<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 0-10161
FIRSTMERIT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-1339938
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
III CASCADE PLAZA, 7TH FLOOR, AKRON, OHIO
44308-1103
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(330) 996-6300
(TELEPHONE NUMBER)
OUTSTANDING SHARES OF COMMON STOCK, AS OF
SEPTEMBER 30, 1997
62,093,698
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
<PAGE> 2
FIRSTMERIT CORPORATION
PART I - FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
- - - ----------------------------
The following statements included in the quarterly unaudited report to
shareholders are incorporated by reference:
Consolidated Balance Sheets as of September 30, 1997, December 31,
1996 and September 30, 1996
Consolidated Statements of Income for the three-month and nine-month
periods ended September 30, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity for the
year ended December 31, 1996 and for the nine months ended September
30, 1997
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996
Notes to Consolidated Financial Statements as of September 30, 1997,
December 31, 1996, and September 30, 1996
Management's Discussion and Analysis of Financial Conditions as of
September 30, 1997, December 31, 1996 and September 30, 1996 and
Results of Operations for the quarter and nine months ended September
30, 1997 and 1996 and for the year ended December 31, 1996.
<PAGE> 3
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- - - ---------------------------------------
<TABLE>
<CAPTION>
(In thousands)
---------------------------------------------
(Unaudited) (Unaudited)
September 30 December 31 September 30
---------------------------------------------
1997 1996 1996
- - - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investment securities $ 1,062,998 1,187,524 1,284,216
Federal funds sold 35,092 15,550 4,309
Commercial loans 1,511,747 1,373,806 1,397,445
Mortgage loans 835,206 944,887 1,168,398
Installment loans 948,301 876,997 879,062
Home Equity loans 241,780 195,924 187,606
Credit card loans 92,715 90,028 82,821
Tax-free loans 12,334 15,119 17,074
Leases 147,301 159,237 139,769
---------------------------------------------
Loans less unearned income 3,789,384 3,655,998 3,872,175
Less allowance for possible loan losses 52,400 49,336 46,607
---------------------------------------------
Net loans 3,736,984 3,606,662 3,825,568
Cash and due from banks 188,773 222,164 242,794
Premises and equipment, net 100,108 102,139 104,725
Accrued interest receivable and other assets 113,888 93,941 88,161
---------------------------------------------
$ 5,237,843 5,227,980 5,549,773
=============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-non-interest bearing $ 736,020 799,771 752,082
Demand-interest bearing 440,913 450,187 446,941
Savings 1,270,439 1,309,275 1,367,527
Certificates and other time deposits 1,739,215 1,645,642 1,797,767
---------------------------------------------
Total deposits 4,186,587 4,204,875 4,364,317
Securities sold under agreements to repurchase
and other borrowings 446,271 423,701 588,729
---------------------------------------------
Total funds 4,632,858 4,628,576 4,953,046
Accrued taxes, expenses, and other liabilities 84,624 75,697 77,042
---------------------------------------------
Total liabilities 4,717,482 4,704,273 5,030,088
Shareholders' equity:
Series preferred stock, without par value:
authorized and unissued 7,000,000 shares - - -
Common stock, without par value:
authorized 80,000,000 shares; issued 67,989,020
67,719,750 and 67,412,040 shares, respectively 109,937 107,343 105,324
Treasury stock, 5,895,322, 3,806,964 and 3,241,184 shares,
respectively (102,907) (59,258) (44,919)
Net unrealized holding gains (losses)
on available for sale securities 1,459 (2,217) (9,380)
Retained earnings 511,872 477,839 468,660
---------------------------------------------
Total shareholders' equity 520,361 523,707 519,685
---------------------------------------------
$ 5,237,843 5,227,980 5,549,773
=============================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
FIRSTMERIT CORPORATION AND SUBSIDIARIES
AVERAGE CONSOLIDATED BALANCE SHEETS
- - - ---------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited)
Quarters
----------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------
3rd 2nd 1st 4th 3rd
- - - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment securities $1,070,448 1,091,932 1,148,175 1,271,617 1,279,273
Federal funds sold 18,417 17,686 7,404 36,692 7,844
Commercial loans 1,509,609 1,485,582 1,409,832 1,389,556 1,348,707
Mortgage loans 892,428 934,125 941,633 1,058,280 1,196,521
Installment loans 948,031 925,216 880,395 894,133 868,419
Home Equity loans 236,532 219,711 199,881 193,891 178,404
Credit card loans 88,954 87,108 88,657 84,598 83,483
Tax free loans 12,593 13,891 14,816 16,300 17,730
Leases 147,722 152,745 157,036 160,365 165,390
----------------------------------------------------------------------
Loans less unearned income 3,835,869 3,818,378 3,692,250 3,797,123 3,858,654
Less allowance for possible
loan losses 51,530 50,471 49,666 46,563 47,476
----------------------------------------------------------------------
Net loans 3,784,339 3,767,907 3,642,584 3,750,560 3,811,178
Cash and due from banks 178,440 179,243 183,034 201,148 202,548
Premises and equipment, net 100,495 100,487 101,606 104,875 104,442
Accrued interest receivable
and other assets 111,536 101,854 79,602 74,989 83,146
----------------------------------------------------------------------
$5,263,675 5,259,109 5,162,405 5,439,881 5,488,431
======================================================================
LIABILITIES
Deposits:
Demand-non-interest bearing $ 741,827 738,417 711,995 759,224 747,318
Demand-interest bearing 447,256 447,398 446,893 453,654 448,771
Savings 1,273,592 1,283,787 1,288,069 1,353,270 1,388,472
Certificates and other time
deposits 1,728,686 1,696,932 1,647,357 1,784,786 1,759,320
----------------------------------------------------------------------
Total deposits 4,191,361 4,166,534 4,094,314 4,350,934 4,343,881
Securities sold under agreements to
repurchase and other borrowings 466,525 495,178 454,334 488,189 553,743
----------------------------------------------------------------------
Total funds 4,657,886 4,661,712 4,548,648 4,839,123 4,897,624
Accrued taxes, expenses and
other liabilities 89,185 85,395 87,938 78,350 65,973
----------------------------------------------------------------------
Total liabilities 4,747,071 4,747,107 4,636,586 4,917,473 4,963,597
SHAREHOLDERS' EQUITY 516,604 512,002 525,819 522,408 524,834
----------------------------------------------------------------------
$5,263,675 5,259,109 5,162,405 5,439,881 5,488,431
======================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- - - ---------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
(In thousands except per share data)
