DBRS: FMER’s 1Q Results Down On Lwr Acquired Loan Accretion and BOLI Income; Solid B/S Fundamentals

Summary:
• The Company reported 1Q15 earnings available to common shareholders of $55.3 million down 6.5% from 4Q14, and up 7.1% from 1Q14.
• The quarter-on-quarter (QoQ) decline in earnings mostly reflected continuing contraction in acquired loan accretion, and lower bank-owned life insurance (BOLI) income. Partially offsetting these headwinds, non-interest expense decreased, QoQ, driven by lower levels of professional services costs, and equipment expense.
• 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) 1Q15 results as sound, despite the challenging operating environment. Importantly, balance sheet fundamentals remained solid, including loan and deposit growth, sound asset quality and solid funding and capital profiles.

Spread income declined by 3.6%, QoQ, primarily driven by lower acquired loan accretion and the impact of the low interest rate environment on new loan origination yields. The net interest margin narrowed by 8 bps to 3.48%, of which 5 bps was related to the lower accretion. Meanwhile, adjusted non-interest income was down 7.3%, QoQ, mostly due to lower levels of BOLI income and deposit service charges. Finally, adjusted non-interest expense remained well managed, and was down 3.2%, QoQ. DBRS notes that adjustments to non-interest income and non-interest expense included, investment securities gains, branch closure related costs, and restructuring costs.

During the quarter, loan growth was sustained, and up 1.1% (period-end), despite the continuing run-off of acquired loans. Overall loan growth was broad-based, led by higher levels of commercial loans and installment loans.

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 March 31, 2015, the Company’s estimated Basel III common equity tier 1 ratio was a solid 10.6% (transitional basis).

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.