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
MARCH 31, 1996
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)
OUTSTANDING SHARES OF COMMON STOCK, AS OF MARCH 31,
1996
33,171,812
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 March 31, 1996, December 31, 1995 and
March 31, 1995
Consolidated Statements of Income for the three months ended March 31, 1996
and 1995
Consolidated Statements of Changes in Shareholders' Equity for the year
ended December 31, 1995 and for the three months ended March 31, 1996
Consolidated Statements of Cash Flows for the three months ended March 31,
1996 and 1995
Notes to Consolidated Financial Statements as of March 31, 1996, December
31, 1995, and March 31, 1995
Management's Discussion and Analysis of Financial Conditions as of March
31, 1996, December 31, 1995 and March 31, 1995 and Results of Operations
for the quarter and three months ended March 31, 1996 and 1995 and for the
year ended December 31, 1995.
3
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- - - ---------------------------------------
(In thousands)
----------------------------------------------------------
March 31, December 31, March 31,
----------------------------------------------------------
1996 1995 1995
- - - --------------------------------------------------------------------------------------------------------------------------
ASSETS
Investment securities $ 1,357,062 1,403,059 1,544,894
Federal funds sold 2,446 12,575 10,335
Loans less unearned income 3,786,300 3,770,366 3,809,447
Less allowance for possible loan losses 47,474 46,840 37,426
-------------------------------------------------------------
Net loans 3,738,826 3,723,526 3,772,021
-------------------------------------------------------------
Total earning assets 5,098,334 5,139,160 5,327,250
Cash and due from banks 218,967 287,671 235,416
Premises and equipment, net 97,376 94,158 85,906
Accrued interest receivable and other assets 86,486 75,532 104,872
-------------------------------------------------------------
$ 5,501,163 5,596,521 5,753,444
=============================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-non-interest bearing $ 712,914 810,948 711,963
Demand-interest bearing 452,850 432,409 439,091
Savings 1,442,940 1,454,876 1,556,818
Certificates and other time deposits 1,764,831 1,803,692 1,768,595
-------------------------------------------------------------
Total deposits 4,373,535 4,501,925 4,476,467
Securities sold under agreements to repurchase
and other borrowings 524,072 486,958 701,944
-------------------------------------------------------------
Total funds 4,897,607 4,988,883 5,178,411
Accrued taxes, expenses, and other liabilities 66,284 64,757 50,497
-------------------------------------------------------------
Total liabilities 4,963,891 5,053,640 5,228,908
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 33,658,294
33,614,487 and 33,344,247 shares, respectively 104,405 103,861 100,780
Treasury stock, 486,482, 122,870 and 35,450 shares,
respectively (13,278) (2,963) (719)
Net unrealized holding gains (losses)
on available for sale securities (7,633) (1,292) (12,918)
Retained earnings 453,778 443,275 437,393
-------------------------------------------------------------
Total shareholders' equity 537,272 542,881 524,536
-------------------------------------------------------------
$ 5,501,163 5,596,521 5,753,444
=============================================================
4
FIRSTMERIT CORPORATION AND SUBSIDIARIES
AVERAGE CONSOLIDATED BALANCE SHEETS
- - - -----------------------------------------
(In thousands except ratios)
Quarters
--------------------------------------------------------------------------------------
1996 1995
--------------------------------------------------------------------------------------
1st 4th 3rd 2nd 1st
- - - -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investment securities $ 1,378,465 1,355,618 1,394,350 1,479,016 1,498,357
Federal funds sold 18,994 50,560 17,927 9,465 15,482
Loans less unearned income 3,772,550 3,814,172 3,864,206 3,869,187 3,807,842
Less allowance for possible
loan losses 47,428 39,199 38,228 37,833 36,450
--------------------------------- ------------------ ------------------- ---------------
Net loans 3,725,122 3,774,973 3,825,978 3,831,354 3,771,392
--------------------------------- ------------------ ------------------- ---------------
Total earning assets 5,122,581 5,181,151 5,238,255 5,319,835 5,285,231
Cash and due from banks 232,183 221,632 216,342 205,097 232,548
Premises and equipment, net 95,837 93,640 90,999 87,263 84,590
Accrued interest receivable
and other assets 68,467 82,342 88,309 99,071 109,206
--------------------------------- ------------------ ------------------- ---------------
