Q3 2024 First Merchants Corp Earnings Call
Speaker Change: Thank you for standing by and welcome to the First Merchant's Corporation, 3rd quarter, 2024, earnings conference call.
Speaker Change: Before we begin management, we'd like to remind you that today's call contains forward-looking statements with respect to the future performance and financial condition of First Merchants Corporation that involves risk and uncertainties.
Speaker Change: Further information is contained within the press release.
Speaker Change: which we encourage you to review.
Speaker Change: Additionally, management may refer to non-gap measures which are intended to supplement but not substitute for the most directly comparable gap measures. The press release available on the website contains financial and other quantitative information to be discussed today as well as a reconciliation of gap to non-gap measures. As a reminder, today's call is being recorded.
Speaker Change: I will now turn the conference over to Mr. Mark Hardwick, CEO. Mr. Hardwick, you may begin.
Mark Hardwick: Good morning and welcome to First Merchants 3rd quarter 2024 Conference Call. Thanks for the introductions and for covering the forward-looking statement on page 2.
Mark Hardwick: We released our earnings today at approximately 8am Eastern Time and you can access the slides by following the link on the third page of our earnings release.
Mark Hardwick: On page three of our slides, we will see today's printers, presenters, and our bios, including President Mike Stewart, Chief Credit Off-Surke, John Martin, and Chief Financial Off-Surmer Michelle Keviecki.
Mark Hardwick: We're pleased with our third quarter results in the focused momentum that we are building.
Mark Hardwick: The Pitting Sale of 5-9 Corgue Illinois branches.
Mark Hardwick: Restructuring of those securities portfolio and successful completion of our four major technology initiatives provide us with the opportunity to reprioritize our core markets and introduce innovative customer acquisition strategies.
Mark Hardwick: We are well positioned for organic growth in 2025.
Mark Hardwick: and any well-priced inorganic growth opportunities that may be available in the future.
Speaker Change: On page 4 we have a few financial highlights for the quarter, including 18.3 billion of total assets, 12.7 billion of total loans, 14.4 billion of total deposits, and 5.6 billion of assets under advisement.
Speaker Change: Our map also highlights the five Chicago area branches we announced we were selling in August. We expect that transition to close in December of this year and we now have regulatory approval.
Speaker Change: On slide five, you can see earnings per share for the quarter total 84 cents or 95 cents per share after adjusting for a $9.1 million loss. We recorded from a third quarter sale of securities.
Speaker Change: We are anticipating a 20 to 25 million dollar gain on the sale of our Chicago land branches in the fourth quarter and we took advantage of favorable market conditions to restructure a small portion of its curvy sport filio.
Speaker Change: We plan to use the remainder of the gain in the fourth quarter to support additional balance sheet restructuring that we believe will position us for higher earnings in the future.
Speaker Change: Our changeable book, our tangible Common Equity Ratio has continued to build and is now 8.76%.
Speaker Change: 3rd quarter change of public value per share, which is reported on slide 11, was $26.64 per share, and has increased by $4.21 per share, or 19% over the last 12 months.
Speaker Change: and $7.38 per share or 38% of the last two years.
Speaker Change: I've just did net interest margin also improved by seven basis points.
Speaker Change: Q3 over Q2 and help strive BP in our growth.
Speaker Change: which supported a sub-55% efficiency ratio for the quarter.
Mark Hardwick: Irvings per share for the nine months ended September 30, 2024 total $2.31 per share or $2.48 per share when adjusted for the loss from the sale securities. Now Mike Stewart will discuss our liner business momentum. Mike, yeah, thank you, Mark. And good morning to all.
Mike Stewart: Our business strategy summarized on slide six remains unchanged.
Mike Stewart: We are a commercially focused organization across all these business segments and our primary markets of Indiana, Michigan and Ohio.
Mike Stewart: throughout 2024, we have remained focused on building earnings momentum by executing our strategic comparative sub, organic loan, deposit, the income growth, and increasing market share.
Mike Stewart: by Engaging, rewarding and retaining our team mates and investing in the technology platforms of our Delivery Channel.
Speaker Change: and as Mark noted on the prior slide, we have now completed all four of our major technology initiatives.
Speaker Change: We have upgraded our digital channels in our consumer, commercial, and private well segments, which is essentially touching our entire client base.
Speaker Change: Therefore, we have improved client experiences and enhanced tools for our sales teams to leverage as we grow the feed, base businesses and compete for a larger share of wallets. So let's turn this slide seven.
Speaker Change: The third quarter continues the choppy trend of long growth we've experienced the past year.
Speaker Change: Total Lones Group 0.5% on an annualized basis during the quarter, which followed last quarter's 6% growth. You're today, total loans have grown at an annualized rate of 1.9%.
Speaker Change: The $9.6 billion commercial segment was essentially flat during the third quarter. But within this segment, the CNI portfolio continues to be the primary driver of our growth, 21%.
Speaker Change: Last quarter of the CNI portfolio grew at nearly 13% and you're today CNI has grown over 250 million or nearly 4.5% annualized.
Speaker Change: The CNI growth has been shared across all the regions with Indiana, Michigan and our sponsor teams driving the bulk of the increase.
Speaker Change: The strong CNI growth has been offset by the contraction within the investment real estate portfolio.
