Q1 2025 First Merchants Corp Earnings Call
Yeah.
Speaker Change: Thank you for standing by and welcome to the first merchants Corporation first quarter 2025 earnings Conference call before we begin management would like to remind you that today's call contains forward looking statements with respect to the future performance and financial condition of first merchants Corporation.
That involve risks and uncertainties 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 the most directly comparable GAAP measures. The press release available on the website contains financial and other quantitative.
Speaker Change: Information to be discussed today as well as a reconciliation of GAAP to non-GAAP measures. As a reminder, today's call is being recorded I will now turn the conference over to Mr hardware, Mr. Mark Hardwick CEO. Mr. Hardwick you may begin.
Mark Hardwick: Good morning, and welcome to first merchants first quarter 2025 conference call. Thanks for the introduction and for covering the forward looking statement on page two 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 our buyers, including President Mike Stewart, Chief Credit Officer, John Martin and Chief Financial Officer, Michelle Caveats Gate.
Speaker Change: Slide four has a map with all 111 banking centers.
Speaker Change: Some Q1 financial highlights in a number of the awards. We received recently the first quarter was a strong start for the year as we delivered four 8% annualized loan growth and a 23 basis point increase in our return on assets.
Speaker Change: First quarter total assets were $18 4 billion with $13 billion in total loans $14 5 billion in total deposits and $5 8 billion of assets under advisement.
First quarter net income, which you can see on slide five was $54 9 million, an increase of $7 4 million or 15, 6% from one year ago.
Speaker Change: GAAP earnings per share increased to 94 from 80 cents a year ago.
Speaker Change: Our a 17, 5% increase due to balance sheet growth margin improvement fee income growth expense reductions and share repurchase activity.
Speaker Change: Core earnings per share grew by 10, 6% from one year ago after adjusting for last year's technology integration.
Speaker Change: Spencers, which temporarily elevated those those levels.
Speaker Change: While we are very pleased with the progress we've made increasing earnings and profitability over last year. The volatility in the market has clearly had an impact on our share price while its frustrating it's not something that we can directly control but.
Speaker Change: But we can take advantage of it by buying back our shares our board recently approved a new $100 million share repurchase program, and we've already repurchased $10 million in shares.
Speaker Change: We also redeemed through additional capital activities, another $30 million of sub debt.
Speaker Change: Our tangible common equity of eight 9% is above our target levels and provides the optimal capital flexibility given the minimal reliance that we have on hybrid equities that are always available to us if we would happen to need them.
Speaker Change: Now, Mike Stewart will discuss our line of business momentum.
Speaker Change: Thank you Mark and good morning to all our business strategy summarized on slide six remains unchanged. We are a commercially focused organization across all of these business segments, and our primary markets of Indiana, Michigan and Ohio.
Speaker Change: So, let's turn to slide seven I'd like to slide as.
Speaker Change: As Mark stated earlier loans grew nearly $155 million or at a four 8% annualized rate, which follows the strong 6% loan growth we saw last quarter.
Speaker Change: The $9 8 billion dollar commercial segment was the primary driver of the growth increasing $169 million or a 7% annualized growth rate within the commercial segments C&I grew by $248 million, which offset the $96 million decline in our <unk>.
Speaker Change: Desperate real estate portfolio.
Speaker Change: We saw the C&I loan growth in all of our markets as the M&A and Capex pipelines, we discussed last quarter were funded and closed our.
Speaker Change: Our commercial bankers continue to win new client relationships across our footprint.
Speaker Change: And revolver usage increased during the quarter due to a reduction in client cash balances, which we'll talk about on the next page and inflationary effects on inventory and receivables, which might be early impacts of tariffs.
Speaker Change: Another pleasing bullet point on this page is the quarter ending pipeline, which is consistent from prior quarter end and gives us optimism that we will be able to maintain our loan growth.
Speaker Change: A few comments on the consumer portfolio.
Speaker Change: We have a very strong team of mortgage bankers that are driving the growth of both noninterest income and the $24 million of balance sheet growth referenced on this slide.
Speaker Change: We utilize our balance sheet for variable rate short term fixed rates or construction loans.
Speaker Change: On a quarter over prior year quarter basis, our mortgage unit volume is up over 15% and our dollar volume is up over 30% and as you can see on the bottom of page our mortgage pipeline remained strong.
