Q1 2022 First Merchants Corp Earnings Call
First merchants Corporation first quarter earnings before we begin management would like to remind you that today's call contains forward looking statements with respect to the future performance and financial condition of first merchants corporation that involve risks and uncertainties.
Pretty information that's contained within the press release, which we encourage you to review. Additionally management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures.
Press release available on the website contains financial and other quantitative information to be discussed today as well as every conciliation of GAAP to non-GAAP measures.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press star zero on you touched on the telephone.
As a reminder, this conference call is being recorded.
And I'd like to introduce your host for today's conference Mark Hardwick, Chief Executive Officer. Thank you. Please go ahead.
Good afternoon, good morning, and welcome to the first merchants first quarter 2022 conference call. Let me thanks for the introduction and for covering the forward looking statement on page two.
We released our earnings this morning at approximately eight a M eastern <unk> Eastern standard time.
And hopefully you have a slide presentation. If not you can access supplied by following the link on the second page of the earnings release.
On page three Youll see today's presenters and our bias to include President, Mike Stewart, Chief Credit Officer, John Martin, Our Chief Financial Officer, Michelle Kirby S. K.
Page four is a snapshot of the first merchants geographic footprint and some relevant financial highlights for your review.
Our Q1 return on assets of $1, two 6% and word hurdle and return on tangible common equity of 15% continue to be reflective of a high performing and sustainable business model now.
Now if you turn if you would turn to slide five.
Net income totaled $48 $6 million or <unk> 91 per share equaling. The same total as Q1 of 2021. However, excluding PPP income our Q1 2022 earnings per share totaled <unk> 88 cents compared to 78.
From last year, an increase of nearly 13%.
Loan growth, excluding PPP totaled seven 2% in deposit growth totaled five 4% for the quarter.
Our acquisition of local one closed on April the first of 2022 and our system integration is planned for the third quarter of this year.
Consistent with our vision statement of enhancing the financial wellness of the diverse communities. We serve we introduced a new tagline.
Helping new prosper are our testing of various options resulted in this final version due to the primary emotion of curiosity that sparked and our test audience. So we were excited to have rolled that out and.
To start using it consistently throughout the footprint.
Now, Mike Stewart will provide some color on our lines of business.
Level, one, but for Michele and John will review, our financial and credit data.
Thank you Mark and good morning to all and as you look at the next two slides I'll provide an update on our line of business results and their contributions within the quarter.
Since our business strategy remains unchanged, which is page six how about we focus on page seven business highlights.
So the top of that page offered the breakdown of the core loan growth by our business units. It was another solid quarter of active engagement with our clients and prospects that delivered the annualized growth rate of more than 7%, excluding the PPP loans.
The growth rate was eight 5% over the past 12 months.
Within that chart, you see the consumer portfolio contracted by 1%, but has increased throughout the past year by two 5% the quarterly.
<unk> can be attributed to HELOC product within increasing home values, coupled with first mortgage refinances bed repayments and reduced utilization.
Our consumer clients, though continue to have strong credit profiles and good liquidity and as shown in the bottom chart deposits balances grew in the quarter by 7% as we continue to gain accounts through both traditional banking centers and digital capabilities at.
At the end of March the consumer loan pipeline is up 6% from the end of 2021 and up over 25% from a year ago.
Back on the top of that chart, the mortgage portfolio grew near a 20% annualized rate.
The drivers of this increase come from continued strength in construction and purchase volumes with more of our clients choosing our on balance sheet variable rate pricing options given the rise in the 10 year Treasury and result in horizon fixed rate alternatives Ms.
Michelle is going to review the noninterest income to tail will you see the mortgage gain on sale was at a low point as overall mortgage originations are down.
The pipeline for our mortgage team ended the quarter modestly higher than the end of December and slightly down from the prior year.
Purchase and rehab volumes are nearly 60% of the current pipeline, which is up 30% from a year ago reinforcing that macro slowdown in refinance volumes.
Our total non P. P P commercial loan portfolio grew at 6% annualized rate within the quarter.
As noted in those bullet points down below that chart. The CNI growth rate was 10% on an annualized rate.
