FIRSTMERIT COPRORATION 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

FOR THE QUARTERLY PERIOD ENDED March 31, 2006


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

For the transition period from to

COMMISSION FILE NUMBER 0-10161

FIRSTMERIT CORPORATION

(Exact name of registrant as specified in its charter)


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

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

(330) 996-6300
(Telephone Number)

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

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

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

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

As of April 28, 2006 79,771,628 shares, without par value, were outstanding.

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited, except December 31, 2005, which is derived from the audited financial statements)


	March 31,			December 31,			March 31,
	2006			2005			2005
ASSETS
Cash and due from banks	$	206,912			225,953			191,582
Investment securities (at fair value) and federal funds sold		2,460,321			2,546,496			2,772,500
Loans held for sale		61,318			42,566			63,171
Loans:
Commercial loans		3,562,968			3,519,483			3,382,102
Mortgage loans		625,514			628,581			637,885
Installment loans		1,509,714			1,524,355			1,601,498
Home equity loans		772,308			778,697			677,724
Credit card loans		135,916			145,592			137,044
Leases		65,682			70,619			83,781

Total loans		6,672,102			6,667,327			6,520,034
Less allowance for loan losses		(87,589	)		(90,661	)		(97,115	)

Net loans		6,584,513			6,576,666			6,422,919
Premises and equipment, net		119,571			120,420			118,059
Goodwill		139,245			139,245			139,245
Intangible assets		3,533			3,756			4,424
Accrued interest receivable and other assets		525,304			499,257			556,998

Total assets	$	10,100,717			10,154,359			10,268,898


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand-non-interest bearing	$	1,465,168			1,523,731			1,427,307
Demand-interest bearing		923,491			830,248			827,507
Savings and money market accounts		2,320,360			2,304,177			2,379,464
Certificates and other time deposits		2,801,543			2,575,494			2,690,273

Total deposits		7,510,562			7,233,650			7,324,551

Securities sold under agreements to repurchase		1,272,362			1,426,037			1,281,745
Wholesale borrowings		285,143			401,104			557,282
Accrued taxes, expenses, and other liabilities		162,098			155,988			158,589

Total liabilities		9,230,165			9,216,779			9,322,167

Commitments and contingencies
Shareholders’ equity:
Preferred stock, without par value: authorized and unissued 7,000,000 shares		—			—			—
Preferred stock, Series A, without par value: designated 800,000 shares; none outstanding		—			—			—
Convertible preferred stock, Series B, without par value: designated 220,000 shares; none outstanding		—			—			—
Common stock, without par value: authorized 300,000,000 shares; issued 92,026,350 at March 31, 2006 and March 31, 2005		127,937			127,937			127,937
Capital surplus		108,958			108,210			108,903
Accumulated other comprehensive loss		(53,395	)		(42,850	)		(38,194	)
Retained earnings		1,002,035			994,487			963,618
Treasury stock, at cost, 12,257,585, 9,691,424 and 8,414,363 shares at March 31, 2006, December 31, 2005 and March 31, 2005, respectively		(314,983	)		(250,204	)		(215,533	)

Total shareholders’ equity		870,552			937,580			946,731

Total liabilities and shareholders’ equity	$	10,100,717			10,154,359			10,268,898

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

FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


	Quarters ended
(Unaudited)	March 31,
(In thousands except per share data)	2006			2005
Interest income:
Interest and fees on loans, including held for sale	$	117,740			100,149
Interest and dividends on investment securities and federal funds sold		25,332			27,692

Total interest income		143,072			127,841

Interest expense:
Interest on deposits:
Demand-interest bearing		2,362			956
Savings and money market accounts		10,748			6,375
Certificates and other time deposits		26,101			20,600
Interest on securities sold under agreements to repurchase		11,923			8,841
Interest on wholesale borrowings		5,965			5,059

Total interest expense		57,099			41,831

Net interest income		85,973			86,010
Provision for loan losses		6,106			11,614

Net interest income after provision for loan losses		79,867			74,396

Other income:
Trust department income		5,394			5,505
Service charges on deposits		16,066			14,820
Credit card fees		10,671			9,411
ATM and other service fees		3,108			2,959
Bank owned life insurance income		2,986			3,074
Investment services and insurance		2,597			2,858
Manufactured housing income		3			102
Investment securities gains, net		16			1,872
Loan sales and servicing income		1,445			1,133
Other operating income		3,111			3,205

Total other income		45,397			44,939

Other expenses:
Salaries, wages, pension and employee benefits		43,031			39,393
Net occupancy expense		6,549			6,536
Equipment expense		2,958			3,185
Stationery, supplies and postage		2,453			2,461
Bankcard, loan processing and other costs		5,827			5,724
Professional services		2,763			2,150
Amortization of intangibles		223			223
Other operating expense		18,095			16,239

Total other expenses		81,899			75,911

Income before federal income tax expense		43,365			43,424
Federal income tax expense		13,401			13,336

Net income	$	29,964			30,088

Other comprehensive loss, net of taxes
Unrealized securities’ holding losses, net of taxes		(9,748	)		(22,604	)
Unrealized hedging gain (loss), net of taxes		(787	)		18
Minimum pension liability adjustment, net of taxes		—			(183	)
Less: reclassification adjustment for securities’ gains losses realized in net income, net of taxes		10			1,217

Total other comprehensive loss, net of taxes		(10,545	)		(23,986	)

Comprehensive income	$	19,419			6,102

Net income applicable to common shares	$	29,964			30,088

Net income used in diluted EPS calculation	$	29,969			30,095

Weighted average number of common shares outstanding — basic		80,374			84,097

Weighted average number of common shares outstanding — diluted		80,648			84,497

Basic earnings per share	$	0.37			0.36

Diluted earnings per share	$	0.37			0.36

Dividend per share	$	0.28			0.27

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

CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRSTMERIT CORPORATION AND SUBSIDIARIES


	Three months ended March 31,
(Unaudited)	2006			2005
	(In thousands)
Operating Activities
Net income	$	29,964			30,088
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		6,106			11,614
Provision for depreciation and amortization		3,609			3,402
Amortization of investment securities premiums, net		827			1,078
Accretion of income for lease financing		(990	)		(1,183	)
Gains on sales of investment securities, net		(16	)		(1,872	)
(Increase) decrease in interest receivable		2,032			(1,286	)
Increase in interest payable		6,602			5,577
Increase in prepaid assets		(3,668	)		(3,549	)
Increase (decrease) in accounts payable		(4,007	)		347
Increase in taxes payable		8,048			15,730
Increase in trade date receivable		—			(87,524	)
Increase in other receivable		(9,919	)		(706	)
Increase in miscellaneous assets		(3,510	)		(1,273	)
Originations of loans held for sale		(80,924	)		(81,539	)
Proceeds from sales of loans, primarily mortgage loans sold in the secondary mortgage markets		67,487			66,579
Losses on sales of loans, net		343			182
Amortization of intangible assets		223			223
Other changes		(10,531	)		1,418

NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES		11,676			(42,694	)
Investing Activities
Dispositions of investment securities:
Available-for-sale — sales		—			87,524
Available-for-sale — maturities		101,060			142,589
Purchases of available-for-sale investment securities		(2,709	)		(175,544	)
Net increase (decrease) in fed funds sold		(28,000	)		646
Net increase in loans and leases, except loans held for sale		(18,621	)		(108,075	)
Purchases of premises and equipment		(4,218	)		(302	)
Sales of premises and equipment		1,458			39


NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES		48,970			(53,123	)
Financing Activities
Net increase (decrease) in demand accounts		34,680			(57,324	)
Net increase (decrease) in savings and money market accounts		16,183			(5,046	)
Net increase in certificates and other time deposits		226,049			21,474
Net decrease in securities sold under agreements to repurchase		(153,675	)		(54,726	)
Net increase (decrease) in wholesale borrowings		(115,961	)		255,508
Cash dividends — common		(22,416	)		(23,272	)
Purchase of treasury shares		(65,413	)		(21,811	)
Proceeds from exercise of stock options, conversion of debentures or conversion of preferred stock		866			3,544


NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		(79,687	)		118,347

Increase (decrease) in cash and cash equivalents		(19,041	)		22,530
Cash and cash equivalents at beginning of period		225,953			169,052

Cash and cash equivalents at end of period	$	206,912			191,582


SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized	$	31,193			19,932

Federal income taxes	$	20			—

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

FirstMerit Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2006 (Unaudited) (Dollars in thousands except per share data)

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

The consolidated balance sheet at December 31, 2005 has been derived from the audited consolidated financial statements at that date. The accompanying unaudited interim financial statements reflect all adjustments (consisting only of normally recurring accruals) that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with the rules of the Securities and Exchange Commission (“SEC”). The consolidated financial statements of the Corporation as of March 31, 2006 and 2005 and for the three months ended March 31, 2006 and 2005 are not necessarily indicative of the results that may be achieved for the full fiscal year or for any future period. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended December 31, 2005.

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

2. Recent Accounting Pronouncements — During February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Standards (“SFAS”) No. 156 “Accounting for Servicing of Financial Assets,” which amends SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value. SFAS No. 156 permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. SFAS No.156 is effective for the first fiscal year that begins after September 15, 2006, but permits earlier adoption. Management has not elected to early adopt and does not anticipate that adoption will have a material impact on the Corporation’s consolidated financial condition or results of operations.

During February 2006, the FASB issued SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments” which amends SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This statement is effective for all financial instruments acquired or issued after the beginning of the entity’s first fiscal year that begins after September 15, 2006. Management is currently evaluating the impact of SFAS No. 155 and does not anticipate that it will have a material impact on the Corporation’s consolidated financial condition or results of operations.


