WASHINGTON, D.C. 20549

FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

FIRSTMERIT CORPORATION

(Exact name of registrant as specified in its charter)

OHIO

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, NO PAR VALUE

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for a least the past 90 days. Yes [X] No [  ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

     State the approximate aggregate market value of the voting stock held by non-affiliates of the registrant as of February 16, 2000: $1,383,203,687.

     Indicate the number of shares outstanding of registrant’s common stock as of February 16, 2000: 88,384,254 shares of common stock, without par value.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Proxy Statement of FirstMerit Corporation, dated March 13, 2000, in Part III.

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PART I

BUSINESS OF FIRSTMERIT

Overview

      Registrant, FirstMerit Corporation (“FirstMerit” or the “Corporation”), is a $10.1 billion bank holding company organized in 1981 under the laws of the State of Ohio and registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”). FirstMerit’s principal business consists of owning and supervising its affiliates. Although FirstMerit directs the overall policies of its affiliates, including lending practices and financial resources, most day-to-day affairs are managed by their respective officers. The principal executive offices of FirstMerit are located at III Cascade Plaza, Akron, Ohio 44308, and its telephone number is (330) 996-6300.

      At December 31, 1999, FirstMerit Bank, N.A., one of the Corporation’s principal subsidiaries (“FirstMerit Bank”), operated a network of 170 full service banking offices and 184 automated teller machines. Its offices span a total of 21 counties in Ohio, including Ashland, Ashtabula, Crawford, Cuyahoga, Delaware, Erie, Franklin, Geauga, Huron, Knox, Lake, Lorain, Madison, Medina, Portage, Richland, Seneca, Stark, Summit, Wayne and Wood Counties, and Lawrence county in Pennsylvania. In its principal market in Northeastern Ohio, FirstMerit serves over 542,000 households and businesses in the 14th largest consolidated metropolitan statistical area (“MSA”) in the country (which combines the primary MSAs for Cleveland, Lorain/ Elyria and Akron, Ohio). FirstMerit Bank has the leading market share in Summit, Medina, Stark, Wayne and Lorain counties in Ohio and one of the three highest market share positions in 11 of the 22 counties in which it operates within Ohio and Pennsylvania.

Subsidiaries and Operations

      Through its affiliates, FirstMerit operates primarily as a regional banking organization, providing a wide range of banking, fiduciary, financial, insurance and investment services to corporate, institutional and individual customers throughout northeastern and central Ohio. FirstMerit’s largest subsidiary is FirstMerit Bank into which FirstMerit has merged all of its subsidiary banks.

      FirstMerit Bank engages in commercial and consumer banking in its respective geographic markets. Commercial and consumer banking generally consists of the acceptance of a variety of demand, savings and time deposits and the granting of commercial and consumer loans for the financing of both real and personal property. As part of its community banking philosophy, FirstMerit Bank has divided its markets into ten geographic areas which are designated as follows: FirstMerit Bank/ Akron, FirstMerit Bank/ Citizens (Canton), FirstMerit Bank/ Cleveland, FirstMerit Bank/ Columbus, FirstMerit Bank/ Elyria, FirstMerit Bank/ Old Phoenix (Medina), FirstMerit Bank/ Wayne County (Wooster), FirstMerit Bank/ Peoples (Mentor), FirstMerit Bank/ New Castle, Pennsylvania and FirstMerit Bank/ Western Region. This strategy allows FirstMerit Bank to deliver a broad line of financial products and services with a community orientation and a high level of personal service. FirstMerit can therefore offer a wide range of specialized services tailored to specific markets in addition to the full range of customary banking products and services. These services include personal and corporate trust services, personal financial services, cash management services and international banking services.

      Other services provided by FirstMerit Bank or its affiliates include automated banking programs, credit cards, rental of safe deposit boxes, letters of credit, leasing, discount brokerage and life insurance products. FirstMerit Bank also operates a trust department, which offers estate and trust services. The majority of its customers is comprised of consumers and small and medium size businesses. FirstMerit Bank is not engaged in lending outside the continental United States and is not dependent upon any one significant customer or specific industry.

      FirstMerit’s non-banking direct and indirect subsidiaries provide insurance sales services, credit life, credit accident and health insurance, securities brokerage services, equipment lease financing and other financial services.