The total commercial growth was muted by refinancings within our investment real estate segment.
Industrial real estate footings have been choppy the past four quarters based on the current.
Historically, low cap rates and liquidity in the secondary market.
Our real estate clients are taking advantage of these values and monetizing product projects for their liquidity or taking the project to the secondary market to lock in those long term fixed rates.
Our team continues to deliver new project financing and with construction draws picking up pace during the spring and summer growth. In this segment is expected for the balance of the year.
The C&I segment remains the growth engine in this quarter and for the past four quarters for that matter. The primary drivers. When this segment continue to be our team in our markets.
Like I've mentioned before our commercial team is actively engaged in winning new clients, taking market share along with providing additional senior debt and treasury services to our existing clients across all the geographic market you see represented on the map.
Within those geographies businesses are expanding plant and equipment to meet growing demand.
We have continued to see capital plans for new equipment and expanded manufacturing sites to meet their growth plans or the onshore more of their production capabilities.
Another driver of the C&I loan growth is the increased revolver commitments and utilization rates both are growing to support the working capital associated with the increasing cells and inventory levels during the quarter revolver commitments increased over $125 million.
New and existing clients in the utilization rates of the revolvers move closer to 45%.
This compares to line utilization of 38% in the first quarter 2021, which was the nadir of the past four years revolver.
All of our commitments have increased nearly 600 million over the past four quarters.
Overall businesses have deployed their PPP liquidity and therefore their line usage and deposit levels are moving back towards normal levels. The quarterly decline in deposit which is noted in the bottom of the chart.
Decline yet the total commercial deposits over the prior year continues to increase.
Lastly for the commercial industrial segment succession planning events within the ownership the middle market companies continue to be a driver for our sponsor finance teams or through dividend recaps and Aesop transactions, we have expertise with all of these strategic capital events.
The economic and business climate across those markets is very good.
We continue to see the resiliency and the management teams of companies we serve.
We have solid business plans they have solid balance sheets, they are well positioned for growth and they continue to effectively navigate supply chain and labor issues. Our teams remain poised to respond to their capital needs and the commercial pipeline remained stable from prior quarters and should be a harbinger for continued C&I loan growth.
Overall the map you see on the top left portion of the page also represent the demographic of a growing economic environment. It's the heart of the Midwest that drives our continued growth and offers a stable source of talent to lead our business efforts across all of our lines of business as.
As Mark said earlier I'm going to make a few comments about our new level, one teammates and the markets they serve across southeast, Michigan and Grand Rapids.
I continue to spend time in their market with their teams and with their clients I really get an energized each time I go there I was there last week.
They have a strong culture and a demonstrated track record of winning.
Terry cable has moved to Farmington Hills to lead the integration efforts and build on the synergies between the level, one franchise and our existing Michigan franchise in Monroe.
Terry is an accomplished executive who most recently led our Fort Wayne team post our I E. B acquisition five years ago. When she joined first merchants from Chicago.
Greg where net who led level once commercial banking effort will continue his leadership role as region president of that geography and work directly with Terry.
I have witnessed Greg and his commercial bankers in action again meeting with their clients and prospective clients and they are an impressive group.
They're like many of first merchants commercial team, they're smart they're active they're engaged they want to win they are connected in their communities.
And they are truly ready to leverage the larger balance sheet offered by our partnership.
Their commercial loan business grew over 7% the past quarter and they have a healthy pipeline heading into the second.
The level one mortgage team is building early synergies with the legacy FM.
F&B mortgage team. So if you remember level ones mortgage results were of similar size to first merchants. Tim Mckay is now fully engaged as president of first merchants mortgage the combined team Tim served as level once president and offers to some stability to the level one mortgage team.
And brings the enhanced processes and platforms to the first merchants team.
<unk> is off to a great start.
The consumer team is eager to gain access to the enhanced product sets currently offered by first merchants and I'm, making headway towards the August integration event.
Rene Marino will continue as the market leader of the 17 banking centers. She is well respected with their current level one team and within the first merchants consumer leadership teams. Renee is also off to a great start.
So the collective organizations, we've got a lot of work to do between now and integration, but that said, we have a stable core banking professionals, leading our daily efforts and are poised to continue winning in southeast Michigan.
