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 September 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 (§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

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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


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

As of November 2, 2010, 108,801,329 shares, without par value, were outstanding.

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FIRSTMERIT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


(Dollars in thousands)	September 30,			December 31,			September 30,
(Unaudited, except December 31, 2009, which is derived from the audited financial statements)	2010			2009			2009
ASSETS
Cash and due from banks	$	650,769		$	161,033		$	193,060
Investment securities
Held-to-maturity		61,818			50,686			38,454
Available-for-sale		3,027,436			2,565,264			2,583,722
Other investments		160,753			128,888			128,901
Loans held for sale		25,542			16,828			12,519
Noncovered loans:
Commercial loans		4,344,784			4,066,522			4,097,252
Mortgage loans		414,728			463,416			481,336
Installment loans		1,349,964			1,425,373			1,481,200
Home equity loans		760,816			753,112			761,553
Credit card loans		144,734			153,525			147,767
Leases		64,009			61,541			60,540

Total noncovered loans		7,079,035			6,923,489			7,029,648
Less: allowance for loan losses noncovered		(116,528	)		(115,092	)		(116,352	)

Net loans noncovered		6,962,507			6,808,397			6,913,296
Covered loans (includes loss share receivable of $318 million)		2,177,807			—			—
Less: allowance for loan losses covered		(3,437	)		—			—

Net loans covered		2,174,370			—			—
Net loans		9,136,877			6,808,397			6,913,296
Premises and equipment, net		194,757			125,205			126,416
Goodwill		460,396			139,598			139,245
Intangible assets		11,416			1,158			1,143
Other real estate covered by FDIC loss share		53,525			—			—
Accrued interest receivable and other assets		572,497			542,845			624,599

Total assets	$	14,355,786		$	10,539,902		$	10,761,355


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand-non-interest bearing	$	2,658,458		$	2,069,921		$	1,898,913
Demand-interest bearing		847,284			677,448			644,121
Savings and money market accounts		4,557,702			3,408,109			3,035,922
Certificates and other time deposits		3,207,972			1,360,318			1,692,318

Total deposits		11,271,416			7,515,796			7,271,274


Federal funds purchased and securities sold under agreements to repurchase		897,755			996,345			1,350,475
Wholesale borrowings		391,914			740,105			749,397
Accrued taxes, expenses, and other liabilities		276,809			222,029			331,000

Total liabilities		12,837,894			9,474,275			9,702,146

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 92,635,910 at September 30, 2010, December 31, 2009 and September 30, 2009, respectively		127,937			127,937			127,937
Capital surplus		484,770			88,573			68,694
Accumulated other comprehensive loss		(4,915	)		(25,459	)		(7,437	)
Retained earnings		1,071,147			1,043,625			1,042,752
Treasury stock, at cost, 6,318,452, 6,629,995 and 6,767,053 shares at September 30, 2010, December 31, 2009 and September 30, 2009, respectively		(161,047	)		(169,049	)		(172,737	)

Total shareholders’ equity		1,517,892			1,065,627			1,059,209

Total liabilities and shareholders’ equity	$	14,355,786		$	10,539,902		$	10,761,355

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

FIRSTMERIT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


	Quarters ended						Nine months ended
(Unaudited)	September 30,						September 30,
(Dollars in thousands except per share data)	2010			2009			2010		2009
Interest income:
Interest and fees on loans, including held for sale	$	118,543		$	84,283		$	312,112	$	258,329
Investment securities
Taxable		23,560			26,165			74,032		81,119
Tax-exempt		3,234			3,223			9,861		9,738

Total investment securities interest		26,794			29,388			83,893		90,857
Total interest income		145,337			113,671			396,005		349,186

Interest expense:
Interest on deposits:
Demand-interest bearing		252			137			553		451
Savings and money market accounts		8,294			5,763			23,768		16,592
Certificates and other time deposits		9,588			12,284			25,504		46,197
Interest on securities sold under agreements to repurchase		986			1,286			3,517		3,496
Interest on wholesale borrowings		2,724			6,824			12,009		21,064

Total interest expense		21,844			26,294			65,351		87,800

Net interest income		123,493			87,377			330,654		261,386
Provision for loan losses noncovered		18,108			23,887			63,967		68,473
Provision for loan losses covered		593			—			860		—

Net interest income after provision for loan losses		104,792			63,490			265,827		192,913

Other income:
Trust department income		5,469			5,081			16,324		15,309
Service charges on deposits		16,859			16,782			49,962		46,798
Credit card fees		12,532			11,711			36,332		34,463
ATM and other service fees		2,996			2,935			8,349		8,380
Bank owned life insurance income		3,219			3,216			11,757		9,216
Investment services and insurance		2,688			2,498			7,151		7,686
Investment securities gains, net		58			2,925			709		4,103
Loan sales and servicing income		4,006			3,881			10,218		10,007
Gain on George Washington acquistion		—			—			1,041		—
Gain on post medical retirement curtailment		—			—			—		9,543
Other operating income		7,308			2,538			16,401		12,095

Total other income		55,135			51,567			158,244		157,600

Other expenses:
Salaries, wages, pension and employee benefits		58,930			43,351			158,985		130,158
Net occupancy expense		8,608			5,739			23,428		18,468
Equipment expense		7,330			5,847			20,115		17,856
Stationery, supplies and postage		2,865			2,167			8,254		6,493
Bankcard, loan processing and other costs		8,281			7,548			23,762		23,252
Professional services		8,544			3,980			21,626		10,316
Amortization of intangibles		1,006			86			1,909		260
FDIC expense		5,267			2,298			13,448		13,350
Other operating expense		19,839			13,149			48,879		37,779

Total other expenses		120,670			84,165			320,406		257,932

Income before federal income tax expense		39,257			30,892			103,665		92,581
Federal income tax expense		10,261			8,129			27,786		24,889

Net income	$	28,996		$	22,763		$	75,879	$	67,692


Other comprehensive income, net of taxes
Unrealized securities’ gains (losses), net of taxes	$	(360	)	$	28,172		$	21,005	$	50,235
Unrealized hedging loss, net of taxes		—			—			—		(94	)
Less: reclassification adjustment for securities’ gains (losses) realized in income, net of taxes		38			(277	)		461		(831	)
Minimum pension liability adjustment, net of taxes		—			1,901			—		2,667

Total other comprehensive gain (loss), net of taxes		(398	)		25,994			20,544		46,643

Comprehensive income	$	28,598		$	48,757		$	96,423	$	114,335

Net income applicable to common shares	$	28,996		$	22,763		$	75,879	$	61,321

Net income used in diluted EPS calculation	$	28,996		$	22,763		$	75,879	$	61,321

Weighted average number of common shares outstanding — basic		108,793			85,872			98,588		84,182

Weighted average number of common shares outstanding — diluted		108,794			85,880			98,590		84,190

Basic earnings per share	$	0.27		$	0.27		$	0.77	$	0.73

Diluted earnings per share	$	0.27		$	0.27		$	0.77	$	0.73

Dividend per share	$	0.16		$	0.16		$	0.48	$	0.61

The accompanying notes are an integral part of the consolidated 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			Income (Loss)			Earnings			Stock			Equity
Balance at December 31, 2008	$	—		$	127,937	$	—		$	94,802		$	(54,080	)	$	1,053,435		$	(284,251	)	$	937,843
Net income		—			—		—			—			—			67,692			—			67,692
Cash dividends — preferred stock		—			—		—			—			—			(1,789	)		—			(1,789	)
Cash dividends — common stock ($0.61 per share)		—			—		—			—			—			(50,286	)		—			(50,286	)
Stock dividend		—			—		—			5,765			—			(21,718	)		15,953			—
Options exercised (2,400 shares)		—			—		—			(18	)		—			—			58			40
Nonvested (restricted) shares granted (536,058 shares)		—			—		—			(13,154	)		—			—			13,151			(3	)
Treasury shares purchased (118,736 shares)		—			—		—			500			—			—			(2,197	)		(1,697	)
Deferred compensation trust (29,597 shares)		—			—		—			(32	)		—			—			32			—
Share-based compensation		—			—		—			6,270			—			—			—			6,270
Issuance of common stock (3,267,751 shares)		—			—		—			(24,561	)		—			—			84,517			59,956
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		—			—		—			—			47,568			—			—			47,568
Unrealized hedging gain, net of taxes		—			—		—			—			(94	)		—			—			(94	)
Minimum pension liability adjustment, net of taxes		—			—		—			—			(831	)		—			—			(831	)
Other		—			—		—			(435	)		—			—			—			(435	)

Balance at September 30, 2009	$	—		$	127,937	$	—		$	68,694		$	(7,437	)	$	1,042,752		$	(172,737	)	$	1,059,209


Balance at December 31, 2009	$	—		$	127,937	$	—		$	88,573		$	(25,459	)	$	1,043,625		$	(169,049	)	$	1,065,627
Net income		—			—		—			—			—			75,879			—			75,879
Cash dividends — common stock ($0.16 per share)		—			—		—			—			—			(48,357	)		—			(48,357	)
Options exercised (48,365 shares)		—			—		—			(330	)		—			—			1,156			826
Nonvested (restricted) shares granted (428,755 shares)		—			—		—			(10,425	)		—			—			10,425			—
Restricted stock activity (165,577 shares)		—			—		—			1,075			—			—			(3,657	)		(2,582	)
Deferred compensation trust (-892 shares)		—			—		—			(78	)		—			—			78			—
Share-based compensation		—			—		—			5,937			—			—			—			5,937
Issuance of common stock (21,487,860 shares)		—			—		—			400,018			—			—			—			400,018
Net unrealized gains on investment securities, net of taxes		—			—		—			—			20,544			—			—			20,544

Balance at September 30, 2010	$	—		$	127,937	$	—		$	484,770		$	(4,915	)	$	1,071,147		$	(161,047	)	$	1,517,892

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

FIRSTMERIT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine months ended
(Unaudited)	September 30,
(Dollars in thousands)	2010			2009
Operating Activities
Net income	$	75,879		$	67,692
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		64,827			68,473
Depreciation and amortization		16,226			14,536
Accretion of acquired loans		50,381			—
Accretion income for lease financing		(1,908	)		(2,584	)
Amortization of investment securities premiums, net		8,611			3,482
Post medical retirement curtailment gain		—			(9,543	)
Gain on acquisition		(1,041	)		—
Gain on sales and calls of investment securities, net		(709	)		(4,103	)
Originations of loans held for sale		(357,489	)		(409,752	)
Proceeds from sales of loans, primarily mortgage loans sold in the secondary mortgage markets		353,710			411,792
Gains on sales of loans, net		(4,935	)		(3,418	)
Amortization of intangible assets		1,909			260
Net change in assets and liabilities
(Increase) decrease in interest receivable		(2,565	)		2,843
Decrease in interest payable		(2,870	)		(8,453	)
Decrease (increase) in prepaid assets		26,280			(6,017	)
Increase in bank owned life insurance		(7,423	)		(9,001	)
Increase in employee pension liability		1,706			(6,068	)
Other decreases		6,199			(21,827	)

NET CASH PROVIDED BY OPERATING ACTIVITIES		226,788			88,312
Investing Activities
Dispositions of investment securities:
Available-for-sale — sales		545,337			102,564
Available-for-sale — maturities		684,026			506,976
Purchases of available-for-sale investment securities		(1,142,886	)		(509,493	)
Net decrease in loans and leases		170,168			324,985
Purchases of premises and equipment		(43,593	)		(7,855	)
Sales of premises and equipment		—			87
Net cash acquired from acquisitions		978,985			—

NET CASH PROVIDED IN INVESTING ACTIVITIES		1,192,037			417,264
Financing Activities
Net increase in demand accounts		220,533			238,885
Net increase in savings and money market accounts		315,451			523,591
Net decrease in certificates and other time deposits		(645,152	)		(1,088,881	)
Net (increase) decrease in securities sold under agreements to repurchase		(821,635	)		429,085
Net decrease in wholesale borrowings		(348,191	)		(594,798	)
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		400,018			59,956
Cash dividends — preferred		—			(1,789	)
Cash dividends — common		(48,357	)		(50,286	)
Purchase of treasury shares		—			(1,697	)
Restricted stock activity		(2,582	)		—
Proceeds from exercise of stock options, conversion of debentures or conversion of preferred stock		826			37

NET CASH USED BY FINANCING ACTIVITIES		(929,089	)		(490,922	)

Increase in cash and cash equivalents		489,736			14,654
Cash and cash equivalents at beginning of period		161,033			178,406

Cash and cash equivalents at end of period	$	650,769		$	193,060


SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest, net of amounts capitalized	$	45,746		$	44,721

Federal income taxes	$	21,108		$	21,822

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

FirstMerit Corporation and Subsidiaries

Notes to Consolidated Financial Statements
September 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 “Bank”). The Parent Company’s other subsidiaries include Citizens Savings Corporation of Stark County, FirstMerit Capital Trust I, FirstMerit Community Development Corporation, FirstMerit Risk Management, Inc., and FMT, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

The accounting and reporting policies of FirstMerit Corporation and its subsidiaries (the “Corporation”) conform to 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 GAAP have been omitted in accordance with the rules of the Securities and Exchange Commission (“SEC”). The consolidated financial statements of the Corporation as of September 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 the 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 did 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. There was no material impact to the Corporation as a result of the adoption of this guidance for the quarter ended September 30, 2010.