Speaker Change: The stabilization of construction projects has continued and our clients have chosen to either sell their projects, which is taking advantage of attractive cap rates, or they've refinanced their projects into the permanent market, they can take advantage of the long-term interest rates.
Speaker Change: The investment real estate portfolio has declined over 11% throughout 2024, which is nearly $150 million.
Speaker Change: During the third quarter of the decline slowed to just over 20 million. And as a high-lighted last quarter, I believe the investment real estate portfolio is close to or at its bottom of footings.
Speaker Change: Why? Because new project for nantines are at healthy levels.
Speaker Change: The investment real estate team continues to win mandates for future multi-family, industrial, and warehouse construction projects and our clients. Continue to appreciate our consistent approach to underwriting through cycles and our record of successful syndications.
Speaker Change: Our commercial focus has always been the primary driver of our balance sheet growth and the commercial and industrial sector is our largest portfolio.
Speaker Change: CNI comprises 50% of our total loan portfolio and 2-thirds of our commercial portfolio. The business owners within our markets continue to execute their operating plans with growing working capital equipment or acquisition needs.
Speaker Change: and our commercial bankers continue to support these companies not only with capital solutions but also with Treasury Solutions.
Speaker Change: Overall, we continue to gain market share with existing and new clients. Those two attributes, organic growth and market share growth are the primary drivers of our industry.
Speaker Change: and Tim. You've got to know that. Continue growth expectations are supported by the fourth bullet point, strong pipelines for both CNI and investment real estate ending at very strong levels.
Speaker Change: The Consumer Portfolio was comprised of residential, mortgage, heloc, installment and private banking relationships. During the third quarter of the Consumer Portfolio group, more than one and a half percent with the private banking and heloc portfolios as the primary drivers of that increase.
Speaker Change: has noted the consumer loan pipeline remains strong heading in the fourth quarter with more gauge up over 15% at the end of June and more than double from the beginning of the year.
Speaker Change: Let's turn this slide in a few comments on the positives.
Speaker Change: The story of this slide is mixed and managing the deposit costs.
Speaker Change: will be reviewing the improvement of our net interest margin. And this slide represents the work our teams have accomplished in a managing and building for the positive relationships while reducing the positive cost on public funds and time to positive categories.
Speaker Change: For the quarter, total deposits grew at a 2.3% annualized rate, while for the full year, our total deposits have declined by only one and a half percent. The commercial segment grew deposits during the quarter after a reduction of over 170 million of public fund balances.
Speaker Change: Public funds are one of our highest cost depository categories and have been a focus of our efforts to both balanced relationships strategy with our pricing tiers. Overall, I am pleased with the growth of the non-public fund balances within the commercial segment which is approximately 255 million.
Speaker Change: We also continued our pricing discipline within our consumer segment, specifically time deposits.
Speaker Change: We began to reduce our money markets and CD specials while reducing the tenors of new CDs earlier this year. The consumer deposit decline during the quarter was primarily within the time deposit category.
Speaker Change: and noted by the last bullet point, we expect 50% of the time deposits that will repricen the fourth quarter to be at lower rates in the current weighted average rate. So for the year, total consumer deposits balances are essentially flat.
Speaker Change: Overall, I am pleased with the active management our teams are having with their clients.
Speaker Change: Stable loan yields and reducing the deposit cost should continue to build the earnings momentum of our balance sheet. I will turn the call over to you, Michele, and you can review more detail of the composition of our balance sheet and the drivers of our income statement.
Michele: Thanks, Mike. Slide 9 covers our third quarter performance.
Michele: Net interest income online 11 has grown for the second straight quarter with an increase of 2.5 million sequentially.
Michele: The available for sale Securities. We sold had a book value of $158 9 million and were sold for a loss of $9 1 million. The bonds had a weighted average yield of 2.85% and an average life of five six years, we took the opportunity to reposition the securities portfolio.
Michele: Leo in anticipation of the gain expected in the fourth quarter from the sale of our Illinois branch is expected to close in December.
Michele: Expected cash flows from scheduled principal interest payments and bond maturities in the next 12 months totaled $298 million with the roll off yield of approximately 2.28%, which will have a positive impact on our overall portfolio yield along with the sale of lower yielding securities.
Michele: Slide 12 shows some details of our loan portfolio.
Michele: The loan portfolio yield increased meaningfully by 14 basis points to 686%.
Michele: New and renewed loans, albeit a little lower than last quarter, we're still at a respectable 7.7% yield.
Michele: The bottom right shows that two thirds of our loan portfolio is variable rate.
Michele: As the fed cuts rates the repricing of our variable rate portfolio is certainly a headwind, but the new loan yield along with the fixed rate loan repricing should help offset the impact in the near term.
Michele: The allowance for credit losses as shown on slide 13.
Michele: This quarter, we recorded net charge offs of $6 7 million, which was offset by a provision for credit losses on loans of $5 million, resulting in a reserve at quarter end of 187 8 million with a coverage ratio of 148%.
Michele: In addition to the ACL, we have $18 8 million of remaining fair value marks on acquired loans when including those marks our coverage ratio is 163%.
Michele: Overall, we are still more than adequately reserved for our allowance and it remains well above peer levels.
Michele: Slide 14 shows details of our deposit portfolio.
Michele: Total cost of deposits was relatively flat increasing by just three basis points to 269% this quarter.
Michele: Deposits included in the sale of the Illinois branches of $287 7 million or request to held for sale, causing the decline in total deposits given theyre not reflected in the total deposit balance at quarter end.
