<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Amendment No.1 to
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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.)
III CASCADE PLAZA, AKRON, OHIO 44308 (330) 996-6300
- ------------------------------------- ---------- ------------------
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) (TELEPHONE NUMBER)
OFFICES)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
and
PREFERRED SHARE PURCHASE RIGHTS
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. YES [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the approximate aggregate market value of the voting stock held by
non-affiliates of the registrant as of February 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
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 as follows:
<PAGE> 3
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.
<PAGE> 4
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.
<PAGE> 5
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.
<PAGE> 6
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.
<PAGE> 7
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.
<PAGE> 8
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.
<PAGE> 9
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.
<PAGE> 10
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,
<PAGE> 11
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>
<PAGE> 12
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.
<PAGE> 13
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.
<PAGE> 14
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.
<PAGE> 15
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.
<PAGE> 16
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>
<PAGE> 17
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.
<PAGE> 18
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>
<PAGE> 19
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.
<PAGE> 20
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>
<PAGE> 21
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>
<PAGE> 22
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>
<PAGE> 23
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>
<PAGE> 24
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.
<PAGE> 25
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.
<PAGE> 26
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.
<PAGE> 27
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.
<PAGE> 28
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."
<PAGE> 29
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>
<PAGE> 30
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>
/S/ JOHN R. COCHRAN /S/ AUSTIN J. MULHERN
Chairman and Chief Senior Vice President
Executive Officer Chief Financial Officer
</TABLE>
<PAGE> 31
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.
/S/ PRICEWATERHOUSECOOPERS LLP
January 31, 1999
<PAGE> 32
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.
<PAGE> 33
FIRSTMERIT CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
REPORT ON AUDITS OF FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<PAGE> 34
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................................................... 1
Financial Statements:
Statements of Net Assets Available for Plan Benefits
at December 31, 1998 and 1997....................................................................... 2
Statements of Changes in Net Assets Available for Plan
Benefits for the years ended December 31, 1998 and 1997............................................ 3
Notes to Financial Statements............................................................................. 4-5
</TABLE>
FIRSTMERIT CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
<PAGE> 35
REPORT OF INDEPENDENT ACCOUNTANTS
To The Trustees of the
FirstMerit Corporation
Employee Stock Purchase Plan:
In our opinion, the accompanying statements of net assets available for plan
benefits and the related statements of changes in net assets available for plan
benefits present fairly, in all material respects, the net assets available for
plan benefits of the FirstMerit Corporation Employee Stock Purchase Plan (the
"Plan") at December 31, 1998 and 1997, and the related changes in net assets
available for plan benefits for the years then ended, 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 upon 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.
/s/ PricewaterhouseCoopers, L.L.P.
April 10, 1999
<PAGE> 36
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
-------------- --------------
<S> <C> <C>
Cash $ 2,855 $ 42,652
Contributions receivable 77,703 -
Investment in FirstMerit Corporation common
stock, at fair value 84,145 57,743
-------------- --------------
Net assets available for plan benefits $ 164,703 $ 100,395
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
FIRSTMERIT CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
<PAGE> 37
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
for the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Additions to plan assets attributable to:
Employee contributions $ 770,208 $ 445,681
Employer contributions 200,000 148,339
Dividend income 4,122 2,639
Net appreciation (depreciation) in fair value of FirstMerit Corporation
common stock (25,908) 9,734
---------------- ----------------
Total additions 948,422 606,393
---------------- ----------------
Deductions from plan assets attributable to:
Benefits paid to participants 862,997 1,574,919
Service fees 21,117 12,934
---------------- ----------------
Total deductions 884,114 1,587,853
---------------- ----------------
Net increase (decrease) 64,308 (981,460)
Net assets available for plan benefits, beginning of year 100,395 1,081,855
---------------- ----------------
Net assets available for plan benefits, end of year $ 164,703 $ 100,395
================ ================
</TABLE>
The accompanying notes are an integral part of the financial statements.
FIRSTMERIT CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
<PAGE> 38
NOTES TO FINANCIAL STATEMENTS
1. PLAN DESCRIPTION:
The following brief description of the FirstMerit Corporation (the
"Corporation") Employee Stock Purchase Plan (the "Plan") is provided for
general information purposes only. Participants should refer to the
Prospectus for more complete information.
GENERAL: The Board of Directors of the Corporation established the Plan
on February 13, 1992 which was approved by the shareholders at the annual
meeting on April 8, 1992. The Plan provides eligible employees of the
Corporation with the opportunity to acquire the Corporation's Common
Shares on a payroll deduction basis. On January 1, 1997, the plan was
amended to provide for the transfer of all existing participant plan
assets to individual employees' brokerage accounts maintained by Merrill
Lynch. This amendment also provides for the monthly additions in
participant account balances to be transferred to the individual
employees' brokerage account. These transfers are reflected as benefits
paid to Plan participants in the Statement of Changes in Net Assets
Available for Plan Benefits.
CONTRIBUTIONS: Effective May 1, 1998, contributions to the Plan consist
of participant payroll deductions, post tax, of a specific dollar amount
up to ten percent of the participant's compensation. Prior to May 1,
1998, contributions were limited to five percent of the participant's
compensation. The election to participate in the Plan must be completed
on or before 5 days prior to the commencement of the monthly grant
period.
VESTING: Participant's are 100% vested in their account balances at all
times.
PURCHASES OF COMMON SHARES: Under the Plan, up to 200,000 of the
Corporation's Common Shares may be issued, subject to adjustment in the
event of certain transactions affecting the Corporation's capital
structure. Each participant in the Plan on a grant date is granted the
option to purchase, from such funds as contributed by the participant,
whole Common Shares of the Corporation at the option price of 85% of the
fair market value of such shares valued as of the business day
immediately preceding the grant date. Shares of Common stock granted
pursuant to the Plan may be authorized but unissued shares, shares now or
hereafter held in the treasury of the Company, or shares purchased on the
open market. When shares are purchased on the open market, the employer
must reimburse the plan for 15% of the purchase price through employer
contributions.
ELIGIBILITY: Any person who has been employed by the Corporation or any
of its subsidiaries for at least six months and who currently is employed
on a regular basis (any person customarily employed at least 20 hours per
week) is eligible to participate in the Plan. Executive officers of the
Corporation are not considered eligible employees.
TRANSFERABILITY: Rights to purchase Common Shares under the Plan are not
transferable, except by will or the laws of descent of distribution, and
they may not be subjected to any lien or liability. Options expire on
termination of employment for any reason other than disability or leave
of absence. No participant may purchase shares under the Plan if, after
the purchase, the participant would own more than 5% of the outstanding
Common Shares of the Corporation. In addition, no participant may
purchase shares exceeding $25,000 in fair market value in any one
calendar year.