$ 5,519,068 5,578,765 5,633,905 5,711,266 5,711,575
================================= ================== =================== ===============
LIABILITIES
Deposits:
Demand-non-interest bearing $ 737,626 755,008 725,235 710,734 708,097
Demand-interest bearing 434,377 421,000 415,810 424,126 444,005
Savings 1,432,303 1,462,460 1,485,227 1,528,247 1,588,708
Certificates and other time
deposits 1,800,514 1,802,822 1,811,975 1,793,889 1,717,283
--------------------------------- ------------------ ------------------- ---------------
Total deposits 4,404,820 4,441,290 4,438,247 4,456,996 4,458,093
Securities sold under agreements to
repurchase and other borrowings 500,221 522,680 588,133 649,942 684,794
--------------------------------- ------------------ ------------------- ---------------
Total funds 4,905,041 4,963,970 5,026,380 5,106,938 5,142,887
Accrued taxes, expenses and
other liabilities 76,894 74,314 70,054 77,462 50,676
--------------------------------- ------------------ ------------------- ---------------
Total liabilities 4,981,935 5,038,284 5,096,434 5,184,400 5,193,563
SHAREHOLDERS' EQUITY 537,133 540,481 537,471 526,866 518,012
--------------------------------- ------------------ ------------------- ---------------
$ 5,519,068 5,578,765 5,633,905 5,711,266 5,711,575
================================= ================== =================== ===============
RATIOS
Net income as a percentage of:
Average assets 1.40% 0.23% 1.17% 0.89% -0.08%
Average shareholders' equity 14.42% 2.34% 12.29% 9.64% -0.93%
5
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- - - -----------------------------------------------------
(In thousands except per share data)
------------------------------------------
Quarters Ended
March 31,
1996 1995
- - - -----------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 80,309 78,112
Interest and dividends on securities:
Taxable 19,803 22,770
Exempt from Federal income taxes 1,288 1,670
Interest on Federal funds sold 227 314
----------------------------------
Total interest income 101,627 102,866
----------------------------------
Interest expense:
Interest on deposits:
Demand-interest bearing 1,994 2,448
Savings 8,427 10,321
Certificates and other time deposits 24,641 21,531
Interest on securities sold under agreements
to repurchase and other borrowings 6,175 10,059
----------------------------------
Total interest expense 41,237 44,359
----------------------------------
Net interest income 60,390 58,507
Provision for possible loan losses 2,957 2,712
----------------------------------
Net interest income after provision
for possible loan losses 57,433 55,795
----------------------------------
Other income:
Trust department income 2,964 2,944
Service charges on depositors' accounts 5,389 5,187
Credit card fees 2,493 2,047
Securities gains 267 0
Other operating income 8,520 7,845
----------------------------------
Total other income 19,633 18,023
----------------------------------
77,066 73,818
----------------------------------
Other expenses:
Salaries, wages, pension and employee benefits 24,094 25,790
Net occupancy expense 4,324 4,185
Equipment expense 3,252 3,089
Other operating expense 16,579 22,654
----------------------------------
Total other expenses 48,249 55,718
----------------------------------
Income before Federal income taxes 28,817 18,100
Federal income taxes 9,564 19,284
----------------------------------
Net income (loss) $ 19,253 (1,184)
==================================
Per share data based on average number of
shares outstanding:
Net Income (loss) $ 0.58 (0.04)
==================================
Dividends paid $ 0.27 0.25
Weighted average number of shares
outstanding 33,261,059 33,334,368
6
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- - - ----------------------------------------------------------
Year Ended December 31, 1995 and
Three Months Ended March 31, 1996
(In Thousands)
-------------------------------------------------------------------------------
Net unrealized
holding gains
(losses) on Total
Common Treasury available for Retained Shareholders'
Stock Stock sale securities Earnings Equity
------------ ----------- ----------------- -------------- --------------
Balance at December 31, 1994 $100,576 (694) (23,205) 446,642 523,319
Net Income - - - 31,318 31,318
Cash dividends ($1.02 per share) - - - (35,299) (35,299)
Stock options exercised 3,285 - - - 3,285
Treasury shares purchased - (2,269) - - (2,269)
Market adjustment investment securities - - 21,913 - 21,913
Acquisition adjustment of fiscal year - - - 614 614
------------ ----------- ----------------- -------------- --------------
Balance at December 31, 1995 103,861 (2,963) (1,292) 443,275 542,881