	March 31, 2006
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for sale:
U.S. Government agency obligations	$	897,301		—		(25,723	)		871,578
Obligations of state and political subdivisions		86,087		1,306		(52	)		87,341
Mortgage-backed securities		1,276,435		534		(51,644	)		1,225,325
Other securities		246,922		3,210		(2,055	)		248,077

	$	2,506,745		5,050		(79,474	)		2,432,321


	Book Value		Fair Value
Due in one year or less	$	239,163		235,966
Due after one year through five years		2,053,462		1,980,443
Due after five years through ten years		102,303		101,510
Due after ten years		111,817		114,402

	$	2,506,745		2,432,321


	December 31, 2005
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for sale:
U.S. Government agency obligations	$	926,459		1		(22,056	)		904,404
Obligations of state and political subdivisions		92,378		1,512		(53	)		93,837
Mortgage-backed securities		1,338,694		819		(39,964	)		1,299,549
Other securities		248,376		2,071		(1,741	)		248,706

	$	2,605,907		4,403		(63,814	)		2,546,496


	Book Value		Fair Value
Due in one year or less	$	150,505		149,204
Due after one year through five years		2,158,175		2,101,053
Due after five years through ten years		178,355		176,118
Due after ten years		118,872		120,121

	$	2,605,907		2,546,496


	March 31, 2005
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for sale:
U.S. Government agency obligations	$	935,209		117		(21,454	)		913,872
Obligations of state and political subdivisions		101,370		1,981		(159	)		103,192
Mortgage-backed securities		1,536,702		3,569		(39,462	)		1,500,809
Other securities		254,287		951		(1,540	)		253,698

	$	2,827,568		6,618		(62,615	)		2,771,571


	Book Value		Fair Value
Due in one year or less	$	42,694		42,629
Due after one year through five years		2,299,738		2,248,083
Due after five years through ten years		352,604		347,637
Due after ten years		132,532		133,222

	$	2,827,568		2,771,571

Expected maturities will differ from contractual maturities based on the issuers’ rights to call or prepay obligations with or without call or prepayment penalties. Securities with remaining maturities over five years consist of mortgage and asset backed securities.

The carrying amount of investment securities pledged to secure trust and public deposits and for purposes required or permitted by law amounted to approximately $2.0 billion at March 31, 2006, $1.9 billion at December 31, 2005, and $2.1 billion at March 31, 2005.

At March 31, 2006, December 31, 2005, and March 31, 2005, the Corporation’s investment in Federal Reserve Bank (“FRB”) was $8.6 million for each period. At March 31, 2006, December 31, 2005, and March 31, 2005, the Corporation’s investment in Federal Home Loan Bank (“FHLB”) stock amounted to $109.6 million, $108.1 million and $104.0 million, respectively, and are included in other securities in the preceding table. FRB and FHLB stock are classified as a restricted investment, carried at cost, and their value is determined by the ultimate recoverability of par value.

The following tables show the unrealized losses that have not been recognized as other-than-temporary in accordance with EITF Issue 03-1. Management believes that due to the credit-worthiness of the issuers and the fact that the Corporation has the intent and the ability to hold the securities for the period necessary to recover the cost of the securities, the decline in the fair values is temporary in nature.


	At March 31, 2006
	Less than 12 months					12 months or longer							Total
											No.
			Unrealized					Unrealized			Securities				Unrealized
Description of Securities	Fair Value		Losses			Fair Value		Losses			Impaired		Fair Value		Losses
U.S. Government agency obligations	$	132,033		(3,760	)		739,545		(21,963	)		39		871,578		(25,723	)
Obligations of states and political subdivisions		1,934		(3	)		2,939		(49	)		5		4,873		(52	)
Mortgage-backed securities		166,710		(4,629	)		1,007,795		(47,015	)		54		1,174,505		(51,644	)
Other securities		57,288		(1,574	)		21,655		(481	)		4		78,943		(2,055	)

Total temporarily impaired securities	$	357,965		(9,966	)		1,771,934		(69,508	)		102		2,129,899		(79,474	)


	At December 31, 2005
	Less than 12 months					12 months or longer							Total
											No.
			Unrealized					Unrealized			Securities				Unrealized
Description of Securities	Fair Value		Losses			Fair Value		Losses			Impaired		Fair Value		Losses
U.S. Government agency obligations	$	289,001		(5,361	)		615,319		(16,695	)		33		904,320		(22,056	)
Obligations of states and political subdivisions		3,795		(11	)		1,988		(42	)		3		5,783		(53	)
Mortgage-backed securities		420,506		(7,630	)		834,827		(32,334	)		41		1,255,333		(39,964	)
Other securities		79,095		(1,232	)		14,403		(509	)		3		93,498		(1,741	)

Total temporarily impaired securities	$	792,397		(14,234	)		1,466,537		(49,580	)		80		2,258,934		(63,814	)


	At March 31, 2005
	Less than 12 months					12 months or longer							Total
											No.
			Unrealized					Unrealized			Securities				Unrealized
Description of Securities	Fair Value		Losses			Fair Value		Losses			Impaired		Fair Value		Losses
U.S. Treasury securities	$	243		(6	)		—		—			—		243		(6	)
U.S. Government agency obligations		403,348		(6,894	)		506,738		(14,552	)		22		910,086		(21,446	)
Obligations of states and political subdivisions		12,082		(96	)		1,679		(62	)		2		13,761		(158	)
Mortgage-backed securities		746,889		(13,253	)		688,744		(26,213	)		31		1,435,633		(39,466	)
Other securities		33,067		(484	)		28,697		(1,055	)		4		61,764		(1,539	)

Total temporarily impaired securities	$	1,195,629		(20,733	)		1,225,858		(41,882	)		59		2,421,487		(62,615	)

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

The activity within the ALL for the three months ended March 31, 2006 and 2005 and the full year ended December 31, 2005 is shown in the following table:

5. Goodwill and Intangible Assets — The following table summarizes goodwill and intangible assets:


	At March 31, 2006						At December 31, 2005						At March 31, 2005
	Gross		Accumulated		Net		Gross		Accumulated		Net		Gross		Accumulated		Net
	Amount		Amortization		Amount		Amount		Amortization		Amount		Amount		Amortization		Amount
Amortizable intangible assets:

Deposit base intangible assets	$	10,137		6,603		3,534		10,137		6,381		3,756		10,137		5,713		4,424


Unamortizable intangible assets:

Goodwill	$	139,245				139,245		139,245				139,245		139,245				139,245

Amortization expense for intangible assets was $0.22 million for both quarters ended March 31, 2006 and 2005. The following table shows the estimated future amortization expense for deposit base intangible assets based on existing asset balances at December 31, 2005:


For the years ended:

December 31, 2006	$	889
December 31, 2007		889
December 31, 2008		573
December 31, 2009		347
December 31, 2010		347

During the first quarter of 2006, the Corporation conducted its annual impairment testing as required by SFAS No. 142 “Goodwill and Other Intangible Assets,” and concluded that goodwill was not impaired.

6. Earnings Per Share — The reconciliation between basic and diluted earnings per share (“EPS”) is presented as follows:


	Quarter ended		Quarter ended
	March 31,		March 31,
	2006		2005
BASIC EPS:
Net income applicable to common shares	$	29,964		30,088


Average common shares outstanding		80,374		84,097


Net income per share — basic	$	0.37		0.36


DILUTED EPS:

Net income available to common shares	$	29,964		30,088
Add: interest expense on convertible bonds		5		7

		29,969		30,095


Avg common shares outstanding		80,374		84,097
Add: Equivalents from stock options and restricted stock		224		345
Add: Equivalents-convertible bonds		50		54

Average common shares and equivalents outstanding		80,648		84,496


Net income per common share — diluted	$	0.37		0.36

For the quarters ended March 31, 2006 and 2005, options to purchase 6.1 million and 2.2 million shares, respectively, were outstanding, but not included in the computation of diluted earnings per share because they were antidilutive.

On January 20, 2006 the Corporation entered into an accelerated share repurchase arrangement with Goldman, Sachs & Co. to repurchase 2.5 million common shares. The initial price paid per common shares was $25.97. The repurchased common shares were subject to a volume weighted average share price during the repurchase period that ended on March 29, 2006. The 103,728 shares received by the Corporation as a purchase, price adjustment at settlement, as well as the repurchased common shares, were reflected in treasury stock on the consolidated balance sheet to be used solely to satisfy the obligations of the Corporation under its various employee stock option, thrift savings, purchase programs or other corporate purpose.

7. Segment Information — The Corporation provides a diversified range of banking and certain nonbanking financial services and products through its various subsidiaries. Management reports the Corporation’s results through its major segment classification, Supercommunity

Banking. Included in the Parent Company and Other Subsidiaries category are certain nonbanking affiliates and portions of certain assets, capital, and support functions not specifically identifiable with Supercommunity Banking.

The Corporation’s business is conducted solely in the United States of America. The following tables present a summary of financial results as of and for the three-month periods ended March, 2006 and 2005 and the full year ended December 31, 2005:


			Parent Company
	Supercommunity		and Other						FirstMerit
March 31, 2006	Banking		Subsidiaries			Eliminations			Consolidated
OPERATIONS (thousands) :
Net interest income	$	84,044		27,976			(26,047	)		85,973
Provision for loan losses		6,155		(49	)		—			6,106
Other income		45,397		—			—			45,397
Other expenses		80,686		1,207			—			81,899
Net income		29,337		31,444			(30,817	)		29,964
AVERAGES (millions) :
Assets	$	10,015		1,182			(1,085	)		10,112
Loans		6,694		4			—			6,698
Earnings assets		9,240		1,049			(1,043	)		9,246
Deposits		7,355		—			(41	)		7,314
Shareholders’ equity		722		1,065			(898	)		889


			Parent
			Company and
	Supercommunity		Other						FirstMerit
December 31, 2005	Banking		Subsidiaries			Eliminations			Consolidated
OPERATIONS (thousands) :
Net interest income	$	342,089		200,687			(193,781	)		348,995
Provision for loan losses		43,853		(33	)		—			43,820
Other income		190,056		410			—			190,466
Other expenses		309,213		4,287			8			313,508
Net income		128,427		137,933			(135,877	)		130,483
AVERAGES (millions) :
Assets	$	10,176		1,253			(1,165	)		10,264
Loans		6,605		6			—			6,611
Earnings assets		9,418		1,116			(1,099	)		9,435
Deposits		7,334		—			(35	)		7,299
Shareholders’ equity		800		1,151			(984	)		967


			Parent
			Company and
	Supercommunity		Other						FirstMerit
March 31, 2005	Banking		Subsidiaries			Eliminations			Consolidated
OPERATIONS (thousands) :
Net interest income	$	84,432		25,795			(24,217	)		86,010
Provision for loan losses		11,766		(152	)		—			11,614
Other income		44,786		153			—			44,939
Other expenses		74,719		1,189			3			75,911
Net income		29,633		31,298			(30,843	)		30,088
AVERAGES (millions) :
Assets	$	10,146		1,259			(1,178	)		10,227
Loans		6,488		4			—			6,492
Earnings assets		9,407		1,115			(1,100	)		9,422
Deposits		7,404		—			(49	)		7,355
Shareholders’ equity		801		1,161			(984	)		978

8. Accounting for Derivatives — The Corporation follows the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 149, in accounting for its derivative activities.

