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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 0-10161
FIRSTMERIT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO
------------------------------------------------------
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
34-1339938
------------------------------------------------------
(I.R.S. EMPLOYER IDENTIFICATION NO.)
III CASCADE PLAZA, AKRON, OHIO 44308 (330) 996-6300
- ------------------------------------- ---------- ------------------
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) (TELEPHONE NUMBER)
OFFICES)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
and
PREFERRED SHARE PURCHASE RIGHTS
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. YES [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the approximate aggregate market value of the voting stock held by
non-affiliates of the registrant as of February 1, 1999: $1,909,214,509.
Indicate the number of shares outstanding of registrant's common stock as
of February 1, 1999: 74,110,408 Shares of Common Stock, without Par Value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of FirstMerit Corporation, dated March 17,
1999, in Part III.
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PART I
ITEM 1. BUSINESS
BUSINESS OF FIRSTMERIT
OVERVIEW
Registrant, FirstMerit Corporation ("FirstMerit" or the "Corporation"), is
a bank holding company organized in 1981 under the laws of the State of Ohio and
registered under the Bank Holding Company Act of 1956, as amended (the "BHCA").
FirstMerit's principal business consists of owning and supervising its
affiliates. Although FirstMerit directs the overall policies of its affiliates,
including lending practices and financial resources, most day-to-day affairs are
managed by their respective officers. The principal executive offices of
FirstMerit are located at III Cascade Plaza, Akron, Ohio 44308, and its
telephone number is (330) 996-6300.
At December 31, 1998, FirstMerit Bank, N.A., one of the Corporation's
principal subsidiaries ("FirstMerit Bank"), operated a network of 153 full
service banking offices and 174 automated teller machines. Its offices span a
total of 14 counties in Ohio, including Ashtabula, Cuyahoga, Delaware, Erie,
Franklin, Geauga, Lake, Lorain, Madison, Medina, Portage, Stark, Summit and
Wayne Counties. FirstMerit serves over 450,000 households and businesses in the
14th largest consolidated metropolitan statistical area ("MSA") in the country
(which combines the primary MSAs for Cleveland, Lorain/Elyria and Akron, Ohio).
FirstMerit Bank has the leading market share in Summit, Medina, Stark and Lorain
counties in Ohio.
Signal Corp was merged with and into FirstMerit on February 12, 1999.
Signal Corp was a bank holding company which had as its primary wholly-owned
subsidiaries Signal Bank, N.A., a national bank, Summit Bank, N.A., a national
bank, First Federal Savings Bank of New Castle, a federal savings bank and
Mobile Consultants, Inc., a broker and servicer of manufactured housing finance
contracts. Since that acquisition, FirstMerit Bank also has the leading market
share in Wayne County, Ohio, and one of the three highest market share positions
in 11 of the 22 counties in which it operates. See "Business -- Recent
Transactions."
SUBSIDIARIES AND OPERATIONS
Through its affiliates, FirstMerit operates primarily as a regional banking
organization, providing a wide range of banking, fiduciary, financial, insurance
and investment services to corporate, institutional and individual customers
throughout northeastern and central Ohio. FirstMerit's largest subsidiary is
FirstMerit Bank into which FirstMerit has merged all of its subsidiary banks.
FirstMerit Bank engages in commercial and consumer banking in its
respective geographic markets. Commercial and consumer banking generally
consists of the acceptance of a variety of demand, savings and time deposits and
the granting of commercial and consumer loans for the financing of both real and
personal property. As part of its community banking philosophy, FirstMerit Bank
has divided its markets into eight geographic areas which are designated as
follows: FirstMerit Bank/Akron, FirstMerit Bank/Citizens (Canton), FirstMerit
Bank/ Cleveland, FirstMerit Bank/Columbus, FirstMerit Bank/Elyria, FirstMerit
Bank/Old Phoenix (Medina), FirstMerit Bank/Wayne County (Wooster) and FirstMerit
Bank/Peoples (Mentor). Each of these regional operations is headed by a
president and local community board. This strategy allows FirstMerit Bank to
deliver a broad line of financial products and services with a community
orientation and a high level of personal service. FirstMerit can therefore offer
a wide range of specialized services tailored to specific markets in addition to
the full range of customary banking products and services. These services
include personal and corporate trust services, personal financial services, cash
management services and international banking services.
Other services provided by FirstMerit Bank or its affiliates include
automated banking programs, credit cards, rental of safe deposit boxes, letters
of credit, leasing, discount brokerage and credit life insurance. FirstMerit
Bank also operates a trust department, which offers estate and trust services.
The majority of its customers is comprised of consumers and small and medium
size businesses. FirstMerit Bank is not engaged in lending outside the
continental United States and is not dependent upon any one significant customer
or specific industry.
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FirstMerit's non-banking direct and indirect subsidiaries provide insurance
sales services, credit life, credit accident and health insurance, securities
brokerage services, equipment lease financing and other financial services.
FirstMerit's principal direct operating subsidiaries other than FirstMerit
Bank include FirstMerit Credit Life Insurance Company and FirstMerit Community
Development Corporation. FirstMerit Credit Life Insurance Company was formed in
1985 to underwrite credit life and credit accident and health insurance in
connection with the extension of credit to its customers. FirstMerit Community
Development Corporation was organized in 1994 to further FirstMerit's efforts in
identifying the credit needs of its lending communities and meeting the
requirements of the Community Reinvestment Act ("CRA"). Congress enacted CRA to
ensure that financial institutions meet the deposit and credit needs of their
communities. Through a community development corporation, financial institutions
can fulfill these requirements by nontraditional activities such as acquiring,
rehabilitating or investing in real estate in low to moderate income
neighborhoods, and promoting the development of small business.
FirstMerit Bank is the parent corporation of several wholly-owned Ohio
corporations. In 1995, FirstMerit Mortgage Corporation ("FirstMerit Mortgage"),
which is located in Canton, Ohio, was organized and capitalized. FirstMerit
Mortgage originates residential mortgage loans and provides mortgage loan
servicing for itself and FirstMerit Bank. In 1993, FirstMerit Leasing Company
("FirstMerit Leasing") and FirstMerit Securities, Inc. ("FirstMerit Securities")
were organized. FirstMerit Leasing provides equipment lease financing and
related services, while FirstMerit Securities offers discount brokerage services
to customers of FirstMerit Bank and other FirstMerit subsidiaries.
FirstMerit Bank is also the parent corporation of Abell & Associates, Inc.
("Abell") a nationally-known life insurance and financial consulting firm
acquired in May 1997, and FirstMerit Insurance Agency, Inc. Abell assists in the
design and funding of estate plans, corporate succession plans and executive
compensation plans. The firm also does consulting work for law and accounting
firms, as well as individual corporations, concentrating on funding for
corporate liability issues. FirstMerit Insurance Agency, Inc. became a
subsidiary of FirstMerit Bank when FirstMerit acquired Great Northern Financial
Corporation in 1994 (at which time its life insurance license was inactive).
FirstMerit Insurance Agency, Inc.'s license to sell life insurance products and
annuities was reactivated in 1997.
Although FirstMerit is a corporate entity legally separate and distinct
from its affiliates, bank holding companies such as FirstMerit, which are
subject to the BHCA, are expected to act as a source of financial strength for
their subsidiary banks. The principal source of FirstMerit's income is dividends
from its subsidiaries. There are certain regulatory restrictions on the extent
to which financial institution subsidiaries can pay dividends or otherwise
supply funds to FirstMerit.
RECENT TRANSACTIONS
FirstMerit engages in discussions concerning possible acquisitions of other
financial institutions and financial services companies on a regular basis.
FirstMerit also periodically acquires branches and deposits in its principal
markets. FirstMerit's strategy for growth includes strengthening market share in
its existing markets, expanding into complementary markets and broadening its
product offerings. Consistent with this strategy, FirstMerit completed two
strategic acquisitions in 1998 and one in early 1999.
CoBancorp Acquisition. FirstMerit completed the acquisition of CoBancorp
Inc., Elyria, Ohio, ("CoBancorp") the parent of PremierBank & Trust and
Jefferson Savings Bank, on May 22, 1998 (the "CoBancorp Merger"). FirstMerit had
entered into an Agreement of Affiliation and Plan of Merger with CoBancorp on
November 2, 1997. Under the terms of the CoBancorp Merger, CoBancorp
shareholders had a right to elect to exchange their common stock for either
Common Stock of FirstMerit, cash, or a combination of Common Stock and cash,
provided that no less than 30% nor more than 49% of the total transaction value
could be paid in cash. The CoBancorp Merger was structured as a tax-free
exchange for CoBancorp shareholders who received FirstMerit Common Stock, and
was accounted for as a purchase transaction. At the effective time of the
CoBancorp Merger, based upon the average closing price of FirstMerit's Common
Stock of $29.375 per share over a specified period, the value of the transaction
on such date was approximately $174.1 million. In connection with the CoBancorp
Merger, FirstMerit issued approximately 3.9 million shares of Common Stock, paid
$50.0
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million in cash (based upon the CoBancorp shareholder elections and
allocations), and assumed merger-related liabilities of approximately $9.6
million. The transaction created goodwill of approximately $136.5 million that
will be amortized primarily over 25 years.
Security First Acquisition. On October 23, 1998, FirstMerit acquired
Security First Corporation ("Security First") pursuant to an Agreement of
Affiliation and Plan of Merger by and between Security First and FirstMerit.
Security First was the parent company of Security Federal Savings and Loan
Association of Cleveland and First Federal Savings Bank of Kent. Pursuant to the
merger agreement, Security First merged with and into FirstMerit in a tax-free,
stock-for-stock exchange (the "Security First Merger"). All shares of Security
First common stock issued and outstanding immediately prior to the effective
time of the Security First Merger were converted into the right to receive
0.8855 of a share of FirstMerit Common Stock. At the effective time of the
Security First Merger, based upon the average closing price of FirstMerit's
Common Stock of $22.58 per share over a specified period, the value of the
transaction on such date was approximately $199.0 million. In connection with
the Security First Merger, FirstMerit issued approximately 7.0 million shares of
Common Stock. The transaction was accounted for as a pooling-of-interests.
At the time FirstMerit announced the Security First Merger, FirstMerit also
announced the termination of a previously initiated stock repurchase program. In
order for the Security First Merger to be treated as a pooling-of-interest for
accounting purposes, FirstMerit reissued approximately 1.38 million shares of
FirstMerit Common Stock through an underwritten public offering which closed on
September 14, 1998.
Signal Corp Acquisition. On August 10, 1998, FirstMerit entered into an
Agreement of Affiliation and Plan of Merger with Signal Corp ("Signal"), a bank
holding company, which had as its primary wholly-owned subsidiaries Signal Bank,
N.A., a national bank, Summit Bank, N.A., a national bank, First Federal Savings
Bank of New Castle, a federal savings bank and Mobile Consultants, Inc., a
broker and servicer of manufactured housing finance contracts. Pursuant to the
merger agreement, Signal merged with and into FirstMerit in a tax-free,
stock-for-stock exchange (the "Signal Merger"). All shares of Signal common
stock issued and outstanding immediately prior to the effective time were
converted into the right to receive 1.32 shares of FirstMerit Common Stock.
FirstMerit issued approximately 16.8 million shares of Common Stock and
approximately 214,000 Shares of FirstMerit 6 1/2% Cumulative Convertible
Preferred Stock, Series B, no par value ("FirstMerit Preferred Stock") in
connection with the merger, and based on the closing price of the Common Stock
on February 12, 1999 of $25.00 per share and the closing price of the FirstMerit
Preferred Stock on February 4, 1999 (the last trade before the merger) of $71.00
per share, the value of the transaction on such date was approximately $436
million. The Signal Merger was accounted for as a pooling-of-interests.
FirstMerit believes that these acquisitions have and will continue to
further strengthen its competitive position in the northeastern and central Ohio
markets and have broadened the financial services it can offer to its customers.
FirstMerit believes it has significant experience in integrating acquired
businesses. FirstMerit continues to explore acquisition opportunities that would
meet its objectives.
COMPETITION
The financial services industry is highly competitive. FirstMerit and its
subsidiaries (the "Subsidiaries") compete with other local, regional and
national providers of financial services such as other bank holding companies,
commercial banks, savings associations, credit unions, consumer and commercial
finance companies, equipment leasing companies, brokerage institutions, money
market funds and insurance companies. The Subsidiaries' primary financial
institution competitors include Bank One, National City Bank, KeyBank, Firstar
Bank and Fifth Third Bank. Mergers between financial institutions within Ohio
and in neighboring states have added competitive pressure, which pressure has
intensified due to interstate banking which became permissible under the
Interstate Banking and Branching Efficiency Act of 1994. FirstMerit competes in
its markets by offering quality and innovative services at competitive prices.
REGULATION AND SUPERVISION
FirstMerit is registered as a bank holding company under the BHCA. Bank
holding companies are subject to regulation by the Federal Reserve. Under
Federal Reserve policy, a bank holding company is expected to act as a source of
financial strength to each subsidiary bank and to commit resources to support
such subsidiary banks.
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The BHCA requires the prior approval of the Federal Reserve in any case where a
bank holding company proposes to acquire direct or indirect ownership or control
of more than five percent (5%) of the voting shares of any bank that is not
already majority-owned by it, or to merge or consolidate with any other bank
holding company.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than five percent of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve has determined to be so closely related
to banking or to managing or controlling banks as to be a proper incident
thereto. The Federal Reserve has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include: operating a savings association, mortgage company, finance
company, credit card company or factoring company; performing certain data
processing operations; providing investment and financial advice; and acting as
an insurance agent for certain types of credit-related insurance.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to the
bank holding company or any of its subsidiaries, on investments in the stock or
other securities of the bank holding company or its subsidiaries and on the
taking of such stock or securities as collateral for loans to any borrower.
Further, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of any services.
On September 29, 1994, President Clinton signed the Interstate Banking and
Branching Efficiency Act of 1994 ("Interstate Act"). The Interstate Act
generally permits nationwide interstate banking and branching commencing one
year after enactment. After that time an "adequately capitalized" and "well
managed" bank holding company may acquire a bank in any state, subject to
certain concentration limitations. No banking organization may control more than
ten percent of deposits nationwide or more than 30.0% of deposits in any one
state. Individual states may waive the 30.0% limitation. As of June 1, 1997,
interstate bank holding companies can consolidate banks they own in multiple
states into a single branch network, or acquire out-of-state banks as branches.
De novo interstate branching is not authorized by the Interstate Act, but states
may specifically authorize it. States may also limit the acquisition of
newly-formed banks for a period of up to five years to restrict effective de
novo branching. The Interstate Act requires CRA compliance by out-of-state
branches and prohibits "deposit production offices" to ensure that local savings
are not diverted to other states. Institutions must maintain a loan
activity-to-deposit ratio within a host state at least equal to one-half of the
average percentage for all banks in the host state, otherwise the institution's
federal regulator may close the out-of-state branch and restrict the institution
from opening new branches in that state. Certain state laws, such as those on
intrastate branching, consumer protection and fair lending, will still apply to
out-of-state banks or branches. FirstMerit management believes that the
Interstate Act may continue to stimulate mergers in the banking industry.
FirstMerit is also under the jurisdiction of the Securities and Exchange
Commission (the "SEC") and certain state securities commissions for matters
relating to the offering and sale of its securities. FirstMerit is subject to
the disclosure and regulatory requirements of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended, as administered by
the SEC.
SUMMARY RESULTS OF OPERATIONS
As of year-end 1998, FirstMerit's consolidated total assets were $7.1
billion. Earnings for FirstMerit in 1998 were $97.5 million, or $1.34 per
diluted share, compared with $95.7 million, or $1.35 per diluted share the year
ended 1997. If merger-related expenses and conforming accounting adjustments of
$12.8 million, after taxes, related to the Security First pooling-of-interests
acquisition are excluded, 1998 earnings would have been $110.3 million, or $1.52
per diluted share. See note 2 to the consolidated financial statements for more
information on merger-related costs and conforming accounting entries. Total
cash dividends paid to shareholders for the entire year were $0.66, an increase
of $0.05 per share over the previously stated annual payments of $0.61. All per
share amounts reflect the two-for-one split that occurred September 29, 1997 for
shareholders of record as of September 2, 1997. Additionally, all prior period
data has been restated to reflect the Security First pooling-of-
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interests and 1998 data also includes the results of the CoBancorp purchase
acquisition from May 22, 1998 through December 31, 1998. Because the
unquantified CoBancorp results of approximately seven months are in 1998 totals
only, almost all 1998 data is greater than prior years' figures.
On a fully-tax equivalent basis, net interest income was $308.9 million, up
8.5% from last year. The net interest margin was 5.04% compared to 5.11% in 1997
as higher earning-asset volumes made up for the decrease in the net interest
margin.
Other income, less securities gains, was $412.7 million for the year, an
increase of $44.5 million or 12% over the prior year figures. The largest gains
in other income over one year ago were experienced in credit card fees, up 40%;
other service fees, up 42%; and other operating income, up 25%. Excluding the
merger-related costs associated with the Security First pooling-of-interests,
other expenses were $232.9 million compared to $204.4 million in 1997. The
thirteen percent increase in operating expenses, offset by growth in net
revenue, kept the efficiency ratio at 55.0% for both 1998 and 1997.
During 1998, the Corporation recorded a provision for loan losses of $28.4
million, including $7.3 million from a conforming accounting adjustment related
to the loans of Security First. Last year's provision for loan losses totaled
$21.9 million. In addition to the conforming adjustment, the provisions for both
years address the continuing shift in FirstMerit's loan portfolio from
residential mortgages into commercial and consumer loans, which historically
have higher loss rates. Nonperforming assets were 0.33% of total loans and other
real estate compared to 0.37% one year ago. The allowance for loan losses as a
percentage of outstanding loans was 1.58% at year-end 1998 and 1.32% at year-end
1997.
ITEM 2. PROPERTIES
FIRSTMERIT CORPORATION
FirstMerit's executive offices and certain holding company operational
facilities, totaling approximately 88,000 square feet, are leased from
FirstMerit Bank. FirstMerit relocated its executive offices in 1994 to III
Cascade, a seven-story office building located in downtown Akron, Ohio. During
1993, a long-term leasehold interest in III Cascade was acquired by an Ohio
general partnership (the "Partnership"), the general partners of which are
FirstMerit and a Delaware corporation subsidiary of Banc One Capital
Corporation. FirstMerit does not control the Partnership. The City of Akron is
the lessor of the property. FirstMerit Bank has subleased all of the premises of
III Cascade from the Partnership, and FirstMerit subleases a portion of the
premises from FirstMerit Bank. The facilities owned or leased by FirstMerit and
its Subsidiaries are considered by management to be adequate, and neither the
location nor unexpired term of any lease is considered material to the business
of FirstMerit.
FIRSTMERIT BANK
The principal executive offices of FirstMerit Bank are located in its
28-story main office building located at 106 South Main Street, Akron, Ohio,
which is owned by FirstMerit Bank. FirstMerit Bank is the principal tenant of
the building occupying approximately one-half of a total of 215,000 square feet
of the building, with the remaining portion leased to tenants unrelated to
FirstMerit Bank. The properties occupied by 79 of FirstMerit Bank's other
branches are owned by FirstMerit Bank, while the properties occupied by its
remaining 73 branches are leased with various expiration dates. There is no
mortgage debt owing on any of the above property owned by FirstMerit Bank.
FirstMerit Bank also owns automated teller machines, on-line teller terminals
and other computers and related equipment for use in its business. In 1996
FirstMerit Bank completed major renovations to its main office building.
FirstMerit Bank renovated all space which it occupies in the building, as well
as all public areas.
FirstMerit Bank also owns 19.5 acres near downtown Akron, on which is
located FirstMerit's Operations Center. The Operations Center is occupied and
operated by FirstMerit Services Division, an operating division of FirstMerit
Bank. The Operations Center primarily provides computer and communications
technology-based services to FirstMerit and the Subsidiaries, and also markets
its services to non-affiliated institutions. There is no mortgage debt owing on
the Operations Center property. In connection with its Operations Center, the
Services Division has a disaster recovery center at a remote site on leased
property.
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The Trust and the Organizational & Development Departments of FirstMerit
Bank are located in Main Place, a four-story office building located in downtown
Akron. These departments occupy approximately 31,830 square feet of leased space
in Main Place.