Net Income - - - 19,253 19,253
Cash dividends ($.27 per share) - - - (8,750) (8,750)
Stock options exercised 544 - - - 544
Treasury shares purchased - (10,315) - - (10,315)
Market adjustment investment securities - - (6,341) - (6,341)
------------ ----------- ----------------- -------------- --------------
Balance at March 31, 1996 $104,405 ($13,278) (7,633) 453,778 537,272
============ =========== ================= ============== ==============
7
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1996 and 1995
(In thousands)
-------------------------
1996 1995
-------------------------
Operating Activities
- - - ----------------------------
Net income (loss) $19,253 ($1,184)
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 2,957 2,712
Provision for depreciation and amortization 2,310 2,438
Amortization of investment securities premiums, net 760 885
Amortization of income for lease financing (3,660) 1,872
Gains on sales of investment securities, net (267) -
Deferred federal income taxes 3,374 1,194
Decrease (increase) in interest receivable (5,597) 56
Increase in interest payable 285 2,680
Amortization of values ascribed to acquired intangibles 818 819
Other increases (decreases) (4,893) 16,081
-------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,340 27,553
-------------------------
Investing Activities
- - - ----------------------------
Dispositions of investment securities:
Available-for-sale - sales 21,482 56
Held-to-maturity - maturities - 173,179
Available-for-sale - maturities 83,407 37,851
Purchases of investment securities held-to-maturity - (7,199)
Purchases of investment securities available-for-sale (69,140) (123,621)
Net decrease in federal funds sold 10,129 3,365
Net increase in loans and leases (14,597) (124,550)
Purchases of premises and equipment (6,142) (8,147)
Sales of premises and equipment 614 3,026
-------------------------
NET CASH PROVIDED\(USED) BY INVESTING ACTIVITIES 25,753 (46,040)
-------------------------
Financing Activities
- - - ----------------------------
Net decrease in demand, NOW and savings deposits (89,529) (133,587)
Net increase (decrease) in time deposits (38,861) 68,597
Net increase in securities sold under repurchase
agreements and other borrowings 37,114 89,320
Cash dividends (8,750) (8,679)
Purchase of treasury shares (10,315) -
Proceeds from exercise of stock options 544 179
-------------------------
NET CASH PROVIDED\(USED) BY FINANCING ACTIVITIES (109,797) 15,830
Decrease in cash and cash equivalents (68,704) (2,657)
Cash and cash equivalents at beginning of year 287,671 238,073
-------------------------
Cash and cash equivalents at end of year $218,967 $235,416
=========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
- - - -------------------------------------------------
Cash paid during the year for:
Interest, net of amounts capitalized $22,081 $30,040
Income taxes 7,032 31
=========================
See accompanying notes to consolidated financial statements.
8
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, December 31, 1995
and March 31, 1995
1. FirstMerit Corporation ("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 Citizens Investment Corporation, Citizens Savings Corporation of Stark
County, FirstMerit Community Development Corporation, FirstMerit Credit Life
Insurance Company and FirstMerit Trust Co., N.A.
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 by the Corporation
during the first quarter of 1994. Effective December 31, 1995, the Corporation
transferred all held-to-maturity investments to available-for-sale. This
one-time reclassification was permitted by the Financial Accounting Standards
Board to allow institutions to reassess the appropriateness of their
designations of securities. The reclassification provides the Corporation with
more flexibility to respond, through the portfolio, to changes in market
interest rates, or to increases in loan demand or deposit withdrawals.
3. Effective December 31, 1995, the Corporation adopted Statement of Financial
Accounting Standard No. 114, "Accounting by Creditors for Impairment of a Loan,"
and Statement No. 118, an amendment of Statement No. 114, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures." These
statements prescribe how the allowance for loan losses related to impaired loans
should be determined and illustrate the required impaired loan 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 prices, or the
fair value of the underlying collateral. Under the Corporation's credit policies
and practices, and in conjunction with provisions within Statements No. 114 and
No. 118, all nonaccrual and restructured commercial, agricultural, construction,
and commercial real estate loans, meet the definition of impaired loans.
