FirstMerit 10Q 2009 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

FOR THE QUARTERLY PERIOD ENDED September 30, 2009


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

For the transition period from to

COMMISSION FILE NUMBER 0-10161

FIRSTMERIT CORPORATION

(Exact name of registrant as specified in its charter)


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

III CASCADE PLAZA, 7TH FLOOR, AKRON, OHIO
44308-1103
(Address of principal executive offices)

(330) 996-6300
(Telephone Number)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

As of October 28, 2009, 85,844,862 shares, without par value, were outstanding.

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS


(In thousands)	September 30,			December 31,			September 30,
(Unaudited, except December 31, 2008, which is derived from the audited financial statements)	2009			2008			2008
ASSETS
Cash and due from banks	$	193,060		$	178,406		$	186,087
Investment securities
Held-to-maturity		166,663			158,273			161,722
Available-for-sale		2,584,414			2,614,575			2,288,511
Loans held for sale		12,519			11,141			9,126
Loans:
Commercial loans		4,097,252			4,352,730			4,273,065
Mortgage loans		481,336			547,125			559,276
Installment loans		1,481,200			1,574,587			1,613,481
Home equity loans		761,553			733,832			717,887
Credit card loans		147,767			149,745			148,179
Leases		60,540			67,594			69,704

Total loans		7,029,648			7,425,613			7,381,592
Less allowance for loan losses		(116,352	)		(103,757	)		(102,007	)

Net loans		6,913,296			7,321,856			7,279,585
Premises and equipment, net		126,416			133,184			128,570
Goodwill		139,245			139,245			139,245
Intangible assets		1,143			1,403			1,490
Accrued interest receivable and other assets		624,599			541,943			490,509

Total assets	$	10,761,355		$	11,100,026		$	10,684,845


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand-non-interest bearing	$	1,898,913		$	1,637,534			1,540,523
Demand-interest bearing		644,121			666,615			663,924
Savings and money market accounts		3,035,922			2,512,331			2,386,453
Certificates and other time deposits		1,692,318			2,781,199			2,839,656

Total deposits		7,271,274			7,597,679			7,430,556
				��
Securities sold under agreements to repurchase		1,350,475			921,390			1,244,200
Wholesale borrowings		749,397			1,344,195			898,720
Accrued taxes, expenses, and other liabilities		331,000			298,919			185,291

Total liabilities		9,702,146			10,162,183			9,758,767

Commitments and contingencies
Shareholders’ equity:
Preferred stock, without par value:
authorized and unissued 7,000,000 shares		—			—			—
Preferred stock, Series A, without par value:
designated 800,000 shares; none outstanding		—			—			—
Convertible preferred stock, Series B, without par value:
designated 220,000 shares; none outstanding		—			—			—
Fixed-Rate Cumulative Perpetual Preferred Stock, Series A, $1,000 liquidation preference; authorized and issued 125,000 shares		—			—			—
Common stock, without par value:
authorized 300,000,000 shares; issued 92,635,910, 92,026,350 and 92,026,350 at September 30, 2009, December 31, 2008 and September 30, 2008, respectively.		127,937			127,937			127,937
Capital surplus		68,694			94,802			93,387
Accumulated other comprehensive loss		(7,437	)		(54,080	)		(59,190	)
Retained earnings		1,042,752			1,053,435			1,047,781
Treasury stock, at cost, 6,767,053, 11,066,108 and 11,052,155 shares at September 30, 2009, December 31, 2008 and September 30, 2008, respectively		(172,737	)		(284,251	)		(283,837	)

Total shareholders’ equity		1,059,209			937,843			926,078

Total liabilities and shareholders’ equity	$	10,761,355		$	11,100,026		$	10,684,845

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

FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


	Quarters ended						Nine months ended
(Unaudited)	September 30,						September 30,
(In thousands except per share data)	2009			2008			2009			2008
Interest income:
Interest and fees on loans, including held for sale	$	84,283		$	107,927			258,329		$	330,731
Interest and dividends on investment securities and federal funds sold		29,388			29,223			90,857			87,714

Total interest income		113,671			137,150			349,186			418,445

Interest expense:
Interest on deposits:
Demand-interest bearing		137			589			451			2,144
Savings and money market accounts		5,763			6,932			16,592			23,075
Certificates and other time deposits		12,284			23,463			46,197			82,037
Interest on securities sold under agreements to repurchase		1,286			8,244			3,496			28,105
Interest on wholesale borrowings		6,824			6,801			21,064			20,133

Total interest expense		26,294			46,029			87,800			155,494

Net interest income		87,377			91,121			261,386			262,951
Provision for loan losses		23,887			15,531			68,473			41,617

Net interest income after provision for loan losses		63,490			75,590			192,913			221,334

Other income:
Trust department income		5,081			5,562			15,309			16,836
Service charges on deposits		16,782			16,648			46,798			47,412
Credit card fees		11,711			12,084			34,463			35,387
ATM and other service fees		2,935			2,717			8,380			8,281
Bank owned life insurance income		3,216			3,139			9,216			9,557
Investment services and insurance		2,498			2,899			7,686			8,554
Investment securities gains, net		2,925			—			4,103			571
Loan sales and servicing income		3,881			1,370			10,007			4,646
Gain on Visa Inc. redemption		—			—			—			7,898
Gain on post medical retirement curtailment		—			—			9,543			—
Other operating income		2,538			2,610			12,095			9,499

Total other income		51,567			47,029			157,600			148,641

Other expenses:
Salaries, wages, pension and employee benefits		43,351			45,043			130,158			132,472
Net occupancy expense		5,739			5,741			18,468			18,699
Equipment expense		5,847			5,962			17,856			17,998
Stationery, supplies and postage		2,167			2,347			6,493			6,914
Bankcard, loan processing and other costs		7,548			7,497			23,252			22,097
Professional services		3,980			3,966			10,316			8,434
Amortization of intangibles		86			86			260			486
Other operating expense		15,447			9,967			51,129			35,293

Total other expenses		84,165			80,609			257,932			242,393

Income before federal income tax expense		30,892			42,010			92,581			127,582
Federal income tax expense		8,129			12,257			24,889			37,233

Net income	$	22,763		$	29,753			67,692		$	90,349

Other comprehensive income, net of taxes
Unrealized securities’ holding gain (loss), net of taxes	$	28,172		$	(8,978	)		50,235		$	(19,488	)
Unrealized hedging gain (loss), net of taxes		—			347			(94	)		1,133
Minimum pension liability adjustment, net of taxes		(277	)		875			(831	)		2,621
Less: reclassification adjustment for securities’ gain realized in net income, net of taxes		1,901			—			2,667			371

Total other comprehensive gain (loss), net of taxes		25,994			(7,756	)		46,643			(16,105	)

Comprehensive income	$	48,757		$	21,997			114,335		$	74,244

Net income applicable to common shares	$	22,763		$	29,753			61,321		$	90,349

Net income used in diluted EPS calculation	$	22,763		$	29,753			61,321		$	90,354

Weighted average number of common shares outstanding — basic *		85,872			82,090			84,182			82,015

Weighted average number of common shares outstanding — diluted *		85,880			82,117			84,190			82,062

Basic earnings per share *	$	0.27		$	0.36			0.73		$	1.10

Diluted earnings per share *	$	0.27		$	0.36			0.73		$	1.10

Stock dividend per share		0.72	%		—			0.73	%		—

Dividend per share	$	0.16		$	0.29			0.61		$	0.87


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

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

FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(In thousands)


												Accumulated
						Common						Other									Total
	Preferred			Common		Stock			Capital			Comprehensive			Retained			Treasury			Shareholders’
	Stock			Stock		Warrant			Surplus			Income			Earnings			Stock			Equity
Balance at December 31, 2007	$	—		$	127,937	$	—		$	100,028		$	(43,085	)	$	1,027,775		$	(295,678	)	$	916,977
Net income		—			—		—			—			—			90,349			—			90,349
Cash dividends — common stock ($0.87 per share)		—			—		—			—			—			(70,343	)		—			(70,343	)
Options exercised (125,662 shares)		—			—		—			(963	)		—			—			3,027			2,064
Nonvested (restricted) shares granted (405,653 shares)		—			—		—			(10,083	)		—			—			10,084			1
Debentures converted (2,841 shares)		—			—		—			(38	)		—			—			63			25
Treasury shares purchased (42,429 shares)		—			—		—			213			—			—			(900	)		(687	)
Deferred compensation trust (23,718 shares)		—			—		—			433			—			—			(433	)		—
Share-based compensation		—			—		—			3,797			—			—			—			3,797
Net unrealized gains on investment securities, net of taxes		—			—		—			—			(19,859	)		—			—			(19,859	)
Unrealized hedging gain, net of taxes		—			—		—			—			1,133			—			—			1,133
Minimum pension liability adjustment, net of taxes		—			—		—			—			2,621			—			—			2,621

Balance at September 30, 2008	$	—		$	127,937	$	—		$	93,387		$	(59,190	)	$	1,047,781		$	(283,837	)	$	926,078


Balance at December 31, 2008	$	—		$	127,937		—		$	94,802		$	(54,080	)	$	1,053,435		$	(284,251	)	$	937,843
Net income		—			—		—			—			—			67,692			—			67,692
Cash dividends — preferred stock		—			—		—			—			—			(1,789	)		—			(1,789	)
Cash dividends — common stock ($0.61 per share)		—			—		—			—			—			(50,286	)		—			(50,286	)
Stock dividend		—			—		—			5,765			—			(21,718	)		15,953			—
Options exercised (2,400 shares)		—			—		—			(18	)		—			—			58			40
Nonvested (restricted) shares granted (536,058 shares)		—			—		—			(13,154	)		—			—			13,151			(3	)
Debentures converted		—			—		—			—			—			—			—			—
Treasury shares purchased (118,736 shares)		—			—		—			500			—			—			(2,197	)		(1,697	)
Deferred compensation trust (29,597 shares)		—			—		—			(32	)		—			—			32			—
Share-based compensation		—			—		—			6,270			—			—			—			6,270
Issuance of common stock (3,267,751 shares)		—			—		—			(24,561	)		—			—			84,517			59,956
Issuance of Fixed-Rate Cumulative Perpetual Preferred Stock		120,622			—		4,582			—			—			(204	)		—			125,000
Redemption of Fixed-Rate Cumulative Perpetual Preferred Stock		(120,622	)		—		—			—			—			(4,378	)		—			(125,000	)
Repurchase of warrants		—			—		(4,582	)		(443	)		—			—			—			(5,025	)
Net unrealized gains on investment securities, net of taxes		—			—		—			—			47,568			—			—			47,568
Unrealized hedging gain, net of taxes		—			—		—			—			(94	)		—			—			(94	)
Minimum pension liability adjustment, net of taxes		—			—		—			—			(831	)		—			—			(831	)
Other		—			—		—			(435	)		—			—			—			(435	)

Balance at September 30, 2009	$	—		$	127,937	$	—		$	69,129		$	(7,437	)	$	1,042,752		$	(172,737	)	$	1,059,644

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

FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine months
	ended
(Unaudited)	September 30,
(In thousands)	2009			2008

Operating Activities
Net income	$	67,692		$	90,349
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		68,473			41,617
Provision for depreciation and amortization		14,536			13,835
Amortization of investment securities premiums, net		3,482			799
Accretion of income for lease financing		(2,584	)		(3,047	)
Gains on sales and calls of investment securities, net		(4,103	)		(571	)
Decrease in interest receivable		2,843			5,673
Decrease in interest payable		(8,453	)		(12,730	)
(Decrease) increase in employee pension liability		(6,068	)		19,664
(Decrease) increase in prepaid expenses		(6,017	)		397
Post medical retirement curtailment gain		(9,543	)		—
Increase in bank owned life insurance		(9,001	)		(9,557	)
(Decrease) increase in accounts payable		(13,899	)		7,142
Originations of loans held for sale		(409,752	)		(232,501	)
Proceeds from sales of loans, primarily mortgage loans sold in the secondary mortgage markets		411,792			238,207
(Gains) losses on sales of loans, net		(3,418	)		830
Amortization of intangible assets		260			486
Other decreases		(7,928	)		(15,809	)

NET CASH PROVIDED BY OPERATING ACTIVITIES		88,312			144,784
Investing Activities
Dispositions of investment securities:
Available-for-sale — sales		102,564			77,985
Available-for-sale — maturities		506,976			450,538
Purchases of available-for-sale investment securities		(509,493	)		(516,606	)
Net decrease (increase) in loans and leases, excluding sales		324,985			(377,609	)
Purchases of premises and equipment		(7,855	)		(12,052	)
Sales of premises and equipment		87			116

NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES		417,264			(377,628	)
Financing Activities
Net increase (decrease) in demand accounts		238,885			(5,999	)
Net increase in savings and money market accounts		523,591			91,306
Net (decrease) increase in certificates and other time deposits		(1,088,881	)		13,510
Net increase (decrease) in securities sold under agreements to repurchase		429,085			(11,880	)
Net (decrease) increase in wholesale borrowings		(594,798	)		193,599
Proceeds from issuance of preferred stock		125,000			—
Repurchase of preferred stock		(125,000	)		—
Repurchase of common stock warrant		(5,025	)		—
Proceeds from issuance of common stock		59,956			—
Cash dividends — preferred		(1,789	)		—
Cash dividends — common		(50,286	)		(70,343	)
Purchase of treasury shares		(1,697	)		(687	)
Proceeds from exercise of stock options, conversion of debentures or conversion of preferred stock		37			2,090

NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES		(490,922	)		211,596

Increase (decrease) in cash and cash equivalents		14,654			(21,248	)
Cash and cash equivalents at beginning of period		178,406			207,335

Cash and cash equivalents at end of period	$	193,060		$	186,087


SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized	$	44,721		$	78,909

Federal income taxes	$	21,822		$	38,652

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

FirstMerit Corporation and Subsidiaries

Notes to Consolidated Financial Statements
September 30, 2009(Unaudited)(Dollars in thousands except per share data)

1.Basis of Presentation— FirstMerit Corporation (“Corporation”) is a bank holding company whose principal asset is the common stock of its wholly-owned subsidiary, FirstMerit Bank, N. A. The Corporation’s other subsidiaries include Citizens Savings Corporation of Stark County, FirstMerit Capital Trust I, FirstMerit Community Development Corporation, FMT, Inc., Realty Facility Holdings XV, L.L.C, and FirstMerit Risk Management, Inc.

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

The consolidated balance sheet at December 31, 2008 has been derived from the audited consolidated financial statements at that date. The accompanying unaudited interim financial statements reflect all adjustments (consisting only of normally recurring accruals) that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. In preparing these financial statements, subsequent events were evaluated through October 30, 2009, the date the financial statements were issued. Financial statements are considered issued when they are filed with the Securities and Exchange Commission (“SEC”). In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the financial statements or disclosed in the notes to the financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with the rules of the SEC. The consolidated financial statements of the Corporation as of September 30, 2009 and 2008 are not necessarily indicative of the results that may be achieved for the full fiscal year or for any future period. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended December 31, 2008.

