FIRSTMERIT CORP /OH/
10-K/A, 2000-04-28
NATIONAL COMMERCIAL BANKS
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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

AMENDMENT NO. 1 TO

FORM 10-K

     
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 0-10161

FIRSTMERIT CORPORATION

(Exact name of registrant as specified in its charter)

OHIO

(State or other jurisdiction of
incorporation or organization)
34-1339938
(I.R.S. employer identification no.)
         
III Cascade Plaza, Akron, Ohio
(Address of principal executive offices)		 44308
(Zip code)		 (330) 996-6300
(Telephone Number)

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

PREFERRED SHARE PURCHASE RIGHTS
and
6 1/2% CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES B
(Title of Class)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for 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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and accompanying notes, and the reports of management and independent auditors, are set forth as follows:

CONSOLIDATED BALANCE SHEETS

FIRSTMERIT CORPORATION AND SUBSIDIARIES

                     
Year-ends,
1999 1998
(In thousands)
ASSETS
Investment securities (at market value) $ 2,394,034 1,903,266
Federal funds sold and other interest-earning assets 25,100 6,739
Loans held for sale 46,005 36,475
Commercial loans 3,122,520 2,613,838
Mortgage loans 878,323 1,611,871
Installment loans 1,471,149 1,199,014
Home equity loans 408,343 377,358
Credit card loans 108,163 99,541
Manufactured housing loans 753,254 289,308
Leases 272,429 171,040
Total earning assets 9,479,320 8,308,450
Allowance for possible loan losses (104,897 ) (96,149 )
Cash and due from banks 215,071 327,997
Premises and equipment, net 132,219 140,841
Accrued interest receivable and other assets 393,764 344,885
Total assets $ 10,115,477 9,026,024
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand-non-interest bearing $ 1,016,535 1,026,377
Demand-interest bearing 661,961 917,765
Savings 1,687,983 1,810,340
Certificates and other time deposits 3,493,668 3,091,496
Total deposits 6,860,147 6,845,978
Securities sold under agreements to repurchase and other borrowings 2,281,243 1,123,204
Accrued taxes, expenses, and other liabilities 119,062 117,714
Total liabilities 9,260,452 8,086,896
Mandatorily redeemable preferred securities 21,450 32,472
Commitments and contingencies — —
Shareholders’ equity:
Preferred stock, without par value: authorized 7,000,000 shares — —
Preferred stock, Series A, without par value: designated 800,000 shares at December 31, 1999 and 700,000 shares at December 31, 1998; none outstanding
Cumulative convertible preferred stock, Series B, without par value: designated 220,000 shares at December  31, 1999 and 500,000 shares at December 31, 1998; 163,534 and 403,232 shares outstanding at December 31, 1999 and December 31, 1998, respectively 3,878 9,299
Common stock, without par value: authorized 300,000,000 shares; issued 92,054,156 and 91,161,362 shares, respectively 127,937 122,387
Capital surplus 116,930 117,845
Accumulated other comprehensive income (45,082 ) 5,858
Retained earnings 719,811 668,837
Treasury stock, at cost, 3,678,904 and 1,166,604 shares, respectively (89,899 ) (17,570 )
Total shareholders’ equity 833,575 906,656
Total liabilities and shareholders’ equity $ 10,115,477 9,026,024

See accompanying notes to consolidated financial statements.

1

CONSOLIDATED STATEMENTS OF INCOME

FIRSTMERIT CORPORATION AND SUBSIDIARIES

                             
Years ended
1999 1998 1997
(In thousands except per share data)
Interest income:
Interest and fees on loans $ 571,497 532,066 479,249
Interest and dividends on investment securities:
Taxable 106,513 103,354 97,417
Exempt from federal income taxes 6,637 4,737 4,346
113,150 108,091 101,763
Interest on federal funds sold 204 2,400 3,498
Total interest income 684,851 642,557 584,510
Interest expense:
Interest on deposits:
Demand-interest bearing 4,774 13,222 12,575
Savings 40,327 44,077 40,564
Certificates and other time deposits 169,783 165,198 146,097
Interest on securities sold under agreements to repurchase and other borrowings 85,981 63,879 59,211
Total interest expense 300,865 286,376 258,447
Net interest income 383,986 356,181 326,063
Provision for possible loan losses 37,430 40,921 23,518
Net interest income after provision for possible loan losses 346,556 315,260 302,545
Other income:
Trust department 18,708 16,147 13,442
Service charges on deposits 42,659 39,883 33,279
Credit card fees 26,752 20,064 14,355
Service fees — other 14,223 10,493 7,337
Investment securities gains, net 8,527 6,785 3,114
Manufactured housing income 8,412 7,630 14,684
Loan sales and servicing 9,035 16,900 11,177
Other operating income 26,394 22,246 16,706
Total other income 154,710 140,148 114,094
Other expenses:
Salaries, wages, pension and employee benefits 138,862 143,865 117,093
Net occupancy expense 20,178 23,002 22,592
Equipment expense 19,198 15,882 12,717
Loss on sale of subsidiary — 8,410 —
Intangible amortization expense 10,989 8,926 3,771
Other operating expenses 127,279 144,944 89,692
Total other expenses 316,506 345,029 245,865
Income before taxes and extraordinary item 184,760 110,379 170,774
Federal income taxes 59,043 37,862 56,066
Income before extraordinary item 125,717 72,517 114,708
Extraordinary item, extinguishment of debt — (net of taxes of $3,148) (5,847 ) — —
Net income $ 119,870 72,517 114,708
Other comprehensive income (loss), net of tax Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses), net of tax, arising during period (56,483 ) 5,828 10,492
Less: reclassification adjustment for gains (losses)  realized in net income, net of tax (5,543 ) 4,573 2,493
Net unrealized gains (losses), net of tax (50,940 ) 1,255 7,999
Comprehensive income $ 68,930 73,772 122,707
Net income applicable to common shares $ 119,563 71,826 113,124
Weighted average number of common shares outstanding — basic 90,320 86,377 81,352
Weighted average number of common shares outstanding — diluted 91,523 87,984 87,297
Per share data based on average number of shares outstanding:
Basic net income per share $ 1.32 0.83 1.39
Diluted net income per share $ 1.31 0.82 1.32

See accompanying notes to consolidated financial statements.

2

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FIRSTMERIT CORPORATION AND SUBSIDIARIES

                                                           
Years ended 1999, 1998 and 1997
Accumulated
Other Total
Preferred Common Capital Comprehensive Retained Treasury Shareholders’
Stock Stock Surplus Income Earnings Stock Equity
(In thousands except per share data)
Balance at Year Ended 1996 $ 22,693 114,149 64,462 (3,396 ) 582,519 (68,944 ) 711,483
Net income — — — — 114,708 — 114,708
Cash dividends — common stock ($0.61 per share) — — — — (44,136 ) — (44,136 )
Stock options exercised/debentures or preferred stock converted (12,776 ) 4,182 11,738 — (1,428 ) 1,616 3,332
Shares issued — acquisition — 549 4,911 — 1,499 — 6,959
Treasury shares purchased — — — — — (51,147 ) (51,147 )
Stock dividends — 1,013 (1,013 ) — (5 ) (722 ) (727 )
Market adjustment investment securities, net of tax — — — 7,999 — — 7,999
Other — — 199 — (1,250 ) 257 (794 )
Balance at Year Ended 1997 9,917 119,893 80,297 4,603 651,907 (118,940 ) 747,677
Net income — — — — 72,517 — 72,517
Cash dividends — common stock ($0.66 per share) — — — — (50,525 ) — (50,525 )
Acquisition adjustment of fiscal year — — — — (1,857 ) — (1,857 )
Stock options exercised/debentures or preferred stock converted (618 ) 400 3,717 — (2,607 ) 12,111 13,003
Treasury shares purchased — — — — — (25,703 ) (25,703 )
Treasury shares reissued — acquisition — — 25,919 — — 89,286 115,205
Treasury shares reissued — public offering — — 6,518 — — 20,806 27,324
Stock dividends — 1,929 (1,929 ) — — — —
Market adjustment investment securities, net of tax — — — 1,255 — — 1,255
Other — 165 3,323 — (598 ) 4,870 7,760
Balance at Year Ended 1998 9,299 122,387 117,845 5,858 668,837 (17,570 ) 906,656
Net income — — — — 119,870 — 119,870
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, net of tax — — — (50,940 ) — — (50,940 )
Other — (46 ) — — 36 788 778
Balance at year-end 1999 $ 3,878 127,937 116,930 (45,082 ) 719,811 (89,899 ) 833,575

See accompanying notes to consolidated financial statements.

3

CONSOLIDATED STATEMENTS OF CASH FLOWS

FIRSTMERIT CORPORATION AND SUBSIDIARIES

                             
Years ended,
1999 1998 1997
(In thousands)
Operating Activities
Net income $ 119,870 72,517 114,708
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on sale of subsidiary — 8,410 —
Provision for loan losses 37,430 40,921 23,518
Provision for depreciation and amortization 18,729 19,714 17,407
Amortization of investment securities premiums, net 2,196 1,413 2,908
Amortization of income for lease financing (13,679 ) (11,360 ) (13,436 )
Gains on sales of investment securities, net (8,527 ) (6,785 ) (3,114 )
Deferred federal income taxes (17,993 ) (12,355 ) (293 )
(Increase) decrease in interest receivable (18,073 ) (5,051 ) 504
Increase in interest payable 21,084 1,451 1,395
Amortization of values ascribed to acquired intangibles 10,989 8,926 3,771
Other decreases (14,970 ) (41,479 ) (137,790 )
NET CASH PROVIDED BY OPERATING ACTIVITIES 137,056 76,322 9,578
Investing Activities
Dispositions of investment securities:
Available-for-sale — sales 723,164 687,720 309,451
Available-for-sale — maturities 498,213 589,722 341,138
Purchases of investment securities available-for-sale (1,784,544 ) (1,616,554 ) (600,921 )
Net (increase) decrease in federal funds sold (18,361 ) 37,552 (25,845 )
Net (increase) in loans and leases, except sales (676,744 ) (1,224,699 ) (719,902 )
Sales of loans — 518,951 323,192
Purchases of premises and equipment (22,321 ) (32,240 ) (20,970 )
Sales of premises and equipment 12,214 3,359 5,542
Payment for purchase of CoBancorp, Inc., net of cash acquired — (50,000 ) —
NET CASH USED BY INVESTING ACTIVITIES (1,268,379 ) (1,086,189 ) (388,315 )
Financing Activities
Net increase (decrease) in demand, NOW and savings deposits (388,003 ) 609,441 96,274
Net increase in time deposits 402,172 216,273 334,395
Net increase (decrease) in securities sold under repurchase agreements and other borrowings 1,158,039 171,708 (2,800 )
Proceeds from mandatorily redeemable preferred securities — 50,000 —
Repayment of mandatorily redeemable preferred securities (11,022 ) — —
Cash dividends (68,932 ) (50,525 ) (44,136 )
Purchase of treasury shares (85,666 ) (25,703 ) (51,869 )
Treasury shares reissued — acquisition — 115,205 —
Treasury shares reissued — public offering — 27,324 —
Proceeds from exercise of stock options 11,809 13,003 3,332
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,018,397 1,126,726 335,196
Increase (decrease) in cash and cash equivalents (112,926 ) 116,859 (43,541 )
Cash and cash equivalents at beginning of year 327,997 211,138 254,679
Cash and cash equivalents at end of year $ 215,071 327,997 211,138
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest, net of amounts capitalized $ 156,626 202,374 183,567
Income taxes $ 48,315 60,454 54,317

See accompanying notes to consolidated financial statements.

4

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FIRSTMERIT CORPORATION AND SUBSIDIARIES

Year-ends and for the years ended 1999, 1998 and 1997 (Dollars in thousands)

1.  Summary of Significant Accounting Policies

      The accounting and reporting policies of FirstMerit Corporation and its subsidiaries (the “Corporation”) conform to generally accepted accounting principles and to general practices within the banking industry. The following is a description of the more significant accounting policies.

 (a)  Principles of Consolidation

The consolidated financial statements of the Corporation include the accounts of FirstMerit Corporation (the Parent Company) and its subsidiaries: FirstMerit Bank, N.A., Citizens Investment Corporation, Citizens Savings Corporation of Stark County, FirstMerit Community Development Corporation, FirstMerit Credit Life Insurance Company, FirstMerit Capital Trust I and SF Development Corp.

