DBRS: FMER’s Higher QoQ Earnings Reflect Fee Income Improvement, Lwr Costs, Sustained Loan Growth

Summary:
• 2Q14 earnings available to common shareholders of $57.6 million, up 11.5% from 1Q14, reflecting sustained loan growth, improved fee income and lower expenses.
• Asset quality remained sound and improved quarter-on-quarter (QoQ), including lower levels of non-performing assets and net charge-offs.
• DBRS, Inc. (DBRS) rates FirstMerit’s Issuer & Senior debt at A (low) with a Stable trend.

FirstMerit Corporation (FirstMerit or the Company) reported solid results for 2Q14, despite the difficult business environment. The Company stated net income available to common shareholders of $57.6 million for 2Q14, up 11.5% from 1Q14. Improved QoQ results reflected a 2.7% increase in total revenues and a 1.1% decrease in non-interest expense. Improved fee income and sustained loan growth drove higher revenues. Meanwhile, expenses have trended down as the Company continues to successfully execute on its initiatives. Going forward, FirstMerit’s bottom line should benefit from continued loan growth, which management anticipates will be between 1.5% and 2.0% for each of the next two quarters and continuing branch consolidations and enterprise sourcing initiatives.

Overall, the Company reported broad-based improvements in fee revenue, which increased 7.9% QoQ, including higher levels of service charges on deposits, credit card fees and loan sales and servicing income. Of note, there was $4.0 million in costs associated with branch closings in the other income line. Excluding this item, adjusted fee income improved 13.8% QoQ. Despite net interest margin pressure, sustained average loan growth of 2.0% QoQ drove a modest increase in spread income. Finally, adjusted expenses, which exclude merger-related costs, declined modestly QoQ, primarily reflecting lower levels of net occupancy expense and professional services costs.

Overall, FirstMerit’s balance sheet fundamentals remain sound, reflecting sustained average loan growth, sound and improving asset quality, a strong funding position and a solid capital profile.

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

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