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FMER > SEC Filings for FMER > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for FIRSTMERIT CORP /OH/

Form 10-Q for FIRSTMERIT CORP /OH/


2-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Average Consolidated Balance Sheets (Unaudited)
Fully Tax-equivalent Interest Rates and Interest Differential

                                                    Three months ended                        Three months ended
                                                    September 30, 2012                        September 30, 2011
                                             Average                     Average       Average                     Average
(Dollars in thousands)                       Balance        Interest       Rate        Balance        Interest       Rate
ASSETS
Cash and due from banks                   $    440,231                              $    517,150
Investment securities and federal funds
sold:
U.S. Treasury securities and U.S.
Government agency obligations (taxable)      2,688,658     $  17,981       2.66 %      2,974,656     $  19,864       2.65 %
Obligations of states and political
subdivisions (tax exempt)                      660,143         6,332       3.82 %        385,055         5,275       5.44 %
Other securities and federal funds sold        344,823         2,652       3.06 %        316,383         2,084       2.61 %
Total investment securities and federal
funds sold                                   3,693,624        26,965       2.90 %      3,676,094        27,223       2.94 %
Loans held for sale                             23,631           240       4.04 %         24,524           284       4.59 %
Loans, including loss share receivable       9,402,218       103,128       4.36 %      9,177,487       108,444       4.69 %
Total earning assets                        13,119,473       130,333       3.95 %     12,878,105       135,951       4.19 %
Total allowance for loan losses               (145,061 )                                (138,441 )
Other assets                                 1,319,373                                 1,353,814
Total assets                              $ 14,734,016                              $ 14,610,628
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing                       $  3,236,703     $       -          - %   $  2,988,521     $       -          -
Interest-bearing                             1,080,841           243       0.09 %        913,252           218       0.09 %
Savings and money market accounts            5,746,210         5,166       0.36 %      5,446,351         6,929       0.50 %
Certificates and other time deposits         1,528,177         2,743       0.71 %      2,099,558         4,370       0.83 %
Total deposits                              11,591,931         8,152       0.28 %     11,447,682        11,517       0.40 %
Securities sold under agreements to
repurchase                                   1,032,401           310       0.12 %        969,020           977       0.40 %
Wholesale borrowings                           178,022         1,130       2.53 %        320,691         1,669       2.06 %
Total interest-bearing liabilities           9,565,651         9,592       0.40 %      9,748,872        14,163       0.58 %
Other liabilities                              315,093                                   302,824
Shareholders' equity                         1,616,569                                 1,570,411
Total liabilities and shareholders'
equity                                    $ 14,734,016                              $ 14,610,628
Net yield on earning assets               $ 13,119,473     $ 120,741       3.66 %   $ 12,878,105     $ 121,788       3.75 %
Interest rate spread                                                       3.55 %                                    3.61 %

Note: Interest income on tax-exempt securities and loans has been adjusted to a fully-taxable equivalent basis. Nonaccrual loans have been included in the average balances.


Average Consolidated Balance Sheets
(Unaudited)
Fully Tax-equivalent Interest Rates and
Interest Differential

                                                        Nine Months Ended                                   Nine Months Ended
                                                       September 30, 2012                                  September 30, 2011
(Dollars in thousands)                   Average Balance      Interest      Average Rate     Average Balance      Interest      Average Rate
ASSETS
Cash and due from banks                 $        409,944                                    $        541,992
Investment securities and federal funds
sold:
U.S. Treasury securities and U.S.
Government agency obligations (taxable)        2,797,521     $  56,688           2.71 %            2,906,269     $  59,174           2.72 %
Obligations of states and political
subdivisions (tax exempt)                        526,962        18,450           4.68 %              370,553        15,709           5.67 %
Other securities and federal funds sold          369,639         8,146           2.94 %              296,976         6,436           2.90 %
Total investment securities and federal
funds sold                                     3,694,122        83,284           3.01 %            3,573,798        81,319           3.04 %
Loans held for sale                               24,279           761           4.19 %               21,877           779           4.76 %
Loans, including loss share receivable         9,295,866       309,530           4.45 %            9,126,596       330,965           4.85 %
Total earning assets                          13,014,267       393,575           4.04 %           12,722,271       413,063           4.34 %
Allowance for loan losses                       (143,756 )                                          (138,758 )
Other assets                                   1,316,071                                           1,326,045
Total assets                            $     14,596,526                                    $     14,451,550
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing                     $      3,139,515     $       -              - %     $      2,954,172     $       -              - %
Interest-bearing                               1,069,290           726           0.09 %              859,903           579           0.09 %
Savings and money market accounts              5,717,860        15,302           0.36 %            5,236,540        22,172           0.57 %
Certificates and other time deposits           1,613,270         9,436           0.78 %            2,360,522        16,803           0.95 %
Total deposits                                11,539,935        25,464           0.29 %           11,411,137        39,554           0.46 %
Securities sold under agreements to
repurchase                                       947,135           854           0.12 %              900,920         2,832           0.42 %
Wholesale borrowings                             180,215         3,399           2.52 %              323,678         4,963           2.05 %
Total interest bearing liabilities             9,527,770        29,717           0.42 %            9,681,563        47,349           0.65 %
Other liabilities                                330,254                                             275,452
Shareholders' equity                           1,598,987                                           1,540,363
Total liabilities and shareholders'
equity                                  $     14,596,526                                    $     14,451,550
Net yield on earning assets             $     13,014,267     $ 363,858           3.73 %     $     12,722,271     $ 365,714           3.84 %
Interest rate spread                                                             3.62 %                                              3.69 %

