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
JUNE 30, 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)
(330) 996-6300
(TELEPHONE NUMBER)
OUTSTANDING SHARES OF COMMON STOCK, AS OF JUNE 30, 1996
32,607,220
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 June 30, 1996, December 31, 1995
and June 30, 1995
Consolidated Statements of Income for the three-month and six-month
periods ended June 30, 1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity for the
year ended December 31, 1995 and for the six months ended June 30,
1996
Consolidated Statements of Cash Flows for the six months ended
June 30, 1996 and 1995
Notes to Consolidated Financial Statements as of June 30, 1996,
December 31, 1995, and June 30, 1995
Management's Discussion and Analysis of Financial Conditions as of
June 30, 1996, December 31, 1995 and June 30, 1995 and Results of
Operations for the quarter and six months ended June 30, 1996 and
1995 and for the year ended December 31, 1995.
3
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
-------------------------------------
June 30 December 31, June 30
-------------------------------------
1996 1995 1995
- - - ----------------------------------------------------------------------------------------------------------
ASSETS
Investment securities $ 1,274,464 1,403,059 1,448,392
Federal funds sold 7,098 12,575 9,277
Loans less unearned income 3,855,897 3,770,366 3,923,991
Less allowance for possible loan losses 47,772 46,840 37,301
-------------------------------------
Net loans 3,808,125 3,723,526 3,886,690
-------------------------------------
Total earning assets 5,089,687 5,139,160 5,344,359
Cash and due from banks 253,292 287,671 261,754
Premises and equipment, net 104,013 94,158 89,444
Accrued interest receivable and other assets 89,724 75,532 97,570
-------------------------------------
$ 5,536,716 5,596,521 5,793,127
=====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-non-interest bearing $ 758,965 810,948 769,698
Demand-interest bearing 458,053 432,409 424,540
Savings 1,413,676 1,454,876 1,508,860
Certificates and other time deposits 1,740,398 1,803,692 1,821,238
-------------------------------------
Total deposits 4,371,092 4,501,925 4,524,336
Securities sold under agreements to repurchase
and other borrowings 577,848 486,958 674,052
-------------------------------------
Total funds 4,948,940 4,988,883 5,198,388
Accrued taxes, expenses, and other liabilities 61,917 64,757 57,686
-------------------------------------
Total liabilities 5,010,857 5,053,640 5,256,074
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 33,680,544
33,614,487 and 33,484,365 shares, respectively 104,808 103,861 102,501
Treasury stock, 1,073,324, 122,870 and 37,590 shares,
respectively (30,153) (2,963) (719)
Net unrealized holding gains (losses)
on available for sale securities (12,853) (1,292) (5,623)
Retained earnings 464,057 443,275 440,894
-------------------------------------
Total shareholders' equity 525,859 542,881 537,053
-------------------------------------
$ 5,536,716 5,596,521 5,793,127
=====================================
4
FIRSTMERIT CORPORATION AND SUBSIDIARIES
AVERAGE CONSOLIDATED BALANCE SHEETS
- - - -------------------------------------------
(In thousands except ratios)
Quarters
---------------------------------------------------------------------
1996 1995
---------------------------------------------------------------------
2nd 1st 4th 3rd 2nd
---------------------------------------------------------------------
ASSETS
Investment securities $ 1,313,661 1,378,465 1,355,618 1,394,350 1,479,016
Federal funds sold 13,735 18,994 50,560 17,927 9,465
Loans less unearned income 3,829,106 3,772,550 3,814,172 3,864,206 3,869,187
Less allowance for possible
loan losses 48,151 47,428 39,199 38,228 37,833
---------------------------------------------------------------------
Net loans 3,780,955 3,725,122 3,774,973 3,825,978 3,831,354
---------------------------------------------------------------------
