UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

X	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2016
OR
	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

Commission file number: 001-11267

(Exact name of registrant as specified in its charter)

Ohio	34-1339938
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
III Cascade Plaza, 7th Floor, Akron Ohio	44308
(Address of principal executive offices)	(Zip Code)

(330) 996-6000

(Registrant's telephone number, including area code)

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

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

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

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

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

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

Class	Outstanding as of July 27, 2016
Common Stock, no par value	166,167,956

1

FIRSTMERIT CORPORATION AND SUBSIDIARIES FORM 10-Q TABLE OF CONTENTS
				Page
Glossary of Acronyms and Abbreviations				4
PART 1. FINANCIAL INFORMATION				5
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS				5
	CONSOLIDATED BALANCE SHEETS			5
	CONSOLIDATED STATEMENTS OF INCOME			6
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME			7
	CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY			8
	CONSOLIDATED STATEMENTS OF CASH FLOWS			9
	NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS			10
	Note	1	Summary of Significant Accounting Policies	10
	Note	2	Investment Securities	16
	Note	3	Loans	27
	Note	4	Allowance for Loan Losses	37
	Note	5	Goodwill and Other Intangible Assets	57
	Note	6	Shareholders' Equity	58
	Note	7	Segment Information	60
	Note	8	Derivatives and Hedging Activities	62
	Note	9	Benefit Plans	67
	Note	10	Fair Value Measurement	67
	Note	11	Mortgage Servicing Rights and Mortgage Servicing Activity	80
	Note	12	Commitments and Guarantees	82
	Note	13	Changes and Reclassifications Out of Accumulated Other Comprehensive Income	88
	Note	14	Subsequent Events	89
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS				90
	Consolidated Financial Highlights			90
	Highlights of Second Quarter of 2016 Performance			91
	Regulation and Supervision			94
	Non-GAAP Financial Measures			95
	Results of Operations			100
		Average Tax-Equivalent Balance Sheets		100
		Net Interest Income		102
		Noninterest Income		104
		Noninterest Expense		105
		Income Taxes		105
	Line of Business Results			106
	Financial Condition			109
		Investment Securities		109
		Loans		110
			Originated Loans	111
			Acquired Loans	112
			FDIC Acquired Loans and Related Loss Share Receivable	112
		Allowance for Loan Losses and Reserve for Unfunded Lending Commitments		112

2

FIRSTMERIT CORPORATION AND SUBSIDIARIES FORM 10-Q TABLE OF CONTENTS
				Page
			Allowance for Originated Loan Losses	112
			Allowance for Acquired Loan Losses	117
			Allowance for FDIC Acquired Loan Losses	118
		Asset Quality		119
		Deposits, Securities Sold Under Agreements to Repurchase, Wholesale Borrowings and Long-Term Debt		121
		Capital Resources		122
			Shareholders' Equity	123
			Capital Adequacy	123
	Risk Management			125
		Market Risk and Interest Rate Risk Management		125
		Liquidity Risk Management		127
		Operational Risk Management		128
		Critical Accounting Policies		128
		Off-Balance Sheet Arrangements		129
		Forward-looking Safe-harbor Statement		129
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK				130
ITEM 4. CONTROLS AND PROCEDURES				131
PART II. OTHER INFORMATION				131
	ITEM 1. LEGAL PROCEEDINGS			131
	ITEM 1A. RISK FACTORS			131
	ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			132
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES			132
	ITEM 4. MINE SAFETY DISCLOSURES			132
	ITEM 5. OTHER INFORMATION			132
	ITEM 6. EXHIBITS			133
SIGNATURES				134
Index to Exhibits

3

The acronyms and abbreviations identified below are used in this Form 10-Q including the Notes to Consolidated Financial Statements (unaudited) as well as in Management's Discussion & Analysis of Financial Condition and Results of Operations.

Acquisition Date	Citizens Republic Bancorp Inc. acquisition date of April 12, 2013	FDIC	The Federal Deposit Insurance Corporation
ALCO	Asset/Liability Management Committee	Federal Reserve	The Board of Governors of the Federal Reserve System
ALL	Allowance for loan losses	FHLB	Federal Home Loan Bank, including the Federal Home Loan
AOCI	Accumulated other comprehensive income (loss)	FHLMC	Federal Home Loan Mortgage Corporation
APBO	Accumulated pension benefit obligation	FICO	Fair Isaac Corporation
ASC	Accounting standards codification	FINRA	Financial Industry Regulatory Authority
ASU	Accounting standards update	FNMA	Federal National Mortgage Association
Bank	FirstMerit Bank N.A.	FRAP	Fixed Rate Advantage Program
Basel I	Basel Committee’s 1988 Capital Accord	FRB	Federal Reserve Bank
Basel III	Basel Committee regulatory capital reforms, Third Basel Accord	FSOC	Financial Stability Oversight Council
Basel Committee	Basel Committee on Banking Supervision	GAAP	United States generally accepted accounting principles
BHC	Bank holding company	GSE	Government sponsored enterprise
BHCA	Bank Holding Company Act of 1956, as amended	G-SIFI	Globally Systematically Important Financial Institution
CCAR	Comprehensive Capital Analysis and Review	ISDA	International Swaps and Derivatives Association
CET1	Common equity tier 1 capital	LIBOR	London Interbank Offered Rate
CFPB	Consumer Financial Protection Bureau	Management	FirstMerit Corporation’s Management
Citizens	Citizens Republic Bancorp Inc.	MBS	Mortgage-backed securities
Citizens TARP Preferred	Citizens TARP Preferred issued to the U.S. Treasury as part of the Troubled Assets Relief Program	MSRs	Mortgage servicing rights
CLO	Collateralized loan obligations	NASDAQ	The NASDAQ Stock Market LLC
CMO	Collateralized mortgage obligations	NPR	Notice of Proposal Rulemaking
Common Stock	Common Shares, without par value	NYSE	New York Stock Exchange
Corporation	FirstMerit Corporation and its Subsidiaries	OCC	Office of the Comptroller of the Currency
CPR	Conditional Prepayment Rate	OCI	Other comprehensive income (loss)
CRA	The Community Reinvestment Act	OREO	Other real estate owned
CRE	Commercial Real Estate	OTTI	Other-than-temporary impairment
C&I	Commercial and Industrial	Parent Company	FirstMerit Corporation
Dodd-Frank Act	Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010	Preferred Stock	5.875% Non-Cumulative Perpetual Preferred Stock, Series A
DIF	Federal Deposit Insurance Fund	RIP	Retirement Investment Plan
DTA	Deferred tax asset	ROA	Return on average assets
DTL	Deferred tax liability	ROE	Return on average equity
EPS	Earnings per share	SEC	United States Securities and Exchange Commission
ERISA	Employee Retirement Income Security Act of 1974	TARP	Troubled Asset Relief Program
ERM	Enterprise risk management	TDR	Troubled debt restructuring
ESOP	Employee stock ownership plan	TE	Fully taxable equivalent
EVE	Economic value of equity	U.S. Treasury	United States Department of the Treasury
FASB	Financial Accounting Standards Board	UTB	Unrecognized tax balance
FDIA	Federal Deposit Insurance Act	VIE	Variable interest entity

4

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

CONSOLIDATED BALANCE SHEETS
FIRSTMERIT CORPORATION AND SUBSIDARIES
(In thousands)	June 30,			December 31,			June 30,
(Unaudited, except for December 31, 2015)	2016			2015			2015
ASSETS
Cash and due from banks	$	420,818		$	380,799		$	472,848
Interest-bearing deposits in banks	103,469			83,018			114,741
Total cash and cash equivalents	524,287			463,817			587,589
Investment securities:
Held-to-maturity	2,514,161			2,674,093			2,787,513
Available-for-sale	4,318,688			3,967,735			3,838,509
Other investments	148,367			148,172			147,967
Loans held for sale	3,962			5,472			5,432
Loans	16,343,606			16,076,945			15,705,110
Allowance for loan losses	(149,649		)	(153,691		)	(148,259		)
Net loans	16,193,957			15,923,254			15,556,851
Premises and equipment, net	293,209			319,488			313,819
Goodwill	741,740			741,740			741,740
Intangible assets	56,020			60,628			65,824
Covered other real estate	940			2,134			1,065
Accrued interest receivable and other assets	1,355,256			1,218,071			1,250,705
Total assets	$	26,150,587		$	25,524,604		$	25,297,014
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	6,011,531		$	5,942,248		$	5,725,850
Interest-bearing	3,477,483			3,476,729			3,304,969
Savings and money market accounts	9,354,868			8,450,123			8,418,716
Certificates and other time deposits	2,108,761			2,238,903			2,224,315
Total deposits	20,952,643			20,108,003			19,673,850
Federal funds purchased and securities sold under agreements to repurchase	686,890			1,037,075			1,519,250
Wholesale borrowings	468,447			580,648			366,074
Long-term debt	526,389			505,173			497,393
Accrued taxes, expenses and other liabilities	469,059			353,610			352,490
Total liabilities	23,103,428			22,584,509			22,409,057
Shareholders' equity:
5.875% Non-Cumulative Perpetual Preferred Stock, Series A, without par value: authorized 115,000 shares; 100,000 issued	100,000			100,000			100,000
Common Stock warrant	—			—			—
Common Stock, without par value; authorized 300,000,000 shares; issued: June 30, 2016, December 31, 2015 and June 30, 2015 - 170,183,515 shares	127,937			127,937			127,937
Capital surplus	1,383,266			1,386,677			1,379,194
Accumulated other comprehensive loss	(29,473		)	(79,274		)	(67,621		)
Retained earnings	1,572,681			1,519,438			1,462,859
Treasury stock, at cost: June 30, 2016 - 4,014,513; December 31, 2015 - 4,425,927; June 30, 2015 - 4,410,939 shares	(107,252		)	(114,683		)	(114,412		)
Total shareholders' equity	3,047,159			2,940,095			2,887,957
Total liabilities and shareholders' equity	$	26,150,587		$	25,524,604		$	25,297,014

See accompanying Notes to the Consolidated Financial Statements

5

CONSOLIDATED STATEMENTS OF INCOME
FIRSTMERIT CORPORATION AND SUBSIDIARIES
(In thousands, except per share amounts)	Three Months Ended June 30,				Six Months Ended June 30,
(Unaudited)	2016		2015		2016		2015
Interest income:
Loans and loans held for sale	$	162,977	$	161,872	$	325,255	$	323,411
Investment securities:
Taxable	33,350		32,175		66,499		64,125
Tax-exempt	5,013		5,327		10,274		11,353
Total investment securities interest	38,363		37,502		76,773		75,478
Total interest income	201,340		199,374		402,028		398,889
Interest expense:
Deposits:
Interest bearing	1,013		783		1,942		1,550
Savings and money market accounts	5,641		5,588		11,293		11,135
Certificates and other time deposits	3,116		2,510		6,405		4,687
Federal funds purchased and securities sold under agreements to repurchase	109		329		374		572
Wholesale borrowings	1,121		1,129		2,355		2,289
Long-term debt	4,262		3,917		8,425		7,915
Total interest expense	15,262		14,256		30,794		28,148
Net interest income	186,078		185,118		371,234		370,741
Provision for loan losses	6,391		8,966		14,200		17,214
Net interest income after provision for loan losses	179,687		176,152		357,034		353,527
Noninterest income:
Trust department income	11,167		10,820		21,451		20,969
Service charges on deposits	16,263		16,704		31,849		32,372
Credit card fees	14,942		14,124		28,520		26,773
ATM and other service fees	6,427		6,345		12,661		12,444
Bank owned life insurance income	4,186		3,697		7,882		7,289
Investment services and insurance	3,851		3,871		7,756		7,575
Investment securities gains/(losses), net	2,164		567		2,459		921
Loan sales and servicing income	1,995		3,276		3,847		4,876
Other operating income	4,120		7,178		16,084		19,210
Total noninterest income	65,115		66,582		132,509		132,429
Noninterest expense:
Salaries, wages, pension and employee benefits	86,789		86,020		172,669		176,546
Net occupancy expense	13,466		13,727		28,240		29,681
Equipment expense	12,078		12,592		24,486		23,617
Stationery, supplies and postage	2,945		3,370		6,564		6,898
Bankcard, loan processing and other costs	12,269		12,461		23,277		23,600
Professional services	4,467		5,358		12,818		9,368
Amortization of intangibles	2,304		2,598		4,608		5,196
FDIC insurance expense	5,192		5,077		10,637		10,244
Other operating expense	20,810		20,471		43,984		37,176
Total noninterest expense	160,320		161,674		327,283		322,326
Income before income tax expense	84,482		81,060		162,260		163,630
Income tax expense	26,173		24,476		49,815		49,907
Net income	58,309		56,584		112,445		113,723
Less: Net income allocated to participating shareholders	496		467		955		937
Preferred Stock dividends	1,469		1,469		2,938		2,938
Net income attributable to common shareholders	$	56,344	$	54,648	$	108,552	$	109,848
Net income used in diluted EPS calculation	$	56,344	$	54,648	$	108,552	$	109,848
Weighted average number of common shares outstanding - basic	166,188		165,736		165,966		165,574
Weighted average number of common shares outstanding - diluted	166,807		166,277		166,563		166,089
Basic earnings per common share	$	0.34	$	0.33	$	0.65	$	0.66
Diluted earnings per common share	0.34		0.33		0.65		0.66
Cash dividend per common share	0.17		0.16		0.34		0.32

See accompanying Notes to the Consolidated Financial Statements

6

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FIRSTMERIT CORPORATION AND SUBSIDIARIES
	Three Months Ended									Six Months Ended
(In thousands)	June 30, 2016									June 30, 2016
(Unaudited)	Pretax			Tax			After tax			Pretax			Tax			After tax
Net Income	$	84,482		$	26,173		$	58,309		$	162,260		$	49,815		$	112,445
Other comprehensive income/(loss)
Unrealized gains and losses on securities available for sale:
Changes in unrealized securities' holding gains/(losses)	31,489			11,431			20,058			79,868			28,994			50,874
Changes in unrealized securities' holding gains/(losses) that result from securities being transferred from available-for-sale into held-to-maturity	(221		)	(79		)	(142		)	(1,072		)	(14		)	(1,058		)
Net losses/(gains) realized on sale of securities reclassified to noninterest income	(2,164		)	(786		)	(1,378		)	(2,459		)	(892		)	(1,567		)
Net change in unrealized gains/(losses) on securities available for sale	29,104			10,566			18,538			76,337			28,088			48,249
Pension plans and other postretirement benefits:
Amortization of actuarial losses/(gains)	1,076			390			686			3,244			1,163			2,081
Amortization of prior service cost reclassified to other noninterest expense	(560		)	(204		)	(356		)	(820		)	(291		)	(529		)
Net change from defined benefit pension plans	516			186			330			2,424			872			1,552
Total other comprehensive gains/(losses)	29,620			10,752			18,868			78,761			28,960			49,801
Comprehensive income	$	114,102		$	36,925		$	77,177		$	241,021		$	78,775		$	162,246

	Three Months Ended									Six Months Ended
(In thousands)	June 30, 2015									June 30, 2015
(Unaudited)	Pretax			Tax			After tax			Pretax			Tax			After tax
Net Income	$	81,060		$	24,476		$	56,584		$	163,630		$	49,907		$	113,723
Other comprehensive income/(loss)
Unrealized gains and losses on securities available for sale:
Changes in unrealized securities' holding gains/(losses)	(28,642		)	(10,024		)	(18,618		)	5,475			1,916			3,559
Changes in unrealized securities' holding gains/(losses) that result from securities being transferred from available-for-sale into held-to-maturity	(575		)	(203		)	(372		)	(1,079		)	(378		)	(701		)
Net losses/(gains) realized on sale of securities reclassified to noninterest income	(567		)	(198		)	(369		)	(921		)	(322		)	(599		)
Net change in unrealized gains/(losses) on securities available for sale	(29,784		)	(10,425		)	(19,359		)	3,475			1,216			2,259
Pension plans and other postretirement benefits:
Amortization of actuarial losses/(gains)	1,138			399			739			2,276			797			1,479
Amortization of prior service cost reclassified to other noninterest expense	410			144			266			820			287			533
Net change from defined benefit pension plans	1,548			543			1,005			3,096			1,084			2,012
Total other comprehensive gains/(losses)	(28,236		)	(9,882		)	(18,354		)	6,571			2,300			4,271
Comprehensive income	$	52,824		$	14,594		$	38,230		$	170,201		$	52,207		$	117,994

See accompanying Notes to the Consolidated Financial Statements

7

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FIRSTMERIT CORPORATION AND SUBSIDIARIES
(In thousands) (Unaudited)	Preferred Stock		Common Stock		Common Stock Warrant			Capital Surplus			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock			Total Shareholders' Equity
Balance at December 31, 2014	$	100,000	$	127,937	$	3,000		$	1,393,090		$	(71,892	)	$	1,404,717		$	(122,571	)	$	2,834,281
Net income	—		—		—			—			—			113,723			—			113,723
Other comprehensive income	—		—		—			—			4,271			—			—			4,271
Comprehensive income	—		—		—			—			4,271			113,723			—			117,994
Cash dividends - Preferred Stock	—		—		—			—			—			(2,938		)	—			(2,938		)
Cash dividends - Common Stock ($0.32 per share)	—		—		—			—			—			(52,643		)	—			(52,643		)
Nonvested (restricted) shares granted (659,432 shares)	—		—		—			(14,340		)	—			—			14,340			—
Restricted stock activity (276,805 shares)	—		—		—			1,291			—			—			(5,544		)	(4,253		)
Deferred compensation trust (234,703 increase in shares)	—		—		—			637			—			—			(637		)	—
Share-based compensation	—		—		—			7,666			—			—			—			7,666
Repurchase of a Common Stock warrant to the U.S. Treasury for Citizens TARP warrant (2,571,998 shares)	—		—		(3,000		)	(9,150		)	—			—			—			(12,150		)
Balance at June 30, 2015	$	100,000	$	127,937	$	—		$	1,379,194		$	(67,621	)	$	1,462,859		$	(114,412	)	$	2,887,957
Balance at December 31, 2015	$	100,000	$	127,937	$	—		$	1,386,677		$	(79,274	)	$	1,519,438		$	(114,683	)	$	2,940,095
Net income	—		—		—			—			—			112,445			—			112,445
Other comprehensive income	—		—		—			—			49,801			—			—			49,801
Comprehensive income	—		—		—			—			49,801			112,445			—			162,246
Cash dividends - Preferred Stock	—		—		—			—			—			(2,938		)	—			(2,938		)
Cash dividends - Common Stock ($0.34 per share)	—		—		—			—			—			(56,264		)	—			(56,264		)
Nonvested (restricted) shares granted (633,286 shares)	—		—		—			(12,900		)	—			—			12,900			—
Restricted stock activity (221,872 shares)	—		—		—			701			—			—			(4,878		)	(4,177		)
Deferred compensation trust (109,130 increase in shares)	—		—		—			591			—			—			(591		)	—
Share-based compensation	—		—		—			8,197			—			—			—			8,197
Balance as of June 30, 2016	$	100,000	$	127,937	$	—		$	1,383,266		$	(29,473	)	$	1,572,681		$	(107,252	)	$	3,047,159

See accompanying Notes to the Consolidated Financial Statements

8

CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
(In thousands) (Unaudited)	Six Months Ended June 30,
	2016			2015
Operating Activities
Net income	$	112,445		$	113,723
Adjustments to reconcile net income to net cash provided and used by operating activities:
Provision for loan losses	14,200			17,214
Provision/(benefit) for deferred income taxes	22,893			4,162
Depreciation and amortization	32,635			31,274
Benefit attributable to FDIC loss share	257			6,046
Accretion of acquired loans	(33,978		)	(51,170		)
Amortization and accretion of investment securities, net
Available-for-sale	5,062			5,407
Held-to-maturity	1,866			2,110
Losses/(gains) on sales and calls of available-for-sale investment securities, net	(2,756		)	(921		)
Originations of loans held for sale	(14,060		)	(51,673		)
Proceeds from sales of loans, primarily mortgage loans sold in the secondary markets	15,938			60,429
Gains on sales of loans, net	(368		)	(760		)
Amortization of intangible assets	4,608			5,196
Recognition of stock compensation expense	8,197			7,666
Net decrease/(increase) in other assets	(171,074		)	1,442
Net increase/(decrease) in other liabilities	142,897			(1,519		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	138,762			148,626
Investing Activities
Proceeds from sale of investment securities
Available-for-sale	(113		)	171,725
Held-to-maturity	—			668
Other	—			1,015
Proceeds from prepayments, calls, and maturities of investment securities
Available-for-sale	319,566			285,541
Held-to-maturity	214,489			211,636
Other	—			165
Purchases of investment securities
Available-for-sale	(616,645		)	(758,486		)
Held-to-maturity	(57,469		)	(94,756		)
Other	(221		)	(172		)
Net decrease/(increase) in loans and leases	(262,863		)	(356,117		)
Purchases of premises and equipment	(2,412		)	(9,950		)
Sales of premises and equipment	8,501			8,407
NET CASH PROVIDED/(USED) BY INVESTING ACTIVITIES	(397,167		)	(540,324		)
Financing Activities
Net increase in demand accounts	70,037			215,269
Net increase/(decrease) in savings and money market accounts	904,745			19,104
Net decrease in certificates and other time deposits	(130,142		)	(65,188		)
Net increase/(decrease) in securities sold under agreements to repurchase	(350,185		)	246,659
Net increase/(decrease) in wholesale borrowings	(112,201		)	(61,997		)
Repurchase of common stock warrant	—			(12,150		)
Cash dividends - common	(56,264		)	(52,643		)
Cash dividends - preferred	(2,938		)	(2,938		)
Restricted stock activity	(4,177		)	(4,253		)
NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES	318,875			281,863
Increase/(Decrease) in cash and cash equivalents	60,470			(109,835		)
Cash and cash equivalents at beginning of year	463,817			697,424
Cash and cash equivalents at end of year	$	524,287		$	587,589
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest	$	30,920		$	27,970
Federal income taxes	4,859			26,125

See accompanying Notes to the Consolidated Financial Statements

9

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

FirstMerit Corporation and subsidiaries is a diversified financial services company headquartered in Akron, Ohio with 359 banking offices in the Ohio, Michigan, Wisconsin, Illinois, and Pennsylvania areas. The Corporation provides a complete range of banking and other financial services to consumers and businesses through its core operations.

On January 26, 2016, the Corporation and Huntington Bancshares Incorporated (“Huntington”)announced the signing of a definitive merger agreement under which the Corporation will merge into a subsidiary of Huntington in a stock and cash transaction. Based on the closing price of Huntington's common shares on January 25, 2016 of $8.80, the total transaction value is approximately $3.40 billion, including outstanding options and other equity-linked securities.

Under the terms of the definitive merger agreement, the Corporation will merge with a subsidiary of Huntington Bancshares, and FirstMerit Bank will merge with and into The Huntington National Bank. In conjunction with the closing of the transaction, four independent members of the Corporation’s Board of Directors will join the Huntington Board, which will be expanded accordingly.

Shareholders of the Corporation will receive 1.72 shares of Huntington common stock, and $5.00 in cash, for each share of the Corporation common stock. The per share consideration is valued at $20.14 per share based on the closing price of Huntington Common Stock on January 25, 2016.

The respective shareholders of Huntington and the Corporation approved the proposed merger of FirstMerit into Huntington during special meetings held on June 13, 2016 in Akron, Ohio by FirstMerit and in Columbus, Ohio by Huntington.

The transaction is expected to be completed in the third quarter of 2016, subject to the satisfaction of customary closing conditions, including regulatory approvals.

1.    Summary of Significant Accounting Policies

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

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

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

The Consolidated Balance Sheet at December 31, 2015 has been derived from the audited consolidated financial statements at that date. The accompanying unaudited interim financial statements reflect all adjustments (consisting only of normally recurring adjustments) that are, in the opinion of Management,

10

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

necessary for a fair statement of the results for the interim periods presented. Certain reclassifications of prior year’s amounts have been made to conform to the current year presentation. Such reclassifications had no effect on net earnings or equity. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules of the SEC. The unaudited consolidated financial statements of the Corporation as of June 30, 2016 and 2015 are not necessarily indicative of the results that may be achieved for the full fiscal year or for any future period. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”). There have been no significant changes in the current quarter to the Corporation’s accounting policies as disclosed in the 2015 Form 10-K.

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

Recently Adopted Accounting Standards

FASB ASU 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments. The amendments in ASU 2015-16 require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this update will be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued. The adoption of this guidance did not have a material effect on the Corporation's financial position or results of operations.

FASB ASU 2015-5, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The amendments in ASU 2015-05 provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. In addition, the guidance in this update supersedes 350-40-25-16. Consequently, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. The amendments are effective for public business entities for annual and interim periods within those annual periods, beginning after December 15, 2015. An entity can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. For prospective transition, the only disclosure requirements at transition are the nature of and reason for the change in accounting principle, the transition method, and a qualitative description of the financial statement line items affected by the change. For retrospective transition, the disclosure requirements at transition include the requirements for prospective transition and quantitative information about the effects of the accounting change. The adoption of this guidance did not have a material effect on the Corporation's financial position or results of operations.

FASB ASU 2015-2, Amendments to the Consolidation Analysis. The amendments in ASU 2015-02 affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

entities are subject to reevaluation under the revised consolidation model. These amendments modify the current accounting guidance to address limited partnerships and similar entities, certain investments funds, fees paid to a decision maker or service provider, and the impact of fee arrangements and related parties on the primary beneficiary determination. The amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. A reporting entity may apply the amendments using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively. The adoption of this guidance did not have a material effect on the Corporation's financial position or results of operations.

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

Recently Issued Accounting Standards

ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments will require a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments will also limit the amount of the allowance for credit losses to the amount by which fair value is below amortized cost because the classification as available for sale is premised on an investment strategy that recognizes that the investment could be sold at fair value, if cash collection would result in the realization of an amount less than fair value. The amendments require changes to presentational matters, such as presenting credit losses as an allowance rather than a write-down. The amendments in ASU 2016-13 retain many of the disclosure amendments in Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. In addition, disclosures of credit quality indicators in relation to the amortized cost of financing receivables are further disaggregated by year of origination (or vintage). The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years for public business entities. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years using a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., a

12

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

modified-retrospective approach) or a prospective transition approach for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Corporation is in process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements and related disclosures.

ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This update amends the new revenue recognition guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. The amendments in this update clarify that, for a contract to be considered completed at transition, substantially all of the revenue must have been recognized under legacy GAAP. This update also includes a practical expedient to ease transition for contracts that were modified prior to adoption of the revenue standard under both the full and modified retrospective transition approaches. The amendments clarify how an entity should evaluate the collectibility threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria. They also clarify that the fair value of noncash consideration should be measured at contract inception when determining the transaction price. The amendments also allow an entity to make an accounting policy election to exclude from the transaction price certain types of taxes collected from a customer if it discloses that policy. The effective date and transition requirements for this update are the same as those of the new standard. The Corporation is in process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements and related disclosures.

ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2006 EITF Meeting (SEC Update). The amendments in this update rescinds the following SEC Staff Observer comments that relate to narrow revenue recognition issues from ASC 605, Revenue Recognition, and ASC 932, Extractive Activities — Oil and Gas, upon an entity’s adoption of ASC 606: Revenue and Expense Recognition for Freight Services in Process, Accounting for Shipping and Handling Fees and Costs, Accounting for Consideration Given by a Vendor to a Customer (including a Reseller of the Vendor’s Products), and Accounting for Gas Balancing Arrangements. The ASU also rescinds the SEC Staff Announcement: Determining the Nature of a Host Contract Related to a Hybrid Instrument Issued in the Form of a Share under Topic 815, issued as EITF Topic D-109 and codified in ASC 815-10-S99-3, as of the effective date of ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity. The effective date and transition requirements for this update are the same as those of the new standard. The Corporation is in process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements and related disclosures.

ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This update amends the new revenue recognition guidance on accounting for licenses of intellectual property and identifying performance obligations. The amendments clarify how an entity should evaluate the nature of its promise in granting a license of intellectual property, which will determine whether it recognizes revenue over time or a point in time. The amendments also clarify when a promised good or service is separately identifiable, that is distinct within the context of the contract, and allow entities to disregard items that are immaterial in the context of a contract. The effective date and transition requirements for this update are the same as those of the new standard. For public business entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted, but not before December 15, 2016. The amendments can be adopted using either the full retrospective approach or a modified retrospective approach. The Corporation is in process of assessing the

13

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

potential impact the adoption of this guidance will have on its consolidated financial statements and related disclosures.

FASB ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in ASU 2016-09 simplify several aspects of accounting for employee share-based payments including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some areas of the simplification apply only to nonpublic entities. The new guidance will require all income tax effects of awards to be recognized as income tax expense or benefit in the income statement when the awards vest or are settled and additional paid in capital pools will be eliminated. The guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Companies will be required to account for forfeitures of share-based payments by recognizing forfeitures of awards as they occur or estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as currently required, through an accounting policy election. The guidance will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer's income tax withholding obligation. The guidance requires an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption will be permitted in any interim or annual period for which financial statements have not yet been issued or have not been made available for issuance, however all of the guidance must be adopted in the same period. If early adoption is elected in an interim period, any adjustments should be reflected as of the beginning of the annual period that includes that interim period. The adoption of this guidance is not expected to have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments in ASU 2016-08 are intended to improve the operability and understandability of the implementation guidance by clarifying the following: how an entity should identify the unit of accounting for the principal versus agent evaluation; how the control principle applies to transactions, such as service arrangements; reframes the indicators to focus on a principal rather than an agent, removes the credit risk and commission indicators and clarifies the relationship between the control principle and the indicators; and revises the existing illustrative examples and adds new illustrative examples. For public business entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted, but not before December 15, 2016. The amendments can be adopted using either the full retrospective approach or a modified retrospective approach. The Corporation is in process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements and related disclosures.

FASB ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323), The amendments in this update eliminate the requirement that when an investment qualifies for use of the equity method due to an increase in level of ownership or influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by step basis as if the equity method had been in effect during all previous periods that the investment had been held. For public business entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the

14

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

adoption of the equity method. The Corporation is in process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements and related disclosures

FASB ASU 2016-06, Derivatives and Hedging (Topic 815), Contingent Put and Call Options in Debt Instruments. The amendments in this update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the

embedded call (put) options solely in accordance with the four-step decision sequence. For public business entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. An entity should apply the amendments in this update on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Corporation is in process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements and related disclosures.

FASB ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on
Existing Hedge Accounting Relationships. The amendments in ASU 2016-05 clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria (including those in paragraphs 815-20-35-14 through 35-18) continue to be met. For public business entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Corporation is in process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements and related disclosures.

FASB ASU 2016-02, Leases (Topic 842), The amendments in ASU 2016-02 increase transparency and comparability by requiring a lessee to recognize assets and liabilities for operating and capital leases with lease terms of more than 12 months. Additional qualitative and quantitative requirements disclosures are required to provide additional information to better understand the amount, timing, and uncertainty of cash flows arising from leases. Lessor accounting will remain largely unchanged from current GAAP. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Corporation is in process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements and related disclosures.

FASB ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update supersede the guidance to classify equity securities with readily determinable fair values into different categories (that is, trading or available-for-sale) and require equity securities (including other ownership interests, such as partnerships, unincorporated joint ventures, and limited liability companies) to be measured at fair value with changes in the fair value recognized through net income. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. The amendments also require enhanced disclosures about those investments. The amendments improve financial reporting by providing relevant information about an entity’s equity investments and reducing the number of items that are recognized in other comprehensive income. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments should be applied by means of a

15

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The adoption of this guidance is not expected to have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2014-09, Revenue from Contracts with Customers. In May 2014, the FASB issued new accounting guidance that revises the criteria for determining when to recognize revenue from contracts with customers and expands disclosure requirements. The amendments in this update supersede virtually all existing GAAP revenue recognition guidance, including most industry-specific revenue recognition guidance. The core principle requires an entity to recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 applies to contracts with customers to provide goods and services, with certain exclusions such as lease contracts, financing arrangements, and financial instruments. On July 9, 2015, the FASB decided to delay, by one year, the effective dates, permitting public entities to apply this guidance to annual reporting periods beginning after December 15, 2017, with early adoption permitted, but not before December 15, 2016. The amendments can be adopted using either the full retrospective approach or a modified retrospective approach. There are many aspects of this new accounting guidance that are still being interpreted, and the FASB has recently issued updates to certain aspects of the guidance as noted above. The Corporation is in process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements and related disclosures.