ITEM 3. LEGAL PROCEEDINGS
The nature of FirstMerit's business results in a certain amount of
litigation. Accordingly, FirstMerit and its subsidiaries are subject to various
pending and threatened lawsuits in which claims for monetary damages are
asserted. Management, after consultation with legal counsel, is of the opinion
that the ultimate liability of such pending matters would not have a material
adverse effect on FirstMerit's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a Special Meeting of Shareholders on December 9, 1998, the Shareholders
of FirstMerit voted (i) to adopt the Signal Merger Agreement, including the
issuance of shares of FirstMerit Common Stock and FirstMerit Preferred Stock,
contemplated thereby ("Proposal I"); and (ii) to set the number of directors at
21, increasing such number by three ("Proposal II"). Of the 52,133,880 votes
cast in person at the meeting or by proxy, 50,326,251 were voted in favor
Proposal I and 50,140,612 were voted in favor of Proposal II; 964,394 were voted
against Proposal I and 1,453,235 were voted against Proposal II; 290,226
abstained with respect to Proposal I and 540,033 abstained with respect to
Proposal II; and there were 553,009 broker non-votes with respect to Proposal I
and no broker non-votes with respect to Proposal II.
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EXECUTIVE OFFICERS OF REGISTRANT
The following persons are the executive officers of FirstMerit as of
December 31, 1998. Unless otherwise designated, they are officers of FirstMerit,
and unless otherwise stated, they have held their indicated positions for the
past five years.
DATE APPOINTED
NAME AGE TO FIRSTMERIT POSITION AND BUSINESS EXPERIENCE
- --------------------------- --- -------------- -----------------------------------------------
Sid A. Bostic 56 02-01-98 President and Chief Operating Officer of
FirstMerit and of FirstMerit Bank since
February 1, 1998; previously Chairman,
President and Chief Executive Officer, Norwest
Bank Indiana, N.A., Fort Wayne, Indiana
John R. Cochran 56 03-01-95 Chairman and Chief Executive Officer of
FirstMerit and of FirstMerit Bank since
February 1, 1998; previously President and
Chief Executive Officer of FirstMerit and
FirstMerit Bank; previously President and Chief
Executive Officer of Norwest Bank Nebraska,
N.A.
John R. Macso 52 11-08-90 Executive Vice President of FirstMerit and
President, FirstMerit Bank Services Division
and Chief Technology Officer, since February 1,
1998; previously President and Chief Executive
Officer of FirstMerit Bank; previously
Executive Vice President of FirstMerit Bank
Robert P. Brecht 49 08-09-91 Executive Vice President of FirstMerit and of
FirstMerit Bank; previously Executive Vice
President of FirstMerit Bank since July 20,
1995; previously President and Chief Executive
Officer of Peoples Bank, N.A.
Jack R. Gravo 52 02-16-95 Executive Vice President of FirstMerit and
Chairman of FirstMerit Mortgage Corporation;
previously Executive Vice President and Chief
Financial Officer of FirstMerit and FirstMerit
Bank; previously President and Chief Executive
Officer of Citizens National Bank since
February 1, 1995; previously President of The
CIVISTA Corporation
Bruce M. Kephart 47 07-25-95 Executive Vice President of FirstMerit and
Regional President of FirstMerit Bank;
previously Vice President, Bank One, Cleveland,
N.A.
Austin J. Mulhern 57 10-23-98 Senior Vice President and Chief Financial
Officer of FirstMerit and FirstMerit Bank;
formerly President and Chief Operating Officer
of Security Federal Savings and Loan
Association of Cleveland
George P. Paidas 52 04-13-94 Executive Vice President of FirstMerit and
Regional President of FirstMerit Bank; formerly
President and Chief Executive Officer of The
Old Phoenix National Bank of Medina
Charles F. Valentine 59 10-23-98 Executive Vice President of FirstMerit and
President and Chief Executive Officer of
FirstMerit Bank Construction Financing
Division; formerly Chairman and Chief Executive
Officer of Security First Corp. and Security
Federal Savings and Loan Association
Gregory R. Bean 47 04-10-91 Senior Vice President of FirstMerit; Senior
Vice President and Senior Trust Officer of
FirstMerit Bank
Gary J. Elek 47 02-11-88 Senior Vice President and Treasurer of
FirstMerit and Senior Vice President of
FirstMerit Bank
Terry E. Patton 50 04-10-85 Senior Vice President, Counsel and Secretary of
FirstMerit and FirstMerit Bank
William E. Stansifer 51 10-02-95 Senior Vice President of FirstMerit and
FirstMerit Bank; previously Senior Vice
President, Banking Credit Policy Office,
Norwest Corporation
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The outstanding shares of FirstMerit Common Stock are quoted on The Nasdaq
Stock Market National Market System. The following table contains bid and cash
dividend information for FirstMerit Common Stock for the two most recent fiscal
years:
STOCK PERFORMANCE AND DIVIDENDS(1)
BIDS PER SHARE
QUARTER HIGH DIVIDEND BOOK
ENDING ------ LOW RATE VALUE(2)
03-31-97 $21.38 17.38 0.1450 $8.33
06-30-97 25.25 19.25 0.1450 8.40
09-30-97 27.00 22.63 0.1600 8.49
12-31-97 30.75 24.88 0.1600 8.67
03-31-98 34.38 25.88 0.1600 8.54
06-30-98 33.75 27.25 0.1600 9.91
09-30-98 31.00 21.38 0.1600 10.41
12-31-98 28.13 20.75 0.1800 10.38
(1) This table sets forth the high and low closing bid quotations, dividend
rates and book values per share for the calendar periods indicated. These
quotations furnished by the National Quotations Bureau Incorporated,
represent prices between dealers, do not include retail markup, markdowns,
or commissions, and may not represent actual transactions.
(2) Based upon number of shares outstanding at the end of each quarter.
On February 1, 1999 there were approximately 8,780 shareholders of record
of FirstMerit Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Results of Operations
Interest income....................... $ 503,097 463,540 460,923 460,220 410,428
Conversion to fully-tax equivalent.... 3,492 3,212 3,043 3,840 4,590
---------- --------- --------- --------- ---------
Interest income*...................... 506,589 466,752 463,966 464,060 415,018
Interest expense...................... 197,651 181,935 186,336 203,541 158,304
---------- --------- --------- --------- ---------
Net interest income*.................. 308,938 284,817 277,630 260,519 256,714
Provision for possible loan losses.... 28,383 21,903 18,074 20,140 5,206
Other income.......................... 110,480 85,336 84,194 70,216 72,074
Other expenses........................ 242,723 204,386 224,911 241,146 205,419
---------- --------- --------- --------- ---------
Income before federal income taxes*... 148,312 143,864 118,839 69,449 118,163
Federal income taxes.................. 47,342 44,978 38,446 34,284 35,524
Fully-tax equivalent adjustment....... 3,492 3,212 3,043 3,840 4,590
---------- --------- --------- --------- ---------
Federal income taxes*................. 50,834 48,190 41,489 38,124 40,114
Income before extraordinary item........ 97,478 95,674 77,350 31,325 78,049
Extraordinary item -- gain on
disposition of assets after
combination (net of tax effect)....... -- -- -- 5,599 --
---------- --------- --------- --------- ---------
Net income(a)........................... $ 97,478 95,674 77,350 36,924 78,049
========== ========= ========= ========= =========
8
10
YEARS ENDED,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Per share:
Income before extraordinary item... $ 1.37 1.38 1.08 0.43 1.10
Extraordinary item (net of tax
effect).......................... -- -- -- 0.08 --
---------- --------- --------- --------- ---------
Basic net income(a)................ $ 1.37 1.38 1.08 0.51 1.10
========== ========= ========= ========= =========
Diluted net income(a).............. $ 1.34 1.35 1.06 0.50 1.09
========== ========= ========= ========= =========
Cash dividends..................... $ 0.66 0.61 0.55 0.51 0.49
Dividend payout ratio................. 48.14% 44.25% 51.05% 119.27% 44.40%
Average Ratios
Return on total assets(a)............. 1.47% 1.61% 1.27% 0.60% 1.33%
Return on shareholders' equity(a)..... 14.26% 16.44% 13.23% 6.36% 13.92%
Shareholders' equity to total
assets............................. 10.35% 9.82% 9.62% 9.40% 9.55%
Balance Sheet Data
Total assets (at year end)............ $7,127,148 5,992,943 5,862,741 6,143,748 6,230,324
Daily averages:
Total assets....................... $6,609,659 5,925,238 6,075,967 6,180,666 5,873,559
Earning assets..................... 6,130,813 5,577,001 5,721,386 5,792,121 5,510,376
Deposits and other funds........... 5,822,864 5,241,547 5,412,169 5,525,646 5,256,946
Shareholders' equity............... 683,809 582,029 584,469 580,725 560,821
- ---------------
*Fully-tax equivalent basis
(a) The 1998 net income, the provision for possible loan losses, other expenses,
and the profitability ratios shown include merger-related expenses
associated with the Security First pooling-of-interests acquisition of $12.8
million after taxes. These same results, restated to exclude the
merger-related expenses, can be found in the "Earnings Summary" section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The results for 1996 include a one-time Savings Association
Insurance Fund ("SAIF") assessment of $10.2 million before taxes or $6.7
million after taxes. In addition to the extraordinary gain shown in the
table, results for 1995 include several one-time charges totaling $30.0
million before taxes. The charges related to the CIVISTA acquisition,
overall reengineering costs to improve operating efficiencies and various
other items.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE YEARS 1998, 1997, 1996
The following commentary presents management's discussion and analysis of
the Corporation's financial condition and results of operations. The review
highlights the principal factors affecting earnings and the significant changes
in balance sheet items for the years 1998, 1997 and 1996. Financial information
for prior years is presented when appropriate. The objective of this financial
review is to enhance the reader's understanding of the accompanying tables and
charts, the consolidated financial statements, notes to financial statements,
and financial statistics appearing elsewhere in this report. Where applicable,
this discussion also reflects management's insights of known events and trends
that have or may reasonably be expected to have a material effect on the
Corporation's operations and financial condition.
All financial data has been restated to give effect to acquisitions
accounted for on a pooling of interests basis and stock splits in previous
periods. The results of other bank and branch acquisitions, accounted for as
purchases, have been included effective with the respective dates of
acquisition.
EARNINGS SUMMARY
The Corporation's earnings totaled $110.3 million, or $1.52 per share,
after merger-related expenses of $12.8 million, compared to $95.7 million, or
$1.35 per share, for 1997. Reported net income for 1998, including the
merger-related costs, was $97.5 million, or $1.34 per share. These results
reflect the restatement of both
9
11
years' financial information to account for the acquisition of Security First on
a pooling-of-interests basis. Additionally, 1998 results include the earnings of
CoBancorp, which was accounted for as a purchase transaction, from the merger
date of May 23, 1998. Because results of CoBancorp are included in 1998 totals
for approximately seven months, all individual categories discussed throughout
the Annual Report will have unquantifiable increases over 1997 due solely to the
acquisition.
Excluding the merger-related costs, returns on average equity ("ROE") and
average assets ("ROA") were 16.13% and 1.67% compared to 16.44% and 1.61% for
the prior year. ROE and ROA based on 1998 reported net income of $97.5 million
were 14.26% and 1.47%, respectively.
Net interest income on a fully tax-equivalent basis reached $308.9 million
for the year compared to $284.8 million for 1997, an increase of 8.5%. The
increase occurred because of earning asset volume gains of 9.9%. The net
interest margin declined from 5.11% in 1997 to 5.04% for 1998, due mainly to a
lower interest rate environment.
Adjusted net revenue for 1998 of $412.7 million represents a 12.1% increase
from its year earlier level of $368.2 million. Adjusted net revenue is defined
as net interest income on a tax-equivalent basis added to other income, less
securities gains. The growth in other income and earning assets more than offset
the compression in the net interest margin. Excluding gains from the sale of
securities, other income was $103.8 million, or 24.5% higher than the $83.4
million reported for 1997. Other income now accounts for 25.2% of 1998 net
revenue compared with 22.7% a year ago. Fee improvement was evident
across-the-board as follows: trust fees, up $2.7 million, or 20.3%; credit card
fees, up $5.7 million, or 40%; service charges, up $3.5 million, or 12.7%; other
service fees, up $3.1 million, or 41.5%, and other operating income, up $3.6
million, or 25.1%.
Excluding the $9.8 million pre-tax charge related to the Security First
merger, other expenses totaled $232.9 million for the year compared with $204.4
million for the prior year, an increase of 13.7%. Reported other expenses, when
the merger costs are included, were $242.7 million. Most 1998 expense categories
are consistent with the prior year performance when measured as a percentage of
assets for each period. Amortization of intangibles resulting from the CoBancorp
acquisition has risen sharply, from $2.0 million in 1997 to $6.0 million for
1998. After adjusting for merger-related expenses, the efficiency ratio was
55.0%, same as last year.
The provision for loan losses of $28.4 million includes a merger-related
increase of $7.3 million. Net charge-offs as a percentage of average outstanding
loans totaled 0.35% for 1998 compared to 0.40% last year. At year-end 1998, the
allowance as a percentage of outstanding loans stands at 1.58% compared to the
1997 reserve level of 1.32% of outstanding loans.
The following table summarizes the changes in earnings per share for 1998
and 1997.
CORE* AS REPORTED
----- -----------
1998/ 1998/ 1997/
(DOLLARS) 1997 1997 1996
--------- ----- ----- -----
CHANGES IN EARNINGS PER SHARE
Net income per diluted share for 1997 and 1996,
respectively.................................... $ 1.35 $ 1.35 $ 1.06
Increases (decreases) attributable to:
Net interest income -- taxable equivalent....... 0.34 0.33 0.10
Provision for possible loan losses.............. 0.01 (0.09) (0.05)
Trust services.................................. 0.04 0.04 0.02
Service charges on deposit accounts............. 0.05 0.05 0.03
Credit card fees................................ 0.08 0.08 0.04
Service fees -- other........................... 0.04 0.04 0.02
Securities gains (losses), net.................. 0.07 0.07 0.04
Loan sales and servicing income................. 0.02 0.02 0.02
Other operating income.......................... 0.05 0.05 (0.15)
Salaries and employee benefits.................. (0.16) (0.18) 0.04
Net occupancy expense........................... 0.02 0.01 --
Equipment expense............................... (0.04) (0.04) --
Intangible amortization expense................. (0.06) (0.06) 0.02
10
12
CORE* AS REPORTED
----- -----------
1998/ 1998/ 1997/
(DOLLARS) 1997 1997 1996
--------- ----- ----- -----
SAIF charge..................................... 0.14
Other operating expenses, excluding SAIF........ (0.16) (0.26) 0.08
Federal income taxes -- taxable equivalent...... (0.10) (0.04) (0.09)
Change in share base............................ (0.03) (0.03) 0.03
------ ------ ------
Net change in net income........................ 0.17 (0.01) 0.29
------ ------ ------
Net income per diluted share for 1998 core, 1998
reported and 1997, respectively............... $ 1.52 $ 1.34 $ 1.35
====== ====== ======
- ---------------
*For Management Discussion and Analysis, the term "core" is defined as excluding
merger-related expenses associated with the Security First pooling-of-interests
acquisition. See Note 2 to the consolidated financial statements for further
details.
SUPERCOMMUNITY BANKING RESULTS
The Corporation's operations are managed along its major line of business,
Supercommunity Banking. Note 15 to the consolidated financial statements
provides performance data for this line of business as well as summary
information by product and service group.
NET INTEREST INCOME
Net interest income, the difference between interest and loan fee income on
earning assets and the interest paid on deposits and borrowed funds, is the
principal source of earnings for the Corporation. Throughout this discussion net
interest income is presented on a fully taxable equivalent ("FTE") basis which
restates interest on tax-exempt securities and loans as if such interest were
subject to federal income tax at the statutory rate.
Net interest income is affected by market interest rates on both earning
assets and interest bearing liabilities, the level of earning assets being
funded by interest bearing liabilities, non-interest bearing liabilities and
equity, and the growth in earning assets. The following table shows the
allocation to assets, the source of funding and their respective interest
spreads.
1998
----------------------------------
AVERAGE NET
EARNING INTEREST INTEREST
ASSETS SPREAD INCOME
---------- -------- --------
(DOLLARS IN THOUSANDS)
Interest-bearing liabilities...................... $4,799,955 4.12% 197,758
Non-interest-bearing liabilities and equity....... 1,330,858 8.26%* 111,180
---------- --------
$6,130,813 308,938
========== ========
1997
----------------------------------
AVERAGE NET
EARNING INTEREST INTEREST
ASSETS SPREAD INCOME
---------- -------- --------
Interest-bearing liabilities...................... $4,508,153 4.04% 182,129
Non-interest-bearing liabilities and equity....... 1,068,848 8.37%* 102,688
---------- --------
$5,577,001 284,817
========== ========
1996
----------------------------------
AVERAGE NET
EARNING INTEREST INTEREST
ASSETS SPREAD INCOME
---------- -------- --------
Interest-bearing liabilities...................... $4,667,067 3.99% 186,216
Non-interest-bearing liabilities and equity....... 1,054,319 8.11%* 91,414
---------- --------
$5,721,386 277,630
========== ========
- ---------------
* Yield on earning assets.
11
13
Net interest income, on a fully-tax equivalent basis, increased $24.1
million, or 8.5%, to $308.9 million in 1998 compared to $284.8 million in 1997
and $277.6 million in 1996. The increase over 1997 occurred because the rise in
interest income more than offset the increase in interest expense. Specifically,
interest income rose $39.8 million while interest expense increased $15.7
million, or 8.6%.
Interest income was higher than last year because average earning assets
grew 9.9% or $553.8 million. The increase in average earning assets was
attributable to the CoBancorp, "purchase" acquisition on May 22, 1998 and strong
loan demand. Under "purchase" accounting rules, the results of the acquired
company are included in current year totals from the date of the acquisition
through the end of the year; related prior period totals do not contain the
results of the acquired company. The average yield on earning assets decreased
11 basis points from 8.37% in 1997 to 8.26% during 1998. In summary, higher
earning asset volumes outpaced the decline in earning asset rates resulting in
higher interest income.
Higher interest expense was again volume related as deposits and other
borrowings were used to fund the earning asset growth. Similar to the asset
scenario described in the preceding paragraph, the CoBancorp acquisition played
a large part in the higher funding balances and resultant increase in interest
expense. The cost of funds for the year as a percentage of average earning
assets increased from 4.04% in 1997 to 4.12% this year.
The following table illustrates the specific year-over-year impact to net
interest income based on changes in the rate and volume components of the
interest-earning assets and interest-bearing liabilities.
CHANGES IN NET INTEREST DIFFERENTIAL --
FULLY-TAX EQUIVALENT RATE/VOLUME ANALYSIS
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 AND 1997 1997 AND 1996
-------------------------- --------------------------
INCREASE (DECREASE) IN INCREASE (DECREASE) IN
INTEREST INCOME/EXPENSE INTEREST INCOME/EXPENSE
-------------------------- --------------------------
YIELD/ YIELD/
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------ ------- ------- ------ -------
(DOLLARS IN THOUSANDS)
INTEREST INCOME
Investment securities:
Taxable................................. $ 9,216 (1,698) 7,518 (12,778) 1,428 (11,350)
Tax-exempt.............................. 914 (221) 693 (1,120) 790 (330)
Loans..................................... 36,627 (3,777) 32,850 4,154 8,996 13,150
Federal funds sold........................ (1,239) 15 (1,224) 1,211 105 1,316
------- ------ ------- ------- ------ -------
Total interest income..................... $45,518 (5,681) 39,837 (8,533) 11,319 2,786
------- ------ ------- ------- ------ -------
INTEREST EXPENSE
Interest on deposits:
Demand-interest bearing................. $ (313) (1,902) (2,215) 304 (1,386) (1,082)
Savings................................. 752 4,025 4,777 (2,336) 1,278 (1,058)
Certificates and other time deposits
(CDs)................................ 10,717 (1,409) 9,308 (1,446) (138) (1,584)
Federal funds purchased, securities sold
under agreements to repurchase and other
borrowings.............................. 4,660 (814) 3,846 (1,255) 577 (678)
------- ------ ------- ------- ------ -------
Total interest expense.................... 15,816 (100) 15,716 (4,733) 331 (4,402)
------- ------ ------- ------- ------ -------
Net interest income....................... $29,270 (5,149) 24,121 (3,800) 10,988 7,188
======= ====== ======= ======= ====== =======
- ---------------
Note: The variance created by a combination of rate and volume has been
allocated entirely to the volume column.
The net interest margin is calculated by dividing net interest income FTE
by average earning assets. As with net interest income, the net interest margin
is affected by the level and mix of earning assets, the proportion of earning
assets funded by non-interest bearing liabilities, and the interest rate spread.
In addition, the net interest margin is impacted by changes in federal income
tax rates and regulations as they affect the tax equivalent adjustment.
12
14
The net interest margin for 1998 was 5.04% compared to 5.11% in 1997 and
4.85% in 1996. The decline in the net interest margin compared to last year was
mainly due to falling interest rates during the year (lower interest rate
spread).