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      FirstMerit’s principal direct operating subsidiaries other than FirstMerit Bank include FirstMerit Credit Life Insurance Company and FirstMerit Community Development Corporation. FirstMerit Credit Life Insurance Company was formed in 1985 to underwrite credit life and credit accident and health insurance in connection with the extension of credit to its customers. FirstMerit Community Development Corporation was organized in 1994 to further FirstMerit’s efforts in identifying the credit needs of its lending communities and meeting the requirements of the Community Reinvestment Act (“CRA”). Congress enacted CRA to ensure financial institutions meet the deposit and credit needs of their communities. Through a community development corporation, financial institutions can fulfill these requirements by nontraditional activities such as acquiring, rehabilitating or investing in real estate in low to moderate income neighborhoods, and promoting the development of small business.

      FirstMerit Bank is the parent corporation of several wholly-owned Ohio corporations. In 1995, FirstMerit Mortgage Corporation (“FirstMerit Mortgage”), which is located in Canton, Ohio, was organized and capitalized. FirstMerit Mortgage originates residential mortgage loans and provides mortgage loan servicing for itself and FirstMerit Bank. In 1993, FirstMerit Leasing Company (“FirstMerit Leasing”) and FirstMerit Securities, Inc. (“FirstMerit Securities”) were organized. FirstMerit Leasing provides equipment lease financing and related services, while FirstMerit Securities offers discount brokerage services to customers of FirstMerit Bank and other FirstMerit subsidiaries.

      In connection with the acquisition of Signal Corp (“Signal”), which was merged with and into FirstMerit on February 12, 1999, FirstMerit acquired Signal’s wholly owned subsidiary, Mobile Consultants, Inc. (“MCI”), a broker and servicer of manufactured housing finance contracts. Ownership of MCI was transferred to FirstMerit Bank on November 30, 1999 for business and regulatory purposes.

      FirstMerit Bank is also the parent corporation of Abell & Associates, Inc. (“Abell”) a nationally-known life insurance and financial consulting firm acquired in May 1997, and FirstMerit Insurance Agency, Inc. Abell assists in the design and funding of estate plans, corporate succession plans and executive compensation plans. The firm also does consulting work for law and accounting firms, as well as individual corporations, concentrating on funding for corporate liability issues. FirstMerit Insurance Agency, Inc. became a subsidiary of FirstMerit Bank when FirstMerit acquired Great Northern Financial Corporation in 1994 (at which time its life insurance license was inactive). FirstMerit Insurance Agency, Inc.’s license to sell life insurance products and annuities was reactivated in 1997.

      Although FirstMerit is a corporate entity legally separate and distinct from its affiliates, bank holding companies such as FirstMerit, which are subject to the BHCA, are expected to act as a source of financial strength for their subsidiary banks. The principal source of FirstMerit’s income is dividends from its subsidiaries. There are certain regulatory restrictions on the extent to which financial institution subsidiaries can pay dividends or otherwise supply funds to FirstMerit.

Recent Transactions

      FirstMerit engages in discussions concerning possible acquisitions of other financial institutions and financial services companies on a regular basis. FirstMerit also periodically acquires branches and deposits in its principal markets. FirstMerit’s strategy for growth includes strengthening market share in its existing markets, expanding into complementary markets and broadening its product offerings. Consistent with this strategy, FirstMerit completed two strategic acquisitions in 1998 and one in early 1999.

      FirstMerit believes these strategic acquisitions have strengthened and will continue to further strengthen its competitive position in the northeastern and central Ohio markets and have broadened the financial services it can offer to its customers. FirstMerit believes it has significant experience in integrating acquired businesses and continues to explore acquisition opportunities that would meet its objectives.