Certain previously reported amounts have been reclassified to conform to the current reporting presentation.

2.Accounting Policies Recently Adopted and Pending Accounting Pronouncements—ASC Topic 260, Earnings Per Share. Effective January 1, 2009, the accounting and reporting standards for earnings per share were amended. This amendment clarifies that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities and should be included in the calculation of basic earnings per share using the two-class method prescribed by existing GAAP. The adoption of this amendment did not have a material effect on the Corporation’s consolidated results of operations or earnings per share.

ASC Topic 805, Business Combinations.This accounting guidance requires all businesses acquired after January 1, 2009 to be measured at the fair value of the consideration paid. It requires an entity to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, at their fair values as of that date. An entity is not permitted to recognize a separate valuation allowance as of the acquisition date for loans and other assets acquired in a business combination. Acquisition and restructuring costs are required to be expensed and are not to be included in the cost of the acquisition. The Corporation will apply these accounting standards to business combinations with acquisition dates on or after January 1, 2009.

ASC Topic 810, Consolidation.Effective January 1, 2009, the accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary were amended. The amendment clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Prior to this amendment, such noncontrolling interests were reported in the consolidated statement of financial position as liabilities or in the mezzanine section between liabilities and equity. This amendment also requires expanded disclosures that identify and distinguish between the interests of the parent’s owner and the interests of the noncontrolling owners of an entity. This amendment did not have an impact on the Corporation’s consolidated financial condition or results of operations.

ASC Topic 815, Derivatives and Hedging.Effective March 31, 2009, the accounting and reporting standards for derivatives and hedging requires the Corporation to present specific disclosures which provide greater transparency as to the use of derivative instruments and hedging activity. In accordance with this guidance, the Corporation discloses in Note 8 (Accounting for Derivatives and Hedging Activities) how and why it uses derivative instruments; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect the Corporation’s consolidated financial statements.

ASC Topic 320, Investments — Debt and Equity Securities.Effective June 30, 2009, the Corporation adopted the amendment to the accounting and reporting standards regarding recognition and disclosure of other-than-temporary impairment (“OTTI”). This amendment requires recognition of only the credit portion of OTTI in current earnings for those debt 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 the OTTI is to be included in other comprehensive income. The adoption of this amendment did not have a material impact on the Corporation’s consolidated financial condition or results of operations. See Note 3 (Investment Securities) for additional information regarding the application of this guidance to the Corporation’s investment securities.

ASC Topic 820, Fair Value Measurements and Disclosures.In April 2009, an amendment to the accounting and reporting standards of fair value measurements and disclosures was issued. The amendment provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This amendment also provides guidance on identifying circumstances that indicate a transaction is not orderly. The Corporation adopted this additional guidance on June 30, 2009 and such adoption did not have a material impact on the Corporation’s consolidated financial condition or results of

operations. See Note 10 (Fair Value Measurements) for additional information on how the Corporation determines fair value.

ASC Topic 825, Financial Instruments.Effective June 30, 2009, the Corporation adopted the amendment to the accounting and reporting standards for disclosures about the fair value of financial instruments which requires such disclosures for all interim and annual reporting periods of publically traded companies. See Note 10 (Fair Value Measurements) for disclosures about fair value of the Corporation’s financial instruments.

ASC Topic 855, Subsequent Events.Effective June 30, 2009, the accounting and reporting standards for subsequent events requires the Corporation to disclose the date through which it has evaluated events that occur after the balance sheet date but before financial statements are issued or are available to be issued as well as the basis for that date, that is, whether that date represents the date the financial statements were issued.

Accounting Standards Update (“ASU”) 2009-05, Measuring Liabilities at Fair Value.This ASU allows for the use of specific valuation techniques to measure the fair value of a liability, within the scope of ASC 820,Fair Value Measurements, when a quoted price in an active market for a similar asset is not available. These specific valuation techniques should maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The guidance in this ASU is effective for the Corporation as of October 1, 2009. The Corporation does not expect the adoption of this guidance to have a material effect on the Corporation’s financial condition and results of operations.

�� ASC Topic 715, Compensation—Retirement Benefits.In December 2008, an amendment to the accounting and reporting standards of postretirement benefit plan assets was issued.This amendment requires expanded disclosures about the plan assets of a defined benefit pension or other postretirement plan to provide users of financial statements with an understanding of: how investment allocation decisions are made; the major categories of plan assets; the inputs and valuation techniques used to measure the fair value of plan assets; the effect of fair-value measurements using significant unobservable inputs on changes in plan assets for the period; and significant concentrations of risk within plan assets. These expanded disclosures will be effective for the Corporation’s December 31, 2009 consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standard (“SFAS”) 166, Accounting for Transfers of Financial Assets — An Amendment of FASB Statement No. 140 (“SFAS 166”). (The FASB has yet to incorporate SFAS 166 in the ASC.) SFAS 166 removes the concept of a qualifying special-purpose entity from existing GAAP and removes the exception from applying the accounting and reporting standards within ASC 810,Consolidationto qualifying special purpose entities. SFAS 166 also establishes conditions for accounting and reporting of a transfer of a portion of a financial asset, modifies the asset sale/ derecognition criteria, and changes how retained interests are initially measured. SFAS 166 is expected to provide greater transparency about transfers of financial assets and a transferor’s continuing involvement, if any, with the transferred assets. This guidance will be effective for the Corporation beginning January 1, 2010. The Corporation does not expect its adoption to have a material effect on the Corporation’s financial condition and results of operations.

In June 2009, the FASB issued SFAS 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). (The FASB has yet to incorporate SFAS 167 in the ASC.) The new guidance removes the scope exception for qualifying special-purpose entities, contains new criteria for determining the primary beneficiary of a variable interest entity and increases the frequency of required reassessments to determine whether an entity is the primary beneficiary of a variable interest entity. Enhanced disclosures would also be required. This guidance will be effective forthe Corporation beginning January 1, 2010. The Corporation is in the process of analyzing the potential impact of the new guidance, however, it does not expect the adoption to have a material effect on the Corporation’s financial condition and results of operations.

3.Investment Securities — The following table provides 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 cost which reflects historical cost adjusted for amortization of premiums and accretion of discounts. Available-for-sale securities are carried at fair value with net unrealized gains or losses reported on an after-tax basis as a component of cumulative other comprehensive income in shareholders’ equity. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and illiquidity.


	September 30, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities available for sale
Debt securities
U.S. Treasury and government agency	$	11,995	$	5	$	—		$	12,000
U.S States and political subdivisions		287,882		15,868		(22	)		303,728
Residential mortgage-backed securities:
U.S. government agencies		1,565,762		60,340		(4	)		1,626,098
Residential collateralized mortgage securities:
U.S. government agencies		578,604		20,056		(13	)		598,647
Non-agency		20		—		—			20
Corporate debt securities		61,372		—		(21,870	)		39,502
Other debt securities		692		—		—			692

Total debt securities	$	2,506,327	$	96,269	$	(21,909	)	$	2,580,687
Marketable equity securities		3,727		—		—			3,727

Total securities available for sale	$	2,510,054	$	96,269	$	(21,909	)	$	2,584,414


Securities held to maturity
Debt securities
U.S States and political subdivisions	$	38,454	$	—	$	—		$	38,454
Non-marketable equity securities		128,209		—		—			128,209

Total securities held to maturity	$	166,663	$	—	$	—		$	166,663


	December 31, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities available for sale
Debt securities
U.S. Treasury and government agency	$	20,000	$	38	$	—		$	20,038
U.S States and political subdivisions		286,758		2,726		(3,580	)		285,904
Residential mortgage-backed securities:
U.S. government agencies		1,681,378		29,643		(2,795	)		1,708,226
Residential collateralized mortgage securities:
U.S. government agencies		539,382		7,071		(1,159	)		545,294
Non-agency		20,450		—		(787	)		19,663
Corporate debt securities		61,335		—		(29,979	)		31,356
Other debt securities		730		—		—			730

Total debt securities	$	2,610,033	$	39,478	$	(38,300	)	$	2,611,211
Marketable equity securities		3,364		—		—			3,364

Total securities available for sale	$	2,613,397	$	39,478	$	(38,300	)	$	2,614,575


Securities held to maturity
Debt securities
U.S States and political subdivisions	$	30,266	$	—	$	—		$	30,266
Non-marketable equity securities		128,007		—		—			128,007

Total securities held to maturity	$	158,273	$	—	$	—		$	158,273


	September 30, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities available for sale
Debt securities
U.S. Treasury and government agency	$	501	$	—	$	—		$	501
U.S States and political subdivisions		282,998		566		(18,135	)		265,429
Residential mortgage-backed securities:
U.S. government agencies		1,588,237		7,077		(11,179	)		1,584,135
Residential collateralized mortgage securities:
U.S. government agencies		374,203		1,419		(3,550	)		372,072
Non-agency		21,157		—		(26	)		21,131
Corporate debt securities		61,321		—		(20,049	)		41,272
Other debt securities		743		—		—			743

Total debt securities	$	2,328,659	$	9,062	$	(52,939	)	$	2,285,283
Marketable equity securities		3,228		—		—			3,228

Total securities available for sale	$	2,331,887	$	9,062	$	(52,939	)	$	2,288,511


Securities held to maturity
Debt securities
U.S States and political subdivisions	$	33,791	$	—	$	—		$	33,791
Non-marketable equity securities		127,931		—		—			127,931

Total securities held to maturity	$	161,722	$	—	$	—		$	161,722

The Corporation is a member of the Federal Home Loan Bank (“FHLB”) of Cincinnati. Members are required to own a certain amount of stock based on the level of borrowings and other factors. Stock in the FHLB is non-marketable and is redeemable at the discretion of the FHLB. The Corporation is also member of the Federal Reserve Bank (“FRB”) and owns FRB stock. FHLB and FRB stock are carried at cost, classified as non-marketable equity securities, and periodically evaluated for impairment. Both cash and stock dividends are reported as income.

Gross Unrealized Losses and Fair Value

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


	At September 30, 2009
	Less than 12 months							12 months or longer							Total
						Number of							Number of
			Unrealized			impaired				Unrealized			impaired				Unrealized
Securities available for sale	Fair Value		Losses			securities		Fair Value		Losses			securities		Fair Value		Losses
Debt securities
U.S States and political subdivisions	$	1,697	$	(22	)		2	$	—	$	—			—	$	1,697	$	(22	)
Residential mortgage-backed securities:
U.S. government agencies securities:		—		—			—		306		(4	)		3		306		(4	)
U.S. government agencies		6,200		(13	)		1		—		—			—		6,200		(13	)
Non-agency		—		—			—		—		—			—		—		—
Corporate debt securities		—		—			—		39,502		(21,870	)		8		39,502		(21,870	)

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


	At December 31, 2008
	Less than 12 months							12 months or longer							Total
						Number of							Number of
			Unrealized			impaired				Unrealized			impaired				Unrealized
Securities available for sale	Fair Value		Losses			securities		Fair Value		Losses			securities		Fair Value		Losses
Debt securities
U.S States and political subdivisions	$	121,040	$	(3,333	)		197	$	6,188	$	(247	)		8	$	127,228	$	(3,580	)
Residential mortgage-backed securities:
U.S. government agencies securities:		246,741		(2,668	)		29		15,942		(127	)		4		262,683		(2,795	)
U.S. government agencies		68,630		(483	)		7		28,221		(676	)		3		96,851		(1,159	)
Non-agency		19,638		(787	)		1		—		—			—		19,638		(787	)
Corporate debt securities		—		—			—		31,356		(29,979	)		8		31,356		(29,979	)

Total temporarily impaired securities	$	456,049		(7,271	)		234	$	81,707	$	(31,029	)		23	$	537,756	$	(38,300	)


	At September 30, 2008
	Less than 12 months							12 months or longer							Total
						Number of							Number of
			Unrealized			impaired				Unrealized			impaired				Unrealized
Securities available for sale	Fair Value		Losses			securities		Fair Value		Losses			securities		Fair Value		Losses
Debt securities
U.S. Treasury and government agency	$	—		—			—	$	—	$	—			—	$	—	$	—
U.S States and political subdivisions		236,903		(18,135	)		396		—		—			—		236,903		(18,135	)
Residential mortgage-backed securities:
U.S. government agencies		744,044		(10,421	)		54		49,200		(758	)		5		793,244		(11,179	)
securities:
U.S. government agencies		248,152		(3,550	)		23		—		—			—		248,152		(3,550	)
Non-agency		—		—			—		21,105		(26	)		1		21,105		(26	)
Corporate debt securities		19,300		(7,430	)		4		21,980		(12,619	)		4		41,280		(20,049	)

Total temporarily impaired securities	$	1,248,399	$	(39,536	)		477	$	92,285	$	(13,403	)		10	$	1,340,684	$	(52,939	)

At least quarterly the Corporation conducts a comprehensive security-level impairment assessment on all securities in an unrealized loss position to determine if OTTI exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Under the current OTTI accounting model for debt securities, which was amended by the FASB and adopted by the Corporation in the second quarter of 2009, an OTTI loss must be recognized for a debt security in an unrealized loss position if the Corporation intends to sell the security or it is more likely than not that the Corporation will be required to sell the security before recovery of its amortized cost basis. In this situation, the amount of loss

recognized in income is equal to the difference between the fair value and the amortized cost basis of the security. Even if the Corporation does not expect to sell the security, the Corporation must evaluate the expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in income. The portion of the unrealized loss relating to other factors, such as liquidity conditions in the market or changes in market interest rates, is recorded in accumulated other comprehensive loss. Equity securities are also evaluated to determine whether the unrealized loss is expected to be recoverable based on whether evidence exists to support a realizable value equal to or greater than the amortized cost basis. If it is probable that the Corporation will not recover the amortized cost basis, taking into consideration the estimated recovery period and its ability to hold the equity security until recovery, OTTI is recognized.

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

As of September 30, 2009, gross unrealized losses are concentrated within corporate debt securities which is composed of eight, single issuer, trust preferred securities with stated maturities. Such investments are less than 1% of the fair value of the entire investment portfolio. None of the corporate issuers have deferred paying dividends on their issued trust preferred shares in which the Corporation is invested. The fair values of these investments have been impacted by the recent market conditions which have caused risk premiums to increase markedly, resulting in the significant decline in the fair value of the trust preferred securities. Management believes the Corporation will fully recover the cost of these securities and it does not intend to sell these securities and it is not more likely than not that it will be required to sell them before the anticipated recovery of the remaining amortized cost basis, which may be maturity. As a result, management concluded that these securities were not other-than-temporarily impaired at September 30, 2009 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 the sales of those securities that have been included in earnings as a result of those sales. Gains or losses on the sales of available-for-sale securities are recognized upon sale and are determined by the specific identification method.


