First Merchants Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. First Merchants is a community banking-focused financial holding company operating in Indiana, Illinois and Ohio. Financial statement amounts below are in millions unless otherwise noted.
Financial performance and condition
| Metric | Q2 2015 / June 30, 2015 | Comparable period / prior year-end |
|---|---|---|
| Net income available to common stockholders | $18.0; diluted EPS $0.47 | Q2 2014: $15.2; diluted EPS $0.41 |
| Six-month net income available to common stockholders | $34.1; diluted EPS $0.90 | First half 2014: $28.8; diluted EPS $0.79 |
| Q2 net interest income | $49.0 reported; $51.7 FTE | Q2 2014: $46.1 reported; $48.1 FTE |
| Net interest margin | Q2: 3.81%; first half: 3.79% | Q2 2014: 3.89%; first half 2014: 3.93% |
| Total assets | $6,140 | $5,824 at Dec. 31, 2014 |
| Loans, net of allowance | $4,176 | $3,861 at Dec. 31, 2014 |
| Deposits | $4,790 | $4,641 at Dec. 31, 2014 |
| Total borrowings | $553 | $412 at Dec. 31, 2014 |
| Stockholders’ equity | $750 | $727 at Dec. 31, 2014 |
- For the first half, net cash from operating activities was $36.4; investing activities used $213.9; financing activities provided $164.8. Cash and cash equivalents declined $12.7 to $105.9.
- Second-quarter total other income was $24.6, including an $8.3 gain on the sale of the insurance subsidiary. Q2 income before tax was $26.8 and income tax expense was $8.9.
- The allowance for loan losses was $62.6, or 1.47% of loans, versus $64.0 and 1.63% at year-end. First-half provision was $0.4; net charge-offs were $1.8, compared with net recoveries of $0.5 in first-half 2014.
- Nonperforming loans were $38.6, down $12.2 from year-end; nonperforming assets were $57.8. Allowance coverage of nonaccrual loans was 165.9%, up from 131.1%.
- Available-for-sale securities totaled $575.4. The bank reported $247.7 of FHLB advances and $308.7 of remaining FHLB borrowing capacity. Management said the company and bank remained above applicable well-capitalized thresholds; the company’s tangible common equity to tangible assets ratio was 9.03%.
Changes, transactions and management commentary
- Net income increased year over year, with contributions from higher net interest income, acquisitions and the $8.3 insurance-sale gain. The gain is a material, nonrecurring item; the sale also produced a tax basis difference that increased the effective tax rate.
- Net interest margin declined year over year: management attributed this to lower asset yields and higher funding costs, despite growth in earning assets. Acquisition-related fair-value accretion included in interest income was $2.2 in Q2 and $4.3 in the first half of 2015.
- Assets grew $316.2 from year-end, including loan growth of $313.3. First Merchants acquired C Financial on April 17, 2015, adding six Ohio banking centers, $110.6 of loans and $105.3 of deposits. Management expects the acquisition to be accretive within its first full year of operation.
- First Merchants sold First Merchants Insurance Services on June 12, 2015, for $18.0, including a $2.0 two-year promissory note; the sale generated the $8.3 gain.
- Noninterest expense rose 12.5% in Q2, mainly from added acquisition staffing, acquisition and divestiture-related professional costs, core-system and branch expenses. Management also cited improving asset-quality trends and lower real-estate-owned and foreclosure costs.
- The company signed an agreement to acquire Ameriana Bancorp for an estimated $68.8 transaction value. Closing was anticipated in Q4 2015 or Q1 2016, subject to shareholder and regulatory approvals and other conditions. A shareholder lawsuit filed July 8, 2015 sought to enjoin the transaction; management said the claims were without merit, but the potential outcome and financial impact could not yet be estimated.
Outlook, risks and contingencies
The filing gives no formal earnings or revenue guidance. Management’s stated acquisition accretion expectations are not a forecast of overall results. The company cautioned that results may be affected by interest-rate and loan/deposit pricing changes, economic deterioration, credit and investment portfolio performance, competition, regulation, acquisition integration, liquidity and capital needs. Its interest-rate model estimated 12-month net interest income would rise 6.2% under an immediate 200-basis-point increase and fall 2.0% under a 100-basis-point decrease; management noted these are modeled scenarios, not predictions. Loan commitments and standby/commercial letters of credit totaled $1.66 billion, though many may expire unused or be only partially drawn. Management reported compliance with debt covenants and effective disclosure controls.
Most important facts for investors to verify
- How much reported earnings growth reflects recurring operations versus the $8.3 million insurance-sale gain and acquisition-related accounting effects.
- Whether net interest margin stabilizes, given the year-over-year decline and sensitivity to rates and deposit pricing.
- Credit trends and reserve adequacy, including charge-offs, nonperforming loans, loan growth and acquired-loan performance.
- Integration, cost savings and accretion from C Financial, and the timing, approvals, financing and litigation risks for the proposed Ameriana merger.
- Funding and liquidity as borrowings increase, including utilization of FHLB capacity, off-balance-sheet commitments and capital levels under Basel III.