Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
XQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2014March 31, 2015
  
OR
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
Commission file number: 001-11267
(Exact name of registrant as specified in its charter)
Ohio 34-1339938
(State or other jurisdiction of incorporation or organization)  (I.R.S. Employer Identification No.)
III Cascade Plaza, 7th Floor, Akron Ohio 44308
(Address of principal executive offices)   (Zip Code)
(330) 996-6300996-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):    
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
  (Do not check if a smaller reporting company) 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
Class Outstanding as of 7/4/28/20142015
 Common Stock, no par value 165,394,486165,787,937

   
   
   
 




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FIRSTMERIT CORPORATION AND SUBSIDARIES
FORM 10-Q
TABLE OF CONTENTS
FIRSTMERIT CORPORATION AND SUBSIDARIES
FORM 10-Q
TABLE OF CONTENTS
FIRSTMERIT CORPORATION AND SUBSIDARIES
FORM 10-Q
TABLE OF CONTENTS
   Page   Page
1
Summary of Significant Accounting Policies1
Summary of Significant Accounting Policies
2
Business Combinations2
Investment Securities
3
Investment Securities3
Loans
4
Loans4
Allowance for Loan Losses
5
Allowance for Loan Losses5
Goodwill and Other Intangible Assets
6
Goodwill and Other Intangible Assets6
Shareholders' Equity
7
Shareholders' Equity7
Segment Information
8
Segment Information8
Derivatives and Hedging Activities
9
Derivatives and Hedging Activities9
Benefit Plans
10
Benefit Plans10
Fair Value Measurement
11
Fair Value Measurement11
Mortgage Servicing Rights and Mortgage Servicing Activity
12
Mortgage Servicing Rights and Mortgage Servicing Activity12
Commitments and Guarantees
13
Contingencies and Guarantees13
Changes and Reclassifications Out of Accumulated Other Comprehensive Income
14
Changes and Reclassifications Out of Accumulated Other Comprehensive Income14
Subsequent Events
15
Subsequent Events
Highlights of Second Quarter of 2014 PerformanceHighlights of First Quarter of 2015 Performance
Regulation and Supervision
Regulation and Supervision
  
  
  
  
  
  
  
  
  
  
  

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FIRSTMERIT CORPORATION AND SUBSIDARIES
FORM 10-Q
TABLE OF CONTENTS
    Page
  
   
  
   
   
   
  
Asset Quality (excluding acquired loans and covered assets)
  
  
   
   
 
  
  
  
  
  
  
 
 
 
 
 
ITEM 4. MINE SAFETY DISCLOSURES
 
 
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT
Index to Exhibits 

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The acronyms and abbreviations identified below are used in this Form 10-Q including the Notes to Consolidated Financial Statements (unaudited) as well as in Management's Discussion & Analysis of Financial Condition and Results of Operations.
Acquisition DateCitizens Republic BancorpBanCorp Inc. acquisition date of April 12, 2013Federal ReserveThe Board of Governors of the Federal Reserve System
ALCOAsset/Liability Management CommitteeFHLBFederal Home Loan Bank
ALLAllowance for loan lossesFHLMCFederal Home Loan Mortgage Corporation
AOCIAccumulated other comprehensive income (loss)FICOFair Isaac Corporation
APBOAccumulated pension benefit obligationFINRAFinancial Industry Regulatory Authority
ASCAccounting standards codificationFNMAFederal National Mortgage Association
ASUAccounting standards updateFRAPFixed Rate Advantage Program
BankFirstMerit Bank N.A.FRBFederal Reserve Bank
Basel IBasel Committee'sCommittee’s 1988 Capital AccordGAAPFSOCUnited States generally accepted accounting principlesFinancial Stability Oversight Council
Basel IIIBasel Committee regulatory capital reforms, Third Basel AccordGSEGAAPGovernment sponsored enterpriseUnited States generally accepted accounting principles
Basel CommitteeBasel Committee on Banking SupervisionGSEGovernment sponsored enterprise
BHCBank holding companyISDAInternational Swaps and Derivatives Association
BHCBHCABank holding companyHolding Company Act of 1956, as amendedLIBORLondon Interbank Offered Rate
CCARComprehensive Capital Analysis and ReviewManagementFirstMerit Corporation'sCorporation’s Management
CFPBCET1Bureau of Consumer Financial ProtectionCommon equity tier 1MBSMortgage-backed securities
CFPBConsumer Financial Protection BureauMSRsMortgage servicing rights
CitizensCitizens Republic Bancorp Inc.MSRsNASDAQMortgage servicing rightsThe NASDAQ Stock Market LLC
Citizens TARP PreferredCitizens TARP Preferred issued to the U.S. Treasury as part of the Troubled Assets Relief ProgramNYSENew York Stock Exchange
CME Group Inc.CLOChicago Mercantile ExchangeCollateralized loan obligationsOCCOffice of the Comptroller of the Currency
CLOCMOCollateralized loanmortgage obligationsOCIOther comprehensive income (loss)
CMOCollateralized mortgage obligationsOREOOther real estate owned
Common StockCommon Shares, without par valueOTTIOREOOther-than-temporary impairmentOther real estate owned
CorporationFirstMerit Corporation and its SubsidiariesOTTIOther-than-temporary impairment
CPRConditional Prepayment RateParent CompanyFirstMerit Corporation
Dodd-Frank ActDodd-Frank Wall Street Reform and Consumer Protection Act of 2010Preferred Stock5.875% Non-Cumulative Perpetual Preferred Stock, Series A
DIFFederal Deposit Insurance FundRIPRetirement Investment Plan
DTADeferred tax assetROAReturn on average assets
DTLDeferred tax liabilityROEReturn on average equity
EPSEarnings per shareSECUnited States Securities and Exchange Commission
EVEERISAEconomic valueEmployee Retirement Income Security Act of equity1974TARPTroubled Asset Relief Program
FASBERMFinancial Accounting Standards BoardEnterprise risk managementTDRTroubled debt restructuring
FDICESOPThe Federal Deposit Insurance CorporationEmployee stock ownership planTEFully taxable equivalent
FCMEVEFutures commission merchantEconomic value of equityU.S. TreasuryUnited States Department of the Treasury
FASBFinancial Accounting Standards BoardUTBUnrecognized tax balance
FDIAFederal Deposit Insurance ActVIEVariable interest entity
FDICThe Federal Deposit Insurance Corporation  
    




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PART 1.I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETSFIRSTMERIT CORPORATION AND SUBSIDARIES
          
(In thousands, except share data)June 30, December 31, June 30,
(Unaudited, except for December 31, 2013)2014 2013 2013
(In thousands)March 31, December 31, March 31,
(Unaudited, except for December 31, 2014)2015 2014 2014
ASSETS
    
    
Cash and due from banks$523,027
 $571,171
 $421,836
$426,247
 $480,998
 $520,976
Interest-bearing deposits in banks119,543
 346,651
 487,654
106,178
 216,426
 438,309
Total cash and cash equivalents642,570
 917,822
 909,490
532,425
 697,424
 959,285
Investment securities:          
Held-to-maturity3,052,118
 2,935,688
 2,551,860
2,855,174
 2,903,609
 3,079,620
Available-for-sale3,478,420
 3,273,174
 3,299,392
3,791,059
 3,545,288
 3,433,171
Other investments148,433
 180,803
 267,565
148,475
 148,654
 148,446
Loans held for sale21,632
 11,622
 22,855
3,568
 13,428
 7,143
Loans14,969,627
 14,300,972
 14,143,423
15,490,889
 15,326,147
 14,608,613
Allowance for loan losses(142,036) (141,252) (147,714)(146,552) (143,649) (145,060)
Net loans14,827,591
 14,159,720
 13,995,709
15,344,337
 15,182,498
 14,463,553
Premises and equipment, net315,770
 327,054
 316,877
320,392
 332,297
 323,335
Goodwill741,740
 741,740
 741,740
741,740
 741,740
 741,740
Intangible assets76,886
 82,755
 88,419
68,422
 71,020
 79,819
Covered other real estate51,072
 65,234
 67,786
FDIC acquired other real estate43,660
 49,641
 59,848
Accrued interest receivable and other assets1,208,199
 1,216,416
 1,273,180
1,268,868
 1,216,748
 1,202,701
Total assets$24,564,431
 $23,912,028
 $23,534,873
$25,118,120
 $24,902,347
 $24,498,661
LIABILITIES AND SHAREHOLDERS' EQUITY          
Deposits:          
Noninterest-bearing$5,525,484
 $5,459,029
 $5,277,647
$5,666,752
 $5,786,662
 $5,595,899
Interest-bearing3,028,479
 3,026,735
 2,504,368
3,277,118
 3,028,888
 3,081,658
Savings and money market accounts8,476,096
 8,587,167
 8,520,806
8,610,553
 8,399,612
 8,750,182
Certificates and other time deposits2,268,337
 2,460,670
 2,816,901
2,371,172
 2,289,503
 2,383,935
Total deposits19,298,396
 19,533,601
 19,119,722
19,925,595
 19,504,665
 19,811,674
Federal funds purchased and securities sold under agreements to repurchase1,218,855
 851,535
 844,871
1,113,371
 1,272,591
 926,195
Wholesale borrowings649,021
 200,600
 201,337
316,628
 428,071
 349,277
Long-term debt324,433
 324,428
 324,422
512,625
 505,192
 324,430
Accrued taxes, expenses and other liabilities281,988
 298,970
 393,612
361,115
 357,547
 344,119
Total liabilities21,772,693
 21,209,134
 20,883,964
22,229,334
 22,068,066
 21,755,695
Shareholders' equity:          
5.875% Non-Cumulative Perpetual Preferred Stock, Series A, without par value: authorized 115,000 shares; 100,000 issued100,000
 100,000
 100,000
100,000
 100,000
 100,000
Common Stock warrant3,000
 3,000
 3,000
3,000
 3,000
 3,000
Common Stock, without par value; authorized 300,000,000 shares; issued: June 30, 2014 and December 31, 2013 - 170,183,540 shares; June 30, 2013 - 170,179,911 shares127,937
 127,937
 127,937
Common Stock, without par value; authorized 300,000,000 shares; issued: March 31, 2015, December 31, 2014 and March 31, 2014 - 170,183,540 shares127,937
 127,937
 127,937
Capital surplus1,387,253
 1,390,643
 1,386,063
1,394,933
 1,393,090
 1,393,749
Accumulated other comprehensive loss(39,507) (66,876) (71,897)(49,267) (71,892) (55,504)
Retained earnings1,335,371
 1,277,975
 1,235,530
1,433,926
 1,404,717
 1,303,626
Treasury stock, at cost: June 30, 2014 - 4,790,517 December 31, 2013 - 5,127,332 shares; June 30, 2013 - 5,134,463 shares(122,316) (129,785) (129,724)
Treasury stock, at cost: March 31, 2015 - 4,730,374; December 31, 2014 - 4,793,566 shares; March 31, 2014 - 5,096,157 shares(121,743) (122,571) (129,842)
Total shareholders' equity2,791,738
 2,702,894
 2,650,909
2,888,786
 2,834,281
 2,742,966
Total liabilities and shareholders' equity$24,564,431
 $23,912,028
 $23,534,873
$25,118,120
 $24,902,347
 $24,498,661
          
See accompanying notesNotes to the consolidated financial statements.Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF INCOMEFIRSTMERIT CORPORATION AND SUBSIDIARIES
    
(In thousands except for per share data)Three Months Ended June 30, Six Months Ended June 30,
(In thousands, except per share amounts)Three Months Ended March 31,
(Unaudited)2014 2013 2014 20132015 2014
Interest income:          
Loans and loans held for sale$172,517
 $178,535
 $343,030
 $277,206
$161,539
 $170,514
Investment securities:          
Taxable32,253
 29,138
 64,275
 48,377
31,950
 32,022
Tax-exempt5,555
 6,098
 10,895
 10,143
6,026
 5,340
Total investment securities interest37,808
 35,236
 75,170
 58,520
37,976
 37,362
Total interest income210,325
 213,771
 418,200
 335,726
199,515
 207,876
Interest expense:          
Deposits:          
Interest bearing745
 656
 1,481
 974
767
 737
Savings and money market accounts5,477
 6,469
 11,035
 11,784
5,547
 5,559
Certificates and other time deposits3,009
 3,374
 5,473
 5,437
2,177
 2,464
Securities sold under agreements to repurchase233
 329
 429
 642
Federal funds purchased and securities sold under agreements to repurchase243
 197
Wholesale borrowings1,391
 1,169
 2,520
 2,019
2,340
 1,129
Long-term debt3,893
 3,743
 7,783
 5,491
2,818
 3,890
Total interest expense14,748
 15,740
 28,721
 26,347
13,892
 13,976
Net interest income195,577
 198,031
 389,479
 309,379
185,623
 193,900
Provision for loan losses15,253
 7,309
 29,790
 17,256
8,248
 14,536
Net interest income after provision for loan losses180,324
 190,722
 359,689
 292,123
177,375
 179,364
Noninterest income:          
Trust department income10,070
 9,167
 19,818
 14,907
10,149
 9,748
Service charges on deposits18,528
 20,582
 35,176
 33,168
15,668
 16,648
Credit card fees13,455
 14,317
 25,607
 24,540
12,649
 12,152
ATM and other service fees5,996
 4,945
 11,816
 8,280
6,099
 5,819
Bank owned life insurance income4,040
 3,641
 7,622
 8,538
3,592
 3,582
Investment services and insurance3,852
 3,429
 7,368
 5,844
3,704
 3,516
Investment securities gains/(losses), net80
 (2,794) 136
 (2,803)354
 56
Loan sales and servicing income4,462
 7,985
 8,192
 15,848
1,600
 3,730
Other operating income12,077
 8,167
 24,096
 18,510
12,032
 12,019
Total noninterest income72,560
 69,439
 139,831
 126,832
65,847
 67,270
Noninterest expense:          
Salaries, wages, pension and employee benefits89,465
 105,099
 178,478
 163,005
90,526
 89,013
Net occupancy expense14,347
 13,346
 31,361
 21,628
15,954
 17,014
Equipment expense12,267
 10,309
 24,178
 17,659
11,025
 11,911
Stationery, supplies and postage3,990
 3,407
 8,097
 5,503
3,528
 4,108
Bankcard, loan processing and other costs11,810
 12,417
 22,644
 20,257
11,139
 10,834
Professional services4,745
 17,144
 10,103
 22,554
4,010
 5,359
Amortization of intangibles2,933
 2,411
 5,869
 2,728
2,598
 2,936
FDIC insurance expense5,533
 4,149
 11,504
 7,675
5,167
 5,971
Other operating expense22,310
 20,606
 44,499
 34,025
16,705
 22,185
Total noninterest expense167,400
 188,888
 336,733
 295,034
160,652
 169,331
Income before income tax expense85,484
 71,273
 162,787
 123,921
82,570
 77,303
Income tax expense25,965
 22,823
 49,813
 38,125
25,431
 23,848
Net income59,519
 48,450
 112,974
 85,796
57,139
 53,455
Less: income allocated to participating shareholders489
 383
 926
 813
Less: Net income allocated to participating shareholders407
 380
Preferred Stock dividends1,469
 1,469
 2,938
 2,399
1,469
 1,469
Net income attributable to common shareholders$57,561
 $46,598
 $109,110
 $82,584
$55,263
 $51,606
Net income used in diluted EPS calculation$57,561
 $46,598
 $109,110
 $82,584
$55,263
 $51,606
Weighted average number of common shares outstanding - basic165,335
 157,863
 165,198
 133,909
165,411
 165,060
Weighted average number of common shares outstanding - diluted166,147
 158,390
 166,052
 134,406
166,003
 166,004
Basic earnings per common share$0.35
 $0.30
 $0.66
 $0.62
$0.33
 $0.31
Diluted earnings per common share$0.35
 $0.29
 $0.66
 $0.61
$0.33
 $0.31
Dividend per common share$0.16
 $0.16
 $0.32
 $0.32
Cash dividend per common share$0.16
 $0.16
          
See accompanying notesNotes to the consolidated financial statements.Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEFIRSTMERIT CORPORATION AND SUBSIDIARIES
    
(In thousands) (Unaudited)Three Months Ended June 30, 2014 Six Months Ended June 30, 2014
Pre-tax Tax After-tax Pre-tax Tax After-tax
(In thousands)Three Months Ended March 31, 2015
(Unaudited)Pretax Tax After tax
Net Income$85,484
 $25,965
 $59,519
 $162,787
 $49,813
 $112,974
$82,570
 $25,431
 $57,139
Other comprehensive income/(loss)                
Unrealized gains and losses on securities available for sale:                
Changes in unrealized securities' holding gains/(losses)22,456
 7,860
 14,596
 40,500
 14,175
 26,325
34,117
 11,941
 22,176
Changes in unrealized securities' holding gains/(losses) that result from securities being transferred into available-for-sale from held-to-maturity(494) (173) (321) (988) (346) (642)
Changes in unrealized securities' holding gains/(losses) that result from securities being transferred from available-for-sale to held-to-maturity(504) (176) (328)
Net losses/(gains) realized on sale of securities reclassified to noninterest income(80) (28) (52) (136) (48) (88)(354) (124) (230)
Net change in unrealized gains/(losses) on securities available for sale21,882
 7,659
 14,223
 39,376
 13,781
 25,595
33,259
 11,641
 21,618
Pension plans and other postretirement benefits:                
Net gains/(losses) arising during the period
 
 
 
 
 
Amortization of actuarial gain1,631
 571
 1,060
 1,631
 571
 1,060
Amortization of actuarial losses/(gains)1,138
 398
 740
Amortization of prior service cost reclassified to other noninterest expense1,097
 383
 714
 1,097
 383
 714
410
 143
 267
Net change from defined benefit pension plans2,728
 954
 1,774
 2,728
 954
 1,774
1,548
 541
 1,007
Total other comprehensive gains/(losses)24,610
 8,613
 15,997
 42,104
 14,735
 27,369
34,807
 12,182
 22,625
Comprehensive income$110,094
 $34,578
 $75,516
 $204,891
 $64,548
 $140,343
$117,377
 $37,613
 $79,764

(In thousands) (Unaudited)Three Months Ended June 30, 2013 Six months ended June 30, 2013
Pre-tax Tax After-tax Pre-tax Tax After-tax
(In thousands)Three Months Ended March 31, 2014
(Unaudited)Pretax Tax After tax
Net Income$71,273
 $22,823
 $48,450
 $123,921
 $38,125
 $85,796
$77,303
 $23,848
 $53,455
Other comprehensive income/(loss)                
Unrealized gains and losses on securities available for sale:                
Changes in unrealized securities' holding gains/(losses)(75,729) (26,505) (49,224) (87,362) (30,577) (56,785)18,044
 6,315
 11,729
Changes in unrealized securities' holding gains/(losses) that result from securities being transferred into available-for-sale from held-to-maturity(568) (199) (369) (1,120) (392) (728)
Changes in unrealized securities' holding gains/(losses) that result from securities being transferred from available-for-sale into held-to-maturity(494) (173) (321)
Net losses/(gains) realized on sale of securities reclassified to noninterest income2,794
 978
 1,816
 2,803
 982
 1,821
(56) (20) (36)
Net change in unrealized gains/(losses) on securities available for sale(73,503) (25,726) (47,777) (85,679) (29,987) (55,692)17,494
 6,122
 11,372
Pension plans and other postretirement benefits:           
Net gain/(loss) arising during the period
 
 
 
 
 
Amortization of actuarial gain
 
 
 
 
 
Amortization of prior service cost reclassified to other noninterest expense
 
 
 
 
 
Net change from defined benefit pension plans
 
 
 
 
 
Total other comprehensive gains/(losses)(73,503) (25,726) (47,777) (85,679) (29,987) (55,692)17,494
 6,122
 11,372
Comprehensive income$(2,230) $(2,903) $673
 $38,242
 $8,138
 $30,104
$94,797
 $29,970
 $64,827
                
See accompanying notesNotes to the consolidated financial statements.Consolidated Financial Statements


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

(In thousands) (Unaudited)
Preferred
Stock
 
Common
Stock
 Common Stock Warrant 
Capital
Surplus
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Treasury
Stock
 
Total
Shareholders'
Equity
Balance at December 31, 2013$100,000
 $127,937
 $3,000
 $1,390,643
 $(66,876) $1,277,975
 $(129,785) $2,702,894
Net income
 
 
 
 
 53,455
 
 53,455
Other comprehensive income
 
 
 
 11,372
 
 
 11,372
    Comprehensive income
 
 
 
 11,372
 53,455
 
 64,827
Cash dividends - Preferred Stock
 
 
 
 
 (1,469) 
 (1,469)
Cash dividends - Common Stock ($0.16 per share)
 
 
 
 
 (26,335) 
 (26,335)
Nonvested (restricted) shares granted (82,241 shares)
 
 
 (1,485) 
 
 1,485
 
Restricted stock activity (51,066 shares)
 
 
 419
 
 
 (1,136) (717)
Deferred compensation trust (1,967 increase in shares)
 
 
 406
 
 
 (406) 
Share-based compensation
 
 
 3,766
 
 
 
 3,766
Balance at March 31, 2014$100,000
 $127,937
 $3,000
 $1,393,749
 $(55,504) $1,303,626
 $(129,842) $2,742,966
                
Balance at December 31, 2014$100,000
 $127,937
 $3,000
 $1,393,090
 $(71,892) $1,404,717
 $(122,571) $2,834,281
Net income
 
 
 
 
 57,139
 
 57,139
Other comprehensive income
 
 
 
 22,625
 
 
 22,625
    Comprehensive income
 
 
 
 22,625
 57,139
 
 79,764
Cash dividends - Preferred Stock
 
 
 
 
 (1,469) 
 (1,469)
Cash dividends - Common Stock ($0.16 per share)
 
 
 
 
 (26,461) 
 (26,461)
Nonvested (restricted) shares granted (129,444 shares)
 
 
 (2,631) 
 
 2,631
 
Restricted stock activity (66,252 shares)
 
 
 326
 
 
 (1,296) (970)
Deferred compensation trust (163,965 increase in shares)
 
 
 507
 
 
 (507) 
Share-based compensation
 
 
 3,641
 
 
 
 3,641
Balance as of March 31, 2015$100,000
 $127,937
 $3,000
 $1,394,933
 $(49,267) $1,433,926
 $(121,743) $2,888,786
                
See accompanying Notes to the Consolidated Financial Statements

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

(In thousands) (Unaudited)
Preferred
Stock
 
Common
Stock
 Common Stock Warrant 
Capital
Surplus
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Treasury
Stock
 
Total
Shareholders'
Equity
Balance at December 31, 2012$
 $127,937
 $
 $475,979
 $(16,205) $1,195,850
 $(138,359) $1,645,202
Net income
 
   
 
 85,796
 
 85,796
Other comprehensive income
 
 
 
 (55,691) 
 
 (55,691)
    Comprehensive income
 
 
 
 (55,691) 85,796
 
 30,105
Cash dividends - Preferred Stock
 
 
 
 
 (2,399) 
 (2,399)
Cash dividends - Common Stock ($0.32 per share)
 
 
 
 
 (43,717) 
 (43,717)
Common stock issued in connection with Citizens acquisition (55,468,283 shares)
 
 
 925,272
 
 
 
 925,272
Nonvested (restricted) shares granted (532,282 shares)
 
 
 (19,094) 
 
 12,281
 (6,813)
Restricted stock activity (193,830 shares)
 
 
 894
 
 
 (3,400) (2,506)
Deferred compensation trust (144,923 increase in shares)
 
 
 246
 
 
 (246) 
Share-based compensation
 
 
 6,216
 
 
 
 6,216
Issuance of 5.875% Non-Cumulative Perpetual Preferred Stock, Series A100,000
 
 
 (3,450) 
 
 
 96,550
Issuance of a Common Stock warrant to the U.S. Treasury for Citizens TARP warrant (2,408,203 shares)
 
 3,000
 
 
 
 
 3,000
Balance at June 30, 2013$100,000
 $127,937
 $3,000
 $1,386,063
 $(71,896) $1,235,530
 $(129,724) $2,650,910
                
Balance at December 31, 2013$100,000
 $127,937
 $3,000
 $1,390,643
 $(66,876) $1,277,975
 $(129,785) $2,702,894
Net income
 
 
 
 
 112,974
 
 112,974
Other comprehensive income
 
 
 
 27,369
 
 
 27,369
    Comprehensive income
 
 
 
 27,369
 112,974
 
 140,343
Cash dividends - Preferred Stock
 
 
 
 
 (2,938) 
 (2,938)
Cash dividends - Common Stock ($0.32 per share)
 
 
 
 
 (52,640) 
 (52,640)
Nonvested (restricted) shares granted (573,881 shares)
 
 
 (12,993) 
 
 13,092
 99
Restricted stock activity (237,066 shares)
 
 
 802
 
 
 (5,023) (4,221)
Deferred compensation trust (173,959 increase in shares)
 
 
 600
 
 
 (600) 
Share-based compensation
 
 
 8,201
 
 
 
 8,201
Balance as of June 30, 2014$100,000
 $127,937
 $3,000
 $1,387,253
 $(39,507) $1,335,371
 $(122,316) $2,791,738
                
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
(In thousands) (Unaudited)Three Months Ended March 31,
2015 2014
Operating Activities   
Net income$57,139
 $53,455
Adjustments to reconcile net income to net cash provided and used by operating activities:   
Provision for loan losses8,248
 14,536
Provision/(benefit) for deferred income taxes(1,663) 3,081
Depreciation and amortization14,739
 8,367
Benefit attributable to FDIC loss share4,227
 4,824
Accretion of acquired loans(26,339) (37,965)
Amortization and accretion of investment securities, net   
Available for sale2,680
 1,949
 Held to maturity814
 2,089
Losses/(gains) on sales and calls of available-for-sale investment securities, net(354) (56)
Originations of loans held for sale(40,442) (61,109)
Proceeds from sales of loans, primarily mortgage loans sold in the secondary markets50,868
 66,904
Gains on sales of loans, net(566) (1,316)
Amortization of intangible assets2,598
 2,936
Recognition of stock compensation expense3,641
 3,766
     Net decrease/(increase) in other assets(48,684) 6,506
     Net increase/(decrease) in other liabilities25,224
 26,800
NET CASH PROVIDED BY OPERATING ACTIVITIES52,130
 94,767
Investing Activities   
Proceeds from sale of investment securities   
Available for sale39,302
 7,809
Other
 32,486
Held to maturity1,015
 2,495
Proceeds from prepayments, calls, and maturities of investment securities   
Available for sale129,296
 112,747
Held to maturity92,241
 61,734
Other166
 
Purchases of investment securities   
Available for sale(404,163) (245,403)
Held to maturity(46,164) (214,611)
Other
 (142)
Net decrease/(increase) in loans and leases(152,359) (277,708)
Purchases of premises and equipment(5,795) (16,859)
Sales of premises and equipment7,965
 11,259
NET CASH PROVIDED/(USED) BY INVESTING ACTIVITIES(338,496) (526,193)
Financing Activities   
Net increase in demand accounts128,320
 191,793
Net increase/(decrease) in savings and money market accounts210,941
 163,015
Net decrease in certificates and other time deposits81,669
 (76,735)
Net increase/(decrease) in securities sold under agreements to repurchase(159,220) 74,660
Net increase/(decrease) in long-term debt
 
Net increase/(decrease) in wholesale borrowings(111,443) 148,677
Net proceeds from issuance of preferred stock
 
Cash dividends - common(26,461) (26,335)
Cash dividends - preferred(1,469) (1,469)
Restricted stock activity(970) (717)
NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES121,367
 472,889
Increase/(Decrease) in cash and cash equivalents(164,999) 41,463
Cash and cash equivalents at beginning of year697,424
 917,822
Cash and cash equivalents at end of year$532,425
 $959,285
    
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:   
Cash paid during the year for:   
Interest$14,036
 $11,140
Federal income taxes2,000
 
    
See accompanying notesNotes to the consolidated financial statements.Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
(In thousands) (Unaudited)Six Months Ended June 30,
2014 2013
Operating Activities   
Net income$112,974
 $85,796
Adjustments to reconcile net income to net cash provided and used by operating activities:   
Provision for loan losses29,790
 17,256
Provision/(benefit) for deferred income taxes13,352
 (25,502)
Depreciation and amortization25,450
 17,650
Benefit attributable to FDIC loss share927
 7,858
Accretion of acquired loans(74,126) (54,264)
Amortization and accretion of investment securities, net   
Available for sale4,137
 12,276
 Held to maturity4,236
 3,223
(Gains)/losses on sales and calls of available-for-sale investment securities, net(136) 2,803
Originations of loans held for sale(153,569) (309,247)
Proceeds from sales of loans, primarily mortgage loans sold in the secondary markets147,015
 316,750
Gains on sales of loans, net(3,456) (6,675)
Amortization of intangible assets5,869
 2,728
Recognition of stock compensation expense8,201
 6,216
     Net decrease (increase) in other assets4,168
 177,984
     Net increase in other liabilities(21,506) (74,440)
NET CASH PROVIDED BY OPERATING ACTIVITIES103,326
 180,412
Investing Activities   
Proceeds from sale of investment securities   
Available for sale8,438
 2,179,728
Other32,487
 
Held to maturity2,495
 897
Proceeds from prepayments, calls, and maturities of investment securities   
Available for sale232,087
 427,115
Held to maturity151,133
 73,810
Purchases of investment securities   
Available for sale(411,463) (711,170)
Held to maturity(278,407) (1,263,297)
Other(142) (280)
Net (increase)/decrease in loans and leases(628,735) 241,478
Purchases of premises and equipment(31,599) (11,402)
Sales of premises and equipment24,292
 181
Cash received for acquisition, net of cash paid
 188,948
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES(899,414) 1,126,008
Financing Activities   
Net increase in demand accounts68,199
 131,262
Net (decrease)/increase in savings and money market accounts(111,071) 110,152
Net decrease in certificates and other time deposits(192,333) (157,872)
Net increase/(decrease) in securities sold under agreements to repurchase367,320
 (374,659)
Proceeds from issuance of subordinated debt
 249,924
Net increase/(decrease) in wholesale borrowings448,421
 (654,866)
Net proceeds from issuance of Preferred Stock
 96,550
Cash dividends - common(52,640) (43,717)
Cash dividends - preferred(2,938) (2,399)
Restricted stock activity(4,122) (9,319)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES520,836
 (654,944)
(Decrease)/Increase in cash and cash equivalents(275,252) 651,476
Cash and cash equivalents at beginning of year917,822
 258,014
Cash and cash equivalents at end of year$642,570
 $909,490
    
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:   
Non-cash transaction: Common Stock issued in merger with Citizens$
 $925,211
Non-cash transaction: Consideration from the warrant issued to the Treasury for Citizens TARP
 3,000
Cash paid during the year for:   
Interest expense$28,732
 $20,779
Federal income taxes11,547
 27,662
    
See accompanying notes to the consolidated financial statements.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
FIRSTMERIT CORPORATION AND SUBSIDIARIES 


FirstMerit Corporation and subsidiaries is a diversified financial services company headquartered in Akron, Ohio with 379384 banking offices in the Ohio, Michigan, Wisconsin, Illinois, and Pennsylvania areas. The Corporation provides a complete range of banking and other financial services to consumers and businesses through its core operations.

1.    Summary of Significant Accounting Policies

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

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

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

The Consolidated Balance Sheet at December 31, 20132014 has been derived from the audited consolidated financial statements at that date. The accompanying unaudited interim financial statements reflect all adjustments (consisting only of normally recurring adjustments) that are, in the opinion of Management, necessary for a fair statement of the results for the interim periods presented. Certain reclassifications of prior year’s amounts have been made to conform to the current year presentation. Such reclassifications had no effect on net earnings or equity. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules of the SEC. The unaudited consolidated financial statements of the Corporation as of June 30, 2014March 31, 2015 and 20132014 are not necessarily indicative of the results that may be achieved for the full fiscal year or for any future period. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 20132014 (the “20132014 Form 10-K”). There have been no significant changes in the current quarter to the Corporation’s accounting policies as disclosed in the 20132014 Form 10-K.

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

Recently Adopted Accounting Standards

FASB ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure—a consensus of the FASB Emerging Issues Task Force. The objective of this update is to reduce diversity in practice by addressing the classification of certain foreclosed mortgage loans held by creditors that are either fully or partially guaranteed under government programs. The amendments in this update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the
following conditions are met: 1) the loan has a government guarantee that is not separable from the
loan before foreclosure; 2) at the time of foreclosure, the creditor has the intent to convey the real

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 



estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and 3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The ASU is effective for interim and annual periods beginning after December 15, 2014. The amendments can be adopted using either a prospective transition method or a modified retrospective transition method. The adoption of this accounting guidance did not have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2014-11, Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this update require entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), eliminate accounting guidance on linking repurchase financing transactions, and expand disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers, such as repos, securities lending transactions, and repurchase-to-maturity transactions, accounted for as secured borrowings. The amendments in ASU 2014-11 are effective for the first interim or annual period beginning after December 15, 2014. The amendments must present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Early application is prohibited. The adoption of this accounting guidance did not have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in this update change the definition of a discontinued operation in ASC 205-20 and require additional disclosures for transactions that meet the definition of a discontinued operation and certain other significant transactions that do not meet the discontinued operations criteria. The amendments in ASU 2014-08 are effective prospectively for all disposals, except disposals classified as held for sale before the adoption date or components initially classified as held for sale in periods beginning on or after December 15, 2014, with early adoption permitted. The adoption of this accounting guidance did not have a material effect on the Corporation’s financial position or results of operations.

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


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Recently AdoptedIssued Accounting Standards

FASB ASU 2014-01, 2015-5, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for InvestmentsFees Paid in Qualified Affordable Housing Projects.a Cloud Computing Arrangement. The amendments in ASU 2014-01 do2015-05 provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. In addition, the existing accounting methods, but permit reporting entities to make an accounting policy election to accountguidance in this Update supersedes paragraph 350-40-25-16. Consequently, all software licenses within the scope of Subtopic 350-40 will be accounted for their investments in qualified affordable projects using the proportional amortization method, if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial costconsistent with other licenses of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit).intangible assets. The amendments in ASU 2014-01 are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014,2015. An entity can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. For prospective transition, the only disclosure requirements at transition are the nature of and reason for the change in accounting principle, the transition method, and a qualitative description of the financial statement line items affected by the change. For retrospective transition, the disclosure requirements
at transition include the requirements for prospective transition and quantitative information about the effects of the accounting change. The Corporation is in process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements.
FASB ASU 2015-3, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in ASU 2015-03, require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from that debt liability, consistent with the presentation of a debt discount. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be applied retrospectively to all periods presented. The Corporation early adopted ASU 2014-01 in the first quarter of 2014. Amortization of the initial investment cost of qualifying projects is now recorded in the provision for income taxes together with the tax credits and benefits received. Previously, the amortization was recorded as other noninterest expense. All prior period amounts have been restatedadjusted to reflect the period-specific effects of applying the new guidance. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. The adoption of this guidance is not expected to have a material effect on the amendment, which resulted in an offsetting decrease to other noninterest expense and increase to the provision for income taxesCorporations financial position or results of approximately $0.8 million and $1.5 million for the three and six months ended June 30, 2013, respectively.operations.

Recently Issued Accounting StandardsFASB ASU 2015-2, Amendments to the Consolidation Analysis. The amendments in ASU 2015-02 affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. These amendments modify the evaluation of whether limited partnerships and other similar entities are variable interest entities; eliminate the presumption that a general partner should consolidate a limited partnership; affect the consolidation analysis that are involved with variable interest entities; and provide a scope exception from consolidation for entities that are required to comply or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. A reporting entity may apply the amendments using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal

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year of adoption. A reporting entity also may apply the amendments retrospectively. The adoption of this guidance is not expected to have a material effect on the Corporations financial position or results of operations.

FASB ASU 2014–12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period— a consensus of the FASB Emerging Issues Task Force. The amendments in this update clarify that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense (measured as of the grant date without taking into account the effect of the performance target) related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met. The ASU does not contain any new disclosure requirements. The ASU is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. In addition, entities will have the option of applying the guidance either prospectively (i.e., only to awards granted or modified on or after the effective date) or retrospectively. Retrospective application would only apply to awards with performance targets outstanding at or after the beginning of the first annual period presented (i.e., the earliest presented comparative period). The Corporation is in process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements.

FASB ASU 2014-11, Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this update require entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), eliminates accounting guidance on linking repurchase financing transactions, and expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers, such as repos, securities lending transactions, and repurchase-to-maturity transactions, accounted for as secured borrowings. The amendments in ASU 2014-11 are effective for the first interim or annual period beginning after December 15, 2014. The amendments must present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Early application is prohibited. The adoption of this accounting guidance is not expected to have a material effect on the Corporation'sCorporations financial position or results of operations.

FASB ASU 2014-09, Revenue from Contracts with Customers. The amendments in this update supersede virtually all existing GAAP revenue recognition guidance, including most industry-specific revenue

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recognition guidance. ASU 2014-09 creates a single, principle-based revenue recognition framework and will require entities to apply significantly more judgment and expanded disclosures surrounding revenue recognition. The core principle requires an entity to recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 applies to contracts with customers to provide goods and services, with certain exclusions such as lease contracts, financing arrangements, and financial instruments. The amendments in ASU 2014-09 are effective for fiscal years beginning after December 15, 2016. On April 1, 2015, the FASB proposed to defer the effective date by one year, permitting public organizations to apply this guidance to annual reporting periods beginning after December 15, 2017, with early adoption permitted, but not before the original public organization effective date. The amendments can be adopted using either the full retrospective approach or a modified retrospective approach. Early adoption is prohibited. The Corporation is in process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements.

FASB ASU 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in this update change the definition of a discontinued operation in ASC 205-20 and requires additional disclosures for transactions that meet the definition of a discontinued operation and certain other significant transactions that do not meet the discontinued operations criteria. The amendments in ASU 2014-08 are effective prospectively for all disposals, except disposals classified as held for sale before the adoption date or components initially classified as held for sale in periods beginning on or after December 15, 2014, with early adoption permitted. The adoption of this accounting guidance is not expected to have a material effect on the Corporation's financial position or results of operations.

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

2.     Business Combinations

The Corporation completed the merger with Citizens, a Michigan corporation with approximately $9.6 billion in assets and 219 branches, in the quarter ended June 30, 2013. All of Citizens' common shareholders received 1.37 shares of the Corporation's Common Stock in exchange for one share of Citizens' common stock, resulting in the Corporation issuing 55,468,283 shares of its Common Stock. In conjunction with the completion of the merger, the Corporation fully repurchased the $300 million of Citizens TARP Preferred plus accumulated but unpaid dividends and interest of approximately $55.4 million previously issued to the U.S. Treasury under the Capital Purchase Program. The Corporation used the net proceeds from its February 4, 2013 public offerings, which consisted of $250 million aggregate principal amount of 4.35% subordinated notes due February 4, 2023, and $100 million 5.875% Non-Cumulative Perpetual Preferred Stock, Series A, to repurchase the Citizens TARP Preferred and pay all accrued, accumulated and unpaid dividends and interest. Additionally, a warrant issued by Citizens to the U.S. Treasury to purchase up to 1,757,812.5 shares of Citizens' common stock has been converted into a warrant issued by the Corporation to the U.S. Treasury to purchase 2,408,203 shares of FirstMerit Common Stock.

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The Citizens transaction was accounted for using the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the Acquisition Date. Per the applicable accounting guidance for business combinations, these fair values were subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values become available. The measurement period ended on March 31, 2014.

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

Purchase Price:    
FirstMerit shares of Common Stock issued for Citizens' shares   55,468,283
Closing price per share of the Corporation's Common Stock on April 12, 2013   $16.68
Consideration from Common Stock conversion (1.37 ratio)   925,211
Cash paid to the Treasury for Citizens' TARP Preferred   355,371
Cash paid in lieu of fractional shares to the former Citizens' shareholders   61
Consideration from the warrant issued to the Treasury for Citizens' TARP warrant   3,000
Total purchase price   $1,283,643
Statement of Net Assets Acquired at Fair Value:    
ASSETS    
Cash and due from banks $544,380
  
Investment securities 3,202,575
  
Loans 4,617,004
  
Premises and equipment 138,536
  
Intangible assets 84,774
(a) 
 
Accrued interest receivable and other assets 681,100
  
Total assets $9,268,369
  
LIABILITIES    
Deposits $7,276,754
  
Borrowings 908,824
  
Accrued taxes, expenses, and other liabilities 80,842
  
  Total liabilities $8,266,420
  
Net identifiable assets acquired   1,001,949
Goodwill   $281,694
     
(a) Intangible assets consist of core deposit intangibles of $70.8 million and trust relationships of approximately $14.0 million. The useful lives for which the core deposit intangibles and the trust relationships are being amortized over is 15 years and 12 years, respectively.

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

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





The following table summarizes the fair value of both acquired impaired and nonimpaired loans by product type as of the Acquisition Date.
(In thousands)Acquired Impaired Loans Acquired Nonimpaired Loans Acquired Loans Total
Commercial     
C&I$93,735
 $1,660,199
 $1,753,934
CRE378,569
 359,066
 737,635
Construction13,399
 17,135
 30,534
         Total commercial485,703
 2,036,400
 2,522,103
Consumer     
Residential mortgages232,291
 278,404
 510,695
Installment54,108
 1,165,235
 1,219,343
Home equity lines47,613
 317,250
 364,863
         Total consumer334,012
 1,760,889
 2,094,901
Total$819,715
 $3,797,289
 $4,617,004
      

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

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For acquired nonimpaired loans, the difference between the Acquisition Date fair value and the contractual amounts due at the Acquisition Date represents the fair value adjustment. The fair value adjustment may be a discount (or premium) to an individual loan's cost basis and is accreted (or amortized) to interest income over the loan's remaining life using the level yield method. Acquired nonimpaired loans are reported net of the unamortized fair value adjustment. The fair value adjustment for acquired nonimpaired loans as of the Acquisition Date is presented in the following table.
(In thousands)Acquired Nonimpaired Loans
Outstanding balance$4,017,304
Less: Fair value adjustment220,015
Fair value of acquired nonimpaired loans$3,797,289
  

The table below details contractually required payments, cash flows not expected to be collected and cash flows expected to be collected on acquired nonimpaired loans as of the Acquisition Date.
(In thousands)Acquired Nonimpaired Loans
Contractually required payments including interest (a)
$4,955,180
Less: Contractual cash flows not expected to be collected680,664
Cash flows expected to be collected$4,274,516
  
(a) Total undiscounted amounts of all uncollected contractual principal and interest, including any fees and penalties, both past due and scheduled for the future, assuming no loss or prepayment.

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

Total outstanding acquired impaired loans as of the Acquisition Date were $1.1 billion. A reconciliation of the contractual required payments to the fair value of the acquired impaired loans at the Acquisition Date is as follows:
(In thousands)Acquired Impaired Loans
Contractually required payments including interest (a)
$1,231,172
Nonaccretable difference (b)
(279,899)
Cash flows expected to be collected (c)
951,273
Accretable yield (d)
(131,558)
Fair value of loans acquired$819,715
  
(a) Total undiscounted amounts of all uncollected contractual principal and interest, including any fees and penalties, both past due and scheduled for the future, assuming no loss or prepayment.
(b) The nonaccretable difference represents, as of the Acquisition Date, the amount of contractually required payments, including interest, that are not expected to be collected based on estimated credit losses and other factors, such as prepayments.
(c) Represents the estimate, at Acquisition Date, of the amount and timing of undiscounted principal, interest, and other cash flows expected to be collected. This estimate includes the effect of anticipated prepayments.
(d) The accretable yield represents the excess of cash flows expected at Acquisition Date over the estimated fair value and is recognized as interest income over the remaining life of the loan using the level yield method.


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

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

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

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

There were no merger-related charges recorded in the Consolidated Statements of Income for the three months ended June 30, 2014 and $1.0 million for the six months ended June 30, 2014. These costs were primarily composed of professional service fees.

The following table provides the unaudited pro forma information for the results of operations for the three and six months ended June 30, 2013, as if the acquisition had occurred on January 1, 2013. These adjustments include the impact of certain purchase accounting adjustments including accretion of loan marks, which makes up the vast majority of the adjustments, followed by intangible assets amortization, investment securities amortization, fixed assets depreciation and deposit accretion. In addition, merger-related charges of $32.1 million and $35.7 million for the three and six months ended June 30, 2013 are included in the pro forma information. These unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined corporation that would have been achieved had the acquisition occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of operations.

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(In thousands)Three Months Ended June 30, 2013 Six Months Ended June 30, 2013
Total revenue, net of interest expense$335,796  $643,052 
Net income73,972  153,487 
    




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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-taxafter tax basis as a component of OCI in shareholders' equity.
  June 30, 2014
(In thousands)
Amortized
Cost
 Gross Unrealized Gains Gross Unrealized Losses 
Fair
Value
Securities available-for-sale       
Debt securities       
 U.S. states and political subdivisions$233,228
 $8,600
 $(1,023) $240,805
 Residential mortgage-backed securities:       
 U.S. government agencies998,698
 24,965
 (5,489) 1,018,174
 Commercial mortgage-backed securities:       
 U.S. government agencies86,870
 351
 (1,523) 85,698
 Residential collateralized mortgage-backed securities:       
 U.S. government agencies1,627,871
 5,009
 (34,849) 1,598,031
 Non-agency8
 
 
 8
 Commercial collateralized mortgage-backed securities:       
 U.S. government agencies182,151
 1,008
 (1,126) 182,033
 Asset-backed securities:       
 Collateralized loan obligations297,334
 883
 (4,252) 293,965
 Corporate debt securities61,624
 
 (8,134) 53,490
 Total debt securities3,487,784
 40,816
 (56,396) 3,472,204
Equity securities       
 Marketable equity securities2,935
 
 
 2,935
 Non-marketable equity securities3,281
 
 
 3,281
 Total equity securities6,216
 
 
 6,216
 Total securities available for sale$3,494,000
 $40,816
 $(56,396) $3,478,420
Securities held-to-maturity       
Debt securities       
 U.S. treasuries$5,000
 $5
 $
 $5,005
 U.S. government agency debentures25,000
 
 (707) 24,293
 U.S. states and political subdivisions549,850
 10,072
 (1,253) 558,669
 Residential mortgage-backed securities:       
 U.S. government agencies624,605
 6,825
 (4,933) 626,497
 Commercial mortgage-backed securities:       
 U.S. government agencies56,020
 176
 (445) 55,751
 Residential collateralized mortgage-backed securities:       
 U.S. government agencies1,450,479
 114
 (54,263) 1,396,330
 Commercial collateralized mortgage-backed securities:       
 U.S. government agencies248,974
 641
 (7,252) 242,363
 Corporate debt securities92,190
 768
 
 92,958
 Total securities held to maturity$3,052,118
 $18,601
 $(68,853) $3,001,866
         


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 December 31, 2013 March 31, 2015
(In thousands)(In thousands)
Amortized
Cost
 Gross Unrealized Gains Gross Unrealized Losses 
Fair
Value
(In thousands)
Amortized
Cost
 Gross Unrealized Gains Gross Unrealized Losses 
Fair
Value
Securities available-for-saleSecurities available-for-sale       Securities available-for-sale       
Debt securitiesDebt securities       Debt securities       
U.S. treasury notes & bonds$
 $
 $
 $
U.S. government agency debentures2,500
 13
 
 2,513
U.S. states and political subdivisions$258,787
 $7,376
 $(3,796) $262,367
U.S. states and political subdivisions208,800
 6,750
 (386) 215,164
Residential mortgage-backed securities:       Residential mortgage-backed securities:       
U.S. government agencies962,687
 21,662
 (14,427) 969,922
U.S. government agencies924,453
 24,799
 (1,949) 947,303
Commercial mortgage-backed securities:       Commercial mortgage-backed securities:       
U.S. government agencies72,048
 7
 (2,488) 69,567
U.S. government agencies139,789
 1,231
 (661) 140,359
Residential collateralized mortgage-backed securities:       Residential collateralized mortgage-backed securities:       
U.S. government agencies1,566,262
 4,199
 (52,068) 1,518,393
U.S. government agencies1,895,112
 11,305
 (13,857) 1,892,560
Non-agency9
 
 
 9
Non-agency6
 
 
 6
Commercial collateralized mortgage-backed securities:       Commercial collateralized mortgage-backed securities:       
   U.S. government agencies104,152
 273
 (2,157) 102,268
U.S. government agencies241,839
 2,602
 (382) 244,059
Asset-backed securities:       Asset-backed securities:       
Collateralized loan obligations297,259
 760
 (4,332) 293,687
Collateralized loan obligations297,506
 587
 (4,131) 293,962
Corporate debt securities61,596
 
 (10,952) 50,644
Corporate debt securities61,668
 
 (9,404) 52,264
Total debt securities3,322,800
 34,277
 (90,220) 3,266,857
Total debt securities3,771,673
 47,287
 (30,770) 3,788,190
Equity securitiesEquity securities       Equity securities       
Marketable equity securities3,036
 
 
 3,036
Marketable equity securities2,869
 
 
 2,869
Non-marketable equity securities3,281
 
 
 3,281
Non-marketable equity securities
 
 
 
Total equity securities6,317
 
 
 6,317
Total equity securities2,869
 
 
 2,869
Total securities available for sale$3,329,117
 $34,277
 $(90,220) $3,273,174
Total securities available-for-sale$3,774,542
 $47,287
 $(30,770) $3,791,059
Securities held-to-maturitySecurities held-to-maturity       Securities held-to-maturity       
Debt securitiesDebt securities       Debt securities       
U.S. Treasuries$5,000
 $4
 $
 $5,004
U.S. treasury notes & bonds$5,000
 $
 $
 $5,000
U.S. government agencies debentures25,000
 
 (1,348) 23,652
U.S. government agency debentures25,000
 
 (178) 24,822
U.S. states and political subdivisions480,703
 5,335
 (10,459) 475,579
U.S. states and political subdivisions523,501
 8,864
 (1,147) 531,218
Residential mortgage-backed securities:       Residential mortgage-backed securities:       
U.S. government agencies569,960
 1,108
 (11,617) 559,451
U.S. government agencies577,278
 10,745
 (1,677) 586,346
Commercial mortgage-backed securities:       Commercial mortgage-backed securities:       
U.S. government agencies56,596
 
 (1,190) 55,406
U.S. government agencies57,818
 765
 (108) 58,475
Residential collateralized mortgage-backed securities:       Residential collateralized mortgage-backed securities:       
U.S. government agencies1,464,732
 
 (81,818) 1,382,914
U.S. government agencies1,320,215
 1,959
 (24,846) 1,297,328
Commercial collateralized mortgage-backed securities:       Commercial collateralized mortgage-backed securities:       
U.S. government agencies240,069
 6
 (11,052) 229,023
U.S. government agencies256,352
 1,659
 (3,377) 254,634
Corporate debt securities93,628
 308
 (725) 93,211
Corporate debt securities90,010
 1,079
 
 91,089
Total securities held to maturity$2,935,688
 $6,761
 $(118,209) $2,824,240
Total securities held-to-maturity$2,855,174
 $25,071
 $(31,333) $2,848,912
                


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 June 30, 2013 December 31, 2014
(In thousands)(In thousands)
Amortized
Cost
 Gross Unrealized Gains Gross Unrealized Losses 
Fair
Value
(In thousands)
Amortized
Cost
 Gross Unrealized Gains Gross Unrealized Losses 
Fair
Value
Securities available-for-saleSecurities available-for-sale       Securities available-for-sale       
Debt securitiesDebt securities       Debt securities       
U.S. states and political subdivisions$272,254
 $9,207
 $(3,527) $277,934
U.S. government agency debentures$2,500
 $
 $(18) $2,482
Residential mortgage-backed securities:       U.S. states and political subdivisions221,052
 6,756
 (466) 227,342
U.S. government agencies1,058,323
 27,797
 (10,192) 1,075,928
Residential mortgage-backed securities:       
Commercial mortgage-backed securities:       U.S. government agencies951,839
 22,377
 (3,218) 970,998
U.S. government agencies58,609
 29
 (2,141) 56,497
Commercial mortgage-backed securities:       
Residential collateralized mortgage-backed securities:       U.S. government agencies104,176
 598
 (1,371) 103,403
U.S. government agencies1,586,576
 7,272
 (27,120) 1,566,728
Residential collateralized mortgage-backed securities:       
Non-agency10
 
 
 10
U.S. government agencies1,698,015
 4,777
 (26,225) 1,676,567
Commercial collateralized mortgage-backed securities:   ��   Non-agency7
 
 
 7
   U.S. government agencies108,000
 533
 (1,965) 106,568
Commercial collateralized mortgage-backed securities:       
Asset-backed securities:          U.S. government agencies222,876
 863
 (1,405) 222,334
   Collateralized loan obligations159,916
 
 (1,821) 158,095
Asset-backed securities:       
Corporate debt securities61,569
 
 (10,431) 51,138
Collateralized loan obligations297,446
 11
 (9,613) 287,844
Total debt securities3,305,257
 44,838
 (57,197) 3,292,898
Corporate debt securities61,652
 
 (10,315) 51,337
Equity Securities       
Marketable equity securities3,213
 
 
 3,213
   Total debt securities3,559,563
 35,382
 (52,631) 3,542,314
Equity securitiesEquity securities       
Non-marketable equity securities3,281
 
 
 3,281
   Marketable equity securities2,974
 
 
 2,974
Total equity securities6,494
 
 
 6,494
   Total equity securities2,974
 
 
 2,974
Total securities available for sale$3,311,751
 $44,838
 $(57,197) $3,299,392
   Total securities available-for-sale$3,562,537
 $35,382
 $(52,631) $3,545,288
Securities held-to-maturitySecurities held-to-maturity       Securities held-to-maturity       
Debt securitiesDebt securities       Debt securities       
U.S. treasuries$4,999
 $
 $
 $4,999
U.S. treasury notes & bonds$5,000
 $
 $
 $5,000
U.S. government agency debentures25,000
 
 (1,193) 23,807
U.S. government agency debentures25,000
 
 (537) 24,463
U.S states and political subdivisions436,860
 3,878
 (9,041) 431,697
U.S. states and political subdivisions517,824
 12,645
 (191) 530,278
Residential mortgage-backed securities:       Residential mortgage-backed securities:       
   U.S. government agencies253,839
 
 (8,051) 245,788
U.S. government agencies580,727
 7,495
 (3,045) 585,177
Commercial mortgage-backed securities:       Commercial mortgage-backed securities:       
U.S. government agencies50,352
 
 (619) 49,733
U.S. government agencies58,143
 281
 (329) 58,095
Residential collateralized mortgage-backed securities:       Residential collateralized mortgage-backed securities:       
   U.S. government agencies1,510,374
 67
 (41,674) 1,468,767
U.S. government agencies1,368,534
 718
 (38,875) 1,330,377
Commercial collateralized mortgage-backed securities:       Commercial collateralized mortgage-backed securities:       
   U.S. government agencies175,384
 
 (7,285) 168,099
U.S. government agencies257,642
 557
 (6,768) 251,431
Corporate debt securities95,052
 132
 (1,003) 94,181
Corporate debt securities90,739
 412
 (52) 91,099
Total securities held to maturity$2,551,860
 $4,077
 $(68,866) $2,487,071
    Total securities held-to-maturity$2,903,609
 $22,108
 $(49,797) $2,875,920
                


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  March 31, 2014
(In thousands)
Amortized
Cost
 Gross Unrealized Gains Gross Unrealized Losses 
Fair
Value
Securities available-for-sale       
Debt securities       
 U.S. states and political subdivisions$245,534
 $7,541
 $(2,095) $250,980
 Residential mortgage-backed securities:       
 U.S. government agencies1,013,085
 21,415
 (10,506) 1,023,994
 Commercial mortgage-backed securities:       
 U.S. government agencies87,258
 36
 (2,161) 85,133
 Residential collateralized mortgage-backed securities:       
 U.S. government agencies1,586,051
 3,857
 (41,804) 1,548,104
 Non-agency8
 
 
 8
 Commercial collateralized mortgage-backed securities:       
    U.S. government agencies173,951
 331
 (1,813) 172,469
 Asset-backed securities:       
    Collateralized loan obligations297,293
 958
 (3,692) 294,559
 Corporate debt securities61,610
 
 (10,022) 51,588
 Total debt securities3,464,790
 34,138
 (72,093) 3,426,835
Equity Securities       
 Marketable equity securities3,055
 
 
 3,055
 Non-marketable equity securities3,281
 
 
 3,281
 Total equity securities6,336
 
 
 6,336
 Total securities available-for-sale$3,471,126
 $34,138
 $(72,093) $3,433,171
Securities held-to-maturity       
Debt securities       
 U.S. treasury notes & bonds$4,999
 $6
 $
 $5,005
 U.S. government agency debentures25,000
 
 (1,117) 23,883
 U.S states and political subdivisions517,221
 159
 (7,186) 510,194
 Residential mortgage-backed securities:       
    U.S. government agencies644,820
 2,311
 (8,584) 638,547
 Commercial mortgage-backed securities:       
 U.S. government agencies56,339
 32
 (877) 55,494
 Residential collateralized mortgage-backed securities:       
    U.S. government agencies1,488,641
 
 (64,734) 1,423,907
 Commercial collateralized mortgage-backed securities:       
    U.S. government agencies249,688
 138
 (9,749) 240,077
 Corporate debt securities92,912
 437
 (295) 93,054
 Total securities held-to-maturity$3,079,620
 $3,083
 $(92,542) $2,990,161
         

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

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 



(Dollars in thousands)June 30, 2014March 31, 2015
U.S. State# of Issuers Average Issue Size, Fair Value Amortized Cost Fair Value# of Issuers Average Issue Size, Fair Value Amortized Cost Fair Value
Ohio152
 $1,065
 $158,773
 $161,809
136 $925
 $124,908
 $125,864
Michigan174
 862
 146,565
 150,052
164 857
 138,091
 140,620
Illinois74
 1,578
 113,501
 116,741
62 1,841
 111,649
 114,150
Wisconsin87
 864
 72,616
 75,155
73 760
 53,877
 55,497
Texas65
 794
 50,845
 51,632
63 784
 48,388
 49,396
Pennsylvania49
 972
 47,870
 47,623
46 1,018
 46,085
 46,816
Minnesota42
 678
 27,864
 28,468
35 697
 23,821
 24,405
Washington30
 955
 28,191
 28,660
31 930
 28,194
 28,836
New Jersey37
 751
 26,815
 27,805
37 747
 26,724
 27,623
Missouri19
 1,022
 18,855
 19,413
15 1,098
 16,032
 16,472
New York21
 612
 12,627
 12,860
19 629
 11,646
 11,948
Other123
 640
 78,100
 78,724
121
 639
 76,127
 77,365
Total general obligation bonds873
 $915
 $782,622
 $798,942
802
 $896
 $705,542
 $718,992
              
(Dollars in thousands)December 31, 2013December 31, 2014
U.S. State# of Issuers Average Issue Size, Fair Value Amortized Cost Fair Value# of Issuers Average Issue Size, Fair Value Amortized Cost Fair Value
Ohio154
 $1,041
 $159,674
 $160,265
137
 $979
 $130,741
 $134,127
Michigan166
 744
 122,198
 123,571
169
 842
 138,325
 142,292
Illinois75
 1,314
 96,863
 98,521
66
 1,897
 121,560
 125,169
Wisconsin87
 645
 54,921
 56,152
77
 841
 62,543
 64,776
Texas69
 771
 54,295
 53,204
64
 801
 50,307
 51,293
Pennsylvania51
 891
 48,319
 45,451
45
 1,000
 44,443
 45,006
Minnesota45
 663
 29,840
 29,816
42
 674
 27,740
 28,326
Washington30
 930
 28,393
 27,906
30
 952
 27,987
 28,558
New Jersey38
 722
 27,101
 27,440
37
 746
 26,755
 27,612
Missouri20
 969
 19,253
 19,382
19
 1,011
 18,764
 19,207
New York22
 585
 13,064
 12,878
19
 628
 11,659
 11,929
California18
 599
 10,651
 10,788
Other115
 631
 74,918
 72,572
120
 650
 76,849
 78,020
Total general obligation bonds890
 $829
 $739,490
 $737,946
825
 $917
 $737,673
 $756,315
              
(Dollars in thousands)June 30, 2013March 31, 2014
U.S. State# of Issuers Average Issue Size, Fair Value Amortized Cost Fair Value# of Issuers Average Issue Size, Fair Value Amortized Cost Fair Value
Ohio155
 $983
 $151,243
 $152,289
153
 $1,033
 $159,883
 $158,074
Illinois68
 1,045
 69,718
 71,055
72
 1,496
 107,451
 107,717
Texas70
 774
 55,132
 54,201
68
 779
 52,807
 52,941
Pennsylvania57
 885
 52,581
 50,428
51
 969
 50,579
 49,428
Wisconsin82
 646
 51,660
 52,933
87
 683
 58,635
 59,428
Minnesota47
 658
 30,675
 30,927
42
 672
 27,925
 28,213
New Jersey39
 720
 27,485
 28,078
37
 744
 26,844
 27,518
Michigan174
 689
 119,040
 119,916
171
 789
 135,588
 134,965
Washington31
 947
 29,696
 29,371
30
 940
 28,292
 28,210
Missouri20
 981
 19,351
 19,624
19
 1,012
 18,904
 19,232
New York22
 609
 13,484
 13,400
22
 594
 13,046
 13,075
California20
 591
 11,592
 11,821
Other118
 636
 76,974
 75,021
129
 634
 82,317
 81,807
Total general obligation bonds903
 $605
 $708,631
 $709,064
881
 $863
 $762,271
 $760,608
              


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FIRSTMERIT CORPORATION AND SUBSIDIARIES 




The Corporation owns one revenue bond with an estimated fair value of $0.5 million and an amortized cost of $0.5 million as of June 30, 2014. This bond was purchased in 1999, prior to the Corporation adopting an internal investment policy prohibiting purchases of revenue bonds. The revenue bond's maturity has been pre-refunded with U.S. treasuries. Pre-refunded municipal bonds are those that are backed by an escrow account and invested in U.S. Treasuries which is used to pay bondholders at maturity. Thus the revenue bond carries the credit risk of the U.S. Treasury.

