Benefit Plans

Pension plans. The Corporation had a noncontributory qualified defined benefit pension plan that covered all eligible legacy FirstMerit employees vested in the pension plan as of December 31, 2006 ("FirstMerit Pension Plan"). The FirstMerit Pension Plan was frozen for nonvested employees and closed to new entrants after December 31, 2006. Effective December 31, 2012, the FirstMerit Pension Plan was frozen resulting in no benefits accruing after December 31, 2012. Employees will have an accrued benefit which will be paid upon retirement.

Certain former Citizens' employees were covered by a cash balance defined benefit pension plan after the Acquisition Date through December 31, 2013 ("Citizens Pension Plan"). Effective December 31, 2006, the Citizens Pension Plan was frozen, preserving prior earned benefits but discontinuing the accrual of future benefits.

As of December 31, 2013, the Corporation adopted one noncontributory qualified defined pension plan covering all eligible FirstMerit and former Citizens employees, with the FirstMerit Pension Plan being the surviving plan. The Citizens Pension Plan ceased to exist after December 31, 2013. The plan assets of the FirstMerit Pension Plan and the Citizens Pension Plan were combined and invested in a single trust as of December 31, 2013. Benefits remain frozen in the combined plan with the unique benefit structure under each of the FirstMerit and Citizens Pension Plans retained in the combined plan.

A supplemental nonqualified, nonfunded 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 FirstMerit Pension Plan.

Postretirement medical and life insurance plan. The Corporation also sponsored a benefit plan that provided postretirement medical and life insurance for retired employees ("FirstMerit Postretirement Plan"). The Corporation's medical contribution was limited to 200% of the 1993 level for employees who retire after January 1, 1993.

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 retired after March 1, 2009 do not receive a Corporation subsidy toward retiree medical coverage.

Postretirement medical and life insurance plans were also maintained for certain former Citizens employees after the Acquisition Date through December 31, 2013 ("Citizens Postretirement Plan"). Citizens’ Postretirement Plan provided postretirement health and dental care to full-time employees who retired with eligibility for coverage based on historical plan terms.

As of December 31, 2013, the Corporation adopted one postretirement plan covering all eligible FirstMerit and former Citizens employees, with the FirstMerit Postretirement Plan being the surviving plan. The Citizens Postretirement Plan ceased to exist after December 31, 2013 and future benefits to the existing participants of the Citizens Postretirement Plan Plan will be provided under the FirstMerit Postretirement Plan. The Corporation reserves the right to terminate or amend the FirstMerit Postretirement Plan at any time.

Other employee benefits. FirstMerit's Amended and Restated Executive Deferred Compensation Plan ("FirstMerit Deferred Compensation Plan") allows participating executives to elect to receive incentive compensation payable with respect to any year in whole 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 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 share account is so credited. On December 18, 2013, the FirstMerit Deferred Compensation Plan was amended to freeze the benefit payable to the Corporation's Chairman, President and Chief Executive Officer ("CEO") at the level of the benefit accrued by the CEO under the plan as of November 30, 2013. Subsequent increases or decreases in the CEO's compensation nor any changes in circumstances will cause any increase or decrease in the amount payable to the CEO under this plan. The deferred compensation liability at December 31, 2013 and 2012 was $19.2 million and $10.2 million, respectively, and is included in accrued taxes, expenses and other liabilities on the accompanying Consolidated Balance Sheet.

Savings plans. The Corporation maintains a retirement savings plan under Section 401(k) of the Internal Revenue Code of 1986, as amended, covering substantially all full-time and part-time employees beginning in the quarter following three months of continuous employment ("FirstMerit 401(k) Plan"). Effective January 1, 2009, the Corporation suspended is matching contribution to the savings plan. Effective April 1, 2011, the Corporation reinstated its matching contribution at $.50 of each $1.00 up to 1% of employee's qualifying salary. Starting January 1, 2013, the employer's matching contribution to the FirstMerit 401(k) Plan increased to 100% on the first 3% and then 50% on the next 2% of the employee's qualifying salary. Contributions made by the Corporation to the FirstMerit 401(k) Plan were $4.4 million for 2013, $0.6 million in 2012 and $0.5 million in 2011. Matching contributions vest in accordance with plan specifications.

