-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bpx7DJl8Rl1UJYAnboxqULtPJt69/vFYPMV2gX6ZOTdKg3eP9zzSW31yStscl1kc JM69sRECeeD0c8x96hRAGw== 0000950152-99-006729.txt : 19990813 0000950152-99-006729.hdr.sgml : 19990813 ACCESSION NUMBER: 0000950152-99-006729 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTMERIT CORP /OH/ CENTRAL INDEX KEY: 0000354869 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 341339938 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-10161 FILM NUMBER: 99686183 BUSINESS ADDRESS: STREET 1: 111 CASCADE PLAZA STREET 2: 7TH FLOOR CITY: AKRON STATE: OH ZIP: 44308 BUSINESS PHONE: 3309966300 FORMER COMPANY: FORMER CONFORMED NAME: FIRSTMERIT CORP DATE OF NAME CHANGE: 19941219 FORMER COMPANY: FORMER CONFORMED NAME: FIRST BANCORPORATION OF OHIO /OH/ DATE OF NAME CHANGE: 19941219 FORMER COMPANY: FORMER CONFORMED NAME: FIRST BANCORPORATION OF OHIO DATE OF NAME CHANGE: 19920703 10-Q 1 FIRSTMERIT CORPORATION 10-Q 1 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 JUNE 30, 1999 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 JUNE 30, 1999 90,448,345 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 2 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 June 30, 1999, December 31, 1998 and June 30, 1998 Consolidated Statements of Income for the three-month and six-month periods ended June 30, 1999 and 1998 Consolidated Statements of Changes in Shareholders' Equity for the year ended December 31, 1998 and for the six months ended June 30, 1999 Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998 Notes to Consolidated Financial Statements as of June 30, 1999, December 31, 1998, and June 30, 1998 Management's Discussion and Analysis of Financial Conditions as of June 30, 1999, December 31, 1998 and June 30, 1998 and Results of Operations for the quarter and six months ended June 30, 1999 and 1998 and for the year ended December 31, 1998. 3
FIRSTMERIT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - ----------------------------------------------- (Unaudited, except December 31, 1998) (In thousands) ------------------------------------------------------- June 30 December 31 June 30 ----------- ----------- ----------- 1999 1998 1998 - ------------------------------------------------------------------------------------------------------ ----------- ASSETS Investment securities $1,631,149 1,878,266 1,835,078 Federal funds sold & other investments 1,380 31,739 16,600 Commercial loans 2,918,910 2,613,838 2,463,191 Mortgage loans 1,656,537 1,648,346 1,783,413 Installment loans 1,346,219 1,199,014 1,214,630 Home equity loans 391,532 377,358 306,628 Credit card loans 99,917 99,541 92,672 Manufactured housing loans 536,220 289,308 168,070 Leases 189,938 171,040 193,426 ------------------------------------------------------ Total loans 7,139,273 6,398,445 6,222,030 Less allowance for possible loan losses 106,785 96,149 81,227 ------------------------------------------------------ Net loans 7,032,488 6,302,296 6,140,803 Cash and due from banks 277,307 327,997 272,965 Premises and equipment, net 136,914 140,841 149,176 Intangible assets 162,267 169,725 193,837 Accrued interest receivable and other assets 246,526 175,160 179,618 ------------------------------------------------------ $9,488,031 9,026,024 8,788,077 ====================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand-non-interest bearing $1,041,103 1,026,377 979,248 Demand-interest bearing 670,406 917,765 591,870 Savings 1,792,681 1,810,340 1,567,714 Certificates and other time deposits 3,100,701 3,091,496 3,556,319 ------------------------------------------------------ Total deposits 6,604,891 6,845,978 6,695,151 Securities sold under agreements to repurchase and other borrowings 1,863,963 1,155,676 1,073,660 ------------------------------------------------------ Total funds 8,468,854 8,001,654 7,768,811 Accrued taxes, expenses, and other liabilities 152,675 117,714 148,398 ------------------------------------------------------ Total liabilities 8,621,529 8,119,368 7,917,209 Shareholders' equity: Preferred stock, without par value: authorized 7 million shares Preferred stock, Series A, without par value: designated 800,000 shares; none outstanding Convertible preferred stock, Series B, without par value; designated 220,000 shares; 168,184, 403,232 and 428,342 shares outstanding at June 30, 1999, December 31, 1998 and June 30, 1998, respectively 4,046 9,299 9,917 Common stock, without par value: authorized 300,000,000 shares; issued 92,054,156 91,161,362 and 90,804,649 shares, respectively 127,938 122,387 122,023 Capital surplus 117,960 117,845 102,377 Accumulated other comprehensive income (22,598) 5,858 4,053 Retained earnings 674,447 668,837 677,783 Treasury stock, at cost, 1,605,811, 1,166,604 and 3,127,156 shares, respectively (35,291) (17,570) (45,285) ------------------------------------------------------ Total shareholders' equity 866,502 906,656 870,868 ------------------------------------------------------ $9,488,031 9,026,024 8,788,077 ======================================================
Certain previously reported amounts may have been classified to conform to current presentation. See accompanying notes to the consolidated financial statements. 4
FIRSTMERIT CORPORATION AVERAGE CONSOLIDATED BALANCE SHEETS Unaudited LAST FIVE QUARTERS ---------------------------- - -------------------------------------- ------------------------------- -------------------------------------- (Dollars in thousands) 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 1999 1999 1998 1998 1998 - --------------------------------------------------------------------------- -------------------------------------- ASSETS Investment securities $1,718,124 1,820,047 1,778,551 1,829,307 1,787,231 Federal funds sold 1,149 4,353 5,739 3,051 3,329 Commercial loans 2,821,088 2,648,284 2,625,360 2,518,575 2,317,242 Mortgage loans 1,675,442 1,707,232 1,714,004 1,782,600 1,804,012 Installment loans 1,330,759 1,168,905 1,260,757 1,231,310 1,171,196 Home Equity loans 380,361 348,220 309,130 308,763 298,695 Credit card loans 100,290 102,080 96,694 93,272 91,769 Manufactured housing loans 415,032 368,503 266,759 204,376 138,999 Leases 180,729 170,352 187,638 198,657 167,068 ------------------------- --------------------------------------- Loans less unearned income 6,903,701 6,513,576 6,460,342 6,337,553 5,988,981 Less allowance for possible loan losses 104,875 101,788 95,211 80,774 76,033 ------------------------- --------------------------------------- Net loans 6,798,826 6,411,788 6,365,131 6,256,779 5,912,948 Cash and due from banks 272,025 285,589 172,315 260,322 246,362 Premises and equipment, net 139,026 140,149 140,872 144,844 129,135 Accrued interest receivable and other assets 400,547 402,371 405,167 375,451 303,586 ------------------------- --------------------------------------- Total Assets $9,329,697 9,064,297 8,867,775 8,869,754 8,382,591 ========================= ======================================= LIABILITIES Deposits: Demand-non-interest bearing $1,080,078 1,066,573 1,000,358 951,559 869,547 Demand-interest bearing 694,590 659,189 671,672 582,894 556,069 Savings 1,836,459 1,878,596 1,674,459 1,550,975 1,476,348 Certificates and other time deposits 3,109,435 3,111,321 3,247,273 3,585,969 3,459,774 ------------------------- --------------------------------------- Total deposits 6,720,562 6,715,679 6,593,762 6,671,397 6,361,738 Securities sold under agreements to repurchase and other borrowings 1,538,493 1,239,299 1,163,821 1,107,895 1,028,093 ------------------------- --------------------------------------- Total funds 8,259,055 7,954,978 7,757,583 7,779,292 7,389,831 Accrued taxes, expenses and other liabilities 154,059 172,874 151,472 141,243 140,770 ------------------------- --------------------------------------- Total liabilities 8,413,114 8,127,852 7,909,055 7,920,535 7,530,601 Mandatorily redeemable preferred securities 21,450 22,997 41,676 50,000 50,000 SHAREHOLDERS' EQUITY 895,133 913,448 917,044 899,219 801,990 ------------------------- --------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY $9,329,697 9,064,297 8,867,775 8,869,754 8,382,591 ========================= ======================================= Certain previously reported amounts may have been reclassified to conform to current presentation. See accompanying notes to the consolidated financial statements.
