Q2 2021 First Merchants Corp Earnings Call
Paul.
We released our earnings today at approximately 8 a M. Eastern time, hopefully you have all found your way to our slide presentation, but if not you can access the slides by following the link on the second page of the earnings release.
Betsy Thanks for the introduction and for covering the forward looking statement on page 2.
On page 3 you'll see today's presenters hand Bio's 2 include President, Mike Stewart, Chief Credit Officer, John Martin and Chief Financial Officer, and Michelle Caveats.
Page 4 is a nice 1 page snapshot of first merchants geographic footprint and a few relevant financial highlights for your review.
We feel our year to date return on assets of 1.4 of 5% and return on tangible common equity of $16.8 2% reflect the strength of first merchants overall balance sheet and earnings model.
Now if you return to slide 5.
As my quote in the press release States we.
<unk> pleased with our record setting second quarter net income totaling $55.6 million and earnings per share of $1 <unk> per share.
In addition to earning $105 million and of $1.94.
And earnings per share during the first 6 months of the year, we've consolidated the 17th.
We are banking centers and fully integrated our <unk> Trust company acquisition.
Mike Stewart will now provide some color on our strong balance sheet growth to include our second quarter loan growth of 6.7%. Thank.
Thank you Mark and good afternoon as you look at the next 2 slides I want to provide an update on our line of business results.
<unk> bank contributions within the quarter.
Michelle in John's comments, and slides will provide you greater detail and since nothing has changed with our strategy in key lines of business, which is page 6 I want to focus on page 7 the line of business balance.
Balance sheet highlights.
On the top of the page offers the breakdown of the core.
And net growth by our business units all of these percentages exclude the balances of the PPP loans.
The private wealth and consumer groups grew at 4% and 5% respectively.
<unk> talked about last quarter, our private wealth team is now fully integrated into each of our markets and their connectivity with the commercial team continues.
Loan drive our growth in PWA relationships and the loan activity.
Our consumer loan balances grew in the quarter based on increases in origination both in units and dollars over the prior quarter the.
The growth was further augmented by a slight increase in HELOC utilization moving from 40 to 41.
During the quarter. This is the first increase in organic growth the consumer group has experienced in 5 quarters.
As noted on top of the page, we chose to sell $76 million of the longer term fixed rate on balance sheet mortgage loans during.
During the quarter, we experienced an increase of construction and purchase volume.
1 of which will position the balance sheet for growth over the next several quarters.
And the pipeline for mortgage originations remained strong at the end of June and with the recent decline of the 10 year treasury rates refinance volumes should increase.
Our core non PPP commercial loans grew in the quarter of 14% on an.
Volume basis. The growth was the result of several factors, but primarily the strong pull through of the pipeline as of the end of March.
Post round 2 of PPP, the economic and business climate in all of our markets has been good we have previously discussed the decrease in line of credit utilization rates, which increased.
Annual order by approximately 1% with PPP in the rearview mirror businesses have been active in financing new plant and equipment for the growth new acquisitions have kept pace and the growth in working capital has improved.
Our investment in growing our commercial banking team across all of the markets continued to drive new.
This conversion.
All of our commercial bankers remain engaged with and prepared for the capital needs of businesses is the outlook of our competition in summary, after adjusting for PPP, the $76 million mortgage portfolio sale organic growth for the second quarter was 10% the.
The pipeline.
<unk> to be able to deliver continued growth in subsequent quarters and affirms my expectation on mid to high single digit annual growth rates over time.
A few comments on deposit growth for the quarter overall deposit balances grew around 8% the growth of the commercial deposit base of nearly 30% outpaced.
<unk> line line of the consumer deposits, but both segments were primarily influenced by the various economic stimulus programs consumers, where net users of prior quarter's economic impact payments and municipalities and other public institutions like universities, where net recipients of stimulus dollars throughout the quarter.
As Michelle.
The highlight next our deposit cost continue to decline again in the quarter being nearly equally shared between the consumer and commercial business units.
The map you see on page 7 represent the demographics of the growing economic environment. The heart of the Midwest that drives our growth and a stable source of talent to lead our business efforts.