FASB ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. In July 2010, the FASB issued ASU 2010-20, which requires new qualitative and quantitative disclosures on the allowance for credit losses, credit quality, impaired loans, modifications and nonaccrual and past due financing receivables. The guidance requires that an entity provide disclosures facilitating financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables (i.e., loans), how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. These required disclosures are to be presented on a disaggregated basis at the portfolio segment and the class of financing receivable level. Most of these additional disclosures will be effective for the Corporation as of December 31, 2010. However, specific items regarding activity that occurred before the issuance of this accounting guidance, such as the allowance rollforward and modification disclosures will be required for the Corporation as of January 1, 2011.

2. Business Combinations

Asset Based Loans

On December 16, 2009, 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 approximately $0.1 million and $3.3 million of acquisition related expenses in the quarter and nine months ended September 30, 2010, respectively. These costs were expensed as incurred and 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 Bank received a cash payment from the FDIC of approximately $40.2 million to assume the net liabilities.

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 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 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. These estimated fair values reflect the additional information that the Corporation obtained during the quarter ended June 30, 2010 which resulted in changes to certain fair value estimates made as of the acquisition date. After considering this additional information, the estimated fair value of the Covered Loans increased by $6.3 million and the FDIC loss share receivable on the Covered Loans decreased by $7.5 million as of February 19, 2010. These revised estimates resulted in a increase to the bargain purchase gain of $1.1 million, which was recognized in the quarter ended March 31, 2010, in accordance with ASC 805, and which is included in noninterest income in the consolidated statements of income and comprehensive income for the nine months ended September 30, 2010.

In addition, on April 14, 2020, (the “George Washington True-Up Measurement Date”), the Bank has agreed to pay to the FDIC 50% of the excess, if any, of (1) 20% of the stated threshold ($172.0 million) less (2) the sum of (A) 25% of the asset discount ($47.0 million) received in connection with the George Washington acquisition plus (B) 25% of the cumulative shared-loss payments (as defined below) plus (C) the cumulative servicing amount (as defined below). For purposes of the above calculation, cumulative shared-loss payments means (i) the aggregate of all of the payments made or payable to the Bank under the loss sharing agreements minus (ii) the aggregate of all of the payments made or payable to the FDIC under the loss sharing agreements. The cumulative servicing amount means the sum of the Period Servicing Amounts (as defined in the loss sharing agreements) for every consecutive twelve-month period prior to and ending on the George Washington True-Up Measurement Date in respect of each of the loss sharing agreements during which the loss-sharing provisions of the applicable loss sharing agreements is in effect. During the quarter ended September 30, 2010, the true-up liability was estimated to be $5.2 million as of the date of acquisition and is recorded in accrued taxes, expenses and other liabilities on the consolidated balance sheets. This adjustment resulted in a corresponding reduction to the bargain purchase gain which was recognized in the quarter ended March 31, 2010, in accordance with ASC 805, and which is included in noninterest income in the consolidated statements of income and comprehensive income for the nine months ended September 30, 2010.

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. 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 of $1.0 million or $0.7 million net of tax. 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. Material adjustments to acquisition date estimated fair values are recorded in the period in which the acquisition occurred and, as a result, previously recorded results are subject to change. Certain reclassifications of prior periods’ amount may also be made to conform to the current period’s presentation and would have no effect on previously reported net income amounts.

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. Further, 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.

The Bank recognized $1.7 million and $4.0 million in acquisition related expenses in the quarter and nine months ended September 30, 2010, respectively. These costs were expensed as incurred and are included in the line item entitled professional services in the consolidated statements of income and comprehensive income.

The operating results of the Corporation for the quarter and nine months ended September 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 agreements in place, George Washington’s historical results are not believed to be relevant to the Corporation’s results, and thus no pro forma information is 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	$	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		—		88,694			88,694

Total covered loans and loss share receivable		305,788		(39,343	)		266,445
Core deposit intangible		—		962			962
Covered other real estate		19,021		3,778			22,799
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		5,191			7,760

Total liabilities assumed	$	398,303	$	10,112		$	408,415

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 Bank made a cash payment to the FDIC of approximately $227.5 million to assume the net assets.

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. The Bank exercised its option during the third quarter of 2010 and purchased ten of the former Midwest branches, including the furniture, fixtures and equipment within these branches, for a combined purchase price of $25.1 million.

The loans and other real estate acquired are covered by a loss share agreements 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 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 $1.8 billion and the expected reimbursement for losses to be incurred by the Bank on the acquired loans was $236.8 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. These estimated fair values reflect the additional information that the Corporation obtained during the quarter ended September 30, 2010 which resulted in changes to certain fair value estimates made as of the acquisition date. After considering this additional information, the estimated fair value of the investment securities decreased by $1.1 million, Covered Loans decreased by $5.8 million, the FDIC loss share receivable on the Covered Loans increased by $9.0 million, accrued interest increased by $1.6 million, and other assets increased by $1.6 million as of May 14, 2010. These revised estimates resulted in a reduction of goodwill by $5.3 million to $272.5 million, which was recognized in the quarter ended June 30, 2010 in accordance with ASC 805 and which is reflected in the September 30, 2010 consolidated balance sheets.

In addition, on July 15, 2020 (the “Midwest True-Up Measurement Date”), the Bank has agreed to pay to the FDIC half of the amount, if positive, calculated as: (1) 20% of the intrinsic loss estimate of the FDIC (approximately $152 million); minus (2) the sum of (A) 25% of the asset premium paid in connection with the Midwest acquisition (approximately $20 million), plus (B) 25% of the Cumulative Shared-Loss Payments (as defined below) plus (C) the Cumulative Servicing Amount (as defined below). 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 loss share agreements; minus (ii) the aggregate of all of the payments made or payable to the FDIC under the loss share 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 Midwest True-Up Measurement Date in respect of each of the loss share agreements during which the loss sharing provisions of the applicable loss share agreement is in effect. As of the date of acquisition, 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. During the quarter ended September 30, 2010, the true-up liability was reduced to $7.9 million resulting from a re-estimation of the cumulative loss share payments and cumulative servicing amount.

The acquisitions of the net assets of Midwest constituted a business combination as defined by ASC 805 and, accordingly, were recorded at their estimated fair values on the date of acquisition. The estimated fair value of the liabilities assumed and cash payment made to the FDIC exceeded the revised fair value of assets acquired, resulting in recognition of goodwill of $272.5 million in accordance with ASC 805. 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. Material adjustments to acquisition date estimated fair values are recorded in the period in which the acquisition occurred and, as a result, previously recorded results are subject to change. Certain reclassifications of prior periods’

amount may also be made to conform to the current period’s presentation and would have no effect on previously reported net income amounts.

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

The Bank recognized $3.1 million and $3.9 million in acquisition related expenses during the quarter and nine months September 30, 2010, respectively. These costs were expensed as incurred and are included in the line item entitled professional services in the consolidated statements of income and comprehensive income.

The operating results of the Corporation for the quarter ended September 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.

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		565,210			(977	)		564,233
Commercial loans		1,840,001			(278,100	)		1,561,901
Consumer loans		312,131			(53,742	)		258,389

Total covered loans		2,152,132			(331,842	)		1,820,290
Allowance for loan losses		(5,465	)		5,465			—
Accrued interest		5,436			—			5,436
Loss share receivable		—			236,843			236,843

Total covered loans and loss share receivable		2,152,103			(89,534	)		2,062,569
Core deposit intangible		—			7,433			7,433
Covered other real estate		27,320			1,030			28,350
Goodwill		—			272,450			272,450
Other assets		9,838			—			9,838

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.


	September 30, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities available for sale
Debt Securities
U.S. government agency debentures	$	379,876	$	1,089	$	(43	)	$	380,922
U.S. States and political subdivisions		281,769		13,394		(15	)		295,148
Residential mortgage-backed securities:
U.S. government agencies		1,424,027		62,507		(71	)		1,486,463
Residential collateralized mortgage-backed securities:
U.S. government agencies		789,655		25,464		(55	)		815,064
Non-agency		19		—		—			19
Corporate debt securities		61,423		—		(15,533	)		45,890

Total debt securities		2,936,769		102,454		(15,717	)		3,023,506
Marketable equity securities		3,930		—		—			3,930

Total securities available for sale	$	2,940,699	$	102,454	$	(15,717	)	$	3,027,436


Securities held to maturity
Debt Securities
U.S. States and political subdivisions	$	61,818	$	—	$	—		$	61,818

Total securities held to maturity	$	61,818	$	—	$	—		$	61,818


	December 31, 2009
	Amortized		Gross Unrealized		Gross 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


	September 30, 2009
	Amortized		Gross Unrealized		Gross Unrealized			Fair
	Cost		Gains		Losses			Value
Securities available for sale
Debt Securities	$	11,995	$	5	$	—		$	12,000
U.S. States and political subdivisions		287,882		15,868		(22	)		303,728
Residential mortgage-backed securities:
U.S. government agencies		1,565,762		60,340		(4	)		1,626,098
Residential collateralized mortgage-backed securities:
U.S. government agencies		578,604		20,056		(13	)		598,647
Non-agency		20		—		—			20
Corporate debt securities		61,372		—		(21,870	)		39,502

Total debt securities		2,505,635		96,269		(21,909	)		2,579,995
Marketable equity securities		3,727		—		—			3,727

Total securities available for sale	$	2,509,362	$	96,269	$	(21,909	)	$	2,583,722


Securities held to maturity
Debt Securities
U.S. States and political subdivisions	$	38,454	$	—	$	—		$	38,454

Total securities held to maturity	$	38,454	$	—	$	—		$	38,454

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


	September 30,		December 31,		September 30,
	2010		2009		2009
FRB stock	$	20,714	$	9,064	$	9,064
FHLB stock		139,398		119,145		119,145
Other		641		679		692

Total other investments	$	160,753	$	128,888	$	128,901

FRB and FHLB stock is classified as a restricted investment, carried at cost and valued based on the ultimate recoverability of par value. The $11.7 million increase in FRB stock from December 31, 2009 is a result of the acquisition of FRB stock related to the Midwest acquisition. The $20.3 million increase in FHLB stock is a result of the acquired FHLB Chicago stock of $17.0 million related to the Midwest acquisition and $3.3 million related to 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 September 30, 2010, securities totaling $2.3 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.


