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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 0-10161
FIRSTMERIT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO
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(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
34-1339938
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(I.R.S. EMPLOYER IDENTIFICATION NO.)
III CASCADE PLAZA, AKRON, OHIO 44308 (330) 996-6300
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(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) (TELEPHONE NUMBER)
OFFICES)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
and
PREFERRED SHARE PURCHASE RIGHTS
- - --------------------------------------------------------------------------------
(Title of Class)
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 the
filing requirements for at least the past 90 days. YES [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the approximate aggregate market value of the voting stock held by
non-affiliates of the registrant as of February 2, 1998: $1,572,007,275.
Indicate the number of shares outstanding of registrant's common stock as
of February 1, 1998: 61,762,140 Shares of Common Stock, No Par Value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of FirstMerit Corporation, dated February
23, 1998, in Part III.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Registrant, FirstMerit Corporation ("FirstMerit" or the "Corporation"), is
a multi-bank holding company organized in 1981 under the laws of the State of
Ohio and registered under the Bank Holding Company Act of 1956, as amended. At
December 31, 1997, FirstMerit, its affiliated banks and other subsidiaries had
total consolidated assets of approximately $5.3 billion and consolidated total
shareholders' equity of approximately $530.3 million.
FirstMerit through its affiliates operates principally as a regional
banking organization, providing a wide range of banking, fiduciary, financial,
insurance and investment services to corporate, institutional and individual
customers throughout northern Ohio, including Ashtabula, Cuyahoga, Erie, Geauga,
Lake, Lorain, Medina, Portage, Stark, Summit and Wayne Counties. At December 31,
1997, FirstMerit's subsidiaries operated 129 full service banking offices, had
149 automated teller machines located in 11 counties in Ohio and employed
approximately [2,300] full- and part-time employees. FirstMerit's principal
business consists of owning and supervising its affiliates. FirstMerit directs
their overall policies, including lending practices, and financial resources,
but most day-to-day affairs are managed by the affiliates' own officers and
directors, some of whom are also officers and directors of FirstMerit.
SUBSIDIARIES
FirstMerit's wholly-owned subsidiaries include FirstMerit Bank, National
Association, a national banking association, Akron, Ohio ("FirstMerit Bank"),
Citizens National Bank, a national banking association, Canton, Ohio
("Citizens"), Peoples National Bank, a national banking association, Wooster,
Ohio, Peoples Bank, N.A., a national banking association, Ashtabula, Ohio
(collectively, the "Banks"), FirstMerit Credit Life Insurance Company, an
Arizona corporation, FirstMerit Community Development Corporation, an Ohio
corporation, Citizens Investment Corporation, an Ohio corporation and Citizens
Savings Corporation of Stark County, an Ohio corporation (all, collectively, the
"Subsidiaries").
The Banks all provide a full range of customary banking products and
services. In addition, the Banks provide a wide range of specialized services
tailored to specific markets, including personal and corporate trust services,
personal financial services, cash management services and international banking
services. FirstMerit's nonbanking direct and indirect subsidiaries provide
insurance sales services, credit life, accident and health insurance, securities
brokerage services, equipment lease financing and other financial services.
FirstMerit is in the process of merging the Banks under a single charter.
It is contemplated that this process will be completed in 1998. FirstMerit began
the consolidation process in 1997, when it changed First National Bank of Ohio
to the new charter name of "FirstMerit Bank, National Association," and several
months later merged its former bank subsidiaries, The Old Phoenix National Bank
of Medina and EST National Bank, with and into FirstMerit Bank. FirstMerit Bank
will be the resulting institution of the remaining charter consolidations.
In 1996, FirstMerit Bank, FSB, a former federal savings association
subsidiary of FirstMerit located in Clearwater, Florida ("FirstMerit FSB"), was
merged with and into FirstMerit Trust Company, N.A., a former national trust
company subsidiary of FirstMerit located in Naples, Florida under the name
"FirstMerit Bank, N.A." ("FirstMerit NA"). On December 31, 1996, FirstMerit NA
was merged with and into SouthTrust Bank of Florida N.A.
FirstMerit is a corporate entity legally separate and distinct from its
affiliates, however, bank holding companies such as FirstMerit are expected to
act as a source of financial strength to their respective subsidiary banks. The
principal source of FirstMerit's income is dividends from its subsidiaries.
There are certain regulatory restrictions on the extent to which the
subsidiaries can pay dividends or otherwise supply funds to FirstMerit.
SUBSIDIARY OPERATIONS
Each Bank engages in commercial banking in its respective geographical
market. Commercial banking includes the acceptance of a variety of demand,
savings and time deposits and the granting of commercial and
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consumer loans for the financing of both real and personal property. Other
services include automated banking programs, credit cards, rental of safe
deposit boxes, letters of credit, leasing, discount brokerage and credit life
insurance. The Banks also operate trust departments which offer estate and trust
services. Each Bank offers its services primarily to consumers and small and
medium size businesses in its respective geographical market. None of the Banks
are engaged in lending outside the continental United States. None of the Banks
is dependent upon any one significant customer or a specific industry.
FirstMerit Credit Life Insurance Company, a subsidiary of FirstMerit, was
formed in 1985 to engage in underwriting of credit life and credit accident and
health insurance directly related to the extension of credit by the Banks to
their customers. FirstMerit Community Development Corporation, a subsidiary of
FirstMerit, was organized in 1994 to further the efforts of the subsidiaries in
meeting the credit needs of their lending communities, and the requirements of
the Community Reinvestment Act ("CRA"). Congress enacted CRA to assure that
financial institutions meet the deposit and credit needs of their communities.
Through a community development corporation, financial institutions can meet
these needs by nontraditional activities such as acquiring, rehabilitating or
investing in real estate in low to moderate income neighborhoods, and promoting
the development of small businesses.
In 1995 the Banks jointly organized and capitalized FirstMerit Mortgage
Corporation ("FirstMerit Mortgage"), which is located in Canton, Ohio.
FirstMerit Mortgage is engaged in the business of originating residential
mortgage loans and providing mortgage loan servicing for itself, the Banks and
third parties.
FirstMerit Bank is the parent corporation of two wholly-owned Ohio
corporations organized in 1993, FirstMerit Leasing Company ("FirstMerit
Leasing") and FirstMerit Securities, Inc. ("FirstMerit Securities"). FirstMerit
Leasing primarily provides equipment lease financing and related services, while
FirstMerit Securities primarily provides discount brokerage services to
customers of FirstMerit Bank and other FirstMerit subsidiaries. FirstMerit Bank
is also the parent corporation of Abell & Associations, Inc. ("Abell"), a
nationally known life insurance and financial consulting firm. Abell was
acquired in May 1997 by a former subsidiary of FirstMerit Bank. Abell assists in
the design and funding of estate plans, corporate succession plans and executive
compensation plans. The firm also does consulting work for law and accounting
firms and with individual corporations, designing funding for corporate
liability issues and structured settlements.
Peoples Bank, N.A. is the parent corporation of FirstMerit Insurance
Agency, Inc., a subsidiary acquired by FirstMerit when it acquired Great
Northern Financial Corporation in 1994. FirstMerit Insurance Agency, Inc.'s
license to sell life insurance products and annuities was reactivated in 1997.
ACQUISITIONS
FirstMerit engages on a regular basis in discussions concerning possible
acquisitions of other financial institutions and financial services companies.
FirstMerit also acquires from time to time, branches and deposits in its
principal markets.
On November 2, 1997, FirstMerit, entered into an Agreement of Affiliation
and Plan of Merger ("Agreement") with CoBancorp Inc. ("CoBancorp"), a bank
holding corporation headquartered in Elyria, Ohio, whereby CoBancorp will merge
with and into FirstMerit ("Merger"). Based on FirstMerit's per share closing
price on December 31, 1997 of $28.375, the value of the transaction on such date
was approximately $174.3 million. The Merger is structured as a tax-free
exchange for CoBancorp shareholders receiving FirstMerit common stock, and will
be accounted for as a purchase transaction. The Merger is expected to close in
the second quarter of 1998.
In connection with the Merger, FirstMerit plans to issue between 3.1 and
4.3 million shares of its common stock. The FirstMerit Board of Directors has
approved the repurchase of up to 4.3 million shares of FirstMerit stock for use
in the Merger. These share purchases may be effected through public and private
transactions. Under the terms of the Agreement, each share of CoBancorp common
stock will be exchanged for $44.50 in cash or for shares of common stock of
FirstMerit with a market value per share of $44.50, based upon the market value
of FirstMerit common stock during a ten day period ending ten days prior to
closing of the transaction, subject to adjustment as provided for in the
Agreement. CoBancorp shareholders may elect to exchange their common stock
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for either common stock of FirstMerit, or $44.50 in cash, provided that no less
than 30 percent nor more than 49 percent of the total transaction value will be
paid in cash.
Consummation of the Merger is subject to certain customary conditions,
including, among others, (i) the approval of the Merger, the Agreement and the
transactions contemplated thereby by the CoBancorp shareholders at a Special
Shareholders Meeting scheduled for March 3, 1998 for such purpose, and (ii)
receipt of regulatory approvals.
Subsequent to the execution of the Agreement, CoBancorp and FirstMerit
entered into a Stock Purchase Option dated as of November 3, 1997 (the
"CoBancorp Stock Option"). Under the CoBancorp Stock Option, FirstMerit was
granted an irrevocable option to purchase up to 19.9% of CoBancorp common stock,
no par value at a price equal to $40.00 per share. The number of shares and the
purchase price are subject to adjustment as described in the CoBancorp Stock
Option. The CoBancorp Stock Option is exercisable by FirstMerit only under
specific circumstances involving generally a transaction whereby CoBancorp would
enter into an agreement to merge with a party other than FirstMerit, a third
party would announce a tender offer for CoBancorp, another party shall have
acquired 20% or more of CoBancorp, or the Agreement is not approved by the
CoBancorp shareholders. Under certain circumstances CoBancorp may be required to
repurchase the CoBancorp Stock Option or the shares acquired pursuant to the
exercise thereof, plus pay additional sums.
In October 1997, FirstMerit, through a wholly-owned subsidiary bank,
entered into a purchase and assumption agreement with First Western Bank, N.A.,
to acquire three branches located in Lake County, Ohio. The three branches had a
total of $49.0 million in deposits at the time the agreement was signed. The
transaction closed in January 1998.
In May 1997, FirstMerit, through a wholly owned subsidiary, acquired Abell
& Associates, Inc. Abell is a nationally known life insurance and financial
consulting firm which assists in the design and funding of estate plans,
corporate succession plans and executive compensation plans. The firm also does
consulting work for law and accounting firms and with individual corporations,
designing funding for corporate liability issues and structured settlements.
In January 1995, FirstMerit acquired The CIVISTA Corporation ("CIVISTA") by
merger of CIVISTA with and into FirstMerit. Through the merger, FirstMerit
acquired CIVISTA's subsidiaries, including Citizens Savings Bank of Canton, an
Ohio savings association with its principal offices in Canton, Ohio ("Citizens
Savings"). FirstMerit then effected a merger of Citizens Savings into The First
National Bank in Massillon, a national bank subsidiary of FirstMerit, to form a
new national bank subsidiary called Citizens National Bank, with its principal
offices in Canton, Ohio. When FirstMerit acquired control of CIVISTA, it also
acquired control of certain other wholly-owned subsidiaries of CIVISTA,
including Citizens Savings Corporation of Stark County ("CSC") and Citizens
Investment Corporation ("CIC"). At the time of the merger, the value of the
transaction was approximately $174.2 million. The Merger was structured as a
tax-free exchange for CIVISTA shareholders receiving FirstMerit common stock,
and was accounted for as a pooling of interest transaction.
COMPETITION
The financial services industry is highly competitive. FirstMerit and its
Subsidiaries compete with other local, regional and national providers of
financial services such as other bank holding companies, commercial banks,
savings associations, credit unions, consumer and commercial finance companies,
equipment leasing companies, brokerage institutions, money market funds and
insurance companies. The Subsidiaries' primary financial institution competitors
include Bank One, National City Bank, KeyBank, Star Bank and The Fifth Third
Bank. Mergers between financial institutions within Ohio and in neighboring
states have added competitive pressure, which pressure has intensified due to
interstate banking which became permissible under the Interstate Banking and
Branching Efficiency Act of 1994. FirstMerit competes in its markets by offering
quality and innovative services at competitive prices.
REGULATION AND SUPERVISION
FirstMerit is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended ("BHCA"). Bank holding companies are subject to
regulation by the Federal Reserve. Under Federal
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Reserve policy, a bank holding company is expected to act as a source of
financial strength to each subsidiary bank and to commit resources to support
such subsidiary banks. The BHCA requires the prior approval of the Federal
Reserve in any case where a bank holding company proposes to acquire direct or
indirect ownership or control of more than five percent (5%) of the voting
shares of any bank that is not already majority-owned by it, or to merge or
consolidate with any other bank holding company.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than five percent of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve is authorized to
approve the ownership of shares by a bank holding company in any company the
activities of which the Federal Reserve has determined to be so closely related
to banking or to managing or controlling banks as to be a proper incident
thereto. The Federal Reserve has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include: operating a savings association, mortgage company, finance
company, credit card company or factoring company; performing certain data
processing operations; providing investment and financial advice; and acting as
an insurance agent for certain types of credit-related insurance.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to the
bank holding company or any of its subsidiaries, on investments in the stock or
other securities of the bank holding company or its subsidiaries and on the
taking of such stock or securities as collateral for loans to any borrower.
Further, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of any services.
FirstMerit is also under the jurisdiction of the Securities and Exchange
Commission and certain state securities commissions for matters relating to the
offering and sale of its securities. FirstMerit is subject to the disclosure and
regulatory requirements of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, as administered by the Commission.
On September 29, 1994, President Clinton signed the Interstate Banking and
Branching Efficiency Act of 1994 ("Interstate Act"). The Interstate Act
generally permits nationwide interstate banking and branching commencing one
year after enactment. After that time an "adequately capitalized" and "well
managed" bank holding company may acquire a bank in any state, subject to
certain concentration limitations. No banking organization may control more than
ten percent of deposits nationwide or more than 30.0% of deposits in any one
state. Individual states may waive the 30.0% limitation. After June 1, 1997,
interstate bank holding companies could consolidate banks they own in multiple
states into a single branch network, or acquire out-of-state banks as branches.
De novo interstate branching is not authorized by the Interstate Act, but states
may specifically authorize it. States may also limit the acquisition of
newly-formed banks for a period of up to five years to restrict effective de
novo branching. The Interstate Act requires CRA compliance by out-of-state
branches and prohibits "deposit production offices" to ensure that local savings
are not diverted to other states. Institutions must maintain a loan
activity-to-deposit ratio within a host state at least equal to one-half of the
average percentage for all banks in the host state, otherwise the institution's
federal regulator may close the out-of-state branch and restrict the institution
from opening new branches in that state. Certain state laws, such as those on
intrastate branching, consumer protection and fair lending, will still apply to
out-of-state banks or branches. The Interstate Act is expected to stimulate an
already active merger environment in the banking industry.
SUMMARY RESULTS OF OPERATIONS
As of December 31, 1997, FirstMerit's consolidated total assets were $5.3
billion. Earnings for FirstMerit in 1997 were $86.4 million, or $1.38 per share
(basic), compared with $70.9 million, or $1.09 per share (basic), for the year
ended December 31, 1996. The earnings reported for 1996 were impacted by the
Savings Association Insurance Fund (SAIF) recapitalization charge of $6.7
million recorded September 30, 1996. Excluding the SAIF charge, earnings for the
year ended December 31, 1996 were $77.6 million, or $1.19 per share (basic).
Total cash dividends paid to shareholders for the entire year were $0.61, an
increase of $0.06 per share over the previously stated annual payments of $0.55.
All per share amounts reflect the two-for-one split that occurred September 29,
1997 for shareholders of record as of September 2, 1997.
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On a fully-tax equivalent basis, net interest income was $258.7 million, up
2% from last year. The improved net interest margin of 5.25% compared to 4.94%
in 1996 was primarily responsible for the rise in net interest income.
Other income for the year was $83.6 million, an increase of $14.8 million
or 22% over the prior year adjusted figures. The 1996 adjusted other income
total does not include net proceeds of $13.2 million from sales of affiliate
branches and $490,000 from the sale of the former FirstMerit Bank, N.A. in
Clearwater, Florida. The largest gains in other income over one year ago were
experienced in credit card fees, up 26%; other service fees, up 19%; and other
operating income, up 24%. Other expenses were $191.1 million compared to $199.5
million in 1996. The four percent decline in operating expenses improved the
efficiency ratio from 59.10% in 1996 to 55.60% for 1997. The 1996 other expenses
and efficiency ratio exclude the previously mentioned pre-tax SAIF assessment of
$10.2 million.
During 1997, the Corporation recorded a provision for possible loan losses
of $21.6 million compared to last year's provision of $17.8 million. The
provisions in both years address the continuing shift in FirstMerit's loan
portfolio from residential mortgages into commercial and consumer loans, which
historically have higher loss rates. Nonperforming assets were 0.35% of total
loans and other real estate compared to 0.29% one year ago. The allowance for
loan losses as a percentage of outstanding loans was 1.40% at December 31, 1997
and 1.35% at December 31, 1996.
ITEM 2. PROPERTIES
FIRSTMERIT CORPORATION
FirstMerit's executive offices and certain holding company operational
facilities, totaling approximately 88,000 square feet, are leased from
FirstMerit Bank. FirstMerit relocated its executive offices in 1994 to III
Cascade, a seven-story office building located in downtown Akron, Ohio. During
1993, a long-term leasehold interest in III Cascade was acquired by an Ohio
general partnership (the "Partnership"), the general partners of which are
FirstMerit and a Delaware corporation subsidiary of Banc One Capital
Corporation. FirstMerit does not control the Partnership. The City of Akron is
the lessor of the property. FirstMerit Bank has subleased all of the premises of
III Cascade from the Partnership, and FirstMerit subleases a portion of the
premises from FirstMerit Bank.
