FirstMerit (FMER) 10-Q 2012 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________________________________________

FORM 10-Q

_______________________________________________ 

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

for the quarterly period ended September 30, 2012

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

For the transition period from              to            

COMMISSION FILE NUMBER 0-10161

_______________________________________________ 

FIRSTMERIT CORPORATION

(Exact name of registrant as specified in its charter)

_______________________________________________ 

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

III CASCADE PLAZA, 7TH FLOOR, AKRON, OHIO

44308-1103

(Address of principal executive offices, zip code)

(330) 996-6300

(Registrant's telephone number, including area code)

_______________________________________________ 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    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  x    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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

As of October 29, 2012, 109,652,246 shares of common stock, without par value, were outstanding.

TABLE OF CONTENTS
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS		2
	CONSOLIDATED BALANCE SHEETS	2
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	3
	CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY	4
	CONSOLIDATED STATEMENTS OF CASH FLOWS	5
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.		64
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.		97
ITEM 4. CONTROLS AND PROCEDURES.		97
PART II. OTHER INFORMATION		97
	ITEM 1. LEGAL PROCEEDINGS	97
	ITEM 1A. RISK FACTORS	97
	ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	97
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES	98
	ITEM 4.MINE SAFETY DISCLOSURES	98
	ITEM 5. OTHER INFORMATION	98
	ITEM 6. EXHIBIT INDEX	99
SIGNATURES		100
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

FIRSTMERIT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands) (Unaudited, except December 31, 2011, which is derived from the audited financial statements)	September 30, 2012			December 31, 2011			September 30, 2011
ASSETS
Cash and due from banks	$	201,359		$	219,256		$	202,886
Interest-bearing deposits in banks	37,058			158,063			116,059
Total cash and cash equivalents	238,417			377,319			318,945
Investment securities
Held-to-maturity	620,631			82,764			92,214
Available-for-sale	2,911,993			3,353,553			3,198,046
Other investments	140,730			140,726			160,793
Loans held for sale	17,540			30,077			39,340
Noncovered loans:
Commercial	5,511,678			5,107,747			5,018,857
Residential mortgage	439,062			413,664			397,309
Installment	1,321,081			1,263,665			1,271,327
Home equity	789,743			743,982			743,377
Credit cards	143,918			146,356			142,710
Leases	110,938			73,530			57,992
Total noncovered loans	8,316,420			7,748,944			7,631,572
Allowance for noncovered loan losses	(98,942		)	(107,699		)	(109,187		)
Net noncovered loans	8,217,478			7,641,245			7,522,385
Covered loans (includes loss share receivable of $131.9 million, $205.7 million and $220.5million at September 30, 2012, December 31, 2011 and September 30, 2011, respectively)	1,174,929			1,497,140			1,647,218
Allowance for covered loan losses	(43,644		)	(36,417		)	(34,603		)
Net covered loans	1,131,285			1,460,723			1,612,615
Net loans	9,348,763			9,101,968			9,135,000
Premises and equipment, net	182,043			192,949			193,075
Goodwill	460,044			460,044			460,044
Intangible assets	6,817			8,239			8,782
Covered other real estate (includes loss share receivable of $0.1 million, $1.3 million and $3.5 million at September 30, 2012, December 31, 2011 and September 30, 2011, respectively)	56,795			54,505			61,890
Accrued interest receivable and other assets	645,070			639,558			1,020,149
Total assets	$	14,628,843		$	14,441,702		$	14,688,278
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	3,231,500		$	3,030,225		$	2,971,555
Interest-bearing	1,079,913			1,062,896			967,574
Savings and money market accounts	5,744,103			5,595,409			5,513,472
Certificates and other time deposits	1,476,910			1,743,079			1,943,520
Total deposits	11,532,426			11,431,609			11,396,121
Federal funds purchased and securities sold under agreements to repurchase	963,455			866,265			987,030
Wholesale borrowings	178,083			203,462			248,006
Accrued taxes, expenses, and other liabilities	330,175			374,413			486,467
Total liabilities	13,004,139			12,875,749			13,117,624
Shareholders’ equity:
Preferred stock, without par value: authorized and unissued 7,000,000 shares	—			—			—
Preferred stock, Series A, without par value: designated 800,000 shares; none outstanding	—			—			—
Convertible preferred stock, Series B, without par value: designated 220,000 shares; none outstanding	—			—			—
Common stock, without par value; authorized 300,000,000 shares; issued: September 30, 2012, December 31, 2011 and September 30, 2011 - 115,121,731 shares	127,937			127,937			127,937
Capital surplus	473,781			479,882			478,738
Accumulated other comprehensive loss	(13,900		)	(23,887		)	(4,654		)
Retained earnings	1,175,001			1,131,203			1,118,027
Treasury stock, at cost: September 30, 2012 - 5,468,853 shares; December 31, 2011 - 5,870,923 shares; September 30, 2011 -5,874,748 shares	(138,115		)	(149,182		)	(149,394		)
Total shareholders’ equity	1,624,704			1,565,953			1,570,654
Total liabilities and shareholders’ equity	$	14,628,843		$	14,441,702		$	14,688,278

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

2

FIRSTMERIT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands except per share data)	Quarters ended						Nine Months Ended
(Unaudited)	September 30,						September 30,
	2012			2011			2012			2011
Interest income:
Loans and loans held for sale	$	103,005		$	108,417		$	309,213		$	330,877
Investment securities
Taxable	20,633			21,949			64,834			65,610
Tax-exempt	3,844			3,189			11,270			9,521
Total investment securities interest	24,477			25,138			76,104			75,131
Total interest income	127,482			133,555			385,317			406,008
Interest expense:
Deposits:
Demand-interest bearing	243			218			726			579
Savings and money market accounts	5,166			6,929			15,302			22,172
Certificates and other time deposits	2,743			4,370			9,436			16,803
Securities sold under agreements to repurchase	310			977			854			2,832
Wholesale borrowings	1,130			1,669			3,399			4,963
Total interest expense	9,592			14,163			29,717			47,349
Net interest income	117,890			119,392			355,600			358,659
Provision for noncovered loan losses	9,965			14,604			26,860			41,760
Provision for covered loan losses	6,214			4,768			15,576			17,580
Net interest income after provision for loan losses	101,711			100,020			313,164			299,319
Other income:
Trust department income	6,124			5,607			17,481			16,983
Service charges on deposits	14,603			17,838			43,490			48,460
Credit card fees	11,006			13,640			32,402			39,357
ATM and other service fees	3,680			3,801			11,360			9,781
Bank owned life insurance income	3,094			3,182			9,073			11,439
Investment services and insurance	2,208			1,965			6,843			6,384
Investment securities gains, net	553			4,402			1,361			5,291
Loan sales and servicing income	7,255			3,426			19,085			9,102
Other operating income	6,402			6,911			20,857			18,222
Total other income	54,925			60,772			161,952			165,019
Other expenses:
Salaries, wages, pension and employee benefits	58,061			61,232			183,632			177,815
Net occupancy expense	8,077			8,464			24,640			25,144
Equipment expense	7,143			7,073			21,845			20,725
Stationery, supplies and postage	2,210			2,517			6,638			7,972
Bankcard, loan processing and other costs	8,424			8,449			24,935			24,278
Professional services	4,702			5,732			17,361			17,466
Amortization of intangibles	456			543			1,422			1,629
FDIC expense	1,832			3,240			9,015			12,187
Other operating expense	17,682			18,707			51,944			53,254
Total other expenses	108,587			115,957			341,432			340,470
Income before income tax expense	48,049			44,835			133,684			123,868
Income tax expense	13,096			13,098			37,802			34,808
Net income	$	34,953		$	31,737		$	95,882		$	89,060
Other comprehensive income, net of taxes
Changes in unrealized securities' holding gains and losses	$	4,884		$	7,353		$	10,872		$	24,889
Reclassification for realized securities' gains	(359		)	(2,862		)	(885		)	(3,440		)
Total other comprehensive gain, net of taxes	4,525			4,491			9,987			21,449
Comprehensive income	$	39,478		$	36,228		$	105,869		$	110,509
Net income applicable to common shares	$	34,953		$	31,737		$	95,882		$	89,060
Net income used in diluted EPS calculation	$	34,953		$	31,737		$	95,882		$	89,060
Weighted average number of common shares outstanding - basic	109,645			109,245			109,473			109,052
Weighted average number of common shares outstanding - diluted	109,645			109,246			109,473			109,053
Basic earnings per common share	$	0.32		$	0.29		$	0.88		$	0.82
Diluted earnings per common share	$	0.32		$	0.29		$	0.88		$	0.82
Dividend per common share	$	0.16		$	0.16		$	0.48		$	0.48

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

3

FIRSTMERIT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands)	Preferred Stock		Common Stock		Common Stock Warrant		Capital Surplus			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock			Total Shareholders’ Equity
(Unaudited)
Balance at December 31, 2010	$	—	$	127,937	$	—	$	485,567		$	(26,103	)	$	1,080,900		$	(160,586	)	$	1,507,715
Net income	—		—		—		—			—			89,060			—			89,060
Cash dividends - common stock ($0.48 per share)	—		—		—		—			—			(51,933		)	—			(51,933		)
Nonvested (restricted) shares granted (576,138 shares)	—		—		—		(13,985		)	—			—			13,985			—
Restricted stock activity (145,668 shares)	—		—		—		494			—			—			(2,751		)	(2,257		)
Deferred compensation trust (10,182 increase in shares)	—		—		—		42			—			—			(42		)	—
Share-based compensation	—		—		—		6,620			—			—			—			6,620
Net unrealized gains on investment securities, net of taxes	—		—		—		—			21,449			—			—			21,449
Balance at September 30, 2011	$	—	$	127,937	$	—	$	478,738		$	(4,654	)	$	1,118,027		$	(149,394	)	$	1,570,654
Balance at December 31, 2011	$	—	$	127,937	$	—	$	479,882		$	(23,887	)	$	1,131,203		$	(149,182	)	$	1,565,953
Net income	—		—		—		—			—			95,882			—			95,882
Cash dividends - common stock ($0.48 per share)	—		—		—		—			—			(52,084		)	—			(52,084		)
Nonvested (restricted) shares granted (588,765 shares)	—		—		—		(14,481		)	—			—			14,481			—
Restricted stock activity (186,695 shares)	—		—		—		1,023			—			—			(3,364		)	(2,341		)
Deferred compensation trust (86,174 increase in shares)	—		—		—		50			—			—			(50		)	—
Share-based compensation	—		—		—		7,258			—			—			—			7,258
Net unrealized gains on investment securities, net of taxes	—		—		—		—			9,987			—			—			9,987
Other	—		—		—		49			—			—			—			49
Balance at September 30, 2012	$	—	$	127,937	$	—	$	473,781		$	(13,900	)	$	1,175,001		$	(138,115	)	$	1,624,704

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

4

FIRSTMERIT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine months ended September 30,
(Dollars in thousands)	2012			2011
(Unaudited)
Operating Activities
Net income	$	95,882		$	89,060
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	42,436			59,340
Depreciation and amortization	17,307			17,016
Benefit attributable to FDIC loss share	12,601			31,078
Accretion of acquired loans	(62,191		)	(91,872		)
Accretion income for lease financing	(2,168		)	(1,928		)
Amortization and accretion of securities, net
Available for sale	11,352			11,129
Held to maturity	1,239			25
Gain on sales and calls of investment securities, net
Available for sale	(1,361		)	(5,291		)
Originations of loans held for sale	(575,972		)	(322,760		)
Proceeds from sales of loans, primarily mortgage loans sold in the secondary mortgage markets	596,412			329,967
Gains on sales of loans, net	(7,903		)	(5,208		)
Amortization of intangible assets	1,422			1,629
Net change in assets and liabilities
Interest receivable	(1,375		)	(195		)
Interest payable	(1,117		)	(1,934		)
Prepaid assets	2,420			(5,989		)
Bank owned life insurance	(9,073		)	(7,378		)
Employee pension liability	(258		)	(2,287		)
Other assets and liabilities	3,888			(1,501		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	123,541			92,901
Investing Activities
Proceeds from sales of securities
Available for sale	190,813			182,781
Proceeds from prepayments, calls, and maturities
Available for sale	611,382			778,697
Held to maturity	42,409			18,901
Other	—			12
Purchases of securities
Available for sale	(878,624		)	(1,338,279		)
Held to maturity	(98,893		)	(51,151		)
Other	(42		)	(79		)
Net decrease in loans and leases	(241,290		)	(81,096		)
Purchases of premises and equipment, net	(6,401		)	(12,225		)
NET CASH USED BY INVESTING ACTIVITIES	(380,646		)	(502,439		)
Financing Activities
Net increase in demand accounts	218,292			280,175
Net increase in savings and money market accounts	148,694			701,689
Net decrease in certificates and other time deposits	(266,169		)	(853,748		)
Net increase in securities sold under agreements to repurchase	97,190			209,445
Net decrease in wholesale borrowings	(25,379		)	(78,001		)
Cash dividends - common	(52,084		)	(51,933		)
Restricted stock activity	(2,341		)	(2,257		)
NET CASH PROVIDED BY FINANCING ACTIVITIES	118,203			205,370
Decrease in cash and cash equivalents	(138,902		)	(204,168		)
Cash and cash equivalents at beginning of period	377,319			523,113
Cash and cash equivalents at end of period	$	238,417		$	318,945
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest, net of amounts capitalized	$	27,462		$	43,055
Federal income taxes	$	43,421		$	7,915

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

5

FirstMerit Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2012(Unaudited) (Dollars in thousands except per share data)

1.    Summary of Significant Accounting Policies

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

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

The consolidated balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements at that date. The accompanying unaudited interim financial statements reflect all adjustments (consisting only of normally recurring adjustments) that are, in the opinion of FirstMerit Corporation’s Management (“Management”), necessary for a fair statement of the results for the interim periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules of the Securities and Exchange Commission (“SEC”). The unaudited consolidated financial statements of the Corporation as of September 30, 2012 and 2011 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, 2011 (the “2011 Form 10-K”). Certain reclassifications of prior year’s amounts have been made to conform to the current year presentation. Such reclassifications had no effect on net earnings or equity.

There have been no significant changes to the Corporation’s accounting policies as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2011.

In preparing these accompanying unaudited interim consolidated financial statements, subsequent events were evaluated through the time the consolidated financial statements were issued. No material subsequent events have occurred requiring recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements.

Recently Adopted and Issued Accounting Standards -

FASB ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements. ASU 2011-03 removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. Other criteria applicable to the assessment of effective control are not changed by the amendments in the update. ASU 2011-03 is effective prospectively for all transactions or modifications of existing transactions that occur on or after January 1, 2012. ASU 2011-03 did not have a significant impact on the Corporation's consolidated financial statements.

6

FASB ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This amendment was issued as result of an effort to develop common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRSs”). While ASU 2011-04 is largely consistent with existing fair value measurement principles under U.S. GAAP, it expands the disclosure requirements for fair value measurements and clarifies the existing guidance or wording changes to align with IRFS No. 13. Many of the requirements for the amendments in ASU 2011-04 do not result in a change in the application of the requirements in ASC 820. ASU 2011-04 was effective for the Corporation on a prospective basis beginning in the quarter ended March 31, 2012. The adoption of ASU 2011-04 did not have a significant impact on the Corporation's consolidated financial statements. The newly required disclosures are incorporated into Note 12 (Fair Value Measurement).

FASB ASU 2011-05, Presentation of Comprehensive Income. ASU 2011-05 provides entities with the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income, along with a total for other comprehensive income, and a total amount for comprehensive income. As originally issued, ASU 2011-05 required entities to present reclassification adjustments out of accumulated other comprehensive income by component in the statement in which net income is presented and the statement in which other comprehensive income is presented. This requirement was deferred by ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-05 was effective for the Corporation on a retrospective basis beginning in the quarter ended March 31, 2012. The adoption of ASU 2011-05 did not have an impact on the Corporation's financial statements as the Corporation reports comprehensive income in a single continuous statement with all of the components required by ASU 2011-05.

FASB ASU 2011-08, TestingGoodwill for Impairment. ASU 2011-08 amends the guidance in ASC 350-20 on testing goodwill for impairment and provides the option of performing a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying amount, before applying the current two-step goodwill impairment test. If the entity determines that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. Otherwise, the entity would not need to apply the two-step test. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Corporation has not had to test goodwill for impairment since ASU 2011-08 became effective for the Corporation, January 1, 2012. ASU 2011-08 is not expected to have a significant impact on the Corporation's consolidated financial statements.

FASB ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 amends the guidance in ASC 210, Balance Sheet, to require an entity to disclose information about offsetting and related arrangements to enable users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements with certain financial instruments and derivative instruments. The amendments are effective for annual reporting periods beginning on or after January 1, 2013, with retrospective application to the disclosures of all comparative periods presented. The Corporation has not completed evaluating the impact of ASU 2011-11 on its consolidated financial statements.

FASB ASU 2012-06, Business Combinations: Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution (a consensus of the FASB Emerging Issues Task Force). ASU 2012-06 amends the guidance in ASU 805-20 on

7

the recognition of an indemnification asset as a result of a government-assisted acquisition of a financial institution when a subsequent change in the cash flows expected to be collected on the indemnification asset occurs (as a result of a change in cash flows expected to be collected on the assets subject to indemnification). A subsequent change in the measurement of the indemnification asset is to be accounted for on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value are limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets). The amendments in ASU 2012-06 are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. Early adoption is permitted. The Corporation currently applies the accounting as described within ASU 2012-06, therefore, ASU 2012-06 will not have an impact on its consolidated financial statements.

8

2. Restructuring

During the quarter ended June 30, 2012, Management announced its implementation plans to enhance the operating efficiency and profitability of the Corporation. The efficiency initiative is a long-term plan to optimize service channels and lower the overall cost structure. It includes the elimination of assistant branch manager positions and closing of eight full service branches. As a result of the initiative, the Corporation estimated that it would reduce its workforce by approximately 340 positions. The elimination of the assistant branch manager positions represent the majority of those reductions. The majority of these positions were eliminated as of June 30, 2012. Management expects to complete its reduction in workforce by December 31, 2012. All branch closures occurred in the quarter ended September 30, 2012.

During the quarter ended September 30, 2012, the Corporation recognized the balance of estimated restructuring costs of $0.5 million which primarily consisted of costs associated with the closing of the branches. The following table summarizes the restructuring activity, including the reserves established and the total amount expected to be incurred.

	Employee Separation			Contract Termination			Long-Lived Asset Charges		Other			Total
Total expected restructuring charge	$	3,254		$	415		$	337	$	200		$	4,206
Balance at June 30, 2012	$	1,443		$	—		$	—	$	—		$	1,443
Charge to expense	—			415			—		38			453
Cash payments	(1,128		)	(168		)	—		(38		)	(1,334		)
Noncash utilization	—			—			—		—			—
Balance at September 30, 2012	$	315		$	247		$	—	$	—		$	562
Remaining expected restructuring charge	$	—		$	—		$	—	$	—		$	—

Severance expense of $3.3 million was recognized in the quarter ended June 30, 2012. The remaining obligation related to employee separation costs is included in accrued taxes, expenses and other liabilities in the accompanying unaudited consolidated balance sheets as of September 30, 2012.

The Corporation recognized $5.2 million in professional service fees in the quarter ended June 30, 2012 related to the efficiency initiative which was reported in professional services in the accompanying unaudited consolidated statements of comprehensive income. Other costs include costs related to closing the branches and other expenditures associated with the Corporation's restructuring initiative and are expensed as incurred.

3.    Business Combinations

Citizens Republic Bancorp, Inc. – Merger Agreement

On September 12, 2012, the Corporation and Citizens Republic Bancorp, Inc. (“Citizens”), a Michigan corporation, entered into an Agreement and Plan of Merger (the “Merger Agreement”).

The Merger Agreement provides that Citizens will merge with and into the Corporation (the “Merger”) and each share of Citizens common stock will be canceled and converted into the right to receive 1.37 shares of the Corporation's common stock (except that any shares of Citizens common stock that are owned by Citizens, the Corporation or any of their respective subsidiaries, other than in a fiduciary capacity, will be canceled without any consideration therefor). Each outstanding option to acquire, and each outstanding equity award relating to, one share of Citizens' common stock will be converted into an option to acquire, or an equity award

9

relating to, 1.37 shares of the Corporation's common stock, as applicable. As a result of the Merger, the former shareholders of Citizens will become shareholders of the Corporation. At the effective time of the Merger, the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of Citizens issued to the United States Treasury as part of the Troubled Assets Relief Program (the “TARP Preferred”), will be canceled and converted into the right to receive cash in the aggregate amount equal to the liquidation preference of the TARP Preferred plus all accrued, accumulated and unpaid dividends thereon.

The Merger Agreement provides that upon completion of the Merger, the Corporation will increase its board of directors by two directors. The new directorships will be filled with current members of the Citizens board as recommended by the Citizens board, and the recommended directors must be reasonably acceptable to the Corporation’s board.

The Corporation and Citizens have each made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants to conduct their businesses in the ordinary course between the execution of the Merger Agreement and the completion of the Merger and covenants not to engage in certain kinds of transactions during that period.

Consummation of the Merger is subject to customary conditions, including, among others, (i) approval of the stockholders of each of the Corporation and Citizens, (ii) absence of any material adverse effect, (iii) absence of any order or injunction prohibiting the consummation of the Merger, (iv) the registration statement of the Corporation filed on Form S-4 having become effective, (v) shares of the Corporation's common stock to be issued in connection with the Merger having been approved for listing on the Nasdaq Stock Market, (vi) subject to certain exceptions, the accuracy of representations and warranties with respect to the Corporation's and Citizens’ business, as applicable, (vii) compliance with the Corporation’s and Citizens’ respective covenants, (viii) receipt of customary tax opinions, (ix) receipt of all required regulatory approvals from, among others, various banking regulators and the United States Treasury, and (x) no materially adverse condition or restriction is included in any such regulatory approval.

The Merger Agreement contains certain termination rights for both FirstMerit and Citizens, and further provides that, upon termination of the Merger Agreement under specified circumstances, a party would be required to pay to the other party a termination fee of $37.5 million and the other party’s fees and expenses.

The Merger Agreement has been filed as an exhibit to this report to provide security holders with information regarding its terms. It is not intended to provide any other factual information about the Corporation, Citizens or their respective subsidiaries and affiliates. The Merger Agreement contains representations and warranties by each of the parties to the Merger Agreement. These representations and warranties were made solely for the benefit of the other party to the Merger Agreement and (a) are not intended to be treated as categorical statements of fact, but rather as a way of allocating risk to one of the parties if those statements prove to be inaccurate, (b) may have been qualified in the Merger Agreement by confidential disclosure schedules that were delivered to the other party in connection with the signing of the Merger Agreement, which disclosure schedules contain information that modifies, qualifies and creates exceptions to the representations, warranties and covenants set forth in the Merger Agreement, (c) may be subject to standards of materiality applicable to the parties that differ from what might be viewed as material to stockholders and (d) were made only as of the date of the Merger Agreement or such other date or dates as may be specified in the Merger Agreement. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in public disclosures by the Corporation or Citizens. Accordingly, the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of the Corporation or Citizens should not be relied upon.

10

Midwest Bank and Trust Company – FDIC Assisted Acquisition

On May 14, 2010, the Bank entered into a purchase and assumption agreement with a loss share arrangement with the Federal Deposit Insurance Corporation ("FDIC"), as receiver of Midwest Bank and Trust Company (“Midwest”), a wholly-owned subsidiary of Midwest Bank Holdings, Inc., to acquire substantially all of the loans and certain other assets and assume substantially all of the deposits and certain liabilities in a whole-bank acquisition of Midwest, a full-service commercial bank located in the greater Chicago, Illinois area. The Bank made a cash payment to the FDIC of approximately $227.5 million to assume the net assets.

The acquisition of the net assets of Midwest constituted a business combination and, accordingly, were recorded at their estimated fair values on the date of acquisition. The estimated fair value of the liabilities assumed and cash payment made to the FDIC exceeded the revised fair value of assets acquired, resulting in recognition of goodwill of $272.1 million.

George Washington Savings Bank – FDIC Assisted Acquisition

On February 19, 2010, the Bank entered into a purchase and assumption agreement with a loss share arrangement with the FDIC as receiver of George Washington Savings Bank (“George Washington”), the subsidiary of George Washington Savings Bancorp, to acquire certain assets and assume substantially all of the deposits and certain liabilities in a whole-bank acquisition of George Washington, a full service Illinois-chartered savings bank headquartered in Orland Park, Illinois. The Bank received a cash payment from the FDIC of approximately $40.2 million to assume the net liabilities.

The purchased assets and liabilities assumed were recorded at their estimated fair values on the date of acquisition. The estimated fair value of assets acquired, intangible assets and the cash payment received from the FDIC exceeded the estimated fair value of the liabilities assumed, resulting in a bargain purchase gain of $1.0 million or $0.7 million net of tax.

First Bank Branches

On February 19, 2010, the Bank completed the acquisition of certain assets and the assumption of certain liabilities with respect to 24 branches of First Banks, Inc. (“First Bank”) located in the greater Chicago, Illinois area. This acquisition was accounted for under the acquisition method in accordance with ASC 805, Business Combinations (“ASC 805”).

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

Additional information on these three acquisitions can be found in Note 5 (Loans), Note 7 (Goodwill and Other Intangible Assets) and Note 12 (Fair Value Measurement).

4.    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

11

securities are carried at fair value with net unrealized gains or losses reported on an after-tax basis as a component of other comprehensive income in the statements of comprehensive income and shareholders’ equity.