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

The Corporation's evaluation of its municipal bond portfolio at June 30, 2014March 31, 2015 did not uncover any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized credit rating agency.

FRB and FHLB stock constituteconstitutes the majority of other investments on the Consolidated Balance Sheets.
(In thousands)June 30, 2014 December 31, 2013 June 30, 2013March 31, 2015 December 31, 2014 March 31, 2014
FRB stock$55,435
 $55,294
 $52,477
$55,681
 $55,681
 $55,435
FHLB stock92,547
 125,032
 214,586
92,381
 92,547
 92,547
Other451
 477
 502
413
 426
 464
Total other investments$148,433
 $180,803
 $267,565
$148,475
 $148,654
 $148,446
          

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

Securities with a carrying value of $3.2$3.5 billion, $3.22.8 billion, and $2.73.4 billion at June 30, 2014March 31, 2015, December 31, 20132014, and June 30, 2013March 31, 2014, respectively, were pledged to secure trust and public deposits and securities sold under agreements to repurchase and for other purposes required or permitted by law.


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



Realized Gains and Losses

The following table presents the gross realized gains and losses on the sales of those securities that have been included in earnings as a result of those sales. Gains or losses on the sales of available-for-sale securities are recognized upon sale and are determined using the specific identification method.
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
(In thousands)2014 2013 2014 20132015 2014
Realized gains$80
 $3,786
 $300
 $3,786
$392
 $220
Realized losses
 (6,580) (164) (6,589)(38) (164)
Net securities (losses)/gains$80
 $(2,794) $136
 $(2,803)$354
 $56
          


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



Gross Unrealized Losses and Fair Value

The following table presents the gross unrealized losses and fair value of securities by length of time that individual securities had been in a continuous loss position by major categories of available-for-sale and held-to-maturity securities.
 June 30, 2014 March 31, 2015
 Less than 12 months 12 months or longer Total Less than 12 months 12 months or longer Total
(In thousands)(In thousands) Fair Value 
Unrealized
Losses
 
Number
Impaired
Securities
 Fair Value 
Unrealized
Losses
 
Number
Impaired
Securities
 Fair Value 
Unrealized
Losses
(In thousands) Fair Value 
Unrealized
Losses
 
Number Impaired
Securities
 Fair Value 
Unrealized
Losses
 
Number
Impaired
Securities
 Fair Value 
Unrealized
Losses
Securities available-for-saleSecurities available-for-sale                Securities available-for-sale            
Debt securitiesDebt securities                 Debt securities            
U.S. states and political subdivisions $10,988
 $(16) 14
 $30,271
 $(1,007) 50
 $41,259
 $(1,023)U.S. treasury notes & bonds $
 $
 0 $
 $
 0 $
 $
Residential mortgage-backed securities:                U.S. states and political subdivisions 14,380
 (117) 23 6,004
 (269) 10 20,384
 (386)
U.S. government agencies 11,636
 (3) 1
 259,470
 (5,486) 19
 271,106
 (5,489)Residential mortgage-backed securities:            
Commercial mortgage-backed securities:                U.S. government agencies 74,517
 (360) 5 108,052
 (1,589) 8 182,569
 (1,949)
U.S. government agencies 5,105
 (4) 1
 45,739
 (1,519) 6
 50,844
 (1,523)Commercial mortgage-backed securities:            
Residential collateralized mortgage-backed securities:                U.S. government agencies 49,129
 (175) 7 17,690
 (486) 2 66,819
 (661)
U.S. government agencies 279,311
 (2,358) 19
 904,821
 (32,491) 60
 1,184,132
 (34,849)Residential collateralized mortgage-backed securities:            
Non-agency 
 
 
 
 
 
 
 
U.S. government agencies 70,574
 (762) 6 745,621
 (13,095) 53 816,195
 (13,857)
Commercial collateralized mortgage-backed securities:                Commercial collateralized mortgage-backed securities:            
   U.S. government agencies 24,431
 (97) 1
 43,212
 (1,029) 6
 67,643
 (1,126)   U.S. government agencies 13,206
 (24) 2 61,132
 (358) 6 74,338
 (382)
Asset-backed securities:                Asset-backed securities:            
   Collateralized loan obligations 141,506
 (2,568) 19
 81,749
 (1,684) 12
 223,255
 (4,252)   Collateralized loan obligations 24,087
 (209) 3 181,498
 (3,922) 27 205,585
 (4,131)
Corporate debt securities 
 
 
 53,490
 (8,134) 8
 53,490
 (8,134)Corporate debt securities 
 
 0 52,263
 (9,404) 8 52,263
 (9,404)
Total available-for-sale securities $472,977
 $(5,046) 55
 $1,418,752
 $(51,350) 161
 $1,891,729
 $(56,396)Total securities available-for-sale $245,893
 $(1,647) 46 $1,172,260
 $(29,123) 114 $1,418,153
 $(30,770)
Securities held-to-maturitySecurities held-to-maturity                Securities held-to-maturity            
Debt securitiesDebt securities                Debt securities            
U.S. government agency debentures $
 $
 
 $24,293
 $(707) 1
 $24,293
 $(707)U.S. treasury notes & bonds $5,000
 $
 1 $
 $
 0 $5,000
 $
U.S. states and political subdivisions 59,958
 (334) 56
 66,557
 (919) 90
 126,515
 (1,253)U.S. government agency debentures $
 $
 0 $24,822
 $(178) 1 $24,822
 $(178)
Residential mortgage-backed securities:                U.S. states and political subdivisions 38,202
 (1,093) 26 4,448
 (54) 6 42,650
 (1,147)
U.S. government agencies 
 
 
 206,911
 (4,933) 11
 206,911
 (4,933)Residential mortgage-backed securities:            
Commercial mortgage-backed securities:                U.S. government agencies 28,386
 (123) 2 110,329
 (1,554) 6 138,715
 (1,677)
   U.S. government agencies 
 
 
 23,977
 (445) 3
 23,977
 (445)Commercial mortgage-backed securities:            
Residential collateralized mortgage-backed securities:                   U.S. government agencies 
 
 0 9,554
 (108) 1 9,554
 (108)
   U.S. government agencies 127,284
 (1,100) 8
 1,241,883
 (53,163) 60
 1,369,167
 (54,263)Residential collateralized mortgage-backed securities:            
Commercial collateralized mortgage-backed securities:                   U.S. government agencies 19,016
 (71) 1 1,095,375
 (24,775) 56 1,114,391
 (24,846)
    U.S. government agencies 
 
 
 183,957
 (7,252) 17
 183,957
 (7,252)Commercial collateralized mortgage-backed securities:            
Corporate debt securities 
 
 
 
 
 
 
 
    U.S. government agencies 
 
 0 144,970
 (3,377) 13 144,970
 (3,377)
Total held-to-maturity securities $187,242
 $(1,434) 64
 $1,747,578
 $(67,419) 182
 $1,934,820
 $(68,853)Collateralized loan obligations:            
                    Non-agency 
 
 0 
 
 0 
 
Corporate debt securities 
 
 0 
 
 0 
 
Total securities held-to-maturity $90,604
 $(1,287) 30 $1,389,498
 $(30,046) 83 $1,480,102
 $(31,333)
            


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
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 December 31, 2013 December 31, 2014
 Less than 12 months 12 months or longer Total Less than 12 months 12 months or longer Total
(In thousands)(In thousands) Fair Value 
Unrealized
Losses
 
Number
Impaired
Securities
 Fair Value 
Unrealized
Losses
 
Number
Impaired
Securities
 Fair Value 
Unrealized
Losses
(In thousands) Fair Value 
Unrealized
Losses
 
Number
Impaired
Securities
 Fair Value 
Unrealized
Losses
 
Number
Impaired Securities
 Fair Value 
Unrealized
Losses
Securities available-for-saleSecurities available-for-sale                Securities available-for-sale                
Debt securities:                
Debt securities: Debt securities:                
U.S. states and political subdivisions $38,039
 $(1,996) 65
 $14,157
 $(1,800) 25
 $52,196
 $(3,796)U.S. government agency debentures $2,482
 $(18) 1
 $
 $
 
 $2,482
 $(18)
Residential mortgage-backed securities:                U.S. states and political subdivisions 5,637
 (11) 11
 22,528
 (455) 36
 28,165
 (466)
U.S. government agencies 434,761
 (13,109) 35
 14,890
 (1,318) 2
 449,651
 (14,427)Residential mortgage-backed securities:                
Commercial mortgage-backed securities:                U.S. government agencies 50,126
 (182) 5
 199,773
 (3,036) 14
 249,899
 (3,218)
U.S. government agencies 33,387
 (1,491) 5
 16,944
 (997) 2
 50,331
 (2,488)Commercial mortgage-backed securities:                
Residential collateralized mortgage-backed securities:                U.S. government agencies 12,284
 (55) 2
 45,485
 (1,316) 6
 57,769
 (1,371)
U.S. government agencies 1,135,151
 (44,775) 74
 100,530
 (7,293) 7
 1,235,681
 (52,068)Residential collateralized mortgage-backed securities:                
Nonagency 
 
 
 1
 
 1
 1
 
U.S. government agencies 243,970
 (906) 15
 905,478
 (25,319) 64
 1,149,448
 (26,225)
Commercial collateralized mortgage-backed securities:                Commercial collateralized mortgage-backed securities:                
    U.S. government agencies 43,747
 (2,055) 6
 2,525
 (102) 1
 46,272
 (2,157)    U.S. government agencies 31,375
 (229) 4
 67,169
 (1,176) 7
 98,544
 (1,405)
Asset-backed securities                Asset-backed securities:                
Collateralized loan obligations 223,458
 (4,332) 33
 
 
 
 223,458
 (4,332)Collateralized loan obligations 79,042
 (1,406) 15
 193,687
 (8,207) 27
 272,729
 (9,613)
Corporate debt securities 
 
 
 50,644
 (10,952) 8
 50,644
 (10,952)Corporate debt securities 
 
 
 51,338
 (10,315) 8
 51,338
 (10,315)
Total available-for-sale securities $1,908,543
 $(67,758) 218
 $199,691
 $(22,462) 46
 $2,108,234
 $(90,220)Total securities available-for-sale $424,916
 $(2,807) 53
 $1,485,458
 $(49,824) 162
 $1,910,374
 $(52,631)
Securities held-to-maturitySecurities held-to-maturity                Securities held-to-maturity                
Debt securities: Debt securities:                
Debt securities:                U.S. government agency debentures $
 $
 
 $24,463
 $(537) 1
 $24,463
 $(537)
U.S. government agency debentures $23,652
 $(1,348) 1
 $
 $
 
 $23,652
 $(1,348)U.S. states and political subdivisions 9,085
 (17) 9
 18,371
 (174) 21
 27,456
 (191)
U.S. states and political subdivisions 222,154
 (10,276) 353
 2,478
 (183) 6
 224,632
 (10,459)Residential mortgage-backed securities:                
Residential mortgage-backed securities:                U.S. government agencies 
 
 
 185,361
 (3,045) 10
 185,361
 (3,045)
U.S. government agencies 422,192
 (11,617) 22
 
 
 11
 422,192
 (11,617)Commercial mortgage-backed securities:                
Commercial mortgage-backed securities:                U.S. government agencies 9,950
 (4) 2
 16,735
 (325) 2
 26,685
 (329)
U.S. government agencies 48,831
 (1,190) 8
 
 
 3
 48,831
 (1,190)Residential collateralized mortgage-backed securities:                
Residential collateralized mortgage-backed securities:                U.S. government agencies 28,333
 (149) 3
 1,161,297
 (38,726) 58
 1,189,630
 (38,875)
U.S. government agencies 1,382,915
 (81,818) 66
 
 
 
 1,382,915
 (81,818)Commercial collateralized mortgage-backed securities:                
Commercial collateralized mortgage-backed securities:                U.S. government agencies 41,474
 (55) 3
 171,570
 (6,713) 16
 213,044
 (6,768)
U.S. government agencies 208,863
 (11,052) 19
 
 
 
 208,863
 (11,052)Corporate debt securities 36,933
 (52) 13
 
 
 
 36,933
 (52)
Corporate debt securities 64,541
 (725) 23
 
 
 
 64,541
 (725)Total securities held-to-maturity $125,775
 $(277) 30
 $1,577,797
 $(49,520) 108
 $1,703,572
 $(49,797)
Total held-to-maturity securities $2,373,148
 $(118,026) 492
 $2,478
 $(183) 6
 $2,375,626
 $(118,209)                
                


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 June 30, 2013 March 31, 2014
 Less than 12 months 12 months or longer Total Less than 12 months 12 months or longer Total
(In thousands)(In thousands) Fair Value 
Unrealized
Losses
 
Number
Impaired
Securities
 Fair Value 
Unrealized
Losses
 
Number
Impaired
Securities
 Fair Value 
Unrealized
Losses
(In thousands) Fair Value 
Unrealized
Losses
 
Number
Impaired
Securities
 Fair Value 
Unrealized
Losses
 
Number
Impaired
Securities
 Fair Value 
Unrealized
Losses
Securities available-for-saleSecurities available-for-sale                Securities available-for-sale                
Debt securitiesDebt securities                Debt securities                
U.S. states and political subdivisions $61,933
 $(3,527) 106
 $
 $
 
 $61,933
 $(3,527)U.S. states and political subdivisions $32,307
 $(937) 53
 $17,231
 $(1,158) 29
 $49,538
 $(2,095)
Residential mortgage-backed securities:                Residential mortgage-backed securities:                
U.S. government agencies 331,857
 (10,192) 23
 
 
 
 331,857
 (10,192)U.S. government agencies 399,152
 (9,543) 28
 15,013
 (963) 3
 414,165
 (10,506)
Commercial mortgage-backed securities:                Commercial mortgage-backed securities:                
U.S. government agencies 51,378
 (2,141) 7
 
 
 
 51,378
 (2,141)U.S. government agencies 63,129
 (1,206) 8
 16,891
 (955) 2
 80,020
 (2,161)
Residential collateralized mortgage-backed securities:                Residential collateralized mortgage-backed securities:                
U.S. government agencies 1,070,624
 (27,120) 64
 
 
 
 1,070,624
 (27,120)U.S. government agencies 966,458
 (28,054) 62
 273,543
 (13,750) 18
 1,240,001
 (41,804)
Commercial collateralized mortgage-backed securities:                Commercial collateralized mortgage-backed securities:                
    U.S. government agencies 42,537
 (1,965) 6
 
 
 
 42,537
 (1,965)    U.S. government agencies 90,804
 (1,475) 8
 6,014
 (338) 2
 96,818
 (1,813)
Asset-backed securities                Asset-backed securities:                
Collateralized loan obligations 74,779
 (1,821) 14
 
 
 
 74,779
 (1,821)    Collateralized loan obligations 201,854
 (3,692) 28
 
 
 
 201,854
 (3,692)
Corporate debt securities 
 
 
 51,138
 (10,431) 8
 51,138
 (10,431)Corporate debt securities 
 
 
 51,588
 (10,022) 8
 51,588
 (10,022)
Total available-for-sale securities $1,633,108
 $(46,766) 220
 $51,138
 $(10,431) 8
 $1,684,246
 $(57,197)Total securities available-for-sale $1,753,704
 $(44,907) 187
 $380,281
 $(27,186) 63
 $2,133,985
 $(72,093)
Securities held-to-maturitySecurities held-to-maturity                Securities held-to-maturity                
Debt securitiesDebt securities                Debt securities                
U.S. government agency debentures $23,807
 $(1,193) 1
 $
 $
 
 $23,807
 $(1,193)    U.S. government agency debentures $23,883
 $(1,117) 1
 $
 $
 
 $23,883
 $(1,117)
U.S. states and political subdivisions 228,098
 (9,041) 362
 
 
 
 228,098
 (9,041)    U.S. states and political subdivisions 476,766
 (6,833) 735
 15,544
 (353) 14
 492,310
 (7,186)
Residential mortgage-backed securities:                Residential mortgage-backed securities:                
U.S. government agencies 225,681
 (8,051) 11
 
 
 
 225,681
 (8,051)    U.S. government agencies 295,148
 (7,471) 16
 19,730
 (1,113) 1
 314,878
 (8,584)
Commercial mortgage-backed securities:                Commercial mortgage-backed securities:                
U.S. government agencies 39,697
 (619) 7
 
 
 
 39,697
 (619)U.S. government agencies 50,533
 (877) 8
 
 
 
 50,533
 (877)
Residential collateralized mortgage securities:                Residential collateralized mortgage-backed securities:                
U.S. government agencies 1,451,813
 (41,674) 65
 
 
 
 1,451,813
 (41,674)    U.S. government agencies 865,651
 (36,384) 42
 558,256
 (28,350) 27
 1,423,907
 (64,734)
Commercial collateralized mortgage-backed securities:                Commercial collateralized mortgage-backed securities:                
    U.S. government agencies 150,223
 (7,285) 14
 
 
 
 150,223
 (7,285)    U.S. government agencies 200,487
 (8,507) 18
 19,459
 (1,242) 2
 219,946
 (9,749)
Corporate debt securities 72,017
 (1,003) 25
 
 
 
 72,017
 (1,003)Corporate debt securities 62,051
 (295) 22
 
 
 
 62,051
 (295)
Total held-to-maturity securities $2,191,336
 $(68,866) 485
 $
 $
 
 $2,191,336
 $(68,866)Total securities held-to-maturity $1,974,519
 $(61,484) 842
 $612,989
 $(31,058) 44
 $2,587,508
 $(92,542)
                                

At least quarterly, the Corporation conducts a comprehensive security-level impairment assessment on all securities in an unrealized loss position to determine if OTTI exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Under the current OTTI accounting model for debt securities, anAn OTTI loss must be recognized for a debt security in an unrealized loss position if the Corporation intends to sell the security or it is more likely than not that the Corporation will be required to sell the security before recovery of its amortized cost basis. In this situation, the amount of loss recognized in income is equal to the difference between the fair value and the amortized cost basis of the security. Even if the Corporation does not expect to sell the security, the Corporation must evaluate the expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in income. The portion of the unrealized loss relating to other factors, such as liquidity conditions in the market or changes in market interest rates, is recorded in OCI. Equity securities are also evaluated to determine whether the unrealized loss is expected to be recoverable based on whether evidence exists to support a realizable value equal to or greater than the amortized cost basis. If it is probable that the Corporation will not recover the amortized cost basis, taking into

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amortized cost basis, taking into consideration the estimated recovery period and its ability to hold the equity security until recovery, OTTI is recognized.

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

The investment securities portfolio was in a net unrealized lossgain position of $15.6$10.3 million at June 30, 2014,March 31, 2015, compared to a net unrealized loss position of $55.9$44.9 million at December 31, 20132014 and a net unrealized loss position of $12.4$127.4 million at June 30, 2013.March 31, 2014. Gross unrealized losses were $56.4$62.1 million as of June 30, 2014,March 31, 2015, compared to $90.2$102.4 million at December 31, 2013,2014, and $57.2$164.6 million at June 30, 2013.March 31, 2014. As of June 30, 2014,March 31, 2015, gross unrealized losses are concentrated within agency MBS, CLOs, and corporate debt securities. The fair values of the agency MBSsLower term interest rates have beenpositively impacted by the rising interest rate environment relativeMBS prices quarter to when they were purchased.date while a favorable macro economy and belief that oil and gas related losses are well contained have resulted in tighter CLO spreads. Corporate debt securities are composed of eight, single issuer, trust preferred securities with stated maturities. Such investments are less than 2%1% of the fair value of the entire investment portfolio. None of the corporate issuers have deferred paying dividends on their issued trust preferred shares in which the Corporation is invested. The fair values of these investments have been impacted by the market conditions which have caused risk premiums to increase, resulting in the decline in the fair value of the trust preferred securities.

Management believes the Corporation will fully recover the cost of these agency MBSs, CLOs, and corporate debt securities, and it does not intend to sell these securities and it is not more likely than not that it will be required to sell them before the anticipated recovery of the remaining amortized cost basis, which may be maturity. As a result, Management concluded that these securities were not other-than-temporarily impaired at June 30, 2014March 31, 2015 and has recognized the total amount of the impairment in OCI, net of tax.

The Corporation also holds $294.0 million of CLOs with a gross unrealized loss position of $4.3$4.1 million as of June 30, 2014.March 31, 2015. The new Volcker regulations, as originally adopted, may affect the Corporation's ability to hold these CLOs. Management believes that its holdings of CLOs are not ownership interests in a covered fund prohibited by the Volcker regulations and, therefore, expects to be able to hold these investments until their stated maturities with no restriction.

Contractual Maturity of Debt Securities

The following table shows the remaining contractual maturities and contractual yields of debt securities held-to-maturity and available-for-sale as of June 30, 2014March 31, 2015. Estimated lives on MBSs may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.




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(Dollars in thousands) U.S. Government agency debentures U.S. Treasuries U.S. States and political subdivisions obligations Residential mortgage-backed securities - U.S. govt. agency obligations Commercial mortgage-backed securities - U.S. govt. agency obligations Residential collateralized mortgage obligations - U.S. govt. agency obligations Residential collateralized mortgage obligations - non- U.S. govt. agency issued Commercial collateralized mortgage obligations - U.S. govt. agency obligations Collateralized loan obligations Corporate debt securities Total Weighted Average Yield  U.S. Treasury notes & bonds U.S. Government agency debentures U.S. States and political subdivisions Residential mortgage-backed securities - U.S. govt. agencies Commercial mortgage-backed securities - U.S. govt. agencies Residential collateralized mortgage obligations - U.S. govt. agencies Residential collateralized mortgage obligations - non-agency Commercial collateralized mortgage obligations - U.S. govt. agencies Asset backed securities - collateralized loan obligations Corporate debt securities Total Weighted Average Yield
Securities Available for Sale                        
Securities Available-for-Sale                        
Remaining maturity:                                                
One year or less $
 $
 $11,238
 $1,134
 $16,985
 $9,923
 $
 $
 $16,009
 $
 $55,289
 3.34% $
 $
 $14,933
 $1,742
 $15,907
 $14,287
 $
 $
 $7,504
 $
 $54,373
 2.71%
Over one year through five years 
 
 62,611
 820,491
 24,214
 1,507,289
 8
 142,483
 8,509
 
 2,565,605
 2.23% 
 
 74,124
 789,867
 44,313
 1,827,726
 6
 168,720
 
 
 2,904,756
 2.15%
Over five years through ten years 
 
 135,495
 196,549
 44,499
 80,819
 
 39,550
 269,447
 
 766,359
 2.98% 
 2,513
 100,111
 155,694
 80,139
 50,547
 
 75,339
 286,458
 
 750,801
 2.93%
Over ten years 
 
 31,461
 
 
 
 
 
 
 53,490
 84,951
 2.00% 
 
 25,996
 
 
 
 
 
 
 52,264
 78,260
 1.89%
Fair Value $
 $
 $240,805
 $1,018,174
 $85,698
 $1,598,031
 $8
 $182,033
 $293,965
 $53,490
 $3,472,204
 2.41% $
 $2,513
 $215,164
 $947,303
 $140,359
 $1,892,560
 $6
 $244,059
 $293,962
 $52,264
 $3,788,190
 2.31%
Amortized Cost $
 $
 $233,228
 $998,698
 $86,870
 $1,627,871
 $8
 $182,151
 $297,334
 $61,624
 $3,487,784
   $
 $2,500
 $208,800
 $924,453
 $139,789
 $1,895,112
 $6
 $241,839
 $297,506
 $61,668
 $3,771,673
  
Weighted-Average Yield % % 5.21% 2.63% 2.08% 1.96% 3.64% 1.82% 2.66% 0.95% 2.41%   % 1.25% 5.24% 2.55% 2.05% 1.92% 3.39% 1.89% 2.70% 0.98% 2.31%  
Weighted-Average Maturity 
 
 6.46
 4.00
 4.12
 3.89
 1.74
 3.97
 6.40
 13.31
 4.49
  
Weighted-Average Maturity (in years) 
 3.17
 5.79
 3.67
 4.66
 3.60
 1.99
 3.82
 6.06
 12.56
 4.13
  
                                                
Securities Held to Maturity                        
Securities Held-to-Maturity                        
Remaining maturity:                                                
One year or less $
 $5,005
 $99,753
 $
 $6,380
 $
 $
 $
 $
 $
 $111,138
 1.49% $5,000
 $
 $57,026
 $
 $16,384
 $
 $
 $
 $
 $
 $78,410
 2.05%
Over one year through five years 
 
 66,844
 496,849
 15,075
 1,283,181
 
 120,997
 
 92,958
 2,075,904
 1.86% 
 
 93,443
 472,347
 31,832
 1,274,419
 
 160,403
 
 91,089
 2,123,533
 1.88%
Over five years through ten years 24,293
 
 204,954
 129,648
 34,296
 113,149
 
 121,366
 
 
 627,705
 2.73% 
 24,822
 220,062
 113,999
 10,259
 22,909
 
 94,231
 
 
 486,282
 3.21%
Over ten years 
 
 187,118
 
 
 
 
 
 
 
 187,119
 5.58% 
 
 160,687
 
 
 
 
 
 
 
 160,687
 5.50%
Fair Value $24,293
 $5,005
 $558,669
 $626,497
 $55,751
 $1,396,330
 $
 $242,363
 $
 $92,958
 $3,001,866
 2.25% $5,000
 $24,822
 $531,218
 $586,346
 $58,475
 $1,297,328
 $
 $254,634
 $
 $91,089
 $2,848,912
 2.31%
Amortized Cost $25,000
 $5,000
 $549,850
 $624,605
 $56,020
 $1,450,479
 $
 $248,974
 $
 $92,190
 $3,052,118
   $5,000
 $25,000
 $523,501
 $577,278
 $57,818
 $1,320,215
 $
 $256,352
 $
 $90,010
 $2,855,174
  
Weighted-Average Yield 1.43% 0.26% 4.80% 2.15% 1.98% 1.60% % 2.28% % 2.24% 2.25%   0.31% 1.43% 4.70% 2.17% 2.15% 1.60% % 2.27% % 2.23% 2.31%  
Weighted-Average Maturity 5.33
 0.58
 10.03
 4.71
 4.77
 4.18
 
 5.01
 
 3.53
 5.02
  
Weighted-Average Maturity (in years) 1.00
 4.58
 9.28
 4.06
 3.27
 3.76
 
 4.41
 
 2.78
 4.59
  


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43.     Loans

    Loans outstanding as of June 30, 2014March 31, 2015December 31, 20132014, and June 30, 2013March 31, 2014, net of unearned income, consisted of the following:
(In thousands)(In thousands)June 30, 2014 December 31, 2013 June 30, 2013(In thousands)March 31, 2015 December 31, 2014 March 31, 2014
Originated loans:Originated loans:     Originated loans:     
CommercialCommercial$7,365,499
 $6,648,279
 $5,997,812
Commercial$8,031,892
 $7,830,085
 $7,083,192
Residential mortgageResidential mortgage580,166
 529,253
 462,427
Residential mortgage639,980
 625,283
 555,971
InstallmentInstallment2,051,587
 1,727,925
 1,496,663
Installment2,500,288
 2,393,451
 1,835,522
Home equityHome equity998,179
 920,066
 845,051
Home equity1,134,238
 1,110,336
 946,802
Credit cardsCredit cards151,967
 148,313
 142,319
Credit cards160,766
 164,478
 147,917
LeasesLeases319,795
 239,551
 188,353
Leases388,873
 370,179
 257,509
Total originated loans11,467,193
 10,213,387
 9,132,625
Total originated loans12,856,037
 12,493,812
 10,826,913
Allowance for originated loan lossesAllowance for originated loan losses(91,950) (96,484) (98,645)Allowance for originated loan losses(97,545) (95,696) (92,116)
Net originated loans$11,375,243
 $10,116,903
 $9,033,980
Net originated loans$12,758,492
 $12,398,116
 $10,734,797
Acquired loans:Acquired loans:     Acquired loans:     
CommercialCommercial$1,457,903
 $1,725,970
 $2,267,811
Commercial$1,011,170
 $1,086,899
 $1,562,878
Residential mortgageResidential mortgage425,584
 470,652
 439,380
Residential mortgage378,192
 394,484
 446,374
InstallmentInstallment872,034
 1,004,569
 1,221,060
Installment717,693
 764,168
 943,354
Home equityHome equity268,266
 294,424
 322,111
Home equity217,824
 233,629
 283,309
Total acquired loans3,023,787
 3,495,615
 4,250,362
Total acquired loans2,324,879
 2,479,180
 3,235,915
Allowance for acquired loan lossesAllowance for acquired loan losses(4,977) (741) 
Allowance for acquired loan losses(7,493) (7,457) (2,974)
Net acquired loans$3,018,810
 $3,494,874
 $4,250,362
Net acquired loans$2,317,386
 $2,471,723
 $3,232,941
Covered loans:     
FDIC acquired loans:FDIC acquired loans:     
CommercialCommercial$292,782
 $375,860
 $505,706
Commercial$179,547
 $211,607
 $341,267
Residential mortgageResidential mortgage46,705
 50,679
 56,056
Residential mortgage40,470
 41,276
 49,411
InstallmentInstallment5,364
 6,162
 7,794
Installment4,781
 4,874
 5,531
Home equityHome equity89,815
 97,442
 106,970
Home equity65,170
 73,365
 94,828
Loss share receivableLoss share receivable43,981
 61,827
 83,910
Loss share receivable20,005
 22,033
 54,748
Total covered loans478,647
 591,970
 760,436
Total FDIC acquired loans309,973
 353,155
 545,785
Allowance for covered loan losses(45,109) (44,027) (49,069)
Allowance for FDIC acquired loan lossesAllowance for FDIC acquired loan losses(41,514) (40,496) (49,970)
Net covered loans$433,538
 $547,943
 $711,367
Net FDIC acquired loans$268,459
 $312,659
 $495,815
Total loans:Total loans:     Total loans:     
CommercialCommercial$9,116,184
 $8,750,109
 $8,771,329
Commercial$9,222,609
 $9,128,591
 $8,987,337
Residential mortgageResidential mortgage1,052,455
 1,050,584
 957,863
Residential mortgage1,058,642
 1,061,043
 1,051,756
InstallmentInstallment2,928,985
 2,738,656
 2,725,517
Installment3,222,762
 3,162,493
 2,784,407
Home equityHome equity1,356,260
 1,311,932
 1,274,132
Home equity1,417,232
 1,417,330
 1,324,939
Credit cardsCredit cards151,967
 148,313
 142,319
Credit cards160,766
 164,478
 147,917
LeasesLeases319,795
 239,551
 188,353
Leases388,873
 370,179
 257,509
Loss share receivableLoss share receivable43,981
 61,827
 83,910
Loss share receivable20,005
 22,033
 54,748
Total loans14,969,627
 14,300,972
 14,143,423
Total loans15,490,889
 15,326,147
 14,608,613
Total allowance for loan lossesTotal allowance for loan losses(142,036) (141,252) (147,714)Total allowance for loan losses(146,552) (143,649) (145,060)
Total Net loans$14,827,591
 $14,159,720
 $13,995,709
Total Net loans$15,344,337
 $15,182,498
 $14,463,553
            


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

Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, and net deferred loan fees and costs. Interest income on loans is accrued over the term of the loans primarily using the "simple-interest" method based on the principal balance outstanding. Interest is not accrued on loans where collectability is uncertain. Accrued interest is presented separately in the consolidated balance sheet, except for accrued interest on credit card loans, which is included in the outstanding loan balance. Loan origination fees and certain direct costs incurred to extend credit are deferred and amortized over the term of the loan or loan commitment period as an adjustment to the related loan yield. Net deferred loan origination fees and costs amounted to $6.14.6 million, $6.6$5.4 million, and $6.77.1 million at June 30, 2014March 31, 2015, December 31, 20132014, and June 30, 2013March 31, 2014, respectively.

Acquired Loans

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

Total outstanding acquired impaired loans as of June 30, 2014March 31, 2015 and 20132014 were $714.2$548.2 million and $1.0 billion,$774.5 million, respectively. The outstanding balance of these loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loans, owed at the reporting date, whether or not currently due and whether or not any such amounts have been charged off. Changes in the carrying amount and accretable yield for acquired impaired loans were as follows for the three and six months ended June 30, 2014March 31, 2015 and 2013:2014:    
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
Acquired Impaired Loans2014 2013 2014 20132015 2014
(In thousands)Accretable Yield Carrying Amount of Loans Accretable Yield Carrying Amount of Loans Accretable Yield Carrying Amount of Loans Accretable Yield Carrying Amount of LoansAccretable Yield Carrying Amount of Loans Accretable Yield Carrying Amount of Loans
Balance at beginning of period$142,284
 $557,199
 $
 $
 $136,646
 $601,000
 $
 $
$119,450
 $423,209
 $136,646
 $601,000
Additions due to Citizens acquisition on April 12, 2013
 
 131,558
 819,715
 
 
 131,558
 819,715
Accretion(12,746) 12,746
 (9,090) 9,090
 (24,487) 24,487
 (9,090) 9,090
(11,218) 11,218
 (11,741) 11,741
Net reclassifications from nonaccretable to accretable10,499
 
 
 
 30,013
 
 
 
12,995
 
 19,514
 
Payments received, net
 (50,695) 
 (76,123) 
 (106,237) 
 (76,123)
 (46,114) 
 (55,542)
Disposals$(2,595) $
 $(2,401) $
 $(4,730) $
 $(2,401) $
(2,471) 
 (2,135) 
Balance at end of period$137,442
 $519,250
 $120,067
 $752,682
 $137,442
 $519,250
 $120,067
 $752,682
$118,756
 $388,313
 $142,284
 $557,199
                      
           


Cash flows expected to be collected on acquired impaired loans are estimated quarterly by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default, and the amount of actual prepayments after the acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income, and possibly principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary.


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FIRSTMERIT CORPORATION AND SUBSIDIARIES 



CoveredImproved cash flow expectations for loans or pools that were impaired in prior periods are recorded first as a reversal of previously recorded impairment and then as an increase in prospective yield when all previously recorded impairment has been recaptured. Decreases in expected cash flows are recognized as an impairment through a provision for loan loss and an increase to the allowance for acquired impaired loans.

During the quarter ended March 31, 2015, there was an overall improvement in cash flow expectations, which resulted in the reclassification of $13.0 million from the nonaccretable difference to accretable yield. This reclassification results in prospective yield adjustments on these loan pools.

FDIC Acquired Loans and Related Loss Share Receivable

TheFDIC acquired loans include loans purchased in the 2010 FDIC-assisted acquisitions of George Washington and Midwest areMidwest. George Washington non-single family loss share agreements with the FDIC expired at March 31, 2015 resulting in $5.0 million of loans no longer being covered. As of March 31, 2015, $174.6 million of FDIC acquired loans remained covered by loss sharing agreements between the FDIC and the Corporation that afford the Bank significant loss protection. These covered loans were recorded at estimated fair value at the Acquisition Date with no carryover of the related ALL and are accounted for as acquired impaired loans. AMidwest non-single family loss share receivable was recorded at the Acquisition Date which represents the estimated fair valueagreement. The Midwest non-single family loss share agreement will expire as of reimbursement the Corporation expects to receive from the FDIC for incurred losses on certainJune 30, 2015. As of March 31, 2015, $110.4 million of loans remained covered loans. These expected reimbursements are recorded as part of covered loans.by single family loss share agreements.

Changes in the loss share receivable associated with covered loans for the three and six months ended June 30, 2014March 31, 2015 and 20132014 were as follows:
Loss Share ReceivableThree Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
(In thousands)2014 2013 2014 20132015 2014
Balance at beginning of period$54,748
 $95,593
 $61,827
 $113,734
$22,033
 $61,827
Amortization(4,185) (5,998) (10,048) (14,101)(2,187) (5,863)
Increase/(decrease) due to impairment (recapture) on covered loans(3,897) 2,319
 927
 7,858
Increase/(decrease) due to impairment (recapture) on FDIC acquired loans4,227
 4,824
FDIC reimbursement(1,237) (5,397) (6,324) (15,947)(4,013) (5,087)
Covered loans paid in full(1,448) (2,607) (2,401) (7,634)
FDIC acquired loans paid in full(55) (953)
Balance at end of the period(1)$43,981
 $83,910
 $43,981
 $83,910
$20,005
 $54,748
          

(1) As of March 31, 2015, $6.3 million of the loss share receivable related to non-single family covered loans and $13.8 million related to single family covered loans.
Total outstanding coveredFDIC acquired impaired loans were $637.6$404.4 million and $915.4$702.4 million as of June 30,March 31, 2015 and 2014, and 2013, respectively. The outstanding balance of these loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loans, owed at the reporting date, whether or not currently due and whether or not any such amounts have been charged off. Changes in the carrying amount and accretable yield for coveredFDIC acquired impaired loans were as follows for the three and six months ended June 30, 2014March 31, 2015 and 20132014:
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
Covered Impaired Loans2014 2013 2014 2013
FDIC Acquired Impaired Loans2015 2014
(In thousands)
Accretable
Yield
 
Carrying
Amount of
Loans
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
Accretable
Yield
 
Carrying
Amount of
Loans
 
Accretable
Yield
 
Carrying
Amount of
Loans
Accretable
Yield
 
Carrying
Amount of
Loans
 
Accretable
Yield
 
Carrying
Amount of
Loans
Balance at beginning of period$63,003
 $364,488
 $102,130
 $656,670
 $67,282
 $403,692
 $113,288
 $762,386
$37,511
 $232,452
 $67,282
 $403,692
Accretion(12,139) 12,139
 (17,757) 17,757
 (24,755) 24,755
 (37,271) 37,271
(5,567) 5,567
 (12,616) 12,616
Net reclassifications from non-accretable to accretable5,549
 
 5,413
 
 11,606
 
 15,982
 
Net reclassifications between non-accretable and accretable(56) 
 6,057
 
Payments received, net
 (60,146) 
 (137,170) 
 (111,966) 
 (262,400)
 (38,794) 
 (51,820)
Disposals(2,758) 
 (8,027) 
 (478) 
 (10,241) 
(Disposals)/Additions(2,021) 
 2,280
 
Balance at end of period$53,655
 $316,481
 $81,758
 $537,257
 $53,655
 $316,481
 $81,758
 $537,257
$29,867
 $199,225
 $63,003
 $364,488
                      

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 




The cash flows expected to be collected on covered impaired loans are estimated quarterly in a similar manner as described above for acquired impaired loans. During the quarter ended March 31, 2015, the re-estimation process resulted in a net reclassification of $56.0 thousand from accretable yield to nonaccretable difference. This reclassification results in prospective yield adjustments on the loan pools.

Credit Quality Disclosures

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

31

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



Generally, loans, except for certain commercial, credit card and mortgage loans, and leases on which payments are past due for 90 days are placed on nonaccrual status, unless those loans are in the process of collection and, in Management's opinion, are fully secured. Credit card loans on which payments are past due for 120 days are placed on nonaccrual status. Acquired and coveredFDIC acquired impaired loans are considered to be accruing and performing even though collection of contractual payments may be in doubt because income continues to be accreted on the loan pool as long as expected cash flows are reasonably estimable.

When a loan is placed on nonaccrual status, interest deemed uncollectible which had been accrued in prior years is charged against the ALL and interest deemed uncollectible accrued in the current year is reversed against interest income. Interest on mortgage loans is accrued until Management deems it uncollectible based upon the specific identification method. Payments subsequently received on nonaccrual loans are generally applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable. This generally requires timely principal and interest payments for a minimum of six consecutive payment cycles. Loans are generally written off when deemed uncollectible or when they reach a predetermined number of days past due depending upon loan product, terms and other factors.


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



The following tables provide a summary of loans by portfolio type, including the delinquency status of those loans that continue to accrue interest and those loans that are nonaccrual:
As of June 30, 2014
As of March 31, 2015As of March 31, 2015
(In thousands)            ≥ 90 Days              ≥ 90 Days  
Originated LoansDays Past Due Total   Total Past Due and NonaccrualDays Past Due Total   Total Past Due and Nonaccrual
30-59 60-89 ≥ 90 Past Due Current Loans 
Accruing (a)
 Loans30-59 60-89 ≥ 90 Past Due Current Loans 
Accruing (1)
 Loans
Commercial                              
C&I$1,094
 $1,087
 $6,029
 $8,210
 $4,849,405
 $4,857,615
 $80
 $9,991
$525
 $515
 $5,846
 $6,886
 $5,311,011
 $5,317,897
 $498
 $18,838
CRE2,010
 1,934
 14,333
 18,277
 2,079,741
 2,098,018
 6,633
 11,028
4,401
 1,177
 3,481
 9,059
 2,123,958
 2,133,017
 150
 9,640
Construction
 
 
 
 409,866
 409,866
 
 53

 
 
 
 580,978
 580,978
 
 
Leases103
 
 
 103
 319,692
 319,795
 
 
255
 
 
 255
 388,618
 388,873
 
 
Consumer                              
Installment11,205
 3,164
 4,041
 18,410
 2,033,177
 2,051,587
 3,505
 3,334
11,294
 3,215
 4,157
 18,666
 2,481,622
 2,500,288
 3,332
 3,016
Home Equity Lines1,549
 604
 815
 2,968
 995,211
 998,179
 535
 1,329
1,480
 323
 1,395
 3,198
 1,131,040
 1,134,238
 622
 1,780
Credit Cards677
 385
 510
 1,572
 150,395
 151,967
 258
 446
654
 301
 637
 1,592
 159,174
 160,766
 312
 523
Residential Mortgages13,087
 1,820
 7,527
 22,434
 557,732
 580,166
 4,632
 10,560
9,236
 2,515
 7,402
 19,153
 620,827
 639,980
 3,000
 12,288
Total$29,725
 $8,994
 $33,255
 $71,974
 $11,395,219
 $11,467,193
 $15,643
 $36,741
$27,845
 $8,046
 $22,918
 $58,809
 $12,797,228
 $12,856,037
 $7,914
 $46,085
Acquired Loans            ≥ 90 Days              ≥ 90 Days  
Days Past Due Total   Total Past Due and NonaccrualDays Past Due Total   Total Past Due and Nonaccrual
30-59 60-89 ≥ 90 Past Due Current Loans 
Accruing (c)
 
Loans (c)
30-59 60-89 ≥ 90 Past Due Current Loans 
Accruing (3)
 
Loans (3)
Commercial                              
C&I$1,164
 $511
 $4,239
 $5,914
 $654,347
 $660,261
 $40
 $787
$66
 $131
 $5,366
 $5,563
 $415,247
 $420,810
 $44
 $700
CRE1,678
 1,162
 23,604
 26,444
 757,299
 783,743
 
 1,736
4,507
 1,380
 23,420
 29,307
 554,765
 584,072
 252
 4,172
Construction
 
 666
 666
 13,233
 13,899
 
 

 
 676
 676
 5,612
 6,288
 
 
Consumer                              
Installment6,148
 1,859
 1,296
 9,303
 862,731
 872,034
 1,021
 419
4,859
 1,322
 1,121
 7,302
 710,391
 717,693
 521
 746
Home Equity Lines5,417
 3,089
 1,989
 10,495
 257,771
 268,266
 643
 534
2,850
 1,544
 1,172
 5,566
 212,258
 217,824
 462
 639
Residential Mortgages158
 1,372
 7,298
 8,828
 416,756
 425,584
 847
 1,506
9,894
 590
 5,250
 15,734
 362,458
 378,192
 425
 997
Total$14,565
 $7,993
 $39,092
 $61,650
 $2,962,137
 $3,023,787
 $2,551
 $4,982
$22,176
 $4,967
 $37,005
 $64,148
 $2,260,731
 $2,324,879
 $1,704
 $7,254
Covered Loans (b)
            ≥ 90 Days  
FDIC Acquired Loans (2)
            ≥ 90 Days  
Days Past Due Total   Total Past Due and NonaccrualDays Past Due Total   Total Past Due and Nonaccrual
30-59 60-89 ≥ 90 Past Due Current Loans 
Accruing (c)
 
Loans (c)
30-59 60-89 ≥ 90 Past Due Current Loans 
Accruing (3)
 
Loans (3)
Commercial                              
C&I$2,929
 $
 $6,893
 $9,822
 $46,601
 $56,423
 n/a n/a$815
 $144
 $4,566
 $5,525
 $37,289
 $42,814
 n/a n/a
CRE643
 1,702
 79,916
 82,261
 134,995
 217,256
 n/a n/a413
 5,218
 44,023
 49,654
 78,254
 127,908
 n/a n/a
Construction
 
 17,278
 17,278
 1,823
 19,101
 n/a n/a
 
 6,906
 6,906
 1,919
 8,825
 n/a n/a
Consumer                              
Installment25
 163
 44
 232
 5,132
 5,364
 n/a n/a
 110
 
 110
 4,671
 4,781
 n/a n/a
Home Equity Lines579
 540
 2,036
 3,155
 86,661
 89,816
 n/a n/a2,291
 564
 3,651
 6,506
 58,664
 65,170
 n/a n/a
Residential Mortgages7,141
 381
 5,356
 12,878
 33,828
 46,706
 n/a n/a5,714
 163
 3,684
 9,561
 30,909
 40,470
 n/a n/a
Total$11,317
 $2,786
 $111,523
 $125,626
 $309,040
 $434,666
 n/a n/a$9,233
 $6,199
 $62,830
 $78,262
 $211,706
 $289,968
 n/a n/a
                              
(1)(a) Installment loans 90 days or more past due and accruing include $2.5$2.4 million of loans guaranteed by the U.S. government as of June 30, 2014March 31, 2015.
(2)(b) Excludes loss share receivable of $44.020.0 million as of June 30,March 31, 2015.
(3) Acquired and FDIC acquired impaired loans were not classified as nonperforming assets at March 31, 2015 as the loans are considered to be performing under ASC 310-30. As a result, interest income, through the accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all acquired and covered impaired loans. These asset quality disclosures are, therefore, not applicable to acquired and FDIC acquired impaired loans.


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



As of December 31, 2014
(In thousands)            ≥ 90 Days  
Originated LoansDays Past Due Total   Total Past Due and Nonaccrual
 30-59 60-89 ≥ 90 Past Due Current Loans 
Accruing (1)
 Loans
Commercial               
C&I$2,212
 $1,162
 $2,670
 $6,044
 $5,169,157
 $5,175,201
 $1,547
 $6,114
CRE2,155
 1,460
 8,864
 12,479
 2,104,639
 2,117,118
 1,696
 11,033
Construction
 
 
 
 537,766
 537,766
 
 
Leases
 
 
 
 370,179
 370,179
 
 
Consumer               
Installment14,621
 3,647
 4,716
 22,984
 2,370,467
 2,393,451
 3,695
 3,268
Home Equity Lines1,357
 587
 1,206
 3,150
 1,107,186
 1,110,336
 569
 1,654
Credit Cards668
 516
 860
 2,044
 162,434
 164,478
 407
 596
Residential Mortgages12,086
 2,744
 8,013
 22,843
 602,440
 625,283
 4,242
 11,952
Total$33,099
 $10,116
��$26,329
 $69,544
 $12,424,268
 $12,493,812
 $12,156
 $34,617
                
Acquired Loans            ≥ 90 Days  
 Days Past Due Total   Total Past Due and Nonaccrual
 30-59 60-89 ≥ 90 Past Due Current Loans 
Accruing (3)
 
Loans (3)
Commercial               
C&I$92
 $234
 $4,791
 $5,117
 $444,137
 $449,254
 $
 $787
CRE3,479
 3,398
 23,509
 30,386
 600,288
 630,674
 44
 4,171
Construction
 
 685
 685
 6,286
 6,971
 
 
Consumer               
Installment6,204
 2,029
 1,861
 10,094
 754,074
 764,168
 615
 1,218
Home Equity Lines2,819
 2,123
 2,333
 7,275
 226,354
 233,629
 1,519
 631
Residential Mortgages13,062
 1,648
 7,089
 21,799
 372,685
 394,484
 1,293
 1,249
Total$25,656
 $9,432
 $40,268
 $75,356
 $2,403,824
 $2,479,180
 $3,471
 $8,056
FDIC Acquired Loans (2)
            ≥ 90 Days  
 Days Past Due Total   Total Past Due and Nonaccrual
 30-59 60-89 ≥ 90 Past Due Current Loans 
Accruing (3)
 
Loans (3)
Commercial               
C&I$58
 $
 $6,041
 $6,099
 $42,738
 $48,837
 n/a n/a
CRE234
 1,517
 47,233
 48,984
 104,524
 153,508
 n/a n/a
Construction
 
 6,064
 6,064
 3,198
 9,262
 n/a n/a
Consumer               
Installment23
 
 34
 57
 4,817
 4,874
 n/a n/a
Home Equity Lines1,395
 870
 3,859
 6,124
 67,241
 73,365
 n/a n/a
Residential Mortgages6,205
 91
 3,572
 9,868
 31,408
 41,276
 n/a n/a
Total$7,915
 $2,478
 $66,803
 $77,196
 $253,926
 $331,122
 n/a n/a
                
(1) Installment loans 90 days or more past due and accruing include $2.4 million of loans guaranteed by the U.S. government as of December 31, 2014.
(c)(2) Excludes loss share receivable of $22.0 million as of December 31, 2014.
(3) Acquired and covered impaired loans were not classified as nonperforming assets at June 30,December 31, 2014 as the loans are considered to be performing under ASC 310-30. As a result, interest income, through the accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all acquired and covered impaired loans. These asset quality disclosures are, therefore, not applicable to acquired and covered impaired loans.