At March 31, 2006, the Corporation had various interest rate swaps in place that were accounted for as fair value hedges under SFAS No. 133 since their purpose is to “swap” fixed interest rate liabilities and assets to a variable interest rate basis. Substantially all of the interest rate swaps are associated with the Corporation’s fixed-rate commercial loan swap program that was initiated during the first quarter of 2003 and the remaining interest rate swaps convert the fixed interest rate of commercial real estate construction loans and the fixed interest rate of manditorily redeemable preferred securities to a variable rate. All of the interest rate swaps associated with fixed rate commercial loan swap program qualify for the “shortcut method of accounting” as prescribed in SFAS No. 133. The shortcut method of accounting requires that the hedge and the hedged item meet certain qualifying criteria. If the swap qualifies for the shortcut method of accounting, no hedge ineffectiveness can be assumed, and the need to test for ongoing effectiveness is eliminated. For hedges that qualify for the shortcut method of accounting, the fair value of the swap and the fair value of the hedged item are recorded on the balance sheets. The remaining hedges do not meet all the criteria necessary to be considered for the shortcut method of accounting. Therefore, the long-haul method of accounting is utilized. The long-haul method of accounting requires periodic testing of hedge effectiveness with the portion of the hedge deemed to be ineffective reported in other operating expense.

During 2004, the Corporation began entering into forward swap agreements which, in effect, fixed the borrowing costs of certain variable rate liabilities in the future. These transactions do not qualify for the shortcut method of accounting under SFAS No. 133, as previously discussed. The Corporation classifies these transactions as cash flow hedges, with any hedge ineffectiveness being reported in other operating expense. It is anticipated that the hedges will continue to be effective. A correlation analysis performed at quarter-end verified that the hedges were effective.

Additionally, in the normal course of business, the Corporation sells originated mortgage loans into the secondary mortgage loan markets. The Corporation maintains a risk management program to protect and manage interest-rate risk and pricing associated with its mortgage commitment pipeline. The Corporation’s mortgage commitment pipeline included interest-rate lock commitments (“IRLCs”) that have been extended to borrowers who have applied for loan funding and met certain defined credit and underwriting standards. During the term of the IRLCs, the Corporation is exposed to interest-rate risk, in that the value of the IRLCs may change significantly before the loans close. To mitigate this interest-rate risk, the Corporation enters into various derivatives by selling loans forward to investors using forward commitments. In accordance with SFAS No. 133, the Corporation classifies and accounts for IRLCs as nondesignated derivatives that are recorded at fair value with changes in value recorded to current earnings. The forward sale commitments used to manage the risk on the IRLCs are also classified and accounted for as nondesignated derivatives and, therefore, recorded at fair value with changes recorded to current earnings. During 2003, the Corporation implemented a SFAS No. 133 hedging program for its mortgage loan warehouse to gain protection for the changes in fair value of the mortgage loan warehouse and the forward commitments. As such, both the mortgage loan warehouse and the forward commitments are accounted for utilizing the long-haul method of accounting and the hedge ineffectiveness reported in other operating expense.

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


	Pension Benefits
	Quarter Ended			Quarter ended
	March 31,			March 31,
	2006			2005
Components of Net Periodic Pension Cost
Service Cost	$	1,771			1,597
Interest Cost		2,282			2,206
Expected return on assets		(2,837	)		(2,875	)
Amortization of unrecognized:
Prior service costs		45			58
Cumulative net (gain) loss		1,479			863

Net periodic pension cost	$	2,740			1,849


	Postretirement Benefits
	Quarter Ended			Quarter ended
	March 31,			March 31,
	2006			2005
Components of Net Periodic Postretirement Cost
Service Cost	$	187			201
Interest Cost		415			385
Amortization of unrecognized:
Transition (asset)					—
Prior service costs		(135	)		(135	)
Cumulative net (gain) loss		107			24

Net periodic postretirement cost	$	574			475

The Corporation does not anticipate making a contribution to the pension plan during 2006.

10. Stock Options — The Corporation’s 1987, 1992, 1993, 1996, 1997, 1999 and 2002 Stock Plans (the “Plans”) provide stock options to certain key employees (and to all full-time employees in the case of the 1999 and 2002 stock plans) for up to 7,952,290 common shares of the Corporation. The Corporation believes that such awards better align the interests of its employees with those of its shareholders. In addition, these plans provide for the granting of

non-qualified stock options to certain non-employee directors of the Corporation for which 200,000 common shares of the Corporation have been reserved. Outstanding options under these Plans are generally not exercisable for at least six months from date of grant.

Options under these Plans are granted with an exercise price equal to the market price of the Corporation’s stock at the date of grant; those option awards generally vest based on 3 years of continuous service and have a 10 year contractual terms. Options granted as incentive stock options must be exercised within ten years and options granted as non-qualified stock options have terms established by the Compensation Committee of the Board and approved by the non-employee directors of the Board. Options are cancelable within defined periods based upon the reason for termination of employment.

The Corporation adopted the FASB’s SFAS No. 123 (revised 2004), “Share-Based Payment,” (SFAS No. 123(R)) on the required effective date, January 1, 2006, using the modified prospective transition method provided for under the standard. SFAS 123(R) required an entity to recognize as compensation expense that grant-date fair value of stock options and other equity-based compensation granted to employees within the income statement using a fair-value-based method, eliminating the intrinsic value method of accounting previously permissible under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25) and related interpretations. The Corporation previously elected to use APB No. 25 and adopted the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.”

Certain of the Corporation’s share-based award grants contain terms that provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period. As provided for under SFAS No. 123(R), the Corporation has elected to recognize compensation expense for awards with graded vesting schedule on a straight-line basis over the requisite service period for the entire award. SFAS No. 123(R) requires companies to recognize compensation expense based on the estimated number of stock options and awards for which service is to be rendered. Upon stock option exercise or stock unit conversion, it is the policy of the Corporation to issue shares from treasury stock.

Pro forma information regarding net income and earning per share for the three months ended March 31, 2005 is presented below as if the Corporation had accounted for all stock-based compensation under the fair value method of SFAS No. 123.


	Three months ended March 31, 2005
Net income, as reported	$	30,088
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(745	)
Pro forma net income	$	29,343
Pro forma EPS - Basic	$	0.35
Pro forma EPS - Diluted	$	0.35
Pro forma EPS - Basic	$	0.36
Pro forma EPS - Diluted	$	0.36

Assumptions:

Dividend yield		4.00	%
Expected volatility		28.85	%
Risk free interest rate		3.81	%
Expected lives		5 Years

The Black-Scholes option pricing model is used to estimate the fair market value of the options at the date of grant. This model was originally developed for use in estimating the fair value of traded options which have different characteristics from the Corporation’s employee stock options. The model is also sensitive to changes in subjective assumptions, which can materially affect fair value estimates. Expected volatilities are based on implied volatilities from traded options on the Corporation’s stock, historical volatility of the Corporation’s stock, and other factors. The Corporation uses historical data to estimate option exercise and employee termination with the valuation model. The expected term of options granted is derived from the output of the option valuation model and represent the period of time that options granted are expected to be outstanding; the range given below results from certain groups of employees exhibiting different behavior. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.


	Quarter Ended		Year Ended
	March 31, 2006		December 31, 2005
Assumptions:
Dividend yield		4.16%		4.02%
Expected volatility		24.06		28.39
Risk free interest rate		4.30 - 4.66%		3.77 - 4.38%
Expected lives	3.9 years		5 years

On December 27, 2005, with the approval of the Compensation Committee of the Board of Directors, the Corporation accelerated the vesting of unvested out-of-the-money stock options (“Options”) outstanding under the Amended and Restated 2002 Stock Plan.

The decision to accelerate these Options was made primarily to reduce non-cash compensation expense that would have been recorded in the Corporation’s income statement in future periods upon the adoption of SFAS No. 123R “Share-Based Payment” in January 2006. The Compensation Committee of the Board of Directors of the Corporation is authorized under the 2002 Plan to prescribe the time of the exercise of stock options and to accelerate the time at which stock options become exercisable. As a result of this decision, the Corporation reduced

the after-tax stock option expense it would have been required to record by approximately $2.3 million in 2006 and $1.5 million in 2007.

As a result of this vesting acceleration, options to purchase approximately 1.7 million shares become exercisable immediately. These Options would have vested through February 2008. Based upon the Corporation’s closing price of $26.32, on December 27, 2005, all of the Options accelerated were out-of-the-money, that is, the Options’ exercise price was greater than the current market value of the Corporation’s stock. The number of shares, exercise prices and terms of the Options, subject to acceleration, remain the same.

