FMER Firstmerit Corp. (MM)

AKRON, Ohio , April 26, 2016 /PRNewswire/ --

Quarterly Highlights include:

• Profitability sustained: 68^th consecutive quarter of profitability
• Integration activities progress: Planned merger with Huntington Bancshares Incorporated ("Huntington") on schedule; merger-related costs of $5.5 million
• Loan growth continued: Total loan growth of $148.5 million, or 0.92% from the prior quarter
• Credit quality remained solid:  Net charge-offs to average originated loans of 0.22%
• Balance sheet remained strong:  Strong tangible common equity ratio¹ at 8.30%

FirstMerit Corporation (Nasdaq: FMER) (the "Corporation") reported first quarter 2016 net income of $54.1 million, or $0.31 per diluted share.  Excluding merger-related charges of $5.5 million, or $3.5 million after tax, EPS was $0.34¹ per diluted share.  This compares with $56.7 million, or $0.33 per diluted share, for the fourth quarter 2015 and $57.1 million, or $0.33 per diluted share, for the first quarter 2015.

"Our results in the first quarter of 2016 reflect strong performance throughout the organization.   We successfully achieved solid loan growth, continued to provide high levels of customer service and remain focused on expense management," said Paul G. Greig, chairman, president and CEO, FirstMerit Corporation.

"We are actively preparing and planning our merger integration with Huntington.  We are pleased with the progress and expect to close on schedule during the third quarter of this year,"  Greig said.

Earnings Summary

Net Interest Margin

The net interest margin on a TE basis expanded two basis points compared with the prior quarter, driven by the Corporation's asset sensitive balance sheet and the increase in short-term market interest rates.  During the first quarter 2016, the yield on originated loans increased nine basis points compared with the prior quarter.  At March 31, 2016, 81% of the Corporation's commercial loan portfolio is variable or floating rate and will support continued margin expansion in a rising rate environment.

Loans

Average originated loans were $14.2 billion during the first quarter 2016, an increase of $323.9 million, or 2.34%, compared with the fourth quarter 2015, and an increase of $1.5 billion, or 11.80%, compared with the first quarter 2015.  The loan growth was balanced between commercial and consumer throughout the footprint. Average originated commercial loans increased $193.0 million, or 2.19%, compared with the prior quarter, and increased $666.7 million, or 7.99%, compared with the year-ago quarter.  Average originated installment loans increased $96.8 million, or 3.28%, compared with the prior quarter, and increased $622.8 million, or 25.68%, compared with the year-ago quarter.

Deposits

Average deposits were $20.6 billion during the first quarter 2016, an increase of $632.9 million, or 3.16%, compared with the fourth quarter 2015, and an increase of $846.7 million, or 4.28%, compared with the first quarter 2015.  Average core deposits were $18.4 billion during the first quarter 2016, or 89.32% of total average deposits, an increase of $688.7 million, or 3.88%, compared with the fourth quarter 2015 and an increase of $952.3 million, or 5.45%, compared with the first quarter 2015. Deposit growth was strong, reflecting seasonality and increased balances across the footprint. Despite increases in short-term interest rates, deposit costs remained unchanged from the prior quarter.

Noninterest Income

Noninterest income, excluding gains and losses on securities transactions¹, for the first quarter 2016 was $67.1 million, an increase of $2.0 million, or 2.99%, from the fourth quarter 2015 and an increase of $1.6 million, or 2.45%, from the first quarter 2015. The increase in noninterest income as a percentage of net revenue in the first quarter of 2016 compared with the fourth quarter of 2015 and first quarter of 2015 reflects the Corporation's ongoing success diversifying revenue sources.  Other operating income increased $4.3 million, or 56.15%, from the prior quarter due to the denial of four disputed FDIC claims of $6.0 million submitted on the final commercial loss share certificate at June 30, 2015.