	September 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available for sale
Debt Securities
U.S. government agency debentures	$	35,109	$	28	$	—		$	35,137
U.S. States and political subdivisions	241,436		17,003		(21		)	258,418
Residential mortgage-backed securities:
U.S. government agencies	1,216,671		61,160		—			1,277,831
Commercial mortgage-backed securities:
U.S. government agencies	15,434		233		—			15,667
Residential collateralized mortgage-backed securities:
U.S. government agencies	1,188,072		17,836		(383		)	1,205,525
Non-agency	12		—		—			12
Commercial collateralized mortgage-backed securities:
U.S. government agencies	66,316		2,349		—			68,665
Corporate debt securities	61,527		—		(14,034		)	47,493
Total debt securities	2,824,577		98,609		(14,438		)	2,908,748
Marketable equity securities	3,245		—		—			3,245
Total securities available for sale	$	2,827,822	$	98,609	$	(14,438	)	$	2,911,993
Securities held to maturity
Debt Securities
U.S. States and political subdivisions	$	262,091	$	6,946	$	(17	)	$	269,020
Commercial mortgage-backed securities:
U.S. government agency obligations	33,149		792		—			33,941
Residential collateralized mortgage-backed securities:
U.S. government agencies	129,265		396		—			129,661
Commercial collateralized mortgage obligations:
U.S. government agency obligations	98,961		1,054		—			100,015
Corporate debt securities	97,165		1,435		—			98,600
Total securities held to maturity	$	620,631	$	10,623	$	(17	)	$	631,237

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	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available for sale
Debt Securities
U.S. government agency debentures	$	122,711	$	358	$	—		$	123,069
U.S. States and political subdivisions	334,916		22,865		(50		)	357,731
Residential mortgage-backed securities:
U.S. government agencies	1,407,345		53,129		(131		)	1,460,343
Residential collateralized mortgage-backed securities:
U.S. government agencies	1,115,832		22,058		(55		)	1,137,835
Non-agency	43,225		82		—			43,307
Commercial collateralized mortgage-backed securities:
U.S. government agencies	127,624		1,648		(145		)	129,127
Corporate debt securities	115,947		276		(17,381		)	98,842
Total debt securities	3,267,600		100,416		(17,762		)	3,350,254
Marketable equity securities	3,299		—		—			3,299
Total securities available for sale	$	3,270,899	$	100,416	$	(17,762	)	$	3,353,553
Securities held to maturity
Debt Securities
U.S. States and political subdivisions	$	82,764	$	2,348	$	—		$	85,112
Total securities held to maturity	$	82,764	$	2,348	$	—		$	85,112

	September 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available for sale
Debt Securities
U.S. government agency debentures	$	203,148	$	590	$	(20	)	$	203,718
U.S. States and political subdivisions	298,140		16,426		(125		)	314,441
Residential mortgage-backed securities:
U.S. government agencies	1,419,808		61,416		(2		)	1,481,222
Residential collateralized mortgage-backed securities:
U.S. government agencies	1,080,627		23,327		(45		)	1,103,909
Non-agency	44,715		139		—			44,854
Corporate debt securities	61,474		—		(15,287		)	46,187
Total debt securities	3,107,912		101,898		(15,479		)	3,194,331
Marketable equity securities	3,715		—		—			3,715
Total securities available for sale	$	3,111,627	$	101,898	$	(15,479	)	$	3,198,046
Securities held to maturity
Debt Securities
U.S. States and political subdivisions	$	92,214	$	2,707	$	—		$	94,921
Total securities held to maturity	$	92,214	$	2,707	$	—		$	94,921

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

	September 30, 2012		December 31, 2011		September 30, 2011
FRB stock	$	21,045	$	21,003	$	20,804
FHLB stock	119,145		119,145		139,398
Other	540		578		591
Total other investments	$	140,730	$	140,726	$	160,793

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

Securities with a carrying value of $1.9 billion, $1.9 billion and $2.2 billion as of September 30, 2012, December 31, 2011 and September 30, 2011, 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.

Gross Unrealized Losses and Fair Value

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

	September 30, 2012
	Less than 12 months						12 months or longer						Total
	Fair Value		Unrealized Losses			Number of Impaired Securities	Fair Value		Unrealized Losses			Number of Impaired Securities	Fair Value		Unrealized Losses
Debt Securities
U.S. government agency debentures	$	—	$	—		—	$	—	$	—		—	$	—	$	—
U.S. States and political subdivisions	3,560		(21		)	8	—		—			—	3,560		(21		)
Residential mortgage-backed securities:
U.S. government agencies	—		—			—	14		—			1	14		—
Commercial mortgage-backed securities:
U.S. government agencies	—		—			—	—		—			—	—		—
Residential collateralized mortgage-backed securities:
U.S. government agencies	121,427		(379		)	8	1,581		(4		)	1	123,008		(383		)
U.S. non agencies	—		—			—	2		—			1	2		—
Commercial collateralized mortgage-backed securities:
U.S. government agencies	—		—			—	—		—			—	—		—
Corporate debt securities	—		—			—	47,493		(14,034		)	8	47,493		(14,034		)
Total temporarily impaired securities	$	124,987	$	(400	)	16	$	49,090	$	(14,038	)	11	$	174,077	$	(14,438	)

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	December 31, 2011
	Less than 12 months						12 months or longer						Total
	Fair Value		Unrealized Losses			Number of Impaired Securities	Fair Value		Unrealized Losses			Number of Impaired Securities	Fair Value		Unrealized Losses
Debt Securities
U.S. States and political subdivisions	$	5,249	$	(50	)	6	$	—	$	—		—	$	5,249	$	(50	)
Residential mortgage-backed securities:
U.S. government agencies	40,020		(129		)	4	149		(2		)	1	40,169		(131		)
Residential collateralized mortgage-backed securities:
U.S. government agencies	48,003		(55		)	6	—		—			—	48,003		(55		)
Non-agency	—		—			—	2		—			1	2		—
Commercial collateralized mortgage-backed securities:
U.S. government agencies	30,227		(145		)	2	—		—			—	30,227		(145		)
Corporate debt securities	24,846		(127		)	8	44,234		(17,254		)	8	69,080		(17,381		)
Total temporarily impaired securities	$	148,345	$	(506	)	26	$	44,385	$	(17,256	)	10	$	192,730	$	(17,762	)

	September 30, 2011
	Less than 12 months						12 months or longer						Total
	Fair Value		Unrealized Losses			Number of Impaired Securities	Fair Value		Unrealized Losses			Number of Impaired Securities	Fair Value		Unrealized Losses
Debt Securities
U.S. government agency debentures	$	15,032	$	(20	)	1	$	—	$	—		—	$	15,032	$	(20	)
U.S. States and political subdivisions	16,180		(102		)	18	648		(23		)	1	16,828		(125		)
Residential mortgage-backed securities:
U.S. government agencies	—		—			—	174		(2		)	2	174		(2		)
Residential collateralized mortgage-backed securities:
U.S. government agencies	21,505		(45		)	3	—		—			—	21,505		(45		)
Corporate debt securities	—		—			—	46,187		(15,287		)	8	46,187		(15,287		)
Total temporarily impaired securities	$	52,717	$	(167	)	22	$	47,009	$	(15,312	)	11	$	99,726	$	(15,479	)

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

15

realizable value equal to or greater than the amortized cost basis. If it is probable that the Corporation will not recover the amortized cost basis, taking into consideration the estimated recovery period and its ability to hold the equity security until recovery, OTTI is recognized.

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

As of September 30, 2012, gross unrealized losses are concentrated within corporate debt securities and is composed of eight, single issuer, trust preferred securities with stated maturities. Such investments are less than 2%of the fair value of the entire investment portfolio. None of the corporate issuers have deferred paying dividends on their issued trust preferred shares in which the Corporation is invested. The fair values of these investments have been impacted by market conditions that have caused risk premiums to increase, resulting in the decline in the fair value of the trust preferred securities. Management believes the Corporation will fully recover the cost of these securities, it does not intend to sell these securities and it is not more likely than not that it will be required to sell them before the anticipated recovery of the remaining amortized cost basis, which may be maturity. As a result, Management concluded that these securities were not OTTI at September 30, 2012 and has recognized the total amount of the impairment in other comprehensive income, net of tax.

Realized Gains and Losses

The following table shows the proceeds from sales of available-for-sale securities and the gross realized gains and losses on those sales that have been included in earnings. 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 September 30,					Nine Months Ended September 30,
	2012		2011			2012		2011
Proceeds	$	29,735	$	179,133		$	190,813	$	182,781
Realized gains	553		4,473			1,361		5,418
Realized losses	—		(71		)	—		(127		)
Net securities gains	$	553	$	4,402		$	1,361	$	5,291

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Contractual Maturity of Debt Securities

The following table shows the remaining contractual maturities and contractual yields of debt securities held-to-maturity and available-for-sale as of September 30, 2012. Estimated lives on mortgage-backed securities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	U.S. Government agency debentures			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			Corporate debt securities			Total			Weighted Average Yield
Securities Available for Sale
Remaining maturity:
One year or less	$	35,137		$	7,322		$	4,032		$	5,073		$	62,769		$	—		$	—		$	—		$	114,333		2.68	%
Over one year through five years	—			27,234			1,265,886			—			1,111,218			12			63,358			—			2,467,708			2.55	%
Over five years through ten years	—			177,836			7,913			10,594			31,538			—			5,307			—			233,188			4.74	%
Over ten years	—			46,026			—			—			—			—			—			47,493			93,519			2.74	%
Fair Value	$	35,137		$	258,418		$	1,277,831		$	15,667		$	1,205,525		$	12		$	68,665		$	47,493		$	2,908,748		2.74	%
Amortized Cost	$	35,109		$	241,436		$	1,216,671		$	15,434		$	1,188,072		$	12		$	66,316		$	61,527		$	2,824,577
Weighted-Average Yield	0.73		%	5.37		%	2.98		%	1.75		%	2.14		%	3.81		%	2.13		%	1.09		%	2.74		%
Weighted-Average Maturity	0.14			7.83			3.02			4.00			2.94			1.92			4.35			15.06			3.66
Securities Held to Maturity
Remaining maturity:
One year or less	$	—		$	45,126		$	—		$	—		$	—		$	—		$	—		$	—		$	45,126		1.61	%
Over one year through five years	—			15,116			—			—			129,661			—			21,160			33,529			199,466			2.17	%
Over five years through ten years	—			30,309			—			33,941			—			—			78,855			65,071			208,176			2.81	%
Over ten years	—			178,469			—			—			—			—			—			—			178,469			5.14	%
Fair Value	$	—		$	269,020		$	—		$	33,941		$	129,661		$	—		$	100,015		$	98,600		$	631,237		3.18	%
Amortized Cost	$	—		$	262,091		$	—		$	33,149		$	129,265		$	—		$	98,961		$	97,165		$	620,631
Weighted-Average Yield	—		%	5.10		%	—		%	1.42		%	1.89		%	—		%	2.91		%	2.23		%	3.18		%
Weighted-Average Maturity	—			13.48			—			6.03			2.70			—			6.86			5.29			7.35

5.    Loans

Total noncovered and covered loans outstanding as of September 30, 2012, December 31, 2011 and September 30, 2011 were as follows:

	September 30, 2012			December 31, 2011			September 30, 2011
Commercial	$	5,511,678		$	5,107,747		$	5,018,857
Residential mortgage	439,062			413,664			397,309
Installment	1,321,081			1,263,665			1,271,327
Home equity	789,743			743,982			743,377
Credit card	143,918			146,356			142,710
Leases	110,938			73,530			57,992
Total noncovered loans (a)	8,316,420			7,748,944			7,631,572
Allowance for noncovered loan losses	(98,942		)	(107,699		)	(109,187		)
Net noncovered loans	8,217,478			7,641,245			7,522,385
Covered loans (b)	1,174,929			1,497,140			1,647,218
Allowance for covered loan losses	(43,644		)	(36,417		)	(34,603		)
Net covered loans	1,131,285			1,460,723			1,612,615
Net loans	$	9,348,763		$	9,101,968		$	9,135,000

(a) Includes acquired, noncovered loans of $56.0 million, $113.2 million and $178.0 million as of September 30, 2012, December 31, 2011 and September 30, 2011, respectively.

(b) Includes loss share receivable of $131.9 million, $205.7 million and $220.5 million as of September 30, 2012, December 31, 2011 and September 30, 2011, respectively.

17

Originated loans are presented net of deferred loan origination fees and costs, which amounted to $5.8 million, $6.0 million and $5.8 million at September 30, 2012, December 31, 2011 and September 30, 2011, respectively. Acquired loans, including covered loans, are recorded at fair value as of the date of purchase with no allowance for loan loss. As discussed in Note 3 (Business Combinations), the Bank acquired loans with a fair value of $275.6 million on February 19, 2010 in its acquisition of the First Bank branches, and $177.8 million on February 19, 2010 and $1.8 billion on May 14, 2010 in conjunction with the FDIC-assisted acquisitions of George Washington and Midwest, respectively. The loans that were acquired in these FDIC-assisted transactions are covered by loss sharing agreements that afford the Bank significant loss protection. Loans covered under loss sharing agreements, including the amounts of expected reimbursements from the FDIC under these agreements, are reported as covered loans in the accompanying consolidated balance sheets. Changes in the loss share receivable associated with covered loans for the three and nine months endedSeptember 30, 2012 and 2011 were as follows:

	Three Months Ended						Nine Months Ended
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Balance at beginning of period	$	152,615		$	239,424		$	205,664		$	288,605
Accretion	(8,401		)	(9,322		)	(26,935		)	(30,821		)
Increase due to impairment	1,484			8,224			12,601			31,077
FDIC reimbursement	(12,597		)	(14,493		)	(50,678		)	(62,895		)
Covered loans paid in full	(1,229		)	(3,362		)	(8,780		)	(5,495		)
Balance at end of the period	$	131,872		$	220,471		$	131,872		$	220,471

Acquired Loans

The Corporation evaluates acquired loans for impairment in accordance with the provisions of ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). Acquired loans are considered impaired if there is evidence of credit deterioration since origination and if it is probable that not all contractually required payments will be collected. Acquired impaired loans are not classified as nonperforming assets as the loans are considered to be performing under ASC 310-30.

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

The Corporation has elected to account for all loans acquired in the George Washington and Midwest acquisitions under ASC 310-30 (“Acquired Impaired Loans”) except for $162.6 million of acquired loans with revolving privileges, which are outside the scope of this guidance and which are being accounted for in accordance with ASC 310 (“Acquired Non-Impaired Loans”). The outstanding balance, including contractual principal, interest, fees and penalties, of all covered loans accounted for in accordance with ASC 310-30 was $1.3 billion, $1.6 billion and $1.7 billion as of September 30, 2012, December 31, 2011 and September 30, 2011, respectively.

Over the life of the loans acquired and considered to be impaired under ASC 310-30, the Corporation evaluates the remaining contractual required payments receivable and estimates cash flows expected to be collected, considering the impact of prepayments. The excess of an acquired impaired loan's contractually required payments over the amount of its undiscounted cash flows expected to be collected is referred to as the nonaccretable difference. The nonaccretable difference, which is neither accreted into income nor recorded on our consolidated balance sheet, reflects estimated future credit losses and uncollectible contractual interest expected to be incurred over the life of the acquired impaired loan. The excess of cash flows expected to be

18

collected over the carrying amount of the acquired impaired loans is referred to as the accretable yield. This amount is accreted into interest income over the remaining life of the acquired impaired loans or pools using the level yield method. The accretable yield is affected by changes in interest rate indices for variable rate loans, changes in prepayment speed assumptions and changes in expected principal and interest payments over the estimated lives of the acquired impaired loans.

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

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

Changes in the carrying amount and accretable yield for Acquired Impaired Loans were as follows for the three and nine months endedSeptember 30, 2012 and 2011:

	Three Months Ended												Nine Months Ended
	September 30, 2012						September 30, 2011						September 30, 2012						September 30, 2011
	Accretable Yield			Carrying Amount			Accretable Yield			Carrying Amount			Accretable Yield			Carrying Amount			Accretable Yield			Carrying Amount
Balance at beginning of period	$	147,576		$	964,314		$	196,525		$	1,337,921		$	176,736		$	1,128,978		$	227,652		$	1,512,817
Accretion	(23,631		)	23,631			(31,120		)	31,120			(75,478		)	75,478			(101,244		)	101,244
Net Reclassifications from non-accretable to accretable	6,008			—			27,160			—			30,814			—			67,118			—
Payments received, net	—			(96,593		)	—			(114,500		)	—			(313,104		)	—			(359,520		)
Disposals	(1,929		)	—			(1,057		)	—			(4,048		)	—			(2,018		)	—
Balance at end of period	$	128,024		$	891,352		$	191,508		$	1,254,541		$	128,024		$	891,352		$	191,508		$	1,254,541

A reconciliation of the contractual required payments receivable to the carrying amount of Acquired Impaired Loans as of September 30, 2012 and 2011 is as follows:

	September 30, 2012			September 30, 2011
Contractual required payments receivable	$	1,333,127		$	1,742,815
Nonaccretable difference	(313,751		)	(296,766		)
Expected cash flows	1,019,376			1,446,049
Accretable yield	(128,024		)	(191,508		)
Carrying balance	$	891,352		$	1,254,541

Increases in expected cash flows subsequent to the acquisition are recognized prospectively through adjustment of the yield on the loans or pools over its remaining life, while decreases in expected cash flows are recognized as impairment through a provision for loan loss and an increase in the allowance for covered loan

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losses. The most recent quarterly evaluation of the remaining contractual required payments receivable and cash flows expected to be collected resulted in an overall improvement in the cash flow expectations as a result of positive changes in risk ratings, improvements in the underlying value of collateral dependent loans and actual cash flows received higher than expected. There were no significant changes from prior periods to key assumptions used in the most recent quarterly evaluation of cash flows expected to be collected.

The overall improvement in the cash flow expectations resulted in the reclassification from nonaccretable difference to accretable yield of $6.0 million during the three months ended September 30, 2012. These reclassifications resulted in yield adjustments on these loans and pools on a prospective basis to interest income. Improved cash flow expectations for loans or pools that were impaired during prior periods were recorded first as a reversal of previously recorded impairment and then as an increase in prospective yield when all previously recorded impairment has been recaptured. Additionally, the FDIC loss share receivable was also reduced by the guaranteed portion of the additional cash flows expected to be received through an increase in provision expense and a corresponding reduction in the prospective yield of the remaining loss share receivable.

The most recent quarterly evaluation of the remaining contractual required payments receivable and cash flows expected to be collected resulted in the decline in the cash flow expectations of certain loans and pools during the quarter ended September 30, 2012. The decline in expected cash flows was recorded as provision expense of $7.7 million in the quarter ended September 30, 2012 with a related increase of $1.5 million in the loss share receivable for the portion of the losses recoverable under the loss share agreements with the FDIC. This decrease in cash flows resulted in a net provision for covered loan losses of $6.2 million as in the quarter ended September 30, 2012. Further detail on impairment and provision expense related to acquired impaired loans can be found in the Note 6 (Allowance for Loan Losses).

Credit Quality Disclosures

The 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. See Note 6 (Allowance for Loan Losses) for further information.

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

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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 September 30, 2012
Legacy Loans													≥ 90 Days Past Due  and Accruing (a)
	Days Past Due						Total Past Due		Current		Total Loans					Nonaccrual Loans (b)
	30-59		60-89		≥ 90
Commercial
C&I	$	8,781	$	2,795	$	1,469	$	13,045	$	3,033,770	$	3,046,815	$	57	$	9,926
CRE	3,197		3,856		14,311		21,364		2,099,760		2,121,124		1,862		17,812
Construction	116		—		853		969		308,136		309,105		—		923
Leases	7		—		—		7		110,931		110,938		—		—
Consumer
Installment	8,884		3,430		4,834		17,148		1,301,995		1,319,143		4,439		3,267
Home Equity Lines	1,784		463		1,311		3,558		768,013		771,571		409		1,858
Credit Cards	991		556		808		2,355		141,563		143,918		393		525
Residential Mortgages	14,364		2,777		6,233		23,374		414,438		437,812		2,399		13,169
Total	$	38,124	$	13,877	$	29,819	$	81,820	$	8,178,606	$	8,260,426	$	9,559	$	47,480

Acquired Loans (Noncovered)
	Days Past Due						Total Past Due		Current		Total Loans		≥ 90 Days Past Due  and Accruing			Nonaccrual Loans
	30-59		60-89		≥ 90
Commercial
C&I	$	—	$	—	$	50	$	50	$	2,366	$	2,416	$	—	$	69
CRE	—		—		2,565		2,565		29,653		32,218		—		2,762
Consumer
Installment	50		—		—		50		1,888		1,938		—		—
Home Equity Lines	56		9		100		165		18,007		18,172		132		—
Residential Mortgages	63		—		—		63		1,187		1,250		—		—
Total	$	169	$	9	$	2,715	$	2,893	$	53,101	$	55,994	$	132	$	2,831

Covered Loans (c)													≥ 90 Days Past Due and Accruing (d)
	Days Past Due						Total Past Due		Current		Total Loans			Nonaccrual Loans (d)
	30-59		60-89		≥ 90
Commercial
C&I	$	2,962	$	973	$	27,035	$	30,970	$	131,721	$	162,691	n/a	n/a
CRE	4,965		21,919		184,067		210,951		412,323		623,274		n/a	n/a
Construction	—		998		41,325		42,323		19,453		61,776		n/a	n/a
Consumer
Installment	2,289		—		35		2,324		6,036		8,360		n/a	n/a
Home Equity Lines	1,398		435		1,981		3,814		119,364		123,178		n/a	n/a
Residential Mortgages	10,382		1,248		8,576		20,206		43,573		63,779		n/a	n/a
Total	$	21,996	$	25,573	$	263,019	$	310,588	$	732,470	$	1,043,058	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 September 30, 2012.

(b) Nonaccrual loans at September 30, 2012 include $10.6 million of loans resulting from consumer loans classified as troubled debt restructurings where the borrower's obligation to the Corporation has been restructured in bankruptcy.

(c) Excludes loss share receivable of $131.9 million as of September 30, 2012.

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

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As of December 31, 2011
Legacy Loans							Total Past Due		Current		Total Loans		≥ 90 Days Past Due  and Accruing (a)		Nonaccrual Loans
	Days Past Due
	30-59		60-89		≥ 90
Commercial
C&I	$	1,521	$	940	$	5,490	$	7,951	$	2,740,751	$	2,748,702	$	465	$	9,266
CRE	6,187		4,819		29,976		40,982		1,951,211		1,992,193		984		36,025
Construction	39		—		7,837		7,876		269,459		277,335		609		7,575
Leases	—		—		—		—		73,530		73,530		—		—
Consumer
Installment	11,531		3,388		5,167		20,086		1,241,059		1,261,145		4,864		624
Home Equity Lines	2,627		778		1,241		4,646		720,045		724,691		796		1,102
Credit Cards	1,090		707		1,019		2,816		143,540		146,356		403		622
Residential Mortgages	11,778		2,059		9,719		23,556		388,268		411,824		3,252		6,468
Total	$	34,773	$	12,691	$	60,449	$	107,913	$	7,527,863	$	7,635,776	$	11,373	$	61,682

Acquired Loans (Noncovered)							Total Past Due		Current		Total Loans		≥ 90 Days Past Due  and Accruing		Nonaccrual Loans
	Days Past Due
	30-59		60-89		≥ 90
Commercial
C&I	$	—	$	—	$	66	$	66	$	26,708	$	26,774	$	—	$	69
CRE	—		452		1,675		2,127		60,616		62,743		—		2,880
Consumer
Installment	—		—		1		1		2,519		2,520		1		—
Home Equity Lines	67		—		1		68		19,223		19,291		2		—
Residential Mortgages	—		—		—		—		1,840		1,840		—		—
Total	$	67	$	452	$	1,743	$	2,262	$	110,906	$	113,168	$	3	$	2,949

Covered Loans (b)							Total Past Due		Current		Total Loans		≥ 90 Days Past Due  and Accruing (c)	Nonaccrual Loans (c)
	Days Past Due
	30-59		60-89		≥ 90
Commercial
C&I	$	7,451	$	2,137	$	25,801	$	35,389	$	162,150	$	197,539	n/a	n/a
CRE	20,379		12,895		170,795		204,069		573,779		777,848		n/a	n/a
Construction	4,206		1,674		57,978		63,858		26,051		89,909		n/a	n/a
Consumer
Installment	24		25		60		109		10,013		10,122		n/a	n/a
Home Equity Lines	2,656		1,094		1,088		4,838		136,710		141,548		n/a	n/a
Residential Mortgages	14,106		164		14,254		28,524		45,986		74,510		n/a	n/a
Total	$	48,822	$	17,989	$	269,976	$	336,787	$	954,689	$	1,291,476	n/a	n/a

(a) Installment loans 90 days or more past due and accruing include $3.0 million of loans guaranteed by the U.S. government as of December 31, 2011.

(b) Excludes loss share receivable of $205.7 million as of December 31, 2011.

(c) Acquired impaired loans were not classified as nonperforming assets at December 31, 2011 as the loans are considered to be performing under ASC 310-30. As a result interest income, through the accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all acquired impaired loans. These asset quality disclosures are, therefore, not applicable to acquired impaired loans.

