of June 30, 2010 and 2009 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 for the fiscal year ended December 31, 2009.

Certain reclassifications of prior year’s amounts have been made to conform to current year presentation. Such reclassifications had no effect on net earnings.

Recently Adopted and Issued Accounting Standards — In June 2009, the FASB issued Statement of Financial Accounting Standard (“SFAS”) 166, Accounting for Transfers of Financial Assets – An Amendment of FASB Statement No. 140 which has been codified into ASC 860, Transfers and Servicing (“ASC 860”). This guidance removes the concept of a qualifying special-purpose entity from existing GAAP and removes the exception from applying the accounting and reporting standards within ASC 810, Consolidation (“ASC 810”), to

qualifying special purpose entities. This guidance also establishes conditions for accounting and reporting of a transfer of a portion of a financial asset, modifies the asset sale/de-recognition criteria, and changes how retained interests are initially measured. This guidance is expected to provide greater transparency about transfers of financial assets and a transferor’s continuing involvement, if any, with the transferred assets. This guidance was effective for the Corporation as of January 1, 2010 and it not have an impact on the Corporation’s financial condition and results of operations.

In June 2009, the FASB issued SFAS 167, Amendments to FASB Interpretation No. 46(R) which was codified in ASC 810. This guidance removes the scope exception for qualifying special-purpose entities, contains new criteria for determining the primary beneficiary of a variable interest entity and increases the frequency of required reassessments to determine whether an entity is the primary beneficiary of a variable interest entity. Enhanced disclosures are also required. This guidance was effective for the Corporation as of January 1, 2010 and it did not have an impact on the Corporation’s financial condition and results of operations.

FASB ASU 2010-06, Improving Disclosures about Fair Value Measurements. Accounting Standards Update (“ASU”) 2010-06 amends ASC 820 to require additional disclosures regarding fair value measurements. Specifically, the ASU requires disclosure of the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers; the reasons for any transfers in or out of Level 3; and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. In addition to these new disclosure requirements, the ASU also amends ASC 820 to clarify certain existing disclosure requirements. For example, the ASU clarifies that reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities. Previously, separate fair value disclosures were required for each major category of assets and liabilities. ASU 2010-06 also clarifies the requirement to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. Except for the requirement to disclose information about purchases, sales, issuances, and settlements in the reconciliation of recurring Level 3 measurements on a gross basis, these disclosures are effective for the Corporation and are incorporated into Note 11 (Fair Value Measurement). The requirement to separately disclose purchases, sales, issuances, and settlements of recurring Level 3 measurements becomes effective for the Corporation for the quarter ended June 30, 2011.

FASB ASU 2010-18, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset. ASU 2010-18 addresses whether a loan that is within a pool of loans acquired with deteriorated credit quality and accounted for as a single asset should be removed from the pool if the loan is modified in such a way that it would constitute a troubled debt restructuring. Prior to this guidance, accounting practices differed among entities, with some removing loans from the pool and others not removing them. This guidance clarifies that when a loan within a pool is modified, the loan should not be removed from the pool even if the modification of the loan would otherwise be considered a troubled debt restructuring. Under this guidance, entities will continue to be required to consider whether a pool of acquired loans is impaired if the expected cash flows for the pool change. The affect of a restructuring and whether an impairment has occurred will have to be considered in the context of the accounting for the pool of loans as a whole. The guidance in the ASU is effective for loan modifications

occurring in the first interim or annual period ending on or after July 15, 2010, and is to be applied prospectively. Early application is permitted.

2. Business Combinations

Asset Based Loans

On December 16, 2009, FirstMerit Bank, N.A. (the “Bank”), acquired $102.0 million in outstanding principal of asset based lending loans (“ABL Loans”), as well as the staff to service and build new business, from First Bank Business Capital, Inc., (“FBBC”) for $93.2 million in cash. FBBC is a wholly owned subsidiary of First Bank, a Missouri state chartered bank. This acquisition expands the Corporation’s market presence and asset based lending business into the Midwest.

The purchase was accounted for under the acquisition method in accordance with ASC 805, Business Combinations (“ASC 805”). Accordingly, the ABL Loans and a non-compete agreement acquired were recorded at their fair values, $92.7 million and $0.1 million, respectively, on the date of acquisition. The Bank recorded goodwill of $0.4 million relating to the ABL Loans and non-compete agreements acquired. Additional information can be found in Note 4 (Loans) and Note 6 (Goodwill and Intangible Assets).

First Bank Branches

On February 19, 2010, the Bank completed the acquisition of certain assets and the assumption of certain liabilities with respect to 24 branches of First Bank located in the greater Chicago, Illinois area. This acquisition was accounted for under the acquisition method in accordance with ASC 805. The Bank recognized $1.4 million of acquisition related expenses that were expensed in the quarter ended March 31, 2010 and which are included in the line item entitled professional services in the consolidated statements of income and comprehensive income.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The Bank received cash of $832.5 million to assume the net liabilities.


	Acquired		Fair Value			As Recorded by
	Book Value		Adjustments			FirstMerit Bank, N.A.
Assets
Cash and due from banks	$	3,725	$	—		$	3,725
Loans		301,236		(25,624	)		275,612
Premises and equipment		22,992		18,963			41,955
Goodwill		—		48,347			48,347
Core deposit intangible		—		3,154			3,154
Other assets		941		3,115			4,056

Total assets acquired	$	328,894	$	47,955		$	376,849


Liabilities
Deposits	$	1,199,279	$	7,134		$	1,206,413
Accrued expenses and other liabilities		4,192		(1,271	)		2,921

Total liabilities assumed	$	1,203,471	$	5,863		$	1,209,334

All loans acquired in the First Bank acquisition were performing as of the date of acquisition. The difference between the fair value and the outstanding principal balance of the purchased loans is being accreted to interest income over the remaining term of the loans in accordance with ASC 310, Receivables.

Additional information can be found in Note 4 (Loans) and Note 6 (Goodwill and Intangible Assets).

George Washington Savings Bank — FDIC Assisted Acquisition

On February 19, 2010 the Bank entered into a purchase and assumption agreement with a loss share arrangement with the Federal Deposit Insurance Corporation (“FDIC”), as receiver of George Washington Savings Bank (“George Washington”), the subsidiary of George Washington Savings Bancorp, to acquire certain assets and assume substantially all of the deposits and certain liabilities in a whole-bank acquisition of George Washington, a full service Illinois-chartered savings bank headquartered in Orland Park, Illinois.

The FDIC granted the Bank the option to purchase at appraised value the premises, furniture, fixtures and equipment of George Washington and assume the leases associated with these branches. The Bank exercised its option during the second quarter of 2010 and purchased three of the former George Washington branches, including the furniture, fixtures and equipment within these branches, for a combined purchase price of $4.3 million.

The loans and other real estate (collectively referred to as “Covered Assets”) acquired are covered by a loss share arrangement between the Bank and the FDIC which affords the Bank

significant protection against future losses. The acquired loans covered under loss sharing agreements with the FDIC, including the amounts of expected reimbursements from the FDIC under these agreements, are reported in loans and are referred to as “Covered Loans”. New loans made after the date of the transaction are not covered by the provisions of the loss sharing agreements. The Bank acquired other assets that are not covered by the loss sharing agreements with the FDIC including investment securities purchased at fair market value and other tangible assets.

Pursuant to the terms of the loss sharing agreements, the FDIC is obligated to reimburse the Bank for 80% of losses of up to $172.0 million with respect to the Covered Assets and will reimburse the Bank for 95% of losses that exceed $172.0 million. The Bank will reimburse the FDIC for 80% of recoveries with respect to losses for which the FDIC paid the Bank 80% reimbursement under the loss sharing agreements, and for 95% of recoveries with respect to losses for which the FDIC paid the Bank 95% reimbursement under the loss sharing agreements. The loss sharing agreements applicable to single family residential mortgage loans provides for FDIC loss sharing and the Bank reimbursement to the FDIC for ten years. The loss sharing agreements applicable to commercial loans provides for FDIC loss sharing for five years and the Bank reimbursement to the FDIC for eight years.

The reimbursable losses from the FDIC are based on the pre-acquisition book value of the Covered Assets, as determined by the FDIC at the date of the transaction, the contractual balance of acquired unfunded commitments, and certain future net direct costs incurred in the collection and settlement process. The amount that the Bank realizes on these assets could differ materially from the carrying value that will be reflected in any financial statements, based upon the timing and amount of collections and recoveries on the Covered Assets in future periods.

The loss sharing agreements are subject to certain servicing procedures as specified in agreements with the FDIC. At the date of the transaction, the estimated fair value of the Covered Loans was $177.8 million and the expected reimbursement for losses to be incurred by the Bank on these Covered Loans was $88.7 million. The expected reimbursement for losses on the Covered Loans is included with Covered Loans on the consolidated balance sheets. At the date of the transaction, the estimated fair value of the covered other real estate was $11.5 million and the expected reimbursement for losses to be incurred by the Bank on this covered other real estate was $11.3 million. The expected reimbursement for losses on the covered other real estate is included with other real estate covered by FDIC loss share on the consolidated balance sheets.

The acquisition constituted a business combination as defined by ASC 805 and, accordingly, the purchased assets and liabilities assumed were recorded at their estimated fair values on the date of acquisition. These fair value estimates are considered preliminary, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. Identifiable intangible assets, including core deposit intangible assets, were recorded at fair value. The Bank recognized $1.7 million of acquisition related expenses in the current period which are included in the line item entitled professional services in the consolidated statements of income and comprehensive income. The Bank received a cash payment from the FDIC of approximately $40.2 million to assume the net liabilities. The estimated fair value of assets acquired, intangible assets and the

cash payment received from the FDIC exceeded the estimated fair value of the liabilities assumed, resulting in a bargain purchase gain. During the quarter ended June 30, 2010, the Corporation obtained additional information that resulted in changes to certain acquisition-data fair value estimates. After considering this additional information, the estimated fair value of the Covered Loans increased to be $177.8 million and the FDIC loss share receivable decreased to be $100.0 million as of February 19, 2010. These revised fair values resulted in an additional $1.1 million of bargain purchase gain which was recognized in the quarter ended March 31, 2010, in accordance with ASC 805. Prior periods presented in these consolidated financial statements reflect these fair value adjustments.

The operating results of the Corporation for the quarter and six month period ended June 30, 2010 include the operating results from the date of the transaction produced by the acquisition.

The acquired assets and liabilities, as well as the adjustments to record the assets and liabilities at fair value, are presented in the following table.


	As Recorded		Fair Value			As Recorded by
	by FDIC		Adjustments			FirstMerit Bank, N.A.
Assets
Cash and due from banks	$	57,984	$	—		$	57,984
Investment securities		15,410		—			15,410
Covered loans
Commercial loan		254,492		(117,879	)		136,613
Mortgage loan		27,218		(2,860	)		24,358
Installment loan		24,078		(7,298	)		16,780

Total covered loans		305,788		(128,037	)		177,751
Loss share receivable		—		100,033			100,033

Total covered loans and loss share receivable		305,788		(28,004	)		277,784
Core deposit intangible		—		962			962
Covered other real estate		19,021		(7,561	)		11,460
Other assets		5,680		—			5,680

Total assets acquired	$	403,883	$	(34,603	)	$	369,280


Liabilities
Deposits
Noninterest-bearing deposit accounts	$	54,242	$	—		$	54,242
Savings deposits		62,737		—			62,737
Time deposits		278,755		4,921			283,676

Total deposits		395,734		4,921			400,655
Accrued expenses and other liabilities		2,569		—			2,569

Total liabilities assumed	$	398,303	$	4,921		$	403,224

The Bank and the FDIC are engaged in on-going discussions that may impact which assets and liabilities are ultimately acquired or assumed by the Bank and/or the purchase price. In addition, the tax treatment of FDIC assisted acquisitions is complex and subject to interpretations that may result in future adjustments of deferred taxes as of the acquisition date. As of the date of acquisition and as of June 30, 2010, the Bank has recorded a deferred tax liability of $2.2

million, which resulted from the reduction in the tax basis of certain long-lived assets acquired in the George Washington transaction.

Midwest Bank and Trust Company – FDIC Assisted Acquisition

On May 14, 2010, the Bank entered into a purchase and assumption agreement with a loss share arrangement with the FDIC, as receiver of Midwest Bank and Trust Company (“Midwest”), a wholly owned subsidiary of Midwest Banc Holdings, Inc., to acquire substantially all of the loans and certain other assets and assume substantially all of the deposits and certain liabilities in a whole-bank acquisition of Midwest, a full-service commercial bank located in the greater Chicago, Illinois area.

The FDIC granted the Bank the option to purchase at appraised value the premises, furniture, fixtures and equipment of Midwest and assume the leases associated with these branches. This option is exercisable for 90 days following the closing of the acquisition. The Bank is leasing these facilities and equipment from the FDIC until current appraisals are received and a final purchase decision is made.

The loans and other real estate acquired are covered by a loss share arrangement between the Bank and the FDIC which affords the Bank significant protection against future losses. New loans made after the date of the transaction are not covered by the provisions of the loss sharing agreements. The Bank acquired other assets that are not covered by the loss sharing agreements with the FDIC including investment securities purchased at fair market value and other tangible assets.

Pursuant to the terms of the loss sharing agreements, the FDIC’s obligation to reimburse the Bank for losses with respect to Covered Assets begins with the first dollar of loss incurred. The FDIC will reimburse the Bank for 80% of losses with respect to Covered Assets. The Bank will reimburse the FDIC for 80% of recoveries with respect to losses for which the FDIC has reimbursed the Bank under the loss sharing agreements. The loss sharing agreement applicable to single-family residential mortgage loans provides for FDIC loss sharing and the Bank reimbursement to the FDIC, in each case as described above, for ten years. The loss sharing agreement applicable to Covered Assets other than single-family residential mortgage loans provides for FDIC loss sharing for five years and the Bank reimbursement to the FDIC for eight years, in each case, on the same terms and conditions as described above.

the acquired loans was $227.9 million. The expected reimbursement for losses on these Covered Loans is included with covered loans on the consolidated balance sheets. At the date of the transaction, the estimated fair value of the covered other real estate was $26.2 million and the expected reimbursement for losses to be incurred by the Bank on this covered other real estate was $2.2 million. The expected reimbursement for losses on this covered other real estate is included with other real estate covered by FDIC loss share on the consolidated balance sheets.

In addition, on March 15, 2020 (the “True-Up Measurement Date”), the Bank has agreed to pay to the FDIC half of the amount, if positive, calculated as: (1) 20% of the intrinsic loss estimate of the FDIC (approximately $152 million); minus (2) the sum of (A) 25% of the asset premium paid in connection with the Midwest acquisition (approximately $20 million), plus (B) 25% of the Cumulative Shared-Loss Payments (as defined below) plus (C) the Cumulative Servicing Amount (as defined below). For the purposes of the above calculation, Cumulative Shared-Loss Payments means: (i) the aggregate of all of the payments made or payable to FirstMerit Bank under the Shared-Loss Agreements; minus (ii) the aggregate of all of the payments made or payable to the FDIC under the Shared-Loss Agreements. 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 True-Up Measurement Date in respect of each of the Shared-Loss Agreements during which the loss sharing provisions of the applicable Shared-Loss Agreement is in effect. As of the date of acquisition and June 30, 2010, the true-up liability was estimated to be $8.5 million and is recorded in accrued taxes, expenses and other liabilities on the consolidated balance sheets.

The acquisitions of the net assets of Midwest constitute a business combination as defined by ASC 805 and, accordingly, were recorded at their estimated fair values on the date of acquisition. These fair value estimates are considered preliminary, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. Identifiable intangible assets, including core deposit intangible assets, were recorded at fair value. The Bank recognized $0.4 million of acquisition related expenses in the current period which are included in the line item entitled professional services in the consolidated statements of income and comprehensive income. The Bank made a cash payment to the FDIC of approximately $227.5 million to assume the net assets. The estimated fair value of the liabilities assumed and cash payment made to the FDIC exceeded the fair value of assets acquired, resulting in the recognition of goodwill in the amount of $277.7 million. Additional information can be found in Note 4 (Loans) and Note 6 (Goodwill and Intangible Assets).

The operating results of the Corporation for the quarter ended June 30, 2010 include the operating results from the date of the transaction produced by the acquisition. Due to the significant fair value adjustments recorded, as well as the nature of the FDIC loss sharing agreement in place, Midwest’s historical results are not believed to be relevant to the Corporation’s results, and thus no pro forma information is presented. For these same reasons, the impact of the Midwest acquisition on the Corporation’s results of operations for the quarter ended June 30, 2010 is not meaningful and is not presented.

The acquired assets and liabilities, as well as the adjustments to record the assets and liabilities at fair value, are presented in the following table.