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



As of December 31, 2013
As of March 31, 2014As of March 31, 2014
(In thousands)            ≥ 90 Days              ≥ 90 Days  
Originated LoansDays Past Due Total   Total Past Due and NonaccrualDays Past Due Total   Total Past Due and Nonaccrual
30-59 60-89 ≥ 90 Past Due Current Loans 
Accruing (a)
 Loans30-59 60-89 ≥ 90 Past Due Current Loans 
Accruing (1)
 Loans
Commercial                              
C&I$8,941
 $994
 $10,622
 $20,557
 $4,119,010
 $4,139,567
 $151
 $11,323
$4,088
 $561
 $5,546
 $10,195
 $4,465,961
 $4,476,156
 $2,000
 $6,388
CRE4,507
 2,400
 9,688
 16,595
 2,153,192
 2,169,787
 460
 14,229
13,549
 3,644
 7,999
 25,192
 2,222,093
 2,247,285
 804
 20,679
Construction351
 21
 66
 438
 338,487
 338,925
 
 122
369
 
 
 369
 359,382
 359,751
 
 55
Leases902
 
 
 902
 238,649
 239,551
 
 

 
 
 
 257,509
 257,509
 
 
Consumer                              
Installment15,433
 4,050
 4,462
 23,945
 1,703,980
 1,727,925
 3,735
 3,681
9,162
 2,659
 3,762
 15,583
 1,819,939
 1,835,522
 3,286
 3,222
Home Equity Lines1,864
 918
 965
 3,747
 916,319
 920,066
 418
 1,819
1,644
 444
 902
 2,990
 943,812
 946,802
 509
 1,653
Credit Cards729
 471
 735
 1,935
 146,378
 148,313
 404
 558
783
 438
 573
 1,794
 146,123
 147,917
 262
 488
Residential Mortgages19,858
 2,072
 9,350
 31,280
 497,973
 529,253
 6,008
 10,471
9,632
 1,882
 8,455
 19,969
 536,002
 555,971
 4,999
 10,963
Total$52,585
 $10,926
 $35,888
 $99,399
 $10,113,988
 $10,213,387
 $11,176
 $42,203
$39,227
 $9,628
 $27,237
 $76,092
 $10,750,821
 $10,826,913
 $11,860
 $43,448
                              
Acquired Loans            ≥ 90 Days  Acquired Loans           ≥ 90 Days  
Days Past Due Total   Total Past Due and NonaccrualDays Past Due Total   Total Past Due and Nonaccrual
30-59 60-89 ≥ 90 Past Due Current Loans 
Accruing ( c )
 
Loans ( c )
30-59 60-89 ≥ 90 Past Due Current Loans 
Accruing (3)
 
Loans (3)
Commercial                              
C&I$1,295
 $862
 $3,744
 $5,901
 $788,178
 $794,079
 $40
 $795
$776
 $720
 $4,224
 $5,720
 $705,912
 $711,632
 $170
 $241
CRE5,603
 5,281
 26,366
 37,250
 881,395
 918,645
 403
 651
5,356
 3,639
 21,995
 30,990
 806,886
 837,876
 5
 1,259
Construction2,675
 
 
 2,675
 10,571
 13,246
 
 

 650
 
 650
 12,720
 13,370
 
 
Consumer                              
Installment14,528
 4,076
 3,354
 21,958
 982,611
 1,004,569
 2,263
 679
7,216
 2,563
 1,619
 11,398
 931,956
 943,354
 665
 678
Home Equity Lines4,774
 1,933
 3,606
 10,313
 284,111
 294,424
 1,039
 1,300
3,606
 811
 3,596
 8,013
 275,296
 283,309
 1,078
 1,090
Residential Mortgages$3,918
 $1,426
 $8,063
 $13,407
 $457,245
 $470,652
 $403
 $582
11,743
 1,822
 7,090
 20,655
 425,719
 446,374
 31
 1,405
Total$32,793
 $13,578
 $45,133
 $91,504
 $3,404,111
 $3,495,615
 $4,148
 $4,007
$28,697
 $10,205
 $38,524
 $77,426
 $3,158,489
 $3,235,915
 $1,949
 $4,673
Covered Loans (b)
            ≥ 90 Days  
               
FDIC Acquired Loans (2)
            ≥ 90 Days  
Days Past Due Total   Total Past Due and NonaccrualDays Past Due Total   Total Past Due and Nonaccrual
30-59 60-89 ≥ 90 Past Due Current Loans 
Accruing (c)
 
Loans (c)
30-59 60-89 ≥ 90 Past Due Current Loans 
Accruing (3)
 
Loans (3)
Commercial                              
C&I$836
 $1,489
 $12,957
 $15,282
 $60,955
 $76,237
 n/a n/a$1,744
 $
 $11,867
 $13,611
 $51,641
 $65,252
 n/a n/a
CRE2,855
 3,443
 103,077
 109,375
 164,219
 273,594
 n/a n/a582
 449
 97,596
 98,627
 156,966
 255,593
 n/a n/a
Construction2,191
 1,917
 20,388
 24,496
 1,533
 26,029
 n/a n/a1,008
 
 16,337
 17,345
 3,076
 20,421
 n/a n/a
Consumer                              
Installment33
 
 
 33
 6,130
 6,163
 n/a n/a
 
 
 
 5,531
 5,531
 n/a n/a
Home Equity Lines544
 1,467
 1,651
 3,662
 93,780
 97,442
 n/a n/a758
 538
 2,093
 3,389
 91,439
 94,828
 n/a n/a
Residential Mortgages7,463
 1,565
 5,165
 14,193
 36,485
 50,678
 n/a n/a8,374
 435
 5,872
 14,681
 34,731
 49,412
 n/a n/a
Total$13,922
 $9,881
 $143,238
 $167,041
 $363,102
 $530,143
 n/a n/a$12,466
 $1,422
 $133,765
 $147,653
 $343,384
 $491,037
 n/a n/a
                              
(a)(1) Installment loans 90 days or more past due and accruing include $2.12.3 million of loans guaranteed by the U.S. government as of DecemberMarch 31, 20132014.
(b)(2) Excludes loss share receivable of $61.854.7 million as of DecemberMarch 31, 20132014.
(c)(3) Acquired and covered impaired loans were not classified as nonperforming assets at DecemberMarch 31, 2013 as the loans are considered to be performing under ASC 310-30. As a result, interest income, through the accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all acquired and covered impaired loans. These asset quality disclosures are, therefore, not applicable to acquired and covered impaired loans.


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As of June 30, 2013
(In thousands)            ≥ 90 Days  
Originated LoansDays Past Due Total   Total Past Due and Nonaccrual
 30-59 60-89 ≥ 90 Past Due Current Loans 
Accruing (a)
 Loans
Commercial               
C&I$732
 $587
 $3,537
 $4,856
 $3,473,334
 $3,478,190
 $10
 $9,834
CRE7,950
 2,413
 11,584
 21,947
 2,192,910
 2,214,857
 1,602
 18,954
Construction523
 537
 430
 1,490
 303,275
 304,765
 348
 147
Leases
 
 
 
 188,353
 188,353
 
 
Consumer               
Installment9,141
 3,080
 5,021
 17,242
 1,479,421
 1,496,663
 4,184
 4,146
Home Equity Lines1,080
 1,048
 1,122
 3,250
 841,801
 845,051
 710
 1,841
Credit Cards817
 350
 783
 1,950
 140,369
 142,319
 423
 433
Residential Mortgages13,378
 3,733
 7,138
 24,249
 438,178
 462,427
 4,483
 10,108
Total$33,621
 $11,748
 $29,615
 $74,984
 $9,057,641
 $9,132,625
 $11,760
 $45,463
                
Acquired Loans           ≥ 90 Days  
 Days Past Due Total   Total Past Due and Nonaccrual
 30-59 60-89 ≥ 90 Past Due Current Loans 
Accruing ( c )
 
Loans ( c )
Commercial               
C&I$607
 $85
 $1,914
 $2,606
 $1,157,738
 $1,160,344
 $
 $2,245
CRE6,731
 6,875
 24,775
 38,381
 1,059,743
 1,098,124
 
 494
Construction
 
 724
 724
 16,051
 16,775
 724
 
Consumer               
Installment11,576
 2,440
 2,252
 16,268
 1,204,792
 1,221,060
 151
 715
Home Equity Lines4,785
 1,579
 2,404
 8,768
 313,427
 322,195
 
 5,396
Residential Mortgages14,460
 4,036
 7,591
 26,087
 414,307
 440,394
 45
 77
Total$38,159
 $15,015
 $39,660
 $92,834
 $4,166,058
 $4,258,892
 $920
 $8,927
                
Covered Loans (b)
            ≥ 90 Days  
 Days Past Due Total   Total Past Due and Nonaccrual
 30-59 60-89 ≥ 90 Past Due Current Loans 
Accruing (c)
 
Loans (c)
Commercial               
C&I$4,451
 $497
 $13,693
 $18,641
 $67,290
 $85,931
 n/a n/a
CRE5,751
 10,666
 145,368
 161,785
 220,306
 382,091
 n/a n/a
Construction1,308
 
 32,183
 33,491
 4,194
 37,685
 n/a n/a
Consumer               
Installment17
 54
 
 71
 7,723
 7,794
 n/a n/a
Home Equity Lines1,027
 153
 1,834
 3,014
 103,955
 106,969
 n/a n/a
Residential Mortgages8,760
 1,538
 8,090
 18,388
 37,668
 56,056
 n/a n/a
Total$21,314
 $12,908
 $201,168
 $235,390
 $441,136
 $676,526
 n/a n/a
                
(a) Installment loans 90 days or more past due and accruing include $3.1 million of loans guaranteed by the U.S. government as of June 30, 2013.
(b) Excludes loss share receivable of $83.9 million as of June 30, 2013.
(c) Acquired and covered impaired loans were not classified as nonperforming assets at June 30, 20132014 as the loans are considered to be performing under ASC 310-30. As a result interest income, through the accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all acquired and covered impaired loans. These asset quality disclosures are, therefore, not applicable to acquired and covered impaired loans.

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


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

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

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

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

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

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


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The following tables provide a summary of commercial loans by portfolio type and the Corporation's internal credit quality rating:
As of June 30, 2014
As of March 31, 2015As of March 31, 2015
(In thousands)                
Originated Commercial Loans
Originated LoansCommercial
C&I CRE Construction LeasesC&I CRE Construction Leases Total
Grade 1$33,855
 $
 $
 $9,408
$59,380
 $667
 $
 $13,052
 $73,099
Grade 2134,682
 3,610
 
 10,971
191,008
 3,368
 
 5,782
 200,158
Grade 31,100,807
 290,652
 36,954
 55,648
1,405,007
 339,027
 62,821
 69,686
 1,876,541
Grade 43,439,210
 1,725,808
 371,488
 236,324
3,504,600
 1,724,516
 516,852
 297,790
 6,043,758
Grade 5100,776
 29,382
 
 7,092
103,432
 29,034
 942
 1,307
 134,715
Grade 648,285
 48,566
 1,424
 352
54,470
 36,405
 363
 1,256
 92,494
Grade 7
 
 
 

 
 
 
 
Total$4,857,615
 $2,098,018
 $409,866
 $319,795
$5,317,897
 $2,133,017
 $580,978
 $388,873
 $8,420,765
                
Acquired Commercial Loans
Acquired LoansCommercial
C&I CRE Construction LeasesC&I CRE Construction Leases Total
Grade 1$700
 $
 $
 $
$1,069
 $
 $
 $
 $1,069
Grade 2
 
 
 

 
 
 
 
Grade 335,608
 26,652
 
 
22,875
 24,834
 
 
 47,709
Grade 4553,293
 651,011
 13,899
 
359,751
 496,213
 5,612
 
 861,576
Grade 541,213
 50,267
 
 
15,363
 21,487
 
 
 36,850
Grade 629,447
 55,813
 
 
21,752
 41,538
 676
 
 63,966
Grade 7
 
 
 

 
 
 
 
Total$660,261
 $783,743
 $13,899
 $
$420,810
 $584,072
 $6,288
 $
 $1,011,170
                
Covered Commercial Loans
FDIC Acquired LoansCommercial
C&I CRE Construction LeasesC&I CRE Construction Leases Total
Grade 1$
 $
 $
 $
$
 $
 $
 $
 $
Grade 21,015
 
 
 
1,040
 
 
 
 1,040
Grade 3
 
 
 

 
 
 
 
Grade 438,892
 104,455
 707
 
33,352
 74,128
 579
 
 108,059
Grade 5999
 3,984
 
 
39
 2,134
 
 
 2,173
Grade 615,517
 108,637
 18,045
 
8,383
 51,646
 8,246
 
 68,275
Grade 7
 180
 349
 

 
 
 
 
Total$56,423
 $217,256
 $19,101
 $
$42,814
 $127,908
 $8,825
 $
 $179,547
                


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As of December 31, 2013
As of December 31, 2014As of December 31, 2014
(In thousands)                
Originated Commercial Loans
Originated LoansCommercial
C&I CRE Construction LeasesC&I CRE Construction Leases Total
Grade 1$34,909
 $241
 $
 $9,271
$52,676
 $683
 $678
 $4,451
 $58,488
Grade 2108,709
 3,730
 
 2,900
186,278
 3,454
 
 14,959
 204,691
Grade 3802,624
 315,150
 25,632
 54,446
1,340,100
 294,281
 46,074
 71,908
 1,752,363
Grade 43,083,458
 1,759,383
 306,795
 167,022
3,413,446
 1,745,470
 490,757
 277,277
 5,926,950
Grade 571,857
 34,969
 267
 5,750
139,083
 29,990
 257
 1,389
 170,719
Grade 638,010
 56,314
 6,231
 162
43,618
 43,240
 
 195
 87,053
Grade 7
 
 
 

 
 
 
 
Total$4,139,567
 $2,169,787
 $338,925
 $239,551
$5,175,201
 $2,117,118
 $537,766
 $370,179
 $8,200,264
                
Acquired Commercial Loans
Acquired LoansCommercial
C&I CRE Construction LeasesC&I CRE Construction Leases Total
Grade 1$
 $
 $
 $
$1,076
 $
 $
 $
 $1,076
Grade 21,741
 703
 
 

 
 
 
 
Grade 379,634
 29,224
 
 
20,891
 24,867
 
 
 45,758
Grade 4643,495
 722,307
 13,246
 
376,129
 532,447
 6,286
 
 914,862
Grade 546,807
 93,499
 
 
23,268
 28,382
 685
 
 52,335
Grade 622,402
 72,912
 
 
27,890
 44,978
 
 
 72,868
Grade 7
 
 
 

 
 
 
 
Total$794,079
 $918,645
 $13,246
 $
$449,254
 $630,674
 $6,971
 $
 $1,086,899
                
Covered Commercial Loans
FDIC Acquired LoansCommercial
C&I CRE Construction LeasesC&I CRE Construction Leases Total
Grade 1$
 $
 $
 $
$
 $
 $
 $
 $
Grade 2968
 
 
 
1,347
 
 
 
 1,347
Grade 3
 
 
 

 
 
 
 
Grade 441,115
 113,863
 601
 
36,406
 86,779
 823
 
 124,008
Grade 5427
 6,219
 
 
167
 3,401
 
 
 3,568
Grade 631,621
 153,318
 23,208
 
10,917
 63,328
 8,248
 
 82,493
Grade 72,106
 194
 2,220
 

 
 191
 
 191
Total$76,237
 $273,594
 $26,029
 $
$48,837
 $153,508
 $9,262
 $
 $211,607
                


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As of June 30, 2013
As of March 31, 2014As of March 31, 2014
(In thousands)                
Originated Commercial Loans
Originated LoansCommercial
C&I CRE Construction LeasesC&I CRE Construction Leases Total
Grade 1$40,185
 $1,250
 $
 $12,815
$28,610
 $240
 $299
 $8,452
 $37,601
Grade 2124,748
 3,859
 
 709
135,574
 3,797
 
 3,620
 142,991
Grade 3721,517
 297,052
 19,119
 36,743
940,937
 329,377
 24,731
 58,397
 1,353,442
Grade 42,483,972
 1,826,543
 282,034
 134,834
3,276,975
 1,823,877
 332,227
 179,795
 5,612,874
Grade 541,698
 32,705
 1,363
 3,042
61,507
 39,245
 259
 6,857
 107,868
Grade 666,070
 53,448
 2,249
 210
32,553
 50,749
 2,235
 388
 85,925
Grade 7
 
 
 

 
 
 
 
Grade 8
 
 
 
Total$3,478,190
 $2,214,857
 $304,765
 $188,353
$4,476,156
 $2,247,285
 $359,751
 $257,509
 $7,340,701
         
Acquired Loans       Commercial
Acquired Commercial Loans
C&I CRE Construction LeasesC&I CRE Construction Leases Total
Grade 1$
 $
 $
 $
$700
 $
 $
 $
 $700
Grade 2107
 
 
 

 
 
 
 
Grade 324,511
 28,509
 
 
37,829
 24,177
 
 
 62,006
Grade 41,050,350
 848,214
 15,558
 
609,383
 696,070
 13,370
 
 1,318,823
Grade 558,399
 125,154
 1,217
 
43,721
 51,253
 
 
 94,974
Grade 626,977
 96,247
 
 
19,999
 66,376
 
 
 86,375
Grade 7
 
 
 

 
 
 
 
Grade 8
 
 
 
Total$1,160,344
 $1,098,124
 $16,775
 $
$711,632
 $837,876
 $13,370
 $
 $1,562,878
                
Covered Commercial Loans
FDIC Acquired LoansCommercial
C&I CRE Construction LeasesC&I CRE Construction Leases Total
Grade 1$
 $
 $
 $
$
 $
 $
 $
 $
Grade 21,001
 
 
 
957
 
 
 
 957
Grade 3
 
 
 

 
 
 
 
Grade 444,148
 131,889
 556
 
42,228
 111,610
 653
 
 154,491
Grade 5661
 24,255
 1,364
 
387
 2,883
 
 
 3,270
Grade 638,065
 224,533
 33,856
 
19,864
 140,927
 19,459
 
 180,250
Grade 72,056
 1,414
 1,909
 
1,816
 173
 309
 
 2,298
Grade 8
 
 
 
Total$85,931
 $382,091
 $37,685
 $
$65,252
 $255,593
 $20,421
 $
 $341,266
                

54.    Allowance for Loan Losses

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

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


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FIRSTMERIT CORPORATION AND SUBSIDIARIES 



Allowance for Originated Loan Losses

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

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

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

Loans are generally written off when deemed uncollectible or when they reach a predetermined number of days past due depending upon loan product, terms, and other factors.


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
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The following tables show activity in the originated ALL, by portfolio segment for the three and six months ended June 30, 2014March 31, 2015 and 20132014, as well as the corresponding recorded investment in originated loans at the end of the period:
As of June 30, 2014
As of March 31, 2015As of March 31, 2015
(In thousands)(In thousands)                 
Originated LoansOriginated LoansC&I CRE Construction Leases Installment Home Equity Lines Credit Cards Residential Mortgages TotalOriginated LoansC&I CRE Construction Leases Installment Home Equity Lines Credit Cards Residential Mortgages Total
Three Months EndedThree Months Ended                 Three Months Ended                 
Allowance for originated loan losses, beginning balanceAllowance for originated loan losses, beginning balance$40,175
 $13,385
 $1,470
 $1,027
 $11,604
 $13,160
 $6,851
 $4,444
 $92,116
Allowance for originated loan losses, beginning balance$37,375
 $10,492
 $2,202
 $674
 $12,918
 $19,324
 $7,966
 $4,745
 $95,696
Charge-offsCharge-offs(361) (2,696) 
 
 (4,076) (1,870) (1,311) (834) (11,148)Charge-offs(510) (215) 
 
 (5,055) (911) (1,452) (424) (8,567)
RecoveriesRecoveries372
 30
 2
 372
 2,741
 966
 439
 67
 4,989
Recoveries341
 
 1
 4
 3,020
 613
 366
 35
 4,380
Provision for loan lossesProvision for loan losses3,070
 (1,989) (149) (371) 1,974
 1,647
 1,349
 462
 5,993
Provision for loan losses2,632
 (1,464) (451) (49) 2,475
 407
 921
 1,565
 6,036
Allowance for originated loan losses, ending balanceAllowance for originated loan losses, ending balance$43,256
 $8,730
 $1,323
 $1,028
 $12,243
 $13,903
 $7,328
 $4,139
 $91,950
Allowance for originated loan losses, ending balance$39,838
 $8,813
 $1,752
 $629
 $13,358
 $19,433
 $7,801
 $5,921
 $97,545
Six Months Ended                 
Allowance for originated loan losses, beginning balance$42,981
 $12,265
 $2,810
 $1,081
 $11,935
 $12,900
 $7,740
 $4,772
 $96,484
Charge-offs(5,435) (2,775) 
 
 (8,660) (3,279) (2,766) (1,393) (24,308)
Recoveries1,369
 34
 30
 372
 5,490
 1,870
 857
 105
 10,127
Provision for loan losses4,341
 (794) (1,517) (425) 3,478
 2,412
 1,497
 655
 9,647
Allowance for originated loan losses, ending balance$43,256
 $8,730
 $1,323
 $1,028
 $12,243
 $13,903
 $7,328
 $4,139
 $91,950
                 
Ending allowance for originated loan losses balance attributable to loans:Ending allowance for originated loan losses balance attributable to loans:        Ending allowance for originated loan losses balance attributable to loans:        
Individually evaluated for impairment$5,092
 $112
 $9
 $
 $1,008
 $201
 $361
 $1,019
 $7,802
Individually evaluated for impairment$10,042
 $317
 $
 $
 $1,005
 $254
 $263
 $1,416
 $13,297
Collectively evaluated for impairment38,164
 8,618
 1,314
 1,028
 11,235
 13,702
 6,967
 3,120
 84,148
Collectively evaluated for impairment29,796
 8,496
 1,752
 629
 12,353
 19,179
 7,538
 4,505
 84,248
Total ending allowance for originated loan losses balanceTotal ending allowance for originated loan losses balance$43,256
 $8,730
 $1,323
 $1,028
 $12,243
 $13,903
 $7,328
 $4,139
 $91,950
Total ending allowance for originated loan losses balance$39,838
 $8,813
 $1,752
 $629
 $13,358
 $19,433
 $7,801
 $5,921
 $97,545
Originated loans:Originated loans:                 Originated loans:                 
Originated loans individually evaluated for impairment$10,404
 $25,484
 $53
 $
 $24,394
 $6,956
 $979
 $26,297
 $94,567
Originated loans individually evaluated for impairment$35,792
 $15,000
 $
 $
 $26,882
 $7,632
 $815
 $24,822
 $110,943
Originated loans collectively evaluated for impairment4,847,211
 2,072,534
 409,813
 319,795
 2,027,193
 991,223
 150,988
 553,869
 11,372,626
Originated loans collectively evaluated for impairment5,282,105
 2,118,017
 580,978
 388,873
 2,473,406
 1,126,606
 159,951
 615,158
 12,745,094
Total ending originated loan balanceTotal ending originated loan balance$4,857,615
 $2,098,018
 $409,866
 $319,795
 $2,051,587
 $998,179
 $151,967
 $580,166
 $11,467,193
Total ending originated loan balance$5,317,897
 $2,133,017
 $580,978
 $388,873
 $2,500,288
 $1,134,238
 $160,766
 $639,980
 $12,856,037

As of March 31, 2014
(In thousands)                 
Originated LoansC&I CRE Construction Leases Installment Home Equity Lines Credit Cards Residential Mortgages Total
Three Months Ended                 
Allowance for originated loan losses, beginning balance$42,981
 $12,265
 $2,810
 $1,081
 $11,935
 $12,900
 $7,740
 $4,772
 $96,484
Charge-offs(5,074) (79) 
 
 (4,584) (1,409) (1,455) (559) (13,160)
Recoveries997
 4
 28
 
 2,749
 904
 418
 38
 5,138
Provision for loan losses1,271
 1,195
 (1,368) (54) 1,504
 765
 148
 193
 3,654
Allowance for originated loan losses, ending balance$40,175
 $13,385
 $1,470
 $1,027
 $11,604
 $13,160
 $6,851
 $4,444
 $92,116
Ending allowance for originated loan losses balance attributable to loans:        
 Individually evaluated for impairment$2,866
 $2,918
 $
 $
 $1,006
 $223
 $307
 $1,241
 $8,561
 Collectively evaluated for impairment37,309
 10,467
 1,470
 1,027
 10,598
 12,937
 6,544
 3,203
 83,555
Total ending allowance for originated loan losses balance$40,175
 $13,385
 $1,470
 $1,027
 $11,604
 $13,160
 $6,851
 $4,444
 $92,116
Originated loans:                 
 Originated loans individually evaluated for impairment$7,143
 $31,576
 $404
 $
 $25,818
 $6,931
 $1,034
 $26,198
 $99,104
 Originated loans collectively evaluated for impairment4,469,013
 2,215,709
 359,347
 257,509
 1,809,704
 939,871
 146,883
 529,773
 10,727,809
Total ending originated loan balance$4,476,156
 $2,247,285
 $359,751
 $257,509
 $1,835,522
 $946,802
 $147,917
 $555,971
 $10,826,913
                   


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



As of June 30, 2013
Originated LoansC&I CRE Construction Leases Installment Home Equity Lines Credit Cards Residential Mortgages Total
Three Months Ended                 
Allowance for originated loan losses, beginning balance$40,427
 $18,399
 $2,741
 $1,129
 $9,151
 $14,568
 $7,069
 $5,359
 $98,843
Charge-offs(2,000) (750) 
 (1,237) (3,612) (1,497) (1,459) (414) (10,969)
Recoveries3,528
 203
 31
 
 2,739
 599
 469
 51
 7,620
Provision for loan losses3,212
 (1,029) (728) 1,017
 447
 (404) 1,209
 (573) 3,151
Allowance for originated loan losses, ending balance$45,167
 $16,823
 $2,044
 $909
 $8,725
 $13,266
 $7,288
 $4,423
 $98,645
Six Months Ended                 
Allowance for originated loan losses, beginning balance$36,209
 $20,126
 $3,821
 $639
 $11,154
 $13,724
 $7,384
 $5,885
 $98,942
Charge-offs(4,103) (803) (516) (1,237) (8,206) (3,334) (2,862) (684) (21,745)
Recoveries4,583
 335
 89
 89
 5,235
 1,082
 982
 94
 12,489
Provision for loan losses8,478
 (2,835) (1,350) 1,418
 542
 1,794
 1,784
 (872) 8,959
Allowance for originated loan losses, ending balance$45,167
 $16,823
 $2,044
 $909
 $8,725
 $13,266
 $7,288
 $4,423
 $98,645
                  
Ending allowance for originated loan losses balance attributable to loans:        
 Individually evaluated for impairment$3,169
 $1,010
 $
 $
 $557
 $197
 $255
 $1,280
 $6,468
 Collectively evaluated for impairment41,998
 15,813
 2,044
 909
 8,168
 13,069
 7,033
 3,143
 92,177
Total ending allowance for originated loan losses balance$45,167
 $16,823
 $2,044
 $909
 $8,725
 $13,266
 $7,288
 $4,423
 $98,645
Originated loans:                 
 Originated loans individually evaluated for impairment$9,439
 $24,400
 $1,005
 $
 $30,140
 $6,819
 $1,262
 $23,221
 $96,286
 Originated loans collectively evaluated for impairment3,468,751
 2,190,457
 303,760
 188,353
 1,466,523
 838,232
 141,057
 439,206
 9,036,339
Total ending originated loan balance$3,478,190
 $2,214,857
 $304,765
 $188,353
 $1,496,663
 $845,051
 $142,319
 $462,427
 $9,132,625
                   

The following table presents the originated ALL and the recorded investment as of December 31, 20132014:
As of December 31, 2013
As of December 31, 2014As of December 31, 2014
(In thousands)                 
Originated LoansC&I CRE Construction Leases Installment Home Equity Lines Credit Cards Residential Mortgages TotalOriginated LoansC&I CRE Construction Leases Installment Home Equity Lines Credit Cards Residential Mortgages Total
Ending allowance for originated loan losses balance attributable to loans:Ending allowance for originated loan losses balance attributable to loans:        Ending allowance for originated loan losses balance attributable to loans:        
Individually evaluated for impairment$3,235
 $229
 $
 $
 $1,014
 $223
 $312
 $1,133
 $6,146
Individually evaluated for impairment$72
 $2,914
 $
 $
 $1,178
 $207
 $296
 $1,283
 $5,950
Collectively evaluated for impairment39,746
 12,036
 2,810
 1,081
 10,921
 12,677
 7,428
 3,639
 90,338
Collectively evaluated for impairment37,303
 7,578
 2,202
 674
 11,740
 19,117
 7,670
 3,462
 89,746
Total ending allowance for originated loan losses balanceTotal ending allowance for originated loan losses balance$42,981
 $12,265
 $2,810
 $1,081
 $11,935
 $12,900
 $7,740
 $4,772
 $96,484
Total ending allowance for originated loan losses balance$37,375
 $10,492
 $2,202
 $674
 $12,918
 $19,324
 $7,966
 $4,745
 $95,696
Originated loans:Originated loans:                 Originated loans:                 
Loans individually evaluated for impairment$8,053
 $20,616
 $906
 $
 $27,285
 $6,726
 $1,112
 $23,066
 $87,764
Loans individually evaluated for impairment$11,759
 $23,300
 $
 $
 $24,905
 $7,379
 $854
 $25,251
 $93,448
Loans collectively evaluated for impairment4,131,514
 2,149,171
 338,019
 239,551
 1,700,640
 913,340
 147,201
 506,187
 10,125,623
Loans collectively evaluated for impairment5,163,442
 2,093,818
 537,766
 370,179
 2,368,546
 1,102,957
 163,624
 600,032
 12,400,364
Total ending originated loan balanceTotal ending originated loan balance$4,139,567
 $2,169,787
 $338,925
 $239,551
 $1,727,925
 $920,066
 $148,313
 $529,253
 $10,213,387
Total ending originated loan balance$5,175,201
 $2,117,118
 $537,766
 $370,179
 $2,393,451
 $1,110,336
 $164,478
 $625,283
 $12,493,812
                                    


42

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



Allowance for Acquired Loan Losses

In accordance with the acquisition method of accounting, theThe Citizens' loans were recorded at their fair value as of the Acquisition Date and the prior ALL was eliminated. An ALL for acquired nonimpaired loans is estimated using a methodology similar to that used for originated loans, thatloans. The allowance determined for each acquired nonimpaired loan is based on a specific reserve analysis for loans individually evaluated for impairment and based on historical loss rates for loans collectively evaluated for impairment. If the computed ALL is greater thancompared to the remaining fair value discount,adjustment for that loan. If the computed allowance is greater, the excess is added to the ALLallowance through a provision for loan losses. If the computed ALLallowance is less, no additional ALLallowance is recognized. As of June 30, 2014March 31, 2015, the computed ALL was less than the remaining fair value discount,discount; therefore, no ALL for acquired nonimpaired loans was required.recorded.

Charge-offs and actual losses on an acquired nonimpaired loan first reduce any remaining fair value discount for that loan. Once a loan's discount is depleted, charge-offs and actual losses are applied against the acquired ALL. During the three and six months ended June 30, 2014March 31, 2015, provision for loan losses, equal to net charge-offs, of $3.8$2.2 million and $9.4 million, respectively, werewas recorded. Charge-offs on acquired nonimpaired loans were mainly related to consumer loans that were written off in accordance with the Corporation's credit policies based on a predetermined number of days past due.

The ALL for acquired impaired loans is determined by comparing the present value of the cash flows expected to be collected to the carrying amount for a given pool of loans. Management reforecasts the estimated cash flows expected to be collected on acquired impaired loans on a quarterly basis. If the present value of expected cash flows for a pool is less than its carrying value, impairment is recognized in the current period by an increase in the acquired ALL and a charge to the provision for loan losses. If the present value of expected cash flows for a pool is greater than its carrying value, any previously established acquired ALL is reversed and any remaining difference increases the accretable yield which will be taken into interest income over the remaining life of the loan pool. See Note 43 (Loans) for further information on changes in accretable yield.


38

Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



The following table presents activity in the allowance for acquired impaired loan losses for the three and six months ended June 30, March 31, 2015 and 2014. There was no allowance for acquired impaired loans as of June 30, 2013.:
Allowance for Acquired Impaired Loan LossesThree Months Ended June 30,Six Months Ended June 30,Three Months Ended March 31,
(In thousands)20142015 2014
Balance at beginning of the period$2,974
$741
$7,457
 $741
Charge-offs


 
Recoveries


 
Provision for loan losses2,003
4,236
36
 2,233
Balance at end of the period$4,977
$4,977
$7,493
 $2,974
    

Allowance for CoveredFDIC Acquired Loan Losses

The ALL on coveredFDIC acquired nonimpaired loans is estimated similar to acquired loans as described above except any increase to the ALL and provision for loan losses is partially offset by an increase in the loss share receivable for the portion of the losses recoverable under the loss sharing agreements with the FDIC. Additionally, the Corporation elected to account for all covered loans as impaired except for those loans acquired with revolving privileges, which are outside the scope of impaired loan accounting, and, therefore, are accounted

43

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



for as covered nonimpaired loans. As of June 30, 2014March 31, 2015, the computed ALL was less than the remaining fair value discount, therefore, no ALL for coveredFDIC acquired nonimpaired loans was recorded.

The following table presents activity in the allowance for coveredFDIC acquired impaired loan losses for the three and six months ended June 30, 2014March 31, 2015 and 20132014:
Allowance for Covered Impaired Loan LossesThree Months Ended June 30, Six Months Ended June 30,
(In thousands)2014 2013 2014 2013
Balance at beginning of the period$49,970
 $47,945
 $44,027
 $43,255
 Net provision/(recapture) of loan losses before benefit attributable to FDIC loss share agreements(451) 6,477
 7,428
 16,154
 Net (benefit)/recapture attributable to FDIC loss share agreements3,897
 (2,319) (927) (7,858)
Net provision for loan losses3,446
 4,158
 6,501
 8,296
Increase (decrease) in loss share receivable(3,897) 2,319
 927
 7,858
Loans charged-off(4,410) (5,353) (6,346) (10,340)
Balance at end of the period$45,109
 $49,069
 $45,109
 $49,069
         

During the three months ended June 30, 2014, $0.5 million of previously recognized losses on covered impaired loans were recaptured with an offsetting decrease of $3.9 million in the loss share receivable. This net provision of $3.4 million compares to $4.2 million in the three months ended June 30, 2013. During the six months ended June 30, 2014, $7.4 million of provision on covered impaired loans was recognized with an offsetting increase of $0.9 million in the loss share receivable. This net provision of $6.5 million compares to $8.3 million in the six months ended June 30, 2013.
Allowance for FDIC acquired Impaired Loan LossesThree Months Ended March 31,
(In thousands)2015 2014
Balance at beginning of the period$40,496
 $44,027
 Net provision/(recapture) of loan losses before benefit attributable to FDIC loss share agreements4,225
 7,879
 Net (benefit)/recapture attributable to FDIC loss share agreements(4,227) (4,824)
Net provision/(recapture) for loan losses(2) 3,055
Increase (decrease) in loss share receivable4,227
 4,824
Loans charged-off(3,207) (1,936)
Balance at end of the period$41,514
 $49,970
     

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


4439

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



Credit Quality

A loan is considered to be impaired when, based on current events or information, it is probable the Corporation will be unable to collect all amounts due (principal and interest) per the contractual terms of the loan agreement.

Interest income recognized on impaired loans was $20.0 thousand and $123.0 thousand for the three months and six months ended June 30, 2014, respectively, compared to $79.0 thousand and $165.0$118.0 thousand for the three months and sixended March 31, 2015, compared to $103.0 thousand for the three months ended June 30, 2013March 31, 2014, respectively.. Interest income which would have been earned in accordance with the original terms was $0.5 million and $1.3$0.9 million for the three months and six months ended June 30, 2014March 31, 2015, respectively, compared to $1.1 million and $1.8$0.8 million for the three months and six months ended June 30, 2013March 31, 2014, respectively..

Loan impairment is measured based on either the present value of expected future cash flows discounted at the loan's effective interest rate, at the observable market price of the loan, or the fair value of the collateral for certain collateral dependent loans. Impaired loans include all nonaccrual commercial, agricultural, construction, and commercial real estate loans, and loans modified as a TDR, regardless of nonperforming status. Acquired and coveredFDIC acquired impaired loans are not considered or reported as impaired loans. Nonimpaired acquired loans that are subsequently placed on nonaccrual status are reported as impaired loans and included in the tablesTroubled Debt Restructurings section below. Acquired loans restructured after acquisition are not considered or reported as TDRs if the loans evidenced credit deterioration as of the date of acquisition and are accounted for in pools.

4540

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 




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

As of June 30, 2014
As of March 31, 2015As of March 31, 2015
Originated LoansOriginated Loans  Unpaid   AverageOriginated Loans  Unpaid   Average
 Recorded Principal Related Recorded Recorded Principal Related Recorded
(In thousands)(In thousands)Investment Balance Allowance Investment(In thousands)Investment Balance Allowance Investment
Impaired loans with no related allowanceImpaired loans with no related allowance       Impaired loans with no related allowance       
CommercialCommercial       Commercial       
C&I$2,538
 $4,980
 $
 $3,543
C&I$28,513
 $35,307
 $
 $25,006
CRE20,635
 26,026
 
 22,249
CRE9,343
 15,478
 
 9,634
Construction53
 76
 
 256
Construction
 
 
 
ConsumerConsumer       Consumer       
Installment4,510
 4,620
 
 4,636
Installment1,846
 2,428
 
 1,881
Home equity line1,041
 1,047
 
 1,067
Home equity line977
 1,222
 
 987
Credit card34
 34
 
 48
Credit card21
 21
 
 23
Residential mortgages12,729
 15,748
 
 12,828
Residential mortgages12,424
 15,125
 
 12,488
SubtotalSubtotal41,540
 52,531
 
 44,627
Subtotal53,124
 69,581
 
 50,019
Impaired loans with a related allowanceImpaired loans with a related allowance       Impaired loans with a related allowance       
CommercialCommercial       Commercial       
C&I7,866
 11,562
 5,092
 8,071
C&I7,279
 7,350
 10,042
 5,984
CRE4,849
 4,851
 112
 829
CRE5,657
 5,664
 317
 5,668
Construction
 
 9
 
Construction
 
 
 
ConsumerConsumer       Consumer       
Installment19,884
 20,673
 1,008
 20,498
Installment25,036
 25,100
 1,005
 24,181
Home equity line5,915
 6,145
 201
 5,995
Home equity line6,655
 6,655
 254
 6,715
Credit card945
 945
 361
 1,019
Credit card794
 794
 263
 823
Residential mortgages13,568
 13,678
 1,019
 13,612
Residential mortgages12,398
 12,487
 1,416
 12,414
SubtotalSubtotal53,027
 57,854
 7,802
 50,024
Subtotal57,819
 58,050
 13,297
 55,785
Total impaired loans$94,567
 $110,385
 $7,802
 $94,651
Total impaired loans$110,943
 $127,631
 $13,297
 $105,804
                
Note 1: These tables exclude loans fully charged off.
Note 2: The differences between the recorded investment and unpaid principal balance amounts representsrepresent partial charge offs.




4641

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



As of December 31, 2013
As of December 31, 2014As of December 31, 2014
Originated LoansOriginated Loans  Unpaid   AverageOriginated Loans  Unpaid   Average
 Recorded Principal Related Recorded Recorded Principal Related Recorded
(In thousands)(In thousands)Investment Balance Allowance Investment(In thousands)Investment Balance Allowance Investment
Impaired loans with no related allowanceImpaired loans with no related allowance       Impaired loans with no related allowance       
CommercialCommercial       Commercial       
C&I$2,503
 $6,679
 $
 $7,256
C&I$11,451
 $18,207
 $
 $14,193
CRE17,871
 23,709
 
 18,639
CRE16,874
 22,696
 
 18,027
Construction906
 1,179
 
 1,035
Construction
 
 
 
ConsumerConsumer       Consumer       
Installment2,813
 3,978
 
 3,338
Installment4,460
 4,584
 
 4,272
Home equity line1,018
 1,347
 
��1,079
Home equity line1,723
 1,754
 
 1,792
Credit card49
 49
 
 91
Credit card16
 16
 
 32
Residential mortgages10,250
 12,778
 
 10,258
Residential mortgages12,204
 15,119
 
 12,425
SubtotalSubtotal35,410
 49,719
 
 41,696
Subtotal46,728
 62,376
 
 50,741
Impaired loans with a related allowanceImpaired loans with a related allowance       Impaired loans with a related allowance       
CommercialCommercial       Commercial       
C&I5,551
 7,428
 3,235
 5,009
C&I308
 344
 72
 326
CRE2,744
 2,870
 229
 2,836
CRE6,426
 6,440
 2,914
 4,497
Construction
 
 
 
Construction
 
 
 
ConsumerConsumer       Consumer       
Installment24,472
 24,558
 1,014
 24,985
Installment20,445
 21,024
 1,178
 19,513
Home equity line5,707
 5,707
 223
 5,874
Home equity line5,656
 5,875
 207
 5,944
Credit card1,064
 1,064
 312
 1,238
Credit card838
 838
 296
 966
Residential mortgages12,816
 12,898
 1,133
 12,064
Residential mortgages13,047
 13,158
 1,283
 13,121
SubtotalSubtotal52,354
 54,525
 6,146
 52,006
Subtotal46,720
 47,679
 5,950
 44,367
Total impaired loans$87,764
 $104,244
 $6,146
 $93,702
Total impaired loans$93,448
 $110,055
 $5,950
 $95,108
                
Note 1: These tables exclude loans fully charged off.
Note 2: The differences between the recorded investment and unpaid principal balance amounts representsrepresent partial charge offs.


4742

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



As of June 30, 2013
As of March 31, 2014As of March 31, 2014
Originated LoansOriginated Loans  Unpaid   AverageOriginated Loans  Unpaid   Average
 Recorded Principal Related Recorded Recorded Principal Related Recorded
(In thousands)(In thousands)Investment Balance Allowance Investment(In thousands)Investment Balance Allowance Investment
Impaired loans with no related allowanceImpaired loans with no related allowance       Impaired loans with no related allowance       
CommercialCommercial       Commercial       
C&I$1,031
 $3,423
 $
 $3,075
C&I$2,776
 $5,078
 $
 $4,690
CRE17,021
 23,892
 
 19,143
CRE21,777
 20,050
 
 20,196
Construction1,005
 1,282
 
 2,294
Construction404
 2,777
 
 2,943
ConsumerConsumer       Consumer       
Installment3,464
 4,882
 
 3,838
Installment2,498
 3,502
 
 2,579
Home equity line1,158
 1,481
 
 1,217
Home equity line997
 1,309
 
 1,004
Credit card57
 57
 
 76
Credit card42
 42
 
 50
Residential mortgages10,682
 13,294
 
 10,934
Residential mortgages12,137
 14,845
 
 12,201
SubtotalSubtotal34,418
 48,311
 
 40,577
Subtotal40,631
 47,603
 
 43,663
Impaired loans with a related allowanceImpaired loans with a related allowance       Impaired loans with a related allowance       
CommercialCommercial       Commercial       
C&I8,408
 11,553
 3,169
 10,469
C&I4,367
 9,022
 2,866
 7,406
CRE7,379
 7,416
 1,010
 7,558
CRE9,799
 9,878
 2,918
 9,864
Construction
 
 
 
Construction
 
 
 
ConsumerConsumer       Consumer       
Installment26,676
 26,772
 557
 27,032
Installment23,320
 23,409
 1,006
 23,548
Home equity line5,661
 5,661
 197
 5,784
Home equity line5,934
 5,934
 223
 5,891
Credit card1,205
 1,205
 255
 1,310
Credit card992
 992
 307
 1,025
Residential mortgages12,539
 12,611
 1,280
 12,578
Residential mortgages14,061
 14,161
 1,241
 14,067
SubtotalSubtotal61,868
 65,218
 6,468
 64,731
Subtotal58,473
 63,396
 8,561
 61,801
Total impaired loans$96,286
 $113,529
 $6,468
 $105,308
Total impaired loans$99,104
 $110,999
 $8,561
 $105,464
                
Note 1: These tables exclude loans fully charged off.
Note 2: The differences between the recorded investment and unpaid principal balance amounts representsrepresent partial charge offs.

Troubled Debt Restructurings
In certain circumstances, the Corporation may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near term. In most cases the modification is either a concessionary reduction in interest rate, extension of the maturity date or modification of the adjustable rate provisions of the loan that would otherwise not be considered; however, forgiveness of principal is rarely granted. Concessionary modifications are classified as TDRs unless the modification is short-term, typically less than 90 days. TDRs accrue interest if the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms for a minimum of six consecutive payment cycles after the restructuring date. Acquired loans restructured after acquisition are not considered TDRs if the loans evidenced credit deterioration as of the Acquisition Date and are accounted for in pools.
 
The substantial majority of the Corporation's residential mortgage TDRs involve reducing the client's loan payment through an interest rate reduction for a set period of time based on the borrower's ability to service the modified loan payment. Modifications of mortgages retained in portfolio are handled using

4843

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



proprietary modification guidelines, or the FDIC's Modification Program for residential first mortgages covered by loss share agreements (agreements between the Bank and the FDIC that afford the Bank significant protection against future losses). The Corporation participates in the U.S. Treasury's Home Affordable Modification Program for originated mortgages sold to and serviced for FNMA and FHLMC.

Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial real estate and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period. The Corporation has modified certain loans according to provisions in loss share agreements. Losses associated with modifications on these loans, including the economic impact of interest rate reductions, are generally eligible for reimbursement under the loss share agreements.


4944

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



The following tables provide the number of loans modified in a TDR and the recorded investment and unpaid principal balance by loan portfolio as of June 30, 2014March 31, 2015, December 31, 20132014, and June 30, 2013March 31, 2014.
 As of June 30, 2014 As of March 31, 2015
(Dollars in thousands)(Dollars in thousands)Number of Loans Recorded Investment Unpaid Principal Balance(Dollars in thousands)Number of Loans Recorded Investment Unpaid Principal Balance
Originated loansOriginated loans     Originated loans     
Commercial     Commercial     
 C&I41
 $7,062
 $13,200
 C&I47
 $16,923
 $23,666
 CRE60
 21,407
 25,567
 CRE64
 12,076
 17,325
 Construction31
 53
 76
 Construction31
 
 
 Total originated commercial132
 28,522
 38,843
 Total originated commercial142
 28,999
 40,991
Consumer     Consumer     
 Installment1,350
 24,394
 25,293
 Installment1,186
 26,882
 27,528
 Home equity lines260
 6,956
 7,192
 Home equity lines276
 7,632
 7,877
 Credit card253
 979
 979
 Credit card230
 815
 815
 Residential mortgages326
 26,297
 29,426
 Residential mortgages316
 24,822
 27,612
 Total originated consumer2,189
 58,626
 62,890
 Total originated consumer2,008
 60,151
 63,832
Total originated loans Total originated loans2,321
 $87,148
 $101,733
Total originated loans2,150
 $89,150
 $104,823
Acquired loansAcquired loans     Acquired loans     
Commercial     Commercial     
 C&I1
 $4
 $4
 C&I1
 $2
 $3
 CRE1
 1,661
 1,661
 CRE3
 2,453
 2,635
 Total acquired commercial2
 1,665
 1,665
 Total acquired commercial4
 2,455
 2,638
Consumer     Consumer     
 Installment30
 979
 1,032
 Installment51
 1,195
 1,281
 Home equity lines90
 4,710
 4,750
 Home equity lines162
 7,310
 7,370
 Residential mortgages21
 1,461
 1,635
 Residential mortgages30
 2,186
 2,403
 Total acquired consumer141
 7,150
 7,417
 Total acquired consumer243
 10,691
 11,054
Total acquired loans Total acquired loans143
 $8,815
 $9,082
Total acquired loans247
 $13,146
 $13,692
Covered loans     
FDIC acquired loansFDIC acquired loans     
Commercial     Commercial     
 C&I6
 $177
 $1,070
 C&I8
 $
 $1,355
 CRE24
 37,385
 54,480
 CRE24
 23,895
 39,596
 Construction10
 2,605
 21,331
 Construction9
 346
 9,552
 Total covered commercial40
 40,167
 76,881
 Total FDIC acquired commercial41
 24,241
 50,503
Consumer     Consumer     
 Home equity lines62
 8,489
 8,489
 Home equity lines70
 8,909
 8,914
 Residential mortgages2
 337
 337
 Residential mortgages1
 185
 185
 Total covered consumer64
 8,826
 8,826
 Total FDIC acquired consumer71
 9,094
 9,099
Total covered loans104
 $48,993
 $85,707
Total FDIC acquired loans Total FDIC acquired loans112
 $33,335
 $59,602
Total loansTotal loans     Total loans     
Commercial     Commercial     
 C&I48
 $7,243
 $14,274
 C&I56
 $16,925
 $25,024
 CRE85
 60,453
 81,708
 CRE91
 38,424
 59,556
 Construction41
 2,658
 21,407
 Construction40
 346
 9,552
 Total commercial174
 70,354
 117,389
 Total commercial187
 55,695
 94,132
Consumer     Consumer     
 Installment1,380
 25,373
 26,325
 Installment1,237
 28,077
 28,809
 Home equity lines412
 20,155
 20,431
 Home equity lines508
 23,851
 24,161
 Credit card253
 979
 979
 Credit card230
 815
 815
 Residential mortgages349
 28,095
 31,398
 Residential mortgages347
 27,193
 30,200
 Total consumer2,394
 74,602
 79,133
 Total consumer2,322
 79,936
 83,985
Total loans Total loans2,568
 $144,956
 $196,522
Total loans2,509
 $135,631
 $178,117
            
Note 1: The differences between the recorded investment and unpaid principal balance amounts represents partial charge offs.

5045

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 




 As of December 31, 2013 As of December 31, 2014
(Dollars in thousands)(Dollars in thousands)Number of Loans Recorded Investment Unpaid Principal Balance(Dollars in thousands)Number of Loans Recorded Investment Unpaid Principal Balance
Originated loansOriginated loans     Originated loans     
Commercial     Commercial     
 C&I35
 $4,449
 $7,660
 C&I41
 $7,123
 $13,887
 CRE52
 15,932
 20,569
 CRE67
 17,607
 22,645
 Construction30
 905
 1,179
 Construction31
 
 
 Total originated commercial117
 21,286
 29,408
 Total originated commercial139
 24,730
 36,532
Consumer     Consumer     
 Installment1,553
 27,285
 28,536
 Installment1,205
 24,905
 25,608
 Home equity lines231
 6,725
 7,054
 Home equity lines270
 7,379
 7,629
 Credit card307
 1,113
 1,113
 Credit card238
 854
 854
 Residential mortgages301
 23,067
 25,676
 Residential mortgages315
 25,251
 28,277
 Total originated consumer2,392
 58,190
 62,379
 Total originated consumer2,028
 58,389
 62,368
Total originated loans Total originated loans2,509
 $79,476
 $91,787
Total originated loans2,167
 $83,119
 $98,900
Acquired loansAcquired loans     Acquired loans     
Commercial     Commercial     
 C&I1
 6
 5
 C&I2
 18
 19
 CRE1
 1,730
 1,730
 CRE3
 2,542
 2,595
 Total acquired commercial2
 1,736
 1,735
 Total acquired commercial5
 2,560
 2,614
Consumer     Consumer     
 Installment12
 505
 542
 Installment40
 975
 1,054
 Home equity lines8
 245
 270
 Home equity lines145
 6,932
 6,983
 Residential mortgages7
 431
 502
 Residential mortgages26
 1,633
 1,823
 Total acquired consumer27
 1,181
 1,314
 Total acquired consumer211
 9,540
 9,860
Total acquired loans Total acquired loans29
 $2,917
 $3,049
Total acquired loans216
 $12,100
 $12,474
Covered loans     
FDIC acquired loansFDIC acquired loans     
Commercial     Commercial     
 C&I4
 $1,104
 $2,331
 C&I8
 $177
 $1,589
 CRE24
 39,995
 57,008
 CRE24
 25,499
 42,226
 Construction10
 4,144
 24,547
 Construction9
 339
 9,552
 Total covered commercial38
 45,243
 83,886
 Total FDIC acquired commercial41
 26,015
 53,367
Consumer     Consumer     
 Home equity lines47
 5,401
 5,421
 Home equity lines68
 8,890
 8,901
  Residential Mortgages1
 150
 150
 Residential Mortgages2
 334
 334
 Total covered consumer48
 5,551
 5,571
 Total FDIC acquired consumer70
 9,224
 9,235
Total covered loans86
 $50,794
 $89,457
Total FDIC acquired loans Total FDIC acquired loans111
 $35,239
 $62,602
Total loansTotal loans     Total loans     
Commercial     Commercial     
 C&I40
 $5,559
 $9,996
 C&I51
 $7,318
 $15,495
 CRE77
 57,657
 79,307
 CRE94
 45,648
 67,466
 Construction40
 5,049
 25,726
 Construction40
 339
 9,552
 Total commercial157
 68,265
 115,029
 Total commercial185
 53,305
 92,513
Consumer     Consumer     
 Installment1,565
 27,790
 29,078
 Installment1,245
 25,880
 26,662
 Home equity lines286
 12,371
 12,745
 Home equity lines483
 23,201
 23,513
 Credit card307
 1,113
 1,113
 Credit card238
 854
 854
 Residential mortgages309
 23,648
 26,328
 Residential mortgages343
 27,218
 30,434
 Total consumer2,467
 64,922
 69,264
 Total consumer2,309
 77,153
 81,463
Total loans Total loans2,624
 $133,187
 $184,293
Total loans2,494
 $130,458
 $173,976
            
Note 1: The differences between the recorded investment and unpaid principal balance amounts representsrepresent partial charge offs.

5146

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



    
 As of June 30, 2013 As of March 31, 2014
(Dollars in thousands)(Dollars in thousands)Number of Loans Recorded Investment Unpaid Principal Balance(Dollars in thousands)Number of Loans Recorded Investment Unpaid Principal Balance
Originated loansOriginated loans     Originated loans     
Commercial     Commercial     
 C&I31
 $7,806
 $11,489
 C&I40
 $5,588
 $12,546
 CRE47
 17,361
 21,742
 CRE57
 16,432
 17,079
 Construction31
 1,005
 1,282
 Construction32
 2,769
 2,777
 Total originated commercial109
 26,172
 34,513
 Total originated commercial129
 24,789
 32,402
Consumer     Consumer     
 Installment1,757
 30,140
 31,654
 Installment1,434
 25,818
 26,911
 Home equity lines239
 6,819
 7,142
 Home equity lines244
 6,931
 7,243
 Credit card329
 1,262
 1,262
 Credit card278
 1,034
 1,034
 Residential mortgages293
 23,221
 25,905
 Residential mortgages320
 26,199
 29,006
 Total originated consumer2,618
 61,442
 65,963
 Total originated consumer2,276
 59,982
 64,194
Total originated loans Total originated loans2,727
 $87,614
 $100,476
Total originated loans2,405
 $84,771
 $96,596
Covered loans     
Acquired loansAcquired loans     
Commercial     Commercial     
 C&I3
 $1,635
 $1,880
 C&I1
 5
 5
 CRE21
 46,314
 57,021
 CRE1
 1,695
 1,687
 Construction10
 6,082
 26,155
 Total acquired commercial2
 1,700
 1,692
 Total covered commercial34
 54,031
 85,056
Consumer     
Consumer      Installment23
 797
 828
 Home equity lines42
 5,562
 5,590
 Home equity lines40
 1,926
 1,953
Total covered loans76
 $59,593
 $90,646
 Residential mortgages11
 758
 864
 Total acquired consumer74
 3,481
 3,645
Total acquired loans Total acquired loans76
 $5,181
 $5,337
FDIC acquired loansFDIC acquired loans     
Commercial     
 C&I4
 $677
 $2,232
 CRE25
 39,939
 56,485
 Construction10
 2,560
 21,340
 Total FDIC acquired commercial39
 43,176
 80,057
Consumer     
 Home equity lines52
 6,269
 6,269
 Residential mortgages2
 339
 339
 Total FDIC acquired consumer54
 6,608
 6,608
Total FDIC acquired loans Total FDIC acquired loans93
 $49,784
 $86,665
Total loansTotal loans     Total loans     
Commercial     Commercial     
 C&I34
 $9,441
 $13,369
 C&I45
 $6,270
 $14,783
 CRE68
 63,675
 78,763
 CRE83
 58,066
 75,251
 Construction41
 7,087
 27,437
 Construction42
 5,329
 24,117
 Total commercial143
 80,203
 119,569
 Total commercial170
 69,665
 114,151
Consumer     Consumer     
 Installment1,757
 30,140
 31,654
 Installment1,457
 26,615
 27,739
 Home equity lines281
 12,381
 12,732
 Home equity lines336
 15,126
 15,465
 Credit card329
 1,262
 1,262
 Credit card278
 1,034
 1,034
 Residential mortgages293
 23,221
 25,905
 Residential mortgages333
 27,296
 30,209
 Total consumer2,660
 67,004
 71,553
 Total consumer2,404
 70,071
 74,447
Total loans Total loans2,803
 $147,207
 $191,122
Total loans2,574
 $139,736
 $188,598
            
Note 1: The differences between the recorded investment and unpaid principal balance amounts represents partial charge offs.


47

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the three and six months ended June 30, 2014March 31, 2015 and 20132014 were not materially different. Post-modification balances may include capitalization of unpaid accrued interest and fees associated with the modification as well as forgiveness of principal. Loans modified as TDRs during the three and six months ended June 30, 2014March 31, 2015 and 20132014 did not involve the forgiveness of principal,principal; accordingly, the Corporation did not record a charge-off at the modification date. Additionally, capitalization of any unpaid accrued interest and fees assessed to loans modified in the three and six months ended June 30, 2014March 31, 2015 and 20132014 were not material to the accompanying consolidated financial statements. Specific allowances for loan losses are established for loans whose terms have been modified in a TDR. Specific reserve allocations are generally assessed prior to loans being modified in a TDR, as most of these loans migrate from the Corporation's internal watch list and have been specifically allocated for as part of the Corporation's normal loan loss

52

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



provisioning methodology. At June 30, 2014March 31, 2015, December 31, 2014, and March 31, 2014, the Corporation had $1.66.1 million, $0.2 million, and $0.4 million, respectively, in commitments to lend additional funds to debtors owing receivables whose terms have been modified in a TDR.