      Signal Corp Acquisition. On February 12, 1999, Signal merged with and into FirstMerit in a tax-free, stock-for-stock exchange (the “Signal Merger”). Signal was a bank holding company, which had as its primary wholly-owned subsidiaries Signal Bank, N.A., a national bank, Summit Bank, N.A., a national bank, First Federal Savings Bank of New Castle, a federal savings bank and MCI. At the time of the acquisition, Signal had total assets of $1.95 billion, total deposits of $1.38 billion, and stockholders’ equity of $137.8 million. All shares

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      Security First Acquisition. On October 23, 1998, FirstMerit acquired Security First Corporation (“Security First”) pursuant to an Agreement of Affiliation and Plan of Merger by and between Security First and FirstMerit. Security First was the parent company of Security Federal Savings and Loan Association of Cleveland and First Federal Savings Bank of Kent. At the time of the acquisition, Security First had total assets of $771.1 million, total deposits of $494.9 million, and stockholders’ equity of $73.1 million. At the effective time of the Security First Merger, based upon the average closing price of the Corporation’s common stock of $22.58 per share over a specified period, the value of the transaction on such date was approximately $199.0 million. In connection with the Security First Merger, the Corporation issued approximately 7.0 million shares of common stock. The transaction was accounted for as a pooling-of-interests.

      At the time FirstMerit announced the Security First Merger, FirstMerit also announced the termination of a previously initiated stock repurchase program. In order for the Security First Merger to be treated as a pooling-of-interests for accounting purposes, FirstMerit reissued approximately 1.38 million shares of its common stock through an underwritten public offering which closed on September 14, 1998.

      CoBancorp Acquisition. FirstMerit completed the acquisition of CoBancorp Inc., Elyria, Ohio, (“CoBancorp”) the parent of PremierBank & Trust and Jefferson Savings Bank, on May 22, 1998 (the “CoBancorp Merger”). At the time of the acquisition, CoBancorp had consolidated assets of $643.9 million, total deposits of $562.1 million, and stockholders’ equity of $61.3 million. The CoBancorp Merger was structured as a tax-free exchange for CoBancorp shareholders who received common stock of the Corporation, and was accounted for as a purchase transaction. At the effective time of the CoBancorp Merger, based upon the average closing price of FirstMerit’s common stock of $29.375 per share over a specified period, the value of the transaction on such date was approximately $174.1 million. In connection with the CoBancorp Merger, the Corporation issued approximately 3.9 million shares of common stock, paid $50.0 million in cash (based upon the CoBancorp shareholder elections and allocations), and assumed merger-related liabilities of approximately $9.6 million. The transaction created goodwill of $138.3 million that is being amortized primarily over 25 years.

Competition

      The financial services industry is highly competitive. FirstMerit and its subsidiaries (the “Subsidiaries”) compete with other local, regional and national providers of financial services such as other bank holding companies, commercial banks, savings associations, credit unions, consumer and commercial finance companies, equipment leasing companies, brokerage institutions, money market funds and insurance companies. The Subsidiaries’ primary financial institution competitors include Bank One, National City Bank, KeyBank, Firstar Bank and Fifth Third Bank. Under the Gramm-Leach-Bliley Act of 1999, effective March 11, 2000, securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act may significantly change the competitive environment in which FirstMerit and its Subsidiaries conduct business. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties. Mergers between financial institutions within Ohio and in neighboring states have added competitive pressure, which pressure has intensified due to interstate banking which became permissible under the Interstate Banking and Branching Efficiency Act of 1994. FirstMerit competes in its markets by offering quality and innovative services at competitive prices.

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Regulation and Supervision

      FirstMerit is registered as a bank holding company under the BHCA. Bank holding companies are subject to regulation by the Federal Reserve. Under Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support such subsidiary banks. The BHCA requires the prior approval of the Federal Reserve in any case where a bank holding company proposes to acquire direct or indirect ownership or control of more than five percent (5%) of the voting shares of any bank that is not already majority-owned by it, or to merge or consolidate with any other bank holding company.

      The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring more than five percent of the voting shares of any company that is not a bank and from engaging in any business other than banking or managing or controlling banks. Under the BHCA, the Federal Reserve is authorized to approve the ownership of shares by a bank holding company in any company, the activities of which the Federal Reserve has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. The Federal Reserve has by regulation determined that certain activities are closely related to banking within the meaning of the BHCA. These activities include: operating a savings association, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing investment and financial advice; and acting as an insurance agent for certain types of credit-related insurance.

      Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities of the bank holding company or its subsidiaries and on the taking of such stock or securities as collateral for loans to any borrower. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of any services.