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As of September 30, 2011
Legacy Loans													≥ 90 Days Past Due  and Accruing
	Days Past Due						Total Past Due		Current		Total Loans				Nonaccrual Loans
	30-59		60-89		≥ 90
Commercial
C&I	$	12,639	$	6,255	$	5,361	$	24,255	$	2,633,735	$	2,657,990	$	123	$	6,096
CRE	5,145		11,030		33,003		49,178		1,907,048		1,956,226		—		39,560
Construction	779		1,719		8,943		11,441		241,137		252,578		—		10,580
Leases	—		—		—		—		57,992		57,992		—		—
Consumer
Installment	9,090		4,225		5,052		18,367		1,249,676		1,268,043		1,125		438
Home Equity Lines	2,474		731		922		4,127		718,494		722,621		922		753
Credit Cards	1,222		701		771		2,694		140,016		142,710		357		614
Residential Mortgages	9,687		2,412		7,648		19,747		375,706		395,453		1,481		6,166
Total	$	41,036	$	27,073	$	61,700	$	129,809	$	7,323,804	$	7,453,613	$	4,008	$	64,207

Acquired Loans (Noncovered)													≥ 90 Days Past Due  and Accruing
	Days Past Due						Total Past  Due		Current		Total Loans				Nonaccrual Loans
	30-59		60-89		≥ 90
Commercial
C&I	$	448	$	—	$	138	$	586	$	43,682	$	44,268	$	—	$	138
CRE	1,746		1,696		3,284		6,726		101,069		107,795		394		3,558
Consumer
Installment	1		—		—		1		3,283		3,284		—		—
Home Equity Lines	—		37		1		38		20,718		20,756		1		—
Residential Mortgages	78		—		—		78		1,778		1,856		—		—
Total	$	2,273	$	1,733	$	3,423	$	7,429	$	170,530	$	177,959	$	395	$	3,696

Covered Loans (b)													≥ 90 Days Past Due  and Accruing(c)
	Days Past Due						Total Past Due		Current		Total Loans			Nonaccrual Loans (c)
	30-59		60-89		≥ 90
Commercial
C&I	$	3,913	$	2,108	$	32,491	$	38,512	$	178,882	$	217,394	n/a	n/a
CRE	17,486		11,963		198,957		228,406		649,812		878,218		n/a	n/a
Construction	913		1,346		68,016		70,275		29,779		100,054		n/a	n/a
Consumer
Installment	505		136		42		683		10,455		11,138		n/a	n/a
Home Equity Lines	500		896		979		2,375		143,757		146,132		n/a	n/a
Residential Mortgages	14,807		1,062		9,364		25,233		48,578		73,811		n/a	n/a
Total	$	38,124	$	17,511	$	309,849	$	365,484	$	1,061,263	$	1,426,747	n/a	n/a

(a) Installment loans 90 days or more past due and accruing include $2.6 million of loans guaranteed by the U.S. government as of September 30, 2011.

(b) Excludes loss share receivable of $220.5 million as of September 30, 2011.

(c) Acquired impaired loans were not classified as nonperforming assets at September 30, 2011 as the loans are considered to be performing under ASC 310-30. As a result interest income, through the accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all acquired impaired loans. These asset quality disclosures are, therefore, not applicable to acquired impaired loans.

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

23

information during a borrower’s ability to fulfill its obligation.

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

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

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

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

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

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

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

As of September 30, 2012
Legacy Loans
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	37,327	$	—	$	—	$	13,785
Grade 2	105,504		3,170		—		190
Grade 3	573,561		278,017		19,312		8,857
Grade 4	2,213,241		1,709,667		282,438		87,259
Grade 5	60,544		53,980		2,893		514
Grade 6	56,638		76,290		4,462		333
Grade 7	—		—		—		—
	$	3,046,815	$	2,121,124	$	309,105	$	110,938

Acquired Loans (Noncovered)
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	—	$	—	$	—	$	—
Grade 2	—		—		—		—
Grade 3	—		—		—		—
Grade 4	2,095		28,590		—		—
Grade 5	259		675		—		—
Grade 6	62		2,953		—		—
Grade 7	—		—		—		—
	$	2,416	$	32,218	$	—	$	—

Covered Loans
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	—	$	—	$	—	$	—
Grade 2	1,742		—		—		—
Grade 3	92		449		—		—
Grade 4	91,101		240,630		494		—
Grade 5	3,844		39,883		—		—
Grade 6	61,192		340,063		58,586		—
Grade 7	4,720		2,249		2,696		—
	$	162,691	$	623,274	$	61,776	$	—

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As of December 31, 2011
Legacy Loans
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	37,607	$	—	$	—	$	10,636
Grade 2	122,124		4,218		615		—
Grade 3	479,119		249,382		16,752		5,868
Grade 4	1,973,671		1,548,420		241,302		57,026
Grade 5	50,789		58,942		4,583		—
Grade 6	85,392		130,968		14,083		—
Grade 7	—		263		—		—
	$	2,748,702	$	1,992,193	$	277,335	$	73,530

Acquired Loans (Noncovered)
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	—	$	—	$	—	$	—
Grade 2	—		—		—		—
Grade 3	—		1,871		—		—
Grade 4	26,036		55,129		—		—
Grade 5	—		—		—		—
Grade 6	738		5,743		—		—
Grade 7	—		—		—		—
	$	26,774	$	62,743	$	—	$	—

Covered Loans
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	948	$	—	$	—	$	—
Grade 2	1,376		—		—		—
Grade 3	—		516		—		—
Grade 4	109,360		303,231		487		—
Grade 5	9,661		103,919		1,567		—
Grade 6	69,330		344,445		80,009		—
Grade 7	6,864		25,737		7,846		—
	$	197,539	$	777,848	$	89,909	$	—

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As of September 30, 2011
Legacy Loans
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	48,173	$	11,299	$	1,429	$	—
Grade 2	100,058		3,843		620		—
Grade 3	487,017		245,756		18,067		4,219
Grade 4	1,930,074		1,490,214		209,307		53,771
Grade 5	49,251		73,815		4,851		—
Grade 6	43,417		130,584		18,304		2
Grade 7	—		715		—		—
	$	2,657,990	$	1,956,226	$	252,578	$	57,992

Acquired Loans (Noncovered)
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	—	$	—	$	—	$	—
Grade 2	—		—		—		—
Grade 3	3		1,968		—		—
Grade 4	43,250		98,668		—		—
Grade 5	160		—		—		—
Grade 6	855		6,491		—		—
Grade 7	—		668		—		—
	$	44,268	$	107,795	$	—	$	—

Covered Loans
	Commercial
	C&I		CRE		Construction		Leases
Grade 1	$	915	$	—	$	—	$	—
Grade 2	1,801		—		—		—
Grade 3	—		538		—		—
Grade 4	101,794		343,697		4,207		—
Grade 5	32,094		154,591		1,992		—
Grade 6	78,153		348,152		83,051		—
Grade 7	2,637		31,240		10,804		—
	$	217,394	$	878,218	$	100,054	$	—

6.    Allowance for Loan Losses

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

The allowance for loan losses is Management’s estimate of the amount of probable credit losses inherent in the portfolio at the balance sheet date. Management estimates credit losses based on individual loans determined to be impaired and on all other loans grouped based on similar risk characteristics. Management also considers internal and external factors such as economic conditions, loan management practices, portfolio monitoring, and other risks, collectively known as qualitative factors, or Q-factors, to estimate credit losses in

27

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 allowance for loan losses components and is based on historical loss experience by credit-risk grade (for commercial loan pools) and payment status (for mortgage and consumer loan pools). Balances by credit-risk grade and payment status, as well as descriptions of the credit-risk grades are included in Note 5 (Loans). The historical loss experience component of the allowance for loan losses represents the results of migration analysis of historical net charge-offs for portfolios of loans (including groups of commercial loans within each credit-risk grade and groups of consumer loans by payment status). For measuring loss exposure in a pool of loans, the historical net charge-off or migration experience is utilized to estimate expected losses to be realized from the pool of loans.

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

The activity within the allowance for noncovered loan losses, by portfolio type, for the three and nine months endedSeptember 30, 2012 and 2011 is shown in the following tables:

	Nine Months Ended September 30, 2012
	C&I			CRE			Construction			Leases		Installment			Home Equity  Lines			Credit Cards			Residential Mortgages			Total
Allowance for loan losses, beginning balance	$	32,363		$	31,857		$	5,173		$	341	$	17,981		$	6,766		$	7,369		$	5,849		$	107,699
Charge-offs	(19,906		)	(3,496		)	(165		)	—		(14,441		)	(7,373		)	(4,618		)	(3,431		)	(53,430		)
Recoveries	3,120			825			364			38		9,104			2,588			1,583			191			17,813
Provision for noncovered loan losses	23,582			(4,008		)	(568		)	127		(809		)	2,904			2,901			2,731			26,860
Allowance for loan losses, ending balance	$	39,159		$	25,178		$	4,804		$	506	$	11,835		$	4,885		$	7,235		$	5,340		$	98,942

	Three Months Ended September 30, 2012
	C&I			CRE			Construction			Leases		Installment			Home Equity  Lines			Credit Cards			Residential Mortgages			Total
Allowance for loan losses, beginning balance	$	40,327		$	27,186		$	5,147		$	358	$	13,029		$	5,449		$	6,690		$	5,663		$	103,849
Charge-offs	(8,773		)	(727		)	(127		)	—		(5,507		)	(2,784		)	(1,390		)	(1,691		)	(20,999		)
Recoveries	1,408			180			61			—		2,883			1,007			488			100			6,127
Provision for noncovered loan losses	6,197			(1,461		)	(277		)	148		1,430			1,213			1,447			1,268			9,965
Allowance for loan losses, ending balance	$	39,159		$	25,178		$	4,804		$	506	$	11,835		$	4,885		$	7,235		$	5,340		$	98,942

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	Nine Months Ended September 30, 2011
	C&I			CRE			Construction			Leases			Installment			Home Equity  Lines			Credit Cards			Residential Mortgages			Total
Allowance for loan losses, beginning balance	$	29,764		$	32,026		$	7,180		$	475		$	21,555		$	7,217		$	11,107		$	5,366		$	114,690
Charge-offs	(13,517		)	(7,763		)	(3,245		)	(778		)	(20,204		)	(8,356		)	(6,135		)	(3,786		)	(63,784		)
Recoveries	1,254			54			545			35			10,812			1,840			1,789			192			16,521
Provision for noncovered loan losses	12,837			8,984			2,335			593			6,160			5,542			1,235			4,074			41,760
Allowance for loan losses, ending balance	$	30,338		$	33,301		$	6,815		$	325		$	18,323		$	6,243		$	7,996		$	5,846		$	109,187

	Three Months Ended September 30, 2011
	C&I			CRE			Construction			Leases			Installment			Home Equity  Lines			Credit Cards			Residential Mortgages			Total
Allowance for loan losses, beginning balance	$	28,366		$	32,946		$	7,876		$	353		$	18,089		$	7,142		$	8,403		$	6,012		$	109,187
Charge-offs	(4,528		)	(3,304		)	(550		)	(651		)	(5,911		)	(2,779		)	(1,520		)	(771		)	(20,014		)
Recoveries	540			6			171			1			3,375			658			585			74			5,410
Provision for noncovered loan losses	5,960			3,653			(682		)	622			2,770			1,222			528			531			14,604
Allowance for loan losses, ending balance	$	30,338		$	33,301		$	6,815		$	325		$	18,323		$	6,243		$	7,996		$	5,846		$	109,187

The following tables present the allowance for noncovered loan losses and the recorded investment in noncovered loans, by portfolio type, based on impairment method as of September 30, 2012, December 31, 2011 and September 30, 2011.

	As of September 30, 2012
	C&I		CRE		Construction		Leases		Installment		Home Equity  Lines		Credit Cards		Residential Mortgages		Total
Ending allowance for noncovered loan losses balance attributable to loans:
Individually evaluated for impairment	$	2,900	$	1,953	$	117	$	—	$	1,674	$	95	$	106	$	1,599	$	8,444
Collectively evaluated for impairment	36,259		23,225		4,687		506		10,161		4,790		7,129		3,741		90,498
Total ending allowance for noncovered loan losses balance	$	39,159	$	25,178	$	4,804	$	506	$	11,835	$	4,885	$	7,235	$	5,340	$	98,942
Noncovered loans:
Individually evaluated for impairment	$	9,994	$	28,972	$	3,577	$	—	$	32,577	$	6,922	$	1,767	$	24,569	$	108,378
Collectively evaluated for impairment	3,039,235		2,124,370		305,528		110,938		1,288,505		782,820		142,152		414,494		8,208,042
Total ending noncovered loan balance	$	3,049,229	$	2,153,342	$	309,105	$	110,938	$	1,321,082	$	789,742	$	143,919	$	439,063	$	8,316,420

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	As of December 31, 2011
	C&I		CRE		Construction		Leases		Installment		Home Equity  Lines		Credit Cards		Residential Mortgages		Total
Ending allowance for noncovered loan losses balance attributable to loans:
Individually evaluated for impairment	$	2,497	$	1,599	$	99	$	—	$	1,382	$	31	$	108	$	1,364	$	7,080
Collectively evaluated for impairment	29,866		30,258		5,074		341		16,599		6,735		7,261		4,485		100,619
Total ending allowance for noncovered loan losses balance	$	32,363	$	31,857	$	5,173	$	341	$	17,981	$	6,766	$	7,369	$	5,849	$	107,699
Noncovered loans:
Individually evaluated for impairment	$	8,269	$	36,087	$	9,320	$	—	$	33,571	$	4,763	$	2,202	$	17,398	$	111,610
Collectively evaluated for impairment	2,767,207		2,018,849		268,015		73,530		1,230,094		739,219		144,154		396,266		7,637,334
Total ending noncovered loan balance	$	2,775,476	$	2,054,936	$	277,335	$	73,530	$	1,263,665	$	743,982	$	146,356	$	413,664	$	7,748,944

	As of September 30, 2011
	C&I		CRE		Construction		Leases		Installment		Home Equity  Lines		Credit Cards		Residential Mortgages		Total
Ending allowance for noncovered loan losses balance attributable to loans:
Individually evaluated for impairment	$	256	$	2,064	$	1,264	$	—	$	1,568	$	52	$	121	$	1,346	$	6,671
Collectively evaluated for impairment	30,082		31,237		5,551		325		16,755		6,191		7,875		4,500		102,516
Total ending allowance for noncovered loan losses balance	$	30,338	$	33,301	$	6,815	$	325	$	18,323	$	6,243	$	7,996	$	5,846	$	109,187
Noncovered loans:
Individually evaluated for impairment	$	4,271	$	39,288	$	11,789	$	—	$	34,654	$	4,413	$	2,356	$	16,316	$	113,087
Collectively evaluated for impairment	2,697,987		2,024,734		240,788		57,992		1,236,673		738,964		140,354		380,993		7,518,485
Total ending noncovered loan balance	$	2,702,258	$	2,064,022	$	252,577	$	57,992	$	1,271,327	$	743,377	$	142,710	$	397,309	$	7,631,572

To the extent there is a decrease in the present value of cash flows from Acquired Impaired Loans after the date of acquisition, the Corporation records an allowance for loan losses, net of expected reimbursement under any loss sharing agreements. These expected reimbursements are recorded as part of covered loans in the accompanying consolidated balance sheets. During the three months ended September 30, 2012, the Corporation increased its allowance for covered loan losses to $43.6 million to reserve for estimated additional losses on certain Acquired Impaired Loans. The increase in the allowance was recorded in the three months ended September 30, 2012 by a charge to the provision for covered loan losses of $7.7 million and an increase of $1.5 million in the loss share receivable for the portion of the losses recoverable under the loss sharing agreements.

To the extent credit deterioration occurs in Acquired Non-Impaired loans after the date of acquisition, the Corporation records a provision for loan losses only when the required allowance, net of any expected reimbursement under the loss sharing agreements exceeds any remaining credit discount. The allowance for losses on Acquired Nonimpaired loans, included in the allowance for noncovered covered loan losses on the consolidated balance sheets was $0.3 million, $0.7 million and $0.6 million as of September 30, 2012, December 31, 2011 and September 30, 2011, respectively.

30

The activity within the allowance for covered loan losses for the three and nine months endedSeptember 30, 2012 and 2011 is shown in the following table:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Balance at beginning of the period	$	42,606		$	33,360		$	36,417		$	13,733
Provision for loan losses before benefit attributable to FDIC loss share agreements	7,698			12,992			28,177			48,657
Benefit attributable to FDIC loss share agreements	(1,484		)	(8,224		)	(12,601		)	(31,077		)
Net provision for covered loan losses	6,214			4,768			15,576			17,580
Increase in indemnification asset	1,484			8,224			12,601			31,077
Loans charged-off	(6,660		)	(11,749		)	(20,950		)	(27,787		)
Balance at end of the period	$	43,644		$	34,603		$	43,644		$	34,603

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Credit Quality Disclosures

A loan is considered to be impaired when, based on current events or information, it is probable the Corporation will be unable to collect all amounts due (principal and interest) per the contractual terms of the loan agreement. Loan impairment for all loans is measured based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, at the observable market price of the loan, or the fair value of the collateral for certain collateral dependent loans. Impaired loans include all nonaccrual commercial, agricultural, construction, and commercial real estate loans, and loans modified as troubled debt restructurings (“TDRs”). Aggregated consumer loans, mortgage loans, and leases that are collectively evaluated for impairment are not included in the following tables.

	As of September 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Impaired loans with no related allowance
Commercial
C&I	$	1,443	$	10,154	$	—	$	9,903
CRE	16,910		22,337		—		19,217
Construction	3,370		3,944		—		4,080
Consumer
Installment	2,902		4,739		—		4,888
Home equity line	959		1,239		—		1,237
Credit card	4		4		—		4
Residential mortgages	10,693		12,838		—		11,542
Subtotal	$	36,281	$	55,255	$	—	$	50,871
Impaired loans with a related allowance
Commercial
C&I	8,551		12,555		2,900		10,163
CRE	11,543		14,113		1,953		10,559
Construction	726		726		117		733
Consumer
Installment	29,675		29,675		1,674		30,361
Home equity line	5,963		5,963		95		6,206
Credit card	1,763		1,763		106		1,975
Residential mortgages	13,876		13,967		1,599		13,946
Subtotal	72,097		78,762		8,444		73,943
Total impaired loans	$	108,378	$	134,017	$	8,444	$	124,814

(a) These tables exclude loans fully charged off.

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

32

	As of December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Impaired loans with no related allowance
Commercial
C&I	$	6,999	$	9,121	$	—	$	8,442
CRE	29,566		46,744		—		37,720
Construction	7,522		13,675		—		9,908
Consumer
Installment	—		—		—		—
Home equity line	—		—		—		—
Credit card	—		—		—		—
Residential mortgages	4,244		5,746		—		4,450
Subtotal	48,331		75,286		—		60,520
Impaired loans with a related allowance
Commercial
C&I	1,270		1,769		2,497		752
CRE	6,521		6,789		1,599		3,247
Construction	1,798		2,864		99		1,929
Consumer
Installment	33,571		33,723		1,382		33,742
Home equity line	4,763		4,763		31		4,996
Credit card	2,202		2,202		108		2,497
Residential mortgages	13,154		13,167		1,364		13,155
Subtotal	63,279		65,277		7,080		60,318
Total impaired loans	$	111,610	$	140,563	$	7,080	$	120,838

(a) These tables exclude loans fully charged off.

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

33

	As of September 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Impaired loans with no related allowance
Commercial
C&I	$	843	$	1,831	$	—	$	1,613
CRE	28,728		40,092		—		34,838
Construction	5,883		8,657		—		6,850
Consumer
Installment	—		—		—		—
Home equity line	—		—		—		—
Credit card	—		—		—		—
Residential mortgages	2,872		4,229		—		2,999
Subtotal	$	38,326	$	54,809	$	—	$	46,300
Impaired loans with a related allowance
Commercial
C&I	3,428		4,725		256		4,053
CRE	10,560		15,444		2,064		12,286
Construction	5,906		8,840		1,264		6,386
Consumer
Installment	34,654		34,703		1,568		34,485
Home equity line	4,413		4,412		52		4,581
Credit card	2,359		2,359		121		2,560
Residential mortgages	13,444		13,469		1,346		13,409
Subtotal	74,764		83,952		6,671		77,760
Total impaired loans	$	113,090	$	138,761	$	6,671	$	124,060

(a) These tables exclude loans fully charged off.

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

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

The substantial majority of the Corporation’s residential mortgage TDRs involve reducing the client’s loan payment through an interest rate reduction for a set period of time based on the borrower’s ability to service the modified loan payment. As a result of guidance from the Office of the Comptroller of the Currency ("OCC"), in the quarter ended September 30, 2012, approximately $10.6 million of consumer loans were identified as troubled debt restructurings whereby the borrower's obligation to the Corporation has been discharged in bankruptcy and the borrower has not reaffirmed the debt. These loans were reclassified from performing loans to nonaccrual status as of September 30, 2012 and consisted of $6.7 million of first mortgages, $1.0 million of junior liens and $2.9 million of automobile loans. Modifications of mortgages retained in portfolio are handled using proprietary modification guidelines, or the FDIC’s Modification Program for residential first mortgages covered by loss share agreements (agreements between the Bank and the FDIC that

34

afford the Bank significant protection against future losses). The Corporation participates in the U.S. Treasury’s Home Affordable Modification Program for originated mortgages sold to and serviced for Fannie Mae and Freddie Mac. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial real estate and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period. Acquired loans restructured after acquisition are not considered TDRs for purposes of the Corporation’s accounting and disclosure if the loans evidenced credit deterioration as of the acquisition date and are accounted for in pools. The Corporation has modified certain loans according to provisions in loss share agreements. Losses associated with modifications on these loans, including the economic impact of interest rate reductions, are generally eligible for reimbursement under the loss share agreements.

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 September 30, 2012, December 31, 2011 and September 30, 2011, respectively.

			As of September 30, 2012
			Number of Loans	Recorded Investment		Unpaid Principal Balance
Noncovered loans
	Commercial
		C&I	22	$	2,413	$	8,478
		CRE	36	17,763		21,307
		Construction	27	3,577		4,025
		Subtotal	85	23,753		33,810
	Consumer
		Installment	1,840	32,577		34,414
		Home equity lines	229	6,922		7,202
		Credit card	426	1,767		1,767
		Residential mortgages	308	24,569		26,805
		Subtotal	2,803	65,835		70,188
Covered loans
	Commercial
		C&I	11	5,278		6,216
		CRE	25	52,079		57,681
		Construction	10	14,640		42,567
		Subtotal	46	71,997		106,464
	Consumer
		Home equity lines	30	4,742		4,774
		Total	2,964	$	166,327	$	215,236

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

35

			As of December 31, 2011
			Number of Loans	Recorded Investment		Unpaid Principal Balance
Noncovered loans
	Commercial
		C&I	14	$	2,512	$	4,336
		CRE	28	9,167		12,659
		Construction	22	3,323		3,985
		Subtotal	64	15,002		20,980
	Consumer
		Installment	1,547	33,571		33,723
		Home equity lines	174	4,763		4,763
		Credit card	496	2,202		2,202
		Residential mortgages	177	17,398		18,913
		Subtotal	2,394	57,934		59,601
Covered loans
	Commercial
		C&I	15	7,578		10,812
		CRE	21	57,786		62,159
		Construction	8	12,056		32,035
		Subtotal	44	77,420		105,006
		Total	2,502	$	150,356	$	185,587

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

			As of September 30, 2011
			Number of Loans	Recorded Investment		Unpaid Principal Balance
Noncovered loans
	Commercial
		C&I	8	$	1,096	$	2,654
		CRE	20	8,068		10,725
		Construction	16	3,443		3,657
		Subtotal	44	12,607		17,036
	Consumer
		Installment	1,568	34,654		34,703
		Home equity lines	166	4,413		4,412
		Credit card	529	2,359		2,359
		Residential mortgages	161	16,316		17,698
		Subtotal	2,424	57,742		59,172
Covered loans
	Commercial
		C&I	8	7,287		10,901
		CRE	15	41,403		45,282
		Construction	11	10,940		21,918
		Subtotal	34	59,630		78,101
		Total	2,502	$	129,979	$	154,309

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

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The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the quarters ended September 30, 2012 and 2011 were not materially different. Post-modification balances may include capitalization of unpaid accrued interest and fees associated with the modification as well as forgiveness of principal. Loans modified as TDRs during the quarters ended September 30, 2012 and 2011 did not involve the forgiveness of principal, accordingly, the Corporation did not record a charge-off at the modification date. Additionally, capitalization of any unpaid accrued interest and fees assessed to loans modified in the quarters ended September 30, 2012 and 2011 were not material to the accompanying consolidated financial statements. Specific allowances for loan losses are established for loans whose terms have been modified in a TDR. Specific reserve allocations are generally assessed prior to loans being modified in a TDR, as most of these loans migrate from the Corporation’s internal watch list and have been specifically allocated for as part of the Corporation’s normal loan loss provisioning methodology. At September 30, 2012, the Corporation had $0.3 million in commitments to lend additional funds to debtors owing receivables whose terms have been modified in a TDR.

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 September 30, 2012, December 31, 2011 and September 30, 2011, respectively, including TDRs that continue to accrue interest and TDRs included in nonperforming assets.