	As Recorded			Fair Value			As Recorded by
	by FDIC			Adjustments			FirstMerit Bank, N.A.
Assets
Cash and due from banks	$	279,352		$	—		$	279,352
Investment securities		566,272			(977	)		565,295
Covered loans
Commercial loans		1,842,091			(274,364	)		1,567,727
Consumer loans		312,131			(53,742	)		258,389

Total covered loans		2,154,222			(328,106	)		1,826,116
Allowance for loan losses		(5,465	)		5,465			—
Accrued interest		3,849			—			3,849
Loss share receivable		—			227,854			227,854

Total covered loans and loss share receivable		2,152,606			(94,787	)		2,057,819
Core deposit intangible		—			7,433			7,433
Covered other real estate		27,320			1,030			28,350
Goodwill		—			277,703			277,703
Other assets		8,273			—			8,273

Total assets acquired	$	3,033,823		$	190,402		$	3,224,225


Liabilities
Deposits
Savings deposits	$	748,681		$	—		$	748,681
Time deposits		1,499,913			9,125			1,509,038

Total deposits		2,248,594			9,125			2,257,719
Borrowings		639,804			83,241			723,045
FDIC liability		—			8,527			8,527
Accrued expenses and other liabilities		7,395			—			7,395

Total liabilities assumed	$	2,895,793		$	100,893		$	2,996,686

3. Investment Securities

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


	June 30, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities available for sale
Debt Securities
U.S. Treasury	$	50,000	$	—	$	—		$	50,000
U.S. government agency debentures		326,338		1,130		(21	)		327,447
U.S. States and political subdivisions		286,297		7,960		(81	)		294,176
Residential mortgage-backed securities:
U.S. government agencies		1,491,498		72,850		(63	)		1,564,285
Residential collateralized mortgage-backed securities:
U.S. government agencies		762,259		23,543		—			785,802
Non-agency		20		—		(1	)		19
Corporate debt securities		61,410		—		(17,968	)		43,442

Total debt securities		2,977,822		105,483		(18,134	)		3,065,171
Marketable equity securities		3,443		—		—			3,443

Total securities available for sale	$	2,981,265	$	105,483	$	(18,134	)	$	3,068,614


Securities held to maturity
Debt Securities
U.S. States and political subdivisions	$	65,160	$	—	$	—		$	65,160

Total securities held to maturity	$	65,160	$	—	$	—		$	65,160


	December 31, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities available for sale
Debt Securities
U.S. government agency debentures	$	32,029	$	—	$	(132	)	$	31,897
U.S. States and political subdivisions		289,529		4,984		(394	)		294,119
Residential mortgage-backed securities:
U.S. government agencies		1,557,754		55,325		(1,852	)		1,611,227
Residential collateralized mortgage-backed securities:
U.S. government agencies		566,151		16,394		(238	)		582,307
Non-agency		22		—		—			22
Corporate debt securities		61,385		—		(18,957	)		42,428

Total debt securities		2,506,870		76,703		(21,573	)		2,562,000
Marketable equity securities		3,264		—		—			3,264

Total securities available for sale	$	2,510,134	$	76,703	$	(21,573	)	$	2,565,264


Securities held to maturity
Debt Securities
U.S. States and political subdivisions	$	50,686	$	—	$	—		$	50,686

Total securities held to maturity	$	50,686	$	—	$	—		$	50,686


	June 30, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities available for sale
Debt Securities
U.S. States and political subdivisions	$	285,120	$	2,523	$	(2,334	)	$	285,309
Residential mortgage-backed securities:
U.S. government agencies		1,610,128		46,706		(97	)		1,656,737
Residential collateralized mortgage-backed securities:
U.S. government agencies		534,613		16,428		(230	)		550,811
Non-agency		18,155		—		(951	)		17,204
Corporate debt securities		61,359		—		(28,103	)		33,256

Total debt securities		2,509,375		65,657		(31,715	)		2,543,317
Marketable equity securities		3,622		—		—			3,622

Total securities available for sale	$	2,512,997	$	65,657	$	(31,715	)	$	2,546,939


Securities held to maturity
Debt Securities
U.S. States and political subdivisions	$	27,549	$	—	$	—		$	27,549

Total securities held to maturity	$	27,549	$	—	$	—		$	27,549

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


	June 30,		December 31,		June 30,
	2010		2009		2009
FRB stock	$	19,787	$	9,064	$	8,919
FHLB stock		139,398		119,145		119,145
Other		1,037		679		705

Total other investments	$	160,222	$	128,888	$	128,769

FRB and FHLB stock is classified as a restricted investment, carried at cost and valued based on the ultimate recoverability of par value. The $10.7 million increase in FRB stock from December 31, 2009 is a result of the acquisition of FRB stock in the Midwest acquisition. The $20.3 million increase in FHLB stock is a result of the acquired FHLB Chicago stock of $17.0 million in the Midwest acquisition and $3.3 million in the George Washington acquisition. 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.

At June 30, 2010, securities totaling $1.9 billion were pledged to secure trust and public deposits and securities sold under agreements to repurchase and for other purposes required or permitted by law.

Gross Unrealized Losses and Fair Value

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


	At June 30, 2010
	Less than 12 months							12 months or longer							Total
						Number of							Number of
			Unrealized			Imparied				Unrealized			Imparied				Unrealized
	Fair Value		Losses			Securities		Fair Value		Losses			Securities		Fair Value		Losses
Debt Securities
U.S. government agency debentures	$	30,275	$	(21	)		2	$	—	$	—			—	$	30,275	$	(21	)
U.S. States and political subdivisions		13,822		(68	)		20		689		(13	)		1		14,511		(81	)
Residential mortgage-backed securities:
U.S. government agencies		15,016		(60	)		2		227		(3	)		1		15,243		(63	)
Residential collateralized mortgage-backed securities:
Non-agency		3		(1	)		1		—		—			—		3		(1	)
Corporate debt securities		—		—			—		43,442		(17,968	)		8		43,442		(17,968	)

Total temporarily impaired securities	$	59,116	$	(150	)		25	$	44,358	$	(17,984	)		10	$	103,474	$	(18,134	)


	At December 31, 2009
	Less than 12 months							12 months or longer							Total
						Number of							Number of
			Unrealized			Imparied				Unrealized			Imparied				Unrealized
	Fair Value		Losses			Securities		Fair Value		Losses			Securities		Fair Value		Losses
Debt Securities
U.S. government agency debentures	$	31,897	$	(132	)		3	$	—	$	—			—	$	31,897	$	(132	)
U.S. States and political subdivisions		39,059		(394	)		65		—		—			—		39,059		(394	)
Residential mortgage-backed securities:
U.S. government agencies		216,014		(1,849	)		15		271		(3	)		2		216,285		(1,852	)
Residential collateralized mortgage-backed securities:
U.S. government agencies		68,513		(238	)		6		—		—			—		68,513		(238	)
Non-agency		5		—			1		—		—			—		5		—
Corporate debt securities		—		—					42,428		(18,957	)		8		42,428		(18,957	)

Total temporarily impaired securities	$	355,488	$	(2,613	)		90	$	42,699	$	(18,960	)		10	$	398,187	$	(21,573	)


	At June 30, 2009
	Less than 12 months							12 months or longer							Total
						Number of							Number of
			Unrealized			Imparied				Unrealized			Imparied				Unrealized
	Fair Value		Losses			Securities		Fair Value		Losses			Securities		Fair Value		Losses
Debt Securities
U.S. States and political subdivisions	$	76,239	$	(925	)		117	$	38,794	$	(1,409	)		66	$	115,033	$	(2,334	)
Residential mortgage-backed securities:
U.S. government agencies		30,291		(93	)		4		335		(4	)		3		30,626		(97	)
Residential collateralized mortgage-backed securities:
U.S. government agencies		20,237		(230	)		2		—		—			—		20,237		(230	)
Non-agency		17,180		(951	)		1		—		—			—		17,180		(951	)
Corporate debt securities		—		—			—		33,256		(28,103	)		8		33,256		(28,103	)

Total temporarily impaired securities	$	143,947	$	(2,199	)		124	$	72,385	$	(29,516	)		77	$	216,332	$	(31,715	)

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, which was amended by the FASB and adopted by the Corporation in the second quarter of 2009, 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 other comprehensive income. Equity securities are also evaluated to determine whether the unrealized loss is expected to be recoverable based on whether evidence exists to support a realizable value equal to or greater than the amortized cost basis. If it is probable that the Corporation will not recover the amortized cost basis, taking into consideration the estimated recovery period and its ability to hold the equity security until recovery, OTTI is recognized.

The security-level assessment is performed on each security, regardless of the classification of the security as available for sale or held to maturity. The assessments are based

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

As of June 30, 2010, gross unrealized losses are concentrated within corporate debt securities which is composed of eight, single issuer, trust preferred securities with stated maturities. Such investments are less than 2% of the fair value of the entire investment portfolio. None of the corporate issuers have deferred paying dividends on their issued trust preferred shares in which the Corporation is invested. The fair values of these investments have been impacted by the recent market conditions which have caused risk premiums to increase markedly, resulting in the significant decline in the fair value of the trust preferred securities. Management believes the Corporation will fully recover the cost of these securities and it does not intend to sell these securities and it is not more likely than not that it will be required to sell them before the anticipated recovery of the remaining amortized cost basis, which may be maturity. As a result, Management concluded that these securities were not other-than-temporarily impaired at June 30, 2010 and has recognized the total amount of the impairment in other comprehensive income, net of tax.

Realized Gains and Losses

The following table shows the proceeds from sales of available-for-sale- securities and the gross unrealized 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.


	Quarter ended					Six months ended
	June 30,					June 30,
	2010			2009		2010			2009
Proceeds	$	487,905		$	68,685	$	500,006		$	85,237


Realized gains	$	1,602		$	1,178	$	1,602		$	1,178
Realized losses		(951	)		—		(951	)		—

Net securities gains	$	651		$	1,178	$	651		$	1,178

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 June 30, 2010. Estimated lives on mortgage-backed securities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


																Residential
													Residential			collateralized
										Residential			collateralized			mortgage
										mortgage backed			mortgage			obligations -
				U.S.						securities - U.S.			obligations - U.S.			non U.S.
				government			U.S. States			government			government			government			Corporate						Weighted
	U.S.			agency			and political			agency			agency			agency			debt						Average
	Treasury			debentures			subdivisions			obligations			obligations			obligations			securities			Total			Yield
Securities Available for Sale
Remaining maturity:
One year or less	$	50,000		$	200,630		$	9,351		$	7,320		$	41,997		$	—		$	—		$	309,298			1.81	%
Over one year through five years		—			126,817			13,975			1,541,977			743,805			19			—			2,426,593			3.70	%
Over five years through ten years		—			—			70,959			14,988			—			—			—			85,947			5.52	%
Over ten years		—			—			199,891			—			—			—			43,442			243,333			4.95	%

Fair Value	$	50,000		$	327,447		$	294,176		$	1,564,285		$	785,802		$	19		$	43,442		$	3,065,171			3.71	%

Amortized Cost	$	50,000		$	326,338		$	286,297		$	1,491,498		$	762,259		$	20		$	61,410		$	2,927,822

Weighted-Average Yield		0.17	%		1.09	%		6.07	%		4.04	%		3.48	%		3.96	%		1.10	%		3.71	%
Weighted-Average Maturity		0.0			1.0			10.3			3.0			2.4			3.9			17.3			3.6

Securities Held to Maturity
Remaining maturity:
One year or less	$	—		$	—		$	14,560		$	—		$	—		$	—		$	—		$	14,560			5.94	%
Over one year through five years		—			—			6,350			—			—			—			—			6,350			5.05	%
Over five years through ten years		—			—			9,193			—			—			—			—			9,193			5.94	%
Over ten years		—			—			35,057			—			—			—			—			35,057			7.46	%

Fair Value	$	—		$	—		$	65,160		$	—		$	—		$	—		$	—		$	65,160			6.67	%

Amortized Cost	$	—		$	—		$	65,160		$	—		$	—		$	—		$	—		$	65,160

Weighted-Average Yield								6.67	%														6.67	%
Weighted-Average Maturity								9.9															9.9

4. Loans

As discussed in Note 2 (Business Combinations) above, the Bank acquired loans of $177.8 million on February 19, 2010 and $1.8 billion on May 14, 2010 in conjunction with the FDIC-assisted acquisitions of George Washington and Midwest, respectively. The loans that were acquired in these transactions are covered by loss share agreements with the FDIC which afford the Bank significant loss protection. Loans covered under loss share agreements with the FDIC, including the amounts of expected reimbursements from the FDIC under these agreements, are reported as Covered Loans. The Bank also acquired $275.6 million of loans on February 19, 2010 in its acquisition of the First Bank branches. Acquired loans, including covered loans were initially recorded at fair value with no valuation allowance.

Total non-covered and covered loans outstanding as of June 30, 2010, December 31, 2009 and June 30, 2009 were as follows:


	As of		As of		As of
	June 30,		December 31,		June 30,
	2010		2009		2009
Commercial loans	$	4,335,392	$	4,066,522	$	4,181,857
Mortgage loans		430,550		463,416		503,890
Installment loans		1,370,400		1,425,373		1,497,211
Home equity loans		762,288		753,112		754,110
Credit card loans		146,253		153,525		148,104
Leases		58,555		61,541		59,974

Total noncovered loans		7,103,438		6,923,489		7,145,146
Covered loans		2,275,747		—		—
Less allowance for loan losses		118,343		115,092		111,222

Net loans	$	9,260,842	$	6,808,397	$	7,033,924

The Corporation evaluates purchased loans for impairment in accordance with the provisions of ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). Purchased loans are considered impaired if there is evidence of credit deterioration since origination and if it is probable that not all contractually required payments will be collected. The Corporation has elected to account for all loans acquired in the George Washington and Midwest acquisitions under ASC 310-30 except for $162.1 million of acquired loans with revolving privileges, which are outside the scope of this guidance. Purchased impaired loans are not classified as nonperforming assets at June 30, 2010 as the loans are considered to be performing under ASC 310-30. Interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is recognized on all purchased loans being accounted for under ASC 310-30.

As of the acquisition date of February 19, 2010, the preliminary estimate of contractually required payments receivable, including interest, for all loans accounted for in accordance with ASC 310-30 acquired in the George Washington transaction was $305.6 million. The cash flows expected to be collected as of the acquisition date for these loans were $178.8 million, including interest. These amounts were determined based upon the estimated remaining life of the underlying loans, which includes the effects of estimated prepayments. The fair value of these loans as of the acquisition date was $154.1 million. The outstanding balance, including contractual principal, interest, fees and penalties, of all purchased loans accounted for in

accordance with ASC 310-30 in the George Washington transaction was $268.8 million and $256.9 million as of February 19, 2010 and June 30, 2010, respectively.

As of the acquisition date of May 14, 2010, the preliminary estimate of contractually required payments receivable, including interest, for all loans acquired in the Midwest transaction and accounted for in accordance with ASC 310-30 was $2.4 billion. The cash flows expected to be collected, including interest, as of the acquisition date for these loans were $1.9 billion. These amounts were determined based upon the estimated remaining life of the underlying loans, which includes the effects of estimated prepayments. The fair value of these loans as of the acquisition date was $1.7 billion. The outstanding balance, including contractual principal, interest, fees and penalties, of all purchased loans accounted for in accordance with ASC 310-30 in the Midwest transaction was $2.1 billion and $2.0 billion as of May 14, 2010 and June 30, 2010, respectively.

Changes in the carrying amount of accretable yield for purchased loans accounted for in accordance with ASC 310-30 were as follows for the quarter ended June 30, 2010:


				Carrying
	Accretable			Amount of
	Yield			Loans
Balance at the date of acquisition	$	267,021		$	1,839,572
Accretion		(19,219	)		19,219
Net reclassifications from non-accretable to accretable		728			—
Payments, received, net		—			(65,249	)
Disposals		(301	)		—

Balance at end of period	$	248,229		$	1,793,542

As of the acquisition date of February 19, 2010, the preliminary estimates of the contractually required payments receivable, including interest, for all loans with revolving privileges acquired in the George Washington transaction was $46.3 million. The cash flows expected to be collected, including interest, as of the acquisition date for these loans were $27.1 million. The fair value of these loans as of the acquisition date was $23.7 million.

As of the acquisition date of May 14, 2010, the preliminary estimates of the contractually required payments receivable, including interest, for all loans with revolving privileges acquired in the Midwest transaction was $193.0 million. The cash flows expected to be collected, including interest, as of the acquisition date for these loans were $160.4 million. The fair value of these loans as of the acquisition date was $138.4 million.

The Bank and the FDIC are engaged in on-going discussions that may impact which assets and liabilities are ultimately acquired or assumed by the Bank and/or the purchase price.

The estimated fair values for the purchased impaired and non-impaired loans were based upon the FDIC’s estimated data for acquired loans.

See Note 5 (Allowance for loan losses) for further information.

5. Allowance for loan losses

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

The allowance for loan losses is Management’s estimate of the amount of probable credit losses inherent in the portfolio at the balance sheet date. This estimate is based on the current economy’s impact on the timing and expected amounts of future cash flows on impaired loans, as well as historical loss experience associated with homogenous pools of loans. To the extent credit deterioration occurs on purchased loans after the date of acquisition, the Corporation records an allowance for credit losses, net of any expected reimbursement under any loss sharing agreements with the FDIC. The expected payments from the FDIC under the loss sharing agreements are recorded as part of covered loans in the consolidated balance sheets.

Note 1 (Summary of Significant Accounting Policies) and Note 4 (Allowance for Loan Losses) in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (the “2009 Form 10-K”) more fully describe the components of the allowance for loan loss model.

