1
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, 1998
COMMISSION FILE NUMBER 0-10161
FIRSTMERIT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO
------------------------------------------------------
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
34-1339938
------------------------------------------------------
(I.R.S. EMPLOYER IDENTIFICATION NO.)
III CASCADE PLAZA, AKRON, OHIO 44308 (330) 996-6300
- ------------------------------------- ---------- ------------------
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) (TELEPHONE NUMBER)
OFFICES)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
and
PREFERRED SHARE PURCHASE RIGHTS
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. YES [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the approximate aggregate market value of the voting stock held by
non-affiliates of the registrant as of February 1, 1999: $1,909,214,509.
Indicate the number of shares outstanding of registrant's common stock as
of February 1, 1999: 74,110,408 Shares of Common Stock, without Par Value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of FirstMerit Corporation, dated March 17,
1999, in Part III.
2
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 as follows:
3
CONSOLIDATED BALANCE SHEETS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED,
-----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
ASSETS
Investment securities (at market value)................... $1,551,727 1,136,561
Federal funds sold........................................ 12,505 36,496
Commercial loans.......................................... 2,374,016 1,902,880
Mortgage loans............................................ 987,185 1,072,693
Installment loans......................................... 1,070,324 960,186
Home equity loans......................................... 306,358 275,819
Credit card loans......................................... 99,541 103,041
Tax-free loans............................................ 7,961 8,947
Leases.................................................... 152,011 143,958
---------- ----------
Total earning assets................................... 6,561,628 5,640,581
---------- ----------
Allowance for possible loan losses........................ (78,949) (58,963)
Cash and due from banks................................... 245,950 176,745
Premises and equipment, net............................... 118,540 108,299
Accrued interest receivable and other assets.............. 280,196 126,281
---------- ----------
Total assets........................................... $7,127,365 5,992,943
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-non-interest bearing............................ $ 958,032 790,935
Demand-interest bearing................................ 643,659 516,061
Savings................................................ 1,553,795 1,360,306
Certificates and other time deposits................... 2,306,077 2,096,066
---------- ----------
Total deposits......................................... 5,461,563 4,763,368
---------- ----------
Securities sold under agreements to repurchase and other
borrowings............................................. 807,433 546,862
Accrued taxes, expenses, and other liabilities............ 89,733 87,698
---------- ----------
Total liabilities...................................... 6,358,729 5,397,928
---------- ----------
Commitments and contingencies............................. -- --
Shareholders' equity:
Preferred stock, without par value: authorized and
unissued 7,000,000 shares............................. -- --
Common stock, without par value: authorized 160,000,000
shares; issued 75,162,763 and 74,895,516 shares,
respectively.......................................... 110,276 110,145
Capital surplus........................................... 48,099 16,021
Accumulated other comprehensive income.................... 4,068 3,294
Retained earnings......................................... 623,180 575,960
Treasury stock, at cost, 1,154,071 and 6,238,055 shares,
respectively........................................... (16,987) (110,405)
---------- ----------
Total shareholders' equity................................ 768,636 595,015
---------- ----------
Total liabilities and shareholders' equity................ $7,127,365 $5,992,943
========== ==========
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF INCOME
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Interest income:
Interest and fees on loans................................ $422,650 389,786 376,474
Interest and dividends on investment securities:
Taxable................................................. 74,359 67,158 78,511
Exempt from federal income taxes........................ 4,737 4,346 5,004
-------- -------- --------
79,096 71,504 83,515
Interest on federal funds sold............................ 1,351 2,250 934
-------- -------- --------
Total interest income................................... 503,097 463,540 460,923
-------- -------- --------
Interest expense:
Interest on deposits:
Demand-interest bearing................................. 5,688 8,485 9,758
Savings................................................. 37,178 34,650 36,092
Certificates and other time deposits.................... 120,135 107,997 109,005
Interest on securities sold under agreements to repurchase
and other borrowings.................................... 34,650 30,803 31,481
-------- -------- --------
Total interest expense.................................. 197,651 181,935 186,336
-------- -------- --------
Net interest income..................................... 305,446 281,605 274,587
Provision for possible loan losses.......................... 28,383 21,903 18,074
-------- -------- --------
Net interest income after provision for possible loan
losses................................................ 277,063 259,702 256,513
-------- -------- --------
Other income:
Trust department.......................................... 16,147 13,442 12,182
Service charges on deposits............................... 31,257 27,717 25,892
Credit card fees.......................................... 20,064 14,355 11,415
Service fees -- other..................................... 10,493 7,337 6,184
Investment securities gains (losses), net................. 6,764 1,957 (1,776)
Loan sales and servicing.................................. 7,814 6,009 4,863
Other operating income.................................... 17,941 14,519 25,434
-------- -------- --------
Total other income...................................... 110,480 85,336 84,194
-------- -------- --------
Other expenses:
Salaries, wages, pension and employee benefits............ 110,675 97,500 100,244
Net occupancy expense..................................... 17,872 18,561 19,275
Equipment expense......................................... 15,882 12,717 12,894
Intangible amortization expense........................... 6,002 1,973 3,255
Other operating expenses.................................. 92,292 73,635 89,243
-------- -------- --------
Total other expenses.................................... 242,723 204,386 224,911
-------- -------- --------
Income before federal income taxes...................... 144,820 140,652 115,796
Federal income taxes........................................ 47,342 44,978 38,446
-------- -------- --------
Net income.............................................. $ 97,478 95,674 77,350
======== ======== ========
Other comprehensive income, net of tax Unrealized gains
(losses) on available-for-sale securities:
Unrealized holding gains arising during period (net of tax
expense of $2,589, $3,282 and $49, respectively)........ 5,326 7,071 98
Less: reclassification adjustment for gains realized in
net income, net of tax expense (benefit) of $2,212, $619
and ($588), respectively................................ 4,552 1,336 1,188
-------- -------- --------
Net unrealized gains, net of tax expense (benefit) of
$377, $2,662 and ($539), respectively................... 774 5,735 (1,090)
-------- -------- --------
Comprehensive income, net of tax............................ $ 98,252 101,409 76,260
======== ======== ========
Weighted average number of common shares
outstanding -- basic...................................... 71,095 69,405 71,799
======== ======== ========
Weighted average number of common shares
outstanding -- diluted.................................... 72,703 71,258 73,168
======== ======== ========
Per share data based on average number of shares
outstanding:
Basic net income per share.................................. $ 1.37 1.38 1.08
======== ======== ========
Diluted net income per share................................ $ 1.34 1.35 1.06
======== ======== ========
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED 1998, 1997 AND 1996
------------------------------------------------------------------------
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL COMPREHENSIVE RETAINED TREASURY SHAREHOLDERS'
STOCK SURPLUS INCOME EARNINGS STOCK EQUITY
-------- ------- ------------- -------- -------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Balance at year-end 1995......... $103,935 14,453 (1,351) 483,188 (2,963) 597,262
Net income..................... -- -- -- 77,350 -- 77,350
Cash dividends ($0.55 per
share)...................... -- -- -- (36,376) -- (36,376)
Stock options
exercised/debentures
converted................... 3,483 462 -- -- -- 3,945
Treasury shares purchased...... -- -- -- -- (56,295) (56,295)
Net unrealized gains on
securities.................. -- -- (1,090) -- -- (1,090)
Other.......................... -- -- -- (1,654) -- (1,654)
-------- ------ ------ ------- -------- -------
Balance at year-end 1996......... 107,418 14,915 (2,441) 522,508 (59,258) 583,142
Net income..................... -- -- -- 95,674 -- 95,674
Cash dividends ($0.61 per
share)...................... -- -- -- (38,447) -- (38,447)
Stock options
exercised/debentures
converted................... 2,727 1,106 -- (1,428) -- 2,405
Treasury shares purchased...... -- -- -- -- (51,147) (51,147)
Net unrealized gains on
securities.................. -- -- 5,735 -- -- 5,735
Other.......................... -- -- -- (2,347) -- (2,347)
-------- ------ ------ ------- -------- -------
Balance at year-end 1997......... 110,145 16,021 3,294 575,960 (110,405) 595,015
Net income..................... -- -- -- 97,478 -- 97,478
Cash dividends ($0.66 per
share)...................... -- -- -- (45,887) -- (45,887)
Acquisition adjustment of
fiscal year................. -- -- -- (1,857) -- (1,857)
Stock options
exercised/debentures
converted................... 131 (359) -- (2,607) 9,029 6,194
Treasury shares purchased...... -- -- -- -- (25,703) (25,703)
Treasury shares reissued --
acquisition................. -- 25,919 -- -- 89,286 115,205
Treasury shares
reissued -- public
offering.................... -- 6,518 -- -- 20,806 27,324
Net unrealized gains on
securities.................. -- -- 774 -- -- 774
Other.......................... -- -- -- 93 -- 93
-------- ------ ------ ------- -------- -------
Balance at year-end 1998......... $110,276 48,099 4,068 623,180 (16,987) 768,636
======== ====== ====== ======= ======== =======
See accompanying notes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED,
-------------------------------------
1998 1997 1996
----------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income................................................ $ 97,478 95,674 77,350
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................... 28,383 21,903 18,074
Provision for depreciation and amortization............. 12,087 11,334 10,902
Amortization of investment securities premiums, net..... 1,413 2,908 5,031
Amortization of income for lease financing.............. (11,360) (13,436) (12,656)
(Gains) losses on sales of investment securities, net... (6,764) (1,957) 1,776
Gain on sale of affiliate branches...................... -- -- (13,210)
Deferred federal income taxes........................... (7,046) (5,863) 15,787
(Increase) decrease in interest receivable.............. (5,051) 504 2,091
Increase in interest payable............................ 1,451 1,395 768
Amortization of values ascribed to acquired
intangibles........................................... 6,002 1,972 3,255
Other decreases......................................... (99,404) (13,261) (27,067)
----------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 17,189 101,173 82,101
----------- --------- ---------
INVESTING ACTIVITIES
Dispositions of investment securities:
Available-for-sale -- sales............................... 609,543 209,174 343,600
Available-for-sale -- maturities.......................... 343,852 252,545 306,579
Purchases of investment securities available-for-sale....... (1,362,032) (369,331) (444,752)
Net (increase) decrease in federal funds sold............. 23,991 (16,967) 2,639
Net increase in loans and leases, except sales............ (526,909) (304,851) (88,065)
Sales of loans............................................ -- 61,995 106,484
Purchases of premises and equipment....................... (25,687) (14,182) (23,598)
Sales of premises and equipment........................... 3,359 5,542 4,304
Sales of affiliate branches............................... -- -- 13,210
Purchase of CoBancorp Inc................................. (50,000) -- --
----------- --------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............ (983,883) (176,075) 220,401
----------- --------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in demand, NOW and savings
deposits.................................................. 489,399 (30,412) (123,224)
Net increase (decrease) in time deposits.................... 208,796 143,723 (139,381)
Net increase (decrease) in securities sold under repurchase
agreements and other borrowings........................... 260,571 1,100 (16,121)
Cash dividends.............................................. (45,887) (40,871) (38,562)
Purchase of treasury shares................................. (25,703) (51,147) (56,295)
Treasury shares -- reissued................................. 115,205 -- --
Treasury shares reissued.................................... 27,324 -- --
Proceeds from exercise of stock options..................... 6,194 2,405 3,945
----------- --------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............ 1,035,899 24,798 (369,638)
Increase (decrease) in cash and cash equivalents............ 69,205 (50,104) (67,136)
Cash and cash equivalents at beginning of year.............. 176,745 226,849 293,985
----------- --------- ---------
Cash and cash equivalents at end of year.................... $ 245,950 176,745 226,849
=========== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest, net of amounts capitalized........................ $ 115,323 108,365 116,136
Income taxes................................................ $ 57,582 45,483 21,547
=========== ========= =========
See accompanying notes to consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEAR-ENDS AND FOR THE YEARS ENDED 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of FirstMerit Corporation and its
subsidiaries (the "Corporation") conform to generally accepted accounting
principles and to general practices within the banking industry. In 1998, the
Corporation adopted Statement of Financial Accounting Standards No. 130 (SFAS
130) "Reporting Comprehensive Income," and Statement No. 131 (SFAS 131)
"Disclosures about Segments of an Enterprise and Related Information." SFAS 130
requires additional disclosure of items that affect comprehensive income but not
net income. Items relevant to the Corporation include unrealized gains and
losses on securities available for sale. SFAS 131 designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Corporation's reportable segments.