Note: Interest income on tax-exempt securities and loans has been adjusted to a fully-taxable equivalent basis. Nonaccrual loans have been included in the average balances.


HIGHLIGHTS OF THIRD QUARTER 2012 PERFORMANCE
Earnings Summary

The Corporation reported third quarter 2012 net income of $35.0 million, or $0.32 per diluted share. This compares with $30.6 million, or $0.28 per diluted share, for the second quarter 2012 and $31.7 million, or $0.29 per diluted share, for the third quarter 2011.

Returns on average common equity and average assets for the third quarter 2012 were 8.60% and 0.94%, respectively, compared with 7.69% and 0.84%, respectively, for the second quarter 2012 and 8.02% and 0.86%, respectively, for the third quarter 2011.

Net interest margin was 3.66% for the third quarter of 2012 compared with 3.77% for the second quarter of 2012 and 3.75% for the third quarter of 2011. The net interest margin compressed 11 basis points compared with the second quarter of 2012 due to reductions in overall loan and investment portfolio yields. Despite the persistent low rate environment, the Corporation partially offset earning asset pressure by continuing to remix the deposit base with lower costing liabilities.

Average noncovered loans during the third quarter of 2012 increased $244.4 million, or 3.08%, compared with the second quarter of 2012 and increased $702.2 million, or 9.38%, compared with the third quarter of 2011. Average noncovered commercial loans increased $169.4 million, or 3.21%, compared with the prior quarter, and increased $567.7 million, or 11.64%, compared with the year ago quarter. The average consumer loan portfolio grew for the fifth consecutive quarter, increasing $65.3 million, or 2.52%, compared to the prior quarter, and $102.8 million, or 4.03%, compared with the year ago quarter.

Average deposits were $11.6 billion during the third quarter of 2012, an increase of $36.6 million, or 0.32%, compared with the second quarter of 2012, and an increase of $144.2 million, or 1.26%, compared with the third quarter of 2011. During the third quarter 2012, average core deposits, which exclude time deposits, increased $126.8 million, or 1.28%, compared with the second quarter 2012 and increased $715.6 million, or 7.66%, compared with the third quarter 2011. Average time deposits decreased $90.1 million, or 5.57%, and decreased $571.4 million, or 27.21%, respectively, over prior and year-ago quarters. The Corporation continues to emphasize growth in lower cost core deposit products and decrease its reliance on certificates of deposit accounts to support balance sheet growth. For the third quarter of 2012, average core deposits accounted for 86.82% of total average deposits, compared with 85.99% for the second quarter of 2012 and 81.66% for the third quarter of 2011.

Average investments decreased $4.3 million, or 0.12%, compared with the second quarter of 2012 and increased $17.5 million, or 0.48% compared with the third quarter of 2011.

Net interest income on a fully tax-equivalent ("FTE") basis was $120.7 million in the third quarter 2012 compared with $121.7 million in the second quarter of 2012 and $121.8 million in the third quarter of 2011.

