Q3 2022 First Merchants Corp Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Okay.
Good day, and thank you for standing by and welcome to the first merchants Corporation third quarter earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
To ask a question during this session you will need to press star one one.
Please be advised that today's conference is being recorded.
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.
First merchants corporation that involve risks and uncertainties further information 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 comparable GAAP measures. The press release available on the website contains financial and other quantitative information to be discussed today as well.
Conciliation of GAAP to non-GAAP measures.
I'd now like to hand, the conference over to your Speaker today, Mark Hardwick Chief Executive Officer. Please go ahead.
Well good morning, and welcome to the first merchants third quarter 2022 conference call Michele. Thank you for the introduction and for covering the forward looking statement on page two.
We released earnings our earnings today at approximately eight a M. Eastern you can access today's slide by following the link on the second page of our earnings release.
On page three Youll see today's presenters and our buyers to include President Mike Stewart.
Credit Officer, John Martin and Chief Financial Officer, Michele Kevin you're asking.
Page four is a snapshot of the first merchants geographic footprint and some relevant financial highlights for your review.
Given the close of level one bancorp on April 1st of this year, you will notice an updated banking center map highlighting our now 122 locations across four states.
We also continue to receive meaningful awards for customer service leadership work life balance and performance from publications like Forbes, Newsweek S&P and comparably.
Now if you return to slide five.
Reported earnings per share for the third quarter totaled $1.08 compared to Q3 of 2021.
Results of 98 cents.
When adjusted for PPP income.
Level, one acquisition expenses, our Q3 2022, EPS totaled $1.12, an increase of 25 cents per share or 29 cents.
Over Q3 2020 once adjusted total.
Seven cents per share.
Organic growth in loans of 10% for the quarter and 13, 5% year to date when.
When combined with core margin improvements of 28 basis points for the quarter and 23 basis points year to date are the drivers to our EPS improvements.
Our system integration of level, one is complete and was exceptional in many areas and more challenging than anticipated and others. Our teams in both Michigan and our level and our legacy markets quickly resolved issues with professionalism and customer service mindset that makes me proud.
We also continue to streamline the branch network as evidenced by five completed consolidations in 2022.
The year to date earnings per share story, when normalized for PPP income and acquisition accounting resulted in year to date 2022 earnings per share of.
$3, one SaaS, which is 18, 5% better than our 2021 total of $2 54.
Third quarter return on assets of 143 and return on tangible common equity of 28, five evidenced the strength of our combined companies post acquisition.
Still includes some acquisition costs.
Michele will highlight a few additional adjusted ratio was like the pre tax pre provision earnings and our efficiency ratio later in the material.
<unk> will now provide color on our lines of business.
<unk> presence in the Michigan market with employees and customers has been valuable and I'll just add that.
Our 150 employees strong appreciation dinner this past Thursday was full of energy and excitement.
I can't it can't really express just how encouraged I am by the talent of our new level one colleagues.
Yeah. Thanks, Mark I agree with that statement spending time in the Michigan market as I do in many markets is exciting and being able to meet our clients work with the teammates.
Continue to see the opportunity is really.
Wonderful I think for first merchants bank.
Let's focus on page seven right business highlights.
The top of the page offers the breakdown of the core loan growth by our business units.
Third quarter represented another solid quarter of working with our clients and prospects borrowing need that delivered the annualized growth rate of more than 10%, excluding the PPP loans.
As discussed in our prior calls we strive for high single digit annualized growth rates and these results achieve those targets.
As this morning's news release noted total organic loan growth for the past 12 months has been over 13% and last quarter the growth rate was over 20%.
The commercial segment loan balances now total 9 billion up 11, 5 billion loan portfolio. The two 3% rate of growth for the quarter was at a slower pace than the prior quarter up 13% new business activity was solid as measured by new name generation, but line of credit usage decline this quarter.
As many clients are now highly focused on loan balances given continued steep rise in interest rates that behavior is also a primary driver of the decline in commercial deposits that you can see on the bottom section of this slide.
