1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1995
COMMISSION FILE NUMBER 0-10161
FIRSTMERIT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-1339938
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
III CASCADE PLAZA, 7TH FLOOR, AKRON, OHIO 44308
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(216) 384-8000
(TELEPHONE NUMBER)
SHARES OF COMMON STOCK, AS OF SEPTEMBER 30, 1995
33,604,474
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
2
FIRSTMERIT CORPORATION
PART I - FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
- - - -----------------------------
The following statements included in the quarterly unaudited report to
shareholders are incorporated by reference:
Consolidated Balance Sheets as of September 30, 1995, December 31,
1994 and September 30, 1994
Consolidated Statements of Income for the nine months ended September
30, 1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity for the
year ended December 31, 1994 and for the nine months ended September
30, 1995
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1995 and 1994
Notes to Consolidated Financial Statements as of September 30, 1995,
December 31, 1994, and September 30, 1994
Management's Discussion and Analysis of Financial Conditions as of
September 30, 1995, December 31, 1994 and September 30, 1994 and
Results of Operations for the quarter and nine months ended September
30, 1995 and 1994 and for the year ended December 31, 1994.
3
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- - - ---------------------------------------
(In thousands)
--------------------------------------------------
September 30, December 31, September 30,
--------------------------------------------------
1995 1994 1994
- - - --------------------------------------------------------------------------------------------------------------------------
ASSETS
Investment securities $ 1,339,087 1,610,360 1,676,454
Federal funds sold 9,516 13,700 12,487
Loans less unearned income 3,883,579 3,687,889 3,537,467
Less allowance for possible loan losses 38,673 35,834 35,613
----------------------------------------------------
Net loans 3,844,906 3,652,055 3,501,854
----------------------------------------------------
Total earning assets 5,193,509 5,276,115 5,190,795
Cash and due from banks 240,879 238,073 224,907
Premises and equipment, net 92,689 83,223 81,654
Accrued interest receivable and other assets 93,676 125,162 113,433
----------------------------------------------------
$ 5,620,753 5,722,573 5,610,789
====================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-non-interest bearing $ 729,192 733,171 689,276
Demand-interest bearing 412,332 475,099 463,167
Savings 1,475,968 1,633,189 1,683,209
Certificates and other time deposits 1,809,685 1,699,998 1,638,776
----------------------------------------------------
Total deposits 4,427,177 4,541,457 4,474,428
Securities sold under agreements to repurchase
and other borrowings 590,420 612,624 575,929
----------------------------------------------------
Total funds 5,017,597 5,154,081 5,050,357
Accrued taxes, expenses, and other liabilities 59,468 45,173 38,216
----------------------------------------------------
Total liabilities 5,077,065 5,199,254 5,088,573
Shareholders' equity:
Series preferred stock, without par value:
authorized and unissued 7,000,000 shares - - -
Common stock, without par value:
authorized 80,000,000 shares; issued 33,604,474
33,325,359 and 33,319,759 shares, respectively 102,859 99,882 99,749
Net unrealized holding gains(losses)
on available for sale securities (6,798) (23,205) (13,319)
Retained earnings 447,627 446,642 435,786
----------------------------------------------------
Total shareholders' equity 543,688 523,319 522,216
----------------------------------------------------
$ 5,620,753 5,722,573 5,610,789
====================================================
4
FIRSTMERIT CORPORATION AND SUBSIDIARIES
AVERAGE CONSOLIDATED BALANCE SHEETS
- - - ---------------------------------------
(In thousands except ratios)
Quarters
----------------------------------------------------------------------------------
1995 1994
----------------------------------------------------------------------------------
3rd 2nd 1st 4th 3rd
ASSETS
Investment securities $ 1,394,350 1,479,016 1,498,357 1,645,526 1,647,422
Federal funds sold 17,927 9,465 15,482 31,911 17,110
Loans less unearned income 3,864,206 3,869,187 3,807,842 3,611,012 3,354,209
Less allowance for possible
loan losses 38,228 37,833 36,450 35,902 35,907
-------------- --------- --------- --------- ---------
Net loans 3,825,978 3,831,354 3,771,392 3,575,110 3,318,302
-------------- --------- --------- --------- ---------
Total earning assets 5,238,255 5,319,835 5,285,231 5,252,547 4,982,834
Cash and due from banks 216,342 205,097 232,548 207,142 204,351
Premises and equipment, net 90,999 87,263 84,590 82,181 80,783
Accrued interest receivable
and other assets 88,309 99,071 109,206 109,163 112,377
-------------- --------- --------- --------- ---------
$ 5,633,905 5,711,266 5,711,575 5,651,033 5,380,345
============== ========= ========= ========= =========
LIABILITIES
Deposits:
Demand-non-interest bearing $ 725,235 710,734 708,097 689,964 660,783
Demand-interest bearing 415,810 424,126 444,005 470,873 461,667
Savings 1,485,227 1,528,247 1,588,708 1,665,245 1,685,365
Certificates and other time
deposits 1,811,975 1,793,889 1,717,283 1,674,635 1,573,435
-------------- ---------- --------- --------- ---------
