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FMER > SEC Filings for FMER > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for FIRSTMERIT CORP /OH/


3-May-2013

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                        Three months ended
                                       March 31, 2013                           December 31, 2012                          March 31, 2012
                              Average                     Average       Average                     Average       Average                     Average
(Dollars in thousands)        Balance        Interest       Rate        Balance        Interest       Rate        Balance        Interest       Rate
ASSETS
Cash and due from banks    $    394,896                              $    238,366                              $    378,736
Investment securities
and federal funds sold:
U.S. Treasury securities
and U.S. Government
agency obligations
(taxable)                     2,790,039     $  16,294       2.37 %      2,794,524     $  16,767       2.39 %      2,882,045     $  19,679       2.75 %
Obligations of states
and political
subdivisions (tax
exempt)                         541,014         6,595       4.94 %        510,722         6,583       5.13 %        436,804         5,864       5.40 %
Other securities and
federal funds sold              366,926         2,944       3.25 %        381,569         3,429       3.58 %        371,973         2,739       2.96 %
Total investment
securities and federal
funds sold                    3,697,979        25,833       2.83 %      3,686,815        26,779       2.89 %      3,690,822        28,282       3.08 %
Loans held for sale              14,884           144       3.92 %         20,485           199       3.86 %         26,483           283       4.30 %
Noncovered loans,
covered loans and loss
share receivable              9,695,926        99,006       4.14 %      9,539,393       101,288       4.22 %      9,217,879       103,156       4.50 %
Total earning assets         13,408,789       124,983       3.78 %     13,246,693       128,266       3.85 %     12,935,184       131,721       4.10 %
Total allowance for loan
losses                         (141,735 )                                (141,270 )                                (142,628 )
Other assets                  1,321,593                                 1,358,426                                 1,325,645
Total assets               $ 14,983,543                              $ 14,702,215                              $ 14,496,937
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing        $  3,321,660     $       -          - %   $  3,306,444     $       -          - %   $  3,036,590     $       -          -
Interest-bearing              1,300,816           318       0.10 %      1,122,796           261       0.09 %      1,066,132           247       0.09 %
Savings and money market
accounts                      5,835,750         5,315       0.37 %      5,743,599         5,261       0.36 %      5,675,052         5,103       0.36 %
Certificates and other
time deposits                 1,331,558         2,063       0.63 %      1,422,246         2,287       0.64 %      1,694,247         3,524       0.84 %
Total deposits               11,789,784         7,696       0.26 %     11,595,085         7,809       0.27 %     11,472,021         8,874       0.31 %
Securities sold under
agreements to repurchase        906,717           313       0.14 %        957,564           303       0.13 %        887,715           268       0.12 %
Wholesale borrowings            136,298           850       2.53 %        163,405         1,024       2.49 %        184,659         1,151       2.51 %
Long-term debt                  155,506         1,748       4.56 %              -             -          - %              -             -          - %
Total interest-bearing
liabilities                   9,666,645        10,607       0.45 %      9,409,610         9,136       0.39 %      9,507,805        10,293       0.44 %
Other liabilities               280,233                                   350,886                                   371,533
Shareholders' equity          1,715,005                                 1,635,275                                 1,581,009
Total liabilities and
shareholders' equity       $ 14,983,543                              $ 14,702,215                              $ 14,496,937
Net yield on earning
assets                     $ 13,408,789     $ 114,376       3.46 %   $ 13,246,693     $ 119,130       3.58 %   $ 12,935,184     $ 121,428       3.78 %
Interest rate spread                                        3.34 %                                    3.47 %                                    3.66 %

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.


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HIGHLIGHTS OF FIRST QUARTER 2013 PERFORMANCE

Earnings Summary

The Corporation reported first quarter 2013 net income of $37.3 million, or $0.33 per diluted share. This compares with $38.2 million, or $0.35 per diluted share, for the fourth quarter 2012 and $30.3 million, or $0.28 per diluted share, for the first quarter 2012.

Returns on average common equity ("ROE") and average assets ("ROA") for the first quarter 2013 were 8.83% and 1.01%, respectively, compared with 9.30% and 1.03%, respectively, for the fourth quarter 2012 and 7.72% and 0.84% for the first quarter 2012.

