FIRSTMERIT CORP /OH/
10-Q, 2000-11-13
NATIONAL COMMERCIAL BANKS
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TABLE OF CONTENTS

PART I — FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
AVERAGE CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
PART II. - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Index
SIGNATURES
Exhibit 27

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED
September 30, 2000

COMMISSION FILE NUMBER 0-10161

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

     
OHIO
(State or other jurisdiction of
incorporation or organization)		 34-1339938
(IRS Employer Identification
Number)

III CASCADE PLAZA, 7TH FLOOR, AKRON, OHIO 44308-1103
(Address of Principal Executive Offices)

(330) 996-6300
(Telephone Number)

OUTSTANDING SHARES OF COMMON STOCK, AS OF
OCTOBER 31, 2000
87,736,069

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

 

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FIRSTMERIT CORPORATION

PART I — FINANCIAL STATEMENTS

ITEM 1. FINANCIAL STATEMENTS

      The following statements included in the quarterly unaudited report to shareholders are incorporated by reference:

Consolidated Balance Sheets as of September 30, 2000, December 31, 1999 and September 30, 1999

Consolidated Statements of Income for the three-month and nine-month periods ended September 30, 2000 and 1999

Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 1999 and 1998 and for the nine months ended September 30, 2000

Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 1999

Notes to Consolidated Financial Statements as of September 30, 2000, December 31, 1999, and September 30, 1999

Management’s Discussion and Analysis of Financial Conditions as of September 30, 2000, December 31, 1999 and September 30, 1999 and Results of Operations for the quarter and nine months ended September 30, 2000 and 1999 and for the year ended December 31, 1999.

 

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FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
                                                                                     
(Unaudited, except December 31, 1999) September 30 December 31 September 30
2000 1999 1999
ASSETS
Investment securities $ 2,214,269 2,394,034 2,065,242
Federal funds sold & other investments 100 25,100 1,140
Loans held for sale 202,733 46,005 27,586
 
Commercial loans 3,254,343 3,122,520 2,981,820
Mortgage loans 860,933 878,323 1,307,037
Installment loans 1,516,368 1,471,149 1,436,541
Home equity loans 446,876 408,343 396,272
Credit card loans 110,020 108,163 100,681
Manufactured housing loans 784,328 753,254 672,398
Leases 288,956 272,429 218,032
Total loans 7,261,824 7,014,181 7,112,781
Less allowance for possible loan losses 108,576 104,897 106,892
Net loans 7,153,248 6,909,284 7,005,889
 
Cash and due from banks 215,066 215,071 295,008
Premises and equipment, net 134,904 132,219 134,094
Intangible assets 154,676 162,374 159,951
Accrued interest receivable and other assets 297,218 231,390 237,053
$ 10,372,214 10,115,477 9,925,963
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand-non-interest bearing $ 997,813 1,016,535 1,009,982
Demand-interest bearing 627,533 661,961 631,193
Savings and Money Market 1,785,142 1,687,983 1,705,227
Certificates and other time deposits 4,220,393 3,493,668 3,512,361
Total deposits 7,630,881 6,860,147 6,858,763
Securities sold under agreements to repurchase and other borrowings 1,707,561 2,281,243 2,053,896
Total funds 9,338,442 9,141,390 8,912,659
Accrued taxes, expenses, and other liabilities 136,854 140,512 148,409
Total liabilities 9,475,296 9,281,902 9,061,068
 
Shareholders’ equity:
Preferred Stock, without par value: authorized 7,000,000 shares — — —
Preferred Stock, Series A, without par value: designated 800,000 shares; none outstanding — — —
Cumulative convertible preferred stock, Series B, without par value: designated 220,000 shares; 106,558, 163,534, and 163,534 shares outstanding at September 30, 2000, December 31, 1999 and September 30, 1999, respectively 2,564 3,878 3,934
Common stock, without par value: authorized 300,000,000 shares; issued 91,979,362, 92,054,156 and 92,046,920 shares, respectively 127,937 127,937 127,937
Capital surplus 113,421 116,930 117,536
Accumulated other comprehensive income (35,435 ) (45,082 ) (27,686 )
Retained earnings 782,345 719,811 696,275
Treasury stock, at cost, 3,870,425, 3,678,904 and 2,244,648, shares respectively (93,914 ) (89,899 ) (53,101 )
Total shareholders’ equity 896,918 833,575 864,895
$ 10,372,214 10,115,477 9,925,963

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

See notes to accompanying consolidated financial statements.

 

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FIRSTMERIT CORPORATION
AVERAGE CONSOLIDATED BALANCE SHEETS
                                     
Unaudited
(Dollars in thousands) 3rd Qtr 2nd Qtr 1st Qtr 3rd Qtr YTD
2000 2000 2000 2000
ASSETS
Investment securities & federal funds sold $ 2,366,078 2,286,405 2,356,628 2,335,259
Loans held for sale 53,271 50,374 58,033 53,892
 
Commercial loans 3,285,203 3,275,629 3,198,639 3,248,538
Mortgage loans 877,575 892,438 898,918 889,598
Installment loans 1,517,726 1,502,518 1,474,474 1,498,313
Home Equity loans 440,469 426,009 411,928 426,189
Credit card loans 108,297 103,934 105,573 105,944
Manufactured housing loans 858,654 846,485 768,027 824,513
Leases 291,298 296,717 287,020 291,678
Loans less unearned income 7,379,222 7,343,730 7,144,579 7,284,773
Less allowance for possible
loan losses 110,777 110,139 107,351 109,427
Net loans 7,268,445 7,233,591 7,037,228 7,175,346
 
Cash and due from banks 205,949 242,325 242,223 230,075
Premises and equipment, net 135,049 134,523 133,584 134,388
Accrued interest receivable and other assets 464,019 444,407 434,254 449,885
Total Assets $ 10,492,811 10,391,625 10,261,950 10,378,845
LIABILITIES
Deposits:
Demand-non-interest bearing $ 1,027,707 1,052,392 1,020,384 938,308
Demand-interest bearing 620,211 645,325 643,842 636,401
Savings and money market 1,791,848 1,808,127 1,747,456 1,877,695
Certificates and other time
deposits 4,260,371 3,876,139 3,566,289 3,902,243
Total deposits 7,700,137 7,381,983 6,977,971 7,354,647
Securities sold under agreements to repurchase and other borrowings 1,774,955 2,030,837 2,287,852 2,032,653
Total funds 9,475,092 9,412,820 9,265,823 9,387,300
Accrued taxes, expenses and
other liabilities 143,792 133,026 163,670 140,748
Total liabilities 9,618,884 9,545,846 9,429,493 9,528,048
SHAREHOLDERS’ EQUITY 873,927 845,779 832,457 850,797
LIABILITIES AND SHAREHOLDERS’ EQUITY $ 10,492,811 10,391,625 10,261,950 10,378,845

[Additional columns below]

 

[Continued from above table, first column(s) repeated]
                                     
Unaudited
(Dollars in thousands) 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
1999 1999 1999 1999
ASSETS
Investment securities & federal funds sold $ 2,165,952 1,864,012 1,719,273 1,824,400
Loans held for sale 25,091 — — —
 
Commercial loans 3,028,292 2,929,115 2,821,088 2,648,284
Mortgage loans 1,176,400 1,401,899 1,675,442 1,707,232
Installment loans 1,462,200 1,418,423 1,330,759 1,168,905
Home Equity loans 403,086 391,277 380,361 348,220
Credit card loans 102,926 100,756 100,290 102,080
Manufactured housing loans 711,697 593,752 415,032 368,503
Leases 240,809 202,950 180,729 170,352
Loans less unearned income 7,125,410 7,038,172 6,903,701 6,513,576
Less allowance for possible
loan losses 108,833 108,067 104,875 101,788
Net loans 7,016,577 6,930,105 6,798,826 6,411,788
 
