10-Q 1 l87936ae10-q.htm FIRSTMERIT CORPORATION FORM 10-Q Quarterly Report for FirstMerit Corp.
TABLE OF CONTENTS

FIRSTMERIT CORPORATION PART I - FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
FirstMerit Corporation and Subsidiaries
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Interest Income
Net Interest Margin
Other Income
Other Expenses
FINANCIAL CONDITIONS
Investment Securities
Loans
Asset Quality
Allowance for Loan Losses
Deposits
Market Risk
Capital Resources
PART II. - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES


Table of Contents

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED
March 31, 2001

COMMISSION FILE NUMBER 0-10161

FIRSTMERIT CORPORATION
(Exact name of registrant as specified in its charter)

     
OHIO
34-1339938
(State or other jurisdiction of
(IRS Employer Identification
incorporation or organization)
Number)

III CASCADE PLAZA, 7TH FLOOR, AKRON, OHIO 44308-1103
(Address of principal Executive Offices)

(330) 996-6300
(Telephone Number)

OUTSTANDING SHARES OF COMMON STOCK, AS OF
May 9, 2001
85,563,214

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X   NO

 


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FIRSTMERIT CORPORATION
PART I —FINANCIAL STATEMENTS

ITEM 1. FINANCIAL STATEMENTS

      The following statements included in the quarterly unaudited report to shareholders are incorporated by reference:

    Consolidated Balance Sheets as of March 31, 2001, December 31, 2000 and March 31, 2000
 
    Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2001 and 2000
 
    Consolidated Statements of Changes in Shareholders’ Equity for the year ended December 31, 2000 and for the three months ended March 31, 2001
 
    Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000
 
    Notes to Consolidated Financial Statements as of March 31, 2001, December 31, 2000, and March 31, 2000
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
    Management’s Discussion and Analysis of Financial Conditions as of March 31, 2001, December 31, 2000 and March 31, 2000 and Results of Operations for the quarters ended March 31, 2001 and 2000 and for the year ended December 31, 2000

 


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FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)

                             
March 31 December 31 March 31



2001 2000 2000



(Unaudited, except December 31, 2000)
ASSETS
Investment securities
$ 1,839,667 2,002,291 2,301,363
Federal funds sold & other investments
100 8,100 18,100
Loans held for sale
100,415 135,753 52,025
Commercial loans
3,452,384 3,251,761 3,244,664
Mortgage loans
817,871 848,225 890,812
Installment loans
1,400,492 1,497,270 1,485,105
Home equity loans
455,553 453,462 413,485
Credit card loans
115,999 117,494 106,633
Manufactured housing loans
795,226 786,641 808,613
Leases
292,163 282,232 293,634



Total loans
7,329,688 7,237,085 7,242,946
Less allowance for possible loan losses
110,142 108,285 108,291



Net loans
7,219,546 7,128,800 7,134,655
Cash and due from banks
231,720 235,918 285,462
Premises and equipment, net
132,452 133,894 134,804
Intangible assets
145,962 152,107 159,258
Accrued interest receivable and other assets
426,272 418,340 289,421



$ 10,096,134 10,215,203 10,375,088



LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand-non-interest bearing
$ 1,025,505 1,078,586 1,047,209
Demand-interest bearing
679,178 681,771 665,349
Savings and Money Market
1,877,416 1,805,505 1,801,746
Certificates and other time deposits
3,871,374 4,049,070 3,688,042



Total deposits
7,453,473 7,614,932 7,202,346
Securities sold under agreements to repurchase and other borrowings
1,571,699 1,563,404 2,197,396



Total funds
9,025,172 9,178,336 9,399,742
Accrued taxes, expenses, and other liabilities
158,527 121,978 130,925



Total liabilities
9,183,699 9,300,314 9,530,667
Shareholders’ equity:
Preferred Stock, without par value: authorized 7,000,000 shares Preferred Stock, Series A, without par value: designated 800,000 shares; none outstanding
Cumulative convertible preferred stock, Series B, without par value: designated 220,000 shares; 97,955, 158,708 and 105,658 shares outstanding at March 31, 2001, March 31, 2000 and December 31, 2000, respectively
2,357 2,501 3,818
Common stock, without par value: authorized 300,000,000 shares; issued 91,979,362 shares
127,937 127,937 127,937
Capital surplus
111,843 113,326 116,471
Accumulated other comprehensive income
(2,683 ) (13,798 ) (56,154 )
Retained earnings
821,836 802,905 741,623
Treasury stock, at cost, 6,144,690, 3,653,601 and 4,947,047 at March 31, 2001, March 31, 2000 and December 31, 2000, respectively
(148,855 ) (117,982 ) (89,274 )



Total shareholders’ equity
912,435 914,889 844,421



$ 10,096,134 10,215,203 10,375,088



See accompanying notes to consolidated financial statements.

 


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FIRSTMERIT CORPORATION
AVERAGE CONSOLIDATED BALANCE SHEETS

                                                     
Unaudited

1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr Annual
2001 2000 2000 2000 2000 2000






(Dollars in thousands)
ASSETS
Investment securities/fed funds sold
$ 1,905,192 2,185,718 2,366,078 2,286,405 2,356,628 2,297,668
Loans held for sale
114,794 203,699 53,271 50,374 58,033 91,547
Commercial loans
3,405,933 3,246,067 3,285,203 3,275,629 3,198,639 3,244,140
Mortgage loans
838,962 863,253 877,575 892,438 898,918 882,977
Installment loans
1,405,589 1,516,316 1,517,726 1,502,518 1,474,474 1,502,836
Home Equity loans
454,250 450,193 440,469 426,009 411,928 432,221
Credit card loans
116,377 112,679 108,297 103,934 105,573 107,634
Manufactured housing loans
797,826 788,502 858,654 846,485 768,027 815,461
Leases
286,522 284,075 291,298 296,717 287,020 289,767






Loans less unearned income
7,305,459 7,261,085 7,379,222 7,343,730 7,144,579 7,275,036
Less allowance for possible loan losses
108,616 109,359 110,777 110,139 107,351 109,409






Net loans
7,196,843 7,151,726 7,268,445 7,233,591 7,037,228 7,165,627
Cash and due from banks
193,394 179,809 205,949 242,325 242,223 217,446
Premises and equipment, net
133,952 134,505 135,049 134,523 133,584 134,416
Accrued interest receivable and other assets
564,644 487,368 464,019 444,407 434,254 461,933






Total Assets
$ 10,108,819 10,342,825 10,492,811 10,391,625 10,261,950 10,368,637






LIABILITIES
Deposits:
Demand-non-interest bearing
$ 1,015,171 1,031,499 1,027,707 1,052,392 1,020,384 1,032,992
Demand-interest bearing
647,726 632,477 620,211 645,325 643,842 635,414
Savings and money market
1,832,240 1,810,171 1,791,848 1,808,127 1,747,456 1,789,464
Certificates and other time deposits
3,963,871 4,120,637 4,260,371 3,876,139 3,566,289 3,957,140






Total deposits
7,459,008 7,594,784 7,700,137 7,381,983 6,977,971 7,415,010
Securities sold under agreements to repurchase and other borrowings
1,583,314 1,711,155 1,774,955 2,030,837 2,287,852 1,951,841






Total funds
9,042,322 9,305,939 9,475,092 9,412,820 9,265,823 9,366,851
Accrued taxes, expenses and other liabilities
150,665 141,077 143,792 133,026 163,670 139,677






Total liabilities
9,192,987 9,447,016 9,618,884 9,545,846 9,429,493 9,506,528
Preferred stock
2,383 2,537 2,700 3,620 3,853 3,174
Common stock
127,937 127,937 127,937 127,937 127,937 127,937
Capital surplus
112,151 113,299 113,830 115,792 116,681 114,893
Accumulated other comprehensive income
(6,357 ) (31,641 ) (47,358 ) (60,247 ) (53,146 ) (48,075 )
Retained earnings
806,390 788,988 767,448 747,490 726,700 757,784
Treasury stock
(126,672 ) (105,311 ) (90,630 ) (88,813 ) (89,568 ) (93,604 )






Total shareholders’ equity
915,832 895,809 873,927 845,779 832,457 862,109






LIABILITIES AND SHAREHOLDERS’ EQUITY
$ 10,108,819 10,342,825 10,492,811 10,391,625 10,261,950 10,368,637






Certain previously reported amounts may have been reclassified to conform to current presentation.

