DBRS Confirms FirstMerit Corporation at A (Low), Changes Trend to Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of FirstMerit Corporation (FirstMerit or the Company), including its Issuer & Senior Debt rating of A (low). At the same time, DBRS revised the Negative trend to Stable for most ratings, with the exception of the Short-Term Instruments rating for FirstMerit Bank, N.A, it’s bank subsidiary, which remains on Stable trend. The rating actions follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The change in trend to Stable from Negative reflects the successful completion of a number of benchmarks related to the Citizens Republic Bancorp acquisition (Citizens), including a smooth system conversion, the absence of unexpected customer and employee turnover, and achieving visibility of targeted annual expense synergies. Overall, FirstMerit’s operating fundamentals are in line with those of its similarly rated peers. Underpinning its ratings are its strong community focused banking franchise, sound asset quality, strong funding profile, and solid capital position.

With a deeply entrenched banking franchise, FirstMerit provides a broad menu of products and services through 401 banking offices located in Ohio, Michigan, Wisconsin, Illinois and Pennsylvania. The Company is run conservatively by an experienced management team that has successfully expanded its footprint into Illinois, Michigan and Wisconsin. Overall, FirstMerit holds solid and defensible deposit market positions across its footprint. Indeed, on a metropolitan statistical area basis, the Company holds dominant market shares in Akron, Ohio (27% deposit market share) and Flint, Michigan (34% deposit market share), along with the number two position in Canton, Ohio (24% of deposits).

As with most banks, earnings remain pressured by the difficult operating environment. Spread income continues to reflect a narrowing net interest margin, mostly offset by growing levels of average earning assets, especially commercial loans and installment exposure. Although the Company is reliant on spread income with 1Q14 fee revenues comprising only 26% of total revenues, DBRS believes fee revenue contribution will grow, especially given the Company’s broader product set, larger franchise and common operating platform. Finally, cost saves related to the Citizens transaction have exceeded targeted levels (22% of 6/30/12 Citizens YTD annualized non-interest expense), benefitting FirstMerit’s bottom line. Although FirstMerit’s expenses are somewhat elevated they are in line with their rated peer. Going forward, DBRS anticipates that management will continue to rationalize the expense base.

Another rating consideration for the Company is its sound asset quality, which reflects manageable levels of net charge-offs (NCOs) and non-performing assets (NPAs). Specifically, NCOs (excluding acquired and covered loans) represented a low 0.31% of average loans for 1Q14, up from 0.13% for 4Q13. Meanwhile, NPAs (excluding acquired and covered loans) represented a low 0.58% of loans at March 31, 2014, down from 0.60% at December 31, 2013. Finally, DBRS notes that the Company’s reserve coverage (excluding covered and acquired loans) remains acceptable, including an allowance for credit losses to loan ratio of 0.92%, and an allowance for credit losses to non-performing loan ratio of 229%.

Finally, ratings also considers FirstMerit’s solid capital profile and strong funding position. Despite some contraction due to the Citizens transaction, capital is solid with ample generation ability and provides a sound level of loss absorption capacity and support for growth. At March 31, 2014, FirstMerit had a tangible common equity ratio of 7.69%, and Tier 1 common equity ratio (Basel III) of 9.76%, which was well above the minimum requirement. Meanwhile, funding remains strong, reflecting a large core deposit base, which represented a high 130% of net loans (DBRS calculated) at the end of 1Q14.

FirstMerit, a bank holding company with headquarters in Akron, Ohio, reported $24.5 billion in assets at March 31, 2014.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Mark Nolan
Rating Committee Chair: William Schwartz
Initial Rating Date: February 3, 2005
Most Recent Rating Update: September 26, 2013

For additional information on this rating, please refer to the linking document under Related Research.