Cash and due from banks 252,291 238,835 272,025 285,589
Premises and equipment, net 134,932 136,448 139,026 140,149
Accrued interest receivable and other assets 399,693 428,498 400,547 402,371
Total Assets $ 9,994,536 9,597,898 9,329,697 9,064,297
LIABILITIES
Deposits:
Demand-non-interest bearing $ 1,034,130 1,036,066 1,080,078 1,066,573
Demand-interest bearing 656,777 659,437 694,590 659,189
Savings and money market 1,711,288 1,741,610 1,836,459 1,878,596
Certificates and other time
deposits 3,504,583 3,407,053 3,109,435 3,111,321
Total deposits 6,906,778 6,844,166 6,720,562 6,715,679
Securities sold under agreements to repurchase and other borrowings 2,099,156 1,718,674 1,538,493 1,239,299
Total funds 9,005,934 8,562,840 8,259,055 7,954,978
Accrued taxes, expenses and
other liabilities 137,885 172,355 175,509 195,871
Total liabilities 9,143,819 8,735,195 8,434,564 8,150,849
SHAREHOLDERS’ EQUITY 850,717 862,703 895,133 913,448
LIABILITIES AND SHAREHOLDERS’ EQUITY $ 9,994,536 9,597,898 9,329,697 9,064,297

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

 

See notes to accompanying consolidated financial statements.

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FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME

                                         
(Unaudited)
(In thousands except per share data)
Quarters Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Interest income:
Interest and fees on loans $ 164,165 148,582 476,447 430,136
Interest and dividends on securities 38,187 26,792 113,198 78,607
Total interest income 202,352 175,374 589,645 508,743
Interest expense:
Demand-interest bearing 878 998 2,562 3,821
Savings 13,769 9,888 37,925 30,382
Certificates and other time deposits 66,173 44,063 170,558 123,314
Interest on securities sold under agreements
to repurchase and other borrowings		 29,206 22,454 94,534 56,841
Total interest expense 110,026 77,403 305,579 214,358
Net interest income 92,326 97,971 284,066 294,385
Provision for possible loan losses 5,447 6,913 25,507 32,968
Net interest income after provision
for possible loan losses		 86,879 91,058 258,559 261,417
Other income:
Trust department income 5,230 4,636 16,065 13,417
Service charges on depositors’ accounts 11,935 11,203 34,585 30,872
Credit card fees 8,289 7,001 23,795 19,453
Service fees — other 3,788 4,301 10,982 11,075
Manufactured housing income 1,344 2,910 2,917 5,741
Securities gains (losses) 26 (662 ) (551 ) 7,415
Loan sales and servicing 3,831 2,192 8,334 6,055
Other operating income 7,628 6,953 24,020 18,979
Total other income 42,071 38,534 120,147 113,007
128,950 129,592 378,706 374,424
Other expenses:
Salaries, wages, pension and employee benefits 32,135 33,186 95,507 106,798
Net occupancy expense 5,021 5,333 15,677 16,205
Equipment expense 4,451 4,889 13,016 14,513
Amortization of intangibles 2,609 2,589 7,985 8,200
Other operating expense 25,888 24,911 72,725 103,538
Total other expenses 70,104 70,908 204,910 249,254
Income before Federal income taxes
and extraordinary item		 58,846 58,684 173,796 125,170
Federal income taxes 18,781 18,780 54,056 41,015
Income before extraordinary item 40,065 39,904 119,740 84,155
Extraordinary item, net of tax benefit
of $3,148 (extinguishment of debt)		 — — — (5,847 )
Net income $ 40,065 39,904 119,740 78,308
Other comprehensive income (loss), net of taxes 16,717 (5,088 ) 9,647 (33,544 )
Comprehensive Income $ 56,782 34,816 129,387 44,764
Basic net income per share:
Income before extraordinary item $ 0.45 0.44 1.35 0.92
Extraordinary item — — — (0.06 )
Basic net income after extraordinary charge $ 0.45 0.44 1.35 0.86
Diluted net income per share:
Income before extraordinary item $ 0.45 0.44 1.35 0.92
Extraordinary item — — — (0.06 )
Diluted net income after extraordinary charge $ 0.45 0.44 1.35 0.86
Dividends paid $ 0.22 0.20 0.64 0.56
Weighted-average shares outstanding — basic 88,252 90,087 88,302 90,711
Weighted-average shares outstanding — diluted 89,008 91,260 89,036 91,970

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

See notes to accompanying consolidated financial statements.

 

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Consolidated Statements of Changes in Shareholders’ Equity

FIRSTMERIT CORPORATION AND SUBSIDIARIES

(In thousands except per share data)

(2000 Amounts are unaudited)
                                                                   
Accumulated
Other Total
Preferred Common Capital Comprehensive Retained Treasury Shareholders'
Stock Stock Surplus Income Earnings Stock Equity
Balance at December 31, 1997 $ 9,917 119,893 80,297 4,603 651,907 (118,940 ) 747,677
Net income — — — — 72,517 — 72,517
Cash dividends — common stock ($0.66 per share) & preferred stock — — — — (50,525 ) — (50,525 )
Acquisition adjustment of fiscal year — — — — (1,857 ) — (1,857 )
Stock options exercised/debentures or preferred stock converted (618 ) 400 3,717 — (2,607 ) 12,111 13,003
Treasury shares purchased — — — — — (25,703 ) (25,703 )
Treasury shares reissued — acquisition — — 25,919 — — 89,286 115,205
Treasury shares reissued — public offering — — 6,518 — — 20,806 27,324
Stock dividends — 1,929 (1,929 ) — — — 0
Market adjustment investment securities — — — 1,255 — — 1,255
Other — 165 3,323 — (598 ) 4,870 7,760
Balance at December 31, 1998 9,299 122,387 117,845 5,858 668,837 (17,570 ) 906,656
Net income — — — — 119,871 — 119,871
Cash dividends — common stock ($0.76 per share) — — — — (68,627 ) — (68,627 )
Cash dividends — preferred stock — — — (305 ) — (305 )
Stock options exercised/debentures or preferred stock converted (5,421 ) 5,596 (915 ) — — 12,549 11,809
Treasury shares purchased — — — — — (85,666 ) (85,666 )
Market adjustment investment securities — — — (50,940 ) — — (50,940 )
Other — (46 ) — — 35 788 777
Balance at December 31, 1999 3,878 127,937 116,930 (45,082 ) 719,811 (89,899 ) 833,575
Net income — — — — 119,740 — 119,740
Cash dividends — common stock ($0.64 per share) — — — — (56,875 ) — (56,875 )
Cash dividends — preferred stock — — — — (189 ) — (189 )
Stock options exercised/debentures or preferred stock converted (1,314 ) — (3,509 ) — — 7,727 2,904
Treasury shares purchased — — — — — (11,742 ) (11,742 )
Market adjustment investment securities — — — 9,647 — — 9,647
Other — — — — (142 ) — (142 )
Balance at September 30, 2000 $ 2,564 127,937 113,421 (35,435 ) 782,345 (93,914 ) 896,918

See notes to accompanying consolidated financial statements.

