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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 0-10161
FIRSTMERIT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO
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(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
34-1339938
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(I.R.S. EMPLOYER IDENTIFICATION NO.)
III CASCADE PLAZA, AKRON, OHIO 44308 (330) 996-6300
- - ------------------------------------- ---------- ------------------
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) (TELEPHONE NUMBER)
OFFICES)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
and
PREFERRED SHARE PURCHASE RIGHTS
- - --------------------------------------------------------------------------------
(Title of Class)
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 the
filing requirements for at least the past 90 days. YES [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the approximate aggregate market value of the voting stock held by
non-affiliates of the registrant as of February 2, 1998: $1,572,007,275.
Indicate the number of shares outstanding of registrant's common stock as
of February 1, 1998: 61,762,140 Shares of Common Stock, No Par Value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of FirstMerit Corporation, dated February
23, 1998, in Part III.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Registrant, FirstMerit Corporation ("FirstMerit" or the "Corporation"), is
a multi-bank holding company organized in 1981 under the laws of the State of
Ohio and registered under the Bank Holding Company Act of 1956, as amended. At
December 31, 1997, FirstMerit, its affiliated banks and other subsidiaries had
total consolidated assets of approximately $5.3 billion and consolidated total
shareholders' equity of approximately $530.3 million.
FirstMerit through its affiliates operates principally as a regional
banking organization, providing a wide range of banking, fiduciary, financial,
insurance and investment services to corporate, institutional and individual
customers throughout northern Ohio, including Ashtabula, Cuyahoga, Erie, Geauga,
Lake, Lorain, Medina, Portage, Stark, Summit and Wayne Counties. At December 31,
1997, FirstMerit's subsidiaries operated 129 full service banking offices, had
149 automated teller machines located in 11 counties in Ohio and employed
approximately [2,300] full- and part-time employees. FirstMerit's principal
business consists of owning and supervising its affiliates. FirstMerit directs
their overall policies, including lending practices, and financial resources,
but most day-to-day affairs are managed by the affiliates' own officers and
directors, some of whom are also officers and directors of FirstMerit.
SUBSIDIARIES
FirstMerit's wholly-owned subsidiaries include FirstMerit Bank, National
Association, a national banking association, Akron, Ohio ("FirstMerit Bank"),
Citizens National Bank, a national banking association, Canton, Ohio
("Citizens"), Peoples National Bank, a national banking association, Wooster,
Ohio, Peoples Bank, N.A., a national banking association, Ashtabula, Ohio
(collectively, the "Banks"), FirstMerit Credit Life Insurance Company, an
Arizona corporation, FirstMerit Community Development Corporation, an Ohio
corporation, Citizens Investment Corporation, an Ohio corporation and Citizens
Savings Corporation of Stark County, an Ohio corporation (all, collectively, the
"Subsidiaries").
The Banks all provide a full range of customary banking products and
services. In addition, the Banks provide a wide range of specialized services
tailored to specific markets, including personal and corporate trust services,
personal financial services, cash management services and international banking
services. FirstMerit's nonbanking direct and indirect subsidiaries provide
insurance sales services, credit life, accident and health insurance, securities
brokerage services, equipment lease financing and other financial services.
FirstMerit is in the process of merging the Banks under a single charter.
It is contemplated that this process will be completed in 1998. FirstMerit began
the consolidation process in 1997, when it changed First National Bank of Ohio
to the new charter name of "FirstMerit Bank, National Association," and several
months later merged its former bank subsidiaries, The Old Phoenix National Bank
of Medina and EST National Bank, with and into FirstMerit Bank. FirstMerit Bank
will be the resulting institution of the remaining charter consolidations.
In 1996, FirstMerit Bank, FSB, a former federal savings association
subsidiary of FirstMerit located in Clearwater, Florida ("FirstMerit FSB"), was
merged with and into FirstMerit Trust Company, N.A., a former national trust
company subsidiary of FirstMerit located in Naples, Florida under the name
"FirstMerit Bank, N.A." ("FirstMerit NA"). On December 31, 1996, FirstMerit NA
was merged with and into SouthTrust Bank of Florida N.A.
FirstMerit is a corporate entity legally separate and distinct from its
affiliates, however, bank holding companies such as FirstMerit are expected to
act as a source of financial strength to their respective subsidiary banks. The
principal source of FirstMerit's income is dividends from its subsidiaries.
There are certain regulatory restrictions on the extent to which the
subsidiaries can pay dividends or otherwise supply funds to FirstMerit.
SUBSIDIARY OPERATIONS
Each Bank engages in commercial banking in its respective geographical
market. Commercial banking includes the acceptance of a variety of demand,
savings and time deposits and the granting of commercial and
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consumer loans for the financing of both real and personal property. Other
services include automated banking programs, credit cards, rental of safe
deposit boxes, letters of credit, leasing, discount brokerage and credit life
insurance. The Banks also operate trust departments which offer estate and trust
services. Each Bank offers its services primarily to consumers and small and
medium size businesses in its respective geographical market. None of the Banks
are engaged in lending outside the continental United States. None of the Banks
is dependent upon any one significant customer or a specific industry.
FirstMerit Credit Life Insurance Company, a subsidiary of FirstMerit, was
formed in 1985 to engage in underwriting of credit life and credit accident and
health insurance directly related to the extension of credit by the Banks to
their customers. FirstMerit Community Development Corporation, a subsidiary of
FirstMerit, was organized in 1994 to further the efforts of the subsidiaries in
meeting the credit needs of their lending communities, and the requirements of
the Community Reinvestment Act ("CRA"). Congress enacted CRA to assure that
financial institutions meet the deposit and credit needs of their communities.
Through a community development corporation, financial institutions can meet
these needs by nontraditional activities such as acquiring, rehabilitating or
investing in real estate in low to moderate income neighborhoods, and promoting
the development of small businesses.
In 1995 the Banks jointly organized and capitalized FirstMerit Mortgage
Corporation ("FirstMerit Mortgage"), which is located in Canton, Ohio.
FirstMerit Mortgage is engaged in the business of originating residential
mortgage loans and providing mortgage loan servicing for itself, the Banks and
third parties.
FirstMerit Bank is the parent corporation of two wholly-owned Ohio
corporations organized in 1993, FirstMerit Leasing Company ("FirstMerit
Leasing") and FirstMerit Securities, Inc. ("FirstMerit Securities"). FirstMerit
Leasing primarily provides equipment lease financing and related services, while
FirstMerit Securities primarily provides discount brokerage services to
customers of FirstMerit Bank and other FirstMerit subsidiaries. FirstMerit Bank
is also the parent corporation of Abell & Associations, Inc. ("Abell"), a
nationally known life insurance and financial consulting firm. Abell was
acquired in May 1997 by a former subsidiary of FirstMerit Bank. Abell assists in
the design and funding of estate plans, corporate succession plans and executive
compensation plans. The firm also does consulting work for law and accounting
firms and with individual corporations, designing funding for corporate
liability issues and structured settlements.
Peoples Bank, N.A. is the parent corporation of FirstMerit Insurance
Agency, Inc., a subsidiary acquired by FirstMerit when it acquired Great
Northern Financial Corporation in 1994. FirstMerit Insurance Agency, Inc.'s
license to sell life insurance products and annuities was reactivated in 1997.
ACQUISITIONS
FirstMerit engages on a regular basis in discussions concerning possible
acquisitions of other financial institutions and financial services companies.
FirstMerit also acquires from time to time, branches and deposits in its
principal markets.
On November 2, 1997, FirstMerit, entered into an Agreement of Affiliation
and Plan of Merger ("Agreement") with CoBancorp Inc. ("CoBancorp"), a bank
holding corporation headquartered in Elyria, Ohio, whereby CoBancorp will merge
with and into FirstMerit ("Merger"). Based on FirstMerit's per share closing
price on December 31, 1997 of $28.375, the value of the transaction on such date
was approximately $174.3 million. The Merger is structured as a tax-free
exchange for CoBancorp shareholders receiving FirstMerit common stock, and will
be accounted for as a purchase transaction. The Merger is expected to close in
the second quarter of 1998.
In connection with the Merger, FirstMerit plans to issue between 3.1 and
4.3 million shares of its common stock. The FirstMerit Board of Directors has
approved the repurchase of up to 4.3 million shares of FirstMerit stock for use
in the Merger. These share purchases may be effected through public and private
transactions. Under the terms of the Agreement, each share of CoBancorp common
stock will be exchanged for $44.50 in cash or for shares of common stock of
FirstMerit with a market value per share of $44.50, based upon the market value
of FirstMerit common stock during a ten day period ending ten days prior to
closing of the transaction, subject to adjustment as provided for in the
Agreement. CoBancorp shareholders may elect to exchange their common stock
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for either common stock of FirstMerit, or $44.50 in cash, provided that no less
than 30 percent nor more than 49 percent of the total transaction value will be
paid in cash.
Consummation of the Merger is subject to certain customary conditions,
including, among others, (i) the approval of the Merger, the Agreement and the
transactions contemplated thereby by the CoBancorp shareholders at a Special
Shareholders Meeting scheduled for March 3, 1998 for such purpose, and (ii)
receipt of regulatory approvals.
Subsequent to the execution of the Agreement, CoBancorp and FirstMerit
entered into a Stock Purchase Option dated as of November 3, 1997 (the
"CoBancorp Stock Option"). Under the CoBancorp Stock Option, FirstMerit was
granted an irrevocable option to purchase up to 19.9% of CoBancorp common stock,
no par value at a price equal to $40.00 per share. The number of shares and the
purchase price are subject to adjustment as described in the CoBancorp Stock
Option. The CoBancorp Stock Option is exercisable by FirstMerit only under
specific circumstances involving generally a transaction whereby CoBancorp would
enter into an agreement to merge with a party other than FirstMerit, a third
party would announce a tender offer for CoBancorp, another party shall have
acquired 20% or more of CoBancorp, or the Agreement is not approved by the
CoBancorp shareholders. Under certain circumstances CoBancorp may be required to
repurchase the CoBancorp Stock Option or the shares acquired pursuant to the
exercise thereof, plus pay additional sums.
In October 1997, FirstMerit, through a wholly-owned subsidiary bank,
entered into a purchase and assumption agreement with First Western Bank, N.A.,
to acquire three branches located in Lake County, Ohio. The three branches had a
total of $49.0 million in deposits at the time the agreement was signed. The
transaction closed in January 1998.
In May 1997, FirstMerit, through a wholly owned subsidiary, acquired Abell
& Associates, Inc. Abell is a nationally known life insurance and financial
consulting firm which assists in the design and funding of estate plans,
corporate succession plans and executive compensation plans. The firm also does
consulting work for law and accounting firms and with individual corporations,
designing funding for corporate liability issues and structured settlements.
In January 1995, FirstMerit acquired The CIVISTA Corporation ("CIVISTA") by
merger of CIVISTA with and into FirstMerit. Through the merger, FirstMerit
acquired CIVISTA's subsidiaries, including Citizens Savings Bank of Canton, an
Ohio savings association with its principal offices in Canton, Ohio ("Citizens
Savings"). FirstMerit then effected a merger of Citizens Savings into The First
National Bank in Massillon, a national bank subsidiary of FirstMerit, to form a
new national bank subsidiary called Citizens National Bank, with its principal
offices in Canton, Ohio. When FirstMerit acquired control of CIVISTA, it also
acquired control of certain other wholly-owned subsidiaries of CIVISTA,
including Citizens Savings Corporation of Stark County ("CSC") and Citizens
Investment Corporation ("CIC"). At the time of the merger, the value of the
transaction was approximately $174.2 million. The Merger was structured as a
tax-free exchange for CIVISTA shareholders receiving FirstMerit common stock,
and was accounted for as a pooling of interest transaction.
COMPETITION
The financial services industry is highly competitive. FirstMerit and its
Subsidiaries compete with other local, regional and national providers of
financial services such as other bank holding companies, commercial banks,
savings associations, credit unions, consumer and commercial finance companies,
equipment leasing companies, brokerage institutions, money market funds and
insurance companies. The Subsidiaries' primary financial institution competitors
include Bank One, National City Bank, KeyBank, Star Bank and The Fifth Third
Bank. Mergers between financial institutions within Ohio and in neighboring
states have added competitive pressure, which pressure has intensified due to
interstate banking which became permissible under the Interstate Banking and
Branching Efficiency Act of 1994. FirstMerit competes in its markets by offering
quality and innovative services at competitive prices.
REGULATION AND SUPERVISION
FirstMerit is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended ("BHCA"). Bank holding companies are subject to
regulation by the Federal Reserve. Under Federal
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Reserve policy, a bank holding company is expected to act as a source of
financial strength to each subsidiary bank and to commit resources to support
such subsidiary banks. The BHCA requires the prior approval of the Federal
Reserve in any case where a bank holding company proposes to acquire direct or
indirect ownership or control of more than five percent (5%) of the voting
shares of any bank that is not already majority-owned by it, or to merge or
consolidate with any other bank holding company.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than five percent of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve is authorized to
approve the ownership of shares by a bank holding company in any company the
activities of which the Federal Reserve has determined to be so closely related
to banking or to managing or controlling banks as to be a proper incident
thereto. The Federal Reserve has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include: operating a savings association, mortgage company, finance
company, credit card company or factoring company; performing certain data
processing operations; providing investment and financial advice; and acting as
an insurance agent for certain types of credit-related insurance.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to the
bank holding company or any of its subsidiaries, on investments in the stock or
other securities of the bank holding company or its subsidiaries and on the
taking of such stock or securities as collateral for loans to any borrower.
Further, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of any services.
FirstMerit is also under the jurisdiction of the Securities and Exchange
Commission and certain state securities commissions for matters relating to the
offering and sale of its securities. FirstMerit is subject to the disclosure and
regulatory requirements of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, as administered by the Commission.
On September 29, 1994, President Clinton signed the Interstate Banking and
Branching Efficiency Act of 1994 ("Interstate Act"). The Interstate Act
generally permits nationwide interstate banking and branching commencing one
year after enactment. After that time an "adequately capitalized" and "well
managed" bank holding company may acquire a bank in any state, subject to
certain concentration limitations. No banking organization may control more than
ten percent of deposits nationwide or more than 30.0% of deposits in any one
state. Individual states may waive the 30.0% limitation. After June 1, 1997,
interstate bank holding companies could consolidate banks they own in multiple
states into a single branch network, or acquire out-of-state banks as branches.
De novo interstate branching is not authorized by the Interstate Act, but states
may specifically authorize it. States may also limit the acquisition of
newly-formed banks for a period of up to five years to restrict effective de
novo branching. The Interstate Act requires CRA compliance by out-of-state
branches and prohibits "deposit production offices" to ensure that local savings
are not diverted to other states. Institutions must maintain a loan
activity-to-deposit ratio within a host state at least equal to one-half of the
average percentage for all banks in the host state, otherwise the institution's
federal regulator may close the out-of-state branch and restrict the institution
from opening new branches in that state. Certain state laws, such as those on
intrastate branching, consumer protection and fair lending, will still apply to
out-of-state banks or branches. The Interstate Act is expected to stimulate an
already active merger environment in the banking industry.
SUMMARY RESULTS OF OPERATIONS
As of December 31, 1997, FirstMerit's consolidated total assets were $5.3
billion. Earnings for FirstMerit in 1997 were $86.4 million, or $1.38 per share
(basic), compared with $70.9 million, or $1.09 per share (basic), for the year
ended December 31, 1996. The earnings reported for 1996 were impacted by the
Savings Association Insurance Fund (SAIF) recapitalization charge of $6.7
million recorded September 30, 1996. Excluding the SAIF charge, earnings for the
year ended December 31, 1996 were $77.6 million, or $1.19 per share (basic).
Total cash dividends paid to shareholders for the entire year were $0.61, an
increase of $0.06 per share over the previously stated annual payments of $0.55.
All per share amounts reflect the two-for-one split that occurred September 29,
1997 for shareholders of record as of September 2, 1997.
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On a fully-tax equivalent basis, net interest income was $258.7 million, up
2% from last year. The improved net interest margin of 5.25% compared to 4.94%
in 1996 was primarily responsible for the rise in net interest income.
Other income for the year was $83.6 million, an increase of $14.8 million
or 22% over the prior year adjusted figures. The 1996 adjusted other income
total does not include net proceeds of $13.2 million from sales of affiliate
branches and $490,000 from the sale of the former FirstMerit Bank, N.A. in
Clearwater, Florida. The largest gains in other income over one year ago were
experienced in credit card fees, up 26%; other service fees, up 19%; and other
operating income, up 24%. Other expenses were $191.1 million compared to $199.5
million in 1996. The four percent decline in operating expenses improved the
efficiency ratio from 59.10% in 1996 to 55.60% for 1997. The 1996 other expenses
and efficiency ratio exclude the previously mentioned pre-tax SAIF assessment of
$10.2 million.
During 1997, the Corporation recorded a provision for possible loan losses
of $21.6 million compared to last year's provision of $17.8 million. The
provisions in both years address the continuing shift in FirstMerit's loan
portfolio from residential mortgages into commercial and consumer loans, which
historically have higher loss rates. Nonperforming assets were 0.35% of total
loans and other real estate compared to 0.29% one year ago. The allowance for
loan losses as a percentage of outstanding loans was 1.40% at December 31, 1997
and 1.35% at December 31, 1996.
ITEM 2. PROPERTIES
FIRSTMERIT CORPORATION
FirstMerit's executive offices and certain holding company operational
facilities, totaling approximately 88,000 square feet, are leased from
FirstMerit Bank. FirstMerit relocated its executive offices in 1994 to III
Cascade, a seven-story office building located in downtown Akron, Ohio. During
1993, a long-term leasehold interest in III Cascade was acquired by an Ohio
general partnership (the "Partnership"), the general partners of which are
FirstMerit and a Delaware corporation subsidiary of Banc One Capital
Corporation. FirstMerit does not control the Partnership. The City of Akron is
the lessor of the property. FirstMerit Bank has subleased all of the premises of
III Cascade from the Partnership, and FirstMerit subleases a portion of the
premises from FirstMerit Bank.
The facilities owned or leased by FirstMerit and its Subsidiaries are
considered by management to be adequate, and neither the location nor unexpired
term of any lease is considered material to the business of FirstMerit.
FIRSTMERIT BANK
The principal executive offices of FirstMerit Bank are located in its
28-story main office building located at 106 South Main Street, Akron, Ohio,
which is owned by FirstMerit Bank. FirstMerit Bank is the principal tenant of
the building occupying approximately one-half of a total of 215,000 square feet
of the building, with the remaining portion leased to tenants unrelated to
FirstMerit Bank. The properties occupied by 30 of FirstMerit Bank's other
branches (not including those branches listed below in Medina and Elyria, Ohio)
are owned by FirstMerit Bank, while the properties occupied by its remaining 27
branches (not including those branches listed below in Medina and Elyria, Ohio)
are leased with various expiration dates. There is no mortgage debt owing on any
of the above property owned by FirstMerit Bank. FirstMerit Bank also owns
automated teller machines, on-line teller terminals and other computers and
related equipment for use in its business. In 1996 FirstMerit Bank completed
major renovations to its main office building. FirstMerit Bank renovated all
space which it occupies in the building, as well as all public areas.
FirstMerit Bank also owns 19.5 acres near downtown Akron, on which is
located FirstMerit's Operations Center. The Operations Center is occupied and
operated by FirstMerit Services Division, an operating division of FirstMerit
Bank. The Operations Center primarily provides computer and communications
technology-based services to FirstMerit and the Subsidiaries, and also markets
its services to non-affiliated institutions. There is no mortgage debt owing on
the Operations Center property. In connection with its Operations Center, the
Services Division has a disaster recovery center at a remote site on leased
property.
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The Trust and the Organizational & Development Departments of FirstMerit
Bank are located in Main Place, a four-story office building located in downtown
Akron. These Departments occupy approximately 29,000 square feet of leased space
in Main Place.
FirstMerit Bank's principal Medina, Ohio facility is located at 39 Public
Square, Medina, Ohio. The building which houses these principal offices are
leased. There are 14 other properties in the Medina region, five of these
properties with branches are owned, while the properties occupied by its
remaining nine branches are the subject of various lease obligations having
various expiration dates. These facilities are leased from IRT Properties, a
publicly-held real estate investment trust.
FirstMerit Bank's principal Elyria, Ohio facility is located at 105 Court
Street, Elyria, Ohio. The building which houses these principal offices are
owned. There are 18 other properties in the Elyria region, 13 of these
properties with branches are owned, while the properties occupied by its
remaining five branches are the subject of various lease obligations having
various expiration dates.
PEOPLES NATIONAL BANK
The principal executive offices of Peoples Bank are located in its main
office building at 121 North Market Street, Wooster, Ohio, which is owned by
Peoples Bank. The properties occupied by two of Peoples Bank branches are owned
by Peoples Bank, while the properties occupied by its remaining two branches are
leased at various expiration dates. No mortgage debt exists on the above
property owned by Peoples Bank. Peoples Bank also has automated teller machines
and on-line terminals. The computer operations of Peoples Bank are provided
through FirstMerit.
CITIZENS NATIONAL BANK
The principal executive offices of Citizens are located in its main office
building at 100 Central Plaza South, Canton, Ohio, which is leased by Citizens.
Citizens owns the properties occupied by eight of its other banking offices,
while the properties occupied by the remaining seven are leased under different
leases with various expiration dates. Citizens also maintains a trust office and
private banking office at two additional leased locations. Citizens also has
automated teller machines and on-line terminals. The computer operations of
Citizens are provided through FirstMerit.
PEOPLES BANK, N.A.
The principal executive offices of Peoples N.A. are located in its office
at 7800 Reynolds Road, Mentor, Ohio, which is owned. Peoples N.A. owns the
properties occupied by six of its other branches, while the properties occupied
by its remaining nine branches are leased at various expiration dates. Peoples
N.A. also has automated teller machines and on-line terminals. The computer
operations of Peoples N.A. are provided through FirstMerit.
CITIZENS SAVINGS CORPORATION OF STARK COUNTY
CSC owns a portion of an office condominium and certain low to moderate
income housing units in Stark County, Ohio.
FIRSTMERIT MORTGAGE CORPORATION
The Banks in 1995 jointly organized and capitalized FirstMerit Mortgage,
which is engaged in the business of originating residential mortgage loans and
providing mortgage loan servicing for itself, the Banks and third parties.
FirstMerit Mortgage conducts its business in property owned by Citizens located
at 4455 Hills and Dales Road, Canton, Ohio.
ITEM 3. LEGAL PROCEEDINGS
The nature of FirstMerit's business results in a certain amount of
litigation. Accordingly, FirstMerit and its subsidiaries are subject to various
pending and threatened lawsuits in which claims for monetary damages are
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asserted. Management, after consultation with legal counsel, is of the opinion
that the ultimate liability of such pending matters would not have a material
adverse effect on FirstMerit's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1997 to a vote of
security holders of FirstMerit.
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EXECUTIVE OFFICERS OF REGISTRANT
The following persons are the executive officers of FirstMerit as of
February 23, 1998. Unless otherwise designated, they are officers of FirstMerit,
and unless otherwise stated, they have held their indicated positions for the
past five years.
<TABLE>
<CAPTION>
DATE APPOINTED
NAME AGE TO FIRSTMERIT POSITION AND BUSINESS EXPERIENCE
- - ------------------------ ------- ---------------- --------------------------------------------------------
<S> <C> <C> <C>
Sid A. Bostic 55 02-01-98 President and Chief Operating Officer of FirstMerit and
of FirstMerit Bank since February 1, 1998; previously
Chairman, President and Chief Executive Officer, Norwest
Bank Indiana, N.A., Fort Wayne, Indiana
John R. Cochran 55 03-01-95 Chairman and Chief Executive Officer of FirstMerit and
of FirstMerit Bank since February 1, 1998; previously
President and Chief Executive Officer of FirstMerit and
FirstMerit Bank; previously President and Chief
Executive Officer; previously President and Chief
Executive Officer of Norwest Bank Nebraska, N.A.
John R. Macso 51 11-08-90 President, FirstMerit Services Division and Chief
Technology Officer, since February 1, 1998; previously
Executive Vice President of FirstMerit; previously
President and Chief Executive Officer of FirstMerit
Bank; previously Executive Vice President of FirstMerit
Bank
Robert P. Brecht 47 08-09-91 Executive Vice President of FirstMerit and of FirstMerit
Bank; previously Executive Vice President of FirstMerit
Bank since July 20, 1995; previously President and Chief
Executive Officer of Peoples N.A.
Jack R. Gravo 51 02-16-95 Executive Vice President of FirstMerit and of FirstMerit
Bank; previously President and Chief Executive Officer
of Citizens since February 1, 1995; previously President
of The CIVISTA Corporation
Bruce M. Kephart 46 07-25-95 Executive Vice President of FirstMerit, Regional
President FirstMerit Bank; President and Chief Executive
Officer of Peoples N.A. since July 25, 1995; previously
Vice President, Bank One, Cleveland, N.A.
George P. Paidas 50 04-13-94 Executive Vice President of FirstMerit, and Regional
President of FirstMerit Bank; President and Chief
Executive Officer of The Old Phoenix National Bank of
Medina ("Old Phoenix") since March 9, 1994; previously
Executive Vice President of Old Phoenix
Gregory R. Bean 46 04-10-91 Senior Vice President of FirstMerit; Senior Vice
President and Senior Trust Officer of FirstMerit Bank
Gary J. Elek 46 02-11-88 Senior Vice President and Treasurer of FirstMerit, and
Senior Vice President of FirstMerit Bank
Terry E. Patton 49 04-10-85 Senior Vice President, Counsel and Secretary of
FirstMerit and FirstMerit Bank
William E. Stansifer 50 10-02-95 Senior Vice President of FirstMerit and of FirstMerit
Bank; previously Senior Vice President, Banking Credit
Policy Office, Norwest Corporation
</TABLE>
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<TABLE>
<CAPTION>
DATE APPOINTED
NAME AGE TO FIRSTMERIT POSITION AND BUSINESS EXPERIENCE
- - ------------------------ ------- ---------------- --------------------------------------------------------
<S> <C> <C> <C>
Carrie L. Tolstedt 38 05-22-95 Executive Vice President of FirstMerit and of FirstMerit
Bank; President and Chief Executive Officer of Citizens
National Bank, President and Chief Executive Officer of
Peoples National Bank; previously Senior Vice President
of FirstMerit; previously Senior Vice President of
Norwest Bank Nebraska, N.A.
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The outstanding shares of FirstMerit Common Stock are quoted on The Nasdaq
Stock Market National Market System. The following table contains bid and cash
dividend information for FirstMerit Common Stock for the two most recent fiscal
years:
STOCK PERFORMANCE AND DIVIDENDS
<TABLE>
<CAPTION>
BIDS PER SHARE
QUARTER DIVIDEND BOOK
ENDING HIGH LOW RATE VALUE*
<S> <C> <C> <C> <C>
03-31-96 $16.25 13.88 0.1350 $ 8.10
06-30-96 16.00 15.00 0.1350 8.06
09-30-96 16.00 14.13 0.1350 8.10
12-31-96 18.00 15.63 0.1450 8.20
03-31-97 21.38 17.38 0.1450 8.24
06-30-97 25.25 19.25 0.1450 8.30
09-30-97 27.00 22.63 0.1600 8.38
12-31-97 30.75 24.88 0.1600 8.56
</TABLE>
Number of shareholders at December 31, 1997 -- 6,978
*Based upon number of shares outstanding at the end of each quarter.
This table sets forth the high and low closing bid quotations, dividend
rates and book values per share for the calendar periods indicated. These
quotations furnished by the National Quotations Bureau Incorporated, represent
prices between dealers, do not include retail markup, markdowns, or commissions,
and may not represent actual transactions.
On February 1, 1998 there were approximately 6,945 shareholders of record
of FirstMerit Common Stock.
9
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Results of Operations
Interest income............. $ 407,825 411,745 416,627 371,018 361,208 385,089
Conversion to fully-tax
equivalent............... 3,212 3,043 3,840 4,590 5,264 5,679
---------- --------- --------- --------- --------- ---------
Interest income*............ 411,037 414,788 420,467 375,608 366,472 390,768
Interest expense............ 152,369 160,773 180,933 140,181 135,149 167,405
---------- --------- --------- --------- --------- ---------
Net interest income*........ 258,668 254,015 239,534 235,427 231,323 223,363
Provision for possible loan
losses................... 21,593 17,751 19,763 4,624 8,056 18,965
Other income................ 83,578 82,496 68,517 70,656 71,909 68,591
Other expense............... 191,080 209,702 227,779 193,410 187,945 175,286
---------- --------- --------- --------- --------- ---------
Income before federal income
taxes*................... 129,573 109,058 60,509 108,049 107,231 97,703
Federal income taxes........ 39,998 35,075 30,950 32,110 33,335 29,194
Fully-tax equivalent
adjustment............... 3,212 3,043 3,840 4,590 5,264 5,679
---------- --------- --------- --------- --------- ---------
Federal income taxes*....... 43,210 38,118 34,790 36,700 38,599 34,873
---------- --------- --------- --------- --------- ---------
Income before extraordinary
item........................ 86,363 70,940 25,719 71,349 68,632 62,830
Extraordinary item -- gain on
disposition of assets after
combination (net of tax
effect)..................... -- -- 5,599 -- -- --
---------- --------- --------- --------- --------- ---------
Net income.................... $ 86,363 70,940 31,318 71,349 68,632 62,830
========== ========= ========= ========= ========= =========
Per share:
Income before
extraordinary item..... $ 1.38 1.09 0.38 1.07 1.03 0.95
Extraordinary item (net
of tax effect) -- -- 0.09 -- -- --
---------- --------- --------- --------- --------- ---------
Basic net income......... $ 1.38 1.09 0.47 1.07 1.03 0.95
========== ========= ========= ========= ========= =========
Diluted net income....... $ 1.36 1.08 0.47 N/A N/A N/A
========== ========= ========= ========= ========= =========
Cash dividends........... $ 0.61 0.55 0.51 0.49 0.44 0.40
Dividend payout ratio....... 44.30% 50.56% 132.68% 45.72% 42.13% 41.71%
Average Ratios
Return on total assets...... 1.64% 1.29% 0.55% 1.32% 1.34% 1.28%
Return on shareholders'
equity................... 16.62% 13.44% 5.93% 13.86% 14.30% 14.46%
Shareholders' equity to
total assets............. 9.89% 9.64% 9.34% 9.56% 9.38% 8.86%
Balance Sheet Data
Total assets (at December
31)...................... $5,307,461 5,227,980 5,596,521 5,722,573 5,179,298 5,054,267
Daily averages:
Total assets............. $5,253,785 5,478,482 5,654,811 5,385,758 5,113,854 4,907,738
Earning assets........... 4,926,372 5,143,321 5,287,521 5,030,012 4,724,710 4,539,828
Deposits and other
funds.................. 4,641,569 4,879,343 5,058,333 4,820,339 4,581,960 4,416,929
Shareholders' equity..... 519,618 527,899 528,038 514,860 479,792 434,604
</TABLE>
- - ---------------
*Fully-tax equivalent basis
N/A = not available
10
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS FOR THE YEARS 1997, 1996, 1995
The following commentary presents Management's discussion and analysis of
the Corporation's financial condition and results of operations. The review
highlights the principal factors affecting earnings and the significant changes
in balance sheet items for the years 1997, 1996 and 1995. Financial information
for prior years is presented when appropriate. The objective of this financial
review is to enhance the reader's understanding of the accompanying tables and
charts, the consolidated financial statements, notes to financial statements,
and financial statistics appearing elsewhere in this report. Where applicable,
this discussion also reflects Management's insights of known events and trends
that have or may reasonably be expected to have a material effect on the
Corporation's operations and financial condition.
All financial data has been restated to give effect to acquisitions
accounted for on a pooling of interests basis and stock splits in previous
periods. The results of other bank and branch acquisitions, accounted for as
purchases, have been included effective with the respective dates of
acquisition.
EARNINGS SUMMARY
FirstMerit Corporation's net income totaled $86.4 million, or $1.38 per
share, compared with $70.9 million, or $1.09 per share, earned in 1996. The 1996
earnings were impacted by the one-time Savings Association Insurance Fund (SAIF)
recapitalization charge of $6.7 million, after taxes. Excluding the SAIF charge,
prior year earnings were $77.6 million or $1.19 per share.
Return on average equity for the year was 16.62% and return on average
assets was 1.64%. After adjusting for the 1996 SAIF assessment, last year's
comparable ratios were 14.70% and 1.42%, respectively.
Net interest income on a fully tax-equivalent basis was $258.7 million in
1997 and $254.0 in 1996. The increase occurred because the net interest margin
of 5.25% was 31 basis points higher than the 4.94% earned last year. The
improved margin offset a decline of 4% in average earning assets. The decline in
earning assets occurred as maturing investment securities were used to fund loan
growth and residential mortgage loans were sold to reinvest the proceeds into
higher yielding loans.
Other income totaled $83.6 million compared to adjusted other income of
$68.8 million for 1996. The adjusted figure for last year excludes total gains
of $13.7 million from sales of branches and a former bank affiliate. The largest
gains over one year ago were experienced in credit card fees, up 25.8 percent;
other service fees, up 18.6 percent; and other operating income, up 24.4
percent.
Other expenses were $191.1 million for the year, a four percent improvement
over SAIF-adjusted pre-tax other expenses of $199.5 in 1996. Lower costs were
noted in several expense categories including a 3.8 percent reduction in
salaries and benefits, a 4.9 percent decline in occupancy expense, and a 5.0
percent drop in other operating expenses. The efficiency ratio of 55.60% was 350
basis points better than the 59.10% recorded last year.
The provision for loan losses for 1997 was $21.6 million compared to $17.8
million in 1996. The $3.8 million increase was due to net charge-offs that were
$1.9 higher than a year ago, a five percent rise in year end loan outstandings,
and in response to the continued shift in FirstMerit's loan portfolio from
residential real estate loans to commercial and consumer loans, which have
historically exhibited higher loss rates. Nonperforming assets were 0.35% of
total loans and other real estate compared to 0.29% one year ago. The allowance
for loan losses as a percentage of outstanding loans increased to 1.40%,
compared to 1.35% at December 31, 1996.
Total shareholders' equity at December 31, 1997 was $530.3 million, a one
percent increase over $523.7 million at December 31, 1996. Earnings for the year
were largely offset by cash dividends paid to shareholders and FirstMerit's
stock buyback program that reduced outstanding shares by 2.2 million shares
during 1997.
11
<PAGE> 13
The following table summarizes the changes in earnings per share for 1997
and 1996.
<TABLE>
<CAPTION>
1997/ 1996/
(DOLLARS) 1996 1995
--------- ----- -----
<S> <C> <C>
CHANGES IN EARNINGS PER SHARE
Net income for 1996 and 1995, respectively......... $ 1.09 0.47
Increases (decreases) attributable to:
Net interest income -- taxable equivalent....... 0.07 0.22
Provision for possible loan losses.............. (0.06) 0.03
Trust services.................................. 0.02 0.02
Service charges on deposit accounts............. 0.03 0.05
Credit card fees................................ 0.05 0.03
Securities gains (losses), net.................. 0.06 (0.03)
Other income.................................... (0.14) 0.14
Salaries and employee benefits.................. 0.06 0.20
Net occupancy expense........................... 0.02 (0.01)
Equipment expense............................... 0.00 0.01
Other expenses, excluding SAIF charge........... 0.06 0.00
Savings Association Insurance Fund (SAIF)
charge........................................ 0.16 (0.16)
Charges related to CIVISTA acquisition.......... 0.00 0.24
Extraordinary gain -- disposition of assets..... 0.00 (0.08)
Federal income taxes -- taxable equivalent...... (0.08) (0.05)
Reduction in outstanding shares due to share
repurchases................................... 0.04 0.01
------ ------
Net change in net income........................ 0.29 0.62
------ ------
Net income per share............................ $ 1.38 1.09
====== ======
</TABLE>
NET INTEREST INCOME
Net interest income, the difference between interest and loan fee income on
earning assets and the interest paid on deposits and borrowed funds, is the
principal source of earnings for the Corporation. Throughout this discussion net
interest income is presented on a fully taxable equivalent (FTE) basis which
restates interest on tax-exempt securities and loans as if such interest were
subject to federal income tax at the statutory rate.
