<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
JUNE 30, 1998
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 JUNE 30, 1998
65,202,418
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
1
<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 June 30, 1998, December 31, 1997 and
June 30, 1997
Consolidated Statements of Income for the three-month and six-month
periods ended June 30, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity for the year
ended December 31, 1997 and for the six months ended June 30, 1998
Consolidated Statements of Cash Flows for the six months ended June 30,
1998 and 1997
Notes to Consolidated Financial Statements as of June 30, 1998,
December 31, 1997, and June 30, 1997
Management's Discussion and Analysis of Financial Conditions as of June
30, 1998, December 31, 1997 and June 30, 1997 and Results of Operations
for the quarter and six months ended June 30, 1998 and 1997 and for the
year ended December 31, 1997.
2
<PAGE> 3
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- - ---------------------------------------
<TABLE>
<CAPTION>
(In thousands)
-----------------------------------
(Unaudited) (Unaudited)
June 30 December 31 June 30
-----------------------------------
1998 1997 1997
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investment securities $ 1,327,598 1,116,787 1,072,734
Federal funds sold 10,600 33,100 3,590
Commercial loans 1,870,582 1,553,707 1,508,604
Mortgage loans 896,694 852,482 931,530
Installment loans 1,000,146 922,227 953,256
Home equity loans 280,670 250,513 230,274
Bankcard loans 92,672 103,041 89,426
Tax-free loans 10,161 8,947 12,908
Leases 145,008 143,958 151,687
-------------------------------------
Loans less unearned income 4,295,933 3,834,875 3,877,685
Less allowance for possible loan losses 65,749 53,774 50,893
-------------------------------------
Net loans 4,230,184 3,781,101 3,826,792
-------------------------------------
Total earning assets 5,568,382 4,930,988 4,903,116
Cash and due from banks 216,443 166,742 203,276
Premises and equipment, net 118,120 99,765 100,320
Accrued interest receivable and other assets 276,445 109,966 110,406
-------------------------------------
$ 6,179,390 5,307,461 5,317,118
=====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-non-interest bearing $ 889,032 769,187 747,964
Demand-interest bearing 545,864 470,601 448,137
Savings 1,485,925 1,278,933 1,285,563
Certificates and other time deposits 1,958,061 1,736,490 1,721,152
-------------------------------------
Total deposits 4,878,882 4,255,211 4,202,816
Securities sold under agreements to repurchase
and other borrowings 547,368 441,755 514,680
-------------------------------------
Total funds 5,426,250 4,696,966 4,717,496
Accrued taxes, expenses, and other liabilities 107,127 80,159 82,462
-------------------------------------
Total liabilities 5,533,377 4,777,125 4,799,958
Shareholders' equity:
Series preferred stock, without par value:
authorized and unissued 7,000,000 shares - - -
Common stock, without par value:
authorized 160,000,000 shares; issued 68,142,674
68,127,314 and 67,941,344 shares, respectively 110,197 110,069 109,752
Treasury stock, 2,940,256, 6,159,845 and 5,675,024 shares,
respectively (43,720) (108,734) (90,956)
Net unrealized holding gains (losses)
on available for sale securities 3,059 3,246 (2,143)
Retained earnings 576,477 525,755 500,507
-------------------------------------
Total shareholders' equity 646,013 530,336 517,160
-------------------------------------
$ 6,179,390 5,307,461 5,317,118
=====================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
FIRSTMERIT CORPORATION AND SUBSIDIARIES
AVERAGE CONSOLIDATED BALANCE SHEETS
- - ---------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
(Unaudited)
----------------------- -------------------------------
1998 1997
----------------------- -------------------------------
2nd 1st 4th 3rd 2nd
- - ------------------------------------------------------------------------ -------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment securities $ 1,232,309 1,128,798 1,072,571 1,070,448 1,091,932
Federal funds sold 10,524 3,479 136,589 18,417 17,686
Commercial loans 1,738,644 1,580,524 1,534,687 1,509,609 1,485,582
Mortgage loans 847,178 849,138 850,065 892,428 934,125
Installment loans 967,810 918,595 929,092 948,031 925,216
Home Equity loans 253,849 249,277 246,329 236,532 219,711
Credit card loans 93,169 96,613 94,244 88,954 87,108
Tax free loans 9,306 8,798 10,430 12,593 13,891
Leases 144,309 141,999 144,661 147,722 152,745
----------------------- --------------------------------
Loans less unearned income 4,054,265 3,844,944 3,809,508 3,835,869 3,818,378
Less allowance for possible
loan losses 59,933 55,428 52,910 51,530 50,471
----------------------- --------------------------------
Net loans 3,994,332 3,789,516 3,756,598 3,784,339 3,767,907
Cash and due from banks 195,902 173,618 180,071 178,440 179,243
Premises and equipment, net 107,975 100,268 99,659 100,495 100,487
Accrued interest receivable
and other assets 177,661 112,969 112,944 111,536 101,854
----------------------- --------------------------------
Total Assets $ 5,718,703 5,308,648 5,358,432 5,263,675 5,259,109
======================= ================================
LIABILITIES
Deposits:
Demand-non-interest bearing $ 821,827 745,761 756,838 741,827 738,417
Demand-interest bearing 511,625 466,334 452,685 447,256 447,398
Savings 1,374,759 1,284,677 1,275,827 1,273,592 1,283,787
Certificates and other time
deposits 1,822,837 1,731,546 1,733,328 1,728,686 1,696,932
----------------------------------------------------------
Total deposits 4,531,048 4,228,318 4,218,678 4,191,361 4,166,534
Securities sold under agreements to
repurchase and other borrowings 524,924 456,187 502,553 466,525 495,178
---------------------------------------------------------
Total funds 5,055,972 4,684,505 4,721,231 4,657,886 4,661,712
Accrued taxes, expenses and
other liabilities 94,284 92,164 111,439 89,185 85,395
----------------------------------------------------------
Total liabilities 5,150,256 4,776,669 4,832,670 4,747,071 4,747,107
SHAREHOLDERS' EQUITY 568,447 531,979 525,762 516,604 512,002
----------------------------------------------------------
Total Liabilities and Equity $ 5,718,703 5,308,648 5,358,432 5,263,675 5,259,109
=========================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- - ---------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
(In thousands except per share data)
-------------------------------------------------
Quarters Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 90,448 85,165 175,116 165,765
Interest and dividends on securities:
Taxable 17,701 15,918 34,099 32,674
Exempt from Federal income taxes 1,203 1,123 2,189 2,243
Interest on Federal funds sold 207 9 304 95
----------------------- -----------------------
Total interest income 109,559 102,215 211,708 200,777
----------------------- -----------------------
Interest expense:
Interest on deposits:
Demand-interest bearing 1,579 1,681 3,014 3,448
Savings 8,762 7,609 16,784 14,912
