FIRSTMERIT CORP /OH/
10-Q, 2000-08-14
NATIONAL COMMERCIAL BANKS
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TABLE OF CONTENTS

PART I — FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements
RESULTS OF OPERATIONS
FINANCIAL CONDITION
PART II. — OTHER INFORMATION
SIGNATURES
EXHIBIT 27

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, 2000

COMMISSION FILE NUMBER 0-10161

FIRSTMERIT CORPORATION
 (Exact name of registrant as specified in its charter)

     
OHIO
(State or other jurisdiction of
incorporation or organization)		 34-1339938
(IRS Employer Identification
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, 2000
88,348,369

 
 
 

      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

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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, 2000, December 31, 1999 and June 30, 1999
 
        Consolidated Statements of Income for the three-month and six-month periods ended June 30, 2000
       and 1999
 
        Consolidated Statements of Changes in Shareholders’ Equity for the year ended December 31, 1999
       and for the six months ended June 30. 2000
 
        Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999
 
        Notes to Consolidated Financial Statements as of June 30, 2000, December 31, 1999, and June 30, 1999
 
        Management’s Discussion and Analysis of Financial Conditions as of June 30, 2000, December 31, 1999
      and June 30, 1999 and Results of Operations for the quarter and six months ended June 30, 2000
      and 1999 and for the year ended December 31, 1999.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)

                             
(Unaudited, except December 31, 1999) June 30 December 31 June 30
2000 1999 1999
ASSETS
Investment securities $ 2,239,825 2,394,034 1,631,149
Federal funds sold & other investments 55,100 25,100 1,380
Loans held for sale 48,154 46,005 —
Commercial loans 3,279,392 3,122,520 2,918,910
Mortgage loans 880,326 878,323 1,656,537
Installment loans 1,532,276 1,471,149 1,346,219
Home equity loans 433,469 408,343 391,532
Credit card loans 105,760 108,163 99,917
Manufactured housing loans 882,380 753,254 536,220
Leases 295,608 272,429 189,938
Total loans 7,409,211 7,014,181 7,139,273
Less allowance for possible loan losses 110,089 104,897 106,785
Net loans 7,299,122 6,909,284 7,032,488
Cash and due from banks 258,682 215,071 277,307
Premises and equipment, net 134,351 132,219 136,914
Intangible assets 157,284 162,374 162,267
Accrued interest receivable and other assets 289,491 231,390 246,526
$ 10,482,009 10,115,477 9,488,031
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand-non-interest bearing $ 1,056,440 1,016,535 1,041,103
Demand-interest bearing 635,602 661,961 670,406
Savings and Money Market 1,806,085 1,687,983 1,792,681
Certificates and other time deposits 4,255,069 3,493,668 3,100,701
Total deposits 7,753,196 6,860,147 6,604,891
Securities sold under agreements to repurchase and other borrowings 1,724,647 2,281,243 1,863,963
Total funds 9,477,843 9,141,390 8,468,854
Accrued taxes, expenses, and other liabilities 137,370 140,512 152,675
Total liabilities 9,615,213 9,281,902 8,621,529
Shareholders’ equity:
Preferred Stock, without par value: authorized 7,000,000 shares — — —
Preferred Stock, Series A, without par value: designated 800,000 shares; none outstanding — — —
Cumulative convertible preferred stock, Series B, without par value: designated 220,000 shares; 125,708, 163,534 and 168,184 shares outstanding at June 30, 2000, December 31, 1999 and June 30, 1999, respectively 3,025 3,878 4,046
Common stock, without par value: authorized 300,000,000 shares; issued 91,979,362, 92,054,156 and 92,054,156 shares, respectively 127,937 127,937 127,937
Capital surplus 114,545 116,930 117,960
Accumulated other comprehensive income (52,152 ) (45,082 ) (22,598 )
Retained earnings 761,942 719,811 674,448
Treasury stock, at cost, 3,630,993, 3,678,904 and 1,605,811 (88,501 ) (89,899 ) (35,291 )
Total shareholders’ equity 866,796 833,575 866,502
$ 10,482,009 10,115,477 9,488,031

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

See notes to accompanying consolidated financial statements.

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FIRSTMERIT CORPORATION
AVERAGE CONSOLIDATED BALANCE SHEETS Unaudited
(Dollars in thousands) 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
2000 2000 1999 1999 1999 1999
ASSETS
Investment securities & federal funds sold $ 2,286,405 2,356,628 2,165,952 1,864,012 1,719,273 1,824,400
Loans held for sale 50,374 58,033 25,091 — — —
Commercial loans 3,275,629 3,198,639 3,028,292 2,929,115 2,821,088 2,648,284
Mortgage loans 892,438 898,918 1,176,400 1,401,899 1,675,442 1,707,232
Installment loans 1,502,518 1,474,474 1,462,200 1,418,423 1,330,759 1,168,905
Home Equity loans 426,009 411,928 403,086 391,277 380,361 348,220
Credit card loans 103,934 105,573 102,926 100,756 100,290 102,080
Manufactured housing loans 846,485 768,027 711,697 593,752 415,032 368,503
Leases 296,717 287,020 240,809 202,950 180,729 170,352
Loans less unearned income 7,343,730 7,144,579 7,125,410 7,038,172 6,903,701 6,513,576
Less allowance for possible loan losses 110,139 107,351 108,833 108,067 104,875 101,788
Net loans 7,233,591 7,037,228 7,016,577 6,930,105 6,798,826 6,411,788
Cash and due from banks 242,325 242,223 252,291 238,835 272,025 285,589
Premises and equipment, net 134,523 133,584 134,932 136,448 139,026 140,149
Accrued interest receivable
and other assets 444,407 434,254 399,693 428,498 400,547 402,371
Total Assets $ 10,391,625 10,261,950 9,994,536 9,597,898 9,329,697 9,064,297
LIABILITIES
Deposits:
Demand-non-interest bearing $ 1,052,392 1,020,384 1,034,130 1,036,066 1,080,078 1,066,573
Demand-interest bearing 645,325 643,842 656,777 659,437 694,590 659,189
Savings and money market 1,808,127 1,747,456 1,711,288 1,741,610 1,836,459 1,878,596
Certificates and other time deposits 3,876,139 3,566,289 3,504,583 3,407,053 3,109,435 3,111,321
Total deposits 7,381,983 6,977,971 6,906,778 6,844,166 6,720,562 6,715,679
Securities sold under agreements to repurchase and other borrowings 2,030,837 2,287,852 2,099,156 1,718,674 1,538,493 1,239,299
Total funds 9,412,820 9,265,823 9,005,934 8,562,840 8,259,055 7,954,978
Accrued taxes, expenses and other liabilities 133,026 163,670 137,885 172,355 175,509 195,871
Total liabilities 9,545,846 9,429,493 9,143,819 8,735,195 8,434,564 8,150,849
SHAREHOLDERS’ EQUITY 845,779 832,457 850,717 862,703 895,133 913,448
LIABILITIES AND SHAREHOLDERS’ EQUITY $ 10,391,625 10,261,950 9,994,536 9,597,898 9,329,697 9,064,297

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

See notes to accompanying consolidated financial statements.

