| FIRSTMERIT CORP /OH/ ITEM 1A RISK FACTORS Changes in interest rates could have a material adverse effect on our financial condition and results of operations |
| Our earnings depend substantially on our interest rate spread, which is the difference between (i) the rates we earn on loans, securities and other earning assets and (ii) the interest rates we pay on deposits and other borrowings |
| These rates are highly sensitive to many factors beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities |
| As market interest rates rise, we will have competitive pressures to increase the rates we pay on deposits, which will result in a decrease of our net interest income and could have a material adverse effect on our financial condition and results of operations |
| 7 _________________________________________________________________ [38]Table of Contents Our earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies |
| The policies of the Federal Reserve Board impact us significantly |
| Its policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits and can also affect the value of financial instruments we hold |
| Those policies determine to a significant extent our cost of funds for lending and investing |
| Changes in those policies are beyond our control and are difficult to predict |
| Federal Reserve Board policies can also affect our borrowers, potentially increasing the risk that they may fail to repay their loans |
| For example, a tightening of the money supply by the Federal Reserve Board could reduce the demand for a borrower’s products and services |
| This could adversely affect the borrower’s earnings and ability to repay its loan, which could have a material adverse effect on our financial condition and results of operations |
| Changes in economic and political conditions could adversely affect our earnings, as our borrowers’ ability to repay loans and the value of the collateral securing our loans decline |
| Our success depends, to a certain extent, upon economic and political conditions, local and national, as well as governmental monetary policies |
| Conditions such as inflation, recession, unemployment, changes in interest rates, money supply and other factors beyond our control may adversely affect our asset quality, deposit levels and loan demand and, therefore, our earnings |
| Because we have a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral |
| Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings |
| In addition, substantially all of our loans are to individuals and businesses in Ohio |
| Consequently, any decline in the economy of this market area could have a materially adverse effect on our financial condition and results of operations |
| Terrorism, acts of war or international conflicts could have a material adverse effect on our financial condition and results of operations |
| Acts or threats of war or terrorism, international conflicts, including ongoing military operations in Iraq and Afghanistan, and the actions taken by the United States and other governments in response to such events could negatively impact general business and economic conditions in the United States |
| If terrorist activity, acts of war or other international hostilities cause an overall economic decline, our financial condition and operating results could be materially adversely affected |
| The potential for future terrorist attacks, the national and international responses to terrorist attacks or perceived threats to national security and other actual or potential conflicts or acts of war, including conflict in the Middle East, have created many economic and political uncertainties that could seriously harm our business and results of operations in ways that cannot presently be predicted |
| The primary source of our income from which we pay dividends is the receipt of dividends from FirstMerit Bank |
| The availability of dividends from FirstMerit Bank is limited by various statutes and regulations |
| It is possible, depending upon the financial condition of FirstMerit Bank and other factors, that the OCC could assert that payment of dividends or other payments is an unsafe or unsound practice |
| In addition, the payment of dividends by other subsidiaries is also subject to the laws of the subsidiary’s state of incorporation, and FirstMerit’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors |
| In the event that FirstMerit Bank was unable to pay dividends to us, we in turn would likely have to reduce or stop paying dividends on our common shares |
| Our failure to pay dividends on our common shares could have a material adverse effect on the market price of our common shares |
| 8 _________________________________________________________________ [39]Table of Contents If our actual loan losses exceed our allowance for loan losses, our net income will decrease |
| Our loan customers may not repay their loans according to their terms, and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance |
| We may experience significant loan losses, which could have a material adverse effect on our operating results |
| In accordance with accounting principles generally accepted in the United States, we maintain an allowance for loan losses to provide for loan defaults and non-performance and a reserve for unfunded loan commitments, which when combined, we refer to as the allowance for loan losses |
| Our allowance for loan losses may not be adequate to cover actual credit losses, and future provisions for credit losses could have a material adverse effect on our operating results |
| Our allowance for loan losses is based on prior experience, as well as an evaluation of the risks in the current portfolio |
| The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control, and these losses may exceed current estimates |
| Federal regulatory agencies, as an integral part of their examination process, review our loans and allowance for loan losses |
| We cannot assure you that we will not further increase the allowance for loan losses or that regulators will not require us to increase this allowance |
| Either of these occurrences could have a material adverse effect on our financial condition and results of operations |
| We depend upon the accuracy and completeness of information about customers and counterparties |
| In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information provided to us by customers and counterparties, including financial statements and other financial information |
| We may also rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors |
| For example, in deciding whether to extend credit to a business, we may assume that the customer’s audited financial statements conform with generally accepted accounting principles and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer |
| We may also rely on the audit report covering those financial statements |
| Our financial condition and results of operations could be negatively impacted to the extent we rely on financial statements that do not comply with generally accepted accounting principles or that are materially misleading |