FIRSTMERIT CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
<PAGE> 39
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION: The accompanying financial statements have been
prepared on an accrual basis in accordance with generally accepted
accounting principles.
USE OF ESTIMATES: The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results may differ from those estimates.
CONTRIBUTIONS RECEIVABLE: Contributions receivable consists of
participant payroll deductions not yet transferred to Merrill Lynch.
INVESTMENTS: The investment in the Corporation's common shares is valued
at fair market value using readily available published market values.
The Plan presents in the statements of changes in net assets available
for plan benefits the net appreciation (depreciation) in the fair value
of its investments which consists of the realized gains or losses and the
unrealized appreciation (depreciation) on those investments.
ADMINISTRATIVE EXPENSES: Administrative expenses of the plan are paid by
the Corporation.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Management has determined that the
carrying amount of financial instruments, as reported on the statement of
net assets available for plan benefits, approximates fair value.
3. RIGHT TO TERMINATE:
Although it has not expressed any interest to do so, the Corporation has
the right to terminate the Plan at any time. In the event of Plan
termination any remaining assets in the Plan must be used solely for
distributions to Plan participants.
4. INCOME TAX STATUS:
The Plan is a non-qualified plan under the Internal Revenue Code. The
Plan is not exempt from federal income taxes.
FIRSTMERIT CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
<PAGE> 40
FIRSTMERIT CORPORATION AND
SUBSIDIARIES EMPLOYEES'
SALARY SAVINGS RETIREMENT PLAN
REPORT ON AUDITS OF FINANCIAL STATEMENTS
AND SUPPLEMENTAL SCHEDULES
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<PAGE> 41
INDEX OF FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Independent Accountants........................................................................... 1
Financial Statements:
Statements of Net Assets Available for Plan Benefits
at December 31, 1998 and 1997...................................................................... 2
Statement of Changes in Net Assets Available for Plan Benefits
for the year ended December 31, 1998 .............................................................. 3
Notes to Financial Statements........................................................................... 4-10
Supplemental Schedules:
Item 27(a) - Schedule of Assets Held for Investment Purpose
as of December 31, 1998............................................................................ 11
Item 27(d) - Schedule of Reportable Transactions
for the year ended December 31, 1998................................................................ 12
</TABLE>
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
FirstMerit Corporation
In our opinion, the accompanying statements of net assets available for plan
benefits and the related statements of changes in net assets available for plan
benefits present fairly, in all material respects, the net assets available for
plan benefits of the FirstMerit Corporation and Subsidiaries Employees' Salary
Savings Retirement Plan (the "Plan") at December 31, 1998 and 1997, and the
related changes in net assets available for plan benefits for 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
upon 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.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary schedules included on
pages 11 and 12 are presented for purposes of additional analysis and are not a
required part of the basic financial statements, but are supplementary
information required by the Department of Labor's Rules and Regulations for
Reporting and Disclosure under the Employee Retirement Income Security Act of
1974. The supplementary information has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects, in relation to the basic
financial statements taken as a whole.
/s/ PricewaterhouseCoopers, L.L.P.
April 10, 1999
<PAGE> 43
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Assets:
Investments, at fair value:
Mutual funds:
Federated Government Obligations Fund $ 1,021,282 $ 520,506
Federated Short/Intermediate Government Fund 1,075,909 847,944
Federated Capital Preservation Fund 2,921,528 2,678,250
Fidelity Advisor Series IV Ltd. Term Bond Fund 1,139,031 989,140
Fidelity Advisor Equity Portfolio Growth Fund 7,458,368 5,027,628
Fidelity Blue Chip Growth Fund 8,394,339 5,878,736
Fidelity Overseas Fund 1,844,625 1,673,510
Newpoint Equity Fund 3,765,394 2,747,782
--------------- ---------------
27,620,476 20,363,496
--------------- ---------------
FirstMerit Corporation Common Stock 52,284,130 51,820,440
--------------- ---------------
Total investments 79,904,606 72,183,936
--------------- ---------------
Receivables:
Receivable from participants 165,911 140,296
Receivable from employers 98,686 84,454
Loans to participants 664,009 515,900
--------------- ---------------
Total receivables 928,606 740,650
--------------- ---------------
Other:
Bank overdraft (651,944) (277,817)
--------------- ---------------
Net assets available for plan benefits $ 80,181,268 $ 72,646,769
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
<PAGE> 44
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
for the year ended December 31, 1998
<TABLE>
<S> <C>
Additions:
Contributions:
Participants' contributions $ 3,768,860
Employer's contributions 2,216,420
---------------
5,985,280
---------------
Investment income:
Interest 42,260
Dividends 1,554,921
Net realized gain and unrealized appreciation of investments 2,871,541
---------------
4,468,722
---------------
Assets received from new participants 783,591
---------------
Total additions 11,237,593
---------------
Deductions:
Withdrawals by former participants 3,703,094
---------------
Total deductions 3,703,094
---------------
Excess of additions over deductions 7,534,499
Net assets available for plan benefits at beginning of period 72,646,769
---------------
Net assets available for plan benefits at end of period $ 80,181,268
===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
<PAGE> 45
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF THE PLAN:
The following brief description of the FirstMerit Corporation and
Subsidiaries ("FirstMerit") Employees' Salary Savings Retirement Plan
(the "Plan") provides only general information. Participants should refer
to the Plan Agreement for a more complete description of the Plan's
provisions.
A. GENERAL
The Board of Directors of FirstMerit Corporation established this
defined contribution plan as of October 1, 1985. The Plan covers
all employees of FirstMerit who have six months of service and have
attained the age of twenty-one. The Plan is subject to certain
provisions of the Employee Retirement Income Security Act of 1974
(ERISA).
B. CONTRIBUTIONS
The Plan permits each participant to contribute from one percent to
fifteen percent of compensation. Such contributions are known as
voluntary pretax employee contributions. A participant's
voluntary pretax contributions and earnings are immediately vested
and non-forfeitable.
FirstMerit contributes as a matching contribution an amount equal
to 50 percent of the participant's voluntary pretax contribution.
FirstMerit will not make a matching contribution with respect to
any portion of a participant voluntary pretax contribution that
exceeds six percent of the participant's basic compensation. These
employer matching contributions and earnings are immediately vested
and non-forfeitable.
The Plan also includes a supplemental matching account whereby
FirstMerit makes additional matching contributions equal to 50% of
the participant's voluntary pretax employee contributions which do
not exceed three percent of the participant's basic compensation.
Participants become vested in the Supplemental Matching Program
upon achieving five years of service or upon attaining normal
retirement age.