A summary of stock option activity under the Plans as of March 31, 2006, and changes during the quarter then ended is as follows:


						Weighted-Average
	Shares			Weighted-Average		Remaining		Aggregate Intrinsic
Options	(000’s)			Exercise Price		Contractual Term		Value (000’s)
Outstanding at January 1, 2006		7,495		$	25.66
Granted		37			24.84
Exercised		(52	)		16.54
Forfeited		(2	)		25.46
Expired		(194	)		26.67
Outstanding at March 31, 2006		7,284			25.69		5.79	$	4,995


Exercisable at March 31, 2006		6,734		$	25.78		5.68	$	4,286

A summary of the status of the Corporation’s nonvested shares as of December 31, 2005, and changes during the quarter ended March 31, 2006, is as follows:


				Weighted-Average
	Shares			Grant-Date
Nonvested Shares	(000’s)			Fair Value
Nonvested at January 1, 2006		869		$	25.65
Granted		37			24.84
Vested		(161	)		23.06
Forfeited or expired		(196	)		25.46

Nonvested at March 31, 2006		549		$	25.69

As of March 31, 2006, there was $1.3 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted-average period of 1.64 years. The total compensation cost related to the shares vested during the quarter ended March 31, 2006 was $0.4 million.

The Plans also provide for the award of restricted stock which vests over a 1 to 10 year period which are not included in the above discussions. Unvested restricted shares are subject to certain restrictions and risk of forfeiture by the participants. Cumulative shares outstanding totaled 25,000 at March 31, 2006, 27,000 at December 31, 2005 and 29,000 at March 31, 2005. Compensation expense recorded was $174 thousand for the quarter ended March 31, 2006 (based upon SFAS No 123(R)) and $205 thousand for the quarter ended March 31, 2005 (based upon APB No. 25.).

As of March 31, 2006, there was $0.6 million of total unrecognized compensation cost related to nonvested restricted stock.

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

12. Subsequent Events — On April 19, 2006, the Board of Directors approved the grant of 378,150 shares of non-qualified stock options to the executives of the Corporation which vest over three years. $0.4 million of these grants will be expensed during 2006. The Board also approved the grant of 36,000 non-qualified stock options to the directors of the Corporation which vest over six months. $0.2 million of these grants will be expensed during 2006.

On April 19, 2006, the Board of Director approved the grant of 223,015 shares of restricted stock to the executives of the Corporation which will vest over three years. $1.2 million of these grants will be expensed during 2006. The Board also approved the grant of 6,000 shares of restricted stock to the directors of the Corporation which vest over one year. $0.1 million of these grants will be expensed during 2006.

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

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


FIRSTMERIT CORPORATION AND SUBSIDIARIES	Three months ended								Year ended								Three months ended
(Dollars in thousands)	March 31, 2006								December 31, 2005								March 31, 2005
	Average					Average			Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate
ASSETS
Cash and due from banks	$	194,042								194,485								190,740
Investment securities and federal funds sold:
U.S. Treasury securities and U.S. Government agency obligations (taxable)		2,161,306			20,850		3.91	%		2,416,360			91,814		3.80	%		2,518,784			23,818		3.83	%
Obligations of states and political subdivisions (tax exempt)		90,622			1,527		6.83	%		99,487			6,707		6.74	%		101,571			1,763		7.04	%
Other securities and federal funds sold		248,093			3,526		5.76	%		255,568			12,291		4.81	%		256,060			2,763		4.38	%


Total investment securities and federal funds sold		2,500,021			25,903		4.20	%		2,771,415			110,812		4.00	%		2,876,415			28,344		4.00	%
Loans held for sale		48,129			762		6.42	%		52,740			2,854		5.41	%		53,234			627		4.78	%
Loans		6,697,732			116,997		7.08	%		6,610,509			430,402		6.51	%		6,492,044			99,546		6.22	%

Total earning assets		9,245,882			143,662		6.30	%		9,434,664			544,068		5.77	%		9,421,693			128,517		5.53	%
Allowance for loan losses		(90,229	)							(94,118	)							(96,438	)
Other assets		761,858								729,398								710,770

Total assets	$	10,111,553								10,264,429								10,226,765


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand — non-interest bearing	$	1,462,671			—		—			1,466,106			—		—			1,447,226			—		—
Demand — interest bearing		848,209			2,362		1.13	%		827,829			5,871		0.71	%		820,974			956		0.47	%
Savings and money market accounts		2,292,865			10,748		1.90	%		2,356,813			32,944		1.40	%		2,392,023			6,375		1.08	%
Certificates and other time deposits		2,709,764			26,101		3.91	%		2,647,908			86,764		3.28	%		2,694,466			20,600		3.10	%


Total deposits		7,313,509			39,211		2.17	%		7,298,656			125,579		1.72	%		7,354,689			27,931		1.54	%

Securities sold under agreements to repurchase		1,295,178			11,923		3.73	%		1,409,135			45,423		3.22	%		1,326,242			8,841		2.70	%
Wholesale borrowings		433,257			5,965		5.58	%		431,787			21,449		4.97	%		412,149			5,059		4.98	%


Total interest bearing liabilities		7,579,273			57,099		3.06	%		7,673,472			192,451		2.51	%		7,645,854			41,831		2.22	%

Other liabilities		180,791								158,125								155,797

Shareholders’ equity		888,818								966,726								977,888


Total liabilities and shareholders’ equity	$	10,111,553								10,264,429								10,226,765


Net yield on earning assets	$	9,245,882			86,563		3.80	%		9,434,664			351,617		3.73	%		9,421,693			86,686		3.73	%


Interest rate spread							3.25	%							3.26	%							3.31	%


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

RESULTS OF OPERATIONS

The Corporation recorded first quarter 2006 net income of $30.0 million, or $0.37 per diluted share. This compares with $30.1 million, or $0.36 per diluted share, for the first quarter 2005.

Returns on average common equity (“ROE”) and average assets (“ROA”) for the first quarter were 13.67% and 1.20%, respectively, compared with 12.48% and 1.19% for the first quarter 2005.

Total revenue, defined as net interest income on a fully tax-equivalent (“FTE”) basis plus noninterest income net of securities transactions, totaled $131.9 million for the first quarter 2006, compared with $129.8 million reported in the first quarter 2005. FTE net interest income was $86.6 million for the first quarter 2006, a decline of $0.1 million, or 0.14%, compared with the year-ago quarter.

The Corporation is progressing on its plan to reduce lower-yielding investment securities from the earning asset mix and generate increased levels of net interest income from expected loan portfolio growth during 2006. For the first quarter of 2006, average investment securities accounted for 24.72% of average assets, compared with 28.13% for the first quarter 2005. Over that time, average loan growth, supported by commercial growth of $220.8 million, or 6.6%, offset a $376.4 million, or 13.09%, decrease in investment securities. In the first quarter of 2006, average loans grew $205.7 million, or 3.17%, and average earning assets declined by $175.8 million, or 1.87%, compared with the first quarter 2005. The reduction of the investment portfolio is a key element in the Corporation’s strategy to grow the balance sheet more profitably.

Noninterest income excluding securities transactions totaled $45.4 million for the first quarter 2006, compared with $43.1 million for the first quarter 2005, an increase of $2.3 million, or 5.37%. Service charges increased $1.2 million, or 8.41%, while credit card fees increased $1.3 million, or 13.39%. Compared with the fourth quarter 2005, noninterest income decreased $2.2 million, or 4.60%, reflecting an absence of seasonal credit card and deposit account activity.

Noninterest expense totaled $81.9 million for the first quarter 2006, compared with $75.9 million for the first quarter 2005. Increased employee benefits expense was the main driver of a $3.6 million, or 9.24% increase in salaries, wages and pension and employee benefits compared with the year-ago quarter. During the first quarter 2006, the Company also increased its marketing expenditures $1.5 million, compared with the first quarter of 2005, by implementing a direct marketing campaign designed to grow profitable new households. The efficiency ratio for the first quarter 2006 was 61.90%, compared with 58.33% for the first quarter 2005.

Net charge-offs totaled $9.2 million in the first quarter 2006, compared with $11.8 million for the first quarter 2005, or 0.56% and 0.74% of average loans, respectively. The $2.6 million, or 22.19%, reduction in net charge-offs reflects a return for the Corporation to its trend of improvement in year over year net charge-offs. As of March 31, 2006, nonperforming assets were $72.9 million, or 1.09%, of period-end loans plus other real estate, compared with $72.3 million, or 1.08% , at December 31, 2005, and $46.7 million, or 0.72%, at March 31, 2005.

The Corporation recorded $6.1 million of loan loss provision expense in the first quarter 2006, compared with loan loss provision expenses of $11.6 million in the first quarter 2005. On March 31, 2006, criticized commercial assets (“substandard” and “doubtful”) accounted for 7.47% of total commercial loans, compared with criticized commercial asset levels of 9.19% on March 31, 2005, reflecting a $46.2 million decrease in criticized commercial credits. For the first quarter of 2006, the loan loss provision was $3.3 million below the level of reported net charge-offs, which includes $3.1 million of charges associated with $9.0 million of commercial loans the Corporation intends to sell in the second quarter of 2006.

At March 31 2006, the allowance for loan losses was 1.31% of loans, compared with 1.36% at December 31, 2005, and 1.49% at March 31, 2005. The allowance for credit losses is the sum of the allowance for loan losses and the reserve for unfunded lending commitments. For comparative purposes the allowance for credit losses was 1.40% at March 31, 2006, compared with 1.45% at December 31, 2005, and 1.59% at March 31, 2005.

Assets at March 31, 2006 totaled $10.1 billion, compared with $10.3 billion at March 31, 2005, representing a decrease of $168.2 million, or 1.64%. Period-end loan growth of $152.1 million, or 2.33%, was driven by a $180.9 million, or 5.35% increase in the commercial lending portfolio. Offsetting the growth in the loan portfolio was a $399.7 decrease in the investment portfolio as part of the Corporation’s emphasis on restructuring the balance sheet for higher yielding earning asset mix.

Deposits totaled $7.5 billion at March 31, 2006, an increase of $186.0 million, or 2.54%, from $7.3 billion at March 31, 2005. Noninterest bearing demand deposit accounts (“DDA”) increased $37.9 million, or 2.65%. Growth in noninterest interest DDA accounts primarily from new account acquisitions offset the declines in money market and savings account balances as customers sought higher returns than traditional savings investments.