The activity within the allowance for loan loss for the quarters and six months ended June 30, 2010 and 2009 and the year ended December 31, 2009, is shown in the following table:


	Quarter ended				Six months ended				Year ended
	June 30,				June 30,				December 31,
	2010		2009		2010		2009		2009
Allowance for loan losses-beginning of period	$	117,806	$	106,257	$	115,092	$	103,757	$	103,757
Loans charged off:
Commercial		7,183		10,130		16,078		14,684		39,685
Mortgage		1,395		1,315		3,041		2,238		4,960
Installment		8,430		7,487		17,235		15,925		31,622
Home equity		2,761		1,497		4,831		3,032		7,200
Credit cards		4,010		3,696		8,178		6,663		13,558
Leases		617		3		637		3		97
Overdrafts		812		598		1,403		1,117		2,591
Covered loans		220		—		220		—		—

Total charge-offs		25,428		24,726		51,623		43,662		99,713

Recoveries:
Commercial		430		207		802		431		890
Mortgage		38		193		63		219		270
Installment		3,081		2,022		5,098		4,423		8,329
Home equity		444		111		701		196		494
Credit cards		608		388		1,081		775		1,710
Manufactured housing		55		32		86		85		171
Leases		229		42		238		47		57
Overdrafts		253		175		485		365		694
Covered loans		—		—		—		—		—

Total recoveries		5,138		3,170		8,554		6,541		12,615


Net charge-offs		20,290		21,556		43,069		37,121		87,098
Provision for loan losses		20,633		26,521		46,126		44,586		98,433
Change in loss share receivable		194		—		194		—		—

Allowance for loan losses-end of period	$	118,343	$	111,222	$	118,343	$	111,222	$	115,092

6. Goodwill and Intangible Assets

Goodwill

Goodwill totaled $465.6 million and $139.6 million at June 30, 2010 and December 31, 2009, respectively. Goodwill of $48.3 million was acquired in the first quarter of 2010 in the acquisition of the First Bank branches and $277.7 million was acquired in the second quarter of 2010 in the Midwest acquisition. As of June 30, 2010, the goodwill acquired in the Midwest acquisition remains unallocated to the Corporation’s reporting units due to the short time between the date of the acquisition and the end of the second quarter. Additionally, the Bank and the FDIC are engaged in on-going discussions that may impact which assets and liabilities are ultimately acquired or assumed by the Bank and/or the purchase price.

The Corporation expects $45.3 million of the $48.3 million of goodwill acquired in the First Bank branches acquisition to be deductible for tax purposes. The Corporation expects the goodwill acquired in the Midwest acquisition to be deductible for tax purposes.

These acquisitions are more fully described in Note 2 (Business Combinations).

Other Intangible Assets

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


	June 30, 2010
	Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount
Core deposit intangibles	$	16,760	$	(4,966	)	$	11,794
Non-compete covenant		102		(13	)		89
Lease intangible		617		(78	)		539

	$	17,479	$	(5,057	)	$	12,422


	December 31, 2009
	Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount
Core deposit intangibles	$	5,210	$	(4,154	)	$	1,056
Non-compete covenant		102		—			102

	$	5,312	$	(4,154	)	$	1,158


	June 30, 2009
	Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount
Core deposit intangibles	$	5,210	$	(3,981	)	$	1,229

As a result of the ABL Loan acquisition on December 15, 2009, a non-compete asset was recognized at its acquisition date fair value of $0.1 million. This non-compete asset will be amortized on an accelerated basis over its estimated useful life of four years.

As a result of the acquisition of the First Bank branches on February 19, 2010, a core deposit intangible asset was recognized at its acquisition date fair value of $3.2 million and a lease intangible asset was recognized at its acquisition date fair value of $0.6 million. The core deposit intangible asset will be amortized on an accelerated basis over its useful life of ten years, and the lease intangible asset will be amortized over the remaining weighted average lease terms.

A core deposit intangible asset with an acquisition date fair value of $1.0 million was recognized as a result of the George Washington acquisition on February 19, 2010. The core deposit intangible asset will be amortized on an accelerated basis over its useful life of ten years.

A core deposit intangible asset with an acquisition date fair value of $7.4 million was recognized as a result of the Midwest acquisition on May 14, 2010. The core deposit intangible asset will be amortized on an accelerated basis over its useful life of ten years.

These acquisitions are more fully described in Note 2 (Business Combinations).

Intangible asset amortization expense was $0.7 million and $0.09 for the three months ended June 30, 2010 and 2009, respectively. Estimated amortization expense for each of the next five years is as follows: 2010 — $2.0 million; 2011 — $2.2 million; 2012 — $1.9 million; 2013 — $1.2 million; and 2014 — $1.1 million.

7. Earnings per share

The reconciliation between basic and diluted earnings per share (“EPS”) is calculated using the treasury stock method and presented as follows:


	Quarter ended		Quarter ended			Six months ended		Six months ended
	June 30,		June 30,			June 30,		June 30,
	2010		2009			2010		2009
BASIC EPS:

Net income	$	31,493	$	15,495			50,257		44,929
Less: preferred dividend		—		(4,500	)		—		(6,167	)
Less: accretion of preferred stock discount		—		—			—		(204	)


Net income available to common shareholders	$	31,493	$	10,995			50,257		38,558


Average common shares outstanding (*)		98,968		84,123			93,400		83,323


Net income per share — basic	$	0.32	$	0.13			0.54		0.46


DILUTED EPS:

Net income available to common shareholders	$	31,493	$	10,995			50,257		38,558
Add: interest expense on convertible bonds		—		—			—		—

	$	31,493	$	10,995			50,257		38,558

Avg common shares outstanding (*)		98,968		84,123			93,400		83,323
Add: Equivalents from stock options and restricted stock		1		8			3		8
Add: Equivalents-convertible bonds		—		—			—		—

Average common shares and equivalents outstanding (*)		98,969		84,131			93,403		83,331


Net income per common share — diluted	$	0.32	$	0.13			0.54		0.46


*		Average common shares outstanding have been restated to reflect stock dividends of 611,582 shares declared April 28, 2009 and 609,560 shares declared on August 20, 2009.

For the quarters ended June 30, 2010 and 2009 options to purchase 4.6 million and 4.8 million shares, respectively, were outstanding, but not included in the computation of diluted earnings per share because they were antidilutive.

On January 9, 2009, the Corporation completed the sale to the United States Department of the Treasury (“Treasury”) of $125.0 million of newly issued FirstMerit non-voting preferred shares as part of the Treasury’s Troubled Assets Relief Program Capital Purchase Program. The Corporation issued and sold to the Treasury for an aggregate purchase price of $125.0 million in cash (1) 125,000 shares of FirstMerit’s Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par value and having a liquidation preference of $1,000 per share, and (2) a warrant to purchase 952,260 FirstMerit common shares, each without par value, at an exercise price of $19.69 per share. At June 30, 2009, the warrant was outstanding, but not included in the computation of diluted earnings per share because it was antidilutive.

On April 22, 2009, the Corporation completed the repurchase of all 125,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A. On May 27, 2009, the Corporation completed the repurchase of the warrant held by the Treasury. The Corporation paid $5.0 million to the Treasury to repurchase the warrant.

The Corporation has Distribution Agency Agreements pursuant to which the Corporation may, from time to time, offer and sell shares of its common stock. During the quarter ended June 30, 2009, the Corporation sold 3.3 million shares of its common stock with an average value of $18.36 per share. During the quarter ended March 31, 2010, the Corporation sold 3.9 million shares with an average value of $20.91 per share.

In May 2010 the Corporation closed and completed the sale of a total of 17,600,160 shares of common stock, no par value, at $19.00 per share in a public underwritten offering. The net proceeds from the offering were approximately $320.07 million after deducting underwriting discounts and commissions and the estimated expenses of the offering payable by the Corporation. The Corporation intends to use the net proceeds of the offering, which qualify as tangible common equity and Tier 1 capital, for general corporate purposes, including the contribution of all or substantially all of the net proceeds to the capital of the Bank, which may use such amount for its general corporate purposes following the Midwest acquisition.

8. Segment Information

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

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

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

	•		Retail – The retail line of business includes consumer lending and deposit gathering, residential mortgage loan origination and servicing, and branch-based small business

			banking (formerly known as the “micro business” line). Retail offers a variety of retail financial products and services including consumer direct and indirect installment loans, debit and credit cards, debit gift cards, residential mortgage loans, home equity loans and lines of credit, deposit products, fixed and variable annuities and ATM network services. Deposit products include checking, savings, money market accounts and certificates of deposit.

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

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

The accounting policies of the lines of businesses are the same as those of the Corporation described in Note 1 (Summary of Significant Accounting Policies) to the 2009 Form 10-K. Funds transfer pricing is used in the determination of net interest income by assigning a cost for funds used or credit for funds provided to assets and liabilities within each business unit. Assets and liabilities are match-funded based on their maturity, prepayment and/or re-pricing 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.

The Corporation’s business is conducted solely in the United States of America. The following tables present a summary of financial results for the six-month period ended June 30, 2010 and 2009:


	Commercial				Retail				Wealth				Other						Consolidated
June 30, 2010	2nd Qtr		YTD		2nd Qtr		YTD		2nd Qtr		YTD		2nd Qtr			YTD			2nd Qtr		YTD
OPERATIONS:
Net interest income	$	54,649	$	97,683	$	59,941	$	108,196	$	4,859	$	9,563	$	(2,682	)	$	(8,281	)	$	116,767	$	207,161
Provision for loan losses		12,676		21,030		10,482		20,208		1,104		1,886		(3,629	)		3,002			20,633		46,126
Other income		12,766		22,970		27,990		52,773		8,442		16,161		4,011			16,396			53,209		108,300
Other expenses		27,956		53,053		55,866		107,800		9,596		18,948		12,305			19,935			105,723		199,736
Net income		24,427		37,287		14,968		22,364		1,750		3,237		(9,652	)		(12,631	)		31,493		50,257

AVERAGES :
Assets	$	5,443,648	$	4,837,737	$	2,928,728	$	2,863,282	$	289,357	$	291,671	$	4,810,446		$	4,429,044		$	13,472,179	$	12,421,734


	Commercial				Retail				Wealth				Other						Consolidated
June 30, 2009	2nd Qtr		YTD		2nd Qtr		YTD		2nd Qtr		YTD		2nd Qtr			YTD			2nd Qtr		YTD
OPERATIONS:
Net interest income	$	39,111	$	76,714	$	47,530	$	94,381	$	4,375	$	8,421	$	(3,901	)	$	(5,507	)	$	87,115	$	174,009
Provision for loan losses		10,393		14,893		12,704		22,465		2,002		4,615		1,422			2,613			26,521		44,586
Other income		10,240		20,640		26,789		50,766		8,153		16,216		5,663			18,411			50,845		106,033
Other expenses		23,179		46,761		48,933		99,595		9,269		18,604		9,183			8,807			90,564		173,767
Net income		10,257		23,205		8,244		15,006		816		922		(3,822	)		5,796			15,495		44,929

AVERAGES :
Assets	$	4,134,931	$	4,167,054	$	2,867,829	$	2,883,954	$	305,435	$	309,251	$	3,576,033		$	3,638,738		$	10,884,228	$	10,998,997

9. Derivatives and Hedging Activities

The Corporation, through its mortgage banking, foreign exchange 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. Derivative assets and liabilities are recorded at fair value on the balance sheet and do not take into account the effects of master netting agreements. Master netting agreements allow the Corporation to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable.

The 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.

Derivatives Designated in Hedge Relationships

The Corporation uses interest rate swaps to modify its exposure to interest rate risk. For example, the Corporation employs fair value hedging strategies to convert specific fixed-rate

loans into variable rate instruments. Gains or losses on the derivative instrument as well as the offsetting gains or losses on the hedged item attributable to the hedged risk are recognized in the same line item associated with the hedged item in current earnings. The Corporation also employs cash flow hedging strategies to effectively convert certain floating-rate liabilities into fixed-rate instruments. The effective portion of the gains or losses on the derivative instrument is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The remaining gains or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, are recognized in the current earnings.

As of June 30, 2010, December 31, 2009 and June 30, 2009, 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

June 30, 2010

December 31, 2009

June 30, 2009

June 30, 2010

December 31, 2009

June 30, 2009

Notional/

Contract

Fair

Contract

Fair

Contract

Fair

Contract

Fair

Contract

Fair

Contract

Fair

Amount

Value (a)

Amount

Value (a)

Amount

Value (a)

Amount

Value (b)

Amount

Value (b)

Amount

Value (b)

Interest rate swaps:

Fair value hedges

—

1,452

—

901

—

350,743

33,907

398,895

27,769

440,769

32,003


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

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

Through the Corporation’s Fixed Rate Advantage Program (“FRAP Program”) a customer received a fixed interest rate commercial loan and the Corporation subsequently converted that fixed rate loan to a variable rate instrument over the term of the loan by entering into an interest rate swap with a dealer counterparty. The Corporation receives a fixed rate payment from the customer on the loan and pays the equivalent amount to the dealer counterparty on the swap in exchange for a variable rate payment based on the one month London Inter-Bank Offered Rate (“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.

The Corporation entered into Federal Funds interest rate swaps to lock in a fixed rate to offset the risk of future fluctuations in the variable interest rate on Federal Funds borrowings. The Corporation entered into a swap with the counterparty during which time the Corporation paid a fixed rate and received a floating rate based on the current effective Federal Funds rate. The Corporation then borrowed Federal Funds in an amount equal to at least the outstanding notional amount of the swap(s) which resulted in the Corporation being left with a fixed rate instrument. These instruments were designated as cash flow hedges. The last Federal Funds interest rate swap matured in the quarter ended March 31, 2009 and there were no Federal Funds interest rate swaps outstanding as of June 30, 2010.

There were no cash flow hedges outstanding as of June 30, 2010, December 31, 2009 or June 30, 2009 and there was no activity associated with cash flow hedges for the quarters ended June 30, 2010 or 2009.

Derivatives Not Designated in Hedge Relationships

As of June 30, 2010, December 31, 2009 and June 30, 2009, 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
	June 30, 2010					December 31, 2009				June 30, 2009				June 30, 2010				December 31, 2009				June 30, 2009
	Notional/					Notional/				Notional/				Notional/				Notional/				Notional/
	Contract		Fair			Contract		Fair		Contract		Fair		Contract		Fair		Contract		Fair		Contract		Fair
	Amount		Value (a)			Amount		Value (a)		Amount		Value (a)		Amount		Value (b)		Amount		Value (b)		Amount		Value (b)
Interest rate swaps	$	717,915	$	49,391		$	639,285	$	26,840	$	595,806	$	26,123	$	717,915	$	49,391	$	686,947	$	30,717	$	645,687	$	30,502
Mortgage loan commitments		200,883		4,057			55,023		396		86,293		1,490		—		—		—		—		—		—
Forward sales contracts		132,084		(1,939	)		67,085		884		102,411		215		—		—		—		—		—		—
TBA Securities		—		—			—		—		—		—		—		—		—		—		—		—
Credit contracts		—		—			—		—		—		—		61,175		—		62,458		—		82,674		—
Foreign exchange		3,167		102			—		—		—		—		3,167		102		—		—		—		—
Other		—		—			—		—		—		—		14,699		—		18,171		—		13,859		600


Total	$	1,054,049	$	51,611		$	761,393	$	28,120	$	784,510	$	27,828	$	796,956	$	49,493	$	767,576	$	30,717	$	742,220	$	31,102


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

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

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

The Corporation had other interest rate swaps associated with fixed rate commercial loans with a notional value of $47.7 million and $49.9 million as of December 31, 2009 and June 30, 2009, respectively. These swaps were accounted for as standalone derivatives. This portfolio of interest rate swaps was terminated in January 2010.

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. Fallout can occur for a variety of reasons including falling rate environments when a borrower will abandon an interest rate lock loan commitment at one lender and enter into a new lower interest rate lock 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. 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.

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.

Effective August 1, 2008, the Corporation elected to fair value, on a prospective basis, newly originated conforming fixed-rate and adjustable-rate first mortgage warehouse loans. Prior to this election, all warehouse loans were carried at the lower of cost or market and a hedging program was utilized on its mortgage loans held for sale to gain protection for the changes in fair value of the mortgage loans held for sale and the forward sales contracts. As such, both the 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. Upon the Corporation’s election to prospectively account for substantially all of its mortgage loan warehouse products at fair value it discontinued the application of designated hedging relationships for new originations.

The Corporation periodically enters into derivative contracts by purchasing TBA Securities which are utilized as economic hedges of its MSRs to minimize the effects of loss of value of MSRs associated with increase prepayment activity that generally results from declining interest rates. In a rising interest rate environment, the value of the MSRs generally will increase while the value of the hedge instruments will decline. The hedges are economic hedges only, and are terminated and reestablished as needed to respond to changes in market conditions. There were no outstanding TBA Securities contracts as of June 30, 2010, December 31, 2009 or June 30, 2009.

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 June 30, 2010, the remaining terms on these swap participation agreements generally ranged from one to nine years. The Corporation’s maximum estimated exposure to written swap participations, as measured by projecting a maximum value of the guaranteed derivative instruments based on interest rate curve simulations and assuming 100% default by all obligors on the maximum values, was approximately $4.4 million as of June 30, 2010. The fair values of the written swap participations were not material at June 30, 2010, December 31, 2009 and June 30, 2009.

