UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number: 0-10161
(Exact name of registrant as
specified in its charter)
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Ohio
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34-1339938
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification
No.)
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III Cascade Plaza, 7
th
Floor, Akron Ohio
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44308
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(Address of principal executive
offices)
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(Zip Code)
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(330) 996-6300
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Exchange Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock, without par value
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Exchange Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
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 registrants 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. o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to rule 405 of
Regulation S-T
(232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to
submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of June 30, 2009, the aggregate market value of the
registrants common stock (the only common equity of the
registrant) held by
non-affiliates
of the registrant was $1,449,516,458 based on the closing sale
price as reported on The NASDAQ Stock Market.
Indicate the number of shares outstanding of each of the
registrants classes of common stock, as of the latest
practicable date.
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Class
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Outstanding at February 5, 2010
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Common Stock, no par value
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86,983,440 shares
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DOCUMENTS INCORPORATED BY REFERENCE
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Document
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Parts Into Which Incorporated
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Proxy Statement for the Annual Meeting of Shareholders to be
held on April 21, 2010
(Proxy Statement)
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Part III
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Performance
Graph
Set forth below is a line graph comparing the yearly percentage
change in the cumulative total shareholder return on
FirstMerits Common Stock against the cumulative return of
the Nasdaq Banks Index, the Nasdaq Index and the S&P 500
Index for the period of five fiscal years commencing
December 31, 2004 and ended December 31, 2009. The
graph assumes that the value of the investment in FirstMerit
Common Stock and each index was $100 on December 31, 2004
and that all dividends were reinvested.
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2004
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2005
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2006
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2007
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2008
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2009
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FMER
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100.00
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94.77
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92.64
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81.25
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88.42
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91.76
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CBNK
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100.00
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95.67
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111.40
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89.54
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70.55
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58.97
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Nasdaq
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100.00
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102.13
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112.64
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124.61
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75.05
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108.82
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S&P 500
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100.00
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104.91
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121.20
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127.85
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81.12
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102.15
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TABLE OF CONTENTS
PART I
BUSINESS
OF FIRSTMERIT
Overview
Registrant, FirstMerit Corporation (FirstMerit or
the Corporation), is a $10.5 billion 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). FirstMerits 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, 2009, FirstMerit Bank, N.A.
(FirstMerit Bank), one of the Corporations
principal subsidiaries, operated a network of 160 full service
banking offices and 182 automated teller machines. Its offices
span a total of 24 counties in Ohio, including Ashland,
Ashtabula, Crawford, Cuyahoga, Delaware, Erie, Fairfield,
Franklin, Geauga, Holmes, Huron, Knox, Lake, Lorain, Lucas,
Madison, Medina, Portage, Richland, Seneca, Stark, Summit, Wayne
and Wood Counties, and Lawrence County in Pennsylvania. In its
principal market in Northeastern Ohio, FirstMerit serves nearly
599,216 households and businesses in the 16th largest
consolidated metropolitan statistical area in the country (which
combines the primary metropolitan statistical areas for
Cleveland, Lorain/Elyria and Akron, Ohio). FirstMerit and its
direct and indirect subsidiaries had approximately
2,495 employees at December 31, 2009.
Subsidiaries
and Operations
Through its subsidiaries, FirstMerit operates primarily as a
line of business banking organization, providing a wide range of
banking, fiduciary, financial, insurance and investment services
to corporate, institutional and individual customers throughout
northern and central Ohio, and western Pennsylvania.
FirstMerits banking subsidiary is FirstMerit Bank.
Prior to 2007, the Corporation managed its operations through
the major line of business Supercommunity Banking.
To improve revenue growth and profitability as well as enhance
relationships with customers, the Corporation moved to a line of
business model during the first quarter of 2007. The major lines
of business are Commercial, Retail, Wealth and Other.
Accordingly, prior period information has been reclassified to
reflect this change. Note 15 (Segment Information) to the
consolidated financial statements provides performance data for
these lines of business.
Other services provided by FirstMerit Bank or its affiliates
include automated banking programs, credit and debit cards,
rental of safe deposit boxes, letters of credit, leasing,
securities brokerage and life insurance products. FirstMerit
Bank also operates a trust department, which offers wealth
management and trust services. The majority of its customers are
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.
FirstMerits 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.
FirstMerits principal direct operating subsidiary other
than FirstMerit Bank is FirstMerit Community Development
Corporation. FirstMerit Community Development Corporation was
organized in 1994 to further FirstMerits efforts in
identifying the credit needs of its lending communities and
meeting the requirements of the Community Reinvestment Act
(CRA). Congress enacted the 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 19 wholly-owned
subsidiaries a complete list of which is set forth in
Exhibit 21 filed as an attachment to this Annual Report on
Form 10-K.
FirstMerit Mortgage Corporation, located in
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Canton, Ohio, originates residential mortgage loans and provides
mortgage loan servicing for itself and FirstMerit Bank.
FirstMerit Equipment Finance Company, Inc. (f.k.a. FirstMerit
Credit Services and FirstMerit Leasing) provides commercial
lease financing and related services.
Bank subsidiaries FirstMerit Securities, Inc. and FirstMerit
Financial Services, Inc. provide investment securities and
annuities to customers. Securities trading has been a brokered
program in conjunction with third-party providers since 1999;
beginning January 14, 2010 FirstMerit is internalizing
broker dealer services through the new FirstMerit Financial
Services subsidiary, which will allow investment services and
solutions to be provided locally while building operational
efficiencies. In addition, FirstMerit Advisors, Inc. provides
certain financial planning services to customers of FirstMerit
Bank and other FirstMerit subsidiaries.
Two new subsidiaries, CPHCSub, LLC and CREPD, LLC, were opened
in 2009 to hold distressed commercial and construction
properties, received through the loan foreclosure process during
this time of economic downturn. These properties are held as
other real estate owned (OREO) while being managed and
remarketed for sale. The assets held as OREO for these two
subsidiaries were $2.8 million and $1.2 million,
respectively at December 31, 2009.
FirstMerit Bank is also the parent corporation of FirstMerit
Insurance Group, Inc.; FirstMerit Insurance Agency, Inc., a life
insurance and financial consulting firm an insurance agency
licensed to sell life insurance products and annuities;
FirstMerit Title Agency, Ltd., FirstMerit Mortgage
Reinsurance Company, Inc., and FirstMerit Risk Management, Inc.,
a captive insurance subsidiary.
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 FirstMerits 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.
Additional information regarding FirstMerits business is
included in Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Possible
Transactions
FirstMerit considers from time to time possible acquisitions of
other financial institutions and financial services companies.
FirstMerit also periodically acquires branches and deposits in
its principal markets. FirstMerits strategy for growth
includes strengthening market share in its existing markets,
expanding into complementary markets and broadening its product
offerings.
Competition
The financial services industry remains highly competitive.
FirstMerit and its 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. Primary financial
institution competitors include PNC Bank, KeyBank, Huntington
Bank, US Bank and Fifth Third Bank.
Under the Gramm-Leach-Bliley Act of 1999 (GLBA),
securities firms and insurance companies that elect to become
financial holding companies may acquire banks and other
financial institutions. GLBA continues to change the competitive
environment in which FirstMerit and its subsidiaries conduct
business and thereby engage in broader activities than
previously allowed for bank holding companies under the BHCA.
Mergers between financial institutions within and outside of
Ohio continue to add competitive pressure. FirstMerit competes
in its markets by offering high quality personal services at a
competitive price.
PROMPT
FILINGS
This report on
Form 10-K
has been posted on the Corporations website,
www.firstmerit.com, on the date of filing with the
Securities and Exchange Commission (SEC), and the
Corporation intends to post all future filings of its reports on
Forms 10-K,
10-Q and
8-K on its
website on the date of filing with the SEC in accordance with
the prompt notice requirements of the SEC.
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REGULATION AND
SUPERVISION
Introduction
FirstMerit, its national banking subsidiary FirstMerit Bank, and
many of its nonbanking subsidiaries are subject to extensive
regulation by federal and state agencies. The regulation of bank
holding companies and their subsidiaries is intended primarily
for the protection of depositors, borrowers, other customers,
the federal deposit insurance fund and the banking system as a
whole and not for the protection of security holders. This
regulatory environment, among other things, may restrict
FirstMerits ability to diversify into certain areas of
financial services, acquire depository institutions in certain
markets and pay dividends on its capital stock. It also may
require FirstMerit to provide financial support to its banking
subsidiary, maintain capital balances in excess of those desired
by management and pay higher deposit insurance premiums as a
result of the deterioration in the financial condition of
depository institutions in general.
Regulatory
Agencies
Bank Holding Company. FirstMerit, as a bank
holding company, is subject to regulation under the BHCA and to
inspection, examination and supervision by the Board of
Governors of the Federal Reserve System (Federal Reserve
Board) under the BHCA.
Subsidiary Bank. FirstMerit Bank is subject to
regulation and examination primarily by the Office of the
Comptroller of the Currency (OCC) and secondarily by
the Federal Deposit Insurance Corporation (FDIC).
Nonbank Subsidiaries. Many of
FirstMerits nonbank subsidiaries also are subject to
regulation by the Federal Reserve Board and other applicable
federal and state agencies. FirstMerits investment
advisory subsidiary and broker-dealer subsidiary are regulated
by the SEC, the Financial Industry Regulatory Authority, and
state securities regulators, which require education and
licensing of advisors, require reporting and impose business
conduct rules. FirstMerits insurance subsidiaries are
subject to regulation by applicable state insurance regulatory
agencies, which require education and licensing of agencies and
individual agents, require reports and impose business conduct
rules. Other nonbank subsidiaries of FirstMerit are subject to
the laws and regulations of both the federal government and the
various states in which they conduct business.
Securities and Exchange Commission and
NASDAQ. FirstMerit is also under the jurisdiction
of the SEC and certain state securities commissions for matters
relating to the offering and sale of its securities. FirstMerit
is subject to 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. FirstMerit
is listed on The NASDAQ Stock Market LLC (NASDAQ)
under the trading symbol FMER, and is subject to the
rules of NASDAQ.
Bank
Holding Company Regulation
As a bank holding company, FirstMerits activities are
subject to extensive regulation by the Federal Reserve Board.
FirstMerit is required to file reports with the Federal Reserve
Board and such additional information as the Federal Reserve
Board may require, and is subject to examinations by the Federal
Reserve Board.
The Federal Reserve Board also has extensive enforcement
authority over bank holding companies, including, among other
things, the ability to:
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assess civil money penalties;
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issue cease and desist or removal orders; and
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require that a bank holding company divest subsidiaries
(including its subsidiary banks).
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In general, the Federal Reserve Board may initiate enforcement
actions for violations of laws and regulations and unsafe or
unsound practices.
Under Federal Reserve Board policy, a bank holding company is
expected to serve as a source of financial strength to each
subsidiary bank and to commit resources to support those
subsidiary banks. Under this policy, the Federal Reserve Board
may require a bank holding company to contribute additional
capital to an undercapitalized
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subsidiary bank and may disapprove of the payment of dividends
to the shareholders if the Federal Reserve Board believes the
payment of such dividends would be an unsafe or unsound practice.
The BHCA requires prior approval by the Federal Reserve Board
for a bank holding company to acquire more than a 5% interest in
any bank. Factors taken into consideration in making such a
determination include the effect of the acquisition on
competition, the public benefits expected to be received from
the acquisition, the projected capital ratios and levels on a
post-acquisition basis, and the acquiring institutions
record of addressing the credit needs of the communities it
serves.
The BHCA also governs interstate banking and restricts the
nonbanking activities of FirstMerit to those determined by the
Federal Reserve Board to be financial in nature, or incidental
or complementary to such financial activity, without regard to
territorial restrictions. Transactions among FirstMerit Bank and
its affiliates are also subject to certain limitations and
restrictions of the Federal Reserve Board.
GLBA permits a qualifying bank holding company to become a
financial holding company and thereby affiliate with securities
firms and insurance companies and engage in other activities
that are financial in nature and not otherwise permissible for a
bank holding company. FirstMerit has not elected to become a
financial holding company.
Dividends
and Transactions with Affiliates
FirstMerit is a legal entity separate and distinct from its
subsidiary bank and other subsidiaries. FirstMerits
principal source of funds to pay dividends on its common shares
and service its debt is dividends from these subsidiaries.
Various federal and state statutory provisions and regulations
limit the amount of dividends that FirstMerit Bank may pay to
FirstMerit without regulatory approval. FirstMerit Bank
generally may not, without prior regulatory approval, pay a
dividend in an amount greater than its undivided profits. In
addition, the prior approval of the OCC is required for the
payment of a dividend if the total of all dividends declared in
a calendar year would exceed the total of its net income for the
year combined with its retained net income for the two preceding
years. If, in the opinion of the applicable regulatory
authority, a bank under its jurisdiction is engaged in or is
about to engage in an unsafe or unsound practice, such authority
may require, after notice and hearing, that such bank cease and
desist from such practice. Depending on the financial condition
of the bank, the applicable regulatory authority might deem the
bank to be engaged in an unsafe or unsound practice if the bank
were to pay dividends. The Federal Reserve Board and the OCC
have issued policy statements that provide that insured banks
and bank holding companies should generally only pay dividends
out of current operating earnings. Thus the ability of
FirstMerit Bank to pay dividends in the future is currently
influenced, and could be further influenced, by bank regulatory
policies and capital guidelines.
FirstMerits banking subsidiary is subject to restrictions
under federal law that limit the transfer of funds or other
items of value to FirstMerit and its nonbanking subsidiaries,
including affiliates, whether in the form of loans and other
extensions of credit, investments and asset purchases, or as
other transactions involving the transfer of value from a
subsidiary to an affiliate or for the benefit of an affiliate.
Moreover, loans and extensions of credit to affiliates generally
are required to be secured in specified amounts. A banks
transactions with its nonbank affiliates also are generally
required to be on arms-length terms.
Capital loans from FirstMerit to its subsidiary bank are
subordinate in right of payment to deposits and certain other
indebtedness of the subsidiary bank. In the event of
FirstMerits bankruptcy, any commitment by FirstMerit to a
federal bank regulatory agency to maintain the capital of a
subsidiary bank will be assumed by the bankruptcy trustee and
entitled to a priority of payment.
The Federal Deposit Insurance Act provides that, in the event of
the liquidation or other resolution of an insured
depository institution such as FirstMerit Bank, the insured and
uninsured depositors, along with the FDIC, will have priority in
payment ahead of unsecured, nondeposit creditors, including
FirstMerit, with respect to any extensions of credit they have
made to such insured depository institution.
Regulation
of Nationally-Chartered Banks
As a national banking association, FirstMerit Bank is subject to
regulation under the National Banking Act and is periodically
examined by the OCC. OCC regulations govern permissible
activities, capital requirements, dividend limitations,
investments, loans and other matters. Furthermore, FirstMerit
Bank is subject, as a member bank, to
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certain rules and regulations of the Federal Reserve Board, many
of which restrict activities and prescribe documentation to
protect consumers. FirstMerit Bank is an insured institution as
a member of the Deposit Insurance Fund. As a result, it is
subject to regulation and deposit insurance assessments by the
FDIC. In addition, the establishment of branches by FirstMerit
Bank is subject to prior approval of the OCC. The OCC has the
authority to impose sanctions on FirstMerit Bank and, under
certain circumstances, may place FirstMerit Bank into
receivership.
Capital
Requirements
The Federal Reserve Board has adopted risk-based capital
guidelines for bank holding companies. The OCC and the FDIC have
adopted risk-based capital guidelines for national banks and
state non-member banks, respectively. The guidelines provide a
systematic analytical framework which makes regulatory capital
requirements sensitive to differences in risk profiles among
banking organizations, takes off-balance sheet exposures
expressly into account in evaluating capital adequacy, and
minimizes disincentives to holding liquid, low-risk assets.
Capital levels as measured by these standards are also used to
categorize financial institutions for purposes of certain prompt
corrective action regulatory provisions.
The minimum guideline for the ratio of total capital to
risk-weighted assets (including certain off-balance sheet items
such as standby letters of credit) is 8%. At least half of the
minimum total risk-based capital ratio (4%) must be composed of
common shareholders equity, minority interests in certain
equity accounts of consolidated subsidiaries and a limited
amount of qualifying preferred stock and qualified trust
preferred securities, less goodwill and certain other intangible
assets, including the unrealized net gains and losses, after
applicable taxes, on
available-for-sale
securities carried at fair value (commonly known as
Tier 1 risk-based capital). The remainder of
total risk-based capital (commonly known as
Tier 2 risk-based capital) may consist of
certain amounts of hybrid capital instruments, mandatory
convertible debt, subordinated debt, preferred stock not
qualifying as Tier 1 capital, loan and lease loss allowance
and net unrealized gains on certain
available-for-sale
equity securities, all subject to limitations established by the
guidelines.
Under the guidelines, capital is compared to the relative risk
related to the balance sheet. To derive the risk included in the
balance sheet, one of four risk weights (0%, 20%, 50% and 100%)
is applied to different balance sheet and off-balance sheet
assets, primarily based on the relative credit risk of the
counterparty. The capital amounts and classification are also
subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
The Federal Reserve Board has established minimum leverage ratio
guidelines for bank holding companies. The Federal Reserve Board
guidelines provide for a minimum ratio of Tier 1 capital to
average assets (excluding the loan and lease loss allowance,
goodwill and certain other intangibles), or leverage
ratio, of 3% for bank holding companies that meet certain
criteria, including having the highest regulatory rating, and 4%
for all other bank holding companies. The guidelines further
provide that bank holding companies making acquisitions will be
expected to maintain strong capital positions substantially
above the minimum levels. The OCC and the FDIC have each also
adopted minimum leverage ratio guidelines for national banks and
for state non-member banks, respectively.
The Federal Reserve Boards review of certain bank holding
company transactions is affected by whether the applying bank
holding company is well-capitalized. To be deemed
well-capitalized, the bank holding company must have
a Tier 1 risk-based capital ratio of at least 6% and a
total risk-based capital ratio of at least 10%, and must not be
subject to any written agreement, order, capital directive or
prompt corrective action directive issued by the Federal Reserve
Board to meet and maintain a specific capital level for any
capital measure. FirstMerits capital ratios meet the
requirements to be deemed well capitalized under the
Federal Reserve Boards guidelines.
The federal banking agencies have established a system of prompt
corrective action to resolve certain of the problems of
undercapitalized institutions. This system is based on five
capital level categories for insured depository institutions:
well capitalized, adequately
capitalized, undercapitalized,
significantly undercapitalized, and critically
undercapitalized.
The federal banking agencies may (or in some cases must) take
certain supervisory actions depending upon a banks capital
level. For example, the banking agencies must appoint a receiver
or conservator for a bank within 90 days after it becomes
critically undercapitalized unless the banks
primary regulator determines, with the
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concurrence of the FDIC, that other action would better achieve
regulatory purposes. Banking operations otherwise may be
significantly affected depending on a banks capital
category. For example, a bank that is not well
capitalized generally is prohibited from accepting
brokered deposits and offering interest rates on deposits higher
than the prevailing rate in its market, and the holding company
of any undercapitalized depository institution must guarantee,
in part, specific aspects of the banks capital plan for
the plan to be acceptable.
In order to be well-capitalized, a bank must have
total risk-based capital of at least 10%, Tier 1 risk-based
capital of at least 6% and a leverage ratio of at least 5%, and
the bank must not be subject to any written agreement, order,
capital directive or prompt corrective action directive to meet
and maintain a specific capital level for any capital measure.
FirstMerits management believes that FirstMerit Bank meets
the ratio requirements to be deemed well capitalized
according to the guidelines described above. See Note 20 to
the consolidated financial statements.
The Federal Reserve Board may set capital requirements higher
than the minimums described previously for holding companies
whose circumstances warrant it. For example, holding companies
experiencing or anticipating significant growth may be expected
to maintain capital positions substantially above the minimum
supervisory levels without significant reliance on intangible
assets.
The risk-based capital guidelines adopted by the federal banking
agencies are based on the International Convergence of
Capital Measurement and Capital Standards (Basel I),
published by the Basel Committee on Banking Supervision (the
Basel Committee) in 1988. In 2004, the Basel
Committee published a new, more risk-sensitive capital adequacy
framework (Basel II) for large, internationally active
banking organizations. In December 2007, the federal banking
agencies issued final rules making the implementation of certain
parts of Basel II mandatory for any bank that has
consolidated total assets of at least $250 billion
(excluding certain assets) or has consolidated on-balance sheet
foreign exposure of at least $10 billion, and making it
voluntary for other banks.
In response to concerns regarding the complexity and cost
associated with implementing the Basel II rules, in July
2008, the federal banking agencies issued a notice of proposed
rulemaking that would revise the existing risk-based capital
framework for banks that will not be subject to the
Basel II rules. The proposed rules would allow banks other
than the large Basel II banks to elect to adopt the new
risk weighting methodologies set forth in the proposed rules or
remain subject to the existing risk-based capital rules.
FirstMerit will not be required to implement Basel II. Until the
final rules for the non-Basel II banks are adopted by the
federal banking agencies, FirstMerit is unable to predict
whether and when its subsidiary banks will adopt the new capital
guidelines.
Federal law permits the OCC to order the pro rata assessment of
shareholders of a national bank whose capital stock has become
impaired, by losses or otherwise, to relieve a deficiency in
such national banks capital stock. This statute also
provides for the enforcement of any such pro rata assessment of
shareholders of such national bank to cover such impairment of
capital stock by sale, to the extent necessary, of the capital
stock owned by any assessed shareholder failing to pay the
assessment. As the sole shareholder of FirstMerit Bank,
FirstMerit is subject to such provisions.
Deposit
Insurance
Insurance premiums for each insured institution are determined
based upon the institutions capital level and supervisory
rating provided to the FDIC by the institutions primary
federal regulator and other information the FDIC determines to
be relevant to the risk posed to the deposit insurance fund by
the institution. The assessment rate determined by considering
such information is then applied to the amount of the
institutions deposits to determine the institutions
insurance premium. An increase in the assessment rate could have
a material adverse effect on the earnings of the affected
institutions, depending on the amount of the increase.
Insurance of deposits may be terminated by the FDIC upon a
finding that the insured institution has engaged in unsafe or
unsound practices, is in an unsafe or unsound condition to
continue operations, or has violated any applicable law,
regulation, rule, order or condition enacted or imposed by the
institutions regulatory agency.
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Fiscal
and Monetary Policies
FirstMerits business and earnings are affected
significantly by the fiscal and monetary policies of the federal
government and its agencies. FirstMerit is particularly affected
by the policies of the Federal Reserve Board, which regulates
the supply of money and credit in the United States. Among the
instruments of monetary policy available to the Federal Reserve
are (a) conducting open market operations in United States
government securities, (b) changing the discount rates of
borrowings of depository institutions, (c) imposing or
changing reserve requirements against depository
institutions deposits, and (d) imposing or changing
reserve requirements against certain borrowing by banks and
their affiliates. These methods are used in varying degrees and
combinations to affect directly the availability of bank loans
and deposits, as well as the interest rates charged on loans and
paid on deposits. For that reason alone, the policies of the
Federal Reserve Board have a material effect on the earnings of
FirstMerit.
Privacy
Provisions of Gramm-Leach-Bliley Act
Under GLBA, federal banking regulators were required to adopt
rules that limit the ability of banks and other financial
institutions to disclose non-public information about consumers
to nonaffiliated third parties. These limitations require
disclosure of privacy policies to consumers and, in some
circumstances, allow consumers to prevent disclosure of certain
personal information to a nonaffiliated third party.
USA
Patriot Act
The USA Patriot Act of 2001 and its related regulations require
insured depository institutions, broker-dealers, and certain
other financial institutions to have policies, procedures, and
controls to detect, prevent, and report money laundering and
terrorist financing. The statute and its regulations also
provide for information sharing, subject to conditions, between
federal law enforcement agencies and financial institutions, as
well as among financial institutions, for counter-terrorism
purposes. Federal banking regulators are required, when
reviewing bank holding company acquisition and bank merger
applications, to take into account the effectiveness of the
anti-money laundering activities of the applicants.
EESA and
ARRA
In response to the ongoing financial crisis affecting the
banking system and financial markets, EESA was signed into law
on October 3, 2008 and established TARP. As part of TARP,
the Treasury established the CPP to provide up to
$700 billion of funding to eligible financial institutions
through the purchase of mortgages, mortgage-backed securities,
capital stock and other financial instruments for the purpose of
stabilizing and providing liquidity to the U.S. financial
markets. On January 9, 2009, FirstMerit completed the sale
to the Treasury of $125.0 million of newly issued
FirstMerit non-voting preferred shares as part of the CPP and a
warrant to purchase 952,260 FirstMerit common shares at an
exercise price of $19.69 per share. The American Recovery and
Reinvestment Act of 2009 (ARRA), more commonly known
as the economic stimulus or economic recovery package, was
signed into law on February 17, 2009, by President Obama.
ARRA includes a wide variety of programs intended to stimulate
the economy and provide for extensive infrastructure, energy,
health, and education needs. In addition, ARRA imposes certain
new executive compensation and corporate expenditure limits on
all current and future TARP recipients, including FirstMerit,
until the institution has repaid the Treasury.
On April 22, 2009, FirstMerit completed the repurchase of
all 125,000 shares of its Fixed Rate Cumulative Perpetual
Preferred Stock, Series A, and on May 27, 2009,
FirstMerit completed the repurchase of the warrant held by the
Treasury. FirstMerit is therefore no longer subject to the
compensation and expenditure limits applicable to TARP
recipients.
Corporate
Governance
The Sarbanes-Oxley Act of 2002 effected broad reforms to areas
of corporate governance and financial reporting for public
companies under the jurisdiction of the SEC. Significant
additional corporate governance and financial reporting reforms
have since been implemented by NASDAQ, and apply to FirstMerit.
FirstMerits corporate governance policies include an Audit
Committee Charter, a Compensation Committee Charter, Corporate
Governance Guidelines, Corporate Governance and Nominating
Committee Charter, and Code of Business Conduct and Ethics.
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The Board of Directors reviews FirstMerits corporate
governance practices on a continuing basis. These and other
corporate governance policies have been provided previously to
shareholders and are available, along with other information on
FirstMerits corporate governance practices, on the
FirstMerit website at www.firstmerit.com.
As directed by Section 302(a) of the Sarbanes-Oxley Act,
FirstMerits chief executive officer and chief financial
officer are each required to certify that FirstMerits
Quarterly and Annual Reports do not contain any untrue statement
of a material fact. The rules have several requirements,
including having these officers certify that: they are
responsible for establishing, maintaining, and regularly
evaluating the effectiveness of FirstMerits internal
controls, they have made certain disclosures about
FirstMerits internal controls to its auditors and the
audit committee of the Board of Directors, and they have
included information in FirstMerits Quarterly and Annual
Reports about their evaluation and whether there have been
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to
the evaluation.
Future
Legislation
Various legislation affecting financial institutions and the
financial industry is from time to time introduced in Congress.
Such legislation may change banking statutes and the operating
environment of FirstMerit and its subsidiaries in substantial
and unpredictable ways, and could increase or decrease the cost
of doing business, limit or expand permissible activities or
affect the competitive balance depending upon whether any of
this potential legislation will be enacted, and if enacted, the
effect that it or any implementing regulations, would have on
the financial condition or results of operations of FirstMerit
or any of its subsidiaries. With the enactment of EESA and ARRA
and the current consideration of economic stimulus legislation
by Congress, the nature and extent of future legislative and
regulatory changes affecting financial institutions is very
unpredictable at this time.
Summary
To the extent that the previous information describes statutory
and regulatory provisions applicable to FirstMerit or its
subsidiaries, it is qualified in its entirety by reference to
the full text of those provisions or agreement. Also, such
statutes, regulations and policies are continually under review
by Congress and state legislatures and federal and state
regulatory agencies and are subject to change at any time,
particularly in the current economic and regulatory environment.
Any such change in statutes, regulations or regulatory policies
applicable to FirstMerit could have a material effect on the
business of FirstMerit.
Difficult
economic conditions and market volatility have adversely
impacted the banking industry and financial markets generally
and may significantly affect our business, financial condition,
or results of operation.
Our success depends, to a certain extent, upon economic and
political conditions, local and national, as well as
governmental monetary policies. Conditions such as inflation,
recession, unemployment, changes in interest rates, money supply
and other factors beyond our control may adversely affect our
asset quality, deposit levels and loan demand and, therefore,
our earnings.
Dramatic declines in the housing market beginning in the latter
half of 2007, with falling home prices and increasing
foreclosures, unemployment and underemployment, have negatively
impacted the credit performance of mortgage loans and resulted
in significant write-downs of asset values by financial
institutions. The resulting write-downs to assets of financial
institutions have caused many financial institutions to seek
additional capital, to merge with larger and stronger
institutions and, in some cases, to seek government assistance
or bankruptcy protection.
The capital and credit markets, including the fixed income
markets, have been experiencing volatility and disruption. In
some cases, the markets have produced downward pressure on stock
prices and credit capacity for certain issuers without regard to
those issuers financial strength.
Many lenders and institutional investors have reduced and, in
some cases, ceased to provide funding to borrowers, including to
other financial institutions because of concern about the
stability of the financial markets and the strength of
counterparties. It is difficult to predict how long these
economic conditions will exist, which of our
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markets, products or other businesses will ultimately be
affected, and whether managements actions will effectively
mitigate these external factors. Accordingly, the resulting lack
of available credit, lack of confidence in the financial sector,
decreased consumer confidence, increased volatility in the
financial markets and reduced business activity could materially
and adversely affect our business, financial condition and
results of operations.
As a result of the challenges presented by economic conditions,
we may face the following risks in connection with these events:
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Inability of our borrowers to make timely repayments of their
loans, or decreases in value of real estate collateral securing
the payment of such loans resulting in significant credit
losses, which could result in increased delinquencies,
foreclosures and customer bankruptcies, any of which could have
a material adverse effect on our operating results.
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Increased regulation of our industry, including heightened legal
standards and regulatory requirements or expectations imposed in
connection with the EESA and ARRA. Compliance with such
regulation will likely increase our costs and may limit our
ability to pursue business opportunities.
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Further disruptions in the capital markets or other events,
including actions by rating agencies and deteriorating investor
expectations, may result in an inability to borrow on favorable
terms or at all from other financial institutions.
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Increased competition among financial services companies due to
the recent consolidation of certain competing financial
institutions and the conversion of certain investment banks to
bank holding companies, which may adversely affect our ability
to market our products and services.
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Further increases in FDIC insurance premiums due to the market
developments which have significantly depleted the insurance
fund of the FDIC and reduced the ratio of reserves to insured
deposits.
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The
enactment of new legislation and increased regulatory oversight
may significantly affect our financial condition.
The financial services industry is extensively regulated.
FirstMerit Bank is subject to extensive regulation, supervision
and examination by the OCC and the FDIC. As a holding company,
we also are subject to regulation and oversight by the Federal
Reserve Board. Federal and state regulation is designed
primarily to protect the deposit insurance funds and consumers,
and not to benefit our shareholders. Such regulations can at
times impose significant limitations on our operations.
Regulatory authorities have extensive discretion in connection
with their supervisory and enforcement activities, including the
imposition of restrictions on the operation of an institution,
the classification of assets by the institution and the adequacy
of an institutions allowance for loan losses. Proposals to
change the laws governing financial institutions are frequently
raised in Congress and before bank regulatory authorities.
Substantial regulatory and legislation initiatives, including a
comprehensive overhaul of the regulatory system in the United
States, are possible in the years ahead. Changes in applicable
laws or policies could materially affect our business, and the
likelihood of any major changes in the future and their effects
are impossible to determine. Moreover, it is impossible to
predict the ultimate form any proposed legislation might take or
how it might affect us.
In 2008 and continuing into 2009 and 2010, the Federal Reserve
Board, Congress, the Treasury, the FDIC and others have taken
numerous actions to address the current liquidity and credit
crisis in the financial markets. These measures include
homeowner relief that encourages loan restructuring and
modification; the establishment of significant liquidity and
credit facilities for financial institutions and investment
banks; the lowering of the federal funds rate; and coordinated
efforts to address liquidity and other weaknesses in the banking
sector. There can be no assurance as to the actual impact that
new legislation will have on the economy or financial markets.
The failure of these programs to stabilize the financial markets
could weaken public confidence in financial institutions and
have a substantial and material adverse effect on our ability to
attract and retain new customers.
Further, additional legislation or regulations may be adopted in
the future that reduce the amount that our customers are
required to pay under existing loan contracts or limit our
ability to foreclose on collateral. For example, legislation has
been proposed to give judges the ability to adjust the principal
and interest payments on residential
9
mortgages to allow homeowners to avoid foreclosure. There can be
no assurance that future legislation will not significantly
impact our ability to collect on our current loans or foreclose
on collateral.
Additional information regarding regulation and supervision is
included in the section captioned Regulation and
Supervision in Item 1. Business.
Changes
in economic and political conditions, particularly in Ohio,
could adversely affect our earnings, cash flows and capital, as
our borrowers ability to repay loans and the value of the
collateral securing our loans decline.
Our success depends, to a certain extent, upon economic and
political conditions, local and national, as well as
governmental fiscal and monetary policies. Conditions such as
inflation, recession, unemployment, changes in interest rates,
money supply and other factors beyond our control may adversely
affect our asset quality, deposit levels and loan demand and,
therefore, our earnings and our capital. Because we have a
significant amount of real estate loans, additional decreases in
real estate values could adversely affect the value of property
used as collateral and our ability to sell the collateral upon
foreclosure. Adverse changes in the economy may also have a
negative effect on the ability of our borrowers to make timely
repayments of their loans, which would have an adverse impact on
our earnings and cash flows.
The substantial majority of the loans made by our subsidiaries
are to individuals and businesses in Ohio. Consequently, a
significant continued decline in the economy in Ohio could have
a materially adverse effect on our financial condition and
results of operations and cash flows.
We continue to experience difficult credit conditions in the
markets in which we operate. It remains uncertain when the
negative credit trends in our markets will reverse. As a result,
our future earnings, cash flows and capital continue to be
susceptible to further declining credit conditions in the
markets in which we operate.
Increases
in FDIC insurance premiums may have a material adverse affect on
our earnings.
During 2008, there were higher levels of bank failures, which
dramatically increased resolution costs of the FDIC and depleted
the deposit insurance fund. In order to maintain a strong
funding position and restore reserve ratios of the deposit
insurance fund, the FDIC voted on December 16, 2008 to
increase assessment rates of insured institutions uniformly by
7 basis points (7 cents for every $100 of deposits),
beginning with the first quarter of 2009. Additional changes,
beginning April 1, 2009, were to require riskier
institutions to pay a larger share of premiums by factoring in
rate adjustments based on secured liabilities and unsecured debt
levels.
The Emergency Economic Stabilization Act of 2008 (the
EESA) instituted two temporary programs effective
through December 31, 2009 to further insure customer
deposits at FDIC-member banks: deposit accounts are now insured
up to $250,000 per customer (up from $100,000) and noninterest
bearing transactional accounts are fully insured (unlimited
coverage). On May 20, 2009, President Obama signed into law
the Helping Families Save Their Homes Act of 2009 (the
HFSTHA) which, among other things, amends the EESA
to extend the effectiveness of these temporary programs through
December 31, 2013. On January 1, 2014, the standard
insurance amount will return to $100,000 per depositor for all
account categories except IRAs and certain other retirement
accounts, which will remain at $250,000 per depositor.
On May 22, 2009, the FDIC adopted a final rule that imposed
a special assessment for the second quarter of 2009 of
5 basis points on each insured depositary
institutions assets minus its Tier 1 capital as of
June 30, 2009, which was collected on September 30,
2009 in the amount of $4.9 million.
On November 12, 2009, the FDIC adopted a final rule
requiring insured institutions to prepay their estimated
quarterly risk-based assessments for the fourth quarter of 2009
and for all of 2010, 2011 and 2012. The prepaid assessments for
these periods were collected on December 30, 2009, along
with the regular quarterly risk-based deposit insurance
assessment for the third quarter of 2009. For the fourth quarter
of 2009 and for all of 2010, the prepaid assessment rate was
based on each institutions total basis point assessment in
effect on September 30, 2009, adjusted to assume a 5%
annualized deposit growth rate; for the 2011 and 2012 periods
the computation is adjusted by an additional 3 basis points
increase in the assessment rate. The three-year prepayment for
FirstMerit totaled $43.9 million, and will be expensed over
three years.
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In January 2010, the FDIC issued an advance notice of proposed
rule-making asking for comments on how the FDICs
risk-based deposit insurance assessment system could be changed
to include the risks of certain employee compensation as
criteria in the assessment system.
We are generally unable to control the amount of premiums that
we are required to pay for FDIC insurance. If there are
additional financial institution failures, we may be required to
pay even higher FDIC premiums than the recently increased
levels. Increases in FDIC insurance premiums may materially
adversely affect our results of operations and our ability to
continue to pay dividends on our common shares at the current
rate or at all.
The
strength and stability of other financial institutions may
adversely affect our business.
The actions and commercial soundness of other financial
institutions could affect our ability to engage in routine
funding transactions. Financial services to institutions are
interrelated as a result of trading, clearing, counterparty or
other relationships. We have exposure to different industries
and counterparties, and execute transactions with various
counterparties in the financial industry, including brokers and
dealers, commercial banks, investment banks, mutual and hedge
funds, and other institutional clients. Recent defaults by
financial services institutions, and even rumors or questions
about one or more financial services institution or the
financial services industry in general, have led to marketwide
liquidity problems and could lead to losses or defaults by us or
by other institutions. Many of these transactions expose us to
credit risk in the event of default of its counterparty or
client. In addition, our credit risk may increase when the
collateral held by us cannot be realized upon or is liquidated
at prices not sufficient to recover the full amount of the loan
or derivative exposure due us. Any such losses could materially
and adversely affect our results of operations.
Current
levels of market volatility are unprecedented.
The capital and credit markets have been experiencing volatility
and disruption for more than a year. In recent months, the
volatility and disruption has reached unprecedented levels. In
some cases, the markets have produced downward pressure on stock
prices and credit availability for certain issuers seemingly
without regard to those issuers underlying financial
strength. If current levels of market disruption and volatility
continue or worsen, there can be no assurance that we will not
experience an adverse effect, which may be material, on our
ability to access capital and on our business, financial
condition and results of operations.
The market price for our Common Shares has been volatile in the
past, and several factors could cause the price to fluctuate
substantially in the future, including:
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announcements of developments related to our business;
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fluctuations in our results of operations;
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sales of substantial amounts of our securities into the
marketplace;
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general conditions in our markets or the worldwide economy;
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a shortfall in revenues or earnings compared to securities
analysts expectations;
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changes in analysts recommendations or
projections; and
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our announcement of new acquisitions or other projects.
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Changes
in interest rates could have a material adverse effect on our
financial condition and results of operations.
Our earnings depend substantially on our interest rate spread,
which is the difference between (i) the rates we earn on
loans, securities and other earning assets and (ii) the
interest rates we pay on deposits and other borrowings. These
rates are highly sensitive to many factors beyond our control,
including general economic conditions and the policies of
various governmental and regulatory authorities. As market
interest rates rise, we will have competitive pressures to
increase the rates we pay on deposits, which will result in a
decrease of our net interest income and could have a material
adverse effect on our financial condition and results of
operations. Additional information regarding
11
interest rate risk is included in the section captioned
Interest Rate Sensitivity within Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
Our
earnings are significantly affected by the fiscal and monetary
policies of the federal government and its
agencies.
The policies of the Federal Reserve Board impact us
significantly. The Federal Reserve Board regulates the supply of
money and credit in the United States. Its policies directly and
indirectly influence the rate of interest earned on loans and
paid on borrowings and interest-bearing deposits and can also
affect the value of financial instruments we hold. Those
policies determine to a significant extent our cost of funds for
lending and investing. Changes in those policies are beyond our
control and are difficult to predict. Federal Reserve Board
policies can also affect our borrowers, potentially increasing
the risk that they may fail to repay their loans. For example, a
tightening of the money supply by the Federal Reserve Board
could reduce the demand for a borrowers products and
services. This could adversely affect the borrowers
earnings and ability to repay its loan, which could have a
material adverse effect on our financial condition and results
of operations.
The
primary source of our income from which we pay dividends is the
receipt of dividends from FirstMerit Bank, which is subject to
regulatory restrictions on its payment of
dividends.
The availability of dividends from FirstMerit Bank is limited by
various statutes and regulations. It is possible, depending upon
the financial condition of FirstMerit Bank and other factors,
that the OCC could assert that payment of dividends or other
payments is an unsafe or unsound practice. In addition, the
payment of dividends by other subsidiaries is also subject to
the laws of the subsidiarys state of incorporation.
FirstMerits right to participate in a distribution of
assets upon a subsidiarys liquidation or reorganization is
subject to the prior claims of the subsidiarys creditors.
In the event that FirstMerit Bank was unable to pay dividends to
us, we in turn would likely have to reduce or stop paying
dividends on our Common Shares. Our failure to pay dividends on
our Common Shares could have a material adverse effect on the
market price of our Common Shares. Additional information
regarding dividend restrictions is included in the section
captioned Regulation and Supervision Dividends
and Transactions with Affiliates in Item 1. Business.
If our
actual loan losses exceed our allowance for credit losses, our
net income will decrease.
Our loan customers may not repay their loans according to their
terms, and the collateral securing the payment of these loans
may be insufficient to pay any remaining loan balance. We may
experience significant credit losses, which could have a
material adverse effect on our operating results. In accordance
with accounting principles generally accepted in the United
States, we maintain an allowance for credit losses to provide
for loan defaults and non-performance and a reserve for unfunded
loan commitments, which when combined, we refer to as the
allowance for credit losses. Our allowance for loan losses may
not be adequate to cover actual credit losses, and future
provisions for credit losses could have a material adverse
effect on our operating results. Our allowance for loan losses
is based on prior experience, as well as an evaluation of the
risks in the current portfolio. The amount of future losses is
susceptible to changes in economic, operating and other
conditions, including changes in interest rates that may be
beyond our control, and these losses may exceed current
estimates. Federal regulatory agencies, as an integral part of
their examination process, review our loans and allowance for
loan losses. We cannot assure you that we will not further
increase the allowance for loan losses or that regulators will
not require us to increase this allowance. Either of these
occurrences could have a material adverse effect on our
financial condition and results of operations. Additional
information regarding the allowance for loan losses is included
in the sections captioned Allowance for Loan Losses and
Reserve for Unfunded Lending Commitments and
Allowance for Credit Losses within Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
We
extend credit to a variety of customers based on internally set
standards and the judgment of our loan officers and bank
presidents. Our credit standards and on-going process of credit
assessment might not protect us from significant credit
losses.
We take credit risk by virtue of making loans and leases,
extending loan commitments and letters of credit and, to a
lesser degree, purchasing non-governmental securities. Our
exposure to credit risk is managed through the use of
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consistent underwriting standards that emphasize
in-market lending while avoiding highly leveraged
transactions as well as excessive industry and other
concentrations. Our credit administration function employs risk
management techniques to ensure that loans and leases adhere to
corporate policy and problem loans and leases are promptly
identified. While these procedures are designed to provide us
with the information needed to implement policy adjustments
where necessary, and to take proactive corrective actions, there
can be no assurance that such measures will be effective in
avoiding undue credit risk.
We
depend upon the accuracy and completeness of information about
customers and counterparties.
In deciding whether to extend credit or enter into other
transactions with customers and counterparties, we may rely on
information provided to us by customers and counterparties,
including financial statements and other financial information.
We may also rely on representations of customers and
counterparties as to the accuracy and completeness of that
information and, with respect to financial statements, on
reports of independent auditors. For example, in deciding
whether to extend credit to a business, we may assume that the
customers audited financial statements conform with
generally accepted accounting principles and present fairly, in
all material respects, the financial condition, results of
operations and cash flows of the customer. We may also rely on
the audit report covering those financial statements. Our
financial condition and results of operations could be
negatively impacted to the extent we rely on financial
statements that do not comply with generally accepted accounting
principles or that are materially misleading.
Derivative
transactions may expose us to unexpected risk and potential
losses.
We are party to a number of derivative transactions. Many of
these derivative instruments are individually negotiated and
non-standardized, which can make exiting, transferring or
settling the position difficult. We carry borrowings which
contain embedded derivatives. These borrowing arrangements
require that we deliver underlying securities to the
counterparty as collateral. If market interest rates were to
decline, we may be required to deliver more securities to the
counterparty. We are dependent on the creditworthiness of the
counterparties and are therefore susceptible to credit and
operational risk in these situations.
Derivative contracts and other transactions entered into with
third parties are not always confirmed by the counterparties on
a timely basis. While the transaction remains unconfirmed, we
are subject to heightened credit and operational risk and, in
the event of a default, may find it more difficult to enforce
the contract. In addition, as new and more complex derivative
products are created, covering a wider array of underlying
credit and other instruments, disputes about the terms of the
underlying contracts could arise, which could impair our ability
to effectively manage our risk exposures from these products and
subject us to increased costs. Any regulatory effort to create
an exchange or trading platform for credit derivatives and other
over-the-counter
derivative contracts, or a market shift toward standardized
derivatives, could reduce the risk associated with such
transactions, but under certain circumstances could also limit
our ability to develop derivatives that best suit the needs of
our clients and ourselves and adversely affect our profitability.
We are
subject to examinations and challenges by tax
authorities.
In the normal course of business, FirstMerit and its
subsidiaries are routinely subject to examinations and
challenges from federal and state tax authorities regarding the
amount of taxes due in connection with investments we have made
and the businesses in which we have engaged. Recently, federal
and state taxing authorities have become increasingly aggressive
in challenging tax positions taken by financial institutions.
These tax positions may relate to tax compliance, sales and use,
franchise, gross receipts, payroll, property and income tax
issues, including tax base, apportionment and tax credit
planning. The challenges made by tax authorities may result in
adjustments to the timing or amount of taxable income or
deductions or the allocation of income among tax jurisdictions.
If any such challenges are made and are not resolved in our
favor, they could have a material adverse effect on our
financial condition and results of operations.
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Environmental
liability associated with commercial lending could have a
material adverse effect on our business, financial condition and
results of operations.
In the course of our business, we may acquire, through
foreclosure, commercial properties securing loans that are in
default. There is a risk that hazardous substances could be
discovered on those properties. In this event, we could be
required to remove the substances from and remediate the
properties at our cost and expense. The cost of removal and
environmental remediation could be substantial. We may not have
adequate remedies against the owners of the properties or other
responsible parties and could find it difficult or impossible to
sell the affected properties. These events could have a material
adverse effect on our financial condition and results of
operation.
Our
business strategy includes significant growth plans. Our
financial condition and results of operations could be
negatively affected if we fail to grow or fail to manage our
growth effectively.
We intend to continue pursuing a profitable growth strategy both
within our existing markets and in new markets. Our prospects
must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in significant
growth stages of development. We cannot assure you that we will
be able to expand our market presence in our existing markets or
successfully enter new markets or that any such expansion will
not adversely affect our results of operations. Failure to
manage our growth effectively could have a material adverse
effect on our business, future prospects, financial condition or
results of operations and could adversely affect our ability to
successfully implement our business strategy. Also, if we grow
more slowly than anticipated, our operating results could be
materially adversely affected.
Our ability to grow successfully will depend on a variety of
factors, including the continued availability of desirable
business opportunities, the competitive responses from other
financial institutions in our market areas and our ability to
manage our growth. While we believe we have the management
resources and internal systems in place to successfully manage
our future growth, there can be no assurance growth
opportunities will be available or growth will be successfully
managed.
We
face risks with respect to future expansion.
We may acquire other financial institutions or parts of those
institutions in the future and we may engage in de novo branch
expansion. We may also consider and enter into new lines of
business or offer new products or services. Acquisitions and
mergers involve a number of expenses and risks, including:
|
|
|
|
|
the time and costs associated with identifying and evaluating
potential acquisitions and merger targets;
|
|
|
|
the estimates and judgments used to evaluate credit, operations,
management and market risks with respect to the target
institution may not be accurate;
|
|
|
|
the time and costs of evaluating new markets, hiring experienced
local management and opening new offices, and the time lags
between these activities and the generation of sufficient assets
and deposits to support the costs of the expansion;
|
|
|
|
our ability to finance an acquisition and possible dilution to
our existing shareholders;
|
|
|
|
the diversion of our managements attention to the
negotiation of a transaction, and the integration of the
operations and personnel of the combining businesses;
|
|
|
|
entry into new markets;
|
|
|
|
the introduction of new products and services into our business;
|
|
|
|
the incurrence and possible impairment of goodwill associated
with an acquisition and possible adverse short-term effects on
our results of operations; and
|
|
|
|
the risk of loss of key employees and customers.
|
We may incur substantial costs to expand, and we can give no
assurance such expansion will result in the levels of profits we
seek. There can be no assurance integration efforts for any
future mergers or acquisitions will be successful. Also, we may
issue equity securities in connection with future acquisitions,
which could cause ownership and
14
economic dilution to our current shareholders. There is no
assurance that, following any future mergers or acquisitions,
our integration efforts will be successful or that, after giving
effect to the acquisition, we will achieve profits comparable to
or better than our historical experience.
