Attached files
file | filename |
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EX-3.1 - EX-3.1 - FIRSTMERIT CORP /OH/ | l39627exv3w1.htm |
EX-3.2 - EX-3.2 - FIRSTMERIT CORP /OH/ | l39627exv3w2.htm |
EX-31.2 - EX-31.2 - FIRSTMERIT CORP /OH/ | l39627exv31w2.htm |
EX-31.1 - EX-31.1 - FIRSTMERIT CORP /OH/ | l39627exv31w1.htm |
EX-32.2 - EX-32.2 - FIRSTMERIT CORP /OH/ | l39627exv32w2.htm |
EX-32.1 - EX-32.1 - FIRSTMERIT CORP /OH/ | l39627exv32w1.htm |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED March 31, 2010
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMMISSION FILE NUMBER 0-10161
FIRSTMERIT CORPORATION
(Exact name of registrant as specified in its charter)
OHIO | 34-1339938 | |
(State or other jurisdiction of | (IRS Employer Identification | |
incorporation or organization) | Number) |
III CASCADE PLAZA, 7TH FLOOR, AKRON, OHIO 44308-1103
(Address of principal executive offices)
(330) 996-6300
(Telephone Number)
(Address of principal executive offices)
(330) 996-6300
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES þ
NO o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated, or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if smaller reporting company) |
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ
Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes o No o
As
of May 6, 2010, 91,184,700 shares, without par value, were outstanding.
TABLE OF CONTENTS
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
(In thousands) | ||||||||||||
(Unaudited, except December 31, 2009, which is derived from the | March 31, | December 31, | March 31, | |||||||||
audited financial statements) | 2010 | 2009 | 2009 | |||||||||
ASSETS |
||||||||||||
Cash and due from banks |
$ | 721,938 | $ | 161,033 | $ | 179,397 | ||||||
Investment securities |
||||||||||||
Held-to-maturity |
67,256 | 50,686 | 30,588 | |||||||||
Available-for-sale |
3,102,407 | 2,565,943 | 2,576,637 | |||||||||
Other investments |
131,376 | 128,209 | 128,007 | |||||||||
Loans held for sale |
16,009 | 16,828 | 22,408 | |||||||||
Noncovered Loans: |
||||||||||||
Commercial loans |
4,389,859 | 4,066,522 | 4,344,915 | |||||||||
Mortgage loans |
447,575 | 463,416 | 524,909 | |||||||||
Installment loans |
1,382,522 | 1,425,373 | 1,533,885 | |||||||||
Home equity loans |
766,073 | 753,112 | 741,073 | |||||||||
Credit card loans |
145,029 | 153,525 | 141,597 | |||||||||
Leases |
59,464 | 61,541 | 64,384 | |||||||||
Total noncovered loans |
7,190,522 | 6,923,489 | 7,350,763 | |||||||||
Less: allowance for loan losses |
(117,806 | ) | (115,092 | ) | (106,257 | ) | ||||||
Net noncovered loans |
7,072,716 | 6,808,397 | 7,244,506 | |||||||||
Covered loans (includes loss share receivable of $108 million) |
277,315 | | | |||||||||
Net loans |
7,350,031 | 6,808,397 | 7,244,506 | |||||||||
Premises and equipment, net |
164,408 | 125,205 | 130,920 | |||||||||
Goodwill |
187,945 | 139,598 | 139,245 | |||||||||
Intangible assets |
5,659 | 1,158 | 1,316 | |||||||||
Other real estate covered by FDIC loss share |
11,415 | | | |||||||||
Accrued interest receivable and other assets |
565,004 | 542,845 | 519,152 | |||||||||
Total assets |
$ | 12,323,448 | $ | 10,539,902 | $ | 10,972,176 | ||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||||
Deposits: |
||||||||||||
Demand-non-interest bearing |
$ | 2,217,714 | $ | 2,069,921 | 1,848,200 | |||||||
Demand-interest bearing |
686,503 | 677,448 | 669,789 | |||||||||
Savings and money market accounts |
4,103,657 | 3,408,109 | 2,763,058 | |||||||||
Certificates and other time deposits |
2,362,135 | 1,360,318 | 2,397,166 | |||||||||
Total deposits |
9,370,009 | 7,515,796 | 7,678,213 | |||||||||
Federal funds purchased and securities sold under agreements to repurchase |
896,330 | 996,345 | 804,525 | |||||||||
Wholesale borrowings |
677,715 | 740,105 | 1,134,152 | |||||||||
Accrued taxes, expenses, and other liabilities |
224,041 | 222,029 | 271,017 | |||||||||
Total liabilities |
11,168,095 | 9,474,275 | 9,887,907 | |||||||||
Commitments and contingencies |
||||||||||||
Shareholders equity: |
||||||||||||
Preferred stock, without par value: authorized
and unissued 7,000,000 shares |
| | | |||||||||
Preferred stock, Series A, without par value: designated
800,000 shares; none outstanding |
| | | |||||||||
Convertible preferred stock, Series B, without par value: designated
220,000 shares; none outstanding |
| | | |||||||||
Fixed-Rate Cumulative Perpetual Preferred Stock, Series A,
$1,000 liquidation preference; authorized and issued 125,000 shares |
| | 120,622 | |||||||||
Common stock, without par value: authorized
300,000,000 shares; issued 97,521,571, 93,633,871 and
92,026,350 at March 31, 2010, December 31, 2009 and
March 31, 2009, respectively |
127,937 | 127,937 | 127,937 | |||||||||
Common stock warrant |
| | 4,582 | |||||||||
Capital surplus |
171,330 | 88,573 | 84,876 | |||||||||
Accumulated other comprehensive loss |
(20,983 | ) | (25,459 | ) | (38,634 | ) | ||||||
Retained earnings |
1,047,827 | 1,043,625 | 1,057,681 | |||||||||
Treasury stock, at cost, 6,711,936, 6,629,995 and 10,609,284
shares at March 31, 2010, December 31, 2009 and March 31, 2009,
respectively |
(170,758 | ) | (169,049 | ) | (272,795 | ) | ||||||
Total shareholders equity |
1,155,353 | 1,065,627 | 1,084,269 | |||||||||
Total liabilities and shareholders equity |
$ | 12,323,448 | $ | 10,539,902 | $ | 10,972,176 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
2
Table of Contents
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Quarters ended | ||||||||
(Unaudited) | March 31, | |||||||
(In thousands except per share data) | 2010 | 2009 | ||||||
Interest income: |
||||||||
Interest and fees on loans, including held for sale |
$ | 83,150 | $ | 87,799 | ||||
Investment securities |
||||||||
Taxable |
24,870 | 28,295 | ||||||
Tax-exempt |
3,339 | 3,262 | ||||||
Total investment securities interest |
28,209 | 31,557 | ||||||
Other earning assets |
495 | | ||||||
Total interest income |
111,854 | 119,356 | ||||||
Interest expense: |
||||||||
Interest on deposits: |
||||||||
Demand-interest bearing |
152 | 155 | ||||||
Savings and money market accounts |
7,601 | 5,377 | ||||||
Certificates and other time deposits |
6,406 | 18,588 | ||||||
Interest on securities sold under agreements to repurchase |
1,127 | 999 | ||||||
Interest on wholesale borrowings |
6,174 | 7,343 | ||||||
Total interest expense |
21,460 | 32,462 | ||||||
Net interest income |
90,394 | 86,894 | ||||||
Provision for loan losses |
25,493 | 18,065 | ||||||
Net interest income after provision for loan losses |
64,901 | 68,829 | ||||||
Other income: |
||||||||
Trust department income |
5,281 | 4,790 | ||||||
Service charges on deposits |
15,366 | 14,163 | ||||||
Credit card fees |
11,558 | 11,084 | ||||||
ATM and other service fees |
2,509 | 2,606 | ||||||
Bank owned life insurance income |
5,652 | 3,015 | ||||||
Investment services and insurance |
1,928 | 2,918 | ||||||
Loan sales and servicing income |
3,237 | 2,335 | ||||||
Gain on acquistion |
5,090 | | ||||||
Gain on post medical retirement curtailment |
| 9,543 | ||||||
Other operating income |
3,328 | 4,734 | ||||||
Total other income |
53,949 | 55,188 | ||||||
Other expenses: |
||||||||
Salaries, wages, pension and employee benefits |
48,156 | 42,682 | ||||||
Net occupancy expense |
7,140 | 6,871 | ||||||
Equipment expense |
6,050 | 5,797 | ||||||
Stationery, supplies and postage |
2,693 | 2,275 | ||||||
Bankcard, loan processing and other costs |
7,818 | 7,842 | ||||||
Professional services |
5,237 | 3,480 | ||||||
Amortization of intangibles |
234 | 87 | ||||||
FDIC expense |
3,765 | 2,556 | ||||||
Other operating expense |
12,920 | 11,613 | ||||||
Total other expenses |
94,013 | 83,203 | ||||||
Income before federal income tax expense |
24,837 | 40,814 | ||||||
Federal income tax expense |
6,816 | 11,380 | ||||||
Net income |
$ | 18,021 | $ | 29,434 | ||||
Other comprehensive income, net of taxes |
||||||||
Unrealized securities holding gain, net of taxes |
$ | 4,476 | $ | 15,817 | ||||
Unrealized hedging loss, net of taxes |
| (94 | ) | |||||
Minimum pension liability adjustment, net of taxes |
| (277 | ) | |||||
Total other comprehensive gain, net of taxes |
4,476 | 15,446 | ||||||
Comprehensive income |
$ | 22,497 | $ | 44,880 | ||||
Net income applicable to common shares |
$ | 18,021 | $ | 27,563 | ||||
Net income used in diluted EPS calculation |
$ | 18,021 | $ | 27,563 | ||||
Weighted
average number of common shares outstanding basic* |
87,771 | 82,514 | ||||||
Weighted
average number of common shares outstanding diluted* |
87,777 | 82,523 | ||||||
Basic earnings per share * |
$ | 0.21 | $ | 0.33 | ||||
Diluted earnings per share * |
$ | 0.21 | $ | 0.33 | ||||
Dividend per share |
$ | 0.16 | $ | 0.29 | ||||
* | Average outstanding shares and per share data as of March 31, 2009 are restated to reflect the effect of stock dividends declared April 28, 2009 and August 20, 2009. |
The accompaning notes are an integral part of the consoldiated financial statements.
3
Table of Contents
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Accumulated | |||||||||||||||||||||||||||||||||
Common | Other | Total | |||||||||||||||||||||||||||||||
(Unaudited) | Preferred | Common | Stock | Capital | Comprehensive | Retained | Treasury | Shareholders | |||||||||||||||||||||||||
(In thousands) | Stock | Stock | Warrant | Surplus | Income | Earnings | Stock | Equity | |||||||||||||||||||||||||
Balance at December 31, 2008 |
$ | | $ | 127,937 | $ | | $ | 94,802 | $ | (54,080 | ) | $ | 1,053,435 | $ | (284,251 | ) | $ | 937,843 | |||||||||||||||
Net income |
| | | | | 67,692 | | 67,692 | |||||||||||||||||||||||||
Cash dividends preferred stock |
| | | | | (1,789 | ) | | (1,789 | ) | |||||||||||||||||||||||
Cash dividends common stock ($0.61 per share) |
| | | | | (50,286 | ) | | (50,286 | ) | |||||||||||||||||||||||
Stock dividend |
| | | 5,765 | | (21,718 | ) | 15,953 | | ||||||||||||||||||||||||
Options exercised (2,400 shares) |
| | | (18 | ) | | | 58 | 40 | ||||||||||||||||||||||||
Nonvested (restricted) shares granted (536,058 shares) |
| | | (13,154 | ) | | | 13,151 | (3 | ) | |||||||||||||||||||||||
Treasury shares purchased (118,736 shares) |
| | | 500 | | | (2,197 | ) | (1,697 | ) | |||||||||||||||||||||||
Deferred compensation trust (29,597 shares) |
| | | (32 | ) | | | 32 | | ||||||||||||||||||||||||
Share-based compensation |
| | | 6,270 | | | | 6,270 | |||||||||||||||||||||||||
Issuance of common stock (3,267,751 shares) |
| | | (24,561 | ) | | | 84,517 | 59,956 | ||||||||||||||||||||||||
Issuance of Fixed-Rate Cumulative Perpetual Preferred Stock |
120,622 | | 4,582 | | | (204 | ) | | 125,000 | ||||||||||||||||||||||||
Net unrealized gains on investment securities, net of taxes |
| | | | 47,568 | | | 47,568 | |||||||||||||||||||||||||
Unrealized hedging gain, net of taxes |
| | | | (94 | ) | | | (94 | ) | |||||||||||||||||||||||
Minimum pension liability adjustment, net of taxes |
| | | | (831 | ) | | | (831 | ) | |||||||||||||||||||||||
Balance at March 31, 2009 |
$ | 120,622 | $ | 127,937 | $ | 4,582 | $ | 69,572 | $ | (7,437 | ) | $ | 1,047,130 | $ | (172,737 | ) | $ | 1,189,669 | |||||||||||||||
Balance at December 31, 2009 |
$ | | $ | 127,937 | $ | | $ | 88,573 | $ | (25,459 | ) | $ | 1,043,625 | $ | (169,049 | ) | $ | 1,065,627 | |||||||||||||||
Net income |
| | | | | 18,021 | | 18,021 | |||||||||||||||||||||||||
Cash dividends common stock ($0.16 per share) |
| | | | | (13,819 | ) | | (13,819 | ) | |||||||||||||||||||||||
Options exercised (29,161 shares) |
| | | (185 | ) | | | 677 | 492 | ||||||||||||||||||||||||
Nonvested (restricted) shares granted (4,375 shares) |
| | | (99 | ) | | | 99 | | ||||||||||||||||||||||||
Treasury shares purchased (115,477 shares) |
| | | 523 | | | (2,509 | ) | (1,986 | ) | |||||||||||||||||||||||
Deferred compensation trust (8,828 shares) |
| | | (24 | ) | | | 24 | | ||||||||||||||||||||||||
Share-based compensation |
| | | 2,543 | | | | 2,543 | |||||||||||||||||||||||||
Issuance of common stock (3,887,700 shares) |
| | | 79,999 | | | | 79,999 | |||||||||||||||||||||||||
Net unrealized gains on investment securities, net of taxes |
| | | | 4,476 | | | 4,476 | |||||||||||||||||||||||||
Balance at March 31, 2010 |
$ | | $ | 127,937 | $ | | $ | 171,330 | $ | (20,983 | ) | $ | 1,047,827 | $ | (170,758 | ) | $ | 1,155,353 | |||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
4
Table of Contents
FIRSTMERIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended | ||||||||
(Unaudited) | March 31, | |||||||
(In thousands) | 2010 | 2009 | ||||||
Operating Activities |
||||||||
Net income |
$ | 18,021 | $ | 29,434 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for loan losses |
25,493 | 18,065 | ||||||
Depreciation and amortization |
5,277 | 4,938 | ||||||
Accretion |
(3,116 | ) | (889 | ) | ||||
Amortization of investment securities premiums, net |
1,971 | 851 | ||||||
Post medical retirement curtailment gain |
| (9,543 | ) | |||||
Gain on acquisition |
(5,090 | ) | | |||||
Originations of loans held for sale |
(79,771 | ) | (130,899 | ) | ||||
Proceeds from sales of loans, primarily mortgage loans
sold in the secondary mortgage markets |
81,893 | 120,558 | ||||||
Gains on sales of loans, net |
(1,303 | ) | (926 | ) | ||||
Net change in assets and liabilities |
||||||||
(Increase) decrease in interest receivable |
(1,633 | ) | 2,589 | |||||
Increase (decrease) in interest payable |
1,415 | (421 | ) | |||||
Increase in prepaid assets |
(719 | ) | (5,175 | ) | ||||
Increase (decrease) in accounts payable |
2,114 | (9,616 | ) | |||||
(Decrease) increase in taxes payable |
(4,297 | ) | 6,243 | |||||
Decrease (increase) in other receivables |
741 | (24 | ) | |||||
(Increase) decrease in other assets |
(5,688 | ) | 68 | |||||
Other increases (decreases) |
8,203 | (8,394 | ) | |||||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
43,511 | 16,859 | ||||||
Investing Activities |
||||||||
Dispositions of investment securities: |
||||||||
Available-for-sale sales |
12,161 | 16,552 | ||||||
Available-for-sale maturities |
153,567 | 158,998 | ||||||
Purchases of available-for-sale investment securities |
(714,255 | ) | (97,745 | ) | ||||
Net (increase) decrease in loans and leases |
(12,299 | ) | 55,776 | |||||
Purchases of premises and equipment |
(2,266 | ) | (2,619 | ) | ||||
Sales of premises and equipment |
| 32 | ||||||
Net cash acquired from acquisitions |
931,060 | | ||||||
NET CASH PROVIDED IN INVESTING ACTIVITIES |
367,968 | 130,994 | ||||||
Financing Activities |
||||||||
Net (decrease) increase in demand accounts |
(3,671 | ) | 213,840 | |||||
Net increase in savings and money market accounts |
232,767 | 250,727 | ||||||
Net increase (decrease) in certificates and other time deposits |
18,049 | (384,033 | ) | |||||
Net decrease in securities sold under agreements to repurchase |
(100,015 | ) | (116,865 | ) | ||||
Net decrease in wholesale borrowings |
(62,390 | ) | (210,043 | ) | ||||
Net proceeds from issuance of preferred stock |
| 125,000 | ||||||
Net proceeds from issuance of common stock |
79,999 | | ||||||
Cash dividends preferred |
| (1,667 | ) | |||||
Cash dividends common |
(13,819 | ) | (23,317 | ) | ||||
Purchase of treasury shares |
(1,986 | ) | (542 | ) | ||||
Proceeds from exercise of stock options, conversion
of debentures or conversion of preferred stock |
492 | 38 | ||||||
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES |
149,426 | (146,862 | ) | |||||
Increase in cash and cash equivalents |
560,905 | 991 | ||||||
Cash and cash equivalents at beginning of period |
161,033 | 178,406 | ||||||
Cash and cash equivalents at end of period |
$ | 721,938 | $ | 179,397 | ||||
SUPPLEMENTAL DISCLOSURES |
||||||||
Cash paid during the period for: |
||||||||
Interest, net of amounts capitalized |
$ | 12,908 | $ | 13,162 | ||||
Federal income taxes |
$ | 797 | $ | | ||||
The accompanying notes are an integral part of the consolidated financial statements.
5
Table of Contents
FirstMerit Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2010 (Unaudited) (Dollars in thousands except per share data)
March 31, 2010 (Unaudited) (Dollars in thousands except per share data)
1. Summary of Significant Accounting Policies
Basis of Presentation FirstMerit Corporation (the Parent Company) is a bank
holding company whose principal asset is the common stock of its wholly-owned subsidiary,
FirstMerit Bank, N. A. The Parent Companys other subsidiaries include Citizens Savings
Corporation of Stark County, FirstMerit Capital Trust I, FirstMerit Community Development
Corporation, FirstMerit Risk Management, Inc., and FMT, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation.
The accounting and reporting policies of FirstMerit Corporation and its subsidiaries (the
Corporation) conform to generally accepted accounting principles (GAAP) in the United States of
America and to general practices within the financial services industry. Effective July 1, 2009,
the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) became
the single source of authoritative nongovernmental GAAP. Other than resolving certain minor
inconsistencies in current GAAP, the ASC is not intended to change GAAP, but rather to make it
easier to review and research GAAP applicable to a particular transaction or specific accounting
issue. Technical references to GAAP included in these Notes To Consolidated Financial Statements
are provided under the new ASC structure.
The consolidated balance sheet at December 31, 2009 has been derived from the audited
consolidated financial statements at that date. The accompanying unaudited interim financial
statements reflect all adjustments (consisting only of normally recurring accruals) that are, in
the opinion of Management, necessary for a fair statement of the results for the interim periods
presented. No material subsequent events have occurred requiring recognition in the financial
statements or disclosure in the notes to the financial statements. Certain information and note
disclosures normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted in accordance with
the rules of the Securities and Exchange Commission (SEC). The consolidated financial statements
of the Corporation as of March 31, 2010 and 2009 are not necessarily indicative of the results that
may be achieved for the full fiscal year or for any future period. These unaudited consolidated
financial statements should be read in conjunction with the audited consolidated financial
statements for the fiscal year ended December 31, 2009.
Certain reclassifications of prior years amounts have been made to conform to current year
presentation. Such reclassifications had no effect on net earnings.
Recently Adopted and Issued Accounting Standards In June 2009, the FASB issued
Statement of Financial Accounting Standard (SFAS) 166, Accounting for Transfers of Financial
Assets An Amendment of FASB Statement No. 140 which has been codified into ASC 860, Transfers and
Servicing (ASC 860). This guidance removes the concept of a qualifying special-purpose entity
from existing GAAP and removes the exception from applying the accounting and reporting standards
within ASC 810, Consolidation (ASC 810), to
6
Table of Contents
qualifying special purpose entities. This guidance
also establishes conditions for accounting and reporting of a transfer of a portion of a financial
asset, modifies the asset sale/de-recognition criteria, and changes how retained interests are
initially measured. This guidance is expected to provide greater transparency about transfers of
financial assets and a transferors continuing involvement, if any, with the transferred assets.
This guidance was effective for the Corporation as of January 1, 2010 and it not have an impact on
the Corporations financial condition and results of operations.
In June 2009, the FASB issued SFAS 167, Amendments to FASB Interpretation No. 46(R) which was
codified in ASC 810. This guidance removes the scope exception for qualifying special-purpose
entities, contains new criteria for determining the primary beneficiary of a variable interest
entity and increases the frequency of required reassessments to determine whether an entity is the
primary beneficiary of a variable interest entity. Enhanced disclosures are also required. This
guidance was effective for the Corporation as of January 1, 2010 and it did not have an impact on
the Corporations financial condition and results of operations.
FASB ASU 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends ASC
820 to require additional disclosures regarding fair value measurements. Specifically, the ASU
requires disclosure of the amounts of significant transfers between Level 1 and Level 2 of the fair
value hierarchy and the reasons for these transfers; the reasons for any transfers in or out of
Level 3; and information in the reconciliation of recurring Level 3 measurements about purchases,
sales, issuances and settlements on a gross basis. In addition to these new disclosure
requirements, the ASU also amends ASC 820 to clarify certain existing disclosure requirements. For
example, the ASU clarifies that reporting entities are required to provide fair value measurement
disclosures for each class of assets and liabilities. Previously, separate fair value disclosures
were required for each major category of assets and liabilities. ASU 2010-06 also clarifies the
requirement to disclose information about both the valuation techniques and inputs used in
estimating Level 2 and Level 3 fair value measurements. Except for the requirement to disclose
information about purchases, sales, issuances, and settlements in the reconciliation of recurring
Level 3 measurements on a gross basis, these disclosures are effective for the quarter ended March
31, 2010 and are incorporated into Note 10 (Fair Value Measurement). The requirement to separately
disclose purchases, sales, issuances, and settlements of recurring Level 3 measurements becomes
effective for the Corporation for the quarter ended March 31, 2011.
2. Business Combinations
Asset Based Loans
On December 16, 2009, FirstMerit Bank, N.A. (the Bank), acquired $102.0 million in
outstanding principal of asset based lending loans (ABL Loans), as well as the staff to service
and build new business, from First Bank Business Capital, Inc., (FBBC) for $93.2 million in cash.
FBBC is a wholly owned subsidiary of First Bank, a Missouri state chartered bank. This acquisition
expands the Corporations market presence and asset based lending business into the Midwest.
The purchase was accounted for under the acquisition method in accordance with ASC 805,
Business Combinations (ASC 805). Accordingly, the ABL Loans and a non-compete
7
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agreement acquired
were recorded at their fair values, $92.7 million and $0.1 million, respectively, on the date of
acquisition. The Bank recorded goodwill of $0.4 million relating to the ABL Loans and
non-compete agreement it acquired. Additional information can be found in Note 5 (Goodwill and
Intangible Assets).
All ABL Loans acquired were performing as of the acquisition date and as of March 31, 2010.
The shortfall between the fair value of the ABL Loans acquired and the outstanding principal
balance of these loans at the date of acquisition was a
$9.3 million discount and will be accreted into
interest income over their estimated useful life in accordance with ASC 310, Receivables.
First Bank Branches
On February 19, 2010, the Bank completed the acquisition of certain assets and the assumption
of certain liabilities with respect to 24 branches of First Bank located in the greater Chicago,
Illinois area. This acquisition was accounted for under the acquisition method in accordance with
ASC 805. The Bank recognized $1.4 million of acquisition related costs that were expensed in the
current period. These costs are included in the line item entitled professional services in the
consolidated income statement. Excluding the purchase accounting adjustments, the acquisition
included the assumption of approximately $1.2 billion in deposits and the purchase of $301.2
million of loans and $23.0 million in real and personal property associated with the acquired
branch locations. The Bank received cash of $832.5 million to assume the net liabilities.