Net interest margin was 3.46% for the first quarter 2013 compared with 3.58% for the fourth quarter 2012 and 3.78% for the first quarter 2012. Increased borrowing costs, primarily related to the Corporation's issuance of $250 million aggregate principal amount of subordinated notes in an underwritten public offering completed on February 4, 2013, accounted for six basis points of compression during the first quarter of 2013.

Average noncovered loans during the first quarter 2013 increased $291.1 million, or 3.45%, compared with the fourth quarter 2012 and also increased $953.9 million, or 12.26%, compared with the first quarter 2012. Average noncovered commercial loans increased $259.3 million, or 4.63%, compared with the prior quarter, and increased $716.7 million, or 13.94%, compared with the year ago quarter.

Average deposits were $11.8 billion during the first quarter 2013, an increase of $194.7 million, or 1.68%, compared with the fourth quarter 2012, and an increase of $317.8 million, or 2.77%, compared with the first quarter 2012. During the first quarter 2013, average core deposits, which exclude time deposits, increased $285.4 million, or 2.81%, compared with the fourth quarter 2012 and $680.5 million, or 6.96%, compared with the first quarter 2012. Average time deposits decreased $90.7 million, or 6.38%, and decreased $362.7 million, or 21.41%, respectively, over prior and year-ago quarters. For the first quarter 2013, average core deposits accounted for 88.71% of total average deposits, compared with 87.73% for the fourth quarter 2012 and 85.23% for the first quarter 2012.

Average investments increased $11.2 million, or 0.30%, compared with the fourth quarter 2012 and increased $7.2 million, or 0.19% compared with the first quarter 2012.

Net interest income on a fully tax-equivalent ("FTE") basis was $114.4 million in the first quarter 2013 compared with $119.1 million in the fourth quarter 2012 and $121.4 million in the first quarter 2012.

Noninterest income, excluding gains on securities transactions, for the first quarter 2013 was $57.4 million, a decrease of $1.8 million, or 3.08%, from the fourth quarter 2012 and an increase of $5.9 million, or 11.53%, from the first quarter 2012. Included in noninterest income in both the first quarter of 2013 and the fourth quarter of 2012 were $5.0 million of gains on covered loans paid in full.

Other income, net of securities gains, as a percentage of net revenue for the first quarter 2013 was 33.42% compared with 33.21% for fourth quarter 2012 and 29.77% for the first quarter 2012. Net revenue is defined as net interest income, on an FTE basis, plus other income, less gains from securities sales.

Noninterest expense for the first quarter 2013 was $106.9 million, a decrease of $5.3 million, or 4.69%, from the fourth quarter 2012 and a decrease of $6.8 million, or 6.01%, from the first quarter 2012. Included in


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noninterest expense in the first quarter of 2013 and fourth quarter of 2012 were acquisition related costs associated with the Citizens Republic Bancorp, Inc. ("Citizens") merger of $3.6 million and $2.1 million, respectively. The majority of these acquisition related costs were from professional and legal services rendered in connection with the merger. Also included in noninterest expense in the fourth quarter of 2012 was $2.3 million of fees related to the early termination of Federal Home Loan Bank advances.

During the first quarter 2013, the Corporation reported an efficiency ratio of 62.06%, compared with 62.65% for the fourth quarter 2012 and 65.52% for the first quarter 2012.

Net noncovered charge-offs totaled $5.9 million, or 0.27% of average noncovered loans in the first quarter 2013, compared with $7.1 million, or 0.34% of average noncovered loans, in the fourth quarter 2012 and $12.0 million, or 0.62% of average noncovered loans, in the first quarter 2012.

Nonperforming assets totaled $52.2 million at March 31, 2013, a increase of $2.0 million, or 4.00%, compared with December 31, 2012 and a decrease of $15.7 million, or 23.11%, compared with March 31, 2012. Nonperforming assets at March 31, 2013 represented 0.59% of period-end noncovered loans plus other real estate compared with 0.57% at December 31, 2012 and 0.86% at March 31, 2012.