The commercial pipeline ended the quarter at a highest level. This year, we measure pipeline by both credit that is currently within our approval channel and credit within a proposal phase both are at the highest levels the.
The drivers of the commercial growth in the C&I segment continues to be the expansion of plant and equipment to meet growing demand of products and services for our clients.
Our line of credit utilization rates declined our revolver commitments increased due to the continued inflationary pressures pushing up the values of working capital assets.
Working capital cycles on the other hand are not necessarily slower than the prior periods as the supply chain issues have not been further constrained.
A second driver continues to be succession planning events within the ownership of middle market companies are sponsored finance team and he stopped transaction benefit from these sell side events.
We have maintained a consistent and disciplined approach towards underwriting within these segments.
The last driver is the increase this quarter in investment real estate footings construction projects have continued to fund throughout the summer and there have been a slower pace of project refinancings into the secondary market.
Our underwriting approach has remained consistent within the primary asset classes, we focus which is multifamily industrial warehouse student housing medical office and self storage.
Let's see let's move on to the consumer segment, where loan growth picked up the pace in the quarter reflected by the 21% annualized growth as compared to the 14% growth year to date.
The quarterly increases can be attributed to home equity loans private wealth relationships and small business activity.
Home equity activity is correlated to the continued increases in home values and our average utilization in the portfolio has remained the same two quarters.
Our underwriting approach remains unchanged in all of these categories as well.
At the end of September the consumer loan pipeline remains solid but lower than the prior quarter.
Consumer deposit balances declined for the quarter you can see on the bottom.
We have brought the former level, one franchise deposit base and alignment with our pricing disciplines post our integration at the end of August . This effort is now complete and we look to drive deposit balances through our relationship model and connectivity to our whole bank efforts.
The consumer team continued to gain new accounts through both in branch and digital online activities.
Our investment last year, and a new digital account opening process hit a high point last month with over 18% of new consumer DDA accounts being opened through the digital channel.
So, let's discuss the loan growth within the mortgage portfolio, which increased roughly 187 million in the quarter.
On balance sheet residential portfolio now totals $1 7 billion the driver of the quarter and year to date increases come from continued strength in purchase volumes with more of our clients choosing five and seven year adjustable rate product offerings.
Our underwriting standards remain unchanged prime borrowers with the continued increases in 15, and 30 year fixed rate options, our clients have chosen our shorter term adjustables.
Michele review that noninterest income detail, where mortgage gain on sale remain muted as refinancing volumes are still at historical low levels.
The pipeline for our mortgage team ended the quarter higher than prior year, but less than the end of June purchase and rehab volumes now exceed 70% of both the originated and pipeline units.
On an overall comment the economic and business climate.
Across all of our markets remain stable, while we continue to see the resiliency and the management teams of our company that households, we serve our team remains responsive and ready to support our growth plans up high single digits.
Growth to close out the full year 2022.
A few more comments about our expanded Michigan market and to continue Mark's earlier statements. The level. One system integration was completed at the end of August our new teammates along with many legacy first merchants folks have worked tirelessly through this change of it collectively.
Collectively they have worked with our clients and have built the foundation for future growth in southeast, Michigan, Ann Arbor, and Grand Rapids, I remain impressed and quite frankly optimistic that there's strong growth culture and a demonstrated track record of winning winning will continue.
I'm going to turn it over to Michele to provide the more review of the quarter results and we can then get it to John for the soundness of our portfolio.
Mike.
Our comments will begin on slide eight covering third quarter results.
You can see our balance sheet growth on lines, one through five and that we continue to trend towards a more favorable earning asset mix total loans on line, two which Mike covered in his remarks increased over $290 6 million to organic growth during the quarter, which was offset by PPP loan forgiveness.
Of $21 7 million.
Deposits decreased $136 million during the quarter and the investments on line three decreased 335 million liquidity from the investment portfolio funded our loan growth. This quarter as a result, our loan to deposit ratio continued to trend up and was approximately 81% this quarter compared to <unk>.
73% in the prior quarter.