Gains and losses recognized in income on non-designated hedging instruments for the quarters ended June 30, 2010 and 2009 are as follows:


		Amount of Gain / (Loss)
		Recognized in Income on
Derivatives not	Location of Gain / (Loss)	Derivative
designated as hedging	Recognized in Income on	Quarter ended,			Quarter ended,
instruments	Derivative	June 30, 2010			June 30, 2009
IRLCs	Other income	$	2,818		$	(918	)
Forward sales contracts	Other income		(2,064	)		1,354
TBA Securities	Other income		—			(2,317	)
Credit contracts	Other income		—			—
Other	Other expenses		—			(600	)

Total		$	754		$	(2,481	)

Counterparty Credit Risk

Like other financial instruments, derivatives contain an element of “credit risk”— the possibility that the Corporation will incur a loss because a counterparty, which may be a bank, a broker-dealer or a customer, fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. All derivative contracts may be executed only with exchanges or counterparties approved by the Corporation’s Asset and Liability Committee, and only within the Corporation’s Board of Directors Credit Committee approved credit exposure limits. Where contracts have been created for customers, the Corporation enters into derivatives with dealers to offset its risk exposure. To manage the credit exposure to exchanges and counterparties, the Corporation generally enters into bilateral collateral agreements using standard forms published by the International Swaps and Derivatives Association. These agreements are to include thresholds of credit exposure or the maximum amount of unsecured credit exposure which the Corporation is willing to assume. Beyond the threshold levels, collateral in the form of securities made available from the investment portfolio or other forms of collateral acceptable under the bilateral collateral agreements are provided. The threshold levels for each counterparty are established by the Corporation’s Asset and Liability Committee. The Corporation generally posts collateral in the form of highly rated Government Agency issued

bonds or MBSs. Collateral posted against derivative liabilities was $91.6 million, $70.0 million and $60.8 million as of June 30, 2010, December 31, 2009 and June 30, 2009, respectively.

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
	Quarter ended						Six months ended
	June 30,						June 30,
	2010			2009			2010			2009
Components of Net Periodic Pension Cost
Service Cost	$	1,480		$	1,322		$	2,959		$	2,645
Interest Cost		2,800			2,751			5,600			5,501
Expected return on assets		(3,015	)		(2,805	)		(6,029	)		(5,611	)
Amortization of unrecognized prior service costs		98			86			197			171
Cumulative net loss		1,427			757			2,854			1,516

Net periodic pension cost	$	2,790		$	2,111		$	5,581		$	4,222


	Postretirement Benefits
	Quarter ended				Six months ended
	June 30,				June 30,
	2010		2009		2010		2009
Components of Net Periodic Postretirement Cost
Service Cost	$	15	$	15	$	30	$	30
Interest Cost		240		299		480		598
Amortization of unrecognized prior service costs		—		—		—		—
Cumulative net loss		4		9		8		17

Net Postretirement Benefit Cost		259		323		518		645
Curtailment Gain		—		—		—		(9,543	)

Net periodic postretirement (benefit)/cost	$	259	$	323	$	518	$	(8,898	)

In January 2009, FirstMerit announced to employees that the Corporation’s subsidy for retiree medical for current eligible active employees will be discontinued effective March 1, 2009. Eligible employees who retired on or prior to March 1, 2009, were offered subsidized retiree medical coverage until age 65. Employees who retired after March 1, 2009 will not receive the Corporation’s subsidy toward retiree medical coverage. The elimination of Corporation subsidized retiree medical coverage resulted in an accounting curtailment.

The Corporation maintains a savings plan under Section 401(k) of the Internal Revenue Code, covering substantially all full-time and part-time employees after six months of continuous employment. The savings plan was approved for non-vested employees in the defined benefit pension plan and new hires as of January 1, 2007. Effective January 1, 2009, the Corporation suspended its matching contribution to the savings plan.

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 follows:

	•		Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.

	•		Level 2 — Valuations of assets and liabilities traded in less active dealer or broker markets. Valuations include quoted prices for similar assets and liabilities traded in the same market; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

	•		Level 3 — Valuations based on unobservable inputs significant to the overall fair value measurement.

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.

Financial Instruments Measured at Fair Value

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis at June 30, 2010:


	Level 1		Level 2		Level 3		Total
Available-for-sale securities	$	3,443	$	3,021,712	$	43,459	$	3,068,614
Residential loans held for sale		—		24,733		—		24,733
Derivative assets		—		51,611		—		51,611

Total assets at fair value on a recurring basis	$	3,443	$	3,098,056	$	43,459	$	3,144,958


Derivative liabilities		—		83,400		—		83,400

Total liabilities at fair value on a recurring basis	$	—	$	83,400	$	—	$	83,400


Note:		There were no transfers between Levels 1 and 2 of the fair value hiearchy during the quarter ended June 30, 2010.

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.

For certain available-for sale securities, the Corporation obtains fair value measurements from an independent third party pricing service or independent brokers. The detail by level is shown in the table below.


			Level 2				Level 3
			Independent				Independent
	# Issues		Pricing Service		# Issues		Broker Quotes
U.S. Treasury		1	$	50,000		—	$	—
U.S. government agency debentures		22		327,447		—	$	—
U.S States and political subdivisions		470		294,176		—		—
Residential mortgage-backed securities:
U.S. government agencies		188		1,564,285		—		—
Residential collateralized mortgage-backed securities:
U.S. government agencies		77		785,801		1		1
Non-agency		1		3		1		16
Corporate debt securities		—		—		8		43,442

		759	$	3,021,712		10	$	43,459

Available-for-sale securities classified as Level 2 are valued using the prices obtained from an independent pricing service. The prices are not adjusted. The independent pricing service uses industry standard models to price U.S. Government agencies and MBSs that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Securities of obligations of state and political subdivisions are valued using a type of 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 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. On a quarterly basis, the Corporation obtains from the independent pricing service the inputs used to value a sample of securities held in portfolio. The Corporation reviews these inputs to ensure the appropriate classification, within the fair value hierarchy, is ascribed to a fair value measurement in its entirety. In addition, all fair value measurement are reviewed to determine the reasonableness of the measurement relative to changes in observable market data and market information received from outside market participants and analysts.

Available-for-sale securities classified as level 3 securities are primarily single issuer trust preferred securities. These trust preferred securities, which represent less than 2% of the portfolio at fair value, are valued based on the average of two non-binding broker quotes. Since these securities are thinly traded, the Corporation has determined that using an average of two non-binding broker quotes is a more conservative valuation methodology. The non-binding nature of the pricing results in a classification as Level 3.

Loans held for sale. Effective August 1, 2008, the Corporation elected to account for residential mortgage loans originated subsequent to such date at fair value. Previously, these residential loans had been recorded at the lower of cost or market value. These loans are regularly traded in active markets through programs offered by the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Federal National Mortgage Association (“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.

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” (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 due to counterparty’s inability to pay any uncollateralized position have been incurred. There was no significant change in value of derivative assets and liabilities attributed to credit risk for the quarter ended June 30, 2010.

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized follows:


												Total changes
			Total			Purchases, sales				Fair value		in fair values
	Fair Value		unrealized			issuances and				quarter ended		included in current
	March 31, 2010		gains/(losses) (a)			settlements, net		Transfers		June 30, 2010		period earnings
Other debt securities	$	43,813	$	(354	)	$	—	$	—	$	43,459	$	—


(a)		Reported in other comprehensive income (loss)


											Total changes
			Total		Purchases, sales				Fair value		in fair values
	Fair Value		unrealized		issuances and				quarter ended		included in current
	January 1, 2010		gains/(losses) (a)		settlements, net		Transfers		June 30, 2010		period earnings
Other debt securities	$	42,447	$	1,012	$	—	$	—	$	43,459	$	—


(a)		Reported in other comprehensive income (loss)

Certain financial assets and liabilities are measured at fair value on a nonrecurring basis. Generally, nonrecurring valuations are the result of applying accounting standards that require assets or liabilities to be assessed for impairment, or recorded at the lower-of-cost or fair value.

The following table presents the balances of assets and liabilities measured at fair value on a nonrecurring basis at June 30, 2010:


	Level 1		Level 2		Level 3		Total
Mortgage servicing rights	$	—	$	—	$	19,331	$	19,331
Impaired and nonaccrual loans		—		—		99,635		99,635
Other property (1)		—		—		59,584		59,584

Total assets at fair value on a nonrecurring basis	$	—	$	—	$	178,550	$	178,550


(1)		Represents the fair value, and related change in the value, of foreclosed real estate and other collateral owned by the Corporation during the period.

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

Prepayment Speeds: Generally, when market interest rates decline and other factors favorable to prepayments occur there is a corresponding increase in prepayments as customers refinance existing mortgages under more favorable interest rate terms. When a mortgage loan is prepaid the anticipated cash flows associated with servicing that loan are terminated, resulting in a reduction of the fair value of the capitalized mortgage servicing rights. To the extent that actual borrower prepayments do not react as anticipated by the prepayment model (i.e., the historical data observed in the model does not correspond to actual market activity), it is possible that the prepayment model could fail to accurately predict mortgage prepayments and could result in significant earnings volatility. To estimate prepayment speeds, the Corporation utilizes a third-party prepayment model, which is based upon statistically derived data linked to certain key principal indicators involving historical borrower prepayment activity associated with mortgage loans in the secondary market, current market interest rates and other factors, including the Corporation’s own historical prepayment experience. For purposes of model valuation, estimates are made for each product type within the mortgage servicing rights portfolio on a monthly basis.

Discount Rate: Represents the rate at which expected cash flows are discounted to arrive at the net present value of servicing income. Discount rates will change with market conditions (i.e., supply vs. demand) and be reflective of the yields expected to be earned by market participants investing in mortgage servicing rights.

Cost to Service: Expected costs to service are estimated based upon the incremental costs that a market participant would use in evaluating the potential acquisition of mortgage servicing rights.

Float Income: Estimated float income is driven by expected float balances (principal, interest and escrow payments that are held pending remittance to the investor or other third party) and current market interest rates, including the six month average of the three-month LIBOR index, which are updated on a monthly basis for purposes of estimating the fair value of mortgage servicing rights.

Impaired and nonaccrual loans. Fair value adjustments for these items typically occur when there is evidence of impairment. Loans are designated as impaired when, in the judgment of Management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. The Corporation measures fair value based on the value of the collateral securing the loans. 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. The value of the collateral is determined based on internal estimates as well as third party appraisals or price opinions. These measurements were classified as Level 3.

Other Property. Other property includes foreclosed assets and properties securing residential and commercial loans. Assets acquired through, or in lieu of, loan foreclosures are recorded initially at the lower of the loan balance or fair value, less estimated selling costs, upon the date of foreclosure. Fair value is based upon appraisals or third-party price opinions and, accordingly, considered a Level 3 classification. Subsequent to foreclosure, valuations are updated periodically, and the assets may be marked down further, reflecting a new carrying amount.

Financial Instruments Recorded at Fair Value

The Corporation may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with changes in fair value reported in net income. After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability or firm commitment or when certain specified reconsideration events occur. The fair value election may not be revoked once an election is made.

Effective August 1, 2008, the Corporation elected to fair value newly originated conforming fixed rate and adjustable-rate first mortgage loans held for sale. Previously, these loans had been recorded at the lower of cost or market value. The election of the fair value option aligns the accounting for these loans with the related hedges. It also eliminates the requirements of hedge accounting under GAAP. The fair value option was not elected for loans held for investment.

The following table reflects the differences, as of June 30, 2010, between the fair value carrying amount of residential mortgages held for sale and the aggregate unpaid principal amount the Corporation is contractually entitled to receive at maturity. None of these loans were 90 days or more past due, nor were any on nonaccrual status.


					Fair Value
					Carrying Amount
	Fair Value		Aggregate Unpaid		Less Aggregate
	Carrying Amount		Principal		Unpaid Principal
Loans held for sale reported at fair value	$	24,733	$	23,755	$	978

Interest income on loans held for sale is accrued on the principal outstanding primarily using the “simple-interest” method.

Loans held for sale are measured at fair value with changes in fair value recognized in current earnings. The change in fair value for residential loans held for sale measured at fair value included in earnings for the quarter ended June 30, 2010 was not significant.

Disclosures about Fair Value of Financial Instruments

The carrying amount and fair value of the Corporation’s financial instruments are shown below.


	June 30, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	620,515	$	620,515	$	161,033	$	161,033
Investment securities		3,293,996		3,293,996		2,744,838		2,744,838
Loan held for sale		24,733		24,733		16,828		16,828
Net noncovered loans		6,985,336		6,591,701		6,808,397		6,362,674
Net covered loans and loss share receivable		2,275,506		2,275,506		—		—
Accrued interest receivable		43,191		43,191		39,274		39,274
Mortgage servicing rights		19,327		19,331		20,784		22,241
Derivative assets		51,611		51,611		28,120		28,120

Financial liabilities:
Deposits	$	11,515,171	$	11,527,599	$	7,515,796	$	7,519,604
Federal funds purchased and securities sold under agreements to repurchase		744,055		750,582		996,345		998,645
Wholesale borrowings		474,963		483,572		740,105		745,213
Accrued interest payable		8,757		8,757		11,336		11,336
Derivative liabilities		83,400		83,400		58,486		58,486

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

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

Investment Securities — See Financial Instruments Measured at Fair Value above.

Net noncovered loans — The loan portfolio was segmented based on loan type and repricing characteristics. Carrying values are used to estimate fair values of variable rate loans. A discounted cash flow method was used to estimate the fair value of fixed-rate loans.

Discounting was based on the contractual cash flows, and discount rates are based on the year-end yield curve plus a spread that reflects current pricing on loans with similar characteristics. If applicable, prepayment assumptions are factored into the fair value determination based on historical experience and current economic conditions.

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.

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

Loss share receivable — This loss sharing asset is measured separately from the related covered assets as it is not contractually embedded in the covered assets and is not transferable with the covered assets should FirstMerit Bank choose to dispose of them. Fair value was estimated using projected cash flows related to the loss sharing 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 of the loss sharing reimbursement 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 and wholesale borrowings — The carrying amount of variable rate borrowings including federal funds purchased is considered to be their fair value. Quoted market prices or the discounted cash flow method was used to estimate the fair value of the Corporation’s long-term debt. Discounting was based on the contractual cash flows and the current rate at which debt with similar terms could be issued.

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.

12. Mortgage Servicing Rights and Mortgage Servicing Activity

The Corporation serviced for third parties approximately $2.0 billion of residential mortgage loans at June 30, 2010, December 31, 2009 and June 30, 2009. Loan servicing fees, not including valuation changes included in loan sales and servicing income, were $2.5 million in each of the six months ended June 30, 2010 and 2009, respectively.

Servicing rights are presented within other assets on the balance sheet. 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 are as follows:


	Quarter ended						Six months ended
	June 30,						June 30,
	2010			2009			2010			2009
Balance at beginning of period	$	20,652		$	19,061		$	20,784		$	18,778
Addition of mortgage servicing rights		677			1,755			1,393			3,192
Amortization		(911	)		(1,137	)		(1,759	)		(1,927	)
Changes in allowance for impairment		(1,091	)		1,149			(1,091	)		785

Balance at end of period	$	19,327		$	20,828		$	19,327		$	20,828

Fair value at end of period	$	19,331		$	22,013		$	19,331		$	22,013

On a quarterly basis, the Corporation assesses its capitalized servicing rights for impairment based on their current fair value. For purposes of the impairment, the servicing rights are disaggregated based on loan type and interest rate which are the predominant risk characteristics of the underlying loans. A valuation allowance is established through a charge to earnings to the extent the amortized cost of the mortgage servicing rights exceeds the estimated fair value by stratification. If it is later determined that all or a portion of the temporary impairment no longer exists for the stratification, the valuation is reduced through a recovery to earnings. The valuation allowance was $1.1 million as of June 30, 2010 and $0 million as of December 31, 2009 and June 30, 2009. No permanent impairment losses were written off against the allowance during the quarters ended June 30, 2010 and June 30, 2009.

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 June 30, 2010 are presented in the following table below. These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in the fair value based on 10%

variation in the prepayment speed assumption generally cannot be extrapolated because the relationship of the change in the prepayment speed assumption to the change in fair value may not be linear. Also, in the below table, the effect of a variation in the discount rate assumption on the fair value of the mortgage servicing rights is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in prepayment speed estimates could result in changes in the discount rates), which might magnify or counteract the sensitivities.


Prepayment speed assumption (annual CPR)		12.80	%
Decrease in fair value from 10% adverse change	$	834
Decrease in fair value from 25% adverse change		1,991
Discount rate assumption		9.71	%
Decrease in fair value from 100 basis point adverse change	$	629
Decrease in fair value from 200 basis point adverse change		1,214
Expected weighted-average life (in months)		92.2

13. Contingencies and Guarantees

Litigation

The nature of the Corporation’s business results in a certain amount of litigation. Accordingly, the Corporation and its subsidiaries are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. Management, after consultation with legal counsel, is of the opinion that the ultimate liability of such pending matters will not have a material effect on the Corporation’s financial condition and results of operations.

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. Additional information is provided in Note 9 (Derivatives and Hedging Activities). Commitments generally are extended at the then prevailing interest rates, have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon the total commitment amounts do not necessarily represent future cash requirements. Loan commitments involve credit risk not reflected on the balance sheet. The Corporation mitigates exposure to credit risk with internal controls that guide how applications for credit are reviewed and approved, how credit limits are established and, when necessary, how demands for collateral are made. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Management evaluates the creditworthiness of each prospective borrower on a case-by-case basis and, when appropriate, adjusts the allowance for probable credit losses inherent in all commitments. The allowance for unfunded lending commitments at June 30, 2010 was $6.8 million. Additional information pertaining to this allowance is included 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 June 30, 2010. 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.


