<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1999
COMMISSION FILE NUMBER 0-10161
FIRSTMERIT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-1339938
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
III CASCADE PLAZA, 7TH FLOOR, AKRON, OHIO 44308-1103
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(330) 996-6300
(TELEPHONE NUMBER)
OUTSTANDING SHARES OF COMMON STOCK, AS OF JUNE 30, 1999
90,448,345
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
<PAGE> 2
FIRSTMERIT CORPORATION
PART I - FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
The following statements included in the quarterly unaudited report to
shareholders are incorporated by reference:
Consolidated Balance Sheets as of June 30, 1999, December 31, 1998
and June 30, 1998
Consolidated Statements of Income for the three-month and six-month
periods ended June 30, 1999 and 1998
Consolidated Statements of Changes in Shareholders' Equity for the
year ended December 31, 1998 and for the six months ended June 30,
1999
Consolidated Statements of Cash Flows for the six months ended June
30, 1999 and 1998
Notes to Consolidated Financial Statements as of June 30, 1999,
December 31, 1998, and June 30, 1998
Management's Discussion and Analysis of Financial Conditions as of
June 30, 1999, December 31, 1998 and June 30, 1998 and Results of
Operations for the quarter and six months ended June 30, 1999 and
1998 and for the year ended December 31, 1998.
<PAGE> 3
<TABLE>
<CAPTION>
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------- (Unaudited, except December 31, 1998)
(In thousands) -------------------------------------------------------
June 30 December 31 June 30
----------- ----------- -----------
1999 1998 1998
- ------------------------------------------------------------------------------------------------------ -----------
ASSETS
<S> <C> <C> <C>
Investment securities $1,631,149 1,878,266 1,835,078
Federal funds sold & other investments 1,380 31,739 16,600
Commercial loans 2,918,910 2,613,838 2,463,191
Mortgage loans 1,656,537 1,648,346 1,783,413
Installment loans 1,346,219 1,199,014 1,214,630
Home equity loans 391,532 377,358 306,628
Credit card loans 99,917 99,541 92,672
Manufactured housing loans 536,220 289,308 168,070
Leases 189,938 171,040 193,426
------------------------------------------------------
Total loans 7,139,273 6,398,445 6,222,030
Less allowance for possible loan losses 106,785 96,149 81,227
------------------------------------------------------
Net loans 7,032,488 6,302,296 6,140,803
Cash and due from banks 277,307 327,997 272,965
Premises and equipment, net 136,914 140,841 149,176
Intangible assets 162,267 169,725 193,837
Accrued interest receivable and other assets 246,526 175,160 179,618
------------------------------------------------------
$9,488,031 9,026,024 8,788,077
======================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-non-interest bearing $1,041,103 1,026,377 979,248
Demand-interest bearing 670,406 917,765 591,870
Savings 1,792,681 1,810,340 1,567,714
Certificates and other time deposits 3,100,701 3,091,496 3,556,319
------------------------------------------------------
Total deposits 6,604,891 6,845,978 6,695,151
Securities sold under agreements to repurchase
and other borrowings 1,863,963 1,155,676 1,073,660
------------------------------------------------------
Total funds 8,468,854 8,001,654 7,768,811
Accrued taxes, expenses, and other liabilities 152,675 117,714 148,398
------------------------------------------------------
Total liabilities 8,621,529 8,119,368 7,917,209
Shareholders' equity:
Preferred stock, without par value: authorized 7 million shares
Preferred stock, Series A, without par value: designated 800,000
shares; none outstanding
Convertible preferred stock, Series B, without par value; designated
220,000 shares; 168,184, 403,232 and 428,342 shares outstanding
at June 30, 1999, December 31, 1998 and June 30, 1998,
respectively 4,046 9,299 9,917
Common stock, without par value:
authorized 300,000,000 shares; issued 92,054,156
91,161,362 and 90,804,649 shares, respectively 127,938 122,387 122,023
Capital surplus 117,960 117,845 102,377
Accumulated other comprehensive income (22,598) 5,858 4,053
Retained earnings 674,447 668,837 677,783
Treasury stock, at cost, 1,605,811, 1,166,604 and 3,127,156
shares, respectively (35,291) (17,570) (45,285)
------------------------------------------------------
Total shareholders' equity 866,502 906,656 870,868
------------------------------------------------------
$9,488,031 9,026,024 8,788,077
======================================================
</TABLE>
Certain previously reported amounts may have been classified to conform to
current presentation. See accompanying notes to the consolidated financial
statements.
<PAGE> 4
<TABLE>
<CAPTION>
FIRSTMERIT CORPORATION
AVERAGE CONSOLIDATED BALANCE SHEETS Unaudited
LAST FIVE QUARTERS ----------------------------
- -------------------------------------- ------------------------------- --------------------------------------
(Dollars in thousands) 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr
1999 1999 1998 1998 1998
- --------------------------------------------------------------------------- --------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C>
Investment securities $1,718,124 1,820,047 1,778,551 1,829,307 1,787,231
Federal funds sold 1,149 4,353 5,739 3,051 3,329
Commercial loans 2,821,088 2,648,284 2,625,360 2,518,575 2,317,242
Mortgage loans 1,675,442 1,707,232 1,714,004 1,782,600 1,804,012
Installment loans 1,330,759 1,168,905 1,260,757 1,231,310 1,171,196
Home Equity loans 380,361 348,220 309,130 308,763 298,695
Credit card loans 100,290 102,080 96,694 93,272 91,769
Manufactured housing loans 415,032 368,503 266,759 204,376 138,999
Leases 180,729 170,352 187,638 198,657 167,068
------------------------- ---------------------------------------
Loans less unearned income 6,903,701 6,513,576 6,460,342 6,337,553 5,988,981
Less allowance for possible
loan losses 104,875 101,788 95,211 80,774 76,033
------------------------- ---------------------------------------
Net loans 6,798,826 6,411,788 6,365,131 6,256,779 5,912,948
Cash and due from banks 272,025 285,589 172,315 260,322 246,362
Premises and equipment, net 139,026 140,149 140,872 144,844 129,135
Accrued interest receivable
and other assets 400,547 402,371 405,167 375,451 303,586
------------------------- ---------------------------------------
Total Assets $9,329,697 9,064,297 8,867,775 8,869,754 8,382,591
========================= =======================================
LIABILITIES
Deposits:
Demand-non-interest bearing $1,080,078 1,066,573 1,000,358 951,559 869,547
Demand-interest bearing 694,590 659,189 671,672 582,894 556,069
Savings 1,836,459 1,878,596 1,674,459 1,550,975 1,476,348
Certificates and other time
deposits 3,109,435 3,111,321 3,247,273 3,585,969 3,459,774
------------------------- ---------------------------------------
Total deposits 6,720,562 6,715,679 6,593,762 6,671,397 6,361,738
Securities sold under agreements to
repurchase and other borrowings 1,538,493 1,239,299 1,163,821 1,107,895 1,028,093
------------------------- ---------------------------------------
Total funds 8,259,055 7,954,978 7,757,583 7,779,292 7,389,831
Accrued taxes, expenses and
other liabilities 154,059 172,874 151,472 141,243 140,770
------------------------- ---------------------------------------
Total liabilities 8,413,114 8,127,852 7,909,055 7,920,535 7,530,601
Mandatorily redeemable preferred securities 21,450 22,997 41,676 50,000 50,000
SHAREHOLDERS' EQUITY 895,133 913,448 917,044 899,219 801,990
------------------------- ---------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY $9,329,697 9,064,297 8,867,775 8,869,754 8,382,591
========================= =======================================
Certain previously reported amounts may have been reclassified to conform to current presentation. See accompanying
notes to the consolidated financial statements.
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME (Unaudited)
- ---------------------------------------
(In thousands except per share data)
---------------------------------------------------------
Quarters Ended Six Months Ended
June 30, June 30,
--------------------------- ------------------------
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $ 145,618 130,802 281,613 255,268
Interest and dividends on securities:
Taxable 22,912 26,360 50,402 51,203
Exempt from Federal income taxes 1,734 1,203 3,477 2,189
Interest on Federal funds sold 14 40 80 119
----------------------- -----------------------
Total interest income 170,278 158,405 335,572 308,779
----------------------- -----------------------
Interest expense:
Demand-interest bearing 1,725 1,579 2,823 3,014
Savings 10,139 8,762 20,494 16,784
Certificates and other time deposits 39,107 44,916 79,251 88,189
Interest on securities sold under agreements
to repurchase and other borrowings 17,332 15,383 36,582 29,747
----------------------- -----------------------
Total interest expense 68,303 70,640 139,150 137,734
----------------------- -----------------------
Net interest income 101,975 87,765 196,422 171,045
Provision for possible loan losses 9,657 8,144 26,055 14,308
----------------------- -----------------------
Net interest income after provision
for possible loan losses 92,318 79,621 170,367 156,737
----------------------- -----------------------
Other income:
Trust department income 4,595 4,151 8,781 7,566
Service charges on depositors' accounts 10,574 9,720 19,669 18,770
Credit card fees 6,833 4,792 12,452 8,801
Service fees - other 3,545 2,737 6,774 4,775
Manufactured housing income 1,400 2,464 2,831 5,558
Securities gains (losses) 2,536 1,794 8,077 3,363
Loan sales and servicing 1,855 3,226 3,863 6,655
Other operating income 5,086 4,994 12,026 10,971
----------------------- -----------------------
Total other income 36,424 33,878 74,473 66,459
----------------------- -----------------------
128,742 113,499 244,840 223,196
Other expenses:
Salaries, wages, pension and employee benefits 33,080 33,171 75,351 64,776
Net occupancy expense 4,770 5,502 10,872 11,454
Equipment expense 5,111 3,468 9,624 6,775
Amortization of intangibles 2,897 1,861 5,611 3,119
Other operating expense 27,080 33,672 76,896 58,399
----------------------- -----------------------
Total other expenses 72,938 77,674 178,354 144,523
----------------------- -----------------------
Income before Federal income taxes
and extraordinary item 55,804 35,825 66,486 78,673
Federal income taxes 16,896 11,599 22,235 25,074
Income before extraordinary item 38,908 24,226 44,251 53,599
Extraordinary item, net of tax benefit
of $3,148 (extinguishment of debt) -- -- (5,847) --
---------------------- -----------------------
Net income $ 38,908 24,226 38,404 53,599
====================== =======================
Other comprehensive income (loss), net of taxes:
Unrealized gain (losses) on securities:
Unrealized holding gains (losses) arising during period (17,648) 2,355 (23,206) 2,008
Less: reclassification for gains realized in net income 1,648 1,166 5,250 2,186
---------------------- -----------------------
Other comprehensive income (loss), net of taxes (19,296) 1,189 (28,456) (178)
---------------------- -----------------------
Comprehensive Income $ 19,612 25,415 9,948 53,421
====================== =======================
Basic net income per share:
Income before extraordinary item $ 0.43 0.29 0.48 0.64
Extraordinary item -- -- (0.06) 0.00
---------------------- -----------------------
Basic net income after extraordinary charge $ 0.43 0.29 0.42 0.64
====================== =======================
Diluted net income per share:
Income before extraordinary item 0.42 0.28 0.48 0.63
Extraordinary item -- -- (0.06) 0.00
---------------------- -----------------------
Diluted net income after extraordinary charge $ 0.42 0.28 0.42 0.63
====================== =======================
Dividends paid $ 0.18 0.16 0.36 0.32
Weighted-average shares outstanding - basic 91,049 84,665 91,028 84,026
Weighted-average shares outstanding - diluted 92,311 86,296 92,344 85,785
</TABLE>
See accompanying notes to consolidated financial statements. Certain previously
reported amounts may have been reclassified to conform to current reporting
practices.
