Q4 2024 First Merchants Corp Earnings Call
[inaudible]
Thank you for standing by and welcome to the first merchants Corporation fourth quarter 2024 earnings Conference call before we begin management would like to remind you that today's call contains forward looking statements with respect to that.
Performance financial condition of first merchants corporation that involve risks and uncertainties. Further information is contained within the press release, which we encourage you to review. Additionally management may refer to non-GAAP measures, which are intended to supplement but not substitute for most.
Directly comparable GAAP measures the press release available on the website contains financial and other quantitative information to be discussed today.
Well as a reconciliation of GAAP to non-GAAP measures as a reminder, today's call is being recorded.
Speaker Change: Now I'd like to hand, the program over to Mr. Hardware CEO. Mr. Hart you may begin.
Speaker Change: Good morning, and welcome to the first merchants fourth quarter 2024 conference call. Thanks for the introduction of recovering a forward looking statement on page two.
Speaker Change: We released our earnings today at approximately eight a M. Eastern time, you can access today's slides by following the link on the third page of our earnings release.
Speaker Change: On page three of our slides you will see today's presenters and her bio's, including President Mike Stewart, Chief Credit Officer, John Martin and Chief Financial Officer, Michelle Caveats.
Speaker Change: Please turn to page four.
Speaker Change: We're quite pleased where the FERC fourth quarter results and the focused momentum that we're building 2024 in many respects was a great year for the bank, we certainly had our challenges, but the team was resilient and stayed focused on the many tasks at hand.
Speaker Change: During 2024, and an order we completed our voluntary early retirement program.
Speaker Change: Upgrades to our in branch count origination platform to tariff phenom.
Speaker Change: Grade of our online and mobile platform for both consumer and then commercial clients, we upgraded our private wealth platform to handsets and see enter trusts and black Diamond.
Speaker Change: We completed the sale of five non core, Illinois branches and the corresponding restructure of our corporate however at a portion of our securities portfolio.
Speaker Change: And even though the word slipped into the first quarter of 2025, we just upgraded our wire platform to a real time system powered by an Astro.
Speaker Change: You'll notice on the branch map that we are now down to 110 locations.
Speaker Change: And we're highly focused on delivering top quartile financial results and 2025 with minimal or no distractions.
Speaker Change: The tighter focus on our core markets, Indiana, Ohio, and Michigan will drive new and innovative customer acquisition strategies, which are proving to be rewarding and fun.
Speaker Change: On slide five.
Speaker Change: You can see our earnings per share for the quarter totaled $1.10 or $1 even per share after adjusting for $20 million gain on the sale of the Chicago branches offset by an $11 6 million dollar bond loss related to security sales.
Speaker Change: Loan growth totaled 6% for the quarter consistent with our 2000 and twenty-five expectations.
Speaker Change: Net interest margin also improved by five basis points Q4 over Q3 and.
Speaker Change: And helped drive a P. P in our growth of 4% on a linked basis and again supported a sub 54% efficiency ratio for the quarter.
Our tangible common equity ratio has continued to build and is now 881% fourth quarter tangible book value per share, which is reported on slide 10 was $26 78 per share and is has increased by $5 33 per share or 25% over the last two years.
Speaker Change: Net income totaled $200 million for the full year of 2024, and <unk> and earnings per share totaled $3 41.
Speaker Change: Our Q3 and Q4 momentum is very satisfying and we feel like we are now back to pre Silicon Valley performance metric levels now, Mike Stewart, who will discuss our lines of business momentum Mike.
Mike Stewart: Thank you Mark and good morning to all our business strategy, which is summarized on slide six remains unchanged.
Mike Stewart: Commercially focused organization across all of these business segments, and our primary markets of Indiana, Michigan and Ohio.
Mike Stewart: And throughout 2024, we remained focused on building earnings momentum by executing our strategic imperatives of organic loan deposit fee income growth and taking market share.
Mike Stewart: By engaging and rewarding and retaining our teammates.
Mike Stewart: And by implementing the new technology platforms that Mark talked about that have enhanced our client experience.
Mike Stewart: As you heard Mark summarized on slide four we delivered on the earnings momentum throughout the year, let's turn to slide seven.
Mike Stewart: Loan growth was strong for the fourth quarter across both the commercial and consumer segments, reaching nearly 6% on an annualized basis and bringing the full year growth to 3%.
Mike Stewart: <unk> 9.7 billion dollar commercial segment was the primary driver of the growth by increasing $148 million during the quarter with the C&I portfolio growing $66 million or 3% and the investment real estate portfolio growing over $80 million.