Mark covered earnings per share for the quarter in his remarks rising yields on the loan and investment portfolios drove higher profitability. This quarter, which is reflected in the increase in net interest income on line 11 of $11 6 million.
Noninterest income also increased $1 3 million, which you can see on line 13.
Noninterest expense on line 14 remains elevated which included $3 4 million of merger costs.
Our stated efficiency ratio was $53 three 4%, but was a low 50, 139% excluding merger costs, reflecting strong operating leverage.
The tangible common equity ratio of nine six declined 38 basis points and the tangible book value per share online 26 declined $1 19, as those metrics continue to be impacted by changes in the unrealized loss on the available for sale securities portfolio.
Slide nine shows our year to date results.
Yeah.
<unk> 25 shows year to date earnings per share of $2.62.
Pre tax pre provision income year to date with $205 1 million, an increase of $19 million or 10% when excluding merger costs keep in mind that prior year year to date pretax pre provision income included 27 million of PPP fee income.
So year over year, the core growth was exceptional.
Slide 10 shows highlights of our investment portfolio.
On the bottom right you can see we had a net unrealized loss on the mark to market of the available for sale securities portfolio of $392 5 million compared to last quarters loss of $246 1 million.
So the mark to market adjustment is meaningful half of our portfolio is classified as held to maturity and protects equity from the decline in value for that portion of the portfolio.
In the bottom left you will see the cash flow, we expect to receive from principal roll off totaling $260 million over the remaining months of 2022 and for the year 2023 and.
In addition to this principle, we will also receive an additional 100 million of interest income from the portfolio. So we will have a fair amount of liquidity provided by the investment portfolio over the next 15 months without selling securities.
Slide 11 contains highlights of our loan portfolio.
In the bottom left corner you will see the stated third quarter loan yield increased 67 basis points from 476% from last quarters yield of 4.09%.
Yield on new and renewed loans increased significantly from 387% last quarter to 496% this quarter, an increase of 109 basis points.
On the bottom right you will see seven 7 billion of loans were 66% of our portfolio are variable rate with 42% of the portfolio repricing in one month and 52% repricing in three months. So we will continue to see meaningful increases in interest income from the loan portfolio is.
The fed continues to increase rates.
Slide 12 shows the details related to our allowance for credit losses on loans.
We did not record any provision expense during the third quarter. The provision expense recorded year to date was to establish the C suite day, one allowance associated with the acquisition of level one.
During the third quarter, we had net recoveries of 400000, which brought the ending allowance for credit losses on loans to a robust $226 7 million.
The coverage ratio trend as shown in the graph on the top left our coverage ratio at the end of Q3 was 194% down from 1.98% from prior quarter due to strong loan growth.
This reserve coupled with the remaining fair value accretion of 34 million provides excellent protection as we head into an uncertain economic environment.
Now I will move to slide 13.
The total cost of deposits on the bottom chart shows deposit costs increased this quarter by 23 basis points up to a total cost of 46 basis points, reflecting the strong pricing discipline. We've had in this increasing interest rate environment.
Our interest bearing deposit betas, this quarter were 20%, which were flat compared to prior quarter competition.
Competition for deposits has increased significantly and we do not expect our deposit beta to remain at the current 20% deposit beta.
Slide 14 shows the trending of our net interest margin.
Line, one shows net interest income on a fully tax equivalent basis of $146 6 million.
When you back out noncore interest income items, such as fair value accretion on line two and the impact of PPP loans shown on line three our core net interest income totaled $143 1 million, which is shown on line four compared to the prior quarter total of $130 7 million the increase in core.
Net interest income was $12 4 million, reflecting our higher loan yields stated net interest margin on line seven.
<unk> totaled $3 five 5% for the quarter.
Adjusting for fair value accretion and the impact of the P. P. P loans brings us to core net interest margin of 347%, which is shown on line 10, an increase of 28 basis points from last quarters core NIM of $3 one 9%.
The tax equivalent yield on earning assets increased 53 basis points and cost of funding only increased 26 basis points, we will see additional NIM expansion next quarter with the expected fed rate increases in November and December .
On slide 15.
