FirstMerit Reports Second Quarter 2013 EPS of $0.29 Per Share

AKRON, Ohio, July 23, 2013 /PRNewswire/ --

Quarterly Highlights include:

• Sustained profitability: 57th consecutive quarter of profitability.
• Superior credit quality: Net charge-offs to average originated loans decreased to 0.15% from 0.27% in the prior quarter; nonperforming assets as a percent of period end originated loans plus other real estate remained low at 0.72%.
• Strong balance sheet: Strong tangible common equity ratio at 7.61%.
• Closed Citizens Republic Bancorp acquisition on April 12: Executed successful rebranding campaign in June.

FirstMerit Corporation (Nasdaq: FMER) (the "Corporation") reported second quarter 2013 net income of $48.5 million, or $0.29 per diluted share.  This compares with $37.3 million, or $0.33 per diluted share, for the first quarter 2013 and $30.6 million, or $0.28 per diluted share, for the second quarter 2012. Included in net income for the second quarter of 2013 were $32.1 million of one time pre-tax merger-related costs of which $2.8 million was recorded as a reduction to noninterest income and $29.3 million was recorded as noninterest expense.  One time pre-tax merger costs for the first quarter of 2013 totaled $3.6 million and were recorded as noninterest expense.

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Returns on average common equity ("ROE") and average assets ("ROA") for the second quarter 2013 were 7.56% and 0.85%, respectively, compared with 8.83% and 1.01%, respectively, for the first quarter 2013 and 7.69% and 0.84% for the second quarter 2012. 

On April 12, 2013, the Corporation completed its acquisition of Citizens Republic Bancorp, Inc. ("Citizens") headquartered in Flint, Michigan.  The impact of the acquisition is reflected in the Corporation's financial information from acquisition date.  The acquisition added $9.3 billion in assets, $4.7 billion in loans and $7.3 billion in deposits.  The purchase price of the acquisition was $1.3 billion, including the exchange of Citizens' common stock for 55.5 million shares of the Corporation's outstanding common stock and $355.4 million paid to the U.S. Treasury for Citizens' preferred stock and unpaid dividends and interest.

"FirstMerit's strong second quarter financial results continued to reflect profitable growth.  We completed our acquisition of Citizens on April 12 and introduced the FirstMerit brand to our new branch locations in Michigan and Wisconsin in June.  As a combined company, we are now focused on taking advantage of the many revenue growth opportunities we see across our Midwest footprint. Our value proposition provides consistently strong financial results supported by strong credit quality, a solid balance sheet and high capital levels," said Paul G. Greig, FirstMerit chairman, president and CEO.

Except as noted, the Citizens acquisition is primarily contributing to the increases period over period in the income statement and balance sheets.  Citizens' results of operations are included in the reported current period results since the date of acquisition.

Citizens Acquisition

As required under purchase accounting rules, Citizens' balance sheet was recorded at estimated fair value at acquisition date, April 12, 2013.  These fair value measurements are provisional based on third-party valuations that are currently under review and as such fair values are subject to refinement for up to one year after the acquisition date based on additional information obtained that existed as of the acquisition date.  The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

"Acquired loans", as used herein, are those purchased in the Citizens acquisition. (As used herein, "originated loans" refer to loans which have been originated in the normal course of business and "covered loans" refer to loans covered by loss sharing agreements with the FDIC providing considerable protection against credit risk.)  To record the acquired loans at fair value, a preliminary adjustment, or "mark" of $346.6 million was recorded to reduce the acquired loans to estimated fair value.  The fair value of the acquired loans does not include the pre-acquisition recorded allowance for loan losses of $104.0 million, as such amount was eliminated in purchase accounting.  The acquired loans were segregated between those considered to be performing ("non-impaired acquired loans") and those with evidence of credit deterioration ("acquired impaired loans").  Acquired loans are considered impaired if there is evidence of credit deterioration since origination and if it is probable, at acquisition, all contractually required payments will not be collected.  Revolving loans, including lines of credit, are excluded from acquired impaired loan accounting.