	Quarter ended				Nine months ended
	September 30,				September 30,
	2009		2008		2009		2008
Proceeds	$	17,327	$	—	$	102,564	$	77,985


Realized gains	$	2,925	$	—	$	4,103	$	571
Realized losses		—		—		—		—

Net securities gains	$	2,925	$	—	$	4,103	$	571

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, 2009.


													Residential
										Residential			collateralized
										collateralized			mortgage
	U.S.						Residential			mortgage			obligations -
	Treasury and			U.S. States			mortgage backed			obligations - U.S.			non U.S.
	government			and			securities - U.S.			Government			Government			Corporate									Weighted
	agency			political			Government			agency			agency			debt			Other						Average
	obligations			subdivisions			agency obligations			obligations			obligations			securities			securities			Total			Yield
Securities Available for Sale
Remaining maturity:
One year or less	$	—		$	5,475		$	34,355		$	17,901		$	—		$	—		$	51		$	57,782			4.03	%
Over one year through five years		—			15,060			1,505,040			567,166			22			—			203			2,087,491			4.45	%
Over five years through ten years		—			41,193			86,703			13,580			—			—			252			141,728			5.58	%
Over ten years		12,000			242,000			—			—			—			39,500			186			293,686			4.96	%

Fair Value	$	12,000		$	303,728		$	1,626,098		$	598,647		$	22		$	39,500		$	692		$	2,580,687			4.58	%

Amortized Cost	$	11,995		$	287,882		$	1,565,762		$	578,604		$	22		$	61,370		$	692		$	2,506,329

Weighted-Average Yield		3.13	%		6.06	%		4.55	%		4.27	%		4.67	%		1.18	%		0.00	%		4.58	%
Weighted-Average Maturity		13.7			11.0			3.5			2.5			4.1			18.1			13.7			4.5

Securities Held to Maturity
Remaining maturity:
One year or less	$	—		$	21,588		$	—		$	—		$	—		$	—		$	—		$	21,588			5.66	%
Over one year through five years		—			3,782			—			—			—			—			—			3,782			5.66	%
Over five years through ten years		—			10,769			—			—			—			—			—			10,769			5.66	%
Over ten years		—			2,315			—			—			—			—			—			2,315			5.66	%

Fair Value	$	—		$	38,454		$	—		$	—		$	—		$	—		$	—		$	38,454			5.66	%

Amortized Cost	$	—		$	38,454		$	—		$	—		$	—		$	—		$	—		$	38,454

Weighted-Average Yield					5.66	%																	5.66	%
Weighted-Average Maturity					4.5																		4.5

4.Allowance for loan losses (“ALL”) — 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.

Note 1 (Summary of Significant Accounting Policies) and Note 4 (Allowance for Loan Losses) in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (the “2008 Form 10-K”) more fully describe the components of the allowance for loan loss model.

The activity within the ALL for the quarters and nine months ended September 30, 2009 and 2008 and full year ended December 31, 2008, is shown in the following table:


	Quarter ended				Nine months ended				Year ended
	September 30,				September 30,				December 31,
	2009		2008		2009		2008		2008
Allowance for loan losses-beginning of period	$	111,222	$	98,239	$	103,757	$	94,205	$	94,205
Loans charged off:
Commercial		7,208		3,556		21,892		10,727		16,318
Mortgage		1,455		1,162		3,693		3,671		4,696
Installment		7,135		5,840		23,060		17,464		24,740
Home equity		1,911		1,154		4,943		3,446		4,153
Credit cards		3,384		2,522		10,047		7,315		9,821
Leases		—		20		3		20		26
Overdrafts		726		703		1,843		1,813		2,634

Total charge-offs		21,819		14,957		65,481		44,456		62,388

Recoveries:
Commercial		90		232		521		1,986		2,388
Mortgage		41		2		260		41		76
Installment		2,104		1,757		6,527		5,598		7,071
Home equity		99		484		295		726		851
Credit cards		514		439		1,289		1,455		1,831
Manufactured housing		37		44		122		170		247
Leases		6		28		53		97		104
Overdrafts		171		208		536		568		769

Total recoveries		3,062		3,194		9,603		10,641		13,337

Net charge-offs		18,757		11,763		55,878		33,815		49,051
Provision for loan losses		23,887		15,531		68,473		41,617		58,603

Allowance for loan losses-end of period	$	116,352	$	102,007	$	116,352	$	102,007	$	103,757

5.Intangible Assets — At September 30, 2009, December 31, 2008 and September 30, 2008, the balance of the Corporation’s intangible assets, which consisted of deposit base intangibles, were as follows:


	Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount

September 30, 2008	$	10,137	$	(8,646	)	$	1,491
December 31, 2008	$	10,137	$	(8,734	)	$	1,403
September 30, 2009	$	10,137	$	(8,994	)	$	1,143

Amortization expense for intangible assets was $0.09 million for each of the three-month periods ended September 30, 2009 and 2008. The following table shows the estimated future amortization expense for deposit base intangible assets as of September 30, 2009.

For the years ended:


December 31, 2009	$	88
December 31, 2010		347
December 31, 2011 and beyond		708

	$	1,143

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


	Quarter ended		Quarter ended		Nine months ended			Nine months ended
	September 30,		September 30,		September 30,			September 30,
	2009		2008		2009			2008
BASIC EPS:

Net income	$	22,763	$	29,753	$	67,692		$	90,349
Less: preferred dividend		—		—		(6,167	)		—
Less: accretion of preferred stock discount		—		—		(204	)		—


Net income available to common shareholders	$	22,763	$	29,753	$	61,321		$	90,349


Average common shares outstanding *		85,872		82,090		84,182			82,015


Net income per share — basic	$	0.27	$	0.36	$	0.73		$	1.10


DILUTED EPS:

Net income available to common shareholders	$	22,763	$	29,753	$	61,321		$	90,349
Add: interest expense on convertible bonds		—		—		—			5

	$	22,763	$	29,753	$	61,321		$	90,354

Avg common shares outstanding *		85,872		82,090		84,182			82,015
Add: Equivalents from stock options and restricted stock		8		27		8			28
Add: Equivalents-convertible bonds		—		—		—			19

Average common shares and equivalents outstanding *		85,880		82,117		84,190			82,062


Net income per common share — diluted	$	0.27	$	0.36	$	0.73		$	1.10


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

For the quarters ended September 30, 2009 and 2008 options to purchase 4.8 million and 6.3 million shares, respectively, were outstanding, but not included in the computation of diluted earnings per share because they were antidilutive.

On January 9, 2009, the Corporation completed the sale to the United States Department of the Treasury (the “Treasury”) of $125.0 million of newly issued FirstMerit non-voting preferred shares as part of the Treasury’s Troubled Assets Relief Program (“TARP”) Capital Purchase Program (“CPP”). The Corporation issued and sold to the Treasury for an aggregate purchase price of $125.0 million in cash (1) 125,000 shares of FirstMerit’s Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par value and having a liquidation preference of $1,000 per share, and (2) a warrant to purchase 952,260 FirstMerit common shares, each without par value, at an exercise price of $19.69 per share.

On April 22, 2009, the Corporation repurchased all of 125,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A for $126.2 million, which included all accrued and unpaid dividends as well as the unamortized discount on the preferred stock.

On May 27, 2009, the Corporation completed the repurchase of the warrant held by the Treasury. The Corporation paid $5.0 million to the Treasury to repurchase the warrant.

On May 6, 2009, the Corporation entered into a Distribution Agency Agreement with Credit Suisse Securities (USA) LLC (“Credit Suisse”) pursuant to which the Corporation, from time to time, may offer and sell shares of the Corporation’s common stock. Sales of the common stock are made by means of ordinary brokers’ transactions on the Nasdaq Global Select Market at market prices, in block transactions, or as otherwise agreed with Credit Suisse. During the quarter ended June 30, 2009, the Corporation sold 3.3 million shares with an average value of $18.36 per share. No shares were sold during the quarter ended September 30, 2009.

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

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

•

Commercial —The commercial line of business provides a full range of lending, depository, and related financial services to middle-market corporate, industrial, financial, small business, government and leasing clients. Commercial also includes the personal business of commercial loan clients as well as the “micro business” lines. Products and services offered include commercial loans such as term loans, revolving

		credit arrangements, inventory and accounts receivable financing, commercial mortgages, real estate construction lending and letters of credit.

•		Retail —The retail line of business includes consumer lending and deposit gathering and residential mortgage loan origination and servicing. Retail offers a variety of retail financial products and services, including direct and indirect installment loans, debit and credit cards, home equity loans and lines of credit, residential mortgage loans, 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 2008 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 repricing characteristics. As a result, the three primary lines of business are generally insulated from changes in interest rates. Changes in net interest income due to changes in rates are reported in the other category 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 (“MSRs”) and the origination business franchise value have been allocated capital based upon their respective asset/liability management risk. The provision for loan losses is allocated based upon the actual net charge-offs of each respective line of business, adjusted for loan growth and changes in risk profile. Noninterest income and expenses directly attributable to a line of business are assigned to that line of business. Expenses for centrally provided services are allocated to the business line by various activity based cost formulas.

The Corporation’s business is conducted solely in the United States of America. The following tables present a summary of financial results for the quarters and nine months ended September 30, 2009 and 2008:


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


	Commercial				Retail				Wealth					Other					Consolidated
September 30, 2008	3rd Qtr		YTD		3rd Qtr		YTD		3rd Qtr			YTD		3rd Qtr		YTD			3rd Qtr		YTD
OPERATIONS:
Net interest income	$	37,300	$	112,702	$	47,821	$	145,047	$	4,076		$	12,428	$	1,924	$	(7,226	)	$	91,121	$	262,951
Provision for loan losses		5,568		11,290		9,050		27,570		(346	)		449		1,259		2,308			15,531		41,617
Other income		9,828		29,731		25,604		83,311		8,774			26,309		2,823		9,290			47,029		148,641
Other expenses		20,822		63,623		47,372		142,663		9,015			27,291		3,400		8,816			80,609		242,393
Net income		13,480		43,888		11,052		37,781		2,718			7,147		2,503		1,533			29,753		90,349

8.Derivatives and Hedging Activities — The Corporation, through its mortgage banking and risk management operations, is party to various derivative instruments that are used for asset and liability management and customers’ financing needs. Derivative instruments are contracts between two or more parties that have a notional amount and underlying variable, require no net investment and allow for the net settlement of positions. The notional amount serves as the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified interest rate, index or other component. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the market value of the derivative contract. 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 primary derivatives that the Corporation uses are interest rate swaps, interest rate lock commitments (“IRLCs”), forward sale contracts, and To Be Announced Mortgage Backed Securities (“TBA Securities”). 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.

Derivatives Designated in Hedge Relationships

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

At September 30, 2009, December 31, 2008 and September 30, 2008, the notional or contractual amounts and fair value of the Corporation’s derivatives designated in hedge relationships were as follows:


	Asset Derivatives												Liability Derivatives
	September 30, 2009				December 31, 2008				September 30, 2008				September 30, 2009				December 31, 2008				September 30, 2008
	Notional/				Notional/				Notional/				Notional/				Notional/				Notional/
	Contract		Fair		Contract		Fair		Contract		Fair		Contract		Fair		Contract		Fair		Contract		Fair
	Amount		Value (a)		Amount		Value (a)		Amount		Value (a)		Amount		Value (b)		Amount		Value (b)		Amount		Value (b)

Interest rate swaps:
Fair value hedges	$	—	$	—	$	—	$	—	$	46,048	$	383	$	472,720	$	38,949	$	530,482	$	56,635	$	505,721	$	16,693
Cash flow hedges		—		—		—		—		—		—		—		—		100,000		875		150,000		1,754


Total	$	—	$	—	$	—	$	—	$	46,048	$	383	$	472,720	$	38,949	$	630,482	$	57,510	$	655,721	$	18,447


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

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

Interest Rate Swaps designated as fair value hedges.Through the Corporation’s Fixed Rate Advantage Program (“FRAP Program”) a customer received a fixed interest rate commercial loan and the Corporation subsequently converted that fixed rate loan to a variable rate instrument over the term of the loan by entering into an interest rate swap with a dealer counterparty. The Corporation receives a fixed rate payment from the customer on the loan and pays the equivalent amount to the dealer counterparty on the swap in exchange for a variable rate payment based on the one month London Inter-Bank Offered Rate (“LIBOR”) index. These interest rate swaps are designated as fair value hedges. Through application of the “short cut method of accounting”, there is an assumption that the hedges are effective. The Corporation discontinued originating interest rate swaps under the FRAP program in February 2008 and subsequently began a new interest rate swap program for commercial loan customers, termed the Back-to-Back Program.

The Corporation has other interest rate swaps associated with fixed rate commercial loans. These swaps are designated as fair value hedges and have a similar economic effect as the interest rate swaps originated under the FRAP Program. Regression analysis is utilized to assess the effectiveness of these hedges. There was no ineffectiveness of these fair value hedges for the quarters ended September 30, 2009 and 2008.

Interest Rate Swaps designated as cash flow hedges.The Corporation entered into Federal Funds interest rate swaps to lock in a fixed rate to offset the risk of future fluctuations in the variable interest rate on Federal Funds borrowings. The Corporation entered into a swap with the counterparty during which time the Corporation paid a fixed rate and received a floating rate based on the current effective Federal Funds rate. The Corporation then borrowed Federal Funds in an amount equal to at least the outstanding notional amount of the swap(s) which resulted in the Corporation being left with a fixed rate instrument. These instruments were designated as cash flow hedges. Dollar offset analysis was used to assess the effectiveness of these hedges.