4. Management believes that the interim consolidated financial statements
reflect all adjustments consisting only of normal recurring accruals, necessary
for fair presentation of the March 31, 1996 statement of condition and the
results of operations for the three months ended March 31, 1996 and 1995.
9
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)
Quarter ended March 31, Year ended December 31, Quarter ended March 31,
--------------------------- --------------------------- ---------------------------
1996 1995 1995
--------------------------- --------------------------- ---------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- - - ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investment securities 1,378,465 21,709 6.33% 1,447,024 92,205 6.37% 1,498,357 25,237 6.83%
Federal funds sold 18,994 227 4.81% 22,011 1,681 7.64% 15,482 314 8.23%
Loans, net of unearned income 3,772,550 80,483 8.58% 3,818,486 326,581 8.55% 3,807,842 78,371 8.35%
Less allowance for possible loan losses 47,428 37,923 36,450
------------------ ------------------ ------------------
Net loans 3,725,122 80,483 8.69% 3,780,563 326,581 8.64% 3,771,392 78,371 8.43%
Cash and due from banks 232,183 - - 220,787 - - 232,548 - -
Other assets 164,304 - - 184,426 - - 193,796 - -
------------------ ------------------ ------------------
Total assets 5,519,068 102,419 - 5,654,811 420,467 - 5,711,575 103,922 -
================== ================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-
non-interest bearing 737,626 - - 725,287 - - 708,097 - -
Demand-
interest bearing 434,377 1,994 1.85% 426,608 9,202 2.16% 444,005 2,448 2.24%
Savings 1,432,303 8,427 2.37% 1,514,374 38,438 2.54% 1,588,708 10,321 2.63%
Certificates and other time deposits 1,800,514 24,641 5.50% 1,782,817 97,518 5.47% 1,717,283 21,531 5.08%
------------------ ------------------ ------------------
Total deposits 4,404,820 35,062 3.20% 4,449,086 145,158 3.26% 4,458,093 34,300 3.12%
Federal funds purchased, securities sold
under agreements to repurchase and 500,221 6,175 4.96% 609,247 35,775 5.87% 684,794 10,059 5.96%
other borrowings
Other liabilities 76,894 - 68,440 - 50,676 -
Shareholders' equity 537,133 - 528,038 - 518,012 -
------------------ ------------------ ------------------
Total liabilities and shareholders' equity 5,519,068 41,237 - 5,654,811 180,933 - 5,711,575 44,359 -
================== ================== ==================
Total earning assets 5,122,581 102,419 8.04% 5,249,598 420,467 8.01% 5,285,231 103,922 7.97%
================== ================== ==================
Total interest bearing liabilities 4,167,415 41,237 3.98% 4,333,046 180,933 4.18% 4,434,790 44,359 4.06%
================== ================== ==================
Net yield on earning assets 61,182 4.80% 239,534 4.56% 59,563 4.57%
======== ===== ======== ===== ======== =====
Interest rate spread 4.06% 3.83% 3.92%
===== ===== =====
*Interest income on tax-exempt securities and loans has been adjusted to a fully
taxable equivalent basis.
*Non-accrual loans have been included in the average balances.
10
RESULTS OF OPERATIONS
FirstMerit Corporation's net income for the quarter ended March 31,
1996 was $19,253,000 compared to a net loss of $1,184,000 for the same period
one year ago. Return on average equity was 14.42%, while return on average
assets was 1.40%. These same ratios for the 1995 first quarter were (0.93%) and
(0.08%), respectively. Last year's first quarter loss was attributable to a
one-time charge of $16.2 million associated with the acquisition of The CIVISTA
Corporation.
Fully taxable equivalent net interest income for the quarter increased 2.7% over
the same quarter in 1995 from $59,563,000 to $61,182,000. A gain of 23 basis
points in the net interest margin, from 4.57% at March 31, 1995 to 4.80% at
March 31, 1996, was responsible for the rise in net interest income as
outstanding loan balances remained relatively flat.