5
FIRSTMERIT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited) - --------------------------------------- (In thousands except per share data) --------------------------------------------------------- Quarters Ended Six Months Ended June 30, June 30, --------------------------- ------------------------ 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $ 145,618 130,802 281,613 255,268 Interest and dividends on securities: Taxable 22,912 26,360 50,402 51,203 Exempt from Federal income taxes 1,734 1,203 3,477 2,189 Interest on Federal funds sold 14 40 80 119 ----------------------- ----------------------- Total interest income 170,278 158,405 335,572 308,779 ----------------------- ----------------------- Interest expense: Demand-interest bearing 1,725 1,579 2,823 3,014 Savings 10,139 8,762 20,494 16,784 Certificates and other time deposits 39,107 44,916 79,251 88,189 Interest on securities sold under agreements to repurchase and other borrowings 17,332 15,383 36,582 29,747 ----------------------- ----------------------- Total interest expense 68,303 70,640 139,150 137,734 ----------------------- ----------------------- Net interest income 101,975 87,765 196,422 171,045 Provision for possible loan losses 9,657 8,144 26,055 14,308 ----------------------- ----------------------- Net interest income after provision for possible loan losses 92,318 79,621 170,367 156,737 ----------------------- ----------------------- Other income: Trust department income 4,595 4,151 8,781 7,566 Service charges on depositors' accounts 10,574 9,720 19,669 18,770 Credit card fees 6,833 4,792 12,452 8,801 Service fees - other 3,545 2,737 6,774 4,775 Manufactured housing income 1,400 2,464 2,831 5,558 Securities gains (losses) 2,536 1,794 8,077 3,363 Loan sales and servicing 1,855 3,226 3,863 6,655 Other operating income 5,086 4,994 12,026 10,971 ----------------------- ----------------------- Total other income 36,424 33,878 74,473 66,459 ----------------------- ----------------------- 128,742 113,499 244,840 223,196 Other expenses: Salaries, wages, pension and employee benefits 33,080 33,171 75,351 64,776 Net occupancy expense 4,770 5,502 10,872 11,454 Equipment expense 5,111 3,468 9,624 6,775 Amortization of intangibles 2,897 1,861 5,611 3,119 Other operating expense 27,080 33,672 76,896 58,399 ----------------------- ----------------------- Total other expenses 72,938 77,674 178,354 144,523 ----------------------- ----------------------- Income before Federal income taxes and extraordinary item 55,804 35,825 66,486 78,673 Federal income taxes 16,896 11,599 22,235 25,074 Income before extraordinary item 38,908 24,226 44,251 53,599 Extraordinary item, net of tax benefit of $3,148 (extinguishment of debt) -- -- (5,847) -- ---------------------- ----------------------- Net income $ 38,908 24,226 38,404 53,599 ====================== ======================= Other comprehensive income (loss), net of taxes: Unrealized gain (losses) on securities: Unrealized holding gains (losses) arising during period (17,648) 2,355 (23,206) 2,008 Less: reclassification for gains realized in net income 1,648 1,166 5,250 2,186 ---------------------- ----------------------- Other comprehensive income (loss), net of taxes (19,296) 1,189 (28,456) (178) ---------------------- ----------------------- Comprehensive Income $ 19,612 25,415 9,948 53,421 ====================== ======================= Basic net income per share: Income before extraordinary item $ 0.43 0.29 0.48 0.64 Extraordinary item -- -- (0.06) 0.00 ---------------------- ----------------------- Basic net income after extraordinary charge $ 0.43 0.29 0.42 0.64 ====================== ======================= Diluted net income per share: Income before extraordinary item 0.42 0.28 0.48 0.63 Extraordinary item -- -- (0.06) 0.00 ---------------------- ----------------------- Diluted net income after extraordinary charge $ 0.42 0.28 0.42 0.63 ====================== ======================= Dividends paid $ 0.18 0.16 0.36 0.32 Weighted-average shares outstanding - basic 91,049 84,665 91,028 84,026 Weighted-average shares outstanding - diluted 92,311 86,296 92,344 85,785
See accompanying notes to consolidated financial statements. Certain previously reported amounts may have been reclassified to conform to current reporting practices. 6
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ FIRSTMERIT CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands except per share data) - ------------------------------------------------------------------------------------------------------------------------------------ Six months ended June 30, 1999 and Accumulated years ended 1998 and 1997 Other Preferred Common Capital Comprehensive Stock Stock Surplus Income - ------------------------------------------------------------------------------------------------------------------------------ Balance at Year Ended 1996 $ 22,693 114,149 64,462 (3,396) Net income -- -- -- -- Cash dividends - common stock ($0.61 per share) -- -- -- -- Stock options exercised/debentures or preferred stock converted (12,776) 4,182 11,738 -- Shares issued - acquisition -- 549 4,911 -- Treasury shares purchased -- -- -- -- Stock dividends -- 1,013 (1,013) -- Market adjustment investment securities -- -- -- 7,999 Other -- -- 199 -- - ------------------------------------------------------------------------------------------------------------------------------ Balance at Year Ended 1997 9,917 119,893 80,297 4,603 Net income -- -- -- -- Cash dividends - common stock ($0.66/share) and preferred stock -- -- -- -- Acquisition adjustment of fiscal year -- -- -- -- Stock options exercised/debentures or 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 December 31, 1998 9,299 122,387 117,845 5,858 Net income -- -- -- -- Cash dividends - common stock ($0.36 per share) -- -- -- -- Cash dividends - preferred stock -- -- -- (171) Stock options exercised/debentures or preferred stock converted (5,253) 5,596 115 -- Treasury shares purchased -- -- -- -- Market adjustment investment securities -- -- -- (28,456) Other -- (45) -- -- - ------------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 1999 - Unaudited $ 4,046 127,938 117,960 (22,598) ==============================================================================================================================
Total Retained Treasury Shareholders' Earnings Stock Equity - ----------------------------------------------------------------------------------------------------------------- Balance at Year Ended 1996 582,519 (68,944) 711,483 Net income 114,708 -- 114,708 Cash dividends - common stock ($0.61 per share) (44,136) -- (44,136) Stock options exercised/debentures or preferred stock converted (1,428) 1,616 3,332 Shares issued - acquisition 1,499 -- 6,959 Treasury shares purchased -- (51,147) (51,147) Stock dividends (5) (722) (727) Market adjustment investment securities -- -- 7,999 Other (1,250) 257 (794) - ----------------------------------------------------------------------------------------------------------------- Balance at Year Ended 1997 651,907 (118,940) 747,677 Net income 72,517 -- 72,517 Cash dividends - common stock ($0.66/share) and preferred stock (50,525) -- (50,525) Acquisition adjustment of fiscal year (1,857) -- (1,857) Stock options exercised/debentures or 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 -- -- 0 Market adjustment investment securities -- -- 1,255 Other (598) 4,870 7,760 - ----------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 668,837 (17,570) 906,656 Net income 38,405 -- 38,405 Cash dividends - common stock ($0.36 per share) (33,033) -- (33,033) Cash dividends - preferred stock (171) -- (171) Stock options exercised/debentures or preferred stock converted -- 8,845 9,303 Treasury shares purchased -- (27,354) (27,354) Market adjustment investment securities -- -- (28,456) Other 409 788 1,152 - ----------------------------------------------------------------------------------------------------------------- Balance at June 30, 1999 - Unaudited 674,447 (35,291) 866,502 =================================================================================================================
See accompanying notes to the consolidated financial statements. 7 FIRSTMERIT CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Six Months Ended June 30, 1999 and 1998
(in thousands) 1999 1998 -------- ------- Operating Activities - -------------------- Net income $38,404 53,599 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 26,055 14,308 Provision for depreciation and amortization 9,782 9,019 Amortization of investment securities premiums, net 1,275 653 Amortization of income for lease financing (6,384) (5,632) Gains on sales of investment securities, net (8,077) (3,363) Deferred federal income taxes (3,337) (3,288) Increase in interest receivable (18,733) (1,170) Increase in interest payable 4,293 124 Amortization of values ascribed to acquired intangibles 5,611 3,119 Other increases (672) (145,541) ------- -------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 48,217 (78,172) ------- -------- Investing Activities - -------------------- Dispositions of investment securities: Available-for-sale--sales 385,912 348,885 Available-for-sale--maturities 286,190 286,239 Purchases of investment securities available-for-sale (461,595) (912,251) Net decrease in federal funds sold 30,359 52,691 Net increase in loans and leases, except sales (749,863) (792,018) Sales of loans -- 308,417 Purchases of premises and equipment (13,204) (29,593) Sales of premises and equipment 7,349 770 ------- -------- NET CASH USED BY INVESTING ACTIVITIES (514,852) (736,880) ------- -------- Financing Activities - -------------------- Net decrease in demand, NOW and savings deposits (250,292) (6,209) Net increase in time deposits 9,205 681,096 Net increase in securities sold under repurchase agreements and other borrowings 708,287 81,830 Proceeds from mandatorily redeemable preferred securities -- 50,000 Cash dividends (33,204) (23,655) Purchase of treasury shares (27,354) (26,037) Treasury shares reissued--acquisition -- 115,655 Treasury shares reissued--public offering -- 1,765 Proceeds from exercise of stock options 9,303 2,414 ------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 415,945 876,859 Increase (decrease) in cash and cash equivalents (50,690) 61,827 Cash and cash equivalents at beginning of year 327,997 211,138 ------- -------- Cash and cash equivalents at end of year $277,307 272,965 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: - ------------------------------------------------- Cash paid during the year for: Interest, net of amounts capitalized $71,730 99,844 Income taxes $18,967 35,036 ======== ========
See accompanying notes to consolidated financial statements. 8 FIRSTMERIT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1999, December 31, 1998 and June 30, 1998 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, Signal Capital Trust I, FirstMerit Community Development Corporation, FirstMerit Credit Life Insurance Company, Mobile Consultants, Inc., and SF Development Corp. 2. Acquisitions and Merger-related Costs - 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 million. CoBancorp, Inc. ("COBI") 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 3.897 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 following pro forma information is not necessarily indicative of the results which actually would have been obtained if the merger had been consummated in the past or which may be obtained in the future.