----------------------------------------------------------
Quarters Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
- - - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 85,422 84,463 251,187 247,761
Interest and dividends on securities:
Taxable 15,829 18,453 48,503 57,010
Exempt from Federal income taxes 1,036 1,297 3,279 3,962
Interest on Federal funds sold 223 149 318 641
--------------------------- --------------------------
Total interest income 102,510 104,362 303,287 309,374
--------------------------- --------------------------
Interest expense:
Interest on deposits:
Demand-interest bearing 1,535 1,956 4,983 5,933
Savings 7,872 8,030 22,784 24,592
Certificates and other time deposits 23,460 23,599 67,795 71,541
Interest on securities sold under agreements
to repurchase and other borrowings 5,848 6,849 17,185 19,485
--------------------------- --------------------------
Total interest expense 38,715 40,434 112,747 121,551
--------------------------- --------------------------
Net interest income 63,795 63,928 190,540 187,823
Provision for possible loan losses 6,182 3,485 15,376 9,612
--------------------------- --------------------------
Net interest income after provision
for possible loan losses 57,613 60,443 175,164 178,211
--------------------------- --------------------------
Other income:
Trust department income 3,290 2,875 9,689 9,066
Service charges on depositors' accounts 6,451 6,275 19,381 17,750
Credit card fees 3,836 3,011 10,429 8,498
Service fees - other 1,774 1,479 5,597 4,540
Securities gains 885 24 1,825 236
Gain on sales of loans, net 2,311 1,139 4,315 2,951
Other operating income 3,992 3,015 10,697 12,094
--------------------------- --------------------------
Total other income 22,539 17,818 61,933 55,135
--------------------------- --------------------------
80,152 78,261 237,097 233,346
--------------------------- --------------------------
Other expenses:
Salaries, wages, pension and employee benefits 23,082 22,869 69,552 70,802
Net occupancy expense 4,118 4,387 12,749 13,009
Equipment expense 2,854 3,066 9,568 9,313
Other operating expense 18,266 28,104 51,777 62,891
--------------------------- --------------------------
Total other expenses 48,320 58,426 143,646 156,015
--------------------------- --------------------------
Income before Federal income taxes 31,832 19,835 93,451 77,331
Federal income taxes 9,819 6,388 29,886 25,410
--------------------------- --------------------------
Net income $ 22,013 13,447 63,565 51,921
=========================== ==========================
Per share data based on average number of
shares outstanding:
Net Income $ 0.35 0.21 1.01 0.79
=========================== ==========================
Dividends paid $ 0.16 0.135 0.45 0.405
Weighted average number of shares
outstanding 62,229,074 64,730,818 62,936,930 65,614,100
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- - - --------------------------------------------------------------------------------
Year Ended December 31, 1996 and
Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
(Unaudited)
(In Thousands)
-------------------------------------------------------------------
Net unrealized
holding gains
(losses) on Total
Common Treasury available for Retained Shareholders'
Stock Stock sale securities Earnings Equity
-------- -------- --------------- -------- --------
<S> <C> <C> <C> <C> <C>
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 - - - 63,565 63,565
Cash dividends ($0.45 per share) - - - (29,532) (29,532)
Stock options exercised 2,594 - - - 2,594
Treasury shares purchased - (43,649) - - (43,649)
Market adjustment investment securities - - 3,676 - 3,676
-------- -------- ------ -------- --------
Balance at September 30, 1997 $109,937 (102,907) 1,459 511,872 520,361
======== ======== ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 7
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
-------- --------
1997 1996
-------- --------
Operating Activities
- - - --------------------
<S> <C> <C>
Net income $ 63,565 51,921
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 15,376 9,612
Provision for depreciation and amortization 7,799 7,198
Amortization of investment securities premiums, net 2,328 2,566
Amortization of income for lease financing (10,105) (9,565)
Gains on sales of investment securities, net (1,825) (236)
Deferred federal income taxes 9,624 7,543
Increase in interest receivable (1,354) (3,054)
Increase (decrease) in interest payable 118 (1,290)
Amortization of values ascribed to acquired intangibles 1,408 2,409
Other decreases (22,802) (1,598)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 64,132 65,506
-------- --------
Investing Activities
- - - --------------------
Dispositions of investment securities:
Available-for-sale - sales 199,931 42,654
Available-for-sale - maturities 155,786 223,926
Purchases of investment securities available-for-sale (226,032) (162,509)
Net (increase) decrease in federal funds sold (19,542) 8,266
Net increase in loans and leases (135,593) (102,089)
Purchases of premises and equipment (8,386) (19,347)
Sales of premises and equipment 2,618 1,582
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (31,218) (7,517)
-------- --------
Financing Activities
- - - --------------------
Net decrease in demand, NOW and savings deposits (111,861) (131,683)
Net increase (decrease) in time deposits 93,573 (5,925)
Net increase in securities sold under repurchase
agreements and other borrowings 22,570 101,771
Cash dividends (29,532) (26,536)
Purchase of treasury shares (43,649) (41,956)
Proceeds from exercise of stock options 2,594 1,463
-------- --------
NET CASH USED BY FINANCING ACTIVITIES (66,305) (102,866)
Decrease in cash and cash equivalents (33,391) (44,877)
Cash and cash equivalents at beginning of year 222,164 287,671
-------- --------
Cash and cash equivalents at end of year $188,773 242,794
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
- - - --------------------------------------------------
Cash paid during the year for:
Interest, net of amounts capitalized $ 58,700 69,250
Income taxes $ 31,745 15,462
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 8
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements September 30, 1997, December 31, 1996
and September 30, 1996
1. FirstMerit Corporation ("Corporation"), is a bank holding company whose
principal assets are the common stock of its wholly owned subsidiaries,
FirstMerit Bank, N. A., Citizens National Bank, Peoples National Bank, and
Peoples Bank, N.A. In addition FirstMerit Corporation owns all of the common
stock of Citizens Investment Corporation, Citizens Savings Corporation of Stark
County, FirstMerit Community Development Corporation, and FirstMerit Credit Life
Insurance Company. On September 1, 1997, First National Bank of Ohio changed its
name to FirstMerit Bank, N. A. As of October 14, 1997, The Old Phoenix National
Bank of Medina and EST National Bank were merged into FirstMerit Bank, N. A.