Mike Stewart: For the full year, our commercial segment grew over $250 million or 3%.
Mike Stewart: With the C&I portfolio growing over $300 million offsetting the decline that we've talked about throughout the year and the investment real estate portfolio.
Mike Stewart: Another pleasing bullet point on this page is the year end pipeline.
Mike Stewart: It's at a consistent level from the prior quarter after such a strong balance sheet growth.
Mike Stewart: The growth has been shared across all the regions with Indiana, Michigan and the sponsor teams driving the bulk of the increase.
Mike Stewart: Some of the consistent trends across the C&I spectrum are generally evident like the.
Mike Stewart: The M&A and Capex spending which was slow during the first three quarters of 2024, but has begun to thought, particularly as it relates to acquisition and or ownership transitions.
Mike Stewart: That activity drove quite a bit of commercial lending during the last two months of the year and carried into the pipelines.
Mike Stewart: Fed rate reductions have had a positive impact on loan demand specifically with investment real estate projects, new production for our Investor Real estate team has been strong and the end of the year pipeline demonstrates some of that as well all of these are positive indicators for future balance sheet growth.
Mike Stewart: What about the benefits of easing inflationary pressures are also benefiting our clients in particular, the stability of auto trends in orders along with solid demand for workers in construction and infrastructure industries.
Mike Stewart: So far the response to proposed tariffs Hasnt had a significant impact on inventory our margins have.
Mike Stewart: That being said that revolver usage is up across most industries, along with the use of cash reserves.
Mike Stewart: The agribusiness segment remains a little challenged while commodity prices have reverted to more historic levels over the past four years input costs have not declined as much an equipment purchase remained soft.
Mike Stewart: F N b carries almost no exposure to the impacts of the bird flu as the bulk of our focus has been on crop production.
Mike Stewart: Our commercial focus has always been the primary driver of our balance sheet growth and the commercial and industrial segment is the largest part of our portfolio.
Mike Stewart: NII comprises 50% of the total first merchants loan portfolio and two thirds of the commercial.
Mike Stewart: A few comments on the consumer portfolio loan portfolio.
Mike Stewart: Year to date growth reached $125 million with the on balance sheet residential portfolio driving over 50% of that increase or $65 million.
Mike Stewart: We utilize our balance sheet for variable rate short term fixed rate or construction loans.
Mike Stewart: As the 10 year Treasury has continued to decline during the quarter. Our mortgage production has remained strong throughout.
Mike Stewart: Michel will review the year over year growth.
Mike Stewart: Our mortgage team delivered through the gain on sale activities, we have a really strong team of mortgage bankers throughout our footprint, helping us continue that growth.
Mike Stewart: Let's turn to slide eight deposits.
Mike Stewart: Okay.
Mike Stewart: Story of this slide is mix mix of our product set and our goal of managing deposit cost.
Mike Stewart: Michel will be reviewing the improvement of our net interest margin and this slide represents the work our teams have accomplished in managing and building core deposit relationships, while reducing deposit cost on public funds and maturity deposit categories.
Mike Stewart: So for the quarter total deposits grew at a four 4% annualized rate and for the full year. Our total depart back to deposit balances were essentially flat excuse me the.
Mike Stewart: The commercial segment grew deposits during the quarter by $50 million with the non public fund balances, what we would call operating accounts growing $27 million.
Mike Stewart: Year to date commercial deposit balances declined 1%.
Mike Stewart: But the nonpublic fond account balances or operating accounts grew by 1% or $87 million.
Mike Stewart: Public fund balances declined 6% throughout 2024.
Mike Stewart: Public funds are an important segment, yet one of our highest cost of depository categories.
Mike Stewart: The overall story is we improved our mix of commercial deposits throughout the year by growing operating accounts.
Mike Stewart: We also continued our pricing discipline within our consumer segment, specifically maturity deposits or Cds.
Mike Stewart: The chart at the top states that consumer deposit balances declined during the quarter, 22% on an annualized basis, which they did but the maturity deposit balance decline was essentially the entirety of it at $346 million.
Mike Stewart: So core or primary consumer account deposit balances were flat during the quarter, but grew $127 million in 2024 or roughly 2%.
Mike Stewart: Maturity deposits CD balances declined over $430 million through 2024.
Mike Stewart: The mix of deposit categories has been a focus of our teams a focus on primary accounts and our focus on deposit cost. So overall I am pleased with the active engagement. Our teams are having with their clients as we manage the mix and deposit costs.
Mike Stewart: So I'm going to turn the call over to Michelle. So she can review in more detail the composition of our balance sheet and the drivers of our income statement Michelle.
