SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
COMMISSION FILE NUMBER 0-10161
FIRSTMERIT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<Table>
OHIO 34-1339938
- -------------------------------------------- --------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</Table>
<Table>
III CASCADE PLAZA, AKRON, OHIO 44308 (330) 996-6300
- ------------------------------------- ---------- ------------------
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) (TELEPHONE NUMBER)
OFFICES)
</Table>
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
and
6 1/2% CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES B
------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the approximate aggregate market value of the voting stock held by
non-affiliates of the registrant as of February 15, 2002: $2,320,519,666.
Indicate the number of shares outstanding of registrant's common stock as
of February 15, 2002: 84,845,326 shares of common stock, without par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of FirstMerit Corporation, dated March 8,
2002, in Part III.
The undersigned registrant hereby amends the following items of its Annual
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
on Form 10-K for the fiscal year ended December 31, 2001 for the purpose of
furnishing the financial statements for the FirstMerit Corporation and
Subsidiaries Employees' Salary Savings Retirement Plan and the FirstMerit
Corporation Employees' Stock Purchase Plan Savings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and accompanying notes, and the
reports of management and independent auditors, are set forth immediately
following Item 9 of this Report.
2
CONSOLIDATED BALANCE SHEETS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<Table>
<Caption>
DECEMBER 31,
------------------------
2001 2000
----------- ----------
(IN THOUSANDS)
ASSETS
Investment securities (at market value)................... $ 2,019,259 2,002,291
Federal funds sold & other interest-earning assets........ -- 8,100
Loans held for sale....................................... 44,900 135,753
Commercial loans.......................................... 3,486,199 3,251,761
Mortgage loans............................................ 638,908 848,225
Installment loans......................................... 1,560,905 1,497,270
Home equity loans......................................... 502,521 453,462
Credit card loans......................................... 132,746 117,494
Manufactured housing loans................................ 808,476 786,641
Leases.................................................... 257,565 282,232
----------- ----------
Total earning assets................................... 9,451,479 9,383,229
----------- ----------
Allowance for loan losses................................. (125,235) (108,285)
Cash and due from banks................................... 190,020 235,918
Premises and equipment, net............................... 128,912 133,894
Intangible assets......................................... 139,496 152,107
Accrued interest receivable and other assets.............. 408,702 418,340
----------- ----------
Total assets........................................... $10,193,374 10,215,203
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-non-interest bearing............................ $ 1,153,184 1,078,586
Demand-interest bearing................................ 718,173 681,771
Savings................................................ 1,943,143 1,805,505
Certificates and other time deposits................... 3,724,900 4,049,070
----------- ----------
Total deposits......................................... 7,539,400 7,614,932
----------- ----------
Wholesale borrowings...................................... 1,588,279 1,563,404
Accrued taxes, expenses, and other liabilities............ 154,888 121,978
----------- ----------
Total liabilities...................................... 9,282,567 9,300,314
----------- ----------
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; 50,637 and 105,658
shares outstanding at December 31, 2001 and 2000,
respectively.......................................... 1,209 2,501
Common stock, without par value: authorized 300,000,000
shares; issued 91,979,362 at December 31, 2001 and
2000.................................................. 127,937 127,937
Capital surplus........................................... 115,388 113,326
Accumulated other comprehensive income.................... 3,404 (13,798)
Retained earnings......................................... 838,569 802,905
Treasury stock, at cost, 6,988,076 and 4,947,047 shares,
at December 31, 2001 and 2000, respectively............ (175,700) (117,982)
----------- ----------
Total shareholders' equity................................ 910,807 914,889
----------- ----------
Total liabilities and shareholders' equity................ $10,193,374 10,215,203
=========== ==========
</Table>
Certain previously reported amounts may have been reclassified to conform to
current accounting practices.
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF INCOME
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------------
2001 2000 1999
-------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE
DATA)
Interest income:
Interest and fees on loans................................. $609,195 643,256 571,497
Interest and dividends on investment securities:
Taxable.................................................. 112,143 139,099 106,513
Exempt from federal income taxes......................... 5,483 5,944 6,637
-------- ------- -------
117,626 145,043 113,150
Interest on federal funds sold........................... 78 3,196 204
-------- ------- -------
Total interest income.................................... 726,899 791,495 684,851
-------- ------- -------
Interest expense:
Interest on deposits:
Demand-interest bearing.................................. 3,769 3,705 4,774
Savings.................................................. 44,236 52,883 40,327
Certificates and other time deposits..................... 210,977 236,112 169,783
Interest on wholesale borrowings........................... 76,461 122,551 85,981
-------- ------- -------
Total interest expense................................... 335,443 415,251 300,865
-------- ------- -------
Net interest income...................................... 391,456 376,244 383,986
Provision for loan losses................................... 61,807 32,708 37,430
-------- ------- -------
Net interest income after provision for loan losses...... 329,649 343,536 346,556
-------- ------- -------
Other income:
Trust department........................................... 21,113 22,593 18,708
Service charges on deposits................................ 53,477 47,728 42,659
Credit card fees........................................... 35,372 32,160 26,752
ATM and other service fees................................. 14,690 15,280 14,223
Bank owned life insurance income........................... 12,542 4,138 3,137
Investment services and insurance.......................... 10,657 11,353 11,876
Gain from sale of partnership interest..................... 5,639 -- --
Manufactured housing income................................ 4,643 4,335 8,412
Investment securities gains, net........................... 3,341 507 8,527
Loan sales and servicing................................... 12,089 10,529 9,035
Other operating income..................................... 8,856 15,268 11,381
-------- ------- -------
Total other income....................................... 182,419 163,891 154,710
-------- ------- -------
Other expenses:
Salaries, wages, pension and benefits...................... 132,119 128,167 138,862
Net occupancy expense...................................... 20,497 20,739 20,178
Equipment expense.......................................... 17,133 17,589 19,198
Stationary, supplies and postage........................... 11,371 12,296 13,241
Bankcard, loan processing and other costs.................. 24,935 19,133 28,702
Professional fees.......................................... 10,742 9,878 18,382
Amortization of intangible assets.......................... 9,370 10,552 10,989
Other operating expenses................................... 102,430 56,838 66,954
-------- ------- -------
Total other expenses..................................... 328,597 275,192 316,506
-------- ------- -------
Income before taxes, extraordinary item and cumulative
effect of change in accounting method.................. 183,471 232,235 184,760
Federal income taxes........................................ 60,867 72,448 59,043
-------- ------- -------
Income before extraordinary item and change in accounting
method................................................. 122,604 159,787 125,717
Extraordinary item, extinguishment of debt, net of taxes of
$3,148................................................... -- -- (5,847)
Cumulative effect of Residual Interest accounting change,
net of taxes of $3,392................................... (6,299) -- --
-------- ------- -------
Net income............................................... $116,305 159,787 119,870
======== ======= =======
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available for sale securities:
Unrealized holding gains (losses), net of tax expense
(benefit), arising during period......................... 15,030 30,954 (56,483)
Less: reclassification adjustment for gains (losses)
realized in net income, net of taxes..................... (2,172) (330) (5,543)
-------- ------- -------
Net unrealized gains (losses), net of tax expense
(benefit)................................................ 17,202 31,284 (50,940)
-------- ------- -------
Comprehensive income........................................ $133,507 191,071 68,930
======== ======= =======
Net income applicable to common shares..................... $122,482 159,258 119,563
======== ======= =======
Weighted average number of common shares
outstanding -- basic....................................... 85,594 88,122 90,320
Weighted average number of common shares
outstanding -- diluted..................................... 86,289 88,861 91,523
Basic EPS before extraordinary item and change in accounting
method..................................................... $ 1.43 1.81 1.38
======== ======= =======
Diluted EPS before extraordinary item and change in
accounting method.......................................... $ 1.42 1.80 1.37
======== ======= =======
EPS effect of extraordinary charge, net of taxes............ $ -- -- (0.06)
======== ======= =======
EPS effect of cumulative change in accounting method, net of
taxes...................................................... $ (0.07) -- --
======== ======= =======
Basic Earnings per Share.................................... $ 1.36 1.81 1.32
======== ======= =======
Diluted Earnings per Share.................................. $ 1.35 1.80 1.31
======== ======= =======
</Table>
Certain previously reported amounts may have been reclassified to conform to
current accounting practices.
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<Table>
<Caption>
ACCUMULATED
OTHER TOTAL
PREFERRED COMMON CAPITAL COMPREHENSIVE RETAINED TREASURY SHAREHOLDERS'
STOCK STOCK SURPLUS INCOME EARNINGS STOCK EQUITY
--------- ------- ------- ------------- -------- -------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Balance at December 31, 1998... $9,299 122,387 117,845 5,858 668,837 (17,570) 906,656
Net income................... -- -- -- -- 119,871 -- 119,871
Cash dividends -- common
stock ($0.76/share)........ -- -- -- -- (68,627) -- (68,627)
Cash dividends -- preferred
stock...................... -- -- -- -- (305) -- (305)
Options exercised/debentures,
preferred stock
converted.................. (5,421) 5,596 (915) -- -- 12,549 11,809
Treasury shares purchased.... -- -- -- -- -- (85,666) (85,666)
Market adjustment investment
securities................. -- -- -- (50,940) -- -- (50,940)
Other........................ -- (46) -- -- 35 788 777
------ ------- ------- ------- ------- -------- -------
Balance at December 31, 1999... 3,878 127,937 116,930 (45,082) 719,811 (89,899) 833,575
Net income (loss)............ -- -- -- -- 159,787 -- 159,787
Cash dividends -- common
stock ($0.86 per share).... -- -- -- -- (76,162) -- (76,162)
Cash dividends -- preferred
stock...................... -- -- -- -- (218) -- (218)
Options exercised/debentures,
preferred stock
converted.................. (1,377) -- (3,604) -- -- 6,807 1,826
Treasury shares purchased.... -- -- -- -- -- (34,890) (34,890)
Market adjustment investment
securities................. -- -- -- 31,284 -- -- 31,284
Other........................ -- -- -- -- (313) -- (313)
------ ------- ------- ------- ------- -------- -------
Balance at December 31, 2000... 2,501 127,937 113,326 (13,798) 802,905 (117,982) 914,889
Net Income................... -- -- -- -- 116,305 -- 116,305
Cash dividends -- common
stock ($0.93 per share).... -- -- -- -- (80,050) -- (80,050)
Cash dividends -- preferred
stock...................... -- -- -- -- (122) -- (122)
Options exercised (146,540
shares).................... -- -- (1,803) -- -- 3,717 1,914
Preferred stock converted
(149,001 shares)........... (1,292) -- (2,535) -- -- 3,827 0
Debentures converted (9,092
shares).................... -- -- (127) -- -- 207 80
Treasury shares purchased
(2,592,402 shares)......... -- -- -- -- -- (65,182) (65,182)
Deferred compensation trust
(246,740 shares)........... -- -- 6,068 -- -- (287) 5,781
Market adjustment investment
securities................. -- -- -- 17,202 (527) -- 16,675
Other........................ -- -- 459 -- 58 -- 517
------ ------- ------- ------- ------- -------- -------
Balance at December 31, 2001... $1,209 127,937 115,388 3,404 838,569 (175,700) 910,807
====== ======= ======= ======= ======= ======== =======
</Table>
Certain previously reported amounts may have been reclassified to conform to
current accounting practices.
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
----------- -------- ----------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income.................................................. $ 116,305 159,787 119,870
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses............................... 61,807 32,708 37,430
Provision for depreciation and amortization............. 15,569 15,788 15,744
Amortization of investment securities premiums, net..... 209 606 2,196
Amortization of income for lease financing.............. (16,464) (14,140) (13,679)
Gains on sales of investment securities, net............ (3,341) (507) (8,527)
Deferred federal income taxes........................... 3,068 20,438 (17,993)
Increase (decrease) in interest receivable.............. 16,794 (11,839) (18,073)
Increase (decrease) in interest payable................. (27,226) 27,558 21,084
Proceeds from sales of loans............................ 269,148 101,192 50,596
Gains on sales of loans, net............................ (1,587) (1,718) (633)
(Increase) in other real estate and other property...... (2,060) (7,884) (3,731)
(Increase) decrease in other prepaid assets............. 466 (8,360) (4,757)
Increase (decrease) in accounts payable................. 15,541 (27,360) 12,805
(Increase) in bank owned life insurance................. (12,501) (139,193) (29,032)
Amortization of values ascribed to acquired
intangibles........................................... 9,370 10,552 10,989
Other increase (decreases).............................. 51,614 (41,817) 16,028
----------- -------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 496,712 115,811 190,317
----------- -------- ----------
INVESTING ACTIVITIES
Dispositions of investment securities:
Available-for-sale -- sales............................... 452,280 310,400 723,164
Available-for-sale -- maturities.......................... 602,057 303,204 498,213
Purchases of investment securities available-for-sale....... (1,042,518) (172,643) (1,784,544)
Net (increase) decrease in federal funds sold............... 8,100 17,000 (18,361)
Net increase in loans and leases, except sales.............. (355,336) (429,024) (726,707)
(Increase) in capitalized software.......................... (2,588) (12,490) (3,298)
Purchases of premises and equipment......................... (15,355) (22,912) (22,321)
Sales of premises and equipment............................. 4,768 5,449 12,214
----------- -------- ----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............ (348,592) (1,016) 1,321,640
----------- -------- ----------
FINANCING ACTIVITIES
Net increase (decrease) in demand, NOW and savings
deposits.................................................. 248,638 199,383 (388,003)
Net increase (decrease) in time deposits.................... (324,170) 555,402 402,172
Net increase (decrease) in wholesale borrowings............. 24,875 (739,289) 1,158,039
Repayment of mandatorily redeemable preferred securities.... -- -- (11,022)
Cash dividends -- common and preferred...................... (80,173) (76,380) (68,932)
Purchase of treasury shares................................. (65,182) (34,890) (85,666)
Proceeds from exercise of stock options, conversion of
debentures or conversion of preferred stock............... 1,994 1,826 11,809
----------- -------- ----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............ (194,018) (93,948) 1,018,397
----------- -------- ----------
Increase (decrease) in cash and cash equivalents............ (45,898) 20,847 (112,926)
Cash and cash equivalents at beginning of year.............. 235,918 215,071 327,997
----------- -------- ----------
Cash and cash equivalents at end of year.................... $ 190,020 235,918 215,071
=========== ======== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest, net of amounts capitalized.................... $ 436,513 206,392 156,626
Income taxes............................................ $ 55,065 75,202 48,315
=========== ======== ==========
</Table>
Certain previously reported amounts may have been reclassified to conform to
current accounting practices.
See accompanying notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEAR-ENDS AND FOR THE YEARS ENDED 2000, 1999 AND 1998 (DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
<Table>
The accounting and reporting policies of FirstMerit
Corporation and its subsidiaries (the "Corporation") conform
to generally accepted accounting principles and to general
practices within the banking industry.
The following is a description of the more 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 direct subsidiaries: FirstMerit Bank,
National Association, Citizens Investment Corporation,
Citizens Savings Corporation of Stark County, FirstMerit
Capital Trust I, FirstMerit Community Development
Corporation, FirstMerit Credit Life Insurance Company, and
SF Development Corp.
All significant intercompany balances and transactions have
been eliminated in consolidation.
(b) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and related notes.
Actual results could differ from those estimates.
(c) Investment Securities
Debt and equity securities can be classified as
held-to-maturity, available-for-sale or trading. Securities
classified as held-to-maturity are measured at amortized or
historical cost, securities available-for-sale and trading
at fair value. Adjustment to fair value of the securities
available-for-sale, in the form of unrealized holding gains
and losses, is excluded from earnings and reported net of
tax as a separate component of comprehensive income.