The following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition:
Acquired | Fair Value | As Recorded by | ||||||||||
Book Value | Adjustments | FirstMerit Bank, N.A. | ||||||||||
Assets |
||||||||||||
Cash and due from banks |
$ | 3,725 | $ | | $ | 3,725 | ||||||
Loans |
301,236 | (25,624 | ) | 275,612 | ||||||||
Premises and equipment |
22,992 | 18,963 | 41,955 | |||||||||
Goodwill |
| 48,347 | 48,347 | |||||||||
Core deposit intangible |
| 3,154 | 3,154 | |||||||||
Other assets |
941 | 3,115 | 4,056 | |||||||||
Total assets acquired |
$ | 328,894 | $ | 47,955 | $ | 376,849 | ||||||
Liabilities |
||||||||||||
Deposits |
$ | 1,199,279 | $ | 7,134 | $ | 1,206,413 | ||||||
Accrued expenses and other liabilities |
4,192 | (1,271 | ) | 2,921 | ||||||||
Total liabilities assumed |
$ | 1,203,471 | $ | 5,863 | $ | 1,209,334 | ||||||
All loans acquired in the First Bank acquisition were performing as of the acquisition
date and as of March 31, 2010. The shortfall between the fair value and the outstanding principal
balance of these loans at the date of acquisition was a
$25.6 million discount and will be accreted into
interest income over their estimated useful life in accordance with ASC 310, Receivables.
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Additional information regarding the goodwill and core deposit intangible acquired in the
First Bank acquisition can be found in Note 5 (Goodwill and Intangible Assets).
Pro
forma financial statement information is not presented because the
historical results of the First Bank branches acquired are not
meaningful or significant to the Corporations results.
George
Washington Savings Bank FDIC Assisted Acquisition
On February 19, 2010 the Bank acquired certain assets and assumed substantially all of the
deposits and certain liabilities of the failed George Washington Savings Bank (George
Washington), the subsidiary of George Washington Savings Bancorp, through a purchase and
assumption agreement with the Federal Deposit Insurance Corporation (FDIC). The Illinois
Department of Financial and Professional Regulations, Division of Banking, declared George
Washington closed on February 19, 2010 and appointed the FDIC as receiver.
The Bank did not acquire the real estate, banking facilities, furniture and equipment of
George Washington as part of the purchase and assumption agreement but has the option to purchase
these assets at fair market value from the FDIC. This purchase option expires 90 days after
acquisition date, but was extended by the FDIC. Fair market values for the real estate, facilities,
furniture and equipment will be based on current appraisals and determined at a later date. The
Bank is leasing these facilities and equipment from the FDIC until current appraisals are received
and a final purchase decision is made.
The acquisitions of the net assets of George Washington constitute a business combination as
defined by ASC 805 and, accordingly were recorded at their estimated fair value on the date of acquisition. The Bank recognized $0.3 million of acquisition related costs that were
expensed in the current period. These costs are included in the line item entitled professional
services in the consolidated income statement. The assets acquired and liabilities assumed were
recorded at their estimated fair values on the date of acquisition. The estimated fair value of
assets acquired exceeded the estimated fair value of liabilities assumed, resulting in a bargain
purchase gain of $5.1 million. The Bank and the FDIC are engaged in on-going discussions that may
impact which assets and liabilities are ultimately acquired or assumed by the Bank and/or the
purchase price. In addition, the tax treatment of FDIC assisted acquisitions is complex and subject
to interpretations that may result in future adjustments of deferred taxes as of the acquisition
date.
In connection with the George Washington acquisition, the Bank entered into loss sharing
agreements with the FDIC that collectively cover $327.1 million of assets including single family
residential mortgage loans, commercial real estate and commercial and industrial loans, and other
real estate (collectively referred to as Covered Assets). The Bank acquired other George
Washington assets that are not covered by the loss sharing agreements with the FDIC including
investment securities purchased at fair market value and other tangible assets.
Pursuant to the terms of the loss sharing agreements, the FDIC is obligated to reimburse the
Bank for 80% of losses of up to $172.0 million with respect to the Covered Assets and will
reimburse the Bank for 95% of losses that exceed $172.0 million. The Bank will reimburse the FDIC
for 80% of recoveries with respect to losses for which the FDIC paid the Bank 80% reimbursement
under the loss sharing agreements, and for 95% of recoveries with respect to losses for which the
FDIC paid the Bank 95% reimbursement under the loss sharing agreements.
The amounts covered by the loss sharing agreements are the pre-acquisition book values of the
underlying Covered Assets, the contractual balance of acquired unfunded commitments,
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and certain
future net direct costs incurred in the collection and settlement process. The loss sharing
agreements applicable to single family residential mortgage loans provides for FDIC loss sharing
and the Bank reimbursement to the FDIC, in each case as described above, for ten years. The loss
sharing agreements applicable to commercial loans and securities provides for FDIC loss sharing for
five years and the Bank reimbursement to the FDIC for eight years, in each case as described above.
The Bank will service the Covered Assets. The expected reimbursements under the loss sharing
agreements were recorded on the balance sheet as part of the covered loans acquired at their
estimated fair values of $107.6 million on the acquisition date.
The table below presents a summary of the assets and liabilities purchased in the George
Washington acquisition recorded at estimated fair value on the acquisition date.
The Bank received a cash payment from the FDIC of approximately $40.2
million to assume the net
liabilities.
The estimated fair value of assets acquired and cash payment received
from the FDIC exceeded the estimated fair value of the liabilities
assumed, resulting in a bargain purchase gain of $5.1 million.
As Recorded | Fair Value | As Recorded by | ||||||||||
by FDIC | Adjustments | FirstMerit Bank, N.A. | ||||||||||
Assets |
||||||||||||
Cash and due from banks |
$ | 57,984 | $ | | $ | 57,984 | ||||||
Investment securities |
15,410 | | 15,410 | |||||||||
Covered Loans |
||||||||||||
Commercial Loan |
256,832 | (119,404 | ) | 137,428 | ||||||||
Mortgage Loan |
24,078 | (9,952 | ) | 14,126 | ||||||||
Installment Loan |
27,218 | (7,339 | ) | 19,879 | ||||||||
Total covered loans |
308,128 | (136,695 | ) | 171,433 | ||||||||
Loss share receivable |
| 107,550 | 107,550 | |||||||||
Total covered loans and loss share receivable |
278,983 | |||||||||||
Core deposit intangible |
| 962 | 962 | |||||||||
Covered other real estate |
19,021 | (7,561 | ) | 11,460 | ||||||||
Other assets |
3,340 | | 3,340 | |||||||||
Total assets acquired |
$ | 403,883 | $ | (35,744 | ) | $ | 368,139 | |||||
Liabilities |
||||||||||||
Deposits |
||||||||||||
Noninterest-bearing deposit accounts |
$ | 54,242 | $ | | $ | 54,242 | ||||||
Savings deposits |
62,737 | | 62,737 | |||||||||
Time deposits |
278,755 | 4,921 | 283,676 | |||||||||
Total deposits |
395,734 | 4,921 | 400,655 | |||||||||
Accrued expenses and other liabilities |
2,569 | | 2,569 | |||||||||
Total liabilities assumed |
$ | 398,303 | $ | 4,921 | $ | 403,224 | ||||||
The operating results of the Corporation for the quarter ended March 31, 2010 include the
operating results produced by the George Washington acquisition for the period of February 19, 2010
to March 31, 2010. Due primarily to the Bank acquiring only certain assets and liabilities
in the George Washington acquisition, the significant amount of fair value adjustments,
10
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the loss
sharing agreements with the FDIC, and on-going discussions with the FDIC that may impact which
assets and liabilities are ultimately acquired or assumed by the Bank, historical results from
George Washington are not meaningful or significant to the Corporations results, and thus no 2010
and 2009 pro forma information is presented.
The Corporation evaluated loans purchased in conjunction with the acquisition of George
Washington for impairment in accordance with the provisions of ASC 310-30, Loans and Debt
Securities Acquired with Deteriorated Credit Quality (ASC 310-30). Purchased loans are considered
impaired if there is evidence of credit deterioration since origination and if it is probable that
not all contractually required payments will be collected. In the assessment of credit quality
deterioration, Management made numerous assumptions, interpretations and judgments, using internal
and third-party credit quality information to determine whether it is probable that the Corporation
will be able to collect all contractually required payments. This is a point in time assessment and
inherently subjective due to the nature of the available information and judgment involved.
The Corporation has elected to recognize the accretion of the purchase discount for purchased
nonimpaired loans, excluding those with revolving privileges, based on the acquired loans expected
cash flows, as described in the ASC 310-30. All purchased impaired and nonimpaired loans,
excluding those with revolving privileges, are included in the ASC 310-30 financial statement
disclosures to these consolidated financial statements. Revolving loans are excluded from
purchased impaired loans accounting.
The outstanding balance of all purchased loans accounted for in accordance with ASC 310-30 in
the George Washington acquisition was $268.8 million and $267.2 million, as of February 19, 2010
and March 31, 2010, respectively. As of the acquisition date, the preliminary estimate of
contractually required payments receivable, including interest, for all loans accounted for in
accordance with ASC 310-30 acquired in the George Washington transaction was $349.4 million. The
cash flows expected to be collected as of the acquisition date for these loans were $173.9 million,
including interest. These amounts were determined based upon the estimated remaining life of the
underlying loans, which includes the effects of estimated prepayments. The fair value of these
loans as of the acquisition date was $150.9 million. Interest income, through accretion of the
difference between the carrying amount of the loans and the expected cash flows, is being
recognized on all purchased impaired and nonimpaired loans accounted for in accordance with ASC
310-30.
Changes in the carrying amount of accretable yield for purchased loans accounted for in
accordance with ASC 310-30 were as follows for the quarter ended March 31, 2010 for George
Washington.
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Carrying | ||||||||
Accretable | Amount of | |||||||
Yield | Loans | |||||||
Balance at the date of acquisition |
$ | 22,999 | $ | 150,870 | ||||
Accretion |
(1,044 | ) | 1,044 | |||||
Payments, received, net |
| (3,742 | ) | |||||
Balance at end of period |
$ | 21,955 | $ | 148,172 | ||||
As of the acquisition date, the estimate of contractually required payments receivable,
including interest, for all loans with revolving privileges acquired in the George Washington
transaction was $46.3 million. The cash flows expected to be collected as of the acquisition dates
for all loans with revolving privileges acquired in the George Washington transaction were $24.8
million, including interest. The fair value at acquisition date of loans with revolving privileges
was $20.5 million. The difference between the fair value of the purchased loans with revolving
privileges and the outstanding balance is being accreted to interest income over the remaining
period the revolving lines are in effect.
3. Investment Securities
The following tables provide the amortized cost and fair value for the major categories of
held-to-maturity and available-for-sale securities. Held-to-maturity securities are carried at
amortized cost, which reflects historical cost, adjusted for amortization of premiums and accretion
of discounts. Available-for-sale securities are carried at fair value with net unrealized gains or
losses reported on an after-tax basis as a component of other comprehensive income in shareholders
equity.
12
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March 31, 2010 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Securities available for sale |
||||||||||||||||
Debt Securities |
||||||||||||||||
U.S. government agency debentures |
$ | 280,333 | $ | 50 | $ | (743 | ) | $ | 279,640 | |||||||
U.S. States and political subdivisions |
288,439 | 4,964 | (417 | ) | 292,986 | |||||||||||
Residential mortgage-backed securities: |
||||||||||||||||
U.S. government agencies |
1,653,689 | 56,189 | (299 | ) | 1,709,579 | |||||||||||
Residential collateralized mortgage-backed securities: |
||||||||||||||||
U.S. government agencies |
752,443 | 20,103 | (228 | ) | 772,318 | |||||||||||
Non-agency |
20 | | (1 | ) | 19 | |||||||||||
Corporate debt securities |
61,397 | | (17,603 | ) | 43,794 | |||||||||||
Other debt securities |
667 | | | 667 | ||||||||||||
Total debt securities |
3,036,988 | 81,306 | (19,291 | ) | 3,099,003 | |||||||||||
Marketable equity securities |
3,404 | | | 3,404 | ||||||||||||
Total securities available for sale |
$ | 3,040,392 | $ | 81,306 | $ | (19,291 | ) | $ | 3,102,407 | |||||||
Securities held to maturity |
||||||||||||||||
Debt Securities |
||||||||||||||||
U.S. States and political subdivisions |
$ | 67,256 | $ | | $ | | $ | 67,256 | ||||||||
Total securities held to maturity |
$ | 67,256 | $ | | $ | | $ | 67,256 | ||||||||
December 31, 2009 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Securities available for sale |
||||||||||||||||
Debt Securities |
||||||||||||||||
U.S. government agency debentures |
$ | 32,029 | $ | | $ | (132 | ) | $ | 31,897 | |||||||
U.S. States and political subdivisions |
289,529 | 4,984 | (394 | ) | 294,119 | |||||||||||
Residential mortgage-backed securities: |
||||||||||||||||
U.S. government agencies |
1,557,754 | 55,325 | (1,852 | ) | 1,611,227 | |||||||||||
Residential collateralized mortgage-backed securities: |
||||||||||||||||
U.S. government agencies |
566,151 | 16,394 | (238 | ) | 582,307 | |||||||||||
Non-agency |
22 | | | 22 | ||||||||||||
Corporate debt securities |
61,385 | | (18,957 | ) | 42,428 | |||||||||||
Other debt securities |
679 | | | 679 | ||||||||||||
Total debt securities |
2,507,549 | 76,703 | (21,573 | ) | 2,562,679 | |||||||||||
Marketable equity securities |
3,264 | | | 3,264 | ||||||||||||
Total securities available for sale |
$ | 2,510,813 | $ | 76,703 | $ | (21,573 | ) | $ | 2,565,943 | |||||||
Securities held to maturity |
||||||||||||||||
Debt Securities |
||||||||||||||||
U.S. States and political subdivisions |
$ | 50,686 | $ | | $ | | $ | 50,686 | ||||||||
Total securities held to maturity |
$ | 50,686 | $ | | $ | | $ | 50,686 | ||||||||
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March 31, 2009 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Securities available for sale |
||||||||||||||||
Debt Securities |
||||||||||||||||
U.S. States and political subdivisions |
$ | 288,470 | $ | 3,722 | $ | (2,416 | ) | $ | 289,776 | |||||||
Residential mortgage-backed securities: |
||||||||||||||||
U.S. government agencies |
1,655,231 | 44,634 | (405 | ) | 1,699,460 | |||||||||||
Residential collateralized mortgage-backed securities: |
||||||||||||||||
U.S. government agencies |
522,930 | 15,106 | (164 | ) | 537,872 | |||||||||||
Non-agency |
19,480 | | (404 | ) | 19,076 | |||||||||||
Corporate debt securities |
61,347 | | (34,561 | ) | 26,786 | |||||||||||
Other debt securities |
717 | | | 717 | ||||||||||||
Total debt securities |
2,548,175 | 63,462 | (37,950 | ) | 2,573,687 | |||||||||||
Marketable equity securities |
2,950 | | | 2,950 | ||||||||||||
Total securities available for sale |
$ | 2,551,125 | $ | 63,462 | $ | (37,950 | ) | $ | 2,576,637 | |||||||
Securities held to maturity |
||||||||||||||||
Debt Securities |
||||||||||||||||
U.S. States and political subdivisions |
$ | 30,588 | $ | | $ | | $ | 30,588 | ||||||||
Total securities held to maturity |
$ | 30,588 | $ | | $ | | $ | 30,588 | ||||||||
Other investments on the balance sheet include Federal Reserve Bank (FRB) and Federal
Home Loan Bank (FHLB) stock.
March 31, | December 31, | March 31, | ||||||||||
2010 | 2009 | 2009 | ||||||||||
FRB stock |
$ | 9,064 | $ | 9,064 | $ | 8,862 | ||||||
FHLB stock |
122,312 | 119,145 | 119,145 | |||||||||
Total other investments |
$ | 131,376 | $ | 128,209 | $ | 128,007 | ||||||
FRB and FHLB stock is classified as a restricted investment, carried at cost and valued based
on the ultimate recoverability of par value. Cash and stock dividends received on the stock are
reported as interest income. There are no identified events or changes in circumstances that may
have a significant adverse effect on these investments carried at cost.
At March 31, 2009, securities totaling $2.0 billion were pledged to secure trust and public
deposits and securities sold under agreements to repurchase and for other purposes required or
permitted by law.
Gross Unrealized Losses and Fair Value
The following table presents the gross unrealized losses and fair value of securities in the
securities available-for-sale portfolio by length of time that individual securities in each
category had been in a continuous loss position.
14
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At March 31, 2010 | ||||||||||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||||||
Number of | Number of | |||||||||||||||||||||||||||||||
Unrealized | Imparied | Unrealized | Imparied | Unrealized | ||||||||||||||||||||||||||||
Fair Value | Losses | Securities | Fair Value | Losses | Securities | Fair Value | Losses | |||||||||||||||||||||||||
Debt Securities |
||||||||||||||||||||||||||||||||
U.S. government agency debentures |
$ | 232,571 | $ | (743 | ) | 15 | $ | | $ | | | $ | 232,571 | $ | (743 | ) | ||||||||||||||||
U.S. States and political subdivisions |
39,342 | (417 | ) | 63 | | | | 39,342 | (417 | ) | ||||||||||||||||||||||
Residential mortgage-backed securities: |
||||||||||||||||||||||||||||||||
U.S. government agencies |
131,708 | (296 | ) | 9 | 238 | (3 | ) | 1 | 131,946 | (299 | ) | |||||||||||||||||||||
Residential collateralized
mortgage-backed securities: |
||||||||||||||||||||||||||||||||
U.S. government agencies |
164,827 | (228 | ) | 13 | | | | 164,827 | (228 | ) | ||||||||||||||||||||||
Non-agency |
4 | (1 | ) | 1 | | | | 4 | (1 | ) | ||||||||||||||||||||||
Corporate debt securities |
| | | 43,794 | (17,603 | ) | 8 | 43,794 | (17,603 | ) | ||||||||||||||||||||||
Total temporarily impaired securities |
$ | 568,452 | $ | (1,685 | ) | 101 | $ | 44,032 | $ | (17,606 | ) | 9 | $ | 612,484 | $ | (19,291 | ) | |||||||||||||||
At December 31, 2009 | ||||||||||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||||||
Number of | Number of | |||||||||||||||||||||||||||||||
Unrealized | Imparied | Unrealized | Imparied | Unrealized | ||||||||||||||||||||||||||||
Fair Value | Losses | Securities | Fair Value | Losses | Securities | Fair Value | Losses | |||||||||||||||||||||||||
Debt Securities |
||||||||||||||||||||||||||||||||
U.S. government agency debentures |
$ | 31,897 | $ | (132 | ) | 3 | $ | | $ | | | $ | 31,897 | $ | (132 | ) | ||||||||||||||||
U.S. States and political subdivisions |
39,059 | (394 | ) | 65 | | | | 39,059 | (394 | ) | ||||||||||||||||||||||
Residential mortgage-backed securities: |
||||||||||||||||||||||||||||||||
U.S. government agencies |
216,014 | (1,849 | ) | 15 | 271 | (3 | ) | 2 | 216,285 | (1,852 | ) | |||||||||||||||||||||
Residential collateralized mortgage-backed securities: |
||||||||||||||||||||||||||||||||
U.S. government agencies |
68,513 | (238 | ) | 6 | | | | 68,513 | (238 | ) | ||||||||||||||||||||||
Non-agency |
5 | | 1 | | | | 5 | | ||||||||||||||||||||||||
Corporate debt securities |
| | 42,428 | (18,957 | ) | 8 | 42,428 | (18,957 | ) | |||||||||||||||||||||||
Total temporarily impaired securities |
$ | 355,488 | $ | (2,613 | ) | 90 | $ | 42,699 | $ | (18,960 | ) | 10 | $ | 398,187 | $ | (21,573 | ) | |||||||||||||||
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At March 31, 2009 | ||||||||||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||||||
Number of | Number of | |||||||||||||||||||||||||||||||
Unrealized | Imparied | Unrealized | Imparied | Unrealized | ||||||||||||||||||||||||||||
Fair Value | Losses | Securities | Fair Value | Losses | Securities | Fair Value | Losses | |||||||||||||||||||||||||
Debt Securities |
||||||||||||||||||||||||||||||||
U.S. States and political subdivisions |
$ | 61,369 | $ | (1,430 | ) | 104 | $ | 24,427 | $ | (986 | ) | 39 | $ | 85,796 | $ | (2,416 | ) | |||||||||||||||
Residential mortgage-backed securities: |
||||||||||||||||||||||||||||||||
U.S. government agencies |
63,876 | (401 | ) | 10 | 347 | (4 | ) | 3 | 64,223 | (405 | ) | |||||||||||||||||||||
Residential collateralized mortgage-backed securities: |
||||||||||||||||||||||||||||||||
U.S. government agencies |
10,679 | (2 | ) | 1 | 25,606 | (162 | ) | 3 | 36,285 | (164 | ) | |||||||||||||||||||||
Non-agency |
19,052 | (404 | ) | 1 | | | | 19,052 | (404 | ) | ||||||||||||||||||||||
Corporate debt securities |
| | | 26,786 | (34,561 | ) | 8 | 26,786 | (34,561 | ) | ||||||||||||||||||||||
Total temporarily impaired securities |
$ | 154,976 | $ | (2,237 | ) | 116 | $ | 77,166 | $ | (35,713 | ) | 53 | $ | 232,142 | $ | (37,950 | ) | |||||||||||||||
At least quarterly the Corporation conducts a comprehensive security-level impairment
assessment on all securities in an unrealized loss position to determine if OTTI exists. An
unrealized loss exists when the current fair value of an individual security is less than its
amortized cost basis. Under the current OTTI accounting model for debt securities, which was
amended by the FASB and adopted by the Corporation in the second quarter of 2009, an OTTI loss must
be recognized for a debt security in an unrealized loss position if the Corporation intends to sell
the security or it is more likely than not that the Corporation will be required to sell the
security before recovery of its amortized cost basis. In this situation, the amount of loss
recognized in income is equal to the difference between the fair value and the amortized cost basis
of the security. Even if the Corporation does not expect to sell the security, the Corporation must
evaluate the expected cash flows to be received to determine if a credit loss has occurred. In the
event of a credit loss, only the amount of impairment associated with the credit loss is recognized
in income. The portion of the unrealized loss relating to other factors, such as liquidity
conditions in the market or changes in market interest rates, is recorded in other comprehensive
income. Equity securities are also evaluated to determine whether the unrealized loss is expected
to be recoverable based on whether evidence exists to support a realizable value equal to or
greater than the amortized cost basis. If it is probable that the Corporation will not recover the
amortized cost basis, taking into consideration the estimated recovery period and its ability to
hold the equity security until recovery, OTTI is recognized.
The security-level assessment is performed on each security, regardless of the classification
of the security as available for sale or held to maturity. The assessments are based on the nature
of the securities, the financial condition of the issuer, the extent and duration of the
securities, the extent and duration of the loss and the intent and whether Management intends to
sell or it is more likely than not that it will be required to sell a security before recovery of
its amortized cost basis, which may be maturity. For those securities for which the assessment
shows the Corporation will recover the entire cost basis, Management does not intend to sell
16
Table of Contents
these securities and it is not more likely than not that the Corporation will be required to sell
them before the anticipated recovery of the amortized cost basis, the gross unrealized losses are
recognized in other comprehensive income, net of tax.
As of March 31, 2010, gross unrealized losses are concentrated within corporate debt
securities which is composed of eight, single issuer, trust preferred securities with stated
maturities. Such investments are less than 2% of the fair value of the entire investment portfolio.
None of the corporate issuers have deferred paying dividends on their issued trust preferred shares
in which the Corporation is invested. The fair values of these investments have been impacted by
the recent market conditions which have caused risk premiums to increase markedly, resulting in the
significant decline in the fair value of the trust preferred securities. Management believes the
Corporation will fully recover the cost of these securities and it does not intend to sell these
securities and it is not more likely than not that it will be required to sell them before the
anticipated recovery of the remaining amortized cost basis, which may be maturity. As a result,
Management concluded that these securities were not other-than-temporarily impaired at March 31,
2010 and has recognized the total amount of the impairment in other comprehensive income, net of
tax.
Realized Gains and Losses
Gains or losses on the sales of available-for-sale securities are recognized upon sale and are
determined using the specific identification method. There were no material gains or losses on
sales of available-for-sale securities for the quarters ended March 31, 2010 and 2009.
