Benefit Plans

Pension plans. The Corporation has a defined benefit pension plan which covers employees vested in the pension plan as of December 31, 2006. On May 18, 2006, the Corporation’s Board of Directors approved freezing the defined benefit pension plan for non-vested employees and closed it to new entrants after December 31, 2006. In general, benefits are based on years of service and the employee's compensation. The Corporation's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax reporting purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The Corporation made contributions of $10.0 million, $20.0 million and $10.0 million to the qualified pension plan during 2011, 2010 and 2009, respectively. Management anticipates contributing $10.0 million to the qualified pension plan during 2012.

A supplemental non-qualified, non-funded pension plan for certain officers is also maintained and is being provided for by charges to earnings sufficient to meet the projected benefit obligation. The pension cost for this plan is based on substantially the same actuarial methods and economic assumptions as those used for the defined benefit pension plan.

Postretirement medical and life insurance plan. The Corporation also sponsors a benefit plan which provides postretirement medical and life insurance for retired employees. Effective January 1, 1993, the plan was changed to limit the Corporation's medical contribution to 200% of the 1993 level for employees who retire after January 1, 1993. The Corporation reserves the right to terminate or amend the plan at any time.

Effective March 1, 2009, the Corporation discontinued the subsidy for retiree medical for current eligible active employees. Eligible employees who retired on or prior to March 1, 2009, were offered subsidized retiree medical coverage until age 65. Employees who retire after March 1, 2009 will not receive a Corporation subsidy toward retiree medical coverage. The elimination of Corporation subsidized retiree medical coverage resulted in an accounting curtailment gain of $10.2 million in 2009.

The cost of postretirement benefits expected to be provided to current and future retirees is accrued over those employees’ service periods. In addition to recognizing the cost of benefits for the current period, recognition is being provided for the cost of benefits earned in prior service periods (the transition obligation).

Other employee benefits. FirstMerit’s Amended and Restated Executive Deferred Compensation Plan allows participating executives to elect to receive incentive compensation payable with respect to any year in whole shares of common stock or cash, to elect to defer receipt of any incentive compensation otherwise payable with respect to any year in increments of 1%. An account is maintained in the name of each participant and is credited with cash or shares of common stock equal to the number of shares that could have been purchased with the amount of any compensation so deferred, at the closing price of the common stock on the day as of which the stock account is so credited. The deferred compensation liability at December 31, 2011 and 2010 was $10.0 million and $9.9 million, respectively, and is included in accrued taxes, expenses and other liabilities on the accompanying consolidated balance sheets.

Savings plans. The Corporation maintains a retirement savings plan under Section 401(k) of the Internal Revenue Code, covering substantially all full-time and part-time employees beginning in the quarter following three months of continuous employment. Effective April 1, 2011, the Corporation reinstated its matching contribution at $.50 of each $1.00 up to 1% of employee's qualifying salary. Contributions made by the Corporation to the savings plan were $0.5 million for 2011. The Corporation did not make a contribution to the savings plan during 2010 and 2009, due to a suspension of the matching contribution effective January 1, 2009. The savings plan was approved for non-vested employees in the defined benefit pension plan and new hires as of January 1, 2007. Matching contributions vest in accordance with plan specifications.

The Corporation maintains a qualified defined contribution plan known as Retirement Investment Plan (“RIP”). This plan was established January 1, 2007 for any employee that was not vested in the defined benefit plan on December 31, 2006. All new hires after January 1, 2007 became eligible for the RIP. To be eligible for the annual contribution, an employee must be actively employed on December 31 and eligible to participate in the 401(k) plan (date of hire and age 21 on or before July 1, 2007). The Corporation made a $3.2 million, $2.5 million, and $1.8 million contribution to the RIP for the years ended December 31, 2011, 2010 and 2009, respectively.

Actuarial assumptions. The expected long-term rate of return was estimated using market benchmarks for equities and bonds applied to the plan’s target asset allocation and expected duration of benefit payments. The Corporation's pension plan weighted-average allocations at measurement dates by asset category are as follows:



	Percentage of Plan Assets on Measurement Date
	December 31,
Asset Category	2011		2010
Cash and domestic money market funds	4.33	%	4.39	%
U.S. Treasury obligations	2.37	%	2.97	%
U.S. Government agencies	2.96	%	3.33	%
Corporate bonds	5.22	%	5.38	%
Common stocks	15.30	%	24.56	%
Equity mutual funds	36.80	%	23.26	%
Fixed income mutual funds	18.89	%	19.84	%
Foreign mutual funds	14.13	%	16.27	%
	100.00	%	100.00	%



The Corporation's asset allocation strategy favors equities, with a target allocation of approximately 90% equity securities. The asset allocation policy is as below:
Asset Class	Target		Range
Large Cap U.S. Equity	45.00	%	35% to 55%
Small/Mid Cap U.S. Equity	20.00	%	10% to 30%
International Equity	25.00	%	15% to 35%
Alternative Investments	10.00	%	0% to 15%
	100.00	%

The Corporation's pension plan invests in equities and other return-seeking assets, such as real assets, as well as liability-hedging assets, primarily fixed income. The investment policies recognize that the plan's asset return requirements and risk tolerances will change over time. The Corporation utilizes a dynamic investment policy, whereby the allocation to return-seeking assets and liability-hedging assets is determined by comparing plan assets to the plan liabilities. As the plan's funded status improves, the allocation to liability-hedging assets will increase from the current target of 35% of plan assets.