The difference between the fair value of the non-impaired acquired loans and contractual amounts due at the acquisition date is accreted into interest income over the remaining life of the loans.  The excess of cash flows expected to be collected over the carrying amount of the acquired impaired loans is accreted into interest income over the remaining life of the acquired impaired loans.  Acquired impaired loans are not classified as nonaccrual as they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for purchased impaired loans and not to contractual interest payments. 

Net Interest Income

Net interest income on a fully tax-equivalent ("FTE") basis was $201.6 million in the second quarter 2013 compared with $114.4 million in the first quarter 2013 and $121.7 million in the second quarter 2012.

Net interest margin was 4.12% for the second quarter 2013 compared with 3.46% for the first quarter 2013 and 3.77% for the second quarter 2012.  Net interest margin in the current period was impacted by the net accretion of the fair value adjustments on the acquired loans and certificates of deposits.

Average originated loans were $8.9 billion during the second quarter 2013, an increase of $142.4 million, or 1.63%, compared with the first quarter 2013, and an increase of $936.6 million, or 11.79%, compared with the second quarter 2012.  Average originated commercial loans increased $29.1 million, or 0.50%, compared with the prior quarter, and increased $614.6 million, or 11.65%, compared with the year ago quarter.

Average deposits were $18.3 billion during the second quarter 2013, an increase of $6.5 billion, or 55.51%, compared with the first quarter 2013, and an increase of $6.8 billion, or 58.67%, compared with the second quarter 2012.  Average balances include Citizens' deposit portfolio from the date of acquisition.  During the second quarter 2013, average core deposits, which exclude time deposits, increased $5.2 billion, or 49.68%, compared with the first quarter 2013 and increased $5.7 billion, or 57.53%, compared with the second quarter 2012.  Average time deposits increased $1.3 billion, or 101.29%, and increased $1.1 billion, or 65.62%, respectively, over prior and year-ago quarters.  For the second quarter 2013, average core deposits accounted for 85.38% of total average deposits, compared with 88.71% for the first quarter 2013 and 85.99% for the second quarter 2012.

Average investments increased $2.2 billion, or 60.35%, compared with the first quarter 2013 and increased $2.2 billion, or 60.35% compared with the second quarter 2012.

Noninterest Income

Noninterest income for the second quarter 2013, excluding losses on securities transactions of $2.8 million related to dispositions of securities acquired from Citizens,  was $72.2 million, an increase of $14.8 million, or 25.84%, from the first quarter 2013 and an increase of $17.5 million, or 31.93%, from the second quarter 2012.  Included in noninterest income in the second quarter of 2013, the first quarter of 2013 and the second quarter of 2012 was approximately $1.0 million, $5.0 million and $2.6 million of gains on covered loans paid in full, respectively.

Other income, excluding net securities gains and losses, as a percentage of net revenue for the second quarter 2013 was 26.38% compared with 33.42% for first quarter 2013 and 31.03% for the second quarter 2012.  Net revenue is defined as net interest income, on an FTE basis, plus other income, excluding gains and losses from securities sales.

Noninterest Expense

Noninterest expense for the second quarter 2013 was $189.6 million, an increase of $82.7 million, or 77.36%, from the first quarter 2013 and an increase of $70.6 million, or 59.26%, from the second quarter 2012.  Included in noninterest expense in the second quarter of 2013 and first quarter of 2013 were one time merger related costs associated with the Citizens acquisition of $29.3 million and $3.6 million, respectively.  The majority of these one time costs were from severance arrangements and professional and legal services rendered in connection with the merger.  The Corporation's efficiency ratio was 68.37% for the second quarter 2013, compared with 62.06% for the first quarter 2013 and 67.21% for the second quarter 2012.