Speaker Change: So, let's turn to slide eight talk about deposits.
Speaker Change: The story of this slide continues to be the mix of our product set and our goal of managing deposit costs.
Speaker Change: Shell will be reviewing our net interest margin, but this slide represents the great work our teams have done in managing and building core deposit relationships, while reducing deposit costs on the public funds and maturity deposit categories in particular.
For the quarter total deposits declined one 6% on annualized basis.
Speaker Change: The commercial deposit balance decline is almost solely the result of the activities within the public funds portfolio or $208 million of the $228 million total decline.
Speaker Change: Public funds are an important segment, yet one of our highest cost depository categories.
Speaker Change: What I have labeled core relationship balances declined by $20 million, which is primarily attributed to companies managing their working capital levels.
Speaker Change: We also continued our pricing discipline within our consumer segment, specifically maturity deposits.
Speaker Change: Consumer deposit balances declined during the quarter by $9 million.
Speaker Change: But core consumer relationship balances grew by 188 million, but was offset by the decline of maturity deposits of $197 million.
Speaker Change: The mix of deposit core categories has been the focus of our teams for the past year. It has been a focus on primary focused accounts and deposit costs and overall I am pleased with the active management. Our teams are having with their clients to manage mix and deposit costs. So let me turn the call over to Ms.
Speaker Change: Shell to review in more detail the composition of our balance sheet and the drivers of our income statement Michelle.
Michelle Shell: Thanks, Mike and good morning, everyone.
Speaker Change: Slide nine covers our first quarter performance.
Speaker Change: Looking at the summary income statement in the middle of the page you will see total revenues were down slightly from Q4 after normalizing for the onetime events that occurred in Q4.
Speaker Change: I would remind you that we recorded a gain on the sale of our Illinois branches offset by a loss on securities repositioning.
Speaker Change: Which resulted in a one time $8 4 million dollar increase to noninterest income on line 13 in the fourth quarter.
Speaker Change: Total revenues in Q1 were quite strong despite being impacted by day counts and seasonality.
Speaker Change: Solid expense management during the quarter also added to the performance with an overall result of pre tax pre provision earnings of $67 4 million.
Speaker Change: Those earnings fueled a 56% increase in tangible book value over prior quarter after returning value to shareholders through dividend payments and share repurchases, bringing tangible book value per share up to $27.34, which is an.
Speaker Change: Increase of nine 1% when compared to the same quarter last year.
Speaker Change: Slide 10 shows details of our investment portfolio.
Speaker Change: Expecting cash flows from scheduled principal and interest payments and bond maturities through the remainder of 2025 totaled $214 million with the roll off yield of approximately 2.16%.
Speaker Change: Slide 11 shows some details of our loan portfolio.
The total loan portfolio yield decreased by 34 basis points to 621% as our variable rate portfolio reprice down due to lower short term rates.
Speaker Change: New and renewed loans were priced with a 696% yield and continue to positively impact the overall portfolio yield.
Speaker Change: The allowance for credit losses as shown on slide 12.
Speaker Change: This quarter, we had net charge offs of $4 9 million and recorded $4 2 million of provision.
Speaker Change: The reserve at quarter end was $192 million and the coverage ratio was 147%.
Speaker Change: In addition to the ACL, we have $16 3 million of remaining fair value marks on acquired loans.
Speaker Change: When including those marks our coverage ratio is one 6%.
Speaker Change: Overall, we remain well reserved as our allowance is well above peer levels.
Speaker Change: Slide 13 shows details of our deposit portfolio.
Speaker Change: The total cost of deposits declined meaningfully by 20 basis points to two point to 3% this quarter.
Speaker Change: Our interest bearing deposit costs declined 25 basis points, reflecting a downward cumulative interest bearing deposit beta of 56% and good deposit pricing discipline.
Speaker Change: On slide 14, net interest income on a fully tax equivalent basis of $136 4 million decreased $3 8 million from prior quarter.
Speaker Change: Net interest margin on line six totaled 322% and declined six basis points this quarter.
Speaker Change: When normalizing for the lower day count in the quarter margin was stable on a linked quarter basis.
