<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
<TABLE>
<S> <C>
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 0-10161
FIRSTMERIT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO
------------------------------------------------------
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
34-1339938
------------------------------------------------------
(I.R.S. EMPLOYER IDENTIFICATION NO.)
<TABLE>
<S> <C> <C>
III CASCADE PLAZA, AKRON, OHIO 44308 (330) 996-6300
- ------------------------------------- ---------- ------------------
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) (TELEPHONE NUMBER)
OFFICES)
</TABLE>
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 1, 1999: $1,909,214,509.
Indicate the number of shares outstanding of registrant's common stock as
of February 1, 1999: 74,110,408 Shares of Common Stock, without Par Value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of FirstMerit Corporation, dated March 17,
1999, in Part III.
<PAGE> 2
PART I
ITEM 1. BUSINESS
BUSINESS OF FIRSTMERIT
OVERVIEW
Registrant, FirstMerit Corporation ("FirstMerit" or the "Corporation"), is
a 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 (the "BHCA").
FirstMerit's principal business consists of owning and supervising its
affiliates. Although FirstMerit directs the overall policies of its affiliates,
including lending practices and financial resources, most day-to-day affairs are
managed by their respective officers. The principal executive offices of
FirstMerit are located at III Cascade Plaza, Akron, Ohio 44308, and its
telephone number is (330) 996-6300.
At December 31, 1998, FirstMerit Bank, N.A., one of the Corporation's
principal subsidiaries ("FirstMerit Bank"), operated a network of 153 full
service banking offices and 174 automated teller machines. Its offices span a
total of 14 counties in Ohio, including Ashtabula, Cuyahoga, Delaware, Erie,
Franklin, Geauga, Lake, Lorain, Madison, Medina, Portage, Stark, Summit and
Wayne Counties. FirstMerit serves over 450,000 households and businesses in the
14th largest consolidated metropolitan statistical area ("MSA") in the country
(which combines the primary MSAs for Cleveland, Lorain/Elyria and Akron, Ohio).
FirstMerit Bank has the leading market share in Summit, Medina, Stark and Lorain
counties in Ohio.
Signal Corp was merged with and into FirstMerit on February 12, 1999.
Signal Corp was a bank holding company which had as its primary wholly-owned
subsidiaries Signal Bank, N.A., a national bank, Summit Bank, N.A., a national
bank, First Federal Savings Bank of New Castle, a federal savings bank and
Mobile Consultants, Inc., a broker and servicer of manufactured housing finance
contracts. Since that acquisition, FirstMerit Bank also has the leading market
share in Wayne County, Ohio, and one of the three highest market share positions
in 11 of the 22 counties in which it operates. See "Business -- Recent
Transactions."
SUBSIDIARIES AND OPERATIONS
Through its affiliates, FirstMerit operates primarily as a regional banking
organization, providing a wide range of banking, fiduciary, financial, insurance
and investment services to corporate, institutional and individual customers
throughout northeastern and central Ohio. FirstMerit's largest subsidiary is
FirstMerit Bank into which FirstMerit has merged all of its subsidiary banks.
FirstMerit Bank engages in commercial and consumer banking in its
respective geographic markets. Commercial and consumer banking generally
consists of the acceptance of a variety of demand, savings and time deposits and
the granting of commercial and consumer loans for the financing of both real and
personal property. As part of its community banking philosophy, FirstMerit Bank
has divided its markets into eight geographic areas which are designated as
follows: FirstMerit Bank/Akron, FirstMerit Bank/Citizens (Canton), FirstMerit
Bank/ Cleveland, FirstMerit Bank/Columbus, FirstMerit Bank/Elyria, FirstMerit
Bank/Old Phoenix (Medina), FirstMerit Bank/Wayne County (Wooster) and FirstMerit
Bank/Peoples (Mentor). Each of these regional operations is headed by a
president and local community board. This strategy allows FirstMerit Bank to
deliver a broad line of financial products and services with a community
orientation and a high level of personal service. FirstMerit can therefore offer
a wide range of specialized services tailored to specific markets in addition to
the full range of customary banking products and services. These services
include personal and corporate trust services, personal financial services, cash
management services and international banking services.
Other services provided by FirstMerit Bank or its affiliates include
automated banking programs, credit cards, rental of safe deposit boxes, letters
of credit, leasing, discount brokerage and credit life insurance. FirstMerit
Bank also operates a trust department, which offers estate and trust services.
The majority of its customers is comprised of consumers and small and medium
size businesses. FirstMerit Bank is not engaged in lending outside the
continental United States and is not dependent upon any one significant customer
or specific industry.
1
<PAGE> 3
FirstMerit's non-banking direct and indirect subsidiaries provide insurance
sales services, credit life, credit accident and health insurance, securities
brokerage services, equipment lease financing and other financial services.
FirstMerit's principal direct operating subsidiaries other than FirstMerit
Bank include FirstMerit Credit Life Insurance Company and FirstMerit Community
Development Corporation. FirstMerit Credit Life Insurance Company was formed in
1985 to underwrite credit life and credit accident and health insurance in
connection with the extension of credit to its customers. FirstMerit Community
Development Corporation was organized in 1994 to further FirstMerit's efforts in
identifying the credit needs of its lending communities and meeting the
requirements of the Community Reinvestment Act ("CRA"). Congress enacted CRA to
ensure that financial institutions meet the deposit and credit needs of their
communities. Through a community development corporation, financial institutions
can fulfill these requirements by nontraditional activities such as acquiring,
rehabilitating or investing in real estate in low to moderate income
neighborhoods, and promoting the development of small business.
FirstMerit Bank is the parent corporation of several wholly-owned Ohio
corporations. In 1995, FirstMerit Mortgage Corporation ("FirstMerit Mortgage"),
which is located in Canton, Ohio, was organized and capitalized. FirstMerit
Mortgage originates residential mortgage loans and provides mortgage loan
servicing for itself and FirstMerit Bank. In 1993, FirstMerit Leasing Company
("FirstMerit Leasing") and FirstMerit Securities, Inc. ("FirstMerit Securities")
were organized. FirstMerit Leasing provides equipment lease financing and
related services, while FirstMerit Securities offers discount brokerage services
to customers of FirstMerit Bank and other FirstMerit subsidiaries.
FirstMerit Bank is also the parent corporation of Abell & Associates, Inc.
("Abell") a nationally-known life insurance and financial consulting firm
acquired in May 1997, and FirstMerit Insurance Agency, Inc. 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, as well as individual corporations, concentrating on funding for
corporate liability issues. FirstMerit Insurance Agency, Inc. became a
subsidiary of FirstMerit Bank when FirstMerit acquired Great Northern Financial
Corporation in 1994 (at which time its life insurance license was inactive).
FirstMerit Insurance Agency, Inc.'s license to sell life insurance products and
annuities was reactivated in 1997.
Although FirstMerit is a corporate entity legally separate and distinct
from its affiliates, bank holding companies such as FirstMerit, which are
subject to the BHCA, are expected to act as a source of financial strength for
their subsidiary banks. The principal source of FirstMerit's income is dividends
from its subsidiaries. There are certain regulatory restrictions on the extent
to which financial institution subsidiaries can pay dividends or otherwise
supply funds to FirstMerit.
RECENT TRANSACTIONS
FirstMerit engages in discussions concerning possible acquisitions of other
financial institutions and financial services companies on a regular basis.
FirstMerit also periodically acquires branches and deposits in its principal
markets. FirstMerit's strategy for growth includes strengthening market share in
its existing markets, expanding into complementary markets and broadening its
product offerings. Consistent with this strategy, FirstMerit completed two
strategic acquisitions in 1998 and one in early 1999.
CoBancorp Acquisition. FirstMerit completed the acquisition of CoBancorp
Inc., Elyria, Ohio, ("CoBancorp") the parent of PremierBank & Trust and
Jefferson Savings Bank, on May 22, 1998 (the "CoBancorp Merger"). FirstMerit had
entered into an Agreement of Affiliation and Plan of Merger with CoBancorp on
November 2, 1997. Under the terms of the CoBancorp Merger, CoBancorp
shareholders had a right to elect to exchange their common stock for either
Common Stock of FirstMerit, cash, or a combination of Common Stock and cash,
provided that no less than 30% nor more than 49% of the total transaction value
could be paid in cash. The CoBancorp Merger was structured as a tax-free
exchange for CoBancorp shareholders who received FirstMerit Common Stock, and
was accounted for as a purchase transaction. At the effective time of the
CoBancorp Merger, based upon the average closing price of FirstMerit's Common
Stock of $29.375 per share over a specified period, the value of the transaction
on such date was approximately $174.1 million. In connection with the CoBancorp
Merger, FirstMerit issued approximately 3.9 million shares of Common Stock, paid
$50.0
2
<PAGE> 4
million in cash (based upon the CoBancorp shareholder elections and
allocations), and assumed merger-related liabilities of approximately $9.6
million. The transaction created goodwill of approximately $136.5 million that
will be amortized primarily over 25 years.
Security First Acquisition. On October 23, 1998, FirstMerit acquired
Security First Corporation ("Security First") pursuant to an Agreement of
Affiliation and Plan of Merger by and between Security First and FirstMerit.
Security First was the parent company of Security Federal Savings and Loan
Association of Cleveland and First Federal Savings Bank of Kent. Pursuant to the
merger agreement, Security First merged with and into FirstMerit in a tax-free,
stock-for-stock exchange (the "Security First Merger"). All shares of Security
First common stock issued and outstanding immediately prior to the effective
time of the Security First Merger were converted into the right to receive
0.8855 of a share of FirstMerit Common Stock. At the effective time of the
Security First Merger, based upon the average closing price of FirstMerit's
Common Stock of $22.58 per share over a specified period, the value of the
transaction on such date was approximately $199.0 million. In connection with
the Security First Merger, FirstMerit issued approximately 7.0 million shares of
Common Stock. The transaction was accounted for as a pooling-of-interests.
At the time FirstMerit announced the Security First Merger, FirstMerit also
announced the termination of a previously initiated stock repurchase program. In
order for the Security First Merger to be treated as a pooling-of-interest for
accounting purposes, FirstMerit reissued approximately 1.38 million shares of
FirstMerit Common Stock through an underwritten public offering which closed on
September 14, 1998.
Signal Corp Acquisition. On August 10, 1998, FirstMerit entered into an
Agreement of Affiliation and Plan of Merger with Signal Corp ("Signal"), a bank
holding company, which had as its primary wholly-owned subsidiaries Signal Bank,
N.A., a national bank, Summit Bank, N.A., a national bank, First Federal Savings
Bank of New Castle, a federal savings bank and Mobile Consultants, Inc., a
broker and servicer of manufactured housing finance contracts. Pursuant to the
merger agreement, Signal merged with and into FirstMerit in a tax-free,
stock-for-stock exchange (the "Signal Merger"). All shares of Signal common
stock issued and outstanding immediately prior to the effective time were
converted into the right to receive 1.32 shares of FirstMerit Common Stock.
FirstMerit issued approximately 16.8 million shares of Common Stock and
approximately 214,000 Shares of FirstMerit 6 1/2% Cumulative Convertible
Preferred Stock, Series B, no par value ("FirstMerit Preferred Stock") in
connection with the merger, and based on the closing price of the Common Stock
on February 12, 1999 of $25.00 per share and the closing price of the FirstMerit
Preferred Stock on February 4, 1999 (the last trade before the merger) of $71.00
per share, the value of the transaction on such date was approximately $436
million. The Signal Merger was accounted for as a pooling-of-interests.
FirstMerit believes that these acquisitions have and will continue to
further strengthen its competitive position in the northeastern and central Ohio
markets and have broadened the financial services it can offer to its customers.
FirstMerit believes it has significant experience in integrating acquired
businesses. FirstMerit continues to explore acquisition opportunities that would
meet its objectives.
COMPETITION
The financial services industry is highly competitive. FirstMerit and its
subsidiaries (the "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, Firstar
Bank and 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 BHCA. Bank
holding companies are subject to regulation by the Federal Reserve. Under
Federal 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.
3
<PAGE> 5
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.
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. As of June 1, 1997,
interstate bank holding companies can 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. FirstMerit management believes that the
Interstate Act may continue to stimulate mergers in the banking industry.
FirstMerit is also under the jurisdiction of the Securities and Exchange
Commission (the "SEC") 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 SEC.
SUMMARY RESULTS OF OPERATIONS
As of year-end 1998, FirstMerit's consolidated total assets were $7.1
billion. Earnings for FirstMerit in 1998 were $97.5 million, or $1.34 per
diluted share, compared with $95.7 million, or $1.35 per diluted share the year
ended 1997. If merger-related expenses and conforming accounting adjustments of
$12.8 million, after taxes, related to the Security First pooling-of-interests
acquisition are excluded, 1998 earnings would have been $110.3 million, or $1.52
per diluted share. See note 2 to the consolidated financial statements for more
information on merger-related costs and conforming accounting entries. Total
cash dividends paid to shareholders for the entire year were $0.66, an increase
of $0.05 per share over the previously stated annual payments of $0.61. All per
share amounts reflect the two-for-one split that occurred September 29, 1997 for
shareholders of record as of September 2, 1997. Additionally, all prior period
data has been restated to reflect the Security First pooling-of-
4
<PAGE> 6
interests and 1998 data also includes the results of the CoBancorp purchase
acquisition from May 22, 1998 through December 31, 1998. Because the
unquantified CoBancorp results of approximately seven months are in 1998 totals
only, almost all 1998 data is greater than prior years' figures.
On a fully-tax equivalent basis, net interest income was $308.9 million, up
8.5% from last year. The net interest margin was 5.04% compared to 5.11% in 1997
as higher earning-asset volumes made up for the decrease in the net interest
margin.
Other income, less securities gains, was $412.7 million for the year, an
increase of $44.5 million or 12% over the prior year figures. The largest gains
in other income over one year ago were experienced in credit card fees, up 40%;
other service fees, up 42%; and other operating income, up 25%. Excluding the
merger-related costs associated with the Security First pooling-of-interests,
other expenses were $232.9 million compared to $204.4 million in 1997. The
thirteen percent increase in operating expenses, offset by growth in net
revenue, kept the efficiency ratio at 55.0% for both 1998 and 1997.
During 1998, the Corporation recorded a provision for loan losses of $28.4
million, including $7.3 million from a conforming accounting adjustment related
to the loans of Security First. Last year's provision for loan losses totaled
$21.9 million. In addition to the conforming adjustment, the provisions for 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 0.33% of total loans and other
real estate compared to 0.37% one year ago. The allowance for loan losses as a
percentage of outstanding loans was 1.58% at year-end 1998 and 1.32% at year-end
1997.
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 79 of FirstMerit Bank's other
branches are owned by FirstMerit Bank, while the properties occupied by its
remaining 73 branches 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.
5
<PAGE> 7
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 31,830 square feet of leased space
in Main Place.
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
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
At a Special Meeting of Shareholders on December 9, 1998, the Shareholders
of FirstMerit voted (i) to adopt the Signal Merger Agreement, including the
issuance of shares of FirstMerit Common Stock and FirstMerit Preferred Stock,
contemplated thereby ("Proposal I"); and (ii) to set the number of directors at
21, increasing such number by three ("Proposal II"). Of the 52,133,880 votes
cast in person at the meeting or by proxy, 50,326,251 were voted in favor
Proposal I and 50,140,612 were voted in favor of Proposal II; 964,394 were voted
against Proposal I and 1,453,235 were voted against Proposal II; 290,226
abstained with respect to Proposal I and 540,033 abstained with respect to
Proposal II; and there were 553,009 broker non-votes with respect to Proposal I
and no broker non-votes with respect to Proposal II.
6
<PAGE> 8
EXECUTIVE OFFICERS OF REGISTRANT
The following persons are the executive officers of FirstMerit as of
December 31, 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 56 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 56 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 of Norwest Bank Nebraska,
N.A.
John R. Macso 52 11-08-90 Executive Vice President of FirstMerit and
President, FirstMerit Bank Services Division
and Chief Technology Officer, since February 1,
1998; previously President and Chief Executive
Officer of FirstMerit Bank; previously
Executive Vice President of FirstMerit Bank
Robert P. Brecht 49 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 Bank, N.A.
Jack R. Gravo 52 02-16-95 Executive Vice President of FirstMerit and
Chairman of FirstMerit Mortgage Corporation;
previously Executive Vice President and Chief
Financial Officer of FirstMerit and FirstMerit
Bank; previously President and Chief Executive
Officer of Citizens National Bank since
February 1, 1995; previously President of The
CIVISTA Corporation
Bruce M. Kephart 47 07-25-95 Executive Vice President of FirstMerit and
Regional President of FirstMerit Bank;
previously Vice President, Bank One, Cleveland,
N.A.
Austin J. Mulhern 57 10-23-98 Senior Vice President and Chief Financial
Officer of FirstMerit and FirstMerit Bank;
formerly President and Chief Operating Officer
of Security Federal Savings and Loan
Association of Cleveland
George P. Paidas 52 04-13-94 Executive Vice President of FirstMerit and
Regional President of FirstMerit Bank; formerly
President and Chief Executive Officer of The
Old Phoenix National Bank of Medina
Charles F. Valentine 59 10-23-98 Executive Vice President of FirstMerit and
President and Chief Executive Officer of
FirstMerit Bank Construction Financing
Division; formerly Chairman and Chief Executive
Officer of Security First Corp. and Security
Federal Savings and Loan Association
Gregory R. Bean 47 04-10-91 Senior Vice President of FirstMerit; Senior
Vice President and Senior Trust Officer of
FirstMerit Bank
Gary J. Elek 47 02-11-88 Senior Vice President and Treasurer of
FirstMerit and Senior Vice President of
FirstMerit Bank
Terry E. Patton 50 04-10-85 Senior Vice President, Counsel and Secretary of
FirstMerit and FirstMerit Bank
William E. Stansifer 51 10-02-95 Senior Vice President of FirstMerit and
FirstMerit Bank; previously Senior Vice
President, Banking Credit Policy Office,
Norwest Corporation
</TABLE>
7
<PAGE> 9
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(1)
<TABLE>
<CAPTION>
BIDS PER SHARE
QUARTER HIGH DIVIDEND BOOK
ENDING ------ LOW RATE VALUE(2)
<S> <C> <C> <C> <C>
03-31-97 $21.38 17.38 0.1450 $8.33
06-30-97 25.25 19.25 0.1450 8.40
09-30-97 27.00 22.63 0.1600 8.49
12-31-97 30.75 24.88 0.1600 8.67
03-31-98 34.38 25.88 0.1600 8.54
06-30-98 33.75 27.25 0.1600 9.91
09-30-98 31.00 21.38 0.1600 10.41
12-31-98 28.13 20.75 0.1800 10.38
</TABLE>
(1) 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.
(2) Based upon number of shares outstanding at the end of each quarter.
On February 1, 1999 there were approximately 8,780 shareholders of record
of FirstMerit Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Results of Operations
Interest income....................... $ 503,097 463,540 460,923 460,220 410,428
Conversion to fully-tax equivalent.... 3,492 3,212 3,043 3,840 4,590
---------- --------- --------- --------- ---------
Interest income*...................... 506,589 466,752 463,966 464,060 415,018
Interest expense...................... 197,651 181,935 186,336 203,541 158,304
---------- --------- --------- --------- ---------
Net interest income*.................. 308,938 284,817 277,630 260,519 256,714
Provision for possible loan losses.... 28,383 21,903 18,074 20,140 5,206
Other income.......................... 110,480 85,336 84,194 70,216 72,074
Other expenses........................ 242,723 204,386 224,911 241,146 205,419
---------- --------- --------- --------- ---------
Income before federal income taxes*... 148,312 143,864 118,839 69,449 118,163
Federal income taxes.................. 47,342 44,978 38,446 34,284 35,524
Fully-tax equivalent adjustment....... 3,492 3,212 3,043 3,840 4,590
---------- --------- --------- --------- ---------
Federal income taxes*................. 50,834 48,190 41,489 38,124 40,114
Income before extraordinary item........ 97,478 95,674 77,350 31,325 78,049
Extraordinary item -- gain on
disposition of assets after
combination (net of tax effect)....... -- -- -- 5,599 --
---------- --------- --------- --------- ---------
Net income(a)........................... $ 97,478 95,674 77,350 36,924 78,049
========== ========= ========= ========= =========
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
YEARS ENDED,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Per share:
Income before extraordinary item... $ 1.37 1.38 1.08 0.43 1.10
Extraordinary item (net of tax
effect).......................... -- -- -- 0.08 --
---------- --------- --------- --------- ---------
Basic net income(a)................ $ 1.37 1.38 1.08 0.51 1.10
========== ========= ========= ========= =========
Diluted net income(a).............. $ 1.34 1.35 1.06 0.50 1.09
========== ========= ========= ========= =========
Cash dividends..................... $ 0.66 0.61 0.55 0.51 0.49
Dividend payout ratio................. 48.14% 44.25% 51.05% 119.27% 44.40%
Average Ratios
Return on total assets(a)............. 1.47% 1.61% 1.27% 0.60% 1.33%
Return on shareholders' equity(a)..... 14.26% 16.44% 13.23% 6.36% 13.92%
Shareholders' equity to total
assets............................. 10.35% 9.82% 9.62% 9.40% 9.55%
Balance Sheet Data
Total assets (at year end)............ $7,127,148 5,992,943 5,862,741 6,143,748 6,230,324
Daily averages:
Total assets....................... $6,609,659 5,925,238 6,075,967 6,180,666 5,873,559
Earning assets..................... 6,130,813 5,577,001 5,721,386 5,792,121 5,510,376
Deposits and other funds........... 5,822,864 5,241,547 5,412,169 5,525,646 5,256,946
Shareholders' equity............... 683,809 582,029 584,469 580,725 560,821
</TABLE>
- ---------------
*Fully-tax equivalent basis
(a) The 1998 net income, the provision for possible loan losses, other expenses,
and the profitability ratios shown include merger-related expenses
associated with the Security First pooling-of-interests acquisition of $12.8
million after taxes. These same results, restated to exclude the
merger-related expenses, can be found in the "Earnings Summary" section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The results for 1996 include a one-time Savings Association
Insurance Fund ("SAIF") assessment of $10.2 million before taxes or $6.7
million after taxes. In addition to the extraordinary gain shown in the
table, results for 1995 include several one-time charges totaling $30.0
million before taxes. The charges related to the CIVISTA acquisition,
overall reengineering costs to improve operating efficiencies and various
other items.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE YEARS 1998, 1997, 1996
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 1998, 1997 and 1996. 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
The Corporation's earnings totaled $110.3 million, or $1.52 per share,
after merger-related expenses of $12.8 million, compared to $95.7 million, or
$1.35 per share, for 1997. Reported net income for 1998, including the
merger-related costs, was $97.5 million, or $1.34 per share. These results
reflect the restatement of both
9
<PAGE> 11
years' financial information to account for the acquisition of Security First on
a pooling-of-interests basis. Additionally, 1998 results include the earnings of
CoBancorp, which was accounted for as a purchase transaction, from the merger
date of May 23, 1998. Because results of CoBancorp are included in 1998 totals
for approximately seven months, all individual categories discussed throughout
the Annual Report will have unquantifiable increases over 1997 due solely to the
acquisition.
Excluding the merger-related costs, returns on average equity ("ROE") and
average assets ("ROA") were 16.13% and 1.67% compared to 16.44% and 1.61% for
the prior year. ROE and ROA based on 1998 reported net income of $97.5 million
were 14.26% and 1.47%, respectively.
Net interest income on a fully tax-equivalent basis reached $308.9 million
for the year compared to $284.8 million for 1997, an increase of 8.5%. The
increase occurred because of earning asset volume gains of 9.9%. The net
interest margin declined from 5.11% in 1997 to 5.04% for 1998, due mainly to a
lower interest rate environment.
Adjusted net revenue for 1998 of $412.7 million represents a 12.1% increase
from its year earlier level of $368.2 million. Adjusted net revenue is defined
as net interest income on a tax-equivalent basis added to other income, less
securities gains. The growth in other income and earning assets more than offset
the compression in the net interest margin. Excluding gains from the sale of
securities, other income was $103.8 million, or 24.5% higher than the $83.4
million reported for 1997. Other income now accounts for 25.2% of 1998 net
revenue compared with 22.7% a year ago. Fee improvement was evident
across-the-board as follows: trust fees, up $2.7 million, or 20.3%; credit card
fees, up $5.7 million, or 40%; service charges, up $3.5 million, or 12.7%; other
service fees, up $3.1 million, or 41.5%, and other operating income, up $3.6
million, or 25.1%.
Excluding the $9.8 million pre-tax charge related to the Security First
merger, other expenses totaled $232.9 million for the year compared with $204.4
million for the prior year, an increase of 13.7%. Reported other expenses, when
the merger costs are included, were $242.7 million. Most 1998 expense categories
are consistent with the prior year performance when measured as a percentage of
assets for each period. Amortization of intangibles resulting from the CoBancorp
acquisition has risen sharply, from $2.0 million in 1997 to $6.0 million for
1998. After adjusting for merger-related expenses, the efficiency ratio was
55.0%, same as last year.
The provision for loan losses of $28.4 million includes a merger-related
increase of $7.3 million. Net charge-offs as a percentage of average outstanding
loans totaled 0.35% for 1998 compared to 0.40% last year. At year-end 1998, the
allowance as a percentage of outstanding loans stands at 1.58% compared to the
1997 reserve level of 1.32% of outstanding loans.
The following table summarizes the changes in earnings per share for 1998
and 1997.
<TABLE>
<CAPTION>
CORE* AS REPORTED
----- -----------
1998/ 1998/ 1997/
(DOLLARS) 1997 1997 1996
--------- ----- ----- -----
<S> <C> <C> <C>
CHANGES IN EARNINGS PER SHARE
Net income per diluted share for 1997 and 1996,
respectively.................................... $ 1.35 $ 1.35 $ 1.06
Increases (decreases) attributable to:
Net interest income -- taxable equivalent....... 0.34 0.33 0.10
Provision for possible loan losses.............. 0.01 (0.09) (0.05)
Trust services.................................. 0.04 0.04 0.02
Service charges on deposit accounts............. 0.05 0.05 0.03
Credit card fees................................ 0.08 0.08 0.04
Service fees -- other........................... 0.04 0.04 0.02
Securities gains (losses), net.................. 0.07 0.07 0.04
Loan sales and servicing income................. 0.02 0.02 0.02
Other operating income.......................... 0.05 0.05 (0.15)
Salaries and employee benefits.................. (0.16) (0.18) 0.04
Net occupancy expense........................... 0.02 0.01 --
Equipment expense............................... (0.04) (0.04) --
Intangible amortization expense................. (0.06) (0.06) 0.02
</TABLE>
10
<PAGE> 12
<TABLE>
<CAPTION>
CORE* AS REPORTED
----- -----------
1998/ 1998/ 1997/
(DOLLARS) 1997 1997 1996
--------- ----- ----- -----
<S> <C> <C> <C>
SAIF charge..................................... 0.14
Other operating expenses, excluding SAIF........ (0.16) (0.26) 0.08
Federal income taxes -- taxable equivalent...... (0.10) (0.04) (0.09)
Change in share base............................ (0.03) (0.03) 0.03
------ ------ ------
Net change in net income........................ 0.17 (0.01) 0.29
------ ------ ------
Net income per diluted share for 1998 core, 1998
reported and 1997, respectively............... $ 1.52 $ 1.34 $ 1.35
====== ====== ======
</TABLE>
- ---------------
*For Management Discussion and Analysis, the term "core" is defined as excluding
merger-related expenses associated with the Security First pooling-of-interests
acquisition. See Note 2 to the consolidated financial statements for further
details.
SUPERCOMMUNITY BANKING RESULTS
The Corporation's operations are managed along its major line of business,
Supercommunity Banking. Note 15 to the consolidated financial statements
provides performance data for this line of business as well as summary
information by product and service group.
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>
1998
----------------------------------
AVERAGE NET
EARNING INTEREST INTEREST
ASSETS SPREAD INCOME
---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-bearing liabilities...................... $4,799,955 4.12% 197,758
Non-interest-bearing liabilities and equity....... 1,330,858 8.26%* 111,180
---------- --------
$6,130,813 308,938
========== ========
1997
----------------------------------
AVERAGE NET
EARNING INTEREST INTEREST
ASSETS SPREAD INCOME
---------- -------- --------
Interest-bearing liabilities...................... $4,508,153 4.04% 182,129
Non-interest-bearing liabilities and equity....... 1,068,848 8.37%* 102,688
---------- --------
$5,577,001 284,817
========== ========
1996
----------------------------------
AVERAGE NET
EARNING INTEREST INTEREST
ASSETS SPREAD INCOME
---------- -------- --------
Interest-bearing liabilities...................... $4,667,067 3.99% 186,216
Non-interest-bearing liabilities and equity....... 1,054,319 8.11%* 91,414
---------- --------
$5,721,386 277,630
========== ========
</TABLE>
- ---------------
* Yield on earning assets.
11
<PAGE> 13
Net interest income, on a fully-tax equivalent basis, increased $24.1
million, or 8.5%, to $308.9 million in 1998 compared to $284.8 million in 1997
and $277.6 million in 1996. The increase over 1997 occurred because the rise in
interest income more than offset the increase in interest expense. Specifically,
interest income rose $39.8 million while interest expense increased $15.7
million, or 8.6%.
Interest income was higher than last year because average earning assets
grew 9.9% or $553.8 million. The increase in average earning assets was
attributable to the CoBancorp, "purchase" acquisition on May 22, 1998 and strong
loan demand. Under "purchase" accounting rules, the results of the acquired
company are included in current year totals from the date of the acquisition
through the end of the year; related prior period totals do not contain the
results of the acquired company. The average yield on earning assets decreased
11 basis points from 8.37% in 1997 to 8.26% during 1998. In summary, higher
earning asset volumes outpaced the decline in earning asset rates resulting in
higher interest income.
Higher interest expense was again volume related as deposits and other
borrowings were used to fund the earning asset growth. Similar to the asset
scenario described in the preceding paragraph, the CoBancorp acquisition played
a large part in the higher funding balances and resultant increase in interest
expense. The cost of funds for the year as a percentage of average earning
assets increased from 4.04% in 1997 to 4.12% this year.
The following table illustrates the specific year-over-year impact to net
interest income based on changes in the rate and volume components of the
interest-earning assets and interest-bearing liabilities.
CHANGES IN NET INTEREST DIFFERENTIAL --
FULLY-TAX EQUIVALENT RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 AND 1997 1997 AND 1996
-------------------------- --------------------------
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................................. $ 9,216 (1,698) 7,518 (12,778) 1,428 (11,350)
Tax-exempt.............................. 914 (221) 693 (1,120) 790 (330)
Loans..................................... 36,627 (3,777) 32,850 4,154 8,996 13,150
Federal funds sold........................ (1,239) 15 (1,224) 1,211 105 1,316
------- ------ ------- ------- ------ -------
Total interest income..................... $45,518 (5,681) 39,837 (8,533) 11,319 2,786
------- ------ ------- ------- ------ -------
INTEREST EXPENSE
Interest on deposits:
Demand-interest bearing................. $ (313) (1,902) (2,215) 304 (1,386) (1,082)
Savings................................. 752 4,025 4,777 (2,336) 1,278 (1,058)
Certificates and other time deposits
(CDs)................................ 10,717 (1,409) 9,308 (1,446) (138) (1,584)
Federal funds purchased, securities sold
under agreements to repurchase and other
borrowings.............................. 4,660 (814) 3,846 (1,255) 577 (678)
------- ------ ------- ------- ------ -------
Total interest expense.................... 15,816 (100) 15,716 (4,733) 331 (4,402)
------- ------ ------- ------- ------ -------
Net interest income....................... $29,270 (5,149) 24,121 (3,800) 10,988 7,188
======= ====== ======= ======= ====== =======
</TABLE>
- ---------------
Note: The variance created by a combination of rate and volume has been
allocated entirely to the volume column.
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.
12
<PAGE> 14
The net interest margin for 1998 was 5.04% compared to 5.11% in 1997 and
4.85% in 1996. The decline in the net interest margin compared to last year was
mainly due to falling interest rates during the year (lower interest rate
spread).
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net interest income........................... $ 305,446 281,605 274,587
Tax equivalent adjustment..................... 3,492 3,212 3,043
---------- ---------- ---------
Net interest income -- FTE.................... $ 308,938 $ 284,817 277,630
========== ========== =========
Average earning assets........................ $6,130,813 5,577,001 5,721,386
---------- ---------- ---------
Net interest margin........................... 5.04% 5.11% 4.85%
========== ========== =========
</TABLE>
OTHER INCOME
Excluding securities gains, other income totaled $103.7 million in 1998, an
increase of $20.3 million or 24.4% over 1997, and $31.4 million over adjusted
1996 which also excludes prior gains of $13.7 million from the sale of branches
and a former bank affiliate. Increases in all categories below occurred because
of the 1998 CoBancorp purchase acquisition as well as continued company emphasis
on improving other income (fee income).
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Trust fees............................................ $ 16,147 13,442 12,182
Service charges on deposits........................... 31,257 27,717 25,892
Credit card fees...................................... 20,064 14,355 11,415
Service fees -- other................................. 10,493 7,337 6,184
Mortgage sales and servicing.......................... 7,814 6,009 4,863
Securities gains (losses)............................. 6,764 1,957 (1,776)
Gains from branch/subsidiary sales.................... 473 -- 13,700
Other operating income................................ 17,468 14,519 11,734
-------- ------ ------
$110,480 85,336 84,194
======== ====== ======
</TABLE>
Trust fees increased $2.7 million or 20.1% to $16.1 million in 1998.
Service charges on deposits rose $3.5 million or 12.8% compared to last year.
Credit card fees increased $5.7 million in 1998 partially due to increased
merchant activity and the CoBancorp acquisition. Other service fees rose $3.2
million, or 43.0% compared to last year; a major component of this category is
ATM fees. Income from mortgage sales and servicing was up $1.8 million, these
gains occur as the Corporation's mortgage company sells mortgage loans to the
secondary market. Securities gains increased $4.8 million, or 245.6% as the
Corporation sold several groups of mortgage-backed securities at gains. The
sales of the mortgage-backed securities occurred as management saw the
opportunity to take gains on sales, to reinvest the proceeds in higher yielding
commercial and consumer credits, and to sell before further "run-off" of these
loans occurred during a high refinancing period. Other operating income was up
$2.9 million mainly because of the CoBancorp acquisition.
Excluding gains from sales of securities, other income was $103.7 million
and now represent 25.2% of net revenue compared to 22.7% last year. Net revenue
is defined as net interest income, on a fully-taxable equivalent basis, plus
other income, less securities gains.
FEDERAL INCOME TAX
Federal income tax expense totaled $47.3 million in 1998 compared to $45.0
million in 1997, and $38.4 in 1996. In 1998 the effective federal income tax
rate for the Corporation equaled 32.7% compared to 32.0% in 1997 and 33.3% in
1996.
13
<PAGE> 15
OTHER EXPENSES
Adjusted other expenses, excluding merger-related costs, were $232.9
million in 1998 compared to $202.4 million in 1997 and $214.7 million in 1996,
excluding the $10.2 million pre-tax SAIF assessment. Totals for 1998 include the
results of CoBancorp, Inc. for a little over seven months. In accordance with
purchase accounting rules; prior periods do not include CoBancorp results.
OTHER EXPENSES
<TABLE>
<CAPTION>
REPORTED CORE*
1998 1998 1997 1996
-------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and wages....................... $ 88,014 86,401 76,486 77,616
Pension and benefits..................... 22,661 22,585 21,014 22,628
-------- ------- ------- -------
Salaries, wages, pension and benefits.... 110,675 108,986 97,500 100,244
Net occupancy expense.................... 17,872 17,180 18,561 19,275
Equipment expense........................ 15,882 15,741 12,717 12,894
Taxes, other than federal income taxes... 7,890 7,890 7,168 7,298
Stationery, supplies and postage......... 10,789 10,774 9,529 11,166
Bankcard, loan processing, and other
fees................................... 24,219 22,703 15,639 13,337
Advertising.............................. 5,416 5,183 6,298 7,303
Professional services.................... 11,683 7,233 5,420 4,834
Telephone................................ 4,722 4,722 3,856 3,654
FDIC assessment, excluding SAIF in
1996................................... 1,473 1,473 1,524 6,162
SAIF assessment.......................... -- -- -- 10,200
Amortization of intangibles.............. 6,002 6,002 1,973 3,255
Other operating expenses................. 26,100 25,053 24,201 25,289
-------- ------- ------- -------
Total other expenses..................... $242,723 232,940 204,386 224,911
======== ======= ======= =======
</TABLE>
- ---------------
* Excludes merger-related costs associated with the Security First
pooling-of-interests acquisition. The total pre-tax merger-related costs
incurred were $17.2 million, of which $9.8 million affected Other Expenses as
indicated in the table above. The remaining costs were an increase of $7.3
million to the Provision for Loan Losses and a $0.1 million decline in Other
Income.
Adjusted salaries, wages, pension and benefits totaled $109.0 million in
1998, an increase of $11.5 million or 11.8% from 1997 and 8.8% more than 1996.
Increases over both periods are due to the CoBancorp purchase and employee
annual merit increases.
Adjusted bankcard, loan processing, and other fees increased $7.1 million
to $22.7 million in 1998. The Corporation's efforts to improve the efficiency of
CoBancorp, acquired on May 22, 1998, are still under way.
Amortization of intangible expense during 1998 was $6.0 million, up $4.0
million from 1997 and $2.7 million from 1996. The 1998 increase was due to the
CoBancorp acquisition. The decline in 1997 intangible amortization expense
compared to 1996 occurred as 1996 branch sales, many in the fourth quarter,
lessened goodwill and core deposit intangibles.
Excluding the merger-related expenses, the efficiency ratio for 1998 was
54.98% compared to 54.97% last year. The "lower-is-better" efficiency ratio
indicates the percentage of operating costs that is used to generate each dollar
of net revenue -- that is, during 1998, 54.98 cents was spent to generate $1 of
net revenue.
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 have been classified as
available-for-sale.
In 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
14
<PAGE> 16
shareholders' equity. The adjustments to increase fair value at year-ends 1998
and 1997 were $6.3 million and $5.1 million, respectively.
At year-end 1998, investment securities totaled $1,551.7 million compared
with $1,136.6 million one year earlier, an increase of 36.5%. Investment
securities totaled $1,221.6 million at the end of 1996.
A summary of investment securities' carrying value is presented below as of
year-ends 1998, 1997 and 1996. Presented with the summary is a maturity
distribution schedule with corresponding weighted average yields.
CARRYING VALUE OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997 1996
---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury and Government agency
obligations.................................. $660,018 613,584 684,787
Obligations of states and political
subdivisions................................. 98,058 81,611 93,587
Mortgage-backed securities..................... 537,120 341,957 327,800
Other securities............................... 256,531 99,409 115,435
---------- --------- ---------
$1,551,727 1,136,561 1,221,609
========== ========= =========
</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>
U.S. Treasury securities........ $ 47,332 5.84% 38,138 6.11% -- -- -- --
U.S. Government agency
obligations................... 29,999 5.87% 114,604 5.76% 163,189 5.94% 266,756 5.78%
Obligations of states and
political subdivisions........ 20,723 4.71%* 30,919 4.80%* 32,655 4.68%* 13,761 4.88%*
Mortgage-backed securities...... 1,783 6.41% 13,563 6.84% 59,468 6.15% 462,306 6.54%
Other securities................ 1,591 5.84% 5 5.50% 40,594 4.59% 214,341 6.53%
-------- ---- ------- ---- ------- ---- ------- ----
$101,428 5.63% 197,229 5.75% 295,906 5.66% 957,164 6.30%
======== ==== ======= ==== ======= ==== ======= ====
Percent of total................ 6.54% 12.71% 19.07% 61.68%
======== ======= ======= =======
</TABLE>
- ---------------
* Fully-taxable equivalent based upon federal income tax structure applicable at
December 31, 1998.
At year-end 1998, Collateralized Mortgage Obligations ("CMOs") totaled
$348.8 million which represents approximately 22.5% 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 $6.5
million, or 1.9% of the total investment portfolio.
The yield on the portfolio was 6.29% in 1998 compared to 6.49% in 1997 and
6.32% in 1996.
15
<PAGE> 17
LOANS
Total loans outstanding at year-end 1998 increased 11.9% compared to one
year ago or $4,997.4 million compared to $4,467.5 million. A breakdown by
category is presented below, along with a maturity summary of commercial,
financial and agricultural loans.
<TABLE>
<CAPTION>
YEAR-ENDS,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural....................... $1,176,904 883,114 755,023 591,435 469,188
Installments to individuals.......... 914,573 871,242 853,882 813,412 818,791
Real estate.......................... 2,753,906 2,569,213 2,460,799 2,665,771 2,616,559
Lease financing...................... 152,013 143,955 159,237 179,951 158,737
---------- --------- --------- --------- ---------
Total loans........................ 4,997,396 4,467,524 4,228,941 4,250,569 4,063,275
Less allowance for possible loan
losses............................. 78,949 58,963 54,304 51,412 40,117
---------- --------- --------- --------- ---------
Net loans....................... $4,918,447 4,408,561 4,174,637 4,199,157 4,023,158
========== ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR-END 1998
COMMERCIAL, FINANCIAL
AND AGRICULTURAL
-------------------------
<S> <C>
Due in one year or less..................................... $ 708,504
Due after one year but within five years.................... 259,444
Due after five years........................................ 208,956
----------
Total.................................................. $1,176,904
==========
Loans due after one year with interest at a predetermined
fixed rate................................................ 150,347
Loans due after one year with interest at a floating rate... 318,045
----------
Total.................................................. $ 468,392
==========
</TABLE>
Real estate loans at year-end 1998 totaled $2,753.9 million or 55.1% of
total loans outstanding compared to 57.5% one year ago. Residential loans (1-4
family dwellings) totaled $1,151.0 million, home equity loans $307.5 million,
construction loans $218.1 million and commercial real estate loans $1,077.3
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 5.0% compared to last year
and accounted for 18.3% of total loans compared to 19.5% in 1997.
Commercial, financial, and agricultural loans increased 33.3% during 1998
and make-up 23.6% of total outstanding loans compared to 19.8% last year. Again,
the increase in consumer and commercial loans is evidence of FirstMerit's
shifting loan portfolio.
Lease financing loans increased 5.6% during 1998. Auto leases totaled $63.2
million with equipment leasing totaling $84.9 million, and leveraged leases were
$3.9 million at year-end 1998.
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.
16
<PAGE> 18
The Corporation's Credit Policy Division manages credit risk by
establishing common credit policies for its subsidiary bank, participating in
approval of their largest loans, conducting reviews of their loan portfolios,
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.
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 provide guidance
for determining the allowance for loan loses related to impaired loans and
illustrate the required financial statement disclosures for impaired loans.
Impaired loans are loans for which 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 ("ORE") acquired through foreclosure in satisfaction of
a loan.