There were no outstanding cash flows hedges as of September 30, 2009 and there was no activity associated with cash flow hedges for the quarter ended September 30, 2009. For the quarter ended September 30, 2008, the amount of the hedge effectiveness on cash flow hedges recognized in OCI and reclassified from OCI into other income as well as the amount of hedge ineffectiveness recognized in other income is as follows:


Amount of Gain / (Loss)		Amount of Gain / (Loss)			Amount of Gain /
Recognized in OCI on		Reclassified from			(Loss) Recognized in
Derivative (Effective		Accumulated OCI into			Income on Derivative
Portion)		Income (Effective Portion)			(Ineffective Portion)

$	(115)	$	(8	)	$	295

Derivatives Not Designated in Hedge Relationships

At September 30, 2009, December 31, 2008 and September 30, 2008, the notional 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, 2009					December 31, 2008					September 30, 2008					September 30, 2009				December 31, 2008				September 30, 2008
	Notional/					Notional/					Notional/					Notional/				Notional/				Notional/
	Contract		Fair			Contract		Fair			Contract		Fair			Contract		Fair		Contract		Fair		Contract		Fair
	Amount		Value (a)			Amount		Value (a)			Amount		Value (a)			Amount		Value (b)		Amount		Value (b)		Amount		Value (b)

Interest rate swaps	$	637,467	$	33,620		$	469,133	$	42,371		$	308,901	$	5,346		$	637,467	$	33,620	$	469,133	$	42,371	$	308,901	$	5,346
IRLCs		57,823		1,586			58,021		591			24,265		(102	)		—		—		—		—		—		—
Forward sales contracts		66,815		(671	)		67,027		(517	)		29,201		115			—		—		—		—		—		—
TBA Securities		—		—			—		—			24,793		(31	)		—		—		—		—		—		—
Credit contracts		—		—			—		—			—		—			64,491		—		88,848		—		77,803		—
Other		—		—			—		—			—		—			14,358		—		—		—		—		—


Total	$	762,105	$	34,535		$	594,181	$	42,445		$	387,160	$	5,328		$	716,316	$	33,620	$	557,981	$	42,371	$	386,704	$	5,346


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

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

Interest Rate Swaps.In 2008, the Corporation implemented the Back-to-Back Program, which is an interest rate swap program for commercial loan customers. The Back-to-Back

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

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 on which the potential borrower has set the interest rate for the loan by entering into an IRLC. 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.

IRLCs are considered free-standing derivatives and do not qualify for hedge accounting. IRLCs generally have a term of up to 60 days before the closing of the loan. During this period, the value of the lock changes with changes in interest rates. The IRLC does not bind the potential borrower to entering into the loan, nor does it guarantee that the Corporation will approve the potential borrower for the loan. Therefore, when determining fair value, the Corporation makes estimates of expected “fallout” (locked pipeline loans not expected to close), using models, which consider cumulative historical fallout rates and other factors. Fallout can occur for a variety of reasons including falling rate environments when a borrower will abandon an IRLC at one lender and enter into a new lower interest rate lock 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.

During the term of an interest rate lock commitment, the Corporation has the risk that interest rates will change from the rate quoted to the borrower. The Corporation economically hedges the risk of changing interest rates by entering into forward sales contracts.

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

Effective August 1, 2008, the Corporation elected to fair value, on a prospective basis, newly originated conforming fixed-rate and adjustable-rate first mortgage warehouse loans. Prior to this election, all warehouse loans were carried at the lower of cost or market and a hedging program was utilized on its mortgage loans held for sale to gain protection for the changes in fair value of the mortgage loans held for sale and the forward sales contracts. As such, both the mortgage loans held for sale and the forward sales contracts were recorded at fair value with ineffective changes in value recorded in current earnings as Loan sales and servicing income. Upon the Corporation’s election to prospectively account for substantially all of its

mortgage loan warehouse products at fair value it discontinued the application of designated hedging relationships for new originations.

The Corporation periodically enters into derivative contracts by purchasing TBA Securities which are utilized as economic hedges of its MSRs to minimize the effects of loss of value of MSRs associated with increase prepayment activity that generally results from declining interest rates. In a rising interest rate environment, the value of the MSRs generally will increase while the value of the hedge instruments will decline. The hedges are economic hedges only, and are terminated and reestablished as needed to respond to changes in market conditions. The Corporation held no outstanding TBA Securities contracts as of September 30, 2009 and December 31, 2008. One TBA contract was outstanding at September 30, 2008.

Credit contracts.Prior to implementation of the Back-to-Back Program, certain of the Corporation’s commercial loan customers entered into interest rate swaps with unaffiliated dealer counterparties. The Corporation entered into swap participations with these dealer counterparties whereby the Corporation guaranteed payment in the event that the counterparty experienced a loss on the interest rate swap due to a failure to pay by the Corporation’s commercial loan customer. The Corporation simultaneously entered into reimbursement agreements with the commercial loan customers obligating the customers to reimburse the Corporation for any payments it makes under the swap participations. The Corporation monitors its payment risk on its swap participations by monitoring the creditworthiness of its commercial loan customers, which is based on the normal credit review process the Corporation would have performed had it entered into these derivative instruments directly with the commercial loan customers. At September 30, 2009, the remaining terms on these swap participation agreements generally ranged from one to nine years. The Corporation’s maximum estimated exposure to written swap participations, as measured by projecting a maximum value of the guaranteed derivative instruments based on interest rate curve simulations and assuming 100% default by all obligors on the maximum values, was approximately $7.8 million as of September 30, 2009. The fair values of the written swap participations were not material at September 30, 2009, December 31, 2008 and September 30, 2008.

Gains and losses recognized in income on non-designated hedging instruments for the quarters ended September 30, 2009 and 2008 are as follows:


		Amount of Gain / (Loss)
		Recognized in Income on
		Derivative
Derivatives not	Location of Gain / (Loss)	Quarter ended,			Quarter ended,
designated as hedging	Recognized in Income on	September 30,			September 30,
instruments	Derivative	2009			2008
IRLCs	Other income	$	96		$	(102	)
Forward sales contracts	Other income		(886	)		115
TBA Securities	Other income		—			(31	)
Credit contracts	Other income		—			—
Other	Other expenses		—			—

Total		$	(790	)	$	(18	)

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 (“ISDA”). These agreements are to include thresholds of credit exposure or the maximum amount of unsecured credit exposure which the Corporation is willing to assume. Beyond the threshold levels, collateral in the form of securities made available from the investment portfolio or other forms of collateral acceptable under the bilateral collateral agreements are provided. The threshold levels for each counterparty are established by the Corporation’s Asset and Liability Committee. The Corporation generally posts collateral in the form of highly rated Government Agency issued bonds or MBSs. Collateral posted against derivative liabilities was $83.9 million, $99.4 million and $44.3 million as of September 30, 2009, December 31, 2008 and September 30, 2008, respectively.

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


	Pension Benefits
	Quarter ended						Nine months ended
	September 30,						September 30,
	2009			2008			2009			2008
Components of Net Periodic Pension Cost
Service Cost	$	1,322		$	1,355		$	3,967		$	4,064
Interest Cost		2,751			2,580			8,252			7,739
Expected return on assets		(2,805	)		(2,923	)		(8,416	)		(8,770	)
Amortization of unrecognized prior service costs		86			40			257			120
Cumulative net loss		757			992			2,273			2,978

Net periodic pension cost	$	2,111		$	2,044		$	6,333		$	6,131


	Postretirement Benefits
	Quarter ended					Nine months ended
	September 30,					September 30,
	2009		2008			2009			2008
Components of Net Periodic Postretirement Cost
Service Cost	$	15	$	249		$	44		$	746
Interest Cost		299		443			897			1,329
Amortization of unrecognized prior service costs		—		(136	)		—			(406	)
Cumulative net loss		9		71			26			211

Net Postretirement Benefit Cost		323		627			967			1,880
Curtailment Gain		—		—			(9,543	)		—

Net periodic postretirement (benefit)/cost	$	323	$	627		$	(8,576	)	$	1,880

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

The Corporation maintains a savings plan under Section 401(k) of the Internal Revenue Code, 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 has suspended its matching contribution to the savings plan.

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

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

•

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

•

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

•

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

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

Financial Instruments Measured at Fair Value

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


					Internal models
	Quoted market		Significant		with significant
	prices in active		observable market		unobservable
	markets		parameters		market parameters
Quarter ended September 30, 2009	Level 1		Level 2		Level 3		Total

Available-for-sale securities	$	3,160	$	2,541,732	$	39,522	$	2,584,414
Residential loans held for sale		—		12,322		—		12,322
Derivative assets		—		34,535		—		34,535

Total assets at fair value on a recurring basis	$	3,160	$	2,588,589	$	39,522	$	2,631,271


Derivative liabilities		—		72,569		—		72,569

Total liabilities at fair value on a recurring basis	$	—	$	72,569	$	—	$	72,569

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

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


			Level 2				Level 3
			Independent				Independent
	# Issues		Pricing Service		# Issues		Broker Quotes

U.S. Treasury and government agencies		1	$	12,000		—	$	—
U.S States and political subdivisions		470		303,728		—		—
Residential mortgage-backed securities:
U.S. government agencies securities:		170		1,626,098		—		—
U.S. government agencies		56		598,644		1		3
Non-agency		1		3		1		17
Corporate debt securities		—		—		8		39,502

		698	$	2,540,473		10	$	39,522

Available-for-sale securities classified as Level 2 are valued using the prices obtained from an independent pricing service. The prices are not adjusted. The independent pricing service uses industry-standard models to price U.S. Government agency obligations and MBSs that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. For collateralized mortgage securities, depending on the characteristics of a given tranche, a volatility driven multidimensional static model or Option-Adjusted Spread model is generally used. Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. On a quarterly basis, the Corporation obtains from the independent pricing service the inputs used to value a sample of securities held in portfolio. The Corporation reviews these inputs to ensure the appropriate classification, within the fair value hierarchy, is ascribed to a fair value measurement in its entirety. In addition, all fair value measurement are reviewed to determine the reasonableness of the measurement relative to changes in observable market data and market information received from outside market participants and analysts.

Available-for-sale securities classified as level 3 securities are primarily single issuer trust preferred securities. These trust preferred securities, which represent less than 1% of the portfolio at fair value, are valued based on the average of two non-binding broker quotes. Since these securities are thinly traded, the Corporation has determined that the using an average of two non-binding broker quotes is a more conservative valuation methodology. The non-binding nature of the pricing results in a classification as Level 3.

Loans held for sale.Effective August 1, 2008, the Corporation elected to account for residential mortgage loans originated subsequent to such date at fair value. Previously, these residential loans had been recorded at the lower of cost or market value. These loans are regularly traded in active markets through programs offered by the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Federal National Mortgage Association (“FNMA”), and observable pricing information is available from market participants. The prices are adjusted as necessary to include any embedded servicing value in the loans and to take into consideration

the specific characteristics of certain loans. These adjustments represent unobservable inputs to the valuation but are not considered significant to the fair value of the loans. Accordingly, residential real estate loans held for sale are classified as Level 2.

Derivatives.The Corporation’s derivatives include interest rate swaps and IRLCs 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 IRLCs 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 IRLCs. An IRLC does not bind the potential borrower to entering into the loan, nor does it guarantee that the Corporation will approve the potential borrower for the loan. Therefore, when determining fair value, the Corporation makes estimates of expected “fallout” (locked pipeline loans not expected to close), using models, which consider cumulative historical fallout rates and other factors. Fallout can occur for a variety of reasons including falling rate environments when a borrower will abandon an IRLC at one lender and enter into a new lower interest rate lock 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 IRLCs in their entirety. These measurements are classified as Level 2.

Derivative assets are typically secured through securities with financial counterparties or cross collateralization with a borrowing customer. Derivative liabilities are typically secured through the Corporation pledging securities to financial counterparties or, in the case of a borrowing customer, by the right of setoff. The Corporation considers factors such as the likelihood of default by itself and its counterparties, right of setoff, and remaining maturities in determining the appropriate fair value adjustments. All derivative counterparties approved by the Corporation’s Asset and Liability Committee are regularly reviewed, and appropriate business action is taken to adjust the exposure to certain counterparties, as necessary. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of marketable collateral securing the position. This approach used to estimate impacted exposures to counterparties is also used by the Corporation to estimate its own credit risk on derivative liability positions. To date, no material losses due to a counterparty’s inability to pay any uncollateralized position have been incurred. There was no significant change in value of derivative assets and liabilities attributed to credit risk in the three-month period ended September 30, 2009.

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


											Total changes
			Total		Purchases, sales				Fair value		in fair values
	Fair Value		unrealized		issuances and				quarter ended		included in current
Quarter ended September 30, 2009	June 30, 2009		gains/(losses) (a)		settlements, net		Transfers		September 30, 2009		period earnings

Available-for-sale securities	$	33,279	$	6,243	$	—	$	—	$	39,522	$	—


(a)		Reported in other comprehensive income (loss)


											Total changes
			Total		Purchases, sales				Fair value		in fair values
	Fair Value		unrealized		issuances and				nine months ended		included in current
Nine months ended September 30, 2009	January 1, 2009		gains/(losses) (a)		settlements, net		Transfers		September 30, 2009		period earnings

Available-for-sale securities	$	31,385	$	8,137	$	—	$	—	$	39,522	$	—


(a)		Reported in other comprehensive income (loss)

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


			Internal models		Internal models
	Quoted market		with significant		with significant
	prices in active		observable market		unobservable
	markets		parameters		market parameters
Quarter ended September 30, 2009	Level 1		Level 2		Level 3		Total

Mortgage servicing rights	$	—	$	—	$	21,567	$	21,567
Impaired and nonaccrual loans		—		—		83,487		83,487
Other property (1)		—		—		13,637		13,637

Total assets at fair value on a nonrecurring basis	$	—	$	—	$	118,691	$	118,691


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

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

The Corporation utilizes a third party vendor to perform the modeling to estimate the fair value of its mortgage servicing rights. The Corporation reviews the estimated fair values and

assumptions used by the third party in the model on a quarterly basis. The Corporation also compares the estimates of fair value and assumptions to recent market activity and against its own experience.

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

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

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

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

Impaired and nonaccrual loans.Fair value adjustments for these items typically occur when there is evidence of impairment. Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. The Corporation measures fair value based on the value of the collateral securing the loans. Collateral may be in the form of real estate or personal property including equipment and inventory. The vast majority of the collateral is real estate. The value of the collateral is determined based on internal estimates as well as third party appraisals or non-binding broker quotes. These measurements were classified as Level 3.

Other Property.Other property includes foreclosed assets and properties securing residential and commercial loans. Foreclosed assets are adjusted to fair value less costs to sell upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the

lower of carry value or fair value less costs to sell. Fair value is generally based upon internal estimates and third party appraisals or non-binding broker quotes and, accordingly, considered a Level 3 classification.