C. PARTICIPANTS' ACCOUNTS
FirstMerit Bank, N.A. (a subsidiary of FirstMerit), as the trustee
for the Plan, maintains separate accounts for each participant. The
Plan allows participants to direct their contributions in
FirstMerit Corporation common stock, a stable value fund, a
short-term government bond fund, an intermediate bond fund, a
high-quality, large capitalized stock fund, a blue chip growth
fund, a growth stock fund, an international stock fund, or a
combination thereof with the minimum investment in any option of
5%. Employer matching contributions are invested solely in
FirstMerit Corporation common stock purchased on the open market by
the trustee.
D. PAYMENT OF BENEFITS:
Distributions to participants are made by one or more of the
following methods: (1) a single lump-sum payment, in cash; or (2)
payments in equal or nearly equal monthly, quarterly, semi-annual,
or annual installments over any period not exceeding 10 years or
the participant's life expectancy at the date such payments
commence, if less.
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
<PAGE> 46
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. DESCRIPTION OF THE PLAN, CONTINUED:
E. ADMINISTRATIVE EXPENSES
All expenses associated with administering the Plan, including the
trustee's fees and brokerage commissions on purchases of and
transfers between Investment Funds, are paid by FirstMerit.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. BASIS OF PRESENTATION
The accompanying financial statements have been prepared on an
accrual basis in accordance with generally accepted accounting
principles.
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. INVESTMENTS
Investments in securities are stated at fair value. The fair value
of marketable securities is based on quotations obtained from
national securities exchanges.
The fair value of the investments in the mutual funds is based upon
the number of units held by the Plan at December 31 and the current
value of each unit based upon quotations and bids obtained from
national securities exchanges on the securities in the funds.
Securities transactions are recognized on the trade date (the date
the order to buy or sell is executed).
The Plan presents in the Statement of Changes in Net Assets
Available for Plan Benefits the net appreciation (depreciation) in
the fair value of its investments, which consists of the realized
gains or losses and the unrealized appreciation (depreciation) on
these investments.
D. RISK AND UNCERTAINTIES: The Plan generates a significant portion of
its revenues from investments in domestic and international mutual
funds, bonds and FirstMerit Corporation common stock. As a result,
the Plan's revenues and net assets available for plan benefits
could vary based on the performance of the financial markets.
E. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS: Management has
determined that the carrying amount of financial instruments, as
reported on the Statement of Net Assets Available for Plan
Benefits, approximates fair value.
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
<PAGE> 47
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. INVESTMENTS:
During 1998 and 1997, the Plan's investments (including investments
bought, sold, and held during the period) (depreciated) appreciated in
value as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Mutual funds:
Federated Short/Intermediate Government $ 10,951 $ 2,855
Fidelity Advisor Series IV Ltd. Term Bond 11,900 7,127
Fidelity Advisor Equity Portfolio Growth 1,126,136 232,751
Fidelity Blue Chip Growth Fund 1,573,219 761,170
Fidelity Overseas Fund 123,590 34,324
Newpoint Equity Fund 594,112 275,413
FirstMerit Corporation Common Stock (3,762,895) 17,452,405
--------------- ---------------
Total $ (322,987) $ 18,766,045
=============== ===============
</TABLE>
4. FEDERAL INCOME TAXES:
The Plan and Trust qualify under Section 401 of the Internal Revenue Code
and the Trust is exempt from federal income taxes under Section 501(a).
The Plan obtained its latest determination letter on November 13, 1995,
in which the Internal Revenue Service stated that the Plan, as then
designed, was in compliance with the applicable requirements of the
Internal Revenue Code. The Plan has been amended since receiving the
determination letter. However, the Plan administrator and the Plan's tax
counsel believe that the Plan is currently designed and being operated in
compliance with the applicable requirements of the Internal Revenue Code.
Therefore, no provision for income taxes has been included in the Plan's
financial statements.
5. PLAN TERMINATION:
Although they have not expressed any intent to do so, the Plan may be
terminated by unanimous action of the FirstMerit Corporation Board of
Directors.
6. ASSET ALLOCATION:
The allocation of net assets and changes in net assets for the separate
investment funds are as follows:
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
<PAGE> 48
6. ASSET ALLOCATION, CONTINUED:
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND:
December 31, 1998
<TABLE>
<CAPTION>
FEDERATED FIDELITY FIDELITY
FIRSTMERIT SHORT/ FEDERATED ADVISOR ADVISOR
CORPORATION INTERMEDIATE CAPITAL SERIES IV LTD. EQUITY
COMMON GOVERNMENT PRESERVATION TERM BOND PORTFOLIO
STOCK FUND FUND FUND FUND GROWTH FUND
--------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Investments, at fair value:
Mutual funds $ 1,021,282 $ 1,075,909 $ 2,921,528 $ 1,139,031 $ 7,458,368
FirstMerit Corporation Common Stock 52,284,130 - - - -
--------------- -------------- ------------- ------------- -------------
Total investments 53,305,412 1,075,909 2,921,528 1,139,031 7,458,368
--------------- -------------- ------------- ------------- -------------
Receivables:
Receivables from participants 165,911
Receivable from employer 98,686
Loans to participants 664,009
--------------- -------------- ------------- ------------- -------------
Total receivables 928,606 - - - -
--------------- -------------- ------------- ------------- -------------
Other:
Book overdraft (651,944)
--------------- -------------- ------------- ------------- -------------
Net assets available for plan benefits $ 53,582,074 $ 1,075,909 $ 2,921,528 $ 1,139,031 $ 7,458,368
=============== ============== ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
FIDELITY BLUE FIDELITY
CHIP GROWTH OVERSEAS NEWPOINT
FUND FUND EQUITY FUND TOTAL
-------------- -------------- ------------- ------------------
<S> <C> <C> <C> <C>
Investments, at fair value:
Mutual funds $ 8,394,339 $ 1,844,625 $ 3,765,394 $ 27,620,476
FirstMerit Corporation Common Stock - - - 52,284,130
-------------- -------------- ------------- ------------------
Total investments 8,394,339 1,844,625 3,765,394 79,904,606
-------------- -------------- ------------- ------------------
Receivables:
Receivables from participants 165,911
Receivable from employer 98,686
Loans to participants 664,009
-------------- -------------- ------------- ------------------
Total receivables - - - 928,606
-------------- -------------- ------------- ------------------
Other:
Book overdraft (651,944)
-------------- -------------- ------------- ------------------
Net assets available for plan benefits $ 8,394,339 $ 1,844,625 $ 3,765,394 $ 80,181,268
============== ============== ============= ==================
</TABLE>
Note: The FirstMerit Corporation Common Stock Fund includes cash, receivables
from participants and employers and loans to participants.
