DBRS Confirms FirstMerit Corporation at A (low), Trend Stable

DBRS has today confirmed the ratings of FirstMerit Corporation (FirstMerit or the Company) and its operating bank subsidiary, FirstMerit Bank, N.A., including FirstMerit’s Issuer & Senior Debt rating of A (low). The Trend for all ratings remains Stable. The rating action followed a review by DBRS of the Company’s operating performance, financial fundamentals and future prospects.

FirstMerit’s ratings reflect the Company’s solid northeastern Ohio deposit franchise, strong capital base, and stable income before provisions and taxes. Ratings also reflect the Company’s pressured, albeit sound asset quality.

DBRS comments that FirstMerit, a super-community bank with a dominant deposit market position in Akron, maintains a strong market presence in northeastern Ohio. Indeed, the Company has a greater than 10% market share in 84% of the 95 cities in which it operates. DBRS notes that a sizeable core deposit base, combined with a solid securities portfolio, with a fairly short duration, provides the Company with a relatively low cost funding base.

Even after repurchasing the $125 million in preferred shares that it had sold to the U.S. Treasury (Treasury), as part of the Treasury’s Capital Purchase Program, FirstMerit’s capital position remains robust and provides ample loss absorption capacity and an opportunity to grow the franchise (at September 30, 2009, FirstMerit’s tangible common equity ratio was 8.65%). Indeed, FirstMerit recently announced its intent to acquire 24 Chicago-area branches from FirstBank of Missouri, including roughly $1.2 billion in deposits and $415 million in loans. Although the acquisition falls outside of FirstMerit’s legacy footprint, which is a concern, DBRS comments that FirstMerit’s senior management team has significant experience in the Chicago market.

The ratings confirmation follows FirstMerit’s Q3 2009 results, which reflect net income available to common shareholders of $22.8 million for the quarter, up from $11.0 million for Q2 2009. On a sequential quarter basis, Q3 2009 net income reflected a material decrease in provisions for loan loss reserves, higher securities gains, partially offset by a modest drop in recurrent revenues, and a moderate decline in noninterest expense. Net interest income was relatively flat, as average earning assets contracted by 2% and net interest margin (NIM) widened by 5 basis points (bps) to 3.61%, due to decreasing funding costs outpacing declining asset yields. Recurrent noninterest income (excluding securities gains) decreased by 2% during the quarter, as lower trust revenues and other operating income, more than offset increases in most other fee categories, including a 6% increase in deposit service charges. During Q3 2009, noninterest expenses were down 7%, reflecting the Company’s Q2 2009 $5.1 million FDIC special assessment fee. DBRS comments that FirstMerit’s quarterly core earnings or its income before provision and taxes was stable at $52 million and provides more than adequate capacity to absorb credit costs, at current rates.

Despite the challenging economic environment, FirstMerit’s asset quality remains relatively healthy and credit costs moderate. The Company’s non-performing assets (NPAs) increased to 1.26% of loans, up from 1.03% at June 30, 2009. Meanwhile, net charge-offs (NCOs) contracted slightly to 1.05% of average loans, down from 1.19% for Q2 2009. The bulk of the Company’s charge-offs for the quarter consisted of commercial and installment loans and to a lesser degree, credit cards, home equity and residential mortgages. The quarterly increase in nonaccrual loans reflected three commercial and industrial loans. At September 30, 2009, FirstMerit’s allowance for loan loss reserves to NPAs was solid at 131%, given its current loss rate.

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.