Total earning assets 5,108,351 5,122,581 5,181,151 5,238,255 5,319,835
Cash and due from banks 217,967 232,183 221,632 216,342 205,097
Premises and equipment, net 101,933 95,837 93,640 90,999 87,263
Accrued interest receivable
and other assets 78,603 68,467 82,342 88,309 99,071
---------------------------------------------------------------------
$ 5,506,854 5,519,068 5,578,765 5,633,905 5,711,266
======================================================================
LIABILITIES
Deposits:
Demand-non-interest bearing $ 768,507 737,626 755,008 725,235 710,734
Demand-interest bearing 453,118 434,377 421,000 415,810 424,126
Savings 1,423,458 1,432,303 1,462,460 1,485,227 1,528,247
Certificates and other time
deposits 1,746,516 1,800,514 1,802,822 1,811,975 1,793,889
----------------------------------------------------------------------
Total deposits 4,391,599 4,404,820 4,441,290 4,438,247 4,456,996
Securities sold under agreements to
repurchase and other borrowings 520,575 500,221 522,680 588,133 649,942
----------------------------------------------------------------------
Total funds 4,912,174 4,905,041 4,963,970 5,026,380 5,106,938
Accrued taxes, expenses and
other liabilities 65,567 76,894 74,314 70,054 77,462
----------------------------------------------------------------------
Total liabilities 4,977,741 4,981,935 5,038,284 5,096,434 5,184,400
SHAREHOLDERS' EQUITY 529,113 537,133 540,481 537,471 526,866
----------------------------------------------------------------------
$ 5,506,854 5,519,068 5,578,765 5,633,905 5,711,266
======================================================================
RATIOS
Net income as a percentage of:
Average assets 1.40% 1.40% 0.23% 1.17% 0.89%
Average shareholders' equity 14.61% 14.42% 2.34% 12.29% 9.64%
5
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- - - ---------------------------------------------------
(In thousands except per share data)
-------------------------------------------------------
Quarters Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
- - - -------------------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 82,989 82,115 163,298 160,227
Interest and dividends on securities:
Taxable 18,754 20,878 38,557 43,648
Exempt from Federal income taxes 1,377 1,616 2,665 3,286
Interest on Federal funds sold 265 184 492 498
-------------------------- ------------------------
Total interest income 103,385 104,793 205,012 207,659
-------------------------- ------------------------
Interest expense:
Interest on deposits:
Demand-interest bearing 1,983 2,315 2,899 4,763
Savings 8,135 9,942 17,640 20,263
Certificates and other time deposits 23,301 24,970 47,942 46,501
Interest on securities sold under agreements
to repurchase and other borrowings 6,461 9,857 12,636 19,916
-------------------------- ------------------------
Total interest expense 39,880 47,084 81,117 91,443
-------------------------- ------------------------
Net interest income 63,505 57,709 123,895 116,216
Provision for possible loan losses 3,170 2,586 6,127 5,298
-------------------------- ------------------------
Net interest income after provision
for possible loan losses 60,335 55,123 117,768 110,918
-------------------------- ------------------------
Other income:
Trust department income 3,227 2,374 6,191 5,318
Service charges on depositors' accounts 6,086 4,957 11,475 10,144
Credit card fees 2,994 2,412 5,487 4,459
Securities gains (losses) (55) 440 212 440
Other operating income 5,432 6,560 13,952 14,405
-------------------------- ------------------------
Total other income 17,684 16,743 37,317 34,766
-------------------------- ------------------------
78,019 71,866 155,085 145,684
-------------------------- ------------------------
Other expenses:
Salaries, wages, pension and employee benefits 23,839 28,201 47,933 53,991
Net occupancy expense 4,298 3,935 8,622 8,120
Equipment expense 2,995 3,298 6,247 6,387
Other operating expense 18,208 17,406 34,787 40,060
-------------------------- ------------------------
Total other expenses 49,340 52,840 97,589 108,558
