SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED
March 31, 2004

COMMISSION FILE NUMBER 0-10161

FIRSTMERIT CORPORATION

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
April 30, 2004
84,806,007

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES x NO o

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 o

FIRSTMERIT CORPORATION

CONSOLIDATED BALANCE SHEETS
FIRSTMERIT CORPORATION AND SUBSIDIARIES

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

CONSOLIDATED STATEMENTS OF INCOME
FIRSTMERIT CORPORATION AND SUBSIDIARIES

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

CONSOLIDATED STATEMENT OF CASH FLOWS
FIRSTMERIT CORPORATION AND SUBSIDIARIES

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

FirstMerit Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2004 (unaudited) (Dollars in thousands)

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. The Corporation’s other subsidiaries include Citizens Savings Corporation of Stark County, FirstMerit Capital Trust I, FirstMerit Community Development Corporation, FirstMerit Credit Life Insurance Company, FMT, Inc., SF Development Corp and Realty Facility Holdings XV, L.L.C.

     The consolidated balance sheet at December 31, 2003 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 March 31, 2004 and 2003, and for the three months ended March 31, 2004 and March 31, 2003 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, 2003.

2. Recent Accounting Pronouncements — During December 2003 the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 132 (revised 2003) “Employers’ Disclosure about Pensions and other Postretirement Benefits an Amendment of FASB Statements No. 87, 88, and 106.” This statement revised employers’ disclosures about pension plans and other postretirement benefit plans. It did not change the measurement or recognition of those plans required by SFAS No. 87 “Employers’ Accounting for Pensions,” No. 88 “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” and No. 106 “Postretirement Benefits Other than Pensions.” This statement retains the disclosure requirements contained in the original SFAS No. 132 and requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. These additional disclosures have been included in Note 11 of these consolidated financial statements.

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS No. 148 is an amendment of SFAS No. 123 (“Accounting for Stock-Based Compensation”) and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Corporation currently accounts for stock-based employee compensation under the provisions of Accounting Principles Board (“APB”) No. 25 “Accounting for Stock Issued to Employees” and related interpretations. No stock based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

The following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of SFAS No. 123 to stock based employee compensation. The Black-Scholes option-pricing model was used to estimate the fair market value of the options at the date of grant. This model was originally developed for use in estimating the fair value of traded options, which have different characteristics from the Corporation’s employee stock options. The model is also sensitive to changes in subjective assumptions, which can materially affect fair value estimates. As a result, management believes that the Black-Scholes model may not necessarily provide a reliable single measure of the fair value of employee stock options. Other models are currently under review and may be used by the Corporation for future disclosure.

In December 2003, President Bush signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“Modernization Act”), which introduces a prescription drug benefit under Medicare, into law. On January 12, 2004, FASB issued FASB Staff Position FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP FAS 106-1”) which permits companies to elect to defer accounting for the effects of the Modernization Act. The Company has not elected this deferral and has recognized the effect of the Modernization Act in the calculation of its postretirement benefit liability as of January 1, 2004. This change is more fully described in Note 11 (Benefit Plans) of the first quarter 2004 Form 10-Q.

3. 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, mortgage servicing rights, derivative instruments and hedging activities, and pension and postretirement benefits 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. Note 1 (Summary of Significant Accounting Policies) and Note 5 (Allowance for Loan Losses), as described in the 2003 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 Note 1, as well as in Note 11 (Federal Income Taxes) as described in the 2003 Form 10-K. Within the “Other Income” section of the first quarter 2004 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 2003 Form 10-K in Note 1 and Note 6 (Mortgage Servicing Rights and Mortgage Servicing Activity). Derivative instruments and hedging activities are described more fully in Note 10 (Accounting for Derivatives) of the first quarter 2004 Form 10-Q as well as Note 1, Note 16 (Fair Value Disclosure of Financial Instruments), and Note 17(Financial Instruments with Off-Balance-Sheet Risk) of 2003 Form 10-K. A description of the plans and the assumptions used to estimate the liabilities for pension and postretirement benefits is described in Note 12 (Benefit Plans) to the 2003 Form 10-K as well as Note 11 (Benefit Plans) to the first quarter 2004 Form 10-Q.

4. 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:

     Expected maturities will differ from contractual maturities based on the issuers’ rights to call or prepay obligations with or without call or prepayment penalties. Securities with remaining maturities over five years consist of mortgage and asset backed securities.