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
<PAGE> 49
6. ASSET ALLOCATION, CONTINUED:
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND:
DECEMBER 31, 1997
<TABLE>
<CAPTION>
FEDERATED FIDELITY FIDELITY
FIRSTMERIT SHORT/ FEDERATED ADVISOR ADVISOR
CORPORATION INTERMEDIATE CAPITAL SERIES IV LTD. EQUITY FIDELITY BLUE
COMMON GOVERNMENT PRESERVATION TERM BOND PORTFOLIO CHIP GROWTH
STOCK FUND FUND FUND FUND GROWTH FUND FUND
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Investments, at fair vlaue:
Mutual funds $ 520,506 $ 847,944 $ 2,678,250 $ 989,140 $ 5,027,628 $ 5,878,736
FirstMerit Corporation Common Stock 51,820,440
------------ ------------ ------------ ------------ ------------ ------------
Total investments 52,340,946 847,944 2,678,250 989,140 5,027,628 5,878,736
------------ ------------ ------------ ------------ ------------ ------------
Receivables:
Receivable from participants 140,296
Receivable from employer 84,454
Loans to participants 515,900
------------ ------------ ------------ ------------ ------------ ------------
Total receivables 740,650
------------ ------------ ------------ ------------ ------------ ------------
Other:
Book overdraft (277,817)
------------ ------------ ------------ ------------ ------------ ------------
Net assets available for plan benefits $ 52,803,779 $ 847,944 $ 2,678,250 $ 989,140 $ 5,027,628 $ 5,878,736
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
FIDELITY
OVERSEAS NEWPOINT
FUND EQUITY FUND TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Investments, at fair vlaue:
Mutual funds $ 1,673,510 $ 2,747,782 $ 20,363,496
FirstMerit Corporation Common Stock 51,820,440
------------ ------------ ------------
Total investments 1,673,510 2,747,782 72,183,936
------------ ------------ ------------
Receivables:
Receivable from participants 140,296
Receivable from employer 84,454
Loans to participants 515,900
------------ ------------ ------------
Total receivables 740,650
------------ ------------ ------------
Other:
Book overdraft (277,817)
------------ ------------ ------------
Net assets available for plan benefits $ 1,673,510 $ 2,747,782 $ 72,646,769
============ ============ ============
</TABLE>
Note: The FirstMerit Corporation Common Stock Fund includes cash, receivables
from participants and employers and loans to participants.
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
<PAGE> 50
6. ASSET ALLOCATION, CONTINUED:
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND:
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
FEDERATED FIDELITY
FIRSTMERIT SHORT/ FEDERATED ADVISOR
CORPORATION INTERMEDIATE CAPITAL SERIES IV LTD.
COMMON GOVERNMENT PRESERVATION TERM BOND
STOCK FUND FUND FUND FUND
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Additions:
Contributions:
Participants' contributions $ 1,275,195 $ 98,498 $ 223,240 $ 128,708
Employers' contributions 2,216,420 - - -
------------ ------------ ------------ ------------
3,491,615 98,498 223,240 128,708
------------ ------------ ------------ ------------
Investment income:
Interest 42,260 - - -
Dividends 1,259,620 46,552 151,143 61,136
Net unrealized appreciation (depreciation) of investments (2,274,435) 12,111 - 17,058
------------ ------------ ------------ ------------
(972,555) 58,663 151,143 78,194
------------ ------------ ------------ ------------
Assets received from new participants 458,303 11,194 6,815 30,437
------------ ------------ ------------ ------------
Total additions 2,977,363 168,355 381,198 237,339
------------ ------------ ------------ ------------
Deductions:
Withdrawals by former participants 2,282,815 22,116 442,080 50,037
------------ ------------ ------------ ------------
Total deductions 2,282,815 22,116 442,080 50,037
------------ ------------ ------------ ------------
Excess of additions over deductions 694,548 146,239 (60,882) 187,302
Net transfers with other funds 83,747 81,726 304,160 (37,411)
------------ ------------ ------------ ------------
Net change in assets during the year 778,295 227,965 243,278 149,891
Net assets available for plan benefits at beginning of period 52,803,779 847,944 2,678,250 989,140
------------ ------------ ------------ ------------
Net assets available for plan benefits at end of period $ 53,582,074 $ 1,075,909 $ 2,921,528 $ 1,139,031
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
FIDELITY
ADVISOR
EQUITY FIDELITY BLUE FIDELITY
PORTFOLIO CHIP GROWTH OVERSEAS NEWPOINT
GROWTH FUND FUND FUND EQUITY FUND
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Additions:
Contributions:
Participants' contributions $ 667,260 $ 776,957 $ 241,559 $ 357,443
Employers' contributions - - - -
------------ ------------ ------------ ------------
667,260 776,957 241,559 357,443
------------ ------------ ------------ ------------
Investment income:
Interest - - - -
Dividends 6,925 15,518 10,058 3,969
Net unrealized appreciation (depreciation) of investments 2,035,274 2,072,289 198,654 810,590
------------ ------------ ------------ ------------
2,042,199 2,087,807 208,712 814,559
------------ ------------ ------------ ------------
Assets received from new participants 89,610 111,894 25,433 49,905
------------ ------------ ------------ ------------
Total additions 2,799,069 2,976,658 475,704 1,221,907
------------ ------------ ------------ ------------
Deductions:
Withdrawals by former participants 261,058 361,403 121,204 162,381
------------ ------------ ------------ ------------
Total deductions 261,058 361,403 121,204 162,381
------------ ------------ ------------ ------------
Excess of additions over deductions 2,538,011 2,615,255 354,500 1,059,526
Net transfers with other funds (107,271) (99,652) (183,385) (41,914)
------------ ------------ ------------ ------------
Net change in assets during the year 2,430,740 2,515,603 171,115 1,017,612
Net assets available for plan benefits at beginning of period 5,027,628 5,878,736 1,673,510 2,747,782
------------ ------------ ------------ ------------
Net assets available for plan benefits at end of period $ 7,458,368 $ 8,394,339 $ 1,844,625 $ 3,765,394
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
TOTAL
------------
<S> <C>
Additions:
Contributions:
Participants' contributions $ 3,768,860
Employers' contributions 2,216,420
------------
5,985,280
------------
Investment income:
Interest 42,260
Dividends 1,554,921
Net unrealized appreciation (depreciation) of investments 2,871,541
------------
4,468,722
------------
Assets received from new participants 783,591
------------
Total additions 11,237,593
------------
Deductions:
Withdrawals by former participants 3,703,094
------------
Total deductions 3,703,094
------------
Excess of additions over deductions 7,534,499
Net transfers with other funds -
------------
Net change in assets during the year 7,534,499
Net assets available for plan benefits at beginning of period 72,646,769
------------
Net assets available for plan benefits at end of period $ 80,181,268
============
</TABLE>
Note: The FirstMerit Corporation Common Stock Fund includes cash, receivables
from participants and employers and loans to participants.