The Corporation uses historic plan asset returns combined with current market conditions to estimate the rate of return. The expected rate of return on plan assets is a long-term assumption and generally does not change annually. The expected return on equities was computed using a valuation framework, which projected future returns based on current equity valuations rather than historical returns. Due to active management of the plan’s assets, the return on the plan equity investments historically has exceeded market averages. Management estimated the rate by which the plan assets would outperform the market in the future based on historical experience adjusted for changes in asset allocation and expectations for overall future returns on equities compared to past periods.

The discount rate reflects the market rate for high-quality fixed income debt instruments, that is rated double-A or higher by a recognized ratings agency, on the Corporation’s annual measurement date and is subject to change each year. The discount rate is selected on data specific to the Corporation’s plans and employee population. During 2011, the Corporation used a discount rate of 5.04% in the pension liability valuation, a decrease of 56 basis points from the 2010 discount rate.

The average rate of compensation increase for the qualified pension plans was 5.22% in 2011 and 2010. The average rate of compensation increase for the supplemental executive retirement nonqualified pension plan was 3.75% in 2011 and 2010.

For measurement purposes, the assumed annual rate increase in the per capita cost of non-Medicare covered health care benefits was 8.5% in 2011, decreased gradually to 5.0% in 2019, and Medicare covered health care benefits was 13.0%, decreased gradually to 5.0% in 2027. Increasing or decreasing the assumed health care cost trend rate by one percentage point each future year would not have a material impact on net postretirement benefit cost or obligations.

Additional information on the assumptions used to value the pension liability is included in Critical Accounting Policies within Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The actuarial assumptions used in the defined benefit qualified and nonqualified pension plans and the postretirement medical and life insurance benefit plan were as follows:



	Pension Benefits						Postretirement Benefits
Weighted-average assumptions as of 12/31 measurement date	2011		2010		2009		2011		2010		2009
Discount Rate	5.04	%	5.60	%	5.98	%	4.23	%	4.43	%	4.94	%
Long-term rate of return on assets	7.25	%	8.25	%	8.50	%	—		—		—
Rate of compensation increase	3.75% to 5.22%		3.75% to 5.22%		3.75% to 5.22%		—		—		—
Medical trend rates - non-medicare risk Pre-65	—		—		—		8.5% to 5.0%		9.0% to 5.0%		7.0% to 5.0%
Medical trend rates - non-medicare risk Post-65	—		—		—		12.5% to 5.0%		13.0% to 5.0%		9.0% to 5.0%
Prescription Drugs	—		—		—		8.5% to 5.0%		9.0% to 5.0%		9.0% to 5.0%
Medical trend rates - medicare risk HMO Post-65							12.5% to 5.0%		13.0% to 5.0%		9.0% to 5.0%



The components of net periodic pension and postretirement benefits are:
	Pension Benefits									Postretirement Benefits
	2011			2010			2009			2011		2010		2009
Service cost	$	6,123		$	5,919		$	5,290		$	54	$	61	$	173
Interest cost	11,439			11,200			11,003			886		959		1,412
Expected return on assets	(13,313		)	(12,059		)	(11,222		)	—		—		—
Prior service costs	394			394			392			—		—		(90		)
Cumulative net loss	7,120			5,708			3,031			114		15		63
Curtailment gain	—			—			—			—		—		(10,239		)
Net periodic pension/postretirement cost (benefit)	$	11,763		$	11,162		$	8,494		$	1,054	$	1,035	$	(8,681	)