	As of September 30, 2012
	Accruing TDRs						Nonaccruing TDRs						Total		Total
	Current		Delinquent		Total		Current		Delinquent		Total		TDRS		Allowance
Noncovered loans
Commercial
C&I	$	955	$	—	$	955	$	865	$	593	$	1,458	$	2,413	$	126
CRE	11,609		2,464		14,073		473		3,217		3,690		17,763		401
Construction	3,507		—		3,507		70		—		70		3,577		117
Total noncovered commercial	16,071		2,464		18,535		1,408		3,810		5,218		23,753		644
Consumer
Installment	28,604		1,071		29,675		2,882		20		2,902		32,577		1,674
Home equity lines	5,394		171		5,565		1,131		226		1,357		6,922		95
Credit card	1,655		109		1,764		—		3		3		1,767		106
Residential mortgages	11,386		3,339		14,725		6,611		3,233		9,844		24,569		1,599
Total noncovered consumer	47,039		4,690		51,729		10,624		3,482		14,106		65,835		3,474
Covered loans
Commercial
C&I	1,000		4,278		5,278		—		—		—		5,278		1,527
CRE	17,298		34,782		52,080		—		—		—		52,080		8,088
Construction	6,324		8,315		14,639		—		—		—		14,639		1,632
Total covered commercial	24,622		47,375		71,997		—		—		—		71,997		11,247
Consumer
Home equity lines	4,698		44		4,742		—		—		—		4,742		—
Total TDRs	$	92,430	$	54,573	$	147,003	$	12,032	$	7,292	$	19,324	$	166,327	$	15,365

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	As of December 31, 2011
	Accruing TDRs						Nonaccruing TDRs						Total		Total
	Current		Delinquent		Total		Current		Delinquent		Total		TDRS		Allowance
Noncovered loans
Commercial
C&I	$	91	$	—	$	91	$	—	$	2,421	$	2,421	$	2,512	$	247
CRE	3,305		513		3,818		3,590		1,759		5,349		9,167		236
Construction	2,782		—		2,782		304		237		541		3,323		99
Total noncovered commercial	6,178		513		6,691		3,894		4,417		8,311		15,002		582
Consumer
Installment	31,637		1,800		33,437		—		134		134		33,571		1,382
Home equity lines	4,226		222		4,448		76		239		315		4,763		31
Credit card	2,073		110		2,183		—		19		19		2,202		108
Residential mortgages	13,736		688		14,424		1,622		1,352		2,974		17,398		1,364
Total noncovered consumer	51,672		2,820		54,492		1,698		1,744		3,442		57,934		2,885
Covered loans
Commercial
C&I	1,587		5,991		7,578		—		—		—		7,578		1,384
CRE	35,083		22,703		57,786		—		—		—		57,786		6,567
Construction	5,838		6,218		12,056		—		—		—		12,056		696
Total covered commercial	42,508		34,912		77,420		—		—		—		77,420		8,647
Total TDRs	$	100,358	$	38,245	$	138,603	$	5,592	$	6,161	$	11,753	$	150,356	$	12,114

	As of September 30, 2011
	Accruing TDRs						Nonaccruing TDRs						Total		Total
	Current		Delinquent		Total		Current		Delinquent		Total		TDRS		Allowance
Noncovered loans
Commercial
C&I	$	129	$	—	$	129	$	—	$	967	$	967	$	1,096	$	215
CRE	4,778		—		4,778		1,215		2,075		3,290		8,068		125
Construction	2,760		—		2,760		180		503		683		3,443		772
Total noncovered commercial	7,667		—		7,667		1,395		3,545		4,940		12,607		1,112
Consumer
Installment	32,882		1,772		34,654		—		—		—		34,654		1,568
Home equity lines	3,885		528		4,413		—		—		—		4,413		52
Credit card	2,201		158		2,359		—		—		—		2,359		121
Residential mortgages	12,313		1,570		13,883		1,485		948		2,433		16,316		1,346
Total noncovered consumer	51,281		4,028		55,309		1,485		948		2,433		57,742		3,087
Covered loans
Commercial
C&I	6,052		1,235		7,287		—		—		—		7,287		746
CRE	41,403		—		41,403		—		—		—		41,403		1,542
Construction	10,940		—		10,940		—		—		—		10,940		394
Total covered commercial	58,395		1,235		59,630		—		—		—		59,630		2,682
Total TDRs	$	117,343	$	5,263	$	122,606	$	2,880	$	4,493	$	7,373	$	129,979	$	6,881

Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Corporation evaluates the loan for possible further impairment. The allowance for loan losses may be increased, adjustments may be made in the allocation of the

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allowance for loan losses, or partial charge-offs may be taken to further write-down the carrying value of the loan. The following table provides the number of loans modified in a TDR during the previous 12 months which subsequently defaulted during the quarter ended September 30, 2012, as well as the recorded investment in these restructured loans as of September 30, 2012.

	As of September 30, 2012
	Number of Loans	Recorded Investment
Noncovered loans
Commercial
C&I	—	$	—
CRE	—	—
Construction	—	—
Total noncovered commercial	—	—
Consumer
Installment	122	4,385
Home equity lines	15	669
Credit card	18	122
Residential mortgages	1	80
Total noncovered consumer	156	5,256
Covered loans
Commercial
C&I	—	—
CRE	—	—
Construction	—	—
Total covered commercial	—	—
Total	156	$	5,256

7.    Goodwill and Other Intangible Assets

Goodwill

Goodwill totaled $460.0 million at September 30, 2012, December 31, 2011 and September 30, 2011. Goodwill is not amortized but is evaluated for impairment on an annual basis at November 30th of each year or whenever events or changes in circumstances indicate the carrying value may not be recoverable. No events or changes in circumstances since the November 30, 2011 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists.

Other Intangible Assets

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

	September 30, 2012
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Core deposit intangibles	$	16,759	$	(10,117	)	$	6,642
Non-compete covenant	102		(70		)	32
Lease intangible	618		(475		)	143
	$	17,479	$	(10,662	)	$	6,817

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	December 31, 2011
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Core deposit intangibles	$	16,759	$	(8,829	)	$	7,930
Non-compete covenant	102		(51		)	51
Lease intangible	618		(360		)	258
	$	17,479	$	(9,240	)	$	8,239

	September 30, 2011
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Core deposit intangibles	$	16,760	$	(8,339	)	$	8,421
Non-compete covenant	102		(45		)	57
Lease intangible	617		(313		)	304
	$	17,479	$	(8,697	)	$	8,782

Intangible asset amortization expense was $0.5 million in each of the three months ended September 30, 2012 and 2011. Estimated amortization expense for each of the next five years is as follows: 2012 - $0.4 million; 2013 - $1.2 million; 2014 - $1.1 million; 2015 - $1.0 million; and 2016 - $0.9 million.

8.    Earnings Per Share

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

	Three Months Ended				Nine Months Ended
	September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
BASIC EPS:
Net income	$	34,953	$	31,737	$	95,882	$	89,060
Net income available to common shareholders	$	34,953	$	31,737	$	95,882	$	89,060
Average common shares outstanding	109,645		109,245		109,473		109,052
Basic net income per share	$	0.32	$	0.29	$	0.88	$	0.82
DILUTED EPS:
Income used in diluted earnings per share calculation	$	34,953	$	31,737	$	95,882	$	89,060
Average common and common stock equivalent shares outstanding	109,645		109,246		109,473		109,053
Diluted net income per share	$	0.32	$	0.29	$	0.88	$	0.82

For the three months ended September 30, 2012 and 2011 options to purchase 1.8 million and 3.3 million shares, respectively, were outstanding, but not included in the computation of diluted EPS because they were antidilutive.

9.    Segment Information

Management monitors the Corporation’s results by an internal performance measurement system, which provides lines of business results and key performance measures. The profitability measurement system is based on internal Management methodologies designed to produce consistent results and reflect the underlying economics of the businesses. The development and application of these methodologies is a dynamic process.

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Accordingly, these measurement tools and assumptions may be revised periodically to reflect methodological, product, and/or management organizational changes. Further, these tools measure financial results that support the strategic objectives and internal organizational structure of the Corporation. Consequently, the information presented is not necessarily comparable with similar information for other financial institutions.

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

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

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

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

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

The accounting policies of the lines of businesses are the same as those of the Corporation described in Note 1 (Summary of Significant Accounting Policies) to the 2011 Form 10-K. Funds transfer pricing is used in the determination of net interest income by assigning a cost for funds used or credit for funds provided to assets and liabilities within each business unit. Assets and liabilities are match-funded based on their maturity, prepayment and/or re-pricing characteristics. As a result, the three primary lines of business are generally insulated from changes in interest rates. Changes in net interest income due to changes in rates are reported in Other by the treasury group. Capital has been allocated on an economic risk basis. Loans and lines of credit have been allocated capital based upon their respective credit risk. Asset management holdings in the Wealth segment have been allocated capital based upon their respective market risk related to assets under management. Normal business operating risk has been allocated to each line of business by the level of noninterest expense. Mismatch between asset and liability cash flow as well as interest rate risk for mortgage servicing rights and the origination business franchise value have been allocated capital based upon their respective asset/liability management risk. The provision for loan loss is allocated based upon the actual net

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charge-offs of each respective line of business, adjusted for loan growth and changes in risk profile. Noninterest income and expenses directly attributable to a line of business are assigned to that line of business. Expenses for centrally provided services are allocated to the business line by various activity based cost formulas.

	Commercial				Retail				Wealth						Other						Consolidated
September 30, 2012	3rd Qtr		YTD		3rd Qtr		YTD		3rd Qtr			YTD			3rd Qtr			YTD			3rd Qtr		YTD
OPERATIONS:
Net interest income (loss)	$	65,446	$	193,776	$	51,181	$	158,745	$	4,223		$	13,412		$	(2,960	)	$	(10,333	)	$	117,890	$	355,600
Provision for loan losses	10,401		22,970		1,194		5,459		(519		)	(318		)	5,103			14,325			16,179		42,436
Other income	15,247		47,603		26,783		76,226		8,528			24,987			4,367			13,136			54,925		161,952
Other expenses	39,595		123,074		53,788		169,618		9,711			29,718			5,493			19,022			108,587		341,432
Net income (loss)	19,954		61,967		14,939		38,931		2,313			5,849			(2,253		)	(10,865		)	34,953		95,882
AVERAGES:
Assets	$	6,466,355	$	6,386,617	$	2,960,336	$	2,929,911	$	242,539		$	238,899		$	5,064,786		$	5,041,099		$	14,734,016	$	14,596,526

	Commercial				Retail				Wealth				Other						Consolidated
September 30, 2011	3rd Qtr		YTD		3rd Qtr		YTD		3rd Qtr		YTD		3rd Qtr			YTD			3rd Qtr		YTD
OPERATIONS:
Net interest income (loss)	$	65,998	$	198,197	$	56,705	$	168,718	$	4,568	$	14,205	$	(7,879	)	$	(22,461	)	$	119,392	$	358,659
Provision for loan losses	4,546		29,653		5,249		17,715		1,261		2,587		8,316			9,385			19,372		59,340
Other income	16,219		43,632		28,333		78,309		7,784		24,066		8,436			19,012			60,772		165,019
Other expenses	36,745		110,073		57,567		177,201		10,004		30,363		11,641			22,833			115,957		340,470
Net income (loss)	40,644		100,519		20,464		45,779		1,199		5,420		(30,570		)	(62,658		)	31,737		89,060
AVERAGES:
Assets	$	6,258,625	$	6,162,742	$	2,925,345	$	2,937,888	$	237,638	$	240,919	$	5,189,020		$	5,110,001		$	14,610,628	$	14,451,550

10.     Derivatives and Hedging Activities

The Corporation, through its mortgage banking, foreign exchange and risk management operations, is party to various derivative instruments that are used for asset and liability management and customers’ financing needs. Derivative instruments are contracts between two or more parties that have a notional amount and underlying variable, require no net investment and allow for the net settlement of positions. The notional amount serves as the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified interest rate, index or other component. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the market value of the derivative contract. Derivative assets and liabilities are recorded at fair value on the balance sheet and do not take into account the effects of master netting agreements. Master netting agreements allow the Corporation to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable.

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

Derivatives Designated in Hedge Relationships

The Corporation’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

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recognized in current period earnings along with the corresponding changes in the fair value of the designated hedged item attributable to the risk being hedged.

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

As of September 30, 2012, December 31, 2011 and September 30, 2011, the notional values or contractual amounts and fair value of the Corporation’s derivatives designated in hedge relationships were as follows:

	Asset Derivatives												Liability Derivatives
	September 30, 2012				December 31, 2011				September 30, 2011				September 30, 2012				December 31, 2011				September 30, 2011
	Notional/ Contract Amount		Fair Value (a)		Notional/ Contract Amount		Fair Value (a)		Notional/ Contract Amount		Fair Value (a)		Notional/ Contract Amount		Fair Value (b)		Notional/ Contract Amount		Fair Value (b)		Notional/ Contract Amount		Fair Value (b)
Interest rate swaps:
Fair value hedges	$	—	$	—	$	819	$	—	$	—	$	—	$	182,950	$	22,071	$	234,330	$	25,889	$	248,447	$	28,278

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

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

Derivatives Not Designated in Hedge Relationships

As of September 30, 2012, December 31, 2011 and September 30, 2011, the notional values or contractual amounts and fair value of the Corporation’s derivatives not designated in hedge relationships were as follows:

	Asset Derivatives															Liability Derivatives
	September 30, 2012					December 31, 2011					September 30, 2011					September 30, 2012				December 31, 2011				September 30, 2011
	Notional/ Contract Amount		Fair Value  (a)			Notional/ Contract Amount		Fair Value  (a)			Notional/ Contract Amount		Fair Value  (a)			Notional/ Contract Amount		Fair Value  (b)		Notional/ Contract Amount		Fair Value  (b)		Notional/ Contract Amount		Fair Value  (b)
Interest rate swaps	$	1,166,765	$	62,796		$	976,823	$	58,875		$	934,248	$	61,299		$	1,166,765	$	62,796	$	976,823	$	58,875	$	934,248	$	61,299
Mortgage loan commitments	221,057		7,394			191,514		4,959			227,999		5,525			—		—		—		—		—		—
Forward sales contracts	144,849		(2,223		)	159,377		(1,798		)	182,588		(1,591		)	—		—		—		—		—		—
Credit contracts	—		—			—		—			—		—			20,861		—		17,951		—		24,435		—
Foreign exchange	4,363		80			3,582		65			2,461		85			4,371		71		3,793		62		2,456		80
Other	—		—			—		—			—		—			27,898		—		21,094		1,324		17,809		—
Total	$	1,537,034	$	68,047		$	1,331,296	$	62,101		$	1,347,296	$	65,318		$	1,219,895	$	62,867	$	1,019,661	$	60,261	$	978,948	$	61,379

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

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

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

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

Written loan commitments that relate to the origination of mortgage loans that will be held for resale are considered free-standing derivatives and do not qualify for hedge accounting. Written loan commitments generally have a term of up to 60 days before the closing of the loan. The loan commitment does not bind the potential borrower to entering into the loan, nor does it guarantee that the Corporation will approve the potential borrower for the loan. Therefore, when determining fair value, the Corporation makes estimates of expected “fallout” (loan commitments not expected to close), using models, which consider cumulative historical fallout rates and other factors. Fallout can occur for a variety of reasons including falling rate environments when a borrower will abandon an interest rate lock loan commitment at one lender and enter into a new lower interest rate lock loan commitment at another, when a borrower is not approved as an acceptable credit by the lender or for a variety of other non-economic reasons. In addition, expected net future cash flows related to loan servicing activities are included in the fair value measurement of a written loan commitment.

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

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

The Corporation periodically enters into derivative contracts by purchasing to be announced (“TBA”) securities that are utilized as economic hedges of its mortgage servicing rights (“MSRs”) to minimize the effects of loss of value of MSRs associated with increase prepayment activity that generally results from declining interest rates. In a rising interest rate environment, the value of the MSRs generally will increase while the value of the hedged instruments will decline. The hedges are economic hedges only, and are terminated and reestablished as needed to respond to changes in market conditions. There were no outstanding TBA securities contracts as of September 30, 2012, December 31, 2011 or September 30, 2011.

Credit contracts. Prior to implementation of the Back-to-Back Program, certain of the Corporation’s commercial loan customers entered into interest rate swaps with unaffiliated dealer counterparties. The Corporation entered into swap participations with these dealer counterparties whereby the Corporation guaranteed payment in the event that the counterparty experienced a loss on the interest rate swap due to a failure to pay by the Corporation’s commercial loan customer. The Corporation simultaneously entered into reimbursement agreements with the commercial loan customers obligating the customers to reimburse the Corporation for any payments it makes under the swap participations. The Corporation monitors its payment

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risk on its swap participations by monitoring the creditworthiness of its commercial loan customers, which is based on the normal credit review process the Corporation would have performed had it entered into these derivative instruments directly with the commercial loan customers. At September 30, 2012, the remaining terms on these swap participation agreements generally ranged from one to six years. The Corporation’s maximum estimated exposure to written swap participations, as measured by projecting a maximum value of the guaranteed derivative instruments based on interest rate curve simulations and assuming 100% default by all obligors on the maximum values, was approximately $2.9 million as of September 30, 2012. The fair values of the written swap participations were not material as of September 30, 2012, December 31, 2011 and September 30, 2011.

Gains and losses recognized in income on non-designated hedging instruments for the three months ended September 30, 2012 and 2011 are as follows:

		Amount of Gain / (Loss) Recognized in Income on Derivatives
		Three Months Ended,			Three Months Ended,
		September 30, 2012			September 30, 2011
Mortgage loan commitments	Loan sales and servicing income	$	2,146		$	3,986
Forward sales contracts	Loan sales and servicing income	(1,023		)	(1,596		)
Foreign exchange contracts	Other income	136			6
Total		$	1,259		$	2,396

Counterparty Credit Risk

Like other financial instruments, derivatives contain an element of “credit risk”— the possibility that the Corporation will incur a loss because a counterparty, which may be a bank, a broker-dealer or a customer, fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. All derivative contracts may be executed only with exchanges or counterparties approved by the Corporation’s Asset and Liability Committee, and only within the Corporation’s Board of Directors Credit Committee approved credit exposure limits. Where contracts have been created for customers, the Corporation enters into derivatives with dealers to offset its risk exposure. To manage the credit exposure to exchanges and counterparties, the Corporation generally enters into bilateral collateral agreements using standard forms published by the International Swaps and Derivatives Association. These agreements are to include thresholds of credit exposure or the maximum amount of unsecured credit exposure which the Corporation is willing to assume. Beyond the threshold levels, collateral in the form of securities made available from the investment portfolio or other forms of collateral acceptable under the bilateral collateral agreements are provided. The threshold levels for each counterparty are established by the Corporation’s Asset and Liability Committee. The Corporation generally posts collateral in the form of highly rated Government Agency issued bonds or mortgage backed securities (“MBSs”). Collateral posted against derivative liabilities was $103.0 million, $107.0 million and $113.8 million as of September 30, 2012, December 31, 2011 and September 30, 2011, respectively.

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11.    Benefit Plans

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

	Pension Benefits
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Components of Net Periodic Pension Cost
Service Cost	$	1,799		$	1,531		$	5,397		$	4,593
Interest Cost	2,965			2,860			8,895			8,580
Expected return on assets	(3,034		)	(3,328		)	(9,102		)	(9,984		)
Amortization of unrecognized prior service costs	97			98			291			294
Cumulative net loss	2,593			1,780			7,779			5,340
Net periodic pension cost	$	4,420		$	2,941		$	13,260		$	8,823

	Postretirement Benefits
	Three Months Ended September 30,					Nine Months Ended September 30,
	2012			2011		2012			2011
Components of Net Periodic Postretirement Cost
Service Cost	$	19		$	14	$	57		$	42
Interest Cost	174			221		522			663
Amortization of unrecognized prior service costs	(117		)	—		(351		)	—
Cumulative net loss	72			28		216			84
Net periodic postretirement cost	$	148		$	263	$	444		$	789

Management contributed $10.0 million to the qualified pension plan in the quarter ended September 30, 2012.

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

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12. Fair Value Measurement

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

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

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

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

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

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

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

• the amount of time since the last relevant valuation;

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

• volatility associated with the primary pricing components.

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

• an independent review and approval of valuation models;

• recurring detailed reviews of profit and loss; and

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

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

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between levels of the fair value hierarchy are recognized at the end of the reporting period.

The following tables presents the balances of assets and liabilities measured at fair value on a recurring and nonrecurring basis as of September 30, 2012, December 31, 2011 and September 30, 2011:

				Fair Value by Hierarchy
	September 30, 2012			Level 1		Level 2			Level 3
Recurring fair value measurement
Available-for-sale securities:
Money market mutual funds	$	3,245		$	3,245	$	—		$	—
U.S. government agency debentures	35,137			—		35,137			—
U.S. States and political subdivisions	258,418			—		258,418			—
Residential mortgage-backed securities:
U.S. government agencies	1,277,831			—		1,277,831			—
Commercial mortgage-backed securities:
U.S. government agencies	15,667			—		15,667			—
Residential collateralized mortgage-backed securities:
U.S. government agencies	1,205,525			—		1,205,525			—
Non-agency	12			—		1			11
Commercial collateralized mortgage-backed securities:
U.S. government agencies	68,665			—		68,665			—
Corporate debt securities	47,493			—		—			47,493
Total available-for-sale securities	2,911,993			3,245		2,861,244			47,504
Residential loans held for sale	17,540			—		17,540			—
Derivative assets:
Interest rate swaps - fair value hedges	—			—		—			—
Interest rate swaps - nondesignated	62,796			—		62,796			—
Mortgage loan commitments	7,394			—		7,394			—
Forward sale contracts	(2,223		)	—		(2,223		)	—
Foreign exchange	80			—		80			—
Total derivative assets	68,047			—		68,047			—
Total fair value of assets (a)	$	2,997,580		$	3,245	$	2,946,831		$	47,504
Derivative liabilities:
Interest rate swaps - fair value hedges	22,071			—		22,071			—
Interest rate swaps - nondesignated	62,796			—		62,796			—
Foreign exchange	71			—		71			—
Total derivative liabilities	84,938			—		84,938			—
True-up liability	12,642			—		—			12,642
Total fair value of liabilities (a)	$	97,580		$	—	$	84,938		$	12,642
Nonrecurring fair value measurement
Mortgage servicing rights (b)	$	17,294		$	—	$	—		$	17,294
Impaired loans (c)	44,010			—		—			44,010
Other property (d)	6,333			—		—			6,333
Other real estate covered by loss share (e)	14,695			—		—			14,695
Total fair value	$	82,332		$	—	$	—		$	82,332

(a) - There were no transfers between levels 1 and 2 of the fair value hierarchy during the quarter ended September 30, 2012.

(b) - MSRs with a recorded investment of $21.3 million were reduced by a specific valuation allowance totaling $4.1 million to a reported carrying value of $17.3 million resulting in recognition of $0.6 million in expense included in loans sales and servicing income in the quarter ended September 30, 2012.

(c) - Collateral dependent impaired loans with a recorded investment of $52.5 million were reduced by specific valuation allowance allocations totaling $8.5 million to a reported net carrying value of $44.0 million.

(d) - Amounts do not include assets held at cost at September 30, 2012. During the quarter ended September 30, 2012, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $0.1 million included in noninterest expense.

(e) - Amounts do not include assets held at cost at September 30, 2012. During the quarter ended September 30, 2012, the re-measurement of covered foreclosed assets at fair value subsequent to initial recognition resulted in losses $0.2 million included in noninterest expense.

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				Fair Value by Hierarchy
	December 31, 2011			Level 1		Level 2			Level 3
Recurring fair value measurement
Available-for-sale securities:
Money market mutual funds	$	3,299		$	3,299	$	—		$	—
U.S. government agency debentures	123,069			—		123,069			—
U.S. States and political subdivisions	357,731			—		357,731			—
Residential mortgage-backed securities:
U.S. government agencies	1,460,343			—		1,460,343			—
Residential collateralized mortgage-backed securities:
U.S. government agencies	1,137,835			—		1,137,835			—
Non-agency	43,307			—		2			43,305
Commercial collateralized mortgage-backed securities:
U.S. government agencies	129,127			—		129,127			—
Corporate debt securities	98,842			—		54,608			44,234
Total available-for-sale securities	3,353,553			3,299		3,262,715			87,539
Residential loans held for sale	30,077			—		30,077			—
Derivative assets:
Interest rate swaps - fair value hedges	—			—		—			—
Interest rate swaps - nondesignated	58,875			—		58,875			—
Mortgage loan commitments	4,959			—		4,959			—
Forward sale contracts	(1,798		)	—		(1,798		)	—
Foreign exchange	20			—		65			—
Total derivative assets	62,056			—		62,101			—
Total fair value of assets (a)	$	3,445,686		$	3,299	$	3,354,893		$	87,539
Derivative liabilities:
Interest rate swaps - fair value hedges	25,889			—		25,889			—
Interest rate swaps - nondesignated	58,875			—		58,875			—
Foreign exchange	18			—		62			—
Other	1,324			—		1,324			—
Total derivative liabilities	86,106			—		86,150			—
True-up liability	11,551			—		—			11,551
Total fair value of liabilities (a)	$	97,657		$	—	$	86,150		$	11,551
Nonrecurring fair value measurement
Mortgage servicing rights (b)	$	17,749		$	—	$	—		$	17,749
Impaired loans (c)	56,739			—		—			56,739
Other property (d)	4,087			—		—			4,087
Other real estate covered by loss share (e)	18,707			—		—			18,707
Total fair value	$	97,282		$	—	$	—		$	97,282

(a) - There were no transfers between levels 1 and 2 of the fair value hierarchy during the quarter ended December 31, 2011.  

(b) - MSRs with a recorded investment of $21.2 million were reduced by a specific valuation allowance totaling $3.5 million to a reported carrying value of $17.6 million resulting in the recognition of an impairment charge of $3.5 million in the year ended December 31, 2011.

(c) - Collateral dependent impaired loans with a recorded investment of $64.5 million were reduced by specific valuation allowance allocations totaling $7.7 million to a reported net carrying value of $56.7 million.

(d) Amounts do not include assets held at cost at December 31, 2011. During the year ended December 31, 2011, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $5.4 million included in noninterest expense.

(e) Amounts do not include assets held at cost at December 31, 2011. During the year ended December 31, 2011, the re-measurement of covered foreclosed assets at fair value subsequent to initial recognition resulted in losses of $3.0 million included in noninterest expense.