      On September 29, 1994, President Clinton signed the Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Act”). The Interstate Act generally permits nationwide interstate banking and branching commencing one year after enactment. After that time an “adequately capitalized” and “well managed” bank holding company may acquire a bank in any state, subject to certain concentration limitations. No banking organization may control more than ten percent of deposits nationwide or more than 30.0% of deposits in any one state. Individual states may waive the 30.0% limitation. As of June 1, 1997, interstate bank holding companies can consolidate banks they own in multiple states into a single branch network, or acquire out-of-state banks as branches. De novo interstate branching is not authorized by the Interstate Act, but states may specifically authorize it. States may also limit the acquisition of newly-formed banks for a period of up to five years to restrict effective de novo branching. The Interstate Act requires CRA compliance by out-of-state branches and prohibits “deposit production offices” to ensure that local savings are not diverted to other states. Institutions must maintain a loan activity-to-deposit ratio within a host state at least equal to one-half of the average percentage for all banks in the host state, otherwise the institution’s federal regulator may close the out-of-state branch and restrict the institution from opening new branches in that state. Certain state laws, such as those on intrastate branching, consumer protection and fair lending, will still apply to out-of-state banks or branches. FirstMerit management believes that the Interstate Act may continue to stimulate mergers in the banking industry.

      On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 which will, effective March 11, 2000, permit bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized under the FDICIA prompt corrective action provisions, is well managed, and has at least a satisfactory rating under the CRA by filing a declaration that the bank holding company wishes to become a financial holding company. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve.

      The Gramm-Leach-Bliley Act defines “financial in nature” to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency;

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      FirstMerit is also under the jurisdiction of the Securities and Exchange Commission (the “SEC”) and certain state securities commissions for matters relating to the offering and sale of its securities. FirstMerit is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. FirstMerit is also listed on The Nasdaq Stock Market under the trading symbol “FMER” and is subject to the rules of Nasdaq.

Summary Results of Core Earnings and Operations

      At year-end, FirstMerit’s consolidated assets were $10.1 billion. 1999 core earnings for FirstMerit were $158.0 million, or $1.73 core earnings per diluted share, excluding merger-related and extraordinary after-tax charges of $38.1 million, compared with $93.8 million, or $1.06 per diluted share, for 1998, excluding after-tax merger-related charges of $21.3 million. The 1998 results also include a $28.9 million pre-tax valuation charge related to residual interest on manufactured housing asset-backed securities. Reported net income for 1999 was $119.9 million, or $1.31 per share, compared with $72.5 million, or $0.82 per share for 1998. These results reflect the restatement of both years’ financial information to account for the pooling-of-interests acquisitions of Security First and Signal. The 1998 results also include the earnings of CoBancorp Inc., accounted for as a purchase transaction, from May 22, 1998 through December 31, 1998. See Note 2 to the Consolidated Financial Statements for more information regarding merger costs and conforming accounting entries.

      FirstMerit uses the concept of core earnings to measure the recurring financial results for the periods presented.

      Total cash dividends paid to shareholders for the entire year were $0.76, up 15% from $0.66 paid in 1998.

      Net interest income for 1999 on a fully tax-equivalent basis reached $388.2 million for the year compared to $359.7 million for 1998, an increase of 7.9%. The increase can be attributed to volume gains, where average earning assets increased 11.4%, offset to a lesser degree by increases in funding rates.

      Adjusted net revenue for 1999 of $534.5 million represents an 8.4% increase from the year earlier level of $493.0 million. Growth in fee income and earning assets more than offset the compression in the net interest margin. Excluding gains from the sale of securities and branches, non-interest income was $146.3 million, a 10.1% increase above the $132.9 million reported the prior year. Fees for 1999 account for 27.4% of net revenues compared with 27.0% in 1998.

