FirstMerit Corporation and Subsidiaries

2. Acquisitions and Merger-Related Expenses

On May 22, 1998, the Corporation completed the acquisition of CoBancorp, Inc., a bank holding company headquartered in Elyria, Ohio, with consolidated assets of approximately $666 million. CoBancorp, Inc. was merged with and into the Corporation and accounted for under “purchase” accounting requirements. At the time of the merger, the value of the transaction was $174.1 million. In connection with the merger, the Corporation issued
3.897 million shares of its common stock (valued at $29.375 per share), paid approximately $50.0 million in cash, and assumed merger-related liabilities of approximately $9.6 million. The transaction created goodwill of approximately $138.3 million that is being amortized primarily over 25 years.

On September 14, 1998, FirstMerit closed a secondary underwritten public offering of 1.38 million common shares of FirstMerit Corporation. The reissuance of these shares was necessary to allow the Corporation to treat the Security First merger as a pooling-of-interests.

On October 23, 1998, the Corporation completed the acquisition of Security First Corp., a $771 million holding company headquartered in Mayfield Heights, Ohio. Subsidiaries of Security First Corp. included Security Federal Savings and Loan Association of Cleveland and First Federal Savings Bank of Kent. These subsidiaries were merged with and into FirstMerit Bank, N. A. Under terms of the merger agreement, Security First Corp. was merged with and into the Corporation. The transaction was structured with a fixed exchange ratio of 0.8855 shares of FirstMerit common stock for each common share of Security First, Corp. At the time of the merger, the “pooling-of-interests” transaction was valued at $22.58 per share or approximately $199 million. The accompanying consolidated financial statements for all periods presented have been restated to account for the acquisition. The information presented for 1997 and prior periods coincides with the fiscal year-ends of each entity, which were December 31 for FirstMerit and March 31 for Security First. For example, information as of year-end 1997 combines FirstMerit’s balances at December 31, 1997 with Security First’s balances at March 31, 1998. As a result of this difference in fiscal year ends, the Corporation made an adjustment to shareholders’ equity of $1,841 which represents Security First’s net income and cash dividends paid for the three months ended March 31, 1998.

In conjunction with the Security First acquisition, the Corporation incurred merger-related expenses of approximately $17.2 million, before taxes. The components of the costs are as follows: severance and employee-related expenses of $1.7 million, occupancy and equipment charges of $2.0 million, conversion and contract termination costs of $1.5 million, professional services and other costs of $4.7 million, a conforming adjustment to the provision for possible loan losses of $7.3 million. On an after tax basis, the merger-related expenses totaled approximately $12.8 million, or $0.18 per diluted share. The Other Expenses section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” provides additional details. Some minor reclassification of merger costs from those just described have taken place and are displayed in the Other Expenses section. Additionally, during the 1999 third quarter, based on then current information, estimated liabilities associated with loan conversion expenses were reduced by $0.4 million. This amount was taken into third quarter income but had no effect on core earnings as the increase in reported income was offset by a reduction of the same amount in merger-related expenses.

As of December 31, 1999, as shown in the following table, the remaining liabilities associated with these costs were approximately $1.4 million, most of which is classified as other operating expenses, and relates to final resolution on the sale of duplicate facilities.