2. On October 8, 1997, the Corporation signed an agreement to acquire three
branches with deposits of approximately $49,000,000 from First Western Bancorp.
The acquisition is expected to close during the first quarter 1998, subject to
customary conditions, including among others regulatory approval and will be
accounted for as a purchase transaction. The acquisition will expand market
share in Lake County, an important market of wholly-owned subsidiary, Peoples
Bank, N.A.
On November 2, 1997, the Corporation signed a definitive agreement to
acquire CoBancorp Inc., a bank holding company headquartered in Elyria, Ohio
with consolidated assets of approximately $666,000,000. CoBancorp Inc. will be
merged with and into the Corporation. The merger is expected to provide the
Corporation with the leading deposit market share in Lorain county as well as
provide access into the growing Columbus, Ohio market. Based on the
Corporation's October 31, 1997 closing price of $25.50 per share, the value of
the transaction is approximately $157,000,000.
Under the terms of the agreement, each share of CoBancorp Inc. common stock
will be exchanged for $44.50 in cash or for shares of common stock of the
Corporation with a market value per share of $44.50, based upon the market
value of the Corporation's common stock during a ten day period ending ten days
prior to closing of the transaction, subject to adjustment, as well as a
maximum and minimum amount to be paid, as provided for in the agreement.
CoBancorp Inc. shareholders may elect to exchange their common stock for either
common stock of the Corporation 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. CoBancorp Inc. has also provided the Corporation with an option to
acquire up to 19.9 percent of its common shares exercisable under certain
conditions.
In connection with the merger, the Corporation plans to issue between 3.1
million and 4.3 million shares of its common stock. The Corporation's Board of
Directors has approved the repurchase of up to 4.3 million shares of the
Corporation's common stock for use in the merger. These share purchases may be
effected through public and private transactions.
Consummation of the merger is expected to close in the second quarter 1998
subject to customary conditions, including among others approval of CoBancorp
Inc. shareholders and regulatory approval. The merger is structured as a
tax-free exchange for CoBancorp Inc. shareholders receiving shares of the
Corporation, and will be accounted for as a purchase transaction.
3. 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 earnings per share previously found in APB Opinion No.
15 ("APB 15"), "Earnings per Share," and makes the standards comparable to
recently adopted international EPS guidelines. SFAS 128 replaces the
presentation of "Primary" EPS with the presentation of "Basic" EPS. It also
requires dual presentation of Basic and Diluted EPS on the face of the
statements of income and a reconciliation of the numerator and denominator
between the Basic EPS and Diluted EPS calculations. Basic EPS excludes dilution
and is computed by dividing net income by the weighted-average number of common
shares outstanding. Diluted EPS reflects the dilution that would occur if
securities or other contracts to issue common stock were exercised or converted
to common stock (e.g., exercising of common stock options). SFAS 128 is
effective for
<PAGE> 9
financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier application is not permitted. An entity is,
however, permitted to disclose pro forma Earnings per Share amounts using SFAS
128 in the notes to the financial statements in periods before adoption. After
the effective date, all prior period EPS data must be restated.
In the accompanying Statements of Income, net income per share
calculated under existing standard APB 15 was $0.35 for the quarter ended
September 30, 1997 and $1.01 for the 1997 year-to-date period. For the
comparable 1996 quarter and nine-month periods, APB 15 EPS was $0.21 and $0.79,
respectively. Basic EPS, calculated under SFAS 128, also resulted in earnings
per share totals of $0.35 for the 1997 third quarter, $1.01 for the nine months
ended September 30, 1997, $0.21 for the quarter ended September 30, 1996, and
$0.79 for the 1996 year-to-date period. Diluted EPS for the 1997 third quarter
totaled $0.35 compared to $0.21 for the same quarter last year. For the
nine-month periods, diluted EPS was $1.00 for 1997 and $0.79 for 1996.
For the quarter ended September 30, 1997, under SFAS 128, the potential
dilution of unexercised stock options added 667,143 shares to the existing
62,229,074 weighted-average shares outstanding. For the nine months ended
September 30, 1997, the potential dilution of unexercised stock options under
SFAS 128 added 572,258 shares to the existing weighted-average totals of
62,936,930.
If SFAS 128 had been applied to the three months ended September 30,
1996, outstanding common stock options would have added 362,182 to the existing
outstanding shares total of 64,730,818. For the nine months ended September 30,
1996, SFAS 128 requirements would have increased weighted-average outstanding
shares by 384,201. For all periods presented, there were no differences in the
numerators for the proforma Basic and Diluted EPS computations.
4. The Corporation cautions that any forward looking statements contained in
this report, in a report incorporated by reference to this report or made by
management of the Corporation, involve risks and uncertainties and are subject
to change based upon various factors. Actual results could differ materially
from those expressed or implied.
5. Management believes the interim consolidated financial statements reflect all
adjustments consisting only of normal recurring accruals, necessary for fair
presentation of the September 30, 1997 and September 30, 1996 statements of
condition and the results of operations for the quarters and nine-month periods
ended September 30, 1997 and 1996.