<PAGE> 6
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
FIRSTMERIT CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands except per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 1999 and Accumulated
years ended 1998 and 1997 Other
Preferred Common Capital Comprehensive
Stock Stock Surplus Income
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at Year Ended 1996 $ 22,693 114,149 64,462 (3,396)
Net income -- -- -- --
Cash dividends - common stock ($0.61 per share) -- -- -- --
Stock options exercised/debentures or preferred stock converted (12,776) 4,182 11,738 --
Shares issued - acquisition -- 549 4,911 --
Treasury shares purchased -- -- -- --
Stock dividends -- 1,013 (1,013) --
Market adjustment investment securities -- -- -- 7,999
Other -- -- 199 --
- ------------------------------------------------------------------------------------------------------------------------------
Balance at Year Ended 1997 9,917 119,893 80,297 4,603
Net income -- -- -- --
Cash dividends - common stock ($0.66/share) and preferred stock -- -- -- --
Acquisition adjustment of fiscal year -- -- -- --
Stock options exercised/debentures or preferred stock converted (618) 400 3,717 --
Treasury shares purchased -- -- -- --
Treasury shares reissued - acquisition -- -- 25,919 --
Treasury shares reissued - public offering -- -- 6,518 --
Stock dividends -- 1,929 (1,929) --
Market adjustment investment securities -- -- -- 1,255
Other -- 165 3,323 --
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 9,299 122,387 117,845 5,858
Net income -- -- -- --
Cash dividends - common stock ($0.36 per share) -- -- -- --
Cash dividends - preferred stock -- -- -- (171)
Stock options exercised/debentures or preferred stock converted (5,253) 5,596 115 --
Treasury shares purchased -- -- -- --
Market adjustment investment securities -- -- -- (28,456)
Other -- (45) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 - Unaudited $ 4,046 127,938 117,960 (22,598)
==============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Total
Retained Treasury Shareholders'
Earnings Stock Equity
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at Year Ended 1996 582,519 (68,944) 711,483
Net income 114,708 -- 114,708
Cash dividends - common stock ($0.61 per share) (44,136) -- (44,136)
Stock options exercised/debentures or preferred stock converted (1,428) 1,616 3,332
Shares issued - acquisition 1,499 -- 6,959
Treasury shares purchased -- (51,147) (51,147)
Stock dividends (5) (722) (727)
Market adjustment investment securities -- -- 7,999
Other (1,250) 257 (794)
- -----------------------------------------------------------------------------------------------------------------
Balance at Year Ended 1997 651,907 (118,940) 747,677
Net income 72,517 -- 72,517
Cash dividends - common stock ($0.66/share) and preferred stock (50,525) -- (50,525)
Acquisition adjustment of fiscal year (1,857) -- (1,857)
Stock options exercised/debentures or preferred stock converted (2,607) 12,111 13,003
Treasury shares purchased -- (25,703) (25,703)
Treasury shares reissued - acquisition -- 89,286 115,205
Treasury shares reissued - public offering -- 20,806 27,324
Stock dividends -- -- 0
Market adjustment investment securities -- -- 1,255
Other (598) 4,870 7,760
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 668,837 (17,570) 906,656
Net income 38,405 -- 38,405
Cash dividends - common stock ($0.36 per share) (33,033) -- (33,033)
Cash dividends - preferred stock (171) -- (171)
Stock options exercised/debentures or preferred stock converted -- 8,845 9,303
Treasury shares purchased -- (27,354) (27,354)
Market adjustment investment securities -- -- (28,456)
Other 409 788 1,152
- -----------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 - Unaudited 674,447 (35,291) 866,502
=================================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 7
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
(in thousands)
1999 1998
-------- -------
<S> <C> <C>
Operating Activities
- --------------------
Net income $38,404 53,599
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 26,055 14,308
Provision for depreciation and amortization 9,782 9,019
Amortization of investment securities premiums, net 1,275 653
Amortization of income for lease financing (6,384) (5,632)
Gains on sales of investment securities, net (8,077) (3,363)
Deferred federal income taxes (3,337) (3,288)
Increase in interest receivable (18,733) (1,170)
Increase in interest payable 4,293 124
Amortization of values ascribed to acquired intangibles 5,611 3,119
Other increases (672) (145,541)
------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 48,217 (78,172)
------- --------
Investing Activities
- --------------------
Dispositions of investment securities:
Available-for-sale--sales 385,912 348,885
Available-for-sale--maturities 286,190 286,239
Purchases of investment securities available-for-sale (461,595) (912,251)
Net decrease in federal funds sold 30,359 52,691
Net increase in loans and leases, except sales (749,863) (792,018)
Sales of loans -- 308,417
Purchases of premises and equipment (13,204) (29,593)
Sales of premises and equipment 7,349 770
------- --------
NET CASH USED BY INVESTING ACTIVITIES (514,852) (736,880)
------- --------
Financing Activities
- --------------------
Net decrease in demand, NOW and savings deposits (250,292) (6,209)
Net increase in time deposits 9,205 681,096
Net increase in securities sold under repurchase
agreements and other borrowings 708,287 81,830
Proceeds from mandatorily redeemable preferred securities -- 50,000
Cash dividends (33,204) (23,655)
Purchase of treasury shares (27,354) (26,037)
Treasury shares reissued--acquisition -- 115,655
Treasury shares reissued--public offering -- 1,765
Proceeds from exercise of stock options 9,303 2,414
------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 415,945 876,859
Increase (decrease) in cash and cash equivalents (50,690) 61,827
Cash and cash equivalents at beginning of year 327,997 211,138
------- --------
Cash and cash equivalents at end of year $277,307 272,965
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
- -------------------------------------------------
Cash paid during the year for:
Interest, net of amounts capitalized $71,730 99,844
Income taxes $18,967 35,036
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 8
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, December 31, 1998 and June 30, 1998
1. Organization - FirstMerit Corporation ("Corporation"), is a bank holding
company whose principal assets are the common stock of its wholly owned
subsidiary, FirstMerit Bank, N. A. In addition FirstMerit Corporation owns all
of the common stock of Citizens Investment Corporation, Citizens Savings
Corporation of Stark County, Signal Capital Trust I, FirstMerit Community
Development Corporation, FirstMerit Credit Life Insurance Company, Mobile
Consultants, Inc., and SF Development Corp.
2. Acquisitions and Merger-related Costs - 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
million. CoBancorp, Inc. ("COBI") 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 3.897 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 following pro forma information is not necessarily indicative of
the results which actually would have been obtained if the merger had been
consummated in the past or which may be obtained in the future.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Six months ended June 30, 1998 for FirstMerit and three months ended March 31, 1998 for
CoBancorp. CoBancorp results from April 1, 1998 to May 21, 1998 could not be isolated
and are not included in the following table. CoBancorp results from May 22, 1998
(the date of merger) through June 30, 1998 are included in the FirstMerit totals.
- ------------------------------------------------------------------------------------------
Pro Forma
Firstmerit CoBancorp Adjustments Combined
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $308,779 11,942 354 321,075
- ------------------------------------------------------------------------------------------
Net interest income 171,045 7,295 -1,151 177,189
- ------------------------------------------------------------------------------------------
Net income 53,599 1,307 -1,913 52,993
- ------------------------------------------------------------------------------------------
Weighted average diluted shares 85,785
- ------------------------------------------------------------------------------------------
Earnings per diluted share $0.62
- ------------------------------------------------------------------------------------------
</TABLE>
On September 14, 1998, FirstMerit closed on the secondary underwritten
public offering of 1.38 million shares of FirstMerit Common Stock. The
reissuance of these shares was necessary to allow FirstMerit to treat the
Security First merger as a pooling-of-interests for accounting purposes.
<PAGE> 9
On October 23, 1998, the Corporation completed the acquisition of
Security First Corp. ("Security First"), a $678 million holding company
headquartered in Mayfield Heights, Ohio. 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 share of Security First common stock. At the time of the merger,
the pooling-of-interests transaction was valued at $22.58 per share, or
approximately $199 million. The accompanying consolidated financial statements,
the notes thereto and management's discussion and analysis have all been
restated to account for the acquisition as if it had happened at the beginning
of each period presented. In conjunction with the Security First acquisition,
the Corporation incurred merger-related and conforming accounting expenses of
approximately $17.2 million, before taxes, or $12.8 million after taxes. The
components of these costs and the remaining unpaid amounts at December 31, 1998,
March 31, 1999 and June 30, 1999 are shown in the following table. The remaining
liability at June 30, 1999 is expected to be paid during 1999 and is not
expected to have any adverse effect on liquidity.