SFAS 131 also requires disclosures about products and services, geographic areas
and major customers. The adoption of SFAS 130 and SFAS 131 did not affect
results of operations or financial position. The following is a description of
the more significant accounting policies.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of FirstMerit
Corporation (the "Parent Company") and its direct subsidiaries: FirstMerit
Bank N.A., Citizens Investment Corporation, Citizens Savings Corporation of
Stark County, FirstMerit Community Development Corporation, FirstMerit
Credit Life Insurance Company, and SF Development Corp.
All significant intercompany balances and transactions have been eliminated
in consolidation.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and related notes. Actual results could differ from those estimates.
(c) Investment Securities
Debt and equity securities are classified as held-to-maturity,
held-to-maturity are measured at amortized or historical cost, securities
available-for-sale and trading at fair value. Adjustment to fair value of
the securities available-for-sale, in the form of unrealized holding gains
and losses, is excluded from earnings and reported net of tax as a separate
component of comprehensive income. Adjustment to fair value of securities
classified as trading is included in earnings. Gains or losses on the sales
of investment securities are recognized upon realization and are determined
by the specific identification method.
The Corporation's investment portfolio is designated as available-for-sale.
Classification as available-for-sale Corporation to sell securities to fund
liquidity and manage the Corporation's interest rate risk. The Corporation
does maintain a relatively small trading account that is used as a hedge
against variations in deferred compensation expense.
(d) Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, balances on deposit with
correspondent banks and checks in the process of collection.
(e) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed on the straight-line and
declining-balance methods over the estimated useful lives of the assets.
Amortization of leasehold improvements is computed on the straight-line
method based on lease terms or useful lives, whichever is less.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
(f) Loans
Impaired loans are loans for which, based on current information or events,
it is probable that the Corporation will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Impaired
loans are valued based on the present value of the loans' expected future
cash flows at the loans' effective interest rates, at the loans' observable
market price, or the fair value of the loan collateral.
(g) Interest and Fees on Loans
Interest income on loans is generally accrued on the principal balances of
loans outstanding using the "simple-interest" method. Loan origination fees
and certain direct origination costs of mortgage loans are deferred and
amortized, generally over the contractual life of the related loans using a
level yield method. Interest is not accrued on loans for which
circumstances indicate collection is questionable.
(h) Provision for Possible Loan Losses
The provision for possible loan losses charged to operating expenses is
determined based on management's evaluation of the loan portfolios and the
adequacy of the allowance for possible loan losses under current economic
conditions and such other factors which, in management's judgement, deserve
current recognition.
(i) Lease Financing
The Corporation leases equipment to customers on both a direct and
leveraged lease basis. The net investment in financing leases includes the
aggregate amount of lease payments to be received and the estimated
residual values of the equipment, less unearned income and non-recourse
debt pertaining to leveraged leases. Income from lease financing is
recognized over the lives of the leases on an approximate level rate of
return on the unrecovered investment. Residual values of leased assets are
reviewed on an annual basis for reasonableness. Declines in residual values
judged to be other than temporary are recognized in the period such
determinations are made.
(j) Mortgage Servicing Fees
The Corporation generally records loan administration fees earned for
servicing loans for investors as income is collected. Earned servicing fees
and late fees related to delinquent loan payments are also recorded as
income is collected.
(k) Federal Income Taxes
The Corporation follows the asset and liability method of accounting for
income taxes. Deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The
effect of a change in tax rates is recognized in income in the period of
the enactment date.
(l) Value Ascribed to Acquired Intangibles
The value ascribed to acquired intangibles, including core deposit
premiums, results from the excess of cost over fair value of net assets
acquired in acquisitions of financial institutions. Such values are being
amortized over periods ranging from 10 to 25 years, which represent the
estimated remaining lives of the long-term interest bearing assets
acquired. Amortization is generally computed on a straight-line basis based
on the expected reduction in the carrying value of such acquired assets. If
no significant amount of long-term interest bearing assets is acquired,
such value is amortized over the estimated life of the acquired deposit
base, with amortization periods ranging from 10 to 15 years.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
(m) Trust Department Assets and Income
Property held by the Corporation in a fiduciary or other capacity for trust
customers is not included in the accompanying consolidated financial
statements, since such items are not assets of the Corporation. Trust income
is reported generally on a cash basis which approximates the accrual basis
of accounting.
(n) Per Share Data
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing net income by the weighted
average number of common shares plus common stock equivalents computed
using the Treasury Share method. All earnings per share disclosures
appearing in these financial statements are computed assuming dilution
unless otherwise indicated.
(o) Reclassifications
Certain previously reported amounts have been reclassified to conform to
the current reporting presentation.
2. ACQUISITIONS AND MERGER-RELATED EXPENSES
On May 22, 1998, the Corporation completed the acquisition of CoBancorp,
Inc., a bank holding company headquartered in Elyria, Ohio with consolidated
assets of approximately $666.0 million. CoBancorp, Inc. ("CoBancorp") was merged
with and into the Corporation and accounted for under purchase accounting
requirements. At the time of the merger, the value of the transaction was $174.1
million. In connection with the merger, the Corporation issued 3.9 million
shares of its common stock (valued at $29.375/share), paid approximately $50.0
million in cash, and assumed merger-related liabilities of approximately $9.6
million. The transaction created goodwill of approximately $136.5 million that
will be amortized primarily over 25 years.
The proforma combined unaudited operating results assuming the companies
had combined at the beginning of each period is as follows:
FIRSTMERIT PROFORMA
PERIOD AND DESCRIPTION CORPORATION COBANCORP ADJUSTMENTS COMBINED
- ---------------------- ----------- --------- ----------- ---------
YEAR ENDED DECEMBER 31, 1998 (FIRSTMERIT)
AND THREE MONTHS ENDED MARCH 31, 1998
(COBANCORP):
Pro forma interest income.................. $503,097 11,942 211 515,250
Net interest income........................ 305,446 7,295 (944) 311,797
Net income available to common
shareholders............................. 97,478 1,307 (1,394) 97,391
Adjusted income for diluted EPS
calculation.............................. 97,478 1,307 (1,394) 97,391
Wtd-avg diluted shares..................... 72,703 3,485 76,572
Earnings per diluted share................. $ 1.34 0.37 1.27
YEAR ENDED DECEMBER 31, 1997:
Pro forma interest income.................. $407,825 48,141 844 456,810
Net interest income........................ 255,456 29,054 (3,776) 280,734
Net income available to common
shareholders............................. 86,363 4,800 (5,577) 85,586
Adjusted income for diluted EPS
calculation.............................. 86,363 4,800 (5,577) 85,586
Wtd-avg diluted shares..................... 63,537 3,498 67,420
Earnings per diluted share................. $ 1.36 1.37 1.27
The unaudited proforma operating results of each separate company have been
adjusted to reflect their new accounting basis' recognized to record the
purchase combination. Figures shown for CoBancorp include extraordinary merger
costs, net of tax, of $164.0 for the three-month period and $724.0 for 1997.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
On September 14, 1998, FirstMerit closed a secondary underwritten public
offering of 1.38 million common shares of FirstMerit Common Stock. The
reissuance of these shares was necessary to allow the Corporation to treat the
Security First merger as a pooling-of-interests.
On October 23, 1998, the Corporation completed the acquisition of Security
First Corp, ("Security First") a $678.0 million holding company headquartered in
Mayfield Heights, Ohio. Subsidiaries of Security First included Security Federal
Savings and Loan Association of Cleveland and First Federal Savings Bank of
Kent. These subsidiaries were merged with and into FirstMerit Bank, N.A. Under
terms of the merger agreement, Security First was merged with and into the
Corporation. The transaction was structured with a fixed exchange ratio of
0.8855 shares of FirstMerit Common Stock for each common share of Security
First. At the time of the merger, the pooling-of-interests transaction was
valued at $22.58 per share or approximately $199.0 million. The accompanying
consolidated financial statements for all periods presented have been restated
to account for the acquisition. The information presented for 1997 and prior
periods coincides with the fiscal year-ends of each entity, which were December
31 for FirstMerit and March 31 for Security First. For example, information as
of year-end 1997 combines FirstMerit's balances as of December 31, 1997 with
Security First's balances at March 31, 1998. As a result of this difference in
fiscal year ends, the Corporation made an adjustment to shareholders' equity of
$1,841 which represents Security First's net income and cash dividends paid for
the three months ended March 31, 1998.
In conjunction with the Security First acquisition, the Corporation
incurred merger-related expenses of approximately $17.2 million, before taxes.
The components of the costs are as follows: severance and employee-related
expenses of $1.7 million, occupancy and equipment charges of $2.0 million,
conversion and contract termination costs of $1.5 million, professional services
and other costs of $4.7 million, a conforming adjustment to the provision for
possible loan losses of $7.3 million. On an after tax basis, the merger-related
expenses totaled approximately $12.8 million, or $0.18 per diluted share.
FIRSTMERIT SECURITY PROFORMA
PERIOD AND DESCRIPTION CORPORATION FIRST COMBINED
- ---------------------- ----------- -------- --------
NINE MONTHS ENDED SEPTEMBER 30, 1998:
Proforma interest income.................................... $328,819 43,163 371,982
Net interest income......................................... 203,932 20,765 224,697
Net income available to common shareholders................. 71,685 7,820 79,505
Adjusted income for diluted EPS calculation................. 71,685 7,995 79,680
Wtd-avg diluted shares...................................... 64,220 8,666 71,894
Earnings per diluted share.................................. $ 1.12 0.92 $ 1.11
YEAR ENDED 1997:
Proforma interest income.................................... $407,825 55,715 463,540
Net interest income......................................... 255,456 26,149 281,605
Net income available to common shareholders................. 86,363 9,311 95,674
Adjusted income for diluted EPS calculation................. 86,363 9,645 96,008
Wtd-avg diluted shares...................................... 63,537 8,718 71,257
Earnings per diluted share.................................. $ 1.36 1.11 1.35
YEAR ENDED 1996:
Interest income............................................. $411,745 49,178 460,923
Net interest income......................................... 250,972 23,615 274,587
Net income available to common shareholders................. 70,940 6,410 77,350
Adjusted income for diluted EPS calculation................. 70,940 6,801 77,741
Wtd-avg diluted shares...................................... 65,469 8,695 73,168
Earnings per diluted share.................................. $ 1.08 $ 0.78 1.06
On February 12, 1999, the Corporation completed its acquisition of Signal
Corp a $1.9 billion bank holding company headquartered in Wooster, Ohio
("Signal"). Principal subsidiaries of Signal included Signal Bank,
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
N.A., Summit Bank, N.A., First Federal Savings Bank of New Castle
(Pennsylvania), and Mobile Consultants, Inc. Under terms of the agreement, the
fixed exchange ratio was 1.32 shares of FirstMerit Common Stock for each share
of Signal Common Stock, and one share of FirstMerit Preferred Stock for each
share of Signal Preferred Stock. Based on an assumed closing price of $25.00 per
share of Common Stock and $71.00 per share of Preferred Stock, the value of the
transaction was approximately $436.0 million. The transaction will be accounted
for as a pooling-of-interests. In conjunction with this merger, the Corporation
anticipates incurring merger-related expenses and conforming accounting policy
changes of approximately $40.0 million.
The following unaudited proforma information is not necessarily indicative
of the results which actually would have been obtained if the Signal merger had
been consummated in the past or which may be obtained in the future.