Contractual Maturity of Debt Securities
The following table shows the remaining contractual maturities and contractual yields of debt
securities held-to-maturity and available-for-sale as of March 31, 2010. Estimated lives on
mortgage-backed securities may differ from contractual maturities as issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
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Residential | ||||||||||||||||||||||||||||||||||||
Residential | collateralized | |||||||||||||||||||||||||||||||||||
collateralized | mortgage | |||||||||||||||||||||||||||||||||||
Residential | mortgage | obligations - | ||||||||||||||||||||||||||||||||||
U.S. | mortgage backed | obligations - U.S. | non U.S. | |||||||||||||||||||||||||||||||||
Government | U.S. States | securities - U.S. | Government | Government | Corporate | Weighted | ||||||||||||||||||||||||||||||
agency | and political | Government | agency | agency | debt | Other | Average | |||||||||||||||||||||||||||||
debentures | subdivisions | agency obligations | obligations | obligations | securities | securities | Total | Yield | ||||||||||||||||||||||||||||
Securities Available for Sale |
||||||||||||||||||||||||||||||||||||
Remaining maturity: |
||||||||||||||||||||||||||||||||||||
One year or less |
$ | 40,053 | $ | 11,477 | $ | 22,709 | $ | 22,302 | $ | | $ | | $ | 51 | $ | 96,592 | 2.62 | % | ||||||||||||||||||
Over one year through five years |
227,554 | 14,157 | 1,686,870 | 750,017 | 20 | | 203 | 2,678,821 | 3.61 | % | ||||||||||||||||||||||||||
Over five years through ten years |
| 59,542 | | | | | 253 | 59,795 | 5.97 | % | ||||||||||||||||||||||||||
Over ten years |
12,026 | 207,810 | | | | 43,794 | 160 | 263,790 | 4.86 | % | ||||||||||||||||||||||||||
Fair Value |
$ | 279,633 | $ | 292,986 | $ | 1,709,579 | $ | 772,319 | $ | 20 | $ | 43,794 | $ | 667 | $ | 3,098,998 | 3.82 | % | ||||||||||||||||||
Amortized Cost |
$ | 280,327 | $ | 288,439 | $ | 1,653,689 | $ | 752,443 | $ | 20 | $ | 61,397 | $ | 667 | $ | 3,036,982 | ||||||||||||||||||||
Weighted-Average Yield |
0.95 | % | 6.07 | % | 4.15 | % | 3.41 | % | 3.93 | % | 0.96 | % | 0.00 | % | 3.82 | % | ||||||||||||||||||||
Weighted-Average Maturity |
2.4 | 10.4 | 3.3 | 2.5 | 4.0 | 17.6 | 13.2 | 4.0 | ||||||||||||||||||||||||||||
Securities Held to Maturity |
||||||||||||||||||||||||||||||||||||
Remaining maturity: |
||||||||||||||||||||||||||||||||||||
One year or less |
$ | | $ | 19,163 | $ | | $ | | $ | | $ | | $ | | $ | 19,163 | 5.97 | % | ||||||||||||||||||
Over one year through five years |
| 3,417 | | | | | | 3,417 | 5.97 | % | ||||||||||||||||||||||||||
Over five years through ten years |
| 9,619 | | | | | | 9,619 | 5.97 | % | ||||||||||||||||||||||||||
Over ten years |
| 35,057 | | | | | | 35,057 | 7.46 | % | ||||||||||||||||||||||||||
Fair Value |
$ | | $ | 67,256 | $ | | $ | | $ | | $ | | $ | | $ | 67,256 | 6.74 | % | ||||||||||||||||||
Amortized Cost |
$ | | $ | 67,256 | $ | | $ | | $ | | $ | | $ | | $ | 67,256 | ||||||||||||||||||||
Weighted-Average Yield |
6.74 | % | 6.74 | % | ||||||||||||||||||||||||||||||||
Weighted-Average Maturity |
9.6 | 9.6 |
4. Allowance for loan losses
The Corporations Credit Policy Division manages credit risk by establishing common credit
policies for its subsidiary bank, participating in approval of its loans, conducting reviews of
loan portfolios, providing centralized consumer underwriting, collections and loan operation
services, and overseeing loan workouts. The Corporations objective is to minimize losses from its
commercial lending activities and to maintain consumer losses at acceptable levels that are stable
and consistent with growth and profitability objectives.
Note 1 (Summary of Significant Accounting Policies) and Note 4 (Allowance for Loan Losses) in
the Corporations Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (the 2009
Form 10-K) more fully describe the components of the allowance for loan loss model.
There
was no further credit detioriation requiring an allowance for loan
losses related to the $523.3 million of acquired loans at
March 31, 2010.
The activity within the allowance for loan loss for the quarters ended March 31, 2010 and 2009
and the year ended December 31, 2009, is shown in the following table:
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Three months ended | Year ended | |||||||||||
March 31, | December 31, | |||||||||||
2010 | 2009 | 2009 | ||||||||||
Allowance for loan losses-beginning of period |
$ | 115,092 | $ | 103,757 | $ | 103,757 | ||||||
Loans charged off: |
||||||||||||
Commercial |
8,895 | 4,554 | 39,685 | |||||||||
Mortgage |
1,646 | 923 | 4,960 | |||||||||
Installment |
8,805 | 8,438 | 31,622 | |||||||||
Home equity |
2,070 | 1,535 | 7,200 | |||||||||
Credit cards |
4,168 | 2,967 | 13,558 | |||||||||
Leases |
20 | | 97 | |||||||||
Overdrafts |
591 | 519 | 2,591 | |||||||||
Total charge-offs |
26,195 | 18,936 | 99,713 | |||||||||
Recoveries: |
||||||||||||
Commercial |
372 | 224 | 890 | |||||||||
Mortgage |
25 | 26 | 270 | |||||||||
Installment |
2,017 | 2,401 | 8,329 | |||||||||
Home equity |
257 | 85 | 494 | |||||||||
Credit cards |
473 | 387 | 1,710 | |||||||||
Manufactured housing |
31 | 53 | 171 | |||||||||
Leases |
9 | 5 | 57 | |||||||||
Overdrafts |
232 | 190 | 694 | |||||||||
Total recoveries |
3,416 | 3,371 | 12,615 | |||||||||
Net charge-offs |
22,779 | 15,565 | 87,098 | |||||||||
Provision for loan losses |
25,493 | 18,065 | 98,433 | |||||||||
Allowance for loan losses-end of period |
$ | 117,806 | $ | 106,257 | $ | 115,092 | ||||||
5. Goodwill and Intangible Assets
Goodwill
Changes in the carrying amount of goodwill for the quarter ended March 31, 2010 are as
follows:
Commercial | Retail | Wealth | Total | |||||||||||||
Balance at January 1, 2010 |
$ | 73,827 | $ | 59,038 | $ | 6,733 | $ | 139,598 | ||||||||
Goodwill acquired: |
||||||||||||||||
First Bank branches |
46,414 | 1,933 | | 48,347 | ||||||||||||
Balance at March 31, 2010 |
$ | 120,241 | $ | 60,971 | $ | 6,733 | $ | 187,945 | ||||||||
On
February 19, 2010 the Bank completed the acquisition of certain assets and the
transfer of certain liabilities with respect to 24 branches of First Bank located in the greater
Chicago, Illinois area and recognized $48.3 million of goodwill. $45.3 million of this goodwill is
expected to be deductible for tax purposes. Goodwill associated with this acquisition was
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allocated to the
Corporations reporting units based on the composition of the assets acquired.
These acquisitions are more fully described in Note 2 (Business Combinations).
Other Intangible Assets
The following tables show the gross carrying amount and the amount of accumulated amortization
of intangible assets subject to amortization.
March 31, 2010 | ||||||||||||
Gross Carrying | Accumulated | Net Carrying | ||||||||||
Amount | Amortization | Amount | ||||||||||
Core deposit intangibles |
$ | 9,326 | $ | (4,380 | ) | $ | 4,946 | |||||
Non-compete covenant |
102 | (6 | ) | 96 | ||||||||
Lease intangible |
617 | | 617 | |||||||||
$ | 10,045 | $ | (4,386 | ) | $ | 5,659 | ||||||
December 31, 2009 | ||||||||||||
Gross Carrying | Accumulated | Net Carrying | ||||||||||
Amount | Amortization | Amount | ||||||||||
Core deposit intangibles |
$ | 5,210 | $ | (4,154 | ) | $ | 1,056 | |||||
Non-compete covenant |
102 | | 102 | |||||||||
$ | 5,312 | $ | (4,154 | ) | $ | 1,158 | ||||||
March 31, 2009 | ||||||||||||
Gross Carrying | Accumulated | Net Carrying | ||||||||||
Amount | Amortization | Amount | ||||||||||
Core deposit intangibles |
$ | 5,210 | $ | (3,894 | ) | $ | 1,316 | |||||
As a result of the ABL Loan acquisition on December 15, 2009, a non-compete asset was
recognized at its acquisition date fair value of $0.1 million. This non-compete asset will be
amortized on an accelerated basis over its estimated useful life of ten years.
As a result of the acquisition of the First Bank branches on February 19, 2010, a core deposit
intangible asset was recognized at its acquisition date fair value of $3.2 million and a lease
intangible asset was recognized at its acquisition date fair value of $0.6 million. The core
deposit intangible asset will be amortized on an accelerated basis over its useful life of ten
years, and the lease intangible asset will be amortized over the remaining weighted average lease
terms.
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A core deposit intangible asset with an acquisition date fair value of $1.0 million was
recognized as a result of the George Washington acquisition on February 19, 2010. The core deposit
intangible asset will be amortized on an accelerated basis over its useful life of ten years.
These acquisitions are more fully described in Note 2 (Business Combinations).
Intangible asset amortization expense was $0.2 million and $0.1 for the quarters ended March
31, 2010 and 2009, respectively. Estimated amortization expense for each of the next five years is
as follows: 2010 $1.4 million; 2011 $1.2 million; 2012 $1.0 million; 2013 $0.4 million; and
2014 $0.4 million.
6. Earnings per share
The reconciliation between basic and diluted earnings per share (EPS) is calculated using
the treasury stock method and presented as follows:
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Quarter ended | Quarter ended | |||||||
March 31, | March 31, | |||||||
2010 | 2009 | |||||||
BASIC EPS: |
||||||||
Net income |
$ | 18,021 | $ | 29,434 | ||||
Less: preferred dividend |
| (1,667 | ) | |||||
Less: accretion of preferred stock discount |
| (204 | ) | |||||
Net income available to common shareholders |
$ | 18,021 | $ | 27,563 | ||||
Average common shares outstanding (*) |
87,771 | 82,514 | ||||||
Net income per share basic |
$ | 0.21 | $ | 0.33 | ||||
DILUTED EPS: |
||||||||
Net income available to common shareholders |
$ | 18,021 | $ | 27,563 | ||||
Add: interest expense on convertible bonds |
| | ||||||
$ | 18,021 | $ | 27,563 | |||||
Avg common shares outstanding (*) |
87,771 | 82,514 | ||||||
Add: Equivalents from stock options and restricted stock |
6 | 9 | ||||||
Add: Equivalents-convertible bonds |
| | ||||||
Average common shares and equivalents outstanding (*) |
87,777 | 82,523 | ||||||
Net income per common share diluted |
$ | 0.21 | $ | 0.33 | ||||
* | Average common shares outstanding have been restated as of March 31, 2009 to reflect stock dividends of 611,582 shares declared April 28, 2009 and 609,560 shares declared on August 20, 2009. |
For the quarters ended March 31, 2010 and 2009 options to purchase 4.6 million and 5.5
million shares, respectively, were outstanding, but not included in the computation of diluted
earnings per share because they were antidilutive.
On January 9, 2009, the Corporation completed the sale to the United States Department of the
Treasury (Treasury) of $125.0 million of newly issued FirstMerit non-voting preferred shares as
part of the Treasurys Troubled Assets Relief Program Capital Purchase Program. The Corporation
issued and sold to the Treasury for an aggregate purchase price of $125.0 million in cash (1)
125,000 shares of FirstMerits Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each
without par value and having a liquidation preference of $1,000 per share, and (2) a warrant to
purchase 952,260 FirstMerit common shares, each without par value, at an exercise price of $19.69
per share. At March 31, 2009, the warrant was outstanding, but not included in the computation of
diluted earning per share because it was antidilutive.
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On April 22, 2009, the Corporation completed the repurchase of all 125,000 shares of its Fixed
Rate Cumulative Perpetual Preferred Stock, Series A. On May 27, 2009, the Corporation completed
the repurchase of the warrant held by the Treasury.
On March 3, 2010, the Corporation entered into two distribution agency agreements with Credit
Suisse Securities (USA) LLC and RBC Capital Markets Corporation (collectively, the Sales Agents),
pursuant to which the Corporation may, from time to time, offer and sell shares of the
Corporations common stock. Sales of the common stock are made by means of ordinary brokers
transactions on the Nasdaq Global Select Market at market prices, in block transactions or as
otherwise agreed with the Sales Agents. During the quarter ended March 31, 2010, the Corporation
sold 3.9 million shares with an average value of $20.91 per share.
7. Segment Information
Management monitors the Corporations results by an internal performance measurement system,
which provides lines of business results and key performance measures. The profitability
measurement system is based on internal Management methodologies designed to produce consistent
results and reflect the underlying economics of the businesses. The development and application of
these methodologies is a dynamic process. Accordingly, these measurement tools and assumptions may
be revised periodically to reflect methodological, product, and/or management organizational
changes. Further, these tools measure financial results that support the strategic objectives and
internal organizational structure of the Corporation. Consequently, the information presented is
not necessarily comparable with similar information for other financial institutions.
A description of each business, selected financial performance, and the methodologies used to
measure financial performance are presented below.
| Commercial The commercial line of business provides a full range of lending, depository, and related financial services to middle-market corporate, industrial, financial, business banking (formerly known as small business), public entities, and leasing clients. Commercial also includes personal business from commercial loan clients in coordination with the Wealth Management segment. Products and services offered include commercial term loans, revolving credit arrangements, asset-based lending, leasing, commercial mortgages, real estate construction lending, letters of credit, cash management services and other depository products. | ||
| Retail The retail line of business includes consumer lending and deposit gathering, residential mortgage loan origination and servicing, and branch-based small business banking (formerly known as the micro business line). Retail offers a variety of retail financial products and services including consumer direct and indirect installment loans, debit and credit cards, debit gift cards, residential mortgage loans, home equity loans and lines of credit, deposit products, fixed and variable annuities and ATM network services. Deposit products include checking, savings, money market accounts and certificates of deposit. | ||
| Wealth The wealth line of business offers a broad array of asset management, private banking, financial planning, estate settlement and administration, credit and deposit |
23
Table of Contents
products and services. Trust and investment services include personal trust and planning, investment management, estate settlement and administration services. Retirement plan services focus on investment management and fiduciary activities. Brokerage and insurance delivers retail mutual funds, other securities, variable and fixed annuities, personal disability and life insurance products and brokerage services. Private banking provides credit, deposit and asset management solutions for affluent clients. | |||
| Other The other line of business includes activities that are not directly attributable to one of the three principal lines of business. Included in the Other category are the parent company, eliminations companies, community development operations, the Treasury Group, which includes the securities portfolio, wholesale funding and asset liability management activities, and the economic impact of certain assets, capital and support function not specifically identifiable with the three primary lines of business. |
The accounting policies of the lines of businesses are the same as those of the Corporation
described in Note 1 (Summary of Significant Accounting Policies) to the 2009 Form 10-K. Funds
transfer pricing is used in the determination of net interest income by assigning a cost for funds
used or credit for funds provided to assets and liabilities within each business unit. Assets and
liabilities are match-funded based on their maturity, prepayment and/or re-pricing characteristics.
As a result, the three primary lines of business are generally insulated from changes in interest
rates. Changes in net interest income due to changes in rates are reported in Other by the Treasury
Group. Capital has been allocated on an economic risk basis. Loans and lines of credit have been
allocated capital based upon their respective credit risk. Asset management holdings in the Wealth
segment have been allocated capital based upon their respective market risk related to assets under
management. Normal business operating risk has been allocated to each line of business by the level
of noninterest expense. Mismatch between asset and liability cash flow as well as interest rate
risk for mortgage servicing rights and the origination business franchise value have been allocated
capital based upon their respective asset/liability management risk. The provision for loan loss is
allocated based upon the actual net charge-offs of each respective line of business, adjusted for
loan growth and changes in risk profile. Noninterest income and expenses directly attributable to a
line of business are assigned to that line of business. Expenses for centrally provided services
are allocated to the business line by various activity based cost formulas.
The Corporations business is conducted solely in the United States of America. The following
tables present a summary of financial results for the three-month period ended March 31, 2010 and
2009:
24
Table of Contents
FirstMerit | ||||||||||||||||||||
March 31, 2010 | Commercial | Retail | Wealth | Other | Consolidated | |||||||||||||||
OPERATIONS: |
||||||||||||||||||||
Net interest income |
$ | 42,649 | $ | 48,074 | $ | 4,704 | $ | (5,033 | ) | $ | 90,394 | |||||||||
Provision for loan losses |
8,354 | 9,725 | 782 | 6,632 | 25,493 | |||||||||||||||
Other income |
10,212 | 24,764 | 7,719 | 11,254 | 53,949 | |||||||||||||||
Other expenses |
25,097 | 51,951 | 9,352 | 7,613 | 94,013 | |||||||||||||||
Net income |
12,621 | 7,197 | 1,488 | (3,285 | ) | 18,021 | ||||||||||||||
AVERAGES : |
||||||||||||||||||||
Assets |
$ | 4,144,987 | $ | 2,841,569 | $ | 294,010 | $ | 4,076,544 | $ | 11,357,110 |
FirstMerit | ||||||||||||||||||||
March 31, 2009 | Commercial | Retail | Wealth | Other | Consolidated | |||||||||||||||
OPERATIONS: |
||||||||||||||||||||
Net interest income |
$ | 37,647 | $ | 46,857 | $ | 4,046 | $ | (1,656 | ) | $ | 86,894 | |||||||||
Provision for loan losses |
4,500 | 9,761 | 2,613 | 1,191 | 18,065 | |||||||||||||||
Other income |
10,400 | 23,976 | 8,064 | 12,748 | 55,188 | |||||||||||||||
Other expenses |
23,582 | 50,662 | 9,335 | (376 | ) | 83,203 | ||||||||||||||
Net income |
12,977 | 6,767 | 106 | 9,584 | 29,434 | |||||||||||||||
AVERAGES : |
||||||||||||||||||||
Assets |
$ | 4,199,534 | $ | 2,900,257 | $ | 313,109 | $ | 3,702,142 | $ | 11,115,042 |
8. Derivatives and Hedging Activities
The Corporation, through its mortgage banking and risk management operations, is party to
various derivative instruments that are used for asset and liability management and customers
financing needs. Derivative instruments are contracts between two or more parties that have a
notional amount and underlying variable, require no net investment and allow for the net settlement
of positions. The notional amount serves as the basis for the payment provision of the contract and
takes the form of units, such as shares or dollars. The underlying variable represents a specified
interest rate, index or other component. The interaction between the notional amount and the
underlying variable determines the number of units to be exchanged between the parties and
influences the market value of the derivative contract. Derivative assets and liabilities are
recorded at fair value on the balance sheet and do not take into account the effects of master
netting agreements. Master netting agreements allow the Corporation to settle all derivative
contracts held with a single counterparty on a net basis, and to offset net derivative positions
with related collateral, where applicable.
The predominant derivative and hedging activities include interest rate swaps and certain
mortgage banking activities. Generally, these instruments help the Corporation manage exposure to
market risk, and meet customer financing needs. Market risk represents the possibility that
economic value or net interest income will be adversely affected by fluctuations in external
factors, such as interest rates, market-driven rates and prices or other economic factors.
Derivatives Designated in Hedge Relationships
25
Table of Contents
The Corporation uses interest rate swaps to modify its exposure to interest rate risk. For
example, the Corporation employs fair value hedging strategies to convert specific fixed-rate loans
into variable rate instruments. Gains or losses on the derivative instrument as well as the
offsetting gains or losses on the hedged item attributable to the hedged risk are recognized in the
same line item associated with the hedged item in current earnings. The Corporation also employs
cash flow hedging strategies to effectively convert certain floating-rate liabilities into
fixed-rate instruments. The effective portion of the gains or losses on the derivative instrument
is reported as a component of other comprehensive income (OCI) and reclassified into earnings in
the same line item associated with the forecasted transaction and in the same period or periods
during which the hedged transaction affects earnings. The remaining gains or loss on the derivative
instrument in excess of the cumulative change in the present value of future cash flows of the
hedged item, if any, are recognized in the current earnings.
As of March 31, 2010, December 31, 2009 and March 31, 2009, the notional values or contractual
amounts and fair value of the Corporations derivatives designated in hedge relationships were as
follows:
Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2010 | December 31, 2009 | March 31, 2009 | March 31, 2010 | December 31, 2009 | March 31, 2009 | ||||||||||||||||||||||||||||||||||||||||||||
Notional/ | Notional/ | Notional/ | Notional/ | Notional/ | Notional/ | ||||||||||||||||||||||||||||||||||||||||||||
Contract | Fair | Contract | Fair | Contract | Fair | Contract | Fair | Contract | Fair | Contract | Fair | ||||||||||||||||||||||||||||||||||||||
Amount | Value (a) | Amount | Value (a) | Amount | Value (a) | Amount | Value (b) | Amount | Value (b) | Amount | Value (b) | ||||||||||||||||||||||||||||||||||||||
Interest rate swaps: |
|||||||||||||||||||||||||||||||||||||||||||||||||
Fair value hedges |
$ | | $ | | $ | 1,452 | $ | | $ | 640 | $ | | $ | 370,947 | $ | 28,762 | $ | 398,895 | $ | 27,769 | $ | 460,159 | $ | 45,709 |
(a) | Included in Other Assets on the Consolidated Balance Sheet | |
(b) | Included in Other Liabilities on the Consolidated Balance Sheet |
Through the Corporations Fixed Rate Advantage Program (FRAP Program) a customer
received a fixed interest rate commercial loan and the Corporation subsequently converted that
fixed rate loan to a variable rate instrument over the term of the loan by entering into an
interest rate swap with a dealer counterparty. The Corporation receives a fixed rate payment from
the customer on the loan and pays the equivalent amount to the dealer counterparty on the swap in
exchange for a variable rate payment based on the one month London Inter-Bank Offered Rate
(LIBOR) index. These interest rate swaps are designated as fair value hedges. Through application
of the short cut method of accounting, there is an assumption that the hedges are effective. The
Corporation discontinued originating interest rate swaps under the FRAP program in February 2008
and subsequently began a new interest rate swap program for commercial loan customers, termed the
Back-to-Back Program.
The Corporation entered into Federal Funds interest rate swaps to lock in a fixed rate to
offset the risk of future fluctuations in the variable interest rate on Federal Funds borrowings.
The Corporation entered into a swap with the counterparty during which time the Corporation paid a
fixed rate and received a floating rate based on the current effective Federal Funds rate. The
Corporation then borrowed Federal Funds in an amount equal to at least the outstanding notional
amount of the swap(s) which resulted in the Corporation being left with a fixed rate instrument.
These instruments were designated as cash flow hedges. The last Federal Funds interest rate swap
matured in the quarter ended March 31, 2009.