<TABLE>
<CAPTION>
Dollars in thousands
- --------------------------------------------------------------------------------------------
Remaining Remaining Remaining
Costs Liability Liability Liability
Accured December 31, March June 30
Description of Cost in 1998 1998 31, 1999 1999
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salary, wages and benefits $ 1,689 50 42 42
- --------------------------------------------------------------------------------------------
Occupancy and equipment
expense 552 511 482 475
- --------------------------------------------------------------------------------------------
Loan conversion expense 1,516 1,031 844 776
- --------------------------------------------------------------------------------------------
Professional services 4,450 1,467 -- --
- --------------------------------------------------------------------------------------------
Other operating expenses 1,576 1,196 1,417 1,390
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 9,783 4,255 2,785 2,683
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Reduction of other operating
income 89 -- -- --
- --------------------------------------------------------------------------------------------
Provision for loan losses
conforming entry 7,300 -- -- --
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Totals $17,172 4,255 2,785 2,683
- --------------------------------------------------------------------------------------------
</TABLE>
On February 12, 1999, the Corporation completed the acquisition of
Signal Corp, a $1.9 billion bank holding company headquartered in Wooster, Ohio.
Under terms of the merger 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 Series B preferred stock for each share of Signal Series B preferred
stock. Based on the closing price of $25.00 per common share and $71.00 per
Series B preferred share, the transaction, accounted for as a
pooling-of-interests, was valued at approximately $436 million. The accompanying
<PAGE> 10
consolidated financial statements, the notes thereto and management's discussion
and analysis have all been restated to account for the acquisition as if it had
happened at the beginning of each period presented.
In conjunction with the Signal acquisition, the Corporation incurred
merger-related and conforming accounting expenses of approximately $43.8
million, before taxes, or $32.3 million after taxes. The components of these
costs and the remaining unpaid amounts at March 31, 1999 and June 30, 1999 are
shown in the following table. The unpaid liability at June 30, 1999 is expected
to be paid during the remainder of 1999 and is not expected to have a material
impact on liquidity.
Dollars in thousands
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Remaining Remaining
Description Costs Liability Liability
of Cost Accrued March 31, June 30,
1st Q 1999 1999 1999
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salary, wages and benefits $ 7,736 1,555
- -----------------------------------------------------------------------------------------------
Loan conversion expense 7,016 1,663 1,126
- -----------------------------------------------------------------------------------------------
Professional services 8,856 295
- -----------------------------------------------------------------------------------------------
Other operating expenses 10,014 6,483 5,857
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 33,622 9,996 6,983
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Provision for loan losses conforming entry 10,200
- -----------------------------------------------------------------------------------------------
Totals $43,822 9,996 6,983
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 11
3. Segment Information - The Corporation provides a diversified range of banking
and certain nonbanking financial services and products through its various
subsidiaries. Management reports the Corporation's results through its major
segment classification - Supercommunity Banking. Included in this category are
certain nonbank affiliates, eliminations of certain intercompany transactions
and certain nonrecurring transactions. Also included are portions of certain
assets, capital, and support functions not specifically identifiable with
Supercommunity Banking. The Corporation's business is conducted solely in the
United States. 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 three-month and
six-month periods ended June 30, 1999. In the Earnings Summary and other
sections of Management's Discussion and Analysis, these same income statement
categories and ratios are calculated excluding merger and other unusual
expenses.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
SuperCommunity Corporate
1999 Banking Parent/Other Adjs/Elims Consolidated
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands) 2Q YTD 2Q YTD 2Q YTD 2Q YTD
-----------------------------------------------------------------------------------------------------------------
OPERATIONS:
-----------------------------------------------------------------------------------------------------------------
Net interest income $103,289 199,161 -1,313 -2,738 -9 -9 101,967 196,414
-----------------------------------------------------------------------------------------------------------------
Provision for possible
loan losses 9,392 25,610 265 445 --- --- 9,657 26,055
-----------------------------------------------------------------------------------------------------------------
Other income 34,962 71,810 10,337 18,508 -8,875 -15,845 36,424 74,473
-----------------------------------------------------------------------------------------------------------------
Other expenses 74,501 179,934 7,314 14,266 -8,885 -15,854 72,930 178,346
-----------------------------------------------------------------------------------------------------------------
Income before
extraordinary charge 33,572 39,921 35,208 41,885 -29,872 -37,555 38,908 44,251
-----------------------------------------------------------------------------------------------------------------
Net income (loss) $33,572 34,074 35,208 41,885 -29,872 -37,555 38,908 38,404
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
(in billions)
-----------------------------------------------------------------------------------------------------------------
AVERAGES:
-----------------------------------------------------------------------------------------------------------------
Assets NA 9,187 NA 1,115 NA -1,125 NA 9,177
-----------------------------------------------------------------------------------------------------------------
Loans NA 6,694 NA 15 NA -7 NA 6,702
-----------------------------------------------------------------------------------------------------------------
Earnings assets NA 8,517 NA 1,006 NA -1,050 NA 8,473
-----------------------------------------------------------------------------------------------------------------
Deposits NA 6,778 NA --- NA -59 NA 6,719
-----------------------------------------------------------------------------------------------------------------
Shareholders' equity NA 0.828 NA 0.933 NA -0.855 NA 0.906
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
RATIOS:
-----------------------------------------------------------------------------------------------------------------
ROE NA 8.29% NA NM NA NM 17.43% 8.55%
-----------------------------------------------------------------------------------------------------------------
ROA NA 0.75% NA NM NA NM 1.67% 0.84%
-----------------------------------------------------------------------------------------------------------------
Efficiency ratio* NM NM NA NM NA NM 51.13% 52.47%
----------------------------------------------------------------------------------------------------------------
</TABLE>
NM - Not Meaningful
NA - Not available due to limited average balance information maintained by
acquired companies.
* - Adjusted for merger-related and conforming expenses and extraordinary item
Note: 1998 information is not presented due to limited average balance and
business line information maintained by certain acquired companies.
<PAGE> 12
The table below presents estimated revenues from external customers, by
product and service group for the 1999 second quarter and year-to-date periods:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Three months ended June 30, 1999
(in thousands) Retail Commercial Trust Services Total
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest and fees $ 97,097 89,036 4,595 190,728
- ----------------------------------------------------------------------------------------------
Service charges 11,725 2,394 -- 14,119
- ----------------------------------------------------------------------------------------------
Loan sales/service 1,855 -- -- 1,855
- ----------------------------------------------------------------------------------------------
Totals $110,677 91,430 4,595 206,702
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Six months ended June 30, 1999
- ----------------------------------------------------------------------------------------------
(in thousands) Retail Commercial Trust Services Total
- ----------------------------------------------------------------------------------------------
Interest and fees $195,195 175,763 8,781 379,739
- ----------------------------------------------------------------------------------------------
Service charges 21,608 4,835 -- 26,443
- ----------------------------------------------------------------------------------------------
Loan sales/service 3,863 -- -- 3,863
- ----------------------------------------------------------------------------------------------
Totals $220,666 180,598 8,781 410,045
- ----------------------------------------------------------------------------------------------
</TABLE>
4. Earnings per Share - Primary and Diluted earnings per share were calculated
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
EARNINGS PER SHARE CALCULATION 1999 1998
- --------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30:
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Income before extraordinary charge $38,908 24,226
- --------------------------------------------------------------------------------------------------
Net income (loss) 38,908 24,226
- --------------------------------------------------------------------------------------------------
Less: preferred stock dividends -84 0
- --------------------------------------------------------------------------------------------------
Net income (loss) available to common shareholders $38,824 24,226
- --------------------------------------------------------------------------------------------------
Average common shares outstanding 91,048,773 84,665,123
- --------------------------------------------------------------------------------------------------
EARNINGS PER BASIC COMMON SHARE $0.43 0.29
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Net income (loss) available to common shareholders $38,824 24,226
- --------------------------------------------------------------------------------------------------
Add: preferred stock dividends 84 0
- --------------------------------------------------------------------------------------------------
Add: interest expense on convertible bonds, net 18 51
- --------------------------------------------------------------------------------------------------
Income (loss) available to common shareholders $38,926 24,277
- --------------------------------------------------------------------------------------------------
Average common shares outstanding 91,048,773 84,665,123
- --------------------------------------------------------------------------------------------------
Equivalents from stock options* 653,245 1,631,000
- --------------------------------------------------------------------------------------------------
Equivalents from convertible debentures 142,214
- --------------------------------------------------------------------------------------------------
Equivalents from convertible preferred securities 466,540
- --------------------------------------------------------------------------------------------------
Avg common stock and equivalents outstanding 92,310,772 86,296,425
- --------------------------------------------------------------------------------------------------
EARNINGS PER DILUTED COMMON SHARE $0.42 0.28
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 13
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
EARNINGS PER SHARE CALCULATION 1999 1998
- --------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30:
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Income before extraordinary charge $44,251 53,599
- --------------------------------------------------------------------------------------------------
Net income (loss) 38,404 53,599
- --------------------------------------------------------------------------------------------------
Less: preferred stock dividends -171 -175
- --------------------------------------------------------------------------------------------------
Net income available to common shareholders $38,223 53,424
- --------------------------------------------------------------------------------------------------
Average common shares outstanding 91,028,180 84,026,385
- --------------------------------------------------------------------------------------------------
EARNINGS PER BASIC COMMON SHARE 0.42 0.64
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Net income available to common shareholders $38,223 53,424
- --------------------------------------------------------------------------------------------------
Add: preferred stock dividends 171 175
- --------------------------------------------------------------------------------------------------
Add: interest expense on convertible bonds, net 39 128
- --------------------------------------------------------------------------------------------------
Income used in diluted share calculation $38,433 53,727
- --------------------------------------------------------------------------------------------------
Average common shares outstanding 91,028,180 84,026,385
- --------------------------------------------------------------------------------------------------
Equivalents from stock options* 639,515 1,758,698
- --------------------------------------------------------------------------------------------------
Equivalents from convertible debentures 145,916
- --------------------------------------------------------------------------------------------------
Equivalents from convertible preferred securities 530,743
- --------------------------------------------------------------------------------------------------
Avg common stock and equivalents outstanding 92,344,354 85,785,083
- --------------------------------------------------------------------------------------------------
EARNINGS PER DILUTED COMMON SHARE 0.42 0.63
- --------------------------------------------------------------------------------------------------
</TABLE>
* - Breakout of stock equivalents was not available for the 1998 periods.