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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,
2000 1999 2000 1999
Interest income:
Interest and fees on loans $ 160,176 145,618 312,282 281,613
Interest and dividends on securities 37,071 24,660 75,011 53,959
Total interest income 197,247 170,278 387,293 335,572
Interest expense:
Demand-interest bearing 832 1,725 1,684 2,823
Savings 12,821 10,139 24,156 20,494
Certificates and other time deposits 56,317 39,107 104,385 79,251
Interest on securities sold under agreements to repurchase and other borrowings 31,988 17,332 65,328 36,582
Total interest expense 101,958 68,303 195,553 139,150
Net interest income 95,289 101,975 191,740 196,422
Provision for possible loan losses 8,346 9,657 20,060 26,055
Net interest income after provision for possible loan losses 86,943 92,318 171,680 170,367
Other income:
Trust department income 5,775 4,595 10,835 8,781
Service charges on depositors’ accounts 11,638 10,574 22,650 19,669
Credit card fees 8,272 6,833 15,506 12,452
Service fees — other 3,693 3,545 7,194 6,774
Manufactured housing income 922 1,400 1,573 2,831
Securities gains (losses) 137 2,536 (577 ) 8,077
Loan sales and servicing 1,723 1,855 4,503 3,863
Other operating income 7,028 5,086 16,392 12,026
Total other income 39,188 36,424 78,076 74,473
126,131 128,742 249,756 244,840
Other expenses:
Salaries, wages, pension and employee benefits 30,993 33,080 63,372 75,351
Net occupancy expense 4,908 4,770 10,656 10,872
Equipment expense 4,139 5,111 8,565 9,624
Amortization of intangibles 2,688 2,897 5,376 5,611
Other operating expense 25,989 27,080 46,837 76,896
Total other expenses 68,717 72,938 134,806 178,354
Income before Federal income taxes and extraordinary item 57,414 55,804 114,950 66,486
Federal income taxes 17,438 16,896 35,275 22,235
Income before extraordinary item 39,976 38,908 79,675 44,251
Extraordinary item, net of tax benefit of $3,148 (extinguishment of debt) — — — (5,847 )
Net income $ 39,976 38,908 79,675 38,404
Other comprehensive income (loss), net of taxes 4,002 (19,296 ) (7,070 ) (28,456 )
Comprehensive Income $ 43,978 19,612 72,605 9,948
Basic net income per share:
Income before extraordinary item $ 0.45 0.43 0.90 0.48
Extraordinary item — — — (0.06 )
Basic net income after extraordinary charge $ 0.45 0.43 0.90 0.42
Diluted net income per share:
Income before extraordinary item 0.45 0.42 0.90 0.48
Extraordinary item — — — (0.06 )
Diluted net income after extraordinary charge $ 0.45 0.42 0.90 0.42
Dividends paid $ 0.22 0.18 0.42 0.36
Weighted-average shares outstanding — basic 88,341 91,049 88,327 91,028
Weighted-average shares outstanding — diluted 89,019 92,311 89,045 92,344

Certain previously reported amounts may have been reclassified to conform to current reporting practices.

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Changes in Shareholders’ Equity

FIRSTMERIT CORPORATION AND SUBSIDIARIES
(In thousands except per share data)

                                                           
(2000 Amounts are unaudited) Accumulated
Other Total
Preferred Common Capital Comprehensive Retained Treasury Shareholders'
Stock Stock Surplus Income Earnings Stock Equity
Balance at Year Ended 1997 $ 9,917 119,893 80,297 4,603 651,907 (118,940 ) 747,677
Net income — — — — 72,517 — 72,517
Cash dividends — common stock ($0.66 per share) & preferred stock — — — — (50,525 ) — (50,525 )
Acquisition adjustment of fiscal year — — — — (1,857 ) — (1,857 )
Stock options exercised/debentures or preferred stock converted (618 ) 400 3,717 — (2,607 ) 12,111 13,003
Treasury shares purchased — — — — — (25,703 ) (25,703 )
Treasury shares reissued — acquisition — — 25,919 — — 89,286 115,205
Treasury shares reissued — public offering — — 6,518 — — 20,806 27,324
Stock dividends — 1,929 (1,929 ) — — — —
Market adjustment investment securities — — — 1,255 — — 1,255
Other — 165 3,323 — (598 ) 4,870 7,760
Balance at December 31, 1998 9,299 122,387 117,845 5,858 668,837 (17,570 ) 906,656
Net income — — — — 119,871 — 119,871
Cash dividends — common stock ($0.76 per share) — — — — (68,627 ) — (68,627 )
Cash dividends — preferred stock — — — (305 ) — (305 )
Stock options exercised/debentures or preferred stock converted (5,421 ) 5,596 (915 ) — — 12,549 11,809
Treasury shares purchased — — — — — (85,666 ) (85,666 )
Market adjustment investment securities — — — (50,940 ) — — (50,940 )
Other — (46 ) — — 35 788 777
Balance at December 31, 1999 3,878 127,937 116,930 (45,082 ) 719,811 (89,899 ) 833,575
Net income — — — — 79,675 — 79,675
Cash dividends — common stock ($0.42 per share) — — — — (37,257 ) — (37,257 )
Cash dividends — preferred stock — — — — (143 ) — (143 )
Stock options exercised/debentures or preferred stock converted (853 ) — (2,385 ) — — 4,436 1,198
Treasury shares purchased — — — — — (3,038 ) (3,038 )
Market adjustment investment securities — — — (7,070 ) — — (7,070 )
Other — — — — (144 ) — (144 )
Balance at June 30, 2000 $ 3,025 127,937 114,545 (52,152 ) 761,942 (88,501 ) 866,796

See notes to accompanying consolidated financial statements.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999

(In thousands)