 

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

(In thousands)

                       
Unaudited
2000 1999
Operating Activities
Net income $ 119,740 78,308
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 25,507 32,968
Provision for depreciation and amortization 12,512 13,781
Amortization of investment securities premiums, net 464 1,811
Amortization of income for lease financing (10,605 ) (10,144 )
Gains (losses) on sales of investment securities, net 551 (7,415 )
Deferred federal income taxes 6,737 (4,618 )
Increase in interest receivable (14,217 ) (16,335 )
Increase in interest payable 32,016 12,895
Amortization of values ascribed to acquired intangibles 7,985 8,200
Other decreases (100,834 ) (68,852 )
NET CASH PROVIDED BY OPERATING ACTIVITIES 79,856 40,599
 
Investing Activities
Dispositions of investment securities:
Available-for-sale — sales 121,709 570,361
Available-for-sale — maturities 215,707 369,120
Purchases of investment securities available-for-sale (142,636 ) (1,102,442 )
Net decrease in federal funds sold 25,000 5,599
Net increase in loans and leases, except sales (502,318 ) (754,003 )
Sales of loans 86,724 —
Purchases of premises and equipment (18,962 ) (16,147 )
Sales of premises and equipment 3,765 9,113
NET CASH USED BY INVESTING ACTIVITIES (211,011 ) (918,399 )
 
Financing Activities
Net increase (decrease) in demand, NOW and savings deposits 44,009 (408,080 )
Net increase in time deposits 726,725 420,865
Net increase (decrease) in securities sold under repurchase agreements and other borrowings (573,682 ) 930,692
Repayment of mandatorily redeemable preferred securities — (11,022 )
Cash dividends (57,064 ) (51,246 )
Purchase of treasury shares (11,742 ) (46,597 )
Proceeds from exercise of stock options 2,904 10,199
NET CASH PROVIDED BY FINANCING ACTIVITIES 131,150 844,811
 
Decrease in cash and cash equivalents (5 ) (32,989 )
Cash and cash equivalents at beginning of year 215,071 327,997
Cash and cash equivalents at end of year $ 215,066 295,008
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
 
Cash paid during the year for:
Interest, net of amounts capitalized $ 146,683 111,282
Income taxes $ 50,970 44,548

See accompanying notes to consolidated financial statements.

 

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FirstMerit Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)
September 30, 2000, December 31, 1999 and September 30, 1999

1. Organization — FirstMerit Corporation (“Corporation”), is a bank holding company whose principal assets are the common stock of its wholly owned subsidiary, FirstMerit Bank, N. A. In addition FirstMerit Corporation owns all of the common stock of Citizens Investment Corporation, Citizens Savings Corporation of Stark County, FirstMerit Capital Trust I, FirstMerit Community Development Corporation, FirstMerit Credit Life Insurance Company, and SF Development Corp.

2. Acquisitions and Merger-related Costs — On October 23, 1998, the Corporation completed the acquisition of Security First Corp. (“Security First”), a $771.1 million holding company headquartered in Mayfield Heights, Ohio. Under terms of the merger agreement, Security First was merged with and into the Corporation. The transaction was structured with a fixed exchange ratio of 0.8855 shares of FirstMerit common stock for each share of Security First common stock. At the time of the merger, the pooling-of-interests transaction was valued at $22.58 per share, or approximately $199 million. The accompanying consolidated financial statements, related notes and management’s discussion and analysis have all been restated to account for the acquisition as if it had happened at the beginning of each period presented. In conjunction with the Security First acquisition, the Corporation incurred merger-related and conforming accounting expenses of approximately $17.2 million, before taxes, or $12.8 million after taxes. The remaining liability of $549 thousand at September 30, 2000 is expected to be paid during the fourth quarter of 2000 or reversed in the fourth quarter, as appropriate.

      In conjunction with the Security First acquisition, on September 14, 1998, FirstMerit closed on the secondary underwritten public offering of 1.38 million shares of FirstMerit Common Stock. The reissuance of these shares was necessary to allow FirstMerit to treat the Security First merger as a pooling-of-interests for accounting purposes.

 

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      On February 12, 1999, the Corporation completed the acquisition of Signal Corp, a $1.9 billion bank holding company headquartered in Wooster, Ohio. Under terms of the merger agreement, the fixed exchange ratio was 1.32 shares of FirstMerit common stock for each share of Signal common stock and one share of FirstMerit Series B preferred stock for each share of Signal Series B preferred stock. Based on the closing price of $25.00 per common share and $71.00 per Series B preferred share, the transaction, accounted for as a pooling-of-interests, was valued at approximately $436 million. The accompanying consolidated financial statements, the related notes and management’s discussion and analysis have all been restated to account for the acquisition as if it had happened at the beginning of each period presented. Pro forma information for the separate entities and for the combined entity from January 1, 1999 through the February 12, 1999 acquisition date is not presented due to immateriality.

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

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

3. Segment Information — The Corporation provides a diversified range of banking and certain nonbanking financial services and products through its various subsidiaries. Management reports the Corporation’s results through its major segment classification — Supercommunity Banking. Included in this category are certain nonbank affiliates, eliminations of certain intercompany transactions and certain nonrecurring transactions. Also included are portions of certain assets, capital, and support functions not specifically identifiable with Supercommunity Banking. The Corporation’s business is conducted solely in the United States. The Corporation evaluates performance based on profit or loss from operations before income taxes. The following table presents a summary of financial results and significant performance measures for the three-month and nine-month periods ended September 30, 2000 and 1999. In the Earnings Summary and other sections of Management’s Discussion and Analysis, these same income statement categories and ratios are calculated excluding merger and other unusual expenses.

 

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Dollars in thousands, except averages
in millions Parent Company
Super Other Subsidiaries Corporate
2000 Community Banking & Eliminations Consolidated
OPERATIONS: 3Q YTD 3Q YTD 3Q YTD
Net interest income $ 96,419 290,088 (4,093) (6,022) 92,326 284,066
Provision for loan losses 5,447 25,410 -- 97 5,447 25,507
Other income 41,694 118,706 377 1,441 42,071 120,147
Other expenses 69,465 204,133 639 777 70,104 204,910
Net income $ 41,612 118,341 (1,547) 1,399 40,065 119,740
AVERAGES:
Assets $ 10,949 10,320 NM NM 10,493 10,379
Loans 7,667 7,283 NM NM 7,379 7,285
Earnings assets 10,199 9,662 NM NM 9,799 9,674
Deposits 8,698 7,371 NM NM 7,700 7,355
Equity $ 0.904 0.873 NM NM 0.874 0.851
RATIOS:
ROCE (ROE) NM NM NM NM 18.29% 18.87 %
ROA NM NM NM NM 1.52% 1.54 %
Efficiency ratio NM NM NM NM 49.88% 48.30 %
                                                 
Dollars in thousands, except averages
in millions Parent Company
Super Other Subsidiaries Corporate
1999 Community Banking & Eliminations Consolidated
OPERATIONS: 3Q YTD 3Q YTD 3Q YTD
Net interest income $ 96,669 295,830 1,302 (1,445) 97,971 294,385
Provision for loan losses 6,623 32,233 290 735 6,913 32,968
Other income 35,668 107,478 2,866 5,529 38,534 113,007
Other expenses 74,431 254,365 (3,523) (5,111) 70,908 249,254
Income before extraordinary charge 33,859 73,780 6,045 10,375 39,904 84,155
Net income $ 33,859 67,933 6,045 10,375 39,904 78,308
AVERAGES:
Assets $ 9,610 9,328 NM NM 9,598 9,352
Loans 7,020 6,808 NM NM 7,038 6,815
Earnings assets 8,832 8,622 NM NM 8,902 8,618
Deposits 6,898 6,818 NM NM 6,844 6,774
Equity $ 0.840 0.832 NM NM 0.863 0.891
RATIOS:
ROCE (ROE) NM NM NM NM 18.44% 11.79 %
ROA NM NM NM NM 1.65% 1.12 %
Efficiency ratio* NM NM NM NM 49.45% 51.44 %