| Our organizational documents may have the effect of discouraging a third party from making an acquisition of FirstMerit by means of a tender offer, proxy contest or otherwise |
| Our amended and restated articles of incorporation and amended and restated code of regulations contain provisions that could make the removal of incumbent directors more difficult and time-consuming and may have the effect of discouraging a tender offer or other takeover attempt not previously approved by our Board of Directors |
| Additionally, our Board of Directors declared a dividend of one right for each FirstMerit common share outstanding pursuant to a shareholder rights plan |
| If triggered, the shareholder rights plan would cause substantial dilution to a person or group of persons that acquires more than 10prca of FirstMerit’s outstanding common shares on terms not approved by our Board of Directors |
| This shareholder rights plan could discourage or make more difficult a merger, tender offer or other similar transaction with FirstMerit without the prior approval of FirstMerit’s Board of Directors |
| Government regulation can result in limitations on our operations |
| The financial services industry is extensively regulated |
| FirstMerit Bank is subject to extensive regulation, supervision and examination by the OCC and the FDIC As a holding company, we also are subject to regulation and oversight by the OCS Federal and state regulation is designed primarily to protect the deposit insurance funds and consumers, and not to benefit our shareholders |
| Such 9 _________________________________________________________________ [40]Table of Contents regulations can at times impose significant limitations on our operations |
| Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for loan losses |
| Proposals to change the laws governing financial institutions are frequently raised in Congress and before bank regulatory authorities |
| Changes in applicable laws or policies could materially affect our business, and the likelihood of any major changes in the future and their effects are impossible to determine |
| Moreover, it is impossible to predict the ultimate form any proposed legislation might take or how it might affect us |
| We are subject to examinations and challenges by tax authorities |
| In the normal course of business, FirstMerit and its subsidiaries are routinely subject to examinations and challenges from federal and state tax authorities regarding the amount of taxes due in connection with investments we have made and the businesses in which we have engaged |
| Recently, federal and state taxing authorities have become increasingly aggressive in challenging tax positions taken by financial institutions |
| These tax positions may relate to tax compliance, sales and use, franchise, gross receipts, payroll, property and income tax issues, including tax base, apportionment and tax credit planning |
| The challenges made by tax authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions |
| If any such challenges are made and are not resolved in our favor, they could have a material adverse effect on our financial condition and results of operations |
| Environmental liability associated with commercial lending could have a material adverse effect on our business, financial condition and results of operations |
| In the course of our business, we may acquire, through foreclosure, commercial properties securing loans that are in default |
| There is a risk that hazardous substances could be discovered on those properties |
| In this event, we could be required to remove the substances from and remediate the properties at our cost and expense |
| The cost of removal and environmental remediation could be substantial |
| We may not have adequate remedies against the owners of the properties or other responsible parties and could find it difficult or impossible to sell the affected properties |
| These events could have a material adverse effect on our financial condition and results of operation |
| Our business strategy includes significant growth plans |
| Our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively |
| We intend to continue pursuing a profitable growth strategy |
| Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in significant growth stages of development |
| We cannot assure you that we will be able to expand our market presence in our existing markets or successfully enter new markets or that any such expansion will not adversely affect our results of operations |
| Failure to manage our growth effectively could have a material adverse effect on our business, future prospects, financial condition or results of operations and could adversely affect our ability to successfully implement our business strategy |
| Also, if we grow more slowly than anticipated, our operating results could be materially adversely affected |
| Our ability to grow successfully will depend on a variety of factors including the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market areas and our ability to manage our growth |
| While we believe we have the management resources and internal systems in place to successfully manage our future growth, there can be no assurance growth opportunities will be available or growth will be successfully managed |
| 10 _________________________________________________________________ [41]Table of Contents We face risks with respect to future expansion |
| We may acquire other financial institutions or parts of those institutions in the future and we may engage in de novo branch expansion |
| We may also consider and enter into new lines of business or offer new products or services |
| Acquisitions and mergers involve a number of expenses and risks, including: • the time and costs associated with identifying and evaluating potential acquisitions and merger targets; • the estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target institution may not be accurate; • the time and costs of evaluating new markets, hiring experienced local management and opening new offices, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion; • our ability to finance an acquisition and possible dilution to our existing shareholders; • the diversion of our management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the combining businesses; • entry into new markets where we lack experience; • the introduction of new products and services into our business; • the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations; and • the risk of loss of key employees and customers |
| We may incur substantial costs to expand, and we can give no assurance such expansion will result in the levels of profits we seek |
| There can be no assurance integration efforts for any future mergers or acquisitions will be successful |
| Also, we may issue equity securities in connection with future acquisitions, which could cause ownership and economic dilution to our current shareholders |
