FIRSTMERIT CORP /OH/ - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED
June 30, 2002

COMMISSION FILE NUMBER 0-10161

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


OHIO		34-1339938




(State or other jurisdiction of incorporation or organization)		(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
August 5, 2002
84,637,148

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

TABLE OF CONTENTS


PART I — FINANCIAL STATEMENTS
	ITEM 1. FINANCIAL STATEMENTS
	CONSOLIDATED BALANCE SHEETS
	CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
	CONSOLIDATED STATEMENTS OF CASH FLOWS
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. — OTHER INFORMATION
	Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	Item 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EX 10.35 Employment Agreement of David G. Lucht
EX 10.36 Employment Agreement of David G. Lucht

FIRSTMERIT CORPORATION

PART I — FINANCIAL STATEMENTS

ITEM 1. FINANCIAL STATEMENTS

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

Consolidated Balance Sheets as of June 30, 2002 (unaudited), December 31, 2001 and June 30, 2001 (unaudited)

Consolidated Statements of Income and Comprehensive Income for the three-month and six-month periods ended June 30, 2002 (unaudited) and 2001 (unaudited)

Consolidated Statements of Cash Flows for the six months ended June 30, 2002 (unaudited) and 2001 (unaudited)

Notes to Consolidated Financial Statements as of June 30, 2002 (unaudited)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Conditions as of June 30, 2002, December 31, 2001 and June 30, 2001 and Results of Operations for the quarters and six-month periods ended June 30, 2002 and 2001 and for the year ended December 31, 2001

FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(In thousands)


(Unaudited, except December 31, 2001)			June 30			December 31			June 30

			2002			2001			2001

ASSETS




Investment securities			$	2,339,024			2,019,259			1,980,302




Loans held for sale				67,131			44,900			30,313




Commercial loans				3,510,379			3,486,199			3,525,077




Mortgage loans				587,377			638,908			673,661




Installment loans				1,554,265			1,560,905			1,461,926




Home equity loans				549,866			502,521			464,685




Credit card loans				133,952			132,746			122,506




Manufactured housing loans				767,986			808,476			816,362




Leases				233,315			257,565			286,489






Total loans				7,337,140			7,387,320			7,350,706




Less allowance for loan losses				122,790			125,235			110,620

		Net loans		7,214,350			7,262,085			7,240,086









Cash and due from banks				226,468			190,020			252,395




Premises and equipment, net				124,665			128,912			133,394




Intangible assets				139,145			139,496			147,388




Accrued interest receivable and other assets				403,668			408,702			414,747

			$	10,514,451			10,193,374			10,198,625

LIABILITIES AND SHAREHOLDERS’ EQUITY




Deposits:




	Demand-non-interest bearing		$	1,188,962			1,153,184			1,072,049




	Demand-interest bearing			730,090			718,173			679,513




	Savings and Money Market			2,098,569			1,943,143			1,933,271




	Certificates and other time deposits			3,723,019			3,724,900			3,761,712






		Total deposits		7,740,640			7,539,400			7,446,545




Wholesale borrowings				1,653,521			1,588,279			1,710,665






		Total funds		9,394,161			9,127,679			9,157,210




Accrued taxes, expenses, and other liabilities				161,368			154,888			135,165






		Total liabilities		9,555,529			9,282,567			9,292,375









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; none outstanding			—			—			—




	Cumulative convertible preferred stock, Series B, without par value:




		designated 220,000 shares; 49,697, 97,955 and 86,455 shares outstanding at
		June 30, 2002, June 30, 2001 and December 31, 2001, respectively		1,194			1,209			2,056




	Common stock, without par value:




		authorized 300,000,000 shares; issued 92,026,350 shares		127,937			127,937			127,937




	Capital surplus			112,226			115,388			111,536




	Accumulated other comprehensive income			14,756			3,404			(6,557	)




	Retained earnings			882,679			838,569			835,031




	Treasury stock, at cost, 7,105,072, 6,144,690 and 6,727,281 at June 30, 2002, June 30, 2001 and December 31, 2001, respectively			(179,870	)		(175,700	)		(163,753	)






		Total shareholders’ equity		958,922			910,807			906,250






			$	10,514,451			10,193,374			10,198,625

See accompanying notes to consolidated financial statements.

FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME


						(Unaudited)
				(In thousands except per share data)

				Quarters Ended					Six Months Ended
				June 30,					June 30,

				2002		2001			2002		2001

Interest income:




	Interest and fees on loans, including held for sale			$	135,137		156,492			271,465		314,154




	Interest and dividends on securities				28,097		27,006			56,423		59,123

			Total interest income		163,234		183,498			327,888		373,277






Interest expense:




		Demand-interest bearing			478		1,051			953		2,231




		Savings			6,227		12,133			12,504		26,433




		Certificates and other time deposits			37,226		54,907			77,750		115,904




	Interest on wholesale borrowings				13,530		20,316			26,242		43,261

			Total interest expense		57,461		88,407			117,449		187,829

			Net interest income		105,773		95,091			210,439		185,448




Provision for loan losses					18,762		9,394			38,076		21,210

			Net interest income after provision for loan losses		87,011		85,697			172,363		164,238






Other income:




	Trust department income				5,398		5,582			10,564		10,735




	Service charges on deposits				13,451		13,737			25,909		26,028




	Credit card fees				9,776		9,243			18,648		17,578




	ATM and other service fees				3,310		4,050			6,397		7,550




	Bank owned life insurance income				3,221		3,157			6,482		6,243




	Investment services and life insurance fees				2,948		3,011			5,319		5,436




	Gain from sale of partnership interest				—		—			—		5,639




	Manufactured housing income				457		1,227			1,086		2,697




	Securities gains (losses)				1,044		(44	)		4,643		408




	Loan sales and servicing				1,128		3,029			4,959		4,709




	Other operating income				3,165		2,969			7,456		6,122

			Total other income		43,898		45,961			91,463		93,145






					130,909		131,658			263,826		257,383




Other expenses:




	Salaries, wages, pension and employee benefits				33,178		33,067			66,725		64,644




	Net occupancy expense				5,327		4,878			10,961		9,877




	Equipment expense				3,917		4,172			7,792		8,385




	Stationery, supplies and postage				2,670		2,711			5,595		5,476




	Bankcard, loan processing and other costs				6,975		6,152			13,419		11,034




	Professional services				2,451		2,814			4,754		5,906




	Amortization of intangibles				198		2,331			351		4,720




	Other operating expense				14,785		16,699			29,164		30,339

			Total other expenses		69,501		72,824			138,761		140,381






			Income before Federal income taxes and cumulative effect of change in accounting principle		61,408		58,834			125,065		117,002









Federal income taxes					19,376		19,150			39,565		38,125






			Income after taxes but before cumulative effect of change in accounting principle		42,032		39,684			85,500		78,877









Cumulative effect of change in accounting principle, net of tax (impairment of retained interest asset)					—		(6,299	)		—		(6,299	)






			Net income	$	42,032		33,385			85,500		72,578






Other comprehensive income, net of taxes					20,985		(3,874	)		11,352		7,241






Comprehensive Income				$	63,017		29,511			96,852		79,819






Basic net income per share:




	Income before cumulative change in accounting principle			$	0.49		0.46			1.00		0.91




	Cumulative effect of change in accounting principle, net of tax				—		(0.07	)		—		(0.07	)

Basic net income				$	0.49		0.39			1.00		0.84






Diluted net income per share:




	Income before cumulative change in accounting principle			$	0.49		0.46			1.00		0.91




	Cumulative effect of change in accounting principle, net of tax				—		(0.07	)		—		(0.07	)

Diluted net income				$	0.49		0.39			1.00		0.84






		Dividends paid		$	0.24		0.23			0.48		0.46









Weighted-average shares outstanding — basic					85,005		85,513			84,981		86,100




Weighted-average shares outstanding — diluted					85,780		86,255			85,767		86,876

See accompanying notes to consolidated financial statements.