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				Fair Value by Hierarchy
	September 30, 2011			Level 1		Level 2			Level 3
Recurring fair value measurement
Available-for-sale securities:
Money market mutual funds	$	3,715		$	3,715	$	—		$	—
U.S. government agency debentures	203,718			—		203,718			—
U.S. States and political subdivisions	314,441			—		314,441			—
Residential mortgage-backed securities:
U.S. government agencies	1,481,222			—		1,481,222			—
Residential collateralized mortgage-backed securities:
U.S. government agencies	1,103,906			—		1,103,906			—
Non-agency	44,857			—		3			44,854
Commercial collateralized mortgage-backed securities:
U.S. government agencies	—			—		—			—
Corporate debt securities	46,187			—		—			46,187
Total available-for-sale securities	3,198,046			3,715		3,103,290			91,041
Residential loans held for sale	39,340			—		39,340			—
Derivative assets:
Interest rate swaps - fair value hedges	—			—		—			—
Interest rate swaps - nondesignated	61,299			—		61,299			—
Mortgage loan commitments	5,525			—		5,525			—
Forward sale contracts	(1,591		)	—		(1,591		)	—
Foreign exchange	85			—		85			—
Total derivative assets	65,318			—		65,318			—
Total fair value of assets (a)	$	3,302,704		$	3,715	$	3,207,948		$	91,041
Derivative liabilities:
Interest rate swaps - fair value hedges	28,278			—		28,278			—
Interest rate swaps - nondesignated	61,299			—		61,299			—
Foreign exchange	80			—		80			—
Other	—			—		—			—
Total derivative liabilities	89,657			—		89,657			—
True-up liability	11,913			—		—			11,913
Total fair value of liabilities (a)	$	101,570		$	—	$	89,657		$	11,913
Nonrecurring fair value measurement
Mortgage servicing rights (b)	$	16,866		$	—	$	—		$	16,866
Impaired loans (c)	59,155			—		—			59,155
Other property (d)	8,648			—		—			8,648
Other real estate covered by loss share (e)	29,350			—		—			29,350
Total fair value	$	114,019		$	—	$	—		$	114,019

(a) - There were no transfers between levels 1 and 2 of the fair value hierarchy during the quarter endedSeptember 30, 2011.

(b) - MSRs were recorded at carrying value of $16.8 million as of September 30, 2011.

(c) - Collateral dependent impaired loans with a recorded investment of $66.2 million were reduced by specific valuation allowance allocations totaling $7.1 million to a reported net carrying value of $59.2 million.

(d) - Amounts do not include assets held at cost at September 30, 2011. During the quarter ended September 30, 2011, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $1.0 million included in noninterest expense.

(e) Amounts do not include assets held at cost at September 30, 2011. During the quarter ended September 30, 2011, the re-measurement of covered foreclosed assets at fair value subsequent to initial recognition resulted in losses of $1.1 million included in noninterest expense.

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The following section describes the valuation methodologies used by the Corporation to measure financial assets and liabilities at fair value. During the quarters ended September 30, 2012 and 2011, there were no significant changes to the valuation techniques used by the Corporation to measure fair value.

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

Securities are classified as Level 2 if quoted prices for identical securities are not available, and fair value is determined using pricing models by a third-party pricing service.   Approximately 98% of the available-for-sale portfolio is Level 2. For the majority of available-for sale securities, the Corporation obtains fair value measurements from an independent third party pricing service. These instruments include: municipal bonds; bonds backed by the U.S. government; corporate bonds; MBSs; securities issued by the U.S. Treasury; and certain agency and corporate collateralized mortgage obligations.  The independent pricing service uses industry-standard models to price U.S. Government agencies and MBSs that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. For collateralized mortgage securities, depending on the characteristics of a given tranche, a volatility driven multidimensional static model or Option-Adjusted Spread model is generally used. Substantially all assumptions used by the independent pricing service 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. Less than 2% of the available-for-sale portfolio is Level 3 and consists of mortgage-backed securities issued and guaranteed by the National Credit Union Administration and single issuer trust preferred securities. These instruments are measured at unadjusted prices obtained from the independent pricing service. The independent pricing service prices these instruments through a broker quote when sufficient information, such as cash flows or other security structure or market information, is not available to produce an evaluation. Broker-quoted securities are adjusted by the independent pricing service based solely on the receipt of updated quotes from market makers or broker-dealers recognized as market participants. A list of such issues is compiled by the independent pricing service daily. For broker-quoted issues, the independent pricing service applies a zero spread relationship to the bid-side valuation, resulting in the same values for the mean and ask.

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

Loans held for sale. These loans are regularly traded in active markets through programs offered by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association, and

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

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

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

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

The Corporation utilizes a third-party vendor to perform the modeling to estimate the fair value of its mortgage servicing rights. The Corporation reviews the estimated fair values and assumptions used by the third party in the model on a quarterly basis. The Corporation also compares the estimates of fair value and assumptions to recent market activity and against its own experience. See Note 13 (Mortgage Servicing Rights and Mortgage Servicing Activity) for further information on mortgage servicing rights valuation assumptions.

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

52

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

Derivative assets are typically secured through securities with financial counterparties or cross collateralization with a borrowing customer. Derivative liabilities are typically secured through the Corporation pledging securities to financial counterparties or, in the case of a borrowing customer, by the right of setoff. The Corporation considers factors such as the likelihood of default by itself and its counterparties, right of setoff, and remaining maturities in determining the appropriate fair value adjustments. All derivative counterparties approved by the Corporation's Asset and Liability Committee are regularly reviewed, and appropriate business action is taken to adjust the exposure to certain counterparties, as necessary. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of marketable collateral securing the position. This approach used to estimate impacted exposures to counterparties is also used by the Corporation to estimate its own credit risk on derivative liability positions. To date, no material losses have been incurred due to a counterparty's inability to pay any uncollateralized position. There was no significant change in value of derivative assets and liabilities attributed to credit risk for the quarter ended September 30, 2012.

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

An expected value methodology is used as a starting point for determining the fair value of the true-up liability based on the contractual terms prescribed in the loss sharing agreements. The resulting values under both calculations are discounted over 10 years (the period defined in the loss sharing agreements) to reflect the uncertainty in the timing and payment of the true-up liability by the Bank to arrive at a net present value. The discount rate used to value the true-up liability was 2.99% and 3.81% as of September 30, 2012 and 2011, respectively. Increasing or decreasing the discount rate by one percentage point would change the liability by $0.9 million and $1.0 million, respectively, as of September 30, 2012.

In accordance with the loss sharing agreements governing the Midwest acquisition, on July 15, 2020 (the “Midwest True-Up Measurement Date”), the Bank has agreed to pay to the FDIC half of the amount, if positive, calculated as: (1) 20% of the intrinsic loss estimate of the FDIC (approximately $152 million); minus (2) the sum of (A) 25% of the asset premium paid in connection with the Midwest acquisition (approximately $20 million); plus (B) 25% of the cumulative shared-loss payments (as defined below) plus (C) the cumulative servicing amount (as defined below). The fair value of the true-up liability associated with the Midwest acquisition was $7.7 million, $7.2 million and $7.3 million as of September 30, 2012, December 31, 2011 and September 30, 2011, respectively.

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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 ($172.0 million) less (2) the sum of (A) 25% of the asset discount ($47.0 million) received in connection with the George Washington acquisition plus (B) 25% of the cumulative shared-loss payments (as defined below) plus (C) the cumulative servicing amount (as defined below). The fair value of the true-up liability associated with the George Washington acquisition was $5.0 million, $4.3 million and $4.6 million as of September 30, 2012, December 31, 2011 and September 30, 2011, 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 5 (Loans) 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 are summarized follows:

	Three months ended											Nine Months Ended
	September 30, 2012					September 30, 2011						September 30, 2012					September 30, 2011
	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	$	48,096		$	11,820	$	144,570		$	12,196		$	87,539		$	11,551	$	60,344		$	12,061
(Gains) losses included in earnings (a)	—			822		—			(283		)	—			1,091		—			(148		)
Unrealized gains (losses) (b)	(605		)	—		(4,549		)	—			3,137			—		(4,199		)	—
Purchases	—			—		—			—			—			—		83,876			—
Sales	—			—		(44,924		)	—			(40,520		)	—		(44,924		)	—
Settlements	13			—		(4,056		)	—			(2,652		)	—		(4,056		)	—
Net transfers into (out of) Level 3	—			—		—			—			—			—		—			—
Balance at ending of period	$	47,504		$	12,642	$	91,041		$	11,913		$	47,504		$	12,642	$	91,041		$	11,913

(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 hedge accounting under U.S. GAAP.

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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 status as of September 30, 2012, December 31, 2011 and September 30, 2011. The aggregate fair value, contractual balance and gains on loans held for sale are as follows:

	Quarter ended		Year ended		Quarter ended
	September 30, 2012		December 31, 2011		September 30, 2011
Aggregate fair value	$	17,540	$	30,077	$	39,340
Contractual balance	16,635		28,948		37,786
Gain (a)	905		1,129		1,554

(a) Included in loan sales and servicing income.

Disclosures about Fair Value of Financial Instruments

The carrying amount and estimated fair value of the Corporation’s financial instruments that are carried at either fair value or cost as of September 30, 2012, December 31, 2011 and September 30, 2011 are shown in the tables below.

	September 30, 2012
	Carrying Amount		Fair Value
			Total		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	238,417	$	238,417	$	—	$	238,417	$	—
Available for sale securities	2,911,993		2,911,993		3,245		2,861,244		47,504
Held to maturity securities	620,631		631,237		—		631,237		—
Other securities	140,730		140,730		—		140,730		—
Loans held for sale	17,540		17,540		—		17,540		—
Net noncovered loans	8,217,478		7,898,195		—		—		7,898,195
Net covered loans and loss share receivable	1,131,285		1,131,285		—		—		1,131,285
Accrued interest receivable	43,901		43,901		—		43,901		—
Derivatives	68,047		68,047		—		68,047		—
Financial liabilities:
Deposits	$	11,532,426	$	11,540,681	$	—	$	11,540,681	$	—
Federal funds purchased and securities sold under agreements to repurchase	963,455		963,455		—		963,455		—
Wholesale borrowings	178,083		187,230		—		187,230		—
Accrued interest payable	2,798		2,798		—		2,798		—
Derivatives	84,938		84,938		—		84,938		—

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	December 31, 2011
	Carrying Amount		Fair Value
			Total		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	377,319	$	377,319	$	—	$	377,319	$	—
Available for sale securities	3,353,553		3,353,553		3,299		3,262,715		87,539
Held to maturity securities	82,764		85,112		—		85,112		—
Other securities	140,726		140,726		—		140,726		—
Loans held for sale	30,077		30,077		—		30,077		—
Net noncovered loans	7,641,245		7,373,801		—		—		7,373,801
Net covered loans and loss share receivable	1,460,723		1,460,723		—		—		1,460,723
Accrued interest receivable	42,274		42,274		—		42,274		—
Derivatives	62,056		62,101		—		62,101		—
Financial liabilities:
Deposits	$	11,431,609	$	11,445,777	$	—	$	11,445,777	$	—
Federal funds purchased and securities sold under agreements to repurchase	866,265		866,265		—		866,265		—
Wholesale borrowings	203,462		211,623		—		211,623		—
Accrued interest payable	3,915		3,915		—		3,915		—
Derivatives	86,106		86,150		—		86,150		—

	September 30, 2011
	Carrying Amount		Fair Value
			Total		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	318,945	$	318,945	$	—	$	318,945	$	—
Available for sale securities	3,198,046		3,198,046		3,715		3,103,290		91,041
Held to maturity securities	92,214		94,921		—		94,921		—
Other securities	160,793		160,793		—		160,793		—
Loans held for sale	39,340		39,340		—		39,340		—
Net noncovered loans	7,522,385		7,148,775		—		—		7,148,775
Net covered loans and loss share receivable	1,612,615		1,612,615		—		—		1,612,615
Accrued interest receivable	41,199		41,199		—		41,199		—
Derivatives	65,318		65,318		—		65,318		—
Financial liabilities:
Deposits	$	11,396,121	$	11,412,576	$	—	$	11,412,576	$	—
Federal funds purchased and securities sold under agreements to repurchase	987,030		991,304		—		991,304		—
Wholesale borrowings	248,006		256,069		—		256,069		—
Accrued interest payable	4,627		4,627		—		4,627		—
Derivatives	89,657		89,657		—		89,657		—

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The following methods and assumptions were used to estimate the fair value of the remaining classes of financial instruments not measured at fair value on a recurring or nonrecurring basis:

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

Held to maturity securities - The held to maturity portfolio was segmented based on security type and repricing characteristics. Carrying values are used to estimate fair values of variable rate securities. A discounted cash flow method was used to estimate the fair value of fixed-rate securities. 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 securities with similar characteristics. If applicable, prepayment assumptions are factored into the fair value determination based on historical experience and current economic conditions.

Other securities - Other securities is mainly composed of FRB and FHLB stock. The carrying amount of this stock is a reasonable fair value estimate given their restricted nature.

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

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

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

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

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.

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

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

13. Mortgage Servicing Rights and Mortgage Servicing Activity

In the nine months ended September 30, 2012 and 2011, the Corporation sold residential mortgage loans from the held for sale portfolio with unpaid principal balances of $588.6 million and $324.8 million, respectively, and recognized pre-tax gains of $7.9 million and $5.2 million, respectively, which are included as a component of loan sales and servicing income. The Corporation retained the related mortgage servicing rights on $560.9 million and $283.2 million, respectively, of the loans sold and receives servicing fees.

The Corporation serviced for third parties approximately $2.4 billion of residential mortgage loans at September 30, 2012 and $2.2 billion at September 30, 2011. For the nine months ended September 30, 2012 and 2011, loan servicing fees, not including valuation changes included in loan sales and servicing income, were $4.2 million and $4.0 million, respectively.

Servicing rights are presented within other assets on the accompanying consolidated balance sheet. The retained servicing rights are initially valued at fair value. Since mortgage servicing rights do not trade in an active market with readily observable prices, the Corporation relies primarily on a discounted cash flow analysis model to estimate the fair value of its mortgage servicing rights. Additional information can be found in Note 12 (Fair Value Measurement). Mortgage servicing rights are subsequently measured using the amortization method. Accordingly, the mortgage servicing rights are amortized over the period of, and in proportion to, the estimated net servicing income and is recorded in loan sales and servicing income.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Balance at beginning of period	$	21,273		$	21,094		$	21,179		$	21,317
Additions	1,408			798			4,597			2,660
Amortization	(1,390		)	(1,111		)	(4,485		)	(3,196		)
Balance at end of period	21,291			20,781			21,291			20,781
Valuation allowance at beginning of period	(3,488		)	(350		)	(3,539		)	—
Recoveries (Additions)	(590		)	(3,639		)	(539		)	(3,989		)
Valuation allowance at end of period	(4,078		)	(3,989		)	(4,078		)	(3,989		)
Mortgage servicing rights, net carrying balance	$	17,213		$	16,792		$	17,213		$	16,792
Fair value at end of period	$	17,294		$	16,866		$	17,294		$	16,866

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

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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 quarters ended September 30, 2012 and September 30, 2011.

Key economic assumptions and the sensitivity of the current fair value of the mortgage servicing rights related to immediate 10% and 25% adverse changes in those assumptions at September 30, 2012 are presented in the following table below. These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in the fair value based on 10% variation in the prepayment speed assumption generally cannot be extrapolated because the relationship of the change in the prepayment speed assumption to the change in fair value may not be linear. Also, in the below table, the effect of a variation in the discount rate assumption on the fair value of the mortgage servicing rights is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in prepayment speed estimates could result in changes in the discount rates), which might magnify or counteract the sensitivities.

Prepayment speed assumption (annual CPR)	17.5		%
Decrease in fair value from 10% adverse change	$	921
Decrease in fair value from 25% adverse change	2,193
Discount rate assumption	9.7		%
Decrease in fair value from 100 basis point adverse change	$	478
Decrease in fair value from 200 basis point adverse change	926
Expected weighted-average life (in months)	71.5

14.    Contingencies and Guarantees

Litigation

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

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

Overdraft Litigation

Commencing in December 2010, two separate lawsuits were filed in the Summit County Court of Common Pleas and the Lake County Court of Common Plea 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

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overdraft fees, punitive damages, interest, injunctive relief and attorney fees.

365/360 Interest Litigation

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

Indirect Lending Litigation

In April 2012 a lawsuit was filed in the United States District Court for the Northern District of Ohio, Eastern Division, against the Corporation and Bank. The complaint was brought as a putative class action on behalf of all persons who purchased a motor vehicle in Ohio from an Ohio motor vehicle dealer, which purchase and sale was financed by the Bank. The lawsuit alleges a violation of the Clayton Act, as amended by the Robinson-Patman Act, breach of common law of agency, a violation of the Ohio Retail Installment Sales Act and a violation of the federal Truth in Lending Act. The complaint seeks disgorgement of fees, treble damages, interest and attorney fees. In June 2012, the court granted the Corporation's and Bank's motion to dismiss and that decision is now final.

Shareholder Derivative Litigation

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

Merger Litigation

In September and October 2012, six shareholder class action lawsuits were separately filed in the Genesee County Circuit Court of Michigan by purported shareholders of Citizens Republic Bancorp against Citizens, the members of Citizens’ board of directors, and the Corporation, arising out of the Corporation’s proposed acquisition of Citizens. The lawsuits generally allege that the terms and the price of the proposed acquisition are unfair to Citizens’ shareholders and that the Citizens' directors breached their fiduciary duties to Citizens' shareholders by approving the proposed transaction. It is alleged that the Corporation aided and abetted the breaches of duties by Citizens’ directors. Plaintiffs, on behalf of all Citizens' shareholders, seek injunctive relief against the consummation of the proposed transaction, request rescission of the transaction or damages to the extent the transaction is consummated, and costs and attorney fees.

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

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unfavorable, may be material to the results of operations for a particular period. The Corporation has not established any reserves with respect to any of this disclosed litigation because it is not possible to determine either (i) whether a liability has been incurred or (ii) to estimate the ultimate or minimum amount of that liability or both at this time.

Commitments to Extend Credit

Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Loan commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments, and the fair value of these commitments is recorded on the consolidated balance. Additional information is provided in Note 10 (Derivatives and Hedging Activities). Commitments generally are extended at the then-prevailing interest rates, have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon the total commitment amounts do not necessarily represent future cash requirements. Loan commitments involve credit risk not reflected on the balance sheet. The Corporation mitigates exposure to credit risk with internal controls that guide how applications for credit are reviewed and approved, how credit limits are established and, when necessary, how demands for collateral are made. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Management evaluates the creditworthiness of each prospective borrower on a case-by-case basis and, when appropriate, adjusts the allowance for probable credit losses inherent in all commitments. The allowance for unfunded lending commitments at September 30, 2012, December 31, 2011 and September 30, 2011 was $5.8 million, $6.4 million and $6.4 million, respectively. Additional information pertaining to this allowance is included under the heading “Allowance for Loan Losses and Reserve for Unfunded Lending Commitments” within Management’s Discussion and Analysis of Financial Condition and Results of Operation of this report.

The following table shows the remaining contractual amount of each class of commitments to extend credit as of September 30, 2012, December 31, 2011 and September 30, 2011. This amount represents the Corporation’s maximum exposure to loss if the customer were to draw upon the full amount of the commitment and subsequently default on payment for the total amount of the then outstanding loan.

	September 30, 2012		December 31, 2011		September 30, 2011
Loan Commitments
Commercial	$	2,406,226	$	2,023,284	$	2,047,840
Consumer	1,687,955		1,585,655		1,610,924
Total loan commitments	$	4,094,181	$	3,608,939	$	3,658,764

Guarantees

The Corporation is a guarantor in certain agreements with third parties. The following table shows the types of guarantees the Corporation had outstanding as of September 30, 2012, December 31, 2011 and September 30, 2011.

	September 30, 2012		December 31, 2011		September 30, 2011
Financial guarantees
Standby letters of credit	$	125,791	$	135,039	$	130,186
Loans sold with recourse	39,251		38,808		40,763
Total financial guarantees	$	165,042	$	173,847	$	170,949

Standby letters of credit obligate the Corporation to pay a specified third party when a customer fails to

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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 $69.6 million at September 30, 2012, the remaining guarantees extend in varying amounts through 2017.

Changes in the amount of the repurchase reserve for the three and nine months ended September 30, 2012 and 2011 are as follows:

	Three Months Ended September 30, 2012
	Reserve on residential mortgage loans			Reserve on manufactured housing loans			Total repurchase reserve
Balance at beginning of period	$	750		$	1,263		$	2,013
Net realized losses	(202		)	—			(202		)
Net increase to reserve	552			(70		)	482
Balance at end of period	$	1,100		$	1,193		$	2,293

	Three Months Ended September 30, 2011
	Reserve on residential mortgage loans			Reserve on manufactured housing loans		Total repurchase reserve
Balance at beginning of period	$	465		$	1,598	$	2,063
Net realized losses	(96		)	—		(96		)
Net increase to reserve	1			6		7
Balance at end of period	$	370		$	1,604	$	1,974

	Nine Months Ended September 30, 2012
	Reserve on residential mortgage loans			Reserve on manufactured housing loans			Total repurchase reserve
Balance at beginning of period	$	470		$	1,273		$	1,743
Net realized losses	(569		)	—			(569		)
Net increase to reserve	1,199			(80		)	1,119
Balance at end of period	$	1,100		$	1,193		$	2,293

	Nine Months Ended September 30, 2011
	Reserve on residential mortgage loans			Reserve on manufactured housing loans			Total repurchase reserve
Balance at beginning of period	$	600		$	2,233		$	2,833
Net realized losses	(321		)	(35		)	(356		)
Net increase to reserve	91			(594		)	(503		)
Balance at end of period	$	370		$	1,604		$	1,974

The total reserve associated with loans sold with recourse was approximately $2.3 million, $1.7 million and $2.0 million as of September 30, 2012, December 31, 2011 and September 30, 2011, respectively, and is

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included in accrued taxes, expenses and other liabilities on the consolidated balance sheet. The Corporation’s reserve reflects management’s best estimate of losses. The Corporation's reserving methodology uses current information about investor repurchase requests, and assumptions about defect concur rate, repurchase mix, and loss severity, based upon the Corporation’s most recent loss trends. The Corporation also considers qualitative factors that may result in anticipated losses differing from historical loss trends, such as loan vintage, underwriting characteristics and macroeconomic trends.

The Corporation regularly sells residential mortgage loans service retained to government sponsored enterprises (“GSEs”) as part of its mortgage banking activities. The Corporation provides customary representation and warranties to the GSEs in conjunction with these sales. These representations and warranties generally require the Corporation to repurchase assets if it is subsequently determined that a loan did not meet specified criteria, such as a documentation deficiency or rescission of mortgage insurance. If the Corporation is unable to cure or refute a repurchase request, the Corporation is generally obligated to repurchase the loan or otherwise reimburse the counterparty for losses. The Corporation also sells residential mortgage loans serviced released to other investors which contain early payment default recourse provisions. As of September 30, 2012, December 31, 2011 and September 30, 2011, the Corporation had sold $28.5 million, $28.1 million and $29.4 million, respectively, of outstanding residential mortgage loans to GSEs and other investors with recourse provisions. The Corporation had reserved $1.1 million, $0.5 million and $0.4 million as of September 30, 2012, December 31, 2011and September 30, 2011, respectively, for potential losses from representation and warranty obligations and early payment default recourse provisions.

Due to prior acquisitions, as of September 30, 2012 and December 31, 2011, the Corporation continued to service approximately $10.7 million in manufactured housing loans which were sold with recourse compared to $11.4 million as of September 30, 2011. As of September 30, 2012, the Corporation had reserved $1.2 million for potential losses from these manufactured housing loans compared to $1.3 millionand$1.6 million as of December 31, 2011andSeptember 30, 2011, respectively.