Shareholders’ equity was $870.6 million at March 31, 2005. The Corporation’s capital position remains strong as the tangible equity to assets ratio was 7.31% at March 31, 2005. The dividend per common share paid in the first quarter 2006 was $0.28, a $0.01, or 3.7%, increase from the first quarter 2005. The Company also successfully executed an accelerated share repurchase program of 2,618,588 common shares in the first quarter of 2006, which reduced average diluted shares outstanding by 4.56% from the first quarter of 2005.

Net Interest Income

Net interest income, the Corporation’s principal source of earnings, is the difference between interest income generated by earning assets (primarily loans and investment securities) and interest paid on interest-bearing funds (namely customer deposits, securities sold under agreements to repurchase and wholesale borrowings). Net interest income for the quarter ended March 31, 2006 was $86.0 million compared to $86.0 million for the three months ended March 2005. For the purpose of this remaining discussion, net interest income is presented on a fully tax-equivalent (“FTE”) basis, to provide a comparison among all types of interest earning assets. That is, interest on tax-free securities and tax-exempt loans has been restated as if such interest were taxed at the statutory Federal income tax rate of 35%, adjusted for the non-deductible portion of interest expense incurred to acquire the tax-free assets. Net interest income presented

on an FTE basis is a non-GAAP financial measure widely used by financial services organizations. The FTE adjustment was $0.6 million and $0.7 million for the quarters ending March 31, 2006 and 2005, respectively.

FTE net interest income for the quarter ended March 31, 2006 was $86.6 million compared to $86.7 million for the three months ended March 31, 2005. The $0.1 million decrease in FTE net interest income occurred because the $15.2 million increase in interest expense, compared to the same quarter last year, was more than the $15.1 million increase in interest income during the same period.

As illustrated in the following rate/volume analysis table, interest income and interest expense both increased due to the rising interest rate environment.


	Quarters ended March 31, 2006 and 2005
RATE/VOLUME ANALYSIS	Increases (Decreases)
(Dollars in thousands)	Volume			Rate		Total
INTEREST INCOME — FTE
Investment securities	$	(3,833	)		1,373		(2,460	)
Loans held for sale		(65	)		200		135
Loans		3,235			14,216		17,451
Federal funds sold		6			13		19

Total interest income — FTE	$	(657	)		15,802		15,145

INTEREST EXPENSE
Demand deposits-interest bearing	$	33			1,373		1,406
Savings and money market accounts		(274	)		4,647		4,373
Certificates of deposits and other time deposits		118			5,383		5,501
Securities sold under agreements to repurchase		(212	)		3,294		3,082
Wholesale borrowings		268			638		906

Total interest expense	$	(67	)		15,335		15,268

Net interest income — FTE	$	(590	)		467		(123	)

As illustrated in the preceding table, the increased amount of interest income recorded in the 2006 first quarter compared to the same 2005 period, was primarily rate driven as higher yields on loans increased interest income by $14.4 million during those periods. The table also depicts a similar three-month increase in interest expense, again caused by the continued rise in interest rates from 2005 through the first quarter of 2006. The higher rates paid on customer deposits and securities sold under agreements to repurchase in the 2006 quarter compared to the same 2005 period increased interest expense by $14.7 million.

Net Interest Margin

The following table provides 2006 FTE net interest income and net interest margin totals as well as 2005 comparative amounts:


	Quarters ended
	March 31,
(Dollars in thousands)	2006			2005
Net interest income	$	85,973			86,010
Tax equivalent adjustment		590			676

Net interest income — FTE	$	86,563			86,686


Average earning assets	$	9,245,882			9,421,693

Net interest margin — FTE		3.80	%		3.73	%

Average loan outstandings for the current year and prior year first quarters totaled $6.7 billion and $6.5 billion, respectively. Increases in average loan balances from first quarter 2005 to first quarter this year occurred in commercial, residential mortgage and home equity loans while installment loans, credit card loans, and leases declined. Efforts to grow loan outstandings continue to be tempered by the less than robust economy that currently exists in the Corporation’s primary lending areas.

Specific changes in average loan outstandings, compared to first quarter 2005, were as follows: commercial loans were up $220.8 million or 6.6%; home equity loans, as a result of targeted marketing, rose $100.8 million or 14.94%; credit card loans were up $0.4 million or 0.27%; installment loans, both direct and indirect, were down $85.0 million or 5.32%; residential real estate loans were down $15.8 million or 2.45%; and leases were down $15.5 million, or 18.51%. The majority of fixed-rate mortgage loan originations are sold to investors through the secondary mortgage loan market. Average outstanding loans for the 2006 and 2005 third quarters equaled 72.44% and 68.91% of average earning assets, respectively.

Average deposits were $7.3 billion during the 2006 first quarter, down $41.2 million, or 0.56%, from the same period last year. Core deposits, which are defined as checking accounts, savings accounts and money market savings products, also declined. For the quarter ended March 31, 2006, average core deposits decreased $56.5 million or 1.21% and represented 62.95% of total average deposits compared to 63.36% for the 2005 first quarter. Average certificates of deposit (“CDs”) increased $15.3 million or 0.57% compared to the prior year quarter. Average wholesale borrowings increased $21.1 million and as a percentage of total interest-bearing funds equaled 5.72% for the 2006 first quarter and 5.39% for the same quarter one year ago. Securities sold under agreements to repurchase decreased $31.1 million and as a percentage of total interest bearing funds equaled 17.09% for the 2006 first quarter and 17.35% for the 2005 first quarter. Average interest-bearing liabilities funded 81.97% of average earning assets in the current year quarter and 81.15% during the quarter ended March 31, 2005.

Other Income

Other (non-interest) income for the quarter totaled $45.4 million, an increase of $0.4 million from the $45.0 million earned during the same period one year ago.

Other income, net of securities gains, as a percentage of net revenue for the first quarter was 34.39% compared to 33.19% for the same quarter one year ago. Net revenue is defined as net interest income, on a FTE, plus other income, less gains from securities sales.

The primary changes in other income, compared to the first quarter of 2005, were as follows: service charges on deposit accounts totaled $16.1 million, up 8.41% due in part to new fee strategies; credit card fees increased $1.3 million or 13.39%; ATM and other service fees increased $0.1 million or 5.04%; loan sales and servicing income was $1.4 million an increase of $0.3 million or 27.54%; trust department income was $5.4 million, down 2.02%;income from bank owned life insurance decreased $0.1 million or 2.86%; investment services and insurance fees decreased $0.3 million or 9.13% primarily due to the sale of the credit life portfolio in the fourth quarter of 2005; there were no significant sales of investment securities during the first quarter of 2006 and therefore, investment securities gains decreased $1.9 million; and other operating income decreased $0.1 million or 2.93%.

A significant component of loan sales and servicing income category is the income derived from mortgage servicing activities. The following is a summary of changes in capitalized mortgage servicing rights (“MSRs”), net of accumulated amortization and valuation allowance, included in the unaudited consolidated balance sheets:


	Quarter ended			Quarter ended			Quarter ended			Quarter ended			Quarter ended
	March 31			December 31			September 30			June 30			March 31
(Dollars in thousands)	2006			2005			2005			2005			2005
Balance at beginning of period	$	19,971			19,523			18,635			18,396			18,261
Addition of mortgage servicing rights		723			1,230			1,657			1,072			703
Amortization		(773	)		(786	)		(825	)		(759	)		(793	)
Changes in valuation allowance		24			4			56			(74	)		225

Balance at end of period	$	19,945			19,971			19,523			18,635			18,396

On a quarterly basis, the Corporation assesses its MSRs for impairment based on their current fair value. As permitted, the Corporation disaggregates its MSRs portfolio based on loan type and interest rate which are the predominant risk characteristics of the underlying loans. If any impairment results after current market assumptions are applied, the value of the servicing rights is reduced through the use of a valuation allowance, the balance of which is $0, $24 thousand and $11 thousand at March 31, 2006, December 31, 2005 and March 31, 2005, respectively. The MSRs are amortized over the period of and in proportion to the estimated net servicing revenues.

These balances represent the rights to service approximately $2.0 billion, $2.1 billion and $1.9 billion of mortgage loans at March 31, 2006, December 31, 2005, and March 31, 2005, respectively. The portfolio primarily consists of conventional mortgages.

The Corporation continues to focus upon non-interest income (fee income) as a means by which to diversify revenue.

Other Expenses

Other (non-interest) expenses totaled $81.9 million for the first quarter 2006 compared to $75.9 million for the same 2005 quarter, an increase of $6.0 million, or 7.89%.

For the three months ended March 31, 2006, increases in operating costs compared to first quarter 2005 occurred as follows: salaries, wages, pension and employee benefits rose $3.6 million, primarily due to increased pension and postretirement benefits, as well as additional staff being added to revenue-generating positions created to implement strategic revenue initiatives; other expenses increased $1.5 million primarily attributable to increased marketing expense for targeted home equity lines of credit and deposit campaigns, while other categories of expense remain relatively consistent.

The efficiency ratio of 61.9% for first quarter 2006 was worse than the efficiency ratio of 58.33% recorded for the first quarter, 2005. The efficiency ratio for the three months ended March 31, 2006 indicates 61.9 cents of operating costs were spent in order to generate each dollar of net revenue.

Federal Income Taxes

Federal income tax expense was $13.4 million and $13.3 million for the quarters ended March 31, 2006 and 2005, respectively. The effective federal income tax rate for the first quarter 2006 was 30.90% compared to 30.71% for the same quarter 2005. Additional federal income tax information is contained in Note 11 (Federal Income Taxes) in the 2005 Form 10-K, as amended.

FINANCIAL CONDITION

Investment Securities

The March 31, 2006 amortized cost and market value of investment securities, including mortgage-backed securities, by average remaining term, are included in Note 3 (Investment Securities) to these unaudited consolidated financial statements. The Corporation has initiated a deleverage strategy to allow the investment portfolio to shrink by not replacing maturing securities. The proceeds of these maturing securities will be used to fund loan growth or pay down wholesale borrowings.