- ------------------------------------------------------------------------------------------ Six months ended June 30, 1998 for FirstMerit and three months ended March 31, 1998 for CoBancorp. CoBancorp results from April 1, 1998 to May 21, 1998 could not be isolated and are not included in the following table. CoBancorp results from May 22, 1998 (the date of merger) through June 30, 1998 are included in the FirstMerit totals. - ------------------------------------------------------------------------------------------ Pro Forma Firstmerit CoBancorp Adjustments Combined - ------------------------------------------------------------------------------------------ Interest income $308,779 11,942 354 321,075 - ------------------------------------------------------------------------------------------ Net interest income 171,045 7,295 -1,151 177,189 - ------------------------------------------------------------------------------------------ Net income 53,599 1,307 -1,913 52,993 - ------------------------------------------------------------------------------------------ Weighted average diluted shares 85,785 - ------------------------------------------------------------------------------------------ Earnings per diluted share $0.62 - ------------------------------------------------------------------------------------------
On September 14, 1998, FirstMerit closed on the secondary underwritten public offering of 1.38 million shares of FirstMerit Common Stock. The reissuance of these shares was necessary to allow FirstMerit to treat the Security First merger as a pooling-of-interests for accounting purposes. 9 On October 23, 1998, the Corporation completed the acquisition of Security First Corp. ("Security First"), a $678 million holding company headquartered in Mayfield Heights, Ohio. 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 share of Security First common stock. At the time of the merger, the pooling-of-interests transaction was valued at $22.58 per share, or approximately $199 million. The accompanying consolidated financial statements, the notes thereto 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. In conjunction with the Security First acquisition, the Corporation incurred merger-related and conforming accounting expenses of approximately $17.2 million, before taxes, or $12.8 million after taxes. The components of these costs and the remaining unpaid amounts at December 31, 1998, March 31, 1999 and June 30, 1999 are shown in the following table. The remaining liability at June 30, 1999 is expected to be paid during 1999 and is not expected to have any adverse effect on liquidity.
Dollars in thousands - -------------------------------------------------------------------------------------------- Remaining Remaining Remaining Costs Liability Liability Liability Accured December 31, March June 30 Description of Cost in 1998 1998 31, 1999 1999 - -------------------------------------------------------------------------------------------- Salary, wages and benefits $ 1,689 50 42 42 - -------------------------------------------------------------------------------------------- Occupancy and equipment expense 552 511 482 475 - -------------------------------------------------------------------------------------------- Loan conversion expense 1,516 1,031 844 776 - -------------------------------------------------------------------------------------------- Professional services 4,450 1,467 -- -- - -------------------------------------------------------------------------------------------- Other operating expenses 1,576 1,196 1,417 1,390 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- TOTAL OTHER EXPENSES 9,783 4,255 2,785 2,683 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- Reduction of other operating income 89 -- -- -- - -------------------------------------------------------------------------------------------- Provision for loan losses conforming entry 7,300 -- -- -- - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- Totals $17,172 4,255 2,785 2,683 - --------------------------------------------------------------------------------------------
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 10 consolidated financial statements, the notes thereto 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. In conjunction with the Signal acquisition, the Corporation incurred merger-related and conforming accounting expenses of approximately $43.8 million, before taxes, or $32.3 million after taxes. The components of these costs and the remaining unpaid amounts at March 31, 1999 and June 30, 1999 are shown in the following table. The unpaid liability at June 30, 1999 is expected to be paid during the remainder of 1999 and is not expected to have a material impact on liquidity. Dollars in thousands
- ----------------------------------------------------------------------------------------------- Remaining Remaining Description Costs Liability Liability of Cost Accrued March 31, June 30, 1st Q 1999 1999 1999 - ----------------------------------------------------------------------------------------------- Salary, wages and benefits $ 7,736 1,555 - ----------------------------------------------------------------------------------------------- Loan conversion expense 7,016 1,663 1,126 - ----------------------------------------------------------------------------------------------- Professional services 8,856 295 - ----------------------------------------------------------------------------------------------- Other operating expenses 10,014 6,483 5,857 - ----------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- TOTAL OTHER EXPENSES 33,622 9,996 6,983 - ----------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- Provision for loan losses conforming entry 10,200 - ----------------------------------------------------------------------------------------------- Totals $43,822 9,996 6,983 - -----------------------------------------------------------------------------------------------
11 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. 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-month and six-month periods ended June 30, 1999. In the Earnings Summary and other sections of Management's Discussion and Analysis, these same income statement categories and ratios are calculated excluding merger and other unusual expenses.
----------------------------------------------------------------------------------------------------------------- SuperCommunity Corporate 1999 Banking Parent/Other Adjs/Elims Consolidated ----------------------------------------------------------------------------------------------------------------- (in thousands) 2Q YTD 2Q YTD 2Q YTD 2Q YTD ----------------------------------------------------------------------------------------------------------------- OPERATIONS: ----------------------------------------------------------------------------------------------------------------- Net interest income $103,289 199,161 -1,313 -2,738 -9 -9 101,967 196,414 ----------------------------------------------------------------------------------------------------------------- Provision for possible loan losses 9,392 25,610 265 445 --- --- 9,657 26,055 ----------------------------------------------------------------------------------------------------------------- Other income 34,962 71,810 10,337 18,508 -8,875 -15,845 36,424 74,473 ----------------------------------------------------------------------------------------------------------------- Other expenses 74,501 179,934 7,314 14,266 -8,885 -15,854 72,930 178,346 ----------------------------------------------------------------------------------------------------------------- Income before extraordinary charge 33,572 39,921 35,208 41,885 -29,872 -37,555 38,908 44,251 ----------------------------------------------------------------------------------------------------------------- Net income (loss) $33,572 34,074 35,208 41,885 -29,872 -37,555 38,908 38,404 ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- (in billions) ----------------------------------------------------------------------------------------------------------------- AVERAGES: ----------------------------------------------------------------------------------------------------------------- Assets NA 9,187 NA 1,115 NA -1,125 NA 9,177 ----------------------------------------------------------------------------------------------------------------- Loans NA 6,694 NA 15 NA -7 NA 6,702 ----------------------------------------------------------------------------------------------------------------- Earnings assets NA 8,517 NA 1,006 NA -1,050 NA 8,473 ----------------------------------------------------------------------------------------------------------------- Deposits NA 6,778 NA --- NA -59 NA 6,719 ----------------------------------------------------------------------------------------------------------------- Shareholders' equity NA 0.828 NA 0.933 NA -0.855 NA 0.906 ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- RATIOS: ----------------------------------------------------------------------------------------------------------------- ROE NA 8.29% NA NM NA NM 17.43% 8.55% ----------------------------------------------------------------------------------------------------------------- ROA NA 0.75% NA NM NA NM 1.67% 0.84% ----------------------------------------------------------------------------------------------------------------- Efficiency ratio* NM NM NA NM NA NM 51.13% 52.47% ----------------------------------------------------------------------------------------------------------------
NM - Not Meaningful NA - Not available due to limited average balance information maintained by acquired companies. * - Adjusted for merger-related and conforming expenses and extraordinary item Note: 1998 information is not presented due to limited average balance and business line information maintained by certain acquired companies. 12 The table below presents estimated revenues from external customers, by product and service group for the 1999 second quarter and year-to-date periods:
- ----------------------------------------------------------------------------------------------- Three months ended June 30, 1999 (in thousands) Retail Commercial Trust Services Total - ---------------------------------------------------------------------------------------------- Interest and fees $ 97,097 89,036 4,595 190,728 - ---------------------------------------------------------------------------------------------- Service charges 11,725 2,394 -- 14,119 - ---------------------------------------------------------------------------------------------- Loan sales/service 1,855 -- -- 1,855 - ---------------------------------------------------------------------------------------------- Totals $110,677 91,430 4,595 206,702 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Six months ended June 30, 1999 - ---------------------------------------------------------------------------------------------- (in thousands) Retail Commercial Trust Services Total - ---------------------------------------------------------------------------------------------- Interest and fees $195,195 175,763 8,781 379,739 - ---------------------------------------------------------------------------------------------- Service charges 21,608 4,835 -- 26,443 - ---------------------------------------------------------------------------------------------- Loan sales/service 3,863 -- -- 3,863 - ---------------------------------------------------------------------------------------------- Totals $220,666 180,598 8,781 410,045 - ----------------------------------------------------------------------------------------------
