Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS
Registrant, FirstMerit Corporation ("FirstMerit" or the "Corporation"), is a multi-bank holding company organized in 1981 under the laws of the State of Ohio and registered under the Bank Holding Company Act of 1956, as amended. FirstMerit is also a savings and loan holding company registered under the Home Owners' Loan Act of 1933, as amended. The executive offices of FirstMerit are located in Akron, Ohio. FirstMerit was formerly known as First Bancorporation of Ohio until December 19, 1994, when the corporate name was changed upon the approval of the shareholders of FirstMerit. "FirstMerit" is a service mark registered with the United States Patent and Trademark Office. FirstMerit is the sole shareholder of each of the following entities: First National Bank of Ohio, a national banking association, Akron, Ohio ("First National"), The Old Phoenix National Bank of Medina, a national banking association, Medina, Ohio ("Old Phoenix"), EST National Bank, a national banking association, Elyria, Ohio ("EST") (formerly known as Elyria Savings & Trust National Bank), Peoples National Bank, a national banking association, Wooster, Ohio ("Peoples Bank"), Citizens National Bank, a national banking association, Canton, Ohio ("Citizens"), Peoples Bank, N.A., Ashtabula, Ohio, a national banking association, Ashtabula, Ohio ("Peoples N.A."), (collectively, the "Banks"), Bancorp Trust Company, N.A., a national trust company, Naples, Florida ("Bancorp Trust"), Life Savings Bank, FSB, a federal savings association, Clearwater, Florida ("Life Savings"), FirstMerit Credit Life Insurance Company, an Arizona corporation ("FirstMerit Insurance") and FirstMerit Community Development Corporation ("FirstMerit CDC") (all, collectively, the "Subsidiaries").
Although principally a regional banking organization, FirstMerit through the Subsidiaries provides a wide range of banking, fiduciary, financial and investment services to corporate, institutional and individual customers throughout northern Ohio, including Ashtabula, Cuyahoga, Erie, Geauga, Knox, Lake, Lorain, Medina, Portage, Richland, Stark, Summit and Wayne Counties, and southwestern Florida. FirstMerit directs the overall policies and financial resources of the Subsidiaries, but the day-to-day affairs, including lending practices, services, and interest rates, are managed by their own officers and directors, some of whom are also officers and directors of FirstMerit. In addition to the customary services of accepting funds for deposit and making loans, the Banks provide a wide range of specialized services tailored to specific markets, including personal and corporate trust services, personal financial services, cash management services and international banking services. FirstMerit's savings association subsidiary, Life Savings, provides demand, savings and time deposit accounts, consumer and commercial loans, while FirstMerit's non-banking direct and indirect subsidiaries provide insurance sales services, reinsurance of credit life and accident and health insurance on loans made by the Banks, securities brokerage services, equipment lease financing, and other financial services. At February 1, 1995, FirstMerit's Subsidiaries operated 161 full service banking offices, and had 149 automated teller machines, located in 16 counties in the States of Ohio and Florida, and employed approximately 3,359 full- and part-time employees.
SUBSIDIARY OPERATIONS
Each Bank is engaged in commercial banking in its respective geographical market. Commercial banking includes the acceptance of demand, savings and time deposits and the granting of commercial and consumer loans for the financing of both real and personal property. Other services include automated banking programs, credit cards, the rental of safe deposit boxes, letters of credit, leasing, discount brokerage and credit life insurance. The Banks also operate trust departments which offer estate and trust services. Each Bank offers its services primarily to consumers and small and medium size businesses in its respective geographical market. None of the Banks are engaged in lending outside the continental United States. None of the Banks are dependent upon any one significant customer or a specific industry.
During 1994, FirstMerit completed the steps necessary to convert two of its former savings association subsidiaries, Peoples Federal Savings Bank (Wooster, Ohio) and Peoples Savings Bank (Ashtabula, Ohio), into national banks under the respective charters and titles of Peoples National Bank and Peoples Bank, N.A.
Life Savings remains a federally-chartered savings association and operates as such in its geographical market. As a savings association, its business includes the acceptance of demand, savings and time deposit accounts and the granting of consumer loans primarily secured by real property. Life Savings offers its services principally to consumers and small businesses located in its geographical market. It is not engaged in lending outside the continental United States and is not dependent upon any one significant customer or a specific industry.
Bancorp Trust is engaged in providing personal trust services in its geographical markets. These services include acting as trustee in personal trusts, custodial and investment agency services, guardianships and service as personal representative in decedent estates.
FirstMerit Insurance was formed in 1985 to engage in underwriting of credit life and credit accident and health insurance directly related to the extension of credit by the Banks to their customers.
FirstMerit CDC was established in 1994 to further the efforts of FirstMerit's Subsidiaries in meeting the credit needs of their lending communities, and the requirements of the Community Reinvestment Act ("CRA"). Congress enacted CRA to assure that banks and savings associations meet the deposit and credit needs of their communities. Through a community development corporation, financial institutions can meet these needs by non-traditional activities such as acquiring, rehabilitating, or investing in real estate in low to moderate income neighborhoods, and promoting the development of small business.
First National is the parent corporation of two wholly-owned Ohio corporations organized in 1993 --FirstMerit Leasing Company ("FirstMerit Leasing") and a registered broker/dealer subsidiary ("Investor Services"). FirstMerit Leasing primarily provides equipment lease financing and related services, while Investor Services primarily provides discount brokerage services to customers of First National and other Subsidiaries.
ACQUISITIONS
FirstMerit engages on a regular basis in discussions concerning possible acquisitions of other financial institutions. During 1994, FirstMerit acquired control of both Life Savings, a federal savings association with its principal offices located in Clearwater, Florida, and Great Northern Savings Co., an Ohio savings association with its principal offices formerly located in Barberton, Ohio. Life Savings was chartered by FirstMerit in 1994 to acquire the assets and deposit liabilities of Life Federal Savings Bank, a federal savings association under the conservatorship of the Resolution Trust Corporation, which was the successor entity of Life Savings Bank, a failed Florida savings association. Great Northern Savings Co. was acquired on April 22, 1994 through the merger of its parent corporation, Great Northern Financial Corporation, an Ohio corporation and savings and loan holding company, with and into FirstMerit in exchange for approximately 1,882,440 shares of FirstMerit common stock. FirstMerit then immediately effected a merger of Great Northern Savings Co. with and into First National Bank of Ohio, a national bank subsidiary of FirstMerit.
On January 31, 1995, FirstMerit acquired control of Citizens Savings Bank of Canton, an Ohio savings association with its principal offices in Canton, Ohio ("Citizens Savings"). FirstMerit acquired Citizens Savings through the merger of The CIVISTA Corporation, the sole shareholder of Citizens Savings ("CIVISTA"), with and into FirstMerit in exchange for approximately 6,513,119 shares of FirstMerit common stock. FirstMerit then immediately effected a merger of Citizens Savings into The First National Bank in Massillon, a national bank subsidiary of FirstMerit, to form a new national bank subsidiary called Citizens National Bank, with its principal offices in Canton, Ohio.
When FirstMerit acquired control of Citizens Savings through the merger with CIVISTA, it also acquired control of certain other wholly-owned subsidiaries of CIVISTA, including Citizens Savings Corporation of Stark County ("CSC"), The CASNET Group, Inc. ("CASNET"), Citizens Investment Corporation ("CIC") and Crest Investments, Inc. ("Crest").
CSC owns and manages about 350 residential rental units in apartment and duplex complexes which are primarily in the suburban Canton, Ohio area. CSC also owns a large portion of an office condominium in Stark County, and engages in property management for third parties. FirstMerit is in the process of selling all assets, winding up the affairs, and formally dissolving CSC.
CIC owns and has participated in the development of residential real estate in La Quinta, California. FirstMerit also is in the process of selling all assets, winding up the affairs, and formally dissolving CIC.
CASNET had provided data processing services for Citizens Savings and six other savings and loan associations in three states through a service center in Canton, Ohio. CASNET also has developed and marketed computer software for financial institutions, engaged in credit union on-line servicing, and provided microfiche services, interactive voice response technology and personal computer consulting. FirstMerit plans to either wind up the ongoing affairs of CASNET and liquidate its assets or, if there is reasonable interest, sell CASNET and its operations to a third party.
Crest owns Crest Insurance Agency, Inc., which sells securities and tax-deferred annuities under an agreement with a registered broker/dealer. FirstMerit is in the process of consolidating all of the activities of Crest with those of Investor Services, FirstMerit's securities brokerage subsidiary, and a third-party affiliate through which annuities will continue to be offered, after which Crest will be formally dissolved.
COMPETITION
The financial services industry is highly competitive. FirstMerit and its Subsidiaries compete with other local, regional and national providers of financial services such as other bank holding companies, commercial banks, savings associations, credit unions, consumer and commercial finance companies, equipment leasing companies, brokerage institutions, money market funds and insurance companies. The Subsidiaries' primary financial institution competitors include Bank One, National City Bank, Society National Bank, Star Bank and The Fifth Third Bank. Mergers between financial institutions within Ohio and in neighboring states have added competitive pressure, which pressure may intensify during 1995 as interstate banking becomes permissible under the Interstate Banking and Branching Efficiency Act of 1994. FirstMerit competes in its markets by offering quality and innovative services at competitive prices.