<TABLE>
<CAPTION>
YEARS ENDED,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Impaired Loans:
Non-accrual......................................... $10,626 11,185 9,579 7,373 10,517
Restructured........................................ 85 89 92 1,548 2,026
------- ------ ------ ------ ------
Total impaired loans.............................. 10,711 11,274 9,671 8,921 12,543
Other Loans:
Non-accrual......................................... 2,388 4,341 2,430 5,924 6,158
Restructured........................................ -- -- -- -- --
------- ------ ------ ------ ------
Total Other non-performing loans.................. 2,388 4,341 2,430 5,924 6,158
------- ------ ------ ------ ------
Total non-performing loans........................ 13,099 15,615 12,101 14,845 18,701
------- ------ ------ ------ ------
Other real estate (ORE)............................... 3,551 909 123 1,098 10,634
Total non-performing assets....................... 16,650 16,524 12,224 15,943 29,335
======= ====== ====== ====== ======
Loans past due 90 days or more accruing interest...... $18,722 11,166 8,380 7,774 3,847
======= ====== ====== ====== ======
Total non-performing assets as a percent of total
loans & ORE......................................... 0.33% 0.37% 0.29% 0.37% 0.71%
======= ====== ====== ====== ======
</TABLE>
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 1998 were $16.6 million, $16.5 million at
year-end 1997 and $12.2 million at year-end 1996. As a percentage of total loans
outstanding plus ORE, non-performing assets were
17
<PAGE> 19
0.33% at year-end 1998 compared to 0.37% in 1997 and 0.29% in 1996. The average
balances of impaired loans for the years ended 1998 and 1997 were $11.0 million
and $10.5 million, respectively.
For the year ended 1998, impaired assets earned $0.4 million in interest
income. Had they not been impaired, they would have earned $1.1 million. For the
same period, total non-performing loans earned $0.7 million in interest income.
Had they been paid in accordance with the payment terms in force prior to being
considered impaired, on non-accrual status, or restructured, they would have
earned $2.2 million.
In addition to non-performing loans and loans 90 days past due and still
accruing interest, Management identified potential problem loans totaling $31.3
million at year-end 1998. 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 Corporation and the subsidiary bank 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. Management felt it was prudent to increase the allowance at
year end to ensure its adequacy for changes that have occurred in the loan
portfolio.
At year-end 1998, the allowance was $79.0 million or 1.58% of loans
outstanding compared to $59.0 million or 1.32% at year-end 1997 and $54.3
million or 1.28% at year-end 1996. The allowance equaled 602.71% of non-
performing loans at year-end 1998 compared to 377.60% at year-end 1997. The
allowance for possible loan losses related to impaired loans at year-ends 1998
and 1997 totaled $1.1 million for both periods.
Net charge-offs were $16.6 million in 1998 compared to $17.2 million in
1997 and $15.2 million in 1996. As a percentage of average loans outstanding,
net charge-offs equaled 0.35% in 1998, 0.39% in 1997 and 0.35% in 1996. Losses
are charged against the allowance as soon as they are identified.
A five-year summary of activity follows:
ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
YEARS ENDED,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for possible loan losses at beginning
of year...................................... $ 58,963 54,304 51,412 40,117 39,003
Loans charged off:
Commercial, financial and agricultural....... 3,672 1,618 2,665 3,145 1,479
Installment to individuals................... 22,270 23,924 16,670 8,821 5,888
Real estate.................................. 1,353 574 224 883 720
Lease financing.............................. 1,259 1,290 1,315 319 20
Decrease from sale of subsidiary............. -- 389 -- --
---------- ---------- ---------- ---------- ----------
Total...................................... 28,554 27,406 21,263 13,168 8,107
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial, financial and agricultural....... 1,874 1,121 450 569 719
Installment to individuals................... 8,074 8,442 5,223 3,537 3,169
Real estate.................................. 1,463 123 202 129 106
Lease financing.............................. 531 476 206 88 21
---------- ---------- ---------- ---------- ----------
Total...................................... 11,942 10,162 6,081 4,323 4,015
---------- ---------- ---------- ---------- ----------
Net charge-offs................................ 16,612 17,244 15,182 8,845 4,092
---------- ---------- ---------- ---------- ----------
Increase resulting from acquisition of
CoBancorp, Inc............................... 8,215 -- -- -- --
---------- ---------- ---------- ---------- ----------
Provision for possible loan losses............. 28,383 21,903 18,074 20,140 5,206
---------- ---------- ---------- ---------- ----------
Allowance for possible loan losses at end of
year......................................... $ 78,949 $ 58,963 $ 54,304 $ 51,412 $ 40,117
========== ========== ========== ========== ==========
Average loans outstanding...................... $4,807,182 4,391,053 4,343,189 4,271,977 3,760,347
========== ========== ========== ========== ==========
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
YEARS ENDED,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Ratio to average loans:
Net charge-offs.............................. 0.35% 0.39% 0.35% 0.21% 0.11%
Provision for possible loan losses........... 0.59% 0.50% 0.42% 0.47% 0.14%
========== ========== ========== ========== ==========
Loans outstanding at end of year............... $4,997,396 4,467,524 4,228,941 4,250,569 4,150,896
========== ========== ========== ========== ==========
Allowance for possible loan losses:
As a percent of loans outstanding at end of
year....................................... 1.58% 1.32% 1.28% 1.21% 0.97%
As a multiple of net charge-offs............. 4.75 3.42 3.58 5.81 9.80
========== ========== ========== ========== ==========
</TABLE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF
YEAR END 1998 YEAR END 1997 YEAR END 1996 YEAR END 1995
--------------------- --------------------- --------------------- ---------------------
% 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....... $36,146 24% $26,306 20% 15,962 18% 14,570 14%
Loans secured by real
estate............. 22,686 55% 16,030 58% 14,584 58% 21,190 63%
Installment.......... 18,408 18% 15,318 20% 22,303 20% 14,360 19%
Lease financing...... 1,709 3% 1,309 2% 1,455 4% 1,292 4%
------- --- ------- --- ------- --- ------- ---
$78,949 100% $58,963 100% 54,304 100% 51,412 100%
======= === ======= === ======= === ======= ===
<CAPTION>
AS OF
YEAR END 1994
---------------------
% OF
LOANS BY
CATEGORY
TO TOTAL
LOANS
AMOUNT OUTSTANDING
------- -----------
DOLLARS IN THOUSANDS
<S> <C> <C>
Commercial,
financial, and
agricultural....... 7,091 12%
Loans secured by real
estate............. 19,032 64%
Installment.......... 13,245 20%
Lease financing...... 749 4%
------- ---
40,117 100%
======= ===
</TABLE>
DEPOSITS
Average deposits for 1998 totaled $5.1 billion, an increase of 10.5% and
7.2% compared to 1997 and 1996 levels, respectively. Most of the increase
occurred because of the 1998 purchase acquisition of CoBancorp. Purchase
accounting application includes balances of the acquired company in the year of
acquisition but not in prior periods. The Corporation's success with its
"free-checking" product also added to the increase in average non-interest
bearing demand deposit (checking) accounts.
Interest-bearing demand accounts declined during 1998 despite the inclusion
of CoBancorp balances. Average savings and certificate of deposit ("CDs")
accounts were up 2.1% and 9.8%, respectively, over last years' averages. Again,
the CoBancorp acquisition accounted for a large portion, if not all, of the
increases in savings and CDs. The average rate paid on interest-bearing demand
deposits decreased 35 basis points to 1.12%; the average yield paid on savings
accounts increased 30 basis points to 2.72% and the average yield paid on CDs
declined 7 basis point from 5.44% in 1997 to 5.37% in 1998.
Total demand deposits comprised 30.0% of average deposits in 1998 compared
with 27.3% last year and 26.6% in 1996. Savings accounts, including the "Money
Market" products, made up 26.6% of average deposits in 1998 versus 28.9% in 1997
and 30.4% in 1996. CDs accounted for 43.6% of average deposits in 1998, 43.9% in
1997 and 42.9% in 1996. The most notable shift occurred between savings and
demand deposit (checking) accounts as checking balances provided more funds, on
average, and savings accounts less.
The average cost of deposits and other borrowings was up 8 basis points
compared to one year ago, or 4.12% in 1998 compared to 4.04% last year.
19
<PAGE> 21
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- -------------------
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......................... $1,022,909 -- 733,394 -- 745,102 --
Demand deposits -- interest
bearing......................... 508,983 1.12% 536,983 1.58% 529,888 1.84%
Savings deposits.................. 1,364,705 2.72% 1,337,115 2.59% 1,457,762 2.48%
Certificates and other time
deposits........................ 2,237,956 5.37% 2,038,315 5.30% 2,056,139 5.30%
---------- --------- ---------
$5,134,553 4,645,807 4,788,891
========== ========= =========
</TABLE>
The following table summarizes the certificates and other time deposits in
amounts of $0.1 million or more as of year-end 1998, by time remaining until
maturity.
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Maturing in:
Under 3 months............................................ $397,679
3 to 6 months............................................. 83,600
6 to 12 months............................................ 60,419
Over 12 months............................................ 51,600
--------
$593,298
========
</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 year-end 1998 the Corporation was in a moderate asset-sensitive position
as illustrated in the following table:
<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................. $1,264,741 139,925 147,020 406,994 699,476 2,339,240 4,997,396
Investment securities............ 212,009 47,814 83,643 57,073 138,207 1,012,981 1,551,727
Federal funds sold............... 12,505 -- -- -- -- 12,505
---------- --------- -------- ------- ------- --------- ---------
Total Interest Earning Assets...... $1,489,255 187,739 230,663 464,067 837,683 3,352,221 6,561,628
---------- --------- -------- ------- ------- --------- ---------
Interest-Bearing Liabilities:
Demand -- Interest bearing....... $ 32,183 32,183 38,620 -- -- 540,673 643,659
Savings.......................... 108,766 108,766 124,304 -- -- 1,211,959 1,553,795
Certificates and other time
deposits....................... 437,136 202,719 190,100 484,415 518,241 473,466 2,306,077
Securities sold under agreement
to repurchase and other
borrowings..................... 613,153 390 483 4,282 3,951 185,174 807,433
---------- --------- -------- ------- ------- --------- ---------
Total Interest Bearing
Liabilities...................... $1,191,238 344,058 353,507 488,697 522,192 2,411,272 5,310,964
Total GAP.......................... $ 298,017 (156,319) (122,844) (24,630) 315,491 940,949 1,250,664
========== ========= ======== ======= ======= ========= =========
Cumulative GAP..................... $ 298,017 141,698 18,854 (5,776) 309,715 1,250,664
========== ========= ======== ======= ======= =========
</TABLE>
20
<PAGE> 22
MARKET RISK
FirstMerit is exposed to market risks in the normal course of business.
Changes in market interest rates may result in changes in the fair market value
of the Corporation's financial instruments, cash flows, and net interest income.
The Corporation seeks to achieve consistent growth in net interest income and
capital while managing volatility arising from shifts in market interest rates.
The Asset and Liability Committee of the FirstMerit Bank Board of Directors
("ALCO") oversees financial risk management, establishing broad policies that
govern a variety of financial risks inherent in the bank's operations. ALCO
monitors FirstMerit Bank's interest rates and sets limits on allowable risk
annually.
Market risk is the potential of loss arising from adverse changes in the
fair value of financial instruments due to changes in interest rates, exchange
rates, and equity prices. FirstMerit's market risk is composed primarily of
interest rate risk. Interest rate risk on FirstMerit's balance sheet consists of
mismatches of maturity gaps and indices, and options risk. Maturity GAP
mismatches result from differences in the maturity or repricing of asset and
liability portfolios. Options risk exists in many of FirstMerit's retail
products such as prepayable mortgage loans and demand deposits. Options risk
typically results in higher costs or lower revenue for FirstMerit. Index
mismatches occur when asset and liability portfolios are tied to different
market indices which may not move in tandem as market interest rates change.
Interest rate risk is monitored using GAP analysis, earnings simulation and
net present value estimations. Combining the results from these separate risk
measurement processes allows a reasonably comprehensive view of short-term and
long-term interest rate risk in the Corporation. GAP analysis measures the
amount of repricing risk in the balance sheet at a point in time. Earnings
simulation involves forecasting net interest earnings under a variety of
scenarios including changes in the level of interest rates, the shape of the
yield curve, and spreads between market interest rates. ALCO also monitors the
net present value of the balance sheet, which is the discounted present value of
all asset and liability cash flows. Interest rate risk is quantified by changing
the interest rates used for discounting cash flows and comparing the net present
value to the original figure. At year-end, a 100 basis point increase in
interest rates is estimated to reduce net present value by 5.1%. Should interest
rates decrease by 100 basis points, net present value is estimated to increase
by 1.9%.
Presented below, as of December 31, 1998, is an analysis of the
Corporation's interest rate risk for earnings simulation for instantaneous and
sustained parallel shifts in the yield curve up and down 200 basis points.
<TABLE>
<CAPTION>
NEXT 12 MONTHS
NET INTEREST INCOME
-------------------
$ CHANGE % CHANGE
-------- --------
<S> <C> <C>
+200................................................... 3,500 1.06%
+100................................................... 2,716 0.82%
- -100................................................... (2,424) (0.73%)
- -200................................................... (7,161) (2.16%)
</TABLE>
CAPITAL RESOURCES
Shareholders' equity at year-end 1998 totaled $768.6 million compared to
$595.0 million at December 31, 1997, an increase of 29.2%.
21
<PAGE> 23
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total equity............................ $768,636 10.78% 595,015 9.93% 583,142 9.95%
Common equity........................... 768,636 10.78% 595,015 9.93% 583,142 9.95%
Tangible common equity (a).............. 622,324 8.91% 581,217 9.72% 576,344 9.84%
Tier 1 capital (b)...................... 617,663 10.30% 577,510 12.22% 578,392 12.56%
Total risk-based capital (c)............ 692,689 11.55% 636,473 13.47% 632,696 13.74%
Leverage (d)............................ 617,663 8.98% 577,510 9.58% 578,392 9.51%
</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 Improvement Act of 1991
("FDICIA") 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 year-end 1998, the
Corporation's risk-based capital equaled 11.57% of risk-adjusted assets, its
Tier I capital ratio equaled 10.33% and its leverage ratio equaled 8.98%.
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 1998, the Corporation's Directors increased the quarterly cash
dividend, marking the seventeenth consecutive year of annual increases since the
Corporation's formation in 1981. The cash dividend of $0.18 paid has an
indicated annual rate of $0.72 per share. Over the past five years the dividend
has increased at an annual rate of approximately 8.5%.
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 subsidiary maintains sufficient liquidity in the form of
short-term marketable investments with a short-term maturity structure, along
with cash flow from loan repayment. Asset growth is primarily funded by the
growth of core deposits.
Reliance on borrowed funds increased during the year as the investment
portfolio grew slightly. During the year, the Corporation sold, for liquidity
purposes, approximately $200 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 Corporation, primarily cash dividends and other
corporate purposes, are met through cash, short-term investments and dividends
from the banking subsidiary.
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
22
<PAGE> 24
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 3% 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 year-end
1998, the Corporation 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 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; interest rate fluctuations; the ability of the
Corporation to realize expected efficiencies from recent acquisitions 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.
Significant resources continue to be used to address the Year 2000 issue.
Consulting and contract programming resources supplement internal staff and
provide specialized expertise where necessary. FirstMerit is
23
<PAGE> 25
using newly acquired software tools and enhanced procedures to assist in code
remediation, testing, and controlling the numerous software changes. Staff
throughout the organization reviews testing results. Coordination with major
business partners is also in process.
The Corporation first contracted the services of an application
development, outsourcing and integration services firm, to perform an enterprise
wide business unit risk assessment of Year 2000 issues. By year-end 1997, the
firm had 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.
During 1998, the Corporation contracted with a different outside consulting
firm to provide an independent assessment of the Corporation's Year 2000
efforts. Results were reported to the Corporation's Board of Directors in
November 1998. Management and the Board of Directors agreed with the findings
and overall view that the project is on track. The issues identified by the
independent consultants were already in process of being addressed.
Additionally, as a nationally chartered bank the Corporation's banking
subsidiary falls under the regulatory guidelines published by the Federal
Financial Institutions Examination Council ("FFIEC"). Periodic audits of the
Corporation's Year 2000 activities are performed by the Office of the
Comptroller of the Currency ("OCC") as well as the Federal Reserve Bank.
The FFIEC considers five general Year 2000 phases: Awareness, Assessment,
Renovation, Validation and Implementation. The five phases are explained below
along with Corporation's status at December 31, 1998:
Awareness: The Awareness phase defines the Year 2000 problem, gains
executive level support and establishes an overall strategy. The Corporation
began working on the Year 2000 issue in 1996 with identification of major
vendors and their compliance status. Significant progress has been made in the
implementation of the strategy for Year 2000 compliance. Executive Management
has been proactive in the management of the project and contracted with
consultants to assist in performing the assessment and formulating a strategy.
The awareness phase has expanded to include a widespread customer awareness
program to help educate customers of the Year 2000 issue and allow monitoring of
FirstMerit's progress.
Assessment: The Assessment phase defines the size and complexity of the
problem and the magnitude of the effort to address Year 2000 issues. FirstMerit
completed the assessment phase for all mainframe and microcomputer systems
during the first quarter of 1998. FirstMerit has 82 mainframe applications of
which 30 are considered "mission critical." The majority of the applications are
vendor packages. Significant microcomputer software and hardware upgrades for
Year 2000 compliance are substantially complete. The Assessment of
non-information systems such as security systems, elevators, etc. was completed
during the second quarter of 1998.
Renovation: The purpose of the Renovation phase is to ensure all date
routines have been corrected to properly address Year 2000 dates. FirstMerit has
completed 100% of the renovation for the in-house written code for the "mission
critical" applications. Installation of vendor supplied upgrades for the other
"mission critical" applications has occurred where the software was received
timely. Late arriving vendor releases or re-releases of Year 2000 compliant
software has resulted in our inability to complete three of the 30 "mission
critical" applications until the first quarter of 1999.
Renovation and vendor software implementation is also in process for the
non-"mission critical" applications. FirstMerit is approximately 94% complete in
having all of our lines of computer code renovated. The remaining applications
are scheduled to be renovated during the first quarter 1999.
Validation: The Validation phase consists of various types of testing and
retesting. FirstMerit is deeply involved in extensive testing of both in-house
and vendor written systems as well as the various connections to other systems
(internal and external). Non-information system applications or functions such
as vaults and security systems are also in the process of being tested. Testing
guidelines have been issued to ensure consistency and completeness throughout
the organization. Integrated testing is in process to ensure the applications
work together. More than 60% of our lines of computer code were successfully
tested with various future dates as part of a major integrated test over
Columbus Day weekend in October 1998. Core systems were included such as
Certificates of Deposit, Demand Deposit, Installment Loan and Savings. Of the 30
"mission critical"
24
<PAGE> 26
applications, 26 have been successfully tested or are in the process of being
tested. Additionally, many other applications (non-mission critical) are
currently in the testing process.
Implementation: During the Implementation phase, systems are certified as
Year 2000 compliant and placed into production. FirstMerit has been placing
systems, once renovated and validated, into production throughout the project.
As the non-mission critical applications are tested, they will be implemented
into production during the first quarter of 1999.
Another FFIEC area to be addressed is contingency planning. FirstMerit is
considering alternative measures throughout the organization in event of a Year
2000-caused problem. Business areas have reviewed departmental Year 2000 risks
and are incorporating changes to their contingency plans.
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 total cost of the Year 2000 readiness project (operating and capital)
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 expensed approximately $2.2 million and capitalized
approximately $840,000 related to the Year 2000 project.
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 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.
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, 1998.
25
<PAGE> 27
CONSOLIDATED BALANCE SHEETS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED,
-----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Investment securities (at market value)................... $1,551,727 1,136,561
Federal funds sold........................................ 12,505 36,496
Commercial loans.......................................... 2,374,016 1,902,880
Mortgage loans............................................ 987,185 1,072,693
Installment loans......................................... 1,070,324 960,186
Home equity loans......................................... 306,358 275,819
Credit card loans......................................... 99,541 103,041
Tax-free loans............................................ 7,961 8,947
Leases.................................................... 152,011 143,958
---------- ----------
Total earning assets................................... 6,561,628 5,640,581
---------- ----------
Allowance for possible loan losses........................ (78,949) (58,963)
Cash and due from banks................................... 245,950 176,745
Premises and equipment, net............................... 118,540 108,299
Accrued interest receivable and other assets.............. 280,196 126,281
---------- ----------
Total assets........................................... $7,127,365 5,992,943
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-non-interest bearing............................ $ 958,032 790,935
Demand-interest bearing................................ 643,659 516,061
Savings................................................ 1,553,795 1,360,306
Certificates and other time deposits................... 2,306,077 2,096,066
---------- ----------
Total deposits......................................... 5,461,563 4,763,368
---------- ----------
Securities sold under agreements to repurchase and other
borrowings............................................. 807,433 546,862
Accrued taxes, expenses, and other liabilities............ 89,733 87,698
---------- ----------
Total liabilities...................................... 6,358,729 5,397,928
---------- ----------
Commitments and contingencies............................. -- --
Shareholders' equity:
Preferred stock, without par value: authorized and
unissued 7,000,000 shares............................. -- --
Common stock, without par value: authorized 160,000,000
shares; issued 75,162,763 and 74,895,516 shares,
respectively.......................................... 110,276 110,145
Capital surplus........................................... 48,099 16,021
Accumulated other comprehensive income.................... 4,068 3,294
Retained earnings......................................... 623,180 575,960
Treasury stock, at cost, 1,154,071 and 6,238,055 shares,
respectively........................................... (16,987) (110,405)
---------- ----------
Total shareholders' equity................................ 768,636 595,015
---------- ----------
Total liabilities and shareholders' equity................ $7,127,365 $5,992,943
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 28
CONSOLIDATED STATEMENTS OF INCOME
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans................................ $422,650 389,786 376,474
Interest and dividends on investment securities:
Taxable................................................. 74,359 67,158 78,511
Exempt from federal income taxes........................ 4,737 4,346 5,004
-------- -------- --------
79,096 71,504 83,515
Interest on federal funds sold............................ 1,351 2,250 934
-------- -------- --------
Total interest income................................... 503,097 463,540 460,923
-------- -------- --------
Interest expense:
Interest on deposits:
Demand-interest bearing................................. 5,688 8,485 9,758
Savings................................................. 37,178 34,650 36,092
Certificates and other time deposits.................... 120,135 107,997 109,005
Interest on securities sold under agreements to repurchase
and other borrowings.................................... 34,650 30,803 31,481
-------- -------- --------
Total interest expense.................................. 197,651 181,935 186,336
-------- -------- --------
Net interest income..................................... 305,446 281,605 274,587
Provision for possible loan losses.......................... 28,383 21,903 18,074
-------- -------- --------
Net interest income after provision for possible loan
losses................................................ 277,063 259,702 256,513
-------- -------- --------
Other income:
Trust department.......................................... 16,147 13,442 12,182
Service charges on deposits............................... 31,257 27,717 25,892
Credit card fees.......................................... 20,064 14,355 11,415
Service fees -- other..................................... 10,493 7,337 6,184
Investment securities gains (losses), net................. 6,764 1,957 (1,776)
Loan sales and servicing.................................. 7,814 6,009 4,863
Other operating income.................................... 17,941 14,519 25,434
-------- -------- --------
Total other income...................................... 110,480 85,336 84,194
-------- -------- --------
Other expenses:
Salaries, wages, pension and employee benefits............ 110,675 97,500 100,244
Net occupancy expense..................................... 17,872 18,561 19,275
Equipment expense......................................... 15,882 12,717 12,894
Intangible amortization expense........................... 6,002 1,973 3,255
Other operating expenses.................................. 92,292 73,635 89,243
-------- -------- --------
Total other expenses.................................... 242,723 204,386 224,911
-------- -------- --------
Income before federal income taxes...................... 144,820 140,652 115,796
Federal income taxes........................................ 47,342 44,978 38,446
-------- -------- --------
Net income.............................................. $ 97,478 95,674 77,350
======== ======== ========
Other comprehensive income, net of tax Unrealized gains
(losses) on available-for-sale securities:
Unrealized holding gains arising during period (net of tax
expense of $2,589, $3,282 and $49, respectively)........ 5,326 7,071 98
Less: reclassification adjustment for gains realized in
net income, net of tax expense (benefit) of $2,212, $619
and ($588), respectively................................ 4,552 1,336 1,188
-------- -------- --------
Net unrealized gains, net of tax expense (benefit) of
$377, $2,662 and ($539), respectively................... 774 5,735 (1,090)
-------- -------- --------
Comprehensive income, net of tax............................ $ 98,252 101,409 76,260
======== ======== ========
Weighted average number of common shares
outstanding -- basic...................................... 71,095 69,405 71,799
======== ======== ========
Weighted average number of common shares
outstanding -- diluted.................................... 72,703 71,258 73,168
======== ======== ========
Per share data based on average number of shares
outstanding:
Basic net income per share.................................. $ 1.37 1.38 1.08
======== ======== ========
Diluted net income per share................................ $ 1.34 1.35 1.06
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 29
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED 1998, 1997 AND 1996
------------------------------------------------------------------------
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL COMPREHENSIVE RETAINED TREASURY SHAREHOLDERS'
STOCK SURPLUS INCOME EARNINGS STOCK EQUITY
-------- ------- ------------- -------- -------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at year-end 1995......... $103,935 14,453 (1,351) 483,188 (2,963) 597,262
Net income..................... -- -- -- 77,350 -- 77,350
Cash dividends ($0.55 per
share)...................... -- -- -- (36,376) -- (36,376)
Stock options
exercised/debentures
converted................... 3,483 462 -- -- -- 3,945
Treasury shares purchased...... -- -- -- -- (56,295) (56,295)
Net unrealized gains on
securities.................. -- -- (1,090) -- -- (1,090)
Other.......................... -- -- -- (1,654) -- (1,654)
-------- ------ ------ ------- -------- -------
Balance at year-end 1996......... 107,418 14,915 (2,441) 522,508 (59,258) 583,142
Net income..................... -- -- -- 95,674 -- 95,674
Cash dividends ($0.61 per
share)...................... -- -- -- (38,447) -- (38,447)
Stock options
exercised/debentures
converted................... 2,727 1,106 -- (1,428) -- 2,405
Treasury shares purchased...... -- -- -- -- (51,147) (51,147)
Net unrealized gains on
securities.................. -- -- 5,735 -- -- 5,735
Other.......................... -- -- -- (2,347) -- (2,347)
-------- ------ ------ ------- -------- -------
Balance at year-end 1997......... 110,145 16,021 3,294 575,960 (110,405) 595,015
Net income..................... -- -- -- 97,478 -- 97,478
Cash dividends ($0.66 per
share)...................... -- -- -- (45,887) -- (45,887)
Acquisition adjustment of
fiscal year................. -- -- -- (1,857) -- (1,857)
Stock options
exercised/debentures
converted................... 131 (359) -- (2,607) 9,029 6,194
Treasury shares purchased...... -- -- -- -- (25,703) (25,703)
Treasury shares reissued --
acquisition................. -- 25,919 -- -- 89,286 115,205
Treasury shares
reissued -- public
offering.................... -- 6,518 -- -- 20,806 27,324
Net unrealized gains on
securities.................. -- -- 774 -- -- 774
Other.......................... -- -- -- 93 -- 93
-------- ------ ------ ------- -------- -------
Balance at year-end 1998......... $110,276 48,099 4,068 623,180 (16,987) 768,636
======== ====== ====== ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 30
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED,
-------------------------------------
1998 1997 1996
----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 97,478 95,674 77,350
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................... 28,383 21,903 18,074
Provision for depreciation and amortization............. 12,087 11,334 10,902
Amortization of investment securities premiums, net..... 1,413 2,908 5,031
Amortization of income for lease financing.............. (11,360) (13,436) (12,656)
(Gains) losses on sales of investment securities, net... (6,764) (1,957) 1,776
Gain on sale of affiliate branches...................... -- -- (13,210)
Deferred federal income taxes........................... (7,046) (5,863) 15,787
(Increase) decrease in interest receivable.............. (5,051) 504 2,091
Increase in interest payable............................ 1,451 1,395 768
Amortization of values ascribed to acquired
intangibles........................................... 6,002 1,972 3,255
Other decreases......................................... (99,404) (13,261) (27,067)
----------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 17,189 101,173 82,101
----------- --------- ---------
INVESTING ACTIVITIES
Dispositions of investment securities:
Available-for-sale -- sales............................... 609,543 209,174 343,600
Available-for-sale -- maturities.......................... 343,852 252,545 306,579
Purchases of investment securities available-for-sale....... (1,362,032) (369,331) (444,752)
Net (increase) decrease in federal funds sold............. 23,991 (16,967) 2,639
Net increase in loans and leases, except sales............ (526,909) (304,851) (88,065)
Sales of loans............................................ -- 61,995 106,484
Purchases of premises and equipment....................... (25,687) (14,182) (23,598)
Sales of premises and equipment........................... 3,359 5,542 4,304
Sales of affiliate branches............................... -- -- 13,210
Purchase of CoBancorp Inc................................. (50,000) -- --
----------- --------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............ (983,883) (176,075) 220,401
----------- --------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in demand, NOW and savings
deposits.................................................. 489,399 (30,412) (123,224)
Net increase (decrease) in time deposits.................... 208,796 143,723 (139,381)
Net increase (decrease) in securities sold under repurchase
agreements and other borrowings........................... 260,571 1,100 (16,121)
Cash dividends.............................................. (45,887) (40,871) (38,562)
Purchase of treasury shares................................. (25,703) (51,147) (56,295)
Treasury shares -- reissued................................. 115,205 -- --
Treasury shares reissued.................................... 27,324 -- --
Proceeds from exercise of stock options..................... 6,194 2,405 3,945
----------- --------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............ 1,035,899 24,798 (369,638)
Increase (decrease) in cash and cash equivalents............ 69,205 (50,104) (67,136)
Cash and cash equivalents at beginning of year.............. 176,745 226,849 293,985
----------- --------- ---------
Cash and cash equivalents at end of year.................... $ 245,950 176,745 226,849
=========== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest, net of amounts capitalized........................ $ 115,323 108,365 116,136
Income taxes................................................ $ 57,582 45,483 21,547
=========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEAR-ENDS AND FOR THE YEARS ENDED 1998, 1997 AND 1996 (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. In 1998, the
Corporation adopted Statement of Financial Accounting Standards No. 130 (SFAS
130) "Reporting Comprehensive Income," and Statement No. 131 (SFAS 131)
"Disclosures about Segments of an Enterprise and Related Information." SFAS 130
requires additional disclosure of items that affect comprehensive income but not
net income. Items relevant to the Corporation include unrealized gains and
losses on securities available for sale. SFAS 131 designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Corporation's reportable segments.
SFAS 131 also requires disclosures about products and services, geographic areas
and major customers. The adoption of SFAS 130 and SFAS 131 did not affect
results of operations or financial position. 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 direct subsidiaries: FirstMerit
Bank N.A., Citizens Investment Corporation, Citizens Savings Corporation of
Stark County, FirstMerit Community Development Corporation, FirstMerit
Credit Life Insurance Company, and SF Development Corp.
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,
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 comprehensive income. 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's investment portfolio is designated as available-for-sale.
Classification as available-for-sale Corporation to sell securities to fund
liquidity and manage the Corporation's interest rate risk. The Corporation
does maintain a relatively small trading account that is used as a hedge
against variations in deferred compensation expense.
(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.
30
<PAGE> 32
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 of mortgage loans 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 a straight-line 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.
31
<PAGE> 33
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
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing net income by the weighted
average number of common shares plus common stock equivalents computed
using the Treasury Share method. All earnings per share disclosures
appearing in these financial statements are computed assuming dilution
unless otherwise indicated.
(o) Reclassifications
Certain previously reported amounts have been reclassified to conform to
the current reporting presentation.
2. ACQUISITIONS AND MERGER-RELATED EXPENSES
On May 22, 1998, the Corporation completed the acquisition of CoBancorp,
Inc., a bank holding company headquartered in Elyria, Ohio with consolidated
assets of approximately $666.0 million. CoBancorp, Inc. ("CoBancorp") was merged
with and into the Corporation and accounted for under purchase accounting
requirements. At the time of the merger, the value of the transaction was $174.1
million. In connection with the merger, the Corporation issued 3.9 million
shares of its common stock (valued at $29.375/share), paid approximately $50.0
million in cash, and assumed merger-related liabilities of approximately $9.6
million. The transaction created goodwill of approximately $136.5 million that
will be amortized primarily over 25 years.
The proforma combined unaudited operating results assuming the companies
had combined at the beginning of each period is as follows:
<TABLE>
<CAPTION>
FIRSTMERIT PROFORMA
PERIOD AND DESCRIPTION CORPORATION COBANCORP ADJUSTMENTS COMBINED
- ---------------------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998 (FIRSTMERIT)
AND
THREE MONTHS ENDED MARCH 31, 1998
(COBANCORP):
Pro forma interest income.................. $503,097 11,942 211 515,250
Net interest income........................ 305,446 7,295 (944) 311,797
Net income available to common
shareholders............................. 97,478 1,307 (1,394) 97,391
Adjusted income for diluted EPS
calculation.............................. 97,478 1,307 (1,394) 97,391
Wtd-avg diluted shares..................... 72,703 3,485 76,572
Earnings per diluted share................. $ 1.34 0.37 1.27
YEAR ENDED DECEMBER 31, 1997:
Pro forma interest income.................. $407,825 48,141 844 456,810
Net interest income........................ 255,456 29,054 (3,776) 280,734
Net income available to common
shareholders............................. 86,363 4,800 (5,577) 85,586
Adjusted income for diluted EPS
calculation.............................. 86,363 4,800 (5,577) 85,586
Wtd-avg diluted shares..................... 63,537 3,498 67,420
Earnings per diluted share................. $ 1.36 1.37 1.27
</TABLE>
The unaudited proforma operating results of each separate company have been
adjusted to reflect their new accounting basis' recognized to record the
purchase combination. Figures shown for CoBancorp include extraordinary merger
costs, net of tax, of $164.0 for the three-month period and $724.0 for 1997.
32
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
On September 14, 1998, FirstMerit closed a secondary underwritten public
offering of 1.38 million common shares of FirstMerit Common Stock. The
reissuance of these shares was necessary to allow the Corporation to treat the
Security First merger as a pooling-of-interests.
On October 23, 1998, the Corporation completed the acquisition of Security
First Corp, ("Security First") a $678.0 million holding company headquartered in
Mayfield Heights, Ohio. Subsidiaries of Security First included Security Federal
Savings and Loan Association of Cleveland and First Federal Savings Bank of
Kent. These subsidiaries were merged with and into FirstMerit Bank, N.A. Under
terms of the merger agreement, Security First was merged with and into the
Corporation. The transaction was structured with a fixed exchange ratio of
0.8855 shares of FirstMerit Common Stock for each common share of Security
First. At the time of the merger, the pooling-of-interests transaction was
valued at $22.58 per share or approximately $199.0 million. The accompanying
consolidated financial statements for all periods presented have been restated
to account for the acquisition. The information presented for 1997 and prior
periods coincides with the fiscal year-ends of each entity, which were December
31 for FirstMerit and March 31 for Security First. For example, information as
of year-end 1997 combines FirstMerit's balances as of December 31, 1997 with
Security First's balances at March 31, 1998. As a result of this difference in
fiscal year ends, the Corporation made an adjustment to shareholders' equity of
$1,841 which represents Security First's net income and cash dividends paid for
the three months ended March 31, 1998.
In conjunction with the Security First acquisition, the Corporation
incurred merger-related expenses of approximately $17.2 million, before taxes.
The components of the costs are as follows: severance and employee-related
expenses of $1.7 million, occupancy and equipment charges of $2.0 million,
conversion and contract termination costs of $1.5 million, professional services
and other costs of $4.7 million, a conforming adjustment to the provision for
possible loan losses of $7.3 million. On an after tax basis, the merger-related
expenses totaled approximately $12.8 million, or $0.18 per diluted share.
<TABLE>
<CAPTION>
FIRSTMERIT SECURITY PROFORMA
PERIOD AND DESCRIPTION CORPORATION FIRST COMBINED
- ---------------------- ----------- -------- --------
<S> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1998:
Proforma interest income.................................... $328,819 43,163 371,982
Net interest income......................................... 203,932 20,765 224,697
Net income available to common shareholders................. 71,685 7,820 79,505
Adjusted income for diluted EPS calculation................. 71,685 7,995 79,680
Wtd-avg diluted shares...................................... 64,220 8,666 71,894
Earnings per diluted share.................................. $ 1.12 0.92 $ 1.11
YEAR ENDED 1997:
Proforma interest income.................................... $407,825 55,715 463,540
Net interest income......................................... 255,456 26,149 281,605
Net income available to common shareholders................. 86,363 9,311 95,674
Adjusted income for diluted EPS calculation................. 86,363 9,645 96,008
Wtd-avg diluted shares...................................... 63,537 8,718 71,257
Earnings per diluted share.................................. $ 1.36 1.11 1.35
YEAR ENDED 1996:
Interest income............................................. $411,745 49,178 460,923
Net interest income......................................... 250,972 23,615 274,587
Net income available to common shareholders................. 70,940 6,410 77,350
Adjusted income for diluted EPS calculation................. 70,940 6,801 77,741
Wtd-avg diluted shares...................................... 65,469 8,695 73,168
Earnings per diluted share.................................. $ 1.08 $ 0.78 1.06
</TABLE>
On February 12, 1999, the Corporation completed its acquisition of Signal
Corp a $1.9 billion bank holding company headquartered in Wooster, Ohio
("Signal"). Principal subsidiaries of Signal included Signal Bank,
33
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
N.A., Summit Bank, N.A., First Federal Savings Bank of New Castle
(Pennsylvania), and Mobile Consultants, Inc. Under terms of the agreement, the
fixed exchange ratio was 1.32 shares of FirstMerit Common Stock for each share
of Signal Common Stock, and one share of FirstMerit Preferred Stock for each
share of Signal Preferred Stock. Based on an assumed closing price of $25.00 per
share of Common Stock and $71.00 per share of Preferred Stock, the value of the
transaction was approximately $436.0 million. The transaction will be accounted
for as a pooling-of-interests. In conjunction with this merger, the Corporation
anticipates incurring merger-related expenses and conforming accounting policy
changes of approximately $40.0 million.
The following unaudited proforma information is not necessarily indicative
of the results which actually would have been obtained if the Signal merger had
been consummated in the past or which may be obtained in the future.
<TABLE>
<CAPTION>
FIRSTMERIT PROFORMA
PERIOD AND DESCRIPTION CORPORATION SIGNAL CORP COMBINED
- ---------------------- ----------- ------------ -----------
<S> <C> <C> <C>
YEAR ENDED 1998:
Interest income........................................ $ 503,097 139,460 642,557
Net interest income.................................... 305,446 50,735 356,181
Net income (loss) available to common shareholders..... 97,478 (25,652) 71,826
Adjusted income (loss) for diluted EPS calculation..... 97,684 (25,652) 72,032
Weighted-average diluted shares........................ 72,702,750 11,576,709 87,984,006
Earnings per diluted share............................. $ 1.34 ($ 2.22) 0.82
YEAR ENDED 1997:
Interest income........................................ $ 463,540 120,970 584,510
Net interest income.................................... 281,605 44,458 326,063
Net income available to common shareholders............ 95,674 17,450 113,124
Adjusted income for diluted EPS calculation............ 96,008 19,034 115,042
Weighted-average diluted shares........................ 71,257,504 12,151,159 87,297,034
Earnings per diluted share............................. $ 1.35 1.57 1.32
YEAR ENDED 1996:
Interest income........................................ $ 460,923 101,229 562,152
Net interest income.................................... 274,587 38,222 312,809
Net income available to common shareholders............ 77,350 11,164 88,514
Adjusted income for diluted EPS calculation............ 77,741 12,860 90,601
Weighted average diluted shares........................ 73,168,022 11,828,502 88,781,645
Earnings per diluted share............................. $ 1.06 1.09 1.02
</TABLE>
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>
YEAR-END 1998
Available for sale:
U.S. Treasury securities and U.S. Government
agency obligations............................. $ 658,407 3,895 2,284 660,018
Obligations of state and political
subdivisions................................... 97,059 999 -- 98,058
Mortgage-backed securities....................... 533,201 3,950 31 537,120
Other securities................................. 256,802 2,205 2,476 256,531
---------- ------ ----- ---------
$1,545,469 11,049 4,791 1,551,727
========== ====== ===== =========
</TABLE>
34
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
YEAR-END 1997
Available for sale:
U.S. Treasury securities and U.S. Government
agency obligations............................. $ 613,269 2,605 2,290 613,584
Obligations of state and political
subdivisions................................... 81,610 207 206 81,611
Mortgage-backed securities....................... 338,607 3,605 255 341,957
Other securities................................. 97,995 1,564 150 99,409
---------- ------ ----- ---------
$1,131,481 7,981 2,901 1,136,561
========== ====== ===== =========
</TABLE>
The amortized cost and market value of investment securities including
mortgage-backed securities at December 31, 1998, 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..................................... $ 100,797 101,428
Due after one year through five years....................... 195,168 197,229
Due after five years through ten years...................... 294,138 295,906
Due after ten years......................................... 955,366 957,164
---------- ---------
$1,545,469 1,551,727
========== =========
</TABLE>
Proceeds from sales of investment securities during the years 1998, 1997
and 1996 were $543,650, $206,054 and $343,600, respectively. Gross gains of
$5,587, $2,531 and $2,003 and gross losses of $513, $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
$1,065,326 and $831,536 at December 31, 1998 and December 31, 1997,
respectively.
4. LOANS
Loans consist of the following:
<TABLE>
<CAPTION>
YEAR-ENDS,
------------------------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Commercial, financial and agricultural................... $1,176,904 883,114 755,023
Loans secured by real estate............................. 2,753,906 2,569,213 2,460,799
Loans to individuals, net of unearned income............. 914,573 871,242 853,882
Lease financing.......................................... 152,013 143,955 159,237
---------- --------- ---------
$4,997,396 4,467,524 4,228,941
========== ========= =========
</TABLE>
The Corporation grants loans principally to customers located within the
State of Ohio.