	September 30, 2010
	Less than 12 months							12 months or longer							Total
						Number of							Number of
						Imparied							Imparied
	Fair Value		Unrealized Losses			Securities		Fair Value		Unrealized Losses			Securities		Fair Value		Unrealized Losses
Debt Securities
U.S. government agency debentures	$	48,861	$	(43	)		4	$	—	$	—			—	$	48,861	$	(43	)
U.S. States and political subdivisions		—		—			—		680		(15	)		1		680		(15	)
Residential mortgage-backed securities:
U.S. government agencies		28,168		(68	)		3		218		(3	)		1		28,386		(71	)
Residential collateralized mortgage-backed securities:
U.S. government agencies		35,350		(55	)		3		—		—			—		35,350		(55	)
Corporate debt securities		—		—			—		45,890		(15,533	)		8		45,890		(15,533	)

Total temporarily impaired securities	$	112,379	$	(166	)		10	$	46,788	$	(15,551	)		10	$	159,167	$	(15,717	)


	December 31, 2009
	Less than 12 months							12 months or longer							Total
						Number of							Number of
						Imparied							Imparied
	Fair Value		Unrealized Losses			Securities		Fair Value		Unrealized Losses			Securities		Fair Value		Unrealized 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	)


	December 31, 2009
	Less than 12 months							12 months or longer							Total
						Number of							Number of
						Imparied							Imparied
	Fair Value		Unrealized Losses			Securities		Fair Value		Unrealized Losses			Securities		Fair Value		Unrealized Losses
Debt Securities
U.S. States and political subdivisions	$	1,697	$	(22	)		2	$	—	$	—			—	$	1,697	$	(22	)
Residential mortgage-backed securities:
U.S. government agencies		—		—			—		306		(4	)		3		306		(4	)
Residential collateralized mortgage-backed securities:
U.S. government agencies		6,200		(13	)		1		—		—			—		6,200		(13	)
Corporate debt securities		—		—			—		39,502		(21,870	)		8		39,502		(21,870	)

Total temporarily impaired securities	$	7,897	$	(35	)		3	$	39,808	$	(21,874	)		11	$	47,705	$	(21,909	)

At least quarterly the Corporation conducts a comprehensive security-level impairment assessment on all securities in an unrealized loss position to determine if other-than-temporary impairment (“OTTI”) exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Under the current OTTI accounting model for debt securities, an OTTI loss must be recognized for a debt security in an unrealized loss position if the Corporation intends to sell the security or it is more likely than 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 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 September 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 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 OTTI at September 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				Nine months ended
	September 30,				September 30,
	2010		2009		2010			2009
Proceeds	$	45,331	$	17,327	$	545,337		$	102,564


Realized gains	$	58	$	2,925	$	1,660		$	4,103
Realized losses		—		—		(951	)		—

Net securities gains	$	58	$	2,925	$	709		$	4,103

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 September 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
							Residential			collateralized			collateralized
				U.S. States and			mortgage-backed			mortgage			mortgage
	U.S. Government			political			securities - U.S			obligations - U.S.			obligations - non -
	agency			subdivisions			govt. agency			govt. agency			U.S. govt. agency			Corporate debt						Weighted
	debentures			obligations			obligations			obligations			issued			securities			Total			Average Yield
Securities Available for Sale
Remaining maturity:
One year or less	$	246,987		$	11,886		$	5,177		$	72,924		$	—		$	—		$	336,975			1.78	%
Over one year through five years		133,935			12,761			1,431,530			742,139			19			—			2,320,384			3.44	%
Over five years through ten years		—			80,905			49,756			—			—			—			130,661			4.91	%
Over ten years		—			189,596			—			—			—			45,890			235,485			4.89	%

Fair Value	$	380,922		$	295,148		$	1,486,463		$	815,064		$	19		$	45,890		$	3,023,506			3.45	%

Amortized Cost	$	379,876		$	281,769		$	1,424,027		$	789,655		$	19		$	61,423		$	2,936,769

Weighted-Average Yield		0.86	%		6.09	%		3.86	%		3.16	%		4.10	%		1.15	%		3.45	%
Weighted-Average Maturity		0.9			10.0			2.9			2.2			3.7			17.1			3.4

Securities Held to Maturity
Remaining maturity:
One year or less	$	—		$	11,029		$	—		$	—		$	—		$	—		$	11,029			5.81	%
Over one year through five years		—			6,099			—			—			—			—			6,099			5.81	%
Over five years through ten years		—			9,193			—			—			—			—			9,193			5.81	%
Over ten years		—			35,497			—			—			—			—			35,497			7.42	%

Fair Value	$	—		$	61,818		$	—		$	—		$	—		$	—		$	61,818			6.73	%

Amortized Cost	$	—		$	61,818		$	—		$	—		$	—		$	—		$	61,818

Weighted-Average Yield					6.73	%														6.73	%
Weighted-Average Maturity					10.3															10.3

4. Loans

As discussed in Note 2 (Business Combinations), 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, are initially recorded at fair value with no allowance for loan loss. The fair value estimates associated with acquired loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.

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


	September 30,			December 31,			September 30,
	2010			2009			2009
Commercial loans	$	4,344,784		$	4,066,522		$	4,097,252
Mortgage loans		414,728			463,416			481,336
Installment loans		1,349,964			1,425,373			1,481,200
Home equity loans		760,816			753,112			761,553
Credit card loans		144,734			153,525			147,767
Leases		64,009			61,541			60,540

Total non-covered loans		7,079,035			6,923,489			7,029,648
Less allowance for loan losses noncovered		(116,528	)		(115,092	)		(116,352	)

Net non-covered loans		6,962,507			6,808,397			6,913,296
Covered loans		2,177,807			—			—
Less allowance for loan losses		(3,437	)		—			—

Net covered loans		2,174,370			—			—

Net loans	$	9,136,877		$	6,808,397		$	6,913,296

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. Purchased impaired loans are not classified as nonperforming assets at September 30, 2010 as the loans are considered to be performing under ASC 310-30.

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

The Corporation has elected to account for all loans acquired in the George Washington and Midwest acquisitions under ASC 310-30 except for $162.6 million of acquired loans with revolving privileges, which are outside the scope of this guidance and which are being accounted for in accordance with ASC 310. The outstanding balance, including contractual principal, interest, fees and penalties, of all covered loans accounted for in accordance with ASC 310-30 was $2.2 billion as of September 30, 2010.

The following is a summary of the Covered Loans acquired in the George Washington and Midwest acquisitions during 2010 as of the dates of acquisition:


				Loans			Total
	ASC 310-30			Excluded from			Purchased
	Loans			ASC 310-30			Loans
Contractually required principal and interest at acquisition	$	2,679,126		$	238,784		$	2,917,910
Nonaccretable difference (expected losses and foregone interest)		(578,475	)		(51,509	)		(629,984	)


Cash flows expected to be collected at acquisition		2,100,651			187,275			2,287,926
Accretable yield		(267,493	)		(24,637	)		(292,130	)


Fair value of acquired loans at acquisition	$	1,833,159		$	162,638		$	1,995,797

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.

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. The difference between the fair value of the purchased loans with revolving privileges and the outstanding balance is being accreted to interest income over the remaining period the revolving lines are in effect.

The excess of an acquired loan’s cash flows expected to be collected over the initial investment in the loan is represented by the accretable yield. An acquired loan’s contractually required payments in excess of the amount of its cash flows expected to be collected are represented by the nonaccretable balance of the acquired loan. The nonaccretable balance represents expected credit impairment on the loans and is only recognized in income if the payments on the loan exceed the recorded fair value of the loan. For those loans acquired through an FDIC assisted transaction, the majority of the nonaccretable balance on such loans is expected to be received from the FDIC through the loss sharing agreements and is recorded as part of the covered loans in the balance sheet.

Over the life of the acquired loans, the Corporation continues to estimate cash flows expected to be collected, which includes the effects of estimated prepayments. The Corporation assesses impairment of acquired loans at each balance sheet date by comparing the net present value of updated cash flows (discounted by the effective yield calculated at the end of the previous accounting period) to the recorded book value. 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. To the extent impairment exists, an allowance for loan loss is established through a charge to provision for loan loss. See Note 5 (Allowance for loan losses) for further information.

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 and nine months ended ended September 30, 2010:


	Three months ended						Nine months ended
	September 30, 2010						September 30, 2010
				Carrying						Carrying
	Accretable			Amount of			Accretable			Amount of
	Yield			Loans			Yield			Loans
Balance at beginning of period	$	248,281		$	1,793,543		$	267,493		$	1,833,159
Accretion		(31,566	)		31,566			(49,799	)		49,799
Net Reclassifications from non-accretable to accretable		16,947			—			16,255			—
Payments, received, net		—			(176,220	)		—			(234,069	)
Disposals		(725	)		—			(1,012	)		—

Balance at end of period	$	232,937		$	1,648,889		$	232,937		$	1,648,889

Accretion of the loss share receivable for purchased loans accounted for in accordance with ASC 310-30 is recognized through interest income and was $0.5 million for the nine months ended September 30, 2010.

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.

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


	Quarter ended				Nine months ended				Year ended
	September 30,				September 30,				December 31,
	2010		2009		2010		2009		2009
Allowance for loan losses noncovered-beginning of period	$	118,343	$	111,222	$	115,092	$	103,757	$	103,757
Noncovered loans charged off:
Commercial		10,704		7,208		26,541		21,892		39,685
Mortgage		1,153		1,455		4,194		3,693		4,960
Installment		8,154		7,135		25,389		23,060		31,622
Home equity		1,923		1,911		6,754		4,943		7,200
Credit cards		2,902		3,384		11,080		10,047		13,558
Leases		55		—		692		3		97
Overdrafts		926		726		2,329		1,843		2,591

Total charge-offs		25,817		21,819		76,979		65,481		99,713

Noncovered recoveries:
Commercial		503		90		1,305		521		890
Mortgage		138		41		201		260		270
Installment		3,946		2,104		9,044		6,527		8,329
Home equity		481		99		1,182		295		494
Credit cards		600		514		1,681		1,289		1,710
Manufactured housing		36		37		122		122		171
Leases		2		6		240		53		57
Overdrafts		188		171		673		536		694

Total recoveries		5,894		3,062		14,448		9,603		12,615

Net charge-offs		19,923		18,757		62,531		55,878		87,098
Provision for loan losses noncovered		18,108		23,887		63,967		68,473		98,433

Allowance for loan losses noncovered-end of period	$	116,528	$	116,352	$	116,528	$	116,352	$	115,092

To the extent credit deterioration occurs on purchased covered loans after the date of acquisition, the Corporation records an allowance for loan losses, net of any expected reimbursement under any loss sharing agreements with the FDIC. The expected payments from the FDIC under the loss sharing agreements are recorded as part of covered loans in the consolidated balance sheets. During the quarter ended September 30, 2010, the Corporation increased its allowance for loan losses covered to $3.4 million to reserve for estimated additional losses on certain covered loans. The increase in the allowance was recorded by a charge to the provision for loan losses covered of $9.6 million and an increase of $9.1 million in the loss share receivable for the portion of the losses recoverable from the FDIC in accordance with the loss share agreements.

The activity within the allowance for loan loss for covered loans for the quarter and nine months ended ended September 30, 2010 is shown in the following table:


	Three months ended			Nine months ended
	September 30, 2010			September 30, 2010
Balance at beginning of the period	$	241		$	—

Provision for loan losses before benefit attributable to FDIC loss share agreements		9,684			10,144
Benefit attributable to FDIC loss share agreements		(9,091	)		(9,284	)

Net provision for loan losses, covered		593			860

Increase in indemnification asset		9,091			9,284

Loans charged-off		(6,488	)		(6,707	)


Balance at end of the period	$	3,437		$	3,437

Note 1 (Summary of Significant Accounting Policies) and Note 4 (Loans and 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.

6. Goodwill and Intangible Assets

Goodwill

Goodwill totaled $460.4 million, $139.6 million and $139.2 million at September 30, 2010, December 31, 2009, and September 30, 2009, respectively. Goodwill of $48.3 million was acquired in the first quarter of 2010 in the acquisition of the First Bank branches and $272.5 million was acquired in the second quarter of 2010 in the FDIC assisted acquisition of Midwest. 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. Based on receipt of a settlement account transaction form from the FDIC during the quarter ended September 30, 2010, adjustments were made to the value of assets acquired in the Midwest transaction as of the date of acquisition. Additionally, during the quarter ended September 30, 2010, additional information was obtained relative to closing date fair values of the assets acquired in connection with the Midwest transaction. As a result of these adjustments, the amount of goodwill acquired in the Midwest acquisition was reduced in the quarter ended June 30, 2010 by $5.3 million. As of September 30, 2010, the goodwill acquired in the Midwest acquisition remains unallocated to the Corporation’s reporting units, however, it is anticipated that this allocation will be completed prior to the Corporation’s annual goodwill impairment testing performed as of November 30, 2010.

The Corporation expects $45.3 million of the $48.3 million of goodwill acquired in the First Bank branches acquisition and all of 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.


