Shares of FirstMerit Corporation FMER rallied over 3% since the company reported first-quarter 2015 earnings results on Apr 28, before the market opened. Earnings per share of 33 cents were in line with the Zacks Consensus Estimate. Further, earnings came 6.5% above the prior-year figure.
A reduction in net interest income and non-interest income was offset by lower expenses and provisions. Improvement in loans was among the positives, while growth in deposits remained subdued.
Net income attributable to common shareholders summed $55.3 million, up 7.1% year over year.
Performance in Detail
FirstMerit’s net revenues declined 3.7% year over year to $251.5 million. However, the figure missed the Zacks Consensus Estimate of $259.0 million.
Net interest income fell 4.3% year over year to $185.6 million owing to lower interest income, slightly offset by reduced interest expense. Moreover, net interest margin (on a fully tax-equivalent basis) stood at 3.48% compared with 3.84% in the year-ago quarter.
Non-interest income decreased 2.1% year over year to $65.8 million. The reduction was driven by lower service charges on deposits as well as loan sales and servicing income, partially offset by higher trust department income, credit card fees as well as investment services and insurance.
Non-interest expenses amounted to $160.7 million, down 5.1% year over year. The decrease was mainly led by a fall in net occupancy expense, stationery, supplies and postage, professional services, amortization of intangibles as well as other expenses. These were, however, partly offset by a rise in salaries, wages, pension and employee benefits as well as bankcard, loan processing and other costs.
As of Mar 31, 2015, total loans grew 6.0% year over year to $15.5 billion. Further, total deposits rose marginally year over year to $19.9 billion. Moreover, shareholders’ equity increased 5.3% year over year to $2.9 billion as of Mar 31, 2015.
Asset Quality
FirstMerit’s asset quality represented a mixed bag during the quarter. Nonperforming assets increased 9.4% year over year to $68.6 million as of Mar 31, 2015.
However, provision for loan losses declined 43.3% year over year to $8.2 million. Further, net charge-offs totaled $4.2 million, down 47.8% year over year. Also, allowance for loan losses to period-end loans came in at 0.76% versus 0.85% as of Mar 31, 2014.
Capital and Profitability Ratios
On Jan 1, 2015, FirstMerit became subject to the Basel III capital framework and standardized approach for calculating risk-weighted assets. As of Mar 31, 2015, total risk-based capital ratio came in at 13.73% and common equity tier 1 risk-based capital ratio stood at 10.60%.
FirstMerit’s profitability ratios improved during the quarter. Return on average assets as of Mar 31, 2015 stood at 0.93% compared with 0.90% as of Mar 31, 2014. Moreover, return on average equity came in at 8.08% as against 7.93% as of Mar 31, 2014.
Our Take
FirstMerit remains well positioned for future growth on the basis of its sound capital base and improved credit quality. Also, the company’s effective cost management will likely ease the pressure on profitability caused by pressurized revenues.
Nevertheless, the company’s compressed margin and strained top line due to the persistent low interest rate environment remains a matter of concern.
FirstMerit currently carries a Zacks Rank #3 (Hold).
Performance of Other Midwest Banks
Commerce Bancshares, Inc. CBSH reported first-quarter 2015 earnings per share of 61 cents, which surpassed the Zacks Consensus Estimate of 57 cents on the back of higher non-interest income and lower provisions.
Associated Banc-Corp’s ASB first-quarter earnings per share of 30 cents beat the Zacks Consensus Estimate by a penny mainly owing to higher net interest income as well as non-interest income.
However, TCF Financial Corporation’s TCB first-quarter earnings of 21 cents per share missed the Zacks Consensus Estimate of 26 cents, driven by weak top-line performance and mounting expenses.
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