5348

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



The following tables provide a summary of the delinquency status of TDRs along with the specific allowance for loan loss, by loan type, as of June 30, 2014March 31, 2015, December 31, 20132014, and June 30, 2013March 31, 2014, including TDRs that continue to accrue interest and TDRs included in nonperforming assets.
As of June 30, 2014
As of March 31, 2015As of March 31, 2015
Accruing TDRs Nonaccruing TDRs Total TotalAccruing TDRs Nonaccruing TDRs Total Total
(In thousands)Current Delinquent Total Current Delinquent Total TDRs AllowanceCurrent Delinquent Total Current Delinquent Total TDRs Allowance
Originated loans    
              
          
Commercial    
     
 
      
     
 
  
C&I$1,659
 $
 $1,659
 $3,375
 $2,028
 $5,403
 $7,062
 $2,443
$16,558
 $
 $16,558
 $
 $365
 $365
 $16,923
 $124
CRE15,387
 1,529
 16,916
 1,419
 3,072
 4,491
 21,407
 93
6,031
 1,493
 7,524
 3,724
 828
 4,552
 12,076
 71
Construction
 
 
 53
 
 53
 53
 9

 
 
 
 
 
 
 
Total originated commercial17,046
 1,529
 18,575
 4,847
 5,100
 9,947
 28,522
 2,545
22,589
 1,493
 24,082
 3,724
 1,193
 4,917
 28,999
 195
Consumer                              
Installment21,404
 694
 22,098
 2,074
 222
 2,296
 24,394
 1,008
24,701
 409
 25,110
 1,528
 244
 1,772
 26,882
 1,005
Home equity lines5,767
 188
 5,955
 1,001
 
 1,001
 6,956
 201
6,680
 113
 6,793
 811
 28
 839
 7,632
 254
Credit card857
 86
 943
 
 36
 36
 979
 361
721
 77
 798
 
 17
 17
 815
 263
Residential mortgages15,256
 2,349
 17,605
 5,335
 3,357
 8,692
 26,297
 1,019
14,299
 2,286
 16,585
 5,020
 3,217
 8,237
 24,822
 1,416
Total originated consumer43,284
 3,317
 46,601
 8,410
 3,615
 12,025
 58,626
 2,589
46,401
 2,885
 49,286
 7,359
 3,506
 10,865
 60,151
 2,938
Total originated TDRs$60,330
 $4,846
 $65,176
 $13,257
 $8,715
 $21,972
 $87,148
 $5,134
$68,990
 $4,378
 $73,368
 $11,083
 $4,699
 $15,782
 $89,150
 $3,133
Acquired loans                              
Commercial                              
C&I
 
 
 4
 
 4
 4
 4

 
 
 2
 
 2
 2
 2
CRE1,661
 
 1,661
 
 
 
 1,661
 182

 
 
 954
 1,499
 2,453
 2,453
 135
Total acquired commercial1,661
 
 1,661
 4
 
 4
 1,665
 186

 
 
 956
 1,499
 2,455
 2,455
 137
Consumer                              
Installment702
 250
 952
 27
 
 27
 979
 14
1,139
 33
 1,172
 23
 
 23
 1,195
 48
Home equity lines4,026
 576
 4,602
 108
 
 108
 4,710
 
6,610
 564
 7,174
 136
 
 136
 7,310
 
Residential mortgages670
 
 670
 764
 27
 791
 1,461
 
1,335
 
 1,335
 616
 235
 851
 2,186
 
Total acquired consumer5,398
 826
 6,224
 899
 27
 926
 7,150
 14
9,084
 597
 9,681
 775
 235
 1,010
 10,691
 48
Total acquired TDRs$7,059
 $826
 $7,885
 $903
 $27
 $930
 $8,815
 $200
$9,084
 $597
 $9,681
 $1,731
 $1,734
 $3,465
 $13,146
 $185
Covered loans               
FDIC acquired loans               
Commercial                              
C&I$
 $177
 $177
 $
 $
 $
 $177
 $
$
 $
 $
 $
 $
 $
 $
 $
CRE4,909
 32,476
 37,385
 
 
 
 37,385
 1,129

 23,895
 23,895
 
 
 
 23,895
 2,026
Construction666
 1,939
 2,605
 
 
 
 2,605
 68

 346
 346
 
 
 
 346
 293
Total covered commercial5,575
 34,592
 40,167
 
 
 
 40,167
 1,197
Total FDIC acquired commercial
 24,241
 24,241
 
 
 
 24,241
 2,319
Consumer                              
Home equity lines8,038
 115
 8,153
 336
 
 336
 8,489
 
7,703
 939
 8,642
 267
 
 267
 8,909
 24
Residential mortgages337
 
 337
 
 
 
 337
 
185
 
 185
 
 
 
 185
 
Total covered consumer8,375
 115
 8,490
 336
 
 336
 8,826
 
Total covered TDRs$13,950
 $34,707
 $48,657
 $336
 $
 $336
 $48,993
 $1,197
Total FDIC acquired consumer7,888
 939
 8,827
 267
 
 267
 9,094
 24
Total FDIC acquired TDRs$7,888
 $25,180
 $33,068
 $267
 $
 $267
 $33,335
 $2,343
Total loans                              
Commercial                              
C&I$1,659
 $177
 $1,836
 $3,379
 $2,028
 $5,407
 $7,243
 $2,447
$16,558
 $
 $16,558
 $2
 $365
 $367
 $16,925
 $126
CRE21,957
 34,005
 55,962
 1,419
 3,072
 4,491
 60,453
 1,404
6,031
 25,388
 31,419
 4,678
 2,327
 7,005
 38,424
 2,232
Construction666
 1,939
 2,605
 53
 
 53
 2,658
 77

 346
 346
 
 
 
 346
 293
Total commercial24,282
 36,121
 60,403
 4,851
 5,100
 9,951
 70,354
 3,928
22,589
 25,734
 48,323
 4,680
 2,692
 7,372
 55,695
 2,651
Consumer                              
Installment22,106
 944
 23,050
 2,101
 222
 2,323
 25,373
 1,022
25,840
 442
 26,282
 1,551
 244
 1,795
 28,077
 1,053
Home equity lines17,831
 879
 18,710
 1,445
 
 1,445
 20,155
 201
20,993
 1,616
 22,609
 1,214
 28
 1,242
 23,851
 278
Credit card857
 86
 943
 
 36
 36
 979
 361
721
 77
 798
 
 17
 17
 815
 263
Residential mortgages16,263
 2,349
 18,612
 6,099
 3,384
 9,483
 28,095
 1,019
15,819
 2,286
 18,105
 5,636
 3,452
 9,088
 27,193
 1,416
Total consumer57,057
 4,258
 61,315
 9,645
 3,642
 13,287
 74,602
 2,603
63,373
 4,421
 67,794
 8,401
 3,741
 12,142
 79,936
 3,010
Total TDRs$81,339
 $40,379
 $121,718
 $14,496
 $8,742
 $23,238
 $144,956
 $6,531
$85,962
 $30,155
 $116,117
 $13,081
 $6,433
 $19,514
 $135,631
 $5,661
                              


5449

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



As of December 31, 2013
As of December 31, 2014As of December 31, 2014
Accruing TDRs Nonaccruing TDRs Total TotalAccruing TDRs Nonaccruing TDRs Total Total
(In thousands)Current Delinquent Total Current Delinquent Total TDRs AllowanceCurrent Delinquent Total Current Delinquent Total TDRs Allowance
Originated loans                              
Commercial                              
C&I$1,438
 $879
 $2,317
 $177
 $1,955
 $2,132
 $4,449
 $665
$6,740
 $
 $6,740
 $
 $383
 $383
 $7,123
 $72
CRE10,442
 382
 10,824
 1,208
 3,900
 5,108
 15,932
 32
12,885
 952
 13,837
 394
 3,376
 3,770
 17,607
 159
Construction848
 
 848
 
 57
 57
 905
 

 
 
 
 
 
 
 
Total originated commercial12,728
 1,261
 13,989
 1,385
 5,912
 7,297
 21,286
 697
19,625
 952
 20,577
 394
 3,759
 4,153
 24,730
 231
Consumer                              
Installment23,342
 1,238
 24,580
 2,483
 222
 2,705
 27,285
 1,014
22,254
 726
 22,980
 1,663
 262
 1,925
 24,905
 1,178
Home equity lines5,313
 194
 5,507
 1,206
 12
 1,218
 6,725
 223
6,239
 269
 6,508
 871
 
 871
 7,379
 207
Credit card1,046
 66
 1,112
 
 1
 1
 1,113
 312
775
 60
 835
 15
 4
 19
 854
 296
Residential mortgages12,276
 3,327
 15,603
 4,360
 3,104
 7,464
 23,067
 1,133
13,440
 3,538
 16,978
 5,006
 3,267
 8,273
 25,251
 1,283
Total originated consumer41,977
 4,825
 46,802
 8,049
 3,339
 11,388
 58,190
 2,682
42,708
 4,593
 47,301
 7,555
 3,533
 11,088
 58,389
 2,964
Total originated TDRs$54,705
 $6,086
 $60,791
 $9,434
 $9,251
 $18,685
 $79,476
 $3,379
$62,333
 $5,545
 $67,878
 $7,949
 $7,292
 $15,241
 $83,119
 $3,195
Acquired loans                              
Commercial                              
C&I$
 $
 $
 $6
 $
 $6
 $6
 $
$15
 $
 $15
 $3
 $
 $3
 $18
 $18
CRE1,730
 
 1,730
 
 
 
 1,730
 

 
 
 978
 1,564
 2,542
 2,542
 134
Total acquired commercial1,730
 
 1,730
 6
 
 6
 1,736
 
15
 
 15
 981
 1,564
 2,545
 2,560
 152
Consumer                              
Installment369
 136
 505
 
 
 
 505
 
841
 87
 928
 24
 23
 47
 975
 65
Home equity lines182
 
 182
 63
 
 63
 245
 
6,186
 607
 6,793
 139
 
 139
 6,932
 9
Residential mortgages245
 
 245
 32
 154
 186
 431
 
868
 
 868
 470
 295
 765
 1,633
 2
Total acquired consumer796
 136
 932
 95
 154
 249
 1,181
 
7,895
 694
 8,589
 633
 318
 951
 9,540
 76
Total acquired TDRs$2,526
 $136
 $2,662
 $101
 $154
 $255
 $2,917
 $
$7,910
 $694
 $8,604
 $1,614
 $1,882
 $3,496
 $12,100
 $228
Covered loans               
FDIC acquired loans               
Commercial                              
C&I$362
 $742
 $1,104
 $
 $
 $
 $1,104
 $
$
 $177
 $177
 $
 $
 $
 $177
 $
CRE5,259
 34,736
 39,995
 
 
 
 39,995
 3,022
5,123
 20,376
 25,499
 
 
 
 25,499
 2,879
Construction698
 3,446
 4,144
 
 
 
 4,144
 800
339
 
 339
��
 
 
 339
 295
Total covered commercial6,319
 38,924
 45,243
 
 
 
 45,243
 3,822
Total FDIC acquired commercial5,462
 20,553
 26,015
 
 
 
 26,015
 3,174
Consumer                              
Home equity lines5,377
 24
 5,401
 
 
 
 5,401
 
8,561
 
 8,561
 329
 
 329
 8,890
 27
Residential mortgages150
 
 150
 
 
 
 150
 
334
 
 334
 
 
 
 334
 21
Total covered consumer5,527
 24
 5,551
 
 
 
 5,551
 
Total covered TDRs$11,846
 $38,948
 $50,794
 $
 $
 $
 $50,794
 $3,822
Total FDIC acquired consumer8,895
 
 8,895
 329
 
 329
 9,224
 48
Total FDIC acquired TDRs$14,357
 $20,553
 $34,910
 $329
 $
 $329
 $35,239
 $3,222
               
Commercial                              
C&I$1,800
 $1,621
 $3,421
 $183
 $1,955
 $2,138
 $5,559
 $665
$6,755
 $177
 $6,932
 $3
 $383
 $386
 $7,318
 $90
CRE17,431
 35,118
 52,549
 1,208
 3,900
 5,108
 57,657
 3,054
18,008
 21,328
 39,336
 1,372
 4,940
 6,312
 45,648
 3,172
Construction1,546
 3,446
 4,992
 
 57
 57
 5,049
 800
339
 
 339
 
 
 
 339
 295
Total commercial20,777
 40,185
 60,962
 1,391
 5,912
 7,303
 68,265
 4,519
25,102
 21,505
 46,607
 1,375
 5,323
 6,698
 53,305
 3,557
Consumer                              
Installment23,711
 1,374
 25,085
 2,483
 222
 2,705
 27,790
 1,014
23,095
 813
 23,908
 1,687
 285
 1,972
 25,880
 1,243
Home equity lines10,872
 218
 11,090
 1,269
 12
 1,281
 12,371
 223
20,986
 876
 21,862
 1,339
 
 1,339
 23,201
 243
Credit card1,046
 66
 1,112
 
 1
 1
 1,113
 312
775
 60
 835
 15
 4
 19
 854
 296
Residential mortgages12,671
 3,327
 15,998
 4,392
 3,258
 7,650
 23,648
 1,133
14,642
 3,538
 18,180
 5,476
 3,562
 9,038
 27,218
 1,306
Total consumer48,300
 4,985
 53,285
 8,144
 3,493
 11,637
 64,922
 2,682
59,498
 5,287
 64,785
 8,517
 3,851
 12,368
 77,153
 3,088
Total TDRs$69,077
 $45,170
 $114,247
 $9,535
 $9,405
 $18,940
 $133,187
 $7,201
$84,600
 $26,792
 $111,392
 $9,892
 $9,174
 $19,066
 $130,458
 $6,645
                              


5550

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



As of June 30, 2013
As of March 31, 2014As of March 31, 2014
Accruing TDRs Nonaccruing TDRs Total TotalAccruing TDRs Nonaccruing TDRs Total Total
(In thousands)Current Delinquent Total Current Delinquent Total TDRs AllowanceCurrent Delinquent Total Current Delinquent Total TDRs Allowance
Originated loans                              
Commercial                              
C&I$1,021
 $
 $1,021
 $6,248
 $537
 $6,785
 $7,806
 $2,569
$1,779
 $
 $1,779
 $541
 $3,268
 $3,809
 $5,588
 $2,265
CRE11,200
 
 11,200
 1,726
 4,435
 6,161
 17,361
 510
9,254
 1,884
 11,138
 2,124
 3,170
 5,294
 16,432
 37
Construction404
 537
 941
 64
 
 64
 1,005
 
2,363
 350
 2,713
 56
 
 56
 2,769
 
Total originated commercial12,625
 537
 13,162
 8,038
 4,972
 13,010
 26,172
 3,079
13,396
 2,234
 15,630
 2,721
 6,438
 9,159
 24,789
 2,302
Consumer                              
Installment25,800
 913
 26,713
 3,227
 200
 3,427
 30,140
 557
22,757
 480
 23,237
 2,352
 229
 2,581
 25,818
 1,006
Home equity lines5,321
 144
 5,465
 1,354
 
 1,354
 6,819
 197
5,571
 150
 5,721
 1,210
 
 1,210
 6,931
 223
Credit card1,222
 40
 1,262
 
 
 
 1,262
 255
930
 95
 1,025
 
 9
 9
 1,034
 307
Residential mortgages13,514
 2,147
 15,661
 4,518
 3,042
 7,560
 23,221
 1,280
14,749
 2,876
 17,625
 4,968
 3,606
 8,574
 26,199
 1,241
Total originated consumer45,857
 3,244
 49,101
 9,099
 3,242
 12,341
 61,442
 2,289
44,007
 3,601
 47,608
 8,530
 3,844
 12,374
 59,982
 2,777
Total originated TDRs$58,482
 $3,781
 $62,263
 $17,137
 $8,214
 $25,351
 $87,614
 $5,368
$57,403
 $5,835
 $63,238
 $11,251
 $10,282
 $21,533
 $84,771
 $5,079
Covered loans               
Acquired loans               
Commercial               
C&I$
 $
 $
 $5
 $
 $5
 $5
 $
CRE1,695
 
 1,695
 
 
 
 1,695
 
Total acquired commercial1,695
 
 1,695
 5
 
 5
 1,700
 
Consumer               
Installment707
 77
 784
 
 13
 13
 797
 
Home equity lines1,322
 494
 1,816
 110
 
 110
 1,926
 
Residential mortgages758
 
 758
 
 
 
 758
 
Total acquired consumer2,787
 571
 3,358
 110
 13
 123
 3,481
 
Total acquired TDRs$4,482
 $571
 $5,053
 $115
 $13
 $128
 $5,181
 $
FDIC acquired loans               
Commercial                              
C&I$897
 $738
 $1,635
 $
 $
 $
 $1,635
 $518
$300
 $377
 $677
 $
 $
 $
 $677
 $12
CRE5,269
 41,045
 46,314
 
 
 
 46,314
 3,749
5,035
 34,904
 39,939
 
 
 
 39,939
 3,915
Construction1,542
 4,540
 6,082
 
 
 
 6,082
 900
682
 1,878
 2,560
 
 
 
 2,560
 68
Total covered commercial7,708
 46,323
 54,031
 
 
 
 54,031
 5,167
Total FDIC acquired commercial6,017
 37,159
 43,176
 
 
 
 43,176
 3,995
Consumer                              
Home equity lines5,065
 497
 5,562
 
 
 
 5,562
 
5,793
 140
 5,933
 336
 
 336
 6,269
 
Total covered TDRs$12,773
 $46,820
 $59,593
 $
 $
 $
 $59,593
 $5,167
Residential mortgages339
 
 339
 
 
 
 339
 
Total FDIC acquired consumer6,132
 140
 6,272
 336
 
 336
 6,608
 
Total FDIC acquired TDRs$12,149
 $37,299
 $49,448
 $336
 $
 $336
 $49,784
 $3,995
Total loans                              
Commercial                              
C&I$1,918
 $738
 $2,656
 $6,248
 $537
 $6,785
 $9,441
 $3,087
$2,079
 $377
 $2,456
 $546
 $3,268
 $3,814
 $6,270
 $2,277
CRE16,469
 41,045
 57,514
 1,726
 4,435
 6,161
 63,675
 4,259
15,984
 36,788
 52,772
 2,124
 3,170
 5,294
 58,066
 3,952
Construction1,946
 5,077
 7,023
 64
 
 64
 7,087
 900
3,045
 2,228
 5,273
 56
 
 56
 5,329
 68
Total commercial20,333
 46,860
 67,193
 8,038
 4,972
 13,010
 80,203
 8,246
21,108
 39,393
 60,501
 2,726
 6,438
 9,164
 69,665
 6,297
Consumer                              
Installment25,800
 913
 26,713
 3,227
 200
 3,427
 30,140
 557
23,464
 557
 24,021
 2,352
 242
 2,594
 26,615
 1,006
Home equity lines10,386
 641
 11,027
 1,354
 
 1,354
 12,381
 197
12,686
 784
 13,470
 1,656
 
 1,656
 15,126
 223
Credit card1,222
 40
 1,262
 
 
 
 1,262
 255
930
 95
 1,025
 
 9
 9
 1,034
 307
Residential mortgages13,514
 2,147
 15,661
 4,518
 3,042
 7,560
 23,221
 1,280
15,846
 2,876
 18,722
 4,968
 3,606
 8,574
 27,296
 1,241
Total consumer50,922
 3,741
 54,663
 9,099
 3,242
 12,341
 67,004
 2,289
52,926
 4,312
 57,238
 8,976
 3,857
 12,833
 70,071
 2,777
Total TDRs$71,255
 $50,601
 $121,856
 $17,137
 $8,214
 $25,351
 $147,207
 $10,535
$74,034
 $43,705
 $117,739
 $11,702
 $10,295
 $21,997
 $139,736
 $9,074
                              

51

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 




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

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


5652

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



The following table providestables provide the number of loans modified in a TDR duringwithin the previous 12 months that subsequently defaulted during the three months ended June 30,March 31, 2015and March 31, 2014,, as well as the recorded investmentamount defaulted in these restructured loans as of June 30, 2014.loans.
As of June 30, 2014As of March 31, 2015
(Dollars in thousands)Number of Loans Recorded InvestmentNumber of Loans Amount Defaulted
Originated loans      
Commercial      
C&I1
 $170

 $
CRE1
 363

 
Construction
 

 
Total originated commercial2
 533

 
Consumer      
Installment1
 3
2
 
Home equity lines
 

 
Credit card7
 31
2
 17
Residential mortgages1
 99

 
Total originated consumer9
 $133
4
 $17
Covered loans   
FDIC acquired loans   
Commercial      
C&I
 $
1
 $427
CRE
 

 
Construction
 

 
Total covered commercial
 $
Total FDIC acquired commercial1
 $427
Acquired loans   
Commercial   
C&I1
 $55
CRE
 
Construction
 
Total acquired commercial1
 $55
Total loans      
Commercial      
C&I1
 $170
2
 $482
CRE1
 363

 
Construction
 

 
Total commercial2
 533
2
 482
Consumer      
Installment1
 3
2
 
Home equity lines
 

 
Credit card7
 31
2
 17
Residential mortgages1
 99

 
Total consumer9
 133
4
 17
Total11
 $666
6
 $499
      



5753

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



As of December 31, 2013As of March 31, 2014
(Dollars in thousands)Number of Loans Recorded InvestmentNumber of Loans Recorded Investment
Originated loans      
Commercial      
C&I4
 $1,773
1
 $1,557
CRE6
 3,101
1
 376
Construction1
 231

 
Total originated commercial11
 5,105
2
 1,933
Consumer      
Installment17
 170

 
Home equity lines
 

 
Credit card33
 245
3
 4,839
Residential mortgages1
 75

 
Total originated consumer51
 $490
3
 $4,839
Covered loans   
FDIC acquired loans   
Commercial      
C&I
 $

 $
CRE1
 

 
Construction1
 45

 
Total covered commercial2
 $45
Total FDIC acquired commercial
 $
Total loans      
Commercial      
C&I4
 $1,773
1
 $1,557
CRE7
 3,101
1
 376
Construction2
 276

 
Total commercial13
 5,150
2
 1,933
Consumer      
Installment17
 170

 
Home equity lines
 

 
Credit card33
 245
3
 4,839
Residential mortgages1
 75

 
Total consumer51
 490
3
 4,839
Total64
 $5,640
5
 $6,772
      

58

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



 As of June 30, 2013
(Dollars in thousands)Number of Loans Recorded Investment
Originated loans   
Commercial   
C&I
 $
CRE1
 85
Construction1
 537
Total originated commercial2
 622
Consumer   
Installment2
 37
Home equity lines1
 15
Credit card9
 79
Residential mortgages
 
Total originated consumer12
 $131
Covered loans   
Commercial   
C&I
 $
CRE
 
Construction
 
Total covered commercial
 $
Total loans   
Commercial   
C&I
 $
CRE1
 85
Construction1
 537
Total commercial2
 622
Consumer   
Installment2
 37
Home equity lines1
 15
Credit card9
 79
Residential mortgages
 
Total consumer12
 131
Total14
 $753
    


5954

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



65.     Goodwill and Other Intangible Assets

Goodwill

Goodwill totaled $741.7 million as of June 30, 2014March 31, 2015, December 31, 20132014, and June 30, 2013March 31, 2014. Goodwill is not amortized but is evaluated for impairment on an annual basis at November 30 of each year or whenever events or changes in circumstances indicate the carrying value may not be recoverable. No events or circumstances since the November 30, 20132014 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists.
    
Other Intangible Assets

The Corporation has other intangible assets that are amortized, consisting of core deposit intangibles, lease intangibles and trust relationship intangibles. The following tables show the gross carrying amount, accumulated amortization, and net carrying amount of these intangible assets.
June 30, 2014March 31, 2015
Gross Carrying Accumulated Net CarryingGross Carrying Accumulated Net Carrying
(In thousands)Amount Amortization AmountAmount Amortization Amount
Core deposit intangibles (a)(1)
$87,533
 $(20,637) $66,896
$82,323
 $(22,073) $60,250
Lease intangible618
 (538) 80
238
 (185) 53
Trust relationships14,000
 (4,090) 9,910
Trust Relationships (2)
14,000
 (5,881) 8,119
$102,253
 $(25,367) $76,886
$96,561
 (28,139) $68,422
          
December 31, 2013December 31, 2014
Gross Carrying Accumulated Net CarryingGross Carrying Accumulated Net Carrying
(In thousands)Amount Amortization AmountAmount Amortization Amount
Core deposit intangibles (a)(1)
$87,533
 $(16,065) $71,468
$82,323
 $(19,996) $62,327
Non-compete covenant102
 (102) 
Lease intangible618
 (520) 98
238
 (176) 62
Trust Relationships (b)
14,000
 (2,811) 11,189
Trust Relationships (2)
14,000
 (5,369) 8,631
$102,253
 $(19,498) $82,755
$96,561
 $(25,541) $71,020
          
June 30, 2013March 31, 2014
Gross Carrying Accumulated Net CarryingGross Carrying Accumulated Net Carrying
(In thousands)Amount Amortization AmountAmount Amortization Amount
Core deposit intangibles (a)
$87,533
 $(12,416) $75,117
Non-compete covenant102
 (89) 13
Core deposit intangibles (1)
$87,533
 $(18,352) $69,181
Lease intangible618
 (502) 116
238
 (149) 89
Trust relationships (b)
14,000
 (827) 13,173
Trust relationships (2)
14,000
 (3,451) 10,549
$102,253
 $(13,834) $88,419
$101,771
 $(21,952) $79,819
          
(a)(1) Core deposit intangibles are amortized on an accelerated basis over their estimated useful lives which,which range from 10-15 years.
(b) (2) Trust relationship intangibles are amortized on an accelerated basis on their estimated useful lives of 12 years.

Amortization expense for intangible assets was $5.9$2.6 million in the sixthree months ended June 30, 2014March 31, 2015, compared to $2.7$2.9 million in the sixthree months ended June 30, 2013March 31, 2014. Estimated amortization expense for each of the next five years is as follows: remainder of 2015 - $7.8 million2014 - $5.9 million; 2015 - $10.4 million;; 2016 - $9.2 million; 2017 - $8.2 million; and 2018 - $7.3 million; and 2019 - $6.5 million.


6055

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



76.     Shareholders' Equity

Common Stock Warrant
 
The Corporation has an outstanding warrant previously issued by Citizen’s to the U.S. Treasury to initially purchase 2,408,203 shares of FirstMerit Common Stock. Due to a dividend protection clause, which reduces the exercisestrike price is reduced by an amount equivalent to the dividend as a percentage of the closing market price on a penny for penny basis for any dividend paid alongthe day prior to the ex-dividend date. The adjusted shares are calculated by dividing the original proceeds by the adjusted strike price. At March 31, 2015, the adjusted strike price is $17.50 with a corresponding increase inadjusted number of 2,571,998 shares issuable upon exercise of the amount of shares availablewarrant issued to purchase, the U.S. Treasury can purchase up to 2,515,892 shares at an adjusted exercise price of $17.89 as of June 30,2014.and currently available for purchase.

Preferred Stock

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

Earnings Per Share

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

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

6156

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



The reconciliation between basic and diluted EPS using the two-class method and treasury stock method is presented as follows:
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31, 
(In thousands)2014 2013 2014 2013
(Dollars in thousands, except per share amounts)2015 2014 
Basic EPS:           
Net income$59,519
 $48,450
 $112,974
 $85,796
$57,139
 $53,455
 
Less:           
Cash dividends on 5.875% non-cumulative perpetual series A, Preferred Stock1,469
 1,469
 2,938
 2,399
1,469
 1,469
 
Income allocated to participating securities489
 383
 926
 813
407
 380
 
Net income attributable to common shareholders$57,561
 $46,598
 $109,110
 $82,584
$55,263
 $51,606
 
Weighted average Common Stock outstanding used in basic EPS165,335
 157,863
 165,198
 133,909
165,411
 165,060
 
Basic net income per common share$0.35
 $0.30
 $0.66
 $0.62
$0.33
 $0.31
 
           
Diluted EPS:           
Income used in diluted earnings per share calculation$57,561
 $46,598
 $109,110
 $82,584
       
Income used in diluted earnings per common share calculation$55,263
 $51,606
 
Weighted average Common Stock outstanding used in basic EPS165,335
 157,863
 165,198
 133,909
165,411
 165,060
 
Add: Common Stock equivalents:           
Warrant and stock plans812
 527
 854
 497
592
 944
 
Weighted average Common and Common Stock equivalent shares outstanding166,147
 158,390
 166,052
 134,406
166,003
 166,004
 
Diluted net income per share$0.35
 $0.29
 $0.66
 $0.61
Diluted net income per common share$0.33
 $0.31
 
           

Common Stock equivalents consist of employee stock award plans and the Common Stock warrant. These Common Stock equivalents do not enter into the calculation of diluted EPS if the impact would be anti-dilutive, that is, increase EPS or reduce a loss per share. Antidilutive potential Common Stock for the sixthree months ended June 30,March 31, 20142015 and 20132014 totaled 1.00.8 million and 1.51.0 million, respectively.

87.     Segment Information

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

Commercial – The commercial line of business provides a full range of lending, depository, and related financial services to middle-market corporate, industrial, financial, core business banking, public entities, and leasing clients. Commercial also includes personal business from commercial loan clients in coordination with the Wealth Management segment. Products and services offered include commercial term loans, revolving credit arrangements, asset-based lending, leasing, commercial

6257

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



mortgages, real estate construction lending, letters of credit, treasury management, government banking, international banking, merchant card and other depository products and services.

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

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

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

The accounting policies of the lines of businesses are the same as those of the Corporation described in Note 1 (Summary of Significant Accounting Policies) to the 20132014 Form 10-K. Funds transfer pricing is used in the determination of net interest income by assigning a cost for funds used or credit for funds provided to assets and liabilities within each business unit. In the first quarter of 2014, Management changed the estimate regarding the funds transfer pricing crediting rate provided on non-maturity deposits, including amounts for prior periods.deposits. Assets and liabilities are match-funded based on their maturity, prepayment and/or repricing characteristics. As a result, the three primary lines of business are generally insulated from changes in interest rates. Changes in net interest income due to changes in rates are reported in Other by the treasury group. Capital has been allocated on an economic risk basis. Loans and lines of credit have been allocated capital based upon their respective credit risk. Asset management holdings in the Wealth segment have been allocated capital based upon their respective market risk related to assets under management. Normal business operating risk has been allocated to each line of business by the level of noninterest expense. Mismatch between asset and liability cash flow as well as interest rate risk for mortgage servicing rights and the origination business franchise value have been allocated capital based upon their respective asset/liability management risk. The provision for loan loss is allocated based upon the actual net charge-offs of each respective line of business, adjusted for loan growth and changes in risk profile. Noninterest income and expenses directly attributable to a line of business are assigned to that line of business. Expenses for centrally provided services are allocated to the business line by various activity based cost formulas.


6358

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



Substantially all of the Corporation’s business is conducted in the United States of America. The following tables present a summary of financial results as of and for the three and sixthree months ended June 30, 2014March 31, 2015 and June 30, 2013March 31, 2014:
        FirstMerit        FirstMerit
Commercial Retail Wealth Other Consolidated
June 30, 2014QTDYTD QTDYTD QTDYTD QTDYTD QTDYTD
(In thousands)Commercial Retail Wealth Other Consolidated
March 31, 2015QTD QTD QTD QTD QTD
OPERATIONS:                  
Net interest income (loss)$106,924
$211,987
 $94,879
$188,129
 $4,799
$9,477
 $(11,025)$(20,114) $195,577
$389,479
Net interest income/(loss)$99,844
 $91,095
 $5,353
 $(10,669) $185,623
Provision (recapture) for loan losses(4,874)167
 14,905
17,522
 396
351
 4,826
11,750
 15,253
29,790
(526) 7,533
 (170) 1,411
 8,248
Noninterest income26,681
47,987
 25,345
52,381
 14,052
27,516
 6,482
11,947
 72,560
139,831
22,490
 21,737
 13,976
 7,644
 65,847
Noninterest expense61,230
123,215
 87,603
183,377
 12,370
25,097
 6,197
5,044
 167,400
336,733
61,653
 88,271
 13,719
 (2,991) 160,652
Net income (loss)50,211
88,784
 11,515
25,747
 3,955
7,504
 (6,162)(9,061) 59,519
112,974
Net income/(loss)39,785
 11,068
 3,756
 2,530
 57,139
AVERAGES:                  
Assets$9,192,463
$9,132,758
 $5,541,566
$5,495,965
 $258,845
$250,279
 $9,298,402
$9,337,457
 $24,291,276
$24,216,459
$9,454,218
 $5,845,417
 $302,186
 $9,303,273
 $24,905,094
Loans9,506,529
 5,570,590
 292,016
 58,046
 15,427,181
Earning assets9,794,483
 5,582,849
 292,016
 6,431,069
 22,100,417
Deposits6,886,945
 11,124,158
 1,240,960
 536,862
 19,788,925
Economic capital848,890
 479,188
 55,187
 1,483,097
 2,866,362
                  
        FirstMerit        FirstMerit
Commercial Retail Wealth Other Consolidated
June 30, 2013QTDYTD QTDYTD QTDYTD QTDYTD QTDYTD
(In thousands)Commercial Retail Wealth Other Consolidated
March 31, 2014QTD QTD QTD QTD QTD
OPERATIONS:                  
Net interest income (loss)$114,557
$182,947
 $95,904
$145,658
 $4,288
$8,441
 $(16,718)$(27,667) $198,031
$309,379
Net interest income/(loss)$105,063
 $93,250
 $4,678
 $(9,091) $193,900
Provision (recapture) for loan losses2,120
6,886
 2,101
6,174
 (42)166
 3,130
4,030
 7,309
17,256
5,706
 8,339
 (45) 536
 14,536
Noninterest income20,895
40,127
 33,330
57,718
 12,821
21,131
 2,393
7,856
 69,439
126,832
21,306
 27,035
 13,464
 5,465
 67,270
Noninterest expense51,891
94,918
 85,512
138,419
 13,832
24,006
 37,653
37,691
 188,888
295,034
63,966
 96,701
 13,518
 (4,854) 169,331
Net income (loss)52,680
78,569
 26,919
38,074
 2,027
3,379
 (33,176)(34,226) 48,450
85,796
Net income/(loss)36,884
 9,909
 3,035
 3,627
 53,455
AVERAGES:                  
Assets$8,852,267
$7,800,594
 $5,006,423
$4,016,956
 $263,454
$250,206
 $8,688,558
$6,846,825
 $22,810,702
$18,914,581
$9,072,390
 $5,449,856
 $241,618
 $9,380,706
 $24,144,570
Loans9,061,371
 5,084,555
 230,429
 36,126
 14,412,481
Earning assets9,308,031
 5,101,740
 230,429
 6,263,663
 20,903,863
Deposits6,645,640
 11,753,015
 1,009,811
 228,039
 19,636,505
Economic capital654,922
 320,090
 57,784
 1,700,430
 2,733,226
                  

98.     Derivatives and Hedging Activities

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

The predominant derivative and hedging activities include interest rate swaps and certain mortgage banking activities. Generally, these instruments help the Corporation manage exposure to market risk, and meet customer financing needs. Market risk represents the possibility that economic value or net interest income will

59

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



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.

64

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 




Derivatives Designated in Hedge Relationships

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

At June 30, 2014March 31, 2015, December 31, 20132014, and June 30, 2013March 31, 2014, the notional values or contractual amounts and fair value of the Corporation's derivatives designated in hedge relationships were as follows:
Asset Derivatives  Liability DerivativesAsset Derivatives  Liability Derivatives
June 30, 2014 December 31, 2013 June 30, 2013  June 30, 2014 December 31, 2013 June 30, 2013March 31, 2015 December 31, 2014 March 31, 2014  March 31, 2015 December 31, 2014 March 31, 2014
(In thousands)Notional/ Contract Amount 
Fair Value (a)
 Notional/ Contract Amount 
Fair Value (a)
 Notional/ Contract Amount 
Fair Value (a)
  Notional/ Contract Amount 
Fair Value (b)
 Notional/ Contract Amount 
Fair Value (b)
 Notional/ Contract Amount 
Fair Value (b)
Notional/ Contract Amount 
Fair Value (1)
 Notional/ Contract Amount 
Fair Value (1)
 Notional/ Contract Amount 
Fair Value (1)
  Notional/ Contract Amount 
Fair Value (2)
 Notional/ Contract Amount 
Fair Value (2)
 Notional/ Contract Amount 
Fair Value (2)
Interest rate swaps:                                                
Commercial Loan Swaps (FRAPS)$
 $
 $
 $
 $5,389
 $1
  $89,591
 $6,063
 $93,313
 $6,683
 $117,543
 $10,392
Sub Debt Swap250,000
 12,688
 250,000
 5,256
 
 
  
 
 
 
 
 
Fair value hedges$
 $
 $
 $
 $4,632
 $
  $102,828
 $8,989
 $126,637
 $11,574
 $136,186
 $14,319
$250,000
 $12,688
 $250,000
 $5,256
 $5,389
 $1
  $89,591
 $6,063
 $93,313
 $6,683
 $117,543
 $10,392
                                              
(1)a) Included in "Other assets" on the Consolidated Balance Sheets
(2)(b) Included in "Other liabilities" on the Consolidated Balance Sheets

Fair Value Hedges. Prior to 2009, the Corporation entered into interest rate swaps with dealer counterparties to convert certain fixed rate loans to variable rate instruments over the terms of the loans (termed by the Corporation as the FRAP Program). These interest rate swaps are designated as fair value hedges and met the criteria to qualify for the short cut method of accounting. Based on this shortcut method of accounting treatment, no ineffectiveness is assumed. The Corporation discontinued originating interest rate swaps under the FRAP Program in February 2008.

During the fourth quarter of 2014, the Corporation entered into a $250.0 million interest rate swap simultaneously with its long-term debt issuance for interest rate risk management purposes. This interest rate swap effectively modifies the receipt of fixed-rate interest amounts in exchange for floating-rate interest payments over the life of the swap, without an exchange of the underlying principal amount. This interest rate swap was designated as a fair value hedge, and through application of the “short cut method of accounting”, there is an assumption that the hedge is effective in offsetting changes in the fair value of the long-term debt due to changes in the U.S. LIBOR swap rate (the designated benchmark interest rate).



60

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



Derivatives Not Designated in Hedge Relationships
    
As of June 30, 2014March 31, 2015, December 31, 20132014, and June 30, 2013March 31, 2014, 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 DerivativesAsset Derivatives  Liability Derivatives
June 30, 2014 December 31, 2013 June 30, 2013  June 30, 2014 December 31, 2013 June 30, 2013March 31, 2015 December 31, 2014 March 31, 2014  March 31, 2015 December 31, 2014 March 31, 2014
(In thousands)Notional/ Contract Amount 
Fair Value (a)
 Notional/ Contract Amount 
Fair Value (a)
 Notional/ Contract Amount 
Fair Value (a)
  Notional/ Contract Amount 
Fair Value (b)
 Notional/ Contract Amount 
Fair Value (b)
 Notional/ Contract Amount 
Fair Value (b)
Notional/ Contract Amount 
Fair Value (1)
 Notional/ Contract Amount 
Fair Value (1)
 Notional/ Contract Amount 
Fair Value (1)
  Notional/ Contract Amount 
Fair Value (2)
 Notional/ Contract Amount 
Fair Value (2)
 Notional/ Contract Amount 
Fair Value (2)
Interest rate swaps$1,618,463
 $47,952
 $1,622,525
 $46,577
 $1,502,079
 $47,804
  $1,618,463
 $47,952
 $1,622,531
 $46,577
 $1,502,079
 $47,804
$1,718,850
 $59,147
 $1,673,012
 $48,366
 $1,603,125
 $44,672
  $1,718,850
 $59,147
 $1,673,012
 $48,366
 $1,603,125
 $44,672
Mortgage loan commitments169,232
 2,491
 90,541
 891
 251,198
 779
  
 
 
 
 
 
51,937
 388
 102,523
 1,408
 132,614
 1,575
  
 
 
 
 
 
Forward sales contracts
 
 40,906
 384
 139,093
 4,458
  80,161
 545
 
 
 
 
11,758
 
 47,657
 
 53,404
 167
  
 68
 
 272
 
 
Credit contracts15,269
 
 
 
 
 
  52,319
 10
 49,914
 
 50,754
 

 
 10,001
 
 
 
  80,047
 
 69,227
 
 49,456
 
Foreign exchange25,623
 107
 6,478
 50
 8,940
 117
  7,568
 48
 6,893
 50
 7,235
 94
40,537
 350
 22,406
 167
 17,630
 52
  10,052
 169
 6,580
 118
 15,898
 42
Other
 
 
 
 
 
  60,383
 
 63,813
 
 52,370
 
Equity swap
 
 
 
 
 
  30,896
 
 75,138
 
 61,859
 
Total$1,828,587
 $50,550
 $1,760,450
 $47,902
 $1,901,310
 $53,158
  $1,818,894
 $48,555
 $1,743,151
 $46,627
 $1,612,438
 $47,898
$1,823,082
 $59,885
 $1,855,599
 $49,941
 $1,806,773
 $46,466
  $1,839,845
 $59,384
 $1,823,957
 $48,756
 $1,730,338
 $44,714
                                              
(1)(a) Included in "Other assets" on the Consolidated Balance Sheets
(b)(2) Included in "Other liabilities" on the Consolidated Balance Sheets

Interest Rate Swaps. The Corporation's Back-to-Back Program is an interest rate swap program for commercial loan customers that provides the customer with a fixed rate loan while creating a variable rate asset

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for the Corporation through the customer entering into an interest rate swap with the Corporation on terms that match the loan. The Corporation offsets its risk exposure by entering into an offsetting interest rate swap with a dealer counterparty. These swaps do not qualify as designated hedges; therefore, each swap is accounted for as a standalone derivative.

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

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

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


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

Credit contracts. The Corporation has bought and sold credit protection in the form of participations on interest rate swaps (swap participations). These swap participations, which meet the definition of credit derivatives, were entered into in the ordinary course of business. Credit derivatives, whereby the Corporation has purchased credit protection, entitles the Corporation to receive a payment from the counterparty when the customer fails to make payment on any amounts due to the Corporation. Swap participations whereby the Corporation has purchased credit protection have maturities that range between three to nineeight years. For swap participations where the Corporation sold credit protection, the Corporation has guaranteed payment in the event that the counterparty experiences a loss on the 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

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commercial loan customers. Credit derivatives whereby the Corporation has sold credit protection have maturities ranging from less than one year to eightnine years. The Corporation's maximum estimated exposure to sold 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 $3.2$5.7 million as of June 30, 2014March 31, 2015. The fair values of the soldwritten swap participations were not material at June 30, 2014March 31, 2015, December 31, 20132014, and June 30, 2013March 31, 2014.

Gains and losses recognized in income on non-designated hedging instruments for the three and six months ended June 30, 2014March 31, 2015 and 20132014 are as follows:
Derivatives not
designated as hedging
instruments
 
Location of Gain/(Loss)
Recognized
in Income on
Derivative
 
Amount of Gain / (Loss) Recognized in Income on Derivatives (In thousands)
 
Location of Gain/(Loss)
Recognized
in Income on
Derivative
 
Amount of Gain / (Loss) Recognized in Income on Derivatives (In thousands)
 Three Months Ended June 30, Six Months Ended June 30,  Three Months Ended March 31,
 2014 2013 2014 2013  2015 2014
Mortgage loan commitments Other operating income $916
 $(3,374) $1,600
 $(3,622) Loan sales and servicing income $(1,020) $684
Forward sales contracts Other operating income (713) 4,742
 (929) 4,519
 Loan sales and servicing income 204
 (216)
Foreign exchange contracts Other operating income 328
 (122) 107
 (313) Other operating income (877) (221)
Equity swap Other operating expense 
 
Total $531
 $1,246
 $778
 $584
 $(1,693) $247
            

Counterparty Credit Risk
 
Like other financial instruments, derivatives contain an element of "credit risk" or the possibility that the Corporation will incur a loss because a counterparty, which may be a bank, a broker-dealer, a derivative clearing organization, or a customer, fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. DerivativeAll derivative contracts may be executed only with a counterpartyexchanges or cleared through a FCM with a derivative clearing organizationcounterparties approved by the Corporation's ALCO, and only within the Corporation's Board of Directors Credit Committee approved credit exposure limits. Where contracts have been created for customers, the

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Corporation enters into derivatives with dealers to offset its risk exposure. To manage the credit exposure to exchanges and counterparties, the Corporation generally enters into bilateral collateral agreements using standard forms published by the ISDA. These agreements are to includewith collateral delivery thresholds of credit exposure or the maximum amount of unsecured credit exposure that the Corporation is willing to assume.on all bilateral derivatives. 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 ALCO. Under the Dodd-Frank legislation, as of June 10, 2013, the Corporation must clear all interest rate swaps through a clearing house and the credit exposure is to the recognized derivative clearing organization. Margin requirements are established by the derivative clearing organization. When entering into cleared swap, the Corporation must post collateral to the FCM in the amount required by the clearing organization. The Corporation generally posts collateral in the form of highly rated Government Agency issued bonds or MBS.

The majority of the Corporation's over-the-counter derivative transactions are cleared through a recognized derivative clearing organization ("Clearinghouse"). For cleared derivatives, the Clearinghouse is the Corporation's counterparty. For cleared derivatives, the Clearinghouse is the Corporation's counterparty. The Clearinghouse notifies the clearing agent of the required initial and variation margin and the clearing agent notifies the Corporation of the required initial and variation margin. The requirement that the Corporation post initial and variation margin through the clearing agent, to the Clearinghouse, exposes the Corporation to institutional credit risk if the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily through a clearing agent for changes in the value of cleared derivatives.

Collateral posted against derivative liabilities was $64.0$53.6 million, $70.553.5 million, and $82.267.7 million as of June 30, 2014March 31, 2015, December 31, 20132014, and June 30, 2013March 31, 2014, respectively.

Derivative assets and liabilities are recorded at fair value on the balance sheet and do not take into account the effects of master netting agreements the Corporation has with its financial institution counterparties. These master netting agreements allow the Corporation to settle all derivative contracts held with a single financial institution counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. Collateral, usually in the form of investment securities, is posted by the counterparty within the net liability position in accordance with contract thresholds. The following tables illustrate the potential effect of the Corporation's derivative master netting arrangements, by type of financial instrument, on the Corporation's

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statement of financial position as of June 30, 2014March 31, 2015, December 31, 20132014, and June 30, 2013March 31, 2014. The swap agreements the Corporation has in place with its commercial customers are not subject to enforceable master netting arrangements, and, therefore, are excluded from these tables.
As of June 30, 2014As of March 31, 2015
Gross amounts recognized Gross amounts offset in the consolidated balance sheet Net amounts presented in the consolidated balance sheet Gross amounts not offset in the consolidated balance sheet Net amountGross amounts recognized Gross amounts offset in the consolidated balance sheet Net amounts presented in the consolidated balance sheet Gross amounts not offset in the consolidated balance sheet Net amount
(In thousands) Financial instruments (a) Collateral (b)  
Financial instruments (1)
 
Collateral (2)
 
Derivative Assets                      
Interest rate swaps - designated$12,688
 $
 $12,688
 $
 $
 $12,688
Interest rate swaps - non-designated$839
 $
 $839
 $(839) $
 $
$67
 $
 $67
 $(67) $
 $
Foreign exchange19
 
 19
 (19) 
 
219
 
 219
 47
 (266) 
Total derivative assets$858
 $
 $858
 $(858) $
 $
$12,974
 $
 $12,974
 $(20) $(266) $12,688
                      
Derivative liabilities                      
Interest rate swaps - designated$8,989
 $
 $8,989
 $
 $(8,989) $
$6,063
 $
 $6,063
 $
 $(6,063) $
Interest rate swaps - non-designated47,114
 
 47,114
 (839) (46,275) 
59,080
 
 59,080
 (67) (59,013) 
Foreign exchange35
 
 35
 (19) (16) 
47
 
 47
 47
 (94) 
Total derivative liabilities$56,138
 $
 $56,138
 $(858) $(55,280) $
$65,190
 $
 $65,190
 $(20) $(65,170) $
                      

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 As of December 31, 2014
 Gross amounts recognized Gross amounts offset in the consolidated balance sheet Net amounts presented in the consolidated balance sheet Gross amounts not offset in the consolidated balance sheet Net amount
(In thousands)   
Financial instruments (1)
 
Collateral (2)
 
Derivative assets           
Interest rate swaps - designated5,256
 
 5,256
 
 
 5,256
Interest rate swaps - non-designated$352
 $
 $352
 $(352) $
 $
Foreign exchange134
 
 134
 28
 (162) 
    Total derivative assets$5,742
 $
 $5,742
 $(324) $(162) $5,256
            
Derivative liabilities           
Interest rate swaps - designated$6,683
 $
 $6,683
 $
 $(6,683) $
Interest rate swaps - non-designated48,014
 
 48,014
 (352) (47,662) 
Foreign exchange28
 
 28
 28
 (56) 
    Total derivative liabilities$54,725
 $
 $54,725
 $(324) $(54,401) $
            
As of December 31, 2013As of March 31, 2014
Gross amounts recognized Gross amounts offset in the consolidated balance sheet Net amounts presented in the consolidated balance sheet Gross amounts not offset in the consolidated balance sheet Net amountGross amounts recognized Gross amounts offset in the consolidated balance sheet Net amounts presented in the consolidated balance sheet Gross amounts not offset in the consolidated balance sheet Net amount
(In thousands) Financial instruments (a) Collateral (b)  
Financial instruments (1)
 
Collateral (2)
 
Derivative assets                      
Interest rate swaps - non-designated$4,791
 $
 $4,791
 $(4,791) $
 $
$2,811
 $
 $2,811
 $(2,811) $
 $
Foreign exchange4
 
 4
 (4) 
 
33
 
 33
 (17) (16) 
Total derivative assets$4,795
 $
 $4,795
 $(4,795) $
 $
$2,844
 $
 $2,844
 $(2,828) $(16) $
                      
Derivative liabilities                      
Interest rate swaps - designated$11,574
 $
 $11,574
 $
 $(11,574) $
$10,392
 $
 $10,392
 $
 $(10,392) $
Interest rate swaps - non-designated41,787
 
 41,787
 (4,791) (36,996) 
41,861
 
 41,861
 (2,811) (39,050) 
Foreign exchange46
 
 46
 (4) (42) 
17
 
 17
 (17) 
 
Total derivative liabilities$53,407
 $
 $53,407
 $(4,795) $(48,612) $
$52,270
 $
 $52,270
 $(2,828) $(49,442) $
                      
 As of June 30, 2013
 Gross amounts recognized Gross amounts offset in the consolidated balance sheet Net amounts presented in the consolidated balance sheet Gross amounts not offset in the consolidated balance sheet Net amount
(In thousands)   Financial instruments (a) Collateral (b) 
Derivative assets           
Interest rate swaps - non-designated$3,010
 $
 $3,010
 $(3,010) $
 $
Foreign exchange53
 
 53
 (22) (31) 
Total derivative assets$3,063
 $
 $3,063
 $(3,032) $(31) $
            
Derivative liabilities           
Interest rate swaps - designated$14,319
 $
 $14,319
 $
 $(14,319) $
Interest rate swaps - non-designated44,794
 
 44,794
 (3,010) (41,784) 
Foreign exchange22
 
 22
 (22) 
 
Total derivative liabilities$59,135
 $
 $59,135
 $(3,032) $(56,103) $
            
(a)(1) For derivative assets, this includes any derivative liability fair values that could be offset in the event of counterparty default. For derivative liabilities, this includes any derivative asset fair values that could be offset in the event of counterparty default.

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(b)(2) For derivate assets, this includes the fair value of collateral received by the Corporation from the counterparty. Securities received as collateral are not included in the Consolidated Balance Sheets unless the counterparty defaults. For derivative liabilities, this includes the fair value of securities pledged by the Corporation to the counterparty. These securities are included in the Consolidated Balance Sheets unless the Corporation defaults.
 

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9.     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 BenefitsPension Benefits
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
(In thousands)2014 2013 2014 20132015 2014
Service cost$182
 $585
 $364
 $1,170
$207
 $182
Interest cost3,584
 2,632
 7,168
 5,264
3,517
 3,584
Expected return on assets(4,009) (2,960) (8,017) (5,920)(3,902) (4,009)
Amortization of unrecognized prior service costs698
 117
 1,331
 234
570
 634
Amortization of Actuarial Gain804
 1,174
 1,513
 2,348
1,057
 708
Net periodic pension cost$1,259
 $1,548
 $2,359
 $3,096
$1,449
 $1,099
          

Postretirement BenefitsPostretirement Benefits
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
(In thousands)2014 2013 2014 20132015 2014
Service cost$16
 $25
 $33
 $50
$41
 $16
Interest cost164
 130
 327
 260
144
 164
Amortization of unrecognized prior service costs(117) (117) (234) (234)(160) (117)
Amortization of Actuarial Gain59
 67
 118
 134
Amortization of actuarial losses/(gains)81
 59
Net periodic postretirement cost$122
 $105
 $244
 $210
$106
 $122
          

For further information on the Corporation's employee benefit plans, refer to Note 1314 (Benefit Plans) to the consolidated financial statements in the 20132014 Form 10-K.

11.10.    Fair Value Measurement

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

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


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


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

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

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

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

the amount of time since the last relevant valuation;
whether there is an actual trade or relevant external quote available at the measurement date; and
volatility associated with the primary pricing components.

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

an independent review and approval of valuation models;
recurring detailed reviews of profit and loss; and
a validation of valuation model components against benchmark data and similar products, where possible.  

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

Additional information regarding the Corporation's accounting policies for determining fair value is provided in Note 1 (Summary of Significant Accounting Policies) under the heading "Fair Value Measurements" to the 20132014 Form 10-K.


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The following tables present the balance of assets and liabilities measured at fair value on a recurring and nonrecurring basis as of June 30, 2014March 31, 2015, December 31, 20132014, and June 30, 2013March 31, 2014:
   Fair Value by Hierarchy   Fair Value by Hierarchy
(In thousands)June 30, 2014  Level 1  Level 2  Level 3March 31, 2015  Level 1  Level 2  Level 3
Recurring fair value measurement              
Available-for-sale securities:              
Marketable equity securities$2,935
 $2,935
 $
 $
$2,869
 $2,869
 $
 $
Non-marketable equity securities3,281
 
 10
 3,271
U.S. treasury notes & bonds
 
 
 
U.S. government agency debentures2,513
 
 2,513
 
U.S. States and political subdivisions240,805
 
 240,805
 
215,164
 
 215,164
 
Residential mortgage-backed securities:              
U.S. government agencies1,018,174
 
 1,018,174
 
947,303
 
 947,303
 
Commercial mortgage-backed securities:              
U.S. government agencies85,698
 
 85,698
 
140,359
 
 140,359
 
Residential collateralized mortgage-backed securities:              
U.S. government agencies1,598,031
 
 1,598,031
 
1,892,560
 
 1,892,560
 
Non-agency8
 
 1
 7
6
 
 1
 5
Commercial collateralized mortgage-backed securities:              
U.S. government agencies182,033
 
 182,033
 
244,059
 
 244,059
 
Corporate debt securities53,490
 
 
 53,490
52,264
 
 
 52,264
Asset-backed securities:              
Collateralized loan obligations293,965
 
 
 293,965
293,962
 
 
 293,962
Total available for sale securities3,478,420
 2,935
 3,124,752
 350,733
3,791,059
 2,869
 3,441,959
 346,231
Residential loans held for sale21,632
 
 21,632
 
3,568
 
 3,568
 
Derivative assets:              
Interest rate swaps - fair value hedges12,688
 
 12,688
 
Interest rate swaps - nondesignated47,952
 
 47,952
 
59,147
 
 59,147
 
Mortgage loan commitments2,491
 
 2,491
 
388
 
 388
 
Forward sale contracts
 
 
 
Foreign exchange107
 
 107
 
350
 
 350
 
Total derivative assets50,550
 
 50,550
 
72,573
 
 72,573
 
Total fair value of assets (a)$3,550,602
 $2,935
 $3,196,934
 $350,733
Total fair value of assets (1)
$3,867,200
 $2,869
 $3,518,100
 $346,231
Derivative liabilities:              
Interest rate swaps - fair value hedges$8,989
 $
 $8,989
 $
$6,063
 $
 $6,063
 $
Interest rate swaps - nondesignated47,952
 
 47,952
 
59,147
 
 59,147
 
Forward sales contracts545
 
 545
 
68
 
 68
 
Foreign exchange48
 
 48
 
169
 
 169
 
Credit contracts10
 
 10
 
Equity swap
 
 
 
Total derivative liabilities57,544
 
 57,544
 
65,447
 
 65,447
 
True-up liability12,581
 
 
 12,581
13,707
 
 
 13,707
Total fair value of liabilities (a)$70,125
 $
 $57,544
 $12,581
Total fair value of liabilities (1)
$79,154
 $
 $65,447
 $13,707
Nonrecurring fair value measurement              
Mortgage servicing rights (b)$21,987
 $
 $
 $21,987
Impaired loans (c)56,006
 
 
 56,006
Other property (d)17,052
 
 
 17,052
Other real estate covered by loss share (e)22,782
 
 
 22,782
Total fair value$117,827
 $
 $
 $117,827
Mortgage servicing rights (2)
$20,526
 $
 $
 $20,526
Impaired loans (3)
63,839
 
 
 63,839
Other property (4)
16,956
 
 
 16,956
Other real estate covered by loss share (5)
7,293
 
 
 7,293
Total nonrecurring fair value$108,614
 $
 $
 $108,614
              
(a) -
(1) There were no transfers between levels 1, and 2 or 3 of the fair value hierarchy during the three months ended June 30, 2014.
(b) - MSRs with a recorded investment of $22.2 million were reduced by a specific valuation allowance totaling $0.6 million to a reported carrying value of $21.6 million resulting in recognition of $0.1 million in expense included in loans sales and servicing income in the three months ended June 30, 2014.March 31, 2015.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 



(c) -(2) MSRs with a recorded investment of $21.5 million were reduced by a specific valuation allowance totaling $1.1 million to a reported carrying value of $20.4 million resulting in recognition of $0.2 million in expense included in loan sales and servicing income in the three months ended March 31, 2015.
(3) Collateral dependent impaired loans with a recorded investment of $62.2$75.6 million were reduced by specific valuation allowance allocations totaling $6.2$11.8 million to a reported net carrying value of $56.0$63.8 million.
(d) -(4) Amounts do not include assets held at cost at June 30, 2014.March 31, 2015. During the three months ended June 30, 2014,March 31, 2015, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $0.7$0.9 million included in noninterest expense.
(e) -(5) Amounts do not include assets held at cost at June 30, 2014.March 31, 2015. During the three months ended June 30, 2014,March 31, 2015, the re-measurement of covered foreclosed assets at fair value subsequent to initial recognition resulted in losses $0.7of $0.1 million included in noninterest expense.