35
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Information with respect to impaired loans is as follows:
<TABLE>
<CAPTION>
YEAR-ENDS
--------------------
1998 1997
------- -------
<S> <C> <C>
Impaired Loans.............................................. $10,711 $11,274
Allowance for Possible Loan Losses.......................... $ 1,594 $ 2,280
Interest Recognized......................................... $ 427 $ 460
======= =======
</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 analysis of loan activity
with related parties for the years ended December 31, 1998 and 1997 is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Aggregate amount at beginning of year....................... $ 33,066 $ 41,308
Additions (deductions):
New loans................................................. 20,650 8,994
Repayments................................................ (15,933) (16,694)
Changes in directors and their affiliations............... (13,402) (542)
-------- --------
Aggregate amount at end of year............................. $ 24,381 $ 33,066
======== ========
</TABLE>
5. ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses are summarized as
follows:
<TABLE>
<CAPTION>
YEARS ENDED,
------------------------------------
1998 1997 1996
-------- ------------ --------
<S> <C> <C> <C>
Balance at beginning of year.............................. $ 58,963 $ 54,304 $ 51,412
Additions (deductions):
Allowance from purchase acquisition..................... 8215
Provision for loan losses............................... 28,383 21,903 18,074
Loans charged off....................................... (28,554) (27,406) (20,874)
Recoveries on loans previously charged off.............. 11,942 10,162 6,081
Decrease from sale of subsidiary........................ -- -- (389)
-------- -------- --------
Balance at end of year.................................... $ 78,949 $ 58,963 $ 54,304
======== ======== ========
</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.
36
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The components of mortgage servicing rights are as follows:
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Balance at beginning of year, net........................... $ 4,128 $2,396
Additions................................................. 3,244 2,354
Scheduled amortization.................................... (1,270) (622)
Less: allowance for impairment............................ (168) --
------- ------
Balance at end of year, net................................. $ 5,934 $4,128
======= ======
</TABLE>
In 1998, 1997 and 1996, the Corporation's income before federal income
taxes was increased by approximately $1.8 million, $1.7 million and $2.3
million, respectively, as a result of compliance with the accounting Statements
mentioned previously.
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 year-ends 1998 and 1997, the Corporation serviced for others
approximately $1.2 billion and $934.0 million, respectively. The following table
provides servicing information for 1998:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Balance, beginning of year.................................. $ 934,285 $ 908,357
Additions:
Loans originated and sold to investors.................... 260,517 119,715
Existing loans sold to investors.......................... 186,034 100,670
Existing loans from acquisitions.......................... 66,868
Reductions:
Sale of servicing rights.................................. -- --
Loans sold servicing released............................. (4,842) (5,311)
Regular amortization, prepayments and foreclosures........ (277,963) (189,146)
---------- ---------
Balance, end of year........................................ $1,164,899 $ 934,285
========== =========
</TABLE>
7. RESTRICTIONS ON CASH AND DIVIDENDS
The average balance on deposit with the Federal Reserve Bank to satisfy
reserve requirements amounted to $16,535 during 1998. 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,
1998, cash and due from banks included $5,355 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.
37
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
8. PREMISES AND EQUIPMENT
The components of premises and equipment are as follows:
<TABLE>
<CAPTION>
YEAR-ENDS,
------------------- ESTIMATED
1998 1997 USEFUL LIVES
-------- ------- ------------
<S> <C> <C> <C>
Land........................................................ $ 16,145 12,769 --
Buildings................................................... 94,933 91,601 10-35 yrs
Equipment................................................... 77,050 67,854 3-15 yrs
Leasehold improvements...................................... 16,714 13,093 1-20 yrs
-------- ------- ---------
204,842 185,317
Less accumulated depreciation and amortization.............. 86,297 77,018
-------- -------
$118,545 108,299
======== =======
</TABLE>
Amounts included in other expenses for depreciation and amortization
aggregated $12,087, $11,334 and $10,902 for the years ended 1998, 1997 and 1996,
respectively.
At December 31, 1998, 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>
1999 $ 8,116
2000 6,191
2001 5,478
2002 4,618
2003 3,223
2004-2012 12,326
-------
$39,952
=======
</TABLE>
Rentals paid under noncancelable operating leases amounted to $7,862,
$8,029 and $9,128 in 1998, 1997 and 1996, respectively.
9. CERTIFICATES AND OTHER TIME DEPOSITS
The aggregate amounts of certificates and other time deposits of $100 and
over at year end 1998 and 1997 were $593,298 and $500,131, respectively.
Interest expense on these certificates and time deposits amounted to $31,860 in
1998, $24,381 in 1997, and $18,165 in 1996.
10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
The average balance of securities sold under agreements to repurchase and
other borrowings for the years ended 1998, 1997 and 1996 amounted to $688,311,
$595,740 and $623,278, respectively. In 1998, the weighted average annual
interest rate amounted to 5.03%, compared to 5.17% in 1997 and 5.05% in 1996.
The maximum amount of these borrowings at any month end totaled $823,629 during
1998, $695,328 in 1997 and $719,534 during 1996.
At year-end 1998, 1997 and 1996, securities sold under agreements to
repurchase totaled $481,665, $417,833, and $368,566, respectively. The average
annual interest rate for these instruments was 4.77%, compared to 4.81% in 1997
and 4.67% in 1996.
38
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
At year-end 1998, 1997, and 1996, the Corporation had $291,227, $116,189
and $170,356, respectively, of Federal Home Loan Bank advances. The 1998 balance
includes: $135,526 that have maturities within one year with interest rates of
4.65% to 6.60%; $72,666 with maturities over one year to five years with
interest rates of 5.35% to 8.10%; and $83,034 over five years with interest
rates of 4.75% to 8.05%.
At year-end 1998, the Corporation had outstanding balances on lines of
credit with two financial institutions totaling $23,000 and $10,000,
respectively. As of year-end 1998, the unused portions of these lines totaled
$7,000 and $65,000, respectively. The interest rates on these lines were 6.00%
and 5.93%, respectively. At year-end 1997, $6,000 was outstanding on one of the
lines with a corresponding interest rate of 6.01% for the year. The interest
rates on these lines of credit are variable and approximate one-month LIBOR plus
37.5 basis points and one-month LIBOR plus 30.0 basis points, respectively.
At year-end 1998, 1997 and 1996, the Corporation had $1,541, $6,840 and
$8,479 respectively of convertible subordinated debentures outstanding. The 15
year, 6.25% debentures were issued in a public offering in 1993 by Security
First Corp. and are convertible by the holders any time prior to maturity.
Residential mortgage loans totaling $436,840, $174,284, and $201,533 at
year-end 1998, 1997 and 1996, respectively, were pledged to secure Federal Home
Loan Bank ("FHLB") advances. FANNIE MAE ("FNMA") Preferred Stock of
approximately $28.2 million and preferred stock of another financial institution
totaling $4.3 million were pledged against the line of credit with $23,000
outstanding at year-end 1998. FNMA Preferred Stock of $16.0 million was pledged
to secure the $6.0 million outstanding on the line at year-end 1997.
11. FEDERAL INCOME TAXES
Federal income taxes are comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED,
---------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Taxes currently payable..................................... $53,222 50,841 22,659
Deferred expense (benefit).................................. (5,880) (5,863) 15,787
------- ------ ------
$47,342 44,978 38,446
</TABLE>
Actual Federal income tax expense differs from expected Federal income tax
as shown below:
<TABLE>
<CAPTION>
YEARS ENDED,
--------------------
1998 1997 1996
---- ---- ----
<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............................................. -1.2% -1.2% -1.7%
Goodwill amortization..................................... 0.9% 0.2% 1.3%
Reduction to excess tax reserves.......................... -1.7% -1.0% -1.3%
Exercise of options at acquisition........................ -0.6% -0.1% --
Merger expenses at acquisition............................ 1.0% -- --
Dividends received deduction.............................. -0.4% -- --
Bank owned life insurance................................. -0.4% -- --
Other..................................................... 0.1% -0.9% --
---- ---- ----
Effective tax rates......................................... 32.7% 32.0% 33.3%
==== ==== ====
</TABLE>
39
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
For 1998, 1997 and 1996, 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,
---------------------------------
1998 1997 1996
------- ------------ ------
<S> <C> <C> <C>
Loan loss provision......................................... $(9,375) (4,606) 6,214
Depreciation................................................ 132 194 (250)
Deferred loan fees, net..................................... 626 422 901
Leasing..................................................... 514 (3,683) 6,708
SFAS 106 postretirement benefits............................ (1,132) (1,105) (1,057)
SFAS 87 pension expense..................................... (407) 1,333 1,678
FHLB stock dividends........................................ 1,476 1,114 971
SFAS 125 mortgage servicing rights.......................... 2,136 -- --
Severance costs............................................. -- -- 1,315
Valuation reserves.......................................... 147 633 675
Other....................................................... 3 (165) (1,368)
------- ------ ------
Total deferred income tax................................... $(5,880) (5,863) 15,787
======= ====== ======
</TABLE>
Principal components of the Corporation's net deferred tax (liability) are
summarized as follows:
<TABLE>
<CAPTION>
YEAR-ENDS,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Excess of book loan provision over tax loan provision....... $ 20,345 10,970
Excess of tax depreciation over book depreciation........... (4,294) (4,162)
Deferred loan fees tax basis income over book basis......... 576 1,202
Leasing book basis over tax basis........................... (24,845) (24,331)
Postretirement book basis expense over tax basis............ 6,157 5,025
Pension book basis expense over tax basis................... (805) (1,212)
FHLB stock book basis over tax basis........................ (7,085) (5,609)
Security portfolio tax basis over book basis................ (2,074) (1,694)
Mtg. servicing rights book basis over tax basis............. (2,136) --
Valuation reserves book basis over tax basis................ -- 147
Other....................................................... 3,232 3,235
-------- -------
Total net deferred tax (liability).......................... $(10,929) (16,429)
======== =======
</TABLE>
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.
40
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The Corporation also sponsors 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 Corporations' 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 employee's 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 following table sets forth the both plans' funded status and amounts
recognized in the Corporation's consolidated financial statements. The 1998 and
1997 amounts shown reflect a change in the measurement date from December 31 to
September 30. Amounts shown for 1996 have not been restated to show the change
in the measurement date. In addition, all amounts for each year have been
restated to reflect the mergers of CoBancorp and Security First in 1998.
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------ ---------------------------
1998 1997 1996 1998 1997 1996
------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Change in Benefit Obligation
Projected Benefit Obligation (PBO)
Accumulated Postretirement Benefit Obligation
(APBO), beginning of year.................... 70,720 70,119 73,926 27,864 30,888 31,198
Service Cost............................... 3,546 3,379 3,729 855 958 935
Interest Cost.............................. 4,988 4,880 4,978 1,872 2,157 2,133
Plan amendments............................ 1,060 684 144 -- -- (2,952)
Participant contributions.................. -- -- -- 1,390 1,554 1,575
Actuarial (gain) loss...................... (2,735) (2,113) (6,054) (2,330) (5,953) (221)
Benefits Paid.............................. (3,890) (6,229) (6,604) (1,750) (1,740) (1,780)
------ ------ ------ ------- ------- -------
PBO/APBO, end of year........................ 73,689 70,720 70,119 27,901 27,864 30,888
====== ====== ====== ======= ======= =======
Change in Plan Assets
Fair Value of Plan Assets, beginning of
year....................................... 80,877 71,929 67,035 -- -- --
Actuarial return on plan assets............ 2,465 9,454 3,827 -- -- --
Participant contributions.................. -- -- -- 1,390 1,554 1,575
Employer contributions..................... 1,027 5,723 7,671 360 186 205
Benefits paid.............................. (3,890) (6,229) (6,604) (1,750) (1,740) (1,780)
------ ------ ------ ------- ------- -------
Fair Value of Plan Assets, end of year....... 80,479 80,877 71,929 -- -- --
====== ====== ====== ======= ======= =======
Funded Status................................ 6,790 10,157 1,810 (27,901) (27,864) (30,888)
Unrecognized Transition (asset) obligation... (586) (792) (999) 11,488 12,308 13,129
Prior service costs.......................... 4,437 3,707 3,311 -- -- --
Cumulative net (gain) or loss................ (7,137) (8,450) (3,215) 365 1,666 6,394
------ ------ ------ ------- ------- -------
(Accrued) prepaid pension/ postretirement
cost....................................... 3,504 4,622 907 (16,048) (13,890) (11,365)
====== ====== ====== ======= ======= =======
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost....................... 4,250 4,632 2,073 -- -- --
Accrued benefit liability.................. (6,362) (4,218) (3,794) (16,048) (13,890) (11,365)
Intangible asset........................... 5,616 4,208 2,628 -- -- --
------ ------ ------ ------- ------- -------
Net amount recognized........................ 3,504 4,622 907 (16,048) (13,890) (11,365)
====== ====== ====== ======= ======= =======
</TABLE>
41
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------ --------------------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- -------- -------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted-average assumptions as
of December 31
Discount Rate.................... 7.00% 7.50% 7.50% 7.00% 7.50% 7.50%
Long-term rate of return on
assets......................... 9.00% 9.00% 9.00% N/A N/A N/A
Rate of compensation increase.... 4.00% 4.75% 4.75% -- -- --
Medical trend rates.............. -- -- -- 5% to 8% 5% to 9% pre-65: 12.4% to 6%
post-65: 11.8% to 6.1%
</TABLE>
For measurement purposes, a 9% annual rate increase in the per capita cost
of covered health care benefits was assumed for 1999. The rate was assumed to
decrease gradually to 6% in 2002 and remain at that level hereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percent point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
<S> <C> <C>
Effect on total of service and interest cost
components...................................... $ 328 $ (285)
Effect on postretirement benefit obligation....... 2,994 (2,684)
</TABLE>
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------------- -----------------------
1998 1997 1996 1998 1997 1996
------- ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Components of Net Periodic
Pension/Postretirement Cost
Service Cost............................ $ 3,546 3,379 3,729 855 958 935
Interest Cost........................... 4,988 4,880 4,978 1,872 2,157 2,133
Expected return on assets............... (6,537) (6,275) (5,996) -- -- --
Amortization of unrecognized
Transition (asset).................... (207) (207) (207) 821 821 821
Prior service costs................... 331 287 277 -- -- --
Cumulative net (gain) loss............ 25 (56) (99) -- 144 323
------- ------ ------ ----- ----- -----
Net periodic pension/postretirement
cost.................................. $ 2,146 2,008 2,682 3,548 4,080 4,212
======= ====== ====== ===== ===== =====
</TABLE>
The Corporation has elected to amortize the transition obligation for both
the pension and postretirement plans by charges to income over a twenty year
period on a straightline basis.
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, employees
contributions are partially matched by the Corporation. Such matching becomes
vested when the employee reaches five years of credited services. Total savings
plan expenses were $2,286, $2,086 and $2,108 for 1998, 1997 and 1996,
respectively.
13. 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 shares of
FirstMerit Common Stock. 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 shares of FirstMerit Common Stock have been reserved.
Outstanding options under these Plans are generally not exerciseable for at
least six months from date of grant.
42
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
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 1998, 1997, and 1996 along
with significant assumptions used in determining the fair value of the
compensation amounts.
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------ ------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Proforma amounts:
Net income.......................................... $94,645 94,789 76,501
Earnings per share (basic).......................... 1.33 1.37 1.07
Earnings per share (diluted)........................ 1.30 1.33 1.05
Assumptions:
Dividend yield...................................... 0.0% 3.50% 2.70%
Expected volatility................................. 24.94% 23.30% 24.51%
Risk free interest rate............................. 4.55% - 5.61% 5.8% - 6.8% 5.2% - 6.7%
Expected lives...................................... 5 yrs 5 yrs. 5 yrs.
</TABLE>
A summary of stock option activity for the last two years follows:
<TABLE>
<CAPTION>
AVAILABLE RANGE OF OPTION AVERAGE OPTION
SHARES FOR GRANT OUTSTANDING PRICE PER SHARE PRICE PER SHARE
- ------ --------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance
Year-end 1996........................ 582,109 2,028,893 .00 - 16.97 $11.03
New shares reserved............... 2,200,000
Canceled.......................... -- (25,900) 5.41 - 25.06 14.12
Exercised......................... -- (353,032) 5.44 - 15.44 9.05
Granted........................... (549,743) 549,743 .00 - 29.63 18.76
--------- --------- ------------ ------
Balance
Year-end 1997........................ 2,232,366 2,199,704 .00 - 29.63 13.25
Canceled.......................... (65,800) 9.56 - 34.00 18.09
Exercised......................... (276,769) 6.31 - 21.63 12.96
Granted........................... (442,346) 442,346 .00 - 34.00 29.1
--------- --------- ------------ ------
Balance
Year-end 1998........................ 1,790,020 2,299,481 .00 - 34.00 16.5
========= ========= ============ ======
</TABLE>
43
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The ranges of exercise prices and the remaining contractual life of options
as of December 31, 1998 were:
<TABLE>
<CAPTION>
RANGE OF EXERCISE PRICES $0 - $9 $10 - $18 $19 - $26 $27 -$34
- ------------------------ -------- ---------- --------- --------
<S> <C> <C> <C> <C>
Options outstanding:
Outstanding as of December 31, 1998........... 393,422 1,131,343 446,277 328,439
Weighted-average remaining contractual life
(in years).................................. 6.00 6.94 8.56 9.19
Weighted-average exercise price............... $ 4.35 $ 14.17 $ 22.21 $ 31.33
Options exerciseable:
Outstanding as of December 31, 1998........... 297,443 627,676 202,031 51,004
Weighted-average remaining contractual life
(in years).................................. 5.87 6.76 8.19 8.78
Weighted-average exercise price............... $ 4.81 $ 13.60 $ 21.03 $ 31.56
</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 31,885, 19,204 and 12,512 shares issued in 1998, 1997 and 1996,
respectively.
14. PARENT COMPANY
Condensed financial information of FirstMerit Corporation (Parent Company only)
is as follows:
<TABLE>
<CAPTION>
YEAR-ENDS,
-------------------
CONDENSED BALANCE SHEETS 1998 1997
- ------------------------ -------- -------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 15,728 29,169
Investment securities....................................... 4,497 4,342
Loans to subsidiaries....................................... 69,000 66,000
Investment in subsidiaries, at equity in underlying value of
their net assets.......................................... 676,563 480,236
Net loans................................................... 15,375 31,568
Goodwill.................................................... -- 133
Other assets................................................ 3,109 10,176
-------- -------
$784,272 621,624
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Convertible subordinated debt............................... $ 1,541 6,840
Repurchase agreements....................................... 10,000 --
Accrued and other liabilities............................... 4,095 19,769
Shareholders' equity........................................ 768,636 595,015
-------- -------
$784,272 621,624
======== =======
</TABLE>
44
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED,
-----------------------------
CONDENSED STATEMENTS OF INCOME 1998 1997 1996
- ------------------------------ ------- ------- -------
<S> <C> <C> <C>
Income:
Cash dividends from subsidiaries............................ $60,000 100,200 76,250
Other income................................................ 4,044 66,019 61,296
------- ------- -------
64,044 166,219 137,546
Interest and other expenses................................. 4,071 66,313 61,210
------- ------- -------
Income before federal income tax benefit and equity in
undistributed income of subsidiaries...................... 59,973 99,906 76,336
Federal income tax (benefit)................................ (3,221) (1,267) (1,292)
------- ------- -------
63,194 101,173 77,628
Equity in undistributed income (loss) of subsidiaries....... 34,284 (5,499) (278)
------- ------- -------
Net income.................................................. $97,478 95,674 77,350
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED,
--------------------------------
CONDENSED STATEMENTS OF CASH FLOWS 1998 1997 1996
- ---------------------------------- --------- ------- --------
<S> <C> <C> <C>
Operating activities:
Net income.................................................. $ 97,478 95,674 77,350
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity (loss) in undistributed income of subsidiaries....... (34,284) 5,262 278
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....................... 62 1,097 --
Other....................................................... (10,071) 7,694 3,724
--------- ------- --------
Net cash provided by operating activities................... 53,185 109,727 93,922
--------- ------- --------
Investing activities:
Proceeds from maturities of investment securities........... 3,276 -- 2,000
Loans to subsidiaries....................................... (3,000) (4,211) 63,228
Payments for investments in and advances to subsidiaries.... (165,353) (10,840) --
Net increase (decrease) in loans............................ 16,131 2,346 (33,152)
Purchases of investment securities........................ (3,049) (1,211) (4,126)
--------- ------- --------
Net cash (used) provided by investing activities............ (151,995) (13,916) 27,950
--------- ------- --------
Financing activities:
Net increase in securities sold under repurchase agreements
and
other borrowings.......................................... 10,000 -- --
Cash dividends.............................................. (49,322) (40,871) (38,563)
Proceeds from exercise of stock options..................... 7,865 3,138 3,617
Purchase of treasury shares................................. (25,703) (53,607) (56,295)
Treasury shares reissued -- acquisition..................... 115,205 -- --
Treasury shares reissued -- public offering................. 27,324 -- --
Loans made to FirstMerit Bank, N.A.......................... -- -- (17,000)
--------- ------- --------
Net cash (used) provided by financing activities............ 85,369 (91,340) (108,241)
--------- ------- --------
</TABLE>
45
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED,
--------------------------------
CONDENSED STATEMENTS OF CASH FLOWS 1998 1997 1996
- ---------------------------------- --------- ------- --------
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents........ (13,441) 4,471 13,631
Cash and cash equivalents at beginning of year.............. 29,169 24,698 11,067
--------- ------- --------
Cash and cash equivalents at end of year.................... $ 15,728 29,169 24,698
========= ======= ========
</TABLE>
15. SEGMENT INFORMATION
The Corporation provides a diversified range of banking and certain
nonbanking financial services and products through its various subsidiaries.
Management reports the results of the Corporation's operations through its major
line of business Super Community Banking. Parent Company and Others include
activities that are not directly attributable to Super Community Banking.
Included in this category are certain nonbanking affiliates, eliminations of
certain intercompany transactions and certain nonrecurring transactions. Also
included are portions of certain assets, capital, and support functions not
specifically identifiable with Super Community Banking. The Corporation's
business is conducted solely in the United States.
The accounting policies of the segment are the same as those described in
"Summary of Significant Accounting Policies." The Corporation evaluates
performance based on profit or loss from operations before income taxes.
The following table presents a summary of financial results and significant
performance measures for the periods depicted. Information for periods prior to
those presented was not readily available.
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------- --------------------------------------
SUPER- ADJUSTMENTS SUPER- ADJUSTMENTS
COMMUNITY PARENT CO. AND FIRSTMERIT COMMUNITY PARENT CO. AND
BANKING & OTHERS ELIMINATIONS CONSOLIDATED BANKING & OTHERS ELIMINATIONS
(DOLLARS IN THOUSANDS) ---------- ---------- ------------ ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net interest
income........... $ 302,694 62,756 (60,004) 305,446 $ 277,305 91,806 (87,506)
Provision for
possible loan
losses........... 28,321 62 -- 28,383 20,806 1,097 --
Other income....... 108,929 1,563 (12) 110,480 86,817 75,454 (76,935)
Other expenses..... 239,385 3,354 (16) 242,723 203,077 65,550 (64,241)
Net income......... 93,674 98,088 (94,284) 97,478 84,953 96,188 (85,467)
AVERAGE BALANCES:
Assets............. 5,877,288 732,371 6,609,659 5,305,301 619,937
Loans.............. 4,782,377 24,805 4,807,182 4,351,390 39,663
Earning assets..... 6,100,546 30,267 6,130,813 5,065,469 511,532
Deposits........... 5,134,553 -- 5,134,553 4,645,807 --
Shareholders'
equity........... 584,667 99,142 683,809 505,177 76,852
PERFORMANCE RATIOS:
Return on average
equity........... 16.02% 14.26% 18.66%
Return on average
assets........... 1.59% 1.47% 1.78%
Efficiency ratio... 57.19% 57.37% 55.01%
<CAPTION>
1997
------------
FIRSTMERIT
CONSOLIDATED
(DOLLARS IN THOUSANDS) ------------
<S> <C>
SUMMARY OF OPERATIONS:
Net interest
income........... 281,605
Provision for
possible loan
losses........... 21,903
Other income....... 85,336
Other expenses..... 204,386
Net income......... 95,674
AVERAGE BALANCES:
Assets............. 5,925,238
Loans.............. 4,391,053
Earning assets..... 5,577,001
Deposits........... 4,645,807
Shareholders'
equity........... 582,029
PERFORMANCE RATIOS:
Return on average
equity........... 16.44%
Return on average
assets........... 1.61%
Efficiency ratio... 54.55%
</TABLE>
46
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The table below presents estimated revenues from external customers, by
product and service group for the periods depicted.
<TABLE>
<CAPTION>
TRUST
RETAIL COMMERCIAL SERVICES TOTAL
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
1998:
Interest and fees............................ $284,506 256,596 16,147 557,249
Service charges.............................. 33,252 8,498 -- 41,750
Sales and servicing.......................... 7,814 6,764 -- 14,578
-------- -------- -------- --------
$325,572 271,858 16,147 613,577
</TABLE>
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.
Derivative financial instruments -- The fair value of exchange-traded
derivative financial instruments was based on quoted market prices or
dealer quotes. These values represent the estimated amount the Corporation
would receive or pay to terminate the agreements, considering current
interest rates, as well as the current credit-worthiness of the
counterparties. Fair value amounts consist of unrealized gains and losses,
accrued interest receivable and payable, and premiums paid or received, and
take into account master netting agreements.
Accrued interest payable -- The carrying amount is considered a
reasonable estimate of fair value.
47
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
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.
The estimated fair values of the Corporation's financial instruments based
on the assumptions described above are as follows:
<TABLE>
<CAPTION>
YEAR-ENDS
----------------------------------------------------
1998 1997
------------------------ ------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Investment securities................... $1,551,727 1,551,727 $1,136,561 1,136,561
Federal funds sold...................... 12,505 12,505 36,496 36,496
Net loans............................... 4,918,447 4,924,468 4,408,561 4,427,222
Cash and due from banks................. 245,950 245,950 176,745 176,745
Accrued interest receivable............. 41,608 41,608 37,219 37,219
Financial liabilities:
Deposits................................ 5,461,563 5,481,376 4,763,368 4,770,189
Securities sold under agreements to
repurchase and other borrowings...... 807,433 808,660 546,862 547,035
Accrued interest payable................ 21,347 21,347 17,291 17,291
Derivative instruments.................. -- (68) -- --
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
and derivative instruments.
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.
48
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
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>
YEARS ENDED,
-----------------------
1998 1997
---------- ---------
<S> <C> <C>
Commitments to extend credit................................ $2,048,634 1,583,467
========== =========
Standby letters of credit and financial guarantees
written................................................... $ 121,065 114,304
========== =========
Loans sold with recourse.................................... $ 727 1,058
========== =========
Purchased options........................................... $ 11,400 --
========== =========
Futures contracts sold...................................... $ 6,100 --
========== =========
</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 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 $27,627 and $33,796 at December 31, 1998 and 1997, 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 extending 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.
Derivative financial instruments include swaps, futures, forwards and
option contracts, all of which derive their value from underlying interest
rates, commodity values or equity instruments. For most contracts, notional
amounts are used solely to determine cash flows to be exchanged. The notional or
contract amounts associated with the derivative instruments are not recorded as
assets or liabilities on the balance sheet and do not represent the potential
for gain or loss associated with such transactions. The gross losses in 1998
associated with purchase options totaled $31.0 and the gross losses from futures
contracts sold were $36.0. These derivative instruments were not entered into
until 1998.
18. 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.
49
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial and per share data for the years ended 1998 and 1997
are summarized as follows:
<TABLE>
<CAPTION>
QUARTERS
-----------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total interest income..................... 1998 $116,408 124,003 131,571 131,115
==== ======== ======== ======== ========
1997 $111,977 116,041 116,703 118,797
==== ======== ======== ======== ========
Net interest income....................... 1998 $ 70,912 75,156 78,629 80,749
==== ======== ======== ======== ========
1997 $ 68,808 70,680 70,389 71,728
==== ======== ======== ======== ========
Provision for possible loan losses........ 1998 $ 5,547 5,527 5,235 12,074
==== ======== ======== ======== ========
1997 $ 4,219 5,117 6,266 6,301
==== ======== ======== ======== ========
Income before federal income taxes........ 1998 $ 35,295 39,170 41,235 29,120
==== ======== ======== ======== ========
1997 $ 33,525 34,986 35,442 36,699
==== ======== ======== ======== ========
Net income................................ 1998 $ 24,425 26,797 28,283 17,973
==== ======== ======== ======== ========
1997 $ 22,423 23,624 24,369 25,258
==== ======== ======== ======== ========
Net income per share -- basic............. 1998 $ 0.36 0.38 0.39 0.24
==== ======== ======== ======== ========
1997 $ 0.32 0.34 0.35 0.37
==== ======== ======== ======== ========
Net income per share -- diluted........... 1998 $ 0.35 $ 0.38 $ 0.38 $ 0.23
==== ======== ======== ======== ========
1997 $ 0.31 $ 0.33 $ 0.35 $ 0.36
==== ======== ======== ======== ========
</TABLE>
20. 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.
50
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
21. EARNINGS PER SHARE
SFAS 128 requires reconciliation of the numerator and denominator used in
the basic Earnings Per Share ("EPS") calculation to the numerator and
denominator used in the diluted EPS calculation. The calculations are presented
in the table below:
<TABLE>
<CAPTION>
YEARS ENDED,
---------------------------------------
1998 1997 1996
----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BASIC EPS:
Net income available to common shareholders......... $ 97,478 95,674 77,350
Average common shares outstanding................... 71,095,251 69,404,772 71,798,728
Earnings per basic common share..................... $ 1.37 1.38 1.08
DILUTED EPS:
Net income available to common shareholders......... $ 97,478 95,674 77,350
Add: interest expense on convertible bonds, net of
tax.............................................. 206 334 391
----------- ---------- ----------
Adjusted income available to common shareholders.... 97,684 96,008 77,741
Average common shares outstanding................... 71,095,251 69,404,772 71,798,728
Add: common stock equivalents for shares issuable
under:
Stock option plans............................... 1,055,079 1,000,428 375,740
Subordinated debentures conversion............... 552,420 852,304 993,554
----------- ---------- ----------
Average common and common stock equivalent shares
outstanding...................................... 72,702,750 71,257,504 73,168,022
Earnings per diluted common share................... $ 1.34 1.35 1.06
=========== ========== ==========
</TABLE>
22. 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, 1998, 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.
As of year-end 1998, 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."
51
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR CAPITAL
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES: ACTION PROVISIONS:
----------------- ----------------- ------------------
AS OF DECEMBER 31, 1998: AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------ -------- ----- -------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets).... $692,689 11.55% $479,855 8.00% 599,818 10.00%
Tier I Capital (to Risk Weighted Assets)... 617,663 10.30% $239,927 4.00% 359,891 6.00%
Tier I Capital (to Average Assets)......... 617,663 8.98% $206,367 3.00% 343,945 5.00%
</TABLE>
52
<PAGE> 54
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 judgment 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>
JOHN R. COCHRAN SIGNATURE AUSTIN J. MULHERN SIGNATURE
Chairman and Chief Senior Vice President
Executive Officer Chief Financial Officer
</TABLE>
53
<PAGE> 55
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
And Shareholders of FirstMerit Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and retained earnings and of cash
flows present fairly, in all material respects, the financial position of
FirstMerit Corporation and its subsidiaries at December 31, 1998 and 1997 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS SIGNATURE
January 31, 1999
54
<PAGE> 56
AVERAGE CONSOLIDATED BALANCE SHEETS
FULLY-TAX EQUIVALENT INTEREST RATES AND INTEREST DIFFERENTIAL
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- ------------------------------
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)................ $1,055,750 65,176 6.17% 955,112 60,594 6.34% 1,158,357 72,023 6.22
Obligations of states and
political subdivisions
(tax-exempt)............. 98,457 7,767 7.89 86,873 7,074 8.14 100,630 7,404 7.36
Other securities........... 150,561 9,504 6.31 102,327 6,568 6.42 99,977 6,489 6.49
---------- ------- ---------- ------- --------- -------
Total investment
securities........... 1,304,768 82,447 6.32 1,144,312 74,236 6.49 1,358,964 85,916 6.32
Federal funds sold & other
interest-earning assets.... 18,863 1,026 5.44 41,636 2,250 5.40 19,233 934 4.86
Loans........................ 4,807,182 423,116 8.80 4,391,053 390,266 8.89 4,343,189 377,116 8.68
Total earning assets... 6,130,813 506,589 8.26 5,577,001 466,752 8.37 5,721,386 463,966 8.11
Allowance for possible loan
losses..................... (69,191) (56,234) (52,003)
Cash and due from banks...... 204,353 202,600 231,564
Other assets................. 343,684 201,871 175,020
---------- ---------- ---------
Total assets........... $6,609,659 $5,925,238 6,075,967
========== ========== =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits:
Demand-non-interest
bearing.................. $1,022,909 -- -- 733,394 -- -- 745,102 -- --
Demand-interest bearing.... 508,983 5,688 1.12 536,983 8,485 1.58 529,888 9,758 1.84
Savings.................... 1,364,705 37,178 2.72 1,337,115 34,650 2.59 1,457,762 36,092 2.48
Certificates and other time
deposits................. 2,237,956 120,135 5.37 2,038,315 107,997 5.30 2,056,139 109,005 5.30
---------- ------- ---------- ------- --------- -------
Total deposits......... 5,134,553 163,001 3.17 4,645,807 151,132 3.25 4,788,891 154,855 3.23
Federal funds purchased,
securities sold under
agreements to repurchase
and other borrowings....... 688,311 34,650 5.03 595,740 30,803 5.17 623,278 31,481 5.05
---------- ------- ---------- ------- --------- -------
Total interest bearing
liabilities.......... 4,799,955 197,651 4.12 4,508,153 181,935 4.04 4,667,067 186,336 3.99
---------- ------- ---------- ------- --------- -------
Other liabilities............ 102,986 101,662 79,329
Shareholders' equity......... 683,809 582,029 584,469
---------- ---------- ---------
Total liabilities and
shareholders'
equity............... $6,609,659 5,925,238 6,075,967
========== ========== =========
Net yield on earning
assets..................... 308,938 5.04 284,817 5.11 277,630 4.85
======= ==== ======= ==== ======= ====
Interest rate spread......... 4.14 4.33 4.12
==== ==== ====
Income on tax-exempt
securities and loans....... 5,542 5,225 6,241
======= ======= =======
</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.
55
<PAGE> 57
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 March 17,
1999 ("Proxy Statement"), which is incorporated herein by reference.
Information about the Executive Officers of FirstMerit appears in Part I of
this report.
Disclosure by FirstMerit with respect to compliance with Section 16(a)
appears on page 5 of the Proxy Statement, and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
See "Executive Compensation and Other Information" on pages 7 through 18 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 27, and
pages 2 through 6, 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 20 and 21 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, 1998, 1997 and 1996
Consolidated Statements of Income Years ended December 31, 1998, 1997
and 1996
Consolidated Statements of Changes in Shareholders' Equity Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows Years ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements Years ended December 31,
1998, 1997 and 1996
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
FirstMerit filed a Form 8-K on October 26, 1998 to report the
consummation of the merger of Security First Corp. with and into the
Corporation.
(c) Exhibits
See the Exhibit Index.
(d) Financial Statements
See subparagraph (a)(1) above.
56
<PAGE> 58
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 17th day of March, 1999.
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 17th day of March, 1999 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/ AUSTIN J. MULHERN Executive Vice President, Finance and
- ------------------------------------------------ Administration (Chief Financial Officer and Chief
Austin J. Mulhern Accounting Officer)
/s/ KAREN S. BELDEN Director
- ------------------------------------------------
Karen S. Belden
/s/ R. CARY BLAIR Director
- ------------------------------------------------
R. Cary Blair
/s/ SID A. BOSTIC Director
- ------------------------------------------------
Sid A. Bostic
/s/ ROBERT W. BRIGGS Director
- ------------------------------------------------
Robert W. Briggs
/s/ GARY G. CLARK Director
- ------------------------------------------------
Gary G. Clark
/s/ PHILIP A. LLOYD, II Director
- ------------------------------------------------
Philip A. Lloyd, II
/s/ RICHARD COLELLA Director
- ------------------------------------------------
Richard Colella
/s/ TERRY L. HAINES Director
- ------------------------------------------------
Terry L. Haines
/s/ CLIFFORD J. ISROFF Director
- ------------------------------------------------
Clifford J. Isroff
/s/ ROBERT G. MERZWEILER Director
- ------------------------------------------------
Robert G. Merzweiler
/s/ STEPHEN E. MYERS Director
- ------------------------------------------------
Stephen E. Myers
/s/ ROGER T. READ Director
- ------------------------------------------------
Roger T. Read
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
/s/ RICHARD N. SEAMAN Director
- ------------------------------------------------
Richard N. Seaman
/s/ CHARLES F. VALENTINE Director
- ------------------------------------------------
Charles F. Valentine
/s/ JERRY M. WOLF Director
- ------------------------------------------------
Jerry M. Wolf
</TABLE>
<PAGE> 60
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<S> <C>
3.1 Amended and Restated Articles of Incorporation of FirstMerit
Corporation, as amended (incorporated by reference from
Exhibit 3(a) to the Form 8-K filed by the registrant on
April 9, 1998, and the amendment incorporated by reference
from Exhibit 4 to the Form 8-K filed by the registrant on
June 22, 1998)
3.2 Amended and Restated Code of Regulations of FirstMerit
Corporation (incorporated by reference from Exhibit 3(b) to
the Form 10-K filed by the registrant on April 9, 1998)
3.3 Certificate of Designation for FirstMerit Corporation 6 1/2%
Cumulative Convertible Preferred Stock, Series B
4.1 Shareholders Rights Agreement dated October 21, 1993,
between FirstMerit Corporation and FirstMerit Bank, N.A., as
amended and restated May 20, 1998 (incorporated by reference
from Exhibit 4 to the Form 8-A/A filed by the registrant on
June 22, 1998)
4.2 Instrument of Assumption of Indenture between FirstMerit
Corporation and NBD Bank, as Trustee, dated October 23, 1998
regarding FirstMerit Corporation's 6 1/4% Convertible
Subordinated Debentures, due May 1, 2008 (incorporated by
reference from Exhibit 4(b) to the Form 10-Q filed by the
registrant on November 13, 1998)
4.3 Supplemental Indenture, dated as of February 12, 1999,
between FirstMerit and Firstar Bank Milwaukee, National
Association, as Trustee relating to the obligations of the
FirstMerit Capital Trust I, fka Signal Capital Trust I
4.4 Indenture dated as of February 13, 1998 between Firstar Bank
Milwaukee, National Association, as trustee and Signal Corp
(incorporated by reference from Exhibit 4.1 to the Form S-4,
No. 333-52581-01, filed by FirstMerit Capital Trust I, fka
Signal Capital Trust I, on May 13, 1998)
4.5 Amended and Restated Declaration of Trust of FirstMerit
Capital Trust I, fka Signal Capital Trust I, dated as of
February 13, 1998 (incorporated by reference from Exhibit
4.5 to the Form S-4 No. 333-52581-01, filed by FirstMerit
Capital Trust I, fka Signal Capital Trust I, on May 13,
1998)
4.6 Form Capital Security Certificate (incorporated by reference
from Exhibit 4.6 to the Form S-4 No. 333-52581-01, filed by
FirstMerit Capital Trust I, fka Signal Capital Trust I, on
May 13, 1998)
4.7 Series B Capital Securities Guarantee Agreement
(incorporated by reference from Exhibit 4.7 to the Form S-4
No. 333-52581-01, filed by FirstMerit Capital Trust I, fka
Signal Capital Trust I, on May 13, 1998)
4.8 Form of 8.67% Junior Subordinated Deferrable Interest
Debenture, Series B (incorporated by reference from Exhibit
4.7 to the Form S-4 No. 333-52581-01, filed by FirstMerit
Capital Trust I, fka Signal Capital Trust I, on May 13,
1998)
10.1 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 (incorporated by reference from Exhibit 10.2 to
the Form 10-K filed by the registrant on February 24, 1998)*
10.3 1992 Directors Stock Option Program (incorporated by
reference from Exhibit 10.2 to the Form 10-K filed by the
registrant on February 24, 1998)*
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
(incorporated by reference from Exhibit 10.5 to the Form
10-K filed by the registrant on February 24, 1998)*
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)*
</TABLE>
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<S> <C>
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
(incorporated by reference from Exhibit 10.11 to the Form
10-K filed by the registrant on February 24, 1998)*
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
(incorporated by reference from Exhibit 10.13 to the Form
10-K filed by the registrant on February 24, 1998)*
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 dated October 23, 1998 for Charles F.
Valentine (incorporated by reference from Exhibit 10(a) to
the Form 10-Q filed by the registrant on November 13, 1998)*
10.17 SERP Agreement dated October 23, 1998 for Charles F.
Valentine (incorporated by reference from Exhibit 10(b) to
the Form 10-Q filed by the registrant on November 13, 1998)*
10.18 Employment Agreement dated October 23, 1998 for Austin J.
Mulhern (incorporated by reference from Exhibit 10(c) to the
Form 10-Q filed by the registrant on November 13, 1998)*
10.19 SERP Agreement dated October 23, 1998 for Austin J. Mulhern
(incorporated by reference from Exhibit 10(d) to the Form
10-Q filed by the registrant on November 13, 1998)*
10.20 Employment Agreement of John R. Cochran, dated December 1,
1998*
10.21 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)*
10.22 Restricted Stock Award Agreement of John R. Cochran dated
April 9, 1997 (incorporated by reference from Exhibit 10.18
to the Form 10-K filed by the registrant on February 24,
1998)*
10.23 Employment Agreement of Sid A. Bostic dated February 1, 1998
(incorporated by reference from Exhibit 10.19 to the Form
10-K filed by the registrant on February 24, 1998)*
10.24 Restricted Stock Award Agreement of Sid A. Bostic dated
February 1, 1998 (incorporated by reference from Exhibit
10.20 to the Form 10-K filed by the registrant on February
24, 1998)*
10.25 Form of FirstMerit Corporation Termination Agreement*
10.26 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)*
10.27 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)
10.28 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)
10.29 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)
10.30 FirstMerit 1987 Stock Option and Incentive Plan (SF)
(incorporated by reference from Exhibit 4.2 to the Form
S-8/A (No. 333-57439) filed by the registrant on October 26,
1998)*
10.31 FirstMerit 1996 Stock Option and Incentive Plan (SF)
(incorporated by reference from Exhibit 4.3 to the Form
S-8/A (No. 333-57439) filed by the registrant on October 26,
1998)*
</TABLE>
<PAGE> 62
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<S> <C>
10.32 FirstMerit 1994 Stock Option Plan (SF) (incorporated by
reference from Exhibit 4.4 to the Form S-8/A (No. 333-57439)
filed by the registrant on October 26, 1998)*
10.33 FirstMerit 1989 Stock Incentive Plan (SB)(incorporated by
reference from Exhibit 4.6 to the Form S-8/A (No. 333-63797)
filed by the registrant on February 12, 1999)*
10.34 FirstMerit Amended and Restated Stock Option and Incentive
Plan (SG) (incorporated by reference from Exhibit 4.2 to the
Form S-8/A (No. 333-63797) filed by the registrant on
February 12, 1999)*
10.35 FirstMerit Non-Employee Director Stock Option Plan (SG)
(incorporated by reference from Exhibit 4.3 to the Form
S-8/A (No. 333-63797) filed by the registrant on February
12, 1999)*
10.36 FirstMerit 1997 Omnibus Incentive Plan (SG) (incorporated by
reference from Exhibit 4.4 to the Form S-8/A (No. 333-63797)
filed by the registrant on February 12, 1999)*
10.37 FirstMerit 1993 Stock Option Plan (FSB) (incorporated by
reference from Exhibit 4.5 to the Form S-8/A (No. 333-63797)
filed by the registrant on February 12, 1999)*
10.38 First Amendment to Restricted Stock Award Agreement for John
R. Cochran
10.39 Amended and Restated Membership Agreement with respect to
the FirstMerit Corporation Executive Supplemental Retirement
Plan
25.1 Form T-1 Statement of Eligibility of Firstar Trust Company
to act as Property Trustee under the Amended and Restated
Declaration of Trust of FirstMerit Capital Trust I, fka
Signal Capital Trust I (incorporated by reference from
Exhibit 26.1 to the Form S-4 No. 333-52581-01, filed by
FirstMerit Capital Trust I, fka Signal Capital Trust I, on
May 13, 1998)
25.2 Form T-1 Statement of Eligibility of Firstar Trust Company
to act as Debenture Trustee under the FirstMerit Capital
Trust I, fka Signal Capital Trust I, Indenture (incorporated
by reference from Exhibit 26.1 to the Form S-4 No.