<PAGE> 10
<TABLE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
AVERAGE CONSOLIDATED BALANCE SHEET, FULLY-TAX EQUIVALENT INTEREST RATES AND INTEREST DIFFERENTIAL
(Dollars in thousands)
<CAPTION>
Quarter ended September 30, Year ended December 31,
----------------------------------- -------------------------------------
1997 1996
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- - - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investment securities $1,070,448 17,515 6.49% 1,311,188 82,903 6.32%
Federal funds sold 18,417 223 4.80% 19,233 934 4.86%
Loans, net of unearned income 3,835,869 85,541 8.85% 3,812,900 330,951 8.68%
Less allowance for possible loan losses 51,530 47,392
----------------------- --------- -------
Net loans 3,784,339 85,541 8.97% 3,765,508 330,951 8.79%
Cash and due from banks 178,440 - - 207,533 - -
Other assets 212,031 - - 175,020 - -
----------------------- --------- -------
Total assets $5,263,675 103,279 - 5,478,482 414,788 -
======================= ========= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-
non-interest bearing $ 741,827 - - 745,102 - -
Demand-
interest bearing 447,256 1,535 1.36% 447,524 7,839 1.75%
Savings 1,273,592 7,872 2.45% 1,399,011 32,446 2.32%
Certificates and other time deposits 1,728,686 23,460 5.38% 1,772,150 95,379 5.38%
----------------------- --------- -------
Total deposits 4,191,361 32,867 3.11% 4,363,787 135,664 3.11%
Federal funds purchased, securities sold
under agreements to repurchase and 466,525 5,848 4.97% 515,556 25,109 4.87%
other borrowings
Other liabilities 89,185 - 71,240 -
Shareholders' equity 516,604 - 527,899 -
----------------------- --------- -------
Total liabilities and shareholders' equity $5,263,675 38,715 - 5,478,482 160,773 -
======================= ========= =======
Total earning assets $4,924,734 103,279 8.32% 5,143,321 414,788 8.06%
======================= ========= =======
Total interest bearing liabilities $3,916,059 38,715 3.92% 4,134,241 160,773 3.89%
======================= ========= =======
Net yield on earning assets 64,564 5.20% 254,015 4.94%
===================== =========================
Interest rate spread 4.40% 4.18%
<CAPTION>
Quarter ended September 30,
-------------------------------------
1996
Average Average
Balance Balance Rate
- - - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investment securities 1,279,273 20,344 6.33%
Federal funds sold 7,844 149 7.56%
Loans, net of unearned income 3,858,654 84,625 8.72%
Less allowance for possible loan losses 47,476
-----------------------
Net loans 3,811,178 84,625 8.83%
Cash and due from banks 202,548 - -
Other assets 187,588 - -
-----------------------
Total assets 5,488,431 105,118 -
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-
non-interest bearing 747,318 - -
Demand-
interest bearing 448,771 1,956 1.73%
Savings 1,388,472 8,030 2.30%
Certificates and other time deposits 1,759,320 23,599 5.34%
-----------------------
Total deposits 4,343,881 33,585 3.08%
Federal funds purchased, securities sold
under agreements to repurchase and 553,743 6,849 4.92%
other borrowings
Other liabilities 65,973 -
Shareholders' equity 524,834 -
-----------------------
Total liabilities and shareholders' equity 5,488,431 40,434 -
=======================
Total earning assets 5,145,771 105,118 8.13%
=======================
Total interest bearing liabilities 4,150,306 40,434 3.88%
=======================
Net yield on earning assets 64,684 5.00%
===================
Interest rate spread
4.25%
=========
<FN>
*Interest income on tax-exempt securities and loans have been adjusted to a fully taxable equivalent basis.
*Non-accrual loans have been included in the average balances.
</TABLE>
<PAGE> 11
RESULTS OF OPERATIONS
FirstMerit Corporation's net income for the quarter ended September 30,
1997 was $22,013,000, 9.5% higher than last year's third quarter income of
$20,099,000, which excludes a $6,652,000 after-tax charge mandated by federal
legislation to replenish the Savings Association Insurance Fund (SAIF). Return
on average equity was 16.91% and return on average assets was 1.66%. The same
profitability ratios for the 1996 third quarter, excluding the SAIF charge, were
15.24% and 1.46%, respectively.
For the nine months ended September 30, 1997, net income was
$63,565,000, up 8.5% from last year's nine-month SAIF adjusted earnings of
$58,573,000. Return on average equity was 16.35%, and return on average assets
was 1.63%. The comparable ratios, excluding the SAIF charge, for the same period
last year were 14.77% and 1.42%, respectively.
Fully taxable equivalent ("FTE") net interest income for the third
quarter was $64,564,000, essentially level with the $64,684,000 recorded during
last year's quarter. FTE net interest income for the 1997 nine-month period was
$192,989,000, up 1.5% from $190,138,000 one year ago. A higher net interest
margin increased net interest income for both 1997 periods even though earning
assets declined since last year. Specifically, average earning assets were down
4% for the quarter and 5% for the year-to-date period. The asset decline since
last year was primarily due to a planned strategy to reduce low-yielding assets
through the liquidation of investment securities and sale of less profitable
branches. The net interest margin for the quarter was 5.20%, 20 basis points
higher than last year's third quarter margin of 5.00%. For the nine-month
periods, the net interest margin was 5.27% in 1997, 35 basis points more than
the 4.92% recorded in 1996.
Excluding securities gains/losses, other income (noninterest income)
rose 21.7% during the quarter from $17,794,000 to $21,654,000. Improvement was
reported in every category, including a 14.4% increase in trust fees, a 27.4%
increase in credit card fees, a 102.9% rise in gains realized from loan sales,
and a 32.4% increase in other operating income. Higher other operating income
was mainly due to increased letter of credit fees associated with customer
capital market activity and the early termination of an equipment lease. Similar
increases were noted for the 1997 nine-month period, despite pre-tax branch sale
gains of $3,186,000 recorded during the first quarter of 1996.
Other expenses (noninterest expenses) totaled $48,320,000 for the
quarter, a slight increase from last year's SAIF adjusted level of $48,191,000.
The prior year third quarter SAIF assessment was $10,235,000, on a pre-tax
basis. Improvements in occupancy and equipment expense were offset by modest
increases in staff and other operating expenses. For the nine-month period,
expenses, adjusted for the SAIF assessment, were down 1.5% from $145,780,000 in
1996 to $143,646,000 in the
<PAGE> 12
current year; efficiencies were realized in terms of staff reductions and a
lower level of occupancy expense as a result of outsourcing certain real estate
management functions.
The Corporation's third quarter and nine-month 1997 efficiency ratios
improved to 55.49% and 56.20%, respectively, compared with the SAIF adjusted
ratios of 58.45% and 58.55%, respectively, for the prior year periods.
Total loans, net of unearned interest, declined 2.1% at September 30,
1997. The loan mix continues to shift away from lower yielding mortgage loans to
higher yielding commercial and consumer credits. During the quarter, the
Corporation sold $115,000,000 of loans, mainly residential mortgages, realizing
a gain of $2,311,000 from the sale, which helped boost other income. As of
September 30, 1997, commercial and consumer loans constituted 39.9% and 33.9%,
respectively, of the loan portfolio, compared with 36.1% and 29.7%,
respectively, at the end of the third quarter 1996.
The provision for loan losses in the third quarter 1997 was $6,182,000,
compared to $3,485,000 for the three months ended September 30, 1996. The
increased provision reflects the shift in loan mix toward a higher level of
consumer and commercial credits where higher charge-offs would be anticipated.