2.     Investment Securities

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

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

		June 30, 2016
(In thousands)		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available-for-sale
Debt securities
	U.S. treasury notes & bonds	$	4,996	$	1	$	—		$	4,997
	U.S. government agency debentures	2,500		28		—			2,528
	U.S. states and political subdivisions	147,807		3,742		(2		)	151,547
	Residential mortgage-backed securities:
	U.S. government agencies	840,250		20,064		(67		)	860,247
	Commercial mortgage-backed securities:
	U.S. government agencies	198,069		4,095		(116		)	202,048
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	2,325,707		30,400		(3,089		)	2,353,018
	Non-agency	3		—		—			3
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	392,205		6,528		(122		)	398,611
	Asset-backed securities:
	Collateralized loan obligations	297,939		354		(6,499		)	291,794
	Corporate debt securities	61,740		—		(10,633		)	51,107
	Total debt securities	4,271,216		65,212		(20,528		)	4,315,900
Equity securities
	Marketable equity securities	2,788		—		—			2,788
	Total equity securities	2,788		—		—			2,788
	Total securities available-for-sale	$	4,274,004	$	65,212	$	(20,528	)	$	4,318,688
Securities held-to-maturity
Debt securities
	U.S. government agency debentures	$	25,000	$	35	$	—		$	25,035
	U.S. states and political subdivisions	540,425		15,713		(265		)	555,873
	Residential mortgage-backed securities:
	U.S. government agencies	467,462		12,367		—			479,829
	Commercial mortgage-backed securities:
	U.S. government agencies	87,964		1,991		(42		)	89,913
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	1,060,496		4,327		(6,670		)	1,058,153
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	246,509		3,559		(410		)	249,658
	Corporate debt securities	86,305		974		—			87,279
	Total securities held-to-maturity	$	2,514,161	$	38,966	$	(7,387	)	$	2,545,740

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

		December 31, 2015
(In thousands)		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available-for-sale
Debt securities
	U.S. treasury notes & bonds	$	5,001	$	—	$	(1	)	$	5,000
	U.S. government agency debentures	2,500		—		(2		)	2,498
	U.S. states and political subdivisions	188,829		4,170		(204		)	192,795
	Residential mortgage-backed securities:
	U.S. government agencies	900,358		11,325		(5,454		)	906,229
	Commercial mortgage-backed securities:
	U.S. government agencies	173,912		220		(2,023		)	172,109
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	2,155,808		2,659		(30,147		)	2,128,320
	Non-agency	4		—		—			4
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	217,008		580		(1,269		)	216,319
	Asset-backed securities:
	Collateralized loan obligations	297,831		26		(8,446		)	289,411
	Corporate debt securities	61,710		—		(9,481		)	52,229
	Total debt securities	4,002,961		18,980		(57,027		)	3,964,914
Equity securities
	Marketable equity securities	2,821		—		—			2,821
	Total equity securities	2,821		—		—			2,821
	Total securities available-for-sale	$	4,005,782	$	18,980	$	(57,027	)	$	3,967,735
Securities held-to-maturity
Debt securities
	U.S. government agency debentures	25,000		19		—			25,019
	U.S. states and political subdivisions	571,738		22,180		(262		)	593,656
	Residential mortgage-backed securities:
	U.S. government agencies	507,908		4,767		(2,999		)	509,676
	Commercial mortgage-backed securities:
	U.S. government agencies	64,951		294		(574		)	64,671
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	1,161,340		75		(35,881		)	1,125,534
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	255,359		676		(3,611		)	252,424
	Corporate debt securities	87,797		364		(22		)	88,139
	Total securities held-to-maturity	$	2,674,093	$	28,375	$	(43,349	)	$	2,659,119

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

		June 30, 2015
(In thousands)		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available-for-sale
Debt securities
	U.S. treasury notes & bonds	$	5,004	$	1	$	—		$	5,005
	U.S. government agency debentures	2,500		10		—			2,510
	U.S. states and political subdivisions	203,449		5,191		(1,023		)	207,617
	Residential mortgage-backed securities:
	U.S. government agencies	947,347		18,068		(4,563		)	960,852
	Commercial mortgage-backed securities:
	U.S. government agencies	171,842		643		(2,147		)	170,338
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	1,968,918		4,779		(24,308		)	1,949,389
	Non-agency	5		—		—			5
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	227,889		1,254		(705		)	228,438
	Asset-backed securities:
	Collateralized loan obligations	259,743		801		(2,463		)	258,081
	Corporate debt securities	61,681		—		(8,231		)	53,450
	Total debt securities	3,848,378		30,747		(43,440		)	3,835,685
Equity Securities
	Marketable equity securities	2,824		—		—			2,824
	Non-marketable equity securities	—		—		—			—
	Total equity securities	2,824		—		—			2,824
	Total securities available-for-sale	$	3,851,202	$	30,747	$	(43,440	)	$	3,838,509
Securities held-to-maturity
Debt securities
	U.S. government agency debentures	25,000		—		(323		)	24,677
	U.S states and political subdivisions	529,441		8,104		(1,942		)	535,603
	Residential mortgage-backed securities:
	U.S. government agencies	555,273		6,919		(2,940		)	559,252
	Commercial mortgage-backed securities:
	U.S. government agencies	57,462		412		(219		)	57,655
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	1,267,321		445		(35,025		)	1,232,741
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	263,741		1,004		(4,523		)	260,222
	Corporate debt securities	89,275		695		—			89,970
	Total securities held-to-maturity	$	2,787,513	$	17,579	$	(44,972	)	$	2,760,120

The Corporation's U.S. states and political subdivisions portfolio is composed of general obligation bonds issued by a highly diversified number of states, cities, counties, and school districts. The amortized cost and fair value of the Corporation's portfolio of general obligation bonds are summarized by U.S. state in the tables below. As illustrated in the tables below, the aggregate fair value of the Corporation's general obligation bonds was greater than $10.0 million in 11 of the 37 U.S. states in which it holds investments.

19

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

(Dollars in thousands)	June 30, 2016
U.S. State	# of Issuers	Average Issue Size, Fair Value		Amortized Cost		Fair Value
Michigan	116	$	1,404	$	157,403	$	162,897
Ohio	108	1,095		115,545		118,300
Wisconsin	54	651		34,046		35,166
Illinois	52	1,783		90,772		92,711
Texas	51	816		40,409		41,629
Pennsylvania	41	1,037		41,674		42,529
New Jersey	31	724		21,928		22,441
Washington	27	968		25,586		26,149
Minnesota	23	699		15,667		16,076
New York	18	575		10,044		10,346
Missouri	10	1,075		10,414		10,754
Other	105	768		79,275		80,688
Total general obligation bonds	636	$	1,037	$	642,763	$	659,686

(Dollars in thousands)	December 31, 2015
U.S. State	# of Issuers	Average Issue Size, Fair Value		Amortized Cost		Fair Value
Michigan	137	$	1,381	$	180,508	$	189,259
Ohio	111	1,091		116,783		121,117
Illinois	55	1,870		99,524		102,867
Texas	58	807		45,818		46,805
Wisconsin	69	673		44,794		46,454
Pennsylvania	42	1,020		42,185		42,835
Washington	29	950		27,080		27,548
New Jersey	35	725		24,810		25,372
Minnesota	33	667		21,679		22,020
Missouri	15	1,078		15,878		16,174
New York	18	635		11,161		11,422
Other	110	759		81,815		83,477
Total general obligation bonds	712	$	1,033	$	712,035	$	735,350

(Dollars in thousands)	June 30, 2015
U.S. State	# of Issuers	Average Issue Size, Fair Value		Amortized Cost		Fair Value
Michigan	153	$	1,018	$	152,499	$	155,712
Ohio	127	964		121,716		122,474
Illinois	60	1,784		105,581		107,033
Wisconsin	70	585		39,774		40,950
Texas	67	759		50,370		50,877
Pennsylvania	46	1,014		46,547		46,666
Washington	30	939		27,783		28,169
New Jersey	34	720		23,916		24,472
Minnesota	34	692		23,267		23,540
Missouri	15	1,084		15,981		16,265
New York	18	633		11,187		11,392
Other	119	639		75,670		76,040
Total general obligation bonds	773	$	910	$	694,291	$	703,590

20

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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

The Corporation's evaluation of its municipal bond portfolio at June 30, 2016 did not uncover any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized credit rating agency.

FRB and FHLB stock constitutes the majority of other investments on the Consolidated Balance Sheets.

(In thousands)	June 30, 2016		December 31, 2015		June 30, 2015
FRB stock	$	56,303	$	56,083	$	55,853
FHLB stock	91,714		91,714		91,713
Other	350		375		401
Total other investments	$	148,367	$	148,172	$	147,967

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

Securities with a carrying value of $3.2 billion, $2.9 billion, and $3.2 billion at June 30, 2016, December 31, 2015, and June 30, 2015, respectively, were pledged to secure trust and public deposits and securities sold under agreements to repurchase and for other purposes required or permitted by law.

21

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

Realized Gains and Losses

The following table presents the gross realized gains and losses on the sales of those securities that have been included in earnings as a result of those sales. Gains or losses on the sales of available-for-sale securities are recognized upon sale and are determined using the specific identification method.

	Three Months Ended June 30,					Six Months Ended June 30,
(In thousands)	2016		2015			2016		2015
Realized gains	$	2,164	$	672		$	2,459	$	1,064
Realized losses	—		(105		)	—		(143		)
Net securities (losses)/gains	$	2,164	$	567		$	2,459	$	921

Gross Unrealized Losses and Fair Value

The following table presents the gross unrealized losses and fair value of securities by length of time that individual securities had been in a continuous loss position by major categories of available-for-sale and held-to-maturity securities.

		June 30, 2016
		Less than 12 months							12 months or longer							Total
(Dollars in thousands)		Fair Value		Unrealized Losses			Number Impaired Securities		Fair Value		Unrealized Losses			Number Impaired Securities		Fair Value		Unrealized Losses
Securities available-for-sale
Debt securities
	U.S. states and political subdivisions	$	1,567	$	(2	)	3		$	—	$	—		—		$	1,567	$	(2	)
	Residential mortgage-backed securities:
	U.S. government agencies	14,275		(67		)	5		—		—			0		14,275		(67		)
	Commercial mortgage-backed securities:
	U.S. government agencies	23,570		(28		)	1		12,627		(88		)	1		36,197		(116		)
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	13,182		(271		)	1		332,305		(2,818		)	29		345,487		(3,089		)
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	24,401		(38		)	4		19,071		(84		)	1		43,472		(122		)
	Asset-backed securities:
	Collateralized loan obligations	92,851		(1,795		)	16		161,827		(4,704		)	21		254,678		(6,499		)
	Corporate debt securities								51,106		(10,633		)	8		51,106		(10,633		)
	Total securities available-for-sale	$	169,846	$	(2,201	)	30		$	576,936	$	(18,327	)	60		$	746,782	$	(20,528	)
Securities held-to-maturity
Debt securities
	U.S. states and political subdivisions	$	3,525	$	(19	)	$	7	$	6,569	$	(246	)	$	9	$	10,094	$	(265	)
	Residential mortgage-backed securities:
	U.S. government agencies	—		—			0		—		—			0		—		—
	Commercial mortgage-backed securities:
	U.S. government agencies	13,478		(42		)	1		—		—			0		13,478		(42		)
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	—		—			0		598,383		(6,670		)	37		598,383		(6,670		)
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	—		—			0		47,686		(410		)	4		47,686		(410		)
	Collateralized loan obligations:
	Corporate debt securities	5,002		—			1		—		—			0		5,002		—
	Total securities held-to-maturity	$	22,005	$	(61	)	9		$	652,638	$	(7,326	)	50		$	674,643	$	(7,387	)

22

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

		December 31, 2015
		Less than 12 months						12 months or longer						Total
(Dollars in thousands)		Fair Value		Unrealized Losses			Number Impaired Securities	Fair Value		Unrealized Losses			Number Impaired Securities	Fair Value		Unrealized Losses
Securities available-for-sale
Debt securities
	U.S government agency debentures	$	2,498	$	(2	)	1	$	—	$	—		0	$	2,498	$	(2	)
	U.S. treasury notes and bonds	5,000		(1		)	1	—		—			0	5,000		(1		)
	U.S. states and political subdivisions	10,178		(37		)	20	5,899		(167		)	9	16,077		(204		)
	Residential mortgage-backed securities:
	U.S. government agencies	328,156		(3,026		)	27	95,895		(2,428		)	7	424,051		(5,454		)
	Commercial mortgage-backed securities:
	U.S. government agencies	107,074		(1,447		)	15	12,401		(576		)	1	119,475		(2,023		)
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	1,130,779		(10,587		)	78	597,403		(19,560		)	49	1,728,182		(30,147		)
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	113,825		(893		)	12	23,400		(376		)	2	137,225		(1,269		)
	Asset-backed securities:
	Collateralized loan obligations	151,810		(3,576		)	26	126,422		(4,870		)	15	278,232		(8,446		)
	Corporate debt securities	—		—			0	52,229		(9,481		)	8	52,229		(9,481		)
	Total securities available-for-sale	$	1,849,320	$	(19,569	)	180	$	913,649	$	(37,458	)	91	$	2,762,969	$	(57,027	)
Securities held-to-maturity
Debt securities
	U.S. states and political subdivisions	$	18,465	$	(224	)	21	$	4,174	$	(38	)	6	$	22,639	$	(262	)
	Residential mortgage-backed securities:
	U.S. government agencies	85,738		(715		)	6	97,880		(2,284		)	6	183,618		(2,999		)
	Commercial mortgage-backed securities:
	U.S. government agencies	34,833		(346		)	6	9,269		(228		)	1	44,102		(574		)
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	140,514		(1,225		)	12	941,982		(34,656		)	55	1,082,496		(35,881		)
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	71,812		(384		)	7	117,992		(3,227		)	11	189,804		(3,611		)
	Corporate debt securities	19,243		(22		)	6	—		—			0	19,243		(22		)
	Total securities held-to-maturity	$	370,605	$	(2,916	)	58	$	1,171,297	$	(40,433	)	79	$	1,541,902	$	(43,349	)

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

		June 30, 2015
		Less than 12 months						12 months or longer						Total
(Dollars in thousands)		Fair Value		Unrealized Losses			Number Impaired Securities	Fair Value		Unrealized Losses			Number Impaired Securities	Fair Value		Unrealized Losses
Securities available-for-sale
Debt securities
	U.S. states and political subdivisions	$	32,237	$	(587	)	52	$	5,642	$	(436	)	9	$	37,879	$	(1,023	)
	Residential mortgage-backed securities:
	U.S. government agencies	196,219		(2,087		)	15	103,498		(2,476		)	8	299,717		(4,563		)
	Commercial mortgage-backed securities:
	U.S. government agencies	96,573		(1,457		)	14	17,335		(690		)	2	113,908		(2,147		)
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	596,646		(4,398		)	42	706,376		(19,910		)	53	1,303,022		(24,308		)
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	46,771		(71		)	5	61,120		(634		)	7	107,891		(705		)
	Asset-backed securities:
	Collateralized loan obligations	84,565		(1,204		)	10	86,082		(1,259		)	11	170,647		(2,463		)
	Corporate debt securities	4,225		(765		)	1	49,225		(7,466		)	7	53,450		(8,231		)
	Total securities available-for-sale	$	1,057,236	$	(10,569	)	139	$	1,029,278	$	(32,871	)	97	$	2,086,514	$	(43,440	)
Securities held-to-maturity
Debt securities
	U.S. government agency debentures	—		—			0	24,677		(323		)	1	24,677		(323		)
	U.S. states and political subdivisions	98,867		(1,872		)	112	4,430		(70		)	6	103,297		(1,942		)
	Residential mortgage-backed securities:
	U.S. government agencies	83,112		(483		)	5	105,289		(2,457		)	6	188,401		(2,940		)
	Commercial mortgage-backed securities:
	U.S. government agencies	7,263		(41		)	1	9,430		(178		)	1	16,693		(219		)
	Residential collateralized mortgage-backed securities:
	U.S. government agencies	111,360		(835		)	8	1,042,351		(34,190		)	56	1,153,711		(35,025		)
	Commercial collateralized mortgage-backed securities:
	U.S. government agencies	5,025		(2		)	1	142,937		(4,521		)	13	147,962		(4,523		)
	Total securities held-to-maturity	$	305,627	$	(3,233	)	127	$	1,329,114	$	(41,739	)	83	$	1,634,741	$	(44,972	)

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. 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 OCI. Equity securities are also evaluated to determine whether the unrealized loss is expected to be recoverable based on whether evidence exists to support a realizable value equal to or greater than the amortized cost basis. If it is probable that the Corporation will not recover the amortized cost basis, taking into consideration the estimated recovery period and its ability to hold the equity security until recovery, OTTI is recognized.

24

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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

The investment securities portfolio was in a net unrealized gain position of $76.3 million at June 30, 2016, compared to a net unrealized loss position of $53.0 million at December 31, 2015 and a net unrealized loss position of $40.1 million at June 30, 2015. Gross unrealized losses were $27.9 million as of June 30, 2016, compared to $100.4 million at December 31, 2015, and $88.4 million at June 30, 2015. As of June 30, 2016, gross unrealized losses are concentrated within CLOs and corporate debt securities. Securities classified as corporate debt would include eight, single issuer, trust preferred securities with stated maturities. Such investments are only 1% of the fair value of the available-for-sale investment portfolio. None of the corporate issuers have deferred paying dividends on their issued trust preferred shares in which the Corporation is invested. The fair values of these investments have been impacted by the market conditions which have caused risk premiums to increase, resulting in the decline in the fair value of the trust preferred securities.

Management believes the Corporation will fully recover the cost of these CLOs and corporate debt securities, and it does not intend to sell these securities and it is not more likely than not that it will be required to sell them before the anticipated recovery of the remaining amortized cost basis, which may be maturity. As a result, Management concluded that these securities were not other-than-temporarily impaired at June 30, 2016 and has recognized the total amount of the impairment in OCI, net of tax.

The new Volcker Rule, as originally adopted, may affect the Corporation’s ability to hold CLOs. As of June 30, 2016, the Corporation holds $291.8 million of CLOs with a gross unrealized loss position of $6.1 million. Management believes that its holdings of CLOs are not ownership interests in covered funds prohibited by the Volcker Rule regulations and, therefore, expects to be able to hold these investments until their stated maturities. Management seeks to maintain a CLO portfolio consistent with the requirements of the Volcker Rule, and new CLO investments are being made in accordance with the strategy.

Contractual Maturity of Debt Securities

The following table shows the remaining contractual maturities and contractual yields of debt securities held-to-maturity and available-for-sale as of June 30, 2016. Estimated lives on MBSs may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

25

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

(Dollars in thousands)	U.S. Treasury notes & bonds			U.S. Government agency debentures			U.S. States and political subdivisions			Residential mortgage-backed securities - U.S. govt. agencies			Commercial mortgage-backed securities - U.S. govt. agencies			Residential collateralized mortgage obligations - U.S. govt. agencies			Residential collateralized mortgage obligations - non-agency			Commercial collateralized mortgage obligations - U.S. govt. agencies			Asset backed securities - collateralized loan obligations			Corporate debt securities			Total			Weighted Average Yield
Securities Available-for-Sale
Remaining maturity:
One year or less	$	4,997		$	—		$	5,895		$	65		$	—		$	—		$	—		$	—		$	—		$	—		$	10,957		2.32	%
Over one year through five years	—			2,528			75,103			86,480			24,498			13,936			3			22,126			—			—			224,674			3.54	%
Over five years through ten years	—			—			51,441			47,116			123,441			10,705			—			103,837			218,344			—			554,884			2.92	%
Over ten years	—			—			19,108			726,586			54,109			2,328,377			—			272,648			73,450			51,107			3,525,385			2.23	%
Fair Value	$	4,997		$	2,528		$	151,547		$	860,247		$	202,048		$	2,353,018		$	3		$	398,611		$	291,794		$	51,107		$	4,315,900		2.39	%
Amortized Cost	$	4,996		$	2,500		$	147,807		$	840,250		$	198,069		$	2,325,707		$	3		$	392,205		$	297,939		$	61,740		$	4,271,216
Weighted-Average Yield	0.31		%	1.25		%	5.00		%	2.98		%	2.13		%	2.01		%	2.98		%	2.18		%	3.08		%	1.37		%	2.39		%
Weighted-Average Maturity (in years)	0.23			1.92			1.86			3.28			3.60			3.11			0.59			3.90			6.51			11.31			3.55
Securities Held-to-Maturity
Remaining maturity:
One year or less	$	—		$	—		$	64,872		$	—		$	—		$	—		$	—		$	—		$	—		$	22,443		$	87,315		2.36	%
Over one year through five years	—			25,035			157,172			—			36,522			—			—			81,237			—			64,836			364,802			2.47	%
Over five years through ten years	—			—			193,355			21,307			53,391			—			—			40,365			—			—			308,418			3.83	%
Over ten years	—			—			140,474			458,522			—			1,058,153			—			128,056			—			—			1,785,205			2.02	%
Fair Value	$	—		$	25,035		$	555,873		$	479,829		$	89,913		$	1,058,153		$	—		$	249,658		$	—		$	87,279		$	2,545,740		2.31	%
Amortized Cost	$	—		$	25,000		$	540,425		$	467,462		$	87,964		$	1,060,496		$	—		$	246,509		$	—		$	86,305		$	2,514,161
Weighted-Average Yield	—		%	1.43		%	4.21		%	2.13		%	2.14		%	1.59		%	—		%	1.77		%	—		%	2.30		%	2.31		%
Weighted-Average Maturity (in years)	—			0.08			4.50			3.29			2.81			3.25			—			3.56			—			1.52			3.45

26

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

3.     Loans

Loans outstanding as of June 30, 2016, December 31, 2015, and June 30, 2015, net of unearned income, consisted of the following:

(In thousands)		June 30, 2016			December 31, 2015			June 30, 2015
Originated loans:
Commercial		$	9,132,366		$	9,007,830		$	8,633,332
Residential mortgage		728,534			689,045			653,143
Installment		3,353,084			2,990,349			2,720,059
Home equity		1,276,661			1,248,438			1,180,802
Credit cards		174,986			182,843			168,576
	Total originated loans	14,665,631			14,118,505			13,355,912
Allowance for originated loan losses		(105,175		)	(105,135		)	(101,682		)
	Net originated loans	$	14,560,456		$	14,013,370		$	13,254,230
Acquired loans:
Commercial		$	554,414		$	677,149		$	877,598
Residential mortgage		292,877			324,008			358,559
Installment		494,429			573,372			659,348
Home equity		146,916			168,542			200,179
	Total acquired loans	1,488,636			1,743,071			2,095,684
Allowance for acquired loan losses		(4,256		)	(3,877		)	(4,950		)
	Net acquired loans	$	1,484,380		$	1,739,194		$	2,090,734
FDIC acquired loans:
Commercial		$	115,793		$	129,109		$	145,821
Residential mortgage		33,370			35,568			38,029
Installment		1,808			2,077			2,299
Home equity		29,813			38,668			55,545
Loss share receivable		8,555			9,947			11,820
	Total FDIC acquired loans	189,339			215,369			253,514
Allowance for FDIC acquired loan losses		(40,218		)	(44,679		)	(41,627		)
	Net FDIC acquired loans	$	149,121		$	170,690		$	211,887
Total loans:
Commercial		$	9,802,573		$	9,814,088		$	9,656,751
Residential mortgage		1,054,781			1,048,621			1,049,731
Installment		3,849,321			3,565,798			3,381,706
Home equity		1,453,390			1,455,648			1,436,526
Credit cards		174,986			182,843			168,576
Loss share receivable		8,555			9,947			11,820
	Total loans	16,343,606			16,076,945			15,705,110
Total allowance for loan losses		(149,649		)	(153,691		)	(148,259		)
	Total Net loans	$	16,193,957		$	15,923,254		$	15,556,851

27

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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

Originated Loans

Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, and net deferred loan fees and costs. Interest income on loans is accrued over the term of the loans primarily using the "simple-interest" method based on the principal balance outstanding. Interest is not accrued on loans where collectability is uncertain. Accrued interest is presented separately in the consolidated balance sheet, except for accrued interest on credit card loans, which is included in the outstanding loan balance. Loan origination fees and certain direct costs incurred to extend credit are deferred and amortized over the term of the loan or loan commitment period as an adjustment to the related loan yield. Net deferred loan origination fees and costs amounted to $3.3 million, $4.1 million, and $5.4 million at June 30, 2016, December 31, 2015, and June 30, 2015, respectively.

Acquired Loans

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

Total outstanding acquired impaired loans as of June 30, 2016 and 2015 were $340.9 million and $504.7 million, respectively. The outstanding balance of these loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loans, owed at the reporting date, whether or not currently due and whether or not any such amounts have been charged-off. Changes in the carrying amount and accretable yield for acquired impaired loans were as follows for the three and six months ended June 30, 2016 and 2015:    

	Three Months Ended June 30,												Six Months Ended June 30,
Acquired Impaired Loans	2016						2015						2016						2015
(In thousands)	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Balance at beginning of period	$	85,444		$	257,152		$	118,756		$	388,313		$	89,823		$	284,709		$	119,450		$	423,209
Accretion	(7,921		)	7,921			(10,285		)	10,285			(16,823		)	16,823			(21,503		)	21,503
Net reclassifications from nonaccretable to accretable	4,883			—			8,217			—			12,636			—			21,212			—
Payments received, net	—			(25,878		)	—			(42,434		)	—			(62,337		)	—			(88,548		)
Disposals	(3,042		)	—			(4,657		)	—			(6,272		)	—			(7,128		)	—
Balance at end of period	$	79,364		$	239,195		$	112,031		$	356,164		$	79,364		$	239,195		$	112,031		$	356,164

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

28

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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

During the quarter ended June 30, 2016, there was an overall improvement in cash flow expectations, which resulted in the net reclassification of $4.9 million from the nonaccretable difference to accretable yield. This reclassification was $8.2 million for the three months ended June 30, 2015. The reclassification from the nonaccretable difference to the accretable yield results in prospective yield adjustments on the loan pools.

FDIC Acquired Loans and Related Loss Share Receivable

FDIC acquired loans include loans purchased in the 2010 FDIC-assisted acquisitions of George Washington and Midwest. George Washington and Midwest non-single family loss share agreements with the FDIC expired at March 31, 2015 and June 30, 2015, respectively, resulting in $115.8 million of loans no longer being covered as of June 30, 2016. As of June 30, 2016, $65.0 million remained covered by single family loss share agreements.

Changes in the loss share receivable for the three and six months ended June 30, 2016 and 2015 were as follows:

Loss Share Receivable	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2016			2015			2016			2015
Balance at beginning of period	$	9,436		$	20,005		$	9,947		$	22,033
Amortization	(358		)	(1,185		)	(706		)	(3,372		)
Increase/(decrease) due to impairment (recapture) on FDIC acquired loans	(12		)	1,819			257			6,046
FDIC reimbursement	(194		)	(8,713		)	(386		)	(12,726		)
FDIC acquired loans paid in full	(317		)	(106		)	(557		)	(161		)
Balance at end of the period (1)	$	8,555		$	11,820		$	8,555		$	11,820

(1) As of June 30, 2016, the loss share receivable of $8.6 million was related to single family covered loans.

29

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

Total outstanding FDIC acquired impaired loans were $301.2 million and $351.1 million as of June 30, 2016 and 2015, respectively. The outstanding balance of these loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loans, owed at the reporting date, whether or not currently due and whether or not any such amounts have been charged-off. Changes in the carrying amount and accretable yield for FDIC acquired impaired loans were as follows for the three and six months ended June 30, 2016 and 2015:

	Three Months Ended June 30,												Six Months Ended June 30,
FDIC Acquired Impaired Loans	2016						2015						2016						2015
(In thousands)	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Balance at beginning of period	$	22,126		$	122,134		$	29,867		$	199,225		$	22,908		$	130,648		$	37,511		$	232,452
Accretion	(2,231		)	2,231			(4,100		)	4,100			(4,528		)	4,528			(9,667		)	9,667
Net reclassifications between non-accretable and accretable	699			—			2,136			—			2,372			—			2,080			—
Payments received, net	—			(5,604		)	—			(45,517		)	—			(16,415		)	—			(84,311		)
(Disposals)/Additions	(371		)	—			(1,753		)	—			(529		)	—			(3,774		)	—
Balance at end of period	$	20,223		$	118,761		$	26,150		$	157,808		$	20,223		$	118,761		$	26,150		$	157,808

The cash flows expected to be collected on FDIC acquired impaired loans are estimated quarterly in a similar manner as described above for acquired impaired loans. During the quarter ended June 30, 2016, the re-estimation process resulted in a net reclassification of $0.7 million from the nonaccretable difference to accretable yield. This reclassification was $2.1 million for the three months ended June 30, 2015. The reclassification from the nonaccretable difference to the accretable yield results in prospective yield adjustments on the loan pools.

Credit Quality Disclosures

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

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

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

30

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

The following tables provide a summary of loans by portfolio type, including the delinquency status of those loans that continue to accrue interest and those loans that are nonaccrual:

As of June 30, 2016
(In thousands)													≥ 90 Days
Originated Loans	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (1)		Loans
Commercial
C&I	$	1,677	$	1,465	$	10,864	$	14,006	$	5,868,988	$	5,882,994	$	1,062	$	43,887
CRE	4,506		142		12,176		16,824		2,018,674		2,035,498		166		13,860
Construction	—		709		4,760		5,469		699,871		705,340		—		9,195
Leases	—		—		476		476		508,058		508,534		476		—
Consumer
Installment	15,662		3,496		4,005		23,163		3,329,921		3,353,084		3,453		3,506
Home Equity Lines	1,245		713		2,140		4,098		1,272,563		1,276,661		623		2,390
Credit Cards	811		504		860		2,175		172,811		174,986		789		758
Residential Mortgages	9,564		2,017		4,233		15,814		712,720		728,534		1,439		10,701
Total	$	33,465	$	9,046	$	39,514	$	82,025	$	14,583,606	$	14,665,631	$	8,008	$	84,297
Acquired Loans													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (3)		Loans (3)
Commercial
C&I	$	340	$	121	$	1,168	$	1,629	$	179,874	$	181,503	$	—	$	865
CRE	602		896		9,491		10,989		357,811		368,800		—		4,482
Construction	—		—		413		413		3,698		4,111		—		—
Consumer
Installment	3,623		767		486		4,876		489,553		494,429		224		615
Home Equity Lines	960		503		712		2,175		144,741		146,916		587		235
Residential Mortgages	299		943		3,867		5,109		287,768		292,877		646		924
Total	$	5,824	$	3,230	$	16,137	$	25,191	$	1,463,445	$	1,488,636	$	1,457	$	7,121
FDIC Acquired Loans (2)													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (3)		Loans (3)
Commercial
C&I	$	—	$	—	$	1,326	$	1,326	$	29,948	$	31,274	n/a		n/a
CRE	—		804		24,931		25,735		54,153		79,888		n/a		n/a
Construction	—		—		3,512		3,512		1,119		4,631		n/a		n/a
Consumer
Installment	—		—		—		—		1,808		1,808		n/a		n/a
Home Equity Lines	2,097		354		938		3,389		26,424		29,813		n/a		n/a
Residential Mortgages	4,371		204		1,800		6,375		26,995		33,370		n/a		n/a
Total	$	6,468	$	1,362	$	32,507	$	40,337	$	140,447	$	180,784	n/a		n/a

(1)Installment loans 90 days or more past due and accruing include $2.3 million of loans guaranteed by the U.S. government as of June 30, 2016.

(2)Excludes loss share receivable of $8.6 million as of June 30, 2016.

(3) Acquired and FDIC acquired impaired loans were not classified as nonperforming assets at June 30, 2016 as the loans are considered to be performing under ASC 310-30. As a result, interest income, through the accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all acquired and FDIC acquired impaired loans. These asset quality disclosures are, therefore, not applicable to acquired and FDIC acquired impaired loans.

31

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

As of December 31, 2015
(In thousands)													≥ 90 Days
Originated Loans	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (1)		Loans
Commercial
C&I	$	4,684	$	115	$	8,824	$	13,623	$	5,779,785	$	5,793,408	$	236	$	23,123
CRE	12,880		—		2,260		15,140		2,062,204		2,077,344		153		4,503
Construction	1,360		—		486		1,846		643,491		645,337		—		482
Leases	—		—		—		—		491,741		491,741		—		—
Consumer
Installment	17,934		4,828		3,920		26,682		2,963,667		2,990,349		3,519		2,178
Home Equity Lines	1,952		913		1,478		4,343		1,244,095		1,248,438		513		1,674
Credit Cards	1,449		494		632		2,575		180,268		182,843		725		545
Residential Mortgages	11,099		1,519		6,693		19,311		669,734		689,045		2,876		11,600
Total	$	51,358	$	7,869	$	24,293	$	83,520	$	14,034,985	$	14,118,505	$	8,022	$	44,105
Acquired Loans													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (3)		Loans (3)
Commercial
C&I	$	311	$	31	$	3,336	$	3,678	$	236,467	$	240,145	$	13	$	782
CRE	3,192		1,681		9,657		14,530		416,361		430,891		522		4,948
Construction	—		—		733		733		5,380		6,113		—		—
Consumer
Installment	5,059		1,329		974		7,362		566,010		573,372		236		835
Home Equity Lines	1,365		660		1,260		3,285		165,257		168,542		644		514
Residential Mortgages	8,760		567		6,792		16,119		307,889		324,008		1,681		1,166
Total	$	18,687	$	4,268	$	22,752	$	45,707	$	1,697,364	$	1,743,071	$	3,096	$	8,245
FDIC Acquired Loans (2)													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (3)		Loans (3)
Commercial
C&I	$	—	$	—	$	1,054	$	1,054	$	34,412	$	35,466	n/a		n/a
CRE	296		354		28,501		29,151		58,623		87,774		n/a		n/a
Construction	—		—		3,761		3,761		2,108		5,869		n/a		n/a
Consumer
Installment	—		—		—		—		2,077		2,077		n/a		n/a
Home Equity Lines	2,230		52		1,917		4,199		34,469		38,668		n/a		n/a
Residential Mortgages	4,616		172		2,655		7,443		28,125		35,568		n/a		n/a
Total	$	7,142	$	578	$	37,888	$	45,608	$	159,814	$	205,422	n/a		n/a

(1) Installment loans 90 days or more past due and accruing include $2.3 million of loans guaranteed by the U.S. government as of December 31, 2015.

(2) Excludes loss share receivable of $9.9 million as of December 31, 2015.

(3) Acquired and FDIC acquired impaired loans were not classified as nonperforming assets at December 31, 2015 as the loans are considered to be performing under ASC 310-30. As a result, interest income, through the accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all acquired and FDIC acquired impaired loans. These asset quality disclosures are, therefore, not applicable to acquired and FDIC acquired impaired loans.

32

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

As of June 30, 2015
(In thousands)													≥ 90 Days
Originated Loans	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (1)		Loans
Commercial
C&I	$	5,837	$	1,949	$	3,780	$	11,566	$	5,459,797	$	5,471,363	$	—	$	29,241
CRE	3,758		119		2,780		6,657		2,131,715		2,138,372		418		7,486
Construction	483		—		—		483		586,412		586,895		—		—
Leases	17,862		—		—		17,862		418,840		436,702		—		1,162
Consumer
Installment	11,526		3,010		4,191		18,727		2,701,332		2,720,059		3,386		2,903
Home Equity Lines	2,268		720		1,032		4,020		1,176,782		1,180,802		249		1,591
Credit Cards	679		338		558		1,575		167,001		168,576		337		459
Residential Mortgages	9,792		1,935		7,595		19,322		633,821		653,143		3,619		12,300
Total	$	52,205	$	8,071	$	19,936	$	80,212	$	13,275,700	$	13,355,912	$	8,009	$	55,142
Acquired Loans													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (3)		Loans (3)
Commercial
C&I	$	33	$	99	$	3,279	$	3,411	$	334,012	$	337,423	$	—	$	661
CRE	3,353		3,115		17,473		23,941		510,004		533,945		—		5,545
Construction	—		—		694		694		5,536		6,230		—		—
Consumer
Installment	3,999		1,029		1,083		6,111		653,237		659,348		475		671
Home Equity Lines	2,349		785		1,353		4,487		195,692		200,179		762		246
Residential Mortgages	186		1,173		4,902		6,261		352,298		358,559		411		929
Total	$	9,920	$	6,201	$	28,784	$	44,905	$	2,050,779	$	2,095,684	$	1,648	$	8,052
FDIC Acquired Loans (2)													≥ 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		≥ 90		Past Due		Current		Loans		Accruing (3)		Loans (3)
Commercial
C&I	$	—	$	—	$	2,916	$	2,916	$	35,221	$	38,137	n/a		n/a
CRE	664		1,959		32,076		34,699		67,110		101,809		n/a		n/a
Construction	—		—		3,701		3,701		2,174		5,875		n/a		n/a
Consumer
Installment	—		—		—		—		2,299		2,299		n/a		n/a
Home Equity Lines	1,256		246		3,454		4,956		50,589		55,545		n/a		n/a
Residential Mortgages	5,391		319		2,961		8,671		29,358		38,029		n/a		n/a
Total	$	7,311	$	2,524	$	45,108	$	54,943	$	186,751	$	241,694	n/a		n/a

(1) Installment loans 90 days or more past due and accruing include $2.7 million of loans guaranteed by the U.S. government as of June 30, 2015.

(2) Excludes loss share receivable of $11.8 million as of June 30, 2015.

(3) Acquired and FDIC acquired impaired loans were not classified as nonperforming assets at June 30, 2015 as the loans are considered to be performing under ASC 310-30. As a result interest income, through the accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all acquired and FDIC acquired impaired loans. These asset quality disclosures are, therefore, not applicable to acquired and FDIC acquired impaired loans.