Noninterest Expense

Noninterest expense for the first quarter 2016 was $167.0 million, an increase of $11.3 million, or 7.29%, from the fourth quarter 2015, and an increase of $6.3 million, or 3.93%, from the first quarter 2015.  Included in noninterest expense for the first quarter 2016 was $5.5 million of merger-related costs, or $3.5 million of after tax expense.  Professional services expense increased $3.3 million, or 65.17%, from the fourth quarter 2015, and $4.3 million, or 108.25%, from the first quarter 2015 primarily from merger-related costs.  Salaries and wages decreased $2.5 million, or 3.48%, compared with the first quarter of 2015, demonstrating expense discipline.  Other operating expense experienced an increase of $6.4 million, or 70.70%, from the fourth quarter 2015 primarily due to the favorable re-estimation of certain repurchase reserve liabilities recognized in the prior quarter.

Provision for Income Taxes

The effective tax rate was 30.40% for the first quarter 2016, compared with 30.06% for the fourth quarter 2015, and 30.80% for the first quarter 2015.

Asset Quality (excluding acquired loans and covered assets)

Due to the impact of business combination accounting and protection against credit risk from FDIC loss sharing agreements, acquired loans and covered assets are excluded from the asset quality discussion to provide for improved comparability to prior periods and better perspective into asset quality trends. Acquired loans are recorded at fair value at the date of acquisition with no allowance brought forward in accordance with business combination accounting. Impaired acquired and covered loans are considered to be performing due to the application of the accretion method under the applicable accounting guidance.

Nonperforming assets totaled $112.3 million at March 31, 2016, an increase of $17.8 million, or 18.83%, compared with December 31, 2015 and an increase of $43.7 million, or 63.68%, compared with March 31, 2015. Nonperforming assets at March 31, 2016 represented 0.78% of period-end originated loans plus noncovered other real estate compared with 0.67% at December 31, 2015 and 0.53% at March 31, 2015. Included in nonperforming assets as of March 31, 2016 were $25.5 million of OREO no longer covered by FDIC loss share agreements.

The allowance for originated loan losses totaled $102.9 million at March 31, 2016.  At March 31, 2016, the allowance for originated loan losses was 0.72% of period-end originated loans, compared with 0.74% at December 31, 2015, and 0.76% at March 31, 2015.  The allowance for credit losses is the sum of the allowance for originated loan losses and the reserve for unfunded lending commitments.  The allowance for credit losses was 0.75% of period end originated loans at March 31, 2016, compared with 0.77% at December 31, 2015, and 0.79% at March 31, 2015.  The allowance for credit losses to nonperforming loans was 146.35% at March 31, 2016, compared with 247.60% at December 31, 2015, and 221.06% at March 31, 2015.

Capital

Shareholders' equity was $3.0 billion at March 31, 2016 and $2.9 billion as of December 31, 2015 and March 31, 2015. The Corporation continued to have a  strong capital position as tangible common equity¹ to assets was 8.30% at March 31, 2016, compared with 8.24% at December 31, 2015 and 8.14% at March 31, 2015.  The common share cash dividend paid in the first quarter 2016 was $0.17 per share.

At March 31, 2016, Basel III capital ratios on a transitional basis remain well in excess of applicable regulatory requirements, with a total risk-based capital ratio of 13.60%, and a common equity tier 1 risk-based capital ratio of 10.48%.

Non-GAAP Financial Measures

In addition to results presented in accordance with U.S. generally accepted accounting principles ("GAAP"), this news release contains certain non-GAAP financial information and performance measures. The Corporation's management uses these non-GAAP financial measures in their analysis of the Corporation's performance and the efficiency of its operations. Management believes that these non-GAAP financial measures provide a greater understanding of ongoing operations of the Corporation and enhance comparability of results with prior periods, and facilitate investors' assessments of business and performance trends in comparison to others in the financial services industry. The Corporation believes that a meaningful analysis of its financial performance requires an understanding of the factors underlying that performance. The Corporation's management believes that investors may use these non-GAAP financial measures to analyze financial performance without the impact of unusual items that may obscure trends in the Corporation's underlying performance. These disclosures should not be viewed as a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

The Corporation evaluates its net interest income on a fully taxable-equivalent basis, a non-GAAP financial measure. The Corporation believes managing the business with net interest income on a fully taxable-equivalent basis provides a more accurate picture of the interest margin for comparative purposes. Total revenue, net of interest expense, includes net interest income on a fully taxable-equivalent basis and noninterest income excluding gains and losses on the sale of securities. The Corporation views related ratios and analysis (i.e., efficiency ratios) on a fully taxable-equivalent basis. To derive the fully taxable-equivalent basis, net interest income is adjusted to reflect tax-exempt income on an equivalent before-tax basis with a corresponding increase in income tax expense. For purposes of this calculation, the Corporation uses the federal statutory tax rate of 35 percent. This measure ensures comparability of net interest income arising from taxable and tax-exempt sources.