Certificates and other time deposits 24,367 22,659 47,283 44,335
Interest on securities sold under agreements
to repurchase and other borrowings 6,664 6,025 12,340 11,337
----------------------- -----------------------
Total interest expense 41,372 37,974 79,421 74,032
----------------------- -----------------------
Net interest income 68,187 64,241 132,287 126,745
Provision for possible loan losses 5,443 5,033 10,906 9,194
----------------------- -----------------------
Net interest income after provision
for possible loan losses 62,744 59,208 121,381 117,551
----------------------- -----------------------
Other income:
Trust department income 4,151 3,288 7,566 6,399
Service charges on depositors' accounts 7,195 6,423 14,080 12,930
Credit card fees 4,792 3,633 8,801 6,593
Service fees - other 2,737 1,845 4,775 3,823
Securities gains (losses) 1,775 477 3,323 940
Gain on sales of loans, net 1,886 881 3,459 2,004
Other operating income 4,018 3,271 8,203 6,705
----------------------- -----------------------
Total other income 26,554 19,818 50,207 39,394
----------------------- -----------------------
89,298 79,026 171,588 156,945
Other expenses:
Salaries, wages, pension and employee benefits 25,246 23,489 49,073 46,470
Net occupancy expense 3,712 3,970 7,888 8,631
Equipment expense 3,468 3,217 6,649 6,714
Other operating expense 21,763 16,903 41,363 33,511
----------------------- -----------------------
Total other expenses 54,189 47,579 104,973 95,326
----------------------- -----------------------
Income before Federal income taxes 35,109 31,447 66,615 61,619
Federal income taxes 10,964 10,128 20,505 20,067
----------------------- -----------------------
Net income $ 24,145 21,319 46,110 41,552
======================= =======================
Other comprehensive income, net of tax
Unrealized gain (losses) on available-
for-sale securities 1,180 5,733 (187) 74
----------------------- -----------------------
Comprehensive Income $ 25,325 27,052 45,923 41,626
======================= =======================
Per share data based on average number of
shares outstanding:
Net Income - basic $ 0.38 0.34 0.74 0.66
======================= =======================
Net Income - diluted $ 0.38 0.34 0.73 0.65
======================= =======================
Dividends paid $ 0.16 0.145 0.32 0.29
Weighted-average shares outstanding - basic 62,826,593 62,902,392 62,282,099 63,296,726
Weighted-average shares outstanding - diluted 63,642,285 63,514,392 63,143,349 63,851,138
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- - ------------------------------------------------------------------------
Year Ended December 31, 1997 and
Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
(In Thousands)
--------------------------------------------------------------
Accumulated
Other Total
Common Treasury Comprehensive Retained Shareholders'
Stock Stock Income Earnings Equity
-------- ---------- --------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
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
======== ========== =============== ========== =============
Net Income - - - 46,110 46,110
Cash dividends ($0.32 per share) - - - (21,307) (21,307)
Stock options exercised 128 - - - 128
Treasury shares purchased - (26,037) - - (26,037)
Treasury shares reissued -
Acquisition - 89,286 - 25,919 115,205
Treasury shares reissued - 1,765 - - 1,765
Market adjustment investment
securities - - (187) - (187)
-------- ---------- --------------- ---------- -------------
Balance at June 30, 1998 - Unaudited $110,197 (43,720) 3,059 576,477 646,013
======== ========== =============== ========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
FIRSTMERIT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
----------- ----------
1998 1997
----------- ----------
Operating Activities
- - -------------------------
<S> <C> <C>
Net income $46,110 41,552
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 10,906 9,194
Provision for depreciation and amortization 5,310 5,217
Amortization of investment securities premiums, net 653 1,826
Amortization of income for lease financing (5,632) (6,560)
Gains on sales of investment securities, net (3,323) (940)
Increase (decrease) deferred federal income taxes (3,288) 10,992
Increase in interest receivable (1,170) (235)
Increase (decrease) in interest payable 124 406
Amortization of values ascribed to acquired intangibles 711 936
Other (increases) decreases (135,783) (21,836)
----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES (85,382) 40,552
----------- ----------
Investing Activities
- - ------------------------
Dispositions of investment securities:
Available-for-sale - sales 338,158 100,678
Available-for-sale - maturities 129,694 116,892
Purchases of investment securities available-for-sale (676,285) (103,555)
Net (increase) decrease in federal funds sold 22,500 11,960
Net (increase) decrease in loans and leases, except sales (454,357) (222,764)
Sales of loans - -
Purchases of premises and equipment (24,435) (5,682)
Sales of premises and equipment 770 2,284
----------- ----------
NET CASH USED BY INVESTING ACTIVITIES (663,955) (100,187)
----------- ----------
Financing Activities
- - -----------------------
Net decrease in demand, NOW and savings deposits 402,100 (77,569)
Net increase (decrease) in time deposits 221,571 75,510
Net increase in securities sold under repurchase - -
agreements and other borrowings 105,613 90,979
Cash dividends (21,307) (18,884)
Purchase of treasury shares (26,037) (31,698)
Treasury shares reissued - acquisition 115,205 -
Treasury shares reissued 1,765 -
Proceeds from exercise of stock options 128 2,409
----------- ----------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES 799,038 40,747
Decrease (increases) in cash and cash equivalents 49,701 (18,888)
Cash and cash equivalents at beginning of year 166,742 222,164
----------- ----------
Cash and cash equivalents at end of year $216,443 203,276
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
- - ---------------------------------------------------
Cash paid during the year for:
Interest, net of amounts capitalized $41,818 74,894
Income taxes $31,500 20,000
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
FIRSTMERIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997
AND JUNE 30, 1997
1. Organization - FirstMerit Corporation ("Corporation"), is a bank holding
company whose principal assets are the common stock of its wholly owned
subsidiary, FirstMerit Bank, N. A. In addition FirstMerit Corporation owns all
of the common stock of Citizens Investment Corporation, Citizens Savings
Corporation of Stark County, FirstMerit Community Development Corporation, 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. As of March 21, 1998, Citizens National Bank, Peoples
National Bank, and Peoples Bank, N. A. were merged into FirstMerit Bank, N. A.
2. Acquisitions - On October 8, 1997, the Corporation acquired three branches
from First Western Bancorp. The acquisition added $46.7 million of deposits and
closed January 16, 1998. The acquisition expands market share in important
Lake County.