REGULATION AND SUPERVISION
FirstMerit is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended ("BHCA"). Bank holding companies are subject to regulation by the Federal Reserve. Under Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support such subsidiary banks.
The BHCA requires the prior approval of the Federal Reserve in any case where a bank holding company proposes to acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority-owned by it, or to merge or consolidate with any other bank holding company. The BHCA prohibits the Federal Reserve from approving an application from a bank holding company to acquire shares of a bank located outside the state in which the operations of the holding company's banking subsidiaries are principally conducted, unless such an acquisition is specifically authorized by statute of the state in which the bank whose shares are to be acquired is located. At present, many states, including Ohio, have adopted legislation permitting such acquisitions by bank holding companies and such legislation is pending in the legislatures of other states.
The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring more than five percent of the voting shares of any company that is not a bank and from engaging in any business other than banking or managing or controlling banks. Under the BHCA, the Federal Reserve is authorized to approve the ownership of shares by a bank holding company in any company the activities of which the Federal Reserve has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. The Federal Reserve has by regulation determined that certain activities are closely related to banking within the meaning of the BHCA. These activities include: operating a savings association, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing investment and financial advice; and acting as an insurance agent for certain types of credit-related insurance.
Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities of the bank holding company or its subsidiaries and on the taking of such stock or securities as collateral for loans to any borrower. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of any services.
FirstMerit is also under the jurisdiction of the Securities and Exchange Commission and certain state securities commissions for matters relating to the offering and sale of its securities. FirstMerit is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the Commission.
FirstMerit also is a registered savings and loan holding company under the Home Owners' Loan Act of 1933, as amended ("HOLA"), due to its control of Life Savings. The primary federal regulator of savings and loan holding companies is the Office of Thrift Supervision ("OTS").
With certain exceptions, a savings and loan holding company must obtain prior written approval of OTS before acquiring control of an insured institution or savings and loan holding company through the acquisition of stock or through a merger or some other business combination. HOLA prohibits OTS from approving an acquisition by a savings and loan holding company which would result in the holding company controlling savings associations in more than one state, subject to certain exceptions, including where the statutes of the state in which the savings association to be acquired is located specifically permit a savings association chartered by such state to be acquired by an out-of-state savings association or savings and loan holding company. Ohio presently has legislation permitting such an interstate acquisition by a savings and loan association or savings and loan holding company. HOLA also prohibits savings and loan holding companies and their subsidiaries which are not savings associations from engaging in unrelated business activities other than those specifically exempted by statute or regulation.
On September 29, 1994, President Clinton signed the Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Act"). The Interstate Act generally permits nationwide interstate banking and branching
commencing one year after enactment. After that time an "adequately capitalized" and "well managed" bank holding company may acquire a bank in any state, subject to certain concentration limitations. No banking organization may control more than ten percent of deposits nationwide or more than 30.0% of deposits in any one state. Individual states may waive the 30.0% limitation. Beginning June 1, 1997, interstate bank holding companies may consolidate banks they own in multiple states into a single branch network, or acquire out-of-state banks as branches. States may authorize interstate branching earlier than June 1, 1997, or may opt out of the process altogether. De novo interstate branching is not authorized by the Interstate Act, but states may specifically authorize it. States may also limit the acquisition of newly-formed banks for a period of up to five years to restrict effective de novo branching. The Interstate Act requires CRA compliance by out-of-state branches and prohibits "deposit production offices" to ensure that local savings are not diverted to other states. Institutions must maintain a loan activity-to-deposit ratio within a host state at least equal to one-half of the average percentage for all banks in the host state, otherwise the institution's federal regulator may close the out-of-state branch and restrict the institution from opening new branches in that state. Certain state laws, such as those on intrastate branching, consumer protection and fair lending, will still apply to out-of-state banks or branches. The Interstate Act is expected to stimulate an already active merger environment in the banking industry.
SUMMARY RESULTS OF OPERATIONS
As of December 31, 1994, FirstMerit's consolidated total assets were $4,924,157,000. Consolidated total assets as of January 31, 1995, after taking effect of the acquisition of CIVISTA, were $5,700,896,000. Earnings for FirstMerit reached a record level in 1994 as $60,301,000 was reported for the year ended December 31, 1994. The earnings reported reflect a $4,741,000 increase, or 8.5% over the prior year's earnings, which also were an all time high. Earnings on a per share basis totaled $2.22, up from the $2.05 reported for 1993, and total cash dividends paid to shareholders for the entire year was $.98 per share, an increase of $.11 per share over the previously stated annual payment of $.87.
During the third quarter of 1993, the Board of Directors elected to declare a two-for-one stock split. All per share data is restated to reflect the stock split.
Total interest income increased in 1994 by $11.6 million, or 3.7%, compared to 1993, which had shown a decrease of 5.9% from 1992. Interest expense increased by $6.1 million, or 5.5%, in 1994, resulting in a net interest income improvement of $5.5 million or 2.7%. Non-interest income increased 4.4% to $57,774,000 in 1994, although income from mortgage loan sales and servicing decreased $2.9 million, largely as a result of higher market interest rates.
Shareholders' equity, which amounted to $431,538,000, increased by 3.44% compared to one year ago. Over the years, additional measures of the capital adequacy of a financial institution have been added, and include guidelines by which regulatory agencies consider a banking institution to be well capitalized. For an institution to be considered well capitalized, it must have a total risk-based capital ratio of at least 10.0%, a Tier 1 capital ratio of at least 6.0%, a leverage ratio of at least 5%, and must not be subject to any order or directive requiring the institution to improve its capital level. At December 31, 1994, FirstMerit had a risk-based capital ratio of 14.42%, a Tier 1 capital ratio of 13.37%, a leverage ratio of 8.74%, and was not subject to any order or directive requiring it to improve its capital level.
A favorable trend in the decline in charge-offs and non-performing assets continued in 1994. Total charge-offs amounted to .13% of average outstanding loans, down from the .18% reported in 1993 and the .53% reported for 1992. Also reflecting a continuing trend was the reduction in non-performing assets from 1.51% of total loans at the end of 1992 to .83% for 1993 and .49% for 1994. Both improvements can be attributed to the continued emphasis on professionalism in the credit granting process and in the involvement with customers as their financial circumstances change. The improvement in asset quality can also be noted in the substantial reduction in the provision for loan losses which declined to $4.5 million in 1994 from $7.2 million in 1993 and $17.7 million in 1992.
ITEM 2.



ITEM 2. PROPERTIES
FIRSTMERIT CORPORATION
FirstMerit's executive offices and certain holding company operational facilities, totalling 54,510 square feet, are leased from First National. FirstMerit relocated its executive offices in 1994 to III Cascade, a seven-story office building located in downtown Akron, Ohio. During 1993, a long-term leasehold interest in III Cascade was acquired by an Ohio general partnership (the "Partnership"), the general partners of which are FirstMerit and a Delaware corporation subsidiary of Banc One Capital Corporation. FirstMerit does not control the Partnership. The City of Akron is the lessor of the property. First National has subleased all of the premises of III Cascade from the Partnership, and FirstMerit subleases a portion of the premises from First National.
As a result of FirstMerit's merger with CIVISTA on January 31, 1995, FirstMerit became the owner of two Canton, Ohio residential apartment complexes formerly owned by CIVISTA: Woodlawn Village and London Square. Woodlawn Village and London Square have 198 and 224 apartment and townhouse units, respectively. Both properties are subject to long-term mortgage loans with approximately $7,537,276 million in aggregate remaining principal. FirstMerit intends to sell the complexes during 1995.
The facilities owned or leased by FirstMerit and its Subsidiaries are considered by management to be adequate, and neither the location nor unexpired term of any lease is considered material to the business of FirstMerit.
FIRST NATIONAL BANK OF OHIO
The principal executive offices of First National are located in its 28-story main office building located at 106 South Main Street, Akron, Ohio, which is owned by First National. First National is the principal tenant of the building occupying approximately one-half of a total of 215,000 square feet of the building, with the remaining portion leased to tenants unrelated to First National. The properties occupied by 35 of First National's other branches are owned by First National, while the properties occupied by its remaining 32 branches are leased with various expiration dates. First National also leases property in which the operations of two additional offices, a loan production office and a branch trust office, are located. There is no mortgage debt owing on any of the above property owned by First National. First National also owns automated teller machines, on-line teller terminals and other computers and related equipment for use in its business.
First National in 1994 relocated its Installment Loan, Mortgage Loan, Credit Recovery and Credit Departments to renovated offices covering 30,600 square feet in III Cascade. First National also has begun major renovations to its main office building. First National plans to renovate all space which it occupies in the building, as well as all public areas.
First National also owns 19.5 acres near downtown Akron, on which is located FirstMerit's Operations Center. The Operations Center is occupied and operated by FirstMerit Services Division, an operating division of FirstMerit. The Operations Center primarily provides computer and communications technology-based services to FirstMerit and the Subsidiaries, and also markets its services to non-affiliated institutions. There is no mortgage debt owing on the Operations Center property. In connection with its Operations Center, the Services Division has a disaster recovery center at a remote site on leased property.
The Trust Department of First National relocated in 1993 from the main office building of First National to Main Place, a four-story office building located in downtown Akron. The Trust Department occupies 16,650 square feet of leased space in Main Place.