These securities are purchased within an overall strategy to maximize future earnings taking into account an acceptable level of interest rate risk. While the maturities of the mortgage and asset-backed securities are beyond five years, these instruments provide periodic principal payments and include securities with adjustable interest rates, reducing the interest rate risk associated with longer-term investments.

Allowance for Credit Losses

During the fourth quarter of 2005, the Corporation reclassified the reserve for unfunded lending commitments from the allowance for loan losses to other liabilities. The allowance for credit losses is the sum of the allowance for loan losses and the reserve for unfunded lending commitments.


	Quarter ended			Year Ended			Quarter ended
	March 31,			December 31,			March 31,
	2006			2005			2005
Allowance for Loan Losses

Allowance for loan losses-beginning of period	$	90,661			97,296			97,296
Provision for loan losses		6,106			43,820			11,614
Loans charged off		(14,914	)		(69,105	)		(16,740	)
Recoveries on loans previously charged off		5,736			18,650			4,945

Allowance for loan losses-end of period	$	87,589			90,661			97,115


Reserve for Unfunded Lending Commitments

Balance at beginning of period	$	6,072			5,774			5,774
Provision for credit losses		(219	)		298			705

Balance at end of period	$	5,853			6,072			6,479


Allowance for Credit Losses	$	93,442			96,733			103,594


Annualized net charge-offs as a % of average loans		0.56	%		0.76	%		0.74	%


Allowance for credit losses:
As a percentage of loans outstanding		1.40	%		1.45	%		1.59	%

As a percentage of nonperforming loans		145.32	%		155.36	%		251.44	%

As a multiple of annualized net charge offs		2.51	x		1.92	x		2.17	x


Allowance for loan losses:
As a percentage of loans outstanding		1.31	%		1.36	%		1.49	%

As a percentage of nonperforming loans		136.22	%		145.61	%		235.71	%

As a multiple of annualized net charge offs		2.35	x		1.80	x		2.03	x

The allowance for credit losses decreased $3.3 million from December 31, 2005 to March 31, 2006 as compared to a decrease of $10.2 million from March 31, 2006 to March 31, 2005. The decrease was attributable to an overall improvement in criticized assets. The following tables show this overall trend in increased credit quality by specific asset and risk categories.


	At March 31, 2006
	Loan Type
	Commercial		Commercial R/E				Installment		Home Equity		Credit Card		Res Mortgage
Allowance for Loan Losses Components:	Loans		Loans		Leases		Loans		Loans		Loans		Loans		Total
(In thousands)
Individually Impaired Loan Component:
Loan balance	$	23,822		22,742				—		—		—		—		46,564
Allowance		8,338		2,194				—		—		—		—		10,532
Collective Loan Impairment Components:
Credit risk-graded loans
Grade 1 loan balance		18,654		1,525		—										20,179
Grade 1 allowance		76		2		—										78
Grade 2 loan balance		127,550		93,836		3,373										224,759
Grade 2 allowance		1,020		314		30										1,364
Grade 3 loan balance		292,279		325,591		8,198										626,068
Grade 3 allowance		2,008		1,449		209										3,666
Grade 4 loan balance		894,716		1,535,663		45,717										2,476,096
Grade 4 allowance		15,399		11,089		878										27,366
Grade 5 (Special Mention) loan balance		63,877		52,743		168										116,788
Grade 5 allowance		3,315		1,162		10										4,487
Grade 6 (Substandard) loan balance		56,843		52,220		2,901										111,964
Grade 6 allowance		6,335		2,833		360										9,528
Grade 7 (Doubtful) loan balance		582		325		—										907
Grade 7 allowance		183		31		—										214
Consumer loans based on payment status:
Current loan balances						5,015		1,492,098		768,903		131,267		599,300		2,996,583
Current loans allowance						66		16,820		2,283		3,663		947		23,779
30 days past due loan balance						261		12,218		1,992		2,143		10,661		27,275
30 days past due allowance						8		1,076		159		823		91		2,157
60 days past due loan balance						44		3,590		1,152		1,153		2,223		8,162
60 days past due allowance						5		928		254		717		60		1,964
90+ days past due loan balance						5		1,808		261		1,353		13,330		16,757
90+ days past due allowance						1		861		99		1,252		241		2,454

Total loans	$	1,478,323		2,084,645		65,682		1,509,714		772,308		135,916		625,514		6,672,102

Total Allowance for Loan Losses	$	36,674		19,074		1,567		19,685		2,795		6,455		1,339		87,589


	At December 31, 2005
	Loan Type
	Commercial		Commercial R/E				Installment		Home Equity		Credit Card		Res Mortgage
Allowance for Loan Losses Components:	Loans		Loans		Leases		Loans		Loans		Loans		Loans		Total
(In thousands)
Individually Impaired Loan Component:
Loan balance	$	27,515		18,254		—		—		—		—		—		45,769
Allowance		4,534		2,851		—		—		—		—		—		7,385
Collective Loan Impairment Components:
Credit risk-graded loans
Grade 1 loan balance		16,353		2,233		—										18,586
Grade 1 allowance		64		3		—										67
Grade 2 loan balance		159,785		99,392		3,643										262,820
Grade 2 allowance		1,297		341		33										1,671
Grade 3 loan balance		244,116		355,950		25,245										625,311
Grade 3 allowance		2,008		1,583		231										3,822
Grade 4 loan balance		851,968		1,514,990		31,428										2,398,386
Grade 4 allowance		15,600		11,387		1,018										28,005
Grade 5 (Special Mention) loan balance		58,878		46,657		127										105,662
Grade 5 allowance		3,463		1,110		8										4,581
Grade 6 (Substandard) loan balance		69,358		53,333		3,111										125,802
Grade 6 allowance		8,265		3,089		413										11,767
Grade 7 (Doubtful) loan balance		324		377		—										701
Grade 7 allowance		117		40		—										157
Consumer loans based on payment status:
Current loan balances						6,687		1,500,694		775,912		141,888		597,705		3,022,886
Current loans allowance						95		18,962		1,918		4,014		969		25,958
30 days past due loan balance						250		15,574		1,764		1,453		14,461		33,502
30 days past due allowance						8		1,456		108		545		133		2,250
60 days past due loan balance						75		5,296		511		1,154		4,569		11,605
60 days past due allowance						9		1,401		87		699		133		2,329
90+ days past due loan balance						53		2,791		510		1,097		11,846		16,297
90+ days past due allowance						16		1,377		155		975		146		2,669

Total loans	$	1,428,297		2,091,186		70,619		1,524,355		778,697		145,592		628,581		6,667,327

Total Allowance for Loan Losses	$	35,348		20,404		1,831		23,196		2,268		6,233		1,381		90,661


	At March 31, 2005
	Loan Type
	Commercial		Commercial R/E				Installment		Home Equity		Credit Card		Res Mortgage
Allowance for Loan Losses Components:	Loans		Loans		Leases		Loans		Loans		Loans		Loans		Total
(In thousands)
Individually Impaired Loan Component:
Loan balance	$	12,441		13,343		615		—		—		—		—		26,399
Allowance		5,006		2,638		615		—		—		—		—		8,259
Collective Loan Impairment Components:
Credit risk-graded loans
Grade 1 loan balance		19,294		1,440		—										20,734
Grade 1 allowance		66		2		—										68
Grade 2 loan balance		175,538		97,130		17,290										289,958
Grade 2 allowance		1,268		284		139										1,691
Grade 3 loan balance		282,167		293,395		4,830										580,392
Grade 3 allowance		2,149		1,177		243										3,569
Grade 4 loan balance		797,846		1,399,926		45,001										2,242,773
Grade 4 allowance		16,804		8,398		1,047										26,249
Grade 5 (Special Mention) loan balance		72,681		45,566		699										118,946
Grade 5 allowance		4,841		814		51										5,706
Grade 6 (Substandard) loan balance		108,551		67,622		134										176,307
Grade 6 allowance		14,439		3,039		20										17,498
Grade 7 (Doubtful) loan balance		415		344		22										781
Grade 7 allowance		154		42		9										205
Consumer loans based on payment status:
Current loan balances						13,788		1,571,910		673,797		133,229		612,532		3,005,256
Current loans allowance						208		19,914		1,731		3,766		1,139		26,758
30 days past due loan balance						1,138		14,897		2,546		1,501		11,214		31,296
30 days past due allowance						36		1,223		127		536		135		2,057
60 days past due loan balance						227		5,151		467		1,034		3,129		10,008
60 days past due allowance						25		1,165		67		573		115		1,945
90+ days past due loan balance						37		3,941		914		1,281		11,011		17,184
90+ days past due allowance						9		1,700		252		1,013		136		3,110

Total loans	$	1,468,933		1,918,766		83,781		1,595,899		677,724		137,045		637,886		6,520,034

Total Allowance for Loan Losses	$	44,727		16,394		2,402		24,002		2,177		5,888		1,525		97,115

Total charge-offs were $9.2 million for the quarter ended March 31, 2006 down $2.6 million or 22.19% from the year ago quarter. First quarter charge-offs include $3.2 million that was taken to charge down $9.0 million in commercial non-accrual loans that were reclassified to loans held for sale due to a pending sale in the second quarter of 2006. These held for sale loans remain in the nonaccrual loan totals. Criticized commercial assets (“individually impaired,” “substandard” and “doubtful”) decreased $46.2 million and accounted for 7.47% of total commercial loans at March 31, 2006 compared with criticized commercial asset levels of 9.19% at March 31, 2005.

Installment, home equity and credit card charge-offs were down $3.0 million from the prior year quarter reflecting the minimal negative residual impact from the October 2005 bankruptcy legislative change. Loans past due 90 days or more accruing interest were down $4.3 million or 18.60% from the prior year quarter reflecting the favorable trends in the retail portfolio.