Speaker Change: Next slide 15 shows the details of noninterest income.
Speaker Change: Noninterest income totaled $30 million with customer related fees of $27 1 million.
Speaker Change: Customer related fees declined from last quarter, reflecting lower derivative hedge fees card payment fees and gains on sales of mortgage loans.
Speaker Change: The first quarter is always seasonally lower for our mortgage business, but we still had a strong start to the year, giving gains this quarter were over 50% higher than the first quarter of last year.
Speaker Change: Moving to slide 16.
Speaker Change: Noninterest expense for the quarter totaled $92 9 million, a decrease of $3 4 million from prior quarter.
Speaker Change: We completed a voluntary early retirement program in the first quarter of 2024 and as you can see on the bar chart on the bottom right.
Speaker Change: Salaries and benefits have been lower and all subsequent quarters.
Speaker Change: We continue to demonstrate effective expense discipline to maintain our efficiency ratio, which was $54 five 4% for the quarter.
Speaker Change: Slide 17 shows our capital ratios.
Speaker Change: We continued to grow capital this quarter with common equity tier one climbing to 11, 5%.
Speaker Change: These strong capital ratios, along with our ample loan loss reserves provide immense balance sheet strength against any economic uncertainty. We may face. This year and also provides great strategic flexibility.
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 My remarks start on slide 18, we had strong mid single digit commercial loan growth led by commercial industrial loans shown on line for total investment real estate or CRE non owner occupied on line seven includes both stabilized.
John Martin: Our stabilizing properties and construction land and land development.
John Martin: We originate construction loans that meet secondary market underwriting standards, allowing properties to stabilize post construction.
John Martin: Our expectation is that borrowers will either transition to the secondary market or proceed with a property sale.
We continue to have ample room for new originations, given our concentration levels and are well below any regulatory thresholds of concern.
Speaker Change: On slides 19 and 20.
Speaker Change: We provide more details on the loan portfolio on slide 19, the C&I classification includes sponsor finance as well as owner occupied CRE I would highlight that our current line utilization increased again for the quarter from 46% to 40%.
Speaker Change: 9% contributing to roughly $71 million in growth in C&I loans, we saw some firms purchasing additional inventory in anticipation of the tariffs while others were unfazed by the tariffs and continued to make inventory purchases at planned or increased levels.
And the sponsor finance portfolio, we have key credit metrics for the 90 are platform companies.
Speaker Change: We underwrite to higher origination underwriting standards as compared to regular C&I loans and track the portfolio quarterly.
Speaker Change: This portfolio almost exclusively consists of single bank deals for platform companies are private equity firms.
Speaker Change: As opposed to large widely syndicated leverage loans from money Center bank trading desks.
Speaker Change: On slide 20, we breakout the investment or non owner occupied commercial real estate portfolio. Our office loans are detailed on the bottom half of this slide and represent only one 8% of total loans and potential issues are easily managed that.
Speaker Change: The wheel chart on the bottom right details office portfolio maturities loans maturing in less than a year represent 25, 2% of the portfolio are roughly $60 million.
Speaker Change: On slide 21, I highlight this quarter's asset quality trends in position.
Speaker Change: Non accrual loans were up $8 $1 million with 90 days past due declining to $4 $3 million NPA and 90 day past due loans represent only 7% of total loans.
Speaker Change: Planned sale of the collateral for the $22 million nonperforming multifamily property you mentioned last quarter was delayed for several weeks, although the sale is scheduled.
Speaker Change: To occur within the next 30 days without principal loss.
Speaker Change: Finishing out this slide classified loans leveled and decline to end the quarter at 278% of loans, while net charge offs were roughly $5 million for the quarter or 15 basis points annualized.
Speaker Change: Then moving to the asset quality roll forward on slide 22 in column, one Q25, new non accruals on line two totaled $19 $6 million, the largest of which was a $6 8 million C&I loan.
Speaker Change: We had a reduction from payoffs or changes in accrual status on line three of $5 billion, then dropping down to line 11, 90 day delinquent loans decreased one $6 million with npa's ending the quarter at $91 2 million to.
Speaker Change: To summarize asset quality remained stable classified loan balances have leveled and declined with 15 basis points of annualized charge offs, we have a solid quarter of C&I loan growth and have begun to analyzing the impact of tariffs on new originations through relationship management discussions and.