FIRSTMERIT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)


			Six months ended
(Unaudited)			June 30,

Operating Activities			2002			2001






Net income			$	85,500			72,578




Adjustments to reconcile net income to net cash provided by operating activities:




		Provision for loan losses		38,076			21,210




		Provision for depreciation and amortization		7,768			7,829




		Amortization of investment securities premiums, net		1,127			54




		Amortization of income for lease financing		(8,056	)		(9,658	)




		Gains on sales of investment securities, net		(4,643	)		(408	)




		Deferred federal income taxes		14,683			11,027




		(Increase) decrease in interest receivable		(4,217	)		9,497




		Decrease in interest payable		(5,201	)		(18,675	)




		Proceeds from sales of loans, primarily mortgage loans sold in the secondary markets		309,752			334,405




		Gain on sales of loans		(483	)		(542	)




		Amortization of intangible assets		351			2,389




		Other decreases		303			14,113






NET CASH PROVIDED BY OPERATING ACTIVITIES				434,960			443,819

Investing Activities









Dispositions of investment securities:




	Available-for-sale — sales			336,411			283,504




	Available-for-sale — maturities			247,404			303,145




Purchases of investment securities available-for-sale				(882,599	)		(553,974	)




Net decrease in federal funds sold				—			8,100




Net increase in loans and leases, except sales				(313,785	)		(351,261	)




Purchases of premises and equipment				(4,358	)		(8,846	)




Sales of premises and equipment				837			1,517






NET CASH (USED) IN INVESTING ACTIVITIES				(616,090	)		(317,815	)






Financing Activities









Net increase in demand and savings deposits				203,121			118,971




Net decrease in time deposits				(1,881	)		(287,358	)




Net increase in wholesale borrowings				65,242			147,261




Cash dividends — common and preferred				(41,390	)		(39,989	)




Purchase of treasury shares				(12,784	)		(49,484	)




Proceeds from exercise of stock options, conversion of debentures or conversion of preferred stock				5,270			1,072






NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES				217,578			(109,527	)






Increase in cash and cash equivalents				36,448			16,477




Cash and cash equivalents at beginning of period				190,020			235,918






Cash and cash equivalents at end of period			$	226,468			252,395






SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:









Cash paid during the period for:




		Interest, net of amounts capitalized	$	47,707			101,995




		Federal income taxes	$	18,331			20,225

See accompanying notes to consolidated financial statements.

FirstMerit Corporation and Subsidiaries

Notes to Consolidated Financial Statements
June 30, 2002 (unaudited)

1. Company Organization and Financial Presentation — 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 Savings Corporation of Stark County, FirstMerit Capital Trust I, FirstMerit Community Development Corporation, FirstMerit Credit Life Insurance Company, FMT, Inc. and SF Development Corp.

The consolidated balance sheet at December 31, 2001 has been derived from the audited consolidated financial statements at that date. The accompanying unaudited interim financial statements reflect all adjustments (consisting only of normally recurring accruals) that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with the rules of the Securities and Exchange Commission. The consolidated financial statements of the Corporation as of June 30, 2002 and 2001, and for the three-month and six-month periods ended June 30, 2002 and June 30, 2001 are not necessarily indicative of the results that may be achieved for the full fiscal year or for any future period. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended December 31, 2001.

2. Critical Accounting Policies — The accounting and reporting policies of the Corporation are in accordance with accounting principles generally accepted within the United States of America and conform to general practices within the banking industry. Accounting and reporting policies for the allowance for loan losses, income taxes, and mortgage servicing rights are deemed critical since they involve the use of estimates and require significant management judgments. Application of assumptions different than those used by management could result in material changes in the Corporation’s financial position or results of operations. Footnote number one (Summary of Significant Accounting Policies) and footnote five (Allowance for loan losses), as described in the 2001 Annual Report and Form 10-K, provide considerable detail with regard to the Corporation’s methodology and reporting of the allowance for loan losses. Additional information for income tax accounting is contained within the same Summary of Significant Accounting Policies footnote, as well as in footnote twelve (Federal Income Taxes). Within the “Other Income” section of the second quarter 2002 Form 10-Q, the Corporation’s basis for accounting for mortgage servicing rights, which is based on a discounted cash flow model believed to be comparable to those used by other financial institutions, is discussed in more detail. Accounting for mortgage servicing rights was also discussed at year end in the Summary of Significant Accounting Policies footnote and within footnote seven (Mortgage Servicing Rights and Mortgage Servicing).

3. Manufactured Housing Activity and Related 2001 Restructure Charge — In the fourth quarter of 2001, the Corporation exited the manufactured housing (“MH”) lending business and thereby stopped originating manufactured housing finance contracts. The collection and recovery aspect of servicing for existing MH contracts was retained. The following table shows the balance of the related restructure liability since its inception. Management has evaluated the expected future costs to be incurred associated with the restructure liability and believes the recorded liability as of June 30, 2002 is appropriate to provide for these costs.

Dollars in thousands

12/31/01

Payments

6/30/02

Balance Sheet Category

Restructure liability

$18,630

2,087

16,543

Accrued taxes, expenses and other liabilities

4. Goodwill and Intangible Assets - During the first quarter of 2002, the Corporation adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 specifies that intangible assets with indefinite useful lives and goodwill are no longer subject to periodic amortization. Rather, the standard requires goodwill to be periodically tested for impairment and, if impaired, written down to its fair value.

The Corporation’s goodwill of $141.7 million at June 30, 2002 was primarily a result of the 1998 purchase acquisition of CoBancorp, Inc. As part of the implementation of SFAS 142, the Corporation’s goodwill was tested for impairment during the 2002 first quarter. The results of this testing indicated goodwill impairment had not occurred.

The Corporation’s remaining intangible assets subject to amortization at June 30, 2002 include a core deposit premium associated with the CoBancorp, Inc. purchase. The original core deposit premium recorded was $10.1 million. The remaining amortization period of this core deposit intangible asset is approximately 8 years. Core deposit amortization expense totaled approximately $200 thousand in both 2002 quarters, and that amount is considered representative of expected amortization in future quarters.

The following table illustrates the after-tax income statement and earnings per share impact of SFAS 142 on current and prior periods.


	1Q 2002		2Q 2002		1Q 2001		2Q 2001
Goodwill amortization	$	—		—		2,004		2,004




Other intangible asset amortization		153		198		114		327




Total amortization expense		153		198		2,118		2,331




Reported net income after change in acctg method		43,468		42,032		39,193		33,385

Reported net income after change in acctg method		43,468		42,032		39,193		33,385




Add back : goodwill amortization		—		—		2,004		2,004

Adjusted net income	$	43,468		42,032		41,197		35,389

Basic earnings per share:




Reported net income after change in acctg method	$	0.51		0.49		0.45		0.39




Goodwill amortization		—		—		0.02		0.02

Adjusted net income		0.51		0.49		0.47		0.41

Diluted earnings per share:




Reported net income after change in acctg method		0.51		0.49		0.45		0.39




Goodwill amortization		—		—		0.02		0.02

Adjusted net income	$	0.51		0.49		0.47		0.41

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

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


			June 30, 2002

			Gross		Gross
	Book		Unrealized		Unrealized		Market
	Value		Gains		Losses		Value

US Treasuries and agencies	$	695,467		8,054		335		703,186




Obligations — state/political subdivisions		111,994		2,344		65		114,273




Mortgage-backed securities		1,229,752		23,220		368		1,252,604




Other securities		279,109		845		10,993		268,961

	$	2,316,322		34,463		11,761		2,339,024


EXPECTED MATURITIES:	Book Value		Market Value

Due in one year or less	$	266,980		269,482




Due after one year through five years		1,848,458		1,875,920




Due after five years through ten years		120,250		120,511




Due after ten years		80,634		73,111

	$	2,316,322		2,339,024

Expected maturities based on average remaining life will differ from contractual maturities based on the issuers’ rights to call or prepay obligations with or without call or prepayment penalties. As of June 30, 2002, the duration of the portfolio was 1.8 years compared to 2.16 years at December 31, 2001. The last paragraph of the Market Risk section of this document provides additional information with regard to shortening the securities' duration and the related investment strategy.