333-52581-01, filed by FirstMerit Capital Trust I, fka
Signal Capital Trust I, on May 13, 1998)
21 Subsidiaries of FirstMerit Corporation
23 Consent of PricewaterhouseCoopers, L.L.P.
27 Financial Data Schedule
99 FirstMerit Corporation Supplemental Consolidated Balance
Sheets and the related Supplemental Consolidated Statements
of Income and Retained Earnings and of Cash Flows at
December 31, 1998 and 1997, and the Consolidated Results of
Operations and Cash Flows for each of the three years in the
period ended December 31, 1998
</TABLE>
<PAGE> 1
EXHIBIT 3.3
CERTIFICATE OF DESIGNATION
OF
SERIES B PREFERRED STOCK
OF
FIRSTMERIT CORPORATION
John R. Cochran, Chairman of the Board and Chief Executive Officer, and
Terry E. Patton, Secretary of FirstMerit Corporation, an Ohio corporation with
its principal office in Akron, Ohio (the "Corporation") do hereby certify that
they are respectively the Chief Executive Officer and Secretary of the
Corporation and that on January 21, 1999, at a meeting of the Board of Directors
at which a quorum was present, the Board, by majority vote of the Directors
present, authorized, adopted and approved the following resolution to amend the
Articles of Incorporation of the Corporation pursuant to the authority of
Section 1701.70(B)(l) of the Ohio Revised Code and Article Fourth of the
Corporation's Articles of Incorporation:
RESOLVED, that pursuant to the authority conferred upon the Board of
Directors of the Corporation (hereinafter called the "Board of Directors" or the
"Board") by Article Fourth of the Amended and Restated Articles of Incorporation
("Articles"), and pursuant to Section 1701.70 of the Ohio Revised Code, the
Board of Directors hereby amends the Articles to create a series of preferred
stock, no par value, to be designated as the 6 1/2% Cumulative Convertible
Preferred Stock Series B, no par value, initially consisting of 500,000 shares,
and to the extent that the designations, powers, preferences and relative and
special rights and qualifications, limitations and restrictions of the Series B
Preferred Stock are not stated and expressed in the Articles, does hereby fix
and state such designations, powers, preferences and relative and other special
rights and the qualifications, limitations and restrictions thereof as set forth
herein; and
RESOLVED, that the Articles be and they hereby are amended by
(1) adding the following language to the first sentence of Article FOURTH Part
C, Section 5:
"Except as provided in Part B or D of these Amended and Restated
Articles of Incorporation"
and (2) adding at the end of Part C of Article FOURTH thereof a new Part D
reading as follows:
PART D. 6 1/2% Cumulative Convertible Preferred Stock Series B, no par
value.
SECTION 1. DESIGNATION AND AMOUNT.
-1-
<PAGE> 2
Of the 7,000,000 shares of authorized no par value preferred stock,
500,000 shares are hereby designated as a series entitled "6 1/2% Cumulative
Convertible Preferred Stock, Series B" (hereinafter called "Series B Preferred
Stock"). The number of shares of Series B Preferred Stock may be increased or
decreased by resolution of the Board of Directors; provided, that no decrease
shall reduce the number of shares of Series B Preferred Stock to a number less
than the number of shares then outstanding plus the number of shares reserved
for issuance upon the exercise of outstanding options, rights or warrants or
upon the conversion of any outstanding securities issued by the Corporation
convertible into Series B Preferred Stock.
SECTION 2. DIVIDENDS AND DISTRIBUTIONS.
(a) DIVIDEND PAYMENT. The holders of Series B Preferred Stock, in
preference to the holders of Common Stock and of any other class of shares
ranking junior to the Series B Preferred Stock, shall be entitled to receive out
of any funds legally available for Series B Preferred Stock and when and as
declared by the Board of Directors, dividends in cash at the annual rate of 6
1/2% of the liquidation preference of $25.00 per share, payable in accordance
with this Section 2.
(b) DIVIDEND PAYMENT DATES. Dividends on Series B Preferred Stock shall
be payable, if declared, quarterly on March 1, June 1, September 1, and December
1 of each year, the first quarterly dividend being payable, if declared, on
March 1, 1999. The dividends payable for each full quarterly dividend period on
each share of Series B Preferred Stock shall be $.40625.
Dividends for a dividend period on the Series B Preferred Stock, or for
any period shorter or longer than a full dividend period on the Series B
Preferred Stock shall be computed on the basis of 30-day months and a 360-day
year. The aggregate dividend payable quarterly to each holder of Series B
Preferred Stock shall be rounded to the nearest one cent with $.005 being
rounded upward. Each dividend shall be payable to the holders of record on such
record date, not less than 15 nor more than 30 days preceding the payment date
thereof, as shall be fixed from time to time by the Corporation's Board of
Directors.
(c) CUMULATIVE DIVIDENDS. Dividends on Series B Preferred Stock shall
be cumulative as follows:
(1) With respect to shares included in the issue of Series B Preferred
Stock and preferred shares issued any time thereafter up to and
including the record date for the payment of the first dividend on the
issue of Series B Preferred Stock, dividends shall be cumulative from
the date of the issue of Series B Preferred Stock; and
(2) With respect to preferred shares issued any time after the
aforesaid record date for payment of the first dividend on the issue of
Series B Preferred Stock, dividends shall be cumulative from the
dividend payment date next preceding the date of issue of such shares,
except that if such shares are issued during the period commencing the
day after the record date for the payment of a dividend on Series B
Preferred Stock and ending on the payment date of that dividend,
dividends with respect to such shares shall be cumulative from that
dividend payment date.
-2-
<PAGE> 3
SECTION 3. REDEMPTION.
(a) GENERAL. The Series B Preferred Stock may not be redeemed prior to
June 24, 1999. Subject to the provisions of Section 5(b)(iii) of this Part, on
and after June 24, 1999, the shares of Series B Preferred Stock may be redeemed,
in whole or in part, at the election of the Corporation, upon notice as provided
in this Section 3, by resolution of its Board of Directors, at any time or from
time to time, at a redemption price of $25.00 per share, plus, in each case, an
amount equal to all accumulated, accrued, and unpaid dividends through the date
fixed for redemption.
(b) NOTICE. Notice of every redemption shall be mailed, postage
prepaid, to the holders of record of the Series B Preferred Stock to be redeemed
at their respective addresses then appearing on the books of the Corporation,
not less than 30 days nor more than 60 days prior to the date fixed for such
redemption. At any time after notice as provided above has been deposited in the
mail, the Corporation may deposit the aggregate redemption price for the Series
B Preferred Stock to be redeemed, together with accrued and unpaid dividends
thereon to the redemption date, with any bank or trust company having capital
and surplus of not less than $100,000,000 named in such notice and direct that
there be paid to the respective holders of the Series B Preferred Stock so to be
redeemed amounts equal to the redemption price of the Series B Preferred Stock
so to be redeemed, together with such accrued and unpaid dividends thereon, on
surrender of the share certificate or certificates held by such holders; and
upon the deposit of such notice in the mail and the making of such deposit of
money with such bank or trust company, such holders shall cease to be
shareholders with respect to such shares; and from and after the time such
notice shall have been so deposited and such deposit of money shall have been so
made, such holders shall have no rights or claim against the Corporation with
respect to such shares, except only the right to receive such money from such
bank or trust company without interest or to exercise before the redemption date
any unexpired privileges of conversion. In the event less than all of the
outstanding shares of Series B Preferred Stock are to be redeemed, the
Corporation shall select by lot the shares so to be redeemed in such manner as
shall be prescribed by the Board of Directors.
(c) UNCLAIMED FUNDS. If the holders of the Series B Preferred Stock
which have been called for redemption shall not within six years after such
deposit claim the amount deposited for the redemption thereof, any such bank or
trust company shall, upon demand, pay over to the Corporation such unclaimed
amounts and thereupon such bank or trust company and the Corporation shall be
relieved of all responsibility in respect thereof and to such holders.
(d) STATUS OF REDEEMED STOCK. Any Series B Preferred Stock which is (a)
redeemed by the Corporation pursuant to the provisions of this Section, (b)
converted in accordance with Section 4 hereof, or (c) otherwise acquired by the
Corporation, shall resume the status of authorized but unissued Series B
Preferred Stock.
SECTION 4. CONVERSION.
Shares of the Series B Preferred Stock shall be convertible into Common
Stock on the following terms and conditions:
-3-
<PAGE> 4
(a) CONVERSION RIGHT. Subject to and upon compliance with the
provisions of this Section, the holder of any shares of Series B Preferred Stock
may at such holder's option, at any time or from time to time, convert any such
shares into the number of fully paid and non-assessable shares of Common Stock
determined by dividing (i) the product of $25.00 and the number of shares of
Series B Preferred Stock to be converted by (ii) the conversion price (the
"Conversion Price") in effect on the conversion date. The initial Conversion
Price shall be $9.0123, subject to adjustment as set forth in paragraph (d) of
this Section 4. If any shares of Series B Preferred Stock shall be called for
redemption, the right to convert such shares shall terminate and expire at the
close of business on the redemption date.
(b) DIVIDEND UPON CONVERSION OR REDEMPTION. No payment or adjustment
shall be made by the Corporation to any holder of shares of Series B Preferred
Stock surrendered for conversion or redemption in respect of dividends accrued
since the last preceding dividend payment date on the shares of Series B
Preferred Stock surrendered for conversion; provided, however, that if shares of
Series B Preferred Stock shall be converted or redeemed subsequent to any record
date with respect to any dividend payment date and prior to the next such
succeeding dividend payment date, the dividend falling due on such dividend
payment date shall be payable on such dividend payment date notwithstanding such
conversion or redemption, and such dividend (whether or not punctually paid or
duly provided for) shall be paid to the person in whose name such shares are
registered at the close of business on such record date.
(c) METHOD OF CONVERSION.
(i) The surrender of any shares of Series B Preferred
Stock for conversion shall be made by the holder thereof by
delivering the certificate or certificates evidencing
ownership of such shares with proper endorsement or
instruments of transfer to the Corporation at the office or
agency to be maintained by the Corporation for that purpose,
and such holder shall give written notice to the Corporation
at said office or agency that he elects to convert such shares
of Series B Preferred Stock in accordance with the provisions
thereof and of this Section. Such notice shall also state the
number of whole shares of Series B Preferred Stock and the
name or names (with addresses) in which the certificate or
certificates evidencing ownership of Common Stock which shall
be issuable on such conversion shall be issued. In the case of
lost or destroyed certificates evidencing ownership of shares
of Series B Preferred Stock to be surrendered for conversion,
the holder shall submit proof of loss or destruction and such
indemnity as shall be required by the Corporation.
(ii) Subject to the provisions hereof, every such
notice of election to convert shall constitute a contract
between the holder of such shares of Series B Preferred Stock
and the Corporation, whereby such holder shall be deemed to
subscribe for the amount of
-4-
<PAGE> 5
the Common Stock which he will be entitled to receive upon
such conversion and, in payment and satisfaction of such
subscription, to surrender such shares of Series B Preferred
Stock and to release the Corporation from all obligations
thereon (subject to the payment of accrued dividends in
accordance herewith), and whereby the Corporation shall be
deemed to agree that the surrender of such shares of Series B
Preferred Stock and the extinguishment of its obligation
thereon (except as aforesaid), shall constitute full payment
for the Common Stock so subscribed for and to be issued upon
such conversion.
(iii) As soon as practicable after its receipt of
such notice and the certificate or certificates evidencing
ownership of such shares of Series B Preferred Stock, the
Corporation shall issue and shall deliver at said office or
agency to the person for whose account such shares of Series B
Preferred Stock were so surrendered, or on his or her written
order, a certificate or certificates for the number of such
shares of common stock into which the Series B Preferred Stock
surrendered is to be converted and a check or cash payment (if
any) to which such holder is entitled with respect to
fractional shares as determined by the Corporation, in
accordance with Section 4(e) hereof, at the close of business
on the date of conversion.
(iv) Such conversion shall be deemed to have been
effected on the date on which the Corporation shall have
received such notice and the certificate or certificates for
such shares of Series B Preferred Stock; and the person or
persons in whose name or names any certificate or certificates
for Common Stock shall be issuable upon such conversion shall
be deemed to have become on said date the holder or holders of
record of the shares represented thereby; provided that any
such surrender on any date when the stock transfer books of
the Corporation shall be closed shall become effective for all
purposes on the next succeeding day on which such stock
transfer books are open, but such conversion shall be at the
Conversion Price in effect on the date upon which such
surrender occurs.
(d) ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price shall be
subject to adjustments from time to time as follows:
(i) In case the corporation shall at any time (A) declare a
dividend on the Common Stock in shares of its capital stock,
(B) subdivide its outstanding Common Stock, (C) combine the
outstanding Common Stock into a smaller number of shares, or
(D) issue any shares of its capital stock by reclassification
of the Common Stock (including any such reclassification in
connection with a consolidation or merger in which the
Corporation is the surviving corporation), the Conversion
Price in effect on the record date for such dividend or on the
effective date of such subdivision, combination or
reclassification shall be proportionately adjusted so that the
holder of any Series B Preferred Stock converted after such
time shall be entitled to receive
-5-
<PAGE> 6
the aggregate number and kind of shares which, if such Series
B Preferred Stock had been converted immediately prior to such
time, the holder would have owned upon such conversion and
been entitled to receive by virtue of such dividend,
subdivision, combination or reclassification. Such adjustment
shall be made successively whenever any event listed above
shall occur.
(ii) In case the Corporation shall issue rights or warrants to
all holders of its Common Stock (which rights or warrants are
not available on an equivalent basis to holders of the Series
B Preferred Stock on conversion) entitling them to subscribe
for or purchase Common Stock at a price per share less than
the current market price per share (as defined in subparagraph
(iv) of this paragraph (d), at the record date for the
determination of stockholders entitled to receive such rights
or warrants, the Conversion Price shall be adjusted (subject
to the limitations contained in subparagraph (vii) of this
paragraph (d)) by multiplying the Conversion Price in effect
immediately prior to such record date by a fraction, the
denominator of which shall be the number of shares of Common
Stock outstanding on such date of issue plus the number of
additional shares of Common Stock to be offered for
subscription or purchase pursuant to the rights or warrants
and the numerator of which shall be the number of shares of
Common Stock outstanding on the date of issue plus the number
of shares of Common Stock which the aggregate offering price
of the total number of shares of Common Stock so to be offered
would purchase at such current market price. Such adjustment
shall become effective at the close of business on such record
date; however, to the extent that Common Stock is not
delivered after the expiration of such rights or warrants, the
Conversion Price shall be readjusted (but only with respect to
Series B Preferred Stock converted after such expiration) to
the Conversion Price which would then be in effect had the
adjustments made upon the issuance of such rights or warrants
been made upon the basis of delivery of only the number of
shares of Common Stock actually issued.
(iii) In case the Corporation shall distribute to all holders
of Common Stock (including any such distribution made in
connection with a consolidation or merger in which the
Corporation is the surviving corporation) evidences of its
indebtedness or assets (including securities but excluding
cash dividends or distributions paid out of retained earnings
and dividends payable in Common Stock) or subscription rights
or warrants (excluding those referred to in subparagraph (ii)
of this paragraph (d), the Conversion Price shall be adjusted
(subject to the limitations contained in subparagraph (vii) of
this paragraph (d)) by multiplying the Conversion Price in
effect immediately prior to the record date for determination
of stockholders entitled to receive such distribution by a
fraction, the denominator of which shall be the current market
price per share of Common Stock (as defined in subparagraph
(iv) of this paragraph (d)) on such record date and the
numerator of which shall be such current market price per
share of Common Stock, less the fair market value (as
determined by the Board of Directors, whose determination
shall be conclusive) of the portion of the evidences of
indebtedness or assets or subscription rights or warrants so
to be distributed which are applicable to one share of Common
Stock. Such adjustment shall become effective at the close of
business on such record date.
-6-
<PAGE> 7
(iv) For the purpose of any computation under subparagraphs
(ii) and (iii) of this paragraph (d), the current market price
per share of Common Stock on any record date shall be deemed
to be the average of the daily closing prices for the five
consecutive business days selected by the Board of Directors
commencing not more than 20 trading days before, and ending
not later than, the earlier of the day in question and the day
before the "ex" date with respect to the issuance or
distribution requiring such computation. For this purpose, the
term "'ex' date," when used with respect to any issuance or
distribution, shall mean the first date on which the Common
Stock trades on the applicable exchange or in the applicable
market without the right to receive such issuance or
distribution. The closing price for each date shall be the
reported last sale price or, in case no such reported sale
takes place on such day, the average of the reported closing
bid and asked prices on the Nasdaq National Market System, or,
if the Common Stock is not listed or admitted to trading on
any national securities exchange or quoted on such National
Market System, the average of the closing bid and asked prices
in the over-the-counter market as furnished by any New York
Stock Exchange member firm selected from time to time by the
Board for that purpose.
(v) In the case of any consolidation of the Corporation with,
or merger of the Corporation into, any other entity, any
merger of another entity into the Corporation (other than a
merger which does not result in any reclassification,
conversion, exchange or cancellation of outstanding shares of
Common Stock of the Corporation) or any sale or transfer of
all or substantially all of the assets of the Corporation,
each holder of a share of Series B Preferred Stock then
outstanding shall have the right thereafter to convert such
share only into the kind and amount of securities, cash and
other property receivable upon such consolidation, merger,
sale or transfer by a holder of the number of shares of Common
Stock of the Corporation into which such shares of Series B
Preferred Stock might have been converted immediately prior to
such consolidation, merger, sale or transfer, assuming such
holder of Common Stock of the Corporation is not an entity
with which the Corporation consolidated or into which the
corporation merged or which merged into the Corporation or to
which such sale or transfer was made, as the case may be
("constituent entity"), or an affiliate of a constituent
entity, and assuming such holder failed to exercise his rights
of election, if any, as to the kind or amount of securities,
cash and other property receivable upon such consolidation,
merger, sale or transfer (provided that if the kind or amount
of securities, cash and other property receivable be upon such
consolidation, merger, sale or transfer is not the same for
each share of Common Stock of the Corporation held immediately
prior to such consolidation, merger, sale or transfer by other
than a constituent entity or an affiliate thereof in respect
of which such rights of election shall not have been exercised
("non-electing share"), then for the purpose of this
subsection (v) the kind and amount of
-7-
<PAGE> 8
securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by each non-electing
share shall be deemed to be the kind and amount so receivable
per share by a plurality of the non-electing shares). If
necessary, appropriate adjustment shall be made in the
application of the provisions set forth herein with respect to
the rights and interests thereafter of the holders of shares
of Series B Preferred Stock, to the end that the provisions
set forth herein shall thereafter correspondingly be made
applicable, as nearly as may reasonably be, in relation to any
shares of stock or other securities or property thereafter
deliverable on the conversion of the shares. The above
provisions shall similarly apply to successive consolidations,
mergers, sales or transfers. The Corporation shall not effect
any such consolidation, merger or sale, unless prior to or
simultaneously with the consummation thereof the successor
corporation (if other than the Corporation) resulting from
such consolidation or merger or the corporation purchasing
such assets or other appropriate corporation or entity shall
assume, by written instrument, the obligation to deliver to
the holder of each share of Series B Preferred Stock such
shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holder may be entitled to
receive under this Section 4(d).
(vi) The corporation may make such adjustments in the
Conversion Price, in addition to those required by
subparagraphs (i) through (v) of this Section 4(d), as it
considers to be advisable in order that any event treated for
federal income tax purposes as a dividend of stock or stock
rights shall not be taxable to the recipients.
(vii) No adjustment in the Conversion Price will be made for
the issuance of shares of capital stock to employees pursuant
to the Corporation or any of its subsidiaries' stock option,
stock ownership or other benefit plans. No adjustment will be
required to be made in the Conversion Price until cumulative
adjustments require an adjustment of at least 1% of such
Conversion Price.
(e) FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the conversion of any shares of Series B
Preferred Stock, but the holder thereof will receive in cash an amount equal to
the value of such fractional share of Common Stock based on the current market
price (as defined in subparagraph (iv) of Section 4(d)). If more than one share
of Series B Preferred Stock shall be surrendered for conversion at one time by
the same holder, the number of full shares issuable upon conversion thereof
shall be computed on the basis of the aggregate number of such shares so
surrendered.
(f) PAYMENT OF TAXES. The Corporation shall pay any tax in respect of
the issue of stock certificates on conversion of shares of Series B Preferred
Stock. The Corporation shall not, however, be required to pay any tax which may
be payable in respect of any transfer involved in the issue and delivery of
stock in any name other than that of the holder of the shares converted, and the
Corporation shall not be required to issue or deliver any such stock certificate
unless and until the
-8-
<PAGE> 9
person or persons requesting the issuance hereof shall have paid the Corporation
the amount of any such tax or shall have established to the satisfaction of the
Corporation that such tax has been paid.
(g) COMMON STOCK RESERVED FOR CONVERSION. The Corporation shall at all
times reserve and keep available out of its authorized and unissued Common Stock
or have available in its treasury the full number of shares of Common Stock
deliverable upon the conversion of all outstanding shares of Series B Preferred
Stock and shall take all such action as may be required from time to time in
order that it may validly and legally issue fully paid and non-assessable shares
of Common Stock upon conversion of the Series B Preferred Stock.
(h) NOTICE. In the event:
(i) the Corporation shall declare a dividend (or any other
distribution) on its Common Stock (other than a cash dividend payable
out of retained earnings); or
(ii) the Corporation shall authorize the issuance to holders of
its Common Stock of rights or warrants to subscribe for or purchase
Common Stock; or
(iii) of a reclassification of the Common Stock of the Corporation
(other than a subdivision or combination of its outstanding Common
Stock, or a change in par value, or from par value to no par value, or
from no par value to par value) or of any consolidation or merger to
which the Corporation is a party or of the sale or transfer of all or
substantially all of the assets of the Corporation and for which
approval of any stockholders of the Corporation is required; or
(iv) of the voluntary or involuntary dissolution, liquidation or
winding up of the Corporation:
then, and in each event, the Corporation shall cause to be mailed to
each holder of Series B Preferred Stock, at his address as the same
shall appear on the books of the Corporation, as promptly as possible
but in any event at least fifteen days prior to the applicable date
hereinafter specified, (A) the record date for the purpose of such
dividend, distribution, rights or warrants, and the nature and amount
of such dividend, distribution, rights or warrants; or (B) the date on
which such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up is expected to become effective,
and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their Common Stock for securities
or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or
winding up.
(h) "COMMON STOCK." For the purposes of Section 4, "Common Stock" shall
mean stock of the Corporation of any class, whether now or hereafter authorized,
which has the right to participate in the distribution of either earnings or
assets of the Corporation without limit as to the amount of percentage,
including, without limitation, the Common Stock. In case by reason of the
operation of Section 4 the shares of Series B Preferred Stock shall be
convertible into any other shares of stock or other securities or property of
the Corporation
-9-
<PAGE> 10
or of any other corporation, any reference herein to the conversion of shares of
Series B Preferred Stock shall be deemed to refer to and include the conversion
of shares of Series B Preferred Stock into such other shares of stock or other
securities or property.
SECTION 5. VOTING RIGHTS.
(a) GENERAL. Except as expressly provided in this Section, or as
otherwise from time to time required by applicable law, the Series B Preferred
Stock shall have no voting rights.
(i) If, and so often as, the Corporation shall be in default in the
payment of the equivalent of the full dividends on the Series B
Preferred Stock, whether or not earned or declared, for six dividend
payment periods (whether or not consecutive), which in the aggregate
contain at least 540 days, the holders of the Series B Preferred Stock,
voting separately as a class, shall be entitled to elect, as herein
provided, two additional members of the Board of Directors of the
Corporation; provided however, that the holders of the Series B
Preferred Stock shall not have or exercise such special class voting
rights except at meetings of such shareholders for the election of
directors at which the holders of not less than one-third of the
outstanding Series B Preferred Stock then outstanding are present in
person or by proxy; and provided further that the special class voting
rights provided for in this paragraph when the same shall have become
vested shall remain so vested until all accrued and unpaid dividends on
the Series B Preferred Stock shall have been paid, whereupon the
holders of the Series B Preferred Stock shall be divested of their
special class voting rights in respect of subsequent elections of
directors, subject to the revesting of such special class voting rights
in the event above specified in this paragraph.
(ii) In the event of default entitling the holders of Series B
Preferred Stock to elect two additional directors as specified in
paragraph (i) of this Section, a special meeting of such holders for
the purpose of electing such directors shall be called by the Secretary
of the Corporation upon written request of, or may be called by, the
holders of record of at least 25% of the shares of the Series B
Preferred Stock, and notice thereof shall be given in the same manner
as that required for the annual meeting of shareholders; provided,
however, that the Corporation shall not be required to call such
special meeting if the annual meeting of shareholders shall be called
to be held within 90 days after the date of receipt of the foregoing
written request from the holders of the Series B Preferred Stock. At
any meeting at which the holders of the Series B Preferred Stock shall
be entitled to elect directors, the holders of one-third of the shares
of the Series B Preferred Stock, present in person or by proxy, shall
be sufficient to constitute a quorum, and the vote of the holders of a
plurality of such shares so present at any such meeting at which there
shall be such a quorum shall be sufficient to elect the members of the
Board of Directors which the holders of Series B Preferred Stock are
entitled to elect as herein provided. Notwithstanding any provision of
these Articles of Incorporation or the Code of Regulations of the
Corporation or any action taken by the holders of any class of shares
fixing the number of directors of the Corporation, the two directors
who may be elected by the holders of the Series B Preferred Stock
pursuant to this Section shall serve in addition to any other directors
then in office or proposed to be elected otherwise than pursuant to
this Section. Nothing in this Section shall prevent any
-10-
<PAGE> 11
change otherwise permitted in the total number of directors of the
Corporation or require the resignation of any director elected
otherwise than pursuant to this Section. Notwithstanding any
classification of the other directors of the Corporation, the two
directors elected by the holders of the Series B Preferred Stock shall
be elected annually for terms expiring at the next succeeding annual
meeting of shareholders, subject to subsection (a) (iii) hereof.
(iii) Immediately upon any divesting of the special class voting
rights of the holders of the Series B Preferred Stock in respect of
elections of directors as provided in this Section, the terms of office
of all directors then in office elected by such holders shall
terminate. If the office of any director elected by such holders voting
as a class becomes vacant by reason of death, resignation, removal from
office or otherwise, the remaining director elected by such holders
voting as a class may elect a successor who shall hold office for the
unexpired term in respect of which such vacancy occurred.
(b) VOTING RIGHTS ON EXTRAORDINARY MATTERS. The affirmative vote or
consent of the holders of at least two-thirds of the shares of the Series B
Preferred Stock then outstanding, voting or consenting separately as a class,
given in person or by proxy either in writing or at a meeting called for such
purpose, shall be necessary to effect any one or more of the following (but so
far as the holders of Series B Preferred Stock are concerned, such action may be
effected with such vote or consent):
(i) Any amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Articles of
Incorporation or of the Code of Regulations of the Corporation which
affects materially and adversely the preferences or voting or other
rights of the holders of the Series B Preferred Stock; provided,
however, neither the amendment of the Articles of Incorporation so as
to authorize, create or change the authorized or outstanding number of
Series B Preferred Stock or of any shares ranking on a parity with or
junior to the Series B Preferred Stock, nor the amendment of the
provisions of the Code of Regulations so as to change the number of
directors of the Corporation, shall be deemed to materially and
adversely affect the preferences or voting or other rights of the
holders of Series B Preferred Stock;
(ii) The authorization, creation or the increase in the authorized
number of any shares, or any security convertible into shares, in
either case ranking senior to the Series B Preferred Stock; or
(iii) The purchase or redemption (for sinking fund purposes or
otherwise) of less than all of the shares of the Series B Preferred
Stock then outstanding except in accordance with a stock purchase offer
made to all holders of record of Series B Preferred Stock, unless all
dividends on all Series B Preferred Stock then outstanding for all
previous dividend periods shall have been declared and paid or funds
therefor set apart. Notwithstanding anything to the contrary herein, an
amendment which increases the number of authorized shares of any class
or series of Preferred Stock or the creation or issuance of other
classes or series of Preferred Stock, in each case ranking on a parity
with or junior to the Series B Preferred Stock with respect to the
payment of dividends and distribution of assets upon liquidation,
-11-
<PAGE> 12
dissolution or winding up, or substitutes the surviving entity in a
merger or consolidation for the Corporation, shall not be considered to
be such an adverse change.
SECTION 6. DEFINITIONS.
For the purposes of this Part:
(a) Whenever reference is made to shares "RANKING PRIOR (OR SENIOR) TO
THE SERIES B PREFERRED STOCK," such reference shall mean and include all shares
of the Corporation in respect of which the rights of the holders thereof as to
the payment of dividends or as to distributions in the event of a voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation are given preference over the rights of the holders of Series B
Preferred Stock;
(b) Whenever reference is made to shares "ON A PARITY WITH THE SERIES B
PREFERRED SHARES", such reference shall mean and include all other shares of the
Corporation in respect of which the rights of the holders thereof as to the
payment of dividends or as to distributions in the event of a voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation rank equally (except as to the amounts fixed therefor) with the
rights of the holders of Series B Preferred Stock; and
(c) Whenever reference is made to shares "RANKING JUNIOR TO THE SERIES
B PREFERRED STOCK," such reference shall mean and include all shares of the
Corporation other than those defined under Subsections (a) and (b) of this
Section.
PART 7. LIQUIDATION RIGHTS: PRIORITY.
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the affairs of the Corporation, the holders of Series B
Preferred Stock shall be entitled to receive in full out of the assets of the
Corporation, including its capital, before any amount shall be paid or
distributed among the holders of the Common Stock or any other shares ranking
junior to the Series B Preferred Stock, $25.00, plus an amount equal to all
dividends accrued and unpaid thereon to the date of payment of the amount due
pursuant to such liquidation, dissolution or winding up of the affairs of the
Corporation.
In the event the net assets of the Corporation legally available therefor
are insufficient to permit the payment upon all outstanding shares of Series B
Preferred Stock of the full preferential amount to which they are respectively
entitled, then such net assets shall be distributed ratably upon all outstanding
shares of Series B Preferred Stock in proportion to the full preferential amount
to which each such share is entitled. After payment to the holders of Series B
Preferred Stock of the full preferential amounts as aforesaid, the holders of
Series B Preferred Stock, as such, shall have no right or claim to any of the
remaining assets of the Corporation.
No payment on account of such liquidation, dissolution or winding up of the
affairs of the Corporation shall be made to the holders of any class or series
of stock ranking on a parity with the Series B Preferred Stock in respect of the
distribution of assets, unless there shall likewise be paid at the same time to
the holders of the Series B Preferred Stock like proportionate distributive
-12-
<PAGE> 13
amounts, ratably, in proportion to the full distributive amounts to which they
and the holders of such parity stock are respectively entitled with respect to
such preferential distribution.
/S/ John R. Cochran
------------------------------------
John R. Cochran,
President and Chief Executive Officer
/S/ Terry E. Patton
------------------------------------
Terry E. Patton, Secretary
-13-
<PAGE> 1
Exhibit 4.3
SUPPLEMENTAL INDENTURE
This Supplemental Indenture dated as of February 12, 1999, between
FirstMerit Corporation, an Ohio Corporation (hereinafter the "Surviving
Corporation"), and Firstar Bank Milwaukee, National Association, successor via
merger to Firstar Trust Company, a national bank, as debenture trustee
(hereinafter the "Debenture Trustee").
WHEREAS, Signal Corp (fka FirstFederal Financial Services Corp), an Ohio
corporation (hereinafter the "Merging Corporation") entered into an Indenture
dated as of February 13, 1998 with the Debenture Trustee (hereinafter the
"Indenture") for the purpose of issuing 8.67% Junior Subordinated Deferrable
Interest Debentures due February 28, 2028 (the "Securities"); and
WHEREAS, the Surviving Corporation has agreed to assume the Indenture
pursuant to Section 2.8 of the Merger Agreement; and
WHEREAS, Section 10.01 of the Indenture permits the Merging Corporation to
consolidate or merger with another Person provided the terms and conditions of
this Section 10.01 are met.
NOW, THEREFORE, in consideration of the premises and mutual agreements
herein contained, the parties agree as follows:
1. SURVIVING CORPORATION. The Surviving Corporation hereby represents and
warrants that it is a corporation organized and existing under the laws of the
State of Ohio.
2. ASSUMPTION OF INDENTURE. The Surviving Corporation expressly assumes the
due and punctual payment of the principal of (and premium, if any) and interest
on the Securities according to their tenor and the due and punctual performance
and observance of all the covenants and conditions of the Indenture which were
to be kept and performed by the Merging Corporation, and shall be deemed a party
to such Indenture as if an original signatory thereto.
3. ACCEPTED BY DEBENTURE TRUSTEE. The Debenture Trustee accepts this
Supplemental Indenture as satisfactory in form as required by Section 10.01 of
the Indenture.
4. NAME. The Trustee and Surviving Corporation agree that the Indenture is
hereby amended such that the words "FirstFederal Services Corp" are replaced
with "FirstMerit Corporation" wherever such words appear in the Indenture.
<PAGE> 2
5. CAPITALIZED TERMS. Each capitalized term used but not defined herein
shall have the meaning ascribed thereto in the Indenture.
Except as expressly amended hereby, the Indenture shall continue in full
force and effect in accordance with the provisions thereof and the Indenture is
in all respects hereby ratified and confirmed. This supplemental indenture and
all its provisions shall be deemed a part of the Indenture in the Manner and to
the extent herein and therein provided.
IN WITNESS WHEREOF, the parties hereto have caused their names to be signed
hereto by their respective officer thereunto duly authorized as of the day and
year written above.
SURVIVING CORPORATION:
FIRSTMERIT CORPORATION,
an Ohio corporation
By: /s/ Austin J. Mulhern
------------------------------------
Its: Senior Vice President, Finance and
-----------------------------------
Administration
DEBENTURE TRUSTEE:
FIRSTAR BANK MILWAUKEE, NATIONAL ASSOCIATION,
a national bank
By: /s/ Yvonne Sira
------------------------------------
Its: Assistant Vice President
------------------------------------
ATTEST:
/s/ Charles R. Fiderson
---------------------------------------
Charles R. Fiderson
Assistant Secretary
---------------------------------------
<PAGE> 1
Exhibit 10.20
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT entered into effective as of the 1st day of
December, 1998, by and between John R. Cochran ("Executive") and FirstMerit
Corporation, an Ohio corporation ("FirstMerit").
R E C I T A L S:
A. FirstMerit and the Executive entered in to an Employment Agreement,
dated February 16, 1995 (the "Old Employment Agreement"), and a certain Amended
and Restated FirstMerit Corporation Termination Agreement, dated December 18,
1997 (the "Old Termination Agreement"), which superseded an Amended and Restated
FirstMerit Corporation Termination Agreement, dated May 1, 1996, between
FirstMerit and the Executive, which, in turn, superseded the FirstMerit
Termination Agreement, dated March 1, 1995, also between FirstMerit and the
Executive.
B. FirstMerit and the Executive desire to supersede the Old Employment
Agreement and the Old Termination Agreement as hereinafter provided in order to
reflect certain changed circumstances and agreements with respect to the
Executive's employment with FirstMerit.
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. Definitions.
------------
1.1 "Accountants" has the meaning set forth in Section 11.4(B)(i).
1.2 "Base Salary" has the meaning set forth in Section 6.1.
1.3 "Cause" means the termination of Executive's employment by
FirstMerit for any of the following reasons:
(A) Felonious criminal activity whether or not affecting
FirstMerit;
(B) Disclosure to unauthorized persons of FirstMerit
information which is believed by the Board of Directors of FirstMerit,
acting in good faith, to be confidential; PROVIDED, HOWEVER, that any
such disclosure shall not be considered to be "cause" for termination
to the extent that:
(i) it is required of Executive pursuant to an order
of a court having competent jurisdiction or a subpoena from an
appropriate governmental agency; or
(ii) it is made by Executive in the ordinary course
of business within the scope of his authority;
<PAGE> 2
(C) Dishonesty or the breach of any contract with or violation
of any legal obligation to FirstMerit; or
(D) Gross negligence or insubordination in the performance of
the duties held by the Chairman and Chief Executive Officer of
FirstMerit.
1.4 "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 (A) 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 30% or more of the combined voting power
of FirstMerit's then outstanding securities or (B) 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-year period.
1.5 "Change of Control Benefits" has the meaning set forth in
Section 11.1.
1.6 "Code" has the meaning set forth in Section 11.4(A).
1.7 "Covered Payments" has the meaning set forth in Section
11.4(A).
1.8 "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.
1.9 "Excise Tax" has the meaning set forth in Section 11.4(A).
1.10 "Excise Tax Reimbursement" has the meaning set forth in
Section 11.4(A).
1.11 "Executive Life Insurance Policy" has the meaning set forth in
Section 7.2.
1.12 "FirstMerit" means FirstMerit Corporation and each of the
affiliates of FirstMerit Corporation (meaning any entity that directly, or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with, FirstMerit Corporation), along with all successors
and assigns of each of such entities.
1.13 "Good Reason" means the termination of Executive's employment by
Executive for any of the following reasons:
2
<PAGE> 3
(A) Involuntary reduction in Executive's Base Salary unless
such reduction occurs simultaneously with a company-wide reduction in
officers' salaries;
(B) Involuntary discontinuance or reduction in Executive's
incentive compensation award opportunities under FirstMerit's plan
unless a company-wide reduction of all officers' incentive compensation
awards occurs simultaneously with such discontinuance or reduction;
(C) Significant reduction in Executive's responsibilities and
status within the FirstMerit organization, or a change in his title or
office without written consent of Executive;
(D) 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;
(E) Failure to obtain an assumption of FirstMerit's
obligations under this Agreement by any successor to FirstMerit,
regardless of whether such entity becomes a successor to FirstMerit as
a result of a merger, consolidation, sale of assets of FirstMerit, or
other form of reorganization;
(F) Termination of employment which is not effected pursuant
to a notice of termination satisfying the requirements of Section 9
hereof; or
(G) A material breach of this Agreement by FirstMerit, which
breach is not corrected within a reasonable time after notice.
1.14 "ICP" has the meaning set forth in Section 6.2 hereof.
1.15 "Membership Agreement" has the meaning set forth in Section
7.1(C) hereof.
1.16 "Old Employment Agreement has the meaning set forth in Recital
A above.
1.17 "Old Termination Agreement" has the meaning set forth in
Recital A above.
1.18 "Pension Plan" has the meaning set forth in Section 7.1(A)
hereof.
1.19 "Retirement Plan" has the meaning set forth in Section 7.1(B)
hereof.
1.20 "Retirement" means termination of employment by the Executive in
accordance with FirstMerit's retirement policy (including early retirement
policy) which is in effect from time to time and is generally applicable to
FirstMerit's salaried employees.
1.21 "SERP" has the meaning set forth in Section 7.1(C) hereof.
3
<PAGE> 4
1.22 "Term" has the meaning set forth in Section 5.
1.23 "Termination Date" means the date on which the termination of
the Executive's employment with FirstMerit becomes effective.
1.24 "Top Hat Plan" has the meaning set forth in Section 7.1(D)
hereof.
2. Termination of Prior Agreements.
--------------------------------
The parties hereto acknowledge and agree that, effective as of December
1, 1998, the Old Employment Agreement and the Old Termination Agreement are each
hereby terminated and each and every provision of each of such agreements is,
and shall be, rendered void and of no further force or effect whatsoever.
3. 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 5 of this Agreement.
4. Duties.
-------
During the Term, Executive shall serve FirstMerit as its Chairman and
Chief Executive Officer in accordance with directions from 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 Board of
Directors. 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 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 4 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 Chairman and Chief Executive Officer.
5. Term of Employment.
-------------------
The term of this Agreement (the "Term") shall commence as of December
1, 1998 and shall continue for a period of five (5) years ending on November 30,
2003, unless this Agreement has been earlier terminated in accordance with the
provisions of Section 9 hereof. Following expiration of the Term, Executive's
employment status will be "at will."
6. Compensation.
-------------
4
<PAGE> 5
6.1 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 base salary of Five Hundred Fifty Thousand
Dollars ($550,000) 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 it may be adjusted from
time to time, is referred to herein as the "Base Salary").
6.2 BONUS. In addition to the Base Salary, Executive will receive with
respect to each calendar year a bonus in accordance with FirstMerit's Annual
Incentive Compensation Plan ("ICP"), as it may be amended from time to time, a
copy of which has been delivered to Executive. The Executive's target award
under the ICP shall be at least sixty percent (60%) of his Base Salary. The
Compensation Committee will evaluate the Executive's performance based upon
performance goals and criteria established by the Compensation Committee in good
faith. FirstMerit's corporate goals will be established annually in accordance
with the procedures set forth in the ICP.
6.3 WITHHOLDING. All compensation payable to Executive pursuant to this
Section 6 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.
7. Other Benefits of Employment.
-----------------------------
7.1 Retirement Benefits.
--------------------
(A) PENSION PLAN. Executive will participate in the FirstMerit
Corporation Pension Plan (the "Pension Plan"), a copy of which has been
provided to Executive, in accordance with the provisions of the Pension
Plan, as amended from time to time.
(B) EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN. Executive will
be entitled to participate in the FirstMerit Corporation Employees'
Salary Savings Retirement Plan (the "Retirement Plan"), a copy of which
has been provided to Executive, in accordance with the provisions of
the Retirement Plan, as amended from time to time.
(C) SERP. Executive will participate in FirstMerit
Corporation's 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; PROVIDED,
HOWEVER, that the Executive's participation in the SERP will be subject
to the terms and conditions of the Amended and Restated Membership
Agreement, dated as of December 1, 1998 (the "Membership Agreement"),
between FirstMerit and the Executive. The Membership Agreement will
include the following provisions:
(i) Executive will have the right to receive payments
from the SERP in the form of a lump sum, but only to the
extent permitted by the SERP.
