First Merchants Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020. First Merchants is an Indiana-based community banking holding company operating 125 banking locations across Indiana, Illinois, Ohio and Michigan. Unless noted otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparable / prior date |
|---|---|---|
| Net interest income | $100.4 | $93.9 in Q1 2020 |
| Net interest margin, FTE | 3.23% | 3.46% in Q1 2020 |
| Net income available to common stockholders | $49.5 | $34.3 in Q1 2020 |
| Diluted earnings per share | $0.91 | $0.62 in Q1 2020 |
| Noninterest income / expense | $24.1 / $66.1 | $29.8 / $66.2 in Q1 2020 |
| Cash provided by operating activities | $52.8 | $71.5 in Q1 2020 |
| Total assets | $14,629 | $14,067 at December 31, 2020 |
| Total loans / allowance for credit losses | $9,318 / $201 | $9,243 / $131 at December 31, 2020 |
| Total deposits / borrowings | $11,952 / $663 | $11,362 / $685 at December 31, 2020 |
| Stockholders’ equity | $1,806 | $1,876 at December 31, 2020 |
Q1 net income increased 44% year over year. Lower deposit and borrowing costs supported net interest income, while the FTE margin narrowed as asset yields fell. The margin included a 13-basis-point benefit from PPP processing-fee income. Noninterest income declined 19%, reflecting lower securities gains, derivative hedge fees and card payment fees. The effective tax rate was 15.3%, compared with 9.2% in Q1 2020.
Investing activities used $613.2 million of cash, primarily reflecting securities purchases; financing activities provided $555.4 million, largely from deposit growth. Cash and cash equivalents ended the quarter at $187.9 million, down from $192.9 million at year-end.
The Corporation reported regulatory capital ratios above stated minimums. At March 31, the Corporation’s total risk-based capital ratio was 14.33%, CET1 ratio 11.99% and Tier 1 leverage ratio 9.41%. The Bank met the regulatory definition of well-capitalized. Tangible common equity to tangible assets was 8.78%, versus 9.65% at year-end.
Material changes and notable items
- CECL adoption: Adopted the expected-credit-loss standard on January 1, 2021. The day-one adjustment reduced retained earnings by $68.0 million after tax; the loan allowance increased $74.1 million, and a $20.5 million reserve for unfunded commitments was recorded in liabilities. The quarter’s loan-loss provision was zero, versus $19.8 million in Q1 2020.
- Balance-sheet growth: Assets rose 4.0% from year-end. Deposits grew $590.2 million, partly from PPP proceeds and government stimulus payments; investment securities increased $554.1 million as excess liquidity was invested. Loans increased $75.1 million, including PPP loans, which reached $741.7 million.
- Market-value effects: Higher longer-term interest rates reduced unrealized gains on available-for-sale securities; accumulated other comprehensive income fell $39.0 million during the quarter. Management attributed the securities’ unrealized losses to interest rates rather than credit quality and reported no allowance on available-for-sale securities.
- Asset quality: Net charge-offs were $3.6 million, compared with $0.6 million a year earlier. Nonperforming loans were $58.6 million, down from $64.7 million at year-end; nonaccrual loans were $57.9 million. The allowance was 2.16% of total loans, or 2.34% excluding PPP loans.
- COVID-19 accommodations: $65.1 million across 49 loans remained in payment deferral at quarter-end; $46.6 million, or 72%, related to hotels. PPP loans are SBA-guaranteed and earn 1% interest, with fee income recognized over the loan term or upon forgiveness/payoff.
- Capital returns and acquisition: A new repurchase authorization permits purchases of up to 3.333 million shares or $100 million; no program repurchases had occurred by March 31. On April 1, the Bank completed its acquisition of Hoosier Trust Company for $3.225 million in cash.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management described ongoing uncertainty around COVID-19, the pace of economic recovery, borrower repayment capacity and collateral values. It also cited sensitivity to interest rates, loan and deposit pricing, credit quality, PPP participation, competition, regulation and acquisition integration. The bank’s modeled 12-month net interest income sensitivity was +3.9% under an immediate 200-basis-point rate increase and -0.5% under a 100-basis-point decrease from the base case; management cautioned that actual results may differ.
Liquidity sources include core deposits, securities, cash and borrowing capacity; remaining FHLB borrowing capacity was $714.6 million. The filing identifies the DOJ fair-lending Settlement Agreement and Agreed Order as a risk factor. Management said ordinary-course litigation and regulatory examinations were not expected to have a material adverse effect; no other material legal proceedings were reported. Management noted that COVID-19 and related uncertainty could materially affect estimates, especially credit-loss estimates.
Investor verification priorities
- Track credit performance of hotel and other commercial real-estate borrowers, including deferred loans, delinquencies, nonaccruals and charge-offs.
- Assess CECL allowance assumptions and the effect of the staged regulatory-capital transition through 2024.
- Monitor net interest margin, PPP fee recognition and deposit costs as rates and liquidity conditions change.
- Evaluate the impact of higher rates and securities valuations on accumulated other comprehensive income and tangible capital.
- Review execution of the share repurchase authorization, the Hoosier Trust integration and compliance with the DOJ fair-lending order.