We
operate in an extremely competitive market, and our business
will suffer if we are unable to compete
effectively.
In our market area, we encounter significant competition from
other commercial banks, savings and loan associations, credit
unions, mortgage banking firms, consumer finance companies,
securities brokerage firms, insurance companies, money market
mutual funds and other financial institutions. The increasingly
competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems
and the accelerating pace of consolidation among financial
service providers. Many of our competitors have substantially
greater resources and lending limits than we do and may offer
services that we do not or cannot provide. Our financial
performance and return on investment to shareholders will depend
in part on our continued ability to compete successfully in our
market area and on our ability to expand our scope of available
financial services as needed to meet the needs and demands of
our customers.
Consumers
may decide not to use banks to complete their financial
transactions.
Technology and other changes are allowing parties to complete
financial transactions that historically have involved banks at
one or both ends of the transaction. For example, consumers can
now pay bills and transfer funds directly without banks. The
process of eliminating banks as intermediaries, known as
disintermediation, could result in the loss of fee income, as
well as the loss of customer deposits and income generated from
those deposits.
Loss
of key employees may disrupt relationships with certain
customers.
Our business is primarily relationship-driven in that many of
our key employees have extensive customer relationships. Loss of
a key employee with such customer relationships may lead to the
loss of business if the customers were to follow that employee
to a competitor. While we believe our relationship with our key
producers is good, we cannot guarantee that all of our key
personnel will remain with our organization. Loss of such key
personnel, should they enter into an employment relationship
with one of our competitors, could result in the loss of some of
our customers.
Impairment
of goodwill or other intangible assets could require charges to
earnings, which could result in a negative impact on our results
of operations.
Under current accounting standards, goodwill and certain other
intangible assets with indeterminate lives are no longer
amortized but, instead, are assessed for impairment periodically
or when impairment indicators are present. Assessment of
goodwill and such other intangible assets could result in
circumstances where the applicable intangible asset is deemed to
be impaired for accounting purposes. Under such circumstances,
the intangible assets impairment would be reflected as a
charge to earnings in the period during which such impairment is
identified.
We may
be exposed to liability under non-solicitation agreements to
which one or more of our employees may be a party to with
certain of our competitors.
From time to time, we may hire employees who may be parties to
non-solicitation or non-competition agreements with one or more
of our competitors. Although we expect that all such employees
will comply with the terms of their non-solicitation agreements,
it is possible that if customers of our competitors choose to
move their business to us, or employees of our competitor seek
employment with us, even without any action on the part of any
employee bound by any such agreement, that one or more of our
competitors may choose to bring a claim against us and our
employee.
Unauthorized
disclosure of sensitive or confidential client or customer
information, whether through a breach of our computer systems or
otherwise, could severely harm our business.
As part of our business we collect, process, and retain
sensitive and confidential client and customer information on
behalf of FirstMerit and other third parties. Despite the
security measures we have in place, our facilities and
15
systems, and those of our third party service providers, may be
vulnerable to security breaches, acts of vandalism, computer
viruses, misplaced or lost data, programming
and/or human
errors, or other similar events. Any security breach involving
the misappropriation, loss or other unauthorized disclosure of
confidential customer information, whether by FirstMerit or by
our vendors, could severely damage our reputation, expose us to
the risks of litigation and liability, disrupt our operations
and have a material adverse effect on our business.
We may
elect or be compelled to seek additional capital in the future,
but that capital may not be available when it is
needed.
We are required by federal and state regulatory authorities to
maintain adequate levels of capital to support our operations.
As we experience loan losses, additional capital may need to be
infused. In addition, we may elect to raise additional capital
to support our business or to finance acquisitions, if any, or
we may otherwise elect or be required to raise additional
capital. Our ability to raise additional capital will depend on
our financial performance, conditions in the capital markets,
economic conditions and a number of other factors, many of which
are outside our control. Accordingly, there can be no assurance
that we can raise additional capital if needed or on terms
acceptable to us. If we cannot raise additional capital when
needed, it may have a material adverse effect on our financial
condition, results of operations and prospects.
Our
organizational documents, state laws and regulated industry may
discourage a third party from acquiring FirstMerit by means of a
tender offer, proxy contest or otherwise.
Certain provisions of our amended and restated articles of
incorporation and amended and restated code of regulations,
certain laws of the State of Ohio, and certain aspects of the
BHCA and other governing statutes and regulations, may have the
effect of discouraging a tender offer or other takeover attempt
not previously approved by our Board of Directors.
FirstMerit
Corporation
FirstMerits executive offices and certain holding company
operational facilities, totaling approximately
108,230 square feet, are located in a seven-story office
building at III Cascade in downtown Akron, Ohio owned by
FirstMerit Bank. The building is the subject of a ground lease
with the City of Akron as the lessor of the land.
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 a 28-story office building at 106 South Main Street, Akron,
Ohio, which is owned by FirstMerit Bank. FirstMerit Bank Akron
is the principal tenant of the building, occupying approximately
122,500 square feet of the building. The remaining portion
is leased to tenants unrelated to FirstMerit Bank. The
properties occupied by 99 of FirstMerit Banks other
branches are owned by FirstMerit Bank, while the properties
occupied by its remaining 60 branches are leased with various
expiration dates. FirstMerit Mortgage Corporation, FirstMerit
Title Agency, Ltd., and certain of FirstMerit Banks
loan operation and documentation preparation activities are
conducted in owned space in Canton, Ohio. 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.
FirstMerit Bank also owns 15.5 acres near downtown Akron,
on which FirstMerits primary Operations Center is located.
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 its 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, and leases additional space for activities
related to its operations.
16
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
In the normal course of business, FirstMerit is at all times
subject to pending and threatened legal actions, some for which
the relief or damages sought are substantial. Although
FirstMerit is not able to predict the outcome of such actions,
after reviewing pending and threatened actions with counsel,
management believes that the outcome of such actions will not
have a material adverse effect on the results of operations or
stockholders equity of FirstMerit. Although FirstMerit is
not able to predict whether the outcome of such actions may or
may not have a material adverse effect on results of operations
in a particular future period as the time and amount of any
resolution of such actions and its relationship to the future
results of operations are not known.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of security holders in the
fourth quarter of 2009.
EXECUTIVE
OFFICERS OF THE REGISTRANT
The following persons were the executive officers of FirstMerit
as of December 31, 2009. Unless otherwise stated, each
listed position was held on January 1, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Appointed
|
|
|
Name
|
|
Age
|
|
To FirstMerit
|
|
Position and Business Experience
|
|
Paul G. Greig
|
|
|
54
|
|
|
|
05/18/06
|
|
Chairman, President and Chief Executive Officer of FirstMerit
and of FirstMerit Bank since May 18, 2006; previously President
and Chief Executive Officer of Charter One Bank-Illinois.
|
Terrence E. Bichsel
|
|
|
61
|
|
|
|
09/16/99
|
|
Executive Vice President and Chief Financial Officer of
FirstMerit and FirstMerit Bank.
|
Kenneth Dorsett
|
|
|
55
|
|
|
|
09/10/07
|
|
Executive Vice President, Wealth Management Services since
September 10, 2007; previously President and Chief Executive
Officer of Everest Advisors, Inc.
|
David Goodall
|
|
|
44
|
|
|
|
11/19/09
|
|
Executive Vice President, Commercial Banking since November 11,
2009; previously was President and CEO of National City Business
Credit, Inc.
|
Chistopher J. Maurer
|
|
|
60
|
|
|
|
01/01/94
|
|
Executive Vice President Human Resources since May 22, 1999.
|
William Richgels
|
|
|
59
|
|
|
|
05/01/07
|
|
Executive Vice President, Chief Credit Officer since May 1,
2007; previously Senior Vice President & Senior Credit
Officer of JPMorganChase.
|
Julie A. Grossi
|
|
|
46
|
|
|
|
02/09/07
|
|
Executive Vice President, Retail, since February 9, 2007;
previously Senior Vice President, Washington Mutual.
|
Larry A. Shoff
|
|
|
53
|
|
|
|
09/01/99
|
|
Executive Vice President and Chief Technology Officer of
FirstMerit and FirstMerit Bank.
|
Judith A. Steiner
|
|
|
47
|
|
|
|
05/14/90
|
|
Executive Vice President, Secretary and General Counsel of
FirstMerit Corporation since July 1, 2008; previously Senior
Vice President, Assistant Counsel, Assistant Secretary and
AML/BSA Officer of FirstMerit Corporation.
|
17
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
FirstMerits common shares are quoted on The NASDAQ Stock
Market under the trading symbol FMER. The following
table contains bid and cash dividend information for FirstMerit
common Shares for the two most recent fiscal years:
Stock
Performance and Dividends (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
Bids
|
|
|
Dividend
|
|
|
Book
|
|
Quarter Ending
|
|
High
|
|
|
Low
|
|
|
Rate
|
|
|
Value(2)
|
|
|
03-31-08
|
|
|
22.95
|
|
|
|
16.71
|
|
|
|
0.29
|
|
|
|
11.59
|
|
06-30-08
|
|
|
21.94
|
|
|
|
16.31
|
|
|
|
0.29
|
|
|
|
11.43
|
|
09-30-08
|
|
|
30.88
|
|
|
|
13.76
|
|
|
|
0.29
|
|
|
|
11.44
|
|
12-31-08
|
|
|
24.39
|
|
|
|
15.02
|
|
|
|
0.29
|
|
|
|
11.58
|
|
03-31-09
|
|
|
20.71
|
|
|
|
12.45
|
|
|
|
0.29
|
|
|
|
11.84
|
|
06-30-09
|
|
|
21.10
|
|
|
|
16.25
|
|
|
|
0.16
|
|
|
|
11.99
|
|
09-30-09
|
|
|
20.47
|
|
|
|
16.18
|
|
|
|
0.16
|
|
|
|
12.34
|
|
12-31-09
|
|
|
21.62
|
|
|
|
17.93
|
|
|
|
0.16
|
|
|
|
12.50
|
|
|
|
|
(1)
|
|
This table sets forth the high and
low bid quotations and dividend rates for FirstMerit Corporation
for each quarterly period presented. These quotations are
furnished by the National Quotations Bureau Incorporated and
represent prices between dealers, do not include retail markup,
markdowns, or commissions, and may not represent actual
transaction prices.
|
|
(2)
|
|
Based upon number of shares
outstanding at the end of each quarter.
|
On February 6, 2010, there were approximately
7,870 shareholders of record of FirstMerit common shares.
The following table provides information with respect to
purchases FirstMerit made of its shares of common shares during
the fourth quarter of the 2009 fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Number of Shares
|
|
|
|
|
|
|
|
|
|
as Part of Publicly
|
|
|
that May Yet be
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Announced Plans
|
|
|
Purchased Under
|
|
|
|
Shares Purchased(2)
|
|
|
Paid per Share
|
|
|
or Programs(1)
|
|
|
Plans or Programs(1)
|
|
|
Balance as of September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
396,272
|
|
October 1, 2009 October 31, 2009
|
|
|
27,711
|
|
|
$
|
24.27
|
|
|
|
|
|
|
|
396,272
|
|
November 1, 2009 November 30, 2009
|
|
|
3,807
|
|
|
|
21.90
|
|
|
|
|
|
|
|
396,272
|
|
December 1, 2009 December 31, 2009
|
|
|
3,669
|
|
|
|
24.60
|
|
|
|
|
|
|
|
396,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
35,187
|
|
|
$
|
24.05
|
|
|
|
|
|
|
|
396,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
On January 19, 2006 the Board
of Directors authorized the repurchase of up to 3 million
shares (the New Repurchase Plan). The New Repurchase
Plan, which has no expiration date, superseded all other
repurchase programs, including that authorized by the Board of
Directors on July 15, 2004 (the Prior
Repurchase Plan). FirstMerit had purchased all of the
shares it was authorized to acquire under the Prior Repurchase
Plan.
|
|
(2)
|
|
Reflects 35,187 common shares
purchased as a result of either: (1) delivery by the option
holder with respect to the exercise of stock options;
(2) shares withheld to pay income taxes or other tax
liabilities associated with vested restricted shares of common
stock; or (3) shares returned upon the resignation of the
restricted shareholder. No shares were purchased under the
program referred to in note (1) to this table during the
fourth quarter of 2009.
|
18
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
SELECTED
FINANCIAL DATA
FIRSTMERIT
CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands except per share data)
|
|
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
459,527
|
|
|
$
|
553,826
|
|
|
$
|
636,994
|
|
|
$
|
603,841
|
|
|
$
|
541,446
|
|
Conversion to fully-tax equivalent
|
|
|
6,869
|
|
|
|
5,976
|
|
|
|
5,494
|
|
|
|
2,919
|
|
|
|
2,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income*
|
|
|
466,396
|
|
|
|
559,802
|
|
|
|
642,488
|
|
|
|
606,760
|
|
|
|
544,067
|
|
Interest expense
|
|
|
110,763
|
|
|
|
197,637
|
|
|
|
299,448
|
|
|
|
263,468
|
|
|
|
192,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income*
|
|
|
355,633
|
|
|
|
362,165
|
|
|
|
343,040
|
|
|
|
343,292
|
|
|
|
351,616
|
|
Provision for loan losses
|
|
|
98,433
|
|
|
|
58,603
|
|
|
|
30,835
|
|
|
|
76,112
|
|
|
|
43,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses*
|
|
|
257,200
|
|
|
|
303,562
|
|
|
|
312,205
|
|
|
|
267,180
|
|
|
|
307,796
|
|
Other income
|
|
|
210,301
|
|
|
|
201,436
|
|
|
|
196,923
|
|
|
|
195,148
|
|
|
|
190,466
|
|
Other expenses
|
|
|
352,817
|
|
|
|
330,633
|
|
|
|
330,226
|
|
|
|
328,087
|
|
|
|
313,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before federal income taxes*
|
|
|
114,684
|
|
|
|
174,365
|
|
|
|
178,902
|
|
|
|
134,241
|
|
|
|
184,754
|
|
Federal income taxes
|
|
|
25,645
|
|
|
|
48,904
|
|
|
|
50,381
|
|
|
|
36,376
|
|
|
|
51,650
|
|
Fully-tax equivalent adjustment
|
|
|
6,869
|
|
|
|
5,976
|
|
|
|
5,494
|
|
|
|
2,919
|
|
|
|
2,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income taxes*
|
|
|
32,514
|
|
|
|
54,880
|
|
|
|
55,875
|
|
|
|
39,295
|
|
|
|
54,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
82,170
|
|
|
$
|
119,485
|
|
|
$
|
123,027
|
|
|
$
|
94,946
|
|
|
$
|
130,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income**
|
|
$
|
0.90
|
|
|
$
|
1.46
|
|
|
$
|
1.51
|
|
|
$
|
1.17
|
|
|
$
|
1.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income**
|
|
$
|
0.90
|
|
|
$
|
1.46
|
|
|
$
|
1.51
|
|
|
$
|
1.16
|
|
|
$
|
1.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends
|
|
$
|
0.77
|
|
|
$
|
1.16
|
|
|
$
|
1.16
|
|
|
$
|
1.14
|
|
|
$
|
1.10
|
|
Performance Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on total assets (ROA)
|
|
|
0.76
|
%
|
|
|
1.13
|
%
|
|
|
1.19
|
%
|
|
|
0.94
|
%
|
|
|
1.27
|
%
|
Return on common shareholders equity (ROE)
|
|
|
8.09
|
%
|
|
|
12.76
|
%
|
|
|
14.05
|
%
|
|
|
10.67
|
%
|
|
|
13.50
|
%
|
Net interest margin tax-equivalent basis
|
|
|
3.58
|
%
|
|
|
3.72
|
%
|
|
|
3.62
|
%
|
|
|
3.71
|
%
|
|
|
3.73
|
%
|
Efficiency ratio
|
|
|
62.95
|
%
|
|
|
58.78
|
%
|
|
|
61.12
|
%
|
|
|
60.77
|
%
|
|
|
57.88
|
%
|
Book value per common share
|
|
$
|
12.25
|
|
|
$
|
11.58
|
|
|
$
|
11.24
|
|
|
$
|
10.56
|
|
|
$
|
11.39
|
|
Average shareholders equity to total average assets
|
|
|
9.73
|
%
|
|
|
8.87
|
%
|
|
|
8.48
|
%
|
|
|
8.79
|
%
|
|
|
9.42
|
%
|
Dividend payout ratio
|
|
|
85.56
|
%
|
|
|
79.45
|
%
|
|
|
76.82
|
%
|
|
|
98.28
|
%
|
|
|
71.43
|
%
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (at year end)
|
|
$
|
10,539,902
|
|
|
$
|
11,100,026
|
|
|
$
|
10,400,666
|
|
|
$
|
10,298,702
|
|
|
$
|
10,161,317
|
|
Long-term debt (at year end)
|
|
|
740,105
|
|
|
|
1,344,195
|
|
|
|
203,755
|
|
|
|
213,821
|
|
|
|
300,663
|
|
Daily averages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,793,494
|
|
|
$
|
10,549,442
|
|
|
$
|
10,318,788
|
|
|
$
|
10,130,015
|
|
|
$
|
10,264,429
|
|
Earning assets
|
|
|
9,925,234
|
|
|
|
9,729,909
|
|
|
|
9,482,759
|
|
|
|
9,261,292
|
|
|
|
9,434,664
|
|
Deposits and other funds
|
|
|
9,475,734
|
|
|
|
9,424,132
|
|
|
|
9,252,166
|
|
|
|
9,072,820
|
|
|
|
9,139,578
|
|
Shareholders equity
|
|
|
1,049,925
|
|
|
|
936,088
|
|
|
|
875,526
|
|
|
|
889,929
|
|
|
|
966,726
|
|
|
|
|
*
|
|
Fully tax-equivalent basis
|
|
**
|
|
Average outstanding shares and per
share data restated to reflect the effect of stock dividends
declared April 28, 2009 and August 20, 2009.
|
19
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEARS 2009, 2008 AND 2007
|
The following commentary presents a discussion and analysis of
the Corporations financial condition and results of
operations by its management (Management). The
review highlights the principal factors affecting earnings and
the significant changes in balance sheet items for the years
2009, 2008 and 2007. Financial information for prior years is
presented when appropriate. The objective of this financial
review is to enhance the readers 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 Managements insights of
known events and trends that have or may reasonably be expected
to have a material effect on the Corporations operations
and financial condition.
HIGHLIGHTS
OF 2009 PERFORMANCE
Earnings
Summary
FirstMerit Corporation reported fourth quarter 2009 net
income of $14.5 million, or $0.17 per diluted share. This
compares with $22.8 million, or $0.27 per diluted share,
for the third quarter 2009 and $29.1 million, or $0.35 per
diluted share, for the fourth quarter 2008. For the full year
2009, the Corporation reported net income of $82.2 million,
or $0.90 per diluted share, compared with $119.5 million,
or $1.46 per diluted share in 2008.
Returns on average common equity (ROE) and average
assets (ROA) for the fourth quarter 2009 were 5.38%
and 0.54%, respectively, compared with 8.69% and 0.85%,
respectively, for the third quarter 2009 and 12.47% and 1.08%
for the fourth quarter 2008. ROE and ROA for the year ended
December 31, 2009 were 8.09% and 0.76%, respectively,
compared with 12.76% and 1.13%, respectively, for the year ended
December 31, 2008.
On December 16, 2009, the FirstMerit Bank acquired
$102.0 million in outstanding principal of asset based
lending loans (ABL loans), as well as the staff to
service and build new business, from First Bank Business
Capital, Inc., (FBBC). FBBC is a wholly owned
subsidiary of First Bank, a Missouri state chartered bank. This
acquisition expands the Corporations market presence and
asset based lending business into the Midwest.
Average loans during the fourth quarter of 2009 decreased
$108.0 million, or 1.53%, compared with the third quarter
of 2009 and also decreased $417.3 million, or 5.66%,
compared with the fourth quarter of 2008. Decreases against the
respective periods were due to a reduction in both consumer and
commercial demand for borrowing. In the fourth quarter of 2009,
average commercial loans decreased $46.9 million, or 1.14%,
and $214.3 million, or 5.01%, compared with the third
quarter of 2009 and fourth quarter of 2008, respectively.
Average consumer loans decreased $62.3 million, or 2.15%,
and $194.8 million, or 6.78%, over the same periods.
Average deposits were $7.4 billion during the fourth
quarter of 2009, up $13.1 million, or 0.18%, compared with
the third quarter of 2009, and a decrease of
$275.0 million, or 3.58%, compared with the fourth quarter
of 2008. For the fourth quarter 2009, average core deposits
(which are defined as checking accounts, savings accounts and
money market savings products) increased $344.1 million, or
6.24%, compared with the third quarter 2009 and
$1.1 billion, or 21.98%, compared with the fourth quarter
2008. Core deposits represented 79.16% of total average
deposits, compared with 74.64% for the third quarter 2009 and
62.57% for the fourth quarter 2008. The Corporation increased
average core deposits for the ninth consecutive quarter.
Strategic retail and business marketing campaigns, primarily
focused on new Reality Checking and Savings deposit products,
drove the continued growth which began in the fourth quarter of
2007.
Average investments increased $20.8 million, or 0.76%,
compared with the third quarter of 2009 and $248.3 million,
or 9.93% compared with the fourth quarter of 2008. The
Corporations investment portfolio yield decreased in the
fourth quarter of 2009, to 4.35%, compared with 4.51% in the
third quarter of 2009, and decreased from 5.01% in the fourth
quarter of 2008, reflective of the declining interest rate
environment.
Net interest margin was 3.64% for the fourth quarter of 2009
compared with 3.61% for the third quarter of 2009 and 3.82% for
the fourth quarter of 2008, marking a third consecutive quarter
of net interest margin expansion. The Corporations success
both migrating existing and attracting new depository accounts
into its Reality Checking and Savings products continued to
reduce funding costs and positively impact the net interest
margin.
Net interest income on a fully tax-equivalent (FTE)
basis was $89.2 million in the fourth quarter 2009 compared
with $89.1 million in the third quarter of 2009 and
$94.9 million in the fourth quarter of 2008. Declining
20
average loan balances in the fourth quarter of 2009 compared
with the third quarter of 2009 offset net interest margin
expansion during the quarter.
Noninterest income net of securities transactions for the fourth
quarter of 2009 was $50.8 million, an increase of
$2.1 million, or 4.37%, from the third quarter of 2009 and
a decrease of $0.5 million, or 0.09%, from the fourth
quarter of 2008. In the fourth quarter of 2008 the Corporation
recorded $5.8 million of other income from the sale of
Class B Visa Inc. stock. Noninterest income net of
securities transactions as a percentage of net revenue for the
fourth quarter of 2009 was 36.28% compared with 35.32% for third
quarter of 2009 and 35.07% for the fourth quarter of 2008. Net
revenue is defined as net interest income, on an FTE basis, plus
other income, less gains from securities sales.
Noninterest expense for the fourth quarter of 2009 was
$94.9 million, an increase of $10.7 million, or
12.74%, from the third quarter of 2009 and an increase of
$6.6 million, or 7.53%, from the fourth quarter of 2008.
The fourth quarter of 2009 noninterest expenses included
$2.5 million of professional services related to due
diligence and acquisition expense, $1.3 million provision
for unfunded lending commitments and $3.9 million related
to the discontinuation of hedge accounting for a portfolio of
interest rate swaps associated with fixed-rate commercial loans.
For the fourth quarter of 2009, the efficiency ratio was 67.74%,
compared with 61.05% for the third quarter of 2009 and 60.34%
for the fourth quarter of 2008.
Net charge-offs totaled $31.2 million, or 1.79% of average
loans, in the fourth quarter of 2009 compared with
$18.8 million, or 1.05% of average loans, in the third
quarter 2009 and $15.2 million, or 0.82% of average loans,
in the fourth quarter of 2008.
Nonperforming assets totaled $101.0 million at
December 31, 2009, an increase of $12.1 million, or
13.64%, compared with September 30, 2009. Nonperforming
assets at December 31, 2009 represented 1.48% of period-end
loans plus other real estate compared with 1.26% at
September 30, 2009 and 0.77% million at December 31,
2008.
The allowance for loan losses totaled $115.1 million at
December 31, 2009. At December 31, 2009, the allowance
for loan losses was 1.68% of period-end loans compared with
1.66% at September 30, 2009 and 1.40% at December 31,
2008. The allowance for credit losses is the sum of the
allowance for loan losses and the reserve for unfunded lending
commitments. For comparative purposes the allowance for credit
losses was 1.77% at December 31, 2009 compared with 1.72%
at September 30, 2009 and 1.49% at December 31, 2008.
The allowance for credit losses to nonperforming loans was
131.82% at December 31, 2009, compared with 153.27% at
September 30, 2009 and 211.38% at December 31, 2008.
The Corporations total assets at December 31, 2009
were $10.5 billion, a decrease of $222.9 million, or
2.07%, compared with September 30, 2009 and a decrease of
$561.5 million, or 5.06%, compared with December 31,
2008. Commercial loans decreased $286.2 million, or 6.58%
and installment loans decreased $149.2 million or 9.48%,
compared with December 31, 2008, contributing to the
majority of asset declines over the prior year period.
Total deposits were $7.5 billion at December 31, 2009,
an increase of $244.5 million, or 3.36%, from
September 30, 2009 and an increase of $81.9 million,
or 1.08%, from December 31, 2008. Core deposits totaled
$6.2 billion at December 31, 2009, an increase of
$576.5 million, or 10.33%, from September 30, 2009 and
an increase of $1.34 billion, or 27.80%, from
December 31, 2008.
Shareholders equity was $1.08 billion at
December 31, 2009, compared with $1.06 billion at
September 30, 2009, and $937.8 million at
December 31, 2008. The Corporation maintained a strong
capital position as tangible common equity to assets was 8.89%
at December 31, 2009, compared with 8.65% at
September 30, 2009 and 7.27% at December 31, 2008. The
common cash dividend per share paid in the fourth quarter 2009
was $0.16.
Line of
Business Results
Prior to 2007, the Corporation managed its operations through
the major line of business Supercommunity Banking.
To improve revenue growth and profitability as well as enhance
relationships with customers, the Corporation moved to a line of
business model during the first quarter of 2007. The major lines
of business are Commercial, Retail, Wealth and Other.
Note 15 (Segment Information) to the consolidated financial
statements provides performance data for these lines of business.
21
AVERAGE
CONSOLIDATED BALANCE SHEETS (Unaudited)
Fully Tax-equivalent Interest Rates and Interest
Differential
FIRSTMERIT
CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended
|
|
|
Twelve months ended
|
|
|
Twelve months ended
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
183,215
|
|
|
|
|
|
|
|
|
|
|
|
177,089
|
|
|
|
|
|
|
|
|
|
|
|
178,164
|
|
|
|
|
|
|
|
|
|
Investment securities and federal funds sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and U.S. Government agency obligations
(taxable)
|
|
|
2,222,771
|
|
|
|
97,871
|
|
|
|
4.40
|
%
|
|
|
1,985,026
|
|
|
|
94,260
|
|
|
|
4.75
|
%
|
|
|
1,955,049
|
|
|
|
85,544
|
|
|
|
4.38
|
%
|
Obligations of states and political subdivisions (tax exempt)
|
|
|
321,919
|
|
|
|
19,718
|
|
|
|
6.13
|
%
|
|
|
294,724
|
|
|
|
17,910
|
|
|
|
6.08
|
%
|
|
|
255,461
|
|
|
|
15,595
|
|
|
|
6.10
|
%
|
Other securities and federal funds sold
|
|
|
204,272
|
|
|
|
8,394
|
|
|
|
4.11
|
%
|
|
|
216,794
|
|
|
|
11,326
|
|
|
|
5.22
|
%
|
|
|
244,749
|
|
|
|
17,127
|
|
|
|
7.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities and federal funds sold
|
|
|
2,748,962
|
|
|
|
125,983
|
|
|
|
4.58
|
%
|
|
|
2,496,544
|
|
|
|
123,496
|
|
|
|
4.95
|
%
|
|
|
2,455,259
|
|
|
|
118,266
|
|
|
|
4.82
|
%
|
Loans held for sale
|
|
|
19,289
|
|
|
|
1,032
|
|
|
|
5.35
|
%
|
|
|
29,419
|
|
|
|
1,602
|
|
|
|
5.45
|
%
|
|
|
56,036
|
|
|
|
3,050
|
|
|
|
5.44
|
%
|
Loans
|
|
|
7,156,983
|
|
|
|
339,381
|
|
|
|
4.74
|
%
|
|
|
7,203,946
|
|
|
|
434,704
|
|
|
|
6.03
|
%
|
|
|
6,971,464
|
|
|
|
521,172
|
|
|
|
7.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
9,925,234
|
|
|
|
466,396
|
|
|
|
4.70
|
%
|
|
|
9,729,909
|
|
|
|
559,802
|
|
|
|
5.75
|
%
|
|
|
9,482,759
|
|
|
|
642,488
|
|
|
|
6.78
|
%
|
Allowance for loan losses
|
|
|
(108,017
|
)
|
|
|
|
|
|
|
|
|
|
|
(96,714
|
)
|
|
|
|
|
|
|
|
|
|
|
(92,662
|
)
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
793,918
|
|
|
|
|
|
|
|
|
|
|
|
739,158
|
|
|
|
|
|
|
|
|
|
|
|
750,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,794,350
|
|
|
|
|
|
|
|
|
|
|
|
10,549,442
|
|
|
|
|
|
|
|
|
|
|
|
10,318,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand non-interest bearing
|
|
$
|
1,910,171
|
|
|
|
|
|
|
|
|
|
|
|
1,530,021
|
|
|
|
|
|
|
|
|
|
|
|
1,408,726
|
|
|
|
|
|
|
|
|
|
Demand interest bearing
|
|
|
656,367
|
|
|
|
600
|
|
|
|
0.09
|
%
|
|
|
687,160
|
|
|
|
2,514
|
|
|
|
0.37
|
%
|
|
|
733,410
|
|
|
|
6,824
|
|
|
|
0.93
|
%
|
Savings and money market accounts
|
|
|
2,886,842
|
|
|
|
23,472
|
|
|
|
0.81
|
%
|
|
|
2,398,778
|
|
|
|
29,839
|
|
|
|
1.24
|
%
|
|
|
2,266,070
|
|
|
|
54,166
|
|
|
|
2.39
|
%
|
Certificates and other time deposits
|
|
|
2,056,208
|
|
|
|
54,610
|
|
|
|
2.66
|
%
|
|
|
2,801,623
|
|
|
|
105,853
|
|
|
|
3.78
|
%
|
|
|
3,045,715
|
|
|
|
146,559
|
|
|
|
4.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
7,509,588
|
|
|
|
78,682
|
|
|
|
1.05
|
%
|
|
|
7,417,582
|
|
|
|
138,206
|
|
|
|
1.86
|
%
|
|
|
7,453,921
|
|
|
|
207,549
|
|
|
|
2.78
|
%
|
Securities sold under agreements to repurchase
|
|
|
1,013,167
|
|
|
|
4,764
|
|
|
|
0.47
|
%
|
|
|
1,343,441
|
|
|
|
31,857
|
|
|
|
2.37
|
%
|
|
|
1,471,785
|
|
|
|
71,298
|
|
|
|
4.84
|
%
|
Wholesale borrowings
|
|
|
952,979
|
|
|
|
27,317
|
|
|
|
2.87
|
%
|
|
|
663,109
|
|
|
|
27,574
|
|
|
|
4.16
|
%
|
|
|
326,460
|
|
|
|
20,601
|
|
|
|
6.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
7,565,563
|
|
|
|
110,763
|
|
|
|
1.46
|
%
|
|
|
7,894,111
|
|
|
|
197,637
|
|
|
|
2.50
|
%
|
|
|
7,843,440
|
|
|
|
299,448
|
|
|
|
3.82
|
%
|
Other liabilities
|
|
|
268,691
|
|
|
|
|
|
|
|
|
|
|
|
189,222
|
|
|
|
|
|
|
|
|
|
|
|
191,096
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
1,049,925
|
|
|
|
|
|
|
|
|
|
|
|
936,088
|
|
|
|
|
|
|
|
|
|
|
|
875,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
10,794,350
|
|
|
|
|
|
|
|
|
|
|
|
10,549,442
|
|
|
|
|
|
|
|
|
|
|
|
10,318,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on earning assets
|
|
$
|
9,925,234
|
|
|
|
355,633
|
|
|
|
3.58
|
%
|
|
|
9,729,909
|
|
|
|
362,165
|
|
|
|
3.72
|
%
|
|
|
9,482,759
|
|
|
|
343,040
|
|
|
|
3.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.24
|
%
|
|
|
|
|
|
|
|
|
|
|
3.25
|
%
|
|
|
|
|
|
|
|
|
|
|
2.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: |
Interest income on tax-exempt
securities and loans has been adjusted to a fully-taxable
equivalent basis. Nonaccrual loans have been included in the
average balances.
|
22
RESULTS
OF OPERATIONS
Net
Interest Income
Net interest income, the Corporations principal source of
earnings, is the difference between interest income generated by
earning assets (primarily loans and investment securities) and
interest paid on interest-bearing funds (namely customer
deposits and wholesale borrowings). 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, noninterest-bearing
liabilities, the mix of funding between interest bearing
liabilities, noninterest-bearing liabilities and equity, and the
growth in earning assets.
Net interest income for the year ended December 31, 2009
was $348.8 million compared to $356.2 million for year
ended December 31, 2008 and $337.5 million for the
year ended December 31, 2007. The $7.4 million
decrease in net interest income occurred because the
$94.3 million decrease in interest income was more than the
$86.9 million decrease in interest expense during the same
period. For the purpose of this remaining discussion, net
interest income is presented on a FTE basis, to provide a
comparison among all types of interest earning assets. That is,
interest on tax-free securities and tax-exempt loans has been
restated as if such interest were taxed at the statutory Federal
income tax rate of 35% adjusted for the non-deductible portion
of interest expense incurred to acquire the tax-free assets. Net
interest income presented on a FTE basis is a non-GAAP financial
measure widely used by financial services corporations. The FTE
adjustment for full year 2009 was $6.9 million compared
with $6.0 million in 2008 and $5.5 million in 2007.
Net interest income presented on an FTE basis decreased
$6.5 million or 1.80% to $355.6 million in 2009
compared to $362.2 million in 2008 and $343.0 million
in 2007. The decrease from 2008 to 2009 occurred because the
$93.4 million decrease in interest income was more than the
$86.9 million decrease in interest expense during same
period. The $19.1 million increase from 2008 to 2007
occurred because the $101.8 million decrease in interest
expense was more than the $82.7 million decrease in
interest income during same period. As illustrated in the
following rate/volume analysis table, interest income and
interest expense both decreased due to the decline in interest
rates throughout the year.
The average yield on earning assets decreased 105 basis
points from 5.75% in 2008 to 4.70% in 2009 decreasing interest
income by $102.0 million. Higher outstanding balances on
total average earning assets in 2009 caused interest income to
increase $8.6 million from year-ago levels. Average
balances for investment securities were up from last year
increasing interest income by $12.0 million, and lower
rates earned on the securities decreased interest income by
$9.5 million. Average loans outstanding, down from last
year, decreased 2009 interest income by $3.4 million and
lower yields earned on the loans, decreased 2009 loan interest
income by $92.5 million. Similarly, the average yield on
earning assets decreased 103 basis points from 6.78% in
2007 to 5.75% in 2008 decreasing interest income by
$100.6 million. Higher outstanding balances on total
average earning assets in 2008 caused interest income to
increase $16.9 million from 2007 levels. At
December 31, 2008 average balances for investment
securities were up from the 2007 year increased interest
income by $2.5 million, and higher rates earned on the
securities also increased interest income by $2.7 million.
Average loans outstanding, up from 2007 year, increased
2008 interest income by $16.9 million while lower yields
earned on the loans also decreased 2008 loan interest
$103.4 million.
The cost of funds for the year as a percentage of average
earning assets decreased 91 basis points from 2.03% in 2008
to 1.12% in 2009. The cost of funds for the year as a percentage
of average earning assets decreased 113 basis points from
3.16% in 2007 to 2.03% in 2008. As discussed in the deposits and
wholesale borrowings section of managements discussion and
analysis of financial condition and operating results, the drop
in interest rates was the primary factor in this decrease.
23
CHANGES
IN NET INTEREST INCOME- FULLY TAX-EQUIVALENT RATE/VOLUME
ANALYSIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2009 and 2008
|
|
|
2008 and 2007
|
|
|
|
Increase (Decrease) In Interest
|
|
|
Increase (Decrease) In Interest
|
|
|
|
Income/Expense
|
|
|
Income/Expense
|
|
|
|
|
|
|
Yield/
|
|
|
|
|
|
|
|
|
Yield/
|
|
|
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
( In thousands)
|
|
|
INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities and federal funds sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
10,292
|
|
|
|
(9,613
|
)
|
|
|
679
|
|
|
|
138
|
|
|
|
2,777
|
|
|
|
2,915
|
|
Tax-exempt
|
|
|
1,665
|
|
|
|
143
|
|
|
|
1,808
|
|
|
|
2,386
|
|
|
|
(71
|
)
|
|
|
2,315
|
|
Loans held for sale
|
|
|
(542
|
)
|
|
|
(28
|
)
|
|
|
(570
|
)
|
|
|
(1,449
|
)
|
|
|
1
|
|
|
|
(1,448
|
)
|
Loans
|
|
|
(2,816
|
)
|
|
|
(92,507
|
)
|
|
|
(95,323
|
)
|
|
|
16,886
|
|
|
|
(103,354
|
)
|
|
|
(86,468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
8,599
|
|
|
|
(102,005
|
)
|
|
|
(93,406
|
)
|
|
|
17,961
|
|
|
|
(100,647
|
)
|
|
|
(82,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand-interest bearing
|
|
|
(108
|
)
|
|
|
(1,806
|
)
|
|
|
(1,914
|
)
|
|
|
(405
|
)
|
|
|
(3,905
|
)
|
|
|
(4,310
|
)
|
Savings and money market accounts
|
|
|
5,293
|
|
|
|
(11,660
|
)
|
|
|
(6,367
|
)
|
|
|
3,007
|
|
|
|
(27,334
|
)
|
|
|
(24,327
|
)
|
Certificates and other time deposits (CDs)
|
|
|
(24,211
|
)
|
|
|
(27,032
|
)
|
|
|
(51,243
|
)
|
|
|
(11,060
|
)
|
|
|
(29,646
|
)
|
|
|
(40,706
|
)
|
Securities sold under agreements to repurchase
|
|
|
(6,358
|
)
|
|
|
(20,735
|
)
|
|
|
(27,093
|
)
|
|
|
(5,754
|
)
|
|
|
(33,687
|
)
|
|
|
(39,441
|
)
|
Wholesale borrowings
|
|
|
9,865
|
|
|
|
(10,122
|
)
|
|
|
(257
|
)
|
|
|
15,799
|
|
|
|
(8,826
|
)
|
|
|
6,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(15,519
|
)
|
|
|
(71,355
|
)
|
|
|
(86,874
|
)
|
|
|
1,587
|
|
|
|
(103,398
|
)
|
|
|
(101,811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
24,118
|
|
|
|
(30,650
|
)
|
|
|
(6,532
|
)
|
|
|
16,374
|
|
|
|
2,751
|
|
|
|
19,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
|
Rate/volume variances are allocated
on the basis of absolute value of the change in each.
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Net interest income
|
|
$
|
348,764
|
|
|
|
356,189
|
|
|
|
337,546
|
|
Tax equivalent adjustment
|
|
|
6,869
|
|
|
|
5,976
|
|
|
|
5,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income FTE
|
|
$
|
355,633
|
|
|
|
362,165
|
|
|
|
343,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earning assets
|
|
$
|
9,925,234
|
|
|
|
9,729,909
|
|
|
|
9,482,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
3.58
|
%
|
|
|
3.72
|
%
|
|
|
3.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed in the previous section, the decrease in the net
interest margin during 2009 was a result of lack of loan demand
and lower interest rates. The increase in 2008 over 2007 was
primarily a result of the drop in interest rates and the
increase in core deposits.
24
Other
Income
Excluding investment securities gains, other income totaled
$204.3 million in 2009 an increase of $5.0 million or
2.49% from 2008 and an increase of $8.5 million or 4.32%
from 2007. Other income as a percentage of net revenue (FTE net
interest income plus other income, less gains from securities)
was 36.48% compared to 35.50% in 2008. Explanations for the most
significant changes in the components of other income are
discussed immediately after the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Trust department income
|
|
$
|
20,683
|
|
|
|
22,127
|
|
|
|
23,245
|
|
Service charges on deposits
|
|
|
63,366
|
|
|
|
62,862
|
|
|
|
67,374
|
|
Credit card fees
|
|
|
46,512
|
|
|
|
47,054
|
|
|
|
46,502
|
|
ATM and other service fees
|
|
|
11,110
|
|
|
|
10,894
|
|
|
|
12,621
|
|
Bank owned life insurance income
|
|
|
13,740
|
|
|
|
12,008
|
|
|
|
13,476
|
|
Investment services and life insurance
|
|
|
10,008
|
|
|
|
10,503
|
|
|
|
11,241
|
|
Investment securities gains, net
|
|
|
6,037
|
|
|
|
2,126
|
|
|
|
1,123
|
|
Loan sales and servicing income
|
|
|
12,954
|
|
|
|
6,940
|
|
|
|
10,311
|
|
Gain on Visa Inc.
|
|
|
|
|
|
|
13,666
|
|
|
|
|
|
Gain on post medical retirement curtailment
|
|
|
9,543
|
|
|
|
|
|
|
|
|
|
Other operating income
|
|
|
16,348
|
|
|
|
13,256
|
|
|
|
11,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
210,301
|
|
|
|
201,436
|
|
|
|
196,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust department income decreased by 6.53%, down
$1.4 million in 2009 after an increase of 4.81%, or
$1.1 million in 2008 over 2007. Service charges on deposits
increased by $0.5 million or 0.80% in 2009, and were down
$4.5 million or 6.70% in 2008 versus 2007. The decrease in
service charges on deposits during both years is due primarily
to changes in customer behavior whereby they maintain higher
balances in order to avoid being charged fees as well as new
product initiatives that do not charge fees. Credit card fees
decreased $0.5 million or 1.15% in 2009, and
$0.6 million or 1.19% in 2008 over 2007 primarily due to
decreasing volumes. ATM and other service charge fees have
increased $0.2 million or 1.98% in 2009; this increase was
volume driven. Bank owned life insurance income increased
$1.7 million or 14.42% compared to 2008 which was up
primarily due to death proceeds. Investment services and
insurance income decreased $0.5 million in 2009 after a
decrease of $0.7 in 2008 over 2007. During 2009, investment
securities were sold for a gain of $3.9 million up 183.96%
from 2008. Loan sales and servicing income increased
$6.0 million or 86.66% in 2009 after a decrease of
$3.4 million or 32.69% in 2008 over 2007. This increase was
primarily attributable to mortgage modifications. During the
first quarter of 2009, the Corporation recorded
$9.5 million due to the curtailment of the postretirement
medical plan for active employees. During the fourth quarter of
2008, the Corporation recorded $5.8 million from the sale
of Class B Visa, Inc stock. This followed a
$7.9 million gain from the partial redemption of the shares
in the first quarter of 2008. During the first quarter of 2007
$4.1 million of net gains were recorded from the commercial
loan sale more fully described in the Asset Quality section of
this report.
Federal
Income Taxes
Federal income tax expense totaled $25.6 million in 2009
compared to $48.9 million in 2008 and $50.4 million in
2007. The effective federal income tax rate for the year ended
December 31, 2009 was 23.79%, compared to 29.04% and 29.05%
for the year ended December 31, 2008 and 2007,
respectively. Tax reserves have been specifically estimated for
potential at-risk items in accordance with ASC 740, Income
Taxes. Further federal income tax information is contained
in Note 11 (Federal Income Taxes) to the consolidated
financial statements.
25
Other
Expenses
Other expenses were $352.8 million in 2009 compared to
$330.6 million in 2008 and $330.2 million in 2007, an
increase of $22.2 million or 6.71% over 2008 and an
increase of $22.6 million or 6.84% over 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Salaries and wages
|
|
$
|
132,643
|
|
|
$
|
133,091
|
|
|
$
|
126,689
|
|
Pension and employee benefits
|
|
|
43,263
|
|
|
|
46,372
|
|
|
|
43,768
|
|
Net occupancy expense
|
|
|
24,099
|
|
|
|
24,649
|
|
|
|
25,679
|
|
Equipment expense
|
|
|
24,301
|
|
|
|
24,137
|
|
|
|
25,401
|
|
Taxes, other than federal income taxes
|
|
|
6,496
|
|
|
|
6,580
|
|
|
|
6,575
|
|
Stationery, supplies and postage
|
|
|
8,907
|
|
|
|
9,372
|
|
|
|
9,436
|
|
Bankcard, loan processing, and other costs
|
|
|
31,467
|
|
|
|
29,456
|
|
|
|
29,781
|
|
Advertising
|
|
|
7,003
|
|
|
|
9,494
|
|
|
|
9,001
|
|
Professional services
|
|
|
16,414
|
|
|
|
11,695
|
|
|
|
15,865
|
|
Telephone
|
|
|
4,060
|
|
|
|
3,947
|
|
|
|
4,362
|
|
Amortization of intangibles
|
|
|
347
|
|
|
|
573
|
|
|
|
889
|
|
Hedge termination
|
|
|
3,877
|
|
|
|
|
|
|
|
|
|
Other operating expense
|
|
|
49,940
|
|
|
|
31,267
|
|
|
|
32,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
352,817
|
|
|
$
|
330,633
|
|
|
$
|
330,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages were $132.6 million in 2009, a decrease
of $0.4 million or 0.34% over 2008. There was an increase
in salaries and wages in from 2007 to 2008 of $6.4 million
or 5.05%. Increases generally reflect the annual employee merit
increases which were offset by decrease in headcount. Pension
and employee benefits were $43.3 million in 2009, a
decrease of $3.1 million or 6.70% from 2008, primarily due
to the reduction in the ongoing expense resulting from the
curtailment of the postretirement medical plan for active
employees. Note 12 (Benefit Plans) to the consolidated
financial statements more fully describes the changes in pension
and postretirement medical expenses. Professional services
expenses increased $4.7 million or 40.35% in 2009 over 2008
due in part to an increase in acquisition due diligence
activity. During 2008, the economic environment caused higher
levels of bank failures which dramatically increased FDIC
resolution costs. The FDIC significantly increased assessments
during 2009 which resulted in additional FDIC insurance expense
of $15.2 million over 2008 which is recorded in other
operating expense.
Also included in other expense is $3.9 million related to
the discontinuation of hedge accounting for a portfolio of
interest rate swaps associated with fixed-rate commercial loans.
In December 2009, the Corporation corrected an error in hedge
accounting for a portfolio of interest rate swaps associated
with fixed-rate commercial loans recorded in prior periods. The
Corporation assessed the materiality of the error in accordance
with Staff Accounting Bulletin (SAB) No. 108
and concluded the error was not material, either individually or
in the aggregate, to the results of operations of any prior
period or for the year ending December 31, 2009, to trends
for those periods affected, or to a fair presentation of the
Corporations financial statements for those periods.
Accordingly, results for prior periods have not been restated.
Instead, the Corporation increased other expenses and reduced
the commercial loans balance by $3.9 million to correct
this error in the fourth quarter. In addition, this portfolio of
interest rate swaps was terminated in January 2010.
The efficiency ratio for 2009 was 62.95%, compared to 58.78% in
2008 and 61.12% in 2007. The lower is better
efficiency ratio indicates the percentage of operating costs
that are used to generate each dollar of net revenue
that is during 2009, 62.95 cents were spent to generate each $1
of net revenue. Net revenue is defined as net interest income,
on a tax-equivalent basis, plus other income less gains from the
sales of securities.
26
FINANCIAL
CONDITION
Investment
Securities
At December 31, 2009, the securities portfolio totaled
$2.7 billion; $50.7 million of that amount was
held-to-maturity
securities and the remainder was securities
available-for-sale.
In comparison, as of December 31, 2008, the total portfolio
was $2.8 billion, including $30.3 million of
held-to-maturity
securities and $2.6 billion of securities
available-for-sale.
Available-for-sale
securities are held primarily for liquidity, interest rate risk
management and long-term yield enhancement. Accordingly, the
Corporations investment policy is to invest in securities
with low credit risk, such as U.S. Treasury securities,
U.S. Government agency obligations, state and political
obligations and mortgage-backed securities (MBSs).
Held-to-maturity
securities consist principally of securities issued by state and
political subdivisions. Other investments include Federal Home
Loan Bank (FHLB) and Federal Reserve Bank
(FRB) stock.
Net unrealized gains were $55.1 million at
December 31, 2009, compared to $1.2 million at
December 31, 2008. The improvement in the fair value of the
investment securities is driven by government agency securities
held in portfolio.