      Excluding pre-tax merger-related charges of $33.6 million in 1999 and $17.2 million in 1998, as well as an $8.4 million loss on the sale of a subsidiary in 1998, non-interest expense totaled $282.9 million in 1999 compared with $319.5 million the prior year. The 1998 results include a $28.9 million valuation adjustment of mobile home asset-backed residual interest; if excluded, the decline in operating costs would have been 2.6%. Excluding the merger-related costs in both years, the 1999 extraordinary expense and the 1998 loss on the sale of a subsidiary, the efficiency ratio for 1999 was 50.9% compared to 63.6% in 1998, reflecting general cost declines and the 1998 residual interest valuation charge included in the 1998 calculation. If the residual interest charge was excluded in 1998 costs, the efficiency ratio would have been 57.69% for that period.

      The 1999 provision for loan losses was $37.4 million compared with a $40.9 million provision the prior year. Net charge-offs as a percentage of average loans were 0.43% for 1999 compared to 0.34% for 1998. At year-ends 1999 and 1998, the allowance as a percent of outstanding loans stands at approximately 1.50%. For

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ITEM 2.  PROPERTIES

FirstMerit Corporation

      FirstMerit’s executive offices and certain holding company operational facilities, totaling approximately 88,000 square feet, are leased from FirstMerit Bank. FirstMerit relocated its executive offices in 1994 to III Cascade, a seven-story office building located in downtown Akron, Ohio. During 1993, a long-term leasehold interest in III Cascade was acquired by an Ohio general partnership (the “Partnership”), the general partners of which are FirstMerit and a subsidiary of Banc One Capital Corporation. FirstMerit does not control the Partnership. The City of Akron is the lessor of the property. FirstMerit Bank has subleased all of the premises of III Cascade from the Partnership, and FirstMerit subleases a portion of the premises from FirstMerit Bank. The facilities owned or leased by FirstMerit and its Subsidiaries are considered by management to be adequate, and neither the location nor unexpired term of any lease is considered material to the business of FirstMerit.

FirstMerit Bank

      The principal offices of FirstMerit Bank/Akron are located in its 28-story main office building located at 106 South Main Street, Akron, Ohio, which is owned by FirstMerit Bank. FirstMerit Bank/Akron is the principal tenant of the building occupying approximately one-third of a total of 256,695 square feet of the building, with the remaining portion leased to tenants unrelated to FirstMerit Bank. The properties occupied by 92 of FirstMerit Bank’s other branches are owned by FirstMerit Bank, while the properties occupied by its remaining 78 branches are leased with various expiration dates. There is no mortgage debt owing on any of the above property owned by FirstMerit Bank. FirstMerit Bank also owns automated teller machines, on-line teller terminals and other computers and related equipment for use in its business. In 1996 FirstMerit Bank completed major renovations to its main office building. FirstMerit Bank renovated all space which it occupies in the building, as well as all public areas.

      FirstMerit Bank also owns 19.5 acres near downtown Akron, on which is located FirstMerit’s Operations Center. The Operations Center is occupied and operated by FirstMerit Services Division, an operating division of FirstMerit Bank. The Operations Center primarily provides computer and communications technology-based services to FirstMerit and the Subsidiaries, and also markets its services to non-affiliated institutions. There is no mortgage debt owing on the Operations Center property. In connection with its Operations Center, the Services Division has a disaster recovery center at a remote site on leased property.

      The Trust Department and the Organizational & Development Department of FirstMerit Bank are located in Main Place, a four-story office building located in downtown Akron. These departments occupy approximately 31,830 square feet of leased space in Main Place.

ITEM 3.  LEGAL PROCEEDINGS

      The nature of FirstMerit’s business results in a certain amount of litigation. Accordingly, FirstMerit and its Subsidiaries are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. Management, after consultation with legal counsel, is of the opinion that the ultimate liability of such pending matters would not have a material adverse effect on FirstMerit’s financial condition.

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

      No matters were submitted to a vote of security holders in the fourth quarter of 1999.

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EXECUTIVE OFFICERS OF REGISTRANT

      The following persons are the executive officers of FirstMerit as of December 31, 1999. Unless otherwise designated, they are officers of FirstMerit, and unless otherwise stated, they have held their indicated positions for the past five years.

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PART II

      The outstanding shares of FirstMerit Common Stock are quoted on The Nasdaq Stock Market National Market System. The following table contains bid and cash dividend information for FirstMerit Common Stock for the two most recent fiscal years:

Stock Performance and Dividends⁽¹⁾

(1)	This table sets forth the high and low closing bid quotations, dividend rates and book values per share for the calendar periods indicated. These quotations furnished by the National Quotations Bureau Incorporated, represent prices between dealers, do not include retail markup, markdowns, or commissions, and may not represent actual transactions.
(2)	Based upon number of shares outstanding at the end of each quarter.