Speaker Change: And quarterly portfolio reviews, I appreciate your attention and I'll turn the call back over to Mark Hardwick, Yes, Thanks, John turning to Slide 23, you tangible book value per share.
Mark Hardwick: The compound annual growth rate on the bottom left continues to grow at a healthy 7% post dividend post buyback and post acquisition rate.
Michel Shell: As Michel mentioned earlier in the call tangible book value per share has also increased nine 1% in the last 12 months.
Mark Hardwick: Slide 24.
Mark Hardwick: Ah represents our total asset CAGR of 11, 9% during the last 10 years and highlights meaningful acquisitions that have materially added to our demographic footprint fueling growth.
Mark Hardwick: We do believe in accretive M&A, but it is important to note that we focus on organic growth in high performance first.
Mark Hardwick: We are comfortable being selective in the M&A process in April one marked the three year anniversary of our last acquisition.
Mark Hardwick: As we look forward to the remainder of 2025, there has been an increase in volatility and uncertainty regarding the impact of the impacts of tariffs tariffs.
Mark Hardwick: Growth in credit may prove to be challenging and our team maintains active in intensive discussions with our customer base to identify any early signs of stress.
Mark Hardwick: However, so far we haven't identified any specific credit problems and our loan pipeline remains very strong. So at this point, we're sticking to our mid to high single digit loan growth guidance for the year. Thanks for your attention and your investment in first merchants now we are happy to take questions.
Mark Hardwick: Thank you.
Mark Hardwick: A reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment for questions.
Speaker Change: Our first question comes from Daniel Tamayo with Raymond James You May proceed.
Speaker Change: Thank you.
Speaker Change: Good morning, everybody.
Speaker Change:
Speaker Change: Maybe just starting on the on the credit side. So you were saying.
Speaker Change: The multifamily.
Speaker Change: That was scheduled to pay off in the first quarter will now pay off in the second quarter.
Speaker Change: Given that do you think the.
Speaker Change: Well first of all do you expect any kind of additional charge offs related to that it sounded like the answer is no but just for clarity and then second with that coming down do you think you may have reached the peak in nonperforming loans in the first quarter I guess, assuming that we don't go into a meaningful recession here.
Speaker Change: Hey, Danielle it's John Martin.
Speaker Change: Yes so.
Speaker Change: Answer your questions in the order.
Speaker Change: We don't expect any additional loss.
Speaker Change: Have a closing date set on that.
Speaker Change: Early sharply that timeshare, so I'm pretty optimistic at this moment about that closing.
Speaker Change: Fairly short order.
Speaker Change: As it.
Speaker Change: It relates to what would happen in the second quarter.
Speaker Change: That's good.
Speaker Change: But clearly one of the larger non performers we have.
Speaker Change: <unk>.
Speaker Change: Any given quarter have things moving in and out but there is that something that IC lined up behind it that would push that number in a material way any higher than that would be out of that.
Speaker Change: <unk> million dollars.
Speaker Change: Okay terrific.
Speaker Change: And then.
Speaker Change: I guess.
Speaker Change: Another kind of.
Speaker Change: A smaller one but it kind of zooming in on the fee income.
Speaker Change: Michelle.
Speaker Change: I'm not sure. If you if you gave an expectation, but just curious on on your thoughts on where that could land in the second quarter and beyond and.
Speaker Change: Kind of your underlying assumptions.
Speaker Change: Included in that in relation to mortgage banking. If you think that is going to be kind of softer or you are expecting more of a typical seasonal balance here in the middle of the year.
Danny: Hey, Danny.
Danny: Joining the call. So for non interest income really I think for all of our income statement categories I would probably reiterate the guidance that we provided in January as we still think those are the levels that we're here.
Danny: And so you know on fee income.
Danny: So we provided was we thought that we would have year over year mid to high single digit growth.
Danny: And when you look at.
Danny: Mortgage team they had a great quarter. When you look at this Q1's performance this year compared to last year and they'll pick up steam in the remaining quarters, given the seasonality of the business and so we expect double digit growth in mortgage.