	September 30, 2010
	Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount
Core deposit intangibles	$	16,760	$	(5,919	)	$	10,841
Non-compete covenant		102		(19	)		83
Lease intangible		617		(125	)		492

	$	17,479	$	(6,063	)	$	11,416


	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


	September 30, 2009
	Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount
Core deposit intangibles	$	5,210	$	(4,067	)	$	1,143

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 $1.0 million and $0.1 million for the three months ended September 30, 2010 and 2009, respectively. Estimated amortization expense for each of the next five years is as follows: 2010 — $1.0 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				Nine months ended
	September 30,		September 30,		September 30,		September 30,
	2010		2009		2010		2009
BASIC EPS:

Net income	$	28,996	$	22,763	$	75,879	$	67,692
Less: preferred dividend		—		—		—		(6,167	)
Less: accretion of preferred stock discount		—		—		—		(204	)


Net income available to common shareholders	$	28,996	$	22,763	$	75,879	$	61,321


Average common shares outstanding (*)		108,793		85,872		98,588		84,182


Net income per share — basic	$	0.27	$	0.27	$	0.77	$	0.73


DILUTED EPS:

Net income available to common shareholders	$	28,996	$	22,763	$	75,879	$	61,321
Add: interest expense on convertible bonds		—		—		—		—

	$	28,996	$	22,763	$	75,879	$	61,321


Avg common shares outstanding (*)		108,793		85,872		98,588		84,182
Add: Equivalents from stock options and restricted stock		1		8		2		8
Add: Equivalents-convertible bonds		—		—		—		—

Average common shares and equivalents outstanding (*)		108,794		85,880		98,590		84,190


Net income per common share — diluted	$	0.27	$	0.27	$	0.77	$	0.73


*		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 September 30, 2010 and 2009 options to purchase 4.4 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 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 common shares 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.

During the quarter ended June 30, 2010, the Corporation closed and completed the sale of a total of 17,600,160 common shares at $19.00 per share in a public underwritten offering. The net proceeds from the offering were approximately $320.1 million after deducting underwriting discounts and commissions and the estimated expenses of the offering payable by the Corporation.

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 line of 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.


	Commercial				Retail				Wealth				Other						Consolidated
September 30, 2010	3rd Qtr		YTD		3rd Qtr		YTD		3rd Qtr		YTD		3rd Qtr			YTD			3rd Qtr		YTD
OPERATIONS:
Net interest income	$	73,410	$	180,694	$	58,389	$	159,919	$	4,852	$	14,428	$	(13,158	)	$	(24,387	)	$	123,493	$	330,654
Provision for loan losses		13,656		34,686		13,837		34,071		729		2,615		(9,521	)		(6,545	)		18,701		64,827
Other income		12,002		34,997		30,709		83,425		8,238		24,395		4,186			15,427			55,135		158,244
Other expenses		28,220		80,429		58,117		165,523		10,243		29,158		24,090			45,296			120,670		320,406
Net income		28,298		65,373		11,143		28,436		1,377		4,582		(1,561	)		5,274			39,257		103,665

AVERAGES :
Assets	$	5,974,427	$	5,185,560	$	3,085,313	$	2,953,148	$	274,993	$	284,762	$	5,253,798		$	4,775,816		$	14,588,531	$	13,199,286


	Commercial				Retail				Wealth				Other						Consolidated
September 30, 2009	3rd Qtr		YTD		3rd Qtr		YTD		3rd Qtr		YTD		3rd Qtr			YTD			3rd Qtr		YTD
OPERATIONS:
Net interest income	$	39,034	$	115,748	$	46,639	$	141,021	$	4,566	$	12,986	$	(2,862	)	$	(8,369	)	$	87,377	$	261,386
Provision for loan losses		7,041		21,934		13,159		35,624		138		4,753		3,549			6,162			23,887		68,473
Other income		10,108		30,748		26,561		77,326		7,989		24,206		6,909			25,320			51,567		157,600
Other expenses		21,826		68,586		46,736		146,331		9,452		28,055		6,151			14,960			84,165		257,932
Net income		13,180		36,384		8,648		23,654		1,927		2,849		(992	)		4,805			22,763		67,692

AVERAGES :
Assets	$	3,991,160	$	4,107,778	$	2,860,056	$	2,875,900	$	305,416	$	307,959	$	3,472,727		$	3,581,430		$	10,629,359	$	10,873,067

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 September 30, 2010, December 31, 2009 and September 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

September 30, 2010

December 31, 2009

September 30, 2009

September 30, 2010

December 31, 2009

September 30, 2009

Notional/

Fair

Notional/

Contract

Fair

Contract

Value

Notional/

Fair

Contract

Fair

Contract

Fair

Contract

Fair

Amount

Value (a)

Amount

(a)

Contract Amount

Value (a)

Amount

Value (b)

Amount

Value (b)

Amount

Value (b)

Interest rate swaps:

Fair value hedges

—

1,452

—

325,845

36,772

398,895

27,769

423,241

34,034


(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 September 30, 2010.

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

Derivatives Not Designated in Hedge Relationships

As of September 30, 2010, December 31, 2009 and September 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
	September 30, 2010					December 31, 2009				September 30, 2009					September 30,2010				December 31, 2009				September 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	$	751,448	$	59,308		$	639,285	$	26,840	$	637,467	$	33,620		$	751,448	$	59,308	$	686,947	$	30,717	$	686,946	$	38,535
Mortgage loan commitments		244,984		6,201			55,023		396		57,823		1,586			—		—		—		—		—		—
Forward sales contracts		184,250		(972	)		67,085		884		66,815		(671	)		—		—		—		—		—		—
Credit contracts		—		—			—		—		—		—			45,468		—		62,458		—		64,491		—
Foreign exchange		5,189		27			—		—		—		—			5,189		27		—		—		—		—
Other		—		—			—		—		—		—			15,428		677		18,171		—		14,358		—

Total	$	1,185,871	$	64,564		$	761,393	$	28,120	$	762,105	$	34,535		$	817,533	$	60,012	$	767,576	$	30,717	$	765,795	$	38,535


(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 $49.5 million as of December 31, 2009 and September 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 To Be Announced (“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 September 30, 2010, December 31, 2009 or September 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 September 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 $4.6 million as of September 30, 2010. The fair values of the written swap participations were not material at September 30, 2010, December 31, 2009 and September 30, 2009.

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


		Amount of Gain / (Loss)
		Recognized in Income on
Derivatives not	Location of Gain / (Loss)	Derivative
designated as	Recognized in Income on	Quarter ended,			Quarter ended,
hedging instruments	Derivative	September 30, 2010			September 30, 2009
IRLCs	Other income	$	2,144		$	96
Forward sales contracts	Other income		967			(886	)
TBA Securities	Other income		—			—
Credit contracts	Other income		—			—
Other	Other expenses		(677	)		—

Total		$	2,434		$	(790	)

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 $106.6 million, $70.0 million and $83.9 million as of September 30, 2010, December 31, 2009 and September 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						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
Components of Net Periodic Pension Cost
Service Cost	$	1,480		$	1,322		$	4,439		$	3,967
Interest Cost		2,800			2,751			8,400			8,252
Expected return on assets		(3,015	)		(2,805	)		(9,044	)		(8,416	)
Amortization of unrecognized prior service costs		98			86			295			257
Cumulative net loss		1,427			757			4,281			2,273

Net periodic pension cost	$	2,790		$	2,111		$	8,371		$	6,333


	Postretirement Benefits
	Quarter ended				Nine months ended
	September 30,				September 30,
	2010		2009		2010		2009
Components of Net Periodic Postretirement Cost
Service Cost	$	15	$	15	$	45	$	44
Interest Cost		240		299		719		897
Amortization of unrecognized prior service costs		—		—		—		—
Cumulative net loss		4		9		11		26

Net Postretirement Benefit Cost		259		323		776		967
Curtailment Gain		—		—		—		(9,543	)

Net periodic postretirement (benefit)/cost	$	259	$	323	$	776	$	(8,576	)

In January 2009, FirstMerit announced to employees that the Corporation’s subsidy for retiree medical for current eligible active employees would 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 of 1987, as amended, 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.

The Corporation made a contribution of $20.0 million to the qualified pension plan in the quarter ended September 30, 2010.

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.


	Level 1		Level 2		Level 3		Total
Available-for-sale securities	$	3,930	$	2,977,597	$	45,909	$	3,027,436
Residential loans held for sale		—		—		25,542		25,542
Derivative assets		—		64,564		—		64,564

Total assets at fair value on a recurring basis	$	3,930	$	3,042,161	$	71,451	$	3,117,542


Derivative liabilities	$	—	$	96,784	$	—	$	96,784
True-up liability		—		—		13,060		13,060

Total liabilities at fair value on a recurring basis	$	—	$	96,784	$	13,060	$	109,844


Note:		There were no transfers between Levels 1 and 2 of the fair value hiearchy during the quarter ended September 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
			Pricing				Independent
	# Issues		Service		# Issues		Broker Quotes

U.S. government agency debentures		26	$	380,922		—	$	—
U.S States and political subdivisions		461		295,148		—		—
Residential mortgage-backed securities:
U.S. government agencies		185		1,486,463		—		—
Residential collateralized mortgage-backed securities:
U.S. government agencies		83		815,063		1		1
Non-agency		1		1		1		18
Corporate debt securities		—		—		8		45,890

		756	$	2,977,597		10	$	45,909

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 3.

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 September 30, 2010.

True-up liability. In connection with the George Washington and Midwest acquisitions, the Bank has agreed to pay the FDIC should the estimated losses on the acquired loan portfolios as well as servicing fees earned on the acquired loan portfolios not meet thresholds as stated in the purchase agreements.

As it relates to the George Washington acquisition, the true-up liability is measured as follows: 50% of the excess, if any, of (1) 20% of the stated threshold ($172.0 million) less (2) the sum of (A) 25% of the asset discount ($47.0 million) received in connection with the George Washington acquisition plus (B) 25% of the cumulative shared-loss payments (as defined below) plus (C) the cumulative servicing amount (as defined below). For purposes of the above calculation, cumulative shared-loss payments means (i) the aggregate of all of the payments made or payable to the Bank under the loss share agreements minus (ii) the aggregate of all of

the payments made or payable to the FDIC under the loss share agreements. The cumulative servicing amount means the sum of the period servicing amounts (as defined in the loss sharing agreements) for every consecutive twelve-month period prior to and ending on April 14, 2020 in respect of each of the loss share agreements during which the loss-sharing provisions of the applicable loss share agreement is in effect. As of September 30, 2010, the estimated fair value of the George Washington true up liability was $5.2 million.

As it relates to the Midwest acquisition, the true up liability is measured as follows: 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 the Bank under the loss share agreements minus (ii) the aggregate of all of the payments made or payable to the FDIC under the loss share agreements. The cumulative servicing amount means the period servicing amounts (as defined in the loss sharing agreements) for every consecutive twelve-month period prior to and ending on July 15, 2020 in respect of each of the loss share agreements during which the loss sharing provisions of the applicable loss share agreement is in effect. As of September 30, 2010, the estimated fair value of the Midwest true up liability was $7.9 million.

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
	June 30, 2010		gains/losses (a)		settlements, net		Transfers		September 30, 2010		period earnings
Available-for-sale securities	$	43,459	$	2,450	$	—	$	—	$	45,909	$	—
True-up liability	$	13,718	$	—	$	—	$	—	$	13,060	$	658


(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		September 30, 2010		period earnings
Available-for-sale securities	$	42,447	$	3,462	$	—		—	$	45,909	$	—
True-up liability	$	—	$	—	$	13,718		—	$	13,060	$	(4,533	)


(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.


	Level 1		Level 2		Level 3		Total
Mortgage servicing rights	$	—	$	—	$	18,676	$	18,676
Impaired and nonaccrual loans		—		—		116,418		116,418
Other property (1)		—		—		12,688		12,688
Other real estate covered by loss share		—		—		47,978		47,978

Total assets at fair value on a nonrecurring basis	$	—	$	—	$	195,759	$	195,759


(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 September 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	$	25,542	$	24,531	$	1,011

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 and nine months ended September 30, 2010 was $0.03 million and $0.86 million, respectively.