Noninterest income, excluding gains on securities transactions of $0.6 million, for the third quarter of 2012 was $54.4 million, a decrease of $0.4 million, or 0.70%, from the second quarter of 2012 and a decrease of $2.0 million, or 3.54%, from the third quarter of 2011. The decrease in noninterest income from the second quarter of 2012 was attributable to a decrease of $2.6 million in gains on covered loans paid in full partially offset by increased loan sales and servicing income of $2.1 million. The decrease in noninterest income from the third quarter of 2011 was attributable a decline in service charges on deposits of $3.2 million as a result of regulatory revisions to overdraft fee policies which took effect in the fourth quarter of 2011 and a decline in


credit card fees of $2.6 million as a result of the implementation of the Durbin Interchange Amendment in the fourth quarter of 2011. These declines in income were partially offset by an increase in loans sales and servicing income of $3.8 million resulting from an increase in mortgage loan originations and refinancings activity due to a decrease in interest rates in 2012.

Other income, net of $0.6 million in securities gains, as a percentage of net revenue for the third quarter of 2012 was 31.05% compared with 31.03% for second quarter of 2012 and 31.64% for the third quarter of 2011. Net revenue is defined as net interest income, on an FTE basis, plus other income, less gains from securities sales.

Noninterest expense for the third quarter of 2012 was $108.6 million, a decrease of $10.5 million, or 8.81%, from the second quarter of 2012, which included $8.9 million in one-time charges related to the Efficiency Initiative announced in the prior quarter, and a decrease of $7.4 million, or 6.36%, from the third quarter of 2011. Other one-time charges incurred in the third quarter of 2012 included $0.5 million associated with costs of closing eight full service branches and $1.1 million of professional and legal fees associated with the proposed acquisition of Citizens. The Corporation demonstrated significant ongoing progress in reducing operating expenses in response to the challenging industry environment.

During the third quarter of 2012, the Corporation reported an efficiency ratio of 61.75%, compared with 67.21% for the second quarter of 2012 and 64.78% for the third quarter of 2011. Excluding the $8.9 million in one-time charges related to the Efficiency Initiative announced in the prior quarter, the reported efficiency ratio for the second quarter of 2012 would be 62.15%.

As a result of guidance from the OCC, $10.6 million of consumer loans were identified as troubled debt restructurings whereby the borrower's obligation to the Corporation has been discharged in bankruptcy and the borrower has not reaffirmed the debt. These loans were reclassified from performing loans to nonaccrual status and consisted of $6.7 million of first mortgages, $1.0 million of junior liens and $2.9 million of automobile loans, and net loan charge-offs of $2.8 million were recognized.

Net charge-offs of noncovered loans totaled $14.9 million, or 0.72% of average noncovered loans in the third quarter of 2012, including $2.8 million in charge-offs relating to the aforementioned troubled debt restructured loans, compared with $8.8 million, or 0.44% of average noncovered loans, in the second quarter 2012 and $14.6 million, or 0.77% of average noncovered loans, in the third quarter of 2011.

Nonperforming assets totaled $64.1 million at September 30, 2012, an increase of $3.0 million, or 4.87%, compared with June 30, 2012 and a decrease of $26.0 million, or 28.89%, compared with September 30, 2011. The increase in nonperforming assets in the third quarter is a result of the $10.6 million in loans noted above. Excluding the impact of the OCC guidance, nonperforming assets decreased $7.6 million or 12.44% compared with June 30, 2012 and $36.6 million or 40.63% compared with September 30, 2011. Nonperforming assets at September 30, 2012 represented 0.77% of period-end noncovered loans plus noncovered other real estate compared with 0.75% at June 30, 2012 and 1.18% at September 30, 2011.

The allowance for noncovered loan losses totaled $98.9 million at September 30, 2012, down from $103.8 million at June 30, 2012. At September 30, 2012, the allowance for noncovered loan losses was 1.19% of period-end noncovered loans compared with 1.28% at June 30, 2012 and 1.43% at September 30, 2011. The allowance for credit losses is the sum of the allowance for noncovered loan losses and the reserve for unfunded lending commitments. For comparative purposes the allowance for credit losses was 1.26% of period-end noncovered loans at September 30, 2012, compared with 1.35% at June 30, 2012 and 1.51% at September 30, 2011. The allowance for credit losses to nonperforming noncovered loans was 208.11% at September 30, 2012,


compared with 234.57% at June 30, 2012 and 170.16% at September 30, 2011.

The Corporation's total assets at September 30, 2012 were $14.6 billion, an increase of $7.5 million, or 0.05%, compared with June 30, 2012 and a decrease of $59.4 million, or 0.40%, compared with September 30, 2011.