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

Average Consolidated Balance Sheets (Unaudited)
Fully Tax-equivalent Interest Rates and Interest Differential
	Three months ended							Three months ended
	September 30, 2012							September 30, 2011
(Dollars in thousands)	Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate
ASSETS
Cash and due from banks	$	440,231						$	517,150
Investment securities and federal funds sold:
U.S. Treasury securities and U.S. Government agency obligations (taxable)	2,688,658			$	17,981	2.66	%	2,974,656			$	19,864	2.65	%
Obligations of states and political subdivisions (tax exempt)	660,143			6,332		3.82	%	385,055			5,275		5.44	%
Other securities and federal funds sold	344,823			2,652		3.06	%	316,383			2,084		2.61	%
Total investment securities and federal funds sold	3,693,624			26,965		2.90	%	3,676,094			27,223		2.94	%
Loans held for sale	23,631			240		4.04	%	24,524			284		4.59	%
Loans, including loss share receivable	9,402,218			103,128		4.36	%	9,177,487			108,444		4.69	%
Total earning assets	13,119,473			130,333		3.95	%	12,878,105			135,951		4.19	%
Total allowance for loan losses	(145,061		)					(138,441		)
Other assets	1,319,373							1,353,814
Total assets	$	14,734,016						$	14,610,628
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	3,236,703		$	—	—	%	$	2,988,521		$	—	—
Interest-bearing	1,080,841			243		0.09	%	913,252			218		0.09	%
Savings and money market accounts	5,746,210			5,166		0.36	%	5,446,351			6,929		0.50	%
Certificates and other time deposits	1,528,177			2,743		0.71	%	2,099,558			4,370		0.83	%
Total deposits	11,591,931			8,152		0.28	%	11,447,682			11,517		0.40	%
Securities sold under agreements to repurchase	1,032,401			310		0.12	%	969,020			977		0.40	%
Wholesale borrowings	178,022			1,130		2.53	%	320,691			1,669		2.06	%
Total interest-bearing liabilities	9,565,651			9,592		0.40	%	9,748,872			14,163		0.58	%
Other liabilities	315,093							302,824
Shareholders’ equity	1,616,569							1,570,411
Total liabilities and shareholders’ equity	$	14,734,016						$	14,610,628
Net yield on earning assets	$	13,119,473		$	120,741	3.66	%	$	12,878,105		$	121,788	3.75	%
Interest rate spread						3.55	%						3.61	%

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

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Average Consolidated Balance Sheets (Unaudited)
Fully Tax-equivalent Interest Rates and Interest Differential
	Nine Months Ended							Nine Months Ended
	September 30, 2012							September 30, 2011
(Dollars in thousands)	Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate
ASSETS
Cash and due from banks	$	409,944						$	541,992
Investment securities and federal funds sold:
U.S. Treasury securities and U.S. Government agency obligations (taxable)	2,797,521			$	56,688	2.71	%	2,906,269			$	59,174	2.72	%
Obligations of states and political subdivisions (tax exempt)	526,962			18,450		4.68	%	370,553			15,709		5.67	%
Other securities and federal funds sold	369,639			8,146		2.94	%	296,976			6,436		2.90	%
Total investment securities and federal funds sold	3,694,122			83,284		3.01	%	3,573,798			81,319		3.04	%
Loans held for sale	24,279			761		4.19	%	21,877			779		4.76	%
Loans, including loss share receivable	9,295,866			309,530		4.45	%	9,126,596			330,965		4.85	%
Total earning assets	13,014,267			393,575		4.04	%	12,722,271			413,063		4.34	%
Allowance for loan losses	(143,756		)					(138,758		)
Other assets	1,316,071							1,326,045
Total assets	$	14,596,526						$	14,451,550
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	3,139,515		$	—	—	%	$	2,954,172		$	—	—	%
Interest-bearing	1,069,290			726		0.09	%	859,903			579		0.09	%
Savings and money market accounts	5,717,860			15,302		0.36	%	5,236,540			22,172		0.57	%
Certificates and other time deposits	1,613,270			9,436		0.78	%	2,360,522			16,803		0.95	%
Total deposits	11,539,935			25,464		0.29	%	11,411,137			39,554		0.46	%
Securities sold under agreements to repurchase	947,135			854		0.12	%	900,920			2,832		0.42	%
Wholesale borrowings	180,215			3,399		2.52	%	323,678			4,963		2.05	%
Total interest bearing liabilities	9,527,770			29,717		0.42	%	9,681,563			47,349		0.65	%
Other liabilities	330,254							275,452
Shareholders' equity	1,598,987							1,540,363
Total liabilities and shareholders' equity	$	14,596,526						$	14,451,550
Net yield on earning assets	$	13,014,267		$	363,858	3.73	%	$	12,722,271		$	365,714	3.84	%
Interest rate spread						3.62	%						3.69	%

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

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HIGHLIGHTS OF THIRD QUARTER 2012 PERFORMANCE

Earnings Summary

The Corporation reported third quarter 2012 net income of $35.0 million, or $0.32 per diluted share. This compares with $30.6 million, or $0.28 per diluted share, for the second quarter 2012 and $31.7 million, or $0.29 per diluted share, for the third quarter 2011.

Returns on average common equity and average assets for the third quarter 2012 were 8.60% and 0.94%, respectively, compared with 7.69% and 0.84%, respectively, for the second quarter 2012 and 8.02% and 0.86%, respectively, for the third quarter 2011.

Net interest margin was 3.66% for the third quarter of 2012 compared with 3.77% for the second quarter of 2012 and 3.75% for the third quarter of 2011. The net interest margin compressed 11 basis points compared with the second quarter of 2012 due to reductions in overall loan and investment portfolio yields.  Despite the persistent low rate environment, the Corporation partially offset earning asset pressure by continuing to remix the deposit base with lower costing liabilities.

Average noncovered loans during the third quarter of 2012increased$244.4 million, or 3.08%, compared with the second quarter of 2012 and increased$702.2 million, or 9.38%, compared with the third quarter of 2011. Average noncovered commercial loans increased$169.4 million, or 3.21%, compared with the prior quarter, and increased$567.7 million, or 11.64%, compared with the year ago quarter. The average consumer loan portfolio grew for the fifth consecutive quarter, increasing $65.3 million, or 2.52%, compared to the prior quarter, and $102.8 million, or 4.03%, compared with the year ago quarter.

Average deposits were $11.6 billion during the third quarter of 2012, an increase of $36.6 million, or 0.32%, compared with the second quarter of 2012, and an increase of $144.2 million, or 1.26%, compared with the third quarter of 2011. During the third quarter 2012, average core deposits, which exclude time deposits, increased$126.8 million, or 1.28%, compared with the second quarter 2012 and increased$715.6 million, or 7.66%, compared with the third quarter 2011. Average time deposits decreased$90.1 million, or 5.57%, and decreased$571.4 million, or 27.21%, respectively, over prior and year-ago quarters. The Corporation continues to emphasize growth in lower cost core deposit products and decrease its reliance on certificates of deposit accounts to support balance sheet growth.   For the third quarter of 2012, average core deposits accounted for 86.82% of total average deposits, compared with 85.99% for the second quarter of 2012 and 81.66% for the third quarter of 2011.

Average investments decreased$4.3 million, or 0.12%, compared with the second quarter of 2012 and increased$17.5 million, or 0.48% compared with the third quarter of 2011.

Net interest income on a fully tax-equivalent (“FTE”) basis was $120.7 million in the third quarter 2012 compared with $121.7 million in the second quarter of 2012 and $121.8 million in the third quarter of 2011.

Noninterest income, excluding gains on securities transactions of $0.6 million, for the third quarter of 2012 was $54.4 million, a decrease of $0.4 million, or 0.70%, from the second quarter of 2012 and a decrease of $2.0 million, or 3.54%, from the third quarter of 2011. The decrease in noninterest income from the second quarter of 2012 was attributable to a decrease of $2.6 million in gains on covered loans paid in full partially offset by increased loan sales and servicing income of $2.1 million. The decrease in noninterest income from the third quarter of 2011 was attributable a decline in service charges on deposits of $3.2 million as a result of regulatory revisions to overdraft fee policies which took effect in the fourth quarter of 2011 and a decline in

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credit card fees of $2.6 million as a result of the implementation of the Durbin Interchange Amendment in the fourth quarter of 2011. These declines in income were partially offset by an increase in loans sales and servicing income of $3.8 million resulting from an increase in mortgage loan originations and refinancings activity due to a decrease in interest rates in 2012.

Other income, net of $0.6 million in securities gains, as a percentage of net revenue for the third quarter of 2012 was 31.05% compared with 31.03% for second quarter of 2012 and 31.64% for the third quarter of 2011. Net revenue is defined as net interest income, on an FTE basis, plus other income, less gains from securities sales.

Noninterest expense for the third quarter of 2012 was $108.6 million, a decrease of $10.5 million, or 8.81%, from the second quarter of 2012, which included $8.9 million in one-time charges related to the Efficiency Initiative announced in the prior quarter, and a decrease of $7.4 million, or 6.36%, from the third quarter of 2011. Other one-time charges incurred in the third quarter of 2012 included $0.5 million associated with costs of closing eight full service branches and $1.1 million of professional and legal fees associated with the proposed acquisition of Citizens. The Corporation demonstrated significant ongoing progress in reducing operating expenses in response to the challenging industry environment.

During the third quarter of 2012, the Corporation reported an efficiency ratio of 61.75%, compared with 67.21% for the second quarter of 2012 and 64.78% for the third quarter of 2011. Excluding the $8.9 million in one-time charges related to the Efficiency Initiative announced in the prior quarter, the reported efficiency ratio for the second quarter of 2012 would be 62.15%.

As a result of guidance from the OCC, $10.6 million of consumer loans were identified as troubled debt restructurings whereby the borrower's obligation to the Corporation has been discharged in bankruptcy and the borrower has not reaffirmed the debt. These loans were reclassified from performing loans to nonaccrual status and consisted of $6.7 million of first mortgages, $1.0 million of junior liens and $2.9 million of automobile loans, and net loan charge-offs of $2.8 million were recognized.

Net charge-offs of noncovered loans totaled $14.9 million, or 0.72% of average noncovered loans in the third quarter of 2012, including $2.8 million in charge-offs relating to the aforementioned troubled debt restructured loans, compared with $8.8 million, or 0.44% of average noncovered loans, in the second quarter 2012 and $14.6 million, or 0.77% of average noncovered loans, in the third quarter of 2011.

Nonperforming assets totaled $64.1 million at September 30, 2012, an increase of $3.0 million, or 4.87%, compared with June 30, 2012 and a decrease of $26.0 million, or 28.89%, compared with September 30, 2011. The increase in nonperforming assets in the third quarter is a result of the $10.6 million in loans noted above. Excluding the impact of the OCC guidance, nonperforming assets decreased $7.6 million or 12.44% compared with June 30, 2012 and $36.6 million or 40.63% compared with September 30, 2011. Nonperforming assets at September 30, 2012 represented 0.77% of period-end noncovered loans plus noncovered other real estate compared with 0.75% at June 30, 2012 and 1.18% at September 30, 2011.

The allowance for noncovered loan losses totaled $98.9 million at September 30, 2012, down from $103.8 million at June 30, 2012. At September 30, 2012, the allowance for noncovered loan losses was 1.19% of period-end noncovered loans compared with 1.28% at June 30, 2012 and 1.43% at September 30, 2011. The allowance for credit losses is the sum of the allowance for noncovered loan losses and the reserve for unfunded lending commitments. For comparative purposes the allowance for credit losses was 1.26% of period-end noncovered loans at September 30, 2012, compared with 1.35% at June 30, 2012 and 1.51% at September 30, 2011. The allowance for credit losses to nonperforming noncovered loans was 208.11% at September 30, 2012,

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compared with 234.57% at June 30, 2012 and 170.16% at September 30, 2011.

The Corporation's total assets at September 30, 2012 were $14.6 billion, an increase of $7.5 million, or 0.05%, compared with June 30, 2012 and a decrease of $59.4 million, or 0.40%, compared with September 30, 2011.

Total deposits were $11.5 billion at September 30, 2012, a decrease of $83.4 million, or 0.72%, from June 30, 2012 and an increase of $136.3 million, or 1.20%, from September 30, 2011. Core deposits totaled $10.1 billion at September 30, 2012, an increase of $18.3 million, or 0.18% from June 30, 2012 and an increase of $0.6 billion, or 6.38%, from September 30, 2011.

Shareholders' equity was $1.6 billion at September 30, 2012, June 30, 2012 and September 30, 2011, respectively. The Corporation maintained a strong capital position as tangible common equity to assets was 8.18% at September 30, 2012, compared with 8.01% at June 30, 2012 and 7.75% at September 30, 2011. The common cash dividend per share paid in the third quarter 2012 was $0.16.

RESULTS OF OPERATION

Net Interest Income

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

Net interest income for the three and nine months ended September 30, 2012 was $117.9 million and $355.6 million, respectively, compared to $119.4 million and $358.7 million for the three and nine month ended September 30, 2011. For the purpose of this remaining discussion, net interest income is presented on an FTE basis, to make tax-exempt loans and investment securities comparable to other taxable products. That is, interest on tax-exempt investment securities and loans has been restated as if such interest were taxed at the statutory Federal income tax rate of 35%, adjusted for the non-deductible portion of interest expense incurred to acquire the tax-free assets. Net interest income presented on an FTE basis is a non-GAAP financial measure which Management believes to be the preferred industry measurement of net interest income and enhances comparability of net interest income arising from taxable and tax-exempt sources. In addition, Management believes this metric assists investors in understanding management’s view of particular financial measures, as well as aligns presentation of these financial measures with peers in the industry who may also provide a similar presentation. The FTE adjustment was $2.9 million and $2.4 million for the three months ending September 30, 2012 and 2011, respectively, and $8.3 million and $7.1 million for the nine months ended September 30, 2012 and September 30, 2011, respectively.

FTE net interest income for the three and nine month periods ended September 30, 2012 was $120.7 million and $363.9 million, respectively, compared to $121.8 million and $365.7 million for the three and nine months ended September 30, 2011, respectively.

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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.

RATE/VOLUME ANALYSIS	Three Months Ended September 30, 2012 and 2011									Nine Months Ended September 30, 2012 and 2011
	Increases (Decreases)									Increases (Decreases)
(Dollars in thousands)	Volume			Rate			Total			Volume			Rate			Total
INTEREST INCOME - FTE
Investment securities and federal funds sold:
Taxable	$	(1,745	)	$	430		$	(1,315	)	$	(739	)	$	(37	)	$	(776	)
Tax-exempt	2,973			(1,916		)	1,057			5,813			(3,072		)	2,741
Loans held for sale	(10		)	(34		)	(44		)	80			(98		)	(18		)
Loans	2,607			(7,923		)	(5,316		)	6,045			(27,480		)	(21,435		)
Total interest income - FTE	3,825			(9,443		)	(5,618		)	11,199			(30,687		)	(19,488		)
INTEREST EXPENSE
Interest on deposits:
Interest-bearing	38			(13		)	25			142			5			147
Savings and money market accounts	364			(2,127		)	(1,763		)	1,888			(8,758		)	(6,870		)
Certificates of deposits and other time deposits	(1,081		)	(546		)	(1,627		)	(4,713		)	(2,654		)	(7,367		)
Securities sold under agreements to repurchase	60			(727		)	(667		)	139			(2,117		)	(1,978		)
Wholesale borrowings	(852		)	313			(539		)	(2,533		)	969			(1,564		)
Total interest expense	(1,471		)	(3,100		)	(4,571		)	(5,077		)	(12,555		)	(17,632		)
Net interest income - FTE	$	5,296		$	(6,343	)	$	(1,047	)	$	16,276		$	(18,132	)	$	(1,856	)

The net interest margin is calculated by dividing net interest income FTE by average earning assets. As with net interest income, the net interest margin is affected by the level and mix of earning assets, the proportion of earning assets funded by non-interest bearing liabilities, and the interest rate spread. In addition, the net interest margin is impacted by changes in federal income tax rates and regulations as they affect the tax-equivalent adjustment. The following table provides 2012 FTE net interest income and net interest margin totals as well as 2011 comparative amounts:

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2012			2011			2012			2011
Net interest income	$	117,890		$	119,392		$	355,600		$	358,659
Tax equivalent adjustment	2,851			2,396			8,258			7,055
Net interest income - FTE	$	120,741		$	121,788		$	363,858		$	365,714
Average earning assets	$	13,119,473		$	12,878,105		$	13,014,267		$	12,722,271
Net interest margin - FTE	3.66		%	3.75		%	3.73		%	3.84		%

The average yield on earning assets decreased from 4.19% in the quarter ended September 30, 2011 to 3.95% in the quarter ended September 30, 2012. Higher outstanding balances on total average earning assets in the quarter ended September 30, 2012 did not mitigate the decrease in average yield, which caused interest income to decrease $5.6 million from year-ago levels. Average balances for investment securities were up from the third quarter of 2011, increasing interest income by $1.2 million, and lower rates earned on the securities decreased interest income by $1.5 million. Average loans outstanding, up from the third quarter of 2011, increased interest income from the quarter ended September 30, 2011 by $2.6 million and lower yields earned on the loans, decreased loan interest income in the quarter ended September 30, 2012 by $7.9 million. Higher outstanding balances on average deposits and lower rates paid on deposits caused interest expense to decrease $3.4 million in the quarter ended September 30, 2012. Lower average outstanding balances on wholesale debt

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and lower rates paid caused interest expense to decrease by $0.5 million in the quarter ended September 30, 2012.

The cost of funds for the year as a percentage of average earning assets decreased 18 basis points from 0.11% for the quarter ended September 30, 2011 to 0.07% for the quarter ended September 30, 2012. The drop in interest rates was the primary factor driving this decrease.

Other Income

Excluding investment gains, other income for the three and nine months ended September 30, 2012 totaled $54.4 million and $160.6 million, respectively, compared with $56.4 million and $159.7 million in the same periods of 2011. The latter represents a decrease of $2.0 million or 3.54% in the third quarter of 2012 and an increase of $0.9 million or 0.54% in the first nine months of 2012. Other income as a percentage of net revenue (FTE net interest income plus other income, less security gains from securities) was 31.05% and 30.62% for the three and nine months ended September 30, 2012, respectively, compared to 31.64% and 30.40% in the same periods of 2011. Explanations for the most significant changes in the components of other income are discussed immediately after the following table.

	Three Months Ended				Nine Months Ended
(In thousands)	September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
Trust department income	$	6,124	$	5,607	$	17,481	$	16,983
Service charges on deposits	14,603		17,838		43,490		48,460
Credit card fees	11,006		13,640		32,402		39,357
ATM and other service fees	3,680		3,801		11,360		9,781
Bank owned life insurance income	3,094		3,182		9,073		11,439
Investment services and life insurance	2,208		1,965		6,843		6,384
Investment securities gains, net	553		4,402		1,361		5,291
Loan sales and servicing income	7,255		3,426		19,085		9,102
Other operating income	6,402		6,911		20,857		18,222
Total other income	$	54,925	$	60,772	$	161,952	$	165,019

Service charges on deposits decreased$3.2 million and $5.0 million in the three and nine months ended September 30, 2012, respectively, compared to the same periods of 2011, as a result of regulatory revisions to overdraft fee policies that took effect in the fourth quarter of 2011. Credit card fees decreased$2.6 million and $7.0 million in the three and nine months ended September 30, 2012, respectively, compared to the same periods of 2011 as a result of the implementation of the Durbin Interchange Amendment in the fourth quarter of 2011. Loan sales and servicing income increased $3.8 million, or 111.76%, in the third quarter of 2012 and $10.0 million, or 109.68%, in the first nine months of 2012 due to an increase in mortgage loan originations and refinancing activity as a result of lower interest rates in 2012, partially offset by impairment charges of mortgage servicing rights in 2012.

Other Expenses

Other expenses totaled $108.6 million and $341.4 million for the three and nine months ended September 30, 2012, respectively, compared with $116.0 million and $340.5 million the same periods of 2011. The latter represents an increase of $7.4 millionand $1.0 million in the three and nine months ended September 30, 2012, respectively, compared with the same periods of 2011.

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The following table compares the components of other expenses for the three and nine months ended September 30, 2012 and 2011.

	Three Months Ended				Nine Months Ended
	September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
Salaries, wages, pension and employee benefits	$	58,061	$	61,232	$	183,632	$	177,815
Net occupancy expense	8,077		8,464		24,640		25,144
Equipment expense	7,143		7,073		21,845		20,725
Taxes, other than federal income taxes	2,051		1,507		6,025		4,389
Stationery, supplies and postage	2,210		2,517		6,638		7,972
Bankcard, loan processing, and other costs	8,424		8,449		24,935		24,278
Advertising	2,472		2,391		6,436		7,061
Professional services	4,702		5,732		17,361		17,466
Telephone	1,316		1,570		4,094		4,518
Amortization of intangibles	456		543		1,422		1,629
FDIC expense	1,832		3,240		9,015		12,187
Other operating expense	11,843		13,239		35,389		37,286
Total other expense	$	108,587	$	115,957	$	341,432	$	340,470

During the second quarter ended June 30, 2012, management announced its implementation plan to enhance the operating efficiency and profitability of the Corporation and as a result recognized $8.9 million in one-time charges primarily consisting of employee separation costs and professional services fees. Of the total one-time charges, $3.3 million was related to employee separation costs and $5.2 million was related to professional services fees. Other one-time charges incurred in the third quarter of 2012 included $0.5 million associated with costs of closing eight full service branches and $1.1 million of professional and legal fees associated with the proposed acquisition of Citizens. For further information on these one-time charges, refer to Note 2 (Restructuring).

The efficiency ratio for the third quarter 2012 was 61.75%, compared to 64.78% during the same period in 2011. The efficiency ratio indicates the percentage of operating costs that are used to generate each dollar of net revenue - that is, during the third quarter 2012, 61.75 cents was spent to generate each $1 of net revenue. Net revenue is defined as net interest income, on a tax-equivalent basis, plus other income less gains from the sales of securities.

Income Taxes

Income tax expense was $13.1 million (an effective tax rate of 27.26%) and $13.1 million (an effective tax rate of 29.21%) for the quarter ended September 30, 2012 and 2011, respectively, and $37.8 million (an effective tax rate of 28.28%) and $34.8 million (an effective tax rate of 28.10%) for the nine months ended September 30, 2012 and 2011, respectively.

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 9 (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 as of and for the three and nine months endedSeptember 30, 2012 and 2011:

	Commercial				Retail				Wealth						Other						FirstMerit Consolidated
September 30, 2012	QTD		YTD		QTD		YTD		QTD			YTD			QTD			YTD			QTD		YTD
OPERATIONS:
Net interest income (loss) - FTE	$	66,446	$	196,729	$	51,181	$	158,745	$	4,223		$	13,412		$	(1,109	)	$	(5,028	)	$	120,741	$	363,858
Provision for loan losses	10,401		22,970		1,194		5,459		(519		)	(318		)	5,103			14,325			16,179		42,436
Other income	15,247		47,603		26,783		76,226		8,528			24,987			4,367			13,136			54,925		161,952
Other expenses	39,595		123,074		53,788		169,618		9,711			29,718			5,493			19,022			108,587		341,432
Net income (loss)	20,954		64,920		14,939		38,931		2,313			5,849			(3,253		)	(13,818		)	34,953		95,882
AVERAGES :
Assets	$	6,466,355	$	6,386,617	$	2,960,336	$	2,929,911	$	242,539		$	238,899		$	5,064,786		$	5,041,099		$	14,734,016	$	14,596,526
Loans (noncovered and covered)	6,424,591		6,355,908		2,683,439		2,653,490		228,973			225,349			65,215			61,119			9,402,218		9,295,866
Earnings assets	6,529,888		6,454,874		2,716,445		2,686,854		228,998			225,375			3,644,142			3,647,164			13,119,473		13,014,267
Deposits	3,391,783		3,245,210		7,357,534		7,450,182		706,616			703,724			135,998			140,819			11,591,931		11,539,935
Economic Capital	395,725		391,731		215,412		213,227		49,781			49,138			955,651			944,891			1,616,569		1,598,987

	Commercial				Retail				Wealth				Other						FirstMerit Consolidated
September 30, 2011	QTD		YTD		QTD		YTD		QTD		YTD		QTD			YTD			QTD		YTD
OPERATIONS:
Net interest income (loss) - FTE	$	66,674	$	200,154	$	56,705	$	168,718	$	4,568	$	14,205	$	(6,159	)	$	(17,363	)	$	121,788	$	365,714
Provision for loan losses	4,546		29,653		5,249		17,715		1,261		2,587		8,316			9,385			19,372		59,340
Other income	16,219		43,632		28,333		78,309		7,784		24,066		8,436			19,012			60,772		165,019
Other expenses	36,745		110,073		57,567		177,201		10,004		30,363		11,641			22,833			115,957		340,470
Net income (loss)	27,674		69,392		14,448		33,876		708		3,455		(11,093		)	(17,663		)	31,737		89,060
AVERAGES :
Assets	$	6,258,625	$	6,162,742	$	2,925,345	$	2,937,888	$	237,638	$	240,919	$	5,189,020		$	5,110,001		$	14,610,628	$	14,451,550
Loans (noncovered and covered)	6,247,841		6,164,243		2,644,160		2,667,285		224,077		227,851		61,409			67,217			9,177,487		9,126,596
Earnings assets	6,333,506		6,240,618		2,677,173		2,723,413		224,077		227,850		3,643,349			3,530,390			12,878,105		12,722,271
Deposits	3,131,268		2,982,536		7,463,753		7,531,653		628,028		640,232		224,633			256,716			11,447,682		11,411,137
Economic Capital	368,948		368,901		220,946		222,097		44,320		50,574		936,197			898,791			1,570,411		1,540,363

On a quarterly basis, the commercial segment's net income decreased $5.8 million from September 30, 2011 to $21.0 million for the quarter ended September 30, 2012. FTE adjusted net interest income totaled $66.4 million for the quarter ended September 30, 2012 compared to $66.7 million for the quarter ended September 30, 2011, a decrease of $0.3 million, or 0.50% The decrease was primarily attributable to a $428.2 million decrease in covered loan balances acquired via FDIC-assisted acquisitions, offset by $605.0 million increase in noncovered loans. Provision for credit losses for the commercial segment totaled $10.4 million for the quarter ended September 30, 2012 compared to $4.5 million for the quarter ended September 30, 2011, an increase of $5.9 million. The increase in the provision for loan losses reflected the timing of reserves associated with of a few larger credits in the Commercial Bank. On a year-to-date basis, however, provision is down from the same period in 2011. Non-interest income was $15.2 million for the quarter ended September 30, 2012 compared to $16.2 million for the same period in 2011. The decrease was primarily attributable to lower gains recognized from covered loans paid in full, offset partially by higher syndication fees, swap fees, merchant fees and letter of credit fees. Non-interest expense for the commercial segment was $39.6 million for the quarter ended September 30, 2012 compared to $36.7 million for the quarter ended September 30, 2011. The increase in expenses was primarily attributable to a change in the FDIC assessment calculation from using deposit

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balances to risk-weighted assets. Additionally, expenses are higher due to the build-out of specialized banking capabilities, including leasing, asset based lending, capital markets, and treasury management.