The carrying amount of investment securities pledged to secure trust and public deposits and for purposes required or permitted by law amounted to approximately $1.6 billion at June 30, 2002, and $1.4 billion at both December 31, 2001 and June 30, 2001.

6. Allowance for loan losses (“ALL”) — The Corporation’s Credit Policy Division manages credit risk by establishing common credit policies for its subsidiaries, participating in approval of their largest loans, conducting reviews of their loan portfolios, providing them with centralized consumer underwriting, collections and loan operation services, and overseeing their loan workouts. The Corporation’s objective is to minimize losses from its commercial lending activities and to maintain consumer losses at acceptable levels that are stable and consistent with growth and profitability objectives. The activity within the ALL for the first half of the current and prior year, and for the year ended December 31, 2001 is shown in the following table.


Allowance for Loan Losses Activity


		Six months			Year ended			Six months
		ended,			December			ended,
Dollars in thousands		June 30, 2002			31, 2001			June 30, 2001

Allowance — beginning of period		$	125,235			108,285			108,285




Reclass to lease residual reserve			(2,540	)		—			—




Loans charged off:




	Commercial		8,332			10,100			4,305




	Mortgage		293			469			155




	Installment		16,905			22,978			9,699




	Home equity		1,581			1,859			893




	Credit cards		5,701			7,693			5,203




	Manufactured housing		13,579			15,339			7,511




	Leases		1,495			3,447			1,267

Total charge-offs		$	47,886			61,885			29,033

Recoveries:




	Commercial		469			892			696




	Mortgage		31			92			18




	Installment		6,291			9,104			4,585




	Home equity		513			669			383




	Credit cards		1,168			1,658			1,966




	Manufactured housing		1,094			3,654			1,790




	Leases		339			959			720

Total recoveries		$	9,905			17,028			10,158

Net charge-offs		$	37,981			44,857			18,875

Provision for loan losses			38,076			61,807			21,210

Allowance — end of period		$	122,790			125,235			110,620

Annualized net charge offs as a percentage of average loans			1.04	%		0.61	%		0.52	%




Allowance for loan losses as a % of loans outstanding at end of period			1.67	%		1.70	%		1.50	%




Allowance for loan losses as a multiple of annualized net charge offs			1.60	X		2.79	X		2.91	X

7. Asset Quality — Nonperforming assets are defined by the Corporation as nonaccrual loans, restructured loans, and other real estate. Impaired loans are defined as loans for which, based on current information or events, it is probable the Corporation will be unable to collect all amounts due according to the loan contract. 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 at the fair value of the underlying collateral. Under the Corporation’s credit policies and practices, all nonaccrual and restructured commercial, agricultural, construction, and commercial real estate loans, meet the definition of impaired loans.

(Dollars in thousands)


Nonperforming Assets			June 30,			December 31,			June 30,
			2002			2001			2001

Impaired Loans:




	Nonaccrual		$	79,810			54,125			38,571




	Restructured			54			84			87

		Total impaired loans		79,864			54,209			38,658

Other Loans:




	Nonaccrual			10,741			3,128			1,509




	Restructured			—			—			—

		Total nonperforming loans		90,605			57,337			40,167

Other real estate (ORE)				4,856			10,163			8,357

	Total nonperforming assets			95,461			67,500			48,524

Loans past due 90 days or more
	accruing interest		$	28,736			43,220			42,089




Total nonperforming assets as a percentage of total loans and ORE				1.30	%		0.91	%		0.66	%

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.

8. Earnings per Share - The reconciliation between basic and diluted earnings per share (“EPS”) is presented as follows:


	Quarter ended			YTD ended			Quarter ended			YTD ended
Dollars in thousands	June 30, 2002			June 30, 2002			June 30, 2001			June 30, 2001

BASIC EPS:




Income before change in accounting principle	$	42,032			85,500			39,684			78,877




Change in accounting principle		—			—			(6,299	)		(6,299	)




Net income		42,032			85,500			33,385			72,578




Less preferred stock dividends		(20	)		(40	)		(39	)		(79	)




Income available to common shareholders before change in accounting method		42,012			85,460			39,645			78,798




Income available to common shareholders after change in accounting method		42,012			85,460			33,346			72,499




Average common shares outstanding		85,005,091			84,980,829			85,512,873			86,100,306




Income per share before accounting change	$	0.49			1.00			0.46			0.91




Per share effect of change in accounting method		—			—			(0.07	)		(0.07	)




Net income per share — basic	$	0.49			1.00			0.39			0.84




DILUTED EPS:




Income available to common shareholders before change in accounting method	$	42,012			85,460			39,645			78,798




Income available to common shareholders after change in accounting method		42,012			85,460			33,346			72,499




Add: preferred stock dividends		20			40			39			79




Add: interest expense on convertible bonds		9			19			11			22




Income before change in accounting method used in diluted EPS calculation		42,041			85,519			39,695			78,899




Income after change in accounting method used in diluted EPS calculation	$	42,041			85,519			33,396			72,600




Average common shares outstanding		85,005,091			85,980,829			85,512,873			86,100,306




Equivalents from stock options		571,573			579,621			424,424			443,138




Equivalents from convertible bonds		65,643			67,593			78,091			78,675




Equivalents from convertible preferred stock		137,859			138,604			239,825			254,283




Common stock/equivalents		85,780,166			85,766,647			86,255,213			86,876,492




Income per share before accounting change	$	0.49			1.00			0.46			0.91




Effect of change in accounting method		—			—			(0.07	)		(0.07	)




Net income per share — diluted	$	0.49			1.00			0.39			0.84

9. 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 the Parent Company, Other Subsidiaries and Eliminations category are certain nonbank affiliates, and eliminations of certain intercompany 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 tables present a summary of financial results for the three-month and six-month periods ended June 30, 2002 and 2001:


(Dollars in thousands,
except averages in
millions)
					Parent Company,
	Supercommunity				Other Subsidiaries,
Second Qtr 2002	Banking				Eliminations						FirstMerit Consolidated
OPERATIONS:	2Q		YTD		2Q			YTD			2Q		YTD

Net interest income	$	104,469		207,849		1,304			2,590			105,773		210,439




Provision for loan losses		18,762		38,076		—			—			18,762		38,076




Other income		43,476		90,609		422			854			43,898		91,463




Other expenses		69,232		138,217		269			544			69,501		138,761




Net income	$	41,013		83,534		1,019			1,966			42,032		85,500




AVERAGES:




Assets	$	10,390		10,299		30			42			10,420		10,341




Loans		7,359		7,377		3			3			7,362		7,380




Earnings assets		9,672		9,604		18			19			9,690		9,623




Deposits		7,707		7,685		(25	)		(24	)		7,682		7,661




Shareholders’ equity	$	799		790		139			139			938		929


(Dollars in thousands,
except averages in
millions)
					Parent Company,
	Supercommunity				Other Subsidiaries and
Second Qtr 2001	Banking				Eliminations						FirstMerit Consolidated
OPERATIONS:	2Q		YTD		2Q			YTD			2Q		YTD

Net interest income	$	95,797		186,569		(706	)		(1,121	)		95,091		185,448




Provision for loan losses		9,394		21,210		—			—			9,394		21,210




Other income		45,499		92,347		462			798			45,961		93,145




Other expenses		72,872		140,080		(48	)		(301	)		72,824		140,381




Net income after change in
accounting method	$	33,857		73,459		(472	)		(881	)		33,385		72,578




AVERAGES:




Assets	$	10,102		10,087		26			32			10,128		10,119




Loans		7,348		7,326		2			2			7,350		7,328




Earnings assets		9,334		9,322		17			16			9,351		9,338




Deposits		7,395		7,435		(5	)		(10	)		7,390		7,425




Shareholders’ equity	$	802		790		105			121			907		911

10. Accounting for Derivatives - The Corporation follows the provisions of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), in accounting for its derivative activities. The Corporation has three interest rate swaps that are accounted for as fair value hedges under SFAS 133 since their purpose is to “swap” fixed interest rate liabilities to floating interest rates. Two swaps are accounted for under the short-cut method and one is accounted for under the long-haul method. For the six months ended June 30, 2002, a loss of $90 thousand is included as a reduction to other operating income representing the ineffectiveness recognized on the interest rate swaps. At June 30, 2002, the interest rate swaps are included in the wholesale borrowings, CDs and loans held for sale balance sheet categories at $770 thousand, $131 thousand, and $64 thousand, respectively.