5. In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes accounting
and reporting standards for derivative instruments and requires an entity to
recognize all derivatives as either assets or liabilities in the Balance Sheet
and measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as a hedge to various exposures. The
accounting for changes in the fair value of a derivative (i.e., gains and
losses) depends on the intended use of the derivative and its resulting
designation. This statement WAS ORIGINALLY TO BE EFFECTIVE FOR ALL FISCAL
QUARTERS BEGINNING AFTER JUNE 15, 1999.
In July 1999, the FASB issued Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 an amendment of FASB Statement No. 133. The primary
purpose of SFAS 137 was to postpone the implementation date of SFAS 133 by one
year. As a result, the Corporation is required to implement SFAS 133 no later
than the third quarter 2000.
6. Management believes the interim consolidated financial statements reflect all
adjustments consisting only of normal recurring accruals, necessary for fair
presentation of the June 30, 1999 and 1998 and December 31, 1998 statements of
condition and the results of operations for the quarter and six-month periods
ended June 30, 1999 and 1998.
7. The Corporation cautions that any forward looking statements contained in
this report, in a report incorporated by reference to this report or made by
management of the Corporation, involve risks and uncertainties and are subject
to change based upon various factors. Actual results could differ materially
from those expressed or implied. Reference is made to the section titled
"Forward-looking Statements" in the Corporation's Form 10-K for the period ended
December 31, 1998.
<PAGE> 14
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Average Consolidated Balance Sheet, Fully-tax Equivalent Interest Rates and
Interest Differential
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months ended June 30, Year Ended December 31,
--------------------------------------------------- ----------------------
1999 1998
--------------------------------------------------- -----------------------
Average Average Average
Balance Interest Rate Balance
---------------------------------------------------- ---------
ASSETS
<S> <C> <C> <C> <C>
Investment securities $1,718,124 25,718 6.00% 1,715,543
Federal funds sold 1,149 14 4.89% 44,878
Loans, net of unearned income 6,903,701 145,682 8.46% 6,131,665
Less allowance for possible loan losses 104,875 80,441
---------- --------- ----------
Net loans 6,798,826 145,682 -- 6,051,224
Cash and due from banks 272,025 -- -- 204,353
Other assets 539,573 -- -- 504,577
---------- --------- ----------
Total assets $9,329,697 171,414 -- 8,520,575
========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-
non-interest bearing $1,080,078 -- -- 1,083,354
Demand-
interest bearing 694,590 1,725 1.00% 752,096
Savings 1,836,459 10,139 2.21% 1,600,122
Certificates and other time deposits 3,109,435 39,107 5.04% 3,019,637
---------- --------- ----------
Total deposits 6,720,562 50,971 3.04% 6,455,209
Federal funds purchased, securities sold
under agreements to repurchase and 1,538,493 17,332 4.52% 1,063,848
other borrowings
Other liabilities 175,509 -- 159,653
Shareholders' equity 895,133 -- 841,865
---------- --------- ----------
Total liabilities and shareholders' equity $9,329,697 68,303 -- 8,520,575
========== ========= ==========
Total earning assets $8,622,974 171,414 7.97% 7,892,086
========== ========= ==========
Total interest bearing liabilities $7,178,977 68,303 3.82% 6,435,703
========== ========= ==========
Net yield on earning assets 103,111 4.80%
========= =====
Interest rate spread 4.15%
=====
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, Three Months ended June 30,
------------------------------------ -----------------------------------------------
1998 1998
------------------------------------ -----------------------------------------------
Average Average Average
Interest Rate Balance Interest Rate
------------------------------------ -----------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C>
Investment securities 109,917 6.41% 1,787,231 28,240 6.34%
Federal funds sold 2,400 5.35% 3,329 40 4.82%
Loans, net of unearned income 533,732 8.70% 5,988,981 130,845 8.76%
Less allowance for possible loan losses 76,033
---------- ---------- ----------
Net loans 533,732 -- 5,912,948 130,845 --
Cash and due from banks -- -- 246,362 -- --
Other assets -- -- 432,721 -- --
---------- ---------- ----------
Total assets 646,049 -- 8,382,591 159,125 --
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-
non-interest bearing -- -- 869,547 -- --
Demand-
interest bearing 13,222 1.76% 556,069 1,579 1.14%
Savings 44,077 2.75% 1,476,348 8,762 2.38%
Certificates and other time deposits 165,198 5.47% 3,459,774 44,916 5.21%
---------- ---------- ----------
Total deposits 222,497 3.45% 6,361,738 55,257 3.48%
Federal funds purchased, securities sold
under agreements to repurchase and 63,879 6.00% 1,028,093 15,383 6.00%
other borrowings
Other liabilities -- 190,770 --
Shareholders' equity -- 801,990 --
---------- ---------- ----------
Total liabilities and shareholders' equity 286,376 -- 8,382,591 70,640 --
========== ========== ==========
Total earning assets 646,049 8.19% 7,779,541 159,125 8.20%
========== ========== ==========
Total interest bearing liabilities 286,376 4.45% 6,520,284 70,640 4.35%
========== ========== ==========
Net yield on earning assets 359,673 4.56% 88,485 4.56%
========== ========== ========== =========
Interest rate spread 3.74% 3.85%
========== =========
</TABLE>
*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> 15
RESULTS OF OPERATIONS
FirstMerit Corporation's 1999 second quarter net income was $38.9
million, a 60.6% increase over 1998 second quarter net income of $24.2 million.
Excluding $4.8 million of costs associated with Signal Corp's acquisition of
First Shenango Bancorp, Inc., second quarter 1998 net income was $29.0 million.
Return on average equity (ROE) for the 1999 quarter was 17.43% compared to
12.12% last year. Return on average assets (ROA) for the quarter was 1.67%
compared to 1.16% for 1998. Excluding the First Shenango Bancorp, Inc.
merger-related expenses, ROE and ROA for the 1998 second quarter were 14.50% and
1.39%, respectively.
For the six-month period ended June 30, 1999, net income was $38.4
million compared to $53.6 million for 1998's first half. ROE and ROA for the
current six-month period were 8.55% and 0.84%, respectively. The comparable
ratios for the 1998 six-month period were 13.93% and 1.33%. Excluding first
quarter 1999 merger-related costs associated with the February 12, 1999 purchase
acquisition of Signal Corp and the after-tax extraordinary item of $5.8 million,
first-half net income was $76.5 million, up 31.1% from $58.4 million for 1998
(on a comparable basis). ROE and ROA on this same adjusted basis for the first
half were 17.03% and 1.68%, respectively, compared to prior year's ratios of
15.17% and 1.45%.
The results of CoBancorp, Inc., acquired by the Corporation in a
purchase transaction on May 22, 1998, are included in the entire 1999 periods
and in the 1998 totals from the acquisition date through June 30, 1998.
Net interest income on a fully tax-equivalent (FTE) basis was $103.1
million for the second quarter of 1999, a gain of 16.5% above the $88.5 million
reported last year. Growth in average earning assets was 10.8% since June 30,
1998, reaching $8.6 billion. The net interest margin for the 1999 second quarter
was 4.80%, up 24 basis points from 4.56% last year. For the first six months of
1999, net interest income FTE rose 15.2% from $172.5 million to $198.7 million.
For the same six-month period, the net interest margin was 4.73% compared to
4.59% in 1998.
Excluding securities gains/losses from each quarter, noninterest income
was $33.9 million compared to $32.1 million the prior year, an improvement of
5.6%. For the six-month period, noninterest income was up 5.2% above 1998
levels, accounting for 25.0 % of net revenue compared to 26.8% of net revenue
for the prior year period.
Second quarter 1999 operating expenses were $72.9 million, a decline of
6.1% from the prior year level of $77.7 million. The $4.8 million decline was a
result of higher intangible amortization expense and equipment expense in 1999
that was more than offset by the $7.3 million merger-related charge taken during
the second quarter of 1998. The second quarter 1999 efficiency ratio was 51.13%
compared to 56.79% for the 1998 adjusted quarter. The "lower is better"
efficiency ratio indicates the percentage of each dollar of profit used to cover
operating costs. For the
<PAGE> 16
first six months of 1999, operating expenses were $178.4 million versus $144.5
in 1998. Excluding merger-related expenses in both year-to-date periods,
operating expenses for the six months ended June 30, 1999 totaled $144.7
compared to $137.2 million for the 1998 second half. The adjusted first-half
efficiency ratios for 1999 and 1998 were 52.47% and 56.91%, respectively.
Assets totaled $9.5 billion at quarter end, with earning assets
comprising 92% of the total. At June 30, 1999, total loans were $7.1 billion, a
gain of 14.7% above 1998 quarter-end levels. On an average basis, total loans
were $6.9 billion, 15.3% above 1998 second quarter levels. Average commercial
loans grew 21.7% to account for 40.9% of the portfolio, up from 38.7%.
Meanwhile, mortgage loans declined 7.13% to comprise 24.3% of the portfolio,
down from 30.1%. The Corporation continues to shift its loan mix from
lower-yielding mortgage loans to higher-yielding commercial and consumer
credits.
The provision for loan losses was $9.7 million, an increase of 18.6%
above second quarter 1998, consistent with growth of the portfolio and changes
in loan mix. For the six-month period, the provision was $26.1 million compared
to $14.3 million the prior year. Excluding a merger-related provision entry of
$10.2 million recorded in the 1999 first quarter, the provision for loan losses
for the six months ended June 30, 1999 was $15.9 million. The allowance for loan
losses as a percent of period-end loans increased to 1.50% at the end of the
second quarter, compared to 1.31% percent June 30, 1998.