4. Earnings per Share - Primary and Diluted earnings per share were calculated as follows:
- -------------------------------------------------------------------------------------------------- EARNINGS PER SHARE CALCULATION 1999 1998 - -------------------------------------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30: - -------------------------------------------------------------------------------------------------- Income before extraordinary charge $38,908 24,226 - -------------------------------------------------------------------------------------------------- Net income (loss) 38,908 24,226 - -------------------------------------------------------------------------------------------------- Less: preferred stock dividends -84 0 - -------------------------------------------------------------------------------------------------- Net income (loss) available to common shareholders $38,824 24,226 - -------------------------------------------------------------------------------------------------- Average common shares outstanding 91,048,773 84,665,123 - -------------------------------------------------------------------------------------------------- EARNINGS PER BASIC COMMON SHARE $0.43 0.29 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Net income (loss) available to common shareholders $38,824 24,226 - -------------------------------------------------------------------------------------------------- Add: preferred stock dividends 84 0 - -------------------------------------------------------------------------------------------------- Add: interest expense on convertible bonds, net 18 51 - -------------------------------------------------------------------------------------------------- Income (loss) available to common shareholders $38,926 24,277 - -------------------------------------------------------------------------------------------------- Average common shares outstanding 91,048,773 84,665,123 - -------------------------------------------------------------------------------------------------- Equivalents from stock options* 653,245 1,631,000 - -------------------------------------------------------------------------------------------------- Equivalents from convertible debentures 142,214 - -------------------------------------------------------------------------------------------------- Equivalents from convertible preferred securities 466,540 - -------------------------------------------------------------------------------------------------- Avg common stock and equivalents outstanding 92,310,772 86,296,425 - -------------------------------------------------------------------------------------------------- EARNINGS PER DILUTED COMMON SHARE $0.42 0.28 - --------------------------------------------------------------------------------------------------
13
- -------------------------------------------------------------------------------------------------- EARNINGS PER SHARE CALCULATION 1999 1998 - -------------------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30: - -------------------------------------------------------------------------------------------------- Income before extraordinary charge $44,251 53,599 - -------------------------------------------------------------------------------------------------- Net income (loss) 38,404 53,599 - -------------------------------------------------------------------------------------------------- Less: preferred stock dividends -171 -175 - -------------------------------------------------------------------------------------------------- Net income available to common shareholders $38,223 53,424 - -------------------------------------------------------------------------------------------------- Average common shares outstanding 91,028,180 84,026,385 - -------------------------------------------------------------------------------------------------- EARNINGS PER BASIC COMMON SHARE 0.42 0.64 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Net income available to common shareholders $38,223 53,424 - -------------------------------------------------------------------------------------------------- Add: preferred stock dividends 171 175 - -------------------------------------------------------------------------------------------------- Add: interest expense on convertible bonds, net 39 128 - -------------------------------------------------------------------------------------------------- Income used in diluted share calculation $38,433 53,727 - -------------------------------------------------------------------------------------------------- Average common shares outstanding 91,028,180 84,026,385 - -------------------------------------------------------------------------------------------------- Equivalents from stock options* 639,515 1,758,698 - -------------------------------------------------------------------------------------------------- Equivalents from convertible debentures 145,916 - -------------------------------------------------------------------------------------------------- Equivalents from convertible preferred securities 530,743 - -------------------------------------------------------------------------------------------------- Avg common stock and equivalents outstanding 92,344,354 85,785,083 - -------------------------------------------------------------------------------------------------- EARNINGS PER DILUTED COMMON SHARE 0.42 0.63 - --------------------------------------------------------------------------------------------------
* - Breakout of stock equivalents was not available for the 1998 periods. 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 as either assets or liabilities in the Balance Sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge to various exposures. The accounting for changes in the fair value of a derivative (i.e., gains and losses) depends on the intended use of the derivative and its resulting designation. This statement WAS ORIGINALLY TO BE EFFECTIVE FOR ALL FISCAL QUARTERS BEGINNING AFTER JUNE 15, 1999. In July 1999, the FASB issued Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 an amendment of FASB Statement No. 133. The primary purpose of SFAS 137 was to postpone the implementation date of SFAS 133 by one year. As a result, the Corporation is required to implement SFAS 133 no later than the third quarter 2000. 6. Management believes the interim consolidated financial statements reflect all adjustments consisting only of normal recurring accruals, necessary for fair presentation of the June 30, 1999 and 1998 and December 31, 1998 statements of condition and the results of operations for the quarter and six-month periods ended June 30, 1999 and 1998. 7. 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, 1998. 14 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Average Consolidated Balance Sheet, Fully-tax Equivalent Interest Rates and Interest Differential (Dollars in thousands)
Three Months ended June 30, Year Ended December 31, --------------------------------------------------- ---------------------- 1999 1998 --------------------------------------------------- ----------------------- Average Average Average Balance Interest Rate Balance ---------------------------------------------------- --------- ASSETS Investment securities $1,718,124 25,718 6.00% 1,715,543 Federal funds sold 1,149 14 4.89% 44,878 Loans, net of unearned income 6,903,701 145,682 8.46% 6,131,665 Less allowance for possible loan losses 104,875 80,441 ---------- --------- ---------- Net loans 6,798,826 145,682 -- 6,051,224 Cash and due from banks 272,025 -- -- 204,353 Other assets 539,573 -- -- 504,577 ---------- --------- ---------- Total assets $9,329,697 171,414 -- 8,520,575 ========== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand- non-interest bearing $1,080,078 -- -- 1,083,354 Demand- interest bearing 694,590 1,725 1.00% 752,096 Savings 1,836,459 10,139 2.21% 1,600,122 Certificates and other time deposits 3,109,435 39,107 5.04% 3,019,637 ---------- --------- ---------- Total deposits 6,720,562 50,971 3.04% 6,455,209 Federal funds purchased, securities sold under agreements to repurchase and 1,538,493 17,332 4.52% 1,063,848 other borrowings Other liabilities 175,509 -- 159,653 Shareholders' equity 895,133 -- 841,865 ---------- --------- ---------- Total liabilities and shareholders' equity $9,329,697 68,303 -- 8,520,575 ========== ========= ========== Total earning assets $8,622,974 171,414 7.97% 7,892,086 ========== ========= ========== Total interest bearing liabilities $7,178,977 68,303 3.82% 6,435,703 ========== ========= ========== Net yield on earning assets 103,111 4.80% ========= ===== Interest rate spread 4.15% =====
Year ended December 31, Three Months ended June 30, ------------------------------------ ----------------------------------------------- 1998 1998 ------------------------------------ ----------------------------------------------- Average Average Average Interest Rate Balance Interest Rate ------------------------------------ ----------------------------------------------- ASSETS Investment securities 109,917 6.41% 1,787,231 28,240 6.34% Federal funds sold 2,400 5.35% 3,329 40 4.82% Loans, net of unearned income 533,732 8.70% 5,988,981 130,845 8.76% Less allowance for possible loan losses 76,033 ---------- ---------- ---------- Net loans 533,732 -- 5,912,948 130,845 -- Cash and due from banks -- -- 246,362 -- -- Other assets -- -- 432,721 -- -- ---------- ---------- ---------- Total assets 646,049 -- 8,382,591 159,125 -- ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand- non-interest bearing -- -- 869,547 -- -- Demand- interest bearing 13,222 1.76% 556,069 1,579 1.14% Savings 44,077 2.75% 1,476,348 8,762 2.38% Certificates and other time deposits 165,198 5.47% 3,459,774 44,916 5.21% ---------- ---------- ---------- Total deposits 222,497 3.45% 6,361,738 55,257 3.48% Federal funds purchased, securities sold under agreements to repurchase and 63,879 6.00% 1,028,093 15,383 6.00% other borrowings Other liabilities -- 190,770 -- Shareholders' equity -- 801,990 -- ---------- ---------- ---------- Total liabilities and shareholders' equity 286,376 -- 8,382,591 70,640 -- ========== ========== ========== Total earning assets 646,049 8.19% 7,779,541 159,125 8.20% ========== ========== ========== Total interest bearing liabilities 286,376 4.45% 6,520,284 70,640 4.35% ========== ========== ========== Net yield on earning assets 359,673 4.56% 88,485 4.56% ========== ========== ========== ========= Interest rate spread 3.74% 3.85% ========== =========