Fair Value Option

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

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

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

Fair Value

Carrying Amount

Fair Value

Aggregate Unpaid

Less Aggregate

September 30, 2009

Carrying Amount

Principal

Unpaid Principal

Loans held for sale reported at fair value

12,322$

11,950

372

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

The assets accounted for under SFAS 159 are measured at fair value with changes in fair value recognized in current earnings. The changes in fair value included in current period earnings for residential loans held for sale measured at fair value are shown by income statement line item, below:


	Three Months Ended		Nine Months Ended
	September 30, 2009		September 30, 2009
Changes in fair value included in net income:
Loan sales and servicing income	$	155	$	218

Disclosures about Fair Value of Financial Instruments

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


	September 30, 2009				December 31, 2008
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value

Financial assets:
Cash and due from banks	$	193,060	$	193,060	$	178,406	$	178,406
Investment securities		2,751,077		2,751,077		2,772,848		2,772,848
Loan held for sale		12,519		12,519		11,141		11,141
Net loans		6,913,296		6,394,834		7,321,856		6,727,645
Accrued interest receivable		26,195		26,195		42,481		42,481
Mortgage servicing rights		20,881		21,567		18,778		18,803
Derivative assets		34,535		34,535		42,371		42,371

Financial liabilities:
Deposits	$	7,271,274	$	7,280,232	$	7,597,679	$	7,620,870
Securities sold under agreements to repurchase		1,350,475		1,352,896		921,390		921,808
Wholesale borrowings		749,397		757,489		1,344,195		1,350,942
Accrued interest payable		20,565		20,565		29,018		29,018
Derivative liabilities		72,569		72,569		99,882		99,882

General —For short-term financial instruments realizable in three months or less, the carrying amount approximates fair value. Unless otherwise stated, the rates used in discounted cash flow analyses are based on market yield curves.

Cash and due from banks— The carrying amount approximates fair value primarily due to their short-term nature.

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

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

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

Accrued interest receivable— The carrying amount approximates fair value primarily due to their short-term nature.

Mortgage servicing rights— See Financial Instruments Measured at Fair Value above.

Deposits— The carrying amounts of deposits with no stated maturity, which includes demand deposits, money market accounts and other savings accounts, approximates fair 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.

Securities sold under agreements to repurchase and wholesale borrowings— The carrying amounts of Federal funds purchased, repurchase agreements and other short term borrowings are considered to be their fair value because of their short term nature. For all other borrowed funds, quoted market prices or the discounted cash flow method were used to estimate fair values. 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 approximates fair value primarily due to their short-term nature.

Derivative assets and liabilities— See Financial Instruments Measured at Fair Value above.

11.Mortgage Servicing Rights and Mortgage Servicing Activity — The Corporation serviced for third parties approximately $2.0 billion and $2.0 billion of residential mortgage loans at September 30, 2009 and December 31, 2008, respectively. Loan servicing fees, not including valuation changes included in loan sales and servicing income, were $1.3 million for each of the three-month periods ended September 30, 2009 and 2008, and $3.8 million for each of the nine-month periods ended September 30, 2009 and 2008.

Servicing rights are presented within other assets on the balance sheet. The retained servicing rights are initially valued at fair value. Since mortgage servicing rights do not trade in an active market with readily observable prices, the Corporation relies primarily on a discounted cash flow analysis model to estimate the fair value of its mortgage servicing rights. Additional information can be found in Note 10(Fair Value). Mortgage servicing rights are subsequently measured using the amortization method. Accordingly, the mortgage servicing rights are amortized over the period of, and in proportion to, the estimated net servicing income and is recorded in loan sales and servicing income.

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


	Three months ended						Nine months ended
	September 30,						September 30,
	2009			2008			2009			2008

Balance at beginning of period	$	20,828		$	19,869		$	18,778		$	19,354
Addition of mortgage servicing rights		968			637			4,161			2,579
Amortization		(901	)		(643	)		(2,828	)		(2,070	)
Changes in allowance for impairment		(14	)		—			770			—

Balance at end of period	$	20,881		$	19,863		$	20,881		$	19,863

Fair value at end of period	$	21,567		$	23,198		$	21,567		$	23,198

Key economic assumptions and the sensitivity of the fair value of the mortgage servicing rights related to immediate 10% and 20% adverse changes in those assumptions at September 30, 2009 are presented in the table below. These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, in the table below, the effect of a variation in a particular 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)		11.08	%
Decrease in fair value from 10% adverse change	$	831,906
Decrease in fair value from 20% adverse change		1,616,784
Discount rate assumption		9.68	%
Decrease in fair value from 100 basis point adverse change	$	748,699
Decrease in fair value from 200 basis point adverse change		1,443,269
Expected weighted-average life (in months)		104.2

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 serving rights are disaggregated based on loan type and interest rate which are the predominant risk characteristics of the underlying loans. If any impairment results after current market assumptions are applied, the value of the servicing rights is reduced through the use of a valuation allowance, the balance of which is $0.01 million at September 30, 2009, $0.8 million at December 31, 2008 and zero at September 30, 2008.

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

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

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


	Three months ended								Year ended								Three months ended
FIRSTMERIT CORPORATION AND	September 30, 2009								December 31, 2008								September 30, 2008
SUBSIDIARIES	Average					Average			Average					Average			Average					Average
(Dollars in thousands)	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate
ASSETS
Cash and due from banks	$	159,985							$	177,089							$	171,370
Investment securities and federal funds sold:
U.S. Treasury securities and U.S.
Government agency obligations (taxable)		2,210,551			24,115		4.33	%		1,985,026			94,260		4.75	%		1,943,589			23,374		4.78	%
Obligations of states and political subdivisions (tax exempt)		318,853			4,872		6.06	%		294,724			17,910		6.08	%		301,688			4,575		6.03	%
Other securities and federal funds sold		199,028			2,049		4.08	%		216,794			11,326		5.22	%		216,154			2,780		5.12	%


Total investment securities and federal funds sold		2,728,432			31,036		4.51	%		2,496,544			123,496		4.95	%		2,461,431			30,729		4.97	%

Loans held for sale		17,357			230		5.26	%		29,419			1,602		5.45	%		12,048			178		5.88	%
Loans		7,057,021			84,107		4.73	%		7,203,946			434,704		6.03	%		7,282,333			107,781		5.89	%


Total earning assets		9,802,810			115,373		4.67	%		9,729,909			559,802		5.75	%		9,755,812			138,688		5.66	%

Allowance for loan losses		(111,073	)							(96,714	)							(98,091	)
Other assets		777,637								739,158								740,405


Total assets	$	10,629,359							$	10,549,442							$	10,569,496


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand — non-interest bearing	$	1,947,359			—		—		$	1,530,021			—		—		$	1,545,427			—		—
Demand — interest bearing		647,712			137		0.08	%		687,160			2,514		0.37	%		678,803			589		0.35	%
Savings and money market accounts		2,916,980			5,763		0.78	%		2,398,778			29,839		1.24	%		2,373,995			6,932		1.16	%
Certificates and other time deposits		1,872,456			12,284		2.60	%		2,801,623			105,853		3.78	%		2,728,139			23,463		3.42	%


Total deposits		7,384,507			18,184		0.98	%		7,417,582			138,206		1.86	%		7,326,364			30,984		1.68	%

Securities sold under agreements to repurchase		1,087,875			1,286		0.47	%		1,343,441			31,857		2.37	%		1,504,011			8,244		2.18	%
Wholesale borrowings		883,377			6,824		3.06	%		663,109			27,574		4.16	%		634,226			6,801		4.27	%


Total interest bearing liabilities		7,408,400			26,294		1.41	%		7,894,111			197,637		2.50	%		7,919,174			46,029		2.31	%

Other liabilities		234,776								189,222								175,400

Shareholders’ equity		1,038,824								936,088								929,495


Total liabilities and shareholders’ equity	$	10,629,359							$	10,549,442							$	10,569,496


Net yield on earning assets	$	9,802,810			89,079		3.61	%	$	9,729,909			362,165		3.72	%	$	9,755,812			92,659		3.78	%


Interest rate spread							3.26	%							3.25	%							3.35	%


Note:		Interest income on tax-exempt securities and loans has been adjusted to a fully-taxable equivalent basis.

		Nonaccrual loans have been included in the average balances.

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


FIRSTMERIT CORPORATION AND	Nine months ended								Year ended								Nine months ended
SUBSIDIARIES	September 30, 2009								December 31, 2008								September 30, 2008
	Average					Average			Average					Average			Average					Average
(Dollars in thousands)	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate
ASSETS
Cash and due from banks	$	188,010							$	177,089							$	171,812
Investment securities and federal funds sold:
U.S. Treasury securities and U.S.
Government agency obligations (taxable)		2,222,119			74,524		4.48	%		1,985,026			94,260		4.75	%		1,989,648			70,276		4.72	%
Obligations of states and political
subdivisions (tax exempt)		318,825			14,696		6.16	%		294,724			17,910		6.08	%		287,507			13,106		6.09	%
Other securities and federal funds sold		207,938			6,594		4.24	%		216,794			11,326		5.22	%		217,776			8,607		5.28	%


Total investment securities and federal funds sold		2,748,882			95,814		4.66	%		2,496,544			123,496		4.95	%		2,494,931			91,989		4.93	%

Loans held for sale		20,395			829		5.43	%		29,419			1,602		5.45	%		36,310			1,501		5.52	%
Loans		7,227,077			257,619		4.77	%		7,203,946			434,704		6.03	%		7,149,451			329,314		6.15	%


Total earning assets		9,996,354			354,262		4.74	%		9,729,909			559,802		5.75	%		9,680,692			422,804		5.83	%

Allowance for loan losses		(106,190	)							(96,714	)							(95,309	)
Other assets		794,893								739,158								731,689


Total assets	$	10,873,067							$	10,549,442							$	10,488,884


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand — non-interest bearing	$	1,869,669			—		—		$	1,530,021			—		—		$	1,503,871			—		—
Demand — interest bearing		658,048			451		0.09	%		687,160			2,514		0.37	%		696,881			2,144		0.41	%
Savings and money market accounts		2,789,455			16,592		0.80	%		2,398,778			29,839		1.24	%		2,353,140			23,075		1.31	%
Certificates and other time deposits		2,229,694			46,197		2.77	%		2,801,623			105,853		3.78	%		2,778,077			82,037		3.94	%


Total deposits		7,546,866			63,240		1.12	%		7,417,582			138,206		1.86	%		7,331,969			107,256		1.95	%

Securities sold under agreements to repurchase		991,926			3,496		0.47	%		1,343,441			31,857		2.37	%		1,402,201			28,105		2.68	%
Wholesale borrowings		1,017,330			21,064		2.77	%		663,109			27,574		4.16	%		628,441			20,133		4.28	%


Total interest bearing liabilities		7,686,453			87,800		1.53	%		7,894,111			197,637		2.50	%		7,858,740			155,494		2.64	%

Other liabilities		273,116								189,222								188,068

Shareholders’ equity		1,043,829								936,088								938,205


Total liabilities and shareholders’ equity	$	10,873,067							$	10,549,442							$	10,488,884


Net yield on earning assets	$	9,996,354			266,462		3.56	%	$	9,729,909			362,165		3.72	%	$	9,680,692			267,310		3.69	%


Interest rate spread							3.21	%							3.25	%							3.19	%


Note:		Interest income on tax-exempt securities and loans has been adjusted to a fully-taxable equivalent basis.

		Nonaccrual loans have been included in the average balances.

SUMMARY

FirstMerit Corporation reported third quarter 2009 net income of $22.8 million, or $0.27 per diluted share. This compares with $15.5 million, or $0.13 per diluted share, for the second quarter 2009 and $29.8 million, or $0.36 per diluted share, for the third quarter 2008. Earnings per share for all periods presented have been restated to reflect stock dividends declared on April 28, 2009 and August 20, 2009.

Returns on average common equity (“ROE”) and average assets (“ROA”) for the third quarter 2009 were 8.69% and 0.85%, respectively, compared with 6.27% and 0.57% for the second quarter 2009 and 12.73% and 1.12% for the third quarter 2008. Included in the second quarter 2009 results was a $3.7 million after-tax Federal Deposit Insurance Corporation (“FDIC”) Special Assessment fee ($0.04 per share). Also included in the second quarter 2009 results was a $4.5 million after-tax expense ($0.06 per share) associated with the unamortized discount on the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, issued under the TARP program.

Net interest margin was 3.61% for the third quarter of 2009, compared with 3.56% for the second quarter of 2009 and 3.78% for the third quarter of 2008. The margin expansion in the quarter was primarily driven by lower funding costs due to a continued shift in deposit mix with increased emphasis on core deposit products and lower certificate of deposit balances.

Average loans during the third quarter of 2009 decreased $189.7 million, or 2.62%, compared to the second quarter of 2009 and decreased $225.3 million, or 3.09%, compared with the third quarter of 2008. The fluctuation from second quarter 2009 to third quarter 2009 was due to decreases in commercial loans of $157.3 million, or 3.69%, mortgage loans of $21.9 million, or 4.26%, and installment loans of $20.9 million, or 1.38%. The decrease in the third quarter 2009 as compared to third quarter 2008 was due to decreases in commercial loans of $63.2 million, or 1.52%, mortgage loans of $77.2 million, or 13.56%, and installment loans of $125.2 million, or 7.74%. The decrease in average loan volume over both periods reflects the current economic cycle in which business owners and consumers are retrenching on their demand for leverage and borrowing. Business customers continue their trend in inventory and receivable reduction and paying down existing debt to strengthen their balance sheets. Consumer customers are taking a similar approach with lower borrowing demand and increased usage of short-term savings products.

Average deposits during the third quarter of 2009 decreased $230.3 million, or 3.02%, compared with the second quarter of 2009 and increased $58.1 million, or 0.79%, compared with the third quarter of 2008. During the third quarter of 2009, the Corporation increased its average core deposits, which excludes time deposits, by $138.9 million, or 2.58%, compared with the second quarter of 2009, and $913.8 million, or 19.87%, compared with the third quarter of 2008. These results reflect the Corporation’s continued success in growing core deposit relationships and deemphasizing a reliance on higher-cost certificate of deposit accounts. The core deposit growth reflects the Corporation’s success in building a strong brand name in its core markets and capitalizing on market disruption in northeast Ohio.

Average investments decreased $5.4 million, or 0.20%, compared with the second quarter of 2009 and increased $270.7 million, or 11.01%, over the third quarter of 2008. The year-over-year increase is a result of the leverage strategy implemented in the fourth quarter of 2008.

Net interest income on a fully tax-equivalent (“FTE”) basis was $89.1 million in the third quarter 2009 compared with $88.8 million in the second quarter of 2009 and $92.7 million in the third quarter of 2008. Compared with the second quarter of 2009, average earning assets decreased $198.5 million, or 1.98%, and increased $47.0 million, or 0.48%, compared to the third quarter of 2008.

Noninterest income net of securities transactions for the third quarter of 2009 was $48.6 million, a decrease of $1.0 million, or 2.06%, from the second quarter of 2009 and an increase of $1.6 million, or 3.43%, from the third quarter of 2008. The primary changes in these noninterest income categories compared with the third quarter of 2008 were as follows: trust income was $5.1 million, a decrease of $0.5 million; ATM and other service fees was $2.9 million, an increase of $0.2 million; investment services and insurance was $2.5 million, a decrease of $0.4 million; and loan sales and servicing was $3.9 million, an increase of $2.5 million. The increase in loan sales and servicing is primarily attributed to increased mortgage origination and sales volume.