                     
(Unaudited)
2000 1999
Operating Activities
Net income $ 79,675 38,404
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 20,060 26,055
Provision for depreciation and amortization 8,655 9,782
Amortization of investment securities premiums, net 330 1,275
Amortization of income for lease financing (7,070 ) (6,384 )
Gains (losses) on sales of investment securities, net 577 (8,077 )
Deferred federal income taxes 8,376 (3,337 )
Increase in interest receivable (9,352 ) (18,733 )
Increase in interest payable 23,427 4,293
Amortization of values ascribed to acquired intangibles 5,376 5,611
Other decreases (81,505 ) (672 )
NET CASH PROVIDED BY OPERATING ACTIVITIES 48,549 48,217
Investing Activities
Dispositions of investment securities:
Available-for-sale — sales 120,556 385,912
Available-for-sale — maturities 151,644 286,190
Purchases of investment securities available-for-sale (128,587 ) (461,595 )
Net decrease in federal funds sold (30,000 ) 30,359
Net increase in loans and leases, except sales (404,977 ) (749,863 )
Purchases of premises and equipment (13,979 ) (13,204 )
Sales of premises and equipment 3,192 7,349
NET CASH USED BY INVESTING ACTIVITIES (302,151 ) (514,852 )
Financing Activities
Net increase (decrease) in demand, NOW and savings deposits 131,648 (250,292 )
Net increase in time deposits 761,401 9,205
Net increase (decrease) in securities sold under repurchase agreements and other borrowings (556,596 ) 708,287
Cash dividends (37,400 ) (33,204 )
Purchase of treasury shares (3,038 ) (27,354 )
Proceeds from exercise of stock options 1,198 9,303
NET CASH PROVIDED BY FINANCING ACTIVITIES 297,213 415,945
 
Increase (decrease) in cash and cash equivalents 43,611 (50,690 )
Cash and cash equivalents at beginning of year 215,071 327,997
Cash and cash equivalents at end of year $ 258,682 277,307
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year:
Interest, net of amounts capitalized $ 99,206 71,730
Income taxes $ 40,263 18,967

See accompanying notes to consolidated financial statements.

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FirstMerit Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2000, December 31, 1999 and June 30, 1999

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, FirstMerit Capital Trust I, FirstMerit Community Development Corporation, FirstMerit Credit Life Insurance Company, and SF Development Corp.

2. Acquisitions and Merger-related Costs — On October 23, 1998, the Corporation completed the acquisition of Security First Corp. (“Security First”), a $771.1million 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, related notes 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, 1999 and June 30, 2000 are shown in the following table. The remaining liability at June 30, 2000 is expected to be paid during 2000 and is not expected to have any adverse effect on liquidity.

      In conjunction with the Security First acquisition, 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.

                         
(Dollars in thousands) Estimated
Liability at Remaining Liability Remaining Liability
Description of Cost Acquistion December 31, 1999 June 30, 2000
Salary, wages and benefits $ 1,689 11 —
Occupancy and equipment expense 552 40 27
Loan conversion expense 1,516 154 113
Professional services 4,450 — —
Other operating expenses 1,576 1,148 727
Total Other Expenses 9,783 1,353 867
Reduction of other operating income 89 — —
Provision for loan losses 7,300 — —
Total Income Statement Effect $ 17,172 1,353 867

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      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 consolidated financial statements, the related notes 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. Pro forma information for the separate entities and for the combined entity from January 1, 1999 through the February 12, 1999 acquisition date is not presented due to immateriality.

      In conjunction with the Signal acquisition, the Corporation incurred merger-related and conforming accounting expenses of approximately $52.8 million, before taxes, or $38.1 million after taxes. The components of these costs and the remaining unpaid amounts at June 30, 2000 are shown in the following table. The unpaid liability at June 30, 2000 is expected to be paid during the remainder of 2000 and is not expected to have a material impact on liquidity.

                         
(Dollars in thousands) Estimated
Liability at Remaining Liability Remaining Liability
Description of Cost Acquistion December 31, 1999 June 30, 2000
Salary, wages and benefits $ 7,736 — —
Loan conversion expense 7,016 12 12
Professional services 8,856 — —
Other operating expenses 10,014 1,120 621
Total Other Expenses 33,622 1,132 633
Provision for loan losses 10,200 — —
Total Income Statement Effect $ 43,822 1,132 633

      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, 2000 and 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.

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In thousands, except
averages in millions
Parent Company
Super Other Subsidiaries Corporate
2000 Community Banking & Eliminations Consolidated
OPERATIONS: 2Q YTD 2Q YTD 2Q YTD
Net interest income $ 96,605 193,669 (1,316 ) (1,929 ) 95,289 191,740
Provision for loan losses 8,346 19,963 — 97 8,346 20,060
Other income 40,721 77,012 (1,533 ) 1,064 39,188 78,076
Other expenses 68,316 134,668 401 138 68,717 134,806
Net income 39,046 76,729 930 2,946 39,976 79,675
AVERAGES:
Assets 10,318 10,265 NM NM 10,392 10,318
Loans 7,327 7,235 NM NM 7,344 7,237
Earnings assets 9,649 9,599 NM NM 9,681 9,611
Deposits 7,409 7,201 NM NM 7,382 7,180
Equity $ 0.873 0.859 NM NM 0.846 0.839
RATIOS:
ROCE (ROE) NM NM NM NM 19.09 % 19.18 %
ROA NM NM NM NM 1.55 % 1.55 %
Efficiency ratio NM NM NM NM 48.79 % 47.52 %
                                                 
In thousands, except
averages in millions
Parent Company
Super Other Subsidiaries Corporate
1999 Community Banking & Eliminations Consolidated
OPERATIONS: 2Q YTD 2Q YTD 2Q YTD
Net interest income $ 103,289 199,161 (1,322 ) (2,747 ) 101,967 196,414
Provision for loan losses 9,392 25,610 265 445 9,657 26,055
Other income 34,962 71,810 1,462 2,663 36,424 74,473
Other expenses 74,501 179,934 (1,571 ) (1,588 ) 72,930 178,346
Income before extraordinary charge 33,572 39,921 5,336 4,330 38,908 44,251
Net income 33,572 34,074 5,336 4,330 38,908 38,404
AVERAGES:
Assets 9,312 9,187 NM NM 9,330 9,177
Loans 6,899 6,702 NM NM 6,904 6,710
Earnings assets 8,654 8,517 NM NM 8,623 8,473
Deposits 6,775 6,778 NM NM 6,721 6,719
Equity $ 0.827 0.828 NM NM 0.895 0.906
RATIOS:
ROCE (ROE) NM NM NM NM 17.43 % 8.55 %
ROA NM NM NM NM 1.67 % 0.84 %
Efficiency ratio* NM NM NM NM 51.13 % 52.47 %

      NM=Not Meaningful

      * - Adjusted for merger-related and conforming expenses and an extraordinary item.