Michelle: Thanks, Mike Slide nine covers our fourth quarter performance.
Michelle: One shows a small decline in total assets.
Michelle: So that you can see it was derived from the decline in investments, reflecting the sale of bonds as we continue to reposition the portfolio that was offset by the loan growth of 185 million that Mike discussed in his remarks.
Michelle: Moving down to the income statement in the middle of the page net interest income on line 11 continued its growth trajectory with an increase of $3 3 million sequentially.
Michelle: Non interest income on line 13 increased by $17 9 million, which reflected the gain on the sale of our Illinois branches of $20 million offset by an increase in realized losses on the sale of bonds over the prior quarter of $2 5 million.
Michelle: When normalized for those noncore items noninterest income remained strong totaling $34 4 million.
Michelle: As a result pretax pre provision earnings grew linked quarter by nearly $2 $7 million and totaled $73 2 million, reflecting strong core franchise performance.
Michelle: That performance fueled tangible book value growth during the quarter, despite higher interest rates negatively impacting a OCI.
Michelle: Slide 10 shows our annual results you.
Michelle: And you can see at the top of the balance sheet lines showed a favorable change in earning asset mix, reflecting a decrease of $350 million and the lower yielding investment portfolio and an increase of 368 million in higher yielding loans.
Michelle: The decline in deposits on line four was due to the sale of the five Illinois branches that was that was closed in early December.
Michelle: Operating earnings for the year were strong with pre tax pre provision earnings totaling $272 4 million.
Michelle: Tangible book value per share benefited from the strong earnings increasing $1 72.
Michelle: Or 7% to $26 78 at year end.
Michelle: We achieved strong tangible book value growth, while returning value to shareholders through dividend payments and share buybacks totaling $138 million during the year.
Michelle: Slide 11 shows details of our investment portfolio.
Michelle: The securities sold during the fourth quarter had a book value of $109 6 million and were sold for a loss of $11 6 million.
Michelle: The bonds had a weighted average yield of 2.31% and an average life of 688 years.
Michelle: The total bond portfolio repositioning, including the bonds sold in the third quarter resulted in a year to date total of $268 5 million sold for a loss of $20 8 million.
Michelle: Expected cash flows from scheduled principal and interest payments and bond maturities in the next 12 months totaled 270 million with the roll off yield of approximately 2.22%, which will have a positive impact on the overall portfolio yield through next year.
Michelle: Slide 12 shows some details on our loan portfolio. The total loan portfolio yield decreased by 31 basis points to 655% as our variable rate portfolio repriced in response to lower short term rates.
Michelle: New and renewed loans were priced with a 712% yield the strong new loan yields along with the benefit of fixed rate loan repricing helped to offset the variable rate loan re pricing and we will continue to do so going forward in 2025.
Michelle: The allowance for credit losses as shown on slide 13.
Michelle: This quarter, we had net charge offs of only $800000. We recorded $5 7 million of provision for credit losses on loans, which was offset by a reduction of reserves for unfunded commitment balances of $1 5 million.
Michelle: The result was net provision expense of $4 2 million recorded in the income statement.
Michelle: The reserve at quarter end was $192 8 million and the coverage ratio was one 5%.
Michelle: In addition to the ACO, we have $17 4 million of remaining fair value marks on acquired loans when including those marks our coverage ratio is 164%.
Michelle: Overall, we are still more than adequately reserved as our allowance remains well above peer levels.
Michelle: Slide 14 shows details of our deposit portfolio.
Michelle: The total cost of deposits declined meaningfully by 26 basis points to 243% this quarter.
Michelle: Our interest bearing deposit costs declined 31 basis points, reflecting a downward deposit beta of 46%.
Michelle: As a reminder deposits included in the sale of the Illinois branches of $267 4 million for requests to held for sale in the third quarter and were not reflected in the total deposit balance at the end of the third quarter. Therefore deposits grew $156 5 million or four four.
Michelle: <unk> annualized linked quarter.
Michelle: On slide 15, net interest income on a fully tax equivalent basis of $140 2 million increased $3 2 million from prior quarter.
Michelle: Although yield on earning assets declined 19 basis points linked quarter. It was outpaced by the decline in funding costs of 24 basis points shown on line five.
Michelle: The result was a meaningful expansion of stated net interest margin of five basis points and an increase of 18 basis points from the first quarter of the year.
Michelle: Next slide 16 shows the details of noninterest income.
Michelle: Noninterest income totaled $42 7 million and when normalized for the gain on the sale of the Illinois branches and realized loss on Securities was $34 4 million, an increase of <unk> 4 million over prior quarter.
