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, 1997
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
44308-1103
(Address of principal Executive Offices)
(330) 996-6300
(Telephone Number)
OUTSTANDING SHARES OF COMMON STOCK,
AS OF MARCH 31, 1997
31,636,323
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, 1997, December 31, 1996
and March 31, 1996
Consolidated Statements of Income for the three months ended March
31, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity for the
year ended December 31, 1996 and for the three months ended March 31,
1997
Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and 1996
Notes to Consolidated Financial Statements as of March 31, 1997,
December 31, 1996, and March 31, 1996
Management's Discussion and Analysis of Financial Conditions as of
March 31, 1997, December 31, 1996 and March 31, 1996 and Results of
Operations for the quarter ended March 31, 1997 and 1996 and for the
year ended December 31, 1996.
3
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- - - ----------------------------------------------------------------------
(In thousands)
------------------------------------------------------
(Unaudited) (Unaudited)
March 31, December 31, March 31,
------------------------------------------------------
1997 1996 1996
- - - -----------------------------------------------------------------------------------------------------------------------
ASSETS
Investment securities $ 1,102,487 1,187,524 1,357,062
Federal funds sold 17,100 15,550 2,446
Loans less unearned income 3,750,475 3,655,998 3,786,300
Less allowance for possible loan losses 49,637 49,336 47,474
------------------------------------------------------
Net loans 3,700,838 3,606,662 3,738,826
------------------------------------------------------
Total earning assets 4,820,425 4,809,736 5,098,334
Cash and due from banks 217,568 222,164 218,967
Premises and equipment, net 100,713 102,139 97,376
Accrued interest receivable and other assets 86,305 93,941 86,486
------------------------------------------------------
$ 5,225,011 5,227,980 5,501,163
======================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-non-interest bearing $ 718,390 799,771 712,914
Demand-interest bearing 454,547 450,187 452,850
Savings 1,296,023 1,309,275 1,442,940
Certificates and other time deposits 1,651,048 1,645,642 1,764,831
------------------------------------------------------
Total deposits 4,120,008 4,204,875 4,373,535
Securities sold under agreements to repurchase
and other borrowings 504,257 423,701 524,072
------------------------------------------------------
Total funds 4,624,265 4,628,576 4,897,607
Accrued taxes, expenses, and other liabilities 79,531 75,697 66,284
------------------------------------------------------
Total liabilities 4,703,796 4,704,273 4,963,891
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 33,925,129
33,859,875 and 33,658,294 shares, respectively 108,688 107,343 104,405
Treasury stock, 2,288,806, 1,903,482 and 486,482 shares,
respectively (68,207) (59,258) (13,278)
Net unrealized holding gains (losses)
on available for sale securities (7,876) (2,217) (7,633)
Retained earnings 488,610 477,839 453,778
------------------------------------------------------
Total shareholders' equity 521,215 523,707 537,272
------------------------------------------------------
$ 5,225,011 5,227,980 5,501,163
======================================================
4
FIRSTMERIT CORPORATION AND SUBSIDIARIES
AVERAGE CONSOLIDATED BALANCE SHEETS
- - - -------------------------------------------------------------------------------
(In thousands except ratios)
(Unaudited)
Quarters
----------------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------------
1st 4th 3rd 2nd 1st
- - - --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investment securities $ 1,148,175 1,271,617 1,279,273 1,313,661 1,378,465
Federal funds sold 7,404 36,692 7,844 13,735 18,994
Loans less unearned income 3,692,250 3,797,123 3,858,654 3,829,106 3,772,550
Less allowance for possible
loan losses 49,666 46,563 47,476 48,151 47,428
----------------------------------------------------------------------------------------
Net loans 3,642,584 3,750,560 3,811,178 3,780,955 3,725,122
----------------------------------------------------------------------------------------
Total earning assets 4,798,163 5,058,869 5,098,295 5,108,351 5,122,581
Cash and due from banks 183,034 201,148 202,548 217,967 232,183
Premises and equipment, net 101,606 104,875 104,442 101,933 95,837