11. Contingencies - The nature of the Corporation’s business results in a certain amount of litigation. Accordingly, FirstMerit Corporation 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 and results of operations.

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)				June 30, 2002								December 31, 2001								June 30, 2001

				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)			$	1,856,112			23,726		5.13	%		1,559,049			94,292		6.05	%		1,503,418			20,814		5.55	%




	Obligations of states and political subdivisions (tax-exempt)				113,111			2,159		7.66	%		106,002			9,043		8.53	%		102,902			2,205		8.59	%




	Other securities				278,343			3,025		4.36	%		294,629			17,850		6.06	%		299,810			4,845		6.48	%





			Total investment securities		2,247,566			28,910		5.16	%		1,959,680			121,185		6.18	%		1,906,130			27,864		5.86	%




Federal funds sold & other interest-earning assets					2,747			12		1.75	%		2,182			78		3.57	%		1,170			14		4.80	%




Loans held for sale					78,420			1,205		6.16	%		72,843			5,499		7.55	%		93,012			534		2.30	%




Loans					7,361,674			133,978		7.30	%		7,373,493			603,789		8.19	%		7,350,304			155,982		8.51	%




		Total earning assets			9,690,407			164,105		6.79	%		9,408,198			730,551		7.77	%		9,350,616			184,394		7.91	%




Allowance for possible loan losses					(122,716	)							(110,726	)							(111,001	)




Cash and due from banks					170,915								188,198								184,427




Other assets					681,670								695,239								704,452

	Total assets			$	10,420,276								10,180,909								10,128,494

LIABILITIES AND SHAREHOLDERS’ EQUITY




	Deposits:
	Demand- non-interest bearing			$	1,146,763			—		—			1,058,611			—		—			1,057,315			—		—




	Demand- interest bearing				727,201			478		0.26	%		667,406			3,769		0.56	%		669,298			1,051		0.63	%




	Savings				2,117,347			6,227		1.18	%		1,915,006			44,236		2.31	%		1,911,757			12,133		2.55	%




	Certificates and other time deposits				3,690,503			37,226		4.05	%		3,800,574			210,977		5.55	%		3,751,908			54,907		5.87	%

			Total deposits		7,681,814			43,931		2.29	%		7,441,597			258,982		3.48	%		7,390,278			68,091		3.70	%

Wholesale borrowings					1,631,782			13,530		3.33	%		1,660,586			76,461		4.60	%		1,695,455			20,316		4.81	%

		Total interest bearing liabilities			8,166,833			57,461		2.82	%		8,043,572			335,443		4.17	%		8,028,418			88,407		4.42	%





Other liabilities					168,417								157,492								136,059





Shareholders’ equity					938,263								921,234								906,702





	Total liabilities and shareholders’ equity			$	10,420,276								10,180,909								10,128,494





Net yield on earning assets				$	9,690,407			106,644		4.41	%		9,408,198			395,108		4.20	%		9,350,616			95,987		4.12	%





Interest rate spread										3.97	%							3.60	%							3.49	%

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

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

FirstMerit Corporation reported second quarter 2002 net income of $42.0 million, or $0.49 per diluted share. This compares with income of $39.7 million, or $0.46 per diluted share for the 2001 second quarter, which is after taxes but before the cumulative effect of a change in accounting principle.

For the first six months of 2002, FirstMerit reported net income of $85.5 million, or $1.00 per diluted share. This compares with income of $78.9 million, or $0.91 per diluted share for the same 2001 period, which is after taxes but before the impact of the cumulative effect of a change in accounting principle.

For the second quarter of 2002, returns on average common equity (“ROE”) and average assets (“ROA”) were 18.0% and 1.62%, respectively, compared with 17.6% and 1.57% for the prior year quarter, which excludes the cumulative effect of a change in accounting principle. For the first half of 2002, ROE and ROA were 18.6% and 1.67%, respectively, compared to corresponding ratios of 17.5% and 1.57% for the same 2001 period, which excludes the cumulative effect of a change in accounting principle.

Total operating revenues (net interest income plus noninterest income), excluding gains from the sale of securities, were $148.6 million for the second quarter of 2002, an increase of 5.3% from the $141.1 million earned in the prior-year second quarter. Net interest income, on a fully-taxable equivalent basis, was $106.6 million, up 11.1% over the $96.0 million reported in the year-ago quarter. This increase was a result of a combination of margin expansion and a 3.6% increase in average earning assets compared to the second quarter of 2001. The net interest margin was 4.41% for this quarter, compared with 4.12% for the year-ago quarter.

For the six months ended June 30, 2002, operating revenues less securities gains totaled $297.3 million, up $19.1 million, or 6.9%, from the $278.2 million recorded in the prior year first half. Net interest income, on a fully-taxable equivalent basis, was $212.2 million, up 13.4% over the $187.2 million earned during the six months ended June 30, 2001. The net interest margin was 4.45% for the half, compared with 4.04% for the year-ago six-month period. This increase was also a result of a margin expansion and an increase in average earning assets compared to the 2001 first six months.

Excluding net gains or losses from the sale of investment securities, noninterest income was $42.9 million, a decrease of 6.8% from the 2001 second quarter. The majority of the decline is attributed to a $1.3 million write-down in mortgage servicing rights, and the discontinuation of manufactured housing brokered loans during the 2001 fourth quarter.

For the year-to-date period, noninterest income less securities gains was $86.8 million, down 6.4% from the $92.7 million recorded one year ago. The 2001 six-month period includes a $5.6 million gain from the sale of a partnership. If the $5.6 million gain from the sale of a partnership is excluded from prior year first half results, recurring noninterest income for that period would have been $87.1 million, about the same as the $86.8 million earned during the six months ended June 30, 2002.

Noninterest expense declined 4.6% from $72.8 million last year to $69.5 million for the current 2002 quarter, mainly the result of a $1.9 million decline in other operating expenses and a $2.1 million decline in the amortization of intangibles, reflecting the recent accounting change under SFAS 142 which was adopted January 1, 2002. The efficiency ratio improved to 46.4% this quarter, compared with 49.7% for the same period last year. For the 2002 first half, noninterest expense totaled $138.8 million compared to $140.4 million in 2001, which includes goodwill amortization expense of $4.0 million.

Total assets at June 30, 2002 were $10.5 billion, up 3.1% from last year’s second quarter-end. Loans were virtually unchanged at $7.3 billion, with a continuing shift away from mortgages held in portfolio, manufactured housing and auto leasing, toward consumer loans (installment, home equity and credit card), which increased $189 million, or 9.2%, compared with the second quarter of 2001. Investment securities rose 18%, to $2.3 billion, reflecting an increase in short-maturity instruments. The duration of the investment portfolio was 1.8 years at June 30, 2002, compared to 2.6 years as of June 30, 2001 and 2.3 years at March 31, 2002.

Total deposits increased 4.0% to $7.7 billion. Core deposits, defined as demand deposits, savings and money market savings accounts, increased 9.0% since the second quarter of last year, and currently account for 51.9% of total deposits, compared with 49.5% the prior year quarter, reflecting the success of several market-rate sensitive deposit products and a bias toward greater liquidity on the part of consumers.

