First Merchants (FRME) - 2021 Q3 - Quarterly Report

Part I. Financial Information This section provides the unaudited consolidated financial statements and management's discussion and analysis for First Merchants Corporation Financial Statements This section presents the unaudited consolidated condensed financial statements for First Merchants Corporation as of September 30, 2021, and for the three and nine months then ended, including balance sheets, statements of income, comprehensive income, stockholders' equity, and cash flows, along with accompanying notes detailing significant accounting policies, acquisitions, investment securities, loans, allowances, and derivatives Consolidated Condensed Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity as of September 30, 2021, and December 31, 2020 Balance Sheet Summary (in thousands of USD) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $15,060,725 | $14,067,210 | | Net Loans | $8,841,604 | $9,112,526 | | Total Investment Securities | $4,445,516 | $3,146,787 | | Goodwill | $545,385 | $543,918 | | Total Liabilities | $13,192,635 | $12,191,565 | | Total Deposits | $12,348,689 | $11,361,610 | | Total Borrowings | $636,296 | $684,912 | | Total Stockholders' Equity | $1,868,090 | $1,875,645 | - Total assets grew to $15.1 billion from $14.1 billion, primarily driven by an increase in total deposits, which rose by nearly $1 billion to $12.3 billion[9] Consolidated Condensed Statements of Income This section outlines the company's financial performance, including net interest income, credit loss provisions, and net income for the reported periods Income Statement Summary (in thousands of USD, except per share data) | Metric | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $104,715 | $92,921 | $309,407 | $279,816 | | Provision for credit losses - loans | $0 | $12,544 | $0 | $54,191 | | Net Income | $52,770 | $36,210 | $157,798 | $103,465 | | Diluted EPS | $0.98 | $0.67 | $2.92 | $1.91 | - Net income for Q3 2021 increased significantly to $52.8 million from $36.2 million in Q3 2020, driven by higher net interest income and a zero provision for credit losses, compared to a $12.5 million provision in the prior-year quarter[10] Consolidated Condensed Statements of Cash Flows This section details the cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2021 Cash Flow Summary for Nine Months Ended Sep 30 (in thousands of USD) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $161,527 | $144,330 | | Net cash used in investing activities | ($1,059,258) | ($1,179,456) | | Net cash provided by financing activities | $874,096 | $1,022,557 | | Net Change in Cash and Cash Equivalents | ($23,635) | ($12,569) | - For the first nine months of 2021, the company saw a significant use of cash in investing activities, primarily for the purchase of securities ($1.825 billion), which was largely funded by cash from financing activities, including a net increase in deposits of nearly $1 billion[18] Notes to Consolidated Condensed Financial Statements The notes provide detailed explanations of the financial statements, highlighting the adoption of the CECL accounting standard, the acquisition of Hoosier Trust Company, the composition and decrease of the loan portfolio due to PPP loans, the allowance for credit losses, and details on derivatives, fair value measurements, and share-based compensation - The Corporation adopted the CECL (Current Expected Credit Losses) standard on January 1, 2021, replacing the previous "incurred loss" model, which resulted in a one-time cumulative-effect adjustment to retained earnings of $68.0 million, net of tax[21][22] Impact of CECL Adoption on Jan 1, 2021 (in thousands of USD) | Balance Sheet Item | Impact of Adoption | | :--- | :--- | | Allowance for credit losses - Loans | +$74,055 | | Allowance for credit losses on unfunded loan commitments | +$20,500 | | Tax asset, deferred and receivable | +$21,984 | | Retained Earnings | -$68,040 | - On April 1, 2021, the Bank acquired Hoosier Trust Company for $3.225 million in cash, resulting in $1.467 million of goodwill and a $2.247 million customer relationship intangible asset[49][51] - As of September 30, 2021, the loan portfolio totaled $9.04 billion, a decrease from $9.24 billion at year-end 2020, primarily driven by the forgiveness of Paycheck Protection Program (PPP) loans, which fell from $667.1 million to $198.1 million[73] Management's Discussion and Analysis (MD&A) Management discusses the company's financial condition and results of operations, highlighting the impact of the COVID-19 pandemic, the Paycheck Protection Program (PPP), and the adoption of the CECL accounting standard, covering the increase in net income, changes in the balance sheet, capital adequacy, loan quality, liquidity, and interest rate sensitivity COVID-19 Update This section details the impact of the COVID-19 pandemic on the company's operations, including its participation in the Paycheck Protection Program and loan modifications - The Bank actively participated in all phases of the Paycheck Protection Program (PPP), holding approximately 1,600 PPP loans totaling $198.1 million, net of deferred fees, as of September 30, 2021[191] - The company recognized $7.4 million and $23.2 million in PPP loan-related deferred processing fee income during the three and nine months ended September 30, 2021, respectively[191] - The company offered short-term loan modifications to borrowers affected by COVID-19, with loan balances of $15.4 million remaining in deferral as of September 30, 2021[192] Results of Operations This section summarizes the company's financial