Accrued interest receivable
and other assets 79,602 74,989 83,146 78,603 68,467
----------------------------------------------------------------------------------------
$ 5,162,405 5,439,881 5,488,431 5,506,854 5,519,068
========================================================================================
LIABILITIES
Deposits:
Demand-non-interest bearing $ 711,995 759,224 747,318 768,507 737,626
Demand-interest bearing 446,893 453,654 448,771 453,118 434,377
Savings 1,288,069 1,353,270 1,388,472 1,423,458 1,432,303
Certificates and other time
deposits 1,647,357 1,784,786 1,759,320 1,746,516 1,800,514
----------------------------------------------------------------------------------------
Total deposits 4,094,314 4,350,934 4,343,881 4,391,599 4,404,820
Securities sold under agreements to
repurchase and other borrowings 454,334 488,189 553,743 520,575 500,221
----------------------------------------------------------------------------------------
Total funds 4,548,648 4,839,123 4,897,624 4,912,174 4,905,041
Accrued taxes, expenses and
other liabilities 87,938 78,350 65,973 65,567 76,894
----------------------------------------------------------------------------------------
Total liabilities 4,636,586 4,917,473 4,963,597 4,977,741 4,981,935
SHAREHOLDERS' EQUITY 525,819 522,408 524,834 529,113 537,133
----------------------------------------------------------------------------------------
$ 5,162,405 5,439,881 5,488,431 5,506,854 5,519,068
========================================================================================
RATIOS
Net income as a percentage of:
Average assets 1.59% 1.39% 0.97% 1.40% 1.40%
Average shareholders' equity 15.61% 14.48% 10.19% 14.61% 14.42%
5
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- - - ------------------------------------------------------------------
(In thousands except per share data)
---------------------------------------
(Unaudited)
Quarters Ended
March 31,
1997 1996
- - - --------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 80,600 80,309
Interest and dividends on securities:
Taxable 16,756 19,803
Exempt from Federal income taxes 1,120 1,288
Interest on Federal funds sold 86 227
----------------------------------
Total interest income 98,562 101,627
----------------------------------
Interest expense:
Interest on deposits:
Demand-interest bearing 1,767 1,994
Savings 7,303 8,427
Certificates and other time deposits 21,676 24,641
Interest on securities sold under agreements
to repurchase and other borrowings 5,312 6,175
----------------------------------
Total interest expense 36,058 41,237
----------------------------------
Net interest income 62,504 60,390
Provision for possible loan losses 4,161 2,957
----------------------------------
Net interest income after provision
for possible loan losses 58,343 57,433
----------------------------------
Other income:
Trust department income 3,111 2,964
Service charges on depositors' accounts 6,507 5,389
Credit card fees 2,960 2,493
Securities gains 463 267
Other operating income 6,535 8,520
----------------------------------
Total other income 19,576 19,633
----------------------------------
77,919 77,066
----------------------------------
Other expenses:
Salaries, wages, pension and employee benefits 22,981 24,094
Net occupancy expense 4,661 4,324
Equipment expense 3,497 3,252
Other operating expense 16,608 16,579
----------------------------------
Total other expenses 47,747 48,249
----------------------------------
Income before Federal income taxes 30,172 28,817
Federal income taxes 9,939 9,564
----------------------------------
Net income $ 20,233 19,253
==================================
Per share data based on average number of
shares outstanding:
Net Income $ 0.64 0.58
==================================
Dividends paid $ 0.29 0.27
Weighted average number of shares
outstanding 31,847,722 33,261,059
6
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- - - -------------------------------------------------------------------------------
Year Ended December 31, 1996 and
Three Months Ended March 31, 1997
(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, 1995 $103,861 (2,963) (1,292) 443,275 542,881
Net Income -- -- -- 70,940 70,940
Cash dividends ($1.10 per share) -- -- -- (36,376) (36,376)
Stock options exercised 3,482 -- -- -- 3,482
Treasury shares purchased -- (56,295) -- -- (56,295)
Market adjustment investment securities -- -- (925) -- (925)
-------- -------- -------- -------- --------