Noninterest income totaled $29 6 million for the quarter with the acquisition of level, one contributing a couple of million of noninterest income per quarter in Q2 and Q3.
Customer related fees this quarter totaled $22 9 million a decrease of $2 9 million from prior quarter.
The decrease in service charges on deposits reflect changes to our overdraft practices put in place mid year.
Mortgage loan production is still strong at 275 million in loans were originated this quarter, we retained approximately 75% of those loans in the portfolio and sold only 25% of them in the secondary market, causing a reduction in the gain on the sale of loans and noninterest income.
Derivative hedge fees in wealth management fees were negatively impacted by the market derivative hedge fees has slowed because of the rising rate environment and wealth management fees were under pressure due to the decline in asset values.
A couple of unique items that were recorded this quarter was a bully gain of $5 3 million, which was offset by a write down of an equity investment of $1 9 million reflected in other income.
Moving to slide 16.
Total expenses for the quarter totaled $96 4 million, which included in merger costs incurred during the quarter of $3 4 million in severance of 600000.
Core compensation related expenses reflected the impact of wage inflation. The success, we've had filling some recent positions or some open positions recently and accruals for incentives.
Also incurred an increase in marketing costs as we launched ads in the Detroit market to communicate our brand we feel confident in our ability to realize the 30% cost savings and the acquisition of level one in the fourth quarter, but going forward expense levels will reflect our investments in people and technology are low core efficiency ratio reflected in the top.
Right shows that we continue to achieve strong operating leverage even with these investments.
Slide 17 shows our capital ratios.
The decline in tangible common equity ratio over the last few quarters was due to the Aoc I changes I've mentioned earlier on the available for sale investment portfolio and 70 use of $79 million in cash in the acquisition of level, one going forward, our strong earnings and increasing net interest income will create capital.
And strengthen this ratio going forward. Additionally, given we have 226 million in the allowance for credit losses, which adds to our balance sheet safety and soundness, we feel comfortable with our current capital position.
Overall, our financial results reflect strong fundamentals for the quarter and we are very pleased with the results that concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin to discuss asset quality.
Thanks, Michele and good morning, My remarks start on slide 18, where I highlight the loan portfolio, including segmentation growth and composition.
This quarter I've included a portfolio insight slide I will again review asset quality and the nonperforming asset roll forward before ending with a couple of high level comments about the current environment.
Turning to slide 18.
In the quarter, excluding the $22 million reduction in PPP loans, the total loan portfolio grew $291 million or 10%.
Leading the growth this quarter was the addition of $191 million in residential mortgage loans with.
With the rise in interest rates the mortgage team has leveraged the desire borrowers to take advantage of the lower adjustable rate.
Adjustable rates to add high quality, primarily adjustable rate loans to the balance sheet.
While lower than the second quarter, we continued to experience broad growth and commercial and industrial loans, including sponsor finance as well as in the construction as well as in construction lending.
Non owner occupied CRE declined with borrowers moving projects to the permanent market, while construction lending grew with new commitments and higher construction utilization, which climbed to 61% in the third quarter up from 53% in the second quarter.
Turning to slide 19.
A slice of the portfolio of several different ways to provide additional transparency into the portfolio's composition star.
Starting with CNI.
This classification includes sponsor finance as well as owner occupied CRE.
Associated with the operating business.
Our C&I portfolio is representative of our markets and thus has a concentration in manufacturing.
Our current line utilization is 40% down roughly from 45% and I provided historic utilization levels to clear any confusion from prior calls.
We participate in roughly $600 million of shared national credits across various industries with an average exposure of roughly $10 million. We also have $78 million of on balance sheet SBA guaranteed loans, which includes $11 million of remaining PPP loans.
Diving into the sponsor finance portfolio, we have roughly 60 portfolio companies, 90% of those borrowers had senior cash flow leverage less than three times and 86% had total debt to cash flow leverage of less than four times.
85% of those had a fixed charge coverage of greater than one and a half times, which resulted in a current portfolio classified loan ratio of less than 3% at the end of the third quarter.