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      The table below presents estimated revenues from external customers, by product and service group for the 2000 and 1999 periods:

                                                                   
Dollars in 000s
2000 Retail Commercial Trust Total
2Q YTD 2Q YTD 2Q YTD 2Q YTD
Interest and fees $ 102,228 199,504 111,378 220,683 5,775 10,835 219,381 431,022
Service charges 11,776 23,859 3,555 5,985 — — 15,331 29,844
Loan sales/service 1,723 4,503 — — — — 1,723 4,503
Totals $ 115,727 227,866 114,933 226,668 5,775 10,835 236,435 465,369

                                                                   
Dollars in 000s
1999 Retail Commercial Trust Total
2Q YTD 2Q YTD 2Q YTD 2Q YTD
Interest and fees $ 97,097 195,195 89,036 175,763 4,595 8,781 190,728 379,739
Service charges 11,725 21,608 2,394 4,835 — — 14,119 26,443
Loan sales/service 1,855 3,863 — — — — 1,855 3,863
Totals $ 110,677 220,666 91,430 180,598 4,595 8,781 206,702 410,045

      4. Earnings per Share — The reconciliation of the numerator and denominator of basic earnings per share (“EPS”) with that of diluted EPS is presented as follows:

                                 
EARNINGS PER SHARE 2Q 2000 YTD 2000 2Q 1999 YTD 1999
Net income $ 39,976 79,675 38,908 38,404
Less: preferred stock dividends (64 ) (129 ) (84 ) (171 )
Income available to common shareholders 39,912 79,546 38,824 38,223
Average common shares outstanding 88,341,098 88,327,153 91,048,773 91,028,180
Earnings per basic common share $ 0.45 0.90 0.43 0.42
Income available to common shareholders $ 39,912 79,546 38,824 38,223
Add: preferred stock dividends 64 129 84 171
Add: interest on convertible bonds, net 13 29 18 39
Income used in diluted EPS calculation 39,989 79,704 38,926 38,433
Average common shares outstanding 88,341,098 88,327,153 91,048,773 91,028,180
Add: common stock equivalents — stock options 234,155 215,979 653,245 639,515
Add: common stock equivalents - convertible debentures 94,561 107,071 142,214 145,916
Add: common stock equivalents - convertible preferred securities 348,712 394,483 466,540 530,743
Average common shares and common stock equivalents outstanding 89,018,526 89,044,686 92,310,772 92,344,354
Earnings per diluted common share $ 0.45 0.90 0.42 0.42

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      5. In June 1998, the FASB issued Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Statement No. 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 which delayed implementation of Statement No. 133 until the first quarter 2001. The Corporation does not anticipate the adoption of FAS 133 will have a material effect on its earnings or financial condition.

      6. On March 16, 2000, the Corporation issued $150 million of subordinated bank notes under a previously disclosed debt agreement. The notes bear interest at 8.625% and mature on April 1, 2010. Under the agreement, the aggregate principal outstanding at any one time may not exceed $1.0 billion. The notes were offered only to institutional investors.

      7. Management believes the interim unaudited consolidated financial statements reflect all adjustments consisting only of normal recurring accruals and reclassifications, necessary for fair presentation of the June 30, 2000 and 1999 and December 31, 1999 statements of condition and the results of operations for the quarters and six-month periods ended June 30, 2000 and 1999. These results have been determined on the basis of generally accepted accounting principles.

      8. 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, 1999.

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AVERAGE CONSOLIDATED BALANCE SHEETS
Fully-tax Equivalent Interest Rates and Interest Differential

FIRSTMERIT CORPORATION AND SUBSIDIARIES

                                                                                 
Three months ended Year ended Three months ended
(Dollars in thousands) June 30, 2000 December 31, 1999 June 30, 1999
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
Investment securities:
U.S. Treasury securities and U.S Government agency obligations (taxable) $ 1,852,549 30,002 6.51 % 1,444,591 87,238 6.04 % 1,276,038 18,450 5.80 %
Obligations of states and political subdivisions (tax-exempt) 119,139 2,430 8.20 % 130,416 10,618 8.14 % 136,300 2,806 8.26 %
Other securities 296,675 5,258 7.13 % 317,799 19,275 6.07 % 305,786 4,462 5.85 %
Total investment securities 2,268,363 37,690 6.68 % 1,892,806 117,131 6.19 % 1,718,124 25,718 6.00 %
Federal funds sold & other interest-earning assets 18,042 301 6.71 % 5,041 204 4.05 % 1,149 14 4.89 %
Loans held for sale 50,374 1,003 8.01 % 34,418 4,635 13.47 % — — —
Loans 7,343,730 159,236 8.72 % 6,865,330 567,132 8.26 % 6,903,701 145,682 8.46 %
Total earning assets 9,680,509 198,230 8.24 % 8,797,595 689,102 7.83 % 8,622,974 171,414 7.97 %
Allowance for possible loan losses (110,139 ) (105,918 ) (104,875 )
Cash and due from banks 242,325 266,935 272,025
Other assets 578,930 534,435 539,573
Total assets $ 10,391,625 9,493,047 9,329,697
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand- non-interest bearing 1,052,392 — — 1,055,306 — — 1,080,078 — —
Demand- interest bearing 645,325 832 0.52 % 667,469 4,774 0.72 % 694,590 1,725 1.00 %
Savings 1,808,127 12,821 2.85 % 1,791,390 40,327 2.25 % 1,836,459 10,139 2.21 %
Certificates and other time deposits 3,876,139 56,317 5.84 % 3,284,516 169,783 5.17 % 3,109,435 39,107 5.04 %
Total deposits 7,381,983 69,970 3.81 % 6,798,681 214,884 3.16 % 6,720,562 50,971 3.04 %
Federal funds purchased, securities sold under agreements to repurchase and other borrowings 2,030,837 31,988 6.34 % 1,666,025 85,981 5.16 % 1,538,493 17,332 4.52 %
Total interest bearing liabilities 8,360,428 101,958 4.90 % 7,409,400 300,865 4.06 % 7,178,977 68,303 3.82 %
Other liabilities 111,576 126,767 154,059
Mandatorily redeemable preferred securities 21,450 21,450 21,450
Shareholders’ equity 845,779 880,124 895,133
Total liabilities and shareholders’ equity $ 10,391,625 9,493,047 9,329,697
Net yield on earning assets $ 9,680,509 96,272 4.00 % 8,797,595 388,237 4.41 % 8,622,974 103,111 4.80 %
Interest rate spread 3.34 % 3.77 % 4.15 %
     
Notes: Interest income on tax-exempt securities and loans have been adjusted to a fully-taxable equivalent basis. Non-accrual loans have been included in the average balances.

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RESULTS OF OPERATIONS

      FirstMerit Corporation’s second quarter 2000 net income was $40.0 million, or 2.8% above the $38.9 million earned in the second quarter of 1999. Return on average common equity (ROE) for the current year three-month period was 19.09%, up from 17.43% a year ago. Return on average assets (ROA) for the three months ended June 30, 2000 was 1.55% compared to 1.67% for the same 1999 period.

      For the six-month period ended June 30, 2000, net income totaled $79.7 million, up 4.2% from $76.5 million last year, when 1999 after-tax merger costs of $38.1 million are excluded. First-half 1999 net income was $38.4 million including merger costs. ROE and ROA for the 2000 first half were 19.18% and 1.55%, respectively, compared to the same ratios for 1999, on an adjusted basis, of 17.03% and 1.68%.