At September 30, 1997, nonperforming loans totaled $10,949,000, a 5.6% increase
from the year earlier level of $10,372,000. Nonperforming assets were 0.31% of
total loans and other real-estate-owned compared to 0.28% at September 30,
1996. On an annualized basis, net charge-offs as a percentage of average loans
were 0.48% for both the current and prior year quarter. At September 30, 1997,
the allowance for loan losses as a percentage of outstanding loans was 1.38%, an
improvement from the year earlier level of 1.20%. The allowance coverage of
nonperforming loans ratio was 4.79 times at third quarter 1997 and 4.49 times at
the end of the prior year period.
Total shareholders' equity at September 30, 1997, was $520,361,000, up
marginally from $519,685,000 a year earlier. Strong earnings were offset by the
reduction in equity caused by the Corporation's stock buyback program, which
reduced outstanding shares by 343,200 during the third quarter 1997 (adjusted to
reflect the two-for-one stock split on September 29, 1997 to shareholders of
record as of September 2, 1997). At the end of the 1997 third quarter,
outstanding shares totaled 62,093,698 compared to 64,170,856 at September 30,
1996.
Earnings per share for the third quarter were $0.35, an increase of
13.9% over last year's quarterly earnings of $0.31, excluding the $0.10 per
share 1996 SAIF charge. For the nine months ended September 30, 1997, earnings
per share were $1.01, 13.1% higher than the $0.89 recorded for the 1996 SAIF
adjusted nine-month period. The components of change in per share income for the
quarters and nine months ended September 30, 1997 and 1996 are summarized in the
following table:
<PAGE> 13
CHANGES IN EARNINGS PER SHARE
-----------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997/1996 1997/1996
-----------------------------------------------------
<S> <C> <C>
Net income per share September 30,
1996 $0.21 0.79
Increases (decreases) due to:
Net interest income - taxable equivalent --- 0.04
Provision for possible loan losses (0.04) (0.09)
Other income 0.07 0.11
Savings Association Insurance Fund (SAIF)
charge 0.16 0.16
Other expenses, excluding SAIF charge --- 0.03
Federal income taxes - taxable equivalent (0.06) (0.07)
Reduction in weighted-average shares
outstanding due to share repurchases 0.01 0.04
-----------------------------------------------
Net change in net income per share 0.14 0.22
-----------------------------------------------
Net income per share September 30, 1997 $0.35 1.01
===============================================
</TABLE>
NET INTEREST INCOME
Net interest income, the Corporation's principal source of earnings, is
the difference between the interest income generated by earning assets
(primarily loans and investment securities) and the total interest paid on
interest bearing funds (namely deposits and other borrowings). For the purpose
of this discussion, net interest income is presented on a fully-taxable
equivalent ("FTE") basis, to provide a comparison among types of interest
earning assets. That is, interest on tax-free securities and tax-exempt loans
has been restated as if such interest were taxed at the statutory Federal income
tax rate of 35%, adjusted for the non-deductible portion of interest expense
incurred to acquire the tax-free assets.
Net interest income FTE for the quarter ended September 30, 1997 was
$64,564,000 level with the $64,684,000 recorded for the same period one year
ago.
<PAGE> 14
The negligible decline in net interest income occurred as the drop in FTE
interest income of $1,839,000 outpaced the savings in interest expense of
$1,719,000.
The lower interest income was a result of a tactic to reinvest lower
yielding investment securities and mortgage loans into higher earning commercial
and consumer credits and to reduce wholesale borrowing levels. Specifically, the
reduction in outstanding investment securities reduced quarterly income by
$3,417,000, when compared to the same period last year, but higher loan yields
recovered $1,424,000 or 41.7% of the decline. For the third quarter, the yield
on average loans increased 13 basis points from 8.72% in 1996 to 8.85%.
In contrast to the almost level declines in interest income and expense
experienced during the quarter, the decline in interest expense during the
year-to-date period clearly exceeded the drop in interest income. The
redeployment of maturing and sold assets into higher yielding loans was also
prevalent during the 1997 nine-month period. For the nine months ended September
30, 1997, higher yielding loans and securities recovered $7,610,000, or 57.4% of
the drop in interest income caused by fewer securities and loans outstanding.
Loan yields for the year-to-date period averaged 8.89%, 21 basis points better
than the 8.68% earned during last year's nine-month period.
With regard to interest bearing liabilities, declining balances
contributed $2,224,000 and $7,601,000, to the quarterly and year-to-date
reductions in interest expense, respectively. The average cost of funds for the
quarter was 3.92%, up 4 basis points from the 3.88% recorded one year ago. For
the nine-month period, cost of funds averaged 3.88% compared to 3.91% last year.
The following schedule illustrates in more detail the change in net
interest income FTE by rate and volume components for both interest earning
assets and interest bearing liabilities.
<PAGE> 15
CHANGES IN NET INTEREST DIFFERENTIAL -
FULLY-TAX EQUIVALENT RATE/VOLUME ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Quarters ended Nine Months Ended
September 30, September 30,
1997 and 1996 1997 and 1996
------------- -------------
Increase (Decrease) Increase (Decrease)
Interest Income/Expense Interest Income/Expense
----------------------- -----------------------
Volume Yield Rate Total Volume Yield Rate Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Investment Securities $(3,417) 588 (2,829) (10,759) 1,820 (8,939)
Loans (508) 1,424 916 (2,478) 5,790 3,312
Federal funds sold 128 (54) 74 (304) (19) (323)
-------------------------------------------------------------------------
Total interest income (3,797) 1,958 (1,839) (13,541) 7,591 (5,950)
INTEREST EXPENSE
Interest on deposits:
Demand-interest bearing (5) (416) (421) 19 (969) (950)
Savings (710) 552 (158) (2,362) 554 (1,808)
Certificates and other
time deposits (416) 277 (139) (3,105) (641) (3,746)
Federal Funds Purchased,
REPOs & other borrowings (1,093) 92 (1,001) (2,153) (147) (2,300)
-------------------------------------------------------------------------
Total interest expense (2,224) 505 (1,719) (7,601) (1,203) (8,804)
-------------------------------------------------------------------------
Net interest income $(1,573) 1,453 (120) (5,940) 8,794 2,854
=========================================================================
</TABLE>
NET INTEREST MARGIN
The net interest margin, net interest income FTE divided by average
earning assets, is affected by changes in the level of earning assets, the
proportion of earning assets funded by non-interest bearing liabilities, the
interest rate spread, and changes in the corporate tax rates. A meaningful
comparison of the net interest margin requires an adjustment for the changes in
the statutory Federal income tax rate noted above. The following schedule shows
the relationship of the tax equivalent adjustment and the net interest margin.