On May 22, 1998, the acquisition of CoBancorp Inc., a bank holding
company headquartered in Elyria, Ohio with consolidated assets of
approximately $644 million was completed. The merger, accounted for as a
purchase, provides the Corporation with the leading deposit market share in
Lorain county and provides access into the growing Columbus, Ohio market. At
the effective date of the merger the value of the transaction was $174.1
million. In connection with the merger, the Corporation issued 3.897 million
shares of its common stock (valued at $29.375 per share), paid $50.0 million in
cash, and assumed liabilities associated with the merger of approximately $9.6
million. The transaction also created goodwill of approximately $136.5 million
that will be amortized primarily over 25 years. The following table provides
pro forma results of the previously separate operations as well as the
operations on a combined basis. For the six-months ended June 30, 1998,
CoBancorp results are presented separately through May 21, 1998, but included
in FirstMerit's results from the date of purchase (May 22, 1998) through June
30, 1998. Pro forma combined shares were calculated using the exchange rate of
1.586 shares for every share of CoBancorp and assumed 70% of CoBancorp
shareholders received common stock. The following pro forma information is not
necessarily indicative of the results which actually would have been obtained
if the merger had been consummated in the past or which may be obtained in the
future.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------
FirstMerit Pro Forma Pro Forma
Corporation CoBancorp Adjustments Combined
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
- - -------------------------------------------------------------------------------------------------------------------
Interest income $ 407,825 48,141 1,415 457,381
- - -------------------------------------------------------------------------------------------------------------------
Net interest income 255,456 29,054 -4,604 279,906
- - -------------------------------------------------------------------------------------------------------------------
Net income 86,363 4,800 -7,650 83,513
- - -------------------------------------------------------------------------------------------------------------------
Weighted average diluted shares 63,537,328 3,497,150 67,419,864
- - -------------------------------------------------------------------------------------------------------------------
Earnings per diluted share $1.36 $ 1.37 $ 1.24
- - -------------------------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 1998:
- - -------------------------------------------------------------------------------------------------------------------
Interest income $211,708 18,634 708 231,050
- - -------------------------------------------------------------------------------------------------------------------
Net interest income 132,287 11,380 -2,302 141,365
- - -------------------------------------------------------------------------------------------------------------------
Net income 46,110 2,035 -3,825 44,320
- - -------------------------------------------------------------------------------------------------------------------
Weighted average diluted shares 63,143,349 3,535,828 67,068,825
- - -------------------------------------------------------------------------------------------------------------------
Earnings per diluted share $0.73 $ 0.58 $ 0.66
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
On April 5, 1998, the Corporation signed a definitive agreement for the
acquisition of Security First Corp., a $678 million holding company
headquartered in Mayfield Heights, Ohio. Subsidiaries of Security First Corp.
include Security Federal Savings & Loan Association of Cleveland and First
Federal Savings Bank of Kent. The company operates 14 branch offices throughout
six counties in Northeast Ohio. Under terms of the agreement, the transaction
will be structured as a tax-free exchange at a fixed exchange ratio of 0.8855
shares of FirstMerit stock for each share of Security First Corp. Based on
FirstMerit's April 3, 1998 closing price of $33.06 per share, the
transaction is valued at $29.28 per share, for a total value of $256 million.
The acquisition, which will be accounted for as a pooling of interests, is
expected to close by the end of the third quarter 1998, subject to customary
conditions for closing.
On August 11, 1998, the Corporation signed a definitive agreement to
acquire Signal Corp, a $1.9 billion holding company headquartered in Wooster,
Ohio. Subsidiaries of Signal Corp include Signal Bank, N.A., Summit Bank,
N.A., First Federal Savings Bank of New Castle (Pennsylvania) and Mobile
Consultants, Inc. The merger will allow the Corporation to increase its market
share in several key Northeast Ohio communities and marks the Corporation's
entrance into Western Pennsylvania.
Under the terms of the agreement, the fixed exchange ratio will be
1.32 shares of FirstMerit common stock for each share of Signal. Based on the
Corporation's August 10, 1998 closing price of $28.19 per share, the
transaction, which will be accounted for as a pooling-of-interests, is valued
at $37.21 per share or $470 million. The acquisition has been approved by the
Boards of Directors of both the Corporation and Signal and is subject to
approval by the Corporation and Signal shareholders as well as regulatory
authorities. The transaction is expected to close in the first quarter 1999.
The Corporation's previously announced stock repurchase programs
have been suspended as of April 6, 1998.
9
<PAGE> 10
3. Earnings per Share - The reconciliation of the numerator and denominator of
basic earnings per share ("EPS") with that of diluted EPS is presented as
follows:
<TABLE>
<CAPTION>
Income Shares
(Numerator) (Denominator) Per Share Amount
THREE MONTHS ENDED
JUNE 30, 1998:
<S> <C> <C> <C>
Basic EPS:
Net income $24,145 62,826,593 $0.38
Effect of dilutive stock
options 815,692
Diluted EPS:
Net income plus
assumed exercising of
options $24,145 63,642,285 $0.38
SIX MONTHS ENDED
JUNE 30, 1998:
Basic EPS:
Net income $46,110 62,282,099 $0.74
Effect of dilutive stock
options 861,250
Diluted EPS:
Net income plus
assumed exercising of
options $46,110 63,143,349 $0.73
THREE MONTHS ENDED
JUNE 30, 1997:
Basic EPS:
Net income $21,319 62,902,392 $0.34
Effect of dilutive stock
options 612,000
Diluted EPS:
Net income plus
assumed exercising of
options $21,319 63,514,392 $0.34
SIX MONTHS ENDED
JUNE 30, 1997:
Basic EPS:
Net income $41,552 63,296,726 $0.66
Effect of dilutive stock
options 554,412
Diluted EPS:
Net income plus
assumed exercising of
options $41,552 63,851,138 $0.65
</TABLE>
10
<PAGE> 11
4. Comprehensive Income - As of January 1, 1998, the Corporation adopted
Financial Accounting Standards Board (FASB) Statement No. 130, "Reporting
Comprehensive Income." Statement No. 130 establishes new rules for reporting and
display of comprehensive income and its components; however, the adoption of
Statement No. 130 has no effect on the Corporation's net income, shareholders'
equity, or earnings per share. Statement No. 130 requires unrealized gains or
losses on available-for-sale securities, which prior to adoption were reported
separately in shareholders' equity, to be included in "other comprehensive
income." Prior period financial information has been restated to reflect
implementation of Statement No. 130.
5. New Accounting Standards - In June 1997, the FASB issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related
Information," which is effective for fiscal years beginning after December
15, 1997, but is not required to be applied to interim period financial
statements in the year of adoption. Statement No. 131 changes the way public
companies report segment information in annual financial statements and also
requires those companies to report selected segment information in interim
financial reports to shareholders.
In February 1998, the FASB issued Statement No. 132, "Employer's
Disclosures about Pensions and Other Post Retirement Benefits." Statement No.
132 revises employer's disclosures about pension and other post retirement
benefit plans but does not change the measure of recognition of those plans. The
statement standardizes the disclosure requirements to the extent practicable,
requires additional information on changes in the benefit obligations and the
fair value of plan assets that will aid financial analysis, and eliminates
certain disclosures that are no longer useful. Statement No. 132 is effective
for fiscal years beginning after December 15, 1997. Interim period application
in the year of adoption is not required.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Statement No. 133 establishes
accounting and reporting standards for derivative instruments and requires an
entity to recognize all derivatives as either assets or liabilities in the
Balance Sheet and measure those instruments at fair value. If certain conditions
are met, a derivative may be specifically designated as a hedge to various
exposures. The accounting for changes in the fair value of a derivative (i.e.,
gains and losses) depends on the intended use of the derivative and its
resulting designation. This statement shall be effective for all fiscal quarters
beginning after June 15, 1999 (third quarter 1999 for the Corporation).