Net interest income is affected by market interest rates on both earning
assets and interest bearing liabilities, the level of earning assets being
funded by interest bearing liabilities, non-interest bearing liabilities and
equity, and the growth in earning assets. The following table shows the
allocation to assets, the source of funding and their respective interest
spreads.
<TABLE>
<CAPTION>
1997
----------------------------------
AVERAGE NET
EARNING INTEREST INTEREST
ASSETS SPREAD INCOME
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-bearing liabilities...................... $3,908,175 4.44% 173,523
Non-interest-bearing liabilities and equity....... 1,018,197 8.34%* 85,145
---------- --------
$4,926,372 258,668
========== ========
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------
AVERAGE NET
EARNING INTEREST INTEREST
ASSETS SPREAD INCOME
------- -------- --------
<S> <C> <C> <C>
Interest-bearing liabilities $4,134,241 4.18% 172,811
Non-interest-bearing liabilities and equity 1,009,080 8.06%* 81,204
---------- --------
$5,143,321 254,015
========== ========
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
1995
----------------------------------
AVERAGE NET
EARNING INTEREST INTEREST
ASSETS SPREAD INCOME
------- -------- --------
<S> <C> <C> <C>
Interest-bearing liabilities $4,333,046 3.78% 163,789
Non-interest-bearing liabilities and equity 954,475 7.95%* 75,745
---------- --------
$5,287,521 239,534
========== ========
</TABLE>
- - ---------------
*Yield on earning assets
Net interest income increased $4.7 million, or 1.8%, to $258.7 million in
1997 compared to $254.0 million in 1996. The increase occurred because the
decline in interest expense was greater than the reduction in interest income.
Specifically, interest income fell $3.8 million while interest expense decreased
$8.4 million, or 5.2%.
Interest income was lower than last year because earning assets fell 4.2%
or $216.9 million. The decline in average earning assets was mainly attributable
to sales of residential mortgage loans and mortgage-backed securities whose
proceeds were reinvested in higher yielding commercial and consumer credits. The
average yield on earning assets increased 28 basis points from 8.06% to 8.34%
during 1997.
Lower interest expense was due to fewer interest bearing liabilities as the
cost of funds remained stable. Also contributing to less interest expense was a
shift in the composition of customer deposits as earning assets funded by
non-interest bearing liabilities and equity increased from 19.6% in 1996 and
18.1% in 1995 to 20.7% in 1997.
The following table provides an analysis of the effect of changes in
interest rates and volumes on net interest income in 1997 and 1996.
CHANGES IN NET INTEREST DIFFERENTIAL --
FULLY-TAX EQUIVALENT RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1997 AND 1996 1996 AND 1995
--------------------------- --------------------------
INCREASE (DECREASE) IN INCREASE (DECREASE) IN
INTEREST INCOME/EXPENSE INTEREST INCOME/EXPENSE
--------------------------- --------------------------
YIELD/ YIELD/
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- ------ ------- ------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Investment securities:
Taxable............................... $(12,823) 1,376 (11,447) (7,124) (213) (7,337)
Tax-exempt............................ (1,120) 790 (330) (1,590) (375) (1,965)
Loans................................... (2,109) 8,819 6,710 (485) 4,855 4,370
Federal funds sold...................... 1,211 105 1,316 (135) (612) (747)
-------- ------ ------- ------ ------- -------
Total interest income................... (14,841) 11,090 (3,751) (9,334) 3,655 (5,679)
-------- ------ ------- ------ ------- -------
INTEREST EXPENSE
Interest on deposits:
Demand-interest bearing............... 21 (1,393) (1,372) 366 (1,729) (1,363)
Savings............................... (2,871) 1,264 (1,607) (2,677) (3,315) (5,992)
Certificates and other time deposits
(CDs).............................. (3,774) (199) (3,973) (574) (1,565) (2,139)
Federal funds purchased, securities sold
under agreements to repurchase and
other borrowings...................... (1,888) 436 (1,452) (4,563) (6,103) (10,666)
-------- ------ ------- ------ ------- -------
Total interest expense.................. (8,512) 108 (8,404) (7,448) (12,712) (20,160)
-------- ------ ------- ------ ------- -------
Net interest income..................... $ (6,329) 10,982 4,653 (1,886) 16,367 14,481
======== ====== ======= ====== ======= =======
</TABLE>
- - ---------------
Note: The variance created by a combination of rate and volume has been
allocated entirely to volume.
13
<PAGE> 15
Total interest income decreased by $3.8 million in 1997 or 0.9% compared to
1996, which decreased 1.4% from 1995. The 1997 decrease resulted from a decline
in earning assets that was partially offset by an improved earning asset yield.
Sales and maturities of investment securities contributed $13.9 million or 93.9%
of the total drop in average earning assets of $14.8 million. The 28 basis point
improvement in the earning asset yield, from 8.06% to 8.34%, was entirely due to
higher rates earned on loans, as well as the other earning assets, during 1997.
A higher yield on loans contributed $8.8 million more to interest income in 1997
when compared to the prior year. The increased yield earned on loans was mainly
due to a change in the loan portfolio mix from residential mortgages to higher
yielding commercial and consumer loans.
Interest expense decreased $8.4 million or 5.2% compared to last year,
which decreased 11.1% compared to 1995. Lower average savings, CDs and other
borrowing balances lessened interest expense by $2.9 million, $3.8 million and
$1.9 million, respectively, and were responsible for the entire decline caused
by fewer outstandings. Lower rates paid on interest bearing demand accounts and
CDs were offset by higher rates on savings and other borrowings, resulting in a
$0.1 million rise in rate-driven 1997 interest expense.
The net interest margin is calculated by dividing net interest income FTE
by average earning assets. As with net interest income, the net interest margin
is affected by the level and mix of earning assets, the proportion of earning
assets funded by non-interest bearing liabilities and the interest rate spread.
In addition, the net interest margin is impacted by changes in federal income
tax rates and regulations as they affect the tax equivalent adjustment.
The net interest margin for 1997 was 5.25% compared to 4.94% in 1996 and
4.53% in 1995. An improved margin and higher net interest income occurred
despite the fact that the level of earning assets fell to a greater degree than
the decline in outstanding interest-bearing liabilities. Specifically, the 1997
net interest margin and related net interest income outpaced the comparable
amounts from last year because the yield on earning assets rose significantly
while the overall cost of funds remained flat.
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net interest income............................ $ 255,456 250,972 235,694
Tax equivalent adjustment...................... 3,212 3,043 3,840
---------- --------- ---------
Net interest income -- FTE..................... $ 258,668 254,015 239,534
========== ========= =========
Average earning assets......................... $4,926,372 5,143,321 5,287,521
---------- --------- ---------
Net interest margin............................ 5.25% 4.94% 4.53%
========== ========= =========
</TABLE>
OTHER INCOME
Other income totaled $83.6 million in 1997, an increase of $14.8 million or
21.5% over adjusted 1996, which excludes prior year gains of $13.7 million from
the sale of branches and a former bank affiliate.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Trust fees............................................. $13,442 12,182 10,712
Service charges on deposits............................ 26,100 24,372 20,622
Credit card fees....................................... 14,355 11,415 9,372
Service fees -- other.................................. 7,337 6,184 5,724
Mortgage sales and servicing........................... 6,009 4,863 3,236
Securities gains (losses).............................. 1,957 (1,776) 539
Other operating income................................. 14,378 25,256 18,312
------- ------ ------
$83,578 82,496 68,517
======= ====== ======
</TABLE>
Trust fees increased $1.3 million or 10.3% to $13.4 million in 1997.
Service charges on deposits rose $1.7 million or 7.1% compared to last year. The
increases in service charges on deposits for both 1997 and 1996,
14
<PAGE> 16
compared to 1995, was due to the 1996 implementation of standard service charges
and procedures among the subsidiary banks of the Corporation as well as changes
to the deposit product lines. Credit card fees increased $2.9 million in 1997
further illustrating the shift of the Corporation's loan portfolio from
residential mortgage loans to consumer and commercial credits. Other service
fees increased $1.2 million during the year mostly attributable to increased
automated teller machine (ATM) activity.
Income from mortgage sales and servicing rose $1.1 million, or 23.6%, to
$6.0 million for the year. The net increase from 1995 to 1996 was a result of
implementation of Statement of Financial Accounting Standards No. 122
"Accounting for Mortgage Servicing Rights," which added $2.3 million to income.
Fewer loan sales during 1996 compared to 1995, however, offset the SFAS 122
increase and lowered income in this category by approximately $0.7 million. The
Corporation's practice is to sell all fixed rate thirty year residential
mortgage loans originated while retaining the servicing for these loans.
Securities gains were $2.0 million in 1997 compared to losses of $1.8
million in 1996 and gains of $0.5 million in 1995. In 1996, the Corporation sold
securities at a loss, principally in the fourth quarter, to reinvest the
proceeds into higher yielding assets for 1997 and future years.
Other operating income was $14.4 million, $2.8 million higher than the
$11.6 million earned last year, excluding 1996 net gains of $13.7 million from
the sale of branches and a former bank affiliate.
Total other income covered 43.7% of other expenses. Adjusted coverage
ratios for the two years immediately preceding 1997 were 34.7% and 30.1%,
respectively. Unusual charges for both 1996 and 1995 are discussed in more
detail in the "Other Expenses" section of this Annual Report as well as in Note
18 to the consolidated financial statements.
OTHER EXPENSES
Other expenses were $191.1 million in 1997 compared to $209.7 million in
1996 and $227.8 million in 1995. Both 1996 and 1995 contained unusual charges.
In 1996, the Corporation recorded a $10.2 million pre-tax SAIF recapitalization
charge. Excluding the one-time SAIF assessment, other expenses would have been
$199.5 million. Other expenses for 1995 included nonrecurring costs associated
with an early retirement program, the CIVISTA acquisition, and reengineering
charges that totaled $22.4 million. If unusual charges for both 1996 and 1995
are not considered, other expenses for 1997 were $8.4 million and $14.3 million
less than the comparable 1996 and 1995 totals, respectively.
OTHER EXPENSES
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Salaries and wages.................................. $ 70,792 72,572 80,501
Pension and benefits................................ 20,157 21,982 27,234
-------- ------- -------
Salaries, wages, pension and benefits............... 90,949 94,554 107,735
Net occupancy expense............................... 16,609 17,468 16,598
Equipment expense................................... 12,717 12,894 13,417
Taxes, other than federal income taxes.............. 6,410 6,625 6,026
Stationery, supplies and postage.................... 8,956 10,862 10,777
Bankcard, loan processing, and other fees........... 15,639 12,789 11,422
Advertising......................................... 5,911 6,866 5,766
Professional services............................... 4,979 4,297 7,911
Telephone........................................... 3,651 3,654 3,807
FDIC assessment..................................... 1,232 12,943 7,052
Amortization of intangibles......................... 1,869 3,148 3,534
Other operating expenses............................ 22,158 23,602 33,734
-------- ------- -------
Total other expenses................................ $191,080 209,702 227,779
======== ======= =======
</TABLE>
Salaries, wages, pension and benefits totaled $90.9 million in 1997, a
decline of $3.6 million or 3.8% from 1996 and 15.6% less than 1995. Included in
these costs for 1995 were severance and related charges of
15
<PAGE> 17
$4.1 million and an early retirement charge of $3.9 million. The 1996 reduction
was attributable to the actions taken in 1995 to reengineer the Corporation's
retail delivery systems and consolidate back-room operations. In 1997, the
Corporation spent 28.5 cents in benefits for every dollar of salary and wages
compared to 30.3 cents in 1996, and 30.5 cents in 1995, excluding the severance
and early retirement charges.
The Corporation has a benefit plan which presently provides postretirement
medical and life insurance for retired employees. The Corporation reserves the
right to terminate or make additional plan changes at any time. The
Corporation's accumulated postretirement benefit obligation (APBO) as of January
1, 1993 totaled $19.0 million, and is being amortized over twenty years at an
annual cost of $0.9 million.
Bankcard, loan processing, and other fees increased $2.8 million to $15.6
million in 1997. The majority of the increase, approximately $1.5 million, was
due to costs associated with outsourcing the servicing of residential mortgage
loans. These increased processing costs associated with the outsourced servicing
were more than offset by related reductions in salaries and benefits costs.
Professional services totaled $5.0 million in 1997 compared to $4.3 million
in 1996 and $7.9 million in 1995. Included in the 1997 total are costs of $0.3
million associated with the Year 2000 (Y2K) Project. See the section titled
"Year 2000 Issue" in Management's Discussion and Analysis of Financial Condition
and Results of Operations for more Y2K details. In 1995 external groups were
used to help develop a reengineering plan to improve operating efficiencies,
increase revenues and shareholder value, and to help train our employees to
effectively sell our new products and services.
On January 1, 1994, the FDIC implemented a risk-based assessment system for
depository institutions. Under the system, the annual assessment rate for each
insured institution is determined on the basis of both capital and supervisory
measures, and can range from 23 cents to 31 cents per one hundred dollars of
deposits. During the third quarter of 1995, the FDIC reduced the effective rate
of the annual assessment on Bank Insurance Fund ("BIF") deposits to
approximately 4 cents per one hundred dollars of deposits.
As mentioned earlier in this section, the Corporation's FDIC assessment for
1996 included a one-time recapitalization of the Savings Association Insurance
Fund totaling $10.2 million. Excluding the one-time charge, 1996 FDIC expense
would have been $2.7 million. The 1997 FDIC expense of $1.2 million and the 1996
adjusted expense of $2.7 million are considerably less than the 1995 amount due
to the reduction in the effective rate applicable to Bank Insurance Fund ("BIF")
deposits.
Amortization of intangible expense during 1997 was $1.3 million less than
1996 and $1.7 million less than 1995. The decrease occurred since intangible
assets associated with 1996 branch sales,including several in the fourth quarter
of that year, were written off.
Other operating expenses amounted to $22.2 million in 1997 compared to
$23.6 million last year and $33.7 million in 1995. Included in 1995 costs were
$4.6 million of severance payments and fees paid to financial advisors as part
of the CIVISTA acquisition as well as $6.6 million of reengineering charges for
the adjustment to the value of buildings, equipment and other assets.
FEDERAL INCOME TAX
Federal income tax expense totaled $40.0 million in 1997 compared to $35.1
million in 1996, and $34.0 in 1995 when tax expense of $3.0 million associated
with the extraordinary gain is included. In 1997 the effective federal income
tax rate for the Corporation equaled 31.7% compared to 33.1% in 1996 and 52.0%
in 1995.
The effective tax rate in 1995 was higher than normal due to the recapture
of the bad debt reserve totaling approximately $12.4 million, and the
nondeductibility of certain professional fees associated with the CIVISTA
acquisition.
INVESTMENT SECURITIES
The investment portfolio is maintained by the Corporation to provide
liquidity, earnings, and as a means of diversifying risk. In accordance with the
Financial Accounting Standards Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," securities are required to be
classified as held-to-maturity, available-for-sale, or trading. All investment
securities are currently classified as available-for-sale. In
16
<PAGE> 18
this classification, adjustment to fair value of the securities
available-for-sale in the form of unrealized holding gains and losses, is
excluded from earnings and reported net of taxes in a separate component of
shareholders' equity. The adjustments to increase fair value at December 31,
1997 and decrease fair value at December 31, 1996 were $8.4 million and $1.4
million, respectively. Lower interest rates during 1997, compared to the prior
year, increased the market value of the investment portfolio causing the
positive mark to market adjustment.
At December 31, 1997, investment securities totaled $1,116.8 million
compared with $1,187.5 million one year earlier, a decline of 6.0%. Investment
securities totaled $1,403.1 million at the end of 1995.
A summary of investment securities' carrying value is presented below as of
December 31, 1997, 1996 and 1995. Presented with the summary is a maturity
distribution schedule with corresponding weighted average yields.
CARRYING VALUE OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1997 1996 1995
---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury and Government agency
obligations.................................. $ 595,653 655,741 864,967
Obligations of states and political
subdivisions................................. 81,611 93,587 108,842
Mortgage-backed securities..................... 340,114 325,277 331,556
Other securities............................... 99,409 112,919 97,694
---------- --------- ---------
$1,116,787 1,187,524 1,403,059
========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
OVER ONE YEAR OVER FIVE YEARS
ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS OVER TEN YEARS
------------------- ------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELDS AMOUNT YIELDS AMOUNT YIELDS AMOUNT YIELDS
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Treasury securities.................. $ 52,016 5.60% 113,824 6.03% -- -- -- --
U.S. Government agency obligations... 43,903 5.61% 125,032 6.44% 63,030 6.82% 197,848 6.26%
Obligations of states and political
subdivisions....................... 32,783 5.59%* 26,770 6.02%* 19,880 5.49%* 2,178 6.71%*
Mortgage-backed securities........... 3,944 5.80% 12,409 7.05% 79,125 6.68% 244,636 6.85%
Other securities..................... 738 5.40% 1,712 7.59% 2,143 6.23% 94,816 6.56%
-------- ---- -------- ---- ------- ---- ------- ----
$133,384 5.61% 279,747 6.27% 164,178 6.58% 539,478 6.58%
======== ==== ======== ==== ======= ==== ======= ====
Percent of total..................... 11.94% 25.05% 14.70% 48.31%
======== ======== ======= =======
</TABLE>
- - ---------------
* Fully-taxable equivalent based upon federal income tax structure applicable at
December 31, 1997.
At December 31, 1997, mortgage-backed securities totaled $340.1 million
which includes $246.4 million of Collateralized Mortgage Obligations ("CMOs")
representing approximately 24% of the investment portfolio. The duration of
total CMOs is slightly less than the total portfolio. The aggregate book value
of all privately issued mortgage-backed securities does not exceed 10% of
shareholders' equity. CMOs which fail the Federal Financial Institution
Examination Council's (FFIEC) high risk stress test total $3.4 million, or 0.03%
of the total investment portfolio.
The yield on the portfolio was 6.49% in 1997 compared to 6.32% in 1996 and
6.37% in 1995. The current year reduction in the investment portfolio funded
increases in loan portfolios and the sale of branch deposits.
LOANS
Total loans outstanding at December 31, 1997 increased 4.9% compared to one
year ago or $3,834.9 million compared to $3,656.0 million. A breakdown by
category is presented below, along with a maturity summary of commercial,
financial and agricultural loans.
17
<PAGE> 19
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural......................... $ 875,715 748,858 588,864 467,428 430,118
Installments to individuals............ 833,146 811,561 777,990 800,441 632,354
Real estate............................ 1,982,059 1,936,342 2,223,561 2,261,283 2,016,491
Lease financing........................ 143,955 159,237 179,951 158,737 56,903
---------- ---------- ---------- ---------- ----------
Total loans.......................... 3,834,875 3,655,998 3,770,366 3,687,889 3,135,866
Less allowance for possible loan
losses............................... 53,774 49,336 46,840 35,834 35,030
---------- ---------- ---------- ---------- ----------
Net loans.......................... $3,781,101 3,606,662 3,723,526 3,652,055 3,100,836
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------
COMMERCIAL, FINANCIAL AND
AGRICULTURAL
-------------------------
<S> <C>
Due in one year or less..................................... $542,286
Due after one year but within five years.................... 211,477
Due after five years........................................ 121,952
--------
Total................................................... $875,715
========
Loans due after one year with interest at a predetermined
fixed rate................................................ 125,517
Loans due after one year with interest at a floating rate... 207,912
--------
Total................................................... $333,429
</TABLE>
Real estate loans at December 31, 1997 totaled $1,982.1 million or 51.7% of
total loans outstanding compared to 53.0% one year ago. Residential loans (1-4
family dwellings) totaled $910.7 million, home equity loans $251.0 million,
construction loans $151.8 million and commercial real estate loans $668.8
million. The year-end real estate totals point out the shift in the composition
of the Corporation's loan portfolio from residential real estate to higher
yielding commercial and consumer loans.
Commercial real estate loans include both commercial loans where real
estate has been taken as collateral as well as loans for commercial real estate.
The majority of commercial real estate loans are to owner occupants where cash
flow to service debt is derived from the occupying business cash flow instead of
normal building rents. These loans are generally part of an overall relationship
with existing customers primarily within northeast Ohio.
Consumer loans or loans to individuals increased 2.7% compared to last year
and accounted for 21.7% of total loans compared to 22.2% in 1996.
Commercial, financial, and agricultural loans increased 16.9% during 1997
and make-up 22.8% of total outstanding loans compared to 20.5% last year. Again,
the increase in consumer and commercial loans is evidence of FirstMerit's
shifting loan portfolio.
The decline in lease financing loans from $159.2 million in 1996 to $144.0
million at December 31, 1997 is primarily due to decreased originations in the
highly competitive auto lease business. Auto leases totaled $69.6 million with
equipment leasing totaling $70.6 million, and leveraged leases were $3.7 million
at year-end 1997.
There is no concentration of loans in any particular industry or group of
industries. Most of the Corporation's business activity is with customers
located within the state of Ohio.
ASSET QUALITY
Making a loan to earn an interest spread inherently includes taking the
risk of not being repaid. Successful management of credit risk requires making
good underwriting decisions, carefully administering the loan portfolio and
diligently collecting delinquent accounts.
The Corporation's Credit Policy Division manages credit risk by
establishing common credit policies for its subsidiary banks, participating in
approval of their largest loans, conducting reviews of their loan portfolios,
18
<PAGE> 20
providing them with centralized consumer underwriting, collections and loan
operations services, and overseeing their 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.
Effective December 31, 1995, the Corporation adopted Statement of Financial
Accounting Standard No. 114,"Accounting by Creditors for Impairment of a Loan,"
and Statement No. 118, an amendment of Statement No. 114, "Accounting by
Creditors for Impairment of a loan -- Income Recognition and Disclosures." These
statements prescribe how the allowance for loan losses related to impaired loans
should be determined and the required disclosures. Impaired loans are loans for
which, based on current information or events, it is probable that a creditor
will be unable to collect all amounts due according to the contractual terms of
the loan agreement. Impaired loans must be valued based on the present value of
the loans' expected future cash flows at the loans' effective interest rates, at
the loans' observable market price, or the fair value of the loan collateral.
NON-PERFORMING ASSETS
Non-performing assets consist of:
- NON-ACCRUAL LOANS on which interest is no longer accrued because its
collection is doubtful.
- RESTRUCTURED LOANS on which, due to deterioration in the borrower's
financial condition, the original terms have been modified in favor of
the borrower or either principal or interest has been forgiven.
- OTHER REAL ESTATE OWNED (OREO) acquired through foreclosure in
satisfaction of a loan.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Impaired Loans:
Non-accrual.......................................... $11,185 9,579 7,373 10,517 N/A
Restructured......................................... 89 92 1,548 2,026 N/A
------- ------ ------ ------ ------
Total impaired loans............................... 11,274 9,671 8,921 12,543 N/A
Other Loans:
Non-accrual.......................................... 1,434 787 3,918 3,108 12,040
Restructured......................................... -- -- -- -- 6,176
------- ------ ------ ------ ------
Total Other non-performing loans................... 1,434 787 3,918 3,108 18,216
------- ------ ------ ------ ------
Total non-performing loans......................... 12,708 10,458 12,839 15,651 18,216
------- ------ ------ ------ ------
Other real estate owned (OREO)......................... 908 118 1,059 10,393 8,637
Total non-performing assets........................ $13,616 10,576 13,898 26,044 26,853
======= ====== ====== ====== ======
Loans past due 90 days or more accruing interest....... $11,166 8,380 7,252 3,569 4,122
======= ====== ====== ====== ======
Total non-performing assets as a percent of total loans
& OREO............................................... 0.35% 0.29% 0.37% 0.70% 0.85%
======= ====== ====== ====== ======
</TABLE>
- - ---------------
N/A = Not Available
Under the Corporation's credit policies and practices, all non-accrual and
restructured commercial, agricultural, construction, and commercial real estate
loans, meet the definition of impaired loans under Statement No.'s 114 and 118.
Impaired loans as defined by Statements 114 and 118 exclude certain consumer
loans, residential real estate loans, and leases classified as non-accrual.
Consumer installment loans are charged off when they reach 120 days past due.
Credit card loans are charged off when they reach 180 days past due. When any
other loan becomes 90 days past due, it is placed on non-accrual status unless
it is well secured and in the process of collection. Any losses are charged
against the allowance for possible loan losses as soon as they are identified.
Non-performing assets at year end were $13.6 million, $10.6 million at
December 31, 1996 and $13.9 million at December 31, 1995. As a percentage of
total loans outstanding plus OREO, non-performing assets were 0.35% at year-end
1997 compared to 0.29% in 1996 and 0.37% in 1995. The average balances of
19
<PAGE> 21
impaired loans for the years ended December 31, 1997 and 1996 were $10.5 million
and $9.3 million, respectively.
For the year ended December 31, 1997, impaired assets earned $460,000 in
interest income. Had they not been impaired, they would have earned $1.1
million. For the same period, total non-performing loans earned $544,000 in
interest income. Had they paid in accordance with the payment terms in force
prior to being considered impaired, on non-accrual status, or restructured, they
would have earned $1.5 million.
In addition to non-performing loans and loans 90 days past due and still
accruing interest, Management identified potential problem loans totaling $32.1
million at December 31, 1997. These loans are closely monitored for any further
deterioration in the borrowers' financial condition and for the borrowers'
ability to comply with terms of the loans.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Corporation maintains what Management believes is an adequate allowance
for possible loan losses. The Parent Company and the subsidiary banks regularly
analyze the adequacy of their allowances through ongoing reviews of trends in
risk ratings, delinquencies, non-performing assets, charge-offs, economic
conditions, and changes in the composition of the loan portfolio.
At year end the Corporation boosted its allowance for possible loan losses
in response to the continuing shift of its portfolio out of residential mortgage
loans and into commercial and consumer loans, which historically have exhibited
higher loss rates. During the year, consumer delinquencies continued at high
levels and losses in the consumer portfolio were higher than in the recent past.
Management felt it was prudent to increase the allowance at year end to ensure
its adequacy for changes that have occurred and will continue to occur in the
loan portfolio.
At December 31, 1997, the allowance was $53.8 million or 1.40% of loans
outstanding compared to $49.3 million or 1.35% in 1996 and $46.8 million or
1.24% in 1995. The allowance equaled 423.15% of non-performing loans at December
31, 1997 compared to 471.75% in 1996. The allowance for possible loan losses
related to impaired loans at December 31, 1997 and December 31, 1996 totaled
$1.1 million and $1.0 million, respectively.
Net charge-offs were $17.2 million in 1997 compared to $15.3 million in
1996 and $8.8 million in 1995. As a percentage of average loans outstanding, net
charge-offs equaled 0.45% in 1997, 0.40% in 1996 and 0.23% in 1995. Losses are
charged against the allowance as soon as they are identified.
20
<PAGE> 22
A five-year summary of activity follows:
ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for possible loan losses at beginning of
year................................................. $ 49,336 46,840 35,834 35,030 31,592
Loans charged off:
Commercial, financial and agricultural............... 1,618 2,665 3,145 1,479 1,686
Installment to individuals........................... 23,779 16,637 8,578 5,476 5,936
Real estate.......................................... 574 224 883 720 977
Lease financing...................................... 1,290 1,315 319 20 28
Decrease from sale of subsidiary..................... -- 389 -- -- --
---------- --------- --------- --------- ---------
Total.............................................. 27,261 21,230 12,925 7,695 8,627
---------- --------- --------- --------- ---------
Recoveries:
Commercial, financial and agricultural............... 1,121 450 569 719 1,334
Installment to individuals........................... 8,386 5,117 3,382 3,029 2,548
Real estate.......................................... 123 202 129 106 95
Lease financing...................................... 476 206 88 21 32
---------- --------- --------- --------- ---------
Total.............................................. 10,106 5,975 4,168 3,875 4,009
---------- --------- --------- --------- ---------
Net charge-offs........................................ 17,155 15,255 8,757 3,820 4,618
---------- --------- --------- --------- ---------
Provision for possible loan losses..................... 21,593 17,751 19,763 4,624 8,056
---------- --------- --------- --------- ---------
Allowance for possible loan losses at end of year...... $ 53,774 49,336 $ 46,840 35,834 35,030
========== ========= ========= ========= =========
Average loans outstanding.............................. $3,789,231 3,812,900 3,818,486 3,350,162 3,104,406
========== ========= ========= ========= =========
Ratio to average loans:
Net charge-offs...................................... 0.45% 0.40% 0.23% 0.11% 0.15%
Provision for possible loan losses................... 0.57% 0.47% 0.52% 0.14% 0.26%
========== ========= ========= ========= =========
Loans outstanding at end of year....................... $3,834,875 3,655,998 3,770,366 3,687,889 3,135,866
========== ========= ========= ========= =========
Allowance for possible loan losses:
As a percent of loans outstanding at end of year..... 1.40% 1.35% 1.24% 0.97% 1.12%
As a multiple of net charge-offs..................... 3.13 3.23 5.35 9.38 7.59
========== ========= ========= ========= =========
</TABLE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------- --------------------- --------------------- ---------------------
% OF % OF % OF % OF
LOANS BY LOANS BY LOANS BY LOANS BY
CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
LOANS LOANS LOANS LOANS
AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING
------- ----------- ------- ----------- ------- ----------- ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial, and
agricultural....... $25,306 23% 14,962 21% 13,570 16% 6,341 13%
Loans secured by real
estate............. 13,030 51% 11,784 53% 18,690 59% 13,823 61%
Installment.......... 14,318 22% 21,303 22% 13,360 21% 12,245 22%
Lease financing...... 1,120 4% 1,287 4% 1,220 4% 699 4%
------- --- ------- --- ------- --- ------- ---
$53,774 100% 49,336 100% 46,840 100% 33,108 100%
======= === ======= === ======= === ======= ===
<CAPTION>
AS OF
DECEMBER 31, 1993
---------------------
% OF
LOANS BY
CATEGORY
TO TOTAL
LOANS
AMOUNT OUTSTANDING
------- -----------
<S> <C> <C>
Commercial,
financial, and
agricultural....... 16,935 14%
Loans secured by real
estate............. 7,911 64%
Installment.......... 3,388 20%
Lease financing...... 2,986 2%
------- ---
31,220 100%
======= ===
</TABLE>
DEPOSITS
Average deposits for 1997 totaled $4,164.1 million, a decrease of 4.6% and
6.4% compared to 1996 and 1995 levels, respectively. The success of the
Corporation's "free-checking" campaigns brought in additional demand deposits
that partially offset the overall decline in deposits and contributed to a
stabilized cost of funds and an improved net interest margin.
As market interest rates decreased during the year, and the stock market
strengthened, savings deposits were withdrawn and reinvested in equity funds not
held by the Corporation. Specifically, the decline in average savings
21
<PAGE> 23
deposits from $1,399.0 million in 1996 to $1,279.9 million in 1997 accounted for
about 60% of the decline in total average deposits.
Average demand deposits, including both interest-bearing and
noninterest-bearing categories, totaled $1,182.4 million for the year, a
decrease of 0.9% over last year's average. Additionally, the average rate paid
on interest-bearing demand deposits decreased 31 basis points to 1.44%.
Certificates and other time deposits ("CDs") averaged $1,701.9 million for
1997, a decrease of 4.0% over 1996's average of $1,772.2 million. The average
yield paid on CDs declined 1 basis point from 5.38% in 1996 to 5.37% in 1997.
CDs accounted for 40.9% of average deposits in 1997 compared to 40.6% in
1996. Savings equaled 30.7% and 32.1% in 1997 and 1996, respectively, and demand
deposits, both interest and non-interest bearing, were 28.4% and 27.3%,
respectively.
The average cost of deposits and other borrowings was up 1 basis point
compared to one year ago, or 3.90% in 1997 compared to 3.89% last year.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995
-------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
---------- ------- --------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits -- non-interest
bearing...................... $ 733,394 -- 745,102 -- 725,287 --
Demand deposits -- interest
bearing...................... 448,976 1.44% 447,524 1.75% 426,608 2.16%
Savings deposits............... 1,279,859 2.41% 1,399,011 2.32% 1,514,374 2.54%
Certificates and other time
deposits..................... 1,701,886 5.37% 1,772,150 5.38% 1,782,817 5.47%
---------- --------- ---------
$4,164,115 4,363,787 4,449,086
========== ========= =========
</TABLE>
The following table summarizes the certificates and other time deposits in
amounts of $0.1 million or more as of December 31, 1997, by time remaining until
maturity.
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Maturing in:
Under 3 months............................................ $230,432
3 to 6 months............................................. 104,058
6 to 12 months............................................ 37,920
Over 12 months............................................ 32,940
--------
$405,350
========
</TABLE>
INTEREST RATE SENSITIVITY
Interest rate sensitivity measures the potential exposure of earnings and
capital to changes in market interest rates. The Corporation has a policy which
provides guidelines in the management of interest rate risk. This policy is
reviewed periodically to ensure it complies to trends within the financial
markets and within the industry.
The analysis presented below divides interest bearing assets and
liabilities into maturity categories and measures the "GAP" between maturing
assets and liabilities in each category. The Corporation analyzes the historical
sensitivity of its interest bearing transaction accounts to determine the
portion which it classifies as interest rate sensitive versus the portion
classified over one year. The analysis shows that liabilities maturing within
one year exceed assets maturing within the same period by a moderate amount. The
Corporation uses the GAP analysis and other tools to monitor rate risk.
At December 31, 1997 the Corporation was in a moderate asset-sensitive
position as illustrated in the following table:
22
<PAGE> 24
<TABLE>
<CAPTION>
31-60 61-90 91-180 181-365 OVER 1
1-30 DAYS DAYS DAYS DAYS DAYS YEAR TOTAL
---------- -------- -------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans and leases................. $1,049,639 76,787 73,832 250,264 423,102 1,907,477 3,781,101
Investment securities............ 126,798 18,166 54,436 84,765 156,463 676,159 1,116,787
Federal funds sold............... 33,100 -- -- -- -- -- 33,100
---------- -------- -------- ------- ------- --------- ---------
Total Interest Earning Assets...... $1,209,537 94,953 128,268 335,029 579,565 2,583,636 4,930,988
---------- -------- -------- ------- ------- --------- ---------
Interest-Bearing Liabilities:
Demand -- Interest bearing....... $ 18,824 18,824 23,530 -- -- 409,423 470,601
Savings.......................... 76,736 76,736 76,736 -- -- 1,048,725 1,278,933
Certificates and other time
deposits....................... 296,672 140,487 160,068 401,224 347,835 390,204 1,736,490
Securities sold under agreement
to repurchase and other
borrowings..................... 423,860 25 167 11,219 457 6,027 441,755
---------- -------- -------- ------- ------- --------- ---------
Total Interest Bearing
Liabilities...................... $ 816,092 236,072 260,501 412,443 348,292 1,854,379 3,927,779
Total GAP.......................... $ 393,445 (141,119) (132,233) (77,414) 231,273 729,257 1,003,209
========== ======== ======== ======= ======= ========= =========
Cumulative GAP..................... $ 393,445 252,326 120,093 42,679 273,952 1,003,209
========== ======== ======== ======= ======= =========
</TABLE>
CAPITAL RESOURCES
Shareholders' equity at December 31, 1997 totaled $530.3 million compared
to $523.7 million at December 31, 1996, an increase of 1.3%. The Corporation's
stock repurchase program, detailed in the "Earnings Summary" portion of
Management's Discussion and Analysis, offset 1997 earnings to such an extent
that equity grew only slightly during 1997.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total equity............................ $530,336 9.99% 523,707 10.02% 542,881 9.70%
Common equity........................... 530,336 9.99% 523,707 10.02% 542,881 9.70%
Tangible common equity (a.)............. 527,771 9.95% 519,950 9.95% 536,934 9.60%
Tier 1 capital (b.)..................... 516,388 12.30% 523,911 12.63% 538,032 14.53%
Total risk-based capital (c.)........... 568,886 13.55% 573,247 13.82% 584,872 15.80%
Leverage (d.)........................... 516,388 9.66% 523,911 9.63% 538,032 9.66%
</TABLE>
- - ---------------
a) Common equity less all intangibles; computed as a ratio to total assets less
intangible assets.
b) Shareholders' equity 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 Federal Deposit Insurance Corporation Act of 1991 ("FDICA") set capital
guidelines for a financial institution to be considered "well-capitalized."
