First Merchants Corporation - 10-Q Summary (Q2 2010)
Business Context and Reporting Period
This filing covers the quarterly period ended June 30, 2010. First Merchants Corporation is a diversified financial holding company headquartered in Muncie, Indiana, operating primarily through its subsidiary, First Merchants Bank, National Association. The company operates 80 banking centers across Indiana and Ohio, focusing on community banking, trust services, and insurance.
Key Financial Metrics
| Metric | Q2 2010 (3 Months) | YTD 2010 (6 Months) | Q2 2009 (3 Months) | YTD 2009 (6 Months) |
|---|---|---|---|---|
| Net Income (Loss) | $(0.3) million | $1.2 million | $(29.7) million | $(25.6) million |
| Net Income Available to Common | $8.3 million | $8.4 million | $(31.2) million | $(27.7) million |
| Diluted EPS (Common) | $0.35 | $0.36 | $(1.49) | $(1.32) |
| Net Interest Income | $36.2 million | $72.4 million | $38.4 million | $76.9 million |
| Net Interest Margin (FTE) | 3.90% | 3.86% | 3.64% | 3.66% |
| Provision for Loan Losses | $15.0 million | $28.9 million | $59.0 million | $71.9 million |
| Total Assets | $4.18 billion | - | - | - |
| Total Loans (Net) | $2.96 billion | - | - | - |
| Total Deposits | $3.26 billion | - | - | - |
| Allowance for Loan Losses | $87.0 million | - | - | - |
| Non-Performing Assets (NPA) | $142.0 million | - | - | - |
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a significant improvement from losses in 2009 to profitability in 2010. This was primarily driven by a one-time $10.1 million after-tax gain resulting from the exchange of TARP preferred stock for trust preferred securities.
- Asset Reduction: Total assets decreased by approximately $298 million year-to-date. Loans decreased by $219 million due to run-off and reduced demand, while investment securities increased by $83 million using excess liquidity.
- Deposit Decline: Total deposits fell $276 million (7.8%) year-to-date, driven by the maturity of brokered deposits and certificates of deposit (CDs).
- Expense Reduction: Non-interest expenses decreased by $3.8 million (10.1%) in Q2 2010 compared to Q2 2009, largely due to salary savings from the 2009 Lincoln Bank acquisition and reduced FDIC assessments.
- Asset Quality: Non-performing assets remained relatively flat at $146.5 million (including 90+ day delinquents), representing 3.5% of total assets. Net charge-offs for the quarter were $16.6 million.
Guidance, Outlook, and Risks
- Capital Structure: The company exchanged $46.4 million of TARP preferred stock for trust preferred securities, which qualified as Tier 1 regulatory capital. The company maintains "well capitalized" status with a Tier 1 leverage ratio of 9.21%.
- Regulatory Environment: Management notes the recent signing of the Dodd-Frank Act, which may increase operational costs, limit capital raising via trust preferred securities, and impose stricter consumer protection laws.
- Covenant Breach: The company disclosed a failure to meet financial covenants in its $55 million credit facility with Bank of America (specifically return on average assets and asset quality ratios). While the lender has applied a default interest rate, they have not accelerated the loan.
- Market Risk: Interest rate sensitivity analysis indicates that a 200 basis point rise in rates would increase net interest income by 1.8%, while a 100 basis point drop would decrease it by 0.7%.
- Investment Portfolio: The company recognized $400,000 in other-than-temporary impairment (OTTI) losses on pooled trust preferred securities in Q2 2010.
Investor Verification Checklist
- One-Time Gain Impact: Verify the sustainability of earnings by excluding the $10.1 million gain from the preferred stock exchange, which resulted in a core net loss of $0.3 million for the quarter.
- Covenant Status: Monitor the status of the Bank of America credit facility covenant breach and any potential acceleration of the $5 million term loan.
- Asset Quality Trends: Review the composition of non-performing assets, specifically the $20.1 million in Other Real Estate Owned (OREO), which increased by $5.2 million in the first half of 2010.
- Deposit Stability: Assess the impact of the 7.8% decline in deposits on future liquidity and funding costs as brokered deposits mature.
- Regulatory Capital: Confirm the long-term impact of Dodd-Frank regulations on the company's ability to use trust preferred securities for Tier 1 capital.