That I will turn it over to Michelle who can provide you a more complete review of our quarter results and John can share the status of our portfolio Michelle. Thank you Mike. Good morning, everybody. My comments will begin on slide eight covering first quarter results.
We are pleased to report another quarter of strong balance sheet growth, which you can see on lines one through five.
Growth returned to a more normalized growth level as you can see online for once we get past the forgiveness of the remaining PPP loans, which had a period end balance of 49 million liquidity management should normalize as well well we are funding loan growth with our deposit growth and cash flow rollout from our investment portfolio.
Reported earnings per share for the quarter online 20 Threep.
With 91 cents, which was the same EPS in the first quarter of 2021.
Mark mentioned, excluding the income from P. P. P loans earnings per share. This quarter was 88 cents and 78 cents in Q1 of 2021 which is EPS growth of 13% year over year.
EPS in the fourth in the prior quarter, which was fourth quarter of 2021 without PPP fee income was 84 cents. So we had four cents of core earnings growth just over prior quarter.
You will see on line 17, net income totaled $48 6 million an increase of 800000 from prior quarter. Despite declines of $1 7 million in P. P. P fee income, which also demonstrates our strong operating leverage.
Like many of our peers, we experienced a decline in the tangible common equity ratio, which you can see on line six.
And the tangible book value per share online 24 of $1 95, or seven 7% during the quarter due to changes in unrealized gain loss on available for sale Securities, which takes me to my next slide slide nine which shows our investment portfolio highlights.
On the bottom right you can see we did shift to an unrealized loss on the mark to market of the available for sale securities portfolio of $101 3 million.
For comparison last quarter, we had a gain of $75 9 million.
Designate half of our investment portfolio as held to maturity to provide quite a bit which provided quite a bit of capital protection from this mark to market adjustment, we mostly tend to hold our bonds to maturity only selling select securities and we think theres an advantage to be gained so we don't expect to realize what are currently unrealized losses in our income.
Statement in the near future.
The top right graph shows the trend in the portfolio yield.
The yield on the portfolio increased four basis points during the quarter and the purchase yield on new Securities is approximately three 5%.
Slide 10 contains highlights of our loan portfolio.
In the bottom left corner.
You will see the stated first quarter loan yield declined 14 basis points from last quarter to 373%.
Excluding the impact of P. P. P loans loan yield was 326, 4% a decline of only six basis points compared to prior quarter, which was driven by the consumer portfolio.
Yield on new and renewed loans increased from 3.14% last quarter to $3 two 2% this quarter, an increase of eight basis points.
On the bottom right you will see $6 4 billion of loans were 68% of our portfolio are variable rate.
As of quarter end, we had active loan floors I'm, 24% of the total loan portfolio. So about 2 billion alone and nearly all of those won't grow out of those loan floors with the next 50 basis point increase which we expect in Maine.
The asset sensitivity of our balance sheet will create meaningful increase in net interest income given the forward curve.
Slide 11 shows the details related to our allowance for credit losses on loans.
On the bottom of the slide is a roll forward of our allowance balance.
During the quarter, we had charge offs of 500000 and recoveries of $1 1 million, which on a net basis increase the allowance balance modestly and we did not book any provision expense. This quarter. Therefore, the ending allowance for credit losses on loans was 196 million.
The coverage ratio trend is shown in the graph on the top left.
Our coverage ratio at the end of Q1 is 2.09% down from two point, 11% from prior quarter.
Excluding PPP loans the coverage ratio is two point, 10% down from two point, 14% last quarter. So our coverage ratio continues trending down as our portfolio grows.
Now I will move to slide 12.
Although total deposits increased to $173 million during the quarter total interest expense on deposits continued to decline and was down $1 3 million compared to prior quarter on.
On the bottom left you'll see our company's cost of deposits declined from 18 basis points to 13 basis points, mainly due to the repricing of a large deposit in January .
Slide 13 shows the trending of our net interest margin.
Line, one shows net interest income on a fully tax equivalent basis of 108 million.
When you back out non core interest income items, such as fair value accretion shown on line two.
And the impact of PPP loans shown on line three.
