First Merchants Corporation — Q1 2016 Form 10-Q
Amounts are in U.S. dollars; financial statement figures are rounded to millions unless noted. Income and cash-flow comparisons are for the three months ended March 31, 2016 versus March 31, 2015; balance-sheet comparisons are to December 31, 2015.
Business context and reporting period
First Merchants is an Indiana-based community banking company with operations in Indiana, Illinois and Ohio. The filing covers the quarter ended March 31, 2016. Results reflect the December 2015 Ameriana acquisition and the April 2015 C Financial acquisition; the company also sold its insurance subsidiary in June 2015. These transactions affect comparability with the prior-year quarter.
Financial performance and condition
| Metric | Q1 2016 / March 31, 2016 | Prior comparable / December 31, 2015 |
|---|---|---|
| Interest income | $61.2 million | $52.9 million |
| Net interest income | $54.5 million | $47.0 million |
| Net interest margin, FTE | 3.83% | 3.78% |
| Net income available to common shareholders | $17.7 million | $16.2 million |
| Diluted EPS | $0.43 | $0.43 |
| Total assets | $6.799 billion | $6.761 billion |
| Loans, net of allowance | $4.648 billion | $4.631 billion |
| Total deposits | $5.311 billion | $5.290 billion |
| Total borrowings | $541.8 million | $568.5 million |
| Cash and cash equivalents | $85.7 million | $102.2 million |
- Net income increased 9.4%; diluted EPS was unchanged as average diluted shares rose to 40.9 million from 38.0 million.
- Other income was $16.3 million, nearly flat year over year. Higher customer fees and service charges largely offset the absence of insurance commissions following the subsidiary sale. A $471,000 bank-owned life insurance death benefit also contributed to the quarter.
- Noninterest expense rose 14% to $47.0 million. Salaries and benefits increased with the acquired businesses, and the company recorded $1.9 million in acquisition and integration costs.
- Provision for loan losses was $550,000 versus none in Q1 2015. Net charge-offs were $917,000, down from $1.163 million. The allowance was $62.1 million, or 1.32% of loans.
- Operating cash flow was $24.8 million versus $17.7 million; investing cash use was $30.3 million versus $66.0 million; financing cash use was $11.0 million versus financing cash provided of $19.0 million. Cash and cash equivalents declined $16.4 million during the quarter.
- Bank capital ratios remained above regulatory well-capitalized thresholds. The Corporation’s tangible common equity to tangible assets ratio was 9.35%, compared with 9.17% at year-end.
Material changes, outlook and risks
- Nonperforming loans increased to $37.7 million from $33.3 million at year-end; nonperforming assets plus loans 90-days past due and still accruing rose to $54.3 million from $51.5 million. Allowance coverage of nonaccrual loans declined to 169.1% from 199.0%.
- Management cited acquisition-driven growth in average earning assets and fair-value accretion on acquired loans. FTE net interest margin improved five basis points year over year. The filing gives no earnings or revenue guidance.
- Interest-rate simulations—not forecasts—estimated 12-month net interest income of $209.2 million in the base case, $228.0 million under an immediate 200-basis-point rise, and $200.7 million under a 100-basis-point decline. Management cautioned that actual results may differ from the model.
- Liquidity sources include deposits, available-for-sale securities and FHLB advances; remaining FHLB borrowing capacity was $395.8 million. The company’s $20 million U.S. Bank credit line matured April 8, 2016 and was not renewed. Outstanding loan commitments and letters of credit totaled $2.0 billion, though many may expire unused or be only partly drawn.
- Key stated risks include interest-rate and pricing changes, economic weakness and credit deterioration, competition, regulatory changes, and acquisition integration. Management said routine litigation and regulatory examinations were not expected to have a material adverse effect; the filing reported no material change to previously disclosed risk factors.
- After quarter-end, the bank completed conversion from a national to an Indiana state charter, effective April 15, 2016. The company said the change was not expected to affect operations or customers.
Important facts for investors to verify
- How much of earnings and margin growth is recurring versus acquisition-related fair-value accretion, acquired scale, and the one-time life-insurance death benefit.
- Whether rising nonaccrual loans and nonperforming assets persist, particularly in commercial real estate, and whether the allowance remains adequate as acquired portfolios are integrated.
- Whether expense growth and acquisition/integration costs moderate, and how the insurance divestiture affects ongoing fee income.
- Deposit mix, borrowing needs and liquidity after the $20 million credit line expired; monitor potential draws on the $2.0 billion of off-balance-sheet credit commitments.
- Actual performance relative to the filing’s interest-rate sensitivity scenarios and the assumptions underlying those simulations.