FIRSTMERIT PROFORMA
PERIOD AND DESCRIPTION CORPORATION SIGNAL CORP COMBINED
- ---------------------- ----------- ------------ -----------
YEAR ENDED 1998:
Interest income........................................ $ 503,097 139,460 642,557
Net interest income.................................... 305,446 50,735 356,181
Net income (loss) available to common shareholders..... 97,478 (25,652) 71,826
Adjusted income (loss) for diluted EPS calculation..... 97,684 (25,652) 72,032
Weighted-average diluted shares........................ 72,702,750 11,576,709 87,984,006
Earnings per diluted share............................. $ 1.34 ($ 2.22) 0.82
YEAR ENDED 1997:
Interest income........................................ $ 463,540 120,970 584,510
Net interest income.................................... 281,605 44,458 326,063
Net income available to common shareholders............ 95,674 17,450 113,124
Adjusted income for diluted EPS calculation............ 96,008 19,034 115,042
Weighted-average diluted shares........................ 71,257,504 12,151,159 87,297,034
Earnings per diluted share............................. $ 1.35 1.57 1.32
YEAR ENDED 1996:
Interest income........................................ $ 460,923 101,229 562,152
Net interest income.................................... 274,587 38,222 312,809
Net income available to common shareholders............ 77,350 11,164 88,514
Adjusted income for diluted EPS calculation............ 77,741 12,860 90,601
Weighted average diluted shares........................ 73,168,022 11,828,502 88,781,645
Earnings per diluted share............................. $ 1.06 1.09 1.02
3. INVESTMENT SECURITIES
Investment securities are composed of:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
YEAR-END 1998
Available for sale:
U.S. Treasury securities and U.S. Government
agency obligations............................. $ 658,407 3,895 2,284 660,018
Obligations of state and political
subdivisions................................... 97,059 999 -- 98,058
Mortgage-backed securities....................... 533,201 3,950 31 537,120
Other securities................................. 256,802 2,205 2,476 256,531
---------- ------ ----- ---------
$1,545,469 11,049 4,791 1,551,727
========== ====== ===== =========
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
YEAR-END 1997
Available for sale:
U.S. Treasury securities and U.S. Government
agency obligations............................. $ 613,269 2,605 2,290 613,584
Obligations of state and political
subdivisions................................... 81,610 207 206 81,611
Mortgage-backed securities....................... 338,607 3,605 255 341,957
Other securities................................. 97,995 1,564 150 99,409
---------- ------ ----- ---------
$1,131,481 7,981 2,901 1,136,561
========== ====== ===== =========
The amortized cost and market value of investment securities including
mortgage-backed securities at December 31, 1998, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities based
on the issuers' rights to call or prepay obligations with or without call or
prepayment penalties.
AMORTIZED MARKET
COST VALUE
---------- ---------
Due in one year or less..................................... $ 100,797 101,428
Due after one year through five years....................... 195,168 197,229
Due after five years through ten years...................... 294,138 295,906
Due after ten years......................................... 955,366 957,164
---------- ---------
$1,545,469 1,551,727
========== =========
Proceeds from sales of investment securities during the years 1998, 1997
and 1996 were $543,650, $206,054 and $343,600, respectively. Gross gains of
$5,587, $2,531 and $2,003 and gross losses of $513, $574 and $3,779 were
realized on these sales, respectively.
The carrying value of investment securities pledged to secure trust and
public deposits and for purposes required or permitted by law amounted to
$1,065,326 and $831,536 at December 31, 1998 and December 31, 1997,
respectively.
4. LOANS
Loans consist of the following:
YEAR-ENDS,
------------------------------------
1998 1997 1996
---------- --------- ---------
Commercial, financial and agricultural................... $1,176,904 883,114 755,023
Loans secured by real estate............................. 2,753,906 2,569,213 2,460,799
Loans to individuals, net of unearned income............. 914,573 871,242 853,882
Lease financing.......................................... 152,013 143,955 159,237
---------- --------- ---------
$4,997,396 4,467,524 4,228,941
========== ========= =========
The Corporation grants loans principally to customers located within the
State of Ohio.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Information with respect to impaired loans is as follows:
YEAR-ENDS
--------------------
1998 1997
------- -------
Impaired Loans.............................................. $10,711 $11,274
Allowance for Possible Loan Losses.......................... $ 1,594 $ 2,280
Interest Recognized......................................... $ 427 $ 460
======= =======
Earned interest on impaired loans is recognized as income is collected.
The Corporation makes loans to officers on the same terms and conditions as
made available to all employees and to directors on substantially the same terms
and conditions as transactions with other parties. An analysis of loan activity
with related parties for the years ended December 31, 1998 and 1997 is
summarized as follows:
1998 1997
-------- --------
Aggregate amount at beginning of year....................... $ 33,066 $ 41,308
Additions (deductions):
New loans................................................. 20,650 8,994
Repayments................................................ (15,933) (16,694)
Changes in directors and their affiliations............... (13,402) (542)
-------- --------
Aggregate amount at end of year............................. $ 24,381 $ 33,066
======== ========
5. ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses are summarized as
follows:
YEARS ENDED,
------------------------------------
1998 1997 1996
-------- ------------ --------
Balance at beginning of year.............................. $ 58,963 $ 54,304 $ 51,412
Additions (deductions):
Allowance from purchase acquisition..................... 8215
Provision for loan losses............................... 28,383 21,903 18,074
Loans charged off....................................... (28,554) (27,406) (20,874)
Recoveries on loans previously charged off.............. 11,942 10,162 6,081
Decrease from sale of subsidiary........................ -- -- (389)
-------- -------- --------
Balance at end of year.................................... $ 78,949 $ 58,963 $ 54,304
======== ======== ========
6. MORTGAGE SERVICING RIGHTS AND MORTGAGE SERVICING
In accordance with Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights," and Statement No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," when the Corporation intends to sell originated or purchased loans
and retain the related servicing rights, it allocates a portion of the total
costs of the loans to the servicing rights based on estimated fair value. Fair
value is estimated based on market prices, when available, or the present value
of future net servicing income, adjusted for such factors as discount rates and
prepayments. Servicing rights are amortized over the average life of the loans
using the net cash flow method.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The components of mortgage servicing rights are as follows:
1998 1997
------- ------
Balance at beginning of year, net........................... $ 4,128 $2,396
Additions................................................. 3,244 2,354
Scheduled amortization.................................... (1,270) (622)
Less: allowance for impairment............................ (168) --
------- ------
Balance at end of year, net................................. $ 5,934 $4,128
======= ======
In 1998, 1997 and 1996, the Corporation's income before federal income
taxes was increased by approximately $1.8 million, $1.7 million and $2.3
million, respectively, as a result of compliance with the accounting Statements
mentioned previously.
Accounting regulations also require the Corporation to assess its
capitalized servicing rights for impairment based on their current fair value.
As permitted by the regulations, the Corporation disaggregates its servicing
rights portfolio based on loan type and interest rate which are the predominant
risk characteristics of the underlying loans. If any impairment results after
current market assumptions are applied, the value of the servicing rights is
reduced through the use of a valuation allowance.
At year-ends 1998 and 1997, the Corporation serviced for others
approximately $1.2 billion and $934.0 million, respectively. The following table
provides servicing information for 1998:
1998 1997
---------- ---------
Balance, beginning of year.................................. $ 934,285 $ 908,357
Additions:
Loans originated and sold to investors.................... 260,517 119,715
Existing loans sold to investors.......................... 186,034 100,670
Existing loans from acquisitions.......................... 66,868
Reductions:
Sale of servicing rights.................................. -- --
Loans sold servicing released............................. (4,842) (5,311)
Regular amortization, prepayments and foreclosures........ (277,963) (189,146)
---------- ---------
Balance, end of year........................................ $1,164,899 $ 934,285
========== =========
7. RESTRICTIONS ON CASH AND DIVIDENDS
The average balance on deposit with the Federal Reserve Bank to satisfy
reserve requirements amounted to $16,535 during 1998. The level of this balance
is based upon amounts and types of customers' deposits held by the banking
subsidiaries of the Corporation. In addition, deposits are maintained with other
banks at levels determined by Management based upon the volumes of activity and
prevailing interest rates to compensate for check-clearing, safekeeping,
collection and other bank services performed by these banks. At December 31,
1998, cash and due from banks included $5,355 deposited with the Federal Reserve
Bank and other banks for these reasons.
Dividends paid by the subsidiaries are the principal source of funds to
enable the payment of dividends by the Corporation to its shareholders. These
payments by the subsidiaries in 1998 are restricted by the regulatory agencies
principally to the total of 1998 net income. Regulatory approval must be
obtained for the payment of dividends of any greater amount.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
8. PREMISES AND EQUIPMENT
The components of premises and equipment are as follows:
YEAR-ENDS,
------------------- ESTIMATED
1998 1997 USEFUL LIVES
-------- ------- ------------
Land........................................................ $ 16,145 12,769 --
Buildings................................................... 94,933 91,601 10-35 yrs
Equipment................................................... 77,050 67,854 3-15 yrs
Leasehold improvements...................................... 16,714 13,093 1-20 yrs
-------- ------- ---------
204,842 185,317
Less accumulated depreciation and amortization.............. 86,297 77,018
-------- -------
$118,545 108,299
======== =======
Amounts included in other expenses for depreciation and amortization
aggregated $12,087, $11,334 and $10,902 for the years ended 1998, 1997 and 1996,
respectively.
At December 31, 1998, the Corporation was obligated for rental commitments
under noncancelable operating leases on branch offices and equipment as follows:
YEARS ENDING LEASE
DECEMBER 31, COMMITMENTS
- ------------ -----------
1999 $ 8,116
2000 6,191
2001 5,478
2002 4,618
2003 3,223
2004-2012 12,326
-------
$39,952
=======
Rentals paid under noncancelable operating leases amounted to $7,862,
$8,029 and $9,128 in 1998, 1997 and 1996, respectively.
9. CERTIFICATES AND OTHER TIME DEPOSITS
The aggregate amounts of certificates and other time deposits of $100 and
over at year end 1998 and 1997 were $593,298 and $500,131, respectively.
Interest expense on these certificates and time deposits amounted to $31,860 in
1998, $24,381 in 1997, and $18,165 in 1996.
10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
The average balance of securities sold under agreements to repurchase and
other borrowings for the years ended 1998, 1997 and 1996 amounted to $688,311,
$595,740 and $623,278, respectively. In 1998, the weighted average annual
interest rate amounted to 5.03%, compared to 5.17% in 1997 and 5.05% in 1996.
The maximum amount of these borrowings at any month end totaled $823,629 during
1998, $695,328 in 1997 and $719,534 during 1996.
At year-end 1998, 1997 and 1996, securities sold under agreements to
repurchase totaled $481,665, $417,833, and $368,566, respectively. The average
annual interest rate for these instruments was 4.77%, compared to 4.81% in 1997
and 4.67% in 1996.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
At year-end 1998, 1997, and 1996, the Corporation had $291,227, $116,189
and $170,356, respectively, of Federal Home Loan Bank advances. The 1998 balance
includes: $135,526 that have maturities within one year with interest rates of
4.65% to 6.60%; $72,666 with maturities over one year to five years with
interest rates of 5.35% to 8.10%; and $83,034 over five years with interest
rates of 4.75% to 8.05%.
At year-end 1998, the Corporation had outstanding balances on lines of
credit with two financial institutions totaling $23,000 and $10,000,
respectively. As of year-end 1998, the unused portions of these lines totaled
$7,000 and $65,000, respectively. The interest rates on these lines were 6.00%
and 5.93%, respectively. At year-end 1997, $6,000 was outstanding on one of the
lines with a corresponding interest rate of 6.01% for the year. The interest
rates on these lines of credit are variable and approximate one-month LIBOR plus
37.5 basis points and one-month LIBOR plus 30.0 basis points, respectively.
At year-end 1998, 1997 and 1996, the Corporation had $1,541, $6,840 and
$8,479 respectively of convertible subordinated debentures outstanding. The 15
year, 6.25% debentures were issued in a public offering in 1993 by Security
First Corp. and are convertible by the holders any time prior to maturity.
Residential mortgage loans totaling $436,840, $174,284, and $201,533 at
year-end 1998, 1997 and 1996, respectively, were pledged to secure Federal Home
Loan Bank ("FHLB") advances. FANNIE MAE ("FNMA") Preferred Stock of
approximately $28.2 million and preferred stock of another financial institution
totaling $4.3 million were pledged against the line of credit with $23,000
outstanding at year-end 1998. FNMA Preferred Stock of $16.0 million was pledged
to secure the $6.0 million outstanding on the line at year-end 1997.