Other income, net of securities gains, as a percentage of net revenue for the third quarter of 2009 was 35.32% compared with 35.87% for second quarter of 2009 and 33.67% for the third quarter of 2008. Net revenue is defined as net interest income, on a FTE basis, plus other income, less gains from securities sales.

Noninterest expense for the third quarter of 2009 was $84.2 million, a decrease of $6.4 million, or 7.07%, from the second quarter of 2009 and an increase of $3.6 million, or 4.41%, from the third quarter of 2008. Included in the second quarter 2009 expenses was the FDIC Special Assessment pretax fee of $5.1 million.

The efficiency ratio for the third quarter of 2009 was 61.05%, compared with 65.34% for the second quarter of 2009 and 57.64% for the third quarter of 2008.

Net charge-offs totaled $18.8 million, or 1.05% of average loans, in the third quarter of 2009, compared with $21.6 million, or 1.19% of average loans, in the second quarter 2009 and $11.8 million, or 0.64% of average loans, in the third quarter of 2008.

Nonperforming assets totaled $88.9 million at September 30, 2009, an increase of $15.5 million, or 21.17%, compared with June 30, 2009 and an increase of $45.4 million, or 104.37%, compared with September 30, 2008. Nonperforming assets at September 30, 2009 represented 1.26% of period-end loans plus other real estate compared with 1.03% at June 30, 2009 and 0.59% at September 30, 2008.

The allowance for loan losses totaled $116.4 million at September 30, 2009, an increase of $5.1 million from June 30, 2009. Given the current economic environment, the Corporation has continued a strategy to increase reserve levels and year-to-date has provided $12.6 million in excess of net charge-offs to the allowance for loan losses. At September 30, 2009, the allowance for loan losses was 1.66% of period-end loans compared with 1.56% at June 30, 2009 and 1.38%

at September 30, 2008. The allowance for credit losses is the sum of the allowance for loan losses and the reserve for unfunded lending commitments. For comparative purposes the allowance for credit losses was 1.72% at September 30, 2009, compared with 1.64% at June 30, 2009 and 1.47% at September 30, 2008. The allowance for credit losses to nonperforming loans was 153.27% at September 30, 2009, compared with 184.71% at June 30, 2009 and 281.28% at September 30, 2008.

The Corporation’s total assets at September 30, 2009 were $10.8 billion, an increase of $64.4 million, or 0.60%, compared with June 30, 2009 and an increase of $76.5 million, or 0.72%, compared with September 30, 2008. Growth in investment securities of $300.8 million, or 12.28%, compared with September 30, 2008, provided the majority of the overall asset growth.

Total deposits were $7.3 billion at September 30, 2009, a decrease of $179.9 million, or 2.41%, from June 30, 2009 and a decrease of $159.3 million, or 2.14%, from September 30, 2008. The decrease as compared to both June 30, 2009 and September 30, 2008 was driven by a decrease in certificates and time deposits of 18.12% and 40.40%, respectively, reflecting the Corporation’s success remixing the balance sheet and focusing on core deposit growth. Core deposits totaled $5.6 billion at September 30, 2009, an increase of $194.5 million, or 3.61%, from June 30, 2009 and an increase of $988.1 million, or 21.52%, from September 30, 2008.

Shareholders’ equity was $1,059.2 million at September 30, 2009, compared with $1,022.6 million at June 30, 2009 and $926.1 million at September 30, 2008. The Corporation increased its strong capital position as tangible common equity to assets was 8.65% at September 30, 2009, compared with 8.36% at June 30, 2009 and, 7.45% at September 30, 2008. The common dividend per share paid in the third quarter 2009 was $0.16 per share as well as a $0.13 per share dividend of common stock.

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, securities sold under agreements to repurchase and wholesale borrowings). Net interest income for the quarter ended September 30, 2009 was $87.4 million compared to $91.1 million for the quarter ended September 30, 2008. For the purpose of this remaining discussion, net interest income is presented on an FTE basis, to provide a comparison among all types of interest earning assets. That is, interest on tax-free securities and tax-exempt loans has been restated as if such interest were taxed at the statutory Federal income tax rate of 35%, adjusted for the non-deductible portion of interest expense incurred to acquire the tax-free assets. Net interest income presented on an FTE basis is a non-GAAP financial measure widely used by financial services organizations. The FTE adjustment was $1.7 million and $1.5 million for the quarters ending September 30, 2009 and 2008, respectively. The FTE adjustment was $5.1 million and $4.4 million for the nine months ending September 30, 2009 and 2008, respectively.

FTE net interest income for the quarter ended September 30, 2009 was $89.1 million compared to $92.7 million for the three months ended September 30, 2008. FTE net interest income for the nine months ended September 30, 2009 was $266.5 million compared to $267.3 million for six months ended September 30, 2008.

As illustrated in the following rate/volume analysis table, interest income and interest expense both decreased due to the falling interest rate environment. The Federal Reserve discount rate decreased 25 basis points in April 2008, 100 basis points in October 2008, and 75 to 100 basis points again in December 2008 and rates held flat for the first three quarters of 2009. The section entitled “Financial Condition” contains more discussion about changes in earning assets and funding sources.


	Quarters ended September 30, 2009 and 2008									Nine months ended September 30, 2009 and 2008
RATE/VOLUME ANALYSIS	Increases (Decreases)									Increases (Decreases)
(Dollars in thousands)	Volume			Rate			Total			Volume			Rate			Total
INTEREST INCOME — FTE
Investment securities and federal funds sold	$	3,147		$	(2,840	)	$	307		$	9,156		$	(5,331	)	$	3,825
Loans held for sale		72			(20	)		52			(647	)		(25	)		(672	)
Loans		(3,245	)		(20,429	)		(23,674	)		3,538			(75,233	)		(71,695	)

Total interest income — FTE	$	(26	)	$	(23,289	)	$	(23,315	)	$	12,047		$	(80,589	)	$	(68,542	)

INTEREST EXPENSE
Demand deposits-interest bearing	$	(26	)	$	(426	)	$	(452	)	$	(114	)	$	(1,579	)	$	(1,693	)
Savings and money market accounts		1,373			(2,542	)		(1,169	)		3,739			(10,222	)		(6,483	)
Certificates of deposits and other time deposits		(6,366	)		(4,813	)		(11,179	)		(14,270	)		(21,570	)		(35,840	)
Securities sold under agreements to repurchase		(1,815	)		(5,143	)		(6,958	)		(6,447	)		(18,162	)		(24,609	)
Wholesale borrowings		2,236			(2,213	)		23			9,655			(8,724	)		931

Total interest expense	$	(4,598	)	$	(15,137	)	$	(19,735	)	$	(7,437	)	$	(60,257	)	$	(67,694	)

Net interest income — FTE	$	4,572		$	(8,152	)	$	(3,580	)	$	19,484		$	(20,332	)	$	(848	)

Net Interest Margin

The following table provides 2009 FTE net interest income and net interest margin totals as well as 2008 comparative amounts:


	Quarters ended						Nine months
	September 30,						September 30,
(Dollars in thousands)	2009			2008			2009			2008

Net interest income	$	87,377		$	91,121		$	261,386		$	262,951
Tax equivalent adjustment		1,702			1,538			5,076			4,359

Net interest income — FTE	$	89,079		$	92,659		$	266,462		$	267,310


Average earning assets	$	9,802,810		$	9,755,812		$	9,996,354		$	9,680,692

Net interest margin — FTE		3.61	%		3.78	%		3.56	%		3.69	%

Average loans outstanding for the current year and prior year third quarters totaled $7.1 billion and $7.3 billion, respectively. Decreases in average loan balances from third quarter 2008 to the third quarter 2009 occurred in commercial, mortgage, and installment loans and leases while home equity and credit card loans increased. The overall decrease in average loan volume reflects the current economic cycle in which business owners and consumers are retrenching on their demand for leverage and borrowing. Business customers continue their

trend in inventory and receivable reduction and paying down existing debt to strengthen their balance sheets. Consumer customers are taking a similar approach with lower borrowing demand and increased usage of short-term savings products.

Specific changes in average loans outstanding, compared to the third quarter 2008, were as follows: installment loans, both direct and indirect declined $125.2 million or 7.74%; mortgage loans were down $77.2 million or 13.56%; commercial loans were down $63.2 million or 1.52%; leases decreased $10.2 million or 14.69%; home equity loans were up $49.0 million or 6.91%; and credit card loans increased $1.5 million or 1.04%. The majority of fixed-rate mortgage loan originations are sold to investors through the secondary mortgage loan market. Average outstanding loans for the 2009 and 2008 third quarters equaled 71.99% and 74.65% of average earning assets, respectively.

Average deposits were $7.4 billion during the 2009 third quarter, up $58.1 million, or .79%, from the same period last year. For the quarter ended September 30, 2009, average core deposits (which are defined as checking accounts, savings accounts and money market savings products) increased $913.8 million, or 19.87%, and represented 74.64% of total average deposits, compared to 62.76% for the 2008 third quarter. Average certificates of deposit (“CDs”) decreased $855.7 million, or 31.37%, compared to the prior year quarter. These results reflect the Corporation’s continued success in growing core deposit relationships and deemphasizing a reliance on higher-cost certificate of deposit accounts. The core deposit growth reflects the Corporation’s success in building a strong brand name in its core markets and capitalizing on market disruption in northeast Ohio. Average wholesale borrowings increased $249.2 million, and as a percentage of total interest-bearing funds equaled 11.92% for the 2009 third quarter and 8.01% for the same quarter one year ago. Securities sold under agreements to repurchase decreased $416.1 million, and as a percentage of total interest bearing funds equaled 14.68% for the 2009 third quarter and 18.99% for the 2008 third quarter. Average interest-bearing liabilities funded 75.57% of average earning assets in the current year quarter and 81.17% during the quarter ended September 30, 2008.

Other Income

Other (non-interest) income for the quarter ended September 30, 2009 totaled $51.6 million, an increase of $4.5 million from the $47.0 million earned during the same period one year ago. The Corporation continues to focus upon non-interest income (fee income) as a means by which to diversify revenue.

Other income, net of securities gains, as a percentage of net revenue for the third quarter was 35.32% compared to 33.67% for the same quarter one year ago. Net revenue is defined as net interest income, on a FTE basis, plus other income, less gains from securities sales.

The primary changes in other income for the 2009 third quarter as compared to the third quarter of 2008, were as follows: trust department income was $5.1 million, down 8.65%, and investment services and insurance was $2.5 million, down 13.83%, reflecting lower balances in assets under management; loan sales and servicing income was $3.9 million, an increase of $2.5 million, primarily attributable to a rise in mortgage banking revenue as the lower rate environment drove an increase in mortgage loan production and increased profitability on loan

sales; and net investment securities gains were $2.9 million, an increase of 100%, resulting from the execution of a strategy to reduce increasing sensitivity to higher interest rates.

The changes in other income for the nine months ended September 30, 2009 compared to September 30, 2008 were similar to the quarterly analysis. The primary changes in other income for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008, were as follows: trust department income was $15.3 million, down 9.07% and investment services and insurance income was $7.7 million, down 10.15%, reflecting lower balances in assets under management; loan sales and servicing income was $10.0 million, an increase of $5.4 million, primarily attributable to a rise in mortgage banking revenue as the lower rate environment drove an increase in mortgage loan production and increased profitability on loan sales; and net investment securities gains were $4.1 million, an increase of $3.5 million, resulting from the execution of a strategy to reduce increasing sensitivity to higher interest rates. Included in other income in the first nine months of 2009 was a $9.5 million adjustment due to the curtailment of the postretirement medical plan for active employees. Included in other income in the first nine months of 2008 was a $7.9 million gain from the partial redemption of Visa, Inc. shares.

Other Expenses

Other (non-interest) expenses totaled $84.2 million for the third quarter 2009 compared to $80.6 million for the same 2008 quarter, an increase of $3.6 million, or 4.41%. Other expenses totaled $257.9 million for the nine months ended September 30, 2009 compared to $242.4 million for the nine months ended September 30, 2008, an increase of $15.5 million, or 6.41%.

For the three and nine months ended September 30, 2009, increases in operating costs compared to the three and nine months ended September 30, 2008 were primarily attributable to higher FDIC deposit insurance expense. FDIC expense was $13.3 million for the nine months ended September 30, 2009, as compared to $0.9 million for the nine months ended September 30, 2008. In the second quarter of 2009, the FDIC levied a five-basis point emergency special assessment of $5 million based on FirstMerit Bank’s average total assets. This special assessment was to restore the deposit insurance reserve ratio to the 1.15% minimum mandated by the Federal Deposit Insurance Reform Act of 2005. In addition, FDIC deposit insurance expense increased as a result of an overall increase in the FDIC deposit insurance base assessment and the use of assessment credits in 2008 and the first quarter of 2009. All assessment credits were fully utilized subsequent to the first quarter of 2009.

The efficiency ratio of 61.05% for third quarter 2009 increased 341 basis points over the efficiency ratio of 57.64% recorded for the third quarter 2008. The efficiency ratio for the three months ended September 30, 2009 indicates 61.05 cents of operating costs were spent in order to generate each dollar of net revenue.

Federal Income Taxes

Federal income tax expense was $8.1 million and $12.3 million for the quarters ended September 30, 2009 and 2008, respectively. The effective federal income tax rate for the third quarter 2009 was 26.31%, compared to 29.18% for the same quarter 2008. For the nine months ended September 30, 2009 and 2008, respectively, the effective tax rate was 26.88% and

29.18%. Tax reserves have been specifically estimated for potential at-risk items in accordance with ASC 740,Income Taxes.

FINANCIAL CONDITION

Investment Securities

Investment securities, including available-for-sale and held-to-maturity totaled $2.7 billion at September 30, 2009, compared to $2.8 billion at December 31, 2008 and $2.5 billion at September 30, 2008. 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 (“MBSs”). Held to maturity securities are primarily FHLB of Cincinnati stock and FRB stock, which as a member of both organizations, the Corporation is required to own a certain amount of stock based its level of borrowings and other factors.

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

Net unrealized gains were $74.4 million, compared to $1.2 million at December 31, 2008 and net unrealized losses of $43.9 million at September 30, 2008. The improvement in the fair value of the investment securities is driven by government agency securities held in portfolio.

Gross unrealized losses of $21.9 million as of September 30, 2009, compared to $38.3 million at December 31, 2008 and $52.9 million at September 30, 2008 were concentrated within trust preferred securities held in portfolio. The Corporation holds eight, single issuer, trust preferred securities. Such investments are less than 1% 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 caused risk premiums to increase markedly resulting in the significant 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 3 (Investment Securities).