We reviewed the we review the individual names in this portfolio in depth quarterly and monitor closely for changes in asset quality.
Moving to construction finance, we have a limited exposure to residential development at our primarily focus on one to four family non tracked individual build development. Although you have a handful of residential development relationships, we continue to maintain.
For commercial construction, we continue to have a bias towards multifamily construction with a sub concentration of student housing.
Moving down to consumer and residential mortgage the portfolio consists of primarily prime originated residential and consumer loans.
These include Helocs and he loans direct auto and miscellaneous other consume consumer loans in summary, the portfolio has a balanced mix of what one might expect from a Midwest bank with a mortgage consumer sponsor finance and investment real estate business.
Turning to slide 20 as.
As in previous quarters.
This slide highlights our asset quality trends and current position, we continue to have favorable asset a favorable asset quality profile with non accrual loans on line, one down to $5 million with other real estate.
90 days past due and renegotiated loans, mostly unchanged we ended the quarter with $59 million in NPA, and 90 day past due or four 4% of loans or 29 basis points of total assets.
Dropping down to classified loans on line seven or loans with a well defined weakness there was a net increase of $15 million to $207 million or $1, 77% of total loans, which remains comparable to pre pandemic levels.
Then finally, we had a net recovery as Michele mentioned in the third quarter and a net recovery of 700 $751000 year to date in the third quarter, we had a $1.3 million recovery for about 2021 charge off related to a senior housing relationship that helped to offset the raw.
$900000 in charge offs.
Then finishing up on slide 21, we roll forward the migration of nonperforming loans charge offs Owari at 90 days past due nonaccrual loans fell to $5 million on line six with the resolution of a grain marketing company from a prior period offset with the addition of a $4 seven.
CRE our housing relationship that entered the category.
In the quarter.
Given the current environment, we've been able to balance the migration of new nonperforming loans against the resolution of existing nonperforming loans with $2 $5 million of improvement in the quarter.
With respect to <unk> and charge offs.
We had nominal change in <unk> with the largest being a five point, which is the largest in the portfolio being a $5 $8 million student housing project.
With 903, a $900000 in gross charge offs and no. Other significant changes we ended the quarter with $59 million of nonperforming assets and 90 days past due on line 2014.
Yes.
In summary, our asset quality position is strong and continues to remain stable.
Providing a little more color I regularly attend top borrower relationship review meetings and can see the effects from higher interest rates firsthand, while having an impact interest rate stress built into our underwriting and the borrower's ability to adjust either or both pricing and expenses has buffered much of the increase.
We continue to closely monitor the portfolio to ensure timely issue identification and implementation of risk mitigation strategies.
I appreciate your attention and I'll turn the call back over to Mark.
Thanks, John .
We followed a recommendation that Terry Mcevoy had and Terry I know youre on the call. Thank you.
I hope our analyst and investors appreciate it's the additional credit slide that you included John .
I think it addresses some of the areas that maybe.
Maybe you can cause some cause for concern in the industry not specifically first merchants.
In this environment investors are always looking for more information and concerned about what they don't know.
What we clearly believe is that we have a very balanced granular portfolio.
We're underwriting and managing our risk or they just always work in conjunction with our sales teams.
We believe that our healthy level of reserves and low levels of <unk> are a critical part of our strong investment thesis.
Slide 22 highlights our track record of performance.
And on slide 23, you'll see it highlights our combined annual growth rate for assets, both organic and through M&A, which includes nine additive acquisitions since the great recession.
Yeah.
Probably a good time to talk about M&A I'm proud of our M&A capabilities. However, I'm truly looking forward to solely focusing our teams on internal efficiencies through improved processes procedures and technological enhancements, while strengthening the customers' user experience in 2000.
'twenty three.
Slide 24, as a reminder of our of our vision, our mission and our team statement and the strategic imperative is to guide our decision making.
I am confident that when you look at our results to include strong organic growth.
With conservative underwriting standards healthy reserves and capital powered by a strong operating leverage or a strong pre tax pre provision earnings you will see a company's scorecard that aligns with its healthy culture.
We know who we are and what we stand for and our strategic imperatives drive our decision making.
