First Merchants Corporation — 2022 Form 10-K
Business context and reporting period. This filing reports the fiscal year ended December 31, 2022; it is an annual report, not a standalone fourth-quarter report. First Merchants is an Indiana-based community bank holding company operating through 122 banking locations in Indiana, Ohio, Michigan and Illinois. Results include Level One Bancorp from its April 1, 2022 acquisition.
Financial and operating highlights
| Metric | 2022 | 2021 / comparison |
|---|---|---|
| Net income available to common shareholders | $220.7 million | $205.5 million; up 7.4% |
| Diluted EPS | $3.81 | $3.81; unchanged |
| Net interest income | $520.2 million | $410.7 million; up 26.7% |
| Net interest margin, FTE | 3.41% | 3.18% |
| Noninterest income | $107.9 million | $109.3 million |
| Noninterest expense | $355.7 million | $279.2 million; up 27.4% |
| Operating cash flow | $268.0 million | $207.4 million |
At year-end, assets were $17.94 billion, deposits $14.38 billion, loans $12.00 billion and stockholders’ equity $2.03 billion. Return on average assets was 1.29% and return on average equity 11.19%. Adjusted diluted EPS was $4.20 versus $3.38 in 2021, a non-GAAP measure excluding PPP income and Level One acquisition-related costs and provision.
Net cash decreased $44.6 million during 2022: operating activities provided $268.0 million, investing activities used $446.4 million and financing activities provided $133.8 million. Total borrowings were $1.31 billion, up from $634.3 million. The Bank had $617.6 million of remaining FHLB borrowing capacity.
Regulatory capital ratios remained above required levels. Corporation CET1 was 10.65%, total risk-based capital 13.08% and tier 1 leverage 9.10% at year-end. The Bank was reported as well capitalized.
Material changes versus 2021
- Level One added approximately $2.5 billion of assets at acquisition, including $1.6 billion of loans and $1.9 billion of deposits. The transaction was funded with $79.3 million cash, 5.6 million common shares and $25.0 million of preferred stock; it added $166.6 million of goodwill. Core system integration was completed in August 2022.
- Total loans increased $2.8 billion. Excluding Level One’s acquired loans and PPP runoff, organic loan growth was $1.3 billion, or 13.9%.
- Reported deposits rose $1.7 billion, but excluding Level One they declined $280.6 million, or 2.2%. Customers shifted funds from non-maturity deposits into time deposits as rates increased.
- Rising rates lifted asset yields and FTE margin, but interest costs also rose: interest-bearing deposit cost increased to 0.58% from 0.24%, and total cost of funds to 0.72% from 0.35%.
- Available-for-sale securities moved from a $75.9 million net unrealized gain to a $296.7 million net unrealized loss, attributed by management to interest rates rather than credit quality. Accumulated other comprehensive loss reached $239.2 million; tangible common equity to tangible assets fell to 7.34% from 9.01%.
- Net charge-offs declined to $2.7 million from $9.3 million. The allowance for loan losses rose to $223.3 million, or 1.86% of loans, mainly due to acquisition-related CECL allowances and provision.
Outlook, risks and unusual items
- No formal earnings or financial guidance is provided. Management notes that further rate increases were expected in 2023, while emphasizing uncertainty around rates and the economy. A modeled immediate +200-basis-point rate scenario increased 12-month net interest income 2.8%; a -100-basis-point scenario reduced it 2.3%. These are simulations, not forecasts.
- Rate and funding risks include a negative cumulative repricing gap of $4.2 billion over one year, organic deposit outflows, rising deposit pricing pressure and increased use of borrowings to fund loan growth. About 67% of the loan portfolio was variable rate.
- Credit indicators warrant monitoring: criticized commercial loans increased to $411.6 million from $369.5 million; total past-due loans rose to $51.0 million from $34.7 million. Nonperforming assets were $49.0 million, including $6.4 million of OREO, primarily a $5.8 million student-housing property. Management did not expect a loss on that property.
- Level One acquisition-related costs were $16.5 million, with a further $16.8 million of acquisition-related credit-loss provision. Noninterest expense also reflected acquired operating costs, higher compensation, technology spending and FDIC assessments.
- Other key risks include commercial real estate and borrower concentration, economic deterioration, cybersecurity and third-party service disruptions, acquisition integration, competition, and the transition of LIBOR-linked contracts to SOFR. The filing reports no material pending legal proceedings outside ordinary-course matters.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management and auditor excluded Level One from the 2022 internal-control assessment; the filing gives differing acquired-asset percentages in the management and auditor descriptions.
Most important facts for investors to verify
- Whether organic deposits stabilize and funding costs remain manageable as time deposits and borrowings reprice.
- How quickly the Level One acquisition delivers expected synergies and earnings accretion, and whether acquired goodwill or intangibles require adjustment or impairment.
- Whether criticized loans, delinquencies and commercial real estate exposures lead to higher credit losses or allowance needs.
- The effect of the securities portfolio’s unrealized losses on tangible capital and liquidity, including whether securities might need to be sold before recovery.
- How actual net interest income responds to rate movements versus management’s simulations, and completion of the remaining LIBOR-to-SOFR transition.
- Reconcile the filing’s different descriptions of Level One’s share of year-end assets excluded from the internal-control assessment; confirm the relevant figures in the full filing.