Allowance for Credit Losses

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


	Quarter ended			Year Ended			Quarter ended
	September 30,			December 31,			September 30,
(In thousands)	2009			2008			2008

Allowance for Loan Losses
Allowance for loan losses-beginning of period	$	111,222		$	94,205		$	98,239
Provision for loan losses		23,887			58,603			15,531
Net charge-offs		(18,757	)		(49,051	)		(11,763	)

Allowance for loan losses-end of period	$	116,352		$	103,757		$	102,007


Reserve for Unfunded Lending Commitments

Balance at beginning of period	$	6,054		$	7,394		$	7,310
Provision for credit losses		(1,584	)		(806	)		(817	)

Balance at end of period	$	4,470		$	6,588		$	6,493


Allowance for credit losses	$	120,822		$	110,345		$	108,500


Annualized net charge-offs as a % of average loans		1.05	%		0.68	%		0.64	%


Allowance for loan losses:
As a percentage of loans outstanding		1.66	%		1.40	%		1.38	%

As a percentage of nonperforming loans		147.60	%		198.76	%		264.45	%

As a multiple of annualized net charge offs		1.56	x		2.12	x		2.18	X


Allowance for credit losses:
As a percentage of loans outstanding		1.72	%		1.49	%		1.47	%

As a percentage of nonperforming loans		153.27	%		211.38	%		281.28	%

As a multiple of annualized net charge offs		1.62	x		2.25	x		2.32	X

The allowance for credit losses increased $10.5 million from December 31, 2008 to September 30, 2009, and increased $12.3 million from September 30, 2008 to September 30, 2009. The increase for both periods was attributable to additional reserves that were established to address identified risks associated with increasing unemployment rates and the decline in residential and commercial real estate values.

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

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

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


	At September 30, 2009
	Loan Type
			Commercial
Allowance for Loan Losses	Commercial		R/E				Installment		Home Equity		Credit Card		Res Mortgage
Components:	Loans		Loans		Leases		Loans		Loans		Loans		Loans		Total
(In thousands)
Individually Impaired Loan Component:
Loan balance	$	24,708	$	48,189	$	—	$	—	$	—	$	—	$	—	$	72,897
Allowance		7,911		6,957		—		—		—		—		—		14,868
Collective Loan Impairment Components:
Credit risk-graded loans
Grade 1 loan balance		45,463		5,846		7,518										58,827
Grade 1 allowance		29		1		6										36
Grade 2 loan balance		88,543		80,316		1,713										170,572
Grade 2 allowance		68		87		2										157
Grade 3 loan balance		364,463		568,110		16,370										948,943
Grade 3 allowance		620		1,123		35										1,778
Grade 4 loan balance		919,172		1,660,624		32,959										2,612,755
Grade 4 allowance		9,438		15,598		233										25,269
Grade 5 (Special Mention) loan balance		70,790		49,208		1,332										121,330
Grade 5 allowance		1,869		1,952		34										3,855
Grade 6 (Substandard) loan balance		71,261		100,555		648										172,464
Grade 6 allowance		5,986		11,277		53										17,316
Grade 7 (Doubtful) loan balance		—		4		—										4
Grade 7 allowance		—		—		—										0
Consumer loans based on payment status:
Current loan balances								1,452,218		756,735		141,322		446,273		2,796,548
Current loans allowance								17,659		5,535		7,494		3,318		34,006
30 days past due loan balance								16,062		2,312		2,356		13,896		34,626
30 days past due allowance								2,459		660		1,215		587		4,921
60 days past due loan balance								8,382		1,470		1,604		4,253		15,709
60 days past due allowance								3,524		954		1,200		619		6,297
90+ days past due loan balance								4,538		1,036		2,485		16,914		24,973
90+ days past due allowance								3,111		1,064		2,323		1,351		7,849

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

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


	At December 31, 2008
	Loan Type
	Commercial		Commercial R/E				Installment		Home Equity		Credit Card		Res Mortgage
Allowance for Loan Losses Components:	Loans		Loans		Leases		Loans		Loans		Loans		Loans		Total
(In thousands)
Individually Impaired Loan Component:
Loan balance	$	8,438	$	45,220	$	—	$	—	$	—	$	—	$	—	$	53,658
Allowance		48		3,924		—		—		—		—		—		3,972
Collective Loan Impairment Components:
Credit risk-graded loans
Grade 1 loan balance		37,316		9,030		5,976										52,322
Grade 1 allowance		42		18		8										68
Grade 2 loan balance		199,166		138,399		3,046										340,611
Grade 2 allowance		664		606		12										1,282
Grade 3 loan balance		559,165		566,369		27,980										1,153,514
Grade 3 allowance		1,765		3,961		108										5,834
Grade 4 loan balance		992,118		1,583,721		28,333										2,604,172
Grade 4 allowance		8,920		27,145		287										36,352
Grade 5 (Special Mention) loan balance		33,940		41,215		190										75,345
Grade 5 allowance		1,110		2,495		6										3,611
Grade 6 (Substandard) loan balance		66,134		72,387		2,069										140,590
Grade 6 allowance		6,074		9,009		194										15,277
Grade 7 (Doubtful) loan balance		33		79		—										112
Grade 7 allowance		4		6		—										10
Consumer loans based on payment status:
Current loan balances								1,548,639		730,503		143,934		515,093		2,938,169
Current loans allowance								12,762		4,823		3,465		2,736		23,786
30 days past due loan balance								16,912		1,704		2,149		13,264		34,029
30 days past due allowance								2,078		494		866		473		3,911
60 days past due loan balance								5,728		1,087		1,550		5,339		13,704
60 days past due allowance								2,122		748		978		643		4,491
90+ days past due loan balance								3,308		538		2,112		13,429		19,387
90+ days past due allowance								2,097		602		1,804		660		5,163

Total loans	$	1,896,310	$	2,456,420	$	67,594	$	1,574,587	$	733,832	$	149,745	$	547,125	$	7,425,613

Total Allowance for Loan Losses	$	18,627	$	47,164	$	615	$	19,059	$	6,667	$	7,113	$	4,512	$	103,757


	At September 30, 2008
	Loan Type
	Commercial		Commercial R/E				Installment		Home Equity		Credit Card		Res Mortgage
Allowance for Loan Losses Components:	Loans		Loans		Leases		Loans		Loans		Loans		Loans		Total
(In thousands)
Individually Reviewed for Impairment Component:
Loan balance	$	—	$	55,001	$	—	$	—	$	—	$	—	$	—	$	55,001
Allowance		—		4,440		—		—		—		—		—		4,440
Collective Loan Impairment Components:
Credit risk-graded loans
Grade 1 loan balance		37,728		1,002		6,098										44,828
Grade 1 allowance		54		2		11										67
Grade 2 loan balance		207,990		143,842		3,328										355,160
Grade 2 allowance		822		563		16										1,401
Grade 3 loan balance		549,293		526,392		30,208										1,105,893
Grade 3 allowance		1,891		3,122		126										5,139
Grade 4 loan balance		1,014,680		1,544,917		27,543										2,587,140
Grade 4 allowance		11,468		25,669		320										37,457
Grade 5 (Special Mention) loan balance		49,059		59,922		1,222										110,203
Grade 5 allowance		2,067		3,554		47										5,668
Grade 6 (Substandard) loan balance		28,206		54,895		1,305										84,406
Grade 6 allowance		3,092		6,824		131										10,047
Grade 7 (Doubtful) loan balance		59		79		—										138
Grade 7 allowance		9		9		—										18
Consumer loans based on payment status:
Current loan balances								1,591,362		715,395		143,624		531,714		2,982,095
Current loans allowance								12,956		5,123		3,578		4,073		25,730
30 days past due loan balance								14,261		1,538		2,000		12,252		30,051
30 days past due allowance								1,675		482		817		631		3,605
60 days past due loan balance								4,576		759		975		4,379		10,689
60 days past due allowance								1,665		542		626		767		3,600
90+ days past due loan balance								3,282		195		1,580		10,931		15,988
90+ days past due allowance								2,045		219		1,386		1,185		4,835

Total loans	$	1,887,015	$	2,386,050	$	69,704	$	1,613,481	$	717,887	$	148,179	$	559,276	$	7,381,592

Total Allowance for Loan Losses	$	19,403	$	44,183	$	651	$	18,341	$	6,366	$	6,407	$	6,656	$	102,007

Total charge-offs were $21.8 million for the quarter ended September 30, 2009, up $6.9 million, or 45.88%, from the year ago quarter. Criticized commercial assets (“individually impaired,” “special mention,” “substandard” and “doubtful”) increased $116.9 million and accounted for 8.84% of total commercial loans for the 2009 third quarter compared with criticized commercial asset levels of 5.80% at September 30, 2008, reflecting the continued stress in the national housing markets and specifically the residential construction portfolio. The homebuilder portfolio is examined name-by-name, account-by-account, revalued and rerated frequently. A new appraisal is ordered if the projected velocity and absorption are not being met from the most recent appraisal. Generally, the appraisals are less than one year old unless velocity and absorption values are affirmed with current performance. The carrying values are further discounted to reflect current liquidation value. This rigorous valuation and resulting rating adds some volatility to commercial construction asset class but give greater transparency.

Commercial charge-offs were up $3.7 million over the prior year third quarter driven by one commercial credit. Loans past due 90 days on non accruing interest were up $5.6 million or 25.46% from the linked quarter ended June 30, 2009 and up $11.5 million, or 70.95%, from the year ago quarter ended September 30, 2008, reflecting the current deteriorating economic conditions in the retail portfolio.

Loans

Total loans outstanding at September 30, 2009 were $7.0 billion compared to $7.4 billion at December 31, 2008 and $7.4 billion at September 30, 2008. The decline in the loan portfolio of $395.9 million, or 5.33% from December 31, 2008 reflects the current economic cycle in which business owners and consumers are retrenching on their demand for leverage and borrowing. Business customers continue their trend in inventory and receivable reduction and paying down existing debt to strengthen their balance sheets. Consumer customers are taking a similar approach with lower borrowing demand and increased usage of short-term savings products.


	As of		As of		As of
	September 30,		December 31,		September 30,
(Dollars in thousands)	2009		2008		2008

Commercial loans	$	4,097,252	$	$4,352,730	$	4,273,065
Mortgage loans		481,336		547,125		559,276
Installment loans		1,481,200		1,574,587		1,613,481
Home equity loans		761,553		733,832		717,887
Credit card loans		147,767		149,745		148,179
Leases		60,540		67,594		69,704

Total loans	$	7,029,648	$	7,425,613	$	7,381,592

Expected cash flow and interest rate information for commercial loans is presented in the following table:


	As of
	September 30, 2009
	(Dollars in thousands)
Due in one year or less	$	1,752,470
Due after one year but within five years		1,970,643
Due after five years		374,139

Totals	$	4,097,252


Due after one year with a predetermined fixed interest rate	$	897,968
Due after one year with a floating interest rate		1,446,814

Totals	$	2,344,782

The Corporation did not originate higher risk loans such as option ARM products, high loan-to-value ratio mortgages or subprime loans. Accordingly, there is not a material impact to the results of operations from higher risk loan types.

The following table summarizes the Corporation’s nonperforming assets:


	September 30,			December 31,			September 30,
	2009			2008			2008
	(Dollars in thousands)
Nonperforming commercial loans	$	63,357		$	40,195		$	29,245
Other nonaccrual loans:		15,474			12,007			9,328

Total nonperforming loans		78,831			52,202			38,573
Other real estate (“ORE”)		10,050			5,324			4,918

Total nonperforming assets	$	88,881		$	57,526		$	43,491


Loans past due 90 day or more accruing interest	$	27,764		$	23,928		$	16,241

Total nonperforming assets as a percentage of total loans and ORE		1.26	%		0.77	%		0.59	%

The allowance for credit losses covers nonperforming loans by 153.27% at September 30, 2009 compared to 211.38% at December 31, 2008 and 281.28% at September 30, 2008. See Note 1 (Summary of Significant Accounting Policies) of the 2008 Form 10-K for a summary of the Corporation’s nonaccrual and charge-off policies.

The following table is a nonaccrual commercial loan flow analysis:


	Quarter Ended
	September 30,			June 30,			March 31,			December 31,			September 30,
(In thousands)	2009			2009			2009			2008			2008

Nonaccrual commercial loans beginning of period	$	48,563		$	54,070		$	40,195		$	29,245		$	26,702

Credit Actions:
New		24,491			7,259			22,912			18,217			7,504
Loan and lease losses		(3,886	)		(5,951	)		(1,950	)		(1,146	)		(2,440	)
Charged down		(3,321	)		(4,182	)		(2,603	)		(4,458	)		(1,135	)
Return to accruing status		(24	)		(660	)		(3,333	)		(123	)		(409	)
Payments		(2,466	)		(1,973	)		(1,151	)		(1,540	)		(977	)
Sales		—			—			—			—			—

Nonaccrual commercial loans end of period	$	63,357		$	48,563		$	54,070		$	40,195		$	29,245

Nonaccrual commercial loans have increased $14.8 million from the second quarter of 2009 and increased $34.1 million from the third quarter of 2008. Although the Corporation has experienced manageable credit stress within segments of our Commercial loan portfolios, the business climate in our markets continues to be challenging. Residential developers and

homebuilders have been the most adversely affected. The significant decrease of home buyers due to a combination of the restriction of available credit and economic pressure impacting the consumer has negatively impacted this sub-segment of the portfolio. The Corporation participates in the U.S. Treasury Home Affordable Modification Program.

Deposits, Securities Sold Under Agreements to Repurchase and Wholesale Borrowings

The following schedule illustrates the change in composition of the average balances of deposits and average rates paid for the noted periods.


	Quarter Ended					Year Ended					Quarter Ended
	September 30, 2009					December 31, 2008					September 30, 2008
	Average		Average			Average		Average			Average		Average
	Balance		Rate			Balance		Rate			Balance		Rate
						(Dollars in thousands)
Non-interest DDA	$	1,947,359		—		$	1,530,021		—		$	1,545,427		—
Interest-bearing DDA		647,712		0.08	%		687,160		0.37	%		678,803		0.35	%
Savings and money market		2,916,980		0.78	%		2,398,778		1.24	%		2,373,995		1.16	%
CDs and other time deposits		1,872,456		2.60	%		2,801,623		3.78	%		2,728,139		3.42	%

Total customer deposits		7,384,507		0.98	%		7,417,582		1.86	%		7,326,364		1.68	%

Securities sold under agreements to repurchase		1,087,875		0.47	%		1,343,441		2.37	%		1,504,011		2.18	%
Wholesale borrowings		883,377		3.06	%		663,109		4.16	%		634,226		4.27	%

Total funds	$	9,355,759				$	9,424,132				$	9,464,601

Total demand deposits increased as a percent of total average deposits from 35.14% in the 2009 third quarter compared to 30.36% in the third quarter 2008. Savings accounts, including money market products, made up 39.50% of average deposits in the 2009 third quarter compared to 32.40% in the third quarter 2008. Higher cost CDs made up 25.36% of average deposits in the third quarter 2009 and compared to 37.24% in the third quarter 2008. These results reflect the Corporation’s continued success in growing core deposit relationships and deemphasizing a reliance on higher-cost certificate of deposit accounts. The core deposit growth reflects the Corporation’s success in building a strong brand name in its core markets and capitalizing on market disruption in northeast Ohio.