6. Management believes the interim consolidated financial statements reflect all
adjustments consisting only of normal recurring accruals, necessary for fair
presentation of the March 31, 1998 and March 31, 1997 statements of condition
and the results of operations for the quarters ended March 31, 1998 and 1997
7. 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. Reference is made to the section titled
"Forward-looking Statements" in the Corporation's Form 10-K for the period ended
December 31, 1997.
11
<PAGE> 12
<TABLE>
<CAPTION>
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)
Three Months ended June Year ended December 31,
-------------------------------- -------------------------------
1998 1997
-------------------------------- -------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
-------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investment securities $1,232,309 19,504 6.35% 1,095,505 71,126 6.49%
Federal funds sold 10,524 207 7.89% 41,636 2,250 5.40%
Loans, net of unearned income 4,054,265 90,568 8.96% 3,789,231 337,661 8.91%
Less allowance for possible loan losses 59,933 51,155
---------- ---------- ---------- ----------
Net loans 3,994,332 90,568 - 3,738,076 337,661 -
Cash and due from banks 195,902 - - 176,697 - -
Other assets 285,636 - - 201,871 - -
---------- ---------- ---------- ----------
Total assets $5,718,703 110,279 - 5,253,785 411,037 -
---------- ---------- ---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-
non-interest bearing $ 821,827 - - 733,394 - -
Demand-
interest bearing 511,625 1,579 1.24% 448,976 6,467 1.44%
Savings 1,374,759 8,762 2.56% 1,279,859 30,839 2.41%
Certificates and other time deposits 1,822,837 24,367 5.36% 1,701,886 91,406 5.37%
---------- ---------- ---------- ----------
Total deposits 4,531,048 34,708 3.07% 4,164,115 128,712 3.09%
Federal funds purchased, securities sold
under agreements to repurchase and 524,924 6,664 5.09% 477,454 23,657 4.95%
other borrowings
Other liabilities 94,284 - 92,598 -
Shareholders' equity 568,447 - 519,618 -
---------- ---------- ---------- ----------
Total liabilities and shareholders' equity $5,718,703 41,372 - 5,253,785 152,369 -
---------- ---------- ---------- ----------
Total earning assets $5,297,098 110,279 8.35% 4,926,372 411,037 8.34%
---------- ---------- ---------- ----------
Total interest bearing liabilities $4,234,145 41,372 3.92% 3,908,175 152,369 3.90%
---------- ---------- ---------- ----------
Net yield on earning assets 68,907 5.22% 258,668 5.25%
========== ====== ========== ======
Interest rate spread 4.43% 4.44%
====== ======
<CAPTION>
Three Months ended June 30,
--------------------------------
1997
--------------------------------
Average Average
Balance Interest Rate
--------------------------------
<S> <C> <C> <C>
ASSETS
Investment securities 1,091,932 17,732 6.51%
Federal funds sold 686 9 5.26%
Loans, net of unearned income 3,818,378 85,293 8.96%
Less allowance for possible loan losses 50,471
---------- ----------
Net loans 3,767,907 85,293 -
Cash and due from banks 172,099 - -
Other assets 202,341 - -
---------- ----------
Total assets 5,234,965 103,034 -
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand-
non-interest bearing 731,273 - -
Demand-
interest bearing 447,398 1,681 1.51%
Savings 1,283,787 7,609 2.38%
Certificates and other time deposits 1,696,932 22,659 5.36%
---------- ----------
Total deposits 4,159,390 31,949 3.08%
Federal funds purchased, securities sold
under agreements to repurchase and 478,178 6,025 5.05%
other borrowings
Other liabilities 85,395 -
Shareholders' equity 512,002 -
---------- ----------
Total liabilities and shareholders' equity 5,234,965 37,974 -
---------- ----------
Total earning assets 4,910,996 103,034 8.42%
---------- ----------
Total interest bearing liabilities 3,906,295 37,974 3.90%
---------- ----------
Net yield on earning assets 65,060 5.31%
========== ======
Interest rate spread 4.52%
======
<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.
</FN>
</TABLE>
12
<PAGE> 13
RESULTS OF OPERATIONS
FirstMerit Corporation's second quarter net income was $24.1 million, a
gain of 13.3% above second quarter 1997. Return on average equity (ROE) and
return on average assets (ROA) reached 17.04% and 1.69%, respectively. These
profitability ratios compare favorably to second quarter 1997 levels of 16.70%
and 1.63%.
For the six-month period ended June 30, 1998, net income was $46.1
million, up 11.0 percent above prior year. ROE and ROA for the current six-month
period were 16.90% and 1.69%, respectively. The comparable ratios for the 1997
period were 16.37% and 1.61%.
Net interest income on a fully tax-equivalent (FTE) basis was $68.9
million for the second quarter of 1998, a gain of 5.9% above the level reported
for the same 1997 period. Growth in average earning assets was 7.9% above second
quarter 1997, reaching $5.3 billion. This growth more than offset a 1.7% decline
in the net interest margin, from 5.31% in the second quarter of 1997 to 5.22%
for the comparable 1998 period. For the first six months of 1998, net interest
income FTE rose 4.1%. For the same six-month period, the net interest margin was
5.25% compared to 5.31% in 1997.
Excluding securities gains/losses from each quarter, noninterest income
was $24.8 million compared to $19.3 million the prior year, an improvement of
28.1%. Major gains were reported for trust income, up 26.2%, credit card fees,
up 31.9% and other service fees, including ATM revenue, up 48.3%. For the
six-month period, noninterest income was up 22% above 1997 levels, accounting
for 26.0 % of net revenue compared to 23.0% of net revenue for the prior year
period. Results of the recently acquire CoBancorp, Inc., from May 22, 1998 to
June 30, 1998, added approximately $0.885 million to noninterest income to both
the quarter and six-month periods.
Operating expenses were $54.2 million for the second quarter of 1998,
an increase of 13.9% above the prior year level of $47.6 million. Of the $6.6
million increase, processing fees accounted for $2.2 million; salaries, $1.7
million; higher professional fees, $0.7 million and amortization of intangibles,
$0.7 million. For the first six months of 1998, operating expenses were $105.0
million versus $95.3 in 1997, an increase of 10.1%. The second quarter and
six-months year-to-date efficiency ratios were 56.59% and 57.15%, respectively,
compared to 55.82% and 56.56% in 1997.
Assets were nearly $6.2 billion at quarter end, with earning assets
comprising 91% of the total. At June 30, 1998, total loans, net of unearned
interest, were $4.3 billion, a gain of 10.8% above 1997 quarter-end levels. On
an average basis, total loans were $4.1 billion, 6.2% above 1997 second quarter
levels. Commercial loans
13
<PAGE> 14
grew 17% to account for 42.9% of the portfolio, up from 38.9%. Meanwhile,
mortgage loans declined 9.3% to comprise 20.9% of the portfolio, down from
24.5%.