11. FEDERAL INCOME TAXES
Federal income taxes are comprised of the following:
YEARS ENDED,
---------------------------
1998 1997 1996
------- ------ ------
Taxes currently payable..................................... $53,222 50,841 22,659
Deferred expense (benefit).................................. (5,880) (5,863) 15,787
------- ------ ------
$47,342 44,978 38,446
Actual Federal income tax expense differs from expected Federal income tax
as shown below:
YEARS ENDED,
--------------------
1998 1997 1996
---- ---- ----
Statutory rate.............................................. 35.0% 35.0% 35.0%
Increase (decrease) in rate due to:
Interest income on tax-exempt securities and tax-free
loans, net............................................. -1.2% -1.2% -1.7%
Goodwill amortization..................................... 0.9% 0.2% 1.3%
Reduction to excess tax reserves.......................... -1.7% -1.0% -1.3%
Exercise of options at acquisition........................ -0.6% -0.1% --
Merger expenses at acquisition............................ 1.0% -- --
Dividends received deduction.............................. -0.4% -- --
Bank owned life insurance................................. -0.4% -- --
Other..................................................... 0.1% -0.9% --
---- ---- ----
Effective tax rates......................................... 32.7% 32.0% 33.3%
==== ==== ====
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
For 1998, 1997 and 1996, the deferred income tax expense results from
temporary differences in the recognition of income and expense for Federal
income tax and financial reporting purposes. The sources and tax effect of these
temporary differences are presented below:
YEARS ENDED,
---------------------------------
1998 1997 1996
------- ------------ ------
Loan loss provision......................................... $(9,375) (4,606) 6,214
Depreciation................................................ 132 194 (250)
Deferred loan fees, net..................................... 626 422 901
Leasing..................................................... 514 (3,683) 6,708
SFAS 106 postretirement benefits............................ (1,132) (1,105) (1,057)
SFAS 87 pension expense..................................... (407) 1,333 1,678
FHLB stock dividends........................................ 1,476 1,114 971
SFAS 125 mortgage servicing rights.......................... 2,136 -- --
Severance costs............................................. -- -- 1,315
Valuation reserves.......................................... 147 633 675
Other....................................................... 3 (165) (1,368)
------- ------ ------
Total deferred income tax................................... $(5,880) (5,863) 15,787
======= ====== ======
Principal components of the Corporation's net deferred tax (liability) are
summarized as follows:
YEAR-ENDS,
-------------------
1998 1997
-------- -------
Excess of book loan provision over tax loan provision....... $ 20,345 10,970
Excess of tax depreciation over book depreciation........... (4,294) (4,162)
Deferred loan fees tax basis income over book basis......... 576 1,202
Leasing book basis over tax basis........................... (24,845) (24,331)
Postretirement book basis expense over tax basis............ 6,157 5,025
Pension book basis expense over tax basis................... (805) (1,212)
FHLB stock book basis over tax basis........................ (7,085) (5,609)
Security portfolio tax basis over book basis................ (2,074) (1,694)
Mtg. servicing rights book basis over tax basis............. (2,136) --
Valuation reserves book basis over tax basis................ -- 147
Other....................................................... 3,232 3,235
-------- -------
Total net deferred tax (liability).......................... $(10,929) (16,429)
======== =======
12. BENEFIT PLANS
The Corporation has a defined benefit pension plan covering substantially
all of its employees. In general, benefits are based on years of service and the
employee's compensation. The Corporation's funding policy is to contribute
annually the maximum amount that can be deducted for federal income tax
reporting purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future.
A supplemental non-qualified, non-funded pension plan for certain officers
is also maintained and is being provided for by charges to earnings sufficient
to meet the projected benefit obligation. The pension cost for this plan is
based on substantially the same actuarial methods and economic assumptions as
those used for the defined benefit pension plan.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The Corporation also sponsors a benefit plan which presently provides
postretirement medical and life insurance for retired employees. Effective
January 1, 1993, the plan was changed to limit the Corporations' medical
contribution to 200% of the 1993 level for employees who retire after January 1,
1993. The Corporation reserves the right to terminate or amend the plan at any
time.
The cost of postretirement benefits expected to be provided to current and
future retirees is accrued over those employee's service periods. Prior to 1993,
postretirement benefits were accounted for on a cash basis. In addition to
recognizing the cost of benefits for the current period, recognition is being
provided for the cost of benefits earned in prior service periods (the
transition obligation).
The following table sets forth the both plans' funded status and amounts
recognized in the Corporation's consolidated financial statements. The 1998 and
1997 amounts shown reflect a change in the measurement date from December 31 to
September 30. Amounts shown for 1996 have not been restated to show the change
in the measurement date. In addition, all amounts for each year have been
restated to reflect the mergers of CoBancorp and Security First in 1998.
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------ ---------------------------
1998 1997 1996 1998 1997 1996
------ ------ ------ ------- ------- -------
Change in Benefit Obligation
Projected Benefit Obligation (PBO)
Accumulated Postretirement Benefit Obligation
(APBO), beginning of year.................... 70,720 70,119 73,926 27,864 30,888 31,198
Service Cost............................... 3,546 3,379 3,729 855 958 935
Interest Cost.............................. 4,988 4,880 4,978 1,872 2,157 2,133
Plan amendments............................ 1,060 684 144 -- -- (2,952)
Participant contributions.................. -- -- -- 1,390 1,554 1,575
Actuarial (gain) loss...................... (2,735) (2,113) (6,054) (2,330) (5,953) (221)
Benefits Paid.............................. (3,890) (6,229) (6,604) (1,750) (1,740) (1,780)
------ ------ ------ ------- ------- -------
PBO/APBO, end of year........................ 73,689 70,720 70,119 27,901 27,864 30,888
====== ====== ====== ======= ======= =======
Change in Plan Assets
Fair Value of Plan Assets, beginning of
year....................................... 80,877 71,929 67,035 -- -- --
Actuarial return on plan assets............ 2,465 9,454 3,827 -- -- --
Participant contributions.................. -- -- -- 1,390 1,554 1,575
Employer contributions..................... 1,027 5,723 7,671 360 186 205
Benefits paid.............................. (3,890) (6,229) (6,604) (1,750) (1,740) (1,780)
------ ------ ------ ------- ------- -------
Fair Value of Plan Assets, end of year....... 80,479 80,877 71,929 -- -- --
====== ====== ====== ======= ======= =======
Funded Status................................ 6,790 10,157 1,810 (27,901) (27,864) (30,888)
Unrecognized Transition (asset) obligation... (586) (792) (999) 11,488 12,308 13,129
Prior service costs.......................... 4,437 3,707 3,311 -- -- --
Cumulative net (gain) or loss................ (7,137) (8,450) (3,215) 365 1,666 6,394
------ ------ ------ ------- ------- -------
(Accrued) prepaid pension/ postretirement
cost....................................... 3,504 4,622 907 (16,048) (13,890) (11,365)
====== ====== ====== ======= ======= =======
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost....................... 4,250 4,632 2,073 -- -- --
Accrued benefit liability.................. (6,362) (4,218) (3,794) (16,048) (13,890) (11,365)
Intangible asset........................... 5,616 4,208 2,628 -- -- --
------ ------ ------ ------- ------- -------
Net amount recognized........................ 3,504 4,622 907 (16,048) (13,890) (11,365)
====== ====== ====== ======= ======= =======
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------ --------------------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- -------- -------- ----------------------
Weighted-average assumptions as
of December 31
Discount Rate.................... 7.00% 7.50% 7.50% 7.00% 7.50% 7.50%
Long-term rate of return on
assets......................... 9.00% 9.00% 9.00% N/A N/A N/A
Rate of compensation increase.... 4.00% 4.75% 4.75% -- -- --
Medical trend rates.............. -- -- -- 5% to 8% 5% to 9% pre-65: 12.4% to 6%
post-65: 11.8% to 6.1%
For measurement purposes, a 9% annual rate increase in the per capita cost
of covered health care benefits was assumed for 1999. The rate was assumed to
decrease gradually to 6% in 2002 and remain at that level hereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percent point change in assumed
health care cost trend rates would have the following effects:
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total of service and interest cost
components...................................... $ 328 $ (285)
Effect on postretirement benefit obligation....... 2,994 (2,684)
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------------- -----------------------
1998 1997 1996 1998 1997 1996
------- ------ ------ ----- ----- -----
Components of Net Periodic
Pension/Postretirement Cost
Service Cost............................ $ 3,546 3,379 3,729 855 958 935
Interest Cost........................... 4,988 4,880 4,978 1,872 2,157 2,133
Expected return on assets............... (6,537) (6,275) (5,996) -- -- --
Amortization of unrecognized
Transition (asset).................... (207) (207) (207) 821 821 821
Prior service costs................... 331 287 277 -- -- --
Cumulative net (gain) loss............ 25 (56) (99) -- 144 323
------- ------ ------ ----- ----- -----
Net periodic pension/postretirement
cost.................................. $ 2,146 2,008 2,682 3,548 4,080 4,212
======= ====== ====== ===== ===== =====
The Corporation has elected to amortize the transition obligation for both
the pension and postretirement plans by charges to income over a twenty year
period on a straightline basis.
The Corporation maintains a savings plan under Section 401(k) of the
Internal Revenue Code, covering substantially all full-time and part-time
employees after six months of continuous employment. Under the plan, employees
contributions are partially matched by the Corporation. Such matching becomes
vested when the employee reaches five years of credited services. Total savings
plan expenses were $2,286, $2,086 and $2,108 for 1998, 1997 and 1996,
respectively.
13. STOCK OPTIONS
The Corporation's 1982, 1992, and 1997 Stock Plans (the "Plans") provide
incentive options to certain key employees for up to 4,200,000 shares of
FirstMerit Common Stock. In addition, these Plans provide for the granting of
non-qualified stock options to certain non-employee directors of the Corporation
for which 200,000 shares of FirstMerit Common Stock have been reserved.
Outstanding options under these Plans are generally not exerciseable for at
least six months from date of grant.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Options under these Plans are granted at 100% of the fair market value.
Options granted as incentive stock options must be exercised within ten years
and options granted as non-qualified stock options have terms established by the
Compensation Committee of the Board and approved by the non-employee directors
of the Board. Options are cancelable within defined periods based upon the
reason for termination of employment.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Corporation continues to account for its stock option plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to
Employees," and makes no charges against income with respect to options granted.
However, SFAS No. 123 does require the disclosure of the pro forma effect
on net income and earnings per share that would result if the fair value
compensation element were to be recognized as expense. The following table shows
the pro forma earnings and earnings per share for 1998, 1997, and 1996 along
with significant assumptions used in determining the fair value of the
compensation amounts.
1998 1997 1996
-------------- ------------ ------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Proforma amounts:
Net income.......................................... $94,645 94,789 76,501
Earnings per share (basic).......................... 1.33 1.37 1.07
Earnings per share (diluted)........................ 1.30 1.33 1.05
Assumptions:
Dividend yield...................................... 0.0% 3.50% 2.70%
Expected volatility................................. 24.94% 23.30% 24.51%
Risk free interest rate............................. 4.55% - 5.61% 5.8% - 6.8% 5.2% - 6.7%
Expected lives...................................... 5 yrs 5 yrs. 5 yrs.