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

33

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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

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

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

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

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

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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

As of June 30, 2016
(In thousands)
Originated Loans	Commercial
	C&I		CRE		Construction		Leases		Total
Grade 1	$	75,818	$	742	$	—	$	12,001	$	88,561
Grade 2	416,677		806		—		49,953		467,436
Grade 3	1,267,423		294,396		46,114		87,346		1,695,279
Grade 4	3,886,039		1,697,194		609,659		325,346		6,518,238
Grade 5	73,989		13,929		31,744		22,830		142,492
Grade 6	154,707		28,431		17,823		11,058		212,019
Grade 7	8,341		—		—		—		8,341
Total	$	5,882,994	$	2,035,498	$	705,340	$	508,534	$	9,132,366
Acquired Loans	Commercial
	C&I		CRE		Construction		Leases		Total
Grade 1	$	—	$	—	$	—	$	—	$	—
Grade 2	—		—		—		—		—
Grade 3	5,994		24,244		—		—		30,238
Grade 4	140,944		303,228		3,698		—		447,870
Grade 5	27,053		11,607		—		—		38,660
Grade 6	7,512		29,721		413		—		37,646
Grade 7	—		—		—		—		—
Total	$	181,503	$	368,800	$	4,111	$	—	$	554,414
FDIC Acquired Loans	Commercial
	C&I		CRE		Construction		Leases		Total
Grade 1	$	—	$	—	$	—	$	—	$	—
Grade 2	—		—		—		—		—
Grade 3	—		7,040		—		—		7,040
Grade 4	27,834		45,520		—		—		73,354
Grade 5	—		—		—		—		—
Grade 6	3,440		27,328		4,631		—		35,399
Grade 7	—		—		—		—		—
Total	$	31,274	$	79,888	$	4,631	$	—	$	115,793

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

As of December 31, 2015
(In thousands)
Originated Loans	Commercial
	C&I		CRE			Construction		Leases		Total
Grade 1	$	60,440	$	773		$	—	$	12,732	$	73,945
Grade 2	353,581		831			—		69,258		423,670
Grade 3	1,371,850		319,987			59,182		49,956		1,800,975
Grade 4	3,756,333		1,697,261			569,098		344,763		6,367,455
Grade 5	124,140		18,388			7,193		7,858		157,579
Grade 6	124,483		40,105			9,864		7,174		181,626
Grade 7	2,581		(1		)	—		—		2,580
Total	$	5,793,408	$	2,077,344		$	645,337	$	491,741	$	9,007,830
Acquired Loans	Commercial
	C&I		CRE			Construction		Leases		Total
Grade 1	$	346	$	—		$	—	$	—	$	346
Grade 2	—		—			—		—		—
Grade 3	15,548		27,387			—		—		42,935
Grade 4	200,736		361,518			5,380		—		567,634
Grade 5	11,735		12,546			—		—		24,281
Grade 6	11,780		29,440			733		—		41,953
Grade 7	—		—			—		—		—
Total	$	240,145	$	430,891		$	6,113	$	—	$	677,149
FDIC Acquired Loans	Commercial
	C&I		CRE			Construction		Leases		Total
Grade 1	$	—	$	—		$	—	$	—	$	—
Grade 2	1,072		—			—		—		1,072
Grade 3	—		7,004			—		—		7,004
Grade 4	31,637		49,917			819		—		82,373
Grade 5	295		—			—		—		295
Grade 6	2,462		30,853			5,050		—		38,365
Grade 7	—		—			—		—		—
Total	$	35,466	$	87,774		$	5,869	$	—	$	129,109

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

As of June 30, 2015
(In thousands)
Originated Loans	Commercial
	C&I		CRE		Construction		Leases		Total
Grade 1	$	65,856	$	807	$	—	$	14,688	$	81,351
Grade 2	206,384		1,166		—		29,564		237,114
Grade 3	1,417,295		367,457		55,889		65,664		1,906,305
Grade 4	3,567,387		1,715,998		529,517		321,268		6,134,170
Grade 5	98,137		25,466		360		2,956		126,919
Grade 6	112,661		27,478		1,129		2,562		143,830
Grade 7	3,643		—		—		—		3,643
Total	$	5,471,363	$	2,138,372	$	586,895	$	436,702	$	8,633,332
Acquired Loans	Commercial
	C&I		CRE		Construction		Leases		Total
Grade 1	$	1,061	$	—	$	—	$	—	$	1,061
Grade 2	—		—		—		—		—
Grade 3	17,338		27,190		—		—		44,528
Grade 4	289,027		453,830		5,536		—		748,393
Grade 5	13,283		16,815		—		—		30,098
Grade 6	16,714		36,110		694		—		53,518
Grade 7	—		—		—		—		—
Total	$	337,423	$	533,945	$	6,230	$	—	$	877,598
FDIC Acquired Loans	Commercial
	C&I		CRE		Construction		Leases		Total
Grade 1	$	—	$	—	$	—	$	—	$	—
Grade 2	1,129		—		—		—		1,129
Grade 3	—		—		—		—		—
Grade 4	33,992		65,906		817		—		100,715
Grade 5	—		625		—		—		625
Grade 6	3,016		35,278		5,058		—		43,352
Grade 7	—		—		—		—		—
Total	$	38,137	$	101,809	$	5,875	$	—	$	145,821

4.    Allowance for Loan Losses

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

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

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

Allowance for Originated Loan Losses

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

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

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

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

The following tables show activity in the originated ALL, by portfolio segment for the three and six months ended June 30, 2016 and 2015, as well as the corresponding recorded investment in originated loans at the end of the period:

As of June 30, 2016
(In thousands)
Originated Loans		C&I			CRE			Construction		Leases		Installment			Home Equity Lines			Credit Cards			Residential Mortgages			Total
Three Months Ended
Allowance for originated loan losses, beginning balance		$	44,489		$	7,244		$	1,537	$	1,499	$	14,664		$	19,528		$	8,591		$	5,363		$	102,915
Charge-offs		(2,593		)	(111		)	—		—		(5,418		)	(937		)	(1,031		)	(708		)	(10,798		)
Recoveries		1,335			207			2		29		3,573			499			421			45			6,111
Provision for loan losses		1,859			(1,468		)	1,028		822		3,960			698			(831		)	879			6,947
Allowance for originated loan losses, ending balance		$	45,090		$	5,872		$	2,567	$	2,350	$	16,779		$	19,788		$	7,150		$	5,579		$	105,175
Six Months Ended
Allowance for originated loan losses, beginning balance		$	44,760		$	9,631		$	1,594	$	1,313	$	14,183		$	20,094		$	8,831		$	4,729		$	105,135
Charge-offs		(5,803		)	(220		)	—		—		(12,186		)	(1,964		)	(2,484		)	(1,158		)	(23,815		)
Recoveries		1,867			232			4		49		7,379			1,123			778			65			11,497
Provision for loan losses		4,266			(3,771		)	969		988		7,403			535			25			1,942			12,357
Allowance for originated loan losses, ending balance		$	45,090		$	5,872		$	2,567	$	2,350	$	16,779		$	19,788		$	7,150		$	5,579		$	105,175
Ending allowance for originated loan losses balance attributable to loans:
	Individually evaluated for impairment	$	10,447		$	507		$	—	$	—	$	1,149		$	169		$	201		$	981		$	13,454
	Collectively evaluated for impairment	34,643			5,365			2,567		2,350		15,630			19,619			6,949			4,598			91,721
Total ending allowance for originated loan losses balance		$	45,090		$	5,872		$	2,567	$	2,350	$	16,779		$	19,788		$	7,150		$	5,579		$	105,175
Originated loans:
	Originated loans individually evaluated for impairment	$	62,707		$	29,539		$	512	$	—	$	42,272		$	7,874		$	679		$	23,385		$	166,968
	Originated loans collectively evaluated for impairment	5,820,287			2,005,959			704,828		508,534		3,310,812			1,268,787			174,307			705,149			14,498,663
Total ending originated loan balance		$	5,882,994		$	2,035,498		$	705,340	$	508,534	$	3,353,084		$	1,276,661		$	174,986		$	728,534		$	14,665,631

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

As of June 30, 2015
(In thousands)
Originated Loans		C&I			CRE			Construction			Leases			Installment			Home Equity Lines			Credit Cards			Residential Mortgages			Total
Three Months Ended
Allowance for originated loan losses, beginning balance		$	39,838		$	8,813		$	1,752		$	629		$	13,358		$	19,433		$	7,801		$	5,921		$	97,545
Charge-offs		(3,247		)	(408		)	—			—			(5,090		)	(971		)	(1,209		)	(373		)	(11,298		)
Recoveries		453			1			39			3			2,844			839			358			89			4,626
Provision for loan losses		5,832			94			(251		)	(13		)	3,798			738			868			(257		)	10,809
Allowance for originated loan losses, ending balance		$	42,876		$	8,500		$	1,540		$	619		$	14,910		$	20,039		$	7,818		$	5,380		$	101,682
Six Months Ended
Allowance for originated loan losses, beginning balance		$	37,375		$	10,492		$	2,202		$	674		$	12,918		$	19,324		$	7,966		$	4,745		$	95,696
Charge-offs		(3,757		)	(623		)	—			—			(10,145		)	(1,882		)	(2,661		)	(797		)	(19,865		)
Recoveries		794			1			40			7			5,864			1,452			724			124			9,006
Provision for loan losses		8,464			(1,370		)	(702		)	(62		)	6,273			1,145			1,789			1,308			16,845
Allowance for originated loan losses, ending balance		$	42,876		$	8,500		$	1,540		$	619		$	14,910		$	20,039		$	7,818		$	5,380		$	101,682
Ending allowance for originated loan losses balance attributable to loans:
	Individually evaluated for impairment	$	9,117		$	151		$	—		$	—		$	1,001		$	217		$	250		$	890		$	11,626
	Collectively evaluated for impairment	33,759			8,349			1,540			619			13,909			19,822			7,568			4,490			90,056
Total ending allowance for originated loan losses balance		$	42,876		$	8,500		$	1,540		$	619		$	14,910		$	20,039		$	7,818		$	5,380		$	101,682
Originated loans:
	Originated loans individually evaluated for impairment	$	45,969		$	12,072		$	—		$	1,162		$	31,927		$	7,421		$	787		$	24,697		$	124,035
	Originated loans collectively evaluated for impairment	5,425,394			2,126,300			586,895			435,540			2,688,132			1,173,381			167,789			628,446			13,231,877
Total ending originated loan balance		$	5,471,363		$	2,138,372		$	586,895		$	436,702		$	2,720,059		$	1,180,802		$	168,576		$	653,143		$	13,355,912

The following table presents the originated ALL and the recorded investment as of December 31, 2015:

As of December 31, 2015
	(In thousands)
	Originated Loans	C&I		CRE		Construction		Leases		Installment		Home Equity Lines		Credit Cards		Residential Mortgages		Total
Ending allowance for originated loan losses balance attributable to loans:
	Individually evaluated for impairment	$	11,837	$	128	$	—	$	—	$	1,009	$	188	$	243	$	944	$	14,349
	Collectively evaluated for impairment	32,923		9,503		1,594		1,313		13,174		19,906		8,588		3,785		90,786
Total ending allowance for originated loan losses balance		$	44,760	$	9,631	$	1,594	$	1,313	$	14,183	$	20,094	$	8,831	$	4,729	$	105,135
Originated loans:
	Loans individually evaluated for impairment	$	43,818	$	16,614	$	—	$	—	$	36,904	$	7,080	$	717	$	23,905	$	129,038
	Loans collectively evaluated for impairment	5,749,590		2,060,730		645,337		491,741		2,953,445		1,241,358		182,126		665,140		13,989,467
Total ending originated loan balance		$	5,793,408	$	2,077,344	$	645,337	$	491,741	$	2,990,349	$	1,248,438	$	182,843	$	689,045	$	14,118,505

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

Allowance for Acquired Loan Losses

The Citizens' loans were recorded at their fair value as of the Acquisition Date and the prior ALL was eliminated. An ALL for acquired nonimpaired loans is estimated using a methodology similar to that used for originated loans. The allowance determined for each acquired nonimpaired loan is compared to the remaining fair value adjustment for that loan. If the computed allowance is greater, the excess is added to the allowance through a provision for loan losses. If the computed allowance is less, no additional allowance is recognized. As of June 30, 2016, the computed ALL was less than the remaining fair value discount; therefore, no ALL for acquired nonimpaired loans was recorded.

Charge-offs and actual losses on an acquired nonimpaired loan first reduce any remaining fair value discount for that loan. Once a loan's discount is depleted, charge-offs and actual losses are applied against the acquired ALL. During the three and six months ended June 30, 2016, a net recapture to the provision for loan losses, of $0.2 million was recorded, compared to a provision of loan losses equal to net charge-offs of $1.6 million recorded for the three months ended June 30, 2015. Charge-offs on acquired nonimpaired loans were mainly related to consumer loans that were written off in accordance with the Corporation's credit policies based on a predetermined number of days past due.

The ALL for acquired impaired loans is determined by comparing the present value of the cash flows expected to be collected to the carrying amount for a given pool of loans. Management reforecasts the estimated cash flows expected to be collected on acquired impaired loans on a quarterly basis. If the present value of expected cash flows for a pool is less than its carrying value, impairment is recognized by an increase in the ALL and a charge to the provision for loan losses. If the present value of expected cash flows for a pool is greater than its carrying value, any previously established ALL is reversed and any remaining difference increases the accretable yield which will be taken into interest income over the remaining life of the loan pool. See Note 3 (Loans) for further information on changes in accretable yield.

The following table presents activity in the allowance for acquired impaired loan losses for the three and six months ended June 30, 2016 and 2015:

Allowance for Acquired Impaired Loan Losses	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2016			2015			2016			2015
Balance at beginning of the period	$	4,423		$	7,493		$	3,877		$	7,457
Charge-offs	(19		)	—			(19		)	—
Recoveries				—			—			—
Provision/(recapture) for loan losses	(148		)	(2,543		)	398			(2,507		)
Balance at end of the period	$	4,256		$	4,950		$	4,256		$	4,950

Allowance for FDIC Acquired Loan Losses

The ALL on FDIC acquired nonimpaired loans is estimated similar to acquired loans as described above except any increase to the ALL and provision for loan losses is partially offset by an increase in the loss share receivable for the portion of the losses recoverable under the loss share agreements with the FDIC. As of June 30, 2016, the computed ALL was less than the remaining fair value discount; therefore, no ALL for FDIC acquired nonimpaired loans was recorded.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

The following table presents activity in the allowance for FDIC acquired impaired loan losses for the three and six months ended June 30, 2016 and 2015:

Allowance for FDIC acquired Impaired Loan Losses		Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)		2016			2015			2016			2015
Balance at beginning of the period		$	44,599		$	41,514		$	44,679		$	40,496
	Net provision/(recapture) of loan losses before benefit attributable to FDIC loss share agreements	(227		)	928			1,310			5,153
	Net (benefit)/recapture attributable to FDIC loss share agreements	12			(1,819		)	(257		)	(6,046		)
Net provision/(recapture) for loan losses		(215		)	(891		)	1,053			(893		)
Increase/(decrease) in loss share receivable		(12		)	1,819			257			6,046
Loans charged-off		(4,154		)	(815		)	(5,771		)	(4,022		)
Balance at end of the period		$	40,218		$	41,627		$	40,218		$	41,627

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

Credit Quality

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

Interest income recognized on impaired loans was $0.4 million and $0.6 million for the three and six months ended June 30, 2016, compared to $0.1 million and $0.2 million for the three and six months ended June 30, 2015. Interest income which would have been earned in accordance with the original terms was $1.4 million and $2.6 million for the three and six months ended June 30, 2016, compared to $0.9 million and $1.8 million for the three and six months ended June 30, 2015.

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

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

are not considered or reported as TDRs if the loans evidenced credit deterioration as of the date of acquisition and are accounted for in pools.

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

As of June 30, 2016
Originated Loans				Unpaid				Average
		Recorded		Principal		Related		Recorded
(In thousands)		Investment		Balance		Allowance		Investment
Impaired loans with no related allowance
Commercial
	C&I	$	19,489	$	22,663	$	—	$	29,022
	CRE	26,058		24,696		—		17,119
	Construction	512		512		—		102
	Leases	—		—		—		—
Consumer
	Installment	2,366		2,697		—		1,636
	Home equity line	695		948		—		694
	Credit card	15		15		—		19
	Residential mortgages	11,950		14,350		—		11,680
Subtotal		61,085		65,881		—		60,272
Impaired loans with a related allowance
Commercial
	C&I	43,218		51,933		10,447		21,305
	CRE	3,481		3,563		507		1,999
	Construction	—		—		—		—
	Leases	—		—		—		—
Consumer
	Installment	39,906		40,033		1,149		35,473
	Home equity line	7,179		7,180		169		6,803
	Credit card	664		664		201		699
	Residential mortgages	11,435		11,549		981		12,201
Subtotal		105,883		114,922		13,454		78,480
	Total impaired loans	$	166,968	$	180,803	$	13,454	$	138,752

Note 1: These tables exclude loans fully charged-off.

Note 2: The differences between the recorded investment and unpaid principal balance amounts represent partial charge-offs.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

As of December 31, 2015
Originated Loans				Unpaid				Average
		Recorded		Principal		Related		Recorded
(In thousands)		Investment		Balance		Allowance		Investment
Impaired loans with no related allowance
Commercial
	C&I	$	21,066	$	23,854	$	—	$	27,215
	CRE	15,465		17,456		—		13,031
	Construction	—		—		—		—
Consumer
	Installment	1,369		1,658		—		1,807
	Home equity line	670		919		—		999
	Credit card	21		21		—		20
	Residential mortgages	11,550		13,901		—		11,979
Subtotal		50,141		57,809		—		55,051
Impaired loans with a related allowance
Commercial
	C&I	22,752		28,881		11,837		11,284
	CRE	1,149		1,173		128		3,037
	Construction	—		—		—		—
Consumer
	Installment	35,535		35,592		1,009		28,808
	Home equity line	6,410		6,411		188		6,382
	Credit card	696		696		243		757
	Residential mortgages	12,355		12,458		944		12,619
Subtotal		78,897		85,211		14,349		62,887
	Total impaired loans	$	129,038	$	143,020	$	14,349	$	117,938

Note 1: These tables exclude loans fully charged-off.

Note 2: The differences between the recorded investment and unpaid principal balance amounts represent partial charge-offs.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

As of June 30, 2015
Originated Loans				Unpaid				Average
		Recorded		Principal		Related		Recorded
(In thousands)		Investment		Balance		Allowance		Investment
Impaired loans with no related allowance
Commercial
	C&I	$	28,076	$	37,358	$	—	$	27,238
	CRE	11,482		17,585		—		12,983
	Construction	—		—		—		—
	Leases	1,162		1,162		—		598
Consumer
	Installment	1,678		2,183		—		1,753
	Home equity line	884		1,132		—		906
	Credit card	19		19		—		26
	Residential mortgages	12,047		14,700		—		12,146
Subtotal		55,348		74,139		—		55,650
Impaired loans with a related allowance
Commercial
	C&I	17,893		18,062		9,117		7,199
	CRE	590		593		151		600
	Construction	—		—		—		—
Consumer
	Installment	30,249		30,302		1,001		25,722
	Home equity line	6,537		6,537		217		6,684
	Credit card	768		768		250		823
	Residential mortgages	12,650		12,739		890		12,675
Subtotal		68,687		69,001		11,626		53,703
	Total impaired loans	$	124,035	$	143,140	$	11,626	$	109,353

Note 1: These tables exclude loans fully charged-off.

Note 2: The differences between the recorded investment and unpaid principal balance amounts represent partial charge-offs.

Troubled Debt Restructurings

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

The substantial majority of the Corporation's residential mortgage TDRs involve reducing the client's loan payment through an interest rate reduction for a set period of time based on the borrower's ability to service

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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

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

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

The following tables provide the number of loans modified in a TDR and the recorded investment and unpaid principal balance by loan portfolio as of June 30, 2016, December 31, 2015, and June 30, 2015.

			As of June 30, 2016
(Dollars in thousands)			Number of Loans	Recorded Investment		Unpaid Principal Balance
Originated loans
	Commercial
		C&I	27	$	36,650	$	39,985
		CRE	26	20,005		22,025
		Construction	0	—		—
		Total originated commercial	53	56,655		62,010
	Consumer
		Installment	1,310	42,272		42,730
		Home equity lines	260	7,874		8,128
		Credit card	197	679		679
		Residential mortgages	303	23,385		25,899
		Total originated consumer	2,070	74,210		77,436
Total originated loans			2,123	$	130,865	$	139,446
Acquired loans
	Commercial
		C&I	0	$	—	$	—
		CRE	6	4,998		5,453
		Construction	0	—		—
		Total acquired commercial	6	4,998		5,453
	Consumer
		Installment	67	1,585		1,661
		Home equity lines	173	7,520		7,583
		Residential mortgages	32	2,899		3,216
		Total acquired consumer	272	12,004		12,460
Total acquired loans			278	$	17,002	$	17,913
FDIC acquired loans
	Commercial
		C&I	0	$	—	$	—
		CRE	3	13,124		11,417
		Construction	1	566		672
		Total FDIC acquired commercial	4	13,690		12,089
	Consumer
		Home equity lines	71	8,529		8,544
		Residential mortgages	0	—		—
		Total FDIC acquired consumer	71	8,529		8,544
Total FDIC acquired loans			75	$	22,219	$	20,633
Total loans
	Commercial
		C&I	27	$	36,650	$	39,985
		CRE	35	38,127		38,895
		Construction	1	566		672
		Total commercial	63	75,343		79,552
	Consumer
		Installment	1,377	43,857		44,391
		Home equity lines	504	23,923		24,255
		Credit card	197	679		679
		Residential mortgages	335	26,284		29,115
		Total consumer	2,413	94,743		98,440
Total loans			2,476	$	170,086	$	177,992

Note 1: For originated loans, the differences between the recorded investment and unpaid principal balance amounts represent partial charge-offs.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

Note 2: For acquired and FDIC acquired loans, the differences between the recorded investment and unpaid principal balance amounts represent partial charge-offs and remaining purchase discount.

			As of December 31, 2015
(Dollars in thousands)			Number of Loans	Recorded Investment		Unpaid Principal Balance
Originated loans
	Commercial
		C&I	26	$	33,087	$	33,740
		CRE	24	14,671		16,648
		Construction	0	—		—
		Total originated commercial	50	47,758		50,388
	Consumer
		Installment	1,223	36,904		37,250
		Home equity lines	257	7,080		7,330
		Credit card	212	717		717
		Residential mortgages	312	23,905		26,359
		Total originated consumer	2,004	68,606		71,656
Total originated loans			2,054	$	116,364	$	122,044
Acquired loans
	Commercial
		C&I	1	7,611		7,611
		CRE	3	918		1,044
		Total acquired commercial	4	8,529		8,655
	Consumer
		Installment	51	1,117		1,211
		Home equity lines	176	7,718		7,778
		Residential mortgages	31	2,154		2,382
		Total acquired consumer	258	10,989		11,371
Total acquired loans			262	$	19,518	$	20,026
FDIC acquired loans
	Commercial
		C&I	0	$	—	$	—
		CRE	3	14,056		12,479
		Construction	1	593		682
		Total FDIC acquired commercial	4	14,649		13,161
	Consumer
		Home equity lines	81	10,215		10,281
		Residential Mortgages	1	182		182
		Total FDIC acquired consumer	82	10,397		10,463
Total FDIC acquired loans			86	$	25,046	$	23,624
Total loans
	Commercial
		C&I	27	$	40,698	$	41,351
		CRE	30	29,645		30,171
		Construction	1	593		682
		Total commercial	58	70,936		72,204
	Consumer
		Installment	1,274	38,021		38,461
		Home equity lines	514	25,013		25,389
		Credit card	212	717		717
		Residential mortgages	344	26,241		28,923
		Total consumer	2,344	89,992		93,490
Total loans			2,402	$	160,928	$	165,694

Note 1: For originated loans, the differences between the recorded investment and unpaid principal balance amounts represent partial charge-offs.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

Note 2: For acquired and FDIC acquired loans, the differences between the recorded investment and unpaid principal balance amounts represent partial charge-offs and remaining purchase discount.

			As of June 30, 2015
(Dollars in thousands)			Number of Loans	Recorded Investment		Unpaid Principal Balance
Originated loans
	Commercial
		C&I	56	$	29,454	$	36,538
		CRE	69	10,362		15,681
		Construction	31	—		—
		Total originated commercial	156	39,816		52,219
	Consumer
		Installment	1,215	31,927		32,485
		Home equity lines	271	7,421		7,669
		Credit card	231	787		787
		Residential mortgages	316	24,697		27,439
		Total originated consumer	2,033	64,832		68,380
Total originated loans			2,189	$	104,648	$	120,599
Acquired loans
	Commercial
		C&I	2	—		55
		CRE	3	930		1,018
		Total acquired commercial	5	930		1,073
	Consumer
		Installment	50	1,144		1,227
		Home equity lines	174	7,138		7,205
		Residential mortgages	31	2,150		2,386
		Total acquired consumer	255	10,432		10,818
Total acquired loans			260	$	11,362	$	11,891
FDIC acquired loans
	Commercial
		C&I	8	$	—	$	1,299
		CRE	24	11,704		27,933
		Construction	9	525		9,542
		Total FDIC acquired commercial	41	12,229		38,774
	Consumer
		Home equity lines	77	10,563		10,739
		Residential mortgages	1	184		184
		Total FDIC acquired consumer	78	10,747		10,923
Total FDIC acquired loans			119	$	22,976	$	49,697
Total loans
	Commercial
		C&I	66	$	29,454	$	37,892
		CRE	96	22,996		44,632
		Construction	40	525		9,542
		Total commercial	202	52,975		92,066
	Consumer
		Installment	1,265	33,071		33,712
		Home equity lines	522	25,122		25,613
		Credit card	231	787		787
		Residential mortgages	348	27,031		30,009
		Total consumer	2,366	86,011		90,121
Total loans			2,568	$	138,986	$	182,187

Note 1: For originated loans, the differences between the recorded investment and unpaid principal balance amounts represent partial charge-offs.

Note 2: For acquired and FDIC acquired loans, the differences between the recorded investment and unpaid principal balance amounts represent partial charge-offs and remaining purchase discount.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the three and six months ended June 30, 2016 and 2015 were not materially different. Post-modification balances may include capitalization of unpaid accrued interest and fees associated with the modification as well as forgiveness of principal. Loans modified as TDRs during the three and six months ended June 30, 2016 and 2015 did not involve the forgiveness of principal; accordingly, the Corporation did not record a charge-off at the modification date. Additionally, capitalization of any unpaid accrued interest and fees assessed to loans modified in the three and six months ended June 30, 2016 and 2015 were not material to the accompanying consolidated financial statements. Specific allowances for loan losses are established for loans whose terms have been modified in a TDR. Specific reserve allocations are generally assessed prior to loans being modified in a TDR, as most of these loans migrate from the Corporation's internal watch list and have been specifically allocated for as part of the Corporation's normal loan loss provisioning methodology. At June 30, 2016, December 31, 2015, and June 30, 2015, the Corporation had $0.2 million, $7.0 million, and $3.7 million, respectively, in commitments to lend additional funds to debtors owing receivables whose terms have been modified in a TDR.

The following tables provide a summary of the delinquency status of TDRs along with the specific allowance for loan loss, by loan type, as of June 30, 2016, December 31, 2015, and June 30, 2015, including TDRs that continue to accrue interest and TDRs included in nonperforming assets.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

As of June 30, 2016
	Accruing TDRs						Nonaccruing TDRs						Total		Total
(In thousands)	Current		Delinquent		Total		Current		Delinquent		Total		TDRs		Allowance
Originated loans
Commercial
C&I	$	16,082	$	969	$	17,051	$	13,068	$	6,531	$	19,599	$	36,650	$	4,917
CRE	8,851		93		8,944		111		10,950		11,061		20,005		5
Construction	—		—		—		—		—		—		—		—
Total originated commercial	24,933		1,062		25,995		13,179		17,481		30,660		56,655		4,922
Consumer
Installment	39,255		1,064		40,319		1,718		235		1,953		42,272		1,149
Home equity lines	7,017		79		7,096		778		—		778		7,874		169
Credit card	519		117		636		—		43		43		679		201
Residential mortgages	14,324		524		14,848		5,717		2,820		8,537		23,385		981
Total originated consumer	61,115		1,784		62,899		8,213		3,098		11,311		74,210		2,500
Total originated TDRs	$	86,048	$	2,846	$	88,894	$	21,392	$	20,579	$	41,971	$	130,865	$	7,422
Acquired loans
Commercial
C&I	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CRE	2,720		—		2,720		2,151		127		2,278		4,998		156
Construction	—		—		—		—		—		—		—		—
Total acquired commercial	2,720		—		2,720		2,151		127		2,278		4,998		156
Consumer
Installment	1,142		223		1,365		220		—		220		1,585		86
Home equity lines	6,820		583		7,403		117		—		117		7,520		115
Residential mortgages	2,259		—		2,259		640		—		640		2,899		176
Total acquired consumer	10,221		806		11,027		977		—		977		12,004		377
Total acquired TDRs	$	12,941	$	806	$	13,747	$	3,128	$	127	$	3,255	$	17,002	$	533
FDIC acquired loans
Commercial
C&I	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CRE	—		—		—		—		13,124		13,124		13,124		2,236
Construction	—		—		—		566		—		566		566		25
Total FDIC acquired commercial	—		—		—		566		13,124		13,690		13,690		2,261
Consumer
Home equity lines	8,392		87		8,479		50		—		50		8,529		21
Residential mortgages	—		—		—		—		—		—		—		—
Total FDIC acquired consumer	8,392		87		8,479		50		—		50		8,529		21
Total FDIC acquired TDRs	$	8,392	$	87	$	8,479	$	616	$	13,124	$	13,740	$	22,219	$	2,282
Total loans
Commercial
C&I	$	16,082	$	969	$	17,051	$	13,068	$	6,531	$	19,599	$	36,650	$	4,917
CRE	11,571		93		11,664		2,262		24,201		26,463		38,127		2,397
Construction	—		—		—		566		—		566		566		25
Total commercial	27,653		1,062		28,715		15,896		30,732		46,628		75,343		7,339
Consumer
Installment	40,397		1,287		41,684		1,938		235		2,173		43,857		1,235
Home equity lines	22,229		749		22,978		945		—		945		23,923		305
Credit card	519		117		636		—		43		43		679		201
Residential mortgages	16,583		524		17,107		6,357		2,820		9,177		26,284		1,157
Total consumer	79,728		2,677		82,405		9,240		3,098		12,338		94,743		2,898
Total TDRs	$	107,381	$	3,739	$	111,120	$	25,136	$	33,830	$	58,966	$	170,086	$	10,237

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

As of December 31, 2015
	Accruing TDRs						Nonaccruing TDRs						Total		Total
(In thousands)	Current		Delinquent		Total		Current		Delinquent		Total		TDRs		Allowance
Originated loans
Commercial
C&I	$	22,566	$	107	$	22,673	$	4,229	$	6,185	$	10,414	$	33,087	$	6,052
CRE	10,271		2,247		12,518		746		1,407		2,153		14,671		20
Construction	—		—		—		—		—		—		—		—
Total originated commercial	32,837		2,354		35,191		4,975		7,592		12,567		47,758		6,072
Consumer
Installment	34,902		794		35,696		1,125		83		1,208		36,904		1,009
Home equity lines	6,511		114		6,625		399		56		455		7,080		188
Credit card	575		140		715		—		2		2		717		243
Residential mortgages	12,869		2,896		15,765		4,611		3,529		8,140		23,905		944
Total originated consumer	54,857		3,944		58,801		6,135		3,670		9,805		68,606		2,384
Total originated TDRs	$	87,694	$	6,298	$	93,992	$	11,110	$	11,262	$	22,372	$	116,364	$	8,456
Acquired loans
Commercial
C&I	$	7,611	$	—	$	7,611	$	—	$	—	$	—	$	7,611	$	—
CRE	—		—		—		659		259		918		918		201
Total acquired commercial	7,611		—		7,611		659		259		918		8,529		201
Consumer
Installment	967		126		1,093		14		10		24		1,117		45
Home equity lines	6,941		655		7,596		122		—		122		7,718		70
Residential mortgages	1,096		256		1,352		802		—		802		2,154		—
Total acquired consumer	9,004		1,037		10,041		938		10		948		10,989		115
Total acquired TDRs	$	16,615	$	1,037	$	17,652	$	1,597	$	269	$	1,866	$	19,518	$	316
FDIC acquired loans
Commercial
C&I	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CRE	—		14,056		14,056		—		—		—		14,056		2,333
Construction	593		—		593		—		—		—		593		—
Total FDIC acquired commercial	593		14,056		14,649		—		—		—		14,649		2,333
Consumer
Home equity lines	10,065		70		10,135		6		74		80		10,215		23
Residential mortgages	182		—		182		—		—		—		182		—
Total FDIC acquired consumer	10,247		70		10,317		6		74		80		10,397		23
Total FDIC acquired TDRs	$	10,840	$	14,126	$	24,966	$	6	$	74	$	80	$	25,046	$	2,356
Total Loans
Commercial
C&I	$	30,177	$	107	$	30,284	$	4,229	$	6,185	$	10,414	$	40,698	$	6,052
CRE	10,271		16,303		26,574		1,405		1,666		3,071		29,645		2,554
Construction	593		—		593		—		—		—		593		—
Total commercial	41,041		16,410		57,451		5,634		7,851		13,485		70,936		8,606
Consumer
Installment	35,869		920		36,789		1,139		93		1,232		38,021		1,054
Home equity lines	23,517		839		24,356		527		130		657		25,013		281
Credit card	575		140		715		—		2		2		717		243
Residential mortgages	14,147		3,152		17,299		5,413		3,529		8,942		26,241		944
Total consumer	74,108		5,051		79,159		7,079		3,754		10,833		89,992		2,522
Total TDRs	$	115,149	$	21,461	$	136,610	$	12,713	$	11,605	$	24,318	$	160,928	$	11,128

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

As of June 30, 2015
	Accruing TDRs						Nonaccruing TDRs						Total		Total
(In thousands)	Current		Delinquent		Total		Current		Delinquent		Total		TDRs		Allowance
Originated loans
Commercial
C&I	$	17,346	$	—	$	17,346	$	9,260	$	2,848	$	12,108	$	29,454	$	2,893
CRE	5,968		—		5,968		1,598		2,796		4,394		10,362		63
Construction	—		—		—		—		—		—		—		—
Total originated commercial	23,314		—		23,314		10,858		5,644		16,502		39,816		2,956
Consumer
Installment	29,715		603		30,318		1,390		219		1,609		31,927		1,001
Home equity lines	6,611		107		6,718		557		146		703		7,421		217
Credit card	684		100		784		—		3		3		787		250
Residential mortgages	13,925		2,105		16,030		4,957		3,710		8,667		24,697		890
Total originated consumer	50,935		2,915		53,850		6,904		4,078		10,982		64,832		2,358
Total originated TDRs	$	74,249	$	2,915	$	77,164	$	17,762	$	9,722	$	27,484	$	104,648	$	5,314
Acquired loans
Commercial
C&I	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CRE	—		—		—		930		—		930		930		98
Total acquired commercial	—		—		—		930		—		930		930		98
Consumer
Installment	1,082		47		1,129		15		—		15		1,144		44
Home equity lines	6,387		618		7,005		133		—		133		7,138		—
Residential mortgages	1,313		—		1,313		615		222		837		2,150		—
Total acquired consumer	8,782		665		9,447		763		222		985		10,432		44
Total acquired TDRs	$	8,782	$	665	$	9,447	$	1,693	$	222	$	1,915	$	11,362	$	142
FDIC acquired loans
Commercial
C&I	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CRE	—		11,704		11,704		—		—		—		11,704		2,393
Construction	525		—		525		—		—		—		525		96
Total FDIC acquired commercial	525		11,704		12,229		—		—		—		12,229		2,489
Consumer
Home equity lines	9,505		89		9,594		143		826		969		10,563		23
Residential mortgages	184		—		184		—		—		—		184		—
Total FDIC acquired consumer	9,689		89		9,778		143		826		969		10,747		23
Total FDIC acquired TDRs	$	10,214	$	11,793	$	22,007	$	143	$	826	$	969	$	22,976	$	2,512
Total loans
Commercial
C&I	$	17,346	$	—	$	17,346	$	9,260	$	2,848	$	12,108	$	29,454	$	2,893
CRE	5,968		11,704		17,672		2,528		2,796		5,324		22,996		2,554
Construction	525		—		525		—		—		—		525		96
Total commercial	23,839		11,704		35,543		11,788		5,644		17,432		52,975		5,543
Consumer
Installment	30,797		650		31,447		1,405		219		1,624		33,071		1,045
Home equity lines	22,503		814		23,317		833		972		1,805		25,122		240
Credit card	684		100		784		—		3		3		787		250
Residential mortgages	15,422		2,105		17,527		5,572		3,932		9,504		27,031		890
Total consumer	69,406		3,669		73,075		7,810		5,126		12,936		86,011		2,425
Total TDRs	$	93,245	$	15,373	$	108,618	$	19,598	$	10,770	$	30,368	$	138,986	$	7,968

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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

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

The following tables provide the number of loans modified in a TDR within the previous 12 months that subsequently defaulted during the three months ended June 30, 2016 and June 30, 2015, as well as the amount defaulted in these restructured loans.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

	Three Months Ended June 30, 2016
(Dollars in thousands)	Number of Loans	Amount Defaulted
Originated loans
Commercial
C&I	0	$	—
CRE	0	—
Construction	0	—
Total originated commercial	0	$	—
Consumer
Installment	2	$	15
Home equity lines	0	—
Credit card	0	—
Residential mortgages	0	—
Total originated consumer	2	$	15
FDIC acquired loans
Commercial
C&I	0	$	—
CRE	0	—
Construction	0	—
Total FDIC acquired commercial	0	$	—
Acquired loans
Commercial
C&I	0	$	—
CRE	0	—
Construction	0	—
Total acquired commercial	0	$	—
Consumer
Installment	0	$	—
Home equity lines	0	—
Residential mortgages	0	—
Total acquired consumer	—	$	—
Total loans
Commercial
C&I	0	$	—
CRE	0	—
Construction	0	—
Total commercial	0	$	—
Consumer
Installment	2	$	15
Home equity lines	0	—
Credit card	0	—
Residential mortgages	0	—
Total consumer	2	$	15
Total	2	$	15

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

	Three Months Ended June 30, 2015
(Dollars in thousands)	Number of Loans	Recorded Investment
Originated loans
Commercial
C&I	0	$	—
CRE	0	—
Construction	0	—
Total originated commercial	0	$	—
Consumer
Installment	1	$	6
Home equity lines	0	—
Credit card	1	1
Residential mortgages	1	368
Total originated consumer	3	$	375
FDIC acquired loans
Commercial
C&I	0	$	—
CRE	0	—
Construction	0	—
Total FDIC acquired commercial	0	$	—
Acquired loans
Commercial
C&I	0	$	—
CRE	0	—
Construction	0	—
Total acquired commercial	0	$	—
Consumer
Installment	1	$	33
Home equity lines	0	—
Residential mortgages	0	—
Total acquired consumer	1	$	33
Total loans
Commercial
C&I	0	$	—
CRE	0	—
Construction	0	—
Total commercial	0	$	—
Consumer
Installment	2	$	39
Home equity lines	0	—
Credit card	1	1
Residential mortgages	1	368
Total consumer	4	$	408
Total	4	$	408

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

.5.     Goodwill and Other Intangible Assets

Goodwill

Goodwill totaled $741.7 million as of June 30, 2016, December 31, 2015, and June 30, 2015. Goodwill is not amortized but is evaluated for impairment on an annual basis at November 30 of each year or whenever events or changes in circumstances indicate the carrying value may not be recoverable. No events or circumstances since the November 30, 2015 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists.