The Corporation conducts a regular assessment of its investment
securities to determine whether any securities are
other-than-temporary
impaired. Only the credit portion of
other-than-temporary
impairment (OTTI) is to be recognized in current
earnings for those securities where there is no intent to sell
or it is more likely than not the Corporation would not be
required to sell the security prior to expected recovery. The
remaining portion of OTTI is to be included in accumulated other
comprehensive loss, net of income tax.
Gross unrealized losses of $21.6 million as of
December 31, 2009, compared to $38.3 million at
December 31, 2008 were concentrated within trust preferred
securities held in portfolio. The Corporation holds eight,
single issuer, trust preferred securities. Such investments are
less than 2% of the fair value of the entire investment
portfolio. None of the bank issuers have deferred paying
dividends on their issued trust preferred shares in which the
Corporation is invested. The fair values of these investments
have been impacted by market conditions which have caused risk
premiums to increase markedly resulting in the decline in the
fair value of the Corporations trust preferred securities.
Further detail of the composition of the securities portfolio
and discussion of the results of the most recent OTTI assessment
are in Note 3 (Investment Securities) to the consolidated
financial statements.
Loans
Total loans outstanding at year-end 2009 decreased 6.76% to
$6.9 billion compared to one year ago, at $7.4 billion.
The following tables breakdown outstanding loans by category and
provide a maturity summary of commercial loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Commercial loans
|
|
$
|
4,066,522
|
|
|
$
|
4,352,730
|
|
|
$
|
3,906,448
|
|
|
$
|
3,694,121
|
|
|
$
|
3,519,483
|
|
Mortgage loans
|
|
|
463,416
|
|
|
|
547,125
|
|
|
|
577,219
|
|
|
|
608,008
|
|
|
|
628,581
|
|
Installment loans
|
|
|
1,425,373
|
|
|
|
1,574,587
|
|
|
|
1,598,832
|
|
|
|
1,619,747
|
|
|
|
1,524,355
|
|
Home equity loans
|
|
|
753,112
|
|
|
|
733,832
|
|
|
|
691,922
|
|
|
|
731,473
|
|
|
|
778,697
|
|
Credit card loans
|
|
|
153,525
|
|
|
|
149,745
|
|
|
|
153,732
|
|
|
|
147,553
|
|
|
|
145,592
|
|
Leases
|
|
|
61,541
|
|
|
|
67,594
|
|
|
|
73,733
|
|
|
|
77,971
|
|
|
|
70,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
6,923,489
|
|
|
|
7,425,613
|
|
|
|
7,001,886
|
|
|
|
6,878,873
|
|
|
|
6,667,327
|
|
Less allowance for loan losses
|
|
|
115,092
|
|
|
|
103,757
|
|
|
|
94,205
|
|
|
|
91,342
|
|
|
|
90,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
6,808,397
|
|
|
$
|
7,321,856
|
|
|
$
|
6,907,681
|
|
|
$
|
6,787,531
|
|
|
$
|
6,576,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009
|
|
|
|
Commercial
|
|
|
Mortgage
|
|
|
Installment
|
|
|
Home equity
|
|
|
Credit card
|
|
|
|
|
|
|
loans
|
|
|
loans
|
|
|
loans
|
|
|
loans
|
|
|
loans
|
|
|
Leases
|
|
|
|
(In thousands)
|
|
|
Due in one year or less
|
|
$
|
1,702,790
|
|
|
$
|
167,303
|
|
|
$
|
457,276
|
|
|
$
|
298,097
|
|
|
$
|
101,913
|
|
|
$
|
30,922
|
|
Due after one year but within five years
|
|
|
2,014,726
|
|
|
|
224,655
|
|
|
|
800,186
|
|
|
|
385,933
|
|
|
|
51,612
|
|
|
|
29,794
|
|
Due after five years
|
|
|
349,006
|
|
|
|
71,458
|
|
|
|
167,911
|
|
|
|
69,082
|
|
|
|
|
|
|
|
825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,066,522
|
|
|
$
|
463,416
|
|
|
$
|
1,425,373
|
|
|
$
|
753,112
|
|
|
$
|
153,525
|
|
|
$
|
61,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans due after one year with interest at a predetermined fixed
rate
|
|
$
|
868,658
|
|
|
|
133,085
|
|
|
|
962,649
|
|
|
|
21,234
|
|
|
|
13,524
|
|
|
|
30,619
|
|
Loans due after one year with interest at a floating rate
|
|
|
1,495,074
|
|
|
|
163,028
|
|
|
|
5,448
|
|
|
|
433,781
|
|
|
|
38,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,363,732
|
|
|
$
|
296,113
|
|
|
$
|
968,097
|
|
|
$
|
455,015
|
|
|
$
|
51,612
|
|
|
$
|
30,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consistent with the slowdown of the manufacturing-based economy
in Northeast Ohio commercial loans decreased 6.58% in 2009 but
increased 11.42% in 2008. The 2009 decrease was partially
mitigated by the ABL Loans acquired from First Bank Business
Capital, Inc. Single-family mortgage loans continue to be
originated by the Corporations mortgage subsidiary and
then sold into the secondary mortgage market or held in
portfolio. Low interest rates during 2009 resulted in an
increase in mortgage loan originations; however, due to the
downturn in the housing market there was an overall decrease of
15.30% in balances retained in portfolio.
Outstanding home equity loan balances increased
$19.3 million or 2.63% from December 31, 2008 and
installment loans decreased $149.2 million or 9.48%
reflecting the on-going economic downturn. Credit card loans
were up $3.8 million or 2.52% from December 31, 2008.
There is no predominant concentration of loans in any particular
industry or group of industries. Most of the Corporations
business activity is with customers located within the state of
Ohio.
Allowance
for Loan Losses and Reserve for Unfunded Lending
Commitments
The Corporation maintains what Management believes is an
adequate allowance for loan losses. The Corporation and
FirstMerit Bank regularly analyze the adequacy of their
allowance through ongoing review of trends in risk ratings,
delinquencies, nonperforming assets, charge-offs, economic
conditions, and changes in the composition of the loan
portfolio. Notes 1 and 4 to the consolidated financial
statements provide detailed information regarding the
Corporations credit policies and practices.
The Corporation uses a vendor based loss migration model to
forecast losses for commercial loans. The model creates loss
estimates using twelve-month (monthly rolling) vintages and
calculates cumulative three years loss rates within two
different scenarios. One scenario uses five year historical
performance data while the other one uses two year historical
data. The calculated rate is the average cumulative expected
loss of the two and five year data set. As a result, this
approach lends more weight to the more recent performance and
would be more conservative.
The uncertain economic conditions in which we are currently
operating have resulted in risks that differ from our historical
loss experience. Accordingly, Management deemed it appropriate
and prudent to apply qualitative factors (q-factors)
and assign additional reserves. These q-factors are supported by
judgments made by experienced credit risk management personnel
and represent risk associated with the portfolio given the
uncertainty and the inherent imprecision of estimating future
losses.
At December 31, 2009 the allowance for loan losses was
$115.1 million or 1.68% of loans outstanding, compared to
$103.8 million or 1.40% at year-end 2008. The allowance
equaled 125.55% of nonperforming loans at year-end 2009 compared
to 198.76% at year-end 2008. During 2008 additional reserves
were established to address identified risks associated with the
slow down in the housing markets and the decline in residential
and commercial real estate values. These reserves totaled
$19.1 million at year-end 2009 and $18.3 million at
year-end 2008. The increase in the
28
additional allocation augmented the increase in the calculated
loss migration analysis as the loans were downgraded during
2009. Nonperforming loans have increased by $43.4 million
over December 31, 2008 primarily attributable to the
declining economic conditions.
As required by current accounting guidance, the acquired ABL
loans from FBBC were recorded at fair value as of the date of
acquisition, with no carryover of related allowances. The
determination of the fair value of the ABL loans resulted in a
write-down in the value of the loans, which was assigned to an
accretable balance with the accretable balance being recognized
as interest income over the remaining term of the loan. Because
acquired loans are required to be accounted for at fair value on
the date of acquisition, Management believes that asset quality
measures excluding the acquired ABL loans are generally more
meaningful. Therefore, the asset quality ratios included herein
exclude these acquired ABL loans.
Net charge-offs were $87.1 million in 2009 compared to
$49.1 million in 2008 and $28.0 million (including the
loans held for sale) in 2007. As a percentage of average loans
outstanding, net charge-offs and allowance for loans held for
sale equaled 1.22% in 2009, 0.68% in 2008 and 0.40% in 2007.
Losses are charged against the allowance for loan losses as soon
as they are identified.
The allowance for unfunded lending commitments at
December 31, 2009, 2008 and 2007 was $5.8 million,
$6.6 million and $7.4 million, respectively. The
allowance for credit losses, which includes both the allowance
for loan losses and the reserve for unfunded lending
commitments, amounted to $120.8 million at year-end 2009,
$110.3 million at year-end 2008 and $101.6 million at
year-end 2007.
Allowance
for Credit Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
( In thousands)
|
|
|
Allowance for loan losses, beginning of period
|
|
$
|
103,757
|
|
|
$
|
94,205
|
|
|
$
|
91,342
|
|
Net charge-offs
|
|
|
(87,098
|
)
|
|
|
(49,051
|
)
|
|
|
(27,972
|
)
|
Provision for loan losses
|
|
|
98,433
|
|
|
|
58,603
|
|
|
|
30,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses, end of period
|
|
$
|
115,092
|
|
|
$
|
103,757
|
|
|
$
|
94,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for unfunded lending commitments, beginning of period
|
|
$
|
6,588
|
|
|
$
|
7,394
|
|
|
$
|
6,294
|
|
Provision for credit losses
|
|
|
(837
|
)
|
|
|
(806
|
)
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for unfunded lending commitments, end of period
|
|
$
|
5,751
|
|
|
$
|
6,588
|
|
|
$
|
7,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses
|
|
$
|
120,843
|
|
|
$
|
110,345
|
|
|
$
|
101,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
The following tables display the components of the allowance for
loan losses at December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009
|
|
|
|
Loan Type
|
|
Allowance for Loan
|
|
Commercial
|
|
|
Commercial R/E
|
|
|
|
|
|
Installment
|
|
|
Home Equity
|
|
|
Credit Card
|
|
|
Res Mortgage
|
|
|
|
|
Losses Components:
|
|
Loans
|
|
|
Loans
|
|
|
Leases
|
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Individually Impaired Loan Component:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan balance
|
|
$
|
17,480
|
|
|
$
|
50,345
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
67,825
|
|
Allowance
|
|
|
3,678
|
|
|
|
6,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,527
|
|
Collective Loan Impairment Components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit risk-graded loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grade 1 loan balance
|
|
|
75,598
|
|
|
|
1,178
|
|
|
|
7,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,217
|
|
Grade 1 allowance
|
|
|
47
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
Grade 2 loan balance
|
|
|
59,946
|
|
|
|
74,839
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134,852
|
|
Grade 2 allowance
|
|
|
52
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140
|
|
Grade 3 loan balance
|
|
|
316,535
|
|
|
|
517,338
|
|
|
|
15,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
849,119
|
|
Grade 3 allowance
|
|
|
579
|
|
|
|
1,137
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,752
|
|
Grade 4 loan balance
|
|
|
1,030,872
|
|
|
|
1,647,918
|
|
|
|
38,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,716,969
|
|
Grade 4 allowance
|
|
|
8,666
|
|
|
|
16,306
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,229
|
|
Grade 5 (Special Mention) loan balance
|
|
|
42,066
|
|
|
|
40,748
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,844
|
|
Grade 5 allowance
|
|
|
1,224
|
|
|
|
1,873
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,098
|
|
Grade 6 (Substandard) loan balance
|
|
|
83,884
|
|
|
|
107,635
|
|
|
|
578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192,097
|
|
Grade 6 allowance
|
|
|
7,616
|
|
|
|
12,558
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,227
|
|
Grade 7 (Doubtful) loan balance
|
|
|
68
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140
|
|
Grade 7 allowance
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Consumer loans based on payment status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current loan balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,396,198
|
|
|
|
748,207
|
|
|
|
146,906
|
|
|
|
428,150
|
|
|
|
2,719,461
|
|
Current loans allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,038
|
|
|
|
5,829
|
|
|
|
8,106
|
|
|
|
3,304
|
|
|
|
35,277
|
|
30 days past due loan balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,057
|
|
|
|
2,306
|
|
|
|
2,245
|
|
|
|
13,515
|
|
|
|
36,123
|
|
30 days past due allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,813
|
|
|
|
677
|
|
|
|
1,178
|
|
|
|
571
|
|
|
|
5,239
|
|
60 days past due loan balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,919
|
|
|
|
1,678
|
|
|
|
1,622
|
|
|
|
4,301
|
|
|
|
13,520
|
|
60 days past due allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,461
|
|
|
|
1,081
|
|
|
|
1,217
|
|
|
|
617
|
|
|
|
5,376
|
|
90+ days past due loan balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,199
|
|
|
|
921
|
|
|
|
2,752
|
|
|
|
17,450
|
|
|
|
26,322
|
|
90+ days past due allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,458
|
|
|
|
912
|
|
|
|
2,618
|
|
|
|
1,182
|
|
|
|
8,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
1,626,449
|
|
|
$
|
2,440,073
|
|
|
$
|
61,541
|
|
|
$
|
1,425,373
|
|
|
$
|
753,112
|
|
|
$
|
153,525
|
|
|
$
|
463,416
|
|
|
$
|
6,923,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Allowance for Loan Losses
|
|
$
|
21,863
|
|
|
$
|
38,814
|
|
|
$
|
353
|
|
|
$
|
26,770
|
|
|
$
|
8,499
|
|
|
$
|
13,119
|
|
|
$
|
5,674
|
|
|
$
|
115,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008
|
|
|
|
Loan Type
|
|
|
|
Commercial
|
|
|
Commercial R/E
|
|
|
|
|
|
Installment
|
|
|
Home Equity
|
|
|
Credit Card
|
|
|
Res Mortgage
|
|
|
|
|
Allowance for Loan Losses Components:
|
|
Loans
|
|
|
Loans
|
|
|
Leases
|
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Individually Impaired Loan Component:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan balance
|
|
$
|
8,438
|
|
|
$
|
45,220
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
53,658
|
|
Allowance
|
|
|
48
|
|
|
|
3,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,972
|
|
Collective Loan Impairment Components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit risk-graded loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grade 1 loan balance
|
|
|
37,316
|
|
|
|
9,030
|
|
|
|
5,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,322
|
|
Grade 1 allowance
|
|
|
42
|
|
|
|
18
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
Grade 2 loan balance
|
|
|
199,166
|
|
|
|
138,399
|
|
|
|
3,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340,611
|
|
Grade 2 allowance
|
|
|
664
|
|
|
|
606
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,282
|
|
Grade 3 loan balance
|
|
|
559,165
|
|
|
|
566,369
|
|
|
|
27,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,153,514
|
|
Grade 3 allowance
|
|
|
1,765
|
|
|
|
3,961
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,834
|
|
Grade 4 loan balance
|
|
|
992,118
|
|
|
|
1,583,721
|
|
|
|
28,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,604,172
|
|
Grade 4 allowance
|
|
|
8,920
|
|
|
|
27,145
|
|
|
|
287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,352
|
|
Grade 5 (Special Mention) loan balance
|
|
|
33,940
|
|
|
|
41,215
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,345
|
|
Grade 5 allowance
|
|
|
1,110
|
|
|
|
2,495
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,611
|
|
Grade 6 (Substandard) loan balance
|
|
|
66,134
|
|
|
|
72,387
|
|
|
|
2,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140,590
|
|
Grade 6 allowance
|
|
|
6,074
|
|
|
|
9,009
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,277
|
|
Grade 7 (Doubtful) loan balance
|
|
|
33
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
Grade 7 allowance
|
|
|
4
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Consumer loans based on payment status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current loan balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,548,639
|
|
|
|
730,503
|
|
|
|
143,934
|
|
|
|
515,093
|
|
|
|
2,938,169
|
|
Current loans allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,762
|
|
|
|
4,823
|
|
|
|
3,465
|
|
|
|
2,736
|
|
|
|
23,786
|
|
30 days past due loan balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,912
|
|
|
|
1,704
|
|
|
|
2,149
|
|
|
|
13,264
|
|
|
|
34,029
|
|
30 days past due allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,078
|
|
|
|
494
|
|
|
|
866
|
|
|
|
473
|
|
|
|
3,911
|
|
60 days past due loan balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,728
|
|
|
|
1,087
|
|
|
|
1,550
|
|
|
|
5,339
|
|
|
|
13,704
|
|
60 days past due allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,122
|
|
|
|
748
|
|
|
|
978
|
|
|
|
643
|
|
|
|
4,491
|
|
90+ days past due loan balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,308
|
|
|
|
538
|
|
|
|
2,112
|
|
|
|
13,429
|
|
|
|
19,387
|
|
90+ days past due allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,097
|
|
|
|
602
|
|
|
|
1,804
|
|
|
|
660
|
|
|
|
5,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
1,896,310
|
|
|
$
|
2,456,420
|
|
|
$
|
67,594
|
|
|
$
|
1,574,587
|
|
|
$
|
733,832
|
|
|
$
|
149,745
|
|
|
$
|
547,125
|
|
|
$
|
7,425,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Allowance for Loan Losses
|
|
$
|
18,627
|
|
|
$
|
47,164
|
|
|
$
|
615
|
|
|
$
|
19,059
|
|
|
$
|
6,667
|
|
|
$
|
7,113
|
|
|
$
|
4,512
|
|
|
$
|
103,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007
|
|
|
|
Loan Type
|
|
|
|
Commercial
|
|
|
Commercial R/E
|
|
|
|
|
|
Installment
|
|
|
Home Equity
|
|
|
Credit Card
|
|
|
Res Mortgage
|
|
|
|
|
Allowance for Loan Losses Components:
|
|
Loans
|
|
|
Loans
|
|
|
Leases
|
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Individually Impaired Loan Component:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan balance
|
|
$
|
1,869
|
|
|
$
|
14,684
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,553
|
|
Allowance
|
|
|
773
|
|
|
|
2,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,774
|
|
Collective Loan Impairment Components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit risk-graded loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grade 1 loan balance
|
|
|
30,427
|
|
|
|
95
|
|
|
|
3,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,268
|
|
Grade 1 allowance
|
|
|
59
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
Grade 2 loan balance
|
|
|
198,519
|
|
|
|
141,719
|
|
|
|
4,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
344,784
|
|
Grade 2 allowance
|
|
|
951
|
|
|
|
679
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,656
|
|
Grade 3 loan balance
|
|
|
460,212
|
|
|
|
481,951
|
|
|
|
31,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
973,680
|
|
Grade 3 allowance
|
|
|
2,121
|
|
|
|
3,597
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,892
|
|
Grade 4 loan balance
|
|
|
884,174
|
|
|
|
1,489,622
|
|
|
|
32,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,406,161
|
|
Grade 4 allowance
|
|
|
13,311
|
|
|
|
21,525
|
|
|
|
570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,406
|
|
Grade 5 (Special Mention) loan balance
|
|
|
64,965
|
|
|
|
86,654
|
|
|
|
1,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153,072
|
|
Grade 5 allowance
|
|
|
4,015
|
|
|
|
4,339
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,439
|
|
Grade 6 (Substandard) loan balance
|
|
|
29,219
|
|
|
|
22,012
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,315
|
|
Grade 6 allowance
|
|
|
4,250
|
|
|
|
2,709
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,971
|
|
Grade 7 (Doubtful) loan balance
|
|
|
125
|
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
326
|
|
Grade 7 allowance
|
|
|
29
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
Consumer loans based on payment status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current loan balances
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
1,577,443
|
|
|
|
689,248
|
|
|
|
149,229
|
|
|
|
551,626
|
|
|
|
2,967,568
|
|
Current loans allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,702
|
|
|
|
3,692
|
|
|
|
3,531
|
|
|
|
3,831
|
|
|
|
22,756
|
|
30 days past due loan balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,526
|
|
|
|
1,207
|
|
|
|
1,803
|
|
|
|
13,261
|
|
|
|
30,797
|
|
30 days past due allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,387
|
|
|
|
254
|
|
|
|
689
|
|
|
|
610
|
|
|
|
2,940
|
|
60 days past due loan balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,934
|
|
|
|
821
|
|
|
|
1,094
|
|
|
|
2,849
|
|
|
|
8,698
|
|
60 days past due allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,145
|
|
|
|
403
|
|
|
|
680
|
|
|
|
432
|
|
|
|
2,660
|
|
90+ days past due loan balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,929
|
|
|
|
646
|
|
|
|
1,606
|
|
|
|
9,483
|
|
|
|
14,664
|
|
90+ days past due allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,455
|
|
|
|
526
|
|
|
|
1,402
|
|
|
|
1,202
|
|
|
|
4,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
1,669,510
|
|
|
$
|
2,236,938
|
|
|
$
|
73,733
|
|
|
$
|
1,598,832
|
|
|
$
|
691,922
|
|
|
$
|
153,732
|
|
|
$
|
577,219
|
|
|
$
|
7,001,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Allowance for Loan Losses
|
|
$
|
25,509
|
|
|
$
|
34,879
|
|
|
$
|
876
|
|
|
$
|
15,689
|
|
|
$
|
4,875
|
|
|
$
|
6,302
|
|
|
$
|
6,075
|
|
|
$
|
94,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
A five-year summary of activity follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Allowance for loan losses at January 1,
|
|
$
|
103,757
|
|
|
$
|
94,205
|
|
|
$
|
91,342
|
|
|
$
|
90,661
|
|
|
$
|
97,296
|
|
Loans charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
39,685
|
|
|
|
16,318
|
|
|
|
7,856
|
|
|
|
32,628
|
|
|
|
19,349
|
|
Mortgage
|
|
|
4,960
|
|
|
|
4,696
|
|
|
|
5,026
|
|
|
|
1,670
|
|
|
|
1,721
|
|
Installment
|
|
|
31,622
|
|
|
|
24,740
|
|
|
|
18,343
|
|
|
|
20,682
|
|
|
|
29,307
|
|
Home equity
|
|
|
7,200
|
|
|
|
4,153
|
|
|
|
4,151
|
|
|
|
3,847
|
|
|
|
4,340
|
|
Credit cards
|
|
|
13,558
|
|
|
|
9,821
|
|
|
|
8,497
|
|
|
|
8,294
|
|
|
|
11,320
|
|
Leases
|
|
|
97
|
|
|
|
26
|
|
|
|
41
|
|
|
|
3,607
|
|
|
|
3,068
|
|
Overdrafts
|
|
|
2,591
|
|
|
|
2,634
|
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
99,713
|
|
|
|
62,388
|
|
|
|
44,148
|
|
|
|
70,728
|
|
|
|
69,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
890
|
|
|
|
2,388
|
|
|
|
4,351
|
|
|
|
3,734
|
|
|
|
4,166
|
|
Mortgage
|
|
|
270
|
|
|
|
76
|
|
|
|
44
|
|
|
|
142
|
|
|
|
190
|
|
Installment
|
|
|
8,329
|
|
|
|
7,071
|
|
|
|
8,021
|
|
|
|
10,340
|
|
|
|
9,495
|
|
Home equity
|
|
|
494
|
|
|
|
851
|
|
|
|
1,265
|
|
|
|
1,293
|
|
|
|
1,302
|
|
Credit cards
|
|
|
1,710
|
|
|
|
1,831
|
|
|
|
1,842
|
|
|
|
2,123
|
|
|
|
2,348
|
|
Manufactured housing
|
|
|
171
|
|
|
|
247
|
|
|
|
323
|
|
|
|
451
|
|
|
|
710
|
|
Leases
|
|
|
57
|
|
|
|
104
|
|
|
|
286
|
|
|
|
303
|
|
|
|
439
|
|
Overdrafts
|
|
|
694
|
|
|
|
769
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,615
|
|
|
|
13,337
|
|
|
|
16,176
|
|
|
|
18,386
|
|
|
|
18,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
87,098
|
|
|
|
49,051
|
|
|
|
27,972
|
|
|
|
52,342
|
|
|
|
50,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance related to loans held for sale/sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,089
|
)
|
|
|
|
|
Provision for loan losses
|
|
|
98,433
|
|
|
|
58,603
|
|
|
|
30,835
|
|
|
|
76,112
|
|
|
|
43,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at December 31,
|
|
$
|
115,092
|
|
|
$
|
103,757
|
|
|
$
|
94,205
|
|
|
$
|
91,342
|
|
|
$
|
90,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans outstanding
|
|
$
|
7,156,983
|
|
|
$
|
7,203,946
|
|
|
$
|
6,971,464
|
|
|
$
|
6,798,338
|
|
|
$
|
6,610,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio to average loans:*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
1.22
|
%
|
|
|
0.68
|
%
|
|
|
0.40
|
%
|
|
|
0.77
|
%
|
|
|
0.76
|
%
|
Net charge-offs and allowance related to loans held for sale/
sold
|
|
|
1.22
|
%
|
|
|
0.68
|
%
|
|
|
0.40
|
%
|
|
|
1.11
|
%
|
|
|
0.76
|
%
|
Provision for loan losses
|
|
|
1.38
|
%
|
|
|
0.81
|
%
|
|
|
0.44
|
%
|
|
|
1.12
|
%
|
|
|
0.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding at end of year
|
|
$
|
6,923,489
|
|
|
$
|
7,425,613
|
|
|
$
|
7,001,886
|
|
|
$
|
6,878,873
|
|
|
$
|
6,681,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of loans outstanding at end of year
|
|
|
1.68
|
%
|
|
|
1.40
|
%
|
|
|
1.35
|
%
|
|
|
1.33
|
%
|
|
|
1.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a multiple of net charge-offs
|
|
|
1.32
|
|
|
|
2.12
|
|
|
|
3.37
|
|
|
|
1.75
|
|
|
|
1.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a multiple of net charge-offs and allowance related to loans
sold
|
|
|
1.32
|
|
|
|
2.12
|
|
|
|
3.37
|
|
|
|
1.21
|
|
|
|
1.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
The net carrying value of the
acquired ABL loans from FBBC was $88.1 million at
December 31, 2009 and was excluded from the ratios of the
Corporations allowance for loan and credit losses. The ABL
loans were acquired and recorded at fair value on
December 16, 2009.
|
33
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.
The Corporations Credit Policy Division manages credit
risk by establishing common credit policies for its
subsidiaries, participating in approval of their largest loans,
conducting reviews of their loan portfolios, providing them with
centralized consumer underwriting, collections and loan
operations services, and overseeing their loan workouts.
Notes 1 and 4 to the consolidated financial statements,
provide detailed information regarding the Corporations
credit policies and practices.
The Corporations 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.
Nonperforming Loans are defined as follows:
|
|
|
|
|
Nonaccrual loans on which interest is no longer
accrued because its collection is doubtful.
|
|
|
|
Restructured loans on which, due to deterioration
in the borrowers financial condition, the original terms
have been modified in favor of the borrower or either principal
or interest has been forgiven.
|
Nonperforming Assets are defined as follows:
|
|
|
|
|
Nonaccrual loans on which interest is no longer
accrued because its collection is doubtful.
|
|
|
|
Restructured loans on which, due to deterioration
in the borrowers 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 December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Nonperforming Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
|
|
$
|
91,672
|
|
|
$
|
52,202
|
|
|
$
|
31,433
|
|
|
$
|
54,362
|
|
|
$
|
62,262
|
|
ORE
|
|
|
9,329
|
|
|
|
5,324
|
|
|
|
5,829
|
|
|
|
9,815
|
|
|
|
9,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
101,001
|
|
|
$
|
57,526
|
|
|
$
|
37,262
|
|
|
$
|
64,177
|
|
|
$
|
72,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans past due 90 days or more accruing interest
|
|
$
|
35,025
|
|
|
$
|
23,928
|
|
|
$
|
11,702
|
|
|
$
|
16,860
|
|
|
$
|
17,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets as a percentage of total loans and
ORE*
|
|
|
1.48
|
%
|
|
|
0.77
|
%
|
|
|
0.53
|
%
|
|
|
0.93
|
%
|
|
|
1.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
The net carrying value of the
acquired ABL loans from FBBC was $88.1 million at
December 31, 2009 and was excluded from the ratios of the
Corporations allowance for loan and credit losses. The ABL
loans were acquired and recorded at fair value on
December 16, 2009.
|
During 2009 the economic conditions in our markets continued to
be challenging. Residential developers and homebuilders have
been the most adversely affected, with the significant decrease
of buyer resulting from a combination of the restriction of
available credit and economic pressure impacting the consumer.
The Corporation executed a comprehensive review of pass grade
commercial loans (greater than $250 thousand) corporate-wide
utilizing a more conservative interpretation of defined
weakness. The review, coordinated by Loan Review, resulted in
covering over 71% of the commercial portfolio. Consumers
continue to be under pressure due to high debt levels, limited
refinance opportunities, increased cost of living and increasing
unemployment. These conditions have resulted in increases in
bankruptcies as well as charge offs. Commercial nonperforming
loans increased $33.8 million while criticized loans
increased $73.2 million from December 31, 2008.
During the first quarter of 2007, $73.7 million of
commercial loans and $7.1 million of other real estate were
sold. The loans were written down to their fair market value of
$50.6 million and reclassified as loans held for sale in
the fourth quarter of 2006. (Of the loans identified as held for
sale, $41.1 million were classified as nonperforming and
34
$32.6 million were performing.) The loan sale yielded a
gain of $4.1 million which was recorded in loan sales and
servicing during the first quarter of 2007. The sale of other
real estate resulted in a $0.5 million loss and was
recorded in other operating loss also during the first quarter
of 2007.
In 2009 nonperforming assets, other real estate includes
$1.0 million of vacant land no longer considered for branch
expansion and in 2008 other real estate includes
$1.1 million of vacant land no longer considered for branch
expansion and executive relocation properties both of which are
not related to loan portfolios.
During 2009 and 2008, total nonperforming loans earned $51.8
thousand and $36.7 thousand, respectively, in interest income.
Had they been paid in accordance with the payment terms in force
prior to being considered impaired, on nonaccrual status, or
restructured, they would have earned $5.5 million and
$2.7 million in interest income for the years ended
December 31, 2009 and 2008, respectively.
In addition to nonperforming loans and loans 90 day past
due and still accruing interest, Management identified potential
problem commercial loans (classified as substandard and
doubtful) totaling $260.1 million at year-end 2009 and
$194.4 million at year-end 2008. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Nonaccrual commercial loans beginning of period
|
|
$
|
63,357
|
|
|
$
|
48,563
|
|
|
$
|
54,070
|
|
|
$
|
40,195
|
|
|
$
|
29,245
|
|
Credit Actions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
|
|
|
34,612
|
|
|
|
24,491
|
|
|
|
7,259
|
|
|
|
22,912
|
|
|
|
18,217
|
|
Loan and lease losses
|
|
|
(5,272
|
)
|
|
|
(3,886
|
)
|
|
|
(5,951
|
)
|
|
|
(1,950
|
)
|
|
|
(1,146
|
)
|
Charged down
|
|
|
(12,710
|
)
|
|
|
(3,321
|
)
|
|
|
(4,182
|
)
|
|
|
(2,603
|
)
|
|
|
(4,458
|
)
|
Return to accruing status
|
|
|
(478
|
)
|
|
|
(24
|
)
|
|
|
(660
|
)
|
|
|
(3,333
|
)
|
|
|
(123
|
)
|
Payments
|
|
|
(5,476
|
)
|
|
|
(2,466
|
)
|
|
|
(1,973
|
)
|
|
|
(1,151
|
)
|
|
|
(1,540
|
)
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual commercial loans end of period
|
|
$
|
74,033
|
|
|
$
|
63,357
|
|
|
$
|
48,563
|
|
|
$
|
54,070
|
|
|
$
|
40,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual commercial loans have increased $33.8 million
since December 31, 2008.
Deposits,
Securities Sold Under Agreements to Repurchase and Wholesale
Borrowings
Average deposits for 2009 totaled $7.5 billion compared to
$7.4 billion in 2008. Increases in non-interest bearing and
interest bearing demand accounts reflect a shift in customer
preference for liquidity.
The following ratios and table provide additional information
about the change in the mix of customer deposits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
Demand deposits- noninterest-bearing
|
|
$
|
1,910,171
|
|
|
|
|
|
|
$
|
1,530,021
|
|
|
|
|
|
|
$
|
1,408,726
|
|
|
|
|
|
Demand deposits- interest-bearing
|
|
|
656,367
|
|
|
|
0.09
|
%
|
|
|
687,160
|
|
|
|
0.37
|
%
|
|
|
733,410
|
|
|
|
0.93
|
%
|
Savings and money market accounts
|
|
|
2,886,842
|
|
|
|
0.81
|
%
|
|
|
2,398,778
|
|
|
|
1.24
|
%
|
|
|
2,266,070
|
|
|
|
2.39
|
%
|
Certificates and other time deposits
|
|
|
2,056,208
|
|
|
|
2.66
|
%
|
|
|
2,801,623
|
|
|
|
3.78
|
%
|
|
|
3,045,715
|
|
|
|
4.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total customer deposits
|
|
|
7,509,588
|
|
|
|
1.05
|
%
|
|
|
7,417,582
|
|
|
|
1.86
|
%
|
|
|
7,453,921
|
|
|
|
2.78
|
%
|
Securities sold under agreements to repurchase
|
|
|
1,013,167
|
|
|
|
0.47
|
%
|
|
|
1,343,441
|
|
|
|
2.37
|
%
|
|
|
1,471,785
|
|
|
|
4.84
|
%
|
Wholesale borrowings
|
|
|
952,979
|
|
|
|
2.87
|
%
|
|
|
663,109
|
|
|
|
4.16
|
%
|
|
|
326,460
|
|
|
|
6.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funds
|
|
$
|
9,475,734
|
|
|
|
|
|
|
$
|
9,424,132
|
|
|
|
|
|
|
$
|
9,252,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Total average demand deposits comprised 34.18% of average
deposits in 2009 compared to 29.89% in 2008 and 28.74% in 2007.
Savings accounts, including money market products, made up
38.44% of average deposits in 2009 compared to 32.34% in 2008
and 30.40% in 2007. CDs made up 27.38% of average deposits in
2009, 37.77% in 2008 and 40.86% in 2007.
The average cost of deposits, securities sold under agreements
to repurchase and wholesale borrowings was down 104 basis
points compared to one year ago, or 1.46% in 2009 due to a drop
in interest rates and the disruption in the capital markets.
The following table summarizes CDs in amounts of $100 thousand
or more as of year-end 2009, by time remaining until maturity.
|
|
|
|
|
Time until maturity:
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Under 3 months
|
|
$
|
137,363
|
|
3 to 6 months
|
|
|
74,242
|
|
6 to 12 months
|
|
|
104,539
|
|
Over 12 months
|
|
|
46,165
|
|
|
|
|
|
|
|
|
$
|
362,309
|
|
|
|
|
|
|
Capital
Resources
The capital management objectives of the Corporation are to
provide capital sufficient to cover the risks inherent in the
Corporations businesses, to maintain excess capital to
well-capitalized standards and to assure ready access to the
capital markets.
Shareholders
Equity
Shareholders equity was $1,065.6 million at
December 31, 2009, compared with $937.8 million at
December 31, 2008. As of December 31, 2009, the annual
common share dividend was $0.77. The market price ranges of the
Corporations common shares, and dividends by quarter for
each of the last two years is shown in Item 5, Market For
Registrants Common Equity And Related Stockholder Matters
And Issuer Purchases Of Equity Securities of this Report.
Capital
Availability
On January 9, 2009, the Corporation completed the sale to
the United States Department of the Treasury (the
Treasury) of $125.0 million of newly issued
FirstMerit non-voting preferred shares as part of the
Treasurys Troubled Assets Relief Program
(TARP) Capital Purchase Program (CPP).
FirstMerit issued and sold to the Treasury for an aggregate
purchase price of $125.0 million in cash
(1) 125,000 shares of FirstMerits Fixed Rate
Cumulative Perpetual Preferred Shares, Series A, each
without par value and having a liquidation preference of $1,000
per share, and (2) a warrant to purchase 952,260 FirstMerit
common shares, each without par value, at an exercise price of
$19.69 per share.
On April 22, 2009, the Corporation repurchased all
125,000 shares of its Fixed Rate Cumulative Perpetual
Preferred Stock, Series A for $126.2 million which
included all accrued and unpaid dividends as well as the
unamortized discount on the preferred stock.
On May 27, 2009, the Corporation completed the repurchase
of the warrant held by the Treasury. The Corporation paid
$5.0 million to the Treasury to repurchase the warrant.
On May 6, 2009, the Corporation entered into a Distribution
Agency Agreement with Credit Suisse Securities (USA) LLC
(Credit Suisse) pursuant to which the Corporation,
from time to time, may offer and sell shares of the
Corporations common stock. Sales of the common stock are
made by means of ordinary brokers transactions on the
Nasdaq Global Select Market at market prices, in block
transactions, or as otherwise agreed with Credit Suisse. At
36
December 31, 2009, the Corporation had sold
4.3 million shares with an average value of $18.98 per
share and has authorization to raise an additional
$19.0 million through this program.
Capital
Adequacy
Capital adequacy is an important indicator of financial
stability and performance. The Corporation maintained a strong
capital position as tangible common equity to assets was 8.89%
at December 31, 2009, compared with 7.27% at
December 31, 2008.
Financial institutions are subject to a strict uniform system of
capital-based regulations. 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 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 at
least 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 4% 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 2009
the Corporation, on a consolidated basis, as well as FirstMerit
Bank, exceeded the minimum capital levels of the well
capitalized category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
$
|
1,065,627
|
|
|
|
10.11
|
%
|
|
$
|
937,843
|
|
|
|
8.45
|
%
|
|
$
|
916,977
|
|
|
|
8.82
|
%
|
Common equity
|
|
|
1,065,627
|
|
|
|
10.11
|
%
|
|
|
937,843
|
|
|
|
8.45
|
%
|
|
|
916,977
|
|
|
|
8.82
|
%
|
Tangible common equity(a)
|
|
|
924,871
|
|
|
|
8.89
|
%
|
|
|
797,195
|
|
|
|
7.27
|
%
|
|
|
775,755
|
|
|
|
7.56
|
%
|
Tier 1 capital(b)
|
|
|
971,013
|
|
|
|
12.09
|
%
|
|
|
870,870
|
|
|
|
10.19
|
%
|
|
|
840,290
|
|
|
|
10.37
|
%
|
Total risk-based capital(c)
|
|
|
1,071,682
|
|
|
|
13.34
|
%
|
|
|
1,007,679
|
|
|
|
11.80
|
%
|
|
|
1,001,539
|
|
|
|
12.36
|
%
|
Leverage(d)
|
|
|
971,013
|
|
|
|
9.39
|
%
|
|
|
870,870
|
|
|
|
8.19
|
%
|
|
|
840,290
|
|
|
|
8.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
|
|
Bank Only
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
$
|
946,626
|
|
|
|
9.00
|
%
|
|
$
|
744,535
|
|
|
|
6.72
|
%
|
|
$
|
737,395
|
|
|
|
7.10
|
%
|
Common equity
|
|
|
946,626
|
|
|
|
9.00
|
%
|
|
|
744,535
|
|
|
|
6.72
|
%
|
|
|
737,395
|
|
|
|
7.10
|
%
|
Tangible common equity(a)
|
|
|
806,223
|
|
|
|
7.77
|
%
|
|
|
603,887
|
|
|
|
5.52
|
%
|
|
|
596,173
|
|
|
|
5.82
|
%
|
Tier 1 capital(b)
|
|
|
826,517
|
|
|
|
10.31
|
%
|
|
|
762,634
|
|
|
|
8.95
|
%
|
|
|
746,083
|
|
|
|
9.23
|
%
|
Total risk-based capital(c)
|
|
|
922,919
|
|
|
|
11.51
|
%
|
|
|
895,703
|
|
|
|
10.51
|
%
|
|
|
903,894
|
|
|
|
11.18
|
%
|
Leverage(d)
|
|
|
826,517
|
|
|
|
8.00
|
%
|
|
|
762,634
|
|
|
|
7.18
|
%
|
|
|
746,083
|
|
|
|
7.33
|
%
|
|
|
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
quarters average assets less goodwill.
|
37
RISK
MANAGEMENT
Market
Risk Management
Market risk refers to potential losses arising from changes in
interest rates, foreign exchange rates, equity prices and
commodity prices, including the correlation among these factors
and their volatility. When the value of an instrument is tied to
such external factors, the holder faces market risk.
The Corporation is primarily exposed to interest rate risk as a
result of offering a wide array of financial products to its
customers.
Interest
rate risk management
Changes in market interest rates may result in changes in the
fair market value of the Corporations financial
instruments, cash flows, and net interest income. The
Corporation seeks to achieve consistent growth in net interest
income and capital while managing volatility arising from shifts
in market interest rates. The Asset and Liability Committee
(ALCO) oversees market risk management, establishing
risk measures, limits, and policy guidelines for managing the
amount of interest rate risk and its effect on net interest
income and capital. According to these policies, responsibility
for measuring and the management of interest rate risk resides
in the Corporate Treasury function.
Interest rate risk on the Corporations balance sheets
consists of reprice, option, and basis risks. Reprice risk
results from differences in the maturity, or repricing, of asset
and liability portfolios. Option risk arises from embedded
options present in the investment portfolio and in many
financial instruments such as loan prepayment options, deposit
early withdrawal options, and interest rate options. These
options allow customers opportunities to benefit when market
interest rates change, which typically results in higher costs
or lower revenue for the Corporation. Basis risk refers to the
potential for changes in the underlying relationship between
market rates or indices, which subsequently result in a
narrowing of profit spread on an earning asset or liability.
Basis risk is also present in administered rate liabilities,
such as interest-bearing checking accounts, savings accounts and
money market accounts where historical pricing relationships to
market rates may change due to the level or directional change
in market interest rates.
The interest rate risk position is measured and monitored using
risk management tools, including earnings simulation modeling
and economic value of equity sensitivity analysis, which capture
both near-term and long-term interest rate risk exposures.
Combining the results from these separate risk measurement
processes allows a reasonably comprehensive view of short-term
and long-term interest rate risk in the Corporation.
Net interest income simulation
analysis. Earnings simulation involves
forecasting net interest earnings under a variety of scenarios
including changes in the level of interest rates, the shape of
the yield curve, and spreads between market interest rates. The
sensitivity of net interest income to changes in interest rates
is measured using numerous interest rate scenarios including
shocks, gradual ramps, curve flattening, curve steepening as
well as forecasts of likely interest rates scenarios.
Presented below is the Corporations interest rate risk
profile as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Immediate Change in Rates and Resulting Percentage
|
|
|
Increase/(Decrease) in Net Interest Income:
|
|
|
− 100 basis
|
|
+ 100 basis
|
|
+ 200 basis
|
|
+ 300 basis
|
|
|
points
|
|
points
|
|
points
|
|
points
|
|
December 31, 2009
|
|
|
|
*
|
|
|
1.07
|
%
|
|
|
1.56
|
%
|
|
|
1.64
|
%
|
December 31, 2008
|
|
|
|
*
|
|
|
1.77
|
%
|
|
|
3.10
|
%
|
|
|
4.01
|
%
|
|
|
|
*
|
|
Modeling for the decrease in
100 basis points scenario has been suspended due to the
current rate environment.
|
Modeling the sensitivity of net interest earnings to changes in
market interest rates is highly dependent on numerous
assumptions incorporated into the modeling process. To the
extent that actual performance is different than what was
assumed, actual net interest earnings sensitivity may be
different than projected. The assumptions used in the models are
Managements best estimate based on studies conducted by
the ALCO department. The ALCO department uses a data-warehouse
to study interest rate risk at a transactional level and uses
various ad-hoc reports to refine assumptions continuously.
Assumptions and methodologies regarding administered rate
liabilities (e.g., savings,
38
money market and interest-bearing checking accounts), balance
trends, and repricing relationships reflect managements
best estimate of expected behavior and these assumptions are
reviewed regularly.
Economic value of equity modeling. The
Corporation also has longer-term interest rate risk exposure,
which may not be appropriately measured by earnings sensitivity
analysis. ALCO uses economic value of equity (EVE)
sensitivity analysis to study the impact of long-term cash flows
on earnings and capital. EVE involves discounting present values
of all cash flows of on balance sheet and off balance sheet
items under different interest rate scenarios. The discounted
present value of all cash flows represents the
Corporations economic value of equity. The analysis
requires modifying the expected cash flows in each interest rate
scenario, which will impact the discounted present value. The
amount of base-case measurement and its sensitivity to shifts in
the yield curve allow management to measure longer-term
repricing and option risk in the balance sheet. Presented below
is the Corporations EVE profile as of December 31,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Immediate Change in Rates and Resulting Percentage
|
|
|
Increase/(Decrease) in EVE:
|
|
|
− 100 basis
|
|
+ 100 basis
|
|
+ 200 basis
|
|
+ 300 basis
|
|
|
points
|
|
points
|
|
points
|
|
points
|
|
December 31, 2009
|
|
|
|
*
|
|
|
3.00
|
%
|
|
|
2.80
|
%
|
|
|
3.22
|
%
|
December 31, 2008
|
|
|
|
*
|
|
|
2.05
|
%
|
|
|
0.91
|
%
|
|
|
(0.84
|
%)
|
|
|
|
*
|
|
Modeling for the decrease in
100 basis points scenario has been suspended due to the
current rate environment.
|
Management takes corrective action if this analysis indicates
that the Corporations EVE will change by more than 5% in
response to an immediate 100 basis point increase in
interest rates or EVE will change by more than 15% in response
to an immediate 200 basis point increase or decrease in
interest rates. The Corporation is operating within these
guidelines.
Interest rate sensitivity analysis. The
Corporation analyzes the historical sensitivity of its interest
bearing transaction accounts to determine the portion that it
classifies as interest rate sensitive versus the portion
classified over one year. The following analysis divides
interest bearing assets and liabilities into maturity categories
and measures the GAP between maturing assets and
liabilities in each category. The analysis shows that assets
maturing within one year exceed liabilities maturing within the
same period by $133.4 million. Focusing on estimated
repricing activity within one year, the Corporation was in a
liability sensitive position at December 31, 2009 as
illustrated in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-30
|
|
|
31-60
|
|
|
61-90
|
|
|
91-180
|
|
|
181-365
|
|
|
Over 1
|
|
|
|
|
|
|
Days
|
|
|
Days
|
|
|
Days
|
|
|
Days
|
|
|
Days
|
|
|
Year
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases
|
|
$
|
3,625,610
|
|
|
$
|
128,626
|
|
|
$
|
123,597
|
|
|
$
|
319,973
|
|
|
$
|
693,221
|
|
|
$
|
2,049,290
|
|
|
$
|
6,940,317
|
|
Investment securities and federal funds sold
|
|
|
135,748
|
|
|
|
88,298
|
|
|
|
198,121
|
|
|
|
187,472
|
|
|
|
351,804
|
|
|
|
1,783,395
|
|
|
|
2,744,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Earning Assets
|
|
$
|
3,761,358
|
|
|
$
|
216,924
|
|
|
$
|
321,718
|
|
|
$
|
507,445
|
|
|
$
|
1,045,025
|
|
|
$
|
3,832,685
|
|
|
$
|
9,685,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand interest bearing
|
|
|
677,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
677,448
|
|
Savings and money market accounts
|
|
|
2,265,609
|
|
|
|
135,824
|
|
|
|
325,552
|
|
|
|
39,356
|
|
|
|
|
|
|
|
641,768
|
|
|
|
3,408,109
|
|
Certificate and other time deposits
|
|
|
270,799
|
|
|
|
121,780
|
|
|
|
108,669
|
|
|
|
298,023
|
|
|
|
366,255
|
|
|
|
194,792
|
|
|
|
1,360,318
|
|
Securities sold under agreements to repurchase
|
|
|
896,345
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
996,345
|
|
Wholesale borrowings
|
|
|
25,000
|
|
|
|
60,000
|
|
|
|
25,000
|
|
|
|
180,701
|
|
|
|
115,000
|
|
|
|
334,404
|
|
|
|
740,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Bearing Liabilities
|
|
$
|
4,135,201
|
|
|
$
|
317,604
|
|
|
$
|
459,221
|
|
|
$
|
568,080
|
|
|
$
|
506,255
|
|
|
$
|
1,195,964
|
|
|
$
|
7,182,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total GAP
|
|
$
|
(373,843
|
)
|
|
$
|
(100,680
|
)
|
|
$
|
(137,503
|
)
|
|
$
|
(60,635
|
)
|
|
$
|
538,770
|
|
|
$
|
2,636,721
|
|
|
$
|
2,502,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative GAP
|
|
$
|
(373,843
|
)
|
|
$
|
(474,523
|
)
|
|
$
|
(612,026
|
)
|
|
$
|
(672,661
|
)
|
|
$
|
(133,891
|
)
|
|
$
|
2,502,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management of interest rate
exposure. Management uses the results of its
various simulation analyses to formulate strategies to achieve
desired risk profile within the parameters of the
Corporations capital and liquidity
39
guidelines. Specifically, Management actively manages interest
rate risk positions by using derivatives predominately in the
form of interest rate swaps, which modify the interest rate
characteristics of certain assets and liabilities. For more
information about how the Corporation uses interest rate swaps
to manage its balance sheet, see Note 1 (Summary of
Significant Accounting Policies) and Note 17 (Derivatives
and Hedging Activities) to the consolidated financial statements.