Noninterest income rose 8.9% from $18,023,000 for the first quarter 1995 to
$19,633,000 for the three months ended March 31, 1996. Gains from the sale of
three branches added $1,941,000 to 1996 first quarter noninterest income.
Operating expenses for the quarter dropped 13.4% from $55,718,000 in 1995 to
$48,249,000 for 1996. Correspondingly, the efficiency ratio improved to 59.0%
from 70.8% for the same prior year period. The reduced operating expenses and
much improved efficiency ratio are a direct result of the plan developed last
year to increase the Corporation's long-term profitability. More specifically,
the plan called for consolidation of back-room operations, reduction of
personnel, and replacement of computer systems and other equipment. The costs
associated with the implementation of the plan were incurred throughout 1995,
but most heavily during the fourth quarter last year.
Asset quality remained strong during the first quarter. Nonperforming assets
were .33% of total loans and Other Real Estate compared to .46% at March 31,
1995. Net charge-offs to average loans, on an annualized basis, were .25% at
March 31, 1996 and .12% for the same period last year.
The anticipated assessment related to the recapitalization of the Savings
Association Insurance Fund (S.A.I.F.) has not yet materialized. This is an
industry-wide issue that will impact all financial institutions with S.A.I.F.
insured deposits. Assuming the anticipated legislation is approved by Congress,
it may cost banks up to $.85 per $100 in insured deposits. The Corporation has
approximately $1.5 billion in S.A.I.F. insured deposits.
Earnings per share for the first quarter were $.58 compared to ($.04) for the
same quarter in 1995. The components of change in per share income for the
quarters ended March 31, 1996 and 1995 are summarized in the following table:
11
CHANGES IN EARNINGS PER SHARE
Three months ended
March 31,
1996/1995
--------------------------------
Net income per share March 31, 1995 $(0.04)
Increases (decreases) due to:
Net interest income - taxable 0.05
equivalent
Provision for possible loan losses (0.01)
Other income 0.05
Other expenses 0.23
Federal income taxes - taxable
equivalent 0.30
--------------------------------
Net change in net income per share 0.62
--------------------------------
Net income per share March 31, 1996 $0.58
================================
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 (primarily 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 March 31, 1996 was
$61,182,000 compared to $59,563,000 for the same period one year ago, an
increase of $1,619,000 or 2.7%. The rise in net interest income FTE occurred
because the decrease in interest expense was greater than the decline in
interest income.
The following schedule breaks out the change in net interest income FTE
by rate and volume components for both interest earning assets and interest
bearing liabilities. As mentioned previously, both total interest income and
interest expense fell during the first quarter when compared to the same period
last year.
12
Total interest income FTE decreased $1,503,000 for the quarter mainly
due to volume decreases in investment securities and loans which accounted for
declines of $1,888 and $753, respectively. These declines caused by lower
outstanding asset balances were somewhat offset by higher yields earned on
loans. More specifically, loans yielded 8.58% during the first quarter 1996
compared to 8.35% for the three months ended March 31, 1995.
CHANGES IN NET INTEREST DIFFERENTIAL -
FULLY-TAX EQUIVALENT RATE/VOLUME ANALYSIS
(DOLLARS IN THOUSANDS)
Quarters ended
March 31,
1996 and 1995
-------------
Increase (Decrease)
-------------------
Interest Income/Expense
-----------------------
Yield
Volume Rate Total
--------------------------------------------
INTEREST INCOME
Investment Securities $(1,888) (1,640) (3,528)
Loans (753) 2,865 2,112
Federal funds sold 42 (129) (87)
--------------------------------------------
Total interest income $(2,599) 1,096 (1,503)
INTEREST EXPENSE
Interest on deposits:
Demand-interest bearing (44) (410) (454)
Savings (920) (974) (1,894)
Certificates and other
time deposits 1,139 1,971 3,110
Federal Funds Purchased,
REPOs & other borrowings (2,278) (1,606) (3,884)
--------------------------------------------
Total interest expense $(2,103) (1,019) (3,122)
--------------------------------------------
Net interest income $(496) 2,115 1,619
============================================
The preceding table also illustrates the decline in total interest
expense of $3,122,000 that occurred during the 1996 first quarter. Lower
interest costs were a result of significant declines in average outstanding
balances in the savings and other borrowings categories as well as lower
interest rates paid on these funding sources. Individually, average outstandings
for other borrowings fell from $684,794,000 for the first quarter last year to
$500,221,000 for the quarter ended March 31, 1996, lowering interest expense by
$2,278,000.