Asset Quality (excluding acquired loans and covered assets)

Due to the impact of acquisition accounting and protection against credit risk from FDIC loss sharing agreements, acquired loans and covered assets are excluded from the asset quality discussion to provide for improved comparability to prior periods and better perspective into asset quality trends.  Acquired loans are recorded at fair value with no allowance brought forward in accordance with acquisition accounting.  Impaired acquired and covered loans are considered to be performing due to the application of the accretion method under acquisition accounting. 

Net charge-offs on originated loans totaled $3.3 million, or 0.15% of average originated loans in the second quarter 2013, compared with $5.9 million, or 0.27% of average originated loans, in the first quarter 2013 and $8.8 million, or 0.44% of average originated loans, in the second quarter 2012. 

Nonperforming assets totaled $66.2 million at June 30, 2013, an increase of $13.9 million, or 26.70%, compared with March 31, 2013 and an increase of $5.1 million, or 8.34%, compared with June 30, 2012. Nonperforming assets at June 30, 2013 represented 0.72% of period-end originated loans plus other real estate compared with 0.59% at March 31, 2013 and 0.75% at June 30, 2012.

The allowance for originated loan losses totaled $98.6 million at June 30, 2013.   At June 30, 2013, the allowance for originated loan losses was 1.08% of period-end originated loans compared with 1.13% at March 31, 2013 and 1.28% at June 30, 2012.  The allowance for credit losses is the sum of the allowance for originated loan losses and the reserve for unfunded lending commitments.  For comparative purposes, the allowance for credit losses was 1.17% of period end originated loans at June 30, 2013, compared with 1.18% at March 31, 2013 and 1.35% at June 30, 2012.  The allowance for credit losses to nonperforming loans was 234.82% at June 30, 2013, compared with 254.32% at March 31, 2013 and 234.57% at June 30, 2012.

Balance Sheet

The Corporation's total assets at June 30, 2013 were $23.5 billion, an increase of $8.3 billion, or 54.08%, compared with March 31, 2013 and an increase of $8.9 billion, or 60.94%, compared with June 30, 2012.  The increases from prior periods mainly reflect the $9.3 billion in assets acquired in the Citizens merger.

Total deposits were $19.1 billion at June 30, 2013, an increase of $7.2 billion, or 60.32%, from March 31, 2013 and an increase of $7.5 billion, or 64.60%, from June 30, 2012.  Core deposits totaled $16.3 billion at June 30, 2013, an increase of $5.7 billion, or 53.47%, from March 31, 2013 and an increase of $6.3 billion, or 62.42%, from June 30, 2012.  The increases from prior periods reflect the Citizens acquisition.

Shareholders' equity was $2.7 billion as of June 30, 2013 and $1.8 billion as of March 31, 2013 and $1.6 billion as of June 30, 2012.  The increases mainly reflect the addition of $928.3 million in equity from the Citizen acquisition.  The Corporation maintained a strong capital position as tangible common equity to assets was 7.61% at June 30, 2013, compared with 8.03% at March 31, 2013 and 8.01% at June 30, 2012.  The common cash dividend per share paid in the second quarter 2013 was $0.16.

Integration Update

The integration of Citizens into the Corporation continues to progress as scheduled.  Professional consulting groups have been assisting the Corporation with the integration and accounting matters related to the transaction.  The main systems conversion is currently scheduled for the fourth quarter of 2013.

One time merger costs incurred to-date totaled approximately $38.7 million.  Management expects a total of approximately $79.4 million in one time pre-tax merger costs related to the Citizens acquisition.

To date the Corporation has achieved merger-related cost savings related mainly to reduction in headcount.  The timeline for realization of these expected cost synergies remains on track and Management remains confident it will meet its total projected annual cost saves of $59.0 million.

