DBRS: FMER’s 4Q Results Sound; Organic Loan Growth Drives Higher Provision

Summary:
• 4Q14 earnings available to common shareholders of $59.1 million, down 4.5% from $61.9 million for 3Q14, driven by higher provisions for loan losses and a modest increase in non-interest expense, partially offset by a slight increase in revenues.
• Asset quality remained sound, including manageable levels of non-performing assets and very low net charge-offs, which are likely at or near bottoming out.
• DBRS, Inc. (DBRS) rates FirstMerit’s Issuer & Senior debt at A (low) with a Stable trend.

DBRS, Inc. (DBRS) views FirstMerit Corporation’s (FirstMerit or the Company) 4Q14 results as sound. Lower QoQ earnings mostly reflected an increase in provisions for loan losses, due to originated loan growth, along with a modest increase in non-interest expense. Partially offsetting these headwinds, revenues were slightly up, linked-quarter. Overall, balance sheet fundamentals remain solid, reflecting sustained average originated loan growth, sound asset quality, and solid funding and capital profiles.

During the quarter, average loans increased 0.9%, QoQ, driven by a 4.2% increase in originated loans, somewhat offset by continued run-off of the acquired and covered loan portfolios. Despite the loan growth, 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. Meanwhile, non-interest income moderately increased, mostly due to an increase in BOLI. Finally, expenses were well managed, yet modestly up, QoQ.

The Company’s asset quality remains sound, with manageable levels of non-performing assets and very low net charge-offs, reflecting positively on the Company’s conservative credit culture. Meanwhile, FirstMerit’s capital position provides a solid cushion for unexpected losses and is supported by consistent earnings generation. At December 31, 2014, the Company’s Basel III tier 1 common equity ratio was approximately 9.93%

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

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