All significant intercompany balances and transactions have been eliminated in consolidation.

   (b)  Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and related notes. Actual results could differ from those estimates.

   (c)  Investment Securities

Debt and equity securities are classified as held-to-maturity, available-for-sale or trading. Securities classified as held-to-maturity are measured at amortized or historical cost, securities available-for-sale and trading at fair value. Adjustment to fair value of the securities available-for-sale, in the form of unrealized holding gains and losses, is excluded from earnings and reported net of tax as a separate component of comprehensive income. Adjustment to fair value of securities classified as trading is included in earnings. Gains or losses on the sales of investment securities are recognized upon realization and are determined by the specific identification method.

The Corporation’s investment portfolio is designated as available-for-sale. Classification as available-for-sale allows the Corporation to sell securities to fund liquidity and manage the Corporation’s interest rate risk.

   (d)  Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand, balances on deposit with correspondent banks and checks in the process of collection.

   (e)  Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on the straight-line and declining-balance methods over the estimated useful lives of the assets. Amortization of leasehold improvements is computed on the straight-line method based on lease terms or useful lives, whichever is less.

   (f)  Loans

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

   (g)  Interest and Fees on Loans

Interest income on loans is generally accrued on the principal balances of loans outstanding using the “simple-interest” method. Loan origination fees and direct origination costs are deferred and amortized,

5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

generally over the estimated life of the related loans using a level yield method. Interest is not accrued on loans for which circumstances indicate collection is questionable.

   (h)  Provision for Possible Loan Losses

The provision for possible loan losses charged to operating expenses is determined based on Management’s evaluation of the loan portfolios and the adequacy of the allowance for possible loan losses under current economic conditions and such other factors which, in Management’s judgement, deserve current recognition.

   (i)  Lease Financing

The Corporation leases equipment to customers on both a direct and leveraged lease basis. The net investment in financing leases includes the aggregate amount of lease payments to be received and the estimated residual values of the equipment, less unearned income and non-recourse debt pertaining to leveraged leases. Income from lease financing is recognized over the lives of the leases on an approximate level rate of return on the unrecovered investment. Residual values of leased assets are reviewed on an annual basis for reasonableness. Declines in residual values judged to be other than temporary are recognized in the period such determinations are made.

   (j)  Mortgage Servicing Activities

Servicing rights, which are acquired through purchase or originated and retained after the underlying mortgage loans are transferred through sale or securitization, are separately recognized in other assets. Mortgage servicing assets are amortized into service charges and commissions in proportion to, and over the period of, the estimated net servicing income on the underlying mortgage loans or securities. Mortgage servicing assets are stratified by both product type and interest rate range for purposes of evaluating and measuring impairment based on their fair value. Any impairment resulting from declines in fair value are deducted from loan sales and servicing income.

   (k)  Federal Income Taxes

The Corporation follows the asset and liability method of accounting for income taxes. Deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect of a change in tax rates is recognized in income in the period of the enactment date.

   (l)  Value Ascribed to Acquired Intangibles

The value ascribed to acquired intangibles, including core deposit premiums, results from the excess of cost over fair value of net assets acquired in acquisitions of financial institutions. Such values are being amortized over periods ranging from 4.5 to 25 years, which represent the estimated remaining lives of the long-term assets acquired. Amortization is generally computed on a straight-line basis based on the expected reduction in the carrying value of such acquired assets. If no significant amount of long-term interest bearing assets is acquired, such value is amortized over the estimated life of the acquired deposit base, with amortization periods ranging from 10 to 15 years.

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

   (m)  Trust Department Assets and Income

Property held by the Corporation in a fiduciary or other capacity for trust customers is not included in the accompanying consolidated financial statements, since such items are not assets of the Corporation. Trust income is reported generally on a cash basis which approximates the accrual basis of accounting.

   (n)  Per Share Data

Basic earnings per share are computed by dividing net income less preferred stock dividends by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income plus interest on convertible bonds by the weighted average number of common shares plus common stock equivalents computed using the Treasury Share method. All earnings per share disclosures appearing in these financial statements are computed assuming dilution unless otherwise indicated.

   (o)  Reclassifications

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

   (p)  Accounting for Derivative Instruments and Hedging Activities

In June 1998, the FASB issued Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 133 establishes accounting and reporting standards for derivative instruments and requires an entity to recognize all derivatives as either assets or liabilities in the Balance Sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge to various exposures. The accounting changes in the fair value of a derivative (i.e., gains and losses) depends on the intended use of the derivative and its resulting designation. This statement was originally to be effective for all fiscal quarters beginning after June 15, 1999. In July 1999, the FASB issued Statement No. 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of Effective Date of SFAS No. 133.” SFAS 137 delays the implementation of SFAS 133. As a result, the Corporation will implement SFAS 133 in the first quarter 2001 and does not anticipate that the adoption of SFAS 133 will have a material effect on its earnings or financial position.

2.  Acquisitions and Merger-Related Expenses

      On May 22, 1998, the Corporation completed the acquisition of CoBancorp, Inc., a bank holding company headquartered in Elyria, Ohio with consolidated assets of approximately $643.9 million. CoBancorp, (“CoBancorp”) was merged with and into the Corporation and accounted for under “purchase” accounting requirements. At the time of the merger, the value of the transaction was $174.1 million. In connection with the merger, the Corporation issued 3.897 million shares of its common stock (valued at $29.375/share), paid approximately $50.0 million in cash, and assumed merger-related liabilities of approximately $9.6 million. The transaction created goodwill of approximately $138.3 million that is being amortized primarily over 25 years.

      On September 14, 1998, FirstMerit closed a secondary underwritten public offering of 1.38 million common shares of FirstMerit Corporation. The reissuance of these shares was necessary to allow the Corporation to treat the Security First merger as a pooling-of-interests.

      On October 23, 1998, the Corporation completed the acquisition of Security First Corp., a $771.1 million holding company headquartered in Mayfield Heights, Ohio. Subsidiaries of Security First Corp. included Security Federal Savings and Loan Association of Cleveland and First Federal Savings Bank of Kent. These subsidiaries were merged with and into FirstMerit Bank, N. A. Under terms of the merger agreement, Security First Corp. was merged with and into the Corporation. The transaction was structured with a fixed exchange ratio of 0.8855 shares of FirstMerit common stock for each common share of Security First, Corp. 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 for all periods presented have been restated to account for the acquisition. The information presented for 1997 and prior periods coincides with the fiscal year-ends of each entity, which

7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

were December 31 for FirstMerit and March 31 for Security First. For example, information as of year-end 1997 combines FirstMerit’s balances at December 31, 1997 with Security First’s balances at March 31, 1998. As a result of this difference in fiscal year ends, the Corporation made an adjustment to shareholders’ equity of $1.8 million which represents Security First’s net income and cash dividends paid for the three months ended March 31, 1998.

      In conjunction with the Security First acquisition, the Corporation incurred merger-related expenses of approximately $17.2 million, before taxes. The components of the costs are as follows: severance and employee-related expenses of $1.7 million, occupancy and equipment charges of $2.0 million, conversion and contract termination costs of $1.5 million, professional services and other costs of $4.7 million, a conforming adjustment to the provision for possible loan losses of $7.3 million. On an after tax basis, the merger-related expenses totaled approximately $12.8 million, or $0.18 per diluted share. The Other Expenses section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” provides additional details. Some minor reclassification of merger costs from those just described have taken place and are displayed in the Other Expenses section. Additionally, during the 1999 third quarter, based on then current information, estimated liabilities associated with loan conversion expenses were reduced by $0.4 million. This amount was taken into third quarter income but had no effect on core earnings as the increase in reported income was offset by a reduction of the same amount in merger-related expenses. As of December 31, 1999, the remaining liabilities associated with these costs were approximately $1.4 million. As shown in the following table, the majority of the remaining balance, classified as other operating expenses, and relates to final resolution on the sale of duplicate facilities.

                                                 
Estimated
Liability Liability at Liability at Liability at Liability at Liability at
Description of Costs at Acquisition 12/31/98 3/31/99 6/30/99 9/30/99 12/31/99
Salary, wages & benefits $ 1,689 50 42 42 42 11
Occupancy and equipment expense 552 511 482 475 206 40
Loan conversion expense 1,516 1,031 844 776 155 154
Professional services 4,450 1,467 — — — —
Other operating expenses 1,576 1,196 1,417 1,390 1,101 1,148
Total Other Expenses 9,783 4,255 2,785 2,683 1,504 1,353
Reduction of other operating income 89 — — — — —
Provision for loan losses conforming entry 7,300 — — — — —
Totals $ 17,172 4,255 2,785 2,683 1,504 1,353

      On February 12, 1999, the Corporation completed the acquisition of Signal Corp, a $1.9 billion bank holding company headquartered in Wooster, Ohio (“Signal”). Principal subsidiaries of Signal included Signal Bank, N. A., Summit Bank, N. A., First Federal Savings Bank of New Castle (Pennsylvania), and Mobile Consultants, Inc. Under terms of the agreement, the fixed exchange ratio was 1.32 shares of FirstMerit common stock for each share of Signal common stock and one share of FirstMerit preferred stock for each share of Signal preferred stock. Based on the closing price of $25.00 per share on February 12, 1999, the value of the transaction was approximately $436.0 million. The transaction was accounted for as a pooling-of-interests.

      In conjunction with this merger, the Corporation incurred pre-tax costs of $52.8 million during 1999. The components of the merger-related costs and the conforming accounting adjustments were as follows: $7.8 million severance and employee related benefits; $7.0 million conversion and contract termination costs; $8.9 million in professional services fees; $9.9 million of other operating costs; a conforming accounting entry to the provision for possible loan losses of $10.2 million, and an extraordinary charge of $9.0 million related to early extinguishment of debt. The after-tax effect of the merger-related and conforming expenses totaled approximately

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

$38.1 million, or $0.42 per diluted share. As of December 31, 1999, the unpaid liabilities associated with these costs, as shown in the following table, totaled approximately $1.1 million, most of which is classified as other operating expenses and relates to resolution of duplicate facilities.

                                         
Estimated
Liability Liability at Liability at Liability at Liability at
Description of Costs at Acquisition 3/31/99 6/30/99 9/30/99 12/31/99
Salary, wages & benefits $ 7,736 1,555 — — —
Loan conversion expense 7,016 1,663 1,126 637 12
Professional services 8,856 295 — — —
Other operating expenses 10,014 6,483 5,857 3,701 1,120
Total Other Expenses 33,622 9,996 6,983 4,338 1,132
Reduction of other operating income — — — — —
Provision for loan losses conforming entry 10,200 — — — —
Totals $ 43,822 9,996 6,983 4,338 1,132

3.  Investment Securities

      Investment securities are composed of:

                                 
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Year-End 1999
Available for sale:
U.S. Treasury securities and U.S. Government agency obligations $ 819,690 96 20,208 799,578
Obligations of state and political subdivisions 120,000 437 1,376 119,061
Mortgage-backed securities 1,197,898 661 38,343 1,160,216
Other securities 326,181 687 11,689 315,179
$ 2,463,769 1,881 71,616 2,394,034
Year-End 1998
Available for sale:
U.S. Treasury securities and U.S. Government agency obligations $ 692,242 3,981 2,284 693,939
Obligations of state and political subdivisions 137,129 3,048 — 140,177
Mortgage-backed securities 743,753 5,019 417 748,355
Other securities 321,147 2,308 2,660 320,795
$ 1,894,271 14,356 5,361 1,903,266

      The amortized cost and market value of investment securities including mortgage-backed securities at December 31, 1999, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities based on the issuers’ rights to call or prepay obligations with or without call or prepayment penalties.

9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

                 
Amortized Market
Cost Value
Due in one year or less $ 58,914 58,781
Due after one year through five years 577,263 562,644
Due after five years through ten years 382,331 376,041
Due after ten years 1,445,261 1,396,568
$ 2,463,769 2,394,034

      Proceeds from sales of investment securities during the years 1999, 1998 and 1997 were $723,164 and $687,720 and $309,451, respectively. Gross gains of $10,032, $8,513 and $3,771 and gross losses of $1,505, $1,728 and $657 were realized on these sales, respectively.

      The carrying value of investment securities pledged to secure trust and public deposits and for purposes required or permitted by law amounted to $1,739,657 and $1,180,126 at December 31, 1999 and December 31, 1998, respectively.