Balance at December 31, 1996 107,343 (59,258) (2,217) 477,839 523,707
Net Income -- -- -- 20,233 20,233
Cash dividends ($0.29 per share) -- -- -- (9,462) (9,462)
Stock options exercised 1,345 -- -- -- 1,345
Treasury shares purchased -- (8,949) -- -- (8,949)
Market adjustment investment securities -- -- (5,659) -- (5,659)
-------- -------- -------- -------- --------
Balance at March 31, 1997 (Unaudited) $108,688 ($68,207) (7,876) 488,610 521,215
======== ======== ======== ======== ========
7
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1997 and 1996
(In thousands)
(Unaudited)
----------------- -------------
1997 1996
----------------- -------------
Operating Activities
- - - --------------------
Net income $20,233 19,253
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 4,161 2,957
Provision for depreciation and amortization 2,595 2,310
Amortization of investment securities premiums, net 1,267 760
Amortization of income for lease financing (3,403) (3,660)
Gains on sales of investment securities, net (463) (267)
Deferred federal income taxes 10,531 3,374
Increase in interest receivable (995) (5,597)
(Increase) decrease in interest payable (689) 285
Amortization of values ascribed to acquired intangibles 467 818
Other increases (decreases) 5,205 (4,893)
------------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 38,909 15,340
------------------ ------------
Investing Activities
- - - --------------------
Dispositions of investment securities:
Available-for-sale - sales 73,687 21,482
Available-for-sale - maturities 50,352 83,407
Purchases of investment securities available-for-sale (48,514) (69,140)
Net (increase) decrease in federal funds sold (1,550) 10,129
Net increase in loans and leases (94,934) (14,597)
Purchases of premises and equipment (3,394) (6,142)
Sales of premises and equipment 2,225 614
------------------- -------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (22,128) 25,753
------------------- -------------
Financing Activities
- - - --------------------
Net decrease in demand, NOW and savings deposits (90,273) (89,529)
Net increase (decrease) in time deposits 5,406 (38,861)
Net increase in securities sold under repurchase
agreements and other borrowings 80,556 37,114
Cash dividends (9,462) (8,750)
Purchase of treasury shares (8,949) (10,315)
Proceeds from exercise of stock options 1,345 544
------------------ -------------
NET CASH USED BY FINANCING ACTIVITIES (21,377) (109,797)
Decrease in cash and cash equivalents (4,596) (68,704)
Cash and cash equivalents at beginning of year 222,164 287,671
------------------ ------------
Cash and cash equivalents at end of year $217,568 218,967
================== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
- - - --------------------------------------------------
Cash paid during the year for:
Interest, net of amounts capitalized $36,747 22,081
Income taxes $1,000 7,032
================== ============
See accompanying notes to consolidated financial statements.
8
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements March 31, 1997, December 31, 1996 and
March 31, 1996
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, and Peoples 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, and FirstMerit Credit Life Insurance Company.
2. In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 ("SFAS 128"), "Earnings per Share" ("EPS"). SFAS 128 simplifies the
standards forcomputing earnings per share previously found in APB Opinion No.
15 ("APB 15"), "Earnings per Share," and makes the standards comparable to
recently adopted international EPS guidelines. SFAS 128 replaces the
presentation of "Primary" EPS with the presentation of "Basic" EPS. It also
requires dual presentation of Basic and Diluted EPS on the face of the
statements of income and a reconciliation of the numerator and denominator
between the Basic EPS and Diluted EPS calculations. Basic EPS excludes dilution
and is computed by dividing net income by the weighted-average number of common
shares outstanding. Diluted EPS reflects the dilution that would occur if
securities or other contracts to issue common stock were exercised or converted
to common stock (e.g., exercising of common stock options). SFAS 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. An
entity is, however, permitted to disclose pro forma Earnings per Share amounts
using SFAS 128 in the notes to the financial statements in periods before
adoption. After the effective date, all prior period EPS data must be restated.