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
<PAGE> 51
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. ACQUISITION:
Effective April 1, 1999, the First Federal Savings and Loan of Wooster
Savings and Investment Plan was merged into the FirstMerit Corporation
and Subsidiaries Employees' Salary Savings Retirement Plan. Assets with a
value of $10,481,759 at December 31, 1998 are to be transferred to the
Plan effective May 1, 1999.
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
<PAGE> 52
ITEM 27(A) - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
December 31, 1998
<TABLE>
<CAPTION>
COST FAIR VALUE
---------------- ----------------
<S> <C> <C>
Mutual Funds:
Federated Government Obligations Funds - 1,169.88 units $ 1,021,282 $ 1,021,282
Federated Short/Intermediate Government - 86,304.99 units 1,057,047 1,075,909
Federated Capital Preservation - 255,736.55 units 2,921,528 2,921,528
Fidelity Advisor Series IV ltd. Term Bond - 93,260.08 units 1,112,120 1,139,031
Fidelity Advisor Equity Portfolio Growth - 90,699.41 units 5,260,515 7,458,368
Fidelity Blue Chip Growth - 134,709.23 units 5,482,274 8,394,339
Fidelity Overseas Fund - 45,009.20 units 1,593,444 1,844,625
Newpoint Equity Fund - 137,436.95 units 2,505,784 3,765,394
---------------- ----------------
20,953,994 27,620,476
FirstMerit Corporation Common Stock -1,826,271 shares 26,721,002 52,284,130
Book overdraft (651,944) (651,944)
Receivable from participants 165,911 165,911
Receivable from employers 98,686 98,686
Loans to participants - various interest rates, 5 year maximum unless
mortgage 20 year maximum 664,009 664,009
---------------- ----------------
$ 47,951,658 $ 80,181,268
================ ================
</TABLE>
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
<PAGE> 53
for the year ended December 31, 1995
ITEM 27(D) - SCHEDULE OF REPORTABLE TRANSACTIONS
for the year ended December 31, 1998
<TABLE>
<CAPTION>
NUMBER NUMBER OF PURCHASE SELLING COST OF GAIN
ASSET DESCRIPTION OF SHARES TRANSACTIONS PRICE PRICE ASSET ON SALE
--------------------------------------- ---------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Category III: Series of
transactions in
same security exceeds 5% of value
FirstMerit Corporation Common Stock
Issue: 337915102 196,819 129 $5,506,207 $ - $ - $ -
FirstMerit Corporation Common Stock
Issue: 337915102 93,230 173 - 2,668,513 2,650,066 18,447
Federated Government Obligations Fund
Issue: 60934N104 5,805,371 198 5,805,371 - - -
Federated Government Obligations Fund
Issue: 60934N104 5,304,607 151 - 5,304,607 5,304,607 -
There were no Category I, II or IV reportable transactions during the year.
</TABLE>
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
<PAGE> 54
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
Statements of Net Assets Available for FirstMerit Corporation Employee
Stock Purchase Plan Benefits at December 31, 1998 and 1997
Statements of Changes in Net Assets Available for FirstMerit Corporation
Employee Stock Purchase Plan Benefits for the years ended December 31,
1998 and 1997
Notes to Financial Statements
Report of Independent Accountants
Statements of Net Assets Available for FirstMerit Corporation and
Subsidiaries Employees' Salary Savings Retirement Plan Benefits December
31, 1998 and 1997
Statements of Changes in Net Assets Available for FirstMerit Corporation
and Subsidiaries Employees' Salary Savings Retirement Plan Benefits for
the years ended December 31, 1998 and 1997
Notes to Financial Statements
(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.
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Akron,
State of Ohio, on the 29th day of April, 1999.
FIRSTMERIT CORPORATION
By: /s/ Austin J. Mulhern
Austin J. Mulhern, Senior Vice President
(Chief Financial Officer
and Chief Accounting Officer)
<PAGE> 56
EXHIBIT INDEX
EXHIBIT
NO. ITEM
3.1 Amended and Restated Articles of Incorporation
of FirstMerit Corporation
23 Consent of PricewaterhouseCoopers, L.L.P.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
FIRSTMERIT CORPORATION
As of April 21, 1999
FIRST: The name of the Corporation shall be FIRSTMERIT CORPORATION.
SECOND: The place in Ohio where its principal office is to be located
is in the City of Akron in Summit County, but the Corporation may establish and
maintain its principal office, or other offices, at other places in the United
States of America, as its Board of Directors may, from time to time, determine.
THIRD: The purposes for which the Corporation is formed are as follows:
(a) To engage in business as a "bank holding company" in
accordance with the provisions of The Bank Holding Company Act of 1956
(Pub. Law 511, 84th Cong. 2d Sess., approved May 9, 1956), as amended
(hereinafter referred to as the "Act"), and in furtherance thereof to
purchase or otherwise acquire, own, hold for investment and otherwise
deal with or dispose of real and personal property of every kind, type
and description, wherever situated, and securities, including but not
limited to its own securities and the securities of "banks,"
"companies" and other "bank holding companies," as those terms are
defined in the Act, to render services and otherwise engage in any and
all activities pertinent and appropriate to the operation of a bank
holding company; provided, however, that the Corporation shall not own
or hold properties or securities, render any services or engage in any
activities which are prohibited by the Act, or the regulations
promulgated by the Board of Governors of the Federal Reserve System
thereunder, as amended from time to time.
For the purpose of this paragraph, "securities" shall mean any
and all stocks, bonds, debentures, notes, acceptances, evidences of
indebtedness or other obligations, certificates of interest or
participation in any property or ventures, scrip, interim receipts,
voting trust certificates, any interests or instruments commonly known
as securities, and any and all certificates of interest or
participation in, or of deposit of, any of the foregoing, or receipts
for, guaranties of, or warrants or rights to subscribe for or purchase
the same.
(b) In general, to engage in any other lawful act or activity
for which corporations may be formed under Chapter 1701 of the Ohio
Revised Code to the extent that such act or activity is not prohibited
by the Act, or the regulations promulgated thereunder, as amended from
time to time.
<PAGE> 2
FOURTH:
PART A. CLASSES OF STOCK
The maximum number of shares which the Corporation is authorized to
issue and to have outstanding at any time shall be Three Hundred and Seven
Million, which shall be classified as follows:
(a) Three Hundred Million (300,000,000) of said shares shall
be Common Stock, without par value; and
(b) Seven Million (7,000,000) of said shares shall be Series
Preferred Stock without par value (no par value Preferred Stock).
