First Merchants Corporation - Q1 2010 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2010, for First Merchants Corporation, a diversified financial holding company headquartered in Muncie, Indiana. The company operates primarily through its community banking segment, First Merchants Bank, National Association, with 80 banking centers across Indiana and Ohio.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Income | $1,586,000 | $4,117,000 |
| Net Income Available to Common Stockholders | $136,000 | $3,489,000 |
| Diluted EPS (Common) | $0.01 | $0.17 |
| Net Interest Income | $36,215,000 | $38,499,000 |
| Net Interest Margin (FTE) | 3.82% | 3.68% |
| Total Assets | $4,375,866,000 | $4,480,952,000 (Dec 31, 2009) |
| Total Loans (Net) | $3,045,972,000 | $3,177,657,000 (Dec 31, 2009) |
| Total Deposits | $3,397,786,000 | $3,536,536,000 (Dec 31, 2009) |
| Allowance for Loan Losses | $88,568,000 | $58,502,000 (Q1 2009) |
| Non-Performing Assets (NPA) | $142,018,000 | $142,121,000 (Dec 31, 2009) |
| Net Charge-offs | $17,432,000 | $6,002,000 (Q1 2009) |
Material Changes vs. Prior Period
- Profitability Decline: Net income available to common stockholders dropped significantly to $136,000 ($0.01/share) from $3.49 million ($0.17/share) in Q1 2009. This was driven by a $13.9 million provision for loan losses and $17.4 million in net charge-offs, primarily in commercial and industrial loans.
- Asset Quality Pressure: Net charge-offs of $17.4 million exceeded the provision for loan losses by $3.5 million. The five largest customer charge-offs totaled $14.7 million. Non-performing assets remained elevated at $142 million (3.3% of total assets).
- Balance Sheet Contraction: Total assets decreased by approximately $105 million. Loans declined by $139.6 million due to run-off and reduced demand. Deposits fell by $138.8 million, largely due to maturing brokered deposits and CDs.
- Investment Portfolio: The company recognized an other-than-temporary impairment (OTTI) credit loss of $488,000 on pooled trust preferred securities. However, net gains on sales of available-for-sale securities were $1.84 million.
- Capital Actions: The company completed a registered direct private placement of 4.2 million common shares for gross proceeds of approximately $24.15 million. Additionally, the Board reduced the common stock dividend to $0.01 per share to retain capital.
Outlook, Risks, and Management Commentary
- Capital Strategy: Management is evaluating methods to repay $116 million of preferred stock issued under the Treasury's Capital Purchase Program (CPP). The Treasury has expressed willingness to consent to a partial exchange of preferred stock for trust preferred securities, contingent on the recent equity raise.
- Covenant Default: The company failed to meet two financial covenants in its $55 million credit facility with Bank of America (minimum return on average total assets of 0.50% and an asset quality ratio). Bank of America has applied a default interest rate but has not accelerated the term loan.
- Asset Quality Outlook: Management notes that the decline in commercial and residential real estate values continues to negatively impact collateral values. They remain proactive in evaluating loans collateralized by real estate.
- Liquidity: Despite deposit outflows, the company maintains excess liquidity of $175.3 million. Regulatory capital ratios remain in excess of the "well capitalized" standard (Tier 1 risk-based capital ratio of 11.65%).
Investor Verification Checklist
- Covenant Compliance: Verify the status of the Bank of America credit facility covenants and the potential impact of the default interest rate on future earnings.
- Charge-off Concentration: Review the specific details of the five largest charge-offs totaling $14.7 million to assess concentration risk in the commercial portfolio.
- Capital Repayment Plan: Monitor the progress of the proposed exchange of Treasury preferred stock for trust preferred securities and the associated regulatory approvals.
- Deposit Trends: Analyze the sustainability of deposit outflows, particularly regarding brokered deposits, and the impact on funding costs.
- OTTI Exposure: Assess the remaining exposure to pooled trust preferred securities and the potential for further credit losses beyond the $488,000 recognized in Q1.