Total deposits 4,438,247 4,456,996 4,458,093 4,500,717 4,381,250
Securities sold under agreements to
repurchase and other borrowings 588,133 649,942 684,794 575,561 443,836
-------------- ---------- --------- --------- ---------
Total funds 5,026,380 5,106,938 5,142,887 5,076,278 4,825,086
Accrued taxes, expenses and
other liabilities 70,054 77,462 50,676 49,517 39,139
-------------- --------- --------- --------- ---------
Total liabilities 5,096,434 5,184,400 5,193,563 5,125,795 4,864,225
SHAREHOLDERS' EQUITY 537,471 526,866 518,012 525,238 516,120
-------------- --------- --------- --------- ---------
$ 5,633,905 5,711,266 5,711,575 5,651,033 5,380,345
============== ========== ========== ========== ==========
RATIOS
Net income as a percentage of:
Average assets 1.17% 0.89% -0.08% 1.27% 1.30%
Average shareholders' equity 12.29% 9.64% -0.93% 13.61% 13.53%
5
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- - - ---------------------------------------
(In thousands except per share data)
------------------------------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------
1995 1994 1995 1994
------------------------------------------------------------
Interest income:
Interest and fees on loans $ 83,102 70,175 $243,329 199,173
Interest and dividends on securities:
Taxable 19,808 22,598 63,456 63,628
Exempt from Federal income taxes 1,596 1,909 4,882 5,701
Interest on Federal funds sold 295 228 793 1,805
---------------------------- -------------------------
Total interest income 104,801 94,910 312,460 270,307
---------------------------- -------------------------
Interest expense:
Interest on deposits:
Demand-interest bearing 2,194 2,754 6,957 8,095
Savings 9,294 10,758 29,557 32,122
Certificates and other time deposits 25,653 17,450 72,154 48,985
Interest on securities sold under agreements
to repurchase and other borrowings 8,375 5,369 28,291 10,141
---------------------------- -------------------------
Total interest expense 45,516 36,331 136,959 99,343
---------------------------- -------------------------
Net interest income 59,285 58,579 175,501 170,964
Provision for possible loan losses 2,820 1,198 8,118 3,468
---------------------------- -------------------------
Net interest income after provision
for possible loan losses 56,465 57,381 167,383 167,496
---------------------------- -------------------------
Other income:
Trust department income 2,597 2,506 7,915 8,463
Service charges on depositors' accounts 5,044 5,171 15,188 15,496
Credit card fees 2,412 2,186 6,871 6,194
Securities gains (losses) 126 (51) 566 653
Other operating income 7,873 7,156 22,278 21,738
---------------------------- -------------------------
Total other income 18,052 16,968 52,818 52,544
---------------------------- -------------------------
74,517 74,349 220,201 220,040
---------------------------- -------------------------
Other expenses:
Salaries, wages, pension and employee benefits 23,978 24,336 77,969 72,578
Net occupancy expense 4,318 3,530 12,438 10,597
Equipment expense 3,135 2,931 9,522 8,804
Other operating expense 18,170 18,219 58,230 51,336
---------------------------- -------------------------
Total other expenses 49,601 49,016 158,159 143,315
---------------------------- -------------------------
Income before Federal income taxes 24,916 25,333 62,042 76,725
Federal income taxes 8,267 7,731 33,913 23,395
---------------------------- -------------------------
Net income $ 16,649 17,602 28,129 53,330
============================ =========================
Per share data based on average number of
shares outstanding:
Net income $ 0.50 0.53 0.84 1.60
Dividends paid $ 0.25 0.25 0.75 0.73
Weighted average number of shares
outstanding 33,563,711 33,312,439 33,447,352 33,305,235
6
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- - - ----------------------------------------------------------
Year Ended December 31, 1994 and
Nine Months Ended September 30, 1995
----------------------------------------------------------------
Net unrealized
holding gains
(losses) on Total
Common available for Retained Shareholders'
Stock sale securities Earnings Equity
----------- --------------- --------- -------------
Balance at December 31, 1993 $95,992 - 404,129 500,121
Net Income - - 71,349 71,349
Cash dividends ($.98 per share) - - (28,836) (28,836)
Stock options exercised 3,890 - - 3,890
Market adjustment investment securities - (23,205) - (23,205)
---------- --------------- --------- -------------
Balance at December 31, 1994 99,882 (23,205) 446,642 523,319
Net Income - - 28,129 28,129
Cash dividends ($.75 per share) - - (27,758) (27,758)
Stock options exercised 2,977 - - 2,977
Market adjustment investment securities - 16,407 - 16,407
Acquisiton adjustment of fiscal year - - 614 614
--------- --------------- --------- -------------
Balance at September 30, 1995 $102,859 (6,798) 447,627 543,688
======== =============== ========= =============
7
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1995 and 1994
(In thousands)
-----------------
1995 1994
------- ------
Operating Activities
- - - --------------------
Net income $28,129 53,330
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 8,118 3,468
Provision for depreciation and amortization 6,883 6,237
Amortization of investment securities premiums, net 2,106 1,691
Amortization of income for lease financing (5,036) (5,939)
Gains on sales of investment securities, net (566) (653)
Deferred federal income taxes 8,421 1,112
Decrease in interest receivable (37,940) (3,586)