Danny: And even looking at wealth management, although market volatility can be a bit of a headwind for the wealth business. We believe that team has the ability to grow in double digits as well and so when you put all of that noninterest income categories together like bully et cetera, we expect that mid to high single digit growth year over year.
Danny: I pointed out that.
Danny: Pipelines I referenced excuse me my slides is very strong so the mortgage group going into the second quarter.
Danny: That's great.
Danny: Okay, well I will I will step back and I appreciate you taking my questions.
Danny: Thanks Danny.
Speaker Change: Thank you. Our next question comes from Terry Mcevoy.
Speaker Change: Stephens you May proceed.
Terry Mcevoy: Hi, Good morning, everybody first off loved the new updated pictures in the presentation. It looks like John elected not wearing a tie this time, so I just wanted to.
Speaker Change: Thanks, a lot Barry.
Speaker Change: Thanks.
Speaker Change: I like to bid as well.
Speaker Change: In terms of <unk>.
Speaker Change: <unk>.
Speaker Change: On the loan yields they were down more than we had modeled in and impact impacted the margin.
Speaker Change: Could you maybe talk about the amount of fixed rate loans that will be repricing over the next three quarters, where you would have.
Speaker Change: Some pickup on the loans.
Speaker Change: On the yields for those loans.
Speaker Change: Yes, we've got $190 million of fixed rate loans.
Speaker Change: Through the end of 2020.
Speaker Change: As a reminder.
Speaker Change: Great on those.
Speaker Change: But for 60 fives.
Speaker Change: Yeah.
Terry Mcevoy: Okay, and then John since I mentioned mentioned your name just a question on the sponsor finance a good good quarter of growth the classifieds ticked a little bit higher and if my math is correct I think that charge offs in the professional services came out of that portfolio. So.
Speaker Change: I know you provide great great data, but are you seeing any any any concerns there just given the size and what I think was a charge off last quarter.
Terry Mcevoy: Yes.
Terry Mcevoy: Spotted that correctly it did actually come out of that book.
Terry Mcevoy: Roughly $2 $5 million.
Terry Mcevoy: I would say given what that portfolio is how we underwrite it.
Terry Mcevoy: On balance I'm pretty pleased with how it's performed from a historical standpoint.
Terry Mcevoy: So that portfolio has.
Terry Mcevoy: Elevated level of classifieds, because quite frankly, we also grow more aggressively in that portfolio than we do.
Terry Mcevoy: The rest of the book just because of that.
Terry Mcevoy: Nature of the underwriting and the nature of the type of asset there but.
Terry Mcevoy: It's performed pretty well and it continues to perform pretty well.
Terry Mcevoy: But any given quarter and tenant.
Terry Mcevoy: Kind of bump up and down so.
Terry Mcevoy: There's not some underlying concern there there are names in there that we continue to monitor and make sure that.
Terry Mcevoy: We're in touch with the sponsors.
Terry Mcevoy: Really good communication with that group with the sponsors so again.
Terry Mcevoy: Yes.
Terry Mcevoy: And I would expect given the higher spread and.
Terry Mcevoy: Higher underwriting that we put.
Terry Mcevoy: To it.
Terry Mcevoy: Yes.
Speaker Change: It does I appreciate that and thanks for taking my questions.
Speaker Change: Thank you Sir.
Terry Mcevoy: Thank you.
Speaker Change: Our next question comes from Damon Delmonte with K VW you May proceed.
Damon Delmonte: Hey, good morning, everyone and hope everybody is doing well today.
Speaker Change: Michel just wondering if you could just give us a little updated outlook on the expenses, obviously, a very strong quarter to start the year and just curious if your guidance from last quarter still holds and kind of what your thoughts are around that.
Speaker Change: Yes, I think our guidance from last quarter does still hold me I think the guidance that we've provided was that we thought we would have like 1% to 3% expense growth over the 2024 expense base.
Speaker Change: We're running ahead of that probably will all year, but I would.
Speaker Change: Probably just to reiterate that level.
Speaker Change: Okay, Great and then as far as the cash flows that are rolling off the securities portfolio can.
Can you just remind us of the strategy. There are you reinvesting some of that into higher yielding securities or are you kind of reallocating that to support loan growth.
Speaker Change: Yes, we're reallocating that to support loan growth, we're not reinvesting yet and so we'll continue to use that cash for loan growth.