5
<PAGE> 6
(ii) If the Executive's employment with FirstMerit
terminates following a Change of Control and if, as a result
of such termination of employment, the Executive is entitled
to receive the Change of Control Benefits described in Section
11.2 of this Agreement, then, for purposes of calculating the
Executive's Monthly Retirement Income (as defined in the SERP)
under any provision of the SERP:
(a) the Executive shall be deemed to have
attained age 65 on the effective date of the
termination of his employment with FirstMerit
regardless of his actual Attained Age (as defined in
the SERP) as of such date;
(b) the Executive shall be deemed to have
earned ten (10) Years of Service (as defined in the
SERP) on the effective date of the termination of his
employment with FirstMerit regardless of his actual
Years of Service under the SERP as of such date; and
(c) the Executive's Average Monthly Earnings
(as defined in the SERP) shall be determined by
dividing 12 into the annual Base Salary applicable to
the Executive as of the effective date of the
termination of his employment.
(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 Top Hat Plan, as amended from
time to time.
7.2 EXECUTIVE LIFE INSURANCE. During such time as Executive is employed
by FirstMerit, FirstMerit shall pay to the Executive an amount equal to the
premiums payable by the Executive on a permanent whole life insurance policy
(the "Executive Life Insurance Policy"), which shall be owned by Executive and
which shall provide Executive with One Million Dollars ($1,000,000) in life
insurance ), plus forty percent (40%) of such premiums as a gross up amount to
cover the income taxes with respect to such premium reimbursement. 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 7.2 will cease upon the termination of Executive's employment for any
reason other than the Executive's Retirement and except to the extent provided
otherwise in Sections 11.2 and 12.3. If the Executive's employment is terminated
due to his Retirement, FirstMerit shall continue to pay to the Executive an
amount equal to the premiums payable by the Executive on the Executive Life
Insurance Policy, plus 40% of such premiums as a gross up amount, until such
time as Executive Life Insurance Policy becomes a fully-paid and non-assessable
policy. The Executive acknowledges that a physical examination will be required
by the insurer.
7.3 DISABILITY. Executive will be entitled to participate in
FirstMerit's Long Term Disability program 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 they may be
6
<PAGE> 7
amended from time to time.
7.4 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).
7.5 STOCK OPTIONS AND GRANTS. Executive shall continue to be eligible
to receive awards of stock options and restricted stock in accordance with the
provisions of the FirstMerit Corporation 1997 Stock Plan, as the same may be
amended or superseded from time to time. The terms of such awards shall be
determined by the Compensation Committee and shall be subject to approval by the
Board of Directors.
7.6 INCOME TAX PREPARATION. FirstMerit will reimburse Executive for
income tax preparation and financial planning fees in accordance with the
policies of FirstMerit applicable to all of its executives.
7.7 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.
7.8 POST-RETIREMENT MEDICAL. If (a) the Executive retires prior to age
65 or (b) if the Executive's employment is terminated following a Change of
Control and the Executive satisfies any of the conditions set forth in Sections
11.1(A), (B) or (C), FirstMerit will provide the following:
(A) Until the Executive attains age sixty five (65),
FirstMerit will provide the Executive and his dependents with health
care and major medical coverage that is comparable to the coverage that
the Executive and his dependents are receiving on the date of the
Executive's retirement or termination of employment. FirstMerit will
pay one hundred percent (100%) of the cost of such coverage.
(B) On and after the Executive's sixty-fifth (65th) birthday,
FirstMerit will provide the Executive and his dependents with the same
health care and major medical coverage as the Executive and his
dependents would have been eligible to receive under the FirstMerit
Retiree Medical Plan had the Executive otherwise met the requirements
for participation in such plan on the date of his retirement or
termination of employment. FirstMerit and the Executive will share the
cost of such coverage with the Executive paying the same percentage or
amount of such cost as he would be required to pay under the FirstMerit
Retiree Medical Plan, as in effect on his sixty-fifth birthday, based
upon his years of service with FirstMerit.
7
<PAGE> 8
7.9 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 7, 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.
8. Other Provisions Relating to Employment.
----------------------------------------
8.1 EXECUTIVE PHYSICAL EXAMINATION. Approximately every two years,
Executive will have an executive physical examination performed on him 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
8.1 (but not any treatment in connection therewith), which are not otherwise
covered by FirstMerit-sponsored medical plans, will be borne by FirstMerit.
8.2 VACATION. Executive will be entitled to five (5) weeks paid
vacation and ten (10) bank holidays.
8.3 BOARD OF DIRECTORS. 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 8.3 shall require
FirstMerit or its Board to decline to nominate an existing Director at the
expiration of such Director's term.
9. Termination.
------------
9.1 Termination by FirstMerit.
--------------------------
(A) This Agreement shall automatically terminate effective
upon (i) the date of Executive's death; (ii) the date that the
Executive is determined to be Disabled or (iii) the date of the
Executive's Retirement.
(B) FirstMerit may terminate this Agreement, and the
Executive's employment with FirstMerit, without Cause upon ninety (90)
days prior written notice to the Executive.
(C) FirstMerit may terminate this Agreement, and the
Executive's employment with FirstMerit, with Cause effective
immediately and without the requirement of prior notice to the
Executive.
9.2 TERMINATION BY EXECUTIVE. Executive may terminate this Agreement,
and his employment with FirstMerit, with or without Good Reason, upon ninety
(90) days prior written notice to FirstMerit.
9.3 NOTICE. An purported termination of this Agreement by FirstMerit or
the Executive shall be communicated by written notice of termination to the
other party. Such notice shall indicate the specific termination provision in
this Agreement relied upon, shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment
8
<PAGE> 9
under the provisions so indicated, shall specify the Termination Date (which
shall not be earlier than the date of the notice), and, if the notice is from
FirstMerit, shall specify whether the provisions of Section 12.3 shall apply to
the Executive following the Termination Date.
10. Compensation and Benefits Upon Termination of Employment.
---------------------------------------------------------
10.1 TERMINATION OF EMPLOYMENT UPON DEATH. If Executive's employment is
terminated by reason of death, his estate shall be entitled to receive only the
Base Salary to which the Executive was entitled through the Termination Date,
any unpaid bonus or incentive compensation due to the Executive with respect to
the calendar year prior to a calendar year in which the Termination Date occurs,
and such other benefits as may be available to the Executive or his estate
through FirstMerit's benefit plans and policies.
10.2 TERMINATION OF EMPLOYMENT UPON DISABILITY. If Executive's
employment is terminated due to his Disability, Executive shall be entitled to
receive only the Base Salary to which he was entitled through the Termination
Date, any unpaid bonus or incentive compensation due to the Executive with
respect to the calendar year prior to the calendar year in which the Termination
Date occurs, and such other benefits as may be available to the Executive
through FirstMerit's benefit plans and policies.
10.3 TERMINATION OF EMPLOYMENT BY FIRSTMERIT FOR CAUSE. If Executive's
employment is terminated for Cause as provided in Section 9.1(C), Executive
shall be entitled to receive the 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 on the Termination Date.
10.4 TERMINATION WITHOUT CAUSE OR TERMINATION FOR GOOD REASON.
(A) If FirstMerit terminates the Executive's employment
without Cause pursuant to Section 9.1(B) or if the Executive terminates
his employment for Good Reason pursuant to Section 9.2, and the
Termination Date is prior to the expiration of the Term, Executive's
Base Salary and benefits (excluding credit for Years of Service under
the SERP) shall continue for a period of one (1) year from the
Termination Date. In addition, if the Executive is entitled to receive
the severance benefits payable under the preceding sentence, the
Executive shall also be credited with two (2) additional Years of
Service under the SERP.
(B) If FirstMerit terminates the Executive's employment
without Cause pursuant to Section 9.1(B) or if the Executive terminates
his employment for Good Reason pursuant to Section 9.2, and the
Termination Date is after the expiration of the Term, Executive shall
be entitled to receive only the 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.
10.5 TERMINATION OF EMPLOYMENT OTHER THAN FOR GOOD REASON. If Executive
terminates employment with FirstMerit pursuant to Section 9.2 other than for
Good Reason, Executive shall be entitled to receive only the Base Salary to
which he was entitled through the Termination Date and
9
<PAGE> 10
such other benefits as may be available to him through FirstMerit's benefit
plans and policies.
10.6 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 12 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.
11. Termination of Employment Following Change of Control.
------------------------------------------------------
11.1 CONDITIONS TO PAYMENT OF CHANGE OF CONTROL BENEFITS.
Notwithstanding the provisions of Section 10, upon the occurrence of a Change of
Control, the compensation and benefits described in Section 11.2 (the "Change of
Control Benefits") shall be paid and provided to the Executive if any of the
following circumstances apply:
(A) The Executive's employment with FirstMerit, or its
successor, is terminated without Cause pursuant to Section 9.1(B) prior
to the third (3rd) anniversary of the date that the Change of Control
becomes effective;
(B) The Executive terminates his employment with FirstMerit,
or its successor, with Good Reason pursuant to Section 9.2 prior to the
third (3rd) anniversary of the date that the Change of Control becomes
effective; or
(C) The Executive terminates his employment with FirstMerit,
or its successor, with or without Good Reason pursuant to Section 9.2
prior to the first (1st) anniversary of the date that the Change of
Control becomes effective.
The Executive will not be eligible to receive the Change of Control Benefits
under the following circumstances:
(X) The Executive's employment with FirstMerit, or it
successor, is terminated with Cause at any time by FirstMerit, or its
successor;
(Y) The Executive's employment with FirstMerit, or its
successor, is terminated at any time as a result of the Executive's
death, Disability or Retirement (unless he retires prior to his
attainment of age 65 in which case he may be eligible for Change of
Control Benefits if he otherwise satisfies the condition set forth in
Sections 11.1(B) or (C) above); or
(Z) The Executive terminates his employment with FirstMerit,
or its successor, without Good Reason pursuant to Section 9.2 on or
after the first (1st) anniversary of the date that the Change of
Control becomes effective.
10
<PAGE> 11
11.2 Change of Control Benefits.
---------------------------
If the Executive satisfies any of the conditions set forth in Sections
11.1(A), (B) or (C), FirstMerit, or its successor, shall pay or provide the
following to the Executive:
(A) BASE SALARY TO TERMINATION DATE. FirstMerit will pay the
Executive his full Base Salary through the Termination Date at the rate
in effect at the Termination Date or immediately preceding the date on
which the Change in Control becomes effective, whichever is higher.
(B) BASE SALARY. FirstMerit will pay to the Executive an
amount equal to (i) the Executive's annual Base Salary (at the rate in
effect at the Termination Date or immediately preceding the date on
which the Change in Control becomes effective, whichever is higher)
multiplied by (ii) the lesser of the number one (1) or a fraction the
numerator of which is the number of months from and including the month
in which the Termination Date occurs to and including the month in
which the Executive will attain the age of sixty-five (65) and the
denominator of which is twelve (12).
(C) INCENTIVE COMPENSATION. FirstMerit will pay to the
Executive an incentive award in an amount equal to (i) the highest
incentive compensation award earned by the Executive with respect to
the three (3) calendar years immediately preceding the calendar year in
which the Change of Control becomes effective (except that the parties
agree that for purposes of this calculation, the Executive shall be
deemed to have received incentive compensation of $140,000 for calendar
year 1996) multiplied by (ii) the lesser of the number one (1) or a
fraction the numerator of which is the number of months from and
including the month in which the Termination Date occurs to and
including the month in which the Executive will attain the age of
sixty-five (65) and the denominator of which is twelve (12).
(D) STOCK PLANS. The Executive shall be entitled to immediate
vesting of all stock options, restricted stock awards, and other stock,
phantom stock, stock appreciation rights or similar arrangements in
which he participates. Notwithstanding any plan provisions to the
effect that rights under any such plan terminate upon termination of
employment, the Executive shall be given the longer of any period
stated in such plan or agreement or ninety (90) days after the
Termination Date to realize or exercise all rights or options provided
under such plans.
(E) ACCIDENT, DISABILITY AND LIFE INSURANCE. FirstMerit will
pay to the Executive in a lump sum an amount equal to the lesser of (i)
one times the annual cost of all accident, disability, and life
insurance (including conversion rights) with coverage and limits
identical to those in effect with respect to the Executive immediately
prior to the Change of Control or (ii) the amount determined under
clause (i) above multiplied by a fraction the numerator of which is the
number of months from and including the month in which the Termination
Date occurs to and including the month in which the Executive will
attain the age of sixty-five (65) and the denominator of which is
twelve (12). Without limiting the foregoing, FirstMerit shall continue
to pay to the Executive an amount equal to the premiums payable by the
11
<PAGE> 12
Executive with respect to the Executive Life Insurance Policy, plus
forty percent (40%) of such premiums as a gross up amount, until such
time as the Executive Life Insurance Policy becomes a fully-paid and
non-assessable policy.
(F) MEDICAL. Executive will be provided with continued health
care and medical coverage in accordance with the provisions of Section
7.8.
(G) OUTPLACEMENT FEES. For a period not to exceed one (1) year
after the Termination Date, FirstMerit will pay the reasonable expenses
associated with the outplacement of the Executive into a position
comparable to that held by the Executive prior to the Change of Control
through a professional placement firm and in an amount not to exceed
Thirty-five Thousand Dollars ($35,000).
The compensation described in subparagraphs 11.2(A), (B), (C) and the first
sentence of subparagraph 11.2(E) shall be paid by FirstMerit to the Executive in
a lump sum on or before the fifth (5th) day following the Termination Date. For
purposes of this Section 11, the term "month" shall mean a period of thirty (30)
days.
11.3 NON-DUPLICATION OF COMPENSATION AND BENEFITS. Notwithstanding the
foregoing, to avoid duplication of the benefits provided under this Section
11.2, amounts payable, and benefits provided, to the Executive pursuant to this
paragraph 11.2 shall be offset and reduced by amounts that are paid, and
benefits that are provided, to the Executive, following termination of his
employment with FirstMerit (including a termination of employment as a result of
Retirement) and regardless of whether there is a Change of Control, under any
other employment agreement or Executive benefit plan or program to which the
Executive is a party or in which he participates, including, without limitation,
amounts paid and benefits provided to the Executive upon termination of his
employment pursuant to Section 10.
11.4 CERTAIN FURTHER PAYMENTS BY FIRSTMERIT
(A) In the event that any amount or benefit paid or
distributed to the Executive pursuant to this Agreement, taken together
with any amounts or benefits otherwise paid or distributed to the
Executive by FirstMerit or any affiliated company (collectively, the
"Covered Payments"), are or become subject to the tax (the "Excise
Tax") imposed under Section 4999 of the Internal Revenue Code of 1986,
as amended (the "Code"), or any similar tax that may hereafter be
imposed, FirstMerit shall pay to the Executive at the time specified in
this Section 11.4 an additional amount (the "Excise Tax Reimbursement")
such that the net amount retained by the Executive with respect to such
Covered Payments, after deduction of any Excise Tax on the Covered
Payments and any Federal, state and local income or employment tax and
Excise Tax on the Excise Tax Reimbursement provided for by this Section
11.4, but before deduction for any Federal, state or local income or
employment tax withholding on such Covered Payments, shall be equal to
the amount of the Covered Payments. By way of example and without
limiting the foregoing, if the Executive's Covered Payments is
$2,500,000, his "base amount" is $500,000, his combined Federal, state
and local income tax marginal rate is 50% and the computed Excise Tax
is $400,000, then Executive
12
<PAGE> 13
will receive an Excise Tax Reimbursement of $1,333,333, computed as
Excise Tax time (1 divided by (1 minus the aggregate individual tax
rate minus excise tax rate)), in addition to the Covered Payments of
$2,500,000.
(B) For purposes of determining whether any of the Covered
Payments will be subject to the Excise Tax and the amount of such
Excise Tax:
(i) such Covered Payments will be treated as
"parachute payments" within the meaning of Section 280G of the
Code, and all "parachute payments" in excess of the "base
amount" (as defined under Section 280G(b)(3) of the Code)
shall be treated as subject to the Excise Tax, unless, and
except to the extent that, in the good faith judgment of
FirstMerit's independent certified public accountants
appointed prior to the date upon which the Change of Control
became effective or tax counsel selected by such accountants
(the "Accountants"), FirstMerit has a reasonable basis to
conclude that such Covered Payments (in whole or in part)
either do not constitute "parachute payments" or represent
reasonable compensation for personal services actually
rendered (within the meaning of Section 280G(b)(4)(B) of the
Code) in excess of the "base amount," or such "parachute
payments" are otherwise not subject to such Excise Tax; and
(ii) the value of any non-cash benefits or any
deferred payment or benefit shall be determined by the
Accountants in accordance with the principles of Section 280G
of the Code.
(C) For purposes of determining the amount of the Excise Tax
Reimbursement, the Executive shall be deemed to pay:
(i) Federal income taxes at the highest applicable
marginal rate of Federal income taxation for the calendar year
in which the Excise Tax Reimbursement is to be made; and
(ii) any applicable state and local income taxes at
the highest applicable marginal rate of taxation for the
calendar year in which the Excise Tax Reimbursement is to be
made, net of the maximum reduction in Federal income taxes
which could be obtained from the deduction of such state or
local taxes if paid in such year.
(D) In the event that the Excise Tax is subsequently
determined by the Accountants or pursuant to any proceeding or
negotiations with the Internal Revenue Service to be less than the
amount taken into account hereunder in calculating the Excise Tax
Reimbursement made, the Executive shall repay to FirstMerit, at the
time that the amount of such reduction in the Excise Tax is finally
determined, the portion of such prior Excise Tax Reimbursement that
would not have been paid if such Excise Tax had been applied in
initially calculating such Excise Tax Reimbursement, plus interest on
the amount of such repayment at the rate provided in Section
1274(b)(2)(B) of the Code. Notwithstanding the foregoing,
13
<PAGE> 14
in the event any portion of the Excise Tax Reimbursement to be refunded
to FirstMerit has been paid to any Federal, state or local tax
authority, repayment thereof shall not be required until actual refund
or credit of such portion has been made to the Executive, and interest
payable to FirstMerit shall not exceed interest received or credited to
the Executive by such tax authority for the period it held such
portion. The Executive and FirstMerit shall mutually agree upon the
course of action to be pursued (and the method of allocating the
expenses thereof) if the Executive's good faith claim for refund or
credit is denied.
(E) In the event that the Excise Tax is later determined by
the Accountants or pursuant to any proceeding or negotiations with the
Internal Revenue Service to exceed the amount taken into account
hereunder at the time the Excise Tax Reimbursement is made (including,
but not limited to, by reason of any payment the existence or amount of
which cannot be determined at the time of the Excise Tax
Reimbursement), FirstMerit shall make an additional Excise Tax
Reimbursement in respect of such excess (plus any interest or penalty
payable with respect to such excess) at the time that the amount of
such excess is finally determined.
(F) The Excise Tax Reimbursement (or portion thereof) provided
for in Section 11.4(A) above shall be paid to the Executive not later
than ten (10) business days following the payment of the Covered
Payments; provided, however, that if the amount of such Excise Tax
Reimbursement (or portion thereof) cannot be finally determined on or
before the date on which payment is due, FirstMerit shall pay to the
Executive by such date an amount estimated in good faith by the
Accountants to be the minimum amount of such Excise Tax Reimbursement
and shall pay the remainder of such Excise Tax Reimbursement (together
with interest at the rate provided in Section 1274(b)(2)(B) of the
Code) as soon as the amount thereof can be determined, but in no event
later than forty five (45) calendar days after payment of the related
Covered Payment. In the event that the amount of the estimated Excise
Tax Reimbursement exceeds the amount subsequently determined to have
been due, such excess shall constitute a loan by FirstMerit to the
Executive, payable on the fifth (5th) business day after written demand
by FirstMerit for payment (together with interest at the rate provided
in Section 1274(b)(2)(B) of the Code).
11.5 OTHER EMPLOYMENT. The Executive shall not be required to mitigate
the amount of any payment provided for in this Section 11 by seeking other
employment. Moreover, the amount of any payment provided for in this Section 11
shall not be reduced by any compensation earned or benefits provided as the
result of employment of the Executive by another employer or as a result of the
Executive being self-employed after the Termination Date.
12. Confidentiality and Non-Compete
-------------------------------
12.1 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.
14
<PAGE> 15
12.2 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 written information 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 with FirstMerit.
12.3 Non-Competition.
----------------
(A) If FirstMerit satisfies the conditions set forth in
Section 12.3(B) below, then, for a period after termination or
expiration of this Agreement equal to twenty four (24) months,
regardless of whether such termination is by FirstMerit with or without
Cause or the Executive with or without Good Reason, the Executive shall
not (except as an officer, director, employee, agent or consultant of
FirstMerit) directly or indirectly, own, manage, operate, join, or have
a financial interest in, control or participate in the ownership,
management, operation or control of, or be employed as an employee,
agent or consultant, or in any other individual or representative
capacity whatsoever, or use or permit his name to be used in connection
with, or be otherwise connected in any manner with any business or
enterprise 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 on the Termination Date; PROVIDED that the
foregoing restriction shall not be construed to prohibit the ownership
by the Executive of not more than one percent (1%) of any class of
securities of any corporation which is engaged in any of the foregoing
businesses, having a class of securities registered pursuant to the
Securities Exchange Act of 1934, which securities are publicly owned
and regularly traded on any national exchange or in the
over-the-counter market, PROVIDED, FURTHER, that such ownership
represents a passive investment and that neither the Executive nor any
group of persons including the Executive in any way, either directly or
indirectly, manages or exercises control of any such corporation,
guarantees any of its financial obligations, otherwise takes part in
its business other than exercising his rights as a shareholder, or
seeks to do any of the foregoing.
(B) In consideration of the Executive's covenants as contained
in Section 12.3(A), FirstMerit shall pay or provide the items set forth
below in the event of the Executive's termination of employment,
provided that in the event that the Executive's employment is
terminated by FirstMerit for Cause or voluntarily terminated by
Executive, FirstMerit may elect to forego the benefit of the provisions
of Section 12.3(A) and not make any payment under the provisions of
this Section 12.3(B) by written notice delivered to the Executive at
the time notice of termination for Cause is given or within ten (10)
calendar days of the date the Executive's voluntary resignation is
effective.
(i) BASE SALARY. FirstMerit shall pay the Executive,
in equal semi-monthly installments, an amount equal to the
Executive's then current annual Base Salary (or, if higher,
the highest rate thereof as in effect at any time during the
six month period prior to the date of such termination) until
the second (2nd) anniversary of the Termination Date or, if
sooner, until the end of the month in which the Executive will
15
<PAGE> 16
attain the age of sixty-five (65).
(ii) INCENTIVE COMPENSATION. FirstMerit will pay the
Executive, in equal semi-monthly installments, an incentive
award in an amount equal to (a) the highest incentive
compensation award earned by the Executive with respect to the
three (3) calendar years immediately preceding the calendar
year in which the Termination Date occurs (except that the
parties agree that for purposes of this calculation, the
Executive shall be deemed to have received incentive
compensation of $140,000 for calendar year 1996) multiplied by
(b) the lesser of the number two (2) or a fraction the
numerator of which is the number of months from and including
the month in which the Termination Date occurs to and
including the month in which the Executive will attain the age
of sixty-five (65) and the denominator of which is twelve
(12).
(iii) ACCIDENT, DISABILITY AND LIFE INSURANCE.
FirstMerit shall maintain in full force and effect for the
Executive's continued benefit, until the earlier of the second
(2nd) anniversary of the Termination Date or the calendar
month in which the Executive attains the age of sixty-five
(65), all accident, disability and life insurance (including
conversion rights) with coverage and limits identical to those
in effect with respect to the Executive immediately prior to
the Termination Date. Without limiting the foregoing and
except to the extent that the provisions of Section 11.2(E)
are applicable, FirstMerit shall continue to pay to the
Executive an amount equal to the premiums payable by the
Executive with respect to the Executive Life Insurance Policy,
plus forty percent (40%) of such premiums as a gross up
amount, for a period ending the earlier of two (2) years after
the Termination Date or the calendar month in which the
Executive reaches the age of sixty-five (65). For the sole
purpose of determining the Executive's eligibility to
participate in FirstMerit's life, accidental death and
dismemberment insurance plans, the Executive shall be
considered to be on a paid leave of absence as long as he is
receiving benefits under this Section.
(iv) MEDICAL. (a) Until the second (2nd) anniversary
of the Termination Date or, if sooner, until the Executive
attains age sixty-five (65), FirstMerit will provide the
Executive and his dependents with health care and major
medical coverage that is comparable to the coverage that the
Executive and his dependents are receiving on the date of the
Executive's termination of employment. FirstMerit will pay one
hundred percent (100%) of the cost of such coverage.
(b) On and after the Executive's sixth-fifth (65th)
birthday, but not beyond the second (2nd) anniversary of the
Termination Date, FirstMerit will provide the Executive and
his dependents with the same health care and major medical
coverage as the Executive and his dependents would have been
eligible to receive under the FirstMerit Retiree Medical Plan
had the Executive otherwise met the requirements for
participation in such plan on the date of his termination of
employment. FirstMerit and the Executive will share the cost
of such coverage with the Executive paying the same percentage
or amount of such cost as he would be required to pay under
the FirstMerit Retiree Medical Plan, as in effect on his
sixty-fifth (65th) birthday, based
16
<PAGE> 17
upon his years of service with FirstMerit.
12.4 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
paragraph 12. Accordingly, if FirstMerit shall institute an action to enforce
the provisions hereof, Executive hereby waives the claim or defense that an
adequate 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.
Further, if a final determination is made by a court having competent
jurisdiction that the time or territory or any other restriction contained in
Section 12.3(A) is an unenforceable restriction on the Executive's activities,
the provisions of Section 12.3(A) shall not be rendered void but shall be deemed
amended to apply such maximum time and territory and such other restrictions as
such court may judicially determine or otherwise indicate to be reasonable.
13. Miscellaneous
-------------
13.1 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.
13.2 GOVERNING LAW. This Agreement shall be construed under and
governed by the internal laws of the State of Ohio without giving effect to any
choice of law or conflict of law provision or rule (whether of the State of Ohio
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Ohio.
13.3 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. Both parties hereto have participated in the selection of the words and
phrases set forth in this Agreement in order to express their joint intentions
in entering into this employment relationship, and the parties hereto agree that
there shall not be strict interpretation against either party in connection with
any review of this Agreement in which interpretation thereof is an issue.
13.4 NOTICES. Any notice required or permitted under this Agreement
shall be deemed to have been effectively made or given if in writing and
personally delivered, or mailed properly addressed in a sealed envelope, postage
prepaid by certified or registered mail, delivered by a reputable overnight
delivery service or sent by facsimile. Unless otherwise changed by notice,
notice shall be properly addressed to the Executive if addressed to the address
of the Executive on the books and records of FirstMerit at the time of the
delivery of such notice, and properly addressed to FirstMerit if addressed to:
FirstMerit Corporation
III Cascade Plaza
Seventh Floor
17
<PAGE> 18
Akron, Ohio 44308
Attention: General Counsel
13.5 SEVERABILITY. Wherever there is any conflict between any provision
of this Agreement and any statute, law regulation or judicial precedent, the
latter shall prevail, but in such event the provisions of this Agreement thus
affected shall be curtailed and limited only to the extent necessary to bring
them within the requirements of law. In the event that any provision of this
Agreement shall be held by a court of competent jurisdiction to be indefinite,
invalid, void or voidable or otherwise unenforceable, the balance of this
Agreement shall continue in full force and effect unless such construction would
clearly be contrary to the intentions of the parties or would result in an
unconscionable injustice.
13.6 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
18
<PAGE> 19
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed the 2nd day of December, 1998.
FIRSTMERIT CORPORATION
By: /s/ Clifford J. Isroff
-------------------------------------
Its: Director
-------------------------------------
(pursuant to special resolution of
Board of Directors)
/s/ John R. Cochran
-----------------------------------------
John R. Cochran
19
<PAGE> 1
Exhibit 10.25
FIRSTMERIT CORPORATION TERMINATION AGREEMENT
--------------------------------------------
(As Amended and Restated Effective as of September 1, 1998)
Agreement made this 1st day of ____, 1999, by and between FirstMerit
Corporation, an Ohio corporation, (the "Company") and ____________ ("Employee").
R E C I T A L S:
A. The Employee is a key officer of the Company or one of its
subsidiaries.
B. The Board of Directors of the Company has determined that the
interests of FirstMerit Corporation stockholders will be best served by assuring
that its key corporate officers will adhere to the policy of the Board of
Directors with respect to any event by which another entity would acquire
effective control of the Company, including but not limited to a tender offer.
C. The Board of Directors has also determined that it is in the best
interest of the shareholders to promote stability among key officers and
employees.
D. The Company and the Employee previously entered into a FirstMerit
Corporation Termination Agreement, dated ______________ (the "Prior Agreement").
E. The Company and the Employee desire to amend and restate the Prior
Agreement as hereinafter provided.
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. DUTIES OF EMPLOYEE. Employee shall support the position of the Board
of Directors and shall take any action reasonably requested by the Board of
Directors with respect to any event by which another entity would acquire
effective control of the Company, including but not limited to a tender offer.
2. CHANGE IN CONTROL. The term "Change in Control" shall mean a change
in control of a nature that would be required to be reported by persons or
entities subject to the reporting require ments 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 (1) 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 the Company
representing 30% or more of the combined voting power of the Company's then
outstanding securities or (2) at any time during any period of two consecutive
calendar years individuals, who at the beginning of such period constitute the
Board of Directors of the Company, cease for any reason to constitute at least
the majority of such Board unless the election, or the nomination for election,
by
1
<PAGE> 2
the Company'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 the
Company at the beginning of such two-year period.
3. COMPANY'S RIGHT TO TERMINATE. The Company may terminate the
Employee's employment at any time during the term of this Agreement, subject to
providing the benefits hereinafter specified.
4. TERMINATION FOLLOWING CHANGE IN CONTROL. In the event of termination
of employment subsequent to a Change in Control and prior to the expiration of
the term of this Agreement, the Employee shall be entitled to the benefits
provided in paragraph 6 unless such termination is (i) because of the Employee's
death, Retirement or Disability, (ii) by the Company for Cause or (iii) by the
Employee other than for Good Reason.
(1) DISABILITY OR RETIREMENT. Termination of employment by the Company
based on "Dis ability" shall mean termination because of Total and Permanent
Disability as defined in the Long- Term Disability Plan of the Company in effect
from time to time, in which the Employee is participating. Termination of
employment based on "Retirement" shall mean termination of employment by the
Employee in accordance with the retirement policy (including early retirement
policy) which is in effect from time to time and is generally applicable to the
Company's salaried employees.
(2) CAUSE. The term "Cause" shall mean termination upon one or more of
the following acts of the Employee:
(A) Felonious criminal activity whether or not affecting the Company;
(B) Disclosure to unauthorized persons of Company information which
is believed by the Board of Directors of the Company to be
confidential;
(C) Breach of any contract with, or violation of any legal obligation
to, the Company or dishonesty; or
(D) Gross negligence or insubordination in the performance of duties
of the position held by the Employee.
(3) GOOD REASON. The term "Good Reason" shall mean voluntary
termination of employment by the Employee based on any of the following:
(A) Involuntary reduction in the Employee's base salary, as in effect
immediately prior to a Change in Control unless such reduction
occurs simultaneously with a Company-wide reduction in officers'
salaries;
(B) Involuntary discontinuance or reduction in the Employee's
incentive compensation award opportunities under plans applicable
to the Employee and in existence at the time of a Change in
Control, unless a Company-wide reduction of all officers'
2
<PAGE> 3
incentive award opportunities occurs simultaneously with such
discontinuance or reduction;
(C) Involuntary relocation to another office located more than 50
miles from the Employee's office location at the time the Change
in Control occurs;
(D) Significant reduction in the Employee's responsibilities and
status within the Company's organization or change in the
Employee's title or office without prior written consent of the
Employee;
(E) Involuntary discontinuance of the Employee's participation in any
employee benefit plans maintained by the Company unless such
plans are discontinued by reason of law or loss of tax
deductibility to the Company with respect to contributions to
such plans, or are discontinued as a matter of the Company's
policy applied equally to all partici pants in such plans;
(F) Involuntary reduction of the Employee's paid vacation to less
than twenty (20) working days per calendar year;
(G) Failure to obtain an assumption of the Company's obligations
under this Agreement by any successor to the Company, regardless
of whether such entity becomes a successor to the Company as a
result of a merger, consolidation, sale of the assets of the
Company, or other form of reorganization; or
(H) Termination of employment which is not effected pursuant to a
Notice of Termination satisfying the requirements of paragraph 5
herein.
5. NOTICE OF TERMINATION. Any purported termination of the Employee's
employment by the Company or by the Employee shall be communicated by written
Notice of Termination to the other party. For purposes of this Agreement, a
"Notice of Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon, shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Employee's employment under the provisions so indicated and
shall specify a "Date of Termination."
6. COMPENSATION AND BENEFITS UPON TERMINATION.
(1) If, after a Change in Control has occurred and prior to the
expiration of the term of this Agreement, the Employee's employment by the
Company shall be terminated: (A) by the Company other than for Cause,
Disability, Retirement, or death or (B) by the Employee for Good Reason, then
the Employee shall be entitled to the compensation and benefits provided in
subparagraph (3) below.
(2) The compensation described in subparagraphs 3(A), 3(B) and 3(C)
shall be paid by the Company to the Employee in a lump sum on or before the
fifth (5th) day following the Date of Termination.
3
<PAGE> 4
(3) The compensation and benefits payable to an Employee pursuant to this
paragraph 6 shall be as follows:
(A) BASE SALARY TO DATE OF TERMINATION. The Company shall pay to the
Employee his/her full base salary through the Date of Termination at the rate in
effect at the time Notice of Termination is given or immediately preceding a
Change in Control, whichever is higher.
(B) BASE SALARY. The Company shall pay to the Employee an amount equal
to (i) the Employee's annual base salary (at the rate in effect at the time
Notice of Termination is given or immediately preceding a Change in Control,
whichever is higher) multiplied by (ii) the lesser of the number two (2) or a
fraction the numerator of which is the number of months from and including the
month in which the Date of Termination occurs to and including the month in
which the Employee would attain the age of sixty-five (65) and the denominator
of which is twelve (12).
(C) INCENTIVE COMPENSATION. The Company shall pay to the Employee an
incentive award in an amount equal to (i) the average of the incentive
compensation paid to the Employee in the two (2) years immediately preceding the
Date of Termination multiplied by (ii) the lesser of the number two (2) or a
fraction the numerator of which is the number of months from and including the
month in which the Date of Termination occurs to and including the month in
which the Employee would attain age sixty-five (65) and the denominator of which
is twelve (12). If the Employee was not employed by the Company during each of
the two years immediately preceding the Date of Termination, the Employee's
target award under the Company's Annual Incentive Compensation Plan for the year
in which the Date of Termination occurs shall be substituted for the amount that
would otherwise be applicable under subparagraph (i) above.
(D) STOCK PLANS. The Employee shall be entitled to immediate vesting of
all stock options and other stock, phantom stock, stock appreciation rights or
similar arrangements in which he participates. Notwithstanding any plan
provisions to the effect that rights under any such plan terminate upon
termination of employment, the Employee shall be given ninety (90) days after
the Date of Termination to realize or exercise all rights or options provided
under such plans.
(E) MEDICAL AND LIFE INSURANCE. The Company shall maintain in full
force and effect for the Employee's continued benefit until the earlier of the
second (2nd) anniversary of the Date of Termination or the calendar month in
which the Employee attains the age of sixty-five (65), all medical, life and
accidental death and dismemberment insurance (including conversion rights), with
coverage and limits identical to those in effect with respect to the Employee
immediately prior to the Change in Control. If the Employee is a participant in
the Company's Executive Committee Life Insurance Program, the Company shall pay
the premium for the Employee on such insurance for a period ending on the
earlier of the second (2nd) anniversary of the Date of Termination or the last
day of the calendar month in which the Employee attains the age of sixty-five
(65), plus an additional amount to the Employee equal to the Employee's
projected federal, state, county and municipal income taxes on the premiums so
paid, which projected taxes shall be calculated at the highest marginal tax
rates. For the sole purpose of determining the Employee's eligibility to
participate in the Company's medical, life, and accidental death and
dismemberment insurance plans, the
4
<PAGE> 5
Employee shall be considered to be on a paid leave of absence as long as he/she
is receiving compensation or benefits under this Agreement.
(F) EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN. The following shall apply
for purposes of calculating the Employee's benefits under the FirstMerit
Corporation Executive Supplemental Retirement Plan (the "Plan"):
(i) for purposes of calculating the Employee's
Monthly Retirement Income (as defined in the SERP) under Sections 4.01
and 4.02 of the SERP and for purposes of determining the Employee's
vested Monthly Retirement Income under Section 4.05 of the SERP, the
Employee's Years of Service (as defined in the SERP) shall be increased
by the Employee's Protection Period (as hereinafter defined);
(ii) for purposes of calculating the Employee's
Monthly Retirement Income under Section 4.02 of the SERP, the
Employee's Attained Age (as defined in the SERP) shall be increased by
the Employee's Protection Period (as hereinafter defined); and
(iii) the Employee's Average Monthly Earnings for
purposes of the SERP shall be deemed to be equal to the highest,
monthly base salary earned by the Employee during the twenty-four (24)
months immediately preceding the Change in Control.
The terms of this subparagraph 6(F) shall supersede any contrary provisions of
the SERP and any membership agreement executed between the Company and the
Employee in connection with the Employee's participation in the SERP. For
purposes of this subparagraph 6(F), the Employee's Protection Period is
twenty-four (24) months.
(G) OUTPLACEMENT FEES. For a period not to exceed one (1) year after
the Date of Termination, the Company will pay the reasonable expenses associated
with outplacement training of the Employee by a professional placement firm and
in an amount not to exceed Twenty Five Thousand Dollars ($25,000.00).
7. OVERALL LIMITATION ON BENEFITS. Notwithstanding any provision in
this Agreement to the contrary, if the compensation and benefits provided to the
Employee pursuant to or under this Agreement, either alone or with other
compensation and benefits received by the Employee, would 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 pursuant to or under this Agreement shall be
reduced to the extent necessary so that no portion thereof shall be subject to
the excise tax imposed by Section 4999 of the Code. The Employee or any other
party entitled to receive the compensation or benefits hereunder may request a
determination as to whether the compensation or benefits would constitute a
parachute payment and, if requested, such determination shall be made by
independent tax counsel selected by the Company and approved by the party
requesting such determination. In the event that any reduction is required under
this paragraph 7, the Company shall consult with the Employee in determining the
order in which compensation and benefits shall be reduced.
5
<PAGE> 6
8. LEGAL FEES. The Company shall pay all legal fees and expenses
incurred by the Employee in enforcing any right or benefit provided by this
Agreement.
9. TERM OF AGREEMENT. This Agreement shall continue in effect until
the earliest to occur of the following:
(1) the last day of the twenty-fourth (24th) calendar month after the
calendar month in which a Change in Control occurs; or
(2) the date as of which the Employee is removed or resigns from
his/her position as a Senior Officer of the Company unless such removal or
resignation occurs after a Change in Control and is for other than Cause,
Disability, Retirement or death, in the case of removal by the Company, or for
Good Reason, in the case of resignation by the Employee.
In the event that the Employee becomes entitled to the compensation or benefits
provided in paragraph 6 of this Agreement before an event of termination occurs
as provided in this paragraph 9, such compensation and benefits shall continue
for the period provided in paragraph 6 notwithstanding the occurrence of such
event of termination.
10. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, provided that all
notices to the Company shall be directed to the attention of the President of
the Company with a copy to the Secretary of the Company, or to such other
address as either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only upon
receipt.
11. MISCELLANEOUS. No provisions of this Agreement may be modified,
waived, or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Employee and such officer as may be specifically
designated by the Board of Directors of the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar provisions or conditions at the same
or at any prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this Agreement;
provided, however, that this Agreement shall not supersede or in any way limit
the rights, duties of obligations that the Employee may have under any other
written agreement with the Company. Notwithstanding the foregoing, the parties
agree that this Agreement shall supersede the Prior Agreement and that the Prior
Agreement is hereby rendered null and void in all respects. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Ohio.
12. VALIDITY. The validity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
6
<PAGE> 7
13. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original and all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement on the date above first written.
FIRSTMERIT CORPORATION
Attest: BY:
----------------------------- -----------------------------
Name: John R. Cochran
Title: Chairman
COMPANY
Witness:
----------------------------- --------------------------------
Name:
EMPLOYEE
7
<PAGE> 1
Exhibit 10.38
FIRST AMENDMENT TO
RESTRICTED STOCK AWARD AGREEMENT
--------------------------------
FIRST AMENDMENT TO RESTRICTED STOCK AWARD AGREEMENT (the "First
Amendment"), effective as of the 1st day of December, 1998, between FirstMerit
Corporation, an Ohio Corporation (the "Company"), and John R. Cochran (the
"Grantee").
RECITALS:
A. The Company and the Grantee entered into a Restricted Stock Award
Agreement, dated as of March 1, 1995, (the "Award Agreement") concerning the
issuance to Grantee of a restricted stock award of the Company's common stock,
no par value ("Common Stock") pursuant to the provisions of the FirstMerit 1995
Restricted Stock Plan (the "Plan"). Capitalized terms used herein shall have the
meanings ascribed to them in the Award Agreement and the Plan unless otherwise
specifically indicated in this First Amendment.
B. Section 15 of the Plan provides that the Committee may amend the
terms of any Award previously granted under the Plan, regardless of whether such
amendment is prospective or retrospective.
C. The Committee desires to amend the Award Agreement to eliminate any
limitation on the number of Award Shares that may become unrestricted as the
result of the occurrence of a Change of Control and the application of Section
280G of the Internal Revenue Code of 1986 (the "Code"),
IN CONSIDERATION OF THE FOREGOING and good and valuable consideration,
the receipt of which is hereby acknowledged by both the Company and the Grantee,
the Company and Grantee agree that the Award Agreement is hereby amended,
effective as of December 1, 1998, as follows:
1. The following paragraph (C) is added to Section 3 of the Award
Agreement:
"(C) The second sentence of Section 14 of the Plan, as amended or
modified from time to time, shall not apply to any of the Award Shares
granted pursuant to this Award so that the number of Award Shares that
become fully vested upon the occurrence of a Change of Control shall
not be limited because of the application of Code Section 280G to the
Company and the Grantee as result of such Change of Control and the
acceleration of such vesting."
2. Except as expressly modified by the provisions of this First
Amendment, the provisions of the Award Agreement shall remain in full force and
effect.
<PAGE> 2
IN WITNESS WHEREOF, the Company and the Grantee have duly executed this
First Amendment this 2nd day of December, 1998.