<PAGE> 16
NET INTEREST MARGIN
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------------------
1997 1996 1997 1996
--------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Net interest income per
financial statements $63,795 63,928 190,540 187,823
Tax equivalent adjustment 769 756 2,449 2,315
--------------------------------- -----------------------------------
Net interest income - FTE $64,564 64,684 192,989 190,138
================================= ===================================
Average earning assets $4,924,734 5,145,771 4,892,853 5,157,126
================================= ===================================
Net interest margin 5.20% 5.00% 5.27% 4.92%
======================================================================
</TABLE>
Average loans outstanding for the quarter ended September 30, 1997 were
$3,835,869,000, down less than one percent from $3,858,654,000 for the same
quarter last year. The decline occurred because loan sales, securitizations, and
repayments over the last twelve months were slightly more than dollars of new
loans originated. Similarly, for the 1997 nine-month period, average loan
outstandings totaled $3,782,714,000, down one percent from $3,819,979,000 for
the prior year. Average outstanding loans for the quarter and nine-month periods
equaled 77.9% and 77.3% of average earning assets, respectively.
Average customer deposits outstanding for the three months ended
September 30, 1997 were $4,191,361,000, down 3.5% from the year ago quarter. The
largest decline occurred in savings balances which fell 8.3% to $1,273,592,000.
The savings decline is consistent with recent trends experienced whereby a
portion of former traditional savings dollars are being reinvested in mutual
funds, individual company stocks, certificates of deposits, etc. On a percentage
basis, average certificates and other time deposits increased from 42.4% of
total interest bearing funds for the three months ended September 30, 1996 to
44.1% for the 1997 third quarter. Average savings deposits increased from 28.3%
of interest bearing funds for last year's third quarter to 32.5% for the three
months ended September 30, 1997, while average demand deposits increased from
28.8% of total interest bearing funds for the 1996 three-month period to 30.4%
for the current year quarter. Average interest bearing deposits increased from
73.4% of funds during the 1996 third quarter to 74.1% for the 1997 third
quarter. Conversely, average other borrowings decreased from 11.3% of total
funds for the three months ended September 30, 1996 to 10.0% for the 1997
three-month period.
<PAGE> 17
In summary, total average customer deposits are less than one year ago.
On a percentage basis, during the twelve months ended September 30, 1997, all
categories of customer deposits increased as a percentage of total funds. As a
result, loan funding needs of the Corporation were met more by customer deposits
and proceeds from loan/securities sales and less by other borrowings compared to
the prior period.
During the third quarter 1997, interest bearing liabilities funded
79.5% of average earning assets compared to 80.7% one year ago. The decline in
use of interest bearing liabilities as a loan and investment securities funding
source helped keep the cost of funds rate at a level marginally higher than last
year's third quarter.
OTHER INCOME
Other income for the quarter ended September 30, 1997 was $22,539,000,
an increase of $4,721,000 or 26%, over the $17,818,000 earned during the same
period last year. Excluding securities sales, the increase in other income was
$3,860,000, or 22%. For the nine-month period, other income totaled $61,933,000
compared to $55,135,000 a year ago. The sale of three branches during the 1996
first quarter, contributed $3,186,000 to last year's nine-month other income.
The prior year gains from the branch sales were included in the "other operating
income" category of the income statement.
All categories of other income for the 1997 third quarter were higher
than corresponding 1996 totals. Trust department income for the third quarter
was $3,290,000, up 14.4% from the $2,875,000 earned one year ago. Service
charges on depositors' accounts increased 2.8% to $6,451,000 from $6,275,000 for
last year's third quarter. Credit card fees increased 27.4% to $3,836,000 for
the quarter compared to $3,011,000 for the three months ended September 30,
1996. Other service fees, including Automated Teller Machine (ATM) revenue, were
$1,774,000, an increase of 20.0% over last year's third quarter total of
$1,479,000. Securities gains totaled $885,000 compared to $24,000 in the prior
year quarter. A large portion of the 1997 securities gains occurred during
September as a sale of mortgage-backed securities added $766,000 to pretax
income. Net gains on sales of loans, primarily single-family mortgages, were
$2,311,000 for the quarter, versus $1,139,000 last year, and other operating
income was $3,992,000, an increase of $977,000 from the 1996 third quarter.
Letter of credit fees associated with capital market bond issuances and the
early termination of a large equipment lease accounted for most of the increase
in other operating income.
For the 1997 nine-month period, compared to the same period last year,
trust department income increased 6.9% to $9,689,000; service charges on
depositors' accounts increased 9.2% to $19,381,000; credit card fees increased
22.7% to $10,429,000; other service fees, which include ATM revenue, increased
23.3% to $5,597,000; securities gains, primarily from the sale of
mortgage-backed securities and Sallie Mae stock, increased $1,589,000 to
$1,825,000; gains on sales of loans totaled
<PAGE> 18
$4,315,000, an increase of $1,364,000, and other operating income, excluding the
1996 first quarter gain of $3,186,000 from the sale of three branches, was up
20.1% to $10,697,000.
Other income is especially important to banks as it provides a source
of revenues not sensitive to the interest rate environment.
OTHER EXPENSES
Other expenses were $48,320,000 for the third quarter, level with the
adjusted operating expenses of $48,191,000 recorded during the same quarter last
year. The prior year adjusted expenses exclude the $10,235,000 Savings
Association Insurance Fund (SAIF) replenishment passed into law September 30,
1996. For the 1997 year-to-date period, other expenses totaled $143,646,000,
down 1.5% from the adjusted expenses of $145,780,000 a year ago.
Higher other income was the main catalyst for an improved efficiency
ratio for the quarter, from 58.45% adjusted for SAIF, in 1996 to 55.49% in 1997.
Increased other income, higher net interest income, and lower operating costs
all helped the year-to-date efficiency ratio to improve from 58.55% last year to
56.20% in 1997. The third quarter efficiency ratio of 55.49% indicates that for
every one dollar of pretax profit earned, 55.49 cents were used to cover
operating costs. Therefore, the lower the ratio, the more efficient the
organization. The Corporation is committed to keeping other expenses under
control and in line with or better than peer results.