     The carrying amount of investment securities pledged to secure trust and public deposits and for purposes required or permitted by law amounted to approximately $2.0 billion at March 31, 2004, $2.0 billion at December 31, 2003, and $1.8 billion at March 31, 2003.

     5. Allowance for loan losses (“ALL”) — The Corporation’s Credit Policy Division manages credit risk by establishing common credit policies for its subsidiary banks, participating in approval of their 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 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 quarters of the current and prior year is shown in the following table:

Allowance for Loan Losses Activity
Dollars in thousands

       During the quarter ended March 31, 2004, the Corporation strengthened the allowance for loan losses by providing an additional $22.7 million above the quarter’s net charge offs. During the quarter, we observed that rising input costs such as plastic resins, steel and petroleum might impact certain segments of our commercial and industrial loan portfolio. We also observed a higher level of nonaccrual loans from within our previously identified criticized loan levels. These observations led us to change some of the assumptions utilized in the Corporation’s allowance for loan loss methodology. Most notably, we shortened the historical period used for estimating loss migration factors, which had the effect of more heavily weighting recent loss history in the portfolio. Note 1 (Summary of Significant Accounting Policies) and Note 4 (Allowance for Loan Losses) in the 2003 Form 10-K more fully describe the components of the model.

The components of the additional provision consisted of $5.1 million for specific reserves on individually analyzed commercial credits, $21.5 million for the commercial and industrial pools, and offset by $3.9 million of improvement in the retail loan pools.

6. Asset Quality — Nonperforming assets are defined by the Corporation as nonaccrual loans, restructured loans, and other real estate (“ORE”). 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.

Nonperforming Assets
(Dollars in thousands)

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.

7.  Goodwill and Intangible Assets — The following table summarizes goodwill and intangible assets as follows:

Amortization expense for intangible assets was $0.22 million for both quarters ending March 31, 2004 and 2003. The following table shows the estimated future amortization expense for deposit base intangibles based on existing asset balances at December 31, 2003.

During the first quarter of 2004, the Corporation conducted its annual impairment testing as required under SFAS No. 142 “Goodwill and other Intangible Assets,” and concluded that goodwill was not impaired. There have been no events subsequent to that date which would change the conclusions reached.

8.

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

     For the three months ended March 31, 2004 and 2003, options to purchase 1.9 million and 4.9 million shares, respectively were outstanding but not included in the computation of diluted earnings per share because they were antidilutive.

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 nonbanking 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 following tables present a summary of financial results as of and for the three-month periods ended March 31, 2004 and 2003:

10. Accounting for Derivatives — The Corporation follows the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), in accounting for its derivative activities. At March 31, 2004, the Corporation had various interest rate swaps in place that were accounted for as fair value hedges under SFAS No. 133 since their purpose is to “swap” fixed interest rate liabilities and assets to a variable

interest rate basis. All but one of the interest rate swaps are associated with the Corporation’s fixed-rate commercial loan swap program that was initiated during the first quarter of 2003 and the remaining interest rate swap converts the fixed interest rate of mandatorily redeemable trust preferred securities to a variable rate. All of these interest rate swaps, with the exception of the one associated with the mandatorily redeemable trust preferred securities, qualify for the “shortcut method of accounting” as prescribed in SFAS No. 133. The shortcut method requires that the hedge and the hedged item meet certain qualifying criteria. If the swap qualified for shortcut accounting treatment then no hedge ineffectiveness can be assumed and the need to test for ongoing effectiveness is eliminated. For hedges that qualify for shortcut accounting treatment, the fair value of the swap and the fair value of the hedged item are recorded on the balance sheet and statement of consolidated income and comprehensive income. The remaining hedge does not meet all the criteria necessary to be considered for shortcut accounting treatment, and therefore, the “long-haul accounting method” is utilized. The long-haul method requires periodic testing of hedge effectiveness with the portion of the hedge deemed to be ineffective reported in earnings.