Liquidity
Risk Management
Liquidity risk is the possibility of the Corporation being
unable to meet current and future financial obligations as they
come due at a reasonable cost. Liquidity is managed to ensure
stable, reliable and cost-effective sources of funds to satisfy
demand for credit, deposit withdrawals and investment
opportunities. The Corporation considers core earnings, strong
capital ratios and credit quality essential for maintaining high
credit ratings, which allow the Corporation cost-effective
access to market-based liquidity. The Corporation relies on a
large, stable core deposit base and a diversified base of
wholesale funding sources to manage liquidity risk.
The Treasury Group is responsible for identifying, measuring and
monitoring the Corporations liquidity profile. The
position is evaluated daily, weekly and monthly by analyzing the
composition of all funding sources, reviewing projected
liquidity commitments by future months and identifying sources
and uses of funds. Liquidity measures are reported monthly to
ALCO and the Board of Directors in accordance with policies
approved by the Board of Directors. The Treasury Group also
prepares a contingency funding plan that assesses liquidity
needs that may arise from certain stress events. Furthermore,
the company adopted a cash flow measurement approach to
liquidity management in 2009 and models the demand and supply
for funds under multiple (stress) scenarios. The net result is
then compared with the contingent sources for funds, which can
also be altered via the model, to ensure sufficient funds are
available. The overall management of the Corporations
liquidity position is then integrated into retail deposit
pricing policies to ensure a stable core deposit base.
The Corporations primary source of liquidity is its core
deposit base, raised through its retail branch system. Core
deposits comprised approximately 81.9% of total deposits at
December 31, 2009. The Corporation also has available
unused wholesale sources of liquidity, including advances from
the FHLB of Cincinnati, issuance through dealers in the capital
markets and access to certificates of deposit issued through
brokers. Liquidity is further provided by unencumbered, or
unpledged, investment securities that totaled
$831.03 million at December 31, 2009.
The Corporations liquidity could be adversely affected by
both direct and indirect circumstances. An example of a direct
event would be a downgrade in the Corporations public
credit rating by a rating agency due to factors such as
deterioration in asset quality, a large charge to earnings, a
decline in profitability or other financial measures, or a
significant merger or acquisition. Examples of indirect events
unrelated to the Corporation that could have an effect on its
access to liquidity would be terrorism or war, natural
disasters, political events, or the default or bankruptcy of a
major corporation, mutual fund or hedge fund. Similarly, market
speculation or rumors about the Corporation or the banking
industry in general may adversely affect the cost and
availability of normal funding sources.
The Corporations liquidity contingency plan outlines the
process for addressing a liquidity crisis. The plan provides for
an evaluation of funding sources under various market
conditions. It also assigns specific roles and responsibilities
for effectively managing liquidity through a problem period.
Parent Company Liquidity The Corporation
manages its liquidity principally through dividends from the
bank subsidiary. The parent company has sufficient liquidity to
service its debt; support customary corporate operations and
activities (including acquisitions) at a reasonable cost, in a
timely manner and without adverse consequences; as well as pay
dividends to shareholders.
During the year ended December 31, 2009, FirstMerit Bank
paid $28.5 million in dividends to FirstMerit Corporation.
As of December 31, 2009, FirstMerit Bank had an additional
$72.3 million available to pay dividends without regulatory
approval.
Recent Market and Regulatory
Developments. Recent market conditions have made
it difficult or uneconomical to access the capital markets. As a
result, the United States Congress, the Treasury, and the FDIC
have announced various programs designed to enhance market
liquidity and bank capital.
40
In response to the ongoing financial crisis affecting the
banking system and financial markets, EESA was signed into law
on October 3, 2008 and established TARP. As part of TARP,
the Treasury established the CPP to provide up to
$700 billion of funding to eligible financial institutions
through the purchase of mortgages, mortgage-backed securities,
capital stock and other financial instruments for the purpose of
stabilizing and providing liquidity to the U.S. financial
markets. The American Recovery and Reinvestment Act of 2009
(ARRA), more commonly known as the economic stimulus
or economic recovery package, was signed into law on
February 17, 2009, by President Obama. ARRA includes a wide
variety of programs intended to stimulate the economy and
provide for extensive infrastructure, energy, health, and
education needs. In addition, ARRA imposes certain new executive
compensation and corporate expenditure limits on all current and
future TARP recipients until the institution has repaid the
Treasury. On January 9, 2009, the Corporation completed the
sale to the Treasury of $125.0 million of newly issued
FirstMerit non-voting preferred shares as part of the CPP and a
warrant to purchase 952,260 FirstMerit common shares at an
exercise price of $19.69 per share. On April 22, 2009, the
Corporation completed the repurchase of all 125,000 shares
of its Fixed Rate Cumulative Perpetual Preferred Stock,
Series A for $126.2 million which included all accrued
and unpaid dividends as well as the unamortized discount on the
preferred stock. On May 27, 2009 the Corporation completed
the repurchase of the warrant held by the Treasury. The
Corporation paid $5.0 million to the Treasury to repurchase
the warrant.
Separately, the FDIC announced its temporary liquidity guarantee
program (TLPG) pursuant to which the FDIC will
guarantee the payment of certain newly-issued senior unsecured
debt of insured depository institutions (Debt
Guarantee) and funds held at FDIC-insured depository
institutions in noninterest-bearing transaction accounts in
excess of the current standard maximum deposit insurance amount
of $250,000 (Transaction Account Guarantee). Both
guarantees were provided to eligible institutions, including the
Corporation, at no cost through December 5, 2008.
Participation in the TLPG subsequent to December 5, 2008
was optional. The Corporation elected to participate in the TLPG
subsequent to December 5, 2008.
The Transaction Account Guarantee is effective for the
Corporation through June 30, 2010. Under the Debt
Guarantee, qualifying senior unsecured debt newly issued by the
Corporation during the period from October 14, 2008 to
June 30, 2009, inclusive, is covered by the FDIC guarantee.
The maximum amount of debt that eligible institutions can issue
under the guarantee is 125% of the par value of the
entitys qualifying senior unsecured debt, excluding debt
to affiliates that was outstanding as of September 30,
2008, and scheduled to mature by June 30, 2009. The FDIC
will provide guarantee coverage until the earlier of the
eligible debts maturity or June 30, 2012.
Participants in the Debt Guarantee Program are assessed an
annualized fee of 75 basis points for its participation,
and an annualized fee of 10 basis points for its
participation in the Transaction Account Guarantee. To the
extent that these initial assessments are insufficient to cover
the expense or losses arising under TLPG, the FDIC is required
to impose an emergency special assessment on all FDIC-insured
depository institutions as prescribed by the Federal Deposit
Insurance Act. In May 2009, the FDIC announced it was imposing
an emergency special assessment of five basis points on average
assets of all FDIC-insured depository institutions as of
June 30, 2009. On November 12, 2009, the FDIC adopted
a final rule requiring insured institutions to prepay their
estimated quarterly risk-based assessments for the fourth
quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid
assessments for these periods were collected on
December 30, 2009, along with the regular quarterly
risk-based deposit insurance assessment for the third quarter of
2009. For the fourth quarter of 2009 and for all of 2010, the
prepaid assessment rate was based on each institutions
total basis point assessment in effect on September 30,
2009, adjusted to assume a 5% annualized deposit growth rate;
for the 2011 and 2012 periods the computation is adjusted by an
additional three basis points increase in the assessment rate.
The three-year prepayment for the Corporation totaled
$43.9 million.
Contractual
Obligations, Commitments, Contingent Liabilities, and
Off-Balance Sheet Arrangements
Contractual
Obligations
The Corporation has various contractual obligations which are
recorded as liabilities in our consolidated financial
statements. The following table summarizes the
Corporations significant obligations at December 31,
2009
41
and the future periods in which such obligations are expected to
be settled in cash. Additional details regarding these
obligations are provided in the footnotes to the consolidated
financial statements, as referenced in the table:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due in
|
|
|
|
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Statement
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|
|
|
|
|
|
Note
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One Year
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|
|
One to
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|
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Three to
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|
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Over Five
|
|
|
|
Reference
|
|
|
Total
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|
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or Less
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|
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Three Years
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|
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Five Years
|
|
|
Years
|
|
|
|
(In thousands)
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|
|
Deposits without a stated maturity(a)
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|
|
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|
$
|
6,155,478
|
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6,155,478
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|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and brokered certificates of deposits(a)
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|
|
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|
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1,360,317
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|
|
|
1,151,933
|
|
|
|
148,173
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|
|
|
48,598
|
|
|
|
11,613
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|
Federal funds purchased and security repurchase agreements
|
|
|
10
|
|
|
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996,345
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|
|
|
921,345
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|
|
|
|
|
|
|
50,000
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|
|
|
25,000
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|
Long-term debt
|
|
|
10
|
|
|
|
740,105
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|
|
|
320,752
|
|
|
|
345,792
|
|
|
|
31,569
|
|
|
|
41,992
|
|
Operating leases(b)
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|
|
18
|
|
|
|
31,908
|
|
|
|
5,370
|
|
|
|
8,977
|
|
|
|
6,279
|
|
|
|
11,282
|
|
Capital lease obligations(c)
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations(c)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for uncertain tax positions(d)
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|
|
11
|
|
|
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1,656
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|
|
|
1,656
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|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
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|
|
|
|
|
$
|
9,285,809
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|
|
|
8,556,534
|
|
|
|
502,942
|
|
|
|
136,446
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|
|
|
89,887
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|
|
|
|
|
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|
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|
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(a)
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|
Excludes interest.
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(b)
|
|
The Corporations operating
lease obligations represent commitments under noncancelable
operating leases on branch facilities.
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|
(c)
|
|
There were no material purchase or
capital lease obligations outstanding at December 31, 2009.
|
|
(d)
|
|
Gross unrecognized income tax
benefits, see Footnote 11 for further discussion.
|
Commitments
and Off-Balance Sheet Arrangements
The following table details the amounts and expected maturities
of significant commitments and off-balance sheet arrangements as
of December 31, 2009. Additionally details of these
commitments are provided in the footnotes to the consolidated
financial statements, as referenced in the following table:
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|
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|
|
|
|
|
|
Payments Due in
|
|
|
|
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
|
|
|
|
|
|
One Year
|
|
|
One to
|
|
|
Three to
|
|
|
Over Five
|
|
|
|
Reference
|
|
|
Total
|
|
|
or Less
|
|
|
Three Years
|
|
|
Five Years
|
|
|
Years
|
|
|
|
(In thousands)
|
|
|
Commitments to extend credit(e)
|
|
|
18
|
|
|
$
|
2,993,879
|
|
|
|
1,402,243
|
|
|
|
703,289
|
|
|
|
323,178
|
|
|
|
565,169
|
|
Standby letters of credit
|
|
|
18
|
|
|
|
156,374
|
|
|
|
91,691
|
|
|
|
52,733
|
|
|
|
11,950
|
|
|
|
|
|
Loans sold with recourse
|
|
|
18
|
|
|
|
60,068
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|
|
|
60,068
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|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefits(f)
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|
|
12
|
|
|
|
14,659
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|
|
|
2,249
|
|
|
|
4,107
|
|
|
|
3,279
|
|
|
|
5,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
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|
|
|
|
|
$
|
3,224,980
|
|
|
|
1,556,251
|
|
|
|
760,129
|
|
|
|
338,407
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|
|
|
570,193
|
|
|
|
|
|
|
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|
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|
|
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|
(e)
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|
Commitments to extend credit do not
necessarily represent future cash requirements, in that these
commitments often expire without being drawn upon.
|
|
(f)
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|
The postretirement benefit payments
represent actuarilly determined future benefits to eligible plan
participants. Accounting standards requires that the liability
be recorded at net present value while the future payments
contained in this table have not been discounted.
|
Critical
Accounting Policies
The Corporations consolidated financial statements are
prepared in conformity with accounting principles generally
accepted in the United States of America and follow general
practices within the financial services industry in which it
operates. All accounting policies are important, and all
policies described in Note 1 (Summary of Significant
Accounting Policies) provide a greater understanding of how the
Corporations financial performance is recorded and
reported.
42
Some accounting policies are more likely than others to have a
significant effect on the Corporations financial results
and to expose those results to potentially greater volatility.
The policies require Management to exercise judgment and make
certain assumptions and estimates that affect amounts reported
in the financial statements. These assumptions and estimates are
based on information available as of the date of the financial
statements.
Management relies heavily on the use of judgment, assumptions
and estimates to make a number of core decisions, including
accounting for the allowance for loan losses, income taxes,
derivative instruments and hedging activities, and assets and
liabilities that involve valuation methodologies. A brief
discussion of each of these areas follows.
Acquired Loans. Loan that are acquired are
initially recorded at their acquisition date fair values. The
carryover of an allowance for credit losses is prohibited as any
credit losses evident in the loans are to be included in the
determination of the fair value of the loans at the acquisition
date. Acquired loans are evaluated for impairment according to
the provisions of ASC Topic
310-30,
Loans and Debt Securities Acquired with Deteriorated Credit
Quality. Acquired loans are considered impaired if there is
evidence of credit deterioration since origination and if it is
probable that not all contractually required payments will be
collected. In the assessment of credit quality, numerous
assumptions, interpretations and judgments must be made, based
on internal and third-party credit quality information and
ultimately the determination as to the probability that all
contractual cash flows will not be able to be collected. This is
a point in time assessment and inherently subjective due to the
nature of the available information and judgment involved.
Fair values for acquired loans are based on a discounted cash
flow methodology that involves assumptions and judgments as to
credit risk, interest rate risk, prepayment risk, liquidity
risk, default rates, loss severity, payment speeds, collateral
values and discount rate. All of these factors are inherently
subjective and can result in significant changes in the cash
flow estimates over the life of the loan. Such changes may
increase future earnings volatility due to increases or
decreases in the accretable yield (i.e., excess of the expected
cash flows over the estimated fair value) recognized on the loan
or the requirement to record an allowance for loan losses if the
decline in expected cash flows is attributable to a decline in
credit quality.
Due to the accounting requirements of acquired loans, certain
trends and credit statistics may be impacted if such loans are
included. We believe that excluding the acquired loans from the
presentation of such statistics is more meaningful and
representative of our ongoing operations and credit quality.
Allowance for Loan Losses. As explained in
Note 1 (Summary of Significant Accounting Policies) and
Note 4 (Loans and Allowance for Loan Losses) to the
consolidated financial statements, the allowance for loan losses
represents Managements estimate of probable credit losses
inherent in the loan portfolio. This estimate is based on the
current economys impact on the timing and expected amounts
of future cash flows on impaired loans, as well as historical
loss experience associated with homogenous pools of loans.
Managements estimate of the allowance for the commercial
portfolio could be affected by risk rating upgrades or
downgrades as a result of fluctuations in the general economy,
developments within a particular industry, or changes in an
individual credit due to factors particular to that credit such
as competition, management or business performance. A reasonably
possible scenario would be an estimated 10% migration of lower
risk-related pass credits to criticized status which could
increase the inherent losses by $17.5 million.
For the consumer portfolio, where individual products are
reviewed on a group basis or in loan pools, losses can be
affected by such things as collateral value, loss severity, the
economy, and other uncontrollable factors. The consumer
portfolio is largely comprised of loans that are secured by
primary residences and home equity lines and loans. A
10 basis point increase in the estimated loss rates on the
residential mortgage and home equity line and loan portfolios
would increase the inherent losses by $1.2 million. The
remaining consumer portfolio inherent loss analysis includes
reasonably possible scenarios with estimated loss rates
increasing by 25 basis points, which would change the
related inherent losses by $3.9 million.
Additionally the estimate of the allowance for loan losses for
the entire portfolio may change due to modifications in the mix
and level of loan balances outstanding and general economic
conditions as evidenced by changes in interest rates,
unemployment rates, bankruptcy filings, used car prices and real
estate values. While no one factor is dominant, each has the
ability to result in actual loan losses which differ from
originally estimated amounts.
43
The information presented above demonstrates the sensitivity of
the allowance to key assumptions. This sensitivity analysis does
not reflect an expected outcome.
Income Taxes. Management evaluates and
assesses the relative risks and appropriate tax treatment of
transactions after considering statutes, regulations, judicial
precedent and other information and maintains tax accruals
consistent with its evaluation of these relative risks. Changes
to the estimate of accrued taxes occur periodically due to
changes in tax rates, interpretations of tax laws, the status of
examinations being conducted by taxing authorities and changes
to statutory, judicial and regulatory guidance that impact the
relative risks of tax positions. These changes, when they occur,
can affect deferred taxes and accrued taxes as well as the
current periods income tax expense and can be material to
the Corporations operating results for any particular
reporting period.
Note 11 (Federal Income Taxes) to the consolidated
financial statements provides an analysis of the
Corporations income taxes.
Derivative instruments and hedging
activities. In various aspects of its business,
the Corporation uses derivative financial instruments to modify
exposures to changes in interest rates and market prices for
other financial instruments. Derivative instruments are required
to be carried at fair value on the balance sheet with changes in
the fair value recorded directly in earnings. To qualify for and
maintain hedge accounting, the Corporation must meet formal
documentation and effectiveness evaluation requirements both at
the hedges inception and on an ongoing basis. The
application of the hedge accounting policy requires strict
adherence to documentation and effectiveness testing
requirements, judgment in the assessment of hedge effectiveness,
identification of similar hedged item groupings, and measurement
of changes in the fair value of hedged items. If in the future
derivative financial instruments used by the Corporation no
longer qualify for hedge accounting, the impact on the
consolidated results of operations and reported earnings could
be significant. When hedge accounting is discontinued, the
Corporation would continue to carry the derivative on the
balance sheet at its fair value; however, for a cash flow
derivative, changes in its fair value would be recorded in
earnings instead of through other comprehensive income, and for
a fair value derivative, the changes in fair value of the hedged
asset or liability would no longer be recorded through earnings.
See also Note 1 (Summary of Significant Accounting
Policies) and Note 17 (Derivative and Hedging Activities)
of the consolidated financial statements.
Valuation Measurements. Valuation
methodologies often involve a significant degree of judgment,
particularly when there are no observable active markets for the
items being valued. Investment securities, residential mortgage
loans held for sale and derivatives are carried at fair value,
which requires key judgments affecting how fair value for such
assets and liabilities is determined. In addition, the outcomes
of valuations have a direct bearing on the carrying amounts of
goodwill, mortgage servicing rights, and pension and other
postretirement benefit obligations. To determine the values of
these assets and liabilities, as well as the extent to which
related assets may be impaired, Management makes assumptions and
estimates related to discount rates, asset returns, prepayment
rates and other factors. The use of different discount rates or
other valuation assumptions could produce significantly
different results, which could affect the Corporations
results of operations.
Fair
value measurement
The Corporation uses fair value measurements to record certain
assets and liabilities at fair value and determine fair value
disclosures. Additional information regarding fair value
measurement is included in Note 16 (Fair Value Measurement)
to the consolidated financial statements.
Goodwill
Goodwill arising from business combinations represents the value
attributable to unidentifiable intangible elements in the
business acquired. The Corporation is required to evaluate
goodwill for impairment on an annual basis or whenever events or
changes in circumstances indicate that the carrying value may
not be recoverable. The Corporation has elected to test for
goodwill impairment as of November 30th of each year. The
valuation and testing methodologies used in the
Corporations analysis of goodwill impairment are
summarized in Note 1 under the heading Goodwill and
Intangible Assets to the consolidated financial
statements. The first step in testing for goodwill impairment is
to determine the fair value of each reporting unit. The
Corporations reporting units for purposes of this testing
are its major lines of business, Commercial, Retail and Wealth.
Fair values of reporting units are estimated
44
using a discounted cash flow analysis derived from internal
earnings forecasts. The primary assumptions Management uses
include earnings forecasts for five years, terminal values based
on future growth rates, and discount rates that reflect the
range of the Corporations market capitalization and a
control premium. Management believes that the estimates and
assumptions used in the goodwill impairment analysis for its
reporting units are reasonable; however, if actual results and
market conditions differ from the assumptions or estimates used,
the fair value of each reporting unit could change in the
future. The second step of impairment testing is necessary only
if the carrying amount of either reporting unit exceeds its fair
value, suggesting goodwill impairment. In such a case, the
Corporation would estimate a hypothetical purchase price for the
reporting unit (representing the units fair value) and
then compare that hypothetical purchase price with the fair
value of the units net assets (excluding goodwill). Any
excess of the estimated purchase price over the fair value of
the reporting units net assets represents the implied fair
value of goodwill. An impairment loss would be recognized as a
charge to earnings if the carrying amount of the reporting
units goodwill exceeds the implied fair value of goodwill.
Based on the Corporations analysis performed in the fourth
quarter, the fair value of each reporting unit exceeded its
carrying amount.
Mortgage
Servicing Rights
When the Corporation sells mortgage loans in the secondary
market, it may retain the right to service the loans sold in
exchange for a servicing fee that is collected over the life of
the loan as the payments are received from the borrower. Such
amounts are initially capitalized as mortgage servicing rights
on the Consolidated Balance Sheets at current fair value.
Mortgage servicing rights are remeasured at each subsequent
reporting date using the amortization method. Under the
amortization method, mortgage servicing rights are amortized in
proportion to, and over the period of, estimated net servicing
income. Amortization is recorded in loan sales and servicing
income. At each reporting period, mortgage servicing rights are
assessed for impairment based on fair value of those rights.
The fair value of mortgage servicing rights typically rises as
market interest rates increase and declines as market interest
rates decrease; however, the extent to which this occurs depends
in part on (1) the magnitude of changes in market interest
rates, and (2) the differential between the then current
market interest rates for mortgage loans and the mortgage
interest rates included in the mortgage-servicing portfolio.
Since sales of mortgage servicing rights tend to occur in
private transactions and the precise terms and conditions of the
sales are typically not readily available, there is a limited
market to refer to in determining the fair value of mortgage
servicing rights. As such, like other participants in the
mortgage banking business, the Corporation relies primarily on a
discounted cash flow model to estimate the fair value of its
mortgage servicing rights. The Corporation utilizes a third
party vendor to perform the modeling to estimate the fair value
of its mortgage servicing rights. The Corporation reviews the
estimated fair values and assumptions used by the third party in
the model on a quarterly basis. The Corporation also compares
the estimates of fair value and assumptions to recent market
activity and against its own experience.
Prepayment Speeds: Generally, when market
interest rates decline and other factors favorable to
prepayments occur there is a corresponding increase in
prepayments as customers refinance existing mortgages under more
favorable interest rate terms. When a mortgage loan is prepaid
the anticipated cash flows associated with servicing that loan
are terminated, resulting in a reduction of the fair value of
the capitalized mortgage servicing rights. To the extent that
actual borrower prepayments do not react as anticipated by the
prepayment model (i.e., the historical data observed in the
model does not correspond to actual market activity), it is
possible that the prepayment model could fail to accurately
predict mortgage prepayments and could result in significant
earnings volatility. To estimate prepayment speeds, the
Corporation utilizes a third-party prepayment model, which is
based upon statistically derived data linked to certain key
principal indicators involving historical borrower prepayment
activity associated with mortgage loans in the secondary market,
current market interest rates and other factors, including the
Corporations own historical prepayment experience. For
purposes of model valuation, estimates are made for each product
type within the mortgage servicing rights portfolio on a monthly
basis.
Discount Rate: Represents the rate at which
expected cash flows are discounted to arrive at the net present
value of servicing income. Discount rates will change with
market conditions (i.e., supply vs. demand) and be reflective of
the yields expected to be earned by market participants
investing in mortgage servicing rights.
Cost to Service: Expected costs to service are
estimated based upon the incremental costs that a market
participant would use in evaluating the potential acquisition of
mortgage servicing rights.
45
Float Income: Estimated float income is driven
by expected float balances (principal, interest and escrow
payments that are held pending remittance to the investor or
other third party) and current market interest rates, including
the six month average of the three-month London Inter-Bank
Offered Rate (LIBOR) index, which are updated on a
monthly basis for purposes of estimating the fair value of
mortgage servicing rights.
Additional information pertaining to the accounting for mortgage
servicing rights is included in Note 6 (Mortgage Servicing
Rights and Mortgage Servicing Activity) to the consolidated
financial statements.
Pension
and other postretirement benefits
The Corporation sponsors several qualified and nonqualified
pension and other postretirement benefit plans for certain of
its employees. Several statistical and other factors, which
attempt to anticipate future events, are used in calculating the
expense and liability related to the plans. Key factors include
assumptions about the expected rates of return on plan assets,
discount rates, and health care cost trend rates, as determined
by the Corporation, within certain guidelines. The Corporation
considers market conditions, including changes in investment
returns and interest rates, in making these assumptions.
The Corporations pension administrative committee
(Committee) has developed a Statement of
Investment Policies and Objectives (Statement)
to assist FirstMerit and the investment managers of the pension
plan in effectively supervising and managing the assets of the
pension plan. The investment philosophy contained in the
Statement sets the investment time horizon as long term and the
risk tolerance level as slightly above average while requiring
diversification among several asset classes and securities.
Without sacrificing returns, or increasing risk, the Statement
recommends a limited number of investment manager relationships
and permits both separate accounts and commingled investments
vehicles. Based on the demographics, actuarial/funding
situation, business and financial characteristics and risk
preference, the Statement defines that the pension fund as a
total return investor return and accordingly current income is
not a key goal of the plan.
The pension asset allocation policy has set guidelines based on
the plans objectives, characteristics of the pension
liabilities, industry practices, the current market environment,
and practical investment issues. The Committee has decided to
investment in traditional (i.e., publicly traded securities) and
not alternative asset classes (e.g., private equity, hedge
funds, real estate, etc.) at this time.
Assumed discount rates reflect the time value of money as of the
measurement date in determining the present value of future cash
outflows for pension and postretirement benefit payments. The
objective of setting a discount rate is to establish an
obligation for postretirement benefits equivalent to an amount
that, if invested in high-quality fixed income securities, would
provide the necessary future cash flows to pay the pension and
postretirement benefits when due. Assumed discount rates are
reevaluated at each measurement date. If the general level of
interest rates rises or declines, the assumed discount rates
will change in a similar manner.
The method used to estimate the discount rate can be changed if
facts and circumstances indicate that a different method would
result in a better estimate of the discount rate. As of
December 31, 2009 cash flows specific to each plan along
with the Hewitt Top Quartile yield curve (Hewitt Yield
Curve) were used by the Corporation as the basis for
estimating the discount rate. The Hewitt Yield Curve provides
the best estimate of cash flows from investment in high-quality
fixed income securities to be used to pay the Corporations
pension and postretirement benefits when due. Prior to 2008, the
Corporation established the discount rate using the Moodys
Aa Corporate Bond Rate (Moodys Rate). Due to
the significant decline in the percentage of all bond issues of
at least Aa quality over the past several years, Moodys
Rate no longer provides the best estimate of cash flows from
investment in high-quality fixed income securities
The primary assumptions used in determining the
Corporations pension and postretirement benefit
obligations and related expenses are presented in Note 12
(Benefit Plans) to the consolidated financial statements. The
actuarial assumptions used by the Corporation may differ
materially from actual results due to changing market and
economic conditions, higher or lower withdrawal rates or longer
or shorter life spans of participants. While the Corporation
believes that the assumptions used are appropriate, differences
in actual experience or changes in assumptions might materially
affect the Corporations financial position or results of
operations.
46
Forward-Looking
Statements Safe Harbor Statement
Information in the Managements Discussion and
Analysis of Financial Condition and Results of Operations
section 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 the
Corporations 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; and like items.
The Corporation cautions that any forward-looking statements
contained in this report, in a report incorporated by reference
to this report, or made by management of 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. The Corporation may from
time to time issue other forward-looking statements.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
See the information presented in the Market Risk
Management section at pages 37 39 under
Item 7 of this Annual Report.
47
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
CONSOLIDATED
BALANCE SHEETS
FIRSTMERIT
CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
161,033
|
|
|
$
|
178,406
|
|
Investment securities
|
|
|
|
|
|
|
|
|
Held- to- maturity
|
|
|
50,686
|
|
|
|
30,266
|
|
Available-for- sale
|
|
|
2,565,943
|
|
|
|
2,614,575
|
|
Other investments
|
|
|
128,209
|
|
|
|
128,007
|
|
Loans held for sale
|
|
|
16,828
|
|
|
|
11,141
|
|
Loans:
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
4,066,522
|
|
|
|
4,352,730
|
|
Mortgage loans
|
|
|
463,416
|
|
|
|
547,125
|
|
Installment loans
|
|
|
1,425,373
|
|
|
|
1,574,587
|
|
Home equity loans
|
|
|
753,112
|
|
|
|
733,832
|
|
Credit card loans
|
|
|
153,525
|
|
|
|
149,745
|
|
Leases
|
|
|
61,541
|
|
|
|
67,594
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
6,923,489
|
|
|
|
7,425,613
|
|
Allowance for loan losses
|
|
|
(115,092
|
)
|
|
|
(103,757
|
)
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
|
6,808,397
|
|
|
|
7,321,856
|
|
Premises and equipment, net
|
|
|
125,205
|
|
|
|
133,184
|
|
Goodwill
|
|
|
139,598
|
|
|
|
139,245
|
|
Other intangible assets
|
|
|
1,158
|
|
|
|
1,403
|
|
Accrued interest receivable and other assets
|
|
|
542,845
|
|
|
|
541,943
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,539,902
|
|
|
$
|
11,100,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Demand-non-interest bearing
|
|
$
|
2,069,921
|
|
|
$
|
1,637,534
|
|
Demand-interest bearing
|
|
|
677,448
|
|
|
|
666,615
|
|
Savings and money market accounts
|
|
|
3,408,109
|
|
|
|
2,512,331
|
|
Certificates and other time deposits
|
|
|
1,360,318
|
|
|
|
2,781,199
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
7,515,796
|
|
|
|
7,597,679
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
996,345
|
|
|
|
921,390
|
|
Wholesale borrowings
|
|
|
740,105
|
|
|
|
1,344,195
|
|
Accrued taxes, expenses and other liabilities
|
|
|
222,029
|
|
|
|
298,919
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
9,474,275
|
|
|
|
10,162,183
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, without par value:
|
|
|
|
|
|
|
|
|
authorized and unissued 7,000,000 shares
|
|
|
|
|
|
|
|
|
Preferred stock, Series A, without par value:
|
|
|
|
|
|
|
|
|
designated 800,000 shares; none outstanding
|
|
|
|
|
|
|
|
|
Convertible preferred stock, Series B, without par value:
|
|
|
|
|
|
|
|
|
designated 220,000 shares; none outstanding
|
|
|
|
|
|
|
|
|
Common stock, without par value;
|
|
|
|
|
|
|
|
|
authorized 300,000,000 shares; issued 93,633,871 and
92,026,350 at December 31, 2009 and 2008, respectively
|
|
|
127,937
|
|
|
|
127,937
|
|
Capital surplus
|
|
|
88,573
|
|
|
|
94,802
|
|
Accumulated other comprehensive loss
|
|
|
(25,459
|
)
|
|
|
(54,080
|
)
|
Retained earnings
|
|
|
1,043,625
|
|
|
|
1,053,435
|
|
Treasury stock, at cost, 6,629,995 and 11,066,108 shares,
at December 31, 2009 and 2008, respectively
|
|
|
(169,049
|
)
|
|
|
(284,251
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
1,065,627
|
|
|
|
937,843
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
10,539,902
|
|
|
$
|
11,100,026
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
48
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FIRSTMERIT
CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands except per share data)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans, including loans held for sale
|
|
$
|
340,236
|
|
|
$
|
436,194
|
|
|
$
|
524,103
|
|
Interest and dividends on investment securities and federal
funds sold
|
|
|
119,291
|
|
|
|
117,632
|
|
|
|
112,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
459,527
|
|
|
|
553,826
|
|
|
|
636,994
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand-interest bearing
|
|
|
600
|
|
|
|
2,514
|
|
|
|
6,824
|
|
Savings and money market accounts
|
|
|
23,472
|
|
|
|
29,839
|
|
|
|
54,166
|
|
Certificates and other time deposits
|
|
|
54,610
|
|
|
|
105,853
|
|
|
|
146,559
|
|
Interest on securities sold under agreements to repurchase
|
|
|
4,764
|
|
|
|
31,857
|
|
|
|
71,298
|
|
Interest on wholesale borrowings
|
|
|
27,317
|
|
|
|
27,574
|
|
|
|
20,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
110,763
|
|
|
|
197,637
|
|
|
|
299,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
348,764
|
|
|
|
356,189
|
|
|
|
337,546
|
|
Provision for loan losses
|
|
|
98,433
|
|
|
|
58,603
|
|
|
|
30,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
250,331
|
|
|
|
297,586
|
|
|
|
306,711
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust department income
|
|
|
20,683
|
|
|
|
22,127
|
|
|
|
23,245
|
|
Service charges on deposits
|
|
|
63,366
|
|
|
|
62,862
|
|
|
|
67,374
|
|
Credit card fees
|
|
|
46,512
|
|
|
|
47,054
|
|
|
|
46,502
|
|
ATM and other service fees
|
|
|
11,110
|
|
|
|
10,894
|
|
|
|
12,621
|
|
Bank owned life insurance income
|
|
|
13,740
|
|
|
|
12,008
|
|
|
|
13,476
|
|
Investment services and insurance
|
|
|
10,008
|
|
|
|
10,503
|
|
|
|
11,241
|
|
Investment securities gains, net
|
|
|
6,037
|
|
|
|
2,126
|
|
|
|
1,123
|
|
Loan sales and servicing income
|
|
|
12,954
|
|
|
|
6,940
|
|
|
|
10,311
|
|
Gain on Visa Inc.
|
|
|
|
|
|
|
13,666
|
|
|
|
|
|
Gain on post medical retirement curtailment
|
|
|
9,543
|
|
|
|
|
|
|
|
|
|
Other operating income
|
|
|
16,348
|
|
|
|
13,256
|
|
|
|
11,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
210,301
|
|
|
|
201,436
|
|
|
|
196,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, pension and employee benefits
|
|
|
175,906
|
|
|
|
179,463
|
|
|
|
170,457
|
|
Net occupancy expense
|
|
|
24,099
|
|
|
|
24,649
|
|
|
|
25,679
|
|
Equipment expense
|
|
|
24,301
|
|
|
|
24,137
|
|
|
|
25,401
|
|
Stationery, supplies and postage
|
|
|
8,907
|
|
|
|
9,372
|
|
|
|
9,436
|
|
Bankcard, loan processing and other costs
|
|
|
31,467
|
|
|
|
29,456
|
|
|
|
29,781
|
|
Professional services
|
|
|
16,414
|
|
|
|
11,695
|
|
|
|
15,865
|
|
Amortization of intangibles
|
|
|
347
|
|
|
|
573
|
|
|
|
889
|
|
Other operating expense
|
|
|
71,376
|
|
|
|
51,288
|
|
|
|
52,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
352,817
|
|
|
|
330,633
|
|
|
|
330,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before federal income taxes
|
|
|
107,815
|
|
|
|
168,389
|
|
|
|
173,408
|
|
Federal income taxes
|
|
|
25,645
|
|
|
|
48,904
|
|
|
|
50,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
82,170
|
|
|
|
119,485
|
|
|
|
123,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized securities holding gains, net of taxes
|
|
|
38,994
|
|
|
|
10,808
|
|
|
|
22,716
|
|
Unrealized hedging gain (loss), net of taxes
|
|
|
(94
|
)
|
|
|
1,342
|
|
|
|
(1,249
|
)
|
Minimum pension liability adjustment, net of taxes during period
|
|
|
(6,355
|
)
|
|
|
(21,763
|
)
|
|
|
15,686
|
|
Less: reclassification adjustment for securities gains
realized in net income, net of taxes
|
|
|
3,924
|
|
|
|
1,382
|
|
|
|
730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss) gain, net of taxes
|
|
|
28,621
|
|
|
|
(10,995
|
)
|
|
|
36,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
110,791
|
|
|
$
|
108,490
|
|
|
$
|
159,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
75,799
|
|
|
$
|
119,485
|
|
|
$
|
123,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income used in diluted EPS calculation
|
|
$
|
75,799
|
|
|
$
|
119,490
|
|
|
$
|
123,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
basic
|
|
|
84,678
|
|
|
|
82,060
|
|
|
|
81,593
|
|
Weighted average number of common shares outstanding
diluted
|
|
|
84,686
|
|
|
|
82,097
|
|
|
|
81,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share*
|
|
$
|
0.90
|
|
|
$
|
1.46
|
|
|
$
|
1.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share*
|
|
$
|
0.90
|
|
|
$
|
1.46
|
|
|
$
|
1.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock dividend per share
|
|
|
0.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend per share
|
|
$
|
0.77
|
|
|
$
|
1.16
|
|
|
$
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Average outstanding shares and per
share data restated to reflect the effect of stock dividends
declared April 28, 2009 and August 20, 2009.
|
The accompanying notes are an integral part of the consolidated
financial statements.
49
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FIRSTMERIT
CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Stock
|
|
|
Capital
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Treasury
|
|
|
Shareholders
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Warrant
|
|
|
Surplus
|
|
|
Income
|
|
|
Earnings
|
|
|
Stock
|
|
|
Equity
|
|
|
Balance at December 31, 2006
|
|
$
|
|
|
|
$
|
127,937
|
|
|
$
|
|
|
|
$
|
106,916
|
|
|
$
|
(79,508
|
)
|
|
$
|
998,079
|
|
|
$
|
(307,313
|
)
|
|
$
|
846,111
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,027
|
|
|
|
|
|
|
|
123,027
|
|
Cash dividends common stock ($1.16 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(93,331
|
)
|
|
|
|
|
|
|
(93,331
|
)
|
Options exercised (160,235 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(718
|
)
|
|
|
|
|
|
|
|
|
|
|
4,172
|
|
|
|
3,454
|
|
Nonvested (restricted) shares granted (296,150 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,783
|
)
|
|
|
|
|
|
|
|
|
|
|
7,334
|
|
|
|
(449
|
)
|
Debentures converted (4,545 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
111
|
|
|
|
40
|
|
Treasury shares purchased (91,709 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,844
|
|
|
|
|
|
|
|
|
|
|
|
(2,077
|
)
|
|
|
(233
|
)
|
Deferred compensation trust (80,629 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,095
|
)
|
|
|
|
|
|
|
|
|
|
|
2,095
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,935
|
|
Net unrealized gains on investment securities, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,986
|
|
|
|
|
|
|
|
|
|
|
|
21,986
|
|
Unrealized hedging loss, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,249
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,249
|
)
|
Minimum pension liability adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,686
|
|
|
|
|
|
|
|
|
|
|
|
15,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
|
|
|
$
|
127,937
|
|
|
$
|
|
|
|
$
|
100,028
|
|
|
$
|
(43,085
|
)
|
|
$
|
1,027,775
|
|
|
$
|
(295,678
|
)
|
|
$
|
916,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,485
|
|
|
|
|
|
|
|
119,485
|
|
Cash dividends common stock ($1.16 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(93,825
|
)
|
|
|
|
|
|
|
(93,825
|
)
|
Options exercised (126,359 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(966
|
)
|
|
|
|
|
|
|
|
|
|
|
3,041
|
|
|
|
2,075
|
|
Nonvested (restricted) shares granted (409,903 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,183
|
)
|
|
|
|
|
|
|
|
|
|
|
10,186
|
|
|
|
3
|
|
Debentures converted (2,841 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
63
|
|
|
|
25
|
|
Treasury shares purchased (61,329 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
584
|
|
|
|
|
|
|
|
|
|
|
|
(1,331
|
)
|
|
|
(747
|
)
|
Deferred compensation trust (29,013 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
532
|
|
|
|
|
|
|
|
|
|
|
|
(532
|
)
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,845
|
|
Net unrealized gains on investment securities, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,426
|
|
|
|
|
|
|
|
|
|
|
|
9,426
|
|
Unrealized hedging gain, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,342
|
|
|
|
|
|
|
|
|
|
|
|
1,342
|
|
Minimum pension liability adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,763
|
)
|
|
|
|
|
|
|
|
|
|
|
(21,763
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
|
|
|
$
|
127,937
|
|
|
$
|
|
|
|
$
|
94,802
|
|
|
$
|
(54,080
|
)
|
|
$
|
1,053,435
|
|
|
$
|
(284,251
|
)
|
|
$
|
937,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,170
|
|
|
|
|
|
|
|
82,170
|
|
Cash dividends preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,789
|
)
|
|
|
|
|
|
|
(1,789
|
)
|
Cash dividends common stock ($0.77 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63,891
|
)
|
|
|
|
|
|
|
(63,891
|
)
|
Stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,765
|
|
|
|
|
|
|
|
(21,718
|
)
|
|
|
15,953
|
|
|
|
|
|
Options exercised (156,445 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,022
|
)
|
|
|
|
|
|
|
|
|
|
|
3,961
|
|
|
|
2,939
|
|
Nonvested (restricted) shares granted (554,258 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,590
|
)
|
|
|
|
|
|
|
|
|
|
|
13,587
|
|
|
|
(3
|
)
|
Treasury shares purchased (153,923 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,285
|
|
|
|
|
|
|
|
|
|
|
|
(3,043
|
)
|
|
|
(1,758
|
)
|
Deferred compensation trust (22,730 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(227
|
)
|
|
|
|
|
|
|
|
|
|
|
227
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,429
|
|
Issuance of common stock (3,267,751 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,991
|
)
|
|
|
|
|
|
|
|
|
|
|
84,517
|
|
|
|
79,526
|
|
Issuance of Fixed-Rate Cumulative Perpetual Preferred Stock
|
|
|
120,622
|
|
|
|
|
|
|
|
4,582
|
|
|
|
(435
|
)
|
|
|
|
|
|
|
(204
|
)
|
|
|
|
|
|
|
124,565
|
|
Redemption of Fixed-Rate Cumulative Perpetual Preferred Stock
|
|
|
(120,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,378
|
)
|
|
|
|
|
|
|
(125,000
|
)
|
Repurchase of warrants
|
|
|
|
|
|
|
|
|
|
|
(4,582
|
)
|
|
|
(443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,025
|
)
|
Net unrealized gains on investment securities, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,070
|
|
|
|
|
|
|
|
|
|
|
|
35,070
|
|
Unrealized hedging gain, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
(94
|
)
|
Minimum pension liability adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,355
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
|
|
|
$
|
127,937
|
|
|
$
|
|
|
|
$
|
88,573
|
|
|
$
|
(25,459
|
)
|
|
$
|
1,043,625
|
|
|
$
|
(169,049
|
)
|
|
$
|
1,065,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
50
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FIRSTMERIT
CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
82,170
|
|
|
$
|
119,485
|
|
|
$
|
123,027
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
98,433
|
|
|
|
58,603
|
|
|
|
30,835
|
|
Provision for depreciation and amortization
|
|
|
19,495
|
|
|
|
18,711
|
|
|
|
15,298
|
|
Amortization of investment securities premiums, net
|
|
|
5,144
|
|
|
|
1,041
|
|
|
|
717
|
|
Accretion of income for lease financing
|
|
|
(3,432
|
)
|
|
|
(4,034
|
)
|
|
|
(4,257
|
)
|
Gains on sales of investment securities, net
|
|
|
(6,037
|
)
|
|
|
(2,126
|
)
|
|
|
(1,123
|
)
|
Deferred federal income taxes
|
|
|
7,117
|
|
|
|
(11,248
|
)
|
|
|
3,564
|
|
Decrease in interest receivable
|
|
|
3,207
|
|
|
|
6,309
|
|
|
|
8,764
|
|
(Decrease) increase in interest payable
|
|
|
(17,682
|
)
|
|
|
(12,529
|
)
|
|
|
427
|
|
Originations of loans held for sale
|
|
|
(511,416
|
)
|
|
|
(287,803
|
)
|
|
|
(261,165
|
)
|
Proceeds from sales of loans, primarily mortgage loans sold in
the secondary mortgage markets
|
|
|
509,683
|
|
|
|
291,401
|
|
|
|
257,780
|
|
(Gains) losses on sales of loans, net
|
|
|
(3,954
|
)
|
|
|
923
|
|
|
|
668
|
|
Post medical retirement curtailment
|
|
|
(9,543
|
)
|
|
|
|
|
|
|
|
|
(Increase) decrease in other real estate and other property
|
|
|
(4,005
|
)
|
|
|
505
|
|
|
|
3,986
|
|
(Increase) decrease in other prepaid assets
|
|
|
(44,560
|
)
|
|
|
1,767
|
|
|
|
245
|
|
(Decrease) increase in accounts payable
|
|
|
(18,802
|
)
|
|
|
5,439
|
|
|
|
429
|
|
Increase in bank owned life insurance
|
|
|
(10,655
|
)
|
|
|
(12,007
|
)
|
|
|
(11,689
|
)
|
Amortization of intangible assets
|
|
|
347
|
|
|
|
573
|
|
|
|
889
|
|
Other changes
|
|
|
(5,575
|
)
|
|
|
19,617
|
|
|
|
2,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
89,935
|
|
|
|
194,627
|
|
|
|
170,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Dispositions of investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
sales
|
|
|
286,946
|
|
|
|
171,392
|
|
|
|
261,239
|
|
Available-for-sale
maturities
|
|
|
658,771
|
|
|
|
532,115
|
|
|
|
668,741
|
|
Purchases of investment securities
available-for-sale
|
|
|
(833,503
|
)
|
|
|
(987,937
|
)
|
|
|
(985,810
|
)
|
Purchases of ABL loans
|
|
|
(92,885
|
)
|
|
|
|
|
|
|
|
|
Net decrease (increase) in loans and leases, except sales
|
|
|
485,898
|
|
|
|
(395,555
|
)
|
|
|
(73,652
|
)
|
Purchases of premises and equipment
|
|
|
(11,609
|
)
|
|
|
(21,873
|
)
|
|
|
(15,342
|
)
|
Sales of premises and equipment
|
|
|
93
|
|
|
|
447
|
|
|
|
3,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES
|
|
|
493,711
|
|
|
|
(701,411
|
)
|
|
|
(140,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in demand accounts
|
|
|
443,220
|
|
|
|
93,703
|
|
|
|
(44,222
|
)
|
Net increase in savings and money market accounts
|
|
|
895,778
|
|
|
|
217,184
|
|
|
|
27,461
|
|
Net decrease in certificates and other time deposits
|
|
|
(1,420,881
|
)
|
|
|
(44,947
|
)
|
|
|
(150,421
|
)
|
Net increase (decrease) in securities sold under agreements to
repurchase
|
|
|
74,955
|
|
|
|
(334,690
|
)
|
|
|
(5,741
|
)
|
Net (decrease) increase in wholesale borrowings
|
|
|
(604,090
|
)
|
|
|
639,074
|
|
|
|
240,894
|
|
Proceeds from issuance of preferred stock
|
|
|
125,000
|
|
|
|
|
|
|
|
|
|
Repurchase of preferred stock
|
|
|
(125,000
|
)
|
|
|
|
|
|
|
|
|
Repurchase of common stock warrant
|
|
|
(5,025
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
79,526
|
|
|
|
|
|
|
|
|
|
Cash dividends preferred
|
|
|
(1,789
|
)
|
|
|
|
|
|
|
|
|
Cash dividends common
|
|
|
(63,891
|
)
|
|
|
(93,825
|
)
|
|
|
(93,331
|
)
|
Purchase of treasury shares
|
|
|
(1,758
|
)
|
|
|
(747
|
)
|
|
|
(233
|
)
|
Proceeds from exercise of stock options, conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
of debentures or conversion of preferred stock
|
|
|
2,936
|
|
|
|
2,103
|
|
|
|
3,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES
|
|
|
(601,019
|
)
|
|
|
477,855
|
|
|
|
(22,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(17,373
|
)
|
|
|
(28,929
|
)
|
|
|
7,131
|
|
Cash and cash equivalents at beginning of year
|
|
|
178,406
|
|
|
|
207,335
|
|
|
|
200,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
161,033
|
|
|
$
|
178,406
|
|
|
$
|
207,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net of amounts capitalized
|
|
$
|
62,727
|
|
|
$
|
102,111
|
|
|
$
|
167,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income taxes
|
|
$
|
21,699
|
|
|
$
|
53,603
|
|
|
$
|
47,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
51
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2009
(Dollars
in thousands)
FirstMerit Corporation and subsidiaries is a diversified
financial services company headquartered in Akron, Ohio with 160
banking offices in 25 Ohio and Western Pennsylvania counties.