      Net interest income on a fully tax-equivalent basis (FTE) was $96.2 million for the second quarter of 2000 compared to $103.1 million for the prior year quarter, a decrease of 6.7%. This decrease reflects a decline in net interest margin from 4.80% last year to 4.00% this current quarter, partially offset by a 12.3% increase in average earning assets. For the first six months of 2000, net interest income FTE totaled $193.7 million compared to $198.7 million last year. Similar to the trend for the three-month period, the decline in net interest income occurred as higher interest income was more than offset by higher funding costs. The net interest margin for the half was 4.05% compared to 4.73% in 1999.

      Adjusted net revenue for the second quarter of 2000 was $135.3 million or $1.52 per share, up 2.4% from the prior year level of $1.48 per share. The impact of margin compression slightly exceeded growth in fee income. Excluding gains/losses from the sale of securities, non-interest income was $39.1 million, a 15.2% increase from the $33.9 million reported a year ago. Trust income, credit card fees and other operating income, including higher commissions on equity and insurance sales continued their strong performance during the quarter, offset by declines in manufactured housing income and loan sales — due to lower sale activity. Second quarter 2000 fees accounted for 28.9% of net revenues compared to 24.7% in the second quarter of 1999. For the six-month period, fees comprised 28.88% of net revenue, up 384 basis points from 25.04% a year ago.

      Non-interest expense totaled $68.7 million in the second quarter of this year, down 5.8% from second quarter 1999 expenses of $72.9 million. Lower costs were experienced in salary and benefit expenses, equipment expense and other operating expense. The efficiency ratio improved to 48.8% for this quarter versus 51.1% a year ago. The efficiency ratios for the two six-month periods, excluding merger costs in 1999, were 47.52% and 52.47%, respectively.

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      Period-end assets reached $10.5 billion, 10.5% ahead of 1999 year ago assets of $9.5 billion. Earning assets were up 11.2%, while loans, excluding mortgage loans (which yield less than the other loan types), rose 19.1%. Commercial loans increased 12.3%, installment loans were up 16.4% and manufactured housing loans rose 64.6%, accounting for the majority of the portfolio growth.

      Total deposits at June 30, 2000 were $7.8 billion, an increase of 17.4% above year ago 1999 levels; time deposits, up 37.2%, accounted for most of the deposit growth.

      The second quarter loan loss provision was $8.3 million, down 13.6% from the second quarter 1999 provision of $9.7 million. Net charge-offs for the quarter were $6.5 million, or 0.36% of average loans outstanding on an annualized basis, compared to 0.47% at March 31, 2000 and 0.29% a year ago. The allowance stands at 1.49% of period-end loans compared to 1.50% at the end of the prior-year quarter. Non-performing assets as a percent of loans and other real estate were 0.40% this second quarter, compared with 0.46% at March 31, 2000 and 0.30% at June 30, 1999. Reserve coverage of non-performing assets was 3.7 times at quarter end compared to 3.2 times at March 31, 2000 and 5.0 times at June 30, 1999.

      Shareholders’ equity was $866.8 million at quarter end. Average equity to assets for this 2000 quarter was 8.14% compared to 9.59% last year. Common stock dividends paid during the quarter were $0.22 per share up from $0.18 last year. For the six months ended June 30, 2000, cash dividends paid on common shares were $0.42, up 16.7% from the $0.36 paid during the same 1999 period. At quarter end, there were 88.3 million common shares outstanding.

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      Diluted earnings per share for the second quarter were $0.45 compared to last year’s quarterly earnings of $0.42. For the six months ended June 30, 2000, diluted earnings per share were $0.90 compared to $0.83 recorded for the same 1999 period, when 1999 first quarter merger costs and the extraordinary charge are excluded (defined as core earnings). Diluted earnings per share for the six months ended June 30, 1999 totaled $0.42 when the merger costs and extraordinary charge are included. The components of change in per share income for the three-month and six-month periods ended June 30, 2000 and 1999 are summarized in the following table:

                                 
Reported Reported Core Earnings
Three months Six months Six months
ended ended ended
Changes in Earnings per June 30, June 30, June 30,
Share 2000/1999 2000/1999 2000/1999
Diluted net income/core earnings per share June 30, 1999 $ 0.42 0.42 0.83
Increases (decreases) due to:
Net interest income — taxable equivalent (0.07 ) (0.06 ) (0.05 )
Provision for possible loan losses 0.01 0.07 (0.04 )
Other income 0.03 0.03 0.03
Other expenses 0.04 0.48 0.11
Federal income taxes — taxable equivalent 0.00 (0.14 ) (0.01 )
Extraordinary item - extinguishment of debt — 0.07 —
Change in share base 0.02 0.03 0.03
Net change in diluted net income per share 0.03 0.48 0.07
Diluted net income per share June 30, 2000 $ 0.45 0.90 0.90

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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, 2000 was $96.3 million compared to $103.1 million for the same period one year ago, a decrease of $6.8 million. The decrease occurred because the rise in FTE interest income of $26.8 million was more than offset by the increase in interest expense of $33.6 million.

      As shown in the following rate/volume table, FTE interest income rose $26.8 million mainly as a result of volume increases in earning assets, which accounted for 74% of the increase. Specifically, compared to the same quarter last year, the higher interest income was produced as follows: higher loan outstandings contributed $10.5 million; higher securities balances, including federal funds sold, added $9.3 million; higher yields on loans contributed $4.0 million and higher yields on securities/fed funds sold added the remaining $3.0 million.

      The increase in interest expense of $33.7 million, compared to the same 1999 quarter, was more evenly split between rate (45%) and volume (55%) than was the rise in interest income. The biggest factors for higher interest costs were increases related to higher average certficate and time (CD) balances ($11.1 million); higher rates paid on CDs ($6.1 million); higher wholesale borrowing balances ($7.8 million) and higher wholesale borrowing rates.

      For the year-to-date period, net interest income FTE declined $5.0 million to $193.7 million. The net decrease occurred as interest income FTE rose $51.4 million while interest expense increased $56.4 million. Higher loan volume added $25.6 million to interest income, compared to last year’s six-month period, higher securities balances added $17.5 million and higher rates earned on all interest-bearing assets increased interest income by $8.0 million. Interest expense rose as higher interest rates on customer deposits and wholesale borrowings increased interest expense by $17.1 million and interest paid on higher funding volumes resulted in an increase in interest expense of $39.3 million.