Michele: When normalizing for the re class deposits grew organically $83 7 million or two 3% annualized linked quarter.
Michele: Slide 15, net interest income on a fully tax equivalent basis of 137 million increased $2 6 million from prior quarter. This was driven by earning asset yields shown on line, four which increased 13 basis points linked quarter outpacing funding cause.
Michele: On line, five which increased six basis points. The result was a meaningful expansion of stated net interest margin of seven basis points and an increase of 13 basis points from the first quarter.
Michele: Next slide 16 shows the details of noninterest income.
Michele: Noninterest income totaled $24 9 million and when normalized for the realized loss on securities was $34 million, an increase of $2 6 million or eight 4% over prior quarter.
Michele: Customer related fees increased 2 million, primarily reflecting higher gains on sales of mortgage loans.
Michele: Mortgage production was slightly lower than last quarter, but produced more salable loans driving the increase in mortgage gains, we expect mortgage gains to be lower than Q4 due to seasonality given activity tends to slow a bit around the holidays.
Michele: Included in non customer related income was a $1 5 million dollar poorly bully claim even when excluding that bully gain our noninterest income results were slightly above the guidance, we provided last quarter.
Michele: Moving to slide 17, noninterest expense for the quarter totaled $94 6 million, an increase of $3 2 million over prior quarter workforce cost increase driven by higher incentive accruals due to better quarterly performance.
Michele: Slide 18 shows our capital ratios, we continue to have a strong capital position with common equity tier one climbing to 11.25% this quarter.
Michele: Tangible common equity ratio increased 49 basis points due to strong earnings and improvement in the valuation of the available for sale securities portfolio reflected in the Aoc I.
Speaker Change: That concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin to discuss asset quality.
John Martin: Thanks, Michelle and good morning.
John Martin: My remarks, my remarks start on slide 19, I'll begin by highlighting loan portfolio growth touch on the updated insight slides.
John Martin: Review asset quality and the nonperforming asset roll forward before turning the call back over to Mark.
John Martin: Turning to slide 19, we had continued strong commercial and industrial loan growth shown on lines, one and two that was offset by the continued decline in construction and CRE non owner occupied or investment real estate on lines four and five are C&I growth came primarily from new loans rather than increased line utilization.
John Martin: <unk> this quarter, we saw some leveling of the construction portfolio online for with the mini Perm and permanent portfolio online five down $70 million.
John Martin: As mentioned on prior calls our investment real estate strategy is to provide construction financed through stabilization with mini Perm financing options. This can lead to changes between the two categories. We continue to remain well below the regulatory CRE concentration levels and remain active in new originations despite softer demand resulting from.
John Martin: Elevated interest rates.
John Martin: Our loan portfolio insights on slides 20, and 21 are intended to provide transparency into the portfolio as mentioned on prior calls the C&I classification shown on slide 20 includes sponsor finance as well as owner occupied CRE.
John Martin: 21% of our C&I loans support manufacturing businesses, our current line utilization decreased for the quarter. After three consecutive quarters of increase from 45, 3% to 45%, although balances still increased roughly $15 million on higher commitments of roughly $65 million.
John Martin: We participate in roughly $887 million of shared national credits across various industries. These are generally relationships, where we have access to management and revenue opportunities that go beyond the credit exposure.
John Martin: And the sponsor finance portfolio I've highlighted key credit portfolio metrics.
There are 89 platform companies with 51 active sponsors and assortment of industries, 66% have a fixed charge coverage ratio of greater than a one five times on Q2 borrower information.
John Martin: This portfolio generally consists of single bank deals for platform companies of private equity firms as opposed to large widely syndicated leverage loans from money Center Bank trading desks, we review the individual relationships quarterly for changes in borrower condition, including leverage and cash flow.
John Martin: On slide 21, we breakout the investment or non owner occupied commercial real estate portfolio. Our office loans are detailed on the bottom half of the slide and represent only two 1% of total loans with the highest concentration outside of general office in the medical office space.
John Martin: The wheel chart on the bottom right details office portfolio maturities loans maturing in less than a year represent 14, 4% of the portfolio or 37 $5 billion. The office portfolio is well diversified by tenant type and geographic mix. We continued to periodically review our larger office.
John Martin: Borrowers and view the exposure is reasonably mitigated through a combination of loan to value guarantees tenant mix and other considerations.
John Martin: On slide 22, our highlight this quarter as asset quality trends and position nonaccrual loans were down $2 $8 million, while 90 days past due loans saw a significant increase resulting from a $13 million matured relationship.
John Martin: Relationship was renewed shortly after quarter end, bringing $13 million of the $14 $1 million and 90 days past due and current net charge offs were $6 $7 million for the quarter, resulting largely from a $5 $6 million charge off related to the second quarter trucking company loss, we can.
John Martin: Continue to liquidate the remaining exposure and expect to have the relationship largely resolved by the end of the fourth quarter.
John Martin: Then moving to slide 23, I began rolled forward the mitigate our migration of nonperforming loans charge offs or <unk> and 90 days past due for the quarter. We added non accrual loans on line two of $13 $2 million, a reduction from payoffs or changes on accrual status.
John Martin: A $7 $9 million on line three and a reduction from gross charge offs of seven 6 million.
