Q3 2023 First Merchants Corp Earnings Call
[music].
Thank you for standing by and welcome to the first merchants Corporation third quarter 2023 earnings Conference call before we begin management would like to remind you that today's call contains forward looking statements with respect to future performance and financial condition of first merchants corporations that involves risks and.
Further information it was contained within the press release, which we encourage you to review it.
Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for most directly comparable GAAP measures.
Press release available on the website contains financial and on quantitative information to be discussed today as well as weak affiliation of GAAP to non-GAAP measures.
At this time, all participants are in listen only mode.
The speaker's presentation there'll be a question and answer session to ask a question at that time. Please press star one wanting your telephone.
As a reminder, today's call is being recorded.
I'll now turn the conference to your host Mr. Mark Hardwick CEO, Mr. Herbert you may begin.
Good morning, and welcome to first merchants third quarter 2023 conference call Valerie Thanks for the introduction.
Covering our forward looking statement on page two.
We released our earnings today at approximately eight a M. Eastern standard time, you can access today's slides by following the link on the third page of our earnings release.
On page three you'll see today's presenters and our buyers to include President, Mike Stewart, Chief Credit Officer, John Martin.
And Chief Financial Officer, Michelle caveat escape.
On page four you will see a map representing the geographic locations of our 118 banking centers.
As well as a few financial highlights as of 932023.
We also received two more comparable awards during the quarter, including Best places to work for career growth and best places to work for women, which I'm really proud of that so we did include those on page four I'm turning to slide five I'm pleased to report that our performance remains healthy.
And strong and our teams continue to meet the demands of our communities and our client base.
We reported Q3 2023 earnings per share of <unk> 94 per share compared to $1 <unk> per share in the third quarter of 2022 net income totaled $55 $9 million for the quarter producing a return on tangible common equity of 16.
0.54% and a return on assets of one point to 4% for the quarter.
During the quarter our deposits.
Increased by $65 4 million or one 8%.
The core results were even better as we decreased broker.
Deposits by $133 6 million.
I mean, that's all deposits by $128 8 million.
Adjusted gross of $327 8 million in traditional commercial and consumer deposits was very strong and positions positions us well for the coming quarters and expected growth.
Loan yields remained strong, reflecting a highly variable portfolio, increasing to 6.5% to 8%.
New and renewed loan yields totaled 788% up 58 basis points over the second quarter of this year.
Our efficiency ratio remained strong in the low fifties and our allowance for credit losses is still 1.67% percent. Despite.
Meaningful charge off due to a customer fraud that we will discuss later in the call.
Year to date, we've earned $179 9 million or $3 <unk> per share.
And we remain committed to our guidance of mid to high single digit loan growth and top quartile performance metrics now Mike Stewart will provide more insight on loans and deposits. Yes. Thank you Mark and good morning to everybody our business strategy. That's outlined on slide six remains unchanged and as a reminder, that the financial results we deliver represent.
The durability of our business model within the primary markets of Indiana, Michigan and Ohio.
We serve the diverse locations that are both in stable rural markets and in growing Metro markets.
We're a commercially focused organization across all of these business segments.
The collective first merchants team.
It's actively engage within all of our business communities and the offerings listed on this page represent the solutions we deliver.
Throughout 2023, we remain committed to our business strategy organic growth of loans and deposits and fee income.
Attracting retaining and building our team.
Investing in technology platforms, and enhanced service and delivering top tier financial metrics.
If you turn to slide seven.
The map on the left side of the page offers a breakdown of the third quarter loan and deposit portfolio by state with the right side, highlighting loan and deposits by our primary business segments.
The annualized total loan growth for the third quarter was on the lower end of my expectations as our commercial clients aggressively manage their working capital positions.
Credit utilization actually reduced in the quarter and clients slowed or delayed some of their capital outlays or projects as they continue to evaluate the current interest rate environment.
Year to date.
Our total loan portfolio has grown on an annualized rate of four 6% when adjusted for the second quarter loans that we talked about last quarter and as the earnings release stated our loan portfolio is growing six 4% over the last 12 months.
And as Mark said mid single digit growth rate remains the expectations moving forward as the commercial loan pipeline and its September at the highest level, we've seen in the past year.
Moreover October has already shown the benefits from the third quarter pipeline delays that have now closed.
John Martin had the slide page 18 that highlights the year over year growth within the portfolio and that slide reflects that nearly 65% of our loan growth comes from the commercial segment and.
And overall, our commercial represents over 75% of our total loan portfolio with the balance coming from the consumer segment.
That segments comprised of residential mortgage HELOC installment and the private banking relationships and as you can see during the third quarter that segment grew at a seven 3% annualized rate.
Overall, the commercial segment continues to be the loan the loan growth engine at the bank and we continue to get higher spreads on the new loan generation.
Michel will highlight loan yields next but within the investment real estate segment spreads continue to widen up to 75 basis points on similar risk profile from the second half of 2022, and the C&I space spreads are widening up to 25 basis points with a strong emphasis on relationship strategies both deposit.
And PS.
The overall economic environment inclusive of the competitive landscape the competitive landscape with superregional banks in particular firms my expectation up single digit loan growth with improving loan yields through the balance of 2023 and in 2024 with the commercial group driving the bulk of that.
Our balance sheet is positioned for that growth our team is positioned for that.
And our underwriting remains consistent.
Support across all those segments.
So if you think about the deposits that you see on that page deposits grew one 8% on an annualized rate during the third quarter and two 4% year to date.
As you heard Mark discussed from slide five the commercial deposits were actually muted the growth was actually muted by the seasonal decline of the municipal bond space seasonally soft paying down about $128 million. So said differently. The rest of the commercial related deposit base base grew 5% during the quarter.
<unk> when adjusted for those municipal fund declines the consumer deposit segments showed strong growth at over 9% annualized for the quarter and this growth includes the activity through both the branch network and through our private banking team.
The continued deposit growth throughout 2023.
Throughout the bank failures earlier this year throughout the continued fed rate increases supports our ability to remain focused on growth.
So I'm going to turn the call over to Michelle and she can review more of the detail of the balance sheet and income statement drivers. Thanks, Mike.
Slide eight covers our third quarter results lines, one through five show the balance sheet changes for the quarter, Mike covered our loan and deposit growth in his remarks, you can see on line three investments declined by $177 8 million. This quarter, we sold $33 2 million of bonds during the quarter and scheduled pay downs and bond mature.
<unk> accounted for another $38 2 million of the decline the remainder of the decline was due to the change in valuation of available for sale Securities.
Pre tax pre provision earnings totaled $67 4 million this quarter pre tax pre provision return on assets was 148% and pre tax pre provision return on equity was $12 five 1% all of which reflect strong profitability metrics.
Slide nine shows the year to date results.
Loans have grown $627 million year over year, which was funded by the deposit growth of 212 million and proceeds from the investment portfolio sales and scheduled cash flows.
Year to date pretax pre provision earnings totaled $214 3 million.
Pre tax pre provision return on assets was 158% and pre tax pre provision return on equity was 13, 44% year to date, the tangible common equity ratio increased from 666% in prior year to 769% at September 30th reflecting that strong year to date earnings growth.
And tangible book value increased $3.17 over prior year.
