First Merchants (US:FRME)2023-08-01 16:00Part I. Financial Information Financial Statements The financial statements present the consolidated financial position, results of operations, and cash flows for First Merchants Corporation, showing total assets increased to $18.0 billion and net income rose to $60.9 million in Q2 2023 Consolidated Condensed Balance Sheets As of June 30, 2023, total assets slightly increased to $17.97 billion, driven by a $268.5 million increase in net loans, funded by a $198.4 million increase in total deposits and a reduction in investment securities Consolidated Balance Sheet Summary (in thousands) | Balance Sheet Item | June 30, 2023 | December 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $17,968,412 | $17,938,306 | $30,106 | | Net Loans | $12,049,086 | $11,780,617 | $268,469 | | Total Investment Securities | $3,891,491 | $4,263,788 | ($372,297) | | Total Liabilities | $15,822,847 | $15,903,536 | ($80,689) | | Total Deposits | $14,581,155 | $14,382,745 | $198,410 | | Total Borrowings | $1,027,277 | $1,313,945 | ($286,668) | | Total Stockholders' Equity | $2,145,565 | $2,034,770 | $110,795 | Consolidated Condensed Statements of Income For the second quarter of 2023, net income available to common stockholders increased 56.8% to $60.4 million, primarily due to a $9.2 million rise in net interest income from higher interest rates Key Income Statement Data (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | YoY Change | 6 Months 2023 | 6 Months 2022 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $137,835 | $128,661 | +7.1% | $281,954 | $230,941 | +22.1% | | Provision for credit losses | $0 | $16,755 | -100% | $0 | $16,755 | -100% | | Non-Interest Income | $26,319 | $28,277 | -6.9% | $51,316 | $54,174 | -5.3% | | Non-Interest Expenses | $92,593 | $97,313 | -4.8% | $186,313 | $169,638 | +9.8% | | Net Income | $60,862 | $38,991 | +56.1% | $124,941 | $87,577 | +42.7% | | Diluted EPS | $1.02 | $0.63 | +61.9% | $2.09 | $1.54 | +35.7% | Consolidated Condensed Statements of Comprehensive Income (Loss) Comprehensive income for Q2 2023 was $41.8 million, a significant improvement from a $75.2 million loss in Q2 2022, primarily due to a much smaller net unrealized loss on available-for-sale securities Comprehensive Income (Loss) Summary (in thousands) | Component | Q2 2023 | Q2 2022 | 6 Months 2023 | 6 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $60,862 | $38,991 | $124,941 | $87,577 | | Other Comprehensive Income/(Loss), net of tax | ($19,050) | ($114,164) | $21,187 | ($253,669) | | Comprehensive Income/(Loss) | $41,812 | ($75,173) | $146,128 | ($166,092) | Consolidated Condensed Statements of Stockholders' Equity Total stockholders' equity increased from $2.03 billion at year-end 2022 to $2.15 billion as of June 30, 2023, driven by net income and an improvement in other comprehensive loss - For the six months ended June 30, 2023, stockholders' equity increased by $110.8 million, driven by $124.9 million in net income and a $21.2 million improvement in other comprehensive income, net of tax, partially offset by $39.4 million in common stock dividends and $0.9 million in preferred stock dividends14 Consolidated Condensed Statements of Cash Flows For the six months ended June 30, 2023, net cash provided by operating activities was $113.7 million, while net cash used in financing activities was $126.0 million, resulting in a $13.6 million net decrease in cash and cash equivalents Cash Flow Summary (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $113,731 | $95,064 | | Net cash used in investing activities | ($1,330) | ($131,896) | | Net cash provided (used) by financing activities | ($126,020) | $82,245 | | Net Change in Cash and Cash Equivalents | ($13,619) | $45,413 | Notes to Consolidated Condensed Financial Statements The notes provide detailed disclosures on accounting standards, the Level One Bancorp acquisition, investment and loan portfolio composition, allowance for credit losses, goodwill, derivatives, fair value measurements, and regulatory capital - The Corporation adopted ASU 2022-02, which eliminated accounting guidance for Troubled Debt Restructurings (TDRs) and enhanced disclosure requirements for loan modifications to borrowers experiencing financial difficulty293133 - On April 1, 2022, the Corporation acquired Level One Bancorp, Inc., issuing 5.6 million shares of common stock and paying $79.3 million in cash, resulting in $166.6 million of goodwill and $18.6 million of other intangible assets383945 - As of June 30, 2023, the investment securities portfolio had gross unrealized losses of $269.8 million on available-for-sale