These guidelines require a risk-based capital ratio of 10%, a Tier I capital
ratio of 6% and a leverage ratio of 5%. At December 31, 1997, the Corporation's
risk-based capital equaled 13.55% of risk-adjusted assets, its Tier I capital
ratio equaled 12.30% and its leverage ratio equaled 9.66%.
The Corporation's Board of Directors declared a 2-for-1 split of the
Corporation's common stock on September 29, 1997. The split was paid to
shareholders of record as of September 2, 1997.
During 1997, the Corporation's Directors increased the quarterly cash
dividend, marking the sixteenth consecutive year of annual increases since the
Corporation's formation in 1981. The cash dividend of $0.16 paid has an
indicated annual rate of $0.64 per share. Over the past five years the dividend
has increased at an annual rate of approximately 8%.
23
<PAGE> 25
LIQUIDITY
The Corporation's primary source of liquidity is its strong core deposit
base, raised through its retail branch system, along with a strong capital base.
These funds, along with investment securities, provide the ability to meet the
needs of depositors while funding new loan demand and existing commitments.
The banking subsidiaries individually maintain sufficient liquidity in the
form of temporary investments and a short-term maturity structure within the
investment portfolio, along with cash flow from loan repayment. Asset growth in
the banking subsidiaries is funded by the growth of core deposits.
Reliance on borrowed funds decreased during the year as maturing investment
portfolio securities were used to fund deposit withdrawals and repay borrowings.
During the year, the Corporation sold, for liquidity purposes, approximately
$46.0 million of fixed and adjustable rate residential real estate loans. The
loan sales improved liquidity while restructuring the balance sheet to higher
yielding assets.
The liquidity needs of the Parent Company, primarily cash dividends and
other corporate purposes, are met through cash, short-term investments and
dividends from banking subsidiaries.
Management is not aware of any trend or event, other than noted above,
which will result in or that is reasonably likely to occur that would result in
a material increase or decrease in the Corporation's liquidity.
REGULATION AND SUPERVISION
A strict uniform system of capital-based regulation of financial
institutions became effective on December 19, 1992. Under this system, there are
five different categories of capitalization, with "prompt corrective actions"
and significant operational restrictions imposed on institutions that are
capital deficient under the categories. The five categories are: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
To be considered well capitalized an institution must have a total
risk-based capital ratio of at least 10%, a Tier I capital ratio of at least 6%,
a leverage capital ratio of 5%, and must not be subject to any order or
directive requiring the institution to improve its capital level. An adequately
capitalized institution has a total risk-based capital ratio of at least 8%, a
Tier I capital ratio of at least 4% and a leverage capital ratio of at least 4%.
Institutions with lower capital levels are deemed to be undercapitalized,
significantly undercapitalized or critically undercapitalized, depending on
their actual capital levels. The appropriate federal regulatory agency may also
downgrade an institution to the next lower capital category upon a determination
that the institution is in an unsafe or unsound practice. Institutions are
required to monitor closely their capital levels and to notify their appropriate
regulatory agency of any basis for a change in capital category. At December 31,
1997, the Parent Company and its subsidiaries all exceeded the minimum capital
levels of the well capitalized category.
EFFECTS OF INFLATION
The assets and liabilities of the Corporation are primarily monetary in
nature and are more directly affected by the fluctuation in interest rates than
inflation. Movement in interest rates is a result of the perceived changes in
inflation as well as monetary and fiscal policies. Interest rates and inflation
do not move with the same velocity or within the same time frame, therefore, a
direct relationship to the inflation rate cannot be shown. The financial
information presented in this annual report, based on historical data, has a
direct correlation to the influence of market levels of interest rates.
Therefore, Management believes that there is no material benefit in presenting a
statement of financial data adjusted for inflationary changes.
FORWARD-LOOKING STATEMENTS -- SAFE HARBOR STATEMENT
Information in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section above and within this report, which
is not historical or factual in nature, and which relates to expectations for
future shifts in loan portfolio to consumer and commercial loans, increase in
core deposits base, allowance for loan losses, demands for FirstMerit services
and products, future services and products to be offered, increased numbers of
customers, and like items, constitute forward-looking statements that involve a
number of risks and uncertainties. The following factors are among the factors
that could cause actual results to
24
<PAGE> 26
differ materially from the forward-looking statements: general economic
conditions, including their impact on capital expenditures; business conditions
in the banking industry; the regulatory environment; rapidly changing technology
and evolving banking industry standards; competitive factors, including
increased competition with regional and national financial institutions; new
service and product offerings by competitors and price pressures; and like
items.
FirstMerit cautions that any forward-looking statements contained in this
report, in a report incorporated by reference to this report, or made by
management of FirstMerit in this report, in other reports and filings, in press
releases and in oral statements, involve risks and uncertainties and are subject
to change based upon the factors listed above and like items. Actual results
could differ materially from those expressed or implied, and therefore the
forward-looking statements should be considered in light of these factors.
FirstMerit may from time to time issue other forward-looking statements.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define an applicable year. Any of a company's
hardware, date-driven automated equipment, or computer programs that have date
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This faulty recognition could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business activities.
The Corporation has contracted the services of Keane, Inc., an application
development, outsourcing and integration services firm, to perform an enterprise
wide business unit risk assessment of Year 2000 issues. Keane has completed the
enterprise wide business unit risk assessment for the Corporation which included
formal communications with all significant suppliers to determine the extent to
which the Corporation is vulnerable to those third parties' failure to address
their own Year 2000 issues.
On the basis of recent internal business unit risk assessments, the
Corporation determined that there are approximately 1.2 million lines of
in-house code needing review for Year 2000 impacts. Some of this code will
require modification or replacement so that applications and computer systems
will properly utilize dates beyond December 31, 1999. The Corporation is
utilizing both internal and external resources to remediate, or replace, and
test in-house code to ensure uninterrupted customer service through Year 2000
readiness. The Corporation believes that with modifications to existing software
and conversions to new software, the Year 2000 issue will be mitigated. An
internal review of computer hardware and date sensitive automated equipment has
been conducted. Additionally, the Corporation has implemented a program that
utilizes internal resources to assess the Year 2000 readiness of major
borrowers.
The Corporation's total Year 2000 readiness project costs and estimates to
complete include the estimated costs and time associated with the impact of a
third party vendor's Year 2000 issues and are based on presently available
information. There can be no guarantees, however, that the systems and
applications of other companies on which the Corporation's systems and
applications rely will be timely converted or that a failure to convert by
another company, or a conversion that is incompatible with the Corporation's
systems and applications, would not have material adverse effect on the
Corporation.
The Corporation plans to complete the Year 2000 readiness project within
one year and should have significant testing initiated during the third quarter
of 1998. The total remaining cost of the Year 2000 readiness project is
estimated at $5.7 million and is being funded through operating cash flows,
which will be expensed as incurred over the next two years, and is not expected
to have a material adverse effect on the Corporation's results of operations. To
date, the Corporation has incurred and expensed approximately $327,000 related
to the assessment of, and preliminary efforts in connection with, the Year 2000
readiness project and development of a remediation plan.
The costs of the Year 2000 readiness project and the date on which the
Corporation plans to complete Year 2000 remediation are based on management's
best estimates, which were derived utilizing assumptions of future events
including the continued availability of certain resources, third party vendor
remediation plans and other factors. There can be no guarantee, however, that
these estimates will be achieved and actual results could differ
25
<PAGE> 27
materially from those plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
trained programming personnel, the ability to locate and correct all relevant
computer coding, and similar uncertainties.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and accompanying notes, and the
reports of management and independent auditors, are set forth immediately
following Item 9 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
FirstMerit has had no disagreement with its accountants on accounting and
financial disclosure matters and has not changed accountants during the two year
period ending December 31, 1997.
26
<PAGE> 28
CONSOLIDATED BALANCE SHEETS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Investment securities (at market value)................... $1,116,787 1,187,524
Federal funds sold........................................ 33,100 15,550
Commercial loans.......................................... 1,553,707 1,373,806
Mortgage loans............................................ 852,482 944,887
Installment loans......................................... 922,227 876,997
Home equity loans......................................... 250,513 195,924
Credit card loans......................................... 103,041 90,028
Tax-free loans............................................ 8,947 15,119
Leases.................................................... 143,958 159,237
---------- ----------
Total earning assets................................... 4,984,762 4,859,072
---------- ----------
Allowance for possible loan losses........................ (53,774) (49,336)
Cash and due from banks................................... 166,742 222,164
Premises and equipment, net............................... 99,765 102,139
Accrued interest receivable and other assets.............. 109,966 93,941
---------- ----------
Total assets........................................... $5,307,461 5,227,980
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-non-interest bearing............................ $ 769,187 799,771
Demand-interest bearing................................ 470,601 450,187
Savings................................................ 1,278,933 1,309,275
Certificates and other time deposits................... 1,736,490 1,645,642
---------- ----------
Total deposits......................................... 4,255,211 4,204,875
---------- ----------
Securities sold under agreements to repurchase and other
borrowings............................................. 441,755 423,701
Accrued taxes, expenses, and other liabilities............ 80,159 75,697
---------- ----------
Total liabilities...................................... 4,777,125 4,704,273
---------- ----------
Commitments and contingencies............................. -- --
Shareholders' equity:
Preferred stock, without par value: authorized and
unissued 7,000,000 shares............................. -- --
Common stock, without par value: authorized 80,000,000
shares; issued 68,127,314 and 67,719,750 shares,
respectively.......................................... 110,069 107,343
Treasury stock, 6,159,845 and 3,806,964 shares,
respectively.......................................... (108,734) (59,258)
Net unrealized holding gains (losses) on available for
sale securities....................................... 3,246 (2,217)
Retained earnings...................................... 525,755 477,839
---------- ----------
Total shareholders' equity............................. 530,336 523,707
---------- ----------
Total liabilities and shareholders' equity............. $5,307,461 5,227,980
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 29
CONSOLIDATED STATEMENTS OF INCOME
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans................................ $337,181 330,309 325,763
Interest and dividends on investment securities:
Taxable................................................. 64,048 75,498 82,836
Exempt from federal income taxes........................ 4,346 5,004 6,347
-------- -------- --------
68,394 80,502 89,183
Interest on federal funds sold............................ 2,250 934 1,681
-------- -------- --------
Total interest income................................... 407,825 411,745 416,627
-------- -------- --------
Interest expense:
Interest on deposits:
Demand-interest bearing................................. 6,467 7,839 9,202
Savings................................................. 30,839 32,446 38,438
Certificates and other time deposits.................... 91,406 95,379 97,518
Interest on securities sold under agreements to repurchase
and other borrowings.................................... 23,657 25,109 35,775
-------- -------- --------
Total interest expense.................................. 152,369 160,773 180,933
-------- -------- --------
Net interest income..................................... 255,456 250,972 235,694
Provision for possible loan losses.......................... 21,593 17,751 19,763
-------- -------- --------
Net interest income after provision for possible loan
losses................................................ 233,863 233,221 215,931
-------- -------- --------
Other income:
Trust department.......................................... 13,442 12,182 10,712
Service charges on deposits............................... 26,100 24,372 20,622
Credit card fees.......................................... 14,355 11,415 9,372
Investment securities gains (losses), net................. 1,957 (1,776) 539
Other operating income.................................... 27,724 36,303 27,272
-------- -------- --------
Total other income...................................... 83,578 82,496 68,517
-------- -------- --------
Other expenses:
Salaries, wages, pension and employee benefits............ 90,949 94,554 107,735
Net occupancy expense..................................... 16,609 17,468 16,598
Equipment expense......................................... 12,717 12,894 13,417
Other operating expenses.................................. 70,805 84,786 90,029
-------- -------- --------
Total other expenses.................................... 191,080 209,702 227,779
-------- -------- --------
Income before federal income taxes and extraordinary
item.................................................. 126,361 106,015 56,669
Federal income taxes........................................ 39,998 35,075 30,950
-------- -------- --------
Income before extraordinary item........................ 86,363 70,940 25,719
-------- -------- --------
Extraordinary item -- gain on disposition of assets after
business combination (net of income tax effect of
$3,015)................................................... -- -- 5,599
-------- -------- --------
Net income.............................................. $ 86,363 70,940 31,318
======== ======== ========
Weighted average number of common shares
outstanding -- basic...................................... 62,717 65,216 66,908
======== ======== ========
Weighted average number of common shares
outstanding -- diluted.................................... 63,537 65,469 67,137
======== ======== ========
Per share data based on average number of shares
outstanding:
Basic net income per share:
Income before extraordinary item........................ $ 1.38 1.09 0.38
Extraordinary item...................................... -- -- 0.09
-------- -------- --------
Basic net income per share.................................. $ 1.38 1.09 0.47
======== ======== ========
Diluted net income per share:
Income before extraordinary item........................ $ 1.36 1.08 0.38
Extraordinary item...................................... -- -- 0.09
-------- -------- --------
Diluted net income per share................................ $ 1.36 1.08 0.47
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 30
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------------------------------------------------
NET
UNREALIZED
HOLDING
(LOSSES) TOTAL
COMMON TREASURY AVAILABLE FOR RETAINED SHAREHOLDERS'
STOCK STOCK SALE SECURITIES EARNINGS EQUITY
------ -------- --------------- -------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994.............. $100,576 (694) (23,205) 446,642 523,319
Net income.............................. -- -- -- 31,318 31,318
Cash dividends ($0.51 per share)........ -- -- -- (35,299) (35,299)
Stock options exercised................. 3,285 -- -- -- 3,285
Treasury shares purchased............... -- (2,269) -- -- (2,269)
Market adjustment investment
securities........................... -- -- 21,913 -- 21,913
Acquisition adjustment of fiscal year... -- -- -- 614 614
-------- -------- ------- ------- --------
Balance at December 31, 1995.............. 103,861 (2,963) (1,292) 443,275 542,881
Net income.............................. -- -- -- 70,940 70,940
Cash dividends ($0.55 per share)........ -- -- -- (36,376) (36,376)
Stock options exercised................. 3,482 -- -- -- 3,482
Treasury shares purchased............... -- (56,295) -- -- (56,295)
Market adjustment investment
securities........................... -- -- (925) -- (925)
-------- -------- ------- ------- --------
Balance at December 31, 1996.............. 107,343 (59,258) (2,217) 477,839 523,707
Net income.............................. -- -- -- 86,363 86,363
Cash dividends ($0.61 per share)........ -- -- -- (38,447) (38,447)
Stock options exercised................. 2,726 -- -- -- 2,726
Treasury shares purchased............... -- (49,476) -- -- (49,476)
Market adjustment investment
securities........................... -- -- 5,463 -- 5,463
-------- -------- ------- ------- --------
Balance at December 31, 1997.............. $110,069 (108,734) 3,246 525,755 530,336
======== ======== ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 31
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 86,363 70,940 31,318
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses............................... 21,593 17,751 19,763
Provision for depreciation and amortization............. 10,434 10,120 8,862
Amortization of investment securities premiums, net..... 2,801 4,491 2,592
Amortization of income for lease financing.............. (13,436) (12,656) (8,586)
(Gains) losses on sales of investment securities, net... (1,957) 1,776 (539)
Extraordinary gain on dispositions...................... -- -- (5,599)
Gain on sale of affiliate branches...................... -- (13,210) --
Deferred federal income taxes........................... (6,005) 15,549 2,305
(Increase) decrease in interest receivable.............. 746 2,657 2,356
Increase in interest payable............................ 828 183 5,913
Amortization of values ascribed to acquired
intangibles........................................... 1,868 3,148 3,153
Other increases (decreases)............................. (11,945) (28,508) 41,282
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 91,290 72,241 102,820
--------- --------- ---------
INVESTING ACTIVITIES
Dispositions of investment securities:
Available-for-sale -- sales............................... 209,174 343,600 98,688
Held-to-maturity -- maturities............................ -- -- 432,729
Available-for-sale -- maturities.......................... 226,462 301,468 200,895
Purchases of investment securities held-to-maturity......... -- -- (55,507)
Purchases of investment securities available-for-sale....... (357,335) (437,223) (437,840)
Net (increase) decrease in federal funds sold............... (17,550) (2,975) 1,125
Net (increase) decrease in loans and leases, except sales... (228,247) 33,996 (163,275)
Sales of loans.............................................. 45,651 77,773 80,627
Purchases of premises and equipment......................... (13,602) (22,405) (27,949)
Sales of premises and equipment............................. 5,542 4,304 16,766
Sales of affiliate branches................................. -- 13,210 --
--------- --------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............ (129,905) 311,748 146,259
--------- --------- ---------
FINANCING ACTIVITIES
Net decrease in demand, NOW and savings deposits............ (40,512) (139,000) (143,226)
Net increase (decrease) in time deposits.................... 90,848 (158,050) 103,694
Net increase (decrease) in securities sold under repurchase
agreements and other borrowings........................... 18,054 (63,257) (125,666)
Cash dividends.............................................. (38,447) (36,376) (35,299)
Purchase of treasury shares................................. (49,476) (56,295) (2,269)
Proceeds from exercise of stock options..................... 2,726 3,482 3,285
--------- --------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............ (16,807) (449,496) (199,481)
Increase (decrease) in cash and cash equivalents............ (55,422) (65,507) 49,598
Cash and cash equivalents at beginning of year.............. 222,164 287,671 238,073
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 166,742 222,164 287,671
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Amortized cost of the held-to-maturity portfolio transferred
to the available-for-sale portfolio....................... $ -- -- 578,624
========= ========= =========
Cash paid during the year for:
Interest, net of amounts capitalized........................ $ 79,366 91,158 100,740
Income taxes................................................ $ 41,283 18,293 22,099
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of FirstMerit Corporation and its
subsidiaries (the "Corporation") conform to generally accepted accounting
principles and to general practices within the banking industry. The
Corporation's activities are considered to be a single industry segment for
financial reporting purposes. The following is a description of the more
significant accounting policies:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of
FirstMerit Corporation (the "Parent Company") and its wholly-owned
subsidiaries: Citizens Investment Corporation, Citizens National Bank,
Citizens Savings Corporation of Stark County, FirstMerit Bank, N.A.,
FirstMerit Community Development Corporation, FirstMerit Credit Life
Insurance Company, Peoples Bank, N.A., and Peoples National Bank. As
of October 14, 1997, The Old Phoenix National Bank of Medina and EST
National Bank were merged into FirstMerit Bank, N. A.
The results of operations of two former wholly-owned subsidiaries,
FirstMerit Bank, FSB (Clearwater, Florida) and FirstMerit Trust
Company, N.A., which were merged as FirstMerit Bank, N.A., are
included in the consolidated statements of income through December 30,
1996. This former subsidiary was sold December 31, 1996.
All significant intercompany balances and transactions have been
eliminated in consolidation.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and related notes. Actual results could differ from those
estimates.
(c) Investment Securities
Debt and equity securities are classified as held-to-maturity,
available-for-sale, or trading. Securities classified as
held-to-maturity are measured at amortized or historical cost,
securities available-for-sale and trading at fair value. Adjustment to
fair value of the securities available-for-sale, in the form of
unrealized holding gains and losses, is excluded from earnings and
reported net of tax as a separate component of shareholders' equity.
Adjustment to fair value of securities classified as trading is
included in earnings. Gains or losses on the sales of investment
securities are recognized upon realization and are determined by the
specific identification method.
The Corporation designated the entire investment portfolio as
available-for-sale. Classification as available-for-sale allows the
Corporation to sell securities to fund liquidity and manage the
Corporation's interest rate risk. The Corporation does not maintain a
trading account.
(d) Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, balances on deposit
with correspondent banks and checks in the process of collection.
(e) Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed on the
straight-line and declining-balance methods over the estimated useful
lives of the assets. Amortization of leasehold improvements is
computed on the straight-line method based on lease terms or useful
lives, whichever is less.
31
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
(f) Loans
Impaired loans are loans for which, based on current information or
events, it is probable that the Corporation will be unable to collect
all amounts due according to the contractual terms of the loan
agreement. Impaired loans are valued based on the present value of the
loans' expected future cash flows at the loans' effective interest
rates, at the loans' observable market price, or the fair value of the
loan collateral.
(g) Interest and Fees on Loans
Interest income on loans is generally accrued on the principal
balances of loans outstanding using the "simple-interest" method. Loan
origination fees and certain direct origination costs are deferred and
amortized, generally over the contractual life of the related loans
using a level yield method. Interest is not accrued on loans for which
circumstances indicate collection is questionable.
(h) Provision for Possible Loan Losses
The provision for possible loan losses charged to operating expenses
is determined based on Management's evaluation of the loan portfolios
and the adequacy of the allowance for possible loan losses under
current economic conditions and such other factors which, in
Management's judgement, deserve current recognition.
(i) Lease Financing
The Corporation leases equipment to customers on both a direct and
leveraged lease basis. The net investment in financing leases includes
the aggregate amount of lease payments to be received and the
estimated residual values of the equipment, less unearned income and
non-recourse debt pertaining to leveraged leases. Income from lease
financing is recognized over the lives of the leases on an approximate
level rate of return on the unrecovered investment. Residual values of
leased assets are reviewed on an annual basis for reasonableness.
Declines in residual values judged to be other than temporary are
recognized in the period such determinations are made.
(j) Mortgage Servicing Fees
The Corporation generally records loan administration fees earned for
servicing loans for investors as income is collected. Earned servicing
fees and late fees related to delinquent loan payments are also
recorded as income is collected.
(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 10 to 25 years, which
represent the estimated remaining lives of the long-term interest
bearing assets acquired. Amortization is generally computed on an
accelerated basis 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.
32
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
(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
The per share data is based on the weighted average number of common
stock and common stock equivalents outstanding during each year. See
Note 22 to Consolidated Financial Statements for more detailed
information.
(o) Reclassifications
Certain previously reported amounts have been reclassified to conform
to the current reporting presentation.
2. ACQUISITION
On November 2, 1997, the Corporation signed an agreement to acquire
CoBancorp Inc., a bank holding company headquartered in Elyria, Ohio with
consolidated assets of approximately $666 million. CoBancorp Inc. will be merged
with and into the Corporation. Based on the Corporation's December 31, 1997
closing price of $28.375 per share, the value of the transaction is
approximately $174.3 million which is expected to be paid in a combination of
cash and the Corporation's common stock.
Consummation of the merger is expected in the second quarter 1998 subject
to CoBancorp Inc. shareholder's approval and regulatory approval and after the
satisfaction or waiver of all other conditions to the consummation as specified
in the merger agreement. The merger will be accounted for as a purchase
transaction.
3. INVESTMENT SECURITIES
Investment securities are composed of:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1997
Available for sale:
U.S. Treasury securities and U.S. Government
agency obligations.......................... $ 595,364 2,547 2,258 595,653
Obligations of state and political
subdivisions................................ 81,610 207 206 81,611
Mortgage-backed securities.................... 336,821 3,548 255 340,114
Other securities.............................. 97,995 1,564 150 99,409
---------- ------ ------ ---------
$1,111,790 7,866 2,869 1,116,787
========== ====== ====== =========
December 31, 1996
Available for sale:
U.S. Treasury securities and U.S. Government
agency obligations.......................... $ 660,199 1,517 5,975 655,741
Obligations of state and political
subdivisions................................ 93,694 547 654 93,587
Mortgage-backed securities.................... 324,818 2,458 1,999 325,277
Other securities.............................. 112,224 1,434 739 112,919
---------- ------ ------ ---------
$1,190,935 5,956 9,367 1,187,524
========== ====== ====== =========
</TABLE>
33
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The amortized cost and market value of investment securities including
mortgage-backed securities at December 31, 1997, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities based
on the issuers' rights to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
---------- ---------
<S> <C> <C>
Due in one year or less..................................... $ 133,474 133,384
Due after one year through five years....................... 278,657 279,747
Due after five years through ten years...................... 163,250 164,178
Due after ten years....................................... 536,409 539,478
---------- ---------
$1,111,790 1,116,787
========== =========
</TABLE>
Proceeds from sales of investment securities during the years ended
December 31, 1997 and 1996 were $206,054 and $343,600, respectively. Gross gains
of $2,531 and $2,003 and gross losses of $574 and $3,779 were realized on these
sales, respectively.
The carrying value of investment securities pledged to secure trust and
public deposits and for purposes required or permitted by law amounted to
$830,049 and $724,886 at December 31, 1997 and December 31, 1996, respectively.
4. LOANS
Loans consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
---------- ---------
<S> <C> <C>
Commercial, financial and agricultural...................... $ 875,715 748,858
Loans to individuals, net of unearned income................ 833,146 811,561
Real estate................................................. 1,982,059 1,936,342
Lease financing............................................. 143,955 159,237
---------- ---------
$3,834,875 3,655,998
========== =========
</TABLE>
The Corporation grants loans principally to customers located within the
State of Ohio.
Information with respect to impaired loans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -----
<S> <C> <C>
Impaired Loans.............................................. $11,276 9,671
Allowance for Possible Loan Losses.......................... $ 2,280 1,913
Interest Recognized......................................... $ 460 622
======= =====
</TABLE>
Earned interest on impaired loans is recognized as income is collected.
The Corporation makes loans to officers on the same terms and conditions as
made available to all employees and to directors on substantially the same terms
and conditions as transactions with other parties. An
34
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
analysis of loan activity with related parties for the years ended December 31,
1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Aggregate amount at beginning of year....................... $ 41,308 34,173
Additions (deductions):
New loans................................................. 8,288 16,549
Repayments................................................ (16,694) (6,002)
Changes in directors and their affiliations............... (542) (3,412)
-------- --------
Aggregate amount at end of year............................. $ 32,360 41,308
======== ========
</TABLE>
5. ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................................ $ 49,336 46,840 35,834
Additions (deductions):
Provision for possible loan losses........................ 21,593 17,751 19,763
Loans charged off......................................... (27,261) (20,841) (12,925)
Recoveries on loans previously charged off................ 10,106 5,975 4,168
Decrease from sale of subsidiary.......................... (389)
-------- -------- --------
Balance at end of year...................................... $ 53,774 49,336 46,840
======== ======== ========
</TABLE>
6. MORTGAGE SERVICING RIGHTS AND MORTGAGE SERVICING
In accordance with Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights," and Statement No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," when the Corporation intends to sell originated or purchased loans
and retain the related servicing rights, it allocates a portion of the total
costs of the loans to the servicing rights based on estimated fair value. Fair
value is estimated based on market prices, when available, or the present value
of future net servicing income, adjusted for such factors as discount rates and
prepayments. Servicing rights are amortized over the average life of the loans
using the net cash flow method.
The components of mortgage servicing rights are as follows:
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Balance at January 1, net................................... $2,301 15
Additions................................................... 2,219 2,434
Scheduled amortization...................................... (593) (148)
Less: allowance for impairment.............................. 0 0
------ -----
Balance at December 31...................................... $3,927 2,301
====== =====
</TABLE>
In 1997 and 1996, the Corporation's income before federal income taxes was
increased by approximately $1.6 million and $2.3 million, respectively, as a
result of compliance with the accounting Statements mentioned previously. The
consolidated financial statements for 1995 were prepared in accordance with
Statement of Financial Accounting Standards No. 65 "Accounting for Certain
Mortgage Banking Activities," which provided for servicing rights to be recorded
on purchased loans, but not originated loans.
35
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Accounting regulations also require the Corporation to assess its
capitalized servicing rights for impairment based on their current fair value.
As permitted by the regulations, the Corporation disaggregates its servicing
rights 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.
At December 31, 1997 and 1996, the Corporation serviced for others
approximately $890 million and $871 million, respectively. The following table
provides servicing information for 1997:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Balance January 1........................................... $871,057 716,852
Additions:
Loans originated and sold to investors.................... 105,508 126,861
Existing loans sold to investors.......................... 100,670 167,746
Reductions:
Sale of servicing rights.................................. -- --
Loans sold servicing released............................. (5,311) --
Regular amortization, prepayments and foreclosures........ (181,739) (140,402)
-------- --------
Balance December 31......................................... $890,185 871,057
======== ========
</TABLE>
7. RESTRICTIONS ON CASH AND DIVIDENDS
The average balance on deposit with the Federal Reserve Bank to satisfy
reserve requirements amounted to $9,505 during 1997. The level of this balance
is based upon amounts and types of customers' deposits held by the banking
subsidiaries of the Corporation. In addition, deposits are maintained with other
banks at levels determined by Management based upon the volumes of activity and
prevailing interest rates to compensate for check-clearing, safekeeping,
collection and other bank services performed by these banks. At December 31,
1997, cash and due from banks included $4,255 deposited with the Federal Reserve
Bank and other banks for these reasons.
Dividends paid by the subsidiaries are the principal source of funds to
enable the payment of dividends by the Corporation to its shareholders. These
payments by the subsidiaries in 1998 are restricted by the regulatory agencies
principally to the total of 1998 net income. Regulatory approval must be
obtained for the payment of dividends of any greater amount.
8. PREMISES AND EQUIPMENT
The components of premises and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- ESTIMATED
1997 1996 USEFUL LIVES
-------- -------- ------------
<S> <C> <C> <C>
Land...................................................... $ 11,129 11,425 --
Buildings................................................. 82,841 81,642 10-35 yrs
Equipment................................................. 62,191 58,126 3-15 yrs
Leasehold improvements.................................... 13,093 13,124 1-20 yrs
-------- -------- ---------
169,254 164,317
Less accumulated depreciation and amortization............ 69,489 62,178
-------- --------
$ 99,765 102,139
======== ========
</TABLE>
Amounts included in other expenses for depreciation and amortization
aggregated $10,434, $10,120 and $8,862 for the years ended December 31, 1997,
1996 and 1995, respectively.
36
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
At December 31, 1997, the Corporation was obligated for rental commitments
under noncancelable operating leases on branch offices and equipment as follows:
<TABLE>
<CAPTION>
YEARS ENDING LEASE
DECEMBER 31, COMMITMENTS
- - ------------ -----------
<S> <C>
1998 $ 6,968
1999 6,186
2000 4,928
2001 4,411
2002 3,404
2003-2010 5,637
-------
$31,534
=======
</TABLE>
Rentals paid under noncancelable operating leases amounted to $7,688,
$8,819 and $9,574 in 1997, 1996 and 1995, respectively.
9. CERTIFICATES AND OTHER TIME DEPOSITS
The aggregate amounts of certificates and other time deposits of $100 and
over at December 31, 1997 and 1996 were $405,931 and $271,634, respectively.
Interest expense on these certificates and time deposits amounted to $19,257 in
1997, $13,016 in 1996, and $14,360 in 1995.
10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
At December 31, 1997, 1996 and 1995, securities sold under agreements to
repurchase totaled $417,833, $368,566, and $336,033, respectively. The average
balance of securities sold under agreements to repurchase and other borrowings
for the years ended December 31, 1997, 1996 and 1995, amounted to $477,454,
$515,556, and $609,247, respectively. In 1997, the weighted average annual
interest rate amounted to 4.96%, compared to 4.87% in 1996, and 5.87% in 1995.
The maximum amount of these borrowings at any month end amounted to $557,738 in
1997, $608,782 in 1996, and $740,586 in 1995.
At December 31, 1997, 1996, and 1995, the Corporation had $17,922, $55,135,
and $75,875, respectively, of Federal Home Loan Bank advances. The 1997 balance
includes: $11,000 that have maturities within one year with an interest rate of
5.40%; $1,257 with maturities over one year to five years with interest rates of
4.65% to 8.10%; and $5,665 over five years with interest rates of 4.75% to
8.05%.
At December 31, 1997, the Corporation had an outstanding balance on a line
of credit with another financial institution totaling $6.0 million with an
interest rate of 6.01%. The interest rate on this debt is variable and
approximates one-month LIBOR plus 37.5 basis points.
Residential mortgage loans totaling $26,883, $82,702, and $107,813 at
December 31, 1997, 1996 and 1995, respectively, were pledged to secure FHLB
advances.
11. FEDERAL INCOME TAXES
Federal income taxes are comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Taxes currently payable..................................... $46,000 19,526 31,660
Deferred expense (benefit).................................. (6,002) 15,549 2,305
------- ------- -------
$39,998 35,075 33,965
</TABLE>
37
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Actual Federal income tax expense differs from expected Federal income tax
as shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Statutory rate.............................................. 35.0% 35.0% 35.0%
Increase (decrease) in rate due to:
Interest income on tax-exempt securities and tax-free
loans, net............................................. -1.3% -1.9% -3.8%
Goodwill amortization..................................... 0.3% 1.5% 0.9%
Reduction to tax reserves................................. -1.1% -1.4% -0.4%
Loan loss recapture at acquisition........................ 0.0% 0.0% 19.0%
Merger expenses at acquisition............................ 0.0% 0.0% 1.4%
Other..................................................... -1.2% -0.1% -0.1%
---- ---- ----
Effective tax rates......................................... 31.7% 33.1% 52.0%
==== ==== ====
</TABLE>
For 1997, 1996 and 1995, the deferred income tax expense results from
temporary differences in the recognition of income and expense for Federal
income tax and financial reporting purposes. The sources and tax effect of these
temporary differences are presented below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Loan loss provision......................................... $(4,492) 6,323 (2,205)
Depreciation................................................ 198 (232) 375
Deferred loan fees, net..................................... 334 631 1,487
Leasing..................................................... (3,683) 6,708 8,442
FAS 106 postretirement benefits............................. (1,050) (1,012) (434)
FAS 87 pension expense...................................... 1,333 1,678 (1,767)
FHLB stock dividends........................................ 927 844 771
Severance costs............................................. 0 1,315 (1,315)
Valuation reserves.......................................... 633 675 (526)
Other....................................................... (202) (1,381) (2,523)
------- ------- -------
Total deferred income tax................................... $(6,002) 15,549 2,305
======= ======= =======
</TABLE>
Principal components of the Corporation's net deferred tax (liability) are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Excess of book loan provision over tax loan provision....... $ 9,746 5,254
Excess of tax depreciation over book depreciation........... (4,056) (3,858)
Leasing book basis income over tax basis.................... (24,331) (28,014)
Deferred loan fees tax basis income over book basis......... 596 930
Postretirement book basis expense over tax basis............ 4,734 3,684
Pension book basis expense over tax basis................... (1,212) 121
FHLB stock book basis over tax basis........................ (4,857) (3,930)
Security portfolio tax basis over book basis................ (1,694) 1,192
Severance costs book basis over tax basis................... -- --
Valuation reserves book basis over tax basis................ 147 780
Other....................................................... 3,277 3,075
-------- --------
Total net deferred tax (liability).......................... $(17,650) (20,766)
======== ========
</TABLE>
38
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
12. BENEFIT PLANS
The Corporation has a defined benefit pension plan covering substantially
all of its employees. In general, benefits are based on years of service and the
employee's compensation. The Corporation's funding policy is to contribute
annually the maximum amount that can be deducted for federal income tax
reporting purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future.