	June 30, 2010
Loan Commitments
Commercial	$	1,615,853
Consumer		1,756,701

Total loan commitments	$	3,372,554

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 June 30, 2010.


	June 30, 2010
Financial guarantees
Standby letters of credit	$	180,329
Loans sold with recourse		56,985

Total loan commitments	$	237,314

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 $88.8 million at June 30, 2010, the remaining guarantees extend in varying amounts through 2014.

In recourse arrangements, the Corporation accepts 100% recourse. By accepting 100% recourse, the Corporation is assuming the entire risk of loss due to borrower default. The Corporation uses the same credit policies originating loans which will be sold with recourse as it does for any other type of loan. The Corporation’s exposure to credit loss, if the borrower completely failed to perform and if the collateral or other forms of credit enhancement all prove to be of no value, is represented by the notional amount less any allowance for possible loan losses. The allowance for loan loss associated with loans sold with recourse was $2.9 million as of June 30, 2010.

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

AVERAGE CONSOLIDATED BALANCE SHEETS (Unaudited)
Fully Tax-equivalent Interest Rates and Interest Differential


FIRSTMERIT CORPORATION AND
SUBSIDIARIES	Three months ended								Year ended								Three months ended
(Dollars in thousands)	June 30, 2010								December 31, 2009								June 30, 2009
	Average					Average			Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate
ASSETS
Cash and due from banks	$	710,981							$	183,215							$	194,381
Investment securities and federal funds sold:
U.S. Treasury securities and U.S. Government agency obligations (taxable)		2,736,884			23,462		3.44	%		2,222,771			97,871		4.40	%		2,205,221			24,455		4.45	%
Obligations of states and political subdivisions (tax exempt)		349,424			5,184		5.95	%		321,919			19,718		6.13	%		316,703			4,910		6.22	%
Other securities and federal funds sold		212,973			2,139		4.03	%		204,272			8,394		4.11	%		211,947			2,204		4.17	%

Total investment securities and federal funds sold		3,299,281			30,785		3.74	%		2,748,962			125,983		4.58	%		2,733,871			31,569		4.63	%

Loans held for sale		18,827			239		5.09	%		19,289			1,032		5.35	%		20,643			277		5.38	%
Noncovered loans, covered loans and loss share receivable		8,466,859			109,840		5.20	%		7,156,983			339,381		4.74	%		7,246,752			86,004		4.76	%

Total earning assets		11,784,967			140,864		4.79	%		9,925,234			466,396		4.70	%		10,001,266			117,850		4.73	%

Allowance for loan losses		(116,639	)							(108,017	)							(104,864	)
Other assets		1,092,870								793,062								793,445


Total assets	$	13,472,179							$	10,793,494							$	10,884,228


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand — non-interest bearing	$	2,492,539			—		—		$	1,910,171			—		—		$	1,891,792			—		—
Demand — interest bearing		698,261			149		0.09	%		656,367			600		0.09	%		671,235			159		0.10	%
Savings and money market accounts		4,228,323			7,873		0.75	%		2,886,842			23,472		0.81	%		2,810,155			5,452		0.78	%
Certificates and other time deposits		3,126,359			9,510		1.22	%		2,056,208			54,610		2.66	%		2,241,644			15,325		2.74	%


Total deposits		10,545,482			17,532		0.67	%		7,509,588			78,682		1.05	%		7,614,826			20,936		1.10	%

Securities sold under agreements to repurchase		843,652			1,404		0.67	%		1,013,167			4,764		0.47	%		945,178			1,211		0.51	%
Wholesale borrowings		526,926			3,111		2.37	%		952,979			27,317		2.87	%		1,019,786			6,897		2.71	%


Total interest bearing liabilities		9,423,521			22,047		0.94	%		7,565,563			110,763		1.46	%		7,687,998			29,044		1.52	%

Other liabilities		241,870								267,835								284,810

Shareholders’ equity		1,314,249								1,049,925								1,019,628


Total liabilities and shareholders’ equity	$	13,472,179							$	10,793,494							$	10,884,228


Net yield on earning assets	$	11,784,967			118,817		4.04	%	$	9,925,234			355,633		3.58	%	$	10,001,266			88,806		3.56	%


Interest rate spread							3.85	%							3.24	%							3.21	%


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

AVERAGE CONSOLIDATED BALANCE SHEETS (Unaudited)
Fully-tax Equivalent Interest Rates and Interest Differential


FIRSTMERIT CORPORATION AND
SUBSIDIARIES	Six months ended								Year ended								Six months ended
(Dollars in thousands)	June 30, 2010								December 31, 2009								June 30, 2009
	Average					Average			Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate
ASSETS
Cash and due from banks	$	614,191							$	183,215							$	202,254
Investment securities and federal funds sold:
U.S. Treasury securities and U.S. Government agency obligations (taxable)		2,559,223			46,399		3.66	%		2,222,771			97,871		4.40	%		2,227,999			50,409		4.56	%
Obligations of states and political subdivisions (tax exempt)		348,300			10,349		5.99	%		321,919			19,718		6.13	%		318,811			9,824		6.21	%
Other securities and federal funds sold		206,604			4,072		3.97	%		204,272			8,394		4.11	%		212,467			4,545		4.31	%


Total investment securities and federal funds sold		3,114,127			60,820		3.94	%		2,748,962			125,983		4.58	%		2,759,277			64,778		4.73	%

Loans held for sale		16,695			423		5.11	%		19,289			1,032		5.35	%		21,938			599		5.51	%
Noncovered loans, covered loans and loss share receivable		7,809,448			193,429		4.99	%		7,156,983			339,381		4.74	%		7,313,516			173,512		4.78	%

Total earning assets		10,940,270			254,672		4.69	%		9,925,234			466,396		4.70	%		10,094,731			238,889		4.77	%

Allowance for loan losses		(115,839	)							(108,017	)							(103,708	)
Other assets		983,112								793,918								805,720


Total assets	$	12,421,734							$	10,794,350							$	10,998,997


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand — non-interest bearing	$	2,322,184			—		—		$	1,910,171			—		—		$	1,830,181			—		—
Demand — interest bearing		691,279			301		0.09	%		656,367			600		0.09	%		663,301			314		0.10	%
Savings and money market accounts		3,970,523			15,474		0.79	%		2,886,842			23,472		0.81	%		2,724,636			10,829		0.80	%
Certificates and other time deposits		2,466,327			15,916		1.30	%		2,056,208			54,610		2.66	%		2,411,274			33,913		2.84	%


Total deposits		9,450,313			31,691		0.68	%		7,509,588			78,682		1.05	%		7,629,392			45,056		1.19	%

Securities sold under agreements to repurchase		897,490			2,531		0.57	%		1,013,167			4,764		0.47	%		943,156			2,210		0.47	%
Wholesale borrowings		617,170			9,285		3.03	%		952,979			27,317		2.87	%		1,085,417			14,240		2.65	%


Total interest bearing liabilities		8,642,789			43,507		1.02	%		7,565,563			110,763		1.46	%		7,827,784			61,506		1.58	%

Other liabilities		252,272								268,691								294,659

Shareholders’ equity		1,204,489								1,049,925								1,046,373


Total liabilities and shareholders’ equity	$	12,421,734							$	10,794,350							$	10,998,997


Net yield on earning assets	$	10,940,270			211,165		3.89	%	$	9,925,234			355,633		3.58	%	$	10,094,731			177,383		3.54	%


Interest rate spread							3.67	%							3.24	%							3.19	%


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

HIGHLIGHTS OF SECOND QUARTER 2010 PERFORMANCE

Earnings Summary

FirstMerit Corporation reported second quarter 2010 net income of $31.5 million, or $0.32 per diluted share. This compares with $18.8 million, or $0.21 per diluted share, for the first quarter 2010 and $15.5 million, or $0.13 per diluted share, for the second quarter 2009.

Returns on average common equity (“ROE”) and average assets (“ROA”) for the second quarter 2010 were 9.61% and 0.94%, respectively, compared with 6.96% and 0.67% for the first quarter 2010 and 6.27% and 0.57% for the second quarter 2009.

On May 14, 2010, the Corporation acquired, through its subsidiary FirstMerit Bank, N.A., the banking operations of Chicago-based Midwest Bank and Trust Company, the subsidiary bank of Midwest Banc Holdings, Inc. through a purchase and assumption agreement with the FDIC. The Illinois Department of Financial and Professional Regulation, Division of Banking, declared Midwest Bank and Trust closed on May 14, 2010 and appointed the FDIC as receiver. Including the effects of purchase accounting adjustments, FirstMerit Bank, N.A. acquired approximately $2.9 billion in assets and assumed $2.3 billion of the deposits of Midwest Bank and Trust Company. Midwest Bank had 26 branches located throughout the Chicago area.

Net interest margin was 4.04% for the second quarter of 2010 compared with 3.72% for the first quarter of 2010 and 3.56% for the second quarter of 2009. The addition of Midwest Bank and Trust’s balance sheet and the Corporation’s continued emphasis on core deposit gathering and shifting deposit mix away from higher-priced certificate of deposit products drove the expansion over both time periods. In connection with the Midwest Bank acquisition, FirstMerit Bank, N.A., entered into a loss sharing agreement with the FDIC that collectively covers $2.3 billion of assets including one-to four-family residential mortgage loans, commercial real estate and commercial and industrial loans, and other real estate (collectively, “Covered Assets”). FirstMerit Bank N.A., acquired other Midwest Bank assets that are not covered by the loss sharing agreement with the FDIC including investment securities purchased at fair market value and other tangible assets.

Average loans, not including covered loans, during the second quarter of 2010 increased $138.5 million, or 1.97%, compared with the first quarter of 2010 and decreased $85.8 million, or 1.18%, compared with the second quarter of 2009. The decline in average balances compared with the second quarter of 2009 reflects a reduced level of commercial and consumer credit demand and the focus on debt reduction by the Corporation’s business and retail customer base.

At June 30, 2010, average covered loan balances, including the loss share receivable, were $1.3 billion. Average deposits during the second quarter of 2010 increased $2.2 billion, or 26.43%, compared with the first quarter of 2010 and increased $2.9 billion, or 38.49%, compared with the second quarter of 2009. During the second quarter of 2010, the Corporation increased its average core deposits, which excludes time deposits, by $875.7 million, or 13.38%, compared with the first quarter of 2010, and $2.0 billion, or 38.08%, compared with the second quarter of 2009.

Average investments during the second quarter of 2010 increased $381.7 million, or 13.08%, compared with the first quarter of 2010 and increased $565.4 million, or 20.68%, over the second quarter of 2009. Second quarter of 2010 average investments was impacted by $575.0 million of securities purchased late in the first quarter of 2010 as a result of the First Bank acquisition.

Net interest income on a fully tax-equivalent (“FTE”) basis was $118.8 million in the second quarter 2010 compared with $92.3 million in the first quarter of 2010 and $88.8 million in the second quarter of 2009. Compared with the first quarter of 2010, average earning assets increased $1.7 billion, or 16.95%, and increased $1.8 billion, or 17.83%, compared to the second quarter of 2009. The addition of Midwest Bank and Trust’s earning asset base and the incremental margin expansion off those assets was a primary driver of the increases over both periods. Additionally, the Corporation continues to experience net interest margin expansion from successful execution of its core deposit gathering strategies.

Noninterest income net of securities transactions for the second quarter of 2010 was $52.6 million, a decrease of $2.5 million, or 4.60%, from the first quarter of 2010 and an increase of $2.9 million, or 5.82%, from the second quarter of 2009. The primary changes in other income for the 2010 second quarter as compared to the second quarter of 2009 were as follows: trust income was $5.6 million, an increase of 2.50% primarily due to advances in the equity markets; service charges on deposits were $17.7 million, an increase of 11.88% due to an increase in new accounts; credit card fees were $12.2 million, an increase of 4.92% attributable to the improvement in the economy.

Other income, net of securities gains, as a percentage of net revenue for the second quarter of 2010 was 30.67% compared with 37.37% for first quarter of 2010 and 35.87% for the second quarter of 2009. Net revenue is defined as net interest income, on a FTE basis, plus other income, less gains from securities sales. For the three months ended March 31, 2010, other income included a gain of $6.2 million from the George Washington acquisition.

Noninterest expense for the second quarter of 2010 was $105.7 million, an increase of $11.7 million, or 12.46%, from the first quarter of 2010 and an increase of $15.2 million, or 16.74%, from the second quarter of 2009. For the three months ended June 30, 2010, increases in operating expenses compared to the second quarter of 2009 were primarily attributable to increased salary and benefits, and professional services. One-time expenses associated with data processing conversions and related expenses for the acquisitions totaled $4.4 million.

During the second quarter of 2010, the Corporation reported an efficiency ratio of 61.30%, compared with 63.61% for the first quarter of 2010 and 65.34% for the second quarter of 2009.

Net charge-offs totaled $20.3 million, or 1.18% of average loans, excluding covered loans, in the second quarter of 2010 compared with $22.8 million, or 1.36% of average loans, in the first quarter 2010 and $21.6 million, or 1.19% of average loans, in the second quarter of 2009.

Nonperforming assets totaled $109.8 million at June 30, 2010, a decrease of $13.5 million compared with March 31, 2010 and an increase of $36.4 million compared with June 30, 2009. Nonperforming assets at June 30, 2010 represented 1.62% of period-end loans plus other real estate, excluding covered loans, compared with 1.80% at March 31, 2010 and 1.03% at June 30, 2009.

The allowance for loan losses, excluding covered loans, totaled $118.3 million at June 30, 2010, an increase of $0.3 million from March 31, 2010. At June 30, 2010, the allowance for loan losses was 1.75% of period-end loans compared with 1.72% at March 31, 2010, and 1.68% at December 31, 2009. The allowance for credit losses is the sum of the allowance for loan losses, excluding covered loans, and the reserve for unfunded lending commitments. For comparative purposes the allowance for credit losses was 1.84% of period-end loans, excluding covered loans, at June 30, 2010, compared with 1.82% at March 31, 2010 and 1.77% at December 31, 2009. The allowance for credit losses to nonperforming loans was 126.31% at June 30, 2010, compared with 110.80% at March 31, 2010 and 131.82% at December 31, 2009.

The Corporation’s total assets at June 30, 2010 were $14.5 billion, an increase of $2.2 billion inclusive of intangible assets, or 17.85%, compared with March 31, 2010 and an increase of $3.8 billion, or 35.77%, compared with June 30, 2009. Total loans, excluding covered loans, did not significantly change compared with March 31, 2010 and June 30, 2009.

Total deposits were $11.5 billion at June 30, 2010, an increase of $2.1 billion, or 22.89%, from March 31, 2010 and an increase of $4.1 billion, or 54.54%, from June 30, 2009. The increase over both periods was largely driven by the continuation of the Corporation’s expansion strategy in Chicago. Core deposits totaled $7.7 billion at June 30, 2010, an increase of $0.7 million, or 9.80%, from March 31, 2010 and an increase of $2.3 billion, or 42.90%, from June 30, 2009.

Shareholders’ equity was $1.5 billion at June 30, 2010, compared with $1.2 billion at March 31, 2010 and $1.0 billion at June 30, 2009. The Corporation maintained a strong capital position as tangible common equity to assets was 7.34% at June 30, 2010, compared with 7.93% and 8.36% at March 31, 2010 and June 30, 2009, respectively. The common dividend per share paid in the second quarter 2010 was $0.16.

On May 21, 2010, the Corporation announced that it closed and completed the sale of a total of 17,600,160 shares of common stock, no par value, to Credit Suisse Securities (USA) LLC, RBC Capital Market Corporation and Sandler O’Neil & Partners, L.P. at $19.00 per share in a public underwritten offering. The net proceeds from the offering were approximately $320.07 million after deducting underwriting discounts and commissions and the estimated expenses of the offering payable by the Corporation. The Corporation intends to use the net proceeds of the offering, which qualify as tangible common equity and Tier 1 capital, for general corporate purposes, including the contribution of all or substantially all of the net proceeds to the capital of FirstMerit Bank, N.A., which may use such amount for its general corporate purposes following the Midwest Bank acquisition.

On July 10, 2010, the Corporation successfully completed the operational and technical migration of George Washington Savings Bank which the Corporation acquired from the FDIC on February, 19 2010. The Corporation expects to complete the conversion of Midwest Bank and Trust in September 2010.

Acquisitions

In the first quarter of 2010, the Corporation completed two strategic acquisitions. On February 19, 2010, the Bank completed the acquisition of certain assets and the transfer of

certain liabilities with respect to 24 branches of First Bank located in the greater Chicago, Illinois, area. Excluding the purchase accounting adjustments, the acquisition included the assumption of approximately $1.2 billion in deposits and the purchase of $301.2 million of loans and $23.0 million in real and personal property associated with the acquired branch locations. The Bank received cash of $832.5 million to assume the net liabilities. This acquisition resulted in goodwill of $48.3 million.

Also on February 19, 2010, the Bank entered into a purchase and assumption agreement with loss share with the FDIC, as receiver of George Washington Savings Bank, to acquire deposits, loans, and certain other liabilities and certain assets of in a whole-bank acquisition of George Washington Savings Bank. Excluding the effects of purchase accounting adjustments, the Bank acquired approximately $403.9 million in assets and assumed $395.7 million of deposits of George Washington Savings Bank. The transaction resulted in a gain on acquisition of $6.2 million, which is included in noninterest income in the accompanying consolidated statements of income and comprehensive income.