securities and $360.3 million on held-to-maturity securities, primarily attributed to changes in interest rates, not credit quality495259 - The Allowance for Credit Losses on Loans was $221.1 million, or 1.80% of total loans, as of June 30, 2023, with no provision for credit losses recorded in the first six months of 2023102 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Corporation's financial performance for Q2 and H1 2023, highlighting strong net income and EPS growth driven by an expanding net interest margin, a strategic shift from investment securities to loans, stable credit quality, and robust capital and liquidity Highlights for the Second Quarter of 2023 The second quarter of 2023 demonstrated strong profitability with net income of $60.4 million and diluted EPS of $1.02, alongside annualized loan growth of 1.5% and a robust Common Equity Tier 1 (CET1) ratio of 11.07% - Diluted EPS for Q2 2023 was $1.02, compared to $0.63 in Q2 2022189 - Total loans grew by $46.7 million during the quarter, an annualized rate of 1.5%, or 5.4% excluding $116.6 million in non-relationship based commercial loan sales189 - The Common Equity Tier 1 (CET1) Capital Ratio stood at a strong 11.07%189 Results of Operations For the six months ended June 30, 2023, net income available to common stockholders increased to $124.0 million, with total assets reaching $18.0 billion, reflecting a strategic shift from investment securities to loan growth, and an increase in deposits offset by a decrease in borrowings - Total assets reached $18.0 billion as of June 30, 2023, a modest increase of $30.1 million from December 31, 2022188 - The investment portfolio as a percentage of total assets declined to 21.7% at June 30, 2023, down from a peak of 29.3% at December 31, 2021, reflecting a strategic shift towards loan growth189208 - Total deposits increased by $198.4 million since year-end 2022, while total borrowings decreased by $286.7 million over the same period193195 Net Interest Income Net interest income, the primary driver of earnings, increased due to higher asset yields in a rising interest rate environment, with the fully taxable equivalent (FTE) net interest margin for Q2 2023 at 3.39%, up 11 basis points year-over-year Net Interest Margin (FTE) Comparison | Period | Q2 2023 | Q2 2022 | Change (bps) | | :--- | :--- | :--- | :--- | | Net Interest Margin (FTE) | 3.39% | 3.28% | +11 bps | | Period | 6 Months 2023 | 6 Months 2022 | Change (bps) | | :--- | :--- | :--- | :--- | | Net Interest Margin (FTE) | 3.48% | 3.16% | +32 bps | - The increase in FTE asset yields of 178 basis points in Q2 2023 (YoY) was driven by the FOMC's rate hikes and the variable-rate nature of the loan portfolio (66.1% variable)211 - Total cost of funds rose to 1.97% in Q2 2023 from 0.30% in Q2 2022, reflecting deposit pricing pressure and a mix shift from noninterest-bearing to interest-bearing products213219 Non-Interest Income Non-interest income for Q2 2023 decreased by 6.9% to $26.3 million compared to Q2 2022, primarily due to a $1.4 million net loss on the sale of available-for-sale securities - The primary driver for the decrease in non-interest income was a $1.4 million net loss on the sale of available-for-sale securities in Q2 2023, versus a $0.09 million gain in Q2 2022222 - For the six-month period, a $3.0 million net loss on securities sales was the main reason for the year-over-year decline in non-interest income224 Non-Interest Expense Non-interest expense for Q2 2023 decreased by 4.9% to $92.6 million compared to Q2 2022, mainly due to the absence of significant one-time acquisition-related charges from the Level One acquisition in the prior year - Q2 2023 non-interest expense benefited from the absence of $10.0 million in one-time acquisition-related charges recorded in Q2 2022 ($7.0 million in professional services and $3.0 million in salaries)227 - For the first six months of 2023, salaries and employee benefits increased by $13.7 million year-over-year, primarily due to the full-period inclusion of staff from the Level One acquisition229 Capital The Corporation maintained a strong capital position, with all regulatory capital ratios exceeding 'well-capitalized' thresholds, and the tangible common equity to tangible assets ratio improving to 7.99% Regulatory Capital Ratios (Corporation) | Ratio | June 30, 2023 | Dec 31, 2022 | Basel III Minimum Required | | :--- | :--- | :--- | :--- | | CET1 Capital Ratio | 11.07% | 10.65% | 7.00% | | Tier 1 Capital Ratio | 11.24% | 10.83% | 8.50% | | Total Risk-Based Capital Ratio | 13.48% | 13.08% | 10.50% | | Tier 1 Leverage Ratio | 9.40% | 9.10% | 