Shell was all lines of businesses over the past quarter I've continued to visit these markets and of witnessed the reemergence and acceleration of business activities by both our bankers and our communities and I believe this business climate remains good.
I will now turn the call of the shelf, who will provide the complete review of the quarterly results and operating metrics.
The crown share of the soundness of our portfolio.
Thanks, Mike My comments will begin on slide 8.
We had meaningful balance sheet growth during the quarter, which you can see on lines 1 through 4 of total assets increased $294 million or 8%.
The deposit growth.
Before June of $252 million, coupled with PPP loan forgiveness created liquidity of over $600 million of which $219 million was used to fund loan growth and the remaining liquidity was invested in the bond portfolio.
We are pleased to report net income on line 17.
Increased.
Growth of $1 million or 12% over first quarter, which is the 49% increased when annualized leading us to earnings per share of $1 <unk> shown on line 22.
This result, led to an outstanding efficiency ratio for the quarter of $48, 91%.
6 of them.
<unk> 23, you will see the tangible book value per share increased by $1.17 from first quarter due primarily to the exceptional core earnings contribution this quarter and also an increase in unrealized gains in the investment portfolio.
Moving up to line 19.
The return.
Average equity increased 129% to 12.0 of 4%.
Pre tax pre provision return on average equity was a strong 14, 2.7%, reflecting pre tax pre provision earnings of $65.9 million an increase of 7.
On a $4 million over prior quarter.
Slide 9 shows our year to date results.
Line 22 shows year to date earnings per share of $1.94 at 70% increase over the same period in the prior year.
The efficiency.
Evan pointed out for the first half of 2021 is an outstanding 40, 954%.
Slide 10 shows the highlights of our investment portfolio.
The top right graph shows the trend in the portfolio yield.
The yield on the portfolio declined 11.
The race is points during the quarter due to the rate environment. However, the portfolio contributed $24 million of interest income on a fully tax equivalent basis. This quarter, an increase of $1.6 million over prior quarter and the overall portfolio yield continues to outpace that of peers, we continue to invest excess.
11 day quiddity in the investment portfolio and have enjoyed meaningful incremental earnings that has come of that decision.
In the middle right of slide 10, the net.
Net unrealized gains is noted which is that $131.7 million at the end of Q2. This is up $46.4 million.
The 1 contributing capital through the accumulated other comprehensive income as a component of equity.
The net unrealized gains as of today is even higher at $160 million.
The current tax equivalent purchase yield noted in the bottom left is.
Is approximately 2%.
And to maintain excellent credit quality of the portfolio with the double a rated securities and have not extended the duration of the portfolio of this quarter, even though we had significant growth.
On slide 11 in the bottom left corner.
You will see the second quarter loan yield was the strong 4.
The 0.0 of 5%.
Excluding the impact of PPP loans load yield was 378%.
On new and renewed loans in the fourth quarter average $3, 2.7% down 36 basis points from the yield on new and renewed loans from last quarter, which fluctuates depending.
Non growth mix.
On the bottom right is the loan rate structure, which shows the 64% of the loan portfolio is variable and 36 percentage fixed with 5% of the fixed rate loans being PPP loans ex.
Excluding the PPP loans, 67% of our portfolio is variable rate, which allows us to maintain.
Net asset sensitive balance sheet.
Slide 12.
The details related to our allowance for credit losses on loans.
On the bottom left of the slide as of roll forward of our allowance balance.
During the quarter, we had $1.7 million in charge offs and recovery.
Recoveries of 400000, which on a net basis reduced the allowance balance modestly and we did not book any provision expense. This quarter. Therefore, the ending allowance for credit losses on loans was 199.775 million.
The coverage ratio trend as shown on.
The graph on the top left.
Our coverage ratio at the end of Q2 is 2.9% up from $2.1 6 from the prior quarter, but excluding PPP loans. The coverage ratio is 2.29% down from 234% last quarter.
Now.
Now I will move to slide 13.
On the bottom left you will see the cost of deposits continues its downward trend to 19 basis points in the second quarter. This is the 2 basis point decline from the prior quarter and 28 basis point decline from Q2.2020.