The facilities owned or leased by FirstMerit and its Subsidiaries are
considered by management to be adequate, and neither the location nor unexpired
term of any lease is considered material to the business of FirstMerit.
FIRSTMERIT BANK
The principal executive offices of FirstMerit Bank are located in its
28-story main office building located at 106 South Main Street, Akron, Ohio,
which is owned by FirstMerit Bank. FirstMerit Bank is the principal tenant of
the building occupying approximately one-half of a total of 215,000 square feet
of the building, with the remaining portion leased to tenants unrelated to
FirstMerit Bank. The properties occupied by 30 of FirstMerit Bank's other
branches (not including those branches listed below in Medina and Elyria, Ohio)
are owned by FirstMerit Bank, while the properties occupied by its remaining 27
branches (not including those branches listed below in Medina and Elyria, Ohio)
are leased with various expiration dates. There is no mortgage debt owing on any
of the above property owned by FirstMerit Bank. FirstMerit Bank also owns
automated teller machines, on-line teller terminals and other computers and
related equipment for use in its business. In 1996 FirstMerit Bank completed
major renovations to its main office building. FirstMerit Bank renovated all
space which it occupies in the building, as well as all public areas.
FirstMerit Bank also owns 19.5 acres near downtown Akron, on which is
located FirstMerit's Operations Center. The Operations Center is occupied and
operated by FirstMerit Services Division, an operating division of FirstMerit
Bank. The Operations Center primarily provides computer and communications
technology-based services to FirstMerit and the Subsidiaries, and also markets
its services to non-affiliated institutions. There is no mortgage debt owing on
the Operations Center property. In connection with its Operations Center, the
Services Division has a disaster recovery center at a remote site on leased
property.
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The Trust and the Organizational & Development Departments of FirstMerit
Bank are located in Main Place, a four-story office building located in downtown
Akron. These Departments occupy approximately 29,000 square feet of leased space
in Main Place.
FirstMerit Bank's principal Medina, Ohio facility is located at 39 Public
Square, Medina, Ohio. The building which houses these principal offices are
leased. There are 14 other properties in the Medina region, five of these
properties with branches are owned, while the properties occupied by its
remaining nine branches are the subject of various lease obligations having
various expiration dates. These facilities are leased from IRT Properties, a
publicly-held real estate investment trust.
FirstMerit Bank's principal Elyria, Ohio facility is located at 105 Court
Street, Elyria, Ohio. The building which houses these principal offices are
owned. There are 18 other properties in the Elyria region, 13 of these
properties with branches are owned, while the properties occupied by its
remaining five branches are the subject of various lease obligations having
various expiration dates.
PEOPLES NATIONAL BANK
The principal executive offices of Peoples Bank are located in its main
office building at 121 North Market Street, Wooster, Ohio, which is owned by
Peoples Bank. The properties occupied by two of Peoples Bank branches are owned
by Peoples Bank, while the properties occupied by its remaining two branches are
leased at various expiration dates. No mortgage debt exists on the above
property owned by Peoples Bank. Peoples Bank also has automated teller machines
and on-line terminals. The computer operations of Peoples Bank are provided
through FirstMerit.
CITIZENS NATIONAL BANK
The principal executive offices of Citizens are located in its main office
building at 100 Central Plaza South, Canton, Ohio, which is leased by Citizens.
Citizens owns the properties occupied by eight of its other banking offices,
while the properties occupied by the remaining seven are leased under different
leases with various expiration dates. Citizens also maintains a trust office and
private banking office at two additional leased locations. Citizens also has
automated teller machines and on-line terminals. The computer operations of
Citizens are provided through FirstMerit.
PEOPLES BANK, N.A.
The principal executive offices of Peoples N.A. are located in its office
at 7800 Reynolds Road, Mentor, Ohio, which is owned. Peoples N.A. owns the
properties occupied by six of its other branches, while the properties occupied
by its remaining nine branches are leased at various expiration dates. Peoples
N.A. also has automated teller machines and on-line terminals. The computer
operations of Peoples N.A. are provided through FirstMerit.
CITIZENS SAVINGS CORPORATION OF STARK COUNTY
CSC owns a portion of an office condominium and certain low to moderate
income housing units in Stark County, Ohio.
FIRSTMERIT MORTGAGE CORPORATION
The Banks in 1995 jointly organized and capitalized FirstMerit Mortgage,
which is engaged in the business of originating residential mortgage loans and
providing mortgage loan servicing for itself, the Banks and third parties.
FirstMerit Mortgage conducts its business in property owned by Citizens located
at 4455 Hills and Dales Road, Canton, Ohio.
ITEM 3. LEGAL PROCEEDINGS
The nature of FirstMerit's business results in a certain amount of
litigation. Accordingly, FirstMerit and its subsidiaries are subject to various
pending and threatened lawsuits in which claims for monetary damages are
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asserted. Management, after consultation with legal counsel, is of the opinion
that the ultimate liability of such pending matters would not have a material
adverse effect on FirstMerit's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1997 to a vote of
security holders of FirstMerit.
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EXECUTIVE OFFICERS OF REGISTRANT
The following persons are the executive officers of FirstMerit as of
February 23, 1998. Unless otherwise designated, they are officers of FirstMerit,
and unless otherwise stated, they have held their indicated positions for the
past five years.
DATE APPOINTED
NAME AGE TO FIRSTMERIT POSITION AND BUSINESS EXPERIENCE
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Sid A. Bostic 55 02-01-98 President and Chief Operating Officer of FirstMerit and
of FirstMerit Bank since February 1, 1998; previously
Chairman, President and Chief Executive Officer, Norwest
Bank Indiana, N.A., Fort Wayne, Indiana
John R. Cochran 55 03-01-95 Chairman and Chief Executive Officer of FirstMerit and
of FirstMerit Bank since February 1, 1998; previously
President and Chief Executive Officer of FirstMerit and
FirstMerit Bank; previously President and Chief
Executive Officer; previously President and Chief
Executive Officer of Norwest Bank Nebraska, N.A.
John R. Macso 51 11-08-90 President, FirstMerit Services Division and Chief
Technology Officer, since February 1, 1998; previously
Executive Vice President of FirstMerit; previously
President and Chief Executive Officer of FirstMerit
Bank; previously Executive Vice President of FirstMerit
Bank
Robert P. Brecht 47 08-09-91 Executive Vice President of FirstMerit and of FirstMerit
Bank; previously Executive Vice President of FirstMerit
Bank since July 20, 1995; previously President and Chief
Executive Officer of Peoples N.A.
Jack R. Gravo 51 02-16-95 Executive Vice President of FirstMerit and of FirstMerit
Bank; previously President and Chief Executive Officer
of Citizens since February 1, 1995; previously President
of The CIVISTA Corporation
Bruce M. Kephart 46 07-25-95 Executive Vice President of FirstMerit, Regional
President FirstMerit Bank; President and Chief Executive
Officer of Peoples N.A. since July 25, 1995; previously
Vice President, Bank One, Cleveland, N.A.
George P. Paidas 50 04-13-94 Executive Vice President of FirstMerit, and Regional
President of FirstMerit Bank; President and Chief
Executive Officer of The Old Phoenix National Bank of
Medina ("Old Phoenix") since March 9, 1994; previously
Executive Vice President of Old Phoenix
Gregory R. Bean 46 04-10-91 Senior Vice President of FirstMerit; Senior Vice
President and Senior Trust Officer of FirstMerit Bank
Gary J. Elek 46 02-11-88 Senior Vice President and Treasurer of FirstMerit, and
Senior Vice President of FirstMerit Bank
Terry E. Patton 49 04-10-85 Senior Vice President, Counsel and Secretary of
FirstMerit and FirstMerit Bank
William E. Stansifer 50 10-02-95 Senior Vice President of FirstMerit and of FirstMerit
Bank; previously Senior Vice President, Banking Credit
Policy Office, Norwest Corporation
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DATE APPOINTED
NAME AGE TO FIRSTMERIT POSITION AND BUSINESS EXPERIENCE
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Carrie L. Tolstedt 38 05-22-95 Executive Vice President of FirstMerit and of FirstMerit
Bank; President and Chief Executive Officer of Citizens
National Bank, President and Chief Executive Officer of
Peoples National Bank; previously Senior Vice President
of FirstMerit; previously Senior Vice President of
Norwest Bank Nebraska, N.A.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The outstanding shares of FirstMerit Common Stock are quoted on The Nasdaq
Stock Market National Market System. The following table contains bid and cash
dividend information for FirstMerit Common Stock for the two most recent fiscal
years:
STOCK PERFORMANCE AND DIVIDENDS
BIDS PER SHARE
QUARTER DIVIDEND BOOK
ENDING HIGH LOW RATE VALUE*
03-31-96 $16.25 13.88 0.1350 $ 8.10
06-30-96 16.00 15.00 0.1350 8.06
09-30-96 16.00 14.13 0.1350 8.10
12-31-96 18.00 15.63 0.1450 8.20
03-31-97 21.38 17.38 0.1450 8.24
06-30-97 25.25 19.25 0.1450 8.30
09-30-97 27.00 22.63 0.1600 8.38
12-31-97 30.75 24.88 0.1600 8.56
Number of shareholders at December 31, 1997 -- 6,978
*Based upon number of shares outstanding at the end of each quarter.
This table sets forth the high and low closing bid quotations, dividend
rates and book values per share for the calendar periods indicated. These
quotations furnished by the National Quotations Bureau Incorporated, represent
prices between dealers, do not include retail markup, markdowns, or commissions,
and may not represent actual transactions.
On February 1, 1998 there were approximately 6,945 shareholders of record
of FirstMerit Common Stock.
9
11
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Results of Operations
Interest income............. $ 407,825 411,745 416,627 371,018 361,208 385,089
Conversion to fully-tax
equivalent............... 3,212 3,043 3,840 4,590 5,264 5,679
---------- --------- --------- --------- --------- ---------
Interest income*............ 411,037 414,788 420,467 375,608 366,472 390,768
Interest expense............ 152,369 160,773 180,933 140,181 135,149 167,405
---------- --------- --------- --------- --------- ---------
Net interest income*........ 258,668 254,015 239,534 235,427 231,323 223,363
Provision for possible loan
losses................... 21,593 17,751 19,763 4,624 8,056 18,965
Other income................ 83,578 82,496 68,517 70,656 71,909 68,591
Other expense............... 191,080 209,702 227,779 193,410 187,945 175,286
---------- --------- --------- --------- --------- ---------
Income before federal income
taxes*................... 129,573 109,058 60,509 108,049 107,231 97,703
Federal income taxes........ 39,998 35,075 30,950 32,110 33,335 29,194
Fully-tax equivalent
adjustment............... 3,212 3,043 3,840 4,590 5,264 5,679
---------- --------- --------- --------- --------- ---------
Federal income taxes*....... 43,210 38,118 34,790 36,700 38,599 34,873
---------- --------- --------- --------- --------- ---------
Income before extraordinary
item........................ 86,363 70,940 25,719 71,349 68,632 62,830
Extraordinary item -- gain on
disposition of assets after
combination (net of tax
effect)..................... -- -- 5,599 -- -- --
---------- --------- --------- --------- --------- ---------
Net income.................... $ 86,363 70,940 31,318 71,349 68,632 62,830
========== ========= ========= ========= ========= =========
Per share:
Income before
extraordinary item..... $ 1.38 1.09 0.38 1.07 1.03 0.95
Extraordinary item (net
of tax effect) -- -- 0.09 -- -- --
---------- --------- --------- --------- --------- ---------
Basic net income......... $ 1.38 1.09 0.47 1.07 1.03 0.95
========== ========= ========= ========= ========= =========
Diluted net income....... $ 1.36 1.08 0.47 N/A N/A N/A
========== ========= ========= ========= ========= =========
Cash dividends........... $ 0.61 0.55 0.51 0.49 0.44 0.40
Dividend payout ratio....... 44.30% 50.56% 132.68% 45.72% 42.13% 41.71%
Average Ratios
Return on total assets...... 1.64% 1.29% 0.55% 1.32% 1.34% 1.28%
Return on shareholders'
equity................... 16.62% 13.44% 5.93% 13.86% 14.30% 14.46%
Shareholders' equity to
total assets............. 9.89% 9.64% 9.34% 9.56% 9.38% 8.86%
Balance Sheet Data
Total assets (at December
31)...................... $5,307,461 5,227,980 5,596,521 5,722,573 5,179,298 5,054,267
Daily averages:
Total assets............. $5,253,785 5,478,482 5,654,811 5,385,758 5,113,854 4,907,738
Earning assets........... 4,926,372 5,143,321 5,287,521 5,030,012 4,724,710 4,539,828
Deposits and other
funds.................. 4,641,569 4,879,343 5,058,333 4,820,339 4,581,960 4,416,929
Shareholders' equity..... 519,618 527,899 528,038 514,860 479,792 434,604
- - ---------------
*Fully-tax equivalent basis
N/A = not available
10
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS FOR THE YEARS 1997, 1996, 1995
The following commentary presents Management's discussion and analysis of
the Corporation's financial condition and results of operations. The review
highlights the principal factors affecting earnings and the significant changes
in balance sheet items for the years 1997, 1996 and 1995. Financial information
for prior years is presented when appropriate. The objective of this financial
review is to enhance the reader's understanding of the accompanying tables and
charts, the consolidated financial statements, notes to financial statements,
and financial statistics appearing elsewhere in this report. Where applicable,
this discussion also reflects Management's insights of known events and trends
that have or may reasonably be expected to have a material effect on the
Corporation's operations and financial condition.
All financial data has been restated to give effect to acquisitions
accounted for on a pooling of interests basis and stock splits in previous
periods. The results of other bank and branch acquisitions, accounted for as
purchases, have been included effective with the respective dates of
acquisition.
EARNINGS SUMMARY
FirstMerit Corporation's net income totaled $86.4 million, or $1.38 per
share, compared with $70.9 million, or $1.09 per share, earned in 1996. The 1996
earnings were impacted by the one-time Savings Association Insurance Fund (SAIF)
recapitalization charge of $6.7 million, after taxes. Excluding the SAIF charge,
prior year earnings were $77.6 million or $1.19 per share.
Return on average equity for the year was 16.62% and return on average
assets was 1.64%. After adjusting for the 1996 SAIF assessment, last year's
comparable ratios were 14.70% and 1.42%, respectively.
Net interest income on a fully tax-equivalent basis was $258.7 million in
1997 and $254.0 in 1996. The increase occurred because the net interest margin
of 5.25% was 31 basis points higher than the 4.94% earned last year. The
improved margin offset a decline of 4% in average earning assets. The decline in
earning assets occurred as maturing investment securities were used to fund loan
growth and residential mortgage loans were sold to reinvest the proceeds into
higher yielding loans.
Other income totaled $83.6 million compared to adjusted other income of
$68.8 million for 1996. The adjusted figure for last year excludes total gains
of $13.7 million from sales of branches and a former bank affiliate. The largest
gains over one year ago were experienced in credit card fees, up 25.8 percent;
other service fees, up 18.6 percent; and other operating income, up 24.4
percent.
Other expenses were $191.1 million for the year, a four percent improvement
over SAIF-adjusted pre-tax other expenses of $199.5 in 1996. Lower costs were
noted in several expense categories including a 3.8 percent reduction in
salaries and benefits, a 4.9 percent decline in occupancy expense, and a 5.0
percent drop in other operating expenses. The efficiency ratio of 55.60% was 350
basis points better than the 59.10% recorded last year.
The provision for loan losses for 1997 was $21.6 million compared to $17.8
million in 1996. The $3.8 million increase was due to net charge-offs that were
$1.9 higher than a year ago, a five percent rise in year end loan outstandings,
and in response to the continued shift in FirstMerit's loan portfolio from
residential real estate loans to commercial and consumer loans, which have
historically exhibited higher loss rates. Nonperforming assets were 0.35% of
total loans and other real estate compared to 0.29% one year ago. The allowance
for loan losses as a percentage of outstanding loans increased to 1.40%,
compared to 1.35% at December 31, 1996.
Total shareholders' equity at December 31, 1997 was $530.3 million, a one
percent increase over $523.7 million at December 31, 1996. Earnings for the year
were largely offset by cash dividends paid to shareholders and FirstMerit's
stock buyback program that reduced outstanding shares by 2.2 million shares
during 1997.
11
13
The following table summarizes the changes in earnings per share for 1997
and 1996.
1997/ 1996/
(DOLLARS) 1996 1995
--------- ----- -----
CHANGES IN EARNINGS PER SHARE
Net income for 1996 and 1995, respectively......... $ 1.09 0.47
Increases (decreases) attributable to:
Net interest income -- taxable equivalent....... 0.07 0.22
Provision for possible loan losses.............. (0.06) 0.03
Trust services.................................. 0.02 0.02
Service charges on deposit accounts............. 0.03 0.05
Credit card fees................................ 0.05 0.03
Securities gains (losses), net.................. 0.06 (0.03)
Other income.................................... (0.14) 0.14
Salaries and employee benefits.................. 0.06 0.20
Net occupancy expense........................... 0.02 (0.01)
Equipment expense............................... 0.00 0.01
Other expenses, excluding SAIF charge........... 0.06 0.00
Savings Association Insurance Fund (SAIF)
charge........................................ 0.16 (0.16)
Charges related to CIVISTA acquisition.......... 0.00 0.24
Extraordinary gain -- disposition of assets..... 0.00 (0.08)
Federal income taxes -- taxable equivalent...... (0.08) (0.05)
Reduction in outstanding shares due to share
repurchases................................... 0.04 0.01
------ ------
Net change in net income........................ 0.29 0.62
------ ------
Net income per share............................ $ 1.38 1.09
====== ======
NET INTEREST INCOME
Net interest income, the difference between interest and loan fee income on
earning assets and the interest paid on deposits and borrowed funds, is the
principal source of earnings for the Corporation. Throughout this discussion net
interest income is presented on a fully taxable equivalent (FTE) basis which
restates interest on tax-exempt securities and loans as if such interest were
subject to federal income tax at the statutory rate.