A supplemental non-qualified, non-funded pension plan for certain officers
is also maintained and is being provided for by charges to earnings sufficient
to meet the projected benefit obligation. The pension cost for this plan is
based on substantially the same actuarial methods and economic assumptions as
those used for the defined benefit pension plan.
The following table sets forth the plans' funded status and amounts
recognized in the Corporation's consolidated financial statements. The 1997
amounts shown reflect a change in the measurement date from December 31 to
September 30, 1997. Amounts shown for 1996 and 1995 have not been restated to
show the change in the measurement date.
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
1997 1996 1995
------------- -------- --------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $49,365, $49,703 and $48,567,
respectively........................................ $(55,386) (55,222) (54,780)
======== ======== ========
Projected benefit obligation............................. (70,719) (70,119) (73,926)
Plan assets at fair value, primarily U.S. government
obligations, corporate bonds and investments in
equity funds........................................ 80,877 71,929 67,035
-------- -------- --------
Plan assets in excess of projected benefit obligation.... 10,158 1,810 (6,891)
Unrecognized net (gains) losses.......................... (8,450) (3,215) 675
Unrecognized prior service cost.......................... 3,707 3,311 3,340
Remaining unrecognized net asset being amortized over
employees' average remaining service life.............. (792) (999) (1,206)
-------- -------- --------
Prepaid (accrued) pension cost........................... $ 4,623 907 (4,082)
======== ======== ========
Expected long-term rate of return on assets.............. 9.00% 9.00% 9.00%
Weighted-average discount rate........................... 7.50% 7.50% 7.25%
Rate of increase in future compensation levels........... 4.75% 4.75% 4.75%
======== ======== ========
</TABLE>
Net pension cost consists of the following components:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Service cost................................................ $ 3,379 3,728 3,290
Interest cost on projected benefit obligation............... 4,880 4,978 5,175
Actual return on plan assets................................ (9,453) (3,827) (8,563)
Net total of other components............................... 3,202 (2,197) 2,976
------- ------- -------
Net periodic pension cost................................... $ 2,008 2,682 2,878
======= ======= =======
</TABLE>
The Corporation maintains a savings plan under Section 401(k) of the
Internal Revenue Code, covering substantially all full-time and part-time
employees after six months of continuous employment. Under the plan, employee
contributions are partially matched by the Corporation. Such matching becomes
vested when the employee reaches five years of credited service. Total savings
plan expense was $2,086, $2,108 and $2,294 for 1997, 1996 and 1995,
respectively.
39
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
13. POSTRETIREMENT MEDICAL AND LIFE INSURANCE PLAN
The Corporation has a benefit plan which presently provides postretirement
medical and life insurance for retired employees. Effective January 1, 1993, the
plan was changed to limit the Corporation's medical contribution to 200% of the
1993 level for employees who retire after January 1, 1993. The Corporation
reserves the right to terminate or amend the plan at any time.
The cost of postretirement benefits expected to be provided to current and
future retirees is accrued over those employees' service periods. Prior to 1993,
postretirement benefits were accounted for on a cash basis. In addition to
recognizing the cost of benefits for the current period, recognition is being
provided for the cost of benefits earned in prior service periods (the
transition obligation). The Corporation has elected to amortize the transition
obligation by charges to income over a twenty year period on a straight line
basis.
The following table sets forth the plan's status and amounts recognized in
the Corporation's consolidated financial statements. Beginning in 1997, the
plan's measurement date was changed from December 31 to September 30.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................. $(16,861) (20,259)
Fully eligible actives.................................... (2,910) (2,882)
Other actives............................................. (8,092) (7,747)
-------- --------
Total accumulated postretirement benefit obligation......... (27,863) (30,888)
Unrecognized prior net loss................................. 1,665 6,394
Unrecognized prior service costs............................ -- --
Unrecognized transition obligation.......................... 12,308 13,129
-------- --------
Accrued postretirement benefit cost......................... $(13,890) (11,365)
======== ========
</TABLE>
Net postretirement benefit cost includes:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Service cost................................................ $ 958 945
Interest cost............................................... 2,157 2,133
Actual return on plan assets................................ -- --
Amortization of transition obligation....................... 820 821
Net of other amortization and deferrals..................... 144 323
-------- --------
Net periodic postretirement cost............................ $ 4,079 4,222
======== ========
</TABLE>
The following actuarial assumptions effect the determination of these
amounts:
<TABLE>
<CAPTION>
PLAN YEAR JANUARY 1,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Expected long-term rate of return on assets................. N/A N/A
Weighted-average discount rate.............................. 7.50% 7.25%
Medical trend rates:
Pre-65.................................................... 12.4%-6.0% 12.4%-6.0%
Post-65................................................... 11.8%-6.1% 11.8%-6.1%
</TABLE>
40
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Shown below is the impact of a 1% increase in the medical trend rates
(i.e., 10.0% for 1998 grading down to 6.0% in 2002. This information is required
disclosure under SFAS No. 106.
<TABLE>
<CAPTION>
CURRENT
TREND TREND +1% % CHANGE
------- --------- --------
<S> <C> <C> <C>
Aggregate of the service and interest components of net
periodic postretirement health care benefit cost.......... $ 2,564 2,926 14.1%
Accumulated postretirement benefit obligation for health
care benefits............................................. 25,124 28,064 11.7%
</TABLE>
14. STOCK OPTIONS
The Corporation's 1982, 1992, and 1997 Stock Plans (the "Plans") provide
incentive options to certain key employees for up to 4,200,000 common shares of
the Corporation. 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 exerciseable for at
least six months from date of grant.
Options under these Plans are granted at 100% of the fair market value.
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.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Corporation continues to account for its stock option plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to
Employees," and makes no charges against income with respect to options granted.
However, SFAS No. 123 does require the disclosure of the pro forma effect
on net income and earnings per share that would result if the fair value
compensation element were to be recognized as expense. The following table shows
the pro forma earnings and earnings per share for 1997, 1996, and 1995 along
with significant assumptions used in determining the fair value of the
compensation amounts.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Pro forma amounts:
Net income................................................ $ 85,178 67,825 30,377
Earnings per share (basic)................................ 1.36 1.04 0.45
Earnings per share (diluted).............................. 1.34 1.04 0.45
Assumptions:
Dividend yield............................................ 3.5% 4.4% 4.4%
Expected volatility....................................... 23.3% 23.3% 23.7%
Risk free interest rate................................... 5.8%-6.8% 5.2%-6.7% 6.3%-7.3%
Expected lives............................................ 5 yrs. 5-6 yrs. 5 yrs.
</TABLE>
41
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
A summary of stock option activity for the last two years follows:
<TABLE>
<CAPTION>
AVAILABLE RANGE OF OPTION AVERAGE OPTION
FOR GRANT OUTSTANDING PRICE PER SHARE PRICE PER SHARE
---------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance
December 31, 1995.................. 1,634,660 1,308,856 2.16 - 12.10
Canceled........................ -- (26,580)
Exercised....................... -- (490,794) 2.16 - 12.10 $ 7.39
Granted......................... (1,157,980) 1,157,980 14.75 - 16.97 14.77
---------- --------- -------------- ------
Balance
December 31, 1996.................. 476,680 1,949,462 2.31 - 16.97 13.12
New shares reserved............. 2,200,000 --
Canceled........................ -- (181,260) 3.50 - 8.27 7.28
Exercised....................... -- (285,385) 2.31 - 15.44 9.89
Granted......................... (262,714) 262,714 2.31 - 26.00 20.58
---------- --------- -------------- ------
Balance
December 31, 1997.................. 2,413,966 1,745,531 $ 2.31 - 26.00 $14.75
========== ========= ============== ======
</TABLE>
The ranges of exercise prices and the remaining contractual life of options
as of December 31, 1997 were:
<TABLE>
<CAPTION>
$2-$9 $10-$18 $19-$26
RANGE OF EXERCISE PRICES ------ --------- -------
<S> <C> <C> <C>
Options outstanding:
Outstanding as of December 31, 1997......................... 30,364 1,501,353 213,814
Wtd-avg remaining contractual life (in years)............... 2.12 7.69 9.26
Weighted-average exercise price............................. $ 7.20 14.13 21.03
Options exerciseable:
Outstanding as of December 31, 1997......................... 30,364 805,520 189,314
Wtd-avg remaining contractual life (in years)............... 2.12 7.26 9.25
Weighted-average exercise price............................. $ 7.20 13.44 20.58
</TABLE>
The Employee Stock Purchase Plan provides full-time and part-time employees
of the Corporation the opportunity to acquire common shares on a payroll
deduction basis. Shares available under the Employee Stock Purchase Plan are
purchased at 85% of their fair market value on the business day immediately
preceding the semi-annual grant-date Of the 400,000 shares available under the
Plan, there were 19,204 and 12,512 shares issued in 1997 and 1996, respectively.
15. PARENT COMPANY
Condensed financial information of FirstMerit Corporation (Parent Company
only) is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
CONDENSED BALANCE SHEETS -------- -------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 26,627 21,897
Investment securities....................................... 1,207 1,161
Loans to subsidiaries....................................... 66,000 40,789
Investment in subsidiaries, at equity in underlying value of
their net assets.......................................... 429,770 430,708
Net loans................................................... 16,953 30,179
Goodwill.................................................... 133 267
Other assets................................................ 9,200 10,386
-------- -------
$549,890 535,387
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued and other liabilities............................... $ 19,554 11,680
Shareholders' equity........................................ 530,336 523,707
-------- -------
$549,890 535,387
======== =======
</TABLE>
42
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
CONDENSED STATEMENTS OF INCOME -------- ------- -------
<S> <C> <C> <C>
Income:
Cash dividends from subsidiaries............................ $ 87,500 73,800 87,400
Other income................................................ 64,910 60,348 37,069
-------- ------- -------
152,410 134,148 124,469
Interest and other expenses................................. 65,161 59,970 59,652
-------- ------- -------
Income before federal income tax benefit and equity in
undistributed income of subsidiaries...................... 87,249 74,178 64,817
Federal income tax (benefit)................................ (1,248) (1,189) 5,215
-------- ------- -------
88,497 75,367 59,602
Equity in undistributed income (loss) of subsidiaries,
including extraordinary gain in 1995 of $5,599............ (2,134) (4,427) (28,284)
-------- ------- -------
Net income.................................................. $ 86,363 70,940 31,318
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
CONDENSED STATEMENTS OF CASH FLOWS -------- -------- -------
<S> <C> <C> <C>
Operating activities:
Net income.................................................. $ 86,363 70,940 31,318
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed income of subsidiaries.............. 2,134 4,427 28,284
Gain on sale of assets -- FirstMerit Bank, N.A.............. -- (490) --
Cash received on FirstMerit Bank, N.A. sale................. -- 13,060 --
Addition to Provision for loan losses....................... 1,097 -- 1,100
Other....................................................... 7,397 3,396 12,190
-------- -------- -------
Net cash provided by operating activities................... 96,991 91,333 72,892
-------- -------- -------
Investing activities:
Proceeds from maturities of investment securities........... -- -- 10,262
Loans to subsidiaries....................................... (8,211) 63,228 (47,954)
Payments for investments in and advances to subsidiaries.... (10,840) -- --
Net increase (decreases) in loans........................... 12,100 (31,208) --
Purchases of investment securities.......................... (113) (133) (196)
-------- -------- -------
Net cash (used) provided by investing activities............ (7,064) 31,887 (37,888)
-------- -------- -------
Financing activities:
Cash dividends.............................................. (38,447) (36,376) (35,299)
Proceeds from exercise of stock options..................... 2,726 3,482 3,285
Purchase of treasury shares................................. (49,476) (56,295) (2,269)
Loans made to FirstMerit Bank, N.A.......................... -- (17,000) --
-------- -------- -------
Net cash used by financing activities....................... (85,197) (106,189) (34,283)
-------- -------- -------
Net increase in cash and cash equivalents................... 4,730 17,031 721
Cash and cash equivalents at beginning of year.............. 21,897 4,866 4,145
-------- -------- -------
Cash and cash equivalents at end of year.................... $ 26,627 21,897 4,866
======== ======== =======
</TABLE>
43
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
16. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Disclosures of fair value information about certain financial instruments,
whether or not recognized in the consolidated balance sheets are provided as
follows. Instruments for which quoted market prices are not available are valued
based on estimates using present value or other valuation techniques whose
results are significantly affected by the assumptions used, including discount
rates and future cash flows. Accordingly, the values so derived, in many cases,
may not be indicative of amounts that could be realized in immediate settlement
of the instrument. Also, certain financial instruments and all non-financial
instruments are excluded from these disclosure requirements. For these and other
reasons, the aggregate fair value amounts presented below are not intended to
represent the underlying value of the Corporation.
The following methods and assumptions were used to estimate the fair values
of each class of financial instrument presented:
Investment securities -- Fair values are based on quoted prices, or
for certain fixed maturity securities not actively traded estimated values
are obtained from independent pricing services.
Federal funds sold -- The carrying amount is considered a reasonable
estimate of fair value.
Net loans -- Fair value for loans with interest rates that fluctuate
as current rates change are generally valued at carrying amounts with an
appropriate discount for any credit risk. Fair values of other types of
loans are estimated by discounting the future cash flows using the current
rates for which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Cash and due from banks -- The carrying amount is considered a
reasonable estimate of fair value.
Accrued interest receivable -- The carrying amount is considered a
reasonable estimate of fair value.
Deposits -- The carrying amount is considered a reasonable estimate of
fair value for demand and savings deposits and other variable rate deposit
accounts. The fair values for fixed maturity certificates of deposit and
other time deposits are estimated using the rates currently offered for
deposits of similar remaining maturities.
Securities sold under agreements to repurchase and other borrowings.
Fair values are estimated using rates currently available to the
Corporation for similar types of borrowing transactions.
Accrued interest payable -- The carrying amount is considered a
reasonable estimate of fair value.
Commitments to extend credit -- The fair value of commitments to
extend credit is estimated using the fees currently charged to enter into
similar arrangements, taking into account the remaining terms of the
agreements, the creditworthiness of the counterparties, and the difference,
if any, between current interest rates and the committed rates.
Standby letters of credit and financial guarantees written -- Fair
values are based on fees currently charged for similar agreements or on the
estimated cost to terminate or otherwise settle the obligations.
Loans sold with recourse -- Fair value is estimated based on the
present value of the estimated future liability in the event of default.
44
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The estimated fair values of the Corporation's financial instruments based on
the assumptions described above are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1997 1996
----------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Investment securities.............................. $1,116,787 1,116,787 1,187,524 1,187,524
Federal funds sold................................. 33,100 33,100 15,550 15,550
Net loans....................................... 3,781,101 3,786,953 3,606,662 3,585,534
Cash and due from banks............................ 166,742 166,742 222,164 222,164
Accrued interest receivable........................ 32,945 32,945 33,730 33,730
Financial liabilities:
Deposits........................................ 4,255,211 4,260,251 4,204,875 4,209,789
Securities sold under agreements to repurchase and
other borrowings................................ 441,755 441,926 423,701 423,852
Accrued interest payable........................... 17,291 17,291 16,433 16,433
Unrecognized financial instruments:
Commitments to extend credit....................... -- -- -- --
Standby letters of credit and financial guarantees
written......................................... -- -- -- --
Loans sold with recourse........................... -- -- -- --
</TABLE>
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit, financial guarantees, and loans sold with recourse.
These instruments involve, to varying degrees, elements recognized in the
consolidated balance sheets. The contract or notional amount of these
instruments reflect the extent of involvement the Corporation has in particular
classes of financial instruments.
The Corporation's exposure to credit loss in the event of non-performance
by the other party to the financial instrument for commitments to extend credit
and standby letters of credit and financial guarantees written is represented by
the contractual notional amount of those instruments. The Corporation uses the
obligations as it does for on-balance-sheet instruments.
Unless noted otherwise, the Corporation does not require collateral or
other security to support financial instruments with credit risk. The following
table sets forth financial instruments whose contract amounts represent credit
risk.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ---------
<S> <C> <C>
Commitments to extend credit................................ $1,508,351 1,295,118
========== =========
Standby letters of credit and
financial guarantees written................................ $ 114,304 89,404
========== =========
Loans sold with recourse.................................... $ 1,058 1,361
========== =========
</TABLE>
Commitments to extend credit are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally are extended at the then prevailing interest rates, have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the
45
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Corporation evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained if deemed necessary by the Corporation upon
extension of credit is based on Management's credit evaluation of the counter
party. Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment, and income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Corporation to guarantee the performance of a customer
to a third party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond financing and
similar transactions. Except for short-term guarantees of $33,796 and $30,965 at
December 31, 1997 and 1996, respectively, the remaining guarantees extend in
varying amounts through 2020. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extend- ing loan facilities
to customers. Collateral held varies, but may include marketable securities,
equipment and real estate. In recourse arrangements, the Corporation accepts
100% recourse. By accepting 100% recourse, the Corporation is assuming the
entire risk of loss due to borrower default. The Corporation's exposure to
credit loss, if the borrower completely failed to perform and if the collateral
or other forms of credit enhancement all prove to be of no value, is represented
by the notional amount less any allowance for possible loan losses. The
Corporation uses the same credit policies originating loans which will be sold
with recourse as it does for any other type of loan.
18. EXTRAORDINARY GAIN AND UNUSUAL CHARGES
During the third quarter 1996, the corporation recorded a one-time Savings
Association Insurance Fund ("SAIF") recapitalization charge that totaled $10.2
million. The charge was mandated by legislation passed by Congress and signed
into law September 30, 1996.
During 1995, the Corporation recognized an extraordinary gain of $5.6
million, net of taxes of $3.0 million, from the sale of several apartment
complexes formerly owned by a CIVISTA subsidiary. Other 1995 unusual charges
totaled $36.3 million of which $16.2 million related to lost tax benefits, $17.9
million were associated with reengineering costs, and $2.2 million were
severance expenses.
19. CONTINGENCIES
The nature of the Corporation's business results in a certain amount of
litigation. Accordingly, FirstMerit 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 or results of
operations.
46
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial and per share data for the years ended December 31,
1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
QUARTERS
-----------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
IN THOUSANDS (EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total interest income..................... 1997 $ 98,562 102,215 102,510 104,538
==== ======== ======= ======= =======
1996 $101,627 103,385 104,362 102,371
==== ======== ======= ======= =======
Net interest income....................... 1997 $ 62,504 64,241 63,795 64,916
==== ======== ======= ======= =======
1996 $ 60,390 63,505 63,928 63,149
==== ======== ======= ======= =======
Provision for possible loan losses........ 1997 $ 4,161 5,033 6,182 6,217
==== ======== ======= ======= =======
1996 $ 2,957 3,170 3,485 8,139
==== ======== ======= ======= =======
Income (loss) before federal income
taxes................................... 1997 $ 30,172 31,447 31,832 32,910
==== ======== ======= ======= =======
1996 $ 28,817 28,679 19,835 28,684
==== ======== ======= ======= =======
Net income................................ 1997 $ 20,233 21,319 22,013 22,798
==== ======== ======= ======= =======
1996 $ 19,253 19,221 13,447 19,019
==== ======== ======= ======= =======
Net income per share -- basic............. 1997 $ 0.32 0.34 0.35 0.37
==== ======== ======= ======= =======
1996 $ 0.29 0.30 0.21 0.30
==== ======== ======= ======= =======
Net income per share -- diluted........... 1997 $ 0.32 0.33 0.35 0.36
==== ======== ======= ======= =======
1996 $ 0.29 0.29 0.21 0.29
==== ======== ======= ======= =======
</TABLE>
21. SHAREHOLDER RIGHTS PLAN
The Corporation has in effect a shareholder rights plan ("Plan"). The Plan
provides that each share of Common Stock has one right attached. Under the Plan,
subject to certain conditions, the Rights would be distributed after either of
the following events: (1) a person acquires 10% or more of the Common Stock of
the Corporation, or (2) the commencement of a tender offer that would result in
a change in the ownership of 10% or more of the Common Stock. After such an
event, each Right would entitle the holder to purchase shares of Series A
Preferred Stock of the Corporation. Subject to certain conditions, the
Corporation may redeem the Rights for $0.01 per Right.
22. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 ("SFAS 128"), "Earnings per Share" ("EPS"). SFAS 128 simplifies the
standards for computing EPS previously found in APB Opinion No. 15 ("APB 15"),
"Earnings per Share," and makes the standards comparable to recently adopted
international EPS guidelines. SFAS 128 replaces the presentation of "primary"
EPS with the presentation of "basic" EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement and a reconciliation
of the numerator and denominator used in the basic EPS calculation to the
numerator and denominator used in the diluted EPS calculation. Basic EPS
excludes dilution and is computed by dividing net income by the weighted-average
common shares outstanding. Diluted EPS reflects the dilution that would occur
47
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
if securities or other contracts to issue common stock were exercised or
converted to common stock (e.g., exercising of common stock options).
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS:
Net income.................................................. $86,363 62,717 $1.38
======= =====
Effect of dilutive stock options............................ 820
------
Diluted EPS:
Net income + assumed exercising of options.................. $86,363 63,537 $1.36
======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
---------------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS:
Net income $70,940 65,216 $1.09
======= =====
Effect of dilutive stock options............................ 253
------
Diluted EPS:
Net income + assumed exercising of options.................. $70,940 65,469 $1.08
======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
-----------------------------------------
PER
SHARES INCOME SHARE
(DENOMINATOR) (NUMERATOR) AMOUNT
------------- ----------- ---------
<S> <C> <C> <C>
Basic EPS:
Net income................................................ $25,719 66,908 $0.38
======= =====
Effect of dilutive stock options............................ 229
------
Diluted EPS:
Net income + assumed exercising of options............. $25,719 67,137 $0.38
======= ====== =====
</TABLE>
23. REGULATORY MATTERS
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to quantitative judgements
by regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes, as of December 31, 1997, the
Corporation meets all capital adequacy requirements to which it is subject. The
capital terms used in this note to the consolidated financial statements are
defined in the regulations as well as in the "Capital Resources" section of
Management's Discussion and Analysis of financial condition and results of
operations.
48
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
As of December 31, 1997, the most recent notification from the Office of
the Comptroller of the Currency ("OCC") categorized the Corporation as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Corporation must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table. In management's opinion, there are no conditions or events since the
OCC's notification that have changed the Corporation's categorization as "well
capitalized."
<TABLE>
<CAPTION>
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
---------------- ------------------ --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets)............... $568,886 13.55% *335,984 8.0% *419,980 *10.00%
Tier I Capital
(to Risk Weighted Assets)............... 516,388 12.30% *167,992 4.0% *251,988 *6.00%
Tier I Capital
(to Average Assets)..................... 516,388 9.66% *213,909 4.0% *267,387 *5.00%
</TABLE>
* Greater than or equal to.
49
<PAGE> 51
MANAGEMENT'S REPORT
The management of FirstMerit Corporation is responsible for the preparation
and accuracy of the financial information presented in this annual report. These
consolidated financial statements were prepared in accordance with generally
accepted accounting principles, based on the best estimates and judgement of
management.
The Corporation maintains a system of internal controls designed to provide
reasonable assurance that assets are safeguarded, that transactions are executed
in accordance with the Corporation's authorization and policies, and that
transactions are properly recorded so as to permit preparation of financial
statements that fairly present the financial position and results of operations
in conformity with generally accepted accounting principles. These systems and
controls are reviewed by our internal auditors and independent auditors.
The Audit Committee of the Board of Directors is composed of only outside
directors and has the responsibility for the recommendation of the independent
auditors for the Corporation. The Audit Committee meets regularly with
management, internal auditors and our independent auditors to review accounting,
auditing and financial matters. The independent auditors and the internal
auditors have free access to the Audit Committee.
<TABLE>
<S> <C>
/s/ JOHN R. COCHRAN /S/ JACK R. GRAVO
CHAIRMAN AND CHIEF EXECUTIVE VICE PRESIDENT
EXECUTIVE OFFICER FINANCE AND ADMINISTRATION
</TABLE>
50
<PAGE> 52
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of FirstMerit
corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our option.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FirstMerit
Corporation and subsidiaries as of December 31, 1997 and 1996 and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand LLP
Akron, OH
January 15, 1998
51
<PAGE> 53
AVERAGE CONSOLIDATED BALANCE SHEETS
FULLY-TAX EQUIVALENT INTEREST RATES AND INTEREST DIFFERENTIAL
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------- --------- -------- ------- --------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investment securities:
U.S. Treasury securities
and U.S. Government
agency obligations
(taxable)............... $ 906,305 57,484 6.34% 1,110,581 69,010 6.21 1,218,604 75,759 6.22
Obligations of states and
political subdivisions
(tax-exempt)............ 86,873 7,074 8.14 100,630 7,404 7.36 122,244 9,369 7.66
Other securities.......... 102,327 6,568 6.42 99,977 6,489 6.49 106,176 7,077 6.67
---------- ------- --------- ------- --------- -------
Total investment
securities.......... 1,095,505 71,126 6.49 1,311,188 82,903 6.32 1,447,024 92,205 6.37
Federal funds sold.......... 41,636 2,250 5.40 19,233 934 4.86 22,011 1,681 7.64
Loans....................... 3,789,231 337,661 8.91 3,812,900 330,951 8.68 3,818,486 326,581 8.55
Total earning
assets.............. 4,926,372 411,037 8.34 5,143,321 414,788 8.06 5,287,521 420,467 7.95
Allowance for possible loan
losses.................... (51,155) (47,392) (37,923)
Cash and due from banks..... 176,697 207,533 220,787
Other assets................ 201,871 175,020 184,426
---------- --------- ---------
Total assets.......... $5,253,785 5,478,482 5,654,811
========== ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Demand-non-interest
bearing................. $ 733,394 -- -- 745,102 -- -- 725,287 -- --
Demand-interest bearing... 448,976 6,467 1.44 447,524 7,839 1.75 426,608 9,202 2.16
Savings................... 1,279,859 30,839 2.41 1,399,011 32,446 2.32 1,514,374 38,438 2.54
Certificates and other
time deposits........... 1,701,886 91,406 5.37 1,772,150 95,379 5.38 1,782,817 97,518 5.47
---------- ------- --------- ------- --------- -------
Total deposits........ 4,164,115 128,712 3.09 4,363,787 135,664 3.11 4,449,086 145,158 3.26
Federal funds purchased,
securities sold under
agreements to repurchase
and other borrowings...... 477,454 23,657 4.95 515,556 25,109 4.87 609,247 35,775 5.87
---------- ------- --------- ------- --------- -------
Total interest bearing
liabilities......... 3,908,175 152,369 3.90 4,134,241 160,773 3.89 4,333,046 180,933 4.18
---------- ------- --------- ------- --------- -------
Other liabilities........... 92,598 71,240 68,440
Shareholders' equity........ 519,618 527,899 528,038
---------- --------- ---------
Total liabilities and
shareholders'
equity.............. $5,253,785 5,478,482 5,654,811
Net yield on earning
assets.................... 258,668 5.25 254,015 4.94 239,534 4.53
======= ==== ======= ==== ======= ====
Interest rate spread........ 4.44 4.18 3.78
==== ==== ====
Income on tax-exempt
securities and loans...... 5,225 6,241 8,034
======= ======= =======
</TABLE>
- - ---------------
Notes: Interest income on tax-exempt securities and loans have been adjusted to
a fully-taxable equivalent basis.
Non-accrual loans have been included in the average balances.
52
<PAGE> 54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information about the Directors of FirstMerit, see "Election of
Directors" on pages 2 through 5 of FirstMerit's Proxy Statement dated February
23, 1998 ("Proxy Statement"), which is incorporated herein by reference.
Information about the Executive Officers of FirstMerit appears in Part I of
this report.
Disclosures by FirstMerit with respect to compliance with Section 16(a)
appear on page 5 of the Proxy Statement, and are incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
See "Executive Compensation and Other Information" on pages 6 through 16 of
the Proxy Statement, which are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Principal Shareholders" and "Election of Directors" at page 28, and
pages 2 through 4, respectively, of the Proxy Statement, which are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Certain Relationships and Related Transactions" at pages 18 and 19 of
the Proxy Statement, which are incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following Financial Statements appear in Part II of this Report:
Consolidated Balance Sheets December 31, 1997 and 1996
Consolidated Statements of Income Years ended December 31, 1997, 1996
and 1995
Consolidated Statements of Changes in Shareholders' Equity Years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows Years ended December 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements Years ended December 31,
1997, 1996 and 1995
Management's Report
Independent Auditors' Report
(a)(2) Financial Statement Schedules
All schedules are omitted as the required information is inapplicable or
the information is presented in the consolidated financial statements or
related notes which appear in Part II of this report.
(a)(3) Management Contracts or Compensatory Plans or Arrangements
See those documents listed on the Exhibit Index which are marked as
such.
(b) Reports on Form 8-K
Form 8-K filed by FirstMerit on November 12, 1997 reporting on the
execution of a definitive merger agreement with CoBancorp Inc.
(c) Exhibits
See the Exhibit Index.
(d) Financial Statements
See subparagraph (a)(1) above.
53
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Akron,
State of Ohio, on the 23rd day of February, 1998.
FirstMerit Corporation
By: /s/ John R. Cochran
----------------------------------
John R. Cochran, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on the 23rd day of February, 1998 by the following
persons (including a majority of the Board of Directors of the registrant) in
the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JOHN R. COCHRAN Chairman and Chief Executive Officer (Principal
- - ------------------------------------------------ Executive Officer) and Director
John R. Cochran
/s/ JACK R. GRAVO Executive Vice President (Principal Financial
- - ------------------------------------------------ Officer and Principal Accounting Officer)
Jack R. Gravo
/s/ KAREN S. BELDEN Director
- - ------------------------------------------------
Karen S. Belden
/s/ R. CARY BLAIR Director
- - ------------------------------------------------
R. Cary Blair
/s/ JOHN C. BLICKLE Director
- - ------------------------------------------------
John C. Blickle
/s/ SID A. BOSTIC President and Chief Operating Officer and Director
- - ------------------------------------------------
Sid A. Bostic
/s/ ROBERT W. BRIGGS Director
- - ------------------------------------------------
Robert W. Briggs
/s/ ELIZABETH A. DALTON Director
- - ------------------------------------------------
Elizabeth A. Dalton
/s/ TERRY L. HAINES Director
- - ------------------------------------------------
Terry L. Haines
/s/ CLIFFORD J. ISROFF Director
- - ------------------------------------------------
Clifford J. Isroff
/s/ PHILIP A. LLOYD, II Director
- - ------------------------------------------------
Philip A. Lloyd, II
/s/ ROBERT G. MERZWEILER Director
- - ------------------------------------------------
Robert G. Merzweiler
/s/ STEPHEN E. MYERS Director
- - ------------------------------------------------
Stephen E. Myers
/s/ ROGER T. READ Director
- - ------------------------------------------------
Roger T. Read
/s/ JUSTIN T. ROGERS, JR. Director
- - ------------------------------------------------
Justin T. Rogers, Jr.
/s/ DEL SPITZER Director
- - ------------------------------------------------
Del Spitzer
</TABLE>
<PAGE> 56
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- - -------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of FirstMerit
Corporation (incorporated by reference from Exhibit 3(i) to
the Form 8-K filed by the registrant on April 27, 1995)
3.2 Code of Regulations, as amended, of FirstMerit Corporation
(incorporated by reference from Exhibit 3(b) to the Form
10-K filed by the registrant on February 25, 1997)
4.1 Shareholders Rights Agreement dated October 21, 1993,
between FirstMerit Corporation and FirstMerit Bank, N.A., as
amended and restated July 18, 1996 (incorporated by
reference from Exhibit 4 to the Form 8-A/A filed by the
registrant on July 18, 1996)
10.1 1982 Incentive Stock Option Plan of FirstMerit Corporation
(incorporated by reference from Exhibit 4.2 to the Form S-8
(No. 33-7266) filed by the registrant on July 15, 1986)*
10.2 Amended and Restated 1992 Stock Option Program of FirstMerit
Corporation*
10.3 1992 Directors Stock Option Program*
10.4 FirstMerit Corporation 1995 Restricted Stock Plan
(incorporated by reference from Exhibit (10)(d) to the Form
10-Q for the fiscal quarter ended March 31, 1995, filed by
the registrant on May 15, 1995)*
10.5 1997 Stock Option Program of FirstMerit Corporation*
10.6 1985 FirstMerit Corporation Stock Plan (CV) (incorporated by
reference from Exhibit (10)(a) to the Form S-8 (No.
33-57557) filed by the registrant on February 1, 1995)*
10.7 1993 FirstMerit Corporation Stock Plan (CV) (incorporated by
reference from Exhibit (10)(b) to the Form S-8 (No.