FIRSTMERIT CORPORATION
By: /s/ Clifford J. Isroff
-------------------------
Its: Director
------------------------
(pursuant to special
resolution of Board
of Directors)
/s/ John R. Cochran
--------------------------
John R. Cochran
2
<PAGE> 1
Exhibit 10.39
AMENDED AND RESTATED
MEMBERSHIP AGREEMENT
WITH RESPECT TO THE
FIRSTMERIT CORPORATION
EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN
--------------------------------------
AMENDED AND RESTATED MEMBERSHIP AGREEMENT, effective as of the 1st day
of December, 1998, by and between FirstMerit Corporation, an Ohio corporation
(the "Employer"), and John R. Cochran, an individual, (the "Member").
RECITALS:
A. The Employer maintains the FirstMerit Corporation Supplemental
Retirement Plan (the "Plan"), a copy of which is attached hereto as Exhibit A
and is incorporated herein by reference, and the Member became a participant in
the Plan effective as of March 1, 1995.
B. Section 9.07 of the Plan provides that the Employer and any Member
in the Plan may, by written agreement, amend the provisions of the Plan as to
only such Member.
C. The Employer and the Member entered into a Membership Agreement,
effective March 1, 1995, (the "Old Membership Agreement") concerning the
participation of the Member in the Plan.
D. The Employer and Member desire to amend and restate the Old
Membership Agreement in order to reflect certain changed circumstances and
agreements with respect to the Member's employment with the Employer.
IN CONSIDERATION OF THE FOREGOING, and for good and valuable
consideration, receipt of which is hereby acknowledged, the Employer and Member
agree as follows:
1. Definitions
-----------
Capitalized terms used in this Membership Agreement shall have the same
meanings as those ascribed to them in the Plan unless expressly provided
otherwise herein.
2. Termination of Old Membership Agreement.
----------------------------------------
The parties hereto acknowledge and agree that, effective as of December
1, 1998 (the "Effective Date"), the Old Membership Agreement is hereby
terminated and each and every provision thereof shall be rendered void and of
no further force or effect whatsoever.
<PAGE> 2
3. Participation in the Plan
-------------------------
The Member became a participant in the Plan effective as of March 1,
1995 and shall continue to participate in the Plan on and after the Effective
Date subject to the terms and conditions of the Plan as modified by this Amended
and Restated Membership Agreement.
4. Form of Distribution of Benefits Under the Plan
-----------------------------------------------
Notwithstanding any of the provisions of the Old Membership Agreement
to contrary, the Member may, subject to the provisions of Section 4.04 the
Plan, elect to receive any Monthly Retirement Income payable to him under the
terms of the Plan in the form of a lump sum distribution.
5. Change of Control
-----------------
Notwithstanding anything to the contrary contained in the Plan, if the
Member's employment with the Employer terminates following a Change of Control
(as defined in the Employment Agreement, dated as of December 1, 1998, between
the Employer and the Member (the "Employment Agreement")) and if, as a result
of such termination of employment, the Member is entitled to receive the Change
of Control Benefits described in Section 11.2 of the Employment Agreement, then,
for purposes of calculating the Member's Monthly Retirement income under any
provision of the Plan:
(a) the Member shall be deemed to have attained age 65 on the
effective date of the termination of his employment with the
Employer regardless of his actual Attained Age as of such
date;
(b) the Member shall be deemed to have earned ten (10) Years of
Service on the effective date of the termination of his
employment with the Employer regardless of his actual Years of
Service under the Plan as of such date; and
(c) the Member's Average Monthly Earnings shall be determined by
dividing 12 into the annual base salary applicable to the
Member as of the effective date of the termination of his
employment.
6. Termination Without Cause or Termination For Good Reason
--------------------------------------------------------
If the Employer terminates the Member's employment without Cause (as
defined in the Employment Agreement) pursuant to Section 9.1(B) of the
Employment Agreement or if the Member terminates his employment for Good Reason
(as defined in the Employment Agreement) pursuant to Section 9.2 of the
Employment Agreement and the Termination Date (as defined in the Employment
Agreement) is prior to the expiration of the Term (as defined in the Employment
Agreement) the Member will be credited with two (2) additional Years of Service
under the Plan as of the Termination Date.
2
<PAGE> 3
7. Except as expressly modified by this Amended and Restated Membership
Agreement, all of the provisions of the Plan shall apply to the Member.
IN WITNESS WHEREOF, the Employer and the Member have duly executed this
Amended and Restated Membership Agreement the 2nd day of December, 1998.
FIRSTMERIT CORPORATION
By: /s/ Clifford J. Isroff
-----------------------------
Its: Director
-----------------------------
(pursuant to special resolution
of Board of Directors)
EMPLOYER
/s/ John R. Cochran
--------------------------------
John R. Cochran
MEMBER
3
<PAGE> 1
Exhibit 21
DIRECT AND INDIRECT SUBSIDIARIES OF FIRSTMERIT CORPORATION*
- -------------------------------------------------------------------------------
Citizens Investment Corporation
Citizens Savings Corporation of Stark County
FirstMerit Bank, N.A.
- Abell & Associates, Inc.
- Alpha Equipment Group, Inc.
- FirstMerit Insurance Agency, Inc.
- FirstMerit Leasing Company
- FirstMerit Mortgage Corporation
- FirstMerit Securities, Inc.
- Home Financial Services Corp.
- OPN, Inc.
- NB 5 Financial Services, Inc.
- Professional Appraisal Services Corp.
- Signal Finance Company
- Signal Insurance Agency Co.
- Signal R. Corp. (Delaware)
- Signal Securitization Corp. (Delaware)
- Tri-State Service Corporation
FirstMerit Community Development Corporation
FirstMerit Credit Life Insurance Company
Mobile Consultants, Inc.
SF Development Corp.
- Richwood Development (50%)
- Rushmore Subdivision Ltd. (50%)
- Courts of Weymouth Development, Ltd. (33%)
Signal Capital Trust I (Delaware)
* As of February 12, 1999. Unless otherwise indicated,
state of formation is Ohio.
<PAGE> 1
EXHIBIT 23
The Board of Directors of FirstMerit Corporation
We consent to incorporation by reference in Registration Statement Nos.33-7266,
33-47074, 33-47147, 33-57076, 33-57557, 333-57439 and 333-63797 on Forms S-8, of
our report dated March 11, 1999, relating to the supplemental consolidated
balance sheets of FirstMerit Corporation and subsidiaries as of December 31,
1998 and 1997, and the related supplemental consolidated statements of income,
shareholders' equity, and cash flows for each of the years in the three year
period ended December 31, 1998, which report appears as Exhibit 99 to the 1998
Annual Report on Form 10-K of FirstMerit Corporation.
/s/ PricewaterhouseCoopers, L.L.P.
Akron, Ohio
March 17, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<CIK> 0000354869
<NAME>FIRST MERIT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 245,950
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,505
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,551,727
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 1,551,727
<LOANS> 4,997,396
<ALLOWANCE> 78,949
<TOTAL-ASSETS> 7,127,365
<DEPOSITS> 5,461,583
<SHORT-TERM> 807,433
<LIABILITIES-OTHER> 89,733
<LONG-TERM> 0
0
0
<COMMON> 110,276
<OTHER-SE> 658,360
<TOTAL-LIABILITIES-AND-EQUITY> 7,127,365
<INTEREST-LOAN> 422,650
<INTEREST-INVEST> 79,096
<INTEREST-OTHER> 1,351
<INTEREST-TOTAL> 503,097
<INTEREST-DEPOSIT> 163,001
<INTEREST-EXPENSE> 197,651
<INTEREST-INCOME-NET> 305,446
<LOAN-LOSSES> 28,383
<SECURITIES-GAINS> 6,764
<EXPENSE-OTHER> 242,723
<INCOME-PRETAX> 144,820
<INCOME-PRE-EXTRAORDINARY> 144,820
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 97,478
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.34
<YIELD-ACTUAL> 5.04
<LOANS-NON> 13,014
<LOANS-PAST> 18,722
<LOANS-TROUBLED> 85
<LOANS-PROBLEM> 31,300
<ALLOWANCE-OPEN> 67,178
<CHARGE-OFFS> 28,554
<RECOVERIES> 11,942
<ALLOWANCE-CLOSE> 78,949
<ALLOWANCE-DOMESTIC> 78,949
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
Exhibit 99
FirstMerit LOGO
III Cascade Plaza
Akron, Ohio 44308
March 17, 1999
To Our Shareholders:
The merger of Signal Corp into FirstMerit Corporation occurred on February
12, 1999. We are providing you with the following Supplemental Consolidated
Financial Statements of the combined companies for year-end 1998 as required by
Section 14 of the Securities Exchange Act of 1934.
These statements include the results of FirstMerit, as reported in the 1998
Annual Report, combined with the historical results of Signal Corp, for the
periods presented. Included in these results are significant one-time costs
related to First Shenango Bancorp, Inc.'s merger into Signal Corp, as well as
other expenses associated with manufactured housing loans and securities.
Because these statements are historical in nature, they do not reflect any
efficiencies or increased revenue opportunities that might be realized due to
recent acquisitions.
We are excited about the prospects of the combined companies in 1999 and
beyond. We hope you will be also.
Sincerely,
/s/ John R. Cochran
John R. Cochran, Chairman
and Chief Executive Officer
<PAGE> 2
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR-ENDS,
------------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Investment securities (at market value)................... $1,878,266 1,556,088
Federal funds sold and other interest-earning assets...... 31,739 69,291
Commercial loans.......................................... 2,613,838 2,073,855
Mortgage loans............................................ 1,648,346 1,839,201
Installment loans......................................... 1,270,014 1,145,004
Home equity loans......................................... 306,358 275,819
Credit card loans......................................... 99,541 103,041
Manufactured housing loans................................ 289,308 110,827
Leases.................................................... 171,040 185,867
---------- ----------
Total earning assets................................... 8,308,450 7,358,993
---------- ----------
Allowance for possible loan losses........................ (96,149) (67,736)
Cash and due from banks................................... 327,997 211,138
Premises and equipment, net............................... 140,841 129,372
Accrued interest receivable and other assets.............. 344,885 193,663
---------- ----------
Total assets........................................... $9,026,024 7,825,430
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-non-interest bearing............................ $1,026,377 842,059
Demand-interest bearing................................ 917,765 728,455
Savings................................................ 1,810,340 1,574,527
Certificates and other time deposits................... 3,091,496 2,875,223
---------- ----------
Total deposits......................................... 6,845,978 6,020,264
---------- ----------
Securities sold under agreements to repurchase and other
borrowings............................................. 1,123,204 941,830
Accrued taxes, expenses, and other liabilities............ 117,714 115,659
---------- ----------
Total liabilities...................................... 8,086,896 7,077,753
---------- ----------
Mandatorily redeemable preferred securities............... 32,472 --
---------- ----------
Commitments and contingencies............................. -- --
Shareholders' equity:
Preferred stock, without par value: authorized
7,000,000 shares...................................... -- --
Preferred stock, Series A, without par value:
designated 700,000 shares; none outstanding......... -- --
Convertible preferred stock, Series B, without par
value: designated 500,000 shares; 403,232 and
429,892 shares outstanding at year-ends 1998 and
1997, respectively.................................. 9,299 9,917
Common stock, without par value: authorized 160,000,000
shares; issued 91,161,362 and 91,495,444 shares,
respectively.......................................... 122,387 119,893
Capital surplus........................................ 117,845 80,297
Accumulated other comprehensive income................. 5,858 4,603
Retained earnings...................................... 668,837 651,907
Treasury stock, at cost, 1,166,604 and 7,321,885
shares, respectively.................................. (17,570) (118,940)
---------- ----------
Total shareholders' equity............................. 906,656 747,677
---------- ----------
Total liabilities and shareholders' equity............. $9,026,024 $7,825,430
========== ==========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
1
<PAGE> 3
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans................................ $532,066 479,249 452,642
Interest and dividends on investment securities:
Taxable................................................. 103,354 97,417 102,668
Exempt from federal income taxes........................ 4,737 4,346 5,004
-------- ------- -------
108,091.. 101,763 107,672
Interest on federal funds sold............................ 2,400 3,498 1,838
-------- ------- -------
Total interest income................................... 642,557 584,510 562,152
-------- ------- -------
Interest expense:
Interest on deposits:
Demand-interest bearing................................. 13,222 12,575 12,485
Savings................................................. 44,077 40,564 41,816
Certificates and other time deposits.................... 165,198 146,097 141,512
Interest on securities sold under agreements to repurchase
and other borrowings.................................... 63,879 59,211 53,530
-------- ------- -------
Total interest expense.................................. 286,376 258,447 249,343
-------- ------- -------
Net interest income..................................... 356,181 326,063 312,809
Provision for possible loan losses.......................... 40,921 23,518 19,333
-------- ------- -------
Net interest income after provision for possible loan
losses................................................ 315,260 302,545 293,476
-------- ------- -------
Other income:
Trust department.......................................... 16,147 13,442 12,182
Service charges on deposits............................... 39,883 33,279 28,547
Credit card fees.......................................... 20,064 14,355 11,415
Service fees -- other..................................... 10,493 7,337 6,184
Investment securities gains (losses), net................. 6,785 3,114 (1,192)
Manufactured housing income............................... 7,630 14,684 11,580
Loan sales and servicing.................................. 16,900 11,177 8,378
Other operating income.................................... 22,246 16,706 25,997
-------- ------- -------
Total other income...................................... 140,148 114,094 103,091
-------- ------- -------
Other expenses:
Salaries, wages, pension and employee benefits............ 143,865 117,093 114,207
Net occupancy expense..................................... 23,002 22,592 22,277
Equipment expense......................................... 15,882 12,717 12,894
Loss on sale of subsidiary................................ 8,410 0 0
Intangible amortization expense........................... 8,926 3,771 4,374
Other operating expenses.................................. 144,944 89,692 106,610
-------- ------- -------
Total other expenses.................................... 345,029 245,865 260,362
-------- ------- -------
Income before federal income taxes...................... 110,379 170,774 136,205
Federal income taxes........................................ 37,862 56,066 45,995
-------- ------- -------
Net income.............................................. $ 72,517 114,708 90,210
======== ======= =======
Other comprehensive income, net of tax
Unrealized gains (losses) on available-for-sale
securities:
Unrealized holding gains, net of tax expense, arising
during period......................................... 5,828 10,492 (1,617)
Less: reclassification adjustment for gains realized in
net income, net of tax expense (benefit).............. 4,573 2,493 (1,772)
-------- ------- -------
Net unrealized gains (losses), net of tax expense
(benefit)............................................... 1,255 7,999 (3,389)
-------- ------- -------
Comprehensive income.................................... $ 73,772 122,707 86,821
======== ======= =======
Net income applicable to common shares...................... $ 71,826 113,124 88,514
======== ======= =======
Weighted average number of common shares
outstanding -- basic...................................... 86,377 81,352 83,243
======== ======= =======
Weighted average number of common shares
outstanding -- diluted.................................... 87,984 87,297 88,783
======== ======= =======
Per share data based on average number of shares
outstanding:
Basic net income per share.................................. $ 0.83 1.39 1.06
======== ======= =======
Diluted net income per share................................ $ 0.82 1.32 1.02
======== ======= =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
2
<PAGE> 4
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED 1998, 1997 AND 1996
-----------------------------------------------------------------------------------
ACCUMULATED
OTHER TOTAL
PREFERRED COMMON CAPITAL COMPREHENSIVE RETAINED TREASURY SHAREHOLDERS'
STOCK STOCK SURPLUS INCOME EARNINGS STOCK EQUITY
--------- ------- ------- ------------- -------- -------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Year Ended 1995..... $24,132 110,018 50,660 (7) 543,721 (7,106) 721,418
Net income................... -- -- -- -- 90,210 -- 90,210
Cash dividends -- common
stock ($0.55 per share).... -- -- -- -- (41,256) -- (41,256)
Stock options
exercised/debentures or
preferred stock
converted.................. (459) 3,483 660 -- -- 497 4,181
Shares
issued -- acquisition...... -- 279 5,309 -- -- -- 5,588
Treasury shares purchased.... -- -- -- -- -- (62,612) (62,612)
Stock dividends.............. -- 369 8,654 -- (9,023) -- --
Market adjustment investment
securities................. -- -- -- (3,389) -- -- (3,389)
Other........................ (980) (821) -- (1,133) 277 (2,657)
------- ------- ------- ------ ------- -------- -------
Balance at Year Ended 1996..... 22,693 114,149 64,462 (3,396) 582,519 (68,944) 711,483
Net income................... -- -- -- -- 114,708 -- 114,708
Cash dividends -- common
stock ($0.61 per share).... -- -- -- -- (44,136) -- (44,136)
Stock options
exercised/debentures or
preferred stock
converted.................. (12,776) 4,182 11,738 -- (1,428) 1,616 3,332
Shares
issued -- acquisition...... -- 549 4,911 -- 1,499 -- 6,959
Treasury shares purchased.... -- -- -- -- -- (51,869) (51,869)
Stock dividends.............. -- 1,013 (1,013) -- (5) -- (5)
Market adjustment investment
securities................. -- -- -- 7,999 -- -- 7,999
Other........................ -- -- 199 -- (1,250) 257 (794)
------- ------- ------- ------ ------- -------- -------
Balance at Year Ended 1997..... 9,917 119,893 80,297 4,603 651,907 (118,940) 747,677
Net income................... -- -- -- -- 72,517 -- 72,517
Cash dividends -- common
stock ($0.66 per share).... -- -- -- -- (50,525) -- (50,525)
Acquisition adjustment of
fiscal year................ -- -- -- -- (1,857) -- (1,857)
Stock options
exercised/debentures or
preferred stock
converted.................. (618) 400 3,717 -- (2,607) 12,111 13,003
Treasury shares purchased.... -- -- -- -- -- (25,703) (25,703)
Treasury shares reissued --
acquisition................ -- -- 25,919 -- -- 89,286 115,205
Treasury shares
reissued -- public
offering................... -- -- 6,518 -- -- 20,806 27,324
Stock dividends.............. -- 1,929 (1,929) -- -- -- --
Market adjustment investment
securities................. -- -- -- 1,255 -- -- 1,255
Other........................ -- 165 3,323 -- (598) 4,870 7,760
------- ------- ------- ------ ------- -------- -------
Balance at December 31, 1998... $ 9,299 122,387 117,845 5,858 668,837 (17,570) 906,656
======= ======= ======= ====== ======= ======== =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
3
<PAGE> 5
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED,
-----------------------------------
1998 1997 1996
----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 72,517 114,708 90,210
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss on sale of subsidiary.............................. 8,410 -- --
Provision for loan losses............................... 40,921 23,518 19,333
Provision for depreciation and amortization............. 19,714 17,407 14,056
Amortization of investment securities premiums, net..... 1,413 2,908 5,031
Amortization of income for lease financing.............. (11,360) (13,436) (12,656)
(Gains) losses on sales of investment securities, net... (6,785) (3,114) 1,192
Gain on sale of affiliate branches...................... -- -- (13,210)
Deferred federal income taxes........................... (12,355) (293) 20,364
(Increase) decrease in interest receivables............. (5,051) 504 2,091
Increase in interest payable............................ 1,451 1,395 768
Amortization of values ascribed to acquired
intangibles.......................................... 8,926 3,771 4,374
Other increases (decreases)............................. (41,479) (137,790) (22,843)
----------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 76,322 9,578 108,710
----------- -------- --------
INVESTING ACTIVITIES
Dispositions of investment securities:
Available-for-sale -- sales............................... 687,720 309,451 420,384
Available-for-sale -- maturities.......................... 589,722 341,138 418,682
Purchases of investment securities available-for-sale....... (1,616,554) (600,921) (624,909)
Net (increase) decrease in federal funds sold............... 37,552 (25,845) 1,021
Net increase in loans and leases, except sales.............. (1,224,699) (719,902) (570,156)
Sales of loans.............................................. 518,951 323,192 381,189
Purchases of premises and equipment......................... (32,240) (20,970) (27,623)
Sales of premises and equipment............................. 3,359 5,542 4,304
Sales of affiliate branches................................. -- -- 13,210
Payment for purchase of CoBancorp, Inc., net of cash
acquired.................................................. (50,000) -- --
----------- -------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............ (1,086,189) (388,315) 16,102
----------- -------- --------
FINANCING ACTIVITIES
Net increase (decrease) in demand, NOW and savings
deposits.................................................. 609,441 96,274 (79,521)
Net increase (decrease) in time deposits.................... 216,273 334,395 (73,827)
Net increase (decrease) in securities sold under repurchase
agreements and other borrowings........................... 221,708 (2,800) 67,902
Cash dividends.............................................. (50,525) (44,136) (41,256)
Purchase of treasury shares................................. (25,703) (51,869) (62,612)
Treasury shares reissued -- acquisition..................... 115,205 -- --
Treasury shares reissued -- public offering................. 27,324 -- --
Proceeds from exercise of stock options..................... 13,003 3,332 4,181
----------- -------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............ 1,126,726 335,196 (185,133)
Increase (decrease) in cash and cash equivalents............ 116,859 (43,541) (60,321)
Cash and cash equivalents at beginning of year.............. 211,138 254,679 315,000
----------- -------- --------
Cash and cash equivalents at end of year.................... $ 327,997 211,138 254,679
=========== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest, net of amounts capitalized........................ $ 202,374 183,567 178,685
Income taxes................................................ $ 60,454 54,317 28,867
=========== ======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
4
<PAGE> 6
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEAR-ENDS AND FOR THE YEARS ENDED 1998, 1997 AND 1996
(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 following
is a description of the more significant accounting policies.
<TABLE>
<C> <S>
(a) Principles of Consolidation and Presentation
The supplemental consolidated financial statements of
FirstMerit Corporation and its subsidiaries have been
prepared to give retroactive effect to the merger with
Signal Corp on February 12, 1999. Generally accepted
accounting principles proscribe giving effect to a
consummated business combination accounted for by the
pooling-of-interests method in financial statements that do
not include the date of consummation and, therefore, these
financial statements do not include costs associated with
the merger of the Corporation and Signal Corp. These
financial statements do not extend through the date of
consummation; however, they will become the historical
statements of the Corporation after statements covering the
date of consummation are issued.
The consolidated financial statements of the Corporation
include the accounts of FirstMerit Corporation (the Parent
Company) and its direct subsidiaries: FirstMerit Bank, N.
A., Citizens Investment Corporation, Citizens Savings
Corporation of Stark County, FirstMerit Community
Development Corporation, FirstMerit Credit Life Insurance
Company, SF Development Corp., FirstMerit Capital Trust I
and Mobile Consultants, Inc.
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 comprehensive income.
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's investment portfolio is designated 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 maintain a relatively small trading account
that is used as a hedge against variations in deferred
compensation expense.
(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.
</TABLE>
5
<PAGE> 7
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<C> <S>
(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.
(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 of mortgage loans 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.
</TABLE>
6
<PAGE> 8
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<C> <S>
(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 a
straight-line 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.
(m) Trust Department Assets and Income
Property held by the Corporation in a fiduciary or other
capacity for trust customers is not included in the
accompanying consolidated financial statements, since such
items are not assets of the Corporation. Trust income is
reported generally on a cash basis which approximates the
accrual basis of accounting.
(n) Per Share Data
Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed by
dividing net income by the weighted average number of common
shares plus common stock equivalents computed using the
Treasury Share method. All earnings per share disclosures
appearing in these financial statements are computed
assuming dilution unless otherwise indicated.
(o) Reclassifications
Certain previously reported amounts have been reclassified
to conform to the current reporting presentation.
(p) Comprehensive Income
In 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income." SFAS 130 requires additional
disclosure of items that affect comprehensive income but not
net income. Items relevant to the Corporation include
unrealized holding gains and losses on securities available
for sale. The additional disclosures can be found on the
face of the Supplemental Consolidated Statements of Income.
(q) Segment Reporting
In 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 131 ("SFAS 131"), "Disclosures
about Segments of an Enterprise and related information."
SFAS 131 requires disclosure of the internal organizational
units used by management for making operating decisions and
assessing performance. SFAS 131 also requires disclosures
about products and services, geographic areas and major
customers. The adoption of SFAS 131 did not affect results
of operations or financial position but did affect the
disclosure of segment information. See Note 17 to the
Supplemental Consolidated Financial Statements for further
details.
</TABLE>
2. ACQUISITIONS AND MERGER-RELATED EXPENSES
On May 22, 1998, the Corporation completed the acquisition of CoBancorp,
Inc., a bank holding company headquartered in Elyria, Ohio with consolidated
assets of approximately $666.0 million. CoBancorp, Inc. ("CoBancorp") was merged
with and into the Corporation and accounted for under "purchase" accounting
requirements. At the time of the merger, the value of the transaction was $174.1
million.
In connection with the merger, the Corporation issued 3.9 million shares of
its Common Stock (valued at $29.375/share), paid approximately $50.0 million in
cash, and assumed merger-related liabilities of approximately $9.6 million. The
transaction created goodwill of approximately $136.5 million that will be
amortized primarily over 25 years.
7
<PAGE> 9
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The proforma combined unaudited operating results assuming the companies
had combined at the beginning of each period is as follows:
<TABLE>
<CAPTION>
PERIOD AND DESCRIPTION FIRSTMERIT COBANCORP ADJUSTMENTS COMBINED
---------------------- ---------- --------- ----------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1998 (FirstMerit) and 3
months ended March 31, 1998 (CoBancorp):
Pro forma interest income......................... $642,557 11,942 211 654,710
Net interest income............................... 356,181 7,295 (944) 362,532
Net income available to common shareholders'...... 71,826 1,307 (1,394) 71,739
Adjusted income for diluted EPS calculation....... 72,032 1,307 (1,394) 71,945
Weighted-average diluted shares................... 87,984 3,485 92,241
Earnings per diluted share........................ 0.82 0.37 0.78
======== ====== =======
Year ended December 31, 1997:
Pro forma interest income......................... 584,510 48,141 844 633,495
Net interest income............................... 326,063 29,054 (3,776) 351,341
Net income available to common shareholders....... 113,124 4,800 (5,577) 112,347
Adjusted income for diluted EPS calculation....... 115,042 4,800 (5,577) 114,265
Weighted-average diluted shares................... 87,297 3,498 91,570
Earnings per diluted share........................ $ 1.32 1.37 1.25
======== ====== =======
</TABLE>
The unaudited proforma operating results of each separate company have been
adjusted to reflect their new accounting basis' recognized to record the
purchase combination. Figures shown for CoBancorp include extraordinary merger
costs, net of tax, of $164.0 for the 1998 three-month period and $724.0 for
1997.
On September 14, 1998, FirstMerit closed a secondary underwritten public
offering of 1.38 million common shares of FirstMerit Common Stock. The
reissuance of these shares was necessary to allow the Corporation to treat the
Security First Corp. merger as a pooling-of-interests.
On October 23, 1998, the Corporation completed the acquisition of Security
First Corp., a $678.0 million bank holding company headquartered in Mayfield
Heights, Ohio. Subsidiaries of Security First Corp. ("Security First") included
Security Federal Savings and Loan Association of Cleveland and First Federal
Savings Bank of Kent. These subsidiaries were merged with and into FirstMerit
Bank, N. A. Under terms of the merger agreement, Security First Corp. was merged
with and into the Corporation. The transaction was structured with a fixed
exchange ratio of 0.8855 shares of FirstMerit Common Stock for each common share
of Security First. At the time of the merger, the pooling-of-interests
transaction was valued at $22.58 per share or approximately $199.0 million. The
accompanying consolidated financial statements for all periods presented have
been restated to account for the acquisition. The information presented for 1997
and prior periods coincides with the fiscal year-ends of each entity, which were
December 31 for FirstMerit and March 31 for Security First. For example,
information as of year-end 1997 combines FirstMerit's balances at December 31,
1997 with Security First's balances at March 31, 1998. As a result of this
difference in fiscal year ends, the Corporation made an adjustment to
shareholders' equity of $1,841 which represents Security First's net income and
cash dividends paid for the three months ended March 31, 1998.
In conjunction with the Security First acquisition, the Corporation
incurred merger-related expenses of approximately $17.2 million, before taxes.
The components of the costs are as follows: severance and employee-related
expenses of $1.7 million, occupancy and equipment charges of $2.0 million,
conversion and contract termination costs of $1.5 million, professional services
and other costs of $4.7 million and conforming adjustment to the provision for
possible loan losses of $7.3 million. On an after tax basis, the merger-related
expenses totaled approximately $12.8 million, or $0.18 per diluted share.
8
<PAGE> 10
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
On February 12, 1999, the Corporation completed the acquisition of Signal
Corp, a $1.9 billion bank holding company headquartered in Wooster, Ohio.
Principal subsidiaries of Signal Corp ("Signal") included Signal Bank, N.A.,
Summit Bank, N.A., First Federal Savings Bank of New Castle (Pennsylvania),
Signal Capital Trust I, and Mobile Consultants, Inc. Under terms of the
agreement, the fixed exchange ratio is 1.32 shares of FirstMerit common stock
for each share of Signal common stock and one share of FirstMerit preferred
stock for each share of Signal preferred stock. Based on an estimated closing
price of $25.00 per common share and $71.00 per preferred share, the value of
the transaction is approximately $436.0 million. The transaction will be
accounted for as a pooling-of-interests. In conjunction with this merger, the
Corporation anticipates incurring merger-related expenses of $30.8 million and
conforming accounting policy changes totaling $9.5 million. The components are
as follows: $7.8 million severance and employee related benefits; $5.8 million
occupancy and equipment charges; $6.9 million conversion and contract
termination expense; $10.3 million professional services and other costs; and a
conforming accounting entry to the provision for possible loan losses of $9.5
million.
The following information is not necessarily indicative of the results
which actually would have been obtained if the Signal and Security First mergers
had been consummated in the past or which may be obtained in the future.
<TABLE>
<CAPTION>
FIRSTMERIT SECURITY
PERIOD AND DESCRIPTION CORPORATION FIRST SIGNAL CORP COMBINED
---------------------- ----------- -------- ------------ ----------
<S> <C> <C> <C> <C>
Year ended 1998:
Interest income................................. $459,934 43,163 139,460 642,557
Net interest income............................. 284,681 20,765 50,735 356,181
Net income (loss) available to common
shareholders.................................. 89,658 7,820 (25,652) 71,826
Adjusted income (loss) for diluted EPS
calculations.................................. 89,689 7,995 (25,652) 72,032
Weighted-average diluted shares................. 65,028 8,666 11,577 87,984
Earnings per diluted share...................... $ 1.38 0.92 (2.22) 0.82
======== ====== ========== ==========
Year ended 1997:
Interest income................................. 407,825 55,715 120,970 584,510
Net interest income............................. 255,456 26,149 44,458 326,063
Net income available to common shareholders..... 86,363 9,311 17,450 113,124
Adjusted income for diluted EPS calculations.... 86,363 9,645 19,034 115,042
Weighted-average diluted shares................. 63,538 8,718 12,151 87,297
Earnings per diluted share...................... 1.36 1.11 1.57 1.32
======== ====== ========== ==========
Year ended 1996:
Interest income................................. 411,745 49,178 101,229 562,152
Net interest income............................. 250,972 23,615 38,222 312,809
Net income available to common shareholders..... 70,940 6,410 11,164 88,514
Adjusted income for diluted EPS calculations.... 70,940 6,801 12,860 90,601
Weighted-average diluted shares................. 65,470 8,695 11,828 88,782
Earnings per diluted share...................... 1.08 0.78 1.09 1.02
======== ====== ========== ==========
</TABLE>
9
<PAGE> 11
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
3. INVESTMENT SECURITIES
Investment securities are composed of:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year-end 1998
Available for sale:
U.S. Treasury securities and U.S. Government
agency obligations............................. $ 692,242 3,981 2,284 693,939
Obligations of state and political
subdivisions................................... 137,129 3,048 -- 140,177
Mortgage-backed securities....................... 743,753 5,019 417 748,355
Other securities................................. 296,147 2,308 2,660 295,795
---------- ------ ----- ---------
$1,869,271 14,356 5,361 1,878,266
========== ====== ===== =========
Year-end 1997
Available for sale:
U.S. Treasury securities and U.S. Government
agency obligations............................. $ 648,009 2,705 2,354 648,360
Obligations of state and political
subdivisions................................... 116,113 1,838 206 117,745
Mortgage-backed securities....................... 616,148 5,271 1,823 619,596
Other securities................................. 168,783 1,786 182 170,387
---------- ------ ----- ---------
$1,549,053 11,600 4,565 1,556,088
========== ====== ===== =========
</TABLE>
The amortized cost and market value of investment securities including
mortgage-backed securities at December 31, 1998, 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..................................... $ 116,558 117,191
Due after one year through five years....................... 348,600 348,843
Due after five years through ten years...................... 355,581 357,504
Due after ten years......................................... $1,048,532 1,054,728
---------- ---------
$1,869,271 1,878,266
========== =========
</TABLE>
Proceeds from sales of investment securities during the years 1998, 1997
and 1996 were $621,827, $306,331 and $420,384, respectively. Gross gains of
$6,823, $3,771 and $2,981 and gross losses of $1,728, $657 and $4,173 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
$1,180,126 and $960,107 at December 31, 1998 and December 31, 1997,
respectively.
10
<PAGE> 12
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
4. LOANS
Loans consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED,
------------------------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Commercial, financial and agricultural................... $1,308,127 952,507 780,772
Loans to individuals, net of unearned income............. 1,334,138 1,157,940 1,026,012
Loans secured by real estate............................. 3,585,282 3,437,303 3,286,610
Lease financing.......................................... 170,898 185,864 159,237
---------- --------- ---------
$6,398,445 5,733,614 5,252,631
========== ========= =========
</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>
YEAR ENDS
-----------------
1998 1997
------- ------
<S> <C> <C>
Impaired Loans.............................................. $10,968 12,218
Allowance for Possible Loan Losses.......................... 3,735 4,457
Interest Recognized......................................... 427 460
======= ======
</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 analysis of loan activity
with related parties for the years ended December 31, 1998 and 1997 is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Aggregate amount at beginning of year....................... $35,306 41,702
Additions (deductions):
New loans................................................. 20,650 9,124
Repayments................................................ (16,472) (16,944)
Changes in directors and their affiliations............... (13,402) 1,424
------- -------
Aggregate amount at end of year............................. $26,082 35,306
======= =======
</TABLE>
5. ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses are summarized as
follows:
<TABLE>
<CAPTION>
YEARS ENDED,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year................................ $67,736 60,087 56,878
Additions (deductions):
Allowance from purchase acquisition....................... 8,215 2,511
Provision for loan losses................................. 40,921 23,518 19,333
Loans charged off......................................... (32,934) (28,684) (21,876)
Recoveries on loans previously charged off................ 12,211 10,304 6,141
Decrease from sale of subsidiary.......................... (389)
------- ------- -------
Balance at end of year...................................... $96,149 67,736 60,087
======= ======= =======
</TABLE>
11
<PAGE> 13
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
6. MANUFACTURED HOUSING INCOME
The Corporation, through its subsidiary Mobile Consultants, Inc. ("MCi"),
has sold certain manufactured housing finance contracts (MHF contracts) to
various financial institutions while retaining the collection and recovery
aspects of servicing. The amount of MHF contracts serviced as just described
totaled $396.2 million and $430.1 million at December 31, 1998 and 1997,
respectively. At the time MCi sells an MHF contract to an unaffiliated financial
institution, approximately one-third of the fee collected is recorded as a
"manufactured housing brokerage fee" and the remaining two-thirds of the fee is
deposited into escrow accounts and is available to offset potential prepayment
or credit losses (collectively, "MCi reserves"). The MCi reserves are recognized
as "servicing income on brokered MHF contracts" ratably over the MHF contract
life based on the present value of the future cash flows of the MCi reserves
utilizing assumptions for prepayment and credit losses and a discount rate. As a
result of the assumptions used at December 31, 1998, which were based on current
experience, the deferred asset which had resulted from income previously
recorded was written down by $7.4 million to $1.6 million. The undiscounted
balance of the MCi reserves was $34.7 million and $46.4 million as of December
31, 1998 and 1997, respectively.
The Corporation's subsidiary, FirstMerit Bank, N.A., purchases MHF
contracts from MCi, a portion of which are packaged in asset-backed
securitizations ("ABS pools") and sold to investors. Sales and securitizations
of MHF contracts totaled $100 million in 1998 and $150.0 million in 1997.
At the time of sale, the Corporation records an asset, "retained interest
in securitized asset," representing the discounted future cash flows to be
received by the Corporation for (1) servicing income from the ABS pool, (2)
principal and interest payments on MHF contracts contributed to the ABS pools as
a credit enhancement, referred to as "over-collateralization," and (3) excess
interest spread. Excess interest spread represents the difference between
interest collected from the MHF contract borrowers and interest paid to
investors in the ABS pool net of estimated future credit losses and further
reduced by the impact of estimated future prepayments. Future credit loss
assumptions are derived by analyzing historical experience and estimating future
loss probabilities. Future credit losses are measured using Constant Default
Rates, or "CDR", which is an annualized measure of credit losses applied on a
monthly basis. Additionally, estimated future credit losses are impacted by
repossession recovery rates, or the amount of a loan's current outstanding
balance that is satisfied upon the sale of repossessed collateral. Prepayment
assumptions are based on historical experience and industry-wide trends. Future
prepayments are estimated using Manufactured Housing Prepayment, or "MHP", the
manufactured housing industry standard index for prepayment. As of December 31,
1998 the Corporation valued the retained interest in securitized assets using a
discount rate of 10%, a prepayment estimate of 200 MHP, a credit loss estimate
of 3.0% CDR and, a repossession recovery rate of 50%. Based on these
assumptions, the retained interest in securitized assets was written down by
$18.0 million to $26.2 million.
Cash flows from the ABS pools are subject to volatility that could
materially affect operating results. Prepayments resulting from increased
competition, obligor mobility, general and regional economic conditions, and
prevailing interest rates, as well as actual losses incurred, may vary from the
performance the Corporation expects. Actual cash flows from the Corporation's
six ABS pools have been less than originally expected. At December 31, 1998
management determined there was impairment, based on the assumptions above, and,
therefore, adjusted the carrying value of the retained interest in securitized
assets. Management reviews the cash flows and actual performance of the ABS
pools on a quarterly basis. The aggregate amount of ABS pools serviced by the
Corporation totaled $255.8 million and $186.2 million at December 31, 1998 and
1997, respectively, and such amounts are not included in the accompanying
Consolidated Financial Statements.
The Corporation classifies the retained interest in securitized assets in
two components of the Consolidated Balance Sheet, (1) securities available for
sale and, (2) excess servicing, a component of accrued interest receivable and
other assets. Total retained interest in securitized assets and excess servicing
were $26.2 million and $27.0 million at December 31, 1998 and 1997,
respectively.
12
<PAGE> 14
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The components of manufactured housing income were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gain on sale of ABS pools................................... $2,650 5,734 1,574
Manufactured housing brokerage fees......................... 2,464 3,151 6,726
Servicing income on brokered MHF contracts.................. 1,666 4,400 3,200
Servicing income on ABS pools............................... 850 1,399 80
------ ------ ------
Total manufactured housing income................. $7,630 14,684 11,580
====== ====== ======
</TABLE>
7. 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>
1998 1997
------- ------
<S> <C> <C>
Balance at beginning of year, net........................... $ 6,669 3,899
Additions................................................... 7,259 3,943
Scheduled amortization...................................... (2,495) (1,173)
Less: allowance for impairment.............................. (168) --
------- ------
Balance at end of year, net................................. $11,265 6,669
======= ======
</TABLE>
In 1998, 1997 and 1996, the Corporation's income before federal income
taxes was increased by approximately $4.6 million, $2.7 million and $3.8
million, respectively, as a result of compliance with the accounting Statements
mentioned previously.
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.
13
<PAGE> 15
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
At year-ends 1998 and 1997, the Corporation serviced loans for others of
approximately $1.8 billion and $1.5 billion, respectively. The following table
provides servicing information for 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Balance, beginning of year.................................. $1,455,285 1,327,357
Additions:
Loans originated and sold to investors.................... 377,517 221,715
Existing loans sold to investors.......................... 186,034 100,670
Existing loans from acquisitions.......................... 66,868
Reductions:
Sale of servicing rights.................................. -- --
Loans sold servicing released............................. (4,842) (5,311)
Regular amortization, prepayments and foreclosures........ (277,963) (189,146)
---------- ---------
Balance, end of year........................................ $1,802,899 1,455,285
========== =========
</TABLE>
8. RESTRICTIONS ON CASH AND DIVIDENDS
The average balance on deposit with the Federal Reserve Bank or other
governing bodies to satisfy reserve requirements amounted to $28,628 during
1998. 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, 1998, cash and due from banks included $5,355
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.
9. PREMISES AND EQUIPMENT
The components of premises and equipment are as follows:
<TABLE>
<CAPTION>
YEAR-ENDS, ESTIMATED
------------------- USEFUL
1998 1997 LIVES
-------- ------- ---------
<S> <C> <C> <C>
Land........................................................ $ 19,096 15,513 --
Buildings................................................... 112,537 108,132 10-35 yrs
Equipment................................................... 93,413 81,118 3-15 yrs
Leasehold improvements...................................... 18,486 16,707 1-20 yrs
-------- -------
243,532 221,470
Less accumulated depreciation and amortization.............. 102,691 92,098
-------- -------
$140,841 129,372
======== =======
</TABLE>
Amounts included in other expenses for depreciation and amortization
aggregated $16,790, $14,302 and $12,384 for the years ended 1998, 1997 and 1996,
respectively.
14
<PAGE> 16
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
At December 31, 1998, 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>
1999 $ 8,541
2000 6,549
2001 5,830
2002 4,887
2003 3,438
2004-2012 12,837
-------
$42,082
=======
</TABLE>
Rentals paid under noncancelable operating leases amounted to $8,426,
$8,446, and $9,430 in 1998, 1997 and 1996, respectively.
10. CERTIFICATES AND OTHER TIME DEPOSITS
The aggregate amounts of certificates and other time deposits of $100 and
over at year end 1998 and 1997 were $804,806 and $710,089, respectively.
Interest expense on these certificates and time deposits amounted to $54,355 in
1998, $32,528 in 1997, and $27,047 in 1996.
11. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
The average balance of securities sold under agreements to repurchase and
other borrowings for the years ended 1998, 1997 and 1996 amounted to $1,063,848,
$1,055,938 and $998,408, respectively. In 1998, the weighted average annual
interest rate amounted to 6.00%, compared to 5.61% in 1997 and 5.36% in 1996.
The maximum amount of these borrowings at any month end totaled $1,179,734
during 1998, $1,196,824 in 1997 and $1,143,553 during 1996.
At year-ends 1998, 1997 and 1996, securities sold under agreements to
repurchase totaled $489,373, $473,647, and $388,968, respectively. The average
annual interest rate for these instruments was 4.78%, compared to 4.91% in 1997
and 4.71% in 1996.
