First Merchants Corporation — Q3 2015 Form 10-Q
Business context and reporting period. First Merchants is an Indiana-based community banking holding company. This unaudited filing covers the three and nine months ended September 30, 2015; balance-sheet comparisons are against December 31, 2014. Amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $50.3 | $47.9 | $146.3 | $139.9 |
| Other income | $16.9 | $18.4 | $57.8 | $50.0 |
| Net income available to common shareholders | $17.1 | $16.1 | $51.2 | $44.9 |
| Diluted EPS | $0.45 | $0.45 | $1.35 | $1.24 |
| Net interest margin, fully taxable equivalent | 3.85% | 3.98% | 3.82% | 3.95% |
For the nine-month period, net income rose about 14% and diluted EPS rose 8.9%. The third-quarter net income increase was about 6%, while diluted EPS was unchanged. The filing attributes much of the growth in net interest income and earning assets to the Community and C Financial acquisitions. Margin compression reflected lower asset yields and modestly higher funding costs.
- Balance sheet: Total assets were $6.19 billion, up $365.7 million from year-end 2014. Loans were $4.32 billion, up $396.9 million; deposits were $4.81 billion, up $173.9 million.
- Profitability and credit: Q3 provision for loan losses was zero, versus $1.6 million in Q3 2014. Nine-month provision was $0.4 million versus $1.6 million. Nine-month net charge-offs were $1.5 million, down from $3.9 million.
- Asset quality: Nonperforming loans were $36.4 million, down $14.4 million from year-end; nonperforming assets were $51.2 million versus $70.1 million. Allowance for loan losses was $62.9 million, or 1.45% of loans, and covered nonaccrual loans by 192.8%.
- Cash flow: For nine months, operating cash flow was $54.1 million, investing cash flow was negative $289.5 million, and financing cash flow was $201.5 million. Cash and cash equivalents declined $33.9 million to $84.7 million.
- Debt and liquidity: Total borrowings were $566.5 million, up $154.5 million from year-end; FHLB advances were $237.9 million. Remaining FHLB borrowing capacity was $404.7 million. The company reported no outstanding balance on its $20 million line of credit.
- Capital and dividends: The Bank met regulatory well-capitalized requirements; its common equity tier 1 ratio was 12.65%. Tangible common equity to tangible assets was 9.25%. Common dividends were $0.11 per share in Q3 and $0.30 year to date.
Material changes and unusual items
- C Financial was acquired on April 17, 2015, adding six Columbus-area banking centers; the acquisition included $110.6 million of loans and $105.3 million of deposits. Purchase-price allocation remained preliminary.
- First Merchants sold its insurance subsidiary on June 12 for $18 million, including a $2 million two-year note, and recorded an $8.3 million gain. The disposal also reduced recurring insurance commission income and contributed to a higher nine-month effective tax rate.
- The company canceled $5 million of subordinated debentures in August and recorded a $1.3 million gain.
- The proposed Ameriana Bancorp merger, estimated at approximately $68.8 million, was expected to close in Q4 2015 subject to shareholder and regulatory approvals and other conditions. Two shareholder lawsuits sought to block or rescind the transaction; the company said it would contest them, but stated that the potential financial impact could not yet be estimated.
Outlook, commentary and risks
The filing provides no specific earnings or revenue guidance. Management noted that actual results may differ from forward-looking statements and highlighted interest-rate and deposit-pricing changes, economic and credit deterioration, competition, regulation, acquisition integration, liquidity and capital risks. Its 12-month interest-rate simulation estimated net interest income of $188.5 million in the base case, $200.4 million with rates rising 200 basis points, and $183.4 million with rates falling 100 basis points; management cautioned that model assumptions and actual outcomes may differ. Management considered the loan-loss allowance appropriate and reported improving asset-quality trends.
Investor verification priorities
- Confirm the Ameriana merger’s closing status, regulatory and shareholder approvals, and developments in the related litigation.
- Assess whether acquisition-driven loan and deposit growth can be integrated while stabilizing the declining net interest margin.
- Review credit quality, charge-offs, criticized loans, and allowance adequacy as the loan portfolio expands.
- Separate recurring earnings from the insurance-sale and debt-cancellation gains, and evaluate the related tax effects.
- Monitor liquidity, borrowing growth, and capital ratios alongside dividend payments and the substantial unused loan commitments.