Other Intangible Assets

The Corporation has other intangible assets that are amortized, consisting of core deposit intangibles, lease intangibles and trust relationship intangibles. The following tables show the gross carrying amount, accumulated amortization, and net carrying amount of these intangible assets.

	June 30, 2016
	Gross Carrying		Accumulated			Net Carrying
(In thousands)	Amount		Amortization			Amount
Core deposit intangibles (1)	$	82,323	$	(32,083	)	$	50,240
Lease intangible	238		(229		)	9
Trust Relationships (2)	14,000		(8,229		)	5,771
	$	96,561	$	(40,541	)	$	56,020
	December 31, 2015
	Gross Carrying		Accumulated			Net Carrying
(In thousands)	Amount		Amortization			Amount
Core deposit intangibles (1)	$	82,323	$	(28,304	)	$	54,019
Lease intangible	238		(212		)	26
Trust Relationships (2)	14,000		(7,417		)	6,583
	$	96,561	$	(35,933	)	$	60,628
	June 30, 2015
	Gross Carrying		Accumulated			Net Carrying
(In thousands)	Amount		Amortization			Amount
Core deposit intangibles (1)	$	82,323	$	(24,150	)	$	58,173
Lease intangible	238		(194		)	44
Trust relationships (2)	14,000		(6,393		)	7,607
	$	96,561	$	(30,737	)	$	65,824

(1) Core deposit intangibles are amortized on an accelerated basis over their estimated useful lives, which range from 10-15 years.

(2) Trust relationship intangibles are amortized on an accelerated basis on their estimated useful lives of 12 years.

Amortization expense for intangible assets was $4.6 million in the six months endedJune 30, 2016, compared to $5.2 million in the six months endedJune 30, 2015. Estimated amortization expense for each of the next five years is as follows: remainder of 2016 - $4.6 million; 2017 - $8.2 million; 2018 - $7.3 million; and 2019 - $6.5 million; 2020 - $5.2 million.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

6.     Shareholders' Equity

Common Stock Warrant

On May 13, 2015, the Corporation repurchased a warrant previously issued by Citizens to the U.S. Treasury. The warrant, which entitled the U.S. Treasury to purchase 2,571,998 shares of FirstMerit Common Stock at an adjusted strike price of $17.50, was purchased for $12.2 million. In accordance with GAAP, the Corporation recorded a reduction to capital surplus in the amount of $9.2 million in conjunction with this warrant repurchase that reflected the excess amount paid over the previously stated amount.

Preferred Stock

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

Earnings Per Share

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

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

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

The reconciliation between basic and diluted EPS using the two-class method and treasury stock method is presented as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands, except per share amounts)	2016		2015		2016		2015
Basic EPS:
Net income	$	58,309	$	56,584	$	112,445	$	113,723
Less:
Cash dividends on 5.875% non-cumulative perpetual series A, Preferred Stock	1,469		1,469		2,938		2,938
Income allocated to participating securities	496		467		955		937
Net income attributable to common shareholders	$	56,344	$	54,648	$	108,552	$	109,848
Weighted average Common Stock outstanding used in basic EPS	166,188		165,736		165,966		165,574
Basic net income per common share	$	0.34	$	0.33	$	0.65	$	0.66
Diluted EPS:
Income used in diluted earnings per common share calculation	$	56,344	$	54,648	$	108,552	$	109,848
Weighted average Common Stock outstanding used in basic EPS	166,188		165,736		165,966		165,574
Add: Common Stock equivalents
Employee stock award plans	619		541		597		515
Weighted average Common and Common Stock equivalent shares outstanding	166,807		166,277		166,563		166,089
Diluted net income per common share	$	0.34	$	0.33	$	0.65	$	0.66

Common Stock equivalents consist of employee stock award plans. These Common Stock equivalents do not enter into the calculation of diluted EPS if the impact would be anti-dilutive, that is, increase EPS or reduce a loss per share. Anti-dilutive potential Common Stock for the six months endedJune 30,2016 and 2015 totaled 0.2 million and 0.8 million, respectively.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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 financial management practices designed to produce consistent results and reflect the underlying economics of the businesses. The development and application of these methodologies is a dynamic process. Accordingly, these measurement tools and assumptions may be revised periodically to reflect methodological, product, and/or management organizational changes. Further, these tools measure financial results that support the strategic objectives and internal organizational structure of the Corporation. Consequently, the information presented is not necessarily comparable with similar information for other financial institutions.

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

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

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

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

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

The accounting policies of the lines of businesses are the same as those of the Corporation described in Note 1 (Summary of Significant Accounting Policies) to the 2015 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

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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 Other by the treasury group. Capital has been allocated on an economic risk basis. Loans and lines of credit have been allocated capital based upon their respective credit risk. Asset management holdings in the Wealth segment have been allocated capital based upon their respective market risk related to assets under management. Normal business operating risk has been allocated to each line of business by the level of noninterest expense. Mismatches between asset and liability cash flows as well as interest rate risk for mortgage servicing rights and mortgage origination business have been allocated capital based upon their respective asset/liability management risk. The provision for loan loss is allocated based upon the actual net charge-offs of each respective line of business, adjusted for loan growth and changes in risk profile. Noninterest income and expenses directly attributable to a line of business are assigned to that line of business. Expenses for centrally provided services are allocated to the business line by various activity based cost formulas.

Substantially all of the Corporation’s business is conducted in the United States of America. The following tables present a summary of financial results as of and for the three and six months ended June 30, 2016 and June 30, 2015:

																					FirstMerit
(In thousands)	Commercial				Retail				Wealth						Other						Consolidated
June 30, 2016	QTD		YTD		QTD		YTD		QTD			YTD			QTD			YTD			QTD		YTD
OPERATIONS:
Net interest income/(loss)	$	101,313	$	203,932	$	94,369	$	189,096	$	6,314		$	12,867		$	(15,918	)	$	(34,661	)	$	186,078	$	371,234
Provision/ (recapture) for loan losses	1,070		6,842		5,123		9,169		(20		)	(175		)	218			(1,636		)	6,391		14,200
Noninterest income	20,782		41,961		22,079		45,673		15,129			29,437			7,125			15,438			65,115		132,509
Noninterest expense	57,201		118,221		84,880		173,575		13,883			27,236			4,356			8,251			160,320		327,283
Net income/(loss)	41,486		78,539		17,189		33,816		4,927			9,908			(5,293		)	(9,818		)	58,309		112,445
AVERAGES:
Assets	$	9,600,103	$	9,596,152	$	6,370,350	$	6,301,303	$	314,752		$	310,159		$	9,638,361		$	9,639,033		$	25,923,566	$	25,846,647
Loans	9,721,866		9,715,827		6,173,352		6,097,054		306,028			301,586			41,656			46,706			16,242,902		16,161,173
Earning assets	10,081,198		10,077,716		6,178,619		6,103,154		306,028			301,586			6,555,458			6,523,236			23,121,303		23,005,692
Deposits	7,269,121		7,373,805		11,003,769		11,014,512		1,284,516			1,302,113			1,410,044			1,111,129			20,967,450		20,801,559
Economic capital	1,251,845		1,252,069		867,958		870,360		121,824			126,706			770,591			742,055			3,012,218		2,991,190

																					FirstMerit
(In thousands)	Commercial				Retail				Wealth						Other						Consolidated
June 30, 2015	QTD		YTD		QTD		YTD		QTD			YTD			QTD			YTD			QTD		YTD
OPERATIONS:
Net interest income/(loss)	$	101,342	$	202,830	$	92,501	$	184,527	$	5,452		$	10,932		$	(14,177	)	$	(27,548	)	$	185,118	$	370,741
Provision/ (recapture) for loan losses	2,285		1,759		8,447		15,981		(1		)	(171		)	(1,765		)	(355		)	8,966		17,214
Noninterest income	21,918		44,408		23,964		45,701		14,816			28,792			5,884			13,528			66,582		132,429
Noninterest expense	61,032		122,685		87,799		176,070		13,461			27,181			(618		)	(3,610		)	161,674		322,326
Net income/(loss)	38,963		79,816		13,142		24,815		4,425			8,264			54			828			56,584		113,723
AVERAGES:
Assets	$	9,437,824	$	9,445,975	$	5,951,665	$	5,898,835	$	290,798		$	296,461		$	9,449,572		$	9,374,463		$	25,129,859	$	25,015,734
Loans	9,533,843		9,520,262		5,702,015		5,636,666		281,013			286,484			60,490			59,274			15,577,361		15,502,686
Earning assets	9,828,867		9,811,770		5,707,400		5,645,469		281,013			286,484			6,535,441			6,483,544			22,352,721		22,227,267
Deposits	6,777,434		6,831,887		11,105,954		11,115,005		1,188,563			1,214,617			610,711			573,990			19,682,662		19,735,499
Economic capital	1,355,049		1,349,289		767,803		763,446		111,770			109,969			657,810			656,765			2,892,432		2,879,469

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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.

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

Derivatives Designated in Hedge Relationships

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

At June 30, 2016, December 31, 2015, and June 30, 2015, the notional values or contractual amounts and fair value of the Corporation's derivatives designated in hedge relationships were as follows:

	Asset Derivatives												Liability Derivatives
	June 30, 2016				December 31, 2015				June 30, 2015				June 30, 2016				December 31, 2015				June 30, 2015
(In thousands)	Notional/ Contract Amount		Fair Value (1)		Notional/ Contract Amount		Fair Value (1)		Notional/ Contract Amount		Fair Value (1)		Notional/ Contract Amount		Fair Value (2)		Notional/ Contract Amount		Fair Value (2)		Notional/ Contract Amount		Fair Value (2)
Interest rate swaps:
Commercial loan swaps (FRAPS)	$	—	$	—	$	—	$	—	$	—	$	—	$	50,668	$	2,772	$	55,689	$	3,536	$	75,794	$	5,104
Sub debt swap	250,000		29,760		250,000		8,739		250,000		1,153		—		—		—		—		—		—
Fair value hedges	$	250,000	$	29,760	$	250,000	$	8,739	$	250,000	$	1,153	$	50,668	$	2,772	$	55,689	$	3,536	$	75,794	$	5,104

(1)Included in "Other assets" on the Consolidated Balance Sheets

(2)Included in "Other liabilities" on the Consolidated Balance Sheets

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

Sub Debt Swap. During the fourth quarter of 2014, the Corporation entered into a $250.0 million interest rate swap simultaneously with its long-term debt issuance for interest rate risk management purposes. This

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

interest rate swap effectively modifies the receipt of fixed-rate interest amounts in exchange for floating-rate interest payments over the life of the swap, without an exchange of the underlying principal amount. This interest rate swap was designated as a fair value hedge, and through application of the “shortcut method of accounting”, there is an assumption that the hedge is effective in offsetting changes in the fair value of the long-term debt due to changes in the U.S. LIBOR swap rate (the designated benchmark interest rate).

Derivatives Not Designated in Hedge Relationships

As of June 30, 2016, December 31, 2015, and June 30, 2015, the notional values or contractual amounts and fair value of the Corporation's derivatives not designated in hedge relationships were as follows:

	Asset Derivatives												Liability Derivatives
	June 30, 2016				December 31, 2015				June 30, 2015				June 30, 2016				December 31, 2015				June 30, 2015
(In thousands)	Notional/ Contract Amount		Fair Value (1)		Notional/ Contract Amount		Fair Value (1)		Notional/ Contract Amount		Fair Value (1)		Notional/ Contract Amount		Fair Value (2)		Notional/ Contract Amount		Fair Value (2)		Notional/ Contract Amount		Fair Value (2)
Interest rate swaps	$	1,904,459	$	87,575	$	1,824,576	$	48,920	$	1,726,600	$	46,216	$	1,904,459	$	87,575	$	1,824,576	$	48,920	$	1,726,600	$	46,216
Mortgage loan commitments	32,802		253		20,635		149		52,024		342		—		—		—		—		—		—
Forward sales contracts	—		—		—		—		15,200		106		8,059		61		9,659		5		—		—
Credit contracts	—		—		—		—		—		—		74,945		7		73,715		—		73,512		—
Foreign exchange	20,180		254		13,671		299		29,687		256		18,571		207		11,706		284		15,823		177
Equity swap	—		—		—		—		—		—		35,034		—		36,631		—		31,718		—
Total	$	1,957,441	$	88,082	$	1,858,882	$	49,368	$	1,823,511	$	46,920	$	2,041,068	$	87,850	$	1,956,287	$	49,209	$	1,847,653	$	46,393

(1)Included in "Other assets" on the Consolidated Balance Sheets

(2) Included in "Other liabilities" on the Consolidated Balance Sheets

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

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

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

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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

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

Credit contracts. The Corporation has bought and sold credit protection in the form of participations in interest rate swaps (swap participations). These swap participations, which meet the definition of credit derivatives, were entered into in the ordinary course of business. Credit derivatives, whereby the Corporation has purchased credit protection, entitles the Corporation to receive a payment from the counterparty when the customer fails to make payment on any amounts due to the Corporation. Swap participations whereby the Corporation has purchased credit protection have maturities that range between less than two to seven years. For swap participations where the Corporation sold credit protection, the Corporation has guaranteed payment in the event that the counterparty experiences a loss on the swap due to a failure to pay by the Corporation's commercial loan customer. The Corporation simultaneously entered into reimbursement agreements with the commercial loan customers obligating the customers to reimburse the Corporation for any payments it makes under the swap participations. The Corporation monitors its payment risk on its swap participations by monitoring the creditworthiness of its commercial loan customers, which is based on the normal credit review process the Corporation would have performed had it entered into these derivative instruments directly with the commercial loan customers. Credit derivatives whereby the Corporation has sold credit protection have maturities ranging from less than one year to nine years. The Corporation's maximum estimated exposure to sold swap participations, as measured by projecting a maximum value of the guaranteed derivative instruments based on interest rate curve simulations and assuming 100% default by all obligors on the maximum values, was approximately $7.1 million as of June 30, 2016. The fair values of the written swap participations were not material at June 30, 2016, December 31, 2015, and June 30, 2015.

Gains and losses recognized in income on non-designated hedging instruments for the three and six months ended June 30, 2016 and 2015 are as follows:

Derivatives not designated as hedging instruments	Location of Gain/(Loss) Recognized in Income on Derivative	Amount of Gain / (Loss) Recognized in Income on Derivatives (In thousands)
		Three Months Ended June 30,					Six Months Ended June 30,
		2016		2015			2016			2015
Mortgage loan commitments	Loan sales and servicing income	$	12	$	(46	)	$	105		$	(1,066	)
Forward sales contracts	Loan sales and servicing income	20		175			(56		)	378
Foreign exchange contracts	Other operating income	766		165			1,585			(712		)
Equity swap	Other operating expense	—		—			—			—
Total		$	798	$	294		$	1,634		$	(1,400	)

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

Counterparty Credit Risk

Like other financial instruments, derivatives contain an element of "credit risk" or the possibility that the Corporation will incur a loss because a counterparty, which may be a bank, a broker-dealer, a derivative clearing organization, or a customer, fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. All derivative contracts may be executed only with exchanges or counterparties approved by the Corporation's Board of Directors. 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 with collateral delivery thresholds on all bilateral derivatives. Beyond the threshold levels, collateral in the form of securities made available from the investment portfolio or other forms of collateral acceptable under the bilateral collateral agreements are provided. The threshold levels for each counterparty are approved by the Corporation's Board of Directors. The Corporation generally posts collateral in the form of highly rated Government Agency issued bonds or MBS.

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

The fair value of investment securities posted as collateral against derivative liabilities was $55.9 million, $47.2 million, and $45.6 million as of June 30, 2016, December 31, 2015, and June 30, 2015, respectively.

Derivative assets and liabilities are recorded at fair value on the balance sheet and do not take into account the effects of master netting agreements the Corporation has with its financial institution counterparties. These master netting agreements allow the Corporation to settle all derivative contracts held with a single financial institution counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. Collateral, usually in the form of investment securities, is posted by the counterparty in the net liability position in accordance with contract thresholds. The following tables illustrate the potential effect of the Corporation's derivative master netting arrangements, by type of financial instrument, on the Corporation's statement of financial position as of June 30, 2016, December 31, 2015, and June 30, 2015. The swap agreements the Corporation has in place with its commercial customers are not subject to enforceable master netting arrangements, and, therefore, are excluded from these tables.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

	As of June 30, 2016
	Gross amounts recognized		Gross amounts offset in the consolidated balance sheet		Net amounts presented in the consolidated balance sheet		Gross amounts not offset in the consolidated balance sheet						Net amount
(In thousands)							Financial instruments (1)			Collateral (2)
Derivative Assets
Interest rate swaps - designated	$	29,760	$	—	$	29,760	$	—		$	—		$	29,760
Interest rate swaps - non-designated	3		$	—	3		(3		)	—			—
Foreign exchange	76		—		76		(76		)	—			—
Total derivative assets	$	29,839	$	—	$	29,839	$	(79	)	$	—		$	29,760
Derivative liabilities
Interest rate swaps - designated	$	2,772	$	—	$	2,772	$	—		$	(2,772	)	$	—
Interest rate swaps - non-designated	87,572		—		87,572		(3		)	(87,569		)	—
Foreign exchange	131		—		131		(76		)	(55		)	—
Total derivative liabilities	$	90,475	$	—	$	90,475	$	(79	)	$	(90,396	)	$	—

	As of December 31, 2015
	Gross amounts recognized		Gross amounts offset in the consolidated balance sheet		Net amounts presented in the consolidated balance sheet		Gross amounts not offset in the consolidated balance sheet						Net amount
(In thousands)							Financial instruments (1)			Collateral (2)
Derivative assets
Interest rate swaps - designated	$	8,739	$	—	$	8,739	$	—		$	—		$	8,739
Interest rate swaps - non-designated	155		—		155		(155		)	—			—
Foreign exchange	270		—		270		(32		)	(238		)	—
Total derivative assets	$	9,164	$	—	$	9,164	$	(187	)	$	(238	)	$	8,739
Derivative liabilities
Interest rate swaps - designated	$	3,536	$	—	$	3,536	$	—		$	(3,536	)	$	—
Interest rate swaps - non-designated	48,765		—		48,765		(155		)	(48,610		)	—
Foreign exchange	32		—		32		(32		)	—			—
Total derivative liabilities	$	52,333	$	—	$	52,333	$	(187	)	$	(52,146	)	$	—

	As of June 30, 2015
	Gross amounts recognized		Gross amounts offset in the consolidated balance sheet		Net amounts presented in the consolidated balance sheet		Gross amounts not offset in the consolidated balance sheet						Net amount
(In thousands)							Financial instruments (1)			Collateral (2)
Derivative assets
Interest rate swaps - designated	1,153		—		1,153		—			—			1,153
Interest rate swaps - non-designated	$	414	$	—	$	414	$	(414	)	$	—		$	—
Foreign exchange	164		—		164		(49		)	(115		)	—
Total derivative assets	$	1,731	$	—	$	1,731	$	(463	)	$	(115	)	$	1,153
Derivative liabilities
Interest rate swaps - designated	$	5,104	$	—	$	5,104	$	—		$	(5,104	)	$	—
Interest rate swaps - non-designated	45,802		—		45,802		(414		)	(45,388		)	—
Foreign exchange	49		—		49		(49		)	—			—
Total derivative liabilities	$	50,955	$	—	$	50,955	$	(463	)	$	(50,492	)	$	—

(1) For derivative assets, this includes any derivative liability fair values that could be offset in the event of counterparty default. For derivative liabilities, this includes any derivative asset fair values that could be offset in the event of counterparty default.

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

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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
	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2016			2015			2016			2015
Service cost	$	198		$	207		$	396		$	415
Interest cost	3,649			3,517			7,298			7,035
Expected return on assets	(3,788		)	(3,902		)	(7,576		)	(7,804		)
Amortization of unrecognized prior service costs	75			570			150			1,140
Amortization of actuarial losses/(gains)	830			1,057			1,660			2,113
Net periodic pension cost	$	964		$	1,449		$	1,928		$	2,899

	Postretirement Benefits
	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2016			2015			2016			2015
Service cost	$	26		$	41		$	52		$	83
Interest cost	64			144			127			288
Amortization of unrecognized prior service costs	(636		)	(160		)	(1,271		)	(319		)
Amortization of actuarial losses/(gains)	245			81			490			163
Net periodic postretirement cost	$	(301	)	$	106		$	(602	)	$	215

For further information on the Corporation's employee benefit plans, refer to Note 13 (Benefit Plans) to the consolidated financial statements in the 2015 Form 10-K.

10.    Fair Value Measurement

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

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

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

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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

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

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

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

• the amount of time since the last relevant valuation;

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

• volatility associated with the primary pricing components.

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

• an independent review and approval of valuation models;

• recurring detailed reviews of profit and loss; and

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

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

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

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

The following tables present the balance of assets and liabilities measured at fair value on a recurring and nonrecurring basis as of June 30, 2016, December 31, 2015, and June 30, 2015:

			Fair Value by Hierarchy
(In thousands)	June 30, 2016		Level 1		Level 2		Level 3
Recurring fair value measurement
Available-for-sale securities:
Marketable equity securities	$	2,788	$	2,788	$	—	$	—
U.S. treasury notes & bonds	4,997		—		4,997		—
U.S. government agency debentures	2,528		—		2,528		—
U.S. States and political subdivisions	151,547		—		151,547		—
Residential mortgage-backed securities:
U.S. government agencies	860,247		—		860,247		—
Commercial mortgage-backed securities:
U.S. government agencies	202,048		—		202,048		—
Residential collateralized mortgage-backed securities:
U.S. government agencies	2,353,018		—		2,353,018		—
Non-agency	3		—		—		3
Commercial collateralized mortgage-backed securities:
U.S. government agencies	398,611		—		398,611		—
Corporate debt securities	51,107		—		—		51,107
Asset-backed securities:
Collateralized loan obligations	291,794		—		—		291,794
Total available for sale securities	4,318,688		2,788		3,972,996		342,904
Residential loans held for sale	3,962		—		3,962		—
Derivative assets:
Interest rate swaps - fair value hedges	29,760		—		29,760		—
Interest rate swaps - nondesignated	87,575		—		87,575		—
Mortgage loan commitments	253		—		253		—
Foreign exchange	254		—		254		—
Total derivative assets	117,842		—		117,842		—
Total fair value of assets (1)	$	4,440,492	$	2,788	$	4,094,800	$	342,904
Derivative liabilities:
Interest rate swaps - fair value hedges	$	2,772	$	—	$	2,772	$	—
Interest rate swaps - nondesignated	87,575		—		87,575		—
Forward sales contracts	61		—		61		—
Credit contracts	7		—		7		—
Foreign exchange	207		—		207		—
Total derivative liabilities	90,622		—		90,622		—
True-up liability	16,170		—		—		16,170
Total fair value of liabilities (1)	$	106,792	$	—	$	90,622	$	16,170
Nonrecurring fair value measurement
Mortgage servicing rights (2)	$	15,954	$	—	$	—	$	15,954
Impaired loans (3)	104,208		—		—		104,208
Other property (4)	10,027		—		—		10,027
Other real estate covered by loss share (5)	4		—		—		4
Total nonrecurring fair value	$	130,193	$	—	$	—	$	130,193

(1) There were no transfers between levels 1, 2 or 3 of the fair value hierarchy during the three months ended June 30, 2016.

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(2) MSRs with a recorded investment of $17.3 million were reduced by a specific valuation allowance totaling $1.5 million to a reported carrying value of $15.8 million resulting in recognition of $0.7 million in expense included in loan sales and servicing income in the three months ended June 30, 2016.

(3) At June 30, 2016, collateral dependent impaired loans with a recorded investment of $116.1 million were reduced by specific valuation allowance allocations totaling $11.9 million to a reported net carrying value of $104.2 million.

(4) Amounts do not include assets held at cost at June 30, 2016. During the three months ended June 30, 2016, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $0.7 million included in noninterest expense.

			Fair Value by Hierarchy
(In thousands)	December 31, 2015		Level 1		Level 2		Level 3
Recurring fair value measurement
Available-for-sale securities:
Marketable equity securities	$	2,821	$	2,821	$	—	$	—
U.S treasury notes & bonds	5,000		—		5,000		—
U.S. government agency debentures	2,498		—		2,498		—
U.S. States and political subdivisions	192,795		—		192,795		—
Residential mortgage-backed securities:
U.S. government agencies	906,229		—		906,229		—
Commercial mortgage-backed securities:
U.S. government agencies	172,109		—		172,109		—
Residential collateralized mortgage-backed securities:
U.S. government agencies	2,128,320		—		2,128,320		—
Non-agency	4		—		—		4
Commercial collateralized mortgage-backed securities:
U.S. government agencies	216,319		—		216,319		—
Corporate debt securities	52,229		—		—		52,229
Asset-backed securities
Collateralized loan obligations	289,411		—		—		289,411
Total available-for-sale securities	3,967,735		2,821		3,623,270		341,644
Residential loans held for sale	5,472		—		5,472		—
Derivative assets:
Interest rate swaps - fair value hedges	8,739		—		8,739		—
Interest rate swaps - nondesignated	48,920		—		48,920		—
Mortgage loan commitments	149		—		149		—
Foreign exchange	299		—		299		—
Total derivative assets	58,107		—		58,107		—
Total fair value of assets (1)	$	4,031,314	$	2,821	$	3,686,849	$	341,644
Derivative liabilities:
Interest rate swaps - fair value hedges	$	3,536	$	—	$	3,536	$	—
Interest rate swaps - nondesignated	48,920		—		48,920		—
Forward sale contracts	5		—		5		—
Foreign exchange	284		—		284		—
Total derivative liabilities	52,745		—		52,745		—
True-up liability	14,750		—		—		14,750
Total fair value of liabilities (1)	$	67,495	$	—	$	52,745	$	14,750
Nonrecurring fair value measurement
Mortgage servicing rights (2)	$	19,149	$	—	$	—	$	19,149
Impaired loans (3)	71,428		—		—		71,428
Other property (4)	18,576		—		—		18,576
Other real estate covered by loss share (5)	365		—		—		365
Total nonrecurring fair value	$	109,518	$	—	$	—	$	109,518

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

(1) There were no transfers between levels 1, 2 or 3 of the fair value hierarchy during the year ended December 31, 2015.  

(2) MSRs with a recorded investment of $18.9 million were reduced by a specific valuation allowance totaling $0.4 million to a reported carrying value of $18.5 million resulting in a recovery of previously recognized expense of $0.6 million in recoveries included in loans sales and servicing income in the year ended December 31, 2015.

(3)At December 31, 2015, collateral dependent impaired loans with a recorded investment of $84.3 million were reduced by specific valuation allowance allocations totaling $12.9 million to a reported net carrying value of $71.4 million.

(4) Amounts do not include assets held at cost at December 31, 2015. During the year ended December 31, 2015, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $4.5 million included in noninterest expense.

(5) Amounts do not include assets held at cost at December 31, 2015. During the year ended December 31, 2015, the re-measurement of covered foreclosed assets at fair value subsequent to initial recognition resulted in losses of $0.6 million included in noninterest expense.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

			Fair Value by Hierarchy
(In thousands)	June 30, 2015		Level 1		Level 2		Level 3
Recurring fair value measurement
Available-for-sale securities:
Marketable equity securities	$	2,824	$	2,824	$	—	$	—
U.S. treasury notes & bonds	5,005		—		5,005		—
U.S. government agency debentures	2,510		—		2,510		—
U.S. States and political subdivisions	207,617		—		207,617		—
Residential mortgage-backed securities:
U.S. government agencies	960,852		—		960,852		—
Commercial mortgage-backed securities:
U.S. government agencies	170,338		—		170,338		—
Residential collateralized mortgage-backed securities:
U.S. government agencies	1,949,389		—		1,949,389		—
Non-agency	5		—		—		5
Commercial collateralized mortgage-backed securities:
U.S. government agencies	228,438		—		228,438		—
Corporate debt securities	53,450		—		—		53,450
Asset-backed securities:
Collateralized loan obligations	258,081		—		—		258,081
Total available-for-sale securities	3,838,509		2,824		3,524,149		311,536
Residential loans held for sale	5,432		—		5,432		—
Derivative assets:
Interest rate swaps - fair value hedges	1,153		—		1,153		—
Interest rate swaps - nondesignated	46,216		—		46,216		—
Mortgage loan commitments	342		—		342		—
Forward sale contracts	106		—		106		—
Foreign exchange	256		—		256		—
Total derivative assets	48,073		—		48,073		—
Total fair value of assets (1)	$	3,892,014	$	2,824	$	3,577,654	$	311,536
Derivative liabilities:
Interest rate swaps - fair value hedges	$	5,104	$	—	$	5,104	$	—
Interest rate swaps - nondesignated	46,216		—		46,216		—
Foreign exchange	177		—		177		—
Total derivative liabilities	51,497		—		51,497		—
True-up liability	13,408		—		—		13,408
Total fair value of liabilities (1)	$	64,905	$	—	$	51,497	$	13,408
Nonrecurring fair value measurement
Mortgage servicing rights (2)	$	20,809	$	—	$	—	$	20,809
Impaired loans (3)	72,580		—		—		72,580
Other property (4)	33,078		—		—		33,078
Other real estate covered by loss share (5)	4		—		—		4
Total nonrecurring fair value	$	126,471	$	—	$	—	$	126,471

(1) There were no transfers between levels 1, 2 and 3 of the fair value hierarchy during the three months ended June 30, 2015.

(2) MSRs with a recorded investment of $20.6 million were reduced by a specific valuation allowance totaling $0.5 million to a reported carrying value of $20.1 million resulting in recovery of a previously recognized expense of $0.6 million in the three months ended June 30, 2015.

(3) At June 30, 2015, collateral dependent impaired loans with a recorded investment of $82.7 million were reduced by specific valuation allowance allocations totaling $10.2 million to a reported net carrying value of $72.6 million.

(4) Amounts do not include assets held at cost at June 30, 2015. During the three months ended June 30, 2015, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $2.1 million included in noninterest expense.

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(5) Amounts do not include assets held at cost at June 30, 2015. During the three months ended June 30, 2015, the re-measurement of covered foreclosed assets at fair value subsequent to initial recognition resulted in losses of $0.2 million included in noninterest expense.