Thanks for your attention and your investment in first merchants and Michele we are happy to take questions at this time.
As a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.
Okay.
Yeah.
Our first question comes from Scott <unk> with Piper Sandler Your line is now open.
Good morning, everyone. Thanks for taking the question.
Either mark or Michele was was curious if you could address that.
Expense topic, I think the core expense base came in higher than you guys had suggested last quarter and I certainly see that the drivers in terms of marketing and.
Compensation costs, but.
How much of that total level, if now sticky or could it come down on a net basis. I think you guys had previously been saying closer to.
Like an 84 million dollar level as the level one costs came out but sort of a far cry from that now just curious to hear what the appropriate basis that we should be thinking about where to go from here.
Yeah, we had some some one time items that we recorded this quarter I highlighted a couple of those for you.
And so when we look at fourth quarter expenses with inflation and some of the investments that we've made we also increased minimum wage to $16 an hour. So I think fourth quarter expenses could come somewhere in the range of $89 million to $91 million.
Okay.
Correct.
And then you gave some color on NII tailwind as we go forward.
Once the fed stops raising rates you know, we'll certainly have the cash flows from the securities portfolio, but of course, presumably.
Deposit betas will begin to catch up but what's your confidence in <unk> ability to continue to grow NII sequentially once the fed stops raising rates.
Well, we've got that.
A pretty significant portion of our variable rate loans that reprice in the first year. So even once the fed stops raising rates, we will see lift in interest income over the course of the year.
Deposit competition, and how quickly betas rise you know that.
Remains to be seen I do think that we'll see deposit betas get back to historical levels through the cycle.
But we used to think that we will see net interest margin lift over the next couple of quarters.
Yes, Scott and we've always been confident that even when.
The fed stops that our organic growth rates continue to remain strong.
And help us power through in terms of earnings.
Perfect.
Alright, Thank you guys very much.
Okay. Thank you.
Please standby for her next question.
Our next question comes from Daniel Tamayo with Raymond James Your line is now open.
Thank you and good morning, everyone.
Maybe we could talk a little bit about the.
The fee income outlook.
You touched on the.
Overdraft impact in deposit service charge, obviously mortgage banking has.
Come down and then you talked about the amount being sold in the market relative to what youre, keeping you've seen some nice rajiv resi growth there on the balance sheet, but.
Overall kind of the number looked a little bit lighter than I was expecting I guess pulling out the bully gain and the and the.
The corresponding hit there, but how are you thinking about where fee income could shake out here in the fourth quarter.
Okay.
I think these are.
The levels that you can anticipate going forward.
And we've always viewed our noninterest income.
Driven off of our off of our.
Our core customer base, but its also always been Ah.
A real hedge in terms of just interest rates and when when rates rise our noninterest income typically isn't as strong and when rates start to go the other direction our fee income helps pick us up so well.
These levels were not excited about where we are today, but.
It is consistent with what we expect when you have a rising rate environment.
Okay. Thanks Mark.
And then I think you just mentioned that you're continuing to expect pretty good growth.
I think that was meant.
The loan side, but.
Maybe just.
Kinda talk a little bit about what youre seeing what youre expecting on the loan growth side I'm, assuming that the residential mortgage growth will slow here with rates up in.
Perhaps selling them a little bit more of that production, but.
Sure.
Curious, where youre seeing the growth on the loan side and what kind of growth you are expecting as maybe demand slows with rates being up here.
Yes, I'll just say that.
Our guidance of.
Mid to high single digits is kind of all it is always the objective.
We've had a little stronger year this year because of the mortgage activity and our willingness to use our balance sheet.
We're actively.
Looking for additional sources to two two.
Well the.
In the five and seven seven year arms, because there's only so much balance sheet capacity, we can commit to mortgage so.
It's been a really nice add to our growth in 2022.
I don't see it continuing at the same level.
Although I do feel great about our production and the quality of the team.
Looking for.
Secondary source to sell under the market.
The real core of our growth is going to come out of the commercial balance sheet and Mike mentioned, our pipeline I'll, let him maybe touch on some of the areas where he feels best.
