DBRS Comments on Q1 Earnings of FirstMerit Corporation - Senior at A (low)

DBRS has today commented on the Q1 2009 earnings of FirstMerit Corporation (FirstMerit or the Company). Even with the deteriorating economy, FirstMerit reported solid net income available to common shareholders of $27.5 million for the quarter, down moderately from $29.1 million for the prior quarter and $31.4 million for Q1 2008. On a sequential quarter basis, Q1 2009 net income compressed due to a 29 basis points (bps) narrowing of net interest margin (NIM) to 3.53%, a relatively small 6.3% increase in provisions for loan loss reserves and $1.7 million in preferred stock dividend expense related to shares issued to the U.S. Department of the Treasury (Treasury). Partially offsetting was a 4.5% increase in non-interest income, driven by a $9.5 million gain related to the curtailment of the Company’s post-retirement medical benefit plan for active employees, higher investment services and insurance fees and income from bank owned life insurance. Compared with a year ago, quarterly net income was negatively impacted by a 56.8% increase in provisions, a 7 bps narrowing of NIM, a 2.4% increase in non-interest expenses and the $1.7 million preferred stock dividend. Somewhat offsetting was a 4.4% increase in non-interest income. With FirstMerit’s franchise strengths and credit fundamentals maintained, its ratings, including its A (low) - rated senior obligations and Stable trend, remain unaffected.

Although the rapid decline in the economy has led to a considerable escalation in asset quality erosion throughout the banking universe, FirstMerit’s asset quality deterioration was more limited. At March 31, 2009, non-performing assets (NPAs) expanded to 1.04% of loans and other real estate owned, from 0.77% at December 31, 2008 and 0.50% at March 31, 2008. Meanwhile, net charge-offs (NCOs) increased slightly to 0.86% of average loans, up from to 0.82% for the prior quarter and 0.65% for Q1 2008. The bulk of the Company’s gross charge-offs for the quarter consisted of installment, commercial, credit card and home equity lines of credit. DBRS believes that further erosion in FirstMerit’s asset quality is likely, given the deepening recession. For Q1 2009, the Company provisioned $18.0 million for loan loss reserves, 14% of which was for reserve build. DBRS views FirstMerit’s allowance for loan loss reserves as solid with a coverage ratio of 151%.

NIM narrowed to 3.53% during Q1 2009, from 3.82% for the prior quarter, due to the significant decline in interest rates during December 2008, and the Company’s asset sensitive position.

FirstMerit’s liquidity remains acceptable, as core deposits represented 85% of net loans (as of December 31, 2008). The Company’s securities portfolio, which amounts to 25% of total assets, and access to the Federal Home Loan Bank and Federal Reserve discount window round out its liquidity profile.

At March 31, 2009, FirstMerit’s capital was solid, as evidenced by its tangible common equity-to-tangible asset ratio of 7.56% and Tier 1 and Total risk-based capital ratios of 11.86% and 13.11%, respectively. Nonetheless, the Company’s loss absorption capacity compressed somewhat during Q2 2009. On April 22, 2009, FirstMerit repurchased $125 million of the preferred stock that it had issued to the Treasury.

Given FirstMerit’s solid deposit franchise in northeastern Ohio, its diverse business model, good earnings and relatively sound asset quality, DBRS expects the Company to continue generating operating results and maintaining credit fundamentals expected of banks in its rating range.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.