Fitch Affirms FirstMerit at 'BBB+'/'F2' Following Mid-Tier Regional Peer Review,; Outlook Stable

Wed Feb 5, 2014 4:54pm EST

(The following statement was released by the rating agency) NEW YORK, February 05 (Fitch) Fitch Ratings has affirmed the ratings for FirstMerit Corporation's (FMER) at 'BBB+'/'F2'. The Rrating Outlook remains Stable. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS - IDRS, VRs, AND SENIOR DEBT Fitch's affirmation of FMER's ratings is supported by the company's continued stable financial performance, good market position in core markets, solid asset quality, and an adequate capital position given its risk profile. The Stable Outlook reflects Fitch's view that the company will continue to generate reasonable earnings and maintain adequate capital levels for its rating category over the long term. Fitch observes that FMER has generated consistent earnings performance not only throughout the credit crisis but coming out of it as well, reflecting a fairly conservative risk culture. When adjusting for one-time items relating to the acquisition of CRBC, core earnings, measured by pre-provision net revenue (PPNR) are around 1.5% with the company generating a bottom-line return on average assets (ROA) of between 90 basis points (bps) and 105 bps. Fitch believes that cost saves related to its acquisition of Citizens Republic Bancorp could augment earnings performance, in the near- to -mid-term,; they will most likely be off-set by net interest margin compression given the asset-sensitive nature of FMER's balance sheet. Asset quality metrics are in line relative to similarly rated peers. Nonperforming assets (NPAs; legacy and acquired) were less than 1.0% at 4Q'q13 -- one of the lowest levels in the peer group. Furthermore, the company has shown the ability to work down NPAs with relatively small credit costs. FMER's net charge-offs over the last five quarters have averaged 20 bps, in line with similarly rated peers. Fitch views the FMER's capital levels as adequate for its rating and overall risk profile. At 4Q'q13, the company reported ratio a TCE ratio of 7.7%. Fitch notes that the company has maintained capital at these levels even after creating a balance sheet 50% larger than at YE12 year-end 2012 through the acquisition of CRBC. Fitch would expect the company to maintain these types of capital ratios if its taste for sizable acquisitions continues. RATING SENSITIVITIES - IDRS, VRs, AND SENIOR DEBT Ratings could be pressured if operating performance trended downward in comparison to most recent quarters and to below below-peer averages. Given that FMER's profitability, capital and credit metrics are expected to remain in-line with similarly rated peers, Fitch believes FMER's ratings are on the high end of its potential range. KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by FMER, and its subsidiaries are all notched down from FMER's Viability Rating (VR) of 'bbb+' in accordance with Fitch's assessment of each instrument's respective non-performance and relative Loss Severity risk profiles, which vary considerably. RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES FMER's subordinated debt and other hybrid capital ratings are is sensitive to changes in FMER's VR. Rating sensitivities for the VR are listed above. SUBSIDIARY AND AFFILIATED COMPANY KEY RATING DRIVERS FirstMerit Bank, NA is a wholly owned subsidiary of FMER. FirstMerit Bank, NA's ratings are aligned with FHN's reflecting Fitch's view that the bank subsidiary is core to the franchise. SUBSIDIARY AND AFFILIATED COMPANY RATING SENSITIVITIES First Merit Bank, NA's ratings are sensitive to changes to FMER's VR or any changes to Fitch's view of structural subordination between bank subsidiary and holding company. Rating sensitivities for the VR are listed above. KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR FMER's Support Rating and Support Rating Floor of '5' and 'NF' reflect Fitch's view that the company is unlikely to procure extraordinary support should such support be needed. KEY RATING SENSITIVITIES- SUPPORT RATING AND SUPPORT RATING FLOOR FMER's Support Rating and Support Rating Floor are sensitive to Fitch's assumption around as to capacity to procure extraordinary support in case of need. Fitch Ratings reviewed FMER's ratings as part of the mid-tier regional bank review. The 19 banks in today's review include: Associated Banc-Corp (ASBC), BOK Financial Corp (BOKF), Cathay General Bancorp (CATY), City National Bancorp (CYN),Cullen/Frost Bankers, Inc (CFR), East West Bancorp, Inc. (EWBC), First Horizon National Corp (FHN), First National of Nebraska, Inc. (FNNI), First Niagara Financial Group, Inc. (FNFG), First Republic Bank (FRC), First Merit (FMER), Fulton Financial Corp (FULT), Hancock Holding Company (HBHC), People's United Financial, Inc. (PBCT), Synovus Financial Corp (SNV), TCF Financial Corp (TCB), UMB Financial Corporation (UMB), Webster Financial Corp (WBS), Wintrust (WTFC). Fitch has affirmed the following ratings with a Stable Outlook: FirstMerit Corporation --Long-term Issuer Default Rating (IDR) at 'BBB+'; --Short-term IDR at 'F2'; --Viability Rating at 'bbb+'; --Support Rating at '5'; --Support Rating Floor at 'NF'. FirstMerit, N.A. --Long-term IDR at 'BBB+'; --Long-term deposits at 'A-'; --Short-term IDR at 'F2'; --Short-term deposits at 'F2; --Viability Rating at 'bbb+'; --Support '5'; --Support floor 'NF'. Contact: Primary Analyst Doriana Gamboa Director +1-212-908-0865 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Bain Rumohr, CFA Associate Director +1-312-368-3153 Committee Chairperson Christopher Wolfe Managing Director +1-212-908-0771 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: 2014 Outlook: U.S. Banks (Nov 21, 2013) U.S. Banks: Liquidity and Deposit Funding (Aug 08, 2013) U.S. Banks: Interest Rate Risks (What Happens When Rates Rise) (Jun 18, 2013) U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In? (Jul 11, 2013) Global Trading and Universal Banks - Periodic Review (Dec 12, 2013) Fitch Fundamentals Index - U.S.; Index Trend Analysis 4Q13 (Jan15, 2014) Risk Radar Global - Q313 (Sep 05, 2013) Fitch Global Corporate Rating Activity – Third Quarter 2013 (Dec 5, 2013) U.S. Banking Quarterly Comment: 4Q13 (Earnings Continue to Tick Up, but Challenges Remain) (Jan 27, 2014) Global Financial Institutions Rating Criteria (Jan 31, 2014) Assessing and Rating Bank Subordinated and Hybrid Securities (Jan 31, 2014) Applicable Criteria and Related Research: Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here Global Financial Institutions Rating Criteria here U.S. Banking Quarterly Comment: 4Q13 (Earnings Continue to Tick Up, but Challenges Remain) here Fitch Fundamentals Index here Global Trading and Universal Banks Review: Q312 here U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In? here U.S. Banks: Interest Rate Risks (What Happens When Rates Rise) here U.S. Banks: Liquidity and Deposit Funding here 2014 Outlook: U.S. Banks here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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