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Changes in Net Interest Differential —
Fully-Tax Equivalent Rate/Volume Analysis
(Dollars in thousands)

                                                 
Quarters ended Six Months Ended
June 30, June 30,
2000 and 1999 2000 and 1999
Increase (Decrease) Increase (Decrease)
Interest Income/Expense Interest Income/Expense
Volume Yield Rate Total Volume Yield Rate Total
INTEREST INCOME
Investment Securities $ 8,959 3,013 11,972 17,546 2,939 20,485
Loans and loans held for sale 10,544 4,013 14,557 25,571 5,086 30,657
Federal funds sold and others 282 5 287 262 0 262
     Total interest income $ 19,785 7,031 26,816 43,379 8,025 51,404
INTEREST EXPENSE
Interest on deposits:
   Demand-interest bearing $ (64 ) (829 ) (893 ) (85 ) (1,054 ) (1,139 )
   Savings (201 ) 2,883 2,682 (1,082 ) 4,744 3,662
   Certificates and other time deposits 11,140 6,070 17,210 17,135 7,999 25,134
   Federal Funds Purchased, REPOs &
   other borrowings		 7,755 6,901 14,656 23,356 5,390 28,746
     Total interest expense $ 18,630 15,025 33,655 39,324 17,079 56,403
Net interest income $ 1,155 (7,994 ) (6,839 ) 4,055 (9,054 ) (4,999 )

Note: The variance created by a combination of rate and volume has been entirely allocated to the volume column.

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.

2

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Net Interest Margin
(Dollars in thousands)

                                 
Quarters Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Net interest income per financial statements $ 95,289 101,975 191,740 196,422
Tax equivalent adjustment 983 1,136 1,993 2,310
Net interest income — FTE 96,272 103,111 193,733 198,732
Average earning assets $ 9,680,509 8,622,974 9,610,892 8,473,480
Net interest margin 4.00 % 4.80 % 4.05 % 4.73 %

Other Income

      Other income for the quarter ended June 30, 2000 was $39.2 million, an increase of $2.8 million or 7.6%, over the $37.0 million earned during the same period last year. Excluding securities sales, the increase in other income was $5.2 million, or 15.2%. For the six-month period, excluding securities gains, other income totaled $78.7 million, up 18.5% from $66.4 million a year ago.

      Trust department income for the second quarter was $5.8 million, up 25.7% from the $4.6 million earned one year ago. Service charges on depositors’ accounts increased 10.1% to $11.6 million from $10.6 million for last year’s second quarter. Credit card fees, including merchant services, increased 21.1% to $8.3 million for the quarter compared to $6.8 million for the three months ended June 30, 1999. Other service fees, including Automated Teller Machine (ATM) revenue, rose from $3.5 million during the 1999 second quarter to $3.7 million for the same current year period. Manufactured housing income was $0.9 million for the quarter compared to $1.4 million last year. Gains on sales of securites were $137 thousand during the quarter compared to $2.5 million in 1999. Loan sales and servicing income was $1.7 million in the 2000 quarter and $1.9 million in 1999. Other operating income was $7.0 million compared to $5.1 million in 1999.

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      First-half 2000 results compared to the same 1999 period were as follows: trust department income increased 23.4%; service charges on depositors’ accounts increased 15.2%; credit card and merchant service fees increased 24.5%; other service fees, which include ATM revenue, increased 6.2%; manufactured housing income declined from $2.8 million to $1.6 million; securities losses of $0.6 million were recorded during the first six months of 2000 versus gains of $8.1 million in 1999; loan sales and servicing increased 16.6% and other operating income increased $4.4 million.

      The Corporation continues to recognize other income as an important complement to net interest income as it provides a source of revenues not sensitive to the interest rate environment.

Other Expenses

      Other expenses were $68.7 million for the second quarter, a decrease of $4.2 million, or 5.8%, from the $72.9 million recorded during the same quarter last year. Year-to-date 2000 operating costs totaled $134.8 million, down $9.9 million or 6.9% from the $144.7 million recorded for the 1999 first-half, when 1999 merger costs of $33.6 million are excluded.

      The “lower-is-better” efficiency ratio for the second quarter was 48.79%, an improvement of 234 basis points compared to 51.13% for the year ago quarter. The efficiency ratio for the first half of 2000 was 47.52%, an improvement of 495 basis points over the 52.47% recorded in 1999 when 1999 merger costs are excluded. The 2000 second quarter efficiency ratio indicates it took 48.79 cents of operating costs to generate every dollar of profit. The improvement in the efficiency ratios is primarily a result of lower operating costs when compared to the same periods in 1999.

      Salaries, wages, pension and employee benefits (“salaries and benefits”), the largest component of other expenses, totaled $31.0 million for second quarter 2000, down $2.1 million from last year’s expense of $33.1 million. For the six-month period, salaries and benefits were $63.4 million, down $4.2 million or 6.3%, from the like-basis total of $67.6 million in 1999, which excludes $7.7 million of personnel merger costs.

      Other operating expenses for the 2000 second quarter were $26.0 million, down from $27.1 million last year. Year-to-date 2000 other operating expenses totaled $46.8 million, down $4.2 million or 8.2% from the merger-costs-adjusted 1999 total of $51.0 million.

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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:

                                   
June 30, 2000
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury securities and U.S
Government agency obligations $ 806,178 155 21,215 785,118
Obligations of state and political subdivisions 112,001 366 1,119 111,248
Mortgage-backed securities 1,105,995 73 44,075 1,061,993
Other securities 295,075 321 13,930 281,466
$ 2,319,249 915 80,339 2,239,825
Due in one year or less $ 122,508 120,531
Due after one year through five years 466,123 455,560
Due after five years through ten years 386,262 374,844
Due after ten years 1,344,356 1,288,890
$ 2,319,249 2,239,825

      The book value and market value of investment securities including mortgage-backed securities and derivatives at June 30, 2000, 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.

      The carrying value of investment securities pledged to secure trust and public deposits and for purposes required or permitted by law amounted to approximately $1.9

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billion at June 30, 2000, $1.7 billion at December 31, 1999 and $1.3 billion at June 30, 1999.

      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, 2000 were $7.409 billion compared to $7.014 billion at December 31, 1999 and $7.139 billion at June 30, 1999. Excluding mortgage loans, which have decreased 46.7% from the same quarter last year, average commercial and consumer loans grew $1.2 billion or 23.4% during the last twelve months.

      On a categorical basis, increases in average loan outstanding balances occurred in commercial loans, up $454.6 million or 16.1%; manufactured housing loans, up $431.5 million or 104.0%; installment loans, up $171.8 million or 12.9%; home equity loans up $45.6 million or 12.0% and credit card outstandings up $3.6 million or 3.6%. The manufactured housing loan growth was primarily due to FirstMerit retaining a higher percentage of originated loans in its own loan porfolio (i.e., there were fewer sales to other banking institutions in 2000 compared to 1999). Average mortgage loans declined $783.0 million or 46.7% as the Corporation’s continues to shift its loan mix away from lower-yielding mortgage loans and toward higher-yielding commercial and consumer credits.

      Similar to the quarterly growth, 2000 year-to-date average loan outstandings increased in all categories except mortgage loans. For the six-month periods, average loans totaled $7.237 billion for 2000 and $6.710 billion for the prior year. Average outstanding loans for the quarter and six-month periods equaled 75.9% and 75.4% of average earning assets, respectively.