Details of our investment portfolio are disclosed on slide 10.
The sale of $33 million.
Of bonds. This quarter resulted in a loss of $1 7 million year to date, we have sold $347 million in bonds, creating liquidity to put to work in our loan portfolio and ensure we have a solid cash position.
<unk> cash flows from scheduled principal and interest payments and bond maturities for the next 15 months totaled $335 million.
Slide 11 shows some details on our loan portfolio.
As Mark mentioned in his opening remarks, new loan yields increased 58 basis points to 788%.
$8 1 billion of loans or 66% of our portfolio are variable rate with 37% of the total portfolio repricing in one month and 53% of the total portfolio repricing in three months.
Through the end of 2024, we have 1 billion in fixed rate loans maturing, which is a quarter of our total fixed rate loans portfolio with a weighted average maturity of 464% providing good incremental interest income given new loans are repricing at 788% currently.
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The allowance for credit losses on slide 12.
Declined from one 8% to 167% of total loans due to net charge offs incurred during the quarter of $20 4 million, which John will provide details on in his remarks we.
We recorded $5 million of provision for credit losses on loans, which was offset by a reduction of reserves for unfunded commitments of $3 million due to a decline in unfunded commitment balances. The result was net provision expense of $2 million recognized in the income statement.
Slide 13 shows details of our deposit portfolio.
We continue to have a strong core deposit base with 41% of deposits, yielding five basis points or less.
Our non interest bearing deposits were 17, 4% of total deposits at the end of the quarter, which is down slightly from 18, 1% in the prior quarter. Our total cost of deposits increased 33 basis points to 232% this quarter and our interest bearing deposit cycle to date beta at quarter end.
51%, which was up from 47% last quarter.
Big picture of what we're seeing is customer interaction in deposit pricing is lessening so the mix shift and beta increases slowed this quarter compared to last leading us to believe that we're getting closer to achieving deposit price stability. Although we expect the cost of deposits to continue to increase somewhat to the remainder of the year, we expect that pace.
We'll be even slower than what we experienced this quarter.
On slide 14, net interest income on a fully tax equivalent basis of $139 3 million declined $4 4 million from prior quarter.
Earning asset yields increased 19 basis points this quarter as shown on line five and was somewhat offset by the increase in funding costs on line six reflecting stated net interest margin on line seven of 3.29% a decline of 10 basis points from prior quarter.
Average deposits during the quarter were $89 million higher than the period ending balance and given we had muted loan growth this quarter the impact put a bit of pressure on margin.
Noninterest income on slide 15.
Increased $1 5 million driven primarily by $1 9 million dollar increase in gains on sales of mortgage loans.
We originated $192 million of mortgage loans this quarter and held roughly 30% of those for investment and sold the rest in the secondary market.
Our gain on percentage, including servicing income was two 9%. So our mortgage team was able to contribute some meaningful fee income this quarter.
Moving to slide 16, we continue to demonstrate good expense management with total expenses for the quarter of $93 9 million, an increase of $1 3 million over last quarter. The increase was primarily due to higher marketing costs this quarter.
Our efficiency ratio continues to be low coming in at $53 nine 1% for the quarter and 52, 6% year to date.
Slide 17 shows our capital ratios.
Our strong earnings growth this quarter drove capital expansion and all ratios with the exception of the tangible common equity ratio, which declined 30 basis points totaling 769% due to the impact of the OCI that I mentioned earlier in my remarks.
Heading into the remainder of 2023, we feel great about the capital position to strengthen our balance sheet and are pleased with the sources of our growing liquidity coming from customers that enhance franchise value.
That concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin to discuss asset quality.
Thanks Michele.
Hey, Good morning, My remarks start on slide 18, I will highlight the loan portfolio touch on the expanded insights slide review asset quality and the nonperforming asset roll forward before turning the call back over to Mark.
So turning to slide 18 online to commercial industrial loans originated by our sponsor Finance group grew in the quarter by $31 million or 15% annualized while construction loans grew 72 million or 30, 30% annualized from a macro perspective other lines of business off set this growth with total loans ending most.
Unchanged in the quarter, we continue to see activity on sponsor finance lending, where we've maintained consistent underwriting and continued to see stable to marginally improving spreads higher interest rates are driving additional capital contribution requirements to meet our underwriting and stress criteria moving.
Moving down to line nine we slowed balance sheet growth of resi, one to four family mortgages with $10 million added to the portfolio for the quarter. We completed the origination transition strategy in the second quarter, which is essentially stopped portfolio growth and increased sale in servicing income, which Michelle just mentioned.
Turning to slide 19.
We've updated the portfolio inside slide to provide additional transparency in the commercial space. The C&I classification includes sponsor finance as well as other.
As well as owner occupied CRE associated with the business.
Our C&I portfolio has a 20% concentration and manufacturing are Kurt.
Line utilization remained consistent around 41% as Steve just mentioned with line commitments, increasing $32 million, we participate in roughly $644 million of shared national credit across various industries. These are generally relationships, where we have access to management and revenue opportunities beyond the core.
Closure.
And the sponsor finance portfolio I've highlighted key credit portfolio metrics, there are 86 borrowers.
Of which fixed charge coverage.
It exceeds one five times based on the June financial data. Although this has trended lower with higher borrowing crossed it remains healthy with current classified loans at two 7% as compared to three 8% the prior quarter.
This portfolio generally consists of single bank deals for platform companies of private equity firms not large widely syndicated leverage loans. We review of the individual relationships quarterly for changes in borrower condition, including leverage and cash flow coverage.
Turning to slide 20, we continue to provide the breakout of our non owner occupied commercial real estate portfolio with additional detail around our office exposure.
This exposure is broken out on the bottom half of the chart and represents two 1% of total loans unchanged from the prior quarter with the highest concentration outside of general office and medical.
I have added a chart to the bottom right with pork with office portfolio maturities refinance risk appears low with six to $14 $5 million or six 4% of total office loans maturing within the next year I also provided a couple of bullets to provide additional color into the <unk>.
This portfolio and its granularity with a portfolio of 219 loans and an average balance of $1 $2 million. The office portfolio is well diversified by tenant type and geographic mix. We continue to periodically review, our larger office borrowers and view the exposure is reasonably reasonably.
Really mitigated through a combination of loan to value guarantees.
Tenant mix and other considerations.
On slide 21.
I highlight our asset quality trends and current position npa's and greater than 90 days past due loans decreased $17 $6 million or 14 basis points on line five we had two commercial relationships, which made up the $19 million of the $20 million of charge offs for the quarter.
I spoke to both borrowers last quarter when they were moved to non accrual. The first a $14 million charge offs resulted from our previously disclosed commercial loan that was downgraded to non performing in the second quarter. This occurred when we received a report from our lead bank of alleged fraud by a borrower in which we joined.
Operator: Thank you for standing by and welcome to the First Merchants Corp. 3rd quarter 2023 Arnie's conference call. Before we begin, management would like to remind you that today's call contains forward-looking statements with respect to future performances and financial conditions of First Merchants corporations that involves risk and uncertainties. Further information is contained within the press release, which we encourage you to review. Additionally, management may refer to non-gab measures which are intended to supplement, but not substitute for most directly comparable gap measures.