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Table of Contents
There were no cash flow hedges outstanding as of March 31, 2010 and there was no activity
associated with cash flow hedges for the quarter ended March 31, 2010. For the quarter ended March
31, 2009, the amount of the hedge effectiveness on cash flow hedges recognized in OCI and
reclassified from OCI into other income as well as the amount of hedge ineffectiveness recognized
in other income is as follows:
Gain Reclassified | ||||||||||
from Accumulated OCI | Gain Recognized in | |||||||||
Amount of Gain / (Loss) | into Income | Income on Derivative | ||||||||
Recognized in OCI | (Effective Portion) | (Ineffective Portion) | ||||||||
$ | 0 | $ | 692 | $ | 328 | |||||
Derivatives Not Designated in Hedge Relationships
As of March 31, 2010, December 31, 2009 and March 31, 2009, the notional values or contractual
amounts and fair value of the Corporations derivatives not designated in hedge relationships were
as follows:
Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2010 | December 31, 2009 | March 31, 2009 | March 31, 2010 | December 31, 2009 | March 31, 2009 | ||||||||||||||||||||||||||||||||||||||||||||
Notional/ | Notional/ | Notional/ | Notional/ | Notional/ | Notional/ | ||||||||||||||||||||||||||||||||||||||||||||
Contract | Fair | Contract | Fair | Contract | Fair | Contract | Fair | Contract | Fair | Contract | Fair | ||||||||||||||||||||||||||||||||||||||
Amount | Value (a) | Amount | Value (a) | Amount | Value (a) | Amount | Value (b) | Amount | Value (b) | Amount | Value (b) | ||||||||||||||||||||||||||||||||||||||
Interest rate swaps |
$ | 694,277 | $ | 33,510 | $ | 639,285 | $ | 26,840 | $ | 543,789 | $ | 42,385 | $ | 694,277 | $ | 33,510 | $ | 686,947 | $ | 30,717 | $ | 594,065 | $ | 48,914 | |||||||||||||||||||||||||
Mortgage loan commitments |
106,894 | 1,239 | 55,023 | 396 | 82,519 | 2,408 | | | | | | | |||||||||||||||||||||||||||||||||||||
Forward sales contracts |
68,290 | 125 | 67,085 | 884 | 99,565 | (1,139 | ) | | | | | | | ||||||||||||||||||||||||||||||||||||
TBA Securities |
| | | | 211,237 | (145 | ) | | | | | | | ||||||||||||||||||||||||||||||||||||
Credit contracts |
| | | | | | 61,876 | | 62,458 | | 62,189 | | |||||||||||||||||||||||||||||||||||||
Other |
| | | | | | 18,912 | | 18,171 | | 11,551 | | |||||||||||||||||||||||||||||||||||||
Total |
$ | 869,461 | $ | 34,874 | $ | 761,393 | $ | 28,120 | $ | 937,110 | $ | 43,509 | $ | 775,065 | $ | 33,510 | $ | 767,576 | $ | 30,717 | $ | 667,805 | $ | 48,914 | |||||||||||||||||||||||||
(a) | Included in Other Assets on the Consolidated Balance Sheet | |
(b) | Included in Other Liabilities on the Consolidated Balance Sheet |
Interest Rate Swaps. In 2008, the Corporation implemented the Back-to-Back Program, which
is an interest rate swap program for commercial loan customers. The Back-to-Back Program provides
the customer with a fixed rate loan while creating a variable rate asset for the Corporation
through the customer entering into an interest rate swap with the Corporation on terms that match
the loan. The Corporation offsets its risk exposure by entering into an offsetting interest rate
swap with a dealer counterparty. These swaps do not qualify as designated hedges; therefore, each
swap is accounted for as a standalone derivative.
The Corporation had other interest rate swaps associated with fixed rate commercial loans with
a notional value of $47.7 million and $50.3 million as of December 31, 2009 and March 31, 2009,
respectively. These swaps were accounted for as standalone derivatives. This portfolio of interest
rate swaps was terminated in January 2010.
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Mortgage banking. In the normal course of business, the Corporation sells originated mortgage
loans into the secondary mortgage loan markets. During the period of loan origination and prior to
the sale of the loans in the secondary market, the Corporation has exposure to movements in
interest rates associated with mortgage loans that are in the mortgage pipeline and the mortgage
warehouse. A pipeline loan is one in which the Corporation has entered into a written mortgage
loan commitment with a potential borrower that will be held for resale. Once a mortgage loan is
closed and funded, it is included within the mortgage warehouse of loans awaiting sale and delivery
into the secondary market.
Written loan commitments that relate to the origination of mortgage loans that will be held
for resale are considered free-standing derivatives and do not qualify for hedge accounting.
Written loan commitments generally have a term of up to 60 days before the closing of the loan. The
loan commitment does not bind the potential borrower to entering into the loan, nor does it
guarantee that the Corporation will approve the potential borrower for the loan. Therefore, when
determining fair value, the Corporation makes estimates of expected fallout (loan commitments not
expected to close), using models, which consider cumulative historical fallout rates and other
factors. Fallout can occur for a variety of reasons including falling rate environments when a
borrower will abandon an interest rate lock loan commitment at one lender and enter into a new
lower interest rate lock loan commitment at another, when a borrower is
not approved as an acceptable credit by the lender, or for a variety of other non-economic reasons.
In addition, expected net future cash flows related to loan servicing activities are included in
the fair value measurement of a written loan commitment.
Written loan commitments in which the borrower has locked in an interest rate results in
market risk to the Corporation to the extent market interest rates change from the rate quoted to
the borrower. The Corporation economically hedges the risk of changing interest rates associated
with its interest rate lock commitments by entering into forward sales contracts.
The Corporations warehouse (mortgage loans held for sale) is subject to changes in fair
value, due to fluctuations in interest rates from the loans closing date through the date of sale
of the loan into the secondary market. Typically, the fair value of the warehouse declines in value
when interest rates increase and rises in value when interest rates decrease. To mitigate this
risk, the Corporation enters into forward sales contracts on a significant portion of the warehouse
to provide an economic hedge against those changes in fair value.
Effective August 1, 2008, the Corporation elected to fair value, on a prospective basis,
newly originated conforming fixed-rate and adjustable-rate first mortgage warehouse loans. Prior to
this election, all warehouse loans were carried at the lower of cost or market and a hedging
program was utilized on its mortgage loans held for sale to gain protection for the changes in fair
value of the mortgage loans held for sale and the forward sales contracts. As such, both the
mortgage loans held for sale and the forward sales contracts were recorded at fair value with
ineffective changes in value recorded in current earnings as Loan sales and servicing income. Upon
the Corporations election to prospectively account for substantially all of its mortgage loan
warehouse products at fair value it discontinued the application of designated hedging
relationships for new originations.
The Corporation periodically enters into derivative contracts by purchasing TBA
Securities which are utilized as economic hedges of its MSRs to minimize the effects of loss of
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value of MSRs associated with increase prepayment activity that generally results from declining
interest rates. In a rising interest rate environment, the value of the MSRs generally will
increase while the value of the hedge instruments will decline. The hedges are economic hedges
only, and are terminated and reestablished as needed to respond to changes in market conditions.
There were no outstanding TBA Securities contracts as of March 31, 2010 or December 31, 2009. The
Corporation held $211.2 million in outstanding TBA contracts as of March 31, 2009.
Credit contracts. Prior to implementation of the Back-to-Back Program, certain of the
Corporations commercial loan customers entered into interest rate swaps with unaffiliated dealer
counterparties. The Corporation entered into swap participations with these dealer counterparties
whereby the Corporation guaranteed payment in the event that the counterparty experienced a loss on
the interest rate swap due to a failure to pay by the Corporations commercial loan customer. The
Corporation simultaneously entered into reimbursement agreements with the commercial loan customers
obligating the customers to reimburse the Corporation for any payments it makes under the swap
participations. The Corporation monitors its payment risk on its swap participations by monitoring
the creditworthiness of its commercial loan customers, which is based on the normal credit review
process the Corporation would have performed had it entered into these derivative instruments
directly with the commercial loan customers. At March 31, 2010, the remaining terms on these swap
participation agreements generally ranged from one to nine years. The Corporations maximum
estimated exposure to written swap participations, as measured by projecting a maximum value of the
guaranteed derivative instruments based on interest rate curve simulations and assuming 100%
default by all obligors on the maximum values, was approximately $4.1 million as of March 31, 2010.
The fair values of the written swap participations were not material at March 31, 2010, December
31, 2009 and March 31, 2009.
Gains and losses recognized in income on non-designated hedging instruments for the quarters
ended March 31, 2010 and 2009 are as follows:
Amount of Gain / (Loss) | ||||||||||
Recognized in Income on | ||||||||||
Derivative | ||||||||||
Derivatives not | Location of Gain / (Loss) | |||||||||
designated as hedging | Recognized in Income on | Quarter ended, | Quarter ended, | |||||||
instruments | Derivative | March 31, 2010 | March 31, 2009 | |||||||
IRLCs |
Other income | $ | 843 | $ | 1,817 | |||||
Forward sales contracts |
Other income | (758 | ) | (622 | ) | |||||
TBA Securities |
Other income | | (2,106 | ) | ||||||
Credit contracts |
Other income | | | |||||||
Other |
Other expenses | | | |||||||
Total |
$ | 85 | $ | (911 | ) | |||||
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Counterparty Credit Risk
Like other financial instruments, derivatives contain an element of credit risk the
possibility that the Corporation will incur a loss because a counterparty, which may be a bank, a
broker-dealer or a customer, fails to meet its contractual obligations. This risk is measured as
the expected positive replacement value of contracts. All derivative contracts may be executed only
with exchanges or counterparties approved by the Corporations Asset and Liability Committee, and
only within the Corporations Board of Directors Credit Committee approved credit exposure limits.
Where contracts have been created for customers, the Corporation enters into derivatives with
dealers to offset its risk exposure. To manage the credit exposure to exchanges and counterparties,
the Corporation generally enters into bilateral collateral agreements using standard forms
published by the International Swaps and Derivatives Association. These agreements are to include
thresholds of credit exposure or the maximum amount of unsecured credit exposure which the
Corporation is willing to assume. Beyond the threshold levels, collateral in the form of securities
made available from the investment portfolio or other forms of collateral acceptable under the
bilateral collateral agreements are provided. The threshold levels for each counterparty are
established by the Corporations Asset and Liability Committee. The Corporation generally posts
collateral in the form of highly rated Government Agency issued bonds or MBSs. Collateral posted
against derivative liabilities was $73.7 million, $70.0 million and $81.9 million as of March 31,
2010, December 31, 2009 and March 31, 2009, respectively.
9. Benefit Plans
The Corporation sponsors several qualified and nonqualified pension and other postretirement
plans for certain of its employees. The net periodic pension cost is based on estimated values
provided by an outside actuary. The components of net periodic benefit cost are as follows:
Pension Benefits | ||||||||
Three months ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Components of Net Periodic Pension Cost |
||||||||
Service Cost |
$ | 1,480 | $ | 1,322 | ||||
Interest Cost |
2,800 | 2,751 | ||||||
Expected return on assets |
(3,015 | ) | (2,805 | ) | ||||
Amortization of unrecognized prior service costs |
98 | 85 | ||||||
Cumulative net loss |
1,427 | 758 | ||||||
Net periodic pension cost |
$ | 2,790 | $ | 2,111 | ||||
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Postretirement Benefits | ||||||||
Three months ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Components of Net Periodic Postretirement Cost |
||||||||
Service Cost |
$ | 15 | $ | 15 | ||||
Interest Cost |
240 | 299 | ||||||
Cumulative net loss |
4 | 9 | ||||||
Net Postretirement Benefit Cost |
259 | 323 | ||||||
Curtailment Gain |
| (9,543 | ) | |||||
Net periodic postretirement (benefit)/cost |
$ | 259 | $ | (9,220 | ) | |||
In January 2009, FirstMerit announced to employees that the Corporations subsidy for retiree
medical for current eligible active employees will be discontinued effective March 1, 2009.
Eligible employees who retired on or prior to March 1, 2009, were offered subsidized retiree
medical coverage until age 65. Employees who retire after March 1, 2009 will not receive the
Corporations subsidy toward retiree medical coverage. The elimination of Corporation subsidized
retiree medical coverage resulted in an accounting curtailment.
The Corporation maintains a savings plan under Section 401(k) of the Internal Revenue Code,
covering substantially all full-time and part-time employees after three months of continuous
employment. The savings plan was approved for non-vested employees in the defined benefit pension
plan and new hires as of January 1, 2007. Effective January 1, 2009, the Corporation has
suspended its matching contribution to the savings plan.
10. Fair Value Measurement
As defined in ASC 820, Fair Value Measurements and Disclosures, fair value is defined as the
price to sell an asset or transfer a liability in an orderly transaction between market
participants in the principal market or most advantageous market for the asset or liability. Fair
value is based on quoted market prices, when available, for identical or similar assets or
liabilities. In the absence of quoted market prices, Management determines the fair value of the
Corporations assets and liabilities using valuation models or third-party pricing services. Both
of these approaches rely on market-based parameters when available, such as interest rate yield
curves, option volatilities and credit spreads, or unobservable inputs. Unobservable inputs may be
based on Managements judgment, assumptions and estimates related to credit quality, liquidity,
interest rates and other relevant inputs.
GAAP establishes a three-level valuation hierarchy for determining fair value that is based on
the transparency of the inputs used in the valuation process. The inputs used in determining fair
value in each of the three levels of the hierarchy, highest ranking to lowest, are as follows:
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| Level 1 Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities. | ||
| Level 2 Valuations of assets and liabilities traded in less active dealer or broker markets. Valuations include quoted prices for similar assets and liabilities traded in the same market; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. | ||
| Level 3 Valuations based on unobservable inputs significant to the overall fair value measurement. |
The level in the fair value hierarchy ascribed to a fair value measurement in its entirety is
based on the lowest level input that is significant to the overall fair value measurement.
Financial Instruments Measured at Fair Value
The following table presents the balances of assets and liabilities measured at fair value on
a recurring basis at March 31, 2010:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Available-for-sale securities |
$ | 3,404 | $ | 3,054,523 | $ | 43,813 | $ | 3,101,740 | ||||||||
Residential loans held for sale |
| 16,009 | 16,009 | |||||||||||||
Derivative assets |
| 34,874 | 34,874 | |||||||||||||
Total assets at fair value on a recurring basis |
$ | 3,404 | $ | 3,105,406 | $ | 43,813 | $ | 3,152,623 | ||||||||
Derivative liabilities |
| 62,272 | | 62,272 | ||||||||||||
Total liabilities at fair value on a recurring
basis |
$ | | $ | 62,272 | $ | | $ | 62,272 | ||||||||
Note: | There were no transfers between Levels 1 and 2 of the fair value hiearchy during the quarter ended March 31, 2010. |
Available-for-sale securities. When quoted prices are available in an active market,
securities are valued using the quoted price and are classified as Level 1. The quoted prices are
not adjusted. Level 1 instruments include money market mutual funds.
For certain available-for sale securities, the Corporation obtains fair value measurements
from an independent third party pricing service or independent brokers. The detail by level is
shown in the table below.
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Level 2 | Level 3 | |||||||||||||||
Independent | Independent | |||||||||||||||
# Issues | Pricing Service | # Issues | Broker Quotes | |||||||||||||
U.S. government agency debentures |
18 | $ | 279,640 | | $ | | ||||||||||
U.S States and political subdivisions |
938 | 292,986 | | | ||||||||||||
Residential mortgage-backed securities: |
||||||||||||||||
U.S. government agencies |
186 | 1,709,579 | | | ||||||||||||
Residential collateralized mortgage-backed
securities: |
||||||||||||||||
U.S. government agencies |
73 | 772,317 | 1 | 1 | ||||||||||||
Non-agency |
1 | 1 | 1 | 18 | ||||||||||||
Corporate debt securities |
| | 8 | 43,794 | ||||||||||||
1,216 | $ | 3,054,523 | 10 | $ | 43,813 | |||||||||||
Available-for-sale securities classified as Level 2 are valued using the prices obtained
from an independent pricing service. The prices are not adjusted. The independent pricing service
uses industry standard models to price U.S. Government agencies and MBSs that consider various
assumptions, including time value, yield curves, volatility factors, prepayment speeds, default
rates, loss severity, current market and contractual prices for the underlying financial
instruments, as well as other relevant economic measures. Securities of obligations of state and
political subdivisions are valued using a type of matrix, or grid, pricing in which securities are
benchmarked against the treasury rate based on credit rating. For collateralized mortgage
securities, depending on the characteristics of a given tranche, a volatility driven
multidimensional static model or Option-Adjusted Spread model is generally used. Substantially all
assumptions used by the independent pricing service are observable in the marketplace, can be
derived from observable data, or are supported by observable levels at which transactions are
executed in the marketplace. On a quarterly basis, the Corporation obtains from the independent
pricing service the inputs used to value a sample of securities held in portfolio. The Corporation
reviews these inputs to ensure the appropriate classification, within the fair value hierarchy, is
ascribed to a fair value measurement in its entirety. In addition, all fair value measurement are
reviewed to determine the reasonableness of the measurement relative to changes in observable
market data and market information received from outside market participants and analysts.
Available-for-sale securities classified as level 3 securities are primarily single issuer
trust preferred securities. These trust preferred securities, which represent less than 2% of the
portfolio at fair value, are valued based on the average of two non-binding broker quotes. Since
these securities are thinly traded, the Corporation has determined that using an average of two
non-binding broker quotes is a more conservative valuation methodology. The non-binding nature of
the pricing results in a classification as Level 3.
Loans held for sale. Effective August 1, 2008, the Corporation elected to account for
residential mortgage loans originated subsequent to such date at fair value. Previously, these
residential loans had been recorded at the lower of cost or market value. These loans are regularly
traded in active markets through programs offered by the Federal Home Loan Mortgage Corporation
(FHLMC) and the Federal National Mortgage Association (FNMA), and observable pricing
information is available from market participants. The prices are adjusted
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as necessary to include
any embedded servicing value in the loans and to take into consideration the specific
characteristics of certain loans. These adjustments represent unobservable inputs to the valuation
but are not considered significant to the fair value of the loans. Accordingly, residential real
estate loans held for sale are classified as Level 2.
Derivatives. The Corporations derivatives include interest rate swaps and written loan
commitments and forward sales contracts related to residential mortgage loan origination activity.
Valuations for interest rate swaps are derived from third party models whose significant inputs are
readily observable market parameters, primarily yield curves, with appropriate adjustments for
liquidity and credit risk. These fair value measurements are classified as Level 2. The fair values
of written loan commitments and forward sales contracts on the associated loans are based on quoted
prices for similar loans in the secondary market, consistent with the valuation of residential
mortgage loans held for sale. Expected net future cash flows related to
loan servicing activities are included in the fair value measurement of written loan
commitments. A written loan commitment does not bind the potential borrower to entering into the
loan, nor does it guarantee that the Corporation will approve the potential borrower for the loan.
Therefore, when determining fair value, the Corporation makes estimates of expected fallout
(locked pipeline loans not expected to close), using models, which consider cumulative historical
fallout rates and other factors. Fallout can occur for a variety of reasons including falling rate
environments when a borrower will abandon a fixed rate loan commitment at one lender and enter into
a new lower fixed rate loan commitment at another, when a borrower is not approved as an acceptable
credit by the lender, or for a variety of other non-economic reasons. Fallout is not a significant
input to the fair value of the written loan commitments in their entirety. These measurements are
classified as Level 2.
Derivative assets are typically secured through securities with financial counterparties or
cross collateralization with a borrowing customer. Derivative liabilities are typically secured
through the Corporation pledging securities to financial counterparties or, in the case of a
borrowing customer, by the right of setoff. The Corporation considers factors such as the
likelihood of default by itself and its counterparties, right of setoff, and remaining maturities
in determining the appropriate fair value adjustments. All derivative counterparties approved by
the Corporations Asset and Liability Committee are regularly reviewed, and appropriate business
action is taken to adjust the exposure to certain counterparties, as necessary. Counterparty
exposure is evaluated by netting positions that are subject to master netting agreements, as well
as considering the amount of marketable collateral securing the position. This approach used to
estimate impacted exposures to counterparties is also used by the Corporation to estimate its own
credit risk on derivative liability positions. To date, no material losses due to counterpartys
inability to pay any uncollateralized position have been incurred. There was no significant change
in value of derivative assets and liabilities attributed to credit risk for the quarter ended
March 31, 2010.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for
the quarter ended March 31, 2010 are summarized follows:
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Total changes | ||||||||||||||||||||||||
Total | Purchases, sales | Fair value | in fair values | |||||||||||||||||||||
Fair Value | unrealized | issuances and | quarter ended | included in current | ||||||||||||||||||||
January 1, 2010 | gains/(losses) (a) | settlements, net | Transfers | March 31, 2010 | period earnings | |||||||||||||||||||
Other debt securities |
$ | 42,447 | $ | 1,366 | $ | | $ | | $ | 43,813 | $ | | ||||||||||||
(a) | Reported in other comprehensive income (loss) |
Certain financial assets and liabilities are measured at fair value on a nonrecurring
basis. Generally, nonrecurring valuations are the result of applying accounting standards that
require assets or liabilities to be assessed for impairment, or recorded at the lower-of-cost or
fair value. The following table presents the balances of assets and liabilities measured at fair
value on a nonrecurring basis at March 31, 2010:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Mortgage servicing rights |
$ | | $ | | $ | 21,201 | $ | 21,201 | ||||||||
Impaired and nonaccrual loans |
| | 109,645 | 109,645 | ||||||||||||
Other property (1) |
| | 28,850 | 28,850 | ||||||||||||
Total assets at fair value on a nonrecurring basis |
$ | | $ | | $ | 159,696 | $ | 159,696 | ||||||||
(1) | Represents the fair value, and related change in the value, of foreclosed real estate and other collateral owned by the Corporation during the period. |
Mortgage Servicing Rights. The Corporation carries its mortgage servicing rights at lower
of cost or fair value, and therefore, can be subject to fair value measurements on a nonrecurring
basis. Since sales of mortgage servicing rights tend to occur in private transactions and the
precise terms and conditions of the sales are typically not readily available, there is a limited
market to refer to in determining the fair value of mortgage servicing rights. As such, like other
participants in the mortgage banking business, the Corporation relies primarily on a discounted
cash flow model, incorporating assumptions about loan prepayment rates, discount rates, servicing
costs and other economic factors, to estimate the fair value of its mortgage servicing rights.
Since the valuation model uses significant unobservable inputs, the Corporation classifies mortgage
servicing rights as Level 3.
The Corporation utilizes a third party vendor to perform the modeling to estimate the fair
value of its mortgage servicing rights. The Corporation reviews the estimated fair values and
assumptions used by the third party in the model on a quarterly basis. The Corporation also
compares the estimates of fair value and assumptions to recent market activity and against its own
experience.
Prepayment Speeds: Generally, when market interest rates decline and other factors
favorable to prepayments occur there is a corresponding increase in prepayments as customers
refinance existing mortgages under more favorable interest rate terms. When a mortgage loan is
prepaid the anticipated cash flows associated with servicing that loan are terminated, resulting in
a reduction of the fair value of the capitalized mortgage servicing rights. To the extent that
actual
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borrower prepayments do not react as anticipated by the prepayment model (i.e., the
historical data observed in the model does not correspond to actual market activity), it is
possible that the prepayment model could fail to accurately predict mortgage prepayments and could
result in significant earnings volatility. To estimate prepayment speeds, the Corporation utilizes
a third-party prepayment model, which is based upon statistically derived data linked to certain
key principal indicators involving historical borrower prepayment activity associated with mortgage
loans in the secondary market, current market interest rates and other factors, including the
Corporations own historical prepayment experience. For purposes of model valuation, estimates are
made for each product type within the mortgage servicing rights portfolio on a monthly basis.
Discount Rate: Represents the rate at which expected cash flows are discounted to
arrive at the net present value of servicing income. Discount rates will change with market
conditions (i.e., supply vs. demand) and be reflective of the yields expected to be earned by
market participants investing in mortgage servicing rights.
Cost to Service: Expected costs to service are estimated based upon the incremental
costs that a market participant would use in evaluating the potential acquisition of mortgage
servicing rights.
Float Income: Estimated float income is driven by expected float balances (principal,
interest and escrow payments that are held pending remittance to the investor or other third party)
and current market interest rates, including the six month average of the three-month
LIBOR index, which are updated on a monthly basis for purposes of estimating the fair value of
mortgage servicing rights.
Impaired and nonaccrual loans. Fair value adjustments for these items typically occur when
there is evidence of impairment. Loans are designated as impaired when, in the judgment of
Management based on current information and events, it is probable that all amounts due according
to the contractual terms of the loan agreement will not be collected. The measurement of loss
associated with impaired loans can be based on either the observable market price of the loan or
the fair value of the collateral. The Corporation measures fair value based on the value of the
collateral securing the loans. Collateral may be in the form of real estate or personal property
including equipment and inventory. The vast majority of the collateral is real estate. The value of
the collateral is determined based on internal estimates as well as third party appraisals or price
opinions. These measurements were classified as Level 3.
Other Property. Other property includes foreclosed assets and properties securing residential
and commercial loans. Assets acquired through, or in lieu of, loan foreclosures are recorded
initially at the lower of the loan balance or fair value, less estimated selling costs, upon the
date of foreclosure. Fair value is based upon appraisals or third-party price opinions and,
accordingly, considered a Level 3 classification. Subsequent to foreclosure, valuations are updated
periodically, and the assets may be marked down further, reflecting a new carrying amount.
Financial Instruments Recorded at Fair Value
The Corporation may elect to report most financial instruments and certain other items at fair
value on an instrument-by-instrument basis with changes in fair value reported in net
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income. After
the initial adoption, the election is made at the acquisition of an eligible financial asset,
financial liability or firm commitment or when certain specified reconsideration events occur. The
fair value election may not be revoked once an election is made.
Effective August 1, 2008, the Corporation elected to fair value newly originated conforming
fixed rate and adjustable-rate first mortgage loans held for sale. Previously, these loans had been
recorded at the lower of cost or market value. The election of the fair value option aligns the
accounting for these loans with the related hedges. It also eliminates the requirements of hedge
accounting under GAAP. The fair value option was not elected for loans held for investment.
The following table reflects the differences, as of March 31, 2010, between the fair value
carrying amount of residential mortgages held for sale and the aggregate unpaid principal amount
the Corporation is contractually entitled to receive at maturity. None of these loans were 90 days
or more past due, nor were any on nonaccrual status.