During the quarter, salaries and employee benefits, the largest
component of other expenses, increased less than one percent to $23,082,000 and
other operating expenses, excluding the September 1996 SAIF charge, increased
$397,000 to $18,266,000. Nearly offsetting the modest increases in employee and
other operating expenses were declines in occupancy costs, which fell 6.1% due
to savings from the outsourcing of certain real estate management functions, and
lower equipment costs. For the nine-month period, salaries and employee benefits
dropped 1.8% to $69,552,000, and all other operating cost categories varied only
slightly compared to last year's SAIF-adjusted totals.
<PAGE> 19
FINANCIAL CONDITIONS
INVESTMENT SECURITIES
All investment securities of the Corporation are classified as
available for sale. The available for sale classification provides the
Corporation with more flexibility to respond, through the portfolio, to changes
in market interest rates, or to increases in loan demand or deposit withdrawals.
The book value and market value of investment securities classified as available
for sale are as follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1997
------------------
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and U.S. Government agency
obligations $577,595 2,426 3,284 576,737
Obligations of state and
political subdivisions 92,651 210 228 92,633
Mortgage-backed securities 290,886 2,713 629 292,970
Other securities 99,611 1,250 203 100,658
---------------- ---------------- ---------------- ----------------
$1,060,743 6,599 4,344 1,062,998
================ ================ ================ ================
---------------- ----------------
Due in one year or less $123,922 123,934
Due after one year through five years
299,736 300,645
Due after five years through ten years
142,260 143,076
Due after ten years 494,825 495,343
---------------- ----------------
$1,060,743 1,062,998
================ ================
</TABLE>
The book value and market value of investment securities including
mortgage-backed securities and derivatives at September 30, 1997, by contractual
maturity, are shown above. Expected maturities will differ from contractual
maturities based on the issuers' right to call or prepay obligations with or
without call or prepayment penalties.
<PAGE> 20
The carrying value of investment securities pledged to secure trust and public
deposits and for purposes required or permitted by law amounted to approximately
$791,341,000 at September 30, 1997, $724,886,000 at December 31, 1996 and
$702,121,000 at September 30, 1996.
Securities with remaining maturities over five years reflected in the
foregoing schedule consist of mortgage and asset backed securities. These
securities are purchased within an overall strategy to maximize future earnings
taking into account an acceptable level of interest rate risk. While the
maturities of these mortgage and asset backed securities are beyond five years,
these instruments provide periodic principal payments and include securities
with adjustable interest rates, reducing the interest rate risk associated with
longer term investments.
LOANS
Total loans outstanding at September 30, 1997 amounted to
$3,789,384,000 compared to $3,655,998,000 at December 31, 1996 and
$3,872,175,000 at September 30, 1996. Loan demand, net of sales, has resulted in
an annualized growth rate of 5% through September 30, 1997. At September 30,
1997, compared to the same quarter-end balances last year, commercial loans were
$1,511,747,000 or 8% higher than last year's total; mortgage loans were
$835,206,000, down 29%; and installment and bankcard loans (on a combined basis)
were $1,282,796,000, up 12%. The shift in mix from lower yielding mortgage loans
to higher earning commercial and consumer credits is clearly evident in the
preceding loan category totals. The loan to funds ratio, a measure of the
Corporation's liquidity, equaled 81.8% at September 30, 1997 compared to 79.0%
at December 31, 1996 and 78.2% at September 30, 1996.
ASSET QUALITY
Total nonperforming assets (non-accrual and restructured loans and
other real estate loans) amounted to $11,721,000 at September 30, 1997 or 0.31%
of total loans and other real estate outstanding. At December 31, 1996,
nonperforming assets totaled $10,576,000 or 0.29% of outstanding loans and other
real estate compared to $10,751,000 or 0.28% of outstanding loans and other real
estate at September 30, 1996. Effective December 31, 1995, the Corporation
adopted Statement of Financial Accounting Standard No. 114, "Accounting by
Creditors for Impairment of a Loan," and Statement No. 118, an amendment of
Statement No. 114, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures." These statements prescribe how the allowance for
loan losses related to impaired loans should be determined and illustrate the
required impaired loan disclosures. Impaired loans are loans for which, based on
current information or events, it is probable that a creditor will
<PAGE> 21
be unable to collect all amounts due according to the contractual terms of the
loan agreement. Impaired loans must be valued based on the present value of the
loans' expected future cash flows at the loans' effective interest rates, at the
loans' observable market prices, or the fair value of the underlying collateral.
Under the Corporation's credit policies and practices, and in conjunction with
provisions within Statements No. 114 and No. 118, all nonaccrual and
restructured commercial, agricultural, construction, and commercial real estate
loans, meet the definition of impaired loans.
<TABLE>
<CAPTION>
(Dollars in thousands)
September 30, December 31, September 30,
1997 1996 1996
------------------ ---------------------- ------------------
<S> <C> <C> <C>
Impaired Loans:
Non-accrual $6,753 9,579 9,363
Restructured 90 92 93
--------------------------------------------------------------------------------------------------------------
Total impaired loans 6,843 9,671 9,456
------------------ ---------------------- ------------------
Other Loans:
Non-accrual 4,106 787 916
Restructured --- --- ---
--------------------------------------------------------------------------------------------------------------
Total other nonperforming loans 4,106 787 916
--------------------------------------------------------------------------------------------------------------
Total nonperforming loans 10,949 10,458 10,372
--------------------------------------------------------------------------------------------------------------
Other real estate owned 772 118 379
------------------ ---------------------- ------------------
Total nonperforming assets $11,721 10,576 10,751
==============================================================================================================
Loans past due 90 days or more
accruing interest $8,641 8,380 9,015
==============================================================================================================
Total nonperforming assets as a
percent of total loans 0.31% 0.29% 0.28%
==============================================================================================================
<FN>
N/A = Not Available
</TABLE>
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.
<PAGE> 22
ALLOWANCE FOR LOAN LOSSES
The allowance for possible loan losses at September 30, 1997 totaled
$52,400,000 or 1.38% of total loans outstanding compared to $49,336,000 or 1.35%
and $46,607,000 or 1.20% at December 31, 1996 and September 30, 1996,
respectively.