We participated the syndication included three banks, where first merchants was not the lead and agent for the borrower had allegedly both sold and pledged to the banks.
Group's collateral out of trust the balance was charged down based on the alleged fraud and findings uncovered during the lead banks ongoing investigation and subsequent bankruptcy filings by our bar and its agent.
Operator: The press release available on the website contains financial and unquantitative information to be discussed today as well as reconciliation of gap to non-gab measures. At this time, all participants are listening to only mode. After the speaker's presentation, there will be a question and answer session. To ask the question at that time, please press star one on your telephone. As a reminder, today's call is being recorded.
We continue to monitor the bankruptcy process and pursue opportunities for recovery. The second of $5 $3 million charge off was driven by a pullback in industrial construction is segment of the market in which the borrower focused.
And.
And inability to adjust expenses moved.
Moving down to slides are moving down to lines are slides flying seven classified loans declined 1.89% of loans, resulting from both the charge offs as well as an improvement in asset quality.
Mark Hardwick: I will now turn the conversation to your host, Mr. Mark Hardwick, CEO, Mr. Hardwick, you may begin. Good morning and welcome to First Merchants 3rd quarter 2023 conference call. Valerie, thanks for the introduction and for covering the forward-looking statement on page two. We release our earnings today at approximately 8 a.m. Eastern Standard Time. You can access today's slides by following the link on the third page of our earnings release. On page three, you'll see today's presenters and our bios to include, President, Mike Stewart, Chief Credit Officer, John Martin, and Chief Financial Officer, Michelle Kevyevsky.
Moving on to slide 22, where I've again rolled forward the migration of nonperforming loans charge offs, Ori and 90 days past due for the quarter, we added Don Kurt non accrual loans on line two of $7.5 million a.
<unk> from payoffs or charges and accruals changes in accrual status of $2 $5 million on line three and a reduction from gross charge offs of $20 $9 million vendor.
Then dropping down to line 11, 90 days past due decreased $300000, which resulted in <unk> and 90 days past due ending at $17 $6 million for the quarter.
Mark Hardwick: On page four, you will see a map representing the geographic locations of our 118 banking centers as well as a few financial highlights as of 9 30 20 23. We also receive two more comparably awards during the quarter, including best places to work for career growth and best places to work for women, which I'm really proud of. So we did include those on page four.
So just to summarize asset quality remains good when I exclude the impact of the third quarter borrower with alleged fraud Q3 net charge offs would have been an annualized 22 basis points of total average loans for the quarter and we're looking at year to date net charge offs. It would have been an annualized.
10 basis points.
Mark Hardwick: I'm turning to slide five. Please report that our performance remains healthy and strong and our teams continue to meet the demands of our communities and our client base. We reported two three two thousand twenty three earnings per share of 94 cents per share compared to one dollar and eight cents per share in the third quarter of 2022 net income total 55.9 million dollars for the quarter producing a return on tangible common equity of 16.5 by 4% and a return on assets of 1.24% for the quarter.
Both criticized and classified loans remain in check and delinquency remained stable all in all we're ending the quarter with good asset quality metrics I appreciate your attention and I'll turn the call over to Mark Hardwick great.
Alright, Thanks John.
Slides 23, and 24 lenses highlight.
Some of our 10 year combined annual growth rates.
And returns and then slide 25, as a reminder of our vision mission and our team statement along with some strategic imperatives, but at this point I'd love to see.
To get into the Q&A portion of the call.
Thank you.
Mark Hardwick: During the quarter are deposits increased by 65.4 million are 1.8%. The core results were even better as we decreased broker deposits by 133.6 million and municipal deposits by 128.8 million the adjusted growth of 327.8 million and traditional commercial and consumer deposits was very strong and positions positions as well for the coming quarters and expected growth. Low yields remain strong reflecting a highly variable portfolio increasing to 6.58%. New and renewed loan yields totaled 7.88% up 58 basis points over the second quarter of this year.
Ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone again to ask a question. Please press Star 111 moment. Please for our first question.
Our first question comes from the line of Terry Mcevoy of Stephens. Your line is open.
Hi, Thanks, good morning, everyone.
Maybe start with your questions Hey, good.
Morning for Michelle maybe.
Could you just maybe talk about the repricing of certain assets as well as just ongoing increases in funding costs and what does that mean to your thoughts for the near term margin and when and where it might bottom.
Martin Currie.
Our September so our quarterly margin was 329, our September margin was 325. So we do think we'll see a bit more margin compression in Q4.
Mark Hardwick: Our efficiency ratio remains strong in the low 50s and our allowance for credit losses is still 1.67% percent. Despite the meaningful charge draw off due to a customer fraud that we will discuss later in the call.
And we are still working through our planning for 2024, although I would expect either Q4 Q1 of 2024, it's you really see our margin Trust and then with the repricing of the assets that we expect to see through the remainder of 'twenty four we.
Mark Hardwick: Here today, we've earned $179.9 million or $3.3 per share. And we remain committed to our guidance amid the high single-digit loan growth and top quartile performance metrics.
We should be able to see a little pick up in margin, but we'll finish our planning and we'll be able to provide a little bit better guidance to you I think next quarter.
Thank you and maybe as a follow up question for John first off thanks for all the details into the loan portfolio, but my question is how the underlying credit trends within the shared national credit portfolio. How does the how does the does differ at all from the rest of the C&I portfolio, just given there's been a fair amount of concerns with snick.
Michael Stewart: Now, Mike Stewart will provide more insight on loans and deposits. Yeah, thank you, Mark, and good morning to everybody. Our business strategy that's outlined on slide 6 remains unchanged and is a reminder that the financial results we deliver represent. The durability of our business model within the primary markets of Indiana, Michigan, and Ohio. We serve the diverse locations that are both in stable rural markets and in growing metro markets. And we're a commercially focused organization across all these business segments. The collective First Merchants team is actively engaged within all of our business communities and the offerings listed on this page represents the solutions we deliver.
Loans and are you seeing anything different between your kind of core C&I business.
Yeah.
Im really not.
Shared national credit portfolio.
We're underwriting it kind of the same stand that we're not kind of we are running into underwriting it to the same standard.
And really the difference is the size of the size of the credit itself. So.
Michael Stewart: Throughout 2023, we remain committed to our business strategy, organic growth of loans and deposits and fee income, attracting, retaining and building our team, investing in technology platforms that enhance service and delivering top tier financial metrics. If you turn to slide 7, the map on the left side of the page offers a breakdown of the third quarter loan and deposit portfolio by state with the right side highlighting loan and deposits by our primary business segments.
Frankly, there hasn't been a material difference between the two portfolios if anything its probably performing maybe marginally better than the rest of the portfolio.
That is the point of view, we're also seeing some of the expansion in the margin.
Expansion in the loan yields.
Understood. Thank you and I.
I guess, one small one.
Auto suppliers are auto parts manufacturers. It was on one of these slides just given the.
The prolonged strike or potential of a prolonged strike what's the size of that portfolio are there any other.
Michael Stewart: The annualized total loan growth for the third quarter was on the lower end of my expectations as our commercial clients aggressively manage their working capital positions. Line of credit utilization actually reduced in the quarter and clients slowed or delayed some of their capital delays or projects as they continue to evaluate the current interest rate environment. Year to date our total loan portfolio has grown on an annualized rate of 4.6% when adjusting for the second quarter loan.