 


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Consolidated Statements of Income and Comprehensive Income
FIRSTMERIT CORPORATION AND SUBSIDIARIES
(Unaudited)

                     
1Q 2001 1Q 2000


(in thousands except per share data)
Interest and fees on loans
$ 157,662 152,106
Interest and dividends on securities
32,117 37,940


Total interest income
189,779 190,046


Interest on deposits:
Demand-interest bearing
1,180 852
Savings and money market
14,300 11,335
Certificates and other time deposits
60,997 48,068
Interest on securities sold under agreements to repurchase and other borrowings
22,945 33,340


Total interest expense
99,422 93,595


Net interest income
90,357 96,451
Provision for possible loan losses
11,816 11,714


Net interest income after provision for possible loan losses
78,541 84,737


Other income:
Trust department
5,153 5,060
Service charges on deposits
12,291 11,012
Credit card fees
8,335 7,234
ATM and other service fees
3,500 3,684
Bank owned life insurance income
3,086 851
Service fees — other
3,500 3,501
Gain from sale of partnership interest
5,639
Manufactured housing income
1,470 651
Investment securities gains (losses), net
452 (714 )
Loan sales and servicing
1,680 2,780
Other operating income
2,078 4,829


Total other income
47,184 38,888


Other expenses:
Salaries, wages, pension and benefits
31,577 32,379
Net occupancy expense
4,999 5,748
Equipment expense
4,213 4,426
Stationary, supplies and postage
2,765 3,235
Bankcard, loan processing and other costs
4,882 4,731
Professional services
3,092 1,935
Amortization of intangibles
2,389 2,688
Other operating expenses
13,640 10,947


Total other expenses
67,557 66,089


Federal income taxes
18,975 17,837


Net income
$ 39,193 39,699


Other comprehensive income (loss), net of tax
11,115 (11,072 )


Comprehensive income
$ 50,308 28,627


Net income applicable to common shares
$ 39,153 39,634


Net income used in diluted EPS calculation
$ 39,204 39,715


Wtd-avg common shares outstanding — basic
86,694 88,388


Wtd-avg common shares outstanding — diluted
87,508 89,147


Per share data based on average number of shares outstanding:
Basic net income per share
$ 0.45 0.45


Diluted net income per share
$ 0.45 0.45


See accompanying notes to consolidated financial statements.

 


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Consolidated Statements of Changes in Shareholders’ Equity
FIRSTMERIT CORPORATION AND SUBSIDIARIES
(In thousands except per share data)
                                   
Accumulated
Other
Preferred Common Capital Comprehensive
Stock Stock Surplus Income




Balance at Year Ended 1997
$ 9,917 119,893 80,297 4,603
Net income
Cash dividends —common stock ($0.66 per share)
Acquisition adjustment of fiscal year
Options exercised/debentures, preferred stock converted
(618 ) 400 3,717
Treasury shares purchased
Treasury shares reissued —acquisition
25,919
Treasury shares reissued —public offering
6,518
Stock dividends
1,929 (1,929 )
Market adjustment investment securities
1,255
Other
165 3,323




Balance at Year Ended 1998
9,299 122,387 117,845 5,858
Net income
Cash dividends —common stock ($0.76/share)
Cash dividends —preferred stock
Options exercised/debentures, preferred stock converted
(5,421 ) 5,596 (915 )
Treasury shares purchased
Market adjustment investment securities
(50,940 )
Other
(46 )




Balance at Year Ended 1999
3,878 127,937 116,930 (45,082 )
Net income (loss)
Cash dividends —common stock ($0.86 per share)
Cash dividends —preferred stock
Options exercised/debentures, preferred stock converted
(1,377 ) (3,604 )
Treasury shares purchased
Market adjustment investment securities
31,284
Other




Balance at December 31, 2000
2,501 127,937 113,326 (13,798 )
Net income (loss)
Cash dividends —common stock ($0.23 per share)
Cash dividends —preferred stock
Options exercised (77,867 shares)
(1,153 )
Preferred stock converted (16,649 shares)
(282 )
Debentures converted (2,841 shares)
(144 ) (48 )
Treasury shares purchased (1,295,000 shares)
Market adjustment investment securities
11,115




Balance at March 31, 2001 - Unaudited
$ 2,357 127,937 111,843 (2,683 )





[Additional columns below]

[Continued from above table, first column(s) repeated]
                           
Total
Retained Treasury Shareholders'
Earnings Stock Equity



Balance at Year Ended 1997
651,907 (118,940 ) 747,677
Net income
72,517 72,517
Cash dividends —common stock ($0.66 per share)
(50,525 ) (50,525 )
Acquisition adjustment of fiscal year
(1,857 ) (1,857 )
Options exercised/debentures, preferred stock converted
(2,607 ) 12,111 13,003
Treasury shares purchased
(25,703 ) (25,703 )
Treasury shares reissued —acquisition
89,286 115,205
Treasury shares reissued —public offering
20,806 27,324
Stock dividends
Market adjustment investment securities
1,255
Other
(598 ) 4,870 7,760



Balance at Year Ended 1998
668,837 (17,570 ) 906,656
Net income
119,871 119,871
Cash dividends —common stock ($0.76/share)
(68,627 ) (68,627 )
Cash dividends —preferred stock
(305 ) (305 )
Options exercised/debentures, preferred stock converted
12,549 11,809
Treasury shares purchased
(85,666 ) (85,666 )
Market adjustment investment securities
(50,940 )
Other
35 788 777



Balance at Year Ended 1999
719,811 (89,899 ) 833,575
Net income (loss)
159,787 159,787
Cash dividends —common stock ($0.86 per share)
(76,162 ) (76,162 )
Cash dividends —preferred stock
(218 ) (218 )
Options exercised/debentures, preferred stock converted
6,807 1,826
Treasury shares purchased
(34,890 ) (34,890 )
Market adjustment investment securities
31,284
Other
(313 ) (313 )



Balance at December 31, 2000
802,905 (117,982 ) 914,889
Net income (loss)
39,193 39,193
Cash dividends —common stock ($0.23 per share)
(20,222 ) (20,222 )
Cash dividends —preferred stock
(40 ) (40 )
Options exercised (77,867 shares)
1,997 844
Preferred stock converted (16,649 shares)
426 144
Debentures converted (2,841 shares)
73 (119 )
Treasury shares purchased (1,295,000 shares)
(33,369 ) (33,369 )
Market adjustment investment securities
11,115



Balance at March 31, 2001 - Unaudited
821,836 (148,855 ) 912,435




See accompanying notes to consolidated financial statements.