Net interest income is affected by market interest rates on both earning
assets and interest bearing liabilities, the level of earning assets being
funded by interest bearing liabilities, non-interest bearing liabilities and
equity, and the growth in earning assets. The following table shows the
allocation to assets, the source of funding and their respective interest
spreads.
1997
----------------------------------
AVERAGE NET
EARNING INTEREST INTEREST
ASSETS SPREAD INCOME
------- -------- --------
(DOLLARS IN THOUSANDS)
Interest-bearing liabilities...................... $3,908,175 4.44% 173,523
Non-interest-bearing liabilities and equity....... 1,018,197 8.34%* 85,145
---------- --------
$4,926,372 258,668
========== ========
1996
----------------------------------
AVERAGE NET
EARNING INTEREST INTEREST
ASSETS SPREAD INCOME
------- -------- --------
Interest-bearing liabilities $4,134,241 4.18% 172,811
Non-interest-bearing liabilities and equity 1,009,080 8.06%* 81,204
---------- --------
$5,143,321 254,015
========== ========
12
14
1995
----------------------------------
AVERAGE NET
EARNING INTEREST INTEREST
ASSETS SPREAD INCOME
------- -------- --------
Interest-bearing liabilities $4,333,046 3.78% 163,789
Non-interest-bearing liabilities and equity 954,475 7.95%* 75,745
---------- --------
$5,287,521 239,534
========== ========
- - ---------------
*Yield on earning assets
Net interest income increased $4.7 million, or 1.8%, to $258.7 million in
1997 compared to $254.0 million in 1996. The increase occurred because the
decline in interest expense was greater than the reduction in interest income.
Specifically, interest income fell $3.8 million while interest expense decreased
$8.4 million, or 5.2%.
Interest income was lower than last year because earning assets fell 4.2%
or $216.9 million. The decline in average earning assets was mainly attributable
to sales of residential mortgage loans and mortgage-backed securities whose
proceeds were reinvested in higher yielding commercial and consumer credits. The
average yield on earning assets increased 28 basis points from 8.06% to 8.34%
during 1997.
Lower interest expense was due to fewer interest bearing liabilities as the
cost of funds remained stable. Also contributing to less interest expense was a
shift in the composition of customer deposits as earning assets funded by
non-interest bearing liabilities and equity increased from 19.6% in 1996 and
18.1% in 1995 to 20.7% in 1997.
The following table provides an analysis of the effect of changes in
interest rates and volumes on net interest income in 1997 and 1996.
CHANGES IN NET INTEREST DIFFERENTIAL --
FULLY-TAX EQUIVALENT RATE/VOLUME ANALYSIS
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1997 AND 1996 1996 AND 1995
--------------------------- --------------------------
INCREASE (DECREASE) IN INCREASE (DECREASE) IN
INTEREST INCOME/EXPENSE INTEREST INCOME/EXPENSE
--------------------------- --------------------------
YIELD/ YIELD/
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- ------ ------- ------ ------- -------
(DOLLARS IN THOUSANDS)
INTEREST INCOME
Investment securities:
Taxable............................... $(12,823) 1,376 (11,447) (7,124) (213) (7,337)
Tax-exempt............................ (1,120) 790 (330) (1,590) (375) (1,965)
Loans................................... (2,109) 8,819 6,710 (485) 4,855 4,370
Federal funds sold...................... 1,211 105 1,316 (135) (612) (747)
-------- ------ ------- ------ ------- -------
Total interest income................... (14,841) 11,090 (3,751) (9,334) 3,655 (5,679)
-------- ------ ------- ------ ------- -------
INTEREST EXPENSE
Interest on deposits:
Demand-interest bearing............... 21 (1,393) (1,372) 366 (1,729) (1,363)
Savings............................... (2,871) 1,264 (1,607) (2,677) (3,315) (5,992)
Certificates and other time deposits
(CDs).............................. (3,774) (199) (3,973) (574) (1,565) (2,139)
Federal funds purchased, securities sold
under agreements to repurchase and
other borrowings...................... (1,888) 436 (1,452) (4,563) (6,103) (10,666)
-------- ------ ------- ------ ------- -------
Total interest expense.................. (8,512) 108 (8,404) (7,448) (12,712) (20,160)
-------- ------ ------- ------ ------- -------
Net interest income..................... $ (6,329) 10,982 4,653 (1,886) 16,367 14,481
======== ====== ======= ====== ======= =======
- - ---------------
Note: The variance created by a combination of rate and volume has been
allocated entirely to volume.
13
15
Total interest income decreased by $3.8 million in 1997 or 0.9% compared to
1996, which decreased 1.4% from 1995. The 1997 decrease resulted from a decline
in earning assets that was partially offset by an improved earning asset yield.
Sales and maturities of investment securities contributed $13.9 million or 93.9%
of the total drop in average earning assets of $14.8 million. The 28 basis point
improvement in the earning asset yield, from 8.06% to 8.34%, was entirely due to
higher rates earned on loans, as well as the other earning assets, during 1997.
A higher yield on loans contributed $8.8 million more to interest income in 1997
when compared to the prior year. The increased yield earned on loans was mainly
due to a change in the loan portfolio mix from residential mortgages to higher
yielding commercial and consumer loans.
Interest expense decreased $8.4 million or 5.2% compared to last year,
which decreased 11.1% compared to 1995. Lower average savings, CDs and other
borrowing balances lessened interest expense by $2.9 million, $3.8 million and
$1.9 million, respectively, and were responsible for the entire decline caused
by fewer outstandings. Lower rates paid on interest bearing demand accounts and
CDs were offset by higher rates on savings and other borrowings, resulting in a
$0.1 million rise in rate-driven 1997 interest expense.
The net interest margin is calculated by dividing net interest income FTE
by average earning assets. As with net interest income, the net interest margin
is affected by the level and mix of earning assets, the proportion of earning
assets funded by non-interest bearing liabilities and the interest rate spread.
In addition, the net interest margin is impacted by changes in federal income
tax rates and regulations as they affect the tax equivalent adjustment.
The net interest margin for 1997 was 5.25% compared to 4.94% in 1996 and
4.53% in 1995. An improved margin and higher net interest income occurred
despite the fact that the level of earning assets fell to a greater degree than
the decline in outstanding interest-bearing liabilities. Specifically, the 1997
net interest margin and related net interest income outpaced the comparable
amounts from last year because the yield on earning assets rose significantly
while the overall cost of funds remained flat.
1997 1996 1995
---------- --------- ---------
(DOLLARS IN THOUSANDS)
Net interest income............................ $ 255,456 250,972 235,694
Tax equivalent adjustment...................... 3,212 3,043 3,840
---------- --------- ---------
Net interest income -- FTE..................... $ 258,668 254,015 239,534
========== ========= =========
Average earning assets......................... $4,926,372 5,143,321 5,287,521
---------- --------- ---------
Net interest margin............................ 5.25% 4.94% 4.53%
========== ========= =========
OTHER INCOME
Other income totaled $83.6 million in 1997, an increase of $14.8 million or
21.5% over adjusted 1996, which excludes prior year gains of $13.7 million from
the sale of branches and a former bank affiliate.
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Trust fees............................................. $13,442 12,182 10,712
Service charges on deposits............................ 26,100 24,372 20,622
Credit card fees....................................... 14,355 11,415 9,372
Service fees -- other.................................. 7,337 6,184 5,724
Mortgage sales and servicing........................... 6,009 4,863 3,236
Securities gains (losses).............................. 1,957 (1,776) 539
Other operating income................................. 14,378 25,256 18,312
------- ------ ------
$83,578 82,496 68,517
======= ====== ======
Trust fees increased $1.3 million or 10.3% to $13.4 million in 1997.
Service charges on deposits rose $1.7 million or 7.1% compared to last year. The
increases in service charges on deposits for both 1997 and 1996,
14
16
compared to 1995, was due to the 1996 implementation of standard service charges
and procedures among the subsidiary banks of the Corporation as well as changes
to the deposit product lines. Credit card fees increased $2.9 million in 1997
further illustrating the shift of the Corporation's loan portfolio from
residential mortgage loans to consumer and commercial credits. Other service
fees increased $1.2 million during the year mostly attributable to increased
automated teller machine (ATM) activity.
Income from mortgage sales and servicing rose $1.1 million, or 23.6%, to
$6.0 million for the year. The net increase from 1995 to 1996 was a result of
implementation of Statement of Financial Accounting Standards No. 122
"Accounting for Mortgage Servicing Rights," which added $2.3 million to income.
Fewer loan sales during 1996 compared to 1995, however, offset the SFAS 122
increase and lowered income in this category by approximately $0.7 million. The
Corporation's practice is to sell all fixed rate thirty year residential
mortgage loans originated while retaining the servicing for these loans.
Securities gains were $2.0 million in 1997 compared to losses of $1.8
million in 1996 and gains of $0.5 million in 1995. In 1996, the Corporation sold
securities at a loss, principally in the fourth quarter, to reinvest the
proceeds into higher yielding assets for 1997 and future years.
Other operating income was $14.4 million, $2.8 million higher than the
$11.6 million earned last year, excluding 1996 net gains of $13.7 million from
the sale of branches and a former bank affiliate.
Total other income covered 43.7% of other expenses. Adjusted coverage
ratios for the two years immediately preceding 1997 were 34.7% and 30.1%,
respectively. Unusual charges for both 1996 and 1995 are discussed in more
detail in the "Other Expenses" section of this Annual Report as well as in Note
18 to the consolidated financial statements.
OTHER EXPENSES
Other expenses were $191.1 million in 1997 compared to $209.7 million in
1996 and $227.8 million in 1995. Both 1996 and 1995 contained unusual charges.
In 1996, the Corporation recorded a $10.2 million pre-tax SAIF recapitalization
charge. Excluding the one-time SAIF assessment, other expenses would have been
$199.5 million. Other expenses for 1995 included nonrecurring costs associated
with an early retirement program, the CIVISTA acquisition, and reengineering
charges that totaled $22.4 million. If unusual charges for both 1996 and 1995
are not considered, other expenses for 1997 were $8.4 million and $14.3 million
less than the comparable 1996 and 1995 totals, respectively.
OTHER EXPENSES
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Salaries and wages.................................. $ 70,792 72,572 80,501
Pension and benefits................................ 20,157 21,982 27,234
-------- ------- -------
Salaries, wages, pension and benefits............... 90,949 94,554 107,735
Net occupancy expense............................... 16,609 17,468 16,598
Equipment expense................................... 12,717 12,894 13,417
Taxes, other than federal income taxes.............. 6,410 6,625 6,026
Stationery, supplies and postage.................... 8,956 10,862 10,777
Bankcard, loan processing, and other fees........... 15,639 12,789 11,422
Advertising......................................... 5,911 6,866 5,766
Professional services............................... 4,979 4,297 7,911
Telephone........................................... 3,651 3,654 3,807
FDIC assessment..................................... 1,232 12,943 7,052
Amortization of intangibles......................... 1,869 3,148 3,534
Other operating expenses............................ 22,158 23,602 33,734
-------- ------- -------
Total other expenses................................ $191,080 209,702 227,779
======== ======= =======
Salaries, wages, pension and benefits totaled $90.9 million in 1997, a
decline of $3.6 million or 3.8% from 1996 and 15.6% less than 1995. Included in
these costs for 1995 were severance and related charges of
15
17
$4.1 million and an early retirement charge of $3.9 million. The 1996 reduction
was attributable to the actions taken in 1995 to reengineer the Corporation's
retail delivery systems and consolidate back-room operations. In 1997, the
Corporation spent 28.5 cents in benefits for every dollar of salary and wages
compared to 30.3 cents in 1996, and 30.5 cents in 1995, excluding the severance
and early retirement charges.
The Corporation has a benefit plan which presently provides postretirement
medical and life insurance for retired employees. The Corporation reserves the
right to terminate or make additional plan changes at any time. The
Corporation's accumulated postretirement benefit obligation (APBO) as of January
1, 1993 totaled $19.0 million, and is being amortized over twenty years at an
annual cost of $0.9 million.
Bankcard, loan processing, and other fees increased $2.8 million to $15.6
million in 1997. The majority of the increase, approximately $1.5 million, was
due to costs associated with outsourcing the servicing of residential mortgage
loans. These increased processing costs associated with the outsourced servicing
were more than offset by related reductions in salaries and benefits costs.
Professional services totaled $5.0 million in 1997 compared to $4.3 million
in 1996 and $7.9 million in 1995. Included in the 1997 total are costs of $0.3
million associated with the Year 2000 (Y2K) Project. See the section titled
"Year 2000 Issue" in Management's Discussion and Analysis of Financial Condition
and Results of Operations for more Y2K details. In 1995 external groups were
used to help develop a reengineering plan to improve operating efficiencies,
increase revenues and shareholder value, and to help train our employees to
effectively sell our new products and services.
On January 1, 1994, the FDIC implemented a risk-based assessment system for
depository institutions. Under the system, the annual assessment rate for each
insured institution is determined on the basis of both capital and supervisory
measures, and can range from 23 cents to 31 cents per one hundred dollars of
deposits. During the third quarter of 1995, the FDIC reduced the effective rate
of the annual assessment on Bank Insurance Fund ("BIF") deposits to
approximately 4 cents per one hundred dollars of deposits.
As mentioned earlier in this section, the Corporation's FDIC assessment for
1996 included a one-time recapitalization of the Savings Association Insurance
Fund totaling $10.2 million. Excluding the one-time charge, 1996 FDIC expense
would have been $2.7 million. The 1997 FDIC expense of $1.2 million and the 1996
adjusted expense of $2.7 million are considerably less than the 1995 amount due
to the reduction in the effective rate applicable to Bank Insurance Fund ("BIF")
deposits.
Amortization of intangible expense during 1997 was $1.3 million less than
1996 and $1.7 million less than 1995. The decrease occurred since intangible
assets associated with 1996 branch sales,including several in the fourth quarter
of that year, were written off.
Other operating expenses amounted to $22.2 million in 1997 compared to
$23.6 million last year and $33.7 million in 1995. Included in 1995 costs were
$4.6 million of severance payments and fees paid to financial advisors as part
of the CIVISTA acquisition as well as $6.6 million of reengineering charges for
the adjustment to the value of buildings, equipment and other assets.
FEDERAL INCOME TAX
Federal income tax expense totaled $40.0 million in 1997 compared to $35.1
million in 1996, and $34.0 in 1995 when tax expense of $3.0 million associated
with the extraordinary gain is included. In 1997 the effective federal income
tax rate for the Corporation equaled 31.7% compared to 33.1% in 1996 and 52.0%
in 1995.
The effective tax rate in 1995 was higher than normal due to the recapture
of the bad debt reserve totaling approximately $12.4 million, and the
nondeductibility of certain professional fees associated with the CIVISTA
acquisition.
INVESTMENT SECURITIES
The investment portfolio is maintained by the Corporation to provide
liquidity, earnings, and as a means of diversifying risk. In accordance with the
Financial Accounting Standards Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," securities are required to be
classified as held-to-maturity, available-for-sale, or trading. All investment
securities are currently classified as available-for-sale. In
16
18
this classification, 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 net of taxes in a separate component of
shareholders' equity. The adjustments to increase fair value at December 31,
1997 and decrease fair value at December 31, 1996 were $8.4 million and $1.4
million, respectively. Lower interest rates during 1997, compared to the prior
year, increased the market value of the investment portfolio causing the
positive mark to market adjustment.
At December 31, 1997, investment securities totaled $1,116.8 million
compared with $1,187.5 million one year earlier, a decline of 6.0%. Investment
securities totaled $1,403.1 million at the end of 1995.
A summary of investment securities' carrying value is presented below as of
December 31, 1997, 1996 and 1995. Presented with the summary is a maturity
distribution schedule with corresponding weighted average yields.
CARRYING VALUE OF INVESTMENT SECURITIES
DECEMBER 31,
------------------------------------
1997 1996 1995
---------- --------- ---------
(DOLLARS IN THOUSANDS)
U.S. Treasury and Government agency
obligations.................................. $ 595,653 655,741 864,967
Obligations of states and political
subdivisions................................. 81,611 93,587 108,842
Mortgage-backed securities..................... 340,114 325,277 331,556
Other securities............................... 99,409 112,919 97,694
---------- --------- ---------
$1,116,787 1,187,524 1,403,059
========== ========= =========
OVER ONE YEAR OVER FIVE YEARS
ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS OVER TEN YEARS
------------------- ------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELDS AMOUNT YIELDS AMOUNT YIELDS AMOUNT YIELDS
-------- -------- -------- -------- -------- -------- -------- --------
Treasury securities.................. $ 52,016 5.60% 113,824 6.03% -- -- -- --
U.S. Government agency obligations... 43,903 5.61% 125,032 6.44% 63,030 6.82% 197,848 6.26%
Obligations of states and political
subdivisions....................... 32,783 5.59%* 26,770 6.02%* 19,880 5.49%* 2,178 6.71%*
Mortgage-backed securities........... 3,944 5.80% 12,409 7.05% 79,125 6.68% 244,636 6.85%
Other securities..................... 738 5.40% 1,712 7.59% 2,143 6.23% 94,816 6.56%
-------- ---- -------- ---- ------- ---- ------- ----
$133,384 5.61% 279,747 6.27% 164,178 6.58% 539,478 6.58%
======== ==== ======== ==== ======= ==== ======= ====
Percent of total..................... 11.94% 25.05% 14.70% 48.31%
======== ======== ======= =======
- - ---------------
* Fully-taxable equivalent based upon federal income tax structure applicable at
December 31, 1997.
At December 31, 1997, mortgage-backed securities totaled $340.1 million
which includes $246.4 million of Collateralized Mortgage Obligations ("CMOs")
representing approximately 24% of the investment portfolio. The duration of
total CMOs is slightly less than the total portfolio. The aggregate book value
of all privately issued mortgage-backed securities does not exceed 10% of
shareholders' equity. CMOs which fail the Federal Financial Institution
Examination Council's (FFIEC) high risk stress test total $3.4 million, or 0.03%
of the total investment portfolio.
The yield on the portfolio was 6.49% in 1997 compared to 6.32% in 1996 and
6.37% in 1995. The current year reduction in the investment portfolio funded
increases in loan portfolios and the sale of branch deposits.