     Additionally, in the normal course of business, the Corporation sells originated mortgage loans into the secondary mortgage loan markets. The Corporation maintains a risk management program to protect and manage interest-rate risk and pricing associated with its mortgage commitment pipeline. The Corporation’s mortgage commitment pipeline included interest-rate lock commitments (“IRLCs”) that have been extended to borrowers who have applied for loan funding and met certain defined credit and underwriting standards. During the term of the IRLCs, the Corporation is exposed to interest-rate risk, in that the value of the IRLCs may change significantly before the loans close. To mitigate this interest-rate risk, the Corporation enters into various derivatives by selling loans forward to investors using forward commitments. In accordance with SFAS No. 133, the Corporation classifies and accounts for IRLCs as nondesignated derivatives that are recorded at fair value with changes in value recorded to current earnings. The forward sale commitments used to manage the risk on the ILRCs and on the warehouse loans are also classified and accounted for as nondesignated derivatives and, therefore, recorded at fair value with changes recorded through current period earnings. During 2003, the Corporation implemented a SFAS No. 133 hedging program for its mortgage loan warehouse to gain protection for the changes in fair value of the mortgage loans held for sale and the forward commitments. As such, both the mortgage loans held for sale and the forward commitments are recorded at fair value with changes in value recorded to current earnings.

     In 2003, the Corporation began to enter into derivative contracts by purchasing To Be Announced Mortgage Backed Securities (“TBA Securities”) to help mitigate the interest-rate risk associated with its mortgage servicing rights. Within the “Other Income” section of the first quarter 2004 Form 10-Q and Note 6 to the year-end Form 10-K, the Corporation’s basis for accounting for mortgage service rights is discussed in more detail. In accordance with SFAS No. 133, the Corporation classifies and accounts for the TBA Securities as nondesignated derivatives. Accordingly, the TBA Securities are recorded at fair value with changes in value recorded to current period earnings.

     The effect of the derivatives on the balance sheets and statements of income of the Corporation was not material for any period presented in this report.

     11. Benefit Plans – The Corporation sponsors several qualified and nonqualified pension and other postretirement benefit plans for certain of its employees. The net periodic benefit cost is based on estimated values provided by independent actuaries. The components of net periodic benefit cost are as follows:

     As disclosed in its Form 10-K for the year ended December 31, 2003, the Corporation does not expect to make a contribution to its pension plans or postretirement benefit plan during 2004. On December 8, 2003, President Bush signed the Medicare Prescription Drug, Improvement and Modernization Act into law. This law provides for a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the benefit established by the law. The federal subsidy in the law results in a $1.6 million reduction in our OPEB benefit obligation. Concurrently, the Corporation amended its postretirement benefits plan to limit and cap benefits prospectively. The total impact of both changes on our actuarial liability was $13.6 million and is being accounted for as an actuarial gain that will be amortized as a reduction of our periodic cost (expense) and balance sheet liability. Specific authoritative guidance, when issued by the FASB, could require us to re-determine the accounting for the impact of the legislation. The full year impact for 2004 is anticipated to be $2.2 million, and $0.5 million for the quarter ending March 31, 2004.

12. 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.

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

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

RESULTS OF OPERATIONS

     FirstMerit Corporation reported first quarter 2004 net income of $12.7 million, or $0.15 per diluted share (“EPS”), compared to $38.3 million, or $0.45 per diluted share for the 2003 first quarter. The Company strengthened reserves by recording a $22.7 million provision for loan losses above net charge-offs for the first quarter of 2004. This action resulted in a total provision for loan losses of $41.0 million compared to $23.5 million for the prior-year period.

     For the first quarter of 2004, annualized returns on average equity (“ROE”) and average assets (“ROA”) were 5.10% and 0.49%, respectively, compared with 15.98% and 1.46% for the prior-year quarter.

     Total operating revenue, which consists of net interest income on a fully-tax equivalent (“FTE”) basis plus non-interest income, excluding gains from the sale of securities, was $135.5 million for the first quarter of 2004, compared to $151.4 million reported in the prior-year quarter. The decline in revenue this quarter primarily reflects the decrease in earning assets resulting from fourth quarter 2003 sale of the $621 million manufactured housing loan portfolio, as well as reduced mortgage banking activity. FTE net interest income declined 12.4% to $89.7 million, reflecting the impact of a 47 basis point decline in the net interest margin to 3.74% and a 2.2% decline in average earning assets to $9.7 billion. The sale of the higher-yield portfolio of manufactured housing loans changed the earning asset mix that, as anticipated, also affected the net interest margin.

