DBRS Comments on FirstMerit Corp’s 3Q13 Results; Senior at A (low), Negative Trend

DBRS, Inc. (DBRS) has today commented on the 3Q13 Results of FirstMerit Corporation (FirstMerit or the Company). FirstMerit has an Issuer & Senior Debt rating of A (low) with a Negative trend. For the quarter, the Company reported net income available to common shareholders of $38.9 million, down from $46.6 million for 2Q13, and up from $34.8 million for 3Q12. Specifically, lower QoQ earnings were attributable to an 11.5% increase in non-interest expense, partially offset by a 2.6% increase in total revenues. Highlights for the quarter included sustained average loan and deposit growth, sound and improved credit quality, and the maintenance of a solid capital and liquidity profile.

Lower sequential earnings partially reflected merger related costs associated with the Citizens Republic acquisition (Citizens: acquired on April 12, 2013), totaling $34.4 million (pre-tax) in 3Q13 and $32.1 million (pre-tax) in 2Q13 ($2.8 million of which was recorded as a reduction to non-interest income). On an adjusted basis; which excludes the merger related costs in 3Q13 and 2Q13, as well as securities related losses in 2Q13, the Company’s core earnings or DBRS calculated income before provisions and taxes were down 14.4% sequentially, driven by a 11.0% increase in adjusted expenses, partially offset by a 0.5% increase in adjusted revenue. Higher 3Q13 adjusted expenses mostly reflected the Company’s first full quarter impact of Citizens’ cost base, as well as increased levels of processing expense, FDIC claw-back expense, and mortgage repurchase reserves expense.

The modest increase in sequential adjusted revenues was driven by a 2.7% increase in spread income to $203.3 million, partially offset by a 5.3% decrease in adjusted fee income to $71.1 million. Improved spread income reflected a 3.4% increase in average interest earning assets, despite a seven basis point narrowing of net interest margin (NIM) to 4.05%. Sustained average loan growth (up 3.2% in 3Q13) along with higher levels of average securities (up 3.7%) led to higher sequential average earning assets. DBRS notes that average originated loans increased by 5.6% during 3Q13. Meanwhile, the decrease in adjusted non-interest income was mostly due to a 54.4% decline in loans sales and servicing income, driven by lower levels of residential mortgage production.

Asset quality remains sound and improved sequentially. Specifically, non-performing assets (NPAs: excluding acquired and covered loans) decreased $10.8 million or 16.2% and represented a manageable 0.57% of loans at September 30, 2013, down from 0.72% at June 30, 2013. Meanwhile, 3Q13 net charge offs (excluding acquired and covered loans) declined 14.1% to $2.9 million and represented a very low 0.12% of average loans, down from 0.15% in 2Q13. Finally, DBRS notes that FirstMerit’s reserve coverage (reserves for originated loans) remains adequate at 276% of non-performing loans and 1.0% of period-end loans.

FirstMerit’s capital profile remains sound, as evidenced by its estimated risk based capital ratios, including Tier 1 of 11.27% and Total of 13.72%, at September 30, 2013. Furthermore, the Company’s tangible common equity ratio was solid at 7.44%.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]