    Fair Value by Hierarchy
(In thousands)December 31, 2013  Level 1  Level 2  Level 3
Recurring fair value measurement       
Available-for-sale securities:       
Marketable equity securities$3,036
 $3,036
 $
 $
Nonmarketable equity securities3,281
 
 10
 3,271
U.S. States and political subdivisions262,367
 
 262,367
 
Residential mortgage-backed securities:       
U.S. government agencies969,922
 
 969,922
 
Commercial mortgage-backed securities:       
U.S. government agencies69,567
 
 69,567
 
Residential collateralized mortgage-backed securities:       
U.S. government agencies1,518,393
 
 1,518,393
 
Non-agency9
 
 
 9
Commercial collateralized mortgage-backed securities:       
U.S. government agencies102,268
 
 102,268
 
Corporate debt securities50,644
 
 
 50,644
Asset-backed securities       
Collateralized loan obligations293,687
 
 
 293,687
Total available-for-sale securities3,273,174
 3,036
 2,922,527
 347,611
Residential loans held for sale11,622
 
 11,622
 
Derivative assets:       
Interest rate swaps - nondesignated46,577
 
 46,577
 
Mortgage loan commitments891
 
 891
 
Forward sale contracts384
 
 384
 
Foreign exchange50
 
 50
 
Total derivative assets47,902
 
 47,902
 
       Total fair value of assets (a)$3,332,698
 $3,036
 $2,982,051
 $347,611
Derivative liabilities:       
Interest rate swaps - fair value hedges$11,574
 $
 $11,574
 $
Interest rate swaps - nondesignated46,577
 
 46,577
 
Foreign exchange50
 
 50
 
Total derivative liabilities58,201
 
 58,201
 
True-up liability11,463
 
 
 11,463
     Total fair value of liabilities (a)$69,664
 $
 $58,201
 $11,463
Nonrecurring fair value measurement       
Mortgage servicing rights (b)$23,041
 $
 $
 $23,041
Impaired loans (c)47,870
 
 
 47,870
Other property (d)10,018
 
 
 10,018
Other real estate covered by loss share (e)8,754
 
 
 8,754
Total fair value$89,683
 $
 $
 $89,683
        
(a) - There were no transfers between levels 1, 2 or 3 of the fair value hierarchy during the year ended December 31, 2013.  

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    Fair Value by Hierarchy
(In thousands)December 31, 2014  Level 1  Level 2  Level 3
Recurring fair value measurement       
Available-for-sale securities:       
Marketable equity securities$2,974
 $2,974
 $
 $
U.S. government agency debentures2,482
 
 2,482
 
U.S. States and political subdivisions227,342
 
 227,342
 
Residential mortgage-backed securities:       
U.S. government agencies970,998
 
 970,998
 
Commercial mortgage-backed securities:       
U.S. government agencies103,403
 
 103,403
 
Residential collateralized mortgage-backed securities:       
U.S. government agencies1,676,567
 
 1,676,567
 
Non-agency7
 
 1
 6
Commercial collateralized mortgage-backed securities:       
U.S. government agencies222,334
 
 222,334
 
Corporate debt securities51,337
 
 
 51,337
Asset-backed securities       
Collateralized loan obligations287,844
 
 
 287,844
        Total available-for-sale securities3,545,288
 2,974
 3,203,127
 339,187
Residential loans held for sale13,428
 
 13,428
 
Derivative assets:       
Interest rate swaps - fair value hedges5,256
 
 5,256
 
Interest rate swaps - nondesignated48,366
 
 48,366
 
Mortgage loan commitments1,408
 
 1,408
 
Forward sale contracts
 
 
 
Foreign exchange167
 
 167
 
       Total derivative assets55,197
 
 55,197
 
       Total fair value of assets (1)
$3,613,913
 $2,974
 $3,271,752
 $339,187
Derivative liabilities:       
Interest rate swaps - fair value hedges$6,683
 $
 $6,683
 $
Interest rate swaps - nondesignated48,366
 
 48,366
 
Forward sale contracts272
 
 272
 
Foreign exchange118
 
 118
 
       Total derivative liabilities55,439
 
 55,439
 
True-up liability13,294
 
 
 13,294
      Total fair value of liabilities (1)
$68,733
 $
 $55,439
 $13,294
Nonrecurring fair value measurement       
Mortgage servicing rights (2)
$21,228
 $
 $
 $21,228
Impaired loans (3)
56,041
 
 
 56,041
Other property (4)
12,510
 
 
 12,510
Other real estate covered by loss share (5)
3,614
 
 
 3,614
Total nonrecurring fair value$93,393
 $
 $
 $93,393
        
(b) -(1) There were no transfers between levels 1, 2 or 3 of the fair value hierarchy during the year ended December 31, 2014.  
(2) MSRs with a recorded investment of $22.8$22.0 million were reduced by a specific valuation allowance totaling $0.3$1.0 million to a reported carrying value of $22.5$21.1 million resulting in a recovery of previously recognized expense of $2.3$0.7 million in recoveries included in loans sales and servicing income in the year ended ended December 31, 2013.2014.
(c) - (3)Collateral dependent impaired loans with a recorded investment of $52.6$60.3 million were reduced by specific valuation allowance allocations totaling $4.8$4.3 million to a reported net carrying value of $47.9$56.0 million.
(d) Amounts do not include assets held at cost at December 31, 2013. During the year ended December 31, 2013, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $1.4 million included in noninterest expense.
(e) Amounts do not include assets held at cost at December 31, 2013. During the year ended December 31, 2013, the re-measurement of covered foreclosed assets at fair value subsequent to initial recognition resulted in losses of $1.0 million included in noninterest expense.

    Fair Value by Hierarchy
(In thousands)June 30, 2013  Level 1  Level 2  Level 3
Recurring fair value measurement       
Available-for-sale securities:       
Marketable equity securities$3,213
 $3,213
 $
 $
Non-marketable equity securities3,281
   10
 3,271
U.S. States and political subdivisions277,934
 
 277,934
 
Residential mortgage-backed securities:       
U.S. government agencies1,075,928
 
 1,075,928
 
Commercial mortgage-backed securities:       
U.S. government agencies56,497
 
 56,497
 
Residential collateralized mortgage-backed securities:       
U.S. government agencies1,566,728
 
 1,566,728
 
Non-agency10
 
 2
 8
Commercial collateralized mortgage-backed securities:       
U.S. government agencies106,568
 
 106,568
 
Corporate debt securities51,138
 
 
 51,138
Asset-backed securities:       
Collateralized loan obligations158,095
 
 
 158,095
Total available-for-sale securities3,299,392
 3,213
 3,083,667
 212,512
Residential loans held for sale22,855
 
 22,855
 
Derivative assets:       
Interest rate swaps - nondesignated47,804
 
 47,804
 
Mortgage loan commitments779
 
 779
 
Forward sale contracts4,458
 
 4,458
 
Foreign exchange117
 
 117
 
Total derivative assets53,158
 
 53,158
 
       Total fair value of assets (a)$3,375,405
 $3,213
 $3,159,680
 $212,512
Derivative liabilities:       
Interest rate swaps - fair value hedges14,319
 
 14,319
 
Interest rate swaps - nondesignated47,804
 
 47,804
 
Foreign exchange94
 
 94
 
Total derivative liabilities62,217
 
 62,217
 
True-up liability10,937
 
 
 10,937
     Total fair value of liabilities (a)$73,154
 $
 $62,217
 $10,937
Nonrecurring fair value measurement       
Mortgage servicing rights (b)$22,529
 $
 $
 $22,529
Impaired loans (c)52,606
 
 
 52,606
Other property (d)16,825
 
 
 16,825
Other real estate covered by loss share (e)18,338
 
 
 18,338
Total fair value$110,298
 $
 $
 $110,298
        

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 



(a) - There were no transfers between levels 1 and 2 of the fair value hierarchy during the three months ended June 30, 2013.
(b) - MSRs with a recorded investment of $22.6 million were reduced by a specific valuation allowance totaling $0.5 million to a reported carrying value of $22.1 million resulting in recovery of a previously recognized expense of $0.8 million in the three months ended June 30, 2013.
(c) - Collateral dependent impaired loans with a recorded investment of $58.1 million were reduced by specific valuation allowance allocations totaling $5.5 million to a reported net carrying value of $52.6 million.
(d) -(4) Amounts do not include assets held at cost at June 30, 2013.December 31, 2014. During the three monthsyear ended June 30, 2013,December 31, 2014, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $0.3$2.6 million included in noninterest expense.
(e) -(5) Amounts do not include assets held at cost at June 30, 2013.December 31, 2014. During the three monthsyear ended June 30, 2013,December 31, 2014, the re-measurement of covered foreclosed assets at fair value subsequent to initial recognition resulted in losses of $0.61.2 million included in noninterest expense.

    Fair Value by Hierarchy
(In thousands)March 31, 2014  Level 1  Level 2  Level 3
Recurring fair value measurement       
Available-for-sale securities:       
Marketable equity securities$3,055
 $3,055
 $
 $
Non-marketable equity securities3,281
   10
 3,271
U.S. States and political subdivisions250,980
 
 250,980
 
Residential mortgage-backed securities:       
U.S. government agencies1,023,994
 
 1,023,994
 
Commercial mortgage-backed securities:       
U.S. government agencies85,133
 
 85,133
 
Residential collateralized mortgage-backed securities:       
U.S. government agencies1,548,104
 
 1,548,104
 
Non-agency8
 
 1
 7
Commercial collateralized mortgage-backed securities:       
U.S. government agencies172,469
 
 172,469
 
Corporate debt securities51,588
 
 
 51,588
Asset-backed securities:       
Collateralized loan obligations294,559
 
 
 294,559
       Total available-for-sale securities3,433,171
 3,055
 3,080,691
 349,425
Residential loans held for sale7,143
 
 7,143
 
Derivative assets:       
Interest rate swaps - fair value hedges1
 
 1
 
Interest rate swaps - nondesignated44,672
 
 44,672
 
Mortgage loan commitments1,575
 
 1,575
 
Forward sale contracts167
 
 167
 
Foreign exchange52
 
 52
 
       Total derivative assets46,467
 
 46,467
 
       Total fair value of assets (1)
$3,486,781
 $3,055
 $3,134,301
 $349,425
Derivative liabilities:       
Interest rate swaps - fair value hedges10,392
 
 10,392
 
Interest rate swaps - nondesignated44,672
 
 44,672
 
Foreign exchange42
 
 42
 
       Total derivative liabilities55,106
 
 55,106
 
True-up liability11,983
 
 
 11,983
       Total fair value of liabilities (1)
$67,089
 $
 $55,106
 $11,983
Nonrecurring fair value measurement       
Mortgage servicing rights (2)
$22,631
 $
 $
 $22,631
Impaired loans (3)
58,296
 
 
 58,296
Other property (4)
11,568
 
 
 11,568
Other real estate covered by loss share (5)
19,708
 
 
 19,708
Total nonrecurring fair value$112,203
 $
 $
 $112,203
        
(1) There were no transfers between levels 1, 2 and 3 of the fair value hierarchy during the three months ended March 31, 2014.
(2) MSRs with a recorded investment of $22.5 million were reduced by a specific valuation allowance totaling $0.4 million to a reported carrying value of $22.0 million resulting in recovery of a previously recognized expense of $0.1 million in the three months ended March 31, 2014.

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(3) Collateral dependent impaired loans with a recorded investment of $65.3 million were reduced by specific valuation allowance allocations totaling $7.0 million to a reported net carrying value of $58.3 million.
(4) Amounts do not include assets held at cost at March 31, 2014. During the three months ended March 31, 2014, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $0.8 million included in noninterest expense.
(5) Amounts do not include assets held at cost at March 31, 2014. During the three months ended March 31, 2014, the re-measurement of covered foreclosed assets at fair value subsequent to initial recognition resulted in losses of $0.4 million included in noninterest expense.

The following section describes the valuation methodologies used by the Corporation to measure financial assets and liabilities at fair value. During the three months ended June 30, 2014March 31, 2015 and 20132014, there were no significant changes to the valuation techniques used by the Corporation to measure fair value.    

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

Securities are classified as Level 2 if quoted prices for identical securities are not available, and fair value is determined using pricing models by a third-party pricing service.   Approximately 90%91% of the available-for-sale portfolio is Level 2. For the majority of available-for sale securities, the Corporation obtains fair value measurements from an independent third-party pricing service. These instruments include: municipal bonds; bonds backed by the U.S. government; corporate bonds; MBS; securities issued by the U.S. Treasury; and certain agency CMOs.  The independent pricing service uses industry-standard models to price U.S. Governmentgovernment agencies and MBS that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Obligations of state and political subdivisions are valued using a matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. For collateralized mortgage securities, depending on the characteristics of a given tranche, a volatility driven multidimensional static model or Option-Adjusted Spread model is generally used. Substantially all assumptions used by the independent pricing service for securities classified as Level 2 are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.
 
Securities are classified as Level 3 when there is limited activity in the market for a particular instrument and fair value is determined by obtaining broker quotes. As of June 30, 2014March 31, 2015, less than 10%9% of the available-for-sale portfolio is Level 3, which consists of single issuer trust preferred securities and CLOs.

The single issuer trust preferred securities are measured at unadjusted prices obtained from the independent pricing service. The independent pricing service prices these instruments through a broker quote when sufficient information, such as cash flows or other security structure or market information, is not available to produce an evaluation. Broker-quoted securities are adjusted by the independent pricing service based solely on the receipt of updated quotes from market makers or broker-dealers recognized as market participants. A list of such issues is compiled by the independent pricing service daily. For broker-quoted issues, the independent pricing service applies a zero spread relationship to the bid-side valuation, resulting in the same values for the mean and ask.

CLO are securitized products where payments from multiple middle-sized and large business loans are pooled together and segregated into different classes of bonds with payments on these bonds based on their priority within the overall deal structure. The markets for such securities are generally characterized by low trading volumes and wide bid-ask spreads, all driven by more limited market participants. Although estimated

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 



prices are generally obtained for such securities, the level of market observable assumptions used is limited in the valuation. Specifically, market assumptions regarding credit adjusted cash flows and liquidity influences on

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 



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

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

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

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

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

Mortgage Servicing Rights. The Corporation carries its MSRs at lower of cost or fair value, and, therefore, they are subject to fair value measurements on a nonrecurring basis. Since sales of MSRs 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 MSRs. 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 MSRs within Level 3.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 



the fair value of its mortgage servicing rights. Since the valuation model uses significant unobservable inputs, the Corporation classifies MSRs within Level 3.

The Corporation utilizes a third-party vendor to perform the modeling to estimate the fair value of its MSRs. The Corporation reviews the estimated fair values and assumptions used by the third-party in the model on a quarterly basis. The Corporation also compares the estimates of fair value and assumptions to recent market activity and against its own experience. See Note 1211 (Mortgage Servicing Rights and Mortgage Servicing Activity) for further information on MSRs valuation assumptions.

Derivatives. The Corporation's derivatives include interest rate swaps and written loan commitments and forward sales contracts related to residential mortgage loan origination activity. Valuations for interest rate swaps are derived from third-party models whose significant inputs are readily observable market parameters, primarily yield curves, with appropriate adjustments for liquidity and credit risk. These fair value measurements are classified as Level 2. The fair values of written loan commitments and forward sales contracts on the associated loans are based on quoted prices for similar loans in the secondary market, consistent with the valuation of residential mortgage loans held for sale. Expected net future cash flows related to loan servicing activities are included in the fair value measurement of written loan commitments. A written loan commitment does not bind the potential borrower to entering into the loan, nor does it guarantee that the Corporation will approve the potential borrower for the loan. Therefore, when determining fair value, the Corporation makes estimates of expected "fallout" (interest rate locked pipeline loans not expected to close), using models, which consider cumulative historical fallout rates and other factors. Fallout can occur for a variety of reasons including falling rate environments when a borrower will abandon a fixed rate loan commitment at one lender and enter into a new lower fixed rate loan commitment at another, when a borrower is not approved as an acceptable credit by the lender or for a variety of other non-economic reasons. Fallout is not a significant input to the fair value of the written loan commitments in their entirety. These measurements are classified as Level 2.
 
Derivative assets are typically secured through securities with financial counterparties or cross collateralization with a borrowing customer. Derivative liabilities are typically secured through the Corporation pledging securities to financial counterparties or, in the case of a borrowing customer, by the right of setoff. The Corporation considers factors such as the likelihood of default by itself and its counterparties, right of setoff, and remaining maturities in determining the appropriate fair value adjustments. All derivative counterparties approved by the Corporation's Asset and Liability CommitteeBank's Board are regularly reviewed, and appropriate business action is taken to adjust the exposure to certain counterparties, as necessary. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of marketable collateral securing the position. This approach used to estimate impacted exposures to counterparties is also used by the Corporation to estimate its own credit risk on derivative liability positions. To date, no material losses have been incurred due to a counterparty's inability to pay any uncollateralized position. There was no significant change in value of derivative assets and liabilities attributed to credit risk for the three months ended June 30, 2014March 31, 2015.
 
True-up liability. In connection with the George Washington and Midwest acquisitions in 2010, the Bank has agreed to pay the FDIC should the estimated losses on the acquired loan portfolios as well as servicing fees earned on the acquired loan portfolios not meet thresholds as stated in the loss sharing agreements (the "true-up liability"). This contingent consideration is classified as a liability within accrued taxes, expenses and other liabilities on the consolidated balance sheets and is remeasured at fair value each reporting date until the contingency is resolved. The changes in fair value are recognized in earnings in the current period.


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An expected value methodology is used as a starting point for determining the fair value of the true-up liability based on the contractual terms prescribed in the loss sharing agreements. The resulting values under both calculations are discounted over 10 years (the period defined in the loss sharing agreements) to reflect the uncertainty in the timing and payment of the true-up liability by the Bank to arrive at a net present value. The

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discount rate used to value the true-up liability was 3.12%3.05% and 3.59%3.46% as of June 30, 2014March 31, 2015 and 20132014, respectively. Increasing or decreasing the discount rate by one percentage point would change the liability by approximately $0.7$0.7 million and $0.8$0.7 million,, respectively, as of June 30,March 31, 2015 and March 31, 2014.

In accordance with the loss sharing agreements governing the Midwest acquisition, on July 15, 2020 (the “Midwest True-Up Measurement Date”), the Bank has agreed to pay to the FDIC half of the amount, if positive, calculated as: (1) 20% of the intrinsic loss estimate of the FDIC (approximately $152 million); minus (2) the sum of (A) 25% of the asset premium paid in connection with the Midwest acquisition (approximately $21 million); plus (B) 25% of the cumulative shared-loss payments (as defined below) plus (C) the cumulative servicing amount (as defined below). The fair value of the true-up liability associated with the Midwest acquisition was $8.6 million, $7.9 million, $7.18.5 million, and $6.87.4 million as of June 30, 2014March 31, 2015, December 31, 20132014, and June 30, 2013March 31, 2014, respectively.

In accordance with the loss sharing agreements governing the George Washington acquisition, on April 14, 2020 (the “George Washington True-Up Measurement Date”), the Bank has agreed to pay to the FDIC 50% of the excess, if any, of (1) 20% of the stated threshold (approximately $34.4 million) less (2) the sum of (A) 25% of the asset discount (approximately $12 million) received in connection with the George Washington acquisition plus (B) 25% of the cumulative shared-loss payments (as defined below) plus (C) the cumulative servicing amount (as defined below). The fair value of the true-up liability associated with the George Washington acquisition was $5.1 million, $4.7 million, $4.34.8 million, and $4.14.6 million as of June 30, 2014March 31, 2015, December 31, 20132014, and June 30, 2013March 31, 2014, respectively.

For the purposes of the above calculations, cumulative shared-loss payments means: (i) the aggregate of all of the payments made or payable to the Bank under the loss sharing agreements minus (ii) the aggregate of all of the payments made or payable to the FDIC. The cumulative servicing amount means the period servicing amounts (as defined in the loss sharing agreements) for every consecutive twelve-month period prior to and ending on the Midwest and George Washington True-Up Measurement Dates. The cumulative loss share payments and cumulative service amounts components of the true-up calculations are estimated each period end based on the expected amount and timing of cash flows of the acquired loan portfolios. See Note 43 (Loans) and Note 54 (Allowance for Loan Losses) for additional information on the estimated cash flows of the acquired loan portfolios.

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2015 and 2014 are summarized as follows:
 Three Months Ended March 31,
 2015 2014
(In thousands)Available-for-sale securities True-up liability Available-for-sale securities True-up liability
Balance at beginning of period$339,187
 $13,294
 $347,610
 $11,463
(Gains) losses included in earnings (1)

 413
 
 520
Unrealized gains (losses) (2)
6,682
 
 1,768
 
Purchases
 
 
 
Settlements362
 
 47
 
Balance at ending of period$346,231
 $13,707
 $349,425
 $11,983
        
(1)Reported in "Other expense"
(2) Reported in "Other comprehensive income (loss)"


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three and six months ended June 30, 2014 and 2013 are summarized as follows:
 Three Months Ended June 30, Six Months Ended June 30,
 2014 2013 2014 2013
(In thousands)Available-for-sale securities True-up liability Available-for-sale securities True-up liability Available-for-sale securities True-up liability Available-for-sale securities True-up liability
Balance at beginning of period$349,425
 $11,983
 $51,234
 $12,783
 $347,610
 $11,463
 $49,661
 $12,259
Fair value of assets acquired
 
 3,271
 
 
 
 3,271
 
(Gains) losses included in earnings (a)

 598
 
 (1,846) 
 1,118
 
 (1,322)
Unrealized gains (losses) (b)
1,253
 
 (1,923) 
 3,021
 
 (363) 
Purchases
 
 159,916
 
 
 
 159,916
 
Settlements55
 
 14
 
 102
 
 27
 
Balance at ending of period$350,733
 $12,581
 $212,512
 $10,937
 $350,733
 $12,581
 $212,512
 $10,937
                
(a) Reported in "Other expense"
(b) Reported in "Other comprehensive income (loss)"

Fair Value Option

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

Interest income on loans held for sale is accrued on the principal outstanding primarily using the “simple-interest” method. None of these loans were 90 days or more past due, nor were any on nonaccrual as of June 30, 2014March 31, 2015, December 31, 20132014, and June 30, 2013March 31, 2014. The aggregate fair value, contractual balance and gain or loss on loans held for sale was as follows:
(In thousands)June 30, 2014 December 31, 2013 June 30, 2013March 31, 2015 December 31, 2014 March 31, 2014
Aggregate fair value carrying amount$21,632
 $11,622
 $22,855
$4,657
 $14,389
 $7,143
Aggregate unpaid principal / contractual balance20,886
 11,438
 23,220
4,489
 13,873
 6,955
Carrying amount over aggregate unpaid principal (a)(1)
$746
 $184
 $(365)$168
 $516
 $188
          
(a) (1) These changes are included in "Loan sales and servicing income" in the Consolidated Statements of Income.


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
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Disclosures about Fair Value of Financial Instruments

The carrying amount and estimated fair value of the Corporation’s financial instruments that are carried at either fair value or cost as of June 30, 2014March 31, 2015, December 31, 20132014, and June 30, 2013March 31, 2014 are shown in the tables below.
June 30, 2014March 31, 2015
Carrying
Amount
 Fair Value
Carrying
Amount
 Fair Value
(In thousands) Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
Financial assets:                  
Cash and cash equivalents$642,570
 $642,570
 $642,570
 $
 $
$532,425
 $532,425
 $532,425
 $
 $
Available-for-sale securities3,478,420
 3,478,420
 2,935
 3,124,752
 350,733
3,791,059
 3,791,059
 2,869
 3,441,959
 346,231
Held-to-maturity securities3,052,118
 3,001,866
 
 3,001,866
 
2,855,174
 2,848,912
 
 2,848,912
 
Other securities148,433
 148,433
 
 148,433
 
148,475
 148,475
 
 148,475
 
Loans held for sale21,632
 21,632
 
 21,632
 
3,568
 3,568
 
 3,568
 
Net originated loans11,375,243
 11,458,318
 
 
 11,458,318
12,758,492
 12,588,147
 
 
 12,588,147
Net acquired loans3,018,810
 3,166,228
 
 
 3,166,228
2,317,386
 2,393,942
 
 
 2,393,942
Net covered loans and loss share receivable433,538
 433,538
 
 
 433,538
Net FDIC acquired loans and loss share receivable268,459
 268,459
 
 
 268,459
Accrued interest receivable63,172
 63,172
 
 63,172
 
69,086
 69,086
 
 69,086
 
Derivatives50,550
 50,550
 
 50,550
 
72,573
 72,573
 
 72,573
 
Financial liabilities:                  
Deposits$19,298,396
 $19,300,842
 $
 $19,300,842
 $
$19,925,595
 $19,932,571
 $
 $19,932,571
 $
Federal funds purchased and securities sold under agreements to repurchase1,218,855
 1,218,855
 
 1,218,855
 
1,113,371
 1,113,371
 
 1,113,371
 
Wholesale borrowings649,021
 652,615
 
 652,615
 
316,628
 320,180
 
 320,180
 
Long-term debt324,433
 335,757
 
 335,757
 
512,625
 527,018
 
 527,018
 
Accrued interest payable8,311
 8,311
 
 8,311
 
9,620
 9,620
 
 9,620
 
Derivatives57,544
 57,544
 
 57,544
 
65,447
 65,447
 
 65,447
 
                  


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



December 31, 2013December 31, 2014
Carrying
Amount
 Fair Value
Carrying
Amount
 Fair Value
(In thousands) Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
Financial assets:                  
Cash and cash equivalents$917,822
 $917,822
 $917,822
 $
 $
$697,424
 $697,424
 $697,424
 $
 $
Available-for-sale securities3,273,174
 3,273,174
 3,036
 2,922,527
 347,611
3,545,288
 3,545,288
 2,974
 3,203,127
 339,187
Held-to-maturity securities2,935,688
 2,824,240
 
 2,824,240
 
2,903,609
 2,875,920
 
 2,875,920
 
Other securities180,803
 180,803
 
 180,803
 
148,654
 148,654
 
 148,654
 
Loans held for sale11,622
 11,622
 
 11,622
 
13,428
 13,428
 
 13,428
 
Net originated loans10,116,903
 10,017,722
 
 
 10,017,722
12,398,116
 12,235,530
 
 
 12,235,530
Net acquired loans3,494,874
 3,627,275
     3,627,275
2,471,723
 2,564,842
 
 
 2,564,842
Net covered loans and loss share receivable547,943
 547,943
 
 
 547,943
Net FDIC acquired loans and loss share receivable312,659
 312,659
 
 
 312,659
Accrued interest receivable52,929
 52,929
 
 52,929
 
63,657
 63,657
 
 63,657
 
Derivatives47,902
 47,902
 
 47,902
 
55,197
 55,197
 
 55,197
 
Financial liabilities:                  
Deposits$19,533,601
 $19,532,368
 $
 $19,532,368
 $
$19,504,665
 $19,510,192
 $
 $19,510,192
 $
Federal funds purchased and securities sold under agreements to repurchase851,535
 851,535
 
 851,535
 
1,272,591
 1,272,591
 
 1,272,591
 
Wholesale borrowings200,600
 204,124
 
 204,124
 
428,071
 430,676
 
 430,676
 
Long-term debt324,428
 319,711
 
 319,711
 
505,192
 516,476
 
 516,476
 
Accrued interest payable9,339
 9,339
 
 9,339
 
9,820
 9,820
 
 9,820
 
Derivatives58,201
 58,201
 
 58,201
 
55,439
 55,439
 
 55,439
 
                  

 June 30, 2013
 
Carrying
Amount
 Fair Value
(In thousands) Total Level 1 Level 2 Level 3
Financial assets:         
Cash and cash equivalents$909,490
 $909,490
 $909,490
 $
 $
Available for sale securities3,299,392
 3,299,392
 3,213
 3,083,667
 212,512
Held to maturity securities2,551,860
 2,487,071
 
 2,487,071
 
Other securities267,565
 267,565
 
 267,565
 
Loans held for sale22,855
 22,855
 
 22,855
 
Net originated loans9,033,980
 8,984,845
 
 
 8,984,845
Net acquired loans4,250,362
 4,250,362
     4,250,362
Net covered loans and loss share receivable711,367
 711,367
 
 
 711,367
Accrued interest receivable48,635
 48,635
 
 48,635
 
Derivatives53,158
 53,158
 
 53,158
 
Financial liabilities:         
Deposits$19,119,722
 $19,125,843
 $
 $19,125,843
 $
Federal funds purchased and securities sold under agreements to repurchase844,871
 844,871
 
 844,871
 
Wholesale borrowings201,337
 205,210
 
 205,210
 
Long-term debt324,422
 322,322
 
 322,322
 
Accrued interest payable9,066
 9,066
 
 9,066
 
Derivatives62,217
 62,217
 
 62,217
 
          

8076

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



 March 31, 2014
 
Carrying
Amount
 Fair Value
(In thousands) Total Level 1 Level 2 Level 3
Financial assets:         
Cash and cash equivalents$959,285
 $959,285
 $959,285
 $
 $
Available for sale securities3,433,171
 3,433,171
 3,055
 3,080,691
 349,425
Held to maturity securities3,079,620
 2,990,161
 
 2,990,161
 
Other securities148,446
 148,446
 
 148,446
 
Loans held for sale7,143
 7,143
 
 7,143
 
Net originated loans10,734,797
 10,621,047
 
 
 10,621,047
Net acquired loans3,232,941
 3,367,024
 
 
 3,367,024
Net FDIC acquired loans and loss share receivable495,815
 495,815
 
 
 495,815
Accrued interest receivable64,555
 64,555
 
 64,555
 
Derivatives46,467
 46,467
 
 46,467
 
Financial liabilities:         
Deposits$19,811,674
 $19,810,963
 $
 $19,810,963
 $
Federal funds purchased and securities sold under agreements to repurchase926,195
 926,195
 
 926,195
 
Wholesale borrowings349,277
 352,923
 
 352,923
 
Long-term debt324,430
 330,337
 
 330,337
 
Accrued interest payable5,682
 5,682
 
 5,682
 
Derivatives55,106
 55,106
 
 55,106
 
          

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

Cash and cash equivalents For theseDue to their short-term instruments,nature, the carrying amount is considered a reasonable estimate of these instruments approximates the estimated fair value.

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

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

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

Net acquired and coveredFDIC acquired loans – Fair values for acquired and coveredFDIC acquired loans were estimated based on a discounted projected cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. Loans were grouped together according to similar

77

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



characteristics and were treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns. The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows.

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

Accrued interest receivable – The carrying amount is considered a reasonable estimate of fair value.
    
Mortgage servicing rights – See Financial Instruments Measured at Fair Value above.

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

Federal funds purchased and securities sold under agreements to repurchase, wholesale borrowings and long-term debt – The carrying amount of variable rate borrowings including federal funds purchased is considered to be theirapproximates the estimated fair value. Quoted market prices or the discounted cash flow method was used to

81

Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



estimate the fair value of the Corporation's long-term debt. Discounting was based on the contractual cash flows and the current rate at which debt with similar terms could be issued.

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

Derivative assets and liabilities – See Financial Instruments Measured at Fair Value above.
    
True-up liability – See Financial Instruments Measured at Fair Value above.

1211.     Mortgage Servicing Rights and Mortgage Servicing Activity

In the three and sixthree months ended June 30, 2014March 31, 2015 and 20132014, the Corporation sold residential mortgage loans from the held for sale portfolio with unpaid principal balances of $143.6$50.3 million and $310.165.6 million, respectively, and recognized pretax gains of $3.50.6 million and $6.71.3 million, respectively, which are included as a component of loan sales and servicing income. As of June 30, 2014March 31, 2015 and 20132014, the Corporation retained the related MSRs on $125.2$45.2 million and $285.357.1 million, respectively, of the loans sold and receives servicing fees.

The Corporation serviced for third parties approximately $2.7$2.6 billion of residential mortgage loans at June 30, 2014March 31, 2015 and $2.7 billion at June 30, 2013March 31, 2014. For the sixthree months ended June 30, 2014March 31, 2015 and 20132014, loan servicing fees, not including valuation changes included in loan sales and servicing income, were $3.31.6 million and $3.11.6 million, respectively.

Servicing rights are presented within other assets on the accompanying Consolidated Balance Sheets. The retained servicing rights are initially valued at fair value. Since MSRs do not trade in an active market with

78

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



readily observable prices, the Corporation relies primarily on a discounted cash flow analysis model to estimate the fair value of its MSRs. Additional information can be found in Note 1110 (Fair Value Measurement). MSRs are subsequently measured using the amortization method. Accordingly, the MSRs 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 MSRs and MSRs valuation allowance are as follows:
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
(In thousands)2014 2013 2014 20132015 2014
Balance at beginning of period$22,469
 $21,378
 $22,760
 $21,316
$22,011
 $22,760
Addition of Citizens' MSRs on Acquisition Date
 1,065
 
 1,065
Additions643
 1,434
 1,207
 2,701
470
 564
Amortization(963) (1,273) (1,817) (2,478)(991) (855)
Balance at end of period22,150
 22,604
 22,150
 22,604
21,490
 22,469
Valuation allowance at beginning of period(425) (1,234) (282) (2,564)(955) (282)
Recoveries (Additions)(137) 752
 (280) 2,082
Additions(176) (143)
Valuation allowance at end of period(562) (482) (562) (482)(1,131) (425)
MSRs, net carrying balance$21,588
 $22,122
 $21,588
 $22,122
$20,359
 $22,044
Fair value at end of period$21,987
 $22,529
 $21,987
 $22,529
$20,526
 $22,631
          

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 MSRs exceeds the

82

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



estimated fair value by stratification. If it is later determined that all or a portion of the temporary impairment no longer exists for the stratification, the valuation is reduced through a recovery to earnings. No permanent impairment losses were written off against the allowance during the sixthree months ended June 30, 2014March 31, 2015 and 20132014.

Key economic assumptions and the sensitivity of the current fair value of the MSRs related to immediate 10% and 25% adverse changes in those assumptions at June 30, 2014March 31, 2015 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 MSRs 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.

(Dollars in thousands)
Prepayment speed assumption (annual CPR)10.64%12.63%
Decrease in fair value from 10% adverse change$743
$778
Decrease in fair value from 25% adverse change$1,783
$1,510
Discount rate assumption9.90%9.39%
Decrease in fair value from 100 basis point adverse change$682
$632
Decrease in fair value from 200 basis point adverse change$1,320
$1,222
Expected weighted-average life (in months)99.30
93

79

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 




1312.     ContingenciesCommitments and Guarantees

Commitments to Extend Credit

To accommodate the financial needs its customers, the Corporation issues off-balance sheet financial instruments in connection with commercial and consumer lending activities. The credit risk associated with these instruments is essentially the same as that involved in extending loans to customers and is subject to the Corporation's normal credit approval policies. The Corporation maintains an allowance to cover probable credit losses inherent in lending-related commitments. The reserve for unfunded lending commitments at March 31, 2015, December 31, 2014, and March 31, 2014, included in “accrued expenses and other liabilities” on the Consolidated Balance Sheets, was $4.3 million, $5.8 million, and $7.5 million, respectively.

The Corporation's credit risk associated with these instruments is represented by the contractual amounts indicated in the following table.
Unused commitments to extend credit     
(In thousands)March 31, 2015 December 31, 2014 March 31, 2014
 Commercial$3,691,193
 $3,748,690
 $3,394,877
 Consumer2,343,677
 2,387,623
 2,237,324
 Total unused commitments to extend credit$6,034,870
 $6,136,313
 $5,632,201
       

Unused Commitments to Extend Credit. Commitments to extend credit are legally binding agreements to lend to a customer, provided there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Since many commitments expire without being drawn upon, the total contractual amount of commitments does not necessarily represent future cash requirements of the Corporation.

Loan commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments, and the fair value of these commitments is recorded on the consolidated balance sheets. Additional information is provided in Note 8 (Derivatives and Hedging Activities).

Guarantees

The Corporation is a guarantor in certain agreements with third parties. The Corporation's maximum credit risk associated with these instruments is represented by the contractual amounts indicated in the following table.
Financial guarantees     
(In thousands)March 31, 2015 December 31, 2014 March 31, 2014
 Standby letters of credit$275,736
 $242,390
 $194,118
 Loans sold with recourse39,996
 45,071
 38,072
 Total financial guarantees$315,732
 $287,461
 $232,190
       


80

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued
FIRSTMERIT CORPORATION AND SUBSIDIARIES 



Standby Letters of Credit. 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 Corporation has recourse against the customer for any amount required to be paid to a third party under a standby letter of credit. Collateral held varies, but may include marketable securities, equipment, inventory, and real estate. Except for short-term guarantees of $199.8 million at March 31, 2015, the remaining guarantees extend in varying amounts through 2019.

Loans Sold with Recourse. The Corporation regularly sells service retained residential mortgage loans to GSEs as part of its mortgage banking activities. The Corporation provides customary representation and warranties to the GSEs in conjunction with these sales. These representations and warranties generally require the Corporation to repurchase assets if it is subsequently determined that a loan did not meet specified criteria, such as a documentation deficiency or rescission of mortgage insurance. If the Corporation is unable to cure or refute a repurchase request, the Corporation is generally obligated to repurchase the loan or otherwise reimburse the counterparty for losses. The Corporation also sells service released residential mortgage loans to other investors which contain early payment default recourse provisions. As of March 31, 2015, December 31, 2014, and March 31, 2014, the Corporation had sold $33.1 million, $38.1 million, and $27.5 million, respectively, of outstanding residential mortgage loans to GSEs and other investors with recourse provisions. The Corporation had reserved $6.7 million, $7.3 million, and $8.2 million as of March 31, 2015, December 31, 2014, and March 31, 2014, respectively, for estimated losses from representation and warranty obligations and early payment default recourse provisions.

Due to prior acquisitions, as of March 31, 2015, the Corporation continued to service approximately $3.7 million in manufactured housing loans that were sold with recourse compared to $3.7 million and $6.4 million as of December 31, 2014 and March 31, 2014. As of March 31, 2015, the Corporation had reserved $1.1 million for potential losses from these manufactured housing loans, consistent with the reserve balance at December 31, 2014 and March 31, 2014.

The total reserve associated with loans sold with recourse was approximately $7.8 million, $8.4 million, and $9.3 million as of March 31, 2015, December 31, 2014, and March 31, 2014, respectively, and is included in accrued taxes, expenses and other liabilities on the Consolidated Balance Sheets. The Corporation's reserve reflects Management's best estimate of losses. The Corporation's reserving methodology uses current information about investor repurchase requests, and assumptions about repurchase mix and loss severity, based upon the Corporation's most recent loss trends. The Corporation also considers qualitative factors that may result in anticipated losses differing from historical loss trends, such as loan vintage, underwriting characteristics and macroeconomic trends.

Changes in the amount of the repurchase reserve for the three months ended March 31, 2015 and 2014 are as follows:
 Three Months Ended March 31, 2015
(In thousands)Reserve on residential mortgage loans Reserve on manufactured housing loans Total repurchase reserve
Balance at beginning of period$7,250
 $1,124
 $8,374
Net realized losses(198) 
 (198)
Net increase (decrease) to reserve(402) 2
 (400)
Balance at end of period$6,650
 $1,126
 $7,776
      


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FIRSTMERIT CORPORATION AND SUBSIDIARIES 



 Three Months Ended March 31, 2014
(In thousands)Reserve on residential mortgage loans Reserve on manufactured housing loans Total repurchased reserve
Balance at beginning of period$8,737
 $1,114
 $9,851
Net realized losses(2,593) 
 (2,593)
Net increase to reserve2,056
 3
 2,059
Balance at end of period$8,200
 $1,117
 $9,317
      





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Litigation

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

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


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FIRSTMERIT CORPORATION AND SUBSIDIARIES 



Overdraft Litigation

Commencing in December 2010, two separate lawsuits were filed in the Summit County Court of Common Pleas and the Lake County Court of Common Pleas against the Corporation and the Bank. The complaints were brought as putative class actions on behalf of Ohio residents who maintained a checking account at the Bank and who incurred one or more overdraft fees as a result of the alleged re-sequencing of debit transactions. The lawsuit that had been filed in Summit County Court of Common Pleas was dismissed without prejudice on July 11, 2011. The remaining suit in Lake County seeks actual damages, disgorgement of overdraft fees, punitive damages, interest, injunctive relief and attorney fees. In December 2012, the trial court issued an order certifying a proposed class and the Bank and Corporation appealed the order to the Eleventh District Court of Appeals. In September 2013, the Eleventh District Court of Appeals affirmed in part and reversed in part the trial court's class certification order, and remanded the case back to the trial court for further consideration, in particular with respect to the class definition. On October 9, 2013, the Bank and Corporation filed with the Eleventh District Court of Appeals an application for reconsideration and application for consideration en banc. On November 20, 2013, the Eleventh District denied those applications. On December 4, 2013, the Bank and Corporation filed a notice of appeal with the Ohio Supreme Court, and on January 3, 2014, they filed with the Ohio Supreme Court a memorandum in support of the Court's exercising its jurisdiction and accepting the appeal. The plaintiffs filed an opposition, and, on April 24, 2014, the Ohio Supreme Court declined to accept jurisdiction. On July 16,August 6, 2014, the Bank and Corporation filed a motion asking the trial court heldto stay the lawsuit pending arbitration of claims subject to an arbitration agreement. That motion has been fully briefed and is awaiting a status conference, at which time it ordered briefing ondecision by the issue ofcourt. On August 25, 2014, the parties stipulated to a revised class definition (without affecting the pending motion to stay), and addressed certain other matters.an order approving that stipulation is awaiting court approval.

Merger Litigation

Between September 17, 2012 and October 5, 2012, alleged shareholders of Citizens filed six purported class action lawsuits in the Circuit Court of Genesee County, Michigan, relating to the proposed merger between Citizens and FirstMerit, which merger closed in April 2013. The lawsuits were consolidated under the caption In re Citizens Republic Bancorp, Inc. Shareholder Litigation, Case No. 12-99027-CK (the "Lawsuit"). The consolidated complaint in the Lawsuit alleges that the former directors of Citizens breached their fiduciary

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 



duties by failing to obtain the best available price in the merger and by not providing Citizens shareholders with all material information related to the merger, and that FirstMerit and Citizens aided and abetted those alleged breaches of fiduciary duty.  The Complaint sought declaratory and injunctive relief to prevent the consummation of the merger, rescissory damages and other equitable relief.  

The plaintiffs and defendants have entered into a settlement of the Lawsuit, andwhich the court approved the settlement on September 20, 2013. Under the settlement, the defendants amended the joint proxy statement/prospectus relating to the merger to include certain supplemental disclosures to shareholders of Citizens and agreed to pay attorneys' fees and expenses as awarded by the court. An alleged former shareholder of Citizens objected to the settlement and has filed an appeal of the court's approval of the settlement;settlement was dismissed in March 2015 and the settlement will nothas become final until that appeal has been resolved.final.

CRBC 401(k) Litigation

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

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 



participants and beneficiaries in the Plan who held Citizens stock in their Plan accounts during the period from April 17, 2008 to "the present." In April 2014, the court denied the defendants' motion to dismiss the second amended complaint, but stayed the action pending the outcome of a case currently before the U.S. Supreme Court. The court lifted the stay in July 2014.complaint.
    
Based on information currently available, consultation with counsel, available insurance coverage and established reserves, Management believes that the eventual outcome of all claims against the Corporation and its subsidiaries will not, individually or in the aggregate, have a material adverse effect on its consolidated financial position or results of operations. However, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the results of operations for a particular period. The Corporation has not established any reserves with respect to any of this disclosed litigation because it is not possible to determine (i) whether a liability has been incurred; or (ii) an estimate of the ultimate or minimum amount of such liability.

Commitments to Extend Credit

Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Loan commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments, and the fair value of these commitments is recorded on the consolidated balance sheets. Additional information is provided in Note 9 (Derivatives and Hedging Activities). Commitments generally are extended at the then-prevailing interest rates, have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon the total commitment amounts do not necessarily represent future cash requirements. Loan commitments involve credit risk not reflected on the balance sheet. The Corporation mitigates exposure to credit risk with internal controls that guide how applications for credit are reviewed and approved, how credit limits are established and, when necessary, how demands for collateral are made. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Management evaluates the creditworthiness of each prospective borrower on a case-by-case basis and, when appropriate, adjusts the allowance for probable credit losses inherent in all commitments. The reserve for unfunded lending commitments at June 30, 2014, December 31, 2013, and June 30, 2013 was $7.1 million, $7.9 million and $8.1 million, respectively. Additional information pertaining to this allowance is included in Note 5 (Allowance for Loan Losses) and under the heading "Allowance for Loan Losses and Reserve for Unfunded Lending Commitments" within Management's Discussion and Analysis of Financial Condition and Results of Operation of this report.

The following table shows the remaining contractual amount of each class of commitments to extend credit as of June 30, 2014, December 31, 2013, and June 30, 2013. This amount represents the Corporation's maximum exposure to loss if the customer were to draw upon the full amount of the commitment and subsequently default on payment for the total amount of the then outstanding loan.
Loan commitments     
(In thousands)June 30, 2014 December 31, 2013 June 30, 2013
 Commercial$3,386,052
 $3,367,625
 $3,020,138
 Consumer2,280,431
 2,179,010
 2,096,495
 Total loan commitments$5,666,483
 $5,546,635
 $5,116,633
       


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Guarantees

The Corporation is a guarantor in certain agreements with third parties. The following table shows the types of guarantees the Corporation had outstanding as of June 30, 2014, December 31, 2013, and June 30, 2013.
Financial guarantees     
(In thousands)June 30, 2014 December 31, 2013 June 30, 2013
 Standby letters of credit$201,212
 $196,400
 $239,181
 Loans sold with recourse34,662
 45,082
 54,944
 Total financial guarantees$235,874
 $241,482
 $294,125
       

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 $113.7 million at June 30, 2014, the remaining guarantees extend in varying amounts through 2019.

Asset Sales

The Corporation regularly sells residential mortgage loans service retained to GSEs as part of its mortgage banking activities. The Corporation provides customary representation and warranties to the GSEs in conjunction with these sales. These representations and warranties generally require the Corporation to repurchase assets if it is subsequently determined that a loan did not meet specified criteria, such as a documentation deficiency or rescission of mortgage insurance. If the Corporation is unable to cure or refute a repurchase request, the Corporation is generally obligated to repurchase the loan or otherwise reimburse the counterparty for losses. The Corporation also sells residential mortgage loans serviced released to other investors which contain early payment default recourse provisions. As of June 30, 2014, December 31, 2013, and June 30, 2013, the Corporation had sold $24.1 million, $34.6 million, and $41.9 million, respectively, of outstanding residential mortgage loans to GSEs and other investors with recourse provisions. The Corporation had reserved $7.9 million, $8.7 million, and $7.3 million as of June 30, 2014, December 31, 2013, and June 30, 2013, respectively, for potential losses from representation and warranty obligations and early payment default recourse provisions.

Due to prior acquisitions, as of June 30, 2014, the Corporation continued to service approximately $6.4 million in manufactured housing loans that were sold with recourse compared to $6.4 million and $8.2 million as of December 31, 2013 and June 30, 2013, respectively. As of June 30, 2014, the Corporation had reserved $1.1 million for potential losses from these manufactured housing loans, consistent with the reserve balance at December 31, 2013 and June 30, 2013.

The total reserve associated with loans sold with recourse was approximately $9.0 million, $9.9 million, and $8.4 million as of June 30, 2014, December 31, 2013, and June 30, 2013, respectively, and is included in accrued taxes, expenses and other liabilities on the Consolidated Balance Sheets. The Corporation's reserve reflects Management's best estimate of losses. The Corporation's reserving methodology uses current information about investor repurchase requests, and assumptions about repurchase mix and loss severity, based

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upon the Corporation's most recent loss trends. The Corporation also considers qualitative factors that may result in anticipated losses differing from historical loss trends, such as loan vintage, underwriting characteristics and macroeconomic trends.