NM = Not Meaningful

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

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      The table below presents revenues by product and service group for the periods shown:

                                                                   
Dollars in thousands
2000 Retail Commercial Trust Total
3Q YTD 3Q YTD 3Q YTD 3Q YTD
Interest and fees $ 104,523 304,027 115,116 335,799 5,230 16,065 224,869 655,891
Service charges 12,566 36,425 3,157 9,142 — — 15,723 45,567
Loan sales/service 3,831 8,334 — — — — 3,831 8,334
Totals $ 120,920 348,786 118,273 344,941 5,230 16,065 244,423 709,792
 
Dollars in thousands
1999 Retail Commercial Trust Total
3Q YTD 3Q YTD 3Q YTD 3Q YTD
Interest and fees $ 100,813 293,806 90,763 266,525 4,636 13,417 196,212 573,748
Service charges 11,768 33,377 3,736 8,570 — — 15,504 41,947
Loan sales/service 2,192 6,055 — — — — 2,192 6,055
Totals $ 114,773 333,238 94,499 275,095 4,636 13,417 213,908 621,750

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

                                   
EARNINGS PER SHARE 3Q 2000 YTD 2000 3Q 1999 YTD 1999
Net income $ 40,065 119,740 39,904 78,308
Less: preferred stock dividends (46 ) (175 ) (68 ) (239 )
Income available to common shareholders $ 40,019 119,565 39,836 78,069
Average common shares outstanding 88,252 88,302 90,087 90,711
Earnings per basic common share 0.45 1.35 0.44 0.86
 
Income available to common shareholders $ 40,019 119,565 39,836 78,069
Add: preferred stock dividends 46 175 68 239
Add: interest on convertible bonds, net 12 41 18 57
Income used in diluted EPS calculation $ 40,077 119,781 39,922 78,365
Average common shares outstanding 88,252 88,302 90,087 90,711
Common stock equivalents (CSEs) — stock options 377 273 577 610
CSEs — convertible debentures 83 99 142 144
CSEs — convertible preferred securities 296 362 454 505
Average common shares and common stock equivalents outstanding 89,008 89,036 91,260 91,970
Earnings per diluted common share $ 0.45 1.35 0.44 0.86

 

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5. In June 1998, the FASB issued Statement No. 133 (as amended by SFAS No. 138), “Accounting for Derivative Instruments and Hedging Activities.” These statements establish accounting and reporting standards for derivative instruments and requires an entity to recognize all derivatives as either assets or liabilities in the Balance Sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge to various exposures. The accounting for changes in the fair value of a derivative (i.e., gains and losses) depends on the intended use of the derivative and its resulting designation. This statement was originally to be effective for all fiscal quarters beginning after June 15, 1999; however, the FASB issued Statement No. 137 which delayed implementation of these standards until the first quarter 2001. As of the date of this filing, these statements’ expected impact to the Corporation’s financial statements has yet to be quantified, but is not expected to materially change its earnings or financial condition.

6. In September 2000, the FASB issued Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Statement No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral, requires certain disclosures, but carries over most of the provisions of FASB Statement No. 125 without reconsideration. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. Statement No. 140 is effective for transfers occurring after March 31, 2001. This statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The Corporation does not anticipate the adoption of FAS 140 will have a material effect on its earnings or financial condition.

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

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

9. The Corporation cautions that any forward looking statements contained in this report, in a report incorporated by reference to this report or made by management of the Corporation, involve risks and uncertainties and are subject to change based upon various factors. Actual results could differ materially from those expressed or implied. Reference is made to the section titled “Forward-looking Statements” in the Corporation’s Form 10-K for the period ended December 31, 1999.

 

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

                                                                               
FIRSTMERIT CORPORATION AND SUBSIDIARIES Three months ended Year ended Three months ended
(Dollars in thousands) September 30, 2000 December 31, 1999 September 30, 1999
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
Investment securities:
U.S. Treasury securities and U.S
Government agency obligations (taxable) $ 1,817,239 29,156 6.38 % 1,444,591 87,238 6.04 % 1,427,155 21,820 6.07 %
Obligations of states and political subdivisions (tax-exempt) 113,999 2,360 8.24 % 130,416 10,618 8.14 % 129,842 2,524 7.71 %
Other securities 295,566 5,257 7.08 % 317,799 19,275 6.07 % 297,866 3,254 4.33 %
Total investment securities 2,226,804 36,773 6.57 % 1,892,806 117,131 6.19 % 1,854,863 27,598 5.90 %
Federal funds sold & other interest-earning assets 139,274 2,307 6.59 % 5,041 204 4.05 % 9,149 102 4.42 %
Loans held for sale 53,271 866 6.47 % 34,418 4,635 13.47 % — — —
Loans 7,379,222 163,361 8.81 % 6,865,330 567,132 8.26 % 7,038,172 148,652 8.38 %
Total earning assets 9,798,571 203,307 8.25 % 8,797,595 689,102 7.83 % 8,902,184 176,352 7.86 %
Allowance for possible loan losses (110,777 ) (105,918 ) (108,067 )
Cash and due from banks 205,949 266,935 238,835
Other assets 599,068 534,435 564,946
Total assets $ 10,492,811 9,493,047 9,597,898
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand- non-interest bearing $ 1,027,707 — — 1,055,306 — — 1,036,066 — —
Demand- interest bearing 620,211 878 0.56 % 667,469 4,774 0.72 % 659,437 998 0.60 %
Savings 1,791,848 13,769 3.06 % 1,791,390 40,327 2.25 % 1,741,610 9,888 2.25 %
Certificates and other time deposits 4,260,371 66,173 6.18 % 3,284,516 169,783 5.17 % 3,407,053 44,063 5.13 %
Total deposits 7,700,137 80,820 4.18 % 6,798,681 214,884 3.16 % 6,844,166 54,949 3.19 %
Federal funds purchased, securities sold under agreements to repurchase and other borrowings 1,753,505 29,206 6.63 % 1,666,025 85,981 5.16 % 1,718,674 22,454 5.18 %
Total interest bearing liabilities 8,425,935 110,026 5.19 % 7,409,400 300,865 4.06 % 7,526,774 77,403 4.08 %
Other liabilities 143,792 126,767 150,905
 
Mandatorily redeemable preferred securities 21,450 21,450 21,450
 
Shareholders’ equity 873,927 880,124 862,703
Total liabilities and shareholders’ equity $ 10,492,811 9,493,047 9,597,898
 
Net yield on earning assets $ 9,798,571 93,281 3.79 % 8,797,595 388,237 4.41 % 8,902,184 98,949 4.41 %
 
Interest rate spread 3.06 % 3.77 % 3.78 %

Notes: Interest income on tax-exempt securities and loans have been adjusted to a fully-taxable equivalent basis.
           Non-accrual loans have been included in the average balances.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS

      FirstMerit Corporation reported third quarter 2000 net income of $40.1 million, up 0.4% above the $39.9 million earned in the third quarter of 1999. Diluted earnings per share were $0.45 in the third quarter of 2000, compared with $0.44 in the same period of 1999. For the nine months year-to-date, net income increased to $119.7 million from $116.4 million, when prior year merger and one-time after-tax charges of $38.1 million are excluded. For the first nine months, diluted earnings per share were $1.35 in 2000 and $0.86 in 1999. Adjusted for one-time charges incurred in 1999, nine-months core earnings are up 6.3%, to $1.35 in 2000 from $1.27 in 1999.