Michelle: Customer related fees remained robust at $29 4 million, reflecting strong wealth management fees and gains on sales of mortgage loans, along with higher customer loan level hedge fees.
Michelle: Moving to slide 17, noninterest expense for the quarter totaled $96 3 million, an increase of $1 7 million over prior quarter due to higher marketing costs and other onetime operating expenses.
Speaker Change: <unk> changed our expense discipline and achieved positive operating leverage again, this quarter and adjusting for noncore items and delivered a 53, 6% core efficiency ratio.
Michelle: Slide 18 shows our capital ratios.
Michelle: We continue to grow capital this quarter with common equity tier one climbing to 11, 43%.
Michelle: The tangible common equity ratio ended the year at $8 eight 1%.
These strong capital ratios provide us with strategic flexibility going into 2025.
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, My remarks start on slide 19, I'll begin by highlighting loan portfolio growth touch on the updated insight slides review asset quality and the nonperforming asset roll forward before turning the call back over to Mark.
Speaker Change: Turning to slide 19, we had continued strong mid single digit commercial and industrial loan growth shown on line four which includes owner occupied commercial real estate and sponsor finance.
Speaker Change: <unk> C&I, which you can see on line one grew the most while the sponsor finance portfolio online two declined.
As the sponsor finance portfolio matures, we would expect to see periodic payoffs as portfolio companies are sold and sponsors funds mature.
Speaker Change: Total investment real estate or CRE non owner occupied on line seven includes both stabilized or stabilizing properties and construction land and land development, which was mostly unchanged. We continue to have ample room to grow this portfolio and view this as an opportunity.
<unk> for future growth depending on market conditions.
Speaker Change: Moving down July nine there was a strong quarter over quarter growth in public finance, which was up $77 million.
Speaker Change: Part of this growth was due to our willingness and ability to move quickly in the fourth quarter, which resulted in some very attractive and less competitive lending opportunities.
Speaker Change: The originations were all high quality municipal transactions geographically concentrated in Indiana.
Speaker Change: The loan portfolio insights slides on pages 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.
Speaker Change: CRE.
Speaker Change: 21% of our C&I loans support manufacturing businesses. Our current line utilization increased again for the quarter line utilization rose by 1% to 46% contributing roughly $90 million to C&I growth with total C&I commitments.
Speaker Change: Rising roughly $91 million this quarter.
Speaker Change: We participate in roughly $890 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.
Speaker Change: In the sponsor financed portfolio I've highlighted key credit portfolio metrics. There are 85 platform companies with active sponsors and an assortment of industries, 66% have a fixed charge coverage ratio of greater than one five times based on Q3.
Speaker Change: Borrower information.
Speaker Change: This port portfolio generally consists of a single bank deals for platform companies are 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 lever.
Speaker Change: <unk> and cash flow coverage.
Speaker Change: On slide 21, we break out the investment or non owner occupied commercial real estate portfolio.
Speaker Change: Our office portfolio, our office loans are detailed on the bottom half of this slide and represent one 9% of total loans with the highest concentration outside of general office and the medical office space.
Speaker Change: The wheel chart on the bottom right details office portfolio maturities loans maturing in less than a year represent 25% of the portfolio or $67 million up from 15% last quarter. The office portfolio is well diversified by tenant type and geographic.
Speaker Change: Graphic mix, we continue to periodically review our larger office borrowers in view of the exposure is reasonably mitigated through a combination of loan to value guarantees tenant mix and other consideration our large us less than a year maturing office loan is roughly $25 million has a credit.
Speaker Change: Tenant and is under a long term lease we expect this loan to be renewed in due course later this year.
Speaker Change: On slide 22, we highlight this quarter's asset quality trends and position on non accrual or nonaccrual loans were up $14 $7 million, while 90 day past due loans declined to $5 9 million after the renewal of the $13 million.
Speaker Change: But shared relationship discussed during last quarter's call.
Speaker Change: The increase in non accruals resulted largely from a $22 million multifamily housing loan to a developer that is involved in a dispute unrelated to our project. Our project is headed to a sale and we expect to be paid out later in the first quarter or early in the second quarter with no.
Speaker Change: <unk> anticipated loss.
Speaker Change: Finishing out classified loans levels for the quarter, while net charge offs were roughly $800000.
Speaker Change: Then moving to slide 23.
Speaker Change: We've again rolled forward the migration of nonperforming loans charge offs Owari in 90 days past due.
Speaker Change: In the column <unk> 24, we had more movement than in recent quarters with inflows of non accrual loans.
Speaker Change: Line, two of $42 $9 million, the largest of which was the $22 million multifamily project I just mentioned.