From the Acquisition Date through the close of business December 31, 2013, eligible Citizens employees who were employed by the Corporation continued to be covered by an employee savings plan under Section 401(k) ("Citizens 401(k) Plan"). Contributions to the Citizens 401(k) Plan were matched 50% on the first 2% of salary deferred and 25% on the next 6% deferred. The Corporation contributed $1.1 million to the Citizens 401(k) Plan from Acquisition Date through December 31, 2013. The Citizens 401(k) Plan was merged with the FirstMerit 401(k) Plan as of close of business December 31, 2013. The plan terms of the merged plans are substantially the same as the FirstMerit 401(k) Plan.

The Corporation maintained a qualified defined contribution plan known as Retirement Investment Plan through December 31, 2012. The Corporation made a $3.5 million and a $3.2 million contribution to the Retirement Investment Plan for the years ended December 31, 2012 and 2011, respectively. Effective with the termination of this plan as of January 1, 2013, the Corporation will provide, for a five-year period, a transition contribution equal to 3% of an employee's qualifying salary to all eligible plan participants that have earned 60 age-plus-service points, as of December 31, 2012. This transition contribution totaled $1.1 million for the year ended December 31, 2013.

The combined components of net periodic pension and postretirement benefits and other amounts recognized in AOCI for the Corporation's pension and postretirement benefit plans as of December 31, 2013, 2012 and 2011 are as follows:



	Pension Benefits									Postretirement Benefits
	2013			2012			2011			2013			2012			2011
Net periodic cost consists of:
Service cost	$	2,339		$	7,194		$	6,123		$	99		$	77		$	54
Interest cost	12,814			11,862			11,439			563			697			886
Expected return on plan assets	(14,938		)	(12,136		)	(13,313		)	—			—			—
Amortization of prior service cost/(credit)	469			388			394			(468		)	(468		)	—
Amortization of actuarial (gain)/loss	4,693			10,371			7,120			268			288			114
Settlement / curtailment income	(524		)	(142		)	—			—			—			—
Net periodic cost (benefit)	4,852			17,537			11,763			462			594			1,054
Other changes in plan assets and benefit obligations recognized in Other comprehensive income:
Current year actuarial loss/(gain)	(47,417		)	1,281			38,403			(682		)	(57		)	(3,217		)
Amortization of actuarial gain/(loss)	(4,169		)	(10,229		)	(7,120		)	(268		)	(288		)	(114		)
Amortization of prior service (cost)/credit	(469		)	(388		)	(394		)	468			468			—
Total recognized in AOCI	(52,054		)	(9,337		)	30,889			(482		)	123			(3,330		)
Total recognized in net periodic cost and AOCI	$	(47,203	)	$	8,200		$	42,652		$	(20	)	$	717		$	(2,276	)

A measurement date of December 31 is used for plan assets and benefit obligations. The following table sets forth a reconciliation of the changes in the projected benefit obligation for the Corporation's pension and postretirement benefit plans as of December 31, 2013 and 2012 as well as the change in plan assets for the Corporation's qualified pension plans:



	Pension Benefits						Postretirement Benefits
	2013			2012			2013			2012
Accumulated benefit obligation, end of year	307,739			257,206
Change in projected benefit obligation:
Projected benefit obligation, beginning of year	$	259,428		$	243,640		$	14,771		$	16,250
Citizens acquisition	85,483			—			2,062			—
Service cost	2,339			7,194			99			77
Interest cost	12,814			11,862			563			697
Plan amendments	3,927			—			—			—
Participant contributions	—			—			1,538			1,199
Actuarial (gains)/losses and change in assumptions	(35,984		)	8,529			(682		)	(58		)
Benefits paid	(19,172		)	(11,797		)	(2,808		)	(3,394		)
Projected benefit obligation, end of year	$	308,834		$	259,428		$	15,544		$	14,771
Change in plan assets, at fair value:
Fair value of plan assets, beginning of year	$	174,385		$	153,605		$	—		$	—
Citizens acquisition	68,304			—			—			—
Actual return on plan assets	30,298			19,372			—			—
Participant contributions	—			—			1,538			1,199
Employer contributions	3,695			13,205			1,270			2,195
Benefits paid	(19,172		)	(11,797		)	(2,808		)	(3,394		)
Fair value of plan assets, end of year	$	257,510		$	174,385		$	—		$	—
Funded status ^(a)	(51,324		)	(85,043		)	(15,544		)	(14,771		)
Amounts recognized in AOCI before income taxes:
Prior service cost (credit)	$	5,121		$	1,663		$	(3,858	)	$	(4,326	)
Net actuarial loss	53,061			108,572			3,329			4,279
Amount recognized in AOCI	$	58,182		$	110,235		$	(529	)	$	(47	)

^(a)The Corporation recognizes the underfunded status of the plans in accrued taxes, expenses and other liabilities on the Consolidated Balance Sheet.