      Continued strong cost controls, sustained high credit quality, and growth in earning assets more than offset the impact of increased funding costs this quarter. Third quarter 2000 returns on average common equity (ROE) and average assets (ROA) were 18.3% and 1.52%, respectively, compared with prior year third quarter ratios of 18.4% and 1.65%, respectively. For the nine-months year-to-date, ROE and ROA were 18.9% and 1.54%, respectively.

      Net interest income on a fully tax-equivalent basis was $93.3 million for the third quarter of 2000 compared to $98.9 million for the prior year quarter, a decrease of 5.7%. This decrease reflects a decline in net interest margin from 4.41% last year to 3.79% this current quarter, partially offset by a 10.1% increase in average earning assets.

      Adjusted net revenue for the third quarter of 2000 was $135.3 million, or $1.52 per share, up 0.7% from the $1.51 per share reported for the year ago quarter. The impact of margin compression offset growth in fee income and earning assets. Excluding gains/losses from the sale of securities, non-interest income was $42.0 million, a 7.1% increase from the $39.2 million reported a year ago. Loan sales and servicing, trust income and credit card fees contributed to fee growth this quarter, offset by declines in manufactured housing fee income and servicing fees. Third quarter 2000 fees accounted for 31.0% of net revenues compared to 28.4% in the third quarter of 1999.

      Non-interest expense continues to be a focus of management attention. Non-interest expense totaled $70.1 million in the third quarter of this year, down 1.1% from third quarter 1999 expense of $70.9 million. Salary and benefits expense, net occupancy expense and equipment expense all reflect the impact of cost-cutting programs implemented earlier in the year. The efficiency ratio was 49.9% for this quarter versus 49.5% a year ago, and 48.3% year-to-date compared to 51.44% for the nine months ended September 30, 1999.

      Period-end assets were $10.4 billion, 4.5% ahead of 1999 year ago assets of $9.9 billion. Average earning assets were up 10.1%, while period-end loans, excluding

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lower-yielding mortgage loans, rose 10.3%. Average commercial loans increased 12.2%, while average consumer loans, excluding mortgage loans and manufactured housing, rose 11.6%.

      Total deposits at September 30, 2000 were $7.6 billion, an increase of 11.2% above year- ago 1999 levels. Time deposits, up 20.2%, accounted for most of the deposit growth.

      The third quarter loan loss provision was $5.4 million, down 21.2% from the third quarter 1999 provision of $6.9 million. Net charge-offs for the quarter were $7.0 million, or 0.38% of average loans outstanding on an annualized basis, unchanged from the net charge-off ratio of 0.38% last year. The allowance stands at 1.50% of period-end loans, again, unchanged from prior year. Non-performing assets as a percent of loans and other real estate were 0.43% this third quarter, compared with 0.36% at December 31, 1999 and 0.42% at September 30, 1999. Reserve coverage of non-performing assets was 3.5 times, down slightly from 3.6 times the prior year quarter.

      Shareholders’ equity was $896.9 million at quarter end. Average equity to assets for this 2000 quarter was 8.33% compared to 8.99% last year. Common stock dividends paid were $0.22 per share, representing a 48.9% payout ratio. This compares with a 45.5% payout ratio for the prior year quarter. At quarter end, there were 88.1 million shares outstanding.

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      The components of change in per share income for the three-month and nine-month periods ended September 30, 2000 and 1999 are summarized in the following table:

                         
Reported Reported Core Earnings
Three months Nine months Nine months
ended ended ended
Changes in Earnings per September 30, September 30, September 30,
Share 2000/1999 2000/1999 2000/1999
Diluted net income/core earnings per share September 30, 1999 $ 0.44 0.86 1.27
 
Increases (decreases) due to:
 
Net interest income — taxable equivalent (0.03 ) (0.12 ) (0.12 )
Provision for possible loan losses (0.02 ) 0.08 (0.03 )
Other income — 0.07 0.07
Other expenses 0.03 0.50 0.13
Federal income taxes — taxable equivalent 0.02 (0.14 ) (0.01 )
Extraordinary item — extinguishment of debt — 0.06 —
Change in share base 0.01 0.04 0.04
Net change in diluted net income per share 0.01 0.49 0.08
Diluted net income per share September 30, 2000 $ 0.45 1.35 1.35

Net Interest Income

      Net interest income, the Corporation’s principal source of earnings, is the difference between the interest income generated by earning assets (primarily loans and investment securities) and the total interest paid on interest bearing funds (namely

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deposits and other borrowings). For the purpose of this discussion, net interest income is presented on a fully-taxable equivalent (“FTE”) basis, to provide a comparison among types of interest earning assets. That is, interest on tax-free securities and tax-exempt loans has been restated as if such interest were taxed at the statutory Federal income tax rate of 35%, adjusted for the non-deductible portion of interest expense incurred to acquire the tax-free assets.

      Net interest income FTE for the quarter ended September 30, 2000 was $93.3 million compared to $98.9 million for the same period one year ago, a decrease of $5.6 million. The decrease occurred because the rise in FTE interest income of $27.0 million was more than offset by the increase in interest expense of $32.6 million.

      As shown in the following rate/volume table, FTE interest income rose $27.0 million in third quarter 2000, compared to the same 1999 quarter, as both volume and rate gains contributed significantly. Specifically, higher interest income was produced as follows: increases in loan outstandings added $8.4 million and higher securities balances added $6.0 million; higher yields on loans contributed $7.2 million and higher yields on securities added $3.2 million.

      The increase in interest expense of $32.6 million, compared to the same 1999 quarter, was also a result of both rate and volume variances. The biggest factors for higher interest costs were increases related to higher average certficate of deposit and time (CD) balances ($13.3 million); higher rates paid on CDs ($8.9 million); higher wholesale borrowing rates ($6.2 million) and higher savings and money market account rates ($3.5 million).

      For the year-to-date period, net interest income FTE declined $10.7 million to $287.0 million. The net decrease occurred as interest income FTE rose $80.5 million while interest expense increased $91.2 million. Higher loan volume added $34.0 million to interest income, compared to last year’s nine-month period, higher securities balances added $23.5 million and higher rates earned on all interest-bearing assets increased interest income by $20.6 million. Interest expense rose as higher interest rates on customer deposits and wholesale borrowings increased interest expense by $35.5 million and interest paid on higher funding volumes resulted in an increase in interest expense of $55.7 million.

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

                                                     
Quarters ended Nine Months Ended
September 30, September 30,
2000 and 1999 2000 and 1999
Increase (Decrease) Increase (Decrease)
Interest Income/Expense Interest Income/Expense
Volume Yield Rate Total Volume Yield Rate Total
INTEREST INCOME
Investment Securities $ 5,988 3,187 9,175 23,543 8,244 31,787
Loans and loans held for sale 8,416 7,159 15,575 34,029 12,262 46,291
Federal funds sold and others 2,155 50 2,205 2,377 105 2,482
Total interest income $ 16,559 10,396 26,955 59,949 20,611 80,560
 
INTEREST EXPENSE
Interest on deposits:
Demand-interest bearing $ (56 ) (64 ) (120 ) (140 ) (1,119 ) (1,259 )
Savings 386 3,495 3,881 1,198 6,345 7,543
Certificates and other time deposits 13,254 8,856 22,110 30,241 17,003 47,244
Federal Funds Purchased, REPOs & other borrowings 580 6,172 6,752 24,434 13,259 37,693
Total interest expense $ 14,164 18,459 32,623 55,733 35,488 91,221
Net interest income $ 2,395 (8,063 ) (5,668 ) 4,216 (14,877 ) (10,661 )

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

Net Interest Margin

      The net interest margin, net interest income FTE divided by average earning assets, is affected by changes in the level of earning assets, the proportion of earning assets funded by non-interest bearing liabilities, the interest rate spread, and changes in the corporate tax rates. A meaningful comparison of the net interest margin requires an adjustment for the changes in the statutory Federal income tax rate noted above. The following schedule shows the relationship of the tax equivalent adjustment and the net interest margin.