The following section describes the valuation methodologies used by the Corporation to measure financial assets and liabilities at fair value. During the three months ended June 30, 2016 and 2015, there were no significant changes to the valuation techniques used by the Corporation to measure fair value.    

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

Securities are classified as Level 2 if quoted prices for identical securities are not available, and fair value is determined using pricing models by a third-party pricing service.   Approximately 92% of the available-for-sale portfolio is Level 2. For the majority of available-for sale securities, the Corporation obtains fair value measurements from an independent third party pricing service. These instruments include: municipal bonds; bonds backed by the U.S. government; corporate bonds; MBS; securities issued by the U.S. Treasury; and certain agency CMOs.  The independent pricing service uses industry-standard models to price U.S. government agencies and MBS that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Obligations of state and political subdivisions are valued using a matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. For collateralized mortgage securities, depending on the characteristics of a given tranche, a volatility driven multidimensional static model or Option-Adjusted Spread model is generally used. Substantially all assumptions used by the independent pricing service for securities classified as Level 2 are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.

Securities are classified as Level 3 when there is limited activity in the market for a particular instrument and fair value is determined by obtaining broker quotes. As of June 30, 2016, 8% of the available-for-sale portfolio is Level 3, which consists of single issuer trust preferred securities and CLOs.

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

CLO are securitized products where payments from multiple middle-sized and large business loans are pooled together and segregated into different classes of bonds with payments on these bonds based on their priority within the overall deal structure. The markets for such securities are generally characterized by low trading volumes and wide bid-ask spreads, all driven by more limited market participants. Although estimated prices are generally obtained for such securities, the level of market observable assumptions used is limited in the valuation. Specifically, market assumptions regarding credit adjusted cash flows and liquidity influences on discount rates were difficult to observe at the individual bond level. Accordingly, the securities are currently valued by a third party that primarily utilizes dealer or pricing service prices and, subsequently, verifies this

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pricing through a disciplined process to ensure proper valuations and to highlight differences in cash flow modeling or other risks to determine if the market perception of the risk of a CLO is beginning to deviate from other similar tranches. This is done by establishing ranges for appropriate pricing yields for each CLO tranche and, using a standardized cash flow scenario, ensuring yields are consistent with expectations.

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

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

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

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

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

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The Corporation utilizes a third-party vendor to perform the modeling to estimate the fair value of its MSRs. The Corporation reviews the estimated fair values and assumptions used by the third party in the model on a quarterly basis. The Corporation also compares the estimates of fair value and assumptions to recent market activity and against its own experience. See Note 11 (Mortgage Servicing Rights and Mortgage Servicing Activity) for further information on MSRs valuation assumptions.

Derivatives. The Corporation's derivatives include interest rate swaps and written loan commitments and forward sales contracts related to residential mortgage loan origination activity. Valuations for interest rate swaps are derived from third-party models whose significant inputs are readily observable market parameters, primarily yield curves, with appropriate adjustments for liquidity and credit risk. These fair value measurements are classified as Level 2. The fair values of written loan commitments and forward sales contracts on the associated loans are based on quoted prices for similar loans in the secondary market, consistent with the valuation of residential mortgage loans held for sale. Expected net future cash flows related to loan servicing activities are included in the fair value measurement of written loan commitments. A written loan commitment does not bind the potential borrower to entering into the loan, nor does it guarantee that the Corporation will approve the potential borrower for the loan. Therefore, when determining fair value, the Corporation makes estimates of expected "fallout" (interest rate locked pipeline loans not expected to close), using models, which consider cumulative historical fallout rates and other factors. Fallout can occur for a variety of reasons including falling rate environments when a borrower will abandon a fixed rate loan commitment at one lender and enter into a new lower fixed rate loan commitment at another, when a borrower is not approved as an acceptable credit by the lender or for a variety of other non-economic reasons. Fallout is not a significant input to the fair value of the written loan commitments in their entirety. These measurements are classified as Level 2.

Derivative assets are typically secured through securities with financial counterparties or cross collateralization with a borrowing customer. Derivative liabilities are typically secured through the Corporation pledging securities to financial counterparties or, in the case of a borrowing customer, by the right of setoff. The Corporation considers factors such as the likelihood of default by itself and its counterparties, right of setoff, and remaining maturities in determining the appropriate fair value adjustments. All derivative counterparties approved by the Bank's Board are regularly reviewed, and appropriate business action is taken to adjust the exposure to certain counterparties, as necessary. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of marketable collateral securing the position. This approach used to estimate impacted exposures to counterparties is also used by the Corporation to estimate its own credit risk on derivative liability positions. To date, no material losses have been incurred due to a counterparty's inability to pay any uncollateralized position. There was no significant change in value of derivative assets and liabilities attributed to credit risk for the three months ended June 30, 2016.

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

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

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discount rate used to value the true-up liability was 3.08% and 3.58% as of June 30, 2016 and 2015, respectively. Increasing or decreasing the discount rate by one percentage point would change the liability by approximately $0.6 million and $0.6 million, respectively, as of June 30, 2016.

In accordance with the loss share agreements governing the Midwest acquisition, on July 15, 2020 (the “Midwest True-Up Measurement Date”), the Bank has agreed to pay to the FDIC half of the amount, if positive, calculated as: (1) 20% of the intrinsic loss estimate of the FDIC (approximately $152 million); minus (2) the sum of (A) 25% of the asset premium paid in connection with the Midwest acquisition (approximately $21 million); plus (B) 25% of the cumulative shared-loss payments (as defined below) plus (C) the cumulative servicing amount (as defined below). The fair value of the true-up liability associated with the Midwest acquisition was $10.5 million, $9.3 million, and $8.4 million as of June 30, 2016, December 31, 2015, and June 30, 2015, respectively.

In accordance with the loss share agreements governing the George Washington acquisition, on April 14, 2020 (the “George Washington True-Up Measurement Date”), the Bank has agreed to pay to the FDIC 50% of the excess, if any, of (1) 20% of the stated threshold (approximately $34.4 million) less (2) the sum of (A) 25% of the asset discount (approximately $12 million) received in connection with the George Washington acquisition plus (B) 25% of the cumulative shared-loss payments (as defined below) plus (C) the cumulative servicing amount (as defined below). The fair value of the true-up liability associated with the George Washington acquisition was $5.7 million, $5.5 million, and $5.0 million as of June 30, 2016, December 31, 2015, and June 30, 2015, respectively.

For the purposes of the above calculations, cumulative shared-loss payments means: (i) the aggregate of all of the payments made or payable to the Bank under the loss share agreements minus (ii) the aggregate of all of the payments made or payable to the FDIC. The cumulative servicing amount means the period servicing amounts (as defined in the loss share agreements) for every consecutive twelve-month period prior to and ending on the Midwest and George Washington True-Up Measurement Dates. The cumulative loss share payments and cumulative service amounts are components of the true-up calculations and are estimated each period end based on the expected amount and timing of cash flows of the acquired loan portfolios. See Note 3 (Loans) and Note 4 (Allowance for Loan Losses) for additional information on the estimated cash flows of the acquired loan portfolios.

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three and six months ended June 30, 2016 and 2015 are summarized as follows:

	Three Months Ended June 30,											Six Months Ended June 30,
	2016					2015						2016					2015
(In thousands)	Available-for-sale securities			True-up liability		Available-for-sale securities			True-up liability			Available-for-sale securities			True-up liability		Available-for-sale securities			True-up liability
Balance at beginning of period	$	334,157		$	15,115	$	346,685		$	13,707		$	341,644		$	14,750	$	339,187		$	13,294
(Gains) losses included in earnings (1)	—			1,055		—			(299		)	—			1,420		—			114
Unrealized gains (losses) (2)	8,926			—		4,561			—			1,370			—		11,697			—
Purchases	—			—		41,509			—			—			—		41,509			—
Sales	—			—		(71,832		)	—			—			—		(71,832		)	—
Settlements	(179		)	—		(9,387		)	—			(110		)	—		(9,025		)	—
Balance at ending of period	$	342,904		$	16,170	$	311,536		$	13,408		$	342,904		$	16,170	$	311,536		$	13,408

(1)Reported in "Other expense"

(2) Reported in "Other comprehensive income (loss)"

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Fair Value Option

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

Interest income on loans held for sale is accrued on the principal outstanding primarily using the “simple-interest” method. None of these loans were 90 days or more past due, nor were any on nonaccrual as of June 30, 2016, December 31, 2015, and June 30, 2015. The aggregate fair value, contractual balance and gain or loss on loans held for sale was as follows:

(In thousands)	June 30, 2016		December 31, 2015		June 30, 2015
Aggregate fair value carrying amount	$	3,962	$	5,472	$	5,432
Aggregate unpaid principal / contractual balance	3,836		5,320		5,285
Carrying amount over aggregate unpaid principal (1)	$	126	$	152	$	147

(1) These changes are included in "Loan sales and servicing income" in the Consolidated Statements of Income.

Disclosures about Fair Value of Financial Instruments

The carrying amount and estimated fair value of the Corporation’s financial instruments that are carried at either fair value or cost as of June 30, 2016, December 31, 2015, and June 30, 2015 are shown in the tables below.

	June 30, 2016
	Carrying Amount		Fair Value
(In thousands)			Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	524,287	$	524,287	$	524,287	$	—	$	—
Available-for-sale securities	4,318,688		4,318,688		2,788		3,972,996		342,904
Held-to-maturity securities	2,514,161		2,545,740		—		2,545,740		—
Other securities	148,367		148,367		—		148,367		—
Loans held for sale	3,962		3,962		—		3,962		—
Net originated loans	14,560,456		14,349,013		—		—		14,349,013
Net acquired loans	1,484,380		1,532,344		—		—		1,532,344
Net FDIC acquired loans and loss share receivable	149,121		149,121		—		—		149,121
Accrued interest receivable	65,666		65,666		—		65,666		—
Derivatives	117,842		117,842		—		117,842		—
Financial liabilities:
Deposits	$	20,952,643	$	20,960,182	$	—	$	20,960,182	—
Federal funds purchased and securities sold under agreements to repurchase	686,890		686,890		—		686,890		—
Wholesale borrowings	468,447		473,187		—		473,187		—
Long-term debt	526,389		522,151		—		522,151		—
Accrued interest payable	10,632		10,632		—		10,632		—
Derivatives	90,622		90,622		—		90,622		—

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	December 31, 2015
	Carrying Amount		Fair Value
(In thousands)			Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	463,817	$	463,817	$	463,817	$	—	$	—
Available-for-sale securities	3,967,735		3,967,735		2,821		3,623,270		341,644
Held-to-maturity securities	2,674,093		2,659,119		—		2,659,119		—
Other securities	148,172		148,172		—		148,172		—
Loans held for sale	5,472		5,472		—		5,472		—
Net originated loans	14,013,370		13,795,058		—		—		13,795,058
Net acquired loans	1,739,194		1,796,314		—		—		1,796,314
Net FDIC acquired loans and loss share receivable	170,690		170,690		—		—		170,690
Accrued interest receivable	67,887		67,887		—		67,887		—
Derivatives	58,107		58,107		—		58,107		—
Financial liabilities:
Deposits	$	20,108,003	$	20,116,298	$	—	$	20,116,298	$	—
Federal funds purchased and securities sold under agreements to repurchase	1,037,075		1,037,075		—		1,037,075		—
Wholesale borrowings	580,648		582,120		—		582,120		—
Long-term debt	505,173		503,675		—		503,675		—
Accrued interest payable	10,758		10,758		—		10,758		—
Derivatives	52,745		52,745		—		52,745		—

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	June 30, 2015
	Carrying Amount		Fair Value
(In thousands)			Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	587,589	$	587,589	$	587,589	$	—	$	—
Available-for-sale securities	3,838,509		3,838,509		2,824		3,524,149		311,536
Held-to-maturity securities	2,787,513		2,760,120		—		2,760,120		—
Other securities	147,967		147,967		—		147,967		—
Loans held for sale	5,432		5,432		—		5,432		—
Net originated loans	13,254,230		13,077,485		—		—		13,077,485
Net acquired loans	2,090,734		2,167,304		—		—		2,167,304
Net FDIC acquired loans and loss share receivable	211,887		211,887		—		—		211,887
Accrued interest receivable	66,501		66,501		—		66,501		—
Derivatives	48,073		48,073		—		48,073		—
Financial liabilities:
Deposits	$	19,673,850	$	19,681,270	$	—	$	19,681,270	$	—
Federal funds purchased and securities sold under agreements to repurchase	1,519,250		1,519,250		—		1,519,250		—
Wholesale borrowings	366,074		369,337		—		369,337		—
Long-term debt	497,393		509,900		—		509,900		—
Accrued interest payable	9,910		9,910		—		9,910		—
Derivatives	51,497		51,497		—		51,497		—

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

Cash and cash equivalents – Due to their short-term nature, the carrying amount of these instruments approximates the estimated fair value.

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

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

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

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

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

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

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

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

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

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

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

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

True-up liability – See Financial Instruments Measured at Fair Value above.

11.     Mortgage Servicing Rights and Mortgage Servicing Activity

In the six months endedJune 30, 2016 and 2015, the Corporation sold residential mortgage loans from the held for sale portfolio with unpaid principal balances of $15.6 million and $59.7 million, respectively, and recognized pretax gains of $0.4 million and $0.8 million, respectively, which are included as a component of loan sales and servicing income. As of June 30, 2016 and 2015, the Corporation retained the related MSRs, for which it receives servicing fees, on $6.9 million and $51.1 million, respectively, of the loans sold.

The Corporation serviced for third parties approximately $2.2 billion of residential mortgage loans at June 30, 2016 and $2.5 billion at June 30, 2015. Loan servicing fees, not including valuation changes included in loan sales and servicing income, were $1.4 million and $1.6 million, respectively, for the six months endedJune 30, 2016 and 2015.

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

Changes in the carrying amount of MSRs and MSRs valuation allowance are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2016			2015			2016			2015
Carrying amount of MSRs
Beginning balance	$	18,127		$	21,490		$	18,938		$	22,011
Additions	32			63			60			533
Amortization	(849		)	(918		)	(1,688		)	(1,909		)
Ending balance	17,310			20,635			17,310			20,635
Valuation Allowance:
Beginning balance	(868		)	(1,131		)	(399		)	(955		)
Recoveries/(Additions)	(681		)	641			(1,150		)	465
Ending balance	(1,549		)	(490		)	(1,549		)	(490		)
MSRs, net carrying balance	$	15,761		$	20,145		$	15,761		$	20,145
Fair value at end of period	$	15,954		$	20,809		$	15,954		$	20,809

On a quarterly basis, the Corporation assesses its capitalized servicing rights for impairment based on their current fair value. For purposes of the impairment, the servicing rights are disaggregated based on loan type and interest rate which are the predominant risk characteristics of the underlying loans. A valuation allowance is established through a charge to earnings to the extent the amortized cost of the MSRs exceeds the estimated fair value by stratification. If it is later determined that all or a portion of the temporary impairment no longer exists for the stratification, the valuation is reduced through a recovery to earnings. No permanent impairment losses were written off against the allowance during the three and six months endedJune 30, 2016 and 2015.

Key economic assumptions and the sensitivity of the current fair value of the MSRs related to immediate 10% and 25% adverse changes in those assumptions at June 30, 2016 are presented in the following table below. These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in the fair value based on 10% variation in the prepayment speed assumption generally cannot be extrapolated because the relationship of the change in the prepayment speed assumption to the change in fair value may not be linear. Also, in the below table, the effect of a variation in the discount rate assumption on the fair value of the MSRs is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in prepayment speed estimates could result in changes in the discount rates), which might magnify or counteract the sensitivities.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES 

(Dollars in thousands)

Prepayment speed assumption (annual CPR)	13.41		%
Decrease in fair value from 10% adverse change	$	964
Decrease in fair value from 25% adverse change	$	1,242
Discount rate assumption	9.39		%
Decrease in fair value from 100 basis point adverse change	$	463
Decrease in fair value from 200 basis point adverse change	$	898
Expected weighted-average life (in months)	85

12.     Commitments and Guarantees

Commitments to Extend Credit

Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Loan commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments, and the fair value of these commitments is recorded on the consolidated balance sheets. Additional information is provided in Note 10 (Fair Value Measurement). Commitments generally are extended at the then-prevailing interest rates, have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Loan commitments involve credit risk not reflected on the balance sheet. The Corporation mitigates exposure to credit risk with internal controls that guide how applications for credit are reviewed and approved, how credit limits are established and, when necessary, how demands for collateral are made. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Management evaluates the creditworthiness of each prospective borrower on a case-by-case basis and, when appropriate, adjusts the allowance for probable credit losses inherent in all commitments. The reserve for unfunded lending commitments at June 30, 2016, December 31, 2015, and June 30, 2015, included in “accrued expenses and other liabilities” on the Consolidated Balance Sheets, was $4.1 million, $4.1 million, and $3.9 million, respectively.

The Corporation's credit risk associated with these instruments is represented by the contractual amounts indicated in the following table.

Unused commitments to extend credit
(In thousands)		June 30, 2016		December 31, 2015		June 30, 2015
	Commercial	$	3,505,383	$	3,992,089	$	3,746,824
	Consumer	2,508,315		2,393,058		2,397,353
	Total unused commitments to extend credit	$	6,013,698	$	6,385,147	$	6,144,177

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

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

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

Guarantees

The Corporation is a guarantor in certain agreements with third parties. The Corporation's maximum credit risk associated with these instruments is represented by the contractual amounts indicated in the following table.

Financial guarantees
(In thousands)		June 30, 2016		December 31, 2015		June 30, 2015
	Standby letters of credit	$	220,913	$	254,703	$	255,418
	Loans sold with recourse	11,543		12,902		28,891
	Total financial guarantees	$	232,456	$	267,605	$	284,309

Standby Letters of Credit. Standby letters of credit obligate the Corporation to pay a specified third party when a customer fails to repay an outstanding loan or debt instrument, or fails to perform some contractual nonfinancial obligation. The Corporation has recourse against the customer for any amount required to be paid to a third party under a standby letter of credit. Collateral held varies, but may include marketable securities, equipment, inventory, and real estate. Except for short-term guarantees of $106.8 million at June 30, 2016, the remaining guarantees extend in varying amounts through 2024.

Loans Sold with Recourse. The Corporation regularly sells service retained residential mortgage loans to GSEs as part of its mortgage banking activities. The Corporation provides customary representation and warranties to the GSEs in conjunction with these sales. These representations and warranties generally require the Corporation to repurchase assets if it is subsequently determined that a loan did not meet specified criteria, such as a documentation deficiency or rescission of mortgage insurance. If the Corporation is unable to cure or refute a repurchase request, the Corporation is generally obligated to repurchase the loan or otherwise reimburse the counterparty for losses. The Corporation also sells service released residential mortgage loans to other investors which contain early payment default recourse provisions. As of June 30, 2016, December 31, 2015, and June 30, 2015, the Corporation had sold $9.1 million, $10.1 million, and $22.2 million, respectively, of outstanding residential mortgage loans to GSEs and other investors with recourse provisions. The Corporation had reserved $2.6 million, $2.7 million, and $6.7 million as of June 30, 2016, December 31, 2015, and June 30, 2015, respectively, for estimated losses from representation and warranty obligations and early payment default recourse provisions.

The reserve associated with loans sold with recourse is included in accrued taxes, expenses and other liabilities on the Consolidated Balance Sheets. The Corporation's reserve reflects Management's best estimate of

83

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

losses. The Corporation's reserving methodology uses current information about investor repurchase requests, and assumptions about repurchase mix and loss severity, based upon the Corporation's most recent loss trends. The Corporation also considers qualitative factors that may result in anticipated losses differing from historical loss trends, such as loan vintage, underwriting characteristics and macroeconomic trends.

Changes in the repurchase reserves for the three and six months ended June 30, 2016 and 2015 are as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
(In thousands)	2016		2015			2016			2015
Balance at beginning of period	$	2,625	$	6,650		$	2,725		$	7,250
Net increase/(decrease) to reserve	—		363			(53		)	(39		)
Net realized (losses)/gains	—		(363		)	(47		)	(561		)
Balance at end of period	$	2,625	$	6,650		$	2,625		$	6,650

84

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

Litigation

In the normal course of business, the Corporation and its subsidiaries are at all times subject to pending and threatened legal actions, some for which the relief or damages sought are substantial. Based on information currently available, consultation with counsel, available insurance coverage and established reserves, Management believes that the eventual outcome of all claims against the Corporation and its subsidiaries will not, individually or in the aggregate, have a material adverse effect on its consolidated financial position or results of operations. However, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the results of operations for a particular period. The Corporation has not established any reserves with respect to any of this disclosed litigation because it is not possible to determine (i) whether a liability has been incurred; or (ii) an estimate of the ultimate or minimum amount of such liability.

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

Overdraft Litigation

Commencing in December 2010, two separate lawsuits were filed in the Summit County Court of Common Pleas and the Lake County Court of Common Pleas against the Corporation and the Bank. The complaints were brought as putative class actions on behalf of Ohio residents who maintained a checking account at the Bank and who incurred one or more overdraft fees as a result of the alleged re-sequencing of debit transactions. The lawsuit that had been filed in Summit County Court of Common Pleas was dismissed without prejudice on July 11, 2011. The remaining suit in Lake County seeks actual damages, disgorgement of overdraft fees, punitive damages, interest, injunctive relief and attorney fees. In December 2012, the trial court issued an order certifying a proposed class and the Bank and Corporation appealed the order to the Eleventh District Court of Appeals. In September 2013, the Eleventh District Court of Appeals affirmed in part and reversed in part the trial court's class certification order, and remanded the case back to the trial court for further consideration, in particular with respect to the class definition. On October 9, 2013, the Bank and Corporation filed with the Eleventh District Court of Appeals an application for reconsideration and application for consideration en banc. On November 20, 2013, the Eleventh District denied those applications. On December 4, 2013, the Bank and Corporation filed a notice of appeal with the Ohio Supreme Court, and on January 3, 2014, they filed with the Ohio Supreme Court a memorandum in support of the Court's exercising its jurisdiction and accepting the appeal. The plaintiffs filed an opposition, and, on April 24, 2014, the Ohio Supreme Court declined to accept jurisdiction. On August 6, 2014, the Bank and Corporation filed a motion asking the trial court to stay the lawsuit pending arbitration of claims subject to an arbitration agreement. That motion has been fully briefed and is awaiting a decision by the court. On August 25, 2014, the parties stipulated to a revised class definition (without affecting the pending motion to stay). An order approving the stipulated revised class was entered on June 3, 2016.

CRBC 401(k) Litigation

Participants in the Citizens Republic Bancorp 401(k) Plan filed a lawsuit in the United States Court for the Eastern District of Michigan in 2011, alleging that Citizens and certain of its officers and directors violated the Employee Retirement Income Security Act by offering Citizens common stock as an investment alternative in the Plan during periods when it was imprudent to do so and by failing to adequately monitor fiduciaries

85

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

responsible for administering the Plan. The lawsuit, captioned Kidd v. Citizens Republic Bancorp, Inc. et al., Case No. 2:11-cv-11709, asserts claims for monetary and injunctive relief on behalf of a purported class of participants and beneficiaries in the Plan who held Citizens stock in their Plan accounts during the period from April 17, 2008 to "the present." The plaintiffs filed a third amended complaint in November 2015, and the defendants have filed a motion that the complaint be dismissed. Defendant’s Motion to Dismiss was granted by Court on May 29, 2016. Plaintiffs have filed a Notice of Appeal and the appellate court has scheduled a mediation conference for August 15, 2016.

Merger litigation

Five putative derivative and class action lawsuits have been filed by separate shareholders of FirstMerit Corporation (“FirstMerit”) relating to the proposed merger between Huntington Bancshares, Inc. (“Huntington”) and FirstMerit.  Two of those lawsuits were filed in the Summit County Common Pleas Court, Ohio:  W. Patrick Murray v. Huntington Bancshares Incorporated, Case No. CV-2016-02-0917, was filed on February 11, 2016; and The Robinson Family Trust v. Paul Greig, Case No. CV-2016-02-0981, was filed on February 17, 2016 (the “State Court Lawsuits”).  On April 14, 2016, the State Court Lawsuits were consolidated.  The State Court Lawsuits consolidated complaint alleges that the individual directors of FirstMerit breached their fiduciary duties by approving a proposed merger that allegedly undervalues FirstMerit, allegedly provides the directors with benefits not afforded FirstMerit shareholders, and allegedly includes deal protection devices to ensure that the proposed merger will be consummated.  The consolidated complaint also alleges that the directors approved a Registration Statement on S-4, filed on March 4, 2016, (the “Registration Statement”) that omits material information about the proposed merger.  It also alleges that Huntington aided and abetted the alleged breaches of fiduciary duty.  It seeks declaratory and injunctive relief to prevent the consummation of the proposed merger, an award of fees and costs, and other equitable relief.

The other three lawsuits were filed in the United States District Court for the Northern District of Ohio:  Wojno v. FirstMerit Corp., Case No. 5:16-cv-461, was filed on February 26, 2016; Wilkinson v. FirstMerit Corp., Case No. 5:16-cv-723, was filed on March 23, 2016; and Hafner v. Greig, Case No 5:16-cv-762, was filed on March 28, 2016 (the “Federal Court Lawsuits”).  On April 8, 2016, the parties to the Federal Court Lawsuits filed a stipulation that, among other things, would consolidate the actions and designate a consolidated complaint.  The Motion to Consolidate was granted on May 9, 2016. The stipulation remains pending.  Each complaint in the Federal Court Lawsuits makes similar allegations to the State Court Lawsuits consolidated complaint, and also alleges that the directors violated Sections 14(a) and 20(a) of the Securities Exchange of 1934 and Rule 14a-9 promulgated thereunder by approving the Registration Statement.  The Hafner complaint also alleges that Huntington violated Section 20(a) of the Securities Exchange Act in connection with the Registration Statement.  Each complaint in the Federal Court Lawsuits seeks similar relief to the State Court Lawsuits consolidated complaint.

On April 13, 2016, the defendants in the State Court Lawsuits filed a motion to stay the State Court Lawsuits pending the resolution of the parallel Federal Court Lawsuits.  The judge in the State Court Lawsuits granted defendant’s motion to stay on May 20, 2016. All further action in the State Court cases is stayed pending resolution of the consolidated Federal Court action.

On or about June 8, 2016 the parties to the Federal Court litigation filed with the court a Memorandum of Understanding notifying it that the parties have agreed to a preliminary settlement in full of the pending litigation. The agreement, in substance, requires defendants to make additional disclosures to SEC filings prior to shareholder votes scheduled for June 13, 2016. In good faith defendants made such agreed upon disclosures prior to the vote. The parties also agreed to conduct confirmatory discovery as part of the overall settlement

86

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

agreement. The parties are currently finalizing the scope of the discovery and setting dates for limited document production and depositions. The Federal Court has stayed all further action in the case pending submission of a final proposed settlement agreement.

87

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

13.     Changes and Reclassifications Out of Accumulated Other Comprehensive Income

The following table presents the changes in AOCI by component of comprehensive income for the three and six months ended June 30, 2016 and 2015:

	Three Months Ended									Six Months Ended
	June 30, 2016									June 30, 2016
(In thousands)	Pretax			Tax			After tax			Pretax			Tax			After tax
Unrealized and realized securities gains and losses:
Balance at the beginning of the period	$	14,447		$	1,682		$	12,765		$	(32,786	)	$	(15,840	)	$	(16,946	)
Changes in unrealized securities' holding gains/(losses)	31,489			11,431			20,058			79,868			28,994			50,874
Changes in unrealized securities' holding gains/(losses) that result from securities being transferred from available-for-sale into held-to-maturity	(221		)	(79		)	(142		)	(1,072		)	(14		)	(1,058		)
Net losses/(gains) realized on sale of securities reclassified to noninterest income	(2,164		)	(786		)	(1,378		)	(2,459		)	(892		)	(1,567		)
Balance at the end of the period	43,551			12,248			31,303			43,551			12,248			31,303
Pension plans and other postretirement benefits:
Balance at the beginning of the period	(93,852		)	(32,746		)	(61,106		)	(95,760		)	(33,432		)	(62,328		)
Amortization of actuarial losses/(gains)	1,076			390			686			3,244			1,163			2,081
Amortization of prior service cost reclassified to other noninterest expense	(560		)	(204		)	(356		)	(820		)	(291		)	(529		)
Balance at the end of the period	(93,336		)	(32,560		)	(60,776		)	(93,336		)	(32,560		)	(60,776		)
Total Accumulated Other Comprehensive Income	$	(49,785	)	$	(20,312	)	$	(29,473	)	$	(49,785	)	$	(20,312	)	$	(29,473	)

	Three Months Ended									Six Months Ended
	June 30, 2015									June 30, 2015
(In thousands)	Pretax			Tax			After tax			Pretax			Tax			After tax
Unrealized and realized securities gains and losses:
Balance at the beginning of the period	$	24,728		$	8,656		$	16,072		$	(8,531	)	$	(2,985	)	$	(5,546	)
Changes in unrealized securities' holding gains/(losses)	(28,642		)	(10,024		)	(18,618		)	5,475			1,916			3,559
Changes in unrealized securities' holding gains/(losses) that result from securities being transferred from available-for-sale into held-to-maturity	(575		)	(203		)	(372		)	(1,079		)	(378		)	(701		)
Net losses/(gains) realized on sale of securities reclassified to noninterest income	(567		)	(198		)	(369		)	(921		)	(322		)	(599		)
Balance at the end of the period	(5,056		)	(1,769		)	(3,287		)	(5,056		)	(1,769		)	(3,287		)
Pension plans and other postretirement benefits:
Balance at the beginning of the period	(100,520		)	(35,181		)	(65,339		)	(102,068		)	(35,722		)	(66,346		)
Amortization of actuarial losses/(gains)	1,138			399			739			2,276			797			1,479
Amortization of prior service cost reclassified to other noninterest expense	410			144			266			820			287			533
Balance at the end of the period	(98,972		)	(34,638		)	(64,334		)	(98,972		)	(34,638		)	(64,334		)
Total Accumulated Other Comprehensive Income	$	(104,028	)	$	(36,407	)	$	(67,621	)	$	(104,028	)	$	(36,407	)	$	(67,621	)

88

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  - Continued

FIRSTMERIT CORPORATION AND SUBSIDIARIES 

The following table presents current period reclassifications out of AOCI by component of comprehensive income for the three and six months ended June 30, 2016 and 2015:

	Three Months Ended			Six Months Ended			Income statement line item presentation
(In thousands)	June 30, 2016			June 30, 2016
Realized (gains)/losses on sale of securities	$	(2,164	)	$	(2,459	)	Investment securities losses (gains), net
Tax expense (benefit) (36.3%)	(786		)	(892		)	Income tax expense (benefit)
Reclassified amount, net of tax	$	(1,378	)	$	(1,567	)

	Three Months Ended			Six Months Ended			Income statement line item presentation
(In thousands)	June 30, 2015			June 30, 2015
Realized (gains)/losses on sale of securities	$	(567	)	$	(921	)	Investment securities losses (gains), net
Tax expense (benefit) (35%)	(198		)	(322		)	Income tax expense (benefit)
Reclassified amount, net of tax	$	(369	)	$	(599	)

14.     Subsequent Events

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

On July 8, 2016, the Corporation consummated the sale of four branches, located in Wisconsin, for a gain of approximately $1.2 million.

As previously disclosed, on July 13, 2016, Huntington and FirstMerit have reached an agreement with the U.S. Department of Justice to divest 13 FirstMerit branches and associated assets, deposits and employees located in Ohio.

89

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

Figure 1. Consolidated Financial Highlights

Consolidated Financial Highlights
(Unaudited)	Three Months Ended															Six Months Ended
(Dollars in thousands, except per share amounts)	June 30,			March 31,			December 31,			September 30,			June 30,			June 30,
	2016			2016			2015			2015			2015			2016			2015
EARNINGS
Net interest income TE (1)	$	189,897		$	189,115		$	188,979		$	189,119		$	189,018		$	379,012		$	378,572
TE adjustment (1)	3,819			3,959			3,748			3,796			3,900			7,778			7,831
Provision for originated loan losses	6,947			5,410			12,487			10,402			10,809			12,357			16,845
Provision/(recapture) for acquired loan losses	(341		)	1,131			1,503			144			(952		)	790			1,262
Provision/(recapture) for FDIC acquired loan losses	(215		)	1,268			(379		)	3,729			(891		)	1,053			(893		)
Noninterest income	65,115			67,394			65,143			71,426			66,582			132,509			132,429
Noninterest expense	160,320			166,963			155,622			160,742			161,674			327,283			322,326
Net income	58,309			54,136			56,749			59,012			56,584			112,445			113,723
Diluted EPS (3)	0.34			0.31			0.33			0.34			0.33			0.65			0.66
PERFORMANCE RATIOS
Return on average assets (ROA)	0.90		%	0.84		%	0.89		%	0.93		%	0.90		%	0.87		%	0.92		%
Return on average equity (ROE)	7.79		%	7.33		%	7.65		%	8.05		%	7.85		%	7.56		%	7.96		%
Return on average tangible common equity (1)	11.10		%	10.52		%	11.04		%	11.69		%	11.44		%	10.81		%	11.65		%
Net interest margin TE (1)	3.30		%	3.32		%	3.30		%	3.33		%	3.39		%	3.31		%	3.43		%
Efficiency ratio (1)	62.49		%	64.27		%	60.22		%	60.71		%	62.37		%	63.39		%	62.17		%
Number of full-time equivalent employees	3,844			3,949			3,926			3,961			4,017			3,844			4,017
MARKET DATA
Book value per common share	$	18.34		$	18.09		$	17.74		$	17.72		$	17.42		$	18.34		$	17.42
Tangible book value per common share (1)	12.94			12.66			12.29			12.26			11.95			12.94			11.95
Period end common share market value	20.27			21.05			18.65			17.67			20.83			20.27			20.83
Market as a % of book	111		%	116		%	105		%	100		%	120		%	111		%	120		%
Cash dividends per common share	$	0.17		$	0.17		$	0.17		$	0.17		$	0.16		$	0.34		$	0.32
Common Stock dividend payout ratio	50.00		%	54.84		%	51.52		%	50.00		%	48.48		%	52.31		%	48.48		%
Average basic common shares	166,188			165,745			165,762			165,762			165,736			165,966			165,574
Average diluted common shares	166,807			166,239			166,222			166,058			166,277			166,563			166,089
Period end common shares	166,169			165,720			165,758			165,759			165,773			166,169			165,773
Common shares repurchased	167			55			15			20			211			222			277,000
Common Stock market capitalization	$	3,368,246		$	3,488,406		$	3,091,387		$	2,928,962		$	3,453,052		$	3,368,246		$	3,453,052
ASSET QUALITY (excluding acquired and FDIC acquired loans, covered OREO) (2)
Gross charge-offs	$	10,798		$	13,014		$	15,514		$	13,398		$	11,298		$	23,814		$	19,865
Net charge-offs	4,687			7,630			11,407			8,029			6,672			12,317			10,859
Allowance for originated loan losses	105,175			102,915			105,135			104,055			101,682			105,175			101,682
Reserve for unfunded lending commitments	4,112			4,944			4,068			3,574			3,905			4,112			3,905
Nonperforming assets (NPAs)	115,653			112,293			94,498			107,058			117,311			115,653			117,311
Net charge-offs to average loans ratio	0.13		%	0.22		%	0.33		%	0.24		%	0.20		%	0.17		%	0.17		%
Allowance for originated loan losses to period-end loans	0.72		%	0.72		%	0.74		%	0.76		%	0.76		%	0.72		%	0.76		%
Allowance for credit losses to period-end loans	0.75		%	0.75		%	0.77		%	0.79		%	0.79		%	0.75		%	0.79		%
NPAs to loans and other real estate	0.79		%	0.78		%	0.67		%	0.78		%	0.87		%	0.79		%	0.87		%
Allowance for originated loan losses to nonperforming loans	124.77		%	139.64		%	238.37		%	221.22		%	184.40		%	124.77		%	184.40		%
Allowance for credit losses to nonperforming loans	129.65		%	146.35		%	247.60		%	228.82		%	191.48		%	129.65		%	191.48		%
CAPITAL & LIQUIDITY
Period end common equity to assets	11.27		%	11.12		%	11.13		%	11.24		%	11.02		%	11.27		%	11.02		%
Period end tangible common equity to assets (1)	8.48		%	8.30		%	8.24		%	8.31		%	8.09		%	8.48		%	8.09		%
Average equity to assets	11.62		%	11.53		%	11.60		%	11.54		%	11.51		%	11.57		%	11.51		%
Average equity to total loans	18.56		%	18.48		%	18.50		%	18.48		%	18.59		%	18.52		%	18.60		%
Average total loans to deposits	77.42		%	77.87		%	79.54		%	78.91		%	79.06		%	77.65		%	78.46		%
AVERAGE BALANCES
Assets	$	25,923,566		$	25,770,857		$	25,370,946		$	25,217,856		$	25,129,859		$	25,846,647		$	25,015,734
Deposits	20,967,450			20,635,665			20,002,793			19,957,586			19,682,662			20,801,559			19,735,499
Originated loans	14,489,924			14,187,793			13,863,910			13,528,268			13,092,972			14,338,858			12,892,495
Acquired loans, including FDIC acquired loans, less loss share receivable	1,743,799			1,881,965			2,047,167			2,219,488			2,468,035			1,812,881			2,592,270
Earning assets	23,121,303			22,890,082			22,747,631			22,548,977			22,352,721			23,005,692			22,227,267
Shareholders' equity	3,012,218			2,970,167			2,943,268			2,909,660			2,892,432			2,991,190			2,879,469
ENDING BALANCES
Assets	$	26,150,587		$	26,062,649		$	25,524,604		$	25,246,917		$	25,297,014		$	26,150,587		$	25,297,014
Deposits	20,952,643			21,101,366			20,108,003			19,821,916			19,673,850			20,952,643			19,673,850
Originated loans	14,665,631			14,389,513			14,118,505			13,648,325			13,355,912			14,665,631			13,355,912
Acquired loans, including FDIC acquired loans,less loss share receivable	1,669,420			1,826,501			1,948,493			2,140,029			2,337,378			1,669,420			2,337,378
Goodwill	741,740			741,740			741,740			741,740			741,740			741,740			741,740
Intangible assets	56,020			58,324			60,628			63,226			65,824			56,020			65,824
Earning assets	23,432,253			23,525,620			22,955,435			22,661,171			22,599,272			23,432,253			22,599,272
Total shareholders' equity	3,047,159			2,997,957			2,940,095			2,937,300			2,887,957			3,047,159			2,887,957

(1) Represents a non-GAAP financial measure. Refer to the Non-GAAP Financial Measures section for a reconciliation to GAAP financial measures.

