DBRS Ratings on FirstMerit Corp. Unchanged after 1Q13 Results; Senior at A (low), Negative Trend

DBRS, Inc. (DBRS) has today commented that its ratings for FirstMerit Corporation (FirstMerit or the Company), including its A (low) Issuer & Senior Debt rating, are unchanged following the release of its 1Q13 financial results. The trend on all ratings is Negative, except for the short-term instruments rating for FirstMerit Bank, N.A, which is Stable. The Company reported net income of $36.1 million for 1Q13, down from $38.0 million for 4Q12. Lower Quarter-over-Quarter (QoQ) earnings mostly reflected margin pressure, driven by the low interest rate environment. Specifically, higher linked-quarter earnings were attributable to a 5.1% decrease in total revenues, partially offset by a 4.7% decrease in non-interest expense and an 18.4% decrease in provisions for non-covered loans. Highlights for the quarter included sustained average loan and deposit growth, sound asset quality, and a solid capital profile.

As with most banks, the slow growth economy and low interest rate environment continue to pressure FirstMerit’s earnings. During 1Q13, total revenues declined $9.1 million to $168.7 million sequentially, driven by a 4.2% decrease in net interest income and a 6.9% decline in non-interest income. Lower net interest income was attributable to a 12 basis point (bps) narrowing of the Company’s net interest margin (NIM) to a still solid 3.46%, partially offset by a 1.2% increase in average earning assets. The narrower NIM mostly reflected the impact of the issuance of $250 million of subordinated notes in 1Q13. Meanwhile, lower sequential non-interest income was primarily attributable to the non-recurrence of $2.4 million of securities gains reported in 4Q12, a $1.7 million, or 11.7%, decrease in deposit service charges and a $0.9 million, or 8.5% decrease in credit card fees. Lower levels of service and card fees were in part due to seasonality.

Total noninterest expense decreased $5.2 million, or 4.7%, sequentially, to $106.9 million, driven by a $4.1 million, or 26.1%, decrease in pension and employee benefits, the non-recurrence of the 4Q12 $2.3 million FHLB termination fee, and a $1.4 million, or 15.3%, decrease in bankcard loan processing costs.

Positively, FirstMerit’s average loans (non-covered) increased 3.4% during 1Q13, driven by a 4.6% increase in commercial loans. The growth in commercial loans was broad based by segment and geography. Supporting 1Q13 loan growth, average deposits increased 1.7%, driven by a 2.8% increase in core deposits (excludes CDs).

Importantly, the Company’s asset quality remains sound, despite the difficult operating environment.
Specifically, 1Q13 net charge offs (excluding covered loans) totaled $5.9 million, or a low 0.27% of average loans, down from $7.1 million or 0.34% in 4Q12. Meanwhile, non-performing assets increased by a modest $2.0 million or 4.0% sequentially and represented a moderate 0.59% of loans (non-covered), at March 31, 2013, up slightly from 0.57% at December 31, 2012. Finally, DBRS notes that the Company’s reserve coverage (reserves for non-covered loans) remains solid at 242% of non-performing loans and 1.13% of period-end loans.

DBRS views FirstMerit’s capital as ample, providing solid loss absorption capacity. At the end of 1Q13, the Company’s tangible common equity ratio was a solid 8.03%.

Notes:
All figures are in U.S. dollars unless otherwise noted.

[Amended on June 25, 2014 to remove unnecessary disclosures.]