13
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
March 31,
-------------------------------------------
1996 1995
-------------------- --------------------
Net interest income per
financial statements $60,390 58,507
Tax equivalent adjustment 792 1,056
-------------------- --------------------
Net interest income - FTE $61,182 59,563
==================== ====================
Average earning assets $5,122,581 5,285,231
==================== ====================
Net interest margin 4.80% 4.57%
==================== ====================
Average loans outstanding for the quarter ended March 31, 1996 were
$3,772,550,000, down slightly from $3,807,842,000 for the same quarter last
year. The less than one percent decline occurred because loan sales,
securitizations, and repayments over the last twelve months outpaced steady loan
demand.
Average certificates and other time deposits increased from 38.7% of
total interest bearing funds at March 31, 1995 to 43.2% at March 31, 1996, while
average savings deposits decreased from 35.8% of interest bearing funds at March
31, 1995 to 34.4% at March 31, 1996. Interest bearing deposits increased from
84.6% of interest bearing funds at the end of the 1995 first quarter to 88.0% at
the end of the 1996 first quarter. Conversely, other borrowings decreased from
15.4% of total interest bearing funds at March 31, 1995 to 12.0% at March 31,
1996. In summary, during the 12 months ended March 31, 1996, customer deposits
shifted from savings into certificates and other time deposits while the
Corporation took advantage of its good liquidity position and paid down other
borrowings significantly.
During the first quarter 1996, interest bearing liabilities funded
81.3% of average earning assets compared to 83.9% one year ago. The decline in
use of interest bearing
14
liabilities as a loan and investment security funding source helped reduce the
cost of funds thereby improving the net interest margin.
OTHER INCOME
Other income for the quarter ended March 31, 1996 was $19,633,000, an
increase of $1,610,000 or 8.9%, over the $18,023,000 earned during the same
period last year. The sale of three branches during the 1996 first quarter,
contributed $2,986,000 to other income. The gains from the branch sales were
included in the "other operating income" category of the income statement.
Trust department income for the first quarter at $2,964,000 was flat
when compared to $2,944,000 earned one year ago. Service charges on depositors'
accounts increased 3.9% to $5,389,000 from $5,187,000 for last year's first
quarter. Credit card fees increased 21.8% to $2,493,000 for the quarter
compared to $2,047,000 for the three months ended March 31, 1995.
Through a comprehensive study developed last year, the Corporation
continues to examine new sources of non-interest ("other") 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. Implementation of many
of the study's other income recommendations is expected to take place throughout
1996.
OTHER EXPENSE
Other expense was $48,249,000 for the first quarter, a decline of
$7,469,000 or 13.4%, over the $55,718,000 recorded last year. Included in the
prior year expense were costs of $5,850,000 representing fees paid to financial
advisors and severance payments to certain individuals associated with the
Corporation's January 1995 acquisition of The CIVISTA Corporation ("CIVISTA").
Excluding the acquisition costs, other expense was still down $1,619,000 or 3.2%
of 1995 "core" other expenses.
Correspondingly, the efficiency ratio for the first quarter was 59.0%
compared to 70.8% for the same period last year. The reduced operating costs and
related improvement in the efficiency ratio are a result of the restructuring
program implemented last year. The Corporation is committed to keeping other
expense under control and in line with peer results.
Salaries, wages, pension and employee benefits decreased 6.6% to
$24,094,000. The decline was attributable to employee reduction as part of the
previously mentioned restructuring program as well as CIVISTA acquisition
severance payments made in the first quarter last year. Other operating expenses
were also less during the current quarter as a result of better expense control
and the CIVISTA acquisition financial advisor fees incurred during January 1995.
15
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. Effective December 31, 1995, the Corporation transferred all
held-to-maturity investments to available-for-sale. This one-time
reclassification was permitted by the Financial Accounting Standards Board to
allow institutions to reassess the appropriateness of their designations of
securities. The reclassification provides the Corporation with more flexibility
to respond, through the portfolio, to changes in market interest rates, or to
increases in loan demand or deposit withdrawals.
