FirstMerit Corporation and Subsidiaries

(j) Mortgage Servicing Activities

Servicing rights, which are acquired through purchase or originated and retained after the underlying mortgage loans are transferred through sale or securitization, are separately recognized in other assets. Mortgage servicing assets are amortized into service charges and commissions in proportion to, and over the period of, the estimated net servicing income on the underlying mortgage loans or securities. Mortgage servicing assets are stratified by both product type and interest rate range for purposes of evaluating and measuring impairment based on their fair value. Any impairment resulting from declines in fair value are deducted from loan sales and servicing income.

(k) Federal Income Taxes

The Corporation follows the asset and liability method of accounting for income taxes. Deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect of a change in tax rates is recognized in income in the period of the enactment date.

(l) Value Ascribed to Acquired Intangibles

The value ascribed to acquired intangibles, including core deposit premiums, results from the excess of cost over fair value of net assets acquired in acquisitions of financial institutions. Such values are being amortized over periods ranging from 4.5 to 25 years, which represent the estimated remaining lives of the long-term assets acquired. Amortization is generally computed on a straight-line based on the expected reduction in the carrying value of such acquired assets. If no significant amount of long-term interest bearing assets is acquired, such value is amortized over the estimated life of the acquired deposit base, with amortization periods ranging from 10 to 15 years.

(m) Trust Department Assets and Income

Property held by the Corporation in a fiduciary or other capacity for trust customers is not included in the accompanying consolidated financial statements, since such items are not assets of the Corporation. Trust income is reported generally on a cash basis which approximates the accrual basis of accounting.

(n) Per Share Data

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares plus common share equivalents computed using the Treasury Stock Method. All earnings per share disclosures appearing in these financial statements are computed assuming dilution unless otherwise indicated.

(o) Reclassifications

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

(p) Accounting for Derivative Instruments and Hedging Activities In June 1998, the FASB issued Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). SFAS 133 establishes accounting and reporting standards for derivative instruments and requires an entity to recognize all derivatives as either assets or liabilities in the Balance Sheet and to measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge to various exposures. The accounting changes in the fair value of a derivative
(i.e., gains and losses) depend on the intended use of the derivative and its resulting designation. This statement was originally to be effective for all fiscal quarters beginning after June 15, 1999. In July 1999, the FASB issued Statement No. 137, “Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of SFAS No. 133.” SFAS 137 delays the implementation of SFAS 133. As a result, the Corporation will implement SFAS 133 in the first quarter 2001 and does not anticipate that the adoption of SFAS 133 will have a material effect on its earnings or financial position.