Yes, I did highlight briefly.
Daniel that our commercial pipeline at the end of the quarter is really strong.
And if you've watched us over time, you can see that kind of predicting that the outlook quarter to quarter can be a little bit choppy, but when you look at it over continue with time, that's why I feel as confident about that high single digit.
<unk> had a really strong second quarter.
We had a good good third quarter here, but the pipeline makes me feel like the fourth quarter will finish out strong and it's due to I think some of those things I was trying to highlight which is.
Businesses are finishing their capital plans are preparing themselves for 2023.
They are preparing for the continued working capital increases that they still see coming down the pipeline.
And now we've got a broader market as you know in the greater Michigan marketplace that we havent really fully penetrated yet so I do think that that the C&I real estate commercial will be the continued driver of our balance sheet is the biggest part of it as well.
Yeah.
Okay. Thank you that's helpful and then.
Lastly, I guess just kind of following up on the on the NII growth question earlier.
But looking at it from a different perspective.
You talked about.
Cash flow securities funding loan growth to a large extent in the third quarter and still having an ability to do that going forward. How are you thinking about.
The willingness slash ability to be able to do that and then as it relates to the growth of the overall balance sheet. What are you expecting there.
Yes, I'm not sure I fully follow ups I think youre, just talking about the capacity to fund.
Is that what you are is that where youre going Daniel.
So essentially like if youre, if youre going to be Remixing, continuing to remix the balance sheet from.
Funding loan growth from security maturities.
If the balance sheet is expected to remain relatively stable going forward.
Yes, yeah.
Yes, I think our balance sheet will continue to grow the securities balances.
Balances they will decline some as we cash flow that portfolio, but I think the loan growth will do.
<unk> said will be in the mid to high single digits, and so that'll drive balance sheet growth overall.
We are expecting loan to asset ratios to increase as well as longer deposit ratio. So.
Okay. That's helpful. That's all for me thanks, guys.
Thank you.
Please standby for next question.
Our next question comes from Damon Delmonte with K B W. Your line is now open.
Hey, Good morning, everyone Hope you guys are doing well today.
So my first question just on the outlook for the provision.
You guys have been kind of growing into your reserve levels over the last few quarters and not been booking reserves.
Just kind of with the <unk>.
Growing <unk>.
Churn for deterioration of the broader economic outlook could you just give a little update as to where you think a reasonable reserve level would be to settle in at.
So our reserve levels are.
We're still still pretty robust and so we feel like we've got great coverage heading into this uncertain economic environment for kind of whatever it brings our way so I'm not expecting to need to take any additional provision over the coming quarters I think that we've got I think we've just got ample coverage today.
Okay, that's great.
And are there any like segments of the economy or areas in the portfolio, where you're kind of pulled back a little bit out of out of concern of storm clouds on the horizon.
I would answer it.
Damian.
Not really no.
The higher interest rates have economic impacts to projects and the borrowers may have less demand.
Going forward, but from our willingness Sue mentioned it earlier.
Excuse me earlier, it's a consistency of underwriting so it's not that we're pulling back it's just where there is demand in the portfolio given the static underwriting.
Got it Okay. That's helpful. And then I guess lastly, just kind of circle back on the margin.
I appreciate the commentary and color on the outlook, but just wondering from a cadence standpoint Michele.
Pretty sizable increase this quarter I think it was like 27 basis points linked quarter.
How do you feel that the.
Upward trajectory goes over the upcoming quarters.
Do you think you could repeat something like this level or do you think it kind of starts to moderate.
Yes, I think it will moderate our deposit beta was only 20% this quarter and I do think that will creep up.
As.
You know the competition for deposits grows I would think.
We assume a 75 basis point increase in November and another 50 in December we think we've yet another 15 basis points of margin lift assuming and that assumes that our deposit beta start to increase a bit.
Then maybe another 10 in Q1, another 10 basis points lift in NIM in Q1.
Perfect. That's very helpful. That's all I had thanks, a lot guys.
Thanks, Tim.