The allowance for noncovered loan losses totaled $98.8 million at March 31, 2013. At March 31, 2013, the allowance for noncovered loan losses was 1.13% of period-end noncovered loans compared with 1.13% at December 31, 2012 and 1.32% at March 31, 2012. 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 1.18% of period end noncovered loans at March 31, 2013, compared with 1.20% at December 31, 2012 and 1.39% at March 31, 2012. The allowance for credit losses to nonperforming loans was 254.32% at March 31, 2013, compared with 284.50% at December 31, 2012 and 205.13% at March 31, 2012.

The Corporation's total assets at March 31, 2013 were $15.3 billion, an increase of $359.5 million, or 2.41%, compared with December 31, 2012 and an increase of $601.7 million, or 4.10%, compared with March 31, 2012.

Total deposits were $11.9 billion at March 31, 2013, an increase of $166.3 million, or 1.41%, from December 31, 2012 and an increase of $277.6 million, or 2.38%, from March 31, 2012. Core deposits totaled $10.6 billion at March 31, 2013, an increase of $238.4 million, or 2.30%, from December 31, 2012 and an increase of $624.3 million, or 6.24%, from March 31, 2012.

Shareholders' equity was $1.8 billion as of March 31, 2013 and $1.6 billion as of December 31, 2012 and March 31, 2012. On February 4, 2013, the Corporation issued 4,000,000 depositary shares (each representing a 1/40th interest in a share of the Corporation's 5.875% Non-Cumulative Perpetual Preferred Stock, Series A) for total gross proceeds of $100 million. Dividends are payable quarterly in arrears on the 4th day of February, May, August and November, beginning May 4, 2013. As of March 31, 2013, $0.9 million of dividends were accrued and payable on May 4, 2013 and accounted for approximately a one cent reduction in diluted EPS for the three months ended March 31, 2013. The Corporation maintained a strong capital position as tangible common equity to assets was 8.03% at March 31, 2013, compared with 8.16% at December 31, 2012 and 7.86% at March 31, 2012. The common cash dividend per share paid in the first quarter 2013 was $0.16.


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Non-GAAP Financial Measures
The table below presents computations of earnings (loss) and certain other financial measures including "tangible common equity," "Tier 1 common equity", "tangible common equity to tangible assets ratio", "Basel III Tier 1 common ratio", "fee income ratio" and "efficiency ratio", all of which are non-GAAP measures. The table below also reconciles the U.S. GAAP performance measures to the corresponding non-GAAP measures. Management believes these non-GAAP financial measures enhance an investor's understanding of the business by providing a meaningful base for period-to-period comparisons, assisting in operating results analysis, and predicting future performance on the same basis as applied by Management and the Board of Directors. Management and the Board of Directors utilize these non-GAAP financial measures as follows:
Preparation of operating budgets

Monthly financial performance reporting

Monthly, quarterly and year-to-date assessment of the Corporation's business

Monthly close-out reporting of consolidated results (Management only)

Presentations to investors of corporate performance

Tangible common equity ratios have been a focus of some investors in analyzing the capital position of the Corporation absent the effects of intangible assets and preferred stock. Traditionally, the banking regulators have assessed bank and Bank Holding Company ("BHC") capital adequacy based on Tier 1 capital, the calculation of which is codified in federal banking regulations. In connection with the Federal Reserve's Comprehensive Capital Analysis and Review ("CCAR") process, these regulators are supplementing their assessment of the capital adequacy of a bank based on a variation of Tier 1 capital, known as Tier 1 common equity. While not codified, analysts and banking regulators have assessed the Corporation's capital adequacy using the tangible common shareholders' equity and/or the Tier 1 common equity measure. Because tangible common equity and Tier 1 common equity are not formally defined by U.S. GAAP or codified in the federal banking regulations, these measures are considered to be non-GAAP financial measures and other entities may calculate them differently than the Corporation's disclosed calculations. Since analysts and banking regulators may assess the Corporation's capital adequacy using tangible common shareholders' equity and Tier 1 common equity, Management believes that it is useful to provide investors information enabling them to assess the Corporation's capital adequacy on these same bases.
Tier 1 common equity is often expressed as a percentage of risk-weighted assets. Under the risk-based capital framework, a bank's balance sheet assets and credit equivalent amounts of off-balance sheet items are assigned to one of four broad risk categories. The aggregated dollar amount in each category is then multiplied by the risk weighting assigned to that category. The resulting weighted values from each of the four categories are added together and this sum is the risk-weighted assets total that, as adjusted, comprises the denominator of certain risk-based capital ratios. Tier 1 capital is then divided by this denominator (risk-weighted assets) to determine the Tier 1 capital ratio. Adjustments are made to Tier 1 capital to arrive at Tier 1 common equity (non-GAAP). Tier 1 common equity is also divided by the risk-weighted assets to determine the Tier 1 common equity ratio. The amounts disclosed as risk-weighted assets are calculated consistent with banking regulatory requirements. The Corporation currently calculates its risk-based capital ratios under guidelines adopted by the Federal Reserve based on the 1988 Capital Accord ("Basel I") of the Basel Committee on Banking Supervision (the "Basel Committee"). In December 2010, the Basel Committee released its final framework for Basel III, which will strengthen international capital and liquidity regulation. When implemented by U.S. bank regulatory agencies and fully phased-in, Basel III will change capital requirements and place greater emphasis on common equity. The U.S. bank regulatory agencies have not yet adopted final regulations governing the implementation