1998 1997 1996
---------- ---------- ---------
(DOLLARS IN THOUSANDS)
Net interest income........................... $ 305,446 281,605 274,587
Tax equivalent adjustment..................... 3,492 3,212 3,043
---------- ---------- ---------
Net interest income -- FTE.................... $ 308,938 $ 284,817 277,630
========== ========== =========
Average earning assets........................ $6,130,813 5,577,001 5,721,386
---------- ---------- ---------
Net interest margin........................... 5.04% 5.11% 4.85%
========== ========== =========
OTHER INCOME
Excluding securities gains, other income totaled $103.7 million in 1998, an
increase of $20.3 million or 24.4% over 1997, and $31.4 million over adjusted
1996 which also excludes prior gains of $13.7 million from the sale of branches
and a former bank affiliate. Increases in all categories below occurred because
of the 1998 CoBancorp purchase acquisition as well as continued company emphasis
on improving other income (fee income).
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
Trust fees............................................ $ 16,147 13,442 12,182
Service charges on deposits........................... 31,257 27,717 25,892
Credit card fees...................................... 20,064 14,355 11,415
Service fees -- other................................. 10,493 7,337 6,184
Mortgage sales and servicing.......................... 7,814 6,009 4,863
Securities gains (losses)............................. 6,764 1,957 (1,776)
Gains from branch/subsidiary sales.................... 473 -- 13,700
Other operating income................................ 17,468 14,519 11,734
-------- ------ ------
$110,480 85,336 84,194
======== ====== ======
Trust fees increased $2.7 million or 20.1% to $16.1 million in 1998.
Service charges on deposits rose $3.5 million or 12.8% compared to last year.
Credit card fees increased $5.7 million in 1998 partially due to increased
merchant activity and the CoBancorp acquisition. Other service fees rose $3.2
million, or 43.0% compared to last year; a major component of this category is
ATM fees. Income from mortgage sales and servicing was up $1.8 million, these
gains occur as the Corporation's mortgage company sells mortgage loans to the
secondary market. Securities gains increased $4.8 million, or 245.6% as the
Corporation sold several groups of mortgage-backed securities at gains. The
sales of the mortgage-backed securities occurred as management saw the
opportunity to take gains on sales, to reinvest the proceeds in higher yielding
commercial and consumer credits, and to sell before further "run-off" of these
loans occurred during a high refinancing period. Other operating income was up
$2.9 million mainly because of the CoBancorp acquisition.
Excluding gains from sales of securities, other income was $103.7 million
and now represent 25.2% of net revenue compared to 22.7% last year. Net revenue
is defined as net interest income, on a fully-taxable equivalent basis, plus
other income, less securities gains.
FEDERAL INCOME TAX
Federal income tax expense totaled $47.3 million in 1998 compared to $45.0
million in 1997, and $38.4 in 1996. In 1998 the effective federal income tax
rate for the Corporation equaled 32.7% compared to 32.0% in 1997 and 33.3% in
1996.
13
15
OTHER EXPENSES
Adjusted other expenses, excluding merger-related costs, were $232.9
million in 1998 compared to $202.4 million in 1997 and $214.7 million in 1996,
excluding the $10.2 million pre-tax SAIF assessment. Totals for 1998 include the
results of CoBancorp, Inc. for a little over seven months. In accordance with
purchase accounting rules; prior periods do not include CoBancorp results.
OTHER EXPENSES
REPORTED CORE*
1998 1998 1997 1996
-------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Salaries and wages....................... $ 88,014 86,401 76,486 77,616
Pension and benefits..................... 22,661 22,585 21,014 22,628
-------- ------- ------- -------
Salaries, wages, pension and benefits.... 110,675 108,986 97,500 100,244
Net occupancy expense.................... 17,872 17,180 18,561 19,275
Equipment expense........................ 15,882 15,741 12,717 12,894
Taxes, other than federal income taxes... 7,890 7,890 7,168 7,298
Stationery, supplies and postage......... 10,789 10,774 9,529 11,166
Bankcard, loan processing, and other
fees................................... 24,219 22,703 15,639 13,337
Advertising.............................. 5,416 5,183 6,298 7,303
Professional services.................... 11,683 7,233 5,420 4,834
Telephone................................ 4,722 4,722 3,856 3,654
FDIC assessment, excluding SAIF in
1996................................... 1,473 1,473 1,524 6,162
SAIF assessment.......................... -- -- -- 10,200
Amortization of intangibles.............. 6,002 6,002 1,973 3,255
Other operating expenses................. 26,100 25,053 24,201 25,289
-------- ------- ------- -------
Total other expenses..................... $242,723 232,940 204,386 224,911
======== ======= ======= =======
- ---------------
* Excludes merger-related costs associated with the Security First
pooling-of-interests acquisition. The total pre-tax merger-related costs
incurred were $17.2 million, of which $9.8 million affected Other Expenses as
indicated in the table above. The remaining costs were an increase of $7.3
million to the Provision for Loan Losses and a $0.1 million decline in Other
Income.
Adjusted salaries, wages, pension and benefits totaled $109.0 million in
1998, an increase of $11.5 million or 11.8% from 1997 and 8.8% more than 1996.
Increases over both periods are due to the CoBancorp purchase and employee
annual merit increases.
Adjusted bankcard, loan processing, and other fees increased $7.1 million
to $22.7 million in 1998. The Corporation's efforts to improve the efficiency of
CoBancorp, acquired on May 22, 1998, are still under way.
Amortization of intangible expense during 1998 was $6.0 million, up $4.0
million from 1997 and $2.7 million from 1996. The 1998 increase was due to the
CoBancorp acquisition. The decline in 1997 intangible amortization expense
compared to 1996 occurred as 1996 branch sales, many in the fourth quarter,
lessened goodwill and core deposit intangibles.
Excluding the merger-related expenses, the efficiency ratio for 1998 was
54.98% compared to 54.97% last year. The "lower-is-better" efficiency ratio
indicates the percentage of operating costs that is used to generate each dollar
of net revenue -- that is, during 1998, 54.98 cents was spent to generate $1 of
net revenue.
INVESTMENT SECURITIES
The investment portfolio is maintained by the Corporation to provide
liquidity, earnings, and as a means of diversifying risk. In accordance with the
Financial Accounting Standards Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," securities have been classified as
available-for-sale.
In this classification, adjustment to fair value of the securities
available-for-sale in the form of unrealized holding gains and losses, is
excluded from earnings and reported net of taxes in a separate component of
14
16
shareholders' equity. The adjustments to increase fair value at year-ends 1998
and 1997 were $6.3 million and $5.1 million, respectively.
At year-end 1998, investment securities totaled $1,551.7 million compared
with $1,136.6 million one year earlier, an increase of 36.5%. Investment
securities totaled $1,221.6 million at the end of 1996.
A summary of investment securities' carrying value is presented below as of
year-ends 1998, 1997 and 1996. Presented with the summary is a maturity
distribution schedule with corresponding weighted average yields.
CARRYING VALUE OF INVESTMENT SECURITIES
DECEMBER 31,
------------------------------------
1998 1997 1996
---------- --------- ---------
(DOLLARS IN THOUSANDS)
U.S. Treasury and Government agency
obligations.................................. $660,018 613,584 684,787
Obligations of states and political
subdivisions................................. 98,058 81,611 93,587
Mortgage-backed securities..................... 537,120 341,957 327,800
Other securities............................... 256,531 99,409 115,435
---------- --------- ---------
$1,551,727 1,136,561 1,221,609
========== ========= =========
OVER ONE YEAR OVER FIVE YEARS
ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS OVER TEN YEARS
------------------- ------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELDS AMOUNT YIELDS AMOUNT YIELDS AMOUNT YIELDS
-------- -------- ------- -------- ------- -------- ------- --------
U.S. Treasury securities........ $ 47,332 5.84% 38,138 6.11% -- -- -- --
U.S. Government agency
obligations................... 29,999 5.87% 114,604 5.76% 163,189 5.94% 266,756 5.78%
Obligations of states and
political subdivisions........ 20,723 4.71%* 30,919 4.80%* 32,655 4.68%* 13,761 4.88%*
Mortgage-backed securities...... 1,783 6.41% 13,563 6.84% 59,468 6.15% 462,306 6.54%
Other securities................ 1,591 5.84% 5 5.50% 40,594 4.59% 214,341 6.53%
-------- ---- ------- ---- ------- ---- ------- ----
$101,428 5.63% 197,229 5.75% 295,906 5.66% 957,164 6.30%
======== ==== ======= ==== ======= ==== ======= ====
Percent of total................ 6.54% 12.71% 19.07% 61.68%
======== ======= ======= =======
- ---------------
* Fully-taxable equivalent based upon federal income tax structure applicable at
December 31, 1998.
At year-end 1998, Collateralized Mortgage Obligations ("CMOs") totaled
$348.8 million which represents approximately 22.5% of the investment portfolio.
The duration of total CMOs is slightly less than the total portfolio. The
aggregate book value of all privately issued mortgage-backed securities does not
exceed 10% of shareholders' equity. CMOs which fail the Federal Financial
Institution Examination Council's (FFIEC) high risk stress test total $6.5
million, or 1.9% of the total investment portfolio.
The yield on the portfolio was 6.29% in 1998 compared to 6.49% in 1997 and
6.32% in 1996.
15
17
LOANS
Total loans outstanding at year-end 1998 increased 11.9% compared to one
year ago or $4,997.4 million compared to $4,467.5 million. A breakdown by
category is presented below, along with a maturity summary of commercial,
financial and agricultural loans.
YEAR-ENDS,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Commercial, financial and
agricultural....................... $1,176,904 883,114 755,023 591,435 469,188
Installments to individuals.......... 914,573 871,242 853,882 813,412 818,791
Real estate.......................... 2,753,906 2,569,213 2,460,799 2,665,771 2,616,559
Lease financing...................... 152,013 143,955 159,237 179,951 158,737
---------- --------- --------- --------- ---------
Total loans........................ 4,997,396 4,467,524 4,228,941 4,250,569 4,063,275
Less allowance for possible loan
losses............................. 78,949 58,963 54,304 51,412 40,117
---------- --------- --------- --------- ---------
Net loans....................... $4,918,447 4,408,561 4,174,637 4,199,157 4,023,158
========== ========= ========= ========= =========
YEAR-END 1998
COMMERCIAL, FINANCIAL
AND AGRICULTURAL
-------------------------
Due in one year or less..................................... $ 708,504
Due after one year but within five years.................... 259,444
Due after five years........................................ 208,956
----------
Total.................................................. $1,176,904
==========
Loans due after one year with interest at a predetermined
fixed rate................................................ 150,347
Loans due after one year with interest at a floating rate... 318,045
----------
Total.................................................. $ 468,392
==========
Real estate loans at year-end 1998 totaled $2,753.9 million or 55.1% of
total loans outstanding compared to 57.5% one year ago. Residential loans (1-4
family dwellings) totaled $1,151.0 million, home equity loans $307.5 million,
construction loans $218.1 million and commercial real estate loans $1,077.3
million. The year-end real estate totals point out the shift in the composition
of the Corporation's loan portfolio from residential real estate to higher
yielding commercial and consumer loans.
Commercial real estate loans include both commercial loans where real
estate has been taken as collateral as well as loans for commercial real estate.
The majority of commercial real estate loans are to owner occupants where cash
flow to service debt is derived from the occupying business cash flow instead of
normal building rents. These loans are generally part of an overall relationship
with existing customers primarily within northeast Ohio.
Consumer loans or loans to individuals increased 5.0% compared to last year
and accounted for 18.3% of total loans compared to 19.5% in 1997.
Commercial, financial, and agricultural loans increased 33.3% during 1998
and make-up 23.6% of total outstanding loans compared to 19.8% last year. Again,
the increase in consumer and commercial loans is evidence of FirstMerit's
shifting loan portfolio.
Lease financing loans increased 5.6% during 1998. Auto leases totaled $63.2
million with equipment leasing totaling $84.9 million, and leveraged leases were
$3.9 million at year-end 1998.
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.
ASSET QUALITY
Making a loan to earn an interest spread inherently includes taking the
risk of not being repaid. Successful management of credit risk requires making
good underwriting decisions, carefully administering the loan portfolio and
diligently collecting delinquent accounts.
16
18
The Corporation's Credit Policy Division manages credit risk by
establishing common credit policies for its subsidiary bank, participating in
approval of their largest loans, conducting reviews of their loan portfolios,
providing them with centralized consumer underwriting, collections and loan
operations 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 Corporation adopted Statement of Financial Accounting Standard No.
114,"Accounting by Creditors for Impairment of a Loan," and Statement No. 118,
an amendment of Statement No. 114, "Accounting by Creditors for Impairment of a
loan -- Income Recognition and Disclosures." These statements provide guidance
for determining the allowance for loan loses related to impaired loans and
illustrate the required financial statement disclosures for impaired loans.
Impaired loans are loans for which current information or events, it is probable
that a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Impaired loans must be valued based on
the present value of the loans' expected future cash flows at the loans'
effective interest rates, at the loans' observable market price, or the fair
value of the loan collateral.
NON-PERFORMING ASSETS
Non-performing assets consist of:
- NON-ACCRUAL LOANS on which interest is no longer accrued because its
collection is doubtful.
- RESTRUCTURED LOANS on which, due to deterioration in the borrower's
financial condition, the original terms have been modified in favor of
the borrower or either principal or interest has been forgiven.
- OTHER REAL ESTATE ("ORE") acquired through foreclosure in satisfaction of
a loan.
YEARS ENDED,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Impaired Loans:
Non-accrual......................................... $10,626 11,185 9,579 7,373 10,517
Restructured........................................ 85 89 92 1,548 2,026
------- ------ ------ ------ ------
Total impaired loans.............................. 10,711 11,274 9,671 8,921 12,543
Other Loans:
Non-accrual......................................... 2,388 4,341 2,430 5,924 6,158
Restructured........................................ -- -- -- -- --
------- ------ ------ ------ ------
Total Other non-performing loans.................. 2,388 4,341 2,430 5,924 6,158
------- ------ ------ ------ ------
Total non-performing loans........................ 13,099 15,615 12,101 14,845 18,701
------- ------ ------ ------ ------
Other real estate (ORE)............................... 3,551 909 123 1,098 10,634
Total non-performing assets....................... 16,650 16,524 12,224 15,943 29,335
======= ====== ====== ====== ======
Loans past due 90 days or more accruing interest...... $18,722 11,166 8,380 7,774 3,847
======= ====== ====== ====== ======
Total non-performing assets as a percent of total
loans & ORE......................................... 0.33% 0.37% 0.29% 0.37% 0.71%
======= ====== ====== ====== ======
Under the Corporation's credit policies and practices, all non-accrual and
restructured commercial, agricultural, construction, and commercial real estate
loans, meet the definition of impaired loans under Statement No.'s 114 and 118.
Impaired loans as defined by Statements 114 and 118 exclude certain consumer
loans, residential real estate loans, and leases classified as non-accrual.
Consumer installment loans are charged off when they reach 120 days past due.
Credit card loans are charged off when they reach 180 days past due. When any
other loan becomes 90 days past due, it is placed on non-accrual status unless
it is well secured and in the process of collection. Any losses are charged
against the allowance for possible loan losses as soon as they are identified.
Non-performing assets at year-end 1998 were $16.6 million, $16.5 million at
year-end 1997 and $12.2 million at year-end 1996. As a percentage of total loans
outstanding plus ORE, non-performing assets were
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19
0.33% at year-end 1998 compared to 0.37% in 1997 and 0.29% in 1996. The average
balances of impaired loans for the years ended 1998 and 1997 were $11.0 million
and $10.5 million, respectively.
For the year ended 1998, impaired assets earned $0.4 million in interest
income. Had they not been impaired, they would have earned $1.1 million. For the
same period, total non-performing loans earned $0.7 million in interest income.
Had they been paid in accordance with the payment terms in force prior to being
considered impaired, on non-accrual status, or restructured, they would have
earned $2.2 million.
In addition to non-performing loans and loans 90 days past due and still
accruing interest, Management identified potential problem loans totaling $31.3
million at year-end 1998. These loans are closely monitored for any further
deterioration in the borrowers' financial condition and for the borrowers'
ability to comply with terms of the loans.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Corporation maintains what management believes is an adequate allowance
for possible loan losses. The Corporation and the subsidiary bank regularly
analyze the adequacy of their allowances through ongoing reviews of trends in
risk ratings, delinquencies, non-performing assets, charge-offs, economic
conditions, and changes in the composition of the loan portfolio.
At year end the Corporation boosted its allowance for possible loan losses
in response to the continuing shift of its portfolio out of residential mortgage
loans and into commercial and consumer loans, which historically have exhibited
higher loss rates. Management felt it was prudent to increase the allowance at
year end to ensure its adequacy for changes that have occurred in the loan
portfolio.
At year-end 1998, the allowance was $79.0 million or 1.58% of loans
outstanding compared to $59.0 million or 1.32% at year-end 1997 and $54.3
million or 1.28% at year-end 1996. The allowance equaled 602.71% of non-
performing loans at year-end 1998 compared to 377.60% at year-end 1997. The
allowance for possible loan losses related to impaired loans at year-ends 1998
and 1997 totaled $1.1 million for both periods.
Net charge-offs were $16.6 million in 1998 compared to $17.2 million in
1997 and $15.2 million in 1996. As a percentage of average loans outstanding,
net charge-offs equaled 0.35% in 1998, 0.39% in 1997 and 0.35% in 1996. Losses
are charged against the allowance as soon as they are identified.
A five-year summary of activity follows:
ALLOWANCE FOR POSSIBLE LOAN LOSSES
YEARS ENDED,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
Allowance for possible loan losses at beginning
of year...................................... $ 58,963 54,304 51,412 40,117 39,003
Loans charged off:
Commercial, financial and agricultural....... 3,672 1,618 2,665 3,145 1,479
Installment to individuals................... 22,270 23,924 16,670 8,821 5,888
Real estate.................................. 1,353 574 224 883 720
Lease financing.............................. 1,259 1,290 1,315 319 20
Decrease from sale of subsidiary............. -- 389 -- --
---------- ---------- ---------- ---------- ----------
Total...................................... 28,554 27,406 21,263 13,168 8,107
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial, financial and agricultural....... 1,874 1,121 450 569 719
Installment to individuals................... 8,074 8,442 5,223 3,537 3,169
Real estate.................................. 1,463 123 202 129 106
Lease financing.............................. 531 476 206 88 21
---------- ---------- ---------- ---------- ----------
Total...................................... 11,942 10,162 6,081 4,323 4,015
---------- ---------- ---------- ---------- ----------
Net charge-offs................................ 16,612 17,244 15,182 8,845 4,092
---------- ---------- ---------- ---------- ----------
Increase resulting from acquisition of
CoBancorp, Inc............................... 8,215 -- -- -- --
---------- ---------- ---------- ---------- ----------
Provision for possible loan losses............. 28,383 21,903 18,074 20,140 5,206
---------- ---------- ---------- ---------- ----------
Allowance for possible loan losses at end of
year......................................... $ 78,949 $ 58,963 $ 54,304 $ 51,412 $ 40,117
========== ========== ========== ========== ==========
Average loans outstanding...................... $4,807,182 4,391,053 4,343,189 4,271,977 3,760,347
========== ========== ========== ========== ==========
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YEARS ENDED,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
Ratio to average loans:
Net charge-offs.............................. 0.35% 0.39% 0.35% 0.21% 0.11%
Provision for possible loan losses........... 0.59% 0.50% 0.42% 0.47% 0.14%
========== ========== ========== ========== ==========
Loans outstanding at end of year............... $4,997,396 4,467,524 4,228,941 4,250,569 4,150,896
========== ========== ========== ========== ==========
Allowance for possible loan losses:
As a percent of loans outstanding at end of
year....................................... 1.58% 1.32% 1.28% 1.21% 0.97%
As a multiple of net charge-offs............. 4.75 3.42 3.58 5.81 9.80
========== ========== ========== ========== ==========
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
AS OF AS OF AS OF AS OF
YEAR END 1998 YEAR END 1997 YEAR END 1996 YEAR END 1995
--------------------- --------------------- --------------------- ---------------------
% OF % OF % OF % OF
LOANS BY LOANS BY LOANS BY LOANS BY
CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
LOANS LOANS LOANS LOANS
AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING
------- ----------- ------- ----------- ------- ----------- ------- -----------
DOLLARS IN THOUSANDS
Commercial,
financial, and
agricultural....... $36,146 24% $26,306 20% 15,962 18% 14,570 14%
Loans secured by real
estate............. 22,686 55% 16,030 58% 14,584 58% 21,190 63%
Installment.......... 18,408 18% 15,318 20% 22,303 20% 14,360 19%
Lease financing...... 1,709 3% 1,309 2% 1,455 4% 1,292 4%
------- --- ------- --- ------- --- ------- ---
$78,949 100% $58,963 100% 54,304 100% 51,412 100%
======= === ======= === ======= === ======= ===
AS OF
YEAR END 1994
---------------------
% OF
LOANS BY
CATEGORY
TO TOTAL
LOANS
AMOUNT OUTSTANDING
------- -----------
DOLLARS IN THOUSANDS
Commercial,
financial, and
agricultural....... 7,091 12%
Loans secured by real
estate............. 19,032 64%
Installment.......... 13,245 20%
Lease financing...... 749 4%
------- ---
40,117 100%
======= ===
DEPOSITS
Average deposits for 1998 totaled $5.1 billion, an increase of 10.5% and
7.2% compared to 1997 and 1996 levels, respectively. Most of the increase
occurred because of the 1998 purchase acquisition of CoBancorp. Purchase
accounting application includes balances of the acquired company in the year of
acquisition but not in prior periods. The Corporation's success with its
"free-checking" product also added to the increase in average non-interest
bearing demand deposit (checking) accounts.