Fair Value | ||||||||||||
Carrying Amount | ||||||||||||
Fair Value | Aggregate Unpaid | Less Aggregate | ||||||||||
Carrying Amount | Principal | Unpaid Principal | ||||||||||
Loans held for sale reported at fair value |
$ | 16,009 | $ | 15,669 | $ | 340 | ||||||
Interest income on loans held for sale is accrued on the principal outstanding primarily
using the simple-interest method.
Loans held for sale are measured at fair value with changes in fair value recognized in
current earnings. The change in fair value for residential loans held for sale measured at fair
value included in earnings for the quarter ended March 31, 2010 was not significant.
Disclosures about Fair Value of Financial Instruments
The carrying amount and fair value of the Corporations financial instruments are shown below.
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March 31, 2010 | December 31, 2009 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Financial assets: |
||||||||||||||||
Cash and due from banks |
$ | 721,938 | $ | 721,938 | $ | 161,033 | $ | 161,033 | ||||||||
Investment securities |
3,301,039 | 3,301,039 | 2,744,838 | 2,744,838 | ||||||||||||
Loan held for sale |
16,009 | 16,009 | 16,828 | 16,828 | ||||||||||||
Net noncovered loans |
7,072,716 | 6,673,377 | 6,808,397 | 6,362,674 | ||||||||||||
Covered loans and loss share receivable |
277,315 | 277,315 | | | ||||||||||||
Accrued interest receivable |
41,763 | 41,763 | 39,274 | 39,274 | ||||||||||||
Mortgage servicing rights |
20,652 | 21,201 | 20,784 | 22,241 | ||||||||||||
Derivative assets |
34,874 | 34,874 | 28,120 | 28,120 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Deposits |
$ | 9,370,009 | $ | 9,378,490 | $ | 7,515,796 | $ | 7,519,604 | ||||||||
Federal
funds purchased and securities sold under agreements to repurchase |
896,330 | 899,729 | 996,345 | 998,645 | ||||||||||||
Wholesale borrowings |
677,715 | 685,442 | 740,105 | 745,213 | ||||||||||||
Accrued interest payable |
15,303 | 15,303 | 11,336 | 11,336 | ||||||||||||
Derivative liabilities |
62,272 | 62,272 | 58,486 | 58,486 |
The following methods and assumptions were used to estimate the fair values of each class
of financial instrument presented:
Cash and due from banks The carrying amount is considered a reasonable estimate of fair
value.
Investment Securities See Financial Instruments Measured at Fair Value above.
Net noncovered loans The loan portfolio was segmented based on loan type and repricing
characteristics. Carrying values are used to estimate fair values of variable rate loans. A
discounted cash flow method was used to estimate the fair value of fixed-rate loans. Discounting
was based on the contractual cash flows, and discount rates are based on the year-end yield curve
plus a spread that reflects current pricing on loans with similar characteristics. If applicable,
prepayment assumptions are factored into the fair value determination based on historical
experience and current economic conditions.
Loans held for sale The majority of loans held for sale are residential mortgage loans
which are recorded at fair value. All other loans held for sale are recorded at the lower of cost
or market, less costs to sell. See Financial Instruments Measured at Fair Value above.
Covered loans Fair values for loans were based on a discounted cash flow methodology that
considered factors including the type of loan and related collateral, classification status, fixed
or variable interest rate, term of loan and whether or not the loan was amortizing, and current
discount rates. Loans were grouped together according to similar characteristics and were treated
in the aggregate when applying various valuation techniques. The discount rates used for loans are
based on current market rates for new originations of comparable loans and include adjustments for
liquidity concerns. The discount rate does not include a factor for credit losses as that has been
included in the estimated cash flows.
Loss share receivable This loss sharing asset is measured separately from the related
covered assets as it is not contractually embedded in the covered assets and is not transferable
38
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with the covered assets should FirstMerit Bank choose to dispose of them. Fair value was estimated
using projected cash flows related to the loss sharing agreements based on the expected
reimbursements for losses and the applicable loss sharing percentages. These cash flows were
discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement
from the FDIC.
Accrued interest receivable The carrying amount is considered a reasonable estimate of fair
value.
Mortgage servicing rights See Financial Instruments Measured at Fair Value above.
Deposits The estimated fair value of deposits with no stated maturity, which includes
demand deposits, money market accounts and other savings accounts, are established at carrying
value because of the customers ability to withdraw funds immediately. A discounted cash flow
method is used to estimate the fair value of fixed rate time deposits. Discounting was based on the
contractual cash flows and the current rates at which similar deposits with similar remaining
maturities would be issued.
Federal funds purchased and securities sold under agreements to repurchase and wholesale
borrowings The carrying amount of variable rate borrowings including federal funds purchased is
considered to be their fair value. Quoted market prices or the discounted cash flow method was used
to estimate the fair value of the Corporations long-term debt. Discounting was based on the
contractual cash flows and the current rate at which debt with similar terms could be issued.
Accrued interest payable The carrying amount is considered a reasonable estimate of fair
value.
Derivative assets and liabilities See Financial Instruments Measured at Fair Value above.
11. Mortgage Servicing Rights and Mortgage Servicing Activity
The Corporation serviced for third parties approximately $2.0 billion of residential mortgage
loans at March 31, 2010 and December 31, 2009. Loan servicing fees, not including valuation changes
included in loan sales and servicing income, were $1.3 million and $1.2 million in each of the
three months ended March 31, 2010 and 2009, respectively.
Servicing rights are presented within other assets on the balance sheet. The retained
servicing rights are initially valued at fair value. Since mortgage servicing rights do not trade
in an active market with readily observable prices, the Corporation relies primarily on a
discounted cash flow analysis model to estimate the fair value of its mortgage servicing rights.
Additional information can be found in Note 10 (Fair Value Measurement). Mortgage servicing rights
are subsequently measured using the amortization method. Accordingly, the mortgage servicing rights
are amortized over the period of, and in proportion to, the estimated net servicing income and is
recorded in loan sales and servicing income.
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Table of Contents
Changes in the carrying amount of mortgage servicing rights are as follows:
Three months ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Balance at beginning of period |
$ | 20,784 | $ | 18,778 | ||||
Addition of mortgage servicing rights |
717 | 1,437 | ||||||
Amortization |
(849 | ) | (790 | ) | ||||
Changes in allowance for impairment |
| (364 | ) | |||||
Balance at end of period |
$ | 20,652 | $ | 19,061 | ||||
Fair value at end of period |
$ | 21,201 | $ | 19,078 | ||||
On a quarterly basis, the Corporation assesses its capitalized servicing rights for impairment
based on their current fair value. For purposes of the impairment, the servicing rights are
disaggregated based on loan type and interest rate which are the predominant risk characteristics
of the underlying loans. A valuation allowance is established through a charge to earnings to the
extent the amortized cost of the mortgage servicing rights exceeds the estimated fair value by
stratification. If it is later determined that all or a portion of the temporary impairment no
longer exists for the stratification, the valuation is reduced through a recovery to earnings. No
valuation allowances were required as of March 31, 2010 and December 31, 2009. No permanent
impairment losses were written off against the allowance during the quarters ended March 31, 2010
and March 31, 2009.
Key economic assumptions and the sensitivity of the current fair value of the mortgage
servicing rights related to immediate 10% and 25% adverse changes in those assumptions at March 31,
2010 are presented in the following table below. These sensitivities are hypothetical and should be
used with caution. As the figures indicate, changes in the fair value based on 10% variation in the
prepayment speed assumption generally cannot be extrapolated because the relationship of the change
in the prepayment speed assumption to the change in fair value may not be linear. Also, in the
below table, the effect of a variation in the discount rate assumption on the fair value of the
mortgage servicing rights is calculated independently without changing any other assumption. In
reality, changes in one factor may result in changes in another (for example,
changes in prepayment speed estimates could result in changes in the discount rates), which
might magnify or counteract the sensitivities.
Prepayment speed assumption (annual CPR) |
9.75 | % | ||
Decrease in fair value from 10% adverse change |
$ | 776 | ||
Decrease in fair value from 25% adverse change |
1,864 | |||
Discount rate assumption |
9.71 | % | ||
Decrease in fair value from 100 basis point adverse change |
$ | 731 | ||
Decrease in fair value from 200 basis point adverse change |
1,409 | |||
Expected weighted-average life (in months) |
106.1 |
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12. Contingencies and Guarantees
Litigation
The nature of the Corporations business results in a certain amount of litigation.
Accordingly, the Corporation and its subsidiaries are subject to various pending and threatened
lawsuits in which claims for monetary damages are asserted. Management, after consultation with
legal counsel, is of the opinion that the ultimate liability of such pending matters will not have
a material effect on the Corporations financial condition and results of operations.
Commitments to Extend Credit
Commitments to extend credit are agreements to lend to a customer provided there is no
violation of any condition established in the contract. Loan commitments to originate residential
mortgage loans held for sale and forward commitments to sell residential mortgage loans are
considered derivative instruments, and the fair value of these commitments is recorded on the
consolidated balance. Additional information is provided in Note 8 (Derivatives and Hedging
Activities). Commitments generally are extended at the then prevailing interest rates, have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon the total commitment amounts do not
necessarily represent future cash requirements. Loan commitments involve credit risk not reflected
on the balance sheet. The Corporation mitigates exposure to credit risk with internal controls
that guide how applications for credit are reviewed and approved, how credit limits are established
and, when necessary, how demands for collateral are made. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and income-producing commercial
properties. Management evaluates the creditworthiness of each prospective borrower on a
case-by-case basis and, when appropriate, adjusts the allowance for probable credit losses inherent
in all commitments. The allowance for unfunded lending commitments at March 31, 2010 was $6.3
million. Additional information pertaining to this allowance is included under the heading
Allowance for Loan Losses and Reserve for Unfunded Lending Commitments within Managements
Discussion and Analysis of Financial Condition and Results of Operation of this report.
The following table shows the remaining contractual amount of each class of commitments to
extend credit as of March 31, 2010. This amount represents the Corporations maximum exposure to
loss if the customer were to draw upon the full amount of the commitment and subsequently default
on payment for the total amount of the then outstanding loan.
March 31, 2010 | ||||
Loan Commitments |
||||
Commercial |
$ | 1,435,466 | ||
Consumer |
1,652,345 | |||
Total loan commitments |
$ | 3,087,811 | ||
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Guarantees
The Corporation is a guarantor in certain agreements with third parties. The following table
shows the types of guarantees the Corporation had outstanding as of March 31, 2010.
March 31, 2010 | ||||
Financial guarantees |
||||
Standby letters of credit |
$ | 144,963 | ||
Loans sold with recourse |
55,439 | |||
Total loan commitments |
$ | 200,402 | ||
Standby letters of credit obligate the Corporation to pay a specified third party when a
customer fails to repay an outstanding loan or debt instrument, or fails to perform some
contractual nonfinancial obligation. The credit risk involved in issuing letters of credit is
essentially the same as involved in extending loan facilities to customers. Collateral held
varies, but may include marketable securities, equipment and real estate. Any amounts drawn under
standby letters of credit are treated as loans; they bear interest and pose the same credit risk to
the Corporation as a loan. Except for short-term guarantees of $88.4 million at March 31, 2010,
the remaining guarantees extend in varying amounts through 2014.
In recourse arrangements, the Corporation accepts 100% recourse. By accepting 100% recourse,
the Corporation is assuming the entire risk of loss due to borrower default. The Corporation uses
the same credit policies originating loans which will be sold with recourse as it does for any
other type of loan. The Corporations exposure to credit loss, if the borrower completely failed to
perform and if the collateral or other forms of credit enhancement all prove to be of no value, is
represented by the notional amount less any allowance for possible loan losses. An allowance of
$3.0 million was established as of March 31, 2010.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AVERAGE CONSOLIDATED BALANCE SHEETS (Unaudited)
Fully Tax-equivalent Interest Rates and Interest Differential
Fully Tax-equivalent Interest Rates and Interest Differential
FIRSTMERIT CORPORATION AND | ||||||||||||||||||||||||||||||||||||
SUBSIDIARIES | Three months ended | Year ended | Three months ended | |||||||||||||||||||||||||||||||||
(Dollars in thousands) | March 31, 2010 | December 31, 2009 | March 31, 2009 | |||||||||||||||||||||||||||||||||
Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||||||||||||
ASSETS |
||||||||||||||||||||||||||||||||||||
Cash and due from banks |
$ | 521,666 | $ | 183,215 | $ | 209,922 | ||||||||||||||||||||||||||||||
Investment securities and federal funds
sold: |
||||||||||||||||||||||||||||||||||||
U.S.
Treasury securities and U.S. Government agency obligations (taxable) |
2,377,729 | 22,909 | 3.91 | % | 2,222,771 | 97,871 | 4.40 | % | 2,251,028 | 25,954 | 4.68 | % | ||||||||||||||||||||||||
Obligations of states and political subdivisions (tax exempt) |
344,899 | 5,139 | 6.04 | % | 321,919 | 19,718 | 6.13 | % | 320,943 | 4,914 | 6.21 | % | ||||||||||||||||||||||||
Other securities and federal funds sold |
194,991 | 1,986 | 4.13 | % | 204,272 | 8,394 | 4.11 | % | 212,995 | 2,341 | 4.46 | % | ||||||||||||||||||||||||
Total investment securities and
federal
funds sold |
2,917,619 | 30,034 | 4.17 | % | 2,748,962 | 125,983 | 4.58 | % | 2,784,966 | 33,209 | 4.84 | % | ||||||||||||||||||||||||
Loans held for sale |
14,538 | 184 | 5.13 | % | 19,289 | 1,032 | 5.35 | % | 23,248 | 322 | 5.62 | % | ||||||||||||||||||||||||
Noncovered loans |
7,022,381 | 81,829 | 4.73 | % | 7,156,983 | 339,381 | 4.74 | % | 7,381,019 | 87,508 | 4.81 | % | ||||||||||||||||||||||||
Covered loans and loss share receivable |
126,333 | 1,761 | 5.65 | % | | | | | | | ||||||||||||||||||||||||||
Total earning assets |
10,080,871 | 113,808 | 4.58 | % | 9,925,234 | 466,396 | 4.70 | % | 10,189,233 | 121,039 | 4.82 | % | ||||||||||||||||||||||||
Allowance for loan losses |
(115,031 | ) | (108,017 | ) | (102,533 | ) | ||||||||||||||||||||||||||||||
Other assets |
869,604 | 793,062 | 818,420 | |||||||||||||||||||||||||||||||||
Total assets |
$ | 11,357,110 | $ | 10,793,494 | $ | 11,115,042 | ||||||||||||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||||||||||||||||||||||||||||||
Deposits: |
||||||||||||||||||||||||||||||||||||
Demand non-interest bearing |
$ | 2,146,969 | | | $ | 1,910,171 | | | $ | 1,767,885 | | | ||||||||||||||||||||||||
Demand interest bearing |
687,233 | 152 | 0.09 | % | 656,367 | 600 | 0.09 | % | 655,279 | 155 | 0.10 | % | ||||||||||||||||||||||||
Savings and money market accounts |
3,709,246 | 7,601 | 0.83 | % | 2,886,842 | 23,472 | 0.81 | % | 2,638,166 | 5,377 | 0.83 | % | ||||||||||||||||||||||||
Certificates and other time deposits |
1,797,348 | 6,406 | 1.45 | % | 2,056,208 | 54,610 | 2.66 | % | 2,582,788 | 18,588 | 2.92 | % | ||||||||||||||||||||||||
Total deposits |
8,340,796 | 14,159 | 0.69 | % | 7,509,588 | 78,682 | 1.05 | % | 7,644,118 | 24,120 | 1.28 | % | ||||||||||||||||||||||||
Securities sold under agreements to
repurchase |
951,927 | 1,127 | 0.48 | % | 1,013,167 | 4,764 | 0.47 | % | 941,112 | 999 | 0.43 | % | ||||||||||||||||||||||||
Wholesale borrowings |
708,414 | 6,174 | 3.53 | % | 952,979 | 27,317 | 2.87 | % | 1,151,777 | 7,343 | 2.59 | % | ||||||||||||||||||||||||
Total interest bearing liabilities |
7,854,168 | 21,460 | 1.11 | % | 7,565,563 | 110,763 | 1.46 | % | 7,969,122 | 32,462 | 1.65 | % | ||||||||||||||||||||||||
Other liabilities |
262,405 | 267,835 | 304,759 | |||||||||||||||||||||||||||||||||
Shareholders equity |
1,093,568 | 1,049,925 | 1,073,276 | |||||||||||||||||||||||||||||||||
Total liabilities and
shareholders equity |
$ | 11,357,110 | $ | 10,793,494 | $ | 11,115,042 | ||||||||||||||||||||||||||||||
Net yield on earning assets |
$ | 10,080,871 | 92,348 | 3.72 | % | $ | 9,925,234 | 355,633 | 3.58 | % | $ | 10,189,233 | 88,577 | 3.53 | % | |||||||||||||||||||||
Interest rate spread |
3.47 | % | 3.24 | % | 3.17 | % | ||||||||||||||||||||||||||||||
Note: | Interest income on tax-exempt securities and loans has been adjusted to a fully-taxable equivalent basis. Nonaccrual loans have been included in the average balances. |
43
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HIGHLIGHTS OF FIRST QUARTER 2010 PERFORMANCE
Earnings Summary
The Corporation reported first quarter 2010 net income of $18.0 million, or $0.21 per diluted
share. This compares with $14.5 million, or $0.17 per diluted share, for the fourth quarter 2009
and $29.4 million, or $0.33 per diluted share, for the first quarter 2009.
Returns on average common equity (ROE) and average assets (ROA) for the first quarter 2010
were 6.68% and 0.64%, respectively, compared with 5.38% and 0.54% for the fourth quarter 2009 and
12.39% and 1.07% for the first quarter 2009.
In the first quarter of 2010, the Corporation completed two strategic acquisitions in the
Chicago area: 24 branches of First Bank and certain assets and substantially all of the deposits of
the 4-branch George Washington Savings Bank.
Net interest margin was 3.72% for the first quarter of 2010 compared with 3.64% for the fourth
quarter of 2009 and 3.53% for the first quarter of 2009. The Corporations continued emphasis on
core deposit gathering and shifting deposit mix away from higher-priced certificate of deposit
products drove the expansion over both time periods.
Average loans during the first quarter of 2010 increased $150.5 million, or 2.16%, compared
with the fourth quarter of 2009 and decreased $281.5 million, or 3.81%, compared with the first
quarter of 2009. Excluding $286.8 million in average loan balances related to the aforementioned
Chicago bank acquisitions, average loans decreased $119.9 million, or 1.73%, compared with the
fourth quarter of 2009 and decreased $568.4 million, or 7.70% compared with the first quarter of
2009. The decrease in average balances reflects a reduced level of commercial and consumer credit
demand and the focus on debt reduction by the Corporations business and retail customer base.
Average deposits during the first quarter of 2010 increased $943.2 million, or 12.75%,
compared with the fourth quarter of 2009 and increased $696.7 million, or 9.11%, compared with the
first quarter of 2009. During the first quarter of 2010 the Corporation increased its average core
deposits, which excludes time deposits, by $687.3 million, or 11.74%, compared with the fourth
quarter of 2009, and $1.5 billion, or 29.28%, compared with the first quarter of 2009.
Acquisitions represent $706.5 million of average deposit growth and $275.5 million of average core
deposit growth in the first quarter of 2010.
Average investments during the first quarter of 2010 increased $168.4 million, or 6.13%,
compared with the fourth quarter of 2009 and increased $132.7 million, or 4.76%, over the first
quarter of 2009.
Net interest income on a fully tax-equivalent (FTE) basis was $92.3 million in the first
quarter 2010 compared with $89.2 million in the fourth quarter of 2009 and $88.6 million in the
first quarter of 2009. Compared with the fourth quarter of 2009, average earning assets
increased $366.7 million, or 3.77% and decreased $108.4 million or 1.06% compared to the first
quarter of 2009.
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Noninterest income net of securities transactions for the first quarter of 2010 was $53.9
million, an increase of $3.2 million, or 6.27%, from the fourth quarter of 2009 and a decrease of
$1.2 million, or 2.25%, from the first quarter of 2009 which included $9.5 million due to
curtailment of the postretirement medical benefit plan for active employees. Included in
noninterest income in the first quarter 2010 was a $5.1 million ($3.3 million after-tax) gain
related to the George Washington acquisition.
The primary changes in other income for the 2010 first quarter as compared to the first
quarter of 2009 were as follows: trust income was $5.3 million, an increase of 10.25% primarily due
to advances in the equity markets; service charges on deposits were $15.4 million, an increase of
8.49% due to an increase in new accounts; credit card fees were $11.6 million, an increase of 4.28%
attributable to the improvement in the economy; loan sales and servicing income was $3.2 million,
an increase of 38.63%, primarily attributable to refinancing in the current low rate mortgage
market environment; bank owned life insurance income was $5.7 million, an increase of $2.6 million
attributable to realized policy proceeds. A separate line item was added for the $5.1 million gain
on the acquisition of George Washington, while also separately stated in the first quarter of 2009
was the $9.5 million adjustment due to the curtailment of the postretirement medical plan for
active employees.
Other income, net of securities gains, as a percentage of net revenue for the first quarter of
2010 was 36.88% compared with 36.28% for fourth quarter of 2009 and 38.39% for the first quarter of
2009. Net revenue is defined as net interest income, on a FTE basis, plus other income, less gains
from securities sales.
Noninterest expense for the first quarter of 2010 was $94.0 million, a decrease of $0.9
million, or 0.92%, from the fourth quarter of 2009 and an increase of $10.8 million, or 12.99%,
from the first quarter of 2009. For the three months ended March 31, 2010, increases in operating
expenses compared to the first quarter 2009 were primarily attributable to increased salary and
benefits, professional services and FDIC expense. One time expenses associated with data
processing conversions and related expenses for the acquisitions totaled $2.7 million.
During the first quarter of 2010, the Corporation reported an efficiency ratio of 64.10%,
compared with 67.74% for the fourth quarter of 2009 and 57.81% for the first quarter of 2009.
Net charge-offs totaled $22.8 million, or 1.36% of average loans, in the first quarter of 2010
compared with $31.2 million, or 1.79% of average loans, in the fourth quarter 2009 and $15.6
million, or 0.86% of average loans, in the first quarter of 2009.
Nonperforming assets totaled $123.3 million at March 31, 2010, an increase of $22.3 million
compared with December 31, 2009 and an increase of $47.1 million compared with March 31, 2009.
Nonperforming assets at March 31, 2010 represented 1.80% of period-end loans plus other real estate
compared with 1.48% at December 31, 2009 and 1.04% at March 31, 2009.
The allowance for loan losses totaled $117.8 million at March 31, 2010, an increase of $2.7
million from December 31, 2009. At March 31, 2010, the allowance for loan losses was 1.72% of
period-end loans compared with 1.68% at December 31, 2009 and 1.45% at March 31,
45
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2009. The
allowance for credit losses is the sum of the allowance for loan losses and the reserve for
unfunded lending commitments. For comparative purposes the allowance for credit losses was 1.82% of
period-end loans at March 31, 2010, compared with 1.77% at December 31, 2009 and 1.53% at March 31,
2009. The allowance for credit losses to nonperforming loans was 110.80% at March 31, 2010,
compared with 131.82% at December 31, 2009 and 159.93% at March 31, 2009.
The Corporations total assets at March 31, 2010 were $12.3 billion, an increase of $1.8
billion inclusive of intangible assets, or 16.92%, compared with December 31, 2009 and an increase
of $1.4 billion, or 12.32%, compared with March 31, 2009. Total loans increased $436.3 million, or
6.30%, compared with December 31, 2009 and increased $9.0 million, or 0.12%, over March 31, 2009.
Total deposits were $9.4 billion at March 31, 2010, an increase of $1.9 billion, or 24.67%,
from December 31, 2009 and an increase of $1.7 billion, or 22.03%, from March 31, 2009. The
increase compared with March 31, 2009 was driven by both an overall increase in savings and demand
deposits and the acquisitions of the First Bank branches and George Washington. Core deposits
totaled $7.0 billion at March 31, 2010, an increase of $852.4 million, or 13.85%, from December 31,
2009 and an increase of $1.7 billion, or 32.70%, from March 31, 2009.
Shareholders equity was $1,155.4 million at March 31, 2010, compared with $1,065.6 million at
December 31, 2009 and $1,084.3 million at March 31, 2009. The Corporation maintained a strong
capital position as tangible common equity to assets was 7.93% at March 31, 2010, compared with
8.89% and 7.60% at December 31, 2009 and March 31, 2009, respectively. The common dividend per
share paid in the first quarter 2010 was $0.16.