Our company generated average deposit balance growth of $557 million on a linked quarter basis net interest expense from deposits declined 400000 due to the continued deposit pricing discipline.
Slide 14 shows the trending of our net interest margin.
Line, 1 shows net interest income on a fully tax equivalent basis of $109.2 million. When you back out non core interest income items, such as fair value accretion on line 2 and the impact of PPP loans shown on line 3 our core net interest.
The income totaled $97 million compared to the prior quarter total of $94.1 million the increase in core net interest income was $2.9 million.
Stated net interest margin on line 6 with stable and totaled $3.2 2% for the quarter adjusting for fair value.
<unk> accretion and the impact of PPP loans. It brings us 2 of core net interest margin of 3%, which is only 4 basis points lower than the first quarter NIM of 3.0 of 4%.
On slide 15.
Noninterest income totaled $30.9 million for the quarter with total customer.
Customer related fees of $26.9 million.
The quarter over quarter increase was due to gains from the sale of loans of $4.3 million $2.9 million of which was from the $76 million sale of portfolio mortgage loans.
Also wealth management fees increased.
Increased $1.1 million, reflecting the addition of 400000 fees from the Who's Your trust acquisition and tax preparation fees that are collected annually of 500000.
Moving to slide 16.
Total expenses for the quarter totaled $69.3 million.
Which was $3.2 million more than the Q1 expenses of $66.1 million in the bar graph on the far right you will see the increase in salaries and benefits driven by higher salary expense and incentive accruals booked during the quarter.
Slide 17 shows the strength of our capital.
Capital ratios.
The tangible common equity ratio at the top of the page is stated at 9.0% to 4%, but it is 910% without the impact of PPP loans.
As a reminder of the large decline from Q4.2020, the Q1.2021 reflected of 45 basis.
This point impact from seasonal adoption.
At the bottom you will see common equity tier 1 ratio and the total risk based capital ratio remain at very high levels, reflecting the strength of our capital base.
That concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin.
Thanks Michelle.
Well my.
My comments start with slide 18, I will review the loan portfolio, including.
The industry concentrations, the PPP loan program, providing asset quality update including the remaining Covid deferrals, and then close within the asset quality roll forward.
Including a few high.
High level comments before turning the call back over to Mark.
So turning to slide 18 for the quarter the <unk>.
Portfolio experienced strong loan growth as Mike Stewart mentioned in his earlier remarks.
Total growth loans grew $143 million when factoring in the 300.
Wondered $52 million and expected PPP loan forgiveness in the quarter.
When excluding the changes in the PPP loans in the mortgage portfolio loan sale of that Michelle just mentioned the organic loan growth was 10% annualized led by the investment real estate portfolio that I have.
The labeled CRE non owner occupied on line 5 the public finance portfolio on line 7 and the.
The sponsor finance portfolio online too.
We also had an additional $20 million in PPP loan originations in the quarter and ended it with the 4.
$416 million in balances to 3239 borrowers.
With $13.6 million and the remaining on earn fees.
Mortgage loan production remained strong in the quarter of.
Our mortgage banking business is customer centric.
Centric focused on our retail customers and commercial relationships through our private banking business, we operate a mostly originate and sell model as like Stuart highlighted above we decided to take advantage of the current environment to sell an additional $76 million of portfolio loans.
<unk> above our normal origination volume.
This sale in addition to normal attrition through refinance and repayment resulted in the decline in mortgage footings of line 9.
We continue to elevate our excuse me about why it's such opportunities as we continue through the year.
Here the core commercial portfolio remains diversified and balanced with the skew towards manufacturing centered in our geographies with core scalable business lines, leading our growth.
We continue to have a well balanced commercially oriented C&I and investment real estate portfolio of that resembles the market.
Markets we serve.
Slide 19 highlights of our asset quality, our trends continued to be stable to improving with NPA of plus 90 days.
Past due on line 5 down $1.3 million. This left NPA is plus 90 day.
Days past due loans to loans, plus owari unchanged at 65 basis points.