Interest-bearing demand accounts declined during 1998 despite the inclusion
of CoBancorp balances. Average savings and certificate of deposit ("CDs")
accounts were up 2.1% and 9.8%, respectively, over last years' averages. Again,
the CoBancorp acquisition accounted for a large portion, if not all, of the
increases in savings and CDs. The average rate paid on interest-bearing demand
deposits decreased 35 basis points to 1.12%; the average yield paid on savings
accounts increased 30 basis points to 2.72% and the average yield paid on CDs
declined 7 basis point from 5.44% in 1997 to 5.37% in 1998.
Total demand deposits comprised 30.0% of average deposits in 1998 compared
with 27.3% last year and 26.6% in 1996. Savings accounts, including the "Money
Market" products, made up 26.6% of average deposits in 1998 versus 28.9% in 1997
and 30.4% in 1996. CDs accounted for 43.6% of average deposits in 1998, 43.9% in
1997 and 42.9% in 1996. The most notable shift occurred between savings and
demand deposit (checking) accounts as checking balances provided more funds, on
average, and savings accounts less.
The average cost of deposits and other borrowings was up 8 basis points
compared to one year ago, or 4.12% in 1998 compared to 4.04% last year.
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21
YEARS ENDED
------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
---------- ------- --------- ------- --------- -------
(DOLLARS IN THOUSANDS)
Demand deposits -- non-interest
bearing......................... $1,022,909 -- 733,394 -- 745,102 --
Demand deposits -- interest
bearing......................... 508,983 1.12% 536,983 1.58% 529,888 1.84%
Savings deposits.................. 1,364,705 2.72% 1,337,115 2.59% 1,457,762 2.48%
Certificates and other time
deposits........................ 2,237,956 5.37% 2,038,315 5.30% 2,056,139 5.30%
---------- --------- ---------
$5,134,553 4,645,807 4,788,891
========== ========= =========
The following table summarizes the certificates and other time deposits in
amounts of $0.1 million or more as of year-end 1998, by time remaining until
maturity.
AMOUNT
--------
Maturing in:
Under 3 months............................................ $397,679
3 to 6 months............................................. 83,600
6 to 12 months............................................ 60,419
Over 12 months............................................ 51,600
--------
$593,298
========
INTEREST RATE SENSITIVITY
Interest rate sensitivity measures the potential exposure of earnings and
capital to changes in market interest rates. The Corporation has a policy which
provides guidelines in the management of interest rate risk. This policy is
reviewed periodically to ensure it complies to trends within the financial
markets and within the industry.
The analysis presented below divides interest bearing assets and
liabilities into maturity categories and measures the "GAP" between maturing
assets and liabilities in each category. The Corporation analyzes the historical
sensitivity of its interest bearing transaction accounts to determine the
portion which it classifies as interest rate sensitive versus the portion
classified over one year. The analysis shows that liabilities maturing within
one year exceed assets maturing within the same period by a moderate amount. The
Corporation uses the GAP analysis and other tools to monitor rate risk.
At year-end 1998 the Corporation was in a moderate asset-sensitive position
as illustrated in the following table:
31-60 61-90 91-180 181-365 OVER 1
1-30 DAYS DAYS DAYS DAYS DAYS YEAR TOTAL
---------- --------- -------- ------- ------- --------- ---------
(DOLLARS IN THOUSANDS)
Interest Earning Assets:
Loans and leases................. $1,264,741 139,925 147,020 406,994 699,476 2,339,240 4,997,396
Investment securities............ 212,009 47,814 83,643 57,073 138,207 1,012,981 1,551,727
Federal funds sold............... 12,505 -- -- -- -- 12,505
---------- --------- -------- ------- ------- --------- ---------
Total Interest Earning Assets...... $1,489,255 187,739 230,663 464,067 837,683 3,352,221 6,561,628
---------- --------- -------- ------- ------- --------- ---------
Interest-Bearing Liabilities:
Demand -- Interest bearing....... $ 32,183 32,183 38,620 -- -- 540,673 643,659
Savings.......................... 108,766 108,766 124,304 -- -- 1,211,959 1,553,795
Certificates and other time
deposits....................... 437,136 202,719 190,100 484,415 518,241 473,466 2,306,077
Securities sold under agreement
to repurchase and other
borrowings..................... 613,153 390 483 4,282 3,951 185,174 807,433
---------- --------- -------- ------- ------- --------- ---------
Total Interest Bearing
Liabilities...................... $1,191,238 344,058 353,507 488,697 522,192 2,411,272 5,310,964
Total GAP.......................... $ 298,017 (156,319) (122,844) (24,630) 315,491 940,949 1,250,664
========== ========= ======== ======= ======= ========= =========
Cumulative GAP..................... $ 298,017 141,698 18,854 (5,776) 309,715 1,250,664
========== ========= ======== ======= ======= =========
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MARKET RISK
FirstMerit is exposed to market risks in the normal course of business.
Changes in market interest rates may result in changes in the fair market value
of the Corporation's financial instruments, cash flows, and net interest income.
The Corporation seeks to achieve consistent growth in net interest income and
capital while managing volatility arising from shifts in market interest rates.
The Asset and Liability Committee of the FirstMerit Bank Board of Directors
("ALCO") oversees financial risk management, establishing broad policies that
govern a variety of financial risks inherent in the bank's operations. ALCO
monitors FirstMerit Bank's interest rates and sets limits on allowable risk
annually.
Market risk is the potential of loss arising from adverse changes in the
fair value of financial instruments due to changes in interest rates, exchange
rates, and equity prices. FirstMerit's market risk is composed primarily of
interest rate risk. Interest rate risk on FirstMerit's balance sheet consists of
mismatches of maturity gaps and indices, and options risk. Maturity GAP
mismatches result from differences in the maturity or repricing of asset and
liability portfolios. Options risk exists in many of FirstMerit's retail
products such as prepayable mortgage loans and demand deposits. Options risk
typically results in higher costs or lower revenue for FirstMerit. Index
mismatches occur when asset and liability portfolios are tied to different
market indices which may not move in tandem as market interest rates change.
Interest rate risk is monitored using GAP analysis, earnings simulation and
net present value estimations. Combining the results from these separate risk
measurement processes allows a reasonably comprehensive view of short-term and
long-term interest rate risk in the Corporation. GAP analysis measures the
amount of repricing risk in the balance sheet at a point in time. Earnings
simulation involves forecasting net interest earnings under a variety of
scenarios including changes in the level of interest rates, the shape of the
yield curve, and spreads between market interest rates. ALCO also monitors the
net present value of the balance sheet, which is the discounted present value of
all asset and liability cash flows. Interest rate risk is quantified by changing
the interest rates used for discounting cash flows and comparing the net present
value to the original figure. At year-end, a 100 basis point increase in
interest rates is estimated to reduce net present value by 5.1%. Should interest
rates decrease by 100 basis points, net present value is estimated to increase
by 1.9%.
Presented below, as of December 31, 1998, is an analysis of the
Corporation's interest rate risk for earnings simulation for instantaneous and
sustained parallel shifts in the yield curve up and down 200 basis points.
NEXT 12 MONTHS
NET INTEREST INCOME
-------------------
$ CHANGE % CHANGE
-------- --------
+200................................................... 3,500 1.06%
+100................................................... 2,716 0.82%
- -100................................................... (2,424) (0.73%)
- -200................................................... (7,161) (2.16%)
CAPITAL RESOURCES
Shareholders' equity at year-end 1998 totaled $768.6 million compared to
$595.0 million at December 31, 1997, an increase of 29.2%.
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23
1998 1997 1996
---------------- --------------- ---------------
(IN THOUSANDS)
Total equity............................ $768,636 10.78% 595,015 9.93% 583,142 9.95%
Common equity........................... 768,636 10.78% 595,015 9.93% 583,142 9.95%
Tangible common equity (a).............. 622,324 8.91% 581,217 9.72% 576,344 9.84%
Tier 1 capital (b)...................... 617,663 10.30% 577,510 12.22% 578,392 12.56%
Total risk-based capital (c)............ 692,689 11.55% 636,473 13.47% 632,696 13.74%
Leverage (d)............................ 617,663 8.98% 577,510 9.58% 578,392 9.51%
- ---------------
(a) Common equity less all intangibles; computed as a ratio to total assets less
intangible assets.
(b) Shareholders' equity less goodwill; computed as a ratio to risk-adjusted
assets, as defined in the 1992 risk-based capital guidelines.
(c) Tier 1 capital plus qualifying loan loss allowance, computed as a ratio to
risk-adjusted assets, as defined in the 1992 risk-based capital guidelines.
(d) Tier 1 capital; computed as a ratio to the latest quarter's average assets
less goodwill.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") set capital guidelines for a financial institution to be considered
"well-capitalized." These guidelines require a risk-based capital ratio of 10%,
a Tier I capital ratio of 6% and a leverage ratio of 5%. At year-end 1998, the
Corporation's risk-based capital equaled 11.57% of risk-adjusted assets, its
Tier I capital ratio equaled 10.33% and its leverage ratio equaled 8.98%.
The Corporation's Board of Directors declared a 2-for-1 split of the
Corporation's common stock on September 29, 1997. The split was paid to
shareholders of record as of September 2, 1997.
During 1998, the Corporation's Directors increased the quarterly cash
dividend, marking the seventeenth consecutive year of annual increases since the
Corporation's formation in 1981. The cash dividend of $0.18 paid has an
indicated annual rate of $0.72 per share. Over the past five years the dividend
has increased at an annual rate of approximately 8.5%.
LIQUIDITY
The Corporation's primary source of liquidity is its strong core deposit
base, raised through its retail branch system, along with a strong capital base.
These funds, along with investment securities, provide the ability to meet the
needs of depositors while funding new loan demand and existing commitments.
The banking subsidiary maintains sufficient liquidity in the form of
short-term marketable investments with a short-term maturity structure, along
with cash flow from loan repayment. Asset growth is primarily funded by the
growth of core deposits.
Reliance on borrowed funds increased during the year as the investment
portfolio grew slightly. During the year, the Corporation sold, for liquidity
purposes, approximately $200 million of fixed and adjustable rate residential
real estate loans. The loan sales improved liquidity while restructuring the
balance sheet to higher yielding assets.
The liquidity needs of the Corporation, primarily cash dividends and other
corporate purposes, are met through cash, short-term investments and dividends
from the banking subsidiary.
Management is not aware of any trend or event, other than noted above,
which will result in or that is reasonably likely to occur that would result in
a material increase or decrease in the Corporation's liquidity.
REGULATION AND SUPERVISION
A strict uniform system of capital-based regulation of financial
institutions became effective on December 19, 1992. Under this system, there are
five different categories of capitalization, with "prompt corrective actions"
and significant operational restrictions imposed on institutions that are
capital deficient under the
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24
categories. The five categories are: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized.
To be considered well capitalized an institution must have a total
risk-based capital ratio of at least 10%, a Tier I capital ratio of at least 6%,
a leverage capital ratio of 5%, and must not be subject to any order or
directive requiring the institution to improve its capital level. An adequately
capitalized institution has a total risk-based capital ratio of at least 8%, a
Tier I capital ratio of at least 3% and a leverage capital ratio of at least 4%.
Institutions with lower capital levels are deemed to be undercapitalized,
significantly undercapitalized or critically undercapitalized, depending on
their actual capital levels. The appropriate federal regulatory agency may also
downgrade an institution to the next lower capital category upon a determination
that the institution is in an unsafe or unsound practice. Institutions are
required to monitor closely their capital levels and to notify their appropriate
regulatory agency of any basis for a change in capital category. At year-end
1998, the Corporation and its subsidiaries all exceeded the minimum capital
levels of the well capitalized category.
EFFECTS OF INFLATION
The assets and liabilities of the Corporation are primarily monetary in
nature and are more directly affected by the fluctuation in interest rates than
inflation. Movement in interest rates is a result of the perceived changes in
inflation as well as monetary and fiscal policies. Interest rates and inflation
do not move with the same velocity or within the same time frame, therefore, a
direct relationship to the inflation rate cannot be shown. The financial
information presented in this annual report, based on historical data, has a
direct correlation to the influence of market levels of interest rates.
Therefore, management believes that there is no material benefit in presenting a
statement of financial data adjusted for inflationary changes.
FORWARD-LOOKING STATEMENTS -- SAFE HARBOR STATEMENT
Information in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section above and within this report, which
is not historical or factual in nature, and which relates to expectations for
future shifts in loan portfolio to consumer and commercial loans, increase in
core deposits base, allowance for loan losses, demands for FirstMerit services
and products, future services and products to be offered, increased numbers of
customers, and like items, constitute forward-looking statements that involve a
number of risks and uncertainties. The following factors are among the factors
that could cause actual results to differ materially from the forward-looking
statements: general economic conditions, including their impact on capital
expenditures; business conditions in the banking industry; the regulatory
environment; rapidly changing technology and evolving banking industry
standards; competitive factors, including increased competition with regional
and national financial institutions; new service and product offerings by
competitors and price pressures; interest rate fluctuations; the ability of the
Corporation to realize expected efficiencies from recent acquisitions and like
items.
FirstMerit cautions that any forward-looking statements contained in this
report, in a report incorporated by reference to this report, or made by
management of FirstMerit in this report, in other reports and filings, in press
releases and in oral statements, involve risks and uncertainties and are subject
to change based upon the factors listed above and like items. Actual results
could differ materially from those expressed or implied, and therefore the
forward-looking statements should be considered in light of these factors.
FirstMerit may from time to time issue other forward-looking statements.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define an applicable year. Any of a company's
hardware, date-driven automated equipment, or computer programs that have date
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This faulty recognition could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business activities.
Significant resources continue to be used to address the Year 2000 issue.
Consulting and contract programming resources supplement internal staff and
provide specialized expertise where necessary. FirstMerit is
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25
using newly acquired software tools and enhanced procedures to assist in code
remediation, testing, and controlling the numerous software changes. Staff
throughout the organization reviews testing results. Coordination with major
business partners is also in process.
The Corporation first contracted the services of an application
development, outsourcing and integration services firm, to perform an enterprise
wide business unit risk assessment of Year 2000 issues. By year-end 1997, the
firm had completed the enterprise wide business unit risk assessment for the
Corporation which included formal communications with all significant suppliers
to determine the extent to which the Corporation is vulnerable to those third
parties' failure to address their own Year 2000 issues.
During 1998, the Corporation contracted with a different outside consulting
firm to provide an independent assessment of the Corporation's Year 2000
efforts. Results were reported to the Corporation's Board of Directors in
November 1998. Management and the Board of Directors agreed with the findings
and overall view that the project is on track. The issues identified by the
independent consultants were already in process of being addressed.
Additionally, as a nationally chartered bank the Corporation's banking
subsidiary falls under the regulatory guidelines published by the Federal
Financial Institutions Examination Council ("FFIEC"). Periodic audits of the
Corporation's Year 2000 activities are performed by the Office of the
Comptroller of the Currency ("OCC") as well as the Federal Reserve Bank.
The FFIEC considers five general Year 2000 phases: Awareness, Assessment,
Renovation, Validation and Implementation. The five phases are explained below
along with Corporation's status at December 31, 1998:
Awareness: The Awareness phase defines the Year 2000 problem, gains
executive level support and establishes an overall strategy. The Corporation
began working on the Year 2000 issue in 1996 with identification of major
vendors and their compliance status. Significant progress has been made in the
implementation of the strategy for Year 2000 compliance. Executive Management
has been proactive in the management of the project and contracted with
consultants to assist in performing the assessment and formulating a strategy.
The awareness phase has expanded to include a widespread customer awareness
program to help educate customers of the Year 2000 issue and allow monitoring of
FirstMerit's progress.
Assessment: The Assessment phase defines the size and complexity of the
problem and the magnitude of the effort to address Year 2000 issues. FirstMerit
completed the assessment phase for all mainframe and microcomputer systems
during the first quarter of 1998. FirstMerit has 82 mainframe applications of
which 30 are considered "mission critical." The majority of the applications are
vendor packages. Significant microcomputer software and hardware upgrades for
Year 2000 compliance are substantially complete. The Assessment of
non-information systems such as security systems, elevators, etc. was completed
during the second quarter of 1998.
Renovation: The purpose of the Renovation phase is to ensure all date
routines have been corrected to properly address Year 2000 dates. FirstMerit has
completed 100% of the renovation for the in-house written code for the "mission
critical" applications. Installation of vendor supplied upgrades for the other
"mission critical" applications has occurred where the software was received
timely. Late arriving vendor releases or re-releases of Year 2000 compliant
software has resulted in our inability to complete three of the 30 "mission
critical" applications until the first quarter of 1999.
Renovation and vendor software implementation is also in process for the
non-"mission critical" applications. FirstMerit is approximately 94% complete in
having all of our lines of computer code renovated. The remaining applications
are scheduled to be renovated during the first quarter 1999.
Validation: The Validation phase consists of various types of testing and
retesting. FirstMerit is deeply involved in extensive testing of both in-house
and vendor written systems as well as the various connections to other systems
(internal and external). Non-information system applications or functions such
as vaults and security systems are also in the process of being tested. Testing
guidelines have been issued to ensure consistency and completeness throughout
the organization. Integrated testing is in process to ensure the applications
work together. More than 60% of our lines of computer code were successfully
tested with various future dates as part of a major integrated test over
Columbus Day weekend in October 1998. Core systems were included such as
Certificates of Deposit, Demand Deposit, Installment Loan and Savings. Of the 30
"mission critical"
24
26
applications, 26 have been successfully tested or are in the process of being
tested. Additionally, many other applications (non-mission critical) are
currently in the testing process.
Implementation: During the Implementation phase, systems are certified as
Year 2000 compliant and placed into production. FirstMerit has been placing
systems, once renovated and validated, into production throughout the project.
As the non-mission critical applications are tested, they will be implemented
into production during the first quarter of 1999.
Another FFIEC area to be addressed is contingency planning. FirstMerit is
considering alternative measures throughout the organization in event of a Year
2000-caused problem. Business areas have reviewed departmental Year 2000 risks
and are incorporating changes to their contingency plans.
The Corporation's total Year 2000 readiness project costs and estimates to
complete include the estimated costs and time associated with the impact of a
third party vendor's Year 2000 issues and are based on presently available
information. There can be no guarantees, however, that the systems and
applications of other companies on which the Corporation's systems and
applications rely will be timely converted or that a failure to convert by
another company, or a conversion that is incompatible with the Corporation's
systems and applications, would not have material adverse effect on the
Corporation.
The total cost of the Year 2000 readiness project (operating and capital)
is estimated at $5.7 million and is being funded through operating cash flows,
which will be expensed as incurred over the next two years, and is not expected
to have a material adverse effect on the Corporation's results of operations. To
date, the Corporation has expensed approximately $2.2 million and capitalized
approximately $840,000 related to the Year 2000 project.
The costs of the Year 2000 readiness project and the date on which the
Corporation plans to complete Year 2000 remediation are based on management's
best estimates, which were derived utilizing assumptions of future events
including the continued availability of certain resources, third party vendor
remediation plans and other factors. There can be no guarantee, however, that
these estimates will be achieved and actual results could differ materially from
those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of trained
programming personnel, the ability to locate and correct all relevant computer
coding, and similar uncertainties.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and accompanying notes, and the
reports of management and independent auditors, are set forth immediately
following Item 9 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
FirstMerit has had no disagreement with its accountants on accounting and
financial disclosure matters and has not changed accountants during the two year
period ending December 31, 1998.