Increase (decrease) in interest payable (10,339) 2,614
Amortization of values ascribed to acquired intangibles 2,459 3,039
Other increases (decreases) 75,116 (3,057)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 77,351 58,256
-------- --------
Investing Activities
- - - --------------------
Dispositions of investment securities:
Available-for-sale - sales 96,627 49,257
Held-to-maturity - maturities 373,069 348,846
Available-for-sale - maturities 103,089 47,998
Purchases of investment securities held-to-maturity (49,519) (312,747)
Purchases of investment securities available-for-sale (228,448) (251,576)
Net decrease in federal funds sold 4,184 62,101
Net increase in loans and leases (195,933) (398,547)
Purchases of premises and equipment (20,079) (11,400)
Sales of premises and equipment 3,730 1,064
-------- --------
NET CASH PROVIDED\(USED) BY INVESTING ACTIVITIES 86,720 (465,004)
-------- --------
Financing Activities
- - - --------------------
Net decrease in demand, NOW and savings deposits (223,967) (25,333)
Net increase in time deposits 109,687 72,093
Net increase (decrease) in securities sold under repurchase
agreements and other borrowings (22,204) 364,884
Cash dividends (27,758) (21,624)
Proceeds from exercise of stock options 2,977 3,757
-------- --------
NET CASH PROVIDED\(USED) BY FINANCING ACTIVITIES (161,265) 393,777
Increase (decrease) in cash and cash equivalents 2,806 (12,971)
Cash and cash equivalents at beginning of year 238,073 237,878
-------- --------
Cash and cash equivalents at end of year $240,879 224,907
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
- - - --------------------------------------------------
Cash paid during the year for:
Interest, net of amounts capitalized $72,396 69,376
Income taxes 12,562 20,900
======== ========
See accompanying notes to consolidated financial statements.
8
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995, December 31, 1994
and September 30, 1994
1. FirstMerit Corporation is a bank holding company whose principal
assets are the common stock of its wholly owned subsidiaries, First National
Bank of Ohio, The Old Phoenix National Bank of Medina, EST National Bank,
Citizens National Bank, Peoples National Bank, Peoples Bank, N.A. and
FirstMerit Bank, FSB. In addition FirstMerit Corporation owns all of the
common stock of FirstMerit Credit Life Insurance Company, FirstMerit Trust Co.,
N.A., FirstMerit Community Development Corporation, Citizens Investment
Corporation, and Citizens Savings Corporation of Stark County.
2. In May 1993, the Financial Accounting Standards Board issued Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
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 as a net amount in a separate
component of shareholders' equity. This statement was adopted during the first
quarter of 1994.
3. Management believes that the interim consolidated financial statements
reflect all adjustments consisting only of normal recurring accruals, necessary
for fair presentation of the September 30, 1995 statement of condition and the
results of operations for the three-month and nine-month periods ended
September 30, 1995 and 1994.
9
FirstMerit Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1995, December 31, 1994
and September 30, 1994
4. ACQUISITION
The CIVISTA Corporation located in Canton, Ohio was acquired on January 31,
1995 in exchange for 6,157,809 shares of FirstMerit Corporation 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.
Detailed results of operations of the previously separate corporations for
periods prior to the combination are as follows:
FirstMerit CIVISTA
Corporation Corporation Combined
--------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31, 1994
Interest Income $316,809 54,209 371,018
Net Interest Income 200,932 29,905 230,837
Net Income 60,301 11,048 71,349
FOR THE THREE MONTHS
ENDED MARCH 31, 1994
Interest Income 72,486 13,823 86,309
Net Interest Income 47,701 7,652 55,353
Net Income 14,885 2,981 17,866
FOR THE YEAR ENDED
DECEMBER 31, 1993
Interest Income $304,589 56,619 361,208
Net Interest Income 194,802 31,257 226,059
Net Income 55,560 13,072 68,632
10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Average Consolidated Balance Sheet, Fully-tax Equivalent Interest Rates and Interest Differential (Dollars in thousands)
Quarters ended September 31, Year ended December 31,
------------------------------------ ------------------------------------
1995 1994
------------------------------------ ------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- - - ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Investment securities 1,394,350 22,162 6.31% 1,624,724 97,952 6.03%
Federal funds sold 17,927 295 6.53% 55,126 2,168 3.93%
Loans, net of unearned income 3,864,206 83,297 8.55% 3,350,162 275,488 8.22%
Less allowance for possible loan losses 38,228 36,040
------------------------- --------------------------
Net loans 3,825,978 83,297 8.64% 3,314,122 275,488 8.31%
Cash and due from banks 216,342 - - 204,513 - -
Other assets 179,308 - - 187,273 - -
------------------------- --------------------------
Total assets 5,633,905 105,754 - 5,385,758 375,608 -
========================= ==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-
non-interest bearing 725,235 - - 666,469 -
Demand-
interest bearing 415,810 2,194 2.09% 460,994 10,429 2.26%
Savings 1,485,227 9,294 2.48% 1,710,909 43,372 2.54%
Certificates and other time deposits 1,811,975 25,653 5.62% 1,607,616 68,528 4.26%