The Corporation provides a complete range of banking and other
financial services to consumers and businesses through its core
operations.
|
|
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 (GAAP) in
the United States of America and to general practices within the
financial services industry. Effective July 1, 2009, the
Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) became the
single source of authoritative nongovernmental GAAP. Other than
resolving certain minor inconsistencies in current GAAP, the ASC
is not intended to change GAAP, but rather to make it easier to
review and research GAAP applicable to a particular transaction
or specific accounting issue. Technical references to GAAP
included in these Notes To Consolidated Financial Statements are
provided under the new ASC structure.
All material subsequent events have been either recognized in
the financial statements or disclosed in the notes to the
financial statements. The consolidated financial statements of
the Corporation as of December 31, 2009 and 2008 are not
necessarily indicative of the results that may be achieved for
any future period.
The following is a description of the Corporations
significant accounting policies.
(a) Principles
of Consolidation
The consolidated financial statements of the Corporation include
the accounts of FirstMerit Corporation (the Parent
Company) and its subsidiaries: FirstMerit Bank, N.A.,
Citizens Savings Corporation of Stark County, FirstMerit Capital
Trust I, FirstMerit Community Development Corporation,
FirstMerit Risk Management, Inc., and FMT, Inc. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b) Use
of Estimates
The preparation of financial statements are in conformity with
GAAP and prevailing practices within the financial services
industry. Management must make certain estimates and assumptions
that affect the amounts reported in the financial statements and
related notes. If these estimates prove to be inaccurate, actual
results could differ from those reported.
(c) Business
Combinations
Assets acquired and liabilities assumed in a business
combination are accounted for at fair value on the date of
acquisition. Costs related to the acquisition are expensed as
incurred.
(d) Cash
and Cash Equivalents
Cash and cash equivalents consist of cash on hand, cash due from
banks and checks in the process of collection.
(e) Investment
Securities
Debt and equity securities can be classified as
held-to-maturity,
available-for-sale
or trading. Management determines the appropriate classification
of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities are
classified as
held-to-maturity
when the Corporation has the positive intent and ability to hold
the securities to maturity.
Held-to-maturity
securities are stated at amortized cost, adjusted
52
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
for amortization of premiums and accretion of discounts to
maturity.
Available-for-sale
securities at stated at fair value, with the unrealized gains
and losses, net of tax, reported as a separate component of
other comprehensive income (loss) in shareholders equity.
The amortization of premiums, accretion of discounts, interest
and dividends are included in interest and dividends on
investment securities and federal funds sold. Realized gains or
losses on the sales of investment securities are based on
amortized cost of the security sold using the specific
identification method.
Investment securities are reviewed at least quarterly for
impairment in fair value. An unrealized loss exists when the
current fair value of an individual security is less than its
amortized basis. If the Corporation intends to sell the security
in an unrealized loss position or it is more likely than not
that the Corporation will be required to sell the security in an
unrealized loss position before recovery of its amortized basis,
an
other-than-temporary
(OTTI) loss is recognized in income. For securities
in an unrealized loss position which the Corporation does not
intend to sell, any impairment associated with a credit loss is
recognized in income. The portion of the unrealized loss
relating to other factors, such as liquidity conditions in the
market or changes in market interest rates, is recorded in
accumulated other comprehensive income (loss). Equity securities
are evaluated to determine whether the unrealized loss is
expected to be recoverable based on whether evidence exists to
support a realizable value equal to or greater than the
amortized cost basis. If it is probable that the Corporation
will not recover the amortized cost basis, taking into
consideration the estimated recovery period and its ability to
hold the equity security until recovery, an OTTI loss is
recognized in income.
Other investments include Federal Home Loan Bank
(FHLB) and Federal Reserve Bank (FRB)
stock. FHLB and FRB stock are carried at cost and evaluated for
impairment based on the ultimate recoverability of the par
value. Cash and stock dividends received on the stock are
reported as interest income.
(f) Loans
and Loan Income
Loans originated for investment are stated at their principal
amount outstanding, net of unearned income, and interest income
is recognized on an accrual basis. Accrued interest is presented
separately in the balance sheet, except for accrued interest on
credit card loans, which is included in the outstanding loan
balance. Interest income on loans is accrued on the principal
outstanding primarily using the simple-interest
method. Loan origination fees and certain direct costs incurred
to extend credit are deferred and amortized over the term of the
loan and loan commitment period as an adjustment. Interest is
not accrued on loans where collectability is uncertain. Loan
commitment fees are generally deferred and amortized into other
(noninterest) income on an effective interest basis over the
commitment period. Unearned premiums and discounts on consumer
loans are recognized using the effective interest method.
(g) Loans
Held for Sale
Loans originated for resale are included in loans held for sale
in the consolidated financial statements. Effective
August 1, 2008, the Corporation elected the fair value
option, on a prospective basis, for newly originated conforming
fixed-rate and adjustable-rate first mortgage loans held for
sale. Prior to this, residential mortgage loans had been
recorded at the lower of cost or market value. Changes in the
fair value of these loans are recognized in income. For mortgage
loans originated for sale for which the fair value option is
elected, loan origination fees are recorded when earned and
related direct loan origination costs are recognized when
incurred. Upon their sale, differences between carrying value
and sales proceeds realized are recorded to loan sales and
servicing income.
The details of the fair value election for residential mortgage
loans held for sale and a discussion of the valuation
methodology applied to the Corporations loans held for
sale are described in Note 16 (Fair Value Measurement) to
the consolidated financial statements.
53
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
In June 2008, the Corporation transferred $31.7 million of
student loans from
held-for-sale
status to the
held-for-maturity
loan portfolio within installment loans. The secondary markets
for these loans had been adversely affected by market liquidity
issues, prompting the Corporations decision to move them
to a
held-for-maturity
classification. While classified as
held-for-sale
these loans were valued at the lower of cost or market and were
transferred at cost, the lower value. An allowance for loans
losses was established at the time of transfer.
(h) Nonperforming
Loans
With the exception of certain commercial, credit card and
mortgage loans, loans and leases on which payments are past due
for 90 days are placed on nonaccrual status, unless those
loans are in the process of collection and, in Managements
opinion, are fully secured. Credit card loans on which payments
are past due for 120 days are placed on nonaccrual status
unless those loans are in the process of collection and in
Managements opinion are fully secured. Interest on
mortgage loans is accrued until Management deems it
uncollectible based upon the specific identification method.
Loans are generally written off when deemed uncollectible or
when they reach a predetermined number of days past due
depending upon loan product, terms, and other factors. When a
loan is placed on nonaccrual status, interest deemed
uncollectible which had been accrued in prior years is charged
against the allowance for loan losses and interest deemed
uncollectible accrued in the current year is reversed against
interest income. A loan is returned to accrual status when
principal and interest are no longer past due and collectability
is probable. Restructured loans are those on which concessions
in terms have been made as a result of deterioration in a
borrowers financial condition. Under the
Corporations credit policies and practices, individually
impaired loans include all nonaccrual and restructured
commercial, agricultural, construction, and commercial real
estate loans, but exclude certain aggregated consumer loans,
mortgage loans, and leases classified as nonaccrual. Loan
impairment for all loans is measured based on the present value
of expected future cash flows discounted at the loans
effective interest rate or, as a practical alternative, at the
observable market price of the loan, or the fair value of the
collateral if the loan is collateral dependent.
(i) Allowance
for Loan Losses
The allowance for loan losses is Managements estimate of
the amount of probable credit losses inherent in the portfolio
at the balance sheet date. The Corporation determines the
allowance for loan losses based on an on-going evaluation. This
evaluation is inherently subjective, and is based upon
significant judgments and estimates, including the amounts and
timing of cash flows expected to be received on impaired loans
that may be susceptible to significant change. Increases to the
allowance for loan losses are made by charges to the provision
for loan losses. Loans deemed uncollectible are charged against
the allowance for loan losses. Recoveries of previously
charged-off amounts are credited to the allowance for loan
losses.
The Corporations allowance for loan losses is the
accumulation of various components calculated based on
independent methodologies. Managements estimate of each
component of the allowance for loan losses is based on certain
observable data Management believes is the most reflective of
the underlying loan losses being estimated. Changes in the
amount of each component of the allowance for loan losses are
directionally consistent with changes in the observable data and
corresponding analyses. Refer to Note 4 to the consolidated
financial statements for further discussion and description of
the individual components of the allowance for loan losses.
A key element of the methodology for determining the allowance
for loan losses is the Corporations credit-risk grading of
individual commercial loans. Loans are assigned credit-risk
grades based on an internal assessment of conditions that affect
a borrowers ability to meet its contractual obligation
under the loan agreement. The assessment process includes
reviewing a borrowers current financial information,
historical payment experience, credit documentation, public
information, and other information specific to each individual
borrower. Certain commercial loans are reviewed on an annual,
quarterly or rotational basis or as Management become aware of
information affecting a borrowers ability to fulfill its
obligation.
54
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
The provision for loan losses charged to operating expenses is
determined based on Managements evaluation of the loan
portfolio and the adequacy of the allowance for loan losses
under current economic conditions and such other factors, which,
in Managements judgment, require current recognition.
(j) Equipment
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. The residual value represents the
estimated fair value of the leased asset at the end of the lease
term. Unguaranteed residual values of leased assets are reviewed
at least annually for impairment. Declines in residual values
judged to be
other-than-temporary
are recognized in earnings in the period such determinations are
made.
(k) Mortgage
Servicing Rights
The Corporation periodically sells residential real estate loans
while retaining the obligation to perform the servicing of such
loans. Whenever the Corporation undertakes an obligation to
service such loans, Management assesses whether a servicing
asset or liability should be recognized. A servicing asset is
recognized whenever the compensation for servicing is expected
to exceed current market servicing prices. Likewise, a servicing
liability would be recognized in the event that servicing fees
to be received are not expected to adequately compensate the
Corporation for its expected cost. Servicing assets associated
with retained mortgage servicing rights are presented within
other assets on the balance sheet. The Corporation does not
presently have any servicing liabilities.
All separately recognized servicing assets and liabilities are
initially valued at fair value. Mortgage servicing rights do not
trade in an active open market with readily observable market
prices. Although sales of mortgage servicing rights do occur,
the exact terms and conditions may not be available. As a
result, mortgage servicing rights are established and valued at
fair value estimated using discounted cash flow modeling
techniques which require management to make assumptions
regarding future net servicing income, adjusted for such factors
as net servicing income, discount rate and prepayments. The
primary assumptions used in determining the current fair value
of the Corporations mortgage servicing rights as well as a
sensitivity analysis are presented in Note 6 (Mortgage
Servicing Rights) to the consolidated financial statements.
Servicing assets and liabilities are remeasured at each
subsequent reporting date using one of two methods: amortization
over the servicing period or measurement at fair value. The
Corporation has elected to subsequently remeasure servicing
assets using the amortization method. Under the amortization
method, servicing assets or liabilities are amortized in
proportion to, and over the period of, estimated net servicing
income. Amortization is recorded in loan sales and servicing
income.
At each reporting period, mortgage servicing rights are assessed
for impairment based on fair value of those rights on a
stratum-by-stratum
basis. The Corporation stratifies its servicing rights portfolio
into tranches based on loan type and interest rate, the
predominant risk characteristics of the underlying loans. Any
impairment is recognized through a valuation allowance for each
impaired stratum through a charge to income. Increases in the
fair value of impaired mortgage servicing rights are recognized
only up to the amount of the previously recognized valuation
allowance.
The Corporation also reviews mortgage servicing rights for
other-than-temporary
impairment each quarter and recognizes a direct write-down when
the recoverability of a recorded allowance for impairment is
determined to be remote. Unlike an allowance for impairment, a
direct write-down permanently reduces the unamortized cost of
the mortgage servicing right and the allowance for impairment.
55
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
The Corporation generally records loan administration fees for
servicing loans for investors on the accrual basis of
accounting. Servicing fees and late fees related to delinquent
loan payments are also recorded on the accrual basis of
accounting.
(l) 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
related lease terms or the estimated useful lives of the assets,
whichever is shorter.
(m) Goodwill
and Intangible Assets
Goodwill represents the amount by which the cost of net assets
acquired in a business combination exceeds their fair value.
Other intangible assets represent the present value of the
future stream of income to be derived from the purchase of core
deposits. Other intangible assets are amortized on a
straight-line basis over their estimated useful lives. Goodwill
and other intangible assets deemed to have indefinite lives are
not amortized.
Goodwill is evaluated for impairment on an annual basis at
November 30th of each year or whenever events or
changes in circumstances indicate that the carrying value may
not be recoverable. The Corporations reporting units for
purposes of this testing are its major lines of business:
Commercial, Retail, and Wealth. The goodwill impairment test is
a two-step process that requires management to make judgments in
determining what assumptions to use in the calculation. The
first step in impairment testing is to estimate the fair value
of each reporting unit based on valuation techniques including a
discounted cash flow model with revenue and profit forecasts and
comparing those estimated fair values with the carrying values,
which includes the allocated goodwill. If the carrying amount of
a reporting unit exceeds its fair value, goodwill impairment may
be indicated and a second step is performed to compute the
amount of the impairment by determining an implied fair
value of goodwill. The determination of a reporting
units implied fair value of goodwill requires
the Corporation to allocate fair value of the reporting unit to
the assets and liabilities of the reporting unit. Any
unallocated fair value represents the implied fair
value of goodwill, which is compared to its corresponding
carrying value. An impairment loss would be recognized as a
charge to earnings to the extent the carrying amount of the
reporting units goodwill exceeds the implied fair value of
goodwill.
(n) Other
Real Estate Owned
Other real estate owned is included in other assets in the
consolidated balance sheets and is comprised of property
acquired through a foreclosure proceeding or acceptance of a
deed-in-lieu
of foreclosure, and loans classified as in-substance
foreclosure. Other real estate owned is recorded at the lower of
the recorded investment in the loan at the time of acquisition
or the fair value of the underlying property collateral, less
estimated selling costs. Any write-down in the carrying value of
a property at the time of acquisition is charged to the
allowance for loan losses. Any subsequent write-downs to reflect
current fair market value, as well as gains and losses on
disposition and revenues and expenses incurred in maintaining
such properties, are treated as period costs. Other real estate
owned also includes bank premises formerly but no longer used
for banking. Banking premises are transferred at the lower of
carrying value or estimated fair value, less estimated selling
costs.
(o) Derivative
Instruments and Hedging Activities
The Corporation uses interest rate swaps, interest rate lock
commitments and forward contracts sold to hedge interest rate
risk for asset and liability management purposes. All
derivatives are recorded as either other assets or other
liabilities measured at fair value on the balance sheet.
Accounting for changes in fair value (i.e., gains or losses) of
derivatives differs depending on whether the derivative has been
designated and qualifies as part of a hedging
56
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
relationship, and further, on the type of hedging relationship.
For derivatives that are not designated as hedging instruments,
the gain or loss is recognized immediately in other operating
income. A derivative that is designated and qualifies as a
hedging instrument must be designated a fair value hedge, a cash
flow hedge or a hedge of a net investment in a foreign
operation. The Corporation does not have any derivatives that
hedge net investments in foreign operations.
Effectiveness measures the extent to which changes in the fair
value of a derivative instrument offset changes in the fair
value of the hedged item. If the relationship between the change
in the fair value of the derivative instrument and the fair
value of the hedged item falls within a range considered to be
the industry norm, the hedge is considered highly
effective and qualifies for hedge accounting. A hedge is
ineffective if the offsetting difference between the
fair values falls outside the acceptable range.
A fair value hedge is used to limit exposure to changes in the
fair value of existing assets, liabilities and firm commitments
caused by changes in interest rates or other economic factors.
The Corporation recognizes the gain or loss on these
derivatives, as well as the related gain or loss on the
underlying hedged item, in other operating income during the
period in which the fair value changes. If a hedge is perfectly
effective, the change in the fair value of the hedged item will
be offset, resulting in no net effect on earnings.
A cash flow hedge is used to minimize the variability of future
cash flows that is caused by changes in interest rates or other
economic factors. The effective portion of a gain or loss on any
cash flow hedge is reported as a component of accumulated
other comprehensive income (loss) and reclassified into
other operating income in the same period or periods that the
hedged transaction affects earnings. Any ineffective portion of
the derivative gain or loss is recognized in other operating
income during the current period.
In December 2009, the Corporation corrected an error in hedge
accounting for a portfolio of interest rate swaps associated
with fixed-rate commercial loans recorded in prior periods. The
Corporation assessed the materiality of the error in accordance
with Staff Accounting Bulletin (SAB) No. 108
and concluded the error was not material, either individually or
in the aggregate, to the results of operations of any prior
period or for the year ending December 31, 2009, to trends
for those periods affected, or to a fair presentation of the
Corporations financial statements for those periods.
Accordingly, results for prior periods have not been restated.
Instead, the Corporation increased other expenses and reduced
the commercial loans balance by $3.9 million to correct
this error in the fourth quarter. In addition, this portfolio of
interest rate swaps was terminated in January 2010.
(p) 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.
Additional information regarding income taxes is included in
Note 11 (Federal Income Taxes) to the consolidated
financial statements.
(q) Treasury
Stock
Treasury stock is accounted for using the cost method in which
reacquired shares reduce outstanding common stock and capital
surplus.
(r) Per
Share Data
Basic earnings per share is computed by dividing net income less
preferred stock dividends by the weighted average number of
common shares outstanding during the period. Diluted earnings
per share is computed by dividing net income plus interest on
convertible bonds by the weighted average number of common
shares plus common stock
57
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
equivalents computed using the Treasury Share method. All
earnings per share disclosures appearing in these financial
statements, related notes and managements discussion and
analysis, are computed assuming dilution unless otherwise
indicated. The Corporations earnings per share
calculations are illustrated in Note 19 (Earnings per
Share) to the consolidated financial statements.
(s) 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 department income is reported
on the accrual basis of accounting.
(t) Share-Based
Compensation
The Corporations stock based compensation plans are
described in detail in Note 13 (Share-Based Compensation)
to the consolidated financial statements. Compensation expense
is recognized at fair value for stock options and unvested
(restricted) stock awards issued to employees. A Black Scholes
model is utilized to estimate the fair value of stock options,
while the market price of the Corporations common shares
at the date of grant is used to estimate the fair value of
unvested (restricted) stock awards. Compensation cost is
recognized over the required service period, generally defined
as the vesting period for stock option awards and as the
unvested period for nonvested (restricted) stock awards. Certain
of the Corporations share-based awards contain terms that
provide for a graded vesting schedule whereby portions of the
award vest in increments over the requisite service period. The
Corporation recognizes compensation expense for awards with
graded vesting schedule on a straight-line basis over the
requisite service period for the entire award.
(u) Pension
and Other Postretirement Plans
The overfunded or underfunded status of defined benefit plans
are recognized as an asset or liability, respectively, in the
statements of financial position. Changes in the funded status
are recognized as a component of comprehensive income in the
year in which the changes occur.
(v) Fair
Value Measurement
Fair value is defined as the price to sell an asset or transfer
a liability in an orderly transaction between market
participants. It represents an exit price at the measurement
date. Market participants are buyers and sellers, who are
independent, knowledgeable, and willing and able to transact in
the principal (or most advantageous) market for the asset or
liability being measured. Current market conditions, including
imbalances between supply and demand, are considered in
determining fair value. The Corporation values its assets and
liabilities in the principal market where it sells the
particular asset or transfers the liability with the greatest
volume and level of activity. In the absence of a principal
market, the valuation is based on the most advantageous market
for the asset or liability (i.e., the market where the asset
could be sold or the liability transferred at a price that
maximizes the amount to be received for the asset or minimizes
the amount to be paid to transfer the liability).
In measuring the fair value of an asset, the Corporation assumes
the highest and best use of the asset by a market participant to
maximize the value of the asset, and does not consider the
intended use of the asset.
When measuring the fair value of a liability, the Corporation
assumes that the nonperformance risk associated with the
liability is the same before and after the transfer.
Nonperformance risk is the risk that an obligation will not be
satisfied and encompasses not only the Corporations own
credit risk (i.e., the risk that the Corporation will fail to
meet its obligation), but also other risks such as settlement
risk. The Corporation considers the effect of its own credit
risk on the fair value for any period in which fair value is
measured.
58
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
There are three acceptable valuation techniques that can be used
to measure fair value: the market approach, the income approach
and the cost approach. Selection of the appropriate technique
for valuing a particular asset or liability takes into
consideration the exit market, the nature of the asset or
liability being valued, and how a market participant would value
the same asset or liability. Ultimately, determination of the
appropriate valuation method requires significant judgment, and
sufficient knowledge and expertise are required to apply the
valuation techniques.
Valuation inputs refer to the assumptions market participants
would use in pricing a given asset or liability using one of the
three valuation techniques. Inputs can be observable or
unobservable. Observable inputs are those assumptions which
market participants would use in pricing the particular asset or
liability. These inputs are based on market data and are
obtained from a source independent of the Corporation.
Unobservable inputs are assumptions based on the
Corporations own information or estimate of assumptions
used by market participants in pricing the asset or liability.
Unobservable inputs are based on the best and most current
information available on the measurement date. All inputs,
whether observable or unobservable, are ranked in accordance
with a prescribed fair value hierarchy which gives the highest
ranking to quoted prices (unadjusted) in active markets for
identical assets or liabilities (Level 1) and the
lowest ranking to unobservable inputs (Level 3). Fair
values for assets or liabilities classified as Level 2 are
based on one or a combination of the following factors:
(i) quoted prices for similar assets; (ii) observable
inputs for the asset or liability, such as interest rates or
yield curves; or (iii) inputs derived principally from or
corroborated by observable market data. The level in the fair
value hierarchy within which the fair value measurement in its
entirety falls is determined based on the lowest level input
that is significant to the fair value measurement in its
entirety. The Corporation considers an input to be significant
if it drives 10% or more of the total fair value of a particular
asset or liability.
Assets and liabilities are considered to be fair valued on a
recurring basis if fair value is measured regularly (i.e.,
daily, weekly, monthly or quarterly). Recurring valuation occurs
at a minimum on the measurement date. Assets and liabilities are
considered to be fair valued on a nonrecurring basis if the fair
value measurement of the instrument does not necessarily result
in a change in the amount recorded on the balance sheet.
Generally, nonrecurring valuation is the result of the
application of other accounting pronouncements which require
assets or liabilities to be assessed for impairment or recorded
at the lower of cost or fair value. The fair value of assets or
liabilities transferred in or out of Level 3 is measured on
the transfer date, with any additional changes in fair value
subsequent to the transfer considered to be realized or
unrealized gains or losses.
Additional information regarding fair value measurements is
provided in Note 16 (Fair Value Measurement) to the
consolidated financial statements.
(w) Reclassifications
Certain reclassifications of prior years amounts have been
made to conform to current year presentation. Such
reclassifications had no effect on net earnings.
(x) Recently
Adopted and Issued Accounting Standards
The following section discusses new accounting policies that
were adopted by the Corporation during 2009 and the expected
impact of accounting standards recently issued but not yet
required to be adopted. To the extent the adoption of new
accounting standards materially affects financial condition,
results of operations, or liquidity, the impacts are discussed
in the applicable Notes to the Consolidated Financial Statements
as referenced below.
FASB ASC Topic 260, Earnings Per
Share. Effective January 1, 2009, the
accounting and reporting standards for earnings per share were
amended. This amendment clarifies that unvested share-based
payment awards that contain nonforfeitable rights to dividends
or dividend equivalents are considered participating securities
and should be included in the calculation of basic earnings per
share using the two-class method prescribed by existing GAAP.
59
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
The adoption of this amendment did not have a material effect on
the Corporations consolidated results of operations or
earnings per share.
FASB ASC Topic 805, Business
Combinations. This accounting guidance requires
all businesses acquired after January 1, 2009 to be
measured at the fair value of the consideration paid. It
requires an entity to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, at their fair values as of
that date. An entity is not permitted to recognize a separate
valuation allowance as of the acquisition date for loans and
other assets acquired in a business combination. Acquisition and
restructuring costs are required to be expensed and are not to
be included in the cost of the acquisition. See Note 2
(Business Combinations) for additional information regarding the
application of this guidance to the Corporations business
combinations.
FASB ASC Topic 810, Consolidation. Effective
January 1, 2009, the accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary were amended. The amendment
clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be
reported as a component of equity in the consolidated financial
statements. Prior to this amendment, such noncontrolling
interests were reported in the consolidated statement of
financial position as liabilities or in the mezzanine section
between liabilities and equity. This amendment also requires
expanded disclosures that identify and distinguish between the
interests of the parents owner and the interests of the
noncontrolling owners of an entity. This amendment did not have
an impact on the Corporations consolidated financial
condition or results of operations.
FASB ASC Topic 815, Derivatives and
Hedging. Effective March 31, 2009, the
accounting and reporting standards for derivatives and hedging
requires the Corporation to present specific disclosures which
provide greater transparency as to the use of derivative
instruments and hedging activity. In accordance with this
guidance, the Corporation discloses in Note 17 (Derivatives
and Hedging Activities) how and why it uses derivative
instruments; how derivative instruments and related hedged items
are accounted for; and how derivative instruments and related
hedged items affect the Corporations consolidated
financial statements.
FASB ASC Topic 320, Investments Debt and Equity
Securities. Effective June 30, 2009, the
Corporation adopted the amendment to the accounting and
reporting standards regarding recognition and disclosure of
other-than-temporary
impairment (OTTI). This amendment requires
recognition of only the credit portion of OTTI in current
earnings for those debt securities where there is no intent to
sell or it is more likely than not the Corporation would not be
required to sell the security prior to expected recovery. The
remaining portion of the OTTI is to be included in other
comprehensive income. The adoption of this amendment did not
have a material impact on the Corporations consolidated
financial condition or results of operations. See Note 3
(Investment Securities) for additional information regarding the
application of this guidance to the Corporations
investment securities.
FASB ASC Topic 820, Fair Value Measurements and
Disclosures. In April 2009, an amendment to the
accounting and reporting standards of fair value measurements
and disclosures was issued. The amendment provides additional
guidance for estimating fair value when the volume and level of
activity for the asset or liability have significantly
decreased. This amendment also provides guidance on identifying
circumstances that indicate a transaction is not orderly. The
Corporation adopted this additional guidance on June 30,
2009 and such adoption did not have a material impact on the
Corporations consolidated financial condition or results
of operations. See Note 16 (Fair Value Measurement) for
additional information on how the Corporation determines fair
value.
FASB ASC Topic 825, Financial
Instruments. Effective June 30, 2009, the
Corporation adopted the amendment to the accounting and
reporting standards for disclosures about the fair value of
financial instruments which requires such disclosures for all
interim and annual reporting periods of publically traded
companies. See Note 16 (Fair Value Measurement) for
disclosures about fair value of the Corporations financial
instruments.
ASC Topic 855, Subsequent Events. Effective
June 30, 2009, the accounting and reporting standards for
subsequent events requires the Corporation to disclose the date
through which it has evaluated events that occur after
60
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
the balance sheet date but before financial statements are
issued or are available to be issued as well as the basis for
that date, that is, whether that date represents the date the
financial statements were issued.
FASB Accounting Standards Update (ASU)
2009-05,
Measuring Liabilities at Fair Value. This ASU
allows for the use of specific valuation techniques to measure
the fair value of a liability, within the scope of ASC 820,
Fair Value Measurements, when a quoted price in an active
market for a similar asset is not available. These specific
valuation techniques should maximize the use of relevant
observable inputs and minimize the use of unobservable inputs.
This guidance was effective for the Corporation as of
October 1, 2009. The adoption of this guidance did not have
a material effect on the Corporations financial condition
and results of operations.
FASB ASC Topic 715, Compensation Retirement
Benefits. In December 2008, an amendment to the
accounting and reporting standards of postretirement benefit
plan assets was issued. Effective December 31, 2009,
expanded disclosures about the plan assets of a defined benefit
pension or other postretirement plan are required to provide
users of financial statements with an understanding of: how
investment allocation decisions are made; the major categories
of plan assets; the inputs and valuation techniques used to
measure the fair value of plan assets; the effect of fair-value
measurements using significant unobservable inputs on changes in
plan assets for the period; and significant concentrations of
risk within plan assets. These expanded disclosures are made in
Note 12 (Benefit Plans) to the consolidated financial
statements.
In June 2009, the FASB issued Statement of Financial Accounting
Standard (SFAS) 166, Accounting for Transfers of
Financial Assets An Amendment of FASB Statement
No. 140 (SFAS 166). (The FASB has yet to
incorporate SFAS 166 in the ASC.) SFAS 166 removes the
concept of a qualifying special-purpose entity from existing
GAAP and removes the exception from applying the accounting and
reporting standards within ASC 810, Consolidation, to
qualifying special purpose entities. SFAS 166 also
establishes conditions for accounting and reporting of a
transfer of a portion of a financial asset, modifies the asset
sale/derecognition criteria, and changes how retained interests
are initially measured. SFAS 166 is expected to provide
greater transparency about transfers of financial assets and a
transferors continuing involvement, if any, with the
transferred assets. This guidance will be effective for the
Corporation beginning January 1, 2010. The Corporation does
not expect its adoption to have a material effect on the
Corporations financial condition and results of operations.
In June 2009, the FASB issued SFAS 167, Amendments to FASB
Interpretation No. 46(R) (SFAS 167). (The
FASB has yet to incorporate SFAS 167 in the ASC.) The new
guidance removes the scope exception for qualifying
special-purpose entities, contains new criteria for determining
the primary beneficiary of a variable interest entity and
increases the frequency of required reassessments to determine
whether an entity is the primary beneficiary of a variable
interest entity. Enhanced disclosures would also be required.
This guidance will be effective for the Corporation beginning
January 1, 2010. The Corporation does not expect its
adoption to have a material effect on the Corporations
financial condition and results of operations.
FASB ASU
2010-06,
Improving Disclosures about Fair Value
Measurements. ASU
2010-06 was
issued on January 21, 2010 and amends ASC 820 to require
additional disclosures regarding fair value measurements.
Specifically, the ASU requires disclosure of the amounts of
significant transfers between Level 1 and Level 2 of
the fair value hierarchy and the reasons for these transfers;
the reasons for any transfers in or out of Level 3; and
information in the reconciliation of recurring Level 3
measurements about purchases, sales, issuances and settlements
on a gross basis. In addition to these new disclosure
requirements, the ASU also amends ASC 820 to clarify certain
existing disclosure requirements. For example, the ASU clarifies
that reporting entities are required to provide fair value
measurement disclosures for each class of assets and
liabilities. Previously separate fair value disclosures were
required for each major category of assets and liabilities. ASU
2010-06 also
clarifies the requirement to disclose information about both the
valuation techniques and inputs used in estimating Level 2
and Level 3 fair value measurements. Except for the
requirement to disclose information about purchases, sales,
issuances, and settlements in the reconciliation of recurring
Level 3 measurements on a gross basis, these disclosures
are effective for the quarter
61
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
ended March 31, 2010. The requirement to separately
disclose purchases, sales, issuances, and settlements of
recurring Level 3 measurements becomes effective for the
Corporation for the quarter ended March 31, 2011.
On December 16, 2009, FirstMerit Bank, N.A., a wholly-owned
subsidiary of the Corporation, acquired $102.0 million in
outstanding principal of asset based lending loans (ABL
Loans), as well as the staff to service and build new
business, from First Bank Business Capital, Inc.,
(FBBC) for $93.2 million in cash. FBBC is a
wholly owned subsidiary of First Bank, a Missouri state
chartered bank. This acquisition expands the Corporations
market presence and asset based lending business into the
Midwest.
The purchase was accounted for under the acquisition method in
accordance with ASC 805, Business Combinations.
Accordingly, the ABL Loans and non-compete agreement acquired
were recorded at their fair values, $92.7 million and
$.10 million, respectively, on the date of acquisition.
Fair values were determined based on the requirements of ASC
820, Fair Value Measurements. The determination of these
fair values required Management to make estimates about discount
rates, future expected cash flows, market conditions and other
future events that are highly subjective in nature and subject
to change for up to one year after the closing date of the
acquisition as additional information relative to closing date
fair values becomes available.
All ABL Loans acquired were performing as of the acquisition
date and as of December 31, 2009. The difference between
the fair value of the ABL Loans acquired and the outstanding
principal balance of these loans at the date of acquisition was
$9.3 million and will be amortized into interest income
over their estimated useful life in accordance with ASC Topic
310, Receivables.
Under ASC 805, goodwill is recorded equal to the amount by which
the consideration paid and the fair value of the liabilities
assumed exceeds the fair value of the assets purchased. As such,
the Corporation recorded goodwill of $.4 million relating
to the ABL Loans and non-compete agreement it acquired. The
goodwill, which is not amortized for book purposes, was assigned
to the Commercial reporting unit and is deductible for tax
purposes. The goodwill will be amortized over 15 years for
tax purposes using the straight line method.
On February 19, 2010, the Bank completed the purchase of
certain assets and the assumption of certain liabilities with
respect to 24 First Bank branches located in the greater
Chicago, Illinois area. Additional information is provided in
Note 21, Subsequent Events.
62
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
The following tables provide the amortized cost and fair value
for the major categories of
held-to-maturity
and
available-for-sale
securities.
Held-to-maturity
securities are carried at amortized cost, which reflects
historical cost, adjusted for amortization of premiums and
accretion of discounts.
Available-for-sale
securities are carried at fair value with net unrealized gains
or losses reported on an after-tax basis as a component of other
comprehensive income in shareholders equity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
32,029
|
|
|
$
|
|
|
|
$
|
(132
|
)
|
|
$
|
31,897
|
|
U. S States and political subdivisions
|
|
|
289,529
|
|
|
|
4,984
|
|
|
|
(394
|
)
|
|
|
294,119
|
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
1,557,754
|
|
|
|
55,325
|
|
|
|
(1,852
|
)
|
|
|
1,611,227
|
|
Residential collateralized mortgage securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
566,151
|
|
|
|
16,394
|
|
|
|
(238
|
)
|
|
|
582,307
|
|
Non-agency
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
Corporate debt securities
|
|
|
61,385
|
|
|
|
|
|
|
|
(18,957
|
)
|
|
|
42,428
|
|
Other debt securities
|
|
|
679
|
|
|
|
|
|
|
|
|
|
|
|
679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
2,507,549
|
|
|
|
76,703
|
|
|
|
(21,573
|
)
|
|
|
2,562,679
|
|
Marketable equity securities
|
|
|
3,264
|
|
|
|
|
|
|
|
|
|
|
|
3,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
2,510,813
|
|
|
$
|
76,703
|
|
|
$
|
(21,573
|
)
|
|
$
|
2,565,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S States and political subdivisions
|
|
$
|
50,686
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
50,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held to maturity
|
|
$
|
50,686
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
$50,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
20,000
|
|
|
$
|
38
|
|
|
$
|
|
|
|
$
|
20,038
|
|
U.S States and political subdivisions
|
|
|
287,329
|
|
|
|
2,726
|
|
|
|
(3,580
|
)
|
|
|
286,475
|
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
1,681,378
|
|
|
|
29,643
|
|
|
|
(2,795
|
)
|
|
|
1,708,226
|
|
Residential collateralized mortgage securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
539,382
|
|
|
|
7,071
|
|
|
|
(1,159
|
)
|
|
|
545,294
|
|
Non-agency
|
|
|
20,450
|
|
|
|
|
|
|
|
(787
|
)
|
|
|
19,663
|
|
Corporate debt securities
|
|
|
61,335
|
|
|
|
|
|
|
|
(29,979
|
)
|
|
|
31,356
|
|
Other debt securities
|
|
|
730
|
|
|
|
|
|
|
|
|
|
|
|
730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
2,610,604
|
|
|
|
39,478
|
|
|
|
(38,300
|
)
|
|
|
2,611,782
|
|
Marketable equity securities
|
|
|
2,793
|
|
|
|
|
|
|
|
|
|
|
|
2,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
2,613,397
|
|
|
$
|
39,478
|
|
|
$
|
(38,300
|
)
|
|
$
|
2,614,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S States and political subdivisions
|
|
$
|
30,266
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
30,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held to maturity
|
|
$
|
30,266
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
30,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments on the balance sheet include Federal Reserve
Bank (FRB) and Federal Home Loan Bank
(FHLB) stock of $9.1 million,
$119.1 million and $8.9 million, $119.1 million
at December 31, 2009 and 2008, respectively. FHLB and FRB
stock are carried at cost and evaluated for impairment based on
the ultimate recoverability of the par value. Cash and stock
dividends received on the stock are reported as interest income.
The carrying value of investment securities pledged to secure
trust and public deposits, other obligations and for purposes
required or permitted by law amounted to $2.0 billion and
$2.2 billion at December 31, 2009 and 2008,
respectively.
64
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
Realized
Gains and Losses
The following table presents the proceeds from sales of
available-for-sale
securities and the gross realized gains and losses on the sales
of those securities that have been included in earnings as a
result of those sales. Gains or losses on the sales of
available-for-sale
securities are recognized upon sale and are determined using the
specific identification method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Proceeds
|
|
$
|
286,946
|
|
|
$
|
171,392
|
|
|
$
|
261,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains
|
|
$
|
6,037
|
|
|
$
|
2,354
|
|
|
$
|
4,923
|
|
Realized losses
|
|
|
|
|
|
|
(228
|
)
|
|
|
(3,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net securities gains
|
|
$
|
6,037
|
|
|
$
|
2,126
|
|
|
$
|
1,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Unrealized Losses and Fair Value
The following table presents the gross unrealized losses and
fair value of securities in the securities
available-for-sale
portfolio by length of time that individual securities in each
category had been in a continuous loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
impaired
|
|
|
|
|
|
Unrealized
|
|
|
impaired
|
|
|
|
|
|
Unrealized
|
|
Securities available for sale
|
|
Fair Value
|
|
|
Losses
|
|
|
securities
|
|
|
Fair Value
|
|
|
Losses
|
|
|
securities
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S government agencies
|
|
$
|
31,897
|
|
|
$
|
(132
|
)
|
|
|
3
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
31,897
|
|
|
$
|
(132
|
)
|
U.S States and political subdivisions
|
|
|
39,059
|
|
|
|
(394
|
)
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,059
|
|
|
|
(394
|
)
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
216,014
|
|
|
|
(1,849
|
)
|
|
|
15
|
|
|
|
271
|
|
|
|
(3
|
)
|
|
|
2
|
|
|
|
216,285
|
|
|
|
(1,852
|
)
|
Residential collateralized mortgage securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
68,513
|
|
|
|
(238
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,513
|
|
|
|
(238
|
)
|
Non-agency
|
|
|
5
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
Corporate debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,428
|
|
|
|
(18,957
|
)
|
|
|
8
|
|
|
|
42,428
|
|
|
|
(18,957
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
355,488
|
|
|
$
|
(2,613
|
)
|
|
|
90
|
|
|
$
|
42,699
|
|
|
$
|
(18,960
|
)
|
|
|
10
|
|
|
$
|
398,187
|
|
|
$
|
(21,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
impaired
|
|
|
|
|
|
Unrealized
|
|
|
impaired
|
|
|
|
|
|
Unrealized
|
|
Securities available for sale
|
|
Fair Value
|
|
|
Losses
|
|
|
securities
|
|
|
Fair Value
|
|
|
Losses
|
|
|
securities
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S States and political subdivisions
|
|
$
|
121,040
|
|
|
$
|
(3,333
|
)
|
|
|
197
|
|
|
$
|
6,188
|
|
|
$
|
(247
|
)
|
|
|
8
|
|
|
$
|
127,228
|
|
|
$
|
(3,580
|
)
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
246,741
|
|
|
|
(2,668
|
)
|
|
|
29
|
|
|
|
15,942
|
|
|
|
(127
|
)
|
|
|
4
|
|
|
|
262,683
|
|
|
|
(2,795
|
)
|
Residential collateralized mortgage securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
68,630
|
|
|
|
(483
|
)
|
|
|
7
|
|
|
|
28,221
|
|
|
|
(676
|
)
|
|
|
3
|
|
|
|
96,851
|
|
|
|
(1,159
|
)
|
Non-agency
|
|
|
19,638
|
|
|
|
(787
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,638
|
|
|
|
(787
|
)
|
Corporate debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,356
|
|
|
|
(29,979
|
)
|
|
|
8
|
|
|
|
31,356
|
|
|
|
(29,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
456,049
|
|
|
|
(7,271
|
)
|
|
|
234
|
|
|
$
|
81,707
|
|
|
$
|
(31,029
|
)
|
|
|
23
|
|
|
$
|
537,756
|
|
|
$
|
(38,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At least quarterly the Corporation conducts a comprehensive
security-level impairment assessment on all securities in an
unrealized loss position to determine if OTTI exists. An
unrealized loss exists when the current fair value of an
individual security is less than its amortized cost basis. Under
the current OTTI accounting model for debt securities, which was
amended by the FASB and adopted by the Corporation in the second
quarter of 2009, an OTTI loss must be recognized for a debt
security in an unrealized loss position if the Corporation
intends to sell the security or it is more likely than not that
the Corporation will be required to sell the security before
recovery of its amortized cost basis. In this situation, the
amount of loss recognized in income is equal to the difference
between the fair value and the amortized cost basis of the
security. Even if the Corporation does not expect to sell the
security, the Corporation must evaluate the expected cash flows
to be received to determine if a credit loss has occurred. In
the event of a credit loss, only the amount of impairment
associated with the credit loss is recognized in income. The
portion of the unrealized loss relating to other factors, such
as liquidity conditions in the market or changes in market
interest rates, is recorded in accumulated other comprehensive
income. Equity securities are also evaluated to determine
whether the unrealized loss is expected to be recoverable based
on whether evidence exists to support a realizable value equal
to or greater than the amortized cost basis. If it is probable
that the Corporation will not recover the amortized cost basis,
taking into consideration the estimated recovery period and its
ability to hold the equity security until recovery, OTTI is
recognized.
The security-level assessment is performed on each security,
regardless of the classification of the security as available
for sale or held to maturity. The assessments are based on the
nature of the securities, the financial condition of the issuer,
the extent and duration of the securities, the extent and
duration of the loss and the intent and whether management
intends to sell or it is more likely than not that it will be
required to sell a security before recovery of its amortized
cost basis, which may be maturity. For those securities for
which the assessment shows the Corporation will recover the
entire cost basis, management does not intend to sell these
securities and it is not more likely than not that the
Corporation will be required to sell them before the anticipated
recovery of the amortized cost basis, the gross unrealized
losses are recognized in other comprehensive income, net of tax.
As of December 31, 2009, gross unrealized losses are
concentrated within corporate debt securities which is composed
of eight, single issuer, trust preferred securities with stated
maturities. Such investments are less than 2% of the fair value
of the entire investment portfolio. None of the corporate
issuers have deferred paying dividends on their issued trust
preferred shares in which the Corporation is invested. The fair
values of these investments have been impacted by the recent
market conditions which have caused risk premiums to increase
markedly, resulting in the significant decline in the fair value
of the trust preferred securities. Management believes the
Corporation will fully recover the cost of these securities and
it does not intend to sell these securities and it is not more
likely than not that it will be required to sell them before the
anticipated recovery of the remaining amortized cost basis,
which may be
66
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
maturity. As a result, Management concluded that these
securities were not
other-than-temporarily
impaired at December 31, 2009 and has recognized the total
amount of the impairment in other comprehensive income, net of
tax.
Contractual
Maturity of Debt Securities
The following table shows the remaining contractual maturities
and contractual yields of debt securities
held-to-maturity
and
available-for-sale
as of December 31, 2009. Estimated lives on mortgage-backed
securities may differ from contractual maturities as issuers may
have the right to call or prepay obligations with or without
call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
Residential
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgage
|
|
|
collateralized
|
|
|
collateralized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
backed
|
|
|
mortgage
|
|
|
mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities -
|
|
|
obligations -
|
|
|
obligations -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
U.S. States
|
|
|
U.S.
|
|
|
U.S.
|
|
|
non U.S.
|
|
|
Corporate
|
|
|
Other
|
|
|
|
|
|
Weighted
|
|
|
|
Government
|
|
|
and political
|
|
|
Government
|
|
|
Government
|
|
|
Government
|
|
|
debt
|
|
|
debt
|
|
|
|
|
|
Average
|
|
|
|
agencies
|
|
|
subdivisions
|
|
|
agencies
|
|
|
agencies
|
|
|
agencies
|
|
|
securities
|
|
|
securities
|
|
|
Total
|
|
|
Yield
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
|
|
|
$
|
7,162
|
|
|
$
|
6,459
|
|
|
$
|
35,243
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
51
|
|
|
$
|
48,915
|
|
|
|
3.75
|
%
|
Over one year through five years
|
|
|
19,953
|
|
|
|
14,604
|
|
|
|
1,558,883
|
|
|
|
534,042
|
|
|
|
22
|
|
|
|
|
|
|
|
203
|
|
|
|
2,127,707
|
|
|
|
4.23
|
%
|
Over five years through ten years
|
|
|
|
|
|
|
47,991
|
|
|
|
45,885
|
|
|
|
13,022
|
|
|
|
|
|
|
|
|
|
|
|
253
|
|
|
|
107,151
|
|
|
|
5.65
|
%
|
Over ten years
|
|
|
11,944
|
|
|
|
224,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,428
|
|
|
|
172
|
|
|
|
278,906
|
|
|
|
4.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
$
|
31,897
|
|
|
$
|
294,119
|
|
|
$
|
1,611,227
|
|
|
$
|
582,307
|
|
|
$
|
22
|
|
|
$
|
42,428
|
|
|
$
|
679
|
|
|
$
|
2,562,679
|
|
|
|
4.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
$
|
32,029
|
|
|
$
|
289,529
|
|
|
$
|
1,557,754
|
|
|
$
|
566,151
|
|
|
$
|
22
|
|
|
$
|
61,385
|
|
|
$
|
679
|
|
|
$
|
2,507,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Yield
|
|
|
1.44
|
%
|
|
|
6.06
|
%
|
|
|
4.40
|
%
|
|
|
4.05
|
%
|
|
|
4.12
|
%
|
|
|
0.99
|
%
|
|
|
0.00
|
%
|
|
|
4.40
|
%
|
|
|
|
|
Weighted-Average Maturity
|
|
|
6.2
|
|
|
|
10.8
|
|
|
|
3.3
|
|
|
|
2.4
|
|
|
|
4.2
|
|
|
|
17.8
|
|
|
|
13.4
|
|
|
|
4.4
|
|
|
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
|
|
|
$
|
19,520
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
19,520
|
|
|
|
6.31
|
%
|
Over one year through five years
|
|
|
|
|
|
|
3,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,539
|
|
|
|
6.31
|
%
|
Over five years through ten years
|
|
|
|
|
|
|
9,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,619
|
|
|
|
6.31
|
%
|
Over ten years
|
|
|
|
|
|
|
18,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,008
|
|
|
|
7.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
$
|
|
|
|
$
|
50,686
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
50,686
|
|
|
|
6.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
$
|
|
|
|
$
|
50,686
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
50,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Yield
|
|
|
|
|
|
|
6.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.74
|
%
|
|
|
|
|
Weighted-Average Maturity
|
|
|
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.6
|
|
|
|
|
|
67
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
|
|
4.
|
Loans and
Allowance for Loan Losses
|
Loans outstanding by categories are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Commercial loans
|
|
$
|
4,066,522
|
|
|
$
|
4,352,730
|
|
|
$
|
3,906,448
|
|
Mortgage loans
|
|
|
463,416
|
|
|
|
547,125
|
|
|
|
577,219
|
|
Installment loans
|
|
|
1,425,373
|
|
|
|
1,574,587
|
|
|
|
1,598,832
|
|
Home equity loans
|
|
|
753,112
|
|
|
|
733,832
|
|
|
|
691,922
|
|
Credit card loans
|
|
|
153,525
|
|
|
|
149,745
|
|
|
|
153,732
|
|
Leases
|
|
|
61,541
|
|
|
|
67,594
|
|
|
|
73,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,923,489
|
|
|
$
|
7,425,613
|
|
|
$
|
7,001,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within the commercial loan category, commercial real estate
construction loans totaled $274.8 million,
$304.9 million and $514.1 million at December 31,
2009, 2008 and 2007, respectively. The allowance for loan losses
associated with these loans was approximately
$12.7 million, $16.0 million and $8.0 million at
December 31, 2009, 2008 and 2007, respectively. There are
no other significant concentrations within commercial loans.
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, 2009, 2008 and
2007 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Aggregate amount at beginning of year
|
|
$
|
22,005
|
|
|
$
|
18,833
|
|
|
$
|
12,871
|
|
Additions (deductions):
|
|
|
|
|
|
|
|
|
|
|
|
|
New loans
|
|
|
3,504
|
|
|
|
6,839
|
|
|
|
13,316
|
|
Repayments
|
|
|
(4,808
|
)
|
|
|
(3,639
|
)
|
|
|
(6,960
|
)
|
Changes in directors and their affiliations
|
|
|
(575
|
)
|
|
|
(28
|
)
|
|
|
(394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amount at end of year
|
|
$
|
20,126
|
|
|
$
|
22,005
|
|
|
$
|
18,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporations allowance for loan losses is the sum of
various components recognized and measured pursuant to ASC 450,
Contingencies and ASC 310, Receivables.