THE OLD PHOENIX NATIONAL BANK OF MEDINA
The principal executive offices of Old Phoenix are located in its main office building at 39 Public Square, Medina, Ohio. The building which houses its executive offices is leased by Old Phoenix. The properties occupied by four of Old Phoenix's branches are owned by Old Phoenix, while the properties occupied by its remaining 11 branches are the subject of various lease obligations having various expiration dates. These facilities are leased from IRT Properties, a publicly-held real estate investment trust. Old Phoenix also owns
automated teller machines, on-line teller terminals and other related equipment. The computer operations of Old Phoenix are provided through FirstMerit.
EST NATIONAL BANK
The principal executive offices of EST are located in its main office building at 105 Court Street, Elyria, Ohio, which is owned by EST. EST occupies approximately one-half of the total available space in the building. EST owns the land and buildings occupied by 18 of its banking offices. The remaining five banking offices are the subject of lease obligations with various lessors and varying lease terms and expiration dates. EST also has automated teller machines and on-line teller terminals. The computer operations of EST are provided through FirstMerit.
PEOPLES NATIONAL BANK
The principal executive offices of Peoples Bank are located in its main office building at 121 North Market Street, Wooster, Ohio, which is owned by Peoples Bank. The properties occupied by seven of Peoples Bank branches are owned by Peoples Bank, while the properties occupied by its remaining five branches are leased at various expiration dates. No mortgage debt exists on the above property owned by Peoples Bank. Peoples Bank also has automated teller machines and on-line terminals. The computer operations of Peoples Bank are provided through FirstMerit.
CITIZENS NATIONAL BANK
The principal executive offices of Citizens are located in its main office building at 100 Central Plaza South, Canton, Ohio. FirstMerit is in the process of consolidating with these offices, which formerly were the principal executive offices of Citizens Savings Bank of Canton, the principal executive offices of The First National Bank in Massillon, the national bank subsidiary of FirstMerit into which Citizens Savings merged. The executive offices of The First National Bank in Massillon formerly were located at One First National Plaza, Massillon, Ohio, in the center of downtown Massillon. That building is now owned by Citizens, remains a principal branch of Citizens, and is not subject to any mortgage debt. Citizens owns the properties occupied by nine of its other banking offices, while the properties occupied by the remaining nine are leased under different leases with various expiration dates.
PEOPLES BANK, N.A.
The principal executive offices of Peoples N.A. are located in its main office at 4200 Park Avenue, Ashtabula, Ohio, which is owned by Peoples N.A. Peoples N.A. owns the properties occupied by five of its branches, while the properties occupied by its remaining nine branches are leased at various expiration dates. Peoples N.A. also leases the property occupied by a loan production office. No mortgage debt exists on the above property owned by Peoples N.A. Peoples N.A. also has automated teller machines and on-line terminals. The computer operations of Peoples N.A. are provided through FirstMerit.
BANCORP TRUST COMPANY, N.A.
Bancorp Trust has its principal executive offices at 5133 Costello Drive, Suite One, Naples, Florida under a short-term lease with a renewal option at the election of Bancorp Trust. Bancorp Trust leases one additional office in Ft. Myers, Florida.
LIFE SAVINGS BANK, FSB
The principal executive offices of Life Savings are located in its main office at 26149 U.S. Route 19 North, Clearwater, Florida, under a short-term lease. The properties occupied by Life Savings remaining four branches are leased at various expiration dates. No mortgage debt exists on the above property owned by Life Savings. Life Savings also has on-line terminals.
CITIZENS SAVINGS CORPORATION OF STARK COUNTY
CSC, a former subsidiary of The CIVISTA Corporation owns and manages about 350 residential rental units in apartment and duplex complexes which are primarily in the suburban Canton, Ohio area. The principal residential complex is Perry Hills Colony, which has 140 apartment and townhouse units and is subject to a long-term mortgage loan with approximately $1,452,543 million in remaining principal. CSC also owns a large portion of an office condominium in Stark County. FirstMerit intends during 1995 to sell all assets, wind up the affairs, and formally dissolve CSC.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The nature of FirstMerit's business results in a certain amount of litigation. Accordingly, FirstMerit and its subsidiaries are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. Management, after consultation with legal counsel, is of the opinion that the ultimate liability of such pending matters would not have a material effect on FirstMerit's financial condition.
During 1991, a suit was filed in federal court against First National alleging conversion and negligence in the deposit of funds. The suit sought actual damages against First National plus punitive damages, interest, costs, attorneys fees and other relief. Suits brought in state court by other claimants based on the same deposits have been stayed. During 1993, the federal court granted First National's motion for summary judgment. As a result, that suit was dismissed. The plaintiff in that suit subsequently filed a notice of appeal. First National is vigorously seeking to have the favorable federal judgment affirmed on appeal, and FirstMerit continues to believe First National has meritorious defenses to all claims. After consultation with legal counsel, Management believes that the possibility of a multiple recovery by both the federal court and state court plaintiffs is unlikely and that the maximum exposure for damages approximates $7,300,000.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders of FirstMerit was held during the fourth quarter of 1994. The meeting was held on December 15, 1994, for the following purposes:
1. To adopt the Agreement of Affiliation and Plan of Merger dated August 10, 1994 by and between FirstMerit and The CIVISTA Corporation;
2. To change the name of the registrant from First Bancorporation of Ohio to FirstMerit Corporation;
3. To amend FirstMerit's Amended and Restated Articles of Incorporation to increase the authorized Common Stock from 40,000,000 to 80,000,000; and
4. To amend FirstMerit's Amended and Restated Articles of Incorporation to increase the authorized Preferred Stock from 3,500,000 to 7,000,000 shares.
EXECUTIVE OFFICERS OF REGISTRANT
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The outstanding shares of FirstMerit Common Stock are quoted on the NASDAQ National Market System. The following table contains bid and cash dividend information for FirstMerit Common Stock for the two most recent fiscal years:
This table sets forth the high and low closing bid quotations, dividend rates and book values per share for the calendar periods indicated. All previous statistics are adjusted to reflect the two-for-one stock split of August 30, 1993. These quotations, furnished by the National Quotations Bureau Incorporated, represent prices between dealers, do not include retail markup, markdowns, or commissions, and may not represent actual transactions.
On February 1, 1995 there were approximately 7,322 shareholders of record of FirstMerit Common Stock.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following commentary presents Management's discussion and analysis of the Corporation's financial condition and results of operations. The review highlights the principal factors affecting earnings and the significant changes in balance sheet items for years 1994, 1993 and 1992. Financial information for prior years is presented when appropriate. The objective of this financial review is to enhance the reader's understanding of the accompanying tables and charts, the consolidated financial statements, notes to the financial statements and financial statistics appearing elsewhere in this report. Where applicable, this discussion also reflects Management's insights of known events and trends that have or may reasonably be expected to have a material effect on the Corporation's operations and financial condition.
All financial data have been restated to give effect to acquisitions accounted for on a pooling of interest basis and stock splits in previous periods. The results of other bank and branch acquisitions, accounted for as purchases, have been included effective with the respective dates of acquisition.
EARNINGS SUMMARY
FirstMerit Corporation's net income for 1994 totaled $60.3 million. This represents an 8.5% increase over 1993 and a record high for the Corporation. Net income was favorably affected by improved asset quality and increased non-interest income. Net income for 1994 of $60.3 million compares to $55.6 million in 1993 and $53.3 million in 1992.
The return on average assets for the Corporation equaled 1.32% in 1994 compared to 1.28% in 1993 and 1992. The Corporation's return on average equity, which is largely affected by its strong capital base, equaled 14.09% in 1994 compared to 13.79% and 14.49% in 1993 and 1992, respectively.
On April 22, 1994 the Corporation completed the acquisition of Great Northern Financial Corporation for approximately 1,882,440 shares of the Corporation's common stock. The transaction was accounted for as a pooling of interests and the following financial information in this report has been restated to reflect the acquisition.
On August 19, 1993 the Corporation's Board of Directors declared a 2-for-1 split of the Corporation's common stock, to shareholders of record as of August 30, 1993. The per share data is restated to reflect the stock split.
Net income on a per share basis totaled $2.22 compared to $2.05 in 1993 and $1.97 in 1992. The following table summarizes the changes in earnings per share for 1994 and 1993.
NET INTEREST INCOME
Net interest income, the difference between interest and loan fee income on earning assets and the interest paid on deposits and borrowed funds, is the principal source of earnings for the Corporation. Throughout this discussion net interest income is presented on a fully taxable equivalent (FTE) basis which restates interest on tax-exempt securities and loans as if such interest was subject to federal income tax at the statutory rate.
Net interest income is affected by market interest rates on both earning assets and interest bearing liabilities, the level of earning assets being funded by interest bearing liabilities, non-interest bearing liabilities
and equity, and the growth in earning assets. The following table shows the allocation to assets, the source of funding and their respective interest spreads.
Net interest income increased $5.5 million or 2.7% in 1994 compared to 1993 totaling $205.5 million. The increase resulted from an increase in average earning assets as the lower market interest rates in the first half of 1994 as well as the prior two years reduced both the yield on earning assets and the interest spread. The yield on earning assets is down 23 basis points from 1993 at 7.58% and 105 basis points from 1992. Likewise the interest spread is down 22 basis points from both 1993 and 1992 largely due to lower yield on earning assets.