-------------------------- ------------------------
Income before Federal income taxes 28,679 19,026 57,496 37,126
Federal income taxes 9,458 6,362 19,022 25,646
-------------------------- ------------------------
Net income $ 19,221 12,664 38,474 11,480
========================== ========================
Per share data based on average number of
shares outstanding:
Net Income $ 0.59 0.38 1.17 0.34
========================== ========================
Dividends paid $ 0.27 0.25 0.54 0.50
Weighted average number of shares
outstanding 32,812,388 33,442,763 33,030,297 33,388,865
6
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- - - ----------------------------------------------------------
Year Ended December 31, 1995 and
Six Months Ended June 30, 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 - - - 38,474 38,474
Cash dividends ($0.54 per share) - - - (17,692) (17,692)
Stock options exercised 947 - - - 947
Treasury shares purchased - (27,190) - - (27,190)
Market adjustment investment securities - - (11,561) - (11,561)
----------- ------------- ---------------- ---------- ----------
Balance at June 30, 1996 $104,808 (30,153) (12,853) 464,057 525,859
=========== ============= ================ ========== ==========
7
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995
(In thousands)
--------------------------
1996 1995
--------------------------
Operating Activities
- - - ----------------------------
Net income $38,474 11,480
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 6,127 5,298
Provision for depreciation and amortization 4,738 4,650
Amortization of investment securities premiums, net 1,606 1,504
Amortization of income for lease financing (6,873) (1,833)
Gains on sales of investment securities, net (212) (440)
Deferred federal income taxes 4,048 10,978
Increase in interest receivable (3,396) (2,132)
Increase in interest payable 156 4,606
Amortization of values ascribed to acquired intangibles 1,611 1,638
Other increases (decreases) (13,227) 16,304
--------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 33,052 52,053
--------------------------
Investing Activities
- - - ----------------------------
Dispositions of investment securities:
Available-for-sale - sales 27,468 31,629
Held-to-maturity - maturities 289,978
Available-for-sale - maturities 166,656 66,363
Purchases of investment securities held-to-maturity (22,635)
Purchases of investment securities available-for-sale (84,708) (177,524)
Net decrease in federal funds sold 5,477 4,423
Net increase in loans and leases (83,853) (238,100)
Purchases of premises and equipment (15,487) (14,524)
Sales of premises and equipment 894 3,653
--------------------------
NET CASH PROVIDED\(USED) BY INVESTING ACTIVITIES 16,447 (56,737)
--------------------------
Financing Activities
- - - ----------------------------
Net decrease in demand, NOW and savings deposits (67,539) (138,361)
Net increase (decrease) in time deposits (63,294) 121,240
Net increase in securities sold under repurchase
agreements and other borrowings 90,890 61,428
Cash dividends (17,692) (17,842)
Purchase of treasury shares (27,190) --
Proceeds from exercise of stock options 947 1,900
--------------------------
NET CASH PROVIDED\(USED) BY FINANCING ACTIVITIES (83,878) 28,365
Increase (decrease) in cash and cash equivalents (34,379) 23,681
Cash and cash equivalents at beginning of year 287,671 238,073
--------------------------
Cash and cash equivalents at end of year $253,292 261,754
==========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
- - - ---------------------------------------------------------
Cash paid during the year for:
Interest, net of amounts capitalized $46,788 58,260
Income taxes 15,462 7,362
==========================
See accompanying notes to consolidated financial statements.
8
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, December 31, 1995
and June 30, 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, N.A. 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.