The following table sets forth the plans' funded status and amounts recognized in the Corporation's consolidated financial statements.
	Pension Benefits						Postretirement Benefits
	2011			2010			2011			2010
Change in projected benefit obligation:
(PBO), beginning of year	$	211,183		$	193,359		$	19,942		$	19,675
Service cost	6,123			5,919			54			61
Interest cost	11,439			11,200			886			959
Plan amendments	—			—			(4,794		)	—
Participant contributions	—			—			846			509
Actuarial gain	23,727			8,512			1,578			954
Benefits paid	(8,832		)	(7,807		)	(2,262		)	(2,216		)
PBO, end of year	$	243,640		$	211,183		$	16,250		$	19,942
Change in plan assets, at fair value:
Fair value of plan assets, beginning of year	$	152,390		$	122,799		$	—		$	—
Actual return on plan assets	(1,352		)	16,130			—			—
Participant contributions	—			—			846			509
Employer contributions	11,399			21,268			1,416			1,707
Benefits paid	(8,832		)	(7,807		)	(2,262		)	(2,216		)
Fair value of plan assets, end of year	$	153,605		$	152,390		$	—		$	—
Funded status	(90,046		)	(58,793		)	(16,250		)	(19,942		)
Prior service costs	1,909			2,303			(4,794		)	—
Cumulative net loss	117,664			86,381			4,624			3,160
Prepaid (accrued) pension/postretirement cost	29,527			29,891			(16,420		)	(16,782		)
Amounts recognized in the statement of financial condition consist of:
Accrued benefit liability	$	(90,046	)	$	(58,793	)	$	(16,250	)	$	(19,942	)
Intangible asset	—			—			—			—
Accumulated other comprehensive income	119,573			88,684			(170		)	3,160
Net amount recognized	$	29,527		$	29,891		$	(16,420	)	$	(16,782	)

Accumulated Benefit Obligation (“ABO”) for the Corporation's pension plan was $220.9 million and $190.8 million for the years ended December 31, 2011 and 2010, respectively. Information for those pension plans that had an ABO in excess of plan assets is as follows:



	Pension Benefits				Postretirement Benefits
	2011		2010		2011	2010
Aggregate projected benefit obligation	$	243,640	$	211,183	n/a	n/a
Aggregate accumulated benefit obligation	220,932		190,828		n/a	n/a
Aggregate fair value of plan assets	153,605		152,390		n/a	n/a

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 introduced a prescription drug benefit under Medicare, and provides a federal subsidy to sponsors of retiree healthcare benefit plans that offer “actuarially equivalent” prescription drug coverage to retirees. For the years ended December 31, 2011, 2010 and 2009 these subsidies did not have a material effect on our APBO and net postretirement benefit cost.

At December 31, 2011, the projected benefit payments for the pension plans and the postretirement benefit plan, which reflect expected future service, as appropriate, totaled $16.8 million and $1.8 million in 2012, $15.7 million and $1.6 million in 2013, $15.4 million and $1.5 million in 2014, $14.4 million and $1.4 million in 2015, $14.9 million and $1.2 million in 2016, and $74.2 million and $5.0 million in years 2016 through 2020, respectively. The projected payments were calculated using the same assumptions as those used to calculate the benefit obligations in the preceding tables.

Amounts recognized in accumulated other comprehensive loss consist of:



	Pension Benefits				Postretirement Benefits
	2011		2010		2011			2010
Prior service cost	$	1,909	$	2,303	$	(4,794	)	$	—
Cumulative net loss	117,664		86,381		4,624			3,160
Total amount recognized	$	119,573	$	88,684	$	(170	)	$	3,160

Unrecognized Actuarial Gains and Losses. Actuarial gains and losses are changes in measures of the plan assets or benefit obligations that occur during a period because of differences between actual experience and assumptions, or that occur as a result of changes in one or more actuarial assumptions. Actuarial gains and losses can arise from differences between the expected and actual return on plan assets, from changes in the benefit obligation due to changes in discount rates, from changes in assumptions about future compensation increases, health care cost trend rates, or other factors.

Net unrecognized actuarial gains or losses and prior service costs are recognized as an adjustment to accumulated other comprehensive income, net of tax, in the period they arise and, subsequently, recognized as a component of net periodic benefit cost over the average remaining service period of the active employees.

The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost (credit) during the next fiscal year are as follows:



	Pension		Postretirement			Total
Prior service cost	$	388	$	(468	)	$	(80	)
Cumulative net loss	10,371		287			10,658

The following is a description of the valuation methodologies used to measure assets held by the pension plans at fair value.


•	Domestic and foreign money market funds: Valued at quoted prices as reported on the active market in which the money market funds are traded.


•	United States government securities, United States government agency issues and corporate bonds: Valued using independent evaluated prices which are based on observable inputs, such as available trade information, spreads, bids and offers, and United States Treasury curves.


•	Common stocks: Valued at the closing price reported on the active market in which the individual securities are traded.


•	Registered equity, fixed income and foreign mutual funds: Valued at quoted prices as reported on the active market in which the securities are traded.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Corporation believes its valuation method is appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of financial instruments could result in a different fair value measurement at the reporting date.

The following table sets forth by level, within the fair value hierarchy, the pension plans’ assets at fair value as of December 31, 2011:



	Level 1		Level 2		Level 3		Total
Domestic money market funds	$	6,654	$	—	$	—	$	6,654
United States government securities	—		3,646		—		3,646
United States government agency issues	—		4,550		—		4,550
Corporate bonds	—		8,024		—		8,024
Common stocks	23,494		—		—		23,494
Equity mutual funds	56,529		—		—		56,529
Fixed income mutual funds	29,012		—		—		29,012
Foreign mutual funds	21,695		—		—		21,695
Total assets at fair value	$	137,384	$	16,220	$	—	$	153,604