(2) Due to the impact of business combination accounting and protection of FDIC loss share agreements, which provide considerable protection against credit risk, acquired loans, FDIC acquired loans and covered OREO are excluded from this table to provide for improved comparability to prior periods and better perspective into asset quality trends. George Washington and Midwest non-single family loss share agreements with the FDIC expired at March 31, 2015 and June 30, 2015, respectively. As of June 30, 2016, $65.0 million of FDIC acquired loans remained covered by single family loss share agreements, providing considerable protection against credit risk.

(3) Net income used to determine diluted EPS was reduced by the cash dividends payable on the Corporation's 5.875% Non-Cumulative Perpetual Preferred Stock, Series A of approximately $1.5 million in each of the three months ended June 30, 2016, March 31, 2016, December 31, 2015, September 30, 2015, and June 30, 2015.

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HIGHLIGHTS OF SECOND QUARTER OF 2016 PERFORMANCE

As previously reported, the Corporation announced a merger with Huntington Bancshares Incorporated. The details of the merger are contained within a Form 8-K filed by the Corporation on January 28, 2016.

The Corporation reported second quarter 2016 net income of $58.3 million, or $0.34 per diluted share.Excluding merger-related charges and nonmerger-related real estate write-downs primarily due to branch consolidations of $6.6 million, or $4.3 million after tax, EPS was $0.36¹ per diluted share.

Figure 2. Earnings Summary

										Change 2Q 2016 vs.
	2016			2016			2015			2016		2015
(Dollars in thousands, except per share amounts)	2nd qtr			1st qtr			2nd qtr			1st qtr		2nd qtr
Net interest income TE(1)	$	189,897		$	189,115		$	189,018		0.41	%	0.47	%
Diluted earnings per common share	0.34			0.31			0.33			9.68		3.03
Net interest margin on TE basis(1)	3.30		%	3.32		%	3.39		%
Return on average assets	0.90			0.84			0.90
Return on average common equity	7.79			7.33			7.85
Return on average tangible common equity(1)	11.10			10.52			11.44

(1) Represents a non-GAAP financial measure. Refer to the Non-GAAP Financial Measures section for a reconciliation to GAAP financial measures.

Net Interest Margin

The net interest margin on a TE basis decreased two basis points compared with the first quarter of 2016, due to the amortization of higher yielding covered and acquired loans offset by higher balances and higher yields on originated loans. During the second quarter 2016, the yield on originated loans increased three basis points compared with the first quarter of 2016.  At June 30, 2016, 81% of the Corporation's commercial loan portfolio is variable or floating rate and will support continued margin expansion in a rising rate environment. Yields in acquired and FDIC acquired loans decreased compared with the first quarter of 2016, while yields on interest-bearing liabilities remained consistent with the first quarter of 2016.

Loans

Average originated loans were $14.5 billion during the second quarter 2016, an increase of $302.1 million, or 2.13%, compared with the first quarter 2016, and an increase of $1.4 billion, or 10.67%, compared with the second quarter 2015. Originated loans grew in both the commercial and consumer portfolios across the footprint, predominantly in Michigan and Chicago as we continue to penetrate those markets. Average originated commercial loans increased$65.6 million, or 0.73%, compared with the prior quarter, and increased$573.2 million, or 6.74%, compared with the year-ago quarter. Average originated installment loans increased$206.0 million, or 6.76%, compared with the prior quarter, and increased$635.4 million, or 24.27%, compared with the year-ago quarter.

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Deposits

Average deposits were $21.0 billion during the second quarter 2016, an increase of $331.8 million, or 1.61%, compared with the first quarter 2016, and an increase of $1.3 billion, or 6.53%, compared with the second quarter 2015. Average core deposits were $18.9 billion during the second quarter 2016, or 89.95% of total average deposits, an increase of $428.6 million, or 2.33%, compared with the first quarter 2016 and an increase of $1.5 billion, or 8.44%, compared with the second quarter 2015. Deposit growth continued to be strong, reflecting seasonality and increased balances across the footprint. Despite decreases in short-term interest rates, deposit costs remained unchanged from the prior quarter.

Noninterest Income

Noninterest income, excluding gains and losses on securities transactions¹, for the second quarter 2016 was $63.0 million, a decrease of $4.1 million, or 6.18%, from the first quarter 2016 and a decrease of $3.1 million, or 4.64%, from the second quarter 2015. The decrease in noninterest income as a percentage of net revenue in the second quarter of 2016 compared with the first quarter of 2016 and first quarter of 2015 reflects $4.1 million of nonmerger-related real estate write-downs primarily due to branch consolidations, or $2.7 million of costs after tax expense which are included in Other operating income.

Noninterest Expense

Noninterest expense for the second quarter 2016 was $160.3 million, a decrease of $6.6 million, or 3.98%, from the first quarter 2016, and a decrease of $1.4 million, or 0.84%, from the second quarter 2015. Included in noninterest expense for the second quarter 2016 was $2.5 million of merger-related costs, or $1.6 million of after tax expense. Professional services expense decreased $3.9 million, or 46.51%, from the first quarter 2016, and $0.9 million, or 16.63%, from the second quarter 2015 primarily from merger-related costs. Salaries and wages decreased 0.7 million, or 0.95%, compared with the first quarter of 2016, demonstrating expense discipline. Other operating expense experienced a decrease of $2.4 million, or 15.34%, from the first quarter 2016 primarily due to a decrease in expense for the reserve for unfunded lending commitments, gain on sale of other real estate owned, which were offset by an increase in the expense for the FDIC true-up liability.

Provision for Income Taxes

The effective tax rate was 30.98% for the second quarter 2016, compared with 30.40% for the first quarter 2016, and 30.19% for the second quarter 2015.

Asset Quality (excluding acquired loans and covered assets)

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

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Figure 3. Asset Quality

										Change 2Q 2016 vs.
	2016			2016			2015			2016		2015
(Dollars in thousands)	2nd qtr			1st qtr			2nd qtr			1st qtr		2nd qtr
Net charge-offs	$	4,687		$	7,630		$	6,672		(38.57	)%	(29.75	)%
Net charge-offs on average originated loans	0.13		%	0.22		%	0.20		%
Nonperforming loans at period end	$	84,297		$	73,701		$	55,142		14.38	%	52.87	%
Nonperforming assets at period end	115,653			112,293			117,311			2.99	%	(1.41	)%
Allowance for loan losses	105,175			102,915			101,682			2.20	%	3.44	%
Allowance for loan losses to nonperforming loans	124.77		%	139.64		%	184.40		%
Provision for originated loan losses	$	6,947		$	5,410		$	10,809		28.41	%	(35.73	)%

Nonperforming loans totaled $84.3 million at June 30, 2016, an increase of $10.6 million, or 14.38%, compared with March 31, 2016 and an increase of $29.2 million, or 52.87%, compared with June 30, 2015 due to two notes, approximating $12.2 million, with the remaining principal balances being paid off in full subsequent to June 30, 2016.

Nonperforming assets totaled $115.7 million at June 30, 2016, an increase of $3.4 million, or 2.99%, compared with March 31, 2016 and a decrease of $1.7 million, or 1.41%, compared with June 30, 2015. Nonperforming assets at June 30, 2016 represented 0.79% of period-end originated loans plus noncovered other real estate compared with 0.78% at March 31, 2016 and 0.87% at June 30, 2015. Included in nonperforming assets as of June 30, 2016 were $19.0 million of OREO no longer covered by FDIC loss share agreements.

The allowance for originated loan losses totaled $105.2 million at June 30, 2016. At June 30, 2016, the allowance for originated loan losses was 0.72% of period-end originated loans, compared with 0.72% at March 31, 2016, and 0.76% at June 30, 2015. The allowance for credit losses is the sum of the allowance for originated loan losses and the reserve for unfunded lending commitments. The allowance for credit losses was 0.75% of period end originated loans at June 30, 2016, compared with 0.75% at March 31, 2016, and 0.79% at June 30, 2015. The allowance for credit losses to nonperforming loans was 129.65% at June 30, 2016, compared with 146.35% at March 31, 2016, and 191.48% at June 30, 2015.

Capital

Shareholders’ equity was $3.0 billion at June 30, 2016 and March 31, 2016 and $2.9 billion at June 30, 2015. The Corporation continued to have a strong capital position as tangible common equity to assets was 8.48% at June 30, 2016, compared with 8.30% at March 31, 2016 and 8.09% at June 30, 2015. The common share cash dividend paid in the second quarter 2016 was $0.17 per share.

At June 30, 2016, Basel III capital ratios on a transitional basis remain well in excess of applicable regulatory requirements, with a total risk-based capital ratio of 13.94%, and a common equity tier 1 risk-based capital ratio of 10.75%.

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REGULATION AND SUPERVISION

For information on regulatory developments, refer to the 2015 Form 10-K, in the section captioned "Regulatory and Supervision" in Item 1. "Business."

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NON-GAAP FINANCIAL MEASURES

Figure 4 below presents computations of earnings (loss) and certain other financial measures that exclude certain items that are included in the financial results presented in accordance with GAAP and are therefore considered non-GAAP financial measures. Management believes these non-GAAP financial measures enhance an investor's understanding of the business by providing a meaningful base for period-to-period comparisons, assisting in operating results analysis, and predicting future performance on the same basis as applied by Management and the Board of Directors. These non-GAAP financial measures are also used by Management to assess the performance of the Corporation's business, in comparison to the Corporation's other ongoing operations. Management does not consider the activities related to the adjustments to be indications of ongoing operations. Management and the Board of Directors utilize these non-GAAP financial measures as follows, among others:

• Preparation of operating budgets

• Monthly financial performance reporting

• Monthly, quarterly and year-to-date assessment of the Corporation's business

• Monthly close-out reporting of consolidated results (Management only)

• Presentations to investors of corporate performance

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

Total revenue is calculated as net interest income-TE plus noninterest income and excludes net securities gains or losses. Management believes that noninterest income without net securities gains or losses is more indicative of the Corporation's performance because it isolates income that is primarily client relationship and client transaction driven and is more indicative of normalized operations.

The efficiency ratio is a non-GAAP financial measure which measures productivity and is generally calculated as noninterest expense divided by total revenue-TE. The efficiency ratio removes the impact of the Corporation's intangible asset amortization from the calculation. The adjusted efficiency ratio further removes the impact restructure, merger-related, and branch closing costs. The fee income ratio is another non-GAAP financial measure calculated as noninterest income without net securities gains or losses divided by total revenue-TE. Management uses these ratios to monitor performance and believes these measures provide meaningful information to investors.

Tangible common equity ratios have been a focus of some investors in analyzing the capital position of the Corporation absent the effects of intangible assets and preferred stock. Traditionally, the banking regulators have assessed bank and BHC capital adequacy based on Tier 1 capital, the calculation of which is codified in federal banking regulations. The Corporation calculates its risk-based capital ratios under guidelines adopted by the Federal Reserve based on Basel III, which became effective for the Corporation and the Bank on January 1, 2015. The new Basel III rules added CET1 and CET1 risk-based capital ratios. Analysts and banking regulators have assessed the Corporation's capital adequacy using the tangible common shareholders' equity and/or the CET1 measure, on a risk-weighted basis.

CET1 capital is often expressed as a percentage of risk-weighted assets. Under the risk-based capital framework, a bank's various balance sheet assets and credit equivalent amounts of off-balance sheet items are

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assigned to one of several regulatory risk categories. The aggregated dollar amount in each category is then multiplied by the risk weighting assigned to that category. The resulting weighted values are added together and this sum is the risk-weighted assets total that, as adjusted, comprises the denominator of certain risk-based capital ratios. Tier 1 capital is then divided by this denominator (risk-weighted assets) to determine the Tier 1 capital ratio. Adjustments are made to Tier 1 capital to arrive at CET1 (non-GAAP). CET1 is also divided by the risk-weighted assets to determine the CET1 risk-based capital ratio. The amounts disclosed as risk-weighted assets are calculated consistent with current banking regulatory requirements.

Basel III rules are not formally defined by GAAP; therefore, these measures are considered to be non-GAAP financial measures, and other entities may calculate them differently from the Corporation’s disclosed calculations. Since analysts and banking regulators may assess the Corporation’s capital adequacy using the Basel III framework, Management believes that it is useful to provide investors information enabling them to assess the Corporation’s capital adequacy on the same basis.

Tangible book value per share (non-GAAP) and common equity per share (non-GAAP) are approximate measures of the Corporation's common equity excluding goodwill and other intangible assets, and liquidation values. Management uses these values to evaluate the current market value and believes these measures are useful for evaluating the performance of a business consistently, whether acquired or developed internally. These per share values are calculated by deducting preferred stock from shareholder's equity for common equity value (non-GAAP) and deducting intangible assets from the common equity value for tangible book value (non-GAAP). Both values (numerator) are then divided by period end Common Stock outstanding.

Adjusted net income, a non-GAAP financial measure, eliminates the effects of restructure, merger-related, and nonmerger-related real estate due to branch consolidation costs. This measure makes it easier to analyze our results by presenting them on a more comparable basis.

Return on average tangible common shareholders' equity calculates the return on average common shareholders' equity excluding goodwill and other intangible assets. This measure is useful for evaluating the performance of a business consistently, whether acquired or developed internally.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of results as reported under GAAP. These non-GAAP measures are not necessarily comparable to similar measures that may be represented by other companies.

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Figure 4. GAAP to Non-GAAP Reconciliations

(Dollars in thousands)			June 30, 2016			December 31, 2015			June 30, 2015
Tangible common equity to tangible assets at period end
	Shareholders’ equity (GAAP)		$	3,047,159		$	2,940,095		$	2,887,957
	Less:	Intangible assets	56,020			60,628			65,824
		Goodwill	741,740			741,740			741,740
		Preferred Stock	100,000			100,000			100,000
	Tangible common equity (non-GAAP)		$	2,149,399		$	2,037,727		$	1,980,393
	Total assets (GAAP)		26,150,587			25,524,604			25,297,014
	Less:	Intangible assets	56,020			60,628			65,824
		Goodwill	741,740			741,740			741,740
	Tangible assets (non-GAAP)		$	25,352,827		$	24,722,236		$	24,489,450
	Tangible common equity to tangible assets ratio (non-GAAP)		8.48		%	8.24		%	8.09		%
Capital (1)			(Basel III)			(Basel III)			(Basel III)
	Shareholders' equity (GAAP)		$	3,047,159		$	2,940,095		$	2,887,957
	Plus:	Net unrealized (gains)/losses on investment securities related to AOCI	(31,303		)	16,946			3,287
		Defined benefit postretirement plan losses related to AOCI	60,776			62,328			64,334
		Goodwill (GAAP)	741,740			741,740			741,740
		Less: Deferred tax liability associated with goodwill (1)	31,777			26,886			21,472
	Less:	Net non-qualifying goodwill (regulatory) (1)	709,963			714,854			720,268
		Intangible assets (GAAP)	56,020			60,628			65,824
		Less: Deferred tax liability associated with intangible assets (1)	32,743			43,856			47,636
	Less:	Net intangible assets (regulatory)	23,277			16,772			18,188
		Disallowed deferred tax asset (1)	83,132			67,487			74,888
		Other adjustments (1)	55,421			101,231			112,332
	Tier 1 capital (regulatory)		2,204,839			2,119,025			2,029,902
	Less:	Preferred Stock	100,000			100,000			100,000
	Plus:	Tier 1 capital adjustments	55,421			100,000			100,000
	CET1 capital (non-GAAP) (1)		2,160,260			2,119,025			2,029,902
	Risk-weighted assets (regulatory) (1)		$	19,930,314		$	19,891,759		$	19,386,096
	CET1 risk-based capital ratio (non-GAAP) (1)		10.84		%	10.65		%	10.47		%

(Dollars in thousands, except per share amounts)			June 30, 2016		December 31, 2015		June 30, 2015
Book value, common equity value and tangible book value, per share
	Shareholders’ equity (GAAP)		$	3,047,159	$	2,940,095	$	2,887,957
	Less:	Preferred Stock	100,000		100,000		100,000
	Common shareholders' equity (non-GAAP)		2,947,159		2,840,095		2,787,957
	Less:	Intangible assets	56,020		60,628		65,824
		Goodwill	741,740		741,740		741,740
	Tangible common equity (non-GAAP)		$	2,149,399	$	2,037,727	$	1,980,393
	Period end common shares		166,169		165,758		165,773
	Book value per share		$	18.34	$	17.74	$	17.42
	Common equity per share		17.74		17.13		16.82
	Tangible book value per common share		12.94		12.29		11.95

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GAAP to Non-GAAP Reconciliations, continued
			Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)			2016			2015			2016			2015
	Net income (GAAP)		$	58,309		$	56,584		$	112,445		$	113,723
	Adjustments to net income, net of tax (2)
	Plus:	Merger-related nonpersonnel expenses	799			—			4,013			—
		Real estate write-downs due branch consolidation costs	2,679			1,149			2,679			1,932
		Merger-related personnel, and restructure expenses	813			—			1,145			1,149
		Total adjusted charges	4,291			1,149			7,837			3,081
		Adjusted net income (non-GAAP)	$	62,600		$	57,733		$	120,282		$	116,804
	Annualized net income (GAAP)		$	234,518		$	226,958		$	226,126		$	229,331
		Annualized adjusted net income (non-GAAP)	251,776			231,566			241,886			235,544
	Average assets (GAAP)		25,923,566			25,129,859			25,846,647			25,015,734
	Average equity (GAAP)		3,012,218			2,892,432			2,991,190			2,879,469
	Less:	Average Preferred Stock	100,000			100,000			100,000			100,000
	Average common shareholders' equity (non-GAAP)		2,912,218			2,792,432			2,891,190			2,779,469
	Less:	Average intangible assets	57,142			67,089			58,294			68,383
		Average goodwill	741,740			741,740			741,740			741,740
	Average tangible common equity (non-GAAP)		$	2,113,336		$	1,983,603		$	2,091,156		$	1,969,346
	Return on average assets (GAAP)		0.90		%	0.90		%	0.87		%	0.92		%
	Adjusted return on average assets net of adjusted charges (non-GAAP)		0.97		%	0.92		%	0.94		%	0.94		%
	Return on average equity (GAAP)		7.79		%	7.85		%	7.56		%	7.96		%
	Adjusted return on average equity net of adjusted charges (non-GAAP)		8.36		%	8.01		%	8.09		%	8.18		%
	Return on average tangible common equity (non-GAAP) (3)		11.10		%	11.44		%	10.81		%	11.65		%
	Adjusted return on average tangible common equity net adjusted charges (non-GAAP)		11.91		%	11.67		%	11.57		%	11.96		%
	Net income used in diluted EPS calculation		$	56,344		$	54,648		$	108,552		$	109,848
	Plus:	Merger-related nonpersonnel expenses	799			—			4,013			—
		Real estate write-downs due branch consolidation costs	2,679			1,149			2,679			1,932
		Merger-related personnel, and restructure expenses	813			—			1,145			1,149
		Adjusted net income used in diluted EPS calculation (non-GAAP)	60,635			55,797			116,389			112,929
	Weighted average number of common shares outstanding - diluted		166,807			166,277			166,563			166,089
	Diluted earnings per common share		$	0.34		$	0.33		$	0.65		$	0.66
		Adjusted diluted earnings per common share (non-GAAP)	0.36			0.34			0.70			0.68

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GAAP to Non-GAAP Reconciliations, continued

			Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)			2016			2015			2016			2015
	Net interest income (GAAP)		$	186,078		$	185,118		$	371,234		$	370,741
	TE Adjustment		3,819			3,900			7,778			7,831
	Net interest income TE (non-GAAP)		189,897			189,018			379,012			378,572
	Noninterest income (GAAP)		65,115			66,582			132,509			132,429
	Adjustments to noninterest income (2)
	Less:	Securities gains/(losses)	2,164			567			2,459			921
	Plus:	Real estate write-downs due branch consolidation costs (3)	4,121			1,768			4,121			2,973
		Adjusted noninterest income (non-GAAP)	67,072			67,783			134,171			134,481
	Adjusted total revenue, TE excluding securities gains/(losses) (non-GAAP)		256,969			256,801			513,183			513,053
	Noninterest expense (GAAP)		160,320			161,674			327,283			322,326
	Adjustments to noninterest expense (2)
	Less:	Intangible asset amortization	2,304			2,598			4,608			5,196
		Adjusted noninterest expense, excluding amortization of intangibles	158,016			159,076			322,675			317,130
	Less:	Acquisition related personnel, and restructure expesnes(3)	1,251			—			1,762			1,767
		Acquisition related nonpersonnel expenses (3)	1,230			—			6,174			—
		Adjusted noninterest expense (non-GAAP)	$	155,535		$	159,076		$	314,739		$	315,363
	Net interest margin on a TE basis (non-GAAP)		3.30		%	3.39		%	3.31		%	3.43		%
	Fee income ratio (non-GAAP)		24.90		%	25.88		%	25.55		%	25.78		%
	Efficiency ratio, excluding amortization of intangible assets and security gains/(losses) (non-GAAP)		62.49		%	62.37		%	63.39		%	62.17		%
	Adjusted efficiency ratio (non-GAAP)		60.53		%	61.95		%	61.33		%	61.47		%

(1) The Basel III capital rules, effective January 1, 2015, replace tier 1 common equity and the associated tier 1 common equity ratio with CET1 and the CET1 risk-based capital ratio. June 30, 2016 figures are preliminary and presented on a Basel III basis and reflect transitional capital requirements and phase-in provisions, including the standardized approach for calculating risk weighted assets.

(2) Management believes these adjustments increase comparability of period-to-period results and uses these measures to assess performance and believes investors may find them useful in their analysis of the Corporation. It is possible that the activities related to the adjustments may recur; however, Management does not consider the activities related to the adjustments to be indications of ongoing operations.

(3) Management determines these costs to be significant, nonreccurring items in the period and, therefore, removes these additional costs in calculating an adjusted efficiency ratio. Management believes removal of these significant, nonreccurring items improves comparability period-to-period.

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RESULTS OF OPERATIONS

Figure 5. Average Tax-Equivalent Balance Sheets - Quarter to Date

	Three Months Ended
	June 30, 2016							March 31, 2016							June 30, 2015
(Dollars in thousands)	Average Balance			Interest (1)		Average Rate		Average Balance			Interest (1)		Average Rate		Average Balance			Interest (1)		Average Rate
ASSETS
Cash and cash equivalents	$	622,355						$	724,095						$	518,820
Investment securities and federal funds sold:
U.S. Treasury securities and U.S. government agency obligations (taxable)	5,558,522			$	28,018	2.03	%	5,470,079			$	27,763	2.04	%	5,452,598			$	27,098	1.99	%
Obligations of states and political subdivisions (tax exempt)	702,550			7,755		4.44	%	743,159			8,161		4.42	%	724,653			8,443		4.67	%
Other securities and federal funds sold	613,677			5,331		3.49	%	592,144			5,386		3.66	%	594,478			5,077		3.43	%
Total investment securities and federal funds sold	6,874,749			41,104		2.40	%	6,805,382			41,310		2.44	%	6,771,729			40,618		2.41	%
Loans held for sale	3,652			33		3.63	%	5,253			52		3.98	%	3,631			46		5.08	%
Loans, including loss share receivable (2)	16,242,902			164,022		4.06	%	16,079,447			163,285		4.08	%	15,577,361			162,610		4.19	%
Total earning assets	23,121,303			$	205,159	3.57	%	22,890,082			$	204,647	3.60	%	22,352,721			$	203,274	3.65	%
Total allowance for loan losses	(151,267		)					(152,600		)					(146,558		)
Other assets	2,331,175							2,309,280							2,404,876
Total assets	$	25,923,566						$	25,770,857						$	25,129,859
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	6,035,959		$	—	—	%	$	5,990,796		$	—	—	%	$	5,722,240		$	—	—	%
Interest-bearing	3,601,589			1,013		0.11	%	3,590,598			929		0.10	%	3,203,836			783		0.10	%
Savings and money market accounts	9,223,623			5,641		0.25	%	8,851,135			5,652		0.26	%	8,467,845			5,588		0.26	%
Certificates and other time deposits	2,106,279			3,116		0.60	%	2,203,136			3,289		0.60	%	2,288,741			2,510		0.44	%
Total deposits	20,967,450			9,770		0.19	%	20,635,665			9,870		0.19	%	19,682,662			8,881		0.18	%
Securities sold under agreements to repurchase	689,279			109		0.06	%	844,290			265		0.13	%	1,285,920			329		0.10	%
Wholesale borrowings	376,838			1,121		1.20	%	473,149			1,234		1.05	%	393,379			1,129		1.15	%
Long-term debt	519,376			4,262		3.30	%	505,376			4,163		3.31	%	508,744			3,917		3.09	%
Total interest-bearing liabilities	16,516,984			15,262		0.37	%	16,467,684			15,532		0.38	%	16,148,465			14,256		0.35	%
Other liabilities	358,405							342,210							366,722
Shareholders’ equity	3,012,218							2,970,167							2,892,432
Total liabilities and shareholders’ equity	$	25,923,566						$	25,770,857						$	25,129,859
Net yield on earning assets	$	23,121,303		$	189,897	3.30	%	$	22,890,082		$	189,115	3.32	%	$	22,352,721		$	189,018	3.39	%
Interest rate spread						3.20	%						3.22	%						3.30	%

(1) The net yield on earning assets is calculated as annualized taxable-equivalent net interest income divided by average earning assets. The interest income earned on certain earning assets is completely or partially exempt from federal and/or state income taxes. As such, these tax-exempt securities typically yield lower returns than taxable securities. To provide more meaningful comparisons of net interest margins for all earning assets, net interest income on a taxable-equivalent basis is used in calculating net interest margin by increasing the interest earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under generally accepted accounting principles in the Consolidated Statements of Income. The taxable-equivalent adjustments to net interest income were $3.8 million, $4.0 million, and $3.9 million for the three months ended June 30, 2016, March 31, 2016, and June 30, 2015, respectively.

(2) Nonaccrual loans have been included in the average balances.

100

Figure 6. Average Tax-Equivalent Balance Sheets - Year to Date

	Six Months Ended
	June 30, 2016							June 30, 2015
(Dollars in thousands)	Average Balance			Interest (1)		Average Rate		Average Balance			Interest (1)		Average Rate
ASSETS
Cash and cash equivalents	$	673,225						$	540,920
Investment securities and federal funds sold:
U.S. Treasury securities and U.S. Government agency obligations (taxable)	5,514,302			$	55,782	2.03	%	5,391,501			$	53,858	2.01	%
Obligations of states and political subdivisions (tax exempt)	722,854			15,916		4.43	%	728,882			17,590		4.87	%
Other securities and federal funds sold	602,910			10,717		3.57	%	599,648			10,267		3.45	%
Total investment securities and federal funds sold	6,840,066			82,415		2.42	%	6,720,031			81,715		2.45	%
Loans held for sale	4,453			85		3.84	%	4,550			103		4.56	%
Loans, including loss share receivable (2)	16,161,173			327,306		4.07	%	15,502,686			324,902		4.23	%
Total earning assets	23,005,692			$	409,806	3.58	%	22,227,267			$	406,720	3.69	%
Total allowance for loan losses	(151,935		)					(145,467		)
Other assets	2,319,665							2,393,014
Total assets	$	25,846,647						$	25,015,734
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	6,013,378		$	—	—	%	$	5,725,483		$	—	—	%
Interest-bearing	3,596,094			1,942		0.11	%	3,206,545			1,550		0.10	%
Savings and money market accounts	9,037,379			11,293		0.25	%	8,504,794			11,135		0.26	%
Certificates and other time deposits	2,154,708			6,405		0.60	%	2,298,677			4,687		0.41	%
Total deposits	20,801,559			19,640		0.19	%	19,735,499			17,372		0.18	%
Securities sold under agreements to repurchase	766,785			374		0.10	%	1,156,113			572		0.10	%
Wholesale borrowings	424,993			2,355		1.11	%	372,302			2,289		1.24	%
Long-term debt	512,376			8,425		3.31	%	505,125			7,915		3.16	%
Total interest-bearing liabilities	16,492,335			30,794		0.38	%	16,043,556			28,148		0.35	%
Other liabilities	349,744							367,226
Shareholders’ equity	2,991,190							2,879,469
Total liabilities and shareholders’ equity	$	25,846,647						$	25,015,734
Net yield on earning assets	$	23,005,692		$	379,012	3.31	%	$	22,227,267		$	378,572	3.43	%
Interest rate spread						3.20	%						3.34	%

(1) The net yield on earning assets is calculated as annualized taxable-equivalent net interest income divided by average earning assets. The interest income earned on certain earning assets is completely or partially exempt from federal and/or state income taxes. As such, these tax-exempt securities typically yield lower returns than taxable securities. To provide more meaningful comparisons of net interest margins for all earning assets, net interest income on a taxable-equivalent basis is used in calculating net interest margin by increasing the interest earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under generally accepted accounting principles in the Consolidated Statements of Income. The taxable-equivalent adjustments to net interest income were $7.8 million and $7.8 million for the six months endedJune 30, 2016 and June 30, 2015, respectively.

(2) Nonaccrual loans have been included in the average balances.

101

Net Interest Income

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

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

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

Figure 7. Changes in Net Interest Income Tax-Equivalent Rate/Volume Analysis

	Three Months Ended June 30,									Six Months Ended June 30,
	2016 and 2015									2016 and 2015
	Increase (Decrease) In Interest Income/Expense									Increase (Decrease) In Interest Income/Expense
(In thousands)	Due to Volume			Due to Rate			Net			Due to Volume			Due to Rate			Net
INTEREST INCOME-TE
Investment securities and federal funds sold:
Taxable	$	672		$	502		$	1,174		$	1,361		$	1,013		$	2,374
Tax-exempt	(253		)	(435		)	(688		)	(145		)	(1,529		)	(1,674		)
Loans held for sale	—			(13		)	(13		)	(2		)	(16		)	(18		)
Loans	6,819			(5,407		)	1,412			13,541			(11,137		)	2,404
Total interest income-TE	7,238			(5,353		)	1,885			14,755			(11,669		)	3,086
INTEREST EXPENSE
Interest on deposits:
Interest bearing	104			126			230			199			193			392
Savings and money market accounts	479			(426		)	53			679			(521		)	158
Certificates and other time deposits	(213		)	819			606			(310		)	2,028			1,718
Securities sold under agreements to repurchase	(120		)	(100		)	(220		)	(190		)	(8		)	(198		)
Wholesale borrowings	(48		)	40			(8		)	305			(239		)	66
Long-term debt	83			262			345			114			396			510
Total interest expense	285			721			1,006			797			1,849			2,646
Net interest income-TE	$	6,953		$	(6,074	)	$	879		$	13,958		$	(13,518	)	$	440

Note: Rate/volume variances are allocated on the basis of absolute value of the change in each.