------------------------- --------------------------
Total deposits 4,438,247 37,141 3.32% 4,445,988 122,329 2.75%
Federal funds purchased, securities sold
under agreements to repurchase and 588,133 8,375 5.65% 374,351 17,853 4.77%
other borrowings
Other liabilities 70,054 - 50,559 -
Shareholders' equity 537,471 - 514,860 -
------------------------- --------------------------
Total liabilities and shareholders' equity 5,633,905 45,516 - 5,385,758 140,182 -
========================= ==========================
Total earning assets 5,238,255 105,754 8.01% 4,993,972 375,608 7.52%
========================= ==========================
Total interest bearing liabilities 4,301,145 45,516 4.20% 4,153,870 140,182 3.37%
========================= ==========================
Net yield on earning assets 60,238 4.56% 235,426 4.71%
=================== ======================
Interest rate spread 3.81% 4.15%
======= =======
Quarters ended September 31,
--------------------------------------
1994
--------------------------------------
Average Average
Balance Interest Rate
--------------------------------------
ASSETS
Investment securities 1,647,422 25,412 6.12%
Federal funds sold 17,110 228 5.29%
Loans, net of unearned income 3,354,209 70,385 8.33%
Less allowance for possible loan losses 35,907
--------------------------
Net loans 3,318,302 70,385 8.42%
Cash and due from banks 204,351 - -
Other assets 193,160 - -
--------------------------
Total assets 5,380,345 96,025 -
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-
non-interest bearing 660,783 - -
Demand-
interest bearing 461,667 2,754 2.37%
Savings 1,685,365 10,758 2.53%
Certificates and other time deposits 1,573,435 17,450 4.40%
--------------------------
Total deposits 4,381,250 30,962 2.80%
Federal funds purchased, securities sold
under agreements to repurchase and 443,836 5,369 4.80%
other borrowings
Other liabilities 39,139 -
Shareholders' equity 516,120 -
--------------------------
Total liabilities and shareholders' equity 5,380,345 36,331 -
==========================
Total earning assets 4,982,834 96,025 7.65%
==========================
Total interest bearing liabilities 4,164,303 36,331 3.46%
==========================
Net yield on earning assets 59,694 4.75%
======================
Interest rate spread 4.18%
=======
<FN>
*Interest income on tax-exempt securities and loans have been adjusted to a fully taxable equivalent basis.
*Non-accrual loans have been included in the average balances.
11
RESULTS OF OPERATIONS
FirstMerit Corporation's net income for the quarter ended September
30, 1995 was $16,649,000 compared to $17,602,000 one year ago. For the
nine-month period ended September 30, 1995, net income was $28,129,000 compared
to $53,330,000 for the same period last year. Net income for the third quarter
1995 included a refund by the FDIC of a deposit assessment that increased
after-tax earnings by $1,170,000. Also included in the 1995 year-to-date
period are previously reported one-time charges of $2,198,000 related to an
early retirement program and $16,214,000 related to the CIVISTA acquisition.
Excluding the previously reported one-time charges, net income for the 1995
nine-month period would have been $46,541,000.
Return on average assets equaled 1.17% for the third quarter of 1995
compared to 1.30% for the same quarter one year ago. The third quarter 1995
return on average equity was 12.29% compared to 13.53% for the same quarter in
1994. For the nine months ended September 30, 1995, return on average assets
was .66% compared to 1.35% in 1994 and return on average equity was 7.15%
compared to 13.95% last year. Excluding the current year one-time charges,
nine-month 1995 results for return on average assets and return on average
equity would have been 1.10% and 11.83%, respectively.
In March 1995, management began developing a plan for increasing the
profitability of the Corporation on a long-term basis. In addition to
increasing revenue opportunities, in order to increase efficiencies and reduce
operating costs, the plan currently contemplates the consolidation of much of
the back-room operations of the Corporation's subsidiaries into one location.
Although the plan is not yet complete and will continue to be developed,
implementation of the initial portions of the plan occurred during the second
quarter of 1995 and will continue throughout the balance of 1995. Pursuant to
this plan, there are expected to be certain restructuring charges related to
employee displacement, system changes, replacement of equipment and other
costs. The final amount of these costs have yet to be determined but are
expected to be recorded during the fourth quarter of 1995.
As part of the federal budget reconciliation process, legislation is
pending which will impose a one-time assessment on all institutions with
SAIF-insured deposits. The assessment, if enacted, will be based on
FirstMerit's SAIF deposit base which as of the last quarterly assessment
(June 30, 1995) approximated $1,629,000,000.
On a per share basis, net income for the quarter ended September 30,
1995 was $.50 compared to $.53 in 1994. For the 1995 year-to-date period, net
income per share was $.84 compared to $1.60 last year. Excluding the 1995
one-time charges, net income per share for the nine months ended September 30,
1995 would have been $1.39. The components of change in per share income for
the quarters ended September 30, as well as the nine months ended September 30,
1995 and 1994 are summarized in the following table.