In the accompanying Statements of Income, net income per share
calculated under existing standard APB 15 was $0.64 for the three months ended
March 31, 1997 and $0.58 for the corresponding 1996 period. Basic EPS,
calculated under SFAS 128, also resulted in earnings per share totals of $0.64
and $0.58, for the 1997 and 1996 three-month periods, respectively. Diluted EPS
for the 1997 first quarter totaled $0.63 compared to $0.58 for the same quarter
last year.
At March 31, 1997, under SFAS 128, the potential dilution of unexercised
stock options added 263,641 shares to the existing 31,847,722 weighted-average
shares outstanding. At March 31, 1996, outstanding common stock options added
214,973 to the existing outstanding shares total of 33,261,059. There were no
differences in the numerators for the proforma Basic and Diluted EPS
computations in either quarters.
3. The Corporation cautions that any forward looking statements contained in
this report, in a report incorporated by reference to this report or made by
management of the Corporation, involve risks and uncertainties and are subject
to change based upon various factors. Actual results could differ materially
from those expressed or implied.
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, 1997 statement of condition and the
results of operations for the quarters ended March 31, 1997 and 1996.
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 Year ended December
----------------------------- -------------------------------
1997 1996
----------------------------- -------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- - - ------------------------------------------------------------------------------------------------------------------------
ASSETS
Investment securities 1,148,175 18,604 6.57% 1,311,188 82,903 6.32%
Federal funds sold 7,404 86 4.71% 19,233 934 4.86%
Loans, net of unearned income 3,692,250 80,733 8.87% 3,812,900 330,951 8.68%
Less allowance for possible loan losses 49,666 47,392
---------- ---------- ----------- ---------
Net loans 3,642,584 80,733 8.99% 3,765,508 330,951 8.79%
Cash and due from banks 183,034 - - 207,533 - -
Other assets 181,208 - - 175,020 - -
---------- ---------- ----------- ---------
Total assets 5,162,405 99,423 - 5,478,482 414,788 -
=========== ========== =========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-
non-interest bearing 711,995 - - 745,102 - -
Demand-
interest bearing 446,893 1,767 1.60% 447,524 7,839 1.75%
Savings 1,288,069 7,303 2.30% 1,399,011 32,446 2.32%
Certificates and other time deposits 1,647,357 21,676 5.34% 1,772,150 95,379 5.38%
---------- --------- ---------- ----------
Total deposits 4,094,314 30,746 3.05% 4,363,787 135,664 3.11%
Federal funds purchased, securities sold
under agreements to repurchase and 454,334 5,312 4.74% 515,556 25,109 4.87%
other borrowings
Other liabilities 87,938 - 71,240 -
Shareholders' equity 525,819 - 527,899 -
---------- ----------- ---------- ----------
Total liabilities and shareholders' equity 5,162,405 36,058 - 5,478,482 160,773 -
========== =========== ========== ==========
Total earning assets 4,798,163 99,423 8.40% 5,095,929 414,788 8.14%
========== =========== ========== ==========
Total interest bearing liabilities 3,836,653 36,058 3.81% 4,134,241 160,773 3.89%
========== =========== ========== ==========
Net yield on earning assets 63,365 5.36% 254,015 4.98%
========== ====== ========== ======
Interest rate spread 4.59% 4.25%
====== ======
Quarter ended March
-----------------------------
1996
-----------------------------
Average Average
Balance Interest Rate
- - - -------------------------------------------------------------------------------------
ASSETS
Investment securities 1,378,465 21,709 6.33%
Federal funds sold 18,994 227 4.81%
Loans, net of unearned income 3,772,550 80,483 8.58%
Less allowance for possible loan losses 47,428
----------- ----------
Net loans 3,725,122 80,483 8.69%
Cash and due from banks 232,183 - -
Other assets 164,304 - -
---------- ----------
Total assets 5,519,068 102,419 -
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-
non-interest bearing 737,626 - -
Demand-
interest bearing 434,377 1,994 1.85%
Savings 1,432,303 8,427 2.37%
Certificates and other time deposits 1,800,514 24,641 5.50%
---------- ----------
Total deposits 4,404,820 35,062 3.20%
Federal funds purchased, securities sold
under agreements to repurchase and 500,221 6,175 4.96%
other borrowings
Other liabilities 76,894 -
Shareholders' equity 537,133 -
---------- ----------
Total liabilities and shareholders' equity 5,519,068 41,237 -
========== ==========
Total earning assets 5,122,581 102,419 8.04%
========== ==========
Total interest bearing liabilities 4,167,415 41,237 3.98%
========== ==========
Net yield on earning assets 61,182 4.80%
========== ======
Interest rate spread 4.06%
======
<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 March 31,
1997 was $20,233,000, a 5% increase over the $19,253,000 earned for the same
quarter last year. Return on average equity was 15.61% and return on average
assets was 1.59% compared to 14.42% and 1.40%, respectively, one year ago.
