First Merchants Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. First Merchants is an Indiana-based community banking and financial holding company. Unless otherwise indicated, dollar amounts below are in millions; the filing’s financial statements report amounts in thousands.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $36.7 | $38.1 | $76.1 | $74.2 |
| Provision for loan losses | $2.0 | $4.5 | $4.1 | $9.4 |
| Non-interest income | $14.1 | $13.2 | $27.9 | $35.8 |
| Non-interest expense | $33.7 | $34.2 | $68.4 | $68.2 |
| Net income | $10.8 | $9.2 | $22.7 | $23.6 |
| Net income available to common stockholders | $10.0 | $8.1 | $21.0 | $21.3 |
| Diluted earnings per common share | $0.34 | $0.28 | $0.72 | $0.74 |
Q2 net interest margin was 3.88%, down from 4.11% a year earlier; the six-month margin was 4.06%, versus 4.04%. Q2 return on average assets was 0.92% and return on average tangible capital was 12.40%. Six-month return on average assets was 0.98%.
Operating cash flow was $43.8 million for the six months, compared with $37.6 million in 2012. Investing activities used $92.2 million, while financing activities provided $16.3 million. Cash and cash equivalents ended the period at $69.4 million, down from $101.5 million at year-end 2012.
Balance sheet, credit, and capital
- Total assets were $4.34 billion, up $33.4 million from December 31, 2012. Loans were $2.92 billion, up $17.9 million gross (net loans rose $19.0 million); total deposits were $3.33 billion, down $13.6 million.
- Total borrowings were $423.4 million, up from $367.1 million at year-end. This included $57.1 million of federal funds purchased, $161.8 million of repurchase agreements, $92.7 million of FHLB advances, and $111.8 million of subordinated debentures and term loans. The company reported compliance with covenants on its Bank of America facility, which matures in February 2015.
- The allowance for loan losses was $68.2 million, or 2.32% of loans, and covered 175% of non-accrual loans. Non-accrual loans fell to $39.0 million from $53.4 million; nonperforming assets were $55.1 million versus $79.3 million. Six-month net charge-offs declined to $5.3 million from $10.2 million.
- Available-for-sale securities had a fair value of $584.6 million. Accumulated other comprehensive loss increased to $15.2 million from $5.5 million at year-end, largely reflecting unrealized securities losses amid market-value changes. Management reported no other-than-temporary impairment at June 30.
- Consolidated total risk-based capital was 15.69%, Tier 1 risk-based capital 13.83%, and Tier 1 leverage 11.02%. The Bank and Corporation exceeded applicable well-capitalized thresholds. Tangible common equity to tangible assets was 7.74%.
Changes, outlook, and notable items
- Q2 common earnings rose to $10.0 million from $8.1 million, helped by lower loan-loss provision, higher non-interest income, and lower non-interest expense; net interest income declined and margin compressed.
- Six-month common earnings were slightly lower year over year. The 2012 comparison included a $9.1 million pre-tax gain from the SCB Bank purchase-and-assumption transaction, making reported non-interest income lower in 2013. The 2012 period also included a $576,000 life-insurance death benefit. Credit costs improved substantially in 2013.
- On May 13, 2013, First Merchants agreed to acquire CFS Bancorp in an estimated $115 million stock transaction, with closing anticipated in Q4 2013 subject to shareholder, regulatory, and other approvals. A shareholder lawsuit challenging merger disclosures was filed July 30; the company said it would contest the claims.
- After quarter-end, on July 2, the company redeemed $34.0 million of Treasury-held Series B preferred stock; approximately $34 million remained outstanding. It had previously redeemed $22.7 million in January.
- The filing provides no earnings guidance. Management identified interest-rate and funding costs, economic and credit conditions, portfolio performance, competition, regulation, acquisitions and integration, and the ability to sustain dividends as important risks. A separate overdraft-fee class action remained at an early stage; management said the potential loss could not then be reasonably estimated.
- Liquidity sources included core deposits, loan repayments, securities, and borrowing capacity. Remaining FHLB capacity was $205.7 million. Outstanding loan commitments and letters of credit totaled $900.0 million, although management noted that commitments may expire unused or be only partly drawn.
Important facts for investors to verify
- Whether the CFS Bancorp merger received required approvals, closed on the anticipated terms, and produced expected integration results.
- Whether improvement in nonperforming assets and charge-offs continues, and whether the $68.2 million allowance remains adequate as loan conditions change.
- How deposit trends, wholesale borrowings, and funding costs affect net interest margin and liquidity.
- Whether unrealized securities losses recover or result in impairment, and the effect of further interest-rate movements on earnings and capital.
- Developments and potential financial exposure from the overdraft-fee and merger-related lawsuits; the filing did not provide a clear estimated loss for either matter.