At year-ends 1998, 1997, and 1996, the Corporation had $586,117, $386,425
and $542,946, respectively, of Federal Home Loan Bank advances outstanding. The
advance balances outstanding at year-end 1998 included: $309,670 with maturities
within one year, $193,413 with maturities from one to five years and $83,034
with maturities over five years. The FHLB advances have interest rates that
range from 4.65% to 8.10%.
At year-end 1998, the Corporation had outstanding balances on lines of
credit with two financial institutions totaling $23,000 and $10,000,
respectively. As of year-end 1998, the unused portions of these lines totaled
$7,000 and $65,000, respectively. The interest rates on these lines were 6.00%
and 5.93%, respectively. At year-end 1997, $6,000 was outstanding on one of the
lines with a corresponding interest rate of 6.01% for the year. The interest
rates on these lines of credit are variable and approximate one-month LIBOR plus
37.5 basis points and one-month LIBOR plus 30.0 basis points, respectively.
At year-end 1998, 1997 and 1996, the Corporation had $6,541, $47,340 and
$8,479 respectively of convertible subordinated debentures outstanding. The
first of two sets of convertible bonds totaling $1,541 consists of 15 year,
6.25% debentures issued in a public offering in 1993 by Security First. These
bonds mature May 5, 2008 and may be redeemed by the bondholders any time prior
to maturity. The second set of bonds totaled $5,000 at year-end 1998, carry an
interest rate of 9.125%, were issued by Signal Corp, are due in 2004.
15
<PAGE> 17
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
At year-ends 1998, 1997 and 1996, other borrowings totaled $8,173, $28,418
and $5,876, respectively. These borrowings carry interest rates ranging from
4.96% through 12.00%.
Residential mortgage loans totaling $879,175, $579,638, and $760,418 at
year-end 1998, 1997 and 1996, respectively, were pledged to secure Federal Home
Loan Bank ("FHLB") advances. FANNIE MAE ("FNMA") Preferred Stock of
approximately $28.2 million and preferred stock of another financial institution
totaling $4.3 million were pledged against the line of credit outstanding of
$23.0 million at year-end 1998. FNMA Preferred Stock of $16.0 million was
pledged to secure the $6.0 million outstanding on the line at year-end 1997.
12. SIGNAL CAPITAL TRUST SECURITIES
During 1998, Signal Capital Trust I ("Signal Trust") was formed (1) to
issue and sell $50.0 million of 8.67% Capital Securities, Series A, ("Series A
Securities") (2) to issue common securities, (3) to invest the proceeds in the
8.67% Junior Subordinated Deferrable Interest Debentures, Series A
("Debentures") and (4) to engage in certain other limited activities. The Series
A Securities were issued and sold to investors in a private placement exempt
from the Securities Act of 1933 on February 10, 1998. In an exchange offer,
Signal Trust exchanged the outstanding Series A Securities for 8.67% Capital
Securities, Series B which were registered with the Securities and Exchange
Commission in June 1998. The Common Securities are owned solely by the
Corporation's wholly-owned subsidiary, FirstMerit Bank, N. A.
Distributions on the Capital Securities are guaranteed, are cumulative, and
began accumulating on February 13, 1998. The distributions are payable
semi-annually in arrears on February 15 and August 15 of each year, commencing
August 15, 1998 at the annual rate of 8.67% of the liquidation amount of $1,000
per security. The interest payment schedule of the Debentures is identical to
that of the Capital Securities, except that so long as the distributions of the
Debentures are not in default, as defined in the governing indenture, deferment
of the interest payment on the Debentures at any time and from time to time (for
an extension period not exceeding ten consecutive semi-annual periods) is
permitted. During any extension period, certain actions, including declaring or
paying any dividends or distributions, or redeeming or purchasing any capital
stock, is prohibited.
Prior to December 31, 1998, and consummation of the Signal Merger, the
Corporation acquired approximately $17.5 million of the Series B Capital
Securities in the open market. The result of this acquisition was appropriately
eliminated in the consolidated financial statements and notes thereto.
13. FEDERAL INCOME TAXES
Federal income taxes are comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED,
----------------------------
1998 1997 1996
-------- ------ ------
<S> <C> <C> <C>
Taxes currently payable..................................... 50,217 56,359 25,631
Deferred expense (benefit).................................. (12,355) (293) 20,364
-------- ------ ------
$ 37,862 56,066 45,995
======== ====== ======
</TABLE>
16
<PAGE> 18
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Actual Federal income tax expense differs from expected Federal income tax
as shown below:
<TABLE>
<CAPTION>
YEARS ENDED,
---------------------
1998 1997 1996
----- ---- ----
<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............................................. -1.6% -1.3% -1.6%
State and local income taxes, net......................... 0.1% 0.3% 0.3%
Goodwill amortization..................................... 1.0% 0.3% 1.2%
Reduction to excess tax reserves.......................... -1.7% -0.8% -1.1%
Exercise of options at acquisition........................ -0.6% -0.1% --
Merger expenses at acquisition............................ 1.2% 0.1% --
Sale of subsidiary........................................ 1.4% -- --
Other..................................................... -0.5% -0.7% --
----- ---- ----
Effective tax rates......................................... 34.3% 32.8% 33.8%
===== ==== ====
</TABLE>
For 1998, 1997 and 1996, 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
------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Loan loss provision......................................... $(12,101) (5,817) 5,500
Recapture of bad debt reserves.............................. (109) -- 654
Depreciation................................................ (18) 650 (627)
Deferred loan fees, net..................................... (1,362) 1,030 3,933
Leasing..................................................... (1,696) 293 6,708
SFAS 106 postretirement benefits............................ (1,132) (1,105) (1,057)
SFAS 87 pension expense..................................... (407) 1,333 1,678
FHLB stock dividends........................................ 1,990 1,661 1,342
SFAS 125 mortgage servicing rights.......................... 3,130 361 526
Deferred gain on sale of loans.............................. (3,857) 1,531 535
Severance costs............................................. -- -- 1,315
Valuation reserves.......................................... 147 633 675
Other....................................................... (954) (433) (1,333)
-------- ------- -------
Total deferred income tax................................... $(16,369) 137 19,849
======== ======= =======
</TABLE>
Principal components of the Corporation's net deferred tax (liability) are
summarized as follows:
<TABLE>
<CAPTION>
YEAR END,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Excess of book loan provision over tax loan provision....... $ 25,840 13,739
Tax bad debt reserves over base year reserves............... (545) (654)
Excess of tax depreciation over book depreciation........... (4,345) (4,363)
Deferred loan fees tax basis income over book basis......... (1,325) (2,687)
Leasing book basis over tax basis........................... (26,611) (28,307)
Postretirement book basis expense over tax basis............ 6,157 5,025
Pension book basis expense over tax basis................... (805) (1,212)
FHLB stock book basis over tax basis........................ (9,584) (7,594)
</TABLE>
17
<PAGE> 19
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR END,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Security portfolio tax basis over book basis................ (2,781) (2,512)
Mtg. servicing rights book basis over tax basis............. (4,017) (887)
Deferred (gain) loss on sale of loans....................... 1,791 (2,066)
Valuation reserves book basis over tax basis................ -- 147
Other....................................................... 4,674 3,720
-------- -------
Total net deferred tax (liability).......................... $(11,551) (27,651)
======== =======
</TABLE>
14. 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 Corporation also sponsors 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 Corporations' 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 employee's 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 following table sets forth the both plans' funded status and amounts
recognized in the Corporation's consolidated financial statements. The 1998 and
1997 amounts shown reflect a change in the measurement date from December 31 to
September 30. Amounts shown for 1996 have not been restated to show the change
in the measurement date. In addition, all amounts for each year have been
restated to reflect the mergers of CoBancorp and Security First in 1998.
18
<PAGE> 20
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------- --------------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Projected Benefit Obligation
(PBO)/,
Accumulated Postretirement
Benefit
Obligation (APBO),
beginning of year...... $70,720 $70,119 $73,926 $ 27,864 $ 30,888 $ 31,198
Service Cost.............. 3,546 3,379 3,729 855 958 935
Interest Cost............. 4,988 4,880 4,978 1,872 2,157 2,133
Plan amendments........... 1,060 684 144 -- -- (2,952)
Participant
contributions.......... -- -- -- 1,390 1,554 1,575
Actuarial (gain) loss..... (2,735) (2,113) (6,054) (2,330) (5,953) (221)
Benefits Paid............. (3,890) (6,229) (6,604) (1,750) (1,740) (1,780)
------- ------- ------- -------- -------- --------
PBO/APBO, end of year....... 73,689 70,720 70,119 27,901 27,864 30,888
------- ------- ------- -------- -------- --------
CHANGE IN PLAN ASSETS
Fair Value of Plan Assets,
beginning of year......... 80,877 71,929 67,035 -- -- --
Actuarial return on plan
assets................. 2,465 9,454 3,827 -- -- --
Participant
contributions.......... -- -- -- 1,390 1,554 1,575
Employer contributions.... 1,027 5,723 7,671 360 186 205
Benefits paid............. (3,890) (6,229) (6,604) (1,750) (1,740) (1,780)
------- ------- ------- -------- -------- --------
Fair Value of Plan Assets,
end of year............... 80,479 80,877 71,929 -- -- --
------- ------- ------- -------- -------- --------
Funded Status............... 6,790 10,157 1,810 (27,901) (27,864) (30,888)
Unrecognized Transition
(asset) obligation........ (586) (792) (999) 11,488 12,308 13,129
Prior service costs......... 4,437 3,707 3,311 -- -- --
Cumulative net (gain) or
loss...................... (7,137) (8,450) (3,215) 365 1,666 6,394
------- ------- ------- -------- -------- --------
(Accrued) prepaid pension/
postretirement cost....... 3,504 4,622 907 (16,048) (13,890) (11,365)
------- ------- ------- -------- -------- --------
Amounts recognized in the
statement of financial
position consist of:
Prepaid benefit cost...... 4,250 4,632 2,073 -- -- --
Accrued benefit
liability.............. (6,362) (4,218) (3,794) (16,048) (13,890) (11,365)
Intangible asset.......... 4,940 3,556 2,628 -- -- --
Accumulated other
comprehensive income... 676 652 -- -- -- --
------- ------- ------- -------- -------- --------
Net amount recognized....... 3,504 4,622 907 (16,048) (13,890) (11,365)
------- ------- ------- -------- -------- --------
</TABLE>
19
<PAGE> 21
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT
-------------------- ------------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Weighted-average assumptions as
of December 31
Discount Rate................... 7.00% 7.50% 7.50% 7.00% 7.50% 7.50%
Long-term rate of return on 9.00% 9.00% 9.00% N/A N/A N/A
assets........................
Rate of compensation increase... 4.00% 4.75% 4.75% -- -- --
Medical trend rates............. -- -- -- 5% to 8% 5% to 9% pre-65:%
6.0% to 12.4
post-65:%
6.1% to 11.8
</TABLE>
For measurement purposes, a 9.0% annual rate increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate was assumed
to decrease gradually to 6.0% in 2002 and remain at that level hereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percent point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
<S> <C> <C>
Effect on total of service and interest cost components..... $ 328 (285)
Effect on postretirement benefit obligation................. 2,994 (2,684)
</TABLE>
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------- --------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Components of Net Periodic Pension/
Postretirement Cost
Service Cost..................... $ 3,546 $ 3,379 $ 3,729 $ 855 $ 958 $ 935
Interest Cost.................... 4,988 4,880 4,978 1,872 2,157 2,133
Expected return on assets........ (6,537) (6,275) (5,996) -- -- --
Amortization of unrecognized
Transition (asset)............ (207) (207) (207) 821 821 821
Prior service costs........... 331 287 277 -- -- --
Cumulative net (gain) loss....... 25 (56) (99) -- 144 323
------- ------- ------- ------ ------ ------
Net periodic
pension/postretirement cost... 2,146 2,008 2,682 3,548 4,080 4,212
------- ------- ------- ------ ------ ------
</TABLE>
The Corporation has elected to amortize the transition obligation for both
the pension and postretirement plans by charges to income over a twenty-year
period on a straightline basis.
Accumulated Benefit Obligation for the Corporation's pension plan were
($63,211), ($55,386) and ($55,222) for the periods ended December 31, 1998, 1997
and 1996, respectively.
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, employees
contributions are partially matched by the Corporation. Such matching becomes
vested when the employee reaches five years of credited service. Total savings
plan expenses were $2,586, $2,375 and $2,232 for 1998, 1997 and 1996,
respectively. The former CoBancorp employees now working for the Corporation
were merged into the 401(k) plan during 1998 and the former Security First
employees working for the Corporation were merged into the 401(k) plan effective
January 1, 1999.
20
<PAGE> 22
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
As part of the Signal Corp acquisition, the Corporation merged a Signal
Corp profit sharing plan into the Corporation's 401(k) plan. As of December 31,
1998, the profit sharing plan held approximately 59,400 shares of the
Corporation's Common Stock. Employer contributions to the plan were $300 in
1998, $299 in 1997 and $124 in 1996. The account balances of the former
employees of Signal Corp now working for FirstMerit will be merged into the
Corporation's 401(k) plan beginning May 1, 1999.
15. STOCK OPTIONS
The Corporation's 1982, 1992, and 1997 Stock Plans (the "Plans") provide
incentive options to certain key employees for up to 5,966,556 shares of
FirstMerit Common Stock. 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 shares of FirstMerit Common Stock 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 of
the Corporation's Common Stock on the date of the grant. 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 proforma 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 proforma earnings and earnings per share for 1998, 1997, and 1996 along with
significant assumptions used in determining the fair value of the compensation
amounts.
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Proforma amounts:
Net income....................................... $ 65,131 112,981 88,922
Earnings per share (basic)....................... 0.75 1.39 1.07
Earnings per share (diluted)..................... 0.74 1.29 1.00
Assumptions:
Dividend yield................................... 0.00% 3.50% 2.70%
Expected volatility.............................. 24.94% 23.30% 24.51%
Risk free interest rate.......................... 4.55% - 5.61% 5.8% - 6.8% 5.2% - 6.7%
Expected lives................................... 5 yrs. 5 yrs. 5 yrs.
</TABLE>
21
<PAGE> 23
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
A summary of stock option activity for the last two years follows:
<TABLE>
<CAPTION>
RANGE OF
AVAILABLE OUT- OPTION AVERAGE OPTION
FOR GRANT STANDING PRICE PER SHARE PRICE PER SHARE
--------- --------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance
Year-end 1996......................... 582,109 2,920,231 .00 - 16.97 $11.33
New shares reserved................ 2,200,000
Canceled........................... -- (47,639) 5.41 - 25.06 12.46
Exercised.......................... -- (501,503) 5.44 - 15.44 9.54
Granted............................ (549,743) 943,833 .00 - 40.26 24.14
--------- --------- ------------ ------
Balance
Year-end 1997......................... 2,232,366 3,314,922 .00 - 40.26 15.22
Canceled........................... (85,797) 9.56 - 34.00 18.8
Exercised.......................... (876,679) 6.31 - 21.63 17.84
Granted............................ (442,346) 856,826 .00 - 43.11 34.53
--------- --------- ------------ ------
Balance
December 31, 1998..................... 1,790,020 3,209,272 .00 - 43.11 $19.46
========= ========= ============ ======
</TABLE>
The ranges of exercise prices and the remaining contractual life of options
as of December 31, 1998 were:
<TABLE>
<CAPTION>
$0 - $9 $10 - $18 $19 - $26 $27 - $34
RANGE OF EXERCISE PRICES -------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Options outstanding:
Outstanding as of December 31, 1998.......... 393,422 1,131,342 446,277 1,238,231
Wtd-avg remaining contractual life (in
years)..................................... 6.00 6.94 8.56 9.19
Weighted-average exercise price.............. $ 4.35 $ 14.17 $ 22.21 $ 28.16
Options exerciseable:
Outstanding as of December 31, 1998.......... 297,443 627,676 202,031 957,633
Wtd-avg remaining contractual life (in
years)..................................... 5.87 6.76 8.19 8.78
Weighted-average exercise price.............. $ 4.81 $ 13.60 $ 21.03 $ 27.25
</TABLE>
The Employee Stock Purchase Plan provides full-time and part-time employees
of the Corporation the opportunity to acquire shares of the Corporation's Common
Stock 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 625,849 shares
available under the Plan, there were 45,802, 26,770 and 12,512 shares issued in
1998, 1997 and 1996, respectively.
22
<PAGE> 24
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
16. PARENT COMPANY
(Parent Company only) is as follows:
<TABLE>
<CAPTION>
YEAR-ENDS,
---------------------
1998 1997
CONDENSED BALANCE SHEETS ---------- -------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 18,642 30,933
Investment securities....................................... 9,322 9,334
Loans to subsidiaries....................................... 126,336 79,551
Investment in subsidiaries, at equity in underlying value of
their net assets.......................................... 843,993 664,982
Net loans................................................... 15,375 31,568
Goodwill.................................................... -- 133
Other assets................................................ 9,133 12,016
---------- -------
$1,022,801 828,517
========== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Convertible subordinated debt............................... $ 42,041 47,340
Repurchase agreements....................................... 10,000 --
Accrued and other liabilities............................... 64,104 33,500
Shareholders' equity........................................ 906,656 747,677
---------- -------
$1,022,801 828,517
========== =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED,
-----------------------------
1998 1997 1996
CONDENSED STATEMENTS OF INCOME ------- ------- -------
<S> <C> <C> <C>
Income:
Cash dividends from subsidiaries............................ $60,000 101,200 82,250
Other income................................................ 8,526 68,000 62,319
------- ------- -------
68,526 169,200 144,569
Interest and other expenses................................. 19,203 69,943 61,898
------- ------- -------
Income before federal income tax benefit and equity in
undistributed income of subsidiaries...................... 49,323 99,257 82,671
Federal income tax (benefit)................................ (6,941) (1,468) (795)
------- ------- -------
56,264 100,725 83,466
Equity in undistributed income of subsidiaries.............. 16,253 13,983 6,744
------- ------- -------
Net income.................................................. $72,517 114,708 90,210
======= ======= =======
</TABLE>
23
<PAGE> 25
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED,
--------------------------------
1998 1997 1996
CONDENSED STATEMENTS OF CASH FLOWS --------- ------- --------
<S> <C> <C> <C>
Operating activities:
Net income.................................................. $ 72,517 114,708 90,210
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed income of subsidiaries.............. (16,253) (14,220) (6,744)
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....................... 62 1,097 --
Other....................................................... (10,032) 6,675 7,535
--------- ------- --------
Net cash provided by operating activities................... 46,294 108,260 103,571
--------- ------- --------
Investing activities:
Proceeds from maturities of investment securities........... 3,378 10,982 22,402
Loans to subsidiaries....................................... (3,000) (4,211) 63,228
Payments for investments in and advances to subsidiaries.... (209,672) (48,145) (10,475)
Net increase (decrease) in loans............................ 16,131 2,346 (33,152)
Purchases of investment securities.......................... (3,049) (10,909) (15,641)
Other....................................................... 365 (468) 135
--------- ------- --------
Net cash (used) provided by investing activities............ (195,847) (50,405) 26,497
--------- ------- --------
Financing activities:
Net increase in securities sold under repurchase agreements
and other borrowings...................................... 60,000 40,500 4,000
Cash dividends.............................................. (54,651) (45,692) (42,939)
Proceeds from exercise of stock options..................... 15,087 4,323 3,928
Purchase of treasury shares................................. (25,703) (54,329) (62,612)
Purchase of preferred stock................................. (2,002)
Treasury shares reissued -- acquisition..................... 115,205 -- --
Treasury shares reissued -- public offering................. 27,324 -- --
Loans made to FirstMerit Bank, N. A......................... (17,000)
ESOP termination............................................ -- -- 456
--------- ------- --------
Net cash (used) provided by financing activities............ 137,262 (55,198) (116,169)
--------- ------- --------
Net increase (decrease) in cash and cash equivalents........ (12,291) 2,657 13,899
Cash and cash equivalents at beginning of year.............. 30,933 28,276 14,377
--------- ------- --------
Cash and cash equivalents at end of year.................... $ 18,642 30,933 28,276
========= ======= ========
</TABLE>
17. SEGMENT INFORMATION
The Corporation provides a diversified range of banking and certain
nonbanking financial services and products through its various subsidiaries.
Management reports the results of the Corporation's operations through its major
line of business Supercommunity Banking. Parent Company and Others include
activities that are not directly attributable to Super Community Banking.
Included in this category are certain nonbanking affiliates, eliminations of
certain intercompany transactions and certain nonrecurring transactions. Also
included are portions of certain assets, capital, and support functions not
specifically identifiable with Supercommunity Banking. The Corporation's
business is conducted solely in the United States.
24
<PAGE> 26
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The accounting policies of the segment are the same as those described in
"Summary of Significant Accounting Policies." The Corporation evaluates
performance based on profit or loss from operations before income taxes.
The following table presents a summary of financial results and significant
performance measures for the periods depicted. Segment information prior to 1997
was not available.
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------- -----------------------
SUPER- ADJUSTMENTS SUPER-
COMMUNITY PARENT CO. AND FIRSTMERIT COMMUNITY PARENT CO.
BANKING & OTHERS ELIMINATIONS CONSOLIDATED BANKING & OTHERS
---------- ---------- ------------ ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net interest income........ $ 353,429 62,756 (60,004) 356,181 $ 321,763 91,806
Provision for possible loan
losses................... 40,859 62 -- 40,921 22,421 1,097
Other income............... 138,585 1,563 (12) 140,136 115,575 75,454
Other expenses............. 341,691 3,354 (16) 345,029 244,556 65,550
Net income................. 68,713 73,127 (69,323) 72,517 103,987 96,188
AVERAGE BALANCES:
Assets..................... 7,788,204 732,371 8,520,575 6,971,999 619,937
Loans...................... 6,106,860 24,805 6,131,665 5,428,924 39,663
Earning assets............. 7,861,819 30,267 7,892,086 6,617,021 511,532
Deposits................... 6,455,209 -- 6,455,209 5,667,347 --
Shareholders' equity....... 811,414 30,451 841,865 645,552 76,852
PERFORMANCE RATIOS:
Return on average equity... 8.47% 8.61% 16.11%
Return on average assets... 0.88% 0.85% 1.49%
Efficiency ratio........... 68.09% 68.17% 54.99%
<CAPTION>
1997
---------------------------
ADJUSTMENTS
AND FIRSTMERIT
ELIMINATIONS CONSOLIDATED
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SUMMARY OF OPERATIONS:
Net interest income........ (87,506) 326,063
Provision for possible loan
losses................... -- 23,518
Other income............... (76,935) 114,094
Other expenses............. (64,241) 245,865
Net income................. (85,467) 114,708
AVERAGE BALANCES:
Assets..................... 7,591,936
Loans...................... 5,468,587
Earning assets............. 7,128,553
Deposits................... 5,667,347
Shareholders' equity....... 722,404
PERFORMANCE RATIOS:
Return on average equity... 15.88%
Return on average assets... 1.51%
Efficiency ratio........... 54.90%
</TABLE>
The table below presents estimated revenues from external customers, by
product and service group for the periods depicted.
<TABLE>
<CAPTION>
1998
---------------------------------------------
TRUST
RETAIL COMMERCIAL SERVICES TOTAL
-------- ---------- -------- -------
<S> <C> <C> <C> <C>
Interest and fees............................... $435,901 256,596 16,147 708,644
Service charges................................. 41,878 8,498 -- 50,376
Sales and servicing............................. 16,900 6,785 -- 23,685
-------- ------- ------ -------
$494,679 271,879 16,147 782,705
</TABLE>
18. 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.
25
<PAGE> 27
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
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.
Derivative financial instruments -- The fair value of exchange-traded
derivative financial instruments was based on quoted market prices or
dealer quotes. These values represent the estimated amount the Corporation
would receive or pay to terminate the agreements, considering current
interest rates, as well as the current credit-worthiness of the
counterparties. Fair value amounts consist of unrealized gains and losses,
accrued interest receivable and payable, and premiums paid or received, and
take into account master netting agreements.
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.
26
<PAGE> 28
NOTES TO SUPPLEMENTAL 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>
YEAR-ENDS
-------------------------------------------------
1998 1997
----------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Investment securities...................... $1,878,266 1,878,266 1,555,988 1,556,088
Federal funds sold......................... 31,739 31,739 69,291 69,291
Net loans.................................. 6,310,096 6,342,269 5,665,878 5,686,906
Cash and due from banks.................... 327,997 327,997 211,138 211,138
Accrued interest receivable................ 53,119 53,119 37,219 37,219
Financial liabilities:
Deposits................................... 6,845,978 6,888,298 6,020,264 6,024,439
Securities sold under agreements to
repurchase and other borrowings......... 1,123,204 1,132,734 941,830 947,183
Accrued interest payable................... 28,788 28,788 17,291 17,291
Derivative instruments..................... -- 612 -- --
Unrecognized financial instruments:
Commitments to extend credit............... -- -- -- --
Standby letters of credit and financial
guarantees written...................... -- -- -- --
Loans sold with recourse................... -- -- -- --
</TABLE>
19. 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
and derivative instruments.
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.
27
<PAGE> 29
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
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>
YEARS ENDED,
-----------------------
1998 1997
---------- ---------
<S> <C> <C>
Commitments to extend credit................................ $2,270,082 1,583,467
========== =========
Standby letters of credit and financial guarantees
written................................................... $ 122,747 114,304
========== =========
Loans sold with recourse.................................... $ 46,627 11,378
========== =========
Interest rate swaps......................................... $ 75,000 65,500
========== =========
Purchased options........................................... $ 61,400 --
========== =========
Futures contracts sold...................................... $ 6,100 41,000
========== =========
</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 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 $27,627 and $33,796 at December 31, 1998 and 1997, 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 extending loan facilities to customers. Collateral held varies, but may
include marketable securities, equipment and real estate. In certain
transactions, 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.
Derivative financial instruments include swaps, futures, forwards and
option contracts all of which derive their value from underlying interest rates,
commodity values or equity instruments. For most contracts, notional amounts are
used solely to determine cash flows to be exchanged. The notional or contract
amounts associated with the derivative instruments are not recorded as assets or
liabilities on the balance sheet and do not represent the potential for gain or
loss associated with such transactions. During 1998 the Corporation entered into
swap agreements to modify the interest sensitivity of certain liability
portfolios. Specifically, the Corporation swapped $25 million fixed rate
certificate of deposits to floating rate liabilities and swapped $50 million of
fixed rate capital securities to floating rate liabilities. At the same time,
the Corporation purchased a $50 million interest rate cap associated with the
fixed rate capital securities. The gross losses in 1998 associated with purchase
options totaled $31.0 million and the gross losses from future contracts sold
were $36.0 million.
20. 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
28
<PAGE> 30
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
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.
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial and per share data for the years ended 1998 and 1997
are summarized as follows:
<TABLE>
<CAPTION>
QUARTERS
-----------------------------------------
FIRST SECOND THIRD FOURTH
-------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT SHARE
<S> <C> <C> <C> <C> <C>
Total interest income...................... 1998 $150,374 158,405 167,019 166,759
==== ======== ======= ======= =======
1997 $138,107 143,823 149,149 153,431
==== ======== ======= ======= =======
Net interest income........................ 1998 $ 83,280 87,765 91,493 93,643
==== ======== ======= ======= =======
1997 $ 78,390 80,303 81,840 85,530
==== ======== ======= ======= =======
Provision for possible loan losses......... 1998 $ 6,164 8,144 5,941 20,672
==== ======== ======= ======= =======
1997 $ 4,511 5,482 6,727 6,798
==== ======== ======= ======= =======
Income (loss) before federal income
taxes.................................... 1998 $ 42,848 35,825 49,787 (18,081)
==== ======== ======= ======= =======
1997 $ 40,919 42,234 42,408 45,213
==== ======== ======= ======= =======
Net income (loss).......................... 1998 $ 29,373 24,226 33,855 (14,937)
==== ======== ======= ======= =======
1997 $ 27,126 28,526 28,753 30,303
==== ======== ======= ======= =======
Net income (loss) per share -- basic....... 1998 $ 0.35 0.28 0.38 (0.18)
==== ======== ======= ======= =======
1997 $ 0.33 0.34 0.34 0.38
==== ======== ======= ======= =======
Net income (loss) per share -- diluted..... 1998 $ 0.34 0.28 0.37 (0.17)
==== ======== ======= ======= =======
1997 $ 0.31 0.32 0.33 0.36
==== ======== ======= ======= =======
</TABLE>
22. 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 (a "Right").
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.
29
<PAGE> 31
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
23. EARNINGS PER SHARE
SFAS 128 requires reconciliation of the numerator and denominator used in
the basic Earnings Per Share ("EPS") calculation to the numerator and
denominator used in the diluted EPS calculation. The calculations are presented
in the table below:
<TABLE>
<CAPTION>
YEARS ENDED,
---------------------------------------
1998 1997 1996
----------- ---------- ----------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Basic EPS:
Net income........................................... $ 72,517 114,708 90,210
Less: preferred stock dividends...................... (691) (1,584) (1,665)
Net income available to common shareholders.......... 71,826 113,124 88,545
Average common shares outstanding.................... 86,376,507 81,351,984 83,243,457
Earnings per basic common share...................... $ 0.83 1.39 1.06
Diluted EPS:
Net income available to common shareholders.......... 71,826 113,124 88,545
Add: preferred stock dividends....................... -- 1,584 1,665
Add: interest expense on convertible bonds, net...... 206 334 391
----------- ---------- ----------
Adjusted income available to common shareholder...... 72,032 115,042 90,601
Average common shares outstanding.................... 86,376,507 81,351,984 83,243,457
Add: common stock equivalents for shares issuable
under:
Stock option plans................................. 1,055,079 1,511,268 684,620
Convertible debentures/preferred securities........ 552,420 4,433,464 4,854,554
Average common and common stock equivalent shares
outstanding........................................ 87,984,006 87,296,716 88,782,631
----------- ---------- ----------
Earnings per diluted common share.................... $ 0.82 1.32 1.02
=========== ========== ==========
</TABLE>
24. 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, 1998, 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.
As of year-end 1998, 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."
30
<PAGE> 32
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR CAPITAL
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES: ACTION PROVISION:
---------------- --------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year-end 1998:
Total Capital (to Risk $949,229 12.82% M 592,802 8.00% M 740,391 M 10.00%
Weighted Assets)......
Tier I Capital (to Risk 774,303 10.46% M 296,150 4.00% M 444,253 M 6.00%
Weighted Assets)......
Tier I Capital (to 774,303 8.91% M 260,773 3.00% M 434,655 M 5.00%
Average Assets).......
</TABLE>
31
<PAGE> 33
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of FirstMerit Corporation:
In our opinion, the accompanying supplemental consolidated balance sheets
and the related supplemental consolidated statements of income and retained
earnings and of cash flows present fairly, in all material respects, the
consolidated financial position of FirstMerit Corporation and subsidiaries at
December 31, 1998 and 1997, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles applicable
after financial statements are issued for a period which includes the date of
consummation of the business combination. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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 statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
The supplemental financial statements give retroactive effect to the merger
of FirstMerit Corporation and Signal Corp. on February 12, 1999, which has been
accounted for as a pooling of interests as described in the notes 1 and 2 to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling of interests methods in financial statements that
do not include the date of consummation. These financial statements do not
extend through the date of consummation; however, they will become the
historical consolidated financial statements of FirstMerit Corporation and
subsidiaries after financial statements covering the date of consummation of the
business combination are issued.
PRICEWATERHOUSECOOPERS SIGNATURE
March 11, 1999
32
<PAGE> 34
FINANCIAL HIGHLIGHTS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
INCREASE
FOR THE YEAR ENDING (DECREASE)
----------------------- -----------------------
1998 1997 AMOUNT %
---------- --------- --------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income............................. $ 642,557 584,510 58,047 10
Interest expense............................ 286,376 258,447 27,929 11
Net interest income......................... 356,181 326,063 30,118 9
Net interest income--fully-tax equivalent
basis.................................... 359,673 329,275 30,398 9
Provision for possible loan losses*......... 40,921 23,518 17,403 74
Net income*................................. 72,517 114,708 (42,191) (37)
Net income available to common
shareholders*............................ 71,826 113,124 (41,298) (37)
Net yield on earning assets................. 8.19% 8.24% -- --
Return on assets*........................... 0.85% 1.51% -- --
Return on equity*........................... 8.61% 15.88% -- --
Efficiency ratio (excluding unusual
charges)................................. 63.55% 54.71% -- --
Dividends paid.............................. 50,525 44,136 6,389 14
Per Common Share
Net income -- diluted*...................... 0.82 1.32 (0.50) (38)
Dividends paid.............................. 0.66 0.61 0.05 8
Year end book value......................... 9.97 8.76 1.21 14
Weighted average number of shares
outstanding -- basic..................... 86,377 81,352 5,025 6
Weighted average number of shares
outstanding -- diluted................... 87,984 87,297 687 1
At Year End
Total assets................................ $9,026,024 7,825,430 1,200,594 15
Total deposits.............................. 6,845,978 6,020,264 825,714 14
Loans....................................... 6,398,445 5,733,614 664,831 12
Investment securities....................... 1,878,266 1,556,088 322,178 21
Total earning assets..................... 8,308,450 7,358,993 949,457 13
Total funds available.................... 7,969,182 6,962,094 1,007,088 14
Shareholders' equity........................ 906,656 747,677 162,879 22
Average Daily Balances For The Year
Total assets................................ $8,520,575 7,591,936 928,639 12
Total deposits.............................. 6,455,209 5,667,347 787,862 14
Loans....................................... 6,131,665 5,468,587 663,078 12
Investment securities....................... 1,715,543 1,593,224 122,319 8
Total earning assets........................ 7,892,086 7,128,553 763,533 11
Total funds available....................... 7,519,057 6,723,285 795,772 12
Shareholders' equity........................ 841,865 722,404 119,461 17
</TABLE>
- ---------------
* The 1998 net income, provision for possible loan losses, and profitability
ratios shown include 1) merger-related expenses associated with the Security
First pooling-of-interests acquisition of $12.8 million after taxes, 2) merger
costs from Signal's acquisition of First Shenango Bancorp, Inc. ("First
Shenango") of $3.0 million after taxes, and 3) a loss from the sale of a
subsidiary of $5.5 million after taxes.
These same results restated to exclude the merger-related expenses and the
loss from the sale of the subsidiary, can be found in the "Earnings Summary"
section of "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
33
<PAGE> 35
SELECTED FINANCIAL DATA
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Results of Operations
Interest income...................................... $ 642,557 584,510 562,152 548,929 483,136
Conversion to fully-tax equivalent................... 3,492 3,212 3,043 3,840 4,634
---------- --------- --------- --------- ---------
Interest income*..................................... 646,049 587,722 565,195 552,769 487,770
Interest expense..................................... 286,376 258,447 249,343 257,306 198,248
---------- --------- --------- --------- ---------
Net interest income*................................. 359,673 329,275 315,852 295,463 289,522
Provision for possible loan losses................... 40,921 23,518 19,333 21,058 6,008
Other income......................................... 140,148 114,094 103,091 75,349 75,793
Other expenses....................................... 345,029 245,865 260,362 260,927 224,206
---------- --------- --------- --------- ---------
Income before federal income taxes*.................. 113,871 173,986 139,248 88,827 135,101
Federal income taxes................................. 37,862 56,066 45,995 41,137 41,169
Fully-tax equivalent adjustment...................... 3,492 3,212 3,043 3,840 4,634
---------- --------- --------- --------- ---------
Federal income taxes*................................ 41,354 59,278 49,038 44,977 45,803
Income before extraordinary item..................... 72,517 114,708 90,210 43,850 89,298
Income before extraordinary item available to common
shareholders....................................... 72,517 113,124 88,514 42,064 87,934
Extraordinary item -- gain on disposition of assets
after combination (net of tax effect).............. -- -- -- 5,599 --
---------- --------- --------- --------- ---------
Net income (a)......................................... $ 72,517 114,708 90,210 49,449 89,298
---------- --------- --------- --------- ---------
Net income applicable to common stock (a).............. $ 71,826 113,124 88,514 47,663 87,934
---------- --------- --------- --------- ---------
Per common share:
Income before extraordinary item available to
common shareholders............................ $ 0.83 1.39 1.06 0.50 1.13
Extraordinary item (net of tax effect)........... -- 0.07 --
---------- --------- --------- --------- ---------
Basic net income (a)............................. $ 0.83 1.39 1.06 0.57 1.13
========== ========= ========= ========= =========
Diluted net income (a)........................... $ 0.82 1.32 1.02 0.55 1.06
========== ========= ========= ========= =========
Cash dividends................................... $ 0.66 0.61 0.55 0.51 0.49
Dividend payout ratio................................ 79.37% 43.87% 51.73% 102.08% 43.33%
Average Ratios
Return on total assets (a)........................... 0.85% 1.51% 1.21% 0.67% 1.29%
Return on shareholders' equity (a)................... 8.61% 15.88% 12.67% 7.07% 13.38%
Shareholders' equity to total assets................. 9.88% 9.51% 9.52% 9.47% 9.65%
Balance Sheet Data
Total assets (at year end)........................... $9,026,024 7,825,430 7,348,909 7,423,139 7,377,931
Daily averages:
Total assets....................................... $8,520,575 7,591,936 7,480,069 7,386,917 6,916,648
Earning assets................................... 7,892,086 7,128,553 7,061,579 6,961,821 6,518,632
Deposits and other funds......................... 7,519,057 6,723,285 6,677,686 6,608,598 6,186,966
Shareholders' equity............................. 841,865 722,204 712,044 699,603 667,637
</TABLE>
- ---------------
* Fully-tax equivalent basis
(a) The 1998 net income, provision for possible loan losses, and profitability
ratios shown include 1) merger-related expenses associated with the Security
First pooling-of-interests acquisition of $12.8 million after taxes, 2)
merger costs from Signal's acquisition of First Shenango of $3.0 million
after taxes, and 3) a loss from the sale of a subsidiary of $5.5 million
after taxes. The results for 1996 include a one-time Savings Association
Insurance Fund ("SAIF") charge of $15.2 million before taxes or
approximately $9.9 million after taxes. In addition to the extraordinary
gain shown in the table, results for 1995 include several one-time charges
totaling $30.0 million before taxes. The charges related to the CIVISTA
acquisition, overall reengineering costs to improve operating efficiencies
and various other items.
These same results restated to exclude the merger-related expenses and the
loss from the sale of the subsidiary, can be found in the "Earnings Summary"
section of "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
34
<PAGE> 36
AVERAGE CONSOLIDATED BALANCE SHEETS
FULLY-TAX EQUIVALENT INTEREST RATES AND INTEREST DIFFERENTIAL
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------------------------------------
1998 1997
--------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investment securities:
U.S. Treasury
securities and U.S.
Government agency
obligations
(taxable)........... $1,466,525 92,646 6.32% 1,404,024 90,853 6.47%
Obligations of states
and political
subdivisions
(tax-exempt)........ 98,457 7,767 7.89 86,873 7,074 8.14
Other securities...... 150,561 9,504 6.31 102,327 6,568 6.42
---------- ------- ---- ---------- ------- ----
Total investment
securities........ 1,715,543 109,917 6.41 1,593,224 104,495 6.56
Federal funds sold &
other interest-earning
assets................ 44,878 2,400 5.35 66,742 3,498 5.24
Loans................... 6,131,665 533,732 8.70 5,468,587 479,729 8.77
Total earning
assets............ 7,892,086 646,049 8.19 7,128,553 587,722 8.24
Allowance for possible
loan losses........... (69,191) (56,234)
Cash and due from
banks................. 204,353 202,600
Other assets............ 493,327 317,017
---------- ----------
Total assets........ $8,520,575 $7,591,936
========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Demand-non-interest
bearing............. $1,083,354 -- -- 773,285 -- --
Demand-interest
bearing............. 752,096 13,222 1.76 693,277 12,575 1.81
Savings............... 1,600,122 44,077 2.75 1,531,623 40,564 2.65
Certificates and other
time deposits....... 3,019,637 165,198 5.47 2,669,162 146,097 5.47
---------- ------- ---- ---------- ------- ----
Total deposits...... 6,455,209 222,497 3.45 5,667,347 199,236 3.52
Federal funds purchased,
securities sold under
agreements to
repurchase and other
borrowings............ 1,063,848 63,879 6.00 1,055,938 59,211 5.61
---------- ------- ---- ---------- ------- ----
Total interest
bearing
liabilities....... 6,435,703 286,376 4.45 5,950,000 258,447 4.34
Other liabilities....... 159,653 146,247
Shareholders' equity.... 841,865 722,404
---------- ----------
Total liabilities
and shareholders'
equity............ $8,520,575 7,591,936
========== ==========
Net yield on earning
assets................ 359,673 4.56 329,275 4.62
======= ==== ======= ====
Interest rate spread.... 3.73 3.90
==== ====
Income on tax-exempt
securities and
loans................. 5,542 5,225
======= =======
<CAPTION>
YEARS ENDED
---------------------------------
1996
---------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Investment securities:
U.S. Treasury
securities and U.S.
Government agency
obligations
(taxable)........... 1,518,635 96,180 6.33
Obligations of states
and political
subdivisions
(tax-exempt)........ 100,630 7,404 7.36
Other securities...... 99,977 6,489 6.49
---------- ------- ----
Total investment
securities........ 1,719,242 110,073 6.40
Federal funds sold &
other interest-earning
assets................ 37,971 1,838 4.84
Loans................... 5,304,366 453,284 8.55
Total earning
assets............ 7,061,579 565,195 8.00
Allowance for possible
loan losses........... (52,003)
Cash and due from
banks................. 231,564
Other assets............ 238,929
----------
Total assets........ 7,480,069
==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Demand-non-interest
bearing............. 773,560 -- --
Demand-interest
bearing............. 641,607 12,485 1.95
Savings............... 1,653,279 41,816 2.53
Certificates and other
time deposits....... 2,610,832 141,512 5.42
---------- ------- ----
Total deposits...... 5,679,278 195,813 3.45
Federal funds purchased,
securities sold under
agreements to
repurchase and other
borrowings............ 998,408 53,530 5.36
---------- ------- ----
Total interest
bearing
liabilities....... 5,904,126 249,343 4.22
Other liabilities....... 90,339
Shareholders' equity.... 712,044
----------
Total liabilities
and shareholders'
equity............ 7,480,069
==========
Net yield on earning
assets................ 315,852 4.47
======= ====
Interest rate spread.... 3.78
====
Income on tax-exempt
securities and
loans................. 6,241
=======
</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.
35
<PAGE> 37
EARNINGS SUMMARY
FirstMerit Corporation's earnings totaled $93.8 million, or $1.06 per
share, when merger-related expenses, a conforming accounting entry to the
allowance for possible loan losses, and the loss on sale of a subsidiary are
excluded. The after-tax costs excluded totaled $21.3 million. Earnings in 1997,
excluding merger related costs of $0.8 million, were $115.5 million, or $1.33
per share. Reported net income for 1998, which includes the $21.3 million of
after-tax costs just listed, was $72.5 million, or $0.82 per share. All results
presented reflect the restatement of prior period financial information to
account for the pooling-of-interests acquisitions of Security First Corp. and
Signal Corp. Additionally, 1998 results include the earnings of CoBancorp, Inc.,
which was accounted for as a purchase transaction, from the merger date of May
23, 1998 through December 31, 1998. Because results of CoBancorp are included in
1998 totals for approximately seven months, almost all individual categories
discussed throughout the Annual Report will have unquantifiable increases over
1997 due solely to the acquisition.
