First Merchants (US:FRME)2023-10-31 16:00Part I. Financial Information This section presents the unaudited consolidated condensed financial statements and management's discussion and analysis for First Merchants Corporation Item 1. Financial Statements Presents unaudited consolidated condensed financial statements, including balance sheets, income, comprehensive income, equity, and cash flows, with explanatory notes Consolidated Condensed Balance Sheets Total assets reached $18.0 billion at September 30, 2023, driven by loan growth, with deposits increasing and borrowings decreasing Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $17,996,648 | $17,938,306 | | Net Loans | $12,065,640 | $11,780,617 | | Investment Securities (AFS & HTM) | $3,713,724 | $4,263,788 | | Total Liabilities | $15,904,004 | $15,903,536 | | Total Deposits | $14,646,576 | $14,382,745 | | Total Borrowings | $1,024,586 | $1,313,945 | | Total Stockholders' Equity | $2,092,644 | $2,034,770 | Consolidated Condensed Statements of Income Q3 2023 net income decreased to $56.4 million due to higher interest expense, while nine-month net income increased to $181.3 million Q3 Financial Performance (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Net Interest Income | $133,383 | $140,306 | | Provision for credit losses | $2,000 | $0 | | Noninterest Income | $27,842 | $29,617 | | Noninterest Expenses | $93,854 | $96,378 | | Net Income | $56,366 | $63,752 | | Diluted EPS | $0.94 | $1.08 | Nine Months Financial Performance (in thousands, except per share data) | Metric | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | | Net Interest Income | $415,337 | $371,247 | | Provision for credit losses | $2,000 | $16,755 | | Noninterest Income | $79,158 | $83,791 | | Noninterest Expenses | $280,167 | $266,016 | | Net Income | $181,307 | $151,329 | | Diluted EPS | $3.03 | $2.62 | Consolidated Condensed Statements of Comprehensive Income (Loss) Q3 2023 comprehensive loss was $32.9 million, primarily due to unrealized losses on available-for-sale securities, partially offset by net income Comprehensive Income (Loss) Summary (in thousands) | Component | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Net income | $56,366 | $63,752 | | Other comprehensive income/(loss), net of tax | $(89,306) | $(115,533) | | Comprehensive income/(loss) | $(32,940) | $(51,781) | Consolidated Condensed Statements of Stockholders' Equity Stockholders' equity increased to $2.09 billion by September 30, 2023, driven by net income, partially offset by dividends and comprehensive loss - For the nine months ended September 30, 2023, total stockholders' equity increased by $57.9 million, from $2,034.8 million to $2,092.6 million14 - Key changes in equity for the nine months ended September 30, 2023 included: net income of $181.3 million, other comprehensive loss of $68.1 million, and cash dividends on common stock of $59.7 million14 Consolidated Condensed Statements of Cash Flows Nine-month cash flow saw $172.7 million from operations, $86.8 million used in investing, and $83.3 million used in financing, resulting in a $2.6 million net increase Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $172,698 | $144,684 | | Net cash used in investing activities | $(86,775) | $(257,629) | | Net cash provided (used) by financing activities | $(83,344) | $65,331 | | Net Change in Cash and Cash Equivalents | $2,579 | $(47,614) | Notes to Consolidated Condensed Financial Statements Provides detailed explanations of accounting policies and financial activities, covering recent standards, acquisition details, loan portfolio, credit quality, and regulatory capital Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 and nine-month 2023 financial performance, highlighting $55.9 million net income, 4.6% annualized loan growth, and a 11.26% CET1 ratio - Q3 2023 net income available to common stockholders was $55.9 million ($0.94 per diluted share), down from $63.3 million ($1.08 per diluted share) in Q3 2022183184 - Total loans grew by $406.0 million (4.6% annualized) since December 31, 2022, excluding non-relationship based commercial loan sales183 - Total deposits increased by $263.8 million (2.4% annualized) since December 31, 2022183192 - The Common Equity Tier 1 (CET1) Capital Ratio remained strong at 11.26% as of September 30, 2023183 Net Interest Income Q3 2023 FTE net interest margin compressed to 3.29% due to rising interest costs, while the nine-month FTE margin increased to 3.42% Net Interest Margin (FTE) | Period | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Margin (FTE) | 3.29% | 3.55% | 3.42% | 3.30% | - The increase in interest income for Q3 2023 was driven by organic loan growth and the FOMC's cumulative 525 basis point rate hikes since March 2022210 - Total cost of funds rose to 292 basis points for Q3 2023, compared to just 76 basis points in Q3 2022, reflecting the higher interest rate environment and competition for deposits212 Noninterest Income Q3 2023 noninterest income decreased 6.0% to $27.8 million, mainly due to lower life insurance gains and AFS securities losses, partially offset by loan sale gains Noninterest Income Comparison (in millions) | Period | Q3 2023 | Q3 2022 | Change | | :--- | :--- | :--- | :--- | | Total Noninterest Income | $27.8 | $29.6 | $(1.8) | | Gains on life insurance benefits | $0.6 | $5.3 | $(4.7) | | Net realized (losses) gains on AFS securities | $(1.7) | $0.5 | $(2.2) | | Net gains and fees on sales of loans | $5.5 | $2.5 | $3.0 | Noninterest Expense Q3 2023 noninterest expense decreased 2.6% to $93.9 million due to the absence of acquisition charges, while nine-month expenses rose 5.3% - Q3 2023 noninterest expense was $93.9 million, down from $96.4 million in Q3 2022225 - The decrease in Q3 expenses was primarily due to the absence of $3.4 million in acquisition-related charges from the Level One merger recorded in Q3 2022225 - For the nine months ended September 30, 2023, noninterest expense increased by $14.2 million year-over-year, largely due to a $13.2 million increase in salaries and employee benefits related to the Level One acquisition227 Capital The Corporation maintained strong capital, exceeding 'well-capitalized' standards with a 11.26% CET1 ratio, and no share repurchases in the first nine months Regulatory Capital Ratios (Corporation) | Ratio | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | CET1 Capital Ratio | 11.26% | 10.65% | | Tier 1 Capital Ratio | 11.43% | 10.83% | | Total Risk-Based Capital Ratio | 13.66% | 13.08% | | Tier 1 Leverage Ratio | 9.63% | 9.10% | - The Corporation did not repurchase any shares of its common stock during the nine months ended September 30, 2023. Approximately 2.7 million shares remain available for repurchase under the current program235 Loan Quality and Provision for Credit Losses on Loans Nonperforming loans increased to $53.1 million, while ACL decreased to 1.68% of total loans, with Q3 provision of $2.0 million driven by $20.4 million in charge-offs - Nonperforming loans (NPLs) increased to $53.1 million at September 30, 2023, up from $42.5 million at December 31, 2022254258 - The allowance for credit losses on loans was 1.68% of total loans at September 30, 2023, compared to 1.86% at December 31, 2022262 - Q3 2023 net charge-offs were $20.4 million, primarily due to two large commercial and industrial loan charge-offs totaling $19.1 million, one of which was related to alleged fraud at a syndicated specialty finance company263264 Liquidity The Corporation maintained strong liquidity, supported by core deposits, cash flows, $1.5 billion in AFS securities, and $702.7 million FHLB borrowing capacity - The most stable source of liquidity is the core deposit base268 - Available-for-sale securities provided $1.5 billion in liquidity as of September 30, 2023268 - The Bank had an available borrowing capacity of $702.7 million from the FHLB and access to the Federal Reserve's BTFP, with no outstanding balance269270 Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk disclosures refer to MD&A sections, with interest rate sensitivity analysis projecting a 1.5% NII increase for a +200 bps rate rise and 1.1% decrease for a -100 bps fall Net Interest Income Sensitivity | Scenario | Change from Base Case (Sep 30, 2023) | | :--- | :--- | | Rising 200 basis points | +1.5% | | Falling 100 basis points | -1.1% | Item 4. Controls and Procedures Management concluded that disclosure controls and procedures are effective, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are effective287 - There were no changes in internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting288 Part II. Other Information This section provides additional information including legal proceedings, risk factors, equity sales, defaults, and exhibits Item 1. Legal Proceedings The company is not involved in any material legal proceedings beyond routine litigation incidental to ordinary business operations - There are no pending material legal proceedings against the Corporation or its subsidiaries outside of ordinary business litigation290 Item 1A. Risk Factors New risk factors include potential adverse developments in the financial services industry and anticipated new regulations and increased FDIC insurance premiums - New risk factor: Adverse developments in the financial services industry, such as recent bank failures (e.g., Silicon Valley Bank), could create uncertainty and liquidity concerns that materially affect operations292 - New risk factor: Potential new regulations and increased FDIC insurance premiums resulting from recent industry events could increase expenses and reduce profitability292 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased under the stock repurchase program in Q3 2023; 40,311 shares were acquired for employee tax obligations - No shares were repurchased under the publicly announced stock repurchase program during Q3 2023294 - The company acquired 40,311 shares during the quarter, which were related to satisfying employee tax obligations on vested restricted stock awards, not open market repurchases294 Item 3. Defaults Upon Senior Securities No defaults upon senior securities occurred during the reporting period - None295 Item 4. Mine Safety Disclosures This item is not applicable to the Corporation's operations - Not Applicable296 Item 5. Other Information No other information to report, specifically noting no director or officer adopted or terminated a Rule 10b5-1 trading arrangement - During Q3 2023, no director or officer of the Corporation adopted or terminated a Rule 10b5-1 trading arrangement296 Item 6. Exhibits Lists exhibits filed with the Form 10-Q, including CEO/CFO certifications and Inline XBRL data files - Lists exhibits filed with the report, including CEO/CFO certifications (Exhibits 31.1, 31.2, 32) and XBRL data (Exhibit 101 series)298