First Merchants Corporation — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report; unaudited Q4 results are noted below. First Merchants is an Indiana-based community banking holding company operating through First Merchants Bank across Indiana, Illinois and Ohio.
Financial performance and position
| Metric | FY 2015 / Dec. 31, 2015 | Prior comparable period |
|---|---|---|
| Net interest income | $196.4 million | $187.0 million in 2014 |
| Other income | $72.5 million | $66.4 million in 2014 |
| Net income | $65.4 million | $60.2 million in 2014 |
| Diluted EPS | $1.72 | $1.65 in 2014 |
| Net interest margin | 3.80% | 3.91% in 2014 |
| Total assets | $6.76 billion | $5.82 billion at year-end 2014 |
| Loans / deposits | $4.70 billion / $5.29 billion | $3.92 billion / $4.64 billion at year-end 2014 |
| Total borrowings | $568.5 million | $412.0 million at year-end 2014 |
| Stockholders’ equity | $850.5 million | $726.8 million at year-end 2014 |
Net interest income plus other income totaled $268.9 million. Operating cash flow was $56.7 million, down from $75.8 million in 2014; investing activities used $340.4 million, financing activities provided $267.3 million, and cash and cash equivalents declined $16.4 million to $102.2 million. These cash flows reflect bank balance-sheet activity and acquisitions.
Credit quality improved: non-performing assets plus loans 90-days past due fell to $51.5 million from $74.7 million; net charge-offs were $1.9 million, or 0.05% of average loans, versus $6.5 million, or 0.17%, in 2014. The allowance was $62.5 million, 1.33% of loans and 199% of non-accrual loans. Management also identified $240.9 million of criticized but unimpaired loans.
At year-end, the Corporation’s regulatory capital ratios included 14.94% total risk-based capital, 12.51% Tier 1 risk-based capital, 11.49% common equity Tier 1 and 10.85% Tier 1 leverage. The Bank was classified as well capitalized. Available-for-sale securities totaled $658.4 million; the Bank reported $388.2 million of remaining FHLB borrowing capacity. Tangible common equity to tangible assets was 9.17%.
Changes and notable items
- Net income increased 8.7% year over year, while net interest margin declined 11 basis points. Higher average earning assets, chiefly loans, supported net interest income growth; lower asset yields and higher funding costs pressured margin.
- Loans grew $769 million year over year, including $338.7 million of organic growth and acquired loans from C Financial and Ameriana. Year-end assets, deposits and loans also rose substantially through acquisitions.
- Ameriana Bancorp was acquired on December 31, 2015 for approximately $70.4 million in First Merchants shares, adding 13 banking centers. Its results were not materially included in full-year 2015 operating results, although acquired balances were included at year-end. C Financial was acquired in April for $14.5 million.
- The Corporation sold its insurance subsidiary in June for $18.0 million, recognizing an $8.3 million gain. It also recognized a $1.25 million gain from cancellation of $5 million of subordinated debentures.
- FY 2015 included $9.8 million of non-recurring acquisition, merger and system-conversion expenses. The effective tax rate was 28.2%, affected in part by the insurance-sale gain.
- Unaudited Q4 2015 net income available to common stockholders was $14.2 million and diluted EPS was $0.37, compared with $15.3 million and $0.41 in Q4 2014.
Outlook, risks and contingencies
The filing provides no quantified earnings or growth guidance. Management expected the Ameriana acquisition to be accretive and to expand its central and east-central Indiana footprint; this is an expectation, not a forecast of reported results. Management described asset quality as improving and the allowance as adequate, while noting that credit conditions, portfolio mix and collateral values can change loss estimates.
- Key risks include economic and interest-rate changes, credit deterioration, competitive pressure, regulatory and compliance costs, technology and cybersecurity events, operational disruption, and the possibility that acquisitions fail to deliver expected synergies or require difficult integration.
- Construction and land-development loans increased to $366.7 million, or 7.8% of loans, from $207.2 million, or 5.3%, in 2014; management said it was monitoring this segment closely.
- In a modeled 12-month scenario, a 200-basis-point rate increase raised estimated net interest income 7.57% versus base, while a 100-basis-point decrease reduced it 4.93%. These are model scenarios, not management forecasts.
- Loan commitments were $1.55 billion and standby letters of credit $46.7 million; expected drawdowns were uncertain. Management did not expect routine litigation to have a material adverse effect.
- Dividend capacity is subject to regulation; subsidiaries had $29.8 million available for 2016 dividends to the parent without prior regulatory approval. A $15 million stock repurchase program was approved after year-end, on February 9, 2016; purchases were not obligated.
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Ameriana, acquired on the final day of the year, was excluded from management’s and the auditor’s internal-control assessment scope.
Investor verification priorities
- Assess underlying earnings by separating acquisition and system-conversion costs and the insurance-sale and debt-cancellation gains from recurring results.
- Verify Ameriana integration, purchase-price allocation and expected accretion; its year-end inclusion in the balance sheet differs from its limited contribution to 2015 earnings.
- Monitor organic loan growth, construction exposure, criticized loans and acquired-loan discounts alongside non-performing assets and reserve coverage.
- Review the narrowing net interest margin, deposit pricing, borrowing mix and the sensitivity of earnings to rate changes.
- Evaluate liquidity and funding needs, including commitment utilization, deposit retention, FHLB capacity and the parent’s dependence on subsidiary dividends.
- Confirm the timing and execution of the announced repurchase program and the effect of share issuance for acquisitions on per-share results.