Our core net interest income totaled $105 1 million, which is shown on line four.
Compared to the prior quarter total of $101 7 million the increase in core net interest income was $3 4 million.
State and then interest margin online seven totaled 3.03% for the quarter.
Adjusted for fair value accretion and the impact of P. P. P loans brings us to core net interest margin of 297%, which is shown on line 10.
And the increase.
Of five basis points from last quarters core NIM of 292%, we actually had NIM growth of nine basis points, but it was offset by a reduction of four basis points from a lower day count during the quarter.
Last quarter Q4, we hit our margin bottom and we saw a great increase this quarter and we will see meaningful increases each quarter going forward driven by the fed rate increases.
On slide 14, noninterest income totaled $25 9 million for the quarter with total customer related fees of $23 million, which was consistent with last quarter.
Although there were two meaningful variances to note in the mix of revenue sources.
Banking revenue declined compared to last quarter due to lower origination volume.
Setting that was an increase in card payment income during the quarter. We recorded annual card volume incentives of 2 million card swipes in the first quarter of the calendar year are always a bit lower than the fourth quarter due to seasonality, but tend to pick up in the second quarter.
Moving to slide 15.
Total expenses for the quarter totaled $72 3 million, which was 100000 less in Q4 expenses.
Although expenses were well managed this quarter, we do expect quarterly expense levels to trend a bit higher than this quarter, primarily due to increases in salaries and benefits and we will also incur transaction costs from our level one acquisition in the second quarter.
Slide 16 shows the strength of our capital ratios.
Tangible common equity ratio at the top of the page declined to $8 three 1% this quarter, which is a bit below our internal target as a result of the mark to market unrealized loss flowing through accumulated other comprehensive income in equity that I mentioned in my earlier comments.
Given we had 196 million in the allowance for credit losses, which adds to our balance sheet safety and soundness, we feel comfortable with the current level of TCE.
Regulatory capital ratios on the bottom of the page, which exclude the impact of unrealized gain loss on investments continued to remain at very strong levels and above our target.
Overall, our financial results reflect strong fundamentals for the quarter and we are very pleased that.
That concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin to discuss asset quality.
Thanks, Michelle and good morning.
My remarks start on slide 17, where I'll highlight the loan portfolio, including segmentation growth an industry concentrations provide a bridge for the PPP loan program and finish with a review of asset quality and the nonperforming asset quality roll forward before ending with a fewer high level comments.
About the current environment.
So then turning to slide 17.
The loan portfolio consists of a diversified commercially oriented portfolio with concentrations consistent with those segments of the economy found in our geographies.
I'll provide loan growth bridges for both the I provided loan growth bridges for both the quarter and year over year on the right side of the slide.
In the quarter when excluding the $58 million of P. P. P pay downs the loan portfolio grew $165 million or seven 2% annualized.
Experienced broad growth in commercial and industrial loans, including our sponsor finance business construction lending public finance and the residential mortgage portfolio, where there's been increased demand in portfolio jumbo mortgages for the reasons, Steve had indicated earlier.
The PPP program is winding down with $49 million remaining.
Those roughly $4 million were in active repayment at the end of the quarter, leaving roughly $45 million to process for forgiveness or otherwise be repaid.
Given the timing of the applications that our historical experience with Barbara forgiveness. We continue to expect that the remaining PPP loans will be substantially forgiven or converted to principal and interest payments this quarter with the trailing forgiveness applications through the end of the year and beyond.
So turning to slide 18, this slide highlights our asset quality trends in position.
We continue to have a favorable asset quality profile with non accrual loans on line one down slightly although.
Other real estate increased $5.8 million as we completed the foreclosure of performing multifamily project. The project had become entangled in litigation and liens and continued to perform until foreclosure was complete and the property moved to Owari. The property is being positioned for sale and based on reason.
A play appraisals loss is not expected.
This left N P. As the 90 days past due to loans and ore re at 55 basis points dropping down into classified loans on line seven or loans with a well defined weakness we continue to see a decline this quarter down $20 million and ending the quarter at 1.0.