The provision for loan losses was $5.4 million, an increase of 8.1%
above second quarter 1997, consistent with growth of the portfolio. For the
six-month period, the provision was $10.9 million compared to $9.2 million the
prior year, reflecting growth in higher risk commercial and consumer loans, as
well as overall portfolio growth. During the past twelve months, the $23.3
million provided for possible loan losses exceeded net charge-offs of $16.7
million. Additionally, the allowance was increased $8.2 million by including
CoBancorp's pre-merger balance as part of the purchase. As a result, the
allowance for losses as a percent of loans increased to 1.53% at the end of the
second quarter, compared to 1.31% percent June 30, 1997.
At June 30, 1998, non-performing assets were $15.9 million, or 0.37% of
total loans and other real estate, compared to $10.3 million, or 0.27%, for the
same quarter last year. The loan loss allowance (to nonperforming assets)
coverage ratio was 4.4 times compared to 5.2 times at June 30, 1997.
Total deposits grew 16.1%, ending the quarter at $4.9 billion. On an
average basis, deposits were $4.5 billion for the second quarter, up 8.7% from
year earlier levels. Improvement was recorded across-the-board, but particularly
with respect to interest-bearing checking and money market accounts, which grew
at a rate of 14.4%.
Total shareholders' equity grew 24.0% from year earlier levels,
reaching $646.0 million at second quarter end. Earnings retained of $50 million
and re-issuance of $115 million of treasury shares in connection with the
CoBancorp acquisition in the second quarter more than offset the $43.8 million
of treasury shares repurchased during the course of the year. FirstMerit
suspended its stock repurchase program on April 6, 1998 in connection with the
Security First acquisition, and continues to do so. At quarter end, there were
65.2 million shares outstanding compared with 62.4 million at the end of the
prior year quarter.
14
<PAGE> 15
Diluted earnings per share for the second quarter were $0.38, an
increase of 13% over last year's quarterly earnings of $0.34. For the six months
ended June 30, 1998, diluted earnings per share were $0.73, 12% higher than the
$0.65 recorded for the 1997 first half. The components of change in per share
income for the quarters and six months ended June 30, 1998 and 1997 are
summarized in the following table:
<TABLE>
<CAPTION>
CHANGES IN EARNINGS PER SHARE
- - -----------------------------
Three months ended Six months ended
June 30, June 30,
1998/1997 1998/1997
------------------------------------------------
<S> <C> <C>
Diluted net income per share June 30,
1997 $0.34 $0.65
Increases (decreases) due to:
Net interest income - taxable equivalent 0.06 0.08
Provision for possible loan losses -0.01 -0.03
Other income 0.11 0.17
Other expenses -0.11 -0.15
Federal income taxes - taxable
equivalent 0.01 0.00
Change in share base 0 0.01
------------------------------------------------
Net change in diluted net income per
share 0.04 0.08
------------------------------------------------
Diluted net income per share June 30,
1998 $0.38 $0.73
================================================
</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.
15
<PAGE> 16
Net interest income FTE for the quarter ended June 30, 1998 was $68.9
million compared to $65.1 million for the same period one year ago, an increase
of $3.8 million. The rise in net interest income occurred because higher
interest income outpaced an increase in the interest paid on customer deposits
and other bank borrowings.
Higher interest income was a result of earning asset growth over the
past twelve months. Specifically, an upsurge in loan and investment outstandings
added $5.3 million and $1.8 million, respectively, to second quarter interest
income when compared to the same 1997 period. Average loan yield for both
periods was 8.96%.
The increase in interest expense was also volume driven. Average
balances in all customer deposit and wholesale borrowings increased over the
1997 second quarter. In fact, increased outstandings accounted for $3.1 million
of the total rise of interest expense of $3.4 million. Higher certificate of
deposit (CD) balances added $1.7 million of interest expense while increased
savings/money market deposits and borrowings on the wholesale market each
contributed $0.6 million more to quarter-to-quarter interest expense.
The trends in interest income and expense noted for the quarters also
existed for the year-to-date periods. That is, the increase in net interest
income of $5.3 million was due to the rise in interest income ($10.7 million)
being greater than the gain in interest expense ($5.4 million). Also, the
increases in both interest income and interest expense were primarily driven by
volume with less effect caused by changes in rates.
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.
16
<PAGE> 17
CHANGES IN NET INTEREST DIFFERENTIAL -
FULLY-TAX EQUIVALENT RATE/VOLUME ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Quarters ended Six Months Ended
June 30, June 30,
1998 and 1997 1998 and 1997
------------- -------------
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 $2,222 -450 1,772 1,936 -760 1,176
Loans 5,269 6 5,275 8,637 666 9,303
Federal funds sold 194 4 198 234 -25 209
--------------------------------------------------------------------
Total interest income 7,685 -440 7,245 10,807 -119 10,688
INTEREST EXPENSE Interest on deposits:
Demand-interest bearing 198 -300 -102 259 -693 -434
Savings 580 573 1,153 556 1,316 1,872
Certificates and other
time deposits 1,683 25 1,708 2,798 150 2,948
Federal Funds Purchased,
REPOs & other borrowings 593 46 639 562 441 1,003
--------------------------------------------------------------------
Total interest expense 3,054 344 3,398 4,175 1,214 5,389
--------------------------------------------------------------------
Net interest income $4,630 -783 3,847 6,633 -1,334 5,299
====================================================================
</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 schedule below shows the
relationship of the tax equivalent adjustment and the net interest margin.
17
<PAGE> 18
NET INTEREST MARGIN
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
June 30, June 30,
---------------------------------------------------------
1998 1997 1998 1997
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net interest income per
financial statements $68,187 64,241 132,287 126,745
Tax equivalent adjustment 720 819 1,437 1,680
---------------------------- ---------------------------
Net interest income - FTE $68,907 65,060 133,724 128,425
============================ ===========================
Average earning assets $5,297,098 4,910,996 5,135,858 4,879,587
============================ ===========================
Net interest margin 5.22% 5.31% 5.25% 5.31%
=========================================================
</TABLE>
As stated previously in this document, the CoBancorp, Inc. acquisition
was completed on May 22, 1998. As a result, 1998 averages include CoBancorp
balances for the forty-day period from May 22, 1998 through June 30, 1998.
Average loans outstanding for the quarter ended June 30, 1998 were
$4.054 billion, up $235.9 million or 6.2%, from $3.818 billion for the same
quarter last year. The most notable increases occurred in commercial loans, up
$253.1 million or 17.0%; installment loans, up $42.6 million or 4.6%; home
equity loans up $34.1 million or 15.5% and credit card outstandings up $6.1
million or 7.0%. Similarly, for the first half of 1998, average loan
outstandings totaled $3.950 billion, up $194.6 million or 5.2% from $3.756
billion for the prior year. Average outstanding loans for the quarter and
six-month periods equaled 76.5% and 76.9% of average earning assets,
respectively.
Average CDs totaled $1.823 billion at June 30, 1998, up 7.4% from
$1.697 billion at June 30, 1997. On a percentage basis, average CDs were 43% of
total interest bearing funds at both June 30, 1998 and 1997; average savings
deposits, including money market accounts, were about 33% of interest bearing
funds at June 30, 1998 and 1997; interest-bearing demand deposits increased
slightly as a funding source from 11% of total interest bearing funds at June
30, 1997 to 12% at June 30, 1998; and wholesale borrowings made up about 12% of
total interest-bearing deposits at both June 30 quarter ends. During both second
quarter periods, interest bearing liabilities funded 79.9% of average earning
assets.