4. Loans

      Loans consist of the following:

                         
Year Ends,
1999 1998 1997
Commercial, financial and agricultural $ 1,563,142 1,308,127 952,507
Loans to individuals, net of unearned income 1,506,334 1,334,138 1,157,940
Loans secured by real estate 3,672,275 3,548,807 3,437,303
Lease financing 272,430 170,898 185,864
$ 7,014,181 6,361,970 5,733,614

      The Corporation grants loans principally to customers located within the state of Ohio.

      Information with respect to impaired loans is as follows:

                         
Year Ends,
1999 1998 1997
Period-end balances $ 20,206 10,968 12,218
Related allowance for loan losses 5,673 3,735 4,457
Interest recognized 787 427 460

      Earned interest on impaired loans is recognized as income is collected.

      The Corporation makes loans to officers on the same terms and conditions as made available to all employees and to directors on substantially the same terms and conditions as transactions with other parties. An

10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

analysis of loan activity with related parties for the years ended December 31, 1999, 1998 and 1997 is summarized as follows:

                             
1999 1998 1997
Aggregate amount at beginning of year $ 26,082 $ 35,306 $ 41,702
Additions (deductions):
New loans 35,193 20,650 9,124
Repayments (13,571 ) (16,472 ) (16,944 )
Changes in directors and their affiliations (3,183 ) (13,402 ) 1,424
Aggregate amount at end of year $ 44,521 $ 26,082 $ 35,306

5.  Allowance for Possible Loan Losses

      Transactions in the allowance for possible loan losses are summarized as follows:

                           
Years Ended,
1999 1998 1997
Balance at beginning of year $ 96,149 $ 67,736 $ 60,087
Additions (deductions):
Acquisition adjustment/other 1,028 8,215 2,511
Provision for loan losses 37,430 40,921 23,518
Loans charged off (47,836 ) (32,934 ) (28,684 )
Recoveries on loans previously charged off 18,126 12,211 10,304
Balance at end of year $ 104,897 $ 96,149 $ 67,736

6.  Manufactured Housing Income

      The Corporation, through its subsidiary Mobile Consultants, Inc. (“MCi”), has sold certain manufactured housing finance contracts (“MHF contracts”) to various financial institutions while retaining the collection and recovery aspect of servicing. The amount of MHF contracts serviced as just described totaled $374.5 million, $396.2 million and $430.1 million at December 31, 1999, 1998 and 1997, respectively. At the time MCi sells an MHF contract to an unaffiliated financial institution, approximately one-third of the fee collected is recorded as a “manufactured housing brokerage fee” and the remaining two-thirds of the fee is deposited into escrow accounts and available to offset potential prepayment or credit losses (“MCi reserves”). The undiscounted balance of the MCi reserves was $25.1 million, $34.7 million and $46.4 million as of December 31, 1999, 1998 and 1997, respectively. During 1999, approximately 575 MHF contracts totaling $19.7 million were sold generating $1.3 million in manufactured housing brokerage fees. In addition, 1,425 land home loans were sold in 1999 generating $2.4 million in manufactured housing brokerage fees.

      The Corporation’s subsidiary, FirstMerit Bank, N.A., purchases MHF contracts from MCi, a portion of which are packaged in asset-backed securitizations (“ABS pools”) and sold to investors. Sales and securitizations of MHF contracts totaled $100.0 million in 1998 and $150.0 million in 1997. There were no sales and securitizations of MHF contracts during 1999.

      At the time of sale, the Corporation records an asset, “retained interest in securitized assets,” representing the discounted future cash flows to be received by the Corporation for (1) servicing income from the ABS pool, (2) principal and interest payments on MHF contracts contributed to the ABS pools as a credit enhancement, referred to as “over-collateralization” and, (3) excess interest spread. Excess interest spread represents the difference between interest collected from the MHF contract borrowers and interest paid to investors in the ABS pool.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

      Future credit losses are estimated using historical experience of originated manufactured housing loans. The historical data used provides credit loss experience throughout a loan’s term or lifecycle. As a result, this vintage, or static pool, analysis reflects increasing losses in earlier years as the portfolio seasons and declining losses in later years. Prepayment assumptions used to project future cash flows are based on historical experience and industry-wide trends.

      Cash flows from the ABS pools are subject to volatility that could materially affect operating results. Prepayments resulting from increased competition, borrower mobility, general and regional economic conditions, prevailing interest rates, as well as actual losses incurred, may vary from the performance the Corporation expects. Management reviews the cash flows and actual performance of the ABS pools on a quarterly basis. The aggregate amount of ABS pools serviced by the Corporation totaled $222.1 million and $255.8 million at December 31, 1999 and 1998 respectively, and such amounts are not included in the accompanying Consolidated Financial Statements.

      The Corporation classifies the retained interest in securitized assets in the Consolidated Balance Sheet as securities available for sale. Total retained interest in securitized assets was approximately $26.0 million at year-ends 1999 and 1998.

                           
1999 1998 1997
Gain on sale of ABS pools $ — 2,650 5,734
Manufactured housing brokerage fees 3,747 2,464 3,151
Servicing income on brokered MHF contracts 3,236 1,666 4,400
Servicing income on ABS pools 1,429 850 1,399
Total manufactured housing income $ 8,412 7,630 14,684

7.  Mortgage Servicing Rights and Mortgage Servicing

      The Corporation allocates a portion of total costs of the loans originated or purchased that it intends to sell to servicing rights based on estimated fair value. Fair value is estimated based on market prices, when available, or the present value of future net servicing income, adjusted for such factors as discount rates and prepayments. Servicing rights are amortized over the average life of the loans using the net cash flow method.

      The components of mortgage servicing rights are as follows:

                           
1999 1998 1997
Balance at beginning of year, net $ 11,265 6,669 3,899
Additions 3,964 7,259 3,943
Scheduled amortization (2,213 ) (2,495 ) (1,173 )
Less: allowance for impairment (87 ) (168 ) —
Balance at end of year, net $ 12,929 11,265 6,669

      In 1999, 1998 and 1997, the Corporation’s income before federal income taxes was increased by approximately $1.7 million, $4.6 million and $2.7 million, respectively, as a result of compliance with the accounting Statements mentioned previously.

      The Corporation assesses its capitalized servicing rights for impairment based on their current fair value and disaggregates its servicing rights portfolio based on loan type and interest rate which are the predominant risk characteristics of the underlying loans. If any impairment results after current market assumptions are applied, the value of the servicing rights is reduced through the use of a valuation allowance.

12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

      At year-ends 1999 and 1998, the Corporation serviced for others approximately $2.5 billion and $1.8 billion, respectively. The following table provides servicing information for the year-ends indicated:

                           
1999 1998 1997
Balance, beginning of year $ 1,802,899 $ 1,455,285 $ 1,327,357
Additions:
Loans originated and sold to investors 104,019 377,517 221,715
Existing loans sold to investors 687,949 186,034 100,670
Existing loans from acquisitions 66,868
Reductions:
Sale of servicing rights — — —
Loans sold servicing released (3,130 ) (4,842 ) (5,311 )
Regular amortization, prepayments and foreclosures (97,614 ) (277,963 ) (189,146 )
Balance, end of year $ 2,494,123 $ 1,802,899 $ 1,455,285

8.  Restrictions on Cash and Dividends

      The average balance on deposit with the Federal Reserve Bank or other governing bodies to satisfy reserve requirements amounted to $28,724 during 1999. The level of this balance is based upon amounts and types of customers’ deposits held by the banking subsidiary of the Corporation. In addition, deposits are maintained with other banks at levels determined by management based upon the volumes of activity and prevailing interest rates to compensate for check-clearing, safekeeping, collection and other bank services performed by these banks. At December 31, 1999, cash and due from banks included $6,565 deposited with the Federal Reserve Bank and other banks for these reasons.

      Dividends paid by the Subsidiaries are the principal source of funds to enable the payment of dividends by the Corporation to its shareholders. These payments by the Subsidiaries in 1999 are restricted by the regulatory agencies principally to the total of 1999 net income plus undistributed net income of the previous two calendar years. Regulatory approval must be obtained for the payment of dividends of any greater amount.

9.  Premises and Equipment

      The components of premises and equipment are as follows:

                         
Year-ends, Estimated
useful
1999 1998 lives
Land $ 18,067 $ 19,096 —
Buildings 107,636 112,537 10-35 yrs
Equipment 99,957 93,413 3-15 yrs
Leasehold improvements 18,590 18,486 1-20 yrs
244,250 243,532
Less accumulated depreciation and amortization 112,031 102,691
$ 132,219 $ 140,841

      Amounts included in other expenses for depreciation and amortization aggregated $15,774, $16,790 and $14,302 for the years ended 1999, 1998 and 1997, respectively.

13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

      At December 31, 1999, the Corporation was obligated for rental commitments under noncancelable operating leases on branch offices and equipment as follows:

           
Years ending Lease
December 31, commitments
2000 $ 7,605
2001 6,534
2002 5,754
2003 4,333
2004 3,707
2005-2024 18,365
$ 46,298

      Rentals paid under noncancelable operating leases amounted to $9,859, $8,426, and $8,446 in 1999, 1998 and 1997, respectively.

10.  Certificates and Other Time Deposits

      The aggregate amounts of certificates and other time deposits of $100 and over at year end 1999 and 1998 were $1,002,495 and $804,806, respectively. Interest expense on these certificates and time deposits amounted to $31,873 in 1999, $54,355 in 1998, and $32,528 in 1997.

 
11.  Securities Sold Under Agreements to Repurchase and Other Borrowings

      In total, the average balance of securities sold under agreements to repurchase and other borrowings for the years ended 1999, 1998 and 1997 amounted to $1,666,025, $1,063,848 and $1,055,938, respectively. In 1999, the weighted average annual interest rate amounted to 5.16%, compared to 6.00% in 1998 and 5.61% in 1997. The maximum amount of these borrowings at any month end totaled $2,281,243 during 1999, $1,179,734 in 1998 and $1,196,824 during 1997.

      The debt components and their respective terms are as follows.

      At year-ends 1999, 1998 and 1997, securities sold under agreements to repurchase totaled $1,473,774, $489,373, and $473,647, respectively. The average annual interest rate for these instruments was 4.79%, compared to 4.78% in 1998 and 4.91% in 1997.

      At year-ends 1999, 1998, and 1997, the Corporation had $646,322, $586,117 and $386,425, respectively, of Federal Home Loan Bank (“FHLB”) advances outstanding. The advance balances outstanding at year-end 1999 included: $343,683 with maturities within one year, $135,116 with maturities from one to five years and $167,523 with maturities over five years. The FHLB advances have interest rates that range from 4.24% to 8.10%.

      At year-end 1999, the Corporation had outstanding balances on lines of credit with two financial institutions totaling $22,000 and $130,000, respectively. As of year-end 1999, the unused portions of these lines totaled $8,000 and $20,000, respectively. The interest rates on these lines were 6.08% and 6.64%, respectively. At year-end 1998, the outstanding balances on these lines were $23,000 and $10,000 with corresponding interest rates of 6.00% and 5.93%, respectively. The interest rates on these lines of credit are variable and approximate one-month LIBOR plus 25 basis points and one-month LIBOR plus 45 basis points, respectively. The lines of credit discussed previously have a financial requirement whereby the Corporation must maintain a risk-based capital level commensurate with that of a well capitalized institution. The Corporation was in compliance with these requirements as of December 31, 1999.

14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

      At year-ends 1999, 1998 and 1997, the Corporation had $6,061, $6,541 and $47,340 respectively of convertible subordinated debentures outstanding. The first of two sets of convertible bonds totaled $1,061 at year-end 1999, consists of 15 year, 6.25% debentures issued in a public offering in 1993 by Security First. These bonds mature May 5, 2008 and may be redeemed by the bondholders any time prior to maturity. The second set of bonds totaled $5,000 at year-end 1999, carry an interest rate of 9.125%, were issued by Signal, and are due in 2004.

      At year-ends 1999, 1998 and 1997, other borrowings totaled $3,086, $8,173 and $28,418, respectively. These borrowings carry interest rates ranging from 4.96% through 12.00%.

      Residential mortgage loans totaling $1.1 billion, $437 million and $580 million at year-ends 1999, 1998 and 1997, respectively, were pledged to secure FHLB advances. FANNIE MAE (“FNMA”) Preferred Stock of approximately $19.5 million and preferred stock of another financial institution totaling $14.5 million were pledged against the line of credit outstanding of $22.0 million at year-end 1999. FNMA Preferred Stock of approximately $28.2 million and preferred stock of another financial institution totaling $4.3 million were pledged against the line of credit outstanding of $23.0 million at year-end 1998.