The loan loss provision was $18.8 million for the second quarter of 2002 as compared to $9.4 million for the same period last year. For the first half, the loan loss provision was $38.1 million versus $21.2 million in the year ago period. Net charge-offs for the three months and six months ended June 30, 2002 were $18.8 million and $38.0 million, respectively. Net charge-offs for last year’s quarter and half were $8.9 million and $18.9 million, respectively. The allowance for loan losses at June 30, 2002 is 1.67% of total loans, and non-performing assets, as a percentage of outstanding loans and other real estate, is 1.30%. For the prior year quarter, the allowance for loan losses was 1.50% of period-end loans, and nonperforming assets were 0.66% percent of outstanding loans and other real estate. The present level of the allowance for loan losses has been deemed appropriate by the Corporation following a thorough analysis of portfolio risk and nonperforming assets.

Shareholders’ equity was $958.2 million at quarter-end. Average equity to assets was 9.00% for the 2002 quarter compared to 8.95% for the prior-year period. Common dividends per share were $0.24 for the quarter, representing a payout of 49% of net income. At quarter-end, there were 84.9 million shares outstanding.

The components of change in income per share for the current and prior year three-month and year-to-date periods were as follows:


Changes in Earnings per Share	2002						2001

	2nd Qtr			YTD			2nd Qtr			YTD

Diluted net income per share for the beginning of each period indicated	$	0.39			0.84			0.45			0.90




Increases (decreases) due to:




Net interest income — taxable equivalent		0.12			0.29			—			(0.07	)




Provision for possible loan losses		(0.11	)		(0.19	)		(0.01	)		(0.01	)




Other income		(0.02	)		(0.02	)		0.08			0.16




Other expenses		0.04			0.03			(0.05	)		(0.06	)




Federal income taxes — taxable equivalent		0.00			(0.02	)		(0.02	)		(0.03	)




Cumulative change in accounting method		0.07			0.07			(0.07	)		(0.07	)




Change in share base		0.00			0.00			0.01			0.02

Net change in diluted net income per share period-over-period		0.10			0.16			(0.06	)		(0.06	)

Diluted net income per share for the period ended June 30,	$	0.49			1.00			0.39			0.84

Net Interest Income

Net interest income, the Corporation’s principal source of earnings, is the difference between interest income generated by earning assets (primarily loans and investment securities) and interest paid on interest-bearing funds (namely customer deposits and wholesale borrowings). For the purpose of this discussion, net interest income is presented on a fully-taxable equivalent (“FTE”) basis, to provide a comparison among all 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.

FTE net interest income for the quarter ended June 30, 2002 was $106.6 million compared to $96.0 million for the three months ended June 30, 2001. The $10.6 million rise in net interest income occurred because the $30.9 million decline in interest expense, compared to the same quarter last year, was greater than the $20.3 million decline in interest income during the same period.

Consistent with current year second quarter results, the six-month net interest income of $212.2 million was greater than last year’s $187.2 million because the decrease in interest expense more than offset the decline in interest income.

As illustrated in the following table, the lower amounts of interest income recorded in the 2002 quarter and first half, compared to the same 2001 periods, were almost exclusively rate driven as lower yields on earning assets lessened interest income by $24.6 million and $53.3 million, respectively, during those periods. The table also depicts similar three-month and six-month declines in interest expense, again caused by the significant drop in interest rates from 2001 through the half-way point of 2002. The lower rates paid on customer deposits and wholesale borrowings in the 2002 quarter and first half, compared to the same 2001 periods, decreased interest expense by $30.4 million and $68.0 million, respectively.


(Dollars in thousands)		Quarters ended June 30,									Six months ended June 30,

RATE/VOLUME ANALYSIS		Increases (Decreases)									Increases (Decreases)

		Volume			Rate			Total			Volume			Rate			Total

INTEREST INCOME FTE
Investment Securities		$	4,346			(3,300	)		1,046			7,166			(9,784	)		(2,618	)




Loans held for sale			(224	)		895			671			(1,110	)		(953	)		(2,063	)




Loans			207			(22,211	)		(22,004	)		1,886			(42,498	)		(40,612	)




Federal funds sold			7			(9	)		(2	)		0			(29	)		(29	)

	Total interest income	$	4,336			(24,625	)		(20,289	)		7,942			(53,264	)		(45,322	)

INTEREST EXPENSE




Demand-interest bearing		$	38			(611	)		(573	)		68			(1,346	)		(1,278	)




Savings/money market accts			605			(6,511	)		(5,906	)		1,342			(15,271	)		(13,929	)




Certificate of deposits (“CDs”)			(619	)		(17,062	)		(17,681	)		(2,902	)		(35,252	)		(38,154	)




Wholesale borrowings			(535	)		(6,251	)		(6,786	)		(963	)		(16,056	)		(17,019	)

	Total interest expense	$	(511	)		(30,435	)		(30,946	)		(2,455	)		(67,925	)		(70,380	)

Net interest income		$	4,847			5,810			10,657			10,397			14,661			25,058

Net Interest Margin

The following table provides 2002 FTE net interest income and net interest margin totals as well as 2001 comparative amounts.


(Dollars in thousands)	Quarters ended June 30,						Six months ended June 30,

	2002			2001			2002			2001

Net interest income	$	105,773			95,091			210,439			185,448




Tax equivalent adjustment		871			896			1,797			1,730

Net interest income — FTE	$	106,644			95,987			212,236			187,178

Average earning assets	$	9,690,407			9,350,616			9,623,097			9,338,267

Net interest margin		4.41	%		4.12	%		4.45	%		4.04	%

Average loan outstandings totaled $7.4 billion for both the current year and prior year second quarters. Second quarter 2002 over second quarter 2001 increases occurred in commercial, installment, home equity and credit card loans, while residential mortgages, manufactured housing loans and leases declined. The loan migration toward higher-yielding consumer and commercial credits is consistent with the Corporation’s loan strategy. Principal repayments from mortgage and manufactured housing loans were used to fund the loan growth noted in the commercial and other consumer portfolios. Efforts to grow loan outstandings were tempered by the less than robust economy that currently exists in the Corporation’s primary lending areas.

Specific changes in average loan outstandings, compared to second quarter 2001, were as follows: commercial loans up $46.3 million or 1.3%; installment loans up $108.5 million or 7.6%; home equity loans up $78.0 million or 17.0%; credit card loans up $14.0 million or 11.7%; manufactured housing (“MH”) loans down $21.9 million, or 2.7%; residential mortgage loans down $163.8 million, or 21.3%, and leases down $49.7 million, or 17.2%. The significant decline in average mortgage loans was due to normal principal repayment, loan refinancing activity, and the creation of mortgage-backed securities during the second quarter of 2001. Average outstanding loans for the 2002 and 2001 second quarters equaled 76.0% and 78.6% of average earning assets, respectively.

Average deposits were $7.7 billion during the 2002 second quarter, up $291.5 million from the same period last year. The growth occurred in core deposits, which are defined as checking accounts, savings accounts and money market savings products. For the quarter ended June 30, 2002, average core deposits represented 52.0% of total average deposits compared to 49.2% for the 2001 second quarter. Average CDs and wholesale borrowings declined $61.4 million and $42.2 million, respectively, compared to the same categories in the 2001 second quarter. Wholesale borrowings as a percentage of total interest-bearing funds equaled 20.0% for the 2002 second quarter and 20.9% for the same 2001 quarter. Average interest-bearing liabilities funded 84.3% of average earning assets in the current year quarter and 85.6% during the three months ended June 30, 2001.

In summary, loan growth over the past year continues to occur mainly in higher-yielding commercial, installment, home equity and credit card outstandings, resulting in a lower concentration of manufactured housing and residential mortgage loans. Also, the funding mix

for the quarter changed favorably as lower cost core deposits grew and more expensive CDs and wholesale borrowings declined.