Adjustment to fair value of securities classified as trading
is included in earnings. Gains or losses on the sales of
investment securities are recognized upon realization and
are determined by the specific identification method.
The Corporation's investment portfolio is designated as
available-for-sale. Classification as available-for-sale
allows the Corporation to sell securities to fund liquidity
and manage the Corporation's interest rate risk. During a
portion of 2000 and 1999, the Corporation maintained a
relatively small trading account that was used as a hedge
against variations in deferred compensation expense.
(d) Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, balances
on deposit with correspondent banks and checks in the
process of collection.
(e) Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed on
the straight-line and declining-balance methods over the
estimated useful lives of the assets. Amortization of
leasehold improvements is computed on the straight-line
method based on lease terms or useful lives, whichever is
less.
(f) Loans and Loan Income
Loans are stated at their principal amount outstanding 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 generally accrued on the principal balances of loan
outstandings 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
</Table>
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<Table>
commitment period as a yield adjustment. Interest is not
accrued on loans for which circumstances indicate collection
is questionable. Loan commitment fees are generally deferred
and amortized into other (noninterest) income on a
straight-line basis over the commitment period. Unearned
discounts on consumer loans are recognized by the interest
method.
(g) Loans held for sale
Loans classified as held for sale are carried at lower of
cost or market value. If these loan values decline in
subsequent reporting periods before sales occur, the loans
are written down to fair market value with the charge
recorded against income. Upon their sale, differences
between carrying value and sales proceeds realized are also
recorded to income.
(h) Lease financing
The Corporation leases equipment to customers on both a
direct and leveraged lease basis. The net investment in
financing leases includes the aggregate amount of lease
payments to be received and the estimated residual values of
the equipment, less unearned income and non-recourse debt
pertaining to leveraged leases. Income from lease financing
is recognized over the lives of the leases on an approximate
level rate of return on the unrecovered investment. Residual
values of leased assets are reviewed on an annual basis for
impairment. Declines in residual values judged to be other
than temporary are recognized in the period such
determinations are made.
(i) Provision for Loan Losses
The provision for loan losses charged to operating expenses
is determined based on Management's evaluation of the loan
portfolios and the adequacy of the allowance for loan losses
under current economic conditions and such other factors,
which, in Management's judgment, require current
recognition.
(j) Nonperforming Loans
With the exception of certain consumer and residential real
estate loans, loans and leases on which payments are past
due for 90 days are placed on nonaccrual status, unless
those loans and leases are in the process of collection and,
in Management's opinion, are fully secured. Residential real
estate loans over 150 days past due are placed on nonaccrual
status, while other consumer loans are generally written off
when deemed uncollectable 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, uncollected interest accrued in prior years is
charged against the allowance for loan losses and current
year accrued interest 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
borrower's financial condition. Under the Corporation's
credit policies and practices, individually impaired loans
include all nonaccrual and restructured commercial,
agricultural, construction, and commercial real estate loans
above certain dollar amounts, but exclude certain consumer
loans, residential real estate loans, and lease financing
assets classified as nonaccrual. Loan impairment for all
loans is measured based on the present value of expected
future cash flows discounted at the loan's or loan pool's
effective interest rate or, as a practical alternative, at
the observable market price of the loan or loan pool, or the
fair value of the collateral if the loan or loan pool is
collateral dependent.
(k) Allowance for Loan Losses
The allowance for loan losses is Management's estimate of
the amount of probable credit losses in the portfolio. The
Corporation determines the allowance for loan losses based
on an on-going evaluation. This evaluation is inherently
subjective as it requires material 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
</Table>
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<Table>
uncollectable are charged against the allowance for loan
losses. Recoveries of previously charged-off amounts are
credited to the allowance for loan losses.
The Corporation's allowance for loan losses is the
accumulation of various components calculated based on
independent methodologies. All components of the allowance
for loan losses represent an estimation performed according
to either Financial Accounting Standards No. 5 or No. 114.
Management's estimate of each allowance component is based
on certain observable data that 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 5 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 Corporation's credit
risk-evaluation process, which includes credit-risk grading
individual commercial loans. Loans are assigned credit-risk
grades based on an internal assessment of conditions that
affect a borrower's ability to meet its contractual
obligation under the loan agreement. The assessment process
includes reviewing a borrower's 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 or rotational basis or as
Management becomes aware of information affecting a
borrower's ability to fulfill its obligation.
(l) Mortgage Servicing Fees
The Corporation generally records loan administration fees
earned for servicing loans for investors as income is
collected. Earned servicing fees and late fees related to
delinquent loan payments are also recorded as income is
collected.
(m) 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.
(n) Goodwill and Intangible Assets
The Financial Accounting Standards Board issued Statement of
Accounting Standards No. 142 (SFAS 142), "Goodwill and Other
Intangible Assets," which addresses the accounting for
goodwill and other intangible assets. SFAS 142 specifies
that intangible assets with an indefinite useful life and
goodwill will no longer be subject to periodic amortization.
The standard requires goodwill to be periodically tested for
impairment and written down to fair value if considered
impaired. The provisions of SFAS 142 are effective for
fiscal years beginning after December 15, 2001, and are
effective for interim periods in the initial year of
adoption. The different implementation requirements of the
standard are staged in 2002. The Corporation estimates the
adoption of SFAS 142 will increase after-tax 2002 earnings
by approximately $7 million.
For 2001 and previous reporting periods, the values ascribed
to acquired intangibles, including goodwill and core deposit
premiums, were amortized to expense over periods ranging
from 4.5 years to 25 years. The amortization periods
represented the estimated remaining lives of the assets
acquired.
</Table>
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<Table>
(o) Trust Department Assets and Income
Property held by the Corporation in a fiduciary or other
capacity for trust customers is not included in the
accompanying consolidated financial statements, since such
items are not assets of the Corporation. Trust income is
reported on an accrual basis of accounting.
(p) Per Share Data
Basic earnings per share are 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 are computed by dividing net
income less preferred dividends plus interest on convertible
bonds by the weighted average number of common shares plus
common stock equivalents computed using the Treasury Share
method. All earnings per share disclosures appearing in
these financial statements, related notes and management's
discussion and analysis, are computed assuming dilution
unless otherwise indicated. Note 22 to the consolidated
financial statements illustrates the Corporation's earnings
per share calculations for 2001, 2000, and 1999.
(q) Derivative Instruments and Hedging Activities
In June 1998, the FASB issued statement No. 133 "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting
standards for derivative instruments and requires an entity
to recognize all derivative as either assets or liabilities
in the Balance Sheet and measure those instruments at fair
value. Derivatives that do not meet certain criteria for
hedge accounting must be adjusted to fair value through
income. If the derivative qualities for hedge accounting
exist, depending on the nature of the hedge, changes in the
fair value of derivatives will either be offset against the
change in fair value of the hedged asset or liability
through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. Any
ineffective portion of a derivative's change in fair value
will be immediately recognized in earnings.
This statement was originally to be effective for all fiscal
quarters beginning after June 15, 1999. In July 1999, the
FASB issued Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of Effective
Date of SFAS No. 133." SFAS 137 delayed the implementation
of SFAS 133 by one year. As a result, the Corporation
adopted SFAS 133 in the first quarter 2001.
At December 31, 2000, the Corporation had three interest
rate swaps ("swaps") that were considered fair value hedges
according to SFAS 133. The swaps have been classified as
fair value hedges since their purpose was to "swap" fixed
interest rate liabilities to variable interest rates. The
swaps qualified for the "shortcut method of accounting" as
prescribed in SFAS 133. The shortcut method results in
simpler accounting requirements as ineffectiveness is
ignored which eliminates the need for ongoing assessment
tests, and only the fair value of the swap and the fair
value of the hedged asset or liability is recorded on the
Balance Sheet.
The accounting for the swap that didn't qualify for shortcut
treatment requires the fair value of both the swap and the
hedged liability to be determined and recorded through
earnings each period.
At January 1, 2001, the impact of adopting SFAS 133 was a
net increased of $11.4 million to investment securities for
the fair value of derivative instruments and a net increased
of the same amount to hedged liabilities. The net effect of
derivative instruments not qualifying for hedge accounting
was less than $0.1 million at January 1, 2001.
At December 31, 2001, two of the three swaps mentioned
previously remain outstanding. In 2001, SFAS 133-related
entries increased net income by $64 and affected assets and
liabilities by less than $1 million each.
</Table>
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<Table>
(r) Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities
In September 2000, the FASB issued Statement No. 140,
"Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." Statement No. 140
replaces and carries over most of the provisions of FASB
Statement No. 125 and it revises those standards for
accounting for securitizations and other transfers of assets
and collateral and requires additional disclosures. This
Statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers
that are secured borrowings. Statement No. 140 is effective
for transfers occurring after March 31, 2001, however, is
effective for recognition and reclassification of collateral
and for disclosures relating to securitization transactions
and collateral for fiscal years ending after December 15,
2000. The effect of implementation of the Statement's
provisions at December 31, 2000 was immaterial to the
Corporation. The implementation of the remaining provisions
of the Statement effective subsequent to March 31, 2001 had
no material effect on its earnings or financial condition.
(s) Reclassifications
Certain previously reported amounts have been reclassified
to conform to the current reporting presentation.
(t) Recently Issued Accounting Standards
In August 2001, the Financial Accounting Standards Board
issued Statement No. 143, "Accounting for Asset Retirement
Obligations." Statement 143 requires both the recognition of
any liability incurred in connection with the retirement of
an asset, and the capitalization of the cost as part of the
carrying value of the related asset. The capitalized asset
is then depreciated over its estimated remaining life. This
standard will be implemented in the first quarter of 2003.
In October 2001, the Financial Accounting Standards Board
issued Statement No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement supersedes
Statement No. 121, supersedes the accounting and reporting
provisions of APB Opinion No. 30, and amends ARB No. 51.
Statement No. 144 addresses accounting for a segment of a
business accounted for as a discontinued operation and
resolves significant implementation issues related to
Statement No. 121. This statement will be implemented by the
Corporation in 2002.
Prior to the issuance of Statement No. 144, the Corporation
followed Statement No. 121 and reviewed long-lived assets
for impairment when recoverability of the assets came into
question. When assessing impairment, the Corporation
utilizes observable market values, when available, or
estimated expected future cash flows based on reasonable and
supportable assumptions and projections.
The adoption of Standard No. 143 and Standard No. 144 are
not expected to have a material impact on the Corporation's
statements of financial condition, results of operations, or
liquidity.
</Table>
2. ACQUISITIONS AND MERGER-RELATED EXPENSES
On February 12, 1999, The Corporation completed the acquisition of Signal
Corp, a $1.9 billion bank holding company headquartered in Wooster, Ohio.
Principal subsidiaries of Signal Corp included Signal Bank, N. A., Summit Bank,
N. A., First Federal Savings Bank of New Castle (Pennsylvania), and Mobile
Consultants, Inc. Under terms of the agreement, the fixed exchange ratio was
1.32 shares of FirstMerit common stock for each share of Signal common stock and
one share of FirstMerit preferred stock for each share of Signal preferred
stock. Based on the closing price of $25.00 per share on February 12, 1999, the
value of the transaction was approximately $436.0 million. The transaction was
accounted for as a pooling-of-interests.
In conjunction with this merger, the Corporation incurred pre-tax costs of
$52.8 million during 1999. The components of the merger-related costs and the
conforming accounting adjustments were as follows: $7.8 million severance and
employee related benefits; $7.0 million conversion and contract termination
costs; $8.9 million in professional services fees; $9.9 million of other
operating costs; a conforming accounting entry to the provision for possible
loan losses of $10.2 million, and an extraordinary charge of $9.0 million
related to early
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
extinguishment of debt. The after-tax effect of the merger-related and
conforming expenses totaled approximately $38.1 million, or $0.42 per diluted
share. As of December 31, 1999, the unpaid liabilities associated with these
costs totaled approximately $1.1 million. During the 2000 fourth quarter, the
remaining liability of $214 thousand was closed out and recorded as pre-tax
income through a reduction in other operating expenses.
3. INVESTMENT SECURITIES
Investment securities are composed of:
<Table>
<Caption>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ---------
AS OF DECEMBER 31, 2001
Available for sale:
U.S. Treasury securities and U.S. Government
agency obligations.......................... $ 478,644 6,167 783 484,028
Obligations of state and political
subdivisions................................ 109,136 1,248 435 109,949
Mortgage-backed securities.................... 1,147,309 12,867 3,625 1,156,551
Other securities.............................. 278,933 623 10,825 268,731
---------- ------ ------ ---------
$2,014,022 20,905 15,668 2,019,259
========== ====== ====== =========
AS OF DECEMBER 31, 2000
Available for sale:
U.S. Treasury securities and U.S. Government
agency obligations.......................... $ 626,488 651 5,022 622,117
Obligations of state and political
subdivisions................................ 101,959 942 157 102,744
Mortgage-backed securities.................... 1,003,043 2,880 9,080 996,843
Other securities.............................. 291,219 420 11,052 280,587
---------- ------ ------ ---------
$2,022,709 4,893 25,311 2,002,291
========== ====== ====== =========
</Table>
The amortized cost and market value of investment securities including
mortgage-backed securities at December 31, 2001, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities based
on the issuers' rights to call or prepay obligations with or without call or
prepayment penalties.
<Table>
<Caption>
AMORTIZED MARKET
COST VALUE
---------- ---------
Due in one year or less..................................... $ 12,409 12,451
Due after one year through five years....................... 310,784 315,643
Due after five years through ten years...................... 266,706 269,528
Due after ten years......................................... 1,424,123 1,421,637
---------- ---------
$2,014,022 2,019,259
========== =========
</Table>
Proceeds from sales of investment securities during the years 2001, 2000
and 1999 were $452,280, $310,400 and $723,164, respectively. Gross gains of
$12,328, $2,513 and $10,032 and gross losses of $8,987, $2,006 and $1,505 were
realized on these sales, respectively.
The carrying value of investment securities pledged to secure trust and
public deposits and for purposes required or permitted by law amounted to
$1,364,240 and $1,644,163 at December 31, 2001 and December 31, 2000,
respectively.
4. LOANS
Loans outstanding by categories are as follows:
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<Table>
<Caption>
AS OF DECEMBER 31,
----------------------------------
2001 2000 1999
---------- --------- ---------
Commercial loans........................................... $3,486,199 3,251,761 3,122,520
Mortgage loans............................................. 638,908 848,225 878,323
Installment loans.......................................... 1,560,905 1,497,270 1,471,149
Home equity loans.......................................... 502,521 453,462 408,343
Credit card loans.......................................... 132,746 117,494 108,163
Manufactured housing loans................................. 808,476 786,641 753,254
Leases..................................................... 257,565 282,232 272,429
---------- --------- ---------
$7,387,320 7,237,085 7,014,181
========== ========= =========
</Table>
Within the commercial loan category, commercial real estate construction
loans totaled $416.8 million and $370.6 million at December 31, 2001 and 2000,
respectively. The allowance for loan losses associated with these loans totaled
approximately $5.0 million at December 31, 2001 and 2000. Single-family real
estate construction loans and their related allowance for loan losses were
relatively immaterial at December 31, 2001 and 2000.