Fully taxable equivalent ("FTE") net interest income for the quarter increased
from $61,182,000 to $63,365,000, or 3.6%, over the same quarter in 1996.
Correspondingly, the net interest margin rose 56 basis points from 4.80% last
year to 5.36% for the three months ended March 31, 1997. The improvement in net
interest income and the margin was due to higher asset yields, lower cost of
funds, and a shift from lower yielding residential mortgage loans to higher
earning consumer and commercial credits.
Other income was $19,576,000, consistent with the prior year first
quarter. The 1996 first quarter, however, included gains on sales of branches
that totaled $3,186,000 on a pretax basis. Without the branch sales, 1997 first
quarter noninterest income was 19% higher than 1996's adjusted total.
Other expenses for the quarter dropped to $47,747,000, a decline of
$502,000 compared to the first quarter last year. The lower costs and improved
income resulted in an improved efficiency ratio of 57.32%, down from 58.99%
recorded a year ago. The efficiency ratio is the proportion of pretax income
needed to cover operating expenses.
At March 31, 1997, nonperforming assets were 0.30% of total loans and
other real estate compared to 0.33% at March 31, 1996. Net charge-offs to
average loans, on an annualized basis, were 0.42% for the quarter and 0.25% for
the same period last year. The increase in charge-offs occurred primarily in
certain consumer portfolios (i.e., auto loans, auto leases, and credit card
loans). The allowance for loan losses as a percentage of outstanding loans
totaled 1.32% at quarter end versus 1.25% one year ago. The allowance coverage
of nonperforming loans was 4.8 times at March 31, 1997 and 4.1 times one year
ago.
Earnings per share for the first quarter were $0.64 compared to $0.58
for the same quarter in 1996. The components of change in per share income for
the quarters ended March 31, 1997 and 1996 are summarized in the following
table:
11
CHANGES IN EARNINGS PER SHARE
Three months ended
March 31,
1997/1996
-------------------------
Net income per share March 31, 1996 $0.58
Increases (decreases) due to:
Net interest income - taxable equivalent 0.07
Provision for possible loan losses (0.04)
Other income -
Other expenses 0.02
Federal income taxes - taxable equivalent 0.01
-------------------------
Net change in net income per share $0.06
-------------------------
Net income per share March 31, 1997 $0.64
=========================
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
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, 1997 was
$63,365,000 compared to $61,182,000 for the same period one year ago, an
increase of $2,183,000 or 3.6%. The rise in net interest income occurred because
the decline in interest expense outpaced the drop in interest income.
12
In total, first quarter FTE interest income was $99,423,000 compared
to $102,419,000 for the three months ended March 31, 1996. As previously
reported, the decline in interest income of $2,996,000, or 2.9%, was due to the
Corporation's 1996 sales of branches that did not meet desired market share
criteria and the sale of the former FirstMerit Bank in Clearwater, Florida.
Higher asset yields, however, partially offset the interest income lost to fewer
outstandings. Specifically, earning assets yielded 8.40% for the quarter, a 36
basis point improvement over the 8.04% earned last year. Higher interest rates
on loans were the single largest contributor to the improvement noted boosting
earning asset yields 30 basis points, accounting for 83% of the gain.