Classified loans on line 7.
Defined as those with a well defined weakness continued to decline this quarter down $64 million or 25.8 percentage.
Per cent.
This change in classified loans, primarily resulted from several of several larger names being either upgraded or exited from the portfolio.
Net charge offs of the line 9 were down for the quarter $1.3 million.
6 basis points of average annualized loans.
And finally at the bottom of the slide I highlight the remaining Covid deferrals. These continue to decline as the borrowers deferment period, and and it's expected that most all of these remaining deferrals will end in the third and fourth quarter.
In summary asset.
Quality remains stable and somewhat improved really improving and while the operating environment beyond the pandemic continues to remain challenging for some borrowers.
They have been able to adjust to face these challenges.
The portfolio.
Continues to trend of the right direction.
With the help of the PPP program.
Improved economic environment. This has led to better overall part of our financial performance and improvement in the residual of pandemic impacted portfolios.
Then finishing up on slide 20 of again included the asset quality roll forward.
Ford, which reconcile changes in asset quality.
On line, 2 and 3 we have been able to resolve non accruals of the pace, where the inflows in line to match the outflows on line 3 less the $1.7 million and gross charge offs.
Dropping down to lines of 11, we saw declines in.
The 90 days past due loans and renegotiated loans on line 12, resulting in NPA is plus 90 days past due down $1.3 million for the quarter.
Thank you for your attention and I'll turn the call back over to our CEO Mark Hardwick Mark. Thank you John slides 21, and 'twenty 2 of highlights.
I like our track record of performance on slide 23 as of the document the highlights our priorities for the next several years of our journey.
We're making strides across these goals and I will formally share of more detailed progress at year end, but I couldn't be more pleased with our energy level around making first merchants.
Since the bank of choice throughout our markets.
We chose the chose a balanced approach to meeting the needs of our customers while protecting the health of our teammates over the last 15 months.
And just as a reminder, we were.
In the office in the first quarter of 2020.
We were working remotely.
<unk>.
Drive through only or by appointment in the second quarter of last year, but then back in the office.
In the third quarter, all the way until the Thanksgiving break where we had to go back to a remote environment drive through only or appointment.
And then we were back in the office again fairly early in February.
Curious so I only bring that up to say I feel like we really have have momentum and we feel like we've delivered a really strong quarter and we're excited for what's next and we're having fun. So I guess with that Betsy I'd love to open it up for questions at this time.
We will now.
Now begin the question answer session to ask a question you May Press Star then 1 on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
If at any time of your question has been addressed and you would like to withdraw your question. Please press Star then 2.
At this time, we will pause momentarily to assemble our.
The roster.
First question comes from Scott <unk> with Piper Sandler. Please go ahead.
Afternoon, guys. Thanks for taking the question.
Let's see I think you had talked about utilization being up about a percentage point sequentially, where is that number now.
And what do you guys consider a typical utilization rate.
Moving on here Scott.
And John are Triangulating that day.
Yes, So hey, Scott it's John.
Alright, so we've got.
Yes.
I know shipped from call it of 30.
738% at its low.
It's been bobbing around 38, 39% with last quarter ended like 37 minutes at like 38 now.
It got to a high pre pandemic of like 47% of half.
In.
Of the pandemic.
Really led to significant declines from peak to trough.
We've added through that same time period commitments.
From call it.
$2.4 billion up another 3 or $400 million. So you've got 2 things happening there.
Utilization rates.
Bell, but it's also as a result of just increased.
The increased lines, but this quarter, we added an additional call it kind.
So it looks like about $100 million of availability.
And yet we still got an extra 1% of.
Outstanding utilization out of it so.
Good movement.
In that in the lines C&I loans.
Okay perfect. Thank you and then you mentioned in your prepared remarks, but a lot of the loan growth Youre seeing is coming from commercial real estate.
These projects that were delayed during the pandemic or is.
This new growth just trying to get a feel for sort of the underlying trends there.
Well, a couple of things that Mike Stewart here.
Page 7 I would attribute a lot of the commercial growth in outstandings coming from the C&I portfolio.