Additional information regarding the allowance for loan losses and impaired
loans can be found in Notes 1 and 5 to the Consolidated Financial Statements as
well as in Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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, 2001, 2000, and 1999 is
summarized as follows:
<Table>
<Caption>
2001 2000 1999
-------- ------- -------
Aggregate amount at beginning of year....................... $ 41,691 44,521 26,082
Additions (deductions):
New loans................................................. 13,767 38,236 35,193
Repayments................................................ (16,096) (40,937) (13,571)
Changes in directors and their affiliations................. (102) (129) (3,183)
-------- ------- -------
Aggregate amount at end of year............................. $ 39,260 41,691 44,521
======== ======= =======
</Table>
5. ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Corporation's allowance for loan losses is the sum of various
components recognized and measured pursuant to SFAS 5, AICPA SOP "Allowance for
Credit Losses" (for pools of loans) and SFAS 114 (for individually impaired
loans). The components include the following: (a) a component based on
historical loss experience by credit-risk grade (for commercial loan pools) and
payment status (for consumer loan pools) and (b) a component for industry risk
exposure. The Corporation's 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.
The SFAS 114 component of the allowance for loan losses is determined as
part of the Corporation's credit risk-grading process. 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
uncollectable amounts based on its individual loan review.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
"Special-Mention" Loans are commercial loans that have identified potential
weaknesses that deserve Management's close attention. If left uncorrected, these
potential weaknesses may result in noticeable deterioration of the repayment
prospects for the asset or in the institution's credit position.
"Substandard" Loans 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. All
substandard loans of $300 thousand or more are included in the "Individually
Impaired Loans" category and are measured in accordance with SFAS 114.
"Doubtful" Loans 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. All
doubtful loans of $100 thousand or more are included in the "Individually
Impaired Loans" category and are measured in accordance with SFAS 114.
Once it is determined that it is probable an individual loan is impaired,
the Corporation measures the amount of impairment for the loan based primarily
on the appraised or estimated value of collateral, assuming orderly liquidation,
less costs of sale.
SFAS 5, as amended, 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 analyses 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 the inherent probable loss 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 over the life of the pool
discounted at the average pool interest rate. Although the number of loans
observed in worse risk rating (commercial) or worse delinquency (consumer)
categories increased from 2000 to 2001, the losses experienced within those
categories did not change materially from 2000 to 2001.
The industry exposure component of the allowance for loan losses reflects
Management's assertion that it is probable there are additional incurred credit
losses related to manufactured housing that are not adequately captured in the
historical loss experience component. The principal factor influencing
Management's assessment of manufactured housing is the decision by the Company
to cease originating manufactured housing loans through its Mobile Consultants
Inc. subsidiary. Management believes it is probable this decision will lead to
lower sale prices for repossessed units and a larger percentage loss for each
unit repossessed.
Transactions in the allowance for loan losses are summarized as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------
2001 2000 1999
-------- ------- -------
Balance at January 1,....................................... $108,285 104,897 96,149
Additions (deductions):
Acquisition adjustment/other.............................. -- -- 1,028
Provision for loan losses................................. 61,807 32,708 37,430
Loans charged off......................................... (61,885) (49,428) (47,836)
Recoveries on loans previously charged off................ 17,028 20,108 18,126
-------- ------- -------
Balance at December 31,..................................... $125,235 108,285 104,897
======== ======= =======
</Table>
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<Table>
<Caption>
DECEMBER 31, 2001
----------------------------------------------------------------------------------------------------
LOAN TYPE
----------------------------------------------------------------------------------------------------
HOME MFD CREDIT RES
ALLOWANCE FOR LOAN LOSSES COMMERCIAL COMMERCIAL INSTALLMENT EQUITY HOUSING CARD MORTGAGE
COMPONENTS: LOANS R/E LOANS LEASES LOANS LOANS LOANS LOANS LOANS TOTAL
------------------------- ---------- ---------- ------- ----------- ------- ------- ------- -------- ---------
Individually Impaired Loan
Component:
Loan balance............. $ 115,476 40,616 1,791 0 0 0 0 0 157,883
Allowance................ 15,789 4,075 200 0 0 0 0 0 20,064
Collective Loan Impairment
Components:
Historical Loss Experience:
Credit risk-graded loans
(1)
Grade 1 loan balance....... 113,193 10,653 12 123,858
Grade 1 allowance.......... 230 21 0 251
Grade 2 loan balance....... 138,180 140,968 8,983 288,131
Grade 2 allowance.......... 293 564 18 875
Grade 3 loan balance....... 181,981 323,438 65,869 571,288
Grade 3 allowance.......... 1,043 1,941 296 3,280
Grade 4 loan balance....... 1,064,275 1,162,014 40,897 2,267,186
Grade 4 allowance.......... 8,932 9,191 327 18,450
Grade 5 (Special Mention)
loan balance............. 98,095 74,710 2,231 175,036
Grade 5 allowance.......... 3,904 2,241 78 6,223
Grade 6 (Substandard) loan
balance.................. 0 21,054 2,326 23,380
Grade 6 allowance.......... 0 2,232 233 2,465
Grade 7 (Doubtful) loan
balance.................. 1,374 172 1,010 2,556
Grade 7 allowance.......... 356 69 263 688
Consumer loans based on
payment status:
Current loan balances...... 121,034 1,505,464 492,785 754,134 126,849 620,275 3,620,541
Current loans allowance.... 749 10,456 1,971 17,100 3,488 620 34,384
30 days past due loan
balance.................. 9,356 31,066 5,404 37,884 2,171 6,932 92,813
30 days past due
allowance................ 842 4,824 540 7,577 543 69 14,395
60 days past due loan
balance.................. 2,499 14,050 2,685 9,732 1,378 2,252 32,596
60 days past due
allowance................ 375 3,755 537 3,406 689 113 8,875
90+ days past due loan
balance.................. 1,557 10,325 1,647 6,726 2,348 9,449 32,052
90+ days past due
allowance................ 311 4,027 494 4,047 1,352 2,192 12,423
---------- --------- ------- --------- ------- ------- ------- ------- ---------
Total loans................ $1,712,574 1,773,625 257,565 1,560,905 502,521 808,476 132,746 638,908 7,387,320
---------- --------- ------- --------- ------- ------- ------- ------- ---------
Total Allowance for Loan
Losses................... $ 30,547 20,334 3,692 23,062 3,542 32,130 6,072 2,994 122,373
Other components: (2)
Industry exposure loan
balance.................. 0 0 0 0 0 808,476 0 0 808,476
Industry exposure
allowance................ 0 0 0 0 0 2,862 0 0 2,862
---------- --------- ------- --------- ------- ------- ------- ------- ---------
Total Allowance for Loan
Losses................... $ 30,547 20,334 3,692 23,062 3,542 34,992 6,072 2,994 125,235
========== ========= ======= ========= ======= ======= ======= ======= =========
</Table>
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<Table>
<Caption>
DECEMBER 31, 2000
----------------------------------------------------------------------------------------------------
LOAN TYPE
----------------------------------------------------------------------------------------------------
HOME MFD CREDIT RES
ALLOWANCE FOR LOAN LOSSES COMMERCIAL COMMERCIAL INSTALLMENT EQUITY HOUSING CARD MORTGAGE
COMPONENTS: LOANS R/E LOANS LEASES LOANS LOANS LOANS LOANS LOANS TOTAL
------------------------- ---------- ---------- ------- ----------- ------- ------- ------- -------- ---------
Individually Impaired Loan
Component:
Loan balance............. $ 86,014 21,971 1,402 0 0 0 0 0 109,387
Allowance................ 14,183 4,524 1,270 0 0 0 0 0 19,977
Collective Loan Impairment
Components:
Historical Loss Experience:
Credit risk-graded loans
(1)
Grade 1 loan balance....... 109,127 11,213 0 120,340
Grade 1 allowance.......... 221 56 0 277
Grade 2 loan balance....... 179,801 158,218 19,060 357,079
Grade 2 allowance.......... 394 791 38 1,223
Grade 3 loan balance....... 296,033 313,260 61,763 671,056
Grade 3 allowance.......... 1,378 2,334 247 3,959
Grade 4 loan balance....... 897,863 990,196 40,953 1,929,012
Grade 4 allowance.......... 8,398 10,489 369 19,256
Grade 5 (Special Mention)
loan balance............. 80,569 97,236 2,385 180,190
Grade 5 allowance.......... 3,073 2,431 83 5,587
Grade 6 (Substandard) loan
balance.................. 0 9,744 4,452 14,196
Grade 6 allowance.......... 0 1,189 445 1,634
Grade 7 (Doubtful) loan
balance.................. 516 0 359 875
Grade 7 allowance.......... 129 0 90 219
Consumer loans based on
payment status:
Current loan balances...... 142,971 1,457,981 448,342 709,989 112,257 826,106 3,697,646
Current loans allowance.... 904 9,039 1,569 7,153 2,245 826 21,736
30 days past due loan
balance.................. 6,566 22,506 2,789 48,781 2,005 8,966 91,613
30 days past due
allowance................ 657 3,793 223 5,854 501 90 11,118
60 days past due loan
balance.................. 1,775 11,239 1,566 17,816 1,238 2,241 35,875
60 days past due
allowance................ 320 3,376 219 3,563 681 112 8,271
90+ days past due loan
balance.................. 546 5,544 765 10,055 1,994 10,912 29,817
90+ days past due
allowance................ 109 2,627 229 2,731 1,345 2,525 9,568
---------- --------- ------- --------- ------- ------- ------- ------- ---------
Total loans................ $1,649,923 1,601,838 282,232 1,497,270 453,462 786,641 117,494 848,225 7,237,085
---------- --------- ------- --------- ------- ------- ------- ------- ---------
Total Allowance for Loan
Losses................... $ 27,776 21,814 4,532 18,835 2,241 19,301 4,773 3,553 102,825
Other components: (2)
Industry exposure loan
balance.................. 0 0 0 0 0 786,641 0 0 786,641
Industry exposure
allowance................ 0 0 0 0 0 5,460 0 0 5,460
---------- --------- ------- --------- ------- ------- ------- ------- ---------
Total Allowance for Loan
Losses................... $ 27,776 21,814 4,532 18,835 2,241 24,761 4,773 3,553 108,285
========== ========= ======= ========= ======= ======= ======= ======= =========
</Table>
6. MANUFACTURED HOUSING ACTIVITY AND RELATED RESTRUCTURE CHARGE
On October 31, 2001, the Corporation, through its subsidiary Mobile
Consultants, Inc. ("MCi"), exited the manufactured housing lending business and
thereby stopped origination of new manufactured housing ("MH") finance contracts
("MHF contracts"). The collection and recovery aspect of servicing for existing
MHF contracts was retained. In conjunction with the exit of this business, the
Corporation recorded a fourth quarter after-tax restructure charge of $41.1
million, or $0.49 per diluted share.
The after-tax charge includes $9.9 million to stop origination activity at
MCi, the manufactured housing loan subsidiary; $21.1 million to reflect a change
in assumptions related to loan loss severity; $9.4 million for additional loan
loss reserves; and $0.7 million for severance costs. The following paragraphs
provide further detail for each of these restructure charge components.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The $9.9 million exit costs include a write-down of premises and equipment
of $1.7 million, a write-off of goodwill totaling $3.2 million, a write-off of a
deferred tax asset of $4.7 million and additional repossession costs of $300
thousand.
The $21.1 million charge, related to changes in loss severity assumptions,
is expected to occur as a result of moving from retail to wholesale repossession
liquidations. Previously, MH dealers remarketed MH units on the Corporation's
behalf. With the cessation of originations, this process will not be continued
and collection receipts are expected to decline. The estimated corresponding
write-downs as a result of this change are as follows: a decline in the fair
value of the MH securitized retained interest asset of $5.3 million; an
additional liability associated with sold MH finance contracts of $11.4 million;
and increased losses expected from sales of repossessed MH units of $4.4
million. Additionally, because of these origination and collection changes, the
allowance for loan losses, as it pertains to MH loans, has been increased $9.4
million.
Estimated severance payments, stay-bonuses and outplacement costs,
associated with the elimination of 97 origination and collection positions,
total approximately $1.1 million, after taxes. Payout of these involuntary
termination benefits is expected to occur predominantly during 2002 and is not
expected to have a material impact on the Corporation's cash flows.
Prior to exiting the manufactured housing lending business, when MCi sold
an MHF contract to an unaffiliated financial institution, the Company earned a
"manufactured housing brokerage fee." In 2001, 968 MHF contracts totaling $33.2
million were sold generating $2.2 of manufactured housing brokerage fees. In
2000, 867 MHF contracts, totaling $30.9 million, were sold resulting in $1.8
million in manufactured housing brokerage fees. During 1999, 575 MHF contracts
totaling $19.7 million were sold which produced $1.3 million in manufactured
housing brokerage fees.
Until originations of manufactured housing finance contracts stopped, the
Corporation's subsidiary, FirstMerit Bank, N.A., purchased MHF contracts from
MCi, a portion of which, prior to 1999, was securitized and sold to investors.
At the time of the sales, the Corporation recorded a retained interest in
securitized assets representing the discounted future cash flows to be received
by the Corporation for 1) servicing income from the ABS pools, 2) principal and
interest payments on MHF contracts contributed to the ABS pools as a credit
enhancement, referred to as "over-collateralization" and, 3) excess interest
spread. Excess interest spread represents the difference between interest
collected from the MHF contract borrowers and interest paid to investors in the
ABS pool.
In the second quarter of 2001, the Corporation recorded the cumulative
effect of a change in accounting method. Specifically, the requirements of
Emerging Issues Task Force Issue No. 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets" ("EITF 99-20"), were adopted, as required, and changed the
criteria for recognizing an "other than temporary" adverse change in the timing
or amounts of estimated retained interest cash flows. Accordingly, the
Corporation wrote down the value of its manufactured housing residual interest
assets by $9.7 million ($6.3 million after-tax) to $13.0 million. Prior to
implementation of EITF 99-20, these estimated changes would have been recorded
through comprehensive income rather than through earnings. After the initial
implementation of these new rules, adverse changes, if any, will be recorded
directly against income. In the fourth quarter of this year, as described
earlier in this section, the Corporation further reduced the carrying value of
this asset by $5.3 million, after taxes.
The retained interest in securitized assets was $4.9 million at December
31, 2001, and approximately $25 million at December 31, 2000 and 1999. Total
manufactured housing income, consisting primarily of gains on sale of ABS pools,
brokerage fees, and servicing income totaled $3.0 million, $4.3 million and $8.4
million for 2001, 2000 and 1999, respectively. The amount of MHF contracts
serviced totaled $1.3 billion, $1.4 billion and $1.4 billion at December 31,
2001, 2000 and 1999, respectively. The amount of MHF contracts serviced for
others totaled $447.4 million, $543.5 million and $594.5 million at December 31,
2001, 2000 and 1999,
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
respectively. The related MHF servicing asset totaled approximately $1.2 million
at December 31, 2001, $2.1 million at December 31, 2000 and $4.2 million at
December 31, 1999.
7. MORTGAGE SERVICING RIGHTS AND MORTGAGE SERVICING
As mortgage loans are sold or securitized, the Corporation allocates a
portion of the total costs of the loans originated, or purchased, to servicing
rights based on estimated fair value. Fair value is estimated based on market
prices, when available, or the present value of future net servicing income,
adjusted for such factors as discount rates and prepayments. Servicing rights
are amortized in proportion to and over the period of estimated servicing
income.
The components of mortgage servicing rights are as follows:
<Table>
<Caption>
2001 2000 1999
------- ------ ------
Balance at January 1, net................................... $10,422 12,929 11,265
Additions................................................. 8,329 5,095 3,964
Sales..................................................... -- (5,465) --
Scheduled amortization.................................... (2,965) (2,217) (2,213)
Less: allowance for impairment/other...................... (516) 80 (87)
------- ------ ------
Balance at December 31, net................................. $15,270 10,422 12,929
======= ====== ======
</Table>
In 2001, 2000 and 1999, the Corporation's income before federal income
taxes was increased by approximately $4.8 million, $2.5 million and $1.7
million, respectively, as a result of mortgage servicing rights activity.