Total deposits were $11.5 billion at September 30, 2012, a decrease of $83.4 million, or 0.72%, from June 30, 2012 and an increase of $136.3 million, or 1.20%, from September 30, 2011. Core deposits totaled $10.1 billion at September 30, 2012, an increase of $18.3 million, or 0.18% from June 30, 2012 and an increase of $0.6 billion, or 6.38%, from September 30, 2011.

Shareholders' equity was $1.6 billion at September 30, 2012, June 30, 2012 and September 30, 2011, respectively. The Corporation maintained a strong capital position as tangible common equity to assets was 8.18% at September 30, 2012, compared with 8.01% at June 30, 2012 and 7.75% at September 30, 2011. The common cash dividend per share paid in the third quarter 2012 was $0.16.

RESULTS OF OPERATION
Net Interest Income

Net interest income, the Corporation's principal source of earnings, is the difference between interest income generated by earning assets (primarily loans and investment securities) and interest paid on interest-bearing funds (namely customer deposits and wholesale borrowings). Net interest income is affected by market interest rates on both earning assets and interest bearing liabilities, the level of earning assets being funded by interest bearing liabilities, noninterest-bearing liabilities, the mix of funding between interest bearing liabilities, noninterest-bearing liabilities and equity, and the growth in earning assets.

Net interest income for the three and nine months ended September 30, 2012 was $117.9 million and $355.6 million, respectively, compared to $119.4 million and $358.7 million for the three and nine month ended September 30, 2011. For the purpose of this remaining discussion, net interest income is presented on an FTE basis, to make tax-exempt loans and investment securities comparable to other taxable products. That is, interest on tax-exempt investment securities and loans has been restated as if such interest were taxed at the statutory Federal income tax rate of 35%, adjusted for the non-deductible portion of interest expense incurred to acquire the tax-free assets. Net interest income presented on an FTE basis is a non-GAAP financial measure which Management believes to be the preferred industry measurement of net interest income and enhances comparability of net interest income arising from taxable and tax-exempt sources. In addition, Management believes this metric assists investors in understanding management's view of particular financial measures, as well as aligns presentation of these financial measures with peers in the industry who may also provide a similar presentation. The FTE adjustment was $2.9 million and $2.4 million for the three months ending September 30, 2012 and 2011, respectively, and $8.3 million and $7.1 million for the nine months ended September 30, 2012 and September 30, 2011, respectively.

FTE net interest income for the three and nine month periods ended September 30, 2012 was $120.7 million and $363.9 million, respectively, compared to $121.8 million and $365.7 million for the three and nine months ended September 30, 2011, respectively.


The impact of changes in the volume of interest-earning assets and interest-bearing liabilities and interest rates on net interest income is illustrated in the following table.

 RATE/VOLUME ANALYSIS                Three Months Ended September 30, 2012 and 2011               Nine Months Ended September 30, 2012 and 2011
                                                 Increases (Decreases)                                        Increases (Decreases)
(Dollars in thousands)              Volume                Rate                Total              Volume                Rate                Total
INTEREST INCOME - FTE
Investment securities and
federal funds sold:
   Taxable                     $       (1,745 )     $          430       $       (1,315 )   $        (739 )     $           (37 )     $        (776 )
   Tax-exempt                           2,973               (1,916 )              1,057             5,813                (3,072 )             2,741
Loans held for sale                       (10 )                (34 )                (44 )              80                   (98 )               (18 )
Loans                                   2,607               (7,923 )             (5,316 )           6,045               (27,480 )           (21,435 )
Total interest income - FTE             3,825               (9,443 )             (5,618 )          11,199               (30,687 )           (19,488 )
INTEREST EXPENSE
Interest on deposits:
   Interest-bearing                        38                  (13 )                 25               142                     5                 147
   Savings and money market
accounts                                  364               (2,127 )             (1,763 )           1,888                (8,758 )            (6,870 )
   Certificates of deposits
and other time deposits                (1,081 )               (546 )             (1,627 )          (4,713 )              (2,654 )            (7,367 )
   Securities sold under
agreements to repurchase                   60                 (727 )               (667 )             139                (2,117 )            (1,978 )
   Wholesale borrowings                  (852 )                313                 (539 )          (2,533 )                 969              (1,564 )
Total interest expense                 (1,471 )             (3,100 )             (4,571 )          (5,077 )             (12,555 )           (17,632 )
Net interest income - FTE      $        5,296       $       (6,343 )     $       (1,047 )   $      16,276       $       (18,132 )     $      (1,856 )