Excluding the merger-related costs, the conforming accounting entry and the
loss from the sale of the subsidiary, returns on average equity ("ROE") and
average assets ("ROA") were 11.14% and 1.10% compared to 15.99% and 1.52% for
the prior year. ROE and ROA based on 1998 reported net income of $72.5 million
were 8.61% and 0.85%, respectively.
Net interest income on a fully tax-equivalent basis reached $359.7 million
for the year compared to $329.3 million for 1997, an increase of 9.2%. The
increase occurred because of earning asset volume gains of 10.7%. The net
interest margin declined from 4.62% in 1997 to 4.56% for 1998.
Adjusted net revenue for 1998 of $493.0 million represents a 12.0% increase
from its year earlier level of $440.3 million. Adjusted net revenue is defined
as net interest income on a tax-equivalent basis added to other income, less
securities gains. The growth in other income and earning assets more than
offsets the compression in the net interest margin. Excluding gains from the
sale of securities, other income was $133.4 million, or 20.2% higher than the
$111.0 million reported for 1997. Other income now accounts for 27.1% of 1998
net revenue compared with 25.2% a year ago. With the exception of manufactured
housing income, fee improvement was evident across-the-board as follows: trust
fees, up $2.7 million, or 20%; credit card fees, up $5.7 million, or 40%;
service charges, up $6.6 million, or 20%; other service fees, up $3.2 million,
or 43%; mortgage sales and servicing, up $5.7 million, or 51%, and other
operating income, up $5.5 million, or 33%.
Excluding the $9.8 million pre-tax charge related to the Security First
merger, the $4.6 million pre-tax charge related to Signal's acquisition of First
Shenango and the $8.4 million loss from the sale of a subsidiary, other expenses
totaled $322.2 million for the year compared with $245.9 million for the prior
year, an increase of 31.1%. Reported other expenses, when the merger costs and
loss from sale are included, were $339.0 million. Most 1998 expense categories
are consistent with the prior year performance when measured as a percentage of
assets for each period. The following items are included in 1998 other operating
expenses and account for a large portion of the increase in that category: a
valuation adjustment of $18 million related to securitized manufactured housing
loans; a valuation adjustment of $7.4 million related to retained servicing of
manufactured housing contracts; an adjustment of $3.2 million to recognize more
manufactured housing loan origination expenses and the establishment of a
liability of $3.3 million related to repayment of manufactured housing loans.
Amortization of intangibles resulting from the CoBancorp acquisition has risen
sharply, from $3.8 million in 1997 to $8.9 million for 1998. After adjusting for
merger-related expenses and the loss on sale of the subsidiary, the efficiency
ratio was 62.33% compared to 54.71% last year.
The provision for loan losses of $40.9 million includes a merger-related
increase of $9.1 million and a charge of $7.8 million associated with
manufactured housing and commercial loans. Net charge-offs as a percentage of
average outstanding loans totaled 0.34% at year ends 1998 and 1997. At year-end
1998, the allowance as a percentage of outstanding loans stands at 1.50%
compared to the 1997 reserve level of 1.18% of outstanding loans.
36
<PAGE> 38
The following table summarizes the changes in earnings per share for 1998
and 1997.
<TABLE>
<CAPTION>
CORE* AS REPORTED
1998/1997 1998/1997 1997/1996
(DOLLARS) --------- ----------- ---------
<S> <C> <C> <C>
CHANGES IN EARNINGS PER SHARE
Net income per diluted share for 1997 and 1996,
respectively............................................. $1.32 $1.32 $1.02
Increases (decreases) attributable to:
Net interest income -- taxable equivalent................ 0.34 0.34 0.15
Provision for possible loan losses....................... (0.11) (0.20) (0.05)
Trust services........................................... 0.03 0.03 0.01
Service charges on deposit accounts...................... 0.07 0.07 0.06
Credit card fees......................................... 0.06 0.06 0.03
Service fees -- other.................................... 0.04 0.04 0.01
Securities gains (losses), net........................... 0.04 0.04 0.05
Manufactured housing income.............................. (0.08) (0.08) 0.04
Loan sales and servicing income.......................... 0.06 0.06 0.03
Other operating income................................... 0.06 0.06 (0.11)
Salaries and employee benefits........................... (0.27) (0.29) (0.03)
Equipment expense........................................ (0.03) (0.03) --
Intangible amortization expense.......................... (0.06) (0.06) 0.01
Other operating expenses................................. (0.48) (0.71) 0.19
Federal income taxes -- taxable equivalent............... 0.08 0.18 (0.12)
Change in share base..................................... (0.01) (0.01) 0.03
----- ----- -----
Net change in net income................................. (0.21) (0.50) 0.30
----- ----- -----
Net income per diluted share for 1998 core, 1998 reported
and 1997, respectively................................ $1.06 $0.82 $1.32
===== ===== =====
</TABLE>
- ---------------
* The term "core" is defined as excluding merger-related expenses associated
with the Security First pooling-of-interests acquisition and merger-related
expenses associated with Signal's acquisition of First Shenango. See Note 2 to
the supplemental consolidated financial statements for further details.
SUPERCOMMUNITY BANKING RESULTS
The Corporation's operations are managed along its major line of business,
Supercommunity Banking. Note 17 to the supplemental consolidated financial
statements provides performance data for this line of business as well as
summary information by product and service group.
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,
37
<PAGE> 39
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>
1998
----------------------------------------------------
AVERAGE NET
EARNING ASSETS INTEREST SPREAD INTEREST INCOME
-------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-bearing liabilities...................... $6,435,703 3.73% 240,052
Non-interest-bearing liabilities and equity....... 1,456,383 8.19%* 119,621
---------- -------
$7,892,086 359,673
========== =======
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------
AVERAGE NET
EARNING ASSETS INTEREST SPREAD INTEREST INCOME
-------------- --------------- ---------------
<S> <C> <C> <C>
Interest-bearing liabilities...................... $5,950,000 3.90% 232,050
Non-interest-bearing liabilities and equity....... 1,178,553 8.24%* 97,225
---------- -------
$7,128,553 329,275
========== =======
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------------
AVERAGE NET
EARNING ASSETS INTEREST SPREAD INTEREST INCOME
-------------- --------------- ---------------
<S> <C> <C> <C>
Interest-bearing liabilities...................... $5,904,126 3.78% 223,176
Non-interest-bearing liabilities and equity....... 1,157,453 8.01%* 92,676
---------- -------
$7,061,579 315,852
========== =======
</TABLE>
- ---------------
* Yield on earning assets
Net interest income, on a fully-tax equivalent basis, increased $30.4
million, or 9.2%, to $359.7 million in 1998 compared to $329.3 million in 1997
and $315.9 million in 1996. The increase over 1997 occurred because the rise in
interest income more than offset the increase in interest expense. Specifically,
interest income rose $58.3 million while interest expense increased $27.9
million.
Interest income was higher than last year because average earning assets
grew 10.7% or $763.5 million. The increase in average earning assets was
attributable to the CoBancorp purchase acquisition on May 22, 1998 and strong
loan demand. Under purchase accounting rules, the results of the acquired
company are included in current year totals from the date of the acquisition
through the end of the year; corresponding prior period totals do not contain
the results of the acquired company. The average yield on earning assets
decreased 5 basis points from 8.24% in 1997 to 8.19% during 1998. In summary,
higher earning asset volumes outpaced the decline in earning asset rates
resulting in higher interest income.
Higher interest expense was both volume and rate related as deposits and
other borrowings were used to fund the earning asset growth and the cost of
funds increased 11 basis points. Similar to the asset scenario described in the
preceding paragraph, the CoBancorp acquisition played a large part in the higher
funding balances and resultant increase in interest expense. Cost of funds for
the year as a percentage of average earning assets rose from 4.34% in 1997 to
4.45% this year accounting for $5.4 million, or 19.0%, of the total rise in
interest expense of $27.9 million while increased funding volume accounted for
the remaining increase of $22.6 million, or 81.0%.
The following table illustrates the specific year-over-year impact to net
interest income based on changes in the rate and volume components of the
interest-earning assets and interest-bearing liabilities.
38
<PAGE> 40
CHANGES IN NET INTEREST DIFFERENTIAL -- FULLY-TAX EQUIVALENT RATE/VOLUME
ANALYSIS
<TABLE>
<CAPTION>
YEARS ENDED,
------------------------------------------------------------
1998 AND 1997 1997 AND 1996
---------------------------- --------------------------
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...................... $ 6,995 (2,266) 4,729 (7,260) 2,012 (5,248)
Tax-exempt................... 914 (221) 693 (1,120) 790 (330)
Loans............................. 57,718 (3,715) 54,003 14,406 12,039 26,445
Federal funds sold................ (1,169) 71 (1,098) 1,508 152 1,660
------- ------- ------ ------ ------ ------
Total interest income... 64,458 (6,131) 58,327 7,534 14,993 22,527
------- ------- ------ ------ ------ ------
INTEREST EXPENSE
Interest on deposits:
Demand-interest bearing...... 1,034 (387) 647 937 (847) 90
Savings...................... 1,887 1,626 3,513 (3,222) 1,970 (1,252)
Certificates and other time
deposits (CDs)............. 19,174 (73) 19,101 3,193 1,392 4,585
Federal funds purchased,
securities sold under agreements
to repurchase and other
borrowings...................... 475 4,193 4,668 3,226 2,455 5,681
------- ------- ------ ------ ------ ------
Total interest expense............ 22,570 5,359 27,929 4,134 4,970 9,104
------- ------- ------ ------ ------ ------
Net interest income............... $41,888 (11,490) 30,398 3,400 10,023 13,423
======= ======= ====== ====== ====== ======
</TABLE>
- ---------------
Note: The variance created by a combination of rate and volume has been
allocated entirely to the volume column.
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 1998 was 4.56% compared to 4.62% in 1997 and
4.47% in 1996. The decline in the net interest margin compared to last year was
mainly due to falling interest rates during the year (lower interest rate
spread).
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net interest income................................... $ 356,181 326,063 312,809
Tax equivalent adjustment............................. 3,492 3,212 3,043
---------- ---------- ---------
Net interest income -- FTE............................ $ 359,673 $ 329,275 315,852
========== ========== =========
Average earning assets................................ $7,892,086 7,128,553 7,061,579
---------- ---------- ---------
Net interest margin................................... 4.56% 4.62% 4.47%
========== ========== =========
</TABLE>
OTHER INCOME
Excluding securities gains, other income totaled $133.4 million in 1998, an
increase of $22.4 million or 20.2% over 1997, and $29.1 million over adjusted
1996 which also excludes prior gains of $13.7 million from the
39
<PAGE> 41
sale of branches and a former bank affiliate. Increases in all categories below
occurred because of the 1998 CoBancorp purchase acquisition as well as continued
company emphasis on improving other income (fee income).
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Trust fees.................................................. $ 16,147 13,442 12,182
Service charges on deposits................................. 39,883 33,279 28,547
Credit card fees............................................ 20,064 14,355 11,415
Service fees -- other....................................... 10,493 7,337 6,184
Securities gains (losses)................................... 6,785 3,114 (1,192)
Manufactured housing income................................. 7,630 14,684 11,580
Mortgage sales and servicing................................ 16,900 11,177 8,378
Gains from branch/subsidiary sales.......................... 473 0 13,700
Other operating income...................................... 21,773 16,706 12,297
-------- ------- -------
$140,148 114,094 103,091
======== ======= =======
</TABLE>
Trust fees increased $2.7 million or 20.1% to $16.1 million in 1998.
Service charges on deposits rose $6.6 million or 19.8% compared to last year.
Credit card fees increased $5.7 million in 1998 partially due to increased
merchant activity and the CoBancorp acquisition. Other service fees rose $3.2
million, or 43.0% compared to last year; a major component of this category is
ATM fees. Income from mortgage sales and servicing was up $5.7 million, these
gains occur as the Corporation's mortgage company sells mortgage loans to the
secondary market. Securities gains increased $3.6 million, or 117.0% as the
Corporation sold several groups of mortgage-backed securities at gains. The
sales of the mortgage-backed securities occurred as management saw the
opportunity to take gains on sales, to reinvest the proceeds in higher yielding
commercial and consumer credits, and to sell before further "run-off" of these
loans occurred during a high refinancing period. Other operating income, as
presented in the table above, was up $5.1 million in part because of the
CoBancorp and other purchase acquisitions. See "other expenses" for more
description of the acquisitions other than CoBancorp.
Excluding gains from sales of securities, other income was $133.4 million
and now represent 27.1% of net revenue compared to 25.2 % last year. Net revenue
is defined as net interest income, on a fully-taxable equivalent basis, plus
other income, less securities gains.
FEDERAL INCOME TAX
Federal income tax expense totaled $37.9 million in 1998 compared to $56.1
million in 1997, and $46.0 in 1996. In 1998 the effective federal income tax
rate for the Corporation equaled 34.3% compared to 32.8% in 1997 and 33.8% in
1996.
OTHER EXPENSES
Core other expenses, excluding merger-related costs and a loss from the
sale of a subsidiary (Alliance Corporate Resources, Inc.) were $322.2 million in
1998 compared to $245.9 million in 1997 and $245.2 million in 1996. Totals for
1998 include (1) the results of CoBancorp for approximately 7 months and the
full-year results of several smaller acquisitions that were acquired mid-year
1997, and (2) the following expenses recorded in the other operating expenses
category: a valuation adjustment of $18.0 million related to securitized
manufactured housing loans; a valuation adjustment of $7.4 million related to
retained servicing of manufactured housing contracts; an adjustment of $3.2
million to recognize more manufactured housing loan origination expenses and the
establishment of a liability of $3.3 million related to repayment of
manufactured housing loans. In accordance with purchase accounting rules, the
results of the companies purchased are not included in results presented prior
to their purchase dates.
40
<PAGE> 42
<TABLE>
<CAPTION>
REPORTED CORE*
1998 1998 1997 1996
-------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
OTHER EXPENSES
Salaries and wages............................ $112,087 110,474 90,201 87,390
Pension and benefits.......................... 31,778 31,702 26,892 26,817
-------- ------- ------- -------
Salaries, wages, pension and benefits......... 143,865 142,176 117,093 114,207
Net occupancy expense......................... 23,002 22,310 22,592 22,277
Equipment expense............................. 15,882 15,741 12,717 12,894
Taxes, other than federal income taxes........ 7,890 7,890 7,168 7,298
Stationery, supplies and postage.............. 10,789 10,774 9,529 11,166
Bankcard, loan processing, and other fees..... 29,575 28,059 19,126 16,321
Advertising................................... 5,416 5,183 6,298 7,303
Professional services......................... 14,332 9,882 7,191 6,505
Telephone..................................... 4,722 4,722 3,856 3,654
FDIC assessment, excluding SAIF in 1996....... 1,473 1,473 1,524 6,162
SAIF assessment............................... -- -- -- 15,211
Loss on sale of subsidiary.................... 8,410 -- -- --
Amortization of intangibles................... 8,926 8,926 3,771 4,374
Other operating expenses...................... 70,747 65,104 35,000 32,990
-------- ------- ------- -------
Total other expenses.......................... $345,029 322,240 245,865 260,362
======== ======= ======= =======
</TABLE>
- ---------------
* Core other expenses, when compared to reported results, exclude $9.8 million
of pre-tax merger-related costs associated with the Security First
acquisition, $4.6 million of pre-tax charges related to Signal's acquisition
of First Shenango and an $8.4 million loss from the sale of a subsidiary. Also
affecting core earnings, but not other expenses, was an increase to the
provision for possible loan losses of $7.3 million and a decrease in Other
Income of $0.1 million associated with the Security First acquisition.
Adjusted salaries, wages, pension and benefits totaled $142.2 million in
1998, an increase of $25.1 million or 21.4% from 1997. The increase was
primarily due to the 1997 purchase acquisition of CoBancorp, the mid-year 1997
purchases of Alpha Equipment Group, Inc., Alliance Corporate Resources Inc.
(which was subsequently sold December 31, 1998) and Summit Bank (an immaterial
"pooling-of-interests" in which prior periods were not restated) and an
adjustment of $2.8 million to recognize more direct salary and wage expense
associated with the origination of manufactured housing loans. Salaries and
benefits in 1997 were 2.5% higher than 1996 mainly due to merit increases.
Adjusted bankcard, loan processing, and other fees increased $8.9 million
to $28.1 million in 1998. A portion of the increase is due to the activity of
the purchased companies discussed previously in this section. The Corporation's
efforts to improve the efficiency of all acquired companies will be a major goal
in 1999.
Amortization of intangible expense during 1998 was $9.0 million, up $5.2
million from 1997 and $4.6 million from 1996. The 1998 increase was due to the
CoBancorp acquisition. The decline in 1997 intangible amortization expense
compared to 1996 occurred as 1996 branch sales, many in the fourth quarter,
lessened goodwill and core deposit intangibles.
Excluding the merger-related expenses and an $8.4 million loss on a
subsidiary, the efficiency ratio for 1998 was 63.55% compared to 54.71% last
year. The "lower-is-better" efficiency ratio indicates the percentage of
operating costs that is used to generate each dollar of net revenue -- that is,
during 1998, $0.6355 cents was spent to generate $1 of net revenue. The
Corporation's goal in 1999 is to make its recent acquisitions more efficient.
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 have been classified as
available-for-sale.
41
<PAGE> 43
In 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 year-ends 1998
and 1997 were $9.0 million and $7.0 million, respectively.
At year-end 1998, investment securities totaled $1,878.3 million compared
with $1,556.1 million one year earlier, an increase of 20.7%.
A summary of investment securities' carrying value is presented below as of
year-ends 1998, 1997 and 1996. Presented with the summary is a maturity
distribution schedule with corresponding weighted average yields.
CARRYING VALUE OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
YEAR-ENDS,
-----------------------
1998 1997
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Treasury and Government agency obligations............. $ 693,939 648,360
Obligations of states and political subdivisions............ 140,177 117,745
Mortgage-backed securities.................................. 748,355 619,596
Other securities............................................ 295,795 170,387
---------- ---------
$1,878,266 1,556,088
========== =========
</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>
U.S. Treasury securities.......... $ 48,339 5.85% 38,138 6.11% -- -- -- --
U.S. Government agency
obligations..................... 30,999 5.85% 142,624 5.62% 190,716 5.85% 281,789 5.76%
Obligations of states and
political subdivisions.......... 20,737 4.71%* 48,304 5.05%* 36,665 4.70%* 36,605 5.23%*
Mortgage-backed securities........ 2,866 3.99% 25,934 6.22% 87,019 6.00% 518,505 6.52%
Other securities.................. 3,588 6.04% 1,041 5.50% 50,268 4.26% 314,129 5.58%**
-------- ---- ------- ---- ------- ---- --------- ----
$106,529 5.58% 256,041 5.63% 364,668 5.55% 1,151,028 6.02%
======== ==== ======= ==== ======= ==== ========= ====
Percent of total.................. 5.67% 13.63% 19.42% 61.28%
======== ======= ======= =========
</TABLE>
- ---------------
* Fully-taxable equivalent based upon federal income tax structure applicable
at December 31, 1998.
** Weighted-average yield does not reflect $18 million write-down of
Asset-backed securities book values and fair values due to impairment. See
notes 2, 3 and 6 to the consolidated financial statements for additional
information.
At year-end 1998, Collateralized Mortgage Obligations ("CMOs") totaled
$424.2 million, representing approximately 21.7% 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 $6.5
million, or 1.5% of the total investment portfolio.
The yield on the portfolio was 6.41% in 1998 compared to 6.56% in 1997 and
6.40% in 1996.
LOANS
Total loans outstanding at year-end 1998 increased 11.6% compared to one
year ago or $5,733.5 million compared to $6,398.4 million. A breakdown by
category is presented below, along with a maturity summary of commercial,
financial and agricultural loans.
42
<PAGE> 44
<TABLE>
<CAPTION>
YEAR-ENDS,
----------------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural................. $1,308,127 952,507 780,772 604,883 475,692
Installments to individuals.... 1,334,138 1,157,940 1,026,012 949,207 933,445
Real estate.................... 3,585,282 3,437,303 3,286,610 3,331,332 3,195,167
Lease financing................ 170,898 185,864 159,237 179,951 158,737
---------- --------- --------- ---------- ----------
Total loans............... 6,398,445 5,733,614 5,252,631 5,065,373 4,763,041
Less allowance for possible
loan losses.................. 96,149 67,736 54,304 56,878 46,021
---------- --------- --------- ---------- ----------
Net loans................. $6,302,296 5,665,878 5,198,327 5,008,495 4,717,020
========== ========= ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR-END 1998
--------------------------------------
COMMERCIAL, FINANCIAL AND AGRICULTURAL
--------------------------------------
<S> <C>
Due in one year or less..................................... $ 787,501
Due after one year but within five years.................... 288,372
Due after five years........................................ 232,254
----------
Total.................................................. $1,308,127
==========
Loans due after one year with interest at a predetermined
fixed rate................................................ $ 167,110
Loans due after one year with interest at a floating rate... 353,516
----------
Total.................................................. $ 520,626
==========
</TABLE>
Real estate loans at year-end 1998 totaled $3,585.3 million or 56.0% of
total loans outstanding compared to 60.0% one year ago. Residential loans (1-4
family dwellings) totaled $1,643.1 million, home equity loans $531.9 million,
construction loans $228.4 million and commercial real estate loans $1,181.9
million.
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 15.2% compared to last
year and accounted for 20.9% of total loans compared to 20.2% in 1997.
Commercial, financial, and agricultural loans increased 37.3% during 1998
and make-up 20.4% of total outstanding loans compared to 16.6% last year. The
increase in consumer and commercial loans is evidence of FirstMerit's shifting
loan portfolio.
Lease financing loans decreased 8.0% during 1998. Auto leases totaled $63.2
million with equipment leasing totaling $103.9 million, and leveraged leases
were $3.9 million at year-end 1998.
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,
43
<PAGE> 45
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.
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 provide guidance
for determining the allowance for loan loses related to impaired loans and
illustrate the required financial statement disclosures for impaired loans.
Impaired loans are loans for which 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 (ORE) acquired through foreclosure in satisfaction of a
loan.
<TABLE>
<CAPTION>
YEARS ENDED,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Impaired Loans:
Non-accrual............................... $10,883 12,129 9,782 7,852 10,517
Restructured.............................. 85 89 92 1,548 2,026
------- ------ ------ ------ ------
Total impaired loans.............. 10,968 12,218 9,874 9,400 12,543
Other Loans:
Non-accrual............................... 8,456 10,210 7,104 7,765 9,186
Restructured.............................. -- -- 340 366 2,714
------- ------ ------ ------ ------
Total Other non-performing
loans........................... 8,456 10,210 7,444 8,131 11,900
------- ------ ------ ------ ------
Total non-performing loans........ 19,424 22,428 17,318 17,531 24,443
------- ------ ------ ------ ------
Other real estate (ORE)..................... 3,789 2,296 829 1,989 10,958
Total non-performing assets....... 23,213 24,724 18,147 19,520 35,401
======= ====== ====== ====== ======
Loans past due 90 days or more accruing
interest.................................. $18,911 11,327 8,463 7,795 3,847
======= ====== ====== ====== ======
Total non-performing assets as a percent of
total loans & ORE......................... 0.36% 0.43% 0.35% 0.39% 0.75%
======= ====== ====== ====== ======
</TABLE>
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.
44
<PAGE> 46
Non-performing assets at year end were $23.2 million, $24.7 million at
year-end 1997 and $18.1 million at year-end 1996. As a percentage of total loans
outstanding plus ORE, non-performing assets were 0.36% at year-end 1998 compared
to 0.43% in 1997 and 0.35% in 1996. The average balances of impaired loans for
the years ended 1998 and 1997 were $11.6 million and $11.0 million,
respectively.
For the year ended 1998, impaired assets earned $427,000 in interest
income. Had they not been impaired, they would have earned $1.1 million. For the
same period, total non-performing loans earned $732,000 in interest income. Had
they been paid in accordance with the payment terms in force prior to being
considered impaired, on non-accrual status, or restructured, they would have
earned $2.2 million.
In addition to non-performing loans and loans 90 days past due and still
accruing interest, Management identified potential problem loans totaling $45.6
million at year-end 1998. 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 Corporation and the Subsidiary Bank 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 growth in its manufactured housing portfolio and the continuing
shift of its portfolio out of residential mortgage loans and into commercial and
consumer loans, which historically have exhibited higher loss rates. Management
felt it was prudent to increase the allowance at year end to ensure its adequacy
for changes that have occurred in the loan portfolio.
At year-end 1998, the allowance was $96.1 million or 1.50% of loans
outstanding compared to $67.7 million or 1.18% at year-end 1997 and $60.1
million or 1.14% at year-end 1996. The allowance equaled 495.0% of non-
performing loans at year-end 1998 compared to 302.1% at year-end 1997. The
allowance for possible loan losses related to impaired loans at year-ends 1998
and 1997 was $3.7 million at year-end 1998 and $4.5 million at year-end 1997.
Net charge-offs were $20.7 million in 1998 compared to $18.4 million in
1997 and $16.1 million in 1996. As a percentage of average loans outstanding,
net charge-offs equaled 0.34% in 1998 and 1997 and 0.30% in 1996. Losses are
charged against the allowance as soon as they are identified.
45
<PAGE> 47
A five-year summary of activity follows:
ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
YEARS ENDED,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for possible loan losses at
beginning of year.................. $ 67,736 60,087 56,878 46,021 45,748
Loans charged off:
Commercial, financial and
agricultural..................... 3,894 1,838 2,665 3,145 1,479
Installment to individuals......... 26,277 24,824 17,282 9,275 6,367
Real estate........................ 1,489 728 613 1,837 1,948
Lease financing.................... 1,274 1,294 1,315 319 20
Decrease from sale of subsidiary... -- -- 389 -- --
---------- ---------- ---------- ---------- ----------
Total....................... 32,934 28,684 22,264 14,576 9,814
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial, financial and
agricultural..................... 1,930 1,121 450 569 719
Installment to individuals......... 8,285 8,584 5,283 3,537 3,169
Real estate........................ 1,464 123 202 181 171
Lease financing.................... 532 476 206 88 21
---------- ---------- ---------- ---------- ----------
Total....................... 12,211 10,304 6,141 4,375 4,080
---------- ---------- ---------- ---------- ----------
Net charge-offs...................... 20,723 18,380 16,123 10,201 5,734
---------- ---------- ---------- ---------- ----------
Increase resulting from
acquisition........................ 8,215 2,511 -- -- --
---------- ---------- ---------- ---------- ----------
Provision for possible loan losses... 40,921 23,518 19,332 21,058 6,007
---------- ---------- ---------- ---------- ----------
Allowance for possible loan losses at
end of year........................ $ 96,149 $ 67,736 $ 60,087 $ 56,878 $ 46,021
========== ========== ========== ========== ==========
Average loans outstanding............ $6,131,665 5,468,587 5,304,366 5,086,781 4,460,113
========== ========== ========== ========== ==========
Ratio to average loans:
Net charge-offs.................... 0.34% 0.34% 0.30% 0.20% 0.13%
Provision for possible loan
losses........................... 0.67% 0.43% 0.36% 0.41% 0.13%
========== ========== ========== ========== ==========
Loans outstanding at end of year..... $6,398,445 5,733,614 5,252,631 5,065,373 4,763,041
========== ========== ========== ========== ==========
Allowance for possible loan losses:
As a percent of loans outstanding
at end of year................... 1.50% 1.18% 1.14% 1.12% 0.97%
As a multiple of net charge-offs... 4.64 3.69 3.73 5.58 8.03
========== ========== ========== ========== ==========
</TABLE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
AS OF YEAR-END 1998 AS OF YEAR-END 1997 AS OF YEAR-END 1996
------------------------ ------------------------ -----------------------
% OF LOANS % OF LOANS % OF LOANS
BY CATEGORY BY CATEGORY BY CATEGORY
TO TOTAL LOANS TO TOTAL LOANS TO TOTAL LOANS
AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING
------- -------------- ------- -------------- ------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial, and
agricultural................ $40,457 20% $27,522 17% 15,962 15%
Installment................... 28,004 21% 19,350 20% 24,434 19%
Loans secured by real
estate...................... 25,945 56% 19,555 60% 18,236 63%
Lease financing............... 1,743 3% 1,309 3% 1,455 3%
------- --- ------- --- ------ ---
$96,149 100% $67,736 100% 60,087 100%
======= === ======= === ====== ===
</TABLE>
46
<PAGE> 48
<TABLE>
<CAPTION>
AS OF YEAR-END 1995 AS OF YEAR-END 1994
------------------------ -----------------------
% OF LOANS % OF LOANS
BY CATEGORY BY CATEGORY
TO TOTAL LOANS TO TOTAL LOANS
AMOUNT OUTSTANDING AMOUNT OUTSTANDING
------- -------------- ------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural............ $14,570 12% 7,091 10%
Installment........................................ 16,322 19% 15,372 20%
Loans secured by real estate....................... 24,694 66% 22,809 67%
Lease financing.................................... 1,292 3% 749 3%
------- --- ------ ---
$56,878 100% 46,021 100%
======= === ====== ===
</TABLE>
DEPOSITS
Average deposits for 1998 totaled $6.5 billion, an increase of 13.9% and
13.7% compared to 1997 and 1996 levels, respectively. Most of the increase
occurred because of the 1998 purchase acquisition of CoBancorp Inc. Purchase
accounting application includes balances of the acquired company in the year of
acquisition but not in prior periods. The Corporation's success with its
"free-checking" product also added to the increase in average non-interest
bearing demand deposit (checking) accounts.
Increases in deposit category average balances were as follows:
noninterest-bearing demand, up $310.1 million, or 41%; interest-bearing demand,
up $58.8 million, or 8%; savings up $68.5 million, or 4%; and certificate of
deposit (CDs) accounts, up $350.5 million, or 13%. Again, the CoBancorp
acquisition accounted for a large portion of the increases in these categories.
The average rate paid on interest-bearing demand deposits decreased 5 basis
points to 1.76%; the average yield paid on savings accounts increased 10 basis
points to 2.75% and the average yield paid on CDs remained at 5.47%.
Total demand deposits comprised 28.4 % of average deposits in 1998 compared
with 25.9% last year and 24.9% in 1996. Savings accounts, including "Money
Market" products, made up 24.8% of average deposits in 1998 versus 27.0% in 1997
and 29.1% in 1996. CDs accounted for 46.8% of average deposits in 1998, 47.1% in
1997 and 46.0% in 1996. The most notable shift occurred between savings and
demand deposit (checking) accounts as checking balances provided more funds, on
average, and savings accounts less.
The average cost of deposits and other borrowings was up 11 basis points
compared to one year ago, or 4.45% in 1998 compared to 4.34% last year.
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
---------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits-non-interest
bearing......................... $1,083,354 -- 773,285 -- 773,560 --
Demand deposits-interest
bearing......................... 752,096 1.76% 693,277 1.81% 641,607 1.95%
Savings deposits.................. 1,600,122 2.75% 1,531,623 2.65% 1,653,279 2.53%
Certificates and other time
deposits........................ 3,019,637 5.47% 2,669,162 5.47% 2,610,832 5.42%
---------- --------- ---------
$6,455,209 5,667,347 5,679,278
========== ========= =========
</TABLE>
47
<PAGE> 49
The following table summarizes the certificates and other time deposits in
amounts of $0.1 million or more as of year-end 1998, by time remaining until
maturity.
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Maturing in:
Under 3 months........................ $484,560
3 to 6 months......................... 121,342
6 to 12 months........................ 99,410
Over 12 months........................ 136,029
--------
$841,341
========
</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 year-end 1998 the Corporation was in a moderate asset-sensitive position
as illustrated in the following table:
<TABLE>
<CAPTION>
1-30 31-60 61-90 91-180 181-365 OVER 1
DAYS DAYS DAYS DAYS DAYS YEAR TOTAL
---------- -------- -------- ------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans and leases................ $1,412,585 193,694 199,934 546,722 843,988 3,201,522 6,398,445
Investment securities........... 194,494 56,114 92,509 81,823 190,829 1,262,497 1,878,266
Federal funds sold.............. 31,739 -- -- -- -- -- 31,739
---------- -------- -------- ------- --------- --------- ---------
Total Interest Earning Assets..... $1,638,818 249,808 292,443 628,545 1,034,817 4,464,019 8,308,450
---------- -------- -------- ------- --------- --------- ---------
Interest-Bearing Liabilities:
Demand -- Interest bearing...... $ 43,416 43,416 49,853 -- -- 781,080 917,765
Savings......................... 119,810 119,810 135,348 -- -- 1,435,372 1,810,340
Certificates and other time
deposits...................... 517,599 238,202 228,673 609,039 682,540 815,443 3,091,496
Securities sold under agreement
to repurchase and other
borrowings.................... 574,540 5,379 26,475 38,272 121,986 356,552 1,123,204
---------- -------- -------- ------- --------- --------- ---------
Total Interest Bearing
Liabilities..................... $1,255,365 406,807 440,349 647,311 804,526 3,388,447 6,942,805
---------- -------- -------- ------- --------- --------- ---------
Total GAP......................... $ 383,453 (156,999) (147,906) (18,766) 230,291 1,075,572 1,365,645
========== ======== ======== ======= ========= ========= =========
Cumulative GAP.................... $ 383,453 $226,454 78,548 59,782 290,073 1,365,645
========== ======== ======== ======= ========= =========
</TABLE>
MARKET RISK
FirstMerit is exposed to market risks in the normal course of business.
Changes in market interest rates may result in changes in the fair market value
of the Corporation's financial instruments, cash flows, and net interest income.
The corporation seeks to achieve consistent growth in net interest income and
capital while managing volatility arising from shifts in market interest rates.
The Asset and Liability Committee of the FirstMerit Bank Board of Directors
("ALCO") oversees financial risk management, establishing broad policies that
govern a variety of financial risks inherent in FirstMerit Bank's operations.
ALCO monitors FirstMerit Bank's interest rates and sets limits on allowable risk
annually.
Market risk is the potential of loss arising from adverse changes in the
fair value of financial instruments due to changes in interest rates, exchange
rates, and equity prices. FirstMerit's market risk is composed primarily of
interest rate risk. Interest rate risk on FirstMerit's balance sheet consists of
mismatches of maturity gaps and indices, and options risk. Maturity GAP
mismatches result from differences in the maturity or repricing of asset and
liability portfolios. Options risk exists in many of FirstMerit's retail
products such as prepayable mortgage
48
<PAGE> 50
loans and demand deposits. Options risk typically results in higher costs or
lower revenue for FirstMerit. Index mismatches occur when asset and liability
portfolios are tied to different market indices which may not move in tandem as
market interest rates change.
Interest rate risk is monitored using GAP analysis, earnings simulation and
net present value estimations. Combining the results from these separate risk
measurement processes allows a reasonably comprehensive view of short-term and
long-term interest rate risk in the Corporation. Gap analysis measures the
amount of repricing risk in the balance sheet at a point in time. Earnings
simulation involves forecasting net interest earnings under a variety of
scenarios including changes in the level of interest rates, the shape of the
yield curve, and spreads between market interest rates. ALCO also monitors the
net present value of the balance sheet, which is the discounted present value of
all asset and liability cash flows. Interest rate risk is quantified by changing
the interest rates used for discounting cash flows and comparing the net present
value to the original figure. At year-end, a 100 basis point increase in
interest rates is estimated to reduce net present value by 5.9%. Should interest
rates decrease by 100 basis points, net present value is estimated to increase
by 1.8%.
Presented below, as of December 31, 1998, is an analysis of FirstMerit's
interest rate risk for earnings simulation for instantaneous and sustained
parallel shifts in the yield curve up and down 200 basis points.
<TABLE>
<CAPTION>
NEXT 12 MONTHS
NET INTEREST INCOME
-------------------
$ CHANGE % CHANGE
-------- --------
<S> <C> <C>
+200 1,133 0.30%
------ -----
+100 1,532 0.41%
------ -----
- -100 (1,930) (0.52%)
------ -----
- -200 (6,174) (1.66%)
------ -----
</TABLE>
CAPITAL RESOURCES
Shareholders' equity at year-end 1998 totaled $910.6 million compared to
$747.7 million at December 31, 1997, an increase of 21.8%.
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total equity...................... $906,656 10.04% 747,612 9.55% 694,097 9.44%
Common equity..................... 897,357 9.94% 737,695 9.43% 671,404 9.14%
Tangible common equity (a)........ 724,247 8.18% 691,809 8.89% 660,051 9.00%
Tier 1 capital (b)................ 774,303 10.46% 688,693 11.84% 680,367 12.52%
Total risk-based capital (c)...... 949,229 12.82% 792,104 13.62% 739,976 13.62%
Leverage (d)...................... 774,303 8.91% 688,693 8.84% 680,367 10.39%
</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 ("FDICIA") 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 year-end 1998, the
Corporation's risk-based capital equaled 12.82% of risk-adjusted assets, its
Tier I capital ratio equaled 10.46% and its leverage ratio equaled 8.91%.
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 1998, the Corporation's Directors increased the quarterly cash
dividend, marking the seventeenth consecutive year of annual increases since the
Corporation's formation in 1981. The cash dividend of $0.18 paid
49
<PAGE> 51
has an indicated annual rate of $0.72 per share. Over the past five years the
dividend has increased at an annual rate of approximately 8.5%.
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 subsidiary maintains sufficient liquidity in the form of
short-term marketable investments with a short-term maturity structure, along
with cash flow from loan repayment. Asset growth is primarily funded by the
growth of core deposits.
Reliance on borrowed funds increased during the year as the investment
portfolio grew slightly. During the year, the Corporation sold, for liquidity
purposes, approximately $200 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 Corporation, primarily cash dividends and other
corporate purposes, are met through cash, short-term investments and dividends
from the banking subsidiary.
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 3% 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 year-end
1998, 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 fractual in nature, and which relates to expectations for
future shifts in loan portfolio to consumer and commercial loans, increase in
core deposits base,
50
<PAGE> 52
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 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; interest rate fluctuations; the ability of the Corporation to realize
expected efficiencies from recent acquisitions 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.
To ensure the Year 2000 issue is properly addressed significant resources
continue to be used. Consulting and contract programming resources supplement
internal staff and provide specialized expertise where necessary. FirstMerit is
using newly acquired software tools and enhanced procedures to assist in code
remediation, testing, and controlling the numerous software changes. Staff
throughout the organization reviews testing results. Coordination with major
business partners is also in process.
The Corporation first contracted the services of an application
development, outsourcing and integration services firm, to perform an enterprise
wide business unit risk assessment of Year 2000 issues. By year-end 1997, the
firm had 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.
During 1998, the Corporation contracted with a different outside consulting
firm to provide an independent assessment of our Year 2000 efforts. Results were
reported to the Corporation's Board of Directors in November 1998. Management
and the Board of Directors agreed with the findings and overall view that the
project is on track. The issues identified by the independent consultants were
already in process of being addressed. Additionally, as a nationally chartered
bank the Corporation's banking subsidiary falls under the regulatory guidelines
published by the Federal Financial Institutions Examination Council ("FFIEC").
Periodic audits of the Corporation's Year 2000 activities are performed by the
Office of the Comptroller of the Currency ("OCC") as well as the Federal Reserve
Bank.
The FFIEC considers five general Year 2000 phases: Awareness, Assessment,
Renovation, Validation and Implementation. The five phases are explained below
along with Corporation's status at December 31, 1998:
Awareness: The Awareness phase defines the Year 2000 problem, gains
executive level support and establishes an overall strategy. The Corporation
began working on the Year 2000 issue in 1996 with identification of major
vendors and their compliance status. Significant progress has been made in the
implementation of the strategy for Year 2000 compliance. Executive management
has been proactive in the management of the project and contracted with
consultants to assist in performing the assessment and formulating a strategy.
The awareness phase has expanded to include a widespread customer awareness
program to help educate customers of the Year 2000 issue and allow monitoring of
FirstMerit's progress.
51
<PAGE> 53
Assessment: The Assessment phase defines the size and complexity of the
problem and the magnitude of the effort to address Year 2000 issues. FirstMerit
completed the assessment phase for all mainframe and microcomputer systems
during the first quarter of 1998. FirstMerit has 82 mainframe applications of
which 30 are considered "mission critical." The majority of the applications are
vendor packages. Significant microcomputer software and hardware upgrades for
Year 2000 compliance are substantially complete. The Assessment of
non-information systems such as security systems, elevators, etc. was completed
during the second quarter of 1998.
Renovation: The purpose of the Renovation phase is to ensure all date
routines have been corrected to properly address Year 2000 dates. FirstMerit has
completed 100% of the renovation for the in-house written code for the "mission
critical" applications. Installation of vendor supplied upgrades for the other
"mission critical" applications has occurred where the software was received
timely. Late arriving vendor releases or re-releases of Year 2000 compliant
software has resulted in three of the 30 "mission critical" applications which
will not be completed until the first quarter of 1999.
Renovation and vendor software implementation is also in process for the
non-"mission critical" applications. FirstMerit is approximately 94% complete in
having all of our lines of computer code renovated. The remaining applications
are scheduled to be renovated during the first quarter 1999.
Validation: The Validation phase consists of various types of testing and
retesting. FirstMerit is deeply involved in extensive testing of both in-house
and vendor written systems as well as the various connections to other systems
(internal and external). Non-information system applications or functions such
as vaults and security systems are also in the process of being tested. Testing
guidelines have been issued to ensure consistency and completeness throughout
the organization. Integrated testing is in process to ensure the applications
work together. More than 60% of our lines of computer code were successfully
tested with various future dates as part of a major integrated test over
Columbus Day weekend in October 1998. Core systems were included such as
Certificates of Deposit, Demand Deposit, Installment Loan and Savings. Of the 30
"mission critical" applications, 26 have been successfully tested or are in the
process of being tested. Additionally, many other applications (non-mission
critical) are currently in the testing process.
Implementation: During the Implementation phase, systems are certified as
Year 2000 compliant and placed into production. FirstMerit has been placing
systems, once renovated and validated, into production throughout the project.
As the non-mission critical applications are tested, they will be implemented
into production during the first quarter of 1999.
Another FFIEC area to be addressed is contingency planning. FirstMerit is
considering alternative measures throughout the organization in event of a Year
2000-caused problem. Business areas have reviewed departmental Year 2000 risks
and are incorporating changes to their contingency plans.
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 a material adverse effect on the
Corporation.
The total cost of the Year 2000 readiness project (operating and capital)
is estimated at $6.1 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 expensed approximately $2.6 million and capitalized
approximately $840,000 related to the Year 2000 project.
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 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.
52