At June 30, 1999, non-performing assets were $21.4 million, or 0.30% of
total loans and other real estate, compared to $27.9 million, or 0.45%, for the
same quarter last year. The loan loss allowance (to nonperforming assets)
coverage ratio was 5.0 times at quarter end compared to 2.9 times at June 30,
1998.
Total deposits at June 30, 1999 and 1998 were $6.6 billion and $6.7
billion, respectively. Demand, savings and money market accounts comprised 53%
of total deposits at June 30, 1999 compared to 47% at June 30, 1998.
Certificates and other time deposits ("CDs") made up 47% of total deposits at
June 30, 1999 and 53% at June 30, 1998. Other borrowings at June 30, 1999 were
$1.9 billion, up from $1.1 billion a year ago.
Shareholders' equity totaled $866.5 million at quarter end compared to
$870.9 million at June 30, 1998. Earnings during the year continue to be paid
out in the form of dividends and absorbed by merger-related expenses. Other
items that affected shareholders' equity were treasury stock repurchases and the
market value adjustment of securities. Common stock dividends paid were $16.6
million in the second quarter, or $0.18 per share, representing a payout ratio
of 42.9%. At June 30, 1999, there were 90.4 million shares of common stock
outstanding.
On April 29, 1999, the Corporation began a new share repurchase
program to repurchase up to 1.65 million, or approximately 1.8%, of
FirstMerit's outstanding common stock. The program will be in effect for two
years and will give the Corporation more flexibility in managing capital levels
allowing any excess capital to be returned to shareholders.
<PAGE> 17
Diluted earnings per share for the second quarter was $0.42 compared to
last year's quarterly earnings of $0.28. For the six months ended June 30, 1999,
diluted earnings per share was $0.42 compared to $0.63 recorded for the 1998
first half. Excluding merger-related costs in both six-month periods and the
extraordinary charge in the 1999 first quarter, diluted ("core") earnings per
share for 1999 was $0.83 compared to $0.69 for 1998. The components of change in
per share income and core earnings for the three-month and six-month periods
ended June 30, 1999 and 1998 are summarized in the following table:
<TABLE>
<CAPTION>
CHANGES IN EARNINGS PER SHARE
- -----------------------------
Reported CORE EARNINGS Reported CORE EARNINGS
Three months Three months ended Six months Six months
ended ended ended
June 30, June 30, June 30, June 30,
1999/1998 1999/1998 1999/1998 1999/1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Diluted net income/core earnings
per share June 30, 1998 $0.28 0.34 0.63 0.69
Increases (decreases) due to:
Net interest income - taxable
equivalent 0.16 0.16 0.28 0.28
Provision for possible loan losses -0.02 -0.02 -0.13 -0.01
Other income 0.04 0.04 0.08 0.08
Other expenses 0.05 -0.03 -0.37 -0.08
Federal income taxes - taxable
equivalent -0.06 -0.03 0.02 -0.07
Extraordinary item - extinguishment
of debt -0.06
Change in share base -0.03 -0.04 -0.03 -0.06
-----------------------------------------------------------
Net change in diluted net income
per share 0.14 0.08 -0.21 0.14
-----------------------------------------------------------
Diluted net income per share June
30, 1999 $0.42 0.42 0.42 0.83
===========================================================
</TABLE>
<PAGE> 18
NET INTEREST INCOME
Net interest income, the Corporation's principal source of earnings, is
the difference between the interest income generated by earning assets
(primarily loans and investment securities) and the total interest paid on
interest bearing funds (namely deposits and other borrowings). For the purpose
of this discussion, net interest income is presented on a fully-taxable
equivalent ("FTE") basis, to provide a comparison among types of interest
earning assets. That is, interest on tax-free securities and tax-exempt loans
has been restated as if such interest were taxed at the statutory Federal income
tax rate of 35%, adjusted for the non-deductible portion of interest expense
incurred to acquire the tax-free assets.
Net interest income FTE for the quarter ended June 30, 1999 was $103.1
million compared to $88.5 million for the same period one year ago, an increase
of $14.6 million. The increase occurred as interest income increased $12.3
million and interest expense declined $2.3 million. Of the $12.3 million
increase in interest income, loan volume accounted for $19.3 million while
unfavorable loan and securities rate variances lowered interest income by $5.9
million. Interest expense decreased as higher borrowing volumes added $3.7
million to interest expense but lower rates paid customers, compared to second
quarter last year, lessened interest expense by $6.0 million.
For the year-to-date period, net interest income increased $26.3
million to $198.7 million. The net increase occurred as interest income rose
$27.7 million and interest expense increased $1.4 million. Higher loan volume
added $35.2 million to interest income, compared to last year's first half, and
lower rates on interest-bearing assets lessened interest income by $9.3 million.
Interest expense increased on a net basis as lower interest rates paid customers
lessened interest expense by $7.3 million but interest paid on higher funding
volumes resulted in an increase in interest expense of $8.7 million.
The following schedule illustrates in more detail the change in net
interest income FTE by rate and volume components for both interest earning
assets and interest bearing liabilities.
<PAGE> 19
CHANGES IN NET INTEREST DIFFERENTIAL -
FULLY-TAX EQUIVALENT RATE/VOLUME ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Quarters ended Six Months Ended
June 30, June 30,
1999 and 1998 1999 and 1998
------------- -------------
Increase (Decrease) Increase (Decrease)
Interest Income/Expense Interest Income/Expense
----------------------- -----------------------
Volume Yield Rate Total Volume Yield Rate Total
--------------------------------------------------------------------------------
INTEREST INCOME
<S> <C> <C> <C> <C> <C> <C>
Investment Securities $ (1,041) (1,481) (2,522) 1,820 (512) 1,308
Loans 19,302 (4,465) 14,837 35,182 (8,785) 26,397
Federal funds sold (27) 1 (26) (43) 4 (39)
Total interest income 18,234 (5,945) 12,289 36,959 (9,293) 27,666
--------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
Demand-interest bearing 344 (198) 146 604 (795) (191)
Savings 1,988 (611) 1,377 4,795 (1,085) 3,710
Certificates and other
time deposits (4,406) (1,403) (5,809) (6,885) (2,053) (8,938)
Federal Funds Purchased,
REPOs & other borrowings 5,750 (3,801) 1,949 10,205 (3,370) 6,835
--------------------------------------------------------------------------------
Total interest expense 3,676 (6,013) (2,337) 8,719 (7,303) 1,416
--------------------------------------------------------------------------------
Net interest income $ 14,558 68 14,626 28,240 (1,990) 26,250
================================================================================
</TABLE>
NET INTEREST MARGIN
The net interest margin, net interest income FTE divided by average
earning assets, is affected by changes in the level of earning assets, the
proportion of earning assets funded by non-interest bearing liabilities, the
interest rate spread, and changes in the corporate tax rates. A meaningful
comparison of the net interest margin requires an adjustment for the changes in
the statutory Federal income tax rate noted above. The following schedule shows
the relationship of the tax equivalent adjustment and the net interest margin.
<PAGE> 20
NET INTEREST MARGIN
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
----------------------------------------------------
June 30, June 30,
1999 1998 1999 1998
------------------------- -------------------------
Net interest income per
<S> <C> <C> <C> <C>
financial statements $ 101,975 87,765 196,422 171,045
Tax equivalent adjustment 1,136 720 2,310 1,437
------------------------- -------------------------
Net interest income - FTE $ 103,111 88,485 198,732 172,482
========================= =========================
Average earning assets $8,622,974 7,779,541 8,473,480 7,578,018
========================= =========================
Net interest margin 4.80% 4.56% 4.73% 4.59%
========================= =========================
</TABLE>
The CoBancorp, Inc. acquisition was completed on May 22, 1998. As a result,
1998 results only include CoBancorp balances for the forty-day period from May
22, 1998 through June 30, 1998 while CoBancorp balances are included in the
entire 1999 periods.
<PAGE> 21
OTHER INCOME
Other income for the quarter ended June 30, 1999 was $36.4 million, an
increase of $2.5 million or 8%, over the $33.9 million earned during the same
period last year. Excluding securities sales, the increase in other income was
$1.8 million, or 6%. For the six-month period, other income totaled $74.5
million, up from $66.5 million a year ago.
Trust department income for the second quarter was $4.6 million, up $0.4
million from the $4.2 million earned one year ago. Service charges on
depositors' accounts increased 8.8% to $10.6 million from $9.7 million for last
year's second quarter. Credit card fees, including merchant services, increased
42.6% to $6.8 million for the quarter compared to $4.8 million for the three
months ended June 30, 1998. Other service fees, including Automated Teller
Machine (ATM) revenue, rose from $2.7 million during the 1998 second quarter to
$3.5 million for same 1999 period. Manufactured housing income was $1.4 million,
approximately 60% of the $2.5 million recorded last year.
First-half 1999 results compared to the six months ended June 30, 1998 were
as follows: trust department income increased 16.1%; service charges on
depositors' accounts increased 4.8%; credit card fees increased 41.5%; other
service fees, which include ATM revenue, increased 41.9%; and manufactured
housing income declined by half from $5.6 million to $2.8 million.
In banking, other income is an important complement to net interest income
as it provides a source of revenues not sensitive to the interest rate
environment.
<PAGE> 22
OTHER EXPENSES
Other expenses were $72.9 million for the second quarter, a decrease of
$4.7 million or 6.1%, from the $77.7 million recorded during the same quarter
last year. Excluding merger-related expenses of $7.3 million in 1998, other
expenses were $70.3 million. The increase during the 1999 second quarter from
adjusted 1998 other expenses totaled $2.6 million or 3.7%.
The "lower-is-better" efficiency ratio for the second quarter was
51.13% compared to the adjusted ratio of 56.79% a year ago. The adjusted
efficiency ratios for the six-month periods were 52.47% and 56.91% for 1999 and
1998, respectively. The second quarter efficiency ratio of 51.13% indicates that
it took 51.13 cents of operating costs to generate every dollar of profit.