On a quarterly basis, the Corporation assesses its capitalized servicing
rights for impairment based on their current fair value. As permitted, the
Corporation disaggregates its servicing rights portfolio based on loan type and
interest rate which are the predominant risk characteristics of the underlying
loans. If any impairment results after current market assumptions are applied,
the value of the servicing rights is reduced through the use of a valuation
allowance.
At year-ends 2001 and 2000, the Corporation serviced mortgage loans for
outside investors of approximately $1.8 billion and $2.2 billion, respectively.
The following table provides servicing information for the year-ends indicated:
<Table>
<Caption>
2001 2000 1999
---------- --------- ---------
Balance, January 1,........................................ $2,218,377 2,274,123 1,802,899
Additions:
Loans originated and sold to investors................... 554,838 163,596 104,019
Existing loans sold to investors......................... 109,600 8,851 687,949
Reductions:
Loans sold servicing released............................ (17,951) (32,080) (3,130)
Regular amortization, prepayments and foreclosures....... (1,040,986) (196,113) (317,614)
---------- --------- ---------
Balance, December 31,...................................... $1,823,878 2,218,377 2,274,123
========== ========= =========
</Table>
8. RESTRICTIONS ON CASH AND DIVIDENDS
The average balance on deposit with the Federal Reserve Bank or other
governing bodies to satisfy reserve requirements amounted to $6.0 million during
2001. 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
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
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, 2001, cash and due from banks included $3.6 million deposited with
the Federal Reserve Bank and other banks for these reasons.
Dividends paid by the subsidiaries are the principal source of funds to
enable the payment of dividends by the Corporation to its shareholders. These
payments by the subsidiaries in 2001 were restricted, by the regulatory
agencies, principally to the total of 2001 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.
9. PREMISES AND EQUIPMENT
The components of premises and equipment are as follows:
<Table>
<Caption>
YEAR-ENDS, ESTIMATED
------------------ USEFUL
2001 2000 LIVES
-------- ------- ---------
(DOLLARS IN THOUSANDS)
Land........................................................ $ 19,786 17,711 --
Buildings................................................... 117,895 116,668 10-35 yrs
Equipment................................................... 98,980 101,226 3-15 yrs
Leasehold improvements...................................... 16,087 16,978 1-20 yrs
-------- ------- ---------
252,748 252,583
Less accumulated depreciation and amortization.............. 123,836 118,689
-------- -------
$128,912 133,894
======== =======
</Table>
Amounts included in other expenses for depreciation and amortization
aggregated $15,569, $15,788 and $15,774 for the years ended 2001, 2000 and 1999,
respectively.
At December 31, 2001, the Corporation was obligated for rental commitments
under noncancelable operating leases on branch offices and equipment as follows:
<Table>
<Caption>
YEARS ENDING LEASE
DECEMBER 31, COMMITMENTS
- ------------ -----------
2002........................................................ $ 7,182
2003........................................................ 6,540
2004........................................................ 5,967
2005........................................................ 4,859
2006........................................................ 3,754
2007-2025................................................... 18,875
-------
$47,177
=======
</Table>
Rentals paid under noncancelable operating leases amounted to $7,888,
$8,086 and $9,859 in 2001, 2000 and 1999, respectively.
10. CERTIFICATES AND OTHER TIME DEPOSITS
The aggregate amounts of certificates and other time deposits of $100
thousand and over at year end 2001 and 2000 were $1,416,260 and $1,572,465,
respectively. Interest expense on these certificates and time deposits amounted
to $66,647 in 2001, $94,456 in 2000 and $51,715 in 1999.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
11. WHOLESALE BORROWINGS
In total, the average balance of wholesale borrowings for the years ended
2001, 2000 and 1999 amounted to $1,660,586, $1,951,841 and $1,666,025,
respectively. In 2001, the weighted average annual interest rate amounted to
4.60%, compared to 6.28% in 2000 and 5.16% in 1999. The maximum amount of these
borrowings at any month end totaled $1,861,058 during 2001, $2,344,534 in 2000
and $2,281,243 during 1999.
The debt components and their respective terms are as follows.
During 2000, the Corporation issued $150,000 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 principal outstanding at any one
time may not exceed $1,000,000. The notes were offered only to institutional
investors.
At year-ends 2001, 2000 and 1999, securities sold under agreements to
repurchase totaled $1,012,930, $1,090,021 and $1,473,774, respectively. The
average annual interest rates for these instruments were 3.65%, compared to
6.01% in 2000 and 4.79% in 1999.
As of December 31, 2001, 2000 and 1999, the Corporation had $387,678,
$272,067 and $646,322, respectively, of Federal Home Loan Bank advances
outstanding. The advance balances outstanding at year-end 2001 included: $25,714
with maturities within one year, $118,322 with maturities from one to five years
and $243,642 with maturities over five years. The FHLB advances have interest
rates that range from 4.09% to 8.10%.
At year-end 2001, the Corporation had two lines of credit with two
different financial institutions. One line had an outstanding balance of $10,000
with a corresponding interest rate of 2.37% and the other line had no
outstanding balance. As of year-end 2001, the unused portions of these lines
totaled $130,000. The line with the outstanding balance carries a variable
interest rate that approximates the one-month LIBOR rate plus 25 basis points.
The line that was unused at December 31, 2001 has an interest rate that varies
based on the terms of the draw. That is, there are three types of draws allowed
with each one tied to a different index. At year-end 2000, one line had an
outstanding balance of $22,000 with a corresponding interest rate of 6.76% and
the other line had no outstanding balance. As of year-end 2000, the unused
portions of these lines totaled $118,000. The line with the outstanding balance
carries a variable interest rate that approximates the one-month LIBOR rate plus
25 basis points. The line that was unused at December 31, 2000 has an interest
rate that varies based on the terms of the draw. That is, there are four types
of draws allowed with each one tied to a different index.
The lines of credits in existence at December 31, 2001 and 2000 require the
Corporation to maintain risk-based capital ratios at least equal to those of a
well capitalized institution. The Corporation was in compliance with these
requirements at the end of both years.
At year-ends 2001, 2000 and 1999, the Corporation had $5,637, $5,717 and
$6,061, respectively, of convertible subordinated debentures outstanding. The
first of two sets of convertible bonds totaling $637 at year-end 2001, consists
of 15 year, 6.25% debentures issued in a public offering in 1993. These bonds
mature May 5, 2008 and may be redeemed by the bondholders any time prior to
maturity. The second set of bonds totaled $5,000 at year-end 2001, carry an
interest rate of 9.13%, and are due in 2004.
At December 31, 2001, 2000 and 1999, other borrowings totaled $584, $2,149
and $3,086, respectively. These borrowings carry interest rates ranging from
7.95% through 10.00%.
During 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 Corporation's 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 $1,000
per security. Generally, the interest payment schedule of the Debentures is
identical to the Capital Securities schedule. The Corporation has acquired
approximately $28.6 million of the Series B Capital Securities
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
in the open market. The activity and balances resulting from these open market
acquisitions have been eliminated, when appropriate, in the Consolidated
Financial Statements and the related Notes. The outstanding balance of the
Capital Securities totaled $21,450 at December 31, 2001 and 2000.
Residential mortgage loans totaling $866 million, $962 million and $1.1
billion at year-ends 2001, 2000 and 1999, respectively, were pledged to secure
Federal Home Loan Bank ("FHLB") advances. Federal Home Loan Mortgage Corporation
("Freddie Mac") Preferred Stock of approximately $9.1 million and corporate
bonds of other financial institutions totaling $9.1 million were pledged against
the line of credit outstanding of $10.0 million at year-end 2001. FANNIE MAE
("FNMA") Preferred Stock and Freddie Mac Preferred Stock of approximately $20.3
million and corporate bonds of other financial institutions totaling $14.0
million were pledged against the line of credit outstanding of $22.0 million at
year-end 2000. FNMA and Freddie Mac Preferred Stock of approximately $19.5
million and corporate bonds of another financial institution totaling $14.5
million were pledged against the line of credit outstanding of $22.0 million at
year-end 1999.
12. FEDERAL INCOME TAXES
Federal Income Taxes are comprised of the following:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------
2001 2000 1999
------- ------ -------
Taxes currently payable..................................... $54,407 52,010 73,888
Deferred expense (benefit).................................. 3,068 20,438 (17,993)
------- ------ -------
$57,475 72,448 55,895
======= ====== =======
</Table>
Actual Federal income tax expense differs from expected Federal income tax
as shown in the following table:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------
2001 2000 1999
------ ------ ------
Statutory rate.............................................. 35.0% 35.0% 35.0%
Increase (decrease) in rate due to:
Interest income on tax-exempt securities and tax-free
loans, net............................................. (1.0)% (0.8)% (1.3)%
Goodwill amortization..................................... 2.9% 1.0% 1.2%
Reduction in excess tax reserves.......................... (0.3)% (2.7)% (3.3)%
Merger expenses at acquisition............................ -- -- 0.6%
Bank owned life insurance................................. (2.5)% (0.6)% (0.6)%
Dividends received deduction.............................. (0.4)% (0.3)% (0.3)%
Non-deductible meals and entertainment.................... 0.2% 0.1% 0.2%
Other..................................................... (0.8)% (0.5)% 0.3%
---- ---- ----
Effective tax rates....................................... 33.1% 31.2% 31.8%
==== ==== ====
</Table>
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Principal components of the Corporations net deferred tax (liability) are
summarized as follows:
<Table>
<Caption>
YEAR-ENDS,
-------------------
2001 2000
-------- -------
Deferred tax assets:
Allowance for credit losses............................... $ 43,734 36,034
Loan fees and expenses.................................... (6,448) (286)
Employee benefits......................................... 6,519 8,171
Available for sale securities............................. (1,833) 7,146
Valuation reserves........................................ 16,188 5,608
Purchase accounting and acquisition adjustments........... 5,225 6,359
-------- -------
63,385 63,032
-------- -------
Deferred tax liabilities:
Leased assets and depreciation............................ (55,244) (47,899)
FHLB Stock................................................ (15,585) (13,533)
Mortgage banking and loan fees............................ (7,997) (7,268)
Other..................................................... (675) 1,598
-------- -------
(79,501) (67,102)
-------- -------
Total net deferred tax (liability).......................... $(16,116) (4,070)
======== =======
</Table>
13. BENEFIT PLANS
The Corporation has a defined benefit pension plan covering substantially
all of its employees. In general, benefits are based on years of service and the
employee's compensation. The Corporation's funding policy is to contribute
annually the maximum amount that can be deducted for federal income tax
reporting purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future.
A supplemental non-qualified, non-funded pension plan for certain officers
is also maintained and is being provided for by charges to earnings sufficient
to meet the projected benefit obligation. The pension cost for this plan is
based on substantially the same actuarial methods and economic assumptions as
those used for the defined benefit pension plan.
The Corporation also sponsors a benefit plan which presently provides
postretirement medical and life insurance for retired employees. Effective
January 1, 1993, the plan was changed to limit the Corporation's medical
contribution to 200% of the 1993 level for employees who retire after January 1,
1993. The Corporation reserves the right to terminate or amend the plan at any
time.
The cost of postretirement benefits expected to be provided to current and
future retirees is accrued over those employees' service periods.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The following table sets forth both plans' funded status and amounts
recognized in the Corporation's consolidated financial statements.
<Table>
<Caption>
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------------- ---------------------------
2001 2000 1999 2001 2000 1999
-------- ------- ------- ------- ------- -------
Change in Benefit Obligation
Projected Benefit Obligation (PBO)/,
Accumulated Postretirement Benefit
Obligation (APBO), beginning of
year................................ $ 81,170 79,600 73,689 26,784 27,438 27,901
Service Cost........................ 4,193 4,227 4,099 906 854 992
Interest Cost....................... 6,369 5,857 5,339 2,078 1,934 2,030
Plan amendments..................... -- -- 2,626 (2,626) -- --
Participant contributions........... -- -- -- 312 370 275
Actuarial (gain) loss............... 13,491 (4,169) (1,705) 7,777 (2,052) (2,293)
Benefits Paid....................... (5,933) (4,345) (4,448) (1,993) (1,760) (1,467)
-------- ------- ------- ------- ------- -------
PBO/APBO, end of year................. 99,290 81,170 79,600 33,238 26,784 27,438
======== ======= ======= ======= ======= =======
Change in Plan Assets
Fair Value of Plan Assets, beginning
of year............................. 116,508 93,796 80,479 -- -- --
Actuarial return on plan assets..... (27,915) 19,979 14,230 -- -- --
Asset transfer from CoBancorp....... -- -- 3,045 -- -- --
Participant contributions........... -- -- -- 312 370 275
Employer contributions.............. 617 7,078 490 1,681 1,390 1,192
Benefits paid....................... (5,933) (4,345) (4,448) (1,993) (1,760) (1,467)
-------- ------- ------- ------- ------- -------
Fair Value of Plan Assets, end of
year................................ 83,277 116,508 93,796 0 0 0
======== ======= ======= ======= ======= =======
Funded Status......................... (16,013) 35,337 14,196 (33,238) (26,784) (27,438)
Unrecognized Transition (asset)
obligation.......................... (105) (172) (379) 6,871 9,846 10,667
Prior service costs................... 4,764 3,291 3,654 -- 514 556
Cumulative net (gain) or loss......... 18,725 (31,226) (15,627) 3,444 (4,460) (2,527)
-------- ------- ------- ------- ------- -------
(Accrued) prepaid
pension/postretirement cost......... 7,371 7,230 1,844 (22,923) (20,884) (18,742)
======== ======= ======= ======= ======= =======
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost................ 10,672 9,720 3,297 -- -- --
Accrued benefit liability........... (10,249) (7,357) (6,185) (22,923) (20,884) (18,742)
Intangible asset.................... 5,568 4,125 4,277 -- -- --
Accumulated other comprehensive
income........................... 1,380 742 455 -- -- --
-------- ------- ------- ------- ------- -------
Net amount recognized................. $ 7,371 7,230 1,844 (22,923) (20,884) (18,742)
======== ======= ======= ======= ======= =======
</Table>
<Table>
<Caption>
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------- -------------------------------------
2001 2000 1999 2001 2000 1999
----- ---- ---- ----------- ---------- ----------
Weighted-average assumptions as of
December 31
Discount Rate..................... 7.25% 8.00% 7.75% 7.25% 8.00% 7.75%
Long-term rate of return on
assets.......................... 10.00% 9.50% 9.25% -- -- --
Rate of compensation increase..... 3.75% 4.00% 4.00% -- -- --
Medical trend
rates -- non-medicare risk...... -- -- -- 5% to 10% 5% to 6% 5% to 7%
Medical trend rates -- medicare
risk............................ -- -- -- 10% to 40% 5% to 6% 5% to 7%
</Table>
For measurement purposes, a 9 percent annual rate increase in the per
capita cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 6 percent in 2002 and remain at that level
hereafter.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage point change in
assumed health care cost trend rates would have the following effects:
<Table>
<Caption>
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total of service and interest cost
components....................................... $ 301 (276)
Effect on postretirement benefit obligation........ 2,512 (2,336)
</Table>
<Table>
<Caption>
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------ -------------------------
2001 2000 1999 2001 2000 1999
------ ------ ------ ------- ------ ------
Components of Net Periodic
Pension/Postretirement Cost
Service Cost................................ $4,193 4,227 4,099 906 854 992
Interest Cost............................... 6,369 5,857 5,339 2,078 1,935 2,030
Expected return on assets................... (9,649) (8,224) (7,208) -- -- --
Amorization of unrecognized
Transition (asset)........................ (67) (207) (207) 821 821 821
Prior service costs....................... 473 364 364 43 43 43
Cumulative net (gain) loss.................. (844) (325) 70 (128) (120) --
------ ------ ------ ------ ----- -----
Net periodic pension/postretirement cost.... $ 475 1,692 2,457 3,720 3,533 3,886
====== ====== ====== ====== ===== =====
</Table>
The Corporation has elected to amortize the transition obligation for both
the pension and postretirement plans by charges to income over a twenty year
period on a straightline basis.