Other Income

Other (noninterest) income for the quarter totaled $43.9 million, an decrease of $2.1 million from the $46.0 million earned during the same period last year. For the first half of 2002, other income was $91.5 million, 1.8% less than the first six months of 2001. The prior year first half included a pre-tax gain of $5.6 million from the sale of a partnership. Excluding the effect of securities sales in both years’ six-month totals, and the first quarter 2001 gain from the sale of a partnership, other income was approximately $87 million for both first half periods.

The largest contributor to the $2.1 million quarter-over-quarter decline in total other income was a $1.3 million write-down of mortgage servicing rights (“MSRs”). Write-downs of this asset generally occur in a low interest rate environment when modeling indicates a higher probability of increased principal repayment, leading to lower outstanding balances on serviced loans and, therefore, a lower value of the related servicing asset. This servicing asset after the write-down totaled $15.8 million.

Excluding securities gains and losses, other income as a percentage of net revenue, also negatively impacted by the MSR write-down, was 28.67% compared to 32.40% for the same quarter one year ago. Net revenue is defined as net interest income, on a fully-taxable equivalent basis, plus other income less the effect of securities sales. Other income as a percentage of net revenue for the 2002 second quarter was 29.28%, when the MSR write-down is excluded from the calculation.

Other changes, compared to second quarter last year, were as follows: trust department income, which has been negatively impacted by lower stock market values, was $5.4 million, down $0.2 million; service charges on customer deposit accounts totaled $13.5 million, down 2.0%; credit card fees, including merchant services, increased 5.8%, to $9.8 million; ATM and other service fees declined $0.7 million; income from bank owned life insurance (“BOLI”) increased $0.1 million; investment services and life insurance fees declined $0.1 million; MH income decreased $0.8 million since the Corporation ceased MH origination during the fourth quarter of last year; and other operating income totaled $3.2 million during the quarter, consistent with last year’s $3.0 million.

Results for the year-to-date other income categories were consistent with the quarterly trends just discussed. As stated in the opening paragraph of this section, total noninterest income for 2001 included a $5.6 million gain from the sale of a partnership.

The Corporation recognizes other income (fee income) as an important complement to net interest income as it provides a source of revenues not sensitive to the interest rate environment. Consequently, the Corporation is always looking for new opportunities to increase noninterest income.

Other Expenses

Other (noninterest) expenses totaled $69.5 million for the second quarter compared to $72.8 million in 2001, a decrease of $3.3 million, or 4.6%. Other expenses for the first half were $138.8 million, down $1.6 million from the six months ended June 30, 2001.

Operating expenses for the 2002 quarter and first half, compared to the prior year, were reduced as a result of the first quarter 2002 implementation of SFAS 142, which eliminated amortization of goodwill. If the prior year periods were adjusted to exclude amortization expense on goodwill, total operating costs for the quarter and half would have been $70.8 million and $136.8 million, respectively. On this adjusted basis, 2002 second quarter expenses were $1.3 million less than last year while 2002 first half costs were $2.0 million greater than year ago results. Note 4 to the consolidated financial statements contains additional information regarding Statement No. 142 and its impact on the Corporation’s results.

For the three months ended June 30, 2002, all categories of operating costs, except salaries and benefits, net occupancy, and loan processing, were less than amounts incurred in the prior year quarter. Salaries and benefits, the single largest component of noninterest expenses, increased only 0.33%, despite annual pay increases approximating 4% that became effective April 1, 2002; bankcard, loan processing and other costs increased $0.8 million as a result of higher refinancing/new origination activity; professional services costs declined $0.4 million, or 12.9%; and other operating expenses decreased $1.9 million, or 11.5%, mainly due to decreases in other tax expense (taxes other than Federal income tax), advertising costs, and telecommunication costs. The same trends exhibited during the quarter were also evident in the first half results.

The efficiency ratio for the quarter improved from 49.65% to 46.36% because of the reduction in overall operating costs as well as the increase in net interest income. The 2002 first quarter efficiency ratio indicates 46.36 cents in operating costs were used to generate each dollar of net revenue. The efficiency ratio for the first half was 46.28% compared to 48.47% for the same prior year period.

FINANCIAL CONDITION

Investment Securities

The book value and market value of investment securities, including mortgage-backed securities and derivatives, at June 30, 2002, by average remaining term are included in note 5 to the consolidated financial statements.

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 the mortgage and asset-backed securities are beyond five years, these instruments provide periodic principal payments and include securities with adjustable interest rates, reducing the interest rate risk associated with longer term investments.

Loans

Total loans outstanding at June 30, 2002 totaled $7.34 billion compared to $7.39 billion at December 31, 2001 and $7.35 billion at June 30, 2001.


(Dollars in thousands)	As of June 30, 2002		As of June 30, 2001

Commercial loans	$	3,510,379		3,525,077




Mortgage loans		587,377		673,661




Installment loans		1,554,265		1,461,926




Home equity loans		549,866		464,685




Credit card loans		133,952		122,506




Manufactured housing loans		767,986		816,362




Leases		233,315		286,489

Total Loans	$	7,337,140		7,350,706

At quarter end, the Corporation’s commercial loans were $3.51 billion, down approximately $15 million, or less than one-half of one percent, from the balance at June 30, 2001; installment loans were $1.55 billion, up 6.3%, home equity loans were $549.9 million, up 18.3%; credit card loans were $134.0 million, up 9.3%; residential mortgage loans held in portfolio were down $86.3 million or 12.8%; manufactured housing loans totaled $768.0 million, down $48.4 million; and leases were down $53.2 million or 18.6%. The Corporation continues to increase its loan mix from lower-yielding mortgage loans to higher-earning commercial and consumer credits. As discussed in earlier sections of this document, the Corporation ceased origination of manufactured housing loans during the fourth quarter of 2001.

Expected cashflows and interest rate information for commercial loans is presented in the following table.


Commercial Loan Cashflow Schedule	As of June 30, 2002

Due in one year or less	$	1,420,323




Due after one year but within five years		1,342,877




Due after five years		747,179

Totals	$	3,510,379

Due after one year with a predetermined fixed interest rate	$	1,533,362




Due after one year with a floating interest rate		556,693

Totals	$	2,090,055

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)	Quarter Ended					Year Ended					Quarter Ended
	June 30, 2002					December 31, 2001					June 30, 2001

	Average		Average			Average		Average			Average		Average
	Balance		Rate			Balance		Rate			Balance		Rate

Non-interest DDA	$	1,146,763		—			1,058,611		—			1,057,315		—




Interest-bearing DDA		727,201		0.26	%		667,406		0.56	%		669,298		0.63	%




Savings deposits		2,117,347		1.18	%		1,915,006		2.31	%		1,911,757		2.55	%




CDs and other time		3,690,503		4.05	%		3,800,574		5.55	%		3,751,908		5.87	%

Total	$	7,681,814		2.29	%		7,441,597		3.48	%		7,390,278		3.70	%

Interest-bearing and non-interest-bearing demand deposits, on a combined basis, averaged $1.87 billion during the 2002 second quarter, up $147.4 million from second quarter 2001. Savings deposits, including money market savings accounts averaged $2.1 billion, $205.6 million higher than the year ago quarter. The sum of demand and savings accounts, often referred to as “core deposits,” grew $352.9 million, or 9.7%, and represented 24.6% of total average deposits for the second quarter compared to 23.4% last year. Additionally, the average yield paid on core deposits during the quarter was 141 basis points less than last year’s average core deposits rate. Average CDs, still the largest individual component of deposits, totaled $3.69 billion for the second quarter, down 1.6% from the same quarter last year. Average rates paid on CDs fell 1.82% from 5.87% in the 2001 quarter to 4.05% this year. On a percentage basis, average CDs were 45.2% and 46.7%, respectively, of total interest-bearing funds for the June 30, 2002 and 2001 quarters.