Salaries, wages, pension and employee benefits ("Salaries and
benefits"), the largest component of other expenses, totaled $33.1 for second
quarter 1999 compared to last year's expense of $33.2 million. For the six-month
period, salaries and benefits rose from $64.8 million in 1998 to $75.4 million
in 1999. Excluding $7.3 million of personnel merger costs taken in the 1999
first quarter, six-month salaries and benefits were $68.1 million, an increase
of 5.0% from last year's $64.8 million.
Other operating expenses for the 1999 second quarter were $27.1 million,
down $6.6 million from $33.7 million recorded last year. Included in 1998's
other operating expenses were merger-related charges of $7.3 million related to
the acquisition of First Shenango Bancorp, Inc. Excluding merger-related charges
for both periods, first-half 1999 other operating expenses were $52.7 million
compared to $51.1 million for 1998.
<PAGE> 23
FINANCIAL CONDITION
INVESTMENT SECURITIES
All investment securities of the Corporation are classified as available
for sale. The available for sale classification provides the Corporation with
more flexibility to respond, through the portfolio, to changes in market
interest rates, or to increases in loan demand or deposit withdrawals.
The book value and market value of investment securities classified as
available for sale are as follows:
<TABLE>
<CAPTION>
June 30, 1999
-------------
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
---------- ---------- ---------- ----------
U.S. Treasury securities
and U.S. Government agency
<S> <C> <C> <C> <C>
obligations $ 735,772 546 14,710 721,608
Obligations of state and
political subdivisions 127,803 788 766 127,825
Mortgage-backed securities 508,392 239 16,889 491,742
Other securities 293,600 3,321 6,947 289,974
---------- ---------- ---------- ----------
$1,665,567 4,894 39,312 1,631,149
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Book Value Market Value
---------- ----------
<S> <C> <C>
Due in one year or less $ 94,992 95,170
Due after one year through five years 346,177 339,165
Due after five years through ten years 319,501 313,030
Due after ten years 904,897 883,784
---------- ----------
$1,665,567 1,631,149
========== ==========
</TABLE>
The book value and market value of investment securities including
mortgage-backed securities and derivatives at June 30, 1999, by contractual
maturity, are shown in the preceding table. Expected maturities will differ from
contractual maturities based on the issuers' right to call or prepay obligations
with or without call or prepayment penalties.
<PAGE> 24
The carrying value of investment securities pledged to secure trust and public
deposits and for purposes required or permitted by law amounted to approximately
$1.3 billion at June 30, 1999 and $1.2 billion at December 31, 1998.
Securities with remaining maturities over five years reflected in the
foregoing schedule consist of mortgage and asset backed securities. These
securities are purchased within an overall strategy to maximize future earnings
taking into account an acceptable level of interest rate risk. While the
maturities of these mortgage and asset backed securities are beyond five years,
these instruments provide periodic principal payments and include securities
with adjustable interest rates, reducing the interest rate risk associated with
longer term investments.
LOANS
Total loans outstanding at June 30, 1999 were $7.139 billion compared to
$6.398 billion at December 31, 1998 and $6.222 billion at June 30, 1998. Average
loans outstanding for the quarter ended June 30, 1999 were $6.904 billion, up
$914.7 million or 15.3%, from $5.989 billion for the same quarter last year.
The most notable increases occurred in commercial loans, up $503.8 million
or 21.7%; manufactured housing loans, up $276.0 million or 198.6%; installment
loans, up $159.6 million or 13.7%; home equity loans up $81.7 million or 27.3%
and credit card outstandings up $8.5 million or 9.3%. Mortgage loan outstandings
declined $128.6 million or 7.13% as the Corporation's loan mix continues to
shift away from lower-yielding mortgage loans and toward higher-yielding
commercial and consumer credits.
Similar to the quarterly growth, 1999 year-to-date average loan
outstandings totaled $6.710 billion, up $844.7 million or 14.4% from $5.865
billion for the prior year. Growth was noted in all categories except mortgage
loans. Average outstanding loans for the quarter and six-month periods equaled
80.1% and 79.1% of average earning assets, respectively.
ASSET QUALITY
Total nonperforming assets, defined as nonaccrual loans, restructured
loans and other real estate (ORE), totaled $21.4 million at June 30, 1999 or
0.30% of total outstanding loans and ORE. At December 31, 1998, nonperforming
assets totaled $23.2 million or 0.36% of outstanding loans and ORE. At June 30,
1998, nonperforming assets were $27.9 million or 0.45% of outstanding loans and
ORE.
Impaired loans are loans for which, based on current information or events,
it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Impaired loans must be
valued based on the
<PAGE> 25
present value of the loans' expected future cash flows at the loans' effective
interest rates, at the loans' observable market prices, or the fair value of the
underlying collateral. Under the Corporation's credit policies and practices,
and in conjunction with provisions within Statements No. 114 and No. 118, all
nonaccrual and restructured commercial, agricultural, construction, and
commercial real estate loans, meet the definition of impaired loans.
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, December 31 June 30,
1999 1998 1998
------- ------- -------
Impaired Loans:
<S> <C> <C> <C>
Non-accrual $16,921 10,883 22,360
Restructured 83 85 1,887
-----------------------------------------------------------------------------------------------
Total impaired loans 17,004 10,968 24,247
------- ------- -------
Other Loans:
Non-accrual 2,577 8,456 2,658
Restructured -- -- --
-----------------------------------------------------------------------------------------------
Total other nonperforming loans 2,577 8,456 2,658
-----------------------------------------------------------------------------------------------
Total nonperforming loans 19,581 19,424 26,905
-----------------------------------------------------------------------------------------------
Other real estate owned (ORE) 1,814 3,789 954
------- ------- -------
Total nonperforming assets 21,395 23,213 27,859
===============================================================================================
Loans past due 90 days or more
accruing interest 22,375 18,911 11,829
===============================================================================================
Total nonperforming assets as a
percent of total loans and ORE 0.30% 0.36% 0.45%
================================================================================================
</TABLE>
N/A = Not Available
There is no concentration of loans in any particular industry or group of
industries. Most of the Corporation's business activity is with customers
located within the state of Ohio.
<PAGE> 26
ALLOWANCE FOR LOAN LOSSES
The allowance for possible loan losses at June 30, 1999 totaled $106.8
million, or 1.50% of total loans outstanding compared to $96.1 million, or 1.50%
and $81.2 million, or 1.31% at December 31, 1998 and June 30, 1998,
respectively.
<TABLE>
<CAPTION>
Dollars in thousands Six months ended Year ended Six months ended
June 30, December 31, June 30,
1999 1998 1998
--------------------- ----------------------- ---------------------
<S> <C> <C> <C>
Allowance - beginning of period $ 96,149 67,736 67,736
Acquisition adjustment/other 1,012 8,215 8,215
Loans charged off:
Commercial, financial, agricultural 6,866 3,894 928
Installment to individuals 15,741 26,277 13,231
Real estate 2,253 1,489 129
Lease financing 600 1,274 475
Total charge-offs 25,460 32,934 14,763
Recoveries:
Commercial, financial, agricultural 2,674 1,930 644
Installment to individuals 5,967 8,285 4,350
Real estate 194 1,464 558
Lease financing 194 532 179
Total recoveries 9,029 12,211 5,731
Net charge-offs 16,431 20,723 9,032
Provision for possible loan losses 26,055 40,921 14,308
Allowance - end of period $106,785 96,149 81,227
Annualized net charge offs as a
percent of average loans 0.49% 0.34% 0.31%
Allowance for possible loan losses:
As a percent of loans
outstanding at end of period 1.50% 1.50% 1.31%
As a multiple of annualized net
charge offs 3.22X 4.64X 4.46X
</TABLE>
<PAGE> 27
DEPOSITS
The following schedule illustrates the change in composition of the
average balances of deposits and average rates paid for the noted periods.
<TABLE>
<CAPTION>
(Dollars in thousands)
Three months and year ended
June 30, 1999 December 31, 1998 June 30, 1998
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest DDA $1,080,078 - 1,083,354 - 869,547 -
Interest-bearing DDA 694,590 1.00% 752,096 1.76% 556,069 1.14%
Savings deposits 1,836,459 2.21% 1,600,122 2.75% 1,476,348 2.38%
CDs and other time 3,109,435 5.04% 3,019,637 5.47% 3,459,774 5.21%
--------------- -------------- --------------
$6,720,562 3.04% 6,455,209 3.45% 6,361,738 3.48%
=============== ============== ==============
</TABLE>
Average CDs totaled $3.109 billion for the quarter ended June 30, 1999,
down 10.1% from $3.460 billion for the 1998 quarter. On a percentage basis,
average CDs were 43% of total interest bearing funds for the June 30, 1999
quarter and 53% for the same quarter last year; average savings deposits,
including money market accounts, were 26% of interest bearing funds during the
quarter ended June 30, 1999 and 23% for the same period last year;
interest-bearing demand deposits was approximately 9% of interest bearing funds
during both years' second quarters; and wholesale borrowings increased from 16%
of interest-bearing funds during the three months ended June 30, 1998 to 21% for
the June 30, 1999 quarter. During both second quarter periods, interest bearing
liabilities funded approximately 83% of average earning assets.
The following table summarizes the certificates and other time deposits in
amounts of $100 thousand or more as of June 30, 1999 by time remaining until
maturity.