33-57557) filed by the registrant on February 1, 1995)*
10.8 Amended and Restated FirstMerit Corporation Executive
Deferred Compensation Plan (incorporated by reference from
Exhibit 10(h) to the Form 10-K filed by the registrant on
February 25, 1997)*
10.9 Amended and Restated FirstMerit Corporation Director
Deferred Compensation Plan (incorporated by reference from
Exhibit 10(i) to the Form 10-K filed by the registrant on
February 25, 1997)*
10.10 FirstMerit Corporation Executive Supplemental Retirement
Plan (incorporated by reference from Exhibit 10(d) to the
Form 10-K filed by the registrant on March 15, 1996)*
10.11 FirstMerit Corporation Unfunded Supplemental Benefit Plan*
10.12 First Amendment to the FirstMerit Corporation Unfunded
Supplemental Benefit Plan (incorporated by reference from
Exhibit 10(v) to the Form 10-K filed by the registrant on
March 2, 1995)*
10.13 Supplemental Pension Agreement of John R. Macso*
10.14 FirstMerit Corporation Executive Committee Life Insurance
Program Summary (incorporated by reference from Exhibit
10(w) to the Form 10-K filed by the registrant on March 2,
1995)*
10.15 Long Term Disability Plan (incorporated by reference from
Exhibit 10(x) to the Form 10-K filed by the registrant on
March 2, 1995)*
10.16 Employment Agreement of John R. Cochran (incorporated by
reference from Exhibit 10(a) to the Form 10-Q filed by the
registrant on May 15, 1995)*
10.17 Restricted Stock Award Agreement of John R. Cochran dated
March 1, 1995 (incorporated by reference from Exhibit 10(e)
to the Form 10-Q filed by the registrant on May 15, 1995)*
10.18 Restricted Stock Award Agreement of John R. Cochran dated
April 9, 1997*
10.19 Employment Agreement of Sid A. Bostic dated February 1,
1998*
10.20 Restricted Stock Award Agreement of Sid A. Bostic dated
February 1, 1998*
10.18 Form of FirstMerit Corporation Termination Agreement
(incorporated by reference from Exhibit 10(r) to the Form
10-K filed by the registrant on February 25, 1997)*
10.19 Form of Director and Officer Indemnification Agreement and
Undertaking (incorporated by reference from Exhibit 10(s) to
the Form 8-K/A filed by the registrant on April 27, 1995)*
</TABLE>
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- - -------
<S> <C>
10.20 Distribution Agreement, by and among FirstMerit Corporation,
FirstMerit Bank, N.A. and the Agents (incorporated by
reference from Exhibit (10)(ii) to the Form 8-K/A filed by
the registrant on April 27, 1995)
10.21 Form of FirstMerit Bank, N.A. Global Bank Note (Fixed Rate)
(incorporated by reference from Exhibit (10)(iii) to the
Form 8-K/A filed by the registrant on April 27, 1995)
10.22 Form of FirstMerit Bank, N.A. Global Bank Note (Floating
Rate) (incorporated by reference from Exhibit (10)(iv) to
the Form 8-K/A filed by the registrant on April 27, 1995)
10.23 Agreement of Affiliation and Plan of Merger dated November
2, 1997 by and between FirstMerit Corporation and CoBancorp
Inc. (incorporated by reference from Exhibit 99.1 to the
Form 8-K filed by the registrant on November 12, 1997)
10.24 CoBancorp Inc. Stock Purchase Option dated November 3, 1997
(incorporated by reference from Exhibit 99.2 to the Form 8-K
filed by the registrant on November 12, 1997)
21 Subsidiaries of FirstMerit Corporation
23 Consent of Coopers & Lybrand, L.L.P.
27 Financial Data Schedule
</TABLE>
- - ---------------
* Management Contract or Compensatory Plan or Arrangement
<PAGE> 1
Exhibit 10.2
FIRSTMERIT CORPORATION
1992 STOCK OPTION PROGRAM
AS AMENDED AND RESTATED EFFECTIVE NOVEMBER 1, 1997
<PAGE> 2
FIRSTMERIT CORPORATION
1992 STOCK OPTION PROGRAM
AS AMENDED AND RESTATED EFFECTIVE NOVEMBER 1, 1997
TABLE OF CONTENTS
I. INTRODUCTION ........................................................ 1
A. Purpose of the Program ......................................... 1
B. Definitions .................................................... 1
II. PROGRAM ADMINISTRATION .............................................. 4
A. Administration ................................................. 4
B. Participation .................................................. 4
C. Maximum Number of Shares Available ............................. 4
D. Adjustments .................................................... 5
E. Registration Conditions ........................................ 5
F. Committee Action ............................................... 5
III. STOCK OPTIONS ....................................................... 6
A. Price .......................................................... 6
B. Period ......................................................... 6
C. Time of Exercise ............................................... 6
D. Exercise Procedures ............................................ 6
E. Payment ........................................................ 6
F. Special Rule for Incentive Stock Options ....................... 7
G. Reload Stock Options.............................................7
H. Effect of Leaves of Absence .................................... 7
I. Termination of Employment ...................................... 8
IV. DIVIDEND UNITS ...................................................... 8
A. Awards of Dividend Units ....................................... 8
B. Valuation ...................................................... 9
C. Payment ........................................................ 9
D. Termination of Employment ...................................... 9
E. Acceleration of Payments ....................................... 9
V. GENERAL PROVISIONS ................................................. 10
A. Amendment and Termination of Program ...........................10
B. Government and Other Regulations .............................. 10
C. Other Compensation Plans and Programs ......................... 10
D. Miscellaneous Provisions ...................................... 10
E. Effective Dates ............................................... 11
<PAGE> 3
FIRSTMERIT CORPORATION
1992 STOCK OPTION PROGRAM
AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1997
FIRSTMERIT CORPORATION (the "Company") hereby adopts this Amendment and
Restatement of the FirstMerit Corporation 1992 Stock Option Program.
R E C I T A L S:
A. The Company previously adopted the FirstMerit Corporation 1992 Stock
Option Program (the "Program").
B. Article V(A) of the Program provides that the Board of Directors of
the Company may amend the Program at any time and from time to time.
C. The Board of Directors of the Company previously adopted two
amendments to the Program, and in view of the extensiveness of such amendments,
has determined that an amendment and restatement of the Program is desirable.
IN CONSIDERATION OF THE FOREGOING, the Company hereby amends and
restates the Program, effective as of November 1, 1997, as follows:
I. INTRODUCTION
A. PURPOSE OF THE PROGRAM
FirstMerit Corporation has established the Program to further its
long-term financial success by creating the annual opportunity to key employees
of the Company, as hereinafter defined, and its majority-owned subsidiaries
("Subsidiaries") to receive stock and stock-based compensation whereby they can
share in achieving and sustaining such success. The Program also provides a
means to attract and retain the executive talent needed to achieve the Company's
long-term growth and profitability objectives.
B. DEFINITIONS
When used in the Program, the following terms shall have the meanings
set forth below:
"Award(s)" shall mean Incentive Stock Options, Non-Qualified Stock
Options, Reload Stock Options or Dividend Units granted under the Program.
"Company" shall mean FirstMerit Corporation and any successor in a
reorganization or similar transaction.
<PAGE> 4
"Board" shall mean the Board of Directors of the Company.
"Change of Control" shall mean (a) the attainment of beneficial
ownership by any Person (as defined herein) of capital stock of the Company, the
voting power of which constitutes 30 percent or more of the voting power of all
of the Company's outstanding capital stock; or (b) a change in the composition
of a majority of the Board during any period of two years or less, provided that
in determining such change, any Director whose election has been approved in
advance by at least two-thirds of the Directors then in office shall not be
considered a new director. No sale to underwriters or private placement of
capital stock by the Company, nor any acquisition by the Company, through
merger, purchase of assets or otherwise, effected in whole or in part by
issuance or reissuance of shares of its capital stock, shall constitute a Change
of Control.
For purposes of determining a Change of Control under the Program, the
following definitions shall be applicable:
1. The term "Person" shall mean any individual, corporation or other
entity.
2. Any Person shall be deemed to be the beneficial owner of any shares
of capital stock of the Company:
a. which that Person owns directly, whether or not of record,
b. which that Person has the right to acquire pursuant to any
agreement or understanding or upon exercise of conversion rights, warrants or
options, or otherwise,
c. which are beneficially owned, directly or indirectly (including
shares deemed owned through application of Paragraph 2.b. above), by an
"affiliate" or "associate" (as defined in the rules of the Securities and
Exchange Commission) of that Person, or
d. which are beneficially owned, directly or indirectly (including
shares deemed owned through application of Paragraph 2.b. above), by any other
Person with which that Person or his "affiliate" or "associate" has any
agreement, arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of capital stock of the Corporation.
3. For purposes of determining whether a Person has acquired beneficial
ownership of 30 percent or more of the Company, the outstanding shares of
capital stock of the Company shall include shares deemed owned by such Person
through application of Paragraphs 2.b., 2.c., and 2.d. above, but shall not
include any other shares which may be issuable pursuant to any agreement or upon
exercise of conversion rights, warrants or options, or otherwise, but which are
not actually outstanding.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
2
<PAGE> 5
"Committee" shall mean the Salary, Benefits and Options Committee, or
such other Committee of the Board of the Company which shall be designated by
the Board to administer the Program. If the Board does not designate the Salary,
Benefits and Options Committee as the Committee, the Committee shall be composed
of three or more persons who are from time to time appointed to serve by the
Board. Each member of the Committee shall be a "disinterested person" within the
meaning of Rule 16b-3 of the Securities Exchange Act of 1934 or any successor
rule, as any such rule may be amended from time to time.
"Common Stock" shall mean the common stock of the Company, no par value
per share, and may be either stock previously authorized but unissued, or stock
reacquired by the Company.
"Disability" shall mean the inability of a Participant to perform the
services normally rendered due to any physical or mental impairment that can be
expected to be of either permanent or indefinite duration, as determined by the
Committee on the basis of appropriate medical evidence, and that results in the
Participant's Termination of Employment; provided, however, that with respect to
any Participant who has entered into an employment agreement with the Company or
its Subsidiaries, the term of which has not expired at the time a determination
concerning Disability is to be made, Disability shall have the meaning
attributed to "permanent disability" in such employment agreement.
"Fair Market Value" shall mean with respect to a given day, the closing
sales price of a share of Common Stock, as reported by such responsible
reporting service as the Committee may select, or if there were no transactions
in the Common Stock on such day, then the last preceding day on which
transactions took place. The foregoing notwithstanding, the Committee may
determine the Fair Market Value in such other manner as it may deem more
appropriate for Program purposes or as is required by applicable laws or
regulations.
"Incentive Stock Option" or "ISO" shall mean a right to purchase the
Company's Common Stock which is intended to comply with the terms and conditions
for an incentive stock option as set forth in Section 422 of the Code, or such
other sections of the Code as may be in effect from time to time.
"Non-Qualified Stock Option" or "NQSO" shall mean a right to purchase
the Company's Common Stock which is not intended to comply with the terms and
conditions for a tax-qualified stock option, as set forth in Section 422 of the
Code, or such other sections of the Code as may be in effect from time to time.
"Participant" shall mean an officer or full-time salaried employee of
the Company (including a member of the Board who is also an employee), or its
Subsidiaries who, in the judgment of the Committee, is in a position to make a
substantial contribution to the management, growth and success of the Company
and is thus designated by the Committee to receive an Award.
"Program" shall mean the Company's 1992 Stock Option Program, as
amended and restated effective November 1, 1997.
3
<PAGE> 6
"Reload Stock Option" shall mean a stock option granted to a
Participant who has paid for shares subject to option through the delivery of
shares of Common Stock having an aggregate Fair Market Value as determined on
the date of exercise equal to the option price.
"Retirement" shall mean a Participant's Termination of Employment by
reason of the Participant's retirement at his normal retirement date, pursuant
to and in accordance with a pension, retirement or similar plan or other regular
retirement practice of the Company or its Subsidiaries, or in accordance with
the early retirement provision(s) thereof.
"Termination of Employment" shall mean a cessation of the
employee-employer relationship between a Participant and the Company or its
Subsidiaries for any reason.
II. PROGRAM ADMINISTRATION
A. ADMINISTRATION
The Program shall be administered by the Committee, which subject to
the express provisions of the Program, shall have full and exclusive authority
to interpret the Program, to prescribe, amend and rescind rules and regulations
relating to the Program and to make all other determinations deemed necessary or
advisable in the implementation and administration of the Program; provided,
however, that subject to the express provisions hereof or unless required by
applicable law or regulation, no action of the Committee shall adversely affect
the terms and conditions of any Award made to, or any rights hereunder or under
any grant letter of, any Participant, without such Participant's consent. The
Committee's interpretation and construction of the Program shall be conclusive
and binding on all persons, including the Company and all Participants.
B. PARTICIPATION
The Committee shall, from time to time, make recommendations to the
Board with respect to the selection of Participants and the Award or Awards to
be granted to each Participant, and thereafter grant such Award or Awards upon
the approval of a majority of the members of the Board of Directors present and
voting upon such approval, who are "non-employee directors" within the meaning
of Rule 16b-3 of the Securities Exchange Act of 1934 or any successor rule, as
any such rule may be amended from time to time. In making its recommendations,
the Committee may take into account the nature of the services rendered or
expected to be rendered by the respective Participants, their present and
potential contributions to the Company's success, and such other factors as the
Committee in its discretion shall deem relevant.
C. MAXIMUM NUMBER OF SHARES AVAILABLE
The maximum number of shares which may be granted under the Program is
two million (2,000,000) (or such lesser number that as were available for grant
as of the 2-for-1 stock split in
4
<PAGE> 7
September, 1997) plus shares reserved for issuance under the Company's 1982
Incentive Stock Option Plan (the "Prior Plan") for which options have not been
granted.
No Incentive Stock Options shall be granted after January 1, 2002.
D. ADJUSTMENTS
In the event of stock dividends, stock splits, recapitalizations,
mergers, consolidations, combinations, exchanges of shares, spin-offs,
liquidations, reclassifications or other similar changes in the capitalization
of the Company, the number of shares of Common Stock available for grant under
this Program shall be adjusted proportionately or otherwise by the Board and,
where deemed appropriate, the number of shares covered by outstanding stock
options and the option price of outstanding stock options shall be similarly
adjusted. Also, in instances where another corporation or other business entity
is acquired by the Company, and the Company has assumed outstanding employee
option grants under a prior existing plan of the acquired entity, similar
adjustments are permitted at the discretion of the Committee. In the event of
any other change affecting the Common Stock reserved under the Program, such
adjustment, if any, as may be deemed equitable by the Board, shall be made to
give proper effect to such event.
E. REGISTRATION CONDITIONS
1. Unless issued pursuant to a registration statement under the
Securities Act of 1933, as amended, no shares shall be issued to a Participant
under the Program unless the Participant represents and agrees with the Company
that such shares are being acquired for investment and not with a view to the
resale or distribution thereof, or such other documentation as may be required
by the Company, unless in the opinion of counsel to the Company such
representation, agreement or documentation is not necessary to comply with such
Act.
2. Any restriction on the resale of shares shall be evidenced by an
appropriate legend on the stock certificate.
3. The Company shall not be obligated to deliver any Common Stock until
it has been listed on each securities exchange on which the Common Stock may
then be listed or until there has been qualification under or compliance with
such federal or state laws, rules or regulations as the Company may deem
applicable. The Company shall use reasonable efforts to obtain such listing,
qualification and compliance.
F. COMMITTEE ACTION
The Committee may, through Award agreements, limit its discretion under
this Program. To the extent such discretion is not specifically waived in an
Award agreement, the Committee shall retain such discretion.
5
<PAGE> 8
III. STOCK OPTIONS
All stock options granted to Participants under the Program shall be
evidenced by agreements which shall be subject to applicable provisions of the
Program, and such other provisions as the Committee may adopt, including the
following provisions:
A. PRICE
The option price per share of Non-Qualified Stock Options shall be set
by the Committee at the time of grant. The option price per share of Incentive
Stock Options shall not be less than 100 percent of the Fair Market Value of a
share of Common Stock on the date of grant.
B. PERIOD
An ISO shall not be exercisable for a term longer than ten years from
date of its grant. NQSOs shall have a term as established by the Committee.
C. TIME OF EXERCISE
The Committee may prescribe the timing of the exercise of the stock
option and any minimums and installment provisions and may accelerate the time
at which a stock option becomes exercisable, provided that with respect to ISOs,
no such acceleration shall result in a violation of Paragraph F of this Article
III. No stock option shall be exercisable until six months following the date of
grant.
D. EXERCISE PROCEDURES
A stock option, or portion thereof, shall be exercised by delivery of a
written notice of exercise to the Company, and payment of the full price of the
shares being purchased.
E. PAYMENT
The price of an exercised stock option, or portion thereof, may be
paid:
1. in cash or by check, bank draft or money order payable to the order
of the Company,
2. through the delivery of shares of Common Stock owned by the
Participant, having an aggregate Fair Market Value as determined on the date of
exercise equal to the option price, or
3. by a combination of both 1 and 2 above.
The Committee may impose such limitations and prohibitions on the use
of any shares of Common Stock to exercise a stock option as it deems
appropriate.
6
<PAGE> 9
F. SPECIAL RULE FOR INCENTIVE STOCK OPTIONS
If the aggregate Fair Market Value of Common Stock with respect to
which ISOs are exercisable for the first time by a Participant during any
calendar year (under this Program and all other plans of the Company or its
parent and Subsidiaries) exceeds $100,000, such ISOs shall be treated as NQSOs
to the extent of the excess. In applying the foregoing limitation, ISOs shall be
taken into account in the order in which they were granted and the Fair Market
Value of Common Stock subject to such ISOs shall be determined as of the date of
grant. If such limit is exceeded in any calendar year, the Company shall have
the right to designate which shares of Common Stock purchased pursuant to such
ISOs shall be treated as having been acquired by the Participant pursuant to an
ISO.
G. RELOAD STOCK OPTIONS
If a stock option is exercised while the Participant is employed by the
Company and the Participant pays for the shares subject to option through the
delivery of Common Stock having an aggregate Fair Market Value as determined on
the date of exercise equal to the option price, the Participant may be granted a
Reload Stock Option on the date of such exercise. The Award shall equal the
number of whole shares of Common Stock used to pay the purchase price, and the
exercise price of the Reload Stock Option shall equal the Fair Market Value of
the Common Stock on the date of grant. If the Company withholds shares of Common
Stock to cover applicable income and employment taxes related to the exercise of
an option, then the Award shall equal the number of whole shares of Common Stock
used to pay the purchase price less the number of shares withheld.
Subject to the provisions of the Plan or Award, the Reload Stock Option
may be exercised between its date of grant and the date of expiration of an
option. Unless otherwise provided in the Award, shares of stock acquired upon
the exercise of a Reload Stock Option will be restricted from sale for two
years. A Reload Stock Option shall be evidenced by an agreement containing such
other terms and conditions as the Committee approves. No Reload Stock Option
shall be granted with respect to a stock option exercised after the
Participant's Retirement, Disability, death or other Termination of Employment.
No Dividend Units shall be awarded in connection with a Reload Stock Option.
H. EFFECT OF LEAVES OF ABSENCE
It shall not be considered a Termination of Employment when a
Participant is placed by the Company or any of its Subsidiaries on military
leave, sick leave or other bona fide leave of absence. In case of such leave of
absence, the employment relationship for Program purposes shall be continued
until the later of the date when such leave of absence equals ninety days or
when the Participant's right to reemployment with the Company or any of its
Subsidiaries shall no longer be guaranteed either by statute or contract.
7
<PAGE> 10
I. TERMINATION OF EMPLOYMENT
In the event of Termination of Employment, the following provisions
shall apply with respect to ISOs and NQSOs unless waived by the Committee, or as
otherwise specifically provided in the Stock Option Agreement.
1. NQSOs and ISOs shall be exercisable for a period equal to the
lesser of five years or the remaining option term; provided, however, that if
the Participant elects to exercise the Participant's ISOs (a) later than three
(3) months after the date of the Participant's Termination of Employment due to
retirement or (b) twelve (12) months after the date of the Participant's
Termination of Employment due to disability, such ISOs shall be treated as
NQSOs under the Code for purposes of calculating the federal income tax
applicable as a result of the exercise of such ISOs and the subsequent
disposition of the acquired shares.
2. If a Participant's employment with the Company or any of its
Subsidiaries is terminated for any reason other than Death, Disability or
Retirement, all Awards under this Program shall be immediately canceled, except
that if the termination is by the Company or any of its Subsidiaries or any
reason other than misconduct or misfeasance, Participant shall have thirty (30)
days thereafter within which to exercise his options to the extent that the
options are otherwise exercisable immediately prior to such termination, and
further if such termination is attributable to a Change of Control, such Award
shall not be canceled but shall continue as though the Participant remained in
the employ of the Company or any of its Subsidiaries during the remaining
option term of the Award.
3. Notwithstanding the foregoing, the Committee may rescind the right
to exercise stock options following Termination of Employment if the Participant
has been found to be directly or indirectly engaged in any activity which is in
competition with the Company or its Subsidiaries or otherwise adverse to, or not
in the best interest of the Company or its Subsidiaries. Further, no option
agreement for ISOs may extend their exercise period beyond the time allowed by
the Code.
IV. DIVIDEND UNITS
A. AWARDS OF DIVIDEND UNITS
1. The Committee may, at its discretion, award one Dividend Unit to
Participants in the Program with respect to each share of Common Stock for which
an option has been granted. No Dividend Units shall be awarded in connection
with a Reload Stock Option.
2. An Award of a Dividend Unit by the Committee may be made only in
conjunction with a stock option for Common Stock granted to the Participant
under this Program.
8
<PAGE> 11
B. VALUATION
1. The amount payable to a Participant in respect of each Dividend
Unit awarded to such Participant shall be equal to the aggregate dividends
actually paid one share of Common Stock to the extent that such Participant
held such Dividend Unit on the record date established by the Board for payment
of each dividend. A Participant shall be deemed to have held a Dividend Unit
from the date on which the Award of such Dividend Unit was made (or such later
date as may be specified in the related grant letter) to and including the date
on which the term of the Dividend Unit expires.
2. The Committee shall, at the time it awards a Dividend Unit to a
Participant, specify the term of the Dividend Unit (which term shall not be
longer than the term of the stock option to which it is attached) and the period
of time during the term over which the Dividend Unit will accrue dividends.
C. PAYMENT
1. The amount payable to a Participant in respect of a Dividend Unit
shall be paid out by the Company to such Participant only at the date of
exercise of the stock option to which the Unit is attached. The Dividend Unit
shall expire upon the expiration of any stock option which has not been
exercised.
2. Upon payment to a Participant in respect of a Dividend Unit such
Dividend Unit shall be of no further force or effect.
D. TERMINATION OF EMPLOYMENT
In the event of Termination of Employment, any Dividend Unit shall
remain outstanding for the duration of the stock option to which it is attached
until paid upon exercise or until termination or expiration of such stock
option.
E. ACCELERATION OF PAYMENTS
Unless the Committee determines otherwise, in the event of a Change of
Control, the Company shall, promptly after such Change of Control, make payment
to each Participant in an amount equal to the aggregate amount accrued on the
Dividend Units held by such Participant on the date of such Change of Control.
Notwithstanding anything to the contrary or any grant letter, after such Change
of Control and for so long as a Participant holds any Dividend Unit and
dividends are accrued thereon, the Company shall make payment to the Participant
in respect of any such Dividend Unit at the same time as payment of dividends on
Common Stock is made.
9
<PAGE> 12
V. GENERAL PROVISIONS
A. AMENDMENT AND TERMINATION OF PROGRAM
The Board may, at any time and from time to time, suspend or terminate
the Program in whole or amend it from time to time in such respects as the Board
may deem appropriate, subject, however, to the regulatory requirements of
Section 16(b) of the Securities Exchange Act and the requirements of the Code.
B. GOVERNMENT AND OTHER REGULATIONS
The obligation of the Company to issue Awards under the Program shall
be subject to all applicable laws, rules and regulations, and to such approvals
by any government agencies as may be required.
C. OTHER COMPENSATION PLANS AND PROGRAMS
The Program shall not be deemed to preclude the implementation by the
Company and its Subsidiaries of other compensation plans or programs which may
be in effect from time to time.
D. MISCELLANEOUS PROVISIONS
1. NO RIGHT TO CONTINUE EMPLOYMENT: Nothing in the Program or in any
Award confers upon any Participant the right to continue in the employ of the
Company or its Subsidiaries or interferes with or restricts in any way the
rights of the Company or its Subsidiaries to discharge any Participant at any
time for any reason whatsoever, with or without cause.
2. TRANSFERABILITY: No right or interest of any Participant in any
Award under the Program shall be (a) assignable or transferable, except by will
or the laws of descent and distribution, a valid beneficiary designation made in
accordance with procedures established by the Committee, or as expressly stated
herein, or (b) liable for, or subject to, any lien, obligation or liability. An
ISO may be exercised only by the Participant during his or her lifetime, or by
his or her estate, or the person who acquires the right to exercise such option
by bequest or inheritance.
The Board may, in its discretion, authorize all or a portion of the
options to be granted to a Participant, and may also amend outstanding options
to provide, that they be on terms which permit transfer by such Participant to
(i) the spouse, children or grandchildren of the Participant (the "Immediate
Family Members"), (ii) a trust or trusts for the exclusive benefit of such
Immediate Family Members, (iii) a partnership in which such Immediate Family
Members are the only partners, (iv) a limited liability company in which such
Immediate Family Members are the only members; provided that (x) there may be no
consideration for any such transfer, (y) the stock option agreement pursuant to
which such options are granted must be approved by the Board, and must expressly
provide for transferability in a manner consistent with this Section, and (z)
subsequent transfers of transferred options shall be prohibited except those in
accordance with the section(s) herein dealing
10
<PAGE> 13
with transfers by will or the laws of descent and distribution, or pursuant to
qualified domestic relations order. Following transfer, any such options shall
continue to be subject to the same terms and conditions as were applicable
immediately prior to transfer, provided that for all purposes hereof, the term
"Participant" shall be deemed to refer to the "Transferee." The events of
termination of any option will continue to be applied with respect to the
original Participant, following which the options shall be exercisable by the
transferee only to the extent (if at all), and for the periods specified in the
Program or option agreement. The Participant in all such cases will remain
subject to and liable for the withholding taxes due or payable upon exercise by
the Transferee.
The Board may also, in its discretion, pursuant to the requirements and
restrictions listed above except as listed in this paragraph, authorize all or a
portion of the options to be granted to a Participant, to permit a
non-conforming transfer, such as a sale to a family member or family corporation
for estate planning purposes. Nothing herein or in any action by the Board shall
be construed as an amendment to any option other than those expressly indicated
by the action of the Board.
The Company shall not have any obligation to provide notice to the
Transferee of the termination or acceleration of an option for any reason.
3. DESIGNATION OF BENEFICIARY: A Participant, in accordance with
procedures established by the Committee, may designate a person or persons to
receive, in the event of the Participant's death, (a) any payments with respect
to which the Participant would then be entitled, and (b) the right to continue
to participate in the Program to the extent of such Participant's outstanding
Awards. Such designation shall be made upon forms supplied by and delivered to
the Company and may be revoked in writing.
4. WITHHOLDING TAXES: The Company may require a payment from a
Participant to cover applicable withholding for income and employment taxes. The
Company reserves the right to offset such tax payment from any other funds which
may be due the Participant by the Company.
5. PROGRAM EXPENSES: Any expenses of administering the Program shall
be borne by the Company.
6. CONSTRUCTION OF PROGRAM: The interpretation of the Program and the
application of any rules implemented hereunder shall be determined solely in
accordance with the laws of the State of Ohio.
7. UNFUNDED PROGRAM: The Program shall be unfunded, and the Company
shall not be required to segregate any assets which may at any time be
represented by Awards. Any liability of the Company to any person with respect
to an Award under this Program shall be based solely upon any obligations which
may be created by this Program; no such obligation of the Company shall be
deemed to be secured by any pledge or other encumbrance on any property of the
Company.
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<PAGE> 14
8. BENEFIT PLAN COMPUTATIONS: Any benefits received or amounts paid to
a Participant with respect to any Award granted under the Program shall not have
any effect on the level of benefits provided to or received by any Participant,
or the Participant's estate or beneficiary, as part of any employee benefit plan
(other than the Program) of the Company.
9. PRONOUNS, SINGULAR AND PLURAL: The masculine may be read as
feminine, the singular as plural and the plural as singular as necessary to give
effect to the Program.
E. EFFECTIVE DATES
The Program became effective on approval by shareholders of the Company
at the Company's Annual Shareholders Meeting in April 1992. The Program was
amended and restated by the Board in November, 1996 to be effective January 1,
1997. The Program has been further amended effective November 1, 1997 to amend
the provisions to allow for the transferability of options and to increase the
option shares awarded annually pursuant to the 2-for-1 stock split effective in
September 1997. The Program and all outstanding Awards shall remain in effect
until all outstanding Awards have been exercised, expired or canceled.
12
<PAGE> 1
Exhibit 10.3
FIRSTMERIT CORPORATION
1992 DIRECTORS STOCK OPTION PROGRAM
Amended and Restated November 1997
<PAGE> 2
1992 DIRECTORS STOCK OPTION PROGRAM
TABLE OF CONTENTS
PAGE
I. INTRODUCTION ....................................................... 1
A. Purpose of the Program .................................... 1
B. Definitions ............................................... 1
II. PROGRAM ADMINISTRATION ............................................. 3
A. Administration ............................................ 3
B. Participation ............................................. 3
C. Maximum Number of Shares Available ........................ 3
D. Adjustments ............................................... 3
E. Registration Conditions ................................... 3
III. STOCK OPTIONS ...................................................... 4
A. Price ..................................................... 4
B. Period .................................................... 4
C. Time of Exercise .......................................... 4
D. Exercise Procedures ....................................... 4
E. Payment ................................................... 4
F. Termination of Service .................................... 4
IV. DIVIDEND UNITS ..................................................... 5
A. Awards of Dividend Units .................................. 5
B. Valuation ................................................. 5
C. Payment ................................................... 5
D. Termination of Service .................................... 5
E. Acceleration of Payments .................................. 6
V. GENERAL PROVISIONS ................................................. 6
A. Amendment and Termination of Program ...................... 6
B. Government and Other Regulations .......................... 6
C. Other Compensation Plans and Programs ..................... 6
D. Miscellaneous Provisions .................................. 6
E. Effective Dates ........................................... 7
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<PAGE> 3
I. INTRODUCTION
A. PURPOSE OF THE PROGRAM
FirstMerit Corporation (the "Company") has established the Program to
further its long-term financial success by offering stock, and stock-based
compensation to non-employee directors of the Company whereby they can share in
achieving and sustaining such success.
B. DEFINITIONS
When used in the Program, the following terms shall have the meanings
set forth below:
"Award(s)" shall mean Non-Qualified Stock Options and Dividend Units
granted under the Program.
"Company" shall mean FirstMerit Corporation, an Ohio corporation and
any successor in a reorganization or similar transaction.
"Board" shall mean the Board of Directors of the Company.
"Change of Control" shall mean (a) the attainment of beneficial
ownership by any Person (as defined herein) of capital stock of the Company, the
voting power of which constitutes 30 percent or more of the voting power of all
of the Company's outstanding capital stock; or (b) a change in the composition
of a majority of the Board during any period of two years or less, provided that
in determining such change, any Director whose election has been approved in
advance by at least two-thirds of the Directors then in office shall not be
considered a new director. No sale to underwriters or private placement of
capital stock by the Company, nor any acquisition by the Company, through
merger, purchase of assets or otherwise, effected in whole or in part by
issuance or reissuance of shares of its capital stock, shall constitute a Change
of Control.
For purposes of determining a Change of Control under the Program, the
following definitions shall be applicable:
1. The term "Person" shall mean any individual, corporation or other
entity.
2. Any Person shall be deemed to be the beneficial owner of any shares
of capital stock of the Company:
a. which that Person owns directly, whether or not of record,
b. which that Person has the right to acquire pursuant to any
agreement or understanding or upon exercise of conversion rights, warrants or
options, or otherwise,
1
<PAGE> 4
c. which are beneficially owned, directly or indirectly
(including shares deemed owned through application of Paragraph 2.b. above), by
an "affiliate" or "associate" (as defined in the rules of the Securities and
Exchange Commission) of that Person, or
d. which are beneficially owned, directly or indirectly
(including shares deemed owned through application of Paragraph 2.b. above), by
any other Person with which that Person or his "affiliate" or "associate" has
any agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of capital stock of the Company.
3. For purposes of determining whether a Person has acquired beneficial
ownership of 30 percent or more of the Company, the outstanding shares of
capital stock of the Company shall include shares deemed owned by such Person
through application of Paragraphs 2.b., 2.c., and 2.d. above, but shall not
include any other shares which may be issuable pursuant to any agreement or upon
exercise of conversion rights, warrants or options, or otherwise, but which are
not actually outstanding.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Common Stock" shall mean the common stock of the Company, no par value
per share, and may be either stock previously authorized but unissued, or stock
reacquired by the Company.
"Fair Market Value" shall mean with respect to a given day, the closing
sales price of a share of Common Stock, as reported by such responsible
reporting service as the Committee may select, or if there were no transactions
in the Common Stock on such day, then the last preceding day on which
transactions took place. The foregoing notwithstanding, the Committee may
determine the Fair Market Value in such other manner as it may deem more
appropriate for Program purposes or as is required by applicable laws or
regulations.
"Non-Qualified Stock Option" or "NQSO" shall mean a right to purchase
the Company's Common Stock which is not intended to comply with the terms and
conditions for a tax-qualified stock option, as set forth in Section 422 of the
Code, or such other sections of the Code as may be in effect from time to time.
"Participant" shall mean a non-employee Director of the Company.
"Program" shall mean the Company's 1992 Directors Stock Option Program.
"Termination of Service" shall mean a cessation of the Director's
relationship with the Company for any reason.
2
<PAGE> 5
II. PROGRAM ADMINISTRATION
A. ADMINISTRATION
The Program shall be administered by the Secretary of the Company.
Subject to the express provisions of the Program, the Secretary shall have full
and exclusive authority to interpret the Program, and to make such
determinations deemed necessary or advisable in the implementation and
administration of the Program; provided, however, that subject to the express
provisions hereof or unless required by applicable law or regulation, no action
of the Secretary shall adversely affect the terms and conditions of any Award
made to, or any rights hereunder or under any grant letter of, any Participant,
without such Participant's consent.
B. PARTICIPATION
All Directors of the Company who are not also full-time employees of
the Company or a subsidiary shall be Participants in the Program and shall be
awarded options to purchase one thousand two hundred (1200) shares each year on
the date following the annual shareholders meeting.
C. MAXIMUM NUMBER OF SHARES AVAILABLE
The maximum number of shares which may be granted under the Program is
two hundred thousand (200,000).
D. ADJUSTMENTS
In the event of stock dividends, stock splits, recapitalizations,
mergers, consolidations, combinations, exchanges of shares, spin-offs,
liquidations, reclassifications or other similar changes in the capitalization
of the Company, the number of shares of Common Stock available for grant under
this Program shall be adjusted proportionately.
E. REGISTRATION CONDITIONS
1. Unless issued pursuant to a registration statement under the
Securities Act of 1933, as amended, no shares shall be issued to a Participant
under the Program unless the Participant represents and agrees with the Company
that such shares are being acquired for investment and not with a view to the
resale or distribution thereof, or such other documentation as may be required
by the Company, unless in the opinion of counsel to the Company such
representation, agreement or documentation is not necessary to comply with such
Act.
2. Any restriction on the resale of shares shall be evidenced by an
appropriate legend on the stock certificate.
3
<PAGE> 6
3. The Company shall not be obligated to deliver any Common Stock until
it has been listed on each securities exchange on which the Common Stock may
then be listed or until there has been qualification under or compliance with
such federal or state laws, rules or regulations as the Company may deem
applicable. The Company shall use reasonable efforts to obtain such listing,
qualification and compliance.
III. STOCK OPTIONS
All stock options granted to Participants under the Program shall be
evidenced by agreements which shall be subject to applicable provisions of the
Program:
A. PRICE: The option price per share shall be 100 percent of
the Fair Market Value of a share of Common Stock on the date of grant.
B. PERIOD: Any option granted under the Program shall be
exercisable for a term of ten years from date of its grant.
C. TIME OF EXERCISE: No option shall be exercisable until six
months following the date of grant.
D. EXERCISE PROCEDURES: A stock option, or portion thereof,
shall be exercised by delivery of a written notice of exercise to the
Company, and payment of the full price of the shares being purchased.
E. PAYMENT: The price of an exercised stock option, or portion
thereof, may be paid:
1. in cash or by check, bank draft or money order
payable to the order of the Company,
2. through the delivery of shares of Common Stock
owned by the Participant, having an aggregate Fair Market
Value as determined on the date of exercise equal to the
option price, or
3. by a combination of both 1 and 2 above.
The Secretary may impose such limitations and
prohibitions on the use of any shares of Common Stock to
exercise a stock option as it deems appropriate.
F. TERMINATION OF SERVICE: In the event of Termination of
Service, the following provisions shall apply:
1. Discharge for Cause: All outstanding options shall
be cancelled at termination.
4
<PAGE> 7
2. Termination Other Than for Cause: Options shall be
exercisable for a period equal to the lesser of five years or
the remaining option term.
IV. DIVIDEND UNITS
A. AWARDS OF DIVIDEND UNITS
1. One Dividend Unit shall be awarded to Participants in the Program
with respect to each share of Common Stock for which an option has been granted.
When a Participant receives an Award of Dividend Units, the Secretary shall
cause to be issued to such Participant a grant letter specifying the number of
Dividend Units granted and the applicable terms and conditions of the Award.
2. An Award of a Dividend Units shall be made only in conjunction with
a stock option for Common Stock granted to the Participant under this Program.
B. VALUATION
1. The amount payable to a Participant in respect of each Dividend Unit
awarded to such Participant shall be equal to the aggregate dividends actually
paid on one share of Common Stock to the extent that such Participant held such
Dividend Unit on the record date established by the Board for payment of each
such dividend. A Participant shall be deemed to have held a Dividend Unit from
the date on which the Award of such Dividend Unit was made (or such later date
as may be specified in the related grant letter) to and including the date on
which the term of the Dividend Unit expires.
2. The term of a Dividend Unit shall be the term of the stock option to
which it is attached. However, Dividend Units will accrue dividends only for the
first five years following grant.