25
27
CONSOLIDATED BALANCE SHEETS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED,
-----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
ASSETS
Investment securities (at market value)................... $1,551,727 1,136,561
Federal funds sold........................................ 12,505 36,496
Commercial loans.......................................... 2,374,016 1,902,880
Mortgage loans............................................ 987,185 1,072,693
Installment loans......................................... 1,070,324 960,186
Home equity loans......................................... 306,358 275,819
Credit card loans......................................... 99,541 103,041
Tax-free loans............................................ 7,961 8,947
Leases.................................................... 152,011 143,958
---------- ----------
Total earning assets................................... 6,561,628 5,640,581
---------- ----------
Allowance for possible loan losses........................ (78,949) (58,963)
Cash and due from banks................................... 245,950 176,745
Premises and equipment, net............................... 118,540 108,299
Accrued interest receivable and other assets.............. 280,196 126,281
---------- ----------
Total assets........................................... $7,127,365 5,992,943
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-non-interest bearing............................ $ 958,032 790,935
Demand-interest bearing................................ 643,659 516,061
Savings................................................ 1,553,795 1,360,306
Certificates and other time deposits................... 2,306,077 2,096,066
---------- ----------
Total deposits......................................... 5,461,563 4,763,368
---------- ----------
Securities sold under agreements to repurchase and other
borrowings............................................. 807,433 546,862
Accrued taxes, expenses, and other liabilities............ 89,733 87,698
---------- ----------
Total liabilities...................................... 6,358,729 5,397,928
---------- ----------
Commitments and contingencies............................. -- --
Shareholders' equity:
Preferred stock, without par value: authorized and
unissued 7,000,000 shares............................. -- --
Common stock, without par value: authorized 160,000,000
shares; issued 75,162,763 and 74,895,516 shares,
respectively.......................................... 110,276 110,145
Capital surplus........................................... 48,099 16,021
Accumulated other comprehensive income.................... 4,068 3,294
Retained earnings......................................... 623,180 575,960
Treasury stock, at cost, 1,154,071 and 6,238,055 shares,
respectively........................................... (16,987) (110,405)
---------- ----------
Total shareholders' equity................................ 768,636 595,015
---------- ----------
Total liabilities and shareholders' equity................ $7,127,365 $5,992,943
========== ==========
See accompanying notes to consolidated financial statements.
26
28
CONSOLIDATED STATEMENTS OF INCOME
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Interest income:
Interest and fees on loans................................ $422,650 389,786 376,474
Interest and dividends on investment securities:
Taxable................................................. 74,359 67,158 78,511
Exempt from federal income taxes........................ 4,737 4,346 5,004
-------- -------- --------
79,096 71,504 83,515
Interest on federal funds sold............................ 1,351 2,250 934
-------- -------- --------
Total interest income................................... 503,097 463,540 460,923
-------- -------- --------
Interest expense:
Interest on deposits:
Demand-interest bearing................................. 5,688 8,485 9,758
Savings................................................. 37,178 34,650 36,092
Certificates and other time deposits.................... 120,135 107,997 109,005
Interest on securities sold under agreements to repurchase
and other borrowings.................................... 34,650 30,803 31,481
-------- -------- --------
Total interest expense.................................. 197,651 181,935 186,336
-------- -------- --------
Net interest income..................................... 305,446 281,605 274,587
Provision for possible loan losses.......................... 28,383 21,903 18,074
-------- -------- --------
Net interest income after provision for possible loan
losses................................................ 277,063 259,702 256,513
-------- -------- --------
Other income:
Trust department.......................................... 16,147 13,442 12,182
Service charges on deposits............................... 31,257 27,717 25,892
Credit card fees.......................................... 20,064 14,355 11,415
Service fees -- other..................................... 10,493 7,337 6,184
Investment securities gains (losses), net................. 6,764 1,957 (1,776)
Loan sales and servicing.................................. 7,814 6,009 4,863
Other operating income.................................... 17,941 14,519 25,434
-------- -------- --------
Total other income...................................... 110,480 85,336 84,194
-------- -------- --------
Other expenses:
Salaries, wages, pension and employee benefits............ 110,675 97,500 100,244
Net occupancy expense..................................... 17,872 18,561 19,275
Equipment expense......................................... 15,882 12,717 12,894
Intangible amortization expense........................... 6,002 1,973 3,255
Other operating expenses.................................. 92,292 73,635 89,243
-------- -------- --------
Total other expenses.................................... 242,723 204,386 224,911
-------- -------- --------
Income before federal income taxes...................... 144,820 140,652 115,796
Federal income taxes........................................ 47,342 44,978 38,446
-------- -------- --------
Net income.............................................. $ 97,478 95,674 77,350
======== ======== ========
Other comprehensive income, net of tax Unrealized gains
(losses) on available-for-sale securities:
Unrealized holding gains arising during period (net of tax
expense of $2,589, $3,282 and $49, respectively)........ 5,326 7,071 98
Less: reclassification adjustment for gains realized in
net income, net of tax expense (benefit) of $2,212, $619
and ($588), respectively................................ 4,552 1,336 1,188
-------- -------- --------
Net unrealized gains, net of tax expense (benefit) of
$377, $2,662 and ($539), respectively................... 774 5,735 (1,090)
-------- -------- --------
Comprehensive income, net of tax............................ $ 98,252 101,409 76,260
======== ======== ========
Weighted average number of common shares
outstanding -- basic...................................... 71,095 69,405 71,799
======== ======== ========
Weighted average number of common shares
outstanding -- diluted.................................... 72,703 71,258 73,168
======== ======== ========
Per share data based on average number of shares
outstanding:
Basic net income per share.................................. $ 1.37 1.38 1.08
======== ======== ========
Diluted net income per share................................ $ 1.34 1.35 1.06
======== ======== ========
See accompanying notes to consolidated financial statements.
27
29
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED 1998, 1997 AND 1996
------------------------------------------------------------------------
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL COMPREHENSIVE RETAINED TREASURY SHAREHOLDERS'
STOCK SURPLUS INCOME EARNINGS STOCK EQUITY
-------- ------- ------------- -------- -------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Balance at year-end 1995......... $103,935 14,453 (1,351) 483,188 (2,963) 597,262
Net income..................... -- -- -- 77,350 -- 77,350
Cash dividends ($0.55 per
share)...................... -- -- -- (36,376) -- (36,376)
Stock options
exercised/debentures
converted................... 3,483 462 -- -- -- 3,945
Treasury shares purchased...... -- -- -- -- (56,295) (56,295)
Net unrealized gains on
securities.................. -- -- (1,090) -- -- (1,090)
Other.......................... -- -- -- (1,654) -- (1,654)
-------- ------ ------ ------- -------- -------
Balance at year-end 1996......... 107,418 14,915 (2,441) 522,508 (59,258) 583,142
Net income..................... -- -- -- 95,674 -- 95,674
Cash dividends ($0.61 per
share)...................... -- -- -- (38,447) -- (38,447)
Stock options
exercised/debentures
converted................... 2,727 1,106 -- (1,428) -- 2,405
Treasury shares purchased...... -- -- -- -- (51,147) (51,147)
Net unrealized gains on
securities.................. -- -- 5,735 -- -- 5,735
Other.......................... -- -- -- (2,347) -- (2,347)
-------- ------ ------ ------- -------- -------
Balance at year-end 1997......... 110,145 16,021 3,294 575,960 (110,405) 595,015
Net income..................... -- -- -- 97,478 -- 97,478
Cash dividends ($0.66 per
share)...................... -- -- -- (45,887) -- (45,887)
Acquisition adjustment of
fiscal year................. -- -- -- (1,857) -- (1,857)
Stock options
exercised/debentures
converted................... 131 (359) -- (2,607) 9,029 6,194
Treasury shares purchased...... -- -- -- -- (25,703) (25,703)
Treasury shares reissued --
acquisition................. -- 25,919 -- -- 89,286 115,205
Treasury shares
reissued -- public
offering.................... -- 6,518 -- -- 20,806 27,324
Net unrealized gains on
securities.................. -- -- 774 -- -- 774
Other.......................... -- -- -- 93 -- 93
-------- ------ ------ ------- -------- -------
Balance at year-end 1998......... $110,276 48,099 4,068 623,180 (16,987) 768,636
======== ====== ====== ======= ======== =======
See accompanying notes to consolidated financial statements.
28
30
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED,
-------------------------------------
1998 1997 1996
----------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income................................................ $ 97,478 95,674 77,350
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................... 28,383 21,903 18,074
Provision for depreciation and amortization............. 12,087 11,334 10,902
Amortization of investment securities premiums, net..... 1,413 2,908 5,031
Amortization of income for lease financing.............. (11,360) (13,436) (12,656)
(Gains) losses on sales of investment securities, net... (6,764) (1,957) 1,776
Gain on sale of affiliate branches...................... -- -- (13,210)
Deferred federal income taxes........................... (7,046) (5,863) 15,787
(Increase) decrease in interest receivable.............. (5,051) 504 2,091
Increase in interest payable............................ 1,451 1,395 768
Amortization of values ascribed to acquired
intangibles........................................... 6,002 1,972 3,255
Other decreases......................................... (99,404) (13,261) (27,067)
----------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 17,189 101,173 82,101
----------- --------- ---------
INVESTING ACTIVITIES
Dispositions of investment securities:
Available-for-sale -- sales............................... 609,543 209,174 343,600
Available-for-sale -- maturities.......................... 343,852 252,545 306,579
Purchases of investment securities available-for-sale....... (1,362,032) (369,331) (444,752)
Net (increase) decrease in federal funds sold............. 23,991 (16,967) 2,639
Net increase in loans and leases, except sales............ (526,909) (304,851) (88,065)
Sales of loans............................................ -- 61,995 106,484
Purchases of premises and equipment....................... (25,687) (14,182) (23,598)
Sales of premises and equipment........................... 3,359 5,542 4,304
Sales of affiliate branches............................... -- -- 13,210
Purchase of CoBancorp Inc................................. (50,000) -- --
----------- --------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............ (983,883) (176,075) 220,401
----------- --------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in demand, NOW and savings
deposits.................................................. 489,399 (30,412) (123,224)
Net increase (decrease) in time deposits.................... 208,796 143,723 (139,381)
Net increase (decrease) in securities sold under repurchase
agreements and other borrowings........................... 260,571 1,100 (16,121)
Cash dividends.............................................. (45,887) (40,871) (38,562)
Purchase of treasury shares................................. (25,703) (51,147) (56,295)
Treasury shares -- reissued................................. 115,205 -- --
Treasury shares reissued.................................... 27,324 -- --
Proceeds from exercise of stock options..................... 6,194 2,405 3,945
----------- --------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............ 1,035,899 24,798 (369,638)
Increase (decrease) in cash and cash equivalents............ 69,205 (50,104) (67,136)
Cash and cash equivalents at beginning of year.............. 176,745 226,849 293,985
----------- --------- ---------
Cash and cash equivalents at end of year.................... $ 245,950 176,745 226,849
=========== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest, net of amounts capitalized........................ $ 115,323 108,365 116,136
Income taxes................................................ $ 57,582 45,483 21,547
=========== ========= =========
See accompanying notes to consolidated financial statements.
29
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEAR-ENDS AND FOR THE YEARS ENDED 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of FirstMerit Corporation and its
subsidiaries (the "Corporation") conform to generally accepted accounting
principles and to general practices within the banking industry. In 1998, the
Corporation adopted Statement of Financial Accounting Standards No. 130 (SFAS
130) "Reporting Comprehensive Income," and Statement No. 131 (SFAS 131)
"Disclosures about Segments of an Enterprise and Related Information." SFAS 130
requires additional disclosure of items that affect comprehensive income but not
net income. Items relevant to the Corporation include unrealized gains and
losses on securities available for sale. SFAS 131 designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Corporation's reportable segments.
SFAS 131 also requires disclosures about products and services, geographic areas
and major customers. The adoption of SFAS 130 and SFAS 131 did not affect
results of operations or financial position. The following is a description of
the more significant accounting policies.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of FirstMerit
Corporation (the "Parent Company") and its direct subsidiaries: FirstMerit
Bank N.A., Citizens Investment Corporation, Citizens Savings Corporation of
Stark County, FirstMerit Community Development Corporation, FirstMerit
Credit Life Insurance Company, and SF Development Corp.
All significant intercompany balances and transactions have been eliminated
in consolidation.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and related notes. Actual results could differ from those estimates.
(c) Investment Securities
Debt and equity securities are classified as held-to-maturity,
held-to-maturity are measured at amortized or historical cost, securities
available-for-sale and trading at fair value. Adjustment to fair value of
the securities available-for-sale, in the form of unrealized holding gains
and losses, is excluded from earnings and reported net of tax as a separate
component of comprehensive income. Adjustment to fair value of securities
classified as trading is included in earnings. Gains or losses on the sales
of investment securities are recognized upon realization and are determined
by the specific identification method.
The Corporation's investment portfolio is designated as available-for-sale.
Classification as available-for-sale Corporation to sell securities to fund
liquidity and manage the Corporation's interest rate risk. The Corporation
does maintain a relatively small trading account that is used as a hedge
against variations in deferred compensation expense.
(d) Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, balances on deposit with
correspondent banks and checks in the process of collection.
(e) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed on the straight-line and
declining-balance methods over the estimated useful lives of the assets.
Amortization of leasehold improvements is computed on the straight-line
method based on lease terms or useful lives, whichever is less.
30
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
(f) Loans
Impaired loans are loans for which, based on current information or events,
it is probable that the Corporation will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Impaired
loans are valued based on the present value of the loans' expected future
cash flows at the loans' effective interest rates, at the loans' observable
market price, or the fair value of the loan collateral.
(g) Interest and Fees on Loans
Interest income on loans is generally accrued on the principal balances of
loans outstanding using the "simple-interest" method. Loan origination fees
and certain direct origination costs of mortgage loans are deferred and
amortized, generally over the contractual life of the related loans using a
level yield method. Interest is not accrued on loans for which
circumstances indicate collection is questionable.
(h) Provision for Possible Loan Losses
The provision for possible loan losses charged to operating expenses is
determined based on management's evaluation of the loan portfolios and the
adequacy of the allowance for possible loan losses under current economic
conditions and such other factors which, in management's judgement, deserve
current recognition.
(i) Lease Financing
The Corporation leases equipment to customers on both a direct and
leveraged lease basis. The net investment in financing leases includes the
aggregate amount of lease payments to be received and the estimated
residual values of the equipment, less unearned income and non-recourse
debt pertaining to leveraged leases. Income from lease financing is
recognized over the lives of the leases on an approximate level rate of
return on the unrecovered investment. Residual values of leased assets are
reviewed on an annual basis for reasonableness. Declines in residual values
judged to be other than temporary are recognized in the period such
determinations are made.
(j) Mortgage Servicing Fees
The Corporation generally records loan administration fees earned for
servicing loans for investors as income is collected. Earned servicing fees
and late fees related to delinquent loan payments are also recorded as
income is collected.
(k) Federal Income Taxes
The Corporation follows the asset and liability method of accounting for
income taxes. Deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The
effect of a change in tax rates is recognized in income in the period of
the enactment date.
(l) Value Ascribed to Acquired Intangibles
The value ascribed to acquired intangibles, including core deposit
premiums, results from the excess of cost over fair value of net assets
acquired in acquisitions of financial institutions. Such values are being
amortized over periods ranging from 10 to 25 years, which represent the
estimated remaining lives of the long-term interest bearing assets
acquired. Amortization is generally computed on a straight-line basis based
on the expected reduction in the carrying value of such acquired assets. If
no significant amount of long-term interest bearing assets is acquired,
such value is amortized over the estimated life of the acquired deposit
base, with amortization periods ranging from 10 to 15 years.
31
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
(m) Trust Department Assets and Income
Property held by the Corporation in a fiduciary or other capacity for trust
customers is not included in the accompanying consolidated financial
statements, since such items are not assets of the Corporation. Trust income
is reported generally on a cash basis which approximates the accrual basis
of accounting.
(n) Per Share Data
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing net income by the weighted
average number of common shares plus common stock equivalents computed
using the Treasury Share method. All earnings per share disclosures
appearing in these financial statements are computed assuming dilution
unless otherwise indicated.
(o) Reclassifications
Certain previously reported amounts have been reclassified to conform to
the current reporting presentation.
2. ACQUISITIONS AND MERGER-RELATED EXPENSES
On May 22, 1998, the Corporation completed the acquisition of CoBancorp,
Inc., a bank holding company headquartered in Elyria, Ohio with consolidated
assets of approximately $666.0 million. CoBancorp, Inc. ("CoBancorp") was merged
with and into the Corporation and accounted for under purchase accounting
requirements. At the time of the merger, the value of the transaction was $174.1
million. In connection with the merger, the Corporation issued 3.9 million
shares of its common stock (valued at $29.375/share), paid approximately $50.0
million in cash, and assumed merger-related liabilities of approximately $9.6
million. The transaction created goodwill of approximately $136.5 million that
will be amortized primarily over 25 years.
The proforma combined unaudited operating results assuming the companies
had combined at the beginning of each period is as follows:
FIRSTMERIT PROFORMA
PERIOD AND DESCRIPTION CORPORATION COBANCORP ADJUSTMENTS COMBINED
- ---------------------- ----------- --------- ----------- ---------
YEAR ENDED DECEMBER 31, 1998 (FIRSTMERIT)
AND
THREE MONTHS ENDED MARCH 31, 1998
(COBANCORP):
Pro forma interest income.................. $503,097 11,942 211 515,250
Net interest income........................ 305,446 7,295 (944) 311,797
Net income available to common
shareholders............................. 97,478 1,307 (1,394) 97,391
Adjusted income for diluted EPS
calculation.............................. 97,478 1,307 (1,394) 97,391
Wtd-avg diluted shares..................... 72,703 3,485 76,572
Earnings per diluted share................. $ 1.34 0.37 1.27
YEAR ENDED DECEMBER 31, 1997:
Pro forma interest income.................. $407,825 48,141 844 456,810
Net interest income........................ 255,456 29,054 (3,776) 280,734
Net income available to common
shareholders............................. 86,363 4,800 (5,577) 85,586
Adjusted income for diluted EPS
calculation.............................. 86,363 4,800 (5,577) 85,586
Wtd-avg diluted shares..................... 63,537 3,498 67,420
Earnings per diluted share................. $ 1.36 1.37 1.27
The unaudited proforma operating results of each separate company have been
adjusted to reflect their new accounting basis' recognized to record the
purchase combination. Figures shown for CoBancorp include extraordinary merger
costs, net of tax, of $164.0 for the three-month period and $724.0 for 1997.
32
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
On September 14, 1998, FirstMerit closed a secondary underwritten public
offering of 1.38 million common shares of FirstMerit Common Stock. The
reissuance of these shares was necessary to allow the Corporation to treat the
Security First merger as a pooling-of-interests.
On October 23, 1998, the Corporation completed the acquisition of Security
First Corp, ("Security First") a $678.0 million holding company headquartered in
Mayfield Heights, Ohio. Subsidiaries of Security First included Security Federal
Savings and Loan Association of Cleveland and First Federal Savings Bank of
Kent. These subsidiaries were merged with and into FirstMerit Bank, N.A. Under
terms of the merger agreement, Security First was merged with and into the
Corporation. The transaction was structured with a fixed exchange ratio of
0.8855 shares of FirstMerit Common Stock for each common share of Security
First. At the time of the merger, the pooling-of-interests transaction was
valued at $22.58 per share or approximately $199.0 million. The accompanying
consolidated financial statements for all periods presented have been restated
to account for the acquisition. The information presented for 1997 and prior
periods coincides with the fiscal year-ends of each entity, which were December
31 for FirstMerit and March 31 for Security First. For example, information as
of year-end 1997 combines FirstMerit's balances as of December 31, 1997 with
Security First's balances at March 31, 1998. As a result of this difference in
fiscal year ends, the Corporation made an adjustment to shareholders' equity of
$1,841 which represents Security First's net income and cash dividends paid for
the three months ended March 31, 1998.
In conjunction with the Security First acquisition, the Corporation
incurred merger-related expenses of approximately $17.2 million, before taxes.
The components of the costs are as follows: severance and employee-related
expenses of $1.7 million, occupancy and equipment charges of $2.0 million,
conversion and contract termination costs of $1.5 million, professional services
and other costs of $4.7 million, a conforming adjustment to the provision for
possible loan losses of $7.3 million. On an after tax basis, the merger-related
expenses totaled approximately $12.8 million, or $0.18 per diluted share.