<TABLE>
<CAPTION>
(Dollars in Thousands) Amount
Maturing in:
<S> <C>
Under 3 months $438,249
3 to 12 months 278,007
Over 12 months 166,085
-----------------
$882,331
=================
</TABLE>
<PAGE> 28
MARKET RISK
The Corporation is exposed to market risks in the normal course of
business. Changes in market interest rates may result in changes in the fair
market value of the Corporation's financial instruments, cash flows, and net
interest income. The corporation seeks to achieve consistent growth in net
interest income and capital while managing volatility arising from shifts in
market interest rates. The Asset and Liability Committee (ALCO) oversees
financial risk management, establishing broad policies that govern a variety of
financial risks inherent in the Corporation's operations. ALCO monitors the
Corporation's interest rates and sets limits on allowable risk annually. Market
risk is the potential of loss arising from adverse changes in the fair value of
financial instruments due to changes in interest rates, exchange rates, and
equity prices. The Corporation's market risk is composed primarily of interest
rate risk. Interest rate risk on the Corporation's balance sheet consists of
mismatches of maturity gaps and indices, and options risk. Maturity gap
mismatches result from differences in the maturity or repricing of asset and
liability portfolios. Options risk exists in many of the Corporation's retail
products such as prepayable mortgage loans and demand deposits. Options risk
typically results in higher costs or lower revenue for the Corporation. Index
mismatches occur when asset and liability portfolios are tied to different
market indices which may not move in tandem as market interest rates change.
Interest rate risk is monitored using gap analysis, earnings simulation
and net present value estimations. Combining the results from these separate
risk measurement processes allows a reasonably comprehensive view of short-term
and long-term interest rate risk in the Corporation. Gap analysis measures the
amount of repricing risk in the balance sheet at a point in time. Earnings
simulation involves forecasting net interest earnings under a variety of
scenarios including changes in the level of interest rates, the shape of the
yield curve, and spreads between market interest rates. ALCO also monitors the
net present value of the balance sheet, which is the discounted present value
of all asset and liability cash flows. Interest rate risk is quantified by
changing the interest rates used for discounting cash flows and comparing the
net present value to the original figure.
CAPITAL RESOURCES
Shareholders' equity at June 30, 1999 totaled $866.5 million compared to
$906.7 million at December 31, 1998 and $870.9 million at June 30, 1998.
The following table reflects the various measures of capital:
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1999 1998
(In thousands)
<S> <C> <C> <C> <C>
Total equity 866,502 9.13% 906,656 10.04%
Common equity 862,456 9.09% 897,357 9.94%
Tangible common equity (a) 704,236 7.55% 724,247 8.18%
Tier 1 capital (b) 723,730 9.30% 774,303 10.46%
Total risk-based capital (c) 824,526 10.55% 949,229 12.82%
Leverage (d) 723,730 8.37% 774,303 8.91%
</TABLE>
a) Common equity less all intangibles; computed as a ratio to total assets
less intangible assets.
(b) Shareholders' equity minus net unrealized holding gains on equity
securities, plus or minus net unrealized holding losses or gains on
available for sale debt securities, less goodwill; computed as a ratio to
risk-adjusted assets, as defined in the 1992 risk-based capital guidelines.
(c) Tier 1 capital plus qualifying loan loss allowance, computed as a ratio
to risk-adjusted assets, as defined in the 1992 risk-based capital
guidelines.
(d) Tier 1 capital; computed as a ratio to the latest quarter's average assets
less goodwill.
The risk-based capital guidelines issued by the Federal Reserve Bank in
1988 require banks to maintain capital equal to 8% of risk-adjusted assets
effective December 31, 1993. At June 30, 1999 the Corporation's risk-based
capital equaled 10.55% of risk adjusted assets, exceeding the minimum
guidelines.
The cash dividend of $0.18 paid in the second quarter has an indicated
annual rate of $0.72 per share.
<PAGE> 29
YEAR 2000 READINESS
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define an applicable year. Any of a company's
hardware, date-driven automated equipment, or computer programs that have date
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This faulty recognition could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business activities.
The Corporation has based its plans on regulatory guidelines published
by the Federal Financial Institutions Examination Council (FFIEC). The FFIEC
considers five general phases: Awareness, Assessment, Renovation, Validation and
Implementation. The five phases are explained below along with the status at
June 30, 1999:
Awareness: The Awareness phase defines the Year 2000 problem, gains
executive level support and establishes an overall strategy. The Corporation
began working on the Year 2000 issue in 1996 with identification of major
vendors and their compliance status. Significant progress has been made in the
implementation of the strategy for Year 2000 compliance. Executive Management
has been proactive in the management of the project and contracted with
consultants to assist in performing the assessment and formulating a strategy.
The awareness phase has expanded to include a widespread customer awareness
program to help educate customers on the Year 2000 issue and allow monitoring of
the Corporation's progress. This phase has now been completed and continues with
ongoing monitoring.
Assessment: The Assessment phase defines the size and complexity of the
problem and the magnitude of the effort to address Year 2000 issues. The
Corporation completed the assessment phase for all mainframe and microcomputer
systems during the first quarter of 1998. The Corporation has 82 mainframe
applications of which 30 are considered "mission critical." The majority of the
applications are vendor packages. The "mission critical" applications are given
priority and all 30 are on schedule to be Year 2000 ready by December 31, 1998
or earlier. Significant microcomputer software and hardware upgrades for Year
2000 compliance are substantially completed. The assessment of non-information
systems such as security systems, elevators, etc. was completed during the
second quarter 1998. This phase has now been completed.
Renovation: The purpose of the Renovation phase is to ensure all date
routines have been corrected to properly address Year 2000 dates. The renovation
phase has been completed for 100% of the Corporation's "mission critical"
applications. That is, each mission critical application has been renovated or
the vendor's Year 2000 software release has been installed. A few "non-mission
critical" applications have received recent Year 2000 updates. These
applications are being finalized and are in the validation stage. Renovation of
in-house written lines of computer code is 100% complete.
<PAGE> 30
Validation: The Validation phase consists of significant testing. Mission
critical applications have been tested a number of times and further testing of
these applications will continue throughout 1999. In addition to testing of
mission critical applications, the Corporation has tested both in-house and
vendor written systems as well as the various connections to other systems
(internal and external). Non-information systems such as vaults and security
systems have also been tested. Continued testing during 1999 will include
integrated testing, system interfaces to third parties and non mission critical
applications.
Implementation: During the Implementation phase, systems are certified as
Year 2000 compliant and placed into production. The Corporation has placed
renovated systems into production.
Another area of concern mentioned by the FFIEC is the area of contingency
planning where alternative measures are enacted throughout the organization in
event of a Year 2000-caused problem. All business areas reviewed departmental
Year 2000 risks and finalized their contingency plans. Various potential Year
2000 scenarios have been identified and plans for each one have been developed.
Contingency plans are complete for all significant banking areas.
The Corporation continues to work very hard to ensure Year 2000 does not
affect our customers. Substantial testing is occurring throughout 1999. The
Corporation does not anticipate any interruptions in normal business activities.
The Corporation's total Year 2000 readiness project costs and estimates to
complete include the estimated costs and time associated with the impact of a
third party vendor's Year 2000 issues and are based on presently available
information. There can be no guarantees, however, that the systems and
applications of other companies on which the Corporation's systems and
applications rely will be timely converted or that a failure to convert by
another company, or a conversion that is incompatible with the Corporation's
systems and applications, would not have material adverse effect on the
Corporation.
The remaining costs of the Year 2000 readiness project are estimated at
$0.9 million and are being funded through operating cash flows, which will be
expensed as incurred over the remainder of 1999. These costs are not expected to
have a material adverse effect on the Corporation's results of operations. As of
June 30, 1999, the Corporation has incurred and expensed approximately $4.8
million related to the Year 2000 readiness project. At June 30, 1999, it appears
the total cost of the project will be $5.7 million, approximately $0.4 million
less than the $6.1 million reported in the first quarter 1999 10Q.
<PAGE> 31
PART II. - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 21, 1999, the Registrant held its Annual Meeting of Shareholders for
which the Board of Directors solicited proxies. At the Annual Meeting, the
shareholders adopted all proposals stated in the Proxy Statement dated March 17,
1999. The proposals voted on and approved by the shareholders are as follows:
1. The election of five Class II directors, being:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
Karen S. Belden 76,728,335 * 1,111,845
R. Cary Blair 76,769,653 * 1,070,527
Robert W. Briggs 75,967,111 * 1,873,069
Gary G. Clark 76,661,610 * 1,178,570
Clifford J. Isroff 76,678,108 * 1,162,072
</TABLE>
All other Class I and Class III directors continued in their positions.
* Proxies provide that shareholders may either cast a vote for, or abstain
from voting for, directors.
2. Approval of the proposal to amend the Corporation's Amended and Restated
Articles of Incorporation to increase the authorized shares of Common Stock from
160 million to 300 million shares by a vote of 74,125,519 (81%) for, 2,831,735
(3%) against and 880,861 (1%) abstaining.
3. Approval of the proposal to adopt the FirstMerit Corporation 1999 Stock
Plan by a vote of 67,074,007 (74%) for, 7,914,796 (8%) against and 1,572,607(2%)
abstaining.
<PAGE> 32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 Amended and Restated Articles of Incorporation of FirstMerit
Corporation, as amended (incorporated by reference from Exhibit 3.1 to
the Form 10-K/A filed by the registrant on April 29, 1999)
3.2 Amended and Restated Code of Regulations of FirstMerit Corporation
(incorporated by reference from Exhibit 3(b) to the Form 10-K filed by
the registrant on April 9, 1998)
4.1 Shareholders Rights Agreement dated October 21, 1993, between
FirstMerit Corporation and FirstMerit Bank, N.A., as amended and
restated May 20, 1998 (incorporated by reference from Exhibit 4 to the
Form 8-A/A filed by the registrant on June 22, 1998)
4.2 Instrument of Assumption of Indenture between FirstMerit Corporation
and NBD Bank, as Trustee, dated October 23, 1998 regarding FirstMerit
Corporation's 6 1/4% Convertible Subordinated Debentures, due May 1,
2008 (incorporated by reference from Exhibit 4(b) to the Form 10-Q
filed by the registrant on November 13, 1998)
4.3 Supplemental Indenture, dated as of February 12, 1999, between
FirstMerit and Firstar Bank Milwaukee, National Association, as Trustee
relating to the obligations of the FirstMerit Capital Trust I, fka
Signal Capital Trust I (incorporated by reference from Exhibit 4.3 to
the Form 10-K filed by the registrant on March 22,1999)
4.4 Indenture dated as of February 13, 1998 between Firstar Bank Milwaukee
National Association, as trustee and Signal Corp (incorporated by
reference from Exhibit 41 to the Form S-4, No. 333-52581-01, filed by
FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13,
1998)
4.5 Amended and Restated Declaration of Trust of FirstMerit Capital Trust
I, fka Signal Capital Trust I, dated as of February 13, 1998
(incorporated by reference from Exhibit 4.5 to the Form S-4 No.