12
CHANGES IN EARNINGS PER SHARE
- - - -----------------------------
Three months ended Nine months ended
September 30, September 30,
1995/1994 1995/1994
------------------ -----------------
Net income per share September 30, 1994 $.53 1.60
Increases (decreases) due to:
Net interest income - taxable equivalent 0.02 0.12
Provision for possible loan losses (.05) (.13)
Other income 0.03 -
Other expenses (.01) (.44)
Federal income taxes - taxable
equivalent (.02) (.31)
------------------ -----------------
Net change in net income per share (.03) (.76)
------------------ -----------------
Net income per share September 30, 1995 $0.50 0.84
================== =================
NET INTEREST INCOME
Net interest income, the Corporation's principal source of earnings,
is the difference between the interest income generated by earning assets
(primarily loans and investment securities) and the total interest paid on
interest bearing funds (deposits and other borrowings). For the purpose of
this discussion, net interest income is presented on a fully-taxable equivalent
("FTE") basis, to provide a comparison among types of interest earning assets.
Interest on tax-free securities and tax-exempt loans has been restated as if
such interest were taxed at the statutory Federal income tax rate of 35%,
adjusted for the non-deductible portion of interest expense incurred to acquire
the tax-free assets.
Net interest income FTE for the quarter ended September 30, 1995 was
$60,238,000 compared to $59,694,000 for the same period one year ago, an
increase of $544,000 or .9%. For the nine months ended September 30, 1995, net
interest income FTE increased $3,953,000 from $174,499,000 to $178,452,000.
13
As summarized in the schedule below, total interest income FTE
increased $9,729,000 for the quarter ended September 30, 1995. An increase in
loan volume contributed $10,994,000 toward higher interest income FTE while a
decline in investment securities volume dropped interest income FTE by
$4,022,000. In addition to the changes in volume, higher market interest rates
on all interest yielding assets increased total interest income FTE by
$2,744,000. These higher market interest rates caused the yield on earning
assets to increase from 7.65% to 8.01% for the quarters ended September 30,
1995 and 1994, respectively.
For the nine-month period, higher loan volume accounted for
$36,907,000 of the increase and higher market rates on investment securities,
loans, and federal funds sold pushed interest income higher by $13,237,000.
The higher interest rates for the nine-month period increased the yield on
earning assets from 7.52% in 1994 to 7.99% in 1995.
CHANGES IN NET INTEREST DIFFERENTIAL -
FULLY-TAX EQUIVALENT RATE/VOLUME ANALYSIS
(DOLLARS IN THOUSANDS)
Quarters ended Quarters ended
September 30, September 30,
1995 and 1994 1995 and 1994
------------- -------------
Increase (Decrease) Increase (Decrease)
Interest Income/Expense Interest Income/Expense
--------------------------------- --------------------------------
Yield Yield
Volume Rate Total Volume Rate Total
--------------------------------- --------------------------------
INTEREST INCOME
Investment Securities $(4,022) 772 (3,250) (5,943) 4,497 (1,446)
Loans 10,994 1,918 12,912 36,907 7,120 44,027
Federal funds sold 13 54 67 (2,632) 1,620 (1,012)
--------------------------------- --------------------------------
Total interest income $ 6,985 2,744 9,729 28,332 13,237 41,569
INTEREST EXPENSE
Interest on deposits:
Demand-interest bearing (242) (318) (560) (550) (588) (1,138)
Savings (1,252) (212) (1,464) (3,573) 1,008 (2,565)
Certificates and other
time deposits 3,377 4,826 8,203 8,401 14,768 23,169
Federal Funds Purchased,
REPOs & other borrowings 2,055 951 3,006 14,824 3,326 18,150
--------------------------------- --------------------------------
Total interest expense $ 3,983 5,247 9,185 19,102 18,514 37,616
--------------------------------- --------------------------------
Net interest income $ 3,047 (2,503) 544 9,230 (5,277) 3,953
================================= ================================
14
Higher interest rates continued to have a significant impact on
interest expense for both the quarter and nine-month periods ended September
30, 1995. Total interest expense increased $9,185,000 for the quarter ended
September 30, 1995. An increase in the volume of federal funds purchased and
other borrowings accounted for $3,938,000 of the increase while higher market
interest rates on all deposits accounted for $5,247,000 of the total increase.
As higher market interest rates increased the yield on earning assets, it also
increased the Corporation's cost of funds. The average rate for interest
bearing liabilities was 4.20% for the third quarter of 1995 compared to 3.46%
for the same period one year ago.
Similar to the fluctuations for the quarter ended September 30,
1995, the higher interest rate environment raised 1995 nine-month total
interest expense by $18,514,000. Also contributing to higher interest expense
was increased volume in fed funds purchased and other borrowings which raised
interest expense by $19,102,000. The average rate for interest bearing
liabilities was 4.18% for the nine-month period ended September 30, 1995
compared to 3.28% for the same period last year.
NET INTEREST MARGIN
The net interest margin, net interest income FTE divided by average
earning assets, is affected by changes in the level of earning assets, the
proportion of earning assets funded by non-interest bearing liabilities, the
interest rate spread, and changes in the corporate tax rates. A meaningful
comparison of the net interest margin requires an adjustment for the changes in
the statutory Federal income tax rate noted above. The schedule below shows
the relationship of the tax equivalent adjustment and the net interest margin.