 


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FIRSTMERIT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)

                     
Quarters Ended
March 31,

Operating Activities 2001 2000



(Unaudited)
Net income
$ 39,193 39,699
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
11,816 11,714
Provision for depreciation and amortization
3,912 4,020
Amortization of investment securities premiums, net
19 257
Amortization of income for lease financing
(4,892 ) (3,535 )
Gains on sales of investment securities, net
(452 ) 714
Deferred federal income taxes
9,239 2,977
(Increase) decrease in interest receivable
9,781 (4,849 )
Increase (decrease) in interest payable
(3,338 ) 12,234
Proceeds from sales of loans
138,325
Gain on sales of loans (loss)
(542)
Amortization of values ascribed to acquired intangibles
2,389 2,688
Other decreases
10,706 (51,464 )


NET CASH PROVIDED BY OPERATING ACTIVITIES
216,219 14,455


Investing Activities

Dispositions of investment securities:
Available-for-sale — sales
184,521 111,020
Available-for-sale — maturities
104,842 83,381
Purchases of investment securities available-for-sale
(109,206 ) (118,555 )
Net decrease in federal funds sold
8,000 7,000
Net increase in loans and leases, except sales
(200,178 ) (239,570 )
Purchases of premises and equipment
(2,791 ) (9,780 )
Sales of premises and equipment
321 3,175


NET CASH (PROVIDED) BY INVESTING ACTIVITIES
(14,491 ) (163,329 )


Financing Activities

Net increase (decrease) in demand, NOW and savings deposits
16,237 147,825
Net increase (decrease) in time deposits
(177,696 ) 194,374
Net increase (decrease) in securities sold under repurchase agreements and other borrowings
8,295 (105,297 )
Cash dividends — common and preferred
(20,262 ) (17,743 )
Purchase of treasury shares
(33,369 )
Proceeds from exercise of stock options
869 106


NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES
(205,926 ) 219,265
Increase (decrease) in cash and cash equivalents
(4,198 ) 70,391
Cash and cash equivalents at beginning of year
235,918 215,071


Cash and cash equivalents at end of year
$ 231,720 285,462


SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest, net of amounts capitalized
$ 57,435 50,572
Income taxes
$ 23,910


See notes to accompanying consolidated financial statements.

 


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FirstMerit Corporation and Subsidiaries

Notes to Consolidated Financial Statements
March 31, 2001, December 31, 2000 and March 31, 2000

1. Organization —FirstMerit Corporation (“Corporation”), is a bank holding company whose principal assets are the common stock of its wholly owned subsidiary, FirstMerit Bank, N. A. In addition FirstMerit Corporation owns all of the common stock of Citizens Investment Corporation, Citizens Savings Corporation of Stark County, FirstMerit Capital Trust I, FirstMerit Community Development Corporation, FirstMerit Credit Life Insurance Company, FMT, Inc. and SF Development Corp.

2. Acquisitions and Merger-related Costs — On February 12, 1999, the Corporation completed the acquisition of Signal Corp, a $1.9 billion bank holding company headquartered in Wooster, Ohio. Under terms of the merger 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 Series B preferred stock for each share of Signal Series B preferred stock. Based on the closing price of $25.00 per common share and $71.00 per Series B preferred share, the transaction, accounted for as a pooling-of-interests, was valued at approximately $436 million. The accompanying consolidated financial statements, the related notes and management’s discussion and analysis have all been restated to account for the acquisition as if it had happened at the beginning of each period presented. Pro forma information for the separate entities and for the combined entity from January 1, 1999 through the February 12, 1999 acquisition date is not presented due to immateriality.

      In conjunction with the Signal acquisition, the Corporation incurred merger-related and conforming accounting expenses of approximately $52.8 million, before taxes, or $38.1 million after taxes. As of March 31, 2001, no merger reserve balances existed.

3. Segment Information — The Corporation provides a diversified range of banking and certain nonbanking financial services and products through its various subsidiaries. Management reports the Corporation’s results through its major segment classification —Supercommunity Banking. Included in this category are certain nonbank affiliates, eliminations of certain intercompany transactions and certain nonrecurring transactions. Also included are portions of certain assets, capital, and support functions not specifically identifiable with Supercommunity Banking.

 


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The Corporation’s business is conducted solely in the United States. 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 three months ended March 31, 2001:

                         
Parent Co.,
Supercommunity Other Subsidiaries FirstMerit
Banking and Eliminations Consolidated



(Dollars in thousands)
OPERATIONS:
Net interest income
$ 90,772 (415 ) 90,357
Provision for possible loan losses
11,816 11,816
Other income
46,848 336 47,184
Other expenses
67,208 349 67,557
Net income
39,602 (409 ) 39,193
AVERAGES:
Assets
10,070,818 38,001 10,108,819
Loans
7,303,023 2,436 7,305,459
Earnings assets
9,309,633 15,812 9,325,445
Deposits
7,475,509 (16,501 ) 7,459,008
Shareholders’ equity
$ 777,750 138,082 915,832
RATIOS:
ROE
20.65 % (3.25 %) 17.40 %
ROA
1.59 % (.02 %) 1.57 %
Efficiency ratio
48.84 % 0.42 % 49.26 %

      The table below presents estimated revenues from external customers, by product and service group for the 2001 and 2000 first quarters:

                                   
2001 Retail Commercial Trust Services Total





(Dollars in thousands)
Interest and fees
$ 109,075 105,264 5,153 219,492
Service charges
12,843 2,948 15,791
Loan sales/service
1,680 1,680




Totals
$ 123,598 108,212 5,153 236,963




                                   
2000 Retail Commercial Trust Services Total





(Dollars in thousands)
Interest and fees
$ 97,277 109,304 5,060 211,641
Service charges
12,083 2,430 14,513
Loan sales/service
2,780 2,780




Totals
$ 112,140 111,734 5,060 228,934




 


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4. Earnings per Share —The reconciliation of the numerator and denominator of basic earnings per share (“EPS”) with that of diluted EPS is presented as follows:

                         
Income Common Per common
(loss) shares share
(numerator) (denominator) amount



Three months ended March 31, 2001:
Net income
$ 39,193
Less: preferred stock dividends
(40 )
Net income available to common shareholders
39,153
Average common shares outstanding
86,694,266
Earnings per basic common share
$ 0.45
Net income available to common shareholders
39,153
Add: preferred stock dividends
40
Add: interest expense on convertible bonds, net
11
Income used in diluted EPS calculation
$ 39,204
Average common shares outstanding
86,694,266
Equivalents from stock options
462,497
Equivalents from convertible debentures
79,266
Equivalents from convertible preferred securities
271,726
Avg common stock and equivalents outstanding
87,507,755
Earnings per diluted common share
$ 0.45
Three months ended March 31, 2000:
Net income (loss)
$ 39,699
Less: preferred stock dividends
(65 )
Net income available to common shareholders
39,634
Average common shares outstanding
88,388,002
Earnings per basic common share
$ 0.45
Net income available to common shareholders
$ 39,634
Add: preferred stock dividends
65
Add: interest expense on convertible bonds, net
16
Income available to common shareholders
$ 39,715
Average common shares outstanding
88,388,002
Equivalents from stock options
199,625
Equivalents from convertible debentures
119,581
Equivalents from convertible preferred securities
440,253
Avg common stock and equivalents outstanding
89,147,461
Earnings per diluted common share
$ 0.45

5. In June 1998, the FASB issued Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). SFAS 133 establishes accounting and reporting standards for derivative instruments and requires an entity to recognize all derivatives

 


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as either assets or liabilities in the Balance Sheet and measure those instruments at fair value. Derivatives that do not meet certain criteria for hedge accounting must be adjusted to fair value through income. If the derivative qualifies for hedge accounting, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged asset or liability through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Any ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. This statement was originally to be effective for all fiscal quarters beginning after June 15, 1999. In July 1999, the FASB issued Statement No. 137 which delayed implementation of Statement No. 133 until the first quarter 2001. The Corporation implemented SFAS 133 during the 2001 first quarter, the net effect of the initial implementation entry increased investment securities and liabilities by approximately $11.4 million and affected net income by less than $100 thousand. At the end of the 2001 first quarter, SFAS 133 entries to reflect changes in the fair values of FirstMerit's derivatives increased pre-tax income by $118.4 thousand.