*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. 15 RESULTS OF OPERATIONS FirstMerit Corporation's 1999 second quarter net income was $38.9 million, a 60.6% increase over 1998 second quarter net income of $24.2 million. Excluding $4.8 million of costs associated with Signal Corp's acquisition of First Shenango Bancorp, Inc., second quarter 1998 net income was $29.0 million. Return on average equity (ROE) for the 1999 quarter was 17.43% compared to 12.12% last year. Return on average assets (ROA) for the quarter was 1.67% compared to 1.16% for 1998. Excluding the First Shenango Bancorp, Inc. merger-related expenses, ROE and ROA for the 1998 second quarter were 14.50% and 1.39%, respectively. For the six-month period ended June 30, 1999, net income was $38.4 million compared to $53.6 million for 1998's first half. ROE and ROA for the current six-month period were 8.55% and 0.84%, respectively. The comparable ratios for the 1998 six-month period were 13.93% and 1.33%. Excluding first quarter 1999 merger-related costs associated with the February 12, 1999 purchase acquisition of Signal Corp and the after-tax extraordinary item of $5.8 million, first-half net income was $76.5 million, up 31.1% from $58.4 million for 1998 (on a comparable basis). ROE and ROA on this same adjusted basis for the first half were 17.03% and 1.68%, respectively, compared to prior year's ratios of 15.17% and 1.45%. The results of CoBancorp, Inc., acquired by the Corporation in a purchase transaction on May 22, 1998, are included in the entire 1999 periods and in the 1998 totals from the acquisition date through June 30, 1998. Net interest income on a fully tax-equivalent (FTE) basis was $103.1 million for the second quarter of 1999, a gain of 16.5% above the $88.5 million reported last year. Growth in average earning assets was 10.8% since June 30, 1998, reaching $8.6 billion. The net interest margin for the 1999 second quarter was 4.80%, up 24 basis points from 4.56% last year. For the first six months of 1999, net interest income FTE rose 15.2% from $172.5 million to $198.7 million. For the same six-month period, the net interest margin was 4.73% compared to 4.59% in 1998. Excluding securities gains/losses from each quarter, noninterest income was $33.9 million compared to $32.1 million the prior year, an improvement of 5.6%. For the six-month period, noninterest income was up 5.2% above 1998 levels, accounting for 25.0 % of net revenue compared to 26.8% of net revenue for the prior year period. Second quarter 1999 operating expenses were $72.9 million, a decline of 6.1% from the prior year level of $77.7 million. The $4.8 million decline was a result of higher intangible amortization expense and equipment expense in 1999 that was more than offset by the $7.3 million merger-related charge taken during the second quarter of 1998. The second quarter 1999 efficiency ratio was 51.13% compared to 56.79% for the 1998 adjusted quarter. The "lower is better" efficiency ratio indicates the percentage of each dollar of profit used to cover operating costs. For the 16 first six months of 1999, operating expenses were $178.4 million versus $144.5 in 1998. Excluding merger-related expenses in both year-to-date periods, operating expenses for the six months ended June 30, 1999 totaled $144.7 compared to $137.2 million for the 1998 second half. The adjusted first-half efficiency ratios for 1999 and 1998 were 52.47% and 56.91%, respectively. Assets totaled $9.5 billion at quarter end, with earning assets comprising 92% of the total. At June 30, 1999, total loans were $7.1 billion, a gain of 14.7% above 1998 quarter-end levels. On an average basis, total loans were $6.9 billion, 15.3% above 1998 second quarter levels. Average commercial loans grew 21.7% to account for 40.9% of the portfolio, up from 38.7%. Meanwhile, mortgage loans declined 7.13% to comprise 24.3% of the portfolio, down from 30.1%. The Corporation continues to shift its loan mix from lower-yielding mortgage loans to higher-yielding commercial and consumer credits. The provision for loan losses was $9.7 million, an increase of 18.6% above second quarter 1998, consistent with growth of the portfolio and changes in loan mix. For the six-month period, the provision was $26.1 million compared to $14.3 million the prior year. Excluding a merger-related provision entry of $10.2 million recorded in the 1999 first quarter, the provision for loan losses for the six months ended June 30, 1999 was $15.9 million. The allowance for loan losses as a percent of period-end loans increased to 1.50% at the end of the second quarter, compared to 1.31% percent June 30, 1998. At June 30, 1999, non-performing assets were $21.4 million, or 0.30% of total loans and other real estate, compared to $27.9 million, or 0.45%, for the same quarter last year. The loan loss allowance (to nonperforming assets) coverage ratio was 5.0 times at quarter end compared to 2.9 times at June 30, 1998. Total deposits at June 30, 1999 and 1998 were $6.6 billion and $6.7 billion, respectively. Demand, savings and money market accounts comprised 53% of total deposits at June 30, 1999 compared to 47% at June 30, 1998. Certificates and other time deposits ("CDs") made up 47% of total deposits at June 30, 1999 and 53% at June 30, 1998. Other borrowings at June 30, 1999 were $1.9 billion, up from $1.1 billion a year ago. Shareholders' equity totaled $866.5 million at quarter end compared to $870.9 million at June 30, 1998. Earnings during the year continue to be paid out in the form of dividends and absorbed by merger-related expenses. Other items that affected shareholders' equity were treasury stock repurchases and the market value adjustment of securities. Common stock dividends paid were $16.6 million in the second quarter, or $0.18 per share, representing a payout ratio of 42.9%. At June 30, 1999, there were 90.4 million shares of common stock outstanding. On April 29, 1999, the Corporation began a new share repurchase program to repurchase up to 1.65 million, or approximately 1.8%, of FirstMerit's outstanding common stock. The program will be in effect for two years and will give the Corporation more flexibility in managing capital levels allowing any excess capital to be returned to shareholders. 17 Diluted earnings per share for the second quarter was $0.42 compared to last year's quarterly earnings of $0.28. For the six months ended June 30, 1999, diluted earnings per share was $0.42 compared to $0.63 recorded for the 1998 first half. Excluding merger-related costs in both six-month periods and the extraordinary charge in the 1999 first quarter, diluted ("core") earnings per share for 1999 was $0.83 compared to $0.69 for 1998. The components of change in per share income and core earnings for the three-month and six-month periods ended June 30, 1999 and 1998 are summarized in the following table:
CHANGES IN EARNINGS PER SHARE - ----------------------------- Reported CORE EARNINGS Reported CORE EARNINGS Three months Three months ended Six months Six months ended ended ended June 30, June 30, June 30, June 30, 1999/1998 1999/1998 1999/1998 1999/1998 -------------------------------------------------------------------- Diluted net income/core earnings per share June 30, 1998 $0.28 0.34 0.63 0.69 Increases (decreases) due to: Net interest income - taxable equivalent 0.16 0.16 0.28 0.28 Provision for possible loan losses -0.02 -0.02 -0.13 -0.01 Other income 0.04 0.04 0.08 0.08 Other expenses 0.05 -0.03 -0.37 -0.08 Federal income taxes - taxable equivalent -0.06 -0.03 0.02 -0.07 Extraordinary item - extinguishment of debt -0.06 Change in share base -0.03 -0.04 -0.03 -0.06 ----------------------------------------------------------- Net change in diluted net income per share 0.14 0.08 -0.21 0.14 ----------------------------------------------------------- Diluted net income per share June 30, 1999 $0.42 0.42 0.42 0.83 ===========================================================
18 NET INTEREST INCOME Net interest income, the Corporation's principal source of earnings, is the difference between the interest income generated by earning assets (primarily loans and investment securities) and the total interest paid on interest bearing funds (namely 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 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 June 30, 1999 was $103.1 million compared to $88.5 million for the same period one year ago, an increase of $14.6 million. The increase occurred as interest income increased $12.3 million and interest expense declined $2.3 million. Of the $12.3 million increase in interest income, loan volume accounted for $19.3 million while unfavorable loan and securities rate variances lowered interest income by $5.9 million. Interest expense decreased as higher borrowing volumes added $3.7 million to interest expense but lower rates paid customers, compared to second quarter last year, lessened interest expense by $6.0 million. For the year-to-date period, net interest income increased $26.3 million to $198.7 million. The net increase occurred as interest income rose $27.7 million and interest expense increased $1.4 million. Higher loan volume added $35.2 million to interest income, compared to last year's first half, and lower rates on interest-bearing assets lessened interest income by $9.3 million. Interest expense increased on a net basis as lower interest rates paid customers lessened interest expense by $7.3 million but interest paid on higher funding volumes resulted in an increase in interest expense of $8.7 million. The following schedule illustrates in more detail the change in net interest income FTE by rate and volume components for both interest earning assets and interest bearing liabilities. 19 CHANGES IN NET INTEREST DIFFERENTIAL - FULLY-TAX EQUIVALENT RATE/VOLUME ANALYSIS (DOLLARS IN THOUSANDS)
Quarters ended Six Months Ended June 30, June 30, 1999 and 1998 1999 and 1998 ------------- ------------- Increase (Decrease) Increase (Decrease) Interest Income/Expense Interest Income/Expense ----------------------- ----------------------- Volume Yield Rate Total Volume Yield Rate Total -------------------------------------------------------------------------------- INTEREST INCOME Investment Securities $ (1,041) (1,481) (2,522) 1,820 (512) 1,308 Loans 19,302 (4,465) 14,837 35,182 (8,785) 26,397 Federal funds sold (27) 1 (26) (43) 4 (39) Total interest income 18,234 (5,945) 12,289 36,959 (9,293) 27,666 -------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits: Demand-interest bearing 344 (198) 146 604 (795) (191) Savings 1,988 (611) 1,377 4,795 (1,085) 3,710 Certificates and other time deposits (4,406) (1,403) (5,809) (6,885) (2,053) (8,938) Federal Funds Purchased, REPOs & other borrowings 5,750 (3,801) 1,949 10,205 (3,370) 6,835 -------------------------------------------------------------------------------- Total interest expense 3,676 (6,013) (2,337) 8,719 (7,303) 1,416 -------------------------------------------------------------------------------- Net interest income $ 14,558 68 14,626 28,240 (1,990) 26,250 ================================================================================