NET INTEREST MARGIN (DOLLARS IN THOUSANDS)
Quarters Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
1995 1994 1995 1994
---------- --------- --------- ---------
Net interest income per
financial statements $ 59,285 58,579 175,501 170,964
Tax equivalent adjustment 953 1,115 2,951 3,535
---------- --------- --------- ---------
Net interest income - FTE $60,238 59,694 178,452 174,499
========== ========= ========= =========
Average earning assets $5,238,255 4,982,834 5,276,243 4,871,705
========== ========= ========= =========
Net interest margin 4.56% 4.75% 4.52% 4.79%
========== ========= ========= =========
15
The Tax Reform Act of 1986 ("Act") reduced the tax benefit available
to banks acquiring tax exempt assets which has resulted in the reduction of the
tax-equivalent adjustment since the Act's adoption.
Average loans outstanding for the quarter ended September 30, 1995
increased 15.2% to $3,864,206,000 compared to $3,354,209,000 for the same
period one year ago. For the nine months ended September 30, 1995 average
loans outstanding grew to $3,821,218,000 from $3,243,131,000 in 1994. Average
loans outstanding for the third quarter and the nine months ended September 30,
1995 equaled 73.7% and 72.4%, respectively, of average earning assets.
Average certificates and other time deposits have increased from 37.8%
of total interest bearing funds in the third quarter of 1994 to 42.1% in the
third quarter of 1995, while average savings deposits decreased from 40.5% in
the third quarter of 1994 to 34.5% in the third quarter of 1995. Interest
bearing demand deposits decreased from 11.1% to 9.7% of interest bearing funds
while other borrowings increased from 10.7% to 13.7% of interest bearing funds.
Interest bearing liabilities funded 82.1% of average earning assets
for the third quarter of 1995 compared to 83.6% one year ago. Maximizing the
use of non-interest liabilities helps reduce the cost of funds, thus improving
the net interest margin.
NON-INTEREST INCOME
Non-interest income for the quarter ended September 30, 1995 was
$18,052,000 compared to $16,968,000 for the same period one year ago, an
increase of 6.4%. For the nine-month period non-interest income increased
slightly from $52,544,000 to $52,818,000.
Trust department income increased 3.6% or $91,000, service charges on
depositors' accounts decreased 2.5% or $127,000, credit card fees increased
10.3% or $226,000 and other operating income, including securities gains,
increased 12.6% or $894,000 for the three-month period compared to one year
ago. For the nine-month period compared to the same period last year, trust
department income decreased 6.5% or $548,000, service charges on depositors'
accounts decreased 2.0% or $308,000, credit card fees increased 10.9% or
$677,000 and other operating income, including securities gains, increased 2.0%
or $453,000.
The Corporation continues to examine new sources of non-interest
income as well as the current pricing of existing products and services which
provide a source of revenues not sensitive to the interest rate environment.
16
NON-INTEREST EXPENSE
Non-interest expense was $49,601,000 for the third quarter of 1995
compared to $49,016,000 for the same quarter of 1994, an increase of 1.2%.
Salaries and benefits, the largest single component of non-interest expense,
decreased 1.5% for the three months ended September 30, 1995 from $24,336,000
to $23,978,000 for the same period one year ago. For both the current and prior
year three-month periods, salaries and benefits represented approximately 48%
of the third quarter's total operating expenses. The decline in salaries and
benefits is a result of the Corporation's actions to begin consolidation of
back-room operations. These expenses should continue to decline as further
consolidations and efficiencies occur throughout the remainder of 1995. Net
occupancy expense increased from $3,530,000 in 1994's third quarter to
$4,318,000 for the three months ended September 30, 1995. The higher occupancy
expense relates to FirstMerit's investment in improved facilities to better
serve our customers. Other operating expense for the third quarter of 1995
benefited in part by the refund by the FDIC of a deposit assessment totaling
$1,800,000, before taxes.
Non-interest expense for the nine months ended September 30, 1995
totaled $158,159,000 compared to $143,315,000 in 1994, an increase of 10.4%.
For the nine months ended September 30, 1995, salaries and benefits increased
7.4% compared to the same period last year. The nine-month salary and benefit
totals of $77,969,000 and $72,578,000 represented 49.3% and 50.6% of total
operating expenses for 1995 and 1994, respectively. As noted in the previous
paragraph, however, the year-to-date trend of increasing salaries and benefits
expense was reversed during the third quarter of 1995. As also discussed in
the preceding paragraph, higher net occupancy expenses related to improved
banking facilities were recorded during the nine months ended September 30,
1995. Net occupancy expenses for the current and prior year nine-month periods
were $12,438,000 and $10,597,000, respectively. Other operating expense
increased 13.4% or $6,894,000 for the nine months ended September 30, 1995
compared to the same period one year ago.
Included in both the salaries and benefits expense and the other
operating expense for the nine months ended September 30, 1995 are first
quarter charges relating to the acquisition of The CIVISTA Corporation.
Approximately $5,850,000 were fees paid to the financial advisors of both The
CIVISTA Corporation and FirstMerit Corporation to effect the acquisition, as
well as the cost of severance payments to certain individuals as part of the
acquisition. Also included in the 1995 year-to-date salaries and benefits
totals is the second quarter pre-tax early retirement charge of $3,383,000.