| There is no assurance that, following any future mergers or acquisitions, our integration efforts will be successful or that, after giving effect to the acquisition, we will achieve profits comparable to or better than our historical experience |
| Future sales of our common shares or other securities may dilute the value of our common shares |
| In many situations, our Board of Directors has the authority, without any vote of our shareholders, to issue shares of our authorized but unissued securities, including common shares authorized and unissued under our stock option plans |
| In the future, we may issue additional securities, through public or private offerings, in order to raise additional capital |
| Any such issuance would dilute the percentage of ownership interest of existing shareholders and may dilute the per share book value of the common shares |
| We operate in an extremely competitive market, and our business will suffer if we are unable to compete effectively |
| In our market area, we encounter significant competition from other commercial banks, savings and loan associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions |
| The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems and the accelerating pace of consolidation among financial service providers |
| Many of our competitors have substantially greater resources and lending limits than we do and may offer services that we do not or cannot provide |
| Our ability to maintain our 11 _________________________________________________________________ [42]Table of Contents history of strong financial performance and return on investment to shareholders will depend in part on our continued ability to compete successfully in our market area and on our ability to expand our scope of available financial services as needed to meet the needs and demands of our customers |
| Consumers may decide not to use banks to complete their financial transactions |
| Technology and other changes are allowing parties to complete financial transactions that historically have involved banks at one or both ends of the transaction |
| For example, consumers can now pay bills and transfer funds directly without banks |
| The process of eliminating banks as intermediaries, known as disintermediation, could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits Loss of key employees may disrupt relationships with certain customers |
| Our business is primarily relationship-driven in that many of our key employees have extensive customer relationships |
| Loss of a key employee with such customer relationships may lead to the loss of business if the customers were to follow that employee to a competitor |
| While we believe our relationship with our key producers is good, we cannot guarantee that all of our key personnel will remain with our organization |
| Loss of such key personnel, should they enter into an employment relationship with one of our competitors, could result in the loss of some of our customers |
| Impairment of goodwill or other intangible assets could require charges to earnings, which could result in a negative impact on our results of operations |
| Under current accounting standards, goodwill and certain other intangible assets with indeterminate lives are no longer amortized but, instead, are assessed for impairment periodically or when impairment indicators are present |
| Assessment of goodwill and such other intangible assets could result in circumstances where the applicable intangible asset is deemed to be impaired for accounting purposes |
| Under such circumstances, the intangible asset’s impairment would be reflected as a charge to earnings in the period during which such impairment is identified |
| We may be exposed to liability under non-solicitation agreements to which one or more of our officers may be a party to with certain of our competitors |
| From time to time, we may hire employees who may be parties to non-solicitation or non-competition agreements with one or more of our competitors |
| Although we expect that all such employees will comply with the terms of their non-solicitation agreements, it is possible that if customers of our competitors chose to move their business to us, or employees of our competitor seek employment with us, even without any action on the part of any employee bound by any such agreement, that one or more of our competitors may chose to bring a claim against us and our employee |
| The price of our common shares may be volatile, which may result in losses for shareholders |
| The market price for our common shares has been volatile in the past, and several factors could cause the price to fluctuate substantially in the future |
| These factors include: • announcements of developments related to our business; • fluctuations in our results of operations; • sales of substantial amounts of our securities into the marketplace; • general conditions in our markets or the worldwide economy; • a shortfall in revenues or earnings compared to securities analysts’ expectations; 12 _________________________________________________________________ [43]Table of Contents • changes in analysts’ recommendations or projections; and • our announcement of new acquisitions or other projects |
| The market price of our common shares may fluctuate significantly in the future, and these fluctuations may be unrelated to our performance |
| General market price declines or market volatility in the future could adversely affect the price of our common shares, and the current market price may not be indicative of future market prices |
| We may be a defendant in a variety of litigation and other actions, which may have a material adverse effect on our financial condition and results of operation |
| FirstMerit and its subsidiaries may be involved from time to time in a variety of litigation arising out of its business |
| Our insurance may not cover all claims that may be asserted against us, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation |
| Should the ultimate judgments or settlements in any litigation exceed our insurance coverage, they could have a material adverse effect on our financial condition and results of operation |
| In addition, we may not be able to obtain appropriate types or levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms, if at all |
| Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of our computer systems or otherwise, could severely harm our business |
| As part of our business, we collect, process and retain sensitive and confidential client and customer information on behalf of FirstMerit and other third parties |
| Despite the security measures we have in place, our facilities and systems, and those of our third party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events |
| Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by FirstMerit or by our vendors, could severely damage our reputation, expose us to the risks of litigation and liability, disrupt our operations and have a material adverse effect on our business |