LOANS
Total loans outstanding at December 31, 1997 increased 4.9% compared to one
year ago or $3,834.9 million compared to $3,656.0 million. A breakdown by
category is presented below, along with a maturity summary of commercial,
financial and agricultural loans.
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DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Commercial, financial and
agricultural......................... $ 875,715 748,858 588,864 467,428 430,118
Installments to individuals............ 833,146 811,561 777,990 800,441 632,354
Real estate............................ 1,982,059 1,936,342 2,223,561 2,261,283 2,016,491
Lease financing........................ 143,955 159,237 179,951 158,737 56,903
---------- ---------- ---------- ---------- ----------
Total loans.......................... 3,834,875 3,655,998 3,770,366 3,687,889 3,135,866
Less allowance for possible loan
losses............................... 53,774 49,336 46,840 35,834 35,030
---------- ---------- ---------- ---------- ----------
Net loans.......................... $3,781,101 3,606,662 3,723,526 3,652,055 3,100,836
========== ========== ========== ========== ==========
DECEMBER 31, 1997
-------------------------
COMMERCIAL, FINANCIAL AND
AGRICULTURAL
-------------------------
Due in one year or less..................................... $542,286
Due after one year but within five years.................... 211,477
Due after five years........................................ 121,952
--------
Total................................................... $875,715
========
Loans due after one year with interest at a predetermined
fixed rate................................................ 125,517
Loans due after one year with interest at a floating rate... 207,912
--------
Total................................................... $333,429
Real estate loans at December 31, 1997 totaled $1,982.1 million or 51.7% of
total loans outstanding compared to 53.0% one year ago. Residential loans (1-4
family dwellings) totaled $910.7 million, home equity loans $251.0 million,
construction loans $151.8 million and commercial real estate loans $668.8
million. The year-end real estate totals point out the shift in the composition
of the Corporation's loan portfolio from residential real estate to higher
yielding commercial and consumer loans.
Commercial real estate loans include both commercial loans where real
estate has been taken as collateral as well as loans for commercial real estate.
The majority of commercial real estate loans are to owner occupants where cash
flow to service debt is derived from the occupying business cash flow instead of
normal building rents. These loans are generally part of an overall relationship
with existing customers primarily within northeast Ohio.
Consumer loans or loans to individuals increased 2.7% compared to last year
and accounted for 21.7% of total loans compared to 22.2% in 1996.
Commercial, financial, and agricultural loans increased 16.9% during 1997
and make-up 22.8% of total outstanding loans compared to 20.5% last year. Again,
the increase in consumer and commercial loans is evidence of FirstMerit's
shifting loan portfolio.
The decline in lease financing loans from $159.2 million in 1996 to $144.0
million at December 31, 1997 is primarily due to decreased originations in the
highly competitive auto lease business. Auto leases totaled $69.6 million with
equipment leasing totaling $70.6 million, and leveraged leases were $3.7 million
at year-end 1997.
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.
ASSET QUALITY
Making a loan to earn an interest spread inherently includes taking the
risk of not being repaid. Successful management of credit risk requires making
good underwriting decisions, carefully administering the loan portfolio and
diligently collecting delinquent accounts.
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,
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providing them with centralized consumer underwriting, collections and loan
operations 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.
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 the required 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 price, or the fair value of the loan collateral.
NON-PERFORMING ASSETS
Non-performing assets consist of:
- NON-ACCRUAL LOANS on which interest is no longer accrued because its
collection is doubtful.
- RESTRUCTURED LOANS on which, due to deterioration in the borrower's
financial condition, the original terms have been modified in favor of
the borrower or either principal or interest has been forgiven.
- OTHER REAL ESTATE OWNED (OREO) acquired through foreclosure in
satisfaction of a loan.
DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Impaired Loans:
Non-accrual.......................................... $11,185 9,579 7,373 10,517 N/A
Restructured......................................... 89 92 1,548 2,026 N/A
------- ------ ------ ------ ------
Total impaired loans............................... 11,274 9,671 8,921 12,543 N/A
Other Loans:
Non-accrual.......................................... 1,434 787 3,918 3,108 12,040
Restructured......................................... -- -- -- -- 6,176
------- ------ ------ ------ ------
Total Other non-performing loans................... 1,434 787 3,918 3,108 18,216
------- ------ ------ ------ ------
Total non-performing loans......................... 12,708 10,458 12,839 15,651 18,216
------- ------ ------ ------ ------
Other real estate owned (OREO)......................... 908 118 1,059 10,393 8,637
Total non-performing assets........................ $13,616 10,576 13,898 26,044 26,853
======= ====== ====== ====== ======
Loans past due 90 days or more accruing interest....... $11,166 8,380 7,252 3,569 4,122
======= ====== ====== ====== ======
Total non-performing assets as a percent of total loans
& OREO............................................... 0.35% 0.29% 0.37% 0.70% 0.85%
======= ====== ====== ====== ======
- - ---------------
N/A = Not Available
Under the Corporation's credit policies and practices, all non-accrual and
restructured commercial, agricultural, construction, and commercial real estate
loans, meet the definition of impaired loans under Statement No.'s 114 and 118.
Impaired loans as defined by Statements 114 and 118 exclude certain consumer
loans, residential real estate loans, and leases classified as non-accrual.
Consumer installment loans are charged off when they reach 120 days past due.
Credit card loans are charged off when they reach 180 days past due. When any
other loan becomes 90 days past due, it is placed on non-accrual status unless
it is well secured and in the process of collection. Any losses are charged
against the allowance for possible loan losses as soon as they are identified.
Non-performing assets at year end were $13.6 million, $10.6 million at
December 31, 1996 and $13.9 million at December 31, 1995. As a percentage of
total loans outstanding plus OREO, non-performing assets were 0.35% at year-end
1997 compared to 0.29% in 1996 and 0.37% in 1995. The average balances of
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impaired loans for the years ended December 31, 1997 and 1996 were $10.5 million
and $9.3 million, respectively.
For the year ended December 31, 1997, impaired assets earned $460,000 in
interest income. Had they not been impaired, they would have earned $1.1
million. For the same period, total non-performing loans earned $544,000 in
interest income. Had they paid in accordance with the payment terms in force
prior to being considered impaired, on non-accrual status, or restructured, they
would have earned $1.5 million.
In addition to non-performing loans and loans 90 days past due and still
accruing interest, Management identified potential problem loans totaling $32.1
million at December 31, 1997. These loans are closely monitored for any further
deterioration in the borrowers' financial condition and for the borrowers'
ability to comply with terms of the loans.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Corporation maintains what Management believes is an adequate allowance
for possible loan losses. The Parent Company and the subsidiary banks regularly
analyze the adequacy of their allowances through ongoing reviews of trends in
risk ratings, delinquencies, non-performing assets, charge-offs, economic
conditions, and changes in the composition of the loan portfolio.
At year end the Corporation boosted its allowance for possible loan losses
in response to the continuing shift of its portfolio out of residential mortgage
loans and into commercial and consumer loans, which historically have exhibited
higher loss rates. During the year, consumer delinquencies continued at high
levels and losses in the consumer portfolio were higher than in the recent past.
Management felt it was prudent to increase the allowance at year end to ensure
its adequacy for changes that have occurred and will continue to occur in the
loan portfolio.
At December 31, 1997, the allowance was $53.8 million or 1.40% of loans
outstanding compared to $49.3 million or 1.35% in 1996 and $46.8 million or
1.24% in 1995. The allowance equaled 423.15% of non-performing loans at December
31, 1997 compared to 471.75% in 1996. The allowance for possible loan losses
related to impaired loans at December 31, 1997 and December 31, 1996 totaled
$1.1 million and $1.0 million, respectively.
Net charge-offs were $17.2 million in 1997 compared to $15.3 million in
1996 and $8.8 million in 1995. As a percentage of average loans outstanding, net
charge-offs equaled 0.45% in 1997, 0.40% in 1996 and 0.23% in 1995. Losses are
charged against the allowance as soon as they are identified.
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A five-year summary of activity follows:
ALLOWANCE FOR POSSIBLE LOAN LOSSES
DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Allowance for possible loan losses at beginning of
year................................................. $ 49,336 46,840 35,834 35,030 31,592
Loans charged off:
Commercial, financial and agricultural............... 1,618 2,665 3,145 1,479 1,686
Installment to individuals........................... 23,779 16,637 8,578 5,476 5,936
Real estate.......................................... 574 224 883 720 977
Lease financing...................................... 1,290 1,315 319 20 28
Decrease from sale of subsidiary..................... -- 389 -- -- --
---------- --------- --------- --------- ---------
Total.............................................. 27,261 21,230 12,925 7,695 8,627
---------- --------- --------- --------- ---------
Recoveries:
Commercial, financial and agricultural............... 1,121 450 569 719 1,334
Installment to individuals........................... 8,386 5,117 3,382 3,029 2,548
Real estate.......................................... 123 202 129 106 95
Lease financing...................................... 476 206 88 21 32
---------- --------- --------- --------- ---------
Total.............................................. 10,106 5,975 4,168 3,875 4,009
---------- --------- --------- --------- ---------
Net charge-offs........................................ 17,155 15,255 8,757 3,820 4,618
---------- --------- --------- --------- ---------
Provision for possible loan losses..................... 21,593 17,751 19,763 4,624 8,056
---------- --------- --------- --------- ---------
Allowance for possible loan losses at end of year...... $ 53,774 49,336 $ 46,840 35,834 35,030
========== ========= ========= ========= =========
Average loans outstanding.............................. $3,789,231 3,812,900 3,818,486 3,350,162 3,104,406
========== ========= ========= ========= =========
Ratio to average loans:
Net charge-offs...................................... 0.45% 0.40% 0.23% 0.11% 0.15%
Provision for possible loan losses................... 0.57% 0.47% 0.52% 0.14% 0.26%
========== ========= ========= ========= =========
Loans outstanding at end of year....................... $3,834,875 3,655,998 3,770,366 3,687,889 3,135,866
========== ========= ========= ========= =========
Allowance for possible loan losses:
As a percent of loans outstanding at end of year..... 1.40% 1.35% 1.24% 0.97% 1.12%
As a multiple of net charge-offs..................... 3.13 3.23 5.35 9.38 7.59
========== ========= ========= ========= =========
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
AS OF AS OF AS OF AS OF
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------- --------------------- --------------------- ---------------------
% OF % OF % OF % OF
LOANS BY LOANS BY LOANS BY LOANS BY
CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
LOANS LOANS LOANS LOANS
AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING
------- ----------- ------- ----------- ------- ----------- ------- -----------
(DOLLARS IN THOUSANDS)
Commercial,
financial, and
agricultural....... $25,306 23% 14,962 21% 13,570 16% 6,341 13%
Loans secured by real
estate............. 13,030 51% 11,784 53% 18,690 59% 13,823 61%
Installment.......... 14,318 22% 21,303 22% 13,360 21% 12,245 22%
Lease financing...... 1,120 4% 1,287 4% 1,220 4% 699 4%
------- --- ------- --- ------- --- ------- ---
$53,774 100% 49,336 100% 46,840 100% 33,108 100%
======= === ======= === ======= === ======= ===
AS OF
DECEMBER 31, 1993
---------------------
% OF
LOANS BY
CATEGORY
TO TOTAL
LOANS
AMOUNT OUTSTANDING
------- -----------
Commercial,
financial, and
agricultural....... 16,935 14%
Loans secured by real
estate............. 7,911 64%
Installment.......... 3,388 20%
Lease financing...... 2,986 2%
------- ---
31,220 100%
======= ===
DEPOSITS
Average deposits for 1997 totaled $4,164.1 million, a decrease of 4.6% and
6.4% compared to 1996 and 1995 levels, respectively. The success of the
Corporation's "free-checking" campaigns brought in additional demand deposits
that partially offset the overall decline in deposits and contributed to a
stabilized cost of funds and an improved net interest margin.
As market interest rates decreased during the year, and the stock market
strengthened, savings deposits were withdrawn and reinvested in equity funds not
held by the Corporation. Specifically, the decline in average savings
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deposits from $1,399.0 million in 1996 to $1,279.9 million in 1997 accounted for
about 60% of the decline in total average deposits.
Average demand deposits, including both interest-bearing and
noninterest-bearing categories, totaled $1,182.4 million for the year, a
decrease of 0.9% over last year's average. Additionally, the average rate paid
on interest-bearing demand deposits decreased 31 basis points to 1.44%.
Certificates and other time deposits ("CDs") averaged $1,701.9 million for
1997, a decrease of 4.0% over 1996's average of $1,772.2 million. The average
yield paid on CDs declined 1 basis point from 5.38% in 1996 to 5.37% in 1997.
CDs accounted for 40.9% of average deposits in 1997 compared to 40.6% in
1996. Savings equaled 30.7% and 32.1% in 1997 and 1996, respectively, and demand
deposits, both interest and non-interest bearing, were 28.4% and 27.3%,
respectively.
The average cost of deposits and other borrowings was up 1 basis point
compared to one year ago, or 3.90% in 1997 compared to 3.89% last year.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995
-------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
---------- ------- --------- ------- --------- -------
(DOLLARS IN THOUSANDS)
Demand deposits -- non-interest
bearing...................... $ 733,394 -- 745,102 -- 725,287 --
Demand deposits -- interest
bearing...................... 448,976 1.44% 447,524 1.75% 426,608 2.16%
Savings deposits............... 1,279,859 2.41% 1,399,011 2.32% 1,514,374 2.54%
Certificates and other time
deposits..................... 1,701,886 5.37% 1,772,150 5.38% 1,782,817 5.47%
---------- --------- ---------
$4,164,115 4,363,787 4,449,086
========== ========= =========
The following table summarizes the certificates and other time deposits in
amounts of $0.1 million or more as of December 31, 1997, by time remaining until
maturity.
AMOUNT
--------
Maturing in:
Under 3 months............................................ $230,432
3 to 6 months............................................. 104,058
6 to 12 months............................................ 37,920
Over 12 months............................................ 32,940
--------
$405,350
========
INTEREST RATE SENSITIVITY
Interest rate sensitivity measures the potential exposure of earnings and
capital to changes in market interest rates. The Corporation has a policy which
provides guidelines in the management of interest rate risk. This policy is
reviewed periodically to ensure it complies to trends within the financial
markets and within the industry.
The analysis presented below divides interest bearing assets and
liabilities into maturity categories and measures the "GAP" between maturing
assets and liabilities in each category. The Corporation analyzes the historical
sensitivity of its interest bearing transaction accounts to determine the
portion which it classifies as interest rate sensitive versus the portion
classified over one year. The analysis shows that liabilities maturing within
one year exceed assets maturing within the same period by a moderate amount. The
Corporation uses the GAP analysis and other tools to monitor rate risk.
At December 31, 1997 the Corporation was in a moderate asset-sensitive
position as illustrated in the following table:
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31-60 61-90 91-180 181-365 OVER 1
1-30 DAYS DAYS DAYS DAYS DAYS YEAR TOTAL
---------- -------- -------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
Interest Earning Assets:
Loans and leases................. $1,049,639 76,787 73,832 250,264 423,102 1,907,477 3,781,101
Investment securities............ 126,798 18,166 54,436 84,765 156,463 676,159 1,116,787
Federal funds sold............... 33,100 -- -- -- -- -- 33,100
---------- -------- -------- ------- ------- --------- ---------
Total Interest Earning Assets...... $1,209,537 94,953 128,268 335,029 579,565 2,583,636 4,930,988
---------- -------- -------- ------- ------- --------- ---------
Interest-Bearing Liabilities:
Demand -- Interest bearing....... $ 18,824 18,824 23,530 -- -- 409,423 470,601
Savings.......................... 76,736 76,736 76,736 -- -- 1,048,725 1,278,933
Certificates and other time
deposits....................... 296,672 140,487 160,068 401,224 347,835 390,204 1,736,490
Securities sold under agreement
to repurchase and other
borrowings..................... 423,860 25 167 11,219 457 6,027 441,755
---------- -------- -------- ------- ------- --------- ---------
Total Interest Bearing
Liabilities...................... $ 816,092 236,072 260,501 412,443 348,292 1,854,379 3,927,779
Total GAP.......................... $ 393,445 (141,119) (132,233) (77,414) 231,273 729,257 1,003,209
========== ======== ======== ======= ======= ========= =========
Cumulative GAP..................... $ 393,445 252,326 120,093 42,679 273,952 1,003,209
========== ======== ======== ======= ======= =========
CAPITAL RESOURCES
Shareholders' equity at December 31, 1997 totaled $530.3 million compared
to $523.7 million at December 31, 1996, an increase of 1.3%. The Corporation's
stock repurchase program, detailed in the "Earnings Summary" portion of
Management's Discussion and Analysis, offset 1997 earnings to such an extent
that equity grew only slightly during 1997.
AS OF DECEMBER 31,
--------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
(IN THOUSANDS)
Total equity............................ $530,336 9.99% 523,707 10.02% 542,881 9.70%
Common equity........................... 530,336 9.99% 523,707 10.02% 542,881 9.70%
Tangible common equity (a.)............. 527,771 9.95% 519,950 9.95% 536,934 9.60%
Tier 1 capital (b.)..................... 516,388 12.30% 523,911 12.63% 538,032 14.53%
Total risk-based capital (c.)........... 568,886 13.55% 573,247 13.82% 584,872 15.80%
Leverage (d.)........................... 516,388 9.66% 523,911 9.63% 538,032 9.66%
- - ---------------
a) Common equity less all intangibles; computed as a ratio to total assets less
intangible assets.
b) Shareholders' equity 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 Federal Deposit Insurance Corporation Act of 1991 ("FDICA") set capital
guidelines for a financial institution to be considered "well-capitalized."
These guidelines require a risk-based capital ratio of 10%, a Tier I capital
ratio of 6% and a leverage ratio of 5%. At December 31, 1997, the Corporation's
risk-based capital equaled 13.55% of risk-adjusted assets, its Tier I capital
ratio equaled 12.30% and its leverage ratio equaled 9.66%.