The ASC 450 components include the following: a component based
on historical loss experience by credit-risk grade (for
commercial loan pools) and payment status (for mortgage and
consumer loan pools). The Corporations historical loss
component is the most significant of the allowance for loan
losses components, and all other allowance for loan losses
components are based on loss attributes that Management believes
exist within the total portfolio that are not captured in the
historical loss experience component.
ASC 450 components are based on similar risk characteristics
supported by observable data. The historical loss experience
component of the allowance for loan losses represents the
results of migration analysis of historical charge-offs for
portfolios of loans (including groups of commercial loans within
each credit-risk grade and groups of consumer loans by payment
status). For measuring loss exposure in a pool of loans, the
historical charge-off or migration experience is utilized to
estimate expected losses to be realized from the pool of loans.
68
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
The ASC 310 component of the allowance for loan losses is based
on individually impaired loans for the following types of loans
as determined by the Corporations credit-risk grading
process.
|
|
|
|
|
All nonperforming substandard loans of $300 thousand or more.
|
|
|
|
All doubtful loans of $100 thousand or more.
|
Once it is determined that it is probable an individual loan is
impaired under ASC 310, the Corporation measures the amount of
impairment for the loan using the expected future cash flows of
the loan discounted at the loans effective interest rate
or based upon the fair value of the underlying collateral.
The credit-risk grading process for commercial loans is
summarized as follows:
Pass Loans (Grades 1, 2, 3, 4) are not
considered a greater than normal credit risk. Generally, the
borrowers have the apparent ability to satisfy obligations to
the bank, and the Corporation anticipates insignificant
uncollectible amounts based on its individual loan review.
Special-Mention Loans (Grade 5) are commercial
loans that have identified potential weaknesses that deserve
Managements close attention. If left uncorrected, these
potential weaknesses may result in noticeable deterioration of
the repayment prospects for the asset or in the
institutions credit position.
Substandard Loans (Grade 6) are inadequately
protected by the current financial condition and paying capacity
of the obligor or by any collateral pledged. Loans so classified
have a well-defined weakness or weaknesses that may jeopardize
the liquidation of the debt pursuant to the contractual
principal and interest terms. Such loans are characterized by
the distinct possibility that the Corporation may sustain some
loss if the deficiencies are not corrected.
Doubtful Loans (Grade 7) have all the
weaknesses inherent in those classified as substandard, with the
added characteristic that existing facts, conditions, and values
make collection or liquidation in full highly improbable. Such
loans are currently managed separately to determine the highest
recovery alternatives.
As required by current accounting guidance, the acquired ABL
loans from First Bank, Inc. were recorded at fair value with no
carryover of the related allowances. The determination of the
fair value of the ABL loans resulted in a write-down in the
value of the loans, which was assigned to an accretable balance
which will be recognized as interest income over the remaining
term of the loan. The ratios of our allowance for loan and
credit losses do not include these loans.
The following table summarizes the investment in impaired loans
and the related allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Impaired loans with allowance
|
|
$
|
44,961
|
|
|
$
|
22,434
|
|
|
$
|
7,885
|
|
Related allowance
|
|
|
10,527
|
|
|
|
3,973
|
|
|
|
2,774
|
|
Impaired loans without allowance
|
|
|
22,684
|
|
|
|
31,224
|
|
|
|
8,668
|
|
Total impaired loans
|
|
|
67,825
|
|
|
|
53,658
|
|
|
|
16,553
|
|
Average impaired loans
|
|
|
66,289
|
|
|
|
36,631
|
|
|
|
19,425
|
|
Interest income recognized during the period
|
|
|
52
|
|
|
|
37
|
|
|
|
71
|
|
At December 31, 2009, 2008 and 2007, the investment in
nonaccrual loans was $91.7 million, $52.2 million and
$31.4 million, respectively. At December 31, 2009,
2008 and 2007, loans past due 90 or more and accruing interest
was $35.0 million, $23.9 million and
$11.7 million, respectively.
During the first quarter of 2007, $73.7 million of
commercial loans and $7.1 million of other real estate were
sold. The loans were written down to their fair market value of
$50.6 million and reclassified as loans held for sale in
the
69
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
fourth quarter of 2006. The other real estate was also written
down to fair market value of $5.0 million in the fourth
quarter of 2006. The loan sale yielded a gain of
$4.1 million which was recorded in loan sales and servicing
during the first quarter of 2007. The sale of other real estate
resulted in a $0.5 million loss and was recorded in other
operating loss during the first quarter of 2007.
Transactions in the allowance for loan losses are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Allowance for Loan Losses
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Balance at January 1,
|
|
$
|
103,757
|
|
|
$
|
94,205
|
|
|
$
|
91,342
|
|
Additions (deductions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
98,433
|
|
|
|
58,603
|
|
|
|
30,835
|
|
Loans charged off
|
|
|
(99,713
|
)
|
|
|
(62,388
|
)
|
|
|
(44,148
|
)
|
Recoveries on loans previously charged off
|
|
|
12,615
|
|
|
|
13,337
|
|
|
|
16,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
|
|
$
|
115,092
|
|
|
$
|
103,757
|
|
|
$
|
94,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reserve for unfunded lending commitments is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Reserve for Unfunded Lending Commitments
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Balance at January 1,
|
|
$
|
6,588
|
|
|
$
|
7,394
|
|
|
$
|
6,294
|
|
Provision for credit losses
|
|
|
(837
|
)
|
|
|
(806
|
)
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
|
|
$
|
5,751
|
|
|
$
|
6,588
|
|
|
$
|
7,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation has commitments of $4.8 million and
$5.0 million as of December 31, 2009 and 2008,
respectively, to lend additional funds to borrowers with
nonperforming loans.
|
|
5.
|
Goodwill
and Other Intangible Assets
|
Goodwill
Goodwill is not amortized, but is subject to impairment tests on
at least an annual basis. Consistent with prior years, the
Corporation has elected to conduct its annual impairment testing
as of November 30, 2009. Based on this analysis, the fair
value of the Corporations reporting units exceeded their
carrying amounts and, therefore, no impairment loss was
recorded. However, market valuations of financial services
companies remain depressed relative to book values due to
continuing uncertainty surrounding the timing of economic
recovery as well as the impact of the government programs. As a
result, management will continue to evaluate goodwill for
impairment on a quarterly basis depending upon current market
conditions, results of operations, and other factors. It is
possible that a future conclusion could be reached that all or a
portion of the Corporations goodwill may be impaired, in
which case a non-cash charge for the amount of such impairment
would be recorded in earnings. Such a charge, if any, would have
no impact on tangible capital and would not affect the
Corporations well-capitalized designation.
On December 16, 2009 the Corporation acquired
$102.0 million in outstanding principal of ABL loans from
First Bank Business Capital, Inc. The acquisition was accounted
for as a business combination as defined by ASC 805,
Business Combinations. This acquisition is more fully
described in Note 2 (Business Combinations). As a result of
this acquisition $0.4 million of goodwill and
$0.1 million of intangible non- compete asset were recorded
in the commercial line of business.
70
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
Goodwill by line of business as of December 31, 2009 and
2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Retail
|
|
Wealth
|
|
Total
|
|
Balance at December 31, 2008
|
|
$
|
73,474
|
|
|
$
|
59,038
|
|
|
$
|
6,733
|
|
|
$
|
139,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
73,827
|
|
|
$
|
59,038
|
|
|
$
|
6,733
|
|
|
$
|
139,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Intangible Assets
The Corporation has other intangible assets that are amortized,
consisting of core deposit intangibles, and non-compete
agreements related to the ABL loan acquisition. For core deposit
intangibles and non-compete agreements, changes in the gross
carrying amount, accumulated amortization, and net book value
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
|
|
Accumulated
|
|
Non-compete
|
|
Net Carrying
|
|
|
Amount
|
|
Amorization
|
|
Agreement
|
|
Amount
|
|
December 31, 2008
|
|
$
|
10,137
|
|
|
$
|
(8,734
|
)
|
|
$
|
|
|
|
$
|
1,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
$
|
10,137
|
|
|
$
|
(9,081
|
)
|
|
$
|
102
|
|
|
$
|
1,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets was $.35 million
for 2009, and $0.57 in 2008 and $0.89 in 2007. Core deposit
intangible assets are being amortized over a fifteen year life.
Non-compete agreement intangible assets are being amortized over
a four year life.
The following table shows the estimated future amortization
expense for core deposit and non-compete agreements intangible
assets at December 31, 2009.
For the years ended:
|
|
|
|
|
|
December 31, 2010
|
|
$
|
373
|
|
December 31, 2011
|
|
|
373
|
|
December 31, 2012
|
|
|
373
|
|
December 31, 2013
|
|
|
39
|
|
|
|
|
|
|
|
|
$
|
1,158
|
|
|
|
|
|
|
|
|
6.
|
Mortgage
Servicing Rights and Mortgage Servicing Activity
|
The Corporation serviced for third parties approximately
$2.0 billion of residential mortgage loans at
December 31, 2009 and December 31, 2008. Loan
servicing fees, not including valuation changes included in loan
sales and servicing income, were $5.0 million in each of
the years ended December 31, 2009, 2008, and 2007.
Servicing rights are presented within other assets on the
balance sheet. The retained servicing rights are initially
valued at fair value. Since mortgage servicing rights do not
trade in an active market with readily observable prices, the
Corporation relies primarily on a discounted cash flow analysis
model to estimate the fair value of its mortgage servicing
rights. Additional information can be found in Note 16
(Fair Value Measurement). Mortgage servicing rights are
subsequently measured using the amortization method.
Accordingly, the mortgage servicing rights are amortized over
the period of, and in proportion to, the estimated net servicing
income and is recorded in loan sales and servicing income.
71
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
Changes in the carrying amount of mortgage servicing rights are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Balance at beginning of period
|
|
$
|
18,778
|
|
|
$
|
19,354
|
|
|
$
|
19,575
|
|
Additions
|
|
|
4,862
|
|
|
|
3,047
|
|
|
|
2,521
|
|
Amortization
|
|
|
(3,641
|
)
|
|
|
(2,838
|
)
|
|
|
(2,742
|
)
|
(Additions)/Recoveries to valuation allowance, net
|
|
|
785
|
|
|
|
(785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
20,784
|
|
|
$
|
18,778
|
|
|
$
|
19,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at end of period
|
|
$
|
22,241
|
|
|
$
|
18,803
|
|
|
$
|
22,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On a quarterly basis, the Corporation assesses its capitalized
servicing rights for impairment based on their current fair
value. For purposes of the impairment, the servicing rights are
disaggregated based on loan type and interest rate which are the
predominant risk characteristics of the underlying loans. A
valuation allowance is established through a charge to earnings
to the extent the amortized cost of the mortgage servicing
rights exceeds the estimated fair value by stratification. If it
is later determined that all or a portion of the temporary
impairment no longer exists for the stratification, the
valuation is reduced through a recovery to earnings. No
valuation allowances were required as of December 31, 2009
and 2007. As of December 31, 2008, a valuation allowance of
$0.8 million had been established. No permanent impairment
losses were written off against the allowance during the years
ended December 31, 2009, 2008 and 2007.
Key economic assumptions and the sensitivity of the current fair
value of the mortgage servicing rights related to immediate 10%
and 25% adverse changes in those assumptions at
December 31, 2009 are presented in the following table
below. These sensitivities are hypothetical and should be used
with caution. As the figures indicate, changes in the fair value
based on 10% variation in the prepayment speed assumption
generally cannot be extrapolated because the relationship of the
change in the prepayment speed assumption to the change in fair
value may not be linear. Also, in the below table, the effect of
a variation in the discount rate assumption on the fair value of
the mortgage servicing rights is calculated independently
without changing any other assumption. In reality, changes in
one factor may result in changes in another (for example,
changes in prepayment speed estimates could result in changes in
the discount rates), which might magnify or counteract the
sensitivities.
|
|
|
|
|
Fair value of mortgage servicing rights
|
|
$
|
22,241
|
|
Expected weighted-average life (in months)
|
|
|
103.9
|
|
Prepayment speed assumption (annual CPR)
|
|
|
11.1
|
%
|
Decrease in fair value from 10% adverse change
|
|
$
|
862
|
|
Decrease in fair value from 25% adverse change
|
|
|
2,068
|
|
Discount rate assumption
|
|
|
9.7
|
%
|
Decrease in fair value from 100 basis point adverse change
|
|
$
|
767
|
|
Decrease in fair value from 200 basis point adverse change
|
|
|
1,479
|
|
72
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
The following table shows the estimated future amortization for
mortgage servicing rights at December 31, 2009:
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2010
|
|
$
|
2,894
|
|
2011
|
|
|
2,665
|
|
2012
|
|
|
2,315
|
|
2013
|
|
|
2,003
|
|
2014
|
|
|
1,724
|
|
more than 5 years
|
|
|
9,183
|
|
|
|
|
|
|
|
|
$
|
20,784
|
|
|
|
|
|
|
|
|
7.
|
Restrictions
on Cash and Dividends
|
The average balance on deposit with the FRB or other governing
bodies to satisfy reserve requirements amounted to
$2.3 million and $3.0 million during 2009 and 2008,
respectively. The level of this balance is based upon amounts
and types of customers deposits held by the banking
subsidiary of the Corporation. In addition, deposits are
maintained with other banks at levels determined by Management
based upon the volumes of activity and prevailing interest rates
to compensate for check-clearing, safekeeping, collection and
other bank services performed by these banks. At
December 31, 2009, cash and due from banks included
$3.0 million deposited with the FRB 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 2009
were restricted, by the regulatory agencies, principally to the
total of 2009 net income plus undistributed net income of
the previous two calendar years. Regulatory approval must be
obtained for the payment of dividends of any greater amount.
|
|
8.
|
Premises
and Equipment
|
The components of premises and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
Estimated
|
|
|
|
2009
|
|
|
2008
|
|
|
useful lives
|
|
|
Land
|
|
$
|
23,114
|
|
|
$
|
23,114
|
|
|
|
|
|
Buildings
|
|
|
146,772
|
|
|
|
143,632
|
|
|
|
10-35 yrs
|
|
Equipment
|
|
|
103,405
|
|
|
|
106,296
|
|
|
|
3-15 yrs
|
|
Leasehold improvements
|
|
|
19,893
|
|
|
|
20,529
|
|
|
|
1-20 yrs
|
|
Software
|
|
|
56,242
|
|
|
|
53,732
|
|
|
|
3-7 yrs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
349,426
|
|
|
|
347,303
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
224,221
|
|
|
|
214,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
125,205
|
|
|
$
|
133,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in other expenses on the face of the
consolidated financial statements for depreciation and
amortization aggregated $19.5 million, $18.7 million
and $20.0 million for the years ended 2009, 2008 and 2007,
respectively.
73
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
|
|
9.
|
Certificates
and Other Time Deposits
|
The aggregate amounts of certificates and other time deposits of
$100 thousand and over at December 31, 2009 and 2008 were
$362.3 million and $801.21 million, respectively.
Interest expense on these certificates and time deposits
amounted to $13.3 million, $43.8 million and
$43.8 million in 2009, 2008, and 2007, respectively.
|
|
10.
|
Federal
Funds Purchased and Securities Sold under Agreements to
Repurchase and Wholesale Borrowings
|
The following table presents the components of federal funds
purchased and securities sold under agreements to repurchase and
wholesale borrowings:
|
|
|
|
|
|
|
|
|
|
|
As of December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
Federal funds purchased and securities sold under agreements
to repurchase
|
|
$
|
996,345
|
|
|
$
|
921,390
|
|
|
|
|
|
|
|
|
|
|
Wholesale Borrowings
|
|
|
|
|
|
|
|
|
Term Auction Facility
|
|
$
|
|
|
|
$
|
150,000
|
|
Bank notes
|
|
|
140,579
|
|
|
|
149,915
|
|
FHLB advances
|
|
|
576,732
|
|
|
|
1,021,392
|
|
Capital securities
|
|
|
22,296
|
|
|
|
22,343
|
|
Other
|
|
|
498
|
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
Total wholesale borrowings
|
|
$
|
740,105
|
|
|
$
|
1,344,195
|
|
|
|
|
|
|
|
|
|
|
Select financial statement information pertaining to the
securities sold under agreements to repurchase and wholesale
borrowings is follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Federal funds purchased and securities sold under agreements
to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance during the year
|
|
$
|
1,013,167
|
|
|
$
|
1,343,441
|
|
|
$
|
1,471,785
|
|
Weighted-average annual interest rate during the year
|
|
|
0.47
|
%
|
|
|
2.37
|
%
|
|
|
4.84
|
%
|
Maximum month-end balance
|
|
$
|
1,350,475
|
|
|
$
|
1,603,335
|
|
|
$
|
1,601,491
|
|
Wholesale borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance during the year
|
|
$
|
952,979
|
|
|
$
|
663,109
|
|
|
$
|
326,460
|
|
Weighted-average annual interest rate during the year
|
|
|
2.87
|
%
|
|
|
4.16
|
%
|
|
|
6.31
|
%
|
Maximum month-end balance
|
|
$
|
1,159,181
|
|
|
$
|
1,344,195
|
|
|
$
|
713,516
|
|
The respective terms of the wholesale borrowings are as follows:
Term Auction Facility. In 2008, the
Corporation entered into a new borrowing arrangement, Term
Auction Facility (TAF), with the Federal Reserve
Bank. The funds are obtained by institutions at a rate
determined through a competitive bidding process. Borrowings are
collateralized with commercial loans held in an account with the
Federal Reserve. There was no outstanding balance as of
December 31, 2009. At December 31, 2008, the TAFs had
interest rates of 0.42% and 0.60% and maturities of eighty-four
days.
Bank Notes. During 2000, the Corporation
issued $150.0 million of subordinated bank notes under a
debt agreement. The notes bear interest at 8.625% and mature on
April 1, 2010. Under the debt agreement, the aggregate
74
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
principal outstanding at any one time may not exceed
$1.0 billion. The notes were offered only to institutional
investors. In 2009, the Corporation reacquired approximately
$9.4 million from certain institutional investors in arms
length transactions. This purchase did not have a material
effect on the Corporations results of operations.
FHLB Advances. The balances of the FHLB
advances outstanding at year-end 2009 included:
$557.3 million with maturities from one to five years and
$19.5 million with maturities over five years. The FHLB
advances have interest rates that range from 0.373% to 7.15%
during 2009. FHLB advances were secured by real estate loans
totaling $3,791.1 million at December 31, 2009 and
$1,404.5 million at December 31, 2008.
Capital Securities. In 1998, FirstMerit
Capital Trust I, formerly Signal Capital Trust I,
issued and sold $50.0 million of 8.67% Capital Securities
to investors in a private placement. In an exchange offer, a
Common Securities Trust exchanged the outstanding Series A
Securities for 8.67% Capital Securities, Series B which are
owned solely by the Corporations wholly-owned subsidiary,
FirstMerit Bank, N.A. Distributions on the Capital Securities
are payable semi-annually, commencing August 15, 1998 at
the annual rate of 8.67% of the liquidation amount of
$1.0 million per security. Generally, the interest payment
schedule of the Debentures is identical to the Capital
Securities schedule. The Capital Securities mature on
February 15, 2028. The Corporation has acquired
approximately $28.6 million of the Series B Capital
Securities in the open market. The activity and balances
resulting from these open market acquisitions have been properly
eliminated when they represent intercompany transactions in the
consolidated financial statements and the related notes.
Lines of Credit. As of December 31, 2009,
the Corporation has two lines of credit with financial
institutions. The terms of each line of credit are described as
follows:
The Corporation had a $15.0 million line of credit with a
financial institution with no outstanding balance as of
December 31, 2009 and 2008. The line carries two interest
rate options: one month LIBOR plus 200 basis points; or the
greater of the prime lending rate of the financial institution
or the Federal Funds Open Rate plus 50 basis points.
The Corporation had a $15.0 million line of credit with a
financial institution with no outstanding balance as of
December 31, 2009 and 2008. The line carries two interest
rate options: one month LIBOR plus 175 basis points; or the
greater of the prime lending rate of the financial institution
and the sum of the Federal Funds Open Rate plus 50 basis
points or the sum of the daily LIBOR Rate plus 100 basis
points.
Contractual
Maturities
The following table illustrates the contractual maturities of
the Corporations federal funds purchased and securities
sold under agreements to repurchase and wholesale borrowings at
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
One to
|
|
|
Three to
|
|
|
Over Five
|
|
|
|
|
|
|
or Less
|
|
|
Three Years
|
|
|
Five Years
|
|
|
Years
|
|
|
Total
|
|
|
Federal funds purchased and securities sold under agreements
to repurchase
|
|
$
|
921,345
|
|
|
$
|
0
|
|
|
$
|
50,000
|
|
|
$
|
25,000
|
|
|
$
|
996,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank notes
|
|
$
|
140,579
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
140,579
|
|
FHLB advances
|
|
|
180,122
|
|
|
|
345,682
|
|
|
|
31,446
|
|
|
|
19,482
|
|
|
|
576,732
|
|
Capital securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,296
|
|
|
|
22,296
|
|
Other
|
|
|
51
|
|
|
|
110
|
|
|
|
123
|
|
|
|
214
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total wholesale borrowings
|
|
$
|
320,752
|
|
|
$
|
345,792
|
|
|
$
|
31,569
|
|
|
$
|
41,992
|
|
|
$
|
740,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
The following table provides further detail of the maturities of
federal funds purchased and securities sold under agreements to
repurchase at December 31, 2009:
|
|
|
|
|
Overnight
|
|
$
|
896,345
|
|
Up to thirty days
|
|
|
|
|
Thirty day to ninety days
|
|
|
|
|
Over ninety days
|
|
|
100,000
|
|
|
|
|
|
|
|
|
$
|
996,345
|
|
|
|
|
|
|
Federal income tax expense is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Taxes currently payable
|
|
$
|
18,528
|
|
|
$
|
60,152
|
|
|
$
|
46,817
|
|
Deferred (benefit) expense
|
|
|
7,117
|
|
|
|
(11,248
|
)
|
|
|
3,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,645
|
|
|
$
|
48,904
|
|
|
$
|
50,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The actual Federal income tax rate differs from the statutory
tax rate as shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Statutory rate
|
|
|
35.00
|
%
|
|
|
35.00
|
%
|
|
|
35.00
|
%
|
Increase (decrease) in rate due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on tax-exempt securities and tax-free loans, net
|
|
|
(4.15
|
)
|
|
|
(2.29
|
)
|
|
|
(1.87
|
)
|
Bank owned life insurance
|
|
|
(4.65
|
)
|
|
|
(2.65
|
)
|
|
|
(2.80
|
)
|
Low income housing tax credit
|
|
|
(1.91
|
)
|
|
|
(1.06
|
)
|
|
|
(0.96
|
)
|
Dividends received deduction
|
|
|
|
|
|
|
|
|
|
|
(0.17
|
)
|
ESOP Dividends
|
|
|
(0.49
|
)
|
|
|
(0.51
|
)
|
|
|
(0.49
|
)
|
Non-deductible meals and entertainment
|
|
|
0.28
|
|
|
|
0.19
|
|
|
|
0.17
|
|
Other
|
|
|
(0.29
|
)
|
|
|
0.36
|
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rates
|
|
|
23.79
|
%
|
|
|
29.04
|
%
|
|
|
29.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense as reflected in the previous table excludes
net worth-based taxes, which are assessed in lieu of income tax
in Ohio and Pennsylvania. These taxes are $6.1 million,
$6.4 million and $6.4 million in 2009, 2008 and 2007,
respectively, and are recorded in other operating expense in the
consolidated statements of income and comprehensive income.
76
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
Principal components of the Corporations net deferred tax
asset are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for credit losses
|
|
$
|
42,719
|
|
|
$
|
38,611
|
|
Employee benefits
|
|
|
38,303
|
|
|
|
40,761
|
|
REMIC
|
|
|
7,497
|
|
|
|
8,728
|
|
Other
|
|
|
667
|
|
|
|
1,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,186
|
|
|
|
89,434
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Leased assets and depreciation
|
|
|
(6,859
|
)
|
|
|
(3,684
|
)
|
Available for sale securities
|
|
|
(19,296
|
)
|
|
|
(463
|
)
|
FHLB stock
|
|
|
(25,577
|
)
|
|
|
(26,102
|
)
|
Loan fees and expenses
|
|
|
(6,179
|
)
|
|
|
(6,137
|
)
|
Goodwill
|
|
|
(6,216
|
)
|
|
|
(5,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(64,127
|
)
|
|
|
(41,846
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax asset
|
|
$
|
25,059
|
|
|
$
|
47,588
|
|
|
|
|
|
|
|
|
|
|
The period change in deferred taxes recorded both directly to
capital and as a part of the income tax expense and can be
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax changes reflected in other comprehensive income
|
|
$
|
15,411
|
|
|
$
|
(5,920
|
)
|
Deferred tax changes reflected in Federal income tax expense
|
|
|
7,117
|
|
|
|
(11,248
|
)
|
|
|
|
|
|
|
|
|
|
Net change in deferred taxes
|
|
$
|
22,528
|
|
|
$
|
(17,168
|
)
|
|
|
|
|
|
|
|
|
|
In consideration of the positive evidence available from
projected taxable income in future years and net operating loss
carryback availability from prior years, the Corporation
believes that it is more likely than not that the deferred tax
asset will be realized and accordingly no valuation allowance
has been recorded.
Income tax benefits are recognized in the financial statements
for a tax position only if it is considered more likely
than not of being sustained on audit based solely on the
technical merits of the income tax position. If the recognition
criteria are met, the amount of income tax benefits to be
recognized is measured based on the largest income tax benefit
that is more than 50 percent likely to be realized on
ultimate resolution of the tax position.
77
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
A reconciliation of the change in the reserve for uncertain tax
positions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Accrued
|
|
|
Unrecognized
|
|
|
|
Federal and
|
|
|
Interest and
|
|
|
Income Tax
|
|
|
|
State Tax
|
|
|
Penalties
|
|
|
Benefits
|
|
|
Balance at January 1, 2009
|
|
$
|
889
|
|
|
$
|
836
|
|
|
$
|
1,725
|
|
Additions for tax provisions related to current year
|
|
|
148
|
|
|
|
(39
|
)
|
|
|
109
|
|
Additions for tax provisions related to prior year
|
|
|
120
|
|
|
|
794
|
|
|
|
914
|
|
Reduction for tax positions related to prior closed tax years
|
|
|
(81
|
)
|
|
|
(820
|
)
|
|
|
(901
|
)
|
Reduction for tax positions related to prior tax years
|
|
|
(42
|
)
|
|
|
(149
|
)
|
|
|
(191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
1,034
|
|
|
$
|
622
|
|
|
$
|
1,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Reserve:
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential non-deductible compensation
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Potential adjustment to non-deductible interest expense
|
|
|
140
|
|
|
|
15
|
|
|
|
155
|
|
Timing of the accrual for interest on nonperforming assets
|
|
|
|
|
|
|
454
|
|
|
|
454
|
|
State income tax exposure
|
|
|
894
|
|
|
|
153
|
|
|
|
1,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
1,034
|
|
|
$
|
622
|
|
|
$
|
1,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation recognized accrued interest and penalties, as
appropriate, related to unrecognized tax benefits
(UTBs), in the effective tax rate. The balance of
accrued interest and penalties at the reporting periods is
presented in the table above. The reserve of uncertain tax
positions is recorded in accrued taxes, expenses and other
liabilities on the consolidated balance sheets.
The Corporation and its subsidiaries are routinely examined by
various taxing authorities. With few exceptions, the Corporation
is no longer subject to federal, state and local tax
examinations by tax authorities for years before 2005. The
expiration of statutes of limitation for various jurisdictions
is expected to reduce the UTB balance by approximately
$0.8 million within the next twelve months. Management
anticipates that the UTB balance will increase by
$0.5 million as a result of the 2009 tax filings in the
next twelve months. If the total amount of UTBs were recognized
the effective tax rate would decrease by 148 basis points
to 22.48% at December 31, 2009.
Management monitors changes in tax statutes and regulations and
the issuance of judicial decisions to determine the potential
impact to uncertain income tax positions. During 2008, federal
statutes were changed to allow ordinary loss treatment on the
sale of applicable preferred stock. This change eliminated a
potential 2008 UTB. As a participant in Treasurys Capital
Purchase Program, an additional portion of senior
executives compensation was not deductible in 2009. As of
December 31, 2009, Management had identified no other
potential Treasury regulations or legislative initiatives that
could have a significant impact on the UTB balance within the
next twelve months.
Pension plans. The Corporation has a defined
benefit pension plan which covers employees vested in the
pension plan as of December 31, 2006. On May 18, 2006,
the Corporations Board of Directors approved freezing the
defined benefit pension plan for non-vested employees and closed
it to new entrants after December 31, 2006. In general,
benefits are based on years of service and the employees
compensation. The Corporations 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.
The Corporation made a $10.0 million contribution to the
qualified pension plan during 2009; however, no contribution
78
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
was made during 2008 and 2007. Management anticipates
contributing $10.0 million to the qualified pension plan
during 2010.
The amendments to the defined benefit pension plan qualified as
a curtailment of the pension plan, the impact of which was a
$1.4 million gain that was recognized as of
December 31, 2006 by a direct reduction of the pension
plans cumulative net loss.
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.
Postretirement medical and life insurance
plan. The Corporation also sponsors a benefit
plan which 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.
Effective March 1, 2009, the Corporation discontinued the
subsidy for retiree medical for current eligible active
employees. Eligible employees who retired on or prior to
March 1, 2009, were offered subsidized retiree medical
coverage until age 65. Employees who retire after
March 1, 2009 will not receive a Corporation subsidy toward
retiree medical coverage. The elimination of Corporation
subsidized retiree medical coverage resulted in an accounting
curtailment gain of $9.5 million in accordance with ASC
715, Employers Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits.
The cost of postretirement benefits expected to be provided to
current and future retirees is accrued over those
employees service periods. 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).
Other employee benefits. FirstMerits
Amended and Restated Executive Deferred Compensation Plan allows
participating executives to elect to receive incentive
compensation payable with respect to any year in whole shares of
common stock or cash, to elect to defer receipt of any incentive
compensation otherwise payable with respect to any year in
increments of 1%. An account is maintained in the name of each
participant and is credited with cash or shares of common stock
equal to the number of shares that could have been purchased
with the amount of any compensation so deferred, at the closing
price of the common stock on the day as of which the stock
account is so credited. The deferred compensation liability at
December 31, 2009 and 2008 was $10.1 million and
$10.2 million, respectively.
Savings plan. The Corporation maintains a
savings plan under Section 401(k) of the Internal Revenue
Code, covering substantially all full-time and part-time
employees beginning in the quarter following three months of
continuous employment. The savings plan was approved for
non-vested employees in the defined benefit pension plan and new
hires as of January 1, 2007. Through the year ended
December 31, 2008, employee contributions were partially
matched by the Corporation in an amount equal to 50% of each
employees voluntary pretax contribution up to 6% of each
employees eligible compensation and in an amount equal to
50% of each employees voluntary pretax contributions up to
3% of each employees eligible compensation. Matching
contributions vest in accordance with plan specifications.
Effective January 1, 2009, the Corporation has suspended
its matching contribution to the savings plan. The Corporation
did not make a contribution to the savings plan during 2009.
Contributions made by the Corporation to the savings plan were
$4.2 million and $4.2 million for 2008 and 2007,
respectively.
79
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
Actuarial assumptions. The expected long-term
rate of return was estimated using market benchmarks for
equities and bonds applied to the plans target asset
allocation and expected duration of benefit payments. The
Corporations pension plan weighted-average allocations at
measurement dates by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Plan Assets on
|
|
|
|
Measurment Date
|
|
|
|
December 31,
|
|
Asset Category
|
|
2009
|
|
|
2008
|
|
|
Cash and money market funds
|
|
|
2.65
|
%
|
|
|
4.77
|
%
|
U.S. Treasury obligations
|
|
|
3.45
|
%
|
|
|
5.40
|
%
|
U.S. Government agencies
|
|
|
4.70
|
%
|
|
|
7.50
|
%
|
Corporate bonds
|
|
|
6.47
|
%
|
|
|
7.22
|
%
|
Fixed income mutual funds
|
|
|
14.48
|
%
|
|
|
19.13
|
%
|
Domestic equity securities and mutual funds
|
|
|
68.25
|
%
|
|
|
55.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
The Corporations asset allocation strategy favors
equities, with a target allocation of approximately 65% equity
securities. The asset allocation policy is as below:
|
|
|
|
|
|
|
|
|
Asset Class
|
|
Target
|
|
|
Range
|
|
|
Large Cap U.S. Equity
|
|
|
35.00
|
%
|
|
|
25%-40%
|
|
Small/Mid Cap U.S. Equity
|
|
|
15.00
|
%
|
|
|
5%-20%
|
|
International Equity
|
|
|
15.00
|
%
|
|
|
10%-20%
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
65.00
|
%
|
|
|
50%-75%
|
|
Fixed Income
|
|
|
35.00
|
%
|
|
|
30%-50%
|
|
Cash Equivalents
|
|
|
0.00
|
%
|
|
|
0%-10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation uses historic plan asset returns combined with
current market conditions to estimate the rate of return. The
expected rate of return on plan assets is a long-term assumption
and generally does not change annually. The expected return on
equities was computed using a valuation framework, which
projected future returns based on current equity valuations
rather than historical returns. Due to active management of the
plans assets, the return on the plan equity investments
historically has exceeded market averages. Management estimated
the rate by which the plan assets would outperform the market in
the future based on historical experience adjusted for changes
in asset allocation and expectations for overall future returns
on equities compared to past periods.
The discount rate reflects the market rate for high-quality
fixed income debt instruments, that is rated double-A or higher
by a recognized ratings agency, on the Corporations annual
measurement date and is subject to change each year. The
discount rate is selected on data specific to the
Corporations plans and employee population. During 2009,
the Corporation used a discount rate of 5.98% in the pension
liability valuation, a decrease of 88 basis points from the
2008 discount rate.
The average rate of compensation increase for the qualified
pension plans was 5.22% in 2009 and 5.22% in 2008. The
Corporation used an assumed return on assets of 8.50% for both
2009 and 2008.
Additional information on the assumptions used to value the
pension liability is included in Critical Accounting Policies
within Managements Discussion and Analysis of Financial
Condition and Results of Operations.
80
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
The actuarial assumptions used in the defined benefit pension
plan and the postretirement medical and life insurance benefit
plan were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
Weighted-average assumptions as of the measurement date*
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Discount Rate
|
|
|
5.98
|
%
|
|
|
6.86
|
%
|
|
|
6.25
|
%
|
|
|
4.94
|
%
|
|
|
6.93
|
%
|
|
|
6.25
|
%
|
Long-term rate of return on assets
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
3.75% - 5.22%
|
|
|
|
3.75% - 5.22%
|
|
|
|
3.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical trend rates non-medicare risk Pre-65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.0% to 5.0%
|
|
|
|
7.5% to 5.0%
|
|
|
|
8.0% to 5.0%
|
|
Medical trend rates non-medicare risk Post-65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.0% to 5.0%
|
|
|
|
7.5% to 5.0%
|
|
|
|
8.0% to 5.0%
|
|
Prescription Drugs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.0% to 5.0%
|
|
|
|
9.5% to 5.0%
|
|
|
|
10.0% to 5.0%
|
|
Medical trend rates medicare risk HMO Post-65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.0% to 5.0%
|
|
|
|
9.5% to 5.0%
|
|
|
|
10.0% to 5.0%
|
|
|
|
|
*
|
|
The measurement date is December 31
for 2009 and 2008. The measurement date for 2007 is
September 30.
|
For measurement purposes, the assumed annual rate increase in
the per capita cost of non-Medicare covered health care benefits
was 7.0% in 2009, decreased gradually to 5.0% in 2014, and
Medicare covered health care benefits was 9.0%, decreased
gradually to 5.0% in 2018.
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plan. A
100 basis 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 of net
periodic postretirement health care benefit costs
|
|
$
|
13
|
|
|
$
|
(15
|
)
|
Effect on postretirement benefit obligation for health care
benefits
|
|
$
|
256
|
|
|
$
|
(302
|
)
|
The components of net periodic pension and postretirement
benefits are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Components of Net Periodic
Pension/Postretirement Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
5,290
|
|
|
$
|
5,419
|
|
|
$
|
7,466
|
|
|
$
|
173
|
|
|
$
|
994
|
|
|
$
|
889
|
|
Interest cost
|
|
|
11,003
|
|
|
|
10,319
|
|
|
|
9,655
|
|
|
|
1,412
|
|
|
|
1,771
|
|
|
|
1,736
|
|
Expected return on assets
|
|
|
(11,222
|
)
|
|
|
(11,688
|
)
|
|
|
(11,185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service costs
|
|
|
392
|
|
|
|
115
|
|
|
|
164
|
|
|
|
( 90
|
)
|
|
|
(406
|
)
|
|
|
(541
|
)
|
Cumulative net loss
|
|
|
3,031
|
|
|
|
2,983
|
|
|
|
5,346
|
|
|
|
63
|
|
|
|
211
|
|
|
|
407
|
|
Curtailment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,239
|
)
|
|
|
|
|
|
|
|
|
Adjustment for measurement date change
Prior service cost/(credit)
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
(135
|
)
|
|
|
|
|
Acturial loss
|
|
|
|
|
|
|
994
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension/postretirement cost
|
|
$
|
8,494
|
|
|
$
|
8,186
|
|
|
$
|
11,446
|
|
|
$
|
(8,681
|
)
|
|
$
|
2,506
|
|
|
$
|
2,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
Effective December 31, 2008, the Corporation adopted the
final measurement provisions of ASC 715, which required the
annual measurement date of a plans assets and benefit
obligations be as of the date of the employers fiscal
year-end statement of financial position. Prior to the adoption
of this provision, the Corporation had elected a September 30
measurement date to value plan assets and benefit obligations.
The following table summarized the effects of adopting the
measurement date provision of ASC 715 on the consolidated
balance sheet as of December 31, 2008:
|
|
|
|
|
|
|
SFAS 158
|
|
|
|
Measurement Date
|
|
|
|
Adoption Adjustments
|
|
|
Deferred taxes
|
|
$
|
189
|
|
|
|
|
|
|
Total Assets
|
|
$
|
189
|
|
|
|
|
|
|
Pension liabilities
|
|
$
|
540
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
540
|
|
|
|
|
|
|
Retained Earnings
|
|
$
|
(843
|
)
|
Accumulated other comprehensive loss
|
|
|
492
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
(351
|
)
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
189
|
|
|
|
|
|
|
82
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
The following table sets forth the plans funded status and
amounts recognized in the Corporations consolidated
financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected Benefit Obligation (PBO)/,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Postretirement Benefit Obligation
(APBO), beginning of year
|
|
$
|
163,625
|
|
|
$
|
168,722
|
|
|
$
|
29,221
|
|
|
$
|
29,448
|
|
Service cost
|
|
|
5,290
|
|
|
|
5,419
|
|
|
|
173
|
|
|
|
994
|
|
Interest cost
|
|
|
11,003
|
|
|
|
10,319
|
|
|
|
1,412
|
|
|
|
1,771
|
|
Plan Amendments
|
|
|
1,315
|
|
|
|
1,522
|
|
|
|
|
|
|
|
|
|
Participant contributions
|
|
|
|
|
|
|
|
|
|
|
612
|
|
|
|
946
|
|
Actuarial (loss) gain
|
|
|
22,033
|
|
|
|
(14,158
|
)
|
|
|
482
|
|
|
|
(582
|
)
|
Benefits paid
|
|
|
(9,907
|
)
|
|
|
(12,133
|
)
|
|
|
(2,254
|
)
|
|
|
(4,048
|
)
|
Curtailment gain
|
|
|
|
|
|
|
|
|
|
|
(9,971
|
)
|
|
|
|
|
Adjustment for measurement date change
|
|
|
|
|
|
|
3,934
|
|
|
|
|
|
|
|
692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PBO/APBO, end of year
|
|
$
|
193,359
|
|
|
$
|
163,625
|
|
|
$
|
19,675
|
|
|
$
|
29,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Plan Assets, beginning of year
|
|
$
|
99,860
|
|
|
$
|
145,326
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
21,868
|
|
|
|
(32,017
|
)
|
|
|
|
|
|
|
|
|
Participant contributions
|
|
|
|
|
|
|
|
|
|
|
612
|
|
|
|
946
|
|
Employer contributions
|
|
|
10,978
|
|
|
|
1,606
|
|
|
|
1,642
|
|
|
|
3,102
|
|
Benefits paid
|
|
|
(9,907
|
)
|
|
|
(12,133
|
)
|
|
|
(2,254
|
)
|
|
|
(4,048
|
)
|
Adjustment for measurement date change
|
|
|
|
|
|
|
(2,922
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Plan Assets, end of year
|
|
$
|
122,799
|
|
|
$
|
99,860
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status
|
|
$
|
(70,560
|
)
|
|
$
|
(63,765
|
)
|
|
$
|
(19,675
|
)
|
|
$
|
(29,221
|
)
|
Prior service (benefits) costs
|
|
|
2,696
|
|
|
|
1,773
|
|
|
|
|
|
|
|
(3,790
|
)
|
Cumulative net loss
|
|
|
87,647
|
|
|
|
79,290
|
|
|
|
2,220
|
|
|
|
5,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid (accrued) pension/postretirement cost
|
|
$
|
19,783
|
|
|
$
|
17,298
|
|
|
$
|
(17,455
|
)
|
|
$
|
(27,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the statement of financial condition
consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Accrued benefit liability
|
|
|
(70,560
|
)
|
|
|
(63,765
|
)
|
|
|
(19,675
|
)
|
|
|
(29,221
|
)
|
Intangible asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
90,343
|
|
|
|
81,063
|
|
|
|
2,220
|
|
|
|
1,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
19,783
|
|
|
$
|
17,298
|
|
|
$
|
(17,455
|
)
|
|
$
|
(27,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
Accumulated Benefit Obligation (ABO) for the
Corporations pension plan was $172.7 million, and
$143.9 million for the years ended December 31, 2009
and 2008, respectively. Information for those pension plans that
had an ABO in excess of plan assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Aggregate Projected benefit obligation
|
|
$
|
193,359
|
|
|
$
|
163,625
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Aggregate accumulated benefit obligation
|
|
|
172,656
|
|
|
|
143,935
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Aggregate fair value of plan assets
|
|
|
122,799
|
|
|
|
99,860
|
|
|
|
n/a
|
|
|
|
n/a
|
|
During the years ended December 31, 2009 and 2008, the
Corporation received $0.1 million and $0.2 million,
respectively, in subsidy payments under the Medicare
Prescription Drug, Improvement and Modernization Act of 2003. At
December 31, 2009, the projected benefit payments for the
pension plans and the postretirement benefit plan, which reflect
expected future service, as appropriate, and the Medicare
subsidies, totaled $12.3 million and $2.5 million, in
2010 $12.3 million and $2.5 million, in 2011
$12.4 million and $2.2 million, in 2012
$12.2 million and $2.1 million in 2013,
$12.7 million and $1.9 million in 2014, and
$66.1 million and $6.7 million in years 2015 through
2023, respectively. The projected payments were calculated using
the same assumptions as those used to calculate the benefit
obligations in the preceding tables.
Amounts recognized in accumulated other comprehensive loss
consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Prior service cost
|
|
$
|
2,696
|
|
|
$
|
1,773
|
|
|
$
|
|
|
|
$
|
(3,790
|
)
|
Cumulative net loss
|
|
|
87,647
|
|
|
|
79,290
|
|
|
|
2,220
|
|
|
|
5,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount recognized
|
|
$
|
90,343
|
|
|
$
|
81,063
|
|
|
$
|
2,220
|
|
|
$
|
1,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized Actuarial Gains and
Losses. Actuarial gains and losses are changes in
measures of the plan assets or benefit obligations that occur
during a period because of differences between actual experience
and assumptions, or that occur as a result of changes in one or
more actuarial assumptions. Actuarial gains and losses can arise
from differences between the expected and actual return on plan
assets, from changes in the benefit obligation due to changes in
discount rates, from changes in assumptions about future
compensation increases, health care cost trend rates, or other
factors.
Net unrecognized actuarial gains or losses and prior service
costs are recognized as an adjustment to accumulated other
comprehensive income, net of tax, in the period they arise and,
subsequently, recognized as a component of net periodic benefit
cost over the average remaining service period of the active
employees which is in accordance with the provisions of ASC 715.
The amounts in accumulated other comprehensive loss that are
expected to be recognized as components of net periodic benefit
cost (credit) during the next fiscal year are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
|
Total
|
|
Prior service cost
|
|
$
|
393
|
|
|
$
|
|
|
|
$
|
393
|
|
Cumulative net loss
|
|
$
|
5,707
|
|
|
$
|
15
|
|
|
$
|
5,722
|
|
84
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
The following is a description of the valuation methodologies
used to measure assets held by the pension plans at fair value.
|
|
|
|
|
United States government
securities: Valued at the closing price
reported in the active market in which the individual security
is traded.
|
|
|
|
United States government agency issues and corporate
bonds: Valued using independent evaluated
prices which are based on observable inputs, such as available
trade information, spreads, bids and offers, and United States
Treasury curves.
|
|
|
|
Common stocks: Valued at the closing
price reported on the active market on which the individual
securities are traded.
|
|
|
|
Mutual funds: Valued at the net asset
value (NAV) of shares held by the pension plans at year end as
reported on the active market on which the mutual funds are
traded.
|
The preceding methods described may produce a fair value
calculation that may not be indicative of net realizable value
or reflective of future fair values. Furthermore, although the
Corporation believes its valuation method is appropriate and
consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of
financial instruments could result in a different fair value
measurement at the reporting date.
The following table sets forth by level, within the fair value
hierarchy, the pension plans assets at fair value as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Money market funds
|
|
$
|
3,600
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,600
|
|
United States government securities
|
|
|
|
|
|
|
4,225
|
|
|
|
|
|
|
|
4,225
|
|
United States government agency issues
|
|
|
|
|
|
|
5,748
|
|
|
|
|
|
|
|
5,748
|
|
Corporate bonds
|
|
|
|
|
|
|
7,926
|
|
|
|
|
|
|
|
7,926
|
|
Common stocks
|
|
|
33,418
|
|
|
|
|
|
|
|
|
|
|
|
33,418
|
|
Equity and fixed income mutual funds
|
|
|
67,882
|
|
|
|
|
|
|
|
|
|
|
|
67,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
104,900
|
|
|
$
|
17,899
|
|
|
$
|
|
|
|
$
|
122,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
Share-Based
Compensation
|
The Corporations 1999, 2002 and 2006 Stock and Equity
Plans (the Plans) provide stock options and
restricted stock awards to certain key employees (and to all
full-time employees in the case of the 1999, 2002 and 2006
Plans) for up to 6,713,301 common shares of the Corporation. In
addition, the 2002 and 2006 Plans provide for the granting of
non-qualified stock options and nonvested (restricted) shares to
certain non-employee directors of the Corporation. Outstanding
options under these Plans are generally not exercisable for
twelve months from date of grant. The total share-based
compensation expense and recognized during the years ended
December 31, 2009, 2008 and 2007 was $7.3 million,
$4.5 million and $2.1 million, respectively, and the
related tax benefit thereto was $2.6 million,
$1.6 million and $0.7 million, respectively.
Share-based compensation expense related to award granted to
employees as well as award granted to directors is recorded in
salaries, wages, pension and employee benefits in the
consolidated statements of income and comprehensive income.
Certain of the Corporations share-based award grants
contain terms that provide for a graded vesting schedule whereby
portions of the award vest in increments over the requisite
service period. The Corporation has elected to recognize
compensation expense for awards with graded vesting schedule on
a straight-line basis over the requisite service period for the
entire award. Compensation expense is recognized based on the
estimated number of stock options and awards for which service
is to be rendered. Upon stock option exercise or stock unit
conversion, it is the policy of the Corporation to issue shares
from treasury stock.
85
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
In accordance with the Corporations stock option and
nonvested (restricted) shares plans, employee participants that
are 55 or older and have 15 years of service are eligible
to retire. At retirement, all unvested awards continue to vest.
Prior to the Plans amendments during 2007, which
eliminated post retirement vesting, all unvested awards at the
time of retirement continued to vest. The Corporation
accelerates the recognition of compensation costs for
share-based awards granted to retirement-eligible employees
prior and employees who become retirement-eligible is granted or
modified, the compensation cost of these awards is recognized
over the period up to the date the employee first becomes
eligible to retire.
Stock
Option Awards
Options under these Plans are granted with an exercise price
equal to the market price of the Corporations stock at the
date of grant; those option awards generally vest based on
3 years of continuous service and have a 10 year
contractual term. 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. Upon termination, options
are cancelable within defined periods based upon the reason for
termination of employment.
The Black-Scholes option pricing model was used to estimate the
fair market value of the options at the date of grant. This
model was originally developed for use in estimating the fair
value of traded options which have different characteristics
from the Corporations employee stock options. Because of
these differences, the Black-Scholes model is not a perfect
indicator of value of an employee stock option, but it is
commonly used for this purpose. There were no options granted
during the year ended December 31, 2009.