Acquisitions
In the first quarter of 2010, the Corporation completed two strategic acquisitions. On
February 19, 2010, the Bank completed the acquisition of certain assets and the transfer of certain
liabilities with respect to 24 branches of First Bank located in the greater Chicago, Illinois,
area. Excluding the purchase accounting adjustments, the acquisition included the assumption of
approximately $1.2 billion in deposits and the purchase of $301.2 million of loans and $23.0
million in real and personal property associated with the acquired branch locations. The Bank
received cash of $832.5 million to assume the net liabilities. All of the loans in the acquired
portfolio were performing and pass-grade credits. This acquisition was accounted for under the
acquisition method in accordance with ASC 805.
Also, on February 19, 2010, the Bank acquired certain assets and assumed substantially all of
the deposits and liabilities of George Washington through a purchase and assumption agreement with
the FDIC. The Illinois Department of financial and Professional Regulation, Division of Banking,
declared George Washington closed on February 19, 2010 and appointed the FDIC as receiver.
Excluding the effects of purchase accounting adjustments, the Bank acquired approximately $403.9
million in assets and assumed $395.7 million of deposits of George Washington.
In connection with the George Washington acquisition, the Bank entered into a loss sharing
agreement with the FDIC that collectively covers $327.1 million of assets including
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single family
residential mortgage loans, commercial real estate and commercial and industrial loans, and other
real estate. The Bank acquired other George Washington assets that are not covered by the loss
sharing agreement with the FDIC including investment securities purchased at fair market value and
other tangible assets.
See Note 2 (Business Combinations), in the Notes to Unaudited Consolidated Financial
Statements for additional information related to the details of these transactions.
RESULTS OF OPERATION
Net Interest Income
Net interest income, the Corporations principal source of earnings, is the difference between
interest income generated by earning assets (primarily loans and investment securities) and
interest paid on interest-bearing funds (namely customer deposits and wholesale borrowings). Net
interest income is affected by market interest rates on both earning assets and interest bearing
liabilities, the level of earning assets being funded by interest bearing liabilities,
noninterest-bearing liabilities, the mix of funding between interest bearing liabilities,
noninterest-bearing liabilities and equity, and the growth in earning assets.
Net interest income for the quarter ended March 31, 2010 was $90.4 million compared to $86.9
million for the quarter ended March 31, 2009. For the purpose of this remaining discussion, net
interest income is presented on an FTE basis, to provide a comparison among all types of interest
earning assets. That is, interest on tax-free securities and tax-exempt loans has been restated as
if such interest were taxed at the statutory Federal income tax rate of 35%, adjusted for the
non-deductible portion of interest expense incurred to acquire the tax-free assets. Net interest
income presented on an FTE basis is a non-GAAP financial measure widely used by financial services
organizations. The FTE adjustment was $2.0 million and $1.7 million for the quarters ending March
31, 2010 and 2009, respectively.
FTE net interest income for the quarter ended March 31, 2010 was $92.3 million compared to
$88.6 million for the three months ended March 31, 2009.
As illustrated in the following rate/volume analysis table, interest income and interest
expense both decreased due to the falling interest rate environment.
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Quarters ended March 31, 2010 and 2009 | ||||||||||||
RATE/VOLUME ANALYSIS | Increases (Decreases) | |||||||||||
(Dollars in thousands) | Volume | Rate | Total | |||||||||
INTEREST INCOME FTE |
||||||||||||
Investment securities |
$ | 1,565 | $ | (4,740 | ) | $ | (3,175 | ) | ||||
Loans held for sale |
(112 | ) | (26 | ) | (138 | ) | ||||||
Noncovered loans |
(4,198 | ) | (1,481 | ) | (5,679 | ) | ||||||
Covered loans and loss share receivable |
1,761 | | 1,761 | |||||||||
Total interest income FTE |
$ | (984 | ) | $ | (6,247 | ) | $ | (7,231 | ) | |||
INTEREST EXPENSE |
||||||||||||
Demand deposits-interest bearing |
$ | 7 | $ | (10 | ) | $ | (3 | ) | ||||
Savings and money market accounts |
2,195 | 29 | 2,224 | |||||||||
Certificates of deposits and other time deposits |
(4,579 | ) | (7,603 | ) | (12,182 | ) | ||||||
Securities sold under agreements to repurchase |
12 | 116 | 128 | |||||||||
Wholesale borrowings |
(3,358 | ) | 2,189 | (1,169 | ) | |||||||
Total interest expense |
$ | (5,723 | ) | $ | (5,279 | ) | $ | (11,002 | ) | |||
Net interest income FTE |
$ | 4,739 | $ | (968 | ) | $ | 3,771 | |||||
The net interest margin is calculated by dividing net interest income FTE by average earning
assets. As with net interest income, the net interest margin is affected by the level and mix of
earning assets, the proportion of earning assets funded by non-interest bearing liabilities, and
the interest rate spread. In addition, the net interest margin is impacted by changes in federal
income tax rates and regulations as they affect the tax-equivalent adjustment.
The following table provides 2010 FTE net interest income and net interest margin totals as
well as 2009 comparative amounts:
Quarters ended | ||||||||
March 31, | ||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Net interest income |
$ | 90,394 | $ | 86,894 | ||||
Tax equivalent adjustment |
1,954 | 1,683 | ||||||
Net interest income FTE |
$ | 92,348 | $ | 88,577 | ||||
Average earning assets |
$ | 10,080,871 | $ | 10,189,233 | ||||
Net interest margin FTE |
3.72 | % | 3.53 | % | ||||
Average loans outstanding (excluding covered loans) for the current year and prior year first
quarters totaled $7.0 billion and $7.4 billion, respectively. Increases in average loan
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balances from first quarter 2009 to the first quarter 2010 occurred in commercial and home equity,
while mortgage loans, installment loans, credit card loans, and leases declined.
Specific changes in average loans outstanding, compared to the first quarter 2009, were as
follows: commercial loans were down $139.4 million or 3.22%; home equity loans were up $20.1
million or 2.73%; mortgage loans were down $82.0 million or 15.28%; installment loans, both direct
and indirect declined $155.8 million or 10.00%; credit card loans increased $3.8 million or 2.57%;
and leases decreased $5.3 million or 8.06%. Average covered loans have been separately stated and
are described in more detail in Note 2 (Business Combinations). The majority of fixed-rate
mortgage loan originations are sold to investors through the secondary mortgage loan market.
Average outstanding loans for the 2010 and 2009 first quarters equaled 70.91% and 72.44% of average
earning assets, respectively.
Average deposits were $8.3 billion during the 2010 first quarter, up $696.7 million, or 9.11%,
from the same period last year. For the quarter ended March 31, 2010, average core deposits (which
are defined as checking accounts, savings accounts and money market savings products) increased
$1.5 billion, or 29.28%, and represented 78.45% of total average deposits, compared to 66.21% for
the 2009 first quarter. Average certificates of deposit (CDs) decreased $785.4 million, or
30.41%, compared to the prior year. Average wholesale borrowings decreased $443.4 million, and as
a percentage of total interest-bearing funds equaled 9.02% for the 2010 first quarter and 14.45%
for the same quarter one year ago. Securities sold under agreements to repurchase increased $10.8
million, and as a percentage of total interest bearing funds equaled 12.12% for the 2010 first
quarter and 11.81% for the 2009 first quarter. Average interest-bearing liabilities funded 77.91%
of average earning assets in the current year quarter and 78.21% during the quarter ended March 31,
2009.
Other Income
Excluding investment gains, other income for the quarter ended March 31, 2010 totaled $53.9
million, a decrease of $1.2 million from the $55.2 million earned during the same period one year
ago. Other income as a percentage of net revenue (FTE net interest income plus other income, less
security gains from securities) was 36.88%, compared to 38.39% for the same quarter one year ago.
Trust department income was $5.3 million, up 10.25% primarily due to advances in the equity
markets. Service charges on deposits were $15.4 million, up 8.49% primarily attributable to an
increase in new accounts. Credit card fees were $11.6 million, up 4.28% reflecting the slight
improvement in the economy. Loan sales and servicing income was $3.2 million, an increase of $0.9
million, primarily attributable improved revenue from the mortgage servicing function. Bank owned
life insurance income was $5.7 million, up 87.46% attributable to realized policy proceeds. A
separate line item was added for the $5.1 million gain on the acquisition of George Washington,
while also separately stated in the first quarter of 2009 was the $9.5 million adjustment due to
the curtailment of the postretirement medical plan for active employees. Other operating income was
$3.3 million, a decrease of $1.4 million over the first quarter of 2009.
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Other Expenses
Other (non-interest) expenses totaled $94.0 million for the first quarter 2010 compared to
$83.2 million for the same 2009 quarter, an increase of $10.8 million, or 12.99%.
For the three months ended March 31, 2010, FDIC expense increased $1.2 million over the prior
year quarter due to increased assessments enacted in April 2009. Increases in operating expenses
compared to the first quarter of 2009 were primarily attributable to increased salary, occupancy
and professional services related to the first quarter 2010 acquisitions. One time expenses
associated with the data processing conversions of the acquisitions totaled $2.7 million.
The efficiency ratio for the first quarter 2010 was 64.1%, compared to 57.81% during the same
period in 2009. The lower is better efficiency ratio indicates the percentage of operating costs
that are used to generate each dollar of net revenue that is during 2009, 64.1 cents was spent to
generate each $1 of net revenue. Net revenue is defined as net interest income, on a tax-equivalent
basis, plus other income less gains from the sales of securities.
Federal Income Taxes
Federal income tax expense was $6.8 million and $11.4 million for the quarters ended March 31,
2010 and 2009, respectively. The effective federal income tax rate for the first quarter 2010 was
27.39%, compared to 27.88% for the same quarter 2009. Tax reserves have been specifically estimated
for potential at-risk items in accordance with ASC 740, Income Taxes. Further federal income tax
information is described in Note 1 (Summary of Significant Accounting Policies) and Note 11
(Federal Income Taxes) in the 2009 Form 10-K.
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FINANCIAL CONDITION
Acquisitions
On February 19, 2010, the Bank completed the acquisition of certain assets and the transfer of
certain liabilities with respect to 24 branches of First Bank located in the greater Chicago,
Illinois, area. The Bank acquired assets with an acquisition date fair value of approximately $1.2
billion, including $276.5 million of loans, and $41.9 million of premises and equipment, and
assumed $1.2 billion of deposits. The Bank received cash of $832.5 million to assume the net
liabilities. The Bank recorded a core deposit intangible asset of $3.2 million and goodwill of
$48.3 million.
On February 19, 2010, the Bank entered into a purchase and assumption agreement with loss
share with the FDIC to acquire deposits, loans, and certain other liabilities and assets of George
Washington in an FDIC-assisted transaction. The Bank acquired assets with a fair value of
approximately $368.1 million, including $171.4 million of loans, $15.4 million of investment
securities, $58.0 million of cash and due from banks, $11.5 million in other real estate, and
$403.2 million in liabilities, including $400.7 million of deposits. The Bank recorded a core
deposit intangible asset of $1.0 million and received a cash payment from the FDIC of approximately
$40.2 million. The Bank entered into loss share agreements with the FDIC and recorded, at its
acquisition date fair value, a loss share receivable of $107.6 million, which is classified as part
of covered loans in the accompanying consolidated balance sheets. The transaction resulted in a
gain on acquisition of $5.1 million, which is included in noninterest income in the accompanying
consolidated statements of income and comprehensive income.
See Note 2 (Business Combinations), in the notes to unaudited consolidated financial
statements for additional information related to the details of these transactions.
Investment Securities
At March 31, 2010, the securities portfolio totaled $3.2 billion; $67.3 million of that amount
was held-to-maturity securities and the remainder was securities available-for-sale. In comparison,
as of March 31, 2009, the total portfolio was $2.6 billion, including $30.6 million of
held-to-maturity securities and $2.6 billion of securities available-for-sale.
Available-for-sale securities are held primarily for liquidity, interest rate risk management
and long-term yield enhancement. Accordingly, the Corporations investment policy is to invest in
securities with low credit risk, such as U.S. Treasury securities, U.S. Government agency
obligations, state and political obligations and mortgage-backed securities. Held-to-maturity
securities consist principally of securities issued by state and political subdivisions. Other
investments include FHLB and FRB stock.
Net unrealized gains were $62.0 million, $55.1 million and $25.5 million at March 31, 2010,
December 31, 2009, and March 31, 2009, respectively. The improvement in the fair value of the
investment securities is driven by government agency securities held in portfolio.
The Corporation conducts a regular assessment of its investment securities to determine
whether any securities are other-than-temporary impaired. Only the credit portion of OTTI is to
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be recognized in current earnings for those securities where there is no intent to sell or it
is more likely than not the Corporation would not be required to sell the security prior to
expected recovery. The remaining portion of OTTI is to be included in accumulated other
comprehensive loss, net of income tax.
Gross unrealized losses of $19.3 million, compared to $21.6 million as of December 31, 2009,
and $37.9 million at March 31, 2009 were concentrated within trust preferred securities held in the
investment portfolio. The Corporation holds eight, single issuer, trust preferred securities. Such
investments are less than 2% of the fair value of the entire investment portfolio. None of the bank
issuers have deferred paying dividends on their issued trust preferred shares in which the
Corporation is invested. The fair values of these investments have been impacted by market
conditions which have caused risk premiums to increase markedly resulting in the decline in the
fair value of the Corporations trust preferred securities. However, prices are recovering from
their lows reflecting increased liquidity for these securities as well as an improvement in the
credit profile of the issuers as improving.
Further detail of the composition of the securities portfolio and discussion of the results of
the most recent OTTI assessment are in Note 3 (Investment Securities) to the consolidated financial
statements.
Loans
Total loans outstanding at March 31, 2010 were $7.4 billion compared to $6.9 billion at
December 31, 2009 and $7.3 billion at March 31, 2009.
As of | As of | As of | ||||||||||
March 31, | December 31, | March 31, | ||||||||||
2010 | 2009 | 2009 | ||||||||||
(In thousands) | ||||||||||||
Commercial loans |
$ | 4,389,859 | $ | 4,066,522 | $ | 4,344,915 | ||||||
Mortgage loans |
447,575 | 463,416 | 524,909 | |||||||||
Installment loans |
1,382,522 | 1,425,373 | 1,533,885 | |||||||||
Home equity loans |
766,073 | 753,112 | 741,073 | |||||||||
Credit card loans |
145,029 | 153,525 | 141,597 | |||||||||
Leases |
59,464 | 61,541 | 64,384 | |||||||||
Total noncovered loans |
7,190,522 | 6,923,489 | 7,350,763 | |||||||||
Covered Loans |
169,270 | | | |||||||||
Less allowance for loan losses |
117,806 | 115,092 | 106,257 | |||||||||
Net loans |
$ | 7,072,716 | $ | 6,808,397 | $ | 7,244,506 | ||||||
Despite the slowdown of the manufacturing-based economy in Northeast Ohio, commercial loans
increased 1.03% from the prior year first quarter. Single family mortgage loans continue to be
originated by the Corporations mortgage subsidiary and then sold into the secondary mortgage
market or held in portfolio.
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Allowance for Loan Losses and Reserve for Unfunded Commitments
The Corporation uses a vendor based loss migration model to forecast losses for commercial
loans. The model creates loss estimates using twelve-month (monthly rolling) vintages and
calculates cumulative three years loss rates within two different scenarios. One scenario uses five
year historical performance data while the other one uses two year historical data. The calculated
rate is the average cumulative expected loss of the two and five year data set. As a result, this
approach lends more weight to the more recent performance and would be more conservative.
The uncertain economic conditions in which we are currently operating have resulted in risks
that differ from our historical loss experience. Accordingly, Management deemed it appropriate and
prudent to apply qualitative factors (q-factors) and assign additional reserves. These q-factors
are supported by judgments made by experienced credit risk management personnel and represent risk
associated with the portfolio given the uncertainty and the inherent imprecision of estimating
future losses.
As required by current accounting guidance, the acquired loans from First Bank were recorded
at fair value as of the date of acquisition, with no carryover of related allowances. The
determination of the fair value of the loans resulted in a write-down in the value of the loans,
which was assigned to an accretable balance which will be recognized as interest income over the
remaining term of the loans. The acquired loans from George Washington were also recorded at fair
value as of the date of acquisition, with no carryover of related allowances. The determination of
the fair value of the loans resulted in a write-down in the value of the loans, which was assigned
a nonaccretable and an accretable balance which will be recognized as interest income over the
remaining term of the loans. Also in connection with the George Washington acquisition, the Bank
entered into loss sharing agreements with the FDIC that collectively cover single family
residential mortgage loans, commercial real estate and commercial and industrial loans, and other
real estate. (See Note 2 (Business Combinations) for additional information. Because acquired
loans are required to be accounted for at fair value on the date of acquisition, Management
believes that asset quality measures are generally more meaningful when acquired loans are excluded
from such measures. Therefore, the asset quality ratios included herein exclude the acquired loans
with a period end balance of $523.3 million. In addition, ratios of nonperforming loans exclude
these acquired loans and other real estate, with a period end balance of $11.4 million, covered by
the FDIC loss share agreements.
At March 31, 2010 the allowance for loan losses was $117.8 million or 1.72% of loans
outstanding, excluding acquired loans, compared to $115.1 million or 1.68% at year-end 2009 and
$106.3 or 1.45% for the quarter ended March 31, 2009. There were no allowances for loan losses
related to the $523.3 million in acquired loans at March 31, 2010. The allowance equaled 105.14%
of nonperforming loans at March 31, 2010, compared to 125.55% at year-end 2009, and 151.35% for
March 31, 2009. During 2008 additional reserves were established to address identified risks
associated with the slow down in the housing markets and the decline in residential and commercial
real estate values. These reserves totaled $20.0 million, $19.8 million, and $20.1 at March 31,
2010, December 31, 2010, and March 31, 2009, respectively. The increase in the additional
allocation augmented the increase in the calculated loss migration analysis as the loans were
downgraded during 2010. Nonperforming loans have increased by
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$41.8 million over March 31, 2009, and $20.4 over December 31, 2009 primarily attributable to
the declining economic conditions.
Net charge-offs were $22.8 million for the first quarter ended 2010 compared to $87.1 million
for year-end 2009 and $15.6 million in the first quarter ended 2009. As a percentage of average
loans outstanding, net charge-offs equaled 1.36%, 1.22%, and 0.86% for March 31, 2010, December 31,
2009, and March 31, 2009, respectively. Losses are charged against the allowance for loan losses as
soon as they are identified.
The allowance for unfunded lending commitments at March 31, 2010, December 31, 2009, and March
31, 2009 was $6.3 million, $5.8 million and $6.0 million, respectively. The allowance for credit
losses, which includes both the allowance for loan losses and the reserve for unfunded lending
commitments, amounted to $124.1 million at first quarter-end 2010, $120.8 million at year-end 2009
and $112.3 million at first quarter-end 2009.
Allowance for Credit Losses
The allowance for credit losses is the sum of the allowance for loan losses and the reserve
for unfunded lending commitments.
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Quarter ended | Year Ended | Quarter ended | ||||||||||
March 31, | December 31, | March 31, | ||||||||||
(In thousands) | 2010 | 2009 | 2009 | |||||||||
Allowance for Loan Losses | ||||||||||||
Allowance for loan losses-beginning of period |
$ | 115,092 | $ | 103,757 | $ | 103,757 | ||||||
Provision for loan losses |
25,493 | 98,433 | 18,065 | |||||||||
Net charge-offs |
(22,779 | ) | (87,098 | ) | (15,565 | ) | ||||||
Allowance for loan losses-end of period |
$ | 117,806 | $ | 115,092 | $ | 106,257 | ||||||
Reserve for Unfunded Lending Commitments |
||||||||||||
Balance at beginning of period |
$ | 5,751 | $ | 6,588 | $ | 6,588 | ||||||
Provision for credit losses |
586 | (837 | ) | (569 | ) | |||||||
Balance at end of period |
$ | 6,337 | $ | 5,751 | $ | 6,019 | ||||||
Allowance for credit losses |
$ | 124,143 | $ | 120,843 | $ | 112,276 | ||||||
Annualized net charge-offs as a % of average loans |
1.36 | % | 1.22 | % | 0.86 | % | ||||||
Allowance for loan losses: |
||||||||||||
As a percentage of period-end loans, excluding
acquired loans (a) |
1.72 | % | 1.68 | % | 1.45 | % | ||||||
As a percentage of nonperforming loans |
105.14 | % | 125.55 | % | 151.35 | % | ||||||
As a multiple of annualized net charge offs |
1.28 | x | 1.32 | x | 1.68 | x | ||||||
Allowance for credit losses: |
||||||||||||
As a percentage of period-end loans, excluding
acquired loans (a) |
1.82 | % | 1.77 | % | 1.53 | % | ||||||
As a percentage of nonperforming loans |
110.80 | % | 131.82 | % | 159.93 | % | ||||||
As a multiple of annualized net charge offs |
1.34 | x | 1.39 | x | 1.78 | x | ||||||
(a) | Excludes loss share receivable |
The allowance for credit losses increased $3.3 million from December 31, 2009 to March
31, 2010, and increased $11.9 million from March 31, 2009 to March 31, 2010. The increase for both
periods was attributable to additional reserves that were established to address identified risks
associated with the slow down in the housing markets and the decline in residential and commercial
real estate values. The following tables show the overall trend in credit quality by specific asset
and risk categories.
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At March 31, 2010 | ||||||||||||||||||||||||||||||||
Loan Type | ||||||||||||||||||||||||||||||||
Allowance for Loan Losses Components: | Commercial | Commercial R/E | Installment | Home Equity | Credit Card | Res Mortgage | ||||||||||||||||||||||||||
(In thousands) | Loans | Loans | Leases | Loans | Loans | Loans | Loans | Total | ||||||||||||||||||||||||
Individually Impaired Loan Component: |
||||||||||||||||||||||||||||||||
Loan balance |
$ | 16,805 | $ | 68,777 | $ | | $ | | $ | | $ | | $ | | $ | 85,582 | ||||||||||||||||
Allowance |
2,185 | 8,419 | | | | | | 10,604 | ||||||||||||||||||||||||
Collective Loan Impairment Components: |
||||||||||||||||||||||||||||||||
Credit risk-graded loans |
||||||||||||||||||||||||||||||||
Grade 1 loan balance |
105,207 | 1,156 | 7,269 | 113,632 | ||||||||||||||||||||||||||||
Grade 1 allowance |
72 | | 6 | 78 | ||||||||||||||||||||||||||||
Grade 2 loan balance |
43,085 | 38,301 | 63 | 81,449 | ||||||||||||||||||||||||||||
Grade 2 allowance |
50 | 63 | | 113 | ||||||||||||||||||||||||||||
Grade 3 loan balance |
352,421 | 498,233 | 16,247 | 866,901 | ||||||||||||||||||||||||||||
Grade 3 allowance |
791 | 1,350 | 45 | 2,186 | ||||||||||||||||||||||||||||
Grade 4 loan balance |
980,056 | 1,621,687 | 35,020 | 2,636,763 | ||||||||||||||||||||||||||||
Grade 4 allowance |
9,165 | 16,206 | 327 | 25,698 | ||||||||||||||||||||||||||||
Grade 5 (Special Mention) loan balance |
69,325 | 89,821 | 852 | 159,998 | ||||||||||||||||||||||||||||
Grade 5 allowance |
2,717 | 4,402 | 34 | 7,153 | ||||||||||||||||||||||||||||
Grade 6 (Substandard) loan balance |
79,893 | 97,606 | 13 | 177,512 | ||||||||||||||||||||||||||||
Grade 6 allowance |
9,051 | 13,354 | 2 | 22,407 | ||||||||||||||||||||||||||||
Grade 7 (Doubtful) loan balance |
197 | 267 | | 464 | ||||||||||||||||||||||||||||
Grade 7 allowance |
5 | 147 | | 152 | ||||||||||||||||||||||||||||
Consumer loans based on payment status: |
||||||||||||||||||||||||||||||||
Current loan balances |
| 1,357,785 | 741,203 | 139,718 | 416,263 | 2,654,969 | ||||||||||||||||||||||||||
Current loans allowance |
| 18,688 | 6,155 | 8,013 | 3,403 | 36,259 | ||||||||||||||||||||||||||
30 days past due loan balance |
| 12,765 | 1,932 | 1,705 | 11,037 | 27,439 | ||||||||||||||||||||||||||
30 days past due allowance |
| 2,031 | 582 | 917 | 475 | 4,005 | ||||||||||||||||||||||||||
60 days past due loan balance |
| 3,907 | 642 | 1,270 | 2,516 | 8,335 | ||||||||||||||||||||||||||
60 days past due allowance |
| 1,627 | 410 | 969 | 351 | 3,357 | ||||||||||||||||||||||||||
90+ days past due loan balance |
| 2,268 | 1,044 | 2,336 | 17,759 | 23,407 | ||||||||||||||||||||||||||
90+ days past due allowance |
| 1,526 | 1,049 | 2,259 | 960 | 5,794 | ||||||||||||||||||||||||||
Total loans |
$ | 1,646,989 | $ | 2,415,848 | $ | 59,464 | $ | 1,376,725 | $ | 744,821 | $ | 145,029 | $ | 447,575 | $ | 6,836,451 | ||||||||||||||||
Total Allowance for Loan Losses |
$ | 24,036 | $ | 43,941 | $ | 414 | $ | 23,872 | $ | 8,196 | $ | 12,158 | $ | 5,189 | $ | 117,806 | ||||||||||||||||
Note: Total loans excludes loans acquired from First Bank and George Washington which
were recorded at date of acquisition at their fair value.