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 June 30, 1996 statement of condition and the
results of operations for the quarter and six months ended June 30, 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 June 30, Year ended December 31,
--------------------------------- ------------------------------
1996 1995
--------------------------------- ------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- - - ------------------------------------------------------------------------------------------------------------------
ASSETS
Investment securities 1,313,661 20,740 6.35% 1,447,024 92,205 6.37%
Federal funds sold 13,735 265 7.76% 22,011 1,681 7.64%
Loans, net of unearned income 3,829,106 83,147 8.73% 3,818,486 326,581 8.55%
Less allowance for possible loan losses 48,151 37,923
---------- -------- ---------- --------
Net loans 3,780,955 83,147 8.84% 3,780,563 326,581 8.64%
Cash and due from banks 217,967 -- -- 220,787 -- --
Other assets 180,536 -- -- 184,426 -- --
---------- -------- ---------- --------
Total assets $5,506,854 104,152 -- 5,654,811 420,467 --
========== ======== ========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-
non-interest bearing $ 768,507 -- -- 725,287 -- --
Demand-
interest bearing 453,118 1,983 1.76% 426,608 9,202 2.16%
Savings 1,423,458 8,135 2.30% 1,514,374 38,438 2.54%
Certificates and other time deposits 1,746,516 23,301 5.37% 1,782,817 97,518 5.47%
---------- -------- ---------- --------
Total deposits 4,391,599 33,419 3.06% 4,449,086 145,158 3.26%
Federal funds purchased, securities sold
under agreements to repurchase and 520,575 6,461 4.99% 609,247 35,775 5.87%
other borrowings
Other liabilities 65,567 -- 68,440 --
Shareholders' equity 529,113 -- 528,038 --
---------- -------- ---------- --------
Total liabilities and shareholders' equity 5,506,854 39,880 -- 5,654,811 180,933 --
========== ======== ========== ========
Total earning assets 5,108,351 104,152 8.20% 5,249,598 420,467 8.01%
========== ======== ========== ========
Total interest bearing liabilities 4,143,667 39,880 3.67% 4,333,046 180,933 4.18%
========== ======== ========== ========
Net yield on earning assets 64,272 5.06% 239,534 4.56%
======== ===== ======== =====
Interest rate spread 4.33% 3.83%
===== =====
Quarter ended June 30,
------------------------------
1995
------------------------------
Average Average
Balance Interest Rate
- - - --------------------------------------------------------------------------------------
ASSETS
Investment securities 1,479,016 23,260 6.31%
Federal funds sold 9,465 184 7.80%
Loans, net of unearned income 3,869,187 82,328 8.53%
Less allowance for possible loan losses 37,833
---------- --------
Net loans 3,831,354 82,328 6.62%
Cash and due from banks 205,097 -- --
Other assets 186,334 -- --
---------- --------
Total assets 5,711,266 105,772 --
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-
non-interest bearing 710,734 -- --
Demand-
interest bearing 424,126 2,315 2.19%
Savings 1,528,247 9,942 2.61%
Certificates and other time deposits 1,793,889 24,970 5.58%
---------- --------
Total deposits 4,456,996 37,227 3.35%
Federal funds purchased, securities sold
under agreements to repurchase and 649,942 9,857 6.08%
other borrowings
Other liabilities 77,462 --
Shareholders' equity 526,866 --
---------- --------
Total liabilities and shareholders' equity 5,711,266 47,084 --
========== ========
Total earning assets 5,319,835 105,772 7.97%
========== ========
Total interest bearing liabilities 4,396,204 47,084 4.30%
========== ========
Net yield on earning assets 58,688 4.42%
======== =====
Interest rate spread 3.68%
=====
<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.
10
RESULTS OF OPERATIONS
FirstMerit Corporation's net income for the quarter ended June 30, 1996
was $19,221,000 compared to $12,664,000 for the same quarter one year ago.
Included in the prior year quarter was a one-time after-tax charge of $2,198,000
related to an early retirement program. For the second quarter of 1996, return
on average equity was 14.61%, while return on average assets was 1.40%. The same
profitability ratios for the second quarter last year were 9.64% and 0.89%,
respectively.
For the six-month period ended June 30, 1996, net income was
$38,474,000 compared to $11,480,000 a year ago. Last year's first half earnings
were impacted by the early retirement charge of $2,198,000 and a first quarter
after-tax charge of $16,200,000 associated with the acquisition of The CIVISTA
Corporation. Return on average equity for the 1996 six-month period was 14.51%,
and return on average assets was 1.41%. The comparable ratios for the same
period last year were 4.45% and 0.41%, respectively.
Fully taxable equivalent ("FTE") net interest income for the second
quarter was $64,272,000, a 9.5% increase over the same quarter last year. FTE
net interest income for the current year-to-date period was $125,454,000
compared to $118,214,000 one year ago. Driving the increase in net interest
income was an improved net interest margin of 5.06% for the quarter and 4.93%
for the six months ended June 30, 1996. These ratios compare favorably to 4.42%
for the second quarter last year and 4.48% for the six months ended June 30,
1995.