Right Downs and do you have any other observations there.
Yes, it's interesting Terry.
I started researching for the quarter I tried to get to the automotive portfolio.
And when I think about manufacturing there is so much in the Midwest, that's tied to auto and somehow otherwise related to it.
But it's it's some fraction of that manufacturing total it's hard to pull out what is directly tier.
Michael Stewart: So we talked about last quarter. And as the earnings release stated our loan portfolio is growing 6.4% over the last 12 months. As Mark said, mid single digit growth rate remains the expectations moving forward as the commercial loan pipeline in September at the highest level we've seen in the past year. More over October has already shown the benefits from the third quarter pipeline delays that have now closed. John Martin has a slide page 18 that highlights the year over year growth within the portfolio.
Two if you will sort of not really doing tier one suppliers to the automotive industry, but.
It's some.
I'll say significant I will say that to date most of the changes that or the adjustments that manufacturers have made have been relatively minor.
Production still occur or is that most of the plants that we haven't seen any direct.
Widespread impact from either the slowdowns or some of the plant.
Michael Stewart: And that slide reflects that nearly 65% of our loan growth comes from the commercial segment. And overall our commercial represents over 75% of our total loan portfolio with the balance coming from the consumer segment. That segments comprised of residential mortgage, he lock installment and the private banking relationships. And as you can see during the third quarter that segment grew at a 7.3% annualized rate, over all the commercial segment continues to be the lone growth engine of the bank, and we continue to get higher spreads on the new loan generation.
Shutdowns that have occurred.
Great. Thanks for taking my question.
Yes, I would say, though that if it does if it were months.
<unk> of it.
It will obviously have some impact but right now it's been kind of isolated.
Okay, great. Thank you.
Thank you one moment please.
Our next question comes from the line of Damon Delmonte of <unk>. Your line is open.
Michael Stewart: Michele will highlight loan yields next, but within the investment real estate segment spreads continue to widen up to 75 basis points on similar risk profiles from the second half of 2022, and the CNI space spreads are widen up to 25 basis points with a strong emphasis on relationship strategies, both deposits and fees. You know, the overall economic environment inclusive of the competitive landscape, the competitive landscape with super regional banks in particular firms my expectation of single-digit long growth with improving loan yields through the balance of 2023 and in 2024 with the commercial group driving a bulk of that.
Hey, good morning, everyone I hope everybody is doing well today.
Just wanted to David Wright with Hey, Mark just wanted to start with with Michelle on a question on expenses. If you could just give us a little perspective on kind of your thoughts here in the fourth quarter and more so as we go through 2024 as far as kind of a quarterly.
Outlook for the overall expense base.
Yeah.
Hey, good morning, gentlemen.
For Q4, I would say the expense run rate will be probably be in the $94 million to $95 million range, which is really consistent with the guidance that we've provided last quarter.
For 2024, we're still working through our planning as I mentioned the theory and so we'll be able to give you a better run rate probably next quarter or two on what we'll see in 2024.
Michael Stewart: Our balance sheet is positioned for that growth, our team is positioned for that growth, and our underwriter remains consistent and the discipline to cross all those segments. So if you think about the deposits that you see on that page, the positives grew 1.8% on an annualized rate during the third quarter and 2.4% year today. As you heard Mark discuss from slide five, the commercial deposits were actually muted. The growth was actually muted by the seasonal decline of the municipal fund space, seasonally paying down about 128 million dollars.
Got it okay. Thanks, and then on the.
Fee income side of things.
Obviously, a little bit more on the mortgage banking I think this quarter, probably some seasonality here in the fourth quarter, but do you think are kind of I call.
Call. It 28, five to $29 $5 million range is reasonable as we close out the year.
I think that our run rate what we had in Q3 would be a good run rate to use for Q4.
Okay.
Alright, Great and then I guess lastly on the tax rate.
Michael Stewart: So set differently, the rest of the commercial related deposit base grew 5% during the quarter when adjusting for those municipal fund declines. The consumer deposit segments showed strong growth at over 9% annualized for the quarter, and this growth includes the activity through both the branch network and through our private banking team. They continued the deposit growth throughout 2023, throughout the bank failures earlier this year, throughout the continued fed rate increases, supports our ability to remain focused on growth.
Do you have an estimated effective tax rate we should.
Consider.
Okay.
Yes, I think we're expecting it to be 15% to 15, 5%.
Okay.
Okay.
<unk>.
That's all I have for now I'll step back thank you.
Alright, Thanks, Damon. Thank you one moment please.
Our next question comes from the line of Nathan race Piper Sandler Your line is open.
Great.
Everyone.
Doing well.
Michele Kawiecki: So I'll turn the call over to Michelle and she can review more the detail of the balance sheet and the income statement drivers. Thanks Mike. Slide 8 covers our third quarter results. Lines 1 through 5 show the balance sheet changes for the quarter might cover our loan and deposit growth in his remarks. You can see online three investments declined by 177.8 million this quarter. We sold 33.2 million of bonds during the quarter and scheduled pay downs and bond maturities accounted for another 38.2 million of the decline.
Just going back to the margin outlook over the next few quarters curious to hear some thoughts on some of the dynamics on the right.
It was great to see the borrowings held flat versus the last quarter.
So I'm just curious how you guys are thinking about kind of core deposit growth going forward and how you are thinking about funding loan growth. It sounds like mid single digit loan growth should be restored going forward. So I imagine it's just a combination of.
Securities portfolio cash flow.
Michel alluded to earlier and then also with some incremental deposit growth is that the right way to think about it.
Michele Kawiecki: The remainder of the decline was due to the change in valuation of available for sale securities. Pre-tax pre-provision earnings totaled 67.4 million this quarter. Pre-tax pre-provision return on assets was 1.48% and pre-tax pre-provision return on equity was 12.51% all of which reflect strong profitability metrics.
Yes.
And good morning.
I think we're pretty confident in our ability to continue to grow our deposit base to fund our loan growth.
And so that mid to higher single digit growth rate of loans for next year.
Funded primarily out of deposits is what we're focused on.
Michele Kawiecki: Slide 9 shows the year-to-date results. Lones have grown 627 million year over year which was funded by the deposit growth of 212 million and proceeds from the investment portfolio sales and scheduled cash flows. Year-to-date pre-tax pre-provision earnings totaled 214.3 million, pre-tax pre-prevision return on assets was 1.58% and pre-tax pre-prevision return on equity was 13.44% year-to-date. The tangible common equity ratio increased from 6.66% in prior year to 7.69% at September 30 as reflecting that strong year-to-date earnings growth and tangible book value increased $3.17 over prior year.
Okay great.
And then just kind of theoretically higher for longer rate environment.
Do you guys have any visibility in terms of kind of how you think about we're in.
Maybe bottoms and just maybe an overall growth rate for next year, it looks like you're on pace to grow.
400% to 5% this year, so any thoughts on just how NII interjects into next year under that environment.
So I think in Q4 with the margin compression that we think we might see at least a bit of it that we think we'll see.
There could still be some pressure on net interest income I think once we hit that trough, though when we make a turning point then we should be able to see some growth and I think the loan growth that we will expect to see.