A summary of stock option activity for the last two years follows:
AVAILABLE RANGE OF OPTION AVERAGE OPTION
SHARES FOR GRANT OUTSTANDING PRICE PER SHARE PRICE PER SHARE
- ------ --------- ----------- --------------- ---------------
Balance
Year-end 1996........................ 582,109 2,028,893 .00 - 16.97 $11.03
New shares reserved............... 2,200,000
Canceled.......................... -- (25,900) 5.41 - 25.06 14.12
Exercised......................... -- (353,032) 5.44 - 15.44 9.05
Granted........................... (549,743) 549,743 .00 - 29.63 18.76
--------- --------- ------------ ------
Balance
Year-end 1997........................ 2,232,366 2,199,704 .00 - 29.63 13.25
Canceled.......................... (65,800) 9.56 - 34.00 18.09
Exercised......................... (276,769) 6.31 - 21.63 12.96
Granted........................... (442,346) 442,346 .00 - 34.00 29.1
--------- --------- ------------ ------
Balance
Year-end 1998........................ 1,790,020 2,299,481 .00 - 34.00 16.5
========= ========= ============ ======
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The ranges of exercise prices and the remaining contractual life of options
as of December 31, 1998 were:
RANGE OF EXERCISE PRICES $0 - $9 $10 - $18 $19 - $26 $27 -$34
- ------------------------ -------- ---------- --------- --------
Options outstanding:
Outstanding as of December 31, 1998........... 393,422 1,131,343 446,277 328,439
Weighted-average remaining contractual life
(in years).................................. 6.00 6.94 8.56 9.19
Weighted-average exercise price............... $ 4.35 $ 14.17 $ 22.21 $ 31.33
Options exerciseable:
Outstanding as of December 31, 1998........... 297,443 627,676 202,031 51,004
Weighted-average remaining contractual life
(in years).................................. 5.87 6.76 8.19 8.78
Weighted-average exercise price............... $ 4.81 $ 13.60 $ 21.03 $ 31.56
The Employee Stock Purchase Plan provides full-time and part-time employees
of the Corporation the opportunity to acquire common shares on a payroll
deduction basis. Shares available under the Employee Stock Purchase Plan are
purchased at 85% of their fair market value on the business day immediately
preceding the semi-annual grant-date Of the 400,000 shares available under the
Plan, there were 31,885, 19,204 and 12,512 shares issued in 1998, 1997 and 1996,
respectively.
14. PARENT COMPANY
Condensed financial information of FirstMerit Corporation (Parent Company only)
is as follows:
YEAR-ENDS,
-------------------
CONDENSED BALANCE SHEETS 1998 1997
- ------------------------ -------- -------
ASSETS
Cash and due from banks..................................... $ 15,728 29,169
Investment securities....................................... 4,497 4,342
Loans to subsidiaries....................................... 69,000 66,000
Investment in subsidiaries, at equity in underlying value of
their net assets.......................................... 676,563 480,236
Net loans................................................... 15,375 31,568
Goodwill.................................................... -- 133
Other assets................................................ 3,109 10,176
-------- -------
$784,272 621,624
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Convertible subordinated debt............................... $ 1,541 6,840
Repurchase agreements....................................... 10,000 --
Accrued and other liabilities............................... 4,095 19,769
Shareholders' equity........................................ 768,636 595,015
-------- -------
$784,272 621,624
======== =======
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED,
-----------------------------
CONDENSED STATEMENTS OF INCOME 1998 1997 1996
- ------------------------------ ------- ------- -------
Income:
Cash dividends from subsidiaries............................ $60,000 100,200 76,250
Other income................................................ 4,044 66,019 61,296
------- ------- -------
64,044 166,219 137,546
Interest and other expenses................................. 4,071 66,313 61,210
------- ------- -------
Income before federal income tax benefit and equity in
undistributed income of subsidiaries...................... 59,973 99,906 76,336
Federal income tax (benefit)................................ (3,221) (1,267) (1,292)
------- ------- -------
63,194 101,173 77,628
Equity in undistributed income (loss) of subsidiaries....... 34,284 (5,499) (278)
------- ------- -------
Net income.................................................. $97,478 95,674 77,350
======= ======= =======
YEARS ENDED,
--------------------------------
CONDENSED STATEMENTS OF CASH FLOWS 1998 1997 1996
- ---------------------------------- --------- ------- --------
Operating activities:
Net income.................................................. $ 97,478 95,674 77,350
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity (loss) in undistributed income of subsidiaries....... (34,284) 5,262 278
Gain on sale of assets -- FirstMerit Bank, N.A.............. -- -- (490)
Cash received on FirstMerit Bank, N.A. sale................. -- -- 13,060
Addition to Provision for loan losses....................... 62 1,097 --
Other....................................................... (10,071) 7,694 3,724
--------- ------- --------
Net cash provided by operating activities................... 53,185 109,727 93,922
--------- ------- --------
Investing activities:
Proceeds from maturities of investment securities........... 3,276 -- 2,000
Loans to subsidiaries....................................... (3,000) (4,211) 63,228
Payments for investments in and advances to subsidiaries.... (165,353) (10,840) --
Net increase (decrease) in loans............................ 16,131 2,346 (33,152)
Purchases of investment securities........................ (3,049) (1,211) (4,126)
--------- ------- --------
Net cash (used) provided by investing activities............ (151,995) (13,916) 27,950
--------- ------- --------
Financing activities:
Net increase in securities sold under repurchase agreements
and
other borrowings.......................................... 10,000 -- --
Cash dividends.............................................. (49,322) (40,871) (38,563)
Proceeds from exercise of stock options..................... 7,865 3,138 3,617
Purchase of treasury shares................................. (25,703) (53,607) (56,295)
Treasury shares reissued -- acquisition..................... 115,205 -- --
Treasury shares reissued -- public offering................. 27,324 -- --
Loans made to FirstMerit Bank, N.A.......................... -- -- (17,000)
--------- ------- --------
Net cash (used) provided by financing activities............ 85,369 (91,340) (108,241)
--------- ------- --------
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED,
--------------------------------
CONDENSED STATEMENTS OF CASH FLOWS 1998 1997 1996
- ---------------------------------- --------- ------- --------
Net increase (decrease) in cash and cash equivalents........ (13,441) 4,471 13,631
Cash and cash equivalents at beginning of year.............. 29,169 24,698 11,067
--------- ------- --------
Cash and cash equivalents at end of year.................... $ 15,728 29,169 24,698
========= ======= ========
15. SEGMENT INFORMATION
The Corporation provides a diversified range of banking and certain
nonbanking financial services and products through its various subsidiaries.
Management reports the results of the Corporation's operations through its major
line of business Super Community Banking. Parent Company and Others include
activities that are not directly attributable to Super Community Banking.
Included in this category are certain nonbanking affiliates, eliminations of
certain intercompany transactions and certain nonrecurring transactions. Also
included are portions of certain assets, capital, and support functions not
specifically identifiable with Super Community Banking. The Corporation's
business is conducted solely in the United States.
The accounting policies of the segment are the same as those described in
"Summary of Significant Accounting Policies." The Corporation evaluates
performance based on profit or loss from operations before income taxes.
The following table presents a summary of financial results and significant
performance measures for the periods depicted. Information for periods prior to
those presented was not readily available.
1998 1997
----------------------------------------------------- --------------------------------------
SUPER- ADJUSTMENTS SUPER- ADJUSTMENTS
COMMUNITY PARENT CO. AND FIRSTMERIT COMMUNITY PARENT CO. AND
BANKING & OTHERS ELIMINATIONS CONSOLIDATED BANKING & OTHERS ELIMINATIONS
(DOLLARS IN THOUSANDS) ---------- ---------- ------------ ------------ ---------- ---------- ------------
SUMMARY OF OPERATIONS:
Net interest
income........... $ 302,694 62,756 (60,004) 305,446 $ 277,305 91,806 (87,506)
Provision for
possible loan
losses........... 28,321 62 -- 28,383 20,806 1,097 --
Other income....... 108,929 1,563 (12) 110,480 86,817 75,454 (76,935)
Other expenses..... 239,385 3,354 (16) 242,723 203,077 65,550 (64,241)
Net income......... 93,674 98,088 (94,284) 97,478 84,953 96,188 (85,467)
AVERAGE BALANCES:
Assets............. 5,877,288 732,371 6,609,659 5,305,301 619,937
Loans.............. 4,782,377 24,805 4,807,182 4,351,390 39,663
Earning assets..... 6,100,546 30,267 6,130,813 5,065,469 511,532
Deposits........... 5,134,553 -- 5,134,553 4,645,807 --
Shareholders'
equity........... 584,667 99,142 683,809 505,177 76,852
PERFORMANCE RATIOS:
Return on average
equity........... 16.02% 14.26% 18.66%
Return on average
assets........... 1.59% 1.47% 1.78%
Efficiency ratio... 57.19% 57.37% 55.01%
1997
------------
FIRSTMERIT
CONSOLIDATED
(DOLLARS IN THOUSANDS) ------------
SUMMARY OF OPERATIONS:
Net interest
income........... 281,605
Provision for
possible loan
losses........... 21,903
Other income....... 85,336
Other expenses..... 204,386
Net income......... 95,674
AVERAGE BALANCES:
Assets............. 5,925,238
Loans.............. 4,391,053
Earning assets..... 5,577,001
Deposits........... 4,645,807
Shareholders'
equity........... 582,029
PERFORMANCE RATIOS:
Return on average
equity........... 16.44%
Return on average
assets........... 1.61%
Efficiency ratio... 54.55%
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The table below presents estimated revenues from external customers, by
product and service group for the periods depicted.
TRUST
RETAIL COMMERCIAL SERVICES TOTAL
-------- ---------- -------- --------
1998:
Interest and fees............................ $284,506 256,596 16,147 557,249
Service charges.............................. 33,252 8,498 -- 41,750
Sales and servicing.......................... 7,814 6,764 -- 14,578
-------- -------- -------- --------
$325,572 271,858 16,147 613,577
16. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Disclosures of fair value information about certain financial instruments,
whether or not recognized in the consolidated balance sheets are provided as
follows. Instruments for which quoted market prices are not available are valued
based on estimates using present value or other valuation techniques whose
results are significantly affected by the assumptions used, including discount
rates and future cash flows. Accordingly, the values so derived, in many cases,
may not be indicative of amounts that could be realized in immediate settlement
of the instrument. Also, certain financial instruments and all non-financial
instruments are excluded from these disclosure requirements. For these and other
reasons, the aggregate fair value amounts presented below are not intended to
represent the underlying value of the Corporation.
The following methods and assumptions were used to estimate the fair values
of each class of financial instrument presented:
Investment securities -- Fair values are based on quoted prices, or
for certain fixed maturity securities not actively traded estimated values
are obtained from independent pricing services.
Federal funds sold -- The carrying amount is considered a reasonable
estimate of fair value.
Net loans -- Fair value for loans with interest rates that fluctuate
as current rates change are generally valued at carrying amounts with an
appropriate discount for any credit risk. Fair values of other types of
loans are estimated by discounting the future cash flows using the current
rates for which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Cash and due from banks -- The carrying amount is considered a
reasonable estimate of fair value.
Accrued interest receivable -- The carrying amount is considered a
reasonable estimate of fair value.
Deposits -- The carrying amount is considered a reasonable estimate of
fair value for demand and savings deposits and other variable rate deposit
accounts. The fair values for fixed maturity certificates of deposit and
other time deposits are estimated using the rates currently offered for
deposits of similar remaining maturities.
Securities sold under agreements to repurchase and other
borrowings -- Fair values are estimated using rates currently available to
the Corporation for similar types of borrowing transactions.
Derivative financial instruments -- The fair value of exchange-traded
derivative financial instruments was based on quoted market prices or
dealer quotes. These values represent the estimated amount the Corporation
would receive or pay to terminate the agreements, considering current
interest rates, as well as the current credit-worthiness of the
counterparties. Fair value amounts consist of unrealized gains and losses,
accrued interest receivable and payable, and premiums paid or received, and
take into account master netting agreements.
Accrued interest payable -- The carrying amount is considered a
reasonable estimate of fair value.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Commitments to extend credit -- The fair value of commitments to
extend credit is estimated using the fees currently charged to enter into
similar arrangements, taking into account the remaining terms of the
agreements, the creditworthiness of the counterparties, and the difference,
if any, between current interest rates and the committed rates.
Standby letters of credit and financial guarantees written -- Fair
values are based on fees currently charged for similar agreements or on the
estimated cost to terminate or otherwise settle the obligations.
Loans sold with recourse -- Fair value is estimated based on the
present value of the estimated future liability in the event of default.