Changes in the amount of the repurchase reserve for the three and six months ended June 30, 2014 and 2013 are as follows:
 Three Months Ended June 30, 2014
(In thousands)Reserve on residential mortgage loans Reserve on manufactured housing loans Total repurchase reserve
Balance at beginning of period$8,200
 $1,117
 $9,317
Net realized losses(164) 
 (164)
Net increase (decrease) to reserve(136) 5
 (131)
Balance at end of period$7,900
 $1,122
 $9,022
      

 Three Months Ended June 30, 2013
(In thousands)Reserve on residential mortgage loans Reserve on manufactured housing loans Total repurchased reserve
Balance at beginning of period$1,600
 $1,138
 $2,738
Assumed obligation6,000
 
 6,000
Net realized losses(928) 
 (928)
Net increase (decrease) to reserve615
 (32) 583
Balance at end of period$7,287
 $1,106
 $8,393
      

 Six Months Ended June 30, 2014
(In thousands)Reserve on residential mortgage loans Reserve on manufactured housing loans Total repurchase reserve
Balance at beginning of period$8,737
 $1,114
 $9,851
Net realized losses(2,757) 
 (2,757)
Net increase (decrease) to reserve1,920
 8
 1,928
Balance at end of period$7,900
 $1,122
 $9,022
      

 Six Months Ended June 30, 2013
(In thousands)Reserve on residential mortgage loans Reserve on manufactured housing loans Total repurchase reserve
Balance at beginning of period$1,500
 $1,167
 $2,667
Assumed obligation6,000
 
 6,000
Net realized losses(1,070) 
 (1,070)
Net increase (decrease) to reserve857
 (61) 796
Balance at end of period$7,287
 $1,106
 $8,393
      



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1413.     Changes and Reclassifications Out of Accumulated Other Comprehensive Income

The following table presents the changes in AOCI by component of comprehensive income for the three and six months ended June 30, 2014March 31, 2015 and 2013:2014:
Three Months Ended June 30, 2014 Six Months Ended June 30, 2014Three Months Ended March 31, 2015 
(In thousands)Pre-tax Tax After-tax Pre-tax Tax After-taxPretax Tax After tax 
Unrealized and realized securities gains and losses:                 
Balance at the beginning of the period$(27,578) $(9,653) $(17,925) $(45,072) $(15,775) $(29,297)$(8,531) $(2,985) $(5,546) 
Changes in unrealized securities' holding gains/(losses)22,456
 7,860
 14,596
 40,500
 14,175
 26,325
34,117
 11,941
 22,176
 
Changes in unrealized securities' holding gains/(losses) that result from securities being transferred into available-for-sale from held-to-maturity(494) (173) (321) (988) (346) (642)
Changes in unrealized securities' holding gains/(losses) that result from securities being transferred from available-for-sale into held-to-maturity(504) (176) (328) 
Net losses/(gains) realized on sale of securities reclassified to noninterest income(80) (28) (52) (136) (48) (88)(354) (124) (230) 
Balance at the end of the period(5,696) (1,994) (3,702) (5,696) (1,994) (3,702)24,728
 8,656
 16,072
 
Pension plans and other postretirement benefits:                 
Balance at the beginning and end of the period(57,812) (20,233) (37,579) (57,812) (20,233) (37,579)(102,068) (35,722) (66,346) 
Current year actual losses (gains)
 
 
 
 
 
Amortization of actuarial gain1,631
 571
 1,060
 1,631
 571
 1,060
1,138
 398
 740
 
Amortization of prior service cost reclassified to other noninterest expense1,097
 383
 714
 1,097
 383
 714
410
 143
 267
 
Balance at the end of the period$(55,084) $(19,279) $(35,805) $(55,084) $(19,279) $(35,805)(100,520) (35,181) (65,339) 
Total Accumulated Other Comprehensive Income$(60,780) $(21,273) $(39,507) $(60,780) $(21,273) $(39,507)$(75,792) $(26,525) $(49,267) 
                 

Three Months Ended June 30, 2013 Six months ended June 30, 2013Three Months Ended March 31, 2014 
(In thousands)Pre-tax Tax After-tax Pretax Tax After-taxPretax Tax After tax 
Unrealized and realized securities gains and losses:                 
Balance at the beginning of the period$73,083
 $25,579
 $47,504
 $85,259
 $29,841
 $55,418
$(45,072) $(15,775) $(29,297) 
Changes in unrealized securities' holding gains/(losses)(75,729) (26,505) (49,224) (87,362) (30,577) (56,785)18,044
 6,315
 11,729
 
Changes in unrealized securities' holding gains/(losses) that result from securities being transferred into available-for-sale from held-to-maturity(568) (199) (369) (1,120) (392) (728)
Changes in unrealized securities' holding gains/(losses) that result from securities being transferred from available-for-sale into held-to-maturity(494) (173) (321) 
Net losses/(gains) realized on sale of securities reclassified to noninterest income2,794
 978
 1,816
 2,803
 981
 1,822
(56) (20) (36) 
Balance at the end of the period(420) (147) (273) (420) (147) (273)(27,578) (9,653) (17,925) 
Pension plans and other postretirement benefits:                 
Balance at the beginning and end of the period(110,188) (38,565) (71,623) (110,188) (38,565) (71,623)(57,812) (20,233) (37,579) 
Current year actual losses (gains)
 
 
 
 
 
Amortization of actuarial gain
 
 
 
 
 
Current year actual losses/(gains)
 
 
 
Amortization of actuarial losses/(gains)
 
 
 
Amortization of prior service cost reclassified to other noninterest expense
 
 
 
 
 

 
 
 
Balance at the end of the period$(110,188) $(38,565) $(71,623) $(110,188) $(38,565) $(71,623)(57,812) (20,233) (37,579) 
Total Accumulated Other Comprehensive Income$(110,608) $(38,712) $(71,896) $(110,608) $(38,712) $(71,896)$(85,390) $(29,886) $(55,504) 
                 

The following table presents current period reclassifications out of AOCI by component of comprehensive income for the three months ended March 31, 2015 and 2014:
(In thousands) Three Months Ended March 31, 2015 Income statement line item presentation
Realized (gains)/losses on sale of securities $(354) Investment securities losses (gains), net
Tax expense (benefit) (35%) (124) Income tax expense (benefit)
Reclassified amount, net of tax $(230)  
     


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The following table presents current period reclassifications out of AOCI by component of comprehensive income for the three and six months ended June 30, 2014 and 2013:
(In thousands) Three Months Ended June 30, 2014 Six Months Ended June 30, 2014 Income statement line item presentation
Realized (gains)/losses on sale of securities $(80) $(136) Investment securities losses (gains), net
Tax expense (benefit) (35%) (28) (48) Income tax expense (benefit)
Reclassified amount, net of tax $(52) $(88)  
       

(In thousands) Three Months Ended June 30, 2013 Six months ended June 30, 2013 Income statement line item presentation Three Months Ended March 31, 2014 Income statement line item presentation
Realized (gains)/losses on sale of securities $2,794
 $2,803
 Investment securities losses (gains), net $(56) Investment securities losses (gains), net
Tax expense (benefit) (35%) 978
 982
 Income tax expense (benefit) (20) Income tax expense (benefit)
Reclassified amount, net of tax $1,816
 $1,821
  $(36) 
        

1514.     Subsequent Events

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


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Figure 1. Consolidated Financial Highlights
Consolidated Financial Highlights    
(Unaudited)Three Months Ended Six Months EndedThree Months Ended
(Dollars in thousands, except per share amounts)June 30,March 31,December 31,September 30,June 30, June 30,March 31,December 31,September 30,June 30,March 31,
20142013 2014201320152014
EARNINGS    
Net interest income TE (a)(1)
$199,666
$197,854
$202,145
$207,079
$201,605
 $397,520
$315,980
$189,554
$196,509
$197,644
$199,666
$197,854
TE adjustment (a)(1)
4,089
3,954
4,077
3,739
3,574
 8,041
6,601
3,931
3,998
4,066
4,089
3,954
Provision for originated loan losses5,993
3,654
1,552
2,523
3,151
 9,647
8,959
6,036
8,662
4,862
5,993
3,654
Provision for acquired loan losses5,815
7,827
5,515
2,033

 13,642

2,214
3,407
4,411
5,815
7,827
Provision for covered loan losses3,445
3,055
2,983
1,823
4,158
 6,501
8,297
Provision/(recapture) for FDIC acquired loan losses(2)1,228
(81)3,445
3,055
Noninterest income72,560
67,270
72,420
71,090
69,439
 139,831
126,832
65,847
71,960
69,733
72,560
67,270
Noninterest expense167,400
169,331
178,620
210,599
188,888
 336,733
295,034
160,652
165,041
163,145
167,400
169,331
Net income59,519
53,455
57,174
40,715
48,450
 112,974
85,796
57,139
61,079
63,898
59,519
53,455
Diluted EPS (c)(3)
0.35
0.31
0.33
0.23
0.29
 0.66
0.61
0.33
0.36
0.37
0.35
0.31
PERFORMANCE RATIOS    
Return on average assets (ROA)0.98%0.90%0.94%0.67%0.85% 0.94%0.91%0.93%0.98%1.03%0.98%0.90%
Return on average equity (ROE)8.62%7.93%8.48%6.07%7.56% 8.28%8.06%8.08%8.50%9.03%8.62%7.93%
Return on average tangible common equity (d)(1)
12.92%11.98%12.96%9.29%11.49% 12.45%12.01%11.85%12.52%13.41%12.92%11.98%
Net interest margin TE (a)(1)
3.75%3.84%3.89%4.05%4.12% 3.79%3.86%3.48%3.56%3.60%3.75%3.84%
Efficiency ratio (d)(1)
60.43%62.77%64.08%74.64%68.10% 61.59%65.60%61.97%60.39%59.92%60.43%62.77%
Number of full-time equivalent employees4,392
4,521
4,570
4,666
4,619
 4,392
4,619
4,103
4,273
4,302
4,392
4,521
MARKET DATA    
Book value per common share$16.88
$16.62
$16.38
$16.08
$16.06
 $16.88
$16.06
$17.46
$17.14
$17.05
$16.88
$16.62
Tangible book value per common share (d)(1)
11.33
11.03
10.77
10.47
10.43
 11.33
10.43
11.96
11.62
11.52
11.33
11.03
Period end common share market value19.75
20.83
22.23
21.72
20.03
 19.75
20.03
19.06
18.89
17.62
19.75
20.83
Market as a % of book117%125%136%135%125% 117%125%109%110%103%117%125%
Cash dividends per common share$0.16
$0.16
$0.16
$0.16
$0.16
 $0.32
$0.32
$0.16
$0.16
$0.16
$0.16
$0.16
Common Stock dividend payout ratio45.71%51.61%48.48%69.57%55.17% 48.48%52.46%48.48%44.44%43.24%45.71%51.61%
Average basic common shares165,335
165,060
165,054
165,044
157,863
 165,198
133,909
165,411
165,395
165,389
165,335
165,060
Average diluted common shares166,147
166,004
166,097
165,874
158,390
 166,052
134,406
166,003
165,974
165,804
166,147
166,004
Period end common shares165,393
165,087
165,056
165,045
165,045
 165,393
165,045
165,453
165,390
165,384
165,393
165,087
Common shares repurchased186
51
17
7
168
 237
194
66
15
10
186
51
Common Stock market capitalization$3,266,512
$3,438,762
$3,669,195
$3,584,777
$3,305,851
 $3,266,512
$3,305,851
$3,153,534
$3,124,217
$2,914,066
$3,266,512
$3,438,762
ASSET QUALITY (excluding acquired and covered loans) (b)
   
ASSET QUALITY (excluding acquired and FDIC acquired loans, covered OREO) (2)
 
Gross charge-offs$11,148
$13,160
$9,913
$8,515
$10,969
 $24,308
$21,745
$8,567
$9,205
$11,410
$11,148
$13,160
Net charge-offs6,159
8,022
3,359
2,877
3,349
 14,181
9,256
4,187
3,849
5,929
6,159
8,022
Allowance for originated loan losses91,950
92,116
96,484
98,291
98,645
 91,950
98,645
97,545
95,696
90,883
91,950
92,116
Reserve for unfunded lending commitments7,107
7,481
7,907
8,493
8,114
 7,107
8,114
4,330
5,848
6,966
7,107
7,481
Nonperforming assets (NPAs)60,922
62,711
60,883
55,426
66,177
 60,922
66,177
68,606
55,038
63,119
60,922
62,711
Net charge-offs to average loans ratio0.22%0.31%0.13%0.12%0.15% 0.27%0.21%0.13%0.12%0.20%0.22%0.31%
Allowance for originated loan losses to period-end loans0.80%0.85%0.94%1.00%1.08% 0.80%1.08%0.76%0.77%0.75%0.80%0.85%
Allowance for credit losses to period-end loans0.86%0.92%1.02%1.09%1.17% 0.86%1.17%0.79%0.81%0.81%0.86%0.92%
NPAs to loans and other real estate0.53%0.58%0.60%0.57%0.72% 0.53%0.72%0.53%0.44%0.52%0.53%0.58%
Allowance for originated loan losses to nonperforming loans250.27%212.01%228.62%276.19%216.97% 250.27%216.97%211.66%276.44%231.13%250.27%212.01%
Allowance for credit losses to nonperforming loans269.61%229.23%247.35%300.06%234.82% 269.61%234.82%221.06%293.34%248.85%269.61%229.23%
CAPITAL & LIQUIDITY    
Period end tangible common equity to assets (d)(1)
7.89%7.69%7.70%7.41%7.58% 7.89%7.58%8.14%7.98%8.01%7.89%7.69%
Average equity to assets11.40%11.32%11.12%11.08%11.28% 11.36%11.34%11.51%11.55%11.42%11.40%11.32%
Average equity to total loans18.90%19.04%18.81%18.97%18.95% 18.97%18.51%18.60%18.67%18.58%18.90%19.04%
Average total loans to deposits75.15%73.11%72.84%72.11%74.04% 74.13%76.89%77.86%78.47%77.36%75.15%73.11%
AVERAGE BALANCES    
Assets$24,291,276
$24,144,570
$24,034,846
$24,013,594
$22,810,702
 $24,216,459
$18,914,581
$24,905,094
$24,664,987
$24,583,776
$24,291,276
$24,144,570
Deposits19,496,795
19,636,506
19,517,476
19,456,231
18,334,244
 19,566,264
15,080,093
19,788,925
19,450,647
19,531,800
19,496,795
19,636,506
Originated loans11,092,101
10,448,383
9,988,587
9,377,826
8,877,754
 10,772,020
8,806,924
12,689,791
12,306,171
11,814,314
11,092,101
10,448,383
Acquired loans, including covered loans, less loss share receivable3,558,810
3,907,802
4,227,693
4,652,101
4,696,740
 3,732,341
2,787,415
Acquired loans, including FDIC acquired loans, less loss share receivable2,717,884
2,956,867
3,295,547
3,558,810
3,907,802
Earning assets21,367,496
20,903,863
20,593,750
20,276,825
19,609,974
 21,136,960
16,526,512
22,100,417
21,920,889
21,804,243
21,367,496
20,903,863
Shareholders' equity2,768,352
2,733,226
2,673,635
2,661,546
2,571,964
 2,750,886
2,145,851
2,866,362
2,849,618
2,807,886
2,768,352
2,733,226
ENDING BALANCES    
Assets$24,564,431
$24,498,661
$23,912,028
$24,137,730
$23,534,873
 $24,564,431
$23,534,873
$25,118,120
$24,902,347
$24,608,207
$24,564,431
$24,498,661
Deposits19,298,396
19,811,674
19,533,601
19,489,533
19,119,722
 19,298,396
19,119,722
19,925,595
19,504,665
19,366,911
19,298,396
19,811,674
Originated loans11,467,193
10,826,913
10,213,387
9,789,139
9,132,625
 11,467,193
9,132,625
12,856,037
12,493,812
12,071,759
11,467,193
10,826,913
Acquired loans, including covered loans,less loss share receivable3,458,453
3,726,952
4,025,758
4,401,711
4,926,888
 3,458,453
4,926,888
Acquired loans, including FDIC acquired loans,less loss share receivable2,614,847
2,810,302
3,139,521
3,458,453
3,726,952
Goodwill741,740
741,740
741,740
741,740
741,740
 741,740
741,740
741,740
741,740
741,740
741,740
741,740
Intangible assets76,886
79,819
82,755
85,447
88,419
 76,886
88,419
68,422
71,020
73,953
76,886
79,819
Earning assets21,789,773
21,715,302
21,048,910
21,297,250
20,772,749
 21,789,773
20,772,749
22,395,343
22,153,552
21,930,840
21,789,773
21,715,302
Total shareholders' equity2,791,738
2,742,966
2,702,894
2,654,645
2,650,909
 2,791,738
2,650,909
2,888,786
2,834,281
2,820,431
2,791,738
2,742,966
NOTES:   


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(a) - The interest income earned on certain earning assets is completely or partially exempt from federal and/or state income taxes. As such, these tax-exempt securities typically yield lower returns than taxable securities. To provide more meaningful comparisons of net interest margins(1) Represents a non-GAAP financial measure. Refer to the Non-GAAP Financial Measures section for all earning assets, net interest income on a taxable-equivalent basis is used in calculating net interest margin by increasing the interest earned on tax-exempt assetsreconciliation to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under generally accepted accounting principles in the Consolidated Statements of Comprehensive Income.GAAP financial measures.
(b) -(2) Due to the impact of business combination accounting and protection of FDIC loss sharing agreements, which provide considerable protection against credit risk, acquired loans, FDIC acquired loans and covered assetsOREO are excluded from this table to provide for improved comparability to prior periods and better perspective into asset quality trends. Certain non-single family loss share agreements with the FDIC expired at March 31, 2015. As of March 31, 2015, $174.6 million and $110.4 million of FDIC acquired loans remained covered by non-single family loss share agreement and single family loss share agreements, respectively, providing considerable protection against credit risk.

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(c) -(3) Net income used to determine diluted EPS was reduced by the cash dividends payable on the Corporation's 5.875% Non-Cumulative Perpetual Preferred Stock, Series A of approximately $1.5$1.5 million in each of the three months ended June 30, 2014March 31, 2015, MarchDecember 31, 2014, December 31, 2013September 30, 2014, September 30, 2013, and June 30, 2013.2014, and March 31, 2014.
(d) - See Figure 2 entitled GAAP to Non-GAAP Reconciliations, which presents the computations of certain financial measures related to tangible common equity and efficiency ratios. The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period to period comparisons.

HIGHLIGHTS OF SECONDFIRST QUARTER OF 20142015 PERFORMANCE

The Corporation reported secondfirst quarter 20142015 net income of $59.557.1 million, or $0.350.33 per diluted share. This compares with$61.1 million, or $0.36 per diluted share, for the fourth quarter 2014 and $53.5 million, or $0.31 per diluted share, for the first quarter 2014 and $48.5 million, or $0.29 per diluted share, for the second quarter 2013. Pre-tax costs associated with branch closures of $4.0 million were recognized in the second quarter of 2014 and are included within noninterest income.
 
ROE and ROA for the secondfirst quarter 20142015 were 8.62%8.08% and 0.93%, respectively, compared with 8.50% and 0.98%, respectively, compared withfor the fourth quarter 2014 and 7.93% and 0.90%, respectively, for the first quarter 2014 and 7.56% and 0.85%, respectively, for the second quarter 2013.

Net Interest Income

Net interest income on a fully tax-equivalentTE basis was $199.7189.6 million in the secondfirst quarter 2015 compared with $196.5 million in the fourth quarter 2014 compared withand $197.9 million in the first quarter 2014 and $201.6 million in the second quarter 2013.

Net interest margin on a TE basis was 3.75%3.48% for the secondfirst quarter 2015 compared with 3.56% for the fourth quarter 2014 compared withand 3.84% for the first quarter 2014 and 4.12% for the second quarter 2013. Second quarter 2014 netNet interest margin compression in the first quarter, compared with the firstprior quarter, 2014 was primarily driven by declining volumeresulted from anticipated lower accretion from the acquired and FDIC acquired loan portfolios due to the continued decline in the acquired loan portfolio and lower investment portfolio yields, partially offset by increased volume of originated loans and day count.balances.

Average originated loans were $11.112.7 billion during the secondfirst quarter 20142015, an increase of $643.7383.6 million, or 6.16%3.12%, compared with the firstfourth quarter 2014, and an increase of $2.2 billion, or 24.94%21.45%, compared with the secondfirst quarter 20132014. Average originated commercial loans increased $365.5245.0 million, or 5.36%3.17%, compared with the prior quarter, and increased $1.31.2 billion, or 22.01%17.02%, compared with the year-ago quarter.

Average deposits were $19.519.8 billion during the secondfirst quarter 20142015, a decreasean increase of $139.7338.3 million, or 0.71%1.74%, compared with the firstfourth quarter 2014, and an increase of $1.2 billion152.4 million, or 6.34%0.78%, compared with the secondfirst quarter 20132014. During the secondfirst quarter 20142015, average core deposits, which exclude time deposits, decreasedincreased $70.6370.8 million, or 0.41%2.17%, compared with the fourth quarter 2014 and increased$246.7 million, or 1.43%, compared with the first quarter 2014 and increased$1.5 billion, or 9.64%, compared with the second quarter 2013. Average time deposits decreased $69.132.6 million, or 2.88%1.39%, and decreased $346.594.3 million, or 12.93%3.92%, respectively, over the prior and year-ago quarters. For the secondfirst quarter 20142015, average core deposits accounted for 88.03%88.33% of total average deposits, compared with 87.76%87.96% for the firstfourth quarter 2014 and 85.38%87.76% for the secondfirst quarter 20132014.

Average investments increased $170.453.5 million, or 2.63%0.81%, compared with the fourth quarter 2014 and increased$183.2 million, or 2.82%, compared with the first quarter 2014 and increased$725.2 million, or 12.23% compared with the second quarter 2013.


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Noninterest Income

Noninterest income, excluding gains and losses on securities transactions, for the secondfirst quarter 20142015 was $72.565.5 million, an increasea decrease of $5.36.5 million, or 7.83%8.97%, from the fourth quarter 2014 and a decrease of $1.7 million, or 2.56%, from the first quarter 2014 and an increase of $0.2 million, or 0.34%, from the second quarter 2013. Included in noninterest income in the secondfirst quarter 20142015 was $4.12.8 million of net gains on covered loans paid in full,loan resolutions, compared to net gains of $1.60.5 million and $1.0$1.6 million in thefourth quarter 2014 and first quarter 2014 and second quarter 2013, respectively. Also includedOffsetting this increase in noninterest income in the secondfirst quarter of 20142015 were costs of $4.0$1.2 million associated with branch closures.closures, a decrease in bank-owned life insurance income of $3.5 million due to death benefit proceeds received in the fourth quarter of 2014, a decrease in service charges on deposits of $1.9 million, and a decrease in loan sales and servicing income of $1.5 million.

Noninterest income, excluding net securities gains and losses, as a percentage of net revenue for the secondfirst quarter 20142015 was 26.63%25.68% compared with 25.36%26.80% for firstfourth quarter 2014 and 26.38%25.36% for the secondfirst quarter 20132014. Net revenue is defined as net interest income, on an TE basis, plus other income, excluding gains and losses from securities sales.

Noninterest Expense

Noninterest expense for the secondfirst quarter 20142015 was $167.4160.7 million, a decrease of $1.94.4 million, or 1.14%2.66%, from the firstfourth quarter 2014 and a decrease of $21.58.7 million, or 11.38%5.13%, from the second quarter 2013. Included in noninterest expense in the first quarter 2014 and second. Noninterest expense in the current quarter 2013 were merger related costs associated with the Citizens acquisitionincluded $1.8 million of $1.0 million and $32.1 million, respectively.restructure costs. The Corporation's efficiency ratio was 60.43%61.97% for the secondfirst quarter 20142015, compared with60.39% for the fourth quarter 2014 and 62.77% for the first quarter 2014 and 68.10% for the second quarter 2013.

The effective tax rate was 30.37%30.80% for the secondfirst quarter 2015 compared with 29.09% for the fourth quarter 2014 compared withand 30.85% for the first quarter 2014 and 32.02% for the second quarter 2013.

Asset Quality (excluding acquired loans and covered assets)

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

Net charge-offs on originated loans totaled $6.24.2 million, or 0.22% of average originated loans in the secondfirst quarter 2015, compared to $3.8 million in the fourth quarter 2014, compared withand $8.0 million, or 0.31% of average originated loans, in the first quarter 2014 and. Net charge-offs on originated loans were $3.3 million, or 0.15%0.13% of average originated loans in theat second quarter 2013March 31, 2015, compared to 0.12% at December 31, 2014 and 0.31% at March 31, 2014.

Nonperforming assets totaled $60.968.6 million at June 30, 2014March 31, 2015, a decreasean increase of $1.813.6 million, or 2.85%24.65%, compared with MarchDecember 31, 2014 and a decreasean increase of $5.35.9 million, or 7.94%9.40%, compared with June 30, 2013March 31, 2014. Nonperforming assets at June 30, 2014March 31, 2015 represented 0.53% of period-end originated loans plus other real estate compared with 0.58%0.44% at MarchDecember 31, 2014 and 0.72%0.58% at June 30, 2013March 31, 2014. Included in first quarter 2015 nonperforming assets were $3.4 million of OREO no longer covered by FDIC loss share agreements.

The allowance for originated loan losses totaled $92.097.5 million at June 30, 2014March 31, 2015. At June 30, 2014March 31, 2015, the allowance for originated loan losses was 0.80%0.76% of period-end originated loans compared with 0.85%0.77% at March

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December 31, 2014 and 1.08%0.85% at June 30, 2013March 31, 2014. The allowance for originated loan losses at March 31, 2015 compared to December 31, 2014 increased by $1.8 million. The allowance for credit losses is the sum of the allowance for originated loan losses and the reserve for unfunded lending commitments. For comparative purposes, the

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allowance for credit losses was 0.86%0.79% of period end originated loans at June 30, 2014March 31, 2015, compared with 0.92%0.81% at MarchDecember 31, 2014 and 1.17%0.92% at June 30, 2013March 31, 2014. The allowance for credit losses to nonperforming loans was 269.61%221.06% at June 30, 2014March 31, 2015, compared with 229.23%293.34% at MarchDecember 31, 2014 and 234.82%229.23% at June 30, 2013March 31, 2014.

Balance Sheet

The Corporation’s total assets at June 30, 2014March 31, 2015 were $24.625.1 billion, an increase of $65.8215.8 million, or 0.27%0.87%, compared with MarchDecember 31, 2014 and an increase of $1.0 billion619.5 million, or 4.37%2.53%, compared with June 30, 2013March 31, 2014.

Total gross loans (originated, acquired, and FDIC acquired) and total deposits were $15.5 billion and $19.319.9 billion, respectively, at March 31, 2015, $15.3 billion and $19.5 billion, respectively, at December 31, 2014 and $14.6 billion and $19.8 billion, respectively, at March 31, 2014. Core deposits totaled $17.6 billion at June 30, 2014March 31, 2015, a decreasean increase of $513.3339.3 million, or 2.59%1.97%, from MarchDecember 31, 2014 and an increase of $178.7126.7 million, or 0.93%0.73%, from June 30, 2013. Core deposits totaled $17.0 billion at June 30, 2014, a decrease of $397.7 million, or 2.28%, from March 31, 2014 and an increase of $727.2 million, or 4.46%, from June 30, 2013.

Shareholders’ equity was $2.9 billion, $2.8 billion as of June 30, 2014, and $2.7 billion as of March 31, 2015, December 31, 2014, and June 30, 2013March 31, 2014. The Corporation maintained a strong capital position as tangible common equity to assets was 7.89%8.14% at June 30, 2014March 31, 2015, compared with 7.69%7.98% at MarchDecember 31, 2014 and 7.58%7.69% at June 30, 2013March 31, 2014. The common share cash dividend paid in the secondfirst quarter 20142015 was $0.16 per share.

On January 1, 2015, the Corporation became subject to the Basel III capital framework and standardized approach for calculating risk-weighted assets. At March 31, 2015, Basel III capital ratios on a transitional basis remain well in excess of applicable regulatory requirements, with a total risk-based capital ratio of 13.72%, and a common equity tier 1 risk-based capital ratio of 10.60%.

REGULATION AND SUPERVISION

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

FederalThe preemption of certain state laws previously granted to national banking associations by the OCC under the National Bank Act has been limited, especially with respect to consumer laws. Thus, Congress has authorized states to enact their own substantive protections and to allow state attorneys general to initiate civil actions to enforce federal consumer protections. The Corporation is also subject to regulation by the CFPB. The CFPB has the power to examine the Corporation and to make and interpret the rules under the "various" consumer financial laws, and to enforce such laws and rules.
On March 21, 2014, the United States Court of Appeals for the District of Columbia upheld the Federal Reserve debit card interchange rules as consistent with the Durbin Amendment to the Dodd-Frank Act.

Many aspects of the Dodd-Frank Act remain subject to intensive agency rulemaking and subsequent public comment prior to implementation, and it is difficult to predict at this time the ultimate effect of the Dodd-Frank Act on the Corporation. In addition, some of the regulations adopted lack any interpretive guidance.
It is likely, however, that the Corporation’s expenses will increase as a result of new compliance requirements.


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

93To the extent that the information contained within this section describes statutory and regulatory provisions applicable to the Corporation or its subsidiaries, it is qualified in its entirety by reference to the full text of those provisions. Also, such statues, 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.

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New Capital Rules

In July 2013, the Federal Reserve and the OCC jointly adopted final rules effective generally onOn January 1, 2015, to implementthe Corporation and the Bank adopted the Basel III capital framework and regulatory capital changes required bystandardized approach for calculating risk-weighted assets. The implementation of the Dodd-Frank Act.

The new rules will apply to the Bank and the Corporation on a consolidated basis. The rules revise minimumBasel III capital requirements is transitional and prompt corrective action thresholdsphases in from January 1, 2015 through the end of 2018. The Basel III capital requirements emphasize CET1, which replaces tier 1 common equity. CET1 capital primarily includes common shareholders’ equity less certain deductions for goodwill and introduce a newother intangibles, net of taxes, MSRs, net of taxes, and DTAs that arise from tax loss and credit carryforwards. Tier 1 capital is primarily comprised of common equity tier 1 capital or "CET1" requirement.and perpetual preferred stock. Tier 2 capital primarily includes qualifying subordinated debt and qualifying ALL. Periods presented prior to March 31, 2015 are reported on a Basel I basis.

Basel III includes new minimum risk-based and leverage capital requirements for all banking organizations and removal of references to credit ratings. Basel III, when fully phased-in on January 1, 2019, requires a new minimum CET1 risk-based capital of 4.5%. The new minimum ratio of tier 1 capital to risk-weighted assets requirementsis increased from 4.0% to 6.0% and all banking organizations are now subject to a common equity tier 14.0% minimum leverage ratio. The required total risk based capital ratio of 4.5% and a tier 1 capital ratio of 6.0%, which is an increase from 4.0%, and a total capital ratio that remains at 8.0%. The minimum leverage ratio (tier 1 capital to total assets) is 4.0%. The rules adopt stricter eligibility criteria for regulatory capital instruments that would disallow the inclusion of instruments such as trust preferred securities in tier 1 capital going forward, and new constraints on the inclusion of minority interests, mortgage-servicing assets, deferred tax assets, and certain investments in the capital of unconsolidated financial institutions. A new capital conservation buffer of 2.5% of risk-weighted assets is being phased-in over a transition period ending December 31, 2018.not changed. Failure to maintain the in excess of therequired capital conservation buffer will restrict or prohibit dividends, share repurchases and discretionary bonuses. When theThe new rules are fully phased in,provide strict eligibility criteria for regulatory capital instruments, and change the minimum capital requirements plus the capital conservation buffer will exceed the prior prompt corrective action well-capitalized thresholds. The new rules increases the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors. The rules remove any referencescheme to external credit ratings in determining risk weights.

Management is evaluatingreflect the new rulescapital ratios. The final rule also changes the method for calculating risk-weighted assets in an effort to better identify riskier assets requiring higher capital cushions and their effects on the Corporation and the Bank, but Management believes the Corporation and the Bank will remain "well-capitalized” under the new rules. The new rules generally will be effective for the Corporation and the Bank beginning January 1, 2015.to enhance risk sensitivity.

Stress Testing

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

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


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The banking agencies issued Supervisory Guidance on Stress Testing for Banking Organizations With More Than $10 Billion in Total Consolidated Assets on May 17, 2012. On July 30, 2013, the federal banking agencies issued Proposed Supervisory Guidance on Implementing Dodd-Frank Act Company-Run Stress Tests for Banking Organizations with Total Consolidated Assets of more than $10 Billion but less than $50 Billion, which describes supervisory guidanceexpectations for stress testingtests by medium-sized companies,companies. In March 2014, the “Supervisory Guidance,” was issued on March 5, 2014,OCC, the Federal Reserve and the OCC has proposed moving the date such stress tests are due from March 31 to July 31 each year.FDIC issued Final Supervisory Guidelines on Implementing Dodd Frank Act Company-Run Stress Tests for Banking Organizations with Total Consolidated Assets of More Than $10 Billion but Less Than $50 billion.

Each banking organization's board of directors and senior management are required to approve and review the policies and procedures of their stress testing processes as frequently as economic conditions or the condition of the organization may warrant, and at least annually. They are also required to consider the results of the stress test in the normal course of business, including the banking organization's capital planning

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(including (including dividends and share buybacks), assessment of capital adequacy and maintaining capital consistent with its risks and risk management practices. The results of the stress tests are provided to the applicable federal banking agencies. Public disclosure of stress test results is required beginning in 2015. The Corporation submitted its initial stress tests to the regulators in March 2014.

Other Legislation

Various legislationLegislation affecting financial institutions and the financial industry will likely continue to be introduced in Congress and state legislatures, and such legislation may further change banking statutes and the operating environment of the Corporation and its subsidiaries in substantial and unpredictable ways, and could increase or decrease the Corporation'sCorporation’s cost of doing business, limit or expand permissible activities or affect theits competitive balance depending upon whether any of this potential legislationposition. Legislation that is enacted, and if enacted, the effect that it ortogether with any implementing regulations, would have oncould affect the financial condition or results of operations of the Corporation or any of its subsidiaries.

To the extent this Regulation and Supervision information describes statutory and regulatory provisions applicable to the Corporation or its subsidiaries, it is qualified in its entirety by reference to the full text of those provisions. Also, such statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies and are subject to interpretation and 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 Corporation's business. For additional information on regulatory developments, refer to Item 1. “Business, Regulation and Supervision” of the 20132014 Form 10-K.

NON-GAAP FINANCIAL MEASURES
Figure 2 below presents computations of earnings (loss) and certain other financial measures that exclude certain items that are included in the financial results presented in accordance with GAAP and are therefore considered non-GAAP financial measures. Management believes these non-GAAP financial measures enhance an investor's understanding of the business by providing a meaningful base for period-to-period comparisons, assisting in operating results analysis, and predicting future performance on the same basis as applied by Management and the Board of Directors. These non-GAAP financial measures are also used by Management to assess the performance of the Corporation's business, becausein comparison to the Corporation's other ongoing operations. Management does not consider the activities related to the adjustments to be indications of ongoing operations. Management and the Board of Directors utilize these non-GAAP financial measures as follows:follows, among others:
Preparation of operating budgets
Monthly financial performance reporting
Monthly, quarterly and year-to-date assessment of the Corporation's business
Monthly close-out reporting of consolidated results (Management only)
Presentations to investors of corporate performance


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Net interest income is presented on a TE basis and excludes net securities gains and losses.basis. Net interest income-TE includes the effects of taxable-equivalent adjustments using a statutory federal income tax rate of 35% adjusted for the non-deductible portion of interest expense incurred to acquire the tax-free assets. Net interest income TE enhances comparability of net interest income arising from taxable and tax exempt sources and is the preferred industry measurement of net interest income.

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Total revenue is calculated as net interest income-TE plus noninterest income and excludes net securities gains or losses. Management believes that noninterest income without net securities gains or losses is more indicative of the Corporation's performance because it isolates income that is primarily client relationship and client transaction driven and is more indicative of normalized operations.
The efficiency ratio is a non-GAAP financial measure which measures productivity and is generally calculated as noninterest expense divided by total revenue-TE. The efficiency ratio removes the impact of the Corporation's intangible asset amortization from the calculation. The adjusted efficiency ratio further removes the impact of the Citizens' merger related charges. The fee income ratio is another non-GAAP financial measure calculated as noninterest income without net securities gains or losses divided by total revenue-TE. Management uses these ratios to monitor performance and believes these measures provide meaningful information to investors.
Tangible common equity ratios have been a focus of some investors in analyzing the capital position of the Corporation absent the effects of intangible assets and preferred stock. Traditionally, the banking regulators have assessed bank and BHC capital adequacy based on Tier 1 capital, the calculation of which is codified in federal banking regulations. The new Basel III rules, adopted in July 2013, include aeffective January 1, 2015, replace tier 1 common equity Tier I capital to risk-weighted assetsand the tier 1 common equity ratio with CET1 and CET1 risk-based capital ratio. Analysts and banking regulators have assessed the Corporation's capital adequacy using the tangible common shareholders' equity and/or the Tier 1 common equityCET1 measure, including on a risk-weighted basis. Tangible common equity and Tier 1 common equityCET1 are not formally defined by GAAP,GAAP; accordingly, these measures are considered to be non-GAAP financial measures, and other entities may calculate them differently than the Corporation's disclosed calculations. Since analysts and banking regulators assess the Corporation's capital adequacy using tangible common shareholders' equity and Tier 1 common equity,CET1, Management believes this information will assist investors to assess the Corporation's capital adequacy on these same bases.
Tier 1 common equityCET1 capital is often expressed as a percentage of risk-weighted assets. Under the risk-based capital framework, a bank's various balance sheet assets and credit equivalent amounts of off-balance sheet items are assigned to one of several regulatory risk categories. The aggregated dollar amount in each category is then multiplied by the risk weighting assigned to that category. The resulting weighted values are added together and this sum is the risk-weighted assets total that, as adjusted, comprises the denominator of certain risk-based capital ratios. Tier 1 capital is then divided by this denominator (risk-weighted assets) to determine the Tier 1 capital ratio. Adjustments are made to Tier 1 capital to arrive at Tier 1 common equityCET1 (non-GAAP). Tier 1 common equityCET1 is also divided by the risk-weighted assets to determine the Tier 1 common equityCET1 risk-based capital ratio. The amounts disclosed as risk-weighted assets are calculated consistent with current banking regulatory requirements.
The Corporation currently calculates its risk-based capital ratios under guidelines adopted by the Federal Reserve based on the Basel I capital ratios. When fully phased-in,III, which became effective for the new Basel III capital rules adopted in July 2013, will change capital requirements and place greater emphasis on common equity. The calculations provided below are estimates, based on the Corporation's current understanding of the 2013 regulatory capital rules implementing Basel III in the United States, including the Corporation's reading of the requirements, and informal feedback received through the regulatory process. The Corporation's understanding of the Federal Reserve'sCorporation and the OCC's July 2013 Basel III capital rules is evolving and will likely change as the Corporation gains more experience with the new regulations before these become effectiveBank on January 1, 2015. Because the Basel III rules are not formally defined by GAAP, these measures are considered to be non-GAAP financial measures, and other entities may calculate them differently from the Corporation'sCorporation’s disclosed calculations. Since analysts and banking regulators may assess the Corporation'sCorporation’s capital adequacy using the Basel III framework,

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Management believes that it is useful to provide investors information enabling them to assess the Corporation'sCorporation’s capital adequacy on the same basis.

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Tangible book value per share (non-GAAP) and common equity per share (non-GAAP) are approximate measures of the Corporation's common equity excluding goodwill and other intangible assets, and liquidation values. Management uses these values to evaluate the current market value and believes these measures are useful for evaluating the performance of a business consistently, whether acquired or developed internally. These per share values are calculated by deducting preferred stock from shareholder's equity for common equity value (non-GAAP) and deducting intangible assets from the common equity value for tangible book value (non-GAAP). Both values (numerator) are then divided by period end common sharesCommon Stock outstanding.
Return on average tangible common shareholders' equity calculates the return on average common shareholders' equity excluding goodwill and other intangible assets. This measure is useful for evaluating the performance of a business consistently, whether acquired or developed internally.
        Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of results as reported under GAAP. These non-GAAP measures are not necessarily comparable to similar measures that may be represented by other companies.

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Figure 2. GAAP to Non-GAAP Reconciliations
(Dollars in thousands)(Dollars in thousands)June 30, 2014 December 31, 2013 June 30, 2013(Dollars in thousands)March 31, 2015 December 31, 2014 March 31, 2014
Tangible common equity to tangible assets at period endTangible common equity to tangible assets at period end     Tangible common equity to tangible assets at period end     
Shareholders’ equity (GAAP)$2,791,738
 $2,702,894
 $2,650,909
Shareholders’ equity (GAAP)$2,888,786
 $2,834,281
 $2,742,966
Less:Intangible assets76,886
 82,755
 88,419
Less:Intangible assets68,422
 71,020
 79,819
 Goodwill741,740
 741,740
 741,740
 Goodwill741,740
 741,740
 741,740
 Preferred Stock100,000
 100,000
 100,000
 Preferred Stock100,000
 100,000
 100,000
Tangible common equity (non-GAAP)$1,873,112
 $1,778,399
 $1,720,750
Tangible common equity (non-GAAP)$1,978,624
 $1,921,521
 $1,821,407
Total assets (GAAP)24,564,431
 23,912,028
 23,534,873
Total assets (GAAP)25,118,120
 24,902,347
 24,498,661
Less:Intangible assets76,886
 82,755
 88,419
Less:Intangible assets68,422
 71,020
 79,819
 Goodwill741,740
 741,740
 741,740
 Goodwill741,740
 741,740
 741,740
Tangible assets (non-GAAP)$23,745,805
 $23,087,533
 $22,704,714
Tangible assets (non-GAAP)$24,307,958
 $24,089,587
 $23,677,102
Tangible common equity to tangible assets ratio (non-GAAP)7.89% 7.70% 7.58%Tangible common equity to tangible assets ratio (non-GAAP)8.14% 7.98% 7.69%
Tier 1 common equity - Basel I     
Capital (1)
Capital (1)
(Basel III) (Basel I) (Basel I)
Shareholders' equity (GAAP)$2,791,738
 $2,702,894
 $2,650,909
Shareholders' equity (GAAP)$2,888,786
 $2,834,281
 $2,742,966
Plus:Net unrealized (gains) losses on available-for-sale securities3,702
 29,297
 274
Plus:Net unrealized (gains)/ losses on investment securities related to AOCI(16,072) 5,546
 17,925
 Losses recorded in AOCI related to defined benefit postretirement plans35,805
 37,579
 71,623
 Defined benefit postretirement plan losses related to AOCI65,339
 66,346
 37,579
 Trust preferred securities74,502
 74,500
 74,499
 Trust preferred securities
 
 74,501
Less:Goodwill741,740
 741,740
 741,740
 Goodwill (GAAP)741,740
 741,740
 741,740
 Intangible assets76,886
 82,755
 88,419
 
Less: Deferred tax liability associated with goodwill (1)
19,023
 
 
 Disallowed deferred tax asset107,090
 137,027
 130,693
Less:
Net non-qualifying goodwill (regulatory) (1)
722,717
 741,740
 741,740
 Other adjustments1,798
 1,944
 2,841
 Intangible assets (GAAP)68,422
 71,020
 79,819
Tier 1 capital - Basel I (regulatory)1,978,233
 1,880,804
 1,833,612
 
Less: Deferred tax liability associated with intangible assets (1)
21,187
 
 
Less:Preferred Stock100,000
 100,000
 100,000
Less:Net intangible assets (Regulatory)47,235
 71,020
 79,819
 Trust preferred securities74,502
 74,500
 74,499
 
Disallowed deferred tax asset (1)
190,102
 87,001
 129,200
Tier 1 common equity - Basel I (non-GAAP)$1,803,731
 $1,706,304
 $1,659,113
 
Other adjustments (1)
(28,341) 1,951
 1,774
Risk-weighted assets - Basel I (regulatory)$17,104,892
 $16,320,833
 $16,151,960
Tier 1 capital (regulatory)2,006,340
 2,004,461
 1,920,438
Tier 1 common equity ratio - Basel I (non-GAAP)10.55% 10.45% 10.27%Less:Preferred Stock100,000
 100,000
 100,000
Tier 1 common ratio - Basel III (estimates) (1)
     
Shareholders' equity (GAAP)$2,791,738
 $2,702,894
 $2,650,909
 Trust preferred securities
 
 74,501
Plus:Net unrealized (gains) losses on available-for-sale securities3,702
 29,297
 274
Plus:Tier 1 capital adjustments100,000
 
 
 Defined benefit postretirement plans in accumulated other comprehensive income35,805
 37,579
 71,623
Tier 1 common equity (non-GAAP) (1)
N/A
 $1,904,461
 $1,745,937
Less:Non-qualifying goodwill741,740
 741,740
 741,740
CET1 capital (non-GAAP) (1)
$2,006,340
 N/A
 N/A
 Non-qualifying intangible assets76,886
 82,755
 88,419
Risk-weighted assets (regulatory) (1) 
$18,934,941
 $17,391,022
 $16,687,071
 Disallowed deferred tax asset173,039
 205,962
 174,500
Tier 1 common equity ratio (non-GAAP) (1)
N/A
 10.95% 10.46%
 Other adjustments1,798
 1,944
 2,841
CET1 risk-based capital ratio (non-GAAP) (1)
10.60% N/A
 N/A
Tier 1 capital - Basel III (regulatory)1,837,782
 1,737,369
 1,715,306
      
Less:Preferred Stock100,000
 100,000
 100,000
Tier 1 common equity - Basel III (regulatory)$1,737,782
 $1,637,369
 $1,615,306
Risk-weighted assets - Basel III (regulatory)$17,863,506
 $17,114,143
 $16,411,917
Tier 1 common equity ratio - Basel III9.73% 9.57% 9.84%
      

GAAP to Non-GAAP Reconciliations, continued
(Dollars in thousands, except per share amounts)March 31, 2015 December 31, 2014 March 31, 2014
Book value, common equity value and tangible book value, per share     
 Shareholders’ equity (GAAP)$2,888,786
 $2,834,281
 $2,742,966
 Less:Preferred Stock100,000
 100,000
 100,000
 Common shareholders' equity (non-GAAP)2,788,786
 2,734,281
 2,642,966
 Less:Intangible assets68,422
 71,020
 79,819
  Goodwill741,740
 741,740
 741,740
 Tangible common equity (non-GAAP)$1,978,624
 $1,921,521
 $1,821,407
 Period end common shares165,453
 165,390
 165,087
 Book value per share$17.46
 $17.14
 $16.62
 Common equity per share16.86
 16.53
 16.01
 Tangible book value per common share11.96
 11.62
 11.03
        

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GAAP to Non-GAAP Reconciliations, continued
(Dollars in thousands, except per share amounts)June 30, 2014 December 31, 2013 June 30, 2013
Book value, common equity value and tangible book value, per share     
 Shareholders’ equity (GAAP)$2,791,738
 $2,702,894
 $2,650,909
 Less:Preferred Stock100,000
 100,000
 100,000
 Common shareholders' equity2,691,738
 2,602,894
 2,550,909
 Less:Intangible assets76,886
 82,755
 88,419
  Goodwill741,740
 741,740
 741,740
 Tangible common equity (non-GAAP)$1,873,112
 $1,778,399
 $1,720,750
 Period end common shares165,393
 165,056
 165,045
 Book value per share$16.88
 $16.38
 $16.06
 Common equity per share16.27
 15.77
 15.46
 Tangible book value per common share11.33
 10.77
 10.43
        
 Three Months Ended June 30, Six Months Ended June 30,
(Dollars in thousands)2014 2013 2014 2013
 Net income$59,519
 $48,450
 $112,974
 $85,796
 
Adjustments to net income, net of tax (2)
       
 Plus:Acquisition related expenses
 20,851
 706
 23,191
  Branch closure costs$2,646
 $
 $2,568
 $
  Adjusted net income (non-GAAP)$62,165
 $69,301
 $116,248
 $108,987
 Average assets (GAAP)$24,291,276
 $22,810,702
 $24,216,459
 $18,914,581
 Average equity (GAAP)2,768,352
 2,571,964
 2,750,886
 2,145,851
 Less:Average Preferred Stock100,000
 100,000
 100,000
 81,215
 Average common shareholders' equity (non-GAAP)2,668,352
 2,471,964
 2,650,886
 2,064,636
 Less:Average intangible assets78,314
 79,972
 79,775
 43,289
  Average goodwill741,739
 701,220
 741,739
 581,299
 Average tangible common equity (non-GAAP)$1,848,299
 $1,690,772
 $1,829,372
 $1,440,048
         
 Return on average assets0.98% 0.85% 0.94% 0.91%
 Adjusted return on average assets net of Citizens' merger related charges (non-GAAP)1.03% 1.22% 0.97% 1.16%
 Return on average equity8.62% 7.56% 8.28% 8.06%
 Adjusted return on average equity net of Citizens' merger related charges (non-GAAP)9.01% 10.81% 8.52% 10.24%
 
Return on average tangible common equity (non-GAAP) (3)
12.92% 11.49% 12.45% 12.01%
 Adjusted return on average tangible common equity net of Citizens' merger related charges (non-GAAP)13.49% 16.44% 12.81% 15.26%
          
 Three Months Ended March 31,
(Dollars in thousands)2015 2014
 Net income (GAAP)$57,139
 $53,455
 
Adjustments to net income, net of tax (2)
   
 Plus:Acquisition related expenses, net of taxes
 628
  Branch closure costs783
 
  Restructure expenses1,149
 
  Total adjusted charges1,932
 628
  Adjusted net income (non-GAAP)$59,071
 $54,083
 Annualized net income (GAAP)$231,730
 $216,790
  Annualized adjusted net income (non-GAAP)$239,566
 $219,337
 Average assets (GAAP)$24,905,094
 $24,144,570
 Average equity (GAAP)2,866,362
 2,733,226
 Less:Average Preferred Stock100,000
 100,000
 Average common shareholders' equity (non-GAAP)2,766,362
 2,633,226
 Less:Average intangible assets69,692
 81,253
  Average goodwill741,740
 741,739
 Average tangible common equity (non-GAAP)$1,954,930
 $1,810,234
     
 Return on average assets (GAAP)0.93% 0.90%
 Adjusted return on average assets net of adjusted charges (non-GAAP)0.96% 0.91%
 Return on average equity (GAAP)8.08% 7.93%
 Adjusted return on average equity net of adjusted charges (non-GAAP)8.36% 8.02%
 
Return on average tangible common equity (non-GAAP) (3)
11.85% 11.98%
 Adjusted return on average tangible common equity net adjusted charges (non-GAAP)12.25% 12.12%
      

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GAAP to Non-GAAP Reconciliations, continued
   Three Months Ended June 30, Six Months Ended June 30,
(Dollars in thousands)2014 2013 2014 2013
 Net interest income (GAAP)$195,577
 $198,031
 $389,479
 $309,379
 TE Adjustment4,089
 3,574
 8,041
 6,601
 Net interest income - TE (non-GAAP)199,666
 201,605
 397,520
 315,980
 Noninterest income (GAAP)72,560
 69,439
 139,831
 126,832
 
Adjustments to noninterest income (2)
       
 Less:Securities gains (losses)80
 (2,794) 136
 (2,803)
 Plus:
Branch closure costs (3)
3,951
 
 3,951
 
  Adjusted noninterest income (non-GAAP)76,431
 72,233
 143,646
 129,635
 Total revenue, TE excluding securities gains (losses) (non-GAAP)276,097
 273,838
 541,166
 445,615
 Noninterest expense (GAAP)167,400
 188,888
 336,733
 295,034
 
Adjustments to noninterest expense (2)
       
 Less:Intangible asset amortization2,933
 2,411
 5,869
 2,728
  
Branch closures costs and acquisition related expenses (3)
120
 29,284
 1,086
 32,884
  Adjusted noninterest expense (non-GAAP)$164,347
 $157,193
 $329,778
 $259,422
         
 Fee income ratio (non-GAAP)26.63% 26.38% 26.00% 29.09%
 Efficiency ratio (non-GAAP)60.43% 68.10% 61.59% 65.60%
 Adjusted efficiency ratio net of Citizens' merger related charges (non-GAAP)59.53% 57.40% 60.94% 58.22%
          
   Three Months Ended March 31,
(Dollars in thousands)2015 2014
 Net interest income (GAAP)$185,623
 $193,900
 TE Adjustment3,931
 3,954
 Net interest income TE (non-GAAP)189,554
 197,854
 Noninterest income (GAAP)65,847
 67,270
 
Adjustments to noninterest income (2)
   
 Less:Securities gains /(losses)354
 56
 Plus:
Branch closure costs and acquisition related expenses (3)
1,205
 
  Adjusted noninterest income (non-GAAP)66,698
 67,214
 Adjusted total revenue, TE excluding securities gains/(losses) (non-GAAP)256,252
 265,068
 Noninterest expense (GAAP)160,652
 169,331
 
Adjustments to noninterest expense (2)
   
 Less:Intangible asset amortization2,598
 2,936
  Adjusted noninterest expense, excluding amortization of intangibles158,054
 166,395
 Less:Restructure expenses1,767
 
  
Branch closures costs and acquisition related expenses (3)

 966
  Adjusted noninterest expense (non-GAAP)$156,287
 $165,429
     
 Net interest margin on a TE basis (non-GAAP)3.48% 3.84%
 Fee income ratio (non-GAAP)25.68% 25.36%
 Efficiency ratio, excluding amortization of intangible assets and security gains/(losses) (non-GAAP)61.97% 62.77%
 Adjusted efficiency ratio (non-GAAP)60.99% 62.41%
      
(1) The Basel III calculations of Tiercapital rules, effective effective January 1, 2015, replace tier 1 common equity RWA and the Tierassociated tier 1 common equity ratio with CET1 and the CET1 risk-based capital ratio. These ratios reflect the transitional capital requirements and phase-in provisions, including the standardized approach for calculating risk weighted assets. Periods prior to March 31, 2015 are based upon Management's current interpretation of the final Basel III rules issued by the Federal Reserve in July 2013,reported on a fully phased inBasel I basis.
(2) Management believes these adjustments increase comparability of period-to-period results and uses these measures to assess performance and believes investors may find them useful in their analysis of the Corporation. It is possible that the activities related to the adjustments may recur; however, Management does not consider the activities related to the adjustments to be indications of ongoing operations.
(3) Management determines these costs to be significant, non-reoccurring items in the period and, therefore, removes these additional costs in calculating an adjusted efficiency ratio. Management believes removal of these significant, non-reoccurring items improves comparability period to period.


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RESULTS OF OPERATIONS
Figure 3. Average Tax-Equivalent Balance Sheets-Quarter to Date
 Three Months Ended
 June 30, 2014 March 31, 2014 June 30, 2013
(Dollars in thousands)
Average
Balance
 
Interest (1)
 
Average
Rate
 
Average
Balance
 
Interest (1)
 
Average
Rate
 
Average
Balance
 
Interest (1)
 
Average
Rate
ASSETS                 
Cash and cash equivalents$662,000
     $959,071
     $806,129
    
Investment securities and federal funds sold:                 
U.S. Treasury securities and U.S. Government agency obligations (taxable)5,303,645
 $26,751
 2.02% 5,151,341
 $25,910
 2.04% 4,714,823
 $24,679
 2.10%
Obligations of states and political subdivisions (tax exempt)767,731
 8,753
 4.57% 739,875
 8,613
 4.72% 710,579
 9,217
 5.20%
Other securities and federal funds sold583,605
 5,501
 3.78% 593,362
 6,112
 4.18% 504,343
 4,459
 3.55%
Total investment securities and federal funds sold6,654,981
 41,005
 2.47% 6,484,578
 40,635
 2.54% 5,929,745
 38,355
 2.59%
Loans held for sale10,196
 89
 3.51% 6,804
 59
 3.53% 17,394
 143
 3.30%
Loans, including loss share receivable (2)
14,702,319
 173,320
 4.73% 14,412,481
 171,136
 4.82% 13,662,835
 178,847
 5.25%
Total earning assets21,367,496
 $214,414
 4.02% 20,903,863
 $211,830
 4.11% 19,609,974
 $217,345
 4.45%
Total allowance for loan losses(146,368)     (138,891)     (146,565)    
Other assets2,408,148
     2,420,527
     2,541,164
    
Total assets$24,291,276
     $24,144,570
     $22,810,702
    
LIABILITIES AND SHAREHOLDERS’ EQUITY              
Deposits:                 
Noninterest-bearing$5,515,807
 $
 % $5,488,751
 $
 % $5,095,977
 $
 %
Interest-bearing3,066,201
 745
 0.10% 3,045,952
 737
 0.10% 2,347,155
 656
 0.11%
Savings and money market accounts8,580,928
 5,477
 0.26% 8,698,817
 5,559
 0.26% 8,210,780
 6,469
 0.32%
Certificates and other time deposits2,333,859
 3,009
 0.52% 2,402,986
 2,464
 0.42% 2,680,332
 3,374
 0.50%
Total deposits19,496,795
 9,231
 0.19% 19,636,506
 8,760
 0.18% 18,334,244
 10,499
 0.23%
Securities sold under agreements to repurchase1,024,598
 233
 0.09% 884,065
 197
 0.09% 927,451
 329
 0.14%
Wholesale borrowings373,213
 1,391
 1.49% 276,324
 1,129
 1.66% 237,887
 1,169
 1.97%
Long-term debt324,431
 3,893
 4.81% 324,428
 3,890
 4.86% 314,597
 3,743
 4.77%
Total interest-bearing liabilities15,703,230
 14,748
 0.38% 15,632,572
 13,976
 0.36% 14,718,202
 15,740
 0.43%
Other liabilities303,887
     290,021
     424,559
    
Shareholders’ equity2,768,352
     2,733,226
     2,571,964
    
Total liabilities and shareholders’ equity$24,291,276
     $24,144,570
     $22,810,702
    
Net yield on earning assets$21,367,496
 $199,666
 3.75% $20,903,863
 $197,854
 3.84% $19,609,974
 $201,605
 4.12%
Interest rate spread    3.65%     3.75%     4.02%
                  
(1) The net yield on earning assets is calculated as annualized taxable-equivalent net interest income divided by average earning assets. The interest income earned on certain earning assets is completely or partially exempt from federal and/or state income taxes. As such, these tax-exempt securities typically yield lower returns than taxable securities. To provide more meaningful comparisons of net interest margins for all earning assets, net interest income on a taxable-equivalent basis is used in calculating net interest margin by increasing the interest earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under generally accepted accounting principles in the Consolidated Statements of Income. The taxable-equivalent adjustment to net interest income were $4.1 million, $4.0 million, and $3.6 million for the three months ended June 30, 2014, March 31, 2014, and June 30, 2013, respectively.
(2) Nonaccrual loans have been included in the average balances.


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 Six Months Ended Three Months Ended
 June 30, 2014 June 30, 2013 March 31, 2015 December 31, 2014 March 31, 2014
(Dollars in thousands) 
Average
Balance
 
Interest (1)
 
Average
Rate
 
Average
Balance
 
Interest (1)
 
Average
Rate
 
Average
Balance
 
Interest (1)
 
Average
Rate
 
Average
Balance
 
Interest (1)
 
Average
Rate
 
Average
Balance
 
Interest (1)
 
Average
Rate
ASSETS                              
Cash and cash equivalents $809,715
     $601,649
     $563,265
     $500,559
     $959,071
    
Investment securities and federal funds sold:                              
U.S. Treasury securities and U.S. Government agency obligations (taxable) 5,227,913
 $52,661
 2.03% 3,757,748
 $40,974
 2.20% 
U.S. Treasury securities and U.S. government agency obligations (taxable)5,329,725
 $26,760
 2.04% 5,257,657
 $26,803
 2.02% 5,151,341
 $25,910
 2.04%
Obligations of states and political subdivisions (tax exempt) 753,880
 17,365
 4.65% 626,265
 15,812
 5.09% 733,157
 9,147
 5.06% 767,026
 8,636
 4.47% 739,875
 8,613
 4.72%
Other securities and federal funds sold 588,457
 11,614
 3.98% 436,014
 7,403
 3.42% 604,876
 5,190
 3.48% 589,608
 5,213
 3.51% 593,362
 6,113
 4.18%
Total investment securities and federal funds sold 6,570,250
 81,640
 2.51% 4,820,027
 64,189
 2.69% 6,667,758
 41,097
 2.50% 6,614,291
 40,652
 2.44% 6,484,578
 40,636
 2.54%
Loans held for sale 8,510
 148
 3.52% 16,146
 287
 3.58% 5,478
 57
 4.22% 16,708
 145
 3.44% 6,804
 59
 3.53%
Loans, including loss share receivable (2)
 14,558,200
 344,453
 4.77% 11,690,339
 277,852
 4.79% 15,427,181
 162,292
 4.27% 15,289,890
 169,302
 4.39% 14,412,481
 171,135
 4.82%
Total earning assets 21,136,960
 426,241
 4.07% 16,526,512
 342,328
 4.18% 22,100,417
 $203,446
 3.73% 21,920,889
 $210,099
 3.80% 20,903,863
 $211,830
 4.11%
Total allowance for loan losses (142,649)     (144,164)     (144,363)     (138,540)     (138,891)    
Other assets 2,412,433
     1,930,584
     2,385,775
     2,382,079
     2,420,527
    
Total assets $24,216,459
     $18,914,581
     $24,905,094
     $24,664,987
     $24,144,570
    
LIABILITIES AND SHAREHOLDERS’ EQUITYLIABILITIES AND SHAREHOLDERS’ EQUITY         LIABILITIES AND SHAREHOLDERS’ EQUITY              
Deposits:                              
Noninterest-bearing $5,502,354
 $
 % $4,213,720
 $
 
 $5,728,763
 $
 % $5,706,631
 $
 % $5,488,751
 $
 %
Interest-bearing 3,056,132
 1,481
 0.10% 1,826,876
 974
 0.11% 3,209,285
 767
 0.10% 3,021,188
 727
 0.10% 3,045,952
 737
 0.10%
Savings and money market accounts 8,639,547
 11,035
 0.26% 7,029,826
 11,784
 0.34% 8,542,154
 5,547
 0.26% 8,381,548
 5,496
 0.26% 8,698,817
 5,559
 0.26%
Certificates and other time deposits 2,368,231
 5,473
 0.47% 2,009,671
 5,437
 0.55% 2,308,723
 2,177
 0.38% 2,341,280
 2,525
 0.43% 2,402,986
 2,464
 0.42%
Total deposits 19,566,264
 17,989
 0.19% 15,080,093
 18,195
 0.24% 19,788,925
 8,491
 0.17% 19,450,647
 8,748
 0.18% 19,636,506
 8,760
 0.18%
Securities sold under agreements to repurchase 954,719
 429
 0.09% 917,141
 642
 0.14% 1,024,863
 243
 0.10% 1,241,948
 294
 0.09% 884,065
 197
 0.09%
Wholesale borrowings 325,036
 2,520
 1.56% 187,373
 2,019
 2.17% 350,991
 2,340
 2.70% 450,587
 2,360
 2.08% 276,324
 1,129
 1.66%
Long-term debt 324,430
 7,783
 4.84% 235,491
 5,491
 4.70% 505,275
 2,818
 2.26% 350,535
 2,188
 2.48% 324,428
 3,890
 4.86%
Total interest-bearing liabilities 15,668,095
 28,721
 0.37% 12,206,378
 26,347
 0.44% 15,941,291
 13,892
 0.35% 15,787,086
 13,590
 0.34% 15,632,572
 13,976
 0.36%
Other liabilities 295,124
     348,632
     368,678
     321,652
     290,021
    
Shareholders’ equity 2,750,886
     2,145,851
     2,866,362
     2,849,618
     2,733,226
    
Total liabilities and shareholders’ equity $24,216,459
     $18,914,581
     $24,905,094
     $24,664,987
     $24,144,570
    
Net yield on earning assets $21,136,960
 $397,520
 3.79% $16,526,512
 $315,981
 3.86% $22,100,417
 $189,554
 3.48% $21,920,889
 $196,509
 3.56% $20,903,863
 $197,854
 3.84%
Interest rate spread     3.70%     3.74%     3.38%     3.46%     3.75%
                 
(1) The net yield on earning assets is calculated as annualized taxable-equivalent net interest income divided by average earning assets. The interest income earned on certain earning assets is completely or partially exempt from federal and/or state income taxes. As such, these tax-exempt securities typically yield lower returns than taxable securities. To provide more meaningful comparisons of net interest margins for all earning assets, net interest income on a taxable-equivalent basis is used in calculating net interest margin by increasing the interest earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under generally accepted accounting principles in the Consolidated Statements of Income. The taxable-equivalent adjustments to net interest income were $8.0$3.9 million, $4.0 million, and $6.6$4.0 million for the sixthree months ended June 30,March 31, 2015, December 31, 2014, and June 30, 2013,March 31, 2014, respectively.
(2) Nonaccrual loans have been included in the average balances.






