First Merchants Corporation — Q1 2022 Form 10-Q
Business context and reporting period. This unaudited report covers the three months ended March 31, 2022. First Merchants is a community banking company operating through First Merchants Bank. The quarter-end financial statements do not include Level One Bancorp, which was acquired on April 1, 2022, immediately after the reporting period.
Key financial results
| Metric | Q1 2022 | Q1 2021 or prior quarter-end |
|---|---|---|
| Total assets | $15.47 billion | $15.45 billion at Dec. 31, 2021 |
| Net interest income | $102.3 million | $100.4 million in Q1 2021 |
| Net interest margin, FTE | 3.03% | 3.23% in Q1 2021 |
| Other income | $25.9 million | $24.1 million in Q1 2021 |
| Other expenses | $72.3 million | $66.1 million in Q1 2021 |
| Income before tax | $55.9 million | $58.4 million in Q1 2021 |
| Net income available to common stockholders | $48.6 million | $49.5 million in Q1 2021 |
| Diluted EPS | $0.91 | $0.91 in Q1 2021 |
| Cash and due from banks | $148.3 million | $167.1 million at Dec. 31, 2021 |
Net interest income and other income together were $128.2 million. Operating cash flow was $50.2 million, investing cash outflow $190.5 million, and financing cash inflow $121.4 million; cash and cash equivalents declined $18.9 million during the quarter.
Balance sheet, credit and capital
- Loans and deposits: Loans were $9.36 billion, up $114.4 million from year-end; management cited $165.0 million of organic growth, partly offset by a $57.9 million decline in PPP loans. Deposits were $12.91 billion, up $173.4 million.
- Debt and liquidity: Total borrowings were $597.3 million, down $36.9 million from year-end. FHLB advances were $309.0 million, with $720.9 million of remaining FHLB borrowing capacity. Available-for-sale securities totaled $2.16 billion. The filing reports substantial loan commitments and letters of credit; see contingencies below.
- Credit: The loan allowance was $196.0 million, or 2.09% of loans, versus $195.4 million and 2.11% at year-end. No loan-loss provision was recorded; the quarter had $587,000 of net recoveries, compared with $3.6 million of net charge-offs in Q1 2021. Non-accrual loans were $42.7 million, while non-performing assets were $49.1 million.
- Capital: The Corporation’s CET1 ratio was 11.63%; the Bank’s was 11.20%. Management said regulatory capital ratios remained above applicable well-capitalized thresholds. Tangible common equity to tangible assets was 8.31%, down from 9.01% at year-end.
Material changes and notable items
- Despite higher net interest income and fee income, net income declined by $0.9 million. Expense growth—particularly salaries and benefits, other expenses, and FDIC assessments—exceeded the increase in other income.
- The FTE net interest margin fell 20 basis points year over year. Management attributed pressure mainly to lower asset yields and a shift in earning-asset mix toward lower-yielding securities; lower funding costs partly offset it.
- Rising interest rates drove a sharp mark-to-market decline in available-for-sale securities: the portfolio moved from a $75.9 million net unrealized gain at year-end to a $101.3 million net unrealized loss at March 31. The resulting after-tax other comprehensive loss was $139.5 million, and stockholders’ equity fell to $1.81 billion from $1.91 billion. Management stated the securities losses reflected interest rates, not credit quality, and it did not intend or expect to be required to sell before recovery.
- Other real estate owned rose to $6.3 million, primarily due to a $5.8 million student housing property transferred into OREO. Management said a loss on the project was not expected.
- On April 1, 2022, First Merchants completed the Level One acquisition, issuing approximately 5.6 million common shares and paying $79.3 million cash for common shares, and issuing preferred stock in exchange for Level One preferred stock. Level One had $2.4 billion in assets, $1.7 billion in loans and $1.9 billion in deposits at March 31. Purchase accounting fair values were not yet complete.
Outlook, risks and contingencies
- The filing provides no formal earnings or financial guidance. Management expected most remaining PPP loans to be forgiven by the SBA; PPP loans outstanding were $48.7 million at quarter-end.
- Management cited risks from interest-rate and deposit/loan pricing changes, economic deterioration and credit quality, COVID-19 effects, acquisition integration and realization of Level One synergies, regulatory changes, and the ability to maintain earnings and capital for dividends. The stated risk factors also include compliance with a DOJ settlement agreement and agreed order concerning fair-lending practices.
- Off-balance-sheet commitments included $3.96 billion of loan commitments and $31.9 million of standby letters of credit. These contractual amounts are not necessarily expected cash requirements because many commitments may expire unused or be partly drawn.
- The company reported no material pending litigation beyond ordinary-course matters and no material changes to its previously disclosed risk factors. It reported effective disclosure controls and no identified material change in internal control over financial reporting.
Important facts for investors to verify
- Level One’s final purchase-price allocation, integration costs, expected synergies and post-acquisition contribution.
- Whether the securities portfolio’s unrealized losses, tangible-capital decline and net interest margin pressure persist as rates and deposit pricing change.
- Trends in criticized, delinquent and non-performing loans, including the loans behind the quarter’s increase in past-due balances and the student housing OREO outcome.
- Deposit mix and funding costs, FHLB capacity, and the extent to which loan commitments become funded.
- Progress on PPP forgiveness and compliance with the DOJ fair-lending settlement and agreed order.