9% of loans. This is the fourth consecutive quarterly decline in classified loans with credit quality improving across a wide spectrum of loan types, including senior housing manufacturing agricultural.
Residential investment real estate.
Rounding out the slide charge off and recovery activity resulted in a net recovery on line nine of $600000. We will look at the components on the following slide.
Turning to slide 19, then I've provided the nonperforming asset roll forward, which reconciles the changes at N P. As.
On line two we added $4.4 million in new non accrual credits in the quarter. The largest was associated with a $2 $9 million C&I borrower.
The related owner occupied real estate.
On line three we resolved $4 3 million and non accruals the largest new non accrual was a $1.4 million loan to a real estate developer and then online five gross charge offs were $500000 and were more than offset by $1 $1 million in recoveries.
And finally on line seven we added the $5 $8 million property I, just mentioned a moment ago.
So in summary, our asset quality position is strong exudes strength and remains stable.
Our commercial borrowers are deploying their liquidity and drawing down further their lines of credit as they navigate through a challenging operating environment, including the ongoing effects of supply chain issues labor and hiring challenges and higher commodity and other costs. None of these challenges are unique to first merchants or its customers, but I believe.
Our asset quality and allowance position as well to work through individual issues in situations as they may arise.
Thanks for your attention and I'll turn the call back over to you Mark.
Great. Thanks team.
On slide 'twenty, 'twenty, one and 'twenty two we just show.
The trend lines are a number of key items.
Not going to spend really any time on those I think we covered them pretty thoroughly last quarter.
But I would just say I feel like we are.
We're really off to a great start in 2022.
You heard all the comments from Mike Stewart, and John and we have great loan growth Michel highlighted.
Arjun expansion and continued expense management as well as just the stability of our capital and our credit levels.
And then.
On top of all of that is just this exciting new acceleration.
Of our balance sheet that we expect to come from Michigan in the southeast Michigan market in level one.
Yeah.
Mike Stewart did a nice job of mentioning a handful of individuals that are helping drive.
Our performance in that marketplace and I would just also just add administratively.
A team of individuals like like <unk>, who is our chief risk officer or is was.
It was their chief risk officer that is just working hand in hand with our teams.
David Walker, helping us get to the finish line as it relates to the integration.
Pat Ferring has just been outstanding through this process and it's an exciting time here at first merchants so.
Hopefully you can hear from from the tone and the attitude of everyone in this room.
Just the level of optimism that exists around the performance of first merchants into the future. So.
With that I think I'll I'll stop and open it up for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone again that is star one to ask a question.
Joe Your question just press the pound key.
Please standby, while we compile the Q&A roster.
Your first question comes from the lamps cough seafirst from Piper Sandler Your line is now open.
Good morning. This is Ignacio Gonzales on for Scott Secret today.
My first question is with underlying growth loan growth potential in the mix between commercial and consumer.
Where are your current commercial utilization rates.
Yes.
Our current utilization rate.
Got it here soon.
Currently we're sitting at about a 45% Stu mentioned earlier.
Up from the steel used to terminate ear.
Q1 of 'twenty, one of around 37%. So it's trending from I'll call. It trough at that point up to pre pandemic levels than the consumer he locks, which is a much smaller level of balances that sits around the upper thirties right now.
Alright, thank you for that.
Yes.
Just a hop into my second question here, how many rate hikes do you assume we will get this year and if you could also refresh our memory how much would you expect NII on the NIM to expand.
For each 25 basis point and fed rate hikes.
And how does your assumptions change between the first few hikes in the next several.
Yeah. So when we did our modeling we assumed that there is a 100 basis point rate hike in Q2, So 250 basis point hikes.
And then a 50 basis point hike in Q3, and 50 base. Another 50 basis point increase in Q4. So total of 200 left in 2022, so that was our assumption.
At the time and so just looking at net interest income for the year.
Our model is telling us that net interest income will grow 8% from last year just on rate hikes alone. So that's not assuming any growth.
And so too.
To give you some color around what that looks like quarter to quarter. When we look at our margin as I had mentioned we've got some loan floors that we're gonna be growing out of in the second quarter and so the margin expansion in the second quarter will be a bit more modest maybe two basis points, but then when we get into the third and fourth quarter, we expect our margin to expand each quarter more.