John Martin: Dropping down to line 11, 90 day delinquent loans increased $12 $4 million due to the matured and renewed relationship resulting in NPA and 90 day delinquent loans ending the quarter at $78 $4 million. So to summarize C&I growth was good for the quarter commercial real estate.
John Martin: As to refinance and pay off with construction lending balances leveling and asset quality is stabilizing after further digesting last quarter as loss I appreciate your attention and I'll turn the call back over to Mark Hardwick.
Mark Hardwick: Thanks, John turning to slide 24, the 10 year compounded annual growth rate of our earnings per share totaled 10, 2% and has helped support the eight 7% growth rate that we've seen in tangible book value per share.
Mark Hardwick: Slide 25 shows our total asset CAGR of 12% during the last 10 years and highlights meaningful acquisitions that are materially added to our footprint and fuel our growth.
Mark Hardwick: There are no changes in slide 26, as we continue to live out both our vision and strategic imperatives. So in summary.
Mark Hardwick: We're very pleased with the growth that we've seen in capital and tangible book value per share, which has resumed to its historical trajectory of up into the right.
We're also optimistic about the momentum momentum we're seeing in our performance. Thanks in part to active deposit and interest rate management. Our net interest margin is expanding and we feel we have the opportunity to outperform expectations into the foreseeable future.
Mark Hardwick: Thanks for your attention and your investment in first merchants and at this point, we're happy to take questions.
Mark Hardwick: Certainly.
Speaker Change: At this time, if you'd like to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Speaker Change: One moment please for our first question.
Speaker Change: And our first question comes from the line of Terry Mcevoy with Stephens.
Terry Mcevoy: Hi, good morning, everybody.
Terry Mcevoy: Maybe if I could start with a question for Michelle when you think about 2025 and net interest income do you think the positive impact from the security sales book that just occurred in the one you talked about in the fourth quarter will that offset the impact of lower interest rates in terms of keeping net interest income flat to Pos.
Terry Mcevoy: Simply higher next year.
Speaker Change: Well, we're still doing our budgeting for 2025, and so I'll be able to give you some better guidance on the January call for 2025, but.
Speaker Change: So.
Speaker Change: <unk> from the restructuring the portfolio restructuring.
Speaker Change: We've talked about in this declining rate environment, we historically do see a few basis points of margin compression for each quarter point reduction that the fed is from the fed well given that we're asset sensitive but.
Speaker Change: In the downgrade environment, we stay focused on growing net interest income and keeping that momentum going even if net interest margin declines our loan yields have always demonstrated I think some good pricing discipline, regardless of the environment. We think we'll be able to continue to deliver on that performance.
Speaker Change: The bond restructuring.
Speaker Change: Certainly does help margin, although we've got some look we're selling some deposits that have a lower rate.
Speaker Change: The bonds that we sold had a yield of 285 and so that certainly will have a positive impact on margin.
Speaker Change: It does put a bit of pressure on net interest income, but when you look at the sale as a whole. We also have some cost savings from it and so I think overall financially it's really pretty the sale is pretty neutral I think from looking at line. The line. There are some puts and takes but.
Speaker Change: You know really when we when we decided to sell those branches that wasn't really just a short term financial play it was really more of a long term strategic decision.
Speaker Change: Yes, Michelle.
Speaker Change: I'd love to just add Terry.
Speaker Change: Bond sale that we actually did was really late in the quarter. So I was proud of the margin enhancement that we saw this quarter that came from actions that we really haven't been taking inside the existing book and so I'm just pleased that all the effort that we're putting into deposit pricing.
Speaker Change: Loan yields.
Speaker Change: As a result has resulted two quarters in a row and an increasing margin.
Speaker Change: And then just the longer term strategy of of being out of Illinois.
Speaker Change: I feel like you have to be.
Speaker Change: You have to have significant share to make a difference.
Speaker Change: And it was a market where we felt like we were just subscale and we had to kind of go one direction or the other and so really pleased that we found a great partner.
Speaker Change: And were able to liquidate those locations and deposits in a way that I think will be good for them and good for first merchants.
Speaker Change: Yes.
Speaker Change: Agreed.
Speaker Change: And maybe Mark could you just expand on your comment in the release and you mentioned it earlier on the.
Terry Mcevoy: Completion of the technology initiatives re prioritization of core markets and new customer acquisition strategies, what area of the bank, So you're talking about and maybe as an outsider what what type of metrics can we look out over the next several years too.
Terry Mcevoy: To kind of see that progression and growth that you are hinting out there.
Speaker Change: Yes, thanks for asking Mike touched on some of it because it's already happening.
Speaker Change: In his comments, but if you think about the rollout of tariffs, which was an end branch account opening platform, where we reduced our time to open an account from.
Speaker Change: At 45 minutes to about 10 minutes or less.
Speaker Change: And the deployment of Q2, where we have better online and mobile technology for our customers. We're just re prioritizing and refocusing primacy and making sure that we are there.
Speaker Change: We're growing core deposit accounts and when you think about core accounts, they're typically less expensive because there it's more of their operating account than excess funds that.
Speaker Change: People are trying to get the best yield possible and so we're.
Speaker Change: Kind of de prioritizing.
Speaker Change: And re prioritizing the focus on our lesser expensive deposit categories seems kind of logical.
Speaker Change: But.
Speaker Change: Not spending as much time in the public funds space or on Cds and specials around money markets, what we're really trying to drive this business.