Accumulated Benefit Obligation for the Corporation's pension plan were
($84,974), ($68,129), and ($65,804) for the periods ended December 31, 2001,
2000, and 1999, respectively.
The Corporation maintains a savings plan under Section 401(k) of the
Internal Revenue Code, covering substantially all full-time and part-time
employees after six months of continuous employment. Under the plan, employees
contributions are partially matched by the Corporation. Such matching becomes
vested in accordance with plan specifications. Total savings plan expenses were
$2,533, $2,817, and $2,780 for 2001, 2000, and 1999, respectively.
14. STOCK OPTIONS
The Corporation's 1992, 1997 and 1999 Stock Plans (the "Plans") provide
qualified and non-qualified options to certain key employees (and to all
full-time employees in the case of the 1999 stock plan) for up to 5,966,556
common shares of the Corporation. In addition, these plans provide for the
granting of non-qualified stock options to certain non-employee directors of the
Corporation for which 200,000 common shares of the Corporation have been
reserved. Outstanding options under these Plans are generally not exerciseable
for at least six months from date of grant.
Options under these Plans are granted at 100% of the fair market value.
Options granted as incentive stock options must be exercised within ten years
and options granted as non-qualified stock options have terms established by the
Compensation Committee of the Board and approved by the non-employee directors
of the Board. Options are cancelable within defined periods based upon the
reason for termination of employment.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Corporation continues to account for its stock option plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to
Employees," and makes no charges against income with respect to options granted.
However, SFAS No. 123 does require the disclosure of the pro forma effect
on net income and earnings per share that would result if the fair value
compensation element were to be recognized as expense. The following table shows
the pro forma earnings and earnings per share for 2001, 2000, and 1999 along
with significant assumptions used in determining the fair value of the
compensation amounts.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<Table>
<Caption>
2001 2000 1999
----------- ---------------- ----------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Pro forma amounts:
Net income................................ $ 106,508 154,382 114,717
Earnings per share (basic)................ 1.24 1.75 1.27
Earnings per share (diluted).............. 1.23 1.74 1.25
Assumptions:
Dividend yield............................ 3.59% 2.92% 2.52%
Expected volatility....................... 31.00% 24.63%-24.75% 24.11%-25.55%
Risk free interest rate................... 3.86%-5.08% 4.95%-6.83% 5.04%-6.42%
Expected lives............................ 5-7 years 5-7 years 3-9.5 years
</Table>
A summary of stock option activity is as follows:
<Table>
<Caption>
OPTIONS OPTIONS RANGE OF OPTION AVERAGE OPTION
AVAILABLE FOR GRANT OUTSTANDING PRICE PER SHARE PRICE PER SHARE
------------------- ----------- --------------- ---------------
December 31, 1998................... 1,790,020 3,209,272 4.43-34.00 $19.46
New shares reserved............... 4,000,000 -- -- --
Canceled.......................... (146,575) (196,702) 7.16-30.38 24.70
Exercised......................... -- (938,468) 4.43-27.04 14.91
Granted........................... (1,838,982) 1,838,982 25.69-28.63 26.38
---------- --------- -------------
December 31, 1999................... 3,804,463 3,913,084 4.43-34.00 22.60
Canceled.......................... -- (158,671) 6.31-30.38 25.19
Exercised......................... -- (203,081) 4.43-24.84 13.67
Granted........................... (386,819) 386,819 16.44-27.06 17.18
---------- --------- -------------
December 31, 2000................... 3,417,644 3,938,151 4.43-34.00 22.60
Canceled.......................... -- (62,812) 16.44-30.38 25.70
Exercised......................... -- (194,902) 5.30-24.84 16.15
Granted........................... (1,592,324) 1,592,324 23.48-26.19 25.86
---------- --------- -------------
December 31, 2001................... 1,825,320 5,272,761 4.43-34.00 23.64
========== ========= =============
</Table>
The ranges of exercise prices and the remaining contractual life of options
as of December 31, 2001 were as follows:
<Table>
<Caption>
RANGE OF EXERCISE PRICES $0 - $9 $10 - $18 $19 - $26 $27 - $34
- ------------------------ ------- --------- --------- ---------
Options outstanding:
Outstanding as of December 31, 2001................ 60,749 984,632 3,532,522 694,858
Wtd-avg remaining contractual life (in years)...... 2.43 5.09 7.67 6.66
Weighted-average exercise price.................... $ 8.50 14.67 25.29 29.24
Options exerciseable:
Outstanding as of December 31, 2001................ 60,749 866,463 2,527,957 606,709
Wtd-avg remaining contractual life (in years)...... 2.43 4.67 7.73 6.64
Weighted-average exercise price.................... $ 8.50 14.43 25.12 29.07
</Table>
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The Employee Stock Purchase Plan provides full-time and part-time employees
of the Corporation the opportunity to acquire common shares on a payroll
deduction basis. Shares available under the Employee Stock Purchase Plan are
purchased at 85% of their fair market value on the business day immediately
preceding the semi-annual grant-date. Of the 240,705 shares available under the
Plan, there were 45,460, 61,816, and 46,291 shares issued in 2001, 2000, and
1999, respectively.
15. PARENT COMPANY
Condensed financial information of FirstMerit Corporation (Parent Company
only) is as follows:
<Table>
<Caption>
AS OF DECEMBER 31,
-----------------------
CONDENSED BALANCE SHEETS 2001 2000
- ------------------------ ---------- ---------
ASSETS
Cash and due from banks..................................... $ 740 29,187
Investment securities....................................... 8,999 1,207
Loans to subsidiaries....................................... 23,376 7,282
Investment in subsidiaries, at equity in underlying value of
their net assets.......................................... 889,316 886,315
Other assets................................................ 82,900 88,954
---------- ---------
$1,005,331 1,012,945
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Convertible subordinated debt............................... $ 41,137 41,217
Wholesale borrowings........................................ 51,547 51,547
Accrued and other liabilities............................... 1,840 5,292
Shareholders' equity........................................ 910,807 914,889
---------- ---------
$1,005,331 1,012,945
========== =========
</Table>
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
CONDENSED STATEMENTS OF INCOME 2001 2000 1999
- ------------------------------ -------- ------- -------
Income:
Cash dividends from subsidiaries............................ $134,925 160,600 62,000
Other income................................................ 1,063 2,134 5,740
-------- ------- -------
135,988 162,734 67,740
Interest and other expenses................................. 3,849 10,410 11,839
-------- ------- -------
Income before federal income tax benefit and equity in
undistributed income of subsidiaries...................... 132,139 152,324 55,901
Federal income tax (benefit)................................ (1,457) (9,267) (9,501)
-------- ------- -------
133,596 161,591 65,402
Equity in undistributed income (loss) of subsidiaries....... (17,291) (1,804) 54,468
-------- ------- -------
Net income.................................................. $116,305 159,787 119,870
======== ======= =======
</Table>
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------------
CONDENSED STATEMENTS OF CASH FLOWS 2001 2000 1999
- ---------------------------------- --------- -------- -------
Operating activities:
Net income.................................................. $ 116,305 159,787 119,870
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed income of subsidiaries.............. 17,291 1,804 (54,468)
Other....................................................... 3,847 (74,659) (72,302)
--------- -------- -------
Net cash provided (used) by operating activities............ 137,443 86,932 (6,900)
--------- -------- -------
Investing activities:
Proceeds from maturities of investment securities........... 6,227 6,726 9,588
Loans to subsidiaries....................................... (24,951) -- (5,414)
Repayment of loans to subsidiaries.......................... 8,857 131,750 --
Payments for investments in and advances to subsidiaries.... (2,084) (7,202) --
Net decrease in loans....................................... -- 543 13,734
Purchases of investment securities.......................... (16,280) (6,190) (1,512)
--------- -------- -------
Net cash provided (used) by investing activities............ (28,231) 125,627 16,396
--------- -------- -------
Financing activities:
Net increase (decrease) in wholesale borrowings............. (80) (78,797) 119,520
Cash dividends.............................................. (80,172) (76,380) (68,932)
Proceeds from exercise of stock options..................... 7,775 1,826 11,809
Purchase of treasury shares................................. (65,182) (34,890) (85,666)
--------- -------- -------
Net cash provided (used) by financing activities............ (137,659) (188,241) (23,269)
--------- -------- -------
Net increase (decrease) in cash and cash equivalents........ (28,447) 24,318 (13,773)
Cash and cash equivalents at beginning of year.............. 29,187 4,869 18,642
--------- -------- -------
Cash and cash equivalents at end of year.................... $ 740 29,187 4,869
========= ======== =======
</Table>
16. SEGMENT INFORMATION
The Corporation provides a diversified range of banking and certain
nonbanking financial services and products through its various subsidiaries.
Management reports the results of the Corporation's operations through its major
line of business Supercommunity Banking. Parent Company and Other Subsidiaries
include activities that are not directly attributable to Super Community
Banking. Included in this category are certain nonbanking affiliates,
eliminations of certain intercompany transactions and certain nonrecurring
transactions. Also included are portions of certain assets, capital, and support
functions not specifically identifiable with Supercommunity Banking. The
Corporation's business is conducted solely in the United States.
The accounting policies of the segment are the same as those described in
"Summary of Significant Accounting Policies." The Corporation evaluates
performance based on profit or loss from operations before income taxes.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The following table presents a summary of financial results and significant
performance measures for the periods depicted.
<Table>
<Caption>
2001
-------------------------------------------
PARENT CO.
SUPERCOMMUNITY OTHER SUBS
BANKING ELIMS CONSOLIDATED
-------------- ----------- ------------
(DOLLARS IN THOUSANDS)
SUMMARY OF OPERATIONS:
Net interest income........................................ $ 386,202 5,254 391,456
Provision for loan losses.................................. 61,807 -- 61,807
Other income............................................... 180,748 1,671 182,419
Other expenses............................................. 327,868 729 328,597
Net income................................................. 111,796 4,509 116,305
AVERAGE BALANCES:
Assets..................................................... 10,141,784 39,125 10,180,909
Loans...................................................... 7,371,083 2,410 7,373,493
Earning assets............................................. 9,391,420 16,778 9,408,198
Deposits................................................... 7,450,733 (9,136) 7,441,597
Shareholders' equity....................................... 813,103 108,131 921,234
PERFORMANCE RATIOS:
Return on average equity................................... 13.75% 12.65%
Return on average assets................................... 1.10% 1.14%
Efficiency ratio, excludes unusual charges................. 48.55% 48.09%
</Table>
<Table>
<Caption>
2000
-------------------------------------------
PARENT CO.
SUPERCOMMUNITY OTHER SUBS
BANKING ELIMS CONSOLIDATED
-------------- ----------- ------------
(DOLLARS IN THOUSANDS)
SUMMARY OF OPERATIONS:
Net interest income........................................ 383,398 (7,154) 376,244
Provision for loan losses.................................. 32,611 97 32,708
Other income............................................... 161,509 2,382 163,891
Other expenses............................................. 273,215 1,977 275,192
Net income................................................. 157,862 1,925 159,787
AVERAGE BALANCES:
Assets..................................................... 10,310,415 58,222 10,368,637
Loans...................................................... 7,272,807 2,229 7,275,036
Earning assets............................................. 9,652,212 12,039 9,664,251
Deposits................................................... 7,431,772 (16,762) 7,415,010
Shareholders' equity....................................... 881,717 (19,608) 862,109
PERFORMANCE RATIOS:
Return on average equity................................... 17.90% 18.60%
Return on average assets................................... 1.53% 1.54%
Efficiency ratio, excludes unusual charges................. 47.87% 48.69%
</Table>
<Table>
<Caption>
1999
-------------------------------------------
PARENT CO.
SUPERCOMMUNITY OTHER SUBS
BANKING ELIMS CONSOLIDATED
-------------- ----------- ------------
(DOLLARS IN THOUSANDS)
SUMMARY OF OPERATIONS:
Net interest income........................................ 386,891 (2,905) 383,986
Provision for loan losses.................................. 36,429 1,001 37,430
Other income............................................... 154,003 707 154,710
Other expenses............................................. 314,211 2,295 316,506
Net income................................................. 115,989 3,881 119,870
AVERAGE BALANCES:
Assets..................................................... 9,513,827 (20,780) 9,493,047
Loans...................................................... 6,859,513 5,817 6,865,330
Earning assets............................................. 8,842,908 (45,313) 8,797,595
Deposits................................................... 6,836,327 (37,646) 6,798,681
Shareholders' equity....................................... 855,980 24,144 880,124
PERFORMANCE RATIOS:
Return on average equity................................... 18.00% 13.67%
Return on average assets................................... 1.62% 1.26%
Efficiency ratio, excludes unusual charges................. 50.28% 50.86%
</Table>
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The table below presents estimated revenues from external customers, by
product and service group for the periods depicted.
<Table>
<Caption>
RETAIL COMMERCIAL TRUST TOTAL
-------- ---------- ------ -------
2001
Interest and fees.................................. $406,171 401,043 22,593 829,807
Service charges.................................... 50,605 16,817 -- 67,422
Sales and servicing................................ 12,089 -- -- 12,089
-------- ------- ------ -------
Totals.......................................... $468,865 417,860 22,593 909,318
======== ======= ====== =======
2000
Interest and fees.................................. $414,031 447,018 21,580 882,629
Service charges.................................... 49,048 13,180 -- 62,228
Sales and servicing................................ 10,529 -- -- 10,529
-------- ------- ------ -------
Totals.......................................... $473,608 460,198 21,580 955,386
======== ======= ====== =======
1999
Interest and fees.................................. $387,083 367,853 18,708 773,644
Service charges.................................... 45,102 11,780 -- 56,882
Sales and servicing................................ 9,035 -- -- 9,035
-------- ------- ------ -------
Totals.......................................... $441,220 379,633 18,708 839,561
======== ======= ====== =======
</Table>
17. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The Corporation is required to disclose the estimated fair value of its
financial instruments in accordance with SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments." These disclosures do not attempt to estimate or
represent the Corporation's fair value as a whole. Fair value estimates are made
at a point in time, based on relevant market data and information about the
financial instrument, and may change in subsequent reporting periods due to
market conditions or other factors.
Estimated fair value in theory represents the amounts at which financial
instruments could be exchanged or settled in a current transaction between
willing parties. Instruments for which quoted market prices are not available
are valued based on estimates using present value or other valuation techniques
whose results are significantly affected by the assumptions used, including
discount rates and future cash flows. Accordingly, the values so derived, in
many cases, may not be indicative of amounts that could be realized in immediate
settlement of the instrument.
The following methods and assumptions were used to estimate the fair values
of each class of financial instrument presented:
Investment Securities -- The fair value of investment securities is
based on quoted market prices, where available. If quoted market prices are
not available, fair value is estimated using the quoted market prices of
comparable instruments.
Federal funds sold -- The carrying amount is considered a reasonable
estimate of fair value.
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.
Cash and due from banks -- The carrying amount is considered a
reasonable estimate of fair value.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Accrued interest receivable -- The carrying amount is considered a
reasonable estimate of fair value.
