DBRS: FMER Higher QoQ Earnings In-line with Expectations; Lower Prov and Exp, Sustained Loan Growth

Summary:
• 3Q14 earnings available to common shareholders of $61.9 million, up 7.6% from $57.6 million for 2Q14, driven by lower levels of provisions for loan losses and non-interest expense.
• Asset quality remained sound quarter-over-quarter (QoQ), including manageable levels of non-performing assets and low net charge-offs.
• DBRS, Inc. (DBRS) rates FirstMerit’s Issuer & Senior debt at A (low) with a Stable trend.

FirstMerit Corporation’s (FirstMerit or the Company) results for 3Q14 were in-line with DBRS’s expectations. For 3Q14, the Company reported net income available to common shareholders of $61.9 million, up 7.6% from 2Q14. Higher 3Q14 earnings were due to a 39.7% decrease in provisions for loan loss reserves, and a 2.5% decline in non-interest expense. Overall, balance sheet fundamentals remain sound, reflecting sustained average loan growth, sound asset quality and a solid capital position.

Average loans increased 3.1% QoQ, despite the continued run-off of the acquired and covered loan portfolios. Higher average loans mostly reflected increased levels of average originated commercial and installment loans. Notwithstanding the loan growth, FirstMerit’s spread income declined modestly QoQ, due to a moderating net interest margin (NIM). The narrower NIM mostly reflected lower accretion related to the acquired and covered loan portfolios. Over the near term, FirstMerit’s bottom line should continue to benefit from loan growth, which management anticipates at between 1.5% and 2.0% in 4Q14.

Fee income reflected broad-based improvement across most line items, yet was down 3.9% linked-quarter, due to $1.2 million of net losses on covered loan resolutions, as compared to $4.1 million of net gains on resolutions in 2Q14. Meanwhile, lower QoQ non-interest expense was mostly due to lower FDIC expense.

Overall, asset quality remains sound, reflecting manageable levels of non-performing assets and low net charge-offs. The sizable decrease in the Company’s provisions for loan losses reflected a significant swing in covered loan provisions, which reflected a modest recapture in 3Q14, as compared to provisions in 2Q14. Meanwhile, the Company maintains strong funding and capital profiles.

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.