Speaker Change: Towards and forward with our real core primacy deposit accounts and then the so those are three of the four digital technologies that we've rolled out.
Speaker Change: Q2 for both consumer and commercial so we're calling that too.
Speaker Change: <unk> four and branch and the last item is the <unk> platform that we purchased which is called <unk> and black Diamond.
Speaker Change: For our private wealth business and we just think our private wealth business.
Speaker Change: Still has significant upside growth potential where.
Speaker Change: We can look for parity across all markets and we have a really significant presence in our Indiana marketplace with our private wealth business not as much in Detroit.
Speaker Change: And the Detroit MSA level, one didn't have a private wealth business Monroe Bank did.
Speaker Change: We're trying to leverage into the entire Michigan market, and then Columbus, Ohio as well so we feel like.
Speaker Change: We now have a tech platform.
Speaker Change: That really customers are demanding and 2024 and so we're excited about the ability to continue to grow that fee income and re prioritizing the business.
Speaker Change: In a way that's a little bit different because we have something better to sell.
Speaker Change: Great. Thanks for all that market, Jon just a real quick one for you the liquidation of the trucking relationship in the fourth quarter any sense for what that charge offs could look like just to kind of frame up expert to expectations. When we're all talking three months from now.
Yes, we've got less.
Speaker Change: Less than $4 million still outstanding related to the relationship and.
Speaker Change: We've got a specific reserve assigned to that relationship at the end of the quarter of roughly $1 million.
Speaker Change: We continue to work through auctions.
Speaker Change: The sale process it it will be somewhere probably between that $1 million and $2 million Mark.
Speaker Change: Yes, and I would just add because I know we've had separate conversations with investors that.
And last quarter, we really felt like we had the loss behind us and as we were working through the liquidation process.
Speaker Change: We've just have not been able to achieve the valuations that we were originally expecting.
Speaker Change: Understood. Thanks, everyone.
Speaker Change: Thanks Terry.
Speaker Change: Thank you and our next question comes from the line of Nathan race with Piper Sandler.
Nathan Race: Hi, everyone. Good morning, Thanks for taking the questions.
Speaker Change: Hi, Nate.
Nathan Race: Question for Mike or John perhaps just curious how you guys are thinking about loan growth in the fourth quarter. Mike I think you mentioned, the CNI and Investor commercial real estate pipelines are strong heading into <unk>, but just curious how you think all of that's going to translate into kind of loan growth into <unk> and just any maybe.
Speaker Change: Our initial thoughts on loan growth expectations in 2025.
Mike Stewart: Sure Mike.
Mike Stewart: Yes, I think when you when I'm looking at the pipeline report that as a matter of fact im looking at results through October already.
Mike Stewart: It continued to see that.
Mike Stewart: Positive side of my comment around Choppiness. So.
Mike Stewart: The growth is in the C&I.
Mike Stewart: So I think that's going to be in the fourth quarter and the solid.
Mike Stewart: Outcome that mid.
Single digits.
Mike Stewart: <unk> real estate.
Mike Stewart: Our production is still really strong.
Mike Stewart: And but the production or on new projects or new projects are.
Mike Stewart: Typically construction and the equity goes in first so the draws come in later, so thats what im trying to forecast, we really get my head around is when is the footing is really going to be at its bottom as payoffs from really good projects at the secondary market that we originated two two and a half years ago. So I think that we're going to continue to see a little bit more of that.
Mike Stewart: Klein and our Outstandings of real estate offset by growth.
Mike Stewart: Within the commercial C&I segment, continuing in the fourth and in 2025, I I really feel like the.
Mike Stewart: Our outlook still should be in that mid <unk>.
Mike Stewart: Digits.
Mike Stewart: Is that helpful. I mean, the mortgage portfolio probably.
Mike Stewart: Today's pretty flat growing.
Mike Stewart: Because of the activity goes on there because we did use our balance sheet on construction and.
Mike Stewart:
Mike Stewart: Purchases when they make sense with our private wealth group so yes.
Mike Stewart: We have historically said mid to high single digits.
Over the last quarter or two I've been talking about more mid single digits like five or 6%.
Speaker Change: Mostly as Mike mentioned because of some of the investment real estate pay downs.
Speaker Change: As made it a little more difficult for us to be as bullish.
Speaker Change: When you start thinking about trying to get to a seven or eight or 9% level.
Speaker Change: Got it that's helpful and understandable.
Speaker Change: Michelle maybe just thinking about the margin outlook for the fourth quarter, obviously, a number of dynamics that play with the securities portfolio repositioning and perhaps maybe we get two more 25 basis point fed cuts. So just curious how youre thinking about the margin trajectory in <unk>, particularly just given that you guys really managed deposit.
Speaker Change: Well.
Speaker Change: In the third quarter excuse me.
Speaker Change: Yeah, Hey, Nate.
Speaker Change: We do plan to be continue to be proactive in managing our deposit costs as the fed cuts rates with the intention of really driving stability in the NIM. So.
Speaker Change: Stable NIM is internally, what we're expecting and I think that bond sale won't be supportive of that as well.
Speaker Change: And some of those CD pricing Thats, a big part of our portfolio.
Speaker Change: Mhm.
Speaker Change: Perhaps assuming we get maybe more of a gradual fed cutting set.
Speaker Change: Let it go into next year do you think some of the kind of static impacts to your balance sheet from a margin perspective.
