First Merchants Corporation — FY2023 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2023; it does not provide standalone fourth-quarter results. First Merchants is an Indiana-based financial holding company operating one community-banking segment through First Merchants Bank, with 116 locations across Indiana, Ohio, Michigan and Illinois. Amounts below are in U.S. dollars.
Key financial results and position
| Metric | FY2023 / Dec. 31, 2023 | Comparable period |
|---|---|---|
| Net income available to common shareholders | $221.9 million | $220.7 million in 2022 |
| Diluted EPS | $3.73 | $3.81 in 2022 |
| Net interest income | $545.4 million | $520.2 million in 2022 |
| Net interest margin, fully taxable equivalent | 3.35% | 3.41% in 2022 |
| Noninterest income / expense | $105.6 million / $388.3 million | $107.9 million / $355.7 million in 2022 |
| Operating cash flow | $258.8 million | $284.3 million in 2022 |
| Total assets / loans / deposits | $18.4 billion / $12.5 billion / $14.8 billion | Assets $18.0 billion; loans $12.0 billion; deposits $14.4 billion in 2022 |
| Total borrowings | $1.03 billion | $1.31 billion in 2022 |
Net income increased 0.6%, while diluted EPS declined 2.1%. Net interest income rose 4.8%, but margin narrowed by 6 basis points as funding costs rose faster than asset yields. Average total cost of funds increased to 2.67% from 0.72%. Return on average assets was 1.23% (1.29% in 2022) and return on average equity was 10.43% (11.19%). Management’s adjusted, non-GAAP diluted EPS was $3.89, versus $4.20 in 2022; it excludes specified PPP, acquisition-related and non-core items.
Net cash decreased $9.9 million during 2023. Year-end cash and due from banks was $112.6 million, with a further $436.1 million in interest-bearing deposits. Loans grew 4.1%; deposits grew $438.7 million, chiefly from time deposits, while demand and savings balances declined. Borrowings fell $285.2 million. The allowance for loan losses was $204.9 million, or 1.64% of loans, versus $223.3 million and 1.86% a year earlier. Total stockholders’ equity was $2.25 billion; tangible common equity to tangible assets, a non-GAAP measure, was 8.40%, up from 7.31%.
Material changes, outlook and risks
- Credit quality: Net charge-offs rose to $25.6 million from $2.7 million. Two large commercial and industrial charge-offs, including one associated with alleged borrower fraud, drove much of the increase; management characterized the events as idiosyncratic. Nonaccrual loans increased to $53.6 million from $42.3 million, and criticized loans rose to $515.2 million from $417.3 million.
- Securities and liquidity: The company sold $395.2 million of available-for-sale securities, recording a $6.9 million net loss. The portfolio had $220.6 million of gross unrealized losses at year-end, attributed by management to interest rates rather than credit quality. Management reported 27.9% of deposits were uninsured and stated available liquidity was ample; remaining FHLB and Federal Reserve borrowing capacity was $664.9 million and $804.6 million, respectively. The Bank had no BTFP borrowings and $388.8 million of capacity; the program was scheduled to stop making new loans on March 11, 2024.
- Rate sensitivity: The loan portfolio was 65.5% variable-rate, with 49.1% repricing within one month. Modelled 12-month net interest income changed +4.0% under an immediate 200-basis-point rise and -5.0% under a 100-basis-point fall; these are scenarios, not guidance. Management cited deposit pricing and mix shifts as pressure on margin. The filing gives no company earnings or EPS guidance.
- Expenses and unusual items: Noninterest expense increased 9.2%, including $6.3 million in early-retirement and severance costs, a $4.3 million FDIC special assessment, and a $2.1 million lease-termination charge. A planned $40 million subordinated-debt redemption was completed in the first quarter of 2024.
- Accounting revision: The company voluntarily revised prior-period statements for an immaterial LIHTC-related error. Other assets and other liabilities had each been understated by $96.4 million at year-end 2023 and $63.9 million at year-end 2022; income-statement impact was nominal. The auditor issued unqualified opinions on the financial statements and internal controls, and identified the allowance for credit losses as a critical audit matter.
Most important facts for investors to verify
- Whether elevated charge-offs, nonaccruals and criticized loans persist, particularly in residential and commercial lending, and whether the allowance remains adequate.
- Deposit retention, time-deposit repricing, uninsured-deposit levels and the cost and availability of alternative funding.
- How rate changes affect net interest margin and the carrying value or potential sale value of securities with unrealized losses.
- The reconciliation and ongoing presentation of the revised LIHTC balances, and the effects of the 2024 debt redemption and CECL capital phase-in.
- How non-GAAP adjusted earnings compare with GAAP results; adjusted measures are supplemental and not substitutes for GAAP.