performance, highlighting key changes in assets, liabilities, and equity Q3 2021 Performance Highlights (in millions of USD, except per share data) | Metric | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Net Income | $52.8 million | $36.2 million | | Diluted EPS | $0.98 | $0.67 | - Total assets increased by $993.5 million (7.1%) to $15.1 billion from December 31, 2020, primarily due to growth in deposits and investment securities[197] - Total deposits grew by $987.1 million since year-end 2020, driven by increases in demand and savings accounts, partially attributed to PPP loan proceeds and consumer Economic Impact Payments[205] Net Interest Income This section analyzes the components of net interest income and net interest margin, including the impact of interest costs and asset yields - Net interest margin (NIM) on a tax equivalent basis increased by 5 basis points to 3.20% for Q3 2021 compared to 3.15% in Q3 2020[212] - The increase in NIM was driven by a 22 basis point decrease in interest costs, which offset a 12 basis point decline in asset yields[213][215] - Fair value accretion income on purchased loans contributed 4 basis points to NIM in Q3 2021, down from 10 basis points in Q3 2020[214] Loan Quality and Provision for Credit Losses on Loans This section assesses the quality of the loan portfolio, including non-performing loans and the allowance for credit losses, and discusses the provision for credit losses - Non-performing loans totaled $51.9 million at September 30, 2021, a decrease of $12.8 million from year-end 2020[253] - The allowance for credit losses was $200.0 million, or 2.21% of total loans, at September 30, 2021, with the ratio being 2.26% excluding PPP loans[264] - No provision for credit losses was recorded in the first nine months of 2021, compared to a $54.2 million provision in the same period of 2020, which was taken due to increased credit risk related to the COVID-19 pandemic[265] Capital This section reviews the company's capital adequacy, including key regulatory capital ratios and share repurchase activities - The Corporation and the Bank maintained capital ratios in excess of the "well-capitalized" regulatory requirements as of September 30, 2021[240][243] Key Capital Ratios (Corporation) | Ratio | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | CET1 Capital Ratio | 11.75% | 12.02% | | Tier 1 Capital Ratio | 12.17% | 12.48% | | Total Risk-Based Capital Ratio | 14.02% | 14.36% | | Tangible Common Equity to Tangible Assets (non-GAAP) | 8.94% | 9.65% | - Under a new stock repurchase program approved in January 2021, the Corporation repurchased 529,498 shares for $20.8 million during the first nine months of 2021[237] Quantitative and Qualitative Disclosures About Market Risk This section refers to the 'Liquidity' and 'Interest Sensitivity and Disclosure About Market Risk' sections within the Management's Discussion and Analysis for detailed disclosures, showing that as of September 30, 2021, a hypothetical immediate 200 basis point increase in interest rates would increase net interest income by 1.9% over a twelve-month horizon, while a 100 basis point decrease would reduce it by 0.3% Net Interest Income Sensitivity Analysis | Interest Rate Scenario | Change from Base Case (Sep 30, 2021) | Change from Base Case (Dec 31, 2020) | | :--- | :--- | :--- | | Rising 200 basis points | +1.9% | +5.9% | | Falling 100 basis points | -0.3% | +0.7% | Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of the end of the reporting period, concluding that these controls and procedures are effective, with no material changes to internal control over financial reporting identified during the last fiscal quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are effective as of the end of the period covered by the report[292] - 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 Corporation's internal control over financial reporting[293] Part II. Other Information This section provides additional information including legal proceedings, risk factors, equity security sales, and exhibits Legal Proceedings The Corporation states that there are no pending material legal proceedings, other than litigation incidental to the ordinary course of business, that would have a material adverse effect on its financial position or results of operations - The Corporation is not a party to any material legal proceedings outside of routine litigation incidental to its ordinary business[295] Risk Factors There have been no material changes to the risk factors previously disclosed in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2020 - No material changes to the risk factors disclosed in the 2020 Form 10-K were reported[297] Unregistered Sales of Equity Securities and Use of Proceeds This section details the Corporation's purchases of its own equity securities during the third quarter of 2021, with a total of 529,498 shares repurchased as part of a publicly announced program Issuer Purchases of Equity Securities (Q3 2021) | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased as part of Program | | :--- | :--- | :--- | :--- | | July 2021 | 235,079 | $39.67 | 235,079 | | August 2021 | 59,037 | $41.56 | 21,300 | | September 2021 | 273,119 | $38.92 | 273,119 | | Total Q3 | 567,235 | N/A | 529,498 | - The repurchases were made under a program approved on January 27, 2021, authorizing up to 3,333,000 shares or a total investment of $100 million[299] 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 - Exhibits filed with the report include CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906, as well as XBRL data files[302]