333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital
Trust I, on May 13, 1998)
4.6 Form Capital Security Certificate (incorporated by reference from
Exhibit 4.6 to the Form S-4 No. 333-52581-01, filed by FirstMerit
Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)
4.7 Series B Capital Securities Guarantee Agreement (incorporated by
reference from Exhibit 4.7 to the Form S-4 No. 333-52581-01, filed by
FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13,
1998).
<PAGE> 33
4.8 Form of 8.67% Junior Subordinated Deferrable Interest Debenture, Series
B (incorporated by reference from Exhibit 4.7 to the Form S- 4 No.
333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital
Trust I, on May 13, 1998)
10.1 1982 Incentive Stock Option Plan of FirstMerit Corporation
(incorporated by reference from Exhibit 4.2 to the Form S-8 (No.
33-7266) filed by the registrant on July 15, 1986)
10.2 Amended and Restated 1992 Stock Option Program of FirstMerit
Corporation (incorporated by reference from Exhibit 10.2 to the Form
10-K filed by the registrant on February 24, 1998)
10.3 1992 Directors Stock Option Program (incorporated by reference from
Exhibit 10.2 to the Form 10-K filed by the registrant on February 24,
1998)
10.4 FirstMerit Corporation 1995 Restricted Stock Plan (incorporated by
reference from Exhibit (10)(d) to the Form 10-Q for the fiscal quarter
ended March 31, 1995, filed by the registrant on May 15, 1995)
10.5 1997 Stock Option Program of FirstMerit Corporation (incorporated by
reference from Exhibit 10.5 to the Form 10-K filed by the registrant on
February 24, 1998)
10.6 1985 FirstMerit Corporation Stock Plan (CV) (incorporated by reference
from Exhibit (10)(a) to the Form S-8 (No. 33-57557) filed by the
registrant on February 1, 1995)
10.7 1993 FirstMerit Corporation Stock Plan (CV) (incorporated by reference
from Exhibit (10)(b) to the Form S-8 (No. 33-57557) filed by the
registrant on February 1, 1995)
10.8 Amended and Restated FirstMerit Corporation Executive Deferred
Compensation Plan (incorporated by reference from Exhibit 10(h) to the
Form 10-K filed by the registrant on February 25, 1997)
10.9 Amended and Restated FirstMerit Corporation Director Deferred
Compensation Plan (incorporated by reference from Exhibit 10(i) to the
Form 10-K filed by the registrant on February 25, 1997)
10.10 FirstMerit Corporation Executive Supplemental Retirement Plan
(incorporated by reference from Exhibit 10(d) to the Form 10-K filed by
the registrant on March 15, 1996)
<PAGE> 34
10.10.1 Amended and Restated Membership Agreement with respect to the
FirstMerit Corporation Executive Supplemental Retirement Plan
(incorporated by reference from Exhibit 1039 to the Form 10-K filed by
the registrant on March 22,1999)
10.11 FirstMerit Corporation Unfunded Supplemental Benefit Plan (incorporated
by reference from Exhibit 10.11 to the Form 10-K filed by the
registrant on February 24, 1998)
10.12 First Amendment to the FirstMerit Corporation Unfunded Supplemental
Benefit Plan (incorporated by reference from Exhibit 10(v) to the Form
10-K filed by the registrant on March 2, 1995)
10.13 Supplemental Pension Agreement of John R. Macso (incorporated by
reference from Exhibit 10.13 to the Form 10-K filed by the registrant
on February 24, 1998)
10.14 FirstMerit Corporation Executive Committee Life Insurance Program
Summary (incorporated by reference from Exhibit 10(w) to the Form 10-K
filed by the registrant on March 2, 1995)
10.15 Long Term Disability Plan (incorporated by reference from Exhibit 10(x)
to the Form 10-K filed by the registrant on March 2, 1995)
10.16 Employment Agreement dated October 23, 1998 for Charles F. Valentine
(incorporated by reference from Exhibit 10(a) to the Form 10-Q filed by
the registrant on November 13, 1998)
10.17 SERP Agreement dated October 23, 1998 for Charles F. Valentine
(incorporated by reference from Exhibit 10(b) to the Form 10-Q filed by
the registrant on November 13, 1998)
10.18 Employment Agreement dated October 23, 1998 for Austin J. Mulhern
(incorporated by reference from Exhibit 10(c) to the Form 10-Q filed by
the registrant on November 13, 1998)
10.19 SERP Agreement dated October 23, 1998 for Austin J. Mulhern
(incorporated by reference from Exhibit 10(d) to the Form 10-Q filed by
the registrant on November 13, 1998)
10.20 Employment Agreement of John R. Cochran, dated December 1, 1998
(incorporated by reference from Exhibit 10.20 to the Form 10-K filed by
the registrant on March 22,1999)
10.21 Restricted Stock Award Agreement of John R. Cochran dated March 1, 1995
(incorporated by reference from Exhibit 10(e) to the Form 10-Q filed by
the registrant on May 15, 1995)
<PAGE> 35
10.22 Restricted Stock Award Agreement of John R. Cochran dated April 9, 1997
(incorporated by reference from Exhibit 10.18 to the Form 10-K filed by
the registrant on February 24, 1998)
10.21.1 First Amendment to Restricted Stock Award Agreement for John R. Cochran
(incorporated by reference from Exhibit 10.38 the Form 10-K filed by
the registrant on March 22,1999)
10.23 Employment Agreement of Sid A. Bostic dated February 1, 1998
(incorporated by reference from Exhibit 10.19 to the Form 10-K filed by
the registrant on February 24, 1998)
10.23.1 First Amendment to Employment Agreement of Sid A. Bostic dated April
20, 1999 (incorporated by reference from Exhibit 10.23.1 to the Form
10-Q filed by the Registrant on May 14, 1999)
10.24 Restricted Stock Award Agreement of Sid A. Bostic dated February 1,
1998 (incorporated by reference from Exhibit 10.20 to the Form 10-K
filed by the registrant on February 24, 1998)
10.24.1 First Amendment to Restricted Stock Award Agreement of Sid A. Bostic
dated April 20, 1999 (incorporated by reference from Exhibit 10.24.1 to
the Form 10-Q filed by the Registrant on May 14, 1999)
10.25 Form of FirstMerit Corporation Termination Agreement (incorporated by
reference from Exhibit 10.25 to the Form 10-K filed by the registrant
on March 22,1999)
10.25.1 First Amendment to FirstMerit Corporation Change of Control Termination
Agreement of Sid A. Bostic dated April 20, 1999 (incorporated by
reference from Exhibit 10.25.1 to the Form 10-Q filed by the Registrant
on May 14, 1999)
10.26 Form of Director and Officer Indemnification Agreement and Undertaking
(incorporated by reference from Exhibit 10(s) to the Form 8-K/A filed
by the registrant on April 27, 1995)
10.27 FirstMerit 1987 Stock Option and Incentive Plan (SF) (incorporated by
reference from Exhibit 4.2 to the Form S-8/A (No. 333-57439) filed by
the registrant on October 26, 1998)
10.28 FirstMerit 1996 Stock Option and Incentive Plan (SF) (incorporated by
reference from Exhibit 4.3 to the Form S-8/A (No. 333-57439) filed by
the registrant on October 26, 1998)
10.29 FirstMerit 1994 Stock Option Plan (SF) (incorporated by reference from
Exhibit 4.4 to the Form S-8/A (No. 333-57439) filed by the registrant
on October 26, 1998)
<PAGE> 36
10.30 FirstMerit 1989 Stock Incentive Plan (SB)(incorporated by reference
from Exhibit 4.6 to the Form S-8/A (No. 333-63797) filed by the
registrant on February 12, 1999)
10.31 FirstMerit Amended and Restated Stock Option and Incentive Plan (SG)
(incorporated by reference from Exhibit 4.2 to the Form S- 8/A (No.
333-63797) filed by the registrant on February 12, 1999)
10.32 FirstMerit Non-Employee Director Stock Option Plan (SG) (incorporated
by reference from Exhibit 4.3 to the Form S-8/A (No. 333-63797) filed
by the registrant on February 12, 1999)
10.33 FirstMerit 1997 Omnibus Incentive Plan (SG) (incorporated by reference
from Exhibit 4.4 to the Form S-8/A (No. 333-63797) filed by the
registrant on February 12, 1999)
10.34 FirstMerit 1993 Stock Option Plan (FSB) (incorporated by reference from
Exhibit 4.5 to the Form S-8/A (No. 333-63797) filed by the registrant
on February 12, 1999)
10.35 Independent Contractor Agreement with Gary G. Clark dated February 12,
1999 (incorporated by reference from Exhibit 10.38 to the Form 10-Q
filed by the Registrant on May 14, 1999)
10.36 FirstMerit Corporation 1999 Stock Option Plan (incorporated by
reference from Exhibit 10.39 to the Form S-8 (No. 333-78953) filed by
the registrant on May 21, 1999)
27 Financial Data Schedule
(b) FORM 8-K
On April 20, 1999, FirstMerit Corporation filed a Form 8-K to
report the announcement on April 15, 1999, of its first quarter 1999 earnings
and the restatement of both quarters financial information to account for the
acquisition of Signal Corp on February 12, 1999 on a pooling-of-interests basis.
On April 20, 1999, FirstMerit Corporation filed a Form 8-K/A
to report certain amended Item 7 information to the Form 8-K filed on March 5,
1999 regarding the consolidated financial information of Signal Corp and
subsidiaries.
<PAGE> 37
SIGNATURES
Pursuant to the requirements 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.
FIRSTMERIT CORPORATION
By:/s/AUSTIN J. MULHERN
---------------------------------------------
Austin J. Mulhern, Senior Vice President
and Chief Financial Officer
DATE: August 12, 1999
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