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At December 31, 2009 | ||||||||||||||||||||||||||||||||
Loan Type | ||||||||||||||||||||||||||||||||
Allowance for Loan Losses Components: | Commercial | Commercial R/E | Installment | Home Equity | Credit Card | Res Mortgage | ||||||||||||||||||||||||||
(In thousands) | Loans | Loans | Leases | Loans | Loans | Loans | Loans | Total | ||||||||||||||||||||||||
Individually Impaired Loan Component: |
||||||||||||||||||||||||||||||||
Loan balance |
$ | 17,480 | $ | 50,345 | $ | | $ | | $ | | $ | | $ | | $ | 67,825 | ||||||||||||||||
Allowance |
3,678 | 6,849 | | | | | | 10,527 | ||||||||||||||||||||||||
Collective Loan Impairment Components: |
||||||||||||||||||||||||||||||||
Credit risk-graded loans |
||||||||||||||||||||||||||||||||
Grade 1 loan balance |
75,598 | 1,178 | 7,441 | 84,217 | ||||||||||||||||||||||||||||
Grade 1 allowance |
47 | | 6 | 53 | ||||||||||||||||||||||||||||
Grade 2 loan balance |
59,946 | 74,839 | 67 | 134,852 | ||||||||||||||||||||||||||||
Grade 2 allowance |
52 | 88 | | 140 | ||||||||||||||||||||||||||||
Grade 3 loan balance |
316,535 | 517,338 | 15,246 | 849,119 | ||||||||||||||||||||||||||||
Grade 3 allowance |
579 | 1,137 | 36 | 1,752 | ||||||||||||||||||||||||||||
Grade 4 loan balance |
1,030,872 | 1,647,918 | 38,179 | 2,716,969 | ||||||||||||||||||||||||||||
Grade 4 allowance |
8,666 | 16,306 | 257 | 25,229 | ||||||||||||||||||||||||||||
Grade 5 (Special Mention) loan balance |
42,066 | 40,748 | 30 | 82,844 | ||||||||||||||||||||||||||||
Grade 5 allowance |
1,224 | 1,873 | 1 | 3,098 | ||||||||||||||||||||||||||||
Grade 6 (Substandard) loan balance |
83,884 | 107,635 | 578 | 192,097 | ||||||||||||||||||||||||||||
Grade 6 allowance |
7,616 | 12,558 | 53 | 20,227 | ||||||||||||||||||||||||||||
Grade 7 (Doubtful) loan balance |
68 | 72 | | 140 | ||||||||||||||||||||||||||||
Grade 7 allowance |
1 | 3 | | 4 | ||||||||||||||||||||||||||||
Consumer loans based on payment status: |
||||||||||||||||||||||||||||||||
Current loan balances |
1,396,198 | 748,207 | 146,906 | 428,150 | 2,719,461 | |||||||||||||||||||||||||||
Current loans allowance |
18,038 | 5,829 | 8,106 | 3,304 | 35,277 | |||||||||||||||||||||||||||
30 days past due loan balance |
18,057 | 2,306 | 2,245 | 13,515 | 36,123 | |||||||||||||||||||||||||||
30 days past due allowance |
2,813 | 677 | 1,178 | 571 | 5,239 | |||||||||||||||||||||||||||
60 days past due loan balance |
5,919 | 1,678 | 1,622 | 4,301 | 13,520 | |||||||||||||||||||||||||||
60 days past due allowance |
2,461 | 1,081 | 1,217 | 617 | 5,376 | |||||||||||||||||||||||||||
90+ days past due loan balance |
5,199 | 921 | 2,752 | 17,450 | 26,322 | |||||||||||||||||||||||||||
90+ days past due allowance |
3,458 | 912 | 2,618 | 1,182 | 8,170 | |||||||||||||||||||||||||||
Total loans |
$ | 1,626,449 | $ | 2,440,073 | $ | 61,541 | $ | 1,425,373 | $ | 753,112 | $ | 153,525 | $ | 463,416 | $ | 6,923,489 | ||||||||||||||||
Total Allowance for Loan Losses |
$ | 21,863 | $ | 38,814 | $ | 353 | $ | 26,770 | $ | 8,499 | $ | 13,119 | $ | 5,674 | $ | 115,092 | ||||||||||||||||
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At March 31, 2009 | ||||||||||||||||||||||||||||||||
Loan Type | ||||||||||||||||||||||||||||||||
Allowance for Loan Losses Components: | Commercial | Commercial R/E | Installment | Home Equity | Credit Card | Res Mortgage | ||||||||||||||||||||||||||
(In thousands) | Loans | Loans | Leases | Loans | Loans | Loans | Loans | Total | ||||||||||||||||||||||||
Individually Impaired Loan Component: |
||||||||||||||||||||||||||||||||
Loan balance |
$ | 11,861 | $ | 52,038 | $ | | $ | | $ | | $ | | $ | | $ | 63,899 | ||||||||||||||||
Allowance |
4,567 | 5,421 | | | | | | 9,988 | ||||||||||||||||||||||||
Collective Loan Impairment Components: |
||||||||||||||||||||||||||||||||
Credit risk-graded loans |
||||||||||||||||||||||||||||||||
Grade 1 loan balance |
31,584 | 5,967 | 6,058 | 43,609 | ||||||||||||||||||||||||||||
Grade 1 allowance |
30 | 11 | 7 | 48 | ||||||||||||||||||||||||||||
Grade 2 loan balance |
194,607 | 129,771 | 2,593 | 326,971 | ||||||||||||||||||||||||||||
Grade 2 allowance |
472 | 618 | 8 | 1,098 | ||||||||||||||||||||||||||||
Grade 3 loan balance |
507,255 | 538,629 | 19,315 | 1,065,199 | ||||||||||||||||||||||||||||
Grade 3 allowance |
1,377 | 4,010 | 65 | 5,452 | ||||||||||||||||||||||||||||
Grade 4 loan balance |
1,035,542 | 1,617,994 | 34,410 | 2,687,946 | ||||||||||||||||||||||||||||
Grade 4 allowance |
7,862 | 27,282 | 275 | 35,419 | ||||||||||||||||||||||||||||
Grade 5 (Special Mention) loan balance |
33,989 | 40,545 | 157 | 74,691 | ||||||||||||||||||||||||||||
Grade 5 allowance |
889 | 1,901 | 4 | 2,794 | ||||||||||||||||||||||||||||
Grade 6 (Substandard) loan balance |
67,205 | 77,836 | 1,851 | 146,892 | ||||||||||||||||||||||||||||
Grade 6 allowance |
5,013 | 9,175 | 127 | 14,315 | ||||||||||||||||||||||||||||
Grade 7 (Doubtful) loan balance |
33 | 59 | | 92 | ||||||||||||||||||||||||||||
Grade 7 allowance |
3 | 5 | | 8 | ||||||||||||||||||||||||||||
Consumer loans based on payment status: |
||||||||||||||||||||||||||||||||
Current loan balances |
1,511,155 | 737,797 | 135,627 | 494,140 | 2,878,719 | |||||||||||||||||||||||||||
Current loans allowance |
12,557 | 5,040 | 3,269 | 2,722 | 23,588 | |||||||||||||||||||||||||||
30 days past due loan balance |
13,897 | 1,930 | 1,780 | 11,502 | 29,109 | |||||||||||||||||||||||||||
30 days past due allowance |
1,733 | 575 | 708 | 421 | 3,437 | |||||||||||||||||||||||||||
60 days past due loan balance |
5,205 | 766 | 1,547 | 4,074 | 11,592 | |||||||||||||||||||||||||||
60 days past due allowance |
1,950 | 531 | 952 | 501 | 3,934 | |||||||||||||||||||||||||||
90+ days past due loan balance |
3,628 | 580 | 2,643 | 15,193 | 22,044 | |||||||||||||||||||||||||||
90+ days past due allowance |
2,320 | 659 | 2,169 | 1,028 | 6,176 | |||||||||||||||||||||||||||
Total loans |
$ | 1,882,076 | $ | 2,462,839 | $ | 64,384 | $ | 1,533,885 | $ | 741,073 | $ | 141,597 | $ | 524,909 | $ | 7,350,763 | ||||||||||||||||
Total Allowance for Loan Losses |
$ | 20,213 | $ | 48,423 | $ | 486 | $ | 18,560 | $ | 6,805 | $ | 7,098 | $ | 4,672 | $ | 106,257 | ||||||||||||||||
Asset Quality
Making a loan to earn an interest spread inherently includes taking the risk of not being
repaid. Successful management of credit risk requires making good underwriting decisions, carefully
administering the loan portfolio and diligently collecting delinquent accounts.
The Corporations Credit Policy Division manages credit risk by establishing common credit
policies for its subsidiaries, participating in approval of their largest loans, conducting reviews
of their loan portfolios, providing them with centralized consumer underwriting, collections and
loan operations services, and overseeing their loan workouts. Notes 1 (Summary of Significant
Accounting Policies) and 4 (Loans Allowance for Loan Losses) in the 2009 Form 10-K provide detailed
information regarding the Corporations credit policies and practices.
The Corporations objective is to minimize losses from its commercial lending activities and
to maintain consumer losses at acceptable levels that are stable and consistent with growth and
profitability objectives.
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Nonperforming Loans are defined as follows:
| Nonaccrual loans on which interest is no longer accrued because its collection is doubtful. |
| Restructured loans on which, due to deterioration in the borrowers financial condition, the original terms have been modified in favor of the borrower or either principal or interest has been forgiven. |
Nonperforming Assets are defined as follows:
| Nonaccrual loans on which interest is no longer accrued because its collection is doubtful. |
| Restructured loans on which, due to deterioration in the borrowers financial condition, the original terms have been modified in favor of the borrower or either principal or interest has been forgiven. |
| Other real estate (ORE) acquired through foreclosure in satisfaction of a loan. |
March 31, | December 31, | March 31, | ||||||||||
2010 | 2009 | 2009 | ||||||||||
(Dollars in thousands) | ||||||||||||
Nonperforming commercial loans |
$ | 94,798 | $ | 74,033 | $ | 54,070 | ||||||
Other nonaccrual loans: |
17,245 | 17,639 | 16,134 | |||||||||
Total nonperforming loans |
112,043 | 91,672 | 70,204 | |||||||||
Other real estate (ORE) |
11,277 | 9,329 | 6,039 | |||||||||
Total nonperforming assets |
$ | 123,320 | $ | 101,001 | $ | 76,243 | ||||||
Loans past due 90 day or more accruing
interest |
$ | 21,099 | $ | 35,025 | $ | 18,602 | ||||||
Total nonperforming assets as a percentage of
total loans and ORE |
1.80 | % | 1.48 | % | 1.04 | % | ||||||
During 2009 and the first quarter 2010 the economic conditions in our markets continued
to be challenging. Residential developers and homebuilders have been the most adversely affected,
with the significant decrease of buyer resulting from a combination of the restriction of available
credit and economic pressure impacting the consumer. Consumers continue to be under pressure due
to high debt levels, limited refinance opportunities, increased cost of living and increasing
unemployment. These conditions have resulted in increases in bankruptcies as well as charge offs.
Commercial nonperforming loans increased/decreased $20.8 million from December 31, 2009 and $40.7
million from March 31, 2009. Criticized loans increased $80.7 million from December 31, 2009, and
$138.0 from March 31, 2009.
In nonperforming assets, other real estate includes $1.0 million of vacant land no longer
considered for branch expansion which is not related to loan portfolios.
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See Note 1 (Summary of Significant Accounting Policies) of the 2009 Form 10-K for a summary of
the Corporations nonaccrual and charge-off policies.
The following table is a nonaccrual commercial loan flow analysis:
Quarter Ended | ||||||||||||||||||||
March 31, | December 31, | September 30, | June 30, | March 31, | ||||||||||||||||
2010 | 2009 | 2009 | 2009 | 2009 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Nonaccrual commercial loans beginning of period |
$ | 74,033 | $ | 63,357 | $ | 48,563 | $ | 54,070 | $ | 40,195 | ||||||||||
Credit Actions: |
||||||||||||||||||||
New |
31,211 | 34,612 | 24,491 | 7,259 | 22,912 | |||||||||||||||
Loan and lease losses |
(5,367 | ) | (5,272 | ) | (3,886 | ) | (5,951 | ) | (1,950 | ) | ||||||||||
Charged down |
(3,567 | ) | (12,710 | ) | (3,321 | ) | (4,182 | ) | (2,603 | ) | ||||||||||
Return to accruing status |
(672 | ) | (478 | ) | (24 | ) | (660 | ) | (3,333 | ) | ||||||||||
Payments |
(840 | ) | (5,476 | ) | (2,466 | ) | (1,973 | ) | (1,151 | ) | ||||||||||
Sales |
| | | | | |||||||||||||||
Nonaccrual commercial loans end of period |
$ | 94,798 | $ | 74,033 | $ | 63,357 | $ | 48,563 | $ | 54,070 | ||||||||||
Deposits, Securities Sold Under Agreements to Repurchase and Wholesale Borrowings
The following ratios and table provide additional information about the change in the mix of
customer deposits.
Quarter Ended | Year Ended | Quarter Ended | ||||||||||||||||||||||
March 31, 2010 | December 31, 2009 | March 31, 2009 | ||||||||||||||||||||||
Average | Average | Average | Average | Average | Average | |||||||||||||||||||
Balance | Rate | Balance | Rate | Balance | Rate | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Non-interest DDA |
$ | 2,146,969 | | $ | 1,910,171 | | $ | 1,767,885 | | |||||||||||||||
Interest-bearing DDA |
687,233 | 0.09 | % | 656,367 | 0.09 | % | 655,279 | 0.10 | % | |||||||||||||||
Savings and money market |
3,709,246 | 0.83 | % | 2,886,842 | 0.81 | % | 2,638,166 | 0.83 | % | |||||||||||||||
CDs and other time deposits |
1,797,348 | 1.45 | % | 2,056,208 | 2.66 | % | 2,582,788 | 2.92 | % | |||||||||||||||
Total customer deposits |
8,340,796 | 0.69 | % | 7,509,588 | 1.05 | % | 7,644,118 | 1.28 | % | |||||||||||||||
Securities sold under
agreements to repurchase |
951,927 | 0.48 | % | 1,013,167 | 0.47 | % | 941,112 | 0.43 | % | |||||||||||||||
Wholesale borrowings |
708,414 | 3.53 | % | 952,979 | 2.87 | % | 1,151,777 | 2.59 | % | |||||||||||||||
Total funds |
$ | 10,001,137 | $ | 9,475,734 | $ | 9,737,007 | ||||||||||||||||||
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Total average demand deposits comprised 33.98% of average deposits in the 2010 first
quarter compared to 31.70% in the first quarter 2009. Savings accounts, including money market
products, made up 44.46% of average deposits in the 2010 first quarter compared to 34.51% in the
first quarter 2009. CDs made up 21.55% of average deposits in the first quarter 2010 and 33.79% in
the first quarter 2009.
Deposits balances were elevated by the $395.7 million in deposits assumed as part of the
George Washington transaction, and by $1.2 billion in deposits assumed on February 19, 2010 from
First Bank. The Corporation received approximately $40.2 million from the FDIC associated with the
George Washington transaction and believes that this provides sufficient liquidity to fund the
potential at-risk deposit outflows.
The average cost of deposits, securities sold under agreements to repurchase and wholesale
borrowings was down 119 basis points compared to one year ago, or 2.15% for the quarter ended March
31, 2010.
The following table summarizes CDs of $100 thousand or more (Jumbo CDs) as of March 31,
2010, by time remaining until maturity:
Time until maturity: | Amount | |||
(In thousands) | ||||
Under 3 months |
$ | 175,013 | ||
3 to 6 months |
142,376 | |||
6 to 12 months |
240,349 | |||
Over 1 year through 3 years |
103,904 | |||
Over 3 years |
32,125 | |||
$ | 693,767 | |||
Capital Resources
The capital management objectives of the Corporation are to provide capital sufficient to
cover the risks inherent in the Corporations businesses, to maintain excess capital to
well-capitalized standards and to assure ready access to the capital markets.
Shareholders Equity
Shareholders equity at March 31, 2010 totaled $1.2 billion compared to $1.1 billion at
December 31, 2009 and $1.1 billion at March 31, 2009. The cash dividend of $0.16 per share paid in
the first quarter has an indicated annual rate of $0.64 per share.
Capital Availability
On March 3, 2010, the Corporation entered into two distribution agency agreements with Credit
Suisse Securities (USA) LLC and RBC Capital Markets Corporation (collectively, the Sales Agents),
pursuant to which the Corporation may, from time to time, offer and sell shares
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of the Corporations common stock. Sales of the common stock are made by means of ordinary
brokers transactions on the Nasdaq Global Select Market at market prices, in block transactions or
as otherwise agreed with the Sales Agents. During the quarter ended March 31, 2010, the Corporation
sold 3.9 million shares with an average value of $20.91 per share.
Capital Adequacy
Capital adequacy is an important indicator of financial stability and performance. The
Corporation maintained a strong capital position as tangible common equity to assets was 7.93% at
March 31, 2010, compared to 8.89% at December 31, 2009, and 7.60% at March 31, 2009.
Financial institutions are subject to a strict uniform system of capital-based regulations.
Under this system, there are five different categories of capitalization, with prompt corrective
actions and significant operational restrictions imposed on institutions that are capital
deficient under the categories. The five categories are: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically undercapitalized.
To be considered well capitalized, an institution must have a total risk-based capital ratio
of at least 10%, a Tier I capital ratio of at least 6%, a leverage capital ratio of at least 5%,
and must not be subject to any order or directive requiring the institution to improve its capital
level. An adequately capitalized institution has a total risk-based capital ratio of at least 8%,
a Tier I capital ratio of at least 4% and a leverage capital ratio of at least 4%. Institutions
with lower capital levels are deemed to be undercapitalized, significantly undercapitalized or
critically undercapitalized, depending on their actual capital levels. The appropriate federal
regulatory agency may also downgrade an institution to the next lower capital category upon a
determination that the institution is in an unsafe or unsound practice. Institutions are required
to monitor closely their capital levels and to notify their appropriate regulatory agency of any
basis for a change in capital category.
The George Washington FDIC-assisted transaction, which was accounted for as a business
combination, resulted in the recognition of an FDIC indemnification asset, which represents the
fair value of estimated future payments by the FDIC to the Corporation for losses on covered
assets. The FDIC indemnification asset, as well as covered assets, are risk-weighted at 20% for
regulatory capital requirement purposes.
As of March 31, 2010, the Corporation, on a consolidated basis, as well as FirstMerit Bank,
exceeded the minimum capital levels of the well capitalized category.
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March 31, | December 31, | March 31, | ||||||||||||||||||||||
2010 | 2009 | 2009 | ||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Consolidated |
||||||||||||||||||||||||
Total equity |
$ | 1,155,353 | 9.38 | % | $ | 1,065,627 | 10.11 | % | $ | 1,084,269 | 9.88 | % | ||||||||||||
Common equity |
1,155,353 | 9.38 | % | 1,065,627 | 10.11 | % | 963,647 | 8.78 | % | |||||||||||||||
Tangible common equity (a) |
961,749 | 7.93 | % | 924,871 | 8.89 | % | 823,086 | 7.60 | % | |||||||||||||||
Tier 1 capital (b) |
1,002,610 | 11.75 | % | 971,013 | 12.09 | % | 1,001,901 | 11.86 | % | |||||||||||||||
Total risk-based capital (c) |
1,109,453 | 13.01 | % | 1,071,682 | 13.34 | % | 1,107,571 | 13.11 | % | |||||||||||||||
Leverage (d) |
1,002,610 | 9.03 | % | 971,013 | 9.39 | % | 1,001,901 | 9.13 | % | |||||||||||||||
Bank Only |
||||||||||||||||||||||||
Total equity |
$ | 974,433 | 7.92 | % | $ | 946,626 | 9.00 | % | $ | 792,085 | 7.23 | % | ||||||||||||
Common equity |
974,433 | 7.92 | % | 946,626 | 9.00 | % | 792,085 | 7.23 | % | |||||||||||||||
Tangible common equity (a) |
829,529 | 6.82 | % | 806,223 | 7.77 | % | 651,524 | 6.02 | % | |||||||||||||||
Tier 1 capital (b) |
796,182 | 9.35 | % | 826,517 | 10.31 | % | 794,697 | 9.43 | % | |||||||||||||||
Total risk-based capital (c) |
898,734 | 10.56 | % | 922,919 | 11.51 | % | 896,531 | 10.64 | % | |||||||||||||||
Leverage (d) |
796,182 | 7.09 | % | 826,517 | 8.00 | % | 794,697 | 7.26 | % |
(a) | Common equity less all intangibles; computed as a ratio to total assets less intangible assets. | |
(b) | Shareholders equity less goodwill; computed as a ratio to risk-adjusted assets, as defined in the 1992 risk-based capital guidelines. | |
(c) | Tier 1 capital plus qualifying loan loss allowance, computed as a ratio to risk-adjusted assets, as defined in the 1992 risk-based capital guidelines. | |
(d) | Tier 1 capital computed as a ratio to the latest quarters average assets less goodwill. |
Market Risk Management
Market risk refers to potential losses arising from changes in interest rates, foreign
exchange rates, equity prices and commodity prices, including the correlation among these factors
and their volatility. When the value of an instrument is tied to such external factors, the holder
faces market risk. The Corporation is primarily exposed to interest rate risk as a result of
offering a wide array of financial products to its customers.
Interest rate risk management
Changes in market interest rates may result in changes in the fair market value of the
Corporations financial instruments, cash flows, and net interest income. The Corporation seeks to
achieve consistent growth in net interest income and capital while managing volatility arising from
shifts in market interest rates. The Asset and Liability Committee (ALCO) oversees market risk
management, establishing risk measures, limits, and policy guidelines for managing the amount of
interest rate risk and its effect on net interest income and capital. According to
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these policies, responsibility for measuring and the management of interest rate risk resides in
the Corporate Treasury function.
Interest rate risk on the Corporations balance sheets consists of reprice, option, and basis
risks. Reprice risk results from differences in the maturity, or repricing, of asset and liability
portfolios. Option risk arises from embedded options present in the investment portfolio and in
many financial instruments such as loan prepayment options, deposit early withdrawal options, and
interest rate options. These options allow customers opportunities to benefit when market interest
rates change, which typically results in higher costs or lower revenue for the Corporation. Basis
risk refers to the potential for changes in the underlying relationship between market rates or
indices, which subsequently result in a narrowing of profit spread on an earning asset or
liability. Basis risk is also present in administered rate liabilities, such as interest-bearing
checking accounts, savings accounts and money market accounts where historical pricing
relationships to market rates may change due to the level or directional change in market interest
rates. Each of these types of risks is defined in the discussion of market risk management of the
2009 Form 10-K.
The interest rate risk position is measured and monitored using risk management tools,
including earnings simulation modeling and economic value of equity sensitivity analysis, which
capture both near term and long-term interest rate risk exposures. Combining the results from these
separate risk measurement processes allows a reasonably comprehensive view of short-term and
long-term interest rate risk in the Corporation.
Net interest income simulation analysis. Earnings simulation involves forecasting net interest
earnings under a variety of scenarios including changes in the level of interest rates, the shape
of the yield curve, and spreads between market interest rates. The sensitivity of net interest
income to changes in interest rates is measured using numerous interest rate scenarios including
shocks, gradual ramps, curve flattening, curve steepening as well as forecasts of likely interest
rates scenarios. Presented below is the Corporations interest rate risk profile as of March 31,
2010 and 2009:
Immediate Change in Rates and Resulting Percentage Increase/(Decrease) in Net Interest Income: |
||||||||||||||||
- 100 basis | + 100 basis | + 200 basis | + 300 basis | |||||||||||||
points | points | points | points | |||||||||||||
March 31, 2010 |
* | 1.99 | % | 3.41 | % | 4.22 | % | |||||||||
March 31, 2009 |
* | 2.43 | % | 4.25 | % | 5.36 | % |
* | Modeling for the decrease in 100 basis points scenario has been suspended due to the current rate environment. |
Modeling the sensitivity of net interest earnings to changes in market interest rates is
highly dependent on numerous assumptions incorporated into the modeling process. To the extent that
actual performance is different than what was assumed, actual net interest earnings sensitivity may
be different than projected. The assumptions used in the models are Managements best estimate
based on studies conducted by the ALCO department. The ALCO department uses a data-warehouse to
study interest rate risk at a transactional level and uses
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various ad-hoc reports to refine assumptions continuously. Assumptions and methodologies regarding
administered rate liabilities (e.g., savings, money market and interest-bearing checking accounts),
balance trends, and repricing relationships reflect Managements best estimate of expected behavior
and these assumptions are reviewed regularly.