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of Basel III. Accordingly, the calculations provided below are estimates, based on the Corporation's current understanding of the framework, including the Corporation's reading of the requirements, and informal feedback received through the regulatory process. The Corporation's understanding of the framework is evolving and will likely change as the regulations are finalized. Because the Basel III implementation regulations are not formally defined by U.S. GAAP and have not yet been finalized and codified, these measures are considered to be non-GAAP financial measures, and other entities may calculate them differently from the Corporation's disclosed calculations. Since analysts and banking regulators may assess the Corporation's capital adequacy using the Basel III framework, Management believes that it is useful to provide investors information enabling them to assess the Corporation's capital adequacy on the same basis.
The efficiency ratio (non-GAAP), which is a measure of productivity, is generally calculated as other expense divided by total revenue on a taxable equivalent basis. The fee income ratio (non-GAAP) is generally calculated as other income divided by total revenue. Management uses these ratios to monitor performance and believes these measures provide meaningful information to investors. Other expense may be presented excluding adjustments to arrive at adjusted other expense (non-GAAP), which is the numerator for the efficiency ratio. Other income may be presented excluding adjustments to arrive at adjusted other income (non-GAAP), which is the numerator for the fee income ratio. Net interest income on a taxable equivalent basis (non-GAAP) and other income are added together to arrive at total adjusted revenue (non-GAAP). Adjustments are made to arrive at adjusted total revenue (non-GAAP), which is the denominator for the fee income and efficiency ratios. It is possible that the activities related to the adjustments may recur; however, Management does not consider the activities related to the adjustments to be indications of ongoing operations. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of results as reported under GAAP. These non-GAAP measures are not necessarily comparable to similar measures that may be represented by other companies.


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                             GAAP to Non-GAAP Reconciliations
                                                      March 31, 2013      March 31, 2012
                                                            (Dollars in thousands)
Tangible common equity to tangible assets at period
end
  Shareholders' equity (GAAP)                        $     1,754,850     $     1,584,105
  Less: Intangible assets                                      6,055               7,756
        Goodwill                                             460,044             460,044
        Preferred Stock                                      100,000                   -
  Tangible common equity (non-GAAP)                  $     1,188,751     $     1,116,305
  Total assets (GAAP)                                     15,272,484          14,670,818
  Less: Intangible assets                                      6,055               7,756
        Goodwill                                             460,044             460,044
  Tangible assets (non-GAAP)                         $    14,806,385     $    14,203,018
  Tangible common equity to tangible assets ratio
  (non-GAAP)                                                    8.03 %              7.86 %
Tier 1 common equity (1)
  Shareholders' equity (GAAP)                        $     1,754,850     $     1,584,105
        Net unrealized (gains) losses on
  Plus: available-for-sale securities                        (47,504 )           (55,440 )
        Losses recorded in AOCI related to defined
        benefit postretirement plans                          71,623              77,612
  Less: Goodwill                                             460,044             460,044
        Intangible assets                                      6,055               7,756
        Disallowed servicing asset                             1,943               1,771
  Tier 1 capital (regulatory)                              1,310,927           1,136,706
  Less: Preferred Stock                                      100,000                   -
  Tier 1 common equity (non-GAAP)                    $     1,210,927     $     1,136,706
  Risk-weighted assets (regulatory)                  $    10,609,418     $     9,841,806
  Tier 1 common equity ratio (non-GAAP)                        11.41 %             11.55 %
Basel III Tier 1 Common Ratio (2)
  Shareholders' equity (GAAP)                        $     1,754,850     $     1,584,105
  Less: Non-qualifying goodwill                              460,044             460,044
        Non-qualifying intangible assets (3)                   6,055               7,756
        Other adjustments (4)                                  1,943               1,771
  Basel III tier 1 capital (regulatory)                    1,286,808           1,114,534
  Less: Preferred Stock                              $       100,000     $             -
  Basel III tier 1 common equity (regulatory)        $     1,186,808     $     1,114,534
  Basel III risk-weighted assets (regulatory) (5)    $    10,609,418     $     9,841,806
  Basel III tier 1 common equity ratio (non-GAAP)              11.19 %             11.32 %