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Net Interest Margin
(Dollars in thousands)

                                 
Quarters Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Net interest income per financial statements $ 92,326 97,971 284,066 294,393
Tax equivalent adjustment 955 978 2,948 3,288
Net interest income — FTE 93,281 98,949 287,014 297,681
Average earning assets $ 9,798,571 8,902,184 9,673,924 8,617,836
Net interest margin 3.79 % 4.41 % 3.96 % 4.62 %

Other Income

      Other income for the quarter ended September 30, 2000 was $42.1 million, an increase of $3.5 million or 9.2%, over the $38.6 million earned during the same period last year. Excluding securities sales, the increase in other income was $2.8 million, or 7.3%. For the nine-month period, excluding securities gains, other income totaled $120.7 million, up 14.3% from $105.6 million a year ago.

      Trust department income for the third quarter was $5.2 million, up 12.8% from the $4.6 million earned one year ago. Service charges on depositors’ accounts increased 6.5% to $11.9 million from $11.2 million for last year’s third quarter. Credit card fees, including merchant services, increased 18.4% to $8.3 million for the quarter compared to $7.0 million for the three months ended September 30, 1999. Other service fees, including Automated Teller Machine (ATM) revenue, decreased from $4.3 million during the 1999 third quarter to $3.8 million for the same current year period. Manufactured housing income was $1.3 million for the quarter compared to $2.9 million last year. Gains on sales of securities were $26 thousand during the quarter compared to losses of $662 thousand in 1999. Loan sales and servicing income was $3.8 million in the 2000 quarter and $2.2 million in 1999. Other operating income was $7.6 million compared to $7.0 million in 1999.

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      Nine-month 2000 results compared to the same 1999 period were as follows: trust department income increased 19.7%; service charges on depositors’ accounts increased 12.0%; credit card and merchant service fees increased 22.3%; other service fees, which include ATM revenue, decreased slightly from $11.1 million to $11.0 million; manufactured housing income declined from $5.7 million to $2.9 million; securities losses of $0.6 million were recorded during the first nine months of 2000 versus gains of $7.4 million in 1999; loan sales and servicing increased 37.6% and other operating income increased $5.0 million.

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

Other Expenses

      Other expenses were $70.1 million for the third quarter, a decrease of $0.8 million from last year’s comparable amount. Year-to-date 2000 operating costs totaled $204.9 million, down $10.7 million or 5.0% from the $215.7 million recorded for the 1999 nine months, when first quarter 1999 merger costs of $33.6 million are excluded.

      The “lower-is-better” efficiency ratios for the 2000 and 1999 third quarters were 49.88% and 49.45%, respectively. The efficiency ratio through September 30, 2000 was 48.30%, an improvement of 314 basis points over the 51.44% recorded in 1999 when first quarter 1999 merger costs are excluded. The 2000 third quarter efficiency ratio indicates it took 49.88 cents of operating costs to generate every dollar of profit. The improvement in the efficiency ratio is primarily a result of lower operating costs when compared to the same period in 1999.

      Salaries, wages, pension and employee benefits (“salaries and benefits”), the largest component of other expenses, totaled $32.1 million for third quarter 2000, down $1.1 million from last year’s expense of $33.2 million. For the nine-month period, salaries and benefits were $95.5 million, down $3.6 million or 3.6%, from the like-basis total of $99.1 million in 1999, which excludes $7.7 million of personnel merger costs.

      Other operating expenses for the 2000 third quarter were $25.9 million compared to $24.9 million last year. Year-to-date 2000 other operating expenses totaled $72.7 million, down $4.9 million or 6.3% from the merger-costs-adjusted 1999 total of $77.6 million.

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FINANCIAL CONDITION

Investment Securities

      All investment securities of the Corporation are classified as available for sale. The available for sale classification provides the Corporation with more flexibility to respond, through the portfolio, to changes in market interest rates, or to increases in loan demand or deposit withdrawals.

      The book value and market value of investment securities classified as available for sale are as follows:

                 
                                   
September 30, 2000
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury securities and U.S.
Government agency obligations $ 792,765 121 13,705 779,181
Obligations of state and political subdivisions 112,719 490 692 112,517
Mortgage-backed securities 1,069,617 749 29,067 1,041,299
Other securities 292,829 420 11,977 281,272
$ 2,267,930 1,780 55,441 2,214,269
 
Book Market
Value Value
Due in one year or less $ 169,322 167,561
Due after one year through five years 424,959 419,284
Due after five years through ten years 368,434 362,087
Due after ten years 1,305,215 1,265,337
$ 2,267,930 2,214,269

      The book value and market value of investment securities including mortgage-backed securities and derivatives at September 30, 2000, by contractual maturity, are shown in the preceding table. Expected maturities will differ from contractual maturities based on the issuers’ right to call or prepay obligations with or without call or prepayment penalties.

      The carrying value of investment securities pledged to secure trust and public deposits and for purposes required or permitted by law amounted to approximately $1.8

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billion at September 30, 2000 and $1.7 billion at both December 31, 1999 and September 30, 1999.

      Securities with remaining maturities over five years reflected in the foregoing schedule consist of mortgage and asset backed securities. These securities are purchased within an overall strategy to maximize future earnings taking into account an acceptable level of interest rate risk. While the maturities of these mortgage and asset backed securities are beyond five years, these instruments provide periodic principal payments and include securities with adjustable interest rates, reducing the interest rate risk associated with longer term investments.

Loans

      Total loans outstanding at September 30, 2000 were $7.262 billion compared to $7.014 billion at December 31, 1999 and $7.113 billion at September 30, 1999. Excluding mortgage loans, which have decreased 37.4% from the same quarter last year, average commercial and consumer loans grew $0.865 billion or 15.4% during the last twelve months.

      On a categorical basis, increases in average loan outstanding balances occurred in commercial loans, up $356.1 million or 12.2%; manufactured housing loans, up $264.9 million or 44.6%; installment loans, up $99.3 million or 7.0%; home equity loans up $49.2 million or 12.6% and credit card outstandings up $7.5 million or 7.5%. The manufactured housing loan growth was primarily due to FirstMerit retaining a higher percentage of originated loans in its own loan portfolio (i.e., there were fewer sales to other banking institutions in 2000 compared to 1999). Average mortgage loans declined $524.3 million or 37.4% as the Corporation continues to shift its loan mix away from lower-yielding mortgage loans and toward higher-yielding commercial and consumer credits.

      Similar to the quarterly growth, 2000 year-to-date average loan outstandings increased in all categories except mortgage loans. For the nine-month periods, average loans totaled $7.285 billion for 2000 and $6.815 billion for the prior year. Average outstanding loans for both the quarter and nine-month periods equaled 75.3% of average earning assets.