The Corporation's Board of Directors declared a 2-for-1 split of the
Corporation's common stock on September 29, 1997. The split was paid to
shareholders of record as of September 2, 1997.
During 1997, the Corporation's Directors increased the quarterly cash
dividend, marking the sixteenth consecutive year of annual increases since the
Corporation's formation in 1981. The cash dividend of $0.16 paid has an
indicated annual rate of $0.64 per share. Over the past five years the dividend
has increased at an annual rate of approximately 8%.
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LIQUIDITY
The Corporation's primary source of liquidity is its strong core deposit
base, raised through its retail branch system, along with a strong capital base.
These funds, along with investment securities, provide the ability to meet the
needs of depositors while funding new loan demand and existing commitments.
The banking subsidiaries individually maintain sufficient liquidity in the
form of temporary investments and a short-term maturity structure within the
investment portfolio, along with cash flow from loan repayment. Asset growth in
the banking subsidiaries is funded by the growth of core deposits.
Reliance on borrowed funds decreased during the year as maturing investment
portfolio securities were used to fund deposit withdrawals and repay borrowings.
During the year, the Corporation sold, for liquidity purposes, approximately
$46.0 million of fixed and adjustable rate residential real estate loans. The
loan sales improved liquidity while restructuring the balance sheet to higher
yielding assets.
The liquidity needs of the Parent Company, primarily cash dividends and
other corporate purposes, are met through cash, short-term investments and
dividends from banking subsidiaries.
Management is not aware of any trend or event, other than noted above,
which will result in or that is reasonably likely to occur that would result in
a material increase or decrease in the Corporation's liquidity.
REGULATION AND SUPERVISION
A strict uniform system of capital-based regulation of financial
institutions became effective on December 19, 1992. Under this system, there are
five different categories of capitalization, with "prompt corrective actions"
and significant operational restrictions imposed on institutions that are
capital deficient under the categories. The five categories are: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
To be considered well capitalized an institution must have a total
risk-based capital ratio of at least 10%, a Tier I capital ratio of at least 6%,
a leverage capital ratio of 5%, and must not be subject to any order or
directive requiring the institution to improve its capital level. An adequately
capitalized institution has a total risk-based capital ratio of at least 8%, a
Tier I capital ratio of at least 4% and a leverage capital ratio of at least 4%.
Institutions with lower capital levels are deemed to be undercapitalized,
significantly undercapitalized or critically undercapitalized, depending on
their actual capital levels. The appropriate federal regulatory agency may also
downgrade an institution to the next lower capital category upon a determination
that the institution is in an unsafe or unsound practice. Institutions are
required to monitor closely their capital levels and to notify their appropriate
regulatory agency of any basis for a change in capital category. At December 31,
1997, the Parent Company and its subsidiaries all exceeded the minimum capital
levels of the well capitalized category.
EFFECTS OF INFLATION
The assets and liabilities of the Corporation are primarily monetary in
nature and are more directly affected by the fluctuation in interest rates than
inflation. Movement in interest rates is a result of the perceived changes in
inflation as well as monetary and fiscal policies. Interest rates and inflation
do not move with the same velocity or within the same time frame, therefore, a
direct relationship to the inflation rate cannot be shown. The financial
information presented in this annual report, based on historical data, has a
direct correlation to the influence of market levels of interest rates.
Therefore, Management believes that there is no material benefit in presenting a
statement of financial data adjusted for inflationary changes.
FORWARD-LOOKING STATEMENTS -- SAFE HARBOR STATEMENT
Information in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section above and within this report, which
is not historical or factual in nature, and which relates to expectations for
future shifts in loan portfolio to consumer and commercial loans, increase in
core deposits base, allowance for loan losses, demands for FirstMerit services
and products, future services and products to be offered, increased numbers of
customers, and like items, constitute forward-looking statements that involve a
number of risks and uncertainties. The following factors are among the factors
that could cause actual results to
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differ materially from the forward-looking statements: general economic
conditions, including their impact on capital expenditures; business conditions
in the banking industry; the regulatory environment; rapidly changing technology
and evolving banking industry standards; competitive factors, including
increased competition with regional and national financial institutions; new
service and product offerings by competitors and price pressures; and like
items.
FirstMerit cautions that any forward-looking statements contained in this
report, in a report incorporated by reference to this report, or made by
management of FirstMerit in this report, in other reports and filings, in press
releases and in oral statements, involve risks and uncertainties and are subject
to change based upon the factors listed above and like items. Actual results
could differ materially from those expressed or implied, and therefore the
forward-looking statements should be considered in light of these factors.
FirstMerit may from time to time issue other forward-looking statements.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define an applicable year. Any of a company's
hardware, date-driven automated equipment, or computer programs that have date
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This faulty recognition could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business activities.
The Corporation has contracted the services of Keane, Inc., an application
development, outsourcing and integration services firm, to perform an enterprise
wide business unit risk assessment of Year 2000 issues. Keane has completed the
enterprise wide business unit risk assessment for the Corporation which included
formal communications with all significant suppliers to determine the extent to
which the Corporation is vulnerable to those third parties' failure to address
their own Year 2000 issues.
On the basis of recent internal business unit risk assessments, the
Corporation determined that there are approximately 1.2 million lines of
in-house code needing review for Year 2000 impacts. Some of this code will
require modification or replacement so that applications and computer systems
will properly utilize dates beyond December 31, 1999. The Corporation is
utilizing both internal and external resources to remediate, or replace, and
test in-house code to ensure uninterrupted customer service through Year 2000
readiness. The Corporation believes that with modifications to existing software
and conversions to new software, the Year 2000 issue will be mitigated. An
internal review of computer hardware and date sensitive automated equipment has
been conducted. Additionally, the Corporation has implemented a program that
utilizes internal resources to assess the Year 2000 readiness of major
borrowers.
The Corporation's total Year 2000 readiness project costs and estimates to
complete include the estimated costs and time associated with the impact of a
third party vendor's Year 2000 issues and are based on presently available
information. There can be no guarantees, however, that the systems and
applications of other companies on which the Corporation's systems and
applications rely will be timely converted or that a failure to convert by
another company, or a conversion that is incompatible with the Corporation's
systems and applications, would not have material adverse effect on the
Corporation.
The Corporation plans to complete the Year 2000 readiness project within
one year and should have significant testing initiated during the third quarter
of 1998. The total remaining cost of the Year 2000 readiness project is
estimated at $5.7 million and is being funded through operating cash flows,
which will be expensed as incurred over the next two years, and is not expected
to have a material adverse effect on the Corporation's results of operations. To
date, the Corporation has incurred and expensed approximately $327,000 related
to the assessment of, and preliminary efforts in connection with, the Year 2000
readiness project and development of a remediation plan.
The costs of the Year 2000 readiness project and the date on which the
Corporation plans to complete Year 2000 remediation are based on management's
best estimates, which were derived utilizing assumptions of future events
including the continued availability of certain resources, third party vendor
remediation plans and other factors. There can be no guarantee, however, that
these estimates will be achieved and actual results could differ
25
27
materially from those plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
trained programming personnel, the ability to locate and correct all relevant
computer coding, and similar uncertainties.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and accompanying notes, and the
reports of management and independent auditors, are set forth immediately
following Item 9 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
FirstMerit has had no disagreement with its accountants on accounting and
financial disclosure matters and has not changed accountants during the two year
period ending December 31, 1997.
26
28
CONSOLIDATED BALANCE SHEETS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
DECEMBER 31,
-----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
ASSETS
Investment securities (at market value)................... $1,116,787 1,187,524
Federal funds sold........................................ 33,100 15,550
Commercial loans.......................................... 1,553,707 1,373,806
Mortgage loans............................................ 852,482 944,887
Installment loans......................................... 922,227 876,997
Home equity loans......................................... 250,513 195,924
Credit card loans......................................... 103,041 90,028
Tax-free loans............................................ 8,947 15,119
Leases.................................................... 143,958 159,237
---------- ----------
Total earning assets................................... 4,984,762 4,859,072
---------- ----------
Allowance for possible loan losses........................ (53,774) (49,336)
Cash and due from banks................................... 166,742 222,164
Premises and equipment, net............................... 99,765 102,139
Accrued interest receivable and other assets.............. 109,966 93,941
---------- ----------
Total assets........................................... $5,307,461 5,227,980
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-non-interest bearing............................ $ 769,187 799,771
Demand-interest bearing................................ 470,601 450,187
Savings................................................ 1,278,933 1,309,275
Certificates and other time deposits................... 1,736,490 1,645,642
---------- ----------
Total deposits......................................... 4,255,211 4,204,875
---------- ----------
Securities sold under agreements to repurchase and other
borrowings............................................. 441,755 423,701
Accrued taxes, expenses, and other liabilities............ 80,159 75,697
---------- ----------
Total liabilities...................................... 4,777,125 4,704,273
---------- ----------
Commitments and contingencies............................. -- --
Shareholders' equity:
Preferred stock, without par value: authorized and
unissued 7,000,000 shares............................. -- --
Common stock, without par value: authorized 80,000,000
shares; issued 68,127,314 and 67,719,750 shares,
respectively.......................................... 110,069 107,343
Treasury stock, 6,159,845 and 3,806,964 shares,
respectively.......................................... (108,734) (59,258)
Net unrealized holding gains (losses) on available for
sale securities....................................... 3,246 (2,217)
Retained earnings...................................... 525,755 477,839
---------- ----------
Total shareholders' equity............................. 530,336 523,707
---------- ----------
Total liabilities and shareholders' equity............. $5,307,461 5,227,980
========== ==========
See accompanying notes to consolidated financial statements.
27
29
CONSOLIDATED STATEMENTS OF INCOME
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE
DATA)
Interest income:
Interest and fees on loans................................ $337,181 330,309 325,763
Interest and dividends on investment securities:
Taxable................................................. 64,048 75,498 82,836
Exempt from federal income taxes........................ 4,346 5,004 6,347
-------- -------- --------
68,394 80,502 89,183
Interest on federal funds sold............................ 2,250 934 1,681
-------- -------- --------
Total interest income................................... 407,825 411,745 416,627
-------- -------- --------
Interest expense:
Interest on deposits:
Demand-interest bearing................................. 6,467 7,839 9,202
Savings................................................. 30,839 32,446 38,438
Certificates and other time deposits.................... 91,406 95,379 97,518
Interest on securities sold under agreements to repurchase
and other borrowings.................................... 23,657 25,109 35,775
-------- -------- --------
Total interest expense.................................. 152,369 160,773 180,933
-------- -------- --------
Net interest income..................................... 255,456 250,972 235,694
Provision for possible loan losses.......................... 21,593 17,751 19,763
-------- -------- --------
Net interest income after provision for possible loan
losses................................................ 233,863 233,221 215,931
-------- -------- --------
Other income:
Trust department.......................................... 13,442 12,182 10,712
Service charges on deposits............................... 26,100 24,372 20,622
Credit card fees.......................................... 14,355 11,415 9,372
Investment securities gains (losses), net................. 1,957 (1,776) 539
Other operating income.................................... 27,724 36,303 27,272
-------- -------- --------
Total other income...................................... 83,578 82,496 68,517
-------- -------- --------
Other expenses:
Salaries, wages, pension and employee benefits............ 90,949 94,554 107,735
Net occupancy expense..................................... 16,609 17,468 16,598
Equipment expense......................................... 12,717 12,894 13,417
Other operating expenses.................................. 70,805 84,786 90,029
-------- -------- --------
Total other expenses.................................... 191,080 209,702 227,779
-------- -------- --------
Income before federal income taxes and extraordinary
item.................................................. 126,361 106,015 56,669
Federal income taxes........................................ 39,998 35,075 30,950
-------- -------- --------
Income before extraordinary item........................ 86,363 70,940 25,719
-------- -------- --------
Extraordinary item -- gain on disposition of assets after
business combination (net of income tax effect of
$3,015)................................................... -- -- 5,599
-------- -------- --------
Net income.............................................. $ 86,363 70,940 31,318
======== ======== ========
Weighted average number of common shares
outstanding -- basic...................................... 62,717 65,216 66,908
======== ======== ========
Weighted average number of common shares
outstanding -- diluted.................................... 63,537 65,469 67,137
======== ======== ========
Per share data based on average number of shares
outstanding:
Basic net income per share:
Income before extraordinary item........................ $ 1.38 1.09 0.38
Extraordinary item...................................... -- -- 0.09
-------- -------- --------
Basic net income per share.................................. $ 1.38 1.09 0.47
======== ======== ========
Diluted net income per share:
Income before extraordinary item........................ $ 1.36 1.08 0.38
Extraordinary item...................................... -- -- 0.09
-------- -------- --------
Diluted net income per share................................ $ 1.36 1.08 0.47
======== ======== ========
See accompanying notes to consolidated financial statements.
28
30
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------------------------------------------------
NET
UNREALIZED
HOLDING
(LOSSES) TOTAL
COMMON TREASURY AVAILABLE FOR RETAINED SHAREHOLDERS'
STOCK STOCK SALE SECURITIES EARNINGS EQUITY
------ -------- --------------- -------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Balance at December 31, 1994.............. $100,576 (694) (23,205) 446,642 523,319
Net income.............................. -- -- -- 31,318 31,318
Cash dividends ($0.51 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.............................. -- -- -- 70,940 70,940
Cash dividends ($0.55 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.............................. -- -- -- 86,363 86,363
Cash dividends ($0.61 per share)........ -- -- -- (38,447) (38,447)
Stock options exercised................. 2,726 -- -- -- 2,726
Treasury shares purchased............... -- (49,476) -- -- (49,476)
Market adjustment investment
securities........................... -- -- 5,463 -- 5,463
-------- -------- ------- ------- --------
Balance at December 31, 1997.............. $110,069 (108,734) 3,246 525,755 530,336
======== ======== ======= ======= ========
See accompanying notes to consolidated financial statements.
29
31
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income.................................................. $ 86,363 70,940 31,318
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses............................... 21,593 17,751 19,763
Provision for depreciation and amortization............. 10,434 10,120 8,862
Amortization of investment securities premiums, net..... 2,801 4,491 2,592
Amortization of income for lease financing.............. (13,436) (12,656) (8,586)
(Gains) losses on sales of investment securities, net... (1,957) 1,776 (539)
Extraordinary gain on dispositions...................... -- -- (5,599)
Gain on sale of affiliate branches...................... -- (13,210) --
Deferred federal income taxes........................... (6,005) 15,549 2,305
(Increase) decrease in interest receivable.............. 746 2,657 2,356
Increase in interest payable............................ 828 183 5,913
Amortization of values ascribed to acquired
intangibles........................................... 1,868 3,148 3,153
Other increases (decreases)............................. (11,945) (28,508) 41,282
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 91,290 72,241 102,820
--------- --------- ---------
INVESTING ACTIVITIES
Dispositions of investment securities:
Available-for-sale -- sales............................... 209,174 343,600 98,688
Held-to-maturity -- maturities............................ -- -- 432,729
Available-for-sale -- maturities.......................... 226,462 301,468 200,895
Purchases of investment securities held-to-maturity......... -- -- (55,507)
Purchases of investment securities available-for-sale....... (357,335) (437,223) (437,840)
Net (increase) decrease in federal funds sold............... (17,550) (2,975) 1,125
Net (increase) decrease in loans and leases, except sales... (228,247) 33,996 (163,275)
Sales of loans.............................................. 45,651 77,773 80,627
Purchases of premises and equipment......................... (13,602) (22,405) (27,949)
Sales of premises and equipment............................. 5,542 4,304 16,766
Sales of affiliate branches................................. -- 13,210 --
--------- --------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............ (129,905) 311,748 146,259
--------- --------- ---------
FINANCING ACTIVITIES
Net decrease in demand, NOW and savings deposits............ (40,512) (139,000) (143,226)
Net increase (decrease) in time deposits.................... 90,848 (158,050) 103,694
Net increase (decrease) in securities sold under repurchase
agreements and other borrowings........................... 18,054 (63,257) (125,666)
Cash dividends.............................................. (38,447) (36,376) (35,299)
Purchase of treasury shares................................. (49,476) (56,295) (2,269)
Proceeds from exercise of stock options..................... 2,726 3,482 3,285
--------- --------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............ (16,807) (449,496) (199,481)
Increase (decrease) in cash and cash equivalents............ (55,422) (65,507) 49,598
Cash and cash equivalents at beginning of year.............. 222,164 287,671 238,073
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 166,742 222,164 287,671
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Amortized cost of the held-to-maturity portfolio transferred
to the available-for-sale portfolio....................... $ -- -- 578,624
========= ========= =========
Cash paid during the year for:
Interest, net of amounts capitalized........................ $ 79,366 91,158 100,740
Income taxes................................................ $ 41,283 18,293 22,099
========= ========= =========
See accompanying notes to consolidated financial statements.
30
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRSTMERIT CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of FirstMerit Corporation and its
subsidiaries (the "Corporation") conform to generally accepted accounting
principles and to general practices within the banking industry. The
Corporation's activities are considered to be a single industry segment for
financial reporting purposes. The following is a description of the more
significant accounting policies:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of
FirstMerit Corporation (the "Parent Company") and its wholly-owned
subsidiaries: Citizens Investment Corporation, Citizens National Bank,
Citizens Savings Corporation of Stark County, FirstMerit Bank, N.A.,
FirstMerit Community Development Corporation, FirstMerit Credit Life
Insurance Company, Peoples Bank, N.A., and Peoples National Bank. As
of October 14, 1997, The Old Phoenix National Bank of Medina and EST
National Bank were merged into FirstMerit Bank, N. A.
The results of operations of two former wholly-owned subsidiaries,
FirstMerit Bank, FSB (Clearwater, Florida) and FirstMerit Trust
Company, N.A., which were merged as FirstMerit Bank, N.A., are
included in the consolidated statements of income through December 30,
1996. This former subsidiary was sold December 31, 1996.
All significant intercompany balances and transactions have been
eliminated in consolidation.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and related notes. Actual results could differ from those
estimates.
(c) Investment Securities
Debt and equity securities are 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 net of tax as a separate component of shareholders' equity.