Economic value of equity modeling. The Corporation also has longer-term interest rate risk
exposure, which may not be appropriately measured by earnings sensitivity analysis. ALCO uses
economic value of equity (EVE) sensitivity analysis to study the impact of long-term cash flows
on earnings and capital. EVE involves discounting present values of all cash flows of on balance
sheet and off balance sheet items under different interest rate scenarios. The discounted present
value of all cash flows represents the Corporations economic value of equity. The analysis
requires modifying the expected cash flows in each interest rate scenario, which will impact the
discounted present value. The amount of base-case measurement and its sensitivity to shifts in the
yield curve allow management to measure longer-term repricing and option risk in the balance sheet.
Presented below is the Corporations EVE profile as of March 31, 2010 and 2009:
Immediate Change in Rates and Resulting Percentage Increase/(Decrease) in EVE: |
||||||||||||||||
- 100 basis | + 100 basis | + 200 basis | + 300 basis | |||||||||||||
points | points | points | points | |||||||||||||
March 31, 2010 |
* | 2.82 | % | 3.09 | % | 2.27 | % | |||||||||
March 31, 2009 |
* | 2.95 | % | 5.13 | % | 2.40 | % |
* | Modeling for the decrease in 100 basis points scenario has been suspended due to the current rate environment. |
Management of interest rate exposure. Management uses the results of its various
simulation analyses to formulate strategies to achieve a desired risk profile within the parameters
of the Corporations capital and liquidity guidelines. Specifically, Management actively manages
interest rate risk positions by using derivatives predominately in the form of interest rate swaps,
which modify the interest rate characteristics of certain assets and liabilities. For more
information about how the Corporation uses interest rate swaps to manage its balance sheet, see
Note 8 (Derivatives and Hedging Activities) to the unaudited consolidated financial statements
included in this report.
Liquidity Risk Management
Liquidity risk is the possibility of the Corporation being unable to meet current and future
financial obligations in a timely manner. Liquidity is managed to ensure stable, reliable and
cost-effective sources of funds to satisfy demand for credit, deposit withdrawals and investment
opportunities. The Corporation considers core earnings, strong capital ratios and credit quality
essential for maintaining high credit ratings, which allow the Corporation cost-effective access to
market-based liquidity. The Corporation relies on a large, stable core deposit base and a
diversified base of wholesale funding sources to manage liquidity risk.
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The Treasury Group is responsible for identifying, measuring and monitoring the Corporations
liquidity profile. The position is evaluated daily, weekly and monthly by analyzing the composition
of all funding sources, reviewing projected liquidity commitments by future month and identifying
sources and uses of funds. The Treasury Group also prepares a contingency funding plan that details
the potential erosion of funds in the event of a systemic financial market crisis or
institutional-specific stress. In addition, the overall management of the Corporations liquidity
position is integrated into retail deposit pricing policies to ensure a stable core deposit base.
The Corporations primary source of liquidity is its core deposit base, raised through its
retail branch system. Core deposits comprised approximately 78.45% of total deposits at March 31,
2010. The Corporations wholly owned subsidiary, FirstMerit Bank, N.A., received approximately
$40.2 million from the FDIC associated with the FDIC-assisted transaction involving George
Washington. The Corporation believes these funds along with its other sources of liquidity provides
sufficient liquidity to fund potential at-risk deposit outflows from this institution.
The Corporation also has available unused wholesale sources of liquidity, including advances
from the FHLB of Cincinnati, issuance through dealers in the capital markets and access to
certificates of deposit issued through brokers. Liquidity is further provided by unencumbered, or
unpledged, investment securities that totaled $1.2 million at March 31, 2010.
The Corporations liquidity could be adversely affected by both direct and indirect
circumstances. An example of a direct event would be a downgrade in the Corporations public credit
rating by a rating agency due to factors such as deterioration in asset quality, a large charge to
earnings, a decline in profitability or other financial measures, or a significant merger or
acquisition. Examples of indirect events unrelated to the Corporation that could have an effect on
its access to liquidity would be terrorism or war, natural disasters, political events, or the
default or bankruptcy of a major corporation, mutual fund or hedge fund. Similarly, market
speculation or rumors about the Corporation or the banking industry in general may adversely affect
the cost and availability of normal funding sources.
Certain credit markets that the Corporation participates in (from time to time), as sources of
funding have been significantly disrupted and highly volatile since July 2007. As a means of
maintaining adequate liquidity, the Corporation, like many other financial institutions, has relied
more heavily on the liquidity and stability present in the short-term and secured credit markets
since access to unsecured term debt has been restricted. Short-term funding has been available and
cost effective. However, if further market disruption were to also reduce the cost effectiveness
and availability of these funds for a prolonged period of time, management may need to secure other
funding alternatives.
The Corporation maintains a liquidity contingency plan that outlines the process for
addressing a liquidity crisis. The plan provides for an evaluation of funding sources under various
market conditions. It also assigns specific roles and responsibilities for effectively managing
liquidity through a problem period.
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Funding Trends for the Quarter During the three months ended March 31, 2010, lower cost core
deposits increased by $852.4 million from the previous quarter. In aggregate, deposits increased
$1.9 billion. Securities sold under agreements to repurchase decreased $100.0 million from December
31, 2009. Wholesale borrowings decreased $62.4 million from the end of 2009 to March 31, 2010.
The Corporations loan to deposit ratio decreased to 78.55% at March 31, 2010 from 92.14% at
December 31, 2009.
Parent Company Liquidity - The Corporation manages its liquidity principally through dividends
from the bank subsidiary. The parent company has sufficient liquidity to service its debt; support
customary corporate operations and activities (including acquisitions) at a reasonable cost, in a
timely manner and without adverse consequences; as well as pay dividends to shareholders.
During the quarter ended March 31, 2010, FirstMerit Bank did not pay dividends to FirstMerit
Corporation. As of March 31, 2010, FirstMerit Bank had an additional $93.1 million available to
pay dividends without regulatory approval.
Recent Market and Regulatory Developments. Recent market conditions have made it difficult or
uneconomical to access the capital markets. As a result, the United States Congress, the Treasury,
and the Federal Deposit Insurance Corporation (FDIC) have announced various programs designed to
enhance market liquidity and bank capital.
In response to the ongoing financial crisis affecting the banking system and financial
markets, EESA was signed into law on October 3, 2008 and established TARP. As part of TARP, the
Treasury established the CPP to provide up to $700 billion of funding to eligible financial
institutions through the purchase of mortgages, mortgage-backed securities, capital stock and other
financial instruments for the purpose of stabilizing and providing liquidity to the U.S. financial
markets. The American Recovery and Reinvestment Act of 2009 (ARRA), more commonly known as the
economic stimulus or economic recovery package, was signed into law on February 17, 2009, by
President Obama. ARRA includes a wide variety of programs intended to stimulate the economy and
provide for extensive infrastructure, energy, health, and education needs. In addition, ARRA
imposes certain new executive compensation and corporate expenditure limits on all current and
future TARP recipients until the institution has repaid the Treasury. On January 9, 2009, the
Corporation completed the sale to the Treasury of $125.0 million of newly issued FirstMerit
non-voting preferred shares as part of the CPP and a warrant to purchase 952,260 FirstMerit common
shares at an exercise price of $19.69 per share. On April 22, 2009, the Corporation completed the
repurchase of all 125,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A
for $126.2 million which included all accrued and unpaid dividends as well as the unamortized
discount on the preferred stock. On May 27, 2009 the Corporation completed the repurchase of the
warrant held by the Treasury. The Corporation paid $5.0 million to the Treasury to repurchase the
warrant.
Separately, the FDIC announced its temporary liquidity guarantee program (TLPG) pursuant to
which the FDIC will guarantee the payment of certain newly-issued senior unsecured debt of insured
depository institutions (Debt Guarantee) and funds held at FDIC-insured depository institutions
in noninterest-bearing transaction accounts in excess of the current standard maximum deposit
insurance amount of $250,000 (Transaction Account Guarantee). Both guarantees were provided to
eligible institutions, including the Corporation, at no cost
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through December 5, 2008. Participation in the TLPG subsequent to December 5, 2008 was optional.
The Corporation elected to participate in the TLPG subsequent to December 5, 2008.
The Transaction Account Guarantee is effective for the Corporation through June 30, 2010.
Under the Debt Guarantee, qualifying senior unsecured debt newly issued by the Corporation during
the period from October 14, 2008 to June 30, 2009, inclusive, is covered by the FDIC guarantee. The
maximum amount of debt that eligible institutions can issue under the guarantee is 125% of the par
value of the entitys qualifying senior unsecured debt, excluding debt to affiliates that was
outstanding as of September 30, 2008, and scheduled to mature by June 30, 2009. The FDIC will
provide guarantee coverage until the earlier of the eligible debts maturity or June 30, 2012.
Participants in the Debt Guarantee Program are assessed an annualized fee of 75 basis points
for its participation, and an annualized fee of 10 basis points for its participation in the
Transaction Account Guarantee. To the extent that these initial assessments are insufficient to
cover the expense or losses arising under TLPG, the FDIC is required to impose an emergency special
assessment on all FDIC insured depository institutions as prescribed by the Federal Deposit
Insurance Act. In May 2009, the FDIC announced it was imposing an emergency special assessment of
five basis points on average assets of all FDIC-insured depository institutions as of June 30,
2009. On November 12, 2009, the FDIC adopted a final rule requiring insured institutions to prepay
their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of
2010, 2011 and 2012. The prepaid assessments for these periods were collected on December 30, 2009,
along with the regular quarterly risk-based deposit insurance assessment for the third quarter of
2009. For the fourth quarter of 2009 and for all of 2010, the prepaid assessment rate was based on
each institutions total basis point assessment in effect on
September 30, 2009, adjusted to assume a 5% annualized deposit growth rate; for the 2011 and 2012
periods the computation is adjusted by an additional three basis points increase in the assessment
rate. The three-year prepayment for the Corporation totaled $43.9 million.
Critical Accounting Policies
The Corporations consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America and follow general practices within
the financial services industry in which it operates. All accounting policies are important, and
all policies described in Note 1 (Summary of Significant Accounting Policies) of the 2009 Form 10-K
provide a greater understanding of how the Corporations financial performance is recorded and
reported.
Some accounting policies are more likely than others to have a significant effect on the
Corporations financial results and to expose those results to potentially greater volatility. The
policies require Management to exercise judgment and make certain assumptions and estimates that
affect amounts reported in the financial statements. These assumptions and estimates are based on
information available as of the date of the financial statements.
Management relies heavily on the use of judgment, assumptions and estimates to make a number
of core decisions, including accounting for the allowance for loan losses, income taxes, derivative
instruments and hedging activities, and assets and liabilities that involve valuation
methodologies. A brief discussion of each of these areas appears within Managements
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Discussion and Analysis of Financial Condition and Results of Operations in the 2009 Form 10-K.
Purchased loans and related indemnification assets. In accordance with applicable
authoritative accounting guidance, all purchased loans and related indemnification assets are
recorded at fair value at date of purchase. The initial valuation of these loans and related
indemnification asset requires Management to make subjective judgments concerning estimates about
how the acquired loans will perform in the future using valuation methods including discounted cash
flow analysis and independent third-party appraisals. Factors that may significantly affect the
initial valuation include, among others, market-based and industry data related to expected changes
in interest rates, assumptions related to probability and severity of credit losses, estimated
timing of credit losses including those the foreclosure and liquidation of collateral, expected
prepayment rates, required or anticipated loan modifications, unfunded loan commitments, the
specific terms and provisions of any loss share agreements, and specific industry and market
conditions that may impact discount rates and independent third-party appraisals.
On an ongoing basis, the accounting for purchased loans and related indemnification assets
follows applicable authoritative accounting guidance for purchased non-impaired loans and purchased
impaired loans. The amount that the Corporation realizes on these loans and related
indemnification assets could differ materially from the carrying value reflected in these financial
statements, based upon the timing and amount of collections on the acquired loans in future
periods. The Corporations losses on these assets may be mitigated to the extent covered under the
specific terms and provisions of any loss share agreements.
Off-Balance Sheet Arrangements
A detailed discussion of the Corporations off-balance sheet arrangements, including interest
rate swaps, forward sale contracts, IRLCs, and TBA Securities is included in Note 8 (Derivatives
and Hedging Activities) to the Corporations consolidated financial statements included in this
report and in Note 17 to the 2009 Form 10-K. There have been no significant changes since December
31, 2009.
Forward-looking Safe-harbor Statement
Discussions in this report that are not statements of historical fact (including statements
that include terms such as will, may, should, believe, expect, anticipate, estimate,
project, intend, and plan) are forward-looking statements that involve risks and
uncertainties. Any forward-looking statement is not a guarantee of future performance and actual
future results could differ materially from those contained in forward-looking information.
Factors that could cause or contribute to such differences include, without limitation, risks and
uncertainties detained from time to time in the Corporations filings with the Securities and
Exchange Commission, including without limitation the risk factors disclosed in Item 1A, Risk
Factors, of the 2009 Form 10-K.
Forward-looking statements are necessarily based upon estimates and assumptions that are
inherently subject to significant business, operational, economic and competitive uncertainties and
contingencies, many of which are beyond a companys control, and many of
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which, with respect to future business decisions and actions (including acquisitions and
divestitures), are subject to change. Examples of uncertainties and contingencies include, among
other important factors, general and local economic and business conditions; recession or other
economic downturns, expectations of and actual timing and amount of interest rate movements,
including the slope of the yield curve (which can have a significant impact on a financial services
institution); market and monetary fluctuations; inflation or deflation; customer and investor
responses to these conditions; the financial condition of borrowers and other counterparties;
competition within and outside the financial services industry; geopolitical developments including
possible terrorist activity; recent and future legislative and regulatory developments; natural
disasters; effectiveness of the Corporations hedging practices; technology; demand for the
Corporations product offerings; new products and services in the industries in which the
Corporation operates; and critical accounting estimates. Other factors are those inherent in
originating, selling and servicing loans including prepayment risks, pricing concessions,
fluctuation in U.S. housing prices, fluctuation of collateral values, and changes in customer
profiles. Additionally, the actions of the Securities and Exchange Commission (SEC), the Financial
Accounting Standards Board (FASB), the Office of the Comptroller of the Currency (OCC), the Board
of Governors of the Federal Reserve System (Federal Reserve), Financial Industry Regulatory
Authority (FINRA), and other regulators; regulatory and judicial proceedings and changes in laws
and regulations applicable to the Corporation; and the Corporations success in executing its
business plans and strategies and managing the risks involved in the foregoing, could cause actual
results to differ.
Other factors not currently anticipated may also materially and adversely affect the
Corporations results of operations, cash flows and financial position. There can be no assurance
that future results will meet expectations. While the Corporation believes that the
forward-looking statements in this report are reasonable, the reader should not place undue
reliance on any forward-looking statement. In addition, these statements speak only as of the date
made. The Corporation does not undertake, and expressly disclaims, any obligation to update or
alter any statements whether as a result of new information, future events or otherwise, except as
may be required by applicable law.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Market Risk Section in Managements Discussion and Analysis of Financial Condition and
Results of Operations.
ITEM 4. CONTROLS AND PROCEDURES
Management, including the Corporations Chief Executive Officer and Chief Financial Officer,
has made an evaluation of the effectiveness of the design and operation of the Corporations
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.
During the period covered by the report, there was no change in internal control over
financial reporting that has materially affected, or is reasonably likely to materially affect, the
Corporations internal control over financial reporting.
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Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded, as of the end of the period covered by this report, that the Corporations disclosure
controls and procedures are effective.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business, the Corporation is at all times subject to pending and
threatened legal actions, some for which the relief or damages sought are substantial. Although
the Corporation is not able to predict the outcome of such actions, after reviewing pending and
threatened actions with counsel, Management believes that the outcome of any or all such actions
will not have a material adverse effect on the results of operations or shareholders equity of the
Corporation.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from those disclosed in 2009 Form
10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) | Not applicable. |
(b) | Not applicable. |
(a) | The following table provides information with respect to purchases the Corporation made of its common shares during the first quarter of the 2010 fiscal year: |
Total Number of | Maximum | |||||||||||||||
Shares Purchased | Number of Shares | |||||||||||||||
as Part of Publicly | that May Yet Be | |||||||||||||||
Total Number of | Average Price | Announced Plans | Purchased Under | |||||||||||||
Shares Purchased (2) | Paid per Share | or Programs (1) | Plans or Programs | |||||||||||||
Balance as of December 31, 2009 |
396,272 | |||||||||||||||
January 1, 2010 - January 31, 2010 |
38,762 | $ | 22.09 | | 396,272 | |||||||||||
February 1, 2010 - February 28, 2010 |
64,017 | 21.05 | | 396,272 | ||||||||||||
March 1, 2010 - March 31, 2010 |
12,698 | 24.16 | | 396,272 | ||||||||||||
Balance as of March 31, 2010: |
115,477 | $ | 21.73 | | 396,272 | |||||||||||
(1) | On January 19, 2006, the Board of Directors authorized the repurchase of up to 3 million shares (the New Repurchase Plan). The New Repurchase Plan, which has no expiration |
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date, superseded all other repurchase programs, including that authorized by the Board of Directors on July 15, 2004 (the Prior Repurchase Plan). The Corporation had purchased all of the shares it was authorized to acquire under the Prior Repurchase Plan. | ||
(2) | Reflects 115,477 common shares purchased as a result of either: (1) delivered by the option holder with respect to the exercise of stock options; (2) in the case of restricted shares of common stock, shares were withheld to pay income taxes or other tax liabilities with respect to the vesting of restricted shares; or (3) shares were returned upon the resignation of the restricted shareholder. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Corporation held its Annual Meeting of Shareholders on April 21, 2010, for which the Board of
Directors solicited proxies.
(1) Directors were elected at the Annual Meeting for terms expiring at the 2011 Annual Meeting of
Shareholders, with the following voting results:
Authority | Broker | |||||||||||||||
For | Against | Withheld | Non-Votes | |||||||||||||
Steven H. Baer |
64,394,273 | * | 6,103,010 | 8,410,770 | ||||||||||||
Karen S. Belden |
63,948,707 | * | 6,548,576 | 8,410,770 | ||||||||||||
R. Cary Blair |
63,259,864 | * | 7,237,420 | 8,410,770 | ||||||||||||
John C. Blickle |
64,023,421 | * | 6,473,862 | 8,410,769 | ||||||||||||
Robert W. Briggs |
64,091,003 | * | 6,406,281 | 8,410,770 | ||||||||||||
Richard Colella |
63,945,635 | * | 6,551,649 | 8,410,769 | ||||||||||||
Gina D. France |
64,408,180 | * | 6,089,104 | 8,410,769 | ||||||||||||
Paul G. Greig |
63,477,462 | * | 7,019,821 | 8,410,770 | ||||||||||||
Terry L. Haines |
63,341,507 | * | 7,155,777 | 8,410,769 | ||||||||||||
J. Michael Hohhschwender |
63,665,329 | * | 6,831,955 | 8,410,769 | ||||||||||||
Clifford J. Isroff |
63,093,621 | * | 7,403,663 | 8,410,769 | ||||||||||||
Philip A. Lloyd II |
62,142,643 | * | 8,354,640 | 8,410,770 |
* | Proxies provide that shareholders may either cast a vote for, or abstain from voting for, directors. |
In addition to the election of Directors, the following matters were voted on at the Annual Meeting
of Shareholders:
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(2) Ratification of the selection of Ernst & Young LLP as independent registered public accounting
firm for the year ending December 31, 2010:
Authority | Broker | |||||||||||||
For | Against | Withheld | Non-Votes | |||||||||||
76,673,409 | 1,738,647 | 495,991 | | |||||||||||
(3) Approval of amendments to Article FOURTH and Annex A of FirstMerit Corporations Second Amended
and Restated Articles of Incorporation which contain the express terms and standard provision of
the Corporations previously issued shares of Fixed Rate Cumulative Perpetual Preferred Stock,
Series A: |
||||||||||||||
Authority | Broker | |||||||||||||
For | Against | Withheld | Non-Votes | |||||||||||
76,896,616 | 1,129,944 | 881,479 | 15 | |||||||||||
(4) Approval of the amendments to Article III, Section 2 of FirstMerit Corporations Second Amended
and Restated Code of Regulations to authorize the Board of Directors to establish the number of
directors within a range from nine to fifteen without shareholder approval and to establish the
current number of directors at twelve: |
||||||||||||||
Authority | Broker | |||||||||||||
For | Against | Withheld | Non-Votes | |||||||||||
70,881,457 | 7,135,137 | 891,445 | 15 | |||||||||||
(5) Approval of the amendments to Article SEVENTH of FirstMerit Corporations Second Amended and
Restated Articles of Incorporation to include a provision that would allow shareholders to approve,
by a majority of the voting poser of the company, any matter that otherwise could require the
approval of two-thirds or any other proportion (but not less than all) of the voting poser of the
Corporation under Ohio law, and to eliminate the need to obtain shareholder approval for certain
smaller business combinations and mergers: |
||||||||||||||
Authority | Broker | |||||||||||||
For | Against | Withheld | Non-Votes | |||||||||||
70,853,923 | 6,985,958 | 1,068,152 | 20 | |||||||||||
(6) Approval of the amendments to Article EIGHTH of FirstMerit Corporations Second Amended and
Restated Articles of Incorporation to include a provision that would allow shareholders to approve
all amendments to the Articles by a majority of the voting power of the Corporation: |
||||||||||||||
Authority | Broker | |||||||||||||
For | Against | Withheld | Non-Votes | |||||||||||
75,893,990 | 2,038,591 | 975,454 | 19 |
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(7) Approval of the amendments to Article III, Section 4 of FirstMerit Corporations Second Amended
and Restated Code of Regulations to eliminate the provision requiring good cause for shareholders
to remove a director during the term of office for which the director was elected:
Authority | Broker | |||||||||||||
For | Against | Withheld | Non-Votes | |||||||||||
76,388,240 | 1,604,132 | 915,668 | 13 |
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit | ||||
Number | Description | |||
2.1 | Purchase and Assumption Agreement Whole Bank All Deposits, among
the Federal Deposit Insurance Corporation, receiver of George
Washington Savings Bank, Orland Park, Illinois, the Federal
Deposit Insurance Corporation and FirstMerit Bank, N.A., dated as
of February 19, 2010 (incorporated by reference from Exhibit 2.1
to the Current Report on Form 8-K filed by FirstMerit Corporation
on February 22, 2010). |
|||
3.1 | Second Amended and Restated Articles of Incorporation of
FirstMerit Corporation, as amended (filed herewith). |
|||
3.2 | Second Amended and Restated Code of Regulations of FirstMerit
Corporation, as amended (filed herewith). |
|||
10.1 | FirstMerit Corporation 2010 Retention Bonus Plan (incorporated by
reference from Exhibit 10.1 to the Current Report on Form 8-K
filed by FirstMerit Corporation on February 22, 2010). |
|||
10.2 | Distribution Agency Agreement dated March 3, 2010 between
FirstMerit Corporation and Credit Suisse Securities (USA) LLC
(incorporated by reference from Exhibit 99.1 to the Current Report
on Form 8-K filed by FirstMerit Corporation on March 3, 2010). |
|||
10.3 | Distribution Agency Agreement dated March 3, 2010 between
FirstMerit Corporation and RBC Capital Markets Corporation
(incorporated by reference from Exhibit 99.2 to the Current Report
on Form 8-K filed by FirstMerit Corporation on March 3, 2010). |
|||
31.1 | Rule 13a-14(a)/Section 302 Certification of Paul G. Greig, Chief
Executive Officer of FirstMerit Corporation. |
|||
31.2 | Rule 13a-14(a)/Section 302 Certification of Terrence E. Bichsel,
Executive Vice President and Chief Financial Officer of FirstMerit
Corporation. |
|||
32.1 | Rule 13a-14(b)/Section 906 Certification of Paul G. Greig, Chief
Executive Officer of FirstMerit Corporation. |
|||
32.2 | Rule 13a-14(b)/Section 906 Certification of Terrence E. Bichsel,
Executive Vice President and Chief Financial Officer of FirstMerit
Corporation. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRSTMERIT CORPORATION |
||||
By: | /s/TERRENCE E. BICHSEL | |||
Terrence E. Bichsel, Executive Vice President | ||||
and Chief Financial Officer (duly authorized officer of registrant and principal financial officer) |
||||
May 10, 2010
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