Disclosures about Fair Value of Financial Instruments

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


	September 30, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	650,769	$	650,769	$	161,033	$	161,033
Investment securities		3,163,270		3,250,007		2,689,706		2,744,838
Loan held for sale		25,542		25,542		16,828		16,828
Net noncovered loans		6,962,507		6,567,110		6,808,397		6,362,674
Net covered loans and loss share receivable		2,174,370		2,174,370		—		—
Accrued interest receivable		41,839		41,839		39,274		39,274
Mortgage servicing rights		18,671		18,676		20,784		22,241
Derivative assets		64,564		64,564		28,120		28,120

Financial liabilities:
Deposits	$	11,271,416	$	11,296,826	$	7,515,796	$	7,519,604
Federal funds purchased and securities sold under agreements to repurchase		897,755		899,401		996,345		998,645
Wholesale borrowings		391,914		399,123		740,105		745,213
Accrued interest payable		8,466		8,466		11,336		11,336
Derivative liabilities		96,784		96,784		58,486		58,486
True up liability		13,060		13,060		—		—

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 $2.1 billion of residential mortgage loans at September 30, 2010, and $2.0 billion at December 31, 2009 and September 30, 2009. Loan servicing fees, not including valuation changes included in loan sales and servicing income, were $1.3 million for each of the three-months ended September 30, 2010 and 2009, and $3.8 million for each of the nine months ended September 30, 2010 and 2009.

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						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
Balance at beginning of period	$	19,327		$	20,828		$	20,784		$	18,778
Addition of mortgage servicing rights		1,497			968			2,890			4,161
Amortization		(1,144	)		(901	)		(2,903	)		(2,828	)
Changes in allowance for impairment		(1,009	)		(14	)		(2,100	)		770

Balance at end of period	$	18,671		$	20,881		$	18,671		$	20,881

Fair value at end of period	$	18,676		$	21,567		$	18,676		$	21,567

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 $2.1 million as of September 30, 2010 and $0 million as of December 31, 2009 and $.01 million as of September 30, 2009. No permanent impairment losses were written off against the allowance during the quarters ended September 30, 2010 and September 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 September 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)		15.06	%
Decrease in fair value from 10% adverse change	$	910
Decrease in fair value from 25% adverse change		2,190
Discount rate assumption		9.71	%
Decrease in fair value from 100 basis point adverse change	$	588
Decrease in fair value from 200 basis point adverse change		1,136
Expected weighted-average life (in months)		85.4

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 September 30, 2010 was $7.9 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 September 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.


	September 30, 2010
Loan Commitments
Commercial	$	1,862,277
Consumer		1,735,504

Total loan commitments	$	3,597,781

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 September 30, 2010.


	September 30, 2010
Financial guarantees
Standby letters of credit	$	170,539
Loans sold with recourse		50,633

Total financial guarantees	$	221,172

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 $100.7 million at September 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 September 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


	Three months ended								Year ended								Three months ended
	September 30, 2010								December 31, 2009								September 30, 2009
	Average					Average			Average			Average		Average						Average
(Dollars in thousands)	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate
ASSETS
Cash and due from banks	$	821,713							$	183,215							$	159,985
Investment securities and federal funds sold:
U.S. Treasury securities and U.S. Government agency obligations (taxable)		2,609,406			21,364		3.25	%		2,222,771			97,871		4.40	%		2,210,551			24,115		4.33	%
Obligations of states and political subdivisions (tax exempt)		346,380			4,848		5.55	%		321,919			19,718		6.13	%		318,853			4,872		6.06	%
Other securities and federal funds sold		315,225			2,197		2.77	%		204,272			8,394		4.11	%		199,028			2,049		4.08	%

Total investment securities and federal funds sold		3,271,011			28,409		3.45	%		2,748,962			125,983		4.58	%		2,728,432			31,036		4.51	%

Loans held for sale		21,659			269		4.93	%		19,289			1,032		5.35	%		17,357			230		5.26	%
Noncovered loans, covered loans and loss share receivable		9,307,752			118,680		5.06	%		7,156,983			339,381		4.74	%		7,057,021			84,107		4.73	%


Total earning assets		12,600,422			147,358		4.64	%		9,925,234			466,396		4.70	%		9,802,810			115,373		4.67	%

Allowance for loan losses noncovered		(113,025	)							(108,017	)							(111,073	)
Other assets		1,279,421								793,062								777,637


Total assets	$	14,588,531							$	10,793,494							$	10,629,359


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand — non-interest bearing	$	2,729,355			—		—		$	1,910,171			—		—		$	1,947,359			—		—
Demand — interest bearing		858,168			223		0.10	%		656,367			600		0.09	%		647,712			137		0.08	%
Savings and money market accounts		4,503,906			8,212		0.72	%		2,886,842			23,472		0.81	%		2,916,980			5,763		0.78	%
Certificates and other time deposits		3,334,311			9,702		1.15	%		2,056,208			54,610		2.66	%		1,872,456			12,284		2.60	%


Total deposits		11,425,740			18,137		0.63	%		7,509,588			78,682		1.05	%		7,384,507			18,184		0.98	%

Securities sold under agreements to repurchase		928,607			984		0.42	%		1,013,167			4,764		0.47	%		1,087,875			1,286		0.47	%
Wholesale borrowings		443,892			2,725		2.44	%		952,979			27,317		2.87	%		883,377			6,824		3.06	%


Total interest bearing liabilities		10,068,884			21,846		0.86	%		7,565,563			110,763		1.46	%		7,408,400			26,294		1.41	%

Other liabilities		276,765								267,835								234,776

Shareholders’ equity		1,513,527								1,049,925								1,038,824


Total liabilities and shareholders’ equity	$	14,588,531							$	10,793,494							$	10,629,359


Net yield on earning assets	$	12,600,422			125,512		3.95	%	$	9,925,234			355,633		3.58	%	$	9,802,810			89,079		3.61	%


Interest rate spread							3.78	%							3.24	%							3.26	%

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


	Nine months ended								Year ended								Nine months ended
	September 30, 2010								December 31, 2009								September 30, 2009
	Average					Average			Average					Average			Average					Average
(Dollars in thousands)	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate
ASSETS
Cash and due from banks	$	701,392							$	183,215							$	188,010
Investment securities and federal funds sold:
U.S. Treasury securities and U.S. Government agency obligations (taxable)		2,545,998			67,682		3.55	%		2,222,771			97,871		4.40	%		2,222,119			74,524		4.48	%
Obligations of states and political subdivisions tax exempt)		347,653			14,800		5.69	%		321,919			19,718		6.13	%		318,825			14,696		6.16	%
Other securities and federal funds sold		298,975			6,350		2.84	%		204,272			8,394		4.11	%		207,938			6,594		4.24	%


Total investment securities and federal funds sold		3,192,626			88,832		3.72	%		2,748,962			125,983		4.58	%		2,748,882			95,814		4.66	%

Loans held for sale		18,368			692		5.04	%		19,289			1,032		5.35	%		20,395			829		5.43	%
Noncovered loans, covered loans and loss share receivable		8,317,510			312,506		5.02	%		7,156,983			339,381		4.74	%		7,227,077			257,619		4.77	%


Total earning assets		11,528,503			402,030		4.66	%		9,925,234			466,396		4.70	%		9,996,354			354,262		4.74	%

Allowance for loan losses noncovered		(114,823	)							(108,017	)							(106,190	)
Other assets		1,084,214								793,918								794,893


Total assets	$	13,199,286							$	10,794,350							$	10,873,067


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand — non-interest bearing	$	2,459,598			—		—		$	1,910,171			—		—		$	1,869,669			—		—
Demand — interest bearing		773,110			553		0.10	%		656,367			600		0.09	%		658,048			451		0.09	%
Savings and money market accounts		4,168,311			23,768		0.76	%		2,886,842			23,472		0.81	%		2,789,455			16,592		0.80	%
Certificates and other time deposits		2,733,311			25,504		1.25	%		2,056,208			54,610		2.66	%		2,229,694			46,197		2.77	%


Total deposits		10,134,330			49,825		0.66	%		7,509,588			78,682		1.05	%		7,546,866			63,240		1.12	%

Securities sold under agreements to repurchase		907,976			3,517		0.52	%		1,013,167			4,764		0.47	%		991,926			3,496		0.47	%
Wholesale borrowings		558,787			12,009		2.87	%		952,979			27,317		2.87	%		1,017,330			21,064		2.77	%


Total interest bearing liabilities		9,141,496			65,351		0.96	%		7,565,563			110,763		1.46	%		7,686,453			87,800		1.53	%

Other liabilities		352,485								268,691								273,116

Shareholders’ equity		1,245,707								1,049,925								1,043,829


Total liabilities and shareholders’ equity	$	13,199,286							$	10,794,350							$	10,873,067


Net yield on earning assets	$	11,528,503			336,679		3.90	%	$	9,925,234			355,633		3.58	%	$	9,996,354			266,462		3.56	%


Interest rate spread							3.70	%							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.

HIGHLIGHTS OF THIRD QUARTER 2010 PERFORMANCE

Earnings Summary

The FirstMerit Corporation reported third quarter 2010 net income of $29.0 million, or $0.27 per diluted share. This compares with $31.5 million, or $0.32 per diluted share, for the second quarter of 2010 and $22.8 million, or $0.27 per diluted share, for the third quarter 2009.

Returns on average common equity (“ROE”) and average assets (“ROA”) for the third quarter 2010 were 7.60% and 0.79%, respectively, compared with 9.61% and 0.94% for the second quarter of 2010 and 8.69% and 0.85% for the third quarter 2009.

Net interest margin was 3.95% for the third quarter of 2010 compared with 4.04% for the second quarter of 2010 and 3.61% for the third quarter of 2009. Compared with the second quarter of 2010, the compression in net interest margin was attributed to amortization and paydowns in the covered and noncovered loan portfolios. As loan growth remains muted in the Company’s core Ohio and Chicago markets, incoming cash flows from the loan and investment securities portfolios were reinvested into lower-yielding, short duration securities. The expansion in the Corporation’s net interest margin, compared with the third quarter of 2009, is attributable to enhanced earning asset yields from Midwest’s balance sheet and the successful results of the Corporation’s continued emphasis on core deposit gathering and shifting deposit mix away from higher-priced certificate of deposit products.

Average loans, not including acquired loans, during the third quarter of 2010 decreased $29.5 million, or 0.43%, compared with the second quarter of 2010 and decreased $275.9 million, or 3.91%, compared with the third quarter of 2009. The modest changes in average loan balances compared with the second quarter of 2010 and the third quarter of 2009 reflect the Corporation’s business and retail customers’ focus on debt reduction. While the Corporation is adding new commercial loans in both its core Ohio and newer Chicago markets, low credit line utilization by existing customers is mitigating new loan production with respect to overall portfolio balances. At September 30, 2010, average covered loan balances including the indemnification asset were $2.2 billion.

Average deposits during the third quarter of 2010 increased $880.3 million, or 8.35%, compared with the second quarter of 2010 and increased $4.0 billion, or 54.73%, compared with the third quarter of 2009. During the third quarter of 2010, the Corporation increased its average core deposits, which excludes time deposits, by $672.3 million, or 9.06%, compared with the second quarter of 2010, and $2.6 billion, or 46.80%, compared with the third quarter of 2009.

Average investments during the third quarter of 2010 decreased $28.3 million, or 0.86%, compared with the second quarter of 2010 and increased $542.6 million, or 19.89%, over the third quarter of 2009. The increase in third quarter of 2010 average investments, compared with the third quarter of 2009, is due to the purchase of $575.0 million of securities 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 $125.5 million in the third quarter 2010, compared with $118.8 million in the second quarter of 2010 and $89.1 million in the third quarter of 2009. Compared with the second quarter of 2010, average earning assets increased $815.5 million, or 6.92%, and increased $2.8 billion, or 28.54%, compared to the third quarter of 2009.

Noninterest income net of securities transactions for the third quarter of 2010 was $55.1 million, an increase of $2.5 million, or 4.79%, from the second quarter of 2010 and an increase of $6.4 million, or 13.23%, from the third quarter of 2009.

The increase in other income for the third quarter of 2010 compared to the second quarter of 2010 was driven by mortgage revenue, including loan sales and servicing and the fair value of the mortgage pipeline which is recorded in other operating income. The primary change in other income for the 2010 third quarter as compared to the third quarter of 2009 was attributed to $3.9 million in income related to mortgage origination activities.