Speaker Change: We had a reduction from payoffs or changes in accrual status online three of $25 $5 million with the largest outflow from the exit of a $13 million hospitality credit taking to non accrual in Q1, 2024, and a reduction from gross charge.
Speaker Change: US of $2 6 million.
Shopping down July 11, 90 day delinquent loans decreased by $8 $2 million with the renewal of the relationship from last quarter, resulting in NPA is plus 90 day delinquent loans ending the quarter at $84 6 million.
Speaker Change: So to summarize asset quality remained stable classified loan balances have leveled with nominal charge offs, we had a solid quarter of C&I loan growth combined with robust public finance activity and with the right refinance and sale activity in commercial real estate.
Speaker Change: Debating, we hope to see traction and growth in our construction loan portfolio.
Speaker Change: I appreciate your attention and now I will turn the call back over to Mark Hardwick.
Speaker Change: Thanks, John turning to slide 24, the 10 year compounded annual growth rate of earnings per share of seven 5% and it has helped support the 7% growth rate, we've seen in tangible book value per share.
Speaker Change: As you know.
Speaker Change: Those numbers are post dividends post M&A activity or the dilution from those acquisitions.
Speaker Change: And it also includes the OCI impact that is in our total equity calculation.
Speaker Change: Slide 25 shows our total asset CAGR of 12% during the last 10 years and highlights meaningful acquisitions that have materially added to our footprint and help fuel our growth.
Speaker Change: There are no changes to slide 27, as we continue to live both our vision and our strategic strategic imperatives.
Speaker Change: So in summary, I'm proud of this team.
Speaker Change: <unk> of <unk>.
Speaker Change: All 2000, plus employees that we have.
Speaker Change: And I'm really proud of the accomplishments that we delivered in 2024 and yet I'm very happy to turn the page on a year of repositioning.
Speaker Change: Our teams worked very hard last year to put the bank in a position to grow and we have never been positioned positioned better to meet the financial needs of the clients that we serve thanks.
Speaker Change: Thanks for your attention and your investment and I Hope you share the same optimism that the all of us around this table share.
Speaker Change: At this point, we're happy to take questions.
Speaker Change: Thirdly, and our first question for today.
Speaker Change: Comes from the line.
Speaker Change: Brendan Nasser from Hovde Group your question. Please.
Brendan Nasser: Hey, good morning, everybody hope you're doing well.
Speaker Change: Good morning, Brian.
Brendan Nasser: Maybe starting off here.
Brendan Nasser: And kind of asset repricing dynamics as we move through the year.
Brendan Nasser: I think 60% of your book floats on either so for a prime but for the other 40% of our loan book can you remind us how much backfill gas repricing you have across the year.
Brendan Nasser: You'll pick up youre looking to achieve in that paper.
Brendan Nasser: I think our fixed rate securities are currently have about 250 million fixed rate securities theyre going to be repricing in the next 12 months.
Brendan Nasser: I believe there may be about a four 5%.
Brendan Nasser: So we've got some good pickup there I think that'll be a nice tailwind for us.
Brendan Nasser: And then what about the loan side I think you said that was securities.
Brendan Nasser: Oh I'm sorry.
Brendan Nasser: Was the loan book I apologize.
Brendan Nasser: Okay, Okay that makes a great day.
Brendan Nasser: Okay.
Brendan Nasser: Perhaps one more from me.
Brendan Nasser: Kind of on the pace of investments and expenses overall I mean.
Brendan Nasser: Ton of work in 2020 for investment spend on your four major initiatives any early thoughts on the project slate for $2025 to be allocated or or what are you kind of pulled that forward into into 'twenty four.
Brendan Nasser: Tie that commentary into your overall thoughts on the cost base for this year. Thanks.
Speaker Change: Yes, I'll, let Michelle speak to the overall cost base.
Speaker Change: The pull forward of those projects its amazing we were able to upgrade the quality of our technology really without any increased expense.
Speaker Change: The.
Speaker Change: Where it really showed up in our income statement or the actual conversion charges.
Speaker Change: One time kind of.
Speaker Change: Expense related to changing platform and even caring technology over where we were maybe duplicating expense for a short amount of time.
Speaker Change: The 2025 numbers related to all those technology projects really isn't out of inquiry. So it comes back to just the core increase in our investment really in people as we move forward.
Speaker Change: Yes, maybe I'll kind of answer the second part of that when you look at just our total expenses for 2020 for looking into 2025, we think we can keep expense growth pretty minimal.
I would say somewhere in the 1% to 3% probably leaning more towards the low end of that range. Our efficiency ratio continues to be well need to have no doubt that we'll continue to maintain.