6. On March 16, 2000, the Corporation issued $150 million of subordinated bank notes under a previously disclosed debt agreement. The notes bear interest at 8.625% and mature on April 1, 2010. Under the agreement, the aggregate principal outstanding at any one time may not exceed $1.0 billion. The notes were offered only to institutional investors.

7. Management believes the interim unaudited consolidated financial statements reflect all adjustments consisting only of normal recurring accruals and reclassifications, necessary for fair presentation of the March 31, 2001 and 2000 and December 31, 2000 statements of condition and the results of operations for the quarters ended March 31, 2001 and 2000. These results have been determined on the basis of generally accepted accounting principles.

8. The Corporation cautions that any forward looking statements contained in this report, in a report incorporated by reference to this report or made by management of the Corporation, involve risks and uncertainties and are subject to change based upon various factors. Actual results could differ materially from those expressed or implied. Reference is made to the section titled “Forward-looking Statements” in the Corporation’s Form 10-K for the period ended December 31, 2000.

 


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

FIRSTMERIT CORPORATION AND SUBSIDIARIES
                               
Three months ended

March 31, 2001

Average Average
Balance Interest Rate



(Dollars in thousands)
ASSETS
Investment securities:
U.S. Treasury securities and U.S.
Government agency obligations (taxable)
$ 1,501,249 23,309 6.30 %
Obligations of states and political subdivisions (tax-exempt)
99,729 2,108 8.57 %
Other securities
301,936 5,159 6.93 %



Total investment securities
1,902,914 30,576 6.52 %
Federal funds sold & other interest-earning assets
2,278 29 5.16 %
Loans held for sale
114,794 2,319 8.19 %
Loans
7,305,459 157,689 8.75 %
Total earning assets
9,325,445 190,613 8.29 %
Allowance for possible loan losses
(108,616 )
Cash and due from banks
193,394
Other assets
698,596



Total assets
$ 10,108,819



LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand- non-interest bearing
$ 1,015,171
Demand- interest bearing
647,726 1,180 0.74 %
Savings
1,832,240 14,300 3.17 %
Certificates and other time deposits
3,963,871 60,997 6.24 %



Total deposits
7,459,008 76,477 4.16 %
Federal funds purchased, securities sold under agreements to repurchase and other borrowings
1,561,864 22,945 5.96 %



Total interest bearing liabilities
8,005,701 99,422 5.04 %
Other liabilities
150,665
Mandatorily redeemable preferred securities
21,450
Shareholders’ equity
915,832



Total liabilities and shareholders’ equity
$ 10,108,819



Net yield on earning assets
$ 9,325,445 91,191 3.97 %



Interest rate spread
3.25 %




[Additional columns below]

[Continued from above table, first column(s) repeated]
                               
Year ended

December 31, 2000

Average Average
Balance Interest Rate



(Dollars in thousands)
ASSETS
Investment securities:
U.S. Treasury securities and U.S.
Government agency obligations (taxable)
1,836,266 117,652 6.41 %
Obligations of states and political subdivisions (tax-exempt)
116,401 9,573 8.22 %
Other securities
295,783 21,447 7.25 %



Total investment securities
2,248,450 148,672 6.61 %
Federal funds sold & other interest-earning assets
49,218 3,196 6.49 %
Loans held for sale
91,547 7,982 8.72 %
Loans
7,275,036 635,487 8.74 %
Total earning assets
9,664,251 795,337 8.23 %
Allowance for possible loan losses
(109,409 )
Cash and due from banks
217,446
Other assets
596,349



Total assets
10,368,637



LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand- non-interest bearing
1,032,992
Demand- interest bearing
635,414 3,705 0.58 %
Savings
1,789,464 52,883 2.96 %
Certificates and other time deposits
3,957,140 236,112 5.97 %



Total deposits
7,415,010 292,700 3.95 %
Federal funds purchased, securities sold under agreements to repurchase and other borrowings
1,951,841 122,551 6.28 %



Total interest bearing liabilities
8,333,859 415,251 4.98 %
Other liabilities
118,227
Mandatorily redeemable preferred securities
21,450
Shareholders’ equity
862,109



Total liabilities and shareholders’ equity
10,368,637



Net yield on earning assets
9,664,251 380,086 3.93 %



Interest rate spread
3.25 %




[Additional columns below]

[Continued from above table, first column(s) repeated]
                               
Three months ended

March 31, 2000

Average Average
Balance Interest Rate



(Dollars in thousands)
ASSETS
Investment securities:
U.S. Treasury securities and U.S.
Government agency obligations (taxable)
1,931,823 30,765 6.41 %
Obligations of states and political subdivisions (tax-exempt)
122,357 2,497 8.21 %
Other securities
297,052 5,584 7.56 %



Total investment securities
2,351,232 38,846 6.64 %
Federal funds sold & other interest-earning assets
5,396 41 3.06 %
Loans held for sale
58,033 1,667 11.55 %
Loans
7,144,579 150,502 8.47 %
Total earning assets
9,559,240 191,056 8.04 %
Allowance for possible loan losses
(107,351 )
Cash and due from banks
242,223
Other assets
567,838



Total assets
10,261,950



LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand- non-interest bearing
1,020,384
Demand- interest bearing
643,842 852 0.53 %
Savings
1,747,456 11,335 2.61 %
Certificates and other time deposits
3,566,289 48,068 5.42 %



Total deposits
6,977,971 60,255 3.47 %
Federal funds purchased, securities sold under agreements to repurchase and other borrowings
2,287,852 33,340 5.86 %



Total interest bearing liabilities
8,245,439 93,595 4.57 %
Other liabilities
142,220
Mandatorily redeemable preferred securities
21,450
Shareholders’ equity
832,457



Total liabilities and shareholders’ equity
10,261,950



Net yield on earning assets
9,559,240 97,461 4.10 %



Interest rate spread
3.47 %




     
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.

 


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

RESULTS OF OPERATIONS

      FirstMerit Corporation’s first quarter 2001 net income totaled $39.2 million, or $0.45 per diluted share. The first quarter 2001 results include an after-tax gain of $3.7 million related to the sale of a partnership interest. This compares with net income of $39.7 million, or $0.45 per diluted share, reported in the first quarter of 2000.

      For the first quarter 2001, including the gain on the partnership sale, returns on average assets and average common equity were 1.57% and 17.40%, respectively, compared with 1.56% and 19.27% for the prior year.

      Net interest income on a fully tax-equivalent basis was $91.2 million for the first quarter of 2001 compared to $93.1 million in the fourth quarter of 2000 and $97.5 million for the prior year quarter. The net interest margin was 3.97% this quarter, a 13 basis point increase from the fourth quarter of 2000. The first quarter 2000 net interest margin was 4.10%. Average earning assets declined 2.4% from the year ago quarter.

      Excluding gains/losses from the sale of securities and the gain on sale of a partnership interest (recorded in the other operating income category), non-interest income was $41.1 million, 3.8% above the $39.6 million reported a year ago. Growth was strong in manufactured housing income, up 126% and credit card fees, up 15.2%. Adjusted first quarter 2001 fees accounted for 31.1% of net revenues compared to 28.9% in 2000.

      Non-interest expense totaled $67.6 million in the first quarter of this year, up a modest 2.2% from prior year. Improvement was experienced in nearly every category, with the exception of other operating expenses, bankcard processing and professional services. The efficiency ratio, without the benefit from the partnership sale, was 49.3% for this quarter compared to 49.9% in the fourth quarter of 2000 and 46.3% in the year ago quarter.

      Period-end assets were $10.1 billion, down 2.7% from the prior year quarter. Earning assets were down 4.6%, with loans up 1.2% and investment securities down 20.1%. Proceeds from investment securities sales and maturities have largely been used to pay down higher cost funding sources. Consistent with prior periods and FirstMerit’s desired loan mix, credit card, home equity and commercial loans all experienced solid growth from the year ago quarter while installment, manufactured housing and mortgage loans declined.