On May 14, 2010, the Bank entered into a purchase and assumption agreement with loss share with the FDIC, as receiver of Midwest Bank and Trust Company, to acquire substantially all of the loans and certain other assets and assume substantially all of the deposits and certain liabilities in a whole-bank acquisition of Midwest Bank and Trust Company. Excluding the effects of purchase accounting adjustments, the Bank acquired approximately $3.0 billion in assets and assumed $2.3 billion of deposits of Midwest Bank and Trust Company. This acquisition resulted in goodwill of $277.7 million.

In connection with both the George Washington and Midwest Bank acquisitions, the Bank entered into loss share agreements with the FDIC that collectively covers loans and other real estate acquired, and has recorded, at its acquisition date fair value, a total loss share receivable of $330.0 million, which is classified as part of covered loans in the accompanying unaudited consolidated balance sheets. The Bank acquired other assets in both of these acquisitions that are not covered by the loss sharing agreements with the FDIC including investment securities purchased at fair market value and other tangible assets.

See Note 2 (Business Combinations), in the Notes to Unaudited Consolidated Financial Statements for additional information related to the details of these transactions.

RESULTS OF OPERATION

Net Interest Income

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

Net interest income for the quarter ended June 30, 2010 was $116.8 million compared to $87.1 million for the quarter ended June 30, 2009. Net interest income for the six months ended June 30, 2010 was $207.2 million compared to $174.0 million for the six months ended June 30, 2009. For the purpose of this remaining discussion, net interest income is presented on an FTE basis, to provide a comparison among all types of interest earning assets. That is, interest on tax-free securities and tax-exempt loans has been restated as if such interest were taxed at the statutory Federal income tax rate of 35%, adjusted for the non-deductible portion of interest expense incurred to acquire the tax-free assets. Net interest income presented on an FTE basis is a non-GAAP financial measure widely used by financial services organizations. The FTE adjustment was $2.1 million and $1.7 million for the quarters ending June 30, 2010 and 2009, respectively. The FTE adjustment was $4.0 million and $3.4 million for the six months ending June 30, 2010 and 2009, respectively.

FTE net interest income for the quarter ended June 30, 2010 was $118.8 million compared to $88.8 million for the three months ended June 30, 2009. FTE net interest income for the six months ended June 30, 2010 was $211.2 million compared to $177.4 million for the six months ended June 30, 2009.

As illustrated in the following rate/volume analysis table, interest income and interest expense both increased due to the falling interest rate environment.


	Quarters ended June 30, 2010 and 2009									Six months ended June 30, 2010 and 2009
RATE/VOLUME ANALYSIS	Increases (Decreases)									Increases (Decreases)
(Dollars in thousands)	Volume			Rate			Total			Volume			Rate			Total
INTEREST INCOME — FTE
Investment securities	$	5,729		$	(6,513	)	$	(784	)	$	7,637		$	(11,595	)	$	(3,958	)
Loans held for sale		(23	)		(15	)		(38	)		(135	)		(41	)		(176	)
Loans		15,348			8,488			23,836			12,028			7,889			19,917

Total interest income — FTE	$	21,054		$	1,960		$	23,014		$	19,530		$	(3,747	)	$	15,783

INTEREST EXPENSE
Demand deposits-interest bearing	$	7		$	(17	)	$	(10	)	$	13		$	(26	)	$	(13	)
Savings and money market accounts		2,649			(228	)		2,421			4,859			(214	)		4,645
Certificates of deposits and other time deposits		4,653			(10,468	)		(5,815	)		757			(18,754	)		(17,997	)
Securities sold under agreements to repurchase		(140	)		333			193			(111	)		432			321
Wholesale borrowings		(2,998	)		(788	)		(3,786	)		(6,816	)		1,861			(4,955	)

Total interest expense	$	4,171		$	(11,168	)	$	(6,997	)	$	(1,298	)	$	(16,701	)	$	(17,999	)

Net interest income — FTE	$	16,883		$	13,128		$	30,011		$	20,828		$	12,954		$	33,782

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

The following table provides 2010 FTE net interest income and net interest margin totals as well as 2009 comparative amounts:


	Quarters ended						Six months ended
	June 30,						June 30,
(Dollars in thousands)	2010			2009			2009			2009
Net interest income	$	116,767		$	87,115		$	207,161		$	174,009
Tax equivalent adjustment		2,050			1,691			4,004			3,374

Net interest income — FTE	$	118,817		$	88,806		$	211,165		$	177,383


Average earning assets	$	11,784,967		$	10,001,266		$	10,940,270		$	10,094,731

Net interest margin — FTE		4.04	%		3.56	%		3.89	%		3.54	%

Average loans outstanding (excluding covered loans) for the current year and prior year second quarters totaled $6.8 billion and $7.2 billion, respectively.

Specific changes in average loans outstanding, compared to the second quarter 2009, were as follows: commercial loans were up $112.9.4 million or 2.65%; home equity loans were up $14.8 million or 1.98%; mortgage loans were down $75.7 million or 14.74%; installment loans, both direct and indirect declined $135.2 million or 8.94%; leases decreased $2.0 million or 3.26%; and credit card loans remained flat. Average covered loans have been separately stated and are described in more detail in Note 2 (Business Combinations). The majority of fixed-rate mortgage loan originations are sold to investors through the secondary mortgage loan market. Average outstanding loans, including covered loans and loss share receivable, for the 2010 and 2009 second quarters equaled 70.85% and 72.46% of average earning assets, respectively.

Average deposits were $10.5 billion during the 2010 second quarter, up $2.9 million, or 38.49%, from the same period last year. For the quarter ended June 30, 2010, average core deposits (which are defined as checking accounts, savings accounts and money market savings products) increased $2.0 billion, or 38.08%, and represented 70.35% of total average deposits, compared to 70.56% for the 2009 second quarter. Average certificates of deposit (“CDs”) increased $.9 million, or 39.47%, compared to the prior year. Average wholesale borrowings decreased $492.9 million, and as a percentage of total interest-bearing funds equaled 5.59% for the 2010 second quarter and 13.26% for the same quarter one year ago. Securities sold under agreements to repurchase decreased $101.5 million, and as a percentage of total interest bearing funds equaled 8.95% for the 2010 second quarter and 12.29% for the 2009 second quarter. Average interest-bearing liabilities funded 79.96% of average earning assets in the current year quarter and 76.87% during the quarter ended June 30, 2009.

Other Income

Excluding investment gains, other income for the quarter ended June 30, 2010 totaled $52.3 million, an increase of $2.9 million from the $49.7 million earned during the same period one year ago. Other income as a percentage of net revenue (FTE net interest income plus other

income, less security gains from securities) was 30.67%, compared to 35.87% for the same quarter one year ago.

The primary changes in other income for the 2010 second quarter as compared to the second quarter of 2009 were as follows: trust income was $5.6 million, an increase of 2.50% primarily due to advances in the equity markets; service charges on deposits were $17.7 million, an increase of 11.88% due to an increase in new accounts; credit card fees were $12.2 million, an increase of 4.92% attributable to the improvement in the economy.

The changes in other income for the six months ended June 30, 2010 compared to June 30, 2009 were similar to the quarterly analysis. The primary changes in other income for the six months ended June 30, 2010 as compared to June 30, 2009 were as follows: A $6.2 million gain on the acquisition of George Washington was recognized in the first half of 2010, while a $9.5 million adjustment due to the curtailment of the postretirement medical plan for active employees was recognized in the first half of 2009.

Other Expenses

Other (non-interest) expenses totaled $105.7 million for the second quarter 2010 compared to $90.6 million for the same 2009 quarter, an increase of $15.2 million, or 16.74%. Other (non-interest) expenses totaled $199.7 million for the six months ended June 30, 2010 compared to $173.8 million for the six months ended June 30, 2009, an increase of $25.9 million, or 14.94%.

The primary changes in other expenses for the 2010 second quarter as compared to the second quarter of 2009 were as follows: FDIC expense decreased $4.1 million over the prior year quarter due to a $5.1 million emergency special assessment levied by the FDIC in May 2009. Excluding this one-time assessment, FDIC expense for the three months ended June 30, 2010 actually increased $1.0 million or 30.0% over the prior year quarter due to an overall increase in the FDIC deposit insurance assessment base. Increases in operating expenses compared to the second quarter of 2009 were primarily attributable to increased salary, occupancy and professional services related to the 2010 acquisitions. One-time expenses associated with data processing conversions and related expenses for the acquisitions totaled $4.4 million.

The changes in other expenses for the six months ended June 30, 2010 compared to June 30, 2009 were similar to the quarterly analysis. The primary changes in other expense for the six months ended June 30, 2010 as compared to June 30, 2009 were primarily attributable to increased salary, occupancy and professional services related to the 2010 acquisitions.

The efficiency ratio for the second quarter 2010 was 61.30%, compared to 65.34% during the same period in 2009. The “lower is better” efficiency ratio indicates the percentage of operating costs that are used to generate each dollar of net revenue — that is during the second quarter 2010, 61.30 cents was spent to generate each $1 of net revenue. Net revenue is defined as net interest income, on a tax-equivalent basis, plus other income less gains from the sales of securities.

Federal Income Taxes

Federal income tax expense was $12.1 million and $5.4 million for the quarters ended June 30, 2010 and 2009, respectively. The effective federal income tax rate for the second quarter 2010 was 27.80%, compared to 25.77% for the same quarter 2009. Tax reserves have been specifically estimated for potential at-risk items in accordance with ASC 740, Income Taxes. Further federal income tax information is described in Note 1 (Summary of Significant Accounting Policies) and Note 11 (Federal Income Taxes) in the 2009 Form 10-K.

FINANCIAL CONDITION

Acquisitions

On February 19, 2010, the Bank completed the acquisition of certain assets and the transfer of certain liabilities with respect to 24 branches of First Bank located in the greater Chicago, Illinois, area. The Bank acquired assets with an acquisition date fair value of approximately $1.2 billion, including $276.5 million of loans, and $41.9 million of premises and equipment, and assumed $1.2 billion of deposits. The Bank received cash of $832.5 million to assume the net liabilities. The Bank recorded a core deposit intangible asset of $3.2 million and goodwill of $48.3 million.

On February 19, 2010, the Bank entered into a purchase and assumption agreement with loss share with the FDIC, as receiver of George Washington, to acquire deposits, loans, and certain other liabilities and certain assets of in a whole-bank acquisition of George Washington. The Bank acquired assets with a fair value of approximately $369.3 million, including $177.8 million of loans, $15.4 million of investment securities, $58.0 million of cash and due from banks, $11.5 million in other real estate, and $403.2 million in liabilities, including $400.7 million of deposits. The Bank recorded a core deposit intangible asset of $1.0 million and received a cash payment from the FDIC of approximately $40.2 million. The Bank entered into loss share agreements with the FDIC and recorded, at its acquisition date fair value, a loss share receivable of $100.3 million, which is classified as part of covered loans in the accompanying unaudited consolidated balance sheets. The transaction resulted in a gain on acquisition of $6.2 million, which is included in noninterest income in the accompanying consolidated statements of income and comprehensive income. On July 10, 2010, the Corporation successfully completed the operational and technical migration of George Washington.

On May 14, 2010, the Bank entered into a purchase and assumption agreement with loss share with the FDIC, as receiver of Midwest, to acquire substantially all of the loans and certain other assets and assume substantially all of the deposits and certain liabilities in a whole-bank acquisition of Midwest. The Bank acquired assets with a fair value of approximately $2.4 billion, including $1.8 billion of loans, $565.3 million of investment securities, $279.4 million of cash and due from banks, $26.2 million in other real estate, and $3.0 billion in liabilities, including $2.3 billion of deposits. The Bank recorded a core deposit intangible asset of $7.4 million and has made a cash payment to the FDIC of approximately $227.5 million. The Bank entered into loss share agreements with the FDIC and recorded, at its acquisition date fair value, a loss share receivable of $230.0 million, which is classified as part of covered loans in the accompanying consolidated balance sheets. The transaction resulted in goodwill of $277.7

million. The Corporation expects to complete the operational and technical conversion of Midwest in the fourth quarter of 2010.

See Note 2 (Business Combinations), in the notes to unaudited consolidated financial statements for additional information related to the details of these transactions.

Investment Securities

At June 30, 2010, total investment securities were $3.3 billion compared to $2.7 billion at December 31, 2009 and June 30, 2009. Available-for-sale securities were $3.1 billion at June 30, 2010 compared to $2.6 billion at December 31, 2009 and $2.5 billion at June 30, 2009. The Available-for-sale securities are held primarily for liquidity, interest rate risk management and long-term yield enhancement. Accordingly, the Corporation’s investment policy is to invest in securities with low credit risk, such as U.S. Treasury securities, U.S. Government agency obligations, state and political obligations and mortgage-backed securities. Cash proceeds from the First Bank acquisition were utilized to purchase approximately $575.0 million in short term securities late in the first quarter of 2010.

Held-to-maturity securities totaled $65.2 million at June 30, 2010 compared to $50.7 million at December 31, 2009 and $27.5 million at June 30, 2009 and consist principally of securities issued by state and political subdivisions.

Other investments totaled $160.2 million at June 30, 2010 compared to $128.9 million at December 31, 2009 and $128.8 million at June 30, 2009 and consistent primarily of FHLB and FRB stock. The increase of $31.3 million or 24.31% from December 31, 2009 was a result of the FHLB and FRB stock acquired in the George Washington and Midwest acquisitions.

Net unrealized gains were $87.3 million, $55.1 million and $33.9 million at June 30, 2010, December 31, 2009, and June 30, 2009, respectively. The improvement in the fair value of the investment securities is driven by government agency securities held in portfolio.

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

Gross unrealized losses of $18.1 million, compared to $21.6 million as of December 31, 2009, and $31.7 million at June 30, 2009 were concentrated within trust preferred securities held in the investment portfolio. The Corporation holds eight, single issuer, trust preferred securities. Such investments are less than 2% of the fair value of the entire investment portfolio. None of the bank issuers have deferred paying dividends on their issued trust preferred shares in which the Corporation is invested. The fair values of these investments have been impacted by market conditions which have caused risk premiums to increase markedly resulting in the decline in the fair value of the Corporation’s trust preferred securities. However, prices are recovering from their lows reflecting increased liquidity for these securities as well as an improvement in the credit profile of the issuers as improving.

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) to the consolidated financial statements.

Loans

Loans acquired under loss share agreements with the FDIC include the amounts of expected reimbursements from the FDIC under these agreements and are presented as “covered loans” below. Loans not subject to loss share agreements are presented below as “non-covered loans”. Total non-covered loans outstanding at June 30, 2010 were $7.1 billion compared to $6.9 billion at December 31, 2009 and $7.1 billion at June 30, 2009.


	As of		As of		As of
	June 30,		December 31,		June 30,
	2010		2009		2009
	(In thousands)
Commercial loans	$	4,335,392	$	4,066,522	$	4,181,857
Mortgage loans		430,550		463,416		503,890
Installment loans		1,370,400		1,425,373		1,497,211
Home equity loans		762,288		753,112		754,110
Credit card loans		146,253		153,525		148,104
Leases		58,555		61,541		59,974

Total noncovered loans		7,103,438		6,923,489		7,145,146
Covered loans		2,278,571		—		—
Less allowance for loan losses		118,343		115,092		111,222

Net loans	$	9,263,666	$	6,808,397	$	7,033,924

Allowance for Loan Losses and Reserve for Unfunded Commitments

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 and would be more conservative.

The uncertain economic conditions in which we are currently operating have resulted in risks that differ from our historical loss experience. Accordingly, Management deemed it appropriate and prudent to apply qualitative factors (“q-factors”) and assign additional reserves. These q-factors are supported by judgments made by experienced credit risk management personnel and represent risk associated with the portfolio given the uncertainty and the inherent imprecision of estimating future losses.

Purchased loans are recorded at acquisition date at their acquisition date fair values, and, therefore, are excluded from the calculation of loan loss reserves as of the acquisition date. At acquisition, in accordance with ASC 310-30, the Corporation reviews each loan to determine whether there is evidence of deterioration in credit quality since origination and if it is probable that the Corporation will be unable to collect all amounts due according to the loan’s contractual terms. The Corporation considers expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows for each loan meeting the criteria above, and determines the excess of the loan’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference). The remaining amount, representing the excess of the loan’s or pool’s cash flows expected to be collected over the book value of the loan, is accreted into interest income over the remaining life of the loan or pool (accretable yield). The Corporation records a discount on these loans at acquisition to record them at their realizable cash flow.

Subsequent to the acquisition date, purchased loans are incorporated into the Corporation’s allowance process. For loans accounted for in accordance with ASC 310-30, the Corporation continues to estimate cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics. The Corporation evaluates at each balance sheet date whether the present value of its loans determined using the effective interest rates has decreased and if so, recognizes a provision for loan loss, net of amounts recoverable through loss sharing agreements, in its consolidated statement of income. For any increases in cash flows expected to be collected, the Corporation adjusts the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life.