Interest expense for the 1997 first quarter was $36,058,000, 36.8% less
than the $41,237,000 recorded last year. The decline in interest expense of
$5,179,000 was due to fewer deposits, in large part due to the 1996 branch
sales, and a lower cost of funds. The decline in deposit and other borrowing
outstandings resulted in a savings of $3,320,000 compared with the same quarter
one year ago. The drop in the cost of funds rate from 3.98% for the March 31,
1996 quarter to 3.81% this year lowered the Corporation's interest expense by
$1,859,000.
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
March 31,
1997 and 1996
-------------
Increase (Decrease)
Interest Income/Expense
-----------------------
Volume Yield Rate Total
-------------------------------------
INTEREST INCOME
Investment Securities $(3,731) 626 (3,105)
Loans (1,756) 2,006 250
Federal funds sold (135) (6) (141)
-------------------------------------
Total interest income $(5,622) 2,626 (2,996)
INTEREST EXPENSE
Interest on deposits:
Demand-interest bearing 49 (276) (227)
Savings (818) (306) (1,124)
Certificates and other
time deposits (2,015) (950) (2,965)
Federal Funds Purchased,
REPOs & other borrowings (537) (326) (863)
-------------------------------------
Total interest expense $(3,321) (1,858) (5,179)
-------------------------------------
Net interest income $(2,301) 4,484 2,183
=====================================
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
March 31,
-------------------------------
1997 1996
------------------------------
Net interest income per
financial statements $62,504 60,390
Tax equivalent adjustment 861 792
--------------------------------
Net interest income - FTE $63,365 61,182
================================
Average earning assets $4,798,163 5,122,581
=================================
Net interest margin 5.36% 4.80%
=================================
The following comparisons and analysis is based on balances provided in
the Average Consolidated Balance Sheet, Fully-tax Equivalent Interest Rates and
Interest Differential schedule found just after the Notes to the Consolidated
Financial Statements. Average loans outstanding for the quarter ended March 31,
1997 were $3,692,250,000, down two percent from $3,772,550,000 for the same
quarter last year. Over the last twelve months, loan sales and repayments were
greater than new loan demand. Average outstanding loans, as a percentage of
average earning assets, for the current and prior year first quarters were
76.95% and 73.65%, respectively.
Average total deposits were $4,094,314,000 for the first quarter
compared to $4,404,820,000 for the three months ended March 31, 1996. As
reported during 1996, certain branches were closed, and their deposits sold,
when management believed internal market share objectives were not economically
feasible.
Overall, the ratio of each average deposit and borrowed fund category
to total interest bearing funds changed little during the last twelve months.
The following percentage changes in individual deposit and borrowed fund
categories occurred: average certificates and other time deposits decreased from
43.2% of total interest bearing funds for the quarter ended March 31, 1996 to
42.9% for the 1997 first quarter; average savings deposits decreased from 34.4%
of interest bearing funds for the first quarter last year to 33.6% for the same
current year three-month period; and average interest bearing demand deposits
increased from 10.4% of interest bearing funds for the first quarter last year
to 11.6% for the three months ended March 31, 1997. The small shift in the
percentage of CDs and savings to interest bearing DDA helped reduce the first
quarter cost of funds.
15
Average interest bearing deposits increased slightly from 88.0% of
interest bearing funds for the quarter ended March 31, 1996 to 88.2% for the
1997 first quarter; and other borrowings decreased from 12.0% of total interest
bearing funds for the 1996 first quarter to 11.8% for the three months ended
March 31, 1997.
During the first quarter 1997, interest bearing liabilities funded
80.0% of average earning assets compared to 81.4% one year ago. The decline in
use of interest bearing liabilities as a loan and investment security funding
source also helped reduce the cost of funds thereby improving the net interest
margin.
OTHER INCOME
Other income for the quarter ended March 31, 1997 was $19,576,000,
consistent with the $19,633,000 earned during the same period last year. In the
prior year, however, other income contained gains on sales of three branches
that totaled $3,186,000. On the income statement, the 1996 branch sale gains
were included in the OTHER OPERATING INCOME category. Without the branch sales,
1997 first quarter other income was 19% higher than 1996's adjusted total.