Wholesale borrowings decreased from 21.1% of interest-bearing funds during the three months ended June 30, 2001 to 20.0% for the June 30, 2002 quarter. Interest-bearing liabilities funded 85.9% of average earning assets during the quarter ended June 30, 2002 and 85.6% during the quarter ended June 30, 2001. In summary, there was a significant increase in average core deposits during the quarter compared to the same period in 2001. The Corporation’s change in funding mix from higher priced CDs and wholesale borrowings toward less expensive core deposits contributed significantly to the improved net interest margin compared to the second quarter last year.

The following table summarizes scheduled maturities of CDs of $100 thousand or more (“Jumbo CDs”) that were outstanding as of June 30, 2002.


(Dollars in thousands)

Maturing in:	Amount

Under 3 months	$	352,289




3 to 12 months		547,585




Over 12 months		506,926

	$	1,406,800

Market Risk

Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices and commodity prices, including the correlation among these factors and their volatility. The Corporation is primarily exposed to interest rate risk as a result of offering a wide array of financial products to its customers.

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 market risk management, establishing risk measures, limits and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. According to these policies, responsibility for measuring and the management of interest rate risk reside in the Corporate Treasury function.

Interest rate risk on Corporation’s balance sheet consists of reprice, option, and basis risks. Reprice risk results from differences in the maturity, or repricing, of asset and liability portfolios. Options risk arises from “embedded options” present in many financial instruments such as loan prepayment options, deposit early withdrawal options and interest rate options. These options allow customers opportunities to benefit when market interest rates change, which typically results in higher costs or lower revenue for the Corporation. Basis risk refers to the potential for changes in the underlying relationship between market rates or indices, which subsequently result in a narrowing of profit spread on an earning asset or liability. Basis risk is also present in administered rate liabilities, such as interest-bearing checking accounts, savings accounts and money market accounts where historical pricing relationships to market rates may change due to the level or directional change in market interest rates.

The interest rate risk position is measured and monitored using sophisticated and detailed risk management tools, including earnings simulation modeling and economic value of equity sensitivity analysis, which capture both near-term and long-term interest rate risk exposures. 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. 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. The sensitivity of net interest income to changes in interest rates is measured using numerous interest rate scenarios including shocks, gradual ramps, curve flattening, curve steepening as well as forecasts of likely interest rates scenarios. Presented below is the Corporation’s interest rate risk profile as of June 30, 2002:

Immediate Change in Rates and Resulting Percentage Increase/(Decrease) in Net Interest Income:

-200

-100

+100

+200

basis points

June 30, 2002

(2.6

1.19

2.19

- this scenario is not considered relevant due to the current, relatively low interest rate environment.

Modeling the sensitivity of net interest earnings to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. To the extent that actual performance is different than what was assumed, actual net interest earnings sensitivity may be different than projected. The assumptions used in the models are

management’s best estimate based on studies conducted by the ALCO department. The ALCO department uses a sophisticated data-warehouse to study interest rate risk at a transactional level and uses various ad-hoc reports to refine assumptions continuously. Assumptions and methodologies regarding administered rate liabilities, e.g., savings, money market and interest-bearing checking accounts, balance trends and repricing relationships reflect management’s best estimate of expected behavior and these assumptions are reviewed regularly. Each year the forecasting accuracy of the model is tested in a back-test study. This study measures how closely the model would have predicted future net interest income by substituting actual interest rates and balance sheet volumes in a historical model, such as the risk model from one year ago. All other assumptions remain as they were in the historical model. Net interest income is simulated and compared to actual results. The results of the back-test performed in 2001, using the volatile period of January 2001 through November 2001, showed the model’s assumptions were appropriate as simulated net interest income was within 0.5% of realized net interest income. ALCO and the Board of Directors review the results of the back-test study.

The Corporation also has longer-term interest rate risk exposure, which may not be appropriately measured by earnings sensitivity analysis. ALCO uses economic value of equity sensitivity analysis to study the impact of long-term cash flows on earnings and capital. Economic value of equity involves discounting present values of all cash flows on the balance sheet under different interest rate scenarios. The discounted present value of all cash flows represents the Corporation’s economic value of equity. The analysis requires modifying the expected cash flows in each interest rate scenario, which will impact the discounted present value. The amount of base-case measurement and its sensitivity to shifts in the yield curve allows management to measure longer-term repricing and option risk in the balance sheet.

During the quarter, the Corporation reinvested portfolio cash flows into short-term securities in anticipation of rising market interest rates and to avoid locking in long-term yields in a low interest rate environment. As a result of the reinvestment strategy, the duration, or risk-maturity, of the investment portfolio fell from 2.3 years at March 31, 2002 to 1.8 years as of June 30, 2002. The composition of floating and adjustable rate securities has increased materially as the investment portfolio has been used to adjust the interest rate sensitivity of the overall balance sheet. Since December 31, 2001, the book value of the investment portfolio has increased approximately $301 million reflecting excess liquidity from core deposit growth and increases in repurchase agreements, a component of “other borrowings.” Of the $301 million increase, variable rate securities, whose yield will increase as market interest rates rise, increased approximately $489 million while fixed rate securities decreased by $188 million. Also during the quarter, the Corporation focused on extending retail liability maturities. During the quarter, CDs with maturities greater than one year increased by $93 million.

Capital Resources

Shareholders’ equity at June 30, 2002 totaled $958.9 million compared to $910.8 million at December 31, 2001 and $906.3 million at June 30, 2001.

The following table reflects the various measures of capital:


	June 30,			December 31,				June 30,
	2002			2001				2001
(In thousands)
Total equity	$	958,922	9.12	%	910,807	8.94	%		906,250	8.89	%




Common equity		957,728	9.11	%	909,598	8.92	%		904,194	8.87	%




Tangible common equity (a)		818,583	7.89	%	770,102	7.66	%		757,477	7.54	%




Tier 1 capital (b)		812,267	9.34	%	784,818	9.09	%		784,220	9.06	%




Total risk-based capital (c)		1,070,650	12.31	%	1,043,061	12.07	%		1,043,582	12.06	%




Leverage (d)	$	812,267	7.92	%	784,818	7.75	%		784,220	7.85	%

(a) Common equity less all intangibles; computed as a ratio to total assets less intangible assets.

(b) Shareholders’ equity minus net unrealized holding gains on equity securities, plus or minus net unrealized holding losses or gains on available for sale debt securities, less goodwill; computed as a ratio to risk-adjusted assets, as defined in the 1992 risk-based capital guidelines.

(c) Tier 1 capital plus qualifying loan loss allowance, computed as a ratio to risk-adjusted assets, as defined in the 1992 risk-based capital guidelines.

(d) Tier 1 capital; computed as a ratio to the latest quarter’s average assets less goodwill.

The risk-based capital guidelines issued by the Federal Reserve Bank in 1988 require banks to maintain capital equal to 8% of risk-adjusted assets effective December 31, 1993. At June 30, 2002, the Corporation’s risk-based capital equaled 12.31% of risk adjusted assets, exceeding minimum guidelines.

The cash dividend of $0.24 paid in the second quarter has an indicated annual rate of $0.96 per share.

LIQUIDITY RISK MANAGEMENT

Liquidity risk is the possibility of the Corporation being unable to meet current and future financial obligations in a timely manner. Liquidity is managed to ensure stable, reliable and cost-effective sources of funds to satisfy demand for credit, deposit withdrawals and investment opportunities. The Corporation considers core earnings, strong capital ratios and credit quality essential for maintaining high credit ratings, which allow the Corporation cost-effective access to market-based liquidity. The Corporation relies on a large, stable core deposit base and a diversified base of wholesale funding sources to manage liquidity risk.

The Treasury Group is responsible for identifying, measuring and monitoring the Corporation’s liquidity profile. The position is evaluated daily, weekly and monthly by analyzing the composition of all funding sources, reviewing projected liquidity commitments by future month and identifying sources and uses of funds. In addition, the overall management of the Corporation’s liquidity position is integrated into retail deposit pricing policies to ensure a stable core deposit base.