      On December 31, 1999 there were approximately 11,350 shareholders of record of FirstMerit Common Stock.

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ITEM 6.  SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA

FIRSTMERIT CORPORATION AND SUBSIDIARIES

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      The following commentary presents Management’s discussion and analysis of the Corporation’s financial condition and results of operations. The review highlights the principal factors affecting earnings and the significant changes in balance sheet items for the years 1999, 1998 and 1997. Financial information for prior years is presented when appropriate. The objective of this financial review is to enhance the reader’s understanding of the accompanying tables and charts, the consolidated financial statements, notes to financial statements, and financial statistics appearing elsewhere in this report. Where applicable, this discussion also reflects Management’s insights of known events and trends that have or may reasonably be expected to have a material effect on the Corporation’s operations and financial condition.

      All financial data has been restated to give effect to acquisitions accounted for on a pooling of interests basis and stock splits in previous periods. The results of other bank and branch acquisitions, accounted for as purchases, have been included effective with the respective dates of acquisition.

Earnings Summary

      FirstMerit’s core earnings totaled $158.0 million, or $1.73 core earnings per diluted share, excluding merger-related and extraordinary charges of $38.1 million, compared with $93.8 million, or $1.06 per diluted share, for 1998, excluding merger-related charges of $21.3 million. The 1998 results also include a $28.9 million

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      The Corporation uses the concept of core earnings to measure the recurring financial results for the periods presented.

      Excluding the merger-related costs and the extraordinary charge, 1999 returns on average common equity (“ROE”) and average assets (“ROA”) were 18.02% and 1.66%, compared with 11.14% and 1.10% for the prior year.

      Net interest income for 1999 on a fully tax-equivalent basis reached $388.2 million for the year compared to $359.7 million for 1998, an increase of 7.9%. The increase can be attributed to volume gains, where average earning assets increased 11.4%, offset to a lesser degree by increases in funding rates.

      Adjusted net revenue for 1999 of $534.5 million represents an 8.4% increase from the year earlier level of $493.0 million. Growth in fee income and earning assets more than offset the compression in the net interest margin. Excluding gains from the sale of securities and branches, non-interest income was $146.3 million, a 10.1% increase above the $132.9 million reported the prior year. Fee growth was strong in all categories except loan sales and servicing income, which decreased 54.3% as a result of a decline in the level of mortgage bookings and sales. Fees in 1999 account for 27.4% of net revenues compared with 27.0% in 1998.

      Excluding merger-related charges of $33.6 million in 1999 and $17.2 million in 1998, as well as the $8.4 million loss on the sale of a subsidiary in 1998, non-interest expense totaled $282.9 million in 1999 compared with $319.5 million the prior year. The 1998 results include the $28.9 million valuation adjustment of mobile home asset-backed residual interest reported earlier; if excluded, the decline in operating costs would have been 2.6%. On a component basis, improvement was experienced in salary and benefit expense and occupancy costs. Excluding the merger-related costs and the extraordinary expense, the efficiency ratio for 1999 was 50.9% compared to 63.6% in 1998, reflecting general cost declines and the 1998 residual interest valuation charge included in the 1998 calculation. If the residual interest charge was excluded in 1998 costs, the efficiency ratio would have been 57.69% for that period.

      The 1999 provision for loan losses was $37.4 million compared with a $40.9 million provision the prior year. Net charge-offs as a percentage of average loans were 0.43% for 1999 compared to 0.34% for 1998. At year-ends 1999 and 1998, the allowance as a percent of outstanding loans stands at approximately 1.50%. For both years, non-performing assets as a percent of loans and ORE was 0.36%, and reserve coverage was virtually unchanged at 4.1 times the level of non-performing assets.

      The following tables summarize the results of core earnings and net income, and the changes in diluted earnings per share and diluted core earnings per share for 1999 and 1998.