Speaker Change: Can be offset by just continued growth as we discussed previously just now.
Speaker Change: Yes.
Speaker Change: I do yes.
Speaker Change: Hopeful that the fed takes a more measured approach.
Speaker Change: Yes.
Speaker Change: But more measured or.
Speaker Change: I guess time, they put in between rate cuts certainly helps us manage margin.
The more aggressive they are kind of back to back to back it makes it a little more difficult to manage the deposit cost but.
Speaker Change: If.
Okay things settle in where we do have rate cuts, but theyre not quite as aggressive as.
Speaker Change: As we were thinking a couple of months ago. It does help us.
Speaker Change: Okay, Perfect and then maybe a question for John I'm, just curious if you can shed any more light on the increase in classified loans.
John Martin: Yes sure.
Speaker Change: Eight.
John Martin: We did an analysis, obviously it was up for the quarter.
Speaker Change: And you know we.
Speaker Change: We were at a historical.
Speaker Change: The low point for US anyway, when you look at some of the results we've had kind of leading into the run up in interest rates.
The areas that it really came into was the.
Speaker Change: Investment real estate area, we've got a couple of larger projects.
Speaker Change: $10 million to $15 million that have been impacted by the higher rates and honestly, it's distributed between that and <unk>.
Some pressure with the C&I portfolio as well with higher rates.
Speaker Change: We've got a number of names that have come in for the quarter and then it's just a lot of smaller.
Speaker Change: Names that are being affected so.
Speaker Change:
Speaker Change: It's from my perspective, I look at it and I feel good about.
Speaker Change: Where that level is at this point, it's just higher rates have slowed things down.
Speaker Change: Got it maybe.
Speaker Change: Maybe one last one for me.
Speaker Change: Surprised to see the shared national credit balances up about 7% compared to last quarter.
Speaker Change: Curious if those are deals that you guys are agent thing or just any other color on that growth in <unk>.
Speaker Change: Yeah, we don't agent many shared national credits those are generally the relationships that we're picking up in our footprint that have locations that we participate with.
Speaker Change: Our lead bank and are trying to get at other ancillary revenue.
Speaker Change: Add into that Nathan.
Nathan Race: We really formalized a dedicated team we called upper middle market.
Speaker Change: Thats focusing on that segment in Ohio, Indiana, and Michigan. So we have direct calling efforts on companies of size, where we can have access to the management and then look at their capital structure and then what John said didn't backfill with other relationship strategy. So it's direct calling and active in our markets.
Speaker Change: Okay great.
Speaker Change: Helpful.
Speaker Change: Thank you for all the color.
Speaker Change: Thanks, Nick.
Speaker Change: Thank you and our next question comes from the line of Damon Delmonte with <unk>.
Speaker Change: Hey, good morning, everyone and hope you all are doing well today.
Damon Delmonte: Just wanted to start off with good morning, Mark start up for a question probably for Michelle on expenses and kind of the outlook here going into the fourth quarter and kind of how twenty-five is shaping up.
Speaker Change: <unk>.
Speaker Change: Any guidance here what to expect during the fourth quarter.
Michelle Keviecki: I think for the fourth quarter I would expect this quarter's expense level probably to be a good rate to use for 2025 like I mentioned to Terry we're in our planning right now and so we'll probably be able to give you a little bit more guidance on what to expect for 2025 on our January call.
Speaker Change: Gotcha, Okay, and then similarly on the fee income side, if you back out the securities Boston. The bully gain I think you are kind of close to $32 5 million on an operating basis.
You know obviously you commented mortgage banking will probably come down a little bit for seasonality.
Speaker Change: But outside of that you feel comfortable with the other trend.
Speaker Change: Yeah, I do I think.
Speaker Change: The different pieces that you highlighted back off of.
Speaker Change: Are the right ones and so I think in the end.
Last quarter the guidance that I gave for the back half of 2024 was that it would be somewhere between that 30% to 32 range and I think thats still probably a reasonable expectation and that sounds like Thats, where you are landing.
Okay great.
Speaker Change: Then just lastly, just to circle back on the credit in.
Speaker Change: The trucking relationship.
Speaker Change: So it sounds like you'll need to provide a little bit more for the remaining charge offs. There was that what I should take away from that John.
John Martin: Yes, I don't know about I'm, not going to speak to the provision expense because it will depend on what happens within the portfolio and other relationships other names.
John Martin: I'm, just simply saying that we've got specific reserve of $1 million and depending on where where we had in the quarter, while dry weather, we need to replace that or not and that specific assumes that we're going to cover whatever loss, we have and it's already provided for so.
John Martin: Yes.
Well, we'll learn more but what do you think we're in a good spot.
Speaker Change: And David I wanted to jump in just a minute about the expense level as well.
Speaker Change: It's just on my mind, how focused we are on delivering high performance growth growth in high performance in 2025.
Speaker Change: I look at our company post <unk> when we had a voluntary early retirement that we did in the fourth quarter of last year.
Speaker Change: They've got about a year's worth of age on it and we've done some restructuring of the company because of it.
Speaker Change: That is all settled in and we have completed these four major tech initiatives and the focus of our executive management team is about driving results from here, we had a handful of items. We wanted to do that we thought more worthy investment that would make first merchants a better company and they have been.
Speaker Change: Incredibly distracting.