PART B. EXPRESS TERMS OF NO PAR VALUE PREFERRED STOCK
The express terms and provisions of the no par value Preferred Stock
shall be as follows:
SECTION 1. DESIGNATION. All shares of no par value Preferred Stock
shall be of equal rank and shall be identical except in respect to the
particulars as may be fixed and determined by the Board of Directors as
hereinafter provided, and each share of each series shall be identical in all
respects with all other shares of such series, except as to the date from which
dividends are cumulative.
The Board of Directors is hereby authorized in respect of any unissued
shares of no par value Preferred Stock to fix or change:
(a) The division of such shares into series, the designation
of each series (which may be by distinguishing number, letter or title)
and the authorized number of shares in each series, which number may be
increased (except where otherwise provided by the Board of Directors in
creating the series) or decreased (but not below the number of shares
thereof outstanding) by like action of the Board of Directors;
(b) The annual dividend rates of each series;
(c) The dates at which dividends, if declared, shall be
payable;
(d) The redemption rights and price or prices, if any, for
shares of the series;
(e) The terms and amounts of any sinking fund provided for the
purchase or redemption of shares of the series;
(f) The amounts payable on shares of the series in the event
of any voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the corporation;
(g) Whether the shares of the series shall be convertible into
Common Stock and, if so, the conversion price or prices and the
adjustments thereof, if any, and all other terms and conditions upon
which such conversion may be made; and
(h) Restrictions on the issuance of shares of the same series
or of any other class or series.
2
<PAGE> 3
SECTION 2. DIVIDENDS AND DISTRIBUTIONS. The holders of the no par value
Preferred Stock of each series shall be entitled to receive out of any funds
legally available for no par value Preferred Stock as and when declared by the
Board of Directors, dividends in cash at the rate for such series fixed by the
Board of Directors in the manner set forth in Section 1 hereof and no more,
payable quarterly on the dates fixed for such series. Such dividends shall be
cumulative, in the case of shares of each particular series, from and after the
date of issuance thereof. No dividends may be paid or declared or set apart for
any of the no par value Preferred Stock for any quarterly dividend period unless
at the same time a like proportionate dividend for the same quarterly dividend
period, ratably in proportion to the respective annual dividend rates fixed
therefor, shall be paid upon or declared or set apart for all no par value
Preferred Stock, of all series then issued and outstanding and entitled to
receive such dividend.
SECTION 3. CERTAIN RESTRICTIONS. In no event, so long as any no par
value Preferred Stock shall be outstanding, shall any dividends, except a
dividend payable in Common Stock, be paid or declared or any distribution be
made, except as aforesaid, on the Common Stock, nor shall any Common Stock be
purchased, retired or otherwise acquired by the corporation:
(a) Unless all accrued and unpaid dividends on no par value
Preferred Stock, including the full dividends for the current quarterly
dividend period, shall have been declared and paid, or a sum sufficient
for payment thereof set apart; and
(b) Unless there shall be no arrearages with respect to the
redemption of no par value Preferred Stock of any series from any
Sinking Fund provided for shares of such series by the Board of
Directors in the manner set forth in Section 1 hereof.
SECTION 4. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) Subject to the provisions hereof, the holders of the no
par value Preferred Stock of any series shall, in case of voluntary or
involuntary liquidation, dissolution or winding up of the affairs of
the corporation, 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 the amounts fixed
with respect to shares of such series in accordance with the decision
of the Board of Directors in the manner set forth in Section 1 hereof
plus an amount equal to all dividends accrued and unpaid thereon to the
date of payment of the amounts due pursuant to such liquidation,
dissolution or winding up of the affairs of the corporation.
(b) The merger or consolidation of the corporation into or
with any other corporation, or the merger of any other corporation into
it, or the sale, lease or conveyance of all or substantially all the
property of the corporation, shall not be deemed to be a dissolution,
liquidation or winding up, voluntary or involuntary, for the purpose of
this Section 4.
SECTION 5. VOTING RIGHTS. Except as provided in Part C or D of this
Article Fourth of these Amended and Restated Articles of Incorporation, the
holders of no par Preferred Stock shall be entitled at all times to one (1) vote
for each share; and, except as required by law, the holders of such no par value
Preferred Stock and the holders of Common Stock of the corporation shall vote
together as one (1) class on all matters.
PART C. SERIES A PREFERRED STOCK
3
<PAGE> 4
SECTION 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series A Preferred Stock" (the "Series A Preferred Stock") and
the number of shares constituting the Series A Preferred Stock shall be eight
hundred thousand (800,000). Such number of shares may be increased or decreased
by resolution of the Board of Directors; provided, that no decrease shall reduce
the number of shares of Series A 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 A Preferred Stock.
SECTION 2. DIVIDENDS AND DISTRIBUTIONS.
(a) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and
superior to the Series A Preferred Stock with respect to dividends, the
holders of shares of Series A Preferred Stock, in preference to the
holders of Common Stock, no par value, (the "Common Stock") of the
Corporation, and of any other junior stock, shall be entitled to
receive, when, as and if declared by the Board of Directors out of
funds legally available for the purpose, quarterly dividends payable in
cash on (each such date being referred to herein as a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share
of Series A Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (i) $1 or (ii) subject to the
provision for adjustment hereinafter set forth 100 times the aggregate
per share amount of all cash dividends, and 100 times the aggregate per
share amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect
to the first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a share of Series A Preferred Stock. In the
event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares
of Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then in each such case the amount to which
holders of shares of Series A Preferred Stock were entitled immediately
prior to such event under clause (ii) of the preceding sentence shall
be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares
of Common Stock that were outstanding immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution
on the Series A Preferred Stock as provided in paragraph (a) of this
Section immediately after it declares a dividend or distribution on the
Common Stock (other than a dividend payable in shares of Common Stock);
provided that, in the event no dividend or distribution shall have been
declared on the Common Stock during the period between any Quarterly
Dividend Payment Date and the next subsequent Quarterly Dividend
Payment Date, a dividend of $1 per share on the Series A Preferred
Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares,
unless the date of issue of such shares is prior to the record date for
the first Quarterly
4
<PAGE> 5
Dividend Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or unless the
date of issue is a Quarterly Dividend Payment Date or is a date after
the record date for the determination of holders of shares of Series A
Preferred Stock entitled to receive a quarterly dividend and before
such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly
Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the shares of Series A Preferred Stock in
an amount less than the total amount of such dividends at the time
accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The
Board of Directors may fix a record date for the determination of
holders of shares of Series A Preferred Stock entitled to receive
payment of a dividend or distribution declared thereon, which record
date shall be not more than 60 days prior to the date fixed for the
payment thereof.