Please standby for next question.
Our next question comes from Terry Mcevoy with Stephens. Your line is now open.
Good morning, this is brendan on for Terry.
I just have one question most of the other ones have been answered already pertaining to capital <unk> about 10, 4% this quarter.
Can you talk about your thoughts on capital management and.
The potential opportunity for share repurchase going forward.
Our capital levels right now and we're really pleased with where we're at and we don't anticipate doing share repurchases in the coming quarters.
Okay.
Okay perfect that was my question I had thank you.
Thank you.
Please standby for the next question.
Our next question comes from Brian Martin with Janney. Your line is now open.
Hey, good morning, just wanted to touch base just a couple.
Kind of housekeeping questions, just as far as the deposit growth or just the shrinkage. This quarter just given the environment out there just kind of wondering.
Your outlook on the deposit side and just how you're seeing what you're hearing from your customers and your expectation for growth there.
Prospectively or just more stable just how youre thinking about that.
Okay.
Yes.
We expect it to really be more of a stable.
Stable environment.
I mean, we'd love to see some growth just by the pure activity all the work that we're doing but.
Yes.
Interest rate environment, and our management.
That costs.
Our.
I mean, the whole growth back solve but.
We just think it is.
A nice balance between making sure that we're not overpaying and and we're still adding relationships, which the teams are doing every day.
Yes.
Got you.
Okay.
Okay, and then maybe just on the deposit side Michele I think you said youre kind of 'twenty now just as kind of where you're thinking that heads to if you get kind of increases you outlined there maybe a $75 50, a meaningfully to get to next into next year. Just later this year that deposit beta what would you expect that kind of creeping up too.
Okay.
Last cycle, we had a deposit beta of 41% and I think through the cycle by the time, we get to the end of the cycle, we'll probably hit that deposit beta again, but how quickly. It rises it just kind of remains to be seen with competition.
But the NIM over the next quarter or two we've been modeling a 25% deposit beta so up about 5% from where we're at today.
Got you Okay. That's helpful and just the.
Maybe two last ones just on the the utilization was a little bit lower this quarter is that is there any.
Lumpiness in that is that how to read that and trying to have been a little bit different but just.
Well, let's see if there's anything.
Easily explainable or is it just going to be able to lumpy is that how you guys would think about it.
There is two things and then <unk> got some thoughts as well I would say that.
The first thing is that level one had.
34% utilization rate and win those commitments were added in the third quarter to our reporting databases at it drove down from 44% to 40 stores a little bit.
That showed in the quarter.
As well as just paydowns from the.
Balances for people holding cash they find it favorable to pay down their lines over keeping cash in there and there.
To your checking account so a couple of factors there that I think contributed to lower utilization.
And even the legacy first merchants portfolio utilization went down very little but it went down just kind of interesting phenomena to say, the least really and I just attribute that to we got really smart business owners that know how to manage working capital cycles. They are keeping their.
Working capital at really good pace.
When you think about the growth that's happening with just inflationary.
Pressures that go that drive up inventory that then drive up their receivables, but yet they still have ample liquidity for that we're not seeing.
Slowness in.
Account receivable collections were not seeing still inventory.
It's really.
It's to me just another observation of a pretty strong business community.
Got you no that's helpful. Mike.
And maybe just one last one was just on the tax rate just how to think about the tax rate either next quarter or kind of into next year.
It seems like there's a little bit lower than I thought this quarter, maybe I was.
Incorrect in that business.
Do you think about that.
Yes, the tax rate was a little lower this quarter because of the Bally games at some tax.
Exempt and so I would say at an effective tax rate going forward to be about maybe 14, 5%.
Okay.
Is oh I had it in that thanks, and nice quarter guys.
Thanks, Brian its Brian .
At this time there are no other questions.
I would now like to turn the conference back to Mark Hardwick for closing remark.
Okay.
Thank you Michele thanks to all of our participants for joining the call.
We had a great quarter, we're really excited about what the future holds and just look forward to your continued investment. Thank you.
Yes.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yeah.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Yeah.
Okay.
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Okay.