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Net Interest Income

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

To make it easier to compare results among several periods and the yields on various types of earning assets (some taxable, some not), net interest income is presented in this discussion on a TE basis. That is, interest on tax-free securities and tax-exempt loans has been restated as if such interest were taxed at the statutory federal income tax rate of 35% adjusted for the nondeductible portion of interest expense incurred to acquire the tax-free assets. Net interest income presented on a TE basis is a financial measure that is calculated and presented other than in accordance with GAAP and is widely used by financial services organizations. Therefore, Management believes these measures provide useful information for both management and investors by allowing them to make peer comparisons. The net interest margin, which is an indicator of the profitability of the earning assets portfolio less cost of funding, is calculated by dividing net interest income-TE by average earning assets. As with net interest income-TE, the net interest margin is affected by the level and mix of earning assets, the proportion of earning assets funded by noninterest-bearing liabilities and the interest rate spread. In addition, the net interest margin is impacted by changes in federal income tax rates and regulations as they affect the tax-equivalent adjustment.

For the three months ended June 30, 2014, net interest income-TE was $199.7 million, a decrease of $1.9 million or 0.96% from the year ago period. The decrease in taxable equivalent net interest income was attributable to unfavorable rate variances (as the impact of changes in the interest rate environment and product pricing decreased taxable equivalent net interest income by $18.6 million) and favorable volume variances (as balance sheet changes in both volume and mix increased taxable equivalent net interest income by $16.6 million).

The net interest margin for the three months ended June 30, 2014 was 3.75%, 37 basis points lower than 4.12% for the same year ago quarter. Second quarter 2014 net interest margin compression was primarily driven by declining volume in the acquired and covered loan portfolios and lower investment portfolio yields, partially offset by increased volume of originated loans.


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

Figure 4. Changes in Net Interest Income Tax-Equivalent Rate/Volume Analysis
                
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
2014 and 2013 2014 and 20132015 and 2014
Increase (Decrease) In Interest Income/Expense Increase (Decrease) In Interest Income/ExpenseIncrease (Decrease) In Interest Income/Expense
(In thousands)Volume 
Yield/
Rate
 Total Volume 
Yield/
Rate
 TotalDue to Volume 
Due to
Rate
 Net
INTEREST INCOME-TE                
Investment securities and federal funds sold:                
Taxable$3,669
 $(555) $3,114
 $18,009
 $(2,110) $15,899
$1,040
 $(1,113) $(73)
Tax-exempt706
 (1,170) (464) 3,025
 (1,472) 1,553
(79) 613
 534
Loans held for sale(62) 8
 (54) (133) (6) (139)(13) 11
 (2)
Loans13,020
 (18,547) (5,527) 67,861
 (1,260) 66,601
11,525
 (20,368) (8,843)
Total interest income-TE17,333
 (20,264) (2,931) 88,762
 (4,848) 83,914
12,473
 (20,857) (8,384)
INTEREST EXPENSE                
Interest on deposits:                
Interest bearing183
 (94) 89
 603
 (96) 507
39
 (9) 30
Savings and money market accounts280
 (1,272) (992) 2,383
 (3,132) (749)(101) 89
 (12)
Certificates and other time deposits(445) 80
 (365) 892
 (856) 36
(94) (193) (287)
Securities sold under agreements to repurchase31
 (127) (96) 25
 (238) (213)32
 14
 46
Wholesale borrowings552
 (330) 222
 1,182
 (681) 501
363
 848
 1,211
Long-term debt118
 32
 150
 2,130
 162
 2,292
1,577
 (2,649) (1,072)
Total interest expense719
 (1,711) (992) 7,215
 (4,841) 2,374
1,816
 (1,900) (84)
Net interest income-TE$16,614
 $(18,553) $(1,939) $81,547
 $(7) $81,540
$10,657
 $(18,957) $(8,300)
      
Note: Rate/volume variances are allocated on the basis of absolute value of the change in each.

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The following table in Figure 5 provides net interest income-TE and net interest margin totals for the three and sixthree months ended June 30, 2014March 31, 2015 and 20132014:

Figure 5. Net Interest Income and Net Interest Margin
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
(Dollars in thousands)2014 2013 2014 20132015 2014
Net interest income$195,577
 $198,031
 $389,479
 $309,379
$185,623
 $193,900
Tax equivalent adjustment4,089
 3,574
 8,041
 6,601
3,931
 3,954
Net interest income-TE199,666
 201,605
 397,520
 315,980
189,554
 197,854
Average earning assets$21,367,496
 $19,609,974
 21,136,960
 16,526,512
$22,100,417
 $20,903,863
Net interest margin3.75% 4.12% 3.79% 3.86%3.48% 3.84%
          

For the three months ended March 31, 2015, net interest income-TE was $189.6 million, a decrease of $8.3 million, or 4.20%, from the year ago period. The net interest margin for the three months ended March 31, 2015 was 3.48%, 36 basis points lower than 3.84% for the same year ago quarter. The decrease in taxable equivalent net interest income was attributable to a decrease in originated and covered loan yields, partially offset by the benefit provided by an increase in average earning assets. Average earning assets increased by $1.2 billion, or 5.72%, for the three months ended March 31, 2015, compared to the same period in 2014. The increase in average earnings assets primarily reflected a $1.0 billion increase in average total loans and a $183.2 million increase in average investments. The average yield on earning assets decreased from 4.45%4.11% in the second quarter of 2013 to 4.02% in the secondfirst quarter of 2014. Loan to 3.73% in the first quarter of 2015 primarily from decreased yields on originated and covered loans. Originated loan yields were down 5217 basis points to 4.73%3.51% from the year ago quarter. Quarterly average originated loans were up year over year increasing interest income, while the yield on these loans were down 20 basis pointsquarter due to competitive pricing pressures in a low rate environment decreasing interest income. While bothand repayments on higher yielding loans. The yield on covered loans was down 86 basis points from the acquired andyear ago quarter due to a $8.1 million decrease in covered loan portfolios continue to run-off thereby decreasing interest income,discount accretion, partly offset by a $3.7 million favorable reduction in the indemnification asset amortization. These reductions are the result of the continued decline in FDIC acquired loan average balances. The average balances have declined $233.5 million, or 41.4%, from the year ago quarter. The yield on acquired loans was down 31 basis points whilepoint to 7.93%, partially offsetting the yield on covered loans improved by 65 basis points, reflecting improvementdecreases in the re-estimated cash flowsyields of the portfolios, thereby increasing interest income. originated and covered loan portfolios.

Quarterly average balances for investment securities were up from the year ago quarter increasing investment interest income by $4.41.0 million, while the lowlower interest rate environment and reduction of higher cost deposit products resulted in a decrease in investment interest income of $1.70.5 million year over year. The lowlower rates paid

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on interest bearing deposits during the current quarter resulted in a net decrease of $1.30.3 million in interest expense for the three months ended June 30, 2014March 31, 2015, compared to the same prior year period. Increases inHigher quarterly average wholesale borrowings and long-term debtlower rates during the secondfirst quarter of 20142015 caused a net increase in interest expense to increase by 0.4of $1.2 million compared to the same year ago period. The cost of funds for the year as a percentage of average earning assets remained flat at approximately 0.07%0.06% for the three months ended June 30, 2014March 31, 2015 and 0.07% at 0.08%for the three months endedJune 30, 2013March 31, 2014.


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Noninterest Income
    
Excluding investment securities transactions, noninterest income for the three months ended March 31, 2015 and six months ended June 30,March 31, 2014 totaled $72.565.5 million and $139.7$67.2 million, respectively. Noninterest income remained relatively flat compared with the same three month period of 2013 and increased $13.0decreased $1.4 million, or 10.25%2.12%, compared to the sixthree month period ended June 30, 2013March 31, 2014. Noninterest income as a percentage of net revenue (net interest income-TE plus noninterest income, less securities transactions) was 26.63%25.68% for the three months ended June 30, 2014March 31, 2015, up slightly from 26.38%25.36% in the year ago quarter. For the six months ended June 30, 2014, noninterest income as a percentage of net revenue was 26.00%, down from 29.09% for the same period one year ago. Significant changes in noninterest income for the three and sixthree months ended June 30, 2014March 31, 2015 are discussed immediately after Figure 6. Unless otherwise noted, the Citizens acquisition is contributing to the year over year variances for the six months ended June 30.

Figure 6. Noninterest Income
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31, 
% Increase (Decrease)
2015 vs. 2014
(In thousands)2014 2013 2014 2013
(Dollars in thousands)2015 2014 
% Increase (Decrease)
2015 vs. 2014
Trust department income$10,070
 $9,167
 $19,818
 $14,907
$10,149
 $9,748
 
Service charges on deposits18,528
 20,582
 35,176
 33,168
15,668
 16,648
 (5.89)%
Credit card fees13,455
 14,317
 25,607
 24,540
12,649
 12,152
 4.09 %
ATM and other service fees5,996
 4,945
 11,816
 8,280
6,099
 5,819
 4.81 %
Bank owned life insurance income4,040
 3,641
 7,622
 8,538
3,592
 3,582
 0.28 %
Investment services and life insurance3,852
 3,429
 7,368
 5,844
3,704
 3,516
 5.35 %
Investment securities (losses)/gains, net80
 (2,794) 136
 (2,803)
Investment securities gains/(losses), net354
 56
 532.14 %
Loan sales and servicing income4,462
 7,985
 8,192
 15,848
1,600
 3,730
 (57.10)%
Other operating income12,077
 8,167
 24,096
 18,510
12,032
 12,019
 0.11 %
Total noninterest income$65,847
 $67,270
 (2.12)%
$72,560
 $69,439
 $139,831
 $126,832
     
Noninterest income as a percent of net revenue (1)
25.68% 25.36%  
            
(1) TE net interest income plus noninterest income, less gains/(losses) from securities.

Bank owned life insurance income for the six months ended June 30, 2014decreased$0.9 million, or 10.73%, from the same year ago period as a result of a death benefit received in the first quarter of 2013.

Losses of $2.8 million were realized on the sale of investment securities in the second quarter of 2013 as a result of the sale of approximately $2.2 billion of investments acquired in the Citizens merger which were sold shortly after acquisition to reduce prepayment and credit risk.
Loan sales and servicing income includes amortization and impairment or recovery of MSRs, changes in the fair value value of residential mortgage loans held for sale, as well as changes in the value of derivatives used to hedge those loans held for sale. Total loan sales and servicing income decreased year over year by $3.52.1 million, or 44.12%57.10%, in the three months ended June 30, 2014March 31, 2015 as compared to the same prior year period. The overall decrease is being driven by lower loan sales and $7.7 million, or 48.31%,servicing income. The Corporation's mortgage banking business was restructured as of January 1, 2015 and resulted in a lower volume of loans sold in the sixthree months ended June 30, 2014.March 31, 2015. While the Corporation continues to originate residential mortgage loans, it has partnered with a third party to process, underwrite, close, and service the Corporation's residential mortgage loan production. The Corporation will retain for its balance sheet and continue to service community reinvestment act eligible loans, jumbos, and adjustable rate mortgages. The Corporation serviced for third parties approximately $2.7$2.6 billion of residential mortgage loans at June 30,March 31, 2015 and $2.7 billion at March 31, 2014 resulting in loan servicing fees of approximately $1.6 million in each of the three month periods ended March 31, 2015 and March 31, 2014. Also contributing to the decrease in income year over year is the recognition of $1.2 million in costs associated with branch closures which were recorded as a reduction to other operating income in the three months ended March 31, 2015.


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Table of Contents

and June 30, 2013. Loan servicing fees were $1.6 million and $3.3 million in the three and six months ended June 30, 2014, respectively, relatively flat to the same year ago periods. The decline in the 30-year mortgage coupon rate year over year coupled with a decrease in mortgage production has contributed to an overall decline in net gains on sales of loans and the net fair value of the mortgage pipeline, and additional impairment on mortgage servicing rights.

Other operating income increased $3.9 million, or 47.88%, and $5.6 million, or 30.18%, for the three and six months ended June 30, 2014, respectively, compared to the three and six months ended June 30, 2013. Contributing to the quarter over quarter increase were additional gains from covered loan payoffs and related income of $3.7 million and $2.0 million in recoveries on acquired loans that were charged off prior to acquisition. For the three and six months ended June 30, 2014, gains from covered loan payoffs and related income was $4.1 million and $5.7 million, respectively, compared to $1.0 million and $6.0 million for the three and six months ended June 30, 2013, respectively. Gains on covered loan payoffs represent the difference between the credit mark on the paid-off loans less the remaining associated loss share receivable. For the three and six months ended June 30, 2014, recoveries on acquired loans that were charged off prior to acquisition were $2.0 million and $4.1 million, respectively. There were no such recoveries in 2013. Partially offsetting this additional income in the current quarter was approximately $4.0 million of costs associated with branch closures.

Noninterest Expenses

Noninterest expenses for the three and six months ended June 30, 2014March 31, 2015 totaled $167.4160.7 million and $336.7 million, respectively, compared with $188.9169.3 million and $295.0 million, respectively, in the same periodsperiod one year ago. The quarter over quarterago, a decrease of $21.58.7 million, or 11.38%5.13%, and. Significant changes in noninterest expense for the year over year increase of $41.7 million or 14.13%,three months ended March 31, 2015 are discussed immediately after figureFigure 7. Unless otherwise noted, the Citizens acquisition is contributing to the year over year variances for the six months ended June 30.

Figure 7. Noninterest Expense
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31, % Increase (Decrease) 2015 vs 2014
(In thousands)2014 2013 2014 2013
(Dollars in thousands)2015 2014 % Increase (Decrease) 2015 vs 2014
Salaries and wages$69,892
 $85,680
 $141,561
 $132,071
$71,914
 $71,669
 
Pension and employee benefits19,573
 19,419
 36,917
 30,934
18,612
 17,344
 7.31 %
Net occupancy expense14,347
 13,346
 31,361
 21,628
15,954
 17,014
 (6.23)%
Equipment expense12,267
 10,309
 24,178
 17,659
11,025
 11,911
 (7.44)%
Taxes, other than federal income taxes2,576
 2,891
 5,353
 4,814
2,014
 2,774
 (27.40)%
Stationery, supplies and postage3,990
 3,407
 8,097
 5,503
3,528
 4,108
 (14.12)%
Bankcard, loan processing, and other costs11,810
 12,417
 22,644
 20,257
11,139
 10,834
 2.82 %
Advertising3,801
 3,745
 7,319
 5,814
2,747
 3,516
 (21.87)%
Professional services4,745
 17,144
 10,103
 22,554
4,010
 5,359
 (25.17)%
Telephone2,857
 2,728
 5,764
 3,905
2,574
 2,908
 (11.49)%
Amortization of intangibles2,933
 2,411
 5,869
 2,728
2,598
 2,936
 (11.51)%
FDIC expense5,533
 4,149
 11,504
 7,675
FDIC insurance expense5,167
 5,971
 (13.47)%
Other operating expense13,076
 11,242
 26,063
 19,492
9,370
 12,987
 (27.85)%
Total Noninterest Expense$160,652
 $169,331
 (5.13)%
$167,400
 $188,888
 $336,733
 $295,034
     
       


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Total salaries and wagesNet occupancy expense decreased$15.8 $1.1 million,, or 18.43%6.23%, as compared to the secondfirst quarter 2013.of 2014. The numberfirst quarter of full time equivalent employees were 4,3922014 had higher than usual snow removal and 4,619utility costs due to the severe weather across the Corporation's entire footprint. Professional services expense decreased $1.3 million, or 25.17%, as of June 30, 2014 and June 30, 2013, respectively.compared to the first quarter 2014. Included in expense in the prior year second quarter was severance and retention expense of $18.4 million associated with the Citizens acquisition.three months ended

Professional services expense decreased $12.4 million, or 72.32%, as compared to the second quarter 2013. Included in expense in the prior year second quarter wasMarch 31, 2014 were professional and legal fees of $9.5$0.7 million related to the Citizens acquisition. Professional services expense related to the Citizens acquisition in the six months ended June 30, 2013 totaled $12.7 million.

Income Taxes

Income tax expense was $26.025.4 million and $22.823.8 million for the three months ended June 30, 2014March 31, 2015 and 20132014, respectively. The effective income tax rate for the three months ended June 30, 2014March 31, 2015 was 30.37%30.80% compared to 32.02%30.85% for the three months ended June 30, 2013.

Income tax expense was $49.8 million and $38.1 million for the six months ended June 30,March 31, 2014 and 2013, respectively. The effective income tax rate for the six months ended June 30, 2014 was 30.60% compared to 30.77% for the six months ended June 30, 2013.

LINE OF BUSINESS RESULTS

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



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The following tables present a summary of financial results for the three and sixthree months ended June 30, 2014March 31, 2015 and 20132014. A description of each business line, important financial performance data and the methodologies used to measure financial performance are presented in Note 7 (Segment Information) to the consolidated financial statements.

Figure 8. Line of Business Results

Commercial Retail Wealth Other FirstMerit ConsolidatedCommercial  Retail  Wealth  Other  FirstMerit Consolidated 
June 30, 2014QTD YTD QTD YTD QTD YTD QTD YTD QTD YTD
March 31, 2015QTD  QTD  QTD  QTD  QTD 
(In thousands)                             
OPERATIONS:                             
Net interest income (loss)-TE$108,235
 $214,396
 $94,879
 $188,129
 $4,799
 $9,477
 $(8,247) $(14,482) $199,666
 $397,520
Net interest income/(loss) -TE$101,056
 $91,095
 $5,353
 $(7,950) $189,554
 
Provision/(recapture) for loan losses(4,874) 167
 14,905
 17,522
 396
 351
 4,826
 11,750
 15,253
 29,790
(526) 7,533
 (170) 1,411
 8,248
 
Noninterest income26,681
 47,987
 25,345
 52,381
 14,052
 27,516
 6,482
 11,947
 72,560
 139,831
22,490
 21,737
 13,976
 7,644
 65,847
 
Noninterest expense61,230
 123,215
 87,603
 183,377
 12,370
 25,097
 6,197
 5,044
 167,400
 336,733
61,653
 88,271
 13,719
 (2,991) 160,652
 
Net income (loss)50,211
 88,784
 11,515
 25,747
 3,955
 7,504
 (6,162) (9,061) 59,519
 112,974
Net income/(loss)39,785
 11,068
 3,756
 2,530
 57,139
 
AVERAGES:                             
Assets9,192,463
 9,132,758
 5,541,566
 5,495,965
 258,845
 250,279
 9,298,402
 9,337,457
 24,291,276
 24,216,459
9,454,218
 5,845,417
 302,186
 9,303,273
 24,905,094
 
Loans9,176,853
 9,119,431
 5,197,857
 5,141,519
 248,188
 239,358
 79,421
 57,893
 14,702,319
 14,558,201
9,506,529
 5,570,590
 292,016
 58,046
 15,427,181
 
Earnings assets9,465,291
 9,387,095
 5,218,245
 5,160,314
 248,188
 239,358
 6,435,772
 6,350,193
 21,367,496
 21,136,960
9,794,483
 5,582,849
 292,016
 6,431,069
 22,100,417
 
Deposits6,545,608
 6,595,348
 11,720,727
 11,736,782
 1,050,002
 1,030,018
 180,458
 204,117
 19,496,795
 19,566,265
6,886,945
 11,124,158
 1,240,960
 536,862
 19,788,925
 
Economic Capital707,399
 681,305
 349,616
 334,934
 58,834
 58,312
 1,652,503
 1,676,335
 2,768,352
 2,750,886
Economic capital848,890
 479,188
 55,187
 1,483,097
 2,866,362
 
                             
















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Commercial Retail Wealth Other FirstMerit ConsolidatedCommercial  Retail  Wealth  Other  FirstMerit Consolidated 
June 30, 2013QTD YTD QTD YTD QTD YTD QTD YTD QTD YTD
March 31, 2014QTD  QTD  QTD  QTD  QTD 
(In thousands)                             
OPERATIONS:                             
Net interest income (loss)-TE$115,456
 $184,768
 $95,904
 $145,658
 $4,288
 $8,441
 $(14,043) $(22,887) $201,605
 $315,980
Net interest income/(loss) -TE$106,163
 $93,250
 $4,678
 $(6,237) $197,854
 
Provision/(recapture) for loan losses2,120
 6,886
 2,101
 6,174
 (42) 166
 3,130
 4,030
 7,309
 17,256
5,706
 8,339
 (45) 536
 14,536
 
Other income20,895
 40,127
 33,330
 57,718
 12,821
 21,131
 2,393
 7,856
 69,439
 126,832
Other expenses51,891
 94,918
 85,512
 138,419
 13,832
 24,006
 37,653
 37,691
 188,888
 295,034
Net income (loss)52,680
 78,569
 26,919
 38,074
 2,027
 3,379
 (33,176) (34,226) 48,450
 85,796
Noninterest income21,306
 27,035
 13,464
 5,465
 67,270
 
Noninterest expense63,966
 96,701
 13,518
 (4,854) 169,331
 
Net income/(loss)36,884
 9,909
 3,035
 3,627
 53,455
 
AVERAGES:                             
Assets8,852,267
 7,800,594
 5,006,423
 4,016,956
 263,454
 250,206
 8,688,558
 6,846,825
 22,810,702
 18,914,581
9,072,390
 5,449,856
 241,618
 9,380,706
 24,144,570
 
Loans8,737,762
 7,713,431
 4,613,188
 3,680,252
 228,597
 225,930
 83,288
 70,726
 13,662,835
 11,690,339
9,061,371
 5,084,555
 230,429
 36,126
 14,412,481
 
Earnings assets8,924,876
 7,875,314
 4,638,416
 3,705,414
 228,622
 225,957
 5,818,060
 4,719,827
 19,609,974
 16,526,512
9,308,031
 5,101,740
 230,429
 6,263,663
 20,903,863
 
Deposits5,627,946
 4,570,272
 11,663,874
 9,551,733
 812,645
 778,744
 229,779
 179,344
 18,334,244
 15,080,093
6,645,640
 11,753,015
 1,009,811
 228,039
 19,636,505
 
Economic Capital563,672
 513,039
 240,984
 226,878
 75,411
 62,529
 1,691,897
 1,343,405
 2,571,964
 2,145,851
Economic capital654,922
 320,090
 57,784
 1,700,430
 2,733,226
 
                             
             
The commercial segment's net income resulted in a decreasean increase of $2.5$2.9 million, or 7.87% for the three months ended March 31, 2015 to $39.8 million, from $36.9 million for the quarterthree months ended June 30, 2014 to $50.2 million, from $52.7 million for the quarter ended June 30, 2013.March 31, 2014. TE adjusted net interest income for the commercial segment totaled $108.2$101.1 million for the three months ended June 30, 2014March 31, 2015 compared to $115.5$106.2 million for the three months ended June 30, 2013,March 31, 2014, a decrease of $7.2$5.1 million, or 6.25%4.81%. This decrease is a result of margin compression in the commercial loan portfolio of acquired and covered loans, partially offset by higher levels of commercial loan balances. Recapture ofThe provision for loan losses for the commercial segment was $4.9a recapture of $0.5 million for the three months ended June 30, 2014March 31, 2015 compared to $2.1 million of provision for loan losses for the three months ended June 30, 2013, a decrease of $7.0 million. Net charge-offs increased $2.2 million to $2.4$5.7 million for the three months ended June 30, 2014, compared to the same period in 2013. The reduction in other provision for loan losses reflected the results of Management's focused efforts to improve asset quality and portfolio credit metrics. Noninterest income was $26.7March 31, 2014. Net charge-offs were $0.4 million for the three months ended June 30, 2014March 31, 2015, compared to $20.9$4.1 million forduring the same period in 2013, driven by gains on covered loan payoffs and loan sales and servicing fees.2014. Noninterest income increased $1.2 million to $22.5 million for the three months ended March 31, 2015 compared to $21.3 million for the

103


same period in 2014. Noninterest expense for the commercial segment was $61.2$61.7 million for the three months ended June 30, 2014 compared to $51.9March 31, 2015, down from $64.0 million for the same period of 2013 attributable to increased salary and benefit, FDIC, and credit management expenses.2014.

The retail segment's net income resulted in a decreasean increase of $15.4$1.2 million or 11.70% for the three months ended March 31, 2015 to $11.1 million, from $9.9 million for the three months ended June 30, 2014 to $11.5 million, compared to three months ended June 30, 2013.March 31, 2014. TE adjusted net interest income totaled $94.9$91.1 million for the three months ended June 30, 2014March 31, 2015 compared to $95.9$93.3 million for the three months ended June 30, 2013,March 31, 2014, a decrease of $1.0$2.2 million, or 1.07%.2.31%, attributable primarily to margin compression from lower yields and declines in the acquired loan portfolio. Provision for loan losses totaled $14.9$7.5 million for the three months ended June 30, 2014March 31, 2015 compared to $2.1$8.3 million for the three months ended June 30, 2013, an increaseMarch 31, 2014, a decrease of $12.8 million, attributable to provision expenses for loans acquired in the Citizens' acquisition.$0.8 million. Net charge-offs increased $0.8 millionslightly to $3.9$3.8 million for the three months ended June 30, 2014,March 31, 2015, compared to $3.5 million during the same period in 2013.2014. Noninterest income was $25.3$21.7 million for the three months ended June 30, 2014March 31, 2015 compared to $33.3$27.0 million for the three months ended June 30, 2013,March 31, 2014, a decrease of $8.0$5.3 million, or 23.96%19.60%, attributable to one-timelower service charges on deposits and loan sales and servicing income. Also, retail experienced a $1.2 million charge related to branch closures and a reduction in mortgage volumes.consolidations. Noninterest expense increased $2.1decreased $8.4 million, or 2.45%8.72%, to $87.6$88.3 million for the three months ended June 30, 2014March 31, 2015 compared to $85.5$96.7 million for the three months ended June 30, 2013.March 31, 2014. This reduction was driven mainly by lower personnel expenses from branch consolidations and lower operating losses in the Mortgage business.
The wealth segment's net income resulted in an increase of $1.9$0.7 million or 23.8% for the three months ended March 31, 2015 to $3.8 million, from $3.0 million for the three months ended

108


June 30, 2014 to $4.0 million, compared to three months ended June 30, 2013. March 31, 2014. Net interest income totaled $4.8$5.4 million for the three months ended June 30, 2014March 31, 2015 compared to $4.3$4.7 million for the three months ended June 30, 2013,March 31, 2014, an increase of $0.5$0.7 million, or 11.92%14.43%, attributable to an increase in loan and deposit balances. ProvisionRecapture of provision expense increased by $0.4$0.1 million due to loan balance increases.from the same period in 2014. Noninterest income-TEincome was $14.1$14.0 million for the three months ended June 30, 2014March 31, 2015 compared to $12.8$13.5 million for the three months ended June 30, 2013,March 31, 2014, an increase of $1.2$0.5 million, or 9.60%3.80%, attributable to greater brokerage and trust fees. Noninterest expense resulted in a decreasean increase of $1.5$0.2 million, or 10.57%1.49%, to $12.4$13.7 million for the three months ended June 30, 2014March 31, 2015 compared to $13.8$13.5 million for the three months ended June 30, 2013.March 31, 2014.
Activities that are not directly attributable to one of the primary lines of business are included in the Other segment. Included in this category are the Parent Company, community development operations, treasury group, including the securities portfolio, wholesale funding and asset liability management activities, inter-company eliminations, acquisition related expenses, and the economic impact of certain assets, capital and support functions not specifically identifiable with the three primary lines of business. The Other segment recorded a net lossgain of $6.2$2.5 million for the three months ended June 30, 2014, an improvementMarch 31, 2015, a decrease of
$27.0 $1.1 million compared to the three months ended June 30, 2013 due to reduced expenses related to the Citizens acquisition.March 31, 2014.



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Table of Contents

FINANCIAL CONDITION
AcquisitionsInvestment Securities

On April 12, 2013, the Corporation completed the mergerThe following table provides information with Citizens, a Michigan corporation with approximately $9.6 billion in assetsrespect to amortized cost and 219 branches, in a stock and cash transaction. The total purchase price was approximately $1.3 billion, including 55.5 million shares of its Common Stock issued to Citizen's common shareholders at a fair value of $925.2 million and paid by the Corporation to repurchase Citizens TARP Preferred plus accumulated but unpaid dividends and interest of approximately $355.4 million. Additionally, a warrant issued by Citizens to the U.S. Treasury to purchase shares of Citizens' common stock was converted into a warrant with a fair value of $3.0 million issued by the Corporation to the U.S. Treasury to purchase shares of FirstMerit Common Stock. The fair value of the assets acquired, excluding goodwill, totaled $9.3 billion, and included $4.6 billion in loans and $3.2 billion ofCorporation's investment securities. Liabilities assumed were $8.3 billion, including $7.3 billion of deposits.

Additional information can be found in Note 2 (Business Combinations).

Investment Securities

At June 30, 2014, the carrying amount of investment securities were $6.7 billion compared to $6.4 billion at December 31, 2013 and $6.1 billion at June 30, 2013 and are comprised of the following:security portfolio.

Figure 9. Investment Securities
June 30, 2014 December 31, 2013 June 30, 2013March 31, 2015 December 31, 2014 March 31, 2014
(In thousands)Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair valueAmortized Cost Fair Value Net Unrealized Gain/(Loss) Amortized Cost Fair Value Net Unrealized Gain/(Loss) Amortized Cost Fair value Net Unrealized Gain/(Loss)
Available-for-sale securities (1)
$3,494,000
 $3,478,420
 $3,329,117
 $3,273,174
 $3,311,751
 $3,299,392
$3,774,542
 $3,791,059
 $16,517
 $3,562,537
 $3,545,288
 $(17,249) $3,471,126
 $3,433,171
 $(37,955)
Held to maturity securities (2)
3,052,118
 3,001,866
 2,935,688
 2,824,240
 2,551,860
 2,487,071
Held-to-maturity securities (2)
2,855,174
 2,848,912
 (6,262) 2,903,609
 2,875,920
 (27,689) 3,079,620
 2,990,161
 (89,459)
Other securities (3)
148,433
 148,433
 180,803
 180,803
 267,565
 267,565
148,475
 148,475
 
 148,654
 148,654
 
 148,446
 148,446
 
Total investment securities$6,694,551
 $6,628,719
 $6,445,608
 $6,278,217
 $6,131,176
 $6,054,028
$6,778,191
 $6,788,446
 $10,255
 $6,614,800
 $6,569,862
 $(44,938) $6,699,192
 $6,571,778
 $(127,414)
                            
(1) Carried at fair value on the Consolidated Balance Sheets.

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

Available-for-sale securities are held primarily for liquidity, interest rate risk management and long-term yield enhancement. The movement in the investment portfolio between available-for-sale and held to maturity after the first quarter of 2013 was a result of Management's change in intent and commitment to hold certain securities to maturity in order to reduce the impact of the price volatility on accumulated other comprehensive income and certain capital measures, taking into consideration market conditions and changes to regulatory requirements under Basel III capital standards.
The Corporation'sCorporation’s available-for-sale investment policy is to invest in securities viewed to have low credit risk, such as U.S. Treasury securities, U.S. Government agency obligations, state and political obligations, MBS, and corporate bonds, and CLOs. During the second quarter of 2013, the Bank began purchasingbonds. The Corporation has invested in CLOs into its available-for-sale portfolio. Approximately $294.0 million of CLOs are held in the available-for-sale portfolio as of June 30, 2014. Thesethese securities are viewed as offering relative value compared to other investment vehicles in addition to being a floating rate asset, which is conducive to the Corporation'sCorporation’s asset liability risk position. No CLO investments were made until the second quarter of 2013. The CLO portfolio had an amortized cost of $297.5 million as of March 31, 2015, compared to $297.4 million as of December 31, 2014 and $297.3 million as of March 31, 2014. Net unrealized losses on the CLO portfolio amounted to $3.5 million, $9.6 million, and $2.7 million at March 31, 2015, December 31, 2014, and March 31, 2014, respectively. The fair value of the CLOs have been impacted by increased supply which has widened spreads. The current weighted average yield on our CLO portfolio approximates 2.70% as of March 31, 2015. The new Volcker regulations, as originally adopted, may affect the Corporation'sCorporation’s ability to hold these CLOs. Management believes that its holdings of CLOs are not ownership interests in a covered fund prohibited by the Volcker regulations and, therefore, expects to be able to hold these investments until their stated maturities with no restriction.

The investment securities portfolio was in a net unrealized loss position of $15.6 million at June 30, 2014, compared to a net unrealized loss position of $55.9 million at December 31, 2013 and a net unrealized loss position of $12.4 million atJune 30, 2013. Gross unrealized losses were $56.4 million as of June 30, 2014, compared to $90.2 million and $57.2 million at December 31, 2013andJune 30, 2013, respectively. The gross unrealized loss positions were primarily related to MBS issued by government agencies and corporate bonds. The decrease in gross unrealized loss positions on temporarily impaired investment securities was primarily due to declining interest rates in the first half of 2014 relative to the interest rate environment when the investment securities were purchased. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility, and liquidity conditions. The fair value of investment securities generally decreases when interest rates increase and vice versa. In addition, the fair value generally decreases when credit spreads widen and vice versa.
The Corporation conducts a comprehensive security-level impairment assessment on all securities in an unrealized loss position to determine if OTTI exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Management believes the Corporation will fully recover the cost of the agency MBSs and corporate debt securities in an unrealized loss position at June 30, 2014, and it does not intend to sell these securities and it is not more likely than not that it will be required to sell them before the anticipated recovery of the remaining amortized cost basis, which may be maturity. As a result, Management concluded that these securities were not other-than-temporarily impaired at June 30, 2014 and has recognized the total amount of the impairment in OCI, net of tax.

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


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Table of Contents

Loans

Total loans held at June 30, 2014March 31, 2015 were $14.9$15.5 billion compared to $14.2$15.3 billion at December 31, 20132014 and $14.1$14.6 billion at June 30, 2013March 31, 2014. Total loans as of June 30, 2014March 31, 2015 include $3.02.3 billion in acquired loans and $434.7$310.0 million in coveredFDIC acquired loans, excluding theincluding a loss share receivable of $44.0$20.0 million. Acquired loans resulted from the acquisition of Citizens in the second quarter of 2013. CoveredFDIC acquired loans resulted from the 2010 FDIC-assisted acquisitions of George Washington and Midwest. These acquired and covered loans were recorded at estimated fair value at the date of acquisition with no carryover of the related ALL. The major categories of loans outstanding and concentration distributions are presented in the following tables, segregated intobetween originated, acquired, and coveredFDIC acquired loans.

Figure 10. Period End Loans by Product Type
As of June 30, 2014As of March 31, 2015  
(In thousands)Originated Loans
Acquired Loans (1)
Covered Loans (2)
Total Loans
Originated Loans 
Acquired Loans (1)
 
FDIC Acquired Loans (2)
 Total Loans
(Dollars in thousands)Amount Percentage Amount Percentage Amount Percentage Amount Percentage
Commercial$7,365,499
$1,457,903
$292,782
$9,116,184
$8,031,892
 62.5% $1,011,170
 43.5% $179,547
 61.9% $9,222,609
 59.6%
Residential mortgages580,166
425,584
46,705
1,052,455
639,980
 5.0% 378,192
 16.2% 40,470
 14.0% 1,058,642
 6.9%
Installment2,051,587
872,034
5,364
2,928,985
2,500,288
 19.4% 717,693
 30.9% 4,781
 1.6% 3,222,762
 20.8%
Home equity lines998,179
268,266
89,815
1,356,260
1,134,238
 8.8% 217,824
 9.4% 65,170
 22.5% 1,417,232
 9.2%
Credit card151,967


151,967
160,766
 1.3% 
 —% 
 —% 160,766
 1.0%
Leases319,795


319,795
388,873
 3.0% 
 —% 
 —% 388,873
 2.5%
Subtotal11,467,193
3,023,787
434,666
14,925,646
12,856,037
 100.0% 2,324,879
 100.0% 289,968
 100.0% 15,470,884
 100.0%
Loss share receivable

43,981
43,981

 n/m 
 n/m 20,005
 n/m 20,005
 n/m
Total Loans11,467,193
3,023,787
478,647
14,969,627
12,856,037
 n/m 2,324,879
 n/m 309,973
 n/m 15,490,889
 n/m
Allowance for loan losses(91,950)(4,977)(45,109)(142,036)(97,545) n/m (7,493) n/m (41,514) n/m (146,552) n/m
Net Loans$11,375,243
$3,018,810
$433,538
$14,827,591
$12,758,492
 n/m $2,317,386
 n/m $268,459
 n/m $15,344,337
 n/m
         
As of December 31, 2013As of December 31, 2014  
(In thousands)Originated Loans
Acquired Loans (1)
Covered Loans (2)
Total Loans
Originated Loans 
Acquired Loans (1)
 
FDIC Acquired Loans (2)
 Total Loans
(Dollars in thousands)Amount Percentage Amount Percentage Amount Percentage Amount Percentage
Commercial$6,648,279
$1,725,970
$375,860
$8,750,109
$7,830,085
 62.7% $1,086,899
 43.9% $211,607
 63.9% $9,128,591
 59.6%
Residential mortgages529,253
470,652
50,679
1,050,584
625,283
 5.0% 394,484
 15.9% 41,276
 12.5% 1,061,043
 6.9%
Installment1,727,925
1,004,569
6,162
2,738,656
2,393,451
 19.1% 764,168
 30.8% 4,874
 1.5% 3,162,493
 20.7%
Home equity lines920,066
294,424
97,442
1,311,932
1,110,336
 8.9% 233,629
 9.4% 73,365
 22.1% 1,417,330
 9.3%
Credit card148,313


148,313
164,478
 1.3% 
 —% 
 —% 164,478
 1.1%
Leases239,551


239,551
370,179
 3.0% 
 —% 
 —% 370,179
 2.4%
Subtotal10,213,387
3,495,615
530,143
14,239,145
12,493,812
 100.0% 2,479,180
 100.0% 331,122
 100.0% 15,304,114
 100.0%
Loss share receivable

61,827
61,827

 n/m 
 n/m 22,033
 n/m 22,033
 n/m
Total Loans10,213,387
3,495,615
591,970
14,300,972
12,493,812
 n/m 2,479,180
 n/m 353,155
 n/m 15,326,147
 n/m
Allowance for loan losses(96,484)(741)(44,027)(141,252)(95,696) n/m (7,457) n/m (40,496) n/m (143,649) n/m
Net Loans$10,116,903
$3,494,874
$547,943
$14,159,720
$12,398,116
 n/m $2,471,723
 n/m $312,659
 n/m $15,182,498
 n/m
         

111106

Table of Contents

 As of June 30, 2013
(In thousands)Originated Loans
Acquired Loans (1)
Covered Loans (2)
Total Loans
Commercial$5,997,812
$2,267,811
$505,706
$8,771,329
Residential mortgages462,427
439,380
56,056
957,863
Installment1,496,663
1,221,060
7,794
2,725,517
Home equity lines845,051
322,111
106,970
1,274,132
Credit card142,319


142,319
Leases188,353


188,353
    Subtotal9,132,625
4,250,362
676,526
14,059,513
Loss share receivable

83,910
83,910
    Total Loans9,132,625
4,250,362
760,436
14,143,423
Allowance for loan losses(98,645)
(49,069)(147,714)
Net Loans$9,033,980
$4,250,362
$711,367
$13,995,709
     
 As of March 31, 2014  
 Originated Loans 
Acquired Loans (1)
 
FDIC Acquired Loans (2)
 Total Loans
(Dollars in thousands)Amount Percentage Amount Percentage Amount Percentage Amount Percentage
Commercial$7,083,192
 65.4% $1,562,878
 48.2% $341,267
 69.5% $8,987,337
 61.8%
Residential mortgages555,971
 5.1% 446,374
 13.8% 49,411
 10.1% 1,051,756
 7.2%
Installment1,835,522
 17.0% 943,354
 29.2% 5,531
 1.1% 2,784,407
 19.1%
Home equity lines946,802
 8.7% 283,309
 8.8% 94,828
 19.3% 1,324,939
 9.1%
Credit card147,917
 1.4% 
 —% 
 —% 147,917
 1.0%
Leases257,509
 2.4% 
 —% 
 —% 257,509
 1.8%
    Subtotal10,826,913
 100.0% 3,235,915
 100.0% 491,037
 100.0% 14,553,865
 100.0%
Loss share receivable
 n/m 
 n/m 54,748
 n/m 54,748
 n/m
    Total Loans10,826,913
 n/m 3,235,915
 n/m 545,785
 n/m 14,608,613
 n/m
Allowance for loan losses(92,116) n/m (2,974) n/m (49,970) n/m (145,060) n/m
Net Loans$10,734,797
 n/m $3,232,941
 n/m $495,815
 n/m $14,463,553
 n/m
                
n/m = Not Meaningful
(1) Loans assumed from Citizens.
(2) Loans acquired from Citizens. No allowance was brought forward in accordance with the acquisition method of accounting.
(2) Loans which are covered byan FDIC-assisted transaction. Certain non-single family loss sharingshare agreements with the FDIC expired at March 31, 2015. As of March 31, 2015, $174.6 million and $110.4 million of FDIC acquired loans remained covered by non-single family loss share agreement and single family loss share agreements, respectively, providing considerable protection against credit risk.

Originated Loans

Total originated loans increased from December 31, 20132014 by $1.30.4 billion, or 12.28%2.90%, and increased from June 30, 2013March 31, 2014 by $2.32.0 billion, or 25.56%18.74%. This increase was driven primarily by higher commercial loans, which increased 10.79%2.58% from December 31, 20132014 and 22.80%13.39% from June 30, 2013March 31, 2014 due to the Corporation's expansion into the Chicago, Illinois, Michigan and Wisconsin areas. The growth in commercial loans was also attributable to increases in asset-based lending as well as new business within the specialty lending group such as the capital markets, healthcare, and leasing lines of business. The leasing line of business has seen considerable increase in activity. As of June 30, 2014March 31, 2015, leases totaled $319.8388.9 million compared to $239.6370.2 million and $188.4257.5 million at December 31, 20132014 and June 30, 2013March 31, 2014, respectively, resulting in increases of $80.218.7 million, or 33.50%5.05%, from December 31, 20132014 and $131.4 million, or 69.78%51.01%, from June 30, 2013March 31, 2014.

Residential mortgage loans are originated and then sold into the secondary market or held in portfolio. Total residential mortgage loan balances increased from December 31, 20132014 by $50.914.7 million, or 9.62%2.35%, and increased from June 30, 2013March 31, 2014 by $117.784.0 million, or 25.46%15.11%, as a larger amount of shorter maturity and adjustable rate mortgages were held in portfolio compared to the prior year. The Corporation's mortgage banking business was restructured as of January 1, 2015. The Corporation will continue to originate residential mortgage loans but has partnered with a third party to process, underwrite, close and service the Corporation's residential mortgage loan production. The Corporation will retain for its balance sheet and continue to service community reinvestment act eligible loans, jumbos, and adjustable rate mortgages.

Outstanding home equity loans increased from December 31, 20132014 by $78.123.9 million, or 8.49%2.15%, and increased from June 30, 2013March 31, 2014 by $153.1187.4 million, or 18.12%19.80%. Installment loans increased from December 31, 20132014 by $323.7106.8 million, or 18.73%4.46%, and increased from June 30, 2013March 31, 2014 by $554.9664.8 million, or 37.08%36.22%.
 
The Corporation has approximately $5.0$4.9 billion of loans secured by real estate. Approximately 87.03%85.36% of the property underlying these loans is located within the Corporation's primary market area of Ohio, the Chicago, Illinois-metropolitan area, Michigan, Wisconsin, and Western Pennsylvania, and Chicago, Illinois.Pennsylvania.


112107

Table of Contents

Acquired Loans

Acquired loans are those purchased in the Citizens' acquisition during the second quarter of 2013. Total acquired loans was $3.0$2.3 billion as of June 30, 2014March 31, 2015, a decrease from December 31, 20132014 and June 30, 2013March 31, 2014 of $471.8$154.3 million, or 13.50%6.22%, and $1.2$0.9 billion, or 28.86%28.15%, respectively. The acquired loan portfolio will continue to decline, through payoffs, charge-offs, or terminations, unless the Corporation acquires additional loans in the future.

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

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

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

CoveredFDIC Acquired Loans and Related Loss Share Receivable

TheFDIC acquired loans include loans purchased in the 2010 FDIC-assisted acquisitions of George Washington and Midwest areMidwest. George Washington non-single family loans covered by loss sharingshare agreement expired on March 31, 2015. As of March 31, 2015, $5.0 million of FDIC acquired George Washington loans were no longer covered by the non-single family loss share agreement while $174.6 million of FDIC acquired Midwest loans remained covered by the non-single family loss share agreement. The non-single family loss share agreement for the Midwest loans will expire as of June 30, 2015. As of March 31, 2015, $110.4 million single family loans remained covered by loss share agreements between the FDIC and the Corporation, that afforduntil the Bank significant loss protection. agreements expire in 2020.

Total coveredFDIC acquired loans, including the loss share receivable, were $478.6$310.0 million as of June 30, 2014March 31, 2015, a decrease from December 31, 20132014 and June 30, 2013March 31, 2014 of $113.343.2 million, or 19.14%12.23%, and $281.8235.8 million, or 37.06%43.21%, respectively. The coveredFDIC acquired loan portfolio will continue to decline, through payoffs, charge-offs, termination or expiration of loss share coverage, unless the Corporation acquires additional loans subject to loss share agreements in the future.


108


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



113109



Allowance for Loan Losses and Reserve For Unfunded Lending Commitments

Allowance for Originated Loan Losses

The Corporation maintains what Management believes is an adequate originated ALL. The Corporation and the Bank regularly analyze the adequacy of their allowance through ongoing review of trends in risk ratings, delinquencies, nonperforming assets, charge-offs, economic conditions, and changes in the composition of the loan portfolio. See Note 1 (Summary of Significant Accounting Policies) and Note 54 (Allowance for Loan Losses) in the notes to the consolidated financial statements in this Form 10-Q for further information regarding the Corporation's credit policies and practices.

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

Management also considers internal and external factors such as economic conditions,allowance for loan management practices, portfolio monitoring, and other risks, collectively known as qualitative factors, or Q-factors, tolosses represents Management’s best estimate of probable credit losses inherent in the loan portfolio. Q-factors are used to reflectportfolio at the balance sheet date. The evaluation of the ALL is based on ongoing review of trends in risk ratings, delinquencies, nonperforming assets, charge-offs, economic conditions, and changes in the portfolio's collectability characteristicscomposition of the loan portfolio.

The Corporation’s credit administration division manages credit risk by establishing credit policies, processes, and review mechanisms. The credit administration division formulates procedures and guidelines, defines credit standards, establishes and maintains credit controls, and produces Management reports in support of these activities.

The Corporation’s credit risk management division is responsible for the analysis and reporting for all credit risks. To preserve portfolio diversification and to manage the risks inherent to portfolio concentrations, monitoring metrics are established and applied to a range of portfolio segments based on industry, collateral, or purpose. One of three portfolio strategies (Growth, Stable or Contract) are assigned to each segment. The assigned strategies are intended to guide management behavior in matters concerning pricing, underwriting and mitigation of portfolio risk. These metrics are monitored and updated on an on-going basis and reviewed quarterly with senior management and the Board of Directors Risk Management Committee.

The primary indicators of credit quality are delinquency status and our internal risk ratings for our commercial loan portfolio segment, and delinquency status and current FICO scores for our consumer loan portfolio segment. Assignment of internal risk ratings are based on the most current information available from a financial statement standpoint, as well as from an industry and geographic perspective. All aspects of the credit relationship are considered in the risk rating decisioning process, including, but not capturedlimit to, credit structure and terms, compliance with loan covenants and loan agreements, and the impact of weak or improper credit structure. Relationship managers perform regular reviews to access the accuracy of risk ratings. A formal review of all customer risk ratings on any aggregate credit exposure of $250,000 or more is performed at a minimum of once every twelve months unless administered in Core Banking and monitored by historical loss data.Portfolio Management (including the Private Client Services portfolio) in which case the threshold is $350,000. The review is documented with current financial statements for all obligors, co-obligors and guarantors, a current credit status memo and a current risk rating sheet. Additionally, the risk rating is referenced and attested to in a quarterly status review with the risk rating being adjusted as financial results or events require. Risk rating reviews of criticized loans are performed on a quarterly basis jointly between the relationship managers and the regional or senior-regional credit officer and supported with written updates by the loan officer, which include the progress of the credit, action plans, and improvement or deterioration since the previous quarter.


110


As part of our credit monitoring process, our loan review department serves to independently monitor credit quality and assess the effectiveness of credit risk management to provide Management with objective oversight of all lending activities. The loan review department is independent of the line lending and credit administration functions of the Corporation. The primary responsibilities of the loan review department are to provide an independent analysis of risk rating accuracy and timeliness, credit quality (including regulatory, policy, and underwriting compliance), credit administration management, processes, and controls.
At June 30, 2014March 31, 2015, the allowance for originated loan losses was $92.097.5 million, or 0.80%0.76% of originated loans outstanding, compared to $96.595.7 million, or 0.94%0.77%, and $98.692.1 million, or 1.08%0.85%, at December 31, 20132014 and June 30, 2013March 31, 2014, respectively. The allowance equaled 250.27%211.66% of nonperforming loans at June 30, 2014March 31, 2015 compared to 228.62%276.44% and 216.97%212.01% at December 31, 20132014 and June 30, 2013March 31, 2014. The additional reserves related to qualitative risk factors totaled $44.5$55.1 million at June 30, 2014March 31, 2015 compared to $42.9$57.0 million and $34.4$40.9 million at December 31, 20132014 and June 30, 2013March 31, 2014, respectively. Nonperforming loans have decreasedincreased by $5.511.5 million or 12.94%33.13% when compared to December 31, 20132014 butand decreasedincreased by $8.72.6 million, or 19.19%6.07%, when compared to June 30, 2013March 31, 2014.

Net charge-offs on originated loans were $6.24.2 million and 0.22%0.13% of average originated loans outstanding during the three months ended June 30, 2014March 31, 2015 compared to $3.38.0 million and 0.15%0.31% of average originated loans outstanding during the three months ended June 30, 2013March 31, 2014. Losses are charged against the ALL as soon as they are identified.

The reserve for unfunded lending commitments at June 30, 2014March 31, 2015, December 31, 20132014, and June 30, 2013March 31, 2014 was $7.14.3 million, $7.55.8 million, and $8.1$7.5 million,, respectively. Binding unfunded lending commitments include items such as letters of credit, financial guarantees and binding unfunded loan commitments. The allowance for credit losses, which includes both the allowance for originated loan losses and the reserve for unfunded lending commitments, amounted to $99.1101.9 million, $104.4101.5 million, and $106.899.6 million at June 30, 2014March 31, 2015, December 31, 20132014, and June 30, 2013March 31, 2014, respectively.