Other income rose 5.6% during the quarter from $16,743,000 to
$17,684,000. Increased service charges on deposits and trust fees were the
biggest contributors to higher non-interest income.
Other expenses totaled $49,340,000 for the quarter, a decline of over
6% from last year's level. Likewise, year-to-date other expenses were
$97,589,000, some 10% less than 1995's total of $108,558,000. The efficiency
ratios of 59.20% for the quarter ended June 30, 1996 and 59.10% for the current
year six-month period, compared to last year's ratios of 70.05% and 70.09%,
respectively, further illustrate the improvement in controlling operating
expenses.
Asset quality remained strong during the second quarter. Nonperforming
assets were 0.30% of total loans and Other Real Estate compared to 0.45% at June
30, 1995. Net charge-offs to average loans, on an annualized basis, were 0.30%
at June 30, 1996 and 0.28% for the same period last year. The allowance for loan
losses as a percentage of outstanding loans totaled 1.24% at June 30, 1996
compared to 0.95% one year ago.
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
11
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 second quarter were $0.59 compared to $0.38
for the same quarter in 1995. For the six months ended June 30, 1996, earnings
per share were $1.17 compared to $0.34 for the first half of last year. The
components of change in per share income for the quarters and six months ended
June 30, 1996 and 1995 are summarized in the following table:
CHANGES IN EARNINGS PER SHARE
Three months ended Six months ended
June 30, June 30,
1996/1995 1996/1995
-----------------------------------------------------------
Net income per share June 30, 1995 $0.38 0.34
Increases (decreases) due to:
Net interest income - taxable equivalent 0.17 0.22
Provision for possible loan losses (.02) (.02)
Other income 0.03 0.08
Other expenses 0.11 0.33
Federal income taxes - taxable equivalent (.08) 0.22
-----------------------------------------------------------
Net change in net income per share 0.21 0.83
-----------------------------------------------------------
Net income per share June 30, 1996 $0.59 1.17
===========================================================
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. That is, interest on tax-free securities and tax-exempt loans
has been restated as if such interest were taxed at the statutory Federal income
12
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 June 30, 1996 was
$64,272,000 compared to $58,688,000 for the same period one year ago, an
increase of $5,584,000 or 9.5%. The favorable increase in net interest income
occurred as the Corporation paid out less interest on deposits and borrowings
due to declining balances and lower cost of funds rates on these instruments.
The decline in interest expense outpaced a $1,620,000 drop in interest income.
More specifically, on the earning asset side, interest lost on lower
balances in investment securities and loans was somewhat offset by higher yields
earned on these same assets, especially in the loan category where the second
quarter's yield increased 20 basis points from 8.53% in 1995 to 8.73% this year.
With regard to interest bearing liabilities, lower interest rates and declining
balances contributed $4,494,000 and $2,710,000, respectively, to the gain in FTE
net interest income. The average cost of funds rate for the quarter was 3.87%,
some 43 basis points lower than the 4.30% recorded one year ago.
For the first half of 1996, FTE net interest income totaled
$125,454,000, up 6.1% from the $118,214,000 reported during the first half last
year. As was the case with the quarterly results, the six-month gain in interest
income occurred as lower interest expense, caused by declining balances and a
lower deposit interest rate environment, exceeded the decline in interest
income. The six-month FTE yield on earning assets for 1996 was 8.12% compared to
7.98% in 1995. The 1996 average cost of funds rate was 3.93%, down 25 basis
points from 4.18% last year.
The following schedule illustrates in more detail the change in net
interest income FTE by rate and volume components for both interest earning
assets and interest bearing liabilities.