Speaker Change: Probably through the next couple of quarters.
Speaker Change: Okay, Great and then I guess, just lastly, given the strong capital it's nice to see that you guys are.
Speaker Change: On the buyback.
Speaker Change: Mark just kind of curious on your thoughts on M&A, you kind of look across your footprint and potentially into other footprints any updated thoughts on.
Speaker Change: Conversations are changing strategy there.
Speaker Change: Yes, no change in strategy just continue to stay close to the sort of the partners.
Speaker Change: But.
Speaker Change: That we're most interested in and Theyre all any any one were talking to was in Indiana, Ohio, Michigan.
Speaker Change: <unk>.
Speaker Change: And just given the volatility of stock prices.
Speaker Change: So it create any real momentum.
Speaker Change: Got it okay I thought that I had thank you very much.
Steven: Thanks, Steven Thank you.
Speaker Change: Thank you. Our next question comes from Nathan race with Piper Sandler You May proceed.
Steven: Hi, everyone.
Speaker Change: Appreciate you taking the questions.
Speaker Change: Circling back to the margin Michelle just curious to kind of get your expectations for the second quarter, assuming the fed remains on pause. It seems like you still have some deposit cost leverage some repricing within the loan book as well and kind of redeployment of excess liquidity into loans.
Speaker Change: Curious to get your expectations in terms of what we can expect in terms of the magnitude of potential expansion here into Q.
Speaker Change: I mean, we would expect margins remain relatively stable.
Speaker Change: I guess I should clarify stable.
Speaker Change: Excluding the day count impact.
Speaker Change: Stated margin was three 2% for Q1, but we had five basis points.
Speaker Change: The decline was due to the day count So you add that back in to normalize.
Speaker Change: I think that level it seems like a good.
Speaker Change: Level and look forward to in the next coming quarters.
Speaker Change: Okay.
Speaker Change: And the mix in the back half of this year I imagine, it's still probably a safe assumption that you guys can.
Speaker Change: Kind of offset some of the headwinds on a floating rate book, if we do get some fed cuts, maybe one or two cuts in the back half of the year just given some of the loan growth prospects that you have about being funded partially by the cash flow coming off the securities because that's still a fair assumption.
Speaker Change: And the other thing we've been pretty successful outages.
Speaker Change: Repricing deposits.
Speaker Change: Pretty strong downward data and so if we get a couple more fed cuts in the back half of the year I think that gives us an opportunity to.
Speaker Change: Reduced some costs again, there as well that will help offset some of the repricing on the asset side.
Speaker Change: Okay great.
Mark Hardwick: I think mark you.
Speaker Change: Reiterated that you still expect mid to high single digit loan growth. This year, just curious how volumes are tracking so far here in the second quarter, if youre seeing any kind of any unusual activity in light of all the volatility of late.
Speaker Change: And just kind of any other commentary in terms of kind of the loan pipeline heading into the second quarter.
Speaker Change: Yes, I think Mike did a nice job covering it in the calls US we were 5%, 485% this quarter, 6% last quarter.
Speaker Change: So the second quarter, the pipelines were really strong.
Speaker Change: Throughout the regional bank and best buy real estate.
Speaker Change: Categories, and so we're pretty optimistic about how we should at least continue through the remainder of the second quarter and then we'll continue to assess the impacts of tariffs.
Speaker Change: On the customer base, and whether or not it causes them to kind of start to pullback.
Speaker Change: Mike anything you want to add April is off to a good start.
Speaker Change: Okay, great and if I could sneak one last one in for John just maybe on the reserve and think about provisioning going forward you guys. Obviously still have a really strong reserve level. So just curious if we.
Speaker Change: Glued any major seasonal impacts tied to the environment and assuming credit remains fairly stable going forward.
Speaker Change: See much need to provide for growth or acute kind of just kind of grow into kind of the allocated excess reserves that exist.
Speaker Change: Yes.
Speaker Change: I think we generally have targeted the one 5% range and I think.
Speaker Change:
Speaker Change: Depending on what growth as Nate.
Speaker Change: <unk>.
Speaker Change: What happens with credit is going to ultimately of course drives whether we need to provide more but.