Other income, net of securities gains, as a percentage of net revenue for the third quarter of 2010 was 30.50% compared with 30.67% for second quarter of 2010 and 35.32% for the third quarter of 2009. Net revenue is defined as net interest income, on a FTE basis, plus other income, less gains from securities sales.

Noninterest expense for the third quarter of 2010 was $120.7 million, an increase of $14.9 million, or 14.14%, from the second quarter of 2010 and an increase of $36.5 million, or 43.37%, from the third quarter of 2009. For the three months ended September 30, 2010, increases in operating expenses compared to the third 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 acquisitions totaled $4.5 million.

During the third quarter of 2010, the Corporation reported an efficiency ratio of 66.26%, compared with 61.30% for the second quarter of 2010 and 61.05% for the third quarter of 2009.

Net charge-offs, excluding acquired loans, totaled $19.9 million, or 1.17% of average loans, excluding acquired loans, in the third quarter of 2010 compared with $19.8 million, or 1.17% of average loans, in the second quarter of 2010 and $18.8 million, or 1.05% of average loans, in the third quarter of 2009.

Nonperforming assets totaled $115.3 million at September 30, 2010, an increase of $5.5 million compared with June 30, 2010 and an increase of $26.4 million compared with September 30, 2009. Nonperforming assets at September 30, 2010 represented 1.70% of period-end loans plus other real estate, excluding acquired loans, compared with 1.62% at June 30, 2010 and 1.26% at September 30, 2009.

The allowance for loan losses noncovered, totaled $116.5 million at September 30, 2010, a decrease of $1.8 million from June 30, 2010. At September 30, 2010, the allowance for loan losses noncovered was 1.72% of period-end loans compared with 1.75% at June 30, 2010, and 1.72% at March 31, 2010. The allowance for credit losses is the sum of the allowance for loan losses noncovered, and the reserve for unfunded lending commitments. For comparative purposes the allowance for credit losses was 1.84% of period-end loans, excluding acquired loans, at September 30, 2010, compared with 1.85% at June 30, 2010 and 1.82% at March 31, 2010. The allowance for credit losses to nonperforming loans was 118.49% at September 30, 2010, compared with 126.51% at June 30, 2010 and 110.80% at March 31, 2010.

The Corporation’s total assets at September 30, 2010 were $14.4 billion, a decrease of $167.0 million inclusive of intangible assets, or 1.15%, compared with June 30, 2010 and an increase of $3.6 billion, or 33.40%, compared with September 30, 2009. Total loans, excluding acquired loans, did not significantly change compared with June 30, 2010 and September 30, 2009. The primary increase in total assets compared with September 30, 2009, is attributed to the three 2010 acquisitions that increased total loans, including a loss share receivable of $318.4 million, by $2.2 billion as of September 30, 2010.

Total deposits were $11.3 billion at September 30, 2010, a decrease of $243.8 million, or 2.12%, from June 30, 2010 and an increase of $4.0 billion, or 55.01%, from September 30, 2009. The increase in total deposits over September 30, 2009 was driven by the Corporation’s expansion strategy in Chicago. Core deposits totaled $8.1 billion at September 30, 2010, an increase of $0.4 million, or 4.80%, from June 30, 2010 and an increase of $2.5 billion, or 44.53%, from September 30, 2009. The increase in core deposits over the prior quarter is due to the Corporation’s strategy to retain recently acquired depository customers and move them from certificate of deposit accounts into core deposit products. Deposit retention rates for the three acquired Chicago institutions at September 30, 2010, are as follows: First Bank, 94.9%; George Washington, 96.6%; and Midwest (excluding brokered certificate of deposits, CDARS & internet certificate of deposits), 94.6%.

Shareholders’ equity was $1.5 billion at September 30, 2010, compared with $1.5 billion at June 30, 2010 and $1.1 billion at September 30, 2009. The Corporation maintained a strong capital position as tangible common equity to assets was 7.53% at September 30, 2010, compared with 7.37% and 8.65% at June 30, 2010 and September 30, 2009, respectively. The common dividend per share paid in the third quarter 2010 was $0.16.

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 September 30, 2010 was $123.5 million compared to $87.4 million for the quarter ended September 30, 2009. Net interest income for the nine months ended September 30, 2010 was $330.7 million compared to $261.4 million for the nine months ended September 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, therefore, Management believes these measures provide useful information for both management and investors by allowing them to make peer comparisons. The FTE adjustment was $2.0 million and $1.7 million for the quarters ending September 30, 2010 and 2009, respectively. The FTE adjustment was $6.0 million and $5.1 million for the nine months ended September 30, 2010 and 2009, respectively.

FTE net interest income for the quarter ended September 30, 2010 was $125.5 million compared to $89.1 million for the three months ended September 30, 2009. FTE net interest income for the nine months ended September 30, 2010 was $336.7 million compared to $266.5 million for the nine months ended September 30, 2009.

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


	Quarters ended September 30, 2010 and 2009									Nine months ended September 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	$	5,340		$	(7,967	)	$	(2,627	)	$	13,791		$	(20,773	)	$	(6,982	)
Loans held for sale		54			(15	)		39			(79	)		(58	)		(137	)
Loans		379			1,186			1,565			(4,862	)		572			(4,290	)

Total interest income — FTE	$	5,773		$	(6,796	)	$	(1,023	)	$	8,850		$	(20,259	)	$	(11,409	)

INTEREST EXPENSE
Demand deposits-interest bearing	$	51		$	35		$	86		$	81		$	21		$	102
Savings and money market accounts		2,923			(474	)		2,449			7,888			(712	)		7,176
Certificates of deposits and other time deposits		6,475			(9,057	)		(2,582	)		8,764			(29,457	)		(20,693	)
Securities sold under agreements to repurchase		(177	)		(125	)		(302	)		(309	)		330			21
Wholesale borrowings		(2,902	)		(1,197	)		(4,099	)		(9,827	)		772			(9,055	)

Total interest expense	$	6,370		$	(10,818	)	$	(4,448	)	$	6,597		$	(29,046	)	$	(22,449	)

Net interest income — FTE	$	(597	)	$	4,022		$	3,425		$	2,253		$	8,787		$	11,040

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.

As loan growth remains muted in the Company’s core Ohio and Chicago markets, incoming cash flows from the loan and investment securities portfolios were reinvested into lower-yielding, short duration securities. The expansion in the Corporation’s net interest margin, compared with the third quarter of 2009, is attributable to enhanced earning asset yields from the Midwest acquisition and the successful results of the Corporation’s continued emphasis on core deposit gathering and shifting deposit mix away from higher-priced certificate of deposit products.

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


	Quarters ended						Nine months ended
	September 30,						September 30,
(Dollars in thousands)	2010			2009			2010			2009
Net interest income	$	123,493		$	87,377		$	330,654		$	261,386
Tax equivalent adjustment		2,021			1,702			6,025			5,076

Net interest income — FTE	$	125,514		$	89,079		$	336,679		$	266,462


Average earning assets	$	12,600,422		$	9,802,810		$	11,528,503		$	9,996,354

Net interest margin — FTE		3.95	%		3.61	%		3.90	%		3.56	%

Average loans outstanding (excluding acquired loans) for the current year and prior year third quarters totaled $6.8 billion and $7.1 billion, respectively. While the Corporation is adding new commercial loans in

both its core Ohio and newer Chicago markets, low credit line utilization by existing customers is mitigating new loan production with respect to overall portfolio balances.

Specific changes in average loans outstanding, compared to the third quarter 2009, were as follows: commercial loans were up $230.9 million or 5.62%; home equity loans were up $4.3 million or 0.56%; mortgage loans were down $71.0 million or 14.43%; installment loans, both direct and indirect declined $128.8 million or 8.63%; leases decreased $1.1 million or 1.85%; 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 third quarters equaled 73.87% and 71.99% of average earning assets, respectively.

Average deposits were $11.4 billion during the 2010 third quarter, up $4.0 million, or 54.73%, from the same period last year. For the quarter ended September 30, 2010, average core deposits (which are defined as checking accounts, savings accounts and money market savings products) increased $2.6 billion, or 46.80%, and represented 70.82% of total average deposits, compared to 74.64% for the 2009 third quarter. Average certificates of deposit (“CDs”) increased $1.5 million, or 78.07%, compared to the prior year. Average wholesale borrowings decreased $0.4 million, and as a percentage of total interest-bearing funds equaled 4.41% for the 2010 third quarter and 11.92% for the same quarter one year ago. Securities sold under agreements to repurchase decreased $0.2 million, and as a percentage of total interest bearing funds equaled 9.22% for the 2010 third quarter and 14.68% for the 2009 third quarter. Average interest-bearing liabilities funded 79.91% of average earning assets in the current year quarter and 75.57% during the quarter ended September 30, 2009.

Other Income

Excluding investment gains, other income for the quarter ended September 30, 2010 totaled $55.1 million, an increase of $6.5 million from the $48.6 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 30.50%, compared to 35.32% for the same quarter one year ago.

The primary changes in other income for the 2010 third quarter as compared to the third quarter of 2009 were as follows: trust income was $5.5 million, an increase of 7.64% primarily due to advances in the equity markets; credit card fees were $12.5 million, an increase of 7.01% attributable to the improvement in the economy; and other operating income was $7.3 million, an increase of 187.94%, attributable to mortgage origination activities.

The changes in other income for the nine months ended September 30, 2010 compared to September 30, 2009 were similar to the quarterly analysis. The primary changes in other income for the nine months ended September 30, 2010 as compared to September 30, 2009 were as follows: A $1.0 million gain on the acquisition of George Washington was recognized in the first quarter 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 quarter of 2009. In addition, service charges on deposits were $50.0 million, an increase of 6.76%, and bank owned life insurance income was $11.8 million, an increase of 27.57%.

Other Expenses

Other (non-interest) expenses totaled $120.7 million for the third quarter 2010 compared to $84.2 million for the same 2009 quarter, an increase of $36.5 million, or 43.35%. Other (non-interest) expenses

totaled $320.4 million for the nine months ended September 30, 2010 compared to $257.9 million for the nine months ended September 30, 2009, an increase of $62.5 million, or 24.23%.

The primary changes in other expenses for the 2010 third quarter as compared to the third quarter of 2009 were as follows: Increases in operating expenses compared to the third 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 $4.5 million.

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

The efficiency ratio for the third quarter 2010 was 66.26%, compared to 61.05% 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 third quarter 2010, 66.26 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 $10.3 million and $8.1 million for the quarters ended September 30, 2010 and 2009, respectively. The effective federal income tax rate for the third quarter 2010 was 26.14%, compared to 26.31% 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 $275.6 million of loans, and $42.0 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 owned, and $408.4 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 loans and other real estate owned acquired are covered by loss share agreements between the Bank and the FDIC which afford the Bank

significant protection against future losses. As part of the agreements, the Bank has recorded a loss share receivable from the FDIC that represents the estimated fair value of the FDIC’s portion of the losses that are expected to be incurred and reimbursed to the Bank. The loss share receivable associated with the acquired covered loans was $88.7 million as of the date acquisition and is classified as part of covered loans in the consolidated balance sheets. The loss share receivable associated with the acquired other real estate owned was $11.3 million as of the date acquisition and is classified as part of other real estate covered by FDIC loss share in the consolidated balance sheets. The transaction resulted in a gain on acquisition of $1.0 million, which is included in noninterest income in the 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 $3.0 billion, including $1.8 billion of loans, $564.2 million of investment securities, $279.4 million of cash and due from banks, $26.2 million in other real estate owned, 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 loans and other real estate owned acquired are covered by loss share agreements between the Bank and the FDIC which afford the Bank significant protection against future losses. As part of the agreements, the Bank has recorded a loss share receivable from the FDIC that represents the estimated fair value of the FDIC’s portion of the losses that are expected to be incurred and reimbursed to the Bank. The loss share receivable associated with the acquired covered loans was $236.8 million as of the date acquisition and is classified as part of covered loans in the consolidated balance sheets. The loss share receivable associated with the acquired other real estate owned was $2.2 million as of the date acquisition and is classified as part of other real estate covered by FDIC loss share in the consolidated balance sheets. The transaction resulted in goodwill of $272.5 million. On October 9, 2010, the Corporation successfully completed the operational and technical migration of Midwest.