13
CHANGES IN NET INTEREST DIFFERENTIAL -
FULLY-TAX EQUIVALENT RATE/VOLUME ANALYSIS
(DOLLARS IN THOUSANDS)
Quarters ended Six Months Ended
June 30, June 30,
1996 and 1995 1996 and 1995
------------- -------------
Increase (Decrease) Increase (Decrease)
Interest Income/Expense Interest Income/Expense
--------------------------- --------------------------
Volume Yield Rate Total Volume Yield Rate Total
--------------------------------------------------------------------------
INTEREST INCOME
Investment Securities $(2,611) 91 (2,520) (4,185) (1,864) (6,049)
Loans (870) 1,689 819 (2,957) 5,926 2,969
Federal funds sold 82 (1) 81 207 (213) (6)
--------------------------------------------------------------------------
Total interest income $(3,399) 1,779 (1,620) (6,935) 3,849 (3,086)
INTEREST EXPENSE
Interest on deposits:
Demand-interest bearing 127 (459) (332) 128 (1,992) (1,864)
Savings (599) (1,208) (1,807) (1,240) (1,383) (2,623)
Certificates and other
time deposits (632) (1,037) (1,669) (551) 1,992 1,441
Federal Funds Purchased,
REPOs & other borrowings (1,606) (1,790) (3,396) (3,463) (3,817) (7,280)
--------------------------------------------------------------------------
Total interest expense $(2,710) (4,494) (7,204) (5,126) (5,200) (10,326)
--------------------------------------------------------------------------
Net interest income $(689) 6,273 5,584 (1,809) 9,049 7,240
==========================================================================
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.
14
NET INTEREST MARGIN
(DOLLARS IN THOUSANDS)
Quarters Ended Six Months Ended
June 30, June 30,
----------------------------------- -----------------------------------
1996 1995 1996 1995
----------------------------------- -----------------------------------
Net interest income per
financial statements $63,505 57,709 123,895 116,216
Tax equivalent adjustment 767 979 1,559 1,998
----------------------------------- -----------------------------------
Net interest income - FTE $64,272 58,688 125,454 118,214
=================================== ===================================
Average earning assets $5,108,351 5,319,835 5,115,362 5,295,975
=================================== ===================================
Net interest margin 5.06% 4.42% 4.93% 4.48%
=================================== ===================================
Average loans outstanding for the quarter ended June 30, 1996 were
$3,829,106, down slightly from $3,869,187 for the same quarter last year. The
one percent decline occurred because loan sales, securitizations, and repayments
over the last twelve months were slightly greater than the steady loan demand.
Similarly, for the first half of 1996, average loan outstandings totaled
$3,800,498 compared to $3,800,942 for the prior year. Average outstanding loans
for the quarter and six-month periods equaled 75.0% and 74.3% of average earning
assets, respectively.
Average certificates and other time deposits totaled $1,746,516 at June
30, 1996, down 2.6% from $1,793,889 at June 30, 1995. On a percentage basis,
however, average certificates and other time deposits increased from 40.8% of
total interest bearing funds at June 30, 1995 to 42.1% at June 30, 1996, while
average savings deposits decreased from 34.8% of interest bearing funds at June
30, 1995 to 34.4% at June 30, 1996. Interest bearing deposits increased from
85.2% of interest bearing funds at the end of the 1995 second quarter to 87.4%
at the end of the 1996 second quarter. Conversely, other borrowings decreased
from 14.8% of total interest bearing funds at June 30, 1995 to 12.6% at June 30,
1996.
In summary, during the twelve months ended June 30, 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 second quarter 1996, interest bearing liabilities funded
81.1% of average earning assets compared to 82.6% one year ago. The decline in
use of interest bearing liabilities as a loan and investment security funding
source helped reduce the cost of funds thereby improving the net interest
margin.
15
OTHER INCOME
Other income for the quarter ended June 30, 1996 was $17,684,000, an
increase of $941,000 or 5.6%, over the $16,743,000 earned during the same period
last year. For the six-month period, other income totaled $37,317,000 compared
to $34,766,000 a year ago. 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 second quarter was $3,227,000 or 35.9%
higher than the $2,374,000 earned one year ago. Service charges on depositors'
accounts increased 22.8% to $6,086,000 from $4,957,000 for last year's second
quarter. Credit card fees increased 24.1% to $2,994,000 for the quarter compared
to $2,412,000 for the three months ended June 30, 1995. For the 1996 first half,
compared to the same period last year, trust department income increased 16.4%
to $6,191,000, service charges on depositors' accounts increased 13.1% to
$11,475,000, and credit card fees increased 23.1% to $5,487,000.