Speaker Change: I think right now, we've basically been providing for any incremental credit issues with some incremental amount.
Speaker Change: For growth and really kind of wound up being.
Speaker Change: At that one 5% range.
Michelle Joel: Michelle Joel.
Speaker Change: All partners.
Speaker Change: Okay. So it sounds like you're still targeting kind of stay in kind of near the <unk> reserve level.
Speaker Change: Okay, Okay great.
Speaker Change: Appreciate the color thanks, everyone.
Speaker Change: Thanks Nate.
Speaker Change: Thank you. Our next question comes from Brian Martin with Janney You May proceed.
Brian Martin: Hey, good morning.
Speaker Change: Good morning.
Speaker Change: Just what Michelle just wondering I guess can you just remind us what the.
Speaker Change: On the margin just the impact I guess.
Speaker Change: Pending on how the how the fed plays out here the impact if we do see cuts on the margin just kind of.
Speaker Change: 25 basis points.
Speaker Change: What are you expecting impact beyond that.
Speaker Change: Well, our Alco models.
Speaker Change: Tell us that with each 25 basis point cut.
Speaker Change: So we would have maybe about two to three basis points of margin compression.
Speaker Change: But when we did our plan.
Speaker Change: Okay.
Speaker Change: Yes, the two cuts that we had originally built into the plan.
Speaker Change: We did have a bit of modest margin expansion and some of that is due to the fact that we felt like we had some runway on being able to cut deposit costs to offset some of the asset repricing.
Speaker Change: And so far I think we've been like I said, we've been successful with that I think what we did see some increased competition on deposits.
Speaker Change: Think more towards the.
Speaker Change: So the middle of this quarter in the back half of this quarter and so that's the reason why at this point I'd say, we look for margin to be stable.
Speaker Change: Got you Okay. That's helpful.
Speaker Change: And how about maybe just for John I guess the reserves are.
Speaker Change: Just ask a question about that.
Speaker Change: Feels like credit is pretty pretty healthy at this point in the reserves are high and I guess what areas I know, it's early on with the tariffs, but as you kind of look at the book today, what do you see the most exposure the most risk.
Speaker Change: Due to the tariffs that.
Speaker Change: Could creep into the credit side of the equation here as we get into the back half of the year.
Speaker Change: Okay, just trying to identify the areas that you're focused on.
Speaker Change: Yes.
Speaker Change: It's interesting Brian that question.
Speaker Change: So difficult to answer as you know.
Speaker Change: It's so difficult to determine the impacts.
Speaker Change: It can hit or be in any place in our supply chain, but it is way too early I think to.
Speaker Change: Try to draw any conclusions about the impact.
Speaker Change: The tariffs are and when you look at them they are not even.
Speaker Change: Where you might think or hear read a headline that tariff as you dig into it more than the customers somehow been exempted out of it. So it's we're analyzing the impact of the tariffs on initial underwriting and as we do our quarterly portfolio reviews on our larger end.
Speaker Change: Certain specific portfolio sponsor finance as an example, we're asking the question what our borrowers.
Speaker Change: The impact to be and how they are dealing with.
Speaker Change: I'm, not really able to quantify it and feed.
Speaker Change: Ceded back into any kind of analysis that would push the allowance to one direction or another.
Speaker Change: Yeah, Brian I'm really pleased with the work we're doing internally.
Speaker Change: I had a nice meeting internally and talked about trying to do.
Speaker Change: Do not.
Speaker Change: Regards day or not re quote what we hear on the news and just say, let's talk about what we are hearing directly from our borrowers and so our credit teams are commercial bankers. The RMS are actively communicating with customers and trying to find out exactly what they know and.
Speaker Change: How they think it's going to impact their business and to John's point, it's really early.
Speaker Change: I'm proud of our customer base.
Speaker Change: How close they are to the risks and uncertainties.
Speaker Change: Smart they are there they are really capable business owners.
Speaker Change: It's.
Speaker Change: Too early for us to really give you direct.
Speaker Change: Numbers until this settles in.
Speaker Change: Gotcha Okay.
Speaker Change: Mark just last question for me just on the on the capital front I know you talked about the buyback and I guess that seems like the most likely path here and you guys have been active last quarter this quarter to date.
Speaker Change: The.