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 following schedule shows the relationship of the tax equivalent adjustment and the net interest margin. 20 NET INTEREST MARGIN (DOLLARS IN THOUSANDS)
Quarters Ended Six Months Ended ---------------------------------------------------- June 30, June 30, 1999 1998 1999 1998 ------------------------- ------------------------- Net interest income per financial statements $ 101,975 87,765 196,422 171,045 Tax equivalent adjustment 1,136 720 2,310 1,437 ------------------------- ------------------------- Net interest income - FTE $ 103,111 88,485 198,732 172,482 ========================= ========================= Average earning assets $8,622,974 7,779,541 8,473,480 7,578,018 ========================= ========================= Net interest margin 4.80% 4.56% 4.73% 4.59% ========================= =========================
The CoBancorp, Inc. acquisition was completed on May 22, 1998. As a result, 1998 results only include CoBancorp balances for the forty-day period from May 22, 1998 through June 30, 1998 while CoBancorp balances are included in the entire 1999 periods. 21 OTHER INCOME Other income for the quarter ended June 30, 1999 was $36.4 million, an increase of $2.5 million or 8%, over the $33.9 million earned during the same period last year. Excluding securities sales, the increase in other income was $1.8 million, or 6%. For the six-month period, other income totaled $74.5 million, up from $66.5 million a year ago. Trust department income for the second quarter was $4.6 million, up $0.4 million from the $4.2 million earned one year ago. Service charges on depositors' accounts increased 8.8% to $10.6 million from $9.7 million for last year's second quarter. Credit card fees, including merchant services, increased 42.6% to $6.8 million for the quarter compared to $4.8 million for the three months ended June 30, 1998. Other service fees, including Automated Teller Machine (ATM) revenue, rose from $2.7 million during the 1998 second quarter to $3.5 million for same 1999 period. Manufactured housing income was $1.4 million, approximately 60% of the $2.5 million recorded last year. First-half 1999 results compared to the six months ended June 30, 1998 were as follows: trust department income increased 16.1%; service charges on depositors' accounts increased 4.8%; credit card fees increased 41.5%; other service fees, which include ATM revenue, increased 41.9%; and manufactured housing income declined by half from $5.6 million to $2.8 million. In banking, other income is an important complement to net interest income as it provides a source of revenues not sensitive to the interest rate environment. 22 OTHER EXPENSES Other expenses were $72.9 million for the second quarter, a decrease of $4.7 million or 6.1%, from the $77.7 million recorded during the same quarter last year. Excluding merger-related expenses of $7.3 million in 1998, other expenses were $70.3 million. The increase during the 1999 second quarter from adjusted 1998 other expenses totaled $2.6 million or 3.7%. The "lower-is-better" efficiency ratio for the second quarter was 51.13% compared to the adjusted ratio of 56.79% a year ago. The adjusted efficiency ratios for the six-month periods were 52.47% and 56.91% for 1999 and 1998, respectively. The second quarter efficiency ratio of 51.13% indicates that it took 51.13 cents of operating costs to generate every dollar of profit. Salaries, wages, pension and employee benefits ("Salaries and benefits"), the largest component of other expenses, totaled $33.1 for second quarter 1999 compared to last year's expense of $33.2 million. For the six-month period, salaries and benefits rose from $64.8 million in 1998 to $75.4 million in 1999. Excluding $7.3 million of personnel merger costs taken in the 1999 first quarter, six-month salaries and benefits were $68.1 million, an increase of 5.0% from last year's $64.8 million. Other operating expenses for the 1999 second quarter were $27.1 million, down $6.6 million from $33.7 million recorded last year. Included in 1998's other operating expenses were merger-related charges of $7.3 million related to the acquisition of First Shenango Bancorp, Inc. Excluding merger-related charges for both periods, first-half 1999 other operating expenses were $52.7 million compared to $51.1 million for 1998. 23 FINANCIAL CONDITION 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:
June 30, 1999 ------------- Gross Gross Book Unrealized Unrealized Market Value Gains Losses Value ---------- ---------- ---------- ---------- U.S. Treasury securities and U.S. Government agency obligations $ 735,772 546 14,710 721,608 Obligations of state and political subdivisions 127,803 788 766 127,825 Mortgage-backed securities 508,392 239 16,889 491,742 Other securities 293,600 3,321 6,947 289,974 ---------- ---------- ---------- ---------- $1,665,567 4,894 39,312 1,631,149 ========== ========== ========== ==========
Book Value Market Value ---------- ---------- Due in one year or less $ 94,992 95,170 Due after one year through five years 346,177 339,165 Due after five years through ten years 319,501 313,030 Due after ten years 904,897 883,784 ---------- ---------- $1,665,567 1,631,149 ========== ==========
The book value and market value of investment securities including mortgage-backed securities and derivatives at June 30, 1999, by contractual maturity, are shown in the preceding 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. 24 The carrying value of investment securities pledged to secure trust and public deposits and for purposes required or permitted by law amounted to approximately $1.3 billion at June 30, 1999 and $1.2 billion at December 31, 1998. 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 June 30, 1999 were $7.139 billion compared to $6.398 billion at December 31, 1998 and $6.222 billion at June 30, 1998. Average loans outstanding for the quarter ended June 30, 1999 were $6.904 billion, up $914.7 million or 15.3%, from $5.989 billion for the same quarter last year. The most notable increases occurred in commercial loans, up $503.8 million or 21.7%; manufactured housing loans, up $276.0 million or 198.6%; installment loans, up $159.6 million or 13.7%; home equity loans up $81.7 million or 27.3% and credit card outstandings up $8.5 million or 9.3%. Mortgage loan outstandings declined $128.6 million or 7.13% as the Corporation's loan mix continues to shift away from lower-yielding mortgage loans and toward higher-yielding commercial and consumer credits. Similar to the quarterly growth, 1999 year-to-date average loan outstandings totaled $6.710 billion, up $844.7 million or 14.4% from $5.865 billion for the prior year. Growth was noted in all categories except mortgage loans. Average outstanding loans for the quarter and six-month periods equaled 80.1% and 79.1% of average earning assets, respectively. ASSET QUALITY Total nonperforming assets, defined as nonaccrual loans, restructured loans and other real estate (ORE), totaled $21.4 million at June 30, 1999 or 0.30% of total outstanding loans and ORE. At December 31, 1998, nonperforming assets totaled $23.2 million or 0.36% of outstanding loans and ORE. At June 30, 1998, nonperforming assets were $27.9 million or 0.45% of outstanding loans and ORE. 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 25 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, and in conjunction with provisions within Statements No. 114 and No. 118, all nonaccrual and restructured commercial, agricultural, construction, and commercial real estate loans, meet the definition of impaired loans.
(Dollars in thousands) June 30, December 31 June 30, 1999 1998 1998 ------- ------- ------- Impaired Loans: Non-accrual $16,921 10,883 22,360 Restructured 83 85 1,887 ----------------------------------------------------------------------------------------------- Total impaired loans 17,004 10,968 24,247 ------- ------- ------- Other Loans: Non-accrual 2,577 8,456 2,658 Restructured -- -- -- ----------------------------------------------------------------------------------------------- Total other nonperforming loans 2,577 8,456 2,658 ----------------------------------------------------------------------------------------------- Total nonperforming loans 19,581 19,424 26,905 ----------------------------------------------------------------------------------------------- Other real estate owned (ORE) 1,814 3,789 954 ------- ------- ------- Total nonperforming assets 21,395 23,213 27,859 =============================================================================================== Loans past due 90 days or more accruing interest 22,375 18,911 11,829 =============================================================================================== Total nonperforming assets as a percent of total loans and ORE 0.30% 0.36% 0.45% ================================================================================================
N/A = Not Available 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. 26 ALLOWANCE FOR LOAN LOSSES The allowance for possible loan losses at June 30, 1999 totaled $106.8 million, or 1.50% of total loans outstanding compared to $96.1 million, or 1.50% and $81.2 million, or 1.31% at December 31, 1998 and June 30, 1998, respectively.
Dollars in thousands Six months ended Year ended Six months ended June 30, December 31, June 30, 1999 1998 1998 --------------------- ----------------------- --------------------- Allowance - beginning of period $ 96,149 67,736 67,736 Acquisition adjustment/other 1,012 8,215 8,215 Loans charged off: Commercial, financial, agricultural 6,866 3,894 928 Installment to individuals 15,741 26,277 13,231 Real estate 2,253 1,489 129 Lease financing 600 1,274 475 Total charge-offs 25,460 32,934 14,763 Recoveries: Commercial, financial, agricultural 2,674 1,930 644 Installment to individuals 5,967 8,285 4,350 Real estate 194 1,464 558 Lease financing 194 532 179 Total recoveries 9,029 12,211 5,731 Net charge-offs 16,431 20,723 9,032 Provision for possible loan losses 26,055 40,921 14,308 Allowance - end of period $106,785 96,149 81,227 Annualized net charge offs as a percent of average loans 0.49% 0.34% 0.31% Allowance for possible loan losses: As a percent of loans outstanding at end of period 1.50% 1.50% 1.31% As a multiple of annualized net charge offs 3.22X 4.64X 4.46X
27 DEPOSITS The following schedule illustrates the change in composition of the average balances of deposits and average rates paid for the noted periods.