Around the likes of seven to nine basis points.
Does that give you some color.
Yeah, Thanks for that color.
And then just my final question here looking at expenses is 73 million a quarter still the right number and what kind of leverage do you have that pressure increases or the overall revenue environment does not pan out as expected.
Yeah, I would say it would probably be $73 million to $74 million per quarter, it's going to trend a little bit because of increases in salaries.
But we think that it really with the growth that we have particularly with level one coming in as well that we're going to have great operating leverage and we're prepared to manage the expense levels.
Maybe.
Alright, thanks for all that color.
That's all the questions I have for now.
Thank you.
Your next question comes from the line of Daniel Tamayo from Raymond James Your line is now open.
Thanks, Good morning, good morning, everybody.
Just a quick follow up on the margin Michelle does that.
Guidance include any kind of increasing.
And the accretion relative to the deal and what would that be what are you factoring in there.
Yeah. It does not include any accretion from the deal so that that's really excluding growth and accretion.
And so the accretion on our deal is.
We're actually recently refined our loan marks and so the accretion that we had at announcement is actually going to be a bit higher.
And what we had an announcement and so actually the accretion will help our earnings per share accretion and we think that actually the accretion from the deal in 2022 will probably be accretive by 12 stones.
Okay terrific.
And then maybe you know.
You know putting together the the loan growth guidance that you gave on commercial where it sounds like expecting something similar with the pipeline stable and then consumer perhaps a little bit better given the pipeline being up from from yearend and a year ago.
Is it fair to assume that.
Roughly 7%.
Organic growth that you achieved in the first quarter is kind of a floor for for what Youre looking for going forward or how are you feeling about kind of the total portfolio growth.
I guess, excluding level, one and then if you wanted to bake.
Bacon, what with level, one would look like as well.
Yes, Mike Stewart here, Daniel I do think that our.
Consistent mid single digit mid single digit loan growth is that where we're really shooting for the pipelines that you referenced do feel stable and good we're still getting our arms around the quantification of.
Actual pipelines that sit up there in southeast, Michigan, but that being said.
I get to see the volumes that go through that so I feel good about.
We're the level one team is they're already producing.
The consumer portfolio in the pipeline.
It's a really small book of business that our consumer pipe of our book of businesses that have a $1 billion. When you compare it to the commercial pipeline of or our Outstandings, which you know closer to that $5 billion. So it's a bigger.
Relative growth, we get from our commercial teams.
Okay, Daniel C&I is $5 billion, yeah right right.
IRA.
Just going back to the margin for a minute.
Michel did a nice job of explaining where we stand and obviously, it's a little different in last call.
We have a little higher interest rate assumption and we did a quarter ago.
Quite a bit higher actually and.
And then we also have kind of reassess.
Our deposit betas moving away from what was traditionally the.
The formalized model from the path to where we think we are today so.
She was sharing some of the growth expectations are clearly higher than what we've talked about last quarter.
And then as is.
It relates to loan growth.
Mid to high single digits is always kind of our our we're comfortable 678, 9% and in words, but I wouldn't say we're enthusiastic.
Level one can.
Help us achieve the higher end of that range. So I don't know, whether I would call it 7% of floor, but.
But we're pretty confident in our ability to consistently deliver year after year mid to high single digit growth rate.
Okay, great. Thanks for that.
And then finally just.
We'd love to get your thoughts on you gave the new securities yields are certainly higher than what you've got in the portfolio.
Does that change your thoughts on how quickly youre willing to put your remaining excess liquidity to work in terms of.
Specifically on the Securities book.
Or not.
Alright.
We've been putting our liquidity to work consistently throughout this entire cycle and then we will continue to do that.
We're thrilled that we're getting a little higher yield with that excess liquidity as well as runoff.
Yeah.
Alright.
Your next question comes from the line of Damon Delmonte from <unk>. Your line is open.
Hey, good morning, everyone hope everybody's doing well today.
We are thanks Damian.
So first question just wanted to circle back on the expenses.
Michelle I think you said the core expense base should be in the $73 million to $74 million range.