The estimated fair values of the Corporation's financial instruments based
on the assumptions described above are as follows:
YEAR-ENDS
----------------------------------------------------
1998 1997
------------------------ ------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
Financial assets:
Investment securities................... $1,551,727 1,551,727 $1,136,561 1,136,561
Federal funds sold...................... 12,505 12,505 36,496 36,496
Net loans............................... 4,918,447 4,924,468 4,408,561 4,427,222
Cash and due from banks................. 245,950 245,950 176,745 176,745
Accrued interest receivable............. 41,608 41,608 37,219 37,219
Financial liabilities:
Deposits................................ 5,461,563 5,481,376 4,763,368 4,770,189
Securities sold under agreements to
repurchase and other borrowings...... 807,433 808,660 546,862 547,035
Accrued interest payable................ 21,347 21,347 17,291 17,291
Derivative instruments.................. -- (68) -- --
Unrecognized financial instruments:
Commitments to extend credit............ -- -- -- --
Standby letters of credit and financial
guarantees written................... -- -- -- --
Loans sold with recourse................ -- -- -- --
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit, financial guarantees, and loans sold with recourse
and derivative instruments.
These instruments involve, to varying degrees, elements recognized in the
consolidated balance sheets. The contract or notional amount of these
instruments reflect the extent of involvement the Corporation has in particular
classes of financial instruments.
The Corporation's exposure to credit loss in the event of non-performance
by the other party to the financial instrument for commitments to extend credit
and standby letters of credit and financial guarantees written is represented by
the contractual notional amount of those instruments. The Corporation uses the
obligations as it does for on-balance-sheet instruments.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Unless noted otherwise, the Corporation does not require collateral or
other security to support financial instruments with credit risk. The following
table sets forth financial instruments whose contract amounts represent credit
risk.
YEARS ENDED,
-----------------------
1998 1997
---------- ---------
Commitments to extend credit................................ $2,048,634 1,583,467
========== =========
Standby letters of credit and financial guarantees
written................................................... $ 121,065 114,304
========== =========
Loans sold with recourse.................................... $ 727 1,058
========== =========
Purchased options........................................... $ 11,400 --
========== =========
Futures contracts sold...................................... $ 6,100 --
========== =========
Commitments to extend credit are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally are extended at the then prevailing interest rates, have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary by the
Corporation upon extension of credit is based on Management's credit evaluation
of the counter party. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, and income-producing
commercial properties. Standby letters of credit and financial guarantees
written are conditional commitments issued by the Corporation to guarantee the
performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. Except for short-term
guarantees of $27,627 and $33,796 at December 31, 1998 and 1997, respectively,
the remaining guarantees extend in varying amounts through 2020. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Collateral held varies, but may
include marketable securities, equipment and real estate. In recourse
arrangements, the Corporation accepts 100% recourse. By accepting 100% recourse,
the Corporation is assuming the entire risk of loss due to borrower default. The
Corporation's exposure to credit loss, if the borrower completely failed to
perform and if the collateral or other forms of credit enhancement all prove to
be of no value, is represented by the notional amount less any allowance for
possible loan losses. The Corporation uses the same credit policies originating
loans which will be sold with recourse as it does for any other type of loan.
Derivative financial instruments include swaps, futures, forwards and
option contracts, all of which derive their value from underlying interest
rates, commodity values or equity instruments. For most contracts, notional
amounts are used solely to determine cash flows to be exchanged. The notional or
contract amounts associated with the derivative instruments are not recorded as
assets or liabilities on the balance sheet and do not represent the potential
for gain or loss associated with such transactions. The gross losses in 1998
associated with purchase options totaled $31.0 and the gross losses from futures
contracts sold were $36.0. These derivative instruments were not entered into
until 1998.
18. CONTINGENCIES
The nature of the Corporation's business results in a certain amount of
litigation. Accordingly, FirstMerit Corporation and its subsidiaries are subject
to various pending and threatened lawsuits in which claims for monetary damages
are asserted. Management, after consultation with legal counsel, is of the
opinion that the ultimate liability of such pending matters would not have a
material effect on the Corporation's financial condition or results of
operations.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial and per share data for the years ended 1998 and 1997
are summarized as follows:
QUARTERS
-----------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Total interest income..................... 1998 $116,408 124,003 131,571 131,115
==== ======== ======== ======== ========
1997 $111,977 116,041 116,703 118,797
==== ======== ======== ======== ========
Net interest income....................... 1998 $ 70,912 75,156 78,629 80,749
==== ======== ======== ======== ========
1997 $ 68,808 70,680 70,389 71,728
==== ======== ======== ======== ========
Provision for possible loan losses........ 1998 $ 5,547 5,527 5,235 12,074
==== ======== ======== ======== ========
1997 $ 4,219 5,117 6,266 6,301
==== ======== ======== ======== ========
Income before federal income taxes........ 1998 $ 35,295 39,170 41,235 29,120
==== ======== ======== ======== ========
1997 $ 33,525 34,986 35,442 36,699
==== ======== ======== ======== ========
Net income................................ 1998 $ 24,425 26,797 28,283 17,973
==== ======== ======== ======== ========
1997 $ 22,423 23,624 24,369 25,258
==== ======== ======== ======== ========
Net income per share -- basic............. 1998 $ 0.36 0.38 0.39 0.24
==== ======== ======== ======== ========
1997 $ 0.32 0.34 0.35 0.37
==== ======== ======== ======== ========
Net income per share -- diluted........... 1998 $ 0.35 $ 0.38 $ 0.38 $ 0.23
==== ======== ======== ======== ========
1997 $ 0.31 $ 0.33 $ 0.35 $ 0.36
==== ======== ======== ======== ========
20. SHAREHOLDER RIGHTS PLAN
The Corporation has in effect a shareholder rights plan ("Plan"). The Plan
provides that each share of Common Stock has one right attached. Under the Plan,
subject to certain conditions, the Rights would be distributed after either of
the following events: (1) a person acquires 10% or more of the Common Stock of
the Corporation, or (2) the commencement of a tender offer that would result in
a change in the ownership of 10% or more of the Common Stock. After such an
event, each Right would entitle the holder to purchase shares of Series A
Preferred Stock of the Corporation. Subject to certain conditions, the
Corporation may redeem the Rights for $0.01 per Right.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
21. EARNINGS PER SHARE
SFAS 128 requires reconciliation of the numerator and denominator used in
the basic Earnings Per Share ("EPS") calculation to the numerator and
denominator used in the diluted EPS calculation. The calculations are presented
in the table below:
YEARS ENDED,
---------------------------------------
1998 1997 1996
----------- ---------- ----------
(DOLLARS IN THOUSANDS)
BASIC EPS:
Net income available to common shareholders......... $ 97,478 95,674 77,350
Average common shares outstanding................... 71,095,251 69,404,772 71,798,728
Earnings per basic common share..................... $ 1.37 1.38 1.08
DILUTED EPS:
Net income available to common shareholders......... $ 97,478 95,674 77,350
Add: interest expense on convertible bonds, net of
tax.............................................. 206 334 391
----------- ---------- ----------
Adjusted income available to common shareholders.... 97,684 96,008 77,741
Average common shares outstanding................... 71,095,251 69,404,772 71,798,728
Add: common stock equivalents for shares issuable
under:
Stock option plans............................... 1,055,079 1,000,428 375,740
Subordinated debentures conversion............... 552,420 852,304 993,554
----------- ---------- ----------
Average common and common stock equivalent shares
outstanding...................................... 72,702,750 71,257,504 73,168,022
Earnings per diluted common share................... $ 1.34 1.35 1.06
=========== ========== ==========
22. REGULATORY MATTERS
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to quantitative judgements
by regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes, as of December 31, 1998, the
Corporation meets all capital adequacy requirements to which it is subject. The
capital terms used in this note to the consolidated financial statements are
defined in the regulations as well as in the "Capital Resources" section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
As of year-end 1998, the most recent notification from the Office of the
Comptroller of the Currency ("OCC") categorized the Corporation as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Corporation must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table. In management's opinion, there are no conditions or events since the
OCC's notification that have changed the Corporation's categorization as "well
capitalized."
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
FOR CAPITAL
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES: ACTION PROVISIONS:
----------------- ----------------- ------------------
AS OF DECEMBER 31, 1998: AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------ -------- ----- -------- ----- -------- ------
Total Capital (to Risk Weighted Assets).... $692,689 11.55% $479,855 8.00% 599,818 10.00%
Tier I Capital (to Risk Weighted Assets)... 617,663 10.30% $239,927 4.00% 359,891 6.00%
Tier I Capital (to Average Assets)......... 617,663 8.98% $206,367 3.00% 343,945 5.00%
30
MANAGEMENT'S REPORT
The management of FirstMerit Corporation is responsible for the preparation
and accuracy of the financial information presented in this annual report. These
consolidated financial statements were prepared in accordance with generally
accepted accounting principles, based on the best estimates and judgment of
management.
The Corporation maintains a system of internal controls designed to provide
reasonable assurance that assets are safeguarded, that transactions are executed
in accordance with the Corporation's authorization and policies, and that
transactions are properly recorded so as to permit preparation of financial
statements that fairly present the financial position and results of operations
in conformity with generally accepted accounting principles. These systems and
controls are reviewed by our internal auditors and independent auditors.
The Audit Committee of the Board of Directors is composed of only outside
directors and has the responsibility for the recommendation of the independent
auditors for the Corporation. The Audit Committee meets regularly with
management, internal auditors and our independent auditors to review accounting,
auditing and financial matters. The independent auditors and the internal
auditors have free access to the Audit Committee.
/S/ JOHN R. COCHRAN /S/ AUSTIN J. MULHERN
Chairman and Chief Senior Vice President
Executive Officer Chief Financial Officer
31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
And Shareholders of FirstMerit Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and retained earnings and of cash
flows present fairly, in all material respects, the financial position of
FirstMerit Corporation and its subsidiaries at December 31, 1998 and 1997 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/S/ PRICEWATERHOUSECOOPERS LLP
January 31, 1999
32
AVERAGE CONSOLIDATED BALANCE SHEETS
FULLY-TAX EQUIVALENT INTEREST RATES AND INTEREST DIFFERENTIAL
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED
--------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------- ---------- -------- ------- --------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Investment securities:
U.S. Treasury securities
and U.S. Government
agency obligations
(taxable)................ $1,055,750 65,176 6.17% 955,112 60,594 6.34% 1,158,357 72,023 6.22
Obligations of states and
political subdivisions
(tax-exempt)............. 98,457 7,767 7.89 86,873 7,074 8.14 100,630 7,404 7.36
Other securities........... 150,561 9,504 6.31 102,327 6,568 6.42 99,977 6,489 6.49
---------- ------- ---------- ------- --------- -------
Total investment
securities........... 1,304,768 82,447 6.32 1,144,312 74,236 6.49 1,358,964 85,916 6.32
Federal funds sold & other
interest-earning assets.... 18,863 1,026 5.44 41,636 2,250 5.40 19,233 934 4.86
Loans........................ 4,807,182 423,116 8.80 4,391,053 390,266 8.89 4,343,189 377,116 8.68
Total earning assets... 6,130,813 506,589 8.26 5,577,001 466,752 8.37 5,721,386 463,966 8.11
Allowance for possible loan
losses..................... (69,191) (56,234) (52,003)
Cash and due from banks...... 204,353 202,600 231,564
Other assets................. 343,684 201,871 175,020
---------- ---------- ---------
Total assets........... $6,609,659 $5,925,238 6,075,967
========== ========== =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits:
Demand-non-interest
bearing.................. $1,022,909 -- -- 733,394 -- -- 745,102 -- --
Demand-interest bearing.... 508,983 5,688 1.12 536,983 8,485 1.58 529,888 9,758 1.84
Savings.................... 1,364,705 37,178 2.72 1,337,115 34,650 2.59 1,457,762 36,092 2.48
Certificates and other time
deposits................. 2,237,956 120,135 5.37 2,038,315 107,997 5.30 2,056,139 109,005 5.30
---------- ------- ---------- ------- --------- -------
Total deposits......... 5,134,553 163,001 3.17 4,645,807 151,132 3.25 4,788,891 154,855 3.23
Federal funds purchased,
securities sold under
agreements to repurchase
and other borrowings....... 688,311 34,650 5.03 595,740 30,803 5.17 623,278 31,481 5.05
---------- ------- ---------- ------- --------- -------
Total interest bearing
liabilities.......... 4,799,955 197,651 4.12 4,508,153 181,935 4.04 4,667,067 186,336 3.99
---------- ------- ---------- ------- --------- -------
Other liabilities............ 102,986 101,662 79,329
Shareholders' equity......... 683,809 582,029 584,469
---------- ---------- ---------
Total liabilities and
shareholders'
equity............... $6,609,659 5,925,238 6,075,967
========== ========== =========
Net yield on earning
assets..................... 308,938 5.04 284,817 5.11 277,630 4.85
======= ==== ======= ==== ======= ====
Interest rate spread......... 4.14 4.33 4.12
==== ==== ====
Income on tax-exempt
securities and loans....... 5,542 5,225 6,241
======= ======= =======
- ---------------
Notes: Interest income on tax-exempt securities and loans have been adjusted to
a fully-taxable equivalent basis.