Speaker Change: They are are they require a ton of time and energy but.
Speaker Change: But our customers deserve it in the future of the bank deserves it.
Speaker Change: But as we're putting together our plan for next year, Michelle talks about sharing more information later and expectations that this quarter is a good run rate to think about.
Speaker Change: And our focus is on maintaining this expense level and driving results into 2025.
Speaker Change: Got it appreciate that color that's all I had thank you.
Damon Delmonte: Thanks Damon.
Speaker Change: Our next question comes from the line of Daniel Tamayo with Raymond James.
Thank you for the questions good afternoon, everyone.
Speaker Change: Maybe just a question on capital.
Daniel Tamayo: Obviously, you have the impact from the restructuring in the third quarter, and then potentially in the fourth quarter as well but.
Speaker Change: I think you were considering a.
Speaker Change: Sub debt redemption in January just curious kind of how youre thinking about any any potential deployment here in the in the near term of capital.
Speaker Change: Yes, our sub debt has been fully redeemed.
Speaker Change: Oh, sorry go ahead.
Speaker Change: Yes, no do we do have a piece of sub debt that we got from level one for a level one acquisition, yes that is still outstanding sorry.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Our view is too.
Speaker Change: We're not in a capital building bode our view is to make sure we're optimizing our capital.
Speaker Change: Really glad to see that.
Speaker Change: Increased from the kind of mid sevens over 8%.
Speaker Change: And we wanted to deploy the capital and growth in our balance sheet.
Speaker Change: And ideally some cash that may be involved in M&A.
Speaker Change: If the right transaction comes our way.
Speaker Change: And if not then I would like to be active in buybacks and make sure that we're putting the capital to work versus sitting on it into the future.
Speaker Change: Is there a is there a line in terms of from a buyback perspective in terms of valuation that you Wouldnt go over just you'd rather run.
Speaker Change: At a at a reasonable capital level.
Speaker Change: No.
Speaker Change: Think about historical trading levels.
Speaker Change: It's interesting today and I'll show a little frustration.
Speaker Change: We're a growing business, we produced a return on assets that adjusted for the one time sale of bonds were at a $1 23, and we're trading at less than 10 times slightly less than 10 times forward earnings and $1 35, a book.
Speaker Change: And those levels are materially below our historical averages and if that's the case, then then I want to be active in supporting.
Speaker Change: The purchase of our shares.
Speaker Change: It isn't our highest priority I'd, rather use the capital to grow.
Speaker Change: Our balance sheet and to add customers to our company and I'd love to think about cash in an acquisition that we would be excited about that was appropriately priced.
Speaker Change: But if it isn't we're going to be active in supporting the stock when we're trading at these kind of levels. So just.
Speaker Change: Yes.
And being above 8% Tc is.
Speaker Change: Is the number that is that I'm the most focused on.
Speaker Change: Okay.
Speaker Change: Thanks for all that color all my other questions have been answered.
Speaker Change: Thanks Danny.
Speaker Change: And our next question comes from the line of Brendan Nosal with hub group.
Hey, good morning folks have been doing well.
Speaker Change: Thanks Brendan.
Speaker Change: Just one from me here most have been asked and answered.
Speaker Change: On the M&A question clearly it sounds like there is an appetite and ability to do deals with capital where it is today just kind of curious what your read of the environment is today that the pace of conversations and then just refresh us on.
Speaker Change: What you are seeking a potential partner, whether it's geography size range financial metrics things like that thank you.
Speaker Change: Yes.
Speaker Change: Said this multiple times, so it's probably going to sound like a repeat I'm interested in banks that are in D&O.
Speaker Change: In Indiana, Ohio, and Michigan that are less than 25% of our of our assets.
Speaker Change: Most of the time they are challenged as it relates to growth and efficiency.
Speaker Change: And they may have.
Speaker Change: Executive that is looking forward or looking towards retirement.
Speaker Change: And I'm interested if.
Speaker Change: If we're trading at a level that allows us to win that transaction.
Speaker Change: And to solve all three of those chat.
Speaker Change: Challenges.
Post consolidation, we have enough cost take out that it becomes highly efficient.
Speaker Change: That I feel like it's a market we can add resources to start growing the bank, mostly on the commercial and private wealth side.
Speaker Change: Where we think we have the leadership to two two.
Speaker Change: Either leverage the existing leadership in the bank number two or number three or we feel like we have someone inside our company that can step in and help provide the leadership in that marketplace. So.
Speaker Change: Tends to be our focus I'm very aware that with our stock at the levels I just mentioned it makes M&A more challenging.
Speaker Change: And so.
Speaker Change: Okay.
Speaker Change: Today's comments about M&A and capital to use isn't as if we have something.
Speaker Change: <unk> lined up that is not the case.
Speaker Change: But we are.
Speaker Change: <unk>.
Speaker Change: For our next acquisition, we have all of our tech projects behind US we have a really capable talented team and.
Speaker Change: And we have a number of banks that we're interested in and we'll see if those happen or not if they don't we're going to stay focused on performing organically.
Speaker Change: Alright.
Speaker Change: Great color Mark Thanks for taking the question.
Brendan Nosal: Thank you Brendan.
Speaker Change: Thank you and our next question comes from the line of Nathan race with Piper Sandler.
Brendan Nosal: Yeah.
Brendan Nosal: Finger, taking the follow ups.