      Total deposits at period end were $7.5 billion, an increase of 3.5% above 2000 levels, with time deposits, up 5.0%, and savings and money market accounts, up 4.2%, accounting for the majority of growth.

      First quarter loan loss provision was $11.8 million, nearly unchanged from the first quarter 2000 provision of $11.7 million. Net charge-offs for the quarter were $10.0

 


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million, or 0.55% of average loans outstanding on an annualized basis, compared to 0.47% a year ago. The allowance stands at 1.50% of period-end loans, unchanged from the prior year quarter. Non-performing assets as a percent of loans and ORE were 0.52% this first quarter, compared with 0.46% a year ago. Reserve coverage of non-performing assets was 3.6 times, substantially unchanged from last year.

      Shareholders’ equity was $912.4 million at quarter end. Average equity to assets for the 2001 quarter was 9.06% compared to 8.11% last year. Common stock dividends paid were $0.23 per share, representing a 51.1% payout ratio. At quarter end, there were 85.8 million common shares outstanding.

      The components of change in per share income for the quarters ended March 31, 2001 and 2000 were as follows:

         
Changes in Earnings per Share
Three months
ended
March 31,
2001/2000

Diluted net income per share March 31, 2000
$ 0.45
Increases (decreases) due to:
Net interest income — taxable equivalent
(0.07 )
Provision for possible loan losses
Other income
0.09
Other expenses
(0.02 )
Federal income taxes — taxable equivalent
(0.01 )
Change in share base
0.01

Net change in diluted net income per share

Diluted net income per share March 31, 2001
$ 0.45

 


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Net Interest Income

      Net interest income, the Corporation’s principal source of earnings, is the difference between interest income generated by earning assets (primarily loans and investment securities) and interest paid on interest bearing funds (namely customer deposits and other borrowings). For the purpose of this discussion, net interest income is presented on a fully-taxable equivalent (“FTE”) basis, to provide a comparison among all types of interest earning assets. That is, interest on tax-free securities and tax-exempt loans has been restated as if such interest were taxed at the statutory Federal income tax rate of 35%, adjusted for the non-deductible portion of interest expense incurred to acquire the tax-free assets.

      Net interest income FTE for the quarter ended March 31, 2001 was $91.2 million compared to $93.1 million in the 2000 fourth quarter, and $97.5 million for the same period one year ago. The decrease in net interest income occurred because interest expense on deposits and other borrowings increased $5.8 million, compared to the year ago quarter, while interest income fell $0.4 million during the same period.

      The relatively minor decline in interest income occurred as unfavorable securities volumes caused interest income to decline $7.2 million, but was offset almost equally by increases in loan balances and rates. The $5.8 million rise in interest expense resulted primarily from unfavorable yield variances in CDs and savings accounts, partially offset by lower outstanding balances in REPOs and other borrowings. The following table provides more specific rate/volume details.

 


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Changes in Net Interest Differential -
Fully-Tax Equivalent Rate/Volume Analysis
(Dollars in thousands)

                             
Quarters ended March 31, 2001 and 2000
Increase (Decrease)
Interest Income/Expense

Volume Yield Rate Total



INTEREST INCOME
Investment Securities
$ (7,199 ) (1,071 ) (8,270 )
Loans held for sale
1,147 (495 ) 652
Loans
3,473 3,714 7,187
Federal funds sold
(40 ) 28 (12 )



Total interest income
$ (2,619 ) 2,176 (443 )
INTEREST EXPENSE
Interest on deposits:
Demand-interest bearing
$ 7 321 328
Savings
662 2,303 2,965
Certificates and other time deposits
6,118 6,811 12,929
Federal funds purchased, REPOs & other borrowings
(10,665 ) 270 (10,395 )



Total interest expense
$ (3,878 ) 9,705 5,827



Net interest income
$ 1,259 (7,529 ) (6,270 )



Net Interest Margin

      The net interest margin, net interest income FTE divided by average earning assets, is affected by changes in the level of earning assets, the proportion of earning assets funded by non-interest bearing liabilities, the interest rate spread, and changes in the corporate tax rates. A meaningful comparison of the net interest margin requires an adjustment for the changes in the statutory Federal income tax rate noted above. The schedule below shows the relationship of the tax equivalent adjustment and the net interest margin.

 


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Net Interest Margin

                 
Quarters ended March 31,

2001 2000


(Dollars in thousands)
Net interest income per financial statements
90,357 96,451
Tax equivalent adjustment
834 1,010


Net interest income —FTE
91,191 97,461


Average earning assets
9,325,445 9,559,240


Net interest margin
3.97 % 4.10 %


      Average loan outstandings for the quarter ended March 31, 2001 were $7.3 billion, up $160 million or 2.2%, from $7.1 billion for the same quarter last year. Increases occurred in every category except mortgage and installment loans. Leases were principally unchanged from a year ago. The proceeds from secondary market sales and principal repayments on mortgage and installment loans were used to fund growth in higher-yielding commercial and credit card loan categories and to pay down higher cost borrowings. Increases in average loan balances, compared to the same 2000 period, were as follows: commercial loans up $207.3 million or 6.4%; home equity loans up $42.3 million or 10.2%; and manufactured housing loans up $29.8 million or 3.9%. Average mortgage loans declined $60.0 million and average installment credits decreased $68.9 million, or 4.7%. Average outstanding loans for the 2001 and 2000 first quarters equaled 78.3% and 74.7% of average earning assets, respectively.

      Average deposits were $7.459 billion during the 2001 first quarter, up $481.0 million over the same period last year. The mix of deposit categories changed little from first quarter 2000; noninterest bearing demand balances represented approximately 14% of total deposits in both first quarter periods; savings and money market balances comprised 25% of total deposits during both quarters; CDs were 53% of average deposits during the quarter, up slightly from 51% a year ago. Average other borrowings decreased to $1.6 billion, or 31.7% during the quarter. Other borrowings as a percentage of total interest bearing funds decreased from 27.7% during the 2000 quarter to 19.5% this year. Average interest bearing liabilities funded approximately 86% of average earning assets for both three-month periods.

      In summary, loan growth over the past year continues to occur mainly in higher yielding commercial, home equity and credit card outstandings resulting in a lower concentration of mortgage and installment loans. Funding of loan growth since first quarter 2000 was provided primarily by maturities of investment securities and growth in CDs.

 


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Other Income

      Other income for the quarter totaled $47.2 million, an increase of $8.3 million, or 21.3%, over the $38.9 million earned during the same period last year. Excluding securities sales, and a pre-tax gain of $5.6 million from the sale of a partnership interest, the increase in other income was $1.5 million, or 3.8%. Excluding the gain from the sale of the partnership, fee income as a percentage of net revenue during the quarter was 31.1%, up from 28.9% a year ago. Fee income is defined as noninterest income excluding gains or losses from sales of investment securities. Net revenue is defined as net interest income, on a fully-taxable equivalent basis, plus fee income.

      The specific changes, compared to the comparable 2000 quarter, were as follows: trust department income was $5.2 million, substantially unchanged from the comparable year ago period; service charges on customer deposit accounts totaled $12.3 million, up $1.3 million or 11.6%; credit card fees, including merchant services, increased 15.2%, to $8.3 million; income from bank owned life insurance (“BOLI”) was enhanced by 4th Quarter 2000 purchases and contributed $3.1 million during the first quarter compared to $0.9 million during the same period last year; and manufactured housing income was $1.5 million, more than twice last year’s total of $0.7 million. Partially offsetting the stated increases in fees were declines in ATM and other service fees, loan sales and servicing income, and other operating income.

      The Corporation recognizes other income (fee income) as an important complement to net interest income as it provides a source of revenues not sensitive to the interest rate environment. Consequently, the Corporation is always looking for new opportunities to increase noninterest income.