C. PAYMENT
1. The amount payable to a Participant in respect of a Dividend Unit
shall be paid out by the Company to such Participant only upon the exercise of
the option to which it is attached.
2. Upon payment to a Participant in respect of a Dividend Unit such
Dividend Unit shall be of no further force or effect.
D. TERMINATION OF SERVICE
In the event of Termination of Service, any Dividend Unit shall remain
outstanding for the duration of the stock option to which it is attached until
paid upon exercise, but it shall terminate upon termination, cancellation or
expiration of such stock option.
5
<PAGE> 8
E. ACCELERATION OF PAYMENTS
In the event of a Change of Control, the Company shall, promptly after
such Change of Control, make payment to each Participant in an amount equal to
the aggregate amount accrued on the Dividend Units held by such Participant on
the date of such Change of Control. Notwithstanding anything to the contrary or
any grant letter, after such Change of Control and for so long as a Participant
holds any Dividend Unit and dividends are accrued thereon, the Company shall
make payment to the Participant in respect of any such Dividend Unit at the same
time as payment of dividends on Common Stock is made.
V. GENERAL PROVISIONS
A. AMENDMENT AND TERMINATION OF PROGRAM
The Board may, at any time and from time to time, suspend or terminate
the Program in whole. The Program may not be amended without shareholder
approval.
B. GOVERNMENT AND OTHER REGULATIONS
The obligation of the Company to issue Awards under the Program shall
be subject to all applicable laws, rules and regulations, and to such approvals
by any government agencies as may be required.
C. OTHER COMPENSATION PLANS AND PROGRAMS
The Program shall not be deemed to preclude the implementation by the
Company of other compensation plans or programs which may be in effect from time
to time.
D. MISCELLANEOUS PROVISIONS
1. Transferability: No right or interest of any Participant in any
Award under the Program shall be (a) assignable or transferable, except as
expressly stated herein, by will or the laws of descent and distribution or a
valid beneficiary designation made in accordance with procedures established by
the Secretary, or (b) liable for, or subject to, any lien, obligation or
liability.
The Board may, in its discretion, authorize all or a portion of the
options to be granted to a Participant, and may also amend outstanding options
to provide, that they be on terms which permit transfer by such Participant to
(i) the spouse, children or grandchildren of the Participant (the "Immediate
Family Members"), (ii) a trust or trusts for the exclusive benefit of such
Immediate Family Members, (iii) a partnership in which such Immediate Family
Members are the only partners, (iv) a limited liability company in which such
Immediate Family Members are the only members; provided that (x) there may be no
consideration for any such transfer, (y) the stock option agreement pursuant to
which such options are granted must be approved by the Board, and must expressly
provide for transferability in a manner consistent with this Section, and (z)
subsequent transfers of
6
<PAGE> 9
transferred options shall be prohibited except those in accordance with the
section(s) herein dealing with transfers by will or the laws of descent and
distribution, or pursuant to qualified domestic relations order. Following
transfer, any such options shall continue to be subject to the same terms and
conditions as were applicable immediately prior to transfer, provided that for
all purposes hereof, the term "Participant" shall be deemed to refer to the
"Transferee." The events of termination of any option will continue to be
applied with respect to the original Participant, following which the options
shall be exercisable by the transferee only to the extent (if at all), and for
the periods specified in the Program or option agreement. The Participant in all
such cases will remain subject to and liable for the withholding taxes due or
payable upon exercise by the Transferee.
The Board may also, in its discretion, pursuant to the requirements and
restrictions listed above except as listed in this paragraph, authorize all or a
portion of the options to be granted to a Participant, to permit a
non-conforming transfer, such as a sale to a family member or family corporation
for estate planning purposes. Nothing herein or in any action by the Board shall
be construed as an amendment to any option other than those expressly indicated
by the action of the Board.
The Company shall not have any obligation to provide notice to the
Transferee of the termination or acceleration of an option for any reason.
2. Designation of Beneficiary: A Participant, in accordance with
procedures established by the Secretary, may designate a person or persons to
receive, in the event of the Participant's death, (a) any payments with respect
to which the Participant would then be entitled, and (b) the right to continue
to participate in the Program to the extent of such Participant's outstanding
Awards. Such designation shall be made upon forms supplied by and delivered to
the Company and may be revoked in writing.
3. Withholding Taxes: The Company may require a payment from a
Participant to cover applicable withholding for income and employment taxes. The
Company reserves the right to offset such tax payment from any other funds which
may be due the Participant by the Company.
4. Program Expenses: Any expenses of administering the Program shall be
borne by the Company.
5. Construction of Program: The interpretation of the Program and the
application of any rules implemented hereunder shall be determined solely in
accordance with the laws of the State of Ohio.
6. Unfunded Program: The Program shall be unfunded, and the Company
shall not be required to segregate any assets which may at any time be
represented by Awards. Any liability of the Company to any person with respect
to an Award under this Program shall be based solely upon any obligations which
may be created by this Program; no such obligation of the Company shall be
7
<PAGE> 10
deemed to be secured by any pledge or other encumbrance on any property of the
Company.
7. Pronouns. Singular and Plural: The masculine may be read as
feminine, the singular as plural and the plural as singular as necessary to give
effect to the Program.
E. EFFECTIVE DATES
The Program became effective on approval by shareholders of the Company
at the Company's Annual Shareholders Meeting in April, 1992. The Program has
been amended effective January 1, 1997 to make certain non-material changes. The
Program has been further amended effective November 1, 1997 to amend the
provisions to allow for the transferability of options and to increase the
option shares awarded annually pursuant to the 2-for-1 stock split effective in
September 1997. The Program and all outstanding Awards shall remain in effect
until all outstanding awards have been exercised, expired or cancelled.
8
<PAGE> 1
Exhibit 10.5
FIRSTMERIT CORPORATION
1997 STOCK PLAN
AS AMENDED AND RESTATED EFFECTIVE NOVEMBER 1, 1997
<PAGE> 2
FIRSTMERIT CORPORATION
1997 STOCK PLAN
AS AMENDED AND RESTATED EFFECTIVE NOVEMBER 1, 1997
TABLE OF CONTENTS
I. INTRODUCTION .......................................................... 1
A. Purpose of the Plan .............................................. 1
B. Definitions ...................................................... 1
II. EMPLOYEES STOCK OPTION PROGRAM......................................... 5
A. Administration ................................................... 5
B. Participation .................................................... 5
C. Maximum Number of Shares Available ............................... 5
D. Adjustments ...................................................... 5
E. Registration Conditions .......................................... 6
F. Committee Action ................................................. 6
G. Stock Options..................................................... 6
H. Dividend Units.................................................... 9
I. Amendment and Termination......................................... 10
III. DIRECTORS STOCK OPTION PROGRAM ........................................ 10
A. Administration ................................................... 10
B. Participation .................................................... 10
C. Maximum Number of Shares Available ............................... 11
D. Adjustments ...................................................... 11
E. Registration Conditions .......................................... 11
F. Stock Options..................................................... 11
G. Dividend Units.................................................... 12
H. Amendment and Termination......................................... 13
IV. RESTRICTED STOCK PROGRAM .............................................. 14
A. Administration ................................................... 14
B. Participation .................................................... 14
C. Maximum Number of Shares Available ............................... 15
D. Awards ........................................................... 15
E. Restrictions ..................................................... 16
F. Enforcement of Restrictions....................................... 16
G. Privileges of Employee-Participant................................ 16
H. Non-Transferability............................................... 17
I. Withholding Taxes................................................. 17
i
<PAGE> 3
J. Lien on Shares.................................................... 17
K. Share Issuance and Transfer Restrictions.......................... 17
L. Acceleration on Change of Control................................. 18
M. Effective Date and Duration....................................... 19
N. Exclusivity....................................................... 19
O. Amendment and Termination......................................... 19
V. GENERAL PROVISIONS .................................................... 19
A. Government and Other Regulations ................................. 19
B. Other Compensation Plans and Programs ............................ 19
C. Miscellaneous Provisions ......................................... 20
D. Effective Date ................................................... 22
ii
<PAGE> 4
FIRSTMERIT CORPORATION
1997 STOCK PLAN
AS AMENDED AND RESTATED EFFECTIVE NOVEMBER 1, 1997
FIRSTMERIT CORPORATION (the "Company") adopted the 1997 Stock Plan
("Plan"), effective as of January 1, 1997, which Plan received shareholder
approval at the 1997 Annual Shareholders Meeting. The Board amended and
restated the Plan effective November 1, 1997 to make certain administrative
changes related to the 2-for-1 stock split in September 1997 and regarding the
transferability of options. The number of shares of Common Stock approved and
reserved under the Plan, subject to the actual shares available for grant under
the Plan, is 2,000,000 for the Employees Stock Option Program and the
Restricted Stock Program, and 200,000 for the Directors Stock Option Program.
The maximum number of shares of Common Stock which can be granted as part of
the 2,000,000 shares under the Restricted Stock Program is 500,000.
I. INTRODUCTION
A. PURPOSE OF THE PLAN
FirstMerit Corporation has established the Plan to further its
long-term financial success by creating the opportunity to key employees and
non-employee Directors of the Company and its Subsidiaries to receive stock and
stock-based compensation whereby they can share in achieving and sustaining
such success. The Plan also provides a means to attract and retain the
executive talent needed to achieve the Company's long-term growth and
profitability objectives.
B. DEFINITIONS
When used in the Plan, the following terms shall have the meanings set
forth below:
"Award(s)" shall mean Incentive Stock Options, Non-Qualified Stock
Options, Reload Stock Options, Restricted Stock Awards or Dividend Units
granted under the Plan.
"Award Agreement" shall mean an agreement which shall evidence the
particular terms, conditions, rights and duties of the Company and the
Participant with respect to an Award.
"Board" shall mean the Board of Directors of the Company.
"Change of Control" shall mean (a) the attainment of beneficial
ownership by any Person (as defined herein) of capital stock of the Company,
the voting power of which constitutes 30 percent or more of the voting power of
all of the Company's outstanding capital stock; or (b) a change in the
composition of a majority of the Board during any period of two (2) years or
less, provided that in determining such change, any Director whose election has
been approved in advance by at least two-thirds (2/3) of the Directors then in
office shall not be considered a new Director. No sale to underwriters or
private placement of capital stock by the Company, nor any acquisition by the
Company, through merger, purchase of assets or otherwise, effected in whole or
in part by issuance or reissuance of shares of its capital stock, shall
constitute a Change of Control.
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For purposes of determining a Change of Control under the Plan, the
following definitions shall be applicable:
1. The term "Person" shall mean any individual, corporation or other
entity.
2. Any Person shall be deemed to be the beneficial owner of any shares
of capital stock of the Company:
a. which that Person owns directly, whether or not of record,
b. which that Person has the right to acquire pursuant to any
agreement or understanding or upon exercise of conversion
rights, warrants or options, or otherwise,
c. which are beneficially owned, directly or indirectly
(including shares deemed owned through application of
Paragraph 2.b. above), by an "affiliate" or "associate"
(as defined in the rules of the Securities and Exchange
Commission) of that Person, or
d. which are beneficially owned, directly or indirectly
(including shares deemed owned through application of
Paragraph 2.b. above), by any other Person with which that
Person or his "affiliate" or "associate" has any
agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of capital stock
of the Company.
3. For purposes of determining whether a Person has acquired
beneficial ownership of 30 percent or more of the Company, the outstanding
shares of capital stock of the Company shall include shares deemed owned by
such Person through application of Paragraphs 2.b., 2.c. and 2.d. above, but
shall not include any other shares which may be issuable pursuant to any
agreement or upon exercise of conversion rights, warrants or options, or
otherwise, but which are not actually outstanding.
"Committee" shall mean the Compensation Committee of the Board, or
such other Committee of the Board which shall be designated by the Board to
administer the Plan. If the Board does not designate the Compensation Committee
as the Committee, the Committee will be composed of two (2) or more persons who
are from time to time appointed to serve by the Board. Each member of the
Committee will be a "non-employee director" within the meaning of Rule 16b-3 of
the Securities Exchange Act or any successor rule, as any such rule may be
amended from time to time and will qualify as an "outside director" within the
meaning of Code Section 162(m) ("Qualified Director"). A person may be
appointed to the Committee who does not qualify as a "non-employee director" if
the Committee adopts and follows a recusal procedure which qualifies under the
Section 16 Rules.
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<PAGE> 6
"Company" shall mean FirstMerit Corporation and any successor in a
reorganization or similar transaction.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Common Stock" shall mean the common stock of the Company, no par
value per share, and may be either stock previously authorized but unissued, or
stock reacquired by the Company.
"Director" shall mean a duly elected member of the Board.
"Directors Stock Option Program" shall mean the stock option program
delineated in Article III of this Plan.
"Director-Participant" shall mean a Director who is not also a
full-time employee of the Company or any of its Subsidiaries.
"Disability" shall mean the inability of an Employee-Participant to
perform the services normally rendered due to any physical or mental impairment
that can be expected to be of either permanent or indefinite duration, as
determined by the Committee on the basis of appropriate medical evidence, and
that results in the Employee-Participant's Termination of Employment; provided,
however, that with respect to any Employee-Participant who has entered into an
employment agreement with the Company or any of its Subsidiaries, the term of
which has not expired at the time a determination concerning Disability is to
be made, Disability shall have the meaning attributed to "permanent disability"
in such employment agreement.
"Employees Stock Option Program" shall mean the stock option program,
as delineated in Article II of this Plan.
"Employee-Participant" shall mean an officer or full-time salaried
employee (including a Director who is also a full-time employee) of the Company
or any of its Subsidiaries who, in the judgment of the Committee, is in a
position to make a substantial contribution to the management, growth and
success of the Company and is thus designated by the Committee to receive an
Award.
"Fair Market Value" shall mean with respect to a given day, the
closing sales price of a share of Common Stock, as reported by such responsible
reporting service as the Committee may select, or if there were no transactions
in the Common Stock on such day, then the last preceding day on which
transactions took place. The foregoing notwithstanding, the Committee may
determine the Fair Market Value in such other manner as it may deem more
appropriate for Plan purposes or as is required by applicable laws or
regulations.
"Incentive Stock Option" or "ISO" shall mean a right to purchase the
Company's Common Stock which is intended to comply with the terms and
conditions for an incentive stock option as set forth in Section 422 of the
Code, or such other sections of the Code as may be in effect from time to time.
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<PAGE> 7
"Non-Qualified Stock Option" or "NQSO" shall mean a right to purchase
the Company's Common Stock which is not intended to comply with the terms and
conditions for a tax-qualified stock option, as set forth in Section 422 of the
Code, or such other sections of the Code as may be in effect from time to time.
"Participant" shall mean an Employee-Participant or a
Director-Participant.
"Plan" shall mean the Company's 1997 Stock Plan, as set forth herein.
"Reload Stock Option" shall mean an option granted to an
Employee-Participant who has paid for shares subject to option through the
delivery of shares of Common Stock having an aggregate Fair Market Value as
determined on the date of exercise equal to the option price.
"Restricted Shares" shall mean those shares of Common Stock reserved
for issuance as Awards under the Restricted Stock Program, as further provided
in Article IV(D).
"Restricted Stock Program" shall mean the restricted stock program, as
delineated in Article IV of this Plan.
"Retirement" shall mean an Employee-Participant's Termination of
Employment by reason of retirement at his normal retirement date, pursuant to
and in accordance with a pension, retirement or similar plan or other regular
retirement practice of the Company or any of its Subsidiaries, or in accordance
with the early retirement provision(s) thereof.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Securities Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
"Subsidiaries" shall mean the majority-owned subsidiaries of the
Company.
"Termination of Employment" shall mean a cessation of the
employee-employer relationship between an Employee-Participant and the Company
or its Subsidiaries for any reason.
"Termination of Service" shall mean a cessation of the Director's
relationship with the Company for any reason.
4
<PAGE> 8
II. EMPLOYEES STOCK OPTION PROGRAM
A. ADMINISTRATION
The Employees Stock Option Program shall be administered by the
Committee, which, subject to the express provisions of the Employees Stock
Option Program, shall have full and exclusive authority to interpret the
Employees Stock Option Program, to prescribe, amend and rescind rules and
regulations relating to the Employees Stock Option Program and to make all
other determinations deemed necessary or advisable in the implementation and
administration of the Employees Stock Option Program; provided, however, that
subject to the express provisions hereof or unless required by applicable law
or regulation, no action of the Committee shall adversely affect the terms and
conditions of any Award made to, or any rights hereunder or under any Award
Agreement of, any Employee-Participant, without such Employee-Participant's
consent. The Committee's interpretation and construction of the Employees Stock
Option Program shall be conclusive and binding on all persons, including the
Company and all Employee-Participants.
B. PARTICIPATION
The Committee shall, from time to time, make recommendations to the
Board with respect to the selection of Employee-Participants and the Award or
Awards to be granted to each Employee- Participant, and thereafter grant such
Award or Awards upon the approval of a majority of the members of the Board
present and voting upon such approval, who are Qualified Directors. In making
its recommendations, the Committee may take into account the nature of the
services rendered or expected to be rendered by the respective
Employee-Participants, their present and potential contributions to the
Company's success, and such other factors as the Committee in its discretion
shall deem relevant.
C. MAXIMUM NUMBER OF SHARES AVAILABLE
The maximum number of shares which may be granted under the Employees
Stock Option Program is one million (1,000,000) shares, less shares granted
under the Restricted Stock Program.
No Incentive Stock Options shall be granted after January 1, 2007, or
such other period required under the Code.
D. ADJUSTMENTS
In the event of stock dividends, stock splits, recapitalizations,
mergers, consolidations, combinations, exchanges of shares, spin-offs,
liquidations, reclassifications or other similar changes in the capitalization
of the Company, the number of shares of Common Stock available for grant under
this Employees Stock Option Program shall be adjusted proportionately or
otherwise by the Board and, where deemed appropriate, the number of shares
covered by outstanding stock options and the option price of outstanding stock
options shall be similarly adjusted. Also, in instances where another
corporation or other business entity is acquired by the Company, and the
Company has
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assumed outstanding employee option grants under a prior existing plan of the
acquired entity, similar adjustments are permitted at the discretion of the
Committee. In the event of any other change affecting the Common Stock reserved
under the Employees Stock Option Program, such adjustment, if any, as may be
deemed equitable by the Board, shall be made to give proper effect to such
event.
E. REGISTRATION CONDITIONS
Unless issued pursuant to a registration statement under the
Securities Act, no shares shall be issued to an Employee-Participant under the
Employees Stock Option Program unless the Employee-Participant represents to
and agrees with the Company that such shares are being acquired for investment
and not with a view to the resale or distribution thereof, or such other
documentation as may be required by the Company unless, in the opinion of
counsel to the Company, such representation, agreement or documentation is not
necessary to comply with the Securities Act.
Any restriction on the resale of shares shall be evidenced by an
appropriate legend on the stock certificate.
The Company shall not be obligated to deliver any Common Stock until
it has been listed on each securities exchange on which the Common Stock may
then be listed or until there has been qualification under or compliance with
such federal or state laws, rules or regulations as the Company may deem
applicable. The Company shall use reasonable efforts to obtain such listing,
qualification and compliance.
F. COMMITTEE ACTION
The Committee may, through Award Agreements, limit its discretion
under this Employees Stock Option Program. To the extent such discretion is not
specifically waived in an Award Agreement, the Committee shall retain such
discretion.
G. STOCK OPTIONS
All stock options granted to Employee-Participants under the Employees
Stock Option Program shall be evidenced by Award Agreements which shall be
subject to applicable provisions of the Employees Stock Option Program, and
such other provisions as the Committee may adopt, including the following
provisions:
1. PRICE. The option price per share of Non-Qualified Stock
Options ("NQSOs") shall be set by the Committee at the time
of grant. The option price per share of Incentive Stock
Options ("ISOs") shall not be less than 100 percent of the
Fair Market Value of a share of Common Stock on the date of
grant. If a NQSO is to meet the requirements of Section
162(m) of the Code, it shall be issued at Fair Market Value.
2. PERIOD. An ISO shall not be exercisable for a term longer
than ten (10) years from date of grant. NQSOs shall have a
term as established by the Committee.
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3. TIME OF EXERCISE. The Committee may prescribe the timing of
the exercise of the stock option and any minimums and
installment provisions and may accelerate the time at which a
stock option becomes exercisable, provided that with respect
to ISOs, no such acceleration shall result in a violation of
Section 6 of this Paragraph G.
4. EXERCISE PROCEDURES. A stock option, or portion thereof, shall
be exercised by delivery of a written notice of exercise to
the Company and payment of the full price of the shares being
purchased.
5. PAYMENT. The price of an exercised stock option, or portion
thereof, may be paid pursuant to Paragraph V.C.11.
6. SPECIAL RULE FOR INCENTIVE STOCK OPTIONS. If the aggregate
Fair Market Value of Common Stock with respect to which ISOs
are exercisable for the first time by an Employee-Participant
during any calendar year (under this Employees Stock Option
Program and all other plans of the Company and its
Subsidiaries) exceeds One Hundred Thousand Dollars ($100,000),
such ISOs shall be treated as NQSOs to the extent of the
excess. In applying the foregoing limitation, ISOs shall be
taken into account in the order in which they were granted,
and the Fair Market Value of Common Stock subject to such ISOs
shall be determined as of the date of grant. If such limit is
exceeded in any calendar year, the Company shall have the
right to designate which shares of Common Stock purchased
pursuant to such ISOs shall be treated as having been acquired
by the Employee-Participant pursuant to an ISO.
7. RELOAD STOCK OPTIONS. A Reload Stock Option may be granted by
the Committee in an Award Agreement. If a reload option is
granted and a stock option is exercised while the
Employee-Participant is employed by the Company and the
Employee- Participant pays for the shares subject to option
through the delivery of Common Stock having an aggregate Fair
Market Value as determined on the date of exercise equal to
the option price, the Employee-Participant will be granted a
Reload Stock Option on the date of such exercise. The Award
shall equal the number of whole shares of Common Stock used to
pay the purchase price, and the exercise price of the Reload
Stock Option shall equal the Fair Market Value of the Common
Stock on the date of grant. If the Company withholds shares of
Common Stock to cover applicable income and employment taxes
related to the exercise of an option, then the Award shall
equal the number of whole shares of Common Stock used to pay
the purchase price less the number of shares withheld.
Subject to the provisions of the Employees Stock Option
Program, the Reload Stock Option may be exercised between its
date of grant and the date of expiration of an option. Shares
of stock acquired upon the exercise of a Reload Stock Option
are restricted from sale for two years. A Reload Stock Option
shall be evidenced by an Award Agreement containing such other
terms and conditions as the Committee approves. No Reload
Stock Option shall be granted with respect to a stock option
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<PAGE> 11
exercised after the Employee-Participant's Retirement,
Disability, death or other Termination of Employment. No
Dividend Units shall be granted in connection with a Reload
Stock Option.
8. EFFECT OF LEAVES OF ABSENCE. It shall not be considered a
Termination of Employment when an Employee-Participant is
placed by the Company or any of its Subsidiaries on military
leave, sick leave or other bona fide leave of absence. In case
of such leave of absence, the employment relationship for
Employees Stock Option Program purposes shall be continued
until the later of the date when such leave of absence equals
ninety (90) days or when the Employee-Participant's right to
reemployment with the Company or any of its Subsidiaries shall
no longer be guaranteed either by statute or contract.
9. TERMINATION OF EMPLOYMENT. In the event of Termination of
Employment, the following provisions shall apply with respect
to ISOs and NQSOs unless waived by the Committee, or as
otherwise specifically provided in the Award Agreement.
a. TERMINATION DUE TO DEATH, DISABILITY OR RETIREMENT.
NQSOs and ISOs shall be exercisable for a period
equal to the lesser of five (5) years or the
remaining option term; provided, however, that if the
Employee-Participant elects to exercise his ISOs (i)
later than three (3) months after the date of his
Termination of Employment due to Retirement or (ii)
twelve (12) months after the date of his Termination
of Employment due to Disability, such ISOs shall be
treated as NQSOs under the Code for purposes of
calculating the federal income tax applicable as a
result of the exercise of such ISOs and the
subsequent disposition of the acquired shares.
b. OTHER TERMINATION. If an Employee-Participant's
employment with the Company or any of its
Subsidiaries is terminated for any reason other than
death, Disability or Retirement, all Awards under
this Employees Stock Option Program shall be
immediately canceled, except that if the termination
is by the Company or any of its Subsidiaries or for
any reason other than misconduct or misfeasance, the
Employee-Participant shall have thirty (30) days
thereafter within which to exercise his options to
the extent that the options are otherwise exercisable
immediately prior to such termination; and further,
if such termination is attributable to a Change of
Control, such Award shall not be canceled but shall
continue as though the Employee-Participant remained
in the employ of the Company or any of its
Subsidiaries during the remaining option term of the
Award.
c. LIMITATIONS ON EXERCISE. Notwithstanding the
foregoing, the Committee may rescind the right to
exercise stock options following Termination of
Employment if the Employee-Participant has been found
to be directly or indirectly engaged in any activity
which is in competition with the Company
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or any of its Subsidiaries or is otherwise adverse
to, or not in the best interest of, the Company or
any of its Subsidiaries. Further, no option agreement
for ISOs may extend their exercise period beyond the
time allowed by the Code.
H. DIVIDEND UNITS
1. AWARDS OF DIVIDEND UNITS
a. The Committee may, at its discretion, award to an
Employee-Participant one (1) Dividend Unit with
respect to each share of Common Stock for which an
option has been granted under the Employees Stock
Option Program. No Dividend Units shall be awarded
in connection with a Reload Stock Option.
b. An Award of a Dividend Unit by the Committee may be
made only in conjunction with a stock option for
Common Stock granted to the Employee-Participant
under the Employees Stock Option Program.
2. VALUATION
a. The amount payable to an Employee-Participant in
respect of each Dividend Unit awarded to such
Employee-Participant shall be equal to the aggregate
dividends actually paid on one (1) share of Common
Stock to the extent that such Employee-Participant
held such Dividend Unit on the record date
established by the Board for payment of each such
dividend. An Employee-Participant shall be deemed to
have held a Dividend Unit from the date on which the
Award of such Dividend Unit was made (or such later
date as may be specified in the related Award
Agreement) to and including the date on which the
term of the Dividend Unit expires.
b. The Committee shall, at the time it awards a
Dividend Unit to an Employee-Participant, specify
the term of the Dividend Unit (which term shall not
be longer than the term of the stock option to which
it is attached) and the period of time during the
term over which the Dividend Unit will accrue
dividends.
3. PAYMENT
a. The amount payable to an Employee-Participant in
respect of a Dividend Unit shall be paid out by the
Company to such Employee-Participant only at the
date of exercise of the stock option to which the
Dividend Unit is attached. The Dividend Unit shall
expire upon the expiration of any stock option which
has not been exercised.
b. Upon payment to an Employee-Participant in respect
of a Dividend Unit, such Dividend Unit shall be of
no further force or effect.
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4. TERMINATION OF EMPLOYMENT. In the event of Termination of
Employment, any Dividend Unit shall remain outstanding for
the duration of the stock option to which it is attached
until paid upon exercise or until termination or expiration
of such stock option.
5. ACCELERATION OF PAYMENTS. Unless the Committee determines
otherwise, in the event of a Change of Control, the Company
shall, promptly after such Change of Control, make payment to
each Employee-Participant in an amount equal to the aggregate
amount accrued on the Dividend Units held by such
Employee-Participant on the date of such Change of Control.
Notwithstanding anything to the contrary or any Award
Agreement, after such Change of Control and for so long as an
Employee-Participant holds any Dividend Unit and dividends are
accrued thereon, the Company shall make payment to the
Employee-Participant in respect of any such Dividend Unit at
the same time as payment of dividends on Common Stock is made.
I. AMENDMENT AND TERMINATION
The Board may, at any time and from time to time, suspend or terminate
the Employees Stock Option Program in whole or amend it from time to time in
such respects as the Board may deem appropriate, subject, however, to the
regulatory requirements of Section 16(b) of the Securities Exchange Act and the
requirements of the Code.
III. DIRECTORS STOCK OPTION PROGRAM
A. ADMINISTRATION
The Directors Stock Option Program is a self-executing grant program
which shall be administered by the Secretary of the Company. Subject to the
express provisions of the Directors Stock Option Program, the Secretary shall
have full and exclusive authority to interpret the Directors Stock Option
Program, and to make such determinations deemed necessary or advisable in the
implementation and administration of the Directors Stock Option Program;
provided, however, that subject to the express provisions hereof or unless
required by applicable law or regulation, no action of the Secretary shall
adversely affect the terms and conditions of any Award made to, or any rights
hereunder or under any Award Agreement of, any Director-Participant without
such Director-Participant's consent.
B. PARTICIPATION
All Directors who are not also full-time employees of the Company or a
Subsidiary shall be Director-Participants in the Directors Stock Option Program
and shall be awarded options to purchase one thousand two hundred (1,200)
shares each year on the date following the annual shareholders meeting.
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C. MAXIMUM NUMBER OF SHARES AVAILABLE
The maximum number of shares which may be granted under this Directors
Stock Option Program is one hundred thousand (100,000) shares.
D. ADJUSTMENTS
In the event of stock dividends, stock splits, recapitalizations,
mergers, consolidations, combinations, exchanges of shares, spin-offs,
liquidations, reclassifications or other similar changes in the capitalization
of the Company, the number of shares of Common Stock available for grant under
this Directors Stock Option Program shall be adjusted proportionately.
E. REGISTRATION CONDITIONS
Unless issued pursuant to a registration statement under the
Securities Act, no shares shall be issued to a Director-Participant under the
Directors Stock Option Program unless the Director-Participant represents to
and agrees with the Company that such shares are being acquired for investment
and not with a view to the resale or distribution thereof, or such other
documentation as may be required by the Company unless, in the opinion of
counsel to the Company, such representation, agreement or documentation is not
necessary to comply with the Securities Act.
Any restriction on the resale of shares shall be evidenced by an
appropriate legend on the stock certificate.
The Company shall not be obligated to deliver any Common Stock until
it has been listed on each securities exchange on which the Common Stock may
then be listed or until there has been qualification under or compliance with
such federal or state laws, rules or regulations as the Company may deem
applicable. The Company shall use reasonable efforts to obtain such listing,
qualification and compliance.
F. STOCK OPTIONS
All stock options granted to Director-Participants under the Directors
Stock Option Program shall be evidenced by Award Agreements which shall be
subject to applicable provisions of the Directors Stock Option Program,
including the following provisions:
1. PRICE. The option price per share shall be 100 percent of the
Fair Market Value of a share of Common Stock on the date of
grant.
2. PERIOD. Any option granted under the Directors Stock Option
Program shall be exercisable for a term of ten (10) years
from the date of grant.
3. TIME OF EXERCISE. Will be established by the Committee.
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4. EXERCISE PROCEDURES. A stock option, or portion thereof,
shall be exercised by delivery of a written notice of
exercise to the Company and payment of the full price of the
shares being purchased.
5. PAYMENT. The price of an exercised stock option, or portion
thereof, may be paid pursuant to Paragraph V.C.11.
6. TERMINATION OF SERVICE. In the event of Termination of
Service, the following provisions shall apply:
a. DISCHARGE FOR CAUSE. All outstanding options shall be
canceled at termination.
b. TERMINATION OTHER THAN FOR CAUSE. Options shall be
exercisable for a period equal to the lesser of five
(5) years or the remaining option term.
G. DIVIDEND UNITS
1. AWARDS OF DIVIDEND UNITS
a. One (1) Dividend Unit shall be awarded to a
Director-Participant with respect to each share of
Common Stock for which an option has been granted
under the Directors Stock Option Program. When a
Director-Participant receives an Award of Dividend
Units, the Secretary shall cause to be issued to
such Director-Participant an Award Agreement
specifying the number of Dividend Units granted and
the applicable terms and conditions of the Award.
b. An Award of a Dividend Unit shall be made only in
conjunction with a stock option for Common Stock
granted to the Director-Participant under this
Directors Stock Option Program.
2. VALUATION
a. The amount payable to a Director-Participant in
respect of each Dividend Unit awarded to such
Director-Participant shall be equal to the aggregate
dividends actually paid on one share of Common Stock
to the extent that such Director-Participant held
such Dividend Unit on the record date established by
the Board for payment of each such dividend. A
Director-Participant shall be deemed to have held a
Dividend Unit from the date on which the Award of
such Dividend Unit was made (or such later date as
may be specified in the related grant letter) to and
including the date on which the term of the Dividend
Unit expires.
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b. The term of a Dividend Unit shall be the term of the
stock option to which it is attached. However,
Dividend Units will accrue dividends only for the
first five (5) years following grant.
3. PAYMENT
a. The amount payable to a Director-Participant in
respect of a Dividend Unit shall be paid out by the
Company to such Director-Participant only upon the
exercise of the option to which it is attached.
b. Upon payment to a Director-Participant in respect of
a Dividend Unit, such Dividend Unit shall be of no
further force or effect.
4. TERMINATION OF SERVICE. In the event of Termination of
Service, any Dividend Unit shall remain outstanding for the
duration of the stock option to which it is attached until
paid upon exercise, but it shall terminate upon termination,
cancellation or expiration of such stock option.
5. ACCELERATION OF PAYMENTS. In the event of a Change of Control,
the Company shall, promptly after such Change of Control, make
payment to each Director-Participant in an amount equal to the
aggregate amount accrued on the Dividend Units held by such
Director-Participant on the date of such Change of Control.
Notwithstanding anything to the contrary or any Award
Agreement, after such Change of Control and for so long as a
Director-Participant holds any Dividend Unit and dividends are
accrued thereon, the Company shall make payment to the
Director-Participant in respect of any such Dividend Unit at
the same time as payment of dividends on Common Stock is made.
H. AMENDMENT AND TERMINATION
The Board may, at any time and from time to time, amend, suspend or
terminate the Directors Stock Option Program, subject to the applicable
requirements and restrictions of the Code and securities laws. The Directors
Stock Option Program may not be materially amended without shareholder
approval.
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IV. RESTRICTED STOCK PROGRAM
A. ADMINISTRATION
The Restricted Stock Program shall be administered by the Committee. A
majority of members of the Committee shall constitute a quorum, and all
determinations of the Committee shall be made by a majority of its members. Any
determination of the Committee under the Restricted Stock Program may be made
without notice or meeting, by a writing signed by a majority of the Committee
members.
In accordance with and subject to the provisions of the Restricted
Stock Program, the Committee shall, from time to time, recommend to the Board:
1. the Employee-Participants from those employees meeting the
eligibility criteria described in Paragraph B,
2. the number of shares to be subject to each Award,
3. the time at which Awards are made,
4. the duration and nature of Award restrictions,
5. fix such other provisions of the Awards as may be deemed
necessary or desirable, consistent with the terms of the
Restricted Stock Program, and
6. the form or forms of the Award Agreements with
Employee-Participants.
The Committee shall have the authority, subject to the provisions of
the Restricted Stock Program, to establish, adopt and revise such rules and
regulations relating to the Restricted Stock Program as it may deem necessary
or desirable for the administration of the Restricted Stock Program. Each
determination, interpretation or other action made or taken by the Committee
pursuant to the provisions of the Restricted Stock Program shall be conclusive
and binding for all purposes and on all persons, including without limitation
the Company, the stockholders of the Company, the Committee and each of the
members thereof, the Board, officers and employees of the Company and the
Employee-Participants and their respective successors in interest.
B. PARTICIPATION
Employee-Participants shall be such key employees (including officers)
of the Company and any present or future Subsidiary as the Committee, in its
sole discretion, determines to be mainly responsible for the success and future
growth and profitability of the Company and value to its stockholders and whom
the Committee may designate from time to time to receive Awards under the
Restricted Stock Program. Awards may be granted under this Restricted Stock
Program to persons who have previously received Awards or other benefits under
this or other plans of the Company.