Condensed Summary of Core Earnings and Net Income

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*

Core earnings are defined as net income excluding merger-related expenses associated with recent acquisitions, a loss on the sale of a subsidiary, and extraordinary items. These material unusual items which are excluded from core earnings totaled $38.1 million in 1999 and $21.3 million in 1998, on an after-tax basis. Core results for 1998 do not exclude a valuation charge related to residual interest on manufactured housing asset-backed securities. See Note 2 to the Consolidated Financial Statements for further details.

Supercommunity Banking Results

      The Corporation’s operations are managed along its major line of business, Supercommunity Banking. Note 17 to the consolidated financial statements provides performance data for this line of business as well as summary information by product and service group.

Net Interest Income

      Net interest income, the difference between interest and loan fee income on earning assets and the interest paid on deposits and borrowed funds, is the principal source of earnings for the Corporation. Throughout this discussion net interest income is presented on a fully tax-equivalent (“FTE”) basis which restates interest on tax-exempt securities and loans as if such interest were subject to federal income tax at the statutory rate.

      Net interest income is affected by market interest rates on both earning assets and interest bearing liabilities, the level of earning assets being funded by interest bearing liabilities, non-interest bearing liabilities and equity,

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      Net interest income, on a fully-tax equivalent basis, increased $28.6 million, or 7.9%, to $388.2 million in 1999 compared to $359.7 million in 1998 and $329.3 million in 1997. The increase over 1998 occurred because the rise in interest income more than offset the increase in interest expense. Specifically, interest income rose $45.1 million while interest expense increased $14.5 million.

      Interest income was higher than in 1998 because average earning assets grew 11.4% or $905.5 million. The increase in average earning assets was mainly attributable to strong loan demand. Additionally, 1998’s average earning assets included the results of CoBancorp, accounted for as a purchase acquisition, from the acquisition date of May 22, 1998 through December 31, 1998, or approximately seven months compared to a full year in 1999. Totals prior to May 22, 1998 do not include the results of CoBancorp, in accordance with purchase accounting guidelines.

      The overall lower interest rate environment in 1999 compared with the prior year had the following effect on interest-bearing assets and liabilities.

      The average yield on earning assets decreased 36 basis points from 8.19% in 1998 to 7.83% for 1999. In summary, higher earning asset volumes outpaced the decline in interest income caused by lower yields on earning assets.

      Higher interest expense was also volume driven as deposits and other borrowings and certificate of deposits were the main funding sources for the earning asset growth. The cost of funds for the year as a percentage of average earning assets decreased 21 basis points from 3.63% in 1998 to 3.42% this year.

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      The following table illustrates the specific year-over-year impact to net interest income based on changes in the rate and volume components of the interest-earning assets and interest-bearing liabilities.

CHANGES IN NET INTEREST DIFFERENTIAL —

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

      The net interest margin is calculated by dividing net interest income FTE by average earning assets. As with net interest income, the net interest margin is affected by the level and mix of earning assets, the proportion of earning assets funded by non-interest bearing liabilities, and the interest rate spread. In addition, the net interest margin is impacted by changes in federal income tax rates and regulations as they affect the tax equivalent adjustment.

      The net interest margin for 1999 was 4.41% compared to 4.56% in 1998 and 4.62% in 1997. As discussed previously, the decline in the net interest margin compared to last year was a result of the decline in earning asset yield outpacing the decline in earning asset funding costs.

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Other Income

      Excluding securities gains, other income totaled $146.2 million in 1999, an increase of $12.8 million or 9.6% over 1998, and $35.2 million or 31.7% over 1997. Increases were recorded during 1999 in all categories except loan sales and servicing. A portion of the 1999 increases were caused by the application of purchase accounting rules to the May 1998 acquisition of CoBancorp. Specifically, purchase accounting requires including the results of the acquired company in combined results from the date of acquisition forward.

      Trust fees increased $2.6 million or 15.9% to $18.7 million in 1999. The improvement is a result of market value increases in managed assets, a high commitment to quality service, our continued emphasis as being the first choice when choosing a managed asset provider, and sales volumes in excess of goals.

      Service charges on deposits rose $2.8 million or 7.0% compared to last year. Much of this income is based on the number of accounts and customer checking account activity. As stated throughout this Annual Report, as a general rule some portion of the increase between 1999 and prior balances is due to the May 1999 purchase accounting acquisition of CoBancorp, Inc.