Other Expenses

      Other expenses totaled $67.6 million for first quarter 2001 compared to $66.1 million in 2000, a modest increase of 2.2%. The “lower-is-better” efficiency ratio for the quarter was 49.3% compared to 49.9% in the fourth quarter of 2000 and 46.3% a year ago. The 2001 stated efficiency ratio excludes the benefits of the previously discussed gain from the sale of a partnership interest. The first quarter efficiency ratio indicates 49.3 cents in operating costs were spent to generate each dollar of net income.

      For the three months ended March 31, 2001, the majority of expense categories were less than first quarter 2000 totals. Salaries, wages, pension and employee benefits, the largest component of other expenses, declined 2.5%, or $0.8 million; aggregate net occupancy and equipment expenses for the quarter were $9.2 million, 9.5% less than the $10.2 million recorded last year; stationary, supplies and postage was down 14.5% from the year ago quarter; and amortization of intangible assets decreased 11.1% when compared to year ago results. Bankcard, loan processing and other costs were substantially unchanged from first quarter 2000 while professional

 


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services expense rose $1.2 million, and other operating costs were up $2.7 million from year ago results.

FINANCIAL CONDITIONS

Investment Securities

      All investment securities of the Corporation are classified as available for sale. The available for sale classification provides the Corporation with more flexibility to respond, through the portfolio, to changes in market interest rates, or to increases in loan demand or deposit withdrawals.

The book value and market value of investment securities
classified as available for sale are as follows:

                                 
March 31, 2001

Book Gross Unrealized Gross Unrealized Market
Value Gains Losses Value




U.S. Treasury securities and U.S. Government agency obligations
$ 427,061 1,979 1,297 427,743
Obligations of state and political subdivisions
102,382 1,458 48 103,792
Mortgage-backed securities
1,018,187 6,981 3,739 1,021,429
Other securities
295,355 502 9,154 286,703




$ 1,842,985 10,920 14,238 1,839,667




                 
Book Value Market Value


Due in one year or less
$ 87,530 87,749
Due after one year through five years
205,641 206,663
Due after five years through ten years
303,908 307,177
Due after ten years
1,245,906 1,238,078


$ 1,842,985 1,839,667


      The book value and market value of investment securities including mortgage-backed securities and derivatives at March 31, 2000, by contractual maturity, were included in the previous table. Expected maturities will differ from contractual maturities based on the issuers’ right to call or prepay obligations with or without call or prepayment penalties.

 


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      The carrying value of investment securities pledged to secure trust and public deposits and for purposes required or permitted by law amounted to approximately $1,413.3 million at March 31, 2001, $1,644.2 million at December 31, 2000 and $1,916.6 million at March 31, 2000 .

      Securities with remaining maturities over five years reflected in the foregoing schedule consist of mortgage and asset backed securities. These securities are purchased within an overall strategy to maximize future earnings taking into account an acceptable level of interest rate risk. While the maturities of these mortgage and asset backed securities are beyond five years, these instruments provide periodic principal payments and include securities with adjustable interest rates, reducing the interest rate risk associated with longer term investments.

Loans

      Total loans outstanding at March 31, 2001 equaled $7.330 billion compared to $7.237 billion at December 31, 2000 and $7.243 billion at March 31, 2000. At quarter-end, the Corporation’s commercial loans were $3.452 billion, or 6.4% higher than the March 31, 2000 balance of $3.245 billion; home equity loans were $455.6 million, up 10.2%; and credit card loans were $116.0 million, up 8.8%. Installment loans decreased $84.6 million or 5.7% from year ago totals; manufactured housing loans were $795.2 million, down from $808.6 million last year; and mortgage loans totaled $817.9 million, down 8.2% from March 31, 2000. Through secondary market sales and securitizations of conforming single-family mortgages, and paydowns from direct and indirect installment loans, the Corporation continues to change its loan mix from lower yielding mortgage and installment loans to higher earning commercial, credit card and home equity credits.

Asset Quality

      Nonperforming assets (non-accrual loans, restructured loans, and other real estate) totaled $38.2 million at March 31, 2001 or 0.52% of period-end loans and other real estate. At December 31, 2000, nonperforming assets were $36.4 million or 0.50% of outstanding loans and other real estate compared to $33.5 million or 0.46% of outstanding loans and other real estate at March 31, 2000. Impaired loans are loans for which, based on current information or events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans must be valued based on the present value of the loans’ expected future cash flows at the loans’ effective interest rates, at the loans’ observable market prices, or the fair value of the underlying collateral. Under the Corporation’s credit policies and practices, all nonaccrual and restructured commercial, agricultural, construction, and commercial real estate loans, meet the definition of impaired loans.

 


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March 31, December 31, March 31,
Nonperforming Assets 2001 2000 2000




(Dollars in thousands)
Impaired Loans:
Non-accrual
$ 28,991 28,039 27,539
Restructured
141 150 223



Total impaired loans
29,132 28,189 27,762



Other Loans:
Non-accrual
1,552 2,135 1,855
Restructured



Total other nonperforming loans
1,552 2,135 1,855



Total nonperforming loans
30,684 30,324 29,617



Other real estate (ORE)
7,471 6,067 3,848



Total nonperforming assets
38,155 36,391 33,465



Loans past due 90 days or more accruing interest
$ 29,514 31,440 26,870



Total nonperforming assets as a percent of total loans and ORE
0.52 % 0.50 % 0.46 %



There is no concentration of loans in any particular industry or group of industries. Most of the Corporation’s business activity is with customers located within the state of Ohio.

 


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Allowance for Loan Losses

      The allowance for possible loan losses at March 31, 2001 totaled $110.1 million, or 1.50% of total loans outstanding compared to $108.3 million, or 1.50% at December 31, 2000 and $108.3 million, or 1.50% at March 31, 2000.

                           
Three months ended Year ended Three months ended
March 31, December 31, March 31,
2001 2000 2000



Dollars in thousands

Allowance — beginning of period
$ 108,285 104,897 104,897
Loans charged off:
Commercial, financial, agricultural
1,783 7,089 2,587
Installment to individuals
12,038 37,972 9,820
Real estate
299 2,558 351
Lease financing
741 1,809 305
Total charge-offs
14,861 49,428 13,063
Recoveries:
Commercial, financial, agricultural
146 4,805 1,020
Installment to individuals
4,155 13,866 3,561
Real estate
199 763 2
Lease financing
402 674 160
Total recoveries
4,902 20,108 4,743
Net charge-offs
9,959 29,320 8,320
Provision for possible loan losses
11,816 32,708 11,714



Allowance — end of period
$ 110,142 108,285 108,291



Annualized net charge offs as a percent of average loans
0.55 % 0.40 % 0.47 %
Allowance for loan losses as a % of loans outstanding at end of period
1.50 % 1.50 % 1.50 %
Allowance for loan losses as a multiple of annualized net charge offs
3.59X 3.69X 3.66X

      The Corporation’s Credit Policy Division manages credit risk by establishing common credit policies for its subsidiary banks, participating in approval of their largest loans, conducting reviews of their loan portfolios, providing them with centralized consumer underwriting, collections and loan operation services, and overseeing their loan workouts. The Corporation’s objective is to minimize losses from its commercial lending activities and to maintain consumer losses at acceptable levels that are stable and consistent with growth and profitability objectives.

 


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Deposits

      The following schedule illustrates the change in composition of the average balances of deposits and average rates paid for the noted periods.