Adjustment to fair value of securities classified as trading is
included in earnings. Gains or losses on the sales of investment
securities are recognized upon realization and are determined by the
specific identification method.
The Corporation designated the entire investment portfolio as
available-for-sale. Classification as available-for-sale allows the
Corporation to sell securities to fund liquidity and manage the
Corporation's interest rate risk. The Corporation does not maintain a
trading account.
(d) Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, balances on deposit
with correspondent banks and checks in the process of collection.
(e) Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed on the
straight-line and declining-balance methods over the estimated useful
lives of the assets. Amortization of leasehold improvements is
computed on the straight-line method based on lease terms or useful
lives, whichever is less.
31
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
(f) Loans
Impaired loans are loans for which, based on current information or
events, it is probable that the Corporation will be unable to collect
all amounts due according to the contractual terms of the loan
agreement. Impaired loans are valued based on the present value of the
loans' expected future cash flows at the loans' effective interest
rates, at the loans' observable market price, or the fair value of the
loan collateral.
(g) Interest and Fees on Loans
Interest income on loans is generally accrued on the principal
balances of loans outstanding using the "simple-interest" method. Loan
origination fees and certain direct origination costs are deferred and
amortized, generally over the contractual life of the related loans
using a level yield method. Interest is not accrued on loans for which
circumstances indicate collection is questionable.
(h) Provision for Possible Loan Losses
The provision for possible loan losses charged to operating expenses
is determined based on Management's evaluation of the loan portfolios
and the adequacy of the allowance for possible loan losses under
current economic conditions and such other factors which, in
Management's judgement, deserve current recognition.
(i) Lease Financing
The Corporation leases equipment to customers on both a direct and
leveraged lease basis. The net investment in financing leases includes
the aggregate amount of lease payments to be received and the
estimated residual values of the equipment, less unearned income and
non-recourse debt pertaining to leveraged leases. Income from lease
financing is recognized over the lives of the leases on an approximate
level rate of return on the unrecovered investment. Residual values of
leased assets are reviewed on an annual basis for reasonableness.
Declines in residual values judged to be other than temporary are
recognized in the period such determinations are made.
(j) Mortgage Servicing Fees
The Corporation generally records loan administration fees earned for
servicing loans for investors as income is collected. Earned servicing
fees and late fees related to delinquent loan payments are also
recorded as income is collected.
(k) Federal Income Taxes
The Corporation follows the asset and liability method of accounting
for income taxes. Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing
assets and liabilities. The effect of a change in tax rates is
recognized in income in the period of the enactment date.
(l) Value Ascribed to Acquired Intangibles
The value ascribed to acquired intangibles, including core deposit
premiums, results from the excess of cost over fair value of net
assets acquired in acquisitions of financial institutions. Such values
are being amortized over periods ranging from 10 to 25 years, which
represent the estimated remaining lives of the long-term interest
bearing assets acquired. Amortization is generally computed on an
accelerated basis based on the expected reduction in the carrying
value of such acquired assets. If no significant amount of long-term
interest bearing assets is acquired, such value is amortized over the
estimated life of the acquired deposit base, with amortization periods
ranging from 10 to 15 years.
32
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
(m) Trust Department Assets and Income
Property held by the Corporation in a fiduciary or other capacity for
trust customers is not included in the accompanying consolidated
financial statements, since such items are not assets of the
Corporation. Trust income is reported generally on a cash basis which
approximates the accrual basis of accounting.
(n) Per Share Data
The per share data is based on the weighted average number of common
stock and common stock equivalents outstanding during each year. See
Note 22 to Consolidated Financial Statements for more detailed
information.
(o) Reclassifications
Certain previously reported amounts have been reclassified to conform
to the current reporting presentation.
2. ACQUISITION
On November 2, 1997, the Corporation signed an agreement to acquire
CoBancorp Inc., a bank holding company headquartered in Elyria, Ohio with
consolidated assets of approximately $666 million. CoBancorp Inc. will be merged
with and into the Corporation. Based on the Corporation's December 31, 1997
closing price of $28.375 per share, the value of the transaction is
approximately $174.3 million which is expected to be paid in a combination of
cash and the Corporation's common stock.
Consummation of the merger is expected in the second quarter 1998 subject
to CoBancorp Inc. shareholder's approval and regulatory approval and after the
satisfaction or waiver of all other conditions to the consummation as specified
in the merger agreement. The merger will be accounted for as a purchase
transaction.
3. INVESTMENT SECURITIES
Investment securities are composed of:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
December 31, 1997
Available for sale:
U.S. Treasury securities and U.S. Government
agency obligations.......................... $ 595,364 2,547 2,258 595,653
Obligations of state and political
subdivisions................................ 81,610 207 206 81,611
Mortgage-backed securities.................... 336,821 3,548 255 340,114
Other securities.............................. 97,995 1,564 150 99,409
---------- ------ ------ ---------
$1,111,790 7,866 2,869 1,116,787
========== ====== ====== =========
December 31, 1996
Available for sale:
U.S. Treasury securities and U.S. Government
agency obligations.......................... $ 660,199 1,517 5,975 655,741
Obligations of state and political
subdivisions................................ 93,694 547 654 93,587
Mortgage-backed securities.................... 324,818 2,458 1,999 325,277
Other securities.............................. 112,224 1,434 739 112,919
---------- ------ ------ ---------
$1,190,935 5,956 9,367 1,187,524
========== ====== ====== =========
33
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The amortized cost and market value of investment securities including
mortgage-backed securities at December 31, 1997, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities based
on the issuers' rights to call or prepay obligations with or without call or
prepayment penalties.
AMORTIZED MARKET
COST VALUE
---------- ---------
Due in one year or less..................................... $ 133,474 133,384
Due after one year through five years....................... 278,657 279,747
Due after five years through ten years...................... 163,250 164,178
Due after ten years....................................... 536,409 539,478
---------- ---------
$1,111,790 1,116,787
========== =========
Proceeds from sales of investment securities during the years ended
December 31, 1997 and 1996 were $206,054 and $343,600, respectively. Gross gains
of $2,531 and $2,003 and gross losses of $574 and $3,779 were realized on these
sales, respectively.
The carrying value of investment securities pledged to secure trust and
public deposits and for purposes required or permitted by law amounted to
$830,049 and $724,886 at December 31, 1997 and December 31, 1996, respectively.
4. LOANS
Loans consist of the following:
DECEMBER 31,
-----------------------
1997 1996
---------- ---------
Commercial, financial and agricultural...................... $ 875,715 748,858
Loans to individuals, net of unearned income................ 833,146 811,561
Real estate................................................. 1,982,059 1,936,342
Lease financing............................................. 143,955 159,237
---------- ---------
$3,834,875 3,655,998
========== =========
The Corporation grants loans principally to customers located within the
State of Ohio.
Information with respect to impaired loans is as follows:
DECEMBER 31,
------------------
1997 1996
------- -----
Impaired Loans.............................................. $11,276 9,671
Allowance for Possible Loan Losses.......................... $ 2,280 1,913
Interest Recognized......................................... $ 460 622
======= =====
Earned interest on impaired loans is recognized as income is collected.
The Corporation makes loans to officers on the same terms and conditions as
made available to all employees and to directors on substantially the same terms
and conditions as transactions with other parties. An
34
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
analysis of loan activity with related parties for the years ended December 31,
1997 and 1996 is summarized as follows:
1997 1996
-------- --------
Aggregate amount at beginning of year....................... $ 41,308 34,173
Additions (deductions):
New loans................................................. 8,288 16,549
Repayments................................................ (16,694) (6,002)
Changes in directors and their affiliations............... (542) (3,412)
-------- --------
Aggregate amount at end of year............................. $ 32,360 41,308
======== ========
5. ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses are summarized as
follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Balance at beginning of year................................ $ 49,336 46,840 35,834
Additions (deductions):
Provision for possible loan losses........................ 21,593 17,751 19,763
Loans charged off......................................... (27,261) (20,841) (12,925)
Recoveries on loans previously charged off................ 10,106 5,975 4,168
Decrease from sale of subsidiary.......................... (389)
-------- -------- --------
Balance at end of year...................................... $ 53,774 49,336 46,840
======== ======== ========
6. MORTGAGE SERVICING RIGHTS AND MORTGAGE SERVICING
In accordance with Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights," and Statement No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," when the Corporation intends to sell originated or purchased loans
and retain the related servicing rights, it allocates a portion of the total
costs of the loans to the servicing rights based on estimated fair value. Fair
value is estimated based on market prices, when available, or the present value
of future net servicing income, adjusted for such factors as discount rates and
prepayments. Servicing rights are amortized over the average life of the loans
using the net cash flow method.
The components of mortgage servicing rights are as follows:
1997 1996
------ -----
Balance at January 1, net................................... $2,301 15
Additions................................................... 2,219 2,434
Scheduled amortization...................................... (593) (148)
Less: allowance for impairment.............................. 0 0
------ -----
Balance at December 31...................................... $3,927 2,301
====== =====
In 1997 and 1996, the Corporation's income before federal income taxes was
increased by approximately $1.6 million and $2.3 million, respectively, as a
result of compliance with the accounting Statements mentioned previously. The
consolidated financial statements for 1995 were prepared in accordance with
Statement of Financial Accounting Standards No. 65 "Accounting for Certain
Mortgage Banking Activities," which provided for servicing rights to be recorded
on purchased loans, but not originated loans.
35
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Accounting regulations also require the Corporation to assess its
capitalized servicing rights for impairment based on their current fair value.
As permitted by the regulations, the Corporation disaggregates its servicing
rights portfolio based on loan type and interest rate which are the predominant
risk characteristics of the underlying loans. If any impairment results after
current market assumptions are applied, the value of the servicing rights is
reduced through the use of a valuation allowance.
At December 31, 1997 and 1996, the Corporation serviced for others
approximately $890 million and $871 million, respectively. The following table
provides servicing information for 1997:
1997 1996
-------- --------
Balance January 1........................................... $871,057 716,852
Additions:
Loans originated and sold to investors.................... 105,508 126,861
Existing loans sold to investors.......................... 100,670 167,746
Reductions:
Sale of servicing rights.................................. -- --
Loans sold servicing released............................. (5,311) --
Regular amortization, prepayments and foreclosures........ (181,739) (140,402)
-------- --------
Balance December 31......................................... $890,185 871,057
======== ========
7. RESTRICTIONS ON CASH AND DIVIDENDS
The average balance on deposit with the Federal Reserve Bank to satisfy
reserve requirements amounted to $9,505 during 1997. The level of this balance
is based upon amounts and types of customers' deposits held by the banking
subsidiaries of the Corporation. In addition, deposits are maintained with other
banks at levels determined by Management based upon the volumes of activity and
prevailing interest rates to compensate for check-clearing, safekeeping,
collection and other bank services performed by these banks. At December 31,
1997, cash and due from banks included $4,255 deposited with the Federal Reserve
Bank and other banks for these reasons.
Dividends paid by the subsidiaries are the principal source of funds to
enable the payment of dividends by the Corporation to its shareholders. These
payments by the subsidiaries in 1998 are restricted by the regulatory agencies
principally to the total of 1998 net income. Regulatory approval must be
obtained for the payment of dividends of any greater amount.
8. PREMISES AND EQUIPMENT
The components of premises and equipment are as follows:
DECEMBER 31,
-------------------- ESTIMATED
1997 1996 USEFUL LIVES
-------- -------- ------------
Land...................................................... $ 11,129 11,425 --
Buildings................................................. 82,841 81,642 10-35 yrs
Equipment................................................. 62,191 58,126 3-15 yrs
Leasehold improvements.................................... 13,093 13,124 1-20 yrs
-------- -------- ---------
169,254 164,317
Less accumulated depreciation and amortization............ 69,489 62,178
-------- --------
$ 99,765 102,139
======== ========
Amounts included in other expenses for depreciation and amortization
aggregated $10,434, $10,120 and $8,862 for the years ended December 31, 1997,
1996 and 1995, respectively.
36
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
At December 31, 1997, the Corporation was obligated for rental commitments
under noncancelable operating leases on branch offices and equipment as follows:
YEARS ENDING LEASE
DECEMBER 31, COMMITMENTS
- - ------------ -----------
1998 $ 6,968
1999 6,186
2000 4,928
2001 4,411
2002 3,404
2003-2010 5,637
-------
$31,534
=======
Rentals paid under noncancelable operating leases amounted to $7,688,
$8,819 and $9,574 in 1997, 1996 and 1995, respectively.
9. CERTIFICATES AND OTHER TIME DEPOSITS
The aggregate amounts of certificates and other time deposits of $100 and
over at December 31, 1997 and 1996 were $405,931 and $271,634, respectively.
Interest expense on these certificates and time deposits amounted to $19,257 in
1997, $13,016 in 1996, and $14,360 in 1995.
10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
At December 31, 1997, 1996 and 1995, securities sold under agreements to
repurchase totaled $417,833, $368,566, and $336,033, respectively. The average
balance of securities sold under agreements to repurchase and other borrowings
for the years ended December 31, 1997, 1996 and 1995, amounted to $477,454,
$515,556, and $609,247, respectively. In 1997, the weighted average annual
interest rate amounted to 4.96%, compared to 4.87% in 1996, and 5.87% in 1995.
The maximum amount of these borrowings at any month end amounted to $557,738 in
1997, $608,782 in 1996, and $740,586 in 1995.
At December 31, 1997, 1996, and 1995, the Corporation had $17,922, $55,135,
and $75,875, respectively, of Federal Home Loan Bank advances. The 1997 balance
includes: $11,000 that have maturities within one year with an interest rate of
5.40%; $1,257 with maturities over one year to five years with interest rates of
4.65% to 8.10%; and $5,665 over five years with interest rates of 4.75% to
8.05%.
At December 31, 1997, the Corporation had an outstanding balance on a line
of credit with another financial institution totaling $6.0 million with an
interest rate of 6.01%. The interest rate on this debt is variable and
approximates one-month LIBOR plus 37.5 basis points.
Residential mortgage loans totaling $26,883, $82,702, and $107,813 at
December 31, 1997, 1996 and 1995, respectively, were pledged to secure FHLB
advances.
11. FEDERAL INCOME TAXES
Federal income taxes are comprised of the following:
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
Taxes currently payable..................................... $46,000 19,526 31,660
Deferred expense (benefit).................................. (6,002) 15,549 2,305
------- ------- -------
$39,998 35,075 33,965
37
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Actual Federal income tax expense differs from expected Federal income tax
as shown below:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
----- ----- -----
Statutory rate.............................................. 35.0% 35.0% 35.0%
Increase (decrease) in rate due to:
Interest income on tax-exempt securities and tax-free
loans, net............................................. -1.3% -1.9% -3.8%
Goodwill amortization..................................... 0.3% 1.5% 0.9%
Reduction to tax reserves................................. -1.1% -1.4% -0.4%
Loan loss recapture at acquisition........................ 0.0% 0.0% 19.0%
Merger expenses at acquisition............................ 0.0% 0.0% 1.4%
Other..................................................... -1.2% -0.1% -0.1%
---- ---- ----
Effective tax rates......................................... 31.7% 33.1% 52.0%
==== ==== ====
For 1997, 1996 and 1995, the deferred income tax expense results from
temporary differences in the recognition of income and expense for Federal
income tax and financial reporting purposes. The sources and tax effect of these
temporary differences are presented below:
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
Loan loss provision......................................... $(4,492) 6,323 (2,205)
Depreciation................................................ 198 (232) 375
Deferred loan fees, net..................................... 334 631 1,487
Leasing..................................................... (3,683) 6,708 8,442
FAS 106 postretirement benefits............................. (1,050) (1,012) (434)
FAS 87 pension expense...................................... 1,333 1,678 (1,767)
FHLB stock dividends........................................ 927 844 771
Severance costs............................................. 0 1,315 (1,315)
Valuation reserves.......................................... 633 675 (526)
Other....................................................... (202) (1,381) (2,523)
------- ------- -------
Total deferred income tax................................... $(6,002) 15,549 2,305
======= ======= =======
Principal components of the Corporation's net deferred tax (liability) are
summarized as follows:
DECEMBER 31,
--------------------
1997 1996
-------- --------
Excess of book loan provision over tax loan provision....... $ 9,746 5,254
Excess of tax depreciation over book depreciation........... (4,056) (3,858)
Leasing book basis income over tax basis.................... (24,331) (28,014)
Deferred loan fees tax basis income over book basis......... 596 930
Postretirement book basis expense over tax basis............ 4,734 3,684
Pension book basis expense over tax basis................... (1,212) 121
FHLB stock book basis over tax basis........................ (4,857) (3,930)
Security portfolio tax basis over book basis................ (1,694) 1,192
Severance costs book basis over tax basis................... -- --
Valuation reserves book basis over tax basis................ 147 780
Other....................................................... 3,277 3,075
-------- --------
Total net deferred tax (liability).......................... $(17,650) (20,766)
======== ========
38
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
12. BENEFIT PLANS
The Corporation has a defined benefit pension plan covering substantially
all of its employees. In general, benefits are based on years of service and the
employee's compensation. The Corporation's funding policy is to contribute
annually the maximum amount that can be deducted for federal income tax
reporting purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future.
A supplemental non-qualified, non-funded pension plan for certain officers
is also maintained and is being provided for by charges to earnings sufficient
to meet the projected benefit obligation. The pension cost for this plan is
based on substantially the same actuarial methods and economic assumptions as
those used for the defined benefit pension plan.
The following table sets forth the plans' funded status and amounts
recognized in the Corporation's consolidated financial statements. The 1997
amounts shown reflect a change in the measurement date from December 31 to
September 30, 1997. Amounts shown for 1996 and 1995 have not been restated to
show the change in the measurement date.