Speaker Change: Our plan I guess at this point would be to continue to be assertive on the buyback and kind of executing this plan given.
Speaker Change: The focus on organic growth a.
Speaker Change: Tough market in terms of M&A at the moment is that I guess, we should think about that being.
Speaker Change: Pretty solid execution on that on that buyback at current levels, certainly opportunistic with the pricing.
Speaker Change: Yes. It is.
Speaker Change:
Speaker Change: Today is an interesting day I thought we had a hell of an earnings.
Speaker Change: Smith and.
Speaker Change: <unk> beat all analysts expectations. Our teams are focused on the plan you think about there's lots of different ways you hear this.
Speaker Change: <unk>.
Speaker Change: Hum.
Speaker Change: Developed a plan no the plan and work the plan and that's what we're doing as a team and the stock's down 2% today and it's an environment, where the minute were outside of our quiet period, we're going to be active.
Speaker Change: Gotcha, Okay, and that's it for me just housekeeping, maybe Michel the tax rate going forward I guess keep it kind of where we're at.
Speaker Change: Today Okay.
Michel Shell: Yes, yes, I think the range that would use it between like 13% to 14% for the effective tax rate.
Speaker Change: Gotcha, Okay. Thank you for taking the questions.
Michel Shell: Youre welcome.
Speaker Change: Thank you. Our next question comes from Daniel Tamayo with Raymond James You May proceed.
Michel Shell: Okay.
Michel Shell: Thanks, guys just a quick follow up here.
Michel Shell: Alright.
Michel Shell: You talked about the impact just recently talked about the impact from from tariffs on on credit.
Michel Shell: To gauge totally understand that.
Michel Shell: Zooming in and looking more on the demand side zooming in on the construction portfolio, which you saw a nice growth in the first quarter and talked about maybe gaining some share there and then the sponsor book, which.
Michel Shell: It came down a bit just curious.
Michel Shell: How you think the tariffs are impacting demand on the construction side, maybe in terms of input costs and then on the sponsor book overall, and how that might impact your growth guidance.
Michel Shell: Yes so.
Michel Shell: Danielle.
Speaker Change: The feedback we've been receiving directly is that on any project that's already under construction.
Speaker Change: Priced out or have already priced in.
Speaker Change: Any impact that might affect their building costs for <unk>.
Speaker Change: Two completion, so they are already kind of hedge that out.
Speaker Change: Anything that's new that's coming in Theyre pricing it into quotes for the construction of.
Speaker Change: New opportunities so anything that we have are we're underwriting today, we'll have those costs built into it.
Speaker Change: The contractors are hedging that or at least pre buying four or.
Speaker Change: Our new construction and anything Thats already a flip has been it's been accounted for.
Speaker Change: The feedback we're getting from from.
Speaker Change: The development with us too.
Speaker Change: I think that's well said on the construction side and on the sponsor side or just M&A activity. In general is just part of the analysis process that individuals are.
Speaker Change: Executive teams are doing so.
Speaker Change: Doing the same thing understanding the impact what's it mean to margins or is it going to do the evaluation. If there is any changes it might take them more time to do some analysis, but.
Speaker Change: They are still active.
Speaker Change: Great. So it sounds like on the construction side.
Speaker Change: The loans in process alright, those projects in process. If you will or there are even able to pass through any increase in input costs to the two.
Speaker Change: To the direct consumer is what you are hearing.
Speaker Change: They've already bought bought forward or hedged out what the.
Speaker Change: The impact of the tariff would be on what they're planning to buy on a construct constant searching escalator clauses isn't losing contracts.
Speaker Change: Okay, Great I appreciate the color.
Speaker Change: Thank you.
Speaker Change: Thank you I would now like to turn the call back over to Mark Hardwick for any closing remarks.
Speaker Change: Yes, just we appreciate all the attention time that youre willing to give to understand our story.
Speaker Change: The best you, possibly can.
Speaker Change: And we look forward like I said Theyre just continued execution of the plan.
Speaker Change: And the guidance that we've provided in the past. So again, thanks for your time and we'll talk to you next quarter.
Speaker Change: Thank you. This concludes today's conference. Thank you for your participation and have a great day you may now disconnect.
Speaker Change: Yeah.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Okay.