                                                 
Quarter Ended Year Ended Quarter Ended
March 31, 2001 December 31, 2000 March 31, 2000



Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate






(Dollars in Thousands)
Non-interest DDA
$ 1,015,171 1,032,992 1,020,384
Interest-bearing DDA
647,726 0.74 % 635,414 0.58 % 643,842 0.53 %
Savings deposits
1,832,240 3.17 % 1,789,464 2.96 % 1,747,456 2.61 %
CDs and other time
3,963,871 6.24 % 3,957,140 5.97 % 3,566,289 5.42 %



$ 7,459,008 4.16 % 7,415,010 3.95 % 6,977,971 3.47 %



      Average CDs totaled $3.964 billion for the quarter ended March 31,2001, up 11.1% from $3.566 billion for the 2000 quarter. On a percentage basis, average CDs were 50% and 43%, respectively, of total interest bearing funds for the March 31, 2001 and 2000 quarters; average savings deposits, including money market accounts, were 23% of interest bearing funds during the quarter ended March 31, 2001 and 21% for the same period last year; interest-bearing demand deposits were 8% of total interest bearing funds during both 2001’s first quarter and the corresponding 2000 period; and wholesale borrowings decreased from 28% of interest-bearing funds during the three months ended March 31, 2000 to 20% for the March 31, 2001 quarter. Interest bearing liabilities funded approximately 86% of average earning assets during both the quarter ended March 31, 2001 and March 31, 2000.

      The following table summarizes the certificates and other time deposits in amounts of $100 thousand or more as of March 31, 2001 by time remaining until maturity.

         
Amount

(Dollars in Thousands)
Maturing in:
Under 3 months
$ 568,853
3 to 12 months
321,128
Over 12 months
517,691

$ 1,407,672

 


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Market Risk

      The Corporation is exposed to market risks in the normal course of business. Changes in market interest rates may result in changes in the fair market value of the Corporation’s financial instruments, cash flows, and net interest income. The corporation seeks to achieve consistent growth in net interest income and capital while managing volatility arising from shifts in market interest rates. The Asset and Liability Committee (“ALCO”) oversees financial risk management, establishing broad policies that govern a variety of financial risks inherent in the Corporation’s operations. ALCO monitors the Corporation’s interest rates and sets limits on allowable risk annually. Market risk is the potential of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. The Corporation’s market risk is composed primarily of interest rate risk. Interest rate risk on the Corporation’s balance sheet consists of mismatches of maturity gaps and indices, and options risk. Maturity gap mismatches result from differences in the maturity or repricing of asset and liability portfolios. Options risk exists in many of the Corporation’s retail products such as prepayable mortgage loans and demand deposits. Options risk typically results in higher costs or lower revenue for the Corporation. Index mismatches occur when asset and liability portfolios are tied to different market indices which may not move in tandem as market interest rates change.

      Interest rate risk is monitored using gap analysis, earnings simulation and net present value estimations. Combining the results from these separate risk measurement processes allows a reasonably comprehensive view of short-term and long-term interest rate risk in the Corporation. Gap analysis measures the amount of repricing risk in the balance sheet at a point in time. Earnings simulation involves forecasting net interest earnings under a variety of scenarios including changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates. ALCO also monitors the net present value of the balance sheet, which is the discounted present value of all asset and liability cash flows. Interest rate risk is quantified by changing the interest rates used for discounting cash flows and comparing the net present value to the original figure.

 


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Capital Resources

      Shareholders’ equity at March 31, 2001 totaled $912.4 million compared to $914.9 million at December 31, 2000 and $844.4 million at March 31, 2000. See the Consolidated Statement of Changes in Shareholders’ Equity for detailed activity of the equity accounts.

The following table reflects the various measures of capital:

                                                   
As of As of As of
March 31, December 31, March 31,
2001 2000 2000



(In thousands)
Total equity
$ 912,435 9.04 % 914,889 8.96 % 844,421 8.14 %
Common equity
910,078 9.01 % 912,388 8.93 % 840,603 8.10 %
Tangible common equity (a)
761,084 7.65 % 761,060 7.56 % 681,802 6.67 %
Tier 1 capital (b)
783,914 9.14 % 794,736 9.34 % 757,205 8.94 %
Total risk-based capital (c)
1,042,337 12.16 % 1,053,322 12.38 % 1,016,113 12.00 %
Leverage (d)
783,914 7.87 % 794,736 7.80 % 757,205 7.50 %


(a)   Common equity less all intangibles; computed as a ratio to total assets less intangible assets.
(b)   Shareholders’ equity minus net unrealized holding gains on equity securities, plus or minus net unrealized holding losses or gains on available for sale debt securities, less goodwill; computed as a ratio to risk-adjusted assets, as defined in the 1992 risk-based capital guidelines.
(c)   Tier 1 capital plus qualifying loan loss allowance, computed as a ratio to risk-adjusted assets, as defined in the 1992 risk-based capital guidelines.
(d)   Tier 1 capital; computed as a ratio to the latest quarter’s average assets less goodwill.

      The risk-based capital guidelines issued by the Federal Reserve Bank in 1988 require banks to maintain capital equal to 8% of risk-adjusted assets effective December 31, 1993. At March 31, 2001, the Corporation’s risk-based capital equaled 12.16% of risk adjusted assets, exceeding minimum guidelines.

      The cash dividend of $0.23 paid in the first quarter has an indicated annual rate of $0.92 per share.

 


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PART II. —OTHER INFORMATION

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits

Exhibit Index

     
Exhibit
Number

3.1 Amended and Restated Articles of Incorporation of FirstMerit Corporation (incorporated by reference from Exhibit 3.1 to the Form 10-K/A filed by the registrant on April 29, 1999)
3.2 Amended and Restated Code of Regulations of FirstMerit Corporation (incorporated by reference from Exhibit 3(b) to the Form 10-K filed by the registrant on April 9, 1998)
4.1 Shareholders Rights Agreement dated October 21, 1993, between FirstMerit (incorporated by reference from Exhibit 4 to the Form 8-A/A filed by the registrant Corporation and FirstMerit Bank, N.A., as amended and restated May 20, 1998 on June 22, 1998)
4.2 Instrument of Assumption of Indenture between FirstMerit Corporation and NBD Bank, as Trustee, dated October 23, 1998 regarding FirstMerit Corporation’s 6 1/4% Convertible Subordinated Debentures, due May 1, 2008 (incorporated by reference from Exhibit 4(b) to the Form 10-Q filed by the registrant on November 13, 1998)
4.3 Supplemental Indenture, dated as of February 12, 1999, between FirstMerit and Firstar Bank Milwaukee, National Association, as Trustee relating to the obligations of the FirstMerit Capital Trust I, fka Signal Capital Trust I (incorporated by reference from Exhibit 4.3 to the Form 10-K filed by the registrant on March 22,1999)
4.4 Indenture dated as of February 13, 1998 between Firstar Bank Milwaukee National Association, as trustee and Signal Corp (incorporated by reference from Exhibit 41 to the Form S-4, No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)
4.5 Amended and Restated Declaration of Trust of FirstMerit Capital Trust I, fka Signal Capital Trust I, dated as of February 13, 1998 (incorporated by reference from Exhibit 4.5 to the Form S-4 No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)
4.6 Form of Capital Security Certificate (incorporated by reference from Exhibit 4.6 to the Form S-4 No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)
4.7 Series B Capital Securities Guarantee Agreement (incorporated by reference from Exhibit 4.7 to the Form S-4 No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)
4.8 Form of 8.67% Junior Subordinated Deferrable Interest Debenture, Series B (incorporated by reference from Exhibit 4.7 to the Form S- 4 No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)
10.1 Amended and Restated 1992 Stock Option Program of FirstMerit Corporation (incorporated by reference from Exhibit 10.1 to the Form 10-K filed by the registrant on March 9, 2001)*
10.2 Amended and Restated 1992 Directors Stock Option Program (incorporated by reference from Exhibit 10.2 to the Form 10-K filed by the registrant on March 9, 2001) *
10.3 Amended and Restated 1995 Restricted Stock Plan (incorporated by reference from Exhibit 10.3 to the Form 10-K filed by the registrant on March 9, 2001)*
10.4 Amended and Restated 1997 Stock Option Program (incorporated by reference from Exhibit 10.4 to the Form 10-K filed by the registrant on March 9, 2001) *
10.5 Amended and Restated 1999 Stock Option Program (incorporated by reference from Exhibit 10.5 to the Form 10-K/A filed by the registrant on April 30, 2001)*
10.6 Amended and Restated 1987 Stock Option and Incentive Plan (SF) (incorporated by reference from Exhibit 10.6 to the Form 10-K filed by the registrant on March 9, 2001)*
10.7 Amended and Restated 1996 Stock Option and Incentive Plan (SF) (incorporated by reference from Exhibit 10.7 to the Form 10-K filed by the registrant on March 9, 2001)*
10.8 Amended and Restated 1994 Stock Option and Incentive Plan (SF) ((incorporated by reference from Exhibit 10.8 to the Form 10-K filed by the registrant on March 9, 2001)*
10.9 Amended and Restated 1989 Stock Incentive Plan (SB) (incorporated by reference from Exhibit 10.9 to the Form 10-K filed by the registrant on March 9, 2001) *