Deposits -- SFAS No. 107 defines the estimated fair value of deposits
with no stated maturity, which includes demand deposits, money market
accounts and other savings accounts, to be 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.
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 Corporation's long-term debt. Discounting
was based on the contractual cash flows and the current rate at which debt
with similar terms could be issued.
Derivative financial instruments -- The fair value of exchange-traded
derivative financial instruments was based on quoted market prices or
dealer quotes. These values represent the estimated amount the Corporation
would receive or pay to terminate the agreements, considering current
interest rates, as well as the current creditworthiness of the
counterparties. Fair value amounts consist of unrealized gains and losses,
accrued interest receivable and payable, and premiums paid or received, and
take into account master netting agreements.
Accrued interest payable -- The carrying amount is considered a
reasonable estimate of fair value.
<Table>
<Caption>
YEAR-ENDS
----------------------------------------------
2001 2000
---------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- --------- --------- ---------
Financial assets:
Investment securities......................... $2,019,259 2,019,259 2,002,291 2,002,291
Federal funds sold............................ -- -- 8,100 8,100
Net loans & loans held for sale............... 7,306,985 7,297,778 7,264,553 7,168,940
Cash and due from banks....................... 190,020 190,020 235,918 235,918
Accrued interest receivable................... 54,624 54,624 71,418 71,418
Financial liabilities:
Deposits...................................... 7,539,400 7,593,911 7,614,932 7,646,426
Wholesale borrowings.......................... 1,588,279 1,633,107 1,563,404 1,578,148
Accrued interest payable...................... 42,755 42,755 69,981 69,981
Derivative instruments........................ -- (312) -- 11,397
</Table>
18. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit, financial guarantees, and loans sold with recourse
and derivative instruments. See Note 1.(o) to the Consolidated Financial
Statements for more information regarding derivatives.
These instruments involve, to varying degrees, elements recognized in the
consolidated balance sheets. The contract or notional amount of these
instruments reflect the extent of involvement the Corporation has in particular
classes of financial instruments.
The Corporation's exposure to credit loss in the event of non-performance
by the other party to the financial instrument for commitments to extend credit
and standby letters of credit and financial guarantees written is
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
represented by the contractual notional amount of those instruments. The
Corporation uses the obligations as it does for on-balance-sheet instruments.
Unless noted otherwise, the Corporation does not require collateral or
other security to support financial instruments with credit risk. The following
table sets forth financial instruments whose contract amounts represent credit
risk.
<Table>
<Caption>
YEARS ENDED,
------------------------
2001 2000
---------- ----------
Commitments to extend credit................................ $1,834,906 2,440,497
Standby letters of credit and financial guarantees
written................................................... 241,381 201,885
Loans sold with recourse.................................... 21,549 41,508
Interest rate swaps......................................... 35,000 221,450
Purchased options........................................... -- --
Futures contracts sold...................................... -- --
Forward contracts sold...................................... 56,549 53,637
</Table>
Commitments to extend credit are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally are extended at the then prevailing interest rates, have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary by the
Corporation upon extension of credit is based on Management's credit evaluation
of the counter party. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, and income-producing
commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Corporation to guarantee the performance of a customer
to a third party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond financing and
similar transactions. Except for short-term guarantees of $53.3 million and
$49.1 million at December 31, 2001 and 2000, respectively, the remaining
guarantees extend in varying amounts through 2012. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. Collateral held varies, but may include marketable
securities, equipment and real estate. In recourse arrangements, the Corporation
accepts 100% recourse. By accepting 100% recourse, the Corporation is assuming
the entire risk of loss due to borrower default. The Corporation's exposure to
credit loss, if the borrower completely failed to perform and if the collateral
or other forms of credit enhancement all prove to be of no value, is represented
by the notional amount less any allowance for possible loan losses. The
Corporation uses the same credit policies originating loans which will be sold
with recourse as it does for any other type of loan.
Derivative financial instruments principally include interest rate swaps
which derive value from changes to underlying interest rates. The notional or
contract amounts associated with the derivative instruments are not recorded as
assets or liabilities on the balance sheet at December 31, 2001. The Corporation
has entered into swap agreements to modify the interest sensitivity of certain
liability portfolios. Specifically, the Corporation swapped $35.0 million fixed
rate CDs to floating rate liabilities. At December 31, 2000, the Corporation
swapped $21.5 million fixed rate CDs to floating rate liabilities and swapped
$50.0 million of fixed rate capital securities to floating rate liabilities and
swapped $150 million of subordinated debt from fixed to variable.
19. CONTINGENCIES
The nature of the Corporation's business results in a certain amount of
litigation. Accordingly, FirstMerit Corporation and its subsidiaries are subject
to various pending and threatened lawsuits in which claims for monetary damages
are asserted. Management, after consultation with legal counsel, is of the
opinion that the
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
ultimate liability of such pending matters would not have a material effect on
the Corporation's financial condition or results of operations.
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial and per share data for the years ended 2001 and 2000
are summarized as follows:
<Table>
<Caption>
QUARTERS
-----------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Total interest income..................... 2001 $189,779 183,498 181,235 172,387
==== ======== ======== ======== ========
2000 $190,046 197,247 202,352 201,850
==== ======== ======== ======== ========
Net interest income....................... 2001 $ 90,357 95,091 101,184 104,824
==== ======== ======== ======== ========
2000 $ 96,451 95,289 92,326 92,178
==== ======== ======== ======== ========
Provision for loan losses................. 2001 $ 11,816 9,394 10,931 29,666
==== ======== ======== ======== ========
2000 $ 11,714 8,346 5,447 7,201
==== ======== ======== ======== ========
Income after income taxes but before
cumulative change in accounting
method.................................. 2001 $ 39,193 39,684 41,901 1,826
==== ======== ======== ======== ========
2000 $ 39,699 39,976 40,065 40,047
==== ======== ======== ======== ========
Net income................................ 2001 $ 39,193 33,385 41,901 1,826
==== ======== ======== ======== ========
2000 $ 39,699 39,976 40,065 40,047
==== ======== ======== ======== ========
Net income per basic share before
cumulative effect of change in
accounting method....................... 2001 $ 0.45 0.47 0.49 0.02
==== ======== ======== ======== ========
2000 $ 0.45 0.45 0.45 0.46
==== ======== ======== ======== ========
Effect of cumulative change in accounting
method.................................. 2001 $ -- (0.07) -- --
==== ======== ======== ======== ========
2000 $ -- -- -- --
==== ======== ======== ======== ========
Net income per basic share................ 2001 $ 0.45 0.40 0.49 0.02
==== ======== ======== ======== ========
2000 $ 0.45 0.45 0.45 0.46
==== ======== ======== ======== ========
Net income per diluted share before
cumulative effect of change in
accounting method....................... 2001 $ 0.45 0.46 0.49 0.02
==== ======== ======== ======== ========
2000 $ 0.45 0.45 0.45 0.45
==== ======== ======== ======== ========
Effect of cumulative change in accounting
method.................................. 2001 $ -- (0.07) -- --
==== ======== ======== ======== ========
2000 $ -- -- -- --
==== ======== ======== ======== ========
Net income per diluted share.............. 2001 $ 0.45 0.39 0.49 0.02
==== ======== ======== ======== ========
2000 $ 0.45 0.45 0.45 0.45
==== ======== ======== ======== ========
</Table>
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
21. SHAREHOLDER RIGHTS PLAN
The Corporation has in effect a shareholder rights plan ("Plan"). The Plan
provides that each share of Common Stock has one right attached. Under the Plan,
subject to certain conditions, the Rights would be distributed after either of
the following events: (1) a person acquires 10% or more of the Common Stock of
the Corporation, or (2) the commencement of a tender offer that would result in
a change in the ownership of 10% or more of the Common Stock. After such an
event, each Right would entitle the holder to purchase shares of Series A
Preferred Stock of the Corporation. Subject to certain conditions, the
Corporation may redeem the Rights for $0.01 per Right.
22. 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:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ---------- ----------
(DOLLARS IN THOUSANDS)
BASIC EPS:
Income after taxes but before extraordinary item
and cumulative effect of change in accounting
method.......................................... $ 122,604 159,787 125,717
Extraordinary item -- extinguishment of debt, net
of taxes........................................ -- -- (5,847)
Cumulative effect of accounting change for
asset-backed retained interest asset, net of
taxes........................................... (6,299) -- --
----------- ---------- ----------
Net income......................................... 116,305 159,787 119,870
Less: preferred stock dividends.................... (122) (218) (307)
----------- ---------- ----------
Net income available to common shareholders........ $ 116,183 159,569 119,563
----------- ---------- ----------
Average common shares outstanding.................. 85,594,443 88,121,861 90,320,389
After-tax earnings per basic common share before
extraordinary item and change in accounting
method.......................................... $ 1.43 1.81 1.38
Extraordinary item -- extinguishment of debt, net
of taxes........................................ -- -- (0.06)
Cumulative change in accounting, net of taxes...... (0.07) -- --
----------- ---------- ----------
Basic net income per share......................... $ 1.36 1.81 1.32
=========== ========== ==========
</Table>
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ---------- ----------
(DOLLARS IN THOUSANDS)
DILUTED EPS:
Income available to common shareholders before
extraordinary item and change in accounting
method.......................................... $ 122,482 159,569 125,410
Add: preferred stock dividends..................... 122 218 307
Add: interest expense on convertible bonds, net of
tax............................................. 42 39 75
----------- ---------- ----------
122,646 159,826 125,792
Extraordinary item -- extinguishment of debt, net
of taxes........................................ -- -- (5,847)
Cumulative effect of accounting change for
asset-backed retained interest asset, net of
taxes........................................... (6,299) -- --
----------- ---------- ----------
Income used in diluted earnings per share
calculation..................................... $ 116,347 159,826 119,945
----------- ---------- ----------
Average common shares outstanding.................. 85,594,443 88,121,861 90,320,389
Add: common stock equivalents:
Stock option plans.............................. 420,756 300,649 569,817
Convertible debentures/preferred securities..... 273,404 438,682 633,183
----------- ---------- ----------
Average common and common stock equivalent shares
outstanding..................................... 86,288,603 88,861,192 91,523,389
After-tax earnings per diluted common share before
extraordinary item and change in accounting
method.......................................... $ 1.42 1.80 1.37
Extraordinary item -- extinguishment of debt, net
of taxes........................................ -- -- (0.06)
Cumulative change in accounting, net of taxes...... (0.07) -- --
----------- ---------- ----------
Basic net income per share......................... $ 1.35 1.80 1.31
=========== ========== ==========
</Table>
23. REGULATORY MATTERS
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a material
effect on the Corporation's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to quantitative judgements
by regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital to risk-weighted assets, and of
Tier I capital to average assets. Management believes, as of December 31, 2001,
the Corporation meets all capital adequacy requirements to which it is subject.
The capital terms used in this note to the consolidated financial statements are
defined in the regulations as well as in the "Capital Resources" section of
Management's Discussion and Analysis of financial condition and results of
operations.
As of year-end 2001, the most recent notification from the Office of the
Comptroller of the Currency ("OCC") categorized the Corporation as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Corporation must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table. In management's opinion, there are no conditions or events since the
OCC's notification that have changed the Corporation's categorization as "well
capitalized."
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
<Table>
<Caption>
ADEQUATELY
ACTUAL CAPITALIZED: WELL CAPITALIZED:
------------------ --------------- ---------------------
AS OF DECEMBER 31, 2001 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------- ---------- ----- ------- ----- ------- ------
Total Capital (to Risk Weighted
Assets)............................... $1,043,061 12.07% $ 691,087 8.00% $ 863,859 $ 10.00%
---------- ----- --- ------- ---- --- ------- --- ------
Tier I Capital (to Risk Weighted
Assets)............................... 784,818 9.09% $ 345,544 4.00% $ 518,316 $ 6.00%
---------- ----- --- ------- ---- --- ------- --- ------
Tier I Capital (to Average Assets)...... 784,818 7.75% $ 303,753 3.00% $ 506,255 $ 5.00%
---------- ----- --- ------- ---- --- ------- --- ------
</Table>
35
MANAGEMENT'S REPORT
The management of FirstMerit Corporation is responsible for the preparation
and accuracy of the financial information presented in this annual report. These
consolidated financial statements were prepared in accordance with generally
accepted accounting principles, based on the best estimates and judgment of
management.
The Corporation maintains a system of internal controls designed to provide
reasonable assurance that assets are safeguarded, that transactions are executed
in accordance with the Corporation's authorization and policies, and that
transactions are properly recorded so as to permit preparation of financial
statements that fairly present the financial position and results of operations
in conformity with generally accepted accounting principles. These systems and
controls are reviewed by our internal auditors and independent accountants.
The Audit Committee of the Board of Directors is composed of only outside
directors and has the responsibility for the recommendation of the independent
accountants for the Corporation. The Audit Committee meets regularly with
management, internal auditors and our independent accountants to review
accounting, auditing and financial matters. The independent accountants and the
internal auditors have free access to the Audit Committee.
<Table>
/s/ John R. Cochran /s/ Terrence E. Bichsel
JOHN R. COCHRAN TERRENCE E. BICHSEL
Chairman and Chief Executive Vice President
Executive Officer Chief Financial Officer
</Table>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
And Shareholders of FirstMerit Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of FirstMerit
Corporation and its subsidiaries at December 31, 2001 and December 31, 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSE COOPERS LLP
Chicago, Illinois
January 31, 2002
36
FIRSTMERIT CORPORATION AND
AFFILIATES EMPLOYEES' SALARY
SAVINGS RETIREMENT PLAN
REPORT ON AUDITS OF FINANCIAL STATEMENTS AND
SUPPLEMENTAL SCHEDULES
DECEMBER 31, 2001 AND 2000
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
FirstMerit Corporation
In our opinion, the accompanying statements of net assets available for benefits
and the related statements of changes in net assets available for benefits
present fairly, in all material respects, the net assets available for benefits
of the FirstMerit Corporation and Affiliates Employees' Salary Savings
Retirement Plan (the "Plan") at December 31, 2001 and 2000, and the changes in
net assets available for benefits for the year ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Plan's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of assets held
for investment purposes as of December 31, 2001 and reportable transactions for
the year ended December 31, 2001 are presented for the purpose of additional
analysis and are not a required part of the basic financial statements, but are
supplementary information required by the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. These supplemental schedules are the responsibility of the
Plan's management. The supplemental schedules have been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, are fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
/s/ PricewaterhouseCoopers LLP
April 19, 2002
FIRSTMERIT CORPORATION AND AFFILIATES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
CONTENTS
DECEMBER 31, 2001 AND 2000
- -------------------------------------------------------------------------------
PAGES
Report of Independent Accountants 1
Financial Statements:
Statements of Net Assets Available for Plan Benefits
at December 31, 2001 and 2000 2
Statements of Changes in Net Assets Available for Plan Benefits
for the years ended December 31, 2001 and 2000 3
Notes to Financial Statements 4-9
Supplemental Schedules:
Schedule of Assets Held at end of year 10
Schedule of Reportable Transactions for the year ended December 31, 2001 11
FIRSTMERIT CORPORATION AND AFFILIATES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
Assets:
Investments, at fair value $ 38,533,206 $ 41,900,279
FirstMerit Corporation Common Stock 58,722,776 58,373,092
------------ ------------
Total investments 97,255,982 100,273,371
------------ ------------
Receivables:
Contributions receivable from participants 222,192 206,628
Contributions receivable from employers 82,395 78,939
Loans to participants 910,771 811,043
------------ ------------
Total receivables 1,215,358 1,096,610
------------ ------------
Other:
(Book overdraft) cash (5,517) 469,739
------------ ------------
Net assets available for plan benefits $ 98,465,823 $101,839,720
============ ============
The accompanying notes are an integral part of these financial statements.