DECEMBER 31,
SEPTEMBER 30, --------------------
1997 1996 1995
------------- -------- --------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $49,365, $49,703 and $48,567,
respectively........................................ $(55,386) (55,222) (54,780)
======== ======== ========
Projected benefit obligation............................. (70,719) (70,119) (73,926)
Plan assets at fair value, primarily U.S. government
obligations, corporate bonds and investments in
equity funds........................................ 80,877 71,929 67,035
-------- -------- --------
Plan assets in excess of projected benefit obligation.... 10,158 1,810 (6,891)
Unrecognized net (gains) losses.......................... (8,450) (3,215) 675
Unrecognized prior service cost.......................... 3,707 3,311 3,340
Remaining unrecognized net asset being amortized over
employees' average remaining service life.............. (792) (999) (1,206)
-------- -------- --------
Prepaid (accrued) pension cost........................... $ 4,623 907 (4,082)
======== ======== ========
Expected long-term rate of return on assets.............. 9.00% 9.00% 9.00%
Weighted-average discount rate........................... 7.50% 7.50% 7.25%
Rate of increase in future compensation levels........... 4.75% 4.75% 4.75%
======== ======== ========
Net pension cost consists of the following components:
1997 1996 1995
------- ------- -------
Service cost................................................ $ 3,379 3,728 3,290
Interest cost on projected benefit obligation............... 4,880 4,978 5,175
Actual return on plan assets................................ (9,453) (3,827) (8,563)
Net total of other components............................... 3,202 (2,197) 2,976
------- ------- -------
Net periodic pension cost................................... $ 2,008 2,682 2,878
======= ======= =======
The Corporation maintains a savings plan under Section 401(k) of the
Internal Revenue Code, covering substantially all full-time and part-time
employees after six months of continuous employment. Under the plan, employee
contributions are partially matched by the Corporation. Such matching becomes
vested when the employee reaches five years of credited service. Total savings
plan expense was $2,086, $2,108 and $2,294 for 1997, 1996 and 1995,
respectively.
39
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
13. POSTRETIREMENT MEDICAL AND LIFE INSURANCE PLAN
The Corporation has a benefit plan which presently provides postretirement
medical and life insurance for retired employees. Effective January 1, 1993, the
plan was changed to limit the Corporation's medical contribution to 200% of the
1993 level for employees who retire after January 1, 1993. The Corporation
reserves the right to terminate or amend the plan at any time.
The cost of postretirement benefits expected to be provided to current and
future retirees is accrued over those employees' service periods. Prior to 1993,
postretirement benefits were accounted for on a cash basis. In addition to
recognizing the cost of benefits for the current period, recognition is being
provided for the cost of benefits earned in prior service periods (the
transition obligation). The Corporation has elected to amortize the transition
obligation by charges to income over a twenty year period on a straight line
basis.
The following table sets forth the plan's status and amounts recognized in
the Corporation's consolidated financial statements. Beginning in 1997, the
plan's measurement date was changed from December 31 to September 30.
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
Accumulated postretirement benefit obligation:
Retirees.................................................. $(16,861) (20,259)
Fully eligible actives.................................... (2,910) (2,882)
Other actives............................................. (8,092) (7,747)
-------- --------
Total accumulated postretirement benefit obligation......... (27,863) (30,888)
Unrecognized prior net loss................................. 1,665 6,394
Unrecognized prior service costs............................ -- --
Unrecognized transition obligation.......................... 12,308 13,129
-------- --------
Accrued postretirement benefit cost......................... $(13,890) (11,365)
======== ========
Net postretirement benefit cost includes:
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
Service cost................................................ $ 958 945
Interest cost............................................... 2,157 2,133
Actual return on plan assets................................ -- --
Amortization of transition obligation....................... 820 821
Net of other amortization and deferrals..................... 144 323
-------- --------
Net periodic postretirement cost............................ $ 4,079 4,222
======== ========
The following actuarial assumptions effect the determination of these
amounts:
PLAN YEAR JANUARY 1,
------------------------
1997 1996
---------- ----------
Expected long-term rate of return on assets................. N/A N/A
Weighted-average discount rate.............................. 7.50% 7.25%
Medical trend rates:
Pre-65.................................................... 12.4%-6.0% 12.4%-6.0%
Post-65................................................... 11.8%-6.1% 11.8%-6.1%
40
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Shown below is the impact of a 1% increase in the medical trend rates
(i.e., 10.0% for 1998 grading down to 6.0% in 2002. This information is required
disclosure under SFAS No. 106.
CURRENT
TREND TREND +1% % CHANGE
------- --------- --------
Aggregate of the service and interest components of net
periodic postretirement health care benefit cost.......... $ 2,564 2,926 14.1%
Accumulated postretirement benefit obligation for health
care benefits............................................. 25,124 28,064 11.7%
14. STOCK OPTIONS
The Corporation's 1982, 1992, and 1997 Stock Plans (the "Plans") provide
incentive options to certain key employees for up to 4,200,000 common shares of
the Corporation. In addition, these Plans provide for the granting of
non-qualified stock options to certain non-employee directors of the Corporation
for which 200,000 common shares of the Corporation have been reserved.
Outstanding options under these Plans are generally not exerciseable for at
least six months from date of grant.
Options under these Plans are granted at 100% of the fair market value.
Options granted as incentive stock options must be exercised within ten years
and options granted as non-qualified stock options have terms established by the
Compensation Committee of the Board and approved by the non-employee directors
of the Board. Options are cancelable within defined periods based upon the
reason for termination of employment.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Corporation continues to account for its stock option plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to
Employees," and makes no charges against income with respect to options granted.
However, SFAS No. 123 does require the disclosure of the pro forma effect
on net income and earnings per share that would result if the fair value
compensation element were to be recognized as expense. The following table shows
the pro forma earnings and earnings per share for 1997, 1996, and 1995 along
with significant assumptions used in determining the fair value of the
compensation amounts.
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
Pro forma amounts:
Net income................................................ $ 85,178 67,825 30,377
Earnings per share (basic)................................ 1.36 1.04 0.45
Earnings per share (diluted).............................. 1.34 1.04 0.45
Assumptions:
Dividend yield............................................ 3.5% 4.4% 4.4%
Expected volatility....................................... 23.3% 23.3% 23.7%
Risk free interest rate................................... 5.8%-6.8% 5.2%-6.7% 6.3%-7.3%
Expected lives............................................ 5 yrs. 5-6 yrs. 5 yrs.
41
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
A summary of stock option activity for the last two years follows:
AVAILABLE RANGE OF OPTION AVERAGE OPTION
FOR GRANT OUTSTANDING PRICE PER SHARE PRICE PER SHARE
---------- ----------- --------------- ---------------
Balance
December 31, 1995.................. 1,634,660 1,308,856 2.16 - 12.10
Canceled........................ -- (26,580)
Exercised....................... -- (490,794) 2.16 - 12.10 $ 7.39
Granted......................... (1,157,980) 1,157,980 14.75 - 16.97 14.77
---------- --------- -------------- ------
Balance
December 31, 1996.................. 476,680 1,949,462 2.31 - 16.97 13.12
New shares reserved............. 2,200,000 --
Canceled........................ -- (181,260) 3.50 - 8.27 7.28
Exercised....................... -- (285,385) 2.31 - 15.44 9.89
Granted......................... (262,714) 262,714 2.31 - 26.00 20.58
---------- --------- -------------- ------
Balance
December 31, 1997.................. 2,413,966 1,745,531 $ 2.31 - 26.00 $14.75
========== ========= ============== ======
The ranges of exercise prices and the remaining contractual life of options
as of December 31, 1997 were:
$2-$9 $10-$18 $19-$26
RANGE OF EXERCISE PRICES ------ --------- -------
Options outstanding:
Outstanding as of December 31, 1997......................... 30,364 1,501,353 213,814
Wtd-avg remaining contractual life (in years)............... 2.12 7.69 9.26
Weighted-average exercise price............................. $ 7.20 14.13 21.03
Options exerciseable:
Outstanding as of December 31, 1997......................... 30,364 805,520 189,314
Wtd-avg remaining contractual life (in years)............... 2.12 7.26 9.25
Weighted-average exercise price............................. $ 7.20 13.44 20.58
The Employee Stock Purchase Plan provides full-time and part-time employees
of the Corporation the opportunity to acquire common shares on a payroll
deduction basis. Shares available under the Employee Stock Purchase Plan are
purchased at 85% of their fair market value on the business day immediately
preceding the semi-annual grant-date Of the 400,000 shares available under the
Plan, there were 19,204 and 12,512 shares issued in 1997 and 1996, respectively.
15. PARENT COMPANY
Condensed financial information of FirstMerit Corporation (Parent Company
only) is as follows:
DECEMBER 31,
------------------
1997 1996
CONDENSED BALANCE SHEETS -------- -------
ASSETS
Cash and due from banks..................................... $ 26,627 21,897
Investment securities....................................... 1,207 1,161
Loans to subsidiaries....................................... 66,000 40,789
Investment in subsidiaries, at equity in underlying value of
their net assets.......................................... 429,770 430,708
Net loans................................................... 16,953 30,179
Goodwill.................................................... 133 267
Other assets................................................ 9,200 10,386
-------- -------
$549,890 535,387
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued and other liabilities............................... $ 19,554 11,680
Shareholders' equity........................................ 530,336 523,707
-------- -------
$549,890 535,387
======== =======
42
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
CONDENSED STATEMENTS OF INCOME -------- ------- -------
Income:
Cash dividends from subsidiaries............................ $ 87,500 73,800 87,400
Other income................................................ 64,910 60,348 37,069
-------- ------- -------
152,410 134,148 124,469
Interest and other expenses................................. 65,161 59,970 59,652
-------- ------- -------
Income before federal income tax benefit and equity in
undistributed income of subsidiaries...................... 87,249 74,178 64,817
Federal income tax (benefit)................................ (1,248) (1,189) 5,215
-------- ------- -------
88,497 75,367 59,602
Equity in undistributed income (loss) of subsidiaries,
including extraordinary gain in 1995 of $5,599............ (2,134) (4,427) (28,284)
-------- ------- -------
Net income.................................................. $ 86,363 70,940 31,318
======== ======= =======
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
CONDENSED STATEMENTS OF CASH FLOWS -------- -------- -------
Operating activities:
Net income.................................................. $ 86,363 70,940 31,318
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed income of subsidiaries.............. 2,134 4,427 28,284
Gain on sale of assets -- FirstMerit Bank, N.A.............. -- (490) --
Cash received on FirstMerit Bank, N.A. sale................. -- 13,060 --
Addition to Provision for loan losses....................... 1,097 -- 1,100
Other....................................................... 7,397 3,396 12,190
-------- -------- -------
Net cash provided by operating activities................... 96,991 91,333 72,892
-------- -------- -------
Investing activities:
Proceeds from maturities of investment securities........... -- -- 10,262
Loans to subsidiaries....................................... (8,211) 63,228 (47,954)
Payments for investments in and advances to subsidiaries.... (10,840) -- --
Net increase (decreases) in loans........................... 12,100 (31,208) --
Purchases of investment securities.......................... (113) (133) (196)
-------- -------- -------
Net cash (used) provided by investing activities............ (7,064) 31,887 (37,888)
-------- -------- -------
Financing activities:
Cash dividends.............................................. (38,447) (36,376) (35,299)
Proceeds from exercise of stock options..................... 2,726 3,482 3,285
Purchase of treasury shares................................. (49,476) (56,295) (2,269)
Loans made to FirstMerit Bank, N.A.......................... -- (17,000) --
-------- -------- -------
Net cash used by financing activities....................... (85,197) (106,189) (34,283)
-------- -------- -------
Net increase in cash and cash equivalents................... 4,730 17,031 721
Cash and cash equivalents at beginning of year.............. 21,897 4,866 4,145
-------- -------- -------
Cash and cash equivalents at end of year.................... $ 26,627 21,897 4,866
======== ======== =======
43
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
16. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Disclosures of fair value information about certain financial instruments,
whether or not recognized in the consolidated balance sheets are provided as
follows. Instruments for which quoted market prices are not available are valued
based on estimates using present value or other valuation techniques whose
results are significantly affected by the assumptions used, including discount
rates and future cash flows. Accordingly, the values so derived, in many cases,
may not be indicative of amounts that could be realized in immediate settlement
of the instrument. Also, certain financial instruments and all non-financial
instruments are excluded from these disclosure requirements. For these and other
reasons, the aggregate fair value amounts presented below are not intended to
represent the underlying value of the Corporation.
The following methods and assumptions were used to estimate the fair values
of each class of financial instrument presented:
Investment securities -- Fair values are based on quoted prices, or
for certain fixed maturity securities not actively traded estimated values
are obtained from independent pricing services.
Federal funds sold -- The carrying amount is considered a reasonable
estimate of fair value.
Net loans -- Fair value for loans with interest rates that fluctuate
as current rates change are generally valued at carrying amounts with an
appropriate discount for any credit risk. Fair values of other types of
loans are estimated by discounting the future cash flows using the current
rates for which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Cash and due from banks -- The carrying amount is considered a
reasonable estimate of fair value.
Accrued interest receivable -- The carrying amount is considered a
reasonable estimate of fair value.
Deposits -- The carrying amount is considered a reasonable estimate of
fair value for demand and savings deposits and other variable rate deposit
accounts. The fair values for fixed maturity certificates of deposit and
other time deposits are estimated using the rates currently offered for
deposits of similar remaining maturities.
Securities sold under agreements to repurchase and other borrowings.
Fair values are estimated using rates currently available to the
Corporation for similar types of borrowing transactions.
Accrued interest payable -- The carrying amount is considered a
reasonable estimate of fair value.
Commitments to extend credit -- The fair value of commitments to
extend credit is estimated using the fees currently charged to enter into
similar arrangements, taking into account the remaining terms of the
agreements, the creditworthiness of the counterparties, and the difference,
if any, between current interest rates and the committed rates.
Standby letters of credit and financial guarantees written -- Fair
values are based on fees currently charged for similar agreements or on the
estimated cost to terminate or otherwise settle the obligations.
Loans sold with recourse -- Fair value is estimated based on the
present value of the estimated future liability in the event of default.
44
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
The estimated fair values of the Corporation's financial instruments based on
the assumptions described above are as follows:
DECEMBER 31,
------------------------------------------------
1997 1996
----------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- --------- ----------
Financial assets:
Investment securities.............................. $1,116,787 1,116,787 1,187,524 1,187,524
Federal funds sold................................. 33,100 33,100 15,550 15,550
Net loans....................................... 3,781,101 3,786,953 3,606,662 3,585,534
Cash and due from banks............................ 166,742 166,742 222,164 222,164
Accrued interest receivable........................ 32,945 32,945 33,730 33,730
Financial liabilities:
Deposits........................................ 4,255,211 4,260,251 4,204,875 4,209,789
Securities sold under agreements to repurchase and
other borrowings................................ 441,755 441,926 423,701 423,852
Accrued interest payable........................... 17,291 17,291 16,433 16,433
Unrecognized financial instruments:
Commitments to extend credit....................... -- -- -- --
Standby letters of credit and financial guarantees
written......................................... -- -- -- --
Loans sold with recourse........................... -- -- -- --
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit, financial guarantees, and loans sold with recourse.
These instruments involve, to varying degrees, elements recognized in the
consolidated balance sheets. The contract or notional amount of these
instruments reflect the extent of involvement the Corporation has in particular
classes of financial instruments.
The Corporation's exposure to credit loss in the event of non-performance
by the other party to the financial instrument for commitments to extend credit
and standby letters of credit and financial guarantees written is represented by
the contractual notional amount of those instruments. The Corporation uses the
obligations as it does for on-balance-sheet instruments.
Unless noted otherwise, the Corporation does not require collateral or
other security to support financial instruments with credit risk. The following
table sets forth financial instruments whose contract amounts represent credit
risk.
DECEMBER 31,
----------------------
1997 1996
---------- ---------
Commitments to extend credit................................ $1,508,351 1,295,118
========== =========
Standby letters of credit and
financial guarantees written................................ $ 114,304 89,404
========== =========
Loans sold with recourse.................................... $ 1,058 1,361
========== =========
Commitments to extend credit are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally are extended at the then prevailing interest rates, have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the
45
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Corporation evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained if deemed necessary by the Corporation upon
extension of credit is based on Management's credit evaluation of the counter
party. Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment, and income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Corporation to guarantee the performance of a customer
to a third party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond financing and
similar transactions. Except for short-term guarantees of $33,796 and $30,965 at
December 31, 1997 and 1996, respectively, the remaining guarantees extend in
varying amounts through 2020. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extend- ing loan facilities
to customers. Collateral held varies, but may include marketable securities,
equipment and real estate. In recourse arrangements, the Corporation accepts
100% recourse. By accepting 100% recourse, the Corporation is assuming the
entire risk of loss due to borrower default. The Corporation's exposure to
credit loss, if the borrower completely failed to perform and if the collateral
or other forms of credit enhancement all prove to be of no value, is represented
by the notional amount less any allowance for possible loan losses. The
Corporation uses the same credit policies originating loans which will be sold
with recourse as it does for any other type of loan.
18. EXTRAORDINARY GAIN AND UNUSUAL CHARGES
During the third quarter 1996, the corporation recorded a one-time Savings
Association Insurance Fund ("SAIF") recapitalization charge that totaled $10.2
million. The charge was mandated by legislation passed by Congress and signed
into law September 30, 1996.
During 1995, the Corporation recognized an extraordinary gain of $5.6
million, net of taxes of $3.0 million, from the sale of several apartment
complexes formerly owned by a CIVISTA subsidiary. Other 1995 unusual charges
totaled $36.3 million of which $16.2 million related to lost tax benefits, $17.9
million were associated with reengineering costs, and $2.2 million were
severance expenses.
19. CONTINGENCIES
The nature of the Corporation's business results in a certain amount of
litigation. Accordingly, FirstMerit Corporation and its subsidiaries are subject
to various pending and threatened lawsuits in which claims for monetary damages
are asserted. Management, after consultation with legal counsel, is of the
opinion that the ultimate liability of such pending matters would not have a
material effect on the Corporation's financial condition or results of
operations.