      Effective July 16, 1999, the Corporation entered into agreements to issue senior, medium or subordinated notes with maturities ranging from 30 days to 5 years or more. The aggregate principal amount outstanding at any one time may not be exceed $1.0 billion and these notes will be offered only to institutional investors. No amounts are outstanding under the terms of the these agreements at December 31, 1999.

12.  FirstMerit Capital Trust Securities

      During 1998, FirstMerit Capital Trust I, formerly Signal Capital Trust, (“FirstMerit Trust”) was formed to (1) issue and sell $50.0 million of 8.67% Capital Securities, Series A, (“Series A Securities”) (2) to issue common securities, (3) to invest the proceeds in the 8.67% Junior Subordinated Deferrable Interest Debentures, Series A (“Debentures”) and (4) to engage in certain other limited activities. The Series A Securities were issued and sold to investors on February 10, 1998 in a private placement exempt from the Securities Act of 1933. In an exchange offer, FirstMerit Trust exchanged the outstanding Series A Securities for 8.67% Capital Securities, Series B which were registered with the Securities and Exchange Commission in June 1998. The Common Securities are owned solely by the Corporation’s wholly-owned subsidiary, FirstMerit Bank, N. A.

      Distributions on the Capital Securities are guaranteed, are cumulative, and began accumulating on February 13, 1998. The distributions are payable semi-annually in arrears on February 15 and August 15 of each year, commencing August 15, 1998 at the annual rate of 8.67% of the liquidation amount of $1,000 per security. The interest payment schedule of the Debentures is identical of that to the Capital Securities, except that so long as the distributions of the Debentures are not in default, as defined in the governing indenture, deferment of the interest payment on the Debentures at any time and from time to time (for an extension period not exceeding ten consecutive semi-annual periods) is permitted. During any extension period, certain actions, including declaring or paying any dividends or distributions, or redeeming or purchasing any capital stock, is prohibited.

      Prior to December 31, 1998, the Corporation acquired approximately $17.5 million of the Series B Capital Securities in the open market. From January 1, 1999 through the consummation of the Signal merger on February 12, 1999, the Corporation acquired approximately $11.1 million of the Series B Capital Securities in the open market. The activity and balances resulting from these open-market acquisitions have been appropriately eliminated in the Consolidated Financial Statements and the related Notes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

13.  Federal Income Taxes

      Federal income taxes are comprised of the following:

                         
Years ended,
1999 1998 1997
Taxes currently payable $ 73,888 $ 50,217 $ 56,359
Deferred expense (benefit) (17,993 ) (12,355 ) (293 )
$ 55,895 $ 37,862 $ 56,066

      Actual Federal income tax expense differs from expected Federal income tax as shown in the following table:

                           
Years ended,
1999 1998 1997
Statutory rate 35.0 % 35.0 % 35.0 %
Increase (decrease) in rate due to:
Interest income on tax-exempt securities and tax-free loans, net (1.3 )% (1.6 )% (1.3 )%
State and local income taxes, net — 0.1 % 0.3 %
Goodwill amortization 1.2 % 1.0 % 0.3 %
Reduction to tax reserves (3.3 )% (1.7 )% (0.8 )%
Exercise of options at acquisition — (0.6 )% (0.1 )%
Merger expenses 0.6 % 1.2 % 0.1 %
Sale of subsidiary — 1.4 % —
Bank owned life insurance (0.6 )% — —
Dividends received deduction (0.3 )% — —
Non-deductible meals and entertainment 0.2 % — —
Other 0.3 % (0.5 )% (0.7 )%
Effective tax rates 31.8 % 34.3 % 32.8 %

      Principal components of the Corporation’s net deferred tax (liability) are summarized as follows:

                   
Year-ends,
1999 1998
Deferred tax assets:
Allowance for credit losses $ 32,530 $ 25,295
Loan fees and expenses 12,675 —
Employee benefits 5,908 5,352
Available for sale securities 24,406 —
Valuation reserves 6,069 1,791
Purchase accounting and acquisition adjustments 6,338 —
87,926 32,438
Deferred tax liabilities:
Loan fees and expenses — (1,325 )
Available for sale securities — (2,781 )
Leased assets and depreciation (37,404 ) (30,956 )
Mortgage banking and loan fees (10,272 ) (4,017 )
Other (6,621 ) (4,910 )
Total gross deferred tax liabilities (54,297 ) (43,989 )
Total net deferred tax asset (liability) $ 33,629 $ (11,551 )

16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

14. Benefit Plans

      The Corporation has a defined benefit pension plan covering substantially all of its employees. In general, benefits are based on years of service and the employee’s compensation. The Corporation’s funding policy is to contribute annually the maximum amount that can be deducted for federal income tax reporting purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future.

      A supplemental non-qualified, non-funded pension plan for certain officers is also maintained and is being provided for by charges to earnings sufficient to meet the projected benefit obligation. The pension cost for this plan is based on substantially the same actuarial methods and economic assumptions as those used for the defined benefit pension plan.

      The Corporation also sponsors a benefit plan which presently provides postretirement medical and life insurance for retired employees. The cost of postretirement benefits expected to be provided to current and future retirees is accrued over those employee’s service periods. Prior to 1993, postretirement benefits were accounted for on a cash basis. In addition to recognizing the cost of benefits for the current period, recognition is being provided for the cost of benefits earned in prior service periods (the transition obligation). The Corporation reserves the right to terminate or amend the plan at any time.

      The following table sets forth the both plans’ funded status and amounts recognized in the Corporation’s consolidated financial statements.

                                                   
Pension Benefits Postretirement Benefits
1999 1998 1997 1999 1998 1997
Change in Benefit Obligation
Projected Benefit Obligation (PBO)/, Accumulated Postretirement Benefit Obligation (APBO), beginning of year $ 73,689 70,720 70,119 $ 27,901 27,864 30,888
Service Cost 4,099 3,546 3,379 992 855 958
Interest Cost 5,339 4,988 4,880 2,030 1,872 2,157
Plan amendments 2,626 1,060 684 — — —
Participant contributions — — — 275 1,390 1,554
Actuarial (gain) loss (1,705 ) (2,735 ) (2,113 ) (2,293 ) (2,330 ) (5,953 )
Benefits Paid (4,448 ) (3,890 ) (6,229 ) (1,467 ) (1,750 ) (1,740 )
PBO/ APBO, end of year 79,600 73,689 70,720 27,438 27,901 27,864
Change in Plan Assets
Fair Value of Plan Assets, beginning of year 80,479 80,877 71,929 — — —
Actuarial return on plan assets 14,230 2,465 9,454 — — —
Asset transfer from CoBancorp 3,045 — — — — —
Participant contributions — — — 275 360 186
Employer contributions 490 1,027 5,723 1,192 1,390 1,554
Benefits paid (4,448 ) (3,890 ) (6,229 ) (1,467 ) (1,750 ) (1,740 )
Fair Value of Plan Assets, end of year 93,796 80,479 80,877 — — —
Funded Status 14,196 6,790 10,157 (27,438 ) (27,901 ) (27,864 )
Unrecognized Transition (asset) obligation (379 ) (586 ) (792 ) 10,667 11,488 12,308
Prior service costs 3,654 4,437 3,707 556 — —
Cumulative net (gain) or loss (15,627 ) (7,137 ) (8,450 ) (2,527 ) 365 1,666
(Accrued) prepaid pension/ postretirement cost $ 1,844 3,504 4,622 (18,742 ) (16,048 ) (13,890 )

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

                                                   
Pension Benefits Postretirement Benefits
1999 1998 1997 1999 1998 1997
Amounts recognized in the Consolidated Balance Sheets consist of:
Prepaid benefit cost $ 3,297 4,250 4,632 — — —
Accrued benefit liability (6,185 ) (6,362 ) (4,218 ) (18,742 ) (16,048 ) (13,890 )
Intangible asset 4,277 4,940 3,556 — — —
Accumulated other comprehensive income 455 676 652 — — —
Net amount recognized $ 1,844 3,504 4,622 (18,742 ) (16,048 ) (13,890 )
                                                 
Pension Benefits Postretirement Benefits
1999 1998 1997 1999 1998 1997
Weighted-average assumptions as of December 31
Discount Rate 7.75 % 7.00 % 7.50 % 7.75 % 7.00 % 7.50 %
Long-term rate of return on assets 9.25 % 9.00 % 9.00 % N/A N/A N/A
Rate of compensation increase 4.00 % 4.00 % 4.75 % — — —
Medical trend rates — — — 5% to 7 % 5% to 8 % 5% to 9 %

      For measurement purposes, a nine percent annual rate increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to six percent in 2002 and remain at that level hereafter.

      Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percent point change in assumed health care cost trend rates would have the following effects:

                 
1-Percentage 1-Percentage
Point Increase Point Decrease
Effect on total of service and interest cost components $ 369 $ (318 )
Effect on postretirement benefit obligation 2,931 (2,244 )
                                                   
Pension Benefits Postretirement Benefits
1999 1998 1997 1999 1998 1997
Components of Net Periodic Pension/ Postretirement Cost
Service Cost $ 4,099 3,546 3,379 $ 992 855 958
Interest Cost 5,339 4,988 4,880 2,030 1,872 2,157
Expected return on assets (7,208 ) (6,537 ) (6,275 ) — — —
Amortization of unrecognized Transition (asset) (207 ) (207 ) (207 ) 821 821 821
Prior service costs 364 331 287 43 — —
Cumulative net (gain) loss 70 25 (56 ) — — 144
Net periodic pension/postretirement cost $ 2,457 2,146 2,008 3,886 3,548 4,080

      The Corporation has elected to amortize the transition obligation for both the pension and postretirement plans by charges to income over a twenty year period on a straight-line basis.

      Accumulated Benefit Obligation for the Corporation’s pension plan were ($65,804), ($63,211) and ($55,386) for the periods ended December 31, 1999, 1998 and 1997, respectively.

18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

      The Corporation maintains a savings plan under Section 401(K) of the Internal Revenue Code, covering substantially all full-time and part-time employees after six months of continuous employment. Under the plan, employees contributions are partially matched by the Corporation. Such matching becomes vested when the employee reaches five years of credited services. Total savings plan expenses were $2,780, $2,586 and $2,375 for 1999, 1998 and 1997, respectively. The former CoBancorp employees now working for the Corporation were merged into the 401(K) plan during 1998 and the former Security First employees working for the Corporation were merged into FirstMerit’s 401 (K) plan effective January 1, 1999.

 
15.  Stock Options

      The Corporation’s 1982, 1992, 1997 and 1999 Stock Plans (the “Plans”) provide incentive options to certain key employees (and to all full-time employees in the case of 1999 Stock Plan) for up to 4,200,000 common shares of the Corporation. In addition, these Plans provide for the granting of non-qualified stock options to certain non-employee directors of the Corporation for which 200,000 common shares of the Corporation have been reserved. Outstanding options under these Plans are generally not exerciseable for at least six months from date of grant.

      Options under these Plans are granted at 100% of the fair market value. Options granted as incentive stock options must be exercised within ten years and options granted as non-qualified stock options have terms established by the Compensation Committee of the Board and approved by the non-employee directors of the Board. Options are cancelable within defined periods based upon the reason for termination of employment.

      As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” the Corporation continues to account for its stock option plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock issued to Employees,” and makes no charges against income with respect to options granted.

      However, SFAS No. 123 does require the disclosure of the pro forma effect on net income and earnings per share that would result if the fair value compensation element were to be recognized as expense. The following table shows the pro forma earnings and earnings per share for 1999, 1998 and 1997 along with significant assumptions used in determining the fair value of the compensation amounts.