In summary, on a percentage basis, loan growth over the past year
continues to occur mainly in higher yielding consumer and commercial credits
resulting in a lower concentration of mortgage loan outstandings. Some of the
decline in mortgage
18
<PAGE> 19
balances is also attributable to the Corporation's practice of securitizing and
selling mortgage loans when favorable conditions exist. The funding mix feeding
the loan growth, has remained constant between borrowing categories.
OTHER INCOME
Other income for the quarter ended June 30, 1998 was $26.6 million, an
increase of $6.7 million or 34%, over the $19.8 million earned during the same
period last year. Excluding securities sales, the increase in other income was
$5.4 million, or 28%. For the six-month period, other income totaled $50.2
million compared to $39.4 million a year ago. The results of CoBancorp from May
22, 1998 to June 30, 1998 contributed $0.9 million to other income for the 1998
quarter and first half.
Trust department income for the second quarter was $4.2 million, up
$0.8 million from the $3.3 million earned one year ago. CoBancorp's trust fees
totaled $0.3 million for the 1998 period. Service charges on depositors'
accounts increased 12.0% to $7.2 million from $6.4 million for last year's
second quarter. CoBancorp's contribution to service charges on deposits totaled
$0.3 million for the quarter and accounted for 4.5% of the improvement. Credit
card fees, including merchant services, increased 31.9% to $4.8 million for the
quarter compared to $3.6 million for the three months ended June 30, 1997. Other
service fees, including Automated Teller Machine (ATM) revenue, rose from $3.3
million during the 1997 second quarter to $4.0 million for same 1998 period.
The following 1998 first half changes occurred, compared to the same
period last year, when CoBancorp 1998 results are excluded: trust department
income increased 12.9%; service charges on depositors' accounts increased 6.7%;
credit card fees increased 32.6% and other service fees, which include ATM
revenue, increased 22.7%.
In banking, other income is an important complement to net interest
income as it provides a source of revenues not sensitive to the interest rate
environment.
OTHER EXPENSES
Other expenses were $54.2 million for the second quarter, an increase
of $6.6 million or 13.9%, over the $47.6 million recorded during the same
quarter last year. Operating expenses incurred by CoBancorp from May 22, 1998
through June 30, 1998 are responsible for $2.6 million of the increase. After
adjusting for CoBancorp, first half 1998 other expenses totaled $102.4 million
versus $95.3 million a year ago.
19
<PAGE> 20
The lower-is-better efficiency ratio for the quarter was 56.59%
compared to 55.82% a year ago. For the first halves, the efficiency ratios were
57.15% and 56.56% for 1998 and 1997, respectively. The second quarter efficiency
ratio indicates that it took 56.59 cents to make one dollar's profit.
Excluding CoBancorp from quarterly and year-to-date results, salaries,
wages, pension and employee benefits, the largest component of other expenses,
increased 3.2% to $24.2 million. For the six-month period, salaries, wages,
pension and employee benefits rose 3.4% to $48.1 million. The overall rise in
personnel costs approximates the Corporation's annual salary increases.
Other operating expenses were $20.5 million, excluding CoBancorp., up
$3.6 million from second quarter last year. The largest increases were in the
following categories: processing fees up $1.9 million, professional services up
$0.7 million and telecommunications expenses up $0.4 million. First half results
without CoBancorp produced other operating costs of $40.1 million versus $33.5
million last year. The largest increases half-over-half occurred in processing
fees, up $3.5 million, professional services up $1.6 million, telecommunication
expenses up $0.4 million and amortization of intangibles up $0.3 million .
20
<PAGE> 21
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:
<TABLE>
<CAPTION>
June 30, 1998
-------------
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 $663,547 2,197 2,020 663,724
Obligations of state and
political subdivisions 112,020 527 65 112,482
Mortgage-backed securities 411,304 3,798 461 414,641
Other securities 136,023 1,106 378 136,751
---------------- ---------------- ---------------- ----------------
$1,322,894 7,628 2,924 1,327,598
================ ================ ================ ================
<CAPTION>
Book Value Market Value
---------------- ----------------
<S> <C> <C>
Due in one year or less $110,160 110,297
Due after one year through five years
276,082 277,647
Due after five years through ten years
212,754 213,293
Due after ten years 723,898 726,361
---------------- ----------------
$1,322,894 1,327,598
================ ================
</TABLE>
The book value and market value of investment securities including
mortgage-backed securities and derivatives at June 30, 1998, by contractual
maturity, are shown above. Expected maturities will differ from contractual
maturities based on the issuers' right to call or prepay obligations with or
without call or prepayment penalties.
The carrying value of investment securities pledged to secure trust and public
deposits and for purposes required or permitted by law amounted to approximately
$936.0
21
<PAGE> 22
million at June 30, 1998, $830.0 million at December 31, 1997 and $689.6 million
at June 30, 1997.
Securities with remaining maturities over five years reflected in the
foregoing schedule consist of mortgage and asset backed securities. These
securities are purchased within an overall strategy to maximize future earnings
taking into account an acceptable level of interest rate risk. While the
maturities of these mortgage and asset backed securities are beyond five years,
these instruments provide periodic principal payments and include securities
with adjustable interest rates, reducing the interest rate risk associated with
longer term investments.
LOANS
Total loans outstanding at June 30, 1998 amounted to $4.296 billion
compared to $3.835 billion at December 31, 1997 and $3.878 billion at June 30,
1997. The purchase of CoBancorp finalized on May 22, 1998 added $391.1 million
to total loans. If CoBancorp loans outstandings at the end of the quarter are
not included, commercial loans were $1.670 billion, or 10.7% higher than last
year's total; mortgage loans were $780.4 million, down 16.2%; and installment,
home equity, bankcard, tax-free, and leases, (on a combined basis) were $1.455
billion, up 1.8%. Through securitization and sales of single-family mortgages
and sales of pools of unsecuritized mortgage loans, the Corporation continues to
change its loan mix from lower yielding mortgage loans to higher earning
commercial and consumer credits.
ASSET QUALITY
Total nonperforming assets (non-accrual and restructured loans and
other real estate) amounted to $15.9 million at June 30, 1998 or 0.37% of total
outstanding loans and other real estate. At December 31, 1997, nonperforming
assets totaled $13.6 million or 0.35% of outstanding loans and other real estate
compared to $10.3 million or 0.27% of outstanding loans and other real estate at
June 30, 1997. Impaired loans are loans for which, based on current information
or events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Impaired loans
must be valued based on the present value of the loans' expected future cash
flows at the loans' effective interest rates, at the loans' observable market
prices, or the fair value of the underlying collateral. Under the Corporation's
credit policies and practices, and in conjunction with provisions within
Statements No. 114 and No. 118, all nonaccrual and restructured commercial,
agricultural, construction, and commercial real estate loans, meet the
definition of impaired loans.