And some of the public finance that we're doing the really.
<unk> also grew as well, but the biggest growth.
The team from those 2.
The construction portfolio the seasonal so we've been active in the commercial real estate segment predominantly multifamily think about.
Moving housing has still been inactive along with industrial warehouse. So you are in the second quarter.
Construction weather looks good.
So it starts to fund those up.
Perfect.
Okay. Thanks, and then maybe final 1 maybe just sort of taking that question I think you guys said.
$13.6 million.
Okay.
The number correctly.
Yes.
That's correct.
Okay perfect.
Alright, that's it from me. Thank you guys very much.
Thank you Scott.
The next question comes from Daniel Tamayo with Raymond James. Please go ahead.
Sure.
Good afternoon, everyone.
Just wanted to see if I could get your updated expectations for where the core NIM.
That's the right at 3% now would move going forward.
Okay.
Hi, Daniel we do expect core NIM to be under some modest pressure due to excess liquidity and the growth we've had in our securities portfolio, but we feel good about our loan and deposit pricing and we also expect net interest income to continue.
Turning to grow next quarter.
Okay.
Alright, terrific and what are your assumptions within that for any.
The deployment of excess liquidity that you have right now in 1 of those levels. If you can give us as well.
Well, we're expecting the by yield.
To stay around 2%.
And in terms of what the amount that we would expect to invest in the bond portfolio will really just be dependent on what we see and deposit growth as Mike Stewart said, we are seeing inflows of stimulus money into public entities.
And so that will probably be.
The biggest.
Variable.
Okay.
Alright, that's great I appreciate you taking my questions.
Thank you Daniel.
The next question comes from Damon Delmonte with K B W.
Please go ahead.
Hey, good afternoon, everyone hope everybody's doing well today from.
My first question just wanted to touch on the expenses to start off.
Michelle I was hoping you could give a little color on your outlook.
Notice that the salaries and employee benefits were up this quarter is that a reasonable level to continue at or are there some.
Maybe some 1 time items this quarter.
I do think thats, a reasonable level. So we're sticking with the expense guidance of 68 to 70 million each quarter.
Okay.
Alright, great and then with respect to you know the provision outlook just given the strong underlying credit trends. This is the second quarter in a.
Of row, where there was no provision now is it reasonable to assume that we could see that trend continue through the back half of the year.
You know we have a bias not to take negative provision we'd prefer to allow our coverage ratio to come down with our normal levels of loan growth. The normal levels of charge offs, you know that being said we will.
We'll have to keep an eye on the unemployment rate and see where our forecast comes out but that does kind of give you our bias.
Okay.
Fair enough. That's the that's all that I had thank you very much.
Thank you Damon.
The next question comes from Terry Mcevoy with Stephens. Please go ahead.
Hi, good afternoon, everyone.
Hi, Gary.
So the the new loan yields coming down in the quarter definitely caught my eye and I think I forget who mentioned that it was kind of a reflection of a mix shift as I look at the maybe the top of page 18, where loans are growing I hope you hope you could just maybe expand on what the mix shift of how the mix shift impacted the new loan yields last quarter.
<unk>.
Let me get there.
Yes, it's the mix. So when you think about the sponsor that's of traditionally.
Wider spread book of business the.
Public finance is not a widespread so that the lower spread business.
When you think about the investment and people have been talking about across our markets. That's been inside of what I would characterize for us is upper middle market and when you compete in that space, it's a little bit of of thinner spread.
We're getting into leveraging our recently deployed that capital markets.
Our capabilities in syndication.
So I think how that mix.
Mix plays out.
Yield.
Thanks, and then as a follow up the.
The strong growth in the commercial group specifically the C&I I was wondering if it does the specific industry stand out.
Any specific region that was behind that group, maybe expand if you could on on the strong C&I growth. Thank you.
It's pretty balanced I will say the the investment in the bankers that we've been talking about.
Continuing it across all of our markets is paying dividends right. So.
But 2 new people, while 3 new people in a greater Ohio marketplace. So we're seeing some nice growth coming out of there and then Indiana, Indiana Indianapolis in particular continues.