Earning assets funded by non-interest bearing liabilities increased from 18.0% in 1993 and 16.2% in 1992 to 18.6% in 1994. The cost of interest bearing liabilities and equity was 3.36% in 1994 compared to 3.37% and 4.19% in 1993 and 1992, respectively.
While the cost of funds decreased in 1994, higher interest rates in the second half of 1994 resulted in a higher funding cost while the yield on earning assets increased at a slower rate. As a result, the difference between funding cost and yield has decreased and has adversely affected net interest income. This trend is expected to continue at least through the first half of 1995, thereby continuing to negatively impact net interest income in 1995.
The table below provides an analysis of the effect of changes in interest rates and volumes on net interest income in 1994 and 1993.
Total interest income increased by $11.6 million in 1994 or 3.7% compared to 1993, which decreased 5.9% compared to 1992. The 1994 increase resulted from a strong loan demand during the second half of the year as the local economy continued to show strength. Increases in loans accounted for $20.5 million of the $22.8 million increase in interest income due to increases in volume. Increases in interest income due to volume were offset by an $11.2 million decrease due to lower yields/rates. Income from investment securities decreased $5.2 million due to lower interest rates while loan income was off $6.9 million. In total, interest on loans increased $13.6 million while investments including federal funds sold decreased by $2.0 million.
In 1993 lower interest rates offset increases in interest income as decreases due to yields/rates totaled $32.0 million compared to an increase due to volume of $12.6 million for a net decrease of $19.4 million.
Interest expense increased by $6.1 million or 5.5% in 1994 compared to 1993 largely affected by increases in short term borrowings. Much of the funding of the loan volume increase noted above came from short term borrowing as deposit growth remained relatively flat. Increases in interest expense due to volume totaled $8.1 million of which $7.9 million was in short term borrowings while interest expense on deposits increased $.2 million from increased volume.
While interest expense showed a decrease due to yields/rates most of the decrease was a result of lower costs of core deposits over the entire year totaling $3.8 million. The decrease in the cost of core deposits was offset by the increasing cost of short term borrowings which increased $1.8 million as much of the increase in borrowings occurred in the second half of 1994 in a rising interest rate environment.
In 1993 interest expense was mainly affected by lower market interest rates as $24.2 million of the decrease in interest expense was due to lower yields/rates.
The net interest margin is calculated by dividing net interest income FTE by average earning assets. As with net interest income, the net interest margin is affected by the level and mix of earning assets, the proportion of earning assets funded by non-interest bearing liabilities and the interest rate spread.
In addition, the net interest margin is impacted by changes in federal income tax rates and regulations as they affect the tax equivalent adjustment.
The net interest margin was 4.85% in 1994 compared to 5.04% in 1993 and 5.12% in 1992. As interest rates continued their decline during the first half of 1994, the yield on earning assets ended the year at 7.58% down from 7.81% in 1993. The cost of funding the earning assets during 1994 fell 4 basis points to 2.73% compared to 2.77% in 1993 and 3.51% in 1992.
The mix of earning assets was affected by a strong economy during 1994 as average loans outstanding increased 9.6% compared to one year ago. Average loans equalled 67.1% of average earning assets compared to 65.4% and 65.3% in 1993 and 1992, respectively.
The amount of average earning assets funded by non-interest bearing liabilities and equity totaled 18.6% in 1994 compared to 18.0% in 1993 and 16.2% in 1992.
NON-INTEREST INCOME
A $3.5 million increase in trust fees helped offset a $2.9 million decrease in income from mortgage loan sales and servicing. While the decrease in mortgage fees was largely impacted by higher market interest rates, the increase in trust income was largely due to nonrecurring fees collected in 1994 amounting to approximately $2.5 million.
The decrease in mortgage fees resulting from higher market interest rates is expected to continue in 1995.
Service charges on deposits were down 4.9% compared to 1993 and accounted for 34.1% of non-interest income compared to 37.4% and 38.7% in 1993 and 1992, respectively. Credit card fees increased 3.0% compared to 1993 and accounted for 14.5% of non-interest income. Other income increased $1.0 million compared to one year ago, and accounted for 15.4% of non-interest income compared to 13.8% and 11.5% in 1993 and 1992, respectively.
Continued increases in market interest rates had a significant impact on mortgage lending activities throughout 1994. Mortgage sales and loan servicing fees decreased from $4.7 million in 1993 to $1.8 million in 1994, a decrease of 62.0%. The Corporation's practice is to sell all fixed rate thirty year residential mortgage loans originated while retaining the servicing for these loans.
Non-interest income covered 34.1% of non-interest expense in 1994, compared to 34.4% in 1993 and 35.4% in 1992. The banking industry as well as the Corporation continues to pursue new business opportunities which generate fee income and are not subject to interest rate volatility.
NON-INTEREST EXPENSE
Non-interest expense increased 3.9% in 1994 compared to 1993 after a 9.5% increase for 1993 compared to 1992.
Salaries and wages totaled $66.0 million in 1994, an increase of 5.5% or $3.5 million. For 1994, salaries and wages accounted for 39.5% of operating expenses compared to 38.9% and 39.2% in 1993 and 1992, respectively. Pension and benefits expense increased $1.2 million in 1994 compared to one year ago or 6.3%. In 1994 the Corporation spent 31.2 cents in benefits for every dollar of salaries and wages compared to 31 cents in 1993 and 26.7 cents in 1992. 1992 benefit expense does not include provisions for postretirement benefits discussed below.
During 1993 the Corporation adopted the Financial Accounting Standards Board Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106 requires that the cost of all postretirement benefits expected to be provided by an employer to current and future retirees be accrued over those employees' service periods.
The Corporation has a benefit plan which presently provides postretirement medical and life insurance for retired employees. The Corporation reserves the right to terminate or make additional plan changes at any time.
The Corporation's accumulated postretirement benefit obligation (APBO) as of January 1, 1993 totaled $19.0 million, and is being amortized over twenty years at an annual cost of $.9 million.
Occupancy increased from $11.6 million in 1993 to $12.7 million in 1994, an increase of $1.1 million. This increase primarily was due to the acquisition and renovation of a new Corporate headquarters in 1994 and the completion of the renovation of several subsidiary bank buildings.
On January 1, 1994 the FDIC implemented a risk-based assessment system for depository institutions. Under the system, the annual assessment rate for each insured institution is determined on the basis of both capital and supervisory measures, and can range from $.23 per $100.00 of deposits to $.31 per $100.00 of deposits, depending on the capital and supervisory strength of the institution. Total premiums paid by the Corporation during 1994 were $8.3 million compared to $7.4 million and $7.2 million in 1993 and 1992, respectively.
Various legislative proposals concerning the banking industry and regulatory reform are pending including a possible decrease in the FDIC insurance assessment. Given the uncertainty of the legislative and regulatory process, Management cannot assess the impact of such legislation on the Corporation's financial condition or results of operations.
FEDERAL INCOME TAX
Federal income tax expense totaled $26.1 million in 1994 compared to $26.6 million in 1993 and $23.7 million in 1992. In 1994 the effective federal income tax rate for the Corporation equaled 30.2% compared to 32.3% in 1993 and 30.8% in 1992. One of the factors which continues to affect the effective tax rate is the Tax Reform Act of 1986 which raised the disallowance of interest cost on funds employed to carry most tax-exempt securities and loans acquired after August 7, 1986 from 20% to 100%. The result is that a greater proportion of pre-tax earnings is subject to federal income tax. The Corporation continues to invest in obligations of the local communities it serves.
On August 10, 1993 Congress enacted the Omnibus Budget Reconciliation Act of 1993 which included among its provisions an increase in the statutory rate from 34% to 35%. Other provisions which impact the Corporation include changes in the deductibility of certain business expenses, changes in determining benefits and contributions under its qualified retirement plan, and the ability to depreciate future intangible assets.
INVESTMENT SECURITIES
The investment portfolio is maintained by the Corporation to provide liquidity, earnings, and a means of diversifying risk. The Financial Accounting Standards Board issued Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities" effective January 1, 1994. The statement requires debt and equity securities to be classified as held-to-maturity, available-for-sale, or trading. Securities classified as held-to-maturity are measured at amortized or historical cost, securities available-for-sale and trading are measured at fair value. Adjustment to fair value of the securities available-for-sale, in the form of unrealized holding gains and losses, is excluded from earnings and reported as a net amount in a separate component of shareholders' equity. Adjustment to fair value of securities classified as trading is included in earnings.
At December 31, 1994 investment securities totaled $1,377.5 million compared to $1,340.2 million one year ago, an increase of 2.8%. Investment securities totaled $1,333.3 million at December 31, 1992.
During 1994 approximately $49.2 million of investment securities were sold for which a $76 thousand net loss was realized.
A summary of investment securities' carrying value is presented below as of December 31, 1994, 1993 and 1992. Presented with the summary is a maturity distribution schedule with corresponding weighted
average yields. The schedule reflects the liquidity within the investment securities portfolio as 20.9% of the total securities have maturities of one year or less.
The yield on the portfolio fell to 6.15% in 1994 compared to 6.55% in 1993 and 7.53% in 1992.