Nathan Race: Just a couple of housekeeping questions. Michelle can you help us with the impacts of intangibles.
Nathan Race: With the Grand sale planned in the fourth quarter.
Nathan Race:
Michelle Keviecki: If you're referring to any impact on goodwill, we don't have any impact.
Speaker Change: Okay great.
Speaker Change: And then just any thoughts on the tax rate going forward.
Speaker Change: Yes. In fact, this quarter's tax rate I think I would expect it to be between 13 and 14%.
Speaker Change: On a go forward basis.
Speaker Change: Perfect.
Speaker Change: Thank you for taking the follow ups.
Speaker Change: Alright, you're welcome.
Speaker Change: Thank you and our next question comes from the line of Brian Martin with Janney.
Brian Martin: Hey, good afternoon, everyone.
Speaker Change: Hey, Brian.
Brian Martin: I think Mike maybe just a question for Mike maybe you mentioned this earlier, Mike in terms of what the rate is it just the <unk>.
Brian Martin: Down move here.
Brian Martin: Talking about the real estate have you seen any pickup in the pipeline on.
Brian Martin: On that because of the rates going down and the outlook there.
Brian Martin: More rate cuts coming here and if he said that I apologize.
Mike Stewart: Well I didn't associated with rate cuts.
Mike Stewart: R. R R.
Speaker Change: Our production of new real estate opportunities are typically in the construction, so and that and whats been happening through the course of the year.
Speaker Change: Very high level of production for so when we work with our tier one developers and they're primarily focused on multifamily affordable housing warehouse et cetera.
Speaker Change: <unk> built out their capital stacks at the prevailing rates.
Speaker Change: Understand their cost structure. So those are moving through and therefore, a rate reduction that just happened.
Speaker Change: Mike.
Speaker Change: Put projects that worked penciling out so to speak back into play and we might continue to see good activity. If it makes sense a rate reduction also probably helps some real estate and or C&I, where John talked about some.
Speaker Change: Assets that might be struggling with some rate increases that rate reduction would help those assets perform.
Speaker Change: Through a cycle so it's both.
Speaker Change: Does that helpful. Yeah, no that's great.
Speaker Change: So I guess.
Speaker Change: I guess green shoots if youre seeing a couple of banks have kind of mentioned that we're seeing that so okay. And then secondly, maybe just Michelle you mentioned on the margin or dollars of NII.
Speaker Change: As you mentioned I guess, how is your expectation that NII is up in 'twenty five versus 24 or did you not say that maybe I missed what you were saying there.
Speaker Change: Yes, we're expecting to grow net interest income on a go forward basis.
Speaker Change: Okay, Yes, that's right.
Speaker Change: Thank you and then maybe just one one last one for John John.
Speaker Change: I know you mentioned the substandard classified levels any indication of what Youre seeing in special mentioned in terms of Directionally.
Speaker Change: In the quarter was that consistent with.
Speaker Change: A decline in increase.
John Martin: Yeah. So it was the criticized and classifieds have a tendency to move somewhat in tandem it did move up but at a slower rate.
Speaker Change: Gotcha, Okay alright.
Speaker Change: Alright, and then maybe just last one mark.
Speaker Change: You alluded to the fact I mean, it's first time I've heard you talk about M&A in a long time on the.
Speaker Change: Chris in your opening remarks, but just in terms of.
Speaker Change: The dialogue today I guess.
Speaker Change: I understand your comments about the stock price and where the benefits are in terms of buying back stock that I guess is it would you.
Speaker Change: Characterized this year as being more likely given all these technology projects building capital that its more likely.
In the next 12 to 18 months that we'd seen first merchants be able execute on.
Speaker Change: Something based on the conversations or is that unfair read based on.
Speaker Change: What we're hearing today.
Speaker Change: Yes, I don't know it takes a willing seller.
Speaker Change: We are in a great.
Speaker Change: Great position.
Speaker Change: Internally to tackle.
Speaker Change: An acquisition like I described.
Speaker Change: Sellers it seems like the conversations are healthy.
Speaker Change: And active but my take is that most field there are better off waiting until <unk>.
Speaker Change: That is completed.
Speaker Change: Their rate reduction cycle.
Speaker Change: And I think some of that is they would love to get whatever accretion back into their capital numbers that will just naturally come out of rate reductions.
So.
Speaker Change: I would anticipate there is a little more activity post right.
Speaker Change: Post fed rate reductions.
Speaker Change: Gotcha, Okay. While it's good to see you guys had a great position and congrats on a nice quarter guys. Thanks.
Speaker Change: Thank you Brian Thank you.
Speaker Change: Thank you and I'm showing no further questions so with that I'll hand, the call back over to CEO, Mark Hardwick for any closing remarks.
Mark Hardwick: Well. Thank you I enjoyed Q&A today, you guys ask great questions and it gives us a chance to share our passion for the business.
Mark Hardwick: And just are.
Mark Hardwick: Written comments.
Mark Hardwick: Thank you for your investment we're excited about the future and we've got a team in 'twenty 100 people strong that are actively getting after our vision statement of enhancing their financial wellness of the diverse communities, we serve and our tagline of helping your prosper in.
Mark Hardwick: We're making a difference in our communities. We're excited about it so thank you for your investment.
Speaker Change: This concludes today's conference. Thank you for your participation and have a great day you may now disconnect.
Speaker Change: Okay.
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