(1) Tier 1 common equity is a measure that is used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies. Management reviews this measure along with other measures of capital as part of its internal financial analysis.

(2) Estimate based on June 2012 U.S. Notices of Proposed Rulemaking.

(3) Under Basel III, regulatory capital must be reduced by purchased credit card relationship intangible assets. These assets are partially allowed in Basel I capital.

(4) These include adjustments to other comprehensive income related to cash flow hedges, disallowed deferred tax assets, threshold deductions and other adjustments.

(5) FirstMerit continues to develop systems and internal controls to calculate risk-weighted assets as required by Basel III. The amount included above is a reasonable approximation, based on our understanding of the requirements.


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GAAP to Non-GAAP Reconciliations, continued

                                             March 31, 2013     March 31, 2012
                                                  (Dollars in thousands)
Fee Income and Efficiency Ratios
  Other expense (GAAP)                      $      106,925     $      113,768
  Significant items:
  Less: Intangible asset amortization                  317                483
        Other intangible asset amortization              -                  -
        Adjusted other expense (non-GAAP)   $      106,608     $      113,285
  Net interest income (FTE) (non-GAAP)             114,376            121,428
  Other income (GAAP)                               57,392             51,726
  Significant Items:
        Securities gains (losses)                       (9 )              260
        Adjusted other income (non-GAAP)            57,401             51,466
        Adjusted revenue (non-GAAP)         $      171,777     $      172,894
  Fee income ratio (non-GAAP)                        33.42 %            29.77 %
  Efficiency ratio (non-GAAP)                        62.06 %            65.52 %

RESULTS OF OPERATIONS
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, wholesale borrowings and long-term debt). 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 months ended March 31, 2013 was $111.3 million compared to $118.8 million for three months ended March 31, 2012. For the purpose of this remaining discussion, net interest income is presented on a FTE basis, to provide a comparison among all types of interest earning assets. That is, interest on tax-free securities and tax-exempt 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 a FTE basis is a financial measure that is calculated and presented other than in accordance with U.S. GAAP and is widely used by financial services organizations. Therefore, Management believes these measures provide useful information for both management and investors by allowing them to make peer comparisons. The FTE adjustment was $3.0 million and $2.6 million for the quarters ended March 31, 2013 and 2012, respectively.

Net interest income presented on an FTE basis decreased $7.0 million or 5.77% to $114.4 million in the three months ended March 31, 2013 compared to $121.4 million in the same period of 2012.


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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.

                 CHANGES IN NET INTEREST INCOME- FULLY TAX-EQUIVALENT RATE/VOLUME ANALYSIS

                                                                     Three months ended March 31,
                                                                            2013 and 2012
                                                            Increase (Decrease) In Interest Income/Expense
                                                                                Yield/
                                                             Volume              Rate              Total
                                                                       ( Dollars in thousands)
INTEREST INCOME -FTE
Investment securities and federal funds sold:
Taxable                                                   $    (652 )       $    (2,528 )       $   (3,180 )
Tax-exempt                                                    1,306                (575 )              731
. . .
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