The Corporation’s primary source of liquidity is its core deposit base, raised through its retail branch system, along with unencumbered, or unpledged, investment securities and unused wholesale sources of liquidity.

Funding Trends for the Quarter - During the three months ended June 30, 2002, increases in the Corporation’s core deposit base of $203 million were used to purchase investment portfolio securities as loans decreased $50 million. In addition, the Corporation purchased short-term investment securities which were funded with equivalent-term repurchase agreements (a component of wholesale borrowings). As a result, repurchase agreements increased by $114 million during the quarter.

Parent Company Liquidity - FirstMerit Corporation (the Parent Company) manages its liquidity principally through dividends from the bank subsidiary. During the second quarter and first half of 2002, FirstMerit Bank paid FirstMerit Corporation a total of $21 million and $42 million, respectively, in dividends. As of June 30, 2002, FirstMerit Bank had an additional $42 million available to pay dividends without regulatory approval. In addition, the parent company has a $100 million revolving loan commitment from a syndicate of banks, which is used for general corporate purposes. The loan commitment is repaid with earnings from the banking subsidiary. The pricing on the loan commitment is based on LIBOR; the outstanding balance at June 30, 2002 was $0 million.

FORWARD-LOOKING, SAFE-HARBOR STATEMENT

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, 2001.

PART II. — OTHER INFORMATION

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

On April 17, 2002, the Registrant held its Annual Meeting of Shareholders for which the Board of Directors solicited proxies. At the Annual Meeting, the shareholders adopted a proposal, as stated in the Proxy Statement dated March 8, 2002, to elect four Class II directors. The proposal was voted on and approved by the shareholders. The voting results for election of the directors are as follows:

1. The election of four Class II directors, being:


					Authority
	For		Against		Withheld
Karen S. Belden		66,627,057		*		1,478,054




R. Cary Blair		66,663,906		*		1,441,202




Robert W. Briggs		65,728,131		*		2,376,977




Clifford J. Isroff		66,593,736		*		938,472

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

All Class I directors (John R. Cochran, Richard Colella, Philip A. Lloyd, II, Roger T. Read, and Richard N. Seaman), except for Charles F. Valentine who retired April 1, 2002 and Class III directors (John C. Blickle, Sid A. Bostic, Terry L. Haines, Robert G. Merzweiler and Jerry M. Wolf) continued in their positions.

2. A proposal to fix the number of directors at fifteen (as described in the proxy statement) was approved. The voting results, as certified by EquiServe (the Inspector of Election), for the proposal are as follows:


For			66,400,767




Against			1,335,145




Witheld			369,195

3. A proposal to adopt the FirstMerit Corporation 2002 Stock Plan (as described in the proxy statement) was approved. The voting results, as certified by EquiServe (the Inspector of Election), for the proposal are as follows:


For			52,446,288




Against			14,706,267




Withheld			935,281




Broker non-votes			17,271

Broker non-votes, as well as votes withheld, are treated as votes against the proposal.

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		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)*




10.2		Amended and Restated 1992 Directors Stock Option Program (incorporated by reference from Exhibit 10.2 to the Form 10-K filed by the registrant on March 9, 2001)*




10.3		Amended and Restated 1995 Restricted Stock Plan (incorporated by reference from Exhibit 10.3 to the Form 10-K filed by the registrant on March 9, 2001)*




10.4		Amended and Restated 1997 Stock Option Program (incorporated by reference from Exhibit 10.4 to the Form 10-K filed by the registrant on March 9, 2001)*




10.5		Amended and Restated 1999 Stock Plan (incorporated by reference from Exhibit 10.5 to the Form 10-K/A filed by the Registrant on April 30, 2001)*




10.6		Amended and Restated 1987 Stock Option and Incentive Plan (SF)1998 (incorporated by reference from Exhibit 10.6 to the Form 10-K filed by the registrant on March 9, 2001)*




10.7		Amended and Restated 1996 Stock Option and Incentive Plan (SF) (incorporated by reference from Exhibit 10.7 to the Form 10-K filed by the registrant on March 9, 2001)*




10.8		Amended and Restated 1994 Stock Option and Incentive Plan (SF) (incorporated by reference from Exhibit 10.8 to the Form 10-K filed by the registrant on March 9, 2001)*



10.9		Amended and Restated 1989 Stock Incentive Plan (SB) (incorporated by reference from Exhibit 10.9 to the Form 10-K filed by the registrant on March 9, 2001)*




10.10		Amended and Restated Stock Option and Incentive Plan (SG) (incorporated by reference from Exhibit 10.10 to the Form 10-K filed by the registrant on March 9, 2001)*




10.11		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)*




10.12		FirstMerit Corporation 1997 Omnibus Incentive Plan (SG) (incorporated by reference from Exhibit 10.12 to the Form 10-K filed by the registrant on March 9, 2001)*




10.13		FirstMerit Corporation 1993 Stock Option Plan (FSB) (incorporated by reference from Exhibit 10.13 to the Form 10-K filed by the registrant on March 9, 2001)*




10.14		Amended and Restated Executive Deferred Compensation Plan (incorporated by reference from Exhibit 10.14 to the Form 10-K/A filed by the registrant on April 30, 2001)*




10.15		Amended and Restated Director Deferred Compensation Plan (incorporated by reference from Exhibit 10.15 to the Form 10-K/A filed by the registrant on April 30, 2001)*




10.16		Executive Supplemental Retirement Plan (incorporated by reference from Exhibit 10(d) to the Form 10-K filed by the registrant on March 15, 1996)*




10.17		Form of 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)*




10.18		Unfunded Supplemental Benefit Plan (incorporated by reference from Exhibit 10.11 to the Form 10-K filed by the registrant on February 24, 1998)*




10.19		First Amendment to the Unfunded Supplemental Benefit Plan (incorporated by reference from Exhibit 10(v) to the Form 10-K filed by the registrant on March 2, 1995)*




10.20		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)*




10.21		Long Term Disability Plan (incorporated by reference from Exhibit 10(x) to the Form 10-K filed by the registrant on March 2, 1995)*




10.22		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)*




10.23		Amended and Restated Employment Agreement of John R. Cochran (incorporated by reference from Exhibit 10.24 to the Form 10-K/A filed by the Registrant on April 30, 2001)*




10.24		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)*




10.25		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)*




10.26		Second Amendment to Restricted Stock Award Agreement for John R. Cochran (incorporated by reference from Exhibit 10.27 to Form 10-K/A filed by the registrant on April 30, 2001)*




10.27		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)*




10.28		First Amendment to Restricted Stock Award Agreement for John R. Cochran (incorporated by reference from Exhibit 10.29 to the Form 10-K/A filed by the registrant on April 30, 2001)*




10.29		Amended and Restated SERP Agreement for John R. Cochran (incorporated by reference from Exhibit 10.30 to the Form 10-K/A filed by the registrant on April 30, 2001)*







10.30		Form of FirstMerit Corporation Change in Control Termination Agreement (incorporated by reference from Exhibit 10.32 to the Form 10-K filed by the Registrant on March 9, 2001)*




10.31		Form of FirstMerit Corporation Displacement Agreement (incorporated by reference from Exhibit 10.33 to the Form 10-K filed by the registrant on March 9, 2001)*




10.32		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)*




10.33		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 9, 2001)*




10.34		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) *




10.35		Employment Agreement of David G. Lucht dated May 16, 2002. *




10.36		Restricted Stock Award Agreement of David G. Lucht dated May 16, 2002.*




21		Direct and Indirect subsidiaries of FirstMerit Corporation (incorporated by reference from Exhibit 10.38 to the Form 10-K filed by the Registrant on March 8, 2002)




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)

* Management Contract or Compensatory Plan or Arrangement

(b) Form 8-K

There were no Form 8-K filings during the second quarter 2002. Registrant filed on August 13, 2002, a Form 8-K for the purpose of filing certifications of its Chief Executive Officer and Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	FIRSTMERIT CORPORATION

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

DATE: August 13, 2002

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(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.