The following increases in noninterest fee income occurred during the
quarter: trust department income for the first quarter was $3,111,000 or 5.0%
higher than the $2,964,000 earned one year ago; service charges on depositors'
accounts increased 20.7% to $6,507,000 from $5,389,000 for last year's first
quarter; credit card fees rose 18.7% to $2,960,000 for the quarter compared to
$2,493,000 for the three months ended March 31, 1996; and gains on securities
increased 73.4% to $463,000 from $267,000 for last year's first quarter.
The first quarter results continue to reflect the successful
implementation of a comprehensive study that began in 1995 to examine new
sources of non-interest ("other") income and review 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 initial recommendations has been completed, but
the Corporation continues to search out and act upon new noninterest income
opportunities. The timing of loan and securities sales, and the related gains or
losses, is influenced by changes in market interest rates, loan demand, and
deposit withdrawals.
OTHER EXPENSES
Other expenses were $47,747,000 for the first quarter, a decline of
$502,000 or 1.0%, over the $48,249,000 recorded last year. The reduction in
operating costs, coupled with higher core net interest income and increased fee
income, reduced the efficiency ratio from 58.99% for the three months ended
March 31, 1996 to 57.32% for the 1997 first quarter. The 57.32% efficiency ratio
indicates that for every one dollar of pretax profit earned, 57.32 cents were
used to cover operating expenses.
16
Salaries, wages, pension and employee benefits, the largest component
of other expenses, decreased $1,113,000 or 4.6% compared to the first quarter
last year. The decline in salary and related costs are a continuation and
further refinement of actions began in 1995 to reengineer the Corporation's
retail delivery systems, consolidate back-room operations, and become a more
efficient organization. All other components of other expenses were fairly
consistent with prior period results.
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, 1997
--------------
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
---------------- ---------------- ---------------- ----------------
U.S. Treasury securities
and U.S. Government agency
obligations $619,192 626 9,169 610,649
Obligations of state and
political subdivisions 92,429 154 270 92,312
Mortgage-backed securities 300,566 1,443 5,069 296,941
Other securities 102,436 1,060 911 102,585
---------------- ---------------- ---------------- ----------------
$1,114,623 3,283 15,419 1,102,487
================ ================ ================ ================
Book Value Market Value
---------------- ----------------
Due in one year or less $137,065 136,985
Due after one year through five years
341,375 338,262
Due after five years through ten years
131,721 130,526
Due after ten years 504,462 496,714
---------------- ----------------
$1,114,623 1,102,487
================ ================
17
The book value and market value of investment securities including
mortgage-backed securities and derivatives at March 31, 1997, by contractual
maturity, are shown in the table preceding this paragraph. 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 $701,259,000 at March 31, 1997, $724,886,000 at December 31, 1996
and $732,872,000 at March 31, 1996.
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, 1997 amounted to $3,750,475,000
compared to $3,655,998,000 at December 31, 1996 and $3,786,300,000 at March 31,
1996. Outstanding loans are virtually the same as last year's first quarter, but
the mix of loans has changed toward higher yielding commercial and consumer
credits, with less emphasis on residential mortgages. For the first three months
of 1997, loans have increased 2.6%. If this rate of growth remains constant
throughout 1997, annualized growth would equal 10.3%. The loan to funds ratio, a
measure of the Corporation's liquidity, measured 81.1% at March 31, 1997
compared to 79.0% at December 31, 1996 and 77.3% at March 31, 1996.
ASSET QUALITY
Total nonperforming assets (non-accrual and restructured loans and
other real estate loans) amounted to $11,362,000 at March 31, 1997 or 0.30% of
total loans outstanding. At December 31, 1996, nonperforming assets totaled
$10,576,000 or 0.29% of outstanding loans compared to $12,450,000 or 0.33% of
outstanding loans at March 31, 1996. 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
18
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.