The First Bank, George Washington and Midwest acquisitions were considered business combinations and accounted for under ASC 805. All acquired assets and liabilities were recorded at their estimated fair values as of the date of acquisition and identifiable intangible assets were recorded at their estimated fair value. Estimated fair values are considered preliminary and, in accordance with ASC 805, are subject to change up to one year after the acquisition date. This allows for adjustments to the initial purchase entries if additional information relative to closing date fair values becomes available, and the Corporation continues to analyze its estimates of the fair values of the assets acquired and the liabilities assumed. Material adjustments to acquisition date estimated fair values are recorded in the period in which the acquisition occurred and, as a result, previously reported results are subject to change. Certain reclassifications of prior periods’ amounts may also be made to conform to the current period’s presentation and would have no effect on previously reported net income amounts.

During the quarter ended September 30, 2010, additional information was obtained that resulted in changes to certain acquisition-data fair value estimates relating to both the George Washington and Midwest acquisitions. The purchase accounting adjustments for the George Washington acquisition resulted in a reduction of $4.0 million, or approximately $2.6 million net of taxes, to the bargain purchase gain which was recognized for the George Washington acquisition in the quarter ended March 31, 2010, which is included in noninterest income in the consolidated statements of income and comprehensive income for the nine months ended September 30, 2010. The purchase accounting adjustments for the Midwest acquisition resulted in a

reduction of approximately $5.3 million to the goodwill recorded for the Midwest acquisition in the quarter ended June 30, 2010, which is reflected in the consolidated balance sheets as of September 30, 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 September 30, 2010, total investment securities were $3.3 billion compared to $2.8 billion at December 31, 2009 and September 30, 2009. Available-for-sale securities were $3.0 billion at September 30, 2010 compared to $2.6 billion at December 31, 2009 and $2.6 billion at September 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.

Held-to-maturity securities totaled $61.8 million at September 30, 2010 compared to $50.7 million at December 31, 2009 and $38.5 million at September 30, 2009 and consist principally of securities issued by state and political subdivisions.

Other investments totaled $160.8 million at September 30, 2010 compared to $128.9 million at December 31, 2009 and $128.9 million at September 30, 2009 and consisted primarily of FHLB and FRB stock. The increase of $31.9 million or 24.75% 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 $86.7 million, $55.1 million and $74.4 million at September 30, 2010, December 31, 2009, and September 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 OTTI. 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 $15.7 million, compared to $21.6 million as of December 31, 2009, and $21.9 million at September 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 September 30, 2010 were $7.1 billion compared to $6.9 billion at December 31, 2009 and $7.0 billion at September 30, 2009.


	As of			As of			As of
	September 30,			December 31,			September 30,
	2010			2009			2009
				(In thousands)
Commercial loans	$	4,344,784		$	4,066,522		$	4,097,252
Mortgage loans		414,728			463,416			481,336
Installment loans		1,349,964			1,425,373			1,481,200
Home equity loans		760,816			753,112			761,553
Credit card loans		144,734			153,525			147,767
Leases		64,009			61,541			60,540

Total non-covered loans		7,079,035			6,923,489			7,029,648
Less allowance for loan losses noncovered		(116,528	)		(115,092	)		(116,352	)

Net non-covered loans		6,962,507			6,808,397			6,913,296
Covered loans		2,177,807			—			—
Less allowance for loan losses covered		(3,437	)		—			—

Net covered loans		2,174,370			—			—

Net loans	$	9,136,877		$	6,808,397		$	6,913,296

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 the Corporation is currently operating has resulted in risks that differ from its 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 timing inherent in this accounting treatment may result in earnings volatility in future periods.

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 $2.2 billion. In addition, ratios of nonperforming loans exclude these acquired loans and other real estate, with a period end balance of $53.5 million, covered by the FDIC loss share agreements.

At September 30, 2010, the allowance for loan losses on noncovered loans was $116.5 million, or 1.72% of loans outstanding, excluding acquired loans, compared to $115.1 million, or 1.68%, at year-end 2009 and $116.4 million, or 1.66%, for the quarter ended September 30, 2009. The allowance equaled 111.00% of nonperforming loans at September 30, 2010, compared to 125.55% at year-end 2009, and 147.60% for September 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 $11.0 million, $19.8 million, and $20.1 at September 30, 2010, December 31, 2009, and September 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 $26.1 million over September 30, 2009, and $13.3 million over December 31, 2009 primarily attributable to the declining economic conditions.

Net charge-offs on noncovered loans were $19.9 million for the third quarter ended 2010 compared to $87.1 million for year-end 2009 and $18.8 million in the third quarter ended 2009. As a percentage of average loans outstanding, excluding acquired loans, net charge-offs equaled 1.17%, 1.22%, and 1.05% for September 30, 2010, December 31, 2009, and September 30, 2009, respectively. Losses are charged against the allowance for loan losses as soon as they are identified.

During the quarter ended September 30, 2010, the Corporation increased its allowance for loan losses on covered loans to $3.4 million to reserve for estimated additional losses on certain covered loans. The increase in the allowance was recorded by a charge to the provision for loan losses covered of $0.6 million and an

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
	September 30,			December 31,			September 30,
	2010			2009			2009
				(In thousands)
Allowance for Loan Losses Noncovered
Allowance for loan losses-beginning of period	$	118,343		$	103,757		$	111,222
Provision for loan losses		18,108			98,433			23,887
Net charge-offs		(19,923	)		(87,098	)		(18,757	)

Allowance for loan losses-end of period	$	116,528		$	115,092		$	116,352


Reserve for Unfunded Lending Commitments
Balance at beginning of period	$	6,812		$	6,588		$	6,054
Provision for credit losses		1,052			(837	)		(1,584	)

Balance at end of period	$	7,864		$	5,751		$	4,470


Allowance for credit losses	$	124,392		$	120,843		$	120,822


Annualized net charge-offs as a % of average loans		1.17	%		1.22	%		1.05	%


Allowance for loan losses uncovered:
As a percentage of period-end loans, excluding acquired loans (a)		1.72	%		1.68	%		1.66	%

As a percentage of nonperforming loans		111.00	%		125.55	%		147.60	%

As a multiple of annualized net charge offs		1.47x			1.32x			1.56x


Allowance for credit losses:
As a percentage of period-end loans, excluding acquired loans (a)		1.84	%		1.77	%		1.72	%

As a percentage of nonperforming loans		118.49	%		131.82	%		153.27	%

As a multiple of annualized net charge offs		1.57x			1.39x			1.62x


(a)		Excludes loss share receivable

The allowance for credit losses increased $3.5 million from December 31, 2009 to September 30, 2010, and increased $3.6 million from September 30, 2009 to September 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 September 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	$	7,752	$	71,851	$	—	$	—	$	—	$	—	$	—	$	79,603
Allowance		1,080		7,494		—		—		—		—		—		8,574
Collective Loan Impairment Components:
Credit risk-graded loans
Grade 1 loan balance		54,039		1,635		7,967										63,641
Grade 1 allowance		37		—		7										44
Grade 2 loan balance		69,994		14,278		—										84,272
Grade 2 allowance		106		29		—										135
Grade 3 loan balance		266,523		393,783		12,927										673,233
Grade 3 allowance		625		1,039		39										1,703
Grade 4 loan balance		1,181,783		1,689,822		42,671										2,914,276
Grade 4 allowance		10,356		14,418		413										25,187
Grade 5 (Special Mention) loan balance		60,323		75,672		444										136,439
Grade 5 allowance		2,617		3,347		23										5,987
Grade 6 (Substandard) loan balance		61,427		120,628		—										182,055
Grade 6 allowance		7,040		13,900		—										20,940
Grade 7 (Doubtful) loan balance		163		55		—										218
Grade 7 allowance		12		3		—										15
Consumer loans based on payment status:
Current loan balances								1,328,720		734,734		140,742		379,593		2,583,789
Current loans allowance								19,916		5,990		9,614		4,296		39,816
30 days past due loan balance								10,152		3,280		1,444		10,819		25,695
30 days past due allowance								1,702		972		945		508		4,127
60 days past due loan balance								3,770		1,033		1,082		4,532		10,417
60 days past due allowance								1,759		665		1,000		666		4,090
90+ days past due loan balance								2,373		840		1,466		17,781		22,460
90+ days past due allowance								1,880		837		1,720		1,473		5,910

Total loans	$	1,702,004	$	2,367,724	$	64,009	$	1,345,015	$	739,887	$	144,734	$	412,725	$	6,776,098

Total Allowance for Loan Losses	$	21,873	$	40,230	$	482	$	25,257	$	8,464	$	13,279	$	6,943	$	116,528

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
Allowance for Loan Losses	Loan Type
Components:	Commercial		Commercial R/E				Installment		Home Equity		Credit Card		Res Mortgage
(In thousands)	Loans		Loans		Leases		Loans		Loans		Loans		Loans		Total
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
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 September 30, 2009
	Loan Type
Allowance for Loan Losses	Commercial		Commercial R/E				Installment		Home Equity		Credit Card		Res Mortgage
Components:	Loans		Loans		Leases		Loans		Loans		Loans		Loans		Total
(In thousands)
Individually Impaired Loan Component:
Loan balance	$	24,708	$	48,189	$	—	$	—	$	—	$	—	$	—	$	72,897
Allowance		7,911		6,957		—		—		—		—		—		14,868
Collective Loan Impairment Components:
Credit risk-graded loans
Grade 1 loan balance		45,463		5,846		7,518										58,827
Grade 1 allowance		29		1		6										36
Grade 2 loan balance		88,543		80,316		1,713										170,572
Grade 2 allowance		68		87		2										157
Grade 3 loan balance		364,463		568,110		16,370										948,943
Grade 3 allowance		620		1,123		35										1,778
Grade 4 loan balance		919,172		1,660,624		32,959										2,612,755
Grade 4 allowance		9,438		15,598		233										25,269
Grade 5 (Special Mention) loan balance		70,790		49,208		1,332										121,330
Grade 5 allowance		1,869		1,952		34										3,855
Grade 6 (Substandard) loan balance		71,261		100,555		648										172,464
Grade 6 allowance		5,986		11,277		53										17,316
Grade 7 (Doubtful) loan balance		—		4		—										4
Current loan balances								1,452,218		756,735		141,322		446,273		2,796,548
Current loans allowance								17,659		5,535		7,494		3,318		34,006
30 days past due loan balance								16,062		2,312		2,356		13,896		34,626
30 days past due allowance								2,459		660		1,215		587		4,921
60 days past due loan balance								8,382		1,470		1,604		4,253		15,709
60 days past due allowance								3,524		954		1,200		619		6,297
90+ days past due loan balance								4,538		1,036		2,485		16,914		24,973
90+ days past due allowance								3,111		1,064		2,323		1,351		7,849

Total loans	$	1,584,400	$	2,512,852	$	60,540	$	1,481,200	$	761,553	$	147,767	$	481,336	$	7,029,648

Total Allowance for Loan Losses	$	25,921	$	36,995	$	363	$	26,753	$	8,213	$	12,232	$	5,875	$	116,352

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.