As indicated in the table above, the benefit obligation and accumulated benefit obligation for all of the Corporation's pension plans were in excess of the fair value of plan assets.

Actuarial assumptions. The actuarial assumptions used to determine year end obligations for the Corporation's pension and postretirement plans were as follows:



Weighted-average assumptions for year end obligations	2013		2012		2011
Discount rate
Qualified pensions	4.99	%	4.21	%	5.04	%
Nonqualified pensions	4.12	%	4.21	%	5.04	%
Postretirement medical benefits, FirstMerit's plan	4.01	%	3.18	%	4.23	%
Postretirement medical benefits, Citizens' plan	3.98	%	na		na
Postretirement life insurance benefits	5.08	%	4.30	%	5.03	%
Expected long-term rate of return	6.75	%	7.00	%	7.25	%
Rate of compensation increase
Qualified pensions	na		na		5.22	%
Nonqualified pensions	3.75	%	3.75	%	3.75	%
Assumed health care cost trend rate, pre-65 ^(a)
Initial trend	7.50	%	8.00	%	8.50	%
Ultimate trend	5.00	%	5.00	%	5.00	%
Year ultimate trend reached	2019		2019		2019
Assumed health care cost trend rate, post-65^(a)
Initial trend	11.50	%	12.00	%	12.50	%
Ultimate trend	5.00	%	5.00	%	5.00	%
Year ultimate trend reached	2027		2027		2027
Prescription Drugs
Initial trend	7.50	%	8.00	%	8.50	%
Ultimate trend	5.00	%	5.00	%	5.00	%
Year ultimate trend reached	2019		2019		2019

(a) The health care cost trend assumptions relate only to the postretirement benefit plans. Increasing or decreasing the assumed health care cost trend rates by one percentage point each future year would not have a material impact on total service and interest cost or the year end benefit obligation.

The actuarial assumptions used as of the beginning of the year to determine the net periodic costs for the Corporation's pension and postretirement plans were as follows:



Weighted-average assumptions for benefit cost at beginning of year	2013		2012		2011
Discount rate ^(a)
Qualified pension	4.21	%	5.04	%	5.60	%
Nonqualified pensions	4.21	%	5.04	%	5.60	%
Postretirement medical benefits	3.18	%	4.23	%	4.43	%
Postretirement life insurance benefits	4.30	%	5.03	%	5.53	%
Expected long-term rate of return ^(a)	7.00	%	7.25	%	8.25	%
Rate of compensation increase
Qualified pension	na		5.22	%	5.22	%
Nonqualified pensions	3.75	%	3.75	%	3.75	%
Assumed health care cost trend rate, pre-65 ^(b)
Initial trend	8.00	%	8.50	%	9.00	%
Ultimate trend	5.00	%	5.00	%	5.00	%
Year ultimate trend reached	2019		2019		2019
Assumed health care cost trend rate, post-65^(b)
Initial trend	12.00	%	12.50	%	13.00	%
Ultimate trend	5.00	%	5.00	%	5.00	%
Year ultimate trend reached	2027		2027		2027
Prescription Drugs
Initial trend	8.00	%	8.50	%	9.00	%
Ultimate trend	5.00	%	5.00	%	5.00	%
Year ultimate trend reached	2019		2019		2019

(a) The Citizens Pension and Postretirement Plans were remeasured at the Acquisition Date based on discount rate of 3.83% and an expected long-term rate of return of 6.75%.

(b) The health care cost trend assumptions relate only to the postretirement benefit plans. Increasing or decreasing the assumed health care cost trend rates by one percentage point each future year would not have a material impact on total service and interest cost or the year end benefit obligation

The discount rates are determined independently for each plan and reflect the market rate for high-quality fixed income debt instruments, that is rated double-A or higher by a recognized ratings agency.