(Dollars in thousands) Three months and year ended June 30, 1999 December 31, 1998 June 30, 1998 Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate ------------------------- ------------------------- ------------------------- Non-interest DDA $1,080,078 - 1,083,354 - 869,547 - Interest-bearing DDA 694,590 1.00% 752,096 1.76% 556,069 1.14% Savings deposits 1,836,459 2.21% 1,600,122 2.75% 1,476,348 2.38% CDs and other time 3,109,435 5.04% 3,019,637 5.47% 3,459,774 5.21% --------------- -------------- -------------- $6,720,562 3.04% 6,455,209 3.45% 6,361,738 3.48% =============== ============== ==============
Average CDs totaled $3.109 billion for the quarter ended June 30, 1999, down 10.1% from $3.460 billion for the 1998 quarter. On a percentage basis, average CDs were 43% of total interest bearing funds for the June 30, 1999 quarter and 53% for the same quarter last year; average savings deposits, including money market accounts, were 26% of interest bearing funds during the quarter ended June 30, 1999 and 23% for the same period last year; interest-bearing demand deposits was approximately 9% of interest bearing funds during both years' second quarters; and wholesale borrowings increased from 16% of interest-bearing funds during the three months ended June 30, 1998 to 21% for the June 30, 1999 quarter. During both second quarter periods, interest bearing liabilities funded approximately 83% of average earning assets. The following table summarizes the certificates and other time deposits in amounts of $100 thousand or more as of June 30, 1999 by time remaining until maturity.
(Dollars in Thousands) Amount Maturing in: Under 3 months $438,249 3 to 12 months 278,007 Over 12 months 166,085 ----------------- $882,331 =================
28 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. CAPITAL RESOURCES Shareholders' equity at June 30, 1999 totaled $866.5 million compared to $906.7 million at December 31, 1998 and $870.9 million at June 30, 1998. The following table reflects the various measures of capital:
As of As of June 30, December 31, 1999 1998 (In thousands) Total equity 866,502 9.13% 906,656 10.04% Common equity 862,456 9.09% 897,357 9.94% Tangible common equity (a) 704,236 7.55% 724,247 8.18% Tier 1 capital (b) 723,730 9.30% 774,303 10.46% Total risk-based capital (c) 824,526 10.55% 949,229 12.82% Leverage (d) 723,730 8.37% 774,303 8.91%
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 June 30, 1999 the Corporation's risk-based capital equaled 10.55% of risk adjusted assets, exceeding the minimum guidelines. The cash dividend of $0.18 paid in the second quarter has an indicated annual rate of $0.72 per share. 29 YEAR 2000 READINESS The Year 2000 issue is the result of computer programs being written using two digits rather than four to define an applicable year. Any of a company's hardware, date-driven automated equipment, or computer programs that have date sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This faulty recognition could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in normal business activities. The Corporation has based its plans on regulatory guidelines published by the Federal Financial Institutions Examination Council (FFIEC). The FFIEC considers five general phases: Awareness, Assessment, Renovation, Validation and Implementation. The five phases are explained below along with the status at June 30, 1999: Awareness: The Awareness phase defines the Year 2000 problem, gains executive level support and establishes an overall strategy. The Corporation began working on the Year 2000 issue in 1996 with identification of major vendors and their compliance status. Significant progress has been made in the implementation of the strategy for Year 2000 compliance. Executive Management has been proactive in the management of the project and contracted with consultants to assist in performing the assessment and formulating a strategy. The awareness phase has expanded to include a widespread customer awareness program to help educate customers on the Year 2000 issue and allow monitoring of the Corporation's progress. This phase has now been completed and continues with ongoing monitoring. Assessment: The Assessment phase defines the size and complexity of the problem and the magnitude of the effort to address Year 2000 issues. The Corporation completed the assessment phase for all mainframe and microcomputer systems during the first quarter of 1998. The Corporation has 82 mainframe applications of which 30 are considered "mission critical." The majority of the applications are vendor packages. The "mission critical" applications are given priority and all 30 are on schedule to be Year 2000 ready by December 31, 1998 or earlier. Significant microcomputer software and hardware upgrades for Year 2000 compliance are substantially completed. The assessment of non-information systems such as security systems, elevators, etc. was completed during the second quarter 1998. This phase has now been completed. Renovation: The purpose of the Renovation phase is to ensure all date routines have been corrected to properly address Year 2000 dates. The renovation phase has been completed for 100% of the Corporation's "mission critical" applications. That is, each mission critical application has been renovated or the vendor's Year 2000 software release has been installed. A few "non-mission critical" applications have received recent Year 2000 updates. These applications are being finalized and are in the validation stage. Renovation of in-house written lines of computer code is 100% complete. 30 Validation: The Validation phase consists of significant testing. Mission critical applications have been tested a number of times and further testing of these applications will continue throughout 1999. In addition to testing of mission critical applications, the Corporation has tested both in-house and vendor written systems as well as the various connections to other systems (internal and external). Non-information systems such as vaults and security systems have also been tested. Continued testing during 1999 will include integrated testing, system interfaces to third parties and non mission critical applications. Implementation: During the Implementation phase, systems are certified as Year 2000 compliant and placed into production. The Corporation has placed renovated systems into production. Another area of concern mentioned by the FFIEC is the area of contingency planning where alternative measures are enacted throughout the organization in event of a Year 2000-caused problem. All business areas reviewed departmental Year 2000 risks and finalized their contingency plans. Various potential Year 2000 scenarios have been identified and plans for each one have been developed. Contingency plans are complete for all significant banking areas. The Corporation continues to work very hard to ensure Year 2000 does not affect our customers. Substantial testing is occurring throughout 1999. The Corporation does not anticipate any interruptions in normal business activities. The Corporation's total Year 2000 readiness project costs and estimates to complete include the estimated costs and time associated with the impact of a third party vendor's Year 2000 issues and are based on presently available information. There can be no guarantees, however, that the systems and applications of other companies on which the Corporation's systems and applications rely will be timely converted or that a failure to convert by another company, or a conversion that is incompatible with the Corporation's systems and applications, would not have material adverse effect on the Corporation. The remaining costs of the Year 2000 readiness project are estimated at $0.9 million and are being funded through operating cash flows, which will be expensed as incurred over the remainder of 1999. These costs are not expected to have a material adverse effect on the Corporation's results of operations. As of June 30, 1999, the Corporation has incurred and expensed approximately $4.8 million related to the Year 2000 readiness project. At June 30, 1999, it appears the total cost of the project will be $5.7 million, approximately $0.4 million less than the $6.1 million reported in the first quarter 1999 10Q. 31 PART II. - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 21, 1999, the Registrant held its Annual Meeting of Shareholders for which the Board of Directors solicited proxies. At the Annual Meeting, the shareholders adopted all proposals stated in the Proxy Statement dated March 17, 1999. The proposals voted on and approved by the shareholders are as follows: 1. The election of five Class II directors, being:
For Against Abstain Karen S. Belden 76,728,335 * 1,111,845 R. Cary Blair 76,769,653 * 1,070,527 Robert W. Briggs 75,967,111 * 1,873,069 Gary G. Clark 76,661,610 * 1,178,570 Clifford J. Isroff 76,678,108 * 1,162,072