A summary of stock option activity under the Plans as of
December 31, 2009 and 2008, and changes during the years
then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
Aggregate Intrinsic
|
|
Options
|
|
Shares (000s)
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Value (000s)
|
|
|
Outstanding at January 1, 2008
|
|
|
6,802
|
|
|
$
|
25.64
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(126
|
)
|
|
|
16.44
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(7
|
)
|
|
|
24.25
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(560
|
)
|
|
|
28.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
6,109
|
|
|
$
|
25.54
|
|
|
|
3.15
|
|
|
$
|
691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares from stock dividend
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(154
|
)
|
|
|
18.78
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1
|
)
|
|
|
24.28
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1,472
|
)
|
|
|
26.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
4,550
|
|
|
$
|
25.35
|
|
|
|
2.92
|
|
|
$
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
6,010
|
|
|
$
|
25.58
|
|
|
|
3.08
|
|
|
$
|
691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009
|
|
|
4,542
|
|
|
$
|
25.36
|
|
|
|
2.92
|
|
|
$
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no options granted in the years ended
December 31, 2009 and 2008. The total intrinsic value of
options exercised during the years ended December 31, 2009
and 2008 was $0.3 million and $1.2 million,
respectively. Cash received from options exercised under all
share-based payment arrangement for the years ended
86
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
December 31, 2009 and 2008 was $2.9 million and
$2.1 million, respectively. The actual tax benefit realized
for the tax deduction from option exercise of the share-based
payment arrangements totaled $0.1 million for the year
ended December 31, 2009 and $0.4 million for the year
ended December 31, 2008.
In June and September 2009, the Corporation issued a $0.13 stock
dividend. The Corporations Plan includes an anitdilution
feature designed to equalize the fair value of the award as a
result of an equity restructuring such as the stock dividend.
The number of shares available for purchase and the option price
were adjusted proportionately by the Board of Directors which
resulted in 68,000 additional shares outstanding.
The Corporation has a policy of repurchasing shares on the open
market to satisfy share option exercises. The Corporation
repurchased 2.6 million common shares in the first quarter
of 2006 which was adequate to cover option exercises for the
full years 2009, 2008 and 2007.
At December 31, 2009 and 2008, there was $2.8 thousand and
$0.1 million, respectively of unrecognized compensation
cost related to stock options granted under the Plans which will
be recognized over a weighted-average period of 0.30 years
for the year ended December 31, 2009 and 0.53 years
for the year ended December 31, 2008.
Nonvested
Stock Awards
The market price of the Corporations common shares at the
date of grant is used to estimate the fair value of nonvested
(restricted) stock awards. A summary of the status of the
Corporations nonvested shares as of December 31, 2009
and 2008 and changes during the years then ended, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant-Date
|
|
Nonvested (restricted) Shares
|
|
Shares (000s)
|
|
|
Fair Value
|
|
|
Nonvested at January 1, 2008
|
|
|
438
|
|
|
$
|
21.72
|
|
Granted
|
|
|
410
|
|
|
|
19.88
|
|
Vested
|
|
|
(144
|
)
|
|
|
21.87
|
|
Forfeited or expired
|
|
|
(26
|
)
|
|
|
20.79
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2008
|
|
|
678
|
|
|
$
|
20.61
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
554
|
|
|
|
16.53
|
|
Vested
|
|
|
(328
|
)
|
|
|
21.18
|
|
Forfeited or expired
|
|
|
(54
|
)
|
|
|
18.34
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2009
|
|
|
850
|
|
|
$
|
17.88
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 and 2008, there was
$4.3 million and $4.0 million, respectively, of total
unrecognized compensation cost related to nonvested share-based
compensation arrangements granted under the Plans. That cost is
expected to be recognized over a weighted-average period of
1.62 years for the year ended December 31, 2009 and
1.66 years for the year ended December 31, 2008. The
total fair value of shares vested during the year ended
December 31, 2009 and 2008 was $5.7 million and
$3.0 million, respectively.
ASC 718, Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards applies to entities that have
share-based payment arrangements that entitle employees to
receive dividends or dividend equivalents on equity-classified
nonvested shares when those dividends or dividend equivalents
are charged to retained earnings and result in an income tax
deduction. Entities that have share-based payment arrangements
that fall within the scope of ASC 718 are required to increase
capital surplus for a realized income tax benefit associated
with dividends or dividend equivalents paid to employees for
equity classified nonvested equity awards. The Corporation
adopted ASC
87
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
718 on January 1, 2008 for dividends declared on
share-based payment awards subsequent to this date. The adoption
did not have a material impact on financial condition, results
of operations, or liquidity.
Condensed financial information of FirstMerit Corporation
(Parent Company only) is as follows:
Condensed
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
26,002
|
|
|
$
|
12,667
|
|
Investment securities
|
|
|
1,295
|
|
|
|
1,249
|
|
Loans to subsidiaries
|
|
|
128,550
|
|
|
|
103,550
|
|
Investment in subsidiaries, at equity in underlying value of
their net assets
|
|
|
957,774
|
|
|
|
864,586
|
|
Other assets
|
|
|
9,466
|
|
|
|
9,494
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,123,087
|
|
|
$
|
991,546
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
Wholesale borrowings
|
|
$
|
52,393
|
|
|
$
|
52,440
|
|
Accrued and other liabilities
|
|
|
5,067
|
|
|
|
1,263
|
|
Shareholders equity
|
|
|
1,065,627
|
|
|
|
937,843
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
1,123,087
|
|
|
$
|
991,546
|
|
|
|
|
|
|
|
|
|
|
Condensed
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends from subsidiaries
|
|
$
|
31,125
|
|
|
$
|
112,591
|
|
|
$
|
139,111
|
|
Other income
|
|
|
2,881
|
|
|
|
2,708
|
|
|
|
2,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,006
|
|
|
|
115,299
|
|
|
|
141,828
|
|
Interest and other expenses
|
|
|
12,065
|
|
|
|
10,761
|
|
|
|
11,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before federal income tax benefit and equity in
undistributed income of subsidiaries
|
|
|
21,941
|
|
|
|
104,538
|
|
|
|
130,540
|
|
Federal income benefit
|
|
|
(3,336
|
)
|
|
|
(2,250
|
)
|
|
|
(2,581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,277
|
|
|
|
106,788
|
|
|
|
133,121
|
|
Equity in undistributed income (loss) of subsidiaries
|
|
|
56,893
|
|
|
|
12,697
|
|
|
|
(10,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
82,170
|
|
|
$
|
119,485
|
|
|
$
|
123,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
Condensed
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
82,170
|
|
|
$
|
119,485
|
|
|
$
|
123,027
|
|
Adjustments to reconcile net income to net cash provided by
operating activites:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed (income) loss of subsidiaries
|
|
|
(56,893
|
)
|
|
|
(12,697
|
)
|
|
|
10,094
|
|
Increase in Federal income tax payable
|
|
|
3,893
|
|
|
|
4,291
|
|
|
|
2,793
|
|
Other
|
|
|
(391
|
)
|
|
|
2,177
|
|
|
|
(3,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
28,779
|
|
|
|
113,256
|
|
|
|
132,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans to subsidiaries
|
|
|
(318,000
|
)
|
|
|
(186,500
|
)
|
|
|
(115,000
|
)
|
Repayment of loans to subsidiaries
|
|
|
293,000
|
|
|
|
173,500
|
|
|
|
74,500
|
|
Payments for investments in and advances to subsidiaries
|
|
|
(350
|
)
|
|
|
|
|
|
|
|
|
Purchases of investment securities
|
|
|
(46
|
)
|
|
|
(59
|
)
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities
|
|
|
(25,396
|
)
|
|
|
(13,059
|
)
|
|
|
(40,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of subordinated debt
|
|
|
|
|
|
|
(366
|
)
|
|
|
(40
|
)
|
Proceeds from short-term borrowings
|
|
|
|
|
|
|
1,000
|
|
|
|
1,000
|
|
Repayment of short-term borrowings
|
|
|
(47
|
)
|
|
|
(2,511
|
)
|
|
|
|
|
Proceeds from issuance of preferred stock
|
|
|
125,000
|
|
|
|
|
|
|
|
|
|
Repurchase of preferred stock
|
|
|
(125,000
|
)
|
|
|
|
|
|
|
|
|
Repurchase of common stock warrant
|
|
|
(5,025
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
79,526
|
|
|
|
|
|
|
|
|
|
Cash dividends-preferred
|
|
|
(1,789
|
)
|
|
|
|
|
|
|
|
|
Cash dividends-common stock
|
|
|
(63,891
|
)
|
|
|
(93,825
|
)
|
|
|
(93,331
|
)
|
Proceeds from exercise of stock options
|
|
|
2,936
|
|
|
|
2,103
|
|
|
|
3,045
|
|
Purchase of treasury shares
|
|
|
(1,758
|
)
|
|
|
(747
|
)
|
|
|
(233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities
|
|
|
9,952
|
|
|
|
(94,346
|
)
|
|
|
(89,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
13,335
|
|
|
|
5,851
|
|
|
|
2,717
|
|
Cash and cash equivalents at beginning of year
|
|
|
12,667
|
|
|
|
6,816
|
|
|
|
4,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
26,002
|
|
|
$
|
12,667
|
|
|
$
|
6,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management monitors the Corporations results by an
internal performance measurement system, which provides lines of
business results and key performance measures. The profitability
measurement system is based on internal management methodologies
designed to produce consistent results and reflect the
underlying economics of the businesses. The development and
application of these methodologies is a dynamic process.
Accordingly, these measurement tools and assumptions may be
revised periodically to reflect methodological, product,
and/or
89
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
management organizational changes. Further, these tools measure
financial results that support the strategic objectives and
internal organizational structure of the Corporation.
Consequently, the information presented is not necessarily
comparable with similar information for other financial
institutions.
A description of each business, selected financial performance,
and the methodologies used to measure financial performance are
presented below.
|
|
|
|
|
Commercial The commercial line of business
provides a full range of lending, depository, and related
financial services to middle-market corporate, industrial,
financial, business banking (formerly known as small business),
public entities, and leasing clients. Commercial also includes
personal business from commercial loan clients in coordination
with the Wealth Management segment. Products and services
offered include commercial term loans, revolving credit
arrangements, asset-based lending, leasing, commercial
mortgages, real estate construction lending, letters of credit,
cash management services and other depository products.
|
|
|
|
Retail The retail line of business includes
consumer lending and deposit gathering, residential mortgage
loan origination and servicing, and branch-based small business
banking (formerly known as the micro business line).
Retail offers a variety of retail financial products and
services including consumer direct and indirect installment
loans, debit and credit cards, debit gift cards, residential
mortgage loans, home equity loans and lines of credit, deposit
products, fixed and variable annuities and ATM network services.
Deposit products include checking, savings, money market
accounts and certificates of deposit.
|
|
|
|
Wealth The wealth line of business offers a
broad array of asset management, private banking, financial
planning, estate settlement and administration, credit and
deposit products and services. Trust and investment services
include personal trust and planning, investment management,
estate settlement and administration services. Retirement plan
services focus on investment management and fiduciary
activities. Brokerage and insurance delivers retail mutual
funds, other securities, variable and fixed annuities, personal
disability and life insurance products and brokerage services.
Private banking provides credit, deposit and asset management
solutions for affluent clients.
|
|
|
|
Other The other line of business includes
activities that are not directly attributable to one of the
three principal lines of business. Included in the Other
category are the parent company, eliminations companies,
community development operations, the treasury group, which
includes the securities portfolio, wholesale funding and asset
liability management activities, and the economic impact of
certain assets, capital and support function not specifically
identifiable with the three primary lines of business.
|
The accounting policies of the lines of businesses are the same
as those of the Corporation described in Note 1 (Summary of
Significant Accounting Policies). Funds transfer pricing is used
in the determination of net interest income by assigning a cost
for funds used or credit for funds provided to assets and
liabilities within each business unit. Assets and liabilities
are match-funded based on their maturity, prepayment
and/or
repricing characteristics. As a result the three primary lines
of business are generally insulated from changes in interest
rates. Changes in net interest income due to changes in rates
are reported in Other by the treasury group. Capital has been
allocated on an economic risk basis. Loans and lines of credit
have been allocated capital based upon their respective credit
risk. Asset management holdings in the Wealth segment have been
allocated capital based upon their respective market risk
related to assets under management. Normal business operating
risk has been allocated to each line of business by the level of
noninterest expense. Mismatch between asset and liability cash
flow as well as interest rate risk for mortgage servicing rights
and the origination business franchise value have been allocated
capital based upon their respective asset/liability management
risk. The provision for loan loss is allocated based upon the
actual net charge-offs of each respective line of business,
adjusted for loan growth and changes in risk profile.
Noninterest income and expenses directly attributable to a line
of business are assigned to that line of business. Expenses for
centrally provided services are allocated to the business line
by various activity based cost formulas.
90
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
The Corporations business is conducted solely in the
United States of America. The following tables present a summary
of financial results as of and for the years ended
December 31, 2009, 2008, and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FirstMerit
|
|
December 31, 2009
|
|
Commercial
|
|
|
Retail
|
|
|
Wealth
|
|
|
Other
|
|
|
Consolidated
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
154,504
|
|
|
$
|
188,491
|
|
|
$
|
17,846
|
|
|
$
|
(12,077
|
)
|
|
$
|
348,764
|
|
Provision for loan losses
|
|
|
24,110
|
|
|
|
60,780
|
|
|
|
8,085
|
|
|
|
5,458
|
|
|
|
98,433
|
|
Other income
|
|
|
41,344
|
|
|
|
104,212
|
|
|
|
32,342
|
|
|
|
32,403
|
|
|
|
210,301
|
|
Other expenses
|
|
|
92,470
|
|
|
|
194,848
|
|
|
|
37,838
|
|
|
|
27,661
|
|
|
|
352,817
|
|
Net income
|
|
|
51,524
|
|
|
|
24,098
|
|
|
|
2,771
|
|
|
|
3,777
|
|
|
|
82,170
|
|
Averages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
4,071,785
|
|
|
$
|
2,864,636
|
|
|
$
|
306,690
|
|
|
$
|
3,550,383
|
|
|
$
|
10,793,494
|
|
Loans
|
|
|
4,101,451
|
|
|
|
2,685,133
|
|
|
|
297,589
|
|
|
|
72,810
|
|
|
|
7,156,983
|
|
Earnings assets
|
|
|
4,135,791
|
|
|
|
2,712,068
|
|
|
|
297,589
|
|
|
|
2,779,786
|
|
|
|
9,925,234
|
|
Deposits
|
|
|
1,934,036
|
|
|
|
4,708,554
|
|
|
|
533,039
|
|
|
|
333,959
|
|
|
|
7,509,588
|
|
Economic Capital
|
|
|
258,925
|
|
|
|
188,586
|
|
|
|
42,796
|
|
|
|
559,618
|
|
|
|
1,049,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FirstMerit
|
|
December 31, 2008
|
|
Commercial
|
|
|
Retail
|
|
|
Wealth
|
|
|
Other
|
|
|
Consolidated
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
156,403
|
|
|
$
|
190,455
|
|
|
$
|
16,614
|
|
|
$
|
(7,283
|
)
|
|
$
|
356,189
|
|
Provision for loan losses
|
|
|
19,990
|
|
|
|
37,962
|
|
|
|
1,056
|
|
|
|
(405
|
)
|
|
|
58,603
|
|
Other income
|
|
|
40,516
|
|
|
|
113,995
|
|
|
|
33,855
|
|
|
|
13,070
|
|
|
|
201,436
|
|
Other expenses
|
|
|
89,808
|
|
|
|
191,027
|
|
|
|
36,589
|
|
|
|
13,209
|
|
|
|
330,633
|
|
Net income
|
|
|
56,628
|
|
|
|
49,049
|
|
|
|
8,336
|
|
|
|
5,472
|
|
|
|
119,485
|
|
Averages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
4,015,407
|
|
|
$
|
2,931,259
|
|
|
$
|
311,435
|
|
|
$
|
3,291,341
|
|
|
$
|
10,549,442
|
|
Loans
|
|
|
4,042,370
|
|
|
|
2,796,399
|
|
|
|
306,406
|
|
|
|
58,771
|
|
|
|
7,203,946
|
|
Earnings assets
|
|
|
4,076,392
|
|
|
|
2,832,885
|
|
|
|
306,406
|
|
|
|
2,514,226
|
|
|
|
9,729,909
|
|
Deposits
|
|
|
1,937,237
|
|
|
|
4,620,774
|
|
|
|
458,711
|
|
|
|
400,860
|
|
|
|
7,417,582
|
|
Economic Capital
|
|
|
241,663
|
|
|
|
192,114
|
|
|
|
41,937
|
|
|
|
460,374
|
|
|
|
936,088
|
|
91
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FirstMerit
|
|
December 31, 2007
|
|
Commercial
|
|
|
Retail
|
|
|
Wealth
|
|
|
Other
|
|
|
Consolidated
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
151,490
|
|
|
$
|
193,231
|
|
|
$
|
17,917
|
|
|
$
|
(25,092
|
)
|
|
$
|
337,546
|
|
Provision for loan losses
|
|
|
7,872
|
|
|
|
21,260
|
|
|
|
2,658
|
|
|
|
(955
|
)
|
|
|
30,835
|
|
Other income
|
|
|
41,361
|
|
|
|
104,946
|
|
|
|
35,717
|
|
|
|
14,899
|
|
|
|
196,923
|
|
Other expenses
|
|
|
79,183
|
|
|
|
194,512
|
|
|
|
35,962
|
|
|
|
20,569
|
|
|
|
330,226
|
|
Net income
|
|
|
68,767
|
|
|
|
53,562
|
|
|
|
9,759
|
|
|
|
(9,061
|
)
|
|
|
123,027
|
|
Averages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
3,742,894
|
|
|
$
|
2,998,057
|
|
|
$
|
340,716
|
|
|
$
|
3,237,121
|
|
|
$
|
10,318,788
|
|
Loans
|
|
|
3,762,293
|
|
|
|
2,840,612
|
|
|
|
339,259
|
|
|
|
29,300
|
|
|
|
6,971,464
|
|
Earnings assets
|
|
|
3,801,143
|
|
|
|
2,891,424
|
|
|
|
339,324
|
|
|
|
2,450,868
|
|
|
|
9,482,759
|
|
Deposits
|
|
|
1,898,925
|
|
|
|
4,729,292
|
|
|
|
436,072
|
|
|
|
389,632
|
|
|
|
7,453,921
|
|
Economic Capital
|
|
|
243,845
|
|
|
|
191,899
|
|
|
|
47,237
|
|
|
|
392,545
|
|
|
|
875,526
|
|
|
|
16.
|
Fair
Value Measurement
|
As defined in ASC 820, Fair Value Measurements and
Disclosures, fair value is defined as the price to sell an
asset or transfer a liability in an orderly transaction between
market participants in the principal market or most advantageous
market for the asset or liability. Fair value is based on quoted
market prices, when available, for identical or similar assets
or liabilities. In the absence of quoted market prices,
management determines the fair value of the Corporations
assets and liabilities using valuation models or third-party
pricing services. Both of these approaches rely on market-based
parameters when available, such as interest rate yield curves,
option volatilities and credit spreads, or unobservable inputs.
Unobservable inputs may be based on managements judgment,
assumptions and estimates related to credit quality, liquidity,
interest rates and other relevant inputs.
GAAP establishes a three-level valuation hierarchy for
determining fair value that is based on the transparency of the
inputs used in the valuation process. The inputs used in
determining fair value in each of the three levels of the
hierarchy, highest ranking to lowest, are as follow:
|
|
|
|
|
Level 1 Valuations based on unadjusted
quoted prices in active markets for identical assets or
liabilities.
|
|
|
|
Level 2 Valuations of assets and
liabilities traded in less active dealer or broker markets.
Valuations include quoted prices for similar assets and
liabilities traded in the same market; quoted prices for
identical or similar instruments in markets that are not active;
and model-derived valuations whose inputs are observable or
whose significant value drivers are observable.
|
|
|
|
Level 3 Valuations based on unobservable
inputs significant to the overall fair value measurement.
|
The level in the fair value hierarchy ascribed to a fair value
measurement in its entirety is based on the lowest level input
that is significant to the overall fair value measurement.
92
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
Financial
Instruments Measured at Fair Value
The following table presents the balances of assets and
liabilities measured at fair value on a recurring basis at
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Available-for-sale
securities
|
|
$
|
3,264
|
|
|
$
|
2,513,291
|
|
|
$
|
42,447
|
|
|
$
|
2,559,002
|
|
Residential loans held for sale
|
|
|
|
|
|
|
16,828
|
|
|
|
|
|
|
|
16,828
|
|
Derivative assets
|
|
|
|
|
|
|
28,120
|
|
|
|
|
|
|
|
28,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value on a recurring basis
|
|
$
|
3,264
|
|
|
$
|
2,558,239
|
|
|
$
|
42,447
|
|
|
$
|
2,603,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
|
|
|
|
58,486
|
|
|
|
|
|
|
|
58,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value on a recurring basis
|
|
$
|
|
|
|
$
|
58,486
|
|
|
$
|
|
|
|
$
|
58,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: |
There were no significant transfers
between Levels 1 2 of the hierarchy during the year ended
December 31, 2009,
|
Available-for-sale
securities. When quoted prices are available in
an active market, securities are valued using the quoted price
and are classified as Level 1. The quoted prices are not
adjusted. Level 1 instruments include money market mutual
funds.
For certain available-for sale securities, the Corporation
obtains fair value measurements from an independent third party
pricing service or independent brokers. The detail by level is
shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2
|
|
|
|
|
|
Level 3
|
|
|
|
|
|
|
Independent
|
|
|
|
|
|
Independent
|
|
|
|
# Issues
|
|
|
Pricing Service
|
|
|
# Issues
|
|
|
Broker Quotes
|
|
|
U.S. government agencies
|
|
|
3
|
|
|
$
|
31,897
|
|
|
|
|
|
|
$
|
|
|
U.S States and political subdivisions
|
|
|
469
|
|
|
|
294,119
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
175
|
|
|
|
1,604,965
|
|
|
|
|
|
|
|
|
|
Residential collateralized mortgage securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
57
|
|
|
|
582,305
|
|
|
|
1
|
|
|
|
2
|
|
Non-agency
|
|
|
1
|
|
|
|
5
|
|
|
|
1
|
|
|
|
17
|
|
Corporate debt securities
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
42,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
705
|
|
|
$
|
2,513,291
|
|
|
|
10
|
|
|
$
|
42,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities classified as Level 2 are valued using the
prices obtained from an independent pricing service. The prices
are not adjusted. The independent pricing service uses
industry-standard models to price U.S. Government agencies
and MBSs that consider various assumptions, including time
value, yield curves, volatility factors, prepayment speeds,
default rates, loss severity, current market and contractual
prices for the underlying financial instruments, as well as
other relevant economic measures. Securities of obligations of
state and political subdivisions are valued using a type of
matrix, or grid, pricing in which securities are benchmarked
against the treasury rate based on credit rating. For
collateralized mortgage securities, depending on the
characteristics of a given tranche, a volatility driven
multidimensional static model or Option-Adjusted Spread model is
generally used. Substantially all assumptions used by the
independent pricing service are observable in the marketplace,
can be derived from observable data, or are supported by
observable levels at which transactions are executed in the
marketplace. On a quarterly basis, the Corporation obtains from
the independent pricing service the inputs used to value a
sample of securities held in portfolio. The Corporation reviews
these inputs to ensure the appropriate
93
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
classification, within the fair value hierarchy, is ascribed to
a fair value measurement in its entirety. In addition, all fair
value measurement are reviewed to determine the reasonableness
of the measurement relative to changes in observable market data
and market information received from outside market participants
and analysts.
Available-for-sale
securities classified as level 3 securities are primarily
single issuer trust preferred securities. These trust preferred
securities, which represent less than 1% of the portfolio at
fair value, are valued based on the average of two non-binding
broker quotes. Since these securities are thinly traded, the
Corporation has determined that the using an average of two
non-binding broker quotes is a more conservative valuation
methodology. The non-binding nature of the pricing results in a
classification as Level 3.
Loans held for sale. Effective August 1,
2008, the Corporation elected to account for residential
mortgage loans originated subsequent to such date at fair value.
Previously, these residential loans had been recorded at the
lower of cost or market value. These loans are regularly traded
in active markets through programs offered by the Federal Home
Loan Mortgage Corporation (FHLMC) and the Federal
National Mortgage Association (FNMA), and observable
pricing information is available from market participants. The
prices are adjusted as necessary to include any embedded
servicing value in the loans and to take into consideration the
specific characteristics of certain loans. These adjustments
represent unobservable inputs to the valuation but are not
considered significant to the fair value of the loans.
Accordingly, residential real estate loans held for sale are
classified as Level 2.
Derivatives. The Corporations
derivatives include interest rate swaps and written loan
commitments and forward sales contracts related to residential
mortgage loan origination activity. Valuations for interest rate
swaps are derived from third party models whose significant
inputs are readily observable market parameters, primarily yield
curves, with appropriate adjustments for liquidity and credit
risk. These fair value measurements are classified as
Level 2. The fair values of written loan commitments and
forward sales contracts on the associated loans are based on
quoted prices for similar loans in the secondary market,
consistent with the valuation of residential mortgage loans held
for sale. Expected net future cash flows related to loan
servicing activities are included in the fair value measurement
of written loan commitments. A written loan commitment does not
bind the potential borrower to entering into the loan, nor does
it guarantee that the Corporation will approve the potential
borrower for the loan. Therefore, when determining fair value,
the Corporation makes estimates of expected fallout
(locked pipeline loans not expected to close), using models,
which consider cumulative historical fallout rates and other
factors. Fallout can occur for a variety of reasons including
falling rate environments when a borrower will abandon a fixed
rate loan commitment at one lender and enter into a new lower
fixed rate loan commitment at another, when a borrower is not
approved as an acceptable credit by the lender, or for a variety
of other non-economic reasons. Fallout is not a significant
input to the fair value of the written loan commitments in their
entirety. These measurements are classified as Level 2.
Derivative assets are typically secured through securities with
financial counterparties or cross collateralization with a
borrowing customer. Derivative liabilities are typically secured
through the Corporation pledging securities to financial
counterparties or, in the case of a borrowing customer, by the
right of setoff. The Corporation considers factors such as the
likelihood of default by itself and its counterparties, right of
setoff, and remaining maturities in determining the appropriate
fair value adjustments. All derivative counterparties approved
by the Corporations Asset and Liability Committee are
regularly reviewed, and appropriate business action is taken to
adjust the exposure to certain counterparties, as necessary.
Counterparty exposure is evaluated by netting positions that are
subject to master netting agreements, as well as considering the
amount of marketable collateral securing the position. This
approach used to estimate impacted exposures to counterparties
is also used by the Corporation to estimate its own credit risk
on derivative liability positions. To date, no material losses
due to counterpartys inability to pay any uncollateralized
position have been incurred. There was no significant change in
value of derivative assets and liabilities attributed to credit
risk for the year ended December 31, 2009.
94
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
The changes in Level 3 assets and liabilities measured at
fair value on a recurring basis for the year ended
December 31, 2009 are summarized follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total changes
|
|
|
|
|
Total
|
|
Purchases, sales
|
|
|
|
Fair Value
|
|
in fair values
|
|
|
Fair Value
|
|
realized/unrealized
|
|
issuances
|
|
|
|
twelve months ended
|
|
included in current
|
|
|
January 1, 2009
|
|
gains/(losses)(a)
|
|
settlements, net
|
|
Transfers
|
|
December 31, 2009
|
|
period earnings
|
|
Other debt securities
|
|
$
|
31,385
|
|
|
$
|
11,062
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
42,447
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Reported in other comprehensive
income (loss)
|
Certain financial assets and liabilities are measured at fair
value on a nonrecurring basis. Generally, nonrecurring
valuations are the result of applying accounting standards that
require assets or liabilities to be assessed for impairment, or
recorded at the
lower-of-cost
or fair value. The following table presents the balances of
assets and liabilities measured at fair value on a nonrecurring
basis at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
Mortgage servicing rights
|
|
$
|
|
|
|
$
|
|
|
|
$
|
22,241
|
|
|
$
|
22,241
|
|
|
|
|
|
Impaired and nonaccrual loans
|
|
|
|
|
|
|
|
|
|
|
71,349
|
|
|
|
71,349
|
|
|
|
|
|
Other property(1)
|
|
|
|
|
|
|
|
|
|
|
13,265
|
|
|
|
13,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value on a nonrecurring basis
|
|
$
|
|
|
|
$
|
|
|
|
$
|
106,855
|
|
|
$
|
106,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents the fair value, and
related change in the value, of foreclosed real estate and other
collateral owned by the Corporation during the period.
|
Mortgage Servicing Rights. The Corporation
carries its mortgage servicing rights at lower of cost or fair
value, and therefore, can be subject to fair value measurements
on a nonrecurring basis. Since sales of mortgage servicing
rights tend to occur in private transactions and the precise
terms and conditions of the sales are typically not readily
available, there is a limited market to refer to in determining
the fair value of mortgage servicing rights. As such, like other
participants in the mortgage banking business, the Corporation
relies primarily on a discounted cash flow model, incorporating
assumptions about loan prepayment rates, discount rates,
servicing costs and other economic factors, to estimate the fair
value of its mortgage servicing rights. Since the valuation
model uses significant unobservable inputs, the Corporation
classifies mortgage servicing rights as Level 3.
The Corporation utilizes a third party vendor to perform the
modeling to estimate the fair value of its mortgage servicing
rights. The Corporation reviews the estimated fair values and
assumptions used by the third party in the model on a quarterly
basis. The Corporation also compares the estimates of fair value
and assumptions to recent market activity and against its own
experience.
Prepayment Speeds: Generally, when
market interest rates decline and other factors favorable to
prepayments occur there is a corresponding increase in
prepayments as customers refinance existing mortgages under more
favorable interest rate terms. When a mortgage loan is prepaid
the anticipated cash flows associated with servicing that loan
are terminated, resulting in a reduction of the fair value of
the capitalized mortgage servicing rights. To the extent that
actual borrower prepayments do not react as anticipated by the
prepayment model (i.e., the historical data observed in the
model does not correspond to actual market activity), it is
possible that the prepayment model could fail to accurately
predict mortgage prepayments and could result in significant
earnings volatility. To estimate prepayment speeds, the
Corporation utilizes a third-party prepayment model, which is
based upon statistically derived data linked to certain key
principal indicators involving historical borrower prepayment
activity associated with mortgage loans in the secondary market,
current market interest rates and other factors, including the
Corporations
95
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
own historical prepayment experience. For purposes of model
valuation, estimates are made for each product type within the
mortgage servicing rights portfolio on a monthly basis.
Discount Rate: Represents the rate at
which expected cash flows are discounted to arrive at the net
present value of servicing income. Discount rates will change
with market conditions (i.e., supply vs. demand) and be
reflective of the yields expected to be earned by market
participants investing in mortgage servicing rights.
Cost to Service: Expected costs to
service are estimated based upon the incremental costs that a
market participant would use in evaluating the potential
acquisition of mortgage servicing rights.
Float Income: Estimated float income
is driven by expected float balances (principal, interest and
escrow payments that are held pending remittance to the investor
or other third party) and current market interest rates,
including the six month average of the three-month LIBOR index,
which are updated on a monthly basis for purposes of estimating
the fair value of mortgage servicing rights.
Impaired and nonaccrual loans. Fair value
adjustments for these items typically occur when there is
evidence of impairment. Loans are designated as impaired when,
in the judgment of management based on current information and
events, it is probable that all amounts due according to the
contractual terms of the loan agreement will not be collected.
The measurement of loss associated with impaired loans can be
based on either the observable market price of the loan or the
fair value of the collateral. The Corporation measures fair
value based on the value of the collateral securing the loans.
Collateral may be in the form of real estate or personal
property including equipment and inventory. The vast majority of
the collateral is real estate. The value of the collateral is
determined based on internal estimates as well as third party
appraisals or price opinions. These measurements were classified
as Level 3.
Other Property. Other property includes
foreclosed assets and properties securing residential and
commercial loans. Assets acquired through, or in lieu of, loan
foreclosures are recorded initially at the lower of the loan
balance or fair value, less estimated selling costs, upon the
date of foreclosure. Fair value is based upon appraisals or
third-party price opinions and, accordingly, considered a
Level 3 classification. Subsequent to foreclosure,
valuations are updated periodically, and the assets may be
marked down further, reflecting a new carrying amount.
Disclosures
about Fair Value of Financial Instruments
The carrying amount and fair value of the Corporations
financial instruments are shown below.
96
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
The following methods and assumptions were used to estimate the
fair values of each class of financial instrument presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
2,744,838
|
|
|
$
|
2,744,838
|
|
|
$
|
2,772,848
|
|
|
$
|
2,772,848
|
|
Net loans
|
|
|
6,808,397
|
|
|
|
6,362,674
|
|
|
|
7,321,856
|
|
|
|
6,727,645
|
|
Loan held for sale
|
|
|
16,828
|
|
|
|
16,828
|
|
|
|
11,141
|
|
|
|
11,141
|
|
Cash and due from banks
|
|
|
161,033
|
|
|
|
161,033
|
|
|
|
178,406
|
|
|
|
178,406
|
|
Accrued interest receivable
|
|
|
39,274
|
|
|
|
39,274
|
|
|
|
42,481
|
|
|
|
42,481
|
|
Mortgage servicing rights
|
|
|
20,784
|
|
|
|
22,241
|
|
|
|
18,778
|
|
|
|
18,803
|
|
Derivative assets
|
|
|
28,120
|
|
|
|
28,120
|
|
|
|
42,445
|
|
|
|
42,445
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
7,515,796
|
|
|
$
|
7,519,604
|
|
|
$
|
7,597,679
|
|
|
$
|
7,620,870
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
996,345
|
|
|
|
998,645
|
|
|
|
921,390
|
|
|
|
921,808
|
|
Wholesale borrowings
|
|
|
740,105
|
|
|
|
745,213
|
|
|
|
1,344,195
|
|
|
|
1,350,942
|
|
Accrued interest payable
|
|
|
11,336
|
|
|
|
11,336
|
|
|
|
29,018
|
|
|
|
29,018
|
|
Derivative liabilities
|
|
|
58,486
|
|
|
|
58,486
|
|
|
|
99,881
|
|
|
|
99,881
|
|
Investment Securities See Financial
Instruments Measured at Fair Value above.
Net loans The loan portfolio was segmented
based on loan type and repricing characteristics. Carrying
values are used to estimate fair values of variable rate loans.
A discounted cash flow method was used to estimate the fair
value of fixed-rate loans. Discounting was based on the
contractual cash flows, and discount rates are based on the
year-end yield curve plus a spread that reflects current pricing
on loans with similar characteristics. If applicable, prepayment
assumptions are factored into the fair value determination based
on historical experience and current economic conditions.
Loans held for sale The majority of loans
held for sale are residential mortgage loans which are recorded
at fair value. All other loans held for sale are recorded at the
lower of cost or market, less costs to sell. See Financial
Instruments Measured at Fair Value above.
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.
Mortgage servicing rights See Financial
Instruments Measured at Fair Value above.
Deposits The estimated fair value of deposits
with no stated maturity, which includes demand deposits, money
market accounts and other savings accounts, are established at
carrying value because of the customers ability to
withdraw funds immediately. A discounted cash flow method is
used to estimate the fair value of fixed rate time deposits.
Discounting was based on the contractual cash flows and the
current rates at which similar deposits with similar remaining
maturities would be issued.
Federal funds purchased and securities sold under agreements
to repurchase and wholesale borrowings The
carrying amount of variable rate borrowings including federal
funds purchased is considered to be their fair value. Quoted
market prices or the discounted cash flow method was used to
estimate the fair value of the Corporations long-
97
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
term debt. Discounting was based on the contractual cash flows
and the current rate at which debt with similar terms could be
issued.
Accrued interest payable The carrying amount
is considered a reasonable estimate of fair value.
Derivative assets and liabilities See
Financial Instruments Measured at Fair Value above.
Financial
instruments recorded at Fair Value
The Corporation may elect to report most financial instruments
and certain other items at fair value on an
instrument-by-instrument
basis with changes in fair value reported in net income. This
election can be made at the acquisition of an eligible financial
asset, financial liability or firm commitment or when certain
specified reconsideration events occur. The fair value election
may not be revoked once an election is made.
Effective August 1, 2008, the Corporation elected to fair
value newly originated conforming fixed-rate and adjustable-rate
first mortgage loans held for sale. Previously, these loans had
been recorded at the lower of cost or market value. The election
of the fair value option aligns the accounting for these loans
with the related hedges. It also eliminates the requirements of
hedge accounting under GAAP. The fair value option was not
elected for loans held for investment.
The following table reflects the differences, as of
December 31, 2009, between the fair value carrying amount
of residential mortgages held for sale and the aggregate unpaid
principal amount the Corporation is contractually entitled to
receive at maturity. None of these loans were 90 days or
more past due, nor were any on nonaccrual status.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
|
|
Fair Value
|
|
|
Aggregate Unpaid
|
|
|
Less Aggregate
|
|
|
|
Carrying Amount
|
|
|
Principal
|
|
|
Unpaid Principal
|
|
|
Loans held for sale reported at fair value
|
|
$
|
16,828
|
|
|
$
|
16,679
|
|
|
$
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on loans held for sale is accrued on the
principal outstanding primarily using the
simple-interest method.
Loans held for sale are measured at fair value with changes in
fair value recognized in current earnings. The change in fair
value included in earnings for the year ended December 31,
2009 was not significant.
|
|
17.
|
Derivatives
and Hedging Activities
|
The Corporation, through its mortgage banking and risk
management operations, is party to various derivative
instruments that are used for asset and liability management and
customers financing needs. Derivative instruments are
contracts between two or more parties that have a notional
amount and underlying variable, require no net investment and
allow for the net settlement of positions. The notional amount
serves as the basis for the payment provision of the contract
and takes the form of units, such as shares or dollars. The
underlying variable represents a specified interest rate, index
or other component. The interaction between the notional amount
and the underlying variable determines the number of units to be
exchanged between the parties and influences the market value of
the derivative contract. Derivative assets and liabilities are
recorded at fair value on the balance sheet and do not take into
account the effects of master netting agreements. Master netting
agreements allow the Corporation to settle all derivative
contracts held with a single counterparty on a net basis, and to
offset net derivative positions with related collateral, where
applicable.
The predominant derivative and hedging activities include
interest rate swaps and certain mortgage banking activities.
Generally, these instruments help the Corporation manage
exposure to market risk, and meet customer financing needs.
Market risk represents the possibility that economic value or
net interest income will be adversely
98
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
affected by fluctuations in external factors, such as interest
rates, market-driven rates and prices or other economic factors.
Derivatives
Designated in Hedge Relationships
The Corporation uses interest rate swaps to modify its exposure
to interest rate risk. For example, the Corporation employs fair
value hedging strategies to convert specific fixed-rate loans
into variable-rate instruments. Gains or losses on the
derivative instrument as well as the offsetting gains or losses
on the hedged item attributable to the hedged risk are
recognized in the same line item associated with the hedged item
in current earnings. The Corporation also employs cash flow
hedging strategies to effectively convert certain floating-rate
liabilities into fixed-rate instruments. The effective portion
of the gains or losses on the derivative instrument is reported
as a component of other comprehensive income (OCI)
and reclassified into earnings in the same line item associated
with the forecasted transaction and in the same period or
periods during which the hedged transaction affects earnings.
The remaining gains or loss on the derivative instrument in
excess of the cumulative change in the present value of future
cash flows of the hedged item, if any, are recognized in the
current earnings.
At December 31, 2009 and 2008, the notional or contractual
amounts and fair value of the Corporations derivatives
designated in hedge relationships were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
|
Liability Derivatives
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Notional/
|
|
|
|
|
|
Notional/
|
|
|
|
|
|
|
Notional/
|
|
|
|
|
|
Notional/
|
|
|
|
|
|
|
Contract
|
|
|
Fair
|
|
|
Contract
|
|
|
Fair
|
|
|
|
Contract
|
|
|
Fair
|
|
|
Contract
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value(a)
|
|
|
Amount
|
|
|
Value(a)
|
|
|
|
Amount
|
|
|
Value(b)
|
|
|
Amount
|
|
|
Value(b)
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedges
|
|
$
|
1,452
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
$
|
398,895
|
|
|
$
|
27,769
|
|
|
$
|
479,801
|
|
|
$
|
49,552
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,452
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
$
|
398,895
|
|
|
$
|
27,769
|
|
|
$
|
579,801
|
|
|
$
|
50,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Included in Other Assets on the
Consolidate Balance Sheet
|
|
(b)
|
|
Included in Other Liabilities on
the Consolidated Balance Sheet
|
Through the Corporations Fixed Rate Advantage Program
(FRAP Program) a customer received a fixed interest
rate commercial loan and the Corporation subsequently converted
that fixed rate loan to a variable rate instrument over the term
of the loan by entering into an interest rate swap with a dealer
counterparty. The Corporation receives a fixed rate payment from
the customer on the loan and pays the equivalent amount to the
dealer counterparty on the swap in exchange for a variable rate
payment based on the one month London Inter-Bank Offered Rate
(LIBOR) index. These interest rate swaps are
designated as fair value hedges. Through application of the
short cut method of accounting, there is an
assumption that the hedges are effective. The Corporation
discontinued originating interest rate swaps under the FRAP
program in February 2008 and subsequently began a new interest
rate swap program for commercial loan customers, termed the
Back-to-Back
Program.
The Corporation entered into Federal Funds interest rate swaps
to lock in a fixed rate to offset the risk of future
fluctuations in the variable interest rate on Federal Funds
borrowings. The Corporation entered into a swap with the
counterparty during which time the Corporation paid a fixed rate
and received a floating rate based on the current effective
Federal Funds rate. The Corporation then borrowed Federal Funds
in an amount equal to at least the outstanding notional amount
of the swap(s) which resulted in the Corporation being left with
a fixed rate instrument. These instruments were designated as
cash flow hedges. The last Federal Funds interest rate swap
matured in the quarter ended March 31, 2009, and there were
no Federal Funds interest rate swaps outstanding as of
December 31, 2009.
99
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
For the years ended December 31, 2009, 2008 and 2007, the
amount of the hedge effectiveness on cash flow hedges recognized
in OCI and reclassified from OCI into other income as well as
the amount of hedge ineffectiveness recognized in other income
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
December 31, 2009
|
|
December 31, 2008
|
|
December 31, 2007
|
|
|
Gain/(Loss)
|
|
Gain/(Loss)
|
|
Gain/(Loss)
|
|
Gain/(Loss)
|
|
Gain/(Loss)
|
|
Gain/(Loss)
|
|
Gain/(Loss)
|
|
Gain/(Loss)
|
|
Gain/(Loss)
|
|
|
Recognized in
|
|
Reclassified
|
|
Recognized in
|
|
Recognized in
|
|
Reclassified
|
|
Recognized in
|
|
Recognized in
|
|
Reclassified
|
|
Recognized in
|
|
|
OCI on
|
|
from
|
|
Income on
|
|
OCI on
|
|
from
|
|
Income on
|
|
OCI on
|
|
from
|
|
Income on
|
|
|
Derivative
|
|
Accumulated
|
|
Derivative
|
|
Derivative
|
|
Accumulated
|
|
Derivative
|
|
Derivative
|
|
Accumulated
|
|
Derivative
|
|
|
(Effective
|
|
OCI into
|
|
(Ineffective
|
|
(Effective
|
|
OCI into
|
|
(Ineffective
|
|
(Effective
|
|
OCI into
|
|
(Ineffective
|
|
|
Portion)
|
|
Income
|
|
Portion)
|
|
Portion)
|
|
Income
|
|
Portion)
|
|
Portion)
|
|
Income
|
|
Portion)
|
|
Interest rate swaps
|
|
$
|
|
|
|
$
|
692
|
|
|
$
|
328
|
|
|
$
|
94
|
|
|
$
|
(974
|
)
|
|
$
|
601
|
|
|
$
|
(1,249
|
)
|
|
$
|
(611
|
)
|
|
$
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
Not Designated in Hedge Relationships
At December 31, 2009 and 2008, the notional or contractual
amounts and fair value of the Corporations derivatives not
designated in hedge relationships were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
|
Liability Derivatives
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Notional/
|
|
|
|
|
|
Notional/
|
|
|
|
|
|
|
Notional/
|
|
|
|
|
|
Notional/
|
|
|
|
|
|
|
Contract
|
|
|
Fair
|
|
|
Contract
|
|
|
Fair
|
|
|
|
Contract
|
|
|
Fair
|
|
|
Contract
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value(a)
|
|
|
Amount
|
|
|
Value(a)
|
|
|
|
Amount
|
|
|
Value(b)
|
|
|
Amount
|
|
|
Value(b)
|
|
Interest rate swaps
|
|
$
|
639,285
|
|
|
$
|
26,840
|
|
|
$
|
469,133
|
|
|
$
|
42,371
|
|
|
|
$
|
686,947
|
|
|
$
|
30,717
|
|
|
$
|
519,815
|
|
|
$
|
49,454
|
|
Mortgage loan commitments
|
|
|
55,023
|
|
|
|
396
|
|
|
|
58,021
|
|
|
|
591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward sales contracts
|
|
|
67,085
|
|
|
|
884
|
|
|
|
67,027
|
|
|
|
(517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TBA Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,458
|
|
|
|
|
|
|
|
88,848
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,171
|
|
|
|
|
|
|
|
10,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
761,393
|
|
|
$
|
28,120
|
|
|
$
|
594,181
|
|
|
$
|
42,445
|
|
|
|
$
|
767,576
|
|
|
$
|
30,717
|
|
|
$
|
619,560
|
|
|
$
|
49,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Included in Other Assets on the
Consolidate Balance Sheet
|
|
(b)
|
|
Included in Other Liabilities on
the Consolidated Balance Sheet
|
Interest Rate Swaps. In 2008, the Corporation
implemented the
Back-to-Back
Program, which is an interest rate swap program for commercial
loan customers. The
Back-to-Back
Program provides the customer with a fixed rate loan while
creating a variable rate asset for the Corporation through the
customer entering into an interest rate swap with the
Corporation on terms that match the loan. The Corporation
offsets its risk exposure by entering into an offsetting
interest rate swap with a dealer counterparty. These swaps do
not qualify as designated hedges, therefore, each swap is
accounted for as a standalone derivative.
The Corporation has other interest rate swaps associated with
fixed rate commercial loans with a notional value of
$47.7 million as of December 31, 2009. These swaps are
also accounted for as standalone derivatives. This portfolio of
interest rate swaps was terminated in January 2010.
Mortgage banking. In the normal course of
business, the Corporation sells originated mortgage loans into
the secondary mortgage loan markets. During the period of loan
origination and prior to the sale of the loans in the secondary
market, the Corporation has exposure to movements in interest
rates associated with mortgage loans that are in the
mortgage pipeline and the mortgage
warehouse. A pipeline loan is one in which the Corporation
has entered
100
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
into a written mortgage loan commitment with a potential
borrower that will be held for resale. Once a mortgage loan is
closed and funded, it is included within the mortgage warehouse
of loans awaiting sale and delivery into the secondary market.
Written loan commitments that relate to the origination of
mortgage loans that will be held for resale are considered
free-standing derivatives and do not qualify for hedge
accounting. Written loan commitments generally have a term of up
to 60 days before the closing of the loan. The loan
commitment does not bind the potential borrower to entering into
the loan, nor does it guarantee that the Corporation will
approve the potential borrower for the loan. Therefore, when
determining fair value, the Corporation makes estimates of
expected fallout (loan commitments not expected to
close), using models, which consider cumulative historical
fallout rates and other factors. Fallout can occur for a variety
of reasons including falling rate environments when a borrower
will abandon an interest rate lock loan commitment at one lender
and enter into a new lower interest rate lock loan commitment at
another, when a borrower is not approved as an acceptable credit
by the lender, or for a variety of other non-economic reasons.
In addition, expected net future cash flows related to loan
servicing activities are included in the fair value measurement
of a written loan commitment.
Written loan commitments in which the borrower has locked in an
interest rate results in market risk to the Corporation to the
extent market interest rates change from the rate quoted to the
borrower. The Corporation economically hedges the risk of
changing interest rates associated with its interest rate lock
commitments by entering into forward sales contracts.
The Corporations warehouse (mortgage loans held for sale)
is subject to changes in fair value, due to fluctuations in
interest rates from the loans closing date through the
date of sale of the loan into the secondary market. Typically,
the fair value of the warehouse declines in value when interest
rates increase and rises in value when interest rates decrease.
To mitigate this risk, the Corporation enters into forward sales
contracts on a significant portion of the warehouse to provide
an economic hedge against those changes in fair value.
Effective August 1, 2008, the Corporation elected to fair
value, on a prospective basis, newly originated conforming
fixed-rate and adjustable-rate first mortgage warehouse loans.