Where we've added additional 2 bankers in our up on keep kind of upper middle market, Michigan market same way of their new bankruptcy, they're driving some of loan growth and then our specialty business lines. We've added 2 asset based lenders and another sponsor.
Bankers. So it has come in in that segment the segment as well.
Great I appreciate that thank you.
Thank you Terry.
As a reminder, if you have a question. Please press star then 1 can be join in to the queue.
The next question comes from Brian Martin with Janney Montgomery. Please go ahead.
Hey, guys. Thanks for taking the question just wanted.
I wanted to from me just back to the utilization rates for just the minute I guess is your parts of some of your competitors or just other banks. The maybe that's not picking up as much as maybe you guys are seeing a little bit of a pick up here I guess do you expect that to continue to trend up or is it kind of feel like it's going to be a slow grind up just your thoughts on utilization.
Yes.
Brian This is John.
I would say that it's probably going to be of slow grind up they've got to burn through the liquidity that they have on their balance sheet in order to begin to fully utilize the lines, but the requests for line availability.
Even through the pandemic.
Continued to be continued its trend upwards, which would speak to an expectation that they're going to use the lines of ultimately.
That's kind of how we think about it so I would say.
Economic activity their economic activity continues to them.
Pick up.
The debit.
I would fully expect to see that true.
Trend trend upward and while we don't get into the monthly results they were up in the interim and more.
We're down a little bit at the end so its bouncing around month to month and.
From point to point March to June you'll see.
The 1% of improvement so it's hard to say, but I would expect of grind upwards.
Okay I appreciate that and then just the last 2 was just on the forgiveness.
Just your thoughts on the.
The trend there I guess do you expect most of that forgiveness to occur I don't know if you suck forgiveness of round 2.
See that order, but just where most of that occurs by the end of the year is that kind of your thinking today based on the trends.
Yeah.
Brian for and to give you a couple of numbers were about 86% of the count from the first round or 88% of the dollars.
This quarter.
If you think about that and then you think about round 2 we've got 13% of the count and 5% of the dollars. So if you think about what happened last year versus kind of the same point.
Maybe even more so in this year as compared to the first round you'll probably.
<unk> start to see that pick up with comparable.
Apparel forgiveness in 2021.
Got you Okay. That's helpful with the numbers and then maybe just 1 for whomever just on kind of the outlook of capital deployment today, I mean, given the strong earnings this quarter.
It's kind of the outlook being positive just kind of wondering how you're thinking about the.
The deployment outside of kind of the organic growth I mean.
Maybe just from an M&A perspective, I know, it's something you've got the talked about as part of your core strategy, but.
Can you talk about that that'd be great. Thank you.
Yes.
Ill turn the call that.
And typically our strategy is still the same we think of our capital in thirds.
We're kind of out of our payout ratio level the.
But we like.
Yes.
When you think about the share repurchase program, what Michel I think we've repurchased this quarter of 9.
Net Roe.
And we are of $100 million of share repurchase plan on the shelf we didn't have.
Any repurchases through the first 6 months, so when I say this quarter of the $9 million all happened.
Just since July 1.
And so we've had some success taking advantage of of.
$1 million lower prices.
And then the.
The cash in acquisitions is something that we're always interested in.
And as we continue to look at our opportunities, we're making sure of the cash is of significant part of that transaction.
<unk>.
Mike Stewart has done a very nice job of utilizing cash.
Capital as we grow organically so.
I'm not sure anything has really changed and we do have a goal of staying keeping our TCE at 9 which we're doing a nice job of and it produces returns on tangible.
The <unk>.
16% or so.
And we think thats.
A strong number that should get the attention of investors.
Perfect. Okay. Thank you for taking the questions.
Thank you Brian.
Alright.
This concludes our question and answer session.
I would like to turn the conference back over to Mark Hardwick for any closing remarks.
So.
Well.
Just wanted to say thank you for.
All of the participation in the investment in the first merchants.
I said, we feel like we delivered a strong quarter and it's a great.
Section of the momentum that we have so we're.
Uh huh.
Again were.
And excited about the year to come thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.