Asset Quality

      At June 30, 2000, total nonperforming assets, defined as nonaccrual loans, restructured loans and other real estate (“ORE”), were $29.5 million 0.40% of total outstanding loans and ORE. These same statistics for other recent quarter-ends were as follows: $33.5 million or 0.46% at March 31, 2000; $25.3 million or 0.36% at December 31, 2000; and $21.4 million or 0.30% at June 30, 1999.

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      Impaired loans are loans for which, based on current information or events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans must be valued based on the present value of the loans’ expected future cash flows at the loans’ effective interest rates, at the loans’ observable market 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.

                           
(Dollars in thousands)
June 30, December 31, June 30,
2000 1999 1999
Impaired Loans:
Non-accrual $ 22,558 20,159 16,921
Restructured 212 47 83
   Total impaired loans 22,770 20,206 17,004
Other Loans:
Non-accrual 2,622 1,905 2,577
Restructured — — —
   Total other nonperforming loans 2,622 1,905 2,577
   Total nonperforming loans 25,392 22,111 19,581
Other real estate owned (ORE) 4,122 3,173 1,814
   Total nonperforming assets $ 29,514 25,284 21,395
Loans past due 90 days or more accruing interest $ 21,673 30,878 28,585
Total nonperforming assets as a percent of total loans and ORE 0.40 % 0.36 % 0.30 %

NA = 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.

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Allowance for Loan Losses

      The allowance for possible loan losses at June 30, 2000 totaled $110.1 million, or 1.49% of total loans outstanding compared to $104.9 million, or 1.50% and $106.8 million, or 1.50% at December 31, 1999 and June 30, 1999, respectively.

                             
Six months ended Year ended Six months ended
Dollars in thousands June 30, 2000 December 31, 1999 June 30, 1999
Allowance — beginning of period $ 104,897 96,149 96,149
Acquisition adjustment/other — 1,028 1,012
Loans charged off:
Commercial, financial, agricultural 10,199 7,539 6,866
Installment to individuals 12,256 35,904 15,741
Real estate 1,223 3,350 2,253
Lease financing 806 1,043 600
Total charge-offs 24,484 47,836 25,460
Recoveries:
Commercial, financial, agricultural 3,890 3,997 2,674
Installment to individuals 5,158 12,910 5,967
Real estate 217 540 194
Lease financing 351 679 194
Total recoveries 9,616 18,126 9,029
Net charge-offs 14,868 29,710 16,431
Provision for possible loan losses 20,060 37,430 26,055
Allowance — end of period $ 110,089 104,897 106,785
Annualized net charge offs as a percent of average loans 0.41 % 0.43 % 0.49 %
Allowance for possible loan losses:
As a percent of loans outstanding at end of period 1.49 % 1.50 % 1.50 %
As a multiple of annualized net charge offs 3.68X 3.53X 3.22X

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      The Corporation’s Credit Quality department manages credit risk by establishing common credit policies for its subsidiaries, which operate under the authority of the Corporation’s Board of Directors Credit Committee, participating in approval of larger loans, conducting reviews of loan portfolios, providing centralized consumer underwriting, collections and loan operation services, and overseeing loan workouts. The Corporation’s objective is to minimize losses from commercial lending activities and to maintain consumer losses at levels that are within desired risk parameters and consistent with growth and profitability objectives.

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Deposits

      The following schedule illustrates the change in composition of the average balances of deposits and average rates paid for the noted periods.

                                                 
(Dollars in thousands)
Three months and year ended
June 30, 2000 December 31, 1999 June 30, 1999
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Non-interest DDA $ 1,036,417 — 1,055,306 — 1,080,078 —
Interest-bearing DDA 644,586 0.52 % 667,469 0.72 % 694,590 1.00 %
Savings deposits 1,777,790 2.85 % 1,791,390 2.25 % 1,836,459 2.21 %
CDs and other time 3,721,214 5.84 % 3,284,516 5.17 % 3,109,435 5.04 %
$ 7,180,007 3.81 % 6,798,681 3.16 % 6,720,562 3.04 %

      Average CDs totaled $3.876 billion for the quarter ended June 30, 2000, up 24.7% from $3.109 billion for the same 1999 quarter. On a percentage basis, average CDs were 45% and 43% of average total interest bearing funds for the June 30, 2000 and 1999 quarters, respectively; average savings deposits, including money market accounts, were 22% of average interest bearing funds during the quarter ended June 30, 2000 and 26% for the same period last year; average interest-bearing demand deposits were 8% of total average interest bearing funds during 2000’s second quarter and 9% for the corresponding last year period; and average wholesale borrowings increased from 21% of average interest-bearing funds during the three months ended June 30, 1999 to 24% for the June 30, 2000 quarter. During the threee months ended June 30, 2000, average interest bearing liabilities funded approximately 86% of average earning assets compared to 83% in 1999 .

      The following table summarizes the certificates and other time deposits in amounts of $100 thousand or more, as of June 30, 2000, by time remaining until maturity.

         
(Dollars in thousands) Amount
Maturing in:
Under 3 months $ 666,354
3 to 12 months 491,706
Over 12 months 566,946
$ 1,725,006

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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.

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Capital Resources

      Shareholders’ equity at June 30, 2000 totaled $866.8 million compared to $833.6 million at December 31, 1999 and $866.5 million at June 30, 1999.

The following table reflects the various measures of capital:

                                                 
At December 31,
At June 30, 2000 1999 At June 30, 1999
(In thousands)
Total equity $ 866,796 8.27 % 833,575 8.24 % 866,502 9.13 %
Common equity 863,771 8.24 % 829,697 8.20 % 862,456 9.09 %
Tangible common equity (a) 707,374 6.85 % 668,321 6.71 % 704,236 7.55 %
Tier 1 capital (b) 778,638 9.10 % 734,492 8.81 % 723,730 9.30 %
Total risk-based capital (c) 1,037,927 12.14 % 843,658 10.12 % 824,526 10.55 %
Leverage (d) 778,638 7.61 % 734,492 7.47 % 723,730 8.37 %

  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, 2000 the Corporation’s risk-based capital equaled 12.14% of risk adjusted assets, exceeding the minimum guidelines.

      The cash dividend of $0.22 paid in the second quarter has an indicated annual rate of $0.88 per share.

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PART II. — OTHER INFORMATION

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On April 19, 2000, the Registrant held its Annual Meeting of Shareholders for which the Board of Directors solicited proxies. At the Annual Meeting, the shareholders adopted a proposal, as stated in the Proxy Statement dated March 13, 2000, to elect five Class III directors and to fix the total number of directors at eighteen. The proposal was voted on and approved by the shareholders. The voting results for election of the directors are as follows:

        1. The election of five Class III directors, being:

                         
For Against Abstain
John C. Blickle 74,913,670 * 2,105,635
Sid A. Bostic 73,729,771 * 3,289,534
Terry L. Haines 75,064,344 * 1,954,961
Robert G. Merzweiler 75,087,663 * 1,931,642
Jerry M. Wolf 75,070,094 * 1,949,211

        All other Class I and Class II directors continued in their positions.