With lower market interest rates through mid-1994 and the Tax Reform Act of 1986, which reduced the tax benefit of obligations of state and municipalities, the Corporation continued to look at alternative investments to increase yield while maintaining its soundness. Obligations of U.S. Government agencies, mortgage-backed securities, collateral mortgage obligations (CMOs) along with asset-backed securities provided increased yields and accounted for approximately 64.4% of the investment portfolio compared to 67.0% and 61.3% in 1993 and 1992 respectively.
At December 31, 1994, the investment portfolio had a carrying value of $1,377.5 million and a market value of $1,358.3 million compared to $1,340.2 million and $1,356.1 million, respectively in 1993.
During 1994 the use of various financial instruments such as derivatives received considerable attention. While mortgage-backed securities and CMOs are considered derivatives, the Corporation does not have any other forms of financial derivatives, such as swaps and caps as hedges or investments. In addition, the CMOs within the Corporation's investment portfolio tend to be the early tranches of the instruments.
LOANS
Real estate loans at December 31, 1994 totaled $1,777.1 million or 55.9% of total loans outstanding compared to 58.4% one year ago. Residential loans (1-4 family dwellings) totaled $1,037.1 million, home equity loans $100.7 million, construction loans $58.9 million and commercial real estate loans $580.4 million.
Commercial real estate loans include both commercial loans where real estate has been taken as collateral and loans for commercial real estate. The majority of the commercial real estate loans look to the tenants' business for cash flow to service the debt and not to rents of the building itself. These loans are generally a part of an overall relationship with existing customers primarily within northeast Ohio.
Consumer loans or loans to individuals increased 27.6% compared to one year ago and accounted for 24.4% of total loans compared to 23.1% in 1993. Lease financing increased from $56.7 million in 1993 to $158.7 million at December 31, 1994 or 5.0% of total loans outstanding. Auto leasing totaled $97.1 million with equipment leasing totaling $61.6 million at December 31, 1994.
There are no loans outstanding which in total could be considered a concentration of lending in any particular industry or group of industries. Most of the Corporation's business activity is with customers located within the state of Ohio.
In October 1994, the Financial Accounting Standards Board issued Statement No. 118 "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures" ("SFAS No. 118"). SFAS No. 118 amends Statement of Financial Accounting Standard No. 114, which is effective for fiscal years beginning after December 15, 1994 and prescribes how the allowance for loan losses related to impaired loans should be determined and the required disclosures. Impaired loans are loans for which, based on current information or events, it is probable that a creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Impaired loans must be valued based on the present value of the loans' expected future cash flows at the loans' effective interest rates, at the loans' observable market price, or the fair value of the loan collateral. The adoption of this standard is not expected to have a material impact on the financial condition, results of operations or disclosures of the Corporation.
ASSET QUALITY
Credit risk is managed through the Corporation's loan policy which provides the Credit Risk Management Division of the Parent Company the responsibility for managing asset quality. The Division's responsibilities include the development of credit policies to ensure sound credit decisions, loan review, early identification of problem loans, and overseeing loan workouts in subsidiary banks.
The Corporation's credit policies and review procedures are meant to minimize the risk and uncertainties inherent in lending. In following these policies and procedures, Management must rely upon estimates, appraisals, and evaluations of loans and the possibility that changes in such estimates, appraisals and evaluations could occur quickly because of changing economic conditions and the economic prospects of borrowers.
NON-PERFORMING ASSETS
Non-performing assets consist of loans on non-accrual, loans which have been restructured and other real estate, which are defined as follows:
- Non-accrual loans are loans which are 90 days past due and with respect to which, in Management's opinion, collection of interest is doubtful. These loans no longer accrue interest and are accounted for on a cash basis.
- Loans are classified as restructured when, due to the deterioration of a customer's financial ability, the original terms have been favorably modified or either principal or interest has been forgiven.
- Other real estate consists of real estate acquired through foreclosure as satisfaction of debt and loans for which, in Management's opinion, in-substance foreclosure has occurred.
Loans which are 90 days or more past due but continue to accrue interest are loans which, in Management's opinion, are well secured and are in the process of collection. Non-performing assets at December 31, 1994 totaled $15.4 million, down from $22.0 million in 1993 and $38.3 million in 1992. As a percent of total loans outstanding, non-performing assets were .49% in 1994 compared to .84% in 1993 and 1.51% in 1992.
For the year ended December 31, 1994 interest income that would have been earned had these loans not been classified as non-accrual or restructured amounted to $793,000. The interest income actually earned on these loans amounted to $445,000.
In addition to the loans classified as non-performing or past due 90 days or more accruing interest, there were $24.5 million at December 31, 1994 that Management believes to be potential problem loans. The loans are closely monitored by the Credit Risk Management Division to assess the borrowers' ability to comply with
the terms of the loans. Management's most recent review indicates that a charge against the allowance for possible loan losses or classification as non-performing is not warranted for these loans at this time.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Corporation's policy is to maintain the allowance for possible loan losses at a level considered by Management to be adequate for potential future losses. The evaluation performed by the Credit Risk Management Division of the Parent Company is based upon a continuous review of delinquency trends; the amount of non-performing loans (non-accrual, restructured, and other real estate owned); loans past due 90 days or more and classified loans; historical and present trends in loans charged-off; changes in the composition and level of various loan categories; and current economic conditions.
At December 31, 1994, the allowance for possible loan losses was $33.1 million or 1.04% of loans outstanding compared to $32.3 million or 1.23% in 1993 and $29.7 million or 1.17% in 1992. The allowance for loan losses coverage of non-performing assets equalled 214.4% at December 31, 1994 and 8.97 times 1994 net charge-offs.
Net charge-offs for 1994 were $3.7 million, down from $4.6 million and $13.2 million in 1993 and 1992, respectively. As a percent of average loans outstanding, net charge-offs dropped from .18% and .53% in 1993 and 1992, respectively, to .13% in 1994. Management continues to believe that loans should be charged against the allowance for possible loan losses as soon as losses are identified.
DEPOSITS
Average deposits in 1994 increased 1.3% compared to 1993 as market interest rates continued at their lowest level in over 30 years through the first half of 1994. Total deposits averaged $3,758.0 million in 1994 compared to $3,710.4 million and $3,553.3 million in 1993 and 1992, respectively.
As market interest rates continued their downward trend throughout the first half of 1994, the mix of deposits continued to shift toward the more liquid types of deposits. Later in the year, as market interest rates increased, deposits started shifting back to certificates of deposits as rates provided a premium compared to the rates on transaction accounts. The average yield on certificates and other time deposits was 4.19% in 1994, 4.17% in 1993 and 5.15% in 1992.
Certificates and other time deposits accounted for 36.4% of average deposits in 1994 compared to 37.4% in 1993. Savings equaled 37.2% and 36.9% in 1994 and 1993, respectively, and demand deposits, both interest and non-interest bearing, was 26.4% and 25.7%, respectively.
Savings deposits increased 1.95% compared to one year ago and represent 37.2% of total deposits. Interest bearing demand deposits increased 6.3%, totaling 8.7% of deposits as the average rate dropped to 2.20%. Non-interest bearing demand deposits totaled $666.5 million, an increase of 3.7%, and represented 17.7% of total deposits.
The average cost of deposits was down 13 basis points compared to one year ago, or 2.64% compared to 2.77%.
Based upon prior interest rate cycles, deposits are expected to continue to move back into certificates of deposits as interest rates rise, to obtain a premium for investing in longer term certificates.
INTEREST RATE SENSITIVITY
Interest rate sensitivity measures the potential exposure of earnings and capital to changes in market interest rates. The Corporation has a policy which provides guidelines in the management of interest rate risk. This policy is reviewed periodically to ensure it complies with trends within the financial markets and within the industry.
The analysis presented below divides interest bearing assets and liabilities into maturity categories and measures the "GAP" between maturing assets and liabilities in each category. The Corporation analyzes the historical sensitivity of its interest bearing transaction accounts to determine the portion which it classifies as interest rate sensitive versus the portion classified over one year. The analysis shows that liabilities maturing within one year exceed assets maturing within the same period by a moderate amount. The Corporation uses the GAP analysis and other tools to monitor rate risk.
CAPITAL RESOURCES
Shareholders' equity at December 31, 1994 totaled $431.5 million compared to $417.2 million at December 31, 1993, an increase of 3.4%. Shareholders' equity at December 31, 1994 includes a ($23.2) million market value adjustment per SFAS No. 115 discussed earlier, otherwise equity would show a 9.0% increase compared to one year ago.
The following table reflects the various measures of capital:
FDICIA, which was enacted on December 19, 1991, set the capital guidelines for a financial institution to be considered "well-capitalized." These guidelines require a risk-based capital ratio of 10%, a Tier 1 capital ratio of 6% and a leverage ratio of 5%. At December 31, 1994 the Corporation's risk-based capital equaled 14.40% of risk-adjusted assets, a Tier 1 capital ratio of 13.36% and a leverage ratio of 8.74%.
The Corporation's Board of Directors declared a 2-for-1 split of the Corporation's common stock on August 19, 1993. The split was paid to shareholders of record as of August 30, 1993.
During 1994 the Corporation's Directors increased the quarterly cash dividend, marking the thirteenth consecutive year of annual increases since the Corporation's formation in 1981. The cash dividend of $.25 paid has an indicated annual rate of $1.00 per share. Over the past five years the dividend has increased at an annual rate of 8.2%.