The book value and market value of investment securities
classified as available-for-sale are as follows:
March 31, 1996
--------------
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
------------------- ------------------- ------------------- -------------------
U.S. Treasury securities
and U.S. Government agency
obligations $845,225 1,204 12,064 834,363
Obligations of state and
political subdivisions 107,388 745 682 107,451
Mortgage-backed securities 321,967 3,019 3,323 321,664
Other securities 94,224 192 833 93,584
------------------- ------------------- ------------------- -------------------
$1,368,804 5,160 16,902 1,357,062
=================== =================== =================== ===================
Book Market
Value Value
------------------- -------------------
Due in one year or less $159,862 159,998
Due after one year through five
years 476,109 473,013
Due after five years through ten
years 134,268 132,290
Due after ten years 598,565 591,761
------------------- -------------------
$1,368,804 1,357,062
=================== ===================
The book value and market value of investment securities including
mortgage-backed securities and derivatives at March 31, 1996, by contractual
maturity, are shown above. Expected maturities will differ from contractual
maturities based on
16
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 $732,872,000 at March 31, 1996, $741,185,000 at December 31, 1995
and $854,746,000 at March 31, 1995.
Securities with remaining maturities over five years reflected in the
foregoing schedule consist of mortgage and asset backed securities. These
securities are purchased within an overall strategy to maximize future earnings
taking into account an acceptable level of interest rate risk. 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.
LOANS
Total loans outstanding at March 31, 1996 amounted to $3,786,000
compared to $3,770,366 at December 31, 1995 and $3,809,447 at March 31, 1995.
Although loan demand has been steady, loan sales, securitizations, and
repayments have mitigated the growth. The loan to funds ratio, a measure of the
Corporation's liquidity, equaled 77.3% at March 31, 1996 compared to 75.6% at
December 31, 1995 and 73.6% at March 31, 1995.
ASSET QUALITY
Total nonperforming assets (non-accrual and restructured loans and
other real estate loans) amounted to $12,450,000 at March 31, 1996 or 0.33% of
total loans outstanding. At December 31, 1995, nonperforming assets totaled
$13,898,000 or 0.37% of outstanding loans compared to $17,681,000 or 0.46% of
outstanding loans at March 31, 1995. Effective December 31, 1995, the
Corporation adopted Statement of Financial Accounting Standard No. 114,
"Accounting by Creditors for Impairment of a Loan," and Statement No. 118, an
amendment of Statement No. 114, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures." These statements prescribe how the
allowance for loan losses related to impaired loans should be determined and
illustrate the required impaired loan 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 prices, or the fair value of the underlying
collateral. Under the Corporation's credit policies and practices, and in
conjunction with provisions within Statements No. 114 and No. 118, all
nonaccrual and restructured commercial,
17
agricultural, construction, and commercial real estate loans, meet the
definition of impaired loans.
(Dollars in thousands)
March 31, December 31, March 31,
1996 1995 1995
--------------------- ------------------------ ----------------------
Impaired Loans:
Non-accrual $7,692 7,373 N/A
Restructured 1,368 1,548 N/A
- - - -------------------------------------------------------------------------------------------------------------------------
Total impaired loans 9,060 8,921 N/A
--------------------- ------------------------ ----------------------
Other Loans:
Non-accrual 2,658 3,918 13,371
Restructured --- --- 1,745
- - - -------------------------------------------------------------------------------------------------------------------------
Total other nonperforming loans 2,658 3,918 15,116
- - - -------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 11,718 12,839 15,116
- - - -------------------------------------------------------------------------------------------------------------------------
Other real estate owned 732 1,059 2,565
--------------------- ------------------------ ----------------------
Total nonperforming assets 12,450 13,898 17,681
=========================================================================================================================
Loans past due 90 days or more
accruing interest $6,297 7,252 3,268
=========================================================================================================================
Total nonperforming assets as a
percent of total loans 0.33% .37% .46%
=========================================================================================================================
N/A = Not Available
There is no concentration of loans in any particular industry or group of
industries. Most of the Corporation's business activity is with customers
located within the state of Ohio.