The rate of return on plan assets is a long-term assumption established by considering historic plan asset returns and anticipated returns of the asset classes invested in by the pension plan and the allocation strategy currently in place among those classes. 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 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, 2013, 2012 and 2011, these subsidies did not have a material effect on our APBO and net postretirement benefit cost for the Corporation.

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	$	2,534	$	(468	)	$	2,066
Cumulative net loss	1,995		235			2,230

At December 31, 2013 the FirstMerit Pension Plan was sufficiently funded under the requirements of ERISA. Consequently, the Corporation is not required to make a minimum contribution to that plan in 2014. The Corporation also does not expect to make any significant discretionary contributions during 2014. The Corporation made discretionary contributions of $10.0 million to the FirstMerit Pension Plan in both 2012 and 2011.

At December 31, 2013, the projected benefit payments for the Corporation's pension and postretirement plans, which reflect expected future service as appropriate, totaled $28.2 million and $1.6 million in 2014, $22.9 million and $1.5 million in 2015, $22.6 million and $1.3 million in 2016, $20.4 million and $1.3 million in 2017, $20.5 million and $1.2 million in 2018, and $92.6 million and $5.1 million in years 2019 through 2022, respectively. The projected payments were calculated using the same assumptions as those used to calculate the benefit obligations in the preceding tables.

FirstMerit Pension Plan Investment Policy and Strategy. The FirstMerit 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 Policy recognizes 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 ratio status improves, the allocation to liability-hedging assets will increase.



Dynamic Investment Policy Schedule
Return-Seeking (and Diversification) Allocation Strategy
Funded Ratio	Minimum	Target	Maximum
≤80%	58%	65%	72%
81%-83%	55%	62%	69%
84%-86%	52%	58%	64%
87%-89%	47%	53%	59%
90%-92%	43%	49%	55%
93%-95%	39%	44%	49%
96%-98%	35%	40%	45%
99%-101%	31%	35%	39%
102%-104%	27%	31%	35%
105%-107%	22%	26%	30%
107%-110%	18%	22%	26%
>110%	16%	20%	24%

Citizens Pension Plan Investment Policy and Strategy. The Citizens Pension Plan investment policy and strategy for managing defined benefit plan assets was described as growth with income. Management analyzed the potential risks and rewards associated with the asset allocation strategies on a quarterly basis. Implementation of the strategies included regular rebalancing to the target asset allocation. The target asset allocation mix remained at 60% equities and 40% fixed income debt securities and cash equivalents during 2013. The long-term rate of return expected on plan assets was finalized after considering long-term returns in the general market, long-term returns experienced by the assets in the plan, and projected plan expenses.

The weighted-average allocations for the combined FirstMerit and Citizens Pension Plans as of December 31, 2013 and the FirstMerit Pension Plan for December 31, 2012, by asset category, are as follows:



	Percentage of Plan Assets on Measurement Date
	December 31,
Asset Category	2013		2012
Cash and domestic money market funds	1.92	%	2.97	%
U.S. Treasury obligations	1.76	%	2.34	%
U.S. Government agencies	0.96	%	2.03	%
Corporate bonds	3.12	%	4.55	%
Common stocks	11.24	%	15.43	%
Equity mutual funds	27.62	%	31.35	%
Fixed income mutual funds	36.56	%	24.10	%
Foreign mutual funds	16.83	%	17.23	%
	100.00	%	100.00	%

The following is a description of the valuation methodologies used to measure assets held by the FirstMerit 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 FirstMerit Pension Plan's assets at fair value as of December 31, 2013:



	Level 1		Level 2		Level 3		Total
Domestic money market funds	$	4,948	$	—	$	—	$	4,948
United States government securities	—		4,544		—		4,544
United States government agency issues	—		2,461		—		2,461
Corporate bonds	—		8,024		—		8,024
Common stocks	28,951		—		—		28,951
Equity mutual funds	71,118		—		—		71,118
Fixed income mutual funds	94,135		—		—		94,135
Foreign mutual funds	43,330		—		—		43,330
Total assets at fair value	$	242,481	$	15,029	$	—	$	257,510