Business context and reporting period
First Merchants Corporation is a community bank holding company operating through First Merchants Bank, with 122 banking locations across Indiana, Ohio, Michigan and Illinois. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022. Results include Level One Bancorp from its April 1, 2022 acquisition.
Financial performance and position
Unless otherwise stated, amounts are in millions of dollars. Per-share amounts are dollars.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $140.3 | $104.7 | $371.2 | $309.4 |
| Noninterest income | $29.6 | $28.5 | $83.8 | $83.5 |
| Net income | $63.8 | $52.8 | $151.3 | $157.8 |
| Net income available to common stockholders | $63.3 | $52.8 | $150.4 | $157.8 |
| Diluted EPS | $1.08 | $0.98 | $2.62 | $2.92 |
| Noninterest expense | $96.4 | $71.4 | $266.0 | $206.8 |
- Q3 fully taxable equivalent net interest margin was 3.55%, up from 3.20% a year earlier; nine-month margin was 3.30%, versus 3.22%. Management attributed improvement to higher asset yields and interest rates, partly offset by rising deposit and borrowing costs.
- Q3 adjusted diluted EPS excluding PPP income and Level One-related items was $1.12, compared with $0.87 a year earlier. This is a non-GAAP measure; reported GAAP diluted EPS was $1.08.
- At September 30, assets were $17.72 billion, loans $11.65 billion, deposits $14.43 billion, borrowings $1.17 billion and stockholders’ equity $1.91 billion. At December 31, 2021, those amounts were $15.45 billion, $9.24 billion, $12.73 billion, $634.3 million and $1.91 billion, respectively.
- Loans grew $2.4 billion from year-end, including $1.6 billion acquired with Level One; reported organic loan growth, excluding acquired balances and PPP decline, was $923.9 million, or 13.5% annualized. Deposits rose $1.7 billion, including $1.9 billion assumed in the acquisition. Q3 deposits declined $136.0 million on a linked-quarter basis.
- Allowance for loan losses was $226.7 million, or 1.94% of loans, versus $195.4 million and 2.11% at year-end. Nine-month provision of $16.8 million was attributed to Level One acquisition accounting; there was no Q3 provision. Nonaccrual loans were $43.5 million; nonperforming assets were $50.2 million.
- For the first nine months, operating cash flow was $144.7 million, investing cash flow was negative $257.6 million and financing cash flow was positive $65.3 million. Cash and cash equivalents declined $47.6 million to $119.5 million; interest-bearing deposits were $179.6 million. Remaining FHLB borrowing capacity was $802.4 million.
- Available-for-sale securities had fair value of $1.98 billion and gross unrealized losses of $392.6 million. The company said the losses reflected interest-rate changes, not credit deterioration. Nine-month other comprehensive loss was $369.2 million, and accumulated other comprehensive loss was $314.1 million at quarter-end.
- The Bank’s regulatory CET1 ratio was 11.18% and total risk-based capital ratio 12.44%; the filing says it remained well-capitalized. Tangible common equity to tangible assets, a non-GAAP measure, was 6.66%, down from 9.01% at year-end, largely reflecting securities valuation losses.
Material changes, outlook and risks
- Q3 common earnings increased year over year, while nine-month common earnings and diluted EPS declined. Higher net interest income was offset over the nine-month period by higher expenses and acquisition-related costs.
- Level One added approximately $2.5 billion of assets at acquisition, including $1.6 billion of loans, and contributed $167.2 million of goodwill. Nine-month acquisition-related expenses were $16.1 million; the company also recorded acquisition-related credit provisions. Management expected the transaction to be accretive and cited anticipated synergies, but warned that integration and realization of benefits are uncertain.
- Interest-rate increases supported asset yields, but management cited deposit pricing pressure. About 66% of loans were variable rate; 42% of the portfolio repriced within one month and 52% within three months. Its modeled 12-month net interest income sensitivity was +2.4% for an immediate 200-basis-point rise and -3.0% for a 100-basis-point fall; these scenarios are not forecasts.
- Noninterest income included $5.3 million of Q3 life-insurance benefit gains. Other income included a $1.9 million equity-investment write-down. These items, along with acquisition and PPP effects, affect period comparability.
- No quantified earnings or other financial guidance is provided in the supplied filing text. Management said most remaining PPP loans were expected to be forgiven. It identified risks from rates, economic conditions and credit quality, liquidity, competition, acquisitions and integration, and implementation of a Department of Justice fair-lending settlement agreement and order.
- Loan commitments to extend credit were $4.76 billion and standby letters of credit were $43.2 million. Management stated routine litigation and regulatory matters were not expected to have a material adverse effect; the filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether Level One integration delivers the expected cost savings and earnings accretion, and how acquisition-related expenses develop.
- Whether deposit costs and funding needs continue to rise, and how rate movements affect margin, liquidity and securities values.
- Whether loan growth is accompanied by deterioration in criticized, delinquent or nonperforming credits, and whether the allowance remains adequate.
- The persistence and comparability of unusual income and expense items, including life-insurance gains, the equity write-down, PPP runoff and securities-related other comprehensive losses.
- Capital resilience after securities valuation effects, while monitoring the company’s GAAP equity and non-GAAP tangible capital measures separately.