                           
1999 1998 1997
(Dollars in thousands except per share data)
Pro forma amounts:
Net income $ 114,717 65,131 112,981
Earnings per share (basic) 1.27 0.75 1.39
Earnings per share (diluted) 1.25 0.74 1.29
Assumptions:
Dividend yield 2.52 0.00 % 3.50 %
Expected volatility 24.11%-25.55 % 24.94 % 23.30 %
Risk free interest rate 5.04%-6.42 % 4.55%-5.61 % 5.8%-6.8 %
Expected lives 5 years 5 years 5 years

19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

      A summary of stock option activity is as follows:

                                     
Available Range of Option Average Option
SHARES for Grant Outstanding Price per Share Price per Share
Balance
Year-end 1996 582,109 2,920,231 $ .00 - 16.97 $ 11.33
New shares reserved 2,200,000 —
Canceled — (47,639 ) 5.41 - 25.06 11.66
Exercised — (501,503 ) 5.44 - 15.44 9.22
Granted (549,743 ) 943,833 .00 - 40.26 24.14
Balance
Year-end 1997 2,232,366 3,314,922 $ .00 - 40.26 $ 15.22
Canceled — (85,797 ) 9.56 - 34.00 18.8
Exercised — (876,679 ) 6.31 - 21.63 17.84
Granted (442,346 ) 856,826 .00 - 43.11 34.53
Balance
December 31, 1998 1,790,020 3,209,272 $ 0.00 - 43.11 $ 19.46
New shares reserved 4,000,000 —
Canceled (146,575 ) (196,702 ) 7.16 - 30.38 24.70
Exercised — (1,104,572 ) 4.43 - 27.04 14.91
Granted (1,835,032 ) 1,835,032 25.69 - 28.63 26.38
Balance Year-end 1999 3,808,413 3,743,030 $ 0.00 - 43.11

      The ranges of exercise prices and the remaining contractual life of options as of December 31, 1999 were:

                                 
RANGE OF EXERCISE PRICES $0 - $9 $10 - $18 $19 - $26 $27 - $43
Options outstanding:
Outstanding as of December 31, 1999 85,343 985,874 1,878,620 793,193
Weighted-average remaining contractual life (in years) 4.14 5.89 8.69 8.68
Weighted-average exercise price $ 8.01 $ 14.00 $ 25.06 $ 29.01
 
Options exerciseable:
Outstanding as of December 31, 1999 78,657 985,874 610,870 300,290
Weighted-average remaining contractual life (in years) 4.06 5.89 7.75 7.99
Weighted-average exercise price $ 8.04 $ 14.00 $ 23.16 $ 30.44

      The Employee Stock Purchase Plan provides full-time and part-time employees of the Corporation the opportunity to acquire common shares on a payroll deduction basis. Shares available under the Employee Stock Purchase Plan are purchased at 85% of their fair market value on the business day immediately preceding the semi-annual grant-date. Of the 240,705 shares available under the Plan, there were 46,291, 45,802 and 26,770 shares issued in 1999, 1998 and 1997, respectively.

20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

16. Parent Company

      (Parent Company only) is as follows:

                 
Year-ends,
CONDENSED BALANCE SHEETS 1999 1998
ASSETS
Cash and due from banks $ 4,869 18,642
Investment securities 1,246 9,322
Loans to subsidiaries 131,750 126,336
Investment in subsidiaries, at equity in underlying value of their net assets 848,119 843,993
Net loans 640 15,375
Other assets 80,602 9,133
$ 1,067,226 1,022,801
LIABILITIES AND SHAREHOLDERS’ EQUITY
Convertible subordinated debt $ 41,561 42,041
Outstanding balances on lines of credit 130,000 10,000
Accrued and other liabilities 62,090 64,104
Shareholders’ equity 833,575 906,656
$ 1,067,226 1,022,801
                         
Years ended,
CONDENSED STATEMENTS OF INCOME 1999 1998 1997
Income:
Cash dividends from subsidiaries $ 62,000 60,000 101,200
Other income 5,740 8,526 68,000
67,740 68,526 169,200
Interest and other expenses 11,839 19,203 69,943
Income before federal income tax benefit and equity in undistributed income of subsidiaries 55,901 49,323 99,257
Federal income tax (benefit) (9,501 ) (6,941 ) (1,468 )
65,402 56,264 100,725
Equity in undistributed income of subsidiaries 54,468 16,253 13,983
Net income $ 119,870 72,517 114,708

21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

                           
Years ended,
CONDENSED STATEMENTS OF CASH FLOWS 1999 1998 1997
Operating activities:
Net income $ 119,870 72,517 114,708
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of subsidiaries (54,468 ) (16,253 ) (14,220 )
Other (72,302 ) (9,970 ) 7,772
Net cash provided (used) by operating activities (6,900 ) 46,294 108,260
Investing activities:
Proceeds from maturities of investment securities $ 9,588 3,378 10,982
Loans to subsidiaries (5,414 ) (3,000 ) (4,211 )
Payments for investments in and advances to subsidiaries — (209,672 ) (48,145 )
Net decrease in loans 13,734 16,131 2,346
Purchases of investment securities (1,512 ) (3,049 ) (10,909 )
Other — 365 (468 )
Net cash provided (used) by investing activities 16,396 (195,847 ) (50,405 )
Financing activities:
Net increase in securities sold under repurchase agreements and other borrowings 119,520 60,000 40,500
Cash dividends (68,932 ) (54,651 ) (45,692 )
Proceeds from exercise of stock options 11,809 15,087 4,323
Purchase of treasury shares (85,666 ) (25,703 ) (54,329 )
Purchase of preferred stock Treasury shares reissued — acquisition — 115,205 —
Treasury shares reissued — public offering — 27,324 —
Net cash provided (used) by financing activities (23,269 ) 137,262 (55,198 )
Net increase (decrease) in cash and cash equivalents (13,773 ) (12,291 ) 2,657
Cash and cash equivalents at beginning of year 18,642 30,933 28,276
Cash and cash equivalents at end of year $ 4,869 18,642 30,933

17.  Segment Information

      The Corporation provides a diversified range of banking and certain nonbanking financial services and products through its various subsidiaries. Management reports the results of the Corporation’s operations through its major line of business Supercommunity Banking. Parent Company, other Subsidiaries and Eliminations include activities that are not directly attributable to Super Community Banking. Included in this category are certain nonbanking affiliates, eliminations of certain intercompany transactions and certain nonrecurring transactions. Also included are portions of certain assets, capital, and support functions not specifically identifiable with Supercommunity Banking. The Corporation’s business is conducted solely in the United States.

      The accounting policies of the segment are the same as those described in “Summary of Significant Accounting Policies.” The Corporation evaluates performance based on profit or loss from operations before income taxes.

22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

      The following table presents a summary of financial results and significant performance measures for the periods depicted.

                                                   
1999 1998
Super- Parent Co. Super- Parent Co.
community Other Subs community Other Subs
Banking Elims Consolidated Banking Elims Consolidated
(Dollars in thousands)
Summary of operations:
Net interest income $ 386,891 (2,905 ) 383,986 $ 353,429 2,752 356,181
Provision for loan losses 36,429 1,001 37,430 40,859 62 40,921
Other income 154,003 707 154,710 138,585 1,551 140,136
Other expenses 314,211 2,295 316,506 341,691 3,338 345,029
Net income 115,989 3,881 119,870 68,713 3,804 72,517
Average balances:
Assets 9,513,827 (20,780 ) 9,493,047 7,788,204 732,371 8,520,575
Loans 6,859,513 5,817 6,865,330 6,106,860 24,805 6,131,665
Earning assets 8,842,908 (45,313 ) 8,797,595 7,861,819 30,267 7,892,086
Deposits 6,836,327 (37,646 ) 6,798,681 6,455,209 — 6,455,209
Shareholders’ equity 855,980 24,144 880,124 811,414 30,451 841,865
Performance ratios:
Return on average equity 18.00% 13.67% 8.47% 8.61%
Return on average assets 1.62% 1.26% 0.88% 0.85%
Efficiency ratio 50.28% 57.17% 68.09% 68.17%
                           
1997
Super- Parent Co.
community Other Subs
Banking Elims Consolidated
(Dollars in thousands)
Summary of operations:
Net interest income $ 321,763 4,300 326,063
Provision for loan losses 22,421 1,097 23,518
Other income 115,575 (1,481 ) 114,094
Other expenses 244,556 1,309 245,865
Net income 103,987 10,721 114,708
Average balances:
Assets 6,971,999 619,937 7,591,936
Loans 5,428,924 39,663 5,468,587
Earning assets 6,617,021 511,532 7,128,553
Deposits 5,667,347 — 5,667,347
Shareholders’ equity 645,552 76,852 722,404
Performance ratios:
Return on average equity 16.11% 15.88%
Return on average assets 1.49% 1.51%
Efficiency ratio 54.90% 54.99%

23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

      The table below presents estimated revenues from external customers, by product and service group for the periods depicted.

                                     
Trust
Retail Commercial Services Total
1999
Interest and fees $ 387,083 367,853 18,708 773,644
Service charges 45,102 11,780 — 56,882
Sales and servicing 9,035 — — 9,035
Totals $ 441,220 379,633 18,708 839,561
1998:
Interest and fees $ 435,901 263,381 16,147 715,429
Service charges 41,878 8,498 — 50,376
Sales and servicing 16,900 — — 16,900
Totals $ 494,679 271,879 16,147 782,705

18.  Fair Value Disclosure of Financial Instruments

      Disclosures of fair value information about certain financial instruments, whether or not recognized in the consolidated balance sheets are provided as follows. Instruments for which quoted market prices are not available are valued based on estimates using present value or other valuation techniques whose results are significantly affected by the assumptions used, including discount rates and future cash flows. Accordingly, the values so derived, in many cases, may not be indicative of amounts that could be realized in immediate settlement of the instrument. Also, certain financial instruments and all non-financial instruments are excluded from these disclosure requirements. For these and other reasons, the aggregate fair value amounts presented below are not intended to represent the underlying value of the Corporation.

      The following methods and assumptions were used to estimate the fair values of each class of financial instrument presented:

        Investment securities — Fair values are based on quoted prices, or for certain fixed maturity securities not actively traded estimated values are obtained from independent pricing services.
 
        Federal funds sold — The carrying amount is considered a reasonable estimate of fair value.
 
        Net loans — Fair value for loans with interest rates that fluctuate as current rates change are generally valued at carrying amounts with an appropriate discount for any credit risk. Fair values of other types of loans are estimated by discounting the future cash flows using the current rates for which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
 
        Cash and due from banks — The carrying amount is considered a reasonable estimate of fair value.
 
        Accrued interest receivable — The carrying amount is considered a reasonable estimate of fair value.
 
        Deposits — For deposit liabilities with no defined maturities, the fair value disclosed is the amount payable on demand as of the dates presented. The fair values for fixed maturity certificates of deposit and other time deposits are estimated using the rates currently offered for deposits of similar remaining maturities.
 
        Securities sold under agreements to repurchase and other borrowings -Fair values are estimated using rates currently available to the Corporation for similar types of borrowing transactions.

24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

        Derivative financial instruments — The fair value of exchange-traded derivative financial instruments was based on quoted market prices or dealer quotes. These values represent the estimated amount the Corporation would receive or pay to terminate the agreements, considering current interest rates, as well as the current credit-worthiness of the counterparties. Fair value amounts consist of unrealized gains and losses, accrued interest receivable and payable, and premiums paid or received, and take into account master netting agreements.
 
        Accrued interest payable — The carrying amount is considered a reasonable estimate of fair value.
 
        Commitments to extend credit — The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar arrangements, taking into account the remaining terms of the agreements, the creditworthiness of the counterparties, and the difference, if any, between current interest rates and the committed rates.
 
        Standby letters of credit and financial guarantees written — Fair values are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations.
 
        Loans sold with recourse — Fair value is estimated based on the present value of the estimated future liability in the event of default.
 
        The estimated fair values of the Corporation’s financial instruments based on the assumptions described above are as follows:

                                   
Year-ends
1999 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets:
Investment securities $ 2,394,034 2,394,034 1,894,271 1,903,266
Federal funds sold 25,100 25,100 31,739 31,739
Net loans & loans held for sale 6,956,689 6,862,138 6,310,096 6,342,269
Cash and due from banks 215,071 215,071 327,997 327,997
Accrued interest receivable 59,579 59,579 53,119 53,119
Financial liabilities:
Deposits 6,860,147 6,875,532 6,845,978 6,888,298
Securities sold under agreements to repurchase and other borrowings 2,281,243 2,279,912 1,123,204 1,132,734
Accrued interest payable 42,423 42,423 28,788 28,788
Derivative instruments — (2,547 ) — 612
Unrecognized financial instruments:
Commitments to extend credit — — — —
Standby letters of credit and financial guarantees written — — — —
Loans sold with recourse — — — —

19.  Financial Instruments with Off-Balance-Sheet Risk

      The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, financial guarantees, and loans sold with recourse and derivative instruments.

      These instruments involve, to varying degrees, elements recognized in the consolidated balance sheets. The contract or notional amount of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.

25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

      The Corporation’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. The Corporation uses the obligations as it does for on-balance-sheet instruments.