You have a like a pro forma combined company expectations with level, one getting folded into the mix.
Once expense run rate was generally 15 million per quarter, and we had modeled 30% cost savings, which we believe is achievable and so our system integration is scheduled for the end of the third quarter. So.
Fourth quarter of 2022 will be the first quarter, where you should be able to see that expense savings until you know if we're running at about 74 ish million Steve.
Stand alone and then add in another 11 or so for level, one that would that would give you your run rate post integration.
Okay.
Okay. So you don't do you expect to get much in the way of savings here in the second quarter or is it all going to really come in in the fourth.
Yeah, We don't think we think it's all going to come into force.
Okay.
Okay. That's helpful. Thanks, and then when you kind of combine the two balance sheets and you look at like your earning asset base do you have a kind of a pro forma range for what the average earning assets would look like next quarter.
You know I don't have a pro forma earning asset.
Yes.
Six in loans.
You know I guess the real question is how much of the excess liquidity.
Pushed through the bond portfolio.
We're still working through the process of.
Looking to picking kind of picking through their bonds and figuring out what will retain what we might sell keeping cash that sort of thing and so I don't have a final number on that at the moment.
Got it Okay and then on the fee income side I think Michelle you noted there was like a 2 million dollar.
Annual bonus came in the card payment fees is that correct right, yes, that's correct.
So if we kind of take that out of the.
Well take that as well as the gain on sale of securities out that puts you around call. It $23 3 million for the first quarter, how do you kind of see that trending as we go through the year, what kind of growth could you get off of that.
Yeah, I mean, I think the you know.
Our current.
The level of noninterest income this quarter is a good run rate for the year.
We always experience card payment income, that's a little bit seasonally lower in Q1, but we also think that we'll have some good growth with wealth management fees and loan level hedges and so forth. So I think our current level is a good run rate to use.
Okay mortgages are seasonally low in Q1, and the card income helps offset that.
Okay got it okay.
That's all that I had for now thank you very much.
Youre welcome. Thank you.
Your next question comes from the line of females Thomas from Stephens, Inc. Your line is open your line is open.
Thank you good morning, everyone I'm online for Terry Mcevoy today.
My first question is I was curious good morning, I was curious what you guys are expecting for deposit growth throughout the year.
We're expecting a normalized deposit growth level of about 3% to 4%.
Perfect and I.
I guess building off of the rate hike commentary I. Appreciate all the info you guys gave on loan floors in an asset sensitivity. So kind of building off of that and my previous question. What are you guys thinking for deposit betas. This time around to the cycle.
Yeah, you know and Mark had mentioned our models and how we had taken a fresh look at them are hit.
Historically, if we will use our historic betas are from.
Our deposit studies aren't betas would normally has been about 30% in the first step 100, and then about 40% up 200, but given that there's so much liquidity in the system now what we really look at how we think deposit rates will perform competitively we think that the deposit betas in the up 100 will be more in the teens.
Like maybe 15% to 18% and maybe more around 20% up 200, and you know whether.
We're on or whether it's a little bit higher Laurie, we'll we'll find out once.
Once we see how competition reacts in the rates actually come to fruition.
Got it okay perfect. Thank you that's really helpful.
I guess my final question.
You guys gave a lot of great color about the southeast Michigan market level one.
Sounds like a really exciting stuff there. So I guess along those same lines can you guys talk to your kind of what activity you're seeing there what areas of activity or maybe what areas of opportunity that excites you guys. The most.
Yes, Mike Stewart here again really sits front and center with the commercial opportunities think about that.
Density of businesses there.
<unk> size that level, one was in their limited ability to continue to.
Move upmarket, if you will or grow with their existing.
Businesses. So they were kind of cap that theyre hold level.
And I've got to witness firsthand those clients want to continue to be a part of the level one infrastructure that the people and are excited to be thinking that they can grow with the first merchants they've got an active group of bankers.
Great pedigree Theres a lot of market disruption that you might know about from the past several integrations that have happened there with other organizations larger in particular.
It's been it's been a good source of talent and then something that I didn't talk about is level one doesn't have a private wealth group at all.
So our private wealth capabilities is also something that really excites the level, one bankers to be able to offer additional products and services around their relationships.