On a quarterly basis, the retail segment's net income decreased $0.3 million for the quarter ended September 30, 2012 to $15.0 million for the quarter ended September 30, 2011. FTE adjusted net interest income totaled $51.2 million for the quarter ended September 30, 2012 compared to $56.7 million for the quarter ended September 30, 2011, a decrease of $5.5 million, or 9.74%. The decrease was primarily attributable to a $49.3 million decrease in covered loan balances. Additionally, deposit spreads decreased 23 basis points due to a lower internal credit applied to deposits, which was driven by lower market rates. Deposit balances decreased $106.2 million from the third quarter of 2011. The retail segment shifted deposit mix from higher cost time deposits to lower cost core deposits. Provision for credit losses totaled $1.2 million for the quarter ended September 30, 2012 compared to $5.2 million for the quarter ended September 30, 2011, a decrease of $4.1 million, or 77.25%. The decrease in the provision for loan losses reflected the results of focused efforts to improve asset quality and portfolio credit metrics. Net charge-offs declined $0.3 million to $4.8 million for the quarter ended September 30, 2012. Non-interest income was $26.8 million for the quarter ended September 30, 2012 compared to $28.3 million for the quarter ended September 30, 2011, a decrease of $1.6 million, or 5.47%. The decrease was primarily attributable to the effects of new regulations on charges for non-sufficient funds and overdrafts, as well as the effects of the Durbin Interchange Amendment on interchange fees, offset partially by strong mortgage fee income. Non-interest expense was $53.8 million for the quarter ended September 30, 2012 compared to $57.6 million for the quarter ended September 30, 2011. The decrease in expenses was primarily attributable to lower FTEs associated with the Efficiency Initiative announced in the second quarter, as well as the change in the FDIC assessment calculation from using deposit balances to risk-weighted assets.

On a quarterly basis, the wealth segment's net income of $2.3 million for the quarter ended September 30, 2012 increased $1.6 million from the quarter ended September 30, 2011. The increase was attributable to lower provision for loan losses. Additionally, non-interest income of $8.5 million is $0.7 million, or 9.56%, higher than the quarter ended September 30, 2011 due to growth in both trust fees and brokerage revenue. Deposits have grown $78.6 million to $706.6 million as of September 30, 2012. Non-interest expense was $9.7 million for the quarter ended September 30, 2012 compared to $10.0 for the quarter ended September 30, 2011.

Activities that are not directly attributable to one of the primary lines of business are included in the other segment. Included in this category are the parent company, community development operations, treasury operations, including the securities portfolio, wholesale funding and asset liability management activities, inter-company eliminations, and the economic impact of certain assets, capital and support functions not specifically identifiable with the three primary lines of business. The Other segment recorded a net loss of $3.3 million for the quarter ended September 30, 2012, which was $ 7.8 million lower than for the quarter ended September 30, 2011. The decrease in losses was primarily attributable to lower expenses driven by Management's efficiency initiative coupled with lower other real estate expenses. Additionally, net interest income was higher due to the rate compression impact on internal funds transfer pricing.

On a year-to-date basis, the commercial segment's net income increased $1.7 million from September 30, 2011 to $65.1 million for the nine months ended September 30, 2012. FTE adjusted net interest income totaled $196.7 million for the nine months ended September 30, 2012 compared to $200.2 million for the quarter ended September 30, 2011, a decrease of $3.5 million, or 1.7% The decrease was primarily attributable to a $426.0 million decrease in covered loan balances, offset by the $617.7 million increase in noncovered loan balances. Additionally deposit spreads decreased, offsetting strong growth in deposit balances, which grew $262.7 million to $3.2 billion. Provision for credit losses for the commercial segment totaled $23.0 million for the nine months ended September 30, 2012 compared to $29.7 million for the nine months ended September 30,

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2011, a decrease of $6.7 million, or 22.54%. The decrease in the provision for loan losses reflected the results of Management's focused efforts to improve asset quality and portfolio credit metrics. Net charge-offs declined $3.8 million to $19.3 million for the nine months ended September 30, 2012. The remaining provision covered the substantial loan growth. Non-interest income was $47.6 million for the nine months ended September 30, 2012 compared to $43.6 million for the same period in 2011. The increase was primarily attributable to higher syndication fees, swap fees, merchant fees and letter of credit fees, offset partially by lower gains from the sale of covered loans. Non-interest expense for the commercial segment was $123.1 million for the nine months ended September 30, 2012 compared to $110.1 million for the nine months ended September 30, 2011. The increase in expenses was primarily attributable to the build-out of specialized banking capabilities, including leasing, asset based lending, capital markets, and treasury management.

On a year-to-date basis, the retail segment's net income increased $2.8 million for the nine months ended September 30, 2012 to $38.9 million for the nine months ended September 30, 2011. FTE adjusted net interest income totaled $158.7 million for the nine months ended September 30, 2012 compared to $168.8 million for the nine months ended September 30, 2011, a decrease of $10.0 million, or 5.9%. The decrease was primarily attributable to a $49.1 million decrease in covered loan balances. Additionally, deposit spreads decreased eleven basis points due to a lower internal credit applied to deposits, which was driven by lower market rates. Deposit balances decreased $81.5 million with the year-to-date average in 2011. The retail segment shifted deposit mix from higher cost time deposits to lower cost core deposits. Provision for credit losses totaled $5.5 million for the nine months ended September 30, 2012 compared to $17.7 million for the nine months ended September 30, 2011, a decrease of $12.3 million, or 69.18%. The decrease in the provision for loan losses reflected the results of focused efforts to improve asset quality and portfolio credit metrics. Net charge-offs declined $6.7 million to $14.1 million for the nine months ended September 30, 2012. Non-interest income was $76.2 million for the nine months ended September 30, 2012 compared to $78.3 million for the nine months ended September 30, 2011, a decrease of $2.1 million, or 2.66%. The decrease was primarily attributable to the effects of new regulations on charges for non-sufficient funds and overdrafts, as well as the effects of the Durbin Interchange Amendment on interchange fees, offset partially by strong mortgage fee income. Non-interest expense was $169.6 million for the nine months ended September 30, 2012 compared to $177.2 million for the nine months ended September 30, 2011. The decrease in expenses was primarily attributable to the change in FDIC assessment methodology. The internal allocations were shifted from allocating based upon deposits to an allocation based upon risk-weighted assets.

On a year-to-date basis, the wealth segment's net income of $5.5 million for the nine months ended September 30, 2012 increased $2.1 million from the nine months ended September 30, 2011. The increase was attributable to lower provision for loan losses. Deposits have grown $63.5 million to $703.7 million as of September 30, 2012. Non-interest expense was $29.7 million for the nine months ended September 30, 2012 compared to $30.4 million for the nine-months ended September 30, 2011.

The other segment recorded a net loss of $5.0 million for the nine months ended September 30, 2012, which was better than prior year's net loss of $17.6 million.  The decrease in losses was primarily attributable to lower expenses driven by Management's efficiency initiative.   Additionally, net interest income was higher due to the rate compression impact on internal funds transfer pricing.

FINANCIAL CONDITION

Acquisitions

Citizens Republic Bancorp, Inc.- Merger Agreement

On September 12, 2012, the Corporation and Citizens, a Michigan corporation, entered into a Merger Agreement.

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The Merger Agreement provides that Citizens will merge with and into the Corporation and each share of Citizens common stock will be canceled and converted into the right to receive 1.37 shares of the Corporation's common stock (except that any shares of Citizens common stock that are owned by Citizens, the Corporation or any of their respective subsidiaries, other than in a fiduciary capacity, will be canceled without any consideration therefor). Each outstanding option to acquire, and each outstanding equity award relating to, one share of Citizens common stock will be converted into an option to acquire, or an equity award relating to, 1.37 shares of the Corporation common stock, as applicable. As a result of the Merger, the former shareholders of Citizens will become shareholders of the Corporation. At the effective time of the Merger, the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of Citizens issued to the United States Treasury as part of the Troubled Assets Relief Program will be canceled and converted into the right to receive cash in the aggregate amount equal to the liquidation preference of the TARP Preferred plus all accrued, accumulated and unpaid dividends thereon.

The Merger Agreement provides that upon completion of the Merger, the Corporation will increase its board of directors by two directors. The new directorships will be filled with current members of the Citizens board as recommended by the Citizens board, and the recommended directors must be reasonably acceptable to the Corporation’s board.

The Corporation and Citizens have each made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants to conduct their businesses in the ordinary course between the execution of the Merger Agreement and the completion of the Merger and covenants not to engage in certain kinds of transactions during that period.

Consummation of the Merger is subject to customary conditions, including, among others, (i) approval of the stockholders of each of the Corporation and Citizens, (ii) absence of any material adverse effect, (iii) absence of any order or injunction prohibiting the consummation of the Merger, (iv) the registration statement of the Corporation filed on Form S-4 having become effective, (v) shares of the Corporation's common stock to be issued in connection with the Merger having been approved for listing on the Nasdaq Stock Market, (vi) subject to certain exceptions, the accuracy of representations and warranties with respect to the Corporation's and Citizens’ business, as applicable, (vii) compliance with the Corporation’s and Citizens’ respective covenants, (viii) receipt of customary tax opinions, (ix) receipt of all required regulatory approvals from, among others, various banking regulators and the United States Treasury, and (x) no materially adverse condition or restriction is included in any such regulatory approval.

The Merger Agreement contains certain termination rights for both FirstMerit and Citizens, and further provides that, upon termination of the Merger Agreement under specified circumstances, a party would be required to pay to the other party a termination fee of $37.5 million and the other party’s fees and expenses.

The Merger Agreement has been filed as an exhibit to this report to provide security holders with information regarding its terms. It is not intended to provide any other factual information about the Corporation, Citizens or their respective subsidiaries and affiliates. The Merger Agreement contains representations and warranties by each of the parties to the Merger Agreement. These representations and warranties were made solely for the benefit of the other party to the Merger Agreement and (a) are not intended to be treated as categorical statements of fact, but rather as a way of allocating risk to one of the parties if those statements prove to be inaccurate, (b) may have been qualified in the Merger Agreement by confidential disclosure schedules that were delivered to the other party in connection with the signing of the Merger Agreement, which disclosure schedules contain information that modifies, qualifies and creates exceptions to the representations, warranties and covenants set forth in the Merger Agreement, (c) may be subject to standards of materiality applicable to the parties that differ from what might be viewed as material to stockholders and (d)

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were made only as of the date of the Merger Agreement or such other date or dates as may be specified in the Merger Agreement. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in public disclosures by the Corporation or Citizens. Accordingly, the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of the Corporation or Citizens should not be relied upon.

Midwest Bank and Trust Company – FDIC Assisted Acquisition

On May 14, 2010, the Bank entered into a purchase and assumption agreement with a loss share arrangement with the FDIC, as receiver of Midwest, to acquire substantially all of the loans and certain other assets and assume substantially all of the deposits and certain liabilities in a whole-bank acquisition of Midwest, a full-service commercial bank located in the greater Chicago, Illinois area. The Bank made a cash payment to the FDIC of approximately $227.5 million to assume the net assets. The estimated fair value of the liabilities assumed and cash payment made to the FDIC exceeded the revised fair value of assets acquired, resulting in recognition of goodwill of $272.1 million.

The acquisitions of First Bank, George Washington and Midwest were considered business combinations and all acquired assets and liabilities were recorded at their estimated fair value. The one-year measurement period for the three acquisitions expired before June 30, 2011. Material adjustments to acquisition date estimated fair values were recorded in the period in which the acquisition occurred and, as a result, previously reported results are subject to change. Certain reclassifications of prior periods’ amounts may also be made to conform to the current period’s presentation and would have no effect on previously reported net income amounts.

George Washington Savings Bank – FDIC Assisted Acquisition

On February 19, 2010, the Bank entered into a purchase and assumption agreement with a loss share arrangement with the FDIC, as receiver of George Washington to acquire certain assets and assume substantially all of the deposits and certain liabilities in a whole-bank acquisition of George Washington, a full service Illinois-chartered savings bank headquartered in Orland Park, Illinois. The Bank received a cash payment from the FDIC of approximately $40.2 million to assume the net liabilities. The estimated fair value of assets acquired, intangible assets and the cash payment received from the FDIC exceeded the estimated fair value of the liabilities assumed, resulting in a bargain purchase gain of $1.0 million, or $0.7 million net of tax.

First Bank Branches

On February 19, 2010, the Bank completed the acquisition of certain assets and the assumption of certain liabilities with respect to 24 branches of First Bank located in the greater Chicago, Illinois area.

Additional information on these three acquisitions can be found in Note 3 (Business Combinations), Note 5 (Loans), Note 7 (Goodwill and Other Intangible Assets) and Note 12 (Fair Value Measurement) in the notes to unaudited consolidated financial statements.

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Investment Securities

At September 30, 2012, total investment securities were $3.7 billion compared to $3.6 billion at December 31, 2011 and $3.5 billion at September 30, 2011. Available-for-sale securities were $2.9 billion at September 30, 2012 compared to $3.4 billion at December 31, 2011 and $3.2 billion atSeptember 30, 2011. The available-for-sale securities are held primarily for liquidity, interest rate risk management and long-term yield enhancement. Accordingly, the Corporation’s investment policy is to invest in securities with low credit risk, such as U.S. Treasury securities, U.S. Government agency obligations, state and political obligations and mortgage-backed securities. Held-to-maturity securities totaled $620.6 million at September 30, 2012 compared to $82.8 million at December 31, 2011 and $92.2 million at September 30, 2011 and consist principally of securities issued by state and political subdivisions.

Available-for-sale securities decreased $441.6 million and $286.1 million from December 31, 2011 and September 30, 2011, respectively, while held-to-maturity securities increased $537.9 million and $528.4 million from December 31, 2011 and September 30, 2011, respectively. This movement in the investment portfolio was in response to potential future changes in regulatory capital rules.

Other investments totaled $140.7 million at September 30, 2012 and December 31, 2011 compared to $160.8 million at September 30, 2011 and consisted primarily of FHLB and FRB stock. The Corporation redeemed $20.3 million in FHLB Chicago stock in the quarter ended December 31, 2011.

During the nine months endedSeptember 30, 2012 and September 30, 2011, net realized gains of $1.4 million and $5.3 million, respectively, from the sale of available-for-sale securities were recorded. Net unrealized gains were $84.2 million, $82.7 million and $86.4 million at September 30, 2012, December 31, 2011, and September 30, 2011, respectively. The improvement in the fair value of the investment securities is driven by government agency securities held in portfolio.

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

Gross unrealized losses of $14.4 million as of September 30, 2012, compared to $17.8 million as of December 31, 2011 and $15.5 million at September 30, 2011 were concentrated within trust preferred securities held in the investment portfolio. The Corporation holds eight, single issuer, trust preferred securities. Such investments are less than 2% of the fair value of the entire investment portfolio. None of the bank issuers have deferred paying dividends on their issued trust preferred shares in which the Corporation is invested. The fair values of these investments have been impacted by market conditions, which have caused risk premiums to increase resulting in the decline in the fair value of the Corporation’s trust preferred securities.

Further detail of the composition of the securities portfolio and discussion of the results of the most recent OTTI assessment are in Note 4 (Investment Securities) to the unaudited consolidated financial statements.

Loans

Loans acquired under loss share agreements with the FDIC include the amounts of expected reimbursements from the FDIC under these agreements and are presented as “covered loans” below. Loans not

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

Total noncovered loans increased from December 31, 2011 by $567.5 million, or 7.32% and increased from September 30, 2011 by $684.8 million, or 8.97%. This increase was driven primarily by higher commercial loans which increased 7.91% from December 31, 2011 and 9.82% from September 30, 2011 due to the Corporation's expansion into the Chicago, Illinois area. This growth was also attributable to increases in asset-based lending as well as new business within the capital markets and healthcare lines of business. While the Corporation is adding new commercial loans in both its core Ohio and newer Chicago, Illinois markets, low credit line utilization by existing customers is mitigating new loan production with respect to the overall portfolio balances.

Residential mortgage loans are originated and then sold into the secondary market or held in portfolio. Low interest rates contributed to an increase in mortgage loan originations, particularly refinancing activity. Total residential mortgage loan balances increased $25.4 million, or 6.14%, from December 31, 2011 and $41.8 million, or 10.51%, from September 30, 2011as a larger amount of shorter maturity and adjustable rate mortgages were held in portfolio than in previous periods.

Installment loans decreased $57.4 million, or 4.54%, from December 31, 2011 and $49.8 million, or 3.91%, from September 30, 2011 reflecting continued consumer loans pay downs. Credit card loans decreased $2.4 million, or 1.67%, from December 31, 2011 and $1.2 million, or 0.85%, from September 30, 2011.

Total covered loans, including the loss share receivable, decreased from December 31, 2011 by $322.2 million, or 21.52%, and decreased from September 30, 2011 by $472.3 million, or 28.67%. The covered loan portfolio will continue to decline, through payoffs, charge-offs, termination or expiration of loss share coverage, unless the Corporation acquires additional loans subject to loss share agreements in the future.

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

	September 30, 2012			December 31, 2011			September 30, 2011
(dollars in thousands)
Commercial	$	5,511,678		$	5,107,747		$	5,018,857
Residential mortgage	439,062			413,664			397,309
Installment	1,321,081			1,263,665			1,271,327
Home equity	789,743			743,982			743,377
Credit card	143,918			146,356			142,710
Leases	110,938			73,530			57,992
Total noncovered loans (a)	8,316,420			7,748,944			7,631,572
Allowance for noncovered loan losses	(98,942		)	(107,699		)	(109,187		)
Net noncovered loans	8,217,478			7,641,245			7,522,385
Covered loans (b)	1,174,929			1,497,140			1,647,218
Allowance for covered loan losses	(43,644		)	(36,417		)	(34,603		)
Net covered loans	1,131,285			1,460,723			1,612,615
Net loans	$	9,348,763		$	9,101,968		$	9,135,000

(a) Includes acquired, noncovered loans of $56.0 million, $113.2 million and $178.0 million as of September 30, 2012, December 31, 2011 and September 30, 2011, respectively.

(b) Includes loss share receivable of $131.9 million, $205.7 million and $220.5 million as of September 30, 2012, December 31, 2011 and September 30, 2011, respectively.

The Corporation has approximately $3.3 billion of loans secured by real estate. Approximately 85.52% of the property underlying these loans is located within the Corporation’s primary market area of Ohio, Western Pennsylvania, and Chicago, Illinois.

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

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

All loans acquired in the First Bank acquisition were performing as of the date of acquisition and,

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therefore, the difference between the fair value and the outstanding balance of these loans is being accreted to interest income over the remaining term of the loans.

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

Allowance for Loan Losses and Reserve for Unfunded Commitments

The Corporation maintains what Management believes is an adequate allowance for loan losses. The Corporation and the Bank regularly analyze the adequacy of this 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. Notes 1 (Summary of Significant Accounting Policies) and 4 (Loans and Allowance for Loan Losses) to the consolidated financial statements in the 2011 Form 10-K provide detailed information regarding the Corporation’s credit policies and practices.

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

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

Acquired loans are recorded at acquisition date at their acquisition date fair values and, therefore, are excluded from the calculation of loan loss reserves as of the acquisition date. To the extent there is a decrease in the present value of cash flows from Acquired Impaired Loans after the date of acquisition, the Corporation records an allowance for loan losses, net of expected reimbursement under any loss share agreements. These expected reimbursements are recorded as part of covered loans in the accompanying consolidated balance sheets. During the quarter ended September 30, 2012, the Corporation increased its allowance for covered loan losses to $43.6 million to reserve for estimated additional losses on certain Acquired Impaired Loans. The increase in the allowance was recorded by a charge to the provision for covered loan losses of $7.7 million and an increase of $1.5 million in the loss share receivable for the portion of the losses recoverable under the loss share agreements.

For acquired loans that are not deemed impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value. Subsequent to the purchase date, the methods utilized to estimate the required allowance for loan losses for these loans is similar to originated loans; however, the Corporation records a provision for loan losses only when the required

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allowance, net of any expected reimbursement under any loss share agreements, exceeds any remaining credit discounts. The allowance for loan losses on Acquired Non-Impaired Loans was $0.3 million, $0.7 million and $0.6 million as of September 30, 2012, December 31, 2011 and September 30, 2011, respectively, and is included in the allowance for noncovered loan losses on the consolidated balance sheets.

At September 30, 2012, the allowance for loan losses on noncovered loans was $98.9 million, or 1.19% of noncovered loans outstanding, compared to $107.7 million, or 1.39%, at December 31, 2011 and $109.2 million, or 1.43%, as of September 30, 2011. The allowance equaled 196.66% of nonperforming loans at September 30, 2012, compared to 166.64% at December 31, 2011, and 160.80% at September 30, 2011. The additional reserves related to qualitative risk factors totaled $26.0 million, $14.5 million and $14.2 million at September 30, 2012, December 31, 2011 and September 30, 2011, respectively. Nonperforming noncovered loans have decreased by $14.3 million over December 31, 2011 and $17.6 million over September 30, 2011 primarily attributable to the improving economic conditions and extensive loan work out activities.

Net charge-offs on noncovered loans were $14.9 million for the third quarter ended 2012 and $35.6 million for the nine months ended September 30, 2012 compared to $14.6 million and $47.3 million for the same periods in 2011. As a percentage of noncovered average loans outstanding, net charge-offs equaled 0.72% and 0.77% for the quarter ended September 30, 2012 and 2011, respectively, and 0.60% and 0.86% for the nine months ended September 30, 2012 and 2011, respectively. Losses are charged against the allowance for loan losses as soon as they are identified.

The allowance for unfunded lending commitments at September 30, 2012, December 31, 2011 and September 30, 2011 was $5.8 million, $6.4 million and $6.4 million, respectively. Binding unfunded lending commitments include items such as letters of credit, financial guarantees and binding unfunded loan commitments. The allowance for credit losses, which includes both the allowance for loan losses and the reserve for unfunded lending commitments, amounted to $104.7 million, $114.1 million and $115.0 million at September 30, 2012, December 31, 2011 and September 30, 2011, respectively.

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

	Three Months Ended						Nine Months Ended
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
(dollars in thousands)
Allowance for Noncovered Loan Losses
Allowance for loan losses-beginning of period	$	103,849		$	109,187		$	107,699		$	114,690
Provision for loan losses	9,965			14,604			26,860			41,760
(Less) net charge-offs	14,872			14,604			35,617			47,263
Allowance for loan losses-end of period	$	98,942		$	109,187		$	98,942		$	109,187
Reserve for Unfunded Lending Commitments
Balance at beginning of period	$	5,666		$	5,799		$	6,372		$	8,849
Provision for/(relief of) credit losses	94			561			(612		)	(2,489		)
Balance at end of period	5,760			6,360			5,760			6,360
Allowance for credit losses	$	104,702		$	115,547		$	104,702		$	115,547
Annualized net charge-offs as a % of average noncovered loans	0.72		%	0.77		%	0.60		%	0.86		%
Allowance for noncovered loan losses:
As a percentage of period-end noncovered loans	1.19		%	1.43		%	1.19		%	1.43		%
As a percentage of nonperforming noncovered loans	196.66		%	160.80		%	196.66		%	160.80		%
As a multiple of annualized net charge offs	1.67			1.88			2.08			1.73
Allowance for credit losses:
As a percentage of period-end noncovered loans	1.26		%	1.51		%	1.26		%	1.51		%
As a percentage of nonperforming noncovered loans	208.11		%	170.16		%	208.11		%	170.16		%
As a multiple of annualized net charge offs	1.77			1.99			2.20			1.83

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

	At September 30, 2012
	Loan Type
Allowance for Loan Losses Components:	C&I		CRE and Construction		Leases		Installment		Home Equity Lines		Credit  Cards		Residential Mortgages		Total
(In thousands)
Individually Impaired Loan Component:
Loan balance	$	9,994	$	32,549	$	—	$	32,577	$	6,922	$	1,767	$	24,569	$	108,378
Allowance	2,900		2,070		—		1,674		95		106		1,599		8,444
Collective Loan Impairment Components:
Credit risk-graded loans
Grade 1 loan balance	37,327		—		13,785										51,112
Grade 1 allowance	16		—		6										22
Grade 2 loan balance	105,504		3,170		190										108,864
Grade 2 allowance	96		5		—										101
Grade 3 loan balance	573,561		297,329		8,857										879,747
Grade 3 allowance	749		939		16										1,704
Grade 4 loan balance	2,215,334		2,012,160		87,259										4,314,753
Grade 4 allowance	23,035		15,991		430										39,456
Grade 5 (Special Mention) loan balance	60,803		56,802		514										118,119
Grade 5 allowance	3,068		2,441		20										5,529
Grade 6 (Substandard) loan balance	46,706		60,437		333										107,476
Grade 6 allowance	9,295		8,536		34										17,865
Grade 7 (Doubtful) loan balance	—		—		—										—
Grade 7 allowance	—		—		—										—
Consumer loans based on payment status:
Current loan balances							1,272,397		779,494		139,909		397,628		2,589,428
Current loans allowance							7,657		3,496		4,916		2,364		18,433
30 days past due loan balance							8,234		1,683		957		10,672		21,546
30 days past due allowance							664		310		589		473		2,036
60 days past due loan balance							3,193		462		506		2,159		6,320
60 days past due allowance							675		189		530		410		1,804
90+ days past due loan balance							4,681		1,181		780		4,035		10,677
90+ days past due allowance							1,165		795		1,094		494		3,548
Total loans	$	3,049,229	$	2,462,447	$	110,938	$	1,321,082	$	789,742	$	143,919	$	439,063	$	8,316,420
Total Allowance for Loan Losses	$	39,159	$	29,982	$	506	$	11,835	$	4,885	$	7,235	$	5,340	$	98,942