Michele Kawiecki: Details of our investment portfolio are disclosed on slide 10. The sale of $33 million of bonds this quarter resulted in a loss of $1.7 million. Year-to-date, we have sold $347 million in bonds, creating liquidity to put to work in the loan portfolio and ensure we have a solid cash position. Expecting cash flows from scheduled principal and interest payments and bond maturities for the next 15 months totals $335 million.
Over the coming quarters will also help offset any any rising deposit costs that are left until we see some real deposit pricing stability.
Okay, Great makes sense and then maybe just lastly on capital.
You guys are still operating with.
Pretty flexible excess capital level. So just curious to hear any thoughts on that.
Perhaps re engage in buybacks or the planning kind of just to build capital just given the uncertainty.
Out there.
Michele Kawiecki: Slide 11 shows some details on our loan portfolio. As Mark mentioned in his opening remarks, new loan yields increased 58 basis points to 7.88%. 8.1 billion of loans or 66% of our portfolio are variable rate with 37% of the total portfolio repricing in one month and 53% of the total portfolio repricing in three months. Through the end of 2024, we have 1 billion in fixed rate loans maturing which is a quarter of our total fixed rate loans portfolio with a weighted average maturity of 4.64%.
Yes.
I'd love to be more active in the market with buybacks, we haven't felt like that it is.
When the right time to do that.
And what we'd like to just see as stability at our tangible common equity level of above 8%.
And some certainty around the marketplace that we will have less volatility.
Got it.
So it sounds like maybe M&A kind of off the table at least through the first half of 2024.
Fair way to characterize kind of the prospects there.
Yes.
At this point in time, where 100% focused on internal projects, we're really excited about getting Q2 deployed.
Our online and mobile platform.
Michele Kawiecki: Providing good incremental interest income, given new loans are repricing at 7.88% currently. The allowance for credit losses on slide 12 declined from 1.8% to 1.67% of total loans due to net charge-offs incurred during the quarter of $20.4 million which John will provide details on in his remarks. We recorded 5 million of provision for credit losses on loans which was offset by a reduction of reserves for unfunded commitments of $3 million due to a decline in unfunded commitment balances. The result was net provision expense of $2 million recognized in the income statement.
For all of our customers consumer and commercial.
And also getting our <unk> project completed which is a complete.
Replacement of our private wealth platform. So that's the priority at this point in the trading multiples.
We really don't.
Lend to M&A activity.
And so we're continuing to keep our relationship strong with with.
With banks.
We're impressed by that maybe.
Potential candidates in the future, but I don't really feel like where the pricing power to be active at this point.
Nor are we ready internally to focus on M&A.
Michele Kawiecki: Slide 13 shows details of our deposit portfolio. We continue to have a strong core deposit base with 41% of deposits yielding 5 basis points or less. Our non-interest bearing deposits were 17.4% of total deposits at the end of the quarter which is down slightly from 18.1% in the prior quarter. Our total cost of deposits increased 33 basis points to 2.32% this quarter and our interest bearing deposits cycle to date beta at quarter end was 51%, which was up from 47% last quarter.
Got it makes sense I appreciate all the color you guys, taking the questions. Thank you.
Thanks, Nick.
Thank you one moment please.
Our next question comes from the line of Daniel Tamayo of Raymond James Your line is open.
Pardon me Mr. <unk> Your line is open.
One moment please.
Yeah.
Michele Kawiecki: The big picture of what we're seeing is customer interaction in deposit pricing is lessening. So the mixed shift and beta increases slowed this quarter compared to last leading us to believe that we're getting closer to achieving deposit price stability. Although we expect the cost of deposits to continue to increase somewhat through the remainder of the year, we expect that pace will be even slower than what we experienced this quarter. On slide 14, net interest income on a fully tax equivalent basis of $139.3 million declined $4.4 million from prior quarter.
Our next question comes from the line of Brian Martin of Janney. Your line is open.
Hey, good morning, everyone.
Good morning, Brian just a mark just maybe one question Michelle on the margin just the spot margin for the month of September how did it trend kind of throughout the quarter, just trying to get a feel for that based on kind of a slowing deposit costs here.
I think it trended down pretty rapidly actually.
So it ended up landing at $3 25.
Michele Kawiecki: Earning asset yields increased 19 basis points this quarter, as shown on line 5, and was somewhat offset by the increase in funding costs on line 6, reflecting stated net interest margins on line 7 of 3.29 percent, a decline of 10 basis points from prior quarter. Average deposits during the quarter were 89 million higher than the period ending balance and given we had muted bone growth this quarter, the impact put a bit of pressure on margin.
At the end of September.
Okay.
Okay.
And then I guess your commentary, but with the deposit cost flowing in kind of the.
What you outlined as far as fixed rate loans that reprice I mean the.
<unk>.
I guess your expectations that the loan yields continue to expand here in the next three to four quarters, just given that repricing thats occurring.
Along with I mean, that's kind of the message with the kind of the stabilization you're seeing in the in.
Michele Kawiecki: Non-interest income on slide 15 increased 1.5 million, driven primarily by 1.9 million dollar increasing gains on the sales of mortgage loans. We originated 192 million of mortgage loans this quarter and held roughly 30 percent of those for investment and sold the rest in the secondary market. Our gain on percentage, including servicing income, was 2.9 percent, so our mortgage team was able to contribute some meaningful fee income this quarter.
On the funding side.
Yes. This is Mike Stewart I do think that.
On the commercial side the mortgage that we put on would be the same way. So yeah on the repricing and any I think we are doing in the HELOC all of that should.
Drives higher loan yields.
Okay, and as far as when that May trough.
The deposit costs are close to dropping I mean were at least.
Three to four quarters out as far as that we mix or that.
But coming through on that.
Those loan yields given what youre seeing today.
Michele Kawiecki: Moving to slide 16, we continue to demonstrate good expense management with total expenses for the quarter of 93.9 million, an increase of 1.3 million over last quarter. The increase was primarily due to higher marketing costs this quarter. Our efficiency ratio continues to be low coming in at 53.91 percent for the quarter, and 52.6 percent year to date.
Yes.
Model shows.
Our rates stay steady where they are that we will continue to see increases through all of 2024, yeah, Okay perfect and then.
Appreciate all the color on credit just as far as color reserves and kind of recording a provision this quarter just kind of how to think about that in the context of where credit's out obviously pretty good outside of the one fraud.
<unk> in this quarter, but just any any thought on how we should think about modeling that are projecting going forward given the credit environment.
Michele Kawiecki: Slide 17 shows our capital ratios. Our strong earnings growth this quarter drove capital expansion in all ratios with the climbed 30 basis points, totaling 7.69 percent due to the impact of AOCI that I mentioned earlier in my remarks. Heading into the remainder of 2023, the full grade about the capital position, the strength in our balance sheet, and are pleased with the sources of our growing liquidity coming from customers that enhance franchise value.
Yes, I think from a.
Provision expense perspective.
It's going to be a replacement kind of a trading dollars on a replacement side, meaning that will provide for charge offs.
With potentially some release in the ACL.
As far as.
Charge offs go I think we've given guidance in the past of those being.
John Martin: That concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin, to discuss asset quality. Thanks, Michelle. Good morning.
Between 10, and 20 basis points a quarter.