46
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial and per share data for the years ended December 31,
1997 and 1996 are summarized as follows:
QUARTERS
-----------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
IN THOUSANDS (EXCEPT PER SHARE DATA)
Total interest income..................... 1997 $ 98,562 102,215 102,510 104,538
==== ======== ======= ======= =======
1996 $101,627 103,385 104,362 102,371
==== ======== ======= ======= =======
Net interest income....................... 1997 $ 62,504 64,241 63,795 64,916
==== ======== ======= ======= =======
1996 $ 60,390 63,505 63,928 63,149
==== ======== ======= ======= =======
Provision for possible loan losses........ 1997 $ 4,161 5,033 6,182 6,217
==== ======== ======= ======= =======
1996 $ 2,957 3,170 3,485 8,139
==== ======== ======= ======= =======
Income (loss) before federal income
taxes................................... 1997 $ 30,172 31,447 31,832 32,910
==== ======== ======= ======= =======
1996 $ 28,817 28,679 19,835 28,684
==== ======== ======= ======= =======
Net income................................ 1997 $ 20,233 21,319 22,013 22,798
==== ======== ======= ======= =======
1996 $ 19,253 19,221 13,447 19,019
==== ======== ======= ======= =======
Net income per share -- basic............. 1997 $ 0.32 0.34 0.35 0.37
==== ======== ======= ======= =======
1996 $ 0.29 0.30 0.21 0.30
==== ======== ======= ======= =======
Net income per share -- diluted........... 1997 $ 0.32 0.33 0.35 0.36
==== ======== ======= ======= =======
1996 $ 0.29 0.29 0.21 0.29
==== ======== ======= ======= =======
21. SHAREHOLDER RIGHTS PLAN
The Corporation has in effect a shareholder rights plan ("Plan"). The Plan
provides that each share of Common Stock has one right attached. Under the Plan,
subject to certain conditions, the Rights would be distributed after either of
the following events: (1) a person acquires 10% or more of the Common Stock of
the Corporation, or (2) the commencement of a tender offer that would result in
a change in the ownership of 10% or more of the Common Stock. After such an
event, each Right would entitle the holder to purchase shares of Series A
Preferred Stock of the Corporation. Subject to certain conditions, the
Corporation may redeem the Rights for $0.01 per Right.
22. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 ("SFAS 128"), "Earnings per Share" ("EPS"). SFAS 128 simplifies the
standards for computing EPS 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 income statement and a reconciliation
of the numerator and denominator used in the basic EPS calculation to the
numerator and denominator used in the diluted EPS calculation. Basic EPS
excludes dilution and is computed by dividing net income by the weighted-average
common shares outstanding. Diluted EPS reflects the dilution that would occur
47
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
if securities or other contracts to issue common stock were exercised or
converted to common stock (e.g., exercising of common stock options).
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Basic EPS:
Net income.................................................. $86,363 62,717 $1.38
======= =====
Effect of dilutive stock options............................ 820
------
Diluted EPS:
Net income + assumed exercising of options.................. $86,363 63,537 $1.36
======= ====== =====
FOR THE YEAR ENDED DECEMBER 31, 1996
---------------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Basic EPS:
Net income $70,940 65,216 $1.09
======= =====
Effect of dilutive stock options............................ 253
------
Diluted EPS:
Net income + assumed exercising of options.................. $70,940 65,469 $1.08
======= ====== =====
FOR THE YEAR ENDED DECEMBER 31, 1995
-----------------------------------------
PER
SHARES INCOME SHARE
(DENOMINATOR) (NUMERATOR) AMOUNT
------------- ----------- ---------
Basic EPS:
Net income................................................ $25,719 66,908 $0.38
======= =====
Effect of dilutive stock options............................ 229
------
Diluted EPS:
Net income + assumed exercising of options............. $25,719 67,137 $0.38
======= ====== =====
23. REGULATORY MATTERS
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to quantitative judgements
by regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes, as of December 31, 1997, the
Corporation meets all capital adequacy requirements to which it is subject. The
capital terms used in this note to the consolidated financial statements are
defined in the regulations as well as in the "Capital Resources" section of
Management's Discussion and Analysis of financial condition and results of
operations.
48
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRSTMERIT CORPORATION AND SUBSIDIARIES
As of December 31, 1997, the most recent notification from the Office of
the Comptroller of the Currency ("OCC") categorized the Corporation as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Corporation must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table. In management's opinion, there are no conditions or events since the
OCC's notification that have changed the Corporation's categorization as "well
capitalized."
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
---------------- ------------------ --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets)............... $568,886 13.55% *335,984 8.0% *419,980 *10.00%
Tier I Capital
(to Risk Weighted Assets)............... 516,388 12.30% *167,992 4.0% *251,988 *6.00%
Tier I Capital
(to Average Assets)..................... 516,388 9.66% *213,909 4.0% *267,387 *5.00%
* Greater than or equal to.
49
51
MANAGEMENT'S REPORT
The management of FirstMerit Corporation is responsible for the preparation
and accuracy of the financial information presented in this annual report. These
consolidated financial statements were prepared in accordance with generally
accepted accounting principles, based on the best estimates and judgement of
management.
The Corporation maintains a system of internal controls designed to provide
reasonable assurance that assets are safeguarded, that transactions are executed
in accordance with the Corporation's authorization and policies, and that
transactions are properly recorded so as to permit preparation of financial
statements that fairly present the financial position and results of operations
in conformity with generally accepted accounting principles. These systems and
controls are reviewed by our internal auditors and independent auditors.
The Audit Committee of the Board of Directors is composed of only outside
directors and has the responsibility for the recommendation of the independent
auditors for the Corporation. The Audit Committee meets regularly with
management, internal auditors and our independent auditors to review accounting,
auditing and financial matters. The independent auditors and the internal
auditors have free access to the Audit Committee.
/s/ JOHN R. COCHRAN /S/ JACK R. GRAVO
CHAIRMAN AND CHIEF EXECUTIVE VICE PRESIDENT
EXECUTIVE OFFICER FINANCE AND ADMINISTRATION
50
52
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of FirstMerit
corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our option.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FirstMerit
Corporation and subsidiaries as of December 31, 1997 and 1996 and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand LLP
Akron, OH
January 15, 1998
51
53
AVERAGE CONSOLIDATED BALANCE SHEETS
FULLY-TAX EQUIVALENT INTEREST RATES AND INTEREST DIFFERENTIAL
FIRSTMERIT CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------- --------- -------- ------- --------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Investment securities:
U.S. Treasury securities
and U.S. Government
agency obligations
(taxable)............... $ 906,305 57,484 6.34% 1,110,581 69,010 6.21 1,218,604 75,759 6.22
Obligations of states and
political subdivisions
(tax-exempt)............ 86,873 7,074 8.14 100,630 7,404 7.36 122,244 9,369 7.66
Other securities.......... 102,327 6,568 6.42 99,977 6,489 6.49 106,176 7,077 6.67
---------- ------- --------- ------- --------- -------
Total investment
securities.......... 1,095,505 71,126 6.49 1,311,188 82,903 6.32 1,447,024 92,205 6.37
Federal funds sold.......... 41,636 2,250 5.40 19,233 934 4.86 22,011 1,681 7.64
Loans....................... 3,789,231 337,661 8.91 3,812,900 330,951 8.68 3,818,486 326,581 8.55
Total earning
assets.............. 4,926,372 411,037 8.34 5,143,321 414,788 8.06 5,287,521 420,467 7.95
Allowance for possible loan
losses.................... (51,155) (47,392) (37,923)
Cash and due from banks..... 176,697 207,533 220,787
Other assets................ 201,871 175,020 184,426
---------- --------- ---------
Total assets.......... $5,253,785 5,478,482 5,654,811
========== ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Demand-non-interest
bearing................. $ 733,394 -- -- 745,102 -- -- 725,287 -- --
Demand-interest bearing... 448,976 6,467 1.44 447,524 7,839 1.75 426,608 9,202 2.16
Savings................... 1,279,859 30,839 2.41 1,399,011 32,446 2.32 1,514,374 38,438 2.54
Certificates and other
time deposits........... 1,701,886 91,406 5.37 1,772,150 95,379 5.38 1,782,817 97,518 5.47
---------- ------- --------- ------- --------- -------
Total deposits........ 4,164,115 128,712 3.09 4,363,787 135,664 3.11 4,449,086 145,158 3.26
Federal funds purchased,
securities sold under
agreements to repurchase
and other borrowings...... 477,454 23,657 4.95 515,556 25,109 4.87 609,247 35,775 5.87
---------- ------- --------- ------- --------- -------
Total interest bearing
liabilities......... 3,908,175 152,369 3.90 4,134,241 160,773 3.89 4,333,046 180,933 4.18
---------- ------- --------- ------- --------- -------
Other liabilities........... 92,598 71,240 68,440
Shareholders' equity........ 519,618 527,899 528,038
---------- --------- ---------
Total liabilities and
shareholders'
equity.............. $5,253,785 5,478,482 5,654,811
Net yield on earning
assets.................... 258,668 5.25 254,015 4.94 239,534 4.53
======= ==== ======= ==== ======= ====
Interest rate spread........ 4.44 4.18 3.78
==== ==== ====
Income on tax-exempt
securities and loans...... 5,225 6,241 8,034
======= ======= =======
- - ---------------
Notes: 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.
52
54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information about the Directors of FirstMerit, see "Election of
Directors" on pages 2 through 5 of FirstMerit's Proxy Statement dated February
23, 1998 ("Proxy Statement"), which is incorporated herein by reference.
Information about the Executive Officers of FirstMerit appears in Part I of
this report.
Disclosures by FirstMerit with respect to compliance with Section 16(a)
appear on page 5 of the Proxy Statement, and are incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
See "Executive Compensation and Other Information" on pages 6 through 16 of
the Proxy Statement, which are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Principal Shareholders" and "Election of Directors" at page 28, and
pages 2 through 4, respectively, of the Proxy Statement, which are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Certain Relationships and Related Transactions" at pages 18 and 19 of
the Proxy Statement, which are incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following Financial Statements appear in Part II of this Report:
Consolidated Balance Sheets December 31, 1997 and 1996
Consolidated Statements of Income Years ended December 31, 1997, 1996
and 1995
Consolidated Statements of Changes in Shareholders' Equity Years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows Years ended December 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements Years ended December 31,
1997, 1996 and 1995
Management's Report
Independent Auditors' Report
(a)(2) Financial Statement Schedules
All schedules are omitted as the required information is inapplicable or
the information is presented in the consolidated financial statements or
related notes which appear in Part II of this report.
(a)(3) Management Contracts or Compensatory Plans or Arrangements
See those documents listed on the Exhibit Index which are marked as
such.
(b) Reports on Form 8-K
Form 8-K filed by FirstMerit on November 12, 1997 reporting on the
execution of a definitive merger agreement with CoBancorp Inc.
(c) Exhibits
See the Exhibit Index.
(d) Financial Statements
See subparagraph (a)(1) above.
53
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Akron,
State of Ohio, on the 23rd day of February, 1998.
FirstMerit Corporation
By: /s/ John R. Cochran
----------------------------------
John R. Cochran, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on the 23rd day of February, 1998 by the following
persons (including a majority of the Board of Directors of the registrant) in
the capacities indicated.
SIGNATURE TITLE
--------- -----
/s/ JOHN R. COCHRAN Chairman and Chief Executive Officer (Principal
- - ------------------------------------------------ Executive Officer) and Director
John R. Cochran
/s/ JACK R. GRAVO Executive Vice President (Principal Financial
- - ------------------------------------------------ Officer and Principal Accounting Officer)
Jack R. Gravo
/s/ KAREN S. BELDEN Director
- - ------------------------------------------------
Karen S. Belden
/s/ R. CARY BLAIR Director
- - ------------------------------------------------
R. Cary Blair
/s/ JOHN C. BLICKLE Director
- - ------------------------------------------------
John C. Blickle
/s/ SID A. BOSTIC President and Chief Operating Officer and Director
- - ------------------------------------------------
Sid A. Bostic
/s/ ROBERT W. BRIGGS Director
- - ------------------------------------------------
Robert W. Briggs
/s/ ELIZABETH A. DALTON Director
- - ------------------------------------------------
Elizabeth A. Dalton
/s/ TERRY L. HAINES Director
- - ------------------------------------------------
Terry L. Haines
/s/ CLIFFORD J. ISROFF Director
- - ------------------------------------------------
Clifford J. Isroff
/s/ PHILIP A. LLOYD, II Director
- - ------------------------------------------------
Philip A. Lloyd, II
/s/ ROBERT G. MERZWEILER Director
- - ------------------------------------------------
Robert G. Merzweiler
/s/ STEPHEN E. MYERS Director
- - ------------------------------------------------
Stephen E. Myers
/s/ ROGER T. READ Director
- - ------------------------------------------------
Roger T. Read
/s/ JUSTIN T. ROGERS, JR. Director
- - ------------------------------------------------
Justin T. Rogers, Jr.
/s/ DEL SPITZER Director
- - ------------------------------------------------
Del Spitzer
56
EXHIBIT INDEX
EXHIBIT
NUMBER
- - -------
3.1 Amended and Restated Articles of Incorporation of FirstMerit
Corporation (incorporated by reference from Exhibit 3(i) to
the Form 8-K filed by the registrant on April 27, 1995)
3.2 Code of Regulations, as amended, of FirstMerit Corporation
(incorporated by reference from Exhibit 3(b) to the Form
10-K filed by the registrant on February 25, 1997)
4.1 Shareholders Rights Agreement dated October 21, 1993,
between FirstMerit Corporation and FirstMerit Bank, N.A., as
amended and restated July 18, 1996 (incorporated by
reference from Exhibit 4 to the Form 8-A/A filed by the
registrant on July 18, 1996)
10.1 1982 Incentive Stock Option Plan of FirstMerit Corporation
(incorporated by reference from Exhibit 4.2 to the Form S-8
(No. 33-7266) filed by the registrant on July 15, 1986)*
10.2 Amended and Restated 1992 Stock Option Program of FirstMerit
Corporation*
10.3 1992 Directors Stock Option Program*
10.4 FirstMerit Corporation 1995 Restricted Stock Plan
(incorporated by reference from Exhibit (10)(d) to the Form
10-Q for the fiscal quarter ended March 31, 1995, filed by
the registrant on May 15, 1995)*
10.5 1997 Stock Option Program of FirstMerit Corporation*
10.6 1985 FirstMerit Corporation Stock Plan (CV) (incorporated by
reference from Exhibit (10)(a) to the Form S-8 (No.
33-57557) filed by the registrant on February 1, 1995)*
10.7 1993 FirstMerit Corporation Stock Plan (CV) (incorporated by
reference from Exhibit (10)(b) to the Form S-8 (No.
33-57557) filed by the registrant on February 1, 1995)*
10.8 Amended and Restated FirstMerit Corporation Executive
Deferred Compensation Plan (incorporated by reference from
Exhibit 10(h) to the Form 10-K filed by the registrant on
February 25, 1997)*
10.9 Amended and Restated FirstMerit Corporation Director
Deferred Compensation Plan (incorporated by reference from
Exhibit 10(i) to the Form 10-K filed by the registrant on
February 25, 1997)*
10.10 FirstMerit Corporation Executive Supplemental Retirement
Plan (incorporated by reference from Exhibit 10(d) to the
Form 10-K filed by the registrant on March 15, 1996)*
10.11 FirstMerit Corporation Unfunded Supplemental Benefit Plan*
10.12 First Amendment to the FirstMerit Corporation Unfunded
Supplemental Benefit Plan (incorporated by reference from
Exhibit 10(v) to the Form 10-K filed by the registrant on
March 2, 1995)*
10.13 Supplemental Pension Agreement of John R. Macso*
10.14 FirstMerit Corporation Executive Committee Life Insurance
Program Summary (incorporated by reference from Exhibit
10(w) to the Form 10-K filed by the registrant on March 2,
1995)*
10.15 Long Term Disability Plan (incorporated by reference from
Exhibit 10(x) to the Form 10-K filed by the registrant on
March 2, 1995)*
10.16 Employment Agreement of John R. Cochran (incorporated by
reference from Exhibit 10(a) to the Form 10-Q filed by the
registrant on May 15, 1995)*
10.17 Restricted Stock Award Agreement of John R. Cochran dated
March 1, 1995 (incorporated by reference from Exhibit 10(e)
to the Form 10-Q filed by the registrant on May 15, 1995)*
10.18 Restricted Stock Award Agreement of John R. Cochran dated
April 9, 1997*
10.19 Employment Agreement of Sid A. Bostic dated February 1,
1998*
10.20 Restricted Stock Award Agreement of Sid A. Bostic dated
February 1, 1998*
10.18 Form of FirstMerit Corporation Termination Agreement
(incorporated by reference from Exhibit 10(r) to the Form
10-K filed by the registrant on February 25, 1997)*
10.19 Form of Director and Officer Indemnification Agreement and
Undertaking (incorporated by reference from Exhibit 10(s) to
the Form 8-K/A filed by the registrant on April 27, 1995)*
57
EXHIBIT
NUMBER
- - -------
10.20 Distribution Agreement, by and among FirstMerit Corporation,
FirstMerit Bank, N.A. and the Agents (incorporated by
reference from Exhibit (10)(ii) to the Form 8-K/A filed by
the registrant on April 27, 1995)
10.21 Form of FirstMerit Bank, N.A. Global Bank Note (Fixed Rate)
(incorporated by reference from Exhibit (10)(iii) to the
Form 8-K/A filed by the registrant on April 27, 1995)
10.22 Form of FirstMerit Bank, N.A. Global Bank Note (Floating
Rate) (incorporated by reference from Exhibit (10)(iv) to
the Form 8-K/A filed by the registrant on April 27, 1995)
10.23 Agreement of Affiliation and Plan of Merger dated November
2, 1997 by and between FirstMerit Corporation and CoBancorp
Inc. (incorporated by reference from Exhibit 99.1 to the
Form 8-K filed by the registrant on November 12, 1997)
10.24 CoBancorp Inc. Stock Purchase Option dated November 3, 1997
(incorporated by reference from Exhibit 99.2 to the Form 8-K
filed by the registrant on November 12, 1997)
21 Subsidiaries of FirstMerit Corporation
23 Consent of Coopers & Lybrand, L.L.P.
27 Financial Data Schedule
- - ---------------
* Management Contract or Compensatory Plan or Arrangement