Asset Quality

      At September 30, 2000, total nonperforming assets, defined as nonaccrual loans, restructured loans and other real estate (“ORE”), were $31.1 million or 0.43% of total outstanding loans and ORE. These same statistics for other recent quarter-ends were as follows: $29.5 million or 0.40% at June 30, 2000, $33.5 million or 0.46% at

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March 31, 2000; $25.3 million or 0.36% at December 31, 1999; and $29.6 million or 0.42% at September 30, 1999.

      Impaired loans are loans for which, based on current information or events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans must be valued based on the present value of the loans’ expected future cash flows at the loans’ effective interest rates, at the loans’ observable market prices, or the fair value of the underlying collateral. Under the Corporation’s credit policies and practices, and in conjunction with provisions within Statements No. 114 and No. 118, all nonaccrual and restructured commercial, agricultural, construction, and commercial real estate loans, meet the definition of impaired loans.

                             
(Dollars in thousands)
 
September 30, December 31, September 30,
2000 1999 1999
Impaired Loans:
Non-accrual $ 24,824 20,159 25,562
Restructured 159 47 47
Total impaired loans 24,983 20,206 25,609
Other Loans:
Non-accrual 1,671 1,905 2,708
Restructured — — —
Total other nonperforming loans 1,671 1,905 2,708
Total nonperforming loans 26,654 22,111 28,317
Other real estate owned (ORE) 4,449 3,173 1,321
Total nonperforming assets $ 31,103 25,284 29,638
Loans past due 90 days or more accruing interest $ 25,583 30,878 30,000
Total nonperforming assets as a percent of total loans and ORE 0.43 % 0.36 % 0.42 %
NA = Not Available

      There is no concentration of loans in any particular industry or group of industries. Most of the Corporation’s business activity is with customers located within the state of Ohio.

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Allowance for Loan Losses

      The allowance for possible loan losses at September 30, 2000 totaled $108.6 million, or 1.50% of total loans outstanding compared to $104.9 million, or 1.50% and $106.9 million, or 1.50% at December 31, 1999 and September 30, 1999, respectively.

                           
Dollars in thousands Nine months Nine months
ended Year ended ended
September 30, December 31, September 30,
2000 1999 1999
Allowance — beginning of period $ 104,897 96,149 96,149
Acquisition adjustment/other — 1,028 1,012
Loans charged off:
Commercial, financial, agricultural 14,716 7,539 8,269
Installment to individuals 18,968 35,904 28,322
Real estate 1,880 3,350 473
Lease financing 1,322 1,043 794
Total charge-offs 36,886 47,836 37,858
Recoveries:
Commercial, financial, agricultural 6,410 3,997 3,548
Installment to individuals 7,706 12,910 10,462
Real estate 433 540 26
Lease financing 509 679 585
Total recoveries 15,058 18,126 14,621
Net charge-offs 21,828 29,710 23,237
Provision for possible loan losses 25,507 37,430 32,968
Allowance — end of period $ 108,576 104,897 106,892
Annualized net charge offs as a percent of average loans 0.40 % 0.43 % 0.46 %
Allowance for possible loan losses:
As a percent of loans outstanding at end of period 1.50 % 1.50 % 1.50 %
As a multiple of annualized net charge offs 3.72 x 3.53 x 3.44 x

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

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Deposits

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

                                                 
(Dollars in thousands)
Three months ended
September 30, 2000		 Year ended
December 31, 1999		 Three months ended
September 30, 1999
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Non-interest DDA $ 1,027,707 — 1,055,306 — 1,036,066 —
Interest-bearing DDA 620,211 0.56 % 667,469 0.72 % 659,437 0.60 %
Savings deposits 1,791,848 3.06 % 1,791,390 2.25 % 1,741,610 2.25 %
CDs and other time 4,260,371 6.18 % 3,284,516 5.17 % 3,407,053 5.13 %
$ 7,700,137 4.18 % 6,798,681 3.16 % 6,844,166 3.19 %

      Average CDs totaled $4.260 billion for the quarter ended September 30, 2000, up 25.0% from $3.407 billion for the same 1999 quarter. On a percentage basis, average CDs were 51% and 45% of average total interest bearing funds for the September 30, 2000 and 1999 quarters, respectively; average savings deposits, including money market accounts, were 21% of average interest bearing funds during the quarter ended September 30, 2000 and 23% for the same period last year; average interest-bearing demand deposits were 7% of total average interest bearing funds during 2000’s third quarter and 9% for the corresponding last year period; and average wholesale borrowings decreased from 23% of average interest-bearing funds during the three months ended September 30, 1999 to 21% for the September 30, 2000 quarter. During the three months ended September 30, 2000, average interest bearing liabilities funded approximately 86% of average earning assets compared to 85% in 1999 .

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

         
(Dollars in thousands) Amount
Maturing in:
Under 3 months $ 651,624
3 to 12 months 466,267
Over 12 months 631,940
  $ 1,749,831

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Market Risk

      The Corporation is exposed to market risks in the normal course of business. Changes in market interest rates may result in changes in the fair market value of the Corporation’s financial instruments, cash flows, and net interest income. The corporation seeks to achieve consistent growth in net interest income and capital while managing volatility arising from shifts in market interest rates. The Asset and Liability Committee (“ALCO”) oversees financial risk management, establishing broad policies that govern a variety of financial risks inherent in the Corporation’s operations. ALCO monitors the Corporation’s interest rates and sets limits on allowable risk annually. Market risk is the potential of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. The Corporation’s market risk is composed primarily of interest rate risk. Interest rate risk on the Corporation’s balance sheet consists of mismatches of maturity gaps and indices, and options risk. Maturity gap mismatches result from differences in the maturity or repricing of asset and liability portfolios. Options risk exists in many of the Corporation’s retail products such as prepayable mortgage loans and demand deposits. Options risk typically results in higher costs or lower revenue for the Corporation. Index mismatches occur when asset and liability portfolios are tied to different market indices which may not move in tandem as market interest rates change.

      Interest rate risk is monitored using gap analysis, earnings simulation and net present value estimations. Combining the results from these separate risk measurement processes allows a reasonably comprehensive view of short-term and long-term interest rate risk in the Corporation. Gap analysis measures the amount of repricing risk in the balance sheet at a point in time. Earnings simulation involves forecasting net interest earnings under a variety of scenarios including changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates. ALCO also monitors the net present value of the balance sheet, which is the discounted present value of all asset and liability cash flows. Interest rate risk is quantified by changing the interest rates used for discounting cash flows and comparing the net present value to the original figure.

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Capital Resources

      Shareholders’ equity at September 30, 2000 totaled $896.9 million compared to $833.6 million at December 31, 1999 and $864.9 million at September 30, 1999.

      The following table reflects the various measures of capital:

                                                 
At September 30, At December 31, At September 30,
2000 1999 1999
(In thousands)
 
Total equity $ 896,918 8.65 % 833,575 8.24 % 864,895 8.71 %
 
Common equity 894,354 8.62 % 829,697 8.20 % 860,961 8.67 %
 
Tangible common equity (a) 739,678 7.24 % 668,321 6.71 % 701,009 7.18 %
 
Tier 1 capital (b) 795,660 9.32 % 734,492 8.81 % 754,651 8.98 %
 
Total risk-based capital (c) 1,054,733 12.36 % 843,658 10.12 % 865,806 10.30 %
 
Leverage (d) $ 795,660 7.70 % 734,492 7.47 % 754,651 7.99 %

(a)   Common equity less all intangibles; computed as a ratio to total assets less intangible assets.
(b)   Shareholders’ equity minus net unrealized holding gains on equity securities, plus or minus net unrealized holding losses or gains on available for sale debt securities, less goodwill; computed as a ratio to risk-adjusted assets, as defined in the 1992 risk-based capital guidelines.
(c)   Tier 1 capital plus qualifying loan loss allowance, computed as a ratio to risk-adjusted assets, as defined in the 1992 risk-based capital guidelines.
(d)   Tier 1 capital; computed as a ratio to the latest quarter’s average assets less goodwill.