FIRSTMERIT SECURITY PROFORMA
PERIOD AND DESCRIPTION CORPORATION FIRST COMBINED
- ---------------------- ----------- -------- --------
NINE MONTHS ENDED SEPTEMBER 30, 1998:
Proforma interest income.................................... $328,819 43,163 371,982
Net interest income......................................... 203,932 20,765 224,697
Net income available to common shareholders................. 71,685 7,820 79,505
Adjusted income for diluted EPS calculation................. 71,685 7,995 79,680
Wtd-avg diluted shares...................................... 64,220 8,666 71,894
Earnings per diluted share.................................. $ 1.12 0.92 $ 1.11
YEAR ENDED 1997:
Proforma interest income.................................... $407,825 55,715 463,540
Net interest income......................................... 255,456 26,149 281,605
Net income available to common shareholders................. 86,363 9,311 95,674
Adjusted income for diluted EPS calculation................. 86,363 9,645 96,008
Wtd-avg diluted shares...................................... 63,537 8,718 71,257
Earnings per diluted share.................................. $ 1.36 1.11 1.35
YEAR ENDED 1996:
Interest income............................................. $411,745 49,178 460,923
Net interest income......................................... 250,972 23,615 274,587
Net income available to common shareholders................. 70,940 6,410 77,350
Adjusted income for diluted EPS calculation................. 70,940 6,801 77,741
Wtd-avg diluted shares...................................... 65,469 8,695 73,168
Earnings per diluted share.................................. $ 1.08 $ 0.78 1.06
On February 12, 1999, the Corporation completed its acquisition of Signal
Corp a $1.9 billion bank holding company headquartered in Wooster, Ohio
("Signal"). Principal subsidiaries of Signal included Signal Bank,
33
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
N.A., Summit Bank, N.A., First Federal Savings Bank of New Castle
(Pennsylvania), and Mobile Consultants, Inc. Under terms of the agreement, the
fixed exchange ratio was 1.32 shares of FirstMerit Common Stock for each share
of Signal Common Stock, and one share of FirstMerit Preferred Stock for each
share of Signal Preferred Stock. Based on an assumed closing price of $25.00 per
share of Common Stock and $71.00 per share of Preferred Stock, the value of the
transaction was approximately $436.0 million. The transaction will be accounted
for as a pooling-of-interests. In conjunction with this merger, the Corporation
anticipates incurring merger-related expenses and conforming accounting policy
changes of approximately $40.0 million.
The following unaudited proforma information is not necessarily indicative
of the results which actually would have been obtained if the Signal merger had
been consummated in the past or which may be obtained in the future.
FIRSTMERIT PROFORMA
PERIOD AND DESCRIPTION CORPORATION SIGNAL CORP COMBINED
- ---------------------- ----------- ------------ -----------
YEAR ENDED 1998:
Interest income........................................ $ 503,097 139,460 642,557
Net interest income.................................... 305,446 50,735 356,181
Net income (loss) available to common shareholders..... 97,478 (25,652) 71,826
Adjusted income (loss) for diluted EPS calculation..... 97,684 (25,652) 72,032
Weighted-average diluted shares........................ 72,702,750 11,576,709 87,984,006
Earnings per diluted share............................. $ 1.34 ($ 2.22) 0.82
YEAR ENDED 1997:
Interest income........................................ $ 463,540 120,970 584,510
Net interest income.................................... 281,605 44,458 326,063
Net income available to common shareholders............ 95,674 17,450 113,124
Adjusted income for diluted EPS calculation............ 96,008 19,034 115,042
Weighted-average diluted shares........................ 71,257,504 12,151,159 87,297,034
Earnings per diluted share............................. $ 1.35 1.57 1.32
YEAR ENDED 1996:
Interest income........................................ $ 460,923 101,229 562,152
Net interest income.................................... 274,587 38,222 312,809
Net income available to common shareholders............ 77,350 11,164 88,514
Adjusted income for diluted EPS calculation............ 77,741 12,860 90,601
Weighted average diluted shares........................ 73,168,022 11,828,502 88,781,645
Earnings per diluted share............................. $ 1.06 1.09 1.02
3. INVESTMENT SECURITIES
Investment securities are composed of:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
YEAR-END 1998
Available for sale:
U.S. Treasury securities and U.S. Government
agency obligations............................. $ 658,407 3,895 2,284 660,018
Obligations of state and political
subdivisions................................... 97,059 999 -- 98,058
Mortgage-backed securities....................... 533,201 3,950 31 537,120
Other securities................................. 256,802 2,205 2,476 256,531
---------- ------ ----- ---------
$1,545,469 11,049 4,791 1,551,727
========== ====== ===== =========
34
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
YEAR-END 1997
Available for sale:
U.S. Treasury securities and U.S. Government
agency obligations............................. $ 613,269 2,605 2,290 613,584
Obligations of state and political
subdivisions................................... 81,610 207 206 81,611
Mortgage-backed securities....................... 338,607 3,605 255 341,957
Other securities................................. 97,995 1,564 150 99,409
---------- ------ ----- ---------
$1,131,481 7,981 2,901 1,136,561
========== ====== ===== =========
The amortized cost and market value of investment securities including
mortgage-backed securities at December 31, 1998, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities based
on the issuers' rights to call or prepay obligations with or without call or
prepayment penalties.
AMORTIZED MARKET
COST VALUE
---------- ---------
Due in one year or less..................................... $ 100,797 101,428
Due after one year through five years....................... 195,168 197,229
Due after five years through ten years...................... 294,138 295,906
Due after ten years......................................... 955,366 957,164
---------- ---------
$1,545,469 1,551,727
========== =========
Proceeds from sales of investment securities during the years 1998, 1997
and 1996 were $543,650, $206,054 and $343,600, respectively. Gross gains of
$5,587, $2,531 and $2,003 and gross losses of $513, $574 and $3,779 were
realized on these sales, respectively.
The carrying value of investment securities pledged to secure trust and
public deposits and for purposes required or permitted by law amounted to
$1,065,326 and $831,536 at December 31, 1998 and December 31, 1997,
respectively.
4. LOANS
Loans consist of the following:
YEAR-ENDS,
------------------------------------
1998 1997 1996
---------- --------- ---------
Commercial, financial and agricultural................... $1,176,904 883,114 755,023
Loans secured by real estate............................. 2,753,906 2,569,213 2,460,799
Loans to individuals, net of unearned income............. 914,573 871,242 853,882
Lease financing.......................................... 152,013 143,955 159,237
---------- --------- ---------
$4,997,396 4,467,524 4,228,941
========== ========= =========
The Corporation grants loans principally to customers located within the
State of Ohio.
35
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Information with respect to impaired loans is as follows:
YEAR-ENDS
--------------------
1998 1997
------- -------
Impaired Loans.............................................. $10,711 $11,274
Allowance for Possible Loan Losses.......................... $ 1,594 $ 2,280
Interest Recognized......................................... $ 427 $ 460
======= =======
Earned interest on impaired loans is recognized as income is collected.
The Corporation makes loans to officers on the same terms and conditions as
made available to all employees and to directors on substantially the same terms
and conditions as transactions with other parties. An analysis of loan activity
with related parties for the years ended December 31, 1998 and 1997 is
summarized as follows:
1998 1997
-------- --------
Aggregate amount at beginning of year....................... $ 33,066 $ 41,308
Additions (deductions):
New loans................................................. 20,650 8,994
Repayments................................................ (15,933) (16,694)
Changes in directors and their affiliations............... (13,402) (542)
-------- --------
Aggregate amount at end of year............................. $ 24,381 $ 33,066
======== ========
5. ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses are summarized as
follows:
YEARS ENDED,
------------------------------------
1998 1997 1996
-------- ------------ --------
Balance at beginning of year.............................. $ 58,963 $ 54,304 $ 51,412
Additions (deductions):
Allowance from purchase acquisition..................... 8215
Provision for loan losses............................... 28,383 21,903 18,074
Loans charged off....................................... (28,554) (27,406) (20,874)
Recoveries on loans previously charged off.............. 11,942 10,162 6,081
Decrease from sale of subsidiary........................ -- -- (389)
-------- -------- --------
Balance at end of year.................................... $ 78,949 $ 58,963 $ 54,304
======== ======== ========
6. MORTGAGE SERVICING RIGHTS AND MORTGAGE SERVICING
In accordance with Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights," and Statement No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," when the Corporation intends to sell originated or purchased loans
and retain the related servicing rights, it allocates a portion of the total
costs of the loans to the servicing rights based on estimated fair value. Fair
value is estimated based on market prices, when available, or the present value
of future net servicing income, adjusted for such factors as discount rates and
prepayments. Servicing rights are amortized over the average life of the loans
using the net cash flow method.
36
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The components of mortgage servicing rights are as follows:
1998 1997
------- ------
Balance at beginning of year, net........................... $ 4,128 $2,396
Additions................................................. 3,244 2,354
Scheduled amortization.................................... (1,270) (622)
Less: allowance for impairment............................ (168) --
------- ------
Balance at end of year, net................................. $ 5,934 $4,128
======= ======
In 1998, 1997 and 1996, the Corporation's income before federal income
taxes was increased by approximately $1.8 million, $1.7 million and $2.3
million, respectively, as a result of compliance with the accounting Statements
mentioned previously.
Accounting regulations also require the Corporation to assess its
capitalized servicing rights for impairment based on their current fair value.
As permitted by the regulations, the Corporation disaggregates its servicing
rights portfolio based on loan type and interest rate which are the predominant
risk characteristics of the underlying loans. If any impairment results after
current market assumptions are applied, the value of the servicing rights is
reduced through the use of a valuation allowance.
At year-ends 1998 and 1997, the Corporation serviced for others
approximately $1.2 billion and $934.0 million, respectively. The following table
provides servicing information for 1998:
1998 1997
---------- ---------
Balance, beginning of year.................................. $ 934,285 $ 908,357
Additions:
Loans originated and sold to investors.................... 260,517 119,715
Existing loans sold to investors.......................... 186,034 100,670
Existing loans from acquisitions.......................... 66,868
Reductions:
Sale of servicing rights.................................. -- --
Loans sold servicing released............................. (4,842) (5,311)
Regular amortization, prepayments and foreclosures........ (277,963) (189,146)
---------- ---------
Balance, end of year........................................ $1,164,899 $ 934,285
========== =========
7. RESTRICTIONS ON CASH AND DIVIDENDS
The average balance on deposit with the Federal Reserve Bank to satisfy
reserve requirements amounted to $16,535 during 1998. The level of this balance
is based upon amounts and types of customers' deposits held by the banking
subsidiaries of the Corporation. In addition, deposits are maintained with other
banks at levels determined by Management based upon the volumes of activity and
prevailing interest rates to compensate for check-clearing, safekeeping,
collection and other bank services performed by these banks. At December 31,
1998, cash and due from banks included $5,355 deposited with the Federal Reserve
Bank and other banks for these reasons.
Dividends paid by the subsidiaries are the principal source of funds to
enable the payment of dividends by the Corporation to its shareholders. These
payments by the subsidiaries in 1998 are restricted by the regulatory agencies
principally to the total of 1998 net income. Regulatory approval must be
obtained for the payment of dividends of any greater amount.
37
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
8. PREMISES AND EQUIPMENT
The components of premises and equipment are as follows:
YEAR-ENDS,
------------------- ESTIMATED
1998 1997 USEFUL LIVES
-------- ------- ------------
Land........................................................ $ 16,145 12,769 --
Buildings................................................... 94,933 91,601 10-35 yrs
Equipment................................................... 77,050 67,854 3-15 yrs
Leasehold improvements...................................... 16,714 13,093 1-20 yrs
-------- ------- ---------
204,842 185,317
Less accumulated depreciation and amortization.............. 86,297 77,018
-------- -------
$118,545 108,299
======== =======
Amounts included in other expenses for depreciation and amortization
aggregated $12,087, $11,334 and $10,902 for the years ended 1998, 1997 and 1996,
respectively.
At December 31, 1998, the Corporation was obligated for rental commitments
under noncancelable operating leases on branch offices and equipment as follows:
YEARS ENDING LEASE
DECEMBER 31, COMMITMENTS
- ------------ -----------
1999 $ 8,116
2000 6,191
2001 5,478
2002 4,618
2003 3,223
2004-2012 12,326
-------
$39,952
=======
Rentals paid under noncancelable operating leases amounted to $7,862,
$8,029 and $9,128 in 1998, 1997 and 1996, respectively.
9. CERTIFICATES AND OTHER TIME DEPOSITS
The aggregate amounts of certificates and other time deposits of $100 and
over at year end 1998 and 1997 were $593,298 and $500,131, respectively.
Interest expense on these certificates and time deposits amounted to $31,860 in
1998, $24,381 in 1997, and $18,165 in 1996.
10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
The average balance of securities sold under agreements to repurchase and
other borrowings for the years ended 1998, 1997 and 1996 amounted to $688,311,
$595,740 and $623,278, respectively. In 1998, the weighted average annual
interest rate amounted to 5.03%, compared to 5.17% in 1997 and 5.05% in 1996.
The maximum amount of these borrowings at any month end totaled $823,629 during
1998, $695,328 in 1997 and $719,534 during 1996.
At year-end 1998, 1997 and 1996, securities sold under agreements to
repurchase totaled $481,665, $417,833, and $368,566, respectively. The average
annual interest rate for these instruments was 4.77%, compared to 4.81% in 1997
and 4.67% in 1996.
38
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
At year-end 1998, 1997, and 1996, the Corporation had $291,227, $116,189
and $170,356, respectively, of Federal Home Loan Bank advances. The 1998 balance
includes: $135,526 that have maturities within one year with interest rates of
4.65% to 6.60%; $72,666 with maturities over one year to five years with
interest rates of 5.35% to 8.10%; and $83,034 over five years with interest
rates of 4.75% to 8.05%.
At year-end 1998, the Corporation had outstanding balances on lines of
credit with two financial institutions totaling $23,000 and $10,000,
respectively. As of year-end 1998, the unused portions of these lines totaled
$7,000 and $65,000, respectively. The interest rates on these lines were 6.00%
and 5.93%, respectively. At year-end 1997, $6,000 was outstanding on one of the
lines with a corresponding interest rate of 6.01% for the year. The interest
rates on these lines of credit are variable and approximate one-month LIBOR plus
37.5 basis points and one-month LIBOR plus 30.0 basis points, respectively.
At year-end 1998, 1997 and 1996, the Corporation had $1,541, $6,840 and
$8,479 respectively of convertible subordinated debentures outstanding. The 15
year, 6.25% debentures were issued in a public offering in 1993 by Security
First Corp. and are convertible by the holders any time prior to maturity.
Residential mortgage loans totaling $436,840, $174,284, and $201,533 at
year-end 1998, 1997 and 1996, respectively, were pledged to secure Federal Home
Loan Bank ("FHLB") advances. FANNIE MAE ("FNMA") Preferred Stock of
approximately $28.2 million and preferred stock of another financial institution
totaling $4.3 million were pledged against the line of credit with $23,000
outstanding at year-end 1998. FNMA Preferred Stock of $16.0 million was pledged
to secure the $6.0 million outstanding on the line at year-end 1997.
11. FEDERAL INCOME TAXES
Federal income taxes are comprised of the following:
YEARS ENDED,
---------------------------
1998 1997 1996
------- ------ ------
Taxes currently payable..................................... $53,222 50,841 22,659
Deferred expense (benefit).................................. (5,880) (5,863) 15,787
------- ------ ------
$47,342 44,978 38,446
Actual Federal income tax expense differs from expected Federal income tax
as shown below:
YEARS ENDED,
--------------------
1998 1997 1996
---- ---- ----
Statutory rate.............................................. 35.0% 35.0% 35.0%
Increase (decrease) in rate due to:
Interest income on tax-exempt securities and tax-free
loans, net............................................. -1.2% -1.2% -1.7%
Goodwill amortization..................................... 0.9% 0.2% 1.3%
Reduction to excess tax reserves.......................... -1.7% -1.0% -1.3%
Exercise of options at acquisition........................ -0.6% -0.1% --
Merger expenses at acquisition............................ 1.0% -- --
Dividends received deduction.............................. -0.4% -- --
Bank owned life insurance................................. -0.4% -- --
Other..................................................... 0.1% -0.9% --
---- ---- ----
Effective tax rates......................................... 32.7% 32.0% 33.3%
==== ==== ====
39
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
For 1998, 1997 and 1996, the deferred income tax expense results from
temporary differences in the recognition of income and expense for Federal
income tax and financial reporting purposes. The sources and tax effect of these
temporary differences are presented below:
YEARS ENDED,
---------------------------------
1998 1997 1996
------- ------------ ------
Loan loss provision......................................... $(9,375) (4,606) 6,214
Depreciation................................................ 132 194 (250)
Deferred loan fees, net..................................... 626 422 901
Leasing..................................................... 514 (3,683) 6,708
SFAS 106 postretirement benefits............................ (1,132) (1,105) (1,057)
SFAS 87 pension expense..................................... (407) 1,333 1,678
FHLB stock dividends........................................ 1,476 1,114 971
SFAS 125 mortgage servicing rights.......................... 2,136 -- --
Severance costs............................................. -- -- 1,315
Valuation reserves.......................................... 147 633 675
Other....................................................... 3 (165) (1,368)
------- ------ ------
Total deferred income tax................................... $(5,880) (5,863) 15,787
======= ====== ======
Principal components of the Corporation's net deferred tax (liability) are
summarized as follows:
YEAR-ENDS,
-------------------
1998 1997
-------- -------
Excess of book loan provision over tax loan provision....... $ 20,345 10,970
Excess of tax depreciation over book depreciation........... (4,294) (4,162)
Deferred loan fees tax basis income over book basis......... 576 1,202
Leasing book basis over tax basis........................... (24,845) (24,331)
Postretirement book basis expense over tax basis............ 6,157 5,025
Pension book basis expense over tax basis................... (805) (1,212)
FHLB stock book basis over tax basis........................ (7,085) (5,609)
Security portfolio tax basis over book basis................ (2,074) (1,694)
Mtg. servicing rights book basis over tax basis............. (2,136) --
Valuation reserves book basis over tax basis................ -- 147
Other....................................................... 3,232 3,235
-------- -------
Total net deferred tax (liability).......................... $(10,929) (16,429)
======== =======
12. BENEFIT PLANS
The Corporation has a defined benefit pension plan covering substantially
all of its employees. In general, benefits are based on years of service and the
employee's compensation. The Corporation's funding policy is to contribute
annually the maximum amount that can be deducted for federal income tax
reporting purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future.
A supplemental non-qualified, non-funded pension plan for certain officers
is also maintained and is being provided for by charges to earnings sufficient
to meet the projected benefit obligation. The pension cost for this plan is
based on substantially the same actuarial methods and economic assumptions as
those used for the defined benefit pension plan.
40
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The Corporation also sponsors a benefit plan which presently provides
postretirement medical and life insurance for retired employees. Effective
January 1, 1993, the plan was changed to limit the Corporations' medical
contribution to 200% of the 1993 level for employees who retire after January 1,
1993. The Corporation reserves the right to terminate or amend the plan at any
time.
The cost of postretirement benefits expected to be provided to current and
future retirees is accrued over those employee's service periods. Prior to 1993,
postretirement benefits were accounted for on a cash basis. In addition to
recognizing the cost of benefits for the current period, recognition is being
provided for the cost of benefits earned in prior service periods (the
transition obligation).
The following table sets forth the both plans' funded status and amounts
recognized in the Corporation's consolidated financial statements. The 1998 and
1997 amounts shown reflect a change in the measurement date from December 31 to
September 30. Amounts shown for 1996 have not been restated to show the change
in the measurement date. In addition, all amounts for each year have been
restated to reflect the mergers of CoBancorp and Security First in 1998.