All other Class I and Class III directors continued in their positions. * Proxies provide that shareholders may either cast a vote for, or abstain from voting for, directors. 2. Approval of the proposal to amend the Corporation's Amended and Restated Articles of Incorporation to increase the authorized shares of Common Stock from 160 million to 300 million shares by a vote of 74,125,519 (81%) for, 2,831,735 (3%) against and 880,861 (1%) abstaining. 3. Approval of the proposal to adopt the FirstMerit Corporation 1999 Stock Plan by a vote of 67,074,007 (74%) for, 7,914,796 (8%) against and 1,572,607(2%) abstaining. 32 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 3.1 Amended and Restated Articles of Incorporation of FirstMerit Corporation, as amended (incorporated by reference from Exhibit 3.1 to the Form 10-K/A filed by the registrant on April 29, 1999) 3.2 Amended and Restated Code of Regulations of FirstMerit Corporation (incorporated by reference from Exhibit 3(b) to the Form 10-K filed by the registrant on April 9, 1998) 4.1 Shareholders Rights Agreement dated October 21, 1993, between FirstMerit Corporation and FirstMerit Bank, N.A., as amended and restated May 20, 1998 (incorporated by reference from Exhibit 4 to the Form 8-A/A filed by the registrant on June 22, 1998) 4.2 Instrument of Assumption of Indenture between FirstMerit Corporation and NBD Bank, as Trustee, dated October 23, 1998 regarding FirstMerit Corporation's 6 1/4% Convertible Subordinated Debentures, due May 1, 2008 (incorporated by reference from Exhibit 4(b) to the Form 10-Q filed by the registrant on November 13, 1998) 4.3 Supplemental Indenture, dated as of February 12, 1999, between FirstMerit and Firstar Bank Milwaukee, National Association, as Trustee relating to the obligations of the FirstMerit Capital Trust I, fka Signal Capital Trust I (incorporated by reference from Exhibit 4.3 to the Form 10-K filed by the registrant on March 22,1999) 4.4 Indenture dated as of February 13, 1998 between Firstar Bank Milwaukee National Association, as trustee and Signal Corp (incorporated by reference from Exhibit 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 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). 33 4.8 Form of 8.67% Junior Subordinated Deferrable Interest Debenture, Series B (incorporated by reference from Exhibit 4.7 to the Form S- 4 No. 333-52581-01, filed by FirstMerit Capital Trust I, fka Signal Capital Trust I, on May 13, 1998) 10.1 1982 Incentive Stock Option Plan of FirstMerit Corporation (incorporated by reference from Exhibit 4.2 to the Form S-8 (No. 33-7266) filed by the registrant on July 15, 1986) 10.2 Amended and Restated 1992 Stock Option Program of FirstMerit Corporation (incorporated by reference from Exhibit 10.2 to the Form 10-K filed by the registrant on February 24, 1998) 10.3 1992 Directors Stock Option Program (incorporated by reference from Exhibit 10.2 to the Form 10-K filed by the registrant on February 24, 1998) 10.4 FirstMerit Corporation 1995 Restricted Stock Plan (incorporated by reference from Exhibit (10)(d) to the Form 10-Q for the fiscal quarter ended March 31, 1995, filed by the registrant on May 15, 1995) 10.5 1997 Stock Option Program of FirstMerit Corporation (incorporated by reference from Exhibit 10.5 to the Form 10-K filed by the registrant on February 24, 1998) 10.6 1985 FirstMerit Corporation Stock Plan (CV) (incorporated by reference from Exhibit (10)(a) to the Form S-8 (No. 33-57557) filed by the registrant on February 1, 1995) 10.7 1993 FirstMerit Corporation Stock Plan (CV) (incorporated by reference from Exhibit (10)(b) to the Form S-8 (No. 33-57557) filed by the registrant on February 1, 1995) 10.8 Amended and Restated FirstMerit Corporation Executive Deferred Compensation Plan (incorporated by reference from Exhibit 10(h) to the Form 10-K filed by the registrant on February 25, 1997) 10.9 Amended and Restated FirstMerit Corporation Director Deferred Compensation Plan (incorporated by reference from Exhibit 10(i) to the Form 10-K filed by the registrant on February 25, 1997) 10.10 FirstMerit Corporation Executive Supplemental Retirement Plan (incorporated by reference from Exhibit 10(d) to the Form 10-K filed by the registrant on March 15, 1996) 34 10.10.1 Amended and Restated Membership Agreement with respect to the FirstMerit Corporation Executive Supplemental Retirement Plan (incorporated by reference from Exhibit 1039 to the Form 10-K filed by the registrant on March 22,1999) 10.11 FirstMerit Corporation Unfunded Supplemental Benefit Plan (incorporated by reference from Exhibit 10.11 to the Form 10-K filed by the registrant on February 24, 1998) 10.12 First Amendment to the FirstMerit Corporation Unfunded Supplemental Benefit Plan (incorporated by reference from Exhibit 10(v) to the Form 10-K filed by the registrant on March 2, 1995) 10.13 Supplemental Pension Agreement of John R. Macso (incorporated by reference from Exhibit 10.13 to the Form 10-K filed by the registrant on February 24, 1998) 10.14 FirstMerit Corporation Executive Committee Life Insurance Program Summary (incorporated by reference from Exhibit 10(w) to the Form 10-K filed by the registrant on March 2, 1995) 10.15 Long Term Disability Plan (incorporated by reference from Exhibit 10(x) to the Form 10-K filed by the registrant on March 2, 1995) 10.16 Employment Agreement dated October 23, 1998 for Charles F. Valentine (incorporated by reference from Exhibit 10(a) to the Form 10-Q filed by the registrant on November 13, 1998) 10.17 SERP Agreement dated October 23, 1998 for Charles F. Valentine (incorporated by reference from Exhibit 10(b) to the Form 10-Q filed by the registrant on November 13, 1998) 10.18 Employment Agreement dated October 23, 1998 for Austin J. Mulhern (incorporated by reference from Exhibit 10(c) to the Form 10-Q filed by the registrant on November 13, 1998) 10.19 SERP Agreement dated October 23, 1998 for Austin J. Mulhern (incorporated by reference from Exhibit 10(d) to the Form 10-Q filed by the registrant on November 13, 1998) 10.20 Employment Agreement of John R. Cochran, dated December 1, 1998 (incorporated by reference from Exhibit 10.20 to the Form 10-K filed by the registrant on March 22,1999) 10.21 Restricted Stock Award Agreement of John R. Cochran dated March 1, 1995 (incorporated by reference from Exhibit 10(e) to the Form 10-Q filed by the registrant on May 15, 1995) 35 10.22 Restricted Stock Award Agreement of John R. Cochran dated April 9, 1997 (incorporated by reference from Exhibit 10.18 to the Form 10-K filed by the registrant on February 24, 1998) 10.21.1 First Amendment to Restricted Stock Award Agreement for John R. Cochran (incorporated by reference from Exhibit 10.38 the Form 10-K filed by the registrant on March 22,1999) 10.23 Employment Agreement of Sid A. Bostic dated February 1, 1998 (incorporated by reference from Exhibit 10.19 to the Form 10-K filed by the registrant on February 24, 1998) 10.23.1 First Amendment to Employment Agreement of Sid A. Bostic dated April 20, 1999 (incorporated by reference from Exhibit 10.23.1 to the Form 10-Q filed by the Registrant on May 14, 1999) 10.24 Restricted Stock Award Agreement of Sid A. Bostic dated February 1, 1998 (incorporated by reference from Exhibit 10.20 to the Form 10-K filed by the registrant on February 24, 1998) 10.24.1 First Amendment to Restricted Stock Award Agreement of Sid A. Bostic dated April 20, 1999 (incorporated by reference from Exhibit 10.24.1 to the Form 10-Q filed by the Registrant on May 14, 1999) 10.25 Form of FirstMerit Corporation Termination Agreement (incorporated by reference from Exhibit 10.25 to the Form 10-K filed by the registrant on March 22,1999) 10.25.1 First Amendment to FirstMerit Corporation Change of Control Termination Agreement of Sid A. Bostic dated April 20, 1999 (incorporated by reference from Exhibit 10.25.1 to the Form 10-Q filed by the Registrant on May 14, 1999) 10.26 Form of Director and Officer Indemnification Agreement and Undertaking (incorporated by reference from Exhibit 10(s) to the Form 8-K/A filed by the registrant on April 27, 1995) 10.27 FirstMerit 1987 Stock Option and Incentive Plan (SF) (incorporated by reference from Exhibit 4.2 to the Form S-8/A (No. 333-57439) filed by the registrant on October 26, 1998) 10.28 FirstMerit 1996 Stock Option and Incentive Plan (SF) (incorporated by reference from Exhibit 4.3 to the Form S-8/A (No. 333-57439) filed by the registrant on October 26, 1998) 10.29 FirstMerit 1994 Stock Option Plan (SF) (incorporated by reference from Exhibit 4.4 to the Form S-8/A (No. 333-57439) filed by the registrant on October 26, 1998) 36 10.30 FirstMerit 1989 Stock Incentive Plan (SB)(incorporated by reference from Exhibit 4.6 to the Form S-8/A (No. 333-63797) filed by the registrant on February 12, 1999) 10.31 FirstMerit Amended and Restated Stock Option and Incentive Plan (SG) (incorporated by reference from Exhibit 4.2 to the Form S- 8/A (No. 333-63797) filed by the registrant on February 12, 1999) 10.32 FirstMerit Non-Employee Director Stock Option Plan (SG) (incorporated by reference from Exhibit 4.3 to the Form S-8/A (No. 333-63797) filed by the registrant on February 12, 1999) 10.33 FirstMerit 1997 Omnibus Incentive Plan (SG) (incorporated by reference from Exhibit 4.4 to the Form S-8/A (No. 333-63797) filed by the registrant on February 12, 1999) 10.34 FirstMerit 1993 Stock Option Plan (FSB) (incorporated by reference from Exhibit 4.5 to the Form S-8/A (No. 333-63797) filed by the registrant on February 12, 1999) 10.35 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) 10.36 FirstMerit Corporation 1999 Stock Option Plan (incorporated by reference from Exhibit 10.39 to the Form S-8 (No. 333-78953) filed by the registrant on May 21, 1999) 27 Financial Data Schedule (b) FORM 8-K On April 20, 1999, FirstMerit Corporation filed a Form 8-K to report the announcement on April 15, 1999, of its first quarter 1999 earnings and the restatement of both quarters financial information to account for the acquisition of Signal Corp on February 12, 1999 on a pooling-of-interests basis. On April 20, 1999, FirstMerit Corporation filed a Form 8-K/A to report certain amended Item 7 information to the Form 8-K filed on March 5, 1999 regarding the consolidated financial information of Signal Corp and subsidiaries. 37 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/AUSTIN J. MULHERN --------------------------------------------- Austin J. Mulhern, Senior Vice President and Chief Financial Officer DATE: August 12, 1999 EX-27 2 EXHIBIT 27
9 0000354869 FIRSTMERIT 1,000 3-MOS DEC-31-1999 APR-01-1999 JUN-30-1999 277,307 0 1,380 0 1,631,149 0 1,631,149 7,139,273 106,785 9,488,031 6,604,891 1,863,963 152,675 0 0 4,046 127,938 734,518 9,488,031 145,618 24,646 14 170,278 50,971 68,303 101,975 9,657 2,536 72,938 55,804 55,804 0 0 38,908 0.43 0.42 4.80 16,921 22,375 83 63,749 102,359 10,370 5,439 106,785 106,785 0 0
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