      Unless noted otherwise, the Corporation does not require collateral or other security to support financial instruments with credit risk. The following table sets forth financial instruments whose contract amounts represent credit risk.

                 
Years ended,
1999 1998
Commitments to extend credit $ 2,163,197 2,270,082
Standby letters of credit and financial guarantees written $ 154,688 122,747
Loans/securities sold with recourse $ 336,304 382,849
Interest rate swaps $ 46,450 75,000
Purchased options $ 21,450 61,400
Futures contracts sold $ — 6,100
Forward contracts sold $ 42,300 —

      Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally are extended at the then prevailing interest rates, have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Corporation upon extension of credit is based on Management’s credit evaluation of the counter party. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Except for short-term guarantees of $32.9 million and $27.6 million at December 31, 1999 and 1998, respectively, the remaining guarantees extend in varying amounts through 2012. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies, but may include marketable securities, equipment and real estate. In recourse arrangements, the Corporation accepts 100% recourse. By accepting 100% recourse, the Corporation is assuming the entire risk of loss due to borrower default. The Corporation’s exposure to credit loss, if the borrower completely failed to perform and if the collateral or other forms of credit enhancement all prove to be of no value, is represented by the notional amount less any allowance for possible loan losses. The Corporation uses the same credit policies originating loans which will be sold with recourse as it does for any other type of loan.

      Derivative financial instruments include swaps, futures, forwards and option contracts, all of which derive their value from underlying interest rates, commodity values or equity instruments. For most contracts, notional amounts are used solely to determine cash flows to be exchanged. The notional or contract amounts associated with the derivative instruments are not recorded as assets or liabilities on the balance sheet and do not represent the potential for gain or loss associated with such transactions. During 1998 the Corporation entered into swap agreements to modify the interest sensitivity of certain liability portfolios. Specifically, the Corporation swapped $25 million fixed rate CDs to floating rate liabilities and swapped $50.0 million of fixed rate capital securities to floating rate liabilities. At the same time, the Corporation purchased a $50.0 million interest rate cap associated with the fixed rate capital securities. At December 31, 1999, the CD swap totaled $25.0 million, the same as last year-end. The fixed rate capital securities swap and the interest rate cap were both reduced from $50.0 million at December 31, 1998 to $21.45 million at year-end 1999. The Corporation decreased the amount of the capital

26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

securities swap and interest rate cap by $28.55 million in connection with a corresponding decline in the instrument being hedged by the swap and cap.

20.  Contingencies

      The nature of the Corporation’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 effect on the Corporation’s financial condition or results of operations.

21.  Quarterly Financial Data (Unaudited)

      Quarterly financial and per share data for the years ended 1999 and 1998 are summarized as follows:

      (Dollars in thousands, except share data)

                                         
Quarters
First Second Third Fourth
(Dollars in thousands, except share data)
Total interest income 1999 $ 165,294 170,278 175,374 173,905
1998 $ 150,374 158,405 167,019 166,759
Net interest income 1999 $ 94,447 101,975 97,971 89,593
1998 $ 83,280 87,765 91,493 93,643
Provision for possible loan losses 1999 $ 16,398 9,657 6,913 4,462
1998 $ 6,164 8,144 5,941 20,672
Income (loss) before federal income taxes 1999 $ 10,682 55,804 58,684 59,500
1998 $ 42,848 35,825 49,787 (18,081 )
Net income (loss) 1999 ($ 504 ) 38,908 39,904 41,562
1998 $ 29,373 24,226 33,855 (14,937 )
Net income (loss) per share — basic 1999 $ 0.00 0.42 0.44 0.46
1998 $ 0.35 0.28 0.38 (0.18 )
Net income (loss) per share — diluted 1999 $ 0.00 0.41 0.44 0.46
1998 $ 0.34 0.28 0.37 (0.17 )

22.  Shareholder Rights Plan

      The Corporation has in effect a shareholder rights plan (“Plan”). The Plan provides that each share of Common Stock has one right attached. Under the Plan, subject to certain conditions, the Rights would be distributed after either of the following events: (1) a person acquires 10% or more of the Common Stock of the Corporation, or (2) the commencement of a tender offer that would result in a change in the ownership of 10% or more of the Common Stock. After such an event, each Right would entitle the holder to purchase shares of

27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

Series A Preferred Stock of the Corporation. Subject to certain conditions, the Corporation may redeem the Rights for $0.01 per Right.

23.  Earnings Per Share

      The reconciliation of the numerator and denominator used in the basic EPS calculation to the numerator and denominator used in the diluted EPS calculation. The calculations are presented in the table below:

                             
Years ended,
1999 1998 1997
(Dollars in thousands)
Basic EPS:
Income before extraordinary item $ 125,717 72,517 114,708
Net income 119,870 72,517 114,708
Less: preferred stock dividends (307 ) (691 ) (1,584 )
Net income available to common shareholders 119,563 71,826 113,124
Average common shares outstanding 90,320,389 86,376,507 81,351,984
Earnings per basic common share $ 1.32 0.83 1.39
Diluted EPS:
Net income available to common shareholders $ 119,563 71,826 113,124
Add: interest expense on convertible bonds, net of tax 75 206 334
Adjusted net income used in diluted EPS calculation 119,638 72,032 113,458
Average common shares outstanding 90,320,389 86,376,507 81,351,984
Add: common stock equivalents for shares issuable under:
Stock option plans 570,000 1,055,079 1,511,268
Convertible debentures/preferred securities 633,000 552,420 4,433,464
Average common and common stock equivalent shares outstanding 91,523,389 87,984,006 87,296,716
Earnings per diluted common share $ 1.31 0.82 1.30

24.  Regulatory Matters

      The Corporation and FirstMerit Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a material effect on the Corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation’s capital amounts and classification are also subject to quantitative judgements by regulators about components, risk weightings, and other factors.

      Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. Management believes, as of December 31, 1999, the Corporation meets all capital adequacy requirements to which it is subject. The capital terms used in this note to the consolidated financial statements are defined in the regulations as well as in the “Capital Resources” section of Management’s Discussion and Analysis of financial condition and results of operations.

      As of year-end 1999, the most recent notification from the Office of the Comptroller of the Currency (“OCC”) categorized the Corporation as well capitalized under the regulatory framework for prompt corrective

28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FIRSTMERIT CORPORATION AND SUBSIDIARIES

action. To be categorized as well capitalized the Corporation must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. In management’s opinion, there are no conditions or events since the OCC’s notification that have changed the Corporation’s categorization as “well capitalized.”

                                                 
Adequately
Actual Capitalized: Well Capitalized:
As of December 31, 1999: Amount Ratio Amount Ratio Amount Ratio
Total Capital (to Risk Weighted Assets) $ 843,658 10.12 % 666,605 8.00 % 833,257 10.00%
Tier I Capital (to Risk Weighted Assets) 734,492 8.81 % 333,303 4.00 % 499,954 6.00%
Tier I Capital (to Average Assets) 734,492 7.47 % 295,044 3.00 % 491,740 5.00%

29

MANAGEMENT’S REPORT

       The management of FirstMerit Corporation is responsible for the preparation and accuracy of the financial information presented in this annual report. These consolidated financial statements were prepared in accordance with generally accepted accounting principles, based on the best estimates and judgment of management.

      The Corporation maintains a system of internal controls designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with the Corporation’s authorization and policies, and that transactions are properly recorded so as to permit preparation of financial statements that fairly present the financial position and results of operations in conformity with generally accepted accounting principles. These systems and controls are reviewed by our internal auditors and independent auditors.

      The Audit Committee of the Board of Directors is composed of only outside directors and has the responsibility for the recommendation of the independent auditors for the Corporation. The Audit Committee meets regularly with management, internal auditors and our independent auditors to review accounting, auditing and financial matters. The independent auditors and the internal auditors have free access to the Audit Committee.

     
/s/ John R. Chochran /s/ Terrence E. Bichsel
JOHN R. COCHRAN TERRENCE E. BICHSEL
Chairman and Chief Executive Vice President
Executive Officer Chief Financial Officer

30

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors

And Shareholders of FirstMerit Corporation

      In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and retained earnings and of cash flows present fairly, in all material respects, the financial position of FirstMerit Corporation and its subsidiaries at December 31, 1999 and December 31, 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.

/s/ PricewaterhouseCoopers LLP

January 31, 2000

31

AVERAGE CONSOLIDATED BALANCE SHEETS

FULLY-TAX EQUIVALENT INTEREST RATES AND INTEREST DIFFERENTIAL

FIRSTMERIT CORPORATION AND SUBSIDIARIES
                                                     
Years ended
1999 1998
Average Average Average Average
Balance Interest Rate Balance Interest Rate
(Dollars in thousands)
ASSETS
Investment securities:
U.S. Treasury securities and U.S. Government agency obligations (taxable) $ 1,444,591 87,238 6.04 % 1,466,525 92,646 6.32 %
Obligations of states and political subdivisions (tax-exempt) 130,416 10,618 8.14 98,457 7,767 7.89
Other securities 317,799 19,275 6.07 150,561 9,504 6.31
Total investment securities 1,892,806 117,131 6.19 1,715,543 109,917 6.41
Federal funds sold & other interest-earning assets 5,041 204 4.05 44,878 2,400 5.35
Loans held for sale 34,418 4,635 13.47
Loans 6,865,330 567,132 8.26 6,131,665 533,732 8.70
Total earning assets 8,797,595 689,102 7.83 7,892,086 646,049 8.19
Allowance for possible loan losses (105,918 ) (69,191 )
Cash and due from banks 266,935 204,353
Other assets 534,435 493,327
Total assets $ 9,493,047 8,520,575
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand-non-interest bearing $ 1,055,306 — — 1,083,354 — —
Demand-interest bearing 667,469 4,774 0.72 752,096 13,222 1.76
Savings 1,791,390 40,327 2.25 1,600,122 44,077 2.75
Certificates and other time deposits 3,284,516 169,783 5.17 3,019,637 165,198 5.47
Total deposits 6,798,681 214,884 3.16 6,455,209 222,497 3.45
Federal funds purchased, securities sold under agreements to repurchase and other borrowings 1,666,025 85,981 5.16 1,063,848 63,879 6.00
Total interest bearing liabilities 7,409,400 300,865 4.06 6,435,703 286,376 4.45
Other liabilities 148,217 159,653
Shareholders’ equity 880,124 841,865
Total liabilities and shareholders’ equity $ 9,493,047 8,520,575
Net yield on earning assets 388,237 4.41 359,673 4.56
Interest rate spread 3.77 3.74
Income on tax-exempt securities and loans 7,082 5,542

[Additional columns below]

[Continued from above table, first column(s) repeated]
                             
Years ended
1997
Average Average
Balance Interest Rate
(Dollars in thousands)
ASSETS
Investment securities:
U.S. Treasury securities and U.S. Government agency obligations (taxable) 1,404,024 90,853 6.47 %
Obligations of states and political subdivisions (tax-exempt) 86,873 7,074 8.14
Other securities 102,327 6,568 6.42
Total investment securities 1,593,224 104,495 6.56
Federal funds sold & other interest-earning assets 66,742 3,498 5.24
Loans held for sale
Loans 5,468,587 479,729 8.77
Total earning assets 7,128,553 587,722 8.24
Allowance for possible loan losses (56,234 )
Cash and due from banks 202,600
Other assets 317,017
Total assets 7,591,936
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand-non-interest bearing 773,285 — —
Demand-interest bearing 693,277 12,575 1.81
Savings 1,531,623 40,564 2.65
Certificates and other time deposits 2,669,162 146,097 5.47
Total deposits 5,667,347 199,236 3.52
Federal funds purchased, securities sold under agreements to repurchase and other borrowings 1,055,938 59,211 5.61
Total interest bearing liabilities 5,950,000 258,447 4.34
Other liabilities 146,247
Shareholders’ equity 722,404
Total liabilities and shareholders’ equity 7,591,936
Net yield on earning assets 329,275 4.62
Interest rate spread 3.90
Income on tax-exempt securities and loans 5,225

Note:  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.