2
FIRSTMERIT CORPORATION AND AFFILIATES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
Additions:
Contributions:
Participants' contributions $ 5,680,026 $ 5,277,515
Employer's contributions 2,498,502 3,021,257
------------- -------------
8,178,528 8,298,772
------------- -------------
Investment income:
Interest 57,221 47,468
Dividends 2,493,423 2,383,811
Net realized (loss) gain and unrealized (depreciation)
appreciation of investments (6,383,781) 3,944,253
------------- -------------
(3,833,137) 6,375,532
Assets received from new participants 74,830 1,295,047
------------- -------------
Total additions 4,420,221 15,969,351
------------- -------------
Deductions:
Benefits paid to participants 7,794,118 7,038,075
------------- -------------
Total deductions 7,794,118 7,038,075
Net (decrease) increase (3,373,897) 8,931,276
Net assets available for plan benefits at beginning of period 101,839,720 92,908,444
------------- -------------
Net assets available for plan benefits at end of period $ 98,465,823 $ 101,839,720
============= =============
The accompanying notes are an integral part of these financial statements.
3
FIRSTMERIT CORPORATION AND AFFILIATES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE PLAN
The following brief description of the FirstMerit Corporation and
Affiliates ("FirstMerit")(the "Company") Employees' Salary Savings
Retirement Plan (the "Plan") provides only general information.
Participants should refer to the Plan Agreement for a more complete
description of the Plan's provisions.
A. GENERAL
The Board of Directors of FirstMerit Corporation established this
defined contribution plan as of October 1, 1985. The Plan covers
all employees of FirstMerit who have six months of service and have
attained the age of twenty-one. The Plan is subject to certain
provisions of the Employee Retirement Income Security Act of 1974
("ERISA").
B. CONTRIBUTIONS
The Plan permits each participant to contribute from one percent to
fifteen percent of compensation. Such contributions are known as
voluntary pretax employee contributions. A participant's voluntary
pretax contributions and earnings are immediately vested and
non-forfeitable.
FirstMerit contributes as a matching contribution an amount equal
to 50 percent of the participant's voluntary pretax contribution.
FirstMerit will not make a matching contribution with respect to
any portion of a participant voluntary pretax contribution that
exceeds six percent of the participant's basic compensation. These
employer matching contributions and earnings are immediately vested
and non-forfeitable.
The Plan also includes a supplemental matching account whereby
FirstMerit makes additional matching contributions equal to 50% of
the participant's voluntary pretax employee contributions which do
not exceed three percent of the participant's basic compensation.
Participants become vested in the Supplemental Matching Program
upon achieving five years of service or upon attaining normal
retirement age.
C. INVESTMENTS
During 2000, the Company added two new investment options to the
Plan. These new options included the Vanguard 500 Portfolio Fund
and the Fidelity Balanced Fund. In addition to the two new funds
added, the Plan renamed the NewPoint Equity Fund the FirstMerit
Equity Fund. The following is a summary of investment options
available to participants at December 31, 2001:
Federated Government Obligations Fund: The fund seeks to provide
conservative investors with a high quality portfolio, current
income and relative safety. The fund invests in U.S. Treasuries,
government agency securities and repurchase agreements backed by
government securities.
Federated Short/Intermediate Government Fund: The fund seeks to
provide investors with current income by investing in U.S. Treasury
and government agency securities.
Federated Capital Preservation Fund: The fund seeks to offer
investors stable principal with high current income by investing in
Guaranteed Investment Contracts issued by major U.S. and Canadian
life insurance companies and other stable value products.
4
FIRSTMERIT CORPORATION AND AFFILIATES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
Fidelity Advisor Series IV Ltd. Term Bond Fund: The fund invests in
investment-grade bonds from different sectors of the market to give
investors greater return potential through exposure to corporate
and mortgage-backed securities.
Fidelity Advisor Equity Portfolio Growth Fund: The fund invests in
attractively priced stocks of companies that demonstrate the
potential for above-average earnings and revenue growth, a strategy
that may translate into strong returns for investors.
Fidelity Balanced Fund: The fund seeks income consistent with
preservation of capital by investing in a broadly diversified
portfolio of high-yielding securities, including common and
preferred stocks, and bonds. It usually invests at least 25% of
assets in fixed-income senior securities rated BBB or higher.
Fidelity Blue Chip Growth Fund: The fund seeks growth of capital
over the long-term by investing primarily in a diversified
portfolio of common stocks of well-known and established companies.
Fidelity Overseas Fund: The fund seeks long-term growth of capital
by investing in equities issued by companies, whose principal
business activities are outside of the United States. The fund
invests at least 65% of assets in at least three different
countries outside of North America.
FirstMerit Equity Fund: The fund seeks growth of capital and income
by investing at least 65% of assets in common and preferred
domestic stocks of medium- to large-capitalization companies. It
may also invest in investment-grade bonds, notes, convertible
securities, zero-coupon bonds, and U.S. government securities. The
fund may invest the remaining assets in money-market instruments
and foreign equity and debt securities.
Vanguard 500 Portfolio: The fund seeks investment results that
correspond with the price and yield performance of the S&P 500
Index. The fund employs a passive management strategy designed to
track the performance of the S&P 500 Index, which is dominated by
the stock of large U.S. companies.
FirstMerit Corporation Common Stock: The Plan provides for
participants to invest directly in Common Shares of the Company.
Each participant electing to purchase Common Shares of the Company
through the Plan is permitted to vote such Common Shares in the
same manner as any other shareholder and is furnished proxy
materials to such effect. Dividends paid by FirstMerit are
reinvested in the Plan (see Note H).
D. PARTICIPANTS' ACCOUNTS
FirstMerit Bank, N.A. (a subsidiary of FirstMerit), as the trustee
for the Plan, maintains separate accounts for each participant.
Participants can contribute to one investment or a combination
thereof with the minimum investment in any option of 5%. Employer
matching contributions are invested solely in FirstMerit
Corporation common stock purchased on the open market by the
trustee.
5
FIRSTMERIT CORPORATION AND AFFILIATES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
E. PAYMENT OF BENEFITS
Distributions to participants are made by one or more of the
following methods: (1) a single lump-sum payment, in cash; or (2)
payments in equal or nearly equal monthly, quarterly, semi-annual,
or annual installments over any period not exceeding 10 years or
the participant's life expectancy at the date such payments
commence, if less. Benefit distributions are recorded when paid to
participants.
F. LOANS
The loan feature allows participants to borrow against amounts
accumulated in the Plan on their behalf. The plan document sets
forth guidelines as to certain limitations, and permissible
interest rates and repayment terms.
G. ADMINISTRATIVE EXPENSES
All expenses associated with administering the Plan, including the
trustee's fees and brokerage commissions on purchases of and
transfers between Investment Funds, are paid by FirstMerit.
H. AMENDMENT
In September 2000, management of the Company approved an amendment
to the Plan in an attempt to obtain an annual tax deduction under
the Internal Revenue Service ("IRS") Code Section 401(k) for
dividends paid on FirstMerit Stock held in the Plan. The Company
applied for the 401(k) election and the Plan was amended after a
favorable determination letter was received from the IRS. Due to
the amendment to the Plan, participants who hold FirstMerit Stock
in the Plan received dividend distributions instead of having the
dividends reinvested in their participation account. The amount of
dividends distributed in 2001 was $1,510,677 and is included in
benefits paid to participants in the Statements of Changes in Net
Assets Available for Plan Benefits.
Effective January 1, 2002, per the amendment, management of the
Company has elected to allow employees the option of reinvesting
their quarterly dividends.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
The accompanying financial statements have been prepared on an
accrual basis in accordance with accounting principles generally
accepted in the United States of America.
B. USE OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and related
notes. Actual results could differ from those estimates.
6
FIRSTMERIT CORPORATION AND AFFILIATES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
C. INVESTMENTS
Investments in securities are stated at fair value. The fair value
of marketable securities is based on quotations obtained from
national securities exchanges.
The fair value of the investments in the mutual funds is based upon
the number of units held by the Plan at December 31, 2001 and 2000,
respectively, and the current value of each unit based upon
quotations obtained from national securities exchanges on which the
funds are traded as of the last trading day of the reporting
period.
Securities transactions are recognized on the trade date (the date
the order to buy or sell is executed).
The Plan presents in the Statements of Changes in Net Assets
Available for Plan Benefits the net appreciation (depreciation) in
the fair value of its investments, which consists of the realized
gains or losses and the unrealized appreciation (depreciation) on
these investments.
D. RISK AND UNCERTAINTIES
The Plan generates a significant portion of its revenues from
investments in domestic and international mutual funds, bonds and
FirstMerit Corporation common stock. As a result, the Plan's
revenues and net assets available for plan benefits are dependent
on the performance and volatility of the both the U.S. and global
financial markets and economic conditions.
E. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Management has determined that the carrying amount of financial
instruments, as reported on the Statements of Net Assets Available
for Plan Benefits, approximates fair value.
7
FIRSTMERIT CORPORATION AND AFFILIATES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
3. INVESTMENTS
The Plan's investments are maintained in Investment Funds and common
shares of the Company, as described in Note 1. The following presents the
market value of investments that represent 5 percent or more of the
Plan's Net Assets Available for Plan Benefits at December 31, 2001 and
2000:
2001 2000
Mutual funds:
Fidelity Advisor Equity Portfolio Growth Fund $ 9,763,432 $11,596,972
Fidelity Blue Chip Growth Fund 10,630,086 12,292,561
FirstMerit Equity Fund 5,588,522 6,885,591
FirstMerit Corporation Common Stock 58,722,776 58,373,092
As stated in Note 2, the Plan presents, in the Statement of Changes in
Net Assets Available for Plan Benefits, net realized gain and
appreciation (depreciation) of investments, which consist of realized
gains or losses and unrealized appreciation (depreciation). Total
realized gains for 2001 and 2000 were $1,250,150 and $4,463,107,
respectively, and the unrealized depreciation was $(7,633,931) and
$(518,854) for 2001 and 2000, respectively.
Specifically, the Plan's investments (including investments bought, sold,
and held during the period appreciated (depreciated) in value as follows:
2001 2000
Mutual funds $(6,503,033) $(8,259,098)
FirstMerit Corporation Common Stock (1,130,898) 7,740,244
----------- -----------
Total $(7,633,931) $ (518,854)
=========== ===========
4. FEDERAL INCOME TAXES
The Plan and Trust qualify under Section 401 of the Internal Revenue Code
and the Trust is exempt from federal income taxes under Section 501(a).
The Plan obtained its latest determination letter on May 9, 2001,
in which the Internal Revenue Service stated that the Plan, as then
designed, was in compliance with the applicable requirements of the
Internal Revenue Code.
8
FIRSTMERIT CORPORATION AND AFFILIATES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
Therefore, no provision for income taxes has been included in the Plan's
financial statements.
5. PLAN TERMINATION
Although they have not expressed any intent to do so, the Plan may be
terminated by unanimous action of the FirstMerit Corporation Board of
Directors. In the event the plan is terminated, FirstMerit will direct
the trustee to distribute the assets of the trust fund, after payment of
any expenses properly chargeable against the trust fund, to participants
in proportion to the value of their total account balances as of the date
of termination, in cash or in kind and in such a manner as FirstMerit
shall determine.
6. FORFEITURES
At December 31, 2001 and 2000, forfeited nonvested accounts totalled
$189,741 and $435,049, respectively. These amounts will be used to reduce
future Company contributions to the Plan. Company contributions were
reduced by forfeited nonvested accounts in 2001 and 2000 in the amounts
of $700,000 and $43,090, respectively.
7. TRANSACTIONS WITH PARTY-IN-INTEREST
Transactions involving participant notes, common shares of FirstMerit
Corporation and the funds administered by FirstMerit Corporation, trustee
of the Plan, are considered party-in-interest transactions. These
transactions are not, however, considered prohibited transactions under
29 CFR 408(b) of the ERISA regulations. At December 31, 2001 and 2000,
the Plan held units of participation in the FirstMerit Equity Fund
(formerly called the NewPoint Equity Fund), a mutual fund in which the
Trust and Financial Services Division of FirstMerit Bank, N.A. is the
advisor to the fund. As of December 31, 2001 and 2000, the fund had a
total cost of $6,682,310 and $6,164,387 and a total market value of
$5,588,522 and $6,885,591, respectively. During fiscal periods 2001 and
2000, transactions with the fund included aggregate purchases of
$1,327,540 and $2,251,474 and aggregate sales totalling $704,158 and
$1,483,897, respectively.
9
FIRSTMERIT CORPORATION AND AFFILIATES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
SCHEDULE OF ASSETS HELD AT END OF YEAR
- --------------------------------------------------------------------------------
COST CURRENT VALUE
Mutual Funds:
Federated Government Obligations Fund $ 95,542 $ 95,542
Federated Short/Intermediate Government Fund 2,078,131 2,132,703
Federated Capital Preservation Fund 4,270,992 4,270,992
Fidelity Advisor Series IV Ltd. Term Bond Fund 2,230,024 2,273,423
Fidelity Advisor Equity Portfolio Growth Fund 10,228,696 9,763,432
Fidelity Balanced Fund 418,001 413,881
Fidelity Blue Chip Growth Fund 10,626,079 10,630,086
Fidelity Overseas Fund 2,727,809 2,161,810
(*) FirstMerit Equity Fund 6,682,310 5,588,522
Vanguard 500 Portfolio 1,339,844 1,202,815
------------ ------------
40,697,428 38,533,206
(*) FirstMerit Corporation Common Stock 37,413,766 58,722,776
Cash (5,517) (5,517)
(*) Loans to participants - various interest rates, 5 year maximum
unless mortgage 20 year maximum 910,771 910,771
------------ ------------
$ 79,016,448 $ 98,161,236
============ ============
(*)Party-in-interest
10
FIRSTMERIT CORPORATION AND AFFILIATES
- -------------------------------------------------------------------------------
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
SCHEDULE OF REPORTABLE TRANSACTIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
NUMBER NUMBER OF PURCHASE SELLING COST OF GAIN
OF SHARES TRANSACTIONS PRICE PRICE ASSET ON SALE
Category II: Series of transactions
with same broker exceeds 5% of value
FirstMerit Corporation Common Stock 207,085 26 5,223,383 5,223,383 -
Issue: 337915102
FirstMerit Corporation Common Stock 105,342 23 2,628,651 2,810,262 (181,611)
Issue: 337915102
Category III: Series of transactions
in same security exceeds 5% of value
FirstMerit Corporation Common Stock 208,713 28 5,263,509 5,263,509 -
Issue: 337915102
FirstMerit Corporation Common Stock 165,767 212 4,158,748 4,423,720 (264,972)
Issue: 337915102
Federated Government Obligations Fund 5,307,269 194 5,307,269 5,307,269 -
Issue: 60934N104
Federated Government Obligation Fund 5,226,040 122 5,226,040 5,226,040 -
Issue: 601934N104
There were no qualified transactions for Categories I or IV during the year.
11
SIGNATURE
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 30th day of April, 2002.