The Corporation also evaluates its business based on the following ratios that utilize tangible equity, a non-GAAP financial measure. Tangible equity represents an adjusted shareholders' equity or common shareholders' equity amount which has been reduced by goodwill and intangible assets. Return on average tangible common shareholders' equity measures the Corporation's earnings contribution as a percentage of adjusted average common shareholders' equity. The tangible common equity ratio represents adjusted ending common shareholders' equity divided by total assets less goodwill and intangible assets. Return on average tangible shareholders' equity measures the Corporation's earnings contribution as a percentage of adjusted average total shareholders' equity. The tangible equity ratio represents adjusted ending shareholders' equity divided by total assets less goodwill and intangible assets. Tangible book value per common share represents adjusted ending common shareholders' equity divided by ending common shares outstanding. These measures are used to evaluate the Corporation's use of equity. In addition, profitability, relationship and investment models all use return on average tangible shareholders' equity as key measures to support our overall growth goals.

Adjusted net income, a non-GAAP financial measure, eliminates the effects of restructure, merger-related, and branch closing costs.  This measure makes it easier to analyze our results by presenting them on a more comparable basis.

The following tables provide reconciliations of these non-GAAP measures to financial measures defined by GAAP.

Subsequent Events

The Corporation is required under GAAP to evaluate subsequent events through the filing of its consolidated financial statements for the three months ended March 31, 2016 on Form 10-Q.  As a result, the Corporation will continue to evaluate the impact of any subsequent events on critical accounting assumptions and estimates made as of March 31, 2016 and will adjust amounts preliminarily reported, if necessary.

About FirstMerit Corporation

FirstMerit Corporation is a diversified financial services company headquartered in Akron, Ohio, with assets of approximately $26.1 billion as of March 31, 2016, and 368 banking offices and 400 ATM locations in Ohio, Michigan, Wisconsin, Illinois and Pennsylvania. FirstMerit provides a complete range of banking and other financial services to consumers and businesses through its core operations. Principal affiliates include: FirstMerit Bank, N.A. and FirstMerit Mortgage Corporation.

Forward-Looking Statements

This release contains forward-looking statements relating to present or future trends or factors affecting the banking industry, and specifically the financial condition and results of operations, including without limitation, statements relating to the earnings outlook of the Corporation, as well as its operations, markets and products.  Actual results could differ materially from those indicated.  Among the important factors that could cause results to differ materially are interest rate changes, continued softening in the economy, which could materially impact credit quality trends and the ability to generate loans, changes in the mix of the Corporation's business, the ability to complete the proposed merger with Huntington in a timely manner, if at all, the possibility that the anticipated benefits of the merger with Huntington are not realized when expected or at all, competitive pressures, changes in accounting, tax or regulatory practices or requirements, and those risk factors detailed in the Corporation's periodic reports filed with the Securities and Exchange Commission.  The Corporation undertakes no obligation to release revisions to these forward-looking statements or reflect events or circumstances after the date of this release.

(1) Represents a non-GAAP financial measure.  Refer to the Non-GAAP Financial Measures section of this press release for a reconciliation to GAAP financial measures.

(2) Due to the impact of business combination accounting and protection of FDIC loss sharing agreements, which provide considerable protection against credit risk, acquired and FDIC acquired loans and covered OREO are excluded from this table to provide for improved comparability to prior periods and better perspective into asset quality trends. George Washington and Midwest non-single family loss share agreements with the FDIC expired at March 31, 2015 and June 30, 2015, respectively. As of March 31, 2016, $70.7 million of FDIC acquired loans remained covered by single family loss share agreements, providing considerable protection against credit risk.

(3) Net income used to determine diluted EPS was reduced by the cash dividends payable on the Corporation's 5.875% Non-Cumulative Perpetual Preferred Stock, Series A of approximately $1.5 million in each of the quarters presented.