SECTION 3. VOTING RIGHTS. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(a) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall entitle the holder
thereof to 100 votes on all matters submitted to a vote of the
stockholders of the Corporation. In the event the Corporation shall at
any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the number of votes per share to which
holders of shares of Series A Preferred Stock were entitled immediately
prior to such event shall be adjusted by multiplying such number by a
fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(b) Except as otherwise provided herein, in any other
Certificate of Designations creating a series of Preferred Stock or any
similar stock, or by law, the holders of shares of Series A Preferred
Stock and the holders of shares of Common Stock and any other capital
stock of the Corporation having general voting rights shall vote
together as one class on all matters submitted to a vote of
stockholders of the Corporation.
(c) Except as set forth herein, or as otherwise provided by
law, holders of Series A Preferred Stock shall have no special voting
rights and their consent shall not be required (except to the extent
they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
SECTION 4. CERTAIN RESTRICTIONS.
(a) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of
Series A Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of
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stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A
Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, except
dividends paid ratably on the Series A Preferred Stock and all
such parity stock on which dividends are payable or in arrears
in proportion to the total amounts to which the holders of all
such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to
the Series A Preferred Stock, provided that the Corporation
may at any time redeem, purchase or otherwise acquire shares
of any such junior stock in exchange for shares of any stock
of the Corporation ranking junior (either as to dividends or
upon dissolution, liquidation or winding up) to the Series A
Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or any
shares of stock ranking on a parity with the Series A
Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board
of Directors) to all holders of such shares upon such terms as
the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and
preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any
shares of stock of the Corporation unless the Corporation could, under
paragraph (a) of this Section 4, purchase or otherwise acquire such
shares at such time and in such manner.
SECTION 5. REACQUIRED SHARES. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Amended and Restated Articles of Incorporation, or in any other Certificate of
Designations creating a series of Preferred Stock or any similar stock or as
otherwise required by law.
SECTION 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any
liquidation, dissolution or winding up of the Corporation, no distribution shall
be made (1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $100 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment, provided that the holders of Shares of Series A
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount to be distributed per share to holders of shares of
Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except distributions made
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ratably on the Series A Preferred Stock and all such parity stock in proportion
to the total amounts to which the holders of all such shares are entitled upon
such liquidation, dissolution or winding up. In the event the Corporation shall
at any time declare or pay any dividend on the Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the aggregate amount to which
holders of shares of Series A Preferred Stock were entitled immediately prior to
such event under the proviso in clause (1) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
SECTION 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
SECTION 8. NO REDEMPTION. The shares of Series A Preferred Stock shall
not be redeemable.
SECTION 9. RANK. The Series A Preferred Stock shall rank, with respect
to the payment of dividends and the distribution of assets, junior to all series
of any other class of the Corporation's Preferred Stock.
SECTION 10. AMENDMENT. The Amended and Restated Articles of
Incorporation of the Corporation shall not be amended in any manner which would
materially alter or change the powers, preferences or special Rights of the
Series A Preferred Stock so as to affect them adversely without the affirmative
vote of the holders of at least a majority of the outstanding shares of Series A
Preferred Stock, voting together as a single class.
PART D. 6 1/2% CUMULATIVE CONVERTIBLE PREFERRED STOCK SERIES B, NO PAR
VALUE
SECTION 1. DESIGNATION AND AMOUNT.
Of the 7,000,000 shares of authorized no par value Preferred Stock,
220,000 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
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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) 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) 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) Dividends on Series B Preferred Stock shall be cumulative
as follows:
(i) 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
(ii) 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.
SECTION 3. REDEMPTION.
(a) 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
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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 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) 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) 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:
(a) 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
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be called for redemption, the right to convert such shares shall terminate and
expire at the close of business on the redemption date.
(b) 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 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
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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) 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 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
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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.
(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
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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 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) 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.
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(f) 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
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) 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) 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) 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
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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 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) 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 Amended and Restated Articles of Incorporation or the
Amended and Restated 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 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
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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) 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 Amended and Restated Articles of Incorporation or of
the Amended and Restated 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
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or junior to the Series B Preferred Stock with respect to the
payment of dividends and distribution of assets upon
liquidation, 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 D Section 6:
(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.
SECTION 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 amounts, ratably, in proportion to the full distributive amounts to
which they and the holders of such parity stock are
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respectively entitled with respect to such preferential distribution.
FIFTH: The authority of this Corporation, its shareholders and
directors, is subject to the following:
(a) No holder of shares of this Corporation, regardless of
class, shall be entitled as a matter of right to exercise any
preemptive rights, to subscribe for or to purchase shares of any class,
now or hereafter authorized, or to purchase or subscribe for securities
which are convertible into or exchangeable for shares of the
Corporation, regardless of class, or to which shall be attached or
appertain any warrants or rights entitling the holder thereof to
subscribe for or purchase shares of the Corporation, regardless of
class, except such rights to subscribe for or purchase, at such prices
and according to such terms and conditions as the Board of Directors
may, from time to time, approve and authorize in its sole discretion.
(b) The Corporation may purchase its shares, regardless of
class, from time to time, and upon such terms and conditions as the
Board of Directors shall determine; provided, however, that the
Corporation shall not purchase any of its shares if, after such
purchase, its assets would be less than its liabilities plus stated
capital and unless the Corporation first complies with Section 225.6 of
Regulation Y, 12 C.F.R. 225.6, as promulgated and amended, from time to
time, by the Board of Governors of the Federal Reserve System, to the
extent that such regulation may be applicable to the purchase.
(c) No shareholder shall have the right to vote cumulatively
in the election of directors.
SIXTH: The Corporation may indemnify any director or officer, any
former director or officer of the Corporation and any person who is or has
served at the request of the Corporation as a director, officer or trustee of
another corporation, partnership, joint venture, trust or other enterprise (and
his heirs, executors and administrators) against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement, actually and reasonably
incurred by him by reason of the fact that he is or was such director, officer
or trustee in connection with any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative, to the
full extent permitted by applicable law, as the same may be in effect from time
to time. The indemnification provided for herein shall not be deemed to restrict
the right of the Corporation to (i) indemnify employees, agents and others as
permitted by such law, (ii) purchase and maintain insurance or provide similar
protection on behalf of directors, officers or such other persons against
liabilities asserted against them or expenses incurred by them arising out of
their service to the Corporation as contemplated herein, and (iii) enter into
agreements with such directors, officers, employees, agents or others
indemnifying them against any and all liabilities (or such lesser
indemnification as may be provided in such agreements) asserted against them or
incurred by them arising out of their service to the Corporation as contemplated
herein.