Excluding the one-time CIVISTA acquisition and early retirement
charges, year-to-date non-interest expenses would have totaled $150,203,000, an
increase of 4.8% over the prior year's nine-month results.
17
FINANCIAL CONDITIONS
INVESTMENT SECURITIES
To comply with SFAS #115, in 1994, the Corporation placed its core
investment portfolio in held-to-maturity and its remaining investments into
available-for-sale. The core portfolio is held until maturity and should
provide the Corporation with earnings and liquidity over a relatively wide band
of interest rate movements. The available-for-sale portfolio represents the
non-core segment of the Corporation's investment portfolio. This non-core
segment will provide flexibility if under certain circumstances disposition is
prudent. The Corporation's investment strategy focuses on high quality
investments that provide earnings, liquidity and assist in asset/liability
management. The Corporation does not engage in the trading of investment
securities. Investment securities continue to be a source of liquidity in the
funding of loan growth.
The book value and market value of investment securities
classified as held-to-maturity are as follows:
September 30, 1995
-------------------
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
-------- ---------- ---------- --------
U.S. Treasury securities
and U.S. Government agency
obligations $366,497 830 4,438 362,888
Obligations of state and
political subdivisions 124,125 1,193 489 124,829
Mortgage-backed securities 119,223 1,581 1,224 119,579
Other securities 22,576 68 69 22,575
-------- ------ ------ -------
$632,421 3,672 6,220 629,871
======== ====== ====== =======
Book Value Market Value
---------- ------------
Due in one year or less $153,345 153,405
Due after one year through five
years 274,342 272,761
Due after five years through ten
years 100,188 98,832
Due after ten years 104,546 104,873
-------- -------
$632,421 629,871
======== =======
18
The book value and market value of investment securities
classified as available-for-sale are as follows:
September 30, 1995
------------------
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
------ ---------- ---------- -------
U.S. Treasury securities
and U.S. Government agency
obligations $525,891 826 9,802 516,916
Obligations of state and
political subdivisions 0 0 0 0
Mortgage-backed securities 115,262 715 1,632 114,345
Other securities 76,071 111 776 75,405
-------- ------- ------ -------
$717,224 1,652 12,210 706,666
======== ======= ====== =======
Book Value Market Value
---------- -----------
Due in one year or less $31,150 31,134
Due after one year through five
years 240,055 238,178
Due after five years through ten
years 37,433 36,657
Due after ten years 408,586 400,697
-------- -------
$717,224 706,666
======== =======
The book value and market value of investment securities including
mortgage-backed securities and derivatives at September 30, 1995, by
contractual maturity, are shown above. Expected maturities will differ from
contractual maturities based on the issuers' right to call or prepay
obligations with or without call or prepayment penalties.
The carrying value of investment securities pledged to secure trust
and public deposits and for purposes required or permitted by law amounted to
approximately $712,875000 at September 30, 1995, $883,320,000 at December 31,
1994 and $828,920,000 at September 30, 1994.
As noted in prior periods, securities with remaining maturities over
five years reflected in the foregoing schedule consist of mortgage and asset
backed securities. This is part of a strategy to maximize future earnings.
While the maturities of these mortgage and asset backed securities are beyond
five years, these instruments provide periodic principal payments and include
securities with adjustable interest rates, reducing the interest rate risk
associated with longer term investments.
19
LOANS
Total loans outstanding at September 30, 1995 amounted to
$3,883,579,000 compared to $3,687,889,000 at December 31, 1994 and
$3,537,467,000 at September 30, 1994. Loans showed an increase since year end
1994 of $195,690,000 for an annualized growth rate of approximately 7.4%. The
loan to funds ratio at September 30, 1995 equaled 77.4% compared to 71.6% and
70.0% at December 31, 1994 and September 30, 1994, respectively.
ASSET QUALITY
Total non performing assets (non-accrual and restructured and other
real estate owned) amounted to $16,947,000 at September 30, 1995 or .44% of
total loans outstanding. At December 31, 1994 non performing assets equaled
.71% of total loans or $26,044,000 compared to .79% or $28,017,000 at September
30, 1994.
(In thousands)
September 30, December 31, September 30,
1995 1994 1994
------------- ------------- -------------
Non-accrual loans $12,191 13,625 15,163
Restructured loans 1,744 2,026 2,136
Other real estate owned 3,012 10,393 10,718
------------- ------------- -------------
$16,947 26,044 28,017
============= ============= =============
Past Due loans (90 days or more) $4,457 3,569 2,821
============= ============= =============
Total non-performing assets as a
percent of total loans .44% .71% .79%
============= ============= =============
As of this report, there were 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.
20
ALLOWANCE FOR LOAN LOSSES
The allowance for possible loan losses at September 30, 1995 amounted
to $38,673,000 or 1.00% of total loans outstanding compared to $35,834,000 or
.97% at December 31, 1994 and $35,613,000 at September 30, 1994 or 1.01%.