22
<PAGE> 23
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, December 31, June 30,
1998 1997 1997
------------------- ---------------------- -------------------
<S> <C> <C> <C>
Impaired Loans:
Non-accrual $12,240 11,185 7,248
Restructured 87 89 90
- - -----------------------------------------------------------------------------------------------------------------
Total impaired loans 12,327 11,274 7,338
------------------- ---------------------- -------------------
Other Loans:
Non-accrual 2,658 1,434 2,418
Restructured --- --- ---
- - -----------------------------------------------------------------------------------------------------------------
Total other nonperforming loans 2,658 1,434 2,418
- - -----------------------------------------------------------------------------------------------------------------
Total nonperforming loans 14,985 12,708 9,756
- - -----------------------------------------------------------------------------------------------------------------
Other real estate owned (ORE) 953 908 571
------------------- ---------------------- -------------------
Total nonperforming assets 15,938 13,616 10,327
=================================================================================================================
Loans past due 90 days or more
accruing interest 11,829 11,166 6,222
=================================================================================================================
Total nonperforming assets as a
percent of total loans and ORE 0.37% 0.35% 0.27%
=================================================================================================================
</TABLE>
N/A = Not Available
There is no concentration of loans in any particular industry or group of
industries. Most of the Corporation's business activity is with customers
located within the state of Ohio.
23
<PAGE> 24
ALLOWANCE FOR LOAN LOSSES
The allowance for possible loan losses at June 30, 1998 totaled $65.7
million, or 1.53% of total loans outstanding compared to $53.8 million, or 1.40%
and $50.9 million, or 1.31% at December 31, 1997 and June 30, 1997,
respectively.
<TABLE>
<CAPTION>
Dollars in thousands
Six months ended Year ended Six months ended
June 30, December 31, June 30,
1998 1997 1997
---------------------- ----------------------- ---------------------
<S> <C> <C> <C>
Allowance - beginning of period $53,774 49,336 49,336
Add: allowance from CoBancorp
purchase 8,215
Loans charged off:
Commercial, financial, agricultural 928 1,618 983
Installment to individuals 11,415 23,779 11,337
Real estate 59 574 389
Lease financing 475 1,290 536
Total charge-offs 12,877 27,261 13,245
Recoveries:
Commercial, financial, agricultural 644 1,121 864
Installment to individuals 4,350 8,386 4,365
Real estate 558 123 147
Lease financing 179 476 232
Total recoveries 5,731 10,106 5,608
Net charge-offs 7,146 17,155 7,637
Provision for possible loan losses 10,906 21,593 9,194
---------------------- ----------------------- ---------------------
Allowance - end of period $65,749 53,774 50,893
====================== ======================= =====================
Annualized net charge offs as a
percent of average loans 0.36% 0.45% 0.41%
Allowance for possible
loan losses:
As a percent of loans
outstanding at end of
period 1.53% 1.40% 1.31%
As a multiple of annualized net
charge offs 4.56X 3.13X 3.30X
</TABLE>
24
<PAGE> 25
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.
25
<PAGE> 26
DEPOSITS
The following schedule illustrates the change in composition of the
average balances of deposits and average rates paid for the noted periods.
(Dollars in Thousands)
Three months and year ended
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997 June 30, 1997
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------------------- ------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits -
non-interest bearing $821,827 - 733,394 - 731,273 -
Demand Deposits -
interest bearing 511,625 1.24% 448,976 1.44% 447,398 1.51%
Savings Deposits 1,374,759 2.56% 1,279,859 2.41% 1,283,787 2.38%
Certificates and other
time deposits 1,822,837 5.36% 1,701,886 5.37% 1,696,932 5.36%
-------------- -------------- --------------
$4,531,048 3.07% 4,164,115 3.09% 4,159,390 3.08%
============== ============== ==============
</TABLE>
The following table summarizes the certificates and other time deposits
in amounts of $100,000 or more as of June 30, 1998 by time remaining until
maturity.
<TABLE>
<CAPTION>
(Dollars in Thousands) Amount
<S> <C> <C>
Maturing in:
Under 3 months $262,611
3 to 12 months 135,899
Over 12 months 41,144
------------
$439,654
============
</TABLE>
26
<PAGE> 27
CAPITAL RESOURCES
Shareholders' equity at June 30, 1998 totaled $646.0 million compared
to $530.3 million at December 31, 1997 and $517.1 million at June 30, 1997. The
significant increase from last year periods was primarily due to the second
quarter 1998 acquisition of CoBancorp, Inc.
The following table reflects the various measures of capital:
<TABLE>
<CAPTION>
As of As of As of
June 30, December 31, June 30,
1998 1997 1997
<S> <C> <C> <C> <C>
(in thousands)
Total equity $646,013 10.45% 530,336 9.99% 517,160 9.73%
Common equity 646,013 10.45% 530,336 9.99% 517,160 9.73%
Tangible common
equity (a) 642,954 10.41% 527,771 9.95% 513,932 9.67%
Tier 1 capital (b) 486,647 9.68% 516,388 12.30% 517,690 11.79%
Total risk-based capital
(c) 549,545 10.93% 568,886 13.55% 568,583 12.95%
Leverage (d) 486,647 8.75% 516,388 9.66% 517,690 9.89%
</TABLE>
a) Common equity less all intangibles; computed as a ratio to total assets
less intangible assets.
(b) Shareholders' equity minus net unrealized holding gains on equity
securities, plus or minus net unrealized holding losses or gains on
available for sale debt securities, less goodwill; computed as a ratio
to risk-adjusted assets, as defined in the 1992 risk-based capital
guidelines.
(c) Tier 1 capital plus qualifying loan loss allowance, computed as a ratio
to risk-adjusted assets, as defined in the 1992 risk-based capital
guidelines.
(d) Tier 1 capital; computed as a ratio to the latest quarter's average
assets less goodwill.
The risk-based capital guidelines issued by the Federal Reserve Bank in
1988 require banks to maintain capital equal to 8% of risk-adjusted assets
effective December 31, 1993. At June 30, 1998 the Corporation's risk-based
capital equaled 10.93% of risk adjusted assets, far exceeding the minimum
guidelines.
The cash dividend of $0.16 paid in the second quarter has an indicated
annual rate of $0.64 per share.
YEAR 2000 READINESS
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.
FirstMerit continues to recognize the impact of the Year 2000
transition as a serious business issue affecting our institution, our customers
and suppliers. FirstMerit assembled a team from essential areas throughout the
bank to ensure timely completion of Year 2000 compliance. Each team continues
to address their portion of the project under the watchful eyes of both
Executive Management and FirstMerit's Board of Directors. A Project Office was
formed to include full time staff who coordinate corporate-wide Year 2000
planning, documentation, reporting and implementation of readiness measures.
Significant resources are being expended to ensure the millennium
issue is properly addressed. Consulting and programming resources continue to
be used to supplement internal staff and provide specialized expertise where
necessary. FirstMerit is using newly acquired software tools and enhanced
procedures to assist in code remediation, testing and controlling the numerous
software changes. Testing results are being reviewed by staff from throughout
the organization. Coordination with major business partners is also in process
or planned.