      Credit card fees increased $6.9 million or 33.3% in 1999. A large portion of the increase was a result of increased debit card volume, much of the expansion occurring with Signal customers who did not previously have this product. The remainder of the increase was fee driven as the Corporation maintained fee structures consistent with competitors.

      Other service fees rose $3.7 million, or 35.5% compared to last year; major components of this category include certain ATM fees, sales commissions on personalized customer checks, and fee income from the sale of “official” bank checks.

      The 1999 decline in loan sales and servicing income was a result of fewer sales due to the level of interest rates in the economy.

      Other operating income, as presented in the table, was up $4.1 million in part because of higher letter of credit fees, introduction of our new business manager product, and higher commissions on equity and insurance sales.

      Excluding gains from sales of securities, other income was $146.2 million and now represents 27.4% of net revenue compared to 27.1% last year. Net revenue is defined as net interest income, on a fully-taxable equivalent basis, plus other income, excluding securities sales gains or losses.

Federal Income Tax

      Federal income tax expense totaled $55.9 million in 1999, including a tax benefit of $3.1 million associated with an extraordinary item, compared to $37.9 million in 1998, and $56.1 in 1997. In 1999, the effective federal income tax rate for the Corporation, excluding the extraordinary charge, equaled 32.0% compared to 34.3% in 1998 and 32.8% in 1997.

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Other Expenses

      Core other expenses excluding merger-related costs associated with the February 1999 Signal merger were $282.9 million in 1999 compared to $319.5 million in 1998 and $245.9 million in 1997. Totals for 1998 include the results of CoBancorp for approximately seven months and the full-year results of several smaller acquisitions that were acquired mid-year 1997. In accordance with purchase accounting rules, the results of the companies purchased are not included in results presented prior to their purchase dates.

      Adjusted salaries, wages, pension and benefits totaled $131.1 million in 1999, a decrease of $11.1 million or 7.0% from the corresponding adjusted 1998 costs. The decrease in salaries and wages were attributable to efficiencies gained through the Signal acquisition, lower bonus pay, and longer replacement times in filling open positions due to the low unemployment rate in our operating areas. Pension and benefit costs were also reduced by efficiencies realized in the Signal merger and longer job replacement times.

      Adjusted bankcard, loan processing, and other fees decreased $6.4 million to $21.7 million in 1999 as efficiencies were realized compared to pre-merger processing costs.

      Amortization of intangible expense during 1999 was $11.0 million compared to 9.0 million in 1998 and $3.8 million in 1997. The 1998 increase was due to the CoBancorp acquisition.

      The efficiency ratio for 1999, excluding merger-related and other material unusual costs, was 50.86% compared to 63.55% in 1998. The 1998 efficiency ratio includes a $28.9 million pre-tax valuation charge related to residual interest on manufactured housing asset-backed securities. If the residual interest charge had been excluded from the 1998 efficiency ratio calculation, the resultant ratio would have been 57.69%. The “lower-is-better” efficiency ratio indicates the percentage of operating costs that is used to generate each dollar of net revenue — that is, during 1999, 50.86 cents was spent to generate $1 of net revenue.

Investment Securities

      The investment portfolio is maintained by the Corporation to provide liquidity, earnings, and as a means of diversifying risk. In accordance with the Financial Accounting Standards Board Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” securities have been classified as available-for-sale. In this classification, adjustment to fair value of the securities available-for-sale in the form of unrealized holding gains and losses, is excluded from earnings and reported net of taxes in a separate component of shareholders’

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      At year-end 1999, investment securities totaled $2.4 billion compared with $1.9 billion one year earlier, an increase of 25.8%. The most notable increase occurred in mortgage-backed securities which rose from $748.4 million to $1.1 billion as the Corporation securitized its own one-to-four family mortgage loans to improve liquidity and have readily available assets to pledge against potential borrowings.

      A summary of investment securities’ carrying value is presented below as of year-ends 1999 and 1998. Presented with the summary is a maturity distribution schedule with corresponding weighted average yields.

CARRYING VALUE OF INVESTMENT SECURITIES