The average cost of deposits, securities sold under agreements to repurchase and wholesale borrowings was down 205 basis points compared to one year ago, or .42% for the quarter ended September 30, 2009 due to the drop in interest rates and the disruption in the capital markets.

The following table summarizes scheduled maturities of CDs of $100,000 or more (“Jumbo CDs”) that were outstanding as of September 30, 2009:


Maturing in:	Amount
	(In thousands)

Under 3 months	$	252,281
3 to 6 months		92,656
6 to 12 months		73,748
Over 1 year through 3 years		60,187
Over 3 years		8,949

	$	487,821

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 capital in excess of well-capitalized standards and to assure ready access to the capital markets.

Shareholder’s Equity

Shareholders’ equity at September 30, 2009 totaled $1.1 billion, compared to $937.8 million at December 31, 2008 and $926.0 million at September 30, 2008. The common dividend per share paid in the third quarter 2009 was $.16 per share as well as a $.13 per share dividend of common stock.

During the quarter ended June 30, 2009, the Corporation exited from the CPP under TARP. See Note 7 (Earnings Per Share) for further detail.

Capital Availability

During the second quarter of 2009, the Corporation entered into a Distribution Agency Agreement with Credit Suisse Securities (USA) LLC pursuant to which the Corporation, from time to time, offered and sold shares of the Corporation’s common stock. Sales of the Common Shares were made by means of ordinary brokers’ transactions on the NASDAQ Global Select Market at market prices, in block transaction or as otherwise agreed with Credit Suisse. During the quarter ended June 30, 2009, 3.3 million shares were sold at an average market value net of broker’s fees of $18.36 per share. No shares were sold during the quarter ended September 30, 2009.

As a result of current market disruptions, the availability of capital (principally to financial services companies) has become restricted. While the Corporation has been successful in raising additional capital, the cost of the capital was higher than the prevailing market rates prior to the market volatility. Management cannot predict when or if the markets will return to more favorable conditions.

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 8.65% at September 30, 2009, compared to 7.27% at December 31, 2008, and 7.45% at September 30, 2008.

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. As of September 30, 2009, the Corporation, on a consolidated basis, as well as FirstMerit Bank, exceeded the minimum capital levels of the well capitalized category.

The following table reflects the various measures of capital:


	September 30,				December 31,				September 30,
	2009				2008				2008
	(Dollars in thousands)
Consolidated
Total equity	$	1,059,209	9.84	%	$	937,843	8.45	%	$	926,078	8.67	%
Common equity		1,059,209	9.84	%		937,843	8.45	%		926,078	8.67	%
Tangible common equity (a)		918,821	8.65	%		797,195	7.27	%		785,343	7.45	%
Tier 1 capital (b)		945,620	11.43	%		870,870	10.19	%		865,983	10.30	%
Total risk-based capital (c)		1,049,287	12.68	%		1,007,679	11.80	%		1,001,141	11.90	%
Leverage (d)		945,620	9.06	%		870,870	8.19	%		865,983	8.28	%

Bank Only
Total equity	$	839,097	7.81	%	$	744,535	6.72	%	$	768,285	7.20	%
Common equity		839,097	7.81	%		744,535	6.72	%		768,285	7.20	%
Tangible common equity (a)		698,709	6.59	%		603,887	5.52	%		627,550	5.96	%
Tier 1 capital (b)		810,149	9.81	%		762,634	8.95	%		793,311	9.45	%
Total risk-based capital (c)		909,588	11.01	%		895,703	10.51	%		924,782	11.02	%
Leverage (d)		810,149	7.77	%		762,634	7.18	%		793,311	7.60	%


(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.

Participation in the CPP under EESA

In response to the ongoing financial crisis affecting the banking system and financial markets, the Emergency Economic Stabilization Act of 2008 (“EESA”) was signed into law on October 3, 2008, which established Troubled Assets Relief Program (“TARP”). As part of TARP, the Treasury established the Capital Purchase Program (“CPP”) to provide up to $700 billion of funding to eligible financial institutions through the purchase of mortgages, mortgage-backed securities, capital stock and other financial instruments for the purpose of stabilizing and providing liquidity to the U.S. financial markets.

On January 9, 2009, the Corporation completed the sale to the Treasury of $125.0 million of newly issued FirstMerit non-voting preferred shares as part of the CPP. The Corporation issued and sold to the Treasury for an aggregate purchase price of $125.0 million in cash (1) 125,000 shares of FirstMerit’s Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par value and having a liquidation preference of $1,000 per share, and (2) a warrant to purchase 952,260 FirstMerit common shares, each without par value, at an exercise price of

$19.69 per share. On April 22, 2009, the Corporation repurchased all 125,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A for $126.2 million which included all accrued and unpaid dividends as well as the unamortized discount on the preferred stock. On May 27, 2009, the Corporation completed the repurchase of the warrant held by the Treasury. The Corporation paid $5.0 million to the Treasury to repurchase the warrant.

Market Risk

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.

The interest rate risk position can be influenced by a number of factors other than changes in market interest rates, including economic conditions, the competitive environment within the Corporation’s markets, consumer preferences for specific loan and deposit products, and the level of interest rate exposure arising from reprice risk, option risk, and basis risk. Each of these types of risks is defined in the discussion of market risk management in the 2008 Form 10-K.

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

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

Presented below is the Corporation’s interest rate risk profile as of September 30, 2009 and 2008:


	Immediate Change in Rates and Resulting Percentage
	Increase/(Decrease) in Net Interest Income:
	- 100 basis			+ 100 basis			+ 200 basis			+ 300 basis
	points			points			points			points

September 30, 2009		*			0.47	%		0.46	%		0.02	%
September 30, 2008		(3.06	%)		1.44	%		2.77	%		4.14	%


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

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

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

Presented below is the Corporation’s EVE profile as of September 30, 2009 and 2008:


	Immediate Change in Rates and Resulting Percentage
	Increase/(Decrease) in EVE:
	- 100 basis			+ 100 basis			+ 200 basis			+ 300 basis
	points			points			points			points

September 30, 2009		*			1.81	%		(0.13	%)		(0.44	%)
September 30, 2008		(3.20	%)		0.03	%		(1.53	%)		(3.49	%)


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

Management of interest rate exposure.Management uses the results of its various simulation analyses to formulate strategies to achieve a desired risk profile within the parameters of the Corporation’s capital and liquidity guidelines. Specifically, management actively manages interest rate risk positions by using derivatives predominately in the form of interest rate swaps, which modify the interest rate characteristics of certain assets and liabilities. For more information about how the Corporation uses interest rate swaps to manage its balance sheet, see Note 8 (Derivatives and Hedging Activities) to the unaudited consolidated financial statements included in this Report.

Liquidity Risk Management

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

The 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 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. In addition, the overall management of the Corporation’s liquidity position is 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, along with unencumbered, or unpledged, investment securities. 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 also provided by unencumbered, or unpledged, investment securities that totaled $791.7 million at September 30, 2009.

The Corporation’s liquidity could be adversely affected by both direct and indirect circumstances. An example of a direct 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 indirect 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.

Certain credit markets that the Corporation participates in (from time to time), as sources of funding have been significantly disrupted and highly volatile since July 2007. As a means of maintaining adequate liquidity, the Corporation, like many other financial institutions, has relied more heavily on the liquidity and stability present in the short-term and secured credit markets since access to unsecured term debt has been restricted. Short-term funding has been available and cost effective. However, if further market disruption were to also reduce the cost effectiveness and availability of these funds for a prolonged period of time, management may need to secure other funding alternatives.

The Corporation maintains a liquidity contingency plan that 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, 2009, lower cost core deposits increased by $194.5 million from the previous quarter. In aggregate, deposits decreased $179.9 million driven by a decline in higher cost CD balances. Securities sold under agreements to repurchase increased $280.5 million from June 30, 2009. Wholesale borrowings decreased $175.0 million from June 30, 2009. The Corporation’s loan to deposit ratio increased to 96.68% at September 30, 2009 from 95.89% at June 30, 2009.

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

During the quarter ended September 30, 2009, FirstMerit Bank paid $28.5 million in dividends to FirstMerit Corporation. As of September 30, 2009, FirstMerit Bank had an additional $55.5 million available to pay dividends without regulatory approval.

Recent Market and Regulatory Developments.Recent market conditions have made it difficult or uneconomical to access the capital markets. As a result, the United States Congress, the Treasury, and the FDIC have announced various programs designed to enhance market liquidity and bank capital.

In response to the ongoing financial crisis affecting the banking system and financial markets, EESA was signed into law on October 3, 2008 and established TARP. As part of TARP, the Treasury established the CPP to provide up to $700 billion of funding to eligible financial institutions through the purchase of mortgages, mortgage-backed securities, capital stock and other financial instruments for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On January 9, 2009, the Corporation completed the sale to the Treasury of $125.0 million of newly issued FirstMerit non-voting preferred shares as part of the CPP. On April 22, 2009, the Corporation completed the repurchase of all 125,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A for $126.2 million which included all accrued and unpaid dividends as well as the unamortized discount on the preferred stock. On May 27, 2009 the Corporation completed the repurchase of the warrant held by the Treasury. The Corporation paid $5.0 million to the Treasury to repurchase the warrant.

Separately, the FDIC announced its temporary liquidity guarantee program (“TLPG”) pursuant to which the FDIC will guarantee the payment of certain newly-issued senior unsecured debt of insured depository institutions (“Debt Guarantee”) and funds held at FDIC-insured depository institutions in noninterest-bearing transaction accounts in excess of the current standard maximum deposit insurance amount of $250,000 (“Transaction Account Guarantee”). Both guarantees were provided to eligible institutions, including the Corporation, at no cost through December 5, 2008. Participation in the TLPG subsequent to December 5, 2008 is optional.

The Corporation elected to participate in the TLPG subsequent to December 5, 2008. The Transaction Account Guarantee is effective for the Corporation through January 1, 2010. Under the Debt Guarantee, qualifying senior unsecured debt newly issued by the Corporation during the period from October 14, 2008 to June 30, 2009, inclusive, is covered by the FDIC guarantee. The maximum amount of debt that eligible institutions can issue under the guarantee is 125% of the par value of the entity’s qualifying senior unsecured debt, excluding debt to affiliates that was outstanding as of September 30, 2008, and scheduled to mature by June 30, 2009. The FDIC will provide guarantee coverage until the earlier of the eligible debt’s maturity or June 30, 2012.

Participants in the Debt Guarantee Program are assessed an annualized fee of 75 basis points for its participation, and an annualized fee of 10 basis points for its participation in the Transaction Account Guarantee. To the extent that these initial assessments are insufficient to cover the expense or losses arising under TLPG, the FDIC is required to impose an emergency special assessment on all FDIC-insured depository institutions as prescribed by the Federal Deposit Insurance Act. In May 2009, the FDIC announced it was imposing an emergency special assessment of five basis points on average assets of all FDIC-insured depository institutions as of June 30, 2009.

The American Recovery and Reinvestment Act of 2009 (“ARRA”), more commonly known as the economic stimulus or economic recovery package, was signed into law on February 17, 2009, by President Obama. ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients, including the Corporation, until the institution has repaid the Treasury. On April 22, 2009, the Corporation completed the

repurchase of all 125,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A for $126.2 million which included all accrued and unpaid dividends as well as the unamortized discount on the preferred stock. On May 27, 2009 the Corporation completed the repurchase of the warrant held by the Treasury. The Corporation paid $5.0 million to the Treasury to repurchase the warrant.

Critical Accounting Policies

The Corporation’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the financial services industry in which it operates. All accounting policies are important, and all policies described in Note 1 (Summary of Significant Accounting Policies) of the 2008 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 2008 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, IRLCs, and TBA Securities is included in Note 8 (Derivatives and Hedging Activities) to the Corporation’s consolidated financial statements included in this Report and in Note 17 to the 2008 Form 10-K. There have been no significant changes since December 31, 2008.

Forward-looking Safe-harbor Statement

Discussions in this Report that are not statements of historical fact (including statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “project,” intend,” and “plan”) are forward-looking statements that involve risks and uncertainties. Any forward-looking statement is not a guarantee of future performance and actual future results could differ materially from those contained in forward-looking information. Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detained from time to time in the Corporation’s filings with the Securities and Exchange Commission, including without limitation the risk factors disclosed in Item 1A, “Risk Factors,” of the 2008 Form 10-K.

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

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

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

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

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors from those disclosed in 2008 Form 10-K.

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

(a)		Not applicable.

(b)		Not applicable.

(a)		The following table provides information with respect to purchases the Corporation made of its common shares during the third quarter of 2009:


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

Balance as of June 30, 2009								396,272

July 1, 2009 - July 31, 2009		9,036	$	24.11		—		396,272
August 1, 2009 - August 31, 2009		3,302		20.95		—		396,272
September 1, 2009 - September 30, 2009		877		24.02		—		396,272

Balance as of September 30, 2009		13,215	$	23.32		—		396,272


(1)		On January 19, 2006, the Board of Directors authorized the repurchase of up to 3 million shares (the “New Repurchase Plan”). The New Repurchase Plan, which has no expiration


		date, superseded all other repurchase programs, including that authorized by the Board of Directors on July 15, 2004 (the “Prior Repurchase Plan”). The Corporation had purchased all of the shares it was authorized to acquire under the Prior Repurchase Plan.

(2)		Reflects common shares purchased as a result of either: (1) delivery 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 (1) to this table during the third quarter of 2009.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits


Exhibit
Number
3.1		Second Amended and Restated Articles of Incorporation of FirstMerit Corporation, as amended (incorporated by reference from Exhibit 3.1 to the Annual Report on Form 10-K filed by the Registrant on February 18, 2009).

3.2		Second Amended and Restated Code of Regulations of FirstMerit Corporation, as amended (incorporated by reference from Exhibit 3.2 to the Annual Report on Form 10-K filed by the Registrant on February 18, 2009).

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 Certifications of Paul G. Greig, Chief Executive Officer of FirstMerit Corporation.

32.2		Rule 13a-14(b)/Section 906 Certifications of Terrence E. Bichsel, Executive Vice President and Chief Financial Officer of FirstMerit Corporation.

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)

October 30, 2009

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FirstMerit (FMER) Inactive 10-Q2009 Q3 Quarterly report

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