The net interest margin is calculated by dividing net interest income FTE by average earning assets. As with net interest income, the net interest margin is affected by the level and mix of earning assets, the proportion of earning assets funded by non-interest bearing liabilities, and the interest rate spread. In addition, the net interest margin is impacted by changes in federal income tax rates and regulations as they affect the tax-equivalent adjustment. The following table provides 2012 FTE net interest income and net interest margin totals as well as 2011 comparative amounts:

                                 Three Months Ended September 30,         Nine Months Ended September 30,
(Dollars in thousands)               2012                 2011                2012                 2011
Net interest income           $        117,890       $     119,392     $        355,600       $    358,659
Tax equivalent adjustment                2,851               2,396                8,258              7,055
Net interest income - FTE     $        120,741       $     121,788     $        363,858       $    365,714
Average earning assets        $     13,119,473       $  12,878,105     $     13,014,267       $ 12,722,271
Net interest margin - FTE                 3.66 %              3.75 %               3.73 %             3.84 %

The average yield on earning assets decreased from 4.19% in the quarter ended September 30, 2011 to 3.95% in the quarter ended September 30, 2012. Higher outstanding balances on total average earning assets in the quarter ended September 30, 2012 did not mitigate the decrease in average yield, which caused interest income to decrease $5.6 million from year-ago levels. Average balances for investment securities were up from the third quarter of 2011, increasing interest income by $1.2 million, and lower rates earned on the securities decreased interest income by $1.5 million. Average loans outstanding, up from the third quarter of 2011, increased interest income from the quarter ended September 30, 2011 by $2.6 million and lower yields earned on the loans, decreased loan interest income in the quarter ended September 30, 2012 by $7.9 million. Higher outstanding balances on average deposits and lower rates paid on deposits caused interest expense to decrease $3.4 million in the quarter ended September 30, 2012. Lower average outstanding balances on wholesale debt


and lower rates paid caused interest expense to decrease by $0.5 million in the quarter ended September 30, 2012.

The cost of funds for the year as a percentage of average earning assets decreased 18 basis points from 0.11% for the quarter ended September 30, 2011 to 0.07% for the quarter ended September 30, 2012. The drop in interest rates was the primary factor driving this decrease.

Other Income

Excluding investment gains, other income for the three and nine months ended September 30, 2012 totaled $54.4 million and $160.6 million, respectively, compared with $56.4 million and $159.7 million in the same periods of 2011. The latter represents a decrease of $2.0 million or 3.54% in the third quarter of 2012 and an increase of $0.9 million or 0.54% in the first nine months of 2012. Other income as a percentage of net revenue (FTE net interest income plus other income, less security gains from securities) was 31.05% and 30.62% for the three and nine months ended September 30, 2012, respectively, compared to 31.64% and 30.40% in the same periods of 2011. Explanations for the most significant changes in the components of other income are discussed immediately after the following table.

                                               Three Months Ended                                 Nine Months Ended
(In thousands)                     September 30, 2012       September 30, 2011       September 30, 2012       September 30, 2011
Trust department income          $              6,124     $              5,607     $             17,481     $             16,983
Service charges on deposits                    14,603                   17,838                   43,490                   48,460
Credit card fees                               11,006                   13,640                   32,402                   39,357
ATM and other service fees                      3,680                    3,801                   11,360                    9,781
Bank owned life insurance income                3,094                    3,182                    9,073                   11,439
Investment services and life
insurance                                       2,208                    1,965                    6,843                    6,384
Investment securities gains, net                  553                    4,402                    1,361                    5,291
Loan sales and servicing income                 7,255                    3,426                   19,085                    9,102
Other operating income                          6,402                    6,911                   20,857                   18,222
  Total other income             $             54,925     $             60,772     $            161,952     $            165,019

Service charges on deposits decreased $3.2 million and $5.0 million in the three and nine months ended September 30, 2012, respectively, compared to the same periods of 2011, as a result of regulatory revisions to overdraft fee policies that took effect in the fourth quarter of 2011. Credit card fees decreased $2.6 million and $7.0 million in the three and nine months ended September 30, 2012, respectively, compared to the same periods of 2011 as a result of the implementation of the Durbin Interchange Amendment in the fourth quarter of 2011. Loan sales and servicing income increased $3.8 million, or 111.76%, in the third quarter of 2012 and $10.0 million, or 109.68%, in the first nine months of . . .

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