FirstMerit has based its plans on regulatory guidelines published by
the Federal Financial Institutions Examination Council (FFIEC). The FFIEC
considers five general phases: Awareness, Assessment, Renovation, Validation
and Implementation. The five phases are explained below along with FirstMerit's
status at June 30, 1998:
Awareness: The Awareness phase defines the Year 2000 problem, gains
executive level support and establishes an overall strategy. FirstMerit began
working on the Year 2000 issue in 1996 with identification of major vendors and
their compliance status. Significant progress has been made in the
implementation of the strategy for Year 2000 compliance. Executive Management
has been proactive in the management of the project and contracted with
consultants to assist in performing the assessment and formulating a strategy.
The awareness phase has expanded to include a widespread customer awareness
program to help educate customers of the Year 2000 issue and allow monitoring
of FirstMerit's progress.
Assessment: The Assessment phase defines the size and complexity of
the problem and the magnitude of the effort to address Year 2000 issues.
FirstMerit completed the assessment phase for all mainframe and microcomputer
systems during the first quarter of 1998. FirstMerit has 82 mainframe
applications of which 30 are considered "mission critical." The majority of the
applications are vendor packages. The "mission critical" applications are given
priority and all 30 are on schedule to be Year 2000 ready by December 31, 1998
or earlier. Microcomputer software and hardware are in the process of being
upgraded for Year 2000 compliance. The assessment of non-information systems
such as security systems, elevators, etc. was completed during the second
quarter.
Renovation: The purpose of the Renovation phase is to ensure all date
routines have been corrected to properly address Year 2000 dates. At this time,
FirstMerit is heavily involved in the renovation of the in-house written code
and the installation of vendor supplied upgrades. Renovation of in-house code
or Year 2000 compliant vendor software installation is complete for 7 of 30
mission critical applications and is in-process for another 20 (a total of 27
of 30 in process or stage complete).
Validation: The Validation phase consists of significant testing.
FirstMerit has started the extensive testing of both in-house and vendor
written systems as well as the various connections to other systems
(internal and external). Non-information systems such as vaults and security
systems will also be tested. Testing guidelines have been issued to ensure
consistency and completeness throughout the organization. Certain core
applications such as Certificates of Deposit, Demand Deposit, Installment Loan
and Savings have been tested with various different future dates and are Year
2000 compliant. Many others are currently in process and all mainframe
applications remain on schedule to be tested by December 31, 1998 or sooner.
Implementation: During the Implementation phase, systems are
certified as Year 2000 compliant and placed into production. FirstMerit will
place systems, once renovated and validated, into production throughout 1998.
All mainframe systems continue to be on schedule to be renovated, validated and
implemented into production by December 31, 1998.
Another area of concern mentioned by the FFIEC is the area of
contingency planning where FirstMerit is considering alternative measures
throughout the organization in event of a Year 2000 caused problem. At present,
business areas are reviewing departmental Year 2000 risks to incorporate
changes to their contingency plans.
Plans will include "drop dead dates" which will act as a trigger for
use of alternate vendors, suppliers, outside resources, etc., if necessary.
Vendors for mission critical applications have been closely monitored
throughout the project to identify any potential areas of concern.
FirstMerit continues to work very hard to ensure Year 2000 does not
affect our customers. The majority of Project Year 2000 remains on schedule to
be completed during 1998, allowing 1999 for additional testing and follow-up.
We do not anticipate any interruptions in normal business activities.
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 total remaining cost of the Year 2000 readiness project is
estimated at $5.1 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.
As of June 30, 1998, the Corporation has incurred and expensed approximately
$1.1 million 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 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.
27
<PAGE> 28
PART II. - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 8, 1998, the Registrant held its Annual Meeting of
Shareholders for which the Board of Directors solicited proxies. At the
Annual Meeting, the shareholders adopted all proposals stated in the
Proxy Statement dated February 23, 1998. The proposals voted on and
approved by the shareholders are as follows:
1. The election of five Class I directors, being:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
John R. Cochran 52,434,414 * 686,800
Richard Collela 52,296,595 * 824,619
Philip A. Lloyd, II 52,347,614 * 773,600
Roger T. Read 52,335,586 * 785,628
Richard N. Seaman 52,366,888 * 754,326
</TABLE>
All other Class II and Class III directors continued in their
positions.
* Proxies provide that shareholders may either cast a vote
for, or abstain from voting for, directors.
2. Approval of the proposal to amend the Corporation's Amended
and Restated Articles of Incorporation to increase the authorized
shares of Common Stock from 80 million to 160 million shares by a vote
of 50,504,126 (82%) for, 2,022,816 (3%) against and 594,272 (1%)
abstaining.
3. Approval of the proposal to amend the Corporation's Code of
Regulations, as amended, to make the Ohio Control Share Acquisition Act
inapplicable to the Corporation by a vote of 46,216,329 (75%) for,
1,684,317 (3%) against and 1,187,793 (2%) abstaining.
4. Approval of the proposal to amend the Employee Stock
Purchase Plan to allow employees to deduct up to 10% of their
compensation to purchase shares of the Corporation by a vote of
51,301,255 (83%) for, 1,117,515 (2%) against and 702,444 (1%)
abstaining.
28
<PAGE> 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
3(a) Amended and Restated Articles of Incorporation of FirstMerit
Corporation (incorporated by reference from Exhibit 3(a) to
the Form 8-K filed by the registrant on April 9, 1998)
3(b) Amended and Restated Code of Regulations of FirstMerit
Corporation (incorporated by reference from Exhibit 3(b) to
the Form 8-K filed by the registrant on April 9, 1998)
4 Shareholders Rights Agreement dated October 21, 1993, between
FirstMerit Corporation and FirstMerit Bank, N.A., as amended
and restated May 20, 1998 (incorporated by reference from
Exhibit 4 to the Form 8-A/A filed by the registrant on June
22, 1998)
27 Financial Data Schedule
(B) Form 8-K
On June 22, 1998, Firstmerit Corporation filed a Form 8-K to
report the amendment of the FirstMerit Corporation
Shareholders Rights Plan.
On May 22, 1998, FirstMerit Corporation filed a Form 8-K to
report the completion of its acquisition of CoBancorp, Inc.
On April 9, 1998, FirstMerit Corporation filed a Form 8-K to
report:
(a) The approval by the shareholders increasing the
authorized Common Stock of FirstMerit from 80,000,000
to 160,000,000 shares and the amendment of
FirstMerit's Amended and Restated Code of Regulations
to add Article XI making the Ohio Control Share Act
inapplicable to FirstMerit, and
(b) Announcing on April 5, 1998, Security First
Corp., a Deleware corporation, and FirstMerit
Corporation had entered into an Agreement of
Affiliation and Plan of Merger.
29
<PAGE> 30
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: August 14, 1998
30
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<NAME> FIRSTMERIT CORPORATION
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<FISCAL-YEAR-END> DEC-31-1998
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