The Bank acquired $177.8 million and $1.8 billion of loans in conjunction with the FDIC-assisted acquisitions of George Washington and Midwest, respectively. All loans acquired in the George Washington and Midwest acquisitions were acquired under loss share agreements whereby the FDIC reimburses the Bank for a significant amount of losses incurred. The Corporation evaluated the loans acquired in these two acquisitions in accordance with ASC 310-30 and elected to account for all covered loans under ASC 310-30, regardless of the impairment determination, with the exception of $162.1 million loans with revolving privileges, which are outside the scope of ASC 310-30.

Due to the significant change in the accounting for the acquired loans and the loss sharing arrangements with the FDIC, Management believes that asset quality measures excluding the acquired loans are generally more meaningful. Therefore, the asset quality ratios included herein exclude the acquired loans with a period end balance of $2.3 billion. In addition, ratios of nonperforming loans exclude these acquired loans and other real estate, with a period end balance of $50.5 million, covered by the FDIC loss share agreements.

At June 30, 2010 the allowance for loan losses was $118.3 million or 1.75% of loans outstanding, excluding acquired loans, compared to $115.1 million or 1.68% at year-end 2009 and $111.2 or 1.56% for the quarter ended June 30, 2009. The allowance equaled 119.43% of nonperforming loans at June 30, 2010, compared to 125.55% at year-end 2009, and 175.17% for June 30, 2009. During 2008 additional reserves were established to address identified risks associated with the slow down in the housing markets and the decline in residential and commercial real estate values. These reserves totaled $20.0 million, $19.8 million, and $20.1 at

June 30, 2010, December 31, 2010, and June 30, 2009, respectively. The increase in the additional allocation augmented the increase in the calculated loss migration analysis as the loans were downgraded during 2010. Nonperforming loans have increased by $36.4 million over June 30, 2009, and $8.8 million over December 31, 2009 primarily attributable to the declining economic conditions.

At June 30, 2010, the allowance for loan loss included $0.2 million related to the $177.8 million of loans acquired in the George Washington.

Net charge-offs were $20.3 million for the second quarter ended 2010 compared to $87.1 million for year-end 2009 and $21.6 million in the second quarter ended 2009. As a percentage of average loans outstanding, excluding acquired loans, net charge-offs equaled 1.18% , 1.22%, and 1.19% for June 30, 2010, December 31, 2009, and June 30, 2009, respectively. Losses are charged against the allowance for loan losses as soon as they are identified.

The allowance for unfunded lending commitments at June 30, 2010, December 31, 2009, and June 30, 2009 was $6.8 million, $5.8 million and $6.1 million, respectively. The allowance for credit losses, which includes both the allowance for loan losses and the reserve for unfunded lending commitments, amounted to $125.2 million at second quarter-end 2010, $120.8 million at year-end 2009 and $117.3 million at second quarter-end 2009.

Allowance for Credit Losses

The allowance for credit losses is the sum of the allowance for loan losses and the reserve for unfunded lending commitments.


	Quarter ended			Year Ended			Quarter ended
	June 30,			December 31,			June 30,
	2010			2009			2009
				(In thousands)
Allowance for Loan Losses
Allowance for loan losses-beginning of period	$	117,806		$	103,757		$	106,257
Provision for loan losses		20,633			98,433			26,521
Change in loss share receivable		194			0
Net charge-offs		(20,290	)		(87,098	)		(21,556	)

Allowance for loan losses-end of period	$	118,343		$	115,092		$	111,222


Reserve for Unfunded Lending Commitments
Balance at beginning of period	$	6,337		$	6,588		$	6,019
Provision for credit losses		475			(837	)		35

Balance at end of period	$	6,812		$	5,751		$	6,054


Allowance for credit losses	$	125,155		$	120,843		$	117,276


Annualized net charge-offs as a % of average loans		1.18	%		1.22	%		1.19	%


Allowance for loan losses:
As a percentage of period-end loans, excluding acquired loans (a)		1.75	%		1.68	%		1.56	%

As a percentage of nonperforming loans		119.43	%		125.55	%		175.17	%

As a multiple of annualized net charge offs		1.47x			1.32x			1.29x


Allowance for credit losses:
As a percentage of period-end loans, excluding acquired loans (a)		1.84	%		1.77	%		1.64	%

As a percentage of nonperforming loans		126.31	%		131.82	%		184.71	%

As a multiple of annualized net charge offs		1.55x			1.39x			1.36x


(a)		Excludes loss share receivable

The allowance for credit losses increased $4.3 million from December 31, 2009 to June 30, 2010, and increased $7.9 million from June 30, 2009 to June 30, 2010. The increase for both periods was attributable to additional reserves that were established to address identified risks associated with the slow down in the housing markets and the decline in residential and commercial real estate values.

The following tables show the overall trend in credit quality by specific asset and risk categories.


	At June 30, 2010
	Loan Type
	Commercial		Commercial R/E				Installment		Home Equity		Credit Card		Res Mortgage
Allowance for Loan Losses Components:	Loans		Loans		Leases		Loans		Loans		Loans		Loans		Total
(In thousands)
Individually Impaired Loan Component:
Loan balance	$	9,489	$	64,382	$	—	$	—	$	—	$	—	$	—	$	73,871
Allowance		1,837		7,797		—		—		—		—		—		9,634
Collective Loan Impairment Components:
Credit risk-graded loans
Grade 1 loan balance		98,958		2,036		8,403										109,397
Grade 1 allowance		69		—		7										76
Grade 2 loan balance		48,864		20,254		57										69,175
Grade 2 allowance		61		37		—										98
Grade 3 loan balance		332,868		483,704		11,734										828,306
Grade 3 allowance		825		1,276		36										2,137
Grade 4 loan balance		1,033,871		1,646,857		37,787										2,718,515
Grade 4 allowance		10,937		14,949		375										26,261
Grade 5 (Special Mention) loan balance		44,203		70,421		574										115,198
Grade 5 allowance		1,797		3,325		26										5,148
Grade 6 (Substandard) loan balance		73,614		111,004		—										184,618
Grade 6 allowance		8,473		13,796		—										22,269
Grade 7 (Doubtful) loan balance		189		396		—										585
Grade 7 allowance		10		24		—										34
Consumer loans based on payment status:
Current loan balances								1,350,571		736,949		142,393		394,733		2,624,646
Current loans allowance								20,250		6,691		9,688		3,893		40,522
30 days past due loan balance								10,008		2,438		1,354		12,455		26,255
30 days past due allowance								1,706		808		868		630		4,012
60 days past due loan balance								2,988		562		947		4,050		8,547
60 days past due allowance								1,379		412		859		643		3,293
90+ days past due loan balance								1,692		390		1,559		17,186		20,827
90+ days past due allowance								1,302		455		1,784		1,077		4,618

Total loans	$	1,642,056	$	2,399,054	$	58,555	$	1,365,259	$	740,339	$	146,253	$	428,424	$	6,779,940

Total Allowance for Loan Losses	$	24,009	$	41,204	$	444	$	24,637	$	8,366	$	13,199	$	6,243	$	118,102

Note: Total loans excludes loans from First Bank, George Washington and MidWest which are recorded at date of acquisition at their fair value.


	At December 31, 2009
	Loan Type
	Commercial		Commercial R/E				Installment		Home Equity		Credit Card		Res Mortgage
Allowance for Loan Losses Components:	Loans		Loans		Leases		Loans		Loans		Loans		Loans		Total
(In thousands)
Individually Impaired Loan Component:
Loan balance	$	17,480	$	50,345	$	—	$	—	$	—	$	—	$	—	$	67,825
Allowance		3,678		6,849		—		—		—		—		—		10,527
Collective Loan Impairment Components:
Credit risk-graded loans
Grade 1 loan balance		75,598		1,178		7,441										84,217
Grade 1 allowance		47		—		6										53
Grade 2 loan balance		59,946		74,839		67										134,852
Grade 2 allowance		52		88		—										140
Grade 3 loan balance		316,535		517,338		15,246										849,119
Grade 3 allowance		579		1,137		36										1,752
Grade 4 loan balance		1,030,872		1,647,918		38,179										2,716,969
Grade 4 allowance		8,666		16,306		257										25,229
Grade 5 (Special Mention) loan balance		42,066		40,748		30										82,844
Grade 5 allowance		1,224		1,873		1										3,098
Grade 6 (Substandard) loan balance		83,884		107,635		578										192,097
Grade 6 allowance		7,616		12,558		53										20,227
Grade 7 (Doubtful) loan balance		68		72		—										140
Grade 7 allowance		1		3		—										4
Consumer loans based on payment status:
Current loan balances								1,396,198		748,207		146,906		428,150		2,719,461
Current loans allowance								18,038		5,829		8,106		3,304		35,277
30 days past due loan balance								18,057		2,306		2,245		13,515		36,123
30 days past due allowance								2,813		677		1,178		571		5,239
60 days past due loan balance								5,919		1,678		1,622		4,301		13,520
60 days past due allowance								2,461		1,081		1,217		617		5,376
90+ days past due loan balance								5,199		921		2,752		17,450		26,322
90+ days past due allowance								3,458		912		2,618		1,182		8,170

Total loans	$	1,626,449	$	2,440,073	$	61,541	$	1,425,373	$	753,112	$	153,525	$	463,416	$	6,923,489

Total Allowance for Loan Losses	$	21,863	$	38,814	$	353	$	26,770	$	8,499	$	13,119	$	5,674	$	115,092


	At June 30, 2009
	Loan Type
	Commercial		Commercial R/E				Installment		Home Equity		Credit Card		Res Mortgage
Allowance for Loan Losses Components:	Loans		Loans		Leases		Loans		Loans		Loans		Loans		Total
(In thousands)
Individually Impaired Loan Component:
Loan balance	$	8,930	$	51,603	$	—	$	—	$	—	$	—	$	—	$	60,533
Allowance		1,442		7,311		—		—		—		—		—		8,753
Collective Loan Impairment Components:
Credit risk-graded loans
Grade 1 loan balance		37,653		5,739		6,180										49,572
Grade 1 allowance		37		14		8										59
Grade 2 loan balance		99,771		107,078		1,473										208,322
Grade 2 allowance		165		653		3										821
Grade 3 loan balance		375,488		540,410		17,726										933,624
Grade 3 allowance		879		4,547		52										5,478
Grade 4 loan balance		1,053,613		1,648,118		32,316										2,734,047
Grade 4 allowance		7,728		30,877		241										38,846
Grade 5 (Special Mention) loan balance		53,765		37,871		1,620										93,256
Grade 5 allowance		1,351		1,797		38										3,186
Grade 6 (Substandard) loan balance		70,051		91,708		659										162,418
Grade 6 allowance		4,482		9,891		39										14,412
Grade 7 (Doubtful) loan balance		—		59		—										59
Grade 7 allowance		—		5		—										5
Consumer loans based on payment status:
Current loan balances								1,468,931		749,807		142,647		471,139		2,832,524
Current loans allowance								12,957		4,690		4,114		2,895		24,656
30 days past due loan balance								19,527		1,998		1,562		13,112		36,199
30 days past due allowance								2,566		545		742		523		4,376
60 days past due loan balance								5,794		1,864		1,407		3,196		12,261
60 days past due allowance								2,229		1,180		1,023		426		4,858
90+ days past due loan balance								2,959		441		2,488		16,443		22,331
90+ days past due allowance								1,903		449		2,338		1,082		5,772

Total loans	$	1,699,271	$	2,482,586	$	59,974	$	1,497,211	$	754,110	$	148,104	$	503,890	$	7,145,146

Total Allowance for Loan Losses	$	16,084	$	55,095	$	381	$	19,655	$	6,864	$	8,217	$	4,926	$	111,222

Asset Quality

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

The Corporation’s Credit Policy Division manages credit risk by establishing common credit policies for its subsidiaries, participating in approval of their largest loans, conducting reviews of their loan portfolios, providing them with centralized consumer underwriting, collections and loan operations services, and overseeing their loan workouts. Notes 1 (Summary of Significant Accounting Policies) and 4 (Loans Allowance for Loan Losses) in the 2009 Form 10-K provide detailed information regarding the Corporation’s credit policies and practices.

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.

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 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.

Nonperforming Assets are defined as follows:

•

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

•

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


	June 30,			December 31,			June 30,
	2010			2009			2009
	(Dollars in thousands)
Nonperforming commercial loans	$	84,535		$	74,033		$	48,563
Other nonaccrual loans:		14,394			17,639			14,929

Total nonperforming loans		98,929			91,672			63,492
Other real estate (“ORE”)		10,852			9,329			9,859

Total nonperforming assets	$	109,781		$	101,001		$	73,351


Loans past due 90 day or more accruing interest	$	36,932		$	35,025		$	22,129

Total nonperforming assets as a percentage of total loans and ORE		1.62	%		1.48	%		1.03	%

The higher levels of non-performing loans reflect the current state of the economy. Residential developers and homebuilders have been the most adversely affected, with the significant decrease of buyers resulting from a combination of the restriction of available credit and economic pressure impacting the consumer. Consumers continue to be under pressure due to high debt levels, limited refinance opportunities, increased cost of living and increasing unemployment. These conditions have resulted in increases in bankruptcies as well as charge offs. Commercial nonperforming loans increased $10.5 million from December 31, 2009 and $35.9 million from June 30, 2009. Commercial criticized loans increased $31.4 million from December 31, 2009, and $58.0 from June 30, 2009.

In nonperforming assets, other real estate includes $1.0 million of vacant land no longer considered for branch expansion which is not related to loan portfolios.

See Note 1 (Summary of Significant Accounting Policies) of the 2009 Form 10-K for a summary of the Corporation’s nonaccrual and charge-off policies.

The following table is a nonaccrual commercial loan flow analysis:


	Quarter Ended
	June 30,			March 31,			December 31,			September 30,			June 30,
	2010			2010			2009			2009			2009
	(In thousands)
Nonaccrual commercial loans beginning of period	$	94,798		$	74,033		$	63,357		$	48,563		$	54,070

Credit Actions:
New		4,419			31,211			34,612			24,491			7,259
Loan and lease losses		(6,071	)		(5,367	)		(5,272	)		(3,886	)		(5,951	)
Charged down		(1,730	)		(3,567	)		(12,710	)		(3,321	)		(4,182	)
Return to accruing status		(1,575	)		(672	)		(478	)		(24	)		(660	)
Payments		(5,306	)		(840	)		(5,476	)		(2,466	)		(1,973	)
Sales		—			—			—			—			—

Nonaccrual commercial loans end of period	$	84,535		$	94,798		$	74,033		$	63,357		$	48,563

Deposits, Securities Sold Under Agreements to Repurchase and Wholesale Borrowings

The following ratios and table provide additional information about the change in the mix of customer deposits.


	Quarter Ended					Year Ended					Quarter Ended
	June 30, 2010					December 31, 2009					June 30, 2009
	Average		Average			Average		Average			Average		Average
	Balance		Rate			Balance		Rate			Balance		Rate
						(Dollars in thousands)
Non-interest DDA	$	2,492,539		—		$	1,910,171		—		$	1,891,792		—
Interest-bearing DDA		698,261		0.09	%		656,367		0.09	%		671,235		0.10	%
Savings and money market		4,228,323		0.75	%		2,886,842		0.81	%		2,810,155		0.78	%
CDs and other time deposits		3,126,359		1.22	%		2,056,208		2.66	%		2,241,644		2.74	%

Total customer deposits		10,545,482		0.67	%		7,509,588		1.05	%		7,614,826		1.10	%
				.
Securities sold under agreements to repurchase		843,652		0.67	%		1,013,167		0.47	%		945,178		0.51	%
Wholesale borrowings		526,926		2.37	%		952,979		2.87	%		1,019,786		2.71	%

Total funds	$	11,916,060				$	9,475,734				$	9,579,790

Deposits balances were elevated by the $3.9 billion in deposits assumed as part of the Midwest, George Washington and First Bank acquisitions in the first half of 2010. Total average demand deposits comprised 30.26% of average deposits in the 2010 second quarter compared to

33.66% in the second quarter 2009. Savings accounts, including money market products, made up 40.1% of average deposits in the 2010 second quarter compared to 36.90% in the second quarter 2009. CDs made up 29.6% of average deposits in the second quarter 2010 and 29.44% in the second quarter 2009.

The average cost of deposits, securities sold under agreements to repurchase and wholesale borrowings was down 56 basis points compared to one year ago, or 1.02% for the quarter ended June 30, 2010.

The following table summarizes CDs of $100 thousand or more (“Jumbo CDs”) as of June 30, 2010, by time remaining until maturity:


Time until maturity:	Amount
	(In thousands)
Under 3 months	$	302,063
3 to 6 months		281,933
6 to 12 months		282,694
Over 1 year through 3 years		170,196
Over 3 years		38,697

	$	1,075,583

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.

Shareholder’s Equity

Shareholders’ equity at June 30, 2010 totaled $1.5 billion compared to $1.1 billion at December 31, 2009 and $1.0 billion at June 30, 2009. The cash dividend of $0.16 per share paid in the second quarter has an indicated annual rate of $0.64 per share.

Capital Availability

In May 2010 the Corporation closed and completed the sale of a total of 17,600,160 shares of common stock, no par value, $19.00 per share in a public underwritten offering. The net proceeds from the offering were approximately $320.07 million after deducting underwriting discounts and commissions and the estimated expenses of the offering payable by the Corporation. The Corporation intends to use the net proceeds of the offering, which qualify as

tangible common equity and Tier 1 capital, for general corporate purposes, including the contribution of all or substantially all of the net proceeds to the capital of FirstMerit Bank, N.A., which may use such amount for its general corporate purposes following the Midwest Bank acquisition.