Speaker Change: Discipline and deliver a sub 55 efficiency ratio in 2025 as well.
Speaker Change: Alright fantastic that's helpful color, thanks for taking the questions.
Speaker Change: Thank you.
Speaker Change: Q and our next question comes from the line of Terry Mcevoy from Stephens. Your question. Please.
Terry Mcevoy: Hi, Thanks, good morning, everybody.
Terry Mcevoy: Maybe the cost of total deposits in Q4, 243% I'm just wondering me where was that at the end of the December end of December or if you don't have that handy, where do you see those deposit costs heading over the next couple of quarters.
Terry Mcevoy: Our December deposit costs were up 2.3, threes, we'd actually made quite a bit of progress.
Terry Mcevoy: The fourth quarter through the end of the fourth quarter really cutting those deposit costs.
Terry Mcevoy: And overall, we believe that we can continue that momentum as I said in my remarks, we had the down deposit data.
Terry Mcevoy: 46% so.
Terry Mcevoy: Our commitment is to continue to move forward if the fed cuts rates in 2025, we're going to go grab more of our share.
Terry Mcevoy: It will be dependent on competition as it always has and so we'll make adjustments as needed.
Mike Stewart: Thanks, Michele and then Mike It sounds like the momentum in in the CNI area will continue in the first half of the year just based on the conversations and some of your comments there.
Speaker Change: There are certain sectors industries, you think are better positioned to support that growth and then as a follow up just since I'm asking in the loan portfolio you highlight the <unk>.
Speaker Change: Hampel opportunities for ample real estate capacity whats your desire to have to build out commercial real estate give given that comment and your low relative exposure.
Speaker Change: On the C&I outlook.
Speaker Change: A couple of things inside.
Speaker Change: Manufacturing segment sitting here as you know restate manufacturing a big part of what we're doing.
Speaker Change: And that outlook.
Speaker Change: Side of the business plan for the company.
Speaker Change: What gives me the.
Speaker Change: In addition to what we see in the pipeline today.
Speaker Change: Give me that.
Speaker Change: Bullish outlook for the next quarter, maybe even two.
Speaker Change: Also I would just remind you know we're really gaining there.
Speaker Change: Momentum in our Michigan market.
Speaker Change: I can't say, where new there anymore, but when you think about what we've done the last three years.
Speaker Change: To build a personal brand up there and our approach that team is making.
Speaker Change: Great strides in the growth so.
Speaker Change: We're trying to get our fair share of that marketplace. So that in and of itself. We're taking market share offices that some of that additional runway of growth.
And at some points out and what I point out that we.
Speaker Change: Real estate portfolio is just really stable balance.
Speaker Change: We have really strong quarter volatile as we work with they are doing a lot of in fact, the projects that we are asset classes that we like.
Speaker Change: You'll be in the multifamily segment, the industrial warehouse you hear us talking about.
Speaker Change: Things, we might be doing in the student housing, even though have gotten a little bit.
Speaker Change: But the rates really excited that we've got capacity to continue to grow and we're just trying to differentiate ourselves from other banks that might already be more full with real estate assets.
Speaker Change: As we build.
Speaker Change: Build out.
Speaker Change: We continue to earn our reputation with syndication and we've got the ability to continue to do more in that space with developers that like our underwriting our approach and our consistency.
Speaker Change: Into that closed so.
Speaker Change: We didn't have the ability to take advantage of that if the projects pencil out.
Speaker Change: If we like the underwriting metrics.
Speaker Change: Perfect I appreciate all the color. Thank you.
Speaker Change: Thank you and our next question comes from the line of Damon Delmonte from <unk>. Your question. Please.
Damon Delmonte: Hey, good morning, everyone and hope that you're all doing well today.
Speaker Change: Just wanted to.
Speaker Change: Get a little bit more color on the margin outlook Michel I think you guys noted at about $270 million of cash flows coming off the securities portfolio is the intent to reinvest at higher rates or are you going to maybe kind of split that with some reinvestment and some funding of loan growth.
Speaker Change: Yeah.
Speaker Change: Our attention is to use it to fund the loan growth.
Speaker Change: For our 2025 plan, so we'll see where that goes.
Speaker Change: But just looking for margin for 2025.
Speaker Change: One is to grow margin.
Speaker Change: You have two rate cuts that are in our plan both in the early half of the year I should say one in March and one in June is only when we have been built them.
Speaker Change: So although we do have we are asset sensitive and we will have loans reprice down.
Speaker Change: We've been very proactive in managing our deposit costs and 24, we think we can do it in 25.