Both from a commercial point of view and then how we run.
Through investment management capabilities through the consumer network. So those are the primary excitement points that sit up there.
Perfect. That's great I appreciate all the color and that's.
That's it from my questions. So thanks for answering my questions guys.
Your next question comes from the line of Brian Martin from Janney. Your line is open.
Hey, good morning, guys. Thanks, I My question on deposit Betas as was just asked but just I guess secondarily, just the Michel the variable rate loans, I guess first merchants and level one what what's the total variable rate loans. It maybe I missed I think you gave a percentage as a percentage given but what is that and how much of it moves.
Immediately with rates.
Yep level and slightly less than ours, but we haven't I don't know that we have the model pulled together.
The.
A few more fixed rate assets on their loan book than we do but.
So we can get that number to you Brian .
I would say their asset sensitivity is really close to our level of asset sensitivity.
And so I think when we when you think about how margin will trend I don't foresee adding level one into that trend that impacting that significantly from ours.
There were more leveraged than we were.
Instead of having some of the fixed rate assets in the bond portfolio. They had a few more in the loan portfolio, but from an asset sensitivity perspective, very similar to us.
Got you Okay. So the comments Michelle you made earlier was about kind of legacy first merchants rather than the combined company on those on your expectations for that for the rate hikes, but the sensitivity is close to it should be a net pretty similar to what you articulated.
Yes, that's correct gotcha. Okay. That's helpful. Thank you and then just on the on the capital front I guess can you talk about I mean, you said you were a little bit less.
Than you expected in your target that you had obviously protected b.
The capital with the held to maturity just kind of how you're thinking about capital deployment here.
You know I guess the potential with share repurchases just organic growth and then the transaction.
Okay, Yes, we are.
We are not actively.
Purchasing shares in the market, we want to get through the close.
So you're exactly where our capital levels land.
Some of this.
The noise around the Ao Ci.
No adds to that assessment, but we are incredibly.
Incredibly strong capital and allowance numbers.
And from our expectations.
<unk> is too so.
Get through this integration report our next quarter numbers, and then provide a little more clarity as to what's next we do have some.
Some sub debt that is callable next year.
We are reassessing.
The hybrid instruments that we have on our balance sheet just to make sure we have the optimal capital stack, but.
I think we're in a really has an incredibly strong position from a tangible common equity standpoint.
At a level.
Really likes it produces a higher return on tangible common equity than what we've had in the past and we kind of.
Suggested that that was going to be one of the priorities going forward about a year ago.
Gotcha, Okay, and maybe just the last one for John just Janet with there's some talk about some concerns with potential recession or whatnot as you get into 'twenty. Three Mega can you talk about just give any thought on just where would you expect.
Distressed I guess, when you're looking at the stress and the potential in the loan portfolio I guess as you kind of monitor monitor that.
Yeah.
Interesting, Brian when I think about potential downside within the portfolio interest rates are going to impact our borrowers.
But we stress we underwrite so there should be room, there but.
That's one place than you'd think about higher commodity prices and input costs for anybody who's manufacturing, you're going to see that higher wages.
We can start to see running through income statement. So you know.
Those are the kinds of things and it's really if it unfolds at a rate that our borrowers can adjust and raise prices.
Then it'll mute some of the effect of it but.
That's where I see it you know it just kind of early on.
So we'll see how it all plays out.
I think my comment about the allowance gives me.
It should give others competence that.
We've certainly factored it in.
And our classified levels are too low right now former a history of the company and so we're in a great position, but that's not your question. Your question is where would you see it and that's that for me as you know.
Those points.
No I agree you guys are in a great spot. So congrats on a nice quarter and thank you for taking the questions.
Thank you Brian .
There are no further questions at this time.
To turn the conference back to Mark Hardwick, Chief Executive Officer.
Thank you Bill and thanks, everyone for attending we appreciate your investment in first merchants your continued interest in <unk>.
As we've said in the past or available for shareholder comments.
Consistent with the color of that's already been provided but look forward to talking to you next quarter. Thank you.
This concludes today's conference call. Thank you for participating and have a wonderful day you may all disconnect.
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