 


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10.10 Amended and Restated Stock Option and Incentive Plan (SG) (incorporated by reference from Exhibit 10.10 to the Form 10-K filed by the registrant on March 9, 2001)*
10.11 Non-Employee Director Stock Option Plan (SG) (incorporated by reference from Exhibit 4.3 to the Form S-8/A (No. 333-63797) filed by the registrant on February 12, 1999)*
10.12 Amended and Restated 1997 Omnibus Incentive Plan (SG) (incorporated by reference from Exhibit 10.12 to the Form 10-K filed by the registrant on March 9, 2001)*
10.13 Amended and Restated 1993 Stock Option Plan (FSB)(incorporated by reference from Exhibit 10.13 to the Form 10-K filed by the registrant on March 9, 2001)*
10.14 Amended and Restated Executive Deferred Compensation Plan (incorporated by reference from Exhibit 10.14 to the Form 10-K/A filed by the registrant on April 30, 2001)*
10.15 Amended and Restated Director Deferred Compensation Plan (incorporated by reference from Exhibit 10.15 to the Form 10-K/A filed by the registrant on April 30, 2001)*
10.16 Executive Supplemental Retirement Plan (incorporated by reference from Exhibit 10(d) to the Form 10-K filed by the registrant on March 15, 1996)*
10.17 Form of Amended and Restated Membership Agreement with respect to the Executive Supplemental Retirement Plan (incorporated by reference from Exhibit 10.39 to the Form 10-K filed by the Registrant on March 22, 1999)*
10.18 Unfunded Supplemental Benefit Plan (incorporated by reference from Exhibit 10.11 to the Form 10-K filed by the registrant on February 24, 1998)*
10.19 First Amendment to the Unfunded Supplemental Benefit Plan (incorporated by reference from Exhibit 10(v) to the Form 10-K filed by the registrant on March 2, 1995)*
10.20 Executive Committee Life Insurance Program Summary (incorporated by reference from Exhibit 10(w) to the Form 10-K filed by the registrant on March 2, 1995)*
10.21 Long Term Disability Plan (incorporated by reference from Exhibit 10(x) to the Form 10-K filed by the registrant on March 2, 1995)*
10.22 Employment Agreement dated October 23, 1998 for Charles F. Valentine (incorporated by reference from Exhibit 10(a) to the Form 10-Q filed by the registrant on November 13, 1998)*
10.23 SERP Agreement dated October 23, 1998 for Charles F. Valentine (incorporated by reference from Exhibit 10(b) to the Form 10-Q filed by the registrant on November 13, 1998)*
10.24 Amended and Restated Employment Agreement of John R. Cochran (incorporated by reference from Exhibit 10.24 to the Form 10-K/A filed by the registrant on April 30, 2001)*
10.25 Restricted Stock Award Agreement of John R. Cochran dated March 1, 1995 (incorporated by reference from Exhibit 10(e) to the Form 10-Q filed by the registrant on May 15, 1995)*
10.26 First Amendment to Restricted Stock Award Agreement for John R. Cochran (incorporated by reference from Exhibit 10.38 to the Form 10-K filed by the Registrant on March 22, 1999)*
10.27 Second Amendment to Restricted Stock Award Agreement for John R. Cochran (incorporated by reference from Exhibit 10.27 to the Form 10-K/A filed by the registrant on April 30, 2001)*
10.28 Restricted Stock Award Agreement of John R. Cochran dated April 9, 1997 (incorporated by reference from Exhibit 10.18 to the Form 10-K filed by the registrant on February 24, 1998)*
10.29 First Amendment to Restricted Stock Award Agreement for John R. Cochran (incorporated by reference from Exhibit 10.29 to the Form 10-K/A filed by the registrant on April 30, 2001)*
10.30 Amended and Restated SERP Agreement for John R. Cochran (incorporated by reference from Exhibit 10.30 to the Form 10-K/A filed by the registrant on April 30, 2001)*
10.31 Employment Agreement of Sid A. Bostic (incorporated by reference from Exhibit 10.31 to the Form 10-K/A filed by the registrant on April 30, 2001)*
10.32 Restricted Stock Award Agreement of Sid A. Bostic dated February 1, 1998 (incorporated by reference from Exhibit 10.20 to the Form 10-K filed by the registrant on February 24, 1998)*
10.33 First Amendment to Restricted Stock Award Agreement of Sid A. Bostic (incorporated by reference from Exhibit 10.25.1 to the Form 10-Q filed by the registrant on May 14, 1999)*

 


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10.34 Form of FirstMerit Corporation Change in Control Termination Agreement (incorporated by reference from Exhibit 10.32 to the Form 10-K filed by the registrant on March 9, 2001)*
10.35 Form of FirstMerit Corporation Displacement Agreement (incorporated by reference from Exhibit 10.33 to the Form 10-K filed by the registrant on March 9, 2001)*
10.36 Form of Director and Officer Indemnification Agreement and Undertaking (incorporated by reference from Exhibit 10(s) to the Form 8-K/A filed by the registrant on April 27, 1995)
10.37 Independent Contractor Agreement with Gary G. Clark, dated February 12, 1999 (incorporated by reference from Exhibit 10.38 to the Form 10-Q filed by the Registrant on May 14, 1999)*
10.38 Credit Agreement among FirstMerit Corporation, Bank One, N.A., and Lenders, dated November 27, 2000 (incorporated by reference from Exhibit 10.36 to the Form 10-K filed by the registrant on March 9, 2001)
10.39 Distribution Agreement, by and among FirstMerit Bank, N.A. and the Agents, dated July 15, 1999 (incorporated by reference from Exhibit 10.41 to the Form 10-K filed by the Registrant on March 10, 2000)
21 Subsidiaries of FirstMerit Corporation (incorporated by reference from Exhibit 21 to the Form 10-K filed by the registrant on March 9, 2001)
25.1 Form T-1 Statement of Eligibility of Firstar Trust Company to act as Property Trustee under the Amended and Restated Declaration of Trust of FirstMerit Capital Trust I, fka Signal Capital Trust I (incorporated by reference from Exhibit 26.1 to the Form S-4 No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)
25.2 Form T-1 Statement of Eligibility of Firstar Trust Company to act as Debenture Trustee under the FirstMerit Capital Trust I, fka Signal Capital Trust I, Indenture (incorporated by reference from Exhibit 26.1 to the Form S-4 No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998)


*   Management Contract or Compensatory Plan or Arrangement

(b)   Form 8-K

      There were no Form 8-K filings during the first quarter 2001.

 


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SIGNATURES

      Pursuant to the requirements 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.





             
FIRSTMERIT CORPORATION
By:
/s/TERRENCE E. BICHSEL
Terrence E. Bichsel, Executive Vice President
and Chief Financial Officer
DATE: May 14, 2001