102

The following table in Figure 8 provides net interest income-TE and net interest margin totals for the three and six months ended June 30, 2016 and 2015:

Figure 8. Net Interest Income and Net Interest Margin

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2016			2015			2016			2015
Net interest income	$	186,078		$	185,118		$	371,234		$	370,741
Tax equivalent adjustment	3,819			3,900			7,778			7,831
Net interest income-TE	189,897			189,018			379,012			378,572
Average earning assets	$	23,121,303		$	22,352,721		23,005,692			22,227,267
Net interest margin	3.30		%	3.39		%	3.31		%	3.43		%

For the three months ended June 30, 2016, net interest income-TE was $189.9 million, an increase of $0.9 million, or 0.47%, from the year ago period. The net interest margin for the three months ended June 30, 2016 was 3.30%, 9 basis points lower than 3.39% for the same year ago quarter. The decrease in taxable equivalent net interest income was attributable to a decrease in acquired and FDIC acquired loan yields, slightly offset by the benefit provided by an increase in average earning assets. Average earning assets increased by $0.8 billion, or 3.44%, for the three months ended June 30, 2016, compared to the same period in 2015. The increase in average earnings assets primarily reflected a $665.5 million increase in average total loans and a $103.0 million increase in average investments. The average yield on earning assets decreased from 3.65% in the second quarter of 2015 to 3.57% in the second quarter of 2016 primarily from decreased yields on the loan portfolios. Originated loan yields were up14 basis points to 3.61% from the year ago quarter due to competitive pricing pressures in a low rate environment and repayments on higher yielding loans. The yield on FDIC acquired loans was down116 basis points from the year ago quarter due to a $2.6 million decrease in FDIC acquired loan discount accretion, partly offset by a $0.8 million favorable reduction in the indemnification asset amortization. These reductions are the result of the continued decline in FDIC acquired loan average balances, which declined $84.5 million, or 30.0%, from the year ago quarter. The yield on acquired loans was also down16 basis point to 7.96% contributing to the overall decrease in total loan yields

Quarterly average balances for investment securities were up from the year ago quarter increasing investment interest income by $0.4 million. Lower quarterly average wholesale borrowings and slightly lower rates during the second quarter of 2016 caused a net decrease in interest expense of $8.0 thousand compared to the same year ago period. The cost of funds for the year as a percentage of average earning assets increased to 0.07% for the three months ended June 30, 2016 from 0.06% at June 30, 2015.

103

Noninterest Income

Excluding investment securities transactions, noninterest income for the three and six months ended June 30, 2016 totaled $63.0 million and $130.1 million, respectively and totaled $66.0 million and $131.5 million for the three and six months ended June 30, 2015. Noninterest income decreased$3.1 million, or 4.64%, compared to the three months ended June 30, 2015, and decreased$1.5 million, or 1.11% compared to the six months ended June 30,2015. Noninterest income as a percentage of net revenue (net interest income-TE plus noninterest income, less securities transactions) was 24.90% for the three months ended June 30, 2016, a decrease from 25.88% in the year ago quarter, and 25.55% for the six months ended June 30, 2016, a decrease from 25.78% in 2015. Significant changes in noninterest income for the three and six months ended June 30, 2016 are discussed immediately after Figure 9.

Figure 9. Noninterest Income

	Three Months Ended June 30,						% Increase (Decrease) 2016 vs. 2015		Six Months Ended June 30,						% Increase (Decrease) 2016 vs. 2015
(Dollars in thousands)	2016			2015					2016			2015
Trust department income	$	11,167		$	10,820		3.21	%	$	21,451		$	20,969		2.30	%
Service charges on deposits	16,263			16,704			(2.64	)%	31,849			32,372			(1.62	)%
Credit card fees	14,942			14,124			5.79	%	28,520			26,773			6.53	%
ATM and other service fees	6,427			6,345			1.29	%	12,661			12,444			1.74	%
Bank owned life insurance income	4,186			3,697			13.23	%	7,882			7,289			8.14	%
Investment services and life insurance	3,851			3,871			(0.52	)%	7,756			7,575			2.39	%
Investment securities gains/(losses), net	2,164			567			281.66	%	2,459			921			166.99	%
Loan sales and servicing income	1,995			3,276			(39.10	)%	3,847			4,876			(21.10	)%
Other operating income	4,120			7,178			(42.60	)%	16,084			19,210			(16.27	)%
Total noninterest income	$	65,115		$	66,582		(2.20	)%	$	132,509		$	132,429		0.06	%
Noninterest income as a percent of net revenue (1)	24.90		%	25.88		%			25.55		%	25.78		%

(1) TE net interest income plus noninterest income, less gains/(losses) from securities.

The decrease in noninterest income as a percentage of net revenue in the second quarter of 2016 compared with the first quarter of 2016 and second quarter of 2015 reflects $4.1 million of nonmerger-related real estate write-downs primarily due to branch consolidations, or $2.7 million of costs after tax expense which are included in Other operating income.

104

Noninterest Expense

Noninterest expense for the three and six months ended June 30, 2016 totaled $160.3 million and $327.3 million, respectively, compared with $161.7 million and $322.3 million in the same periods a year ago. This resulted in a decrease of $1.4 million, or 0.84% for the quarter-to-date period, and an increase of $5.0 million of 1.54% for the year-to-date period. Significant changes in noninterest expense for the three and six months ended June 30, 2016 are discussed immediately after Figure 10.

Figure 10. Noninterest Expense

	Three Months Ended June 30,				% Increase (Decrease) 2016 vs 2015		Six Months Ended June 30,				% Increase (Decrease) 2016 vs 2015
(Dollars in thousands)	2016		2015				2016		2015
Salaries and wages	$	68,752	$	67,485	1.88	%	$	138,162	$	139,400	(0.89	)%
Pension and employee benefits	18,037		18,535		(2.69	)%	34,507		37,146		(7.10	)%
Net occupancy expense	13,466		13,727		(1.90	)%	28,240		29,681		(4.85	)%
Equipment expense	12,078		12,592		(4.08	)%	24,486		23,617		3.68	%
Taxes, other than federal income taxes	1,922		2,032		(5.41	)%	3,953		4,045		(2.27	)%
Stationery, supplies and postage	2,945		3,370		(12.61	)%	6,564		6,898		(4.84	)%
Bankcard, loan processing, and other costs	12,269		12,461		(1.54	)%	23,277		23,600		(1.37	)%
Advertising	3,685		3,103		18.76	%	6,946		5,850		18.74	%
Professional services	4,467		5,358		(16.63	)%	12,818		9,368		36.83	%
Telephone	2,115		2,599		(18.62	)%	4,538		5,173		(12.28	)%
Amortization of intangibles	2,304		2,598		(11.32	)%	4,608		5,196		(11.32	)%
FDIC insurance expense	5,192		5,077		2.27	%	10,637		10,244		3.84	%
Other operating expense	13,088		12,737		2.76	%	28,547		22,108		29.13	%
Total noninterest expense	$	160,320	$	161,674	(0.84	)%	$	327,283	$	322,326	1.54	%

Included in noninterest expense for the second quarter 2016 was $2.5 million of merger-related costs, or $1.6 million of after tax expense. Salaries and wages increased $1.3 million or 1.88% due to merit increases compared to the second quarter of 2015, yet decreased year over year due to fewer full time equivalent employees. Other operating expense increased $0.4 million, or 2.76% compared to the second quarter due to an increase in third party service provider fees, offset by gain on sales of OREO, and a decrease in the reserve for unfunded lending commitments. On a year over year comparison, other operating expense increased $6.4 million, or 29.13%, due to third-party service provider fees, OREO expenses and an increase in the reserve for unfunded lending commitments.

Income Taxes

Income tax expense was $26.2 million and $24.5 million for the three months ended June 30, 2016 and 2015, respectively. The effective income tax rate for the three months ended June 30, 2016 was 30.98% compared to 30.19% for the three months ended June 30, 2015.

Income tax expense was $49.8 million and $49.9 million for the six months endedJune 30, 2016 and 2015, respectively. The effective income tax rate for the six months endedJune 30, 2016 was 30.70% compared to 30.50% for the six months endedJune 30, 2015.

105

LINE OF BUSINESS RESULTS

The Corporation's profitability is primarily dependent on the net interest income, provision for credit losses, non-interest income and operating expenses of its commercial and retail segments as well as the asset management and trust operations of the wealth segment.

The following tables present a summary of financial results for the three and six months ended June 30, 2016 and 2015. A description of each business line, important financial performance data and the methodologies used to measure financial performance are presented in Note 7 (Segment Information) to the consolidated financial statements.

Figure 11. Line of Business Results

	Commercial				Retail				Wealth						Other						FirstMerit Consolidated
June 30, 2016	QTD		YTD		QTD		YTD		QTD			YTD			QTD			YTD			QTD		YTD
(In thousands)
OPERATIONS:
Net interest income/(loss) -TE	$	102,754	$	206,796	$	94,369	$	189,096	$	6,314		$	12,867		$	(13,540	)	$	(29,747	)	$	189,897	$	379,012
Provision/(recapture) for loan losses	1,070		6,842		5,123		9,169		(20		)	(175		)	218			(1,636		)	6,391		14,200
Noninterest income	20,782		41,961		22,079		45,673		15,129			29,437			7,125			15,438			65,115		132,509
Noninterest expense	57,201		118,221		84,880		173,575		13,883			27,236			4,356			8,251			160,320		327,283
Net income/(loss)	41,486		78,539		17,189		33,816		4,927			9,908			(5,293		)	(9,818		)	58,309		112,445
AVERAGES:
Assets	$	9,600,103	$	9,596,152	$	6,370,350	$	6,301,303	$	314,752		$	310,159		$	9,638,361		$	9,639,033		$	25,923,566	$	25,846,647
Loans	9,721,866		9,715,827		6,173,352		6,097,054		306,028			301,586			41,656			46,706			16,242,902		16,161,173
Earnings assets	10,081,198		10,077,716		6,178,619		6,103,154		306,028			301,586			6,555,458			6,523,236			23,121,303		23,005,692
Deposits	7,269,121		7,373,805		11,003,769		11,014,512		1,284,516			1,302,113			1,410,044			1,111,129			20,967,450		20,801,559
Economic capital	1,251,845		1,252,069		867,958		870,360		121,824			126,706			770,591			742,055			3,012,218		2,991,190

106

	Commercial				Retail				Wealth						Other						FirstMerit Consolidated
June 30, 2015	QTD		YTD		QTD		YTD		QTD			YTD			QTD			YTD			QTD		YTD
(In thousands)
OPERATIONS:
Net interest income/(loss) -TE	$	102,528	$	205,228	$	92,501	$	184,527	$	5,452		$	10,932		$	(11,463	)	$	(22,115	)	$	189,018	$	378,572
Provision/(recapture) for loan losses	2,285		1,759		8,447		15,981		(1		)	(171		)	(1,765		)	(355		)	8,966		17,214
Noninterest income	21,918		44,408		23,964		45,701		14,816			28,792			5,884			13,528			66,582		132,429
Noninterest expense	61,032		122,685		87,799		176,070		13,461			27,181			(618		)	(3,610		)	161,674		322,326
Net income/(loss)	38,963		79,816		13,142		24,815		4,425			8,264			54			828			56,584		113,723
AVERAGES:
Assets	$	9,437,824	$	9,445,975	$	5,951,665	$	5,898,835	$	290,798		$	296,461		$	9,449,572		$	9,374,463		$	25,129,859	$	25,015,734
Loans	9,533,843		9,520,262		5,702,015		5,636,666		281,013			286,484			60,490			59,274			15,577,361		15,502,686
Earnings assets	9,828,867		9,811,770		5,707,400		5,645,469		281,013			286,484			6,535,441			6,483,544			22,352,721		22,227,267
Deposits	6,777,434		6,831,887		11,105,954		11,115,005		1,188,563			1,214,617			610,711			573,990			19,682,662		19,735,499
Economic capital	1,355,049		1,349,289		767,803		763,446		111,770			109,969			657,810			656,765			2,892,432		2,879,469

The commercial segment's net income resulted in an increase of $2.5 million, or 6.48%, for the three months ended June 30, 2016 to $41.5 million, from $39.0 million for the three months ended June 30, 2015. TE adjusted net interest income for the commercial segment totaled $102.8 million for the three months ended June 30, 2016 compared to $102.5 million for the three months ended June 30, 2015, an increase of $0.2 million, or 0.22%. The provision for loan losses for the commercial segment was $1.1 million for the three months ended June 30, 2016 compared to $2.3 million for the three months ended June 30, 2015. Net charge-offs decreased to $1.2 million for the three months ended June 30, 2016, compared to $3.2 million during the same period in 2015. Noninterest income decreased $1.1 million to $20.8 million for the three months ended June 30, 2016 compared to $21.9 million for the same period in 2015, due primarily to lower deposit fees, letter of credit fees, and FDIC recoveries. Noninterest expense for the commercial segment was $57.2 million for the three months ended June 30, 2016, down from $61.0 million for the same period of 2015 due to lower legal fees, business development expense, and personnel expenses.

The retail segment's net income increased $4.0 million, or 30.79%, for the three months ended June 30, 2016 to $17.2 million, from $13.1 million for the three months ended June 30, 2015. Net interest income totaled $94.4 million for the three months ended June 30, 2016 compared to $92.5 million for the three months ended June 30, 2015, an increase of $1.9 million, or 2.02%. The increase was due to a $471.3 million increase in loans balances, primarily in Indirect Auto and Recreational lending. Provision for loan losses totaled $5.1 million for the three months ended June 30, 2016 compared to $8.4 million for the three months ended June 30, 2015, a decrease of $3.3 million, or 39.35%. Net charge-offs decreased to $3.6 million for the three months ended June 30, 2016, compared to $4.0 million during the same period in 2015. Noninterest income was $22.1 million for the three months ended June 30, 2016 compared to $24.0 million for the three months ended June 30, 2015, a decrease of $1.9 million, or 7.87%, primarily attributable to a lower mortgage servicing income and branch closure related charges. Noninterest expense decreased$2.9 million, or 3.32%, to $84.9 million for the three months ended June 30, 2016 compared to $87.8 million for the three months ended June 30, 2015 due to lower occupancy and OREO expenses, as well as the reduction resulting from operating losses that occurred in the second quarter of 2015.

The wealth segment's net income increased $0.5 million, or 11.34%, for the three months ended June 30,

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2016 to $4.9 million, from $4.4 million for the three months ended June 30, 2015. Net interest income totaled $6.3 million for the three months ended June 30, 2016 compared to $5.5 million for the three months ended June 30, 2015, an increase of $0.9 million, or 15.81%. Noninterest income was $15.1 million for the three months ended June 30, 2016 compared to $14.8 million for the three months ended June 30, 2015, an increase of $0.3 million, or 2.11%, attributable to increased trust income. Noninterest expense increased $0.4 million, or 3.13%, to $13.9 million for the three months ended June 30, 2016 compared to $13.5 million for the three months ended June 30, 2015.

Activities that are not directly attributable to one of the primary lines of business are included in the Other segment. Included in this category are the Parent Company, community development operations, treasury group, including the securities portfolio, wholesale funding and asset liability management activities, inter-company eliminations, acquisition related expenses, and the economic impact of certain assets, capital and support functions not specifically identifiable with the three primary lines of business. The Other segment recorded a net loss of $5.3 million for the three months ended June 30, 2016, compared to a net gain of $0.1 million for the three months ended June 30, 2015. The decrease was impacted by $2.5 million of merger-related costs.

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FINANCIAL CONDITION

Investment Securities

The following table provides information with respect to amortized cost and fair value of the Corporation's investment security portfolio.

Figure 12. Investment Securities

	June 30, 2016						December 31, 2015							June 30, 2015
(In thousands)	Amortized Cost		Fair Value		Net Unrealized Gain/(Loss)		Amortized Cost		Fair Value		Net Unrealized Gain/(Loss)			Amortized Cost		Fair value		Net Unrealized Gain/(Loss)
Available-for-sale securities (1)	$	4,274,004	$	4,318,688	$	44,684	$	4,005,782	$	3,967,735	$	(38,047	)	$	3,851,202	$	3,838,509	$	(12,693	)
Held-to-maturity securities (2)	2,514,161		2,545,740		31,579		2,674,093		2,659,119		(14,974		)	2,787,513		2,760,120		(27,393		)
Other securities (3)	148,367		148,367		—		148,172		148,172		—			147,967		147,967		—
Total investment securities	$	6,936,532	$	7,012,795	$	76,263	$	6,828,047	$	6,775,026	$	(53,021	)	$	6,786,682	$	6,746,596	$	(40,086	)

(1) Carried at fair value on the Consolidated Balance Sheets.

(2)Carried at amortized cost on the Consolidated Balance Sheets.

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

Available-for-sale securities are held primarily for liquidity, and interest rate risk management. The Corporation’s available-for-sale investment policy is to invest in securities viewed to have low credit risk, such as U.S. Treasury securities, U.S. Government agency obligations, state and political obligations, MBS, and corporate bonds. The Corporation has invested in floating rate CLOs beginning in the second quarter of 2013. The CLO portfolio had an amortized cost of $297.9 million as of June 30, 2016, compared to $297.8 million as of December 31, 2015 and $259.7 million as of June 30, 2015. Net unrealized losses on the CLO portfolio amounted to $6.1 million, $8.4 million, and $1.7 million at June 30, 2016, December 31, 2015, and June 30, 2015, respectively. The current yield on the CLO portfolio approximates 3.08% as of June 30, 2016. Management believes that its holdings of CLOs are not ownership interests in covered funds prohibited by the Volcker Rule regulations and, therefore, expects to be able to hold these investments until their stated maturities. Management seeks to maintain a CLO portfolio consistent with the requirements of the Volcker Rule, and new CLO investments are being made in accordance with this strategy. In 2015, the Corporation purchased $38.0 million of newly issued CLO investments that Management believes to be exempt from the Volcker Rule as these CLOs are structured in a manner consistent with the loan securitization exclusion set forth in the Volcker Rule.

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Loans

Total loans at June 30, 2016 were $16.3 billion, compared to $16.1 billion at December 31, 2015, and $15.7 billion at June 30, 2015. Total loans as of June 30, 2016 include $1.5 billion in acquired loans and $189.3 million in FDIC acquired loans, including a loss share receivable of $8.6 million. Acquired loans resulted from the acquisition of Citizens in the second quarter of 2013. FDIC acquired loans resulted from the 2010 FDIC-assisted acquisitions of George Washington and Midwest. The major categories of loans outstanding and concentration distributions are presented in the following tables, segregated between originated, acquired, and FDIC acquired loans.

Figure 13. Period End Loans by Product Type

	As of June 30, 2016
	Originated Loans					Acquired Loans (1)					FDIC Acquired Loans (2)					Total Loans
(Dollars in thousands)	Amount			Percentage		Amount			Percentage		Amount			Percentage		Amount			Percentage
C&I	$	5,882,994		40.1	%	$	181,503		12.2	%	$	31,274		17.3	%	$	6,095,771		37.3	%
CRE	2,035,498			13.9	%	368,800			24.8	%	79,888			44.2	%	2,484,186			15.2	%
Construction	705,340			4.8	%	4,111			0.3	%	4,631			2.6	%	714,082			4.4	%
Leases	508,534			3.5	%	—			—	%	—			—	%	508,534			3.1	%
Total Commercial	9,132,366			62.3	%	554,414			37.2	%	115,793			64.1	%	9,802,573			60.0	%
Residential mortgages	728,534			5.0	%	292,877			19.7	%	33,370			18.5	%	1,054,781			6.5	%
Installment	3,353,084			22.9	%	494,429			33.2	%	1,808			1.0	%	3,849,321			23.6	%
Home equity lines	1,276,661			8.7	%	146,916			9.9	%	29,813			16.5	%	1,453,390			8.9	%
Credit card	174,986			1.2	%	—			—	%	—			—	%	174,986			1.1	%
Total Consumer	5,533,265			37.7	%	934,222			62.8	%	64,991			35.9	%	6,532,478			40.0	%
Subtotal	14,665,631			100.0	%	1,488,636			100.0	%	180,784			100.0	%	16,335,051			100.0	%
Loss share receivable	—			n/m		—			n/m		8,555			n/m		8,555			n/m
Total Loans	14,665,631			n/m		1,488,636			n/m		189,339			n/m		16,343,606			n/m
Allowance for loan losses	(105,175		)	n/m		(4,256		)	n/m		(40,218		)	n/m		(149,649		)	n/m
Net Loans	$	14,560,456		n/m		$	1,484,380		n/m		$	149,121		n/m		$	16,193,957		n/m

	As of December 31, 2015
	Originated Loans					Acquired Loans (1)					FDIC Acquired Loans (2)					Total Loans
(Dollars in thousands)	Amount			Percentage		Amount			Percentage		Amount			Percentage		Amount			Percentage
C&I	$	5,793,408		41.0	%	$	240,145		13.8	%	$	35,466		17.3	%	$	6,069,019		37.7	%
CRE	2,077,344			14.7	%	430,891			24.7	%	87,774			42.7	%	2,596,009			16.2	%
Construction	645,337			4.6	%	6,113			0.3	%	5,869			2.9	%	657,319			4.1	%
Leases	491,741			3.5	%	—			—	%	—			—	%	491,741			3.1	%
Total Commercial	9,007,830			63.8	%	677,149			38.8	%	129,109			62.9	%	9,814,088			61.1	%
Residential mortgages	689,045			4.9	%	324,008			18.6	%	35,568			17.3	%	1,048,621			6.5	%
Installment	2,990,349			21.2	%	573,372			32.9	%	2,077			1.0	%	3,565,798			22.2	%
Home equity lines	1,248,438			8.8	%	168,542			9.7	%	38,668			18.8	%	1,455,648			9.1	%
Credit card	182,843			1.3	%	—			—	%	—			—	%	182,843			1.1	%
Total Consumer	5,110,675			36.2	%	1,065,922			61.2	%	76,313			37.1	%	6,252,910			38.9	%
Subtotal	14,118,505			100.0	%	1,743,071			100.0	%	205,422			100.0	%	16,066,998			100.0	%
Loss share receivable	—			n/m		—			n/m		9,947			n/m		9,947			n/m
Total Loans	14,118,505			n/m		1,743,071			n/m		$	215,369		n/m		16,076,945			n/m
Allowance for loan losses	(105,135		)	n/m		(3,877		)	n/m		(44,679		)	n/m		(153,691		)	n/m
Net Loans	$	14,013,370		n/m		$	1,739,194		n/m		$	170,690		n/m		$	15,923,254		n/m

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	As of June 30, 2015
	Originated Loans					Acquired Loans (1)					FDIC Acquired Loans (2)					Total Loans
(Dollars in thousands)	Amount			Percentage		Amount			Percentage		Amount			Percentage		Amount			Percentage
C&I	$	5,471,363		41.0	%	$	337,423		16.1	%	$	38,138		15.8	%	$	5,846,924		37.3	%
CRE	2,138,373			16.0	%	533,945			25.5	%	101,808			42.1	%	2,774,126			17.7	%
Construction	586,894			4.4	%	6,230			0.3	%	5,875			2.4	%	598,999			3.8	%
Leases	436,702			3.3	%	—			—	%	—			—	%	436,702			2.8	%
Total Commercial	8,633,332			64.6	%	877,598			41.9	%	145,821			60.3	%	9,656,751			61.5	%
Residential mortgages	653,143			4.9	%	358,559			17.1	%	38,029			15.7	%	1,049,731			6.7	%
Installment	2,720,059			20.4	%	659,348			31.5	%	2,299			1.0	%	3,381,706			21.5	%
Home equity lines	1,180,802			8.8	%	200,179			9.6	%	55,545			23.0	%	1,436,526			9.2	%
Credit card	168,576			1.3	%	—			—	%	—			—	%	168,576			1.1	%
Total Consumer	4,722,580			35.4	%	1,218,086			58.1	%	95,873			39.7	%	6,036,539			38.5	%
Subtotal	13,355,912			100.0	%	2,095,684			100.0	%	241,694			100.0	%	15,693,290			100.0	%
Loss share receivable	—			n/m		—			n/m		11,820			n/m		11,820			n/m
Total Loans	13,355,912			n/m		2,095,684			n/m		253,514			n/m		15,705,110			n/m
Allowance for loan losses	(101,682		)	n/m		(4,950		)	n/m		(41,627		)	n/m		(148,259		)	n/m
Net Loans	$	13,254,230		n/m		$	2,090,734		n/m		$	211,887		n/m		$	15,556,851		n/m

n/m = Not Meaningful

(1) Loans assumed from Citizens.

(2) Loans acquired in an FDIC-assisted transaction. George Washington and Midwest non-single family loss share agreements with the FDIC expired at March 31, 2015 and June 30, 2015, respectively. As of June 30, 2016, $65.0 million of FDIC acquired loans remained covered by single family loss share agreements, providing considerable protection against credit risk.

Originated Loans

Total originated loans increased from December 31, 2015 by $547.1 million, or 3.88%, and increased from June 30, 2015 by $1.3 billion, or 9.81%. The loan growth was balanced between commercial and consumer throughout the footprint. Commercial loans increased $124.5 million, or 0.35%, compared with December 31, 2015, and $499.0 million, or 5.78%, compared with June 30, 2015. Leases contributed primarily to the overall increase in commercial loans. As of June 30, 2016, leases totaled $508.5 million compared to $491.7 million and $436.7 million at December 31, 2015 and June 30, 2015, respectively, resulting in increases of $16.8 million, or 3.42%, from December 31, 2015 and $71.8 million, or 16.45%, from June 30, 2015.

Consumer loans increased $422.6 million, or 8.27%, compared with December 31, 2015, and $810.7 million, or 17.17%, compared with June 30, 2015. Installment loans contributed primarily to the overall increase in consumer loans. Installment loans increased$362.7 million, or 12.13%, compared with December 31, 2015, and increased$633.0 million, or 23.27%, compared with June 30, 2015. This growth is a result of introducing recreational lending into the Corporation's legacy markets and expanding indirect auto lending into Michigan and Wisconsin. The leasing line of business has continued to see considerable increase in activity.

The Corporation has approximately $4.8 billion of loans secured by real estate. Approximately 82.83% of the property underlying these loans is located within the Corporation's primary market area of Ohio, the Chicago, Illinois-metropolitan area, Michigan, Wisconsin, and Western Pennsylvania.

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Acquired Loans

Acquired loans are those purchased in the Citizens acquisition during the second quarter of 2013. Total acquired loans was $1.5 billion as of June 30, 2016, a decrease from December 31, 2015 and June 30, 2015 of $254.4 million, or 14.60%, and $607.0 million, or 28.97%, respectively. The acquired loan portfolio will continue to decline, through payoffs, charge-offs, or terminations, unless the Corporation acquires additional loans in the future.

FDIC Acquired Loans and Related Loss Share Receivable

FDIC acquired loans include loans purchased in the 2010 FDIC-assisted acquisitions of George Washington and Midwest. George Washington and Midwest non-single family loans covered by loss share agreements expired on March 31, 2015 and June 30, 2015, respectively, resulting in $115.8 million of loans no longer being covered as of June 30, 2016. As of June 30, 2016, $65.0 million of loans remained covered by single family loss share agreements, until the agreements expire in March and June of 2020.

Total FDIC acquired loans, including the loss share receivable, were $189.3 million as of June 30, 2016, a decrease from December 31, 2015 and June 30, 2015 of $26.0 million, or 12.09%, and $64.2 million, or 25.31%, respectively. The FDIC acquired loan portfolio will continue to decline, through payoffs, charge-offs, termination or expiration of loss share coverage, unless the Corporation acquires additional loans subject to loss share agreements in the future.

As of June 30, 2016, the loss share receivable related to the remaining single family covered loans was $8.6 million and recorded as part of FDIC acquired loans.

Allowance for Loan Losses and Reserve For Unfunded Lending Commitments

Allowance for Originated Loan Losses

The Corporation maintains what Management believes is an adequate originated ALL. The Corporation and the Bank regularly analyze the adequacy of their allowance through ongoing review of trends in risk ratings, delinquencies, nonperforming assets, charge-offs, economic conditions, and changes in the composition of the loan portfolio. See Note 1 (Summary of Significant Accounting Policies) and Note 4 (Allowance for Loan Losses) in the notes to the consolidated financial statements in this Form 10-Q for further information regarding the Corporation's credit policies and practices.

The level of the allowance for loan losses represents Management’s best estimate of probable credit losses inherent in the loan portfolio at the balance sheet date. The evaluation of the ALL is based on ongoing review of trends in risk ratings, delinquencies, nonperforming assets, charge-offs, economic conditions, and changes in the composition of the loan portfolio.

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

The Corporation’s credit risk management division is responsible for the analysis and reporting for all credit risks. To preserve portfolio diversification and to manage the risks inherent to portfolio concentrations,

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monitoring metrics are established and applied to a range of portfolio segments based on industry, collateral, or purpose. One of three portfolio strategies (Growth, Stable or Contract) are assigned to each segment. The assigned strategies are intended to guide management behavior in matters concerning pricing, underwriting and mitigation of portfolio risk. These metrics are monitored and updated on an on-going basis and reviewed quarterly with senior management and the Board of Directors Risk Management Committee.

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

As part of our credit monitoring process, our loan review department serves to independently monitor credit quality and assess the effectiveness of credit risk management to provide Management with objective oversight of all lending activities. The loan review department is independent of the line lending and credit administration functions of the Corporation. The primary responsibilities of the loan review department are to provide an independent analysis of risk rating accuracy and timeliness, credit quality (including regulatory, policy, and underwriting compliance), credit administration management, processes, and controls.

At June 30, 2016, the allowance for originated loan losses was $105.2 million, or 0.72% of originated loans outstanding, compared to $105.1 million, or 0.74%, and $101.7 million, or 0.76%, at December 31, 2015 and June 30, 2015, respectively. The allowance equaled 124.77% of nonperforming loans at June 30, 2016 compared to 238.37% and 184.40% at December 31, 2015 and June 30, 2015, respectively. The additional reserves related to qualitative risk factors totaled $57.3 million at June 30, 2016, compared to $61.3 million and $60.2 million at December 31, 2015 and June 30, 2015, respectively. Nonperforming loans have increased by $40.2 million, or 91.13%, when compared to December 31, 2015 and increased by $29.2 million, or 52.87%, when compared to June 30, 2015. This increase in nonperforming loans and the resulting decrease in the allowance to nonperforming loans ratio at June 30, 2016 was primarily due to the classification of three specific credits as nonperforming. Based on management's evaluation as of June 30, 2016, no loss is expected on these credits and thus there was no impact on the allowance for loan losses.

Net charge-offs on originated loans were $4.7 million and 0.13% of average originated loans outstanding during the three months ended June 30, 2016, compared to $6.7 million and 0.20% of average originated loans outstanding during the three months ended June 30, 2015. Losses are charged against the ALL as soon as they are identified.

The reserve for unfunded lending commitments at June 30, 2016, December 31, 2015, and June 30, 2015 was $4.1 million, $4.1 million, and $3.9 million, respectively. Binding unfunded lending commitments

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include items such as letters of credit, financial guarantees and binding unfunded loan commitments. The allowance for credit losses, which includes both the allowance for originated loan losses and the reserve for unfunded lending commitments, amounted to $109.3 million, $109.2 million, and $105.6 million at June 30, 2016, December 31, 2015, and June 30, 2015, respectively.