Non-accrual loans have been included in the average balances.
33
FIRSTMERIT CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
REPORT ON AUDITS OF FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
34
CONTENTS
PAGE
----
Report of Independent Accountants......................................................................... 1
Financial Statements:
Statements of Net Assets Available for Plan Benefits
at December 31, 1998 and 1997....................................................................... 2
Statements of Changes in Net Assets Available for Plan
Benefits for the years ended December 31, 1998 and 1997............................................ 3
Notes to Financial Statements............................................................................. 4-5
FIRSTMERIT CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
35
REPORT OF INDEPENDENT ACCOUNTANTS
To The Trustees of the
FirstMerit Corporation
Employee Stock Purchase Plan:
In our opinion, the accompanying statements of net assets available for plan
benefits and the related statements of changes in net assets available for plan
benefits present fairly, in all material respects, the net assets available for
plan benefits of the FirstMerit Corporation Employee Stock Purchase Plan (the
"Plan") at December 31, 1998 and 1997, and the related changes in net assets
available for plan benefits for the years then ended, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based upon our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers, L.L.P.
April 10, 1999
36
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
December 31, 1998 and 1997
ASSETS 1998 1997
-------------- --------------
Cash $ 2,855 $ 42,652
Contributions receivable 77,703 -
Investment in FirstMerit Corporation common
stock, at fair value 84,145 57,743
-------------- --------------
Net assets available for plan benefits $ 164,703 $ 100,395
============== ==============
The accompanying notes are an integral part of the financial statements.
FIRSTMERIT CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
37
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
for the years ended December 31, 1998 and 1997
1998 1997
---------------- ----------------
Additions to plan assets attributable to:
Employee contributions $ 770,208 $ 445,681
Employer contributions 200,000 148,339
Dividend income 4,122 2,639
Net appreciation (depreciation) in fair value of FirstMerit Corporation
common stock (25,908) 9,734
---------------- ----------------
Total additions 948,422 606,393
---------------- ----------------
Deductions from plan assets attributable to:
Benefits paid to participants 862,997 1,574,919
Service fees 21,117 12,934
---------------- ----------------
Total deductions 884,114 1,587,853
---------------- ----------------
Net increase (decrease) 64,308 (981,460)
Net assets available for plan benefits, beginning of year 100,395 1,081,855
---------------- ----------------
Net assets available for plan benefits, end of year $ 164,703 $ 100,395
================ ================
The accompanying notes are an integral part of the financial statements.
FIRSTMERIT CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
38
NOTES TO FINANCIAL STATEMENTS
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: Participant's are 100% vested in their account balances at all
times.
PURCHASES OF COMMON SHARES: Under the Plan, up to 200,000 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. Shares of Common stock 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 subsidiaries 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.
TRANSFERABILITY: Rights to purchase 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.
FIRSTMERIT CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
39
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION: The accompanying financial statements have been
prepared on an accrual basis in accordance with generally accepted
accounting principles.
USE OF ESTIMATES: The preparation of the financial statements in
conformity with generally accepted accounting principles 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 Merrill Lynch.
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 realized gains or losses and the
unrealized appreciation (depreciation) on those investments.
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.
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. The
Plan is not exempt from federal income taxes.
FIRSTMERIT CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
40
FIRSTMERIT CORPORATION AND
SUBSIDIARIES EMPLOYEES'
SALARY SAVINGS RETIREMENT PLAN
REPORT ON AUDITS OF FINANCIAL STATEMENTS
AND SUPPLEMENTAL SCHEDULES
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
41
INDEX OF FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
PAGES
-----
Report of Independent Accountants........................................................................... 1
Financial Statements:
Statements of Net Assets Available for Plan Benefits
at December 31, 1998 and 1997...................................................................... 2
Statement of Changes in Net Assets Available for Plan Benefits
for the year ended December 31, 1998 .............................................................. 3
Notes to Financial Statements........................................................................... 4-10
Supplemental Schedules:
Item 27(a) - Schedule of Assets Held for Investment Purpose
as of December 31, 1998............................................................................ 11
Item 27(d) - Schedule of Reportable Transactions
for the year ended December 31, 1998................................................................ 12
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
42
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
FirstMerit Corporation
In our opinion, the accompanying statements of net assets available for plan
benefits and the related statements of changes in net assets available for plan
benefits present fairly, in all material respects, the net assets available for
plan benefits of the FirstMerit Corporation and Subsidiaries Employees' Salary
Savings Retirement Plan (the "Plan") at December 31, 1998 and 1997, and the
related changes in net assets available for plan benefits for the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
upon our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary schedules included on
pages 11 and 12 are presented for purposes 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. The supplementary information has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects, in relation to the basic
financial statements taken as a whole.
/s/ PricewaterhouseCoopers, L.L.P.
April 10, 1999
43
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
December 31, 1998 and 1997
1998 1997
--------------- ---------------
Assets:
Investments, at fair value:
Mutual funds:
Federated Government Obligations Fund $ 1,021,282 $ 520,506
Federated Short/Intermediate Government Fund 1,075,909 847,944
Federated Capital Preservation Fund 2,921,528 2,678,250
Fidelity Advisor Series IV Ltd. Term Bond Fund 1,139,031 989,140
Fidelity Advisor Equity Portfolio Growth Fund 7,458,368 5,027,628
Fidelity Blue Chip Growth Fund 8,394,339 5,878,736
Fidelity Overseas Fund 1,844,625 1,673,510
Newpoint Equity Fund 3,765,394 2,747,782
--------------- ---------------
27,620,476 20,363,496
--------------- ---------------
FirstMerit Corporation Common Stock 52,284,130 51,820,440
--------------- ---------------
Total investments 79,904,606 72,183,936
--------------- ---------------
Receivables:
Receivable from participants 165,911 140,296
Receivable from employers 98,686 84,454
Loans to participants 664,009 515,900
--------------- ---------------
Total receivables 928,606 740,650
--------------- ---------------
Other:
Bank overdraft (651,944) (277,817)
--------------- ---------------
Net assets available for plan benefits $ 80,181,268 $ 72,646,769
=============== ===============
The accompanying notes are an integral part of these financial statements.
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
44
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
for the year ended December 31, 1998
Additions:
Contributions:
Participants' contributions $ 3,768,860
Employer's contributions 2,216,420
---------------
5,985,280
---------------
Investment income:
Interest 42,260
Dividends 1,554,921
Net realized gain and unrealized appreciation of investments 2,871,541
---------------
4,468,722
---------------
Assets received from new participants 783,591
---------------
Total additions 11,237,593
---------------
Deductions:
Withdrawals by former participants 3,703,094
---------------
Total deductions 3,703,094
---------------
Excess of additions over deductions 7,534,499
Net assets available for plan benefits at beginning of period 72,646,769
---------------
Net assets available for plan benefits at end of period $ 80,181,268
===============
The accompanying notes are an integral part of these financial statements.
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
45
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF THE PLAN:
The following brief description of the FirstMerit Corporation and
Subsidiaries ("FirstMerit") 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. PARTICIPANTS' ACCOUNTS
FirstMerit Bank, N.A. (a subsidiary of FirstMerit), as the trustee
for the Plan, maintains separate accounts for each participant. The
Plan allows participants to direct their contributions in
FirstMerit Corporation common stock, a stable value fund, a
short-term government bond fund, an intermediate bond fund, a
high-quality, large capitalized stock fund, a blue chip growth
fund, a growth stock fund, an international stock fund, 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.
D. 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.
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
46
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. DESCRIPTION OF THE PLAN, CONTINUED:
E. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. BASIS OF PRESENTATION
The accompanying financial statements have been prepared on an
accrual basis in accordance with generally accepted accounting
principles.
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. 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 and the current
value of each unit based upon quotations and bids obtained from
national securities exchanges on the securities in the funds.
Securities transactions are recognized on the trade date (the date
the order to buy or sell is executed).
The Plan presents in the Statement 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
could vary based on the performance of the financial markets.
E. FAIR VALUE DISCLOSURE 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.
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
47
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. INVESTMENTS:
During 1998 and 1997, the Plan's investments (including investments
bought, sold, and held during the period) (depreciated) appreciated in
value as follows:
1998 1997
--------------- ---------------
Mutual funds:
Federated Short/Intermediate Government $ 10,951 $ 2,855
Fidelity Advisor Series IV Ltd. Term Bond 11,900 7,127
Fidelity Advisor Equity Portfolio Growth 1,126,136 232,751
Fidelity Blue Chip Growth Fund 1,573,219 761,170
Fidelity Overseas Fund 123,590 34,324
Newpoint Equity Fund 594,112 275,413
FirstMerit Corporation Common Stock (3,762,895) 17,452,405
--------------- ---------------
Total $ (322,987) $ 18,766,045
=============== ===============
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 November 13, 1995,
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. The Plan has been amended since receiving the
determination letter. However, the Plan administrator and the Plan's tax
counsel believe that the Plan is currently designed and being operated in
compliance with the applicable requirements of the Internal Revenue Code.
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.
6. ASSET ALLOCATION:
The allocation of net assets and changes in net assets for the separate
investment funds are as follows:
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
48
6. ASSET ALLOCATION, CONTINUED:
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND:
December 31, 1998
FEDERATED FIDELITY FIDELITY
FIRSTMERIT SHORT/ FEDERATED ADVISOR ADVISOR
CORPORATION INTERMEDIATE CAPITAL SERIES IV LTD. EQUITY
COMMON GOVERNMENT PRESERVATION TERM BOND PORTFOLIO
STOCK FUND FUND FUND FUND GROWTH FUND
--------------- -------------- ------------- ------------- -------------
Investments, at fair value:
Mutual funds $ 1,021,282 $ 1,075,909 $ 2,921,528 $ 1,139,031 $ 7,458,368
FirstMerit Corporation Common Stock 52,284,130 - - - -
--------------- -------------- ------------- ------------- -------------
Total investments 53,305,412 1,075,909 2,921,528 1,139,031 7,458,368
--------------- -------------- ------------- ------------- -------------
Receivables:
Receivables from participants 165,911
Receivable from employer 98,686
Loans to participants 664,009
--------------- -------------- ------------- ------------- -------------
Total receivables 928,606 - - - -
--------------- -------------- ------------- ------------- -------------
Other:
Book overdraft (651,944)
--------------- -------------- ------------- ------------- -------------
Net assets available for plan benefits $ 53,582,074 $ 1,075,909 $ 2,921,528 $ 1,139,031 $ 7,458,368
=============== ============== ============= ============= =============
FIDELITY BLUE FIDELITY
CHIP GROWTH OVERSEAS NEWPOINT
FUND FUND EQUITY FUND TOTAL
-------------- -------------- ------------- ------------------
Investments, at fair value:
Mutual funds $ 8,394,339 $ 1,844,625 $ 3,765,394 $ 27,620,476
FirstMerit Corporation Common Stock - - - 52,284,130
-------------- -------------- ------------- ------------------
Total investments 8,394,339 1,844,625 3,765,394 79,904,606
-------------- -------------- ------------- ------------------
Receivables:
Receivables from participants 165,911
Receivable from employer 98,686
Loans to participants 664,009
-------------- -------------- ------------- ------------------
Total receivables - - - 928,606
-------------- -------------- ------------- ------------------
Other:
Book overdraft (651,944)
-------------- -------------- ------------- ------------------
Net assets available for plan benefits $ 8,394,339 $ 1,844,625 $ 3,765,394 $ 80,181,268
============== ============== ============= ==================
Note: The FirstMerit Corporation Common Stock Fund includes cash, receivables
from participants and employers and loans to participants.