LIQUIDITY
The Corporation's primary source of liquidity is its strong core deposit base, raised through its retail branch system, along with a strong capital base. These funds, along with investment securities, provide the ability to meet the needs of depositors while funding new loan demand and existing commitments.
The banking subsidiaries individually maintain sufficient liquidity in the form of temporary investments and a short-term maturity structure within the investment portfolio, along with cash flow from loan repayment. Asset growth in the banking subsidiaries is funded by the growth of core deposits.
Loan demand increased significantly during the second half of 1994 while deposit growth remained relatively flat. As a result much of the loan growth was funded by short term borrowing such as Federal Home Loan Bank advances, Federal Funds purchased, and securities sold under agreement to repurchase. The Corporation intends, through one of its banking subsidiaries, to implement a bank note program which would be available to fund future loan demand.
The liquidity needs of the Parent Company, primarily cash dividends and other corporate purposes, are met through cash, short term investments and quarterly dividends from banking subsidiaries.
Management is not aware of any trend or event, other than noted above, that will result in or that is reasonably likely to occur that would result in a material increase or decrease in the Corporation's liquidity.
REGULATION AND SUPERVISION
A strict uniform system of capital-based regulation of financial institutions became effective on December 19, 1992. Under this system, there are five different categories of capitalization, with "prompt corrective actions" and significant operational restrictions imposed on institutions that are capital deficient under the categories. The five categories are: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
To be considered well capitalized an institution must have a total risk-based capital ratio of at least 10%, a Tier 1 capital ratio of at least 6%, a leverage capital ratio of 5%, and must not be subject to any order or directive requiring the institution to improve its capital level. An adequately capitalized institution has a total risk-based capital ratio of at least 8%, a Tier 1 capital ratio of at least 4% and a leverage capital ratio of at least 4%. Institutions with lower capital levels are deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized, depending on their actual capital levels. The appropriate federal regulatory agency may also downgrade an institution to the next lower capital category upon a determination that the institution is in an unsafe or unsound condition or is engaged in an unsafe or unsound practice. Institutions are required to monitor closely their capital levels and to notify their appropriate regulatory agency of any basis for a change in capital category. At December 31, 1994, the Parent Company and its subsidiaries all exceeded the minimum capital levels of the well capitalized category.
EFFECTS OF INFLATION
The assets and liabilities of the Corporation are primarily monetary in nature and are more directly affected by the fluctuation in interest rates than inflation. Movement in interest rates is a result of the perceived changes in inflation as well as monetary and fiscal policies. Interest rates and inflation do not move with the same velocity or within the same time frame; therefore, a direct relationship to the inflation rate cannot be shown. The financial information presented in this annual report, based on historical data, has a direct correlation to the influence of market levels of interest rates. Therefore, Management believes that there is no material benefit in presenting a statement of financial data adjusted for inflationary changes.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and accompanying notes, and the reports of management and independent auditors, are set forth immediately following Item 9

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
FirstMerit has had no disagreement with its accountants on accounting and financial disclosure matters and has not changed accountants during the two year period ending December 31, 1994.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
On December 15, 1994, the shareholders of the Corporation approved amendments to its Articles of Incorporation to increase the authorized common stock from 40 million to 80 million shares and to increase the authorized preferred stock from 3.5 million to 7.0 million shares.
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of FirstMerit Corporation and its subsidiaries (the "Corporation") conform to generally accepted accounting principles and to general practices within the banking industry. On December 15, 1994 the shareholders approved a change in the name of the Corporation from First Bancorporation of Ohio to FirstMerit Corporation. The Corporation's activities are considered to be a single industry segment for financial reporting purposes. The following is a description of the more significant accounting policies:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of FirstMerit Corporation (the "Parent Company") and its wholly-owned subsidiaries: First National Bank of Ohio, The Old Phoenix National Bank of Medina, Elyria Savings & Trust National Bank, The First National Bank in Massillon, Peoples National Bank, Peoples Bank, N.A., Life Savings Bank, FSB, FBOH Credit Life Insurance Company, FBOH Community Development Corporation and Bancorp Trust Co., N.A. All significant intercompany balances and transactions have been eliminated in consolidation.
(b) Investment Securities
The Corporation adopted Statement of Financial Accounting Standards No. 115 in 1994. The statement requires debt and equity securities to be classified as held-to-maturity, available-for-sale, or trading. Securities classified as held-to-maturity are measured at amortized or historical cost, securities available-for-sale and trading at fair value. Adjustment to fair value of the securities available-for-sale, in the form of unrealized holding gains and losses, is excluded from earnings and reported net of tax amount in a separate component of shareholders' equity. Adjustment to fair value of securities classified as trading is included in earnings. Gains or losses on the sales of investment securities are recognized upon realization and are determined by the specific identification method.
Effective January 1, 1994, the Corporation designated the core portion of its investment portfolio as held-to-maturity. This core portfolio is characterized by securities that will provide satisfactory earnings over a relatively wide band of interest rate movement and time frame. The Corporation has the ability to hold investment securities to maturity and it is Management's intent to hold these securities to maturity. The remaining investment securities were designated as available-for-sale because these securities may be sold under certain circumstances to fund liquidity and to manage the Corporation's interest rate risk. The Corporation does not maintain a trading account.
(c) Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, balances on deposit with correspondent banks and checks in the process of collection.
(d) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on the straight-line and declining-balance methods over the estimated useful lives of the assets. Amortization of leasehold improvements is computed on the straight-line method based on lease terms or useful lives, whichever is less.
(e) Interest and Fees on Loans
Interest income on loans is generally accrued on the principal balances of loans outstanding using the "simple-interest" method. Loan origination fees and certain direct origination costs are deferred and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
amortized, generally over the contractual life of the related loans using a level yield method. Interest is not accrued on loans for which circumstances indicate collection is questionable.
(f) Provision for Possible Loan Losses
The provision for possible loan losses charged to operating expenses is determined based on Management's evaluation of the loan portfolios and the adequacy of the allowance for possible loan losses under current economic conditions and such other factors which, in Management's judgment, deserve current recognition.
(g) Lease Financing
The Corporation leases equipment to customers on both a direct and leveraged lease basis. The net investment in financing leases includes the aggregate amount of lease payments to be received and the estimated residual values of the equipment, less unearned income and non-recourse debt pertaining to leveraged leases. Income from lease financing is recognized over the lives of the leases on an approximate level rate of return on the unrecovered investment. Residual values of leased assets are reviewed on an annual basis for reasonableness. Declines in residual values judged to be other than temporary are recognized in the period such determinations are made.
(h) Federal Income Taxes
The Corporation follows the asset and liability method of accounting for income taxes. Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect of a change in tax rates is recognized in income in the period of the enactment date.
(i) Value Ascribed To Acquired Intangibles
The value ascribed to acquired intangibles, including core deposit premiums, results from the excess of cost over fair value of net assets acquired in acquisitions of financial institutions. Such values are being amortized over periods ranging from 10 to 25 years, which represents the estimated remaining lives of the long term interest bearing assets acquired. Amortization is generally computed on an accelerated basis based on the expected reduction in the carrying value of such acquired assets. If no significant amount of long term interest bearing assets is acquired, such value is amortized over the estimated life of the acquired deposit base, with amortization periods ranging from 10 to 15 years.
(j) Trust Department Assets and Income
Property held by the Corporation in a fiduciary or other capacity for trust customers is not included in the accompanying consolidated financial statements, since such items are not assets of the Corporation. Trust income is reported generally on a cash basis which approximates the accrual basis of accounting.
(k) Per Share Data
The per share data is based on the weighted average number of shares of common stock and common stock equivalents outstanding during each year, adjusted to reflect the two-for-one stock split of August 30, 1993.
(l) Reclassifications
Certain previously reported amounts have been reclassified to conform to the current reporting presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
2. ACQUISITIONS
Great Northern Financial Corporation, a savings and loan holding company located in Barberton, Ohio, was acquired on April 22, 1994 in exchange for approximately 1,882,440 shares of the Corporation's common stock. The transaction was accounted for as a pooling of interests. The accompanying consolidated financial statements for all periods presented have been restated to account for the acquisition.
On August 10, 1994 FirstMerit Corporation entered into an Agreement of Affiliation and Plan of Merger with The CIVISTA Corporation, a savings and loan holding company headquartered in Canton, Ohio ("CIVISTA"). The agreement provided that all outstanding shares and options of CIVISTA would be exchanged for approximately 6,513,119 shares of the Corporation's common stock.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
3. INVESTMENT SECURITIES
The amortized cost and market value of investment securities including mortgage-backed securities at December 31, 1994, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities based on the issuers' rights to call or prepay obligations with or without call or prepayment penalties.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Proceeds from sales of investment securities during the years ended December 31, 1994 and 1993 were $49,257 and $28,072, respectively. Gross gains of $96 and $109 and gross losses of $172 and $80 were realized on these sales, respectively.
The carrying value of investment securities pledged to secure trust and public deposits and for purposes required or permitted by law amounted to $883,320 and $614,533 at December 31, 1994 and 1993, respectively.
4. LOANS
At December 31, 1994 and 1993, the Corporation serviced loans for others aggregating $433,903 and $396,027, respectively.
