DBRS Confirms FirstMerit’s Senior Debt at A (low); Maintains Stable Trend -Withdraws Ratings

DBRS, Inc. (DBRS) has today confirmed all ratings of FirstMerit Corporation (FirstMerit or the Company), including its Issuer & Senior Debt rating of A (low). The trend on all ratings remained Stable. Subsequent to the confirmation, DBRS withdrew the ratings of FirstMerit. The decision to withdraw the ratings was made at DBRS’s discretion.

The Company’s ratings and Stable trend consider FirstMerit’s strong community focused banking franchise along with its solid balance sheet fundamentals, including sound asset quality, a strong funding profile, and a solid capital position. Ratings also reflect the Company’s pressured earnings generation capacity.

DBRS considers FirstMerit to be comfortably placed within its rating category. Nonetheless, enhancement in its earnings drivers along with sustained improved core earnings, while maintaining sound balance sheet fundamentals, could be viewed positively. Conversely, deterioration in earnings capacity and/or balance sheet fundamentals, could be viewed negatively.

With a deeply entrenched Midwestern banking franchise, FirstMerit provides a broad-based menu of products and services through its 384 banking offices in Ohio, Michigan, Wisconsin, Illinois and Pennsylvania. On a metropolitan statistical area basis, the Company holds strong defensible market shares in Akron, Ohio (27% deposit market share), Flint, Michigan (31%), and Canton, Ohio (23%).

Reflective of the first full year of contribution from the Citizens Republic Bancorp, Inc. (Citizens) acquisition (closed on April 12, 2013), as well as the non-recurrence of sizable 2013 merger related expenses, 2014 earnings increased 30% to $230.1 million, year-on-year (YoY). More recently, 1Q15 earnings declined 6.5% to $55.3 million, quarter-on-quarter (QoQ), pressured by continuing contraction in acquired loan accretion, and lower bank-owned life insurance (BOLI) income.

For 2014, spread income improved 9.1% to $775.6 million, YoY, reflecting the first full year impact of the Citizens acquisition, along with solid originated loan growth, especially within the commercial and installment loan portfolios. Partially offsetting, the Company’s net interest margin (NIM) contracted by 24 bps to 3.68%, as declining average earning asset yields outpaced decreasing interest bearing liability costs. More recently, 1Q15 spread income declined by 3.6% QoQ, due to an 8 bps narrowing of the NIM to 3.48%, partially offset by a 0.8% increase in average earning assets. Growth in average earning assets was mostly driven by higher levels of commercial loans. DBRS notes that the Company is well-positioned for an eventual rise in interest rates, given its moderate asset sensitive balance sheet.

FirstMerit’s expense base remains well managed. Nonetheless, the Company’s reported 1Q15 efficiency ratio of approximately 62% (61% for 2014), is somewhat high, reflecting room for improvement in both revenues and expenses. Going forward, DBRS anticipates that management will continue to rationalize expenses, including those related to its branch network.

Ratings also reflect the Company’s sound asset quality, which includes manageable levels of net charge-offs (NCOs) and non-performing assets (NPAs). Specifically, NCOs (excluding acquired and covered loans) represented a very low 0.13% of average loans for 1Q15. Meanwhile, NPAs (excluding acquired and covered loans) represented a moderate 0.53% of loans at March 31, 2015, slightly down from 0.58% at March 31, 2014. Finally, DBRS views the Company’s reserve coverage (excluding covered and acquired loans) as acceptable, reflecting an allowance for credit losses to period-end originated loan ratio of 0.79%, and an allowance for credit losses to non-performing originated loan ratio of 221%.

Overall, FirstMerit maintains a sound capital profile and a strong funding position. Indeed, capital provides for a solid level of loss absorption capacity and support for growth, as indicated by its tangible common equity ratio of 8.14%, and common equity Tier 1 ratio of 10.6%, as of March 31, 2015. Meanwhile, funding remains strong, reflecting a large core deposit base, which represented a high 121% of net loans (DBRS calculated) at the end of 1Q15.

FirstMerit, a diversified financial services corporation headquartered in Akron, Ohio, reported $25.1 billion in consolidated assets as of March 31, 2015.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organiations (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2015), and DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). 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: Roger Lister
Initial Rating Date: 3 February 2005
Most Recent Rating Update: 3 July 2014

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