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
49
6. ASSET ALLOCATION, CONTINUED:
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND:
DECEMBER 31, 1997
FEDERATED FIDELITY FIDELITY
FIRSTMERIT SHORT/ FEDERATED ADVISOR ADVISOR
CORPORATION INTERMEDIATE CAPITAL SERIES IV LTD. EQUITY FIDELITY BLUE
COMMON GOVERNMENT PRESERVATION TERM BOND PORTFOLIO CHIP GROWTH
STOCK FUND FUND FUND FUND GROWTH FUND FUND
------------ ------------ ------------ ------------ ------------ ------------
Investments, at fair vlaue:
Mutual funds $ 520,506 $ 847,944 $ 2,678,250 $ 989,140 $ 5,027,628 $ 5,878,736
FirstMerit Corporation Common Stock 51,820,440
------------ ------------ ------------ ------------ ------------ ------------
Total investments 52,340,946 847,944 2,678,250 989,140 5,027,628 5,878,736
------------ ------------ ------------ ------------ ------------ ------------
Receivables:
Receivable from participants 140,296
Receivable from employer 84,454
Loans to participants 515,900
------------ ------------ ------------ ------------ ------------ ------------
Total receivables 740,650
------------ ------------ ------------ ------------ ------------ ------------
Other:
Book overdraft (277,817)
------------ ------------ ------------ ------------ ------------ ------------
Net assets available for plan benefits $ 52,803,779 $ 847,944 $ 2,678,250 $ 989,140 $ 5,027,628 $ 5,878,736
============ ============ ============ ============ ============ ============
FIDELITY
OVERSEAS NEWPOINT
FUND EQUITY FUND TOTAL
------------ ------------ ------------
Investments, at fair vlaue:
Mutual funds $ 1,673,510 $ 2,747,782 $ 20,363,496
FirstMerit Corporation Common Stock 51,820,440
------------ ------------ ------------
Total investments 1,673,510 2,747,782 72,183,936
------------ ------------ ------------
Receivables:
Receivable from participants 140,296
Receivable from employer 84,454
Loans to participants 515,900
------------ ------------ ------------
Total receivables 740,650
------------ ------------ ------------
Other:
Book overdraft (277,817)
------------ ------------ ------------
Net assets available for plan benefits $ 1,673,510 $ 2,747,782 $ 72,646,769
============ ============ ============
Note: The FirstMerit Corporation Common Stock Fund includes cash, receivables
from participants and employers and loans to participants.
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
50
6. ASSET ALLOCATION, CONTINUED:
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND:
FOR THE YEAR ENDED DECEMBER 31, 1998
FEDERATED FIDELITY
FIRSTMERIT SHORT/ FEDERATED ADVISOR
CORPORATION INTERMEDIATE CAPITAL SERIES IV LTD.
COMMON GOVERNMENT PRESERVATION TERM BOND
STOCK FUND FUND FUND FUND
------------ ------------ ------------ ------------
Additions:
Contributions:
Participants' contributions $ 1,275,195 $ 98,498 $ 223,240 $ 128,708
Employers' contributions 2,216,420 - - -
------------ ------------ ------------ ------------
3,491,615 98,498 223,240 128,708
------------ ------------ ------------ ------------
Investment income:
Interest 42,260 - - -
Dividends 1,259,620 46,552 151,143 61,136
Net unrealized appreciation (depreciation) of investments (2,274,435) 12,111 - 17,058
------------ ------------ ------------ ------------
(972,555) 58,663 151,143 78,194
------------ ------------ ------------ ------------
Assets received from new participants 458,303 11,194 6,815 30,437
------------ ------------ ------------ ------------
Total additions 2,977,363 168,355 381,198 237,339
------------ ------------ ------------ ------------
Deductions:
Withdrawals by former participants 2,282,815 22,116 442,080 50,037
------------ ------------ ------------ ------------
Total deductions 2,282,815 22,116 442,080 50,037
------------ ------------ ------------ ------------
Excess of additions over deductions 694,548 146,239 (60,882) 187,302
Net transfers with other funds 83,747 81,726 304,160 (37,411)
------------ ------------ ------------ ------------
Net change in assets during the year 778,295 227,965 243,278 149,891
Net assets available for plan benefits at beginning of period 52,803,779 847,944 2,678,250 989,140
------------ ------------ ------------ ------------
Net assets available for plan benefits at end of period $ 53,582,074 $ 1,075,909 $ 2,921,528 $ 1,139,031
============ ============ ============ ============
FIDELITY
ADVISOR
EQUITY FIDELITY BLUE FIDELITY
PORTFOLIO CHIP GROWTH OVERSEAS NEWPOINT
GROWTH FUND FUND FUND EQUITY FUND
------------ ------------ ------------ ------------
Additions:
Contributions:
Participants' contributions $ 667,260 $ 776,957 $ 241,559 $ 357,443
Employers' contributions - - - -
------------ ------------ ------------ ------------
667,260 776,957 241,559 357,443
------------ ------------ ------------ ------------
Investment income:
Interest - - - -
Dividends 6,925 15,518 10,058 3,969
Net unrealized appreciation (depreciation) of investments 2,035,274 2,072,289 198,654 810,590
------------ ------------ ------------ ------------
2,042,199 2,087,807 208,712 814,559
------------ ------------ ------------ ------------
Assets received from new participants 89,610 111,894 25,433 49,905
------------ ------------ ------------ ------------
Total additions 2,799,069 2,976,658 475,704 1,221,907
------------ ------------ ------------ ------------
Deductions:
Withdrawals by former participants 261,058 361,403 121,204 162,381
------------ ------------ ------------ ------------
Total deductions 261,058 361,403 121,204 162,381
------------ ------------ ------------ ------------
Excess of additions over deductions 2,538,011 2,615,255 354,500 1,059,526
Net transfers with other funds (107,271) (99,652) (183,385) (41,914)
------------ ------------ ------------ ------------
Net change in assets during the year 2,430,740 2,515,603 171,115 1,017,612
Net assets available for plan benefits at beginning of period 5,027,628 5,878,736 1,673,510 2,747,782
------------ ------------ ------------ ------------
Net assets available for plan benefits at end of period $ 7,458,368 $ 8,394,339 $ 1,844,625 $ 3,765,394
============ ============ ============ ============
TOTAL
------------
Additions:
Contributions:
Participants' contributions $ 3,768,860
Employers' contributions 2,216,420
------------
5,985,280
------------
Investment income:
Interest 42,260
Dividends 1,554,921
Net unrealized appreciation (depreciation) of investments 2,871,541
------------
4,468,722
------------
Assets received from new participants 783,591
------------
Total additions 11,237,593
------------
Deductions:
Withdrawals by former participants 3,703,094
------------
Total deductions 3,703,094
------------
Excess of additions over deductions 7,534,499
Net transfers with other funds -
------------
Net change in assets during the year 7,534,499
Net assets available for plan benefits at beginning of period 72,646,769
------------
Net assets available for plan benefits at end of period $ 80,181,268
============
Note: The FirstMerit Corporation Common Stock Fund includes cash, receivables
from participants and employers and loans to participants.
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
51
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. ACQUISITION:
Effective April 1, 1999, the First Federal Savings and Loan of Wooster
Savings and Investment Plan was merged into the FirstMerit Corporation
and Subsidiaries Employees' Salary Savings Retirement Plan. Assets with a
value of $10,481,759 at December 31, 1998 are to be transferred to the
Plan effective May 1, 1999.
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
52
ITEM 27(A) - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
December 31, 1998
COST FAIR VALUE
---------------- ----------------
Mutual Funds:
Federated Government Obligations Funds - 1,169.88 units $ 1,021,282 $ 1,021,282
Federated Short/Intermediate Government - 86,304.99 units 1,057,047 1,075,909
Federated Capital Preservation - 255,736.55 units 2,921,528 2,921,528
Fidelity Advisor Series IV ltd. Term Bond - 93,260.08 units 1,112,120 1,139,031
Fidelity Advisor Equity Portfolio Growth - 90,699.41 units 5,260,515 7,458,368
Fidelity Blue Chip Growth - 134,709.23 units 5,482,274 8,394,339
Fidelity Overseas Fund - 45,009.20 units 1,593,444 1,844,625
Newpoint Equity Fund - 137,436.95 units 2,505,784 3,765,394
---------------- ----------------
20,953,994 27,620,476
FirstMerit Corporation Common Stock -1,826,271 shares 26,721,002 52,284,130
Book overdraft (651,944) (651,944)
Receivable from participants 165,911 165,911
Receivable from employers 98,686 98,686
Loans to participants - various interest rates, 5 year maximum unless
mortgage 20 year maximum 664,009 664,009
---------------- ----------------
$ 47,951,658 $ 80,181,268
================ ================
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
53
for the year ended December 31, 1995
ITEM 27(D) - SCHEDULE OF REPORTABLE TRANSACTIONS
for the year ended December 31, 1998
NUMBER NUMBER OF PURCHASE SELLING COST OF GAIN
ASSET DESCRIPTION OF SHARES TRANSACTIONS PRICE PRICE ASSET ON SALE
--------------------------------------- ---------- ------------ ----------- ----------- ----------- -----------
Category III: Series of
transactions in
same security exceeds 5% of value
FirstMerit Corporation Common Stock
Issue: 337915102 196,819 129 $5,506,207 $ - $ - $ -
FirstMerit Corporation Common Stock
Issue: 337915102 93,230 173 - 2,668,513 2,650,066 18,447
Federated Government Obligations Fund
Issue: 60934N104 5,805,371 198 5,805,371 - - -
Federated Government Obligations Fund
Issue: 60934N104 5,304,607 151 - 5,304,607 5,304,607 -
There were no Category I, II or IV reportable transactions during the year.
FIRSTMERIT CORPORATION AND SUBSIDIARIES
EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN
54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following Financial Statements appear in Part II of this Report:
Consolidated Balance Sheets December 31, 1998, 1997 and 1996
Consolidated Statements of Income Years ended December 31, 1998, 1997
and 1996
Consolidated Statements of Changes in Shareholders' Equity Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows Years ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements Years ended December 31,
1998, 1997 and 1996
Management's Report
Independent Auditors' Report
Statements of Net Assets Available for FirstMerit Corporation Employee
Stock Purchase Plan Benefits at December 31, 1998 and 1997
Statements of Changes in Net Assets Available for FirstMerit Corporation
Employee Stock Purchase Plan Benefits for the years ended December 31,
1998 and 1997
Notes to Financial Statements
Report of Independent Accountants
Statements of Net Assets Available for FirstMerit Corporation and
Subsidiaries Employees' Salary Savings Retirement Plan Benefits December
31, 1998 and 1997
Statements of Changes in Net Assets Available for FirstMerit Corporation
and Subsidiaries Employees' Salary Savings Retirement Plan Benefits for
the years ended December 31, 1998 and 1997
Notes to Financial Statements
(a)(2) Financial Statement Schedules
All schedules are omitted as the required information is inapplicable or
the information is presented in the consolidated financial statements or
related notes which appear in Part II of this report.
(a)(3) Management Contracts or Compensatory Plans or Arrangements
See those documents listed on the Exhibit Index which are marked as
such.
(b) Reports on Form 8-K
FirstMerit filed a Form 8-K on October 26, 1998 to report the
consummation of the merger of Security First Corp. with and into the
Corporation.
(c) Exhibits
See the Exhibit Index.
(d) Financial Statements
See subparagraph (a)(1) above.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Akron,
State of Ohio, on the 29th day of April, 1999.
FIRSTMERIT CORPORATION
By: /s/ Austin J. Mulhern
Austin J. Mulhern, Senior Vice President
(Chief Financial Officer
and Chief Accounting Officer)
56
EXHIBIT INDEX
EXHIBIT
NO. ITEM
3.1 Amended and Restated Articles of Incorporation
of FirstMerit Corporation
23 Consent of PricewaterhouseCoopers, L.L.P.