Figure 14. Summary of the Allowance for Credit Losses

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2016			2015			2016			2015
Allowance for Originated Loan Losses - beginning of period	$	102,915		$	97,545		$	105,135		$	95,696
Originated loans charged-off:
Commercial	2,634			3,577			5,882			4,262
Mortgage	708			373			1,158			797
Installment	4,548			4,621			10,858			9,226
Home equity	937			971			1,964			1,882
Credit cards	1,031			1,209			2,484			2,661
Leases	—			—			—			—
Overdrafts	940			547			1,468			1,037
Total charge-offs	10,798			11,298			23,814			19,865
Originated Recoveries:
Commercial	1,509			448			2,045			773
Mortgage	45			89			65			124
Installment	3,337			2,716			6,951			5,584
Home equity	499			839			1,123			1,452
Credit cards	421			358			778			724
Manufactured housing	4			6			10			19
Leases	29			3			49			7
Overdrafts	267			167			476			323
Total recoveries	6,111			4,626			11,497			9,006
Originated net charge-offs	4,687			6,672			12,317			10,859
Provision for originated loan losses	6,947			10,809			12,357			16,845
Allowance for originated loan losses - end of period	$	105,175		$	101,682		$	105,175		$	101,682
Reserve for Unfunded Lending Commitments (1)
Balance at beginning of period	$	4,944		$	4,330		$	4,068		$	5,848
Provision for/(relief of) credit losses	(832		)	(425		)	44			(1,943		)
Balance at end of period	$	4,112		$	3,905		$	4,112		$	3,905
Allowance for credit losses	$	109,287		$	105,587		$	109,287		$	105,587
Average originated loans outstanding	14,489,924			13,092,972			14,338,858			12,892,495
Ratio to average originated loans:
Originated net charge-offs	0.13		%	0.20		%	0.17		%	0.17		%
Provision for originated loan losses	0.19		%	0.33		%	0.17		%	0.26		%
Originated loans outstanding	$	14,665,631		$	13,355,912		$	14,665,631		$	13,355,912
Allowance for originated loan losses:
As a percentage of period-end originated loans	0.72		%	0.76		%	0.72		%	0.76		%
As a percentage of nonperforming originated loans	124.77		%	184.40		%	124.77		%	184.40		%
As a multiple of originated net charge-offs	5.58			3.80			4.25			4.64
Allowance for credit losses:
As a percentage of period-end originated loans	0.75		%	0.79		%	0.75		%	0.79		%
As a percentage of nonperforming originated loans	129.65		%	191.48		%	129.65		%	191.48		%
As a multiple of annualized net charge-offs	5.80			3.95			4.41			4.82

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

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Figure 15. Overall Credit Quality by Specific Asset and Risk Categories of Originated Loans

	As of June 30, 2016
	Loan Type
			CRE and						Home Equity		Credit		Residential
Allowance for Loan Losses Components:	C & I		Construction		Leases		Installment		Lines		Cards		Mortgages		Total
(In thousands)
Individually Impaired Component:
Loan balance	$	62,707	$	30,051	$	—	$	42,272	$	7,874	$	679	$	23,385	$	166,968
Allowance	10,447		507		—		1,149		169		201		981		13,454
Collectively Impaired Components:
Commercial loans based on risk rating:
Grade 1 loan balance	75,818		742		12,001										88,561
Grade 1 allowance	7		—		2										9
Grade 2 loan balance	416,677		806		49,953										467,436
Grade 2 allowance	6		2		1										9
Grade 3 loan balance	1,267,423		340,510		87,346										1,695,279
Grade 3 allowance	654		58		49										761
Grade 4 loan balance	3,886,039		2,306,853		325,346										6,518,238
Grade 4 allowance	19,041		4,641		1,050										24,732
Grade 5 (Special Mention) loan balance	59,987		45,658		22,830										128,475
Grade 5 allowance	3,418		2,878		583										6,879
Grade 6 (Substandard) loan balance	106,002		16,218		11,058										133,278
Grade 6 allowance	11,494		353		665										12,512
Grade 7 (Doubtful) loan balance	8,341		—		—										8,341
Grade 7 allowance	23		—		—										23
Consumer loans based on payment status:
Current loan balance							3,288,947		1,264,767		172,292		692,679		5,418,685
Current loan allowance							12,227		15,179		4,514		3,598		35,518
30 days past due loan balance							14,721		1,214		729		9,564		26,228
30 days past due allowance							1,141		542		541		280		2,504
60 days past due loan balance							3,245		666		495		903		5,309
60 days past due allowance							1,033		636		582		285		2,536
90+ days past due loan balance							3,899		2,140		791		2,003		8,833
90+ days past due allowance							1,229		3,262		1,312		435		6,238
Total originated loans	$	5,882,994	$	2,740,838	$	508,534	$	3,353,084	$	1,276,661	$	174,986	$	728,534	$	14,665,631
Total allowance for originated loan losses	$	45,090	$	8,439	$	2,350	$	16,779	$	19,788	$	7,150	$	5,579	$	105,175

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	As of December 31, 2015
	Loan Type
			CRE and							Home Equity		Credit		Residential
Allowance for Loan Losses Components:	C & I		Construction			Leases		Installment		Lines		Cards		Mortgages		Total
(In thousands)
Individually Impaired Component:
Loan balance	$	43,818	$	16,614		$	—	$	36,904	$	7,080	$	717	$	23,905	$	129,038
Allowance	11,837		128			—		1,009		188		243		944		14,349
Collectively Impaired Components:
Commercial loans based on risk rating:
Grade 1 loan balance	60,440		773			12,732										73,945
Grade 1 allowance	2		—			—										2
Grade 2 loan balance	353,581		831			69,258										423,670
Grade 2 allowance	9		2			1										12
Grade 3 loan balance	1,371,850		379,169			49,956										1,800,975
Grade 3 allowance	742		102			25										869
Grade 4 loan balance	3,756,333		2,266,131			344,763										6,367,227
Grade 4 allowance	13,127		6,144			732										20,003
Grade 5 (Special Mention) loan balance	119,051		25,561			7,858										152,470
Grade 5 allowance	6,743		1,025			178										7,946
Grade 6 (Substandard) loan balance	85,754		33,603			7,174										126,531
Grade 6 allowance	12,285		3,824			377										16,486
Grade 7 (Doubtful) loan balance	2,581		(1		)	—										2,580
Grade 7 allowance	15		—			—										15
Consumer loans based on payment status:
Current loan balance								2,927,640		1,237,185		179,693		652,255		4,996,773
Current loan allowance								10,068		16,230		5,525		2,984		34,807
30 days past due loan balance								17,366		1,811		1,362		7,890		28,429
30 days past due allowance								1,123		707		1,183		248		3,261
60 days past due loan balance								4,612		884		477		1,254		7,227
60 days past due allowance								1,050		792		683		156		2,681
90+ days past due loan balance								3,827		1,478		594		3,741		9,640
90+ days past due allowance								933		2,177		1,197		397		4,704
Total originated loans	$	5,793,408	$	2,722,681		$	491,741	$	2,990,349	$	1,248,438	$	182,843	$	689,045	$	14,118,505
Total allowance for originated loan losses	$	44,760	$	11,225		$	1,313	$	14,183	$	20,094	$	8,831	$	4,729	$	105,135

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	As of June 30, 2015
	Loan Type
			CRE and						Home Equity		Credit		Residential
Allowance for Loan Losses Components:	C & I		Construction		Leases		Installment		Lines		Cards		Mortgages		Total
(In thousands)
Individually Impaired Component:
Loan balance	$	45,969	$	12,072	$	1,162	$	31,927	$	7,421	$	787	$	24,697	$	124,035
Allowance	9,117		151		—		1,001		217		250		890		11,626
Collectively Impaired Components:
Commercial loans based on risk rating:
Grade 1 loan balance	65,856		807		14,688										81,351
Grade 1 allowance	2		—		—										2
Grade 2 loan balance	206,384		1,166		29,564										237,114
Grade 2 allowance	8		2		1										11
Grade 3 loan balance	1,417,295		423,346		65,664										1,906,305
Grade 3 allowance	912		154		37										1,103
Grade 4 loan balance	3,566,115		2,245,135		321,268										6,132,518
Grade 4 allowance	16,169		7,038		469										23,676
Grade 5 (Special Mention) loan balance	92,430		25,801		2,956										121,187
Grade 5 allowance	6,943		621		62										7,626
Grade 6 (Substandard) loan balance	73,671		16,940		1,400										92,011
Grade 6 allowance	9,666		2,074		50										11,790
Grade 7 (Doubtful) loan balance	3,643		—		—										3,643
Grade 7 allowance	59		—		—										59
Consumer loans based on payment status:
Current loan balance							2,670,226		1,169,615		166,317		614,938		4,621,096
Current loan allowance							11,931		17,054		5,639		3,673		38,297
30 days past due loan balance							11,088		2,073		645		6,789		20,595
30 days past due allowance							739		979		540		226		2,484
60 days past due loan balance							2,893		661		289		1,326		5,169
60 days past due allowance							592		625		407		199		1,823
90+ days past due loan balance							3,925		1,032		538		5,393		10,888
90+ days past due allowance							647		1,164		982		392		3,185
Total originated loans	$	5,471,363	$	2,725,267	$	436,702	$	2,720,059	$	1,180,802	$	168,576	$	653,143	$	13,355,912
Total allowance for originated loan losses	$	42,876	$	10,040	$	619	$	14,910	$	20,039	$	7,818	$	5,380	$	101,682

Allowance for Acquired Loan Losses

The Citizens’ loans were recorded at their fair value as of the Acquisition Date and the prior ALL was eliminated. An ALL for nonimpaired acquired loans is estimated using a methodology similar to that used for originated loans. The allowance determined for each acquired nonimpaired loan is compared to the remaining fair value adjustment for that loan. If the computed allowance is greater, the excess is added to the allowance through a provision for loan losses. If the computed allowance is less, no additional allowance is recognized. As of June 30, 2016, the computed ALL was less than the remaining fair value discount; therefore, no ALL for acquired nonimpaired loans was recorded.

Charge-offs and actual losses on an acquired nonimpaired loan first reduce any remaining fair value discount for that loan. Once a loan's discount is depleted, charge-offs and actual losses are applied against the ALL. During the three months ended June 30, 2016 , a net recapture to the provision for loan losses, of $0.2 million was recorded, compared to a provision of loan losses equal to net charge-offs of $1.6 million recorded for the three months ended June 30, 2015. Charge-offs on acquired nonimpaired loans were mainly related to

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consumer loans that were written off in accordance with the Corporation’s credit policies based on a predetermined number of days past due.

The ALL for acquired impaired loans is determined by comparing the present value of the cash flows expected to be collected to the carrying amount for a given pool of loans. Management reforecasts the estimated cash flows expected to be collected on acquired impaired loans on a quarterly basis. Expected cash flows may increase or decrease for a variety of reasons, for example, when the contractual terms of the loan agreement are modified, when interest rates on variable rate loans change, or when principal and/or interest payments are received. Cash flows expected to be collected on acquired impaired loans are estimated by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default, loss given default, and the amount of actual prepayments after the Acquisition Dates. Prepayments affect the estimated life of loans and could change the amount of interest income, and possibly principal, expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary. These adjustments are based, in part, on actual loss severities recognized for each loan type, as well as changes in the probability of default. For periods in which estimated cash flows are not re-forecasted, the prior reporting periods' estimated cash flows are adjusted to reflect the actual cash received and credit events that transpired during the current reporting period.

During the six months ended June 30, 2016, there was a provision of losses on acquired impaired loans of $0.4 million compared to a recapture of $2.5 million in the six months ended June 30, 2015. The allowance for acquired impaired loan losses was $4.3 million and $5.0 million as of June 30, 2016 and 2015, respectively. In addition to the provision in the six months ended June 30, 2016, an additional $4.9 million of cash flow was reclassified from non-accretable to accretable cash flow within the quarter. Life to date, the acquired impaired portfolio’s performance has exceeded original expectations with $142.1 million being reclassified from non-accretable to accretable cash flow, while total cumulative provision has totaled $4.3 million.

Allowance for FDIC Acquired Loan Losses

The ALL on FDIC nonimpaired acquired loans is estimated similar to acquired loans as described above except any increase to the allowance and provision for loan losses is partially offset by an increase in the loss share receivable for the portion of the losses recoverable under the loss share agreements with the FDIC. As of June 30, 2016, the computed ALL was less than the remaining fair value discount; therefore, no ALL for FDIC nonimpaired loans was recorded.

The ALL for FDIC acquired impaired loans was $40.2 million, $44.7 million, and $41.6 million as of June 30, 2016, December 31, 2015, and June 30, 2015, respectively, and is determined in a manner similar to the acquired impaired loans described above. During the three months ended June 30, 2016, $0.2 million of recapture of previous provision expense on FDIC acquired impaired loans were recognized with an offsetting increase of $12.0 thousand to the loss share receivable. The net recapture from the impaired FDIC acquired portfolio was $0.2 million in the three months ended June 30, 2016, compared to a net recapture of $891.0 thousand in the three months ended June 30, 2015.

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Asset Quality

Nonperforming Loans are defined as follows:

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

• Restructured loans on which, due to a borrower experiencing financial difficulties or expected to experience difficulties in the near term, the original terms of the loan are modified to maximize the collection of amounts due.

Nonperforming Assets are defined as follows:

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

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

• Other real estateacquired through foreclosure in satisfaction of a loan.

Figure 16. Asset Quality⁽¹⁾ 

(Dollars in thousands)	June 30, 2016			December 31, 2015			June 30, 2015
Nonperforming originated loans:
Restructured nonaccrual loans:
Commercial loans	$	30,660		$	12,567		$	16,502
Consumer loans	11,311			9,805			10,982
Total restructured loans	41,971			22,372			27,484
Other nonaccrual loans:
Commercial loans	36,282			15,541			21,387
Consumer loans	6,044			6,192			6,271
Total nonaccrual loans	42,326			21,733			27,658
Total nonperforming originated loans	84,297			44,105			55,142
Other real estate, excluding covered assets (2) (3)	31,356			50,393			62,169
Total nonperforming assets ("NPAs") (3)	$	115,653		$	94,498		$	117,311
Originated loans past due 90 days or more accruing interest	$	8,008		$	8,022		$	8,009
Total NPAs as a percentage of total originated loans and noncovered OREO (3)	0.79		%	0.67		%	0.87		%

(1) Due to the impact of acquisition accounting and protection against credit risk from FDIC loss share agreements, acquired loans, FDIC acquired loans and covered OREO are excluded from the asset quality figures to provide for improved comparability to prior periods and better perspective into asset quality trends. Acquired loans are recorded at fair value with no allowance brought forward in accordance with acquisition accounting. Acquired and FDIC acquired impaired loans with an accretable yield are considered to be accruing and performing even though collection of contractual payments on loans within the pool may be in doubt, because the pool is the unit of accounting and income continues to be accreted on the pool as long as expected cash flows are reasonably estimable.

(2) As of June 30, 2016, OREO included 18 former banking facilities that the Corporation no longer intends to use for banking purposes valued at approximately $4.0 million.

(3) As of June 30, 2016, $19.0 million of OREO was no longer covered by a FDIC loss share agreement, therefore, was included in NPAs. OREO that remains covered by FDIC loss share agreements has considerable protection against credit risk and are not reported as NPAs.

Nonperforming loans totaled $84.3 million at June 30, 2016, an increase of $10.6 million, or 14.38%, compared with March 31, 2016 and an increase of $29.2 million, or 52.87%, compared with June 30, 2015 due to two notes, approximating $12.2 million, with the remaining principal balances being paid off in full subsequent to June 30, 2016.

Total nonperforming assets as of June 30, 2016 were $115.7 million, an increase of $21.2 million, or 22.39%, from December 31, 2015 and a decrease of $1.7 million, or 1.41%, from June 30, 2015. Commercial nonperforming originated loans increased$38.8 million, or 138.16%, from December 31, 2015 and increased$29.1 million, or 76.68%, from June 30, 2015. Total OREO decreased$19.0 million, or 37.78%, from December 31, 2015 and decreased$30.8 million, or 49.56%, from June 30, 2015. Due to the expiration of

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certain FDIC loss share agreements in 2015, $19.0 million of OREO no longer covered by a FDIC loss share agreement is being being reported as nonperforming assets as of June 30, 2016.

Borrower FICO scores provide information about the credit quality of our consumer loan portfolio as they provide an indication as to the likelihood that debtors will repay their debts. Borrower FICO scores are obtained from a nationally recognized consumer rating agency on a quarterly basis and trends are evaluated for consideration as a qualitative adjustment to the allowance. As of June 30, 2016, the average FICO scores on the originated consumer portfolio subcomponents are excellent with average scores on installment loans at 760, home equity lines at 778, residential mortgages at 747, and credit cards at 763.

Figure 17. Nonaccrual Originated Commercial Loan Flow Analysis

	Three Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,
(In thousands)	2016			2016			2015			2015			2015
Nonaccrual originated commercial loans - beginning of period	$	56,726		$	28,108		$	30,821		$	37,889		$	28,478
Credit Actions:
New	22,340			41,808			11,720			16,899			22,400
Charged down	(2,633		)	(3,222		)	(6,961		)	(4,372		)	(3,104		)
Return to accruing status	(1,998		)	(3,662		)	—			(8,904		)	(6,923		)
Payments	(7,493		)	(6,306		)	(7,472		)	(10,691		)	(2,962		)
Nonaccrual originated commercial loans - end of period	$	66,942		$	56,726		$	28,108		$	30,821		$	37,889

See the section titled "Allowance for Originated Loan Losses" for more information on the increase in new credit actions.

In certain circumstances, the Corporation may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near term. In most cases the modification is either a concessionary reduction in interest rate, extension of the maturity date or modification of the adjustable rate provisions of the loan that would otherwise not be considered. Concessionary modifications are classified as TDRs unless the modification is short-term (30 to 90 days) and considered to be an insignificant delay while awaiting additional information from the borrower. All amounts due, including interest accrued at the contractual interest rate, are expected to be collected. TDRs return to accrual status once the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles. A sustained period of repayment performance would be a minimum of six consecutive payment cycles from the date of restructure.

The Corporation’s TDR portfolio is summarized in the following table.

Figure 18. TDR Portfolio

(In thousands)	June 30, 2016		June 30, 2015
Originated TDRs	$	130,865	$	104,648
Acquired TDRs (1)	17,002		11,362
FDIC Acquired TDRs (1)	22,219		22,976
Total TDRs	$	170,086	$	138,986
Nonperforming TDRs	$	58,966	$	30,368

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

Originated consumer TDRs are predominantly composed of installment loans, first and second lien residential mortgages and home equity lines of credit. Total originated consumer TDRs represented 56.71%and 61.95% of the total originated TDR portfolio as of June 30, 2016, and June 30, 2015, respectively. The Corporation restructures residential mortgages in a variety of ways to help clients remain in their homes and to mitigate the potential for additional losses. The primary restructuring methods being offered to our residential clients are reductions in interest rates and extensions in terms. Modifications of mortgages retained in portfolio are handled using proprietary modification guidelines, or the FDIC’s Modification Program for residential first mortgages covered by loss share agreements.  The Corporation participates in the U.S. Treasury’s Home Affordable Modification Program for originated mortgages sold to and serviced for FNMA and FHLMC.

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

A loan is considered to be impaired when, based on current events or information, it is probable the Corporation will be unable to collect all amounts due (principal and interest) per the contractual terms of the loan agreement. Loan impairment for all loans is measured based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, at the observable market price of the loan, or the fair value of the collateral for certain collateral dependent loans. Impaired loans include all nonaccrual commercial, agricultural, construction, and commercial real estate loans, and loans modified as TDRs. Interest income recognized on impaired loans was $0.4 million and $0.6 million, for the three and six months ended June 30, 2016, compared to $0.1 million and $0.2 million for the three and six months ended June 30, 2015, respectively. Interest income which would have been earned in accordance with the original terms was $1.4 million and $2.6 million, for the three and six months ended June 30, 2016 compared to $0.9 million and $1.8 million for the three and six months ended June 30, 2015, respectively.

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

Average quarter to date deposits totaled $21.0 billion as of June 30, 2016, $20.0 billion as of December 31, 2015, and $19.7 billion as of June 30, 2015. The Corporation has successfully executed a strategy to increase the concentration of lower cost deposits within the overall deposit mix by focusing on growth in checking, money market and savings account products with less emphasis on renewing maturing certificate of deposit accounts. In addition to efficiently funding balance sheet growth, the increased concentration in core deposit accounts generally deepens and extends the length of customer relationships.

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

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Figure 19. Respective Rates of Deposit Products and Funding

	Three Months Ended
	June 30, 2016				December 31, 2015				June 30, 2015
(Dollars in thousands)	Average Balance		Average Rate		Average Balance		Average Rate		Average Balance		Average Rate
Noninterest-bearing	$	6,035,959	—	%	$	5,982,186	—	%	$	5,722,240	—	%
Interest-bearing	3,601,589		0.11	%	3,352,908		0.09	%	3,203,836		0.10	%
Savings and money market accounts	9,223,623		0.25	%	8,408,703		0.26	%	8,467,845		0.26	%
Certificates and other time deposits	2,106,279		0.60	%	2,258,996		0.59	%	2,288,741		0.44	%
Total customer deposits	20,967,450		0.19	%	20,002,793		0.19	%	19,682,662		0.18	%
Securities sold under agreements to repurchase	689,279		0.06	%	1,131,659		0.11	%	1,285,920		0.10	%
Wholesale borrowings	376,838		1.20	%	402,679		1.18	%	393,379		1.15	%
Long-term debt	519,376		3.30	%	508,954		3.19	%	508,744		3.09	%
Total funds	$	22,552,943	0.27	%	$	22,046,085	0.28	%	$	21,870,705	0.26	%

Average quarter to date demand deposits comprised 45.96% of average deposits during the three months ended June 30, 2016, compared to 46.67% during the three months ended December 31, 2015, and 45.35% during the three months ended June 30, 2015. Savings accounts, including money market products, made up 43.99% of average deposits during the three months ended June 30, 2016 compared to 42.04% during the three months ended December 31, 2015, and 43.02% during the three months ended June 30, 2015. Certificates and other time deposits made up 10.05% of average deposits during the three months ended June 30, 2016, 11.29% during the three months ended December 31, 2015, and 11.63% during the three months ended June 30, 2015.

The average cost of interest-bearing deposits, federal funds purchased and securities sold under agreements to repurchase, wholesale borrowings and long-term debt was 0.37% at June 30, 2016, up2 basis points from 0.35% at June 30, 2015.

The following table in Figure 20 summarizes certificates and other time deposits in amounts of $100 thousand or more for the three months ended June 30, 2016 by time remaining until maturity.

Figure 20. Certificates and Other Time Deposits in increments of $100 Thousand or More

(In thousands)
Time until maturity:	Amount
Under 3 months	$	157,170
3 to 6 months	140,448
6 to 12 months	125,107
Over 12 months	209,733
Total	$	632,458

Capital Resources

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

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Shareholders' Equity

Shareholders' equity was $3.0 billion as of June 30, 2016, compared with $2.9 billion as of December 31, 2015, and June 30, 2015. The Corporation's Common Stock is traded on the NASDAQ under the symbol FMER with 11,286 holders of record at June 30, 2016.

• At June 30, 2016, the Corporation's common equity value per common share was $17.74 based on approximately 166.2 million shares outstanding at June 30, 2016, compared to $17.13 based on approximately 165.8 million shares outstanding at December 31, 2015, and $16.82 based on approximately 165.8 million shares outstanding at June 30, 2015.

• At June 30, 2016, the Corporation's tangible book value per common share was $12.94 compared to $12.29 at December 31, 2015, and $11.95 at June 30, 2015.

• At June 30, 2016, the Corporation's book value per common share was $18.34, compared to $17.74 at December 31, 2015, and $17.42 at June 30, 2015.

• At June 30, 2016, the Corporation had approximately 4.0 million treasury shares, compared to approximately 4.4 million treasury shares at December 31, 2015 and June 30, 2015. Treasury shares are typically issued as needed in connection with stock-based compensation awards and for other corporate purposes.

During the second quarter of 2016, the Corporation made a dividend payment of $0.17 per share, or 28.1 million in the aggregate, on its Common Stock. As of June 30, 2016, the dividend of $0.17 per common share has annualized rate of $0.68 per common share. Also, in the second quarter of 2016, the Corporation made a quarterly dividend payment of $1.5 million in the aggregate, or $14.69 per share, or $0.37 per depositary share, on the Corporation's 5.875% Non-Cumulative Perpetual Preferred Stock, Series A, which trades on the NYSE.

On May 13, 2015, the Corporation repurchased a warrant previously issued by Citizens to the U.S. Treasury for $12.2 million, which resulted in a reduction to capital surplus in the amount of $9.2 million.

The following table in Figure 21 shows activities that caused the change in outstanding Common Stock over the past five quarters.

Figure 21. Changes in Common Stock Outstanding

	2016		2016		2015		2015		2015
(Shares in thousands)	2nd qtr		1st qtr		4th qtr		3rd qtr		2nd qtr
Beginning of period	165,720		165,758		165,759		165,773		165,453
Issued/(repurchased)	(167	)	(55	)	(15	)	(20	)	(210	)
Reissued/(returned) under employee benefit plans, net	616		17		14		6		530
End of period	166,169		165,720		165,758		165,759		165,773

Capital Adequacy

Capital adequacy is an important indicator of financial stability and performance. The Corporation maintained a strong capital position with tangible common equity to tangible assets of 8.48% at June 30, 2016, compared with 8.24% at December 31, 2015, and 8.09% at June 30, 2015.

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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 1 capital ratio of at least 8%, a leverage capital ratio of at least 5%, a CET1 ratio of at least 6.5%, and must not be subject to any order or directive requiring the institution to improve its capital level. An adequately capitalized institution has a total risk-based capital ratio of at least 8%, a tier 1 capital ratio of at least 6%, a CET1 ratio of at least 4.5%, and a leverage capital ratio of at least 4%. Institutions with lower capital levels are deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized, depending on their actual capital levels. The appropriate federal regulatory agency may also downgrade an institution to the next lower capital category upon a determination that the institution is in an unsafe or unsound practice. Institutions are required to monitor closely their capital levels and to notify their appropriate regulatory agency of any basis for a change in capital category.

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

As of June 30, 2016, the Corporation, on a consolidated basis, as well as the Bank, exceeded the minimum capital levels of the well-capitalized category.

Figure 22. Capital Position

(Dollars in thousands)	June 30, 2016				December 31, 2015				June 30, 2015
Consolidated
Total equity	$	3,047,159	11.65	%	$	2,940,095	11.52	%	$	2,887,957	11.42	%
Common equity (1)	2,947,159		11.27	%	2,840,095		11.13	%	2,787,957		11.02	%
CET1 capital (1) (2)	2,160,260		10.84	%	2,119,025		10.65	%	2,029,902		10.47	%
Tier 1 capital (1) (2)	2,204,839		11.06	%	2,119,025		10.65	%	2,029,902		10.47	%
Total risk-based capital (1) (2)	2,799,651		14.05	%	2,733,143		13.74	%	2,638,943		13.61	%
Tier 1 leverage (2)	2,204,839		8.78	%	2,119,025		8.63	%	2,029,902		8.36	%
Tangible common equity (1)	2,149,399		8.48	%	2,037,727		8.24	%	1,980,393		8.09	%
	June 30, 2016				December 31, 2015				June 30, 2015
Bank Only
Total equity	$	3,189,501	12.19	%	$	3,083,117	12.08	%	$	3,035,571	12.01	%
Common equity (1)	3,189,501		12.19	%	3,083,117		12.08	%	3,035,571		12.01	%
CET1 capital (1) (2)	2,340,402		11.74	%	2,262,669		11.38	%	2,169,590		11.20	%
Tier 1 capital (1) (2)	2,340,402		11.74	%	2,262,669		11.38	%	2,169,590		11.20	%
Total risk-based capital (1) (2)	2,742,255		13.75	%	2,668,419		13.42	%	2,569,644		13.27	%
Tier 1 leverage (2)	2,340,402		9.34	%	2,262,669		9.23	%	2,169,590		8.95	%
Tangible common equity (1)	2,391,741		9.43	%	2,280,749		9.23	%	2,228,007		9.10	%

(1)See Figure 4 entitled GAAP to Non-GAAP Reconciliations, which presents the computations of certain financial measures related to tangible common equity and efficiency ratios. The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period to period comparisons.

(2) The Basel III capital rules, effective January 1, 2015, replace tier 1 common equity and the associated tier 1 common equity ratio with CET1 capital and the CET1 risk-based capital ratio. June 30, 2016 figures are preliminary and presented on a Basel III basis and reflect transitional capital requirements and phase-in provisions, including the standardized approach for calculating risk weighted assets. December 31, 2015 and June 30, 2015 amounts and ratios are reported on a Basel III basis.

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RISK MANAGEMENT

Market Risk and Interest Rate Risk Management

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

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

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

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

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

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Presented below is the Corporation’s interest rate risk profile as of June 30, 2016 and 2015:

Figure 23. Net Interest Income Simulation Results

	Immediate Change in Rates and Resulting  Percentage Increase/(Decrease) in Net Interest Income:
	- 100 basis points		+ 100 basis points		+ 200 basis points		+ 300 basis points
June 30, 2016	(8.32	)%	1.87	%	3.33	%	4.31	%
June 30, 2015	(5.01	)%	1.89	%	3.67	%	5.00	%

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.

Management reviews and takes appropriate action if this analysis indicates that the Corporation’s NII will change by more than +/-5% in response to an immediate 100 basis point increase or decrease in interest rates or NII will change by more than +/-10% in response to an immediate 200 basis point increase in interest rates. The Corporation is operating within these guidelines.

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

Presented below is the Corporation’s EVE profile as of June 30, 2016 and 2015:

Figure 24. EVE Simulation Results

	Immediate Change in Rates and Resulting Percentage Increase/(Decrease) in EVE:
	- 100 basis points		+ 100 basis points		+ 200 basis points		+ 300 basis points
June 30, 2016	(4.36	)%	2.90	%	3.97	%	3.84	%
June 30, 2015	(3.86	)%	1.49	%	1.92	%	1.61	%

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

Management of interest rate exposure.Management uses the results of its various simulation analysis to formulate strategies to achieve a desired risk profile within the parameters of the Corporation’s capital and liquidity guidelines. Specifically, Management actively manages interest rate risk positions by structuring investment portfolio cash flows to support the desired risk position, and by using derivatives predominately in the form of interest rate swaps, which modify the interest rate characteristics of certain assets and liabilities. For more information about how the Corporation uses interest rate swaps to manage its balance sheet, see Note 8 (Derivatives and Hedging Activities) in the notes to the consolidated financial statements in this Form 10-Q.

Liquidity Risk Management

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

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

The Corporation’s primary source of liquidity is its core deposit base. Core deposits comprised approximately 89.94% of total deposits at June 30, 2016. The Corporation also has available unused wholesale sources of liquidity, including advances from the FHLB of Cincinnati, issuance through dealers in the capital markets and access to certificates of deposit issued through brokers. Liquidity is further provided by unencumbered, or unpledged, investment securities that totaled $3.0 billion as of June 30, 2016.

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

Funding Trends for the Quarter - During the three months ended June 30, 2016, lower cost core deposits decreased by $84.7 million from the first quarter 2016. In the aggregate, there was a decrease in deposits of

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$148.7 million from March 31, 2016. The Corporation’s loan to deposit ratio increased to 78.00% as of June 30, 2016 from 76.89% as of March 31, 2016. Securities sold under agreements to repurchase decreased$33.0 million from March 31, 2016. Wholesale borrowings and long-term debt had a net increase of $96.6 million from March 31, 2016.

Parent Company Liquidity - The Corporation manages its liquidity principally through dividends from the Bank. 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; and pay dividends to shareholders.

During the three months ended June 30, 2016, the Bank paid $72.4 million in dividends to the Corporation. As of June 30, 2016, the Bank had an additional $365.5 million available to pay dividends without regulatory approval.

Operational Risk Management

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

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

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

The Corporation seeks to mitigate operational risk through identification and measurement of risk, alignment of business strategies within risk guidelines, and through its system of internal controls and reporting. Further, the Corporation regularly evaluates and seeks to strengthen its system of internal controls to improve its oversight of operational risk and compliance with applicable laws, and regulations and prescribed standards.

Critical Accounting Policies

The Corporation’s consolidated financial statements are prepared in conformity with GAAP and follow general practices within the financial services industry in which it operates. All accounting policies are

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important, and all policies described in Note 1 (Summary of Significant Accounting Policies) to the consolidated financial statements of the 2015 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. Critical accounting policies require application of Management’s most difficult, subjective, or complex judgment and make certain assumptions and estimates about the effect of matters that are inherently uncertain or may change in future periods.

Management relies heavily on the use of judgment, assumptions and estimates to make a number of core decisions, including accounting for the ALL, income taxes, derivative instruments and hedging activities, and assets and liabilities that involve valuation methodologies. A brief discussion of each of these areas appears within Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2015 Form 10-K.

Off-Balance Sheet Arrangements

A detailed discussion of the Corporation’s off-balance sheet arrangements, including interest rate swaps, forward sale contracts and mortgage loan commitments is included in Note 8 (Derivatives and Hedging Activities) to the Corporation’s unaudited consolidated financial statements included in this Form 10-Q and in Note 18 to the consolidated financial statements in the 2015 Form 10-K. There have been no significant changes since December 31, 2015.

Forward-looking Safe-harbor Statement

Statements in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and elsewhere within this Form 10-Q, which are not historical or factual in nature, constitute forward-looking statements. These forward-looking statements relate to, among other things, expectations for future shifts in loan portfolio to consumer and commercial loans, increase in core deposits base, allowance for loan losses, demands for the Corporation’s services and products, future services and products to be offered, increased numbers of customers, and like items, and involve a number of risks and uncertainties. The following factors are among the factors that could cause actual results to differ materially from the forward-looking statements: general economic conditions, including their impact on capital expenditures; business conditions in the banking industry; the regulatory environment; rapidly changing technology and evolving banking industry standards; the ability to complete the proposed merger with Huntington in a timely manner, if at all, the possibility that the anticipated benefits of the merger with Huntington are not realized when expected or at all; competitive factors, including increased competition with regional and national financial institutions; new service and product offerings by competitors and price pressures; and like items.

Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, operational, economic and competitive uncertainties and contingencies, many of which are beyond a company’s control, and many of which, with respect to future business decisions and actions (including acquisitions and divestitures), are subject to change. Examples of uncertainties and contingencies include, among other important factors: general and local economic and business conditions; recession or other economic downturns; expectations of, and actual timing and amount of, interest rate movements, including the slope of the yield curve (which can have a significant impact on a financial services institution); market and monetary fluctuations; inflation or deflation; customer and investor responses to these conditions; the financial condition of borrowers and other counterparties; competition within and outside the

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financial services industry; geopolitical developments including possible terrorist activity; recent and future legislative and regulatory developments; natural disasters; effectiveness of the Corporation’s hedging practices; technology; demand for the Corporation’s product offerings; new products and services in the industries in which the Corporation operates; critical accounting estimates, in the time frame anticipated or at all, and those risk factors detailed in the Corporation’s periodic reports and registration statements filed with the SEC. Other factors are those inherent in originating, selling and servicing loans including prepayment risks, pricing concessions, fluctuation in U.S. housing prices, fluctuation of collateral values and changes in customer profiles. Additionally, the actions of the SEC, the FASB, the FDIC, the OCC, the Federal Reserve System, FINRA, and other regulators; regulatory and judicial proceedings and changes in laws and regulations applicable to the Corporation including the costs of complying with any such laws and regulations; and the Corporation’s success in executing its business plans and strategies, including efforts to reduce operating expenses, and managing the risks involved in the foregoing, could cause actual results to differ.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

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ITEM 4. CONTROLS AND PROCEDURES.

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

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

During the quarter ended June 30, 2016, there was no change in internal control over financial reporting, as described in "Internal Control-Integrated Framework," as updated by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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

For additional information on litigation, see Note 12 (Commitments and Guarantees) in the notes to the consolidated financial statements in this Form 10-Q.

ITEM 1A. RISK FACTORS.

There have been no material changes in our risk factors from those disclosed in the 2015 Form 10-K.

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

The following table provides information with respect to purchases the Corporation made of shares of its Common Stock during the second quarter of the 2016 fiscal year:

Calendar Month	Total Number of Shares  Purchased (1)	Average Price Paid per  Share		Total Number of Shares  Purchased as Part of Publicly Announced Plans or Programs (2)	Maximum Number of  Shares that May Yet Be Purchased Under Plans or Programs (2)
April 1 - April 30, 2016	151,616	$	22.33	—	396,272
May 1 - May 31, 2016	9,127	21.63		—	396,272
June 1 - June 30, 2016	6,368	20.51		—	396,272
Total	167,111	$	22.23	—	396,272

(1) Reflects 167,111 shares of Common Stock purchased as a result of either: (1) delivered by the option holder with respect to the exercise of stock options; (2) shares withheld to pay income taxes or other tax liabilities associated with vested restricted shares of Common Stock; or (3) shares returned upon the resignation of the restricted shareholder. No shares were purchased under the program referred to in note (2) to this table during the second quarter of 2016.

(2) On January 19, 2006, the Board of Directors authorized the repurchase of up to 3 million shares of Common Stock (the “New Repurchase Plan”). The New Repurchase Plan, which has no expiration date, superseded all other repurchase programs, including that authorized by the Board of Directors on July 15, 2004.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not Applicable.

ITEM 5.     OTHER INFORMATION.

Not Applicable.

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ITEM 6. EXHIBITS

Exhibit
Number	Description
10.1	FirstMerit Corporation 2011 Equity Incentive Plan Form of Time-Based Restricted Stock Unit Award Agreement
31.1	Rule 13a-14(a)/Section 302 Certification of Paul G. Greig, Chief Executive Officer of FirstMerit Corporation (filed herewith).
31.2	Rule 13a-14(a)/Section 302 Certification of Terrence E. Bichsel, Senior Executive Vice President and Chief Financial Officer of FirstMerit Corporation (filed herewith).
32.1	Rule 13a-14(b)/Section 906 Certification of Paul G. Greig, Chief Executive Officer of FirstMerit Corporation (furnished herewith).
32.2	Rule 13a-14(b)/Section 906 Certification of Terrence E. Bichsel, Senior Executive Vice President and Chief Financial Officer of FirstMerit Corporation (furnished herewith).
101.1	The following financial information from FirstMerit Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Comprehensive Income; (iii) the Consolidated Statements of Changes in Shareholders’ Equity; (iv) the Consolidated Statements of Cash Flows; and (iv) Notes to Consolidated Financial Statements.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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

July 29, 2016

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FirstMerit Corporation

Form 10-Q

Index to Exhibits

Exhibit	Description
10.1	FirstMerit Corporation 2011 Equity Incentive Plan Form of Time-Based Restricted Stock Unit Award Agreement
31.1	Rule 13a-14(a)/Section 302 Certification of Paul G. Greig, Chief Executive Officer of FirstMerit Corporation (filed herewith).
31.2	Rule 13a-14(a)/Section 302 Certification of Terrence E. Bichsel, Senior Executive Vice President and Chief Financial Officer of FirstMerit Corporation (filed herewith).
32.1	Rule 13a-14(b)/Section 906 Certification of Paul G. Greig, Chief Executive Officer of FirstMerit Corporation (furnished herewith).
32.2	Rule 13a-14(b)/Section 906 Certification of Terrence E. Bichsel, Senior Executive Vice President and Chief Financial Officer of FirstMerit Corporation (furnished herewith).
101.1	The following financial information from FirstMerit Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Comprehensive Income; (iii) the Consolidated Statements of Changes in Shareholders’ Equity; (iv) the Consolidated Statements of Cash Flows; and (iv) Notes to Consolidated Financial Statements.

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