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.

Forward-Looking Statements - Safe Harbor Statement

Information in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section above and within this report, which is not historical or factual in nature, and which relates to expectations for future shifts in loan portfolio to consumer and commercial loans, increase in core deposit base, allowance for loan losses, demands for FirstMerit services and products, future services and products to be offered, increased numbers of customers, and like items, constitute forward-looking statements that involve a number of risks and uncertainties. The following items are among the factors that could cause actual results to differ materially from the forward-looking statements: general economic conditions, including their impact on capital expenditures; business conditions in the banking industry; the regulatory environment; rapidly changing technology and evolving banking industry standards; competitive factors, including increased competition with regional and national financial institutions; new service and product offerings by competitors and price pressures; and like items.

FirstMerit cautions that any forward-looking statements contained in this report, in a report incorporated by reference to this report, or made by Management of FirstMerit in this report, in other reports and filings, in press releases and in oral statements, involve risks and uncertainties and are subject to change based upon the factors listed above and like items. Actual results could differ materially from those expressed or implied, and therefore the forward-looking statements should be considered in light of these factors. FirstMerit may from time to time issue other forward-looking statements.

Year 2000 Issue

The Year 2000 issue is the result of computer programs being written using two digits rather than four to define an applicable year. Any of a company’s hardware, date-driven automated equipment, or computer programs that have date sensitive software may recognize a date using “00” as the year 1900 rather than the year 2000. This faulty recognition could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in normal business activities.

To ensure the Year 2000 issue was properly addressed, significant resources were used. Consulting and contract programming resources supplemented internal staff and provided specialized expertise where necessary. FirstMerit used newly acquired software tools and enhanced procedures to assist in code remediation, testing, and controlling the numerous software changes. Staff throughout the organization reviewed testing results. Coordination with major business partners also took place.

The Corporation first contracted the services of an application development, outsourcing and integration services firm to perform an enterprise wide business unit risk assessment of Year 2000 issues. By year-end 1997, the firm had completed the enterprise wide business unit risk assessment for the Corporation which included formal communications with all significant suppliers to determine the extent to which the Corporation is vulnerable to those third parties’ failure to address their own Year 2000 issues.

During 1998, the Corporation contracted with a different outside consulting firm to provide an independent assessment of our Year 2000 efforts. Results were reported to the Corporation’s Board of Directors in November 1998. Management and the Board of Directors agreed with the findings and overall view that the project is on track. The issues identified by the independent consultants were already in process of being addressed. Additionally, as a nationally chartered bank, the Corporation’s banking subsidiary falls under the regulatory guidelines published by the Federal Financial Institutions Examination Council (FFIEC). Periodic audits of the Corporation’s Year 2000 activities are performed by the Office of the Comptroller of the Currency (OCC) as well as the Federal Reserve Bank.

As a sign of confidence regarding the Corporation’s Year 2000 efforts, the announcement was made in April 1999 that some branches would be open on January 1, 2000. FirstMerit was the first bank in any of our markets to make such an announcement. During 1999, the Corporation completed extensive Year 2000 testing, contingency planning and year-end preparation.

The FFIEC considers five general Year 2000 phases: Awareness, Assessment, Renovation, Validation and Implementation. The five phases are explained as follows along with Corporation’s status at December 31, 1999:

Awareness: The Awareness phase defines the Year 2000 problem, gains executive level support and establishes an overall strategy. The Corporation began working on the Year 2000 issue in 1996 with identification of major vendors and their compliance status. Executive Management was proactive in the management of the project and contracted with consultants to assist in performing the assessment and formulating a strategy. The awareness phase was expanded to include a widespread customer awareness program to help educate customers of the Year 2000 issue and allow monitoring of FirstMerit’s progress.

Assessment: The Assessment phase defines the size and complexity of the problem and the magnitude of the effort to address Year 2000 issues. FirstMerit completed the assessment phase for all mainframe and microcomputer systems during the first quarter of 1998. FirstMerit has 82 mainframe applications of which 30 are considered “mission critical.” The majority of the applications are vendor packages. Significant microcomputer software and hardware upgrades for Year 2000 compliance are substantially complete. The assessment of non-information systems such as security systems, elevators, etc. was completed during the second quarter of 1998.