Speaker Change: And also we've got really strong ammonia.
Speaker Change: Alone.
Brendan Nasser: So that coupled with the fixed rate loans that Brendan asked about this deal.
Speaker Change: We'll be able to achieve the margin growth.
Brendan Nasser: Maryland stability.
Speaker Change: Believe we can grow it.
Brendan Nasser: Great. Okay, I appreciate that color.
Speaker Change: And then just to circle back on the loan commentary so Mike.
Brendan Nasser: Do you feel kind of.
Brendan Nasser: A low mid single digit net growth is doable or do you think you could actually get to a more solid middle single digit growth footing.
Brendan Nasser: Yes, I'm feeling middle single digit.
Brendan Nasser: We used to talk about high single digit it might not be in the high that.
Brendan Nasser: On the bullish side of that.
Brendan Nasser: I made a comment in my opening that 6% this quarter.
Speaker Change: It's a really good number to think about one five.
Speaker Change: Got it okay, great and then just lastly, any updated thoughts on capital management.
Speaker Change: Your capital levels are obviously very strong.
Speaker Change: Ben.
Speaker Change: On the M&A market and Theres been some activities across your footprint.
Speaker Change: Wondering what your priorities are for deploying capital is it just to support organic growth do you think there is M&A opportunities and if so kind of geographically do you feel the need to expand out of your core markets or do you see opportunities to maybe.
Speaker Change: Enhance your positions in your in your core markets.
Speaker Change: Yes.
Speaker Change: We love our capital base.
Speaker Change: Really happy with the levels, where we are today and it provides a lot of flexibility to the power of our earnings stream into 2025.
Speaker Change: Love to use as much of it is possible to grow the balance sheet.
Speaker Change: As I mentioned I kind of gave a mid to high single digit number is kind of where I think we'll come out with loan. So arguably we need about a third of our capital basis for the balance sheet growth.
Speaker Change: We use about a third for dividends and the rest will continue to accumulate.
Speaker Change: Our M&A focus is systems.
Speaker Change: Like it has been for a long time within the three states, where we currently do business.
Speaker Change: Ohio and Michigan.
Speaker Change: And.
Speaker Change: If something makes sense Wolfgang.
Speaker Change: We're certainly in communication with bank.
Speaker Change: I don't know what the real appetite is going to be but there are some that makes sense, where we feel like if we were to acquire.
Speaker Change: Institution or two on that footprint over time, then it would give us a nice new organic market, where we might be able to grow into the future, but it's not a priority. Our focus is the prioritization of performing organically.
Speaker Change: Got it great appreciate that color.
Speaker Change: All that I had thank you very much.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Nathan race from Piper Sandler Your question. Please.
Nathan Race: Yes, hi, everyone. Thanks for taking the questions.
Speaker Change: Just going back to the last line of questioning on capital.
Nathan Race: It looks like you guys are active on share repurchases in the quarter.
Speaker Change: Just curious if that appetite.
Speaker Change: Remains high end of this year, just given some of the <unk>.
Speaker Change: Any commentary.
Speaker Change: Yes, I am interested in share repurchases, where we're trading below historical averages.
Speaker Change: And when I say that I think about what what are our earnings multiple.
Speaker Change: Multiple and if we're trading below the historical averages that are closer to half of 13.
Speaker Change: And then I have an interest in being active where we're trading at.
Speaker Change: Our historical averages and we believe that if we.
Speaker Change: The estimates et cetera are appropriate then we're likely to say.
Speaker Change: Share repurchase and just accumulate capital for future years.
Speaker Change: Okay, Great that's really helpful and then.
Speaker Change: Michelle I think last quarter talking about a run rate for fee income around 30 to 32 going forward you guys, obviously exceeded that here in the fourth quarter, but just kind of any thoughts on kind of fee income growth run rate.
Speaker Change: Our June 2025.
Speaker Change: Yes, I mean, we expect 2025 non interest income to grow year over year, probably in the mid to high single digits.
Speaker Change: The drivers of that growth, we're expecting to come from our wealth management and our mortgage team.
Speaker Change: They delivered exceptional performance in 'twenty four and we think we can grow at a double digit pace in 'twenty five and so when you couple that with the other components of fee income growth, we think that will bring our overall noninterest income growth to that mid to high single digits. When you look at it year over year.
Speaker Change: And even treasury management.
Speaker Change: Similar range.
Speaker Change: With the use of Q2.
Speaker Change: We think about our plan the private wealth commercial artyom for you.
Speaker Change: The mortgage business, there really strong drivers of performance and I love the historical performance and we think it can continue.
Speaker Change: Okay, that's really helpful and then.