FirstMerit Corporation
By: /s/ Terrence E. Bichsel
-------------------------------
Terrance E. Bichsel
Executive Vice President, Financial
Administration (Chief Financial Officer and
Chief Accounting Officer)
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER
- -------
3.1 Amended and Restated Articles of Incorporation of FirstMerit
Corporation, as amended (incorporated by reference from
Exhibit 3.1 to the Form 10-K/A filed by the Registrant on
April 29, 1999)
3.2 Amended and Restated Code of Regulations of FirstMerit
Corporation (incorporated by reference from Exhibit 3(b) to
the Form 10-K filed by the registrant on April 9, 1998)
4.1 Shareholders Rights Agreement dated October 21, 1993,
between FirstMerit Corporation and FirstMerit Bank, N.A., as
amended and restated May 20, 1998 (incorporated by reference
from Exhibit 4 to the Form 8-A/A filed by the registrant on
June 22, 1998)
4.2 Instrument of Assumption of Indenture between FirstMerit
Corporation and NBD Bank, as Trustee, dated October 23, 1998
regarding FirstMerit Corporation's 6 1/4% Convertible
Subordinated Debentures, due May 1, 2008 (incorporated by
reference from Exhibit 4(b) to the Form 10-Q filed by the
registrant on November 13, 1998)
4.3 Supplemental Indenture, dated as of February 12, 1999,
between FirstMerit and Firstar Bank Milwaukee, National
Association, as Trustee relating to the obligations of the
FirstMerit Capital Trust I, fka Signal Capital Trust I
(incorporated by reference from Exhibit 4.3 to the Form 10-K
filed by the Registrant on March 22, 1999)
4.4 Indenture dated as of February 13, 1998 between Firstar Bank
Milwaukee, National Association, as trustee and Signal Corp
(incorporated by reference from Exhibit 4.1 to the Form S-4,
No. 333-52581-01, filed by FirstMerit Capital Trust I, fka
Signal Capital Trust I, on May 13, 1998)
4.5 Amended and Restated Declaration of Trust of FirstMerit
Capital Trust I, fka Signal Capital Trust I, dated as of
February 13, 1998 (incorporated by reference from Exhibit
4.5 to the Form S-4 No. 333-52581-01, filed by FirstMerit
Capital Trust I, fka Signal Capital Trust I, on May 13,
1998)
4.6 Form Capital Security Certificate (incorporated by reference
from Exhibit 4.6 to the Form S-4 No. 333-52581-01, filed by
FirstMerit Capital Trust I, fka Signal Capital Trust I, on
May 13, 1998)
4.7 Series B Capital Securities Guarantee Agreement
(incorporated by reference from Exhibit 4.7 to the Form No.
333-52581-01, filed by FirstMerit Capital Trust I, fka
Signal Capital Trust I, on May 13, 1998)
4.8 Form of 8.67% Junior Subordinated Deferrable Interest
Debenture, Series B (incorporated by reference from Exhibit
4.7 to the Form S-4 No. 333-52581-01, filed by FirstMerit
Capital Trust I, fka Signal Capital Trust I, on May 13,
1998)
10.1 Amended and Restated 1992 Stock Option Program of FirstMerit
Corporation (incorporated by reference from Exhibit 10.1 to
the Form 10-K filed by the registrant on March 9, 2001)*
10.2 Amended and Restated 1992 Directors Stock Option Program
(incorporated by reference from Exhibit 10.2 to the Form
10-K filed by the registrant on March 9, 2001) *
10.3 Amended and Restated 1995 Restricted Stock Plan
(incorporated by reference from Exhibit 10.3 to the Form
10-K filed by the registrant on March 9, 2001)*
10.4 Amended and Restated 1997 Stock Option Program (incorporated
by reference from Exhibit 10.4 to the Form 10-K filed by the
registrant on March 9, 2001) *
10.5 Amended and Restated 1999 Stock Option Program (incorporated
by reference from Exhibit 10.5 to the Form 10-K/A filed by
the registrant on April 30, 2001)*
10.6 Amended and Restated 1987 Stock Option and Incentive Plan
(SF) (incorporated by reference from Exhibit 10.6 to the
Form 10-K filed by the registrant on March 9, 2001)*
10.7 Amended and Restated 1996 Stock Option and Incentive Plan
(SF) (incorporated by reference from Exhibit 10.7 to the
Form 10-K filed by the registrant on March 9, 2001)*
10.8 Amended and Restated 1994 Stock Option and Incentive Plan
(SF) ((incorporated by reference from Exhibit 10.8 to the
Form 10-K filed by the registrant on March 9, 2001)*
10.9 Amended and Restated 1989 Stock Incentive Plan (SB)
(incorporated by reference from Exhibit 10.9 to the Form
10-K filed by the registrant on March 9, 2001) *
10.10 Amended and Restated Stock Option and Incentive Plan (SG)
(incorporated by reference from Exhibit 10.10 to the Form
10-K filed by the registrant on March 9, 2001)*
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER
- -------
10.11 Non-Employee Director Stock Option Plan (SG) (incorporated
by reference from Exhibit 4.3 to the Form S-8/A (No.
333-63797) filed by the registrant on February 12, 1999)*
10.12 Amended and Restated 1997 Omnibus Incentive Plan (SG)
(incorporated by reference from Exhibit 10.12 to the Form
10-K filed by the registrant on March 9, 2001)*
10.13 Amended and Restated 1993 Stock Option Plan (FSB)
(incorporated by reference from Exhibit 10.13 to the Form
10-K filed by the registrant on March 9, 2001)*
10.14 Amended and Restated Executive Deferred Compensation Plan
(incorporated by reference from Exhibit 10.14 to the Form
10-K/A filed by the registrant on April 30, 2001)*
10.15 Amended and Restated Director Deferred Compensation Plan
(incorporated by reference from Exhibit 10.15 to the Form
10-K/A filed by the registrant on April 30, 2001)*
10.16 Executive Supplemental Retirement Plan*
10.17 Form of Amended and Restated Membership Agreement with
respect to the Executive Supplemental Retirement Plan
(incorporated by reference from Exhibit 10.39 to the Form
10-K filed by the Registrant on March 22, 1999)*
10.18 Unfunded Supplemental Benefit Plan (incorporated by
reference from Exhibit 10.11 to the Form 10-K filed by the
registrant on February 24, 1998)*
10.19 First Amendment to the Unfunded Supplemental Benefit Plan*
10.20 Executive Life Insurance Program Summary*
10.21 Long Term Disability Plan*
10.22 SERP Agreement dated October 23, 1998 for Charles F.
Valentine (incorporated by reference from Exhibit 10(b) to
the Form 10-Q filed by the registrant on November 13, 1998)*
10.23 Amended and Restated Employment Agreement of John R. Cochran
(incorporated by reference from Exhibit 10.24 to the Form
10-K/A filed by the registrant on April 30, 2001)*
10.24 Restricted Stock Award Agreement of John R. Cochran dated
March 1, 1995*
10.25 First Amendment to Restricted Stock Award Agreement for John
R. Cochran (incorporated by reference from Exhibit 10.38 to
the Form 10-K filed by the Registrant on March 22, 1999)*
10.26 Second Amendment to Restricted Stock Award Agreement for
John R. Cochran (incorporated by reference from Exhibit
10.27 to the Form 10-K/A filed by the registrant on April
30, 2001)*
10.27 Restricted Stock Award Agreement of John R. Cochran dated
April 9, 1997 (incorporated by reference from Exhibit 10.18
to the Form 10-K filed by the registrant on February 24,
1998)*
10.28 First Amendment to Restricted Stock Award Agreement for John
R. Cochran (incorporated by reference from Exhibit 10.29 to
the Form 10-K/A filed by the registrant on April 30, 2001)*
10.29 Amended and Restated SERP Agreement for John R. Cochran
(incorporated by reference from Exhibit 10.30 to the Form
10-K/A filed by the registrant on April 30, 2001)*
10.30 Employment Agreement of Sid A. Bostic dated April 17, 2002*
10.31 Restricted Stock Award Agreement of Sid A. Bostic dated
February 1, 1998 (incorporated by reference from Exhibit
10.20 to the Form 10-K filed by the registrant on February
24, 1998)*
10.32 First Amendment to Restricted Stock Award Agreement of Sid
A. Bostic (incorporated by reference from Exhibit 10.25.1 to
the Form 10-Q filed by the registrant on May 14, 1999)*
10.33 Form of FirstMerit Corporation Change in Control Termination
Agreement (incorporated by reference from Exhibit 10.32 to
the Form 10-K filed by the registrant on March 9, 2001)*
10.34 Form of FirstMerit Corporation Displacement Agreement
(incorporated by reference from Exhibit 10.33 to the Form
10-K filed by the registrant on March 9, 2001)*
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER
- -------
10.35 Form of Director and Officer Indemnification Agreement and
Undertaking
10.36 2002 Stock Plan*
10.37 Credit Agreement among FirstMerit Corporation, Bank One,
N.A., and Lenders, dated November 27, 2000 (incorporated by
reference from Exhibit 10.36 to the Form 10-K filed by the
registrant on March 9, 2001)
10.38 Distribution Agreement, by and among FirstMerit Bank, N.A.
and the Agents, dated July 15, 1999 (incorporated by
reference from Exhibit 10.41 to the Form 10-K filed by the
Registrant on March 10, 2000)
21 Subsidiaries of FirstMerit Corporation (incorporated by reference
from Exhibit 10.38 to the Form 10-K filed by the Registrant on
March , 2002)
23 Consent of PricewaterhouseCoopers, LLP
</Table>
FIRSTMERIT CORPORATION AND
AFFILIATES EMPLOYEES' STOCK PURCHASE PLAN
REPORT ON AUDITS OF FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of the FirstMerit Corporation:
In our opinion, the accompanying statements of net assets available for benefits
and the related statements of changes in net assets available for benefits
present fairly, in all material respects, the net assets available for benefits
of the FirstMerit Corporation and Affiliates Employees' Stock Purchase Plan (the
"Plan") at December 31, 2001 and 2000, and the changes in net assets available
for benefits for the years then ended in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Plan's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
/s/ PricewaterhouseCoopers LLP
April 19, 2002
1
FIRSTMERIT CORPORATION AND AFFILIATES
EMPLOYEES' STOCK PURCHASE PLAN
CONTENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
PAGE
Report of Independent Accountants 1
Financial Statements:
Statements of Net Assets Available for Plan Benefits
at December 31, 2001 and 2000 2
Statements of Changes in Net Assets Available for Plan
Benefits for the years ended December 31, 2001 and 2000 3
Notes to Financial Statements 4-6
FIRSTMERIT CORPORATION AND AFFILIATES
EMPLOYEES' STOCK PURCHASE PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
AT DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
Assets:
Cash $ 55,689 $150,941
Investment in FirstMerit Corporation Common Stock,
at fair value 59,625 6,496
-------- --------
Net assets available or plan benefits $115,314 $157,437
======== ========
The accompanying notes are an integral part of the financial statements.
2
FIRSTMERIT CORPORATION AND AFFILIATES
EMPLOYEES' STOCK PURCHASE PLAN
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
Additions to plan assets attributable to:
Employee contributions $ 963,202 $ 1,038,616
Employer contributions 225,000 225,000
Dividend income 5,538 6,684
Net appreciation (depreciation) in fair value of
FirstMerit Corporation Common Stock 14,669 (25,990)
--------- ---------
Total additions 1,208,409 1,244,310
--------- ---------
Deductions from plan assets attributable to:
Benefits paid to participants 1,146,380 1,224,932
Service fees 30,172 31,252
Excess employer contribution 73,980 -
--------- ---------
Total deductions 1,250,532 1,256,184
--------- ---------
Net decrease (42,123) (11,874)
Net assets available for plan benefits, beginning of year 157,437 169,311
--------- ---------
Net assets available for plan benefits, end of year $ 115,314 $ 157,437
========= =========
The accompanying notes are an integral part of the financial statements.
3
FIRSTMERIT CORPORATION AND AFFILIATES
EMPLOYEES' STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
1. PLAN DESCRIPTION
The following brief description of the FirstMerit Corporation (the
"Corporation") Employee Stock Purchase Plan (the "Plan") is provided for
general information purposes only. Participants should refer to the
Prospectus for more complete information.
GENERAL
The Board of Directors of the Corporation established the Plan on
February 13, 1992, which was approved by the shareholders at the annual
meeting on April 8, 1992. The Plan provides eligible employees of the
Corporation with the opportunity to acquire the Corporation's Common
Shares on a payroll deduction basis. On January 1, 1997, the plan was
amended to provide for the transfer of all existing participant plan
assets to individual employees' brokerage accounts maintained by Merrill
Lynch. This amendment also provides for the monthly additions in
participant account balances to be transferred to the individual
employees' brokerage account. These transfers are reflected as benefits
paid to Plan participants in the Statement of Changes in Net Assets
Available for Plan Benefits.
CONTRIBUTIONS
Effective May 1, 1998, contributions to the Plan consist of participant
payroll deductions, post tax, of a specific dollar amount up to ten
percent of the participant's compensation. Prior to May 1, 1998,
contributions were limited to five percent of the participant's
compensation. The election to participate in the Plan must be completed
on or before 5 days prior to the commencement of the monthly grant
period.
VESTING
Participants are 100% vested in their account balances at all times.
PURCHASES OF COMMON SHARES
Under the Plan, up to 400,000 of the Corporation's Common Shares may be
issued, subject to adjustment in the event of certain transactions
affecting the Corporation's capital structure. Each participant in the
Plan on a grant date is granted the option to purchase, from such funds
as contributed by the participant, whole Common Shares of the Corporation
at the option price of 85% of the fair market value of such shares valued
as of the business day immediately preceding the grant date. Common
shares granted pursuant to the Plan may be authorized but unissued
shares, shares now or hereafter held in the treasury of the Company, or
shares purchased on the open market. When shares are purchased on the
open market, the employer must reimburse the Plan for 15% of the purchase
price through employer contributions.
ELIGIBILITY
Any person who has been employed by the Corporation or any of its
affiliates for at least six months and who currently is employed on a
regular basis (any person customarily employed at least 20 hours per
week) is eligible to participate in the Plan. Executive officers of the
Corporation are not considered eligible employees.
4
FIRSTMERIT CORPORATION AND AFFILIATES
EMPLOYEES' STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
TRANSFERABILITY
Rights to purchase the Corporation's Common Shares under the Plan are not
transferable, except by will or the laws of descent of distribution, and
they may not be subjected to any lien or liability. Options expire on
termination of employment for any reason other than disability or leave
of absence. No participant may purchase shares under the Plan if, after
the purchase, the participant would own more than 5% of the outstanding
Common Shares of the Corporation. In addition, no participant may
purchase shares exceeding $25,000 in fair market value in any one
calendar year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on an accrual
basis in accordance with accounting principles generally accepted in the
United States of America.
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results may differ from those estimates.
CONTRIBUTIONS RECEIVABLE
Contributions receivable consists of participant payroll deductions not
yet transferred to the Plan.
ADMINISTRATIVE EXPENSES
Administrative expenses of the Plan are paid by the Corporation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management has determined that the carrying amount of financial
instruments, as reported on the statement of net assets available for
plan benefits, approximates fair value.
INVESTMENTS
The investment in the Corporation's common shares is valued at fair
market value using readily available published market values.
The Plan presents in the statements of changes in net assets available
for plan benefits the net appreciation (depreciation) in the fair value
of its investments, which consists of the unrealized appreciation
(depreciation) on those investments.
5
FIRSTMERIT CORPORATION AND AFFILIATES
EMPLOYEES' STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
3. RIGHT TO TERMINATE
Although it has not expressed any interest to do so, the Corporation has
the right to terminate the Plan at any time. In the event of Plan
termination any remaining assets in the Plan must be used solely for
distributions to Plan participants.
4. INCOME TAX STATUS
The Plan is a non-qualified plan under the Internal Revenue Code.
However, the Plan is exempt from federal income taxes.
5. SUBSEQUENT EVENT
Effective January 1, 2002, the Plan no longer provides for a 15% discount
on the purchase of FirstMerit Corporation common shares. As a result,
future purchases made through the Plan will be at 100% of fair market
value.
6