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------ ---------------------------
1998 1997 1996 1998 1997 1996
------ ------ ------ ------- ------- -------
Change in Benefit Obligation
Projected Benefit Obligation (PBO)
Accumulated Postretirement Benefit Obligation
(APBO), beginning of year.................... 70,720 70,119 73,926 27,864 30,888 31,198
Service Cost............................... 3,546 3,379 3,729 855 958 935
Interest Cost.............................. 4,988 4,880 4,978 1,872 2,157 2,133
Plan amendments............................ 1,060 684 144 -- -- (2,952)
Participant contributions.................. -- -- -- 1,390 1,554 1,575
Actuarial (gain) loss...................... (2,735) (2,113) (6,054) (2,330) (5,953) (221)
Benefits Paid.............................. (3,890) (6,229) (6,604) (1,750) (1,740) (1,780)
------ ------ ------ ------- ------- -------
PBO/APBO, end of year........................ 73,689 70,720 70,119 27,901 27,864 30,888
====== ====== ====== ======= ======= =======
Change in Plan Assets
Fair Value of Plan Assets, beginning of
year....................................... 80,877 71,929 67,035 -- -- --
Actuarial return on plan assets............ 2,465 9,454 3,827 -- -- --
Participant contributions.................. -- -- -- 1,390 1,554 1,575
Employer contributions..................... 1,027 5,723 7,671 360 186 205
Benefits paid.............................. (3,890) (6,229) (6,604) (1,750) (1,740) (1,780)
------ ------ ------ ------- ------- -------
Fair Value of Plan Assets, end of year....... 80,479 80,877 71,929 -- -- --
====== ====== ====== ======= ======= =======
Funded Status................................ 6,790 10,157 1,810 (27,901) (27,864) (30,888)
Unrecognized Transition (asset) obligation... (586) (792) (999) 11,488 12,308 13,129
Prior service costs.......................... 4,437 3,707 3,311 -- -- --
Cumulative net (gain) or loss................ (7,137) (8,450) (3,215) 365 1,666 6,394
------ ------ ------ ------- ------- -------
(Accrued) prepaid pension/ postretirement
cost....................................... 3,504 4,622 907 (16,048) (13,890) (11,365)
====== ====== ====== ======= ======= =======
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost....................... 4,250 4,632 2,073 -- -- --
Accrued benefit liability.................. (6,362) (4,218) (3,794) (16,048) (13,890) (11,365)
Intangible asset........................... 5,616 4,208 2,628 -- -- --
------ ------ ------ ------- ------- -------
Net amount recognized........................ 3,504 4,622 907 (16,048) (13,890) (11,365)
====== ====== ====== ======= ======= =======
41
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------ --------------------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- -------- -------- ----------------------
Weighted-average assumptions as
of December 31
Discount Rate.................... 7.00% 7.50% 7.50% 7.00% 7.50% 7.50%
Long-term rate of return on
assets......................... 9.00% 9.00% 9.00% N/A N/A N/A
Rate of compensation increase.... 4.00% 4.75% 4.75% -- -- --
Medical trend rates.............. -- -- -- 5% to 8% 5% to 9% pre-65: 12.4% to 6%
post-65: 11.8% to 6.1%
For measurement purposes, a 9% annual rate increase in the per capita cost
of covered health care benefits was assumed for 1999. The rate was assumed to
decrease gradually to 6% in 2002 and remain at that level hereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percent point change in assumed
health care cost trend rates would have the following effects:
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total of service and interest cost
components...................................... $ 328 $ (285)
Effect on postretirement benefit obligation....... 2,994 (2,684)
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------------- -----------------------
1998 1997 1996 1998 1997 1996
------- ------ ------ ----- ----- -----
Components of Net Periodic
Pension/Postretirement Cost
Service Cost............................ $ 3,546 3,379 3,729 855 958 935
Interest Cost........................... 4,988 4,880 4,978 1,872 2,157 2,133
Expected return on assets............... (6,537) (6,275) (5,996) -- -- --
Amortization of unrecognized
Transition (asset).................... (207) (207) (207) 821 821 821
Prior service costs................... 331 287 277 -- -- --
Cumulative net (gain) loss............ 25 (56) (99) -- 144 323
------- ------ ------ ----- ----- -----
Net periodic pension/postretirement
cost.................................. $ 2,146 2,008 2,682 3,548 4,080 4,212
======= ====== ====== ===== ===== =====
The Corporation has elected to amortize the transition obligation for both
the pension and postretirement plans by charges to income over a twenty year
period on a straightline basis.
The Corporation maintains a savings plan under Section 401(k) of the
Internal Revenue Code, covering substantially all full-time and part-time
employees after six months of continuous employment. Under the plan, employees
contributions are partially matched by the Corporation. Such matching becomes
vested when the employee reaches five years of credited services. Total savings
plan expenses were $2,286, $2,086 and $2,108 for 1998, 1997 and 1996,
respectively.
13. STOCK OPTIONS
The Corporation's 1982, 1992, and 1997 Stock Plans (the "Plans") provide
incentive options to certain key employees for up to 4,200,000 shares of
FirstMerit Common Stock. In addition, these Plans provide for the granting of
non-qualified stock options to certain non-employee directors of the Corporation
for which 200,000 shares of FirstMerit Common Stock have been reserved.
Outstanding options under these Plans are generally not exerciseable for at
least six months from date of grant.
42
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Options under these Plans are granted at 100% of the fair market value.
Options granted as incentive stock options must be exercised within ten years
and options granted as non-qualified stock options have terms established by the
Compensation Committee of the Board and approved by the non-employee directors
of the Board. Options are cancelable within defined periods based upon the
reason for termination of employment.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Corporation continues to account for its stock option plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to
Employees," and makes no charges against income with respect to options granted.
However, SFAS No. 123 does require the disclosure of the pro forma effect
on net income and earnings per share that would result if the fair value
compensation element were to be recognized as expense. The following table shows
the pro forma earnings and earnings per share for 1998, 1997, and 1996 along
with significant assumptions used in determining the fair value of the
compensation amounts.
1998 1997 1996
-------------- ------------ ------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Proforma amounts:
Net income.......................................... $94,645 94,789 76,501
Earnings per share (basic).......................... 1.33 1.37 1.07
Earnings per share (diluted)........................ 1.30 1.33 1.05
Assumptions:
Dividend yield...................................... 0.0% 3.50% 2.70%
Expected volatility................................. 24.94% 23.30% 24.51%
Risk free interest rate............................. 4.55% - 5.61% 5.8% - 6.8% 5.2% - 6.7%
Expected lives...................................... 5 yrs 5 yrs. 5 yrs.
A summary of stock option activity for the last two years follows:
AVAILABLE RANGE OF OPTION AVERAGE OPTION
SHARES FOR GRANT OUTSTANDING PRICE PER SHARE PRICE PER SHARE
- ------ --------- ----------- --------------- ---------------
Balance
Year-end 1996........................ 582,109 2,028,893 .00 - 16.97 $11.03
New shares reserved............... 2,200,000
Canceled.......................... -- (25,900) 5.41 - 25.06 14.12
Exercised......................... -- (353,032) 5.44 - 15.44 9.05
Granted........................... (549,743) 549,743 .00 - 29.63 18.76
--------- --------- ------------ ------
Balance
Year-end 1997........................ 2,232,366 2,199,704 .00 - 29.63 13.25
Canceled.......................... (65,800) 9.56 - 34.00 18.09
Exercised......................... (276,769) 6.31 - 21.63 12.96
Granted........................... (442,346) 442,346 .00 - 34.00 29.1
--------- --------- ------------ ------
Balance
Year-end 1998........................ 1,790,020 2,299,481 .00 - 34.00 16.5
========= ========= ============ ======
43
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The ranges of exercise prices and the remaining contractual life of options
as of December 31, 1998 were:
RANGE OF EXERCISE PRICES $0 - $9 $10 - $18 $19 - $26 $27 -$34
- ------------------------ -------- ---------- --------- --------
Options outstanding:
Outstanding as of December 31, 1998........... 393,422 1,131,343 446,277 328,439
Weighted-average remaining contractual life
(in years).................................. 6.00 6.94 8.56 9.19
Weighted-average exercise price............... $ 4.35 $ 14.17 $ 22.21 $ 31.33
Options exerciseable:
Outstanding as of December 31, 1998........... 297,443 627,676 202,031 51,004
Weighted-average remaining contractual life
(in years).................................. 5.87 6.76 8.19 8.78
Weighted-average exercise price............... $ 4.81 $ 13.60 $ 21.03 $ 31.56
The Employee Stock Purchase Plan provides full-time and part-time employees
of the Corporation the opportunity to acquire common shares on a payroll
deduction basis. Shares available under the Employee Stock Purchase Plan are
purchased at 85% of their fair market value on the business day immediately
preceding the semi-annual grant-date Of the 400,000 shares available under the
Plan, there were 31,885, 19,204 and 12,512 shares issued in 1998, 1997 and 1996,
respectively.
14. PARENT COMPANY
Condensed financial information of FirstMerit Corporation (Parent Company only)
is as follows:
YEAR-ENDS,
-------------------
CONDENSED BALANCE SHEETS 1998 1997
- ------------------------ -------- -------
ASSETS
Cash and due from banks..................................... $ 15,728 29,169
Investment securities....................................... 4,497 4,342
Loans to subsidiaries....................................... 69,000 66,000
Investment in subsidiaries, at equity in underlying value of
their net assets.......................................... 676,563 480,236
Net loans................................................... 15,375 31,568
Goodwill.................................................... -- 133
Other assets................................................ 3,109 10,176
-------- -------
$784,272 621,624
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Convertible subordinated debt............................... $ 1,541 6,840
Repurchase agreements....................................... 10,000 --
Accrued and other liabilities............................... 4,095 19,769
Shareholders' equity........................................ 768,636 595,015
-------- -------
$784,272 621,624
======== =======
44
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED,
-----------------------------
CONDENSED STATEMENTS OF INCOME 1998 1997 1996
- ------------------------------ ------- ------- -------
Income:
Cash dividends from subsidiaries............................ $60,000 100,200 76,250
Other income................................................ 4,044 66,019 61,296
------- ------- -------
64,044 166,219 137,546
Interest and other expenses................................. 4,071 66,313 61,210
------- ------- -------
Income before federal income tax benefit and equity in
undistributed income of subsidiaries...................... 59,973 99,906 76,336
Federal income tax (benefit)................................ (3,221) (1,267) (1,292)
------- ------- -------
63,194 101,173 77,628
Equity in undistributed income (loss) of subsidiaries....... 34,284 (5,499) (278)
------- ------- -------
Net income.................................................. $97,478 95,674 77,350
======= ======= =======
YEARS ENDED,
--------------------------------
CONDENSED STATEMENTS OF CASH FLOWS 1998 1997 1996
- ---------------------------------- --------- ------- --------
Operating activities:
Net income.................................................. $ 97,478 95,674 77,350
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity (loss) in undistributed income of subsidiaries....... (34,284) 5,262 278
Gain on sale of assets -- FirstMerit Bank, N.A.............. -- -- (490)
Cash received on FirstMerit Bank, N.A. sale................. -- -- 13,060
Addition to Provision for loan losses....................... 62 1,097 --
Other....................................................... (10,071) 7,694 3,724
--------- ------- --------
Net cash provided by operating activities................... 53,185 109,727 93,922
--------- ------- --------
Investing activities:
Proceeds from maturities of investment securities........... 3,276 -- 2,000
Loans to subsidiaries....................................... (3,000) (4,211) 63,228
Payments for investments in and advances to subsidiaries.... (165,353) (10,840) --
Net increase (decrease) in loans............................ 16,131 2,346 (33,152)
Purchases of investment securities........................ (3,049) (1,211) (4,126)
--------- ------- --------
Net cash (used) provided by investing activities............ (151,995) (13,916) 27,950
--------- ------- --------
Financing activities:
Net increase in securities sold under repurchase agreements
and
other borrowings.......................................... 10,000 -- --
Cash dividends.............................................. (49,322) (40,871) (38,563)
Proceeds from exercise of stock options..................... 7,865 3,138 3,617
Purchase of treasury shares................................. (25,703) (53,607) (56,295)
Treasury shares reissued -- acquisition..................... 115,205 -- --
Treasury shares reissued -- public offering................. 27,324 -- --
Loans made to FirstMerit Bank, N.A.......................... -- -- (17,000)
--------- ------- --------
Net cash (used) provided by financing activities............ 85,369 (91,340) (108,241)
--------- ------- --------
45
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED,
--------------------------------
CONDENSED STATEMENTS OF CASH FLOWS 1998 1997 1996
- ---------------------------------- --------- ------- --------
Net increase (decrease) in cash and cash equivalents........ (13,441) 4,471 13,631
Cash and cash equivalents at beginning of year.............. 29,169 24,698 11,067
--------- ------- --------
Cash and cash equivalents at end of year.................... $ 15,728 29,169 24,698
========= ======= ========
15. SEGMENT INFORMATION
The Corporation provides a diversified range of banking and certain
nonbanking financial services and products through its various subsidiaries.
Management reports the results of the Corporation's operations through its major
line of business Super Community Banking. Parent Company and Others include
activities that are not directly attributable to Super Community Banking.
Included in this category are certain nonbanking affiliates, eliminations of
certain intercompany transactions and certain nonrecurring transactions. Also
included are portions of certain assets, capital, and support functions not
specifically identifiable with Super Community Banking. The Corporation's
business is conducted solely in the United States.
The accounting policies of the segment are the same as those described in
"Summary of Significant Accounting Policies." The Corporation evaluates
performance based on profit or loss from operations before income taxes.
The following table presents a summary of financial results and significant
performance measures for the periods depicted. Information for periods prior to
those presented was not readily available.
1998 1997
----------------------------------------------------- --------------------------------------
SUPER- ADJUSTMENTS SUPER- ADJUSTMENTS
COMMUNITY PARENT CO. AND FIRSTMERIT COMMUNITY PARENT CO. AND
BANKING & OTHERS ELIMINATIONS CONSOLIDATED BANKING & OTHERS ELIMINATIONS
(DOLLARS IN THOUSANDS) ---------- ---------- ------------ ------------ ---------- ---------- ------------
SUMMARY OF OPERATIONS:
Net interest
income........... $ 302,694 62,756 (60,004) 305,446 $ 277,305 91,806 (87,506)
Provision for
possible loan
losses........... 28,321 62 -- 28,383 20,806 1,097 --
Other income....... 108,929 1,563 (12) 110,480 86,817 75,454 (76,935)
Other expenses..... 239,385 3,354 (16) 242,723 203,077 65,550 (64,241)
Net income......... 93,674 98,088 (94,284) 97,478 84,953 96,188 (85,467)
AVERAGE BALANCES:
Assets............. 5,877,288 732,371 6,609,659 5,305,301 619,937
Loans.............. 4,782,377 24,805 4,807,182 4,351,390 39,663
Earning assets..... 6,100,546 30,267 6,130,813 5,065,469 511,532
Deposits........... 5,134,553 -- 5,134,553 4,645,807 --
Shareholders'
equity........... 584,667 99,142 683,809 505,177 76,852
PERFORMANCE RATIOS:
Return on average
equity........... 16.02% 14.26% 18.66%
Return on average
assets........... 1.59% 1.47% 1.78%
Efficiency ratio... 57.19% 57.37% 55.01%
1997
------------
FIRSTMERIT
CONSOLIDATED
(DOLLARS IN THOUSANDS) ------------
SUMMARY OF OPERATIONS:
Net interest
income........... 281,605
Provision for
possible loan
losses........... 21,903
Other income....... 85,336
Other expenses..... 204,386
Net income......... 95,674
AVERAGE BALANCES:
Assets............. 5,925,238
Loans.............. 4,391,053
Earning assets..... 5,577,001
Deposits........... 4,645,807
Shareholders'
equity........... 582,029
PERFORMANCE RATIOS:
Return on average
equity........... 16.44%
Return on average
assets........... 1.61%
Efficiency ratio... 54.55%
46
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The table below presents estimated revenues from external customers, by
product and service group for the periods depicted.
TRUST
RETAIL COMMERCIAL SERVICES TOTAL
-------- ---------- -------- --------
1998:
Interest and fees............................ $284,506 256,596 16,147 557,249
Service charges.............................. 33,252 8,498 -- 41,750
Sales and servicing.......................... 7,814 6,764 -- 14,578
-------- -------- -------- --------
$325,572 271,858 16,147 613,577
16. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Disclosures of fair value information about certain financial instruments,
whether or not recognized in the consolidated balance sheets are provided as
follows. Instruments for which quoted market prices are not available are valued
based on estimates using present value or other valuation techniques whose
results are significantly affected by the assumptions used, including discount
rates and future cash flows. Accordingly, the values so derived, in many cases,
may not be indicative of amounts that could be realized in immediate settlement
of the instrument. Also, certain financial instruments and all non-financial
instruments are excluded from these disclosure requirements. For these and other
reasons, the aggregate fair value amounts presented below are not intended to
represent the underlying value of the Corporation.
The following methods and assumptions were used to estimate the fair values
of each class of financial instrument presented:
Investment securities -- Fair values are based on quoted prices, or
for certain fixed maturity securities not actively traded estimated values
are obtained from independent pricing services.
Federal funds sold -- The carrying amount is considered a reasonable
estimate of fair value.
Net loans -- Fair value for loans with interest rates that fluctuate
as current rates change are generally valued at carrying amounts with an
appropriate discount for any credit risk. Fair values of other types of
loans are estimated by discounting the future cash flows using the current
rates for which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Cash and due from banks -- The carrying amount is considered a
reasonable estimate of fair value.
Accrued interest receivable -- The carrying amount is considered a
reasonable estimate of fair value.
Deposits -- The carrying amount is considered a reasonable estimate of
fair value for demand and savings deposits and other variable rate deposit
accounts. The fair values for fixed maturity certificates of deposit and
other time deposits are estimated using the rates currently offered for
deposits of similar remaining maturities.
Securities sold under agreements to repurchase and other
borrowings -- Fair values are estimated using rates currently available to
the Corporation for similar types of borrowing transactions.
Derivative financial instruments -- The fair value of exchange-traded
derivative financial instruments was based on quoted market prices or
dealer quotes. These values represent the estimated amount the Corporation
would receive or pay to terminate the agreements, considering current
interest rates, as well as the current credit-worthiness of the
counterparties. Fair value amounts consist of unrealized gains and losses,
accrued interest receivable and payable, and premiums paid or received, and
take into account master netting agreements.
Accrued interest payable -- The carrying amount is considered a
reasonable estimate of fair value.
47
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Commitments to extend credit -- The fair value of commitments to
extend credit is estimated using the fees currently charged to enter into
similar arrangements, taking into account the remaining terms of the
agreements, the creditworthiness of the counterparties, and the difference,
if any, between current interest rates and the committed rates.
Standby letters of credit and financial guarantees written -- Fair
values are based on fees currently charged for similar agreements or on the
estimated cost to terminate or otherwise settle the obligations.
Loans sold with recourse -- Fair value is estimated based on the
present value of the estimated future liability in the event of default.
The estimated fair values of the Corporation's financial instruments based
on the assumptions described above are as follows:
YEAR-ENDS
----------------------------------------------------
1998 1997
------------------------ ------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
Financial assets:
Investment securities................... $1,551,727 1,551,727 $1,136,561 1,136,561
Federal funds sold...................... 12,505 12,505 36,496 36,496
Net loans............................... 4,918,447 4,924,468 4,408,561 4,427,222
Cash and due from banks................. 245,950 245,950 176,745 176,745
Accrued interest receivable............. 41,608 41,608 37,219 37,219
Financial liabilities:
Deposits................................ 5,461,563 5,481,376 4,763,368 4,770,189
Securities sold under agreements to
repurchase and other borrowings...... 807,433 808,660 546,862 547,035
Accrued interest payable................ 21,347 21,347 17,291 17,291
Derivative instruments.................. -- (68) -- --
Unrecognized financial instruments:
Commitments to extend credit............ -- -- -- --
Standby letters of credit and financial
guarantees written................... -- -- -- --
Loans sold with recourse................ -- -- -- --
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit, financial guarantees, and loans sold with recourse
and derivative instruments.
These instruments involve, to varying degrees, elements recognized in the
consolidated balance sheets. The contract or notional amount of these
instruments reflect the extent of involvement the Corporation has in particular
classes of financial instruments.
The Corporation's exposure to credit loss in the event of non-performance
by the other party to the financial instrument for commitments to extend credit
and standby letters of credit and financial guarantees written is represented by
the contractual notional amount of those instruments. The Corporation uses the
obligations as it does for on-balance-sheet instruments.
48
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Unless noted otherwise, the Corporation does not require collateral or
other security to support financial instruments with credit risk. The following
table sets forth financial instruments whose contract amounts represent credit
risk.
YEARS ENDED,
-----------------------
1998 1997
---------- ---------
Commitments to extend credit................................ $2,048,634 1,583,467
========== =========
Standby letters of credit and financial guarantees
written................................................... $ 121,065 114,304
========== =========
Loans sold with recourse.................................... $ 727 1,058
========== =========
Purchased options........................................... $ 11,400 --
========== =========
Futures contracts sold...................................... $ 6,100 --
========== =========
Commitments to extend credit are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally are extended at the then prevailing interest rates, have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary by the
Corporation upon extension of credit is based on Management's credit evaluation
of the counter party. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, and income-producing
commercial properties. Standby letters of credit and financial guarantees
written are conditional commitments issued by the Corporation to guarantee the
performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. Except for short-term
guarantees of $27,627 and $33,796 at December 31, 1998 and 1997, respectively,
the remaining guarantees extend in varying amounts through 2020. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Collateral held varies, but may
include marketable securities, equipment and real estate. In recourse
arrangements, the Corporation accepts 100% recourse. By accepting 100% recourse,
the Corporation is assuming the entire risk of loss due to borrower default. The
Corporation's exposure to credit loss, if the borrower completely failed to
perform and if the collateral or other forms of credit enhancement all prove to
be of no value, is represented by the notional amount less any allowance for
possible loan losses. The Corporation uses the same credit policies originating
loans which will be sold with recourse as it does for any other type of loan.
Derivative financial instruments include swaps, futures, forwards and
option contracts, all of which derive their value from underlying interest
rates, commodity values or equity instruments. For most contracts, notional
amounts are used solely to determine cash flows to be exchanged. The notional or
contract amounts associated with the derivative instruments are not recorded as
assets or liabilities on the balance sheet and do not represent the potential
for gain or loss associated with such transactions. The gross losses in 1998
associated with purchase options totaled $31.0 and the gross losses from futures
contracts sold were $36.0. These derivative instruments were not entered into
until 1998.
18. 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 or results of
operations.