Loans

Total loans outstanding at March 31, 2006 were $6.7 billion compared to $6.7 billion at December 31, 2005 and $6.5 billion at March 31, 2005.

The commercial loan portfolio for the 2006 first quarter increased by 5.35% over the prior year first quarter, but continues to be impacted by lower demand for credit in our region. While the Corporation originated $94.4 million of mortgage loans in the first quarter 2006, compared to $102.4 million in same quarter of 2005, and $509.9 million for the full year ended December 31, 2005, the majority of these loans were fixed rate mortgages and sold with servicing rights retained. Further discussion of the Corporation’s loan mix strategy as well as changes in average balances for the quarter ended March 31, 2006 compared to the quarter ended March 31, 2006 can be found in the Net Interest Income section of this document.

The following table summarizes the Corporation’s nonperforming assets:


	March 31,			December 31,			March 31,
	2006			2005			2005
				(Dollars in thousands)
Nonperforming commercial loans	$	56,258			54,176			34,207
Other nonaccrual loans:		8,044			8,086			6,994

Total nonperforming loans		64,302			62,262			41,201
Other real estate (“ORE”)		8,639			9,995			5,502

Total nonperforming assets	$	72,941			72,257			46,703


Loans past due 90 day or more accruing interest	$	18,640			17,931			22,899

Total nonperforming assets as a percentage of total loans and ORE		1.09	%		1.08	%		0.72	%

The allowance for credit losses covers nonperforming loans by 145.32% compared to 251.44% at the end of the prior year quarter. See Note 1 (Summary of Significant Accounting Policies) of the 2005 Form 10-K, as amended for a summary of the Corporation’s nonaccrual and charge-off policies.

The following table is a nonaccrual commercial loan flow analysis:


	Period End
	1Q06			4Q05			3Q05			2Q05			1Q05
	(Dollars in thousands)
Nonaccrual commercial loans beginning of period	$	54,176			34,144			38,124			34,207			33,831

Credit Actions:
New		10,259			29,778			4,848			22,498			11,315
Loan and lease losses		(3,385	)		(3,005	)		(2,722	)		(3,332	)		(3,904	)
Charged down		(2,681	)		(5,285	)		(253	)		(2,444	)		(1,874	)
Return to accruing status		(368	)		(1,179	)		(228	)		(801	)		(2,130	)
Payments and transfers to ORE		(1,743	)		(277	)		(5,625	)		(12,004	)		(3,031	)

Nonaccrual commercial loans end of period	$	56,258			54,176			34,144			38,124			34,207

Nonaccrual commercial loans have increased $2.1 million during the first quarter of 2006. As previously mentioned a sale of nonaccrual loans has been scheduled for April 2006. These loans, which have a net book value of $5.8 million, have been reclassified as loans held for sale but still remain in the nonaccrual totals. Additionally, a sale of the collateral for a large commercial nonaccrual loan has also be been scheduled for auction during the second quarter of 2006, which will further reduce the nonaccrual loan balance.

Deposits

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


	Quarter Ended					Year Ended					Quarter Ended
	March 31, 2006					December 31, 2005					March 31, 2005
	Average		Average			Average		Average			Average		Average
	Balance		Rate			Balance		Rate			Balance		Rate
	(Dollars in thousands)
Non-interest DDA	$	1,462,671		—			1,466,106		—			1,447,226		—
Interest-bearing DDA		848,209		1.13	%		827,829		0.71	%		820,974		0.47	%
Savings and money market accounts		2,292,865		1.90	%		2,356,813		1.40	%		2,392,023		1.08	%
CDs and other time deposits		2,709,764		3.91	%		2,647,908		3.28	%		2,694,466		3.10	%

Total customer deposits	$	7,313,509		2.17	%		7,298,656		1.72	%		7,354,689		1.54	%

Securities sold under agreements to repurchase		1,295,178		3.73	%		1,409,135		3.22	%		1,326,242		2.70	%
Wholesale borrowings		433,257		5.58	%		431,787		4.97	%		412,149		4.98	%

Total funds	$	9,041,944					9,139,578					9,093,080

Interest-bearing and noninterest-bearing demand deposits, on a combined basis, averaged $2.3 billion during the 2006 first quarter, up $42.7 million or 1.88% from first quarter 2005. Savings deposits, including money market savings accounts averaged $2.3 billion, $99.2 million or 4.15% lower than the year ago quarter. The sum of demand and savings accounts, often referred to as “core deposits,” dropped $56.5 million or 1.21%, and represented 62.95% of total average deposits for the first quarter, 2006 compared to 63.36% last year. The drop was attributable to heightened competition for core deposits within the Corporation’s regional banking areas.

The weighted-average yield paid on interest-bearing core deposits during the quarter at 1.67% was 76 basis points more than last year’s average core deposits rate. Average CDs, still the largest individual component of deposits, totaled $2.7 billion for the first quarter, up 0.57% from the same quarter last year. Average rates paid on CDs rose 81 basis points from 3.10% in the 2005 quarter to 3.91% this year. On a percentage basis, average CDs were 35.75% and 35.24%, respectively, of total interest-bearing funds for the March 31, 2006 and 2005 quarters.

Securities sold under agreements to repurchase decreased to 17.09% of interest-bearing funds during the three months ended March 31, 2006 from 17.35% for the March 31, 2005 quarter. Interest-bearing liabilities funded 81.97% of average earning assets during the quarter ended March 31, 2006 and 81.15% during the quarter ended March 31, 2005. Wholesale funds increased to 5.72% of interest-bearing funds during the first quarter, 2006 from 5.39% in the year ago quarter. In summary, the decrease in average core deposits during the quarter compared to the same period in 2005 was offset by the larger decrease in CDs. The funding mix from higher priced CDs towards less expensive securities sold under agreements to repurchase has helped to mitigate the decline in the net interest margin.

The following table summarizes scheduled maturities of CDs of $100 thousand or more (“Jumbo CDs”) that were outstanding as of March 31, 2006:


Maturing in:	Amount
	(In thousands)
Under 3 months	$	472,792
3 to 6 months		285,770
6 to 12 months		168,261
Over 1 year through 3 years		148,781
Over 3 years		44,723

	$	1,120,327

Market Risk

Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices and commodity prices, including the correlation among these factors and their volatility. 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 Asset and Liability Committee (“ALCO”) oversees market risk management, establishing risk measures, limits, and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. According to these policies, responsibility for measuring and the management of interest rate risk resides in the Corporate Treasury function.

Interest rate risk on the Corporation’s consolidated 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 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 net 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 economic value of equity sensitivity analysis, which capture both near-term and long-term interest rate risk exposures. Combining the results from these separate risk measurement processes allows a reasonably comprehensive view of short-term and long-term interest rate risk in the Corporation.

Earnings simulation involves forecasting net interest earnings under a variety of scenarios including changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates. The sensitivity of net interest income to changes in interest rates is measured using numerous interest rate scenarios including shocks, gradual ramps, curve flattening, curve steepening as well as forecasts of likely interest rates scenarios. Presented below is the Corporation’s interest rate risk profile as of March 31, 2006:

Immediate Change in Rates and Resulting Percentage Increase/(Decrease) in Net Interest Income:


	-100 basis points			+100 basis points			+200 basis points
March 31, 2006		(1.14	%)		(0.36	%)		(1.00	%)
March 31, 2005		(1.98	%)		0.02	%		(0.53	%)

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 ALCO. ALCO 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.

The Corporation also has longer-term interest rate risk exposure, which may not be appropriately measured by earnings sensitivity analysis. ALCO uses economic value of equity, or EVE, sensitivity analysis to study the impact of long-term cash flows on earnings and capital. Economic value of equity involves discounting present values of all cash flows on the balance sheet and off balance sheet items under different interest rate scenarios. The discounted present value of all cash flows represents the Corporation’s economic value of equity. The analysis requires modifying the expected cash flows in each interest rate scenario, which will impact the discounted present value. The amount of base-case measurement and its sensitivity to shifts in the yield curve allow management to measure longer-term repricing and option risk in the balance sheet. Presented below is the Corporation’s EVE profile as of March 31, 2006:

Immediate Change in Rates and Resulting Percentage Increase/(Decrease) in EVE:


	-100 basis points			+100 basis points			+200 basis points
March 31, 2006		(1.22	%)		0.22	%		(0.70	%)
March 31, 2005		(5.17	%)		(0.57	%)		(2.56	%)

Capital Resources

Shareholders’ equity at March 31, 2006 totaled $870.6 million compared to $937.6 million at December 31, 2005 and $946.7 million at March 31, 2005. The $67.0 million reduction is primarily attributable to the accelerated repurchase program of treasury stock more fully described in Note 6 (Earnings Per Share) in these consolidated unaudited financial statements.

The following table reflects the various measures of capital:


	March 31,				December 31,				March 31,
	2006				2005				2005
	(Dollars in thousands)
Consolidated
Total equity	$	870,552	8.62	%		937,580	9.23	%		946,731	9.21	%
Common equity		870,552	8.62	%		937,580	9.23	%		946,731	9.21	%
Tangible common equity (a)		727,774	7.31	%		794,579	7.93	%		803,062	7.93	%
Tier 1 capital (b)		802,619	9.89	%		858,879	10.60	%		862,706	10.96	%
Total risk-based capital (c)		1,017,051	12.53	%		1,075,987	13.28	%		1,080,896	13.73	%
Leverage (d)		802,619	8.00	%		858,879	8.48	%		862,706	8.54	%

Bank Only
Total equity	$	707,544	7.01	%		712,378	7.02	%		774,218	7.66	%
Common equity		707,544	7.01	%		712,378	7.02	%		774,218	7.66	%
Tangible common equity (a)		564,766	5.68	%		569,377	5.69	%		630,549	6.33	%
Tier 1 capital (b)		728,795	9.00	%		722,814	8.94	%		779,267	9.92	%
Total risk-based capital (c)		940,498	11.61	%		937,233	11.59	%		994,856	12.67	%
Leverage (d)	$	728,795	7.28	%		722,814	7.15	%		779,267	7.73	%


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

(b)		Shareholders’ equity minus net unrealized holding gains on equity securities, plus or minus net unrealized holding losses or gains on available for sale debt securities, less goodwill; computed as a ratio to risk-adjusted assets, as defined in the 1992 risk-based capital guidelines.