<TABLE>
<CAPTION>
(Dollars in thousands)
Nine Months Ended Year Ended Nine Months Ended
September 30, December 31, September 30,
1997 1996 1996
--------------------- ----------------------- ---------------------
<S> <C> <C> <C>
Balance at beginning of year $49,336 46,840 46,840
Provision charged to
operating expenses 15,376 17,751 9,612
Loans charged off 20,260 21,230 14,232
Recoveries on loans
previously charged off 7,948 5,975 4,387
--------------------- ----------------------- ---------------------
$52,400 49,336 46,607
===================== ======================= =====================
Net charge offs as a percent
of average loans 0.44% 0.40% 0.34%
Allowance for possible loan losses:
As a percent of loans
outstanding at end of
period 1.38% 1.35% 1.20%
As a multiple of annualized
net charge offs 3.18X 3.23X 3.54X
</TABLE>
The Corporation's Credit Policy Division manages credit risk by establishing
common credit policies for its subsidiary banks, participating in approval of
their largest loans, conducting reviews of their loan portfolios, providing them
with centralized consumer underwriting, collections and loan operation services,
and overseeing their loan workouts. The Corporation's objective is to minimize
losses from its commercial lending activities and to maintain consumer losses at
acceptable levels that are stable and consistent with growth and profitability
objectives.
<PAGE> 23
DEPOSITS
The following schedule illustrates the change in composition of the
average balances of deposits and average rates paid for the noted periods.
<TABLE>
<CAPTION>
(Dollars in thousands)
Nine months and year ended
September 30, 1997 December 31, 1996 September 30, 1996
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits -
non-interest bearing $724,767 - 745,102 - 742,724 -
Demand Deposits -
interest bearing 447,183 1.49% 447,524 1.75% 445,503 1.78%
Savings Deposits 1,281,763 2.38% 1,399,011 2.32% 1,414,649 2.32%
Certificates and other
time deposits 1,691,288 5.36% 1,772,150 5.38% 1,768,748 5.40%
--------------- -------------- --------------
$4,145,001 3.08% 4,363,787 3.11% 4,371,624 3.12%
=============== ============== ==============
</TABLE>
The following table summarizes the certificates and other time deposits
in amounts of $100,000 or more as of September 30, 1997 by time remaining until
maturity.
<TABLE>
<CAPTION>
(Dollars in thousands) Amount
------------------------------------------------
<S> <C>
Maturing in:
Under 3 months $254,402
3 to 12 months 104,087
Over 12 months 34,915
--------------
$393,404
==============
</TABLE>
<PAGE> 24
CAPITAL RESOURCES
Shareholders' equity at September 30, 1997 totaled $520,361,000
compared to $523,707,000 at December 31, 1996 and $519,685,000 at September 30,
1996.
The following table reflects the various measures of capital:
<TABLE>
<CAPTION>
As of As of As of
September 30, December 31, September 30,
1997 1996 1996
<S> <C> <C> <C> <C>
(In thousands)
Total equity $520,361 9.93% 523,707 10.02% 519,685 9.36%
Common equity 520,361 9.93% 523,707 10.02% 519,685 9.36%
Tangible common equity (a) 517,551 9.88% 519,950 9.95% 515,078 9.29%
Tier 1 capital (b) 508,247 11.53% 523,911 12.63% 521,033 12.33%
Total risk-based capital (c) 560,647 12.72% 573,247 13.82% 567,640 13.44%
Leverage (d) 508,247 9.68% 523,911 9.63% 521,033 9.51%
<FN>
(a) Common equity less all intangibles; computed as a ratio to total assets
less intangible assets.
(b) Shareholders' equity minus net unrealized holding gains on equity
securities, plus or minus net unrealized holding losses or gains on
available for sale debt securities, less goodwill; computed as a ratio to
risk-adjusted assets, as defined in the 1992 risk-based capital
guidelines.
(c) Tier 1 capital plus qualifying loan loss allowance, computed as a ratio to
risk-adjusted assets, as defined in the 1992 risk-based capital
guidelines.
(d) Tier 1 capital; computed as a ratio to the latest quarter's average assets
less goodwill.
</TABLE>
The risk-based capital guidelines issued by the Federal Reserve Bank in
1988 require banks to maintain capital equal to 8% of risk-adjusted assets
effective December 31, 1993. At September 30, 1997 the Corporation's risk-based
capital equalled 12.72% of risk adjusted assets, far exceeding the minimum
guidelines.
The cash dividend of $0.16 paid in the third quarter has an indicated
annual rate of $0.64 per share.
<PAGE> 25
PART II. - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) FORM 8-K
None
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRSTMERIT CORPORATION
By: /s/ JACK R. GRAVO
-----------------------------------------------
Jack R. Gravo, Executive Vice President
Finance and Administration
DATE: November 12, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000354869
<NAME> FIRST MERIT CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 188,773
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 35,092
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,062,998
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 1,062,998
<LOANS> 3,789,384
<ALLOWANCE> 52,400
<TOTAL-ASSETS> 5,237,843
<DEPOSITS> 4,186,587
<SHORT-TERM> 446,271
<LIABILITIES-OTHER> 84,624
<LONG-TERM> 0
0
0
<COMMON> 7,030
<OTHER-SE> 513,331
<TOTAL-LIABILITIES-AND-EQUITY> 5,237,843
<INTEREST-LOAN> 85,422
<INTEREST-INVEST> 16,865
<INTEREST-OTHER> 223
<INTEREST-TOTAL> 102,510
<INTEREST-DEPOSIT> 32,867
<INTEREST-EXPENSE> 38,715
<INTEREST-INCOME-NET> 63,795
<LOAN-LOSSES> 6,182
<SECURITIES-GAINS> 885
<EXPENSE-OTHER> 48,320
<INCOME-PRETAX> 31,832
<INCOME-PRE-EXTRAORDINARY> 31,832
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,013
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
<YIELD-ACTUAL> 5.20
<LOANS-NON> 10,859
<LOANS-PAST> 8,641
<LOANS-TROUBLED> 90
<LOANS-PROBLEM> 28,715
<ALLOWANCE-OPEN> 50,893
<CHARGE-OFFS> 7,015
<RECOVERIES> 2,340
<ALLOWANCE-CLOSE> 52,400
<ALLOWANCE-DOMESTIC> 52,400
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