Okay.
And just your thought Jonathan.
John Martin: My remarks start on slide 18. I'll highlight the loan portfolio, touch on the expanded insights slide, review asset quality, and the non-performing asset rule forward before turning the call back over to mark. So turning to slide 18, online too, commercial industrial loans originated by our sponsor finance group grew in the quarter by $31 million, or 15 percent annualized. While construction loans grew 72 million, or 30 percent annualized, from a macro perspective other lines of business offset this growth with total loans ending mostly unchanged in the quarter.
<unk>.
As far as credit goes kind of you talked about the snakes being pretty good maybe better than the other portfolio, but just within the traditional portfolio where are the concerns that I mean, we've seen a handful of other banks have some has some issues this quarter.
Kind of ongoing but if you look to your portfolio as far as where the the greater I guess, what you are maybe more mindful of today.
You know were looking paying more attention to can you give us any any thoughts there.
Yeah.
Brian when I think about.
John Martin: We continue to see activity and sponsor finance lending where we maintain consistent underwriting and continue to see stable to marginally improving spreads. Higher interest rates are driving additional capital contribution requirements to meet our underwriting and stress criteria. Moving down to line 9, we slowed down sheet growth of Rezzy 1-4 family mortgages with $10 million added to the portfolio for the quarter. We completed the origination transition strategy in the second quarter, which has essentially stopped portfolio growth and increased sale and servicing income, which Michelle just mentioned.
Potential impacts from higher rates.
I think about it in the construction portfolio, just because what you underwrote too and the appraisals that you have potentially.
Front.
Are going to necessarily drive tighter cash flow coverage.
What I think about the broader portfolio.
Yeah.
Across the spectrum.
The commercial loan portfolio.
We underwrite we stress, we do multi variable stress tests upfront on our C&I borrowers and so.
John Martin: Turning to slide 19. We've updated the portfolio insight slide to provide additional transparency in the commercial space. The CNI classification includes sponsor finance as well as other as well as owner occupied CR re associated with the business. Our CNI portfolio has a 20% concentration in manufacturing. Our current line utilization remain consistent around 41% as due just mentioned with line commitments increasing $32 million. We participate in roughly $644 million of shared national credit across various industries.
There is not one particular portfolio that I'm looking at.
That concerns me maybe more than another.
But even.
Even in the construction portfolio and as we knew you'd add new names those are requiring additional capital as our as I mentioned in that portion of my speech, Brian around the sponsor finance portfolio the things we're underwriting today.
I feel pretty good about because they have the higher interest rates already built into them. So I don't know if that answers. Your question I wish I could say it was this portfolio of that portfolio, but generally speaking to this point.
John Martin: These are generally relationships where we have access to management and revenue opportunities beyond the credit exposure in the sponsor finance portfolio. I've highlighted key credit portfolio metrics. There are 86 borrowers of which fixed charge coverage of exceeds 1.5 times based on the June financial data. Although this has trended lower with higher borrowing craft, it remains healthy with current classified loans at 2.7% as compared to 3.8% the prior quarter. This portfolio generally consists of single bank deals for platform companies and private equity firms not large widely syndicated leverage loans. We review the individual relationships quarterly for changes in borrow condition, including leverage and cash flow coverage.
Absent the and I am not going to use the word idiosyncratic.
The fraud event that occurred.
Yes.
Maybe construction, but that that would be it.
Okay and getting the renewals today on some of these credits are commercial real estate credits has that been a problem given the.
The increase in rates that are coming to these folks or I guess has that been.
Those loans really are getting renewed without an issue at this point today.
Well what happens Brian at some level is that when you have a construction project you've got a conversion covenant requirement.
That they need to meet and in order for them to.
Move to the secondary market and with higher short term rates the way we measure it on short term rates, it's tighter and so we're.
John Martin: Turning to slide 20. We've continued to provide the breakout of our nonowner occupied commercial real estate portfolio with additional detail around our office exposure. Office exposure is broken out on the bottom half of the chart and represents 2.1% of total loans unchanged from the prior quarter with the highest concentration outside of general office in medical. I've added a chart to the bottom right with office portfolio maturities, refinance risk appears low with $6.5 million or $6.4% of total office loans maturing within the next year.
We're requiring maturity a number of different strategies, but wind is potentially additional cash.
Capital being put in maybe marginal right sizing maybe additional guarantees additional collateral.
But from a.
Extend and pretend as the industry my colleagues like to say.
It's more just a strategy around.
What to do when when when interest rates maybe.
Our challenge at a particular project.
John Martin: I also provided a couple of bullets to provide additional color into the office portfolio and its granularity with a portfolio of 219 loans in an average balance of $1.2 million. The office portfolio is well diversified by tenant type and geographic mix. We continue to periodically review our larger office borrowers and view the exposure as reasonably reasonably mitigated through a combination of loan to value guarantees, a tenant mix and other considerations. On slide 21, I highlight our asset quality trends and current position NPAs and greater than 90 days past 2 loans decreased $17.6 million or 14 basis points on line 5.
Got you okay.
It's safe to say.
Just jump in I would say most of those loans arent going through a renewal process.
Secondary bartos as strategies, we've got employ if we needed to but if we can.
We're not necessarily seeing any of that right right and then on a renewal.
Renewal specific if I'm understanding your question something that might have had a renewal after three years or five years.
Borrowers have had the opportunity to increase rental rates and changed the dynamics of an individual project.
Or an individual property. So we haven't seen issues necessarily related to our borrowers inability to get renewed as a result of the higher higher interest rates, yes, no I. Appreciate I was really talking about the commercial real estate not construction, but I appreciate all the commentary on it and just trying to understand that so but thank you for taking.
John Martin: We had two commercial relationships which made up the $19 million of the $20 million or charge us for the quarter. I spoke to both borrowers last quarter when they were moved to not a cruel. The first, the $14 million charge off resulted from the previously disclosed commercial loan that was downgraded to not performing in the second quarter. This occurred when we received a report from the lead bank of an alleged fraud by a borrower in which we jointly participated.
Questions.
Yes.
Valerie I assume does that conclude.
The Q&A portion missed.
Mr. Tomorrow I had a question, but his line may be muted.
John Martin: The syndication included three banks where first merchants was not the lead. An agent for the borrower had allegedly both sold and pledged the bank's groups collateral out of trust. First. The balance was charged down based on the alleged fraud and findings uncovered during the lead banks ongoing investigation and subsequent bankruptcy violins by our bar for and its agent. We continue to monitor the bankruptcy process and pursue opportunities for recovery. The second 5.3 million dollar charge off was driven by a pullback industrial construction as segment of the market in which the bar were focused and and inability to just expenses. Moving down to our slide slide seven classified loans declined 1.89% of loans resulting from both the charge off as well as an improvement in asset quality.
Okay. So that does conclude our Q&A portion I'd like to turn the call back over to Mr. Hardwood for any closing remarks.
Great. Thanks Valerie.
I hope you can hear the confidence we have in our business model.
Our margins are healthy our capital is strong our efficiency isn't top quartile performance range and more importantly, we're confident that we will continue to achieve our growth rates for both loans and deposits and into the future.
Sure.
If we do that we're taking care of the needs of the community that we serve and likely it's taken care of all of our stakeholders. So we.