(In thousands)
September 30, December 31, September 30,
1995 1994 1994
------------- ------------- -------------
Balance at beginning of year $35,834 35,030 35,030
Provision charged to
operating expenses 8,118 4,624 3,466
Loans charged off 8,436 7,695 6,003
Recoveries on loans
previously charged off 3,157 3,875 3,120
------------- ------------- -------------
$38,673 35,834 35,613
============= ============= =============
Net charge offs as a percent
of average loans .18% .11% .11%
Allowance for possible
loan losses:
As a percent of loans
outstanding at end of
period 1.00% .97% 1.01%
As a multiple of net
charge offs 5.48X 9.38X 9.24X
The Credit Risk Management Division of the Corporation is responsible
for determining the adequacy of the allowance for possible loan losses through
internal review, analysis of delinquency trends and ratios, changes in the
composition and level of various loan categories, historical loss experience,
and current economic conditions.
21
DEPOSITS
The following schedule illustrates the change in composition of the
average balances of deposits and average rates paid for the noted periods.
(Dollars in Thousands)
Nine Months and Year Ended
-------------------------------------------------------------------------------
September 30, 1995 December 31, 1994 September 30, 1994
-------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
----------------------- ------------------------ ------------------------
Demand Deposits -
non-interest bearing $710,560 - 666,469 - 663,491 -
Demand Deposits -
interest bearing 427,657 2.18% 460,994 2.26% 461,449 2.35%
Savings Deposits 1,531,868 2.58% 1,710,909 2.54% 1,717,029 2.50%
Certificates and other
time deposits 1,776,074 5.43% 1,607,616 4.26% 1,569,288 4.17%
---------- --------- ---------
$4,446,159 3.27% 4,445,988 2.75% 4,411,257 2.70%
========== ========= =========
The following table summarizes the certificates and other time
deposits in amounts of $100,000 or more as of September 30, 1995 by time
remaining until maturity.
Amount
Maturing in:
Under 3 months $ 109,665
3 to 12 months 61,081
Over 12 months 59,130
---------
$ 229,876
=========
22
CAPITAL RESOURCES
Shareholders' equity at September 30, 1995 totaled $543,688,000
compared to $523,319,000 at December 31, 1994 and $522,216,000 at September 30,
1994.
The following table reflects the various measures of capital:
As of As of As of
September 30, December 31, September 30,
1995 1994 1994
(In thousands)
Total equity 543,688 9.67% 523,319 9.14% 522,216 9.31%
Common equity 543,688 9.67% 523,319 9.14% 522,216 9.31%
Tangible common
equity (a) 528,275 9.42% 504,337 8.84% 503,573 9.01%
Tier 1 capital (b) 543,333 14.46% 537,999 15.32% 526,685 15.07%
Total risk-based
capital (c) 582,006 15.48% 573,833 16.34% 562,298 16.09%
Leverage (d) 543,333 9.66% 537,999 9.53% 526,685 9.81%
<FN>
(a) Common equity less all intangibles; computed as a ratio to total
assets less intangible assets.
(b) Shareholders' equity minus net unrealized holding gains on equity
securities, plus or minus net unrealized holding losses or gains on
available for sale debt securities, less goodwill; computed as a ratio
to risk-adjusted assets, as defined in the 1992 risk-based capital
guidelines.
(c) Tier 1 capital plus qualifying loan loss allowance, computed as a
ratio to risk-adjusted assets, as defined in the 1992 risk-based
capital guidelines.
(d) Tier 1 capital; computed as a ratio to the latest quarter's average
assets less goodwill.
The risk-based capital guidelines issued by the Federal Reserve Bank
in 1988 require banks to maintain capital equal to 8% of risk-adjusted assets
effective December 31, 1993. At September 30, 1995 the Corporation's
risk-based capital equaled 15.48% of risk adjusted assets, far exceeding the
minimum guidelines.
The cash dividend of $.25 paid in the third quarter has an indicated
annual rate of $1.00 per share.
23
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Corporation's prior discussion of this matter
in Part I., Item 3 of the Corporation's Form 10-K and Form 10-K/A for the
fiscal year ended December 31, 1994.
During 1991, a suit was filed in federal court against First National
Bank of Ohio ("First National"), a subsidiary of the Corporation, alleging
conversion and negligence in the deposit of funds. The suit sought
compensatory damages against First National in the approximate amount of $7.3
million, plus punitive damages, interest, costs, attorneys' fees and other
relief. Additional lawsuits brought in state court by other claimants based on
the same deposits and actions 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.
During 1993, the federal court granted First National's motion for
summary judgment. As a result, the federal court suit was dismissed. The
plaintiff in that suit subsequently appealed the dismissal. In August, 1995,
the appellate court reversed the federal court's decision which had dismissed
the lawsuit and then remanded the case to the federal court for further
proceedings. The Corporation continues to believe that First National has
meritorious defenses to all claims.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10(a) Employment Agreement of Howard L. Flood
27 Financial Data Schedule
(b) Form 8-K
None
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRSTMERIT CORPORATION
By:_________________________
Gary J. Elek, Senior Vice President/Treasurer
Authorized to sign for the Corporation
By:_________________________
Gary J. Elek, Senior Vice President/Treasurer
Principal Financial Officer and
Principal Accounting Officer
DATE: November 13, 1995