SEVENTH:
(a) Except as otherwise expressly provided in this Article
SEVENTH, any Business Combination (as hereinafter defined) with an
Interested Party (as hereinafter defined) or any
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Affiliate (as hereinafter defined) thereof shall require the
affirmative vote of at least eighty percent (80%) of the outstanding
shares of each class of capital stock of the Corporation issued and
outstanding and entitled to vote as a class and a majority of each
class of those shares of capital stock of the Corporation issued and
outstanding and entitled to vote as a class other than those shares
beneficially owned by an Interested Party and any Affiliate thereof.
For the purpose of this Article SEVENTH, an "Interested Party" is
defined as a corporation, person or entity that, together with all
Affiliates thereof, is the beneficial owner, directly or indirectly, of
ten percent (10%) or more of the shares of any class of capital stock
of the Corporation issued and outstanding and entitled to vote.
(b) The provisions of this Article SEVENTH set forth in
paragraph (a) hereof shall not apply to any Business Combination:
(i) with an Interested Party if the Board of Directors of the
Corporation shall have approved, by resolution, a memorandum
of understanding or agreement with such Interested Party, a
transaction substantially consistent with such Business
Combination prior to or simultaneously at the time such
Interested Party, together with all Affiliates thereof, became
the beneficial owner, directly or indirectly, of ten percent
(10%) or more of any class of the outstanding shares of
capital stock of the Corporation; or
(ii) (a) which has been approved at any time before
consummation thereof by a two-thirds (2/3) vote of the total
membership of the Board of Directors of the Corporation and a
majority of the Continuing Directors (as hereinafter defined)
of the Corporation at the time of said vote; and
(b) which provides for a price to be paid in cash for the
shares of capital stock of the Corporation in an amount not
less than the highest price, including commissions, previously
paid by such Interested Party for any of the shares of the
Corporation's capital stock of that class.
(c) For the purposes of this Article SEVENTH: (i) an
Interested Party shall be deemed to be the beneficial owner of any
shares of capital stock of the Corporation if such Interested Party
would be deemed the beneficial owner of such shares under the General
Rules and Regulations of the Securities Exchange Act of 1934 as
presently in effect, and (ii) the term "Affiliate" shall have the
meaning ascribed to such term in Rule 12b-2 of such Rules and
Regulations as presently in effect.
(d) A majority of the Continuing Directors shall determine for
the purposes of this Article SEVENTH, on the basis of information then
known to it, whether (i) any Interested Party beneficially owns,
together with its Affiliates, directly or indirectly, ten percent (10%)
or more of a class of the outstanding shares of capital stock of the
Corporation entitled to vote as a class, (ii) any sale, lease, exchange
or other disposition of part of the assets of the Corporation involves
substantially all of the assets of the Corporation, (iii) the
memorandum of understanding or agreement referred to above is
substantially consistent with the transaction to which it relates, and
(iv) if an Interested Party purchases capital stock for consideration
other than cash, the "price" paid by the Interested Party for such
capital stock. A corporation, person or other entity purchasing shares
of capital stock of any class directly from the Corporation shall not
be deemed an Interested Person by reason of such purchase if such
determination is not made later than simultaneously with
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such purchase. Any such determination by the Continuing Directors shall
be conclusive and binding for all purposes of this Article SEVENTH.
(e) A Business Combination, for the purposes of this Article
SEVENTH, shall mean:
(i) any merger or consolidation of the Corporation, or a
subsidiary of the Corporation, into or with any other person,
corporation or entity; or
(ii) any sale, lease, mortgage, pledge, transfer or other
disposition of all or substantially all of the assets of the
Corporation to or with any other corporation, person or
entity; or
(iii) any reclassification of securities (including a reverse
stock split) or recapitalization of the Corporation, or any
merger or consolidation of the Corporation with any
subsidiaries or any other transaction which has the effect of
increasing the proportionate share of the outstanding shares
of any class of equity or convertible securities of the
Corporation or any subsidiary which is directly or indirectly
owned by any corporation, person or other entity; or
(iv) the issuance or transfer by the Corporation or any
subsidiary (in one transaction or a series of transactions) of
any securities of the Corporation or any subsidiary to any
corporation, person or entity of a number or amount of
securities equal to five percent (5%) or more of the then
outstanding number or amount of any class of the Corporation's
securities to a corporation, person or other entity; or
(v) the adoption of any plan as proposed for liquidation or
dissolution of the Corporation proposed by or on behalf of any
corporation, person or entity.
(f) For the purposes of this Article SEVENTH, the term
Continuing Directors shall mean those members of the Board of Directors
of the Corporation (i) elected by the shareholders, or otherwise
appointed, prior to the time when the Interested Party and any
Affiliate acquired four percent (4%) of the shares of a class of the
capital stock of the Corporation issued and outstanding and entitled to
vote or (ii) a person recommended to succeed a Continuing Director by a
majority of the Continuing Directors.
(g) This Article SEVENTH may not be amended or repealed except
by the affirmative vote of the holders of at least eighty percent (80%)
of the shares of each class of capital stock of the Corporation issued
and outstanding and entitled to vote as a class, and a majority of
those shares of each class of capital stock of the Corporation issued
and outstanding and entitled to vote as a class other than those shares
beneficially owned by an Interested Party and any Affiliate thereof;
provided, however, that the only vote required for amendment or repeal
shall be the affirmative vote of the holders of two-thirds (2/3) of
such issued and outstanding shares if the Board of Directors of the
Corporation proposes the amendment or repeal by resolution approved by
seventy-five percent (75%) of the total membership of the Board of
Directors and a majority of the Continuing Directors.
EIGHTH: These Amended and Restated Articles of Incorporation shall
supercede the existing articles of incorporation and amendments thereto.
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Exhibit 23
Consent of PricewaterhouseCoopers, L.L.P.
The Board of Directors
FirstMerit Corporation
We consent to incorporation by reference in Registration Statement Nos.
33-7266, 33-47074, 33-47147, 33-57076, 33-57557, 333-57439, 33- 63101 and
333-63797 on Forms S-8, of (i) 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 (ii) our report dated April 10, 1999, relating to the Statements of
Net Assets Available for Plan Benefits of Employee Stock Purchase Plan at
December 31, 1998 and 1999 and the Statements of Changes in Net Assets Available
for Plan Benefits for the years then ended; and (iii) our report dated April 10,
1999, relating to the Statements of Net Assets Available for Plan Benefits of
Employees' Salary Savings Retirement Plan at December 31, 1998 and 1997, and the
Statement of Changes in Net Assets Available for Plan Benefits for the period
ended December 31, 1998; all of such reports appear in Amendment No. 1 to the
1998 annual report on Form 10-K of FirstMerit Corporation.
/s/ PricewaterhouseCoopers, L.L.P.
April 23, 1998