We appreciate your time today, we appreciate your investment and interest in first merchants look forward to talking to you soon.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you all for participating and have a great day you may all disconnect.
John Martin: Moving on to slide 22 where I've again rolled forward the migration of non-performing loans, charge off, or E and 90 days past due. For the quarter we added non accrual loans on line two of 7.5 million dollars. A reduction from payoffs or charges in accrual changes in accrual status of 2.5 million dollars on line three and a reduction from gross charge us of 20.9 million dollars. Then dropping down to 11.90 days past due decreased 300,000 dollars which resulted in NPAs and 90 days past due ending at 17.6 million dollars for the quarter.
Okay.
[music].
Okay.
[music].
John Martin: So just to summarize, asset quality remains good. When I exclude the impact of the third quarter borrower with alleged fraud, Q3 net charge us would have been an annualized 22 basis points of total average loans for the quarter. And when looking at year to date net charge us, it would have been an annualized 10 basis points both criticized and classified loans remain in check and delinquency remains stable. All in all, we're ending the quarter with good asset quality metrics.
Mark Hardwick: I appreciate your attention and I'll turn the call over to Mark Hardwick. Great. Thanks, John.
Mark Hardwick: Hey, slides 23 and 24. They just highlight some of our 10 year combined annual growth rates and returns and then slide 25 as a reminder of our vision mission and our team statement along with some strategic comparatives.
Operator: But at this point, I'd love to get into the Q&A portion of the call. Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 11 on your telephone. Again, to ask a question, please press star 11. One moment please for our first question.
Terence McEvoy: Our first question comes from a line of Perry McAvoy of Stevens. Your line is open. Okay. Hi, thanks. Good morning, everyone. Maybe start with a question. Thank you, morning.
Michele Kawiecki: From Michelle, maybe could you just maybe talk about the reprise thing of certain assets, as well as just ongoing increases in funding costs? And what does that mean to your thoughts for the near term margin and when and where at my bottom? Good morning, Terry. You know, our September, so our quarterly margin was 329. Our September margin was 325. So we do think we'll see a bit more margin compression in Q4.
Michele Kawiecki: And we are still working through our planning for 2024, although I would expect either Q4 or Q1 of 2024 to really see our margin trough. And then with the repricing of the assets that we expect to see through the remainder of 24, we should be able to see a little pickup in margin.
Michele Kawiecki: But we'll finish our planning and we'll be able to provide a little bit better guidance to you, I think, next quarter.
John Martin: Thank you, and maybe as a follow-up question for John.
John Martin: First off, thanks for all the details into the loan portfolio. But my question is how the underlying credit trends within the shared national credit portfolio, how does it differ at all from the rest of the C&I portfolio, just given there's been a fair amount of concerns with SNCC loans, and are you seeing anything different between your kind of core C&I business? Yeah, I'm really not that the shared national credit portfolio, we're underwriting it kind of the same standard, we're not kind of, we're underwriting it to the same standard, and really the difference is the size of the credit itself.
John Martin: So, frankly, there hasn't been a material difference between the two portfolios. If anything, it's probably performing maybe marginally better than the rest of the portfolio. That is the point we're also seeing some of the expansion in the margin, expansion in the loan yields.
John Martin: Yeah, understood, thank you, and I guess one small one, the auto suppliers or auto parts manufacturers, it was on one of these slides, just given the prolonged strike or potential of a prolonged strike, what's the size of that portfolio, are there any other write-downs and do you have any other observations there? Yeah, it's interesting, Jerry, when I started researching for the quarter, I tried to get to the automotive portfolio, and when I think about manufacturing, there's so much in the Midwest that's tied to auto and somehow otherwise related to it, but it's some fraction of that manufacturing total, it's harder to pull out what is directly to two, if you will, because we're not really doing tier one suppliers to the auto mode of industry, but it's some, I'll say significant, I will say that to date, most of the changes that or the adjustments that manufacturers have made have been relatively minor, production still occurs at most of the plants, and we haven't seen any direct widespread impact from either the slowdowns or some of the plant shutdowns that have occurred.
John Martin: Right, thanks for taking my question. Yeah, I would say, though, that if it does, if it were months of it, it will obviously have some impact, but right now it's been kind of isolated. Thank you. One moment, please.
Damon Delmonte: Our next question comes from a lot of Damon Demonti of KBW. A lot of open.
Michele Kawiecki: Hey, good morning, everyone. Hope everybody's doing well today. Just wanted to start with, Emma, just wanted to start with Michelle on the question on[inaudible] Space. Hey, good morning Damon. For Chief Four, I would say the expense run rate will be probably be in the 94 to 95 million range, which is really consistent with the guidance that we've provided last quarter. For 2024, we're still working through our planning as I mentioned a theory, and so we'll be able to give you a better run rate probably next quarter to what we'll see in 2024.
Michele Kawiecki: Got it. Okay, thanks. And then on the seeing from side of things, obviously a little bit more in the mortgage banking, I think this quarter, probably some seasonality here in the fourth quarter, but you know, do you think kind of a, it's called a 28 and a half to 29 and a half million range is reasonable as we close up here? You know, I think that that our run rate, what we had in Q3 would be a good run rate to use for Q4.
Michele Kawiecki: Okay, all right, great. And then I guess last year on the tax rate, do you have an estimated effective tax rate we should consider? Yeah, I think we're expecting it to be 15 to 15 and a half percent. Okay. Okay, that's all I have for now. I'll step back. Thank you. All right, thanks, thank you.
Nathan Race: Our next question comes on a lot of Nathan Rays of Piper Sandley Alliance Open. Yep, great.
Nathan Race: Hi, everyone. Everyone's doing well. Just going back to the margin, I'll look at the next few quarters. Here's kind of here's some thoughts on some of the dynamics on the right. The balance sheet, you know, is great to see the farings held flat versus the last quarter. So just curious how you guys are thinking about kind of quarter positive growth going forward, how you are thinking about funding the long growth. It sounds like midfield digit long growth should be restored going forward.
Nathan Race: So I imagine it's just a combination of security portfolio cash flow about Michelle alluded to earlier and then also with some incremental deposit growth. Is that the right way to think about it? Yeah, I think and good morning, Nate. I think we're pretty confident our ability to continue to grow our positive base to fund our long growth. And so that mid to higher single digit growth rate of loans for next year funded primarily out of deposits is what we're focused on.
Nathan Race: Okay, great. And then just kind of theoretically in a higher for longer rate environment, do you guys have any visibility in terms of kind of how you think about, you know, maybe bottoms and just maybe an overall growth rate for next year, because it looks like around basic growth and I, you know, four to five percent this year. So I need to also understand just how NIH rejects into next year under that environment.
Nathan Race: Well, I think in Q4 with the margin compression that we think we might see at least a bit of it that we think we'll see, there could still be some pressure on that interest income. I think once we hit that trough though and we make a turning point then we should be able to see some growth. And I think the long growth that we'll expect to see, you know, over the coming quarters will also help offset any rising deposit costs that are left until we see some role-deposit pricing stability.