The Corporation grants loans principally to customers located within the state of Ohio.
5. ALLOWANCE FOR POSSIBLE LOAN LOSSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
6. RESTRICTIONS ON CASH AND DIVIDENDS
The average balance on deposit with the Federal Reserve Bank to satisfy reserve requirements amounted to $16,943 during 1994. The level of this balance is based upon amounts and types of customers' deposits held by the banking subsidiaries of the Corporation. In addition, deposits are maintained with other banks at levels determined by Management based upon the volumes of activity and prevailing interest rates to compensate for check-clearing, safekeeping, collection and other bank services performed by these banks. At December 31, 1994, cash and due from banks included $20,079 deposited with the Federal Reserve Bank and other banks for these reasons.
Dividends paid by the subsidiaries are the principal source of funds to enable the payment of dividends by the Corporation to its shareholders. These payments by the subsidiaries in 1995 are restricted by the regulatory agencies principally to the total of 1995 net income plus $25,048, representing the undistributed net income of the past two calendar years. Regulatory approval must be obtained for the payment of dividends of any greater amount.
7. PREMISES AND EQUIPMENT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
8. CERTIFICATES AND OTHER TIME DEPOSITS
The aggregate amount of certificates and other time deposits of $100 and over at December 31, 1994 and 1993 was $209,330 and $132,387, respectively. Interest expense on these certificates and deposits amounted to $8,541 in 1994, $5,504 in 1993, and $6,645 in 1992.
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
At December 31, 1994 and 1993, securities sold under agreements to repurchase totaled $467,393 and $185,571, respectively. The average balance of securities sold under agreements to repurchase and other borrowings for the years ended December 31, 1994 and 1993, amounted to $358,831 and $187,705, respectively. In 1994 the weighted average annual interest rate amounted to 4.64%, compared to 3.67% in 1993. The maximum amount of these borrowings at any month end amounted to $595,024 in 1994 and $215,768 in 1993.
At December 31, 1994, the Corporation had $135,429 of Federal Home Loan Bank advances of which: $100,116 have maturities within one year with interest rates of 5.90% to 8.75%; $28,850 with maturities over one year to five years with interest rates of 4.65% to 8.40%; and $6,463 over five years with interest rates of 4.75% to 8.05%.
10. FEDERAL INCOME TAXES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
11. BENEFIT PLANS
The Corporation has a defined benefit pension plan covering substantially all of its employees. In general, benefits are based on years of service and the employee's compensation. The Corporation's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax reporting purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future.
A supplemental non-qualified, non-funded pension plan for certain officers is also maintained and is being provided for by charges to earnings sufficient to meet the projected benefit obligation. The pension cost for this plan is based on substantially the same actuarial methods and economic assumptions as those used for the defined benefit pension plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The Corporation maintains a savings plan under Section 401(k) of the Internal Revenue Code, covering substantially all full-time employees after one year of continuous employment. Under the plan, employee contributions are partially matched by the Corporation. Such matching becomes vested when the employee reaches three years of credited service. Total savings plan expense was $1,874, $1,740 and $1,945 for 1994, 1993 and 1992, respectively.
12. POSTRETIREMENT MEDICAL AND LIFE INSURANCE PLAN
The Corporation has a benefit plan which presently provides postretirement medical and life insurance for retired employees. Effective January 1, 1993 the plan was changed to limit the Corporation's medical contribution to 200% of the 1993 level for employees who retire after January 1, 1993. The Corporation reserves the right to terminate or amend the plan at any time.
On January 1, 1993, the Corporation implemented Statement of Financial Accounting Standards (SFAS) No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions." This statement requires that the cost of postretirement benefits expected to be provided to current and future retirees be
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
accrued over those employees' service periods. In addition to recognizing the cost of benefits for the current period, SFAS No. 106 requires recognition of the cost of benefits earned in prior service periods (the transition obligation). Prior to 1993, postretirement benefits were accounted for on a cash basis. As of January 1, 1993, the Corporation's accumulated postretirement benefit obligation (also its transition obligation) totalled approximately $19 million. The Corporation, as permitted by SFAS No. 106, has elected to amortize the transition obligation by charges to income over a twenty year period on a straight line basis.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
13. STOCK OPTIONS
The 1992 Stock Option Program provides incentive and non-qualified options to certain key employees for up to 1,000,000 common shares of the Corporation. In addition, the 1992 Directors Stock Option Program provides for the granting of non-qualified stock options to certain non-employee directors of the Corporation for which 100,000 common shares of the Corporation have been reserved. Options under these 1992 Programs are not exercisable for at least six months from date of grant.
Options continue to be outstanding under the 1982 Incentive Stock Options Plan as amended in 1986, and these options are all fully exercisable.
Options under these plans are granted at 100% of the fair market value. Options granted as incentive stock options must be exercised within ten years; options granted as non-qualified stock options shall have terms established by a committee of the Board. Options are cancellable within defined periods of time based upon the reason for termination of employment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
14. PARENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
15. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosures of fair value information about certain financial instruments, whether or not recognized in the consolidated balance sheets. Instruments for which quoted market prices are not available are valued based on estimates using present value or other valuation techniques whose results are significantly affected by the assumptions used, including discount rates and future cash flows. Accordingly, the values so derived, in many cases, may not be indicative of amounts that could be realized in immediate settlement of the instrument. Also, certain financial instruments and all nonfinancial instruments are excluded from these disclosure requirements. For these and other reasons, the aggregate fair value amounts presented below are not intended to represent the underlying value of the Corporation.
The following methods and assumptions were used to estimate the fair values of each class of financial instrument presented:
Investment securities -- Fair values are based on quoted market prices, or for certain fixed maturity securities not actively traded estimated values are obtained from independent pricing services.
Federal funds sold -- The carrying amount is considered a reasonable estimate of fair value.
Net loans -- Fair value for loans with interest rates that fluctuate as current rates change are generally valued at carrying amounts with an appropriate discount for any credit risk. Fair values of other types of loans are estimated by discounting the future cash flows using the current rates for which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Cash and due from banks -- The carrying amount is considered a reasonable estimate of fair value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Accrued interest receivable -- The carrying amount is considered a reasonable estimate of fair value.
Deposits -- The carrying amount is considered a reasonable estimate of fair value for demand and savings deposits and other variable rate deposit accounts. The fair values for fixed maturity certificates of deposit and other time deposits are estimated using the rates currently offered for deposits of similar remaining maturities.
Securities sold under agreements to repurchase and other borrowings -- Fair values are estimated using rates currently available to the Corporation for similar types of borrowing transactions.
Accrued interest payable -- The carrying amount is considered a reasonable estimate of fair value.
Commitments to extend credit -- The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar arrangements, taking into account the remaining terms of the agreements, the creditworthiness of the counterparties, and the difference, if any, between current interest rates and the committed rates.
Standby letters of credit and financial guarantees written -- Fair values are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations.
Loans sold with recourse -- Fair value is estimated based on the present value of the estimated future liability in the event of default.
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, financial guarantees, and loans sold with recourse.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
These instruments involve, to varying degrees, elements recognized in the consolidated balance sheets. The contract or notional amount of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally are extended at the then prevailing interest rates, have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Corporation upon extension of credit is based on Management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Except for short term guarantees of $20,842 and $22,635 at December 31, 1994 and 1993, respectively, the remaining guarantees extend in varying amounts through 2008. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies, but may include marketable securities, equipment and real estate. In recourse arrangements, the Corporation accepts 100% recourse. By accepting 100% recourse, the Corporation is assuming the entire risk of loss due to borrower default. The Corporation's exposure to credit loss, if the borrower completely failed to perform and if the collateral or other forms of credit enhancement all prove to be of no value, is represented by the notional amount less any allowance for possible loan losses. The Corporation uses the same credit policies originating loans which will be sold with recourse as it does for any other type of loan.
17. CONTINGENCIES
The nature of the Corporation's business results in a certain amount of litigation. Accordingly, FirstMerit Corporation and its subsidiaries are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. Management, after consultation with legal counsel, is of the opinion that the ultimate liability of such pending matters would not have a material effect on the Corporation's financial condition or results of operations.
During 1991, a law suit was filed in federal court against First National Bank of Ohio ("Bank"), a subsidiary of the Parent Company, alleging conversion and negligence in the deposit of funds. The suit sought
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
actual damages against the Bank plus punitive damages, interest, costs, attorney's fees and other relief. Law suits brought in state court by other claimants based on the same deposits have been stayed. Management, after consultation with legal counsel, believes that the possibility of a multiple recovery by both the federal court and state court plaintiffs is unlikely and the maximum exposure for damages approximates $7.3 million.
During 1993, the federal court granted the Bank's motion for summary judgement. As a result, that suit was dismissed. The plaintiff in that suit subsequently filed a notice of appeal. The Bank is vigorously seeking to have the favorable federal judgement affirmed on appeal. The Corporation continues to believe the Bank has meritorious defenses to all claims.