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	At December 31, 2011
	Loan Type
Allowance for Loan Losses Components:	C&I		CRE and Construction		Leases		Installment		Home Equity Lines		Credit  Cards		Residential Mortgages		Total
(In thousands)
Individually Impaired Loan Component:
Loan balance	$	8,269	$	45,407	$	—	$	33,571	$	4,763	$	2,202	$	17,398	$	111,610
Allowance	2,497		1,698		—		1,382		31		108		1,364		7,080
Collective Loan Impairment Components:
Credit risk-graded loans
Grade 1 loan balance	37,607		—		10,636										48,243
Grade 1 allowance	15		—		6										21
Grade 2 loan balance	122,124		4,833		—										126,957
Grade 2 allowance	117		12		—										129
Grade 3 loan balance	479,119		268,005		5,868										752,992
Grade 3 allowance	756		1,015		9										1,780
Grade 4 loan balance	1,999,707		1,844,851		57,026										3,901,584
Grade 4 allowance	17,643		16,968		326										34,937
Grade 5 (Special Mention) loan balance	50,789		63,525		—										114,314
Grade 5 allowance	2,226		2,841		—										5,067
Grade 6 (Substandard) loan balance	77,861		105,387		—										183,248
Grade 6 allowance	9,109		14,496		—										23,605
Grade 7 (Doubtful) loan balance	—		263		—										263
Grade 7 allowance	—		—		—										—
Consumer loans based on payment status:
Current loan balances							1,210,007		734,505		141,338		372,710		2,458,560
Current loans allowance							12,286		4,619		5,158		3,045		25,108
30 days past due loan balance							11,531		2,694		1,090		11,778		27,093
30 days past due allowance							1,333		623		529		498		2,983
60 days past due loan balance							3,388		778		707		2,059		6,932
60 days past due allowance							1,104		442		530		315		2,391
90+ days past due loan balance							5,168		1,242		1,019		9,719		17,148
90+ days past due allowance							1,876		1,051		1,044		627		4,598
Total loans	$	2,775,476	$	2,332,271	$	73,530	$	1,263,665	$	743,982	$	146,356	$	413,664	$	7,748,944
Total Allowance for Loan Losses	$	32,363	$	37,030	$	341	$	17,981	$	6,766	$	7,369	$	5,849	$	107,699

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	September 30, 2011
	Loan Type
Allowance for Loan Losses Components:	C&I		CRE and Construction		Leases		Installment		Home Equity Lines		Credit Cards		Residential Mortgages		Total
(In thousands)
Individually Impaired Loan Component:
Loan balance	$	4,271	$	51,077	$	—	$	34,654	$	4,413	$	2,356	$	16,316	$	113,087
Allowance	256		3,328		—		1,568		52		121		1,346		6,671
Collective Loan Impairment Components:
Credit risk-graded loans
Grade 1 loan balance	48,173		12,728		—										60,901
Grade 1 allowance	15		—		4										19
Grade 2 loan balance	100,058		4,463		—										104,521
Grade 2 allowance	116		12		—										128
Grade 3 loan balance	487,020		265,791		4,219										757,030
Grade 3 allowance	871		1,155		7										2,033
Grade 4 loan balance	1,973,312		1,796,912		53,771										3,823,995
Grade 4 allowance	20,482		17,728		314										38,524
Grade 5 (Special Mention) loan balance	49,411		78,198		—										127,609
Grade 5 allowance	3,153		3,826		—										6,979
Grade 6 (Substandard) loan balance	40,013		106,762		2										146,777
Grade 6 allowance	5,445		14,067		—										19,512
Grade 7 (Doubtful) loan balance	—		668		—										668
Grade 7 allowance	—		—		—										—
Consumer loans based on payment status:
Current loan balances							1,220,076		735,364		137,815		363,685		2,456,940
Current loans allowance							13,528		4,496		5,889		3,052		26,965
30 days past due loan balance							7,918		1,994		1,123		9,765		20,800
30 days past due allowance							1,098		542		625		538		2,803
60 days past due loan balance							3,728		721		676		1,751		6,876
60 days past due allowance							1,251		399		544		287		2,481
90+ days past due loan balance							4,951		885		740		5,792		12,368
90+ days past due allowance							878		754		817		623		3,072
Total loans	$	2,702,258	$	2,316,599	$	57,992	$	1,271,327	$	743,377	$	142,710	$	397,309	$	7,631,572
Total Allowance for Loan Losses	$	30,338	$	40,116	$	325	$	18,323	$	6,243	$	7,996	$	5,846	$	109,187

Asset Quality

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

The Corporation’s Credit Policy Division manages credit risk by establishing common credit policies for its subsidiaries, participating in approval of their largest loans, conducting reviews of their loan portfolios, providing them with centralized consumer underwriting, collections and loan operations services, and overseeing their loan workouts. Notes 1 (Summary of Significant Accounting Policies) and 4 (Loans Allowance for Loan Losses) to the consolidated financial statements in the 2011 Form 10-K provide detailed information regarding the Corporation’s credit policies and practices.

The Corporation’s objective is to minimize losses from its commercial lending activities and to maintain consumer losses at acceptable levels that are stable and consistent with growth and profitability objectives.

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Nonperforming Loans are defined as follows:

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

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

Nonperforming Assets are defined as follows:

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

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

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

(Dollars in thousands)	September 30, 2012			December 31, 2011			September 30, 2011
Nonperforming noncovered loans:
Restructured nonaccrual noncovered loans:
Commercial loans	$	5,218		$	8,311		$	4,940
Consumer loans	14,106			3,465			2,433
Total restructured loans	19,324			11,776			7,373
Other nonaccrual noncovered loans:
Commercial loans	26,274			47,504			54,992
Consumer loans	4,713			5,351			5,538
Total nonaccrual loans	30,987			52,855			60,530
Total nonperforming noncovered loans	50,311			64,631			67,903
Other noncovered real estate	13,744			16,463			22,172
Total nonperforming noncovered assets	$	64,055		$	81,094		$	90,075
Noncovered loans past due 90 days or more accruing interest	$	9,691		$	11,376		$	4,403
Total nonperforming noncovered assets as a percentage of total noncovered loans and ORE	0.77		%	1.05		%	1.18		%

Credit quality continued to improve during the nine months ended September 30, 2012. Total nonperforming noncovered assets as of September 30, 2012 were $64.1 million, a decrease of $17.0 million, or 21.01%, from December 31, 2011 and a decrease of $26.0 million, or 28.89%, from September 30, 2011. Total noncovered loans past due 30-89 days totaled $52.2 million at September 30, 2012, an increase of $4.2 million, or 8.74%, from December 31, 2011 and a decrease of $19.9 million, or 27.64%, from September 30, 2011. Delinquency trends are observable in the Allowance for Loan Loss Allocation tables within this section. Commercial nonperforming noncovered loans decreased$24.3 million from December 31, 2011 and $28.4 million from September 30, 2011 reflecting movement of assets for disposition into other real estate along with loan payments and charge-downs. New nonperforming noncovered commercial loans have continued to decline from December 31, 2011 through September 30, 2012. Total other noncovered real estate decreased$2.7 million from December 31, 2011 and decreased$8.4 million from September 30, 2011, reflecting the disposition of foreclosed properties and a slow down in new foreclosures. As of September 30, 2012, other noncovered real estate includes $1.2 million of vacant land no longer considered for branch expansion.

Net charge offs within the noncovered consumer portfolio were $6.9 million and $16.4 million for the three and nine months ended September 30, 2012 compared to $6.3 million and $23.8 million for the three and

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nine months ended September 30, 2011. Average FICO scores on the noncovered consumer portfolio subcomponents are excellent with average scores on installment loans at 717, home equity lines at 775, residential mortgages at 753 and credit cards at 773.

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

underlying loans are both well secured (the collateral value is sufficient to cover principal and accrued interest) and are in the process of collection. At September 30, 2012, accruing noncovered loans 90 days or more past due totaled $9.7 million compared to $11.4 million at December 31, 2011 and $4.4 million at September 30, 2011. 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 allowance for loan losses and interest deemed uncollectible accrued in the current year is reversed against interest income. Interest on mortgage loans is accrued until Management deems it uncollectible based upon the specific identification method. Payments subsequently received on nonaccrual loans are generally applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable. This generally requires timely principal and interest payments for a minimum of six consecutive payment cycles. Loans are generally written off when deemed uncollectible or when they reach a predetermined number of days past due depending upon loan product, terms and other factors.

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

	Three Months Ended
	September 30, 2012			June 30, 2012			March 31, 2012			December 31, 2011			September 30, 2011
Nonaccrual noncovered commercial loans beginning of period	$	38,381		$	44,546		$	55,815		$	59,932		$	63,688
Credit Actions:
New	25,182			10,091			5,980			11,402			9,232
Loan and lease losses	(400		)	(6,675		)	(3,296		)	(648		)	(5,047		)
Charged down	(9,227		)	(266		)	(3,703		)	(6,769		)	(3,987		)
Return to accruing status	(2,177		)	(1,247		)	(1,990		)	(119		)	(38		)
Payments	(20,267		)	(8,068		)	(8,260		)	(7,983		)	(3,916		)
Nonaccrual noncovered commercial loans end of period	$	31,492		$	38,381		$	44,546		$	55,815		$	59,932

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

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The Corporation's TDR portfolio, excluding covered loans, totaled $89.6 million, $72.9 million and $70.3 million as of September 30, 2012, December 31, 2011 and September 30, 2011, respectively. These TDRs are predominately composed of noncovered consumer installment loans, first and second lien residential mortgages and home equity lines of credit and represented 73.49%, 79.43% and 82.08% of the total noncovered TDR portfolio as of September 30, 2012, December 31, 2011 and September 30, 2011, respectively. We restructure residential mortgages in a variety of ways to help our clients remain in their homes and to mitigate the potential for additional losses. The primary restructuring methods being offered to our residential clients are reductions in interest rates and extensions in terms. Modifications of mortgages retained in portfolio are handled using proprietary modification guidelines, or the FDIC's Modification Program for residential first mortgages covered by loss share agreements.  The Corporation participates in the U.S. Treasury's Home Affordable Modification Program for originated mortgages sold to and serviced for Fannie Mae and Freddie Mac. As a result of guidance from the OCC, in the quarter ended September 30, 2012, approximately $10.6 million of consumer loans were identified as troubled debt restructurings whereby the borrower's obligation to the Corporation has been discharged in bankruptcy and the borrower has not reaffirmed the debt. These loans were reclassified from performing loans to nonaccrual status as of September 30, 2012 and consisted of $6.7 million of first mortgages, $1.0 million of junior liens and $2.9 million of automobile loans.

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

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

Deposits, Securities Sold Under Agreements to Repurchase and Wholesale Borrowings

Average deposits as of September 30, 2012 totaled and December 31, 2011 totaled $11.6 billion compared to $11.4 billion at September 30, 2011. 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.

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

	Three Months Ended
	September 30, 2012				December 31, 2011				September 30, 2011
	Average Balance		Average Rate		Average Balance		Average Rate		Average Balance		Average Rate
(dollars in thousands)
Noninterest-bearing	$	3,236,703	—		$	3,144,183	—		$	2,988,521	—
Interest-bearing	1,080,841		0.09	%	1,060,771		0.09	%	913,252		0.09	%
Savings and money market accounts	5,746,210		0.36	%	5,732,007		0.35	%	5,446,351		0.50	%
Certificates and other time deposits	1,528,177		0.71	%	1,618,322		0.79	%	2,099,558		0.83	%
Total customer deposits	11,591,931		0.28	%	11,555,283		0.29	%	11,447,682		0.40	%
Securities sold under agreements to repurchase	1,032,401		0.12	%	920,352		0.12	%	969,020		0.40	%
Wholesale borrowings	178,022		2.53	%	177,987		2.53	%	320,691		2.06	%
Total funds	$	12,802,354			$	12,653,622			$	12,737,393

Average demand deposits comprised 37.25% of average deposits in the 2012third quarter compared to 34.08% in the 2011third quarter. Savings accounts, including money market products, made up 49.57% of average deposits in the 2012third quarter compared to 47.58% in the 2011third quarter. Certificates of deposits made up 13.18% of average deposits in the third quarter 2012 and 18.34% in the third quarter 2011.

The average cost of deposits, securities sold under agreements to repurchase and wholesale borrowings was down 18 basis points compared to the same period one year ago, or 45.00%, for the quarter ended September 30, 2012 due to a drop in interest rates.

The following table summarizes certificates of deposits of $100 thousand or more as of September 30, 2012, by time remaining until maturity:

	Amount
Time until maturity:	(In thousands)
Under 3 months	$	126,357
3 to 6 months	110,978
6 to 12 months	172,281
Over 1 year through 3 years	92,916
Over 3 years	20,711
	$	523,243

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 at September 30, 2012, December 31, 2011 and September 30, 2011 totaled $1.6 billion, respectively. The cash dividend of $0.16 per share paid in the third quarter of 2012 has an indicated annual rate of $0.64 per share.

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Capital Adequacy

Capital adequacy is an important indicator of financial stability and performance. The Corporation maintained a strong capital position as tangible common equity to assets was 8.18% at September 30, 2012, compared to 7.86% at December 31, 2011, and 7.75% at September 30, 2011.

Financial institutions are subject to a strict uniform system of capital-based regulations. Under this system, there are five different categories of capitalization, with “prompt corrective actions” and significant operational restrictions imposed on institutions that are capital deficient under the categories. The five categories are: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.

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

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

As of September 30, 2012, the Corporation, on a consolidated basis, as well as FirstMerit Bank, exceeded the minimum capital levels of the well capitalized category.

	September 30, 2012				December 31, 2011				September 30, 2011
(dollars in thousands)
Consolidated
Total equity	$	1,624,704	11.11	%	$	1,565,953	10.84	%	$	1,570,654	10.69	%
Common equity	1,624,704		11.11	%	1,565,953		10.84	%	1,570,654		10.69	%
Tangible common equity (a)	1,157,843		8.18	%	1,097,670		7.86	%	1,101,828		7.75	%
Tier 1 capital (b)	1,170,095		11.37	%	1,119,892		11.48	%	1,104,869		11.02	%
Total risk-based capital (c)	1,298,944		12.63	%	1,242,177		12.73	%	1,230,519		12.27	%
Leverage (d)	1,170,095		8.25	%	1,119,892		7.95	%	1,104,869		7.86	%
Bank Only
Total equity	$	1,565,513	10.71	%	$	1,483,743	10.29	%	$	1,487,926	10.14	%
Common equity	1,565,513		10.71	%	1,483,743		10.29	%	1,487,926		10.14	%
Tangible common equity (a)	1,098,652		7.77	%	1,015,460		7.28	%	1,019,100		7.18	%
Tier 1 capital (b)	1,106,099		10.77	%	1,033,171		10.62	%	1,017,738		10.17	%
Total risk-based capital (c)	1,229,922		11.98	%	1,150,675		11.82	%	1,138,725		11.38	%
Leverage (d)	1,106,099		7.81	%	1,033,171		7.35	%	1,017,738		7.26	%

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

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

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

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

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Market Risk Management

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

Interest rate risk management

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

Interest rate risk on the Corporation’s balance sheets consists of reprice, option, and basis risks. Reprice risk results from differences in the maturity, or repricing, of asset and liability portfolios. Option risk arises from “embedded options” present in the investment portfolio and in many financial instruments such as loan prepayment options, deposit early withdrawal options, and interest rate options. These options allow customers opportunities to benefit when market interest rates change, which typically results in higher costs or lower revenue for the Corporation. Basis risk refers to the potential for changes in the underlying relationship between market rates or indices, which subsequently result in a narrowing of profit spread on an earning asset or liability. Basis risk is also present in administered rate liabilities, such as interest-bearing checking accounts, savings accounts and money market accounts where historical pricing relationships to market rates may change due to the level or directional change in market interest rates. Each of these types of risks is defined in the discussion of market risk management of the 2011 Form 10-K.

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

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Net interest income simulation analysis. Earnings simulation involves forecasting net interest earnings under a variety of scenarios including changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates. The sensitivity of net interest income to changes in interest rates is measured using numerous interest rate scenarios including shocks, gradual ramps, curve flattening, curve steepening as well as forecasts of likely interest rates scenarios. Presented below is the Corporation’s interest rate risk profile as of September 30, 2012and2011:

	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
September 30, 2012	(7.65	)%	3.40	%	5.80	%	7.70	%
September 30, 2011	(3.06	)%	2.79	%	3.92	%	4.81	%

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

Economic value of equity modeling. The Corporation also has longer-term interest rate risk exposure, which may not be appropriately measured by earnings sensitivity analysis. ALCO uses economic value of equity (“EVE”) sensitivity analysis to study the impact of long-term cash flows on earnings and capital. EVE involves discounting present values of all cash flows of on balance sheet and off balance sheet items under different interest rate scenarios. The discounted present value of all cash flows represents the Corporation’s economic value of equity. The analysis requires modifying the expected cash flows in each interest rate scenario, which will impact the discounted present value. The amount of base-case measurement and its sensitivity to shifts in the yield curve allow management to measure longer-term repricing and option risk in the balance sheet. Presented below is the Corporation’s EVE profile as of September 30, 2012 and 2011:

	Immediate Change in Rates and Resulting Percentage Increase/(Decrease) in EVE:
	- 100 basis points		+ 100 basis points		+ 200 basis points		+ 300 basis points
September 30, 2012	(3.02	)%	1.66	%	1.74	%	0.45	%
September 30, 2011	0.18	%	4.77	%	7.01	%	7.89	%

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

Management of interest rate exposure.Management uses the results of its various simulation analysis to formulate strategies to achieve a desired risk profile within the parameters of the Corporation’s capital and

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liquidity guidelines. Specifically, Management actively manages interest rate risk positions by using derivatives predominately in the form of interest rate swaps, which modify the interest rate characteristics of certain assets and liabilities. For more information about how the Corporation uses interest rate swaps to manage its balance sheet, see Note 10 (Derivatives and Hedging Activities) to the unaudited consolidated financial statements.

Liquidity Risk Management

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

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

The Corporation’s primary source of liquidity is its core deposit base, raised through its retail branch system. Core deposits comprised approximately 87.19% of total deposits at September 30, 2012. The Corporation also has available unused wholesale sources of liquidity, including advances from the FHLB of Cincinnati, issuance through dealers in the capital markets and access to certificates of deposit issued through brokers. Liquidity is further enhanced by an excess reserve position that averaged greater than one half billion dollars through the third quarter of 2012 in addition to unencumbered, or unpledged, investment securities that totaled $1.4 billion as of September 30, 2012.

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

Funding Trends for the Quarter - During the three months ended September 30, 2012, lower cost core deposits increased by $18.3 million from the previous quarter. In aggregate, deposits decreased $83.4 million from June 30, 2012. Securities sold under agreements to repurchase increased$66.5 million from June 30, 2012. Wholesale borrowings decreased$0.1 million from June 30, 2012. The Corporation’s loan to deposit ratio increased to 82.30% at September 30, 2012 from 80.68% at June 30, 2012.

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

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consequences; and pay dividends to shareholders.

During the quarter ended September 30, 2012, FirstMerit Bank paid $17.5 million in dividends to FirstMerit Corporation. As of September 30, 2012, FirstMerit Bank had an additional $203.2 million available to pay dividends without regulatory approval.

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

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

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

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

In December 2010, the Basel Committee on Banking Supervision (the “Basel Committee”) released its final framework for strengthening international capital and liquidity regulation (“Basel III”). Minimum global liquidity standards under Basel III are meant to ensure banks maintain adequate levels of liquidity on both a short and medium to longer horizon. Expected liquidity standard implementation dates are January 1, 2015 and January 1, 2018. When implemented by the federal banking agencies and fully phased-in, Basel III will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity. When fully phased in on January 1, 2019, Basel III will require banking institutions to maintain heightened Tier 1 common equity, Tier 1 capital and total capital ratios, as well as maintaining a “capital conservation buffer.” Regulations implementing Basel III are expected to be proposed in

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mid-2012, with adoption of final regulations unknown. Notwithstanding its release of the Basel III framework as a final framework, the Basel Committee is considering further amendments to Basel III, including imposition of additional capital surcharges on globally systemically important financial institutions. In addition to Basel III, the Dodd-Frank Act requires or permits federal banking agencies to adopt regulations affecting capital requirements in a number of respects, including potentially more stringent capital requirements for systemically important financial institutions. Accordingly, the regulations ultimately applicable to the Corporation may differ substantially from the currently published final Basel III framework. Requirements of higher capital levels or higher levels of liquid assets could adversely impact the Corporation’s net income and return on equity.

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

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

Critical Accounting Policies

The Corporation’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the financial services industry in which it operates. All accounting policies are important, and all policies described in Note 1 (Summary of Significant Accounting Policies) to the consolidated financial statements of the 2011 Form 10-K provide a greater understanding of how the Corporation’s financial performance is recorded and reported.

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

Management relies heavily on the use of judgment, assumptions and estimates to make a number of core decisions, including accounting for the allowance for loan losses, income taxes, derivative instruments and hedging activities, and assets and liabilities that involve valuation methodologies. A brief discussion of each of these areas appears within Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2011 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, mortgage loan commitments, and TBA Securities is included in Note 10 (Derivatives

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and Hedging Activities) to the Corporation’s unaudited consolidated financial statements included in this report and in Note 17 to the consolidated financial statements in the 2011 Form 10-K. There have been no significant changes since December 31, 2011.

Forward-looking Safe-harbor Statement

Discussions in this report that are not statements of historical fact (including statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “project,” intend,” and “plan”) are forward-looking statements that involve risks and uncertainties. Any forward-looking statement is not a guarantee of future performance and actual future results could differ materially from those contained in forward-looking information. Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detailed from time to time in the Corporation’s filings with the Securities and Exchange Commission, including without limitation the risk factors disclosed in Item 1A, “Risk Factors,” of the 2011 Form 10-K.

Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, operational, economic and competitive uncertainties and contingencies, many of which are beyond a company’s control, and many of which, with respect to future business decisions and actions (including acquisitions and divestitures), are subject to change. Examples of uncertainties and contingencies include, among other important factors; general and local economic and business conditions; recession or other economic downturns; expectations of, and actual timing and amount of, interest rate movements, including the slope of the yield curve (which can have a significant impact on a financial services institution); market and monetary fluctuations; inflation or deflation; customer and investor responses to these conditions; the financial condition of borrowers and other counterparties; competition within and outside the financial services industry; geopolitical developments including possible terrorist activity; recent and future legislative and regulatory developments; natural disasters; effectiveness of the Corporation’s hedging practices; technology; demand for the Corporation’s product offerings; new products and services in the industries in which the Corporation operates; critical accounting estimates; the possibility that regulatory and other approvals and conditions to the Merger are not received or satisfied on a timely basis or at all, or contain unanticipated terms and conditions; the possibility that modifications to the terms of the Merger may be required in order to obtain or satisfy such approvals or conditions; the timing of approvals by Citizens' and the Corporation's shareholders; delays in closing the Merger and the Merger of the parties' bank subsidiaries; difficulties, delays and unanticipated costs in integrating the merging organizations' businesses or realizing expected cost savings and other benefits; business disruptions as a result of the integration of the merging organizations, including possible loss of customers; diversion of management time to address Merger related issues; changes in asset quality and credit risk as a result of the Merger. Other factors are those inherent in originating, selling and servicing loans including prepayment risks, pricing concessions, fluctuation in U.S. housing prices, fluctuation of collateral values, and changes in customer profiles. Additionally, the actions of the SEC, the FASB, the OCC, the Federal Reserve System, Financial Industry Regulatory Authority, and other regulators; regulatory and judicial proceedings and changes in laws and regulations applicable to the Corporation including the costs of complying with any such laws and regulations; and the Corporation’s success in executing its business plans and strategies, including efforts to reduce operating expenses, and managing the risks involved in the foregoing, could cause actual results to differ.

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

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update or alter any statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES.

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

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

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

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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

For additional information on litigation, see Note 14 (Contingencies and Guarantees) to the unaudited consolidated financial statements.

ITEM 1A. RISK FACTORS.

There have been no material changes in our risk factors from those disclosed in the 2011 Form 10-K.

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

(a) Not applicable.

(b) Not applicable.

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(c) The following table provides information with respect to purchases the Corporation made of shares of its common stock during the third quarter of the 2012 fiscal year:

	Total Number of Shares  Purchased (1)	Average Price Paid per  Share		Total Number of Shares  Purchased as Part of Publicly Announced Plans or Programs (2)	Maximum Number of  Shares that May Yet Be Purchased Under Plans or Programs (2)
Balances as of December 31, 2011					396,272
July 1, 2012 - July 31, 2012	248	$	24.63	—	396,272
August 1, 2012 - August 31, 2012	936	16.49		—	396,272
September 1, 2012 - September 30, 2012	4,953	19.61		—	396,272
Balances as of September 30, 2012	6,137	$	19.34	—	396,272

(1) Reflects 6,137 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 third quarter of 2012.

(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.

None.

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ITEM 6. EXHIBITS.

Exhibit Index

Exhibit Number
2.1	Agreement and Plan of Merger, dated September 12, 2012, by and between FirstMerit Corporation and Citizens Republic Bancorp, Inc. (incorporated by reference from Exhibit 2.1 to the Current Report on Form 8-K filed by FirstMerit Corporation on September 13, 2012).
3.1	Second Amended and Restated Articles of Incorporation of FirstMerit Corporation, as amended (incorporated by reference from Exhibit 3.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (File No. 000-10161) filed by FirstMerit Corporation on May 10, 2010).
3.2	Second Amended and Restated Code of Regulations of FirstMerit Corporation, as amended (incorporated by reference from Exhibit 3.2 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (File No. 000-10161) filed by FirstMerit Corporation on May 10, 2010).
10.1	Transition and Retirement Agreement, dated August 31, 2012, by and between FirstMerit Bank, N.A. and Larry A.Shoff.
10.53	FirstMerit Corporation Form of Indemnification Agreement with Officers and Directors.
31.1	Rule 13a-14(a)/Section 302 Certification of Paul G. Greig, Chief Executive Officer of FirstMerit Corporation.
31.2	Rule 13a-14(a)/Section 302 Certification of Terrence E. Bichsel, Executive Vice President and Chief Financial Officer of FirstMerit Corporation.
32.1	Rule 13a-14(b)/Section 906 Certification of Paul G. Greig, Chief Executive Officer of FirstMerit Corporation.
32.2	Rule 13a-14(b)/Section 906 Certification of Terrence E. Bichsel, Executive Vice President and Chief Financial Officer of FirstMerit Corporation.
101	The following materials from FirstMerit Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, 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, Executive Vice President and Chief Financial Officer (duly authorized officer of registrant and principal financial officer)

November 2, 2012

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