        * Proxies provide that shareholders may either cast a vote for, or abstain from voting for, directors.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

      (a) Exhibits

     
Exhibit
Number Exhibit Index
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)

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4.4 Indenture dated as of February 13, 1998 between Firstar Bank Milwaukee, National Association, as trustee and Signal Corp (incorporated by reference from Exhibit 4.1 to the Form S-4, No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)
4.5 Amended and Restated Declaration of Trust of FirstMerit Capital Trust I, fka Signal Capital Trust I, dated as of February 13, 1998 (incorporated by reference from Exhibit 4.5 to the Form S-4 No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13,1998)
4.6 Form Capital Security Certificate (incorporated by reference from Exhibit 4.6 to the Form S-4 No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)
4.7 Series B Capital Securities Guarantee Agreement (incorporated by reference from Exhibit 4.7 to the Form No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)
4.8 Form of 8.67% Junior Subordinated Deferrable Interest Debenture, Series B (incorporated by reference from Exhibit 4.7 to the Form S-4 No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)
10.1 1982 Incentive Stock Option Plan of FirstMerit Corporation (incorporated by reference from Exhibit 4.2 to the Form S-8 (No. 33-7266) filed by the registrant on July 15, 1986)*
10.2 Amended and Restated 1992 Stock Option Program of FirstMerit Corporation (incorporated by reference from Exhibit 10.2 to the Form 10-K filed by the registrant on February 24, 1998)*
10.3 FirstMerit Corporation 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 FirstMerit Corporation 1997 Stock Option Program (incorporated by reference from Exhibit 10.5 to the Form 10-K filed by the registrant on February 24, 1998)*
10.6 FirstMerit Corporation 1999 Stock Plan (incorporated by reference from Exhibit 10.39 to the Form S-8 filed by the Registrant on May 21, 1999)*
10.7 FirstMerit Corporation 1987 Stock Option and Incentive Plan (SF)1998 (incorporated by reference from Exhibit 10.7 to the Form 10-K filed by the registrant on March 10, 2000)*
10.8 FirstMerit Corporation 1996 Stock Option and Incentive Plan (SF) (incorporated by reference from Exhibit 10.8 to the Form 10-K filed by the registrant on March 10, 2000)*
10.9 FirstMerit Corporation 1994 Stock Option Plan (SF) (incorporated by reference from Exhibit 10.9 to the Form 10-K filed by the registrant on March 10, 2000)*
10.10 FirstMerit Corporation 1989 Stock Incentive Plan (SB) (incorporated by reference from Exhibit 10.10 to the Form 10-K filed by the registrant on March 10, 2000)*
10.11 FirstMerit Corporation Amended and Restated Stock Option and Incentive Plan (SG) (incorporated by reference from Exhibit 10.11 to the Form 10-K filed by the registrant on March 10, 2000)*
10.12 FirstMerit Corporation 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)*
10.13 FirstMerit Corporation 1997 Omnibus Incentive Plan (SG) (incorporated by reference from Exhibit 10.13 to the Form 10-K filed by the registrant on March 10, 2000)*
10.14 FirstMerit Corporation 1993 Stock Option Plan (FSB) (incorporated by reference from Exhibit 10.14 to the Form 10-K filed by the registrant on March 10, 2000)*
10.15 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)*
10.16 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)*

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10.17 FirstMerit Corporation Executive Supplemental Retirement Plan (incorporated by reference from Exhibit 10(d) to the Form 10-K filed by the registrant on March 15, 1996)*
10.18 Amended and Restated Membership Agreement with respect to the FirstMerit Corporation Executive Supplemental Retirement Plan (incorporated by reference from Exhibit 10.39 to the Form 10-K filed by the Registrant on March 22, 1999)*
10.19 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)*
10.20 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)*
10.21 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)*
10.22 Long Term Disability Plan (incorporated by reference from Exhibit 10(x) to the Form 10-K filed by the registrant on March 2, 1995)*
10.23 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)*
10.24 Employment Agreement with John R. Macso, dated August 3, 1999 (incorporated by reference from Exhibit 10.13.1 to the Form 10-Q filed by the Registrant on November 12, 1999)*
A. Agreement with John R. Macso, dated August 3, 1999 (incorporated by reference from Exhibit 10.13.2 to the Form 10-Q filed by the Registrant on November 12, 1999)*
10.26 Stock Option Agreement with John R. Macso, dated August 3, 1999 (incorporated by reference from Exhibit 10.13.3 to the Form 10-Q filed by the Registrant on November 12, 1999)*
10.27 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)*
10.28 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)*
10.29 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)*
10.30 Restricted Stock Award Agreement of John R. Cochran dated March 1, 1995 (incorporated by reference from Exhibit 10(e) to the Form 10-Q filed by the registrant on May 15, 1995)*
10.31 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)*
10.32 First Amendment to Restricted Stock Award Agreement for John R. Cochran (incorporated by reference from Exhibit 10.38 to the Form 10-K filed by the Registrant on March 22, 1999)*
10.33 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)*
10.34 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)*
10.35 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)*
10.36 First Amendment to Restricted Stock Award 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)*
10.37 Form of FirstMerit Corporation Termination Agreement (incorporated by reference from Exhibit 10.24.1 to the Form 10-Q filed by the Registrant on March 22, 1999)*
10.38 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)*
10.39 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)*
10.40 Credit Agreement among FirstMerit Corporation, Bank of America, N.A., and Lenders, dated November 29,1999 (incorporated by reference from Exhibit 10.40 to the Form 10-K filed by the registrant on March 10, 2000)*
10.41 Distribution Agreement, by and among FirstMerit Bank, N.A. and the Agents, dated July 15, 1999

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(incorporated by reference from Exhibit 10.41 to the Form 10-K filed by the registrant on March 10, 2000)*
25.1 Form T-1 Statement of Eligibility of Firstar Trust Company to act as Property Trustee under the Amended and Restated Declaration of Trust of FirstMerit Capital Trust I, fka Signal Capital Trust I (incorporated by reference from Exhibit 26.1 to the Form S-4 No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)
25.2 Form T-1 Statement of Eligibility of Firstar Trust Company to act as Debenture Trustee under the FirstMerit Capital Trust I, fka Signal Capital Trust I, Indenture (incorporated by reference from Exhibit 26.1 to the Form S-4 No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)
27 Financial Data Schedule

*   Management Contract or Compensatory Plan or Arrangement

      (b) Form 8-K

      There were no Form 8-K filings during the second quarter 2000.

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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/ TERRENCE E. BICHSEL
Terrence E. Bichsel, Executive Vice President
and Chief Financial Officer

DATE: August 14, 2000



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