The Corporation's increases in other income for the current year
periods reflect the successful implementation of a comprehensive study begun
last year to examine new sources of non-interest ("other") income as well as the
current pricing of existing products and services. Other income is especially
important to banks as it provides a source of revenues not sensitive to the
interest rate environment. Implementation of the study's other income
recommendations is ongoing and expected to materially completed by year end
1996..
OTHER EXPENSES
Other expenses were $49,340,000 for the second quarter, a decline of
$3,500,000 or 6.6%, over the $52,840,000 recorded last year. For the first half
of 1996, other expenses totaled $97,589,000 versus $108,558,000 a year ago.
Included in the prior year first half operating expenses 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").
Correspondingly, the efficiency ratios for the second quarter and
six-month periods were 59.20% and 59.10%, respectively, compared to 70.05% for
the 1995 second quarter and 70.09% for the six months ended June 30, 1995. The
reduced operating costs and related improvement in the efficiency ratios are a
continued result of the restructuring program implemented last year. The
Corporation is committed to keeping other expenses under control and in line
with peer results.
Salaries, wages, pension and employee benefits, the largest component
of other expenses, decreased 15.5% to $23,839,000. For the six-month period,
salaries, wages, pension and employee benefits dropped 11.2% to $47,933,000. The
decline in
16
personnel costs was attributable to staff reduction implemented as part of the
previously mentioned restructuring program, as well as CIVISTA acquisition
severance payments made in the first quarter last year. For the 1996
year-to-date period, other operating expenses were less because of the CIVISTA
acquisition financial advisor fees incurred during January 1995.
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:
June 30, 1996
-------------
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
---------------- ---------------- --------------- ----------------
U.S. Treasury securities
and U.S. Government agency
obligations $796,388 677 15,952 781,113
Obligations of state and
political subdivisions 98,457 670 666 98,461
Mortgage-backed securities 306,886 1,626 6,319 302,193
Other securities 92,504 1,220 1,027 92,697
---------------- --------------- -------------- --------------
$1,294,235 4,193 23,964 1,274,464
================ =============== =============== ==============
Book Value Market Value
---------------- ----------------
Due in one year or less $163,512 163,540
Due after one year through five years
424,214 418,537
Due after five years through ten years
131,453 128,515
Due after ten years 575,056 563,872
---------------- ----------------
$1,294,235 1,274,464
================ ================
17
The book value and market value of investment securities including
mortgage-backed securities and derivatives at June 30, 1996, 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 $719,847,000 at June 30, 1996, $741,185,000 at December 31, 1995
and $782,044,000 at June 30, 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 June 30, 1996 amounted to $3,855,897
compared to $3,770,366 at December 31, 1995 and $3,923,991 at June 30, 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 77.9% at June 30, 1996 compared to 75.6% at
December 31, 1995 and 75.5% at June 30, 1995.
ASSET QUALITY
Total nonperforming assets (non-accrual and restructured loans and
other real estate loans) amounted to $11,489,000 at June 30, 1996 or 0.30% of
total loans outstanding. At December 31, 1995, nonperforming assets totaled
$13,898,000 or 0.37% of outstanding loans compared to $17,772,000 or 0.45% of
outstanding loans at June 30, 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
18
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.