114111


Figure 11. Summary of the Allowance for Credit Losses
Three Months Ended June 30, Six Months Ended June 30,
2014 2013 2014 2013Three Months Ended March 31,
(Dollars in thousands)       2015 2014
Allowance for Originated Loan Losses-beginning of period$92,116
 $98,843
 $96,484
 $98,942
$95,696
 $96,484
Originated loans charged off:          
Commercial3,057
 2,750
 8,210
 5,422
685
 5,153
Mortgage834
 414
 1,393
 684
424
 559
Installment4,076
 3,612
 8,660
 8,206
4,605
 4,584
Home equity1,204
 1,133
 2,042
 2,439
911
 838
Credit cards1,311
 1,459
 2,766
 2,862
1,452
 1,455
Leases
 1,237
 
 1,237

 
Overdrafts666
 364
 1,237
 895
490
 571
Total charge-offs11,148
 10,969
 24,308
 21,745
8,567
 13,160
Originated Recoveries:          
Commercial404
 3,762
 1,433
 5,007
325
 1,029
Mortgage67
 51
 105
 94
35
 38
Installment2,728
 2,728
 5,466
 5,197
2,868
 2,738
Home equity820
 486
 1,519
 833
613
 699
Credit cards439
 469
 857
 982
366
 418
Manufactured housing13
 11
 24
 38
13
 11
Leases372
 
 372
 89
4
 
Overdrafts146
 113
 351
 249
156
 205
Total recoveries4,989
 7,620
 10,127
 12,489
4,380
 5,138
Originated net charge-offs6,159
 3,349
 14,181
 9,256
4,187
 8,022
Provision for originated loan losses5,993
 3,151
 9,647
 8,959
6,036
 3,654
Allowance for originated loan losses-end of period$91,950
 $98,645
 $91,950
 $98,645
$97,545
 $92,116
Reserve for Unfunded Lending Commitments       
Reserve for Unfunded Lending Commitments (1)
   
Balance at beginning of period$7,481
 $4,941
 $7,907
 $5,433
$5,848
 $7,907
Provision for/(relief of) credit losses(374) 3,173
 (800) 2,681
(1,518) (426)
Balance at end of period7,107
 8,114
 7,107
 8,114
4,330
 7,481
Allowance for credit losses (1)
$99,057
 $106,759
 $99,057
 $106,759
Allowance for credit losses$101,875
 $99,597
Average originated loans outstanding11,092,101
 8,877,754
 10,772,020
 8,806,924
12,689,791
 10,448,383
Ratio to average originated loans:          
Originated net charge-offs0.22% 0.15% 0.27% 0.21%0.13% 0.31%
Provision for originated loan losses0.22% 0.14% 0.18% 0.21%0.19% 0.14%
Originated loans outstanding-end of period11,467,193
 9,132,625
 11,467,193
 9,132,625
12,856,037
 10,826,913
Allowance for originated loan losses:          
As a percentage of period-end originated loans0.80% 1.08% 0.80% 1.08%0.76% 0.85%
As a percentage of nonperforming originated loans250.27% 216.97% 250.27% 216.97%211.66% 212.01%
As a multiple of originated net charge-offs3.72
 7.34
 3.22
 5.28
5.74
 2.83
Allowance for credit losses:          
As a percentage of period-end originated loans0.86% 1.17% 0.86% 1.17%0.79% 0.92%
As a percentage of nonperforming originated loans269.61% 234.82% 269.61% 234.82%221.06% 229.23%
As a multiple of annualized net charge-offs4.01
 7.95
 3.46
 5.72
6.00
 3.06
          

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






115112


Figure 12. Overall Credit Quality by Specific Asset and Risk Categories of Originated Loans
As of June 30, 2014As of March 31, 2015
Loan TypeLoan Type
  CRE and     Home Equity Credit Residential    CRE and     Home Equity Credit Residential  
Allowance for Loan Losses Components:C & I Construction Leases Installment Lines Cards Mortgages TotalC & I Construction Leases Installment Lines Cards Mortgages Total
(In thousands)                              
Individually Impaired Loan Component:                              
Loan balance$10,404
 $25,537
 $
 $24,394
 $6,956
 $979
 $26,297
 $94,567
$35,792
 $15,000
 $
 $26,882
 $7,632
 $815
 $24,822
 $110,943
Allowance5,092
 121
 
 1,008
 201
 361
 1,019
 7,802
10,042
 317
 
 1,005
 254
 263
 1,416
 13,297
Collective Loan Impairment Components:                              
Credit risk-graded loans               
Commercial loans based on risk rating:

               
Grade 1 loan balance33,855
 
 9,408
         43,263
59,380
 667
 13,052
         73,099
Grade 1 allowance3
 
 1
         4
3
 
 1
         4
Grade 2 loan balance134,682
 3,610
 10,971
         149,263
191,008
 3,368
 5,782
         200,158
Grade 2 allowance63
 2
 7
         72
9
 3
 
         12
Grade 3 loan balance1,100,807
 327,606
 55,648
         1,484,061
1,405,007
 401,848
 69,686
         1,876,541
Grade 3 allowance878
 255
 61
         1,194
1,045
 186
 45
         1,276
Grade 4 loan balance3,438,768
 2,089,669
 236,324
         5,764,761
3,503,044
 2,240,985
 297,790
         6,041,819
Grade 4 allowance24,194
 7,060
 693
         31,947
17,451
 7,118
 506
         25,075
Grade 5 (Special Mention) loan balance100,776
 29,382
 7,092
         137,250
88,445
 29,976
 1,307
         119,728
Grade 5 allowance7,553
 526
 245
         8,324
6,831
 678
 28
         7,537
Grade 6 (Substandard) loan balance38,323
 32,080
 352
         70,755
35,221
 22,151
 1,256
         58,628
Grade 6 allowance5,473
 2,089
 21
         7,583
4,457
 2,263
 49
         6,769
Grade 7 (Doubtful) loan balance
 
 
         

 
 
         
Grade 7 allowance
 
 
         

 
 
         
Consumer loans based on payment status:                              
Current loan balances      2,009,699
 988,443
 149,538
 537,140
 3,684,820
      2,455,393
 1,123,549
 158,453
 601,509
 4,338,904
Current loans allowance      8,860
 11,863
 5,256
 2,471
 28,450
      10,427
 16,607
 5,480
 3,612
 36,126
30 days past due loan balance      10,764
 1,445
 641
 10,958
 23,808
      10,971
 1,345
 625
 6,368
 19,309
30 days past due allowance      631
 575
 509
 212
 1,927
      671
 649
 528
 215
 2,063
60 days past due loan balance      2,980
 520
 348
 801
 4,649
      3,032
 323
 273
 1,872
 5,500
60 days past due allowance      643
 405
 430
 68
 1,546
      517
 297
 378
 255
 1,447
90+ days past due loan balance      3,750
 815
 461
 4,970
 9,996
      4,010
 1,389
 600
 5,409
 11,408
90+ days past due allowance      1,101
 859
 772
 369
 3,101
      738
 1,626
 1,152
 423
 3,939
Total loans$4,857,615
 $2,507,884
 $319,795
 $2,051,587
 $998,179
 $151,967
 $580,166
 $11,467,193
Total Allowance for Loan Losses$43,256
 $10,053
 $1,028
 $12,243
 $13,903
 $7,328
 $4,139
 $91,950
Total originated loans$5,317,897
 $2,713,995
 $388,873
 $2,500,288
 $1,134,238
 $160,766
 $639,980
 $12,856,037
Total allowance for originated loan losses$39,838
 $10,565
 $629
 $13,358
 $19,433
 $7,801
 $5,921
 $97,545
                              


116113


As of December 31, 2013As of December 31, 2014
Loan TypeLoan Type
  CRE and     Home Equity Credit Residential    CRE and     Home Equity Credit Residential  
Allowance for Loan Losses Components:C & I Construction Leases Installment Lines Cards Mortgages TotalC & I Construction Leases Installment Lines Cards Mortgages Total
(In thousands)                              
Individually Impaired Loan Component:                              
Loan balance$8,053
 $21,522
 $
 $27,285
 $6,726
 $1,112
 $23,066
 $87,764
$11,759
 $23,300
 $
 $24,905
 $7,379
 $854
 $25,251
 $93,448
Allowance3,235
 229
 
 1,014
 223
 312
 1,133
 6,146
72
 2,914
 
 1,178
 207
 296
 1,283
 5,950
Collective Loan Impairment Components:                              
Credit risk-graded loans               
Commercial loans based on risk rating:

               
Grade 1 loan balance34,909
 241
 9,271
         44,421
52,676
 1,361
 4,451
         58,488
Grade 1 allowance10
 
 2
         12
2
 
 1
         3
Grade 2 loan balance108,709
 3,730
 2,900
         115,339
186,278
 3,454
 14,959
         204,691
Grade 2 allowance80
 3
 3
         86
8
 
 1
         9
Grade 3 loan balance802,624
 340,782
 54,446
         1,197,852
1,340,100
 340,355
 71,908
         1,752,363
Grade 3 allowance869
 421
 85
         1,375
830
 191
 6
         1,027
Grade 4 loan balance3,083,312
 2,057,357
 167,022
         5,307,691
3,413,446
 2,228,833
 277,277
         5,919,556
Grade 4 allowance28,114
 9,255
 732
         38,101
23,562
 6,118
 625
         30,305
Grade 5 (Special Mention) loan balance70,978
 34,687
 5,750
         111,415
132,764
 30,247
 1,389
         164,400
Grade 5 allowance5,385
 1,023
 246
         6,654
8,022
 751
 32
         8,805
Grade 6 (Substandard) loan balance30,982
 50,393
 162
         81,537
38,178
 27,334
 195
         65,707
Grade 6 allowance5,288
 4,144
 13
         9,445
4,879
 2,720
 9
         7,608
Grade 7 (Doubtful) loan balance
 
 
         

 
 
         
Grade 7 allowance
 
 
         

 
 
         
Consumer loans based on payment status:                              
Current loan balances      1,678,155
 909,799
 145,332
 481,338
 3,214,624
      2,346,551
 1,100,076
 161,644
 583,994
 4,192,265
Current loans allowance      7,964
 10,063
 5,123
 2,403
 25,553
      9,465
 16,544
 5,115
 2,715
 33,839
30 days past due loan balance      14,524
 1,683
 696
 16,335
 33,238
      14,019
 1,191
 639
 9,231
 25,080
30 days past due allowance      1,044
 685
 541
 482
 2,752
      859
 581
 492
 209
 2,141
60 days past due loan balance      3,729
 906
 449
 1,276
 6,360
      3,506
 569
 498
 1,645
 6,218
60 days past due allowance      920
 710
 542
 221
 2,393
      667
 545
 607
 203
 2,022
90+ days past due loan balance      4,232
 952
 724
 7,238
 13,146
      4,470
 1,121
 843
 5,162
 11,596
90+ days past due allowance      993
 1,219
 1,222
 533
 3,967
      749
 1,447
 1,456
 335
 3,987
Total loans$4,139,567
 $2,508,712
 $239,551
 $1,727,925
 $920,066
 $148,313
 $529,253
 $10,213,387
Total Allowance for Loan Losses$42,981
 $15,075
 $1,081
 $11,935
 $12,900
 $7,740
 $4,772
 $96,484
Total originated loans$5,175,201
 $2,654,884
 $370,179
 $2,393,451
 $1,110,336
 $164,478
 $625,283
 $12,493,812
Total allowance for originated loan losses$37,375
 $12,694
 $674
 $12,918
 $19,324
 $7,966
 $4,745
 $95,696
                              


117114


As of June 30, 2013As of March 31, 2014
Loan TypeLoan Type
  CRE and     Home Equity Credit Residential    CRE and     Home Equity Credit Residential  
Allowance for Loan Losses Components:C & I Construction Leases Installment Lines Cards Mortgages TotalC & I Construction Leases Installment Lines Cards Mortgages Total
(In thousands)                              
Individually Impaired Loan Component:                              
Loan balance$9,439
 $25,405
 $
 $30,140
 $6,819
 $1,262
 $23,221
 $96,286
$7,143
 $31,980
 $
 $25,818
 $6,931
 $1,034
 $26,198
 $99,104
Allowance3,169
 1,010
 
 557
 197
 255
 1,280
 6,468
2,866
 2,918
 
 1,006
 223
 307
 1,241
 8,561
Collective Loan Impairment Components:                              
Credit risk-graded loans               
Commercial loans based on risk rating:               
Grade 1 loan balance40,185
 1,250
 12,815
         54,250
28,610
 539
 8,452
         37,601
Grade 1 allowance12
 
 4
         16
2
 
 2
         4
Grade 2 loan balance124,748
 3,859
 709
         129,316
135,574
 3,797
 3,620
         142,991
Grade 2 allowance90
 4
 1
         95
89
 3
 3
         95
Grade 3 loan balance721,517
 316,171
 36,743
         1,074,431
940,937
 354,108
 58,397
         1,353,442
Grade 3 allowance948
 617
 67
         1,632
746
 456
 76
         1,278
Grade 4 loan balance2,483,827
 2,099,371
 134,834
         4,718,032
3,276,466
 2,147,946
 179,795
         5,604,207
Grade 4 allowance27,530
 11,775
 679
         39,984
27,884
 7,892
 662
         36,438
Grade 5 (Special Mention) loan balance41,698
 33,504
 3,042
         78,244
61,507
 38,312
 6,857
         106,676
Grade 5 allowance2,863
 1,063
 138
         4,064
4,734
 994
 260
         5,988
Grade 6 (Substandard) loan balance56,776
 40,062
 210
         97,048
25,919
 30,354
 388
         56,661
Grade 6 allowance10,555
 4,398
 20
         14,973
3,854
 2,592
 24
         6,470
Grade 7 (Doubtful) loan balance
 
 
         

 
 
         
Grade 7 allowance
 
 
         

 
 
         
Consumer loans based on payment status:                              
Current loan balances      1,450,394
 835,126
 139,146
 420,146
 2,844,812
      1,794,831
 937,032
 145,192
 516,286
 3,393,341
Current loans allowance      5,990
 9,573
 4,879
 1,925
 22,367
      8,819
 10,992
 4,627
 2,400
 26,838
30 days past due loan balance      8,602
 960
 792
 10,939
 21,293
      8,751
 1,503
 747
 7,002
 18,003
30 days past due allowance      548
 563
 561
 341
 2,013
      591
 714
 549
 218
 2,072
60 days past due loan balance      2,938
 1,024
 343
 2,521
 6,826
      2,553
 440
 395
 1,136
 4,524
60 days past due allowance      544
 1,237
 379
 392
 2,552
      541
 307
 478
 189
 1,515
90+ days past due loan balance      4,589
 1,122
 776
 5,600
 12,087
      3,569
 896
 549
 5,349
 10,363
90+ days past due allowance      1,086
 1,696
 1,214
 485
 4,481
      647
 924
 890
 396
 2,857
Total loans$3,478,190
 $2,519,622
 $188,353
 $1,496,663
 $845,051
 $142,319
 $462,427
 $9,132,625
Total Allowance for Loan Losses$45,167
 $18,867
 $909
 $8,725
 $13,266
 $7,288
 $4,423
 $98,645
Total originated loans$4,476,156
 $2,607,036
 $257,509
 $1,835,522
 $946,802
 $147,917
 $555,971
 $10,826,913
Total allowance for originated loan losses$40,175
 $14,855
 $1,027
 $11,604
 $13,160
 $6,851
 $4,444
 $92,116
                              

















118


Allowance for Acquired Loan Losses

The Citizens’ loans were recorded at their fair value as of the Acquisition Date and the prior ALL was eliminated. An ALL for nonimpaired acquired loans is estimated using a methodology similar to that used for originated loans,loans. The allowance determined for each acquired nonimpaired loan is compared to the remaining fair value adjustment for that is, based on a specific reserve analysis for loans individually evaluated for impairment and based on historical loss rates for loans collectively evaluated for impairment.loan. If the computed allowance is greater, than the remaining fair value discount, the excess is added to the allowance through a provision for loan losses. If the computed allowance is less, no additional allowance is recognized. As of June 30, 2014March 31, 2015, the computed allowance was less than the remaining fair value discount; therefore, no ALL for acquired nonimpaired loans was required.recorded.

Charge-offs and actual losses on an acquired nonimpaired loan first reduce any remaining fair value discount for that loan. Once a loan's discount is depleted, charge-offs and actual losses are applied against the ALL. During the three months ended June 30,March 31, 2015 and 2014,, provision for loan losses, equal to net charge-offs, of $3.8$2.2 million and $5.6 million was recorded. Charge-offs on acquired nonimpaired loans were mainly related to consumer loans that were written off in accordance with the Corporation'sCorporation’s credit policies based on a predetermined number of days past due.

115


The ALL for acquired impaired loans is determined by comparing the present value of the cash flows expected to be collected to the carrying amount for a given pool of loans. Management reforecasts the estimated cash flows expected to be collected on acquired impaired loans on a quarterly basis. Expected cash flows may increase or decrease for a variety of reasons, for example, when the contractual terms of the loan agreement are modified, when interest rates on variable rate loans change, or when principal and/or interest payments are received. Cash flows expected to be collected on acquired impaired loans are estimated by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default, loss given default, and the amount of actual prepayments after the Acquisition Dates. Prepayments affect the estimated life of loans and could change the amount of interest income, and possibly principal, expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary. These adjustments are based, in part, on actual loss severities recognized for each loan type, as well as changes in the probability of default. For periods in which estimated cash flows are not re-forecasted, the prior reporting periodsperiods' estimated cash flows are adjusted to reflect the actual cash received and credit events that transpired during the current reporting period.
 
Increases in expected cash flows of acquired impaired loans subsequent to acquisition are recognized prospectively through adjustment of the yield on the loans or pools over its remaining life, while decreases in expected cash flows are recognized as impairment through a provision for loan loss and an increase in the ALL. If the present value of expected cash flows for a pool is less than its carrying value, impairment is recognized in the current period by an increase in the acquired ALL and a charge to the provision for loan losses. If the present value of expected cash flows for a pool is greater than its carrying value, any previously established acquired ALL is reversed and any remaining difference increases the accretable yield which will be taken into interest income over the remaining life of the loan pool.

During the sixthree months ended June 30,March 31, 2015 and 2014, provision for acquired impaired loan losses of $2.0$36.0 thousand and $2.2 million, respectively, was recognized resulting in an allowance for acquired impaired loan losses of $5.0$7.5 million and $3.0 million as of June 30,March 31, 2015 and 2014,. respectively.

Allowance for CoveredFDIC Acquired Loan Losses

The ALL on coveredFDIC nonimpaired acquired loans is estimated similar to acquired loans as described above except any increase to the allowance and provision for loan losses is partially offset by an increase in the loss share receivable for the portion of the losses recoverable under the loss sharing agreements with the FDIC. Additionally, the Corporation elected to account for all covered loans as impaired except for those loans acquired with revolving privileges, which are outside the scope of impaired loan accounting, and, therefore, are accounted for as covered

119


nonimpaired loans. As of June 30, 2014March 31, 2015, the computed allowance was less than the remaining fair value discount, therefore, no allowanceALL for coveredFDIC acquired nonimpaired loans was recorded.

The allowanceALL for coveredFDIC acquired impaired for loan lossesloans was $45.1$41.5 million, $44.0$40.5 million, and $49.1$50.0 million as of June 30, 2014March 31, 2015, December 31, 20132014, and June 30, 2013March 31, 2014, respectively. During the three months ended June 30, 2014March 31, 2015, $0.5$4.2 million of previously recognized losses on coveredFDIC acquired impaired loans were recapturedrecognized with an offsetting decreaseincrease of $3.9$4.2 million to the loss share receivable. The net provision from the impaired coveredFDIC acquired portfolio was $3.4$2.0 thousand in the three months ended March 31, 2015 compared to a net provision of $3.1 million in the three months ended June 30,March 31, 2014 compared to $4.2 million in the three months ended June 30, 2013.

Asset Quality(excluding acquired loans and covered assets)

Due to the impact of business combination accounting and protection against credit risk from FDIC loss sharing agreements, acquired loans and covered assets are excluded from the asset quality discussion to provide for improved comparability to prior periods and better perspective into asset quality trends. Acquired loans are recorded at fair value with no ALL brought forward in accordance with business combination accounting. Acquired and covered impaired loans with an accretable yield are considered to be accruing and performing even though collection of contractual payments on loans within the pool may be in doubt, because the pool is the unit of accounting and income continues to be accreted on the pool as long as expected cash flows are reasonably estimable.
Making a loan to earn an interest spread inherently includes taking the risk of not being repaid. Successful management of credit risk requires making good underwriting decisions, carefully administering the loan portfolio and diligently collecting delinquent accounts.

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

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

Note 1 (Summary of Significant Accounting Policies) and Note 5 (Allowance for Loan Losses) in the notes to the consolidated financial statements in this Form 10-Q, provide detailed information regarding the Corporation's credit policies and practices and the credit-risk grading process for commercial loans.


120116


Nonperforming Loans are defined as follows:

Nonaccrual loans on which interest is no longer accrued because its collection is doubtful.
Restructured loans on which, due to a borrower experiencing financial difficulties or expected to experience difficulties in the near-term,near term, the original terms of the loan are modified to maximize the collection of amounts due.

Nonperforming Assets are defined as follows:

Nonaccrual loans on which interest is no longer accrued because its collection is doubtful.
Restructured loans on which, due to deterioration in the borrower's financial condition, the original terms have been modified in favor of the borrower or either principal or interest has been forgiven.
Other real estate acquired through foreclosure in satisfaction of a loan.

Figure 13. Asset Quality(1)
(Dollars in thousands)June 30, 2014 December 31, 2013 June 30, 2013March 31, 2015 December 31, 2014 March 31, 2014
Nonperforming originated loans:          
Restructured nonaccrual loans:          
Commercial loans$9,947
 $7,297
 $13,010
$4,917
 $4,153
 $9,159
Consumer loans12,025
 11,388
 12,341
10,865
 11,088
 12,374
Total restructured loans21,972
 18,685
 25,351
15,782
 15,241
 21,533
Other nonaccrual loans:          
Commercial loans11,125
 18,377
 15,925
23,561
 12,994
 17,963
Consumer loans3,644
 5,141
 4,188
6,742
 6,382
 3,952
Total nonaccrual loans14,769
 23,518
 20,113
30,303
 19,376
 21,915
Total nonperforming originated loans36,741
 42,203
 45,464
46,085
 34,617
 43,448
Other real estate, excluding covered assets24,181
 18,680
 20,713
Total nonperforming assets$60,922
 $60,883
 $66,177
Other real estate, excluding covered assets (2) (3)
22,521
 20,421
 19,263
Total nonperforming assets ("NPAs") (3)
$68,606
 $55,038
 $62,711
Originated loans past due 90 days or more accruing interest$15,643
 $11,176
 $11,760
$7,914
 $12,156
 $11,860
Total nonperforming assets as a percentage of total originated loans and ORE0.53% 0.60% 0.72%
Total NPAs as a percentage of total originated loans and ORE (3)
0.53% 0.44% 0.58%
          

(1) Due to the impact of acquisition accounting and protection against credit risk from FDIC loss sharing agreements, acquired loans, FDIC acquired loans and covered OREO are excluded from the asset quality figures to provide for improved comparability to prior periods and better perspective into asset quality trends. Acquired loans are recorded at fair value with no allowance brought forward in accordance with acquisition accounting. Acquired and covered impaired loans with an accretable yield are considered to be accruing and performing even though collection of contractual payments on loans within the pool may be in doubt, because the pool is the unit of accounting and income continues to be accreted on the pool as long as expected cash flows are reasonably estimable.
Total nonperforming assets as of June 30, 2014 were $60.9 million, an increase of $39.0 thousand, or 0.06%, from December 31, 2013 and a decrease of $5.3 million, or 7.94%, from June 30, 2013. Total originated loans past due 30-89 days totaled $38.7 million at June 30, 2014, a decrease of $24.8 million, or 39.04%, from December 31, 2013, and a decrease of $6.7 million, or 14.66%, from June 30, 2013. Delinquency trends are observable in the Allowance for Loan Loss Allocation tables within this section. Commercial nonperforming originated loans decreased$4.6 million, or 17.92%, from December 31, 2013 and decreased$7.9 million, or 27.17%, from June 30, 2013. Total OREO increased$5.5 million, or 29.45%, from December 31, 2013 and $3.5 million, or 16.74%, from June 30, 2013. During the three months ended June 30, 2014, 16 closed branches were transferred into other real estate at a value of $3.8 million.(2) As of June 30, 2014, other real estateMarch 31, 2015, OREO included 1711 former banking facilities that the Corporation no longer intends to use for banking purposes valued at approximately $4.6$2.5 million.
(3) As of March 31, 2015, $3.4 million of OREO was no longer covered by a FDIC loss share agreement, therefore, was included in NPAs. OREO that remains covered by FDIC loss share agreements has considerable protection against credit risk and are not reported as NPAs.

Total nonperforming assets as of March 31, 2015 were $68.6 million, an increase of $13.6 million, or 24.65%, from December 31, 2014 and an increase of $5.9 million, or 9.40%, from March 31, 2014. Commercial nonperforming originated loans increased$11.3 million, or 66.08%, from December 31, 2014 and increased$1.4 million, or 5.00%, from March 31, 2014. The increase in this quarters commercial nonperforming originated loans is due to credit deterioration of two loans. Total OREO increased$2.1 million, or 10.28%, from December 31, 2014 and $3.3 million, or 16.91%, from March 31, 2014. Due to the expiration of certain FDIC loss share agreements in the first quarter of 2015, previously covered OREO of $3.4 million has been reclassed into nonperforming assets. Certain FDIC loss share agreements will expire in the second quarter of 2015 and will result in an increase in nonperforming assets from OREO previously covered under such agreements.

Net charge offs withinBorrower FICO scores provide information about the originatedcredit quality of our consumer loan portfolio wereas they provide an indication as to the likelihood that debtors will repay their debts. We obtain the scores from a

117


nationally recognized consumer rating agency on a quarterly basis and trends are evaluated for consideration as a qualitative adjustment to the allowance. As of $3.9 millionMarch 31, 2015 for, the three months ended June 30, 2014 compared to $3.1 million for the three months ended June 30, 2013. Averageaverage FICO scores on the originated consumer portfolio subcomponents are excellent with average scores on installment loans at 753,751, home equity lines at 777,776, residential mortgages at 741,750, and credit cards at 770.768.
 
Originated loans past due 90 days or more but still accruing interest are classified as such where the
underlying loans are both well secured (the collateral value is sufficient to cover principal and accrued interest) and are in the process of collection. At June 30, 2014, accruing originated loans 90 days or more past due

121


totaled $15.6 million compared to $11.2 million and $11.8 million at December 31, 2013 and June 30, 2013, respectively. Credit card loans on which payments are past due for 120 days are placed on nonaccrual status.When a loan is placed on nonaccrual status, interest deemed uncollectible that had been accrued in prior years is charged against the ALL and interest deemed uncollectible accrued in the current year is reversed against interest income. Interest on mortgage loans is accrued until Management deems it uncollectible based upon the specific identification method. Payments subsequently received on nonaccrual loans are generally applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable. This generally requires timely principal and interest payments for a minimum of six consecutive payment cycles. Loans are generally written off when deemed uncollectible or when they reach a predetermined number of days past due depending upon loan product, terms, and other factors.

Figure 14. Nonaccrual Originated Commercial Loan Flow Analysis
Three Months EndedThree Months Ended
June 30, March 31, December 31, September 30, June 30,March 31, December 31, September 30, June 30, March 31,
(In thousands)2014 2014 2013 2013 20132015 2014 2014 2014 2014
Nonaccrual originated commercial loans beginning of period$27,122
 $25,674
 $19,140
 $28,935
 $23,843
$17,147
 $22,347
 $21,072
 $27,122
 $25,674
Credit Actions:                  
New7,846
 14,334
 10,527
 943
 15,197
14,557
 3,275
 10,381
 7,846
 14,334
Loan and lease losses
 
 
 (1,223) (1,348)
Charged down(2,783) (5,176) (885) 
 (2,639)(221) (330) (4,037) (2,783) (5,176)
Return to accruing status
 (1,088) (221) (394) (3,981)(322) 
 
 
 (1,088)
Payments(11,113) (6,622) (2,887) (9,121) (2,137)(2,683) (8,145) (5,069) (11,113) (6,622)
Sales
 
 
 
 
Nonaccrual originated commercial loans end of period$21,072
 $27,122
 $25,674
 $19,140
 $28,935
$28,478
 $17,147
 $22,347
 $21,072
 $27,122
                  

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

The Corporation'sCorporation’s TDR portfolio excludingis summarized in the following table.

Figure 15. TDR Portfolio

(In thousands)March 31, 2015 March 31, 2014
Originated TDRs$89,150
 $84,771
Acquired TDRs (1)
13,146
 5,181
FDIC Acquired TDRs (1)
33,335
 49,784
Total TDRs$135,631
 $139,736
Nonperforming TDRs$19,514
 $21,997
    
(1) Acquired and FDIC acquired loans restructured after acquisition are not considered TDRs for purposes of the Corporation’s accounting and covereddisclosure if the loans totaled $87.1 million, $79.5 million, and $87.6 millionevidenced credit deterioration as of June 30, 2014, December 31, 2013,the date of acquisition and are accounted for in pools.

June 30, 2013, respectively. TheseOriginated consumer TDRs are predominately composed of originated consumer installment loans, first and second lien residential mortgages and home equity lines of credit credit. Total originated consumer TDRs represented 67.47%and represented 67.27%, 73.22%, and 70.13%, respectively,70.76% of the total originated TDR portfolio as of June 30,March 31, 2015, and March 31, 2014,, December 31, 2013, and June 30, 2013, respectively. We restructure residential mortgages in a variety of ways to help our clients remain in their homes and to mitigate the potential for additional losses. The primary restructuring methods being offered to our residential clients are

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reductions in interest rates and extensions in terms. Modifications of mortgages retained in portfolio are handled using proprietary modification guidelines, or the FDIC'sFDIC’s Modification Program for residential first mortgages covered by loss share agreements.  The Corporation participates in the U.S. Treasury'sTreasury’s Home Affordable Modification Program for originated mortgages sold to and serviced for FNMA and FHLMC.

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

AcquiredA loan is considered to be impaired when, based on current events or information, it is probable the Corporation will be unable to collect all amounts due (principal and covered loans restructured after acquisition are not considered TDRs for purposesinterest) per the contractual terms of the Corporation's accounting and disclosure ifloan agreement. Loan impairment for all loans is measured based on either the loans evidenced credit deterioration aspresent value of expected future cash flows discounted at the loan’s effective interest rate, at the observable market price of the Acquisition Dateloan, or the fair value of the collateral for certain collateral dependent loans. Impaired loans include all nonaccrual commercial, agricultural, construction, and are accountedcommercial real estate loans, and loans modified as TDRs. Interest income recognized on impaired loans was $0.1 million for the three months ended March 31, 2015, compared to $0.1 million for the three months ended March 31, 2014. Interest income which would have been earned in pools.accordance with the original terms was $0.9 million for the three months ended March 31, 2015, compared to $0.8 million for the three months ended March 31, 2014.

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

Average quarter to date deposits as of June 30, 2014 totaled $19.5 billion compared to $19.5 billion and $18.319.8 billion as of March 31, 2015, $19.5 billion as of December 31, 2013 and June 30, 20132014, respectively.and $19.6 billion as of March 31, 2014. The Corporation has successfully executed a strategy to increase the concentration of lower cost deposits within the overall deposit mix by focusing on growth in checking, money market and savings account products with less emphasis on renewing maturing certificate of deposit accounts. In addition to efficiently funding balance sheet growth, the increased concentration in core deposit accounts generally deepens and extends the length of customer relationships.

The following table in Figure 15 presentsprovides additional information about the Corporation's deposit products and their respective rates for the three months ended June 30, 2014, December 31, 2013, and June 30, 2013.rates.
    
Figure 1516. Respective Rates of Deposit Products and Respective RatesFunding
Three Months EndedThree Months Ended
June 30, 2014 December 31, 2013 June 30, 2013March 31, 2015 December 31, 2014 March 31, 2014
(Dollars in thousands)
Average
Balance
 
Average
Rate
 
Average
Balance
 
Average
Rate
 
Average
Balance
 
Average
Rate
Average
Balance
 
Average
Rate
 
Average
Balance
 
Average
Rate
 
Average
Balance
 
Average
Rate
Noninterest-bearing$5,515,807
 % $5,546,316
 % $5,095,977
 %$5,728,763
 % $5,706,631
 % $5,488,751
 %
Interest-bearing3,066,201
 0.10% 2,875,375
 0.10% 2,347,155
 0.11%3,209,285
 0.10% 3,021,188
 0.10% 3,045,952
 0.10%
Savings and money market accounts8,580,928
 0.26% 8,544,097
 0.28% 8,210,780
 0.32%8,542,154
 0.26% 8,381,548
 0.26% 8,698,817
 0.26%
Certificates and other time deposits2,333,859
 0.52% 2,551,688
 0.39% 2,680,332
 0.50%2,308,723
 0.38% 2,341,280
 0.43% 2,402,986
 0.42%
Total customer deposits19,496,795
 0.19% 19,517,476
 0.19% 18,334,244
 0.23%19,788,925
 0.17% 19,450,647
 0.18% 19,636,506
 0.18%
Securities sold under agreements to repurchase1,024,598
 0.09% 948,959
 0.12% 927,451
 0.14%1,024,863
 0.10% 1,241,948
 0.09% 884,065
 0.09%
Wholesale borrowings373,213
 1.49% 200,622
 1.85% 237,887
 1.97%350,991
 2.70% 450,587
 2.08% 276,324
 1.66%
Long-term debt324,431
 4.81% 324,426
 4.77% 314,597
 4.77%505,275
 2.26% 350,535
 2.48% 324,428
 4.86%
Total funds$21,219,037
 0.28% $20,991,483
 0.27% $19,814,179
 0.32%$21,670,054
 0.26% $21,493,717
 0.25% $21,121,323
 0.27%
                      


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Average quarter to date demand deposits comprised 44.02%45.17% of average deposits during the three months ended June 30, 2014March 31, 2015 compared to 43.15%44.87% during the three months ended December 31, 20132014, and 40.60%43.46% during the three months ended June 30, 2013March 31, 2014. Savings accounts, including money market products, made up 44.01%43.17% of average deposits during the three months ended June 30, 2014March 31, 2015 compared to 43.78%43.09% during the three months ended December 31, 20132014, and 44.78%44.30% during the three months ended June 30, 2013March 31, 2014. Certificates and other time deposits made up 11.97%11.67% of average deposits during the three months ended June 30, 2014March 31, 2015, 13.07%12.04% during the three months ended December 31, 20132014, and 14.62%12.24% during the three months ended June 30, 2013March 31, 2014.


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The average cost of deposits, federal funds purchased and securities sold under agreements to repurchase, wholesale borrowings and long-term debt was down 51 basis pointspoint compared to the same period one year ago, or 11.63%2.78% for the three months ended June 30, 2014March 31, 2015 due to a drop in interest rates..

The following table in Figure 1617 summarizes certificates and other time deposits in amounts of $100 thousand or more for the three months ended June 30, 2014March 31, 2015 by time remaining until maturity.

Figure 1617. Certificates and Other Time Deposits in increments of $100 Thousand or More
 Amount
(In thousands)  
Time until maturity: (In thousands) Amount
Under 3 months $236,083
 $210,135
3 to 6 months 195,574
 140,314
6 to 12 months 198,057
 132,614
Over 12 months 160,391
 233,289
Total $790,105
 $716,352
    

Capital Resources

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

Shareholders' Equity

Shareholders' equity was $2.82.9 billion as of June 30, 2014March 31, 2015, compared with $2.7$2.8 billion as of December 31, 20132014 and $2.7 billion as of June 30, 2013March 31, 2014. The Corporation's Common Stock is traded on the NYSENASDAQ under the symbol FMER with 12,46912,060 holders of record at June 30, 2014March 31, 2015.

At June 30, 2014,March 31, 2015, the Corporation's common equity value per common share was $16.27$16.86 based on approximately 165.4165.5 million shares outstanding at June 30, 2014,March 31, 2015, compared to $15.77$16.53 based on approximately 165.1165.4 million shares outstanding at December 31, 2013,2014, and $15.46$16.01 based on approximately 165.0165.1 million shares outstanding at June 30, 2013.March 31, 2014.

At June 30, 2014,March 31, 2015, the Corporation's tangible book value per common share was $11.33$11.96 compared to $10.77$11.62 at December 31, 2013,2014, and $10.43$11.03 at June 30, 2013.March 31, 2014.

At June 30, 2014,March 31, 2015, the Corporation's book value per common share was $16.88$17.46 compared to $16.38$17.14 at December 31, 2013,2014, and $16.06$16.62 at June 30, 2013.March 31, 2014.


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At June 30, 2014,March 31, 2015, the Corporation had approximately 4.84.7 million treasury shares, compared to approximately 5.14.8 million treasury shares at December 31, 20132014 and approximately 5.1 million treasury shares at June 30, 2013.March 31, 2014. Treasury shares are typically issued as needed in connection with stock-based compensation awards and for other corporate purposes.

During the secondfirst quarter of 20142015, the Corporation made a dividend payment of $0.16 per share, or $26.3$26.5 million in the aggregate, on its Common Stock. As of June 30, 2014March 31, 2015, the dividend of $0.16 cents per common share has an indicated annualannualized rate of $0.64 per common share. Also in the secondfirst quarter of 20142015, the Corporation made a quarterly dividend payment of $1.5 million in the aggregate, or $14.69 per share, or $0.36725 per depositary share, on the Corporation's 5.875% Non-Cumulative Perpetual Preferred Stock, Series A.A, which trades on the NYSE.

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The following table in Figure 1718 shows activities that caused the change in outstanding Common Stock over the past five quarters.

Figure 1718. Changes in Common Stock Outstanding
2014 2014 2013 2013 20132015 2014 2014 2014 2014
(Shares in thousands)2nd qtr 1st qtr 4th qtr 3rd qtr 2nd qtr1st qtr 4th qtr 3rd qtr 2nd qtr 1st qtr
Beginning of period165,087
 165,056
 165,045
 165,045
 109,746
165,390
 165,384
 165,393
 165,087
 165,056
Issued (repurchased)(186) (51) (13) 7
 55,467
(66) (15) (10) (186) (51)
Reissued (returned) under employee benefit plans492
 82
 24
 (7) (168)
Reissued (returned) under employee benefit plans, net129
 21
 1
 492
 82
End of period165,393
 165,087
 165,056
 165,045
 165,045
165,453
 165,390
 165,384
 165,393
 165,087
                  

Capital Adequacy

Capital adequacy is an important indicator of financial stability and performance. The Corporation maintained a strong capital position with tangible common equity to tangible assets of 7.89%8.14% at June 30, 2014March 31, 2015, compared with 7.70%7.98% at December 31, 20132014, and 7.58%7.69% at June 30, 2013March 31, 2014.

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 Tiertier 1 capital ratio of at least 6%8%, a leverage capital ratio of at least 5%, a CET1 ratio of at least 6.5%, 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 Tiertier I capital ratio of at least 4%6%, a CET1 ratio of at least 4.5%, 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.


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The George Washington and Midwest FDIC-assisted acquisitions in 2010 resulted in the recognition of loss share receivables from the FDIC, which represents the fair value of estimated future payments by the FDIC to the Corporation for losses on covered assets. The FDIC loss share receivables, as well as covered assets, are risk-weighted at 20% for regulatory capital requirement purposes. No loans acquired in the Citizens merger are subject to loss share receivables from the FDIC.


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As of June 30, 2014March 31, 2015, the Corporation, on a consolidated basis, as well as the Bank, exceeded the minimum capital levels of the well-capitalized category.

Figure 1819. Capitalization Tables
(Dollars in thousands)June 30, 2014 December 31, 2013 June 30, 2013
Consolidated        
Total equity$2,791,738
11.36% $2,702,894
11.30% $2,650,909
11.26%
Common equity (a)
2,691,738
10.96% 2,602,894
10.89% 2,550,909
10.84%
Tangible common equity (a) (b)
1,873,112
7.89% 1,778,399
7.70% 1,720,750
7.58%
Tier 1 capital (a) (b)
1,978,233
11.57% 1,880,804
11.52% 1,833,612
11.35%
Total risk-based capital (a) (b)
2,377,307
13.90% 2,279,891
13.97% 2,239,363
13.86%
Leverage (b)
1,978,233
8.46% 1,880,804
8.14% 1,833,612
8.41%
         
 June 30, 2014 December 31, 2013 June 30, 2013
Bank Only        
Total equity$2,948,000
12.01% $2,859,515
11.98% $2,813,453
11.98%
Common equity (a)
2,948,000
12.01% 2,859,515
11.98% 2,813,453
11.98%
Tangible common equity (a) (b)
2,129,374
8.98% 2,036,941
8.84% 1,990,652
8.78%
Tier 1 capital (a) (b)
2,079,510
12.16% 1,978,140
12.14% 1,927,191
11.96%
Total risk-based capital (a) (b)
2,223,493
13.00% 2,122,124
13.02% 2,077,885
12.90%
Leverage (b)
2,079,510
8.93% 1,978,140
8.58% 1,927,191
8.87%
         
(Dollars in thousands)March 31, 2015 December 31, 2014 March 31, 2014
Consolidated        
Total equity$2,888,786
11.50% $2,834,281
11.38% $2,742,966
11.20%
Common equity (1)
2,788,786
11.10% 2,734,281
10.98% 2,642,966
10.79%
CET1 capital (1) (2)
2,006,340
10.60% N/A
N/A
 N/A
N/A
Tier 1 common equity (1) (2)
N/A
N/A
 1,904,461
10.95% 1,745,937
10.46%
Tier 1 capital (1) (2)
2,006,340
10.60% 2,004,461
11.53% 1,920,438
11.51%
Total risk-based capital (1) (2)
2,597,358
13.72% 2,653,893
15.26% 2,322,908
13.92%
Tier 1 leverage (2) 
2,006,340
8.31% 2,004,461
8.43% 1,920,438
8.27%
Tangible common equity (1)
1,978,624
8.14% 1,921,521
7.98% 1,821,407
7.69%
         
 March 31, 2015 December 31, 2014 March 31, 2014
Bank Only        
Total equity$3,020,048
12.03% $2,932,847
11.79% $2,895,511
11.83%
Common equity (1)
3,020,048
12.03% 2,932,847
11.79% 2,895,511
11.83%
Tier 1 capital (1) (2)
2,129,378
11.26% 2,127,065
12.22% 2,017,602
12.09%
Total risk-based capital (1) (2)
2,530,261
13.38% 2,521,412
14.49% 2,164,993
12.97%
Tier 1 Leverage (2)
2,129,378
8.87% 2,127,065
8.94% 2,017,602
8.71%
Tangible common equity (1)
2,209,886
9.10% 2,120,087
8.81% 2,073,952
8.77%
         
(1)(a) See Figure 2 entitled GAAP to Non-GAAP Reconciliations, which presents the computations of certain financial measures related to tangible common equity and efficiency ratios. The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period to period comparisons.
(b) December(2) The Basel III capital rules, effective January 1, 2015, replace tier 1 common equity and the associated tier 1 common equity ratio with common equity tier 1 ("CET1") capital and the CET1 risk-based capital ratio. March 31, 20132015 figures are preliminary and June 30, 2013 data reflects purchase accounting adjustments which resulted in an increasepresented on a Basel III basis and reflect transitional capital requirements and phase-in provisions, including the standardized approach for calculating risk weighted assets. Periods prior to goodwill of approximately $1.9 million and $7.4 million, respectively, from that previously reported.March 31, 2015 are reported on a Basel I basis.

RISK MANAGEMENT

Market Risk Management

Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices and commodity prices, including the correlation among these factors and their volatility. When the value of an instrument is tied to such external factors, the holder faces “marketmarket risk. The Corporation is primarily exposed to interest rate risk as a result of offering a wide array of financial products to its customers.

Interest rate risk management

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

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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”embedded options present in the investment portfolio and in many financial instruments such as loan prepayment options, deposit early withdrawal options, and interest rate options. These options allow customers opportunities to benefit when market interest rates change, which typically results in higher costs or lower revenue for the Corporation. Basis risk refers to the potential for changes in the underlying relationship between market rates or indices, which subsequently result in a narrowing of profit spread on an earning asset or liability. Basis risk is also present in administered rate liabilities, such as interest-bearing checking accounts, savings

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accounts and money market accounts where historical pricing relationships to market rates may change due to the level or directional change in market interest rates.

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

Net interest income simulation analysis. Earnings simulation involves forecasting net interest earnings under a variety of scenarios including changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates. The sensitivity of net interest income to changes in interest rates is measured using numerous interest rate scenarios including shocks, gradual ramps, curve flattening, curve steepening as well as forecasts of likely interest rates scenarios.

Presented below is the Corporation’s interest rate risk profile as of June 30, 2014March 31, 2015 and 20132014:

Figure 1920. Net Interest Income Simulation Results
 
  
Immediate Change in Rates and Resulting  Percentage
Increase/(Decrease) in Net Interest Income:
 - 100
basis
points
 + 100
basis
points
 + 200
basis
points
 + 300
basis
points
June 30, 2014(3.52)% 1.64% 3.27% 4.55%
June 30, 2013(3.86)% 0.69% 1.53% 2.02%
        
  
Immediate Change in Rates and Resulting  Percentage
Increase/(Decrease) in Net Interest Income:
 - 100
basis
points
 + 100
basis
points
 + 200
basis
points
 + 300
basis
points
March 31, 2015(4.71)% 2.31% 4.45% 6.04%
March 31, 2014(5.22)% 2.16% 4.22% 5.95%
        

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 EVE sensitivity analysis to study the impact of long-term cash flows on earnings and capital. EVE involves discounting present values of

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all cash flows of on balance sheet and off balance sheet items under different interest rate scenarios. The discounted present value of all cash flows represents the Corporation’s EVE. The analysis requires modifying the expected cash flows in each interest rate scenario, which will impact the discounted present value. The amount of base-case measurement and its sensitivity to shifts in the yield curve allow Management to measure longer-term repricing and option risk in the balance sheet.

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Presented below is the Corporation’s EVE profile as of June 30, 2014March 31, 2015 and 20132014:

Figure 2021. EVE Simulation Results
 
  
Immediate Change in Rates and Resulting Percentage
Increase/(Decrease) in EVE:
 - 100
basis
points
 + 100
basis
points
 + 200
basis
points
 + 300
basis
points
June 30, 2014(2.42)% 0.38 % (0.18)% (1.26)%
June 30, 2013(5.57)% (1.07)% (2.71)% (5.06)%
        
  
Immediate Change in Rates and Resulting Percentage
Increase/(Decrease) in EVE:
 - 100
basis
points
 + 100
basis
points
 + 200
basis
points
 + 300
basis
points
March 31, 2015(4.88)% 2.14 % 3.00 % 2.90 %
March 31, 2014(2.35)% (0.71)% (1.12)% (2.06)%
        

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

Management of interest rate exposure. Management uses the results of its various simulation analysis to formulate strategies to achieve a desired risk profile within the parameters of the Corporation’s capital and liquidity guidelines. Specifically, Management actively manages interest rate risk positions by structuring investment portfolio cash flows to support the desired risk position, and 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 98 (Derivatives and Hedging Activities) in the notes to the unaudited consolidated financial statements.statements in this Form 10-Q.

Liquidity Risk Management

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

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

The Corporation’s primary source of liquidity is its core deposit base. Core deposits comprised approximately 88.25%88.10% of total deposits at June 30, 2014March 31, 2015. The Corporation also has available unused

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wholesale sources of liquidity, including advances from the FHLB of Cincinnati, issuance through dealers in the capital markets and access to certificates of deposit issued through brokers. Liquidity is further provided by unencumbered, or unpledged, investment securities that totaled $2.8 billion as of June 30, 2014March 31, 2015.

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

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specific event would be a downgrade in the Corporation’s public credit rating by a rating agency due to factors such as deterioration in asset quality, a large charge to earnings, a decline in profitability or other financial measures, or a significant merger or acquisition. Examples of systemic events unrelated to the Corporation that could have an effect on its access to liquidity would be terrorism or war, natural disasters, political events, or the default or bankruptcy of a major corporation, mutual fund or hedge fund. Similarly, market speculation or rumors about the Corporation or the banking industry in general may adversely affect the cost and availability of normal funding sources. The liquidity contingency plan therefore outlines the process for addressing a liquidity crisis. The plan provides for an evaluation of funding sources under various market conditions. It also assigns specific roles and responsibilities for effectively managing liquidity through a problem period.
 
Funding Trends for the Quarter - During the three months ended June 30, 2014March 31, 2015, lower cost core deposits decreasedincreased by $397.7339.3 million from the firstfourth quarter 2014. In the aggregate, there was an increase in deposits decreasedof $513.3420.9 million from December 31, 2014. The Corporation’s loan to deposit ratio decreased to 77.74% as of March 31, 2015 from 78.58% as of December 31, 2014. Securities sold under agreements to repurchase increaseddecreased $292.7159.2 million from MarchDecember 31, 2014. Wholesale borrowings and long-term debt had a net increasedecrease of $299.7104.0 million from March 31, 2014. The Corporation’s loan to deposit ratio increased to 77.57% as of June 30, 2014 from 73.74% as of MarchDecember 31, 2014.

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

During the three months ended June 30, 2014March 31, 2015, the Bank paid $69.3 million indid not pay dividends to the Corporation. As of June 30, 2014March 31, 2015, the Bank had an additional $174.1356.5 million available to pay dividends without regulatory approval.

Operational Risk Management

Like all businesses, we arethe Corporation is subject to operational risks, including, but not limited to, risks of human error, internal processes and systems that turn out to be inadequate and external events. These events include, among other things, threats to ourthe Corporation's cybersecurity, since we relyit relys upon information systems and the internetInternet to conduct ourits business activities. WeThe Corporation is also are exposed to the costs of complying with laws, regulations and prescribed practices, which are changing rapidly and in large volumes, especially as a result of the Dodd-Frank Act and the proposal and adoption of implementing rules. Noncompliance may increase our operating costs, result in monetary losses, adversely affect ourthe Corporation's reputation and regulatory relations and our ability to implement ourits business plans and pursue expansion opportunities. We seek

The Corporation also faces the risk of operational disruption, failure or capacity constraints due to its dependency on third party vendors for components of its business infrastructure. While the Corporation has selected these third party vendors carefully, it does not control their operations. As such, any failure on the part of these business partners to perform their various responsibilities could also adversely affect the Corporation's business and operations.

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The Corporation may be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control, which may include, for example, computer viruses, cyber attacks, spikes in transaction volume and/or customer activity, electrical or telecommunications outages, or natural disasters. Although the Corporation has programs in place related to business continuity, disaster recovery and information security to maintain the confidentiality, integrity and availability of its systems, business applications and customer information, such disruptions may give rise to interruptions in service to customers and loss or liability to the Corporation.

The Corporation seeks to mitigate operational risk through identification and managementmeasurement of risk, alignment of business strategies within risk guidelines, and the Corporations tolerance for risk as well as through ourits system of internal controls and reporting. WeFurther, the Corporation regularly evaluateevaluates and seekseeks to strengthen ourits system of internal controls to improve theits oversight of our operational risk and compliance with applicable laws, and regulations and prescribed standards.

Critical Accounting Policies

The Corporation’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of AmericaGAAP and follow general practices within the financial services industry in which it operates. All accounting policies are important, and all policies described in Note 1.1 (Summary of Significant Accounting Policies) to the consolidated financial statements of the 20132014 Form 10-K provide a greater understanding of how the Corporation’s financial performance is recorded and reported.

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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. TheCritical accounting policies require Management to exerciseapplication of Management’s most difficult, subjective, or complex judgment and make certain assumptions and estimates about the effect of matters that affect amounts reportedare inherently uncertain or may change in the financial statements. These assumptions and estimates are based on information available as of the date of the financial statements.future periods.

Management relies heavily on the use of judgment, assumptions and estimates to make a number of core decisions, including accounting for the ALL, income taxes, derivative instruments and hedging activities, and assets and liabilities that involve valuation methodologies. A brief discussion of each of these areas appears within Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 20132014 Form 10-K.

Off-Balance Sheet Arrangements

A detailed discussion of the Corporation’s off-balance sheet arrangements, including interest rate swaps, forward sale contracts and mortgage loan commitments is included in Note 98 (Derivatives and Hedging Activities) to the Corporation’s unaudited consolidated financial statements included in this reportForm 10-Q and in Note 1819 to the consolidated financial statements in the 20132014 Form 10-K. There have been no significant changes since December 31, 20132014.


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Forward-looking Safe-harbor Statement

DiscussionsStatements in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and elsewhere within this report thatForm 10-Q, which are not statements of historical fact (including statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “project,” intend,” and “plan”) areor factual in nature, constitute forward-looking statements. These forward-looking statements thatrelate to, among other things, expectations for future shifts in loan portfolio to consumer and commercial loans, increase in core deposits base, allowance for loan losses, demands for the Corporation’s services and products, future services and products to be offered, increased numbers of customers, and like items, and involve a number of risks and uncertainties. Any forward-looking statement is not a guarantee of future performance andThe following factors are among the factors that could cause actual future results couldto differ materially from those contained inthe forward-looking information. Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detailed from time to timestatements: general economic conditions, including their impact on capital expenditures; business conditions in the Corporation’s filingsbanking industry; the regulatory environment; rapidly changing technology and evolving banking industry standards; competitive factors, including increased competition with the Securitiesregional and Exchange Commission, including without limitation the risk factors disclosed in Item 1A, “Risk Factors,” of the 2013 Form 10-K.national financial institutions; new service and product offerings by competitors and price pressures; and like items.

Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, operational, economic and competitive uncertainties and contingencies, many of which are beyond a company’s control, and many of which, with respect to future business decisions and actions (including acquisitions and divestitures), are subject to change. Examples of uncertainties and contingencies include, among other important factors: general and local economic and business conditions; recession or other economic downturns; expectations of, and actual timing and amount of, interest rate movements, including the slope of the yield curve (which can have a significant impact on a financial services institution); market and monetary fluctuations; inflation or deflation; customer and investor responses to these conditions; the financial condition of borrowers and other counterparties; competition within and outside the financial services industry; geopolitical developments including possible terrorist activity; recent and future legislative and regulatory developments; natural disasters; effectiveness of the Corporation’s hedging practices; technology; demand for the Corporation’s product offerings; new products and services in the industries in which the Corporation operates; critical accounting estimates; the Corporation's ability to realize the synergies and benefits contemplated by the acquisition of Citizens, such as it being accretive to earnings and expanding the Corporation's geographic presence, in the time frame anticipated or at all, and those risk factors detailed in the Corporation'sCorporation’s periodic reports and registration statements filed with the SEC. Other factors are those

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inherent in originating, selling and servicing loans including prepayment risks, pricing concessions, fluctuation in U.S. housing prices, fluctuation of collateral values and changes in customer profiles. Additionally, the actions of the SEC, the FASB, the OCC, the Federal Reserve System, FINRA, and other regulators; regulatory and judicial proceedings and changes in laws and regulations applicable to the Corporation including the costs of complying with any such laws and regulations; and the Corporation’s success in executing its business plans and strategies, including efforts to reduce operating expenses, and managing the risks involved in the foregoing, could cause actual results to differ.

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

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

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ITEM 4. CONTROLS AND PROCEDURES.

Management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, has made an evaluation of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.
Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer have concluded, as of the end of the period covered by this report, that the Corporation’s disclosure controls and procedures are effective.
During the quarter ended June 30, 2014March 31, 2015, there was no change in internal control over financial reporting, under the original Internalas described in "Internal Control-Integrated Framework, issued" as updated by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II -II. OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS.

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

For additional information on litigation, see Note 1312 (ContingenciesCommitments and Guarantees) in the notes to the consolidated financial statements.statements in this Form 10-Q.

ITEM 1A.RISK FACTORS.

There have been no material changes in our risk factors from those disclosed in the 20132014 Form 10-K.


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ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table provides information with respect to purchases the Corporation made of shares of its Common Stock during the secondfirst quarter of the 20142015 fiscal year:
Calendar Month
Total Number of
Shares  Purchased (1)
 
Average Price
Paid per  Share
 
Total Number of
Shares  Purchased
as Part of Publicly
Announced Plans
or Programs (2)
 
Maximum
Number of  Shares
that May Yet Be
Purchased Under
Plans or Programs
(2)
April 1- April 30, 2014164,751
 $20.06
 
 396,272
May 1- May 31, 201413,242
 22.46
 
 396,272
June 1- June 30, 20148,007
 23.23
 
 396,272
Total186,000
 $
 
 396,272
        
Calendar Month
Total Number of
Shares  Purchased (1)
 
Average Price
Paid per  Share
 
Total Number of
Shares  Purchased
as Part of Publicly
Announced Plans
or Programs (2)
 
Maximum
Number of  Shares
that May Yet Be
Purchased Under
Plans or Programs (2)
January 1- January 31, 20153,428
 $20.73
 
 396,272
February 1- February 28, 20154,521
 18.68
 
 396,272
March 1- March 31, 201558,303
 19.59
 
 396,272
Total66,252
 $19.59
 
 396,272
        
 
(1)
Reflects 186,00066,252 shares of Common Stock purchased as a result of either: (1) delivered by the option holder with respect to the exercise of stock options; (2) shares withheld to pay income taxes or other tax liabilities associated with vested restricted shares of Common Stock; or (3) shares returned upon the resignation of the restricted shareholder. No shares were purchased under the program referred to in note (2) to this table during the secondfirst quarter of 20142015.
(2)On January 19, 2006, the Board of Directors authorized the repurchase of up to 3 million shares of Common Stock (the “New Repurchase Plan”). The New Repurchase Plan, which has no expiration date, superseded all other repurchase programs, including that authorized by the Board of Directors on July 15, 2004.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES.
    None.

ITEM 4.MINE SAFETY DISCLOSURES.

Not Applicable.

ITEM 5.     OTHER INFORMATION.

Not Applicable.

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ITEM 6.EXHIBITS

Exhibit  
Number Description
3.2Second Amended and Restated Code of Regulations of FirstMerit Corporation,  as Amended, as of April 15, 2015.
31.1 Rule 13a-14(a)/Section 302 Certification of Paul G. Greig, Chief Executive Officer of FirstMerit Corporation.
31.2 Rule 13a-14(a)/Section 302 Certification of Terrence E. Bichsel, Senior Executive Vice President and Chief Financial Officer of FirstMerit Corporation.
32.1 Rule 13a-14(b)/Section 906 Certification of Paul G. Greig, Chief Executive Officer of FirstMerit Corporation.
32.2 Rule 13a-14(b)/Section 906 Certification of Terrence E. Bichsel, Senior Executive Vice President and Chief Financial Officer of FirstMerit Corporation.
101.1 The following financial information from FirstMerit Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014March 31, 2015 formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Comprehensive Income; (iii) the Consolidated Statements of Changes in Shareholders’ Equity; (iv) the Consolidated Statements of Cash Flows; and (iv) Notes to Consolidated Financial Statements.
   





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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 FIRSTMERIT CORPORATION
  
 By:/s/    TERRENCE E. BICHSEL        
  
Terrence E. Bichsel, Senior Executive Vice President
and Chief Financial Officer (duly authorized officer of registrant and principal financial officer)
AugustMay 1, 20142015



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FirstMerit Corporation
Form 10-Q
Index to Exhibits

Exhibit Description
3.2Second Amended and Restated Code of Regulations of FirstMerit Corporation,  as Amended, as of April 15, 2015.
31.1 Rule 13a-14(a)/Section 302 Certification of Paul G. Greig, Chief Executive Officer of FirstMerit Corporation.
31.2 Rule 13a-14(a)/Section 302 Certification of Terrence E. Bichsel, Senior Executive Vice President and Chief Financial Officer of FirstMerit Corporation.
32.1 Rule 13a-14(b)/Section 906 Certification of Paul G. Greig, Chief Executive Officer of FirstMerit Corporation.
32.2 Rule 13a-14(b)/Section 906 Certification of Terrence E. Bichsel, Senior Executive Vice President and Chief Financial Officer of FirstMerit Corporation.
101.1 
The following financial information from FirstMerit Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014March 31, 2015 formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Comprehensive Income; (iii) the Consolidated Statements of Changes in Shareholders’ Equity; (iv) the Consolidated Statements of Cash Flows; and (iv) Notes to Consolidated Financial Statements.





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