      The Federal Deposit Insurance Corporation Act of 1991 (“FDICIA”) set capital guidelines for a financial institution to be considered “well-capitalized.” These guidelines require a risk-based capital ratio of 10%, a Tier I capital ratio of 6% and a leverage ratio of 5%. At September 30, 2000, the Corporation’s risk-based capital equaled 12.36% of risk-adjusted assets, its Tier I capital ratio equaled 9.32% and its leverage ratio equaled 7.70%. The cash dividend of $0.22 paid in the third quarter has an indicated annual rate of $0.88 per share.

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PART II. - OTHER INFORMATION

Item 6.      EXHIBITS AND REPORTS ON FORM 8-K

(a)     Exhibits

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)*

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10.5   FirstMerit Corporation 1997 Stock Option Program (incorporated by reference from Exhibit 10.5 to the Form 10-K filed by the registrant on February 24, 1998)*
 
10.6   FirstMerit Corporation 1999 Stock Plan (incorporated by reference from Exhibit 10.39 to the Form S-8 filed by the Registrant on May 21, 1999)*
 
10.7   FirstMerit Corporation 1987 Stock Option and Incentive Plan (SF)1998 (incorporated by reference from Exhibit 10.7 to the Form 10-K filed by the registrant on March 10, 2000)*
 
10.8   FirstMerit Corporation 1996 Stock Option and Incentive Plan (SF) (incorporated by reference from Exhibit 10.8 to the Form 10-K filed by the registrant on March 10, 2000)*
 
10.9   FirstMerit Corporation 1994 Stock Option Plan (SF) (incorporated by reference from Exhibit 10.9 to the Form 10-K filed by the registrant on March 10, 2000)*
 
10.10   FirstMerit Corporation 1989 Stock Incentive Plan (SB) (incorporated by reference from Exhibit 10.10 to the Form 10-K filed by the registrant on March 10, 2000)*
 
10.11   FirstMerit Corporation Amended and Restated Stock Option and Incentive Plan (SG) (incorporated by reference from Exhibit 10.11 to the Form 10-K filed by the registrant on March 10, 2000)*
 
10.12   FirstMerit Corporation Non-Employee Director Stock Option Plan (SG) (incorporated by reference from Exhibit 4.3 to the Form S-8/ A (No. 333-63797) filed by the registrant on February 12, 1999)*
 
10.13   FirstMerit Corporation 1997 Omnibus Incentive Plan (SG) (incorporated by reference from Exhibit 10.13 to the Form 10-K filed by the registrant on March 10, 2000)*
 
10.14   FirstMerit Corporation 1993 Stock Option Plan (FSB) (incorporated by reference from Exhibit 10.14 to the Form 10-K filed by the registrant on March 10, 2000)*
 
10.15   Amended and Restated FirstMerit Corporation Executive Deferred Compensation Plan (incorporated by reference from Exhibit 10(h) to the Form 10-K filed by the registrant on February 25, 1997)*
 
10.16   Amended and Restated FirstMerit Corporation Director Deferred Compensation Plan (incorporated by reference from Exhibit 10(i) to the Form 10-K filed by the registrant on February 25, 1997)*
 
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   Employment Agreement dated October 23, 1998 for Charles F. Valentine (incorporated by reference from Exhibit 10(a) to the Form 10-Q filed by the registrant on November 13, 1998)*
 
10.28   SERP Agreement dated October 23, 1998 for Charles F. Valentine (incorporated by reference from Exhibit 10(b) to the Form 10-Q filed by the registrant on November 13, 1998)*

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10.29   Employment Agreement of John R. Cochran, dated December 1, 1998 (incorporated by reference from Exhibit 10.20 to the Form 10-K filed by the Registrant on March 22, 1999)*
 
10.30   Restricted Stock Award Agreement of John R. Cochran dated March 1, 1995 (incorporated by reference from Exhibit 10(e) to the Form 10-Q filed by the registrant on May 15, 1995)*
 
10.31   Restricted Stock Award Agreement of John R. Cochran dated April 9, 1997 (incorporated by reference from Exhibit 10.18 to the Form 10-K filed by the registrant on February 24, 1998)*
 
10.32   First Amendment to Restricted Stock Award Agreement for John R. Cochran (incorporated by reference from Exhibit 10.38 to the Form 10-K filed by the Registrant on March 22, 1999)*
 
10.33   Employment Agreement of Sid A. Bostic, dated February 1, 1998 (incorporated by reference from Exhibit 10.19 to the Form 10-K filed by the registrant on February 24, 1998)*
 
10.34   First Amendment to Employment Agreement of Sid A. Bostic, dated April 20, 1999 (incorporated by reference from Exhibit 10.23.1 to the Form 10-Q filed by the registrant on May 14, 1999)*
 
10.35   Restricted Stock Award Agreement of Sid A. Bostic dated February 1, 1998 (incorporated by reference from Exhibit 10.20 to the Form 10-K filed by the registrant on February 24, 1998)*
 
10.36   First Amendment to Restricted Stock Award Agreement of Sid A. Bostic, dated April 20, 1999 (incorporated by reference from Exhibit 10.25.1 to the Form 10-Q filed by the registrant on May 14, 1999)*
 
10.37   Form of FirstMerit Corporation Termination Agreement (incorporated by reference from Exhibit 10.24.1 to the Form 10-Q filed by the Registrant on March 22, 1999)*
 
10.38   Form of Director and Officer Indemnification Agreement and Undertaking (incorporated by reference from Exhibit 10(s) to the Form 8-K/ A filed by the registrant on April 27, 1995)*
 
10.39   Independent Contractor Agreement with Gary G. Clark, dated February 12, 1999 (incorporated by reference from Exhibit 10.38 to the Form 10-Q filed by the Registrant on May 14, 1999)*
 
10.40   Credit Agreement among FirstMerit Corporation, Bank of America, N.A., and Lenders, dated November 29,1999 (incorporated by reference from Exhibit 10.40 to the Form 10-K filed by the registrant on March 10, 2000)*
 
10.41   Distribution Agreement, by and among FirstMerit Bank, N.A. and the Agents, dated July 15, 1999 (incorporated by reference from Exhibit 10.41 to the Form 10-K filed by the registrant on March 10, 2000)*
 
25.1   Form T-1 Statement of Eligibility of Firstar Trust Company to act as Property Trustee under the Amended and Restated Declaration of Trust of FirstMerit Capital Trust I, fka Signal Capital Trust I (incorporated by reference from Exhibit 26.1 to the Form S-4 No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)
 
25.2   Form T-1 Statement of Eligibility of Firstar Trust Company to act as Debenture Trustee under the FirstMerit Capital Trust I, fka Signal Capital Trust I, Indenture (incorporated by reference from Exhibit 26.1 to the Form S-4 No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)
 
27   Financial Data Schedule

*   Management Contract or Compensatory Plan or Arrangement

(b)   Form 8-K
 
  There were no Form 8-K filings during the third quarter 2000.

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SIGNATURES

      Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
     
FIRSTMERIT CORPORATION
 
 
By: /s/ TERRENCE E. BICHSEL
Terrence E. Bichsel, Executive Vice
President and Chief Financial Officer

DATE: November 13, 2000



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