32

FirstMerit Corporation and
Subsidiaries Employees’
Salary Savings Retirement
Plan
 Report On Audits Of Financial Statements And
Supplemental Schedules
for the years ended December 31, 1999 and 1998

33

FirstMerit Corporation and Subsidiaries Employees’ Salary Savings Retirement Plan
Contents

           
PAGES
Report of Independent Accountants 35
 
Financial Statements:
 
Statements of Net Assets Available for Plan Benefits at December 31, 1999 and 1998 36
 
Statement of Changes in Net Assets Available for Plan Benefits for the years ended December 31, 1999 and 1998 37
 
Notes to Financial Statements 38-41
 
 
Supplemental Schedules:
Item 27(a) — Schedule of Assets Held for Investment Purpose as of December 31, 1999 42
 
Item 27(d) — Schedule of Reportable Transactions for the year ended December 31, 1999 43-44

 

34

Report Of Independent Accountants

The Board of Directors
FirstMerit Corporation

In our opinion, the accompanying statements of net assets available for plan benefits and the related statements of changes in net assets available for plan benefits present fairly, in all material respects, the net assets available for plan benefits of the FirstMerit Corporation and Subsidiaries Employees’ Salary Savings Retirement Plan (the “Plan”) at December 31, 1999 and 1998, and the related changes in net assets available for plan benefits for the years then ended, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based upon our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.

Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary schedules included on pages 42 to 44 are presented for purposes of additional analysis and are not a required part of the basic financial statements, but are supplementary information required by the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplementary information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects, in relation to the basic financial statements taken as a whole.

/s/ PricewaterhouseCoopers LLP

April 21, 2000

35

FirstMerit Corporation and Subsidiaries Employees’ Salary Savings Retirement Plan
Statements of Net Assets Available for Plan Benefits
December 31, 1999 and 1998

                       
1999 1998
Assets:
Investments, at fair value $ 44,145,989 $ 27,620,476
FirstMerit Corporation Common Stock 47,385,290 52,284,130
Total investments 91,531,279 79,904,606
 
Receivables:
Receivable from participants 194,475 165,911
Receivable from employers 115,587 98,686
Loans to participants 660,633 664,009
 
Total receivables 970,695 928,606
 
Other:
Cash/(bank overdraft) 406,470 (651,944 )
Net assets available for plan benefits $ 92,908,444 $ 80,181,268

The accompanying notes are an integral part of these financial statements.

36

FirstMerit Corporation and Subsidiaries Employees’ Salary Savings Retirement Plan
Statements of Changes in Net Assets Available for Plan Benefits
For the years ended December 31, 1999 and 1998

                       
1999 1998
Additions:
 
Contributions:
Participants’ contributions $ 4,765,690 $ 3,768,860
Employer’s contributions 3,277,213 2,216,420
8,042,903 5,985,280
 
Investment income:
Interest 42,835 42,260
Dividends 1,992,381 1,554,922
Net realized gain and unrealized appreciation of investments (603,821 ) 2,871,541
1,431,395 4,468,723
Assets received from new participants 9,402,046 783,590
Total additions 18,876,344 11,237,593
 
Deductions:
Withdrawals by former participants 6,149,168 3,703,094
Total deductions 6,149,168 3,703,094
Excess of additions over deductions 12,727,176 7,534,499
Net assets available for plan benefits at beginning of period 80,181,268 72,646,769
Net assets available for plan benefits at end of period $ 92,908,444 $ 80,181,268

The accompanying notes are an integral part of these financial statements.

37

FirstMerit Corporation and Subsidiaries Employees’ Salary Savings Retirement Plan
Notes to Financial Statements

1. Description of the Plan:

  The following brief description of the FirstMerit Corporation and Subsidiaries (“FirstMerit”) Employees’ Salary Savings Retirement Plan (the “Plan”) provides only general information. Participants should refer to the Plan Agreement for a more complete description of the Plan’s provisions.

  A. General

  The Board of Directors of FirstMerit Corporation established this defined contribution plan as of October 1, 1985. The Plan covers all employees of FirstMerit who have six months of service and have attained the age of twenty-one. The Plan is subject to certain provisions of the Employee Retirement Income Security Act of 1974 (ERISA).

  B. Contributions

  The Plan permits each participant to contribute from one percent to fifteen percent of compensation. Such contributions are known as voluntary pretax employee contributions. A participant’s voluntary pretax contributions and earnings are immediately vested and non-forfeitable.
 
  FirstMerit contributes as a matching contribution an amount equal to 50 percent of the participant’s voluntary pretax contribution. FirstMerit will not make a matching contribution with respect to any portion of a participant voluntary pretax contribution that exceeds six percent of the participant’s basic compensation. These employer matching contributions and earnings are immediately vested and non-forfeitable.
 
  The Plan also includes a supplemental matching account whereby FirstMerit makes additional matching contributions equal to 50% of the participant’s voluntary pretax employee contributions which do not exceed three percent of the participant’s basic compensation. Participants become vested in the Supplemental Matching Program upon achieving five years of service or upon attaining normal retirement age.

  C. Participants’ Accounts

  FirstMerit Bank, N.A. (a subsidiary of FirstMerit), as the trustee for the Plan, maintains separate accounts for each participant. The Plan allows participants to direct their contributions in FirstMerit Corporation common stock, a stable value fund, a short-term government bond fund, an intermediate bond fund, a high-quality, large capitalized stock fund, a blue chip growth fund, a growth stock fund, an international stock fund, or a combination thereof with the minimum investment in any option of 5%. Employer matching contributions are invested solely in FirstMerit Corporation common stock purchased on the open market by the trustee.

  D. Payment of Benefits:

  Distributions to participants are made by one or more of the following methods: (1) a single lump-sum payment, in cash; or (2) payments in equal or nearly equal monthly, quarterly, semi-annual, or annual installments over any period not exceeding 10 years or the participant’s life expectancy at the date such payments commence, if less.

38

FirstMerit Corporation and Subsidiaries Employees’ Salary Savings Retirement Plan
Notes to Financial Statements

  E. Administrative Expenses

  All expenses associated with administering the Plan, including the trustee’s fees and brokerage commissions on purchases of and transfers between Investment Funds, are paid by FirstMerit.

2. Summary of Significant Accounting Policies:

  A. Basis of Presentation

  The accompanying financial statements have been prepared on an accrual basis in accordance with accounting principles generally accepted in the United States.

  B. Use of Estimates

  The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and related notes. Actual results could differ from those estimates.

  C. Investments

  Investments in securities are stated at fair value. The fair value of marketable securities is based on quotations obtained from national securities exchanges.

  The fair value of the investments in the mutual funds is based upon the number of units held by the Plan at December 31 and the current value of each unit based upon quotations and bids obtained from national securities exchanges on the securities in the funds.

  Securities transactions are recognized on the trade date (the date the order to buy or sell is executed).

  The Plan presents in the Statement of Changes in Net Assets Available for Plan Benefits the net appreciation (depreciation) in the fair value of its investments, which consists of the realized gains or losses and the unrealized appreciation (depreciation) on these investments.

  D. Risk and Uncertainties

  The Plan generates a significant portion of its revenues from investments in domestic and international mutual funds, bonds and FirstMerit Corporation common stock. As a result, the Plan’s revenues and net assets available for plan benefits could vary based on the performance of the financial markets.

  E. Fair Value Disclosure of Financial Instruments

  Management has determined that the carrying amount of financial instruments, as reported on the Statement of Net Assets Available for Plan Benefits, approximates fair value.

39

FirstMerit Corporation and Subsidiaries Employees’ Salary Savings Retirement Plan
Notes to Financial Statements

2. Summary of Significant Accounting Policies, continued:

  F. New Accounting Standard

  Effective December 31, 1999, the Plan adopted Statement of Position 99-3, which eliminated the requirement to present earnings and expenses by investment fund option for participant-directed investments. Therefore all participant-directed investments are shown in the aggregate in the Statement of Changes in Net Assets Available for Plan Benefits

3. Investments:

  During 1999 and 1998, the Plan’s investments (including investments bought, sold, and held during the period) (depreciated) appreciated in value as follows:

                     
1999 1998
Mutual funds:
Federated Short/Intermediate Government $ (12,954 ) $ 10,951
Fidelity Advisor Series IV Ltd. Term Bond 14,967 11900
Fidelity Advisor Equity Portfolio Growth 2,090,998 1,126,136
Fidelity Blue Chip Growth Fund 1,787,442 1,573,219
Fidelity Overseas Fund 652,743 123,590
Newpoint Equity Fund 1,398,232 594,112
 
FirstMerit Corporation Common Stock (10,767,892 ) (3,762,895 )
 
Total $ (4,836,464 ) $ (322,987 )

4. Federal Income Taxes:

  The Plan and Trust qualify under Section 401 of the Internal Revenue Code and the Trust is exempt from federal income taxes under Section 501(a).
 
  The Plan obtained its latest determination letter on November 13, 1995, in which the Internal Revenue Service stated that the Plan, as then designed, was in compliance with the applicable requirements of the Internal Revenue Code. The Plan has been amended since receiving the determination letter. However, the Plan administrator and the Plan’s tax counsel believe that the Plan is currently designed and being operated in compliance with the applicable requirements of the Internal Revenue Code. Therefore, no provision for income taxes has been included in the Plan’s financial statements.

5. Plan Termination:

  Although they have not expressed any intent to do so, the Plan may be terminated by unanimous action of the FirstMerit Corporation Board of Directors.

40

FirstMerit Corporation and Subsidiaries Employees’ Salary Savings Retirement Plan
Notes to Financial Statements

6. Acquisition:

  Effective April 1, 1999, the First Federal Savings and Loan of Wooster Savings and Investment Plan was merged into the FirstMerit Corporation and Subsidiaries Employees’ Salary Savings Retirement Plan. Assets with a value of $9,402,046 were transferred to the Plan effective May 1, 1999.

41

FirstMerit Corporation and Subsidiaries Employees’ Salary Savings Retirement Plan
Item 27(a) - Schedule of Assets Held for Investment Purpose
December 31, 1999

                   
Cost Fair Value
Mutual Funds:
Federated Government Obligations Funds $ 230,468 $ 230,468
Federated Short/Intermediate Government 1,337,236 1,331,328
Federated Capital Preservation 4,713,975 4,713,975
Fidelity Advisor Series IV Ltd. Term Bond 1,867,937 1,826,060
Fidelity Advisor Equity Portfolio Growth 8,549,729 12,838,580
Fidelity Blue Chip Growth 8,621,952 13,321,459
Fidelity Overseas Fund 2,065,817 2,969,741
New Point Equity Fund 4,256,536 6,914,378
 
31,643,650 44,145,989
 
FirstMerit Corporation Common Stock 32,590,054 47,385,290
Cash 406,470 406,470
Receivable from participants 194,475 194,475
Receivable from employers 115,587 115,587
Loans to participants — various interest rates, 5 year maximum unless mortgage 20 year maximum 660,633 660,633
 
$ 65,610,869 $ 92,908,444

42

FirstMerit Corporation and Subsidiaries Employees’ Salary Savings Retirement Plan
Item 27(d) - Schedule of Reportable Transactions
for the year ended December 31, 1999

                                                 
Number Number of Purchase Selling Cost of Gain
of Shares Transactions Price Price Asset on Sale
Category III: Series of transactions
in same security exceeds 5% of value
 
Federated Cap Preserve
Issue: 140411109 20,364 12 $ 203,638 $ 203,638
 
Federated Cap Preserve
Issue: 140411109 283,674 205 2,836,805 2,836,805
 
Federated Cap Preserve
Issue: 140411109 124,603 151 $ 1,247,983 1,247,983
 
Fidelity Adv. Equity Growth C1
Issue: 315805101 14,091 2 961,366 961,366
 
Fidelity Adv. Equity Growth C1
Issue: 315805101 44,187 188 2,824,845 2,824,845
 
Fidelity Adv. Equity Growth C1
Issue: 315805101 10,957 96 705,514 644,825 $ 60,686
 
Fidelity Blue Chip Growth
Issue: 316389303 8,545 1 453,309 453,309
 
Fidelity Blue Chip Growth
Issue: 316389303 60,668 187 3,217,604 3,217,604
 
Fidelity Blue Chip Growth
Issue: 316389303 14,319 111 760,411 728,109 32,294
 
FirstMerit Corporation Common Stock
Issue: 337915102 257,709 56 6,875,383 6,875,383
 
FirstMerit Corporation Common Stock
Issue: 337915102 154,776 189 4,173,989 4,169,406 4,590
 
Federated Government Obligations Fund
Issue: 60934N104 6,170,480 168 6,170,480 6,170,480
 
Federated Government Obligation Fund
Issue04/19/2000 601934N104 6,961,294 135 6,961,294 6,961,294

43

FirstMerit Corporation and Subsidiaries Employees’ Salary Savings Retirement Plan
Item 27(d) - Schedule of Reportable Transactions
for the year ended December 31, 1999

                                         
Number Number of Principal Cost of Gain/
of Shares Transactions Cash Asset Loss
Category II: Series of Transactions
with same broker exceeds 5% of value
 
Broker: Everen Clearing Corp. 185,125 87 $ 4,840,813 $ 4,875,826 $ (35,011 )
 
Broker: McDonald & Co. Securities Inc. 194,161 36 5,342,862 5,273,385 69,477

There were no Category I or IV or reportable transactions during the year.