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

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

The risk-based capital guidelines issued by the Federal Reserve Bank in 1988 require banks to maintain adequate capital equal to 8% of risk-adjusted assets effective December 31, 1993. At March 31, 2006, the Corporation’s risk-based capital equaled 12.53% of risk-adjusted assets, exceeding minimum guidelines.

The cash dividend of $0.28 per share paid in the first quarter, has an indicated annual rate of $1.12 per share.

Liquidity Risk Management

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

The Treasury Group is responsible for identifying, measuring and monitoring the Corporation’s liquidity profile. The position is evaluated daily, weekly and monthly by analyzing the composition of all funding sources, reviewing projected liquidity commitments by future month and identifying sources and uses of funds. The Treasury Group also prepares a contingency funding plan that details the potential erosion of funds in the event of a systemic financial market crisis or institutional-specific stress. In addition, the overall management of the Corporation’s liquidity position is integrated into retail deposit pricing policies to ensure a stable core deposit base.

The Corporation’s primary source of liquidity is its core deposit base, raised through its retail branch system, along with unencumbered, or unpledged, investment securities and unused wholesale sources of liquidity. The Corporation also has available unused wholesale sources of liquidity, including advances from the Federal Home Loan Bank of Cincinnati, issuance through dealers in the capital markets and access to certificates of deposits issued through brokers. Liquidity is also provided by unencumbered, or unpledged investment securities that totaled $543.8 million at March 31, 2006.

Funding Trends for the Quarter - During the three months ended March 31, 2006, total average deposits increased $14.9 million from the linked quarter as certificates of deposit were allowed to mature without rollover.

Parent Company Liquidity — The Corporation manages its liquidity principally through dividends from the bank subsidiary. During the first quarter ended March 31, 2006, FirstMerit Bank paid FirstMerit Corporation $24.0 million in dividends. As of March 31, 2006, FirstMerit Bank had an additional $5.3 million available to pay dividends without regulatory approval.

Critical Accounting Policies

The accounting and reporting policies of the Corporation are in accordance with accounting principles generally accepted within the United States of America and conform to general practices within the banking industry. Accounting and reporting policies for the allowance for loan losses, income taxes, mortgage servicing rights, derivative instruments and hedging activities, and pension and postretirement benefits are deemed critical since they involve the use of estimates and require significant management judgments. Application of assumptions different than those used by management could result in material changes in the Corporation’s financial position or results of operations. Note 1 (Summary of Significant Accounting Policies)

and Note 4 (Allowance for Loan Losses), as described in the 2005 Form 10-K, as amended, provide detail with regard to the Corporation’s methodology and reporting of the allowance for loan losses. Additional information for income tax accounting is contained within Note 1, as well as in Note 11 (Federal Income Taxes) as described in the 2005 Form 10-K, as amended. Accounting for mortgage servicing rights was also discussed in the 2005 Form 10-K, as amended in Note 1 and Note 6 (Mortgage Servicing Rights and Mortgage Servicing Activity). Derivative instruments and hedging activities are described more fully in Note 9 (Accounting for Derivatives) in these consolidated financial statements, as well as Note 1, Note 16 (Fair Value Disclosure of Financial Instruments), and Note 17 (Financial Instruments with Off-Balance-Sheet Risk) of the 2005 Form 10-K, as amended. A description of the plans and the assumptions used to estimate the liabilities for pension and postretirement benefits is described in Note 12 (Benefit Plans) to the 2005 Form 10-K, as amended as well as Note 10 (Benefit Plans) in these consolidated financial statements.

Off-Balance Sheet Arrangements

A detailed discussion of the Corporation’s off-balance sheet arrangements, including interest swaps, hedges, forward interest rate swap agreements, IRLCs and forward sales agreements, TBA securities, options and swaptions is included in Note 8 (Accounting for Derivatives) in these consolidated unaudited financial statements and in Note 17 to the 2005 Form 10-K, as amended.

Forward-looking Safe-harbor Statement

The Corporation cautions that any forward-looking statements contained in this report, in a report incorporated by reference to this report or made by management of the Corporation, involve risks and uncertainties and are subject to change based upon various factors. Actual results could differ materially from those expressed or implied. Reference is made to the section titled “Forward-looking Statements” in the Corporation’s 2005 Form 10-K, as amended, as amended.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors from those disclosed in our 2006 Annual Report on Form 10-K.

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

(a) Not applicable.
(b) Not applicable.

The following table provides information with respect to purchases the Corporation made of its common shares during the first quarter of the 2006 fiscal year:


					Total Number of		Maximum
					Shares Purchased		Number of Shares
					as Part of Publicly		that May Yet be
	Total Number of		Average Price		Announced Plans		Purchased Under
	Shares Purchased (2)(3)		Paid per Share		or Programs (1)		Plans or Programs
Balance as of December 31, 2005:								—
January 1, 2006 - January 31, 2006								3,000,000
		2,500,000		25.97		2,500,000		500,000
February 1, 2006 - February 28, 2006		10,183		—		—		500,000
March 1, 2006 - March 31, 2006		108,405		—		103,728		396,272

Balance as of March 31, 2006:		2,618,588	$	24.80		2,603,728		396,272


(1)		On January 19, 2006, the Board of Directors authorized the repurchase of up to 3 million shares (the “New Repurchase Plan”). The New Repurchase Plan superseded all other repurchase programs, including that authorized by the Board of Directors on July 15, 2004 (the “Prior Repurchase Plan”). The Corporation had purchased all of the shares it was authorized to acquire under the Prior Repurchase Plan.

(2)		On January 20, 2006, the Corporation entered into an accelerated share repurchase arrangement with Goldman, Sachs & Co. to repurchase 2.5 million common shares. The initial price paid per common share was $25.97. The repurchased common shares were subject to a volume weighted average share price during the repurchase period that ended

ITEM 6. EXHIBITS

Exhibit Index


Exhibit
Number
3.1		Amended and Restated Articles of Incorporation of FirstMerit Corporation, as amended (incorporated by reference from Exhibit 3.1 to the Form 10-K/A filed by the Registrant on April 29, 1999)

3.2		Amended and Restated Code of Regulations of FirstMerit Corporation (incorporated by reference from Exhibit 3(b) to the Form 10-K filed by the registrant on April 9, 1998)

4.1		Shareholders Rights Agreement dated October 21, 1993, between FirstMerit Corporation and FirstMerit Bank, N.A., as amended and restated May 20, 1998 (incorporated by reference from Exhibit 4 to the Form 8-A/A filed by the registrant on June 22, 1998)

4.2		Instrument of Assumption of Indenture between FirstMerit Corporation and NBD Bank, as Trustee. dated October 23, 1998 regarding FirstMerit Corporation’s 6 1/4% Convertible Subordinated Debentures, due May 1, 2008 (incorporated by reference from Exhibit 4(b) to the Form 10-Q filed by the registrant on November 13, 1998)

4.3		Supplemental Indenture, dated as of February 12, 1999, between FirstMerit and Firstar Bank Milwaukee, National Association, as Trustee relating to the obligations of the FirstMerit Capital Trust I, fka Signal Capital Trust I (incorporated by reference from Exhibit 4.3 to the Form 10-K filed by the Registrant on March 22, 1999)

4.4		Indenture dated as of February 13, 1998 between Firstar Bank Milwaukee, National Association, as trustee and Signal Corp (incorporated by reference from Exhibit 4.1 to the Form S-4 No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)

4.5		Amended and Restated Declaration of Trust of FirstMerit Capital Trust I, fka Signal Capital Trust I, dated as of February 13, 1998 (incorporated by reference from Exhibit 4.5 to the Form S-4 No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)

4.6		Form Capital Security Certificate (incorporated by reference from Exhibit 4.6 to the Form S-4 No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)

4.7		Series B Capital Securities Guarantee Agreement (incorporated by reference from Exhibit 4.7 to the Form S-4 No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)

4.8		Form of 8.67% Junior Subordinated Deferrable Interest Debenture, Series B (incorporated by reference from Exhibit 4.7 to the Form S-4 No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)

10.1		Accelerated Share Repurchase Master Confirmation (incorporated by reference from Exhibit 99.1 to the Form 8-K filed by the registrant on January 20, 2006)

10.2		Executive Cash Incentive Plan (incorporated by reference from the Form 8-K filed by the registrant on February 21, 2006)


	As of
	March 31, 2006
	(Dollars in thousands)
Due in one year or less	$	1,556
Due after one year but within five years		1,675
Due after five years		332

Totals	$	3,563


Due after one year with a predetermined fixed interest rate	$	940,204
Due after one year with a floating interest rate		1,066,692

Totals	$	2,006,896


Exhibit
Number
31.1		Rule 13a-14(a)/Section 302 Certification of John R. Cochran, Chairman and Chief Executive Officer of FirstMerit Corporation

31.2		Rule 13a-14(a)/Section 302 Certification of Terrence E. Bichsel, Executive Vice President and Chief Financial Officer of FirstMerit Corporation

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


	FIRSTMERIT CORPORATION

	By:	/s/ TERRENCE E. BICHSEL

		Terrence E. Bichsel, Executive Vice President
		and Chief Financial Officer

DATE: May 5, 2006


		on March 29, 2006. The 103,728 shares received by the Corporation as a purchase price adjustment at settlement, as well as the repurchased common shares, were reflected in treasury stock on the consolidated balance sheet to be used solely to satisfy the obligations of the Corporation under its various employee stock option, thrift savings, purchase programs or other corporate purpose.

(3)		14,860 of these common shares were either delivered by the option holder with respect to the exercise of stock options or the settlement of performance share awards, or in the case of restricted shares of common stock, withheld to pay income tax or other tax liabilities with respect to the vesting of restricted shares.