DBRS: FMER’s Lower QoQ Earnings Reflect Lower Revenues; Sustained Loan Growth

Summary:
• 1Q14 earnings available to common shareholders of $51.6 million, down from $55.3 million, yet up from $36.0 million for 1Q13.
• Lower QoQ earnings mostly reflected lower customer activity, due to two fewer days in the quarter and severe weather.
• DBRS rates FirstMerit’s Issuer & Senior debt at A (low) with a Negative trend.

DBRS, Inc. (DBRS) considers FirstMerit Corporation’s (FirstMerit or the Company) 1Q14 results to be sound, despite lower quarter-on-quarter (QoQ) earnings. Lower linked-quarter earnings mostly reflected a moderate decrease in fee income, mainly due to lower levels of deposit service charges and trust income. Furthermore, a slight narrowing of the Company’s net interest margin led to a modest decline in net interest income, despite higher levels of average loans. Partially offsetting these revenue headwinds, linked-quarter expenses were down moderately, reflecting declines across many line items, including salaries and benefit expense, and equipment costs. Going forward, the Company’s bottom line should benefit from branch consolidations, as well as enterprise sourcing efficiencies, especially in 2H14. Importantly, management anticipates a further $18 million in full year run rate expense saves related to its efficiency initiatives. Overall, balance sheet fundamentals remain sound, reflecting sustained average loan growth, sound asset quality and solid funding and capital profiles.

The Company’s credit quality remains sound, despite slightly higher QoQ levels of net charge-offs and non-performing assets. Furthermore, reserve coverage (reserves for originated loans) remains adequate, but lower than peers, at 0.9% of period-end loans.

FirstMerit’s liquidity and capital profiles remain solid. Funding reflects a core deposit base that fully funds loans. Meanwhile, capital remains solid, and provides sound loss absorption capacity and the potential for balance sheet growth.

DBRS rates FirstMerit Corporation Issuer & Senior debt at A (low) with a Negative trend.

Note:
All figures are in U.S. Dollars unless otherwise noted.