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

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


	September 30,			December 31,			September 30,
(Dollars in thousands)	2010			2009			2009
Nonperforming commercial loans	$	91,646		$	74,033		$	63,357
Other nonaccrual loans:		13,331			17,639			15,474

Total nonperforming loans		104,977			91,672			78,831
Other real estate (“ORE”)		10,290			9,329			10,050

Total nonperforming assets	$	115,267		$	101,001		$	88,881


Loans past due 90 day or more accruing interest	$	36,895		$	35,025		$	27,764

Total nonperforming assets as a percentage of total loans and ORE		1.70	%		1.48	%		1.26	%

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 $17.6 million from December 31, 2009 and $28.3 million from September 30, 2009. Commercial criticized loans increased $66.6 million from December 31, 2009, and $42.8 million from September 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:


	Quarters Ended
	September 30,			June 30,			March 31,			December 31,			September 30,
	2010			2010			2010			2009			2009
							(In thousands)
Nonaccrual commercial loans beginning of period	$	84,535		$	94,798		$	74,033		$	63,357		$	48,563

Credit Actions:
New		19,625			4,419			31,211			34,612			24,491
Loan and lease losses		(6,381	)		(6,071	)		(5,367	)		(5,272	)		(3,886	)
Charged down		(4,139	)		(1,730	)		(3,567	)		(12,710	)		(3,321	)
Return to accruing status		(200	)		(1,575	)		(672	)		(478	)		(24	)
Payments		(1,795	)		(5,306	)		(840	)		(5,476	)		(2,466	)

Nonaccrual commercial loans end of period	$	91,646		$	84,535		$	94,798		$	74,033		$	63,357

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
	September 30, 2010					December 31, 2009					September 30, 2009
	Average		Average			Average		Average			Average		Average
	Balance		Rate			Balance		Rate			Balance		Rate
						(Dollars in thousands)
Non-interest DDA	$	2,729,355		—		$	1,910,171		—		$	1,947,359		—
Interest-bearing DDA		858,168		0.10	%		656,367		0.09	%		647,712		0.08	%
Savings and money market accounts		4,503,906		0.72	%		2,886,842		0.81	%		2,916,980		0.78	%
CDs and other time deposits		3,334,311		1.15	%		2,056,208		2.66	%		1,872,456		2.60	%

Total customer deposits		11,425,740		0.63	%		7,509,588		1.05	%		7,384,507		0.98	%

Securities sold under agreements to repurchase		928,607		0.42	%		1,013,167		0.47	%		1,087,875		0.47	%
Wholesale borrowings		443,892		2.44	%		952,979		2.87	%		883,377		3.06	%

Total funds	$	12,798,239				$	9,475,734				$	9,355,759

The increase in total deposits over prior year was driven by the Corporation’s expansion strategy in Chicago which resulted in the acquisition of $3.9 billion of deposits in the first half of 2010. The Corporation’s strategy is to retain recently acquired depository customers and move them from certificate of deposit accounts into core deposit products. Deposit retention rates for the three acquired Chicago institutions at September 30, 2010, are as follows: First Bank, 94.9%; George Washington, 96.6%; and Midwest (excluding brokered certificate of deposits, CDARS & internet certificate of deposits), 94.6%.

Average demand deposits comprised 31.40% of average deposits in the 2010 third quarter compared to 35.14% in the 2009 third quarter. Savings accounts, including money market products, made up 39.42% of average deposits in the 2010 third quarter compared to 39.50% in the 2009 third quarter. CDs made up 29.18% of average deposits in the third quarter 2010 and 25.36% in the third quarter 2009.

The average cost of deposits, securities sold under agreements to repurchase and wholesale borrowings was down 110 basis points compared to one year ago, or 1.71% for the quarter ended September 30, 2010.

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


Time until maturity:	Amount
	(In thousands)
Under 3 months	$	330,424
3 to 6 months		240,541
6 to 12 months		270,983
Over 1 year through 3 years		184,475
Over 3 years		38,815

	$	1,065,238

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 September 30, 2010 totaled $1.5 billion compared to $1.1 billion at December 31, 2009 and $1.1 billion at September 30, 2009. The cash dividend of $0.16 per share paid in the third 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 at $19.00 per share in a public underwritten offering. The net proceeds from the offering were approximately $320.1 million after deducting underwriting discounts and commissions and the estimated expenses of the offering payable by the Corporation.

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 7.53% at September 30, 2010, compared to 8.89% at December 31, 2009, and 8.65% at September 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 September 30, 2010, the Corporation, on a consolidated basis, as well as FirstMerit Bank, exceeded the minimum capital levels of the well capitalized category.


	September 30,				December 31,				September 30,
	2010				2009				2009
					(Dollars in thousands)
Consolidated
Total equity	$	1,517,892	10.57	%	$	1,065,627	10.11	%	$	1,059,209	9.84	%
Common equity		1,517,892	10.57	%		1,065,627	10.11	%		1,059,209	9.84	%
Tangible common equity (a)		1,046,080	7.53	%		924,871	8.89	%		918,821	8.65	%
Tier 1 capital (b)		1,049,132	11.46	%		971,013	12.09	%		945,620	11.43	%
Total risk-based capital (c)		1,163,701	12.71	%		1,071,682	13.34	%		1,049,287	12.68	%
Leverage (d)		1,049,132	7.48	%		971,013	9.39	%		945,620	9.06	%

Bank Only
Total equity	$	1,322,002	9.22	%	$	946,626	9.00	%	$	839,097	7.81	%
Common equity		1,322,002	9.22	%		946,626	9.00	%		839,097	7.81	%
Tangible common equity (a)		850,190	6.13	%		806,223	7.77	%		698,709	6.59	%
Tier 1 capital (b)		959,164	10.50	%		826,517	10.31	%		810,149	9.81	%
Total risk-based capital (c)		1,069,338	11.71	%		922,919	11.51	%		909,588	11.01	%
Leverage (d)		959,164	6.78	%		826,517	8.00	%		810,149	7.77	%

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 September 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

September 30, 2010

1.87%

3.46%

4.54%

September 30, 2009

0.47%

0.46%

0.02%


*		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 September 30, 2010 and 2009:

Immediate Change in Rates and Resulting Percentage

Increase/(Decrease) in EVE:

- 100 basis

+ 100 basis

+ 200 basis

+ 300 basis

points

September 30, 2010

4.18%

5.87%

5.57%

September 30, 2009

1.81%

(0.13%)

(0.44%)


*		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 71.54% of total deposits at September 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 third quarter of 2010 in addition to unencumbered, or unpledged, investment securities that totaled $800.2 million as of September 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 September 30, 2010, lower cost core deposits increased by $0.4 million from the previous quarter. In aggregate, deposits decreased $0.2 billion. Securities sold under agreements to repurchase increased $0.2 million from June 30, 2010. Wholesale borrowings decreased $0.1 million from June 30, 2010. The Corporation’s loan to deposit ratio increased to 82.10% at September 30, 2010 from 81.45% at June 30, 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 September 30, 2010, FirstMerit Bank did not pay dividends to FirstMerit Corporation. As of September 30, 2010, FirstMerit Bank had an additional $149.7 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 of 2010 (the “Dodd-Frank Act”). The Dodd-Frank Act is the most comprehensive

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

In this respect, it is noteworthy that preemptive rights heretofore granted to national banking associations by the 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 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 not yet known. In addition, because most aspects of this legislation will be subject to intensive agency rulemaking and subsequent public comment prior to implementation 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.

The FDIC’s Temporary Liquidity Guarantee Program (“TLPG”), adopted November 21, 2008 guaranteed the payment of certain newly-issued senior unsecured debt of insured depository institutions (“Debt Guarantee”) and provided unlimited insurance coverage for 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 Program (“TAGP”)). Both components were provided to eligible institutions, including the Corporation, at no cost through December 5, 2008; participation subsequent to December 5, 2008 was optional. The Corporation elected to participate in TLPG and TAGP subsequent to December 5, 2008.

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.

Unlimited coverage for non-interest bearing transaction accounts through the Transaction Account Guarantee was extended to customers by the Corporation through June 30, 2010, at which point the Corporation

opted out of the program. Due to the provisions of the Dodd-Frank Act, the FDIC will not be extending the TAGP program beyond its scheduled expiration on December 31, 2010.

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 Act was signed into law. The Dodd-Frank Act imposes new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions. Because the Dodd-Frank Act requires various federal agencies to adopt a broad range of regulations with significant discretion, many of the details of the new law and the effects it will have on the Corporation will not be known for months or even years.

The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States. There are a number of reform provisions that are likely to significantly impact the ways in which banks and bank holding companies, including the Corporation, do business. For example, the Dodd-Frank Act changes the assessment base for federal deposit insurance premiums by modifying the deposit insurance assessment base calculation to equal a depository institution’s consolidated assets less tangible capital and permanently increases the standard maximum amount of deposit insurance per customer to $250,000 and non-interest bearing transaction accounts will have unlimited deposit insurance through January 1, 2013. The Dodd-Frank Act also imposes more stringent capital requirements on bank holding companies by, among other things, imposing leverage ratios on bank holding companies and prohibiting new trust preferred issuances from counting as Tier I capital. The Dodd-Frank Act also repeals the federal prohibition on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts. Other provisions of the Dodd-Frank Act include, but are not limited to: (i) the creation of a new financial consumer protection agency that is empowered to promulgate new consumer protection regulations and revise existing regulations in many areas of consumer protection; (ii) new comprehensive regulation of the over-the counter derivatives market; (iii) reform related to the regulation of credit rating agencies; (iv) restrictions on the ability of banks to sponsor or invest in private equity or hedge funds; and (v) the implementation of a number of new corporate governance provisions, including, but not limited to, requiring companies to “claw back” incentive compensation under certain circumstances, providing shareholders the opportunity to cast a non-binding vote on executive compensation, new executive compensation disclosure requirements and considerations regarding the independence of compensation advisors.

Many provisions of the Dodd-Frank Act will not be implemented immediately and will require interpretation and rule making by federal regulators. The Corporation is closely monitoring all relevant sections of the Dodd-Frank Act to ensure continued compliance with laws and regulations. While the ultimate effect of the Dodd-Frank Act on the Corporation cannot currently be determined, the law is likely to result in increased compliance costs and fees paid to regulators, along with possible restrictions on the Corporation’s operations.

The Corporation’s results of operations, financial condition or liquidity may be adversely impacted by issues arising in foreclosure practices, including delays in the foreclosure process, related to certain industry deficiencies, as well as potential losses in connection with actual or projected repurchases and indemnification payments related to mortgages sold into the secondary market.

Recent announcements of deficiencies in foreclosure documentation by several large seller/servicer financial institutions have raised various concerns relating to mortgage foreclosure practices in the United States. A group of state attorneys general and state bank and mortgage regulators in all 50 states and the District of Columbia is currently reviewing foreclosure practices and a number of mortgage sellers/servicers have temporarily suspended foreclosure proceedings in some or all states in which they do business in order to evaluate their foreclosure practices and underlying documentation.

The integrity of the foreclosure process is important to the Corporation’s business, as an originator and servicer of residential mortgages. As a result of the Corporation’s continued focus of concentrating its lending efforts in its primary markets in Ohio, as well as servicing loans for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), the Corporation does not anticipate suspending any of its foreclosure activities. During the past quarter, the Corporation reviewed its foreclosure procedures and concluded they are generally conservative in nature and should not present the significant documentation deficiencies underlying other industry foreclosure problems. Nevertheless, the Corporation could face delays and challenges in the foreclosure process arising from claims relating to industry practices generally, which could adversely affect recoveries and the Corporation’s financial results, whether through increased expenses of litigation and property maintenance, deteriorating values of underlying mortgaged properties or unsuccessful litigation results generally.

In addition, in connection with the origination and sale of residential mortgages into the secondary market, the Corporation makes certain representations and warranties, which, if breached, may require it to repurchase such loans, substitute other loans or indemnify the purchasers of such loans for actual losses incurred in respect of such loans. Although the Corporation believes that its mortgage documentation and procedures have been appropriate and are generally conservative in nature, it is possible that the Corporation will receive repurchase requests in the future and the Corporation may not be able to reach favorable settlements with respect to such requests. It is therefore possible that the Corporation may increase its reserves or may sustain losses associated with such loan repurchases and indemnification payments.

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 third 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 June 30, 2010								396,272
July 1, 2010 - July 31, 2010		1,703	$	20.40		—		396,272
August 1, 2010 - August 31, 2010		2,640		21.07		—		396,272
September 1, 2010 - September 30, 2010		—		—		—		396,272

Balance as of September 30, 2010		4,343	$	20.81		—		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
	3.1	Second Amended and Restated Articles of Incorporation of FirstMerit Corporation, as amended (incorporated by reference from Exhibit 3.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 filed by FirstMerit Corporation on May 10, 2010 ).

	3.2	Second Amended and Restated Code of Regulations of FirstMerit Corporation, as amended (incorporated by reference from Exhibit 3.2 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 filed by FirstMerit Corporation on May 10, 2010 ).

	10.1	FirstMerit Corporation Amended and Restated Executive Cash Incentive Plan (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed by FirstMerit Corporation on August 25, 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 September 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 4,343 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
	By:	/s/TERRENCE E. BICHSEL
		Terrence E. Bichsel, Executive Vice President
		and Chief Financial Officer (duly authorized officer of registrant and principal financial officer)