Mark Hardwick: Okay, great. Makes sense. And then maybe just last year in capital, you know, you guys are still operating with pretty flexible exit capital level. So just curious here any thoughts on a on perhaps re-engaging buybacks or the plan kind of just to build capital just given the uncertainty out there. Yeah, I love to be more active in the market but by fact we haven't felt like we've been that it's been the right time to do that. And what we'd like to just see is stability at our tangible common equity level above 8% and some certainty around the marketplace that will have less volatility.
Mark Hardwick: Got it. So it still sounds like maybe M&A's kind of off the table, at least through the first half of 2024. Is that fair way to characterize kind of the prospects there? Yeah, I am at this point in time we're 100% focused on internal projects. We're really excited about getting Q2 deployed. Our online and mobile platform for all of our customers consumer and commercial and also getting our SS and C project completed, which is a complete replacement of our private wealth platform.
Mark Hardwick: So that's the priority at this point and the training multiples. I really don't lend to M&A activity. And so we're continuing to keep our relationships strong with with banks that were impressed by that may be potential candidates in the future, but I don't really feel like we're the pricing power to be active at this point. No, are we ready internally to focus on M&A?
Nathan Race: Got it. Makes sense.
Daniel Tamayo: I appreciate your call to you guys taking the questions. Thank you. Thanks, Nate. Thank you. One moment, please.
Daniel Tamayo: Our next question comes from a line of Daniel Tamayo, Raymond James, Elaine is open. Hi, Mr. Tamayo, your line is open.
Operator: One moment, please.
Brian Martin: Our next question comes from a line of Brian Martin of Janney, your line is open. Hey, good morning, everyone. Good morning, Brian.
Michele Kawiecki: Hey, just a mark. Just a maybe one question Michelle on the margin, just the spot margin for the month of September. How did I trend kind of throughout the quarter just trying to get a feel for that based on kind of the slowing deposit cost here? You know, I think it turned it down pretty radically, actually. And so it ended up landing at 325. At the end of September. Okay. And the, I guess your commentary, you know, but with the deposit cost lowly and kind of the what you outlined as far as the fixed rate loans are repricing the.
Michele Kawiecki: I guess your expectation is that the loan yield continued to expand here and you know, the next three to four quarters, you know, just given that repricing that's occurring and along with, I mean, that's kind of the message with the kind of stabilization you're seeing in the in the funding side. Yeah, that's my story. I do think that, seeing it on the commercial side, the mortgage that we put on would be the same way.
Michele Kawiecki: So, yeah, I'm the reprising and any thing we're doing on the helot, all that should drive higher loan yields. Okay, and as far as when that may trough, I mean, if the deposit costs are close to troughing, I mean, we're at least, you know, three to four quarters out as far as that we mixer that, you know, the benefit coming through on that on those loan yields given what you see. Yeah, I mean, our model show is right today, where they are that will continue to increase through all of 2024. Yeah, okay. Perfect.
John Martin: And then appreciate all the color and credit just as far as kind of the reserves and actually, you know, kind of recording a provision this quarter, just kind of how to think about that in the context of, you know, we're credits that obviously you're pretty good outside of the one broad situation this quarter, but just any any thought on how we should think about that. How about modeling that or projecting going forward, given the credit environment.
John Martin: Yeah, I think from a provision expense perspective, it's going to be a replacement, kind of a trading dollars on a replacement side, meaning that we'll provide for charge offs with potentially some release in the, the ACL. Well, as far as charge offs go, I think we've given guidance in the past of those being between 10, 20 basis points a quarter. Okay. And in just your thought, John, I'm on the, as far as credit goes, you know, kind of you talked about this next being pretty good, you know, maybe better than the other portfolio, but just within the traditional portfolio, you know, where are the concerns?
John Martin: I mean, we've seen, you know, a handful of other banks have some, have some issues this quarter and just, you know, kind of ongoing, but if you look to your portfolio as far as worth it, you know, the greater, you know, I guess what you're maybe more mindful of today, you know, looking, paying more attention to, can you give us any, any thoughts there? Yeah, you know, Brian, what I think about, you know, potential impacts from higher rates, I think about it in the construction portfolio, just because what you underwrote to and the appraisals that you have potentially up front are going to necessarily drive tighter cash flow coverage.
John Martin: What I think about, you know, the broader portfolio, you know, across the spectrum within the commercial loan portfolio, you know, we underwrite, we stress, we do multi variable stress tests up front on our CNI borrowers. And so there's not one particular portfolio that I'm looking at that concerns may maybe more than another. But even in the construction portfolio, and as we knew you add new names, those are requiring additional capital, as are, you know, as I mentioned in that portion of my speech Brian around the sponsor finance portfolio, the things we're underwriting today, I feel pretty good about because they have the higher interest rates already built into them.
John Martin: So I don't know if that answers your question, you know, I wish I could say it was this portfolio or that portfolio, but I'm generally speaking to this point, you know, the absentee, and I'm not going to use the word idiosyncratic. But the fraud event that occurred, I, you know, maybe construction, but that would be it. Okay, and getting the renewals today on some of these, you know, credits, the commercial real estate credits, has that been a problem, you know, given the, you know, the increase in rates that are coming into these folks, or I guess has that been, you know, those loans really are getting renewed without an issue at this point today.
John Martin: Well, what happens, Brian, at some level is that when you have a construction project, you've got a conversion covenant or requirement that they need to meet and order for them to move to the secondary market and with higher short-term rates, the way we measure it on short-term rates, it's tighter. And so, you know, we're requiring at maturity a number of different strategies, but one is potentially additional capital being put in, maybe marginal right-sizing, maybe additional guarantees, additional collateral, but from a, you know, you know, extended and pretend as the industry, my colleagues like to say, you know, it's more just a strategy around, you know, what to do when interest rates maybe are challenging on a particular project.
John Martin: Got you, okay. I think it's safe to say, I just jump in and say, most of those loans aren't going through a renewal process, they're moving in secondary markets, there's strategies we employ if we needed to, but if we're not, we're not necessarily seeing any of that, right? Right, and on a renewal specific, if I'm understanding your questions, something that might have had a renewal after three or five years, you know, borrowers have had the opportunity to increase rental rates and, you know, change the dynamics of an individual project or an individual property.
John Martin: So, we haven't seen issues necessarily related to, you know, a borrowers inability to get renewed as a result of the higher, higher interest rates. Yeah, no, I appreciate, I was really talking about the commercial real estate and that construction, but I appreciate all the company area on it and just trying to understand that. So, but thank you for taking the questions. Yeah. Valerie, I assume does that conclude the Q&A portion? Mr. Tamiyo had a question, but his line may be muted.
Operator: Okay, so that does conclude our Q&A portion.
Mark Hardwick: I'd like to turn the call back over to Mr. Hardwood for any closing remarks. Great. Thanks, Valerie. You know, I hope you can hear the confidence that we have in our business model. They are margins are healthy. Our capital is strong. Our efficiency is in stock quartile kind of performance range, and more importantly, we're confident that we will continue to achieve our growth rates for both loans and deposits into the future.
Mark Hardwick: And if we do that, we're taking care of the needs of the community that we serve and likely taking care of all of our stakeholders. So we appreciate your time today. We appreciate your investment and interest in first merchants look forward to talking to you soon.
Operator: Thank you. Ladies and gentlemen, this is concludes today's conference. Thank you all for participating and have a great day. You may all disconnect.