4.00% | - The tangible common equity to tangible assets ratio increased to 7.99% at June 30, 2023, from 7.34% at December 31, 2022, partly due to an improvement in the mark-to-market value of the available-for-sale securities portfolio247 - No shares were repurchased during 2022 or the first six months of 2023, with approximately 2.7 million shares remaining available for repurchase under the existing program as of June 30, 2023237 Loan Quality and Provision for Credit Losses on Loans Credit quality remained stable despite an increase in non-performing loans to $69.2 million, primarily due to a single $15.9 million commercial loan, with the allowance for credit losses at $221.1 million and no provision recorded in the first half of 2023 - Non-performing loans increased by $26.7 million since year-end 2022 to $69.2 million, largely due to a $15.9 million commercial loan placed on non-accrual status because of a potential fraud254 Allowance for Credit Losses (ACL) on Loans | Metric | June 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | ACL on Loans | $221.1 million | $223.3 million | | ACL as % of Total Loans | 1.80% | 1.86% | - The Corporation recorded no provision for credit losses for the six months ended June 30, 2023, compared to a $16.8 million provision in the same period of 2022, which was related to the Level One acquisition263 Liquidity The Corporation maintained a strong liquidity position, supported by core deposit growth, cash flows from loans and investments, and access to wholesale funding, including $1.7 billion in available-for-sale securities and $721.1 million in FHLB borrowing capacity - The market value of available-for-sale securities, a key source of liquidity, was $1.7 billion at June 30, 2023268 - The Bank had an available borrowing capacity of $721.1 million from the Federal Home Loan Bank (FHLB) as of June 30, 2023269 - The Corporation has access to the Federal Reserve's Bank Term Funding Program (BTFP) but had no outstanding balance as of June 30, 2023270 Quantitative and Qualitative Disclosures About Market Risk This section details the company's management of interest rate risk, projecting that an immediate 200 basis point increase in rates would increase net interest income by 2.1% over 12 months, while a 100 basis point decrease would reduce it by 1.4% Net Interest Income Sensitivity Analysis | Interest Rate Scenario | Change in Net Interest Income (12-Month Horizon) | | :--- | :--- | | Rising 200 basis points | +2.1% | | Falling 100 basis points | -1.4% | Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures are effective, with no material changes to internal control over financial reporting identified during the last fiscal quarter - The CEO and CFO concluded that the Corporation's disclosure controls and procedures are effective287 - No material changes in internal control over financial reporting occurred during the last fiscal quarter288 Part II. Other Information Legal Proceedings The Corporation is not a party to any material legal proceedings outside of litigation incidental to the ordinary course of business, with no expected material adverse impact on financial position or results - There are no pending material legal proceedings, other than litigation incidental to the ordinary course of business290 Risk Factors The company has added new risk factors concerning potential adverse effects from bank failures or liquidity concerns and the possibility of new regulations, such as higher FDIC insurance premiums, following recent financial industry events - A new risk factor highlights that adverse developments in the financial services industry, such as the bank failures in March 2023, could materially affect operations due to concerns about liquidity and deposit stability292 - Another new risk factor notes that potential new regulations arising from recent industry events could increase costs, such as higher FDIC insurance premiums, and reduce profitability292 Unregistered Sales of Equity Securities and Use of Proceeds The Corporation did not repurchase any equity securities during the three months ended June 30, 2023, with approximately 2.7 million shares remaining authorized for repurchase under the existing program - No shares were repurchased by the company during the three months ended June 30, 2023294 Other Information The Corporation reports that no director or officer adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2023 - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the second quarter of 2023297 Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO pursuant to the Sarbanes-Oxley Act of 2002 and Inline XBRL documents