     Non-interest income for the first quarter of 2004 totaled $45.9 million, compared to $51.9 million for the first quarter of 2003. Excluding securities gains and income from the Company’s discontinued manufactured housing business, non-interest income was $45.7 million in the first quarter of 2004 and $48.4 in the same period last year, a decline of 5.6%. The decline resulted primarily from reduced loan sales and servicing income from a lower level of mortgage banking activity, partially offset by gains in trust revenue, investment services, service charges on deposit accounts and other operating income.

     The Company reported $77.1 million of non-interest expenses for the first quarter of 2004, compared to $73.9 million for the first quarter of 2003, an increase of 4.3%, primarily reflecting a 7.3% increase in salary and benefits expenses for increased personnel associated with recently implemented retail initiatives. Excluding salary expenses, non-interest expenses rose 1.3%. The efficiency ratio rose to 56.7% from 48.7% in the prior-year quarter mainly as a result of the lower level of revenue reported in the first quarter of 2004.

     As of March 31, 2004, nonperforming assets were $88.5 million, or 1.36% of period-end loans plus ORE, compared to $81.2 million, or 1.24%, for the linked quarter and $87.6 million or 1.23%, twelve months ago. The higher level of nonperforming assets reflects a weakening of previously identified criticized loans, rather than newly identified problem credits. Net charge-offs for the first quarter were $18.3 million, compared to $26.2 million for the linked quarter and $27.3 million for the prior-year period. Excluding net charge-offs of manufactured housing loans, net charge-offs were $18.4 million, $22.5 million and $22.0 million for the three respective quarters. All categories of retail charge-offs showed improvement compared to last year’s first quarter; these trends are expected to continue. Annualized net charge-offs for the first quarter of 2004 were 1.13% of average loans compared to 1.48% for the linked quarter and 1.54% for the first quarter of 2003.

     Assets at March 31, 2004 totaled $10.5 billion, a 1.0% decrease from March 31, 2003. The decline primarily reflects the sale of the Company’s $621 million manufactured housing loan portfolio in the fourth quarter of 2003 as well as a 2.5% decline in commercial loans. Consumer and mortgage loans, areas that the Company has focused on most recently, grew 5.8% and 15.0%, respectively.

     Deposits totaled $7.4 billion at March 31, 2004, a decline of 4.3% over the last twelve month. Time deposits declined 18.1% while lower-cost core deposits increased 6.6%. Core deposits now account for 62.3% of deposits, compared to 55.9% at March 31, 2003.

     Shareholders’ equity was $1.0 billion on March 31, 2004. The Corporation’s capital position remains strong; tangible equity to assets was 8.32% at quarter end compared to 7.97% for the prior-year quarter end. Common dividends per share were $0.26 for the quarter, a $0.01 increase from the prior-year quarter. Period-end common shares outstanding were 84.8 million.

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, securities sold under agreements to repurchase and wholesale borrowings). Net interest income for the quarter ended March 31, 2004 was $89.0 million compared to $101.7 million for the three months ended March 31, 2003. The $12.7 million decline in net interest income occurred because the $11.0 million decline in interest expense, compared to the same quarter last year was less than the $23.7 million decline in interest income during the same period. For the purpose of this remaining discussion, net interest income is presented on a fully tax-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. Net interest income presented on a FTE basis is a non-GAAP financial measure widely used by financial services corporations. The FTE adjustment for March 31, 2004 was $0.69 million and $0.66 million for corresponding 2003 period.

     FTE net interest income for the quarter ended March 31, 2004 was $89.7 million compared to $102.4 million for the three months ended March 31, 2003. The $12.7 million decline in FTE net interest income occurred because the $11.0 million decline in interest expense, compared to the same quarter last year, was less than the $23.7 million decline in interest income during the same period. As illustrated in the following rate/volume analysis table, interest income and interest expense both declined due to the historic or near historic low interest rate environment.

     As illustrated in the following table, the lower amounts of interest income recorded in the 2004 first quarter compared to the same 2003 period, was primarily rate driven as lower yields on investment securities and loans lessened interest income by $2.8 million and $15.1 million, respectively, during those periods. The table also depicts similar three-month declines in interest expense, again caused by the continued drop in interest rates from 2003 through the first quarter of 2004. The lower rates paid on customer deposits and wholesale borrowings in the 2004 quarter compared to the same 2003 period, decreased interest expense by $7.1 million.