(Dollars in thousands)
June 30, December 31, June 30,
1996 1995 1995
------------------ ---------------------- ------------------
Impaired Loans:
Non-accrual $7,799 7,373 N/A
Restructured 1,367 1,548 N/A
- - - ---------------------------------------------------------------------------------------------------------------
Total impaired loans 9,166 8,921 N/A
------------------ ---------------------- ------------------
Other Loans:
Non-accrual 1,528 3,918 N/A
Restructured --- --- N/A
- - - ---------------------------------------------------------------------------------------------------------------
Total other nonperforming loans 1,528 3,918
N/A
- - - ---------------------------------------------------------------------------------------------------------------
Total nonperforming loans 10,694 12,839 15,868
- - - ---------------------------------------------------------------------------------------------------------------
Other real estate owned 795 1,059 1,904
------------------ ---------------------- ------------------
Total nonperforming assets 11,489 13,898 17,772
===============================================================================================================
Loans past due 90 days or more
accruing interest $7,806 7,252 3,757
===============================================================================================================
Total nonperforming assets as a
percent of total loans 0.30% 0.37% 0.45%
===============================================================================================================
<FN>
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.
19
ALLOWANCE FOR LOAN LOSSES
The allowance for possible loan losses at June 30, 1996 totaled
$47,772,000 or 1.24% of total loans outstanding compared to $46,840,000 or 1.24%
and $37,301,000 or 0.95% at December 31, 1995 and June 30, 1995, respectively.
(Dollars in thousands)
June 30, December 31, June 30,
1996 1995 1995
-------- ------------ --------
Balance at beginning of year $46,840 35,834 35,834
Provision charged to
operating expenses 6,127 19,763 5,298
Loans charged off 7,965 12,925 5,945
Recoveries on loans
previously charged off 2,770 4,168 2,114
-------- ------------ --------
$47,772 46,840 37,301
======== =========== ========
Net charge offs as a percent
of average loans 0.27% 0.23% 0.20%
Allowance for possible loan losses:
As a percent of loans
outstanding at end of
period 1.24% 1.24% 0.95%
As a multiple of net
charge offs 4.57X 5.35X 4.82X
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.
20
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)
Three months and year ended
------------------------------------------------------------------------------
June 30, 1996 December 31, 1995 June 30, 1995
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------------------- ------------------------- -----------------------
Demand Deposits -
non-interest bearing $768,507 - 725,287 - 710,734 -
Demand Deposits -
interest bearing 453,118 1.76% 426,608 2.16% 424,126 2.19%
Savings Deposits 1,423,458 2.30% 1,514,374 2.54% 1,528,247 2.61%
Certificates and other
time deposits 1,746,516 5.37% 1,782,817 5.47% 1,793,889 5.58%
------------- ------------ --------------
$4,391,599 3.06% 4,449,086 3.26% 4,456,996 3.35%
=============== ============== ==============
The following table summarizes the certificates and other time deposits
in amounts of $100,000 or more as of June 30, 1996 by time remaining until
maturity.
Amount
Maturing in:
Under 3 months $125,405
3 to 12 months 61,814
Over 12 months 39,290
--------------------------------
$226,509
================================
21
CAPITAL RESOURCES
Shareholders' equity at June 30, 1996 totaled $525,859,000 compared to
$542,881,000 at December 31, 1995 and $537,053,000 at June 30, 1995.
The following table reflects the various measures of capital:
As of As of As of
June 30, December 31, June 30,
1996 1995 1995
(In thousands)
Total equity 525,859 9.50% 542,881 9.70% 537,053 9.27%
Common equity 525,859 9.50% 542,881 9.70% 537,053 9.27%
Tangible common equity (a) 520,887 9.42% 536,934 9.60% 519,889 9.00%
Tier 1 capital (b) 517,307 12.40% 538,032 14.53% 535,067 14.50%
Total risk-based capital
(c) 565,079 13.54% 584,872 15.80% 572,368 15.51%
Leverage (d) 512,335 9.33% 538,032 9.66% 535,067 9.38%
<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 June 30, 1996 the Corporation's risk-based
capital equaled 13.54% of risk adjusted assets, far exceeding the minimum
guidelines.
The cash dividend of $.27 paid in the second quarter has an indicated
annual rate of $1.08 per share.
22
PART II. - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
None
(B) FORM 8-K
None
23
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: /s/ GARY J. ELEK
-------------------------------------
Gary J. Elek, Senior Vice President
DATE: August 13, 1996