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<PAGE> 18
The Committee shall, from time to time, make recommendations to the
Board with respect to the selection of Employee-Participants and the Award or
Awards to be granted to each Employee-Participant, and thereafter grant such
Award or Awards upon the approval of a majority of the members of the Board
present and voting upon such approval, who are Qualified Directors. In making
its recommendations, the Committee may take into account the nature of the
services rendered or expected to be rendered by the respective
Employee-Participants, their present and potential contributions to the
Company's success, and such other factors as the Committee in its discretion
shall deem relevant.
C. MAXIMUM NUMBER OF SHARES AVAILABLE
The maximum number of shares which may be granted under the Restricted
Stock Program is two hundred fifty thousand (250,000) shares, which may be
authorized but unissued or treasury shares.
Any shares subject to Awards may thereafter be subject to new Awards
under this Restricted Stock Option Program if shares of Common Stock are issued
under such Awards and are thereafter reacquired by the Company pursuant to
rights reserved by the Company upon issuance thereof, including, without
limitation, the forfeiture of shares subject to an Award prior to the lapse of
restrictions.
If the Company shall at any time change the number of issued shares of
Common Stock without new considerations to the Company (by stock dividends,
stock splits or similar transactions), the total number of shares reserved for
issuance under the Restricted Stock Option Program shall be adjusted
proportionately. Awards may also contain provisions for their continuation or
for other equitable adjustments after changes in the Common Stock resulting
from reorganization, sale, merger, consolidation or similar circumstances.
D. AWARDS
Awards may consist of grants of Restricted Shares to
Employee-Participants as a bonus for service rendered to the Company without
other payment therefor or for payment at less than Fair Market Value. In
addition to the restrictions described in Paragraph E, any Award under the
Restricted Stock Option Program may be subject to such other provisions
(whether or not applicable to an Award to any other Employee-Participant) as
the Committee deems appropriate, including, without limitation, provisions for
the forfeiture of and restrictions on the sale, resale or other disposition of
shares acquired under any Award, provisions giving the Company the right to
repurchase shares acquired under any Award, provisions to comply with federal
and state securities laws, or understandings or conditions as to the
Employee-Participant's employment in addition to those specifically provided
for under the Restricted Stock Option Program.
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E. RESTRICTIONS
An Employee-Participant shall not have a right to retain any
Restricted Shares granted under an Award unless and until such restrictions
have by their terms lapsed. The lapsing of such restrictions is referred to
herein as vesting, and the shares after Vesting has occurred are referred to
herein as vested shares. The restrictions which the Committee may place on the
Awards include, without limitation, the Employee-Participant's continued
employment with the Company for certain periods of time as determined by the
Committee and the attainment of various performance goals by the
Employee-Participant and/or the Company as specified by the Committee with
respect to such Award. The Committee may, in its sole discretion, require
different periods of employment or different performance goals with respect to
different Employee-Participants, with respect to different Awards or with
respect to separate, designated portions of an Award. The Committee may, in its
sole discretion, terminate restrictions on shares issued pursuant to an Award
prior to the time such restrictions otherwise would have lapsed. Any Restricted
Shares granted under an Award which have not become Vested Shares on or before
the termination date, if any, set forth in the Award Agreement shall
permanently be forfeited, and shall thereafter become available for reissuance
under the Plan.
F. ENFORCEMENT OF RESTRICTIONS
The Committee, in its sole discretion, may employ one or more methods
of enforcing the restrictions referred to in Paragraphs E, G, H and J
including, without limitation, the following:
1. placing a legend on the stock certificates referring to the
restrictions,
2. requiring the Employee-Participant to keep stock
certificates, duly endorsed, in the custody of the Company or
its designated agent while the restrictions remain in effect,
3. not issuing certificates for Restricted Shares until the
shares become Vested Shares, or
4. retaining a possessory lien in the Award Shares as provided in
Paragraph J below.
G. PRIVILEGES OF EMPLOYEE-PARTICIPANT
Restricted Shares shall constitute issued and outstanding shares of
the Company for all corporate purposes, and the Employee-Participant shall have
all voting and (subject to any Award restrictions) all dividend, liquidation
and other rights with respect to Restricted Shares while the corresponding
Award remains in effect, as if such Employee-Participant were a holder of
record of unrestricted shares of Common Stock. Notwithstanding the foregoing,
prior to the time at which a Restricted Share becomes a Vested Share, the
Employee-Participant's right to assign or transfer such Restricted Share shall
be subject to the limitations of Paragraph H. Certificates representing
Restricted Shares shall bear a restrictive legend disclosing the restrictions,
the existence of the Restricted Stock Option Program and the existence of the
applicable Award.
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H. NON-TRANSFERABILITY
No right or interest of any Employee-Participant in any Award made
pursuant to the Restricted Stock Option Program shall, prior to the
satisfaction of all restrictions applicable thereto, be assignable or
transferable, in whole or in part, during the lifetime of the
Employee-Participant, either voluntarily or involuntarily, or be made subject
to any lien (except as provided in Paragraphs F and J), directly or indirectly,
by operation of law or otherwise, including execution, levy, garnishment,
attachment, pledge or bankruptcy. In the event of an Employee-Participant's
death, his right and interest in any Award shall, to the extent provided in the
Award, be transferable by testamentary will or the laws of descent and
distribution, and the issuance of any shares subject to an Award shall be made
to the Employee-Participant's legal representatives, heirs or legatees upon
furnishing the Committee with evidence satisfactory to the Committee of such
status.
I. WITHHOLDING TAXES
The Company is entitled to withhold and deduct or take such other
action as delineated in Section V.C.4.
J. LIEN ON SHARES
The Company may, in its sole discretion, require that an
Employee-Participant, as a condition to the receipt of an Award, grant to the
Company a possessory lien on the Restricted Shares in order to secure
retransfer of the shares into the name of the Company, and ensure adequate
provision for any tax withholding obligations arising with respect to such
Award, and to that end, may require that certificates evidencing Restricted
Shares be deposited by the Employee-Participant with the Company, together with
stock powers or other instruments of assignment, each endorsed in blank, which
will permit the transfer to the Company of all or any portion of the Restricted
Shares which are forfeited or required to be retained to satisfy the
Employee-Participant's withholding obligations to the Company.
K. SHARE ISSUANCE AND TRANSFER RESTRICTIONS
1. SHARE ISSUANCE. Notwithstanding any other provision of the
Restricted Stock Program or any Award Agreement entered into
pursuant hereto, the Company shall not be required to issue
or deliver any certificate for shares under this Restricted
Stock Program unless and until both of the following are
satisfied:
a. either:
i. there shall be in effect with respect to
such shares a registration statement under
the Securities Act and any applicable state
securities laws, if the Committee, in its
sole discretion, shall have determined to
file, cause to become effective and
maintain the effectiveness of such
registration statement, or
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ii. if the Committee has determined not to so
register the shares, exemptions from
registration under the Securities Act and
applicable state securities laws shall be
available for such issuance as determined by
counsel for the Company, and there shall
have been received from the
Employee-Participant (or in the event of
death or Disability, the
Employee-Participant's heir(s) or legal
representative(s)) any representations or
agreements requested by the Company in order
to permit such issuance to be made pursuant
to such exemptions, and
b. there shall have been obtained any other consent,
approval or permit from any state or federal
government agency which the Committee shall, in its
sole discretion and upon the advice of counsel, deem
necessary or advisable.
2. TRANSFERS OF VESTED SHARES. Vested Shares may not be sold,
assigned, transferred, pledged, encumbered or otherwise
disposed of (whether voluntarily or involuntarily) except
pursuant to registration under the Securities Act and
applicable state securities laws or pursuant to exemptions
from such registrations. The Company may condition the sale,
assignment, transfer, pledge, encumbrance or other disposition
of such shares not issued pursuant to an effective and current
registration statement under the Securities Act and all
applicable state securities laws, on the receipt from the
party to whom the shares are to be so transferred of any
representations or agreements requested by the Company in
order to permit such transfer to be made.
3. LEGENDS. Unless a registration under the Securities Act is in
effect with respect to the issuance or transfer of Vested
Shares, each certificate representing such shares will be
endorsed with a legend in the form determined necessary by
the Committee or its counsel.
L. ACCELERATION ON CHANGE OF CONTROL
The Committee may provide, in its sole discretion, in one or more
Awards, that notwithstanding the provisions of each Award which would result in
a forfeiture as a result of the Employee-Participant's termination of
employment with the Company prior to the Vesting of Restricted Shares, the
Restricted Shares subject to such Award shall immediately become Vested Shares
as a result of a Change of Control. Notwithstanding anything to the contrary in
the Restricted Stock Option Program, unless expressly provided to the contrary
in the Award Agreement, if Restricted Shares experience an acceleration in
Vesting on a Change of Control as permitted by the preceding sentence, the
portion of the Restricted Shares which experience such acceleration will be
limited to that number which will not cause or contribute to an "excess
parachute payment" with respect to the Employee-Participant, as reasonably
determined by the Committee in accordance with Section 280G of the Code.
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<PAGE> 22
M. EFFECTIVE DATE AND DURATION
The Restricted Stock Option Program shall continue in effect until it
is terminated by action of the Board, but such termination shall not affect the
then outstanding terms of any Award. No Award shall be granted more than ten
(10) years after the date of adoption of the Restricted Stock Option Program;
provided, however, that the terms and conditions applicable to any Award
granted within such period may thereafter be amended or modified by mutual
agreement between the Company and the Employee-Participant or such other
persons as may then have an interest therein. Also, by mutual agreement between
the Company and an Employee-Participant, or under any future plan of the
Company, Awards may be granted to such Employee-Participant in substitution and
exchange for, and in cancellation of, any Awards previously granted such
Employee-Participant under this Restricted Stock Option Program, or any benefit
previously or thereafter granted to him under any future plan of the Company.
N. EXCLUSIVITY
Nothing contained in this Restricted Stock Option Program is intended
to amend, modify or rescind any previously approved compensation plans or
programs adopted by the Company. The Restricted Stock Option Program will be
construed to be in addition to any and all such other plans or programs.
O. AMENDMENT AND TERMINATION
The Board may amend the Restricted Stock Option Program from time to
time or terminate the Restricted Stock Option Program at any time. In addition,
the Company may amend the terms of any Award previously granted under this
Restricted Stock Option Program, prospectively or retroactively, however, no
action authorized by this Paragraph O shall impair the rights of any
Employee-Participant without his consent.
V. GENERAL PROVISIONS
A. GOVERNMENT AND OTHER REGULATIONS
The obligation of the Company to issue Awards under the Plan shall be
subject to all applicable laws, rules and regulations, and to such approvals by
any government agencies as may be required.
B. OTHER COMPENSATION PLANS AND PROGRAMS
The Plan shall not be deemed to preclude the implementation by the
Company and its Subsidiaries of other compensation plans or programs which may
be in effect from time to time.
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<PAGE> 23
C. MISCELLANEOUS PROVISIONS
1. NO RIGHT TO CONTINUE EMPLOYMENT. Nothing in the Plan or in any
Award or Award Agreement confers upon any Employee-Participant the right to
continue in the employ of the Company or its Subsidiaries or interferes with or
restricts in any way the rights of the Company or its Subsidiaries to discharge
any Employee-Participant at any time for any reason whatsoever, with or without
cause.
2. NON-TRANSFERABILITY. No right or interest of any Participant in any
Award under the Plan shall be (a) assignable or transferable, except by will or
the laws of descent and distribution, a valid beneficiary designation made in
accordance with procedures established by the Committee, or as expressly stated
herein, or (b) liable for, or subject to, any lien, obligation or liability. An
ISO may be exercised only by the Participant during his lifetime, by his estate
or by the person who acquires the right to exercise such option by bequest or
inheritance.
The Board may, in its discretion, authorize all or a portion of the
options to be granted to a Participant, and may also amend outstanding options
to provide, that they be on terms which permit transfer by such Participant to
(i) the spouse, children or grandchildren of the Participant (the "Immediate
Family Members"), (ii) a trust or trusts for the exclusive benefit of such
Immediate Family Members, (iii) a partnership in which such Immediate Family
Members are the only partners, (iv) a limited liability company in which such
Immediate Family Members are the only members; provided that (x) there may be
no consideration for any such transfer, (y) the stock option agreement pursuant
to which such options are granted must be approved by the Board, and must
expressly provide for transferability in a manner consistent with this Section,
and (z) subsequent transfers of transferred options shall be prohibited except
those in accordance with the section(s) herein dealing with transfers by will
or the laws of descent and distribution, or pursuant to qualified domestic
relations order. Following transfer, any such options shall continue to be
subject to the same terms and conditions as were applicable immediately prior
to transfer, provided that for all purposes hereof, the term "Participant"
shall be deemed to refer to the "Transferee." The events of termination of any
option will continue to be applied with respect to the original Participant,
following which the options shall be exercisable by the transferee only to the
extent (if at all), and for the periods specified in the Program or option
agreement. The Participant in all such cases will remain subject to and liable
for the withholding taxes due or payable upon exercise by the Transferee.
The Board may also, in its discretion, pursuant to the requirements
and restrictions listed above except as listed in this paragraph, authorize all
or a portion of the options to be granted to a Participant, to permit a
non-conforming transfer, such as a sale to a family member or family
corporation for estate planning purposes. Nothing herein or in any action by
the Board shall be construed as an amendment to any option other than those
expressly indicated by the action of the Board.
The Company shall not have any obligation to provide notice to the
Transferee of the termination or acceleration of an option for any reason.
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<PAGE> 24
3. DESIGNATION OF BENEFICIARY. A Participant, in accordance with
procedures established by the Committee, may designate a person or persons to
receive, in the event of the Participant's death, (a) any payments with respect
to which the Participant would then be entitled, and (b) the right to continue
to participate in the Plan to the extent of such Participant's outstanding
Awards. Such designation shall be made upon forms supplied by and delivered to
the Company and may be revoked in writing.
4. WITHHOLDING TAXES.
The Company's obligation to deliver shares of Common Stock or cash
upon the exercise of stock options granted will be subject to the satisfaction
of all applicable federal, state and local income tax and employment tax
withholding requirements. The Committee (or plan administrator) may, in its
discretion and in accordance with any applicable tax or securities laws
(including the applicable safe-harbor provisions of Securities and Exchange
Commission Rule 16b-3), provide any or all holders of a NQSOs (other than the
automatic grants made pursuant to Directors Stock Option Program) or unvested
shares under the Plan, with the right to use shares of the Company's Common
Stock in satisfaction of all or part of the federal, state and local income tax
and employment tax liabilities incurred by such holders in connection with the
exercise of their options or the vesting of their shares (the "Taxes"). Such
right may be provided to any such option holder in either or both of the
following formats:
(a) Stock Withholding: The holder of the NQSO or unvested
shares may be provided with the election to have the Company withhold,
from the shares of Common Stock otherwise issuable upon the exercise
of such NQSO or the vesting of such shares, a portion of those shares
with an aggregate fair market value not to exceed one hundred percent
(100%) of the applicable Taxes.
(b) Stock Delivery: Provide the holder of the NQSO or the
unvested shares with the election to deliver to the Company, at the
time the NQSO is exercised or the shares vest, one or more shares of
Common Stock previously acquired by such individual (other than in
connection with the option exercise or share vesting triggering the
Taxes) with an aggregate fair market value equal to the designated
percentage (up to 100% as specified by the option holder) of the Taxes
incurred in connection with such option exercise or share vesting.
5. PLAN EXPENSES. Any expenses of administering the Plan shall be
borne by the Company.
6. CONSTRUCTION OF PLAN. The interpretation of the Plan and the
application of any rules implemented hereunder shall be determined solely in
accordance with the laws of the State of Ohio.
7. UNFUNDED PLAN. The Plan shall be unfunded, and the Company shall
not be required to segregate any assets which may at any time be represented by
Awards. Any liability of the Company to any person with respect to an Award
under this Plan shall be based solely upon any
21
<PAGE> 25
obligations which may be created by this Plan; no such obligation of the
Company shall be deemed to be secured by any pledge or other encumbrance on any
property of the Company.
8. BENEFIT PLAN COMPUTATIONS. Any benefits received or amounts paid to
a Participant with respect to any Award granted under the Plan shall not have
any effect on the level of benefits provided to or received by any Participant,
or the Participant's estate or beneficiary, as part of any employee benefit
plan (other than the Plan) of the Company.
9. PRONOUNS, SINGULAR AND PLURAL. The masculine may be read as
feminine, the singular as plural and the plural as singular as necessary to
give effect to the Plan.
10. MAXIMUM ANNUAL GRANT. In no event shall any one individual
participating in the 1997 Stock Plan, be granted stock options and/or
restricted shares for more than one and one-half percent (1.5%) of the total
outstanding shares of Common Stock of the Company, in the aggregate, per
calendar year.
11. PAYMENT. The exercise price will be payable in one of the
alternative forms specified below:
(a) full payment in cash or check made payable to the
Company's order; or
(b) full payment in shares of Common Stock held for the
requisite period necessary to avoid a charge to the Company's reported
earnings and valued at fair market value on the Exercise Date (as such
term is defined below); or
(c) full payment in a combination of shares of Common Stock
held for the requisite period necessary to avoid a charge to the
Company's reported earnings and valued at fair market value on the
Exercise Date and cash or check payable to the Company's order; or
(d) full payment through a sale and remittance procedure
pursuant to which the Participant will provide irrevocable written
directives to a designated brokerage firm to effect the immediate sale
of the purchased shares and remit to the Company, out of the sale
proceeds available on the settlement date, sufficient funds to cover
the aggregate exercise price payable for the purchased shares and
shall concurrently provide written instructions to the Company to
deliver the certificates for the purchased shares directly to such
brokerage firm in order to complete the sale transaction.
For purposes of this subparagraph, the "exercise date" will be the
date on which written notice of the option exercise is delivered to the
Company, and the fair market value per share of Common Stock on any relevant
date shall be determined in accordance with the provisions of the Plan. Except
to the extent the sale and remittance procedure specified above is utilized for
the exercise of the option, payment of the option price for the purchased
shares must accompany the exercise notice.
D. EFFECTIVE DATE
The Plan became effective on approval by shareholders of the Company.
The Plan and all outstanding Awards shall remain in effect until all
outstanding Awards have been exercised, expired or canceled.
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<PAGE> 1
Exhibit 10.11
FIRSTMERIT CORPORATION
UNFUNDED SUPPLEMENTAL BENEFIT PLAN
(EFFECTIVE AS OF JANUARY 1, 1984; ADMINISTRATIVE CHANGES TO CHANGE NAME TO
FIRSTMERIT CORPORATION EFFECTIVE DECEMBER 15, 1994)
ARTICLE 1
DEFINITIONS
Whenever used in this Plan, the following terms shall have the meanings
hereinafter set forth:
1.1 ADMINISTRATIVE COMMITTEE. The Administrative Committee appointed to
administer the Pension Plan for Employees of FirstMerit Corporation.
1.2 BOARD. The Board of Directors of FirstMerit Corporation.
1.3 CODE. The Internal Revenue Code of 1954, as amended, or as it may
be amended from time to time.
1.4 COMPANY. FirstMerit Corporation and any subsidiary and/or
affiliated corporation which has properly adopted the Pension Plan, except where
a specific reference is made to a particular corporation.
1.5 EFFECTIVE DATE. January 1, 1984.
1.6 EMPLOYEE. A Member in the Pension Plan, or any retired Employee of
the Company who is currently receiving a supplemental pension benefit from the
Company.
1.7 PENSION PLAN. The Pension Plan for Employees of FirstMerit
Corporation.
1.8 PLAN. The FirstMerit Corporation Unfunded Supplemental Benefit
Plan.
1.9 PLAN YEAR. The twelve (12)-month period adopted as the Plan Year
for the Pension Plan. The Plan Year for the Pension Plan as of the Effective
date of this Plan is the twelve (12)-month period beginning January 1.
ARTICLE 2
PURPOSE OF PLAN
2.1 PURPOSE. The Plan is designed to provide supplemental retirement
benefits payable out of the general assets of the Company as provided in Section
4.1.
<PAGE> 2
ARTICLE 3
ELIGIBILITY
3.1 EMPLOYEE'S ELIGIBILITY. All Employees and beneficiaries of
Employees eligible to receive benefits from the Pension Plan shall be eligible
to receive benefits under this Plan in accordance with Section 4.1 regardless of
when the Employees may have retired.
3.2 RETIRED EMPLOYEES' ELIGIBILITY. All retired Employees of the
Company who are currently receiving supplemental retirement benefits from the
Company shall be eligible to participate in this Plan and receive the benefit
provided in accordance with Section 4.2.
ARTICLE 4
BENEFITS
4.1 AMOUNT OF BENEFITS. The amount of the benefit payable under the
Plan to an Employee shall be equal to the monthly benefit which would be payable
to or on behalf of an Employee under the Pension Plan if Section 13.01 (as
amended) and the limitations of Code Section 415 were inapplicable, and if the
amount of any compensation deferred by the Employee was included in the
calculation of Compensation for the Plan Year, less the monthly benefit actually
payable to or on behalf of the Employee under the Pension Plan. For purposes of
determining the amount of an Employee's benefit under this Section 4.1, the
vesting requirements of the Pension Plan shall also apply to the benefit payable
under this Plan.
4.2 AMOUNT OF RETIRED EMPLOYEES' BENEFITS. Any retired Employee of the
Company who, as of the Effective Date, is receiving a supplemental retirement
benefit from the Company shall be entitled to receive, in lieu of such
supplemental retirement benefit, a benefit from this Plan equal to the amount of
benefit the retired Employee is receiving on the Effective Date. The terms and
conditions under which such retired Employee's supplemental retirement benefit
is being paid are hereby incorporated in and made a part of this Plan.
4.3 FORM OF BENEFIT PAYMENTS. The benefits payable to or on behalf of
an Employee as determined under Section 4.1 shall be paid as a lump sum payment
or in the form of a life annuity or converted to a joint and survivor annuity
based upon the actuarial factors, as determined by the Administrative Committee
in its sole discretion. In making its decision, the Administrative Committee
shall consider the form in which the Employee's benefit is payable under the
Pension Plan and any other matters it considers relevant.
4.4 TIME OF BENEFIT PAYMENTS. Benefits due under the Plan shall be paid
coincident with the payment date of benefits under the Pension Plan or at such
other time or times as the Administrative Committee in its discretion
determines.
4.5 BENEFITS UNFUNDED. The benefits payable under the Plan shall be
paid by the Company each year out of its general assets and shall not be funded
in any manner.
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<PAGE> 3
ARTICLE 5
ADMINISTRATION
5.1 DUTIES OF ADMINISTRATIVE COMMITTEE. The Plan shall be administered
by the Administrative Committee in accordance with its terms and purposes. The
Administrative Committee shall determine the amount and manner of payment of the
benefits due to or on behalf of each Employee from the Plan and shall cause them
to be paid by the Company accordingly.
5.2 FINALITY OF DECISIONS. The decisions made by and the actions taken
by the Administrative Committee in the administration of the Plan shall be final
and conclusive on all persons, and the members of the Administrative Committee
shall not be subject to individual liability with respect to the Plan.
ARTICLE 6
AMENDMENT AND TERMINATION
6.1 AMENDMENT AND TERMINATION. While the Company intends to maintain
the Plan in conjunction with the Pension Plan for as long as necessary, the
Board reserves the right to amend and/or terminate it at any time for whatever
reasons it may deem appropriate, provided, however, such amendment or
termination shall only operate prospectively. No amendment or termination shall
reduce or eliminate any benefit to which any Employee is entitled under the
terms of the Plan at the time of the amendment or termination.
6.2 CONTRACTUAL OBLIGATION. Notwithstanding Section 6.1, the Company
hereby makes a contractual commitment to pay the benefits payable under the Plan
to the extent it is financially capable of meeting such obligations.
6.3 PLAN FINANCES. The Company may (but shall not be obligated to)
finance its obligation under the Plan by the purchase of life insurance, life
insurance annuities, tax-exempt bonds, or any other asset or investment. Such
investments shall remain part of the general assets of the Company subject to
the claims of the Company's general creditors. The Members shall have no right
to or interest in such investments.
ARTICLE 7
MISCELLANEOUS
7.1 NO EMPLOYMENT RIGHTS. Nothing contained in the Plan shall be
construed as a contract of employment between the Company and an Employee, or as
a right of any Employee to be continued in the employment of the Company, or as
a limitation of the right of the Company to discharge any of its Employees, with
or without cause.
7.2 LAW APPLICABLE. This Plan shall be governed by the laws of the
State of Ohio.
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<PAGE> 4
7.3 APPLICATION AND FORMS FOR SUPPLEMENTAL BENEFIT. The Administrative
Committee may require a Member to complete and file with the Administrative
Committee an application for a supplemental benefit hereunder and all other
forms approved by the Administrative Committee, and to furnish all pertinent
information requested by the Administrative Committee. The Administrative
Committee may rely upon all such information so furnished it, including the
Member's current mailing address, age, or marital status.
7.4 COMMENCEMENT OF SUPPLEMENTAL BENEFIT. No interest shall accrue or
be paid for any period from the date as of which payments are to be made and the
date such payments are actually made.
7.5 MANNER OF MAKING PAYMENTS. Whenever, in the Administrative
Committee's opinion, a person entitled to receive any payment of a benefit or
installment thereof hereunder is under a disability or is incapacitated in any
way so as to be unable to manage his financial affairs, the Administrative
Committee may make payments to such person, to his legal representative or to a
relative or friend of such person for his benefit, or the Administrative
Committee may apply the payment for the benefit of such person in such manner s
the Administrative Committee considers advisable. Any payment of a benefit or
installment thereof in accordance with the provisions of this Section shall be a
complete discharge of any liability for the making of such payment under the
provisions of the Plan. If the Administrative Committee is in doubt as to
whether benefit payments are being received by the person entitled thereto, it
may withhold such payments until such person has been located.
7.6 NONALIENATION OF BENEFITS. Benefits payable under this Plan shall
not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any
kind,, either voluntary or involuntary, including any such liability which is
for alimony or other payments for the support of a spouse or former spouse, or
for any other relative of the Member, prior to actually being received by the
person entitled to the benefit under the terms of the Plan; and any attempt to
anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or
otherwise dispose of any right to benefits payable hereunder, shall be void. The
Plan shall not in any manner be liable for, or subject to, the debts,
contracts,, liabilities, or torts of any person entitled to benefits hereunder.
7.7 ACTION BY COMPANY. Any action which may be taken by a Company under
the Plan may be by resolution of its Board of Directors or by any person or
persons duly authorized by resolution of said Board of Directors to take such
action.
7.8 WRITTEN COMMUNICATIONS REQUIRED. Any notice, request or instruction
to be given hereunder shall be in writing and either personally delivered to the
addressee or deposited, postpaid, in the United States mail, properly addressed
to the addressee, in the case of a Member, beneficiary, or similar person, at
the last address for notice shown on the Administrative Committee's records or,
in the case of the Administrative Committee, at FirstMerit Corporation, 106
South Main Street, Akron, Ohio 44308.
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<PAGE> 5
7.9 PRESUMPTION OF DEATH. If any Member, spouse, or beneficiary who is
entitled to benefit payments under the Plan shall have disappeared or shall have
been absent from his last known place of abode for the continuous period of
seven (7) years with his whereabouts for such period unknown to those persons
most likely to know thereof, and such payee has for like period not been heard
from by those persons most likely to hear from the payee; the Member, spouse, or
beneficiary will be presumed to have died on the day of his disappearance, the
last day his whereabouts were known, or the last day he was heard from,
whichever is latest.
If the Administrative Committee is unable to make or direct payment of
any benefit to any person entitled thereto because the identity or whereabouts
of such person cannot be ascertained, then the Administrative Committee shall be
entitled to withhold payment until both identity and whereabouts are
ascertained.
Adopted and approved effective as of January 1, 1984, this 10th day of
May, 1984.
Signed in the Presence of: FirstMerit Corporation
/s/ Jay E. Smith By:/s/ Howard L. Flood
- - ------------------------------------- ------------------------------
Its: President
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<PAGE> 1
Exhibit 10.13
SUPPLEMENTAL PENSION AGREEMENT
SUPPLEMENTAL PENSION AGREEMENT, entered into this 10th day of June,
1991, by and between FIRST BANCORPORATION OF OHIO, an Ohio corporation (the
"Company") and JOHN R. MACSO, an individual (the "Employee").
R E C I T A L S :
A. Employee is a key employee of Peoples Savings Bank, a wholly-owned
subsidiary of the Company.
B. The Company desires to further ensure the Employee's loyalty by
providing the Employee with enhanced retirement benefits.
In consideration of the foregoing, the mutual covenants hereinafter
contained, and other good and valuable consideration, receipt of which is hereby
acknowledged, the Company and Employee agree as follows:
1. DEFINITIONS
As used herein, the following words and phrases shall have the meanings
specified below.
1.1 Benefit Service
"Benefit Service" means the sum of twenty (20) years plus the number of
Credited Years of Service credited to the Employee under the Qualified Plan (as
defined in Section 1.2) with respect to periods after October 1, 1990.
1.2 Qualified Plan
"Qualified Plan" means the Pension Plan for Employees of First
Bancorporation of Ohio and Subsidiaries, as amended from time to time. Unless
otherwise specifically set forth herein, capitalized terms used in this
Agreement have the same meanings as those ascribed to them in the Qualified
Plan.
1.3 Vesting Service
"Vesting Service" means the sum of twenty (20) years plus the number of
Participating Years of Service credited to the Employee under the Qualified Plan
with respect to periods after October 1, 1990.
<PAGE> 2
2. NORMAL RETIREMENT BENEFIT
Upon his Normal Retirement Date, the Company shall pay to the Employee
a pension, which shall continue for the remainder of the Employee's life, in an
amount equal to:
(a) the Normal Pension to which the Employee would be entitled
under the terms of the Qualified Plan if such Normal Pension
was calculated using the Employee's Benefit Service; less
(b) the amount of the Normal Pension actually payable to the
Employee under the terms of the Qualified Plan as of the
Employee's Normal Retirement Date.
3. EARLY RETIREMENT BENEFIT
3.1 On the first day of any month coinciding with or occurring after
the Employee's fifty-fifth (55th) birthday, the Employee may elect to take early
retirement. Upon such early retirement, the Company shall pay a pension to the
Employee for the remainder of the life of the Employee which pension shall, at
the option of the Employee, commence either on the Employee's Normal Retirement
Date or on the first day of any calendar month between the date of the
Employee's early retirement and his Normal Retirement Date.
3.2 The amount of the pension payable to the Employee as of such date
under this Agreement shall be equal to:
(a) an amount equal to the Early Retirement Benefit to
which the Employee would be entitled under the terms
of the Qualified Plan as of the date such benefit
commences if such Early Retirement Benefit was
calculated using the Employee's Benefit Service; less
(b) the amount of the Early Retirement Benefit actually
payable to the Employee under the terms of the
Qualified Plan as of the date the Employee's Early
Retirement Benefit commences.
4. DISABILITY RETIREMENT BENEFIT
4.1 If the Employee becomes Totally and Permanently Disabled, the
Company shall pay a pension to the Employee for the remainder of the life of the
Employee, which pension shall commence as of the Employee's Normal Retirement
Date.
4.2 The amount of the Pension payable to the Employee under this
Section 4 at the Employee's Normal Retirement Date shall be equal to:
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<PAGE> 3
(a) an amount equal to the Disability Retirement Benefit
to which the Employee would be entitled under the
terms of the Qualified Plan as of the Employee's
Normal Retirement Date if such Disability Retirement
Benefit was calculated using the Employee's Benefit
Service; less
(b) the amount of the Disability Retirement Benefit
actually payable to Employee under the terms of the
Qualified Plan as of the Employee's Normal Retirement
Date.
5. VESTED RETIREMENT BENEFIT
5.1 If the Employee terminates his employment with the Company, or any
of its subsidiaries which are adopting employers of the Qualified Plan, prior to
attaining his Early Retirement or Normal Retirement Dates, the Company shall pay
a pension to the Employee for the remainder of the life of the Employee which
pension shall, at the option of the Employee, commence either on the Employee's
Normal Retirement Date or on the first day of any calendar month between the
Employee's Early Retirement Date or Normal Retirement Date.
5.2 The amount of the pension payable to the Employee under this
Section 5 shall be equal to:
(a) an amount equal to the Vested Pension to which the
Employee would be entitled under the terms of the
Qualified Plan at the time such pension commences if
such pension was calculated using the Employee's
Benefit Service; less
(b) the amount of the Vested Pension actually payable to
the Employee under the terms of the Qualified Plan as
of the date such pension commences.
6. FORM OF PAYMENT
The pensions payable to the Employee under this Agreement shall be paid
to the Employee and his Beneficiary, if applicable, in the same form as the
Employee's pension is paid under the terms of the Qualified Plan. If a pension
payable under this Agreement is paid in a form other than a single-life annuity,
the amount of such pension shall be adjusted using the same assumptions as to
interest and mortality as those used under the Qualified Plan to calculate the
Actuarial Equivalent of a single-life annuity.
7. DEATH BENEFIT
7.1 If the Employee dies prior to his retirement and his Surviving
Spouse is eligible to receive a Qualified Pre-Retirement Survivor Annuity under
the Qualified Plan, the Company shall pay a pension to the Employee's Surviving
Spouse, if any, for the remainder of her life. If the
3
<PAGE> 4
Employee and his Spouse have made a Qualified Election to waive the Qualified
Pre-Retirement Survivor Annuity under the Qualified Plan, then the Company shall
not be obligated to pay any pension to the Employee's Surviving Spouse under
this Section 7.
7.2 The amount of pension payable to the Employee's Surviving Spouse
under this Section 7 shall be equal to:
(a) an amount equal to the Qualified Pre-Retirement
Survivor Annuity to which the Employee's Surviving
Spouse would be entitled under the terms of the
Qualified Plan if such annuity was calculated using
the Employee's Benefit Service; less
(b) the amount of the Qualified Pre-Retirement Survivor
Annuity actually payable to the Employee's Surviving
Spouse under the terms of the Qualified Plan.
8. TERMINATION OF QUALIFIED PLAN
If the Qualified Plan is terminated by the Company, this Agreement
shall also terminate as of the effective date of the termination of the
Qualified Plan. Upon termination of this Agreement pursuant to this Section 8,
the Company shall purchase an annuity or otherwise fund the difference between
(a) the amount of the Accrued Benefit that the Employee would have had under the
Qualified Plan as of the date of its termination if his Accrued Benefit was
calculated using the Employee's Benefit Service as of such date; and (b) the
actual amount of the Employee's Accrued Benefit under the Qualified Plan as of
the date of its termination.
9. MISCELLANEOUS
9.1 Nothing contained in this Agreement shall be deemed to give the
Employee the right to be retained in the service of the Company or to interfere
with the right of the Company to discharge the Employee at any time regardless
of the effect which such discharge shall have upon him under this Agreement.
9.2 The rights of the Employee, the Beneficiary of the Employee, or any
other person claiming through the Employee under this Agreement, shall be solely
those of an unsecured general creditor of the Company. Benefits provided under
this Agreement shall not be separately funded by the Company but shall be paid
out of the operating funds of the Company as such benefits become due.
9.3 Except insofar as this provision may be contrary to applicable law,
no sale, transfer, alienation, assignment, pledge, collateralization, or
attachment of any benefits under this Agreement shall be valid or recognized by
the Company.