49
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial and per share data for the years ended 1998 and 1997
are summarized as follows:
QUARTERS
-----------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Total interest income..................... 1998 $116,408 124,003 131,571 131,115
==== ======== ======== ======== ========
1997 $111,977 116,041 116,703 118,797
==== ======== ======== ======== ========
Net interest income....................... 1998 $ 70,912 75,156 78,629 80,749
==== ======== ======== ======== ========
1997 $ 68,808 70,680 70,389 71,728
==== ======== ======== ======== ========
Provision for possible loan losses........ 1998 $ 5,547 5,527 5,235 12,074
==== ======== ======== ======== ========
1997 $ 4,219 5,117 6,266 6,301
==== ======== ======== ======== ========
Income before federal income taxes........ 1998 $ 35,295 39,170 41,235 29,120
==== ======== ======== ======== ========
1997 $ 33,525 34,986 35,442 36,699
==== ======== ======== ======== ========
Net income................................ 1998 $ 24,425 26,797 28,283 17,973
==== ======== ======== ======== ========
1997 $ 22,423 23,624 24,369 25,258
==== ======== ======== ======== ========
Net income per share -- basic............. 1998 $ 0.36 0.38 0.39 0.24
==== ======== ======== ======== ========
1997 $ 0.32 0.34 0.35 0.37
==== ======== ======== ======== ========
Net income per share -- diluted........... 1998 $ 0.35 $ 0.38 $ 0.38 $ 0.23
==== ======== ======== ======== ========
1997 $ 0.31 $ 0.33 $ 0.35 $ 0.36
==== ======== ======== ======== ========
20. SHAREHOLDER RIGHTS PLAN
The Corporation has in effect a shareholder rights plan ("Plan"). The Plan
provides that each share of Common Stock has one right attached. Under the Plan,
subject to certain conditions, the Rights would be distributed after either of
the following events: (1) a person acquires 10% or more of the Common Stock of
the Corporation, or (2) the commencement of a tender offer that would result in
a change in the ownership of 10% or more of the Common Stock. After such an
event, each Right would entitle the holder to purchase shares of Series A
Preferred Stock of the Corporation. Subject to certain conditions, the
Corporation may redeem the Rights for $0.01 per Right.
50
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
21. EARNINGS PER SHARE
SFAS 128 requires reconciliation of the numerator and denominator used in
the basic Earnings Per Share ("EPS") calculation to the numerator and
denominator used in the diluted EPS calculation. The calculations are presented
in the table below:
YEARS ENDED,
---------------------------------------
1998 1997 1996
----------- ---------- ----------
(DOLLARS IN THOUSANDS)
BASIC EPS:
Net income available to common shareholders......... $ 97,478 95,674 77,350
Average common shares outstanding................... 71,095,251 69,404,772 71,798,728
Earnings per basic common share..................... $ 1.37 1.38 1.08
DILUTED EPS:
Net income available to common shareholders......... $ 97,478 95,674 77,350
Add: interest expense on convertible bonds, net of
tax.............................................. 206 334 391
----------- ---------- ----------
Adjusted income available to common shareholders.... 97,684 96,008 77,741
Average common shares outstanding................... 71,095,251 69,404,772 71,798,728
Add: common stock equivalents for shares issuable
under:
Stock option plans............................... 1,055,079 1,000,428 375,740
Subordinated debentures conversion............... 552,420 852,304 993,554
----------- ---------- ----------
Average common and common stock equivalent shares
outstanding...................................... 72,702,750 71,257,504 73,168,022
Earnings per diluted common share................... $ 1.34 1.35 1.06
=========== ========== ==========
22. REGULATORY MATTERS
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to quantitative judgements
by regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes, as of December 31, 1998, the
Corporation meets all capital adequacy requirements to which it is subject. The
capital terms used in this note to the consolidated financial statements are
defined in the regulations as well as in the "Capital Resources" section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
As of year-end 1998, the most recent notification from the Office of the
Comptroller of the Currency ("OCC") categorized the Corporation as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Corporation must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table. In management's opinion, there are no conditions or events since the
OCC's notification that have changed the Corporation's categorization as "well
capitalized."
51
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
FOR CAPITAL
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES: ACTION PROVISIONS:
----------------- ----------------- ------------------
AS OF DECEMBER 31, 1998: AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------ -------- ----- -------- ----- -------- ------
Total Capital (to Risk Weighted Assets).... $692,689 11.55% $479,855 8.00% 599,818 10.00%
Tier I Capital (to Risk Weighted Assets)... 617,663 10.30% $239,927 4.00% 359,891 6.00%
Tier I Capital (to Average Assets)......... 617,663 8.98% $206,367 3.00% 343,945 5.00%
52
54
MANAGEMENT'S REPORT
The management of FirstMerit Corporation is responsible for the preparation
and accuracy of the financial information presented in this annual report. These
consolidated financial statements were prepared in accordance with generally
accepted accounting principles, based on the best estimates and judgment of
management.
The Corporation maintains a system of internal controls designed to provide
reasonable assurance that assets are safeguarded, that transactions are executed
in accordance with the Corporation's authorization and policies, and that
transactions are properly recorded so as to permit preparation of financial
statements that fairly present the financial position and results of operations
in conformity with generally accepted accounting principles. These systems and
controls are reviewed by our internal auditors and independent auditors.
The Audit Committee of the Board of Directors is composed of only outside
directors and has the responsibility for the recommendation of the independent
auditors for the Corporation. The Audit Committee meets regularly with
management, internal auditors and our independent auditors to review accounting,
auditing and financial matters. The independent auditors and the internal
auditors have free access to the Audit Committee.
JOHN R. COCHRAN SIGNATURE AUSTIN J. MULHERN SIGNATURE
Chairman and Chief Senior Vice President
Executive Officer Chief Financial Officer
53
55
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
And Shareholders of FirstMerit Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and retained earnings and of cash
flows present fairly, in all material respects, the financial position of
FirstMerit Corporation and its subsidiaries at December 31, 1998 and 1997 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS SIGNATURE
January 31, 1999
54
56
AVERAGE CONSOLIDATED BALANCE SHEETS
FULLY-TAX EQUIVALENT INTEREST RATES AND INTEREST DIFFERENTIAL
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED
--------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------- ---------- -------- ------- --------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Investment securities:
U.S. Treasury securities
and U.S. Government
agency obligations
(taxable)................ $1,055,750 65,176 6.17% 955,112 60,594 6.34% 1,158,357 72,023 6.22
Obligations of states and
political subdivisions
(tax-exempt)............. 98,457 7,767 7.89 86,873 7,074 8.14 100,630 7,404 7.36
Other securities........... 150,561 9,504 6.31 102,327 6,568 6.42 99,977 6,489 6.49
---------- ------- ---------- ------- --------- -------
Total investment
securities........... 1,304,768 82,447 6.32 1,144,312 74,236 6.49 1,358,964 85,916 6.32
Federal funds sold & other
interest-earning assets.... 18,863 1,026 5.44 41,636 2,250 5.40 19,233 934 4.86
Loans........................ 4,807,182 423,116 8.80 4,391,053 390,266 8.89 4,343,189 377,116 8.68
Total earning assets... 6,130,813 506,589 8.26 5,577,001 466,752 8.37 5,721,386 463,966 8.11
Allowance for possible loan
losses..................... (69,191) (56,234) (52,003)
Cash and due from banks...... 204,353 202,600 231,564
Other assets................. 343,684 201,871 175,020
---------- ---------- ---------
Total assets........... $6,609,659 $5,925,238 6,075,967
========== ========== =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits:
Demand-non-interest
bearing.................. $1,022,909 -- -- 733,394 -- -- 745,102 -- --
Demand-interest bearing.... 508,983 5,688 1.12 536,983 8,485 1.58 529,888 9,758 1.84
Savings.................... 1,364,705 37,178 2.72 1,337,115 34,650 2.59 1,457,762 36,092 2.48
Certificates and other time
deposits................. 2,237,956 120,135 5.37 2,038,315 107,997 5.30 2,056,139 109,005 5.30
---------- ------- ---------- ------- --------- -------
Total deposits......... 5,134,553 163,001 3.17 4,645,807 151,132 3.25 4,788,891 154,855 3.23
Federal funds purchased,
securities sold under
agreements to repurchase
and other borrowings....... 688,311 34,650 5.03 595,740 30,803 5.17 623,278 31,481 5.05
---------- ------- ---------- ------- --------- -------
Total interest bearing
liabilities.......... 4,799,955 197,651 4.12 4,508,153 181,935 4.04 4,667,067 186,336 3.99
---------- ------- ---------- ------- --------- -------
Other liabilities............ 102,986 101,662 79,329
Shareholders' equity......... 683,809 582,029 584,469
---------- ---------- ---------
Total liabilities and
shareholders'
equity............... $6,609,659 5,925,238 6,075,967
========== ========== =========
Net yield on earning
assets..................... 308,938 5.04 284,817 5.11 277,630 4.85
======= ==== ======= ==== ======= ====
Interest rate spread......... 4.14 4.33 4.12
==== ==== ====
Income on tax-exempt
securities and loans....... 5,542 5,225 6,241
======= ======= =======
- ---------------
Notes: Interest income on tax-exempt securities and loans have been adjusted to
a fully-taxable equivalent basis.
Non-accrual loans have been included in the average balances.
55
57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information about the Directors of FirstMerit, see "Election of
Directors" on pages 2 through 5 of FirstMerit's Proxy Statement dated March 17,
1999 ("Proxy Statement"), which is incorporated herein by reference.
Information about the Executive Officers of FirstMerit appears in Part I of
this report.
Disclosure by FirstMerit with respect to compliance with Section 16(a)
appears on page 5 of the Proxy Statement, and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
See "Executive Compensation and Other Information" on pages 7 through 18 of
the Proxy Statement, which are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Principal Shareholders" and "Election of Directors" at page 27, and
pages 2 through 6, respectively, of the Proxy Statement, which are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Certain Relationships and Related Transactions" at pages 20 and 21 of
the Proxy Statement, which are incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following Financial Statements appear in Part II of this Report:
Consolidated Balance Sheets December 31, 1998, 1997 and 1996
Consolidated Statements of Income Years ended December 31, 1998, 1997
and 1996
Consolidated Statements of Changes in Shareholders' Equity Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows Years ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements Years ended December 31,
1998, 1997 and 1996
Management's Report
Independent Auditors' Report
(a)(2) Financial Statement Schedules
All schedules are omitted as the required information is inapplicable or
the information is presented in the consolidated financial statements or
related notes which appear in Part II of this report.
(a)(3) Management Contracts or Compensatory Plans or Arrangements
See those documents listed on the Exhibit Index which are marked as
such.
(b) Reports on Form 8-K
FirstMerit filed a Form 8-K on October 26, 1998 to report the
consummation of the merger of Security First Corp. with and into the
Corporation.
(c) Exhibits
See the Exhibit Index.
(d) Financial Statements
See subparagraph (a)(1) above.
56
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Akron,
State of Ohio, on the 17th day of March, 1999.
FirstMerit Corporation
By: /s/ JOHN R. COCHRAN
----------------------------------
John R. Cochran, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on the 17th day of March, 1999 by the following persons
(including a majority of the Board of Directors of the registrant) in the
capacities indicated.
SIGNATURE TITLE
- --------- -----
/s/ JOHN R. COCHRAN Chairman and Chief Executive Officer (Principal
- ------------------------------------------------ Executive Officer) and Director
John R. Cochran
/s/ AUSTIN J. MULHERN Executive Vice President, Finance and
- ------------------------------------------------ Administration (Chief Financial Officer and Chief
Austin J. Mulhern Accounting Officer)
/s/ KAREN S. BELDEN Director
- ------------------------------------------------
Karen S. Belden
/s/ R. CARY BLAIR Director
- ------------------------------------------------
R. Cary Blair
/s/ SID A. BOSTIC Director
- ------------------------------------------------
Sid A. Bostic
/s/ ROBERT W. BRIGGS Director
- ------------------------------------------------
Robert W. Briggs
/s/ GARY G. CLARK Director
- ------------------------------------------------
Gary G. Clark
/s/ PHILIP A. LLOYD, II Director
- ------------------------------------------------
Philip A. Lloyd, II
/s/ RICHARD COLELLA Director
- ------------------------------------------------
Richard Colella
/s/ TERRY L. HAINES Director
- ------------------------------------------------
Terry L. Haines
/s/ CLIFFORD J. ISROFF Director
- ------------------------------------------------
Clifford J. Isroff
/s/ ROBERT G. MERZWEILER Director
- ------------------------------------------------
Robert G. Merzweiler
/s/ STEPHEN E. MYERS Director
- ------------------------------------------------
Stephen E. Myers
/s/ ROGER T. READ Director
- ------------------------------------------------
Roger T. Read
59
SIGNATURE TITLE
- --------- -----
/s/ RICHARD N. SEAMAN Director
- ------------------------------------------------
Richard N. Seaman
/s/ CHARLES F. VALENTINE Director
- ------------------------------------------------
Charles F. Valentine
/s/ JERRY M. WOLF Director
- ------------------------------------------------
Jerry M. Wolf
60
EXHIBIT INDEX
EXHIBIT
NUMBER
3.1 Amended and Restated Articles of Incorporation of FirstMerit
Corporation, as amended (incorporated by reference from
Exhibit 3(a) to the Form 8-K filed by the registrant on
April 9, 1998, and the amendment incorporated by reference
from Exhibit 4 to the Form 8-K filed by the registrant on
June 22, 1998)
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)
3.3 Certificate of Designation for FirstMerit Corporation 6 1/2%
Cumulative Convertible Preferred Stock, Series B
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
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 S-4
No. 333-52581-01, filed by FirstMerit Capital Trust I, fka
Signal Capital Trust I, on May 13, 1998)
4.8 Form of 8.67% Junior Subordinated Deferrable Interest
Debenture, Series B (incorporated by reference from Exhibit
4.7 to the Form S-4 No. 333-52581-01, filed by FirstMerit
Capital Trust I, fka Signal Capital Trust I, on May 13,
1998)
10.1 1982 Incentive Stock Option Plan of FirstMerit Corporation
(incorporated by reference from Exhibit 4.2 to the Form S-8
(No. 33-7266) filed by the registrant on July 15, 1986)*
10.2 Amended and Restated 1992 Stock Option Program of FirstMerit
Corporation (incorporated by reference from Exhibit 10.2 to
the Form 10-K filed by the registrant on February 24, 1998)*
10.3 1992 Directors Stock Option Program (incorporated by
reference from Exhibit 10.2 to the Form 10-K filed by the
registrant on February 24, 1998)*
10.4 FirstMerit Corporation 1995 Restricted Stock Plan
(incorporated by reference from Exhibit (10)(d) to the Form
10-Q for the fiscal quarter ended March 31, 1995, filed by
the registrant on May 15, 1995)*
10.5 1997 Stock Option Program of FirstMerit Corporation
(incorporated by reference from Exhibit 10.5 to the Form
10-K filed by the registrant on February 24, 1998)*
10.6 1985 FirstMerit Corporation Stock Plan (CV) (incorporated by
reference from Exhibit (10)(a) to the Form S-8 (No.
33-57557) filed by the registrant on February 1, 1995)*
10.7 1993 FirstMerit Corporation Stock Plan (CV) (incorporated by
reference from Exhibit (10)(b) to the Form S-8 (No.
33-57557) filed by the registrant on February 1, 1995)*
61
EXHIBIT
NUMBER
10.8 Amended and Restated FirstMerit Corporation Executive
Deferred Compensation Plan (incorporated by reference from
Exhibit 10(h) to the Form 10-K filed by the registrant on
February 25, 1997)*
10.9 Amended and Restated FirstMerit Corporation Director
Deferred Compensation Plan (incorporated by reference from
Exhibit 10(i) to the Form 10-K filed by the registrant on
February 25, 1997)*
10.10 FirstMerit Corporation Executive Supplemental Retirement
Plan (incorporated by reference from Exhibit 10(d) to the
Form 10-K filed by the registrant on March 15, 1996)*
10.11 FirstMerit Corporation Unfunded Supplemental Benefit Plan
(incorporated by reference from Exhibit 10.11 to the Form
10-K filed by the registrant on February 24, 1998)*
10.12 First Amendment to the FirstMerit Corporation Unfunded
Supplemental Benefit Plan (incorporated by reference from
Exhibit 10(v) to the Form 10-K filed by the registrant on
March 2, 1995)*
10.13 Supplemental Pension Agreement of John R. Macso
(incorporated by reference from Exhibit 10.13 to the Form
10-K filed by the registrant on February 24, 1998)*
10.14 FirstMerit Corporation Executive Committee Life Insurance
Program Summary (incorporated by reference from Exhibit
10(w) to the Form 10-K filed by the registrant on March 2,
1995)*
10.15 Long Term Disability Plan (incorporated by reference from
Exhibit 10(x) to the Form 10-K filed by the registrant on
March 2, 1995)*
10.16 Employment Agreement dated October 23, 1998 for Charles F.
Valentine (incorporated by reference from Exhibit 10(a) to
the Form 10-Q filed by the registrant on November 13, 1998)*
10.17 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)*
10.18 Employment Agreement dated October 23, 1998 for Austin J.
Mulhern (incorporated by reference from Exhibit 10(c) to the
Form 10-Q filed by the registrant on November 13, 1998)*
10.19 SERP Agreement dated October 23, 1998 for Austin J. Mulhern
(incorporated by reference from Exhibit 10(d) to the Form
10-Q filed by the registrant on November 13, 1998)*
10.20 Employment Agreement of John R. Cochran, dated December 1,
1998*
10.21 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)*
10.22 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)*
10.23 Employment Agreement of Sid A. Bostic dated February 1, 1998
(incorporated by reference from Exhibit 10.19 to the Form
10-K filed by the registrant on February 24, 1998)*
10.24 Restricted Stock Award Agreement of Sid A. Bostic dated
February 1, 1998 (incorporated by reference from Exhibit
10.20 to the Form 10-K filed by the registrant on February
24, 1998)*
10.25 Form of FirstMerit Corporation Termination Agreement*
10.26 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)*
10.27 Distribution Agreement, by and among FirstMerit Corporation,
FirstMerit Bank, N.A. and the Agents (incorporated by
reference from Exhibit (10)(ii) to the Form 8-K/A filed by
the registrant on April 27, 1995)
10.28 Form of FirstMerit Bank, N.A. Global Bank Note (Fixed Rate)
(incorporated by reference from Exhibit (10)(iii) to the
Form 8-K/A filed by the registrant on April 27, 1995)
10.29 Form of FirstMerit Bank, N.A. Global Bank Note (Floating
Rate) (incorporated by reference from Exhibit (10)(iv) to
the Form 8-K/A filed by the registrant on April 27, 1995)
10.30 FirstMerit 1987 Stock Option and Incentive Plan (SF)
(incorporated by reference from Exhibit 4.2 to the Form
S-8/A (No. 333-57439) filed by the registrant on October 26,
1998)*
10.31 FirstMerit 1996 Stock Option and Incentive Plan (SF)
(incorporated by reference from Exhibit 4.3 to the Form
S-8/A (No. 333-57439) filed by the registrant on October 26,
1998)*
62
EXHIBIT
NUMBER
10.32 FirstMerit 1994 Stock Option Plan (SF) (incorporated by
reference from Exhibit 4.4 to the Form S-8/A (No. 333-57439)
filed by the registrant on October 26, 1998)*
10.33 FirstMerit 1989 Stock Incentive Plan (SB)(incorporated by
reference from Exhibit 4.6 to the Form S-8/A (No. 333-63797)
filed by the registrant on February 12, 1999)*
10.34 FirstMerit Amended and Restated Stock Option and Incentive
Plan (SG) (incorporated by reference from Exhibit 4.2 to the
Form S-8/A (No. 333-63797) filed by the registrant on
February 12, 1999)*
10.35 FirstMerit 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)*
10.36 FirstMerit 1997 Omnibus Incentive Plan (SG) (incorporated by
reference from Exhibit 4.4 to the Form S-8/A (No. 333-63797)
filed by the registrant on February 12, 1999)*
10.37 FirstMerit 1993 Stock Option Plan (FSB) (incorporated by
reference from Exhibit 4.5 to the Form S-8/A (No. 333-63797)
filed by the registrant on February 12, 1999)*
10.38 First Amendment to Restricted Stock Award Agreement for John
R. Cochran
10.39 Amended and Restated Membership Agreement with respect to
the FirstMerit Corporation Executive Supplemental Retirement
Plan
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)
21 Subsidiaries of FirstMerit Corporation
23 Consent of PricewaterhouseCoopers, L.L.P.
27 Financial Data Schedule
99 FirstMerit Corporation Supplemental Consolidated Balance
Sheets and the related Supplemental Consolidated Statements
of Income and Retained Earnings and of Cash Flows at
December 31, 1998 and 1997, and the Consolidated Results of
Operations and Cash Flows for each of the three years in the
period ended December 31, 1998