ALLOWANCE FOR LOAN LOSSES
The allowance for possible loan losses at March 31, 1996 totaled
$47,474,000 or 1.25% of total loans outstanding compared to $46,840,000 or 1.24%
and $37,426,000 or 0.98% at December 31, 1995 and March 31, 1995, respectively.
18
(Dollars in thousands)
March 31, December 31, March 31,
1996 1995 1995
------------------------ --------------------------- ------------------------
Balance at beginning of year $46,840 35,834 35,834
Provision charged to
operating expenses 2,957 19,763 2,711
Loans charged off 3,530 12,925 2,177
Recoveries on loans
previously charged off 1,207 4,168 1,058
------------------------ --------------------------- ------------------------
$47,474 46,840 37,426
======================== =========================== ========================
Net charge offs as a percent
of average loans .25% .23% .12%
Allowance for possible
loan losses:
As a percent of loans
outstanding at end of
period 1.25% 1.24% .98%
As a multiple of net
charge offs 5.08X 5.35X 8.25X
The Corporation's Credit Policy Division manages credit risk by establishing
common credit policies for its subsidiary banks, participating in approval of
their largest loans, conducting reviews of their loan portfolios, providing them
with centralized consumer underwriting, collections and loan operation services,
and overseeing their loan workouts. The Corporation's objective is to minimize
losses from its commercial lending activities and to maintain consumer losses at
acceptable levels that are stable and consistent with growth and profitability
objectives.
DEPOSITS
The following schedule illustrates the change in composition of the
average balances of deposits and average rates paid for the noted periods.
19
(Dollars in Thousands)
Three months and year ended
------------------------------------------------------------------------------------------------
March 31, 1996 December 31, 1995 March 31, 1995
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------------------------ ------------------------------ ------------------------------
Demand Deposits -
non-interest bearing $737,626 - 725,287 - 708,097 -
Demand Deposits -
interest bearing 434,377 1.85% 426,608 2.16% 444,005 2.24%
Savings Deposits 1,432,303 2.37% 1,514,374 2.54% 1,588,708 2.63%
Certificates and other
time deposits 1,800,514 5.50% 1,782,817 5.47% 1,717,283 5.08%
----------------- ----------------- -----------------
$4,404,820 3.20% 4,449,086 3.26% 4,458,093 3.12%
================= ================= =================
The following table summarizes the certificates and other time deposits
in amounts of $100,000 or more as of March 31, 1996 by time remaining until
maturity.
Amount
Maturing in:
Under 3 months $118,719
3 to 12 months 68,403
Over 12 months 52,005
-----------------------------------
$239,127
===================================
CAPITAL RESOURCES
Shareholders' equity at March 31, 1996 totaled $537,272,000 compared to
$542,881,000 at December 31, 1995 and $524,536,000 at March 31, 1995.
20
The following table reflects the various measures of capital:
As of As of As of
March 31, December 31, March 31,
1996 1995 1995
(In thousands)
Total equity 537,272 9.77% 552,881 9.70% 524,536 9.12%
Common equity 537,272 9.77% 542,881 9.70% 524,536 9.12%
Tangible common
equity (a) 531,938 9.68% 536,934 9.60% 506,586 8.83%
Tier 1 capital (b) 540,117 14.58% 538,032 14.53% 529,511 14.63%
Total risk-based
capital (c) 586,426 15.83% 584,872 15.80% 566,937 15.66%
Leverage (d) 534,783 9.71% 538,032 9.66% 529,511 9.28%
<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 March 31, 1996 the Corporation's risk-based
capital equaled 15.83% of risk adjusted assets, far exceeding the minimum
guidelines.
The cash dividend of $.27 paid in the first quarter has an indicated
annual rate of $1.08 per share.
21
PART II. - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10(a) Second Amendment to the FirstMerit Corporation 1992 Stock
Option Program dated February 15, 1996
10(b) Form of Multi-Year Non-Qualified Stock Option Agreement
under the 1992 Stock Option Program
10(c) Form of Non-Qualified Stock Option Agreement under the 1992
Stock Option Program
10(d) Form of Performance-Vested Stock Option Agreement under the
1992 Stock Option Program
27 Financial Data Schedule
(b) FORM 8-K
None