Capital Adequacy

Capital adequacy is an important indicator of financial stability and performance. The Corporation maintained a strong capital position as tangible common equity to assets was 7.34% at June 30, 2010, compared to 8.89% at December 31, 2009, and 8.36% at June 30, 2009.

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 I 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 transactions, which were accounted for as business combinations, resulted in the recognition of an FDIC indemnification asset, which represents the fair value of estimated future payments by the FDIC to the Corporation for losses on covered assets. The FDIC indemnification asset, as well as covered assets, are risk-weighted at 20% for regulatory capital requirement purposes.

As of June 30, 2010, the Corporation, on a consolidated basis, as well as FirstMerit Bank, exceeded the minimum capital levels of the well capitalized category.


	June 30,				December 31,				June 30,
	2010				2009				2009
					(Dollars in thousands)
Consolidated
Total equity	$	1,508,719	10.39	%	$	1,065,627	10.11	%	$	1,022,647	9.56	%
Common equity		1,508,719	10.39	%		1,065,627	10.11	%		1,022,647	9.56	%
Tangible common equity (a)		1,030,649	7.34	%		924,871	8.89	%		882,173	8.36	%
Tier 1 capital (b)		1,033,237	11.22	%		971,013	12.09	%		936,038	11.38	%
Total risk-based capital (c)		1,148,427	12.48	%		1,071,682	13.34	%		1,039,044	12.63	%
Leverage (d)		1,033,237	8.00	%		971,013	9.39	%		936,038	8.74	%

Bank Only
Total equity	$	1,297,708	8.95	%	$	946,626	9.00	%	$	804,009	7.52	%
Common equity		1,297,708	8.95	%		946,626	9.00	%		804,009	7.52	%
Tangible common equity (a)		819,638	5.84	%		806,223	7.77	%		663,535	6.29	%
Tier 1 capital (b)		928,221	10.11	%		826,517	10.31	%		802,305	9.77	%
Total risk-based capital (c)		1,039,086	11.31	%		922,919	11.51	%		901,439	10.97	%
Leverage (d)		928,221	7.11	%		826,517	8.00	%		802,305	7.50	%


(a)		Common equity less all intangibles; computed as a ratio to total assets less intangible assets.

(b)		Shareholders’ equity less goodwill; computed as a ratio to risk-adjusted assets, as defined in the 1992 risk-based capital guidelines.

(c)		Tier 1 capital plus qualifying loan loss allowance, computed as a ratio to risk-adjusted assets, as defined in the 1992 risk-based capital guidelines.

(d)		Tier 1 capital computed as a ratio to the latest quarter’s average assets less goodwill.

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 Asset and Liability Committee (“ALCO”) oversees market risk management, establishing risk measures, limits, and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. According to these policies, responsibility for measuring and the management of interest rate risk resides in the Corporate Treasury function.

Interest rate risk on the Corporation’s balance sheets consists of reprice, option, and basis risks. Reprice risk results from differences in the maturity, or repricing, of asset and liability portfolios. Option risk arises from “embedded options” present in the investment portfolio and in many financial instruments such as loan prepayment options, deposit early withdrawal options, and interest rate options. These options allow customers opportunities to benefit when market interest rates change, which typically results in higher costs or lower revenue for the Corporation. Basis risk refers to the potential for changes in the underlying relationship between market rates or indices, which subsequently result in a narrowing of profit spread on an earning asset or liability. Basis risk is also present in administered rate liabilities, such as interest-bearing checking accounts, savings accounts and money market accounts where historical pricing relationships to market rates may change due to the level or directional change in market interest rates. Each of these types of risks is defined in the discussion of market risk management of the 2009 Form 10-K.

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

Net interest income simulation analysis. Earnings simulation involves forecasting net interest earnings under a variety of scenarios including changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates. The sensitivity of net interest income to changes in interest rates is measured using numerous interest rate scenarios including shocks, gradual ramps, curve flattening, curve steepening as well as forecasts of likely interest rates scenarios. Presented below is the Corporation’s interest rate risk profile as of June 30, 2010 and 2009:


	Immediate Change in Rates and Resulting Percentage
	Increase/(Decrease) in Net Interest Income:
	- 100 basis		+ 100 basis			+ 200 basis			+ 300 basis
	points		points			points			points
June 30, 2010		*		0.23	%		0.29	%		(0.55	%)
June 30, 2009		*		1.32	%		2.09	%		2.57	%


*		Modeling for the decrease in 100 basis points scenario has been suspended due to the current rate environment.

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.

Economic value of equity modeling. The Corporation also has longer-term interest rate risk exposure, which may not be appropriately measured by earnings sensitivity analysis. ALCO uses economic value of equity (“EVE”) sensitivity analysis to study the impact of long-term cash flows on earnings and capital. EVE involves discounting present values of all cash flows of on balance sheet and off balance sheet items under different interest rate scenarios. The discounted present value of all cash flows represents the Corporation’s economic value of equity. The analysis requires modifying the expected cash flows in each interest rate scenario, which will impact the discounted present value. The amount of base-case measurement and its sensitivity to shifts in the yield curve allow management to measure longer-term repricing and option risk in the balance sheet. Presented below is the Corporation’s EVE profile as of June 30, 2010 and 2009:


	Immediate Change in Rates and Resulting Percentage
	Increase/(Decrease) in EVE:
	- 100 basis		+ 100 basis			+ 200 basis			+ 300 basis
	points		points			points			points
June 30, 2010		*		4.27	%		6.12	%		7.17	%
June 30, 2009		*		1.27	%		0.08	%		0.18	%


*		Modeling for the decrease in 100 basis points scenario has been suspended due to the current rate environment.

Management of interest rate exposure. Management uses the results of its various simulation analyses 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 included in this report.

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 Corporation’s primary source of liquidity is its core deposit base, raised through its retail branch system. Core deposits comprised approximately 70.35% of total deposits at June 30, 2010. The Corporation also has available unused wholesale sources of liquidity, including advances from the FHLB of Cincinnati, issuance through dealers in the capital markets and access to certificates of deposit issued through brokers. Liquidity is further enhanced by an excess reserve position that averaged greater than one half billion dollars through the second quarter of 2010 in addition to unencumbered, or unpledged, investment securities that totaled $1.2 billion as of June 30, 2010.

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 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 June 30, 2010, lower cost core deposits increased by $0.7 million from the previous quarter. In aggregate, deposits increased $2.1 billion. Securities sold under agreements to repurchase decreased $152.3 million from March 31, 2010. Wholesale borrowings decreased $202.3 million from March 31, 2010. The Corporation’s loan to deposit ratio increased to 78.75% at June 30, 2010 from 78.55% at March 31, 2010.

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; as well as pay dividends to shareholders.

During the quarter ended June 30, 2010, FirstMerit Bank did not pay dividends to FirstMerit Corporation. As of June 30, 2010, FirstMerit Bank had an additional $126.3 million available to pay dividends without regulatory approval.

Recent Market and Regulatory Developments. In response to the current national and international economic recession, and in efforts to stabilize and strengthen the financial markets and banking industries, the United States Congress and governmental agencies have taken a number of significant actions over the past several years, including the passage of legislation and implementation of a number of programs. The most recent of these actions was the passage into law, on July 21, 2010, of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act is the most comprehensive change to banking laws and the financial regulatory environment since the Great Depression of the 1930s. The Dodd-Frank Act affects almost every aspect of the nation’s financial services industry and mandates change in several key areas, including regulation and compliance (both with respect to financial institutions and systemically important nonbank financial companies), securities regulation, executive compensation, regulation of derivatives, corporate governance, and consumer protection.

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

In addition, and among many other legislative changes that the Corporation will assess, the Corporation will (1) experience a new assessment model from the Federal Deposit Insurance Corporation (“FDIC”) based on assets, not deposits, (2) be subject to enhanced executive compensation and corporate governance requirements, and (3) be able, for the first time (and perhaps competitively compelled) to offer interest on business transaction and other accounts.

The extent to which the Dodd-Frank Act and initiatives there under will succeed in addressing the credit markets or otherwise result in an improvement in the national economy is uncertain. In addition, because most aspects of this legislation will be subject to intensive agency rulemaking and subsequent public comment prior to implementation over the next six to 18 months, 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 November 28, 2010, the FDIC issued its final rule creating its temporary liquidity guarantee program (“TLPG”) pursuant to which the FDIC would guarantee the payment of certain newly-issued senior unsecured debt of insured depository institutions (“Debt Guarantee”) and funds held at FDIC-insured depository institutions in noninterest-bearing transaction accounts in excess of the current standard maximum deposit insurance amount of $250,000 (“Transaction Account Guarantee”). Both guarantees were provided to eligible institutions, including the Corporation, at no cost through December 5, 2008. Participation in the TLPG subsequent to December 5, 2008 was optional. The Corporation elected to participate in the TLPG subsequent to December 5, 2008.

The Transaction Account Guarantee was effective for the Corporation through June 30, 2010. Under the Debt Guarantee, if qualifying senior unsecured debt was newly issued by the Corporation during the period from October 14, 2008 to June 30, 2009, inclusive, it would have been covered by the FDIC guarantee. The maximum amount of debt that eligible institutions could have issue under the guarantee is 125% of the par value of the entity’s qualifying senior unsecured debt, excluding debt to affiliates that was outstanding as of September 30, 2008, and scheduled to mature by June 30, 2009. The FDIC was to provide guarantee coverage until the earlier of the eligible debt’s maturity or June 30, 2012. The Corporation did not issue any qualifying senior unsecured debt while the Transaction Account Guarantee was effective.

Participants in the Debt Guarantee Program were assessed an annualized fee of 75 basis points for its participation, and an annualized fee of 10 basis points for its participation in the Transaction Account Guarantee. To the extent that these initial assessments are insufficient to cover the expense or losses arising under TLPG, the FDIC was required to impose an emergency special assessment on all FDIC insured depository institutions as prescribed by the Federal Deposit Insurance Act. In May 2009, the FDIC announced it was imposing an emergency special assessment of five basis points on average assets of all FDIC-insured depository institutions as of June 30, 2009. On November 12, 2009, the FDIC adopted a final rule requiring insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid assessments for these periods were collected on December 30, 2009, along with the regular quarterly risk-based deposit insurance assessment for the third quarter of 2009. For the fourth quarter of 2009 and for all of 2010, the prepaid assessment rate was based on each institution’s total basis point assessment in effect on September 30, 2009, adjusted to assume a 5% annualized deposit growth rate; for the 2011 and 2012 periods the computation is adjusted by an additional three basis points increase in the assessment rate. The three-year prepayment for the Corporation totaled $43.9 million.

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

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 or agreement. Also, such statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies and are subject to change at any time, particularly in the current economic and regulatory environment. Any such change in statutes, regulations or regulatory policies applicable to the Corporation could have a material effect on the business of the Corporation.

Critical Accounting Policies

The Corporation’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the financial services industry in which it operates. All accounting policies are important, and all policies described in Note 1 (Summary of Significant Accounting Policies) of the 2009 Form 10-K provide a greater understanding of how the Corporation’s financial performance is recorded and reported.

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

Management relies heavily on the use of judgment, assumptions and estimates to make a number of core decisions, including accounting for the allowance for loan losses, income taxes, derivative instruments and hedging activities, and assets and liabilities that involve valuation methodologies. A brief discussion of each of these areas appears within Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2009 Form 10-K.

Purchased loans and related indemnification assets. In accordance with applicable authoritative accounting guidance, all purchased loans and related indemnification assets are recorded at fair value at date of purchase. The initial valuation of these loans and related indemnification asset requires Management to make subjective judgments concerning estimates about how the acquired loans will perform in the future using valuation methods including discounted cash flow analysis and independent third-party appraisals. Factors that may significantly affect the initial valuation include, among others, market-based and industry data related to expected changes in interest rates, assumptions related to probability and severity of credit losses, estimated timing of credit losses including those the foreclosure and liquidation of collateral, expected prepayment rates, required or anticipated loan modifications, unfunded loan commitments, the specific terms and provisions of any loss share agreements, and specific industry and market conditions that may impact discount rates and independent third-party appraisals.

On an ongoing basis, the accounting for purchased loans and related indemnification assets follows applicable authoritative accounting guidance for purchased non-impaired loans and purchased impaired loans. The amount that the Corporation realizes on these loans and

related indemnification assets could differ materially from the carrying value reflected in these financial statements, based upon the timing and amount of collections on the acquired loans in future periods. The Corporation’s losses on these assets may be mitigated to the extent covered under the specific terms and provisions of any loss share agreements.

Off-Balance Sheet Arrangements

A detailed discussion of the Corporation’s off-balance sheet arrangements, including interest rate swaps, forward sale contracts, IRLCs, and TBA Securities is included in Note 9 (Derivatives and Hedging Activities) to the Corporation’s consolidated financial statements included in this report and in Note 17 to the 2009 Form 10-K. There have been no significant changes since December 31, 2009.

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 detained 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 2009 Form 10-K.

Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, operational, economic and competitive uncertainties and contingencies, many of which are beyond a company’s control, and many of which, with respect to future business decisions and actions (including acquisitions and divestitures), are subject to change. Examples of uncertainties and contingencies include, among other important factors, general and local economic and business conditions; recession or other economic downturns, expectations of and actual timing and amount of interest rate movements, including the slope of the yield curve (which can have a significant impact on a financial services institution); market and monetary fluctuations; inflation or deflation; customer and investor responses to these conditions; the financial condition of borrowers and other counterparties; competition within and outside the financial services industry; geopolitical developments including possible terrorist activity; recent and future legislative and regulatory developments; natural disasters; effectiveness of the Corporation’s hedging practices; technology; demand for the Corporation’s product offerings; new products and services in the industries in which the Corporation operates; and critical accounting estimates. 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 Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve), Financial Industry Regulatory Authority (FINRA), and other regulators; regulatory and judicial proceedings and changes in laws and regulations applicable to the Corporation; and the

Corporation’s success in executing its business plans and strategies 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.


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.

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

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.

PART II — OTHER INFORMATION


ITEM 1.		LEGAL PROCEEDINGS

In the normal course of business, the Corporation is 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 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.


ITEM 1A.		RISK FACTORS

There have been no material changes in our risk factors from those disclosed in 2009 Form 10-K except for the following:

The recently enacted Dodd-Frank Act may adversely impact the Corporation’s results of operations, financial condition or liquidity.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), was signed into law. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, establishes the new federal Bureau of Consumer Financial Protection, and requires that bureau and other federal agencies to implement many new and significant rules and regulations. At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the rules and regulations promulgated there under will impact the Corporation’s business, although it is likely that compliance with these new laws and regulations will result in additional costs, which could be significant, and may adversely impact the Corporation’s results of operations, financial condition or liquidity.


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

(a) Not applicable.

(b) Not applicable.

(a)

The following table provides information with respect to purchases the Corporation made of its common shares during the second quarter of the 2010 fiscal year:


					Total Number of		Maximum
					Shares Purchased		Number of Shares
					as Part of Publicly		that May Yet Be
	Total Number of		Average Price		Announced Plans		Purchased Under
	Shares Purchased (2)		Paid per Share		or Programs (1)		Plans or Programs

Balance as of March 31, 2010								396,272

April 1, 2010 - April 30, 2010		23,695	$	22.99		—		396,272
May 1, 2010 - May 31, 2010		20,442		23.26		—		396,272
June 1, 2010 - June 30, 2010		1,620		24.74		—		396,272


Balance as of June 30, 2010:		45,757	$	23.17		—		396,272


(1)		On January 19, 2006, the Board of Directors authorized the repurchase of up to 3 million shares (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 (the “Prior Repurchase Plan”). The Corporation had purchased all of the shares it was authorized to acquire under the Prior Repurchase Plan.


ITEM 6.		EXHIBITS

(a) Exhibits


Exhibit
Number		Description

	2.1	Purchase and Assumption Agreement Whole Bank All Deposits, among the Federal Deposit Insurance Corporation, receiver of Midwest Bank and Trust Company, Bank, Elmwood Park, Illinois, the Federal Deposit Insurance Corporation and FirstMerit Bank, N.A., dated as of May 14, 2010. (incorporated by reference from Exhibit 2.1 to the Current Report on Form 8-K filed by FirstMerit Corporation on May 17, 2010).

	10.1	FirstMerit Bank Cash-Settled Value Appreciation Instrument, dated May 14, 2010 (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed by FirstMerit Corporation on May 17, 2010).

	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, 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, Executive Vice President and Chief Financial Officer of FirstMerit Corporation.

	101*	The following materials from FirstMerit Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income and 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, tagged as blocks of text.


*		As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections.


(2)		Reflects 115,477 common shares purchased as a result of either: (1) delivered by the option holder with respect to the exercise of stock options; (2) in the case of restricted shares of common stock, shares were withheld to pay income taxes or other tax liabilities with respect to the vesting of restricted shares; or (3) shares were returned upon the resignation of the restricted shareholder.


	FIRSTMERIT CORPORATION
August 6, 2010	By:	/s/ TERRENCE E. BICHSEL
		Terrence E. Bichsel, Executive Vice President
		and Chief Financial Officer (duly authorized officer of registrant and principal financial officer)