Speaker Change: Any thoughts on the tax rate going forward.
Speaker Change: I would expect it to be maybe 13%, 14% for the year 25.
Speaker Change: Okay great.
Speaker Change: Great and then maybe one last one for John.
Speaker Change: Honestly it sounds like with some of the nonperforming increase in the quarter, that's kind of transitory just given what's going on with that specific client.
Speaker Change: In the past, we've talked about kind of a normalized charge off range south of 20 basis points, but it just seems like given some pretty benign credit trends in the fourth quarter that maybe we're going to kind of trend below that level here in 2025.
Got it.
Speaker Change: Still think between 15 and 20 basis points that good enough.
Speaker Change: With classified team, where they are and where they are.
Speaker Change: And it is sort of transitory but.
Speaker Change: Still see that as being a reasonable range of expectations for.
Speaker Change: Fair enough.
Speaker Change: Okay, Great I appreciate the color and congrats on a great quarter. Thank you.
Speaker Change: Okay.
Speaker Change: Thank you and our next question comes from the line of Daniel <unk> from Raymond James Your question. Please.
Speaker Change: Thank you good afternoon, everyone.
Speaker Change: Maybe first just for Michelle on the details of the restructuring in the fourth quarter.
Speaker Change: I'm just curious if those are fun.
Speaker Change: <unk> were reinvested into securities I know you talked about reinvesting cash flows into loan growth, but just as it relates to those in particular and then.
Speaker Change: Do you expect any any further benefit depending on timing when that transaction happened on the margin in the first quarter.
Oh, yes, we did not reinvest those cash flows actually use the cash flow from the bond sale.
Speaker Change: On to replace the deposits that we sold.
Speaker Change: With those Illinois branches and so.
Speaker Change: When you look at the.
Speaker Change: On the bonds that we sold versus the yield on the deposits that will actually give us some margin pick up in 2025.
Speaker Change: So the immediate to the tune of two to three basis points of benefit.
Speaker Change: Okay. So youll see two to three basis points here in the first quarter.
Speaker Change: Related to that restructuring it sounds like okay.
Speaker Change: I appreciate that and then maybe one for Mark here bigger picture.
Speaker Change: You talked a lot about the investments you made last year.
Speaker Change: You guys talked about.
Speaker Change: Minimal expense growth here and sound pretty excited about 2025 and going forward.
Speaker Change: I'm curious kind of how you think about.
Speaker Change:
Speaker Change: What would be a good type of ROA for the bank going forward pretty strong in the fourth quarter on an operating basis. One by 125 is that an achievable number.
Speaker Change: Longer term or.
Speaker Change: Just curious how you're how you're thinking about now profitability given the invest.
Speaker Change: The investments you've made as we get into more normalized environment.
Speaker Change: Yes.
Speaker Change: Great question.
Speaker Change: And.
Speaker Change: We have a whole series of key performance indicators that we use in.
Speaker Change: We target around 130.
Speaker Change: I don't know, whether we'll reach that in 2025 to 125 number you just mentioned is a great place for a fee.
Speaker Change: The you think about growth in mid to high single digits.
Speaker Change: Across the balance sheet fee income growth the kind of 10% is sort of our goal.
Speaker Change: Maintaining our expense level and they are really low to low.
Speaker Change: A low single digit range.
Speaker Change: Our argument are really happy with the margin numbers the rebound that we've seen.
Speaker Change: Okay.
Speaker Change: Back to free Silicon Valley level.
Speaker Change: And.
Speaker Change: And yes that efficiency ratio is going to stay under 55, and we think with your ROA numbers you just mentioned.
Speaker Change: That's a strong place for us to perform.
Speaker Change: We believe harsco look like top quartile performance and then if our stock trades at a top quartile level just gives us flexibility as we think about what's next.
Speaker Change: Okay terrific. Thanks for all the color that's it for me I appreciate it.
Speaker Change: Thank you.
Speaker Change: This does conclude the question and answer session of today's program I'd like to hand, the program back to Mark Hardwick for any further remarks.
Speaker Change: Yes.
Speaker Change: Hello.
Speaker Change: We have a broad audience here.
Speaker Change: <unk> shareholders customers that left in the sciences.
Speaker Change: Just wanted to say thank you to all of our stakeholders. We appreciate your interest in first merchants your partnership with first merchants.
Speaker Change: And the commitment going forward. So again pleased with the year and clearly from the call you can tell there's a sense of optimism around 2025 land.
Speaker Change: Thank you for your time and have a great day. Thank you.
Speaker Change: Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
Speaker Change: Okay.
Speaker Change: Okay.