Prior to this election, all warehouse loans were carried at the
lower of cost or market and a hedging program was utilized on
its mortgage loans held for sale to gain protection for the
changes in fair value of the mortgage loans held for sale and
the forward sales contracts. As such, both the mortgage loans
held for sale and the forward sales contracts were recorded at
fair value with ineffective changes in value recorded in current
earnings as Loan sales and servicing income. Upon the
Corporations election to prospectively account for
substantially all of its mortgage loan warehouse products at
fair value it discontinued the application of designated hedging
relationships for new originations.
The Corporation periodically enters into derivative contracts by
purchasing TBA Securities which are utilized as economic hedges
of its MSRs to minimize the effects of loss of value of MSRs
associated with increase prepayment activity that generally
results from declining interest rates. In a rising interest rate
environment, the value of the MSRs generally will increase while
the value of the hedge instruments will decline. The hedges are
economic hedges only, and are terminated and reestablished as
needed to respond to changes in market conditions. The
Corporation held no outstanding TBA Securities contracts as of
December 31, 2009 and 2008.
Credit contracts. Prior to implementation of
the
Back-to-Back
Program, certain of the Corporations commercial loan
customers entered into interest rate swaps with unaffiliated
dealer counterparties. The Corporation entered into swap
participations with these dealer counterparties whereby the
Corporation guaranteed payment in the event that the
counterparty experienced a loss on the interest rate swap due to
a failure to pay by the Corporations commercial loan
customer. The Corporation simultaneously entered into
reimbursement agreements with the commercial loan customers
obligating the customers to reimburse the Corporation for any
payments it makes under the swap participations. The Corporation
monitors its payment risk on its swap participations by
monitoring the creditworthiness of its commercial loan
customers, which is based on the normal credit review process
the Corporation would
101
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
have performed had it entered into these derivative instruments
directly with the commercial loan customers. At
December 31, 2009, the remaining terms on these swap
participation agreements generally ranged from one to nine
years. The Corporations maximum estimated exposure to
written swap participations, as measured by projecting a maximum
value of the guaranteed derivative instruments based on interest
rate curve simulations and assuming 100% default by all obligors
on the maximum values, was approximately $4.2 million as of
December 31, 2009. The fair values of the written swap
participations were not material at December 31, 2009 and
2008.
Gains and losses recognized in income on non-designated hedging
instruments for the years ended December 31, 2009, 2008 and
2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain/(Loss)
|
|
Amount of Gain/(Loss) Recognized
|
|
Derivatives not
|
|
Recognized
|
|
in Income on Derivative
|
|
designated as hedging
|
|
in Income on
|
|
Year Ended
|
|
instruments
|
|
Derivative
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Interest rate swaps
|
|
Other expense
|
|
$
|
(3,877
|
)
|
|
$
|
|
|
|
|
|
|
Mortgage loan commitments
|
|
Other income
|
|
|
(195
|
)
|
|
|
591
|
|
|
|
|
|
Forward sales contracts
|
|
Other income
|
|
|
1,401
|
|
|
|
(517
|
)
|
|
|
|
|
TBA Securities
|
|
Other income
|
|
|
(4,451
|
)
|
|
|
2,051
|
|
|
|
|
|
Credit contracts
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(7,122
|
)
|
|
$
|
2,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty
Credit Risk
Like other financial instruments, derivatives contain an element
of credit risk the possibility that the
Corporation will incur a loss because a counterparty, which may
be a bank, a broker-dealer or a customer, fails to meet its
contractual obligations. This risk is measured as the expected
positive replacement value of contracts. All derivative
contracts may be executed only with exchanges or counterparties
approved by the Corporations Asset and Liability
Committee, and only within the Corporations Board of
Directors Credit Committee approved credit exposure limits.
Where contracts have been created for customers, the Corporation
enters into derivatives with dealers to offset its risk
exposure. To manage the credit exposure to exchanges and
counterparties, the Corporation generally enters into bilateral
collateral agreements using standard forms published by the
International Swaps and Derivatives Association
(ISDA). These agreements are to include thresholds
of credit exposure or the maximum amount of unsecured credit
exposure which the Corporation is willing to assume. Beyond the
threshold levels, collateral in the form of securities made
available from the investment portfolio or other forms of
collateral acceptable under the bilateral collateral agreements
are provided. The threshold levels for each counterparty are
established by the Corporations Asset and Liability
Committee. The Corporation generally posts collateral in the
form of highly rated Government Agency issued bonds or MBSs.
Collateral posted against derivative liabilities was
$70.0 million and $99.4 million as of
December 31, 2009 and 2008, respectively.
102
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
|
|
18.
|
Commitments
and Contingencies
|
Obligations
Under Non-cancelable Leases
The Corporation is obligated under various non-cancelable
operating leases on branch offices. Minimum future rental
payments under non-cancelable operating leases at
December 31, 2009 are as follows:
|
|
|
|
|
|
|
Lease
|
|
At December 31,
|
|
Commitments
|
|
|
2010
|
|
$
|
5,370
|
|
2011
|
|
|
4,909
|
|
2012
|
|
|
4,068
|
|
2013
|
|
|
3,492
|
|
2014
|
|
|
2,787
|
|
2015-2028
|
|
|
11,282
|
|
|
|
|
|
|
|
|
$
|
31,908
|
|
|
|
|
|
|
Commitments
to Extend Credit
Commitments to extend credit are agreements to lend to a
customer provided there is no violation of any condition
established in the contract. Loan commitments to originate
residential mortgage loans held for sale and forward commitments
to sell residential mortgage loans are considered derivative
instruments, and the fair value of these commitments is recorded
on the consolidated balance. Additional information is provided
in Note 17 (Derivatives and Hedging Activities).
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. Loan commitments involve credit risk not
reflected on the balance sheet. The Corporation mitigates
exposure to credit risk with internal controls that guide how
applications for credit are reviewed and approved, how credit
limits are established and, when necessary, how demands for
collateral are made. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment,
and income-producing commercial properties. Management evaluates
the creditworthiness of each prospective borrower on a
case-by-case
basis and, when appropriate, adjusts the allowance for probable
credit losses inherent in all commitments. Additional
information pertaining to this allowance is included in
Note 4 (Loans and Allowance for Loan Losses) and under the
heading Allowance for Loan Losses and Reserve for Unfunded
Lending Commitments within Managements Discussion
and Analysis of Financial Condition and Results of Operation
of this report.
The following table shows the remaining contractual amount of
each class of commitments to extend credit as of
December 31, 2009 and 2008. This amount represents the
Corporations maximum exposure to loss if the customer were
to draw upon the full amount of the commitment and subsequently
default on payment for the total amount of the then outstanding
loan.
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Loan Commitments
|
|
|
|
|
|
|
|
|
Commerical
|
|
$
|
1,397,045
|
|
|
$
|
1,335,749
|
|
Consumer
|
|
|
1,596,834
|
|
|
|
1,699,648
|
|
|
|
|
|
|
|
|
|
|
Total loan commitments
|
|
$
|
2,993,879
|
|
|
$
|
3,035,397
|
|
|
|
|
|
|
|
|
|
|
103
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
Guarantees
The Corporation is a guarantor in certain agreements with third
parties. The following table shows the types of guarantees the
Corporation had outstanding as of December 31, 2009 and
2008.
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Financial guarantees
|
|
|
|
|
|
|
|
|
Standby letters of credit
|
|
$
|
156,374
|
|
|
$
|
160,805
|
|
Loans sold with recourse
|
|
|
60,068
|
|
|
|
81,779
|
|
|
|
|
|
|
|
|
|
|
Total loan commitments
|
|
$
|
216,442
|
|
|
$
|
242,584
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit obligate the Corporation to pay a
specified third party when a customer fails to repay an
outstanding loan or debt instrument, or fails to perform some
contractual nonfinancial obligation. The credit risk involved in
issuing letters of credit is essentially the same as involved in
extending loan facilities to customers. Collateral held varies,
but may include marketable securities, equipment and real
estate. Any amounts drawn under standby letters of credit are
treated as loans; they bear interest and pose the same credit
risk to the Corporation as a loan. Except for short-term
guarantees of $91.7 million and $82.0 million at
December 31, 2009 and 2008, respectively, the remaining
guarantees extend in varying amounts through 2014.
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
uses the same credit policies originating loans which will be
sold with recourse as it does for any other type of loan. The
Corporations 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. An allowance of $3.0 million and
$5.3 million was established as of December 31, 2009
and 2008, respectively.
Litigation
The Corporation and its subsidiaries are from time to time
engaged in various matters of litigation, other assertions of
improper or fraudulent loan practices or lending violations, and
other matters. In addition, as part of the ordinary course of
business, the Corporation and its subsidiaries are parties to
litigation involving claims to the ownership of funds in
particular accounts, the collection of delinquent accounts,
challenges to security interests in collateral, and foreclosure
interests, that is incidental to its regular business
activities. While the ultimate liability with respect to these
other litigation matters and claims cannot be determined at this
time, the Corporation believes that damages, if any, and other
amounts relating to pending matters are not likely to be
material to the consolidated financial position or results of
operations. Reserves are established for these various matters
of litigation, when appropriate under ASC Topic 450,
Contingencies, based in part upon the advice of legal
counsel.
Capital
Transactions
On January 9, 2009, the Corporation completed the sale to
the United States Department of the Treasury (the
Treasury) of $125.0 million of newly issued
FirstMerit non-voting preferred shares as part of the
Treasurys Troubled Assets Relief Program
(TARP) Capital Purchase Program (CPP).
FirstMerit issued and sold to the Treasury for an aggregate
purchase price of $125.0 million in cash
(1) 125,000 shares of FirstMerits Fixed Rate
Cumulative Perpetual Preferred Shares, Series A, each
without par value and having a liquidation preference of $1,000
per share, and (2) a warrant to purchase 952,260 FirstMerit
common shares, each without par value, at an exercise price of
$19.69 per share.
104
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
On April 22, 2009, the Corporation repurchased of all
125,000 shares of its Fixed Rate Cumulative Perpetual
Preferred Stock, Series A for $126.2 million which
included all accrued and unpaid dividends as well as the
unamortized discount on the preferred stock.
On May 27, 2009, the Corporation completed the repurchase
of the warrant held by the Treasury. The Corporation paid
$5.0 million to the Treasury to repurchase the warrant.
On May 6, 2009, the Corporation entered into a Distribution
Agency Agreement with Credit Suisse Securities (USA) LLC
(Credit Suisse) pursuant to which the Corporation,
from time to time, may offer and sell shares of the
Corporations common stock. Sales of the common stock are
made by means of ordinary brokers transactions on the
Nasdaq Global Select Market at market prices, in block
transactions, or as otherwise agreed with Credit Suisse. At
December 31, 2009, the Corporation had sold
4.3 million shares with an average value of $18.98 per
share and has authorization to raise an additional
$19.0 million through this program.
Earnings
per Share
The reconciliation of the numerator and denominator used in the
basic earnings per share calculation to the numerator and
denominator used in the diluted earnings per share calculation
is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
82,170
|
|
|
$
|
119,485
|
|
|
$
|
123,027
|
|
Less: preferred dividend
|
|
|
(6,167
|
)
|
|
|
|
|
|
|
|
|
Less: accretion of preferred stock discount
|
|
|
(204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
75,799
|
|
|
$
|
119,485
|
|
|
$
|
123,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding*
|
|
|
84,678,045
|
|
|
|
82,059,662
|
|
|
|
81,593,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share*
|
|
$
|
0.90
|
|
|
$
|
1.46
|
|
|
$
|
1.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders
|
|
$
|
75,799
|
|
|
$
|
119,485
|
|
|
$
|
123,027
|
|
Add: interest expense on convertible bonds, net of tax
|
|
|
|
|
|
|
5
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income used in diluted earnings per share calculation
|
|
$
|
75,799
|
|
|
$
|
119,490
|
|
|
$
|
123,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding*
|
|
|
84,678,045
|
|
|
|
82,059,662
|
|
|
|
81,593,144
|
|
Add: common stock equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option plans
|
|
|
8,102
|
|
|
|
23,548
|
|
|
|
94,622
|
|
Convertible debentures/preferred securities
|
|
|
|
|
|
|
14,228
|
|
|
|
43,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common and common stock equivalent shares outstanding*
|
|
|
84,686,147
|
|
|
|
82,097,438
|
|
|
|
81,731,286
|
|
Diluted net income per share*
|
|
$
|
0.90
|
|
|
$
|
1.46
|
|
|
$
|
1.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Average outstanding shares and per
share data restated to reflect the effect of stock dividends
declared April 28, 2009 and August 20, 2009.
|
For the years ended December 31, 2009, 2008, and 2007,
options to purchase 4.9 million shares, 6.4 million
shares and 6.3 million shares, respectively, were
outstanding but not included in the computation of diluted
earnings per share because they were antidilutive.
105
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
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
Corporations 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 Corporations
assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The
Corporations capital amounts and classification are also
subject to quantitative judgments by regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Corporation to maintain minimum
amounts and ratios (set forth in the following table) of total
and Tier I capital to risk-weighted assets, and of
Tier I capital to average assets. At December 31, 2009
and 2008, Management believes 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 Managements Discussion and
Analysis of financial condition and results of operations.
At December 31, 2009 and 2008, the most recent notification
from the OCC categorized FirstMerit Bank as well capitalized
under the regulatory framework for prompt corrective action. To
be categorized as well capitalized FirstMerit Bank must maintain
minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the table. In
managements opinion, there are no conditions or events
since the OCCs notification that have changed First Merit
Banks categorization as well capitalized.
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adequately
|
|
|
|
|
|
|
|
|
Actual
|
|
|
|
|
Capitalized:
|
|
|
|
|
Well Capitalized:
|
|
As of December 31, 2009
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
Amount
|
|
|
|
|
Ratio
|
|
|
Total Capital
(to Risk Weighted Assets)
|
|
$
|
1,071,682
|
|
|
|
13.34
|
%
|
|
>
|
|
$
|
642,670
|
|
|
|
8.00
|
%
|
|
>
|
|
$
|
803,337
|
|
|
>
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
(to Risk Weighted Assets)
|
|
$
|
971,013
|
|
|
|
12.09
|
%
|
|
>
|
|
$
|
321,335
|
|
|
|
4.00
|
%
|
|
>
|
|
$
|
482,002
|
|
|
>
|
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
(to Average Assets)
|
|
$
|
971,013
|
|
|
|
9.39
|
%
|
|
>
|
|
$
|
413,842
|
|
|
|
4.00
|
%
|
|
>
|
|
$
|
517,303
|
|
|
>
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adequately
|
|
|
|
|
|
|
|
|
Actual
|
|
|
|
|
Capitalized:
|
|
|
|
|
Well Capitalized:
|
|
As of December 31, 2008
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
Amount
|
|
|
|
|
Ratio
|
|
|
Total Capital
(to Risk Weighted Assets)
|
|
$
|
1,007,679
|
|
|
|
11.80
|
%
|
|
>
|
|
$
|
683,403
|
|
|
|
8.00
|
%
|
|
>
|
|
$
|
854,254
|
|
|
>
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
(to Risk Weighted Assets)
|
|
$
|
870,870
|
|
|
|
10.19
|
%
|
|
>
|
|
$
|
341,702
|
|
|
|
4.00
|
%
|
|
>
|
|
$
|
512,553
|
|
|
>
|
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
(to Average Assets)
|
|
$
|
870,870
|
|
|
|
8.19
|
%
|
|
>
|
|
$
|
425,481
|
|
|
|
4.00
|
%
|
|
>
|
|
$
|
531,851
|
|
|
>
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
Bank
Only
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adequately
|
|
|
|
|
|
|
|
|
Actual
|
|
|
|
|
Capitalized:
|
|
|
|
|
Well Capitalized:
|
|
As of December 31, 2009
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
Amount
|
|
|
|
|
Ratio
|
|
|
Total Capital
(to Risk Weighted Assets)
|
|
$
|
922,919
|
|
|
|
11.51
|
%
|
|
>
|
|
$
|
641,231
|
|
|
|
8.00
|
%
|
|
>
|
|
$
|
801,539
|
|
|
>
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
(to Risk Weighted Assets)
|
|
$
|
826,517
|
|
|
|
10.31
|
%
|
|
>
|
|
$
|
320,615
|
|
|
|
4.00
|
%
|
|
>
|
|
$
|
480,923
|
|
|
>
|
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
(to Average Assets)
|
|
$
|
826,517
|
|
|
|
8.00
|
%
|
|
>
|
|
$
|
413,040
|
|
|
|
4.00
|
%
|
|
>
|
|
$
|
516,300
|
|
|
>
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
Only
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adequately
|
|
|
|
|
|
|
|
|
Actual
|
|
|
|
|
Capitalized:
|
|
|
|
|
Well Capitalized:
|
|
As of December 31, 2008
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
Amount
|
|
|
|
|
Ratio
|
|
|
Total Capital
(to Risk Weighted Assets)
|
|
$
|
895,703
|
|
|
|
10.51
|
%
|
|
>
|
|
$
|
681,973
|
|
|
|
8.00
|
%
|
|
>
|
|
$
|
852,466
|
|
|
>
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
(to Risk Weighted Assets)
|
|
$
|
762,634
|
|
|
|
8.95
|
%
|
|
>
|
|
$
|
340,986
|
|
|
|
4.00
|
%
|
|
>
|
|
$
|
511,480
|
|
|
>
|
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
(to Average Assets)
|
|
$
|
762,634
|
|
|
|
7.18
|
%
|
|
>
|
|
$
|
424,764
|
|
|
|
4.00
|
%
|
|
>
|
|
$
|
530,955
|
|
|
>
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.
|
Subsequent
Events (unaudited)
|
On February 19, 2010, FirstMerit Bank, N.A., completed the
previously announced acquisition of certain assets and the
transfer of certain liabilities with respect to 24 branches
of First Bank located in the greater Chicago, Illinois area.
Based on the January 31, 2010 pre-closing balance sheet,
the acquisition included the assumption of approximately
$1.2 billion in deposits and the purchase of
$330.4 million of loans and certain other assets of First
Bank associated with the acquired branch locations. In
consideration of the purchased assets and transferred
liabilities, FirstMerit Bank paid to First Bank a 3.50% deposit
premium on the total deposits assumed on February 19, 2010,
or $42.1 million based on the January 31, 2010
pre-closing balance sheet. In accordance with the purchase and
assumption agreement, total deposits assumed and loans and other
assets purchased are subject to change based on receipt and
review of the February 19, 2010 closing balance sheet; the
consideration paid will be adjusted accordingly. This
acquisition will be accounted for under the acquisition method
in accordance with ASC 805. The fair value of the assets
acquired and liabilities assumed have yet to be determined.
On February 19, 2010 the Corporation acquired, through its
subsidiary FirstMerit Bank, N.A., the operations of George
Washington Savings Bank, the subsidiary of George Washington
Savings Bancorp, through a purchase and assumption agreement
with the FDIC. The Illinois Department of Financial and
Professional Regulations, Division of Banking, declared George
Washington Savings Bank closed on February 19, 2010 and
appointed the FDIC as receiver. As of January 30, 2010,
George Washington Savings Bank had approximately
$393 million in loans which will be subject to a
loss-sharing agreement with the FDIC.
107
FIRSTMERIT
CORPORATION AND SUBSIDARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands)
|
|
22.
|
Quarterly
Financial Data (Unaudited)
|
Quarterly financial and per share data for the years ended 2009
and 2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total interest income
|
|
2009
|
|
$
|
119,356
|
|
|
$
|
116,159
|
|
|
$
|
113,671
|
|
|
$
|
110,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
145,524
|
|
|
$
|
135,771
|
|
|
$
|
137,150
|
|
|
$
|
135,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
2009
|
|
$
|
32,462
|
|
|
$
|
29,044
|
|
|
$
|
26,294
|
|
|
$
|
22,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
61,225
|
|
|
$
|
48,240
|
|
|
$
|
46,029
|
|
|
$
|
42,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
2009
|
|
$
|
86,894
|
|
|
$
|
87,115
|
|
|
$
|
87,377
|
|
|
$
|
87,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
84,299
|
|
|
$
|
87,531
|
|
|
$
|
91,121
|
|
|
$
|
93,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
2009
|
|
$
|
18,065
|
|
|
$
|
26,521
|
|
|
$
|
23,887
|
|
|
$
|
29,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
11,521
|
|
|
$
|
14,565
|
|
|
$
|
15,531
|
|
|
$
|
16,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
2009
|
|
$
|
29,434
|
|
|
$
|
15,495
|
|
|
$
|
22,763
|
|
|
$
|
14,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
31,443
|
|
|
$
|
29,153
|
|
|
$
|
29,753
|
|
|
$
|
29,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per basic share*
|
|
2009
|
|
$
|
0.33
|
|
|
$
|
0.13
|
|
|
$
|
0.27
|
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
0.38
|
|
|
$
|
0.36
|
|
|
$
|
0.37
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted share*
|
|
2009
|
|
$
|
0.33
|
|
|
$
|
0.13
|
|
|
$
|
0.27
|
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
0.38
|
|
|
$
|
0.36
|
|
|
$
|
0.37
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Per share data restated to reflect
the effect of stock dividends declared April 28, 2009 and
August 20, 2009.
|
108
MANAGEMENTS
REPORT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
FirstMerit Corporation is responsible for the preparation,
integrity, and fair presentation of the consolidated financial
statements and related notes included in this annual report. The
consolidated financial statements and notes included in this
annual report have been prepared in conformity with accounting
principles generally accepted in the United States necessarily
include some amounts that are based on Managements best
estimates and judgments. The Management of FirstMerit
Corporation is responsible for establishing and maintaining
adequate internal controls over financial reporting that are
designed to produce reliable financial statements in conformity
with accounting principles generally accepted in the United
States of America. FirstMerit Corporations system of
internal control over financial reporting contains
self-monitoring mechanisms, and compliance is tested and
evaluated through internal audits. Our internal auditors monitor
the operation of the internal control system and report findings
and recommendations to management and the Audit Committee of the
Board of Directors. Actions are taken to correct potential
deficiencies as they are identified. The Audit Committee,
consisting entirely of directors who are independent under the
listing standards of the Nasdaq Stock Market, meets with
management, the internal auditors and the independent registered
public accounting firm, reviews audit plans and results, and
reviews managements actions in discharging its
responsibilities for accounting, financial reporting and
internal controls.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed FirstMerit Corporations system of
internal control over financial reporting as of
December 31, 2009, in relation to criteria for effective
internal control over financial reporting as described in
Internal Control Integrated Framework,
issued by the Committee of Sponsoring Organization of the
Treadway Commission. Based on this assessment, Management
concludes that, as of December 31, 2009, its system of
internal control over financial reporting met those criteria and
was effective. Managements assessment of and conclusion on
the effectiveness of internal control over financial reporting
did not include the internal controls of the acquired FBBC ABL
loans, which is included in the 2009 consolidated financial
statements and constituted 0.88% of total assets as of
December 31, 2009.
The effectiveness of FirstMerit Corporations internal
control over financial reporting as of December 31, 2009
has been audited by Ernst & Young LLP, an independent
registered public accounting firm, as stated in their report
which appears herein.
|
|
|
PAUL G. GREIG
|
|
TERRENCE E. BICHSEL
|
Chairman and Chief
|
|
Executive Vice President and
|
Executive Officer
|
|
Chief Financial Officer
|
109
Report of
Independent Registered Public Accounting Firm
Shareholders and Board of Directors
FirstMerit Corporation
We have audited the consolidated balance sheets of FirstMerit
Corporation and subsidiaries as of December 31, 2009 and
2008, and the related consolidated statements of income, changes
in shareholders equity, and cash flows for each of the
three years in the period ended December 31, 2009. These
financial statements are the responsibility of FirstMerit
Corporations management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards 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. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of FirstMerit Corporation and subsidiaries as
of December 31, 2009 and 2008, and the consolidated results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2009, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
FirstMerit Corporations internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 25, 2010
expressed an unqualified opinion thereon.
Akron, Ohio
February 25, 2010
110
Report of
Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting
Shareholders and Board of Directors
FirstMerit Corporation
We have audited FirstMerit Corporations
(FirstMerit) internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). FirstMerits
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting
included in the accompanying Managements Annual Report on
Internal Control Over Financial Reporting. Our responsibility is
to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Report on Managements
Assessment of Internal Control Over Financial Reporting,
managements assessment of and conclusion on the
effectiveness of internal control over financial reporting did
not include the internal controls of the acquired First Bank
Business Capital, Inc.s (FBBC) asset based lending (ABL)
business, which is included in the 2009 consolidated financial
statements of FirstMerit Corporation and constituted 0.88% of
total assets as of December 31, 2009. Our audit of internal
control over financial reporting of FirstMerit Corporation also
did not include an evaluation of the internal control over
financial reporting of FBBCs ABL business.
In our opinion, FirstMerit maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2009, based on the COSO criteria.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of FirstMerit Corporation and
subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of income, changes in
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2009 and our report
dated February 25, 2010 expressed an unqualified opinion
thereon.
Akron, Ohio
February 25, 2010
111
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
Not Applicable.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
FirstMerit Corporations Management is responsible for
establishing and maintaining effective disclosure controls and
procedures, as defined under
Rules 13a-15(e)
and
15d-15(e) of
the Securities Exchange Act of 1934. As of December 31,
2009, an evaluation was performed under the supervision and with
the participation of Management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Corporations disclosure
controls and procedures. Based on that evaluation, management
concluded that disclosure controls and procedures as of
December 31, 2009 were effective in ensuring material
information required to be disclosed in this Annual Report on
Form 10-K
was recorded, processed, summarized, and reported on a timely
basis. Additionally, there were no changes in the
Corporations internal control over financial reporting.
Managements responsibilities related to establishing and
maintaining effective disclosure controls and procedures include
maintaining effective internal controls over financial reporting
that are designed to produce reliable financial statements in
accordance with accounting principles generally accepted in the
United States of America. As disclosed in the Report on
Managements Assessment of Internal Control Over Financial
Reporting on page 105 of this Annual Report, Management
assessed the Corporations system of internal control over
financial reporting as of December 31, 2009, in relation to
criteria for effective internal control over financial reporting
as described in Internal Control Integrated
Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this
assessment, Management believes that, as of December 31,
2009, its system of internal control over financial reporting
met those criteria and is effective.
Managements assessment of and conclusion on the
effectiveness of internal control over financial reporting did
not include the internal controls of the acquired FBBC ABL
loans, which is included in the 2009 consolidated financial
statements and constituted 0.88% of total assets as of
December 31, 2009.
There have been no significant changes in the Corporations
internal controls or in other factors that could significantly
affect internal controls subsequent to December 31, 2009.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
Not Applicable.
112
PART III
|
|
ITEM 10.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
Directors,
Executive Officers and Persons Nominated or Chosen to Become
Directors or Executive Officers
The information required by Item 401 of
Regulation S-K
concerning the directors of FirstMerit and the nominees for
re-election as directors of FirstMerit at the Annual Meeting of
Shareholders to be held on April 21, 2010 (the 2010
Annual Meeting) is incorporated herein by reference from
the disclosure to be included under the caption
Proposal 1 Election of Directors in
FirstMerits definitive proxy statement relating to the
2010 Annual Meeting to be filed with the SEC
(FirstMerits 2010 Proxy Statement).
The information required by Item 401 of
Regulation S-K
concerning the executive officers of FirstMerit is incorporated
herein by reference from the disclosure provided under the
caption Executive Officers of the Registrant
included in Part I of this Annual Report on Form
10-K.
Compliance
with Section 16(a) of the Exchange Act
The information required by item 405 of
Regulation S-K
is incorporated herein by reference from the disclosure to be
included under the caption Section 16(a) Beneficial
Ownership Reporting Compliance in FirstMerits 2010
Proxy Statement.
Committee
Charters; Code of Business Conduct and Ethics
FirstMerit has adopted a Code of Business Conduct and Ethics
(the Code of Ethics) that covers all employees,
including its principal executive, financial and accounting
officers, and is posted on FirstMerits website
www.firstmerit.com. In the event of any amendment to, or
waiver from, a provision of the Code of Ethics that applies to
its principal executive, financial or accounting officers,
FirstMerit intends to disclose such amendment or waiver on its
website.
Procedures
for Recommending Directors Nominees
Information concerning the procedures by which shareholders of
FirstMerit may recommend nominees to FirstMerits Board of
Directors is incorporated herein by reference from the
disclosure to be included under the caption Director
Nominations in FirstMerits 2010 Proxy Statement.
These procedures have not materially changed from those
described in FirstMerits definitive proxy materials for
the 2009 Annual Meeting of Shareholders held on April 15,
2009.
Audit
Committee
The information required by Items 407(d)(4) and 407(d)(5)
of
Regulation S-K
is incorporated herein by reference from the disclosure to be
included under the caption Committees of the Board of
Directors Audit Committee in FirstMerits
2010 Proxy Statement.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by Item 402 of
Regulation S-K
is incorporated herein by reference from the disclosure to be
included under the captions Compensation Discussion and
Analysis and Executive Compensation and Other
Information in FirstMerits 2010 Proxy Statement.
The information required by Item 407(e)(4) of
Regulation S-K
is incorporated herein by reference from the disclosure to be
included under the caption Compensation Interlocks and
Insider Participation in FirstMerits 2010 Proxy
Statement.
The information required by Item 407(e)(5) of
Regulation S-K
is incorporated herein by reference from the disclosure to be
included under the caption The Compensation Report
in FirstMerits 2010 Proxy Statement.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required by Item 403 of
Regulation S-K
is incorporated herein by reference from the disclosure to be
included under the caption Beneficial Ownership of
Management and Certain Beneficial Owners in
FirstMerits 2010 Proxy Statement.
113
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities to be
|
|
|
|
|
|
|
|
|
|
Issued upon
|
|
|
Weighted Average
|
|
|
Number of
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Securities
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
available for grant
|
|
|
|
Options, Warrants
|
|
|
Options, Warrants
|
|
|
for Options,
|
|
|
|
and Rights
|
|
|
and Rights
|
|
|
Warrants and Rights
|
|
Plan category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity Compensation Plans Approved by Security Holders
|
|
|
|
|
|
|
|
|
|
|
|
|
1999
|
|
|
1,933,487
|
|
|
|
26.32
|
|
|
|
|
|
2002
|
|
|
2,009,809
|
|
|
|
24.89
|
|
|
|
|
|
2002D
|
|
|
89,000
|
|
|
|
23.61
|
|
|
|
|
|
2006
|
|
|
448,438
|
|
|
|
23.95
|
|
|
|
2,163,567
|
|
2006D
|
|
|
69,000
|
|
|
|
22.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,549,734
|
|
|
|
|
|
|
|
2,163,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Compensation Plans Not Approved by Security Holders
None.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENT
|
The information required by Item 404 of
Regulation S-K
is incorporated herein by reference from the disclosure to be
included under the caption Certain Relationships and
Related Transactions in FirstMerits 2010 Proxy
Statement.
The information required by Item 407(a) of
Regulation S-K
is incorporated herein by reference from the disclosure to be
included under the caption The Board of
Directors Independence in FirstMerits
2010 Proxy Statement.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information required by this Item 14 is incorporated
herein by reference from the disclosure to be included under the
captions Independent Registered Public Accounting Firm
Fees and Pre-Approval of Fees in
FirstMerits 2010 Proxy Statement.
114
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENTS SCHEDULES
|
(a)(1) The following Financial Statements appear in Part II
of this Report:
Consolidated Balance Sheets as of December 31, 2009 and
2008;
Consolidated Statements of Income for Years ended
December 31, 2009, 2008, and 2007;
Consolidated Statements of Changes in Shareholders Equity
for Years ended December 31, 2009, 2008, and 2007;
Consolidated Statements of Cash Flows for Years ended
December 31, 2009, 2008, and 2007;
Notes to Consolidated Financial Statements for Years ended
December 31, 2009, 2008, and 2007;
Report of Management on Internal Control Over Financial
Reporting; and
Reports of Independent Registered Public Accounting Firms.
(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) See the Exhibit Index which follows the signature
page.
(b) See the Exhibit Index which follows the signature
page.
(c) See subparagraph (a)(2) above.
115
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
25th day
of February, 2010.
FIRSTMERIT CORPORATION
Paul G. Greig, Chairman and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
|
|
|
/s/ Paul
G. Greig
Paul
G. Greig
Chairman, Chief Executive Officer and Director
(principal executive officer)
|
|
/s/ Terrence
E. Bichsel
Terrence
E. Bichsel
Executive Vice President and Chief Financial
Officer (principal financial officer and principal accounting
officer)
|
|
|
|
/s/ Steven
H. Baer*
Steven
H. Baer
Director
|
|
/s/ R.
Cary Blair*
R.
Cary Blair
Director
|
|
|
|
/s/ Karen
S. Belden*
Karen
S. Belden
Director
|
|
/s/ Robert
W. Briggs*
Robert
W. Briggs
Director
|
|
|
|
/s/ John
C. Blickle*
John
C. Blickle
Director
|
|
/s/ Gina
D. France*
Gina
D. France
Director
|
|
|
|
/s/ Richard
Colella*
Richard
ColellaDirector
|
|
/s/ J.
Michael Hochschwender*
J.
Michael Hochschwender
Director
|
|
|
|
/s/ Terry
L. Haines*
Terry
L. Haines
Director
|
|
/s/ Philip
A. Lloyd, II*
Philip
A. Lloyd, II
Director
|
|
|
|
/s/ Clifford
J. Isroff*
Clifford
J. Isroff
Director
|
|
/s/ Richard
N. Seaman*
Richard
N. Seaman
Director
|
116
*The undersigned, by signing his name hereto, does hereby sign
and execute this Annual Report on
Form 10-K
on behalf of each of the indicated directors of FirstMerit
Corporation pursuant to a Power of Attorney executed by each
such director and filed with this Annual Report on
Form 10-K.
J. Bret Treier,
Attorney-in-Fact
Dated: February 25, 2010
117
Exhibit Index
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Second Amended and Restated Articles of Incorporation of
FirstMerit Corporation, as amended (incorporated by reference
from Exhibit 3.1 to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009, filed with the
SEC by FirstMerit on February 18, 2009).
|
|
3
|
.2
|
|
Second Amended and Restated Code of Regulations of FirstMerit
Corporation as amended (incorporated by reference from
Exhibit 3.2 to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009, filed with the
SEC by FirstMerit on February 18, 2009).
|
|
4
|
.1
|
|
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
Registration Statement on
Form S-4
(No. 333-52581-01)
filed with the SEC by FirstMerit Capital Trust I, fka
Signal Capital Trust I, on May 13, 1998).
|
|
4
|
.2
|
|
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 Registration Statement on
Form S-4
(No. 333-52581-01)
filed with the SEC by FirstMerit Capital Trust I, fka
Signal Capital Trust I, on May 13, 1998).
|
|
4
|
.3
|
|
Form of Capital Security Certificate (incorporated by reference
from Exhibit 4.6 to the Registration Statement on
Form S-4
(No. 333-52581-01)
filed with the SEC by FirstMerit Capital Trust I, fka
Signal Capital Trust I, on May 13, 1998).
|
|
4
|
.4
|
|
Series B Capital Securities Guarantee Agreement
(incorporated by reference from Exhibit 4.7 to the
Registration Statement on
Form S-4
(No. 333-52581-01)
filed with the SEC by FirstMerit Capital Trust I, fka
Signal Capital Trust I, on May 13, 1998).
|
|
4
|
.5
|
|
Form of 8.67% Junior Subordinated Deferrable Interest Debenture,
Series B (incorporated by reference from Exhibit 4.2
to the Registration Statement on
Form S-4
(No. 333-52581-01)
filed with the SEC by FirstMerit Capital Trust I, fka
Signal Capital Trust I, on May 13, 1998).
|
|
4
|
.6
|
|
Supplemental Indenture dated as of February 12, 1999,
between FirstMerit and Firstar Bank Milwaukee, National
Association, as trustee, relating to the obligations of
FirstMerit Capital Trust I, fka Signal Capital
Trust I (incorporated by reference from Exhibit 4.3 to
the Annual Report on
Form 10-K
for the fiscal year ended December 31, 1998, filed with the
SEC by FirstMerit on March 22, 1999).
|
|
4
|
.7
|
|
Letter Agreement dated January 9, 2009, including the
Securities Purchase Agreement Standard Terms
attached thereto as Exhibit A, between FirstMerit and the
United States Department of the Treasury (incorporated by
reference from Exhibit 10.1 to the Current Report on
Form 8-K
filed with the SEC by FirstMerit on January 12, 2009)
[Note: Annex A to the Securities Purchase Agreement is not
included therewith; filed as Exhibit 3.2 to Current Report
on
Form 8-K
filed with the SEC by FirstMerit on January 12, 2009].
|
|
4
|
.8
|
|
Form of Warrant to purchase 952,260 Common Shares of FirstMerit,
issued to the United States Department of the Treasury on
January 9, 2009 (incorporated by reference from
Exhibit 4.1 to the Current Report on
Form 8-K
filed with the SEC by FirstMerit on January 12, 2009).
|
|
10
|
.1
|
|
Credit Agreement between FirstMerit and Citibank, N.A.
(incorporated by reference from Exhibit 99.1 to the Current
Report on
Form 8-K
filed with the SEC by FirstMerit on December 7, 2006).
|
|
10
|
.2*
|
|
Amended and Restated 1997 Stock Plan (incorporated by reference
from Exhibit 1.4 to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2000, filed with the
SEC by FirstMerit on March 9, 2001).
|
|
10
|
.3*
|
|
First Amendment to the Amended and Restated 1997 Stock Plan
(incorporated by reference from Exhibit 10.3 to the Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2008, filed with the
SEC by FirstMerit on February 18, 2009).
|
|
10
|
.4*
|
|
Amended and Restated 1999 Stock Option Plan (incorporated by
reference from Exhibit 10.5 to the Annual Report on
Form 10-K/A
for the fiscal year ended December 31, 2000, filed with the
SEC by FirstMerit on April 30, 2001).
|
|
10
|
.5*
|
|
First Amendment to the Amended and Restated 1999 Stock Plan
(incorporated by reference from Exhibit 10.3 to the Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2008, filed with the
SEC by FirstMerit on February 18, 2009).
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.6*
|
|
Amended and Restated 2002 Stock Plan (incorporated by reference
from Exhibit 10.6 to the Annual Report on
Form 10-K/A
for the fiscal year ended December 31, 2005, filed with the
SEC by FirstMerit on April 30, 2006).
|
|
10
|
.7*
|
|
First Amendment to the Amended and Restated 2002 Stock Plan
(incorporated by reference from Exhibit 10.7 to the Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2010, filed with the
SEC by FirstMerit on February 18, 2009).
|
|
10
|
.8*
|
|
Amended and Restated 2006 Equity plan (incorporated by reference
from Exhibit 10.1 to the Quarterly Report on
Form 10-Q
filed with the SEC by FirstMerit on May 2, 2008).
|
|
10
|
.9*
|
|
First Amendment to the Amended and Restated 2006 Equity Plan
(incorporated by reference from Exhibit 10.9 to the Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2008, filed with the
SEC by FirstMerit on February 18, 2009).
|
|
10
|
.10*
|
|
Amended and Restated Executive Deferred Compensation Plan
(incorporated by reference from Exhibit 10.10 to the Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2008, filed with the
SEC by FirstMerit on February 18, 2009).
|
|
10
|
.11*
|
|
Amended and Restated Director Deferred Compensation Plan
(incorporated by reference from Exhibit 10.11 to the Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2008, filed with the
SEC by FirstMerit on February 18, 2009).
|
|
10
|
.12*
|
|
Amended and Restated Supplemental Executive Retirement Plan
(incorporated by reference from Exhibit 10.12 to the Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2008, filed with the
SEC by FirstMerit on February 18, 2009).
|
|
10
|
.13*
|
|
Form of Amended and Restated Membership Agreement with respect
to the Supplemental Executive Retirement Plan (incorporated by
reference from Exhibit 10.39 to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 1998, filed with the
SEC by FirstMerit on March 22, 1999).
|
|
10
|
.14*
|
|
2008 Supplemental Executive Retirement Plan (incorporated by
reference from Exhibit 10.14 to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008, filed with the
SEC by FirstMerit on February 18, 2009).
|
|
10
|
.15*
|
|
Amendment to the Supplemental Executive retirement plan
(incorporated by reference from Exhibit 10.15 to the Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2008, filed with the
SEC by FirstMerit on February 18, 2009).
|
|
10
|
.16*
|
|
Amended and Restated Unfunded Supplemental Benefit Plan
(incorporated by reference from Exhibit 10.16 to the Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2008, filed with the
SEC by FirstMerit on February 18, 2009).
|
|
10
|
.17*
|
|
Amended and Restated Executive Cash Incentive Plan (incorporated
by reference from Exhibit 10.17 to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008, filed with the
SEC by FirstMerit on February 18, 2009).
|
|
10
|
.18*
|
|
2008 Excess Benefit Plan (incorporated by reference from
Exhibit 10.18 to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008, filed with the
SEC by FirstMerit on February 18, 2009).
|
|
10
|
.19*
|
|
First Amendment to the 2008 Excess Benefit Plan (incorporated by
reference from Exhibit 10.19 to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008, filed with the
SEC by FirstMerit on February 18, 2009).
|
|
10
|
.20*
|
|
Executive Insurance Program Summary (incorporated by reference
from Exhibit 10.20 to the Annual Report on
Form 10-K/A
for the fiscal year ended December 31, 2001, filed with the
SEC by FirstMerit on April 30, 2002).
|
|
10
|
.21*
|
|
Long-Term Disability Benefit Summary (incorporated by reference
from Exhibit 10.21 to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008, filed with the
SEC by FirstMerit on February 18, 2009).
|
|
10
|
.22*
|
|
Director Compensation Summary (incorporated by reference from
Exhibit 10.22 to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008, filed with the
SEC by FirstMerit on February 18, 2009).
|
|
10
|
.23*
|
|
Form of Amended and Restated Change in Control Termination
Agreement (Tier 1) (incorporated by reference from
Exhibit 10.23 to the Annual Report on
Form 10-K
filed by FirstMerit on February 18, 2009).
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.24*
|
|
Form of Amended and Restated Change in Control Termination
Agreement (Tier 1/2008 SERP) (incorporated by reference
from Exhibit 10.24 to the Annual Report on
Form 10-K
filed by FirstMerit on February 18, 2009).
|
|
10
|
.25*
|
|
Form of Displacement Agreement (incorporated by reference from
Exhibit 10.2 to the Current Report on
Form 8-K
filed by FirstMerit on November 5, 2004).
|
|
10
|
.26*
|
|
Form of Director and Officer Indemnification Agreement and
Undertaking (incorporated by reference from Exhibit 10.35
to the Annual Report on
Form 10-K/A
filed by FirstMerit on April 30, 2002).
|
|
10
|
.27*
|
|
Amended and Restated Employment Agreement by and between
FirstMerit Corporation and Paul G. Greig (incorporated by
reference from Exhibit 10.27 to the Annual Report on
Form 10-K
filed by FirstMerit on February 18, 2009).
|
|
10
|
.28*
|
|
Amended and Restated Change in Control Termination Agreement
(Greig) (incorporated by reference from Exhibit 10.28 to
the Annual Report on
Form 10-K
filed by FirstMerit on February 18, 2009).
|
|
10
|
.29*
|
|
Amended and Restated Displacement Agreement (Greig)
(incorporated by reference from Exhibit 10.29 to the Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2009, filed with the
SEC by FirstMerit on February 18, 2009).
|
|
10
|
.30*
|
|
Restricted Stock Award Agreement of Paul G. Greig, dated
May 15, 2006 (incorporated by reference from
Exhibit 10.37 to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006, filed with the
SEC by FirstMerit on February 18, 2007).
|
|
10
|
.31*
|
|
Form of Director Initial Restricted Stock Award (incorporated by
reference from Exhibit 10.2 to the Quarterly Report on
Form 10-Q
filed with the SEC by FirstMerit on May 2, 2008).
|
|
10
|
.32*
|
|
Form of Director Annual Restricted Stock Award (incorporated by
reference from Exhibit 10.3 to the Quarterly Report on
Form 10-Q
filed with the SEC by FirstMerit on May 2, 2008).
|
|
10
|
.33*
|
|
Form of Employee restricted Stock Award (Change in Control)
(incorporated by reference from Exhibit 10.4 to the
Quarterly Report on
Form 10-Q
filed with the SEC by FirstMerit on May 2, 2008).
|
|
10
|
.34*
|
|
Form of Employee Restricted Stock Award (no Change in Control)
(incorporated by reference from Exhibit 10.5 to the
Quarterly Report on
Form 10-Q
filed with the SEC by FirstMerit on May 2, 2008).
|
|
10
|
.35*
|
|
Form of Director Nonqualified Stock Option Agreement
(incorporated by reference from Exhibit 10.6 to the
Quarterly Report on
Form 10-Q
filed with the SEC by FirstMerit on May 2, 2008).
|
|
10
|
.36*
|
|
Form of Employee Nonqualified Stock Option Agreement (Change in
Control) (incorporated by reference from Exhibit 10.7 to
the Quarterly Report on
Form 10-Q
filed with the SEC by FirstMerit on May 2 2008).
|
|
10
|
.37*
|
|
Form of Employee Nonqualified Stock Option Agreement (no Change
in Control) (incorporated by reference from Exhibit 10.8 to
the Quarterly Report on
Form 10-Q
filed with the SEC by FirstMerit on May 2, 2008).
|
|
10
|
.38*
|
|
Form of Letter Agreement dated January 9, 2009, between
FirstMerit Corporation and its Senior Executive Officers
(incorporated by reference from Exhibit 10.2 to the Current
Report on
Form 8-K
filed with the SEC by FirstMerit on January 12, 2009)
[Note: Appendix A is not included therewith; filed as part
of Exhibit 3.2 to the Current Report on
Form 8-K
filed with the SEC by FirstMerit on January 12, 2009].
|
|
10
|
.39
|
|
Credit Agreement by and between FirstMerit Corporation and
SunTrust Bank (incorporated by reference from Exhibit 10.39
to the Annual Report on
Form 10-K
filed by FirstMerit on February 18, 2009).
|
|
10
|
.40
|
|
First Amendment to the Credit Agreement between FirstMerit
Corporation and SunTrust Bank (incorporated by reference from
Exhibit 10.40 to the Annual Report on
Form 10-K
filed by FirstMerit on February 18, 2009).
|
|
10
|
.41
|
|
Line of Credit Letter Agreement between FirstMerit Corporation
and PNC Bank, N.A. (incorporated by reference from
Exhibit 10.41 to the Annual Report on
Form 10-K
filed by FirstMerit on February 18, 2009).
|
|
10
|
.42
|
|
Committed Line of Credit Note between FirstMerit Corporation and
PNC Bank, N.A. (incorporated by reference from
Exhibit 10.42 to the Annual Report on
Form 10-K
filed by FirstMerit on February 18, 2009).
|
|
10
|
.43
|
|
Repurchase Letter Agreement dated April 22, 2009, between
FirstMerit and the United States Department of the Treasury
(incorporated by reference from Exhibit 10.1 to the Current
Report on
Form 8-K
filed with the SEC by FirstMerit on April 22, 2009).
|
|
10
|
.44
|
|
Distribution Agency Agreement dated May 6, 2009, between
FirstMerit and Credit Suisse Securities (USA) LLC (incorporated
by reference from Exhibit 99.1 to the Current Report on
Form 8-K
filed with the SEC by FirstMerit on May 6, 2009).
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.45
|
|
Warrant Repurchase Letter Agreement dated May 27, 2009,
between FirstMerit and the United States Department of the
Treasury (incorporated by reference from Exhibit 10.1 to
the Current Report on
Form 8-K
filed with the SEC by FirstMerit on May 27, 2009).
|
|
10
|
.46
|
|
Purchase and Assumption Agreement dated November 11, 2009,
between FirstMerit Bank, N.A. and First Bank (incorporated by
reference from Exhibit 10.1 to the Current Report on
Form 8-K
filed with the SEC by FirstMerit on November 12, 2009).
|
|
12
|
|
|
Computation of Consolidated Ratios of Earnings to Fixed Charges
(filed herewith).
|
|
21
|
|
|
Subsidiaries of FirstMerit (filed herewith).
|
|
23
|
|
|
Consent of Ernst & Young LLP (filed herewith).
|
|
24
|
|
|
Power of Attorney (filed herewith).
|
|
31
|
.1
|
|
Rule 13a-14(a)/Section 302
Certification of Paul G. Greig, Chairman, President and Chief
Executive Officer of FirstMerit (filed herewith).
|
|
31
|
.2
|
|
Rule 13a-14(a)/Section 302
Certification of Terrence E. Bichsel, Executive Vice President
and Chief Financial Officer of FirstMerit (filed herewith).
|
|
32
|
.1
|
|
Rule 13a-14(b)/Section 906
Certification of Paul G. Greig, Chairman, President and Chief
Executive Officer of FirstMerit (filed herewith).
|
|
32
|
.2
|
|
Rule 13a-14(b)/Section 906
Certification of Terrence E. Bichsel, Executive Vice President
and Chief Financial Officer of FirstMerit (filed herewith).
|