(Dollars in thousands)
March 31, December 31, March 31,
1997 1996 1996
---------------- ---------------- --------------
Impaired Loans:
Non-accrual $ 9,165 9,579 7,692
Restructured 92 92 1,368
- - - ---------------------------------------------------------------------------------------------------
Total impaired loans 9,257 9,671 9,060
---------------- ---------------- --------------
Other Loans:
Non-accrual 1,177 787 2,658
Restructured
- - - ---------------------------------------------------------------------------------------------------
Total other nonperforming loans 1,177 787 2,658
- - - ---------------------------------------------------------------------------------------------------
Total nonperforming loans 10,434 10,458 11,718
- - - ---------------------------------------------------------------------------------------------------
Other real estate owned 928 118 732
---------------- ---------------- --------------
Total nonperforming assets $11,362 10,576 12,450
===================================================================================================
Loans past due 90 days or more $ 8,757 8,380 6,297
accruing interest
===================================================================================================
Total nonperforming assets as a 0.30% 0.29% 0.33%
percent of total loans
===================================================================================================
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, 1997 totaled
$49,637,000 or 1.32% of total loans outstanding compared to $49,336,000 or 1.35%
and $47,474,000 or 1.25% at December 31, 1996 and March 31, 1996, respectively.
19
(Dollars in thousands)
March 31, December 31, March 31,
1997 1996 1996
---------------- ---------------- --------------
Balance at beginning of year $49,336 46,840 46,840
Provision charged to
operating expenses 4,161 17,751 2,957
Loans charged off 6,922 21,230 3,530
Recoveries on loans
previously charged off 3,062 5,975 1,207
---------------- ---------------- --------------
$49,637 49,336 47,474
================ ================ ==============
Net charge offs as a percent
of average loans 0.42% 0.40% 0.25%
Allowance for possible loan losses:
As a percent of loans
outstanding at end of
period 1.32% 1.35% 1.25%
As a multiple of net
charge offs 4.76X 4.72X 5.08x
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
-----------------------------------------------------------------------------
March 31, 1997 December 31, 1996 March 31, 1996
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------------------- ------------------------- -------------------------
Demand Deposits -
non-interest bearing $711,995 - 745,102 - 737,626 -
Demand Deposits -
interest bearing 446,893 1.60% 447,524 1.75% 434,377 1.85%
Savings Deposits 1,288,069 2.30% 1,399,011 2.32% 1,432,303 2.37%
Certificates and other
time deposits 1,647,357 5.34% 1,772,150 5.38% 1,800,514 5.50%
--------------- -------------- --------------
$4,094,314 3.05% 4,363,787 3.11% 4,404,820 3.20%
=============== ============== ==============
The following table summarizes the certificates and other time deposits
in amounts of $100,000 or more as of March 31, 1997 by time remaining until
maturity.
Amount
Maturing in:
Under 3 months $177,986
3 to 12 months 76,228
Over 12 months 30,572
--------------
$284,786
==============
21
CAPITAL RESOURCES
Shareholders' equity at March 31, 1997 totaled $521,215,000 compared to
$523,707,000 at December 31, 1996 and $537,272,000 at March 31, 1996.
The following table reflects the various measures of capital:
(Dollars in thousands)
As of As of As of
March 31, December 31, March 31,
1997 1996 1996
(In thousands)
Total equity 521,215 9.98% 523,707 10.02% 537,272 9.77%
Common equity 521,215 9.98% 523,707 10.02% 537,272 9.77%
Tangible common equity (a) 517,722 9.92% 519,950 9.95% 531,938 9.68%
Tier 1 capital (b) 527,134 12.39% 523,911 12.63% 540,117 14.58%
Total risk-based capital (c) 576,771 13.56% 573,247 13.82% 586,426 15.83%
Leverage (d) 527,134 10.21% 523,911 9.63% 534,783 9.71%
<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, 1997 the Corporation's risk-based
capital equaled 13.56% of risk adjusted assets, far exceeding the minimum
guidelines.
The cash dividend of $0.29 paid in the first quarter has an indicated
annual rate of $1.16 per share.
22
PART II. - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(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/ Jack R. Gravo
----------------------------------------
Jack R. Gravo, Executive Vice President/
Finance & Administration
DATE: May 13, 1997