4
<PAGE> 5
9.4 The Employee shall have the right to change his Beneficiary by
notifying the Company of such in writing. Such change shall become effective
upon written acknowledgment of same by the Company. Any payments made by the
Company to a Beneficiary in good faith and under the terms of this Agreement
shall fully discharge the Company from all further obligations with respect to
such Beneficiary.
9.5 This Agreement shall be binding upon and inure to the benefit of
the Company, its successors and assigns, and the Employee and his heirs,
executors, administrators and legal representatives, successors and assigns;
provided, however, that the Employee may not assign his rights hereunder without
the express written consent of the Company.
9.6 This Agreement shall be governed by the laws of Ohio. This
Agreement is solely between the Company and the Employee. The Employee, his
Beneficiary or other persons claiming through the Employee shall only have
recourse against the Company for enforcement of this Agreement.
9.7 Any words herein used in the masculine shall be read and construed
in the feminine where they would so apply. Words in the singular shall be read
and construed as though used in the plural in all cases where they would so
apply.
9.8 The obligations of the Company under this Plan shall be subject to
all applicable laws, rules and regulations, and such approvals by governmental
agencies as may be required or as the Company deems advisable.
IN WITNESS WHEREOF, the parties have duly executed this Supplemental
Pension Agreement the date and year above first written.
FIRST BANCORPORATION OF OHIO
By /s/ Howard L. Flood
--------------------------------------
Its President & Chief Executive Officer
-------------------------------------
Company
/s/ John R. Macso
-----------------------------------------
John R. Macso
Employee
5
<PAGE> 1
Exhibit 10.18
RESTRICTED STOCK
AWARD AGREEMENT
This Award Agreement is effective as of the 10th Day of April, 1997
("Date of Award"), between FirstMerit Corporation, an Ohio corporation (the
"Company"), and John R. Cochran (the "Grantee"). In consideration of the
agreements set forth below, the Company and the Grantee agree as follows:
1. GRANT. A restricted stock award ("Award") of 12,600 shares ("Award
Shares") of the Company's common stock, no par value ("Common Stock"), is hereby
granted by the Company to the Grantee subject to the following terms and
conditions and to the provisions of the FirstMerit Corporation 1997 Stock Plan
(the "Plan"), the terms of which are hereby incorporated by reference.
2. TRANSFER RESTRICTIONS. None of the Award Shares shall be sold,
assigned or transferred, in whole or in part, voluntarily or involuntarily, by
the Grantee, nor made subject to any lien (except as provided in Section 6,
below), directly or indirectly, by operation of law or otherwise, including
execution, levy, garnishment, attachment, pledge or bankruptcy.
3. RELEASE OF RESTRICTIONS.
(A) The restrictions set forth in Section 2 above shall lapse
as follows:
(i) with respect to 4,200 Award Shares, on the
anniversary of this Award Agreement in the year 2005;
(ii) with respect to 4,200 Award Shares, on the
anniversary of this Award Agreement in the year 2006;
(iii) with respect to 4,200 Award Shares, on the
anniversary of this Award Agreement in the year 2007;
(B) The restrictions set forth in Section 2 above with respect
to all of the Award Shares, to the extent they have not lapsed in
accordance with Subsection 3(A) and to the extent not related to shares
which previously have been forfeited to the Company, shall lapse on the
first to happen of the following:
(i) the Grantee's employment with the Company is
terminated following a Change of Control, or by reason of
death, Disability, Termination of Employment Without Cause or
Termination of Employment for Good Reason (for purposes of
this subsection (i), the terms "Change of Control,"
"Disability," "Termination of Employment Without Cause," and
"Termination of Employment for Good Reason" shall have the
same meanings ascribed to such terms in the Employment
Agreement, effective as of March 1, 1995, between the Company
and the Grantee (the "Employment Agreement"); or
<PAGE> 2
(ii) an action by the Committee, in its sole
discretion, terminating such restrictions.
The Provisions of the second sentence of Section IV.L. of the
Plan shall not apply to this Award and, therefore, the lapse
of the restrictions set forth in Section 2 upon the occurrence
of a Change of Control, as provided in Section 3(B)(i), shall
not be limited as otherwise provided in Section IV.L. of the
Plan.
4. FORFEITURE. The Award Shares shall be forfeited to the Company upon
the Grantee's termination of employment with the Company and its subsidiaries
unless on or prior to the date the restrictions lapse as provided in Section 3
above.
5. RIGHTS AS SHAREHOLDER. The Grantee shall be entitled to all of the
rights of a shareholder with respect to the Award Shares including the right to
vote such shares and to receive dividends and other distributions payable with
respect to such shares since the Date of Award.
6. ESCROW OF SHARE CERTIFICATES. For the purposes of securing the
re-transfer of the shares into the name of the Company in the event of
forfeiture and to ensure adequate provision for any tax withholding obligations
arising with respect to the Award, certificates for the Award Shares shall be
issued in the Grantee's name and shall be held in escrow by, and subject to a
security interest in favor of, the Company until restrictions with respect to
such shares lapse and all withholding obligations have been satisfied or such
shares are forfeited as provided herein; provided, however, that the terms of
such escrow shall make allowance for the transactions contemplated by Section
3(B)(i) above. A certificate or certificates representing the Award Shares as to
which restrictions have lapsed shall be delivered to the Grantee upon such lapse
and the satisfaction of any withholding obligations.
7. GOVERNMENT REGULATIONS. Notwithstanding anything contained herein to
the contrary, the Company's obligation to issue or deliver certificates
evidencing the Award Shares shall be subject to all applicable laws, rules and
regulations and to such approvals by any governmental agencies or national
securities exchanges as may be required.
8. WITHHOLDING TAXES. The Company shall have the right to require the
Grantee to remit to the Company, or to withhold from other amounts payable to
the Grantee, as compensation or otherwise, an amount sufficient to satisfy all
federal, state and local withholding tax requirements.
9. GOVERNING LAW. This Agreement shall be construed under the laws of
the State of Ohio.
10. RIGHT TO TERMINATE EMPLOYMENT. This Award shall not confer upon the
Grantee any right with respect to being continued in the employ of the Company
or to interfere in any way with the right of the Company to terminate his
employment at any time, for any reason, with or without cause, except as may
otherwise be stated in the Employment Agreement.
<PAGE> 3
IN WITNESS WHEREOF, the Company has caused the Award to be granted
pursuant to this Award Agreement on the date first above written.
FIRSTMERIT CORPORATION
By: /s/ Christopher J. Maurer
----------------------------------
Christopher J. Maurer
Accepted:
GRANTEE:
/s/ John R. Cochran
- - ------------------------------
John R. Cochran
Date: April 10, 1997
<PAGE> 1
Exhibit 10.19
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT entered into this 1st day of February, 1998,
between and among FirstMerit Corporation, an Ohio corporation ("FirstMerit"),
FirstMerit Bank, N.A., a national banking association ("FirstMerit Bank")
(collectively sometimes "FirstMerit"), and Sid A. Bostic ("Executive").
R E C I T A L S :
FirstMerit and FirstMerit Bank desire to employ Executive for a period
certain, subject, however, to the terms and conditions of this Agreement.
IN CONSIDERATION OF THE FOREGOING, the mutual covenants contained
herein, and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties agree as follows:
1. EMPLOYMENT
FirstMerit hereby employs Executive, and Executive hereby accepts
employment, according to the terms and conditions set forth in this Agreement
and for the period specified in Section 3 of this Agreement.
2. DUTIES
During the Term (as defined in Section 3), Executive shall serve
FirstMerit and FirstMerit Bank as its President and Chief Operating Officer in
accordance with directions from the Chief Executive Officer and FirstMerit's
Board of Directors, and in accordance with FirstMerit's Amended and Restated
Articles of Incorporation and Amended and Restated Code of Regulations (as both
may be amended from time to time). Executive will report directly to the
Chairman and Chief Executive Officer. While Executive is employed by FirstMerit
as a full-time employee, Executive shall serve FirstMerit faithfully,
diligently, competently and to the best of his ability, and will exclusively
devote his full time, energy and attention to the business of FirstMerit and to
the promotion of its interests. Executive shall not, without the written consent
of the Chairman and Chief Executive Officer and the Board of Directors of
FirstMerit, render services to or for any person, firm, corporation or other
entity or organization in exchange for compensation, regardless of the form in
which such compensation is paid and whether or not it is paid directly or
indirectly to Executive. Nothing in this Section 2 shall preclude Executive from
managing his personal investments and affairs, provided that such activities in
no way interfere with the proper performance of his duties and responsibilities
as President and Chief Operating Officer.
<PAGE> 2
3. TERM OF EMPLOYMENT
The term of this Agreement (the "Term") shall commence as of February
1, 1998, and shall continue for a period of three (3) years ending on January
31, 2001, unless this Agreement has been earlier terminated in accordance with
the provisions of Section 7 hereof. Following expiration of the Term,
Executive's employment status will be "at will."
4. COMPENSATION
4.1 BASE SALARY. While employed under this Agreement, Executive will
receive as his compensation for the performance of his duties and obligations to
FirstMerit under this Agreement a basic salary of Three Hundred Fifty Thousand
Dollars ($350,000) per year, which will be payable in semi-monthly installments,
and which will be subject to annual review by the Compensation Committee as
approved by the Board of Directors (the base salary, as may be adjusted from
time to time, is referred to herein as the "Base Salary").
4.2 BONUS. In addition to the Base Salary, Executive will receive with
respect to each calendar year a bonus in accordance with FirstMerit's Incentive
Compensation Plan ("ICP"), a copy of which has been delivered to Executive, as
may be amended from time to time. Bonuses will be determined by FirstMerit's
Compensation Committee in accordance with the terms of the ICP, subject to
approval by the Board of Directors, and ordinarily will be paid during the first
quarter of the year following the year to which the bonus relates.
4.3 REIMBURSEMENT FOR LOST INCENTIVE PAYMENT. In the event that by
reason of accepting employment with FirstMerit, Executive forfeits all or any
portion of any incentive payment which he may be entitled or may become entitled
to receive from his prior employer, Norwest Bank Indiana, FirstMerit will
reimburse Executive for the amount of such lost incentive payment; provided,
however, that such reimbursement shall not exceed the sum of Seventy-Five
Thousand Dollars ($75,000).
4.4 WITHHOLDING. All compensation payable to Executive pursuant to this
Section 4 shall be paid net of amounts withheld for federal, state, municipal or
local income taxes, the Executive's share, if any, of any payroll taxes, and
such other federal, state, municipal or local taxes as may be applicable to
amounts paid by an employer to its employee or to the employer/employee
relationship.
5. OTHER BENEFITS OF EMPLOYMENT
5.1 RETIREMENT BENEFITS
(A) PENSION PLAN. Executive will participate in the Pension
Plan for Employees of FirstMerit Corporation and Subsidiaries (the
"Pension Plan"), a copy of the summary plan
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<PAGE> 3
description of which has been provided to Executive, in accordance with
the provisions of the Plan, as amended from time to time.
(B) EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN. Executive will
be entitled to participate in the FirstMerit Corporation and
Subsidiaries Employees' Salary Savings Retirement Plan (the "401(k)
Plan"), a copy of the summary plan description of which has been
provided to Executive, in accordance with the provisions of the Plan,
as amended from time to time.
(C) SERP. Executive will participate in the FirstMerit
Corporation Executive Supplemental Retirement Plan (the "SERP"), a copy
of which has been provided to Executive, in accordance with the
provisions of the SERP, as may be amended from time to time and as may
be modified by the provisions of the Membership Agreement entered into
by FirstMerit and Executive in connection with the SERP.
(D) TOP HAT PLAN. Executive will be entitled to participate in
the FirstMerit Corporation Unfunded Supplemental Benefits Plan (the
"Top Hat Plan"), a copy of which has been provided to Executive, in
accordance with the provisions of the Plan, as amended from time to
time.
5.2 CHANGE OF CONTROL TERMINATION AGREEMENT. Following commencement of
the Term, FirstMerit and Executive will enter into a Change of Control
Termination Agreement in the form previously delivered to Executive, the terms
of which will provide for the continuation of compensation and certain benefits
in the event of certain terminations of employment of Executive following a
Change of Control. The terms of such Agreement will provide, subject to certain
limitations, for continuation for a period of thirty (30) months of the Base
Salary, incentive compensation, medical, life, and accidental death and
dismemberment insurance under FirstMerit plans and payment of premiums as
provided in Section 5.3. The Change of Control Termination Agreement will also
provide that if any compensation or benefits payable under such Agreement, alone
or in conjunction with other compensation or benefits received by Executive,
constitute "parachute payments" within the meaning of Section 280G of the
Internal Revenue Code (the "Code") or the regulations adopted or proposed
thereunder, then the compensation and benefits payable under the Agreement will
be reduced to the extent necessary so that no portion shall be subject to the
excise tax imposed by Section 4999 of the Code.
5.3 EXECUTIVE LIFE INSURANCE. During such time as Executive is employed
by FirstMerit, FirstMerit shall pay the premiums, plus forty percent (40%) of
such premiums as a gross-up amount, on a permanent whole life insurance policy
which shall be owned by Executive and which shall provide Executive with Seven
Hundred Fifty Thousand Dollars ($750,000) in life insurance. Executive will be
responsible for the payment of all taxes associated with the payment of the
premiums and the gross-up amount. FirstMerit's obligations under this Section
5.3 will cease upon the termination of Executive's employment for any reason
(other than retirement), except to the
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<PAGE> 4
extent provided otherwise in the Change of Control Termination Agreement or
pursuant to Section 7.5(A). Executive acknowledges that a physical examination
will be required by the insurer.
5.4 DISABILITY. Executive will be entitled to participate in
FirstMerit's Long-Term Disability Plan applicable to executive level employees
of FirstMerit, and in FirstMerit's Short-Term Illness Program, all in accordance
with the provisions of such programs as may be amended from time to time.
5.5 MISCELLANEOUS BENEFITS. Executive will be entitled to participate
in such hospitalization, life insurance, and other employee benefit plans and
programs, if any, as may be adopted by FirstMerit from time to time, in
accordance with the provisions of such plans and programs and on the same basis
as other full-time salaried employees of FirstMerit who participate in such
employee benefit plans (except to the extent that the benefits provided under
any of such plans or programs are expressly offset by any of the benefits
provided under or pursuant to this Agreement).
5.6 STOCK OPTIONS AND GRANTS
(A) NON-QUALIFIED STOCK OPTIONS. Immediately following the
commencement of the Term, FirstMerit will make an award to Executive
under and pursuant to the terms of the FirstMerit 1997 Stock Plan, a
copy of which has been provided to Executive, of non-qualified stock
options ("NQSOs") for Fifty Thousand (50,000) shares of FirstMerit
Corporation common stock, plus an additional Twenty-Five Thousand
(25,000) "performance" shares. The award will be made pursuant to a
Stock Option Agreement in the form and subject to the terms customarily
used by FirstMerit, but the terms of which will include the following:
The NQSOs will be issued at fair market value on the date of grant. The
NQSOs for the 50,000 shares will become exercisable with respect to
one-half of the shares on August 15, 1998, and with respect to the
remaining one-half of the shares on February 15, 1999. The NQSOs for
the 25,000 performance shares will become exercisable on February 16,
1999, if FirstMerit has achieved its three (3)-year earnings per share
growth target as of that date. Notwithstanding the foregoing, all NQSOs
under this grant will become exercisable if Executive's employment is
terminated by reason of Death, Disability or, following a Change of
Control, Termination Without Cause or Termination for Good Reason. Once
vested, the NQSOs will remain exercisable until the date which is ten
(10) years from the date of grant.
(B) RESTRICTED STOCK. Immediately following the commencement
of the Term, FirstMerit will make a restricted stock award to Executive
of Nine Thousand (9,000) shares of FirstMerit Corporation common stock.
The award will be made pursuant to a Restricted Stock Agreement, the
terms of which will include the following: The restrictions on 7,000
shares will lapse on February 1, 2001; the restrictions on 1,000 shares
will lapse on February 1, 2002, but only if Executive is an employee on
such date; and the restrictions on the remaining 1,000 shares will
lapse on February 1, 2003, but only if Executive is an employee
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<PAGE> 5
on such date; provided, however, that all restrictions will lapse if
Executive's employment is terminated by reason of Death, Disability,
following a Change of Control, Termination Without Cause or Termination
for Good Reason. The shares subject to such restricted stock award
shall be registered on the books of FirstMerit in Executive's name, and
Executive shall have all rights of a shareholder with respect thereto
(including, without limitation, voting and dividend rights), other than
the right to transfer such shares during the restricted period, and
such other limitations as may be provided by law or customary for
restricted stock awards.
5.7 INCOME TAX PREPARATION. For calendar years beginning with 1998,
FirstMerit will reimburse Executive for fees incurred in connection with
personal income tax preparation in an amount not to exceed Seven Hundred Fifty
Dollars ($750) per year.
5.8 CLUB DUES. FirstMerit will pay, or reimburse Executive for, all
membership dues and special assessments, and any sales tax assessed or payable
with respect to such dues or assessments, incurred in connection with the
Executive's membership in a country club chosen by the Executive in his sole
discretion.
5.9 MISCELLANEOUS EXPENSE REIMBURSEMENT
(A) TRAVEL AND LIVING EXPENSES. FirstMerit will pay or
reimburse Executive for travel and living expenses (including meals and
lodging) incurred by Executive until such time as Executive's family is
relocated to Northeastern Ohio, to the extent such expenses are (i)
incurred prior to September 30, 1998, and (ii) approved for
reasonableness by the Chairman of the Board of FirstMerit.
(B) RELOCATION EXPENSES. FirstMerit will assist Executive with
the sale of his home in Ft. Wayne, Indiana, and with the purchase of
his home in Northeastern Ohio. FirstMerit will pay or reimburse
Executive for relocation expenses incurred by Executive according to
existing policies of FirstMerit.
5.10 TAXES AND WITHHOLDING. Executive shall be responsible for paying
all federal, state, municipal or local taxes payable by him with respect to any
benefits provided under this Section 5, and FirstMerit will, when required by
law or when otherwise appropriate or customary, withhold from the benefits or
other compensation amounts sufficient to satisfy such taxes.
6. OTHER PROVISIONS RELATING TO EMPLOYMENT
6.1 EXECUTIVE PHYSICAL EXAMINATION. Approximately every two (2) years,
Executive will undergo an executive physical examination by physicians (not
including any physicians who have performed or are then performing medical
services for Executive) of the Cleveland Clinic or comparable facility. The
expenses of the physical examinations required under this Section 6.1 (but not
any treatment in connection therewith), which are not otherwise covered by
FirstMerit-sponsored medical plans, will be borne by FirstMerit.
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6.2 VACATION. Executive will be entitled to five (5) weeks paid
vacation and ten (10) bank holidays per year.
6.3 BOARD OF DIRECTORS. The Board of Directors will appoint Executive
to the Board of Directors of FirstMerit and FirstMerit Bank, effective as of
February 1, 1998. Once Executive has become a Director, FirstMerit will agree to
nominate the Executive at such times as necessary so that Executive remains a
director of FirstMerit during his employment by FirstMerit. Nothing in this
Section 6.3 shall require FirstMerit or its Board to decline to nominate an
existing Director at the expiration of such Director's term.
7. TERMINATION
7.1 DEFINITIONS
(A) "CHANGE OF CONTROL" means a change in control of a nature
that would be required to be reported by persons or entities subject to
the reporting requirements of Section 14(a) of the Securities Exchange
Act of 1934 in response to item 5(f) of Schedule 14A of Regulation
14(A) as in effect on the date hereof, or successor provisions thereto,
provided that, without limitation, such a change in control shall be
deemed to have occurred if (i) any unaffiliated "person," "entity," or
"group" (as defined in Rule 13(d)-3 issued under the Securities
Exchange Act of 1934) directly or indirectly becomes the owner of
securities of FirstMerit representing thirty percent (30%) or more of
the combined voting power of FirstMerit's then outstanding securities
or (ii) at any time during any period of two (2) consecutive calendar
years individuals, who at the beginning of such period constitute the
Board of Directors of FirstMerit, cease for any reason to constitute at
least the majority of such Board unless the election, or the nomination
for election, by FirstMerit's shareholders of each new director was
approved by a vote of at least two-thirds of the directors still in
office who were directors of FirstMerit at the beginning of such two
(2)-year period.
(B) "DISABILITY" or "DISABLED" means eligibility for
disability benefits under the terms of FirstMerit's Long-Term
Disability Plan for executive level employees in effect at the time of
termination of Executive's employment.
(C) "TERMINATION DATE" means the date on which Executive's
employment with FirstMerit terminates.
(D) "TERMINATION OF EMPLOYMENT FOR CAUSE" means the
termination of Executive's employment by FirstMerit for any of the
following reasons:
(i) Felonious criminal activity whether or not
affecting FirstMerit;
(ii) Disclosure to unauthorized persons of FirstMerit
information which is believed by the Board of Directors of
FirstMerit, acting in good faith, to be
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confidential; provided, however, that any such disclosure
shall not be considered to be "cause" for termination to the
extent that:
(a) it is required of Executive pursuant to
an order of a court having competent jurisdiction or
a subpoena from an appropriate government agency; or
(b) it is made by Executive in the ordinary
course of business within the scope of his authority;
(iii) Dishonesty or the breach of any contract with
or violation of any legal obligation to FirstMerit;
(iv) Gross negligence or insubordination in the
performance of duties held by the President and Chief
Operating Officer of FirstMerit.
(E) "TERMINATION OF EMPLOYMENT WITHOUT CAUSE" means the
termination of Executive's employment by FirstMerit for any reason
other than Death, Disability or For Cause.
(F) "TERMINATION OF EMPLOYMENT FOR GOOD REASON" means the
voluntary termination of Executive's employment by Executive for any of
the following reasons:
(i) Involuntary reduction in Executive's Base Salary
unless such reduction occurs simultaneously with a
company-wide reduction in officers' salaries;
(ii) Involuntary discontinuance or reduction in
Executive's incentive compensation award opportunities under
FirstMerit's plan unless a company-wide discontinuance or
reduction of all officers' incentive compensation award
opportunities occurs simultaneously with such discontinuance
or reduction;
(iii) Significant reduction in Executive's
responsibilities and status within the FirstMerit
organization, or a change in his title or office without prior
written consent of Executive;
(iv) Involuntary discontinuance of Executive's
participation in any employee benefit plans maintained by
FirstMerit unless such plans are discontinued by reason of law
or loss of tax deductibility to FirstMerit with respect to
contributions to such plans, or are discontinued as a matter
of FirstMerit policy applied equally to all participants in
such plans;
(v) A material breach of this Agreement, which breach
is not corrected within a reasonable time after notice.
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7.2 TERMINATION OF EMPLOYMENT UPON DEATH. If Executive's employment is
terminated by reason of Death, his estate shall be entitled to receive only
Executive's Base Salary to which he was entitled through the Termination Date,
any unpaid bonus due with respect to a year prior to the year in which the
termination occurred, and such other benefits as may be available to him or his
estate through FirstMerit's benefit plans and policies (including the Membership
Agreement entered into in connection with the SERP as described in Section
5.1(C)).
7.3 TERMINATION OF EMPLOYMENT UPON DISABILITY. If Executive's
employment is terminated due to his inability to perform his duties because of
Disability, Executive shall be entitled to receive only his Base Salary to which
he was entitled through the Termination Date, any unpaid bonus due with respect
to a year prior to the year in which the termination occurred, and such other
benefits as may be available to him through FirstMerit's benefit plans and
policies (including the Membership Agreement entered into in connection with the
SERP as described in Section 5.1(C)).
7.4 TERMINATION OF EMPLOYMENT BY FIRSTMERIT FOR CAUSE. If Executive's
employment is terminated For Cause, Executive shall be entitled to receive only
Executive's Base Salary to which he was entitled through the Termination Date
and such other benefits as may be available to him through FirstMerit's benefit
plans and policies in effect at the time of termination.
7.5 TERMINATION WITHOUT CAUSE OR TERMINATION FOR GOOD REASON
(A) If there is a Termination of Employment Without Cause or a
Termination of Employment For Good Reason, and the Termination Date is
prior to the expiration of the Term, Executive's Base Salary and
benefits (including credit for Years of Service under the SERP) shall
continue for a period of thirty (30) months following the month in
which the Termination Date occurs. Notwithstanding the preceding
sentence, if a termination of employment under this Section 7.5(A)
occurs following a Change of Control, and if the compensation and
benefits provided under this Section 7.5(A), alone or in conjunction
with other compensation or benefits received by Executive, constitute
"parachute payments" within the meaning of Section 280G of the Code or
the regulations adopted or proposed thereunder, then the compensation
and benefits payable under this Section 7.5(A) shall be reduced to the
extent necessary so that no portion shall be subject to the excise tax
imposed by Section 4999 of the Code.
(B) If there is a Termination of Employment Without Cause or a
Termination of Employment For Good Reason, and the Termination Date is
after the expiration of the Term, Executive shall be entitled to
receive only his Base Salary to which he was entitled through the
Termination Date and such other benefits as may be available to him
through FirstMerit's benefit plans and policies.
7.6 TERMINATION OF EMPLOYMENT OTHER THAN FOR GOOD REASON. If Executive
terminates employment with FirstMerit other than for Good Reason, Executive
shall be entitled to receive only
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<PAGE> 9
his Base Salary to which he was entitled through the Termination Date and such
other benefits as may be available to him through FirstMerit's benefit plans and
policies.
7.7 EFFECT OF TERMINATION. Upon termination of Executive's employment,
the obligations of each of the parties under this Agreement shall expire as of
the Termination Date, including, without limitation, the obligations of
FirstMerit to pay any compensation to Executive, except to the extent otherwise
specifically provided in this Agreement. Notwithstanding the foregoing, the
obligations contained in Section 8 of this Agreement and the provisions hereof
relating to the obligations of FirstMerit described in the preceding sentence,
shall survive the termination or expiration of this Agreement in accordance with
the terms set forth therein.
8. CONFIDENTIALITY AND NON-COMPETE
8.1 NON-DISCLOSURE. Executive expressly covenants and agrees that he
will not reveal, divulge or make known to any person, firm, company or
corporation any secret or confidential information of any nature concerning
FirstMerit or its business, or anything connected therewith.
8.2 RETURN OF MATERIALS. Executive agrees to deliver or return to
FirstMerit upon termination or expiration of this Agreement or as soon
thereafter as possible, all information, whether written or stored in media used
in computer systems or otherwise, and any other similar items furnished by
FirstMerit or prepared by Executive in connection with his services hereunder.
Executive will retain no copies thereof after termination of this Agreement or
Executive's employment.
8.3 NON-COMPETE. If Executive terminates his employment other than for
Good Reason during the Term, or if FirstMerit terminates Executive's employment
for Cause during the Term, then, until the first anniversary of the Termination
Date, Executive shall not become associated, directly or indirectly, with any
entity, whether as a shareholder (other than as a holder of not more than one
percent (1%) of the outstanding voting shares of any publicly traded company),
principal, partner, employee or consultant (such activities collectively
referred to as an "Associate"), that is actively engaged in any business which
is in competition with FirstMerit or any of its subsidiaries or affiliates in
any geographic area in which FirstMerit or any of its subsidiaries or affiliates
does business at the date of such termination. If Executive incurs a Termination
of Employment for Good Reason or a Termination of Employment Without Cause
during the Term, then, until the cessation of payments under Section 7.5(A),
Executive shall not become an Associate of any entity that is actively engaged
in any business which is in competition with FirstMerit or any of its
subsidiaries or affiliates in the State of Ohio, and such other geographic area
as FirstMerit or any of its subsidiaries or affiliates may have begun doing
business as of the Termination Date.
8.4 INJUNCTIVE RELIEF. Executive acknowledges that it is impossible to
measure in money the damages that will accrue to FirstMerit by reason of
Executive's failure to observe any of the obligations imposed on him by this
Section 8. Accordingly, if FirstMerit shall institute an action to enforce the
provisions hereof, Executive hereby waives the claim or defense that an adequate
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remedy at law is available to FirstMerit, and Executive agrees not to urge in
any such action the claim or defense that such remedy at law exists.
9. MISCELLANEOUS
9.1 ASSIGNMENT. This Agreement shall be binding upon the parties
hereto, their respective heirs, personal representatives, executors,
administrators and successors; provided, however, that Executive shall not
assign this Agreement.
9.2 GOVERNING LAW. This Agreement shall be construed under and governed
by the internal laws of the State of Ohio. In the event that any provision of
this Agreement shall be held to be void or unenforceable by a court of competent
jurisdiction, this Agreement shall not be rendered null and void thereby but
shall be construed and enforced as if such void or unenforceable provision was
not originally a part of this Agreement. The parties agree to the sole
jurisdiction and venue of the Common Pleas Court in Summit County, Ohio, for any
disputes arising hereunder.
9.3 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of
the parties concerning the employment of Executive by FirstMerit, and any oral
or written statements, representations, agreements or understandings made or
entered into prior to or contemporaneously with the execution of this Agreement,
are hereby rescinded, revoked and rendered null and void by the parties.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed the day and year above first written.
FIRSTMERIT CORPORATION
By: /s/ John R. Cochran
-----------------------------------
John R. Cochran, Chairman and
Chief Executive Officer
/s/ Sid A. Bostic
----------------------------------------
Sid A. Bostic
-10-
<PAGE> 1
Exhibit 10.20
RESTRICTED STOCK
AWARD AGREEMENT
This Award Agreement is effective as of the 1st day of February, 1998
("Date of Award"), between FirstMerit Corporation, an Ohio corporation (the
"Company"), and Sid A. Bostic (the "Grantee"). In consideration of the
agreements set forth below, the Company and the Grantee agree as follows:
1. GRANT. A restricted stock award ("Award") of 9,000 shares ("Award
Shares") of the Company's common stock, no par value ("Common Stock"), is hereby
granted by the Company to the Grantee subject to the following terms and
conditions and to the provisions of the FirstMerit Corporation 1997 Stock Plan
(the "Plan"), the terms of which are hereby incorporated by reference.
2. TRANSFER RESTRICTIONS. None of the Award Shares shall be sold,
assigned or transferred, in whole or in part, voluntarily or involuntarily, by
the Grantee, nor made subject to any lien (except as provided in Section 6
below), directly or indirectly, by operation of law or otherwise, including
execution, levy, garnishment, attachment, pledge or bankruptcy.
3. RELEASE OF RESTRICTIONS
(A) The restrictions set forth in Section 2 above shall lapse
as follows:
(i) with respect to 7,000 Award Shares, on the
anniversary of this Award Agreement in the year 2001;
(ii) with respect to 1,000 Award Shares, on the
anniversary of this Award Agreement in the year 2002, but only
if the Grantee is an employee of the Company on said date;
(iii) with respect to 1,000 Award Shares, on the
anniversary of this Award Agreement in the year 2003, but only
if the Grantee is an employee of the Company on said date.
(B) The restrictions set forth in Section 2 above with respect
to all of the Award Shares, to the extent they have not lapsed in
accordance with subsection 3(A) and to the extent not related to shares
which previously have been forfeited to the Company, shall lapse on the
first to happen of the following:
(i) the Grantee's employment with the Company is
terminated following a Change of Control, or by reason of
death, Disability, Termination of Employment Without Cause or
Termination of Employment for Good Reason (for purposes of
this subsection (i), the terms "Change of Control,"
"Disability," "Termination of
<PAGE> 2
Employment Without Cause," and "Termination of Employment for
Good Reason" shall have the same meanings ascribed to such
terms in the Employment Agreement, effective as of February 1,
1998, between the Company and the Grantee (the "Employment
Agreement")); or
(ii) an action by the Committee, in its sole
discretion, terminating such restrictions.
4. FORFEITURE. The Award Shares shall be forfeited to the Company upon
the Grantee's termination of employment with the Company and its subsidiaries or
affiliates on or prior to the date the restrictions lapse as provided in Section
3 above.
5. RIGHTS AS SHAREHOLDER. The Grantee shall be entitled to all of the
rights of a shareholder with respect to the Award Shares including the right to
vote such shares and to receive dividends and other distributions payable with
respect to such shares since the Date of Award.
6. ESCROW OF SHARE CERTIFICATES. For the purposes of securing the
re-transfer of the Award Shares into the name of the Company in the event of
forfeiture and to ensure adequate provision for any tax withholding obligations
arising with respect to the Award, certificates for the Award Shares shall be
issued in the Grantee's name and shall be held in escrow by, and subject to a
security interest in favor of, the Company until restrictions with respect to
such shares lapse and all withholding obligations have been satisfied or such
shares are forfeited as provided herein; provided, however, that the terms of
such escrow shall make allowance for the transactions contemplated by Section
3(B)(i) above. A certificate or certificates representing the Award Shares as to
which restrictions have lapsed shall be delivered to the Grantee upon such lapse
and the satisfaction of any withholding obligations.
7. GOVERNMENT REGULATIONS. Notwithstanding anything contained herein to
the contrary, the Company's obligation to issue or deliver certificates
evidencing the Award Shares shall be subject to all applicable laws, rules and
regulations and to such approvals by any governmental agencies or national
securities exchanges as may be required.
8. WITHHOLDING TAXES. The Company shall have the right to require the
Grantee to remit to the Company, or to withhold from other amounts payable to
the Grantee, as compensation or otherwise, an amount sufficient to satisfy all
federal, state and local withholding tax requirements.
9. GOVERNING LAW. This Agreement shall be construed under the laws of
the State of Ohio.
10. RIGHT TO TERMINATE EMPLOYMENT. This Award shall not confer upon the
Grantee any right with respect to being continued in the employ of the Company
or to interfere in any way with the right of the Company to terminate his
employment at any time, for any reason, with or without cause, except as may
otherwise be stated in the Employment Agreement.
2
<PAGE> 3
IN WITNESS WHEREOF, the Company has caused the Award to be granted
pursuant to this Award Agreement on the date first above written.
FIRSTMERIT CORPORATION
By: /s/ John R. Cochran
----------------------------------
John R. Cochran, Chairman and
Chief Executive Officer
Accepted:
GRANTEE:
/s/ Sid A. Bostic
- - -----------------------------------
Sid A. Bostic
Date: February 1, 1998
3
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF FIRSTMERIT CORPORATION
AS OF JANUARY 1, 1998
Citizens Investment Corporation Ohio corporation
Citizens National Bank National Banking Association
Citizens Savings Corporation of Stark County Ohio corporation
FirstMerit Bank, N.A. National Banking Association
- Abell & Associates, Inc. Ohio corporation
- FirstMerit Leasing Company Ohio corporation
- FirstMerit Securities, Inc. Ohio corporation
- OPN, Inc. Ohio corporation
- NB 5 Financial Services, Inc. Ohio corporation
FirstMerit Community Development Corporation Ohio corporation
FirstMerit Credit Life Insurance Company Arizona corporation
Peoples Bank, N.A. National Banking Association
- FirstMerit Insurance Agency, Inc. Ohio corporation
Peoples National Bank National Banking Association
Indirect Subsidiary Owned by Subsidiary Banks
- - ---------------------------------------------
FirstMerit Mortgage Corporation Ohio corporation
<PAGE> 1
EXHIBIT 23
The Board of Directors
FirstMerit Corporation
We consent to incorporation by reference in Registration Statement Nos.
33-7266,33-47074, 33-47147, 33-57076, and 33-57557 on Forms S-8, and in
Registration Statement No. 333-43951 on Form S-4, of our report dated January
15, 1998, relating to the consolidated balance sheets of FirstMerit Corporation
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the years
in the three year period ended December 31, 1997, which report appears in the
1997 Annual Report on Form 10-K of FirstMerit Corporation.
/s/ Coopers & Lybrand LLP
Akron, Ohio
February 16, 1998
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<ARTICLE> 9
<CIK> 0000354869
<NAME> FIRSTMERIT CORPORATION
<MULTIPLIER> 1,000
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
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