44

FirstMerit Corporation and
Subsidiaries Employees’
Stock Purchase Plan
 Report on Audits of Financial Statements
for the years ended December 31, 1999 and 1998

45

FirstMerit Corporation and Subsidiaries Employees’ Stock Purchase Plan
Contents

         
PAGE
Report of Independent Accountants 47
Financial Statements:
 
Statements of Net Assets Available for Plan Benefits at December 31, 1999 and 1998 48
 
Statements of Changes in Net Assets Available for Plan Benefits for the years ended December 31, 1999 and 1998 49
 
Notes to Financial Statements 50-52

46

Report of Independent Accountants

To the Board of Directors
FirstMerit Corporation

In our opinion, the accompanying statements of net assets available for plan benefits and the related statements of changes in net assets available for plan benefits present fairly, in all material respects, the net assets available for plan benefits of the FirstMerit Corporation and Subsidiaries Employees’ Stock Purchase Plan (the “Plan”) at December 31, 1999 and 1998, and the related changes in net assets available for plan benefits for the years then ended, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based upon our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.

April 14, 2000

/s/ PricewaterhouseCoopers LLP

47

FirstMerit Corporation and Subsidiaries Employees’ Stock Purchase Plan
Statements of Net Assets Available for Plan Benefits
at December 31, 1999 and 1998

                   
Assets 1999 1998
Cash $ 88,305 $ 2,855
Contributions receivable — 77,703
Investment in FirstMerit Corporation common stock, at fair value 81,006 84,145
Net assets available or plan benefits $ 169,311 $ 164,703

The accompanying notes are an integral part of the financial statements.

48

FirstMerit Corporation and Subsidiaries Employees’ Stock Purchase Plan
Statements of Changes in Net Assets Available for Plan Benefits
for the years ended December 31, 1999 and 1998

                     
1999 1998
Additions to plan assets attributable to:
Employee contributions $ 1,050,136 $ 770,208
Employer contributions 200,000 200,000
Dividend income 6,440 4,122
Net appreciation (depreciation) in fair value of FirstMerit Corporation common stock (3,185 ) (25,908 )
 
Total additions 1,253,391 948,422
 
Deductions from plan assets attributable to:
Benefits paid to participants 1,226,217 862,997
Service fees 22,566 21,117
 
Total deductions 1,248,783 884,114
 
Net increase 4,608 64,308
 
Net assets available for plan benefits, beginning of year 164,703 100,395
 
Net assets available for plan benefits, end of year $ 169,311 $ 164,703

The accompanying notes are an integral part of the financial statements.

49

FirstMerit Corporation and Subsidiaries Employees’ Stock Purchase Plan
Notes to Financial Statements
for the years ended December 31, 1999 and 1998

1. Plan Description:

  The following brief description of the FirstMerit Corporation (the “Corporation”) Employee Stock Purchase Plan (the “Plan”) is provided for general information purposes only. Participants should refer to the Prospectus for more complete information.
 
  General
 
  The Board of Directors of the Corporation established the Plan on February 13, 1992 which was approved by the shareholders at the annual meeting on April 8, 1992. The Plan provides eligible employees of the Corporation with the opportunity to acquire the Corporation’s Common Shares on a payroll deduction basis. On January 1, 1997, the plan was amended to provide for the transfer of all existing participant plan assets to individual employees’ brokerage accounts maintained by Merrill Lynch. This amendment also provides for the monthly additions in participant account balances to be transferred to the individual employees’ brokerage account. These transfers are reflected as benefits paid to Plan participants in the Statement of Changes in Net Assets Available for Plan Benefits.
 
  Contributions
 
  Effective May 1, 1998, contributions to the Plan consist of participant payroll deductions, post tax, of a specific dollar amount up to ten percent of the participant’s compensation. Prior to May 1, 1998, contributions were limited to five percent of the participant’s compensation. The election to participate in the Plan must be completed on or before 5 days prior to the commencement of the monthly grant period.
 
  Vesting
 
  Participant’s are 100% vested in their account balances at all times.
 
  Purchases of Common Shares
 
  Under the Plan, up to 200,000 of the Corporation’s Common Shares may be issued, subject to adjustment in the event of certain transactions affecting the Corporation’s capital structure. Each participant in the Plan on a grant date is granted the option to purchase, from such funds as contributed by the participant, whole Common Shares of the Corporation at the option price of 85% of the fair market value of such shares valued as of the business day immediately preceding the grant date. Shares of Common stock granted pursuant to the Plan may be authorized but unissued shares, shares now or hereafter held in the treasury of the Company, or shares purchased on the open market. When shares are purchased on the open market, the employer must reimburse the plan for 15% of the purchase price through employer contributions.
 
  Eligibility
 
  Any person who has been employed by the Corporation or any of its subsidiaries for at least six months and who currently is employed on a regular basis (any person customarily employed at least 20 hours per week) is eligible to participate in the Plan. Executive officers of the Corporation are not considered eligible employees.

50

FirstMerit Corporation and Subsidiaries Employees’ Stock Purchase Plan
Notes to Financial Statements
for the years ended December 31, 1999 and 1998

  Transferability
 
  Rights to purchase Common Shares under the Plan are not transferable, except by will or the laws of descent of distribution, and they may not be subjected to any lien or liability. Options expire on termination of employment for any reason other than disability or leave of absence. No participant may purchase shares under the Plan if, after the purchase, the participant would own more than 5% of the outstanding Common Shares of the Corporation. In addition, no participant may purchase shares exceeding $25,000 in fair market value in any one calendar year.

2. Summary of Significant Accounting Policies:

  Basis of Presentation
 
  The accompanying financial statements have been prepared on an accrual basis in accordance with accounting principles generally accepted in the United States.
 
  Use of Estimates
 
  The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates.
 
  Contributions Receivable
 
  Contributions receivable consists of participant payroll deductions not yet transferred to Merrill Lynch.
 
  Administrative Expenses
 
  Administrative expenses of the plan are paid by the Corporation.
 
  Fair Value of Financial Instruments
 
  Management has determined that the carrying amount of financial instruments, as reported on the statement of net assets available for plan benefits, approximates fair value.
 
  Investments
 
  The investment in the Corporation’s common shares is valued at fair market value using readily available published market values.
 
  The Plan presents in the statements of changes in net assets available for plan benefits the net appreciation (depreciation) in the fair value of its investments which consists of the realized gains or losses and the unrealized appreciation (depreciation) on those investments.

51

FirstMerit Corporation and Subsidiaries Employees’ Stock Purchase Plan
Notes to Financial Statements
for the years ended December 31, 1999 and 1998

3. Right to Terminate:

  Although it has not expressed any interest to do so, the Corporation has the right to terminate the Plan at any time. In the event of Plan termination any remaining assets in the Plan must be used solely for distributions to Plan participants.

4. Income Tax Status:

  The Plan is a non-qualified plan under the Internal Revenue Code. The Plan is not exempt from federal income taxes.

52

PART IV

 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

      (a)(1)  The following Financial Statements appear in Part II of this Report:

  Consolidated Balance Sheets December 31, 1999, 1998 and 1997
 
  Consolidated Statements of Income Years ended December 31, 1999, 1998 and 1997
 
  Consolidated Statements of Changes in Shareholders’ Equity Years ended December 31, 1999, 1998 and 1997
 
  Consolidated Statements of Cash Flows Years ended December 31, 1999, 1998 and 1997
  Notes to Consolidated Financial Statements Years ended December 31, 1999, 1998 and 1997
 
  Management’s Report
 
  Independent Auditors’ Report
 
  Statements of Net Assets Available for FirstMerit Corporation Employee Stock Purchase Plan Benefits at December 31, 1999 and 1998
 
  Statements of Changes in Net Assets Available for FirstMerit Corporation Employee Stock Purchase Plan Benefits for the years ended December 31, 1999 and 1998
 
  Notes to Financial Statements
 
  Report of Independent Accountants
 
  Statements of Net Assets Available for FirstMerit Corporation and Subsidiaries
 
  Employees’ Salary Savings Retirement Plan Benefits December 31, 1999 and 1998
 
  Statements of Changes in Net Assets Available for FirstMerit Corporation and Subsidiaries
 
  Employees’ Salary Savings Retirement Plan Benefits for the years ended December 31, 1999 and 1998
 
  Notes to Financial Statements

      (a)(2)  Financial Statement Schedules

  All schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes which appear in Part II of this report.

      (a)(3)  Management Contracts or Compensatory Plans or Arrangements

  See those documents listed on the Exhibit Index which are marked as such.

      (b)  Reports on Form 8-K

  No reports on Form 8-K have been filed during the last quarter of 1999.

      (c)  Exhibits

      See the Exhibit Index.

      (d)  Financial Statements

      See subparagraph (a)(1) above.

53

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Akron, State of Ohio, on the 27th day of April, 2000.

  FirstMerit Corporation

  By:  /s/ TERRENCE E. BICHSEL
_________________________________________
Executive Vice President, Finance and Administration
(Chief Financial Officer and Chief Accounting Officer)

54

Exhibit Index

         
Exhibit
Number
3.1 Amended and Restated Articles of Incorporation of FirstMerit Corporation, as amended (incorporated by reference from Exhibit 3.1 to the Form 10-K/ A filed by the Registrant on April 29, 1999)
3.2 Amended and Restated Code of Regulations of FirstMerit Corporation (incorporated by reference from Exhibit 3(b) to the Form 10-K filed by the registrant on April 9, 1998)
4.1 Shareholders Rights Agreement dated October 21, 1993, between FirstMerit Corporation and FirstMerit Bank, N.A., as amended and restated May 20, 1998 (incorporated by reference from Exhibit 4 to the Form 8-A/ A filed by the registrant on June 22, 1998)
4.2 Instrument of Assumption of Indenture between FirstMerit Corporation and NBD Bank, as Trustee, dated October 23, 1998 regarding FirstMerit Corporation’s 6 1/4% Convertible Subordinated Debentures, due May 1, 2008 (incorporated by reference from Exhibit 4(b) to the Form 10-Q filed by the registrant on November 13, 1998)
4.3 Supplemental Indenture, dated as of February 12, 1999, between FirstMerit and Firstar Bank Milwaukee, National Association, as Trustee relating to the obligations of the FirstMerit Capital Trust I, fka Signal Capital Trust I (incorporated by reference from Exhibit 4.3 to the Form  10-K filed by the Registrant on March 22, 1999)
4.4 Indenture dated as of February 13, 1998 between Firstar Bank Milwaukee, National Association, as trustee and Signal Corp (incorporated by reference from Exhibit 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) (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)*

55

         
Exhibit
Number
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)*
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)*
10.25 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 Amendment to John R. Macso Agreements*
10.28 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)*
10.29 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)*
10.30 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)*
10.31 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)*
10.32 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)*
10.33 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)*
10.34 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)*
10.35 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)*
10.36 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)*
10.37 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)*

56

         
Exhibit
Number
10.38 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)*
10.39 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)*
10.40 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)*
10.41 Credit Agreement among FirstMerit Corporation, Bank of America, N.A., and Lenders, dated November 29,1999 (incorporated by reference to Exhibit 10.40 from the Form 10-K filed by the Registrant on March 10, 2000)
10.42 Distribution Agreement, by and among FirstMerit Bank, N.A. and the Agents, dated July 15, 1999 (incorporated by reference to Exhibit 10.41 from the Form 10-K filed by the Registrant on March 10, 2000)
21 Subsidiaries of FirstMerit Corporation (incorporated by reference to Exhibit 21 from the Form 10-K filed by the Registrant on March 10, 2000)
23 Consent of PricewaterhouseCoopers, LLP
24 Power of Attorney (incorporated by reference to Exhibit 24 from 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 (incorporated by reference from Exhibit 27 to Form 10-k filed by the Registrant on March 10, 2000)

  *  Management Contract or Compensatory Plan or Arrangement

57



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