Second Quarter 2013 Conference Call

FirstMerit (Nasdaq: FMER) senior management will host an earnings conference call today at 11:00 a.m. (Eastern Time) to provide an overview of second quarter results and highlights.  To participate in the conference call, please dial (888) 693-3477 ten minutes before start time and provide the reservation number: 17141232.  A replay of the conference call will be available at approximately 2:00 p.m. (Eastern Time) on July 23, 2013 through August 6, 2013 by dialing (855) 859-2056, and entering the PIN: 17141232.  The Corporation will provide a slide presentation, which management will speak to during the conference call.  A copy of the presentation will be available at https://www.firstmerit.com/personal/investors.aspx; click on the Presentations link to access the slide presentation.

About FirstMerit Corporation

FirstMerit Corporation is a diversified financial services company headquartered in Akron, Ohio, with assets of approximately $23.5 billion as of June 30, 2013, and 416 banking offices and 452 ATM locations in Ohio, Michigan, Wisconsin, Illinois and Pennsylvania. FirstMerit provides a complete range of banking and other financial services to consumers and businesses through its core operations. Principal affiliates include: FirstMerit Bank, N.A., FirstMerit Mortgage Corporation, FirstMerit Title Agency, Ltd., and FirstMerit Community Development Corporation.

Subsequent Events

The Corporation is required under generally accepted accounting principles to evaluate subsequent events through the filing of the its consolidated financial statements for the quarter ended June 30, 2013 on Form 10-Q.  As a result, the Corporation will continue to evaluate the impact of any subsequent events on critical accounting assumptions and estimates made as of June 30, 2013 and will adjust amounts preliminarily reported, if necessary.

Forward-Looking Statements

This release contains forward-looking statements relating to present or future trends or factors affecting the banking industry, and specifically the financial condition and results of operations, including without limitation, statements relating to the earnings outlook of the Corporation, as well as its operations, markets and products.  Actual results could differ materially from those indicated.  Among the important factors that could cause results to differ materially are interest rate changes, continued softening in the economy, which could materially impact credit quality trends and the ability to generate loans, changes in the mix of the Corporation's business, competitive pressures, changes in accounting, tax or regulatory practices or requirements, the Corporation's ability to realize the synergies and benefits contemplated by the acquisition of Citizens, such as it being accretive to earnings and expanding the Corporation's geographic presence, in the time frame anticipated or at all, and those risk factors detailed in the Corporation's periodic reports and registration statements filed with the Securities and Exchange Commission.  The Corporation undertakes no obligation to release revisions to these forward-looking statements or reflect events or circumstances after the date of this release.

FirstMerit Corporation
Analysts: Thomas O'Malley/Investor Relations Officer
Phone: 330.384.7109 
Media Contact: Robert Townsend/Media Relations Officer
Phone: 330.384.7075 

NOTES:

(a) - Effective April 12, 2013, the Corporation acquired Citizens.  Citizens' assets and liabilities are included in the consolidated balance sheet at their respective acquisition date fair value.  Citizens' results of operations are included in the consolidated statement of comprehensive income beginning on the date of acquisition. 

(b) Net interest income on a fully tax-equivalent ("FTE") basis restates interest on tax-exempt securities and loans as if such interest were subject to federal income tax at the statutory rate.  Net interest income on an FTE basis is not an accounting principle generally accepted in the United States of America.

(c) - Due to the impact of acquisition accounting and protection of FDIC loss sharing agreements, which provide considerable protection against credit risk, acquired loans and covered assets are excluded from this table to provide for improved comparability to prior periods and better perspective into asset quality trends. 

(d) - Excludes loss share receivable of $83.9 million, $95.6 million, $113.7 million,  $131.9 million and $152.6 million as of June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012 and June 30, 2012, respectively.

(e) - Net income used to determine diluted EPS for the quarters ended June 30, 2013 and March 31, 2013 was reduced by the cash dividends of approximately $1.5 million and $0.9 million, respectively, payable on the Corporation's 5.875% Non-Cumulative Perpetual Preferred Stock, Series A.