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
19. SHAREHOLDER RIGHTS PLAN
The Corporation has in effect a shareholder rights plan ("Plan"). The Plan provides that each share of Common Stock has one right attached. Under the Plan, the Rights would be distributed after either of the following events: (1) a person acquires 15% or more of the Common Stock of the Corporation, except if pursuant to a tender offer on terms determined by a majority of the "Continuing Directors" to be fair; or (2) the commencement of a tender offer that would result in a change in the ownership of 15% or more of the Common Stock. After such an event, each Right would entitle the holder to purchase shares of Series A Preferred Stock of the Corporation. The Corporation may redeem the Rights for $0.01 per Right.
MANAGEMENT'S REPORT
The management of FirstMerit Corporation is responsible for the preparation and accuracy of the financial information presented in this annual report. These consolidated financial statements were prepared in accordance with generally accepted accounting principles, based on the best estimates and judgement of management.
The Corporation maintains a system of internal controls designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with the Corporation's authorization and policies, and that transactions are properly recorded so as to permit preparation of financial statements that fairly present the financial position and results of operations in conformity with generally accepted accounting principles. These systems and controls are reviewed by our internal auditors and independent auditors.
The Audit Committee of the Board of Directors is composed of only outside directors and has the responsibility for the recommendation of the independent auditors for the Corporation. The Audit Committee meets regularly with management, internal auditors and our independent auditors to review accounting, auditing and financial matters. The independent auditors and the internal auditors have free access to the Audit Committee.
/s/ HOWARD L. FLOOD /s/ GARY J. ELEK HOWARD L. FLOOD GARY J. ELEK President and Chief Senior Vice President Executive Officer and Treasurer
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors FirstMerit Corporation:
We have audited the accompanying consolidated balance sheets of FirstMerit Corporation (formerly First Bancorporation of Ohio) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three year period ended December 31, 1994. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FirstMerit Corporation and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1994 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand, L.L.P. Akron, Ohio January 17, 1995 (except for Note 2, as to which the date is January 31, 1995)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
AVERAGE CONSOLIDATED BALANCE SHEETS, FULLY-TAX EQUIVALENT INTEREST RATES AND INTEREST DIFFERENTIAL
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information about the Directors of FirstMerit, see "Election of Directors" on pages 1 through 5 of FirstMerit's Proxy Statement dated March 2, 1995 ("Proxy Statement"), which is incorporated herein by reference.
Information about the Executive Officers of FirstMerit appears in Part I of this report.
Disclosures by FirstMerit with respect to compliance with Section 16(a) appear on page 5 of the Proxy Statement, and are incorporated herein by reference.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
See "Executive Compensation and Other Information" on pages 6 through 16 of the Proxy Statement, which is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Principal Shareholders" and "Election of Directors" at page 20, and pages 1 through 5, respectively, of the Proxy Statement, which are incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Certain Relationships and Related Transactions" at page 16 of the Proxy Statement, which is incorporated herein by reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following Financial Statements appear in Part II of this Report:
Independent Auditors' Report
Management's Report
Consolidated Balance Sheets
December 31, 1994 and 1993
Consolidated Statements of Income
Years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1994, 1993, and 1992
Consolidated Statements of Cash Flows
Years ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
Years ended December 31, 1994, 1993 and 1992
(a)(2) Financial Statement Schedules
All schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes which appear in Part II of this report.
(a)(3) Management Contracts or Compensatory Plans or Arrangements (for remaining Exhibits, see the Exhibit Index which appears following the Signatures section of this report).
CONTRACT, PLAN OR ARRANGEMENT REFERENCE LOCATION - ----------------------------------- ----------------------------------- 1982 Incentive Stock Option Plan of Registration Statement on Form S-8 FirstMerit Corporation No. 33-7266, Exhibit 4.2 Incentive Stock Option Agreement Registration Statement on Form S-8 relating to 1982 Incentive Stock No. 33-7266, Exhibit 4.3 Option Plan of FirstMerit Corporation 1992 Stock Option Program of Form 10-K for fiscal year ended FirstMerit Corporation December 31, 1991, Exhibit 10(c) Incentive Stock Option Agreement Form 10-K for fiscal year ended relating to 1992 Incentive Stock December 31, 1991, Exhibit 10(d) Option Plan of FirstMerit Corporation Non-Qualified Stock Option Form 10-K for fiscal year ended Agreement relating to the 1992 December 31, 1991, Exhibit 10(e) Stock Option Program of FirstMerit Corporation 1985 FirstMerit Corporation Stock Registration Statement on Form S-8 Plan (CV) No. 33-57557, Exhibit 10(a) 1993 FirstMerit Corporation Stock Registration Statement on Form S-8 Plan (CV) No. 33-57557, Exhibit 10(b) Employee Stock Purchase Plan of Form 10-K for fiscal year ended FirstMerit Corporation December 31, 1991, Exhibit 10(f) 1992 Directors Stock Option Program Form 10-K for fiscal year ended December 31, 1991, Exhibit 10(g) Directors Stock Option Agreement Form 10-K for fiscal year ended relating to the 1992 Directors December 31, 1991, Exhibit 10(h) Stock Option Program of FirstMerit Corporation FirstMerit Corporation Executive Form 10-K for fiscal year ended Supplemental Retirement Plan December 31, 1991, Exhibit 10(i) Form of FirstMerit Corporation Form 10-K for fiscal year ended Unfunded Supplemental Benefit December 31, 1991, Exhibit 10(j) Plan FirstMerit Corporation Directors' Form 10-K for fiscal year ended Deferral Fee Plan December 31, 1989, Exhibit 10(e) Termination Agreement of Howard L. Form 10-K for fiscal year ended Flood December 31, 1991, Exhibit 10(l) Form of Termination Agreement with Form 10-K for fiscal year ended certain of the executive officers December 31, 1992, Exhibit 10(m) of FirstMerit Corporation and its Subsidiaries Addendum to Termination Agreement Form 10-K for fiscal year ended of Richard L. Hardgrove December 31, 1993, Exhibit 10(r)
CONTRACT, PLAN OR ARRANGEMENT REFERENCE LOCATION - ----------------------------------- ----------------------------------- Membership Agreement of Howard L. Form 10-K for fiscal year ended Flood with respect to the December 31, 1991, Exhibit 10(o) FirstMerit Corporation Executive Supplemental Retirement Plan Membership Agreement of Scott A. Form 10-K for fiscal year ended Lyons, Jr. with respect to the December 31, 1991, Exhibit 10(q) FirstMerit Corporation Executive Supplemental Retirement Plan Supplemental Pension Agreement of Form 10-K for fiscal year ended John R. Macso December 31, 1991, Exhibit 10(r) First Amendment to the FirstMerit Form 10-K for fiscal year ended Corporation Executive December 31, 1993, Exhibit 10(s) Supplemental Retirement Plan Second Amendment to the FirstMerit Form 10-K for fiscal year ended Corporation Executive December 31, 1994, Exhibit 10(u) Supplemental Retirement Plan First Amendment to the FirstMerit Form 10-K for fiscal year ended Corporation Unfunded Supplemental December 31, 1994, Exhibit 10(v) Benefit Plan FirstMerit Corporation Executive Form 10-K for fiscal year ended Committee Life Insurance Program December 31, 1994, Exhibit 10(w) Summary Long Term Disability Plan Form 10-K for fiscal year ended December 31, 1994, Exhibit 10(x)
(b) Reports on Form 8-K
On December 19, 1994, FirstMerit filed a report on Form 8-K relating to a change in the registrant's corporate name from First Bancorporation of Ohio to FirstMerit Corporation.
(c) Exhibits
See the Exhibit Index which appears following the Signatures section of this report.
(d) Financial Statements
See subparagraph (a)(1) above.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF AKRON, STATE OF OHIO, ON THE 28TH DAY OF FEBRUARY, 1995.
FirstMerit Corporation
By:/s/ HOWARD L. FLOOD -------------------------------- Howard L. Flood, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on the 28th day of February, 1995 by the following persons (including a majority of the Board of Directors of the registrant) in the capacities indicated.
SIGNATURE TITLE --------- -----
/s/ HOWARD L. FLOOD President and Chief Executive Officer - --------------------------------- (Principal Executive Officer) and Director Howard L. Flood
/s/ GARY J. ELEK Senior Vice President and Treasurer - --------------------------------- (Principal Financial Officer and Gary J. Elek Principal Accounting Officer)
/s/ JOHN C. BLICKLE Director - --------------------------------- John C. Blickle
/s/ ROBERT M. CARTER Director - --------------------------------- Robert M. Carter
Director - --------------------------------- Richard A. Chenoweth
Director - --------------------------------- Elizabeth A. Dalton
Director - --------------------------------- Richard G. Gilbert
/s/ TERRY L. HAINES Director - --------------------------------- Terry L. Haines
/s/ RICHARD L. HARDGROVE Director - --------------------------------- Richard L. Hardgrove
/s/ CLIFFORD J. ISROFF Director - --------------------------------- Clifford J. Isroff
/s/ PHILIP A. LLOYD, II Director - --------------------------------- Philip A. Lloyd, II
Director - --------------------------------- Robert G. Merzweiler
Director - --------------------------------- Stephen E. Myers
/s/ GILBERT H. NEAL Director - --------------------------------- Gilbert H. Neal
/s/ ROGER T. READ Director - --------------------------------- Roger T. Read
Director - --------------------------------- Justin T. Rogers, Jr.
/s/ DEL SPITZER Director - --------------------------------- Del Spitzer
EXHIBIT INDEX