Q3 2025 First Merchants Corp Earnings Call
Speaker #2: Thank you for standing by and welcome to the First Merchants Corporation . Third quarter 2020 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 .
Speaker #2: 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 .
Speaker #2: The press release available on the website contains financial and other quantitative information to be discussed today as , as well as a reconciliation of GAAP to non-GAAP measures .
Speaker #2: As a reminder , today's call is being recorded . I will now turn the conference over to Mr. Mark Hardwick , CEO , Mr. Hardwick .
Speaker #2: You may begin .
Speaker #3: Good morning , and welcome to First Merchants Third Quarter 2025 conference call . Thanks for the introduction and for covering the forward looking statement on page two .
Speaker #3: We released our earnings yesterday after the market closed , and you can access today's slides by following the link on the third page of our earnings release on page three of our slides , you will see today's presenters and our bios , including president Mike Stewart , Chief Credit Officer John Martin and Chief Financial Officer Michelle Kawecki .
Speaker #3: Slide four has a map with all 111 banking centers . A few awards that we've received recently and some Q3 financial highlights , including a 1.22% return on assets for the nine months ended September 30th , 2025 .
Speaker #3: On slide five . Our strong balance sheet and earnings performance reflect strength and resilience of our business model . We delivered another 9% loan growth quarter and $0.98 of earnings per share .
Speaker #3: ROA totaled 122 , the same as your year to date number . I mentioned previously and the efficiency ratio was 55% , which is consistent with the high performance we strive for .
Speaker #3: As you all know , we announced the acquisition of First Savings Financial Group on September 25th , adding approximately $2.4 billion in assets and expanding our presence in the southern Indiana , which is part of the Louisville MSA .
Speaker #3: We are confident in our ability and excited about building on their meaningful deposit franchise to create a true community bank in southern Indiana .
Speaker #3: Much like we've done in previous acquisitions , citizens Bank in the northwest part of Indiana and Ieb in Fort Wayne are two great examples of acquisition acquisitions where we saw potential and successfully built them into high performing parts of the First Merchants franchise .
Speaker #3: Over time , we also believe that verticals will prove beneficial by enhancing fee income through their originate and sell models for SBA loans and first lien helocs by adding an additional loan growth and liquidity lever through their triple net leasing business .
Speaker #3: And we will now have an SBA product offering available throughout our current footprint . You may know that we have completed 8 million of SBA originations so far in 2025 .
Speaker #3: While First Savings has originated over 100 million . Our commercial and small business teams are excited to finally have a more robust offering for our communities .
Speaker #3: Larry Myers will be joining our Board of Directors upon the close of the acquisition , and Tony Schein will stay on board to lead verticals and enhance the financial expertise of our commercial team .
Speaker #3: We anticipate a mid first quarter closing a mid second quarter integration and are confident in achieving the announced three year earn back on slide six .
Speaker #3: Year to date net income totaled 167.5 million , an increase of 31.9 million , or 23.5% , from the nine months ended 20 2024 .
Speaker #3: While earnings per share totaled $2.90 , an increase of $0.59 , or 25.5% , during the same period . Michelle will discuss our capital position to include our tangible common equity of 9.18% , which provides meaningful capital flexibility .
Speaker #3: And John will discuss non-performing asset data to include our 90-day, or MPA plus 90 days past due, to total loans of just 0.51%, down from 0.62% a year ago.
Speaker #3: Now , Mike Stewart will discuss our line of business momentum . Thank you , Mark , and good morning to all . Allow me to share some context for my portion of this call .
Speaker #3: I'm calling in today from Charleston , South Carolina , where the first savings bank CBL team is gathered . SBL stands for Small Business Lending and represents first savings banks , dedicated 45 person team that has a national footprint delivering SBA loans .
Speaker #3: They gather once a year in person to review their accomplishments and prepare for their upcoming year . And I am pleased to be able to meet this team later this morning .
Speaker #3: As an early bridge to the integration with First Merchants . So back to our earnings call . The business strategy summarized on slide seven remains unchanged .
Speaker #3: We are a commercially focused organization across all these business segments, and our primary markets are Indiana, Michigan, and Ohio. So, turning to slide eight.
Speaker #3: As Mark stated earlier , this was another great quarter of loan growth across all segments and across all markets . It is very pleasing to see our Midwest economies continue to expand .
Speaker #3: Our clients businesses continue to grow and see our bankers continuing to win new relationships . 268 million in commercial loan growth for the quarter , over 10% annualized 699 million of loan growth year to date .
Speaker #3: Over 9% annualized CapEx financing . Increased usage of revolvers , M&A , financings , and new business conversion are the drivers of this growth .
Speaker #3: Another encouraging bullet point on this page is the quarter ending pipeline , which is consistent with prior quarter end and gives me optimism that we will be able to maintain our loan growth and increasing market share activities into the fourth quarter .
Speaker #3: The consumer segment also shared in the balance sheet growth with residential mortgage loans and private banking relationships , driving the 21 million of loan growth for the quarter .
Speaker #3: Pipelines for these segments also ended at consistent levels to June , so we can turn the slide nine deposits . I will start with the consumer segment on the bottom page , which was the driver of our deposit growth during the quarter , 96 million in total .
Speaker #3: The mix is particularly pleasing with the non maturity categories growing at nearly 5% annualized maturity categories also grew by 27 million . The primary driver of the non maturity balance increase is market share and household growth .
Speaker #3: Note the last two bullet points on this page . Maturity deposit balances have decreased 198 million year to date , with non maturity deposit balances increasing by 178 .
Speaker #3: Commercial business segment . On top of this page has a similar story . While total deposits declined by 23 million in aggregate , core relationship or operating account balances grew by 4.9% , 4.9% or 56 million , improving the mix of all deposit categories has been the focus of our teams for the past year and has been accomplished by focusing on primary core accounts and deposit cost .
Speaker #3: Overall , I'm gratified with the active engagement our teams are having with their clients . We have continued our pricing discipline , specifically maturity deposits and public funds , and remain hyper focused on relationships and converting single product users into a broader bank relationship .
Speaker #3: So before turning the call over to Michelle . Michelle , one last comment regarding First Savings Bank . I'm excited to be working directly with them .
Speaker #3: Larry , his executive team and his board have been welcoming and supportive of building their market presence in Southern Indiana with First Merchants as a partner .
Speaker #3: I have already spent time with their teams visiting banking centers and meeting their clients. They have a strong reputation within Jeffersonville, New Albany, and their Southern Indiana footprint.
Speaker #3: Their community Bank model and reputation are well established . Continuing their growth within this community will be our priority as their branch network and commercial capabilities are well positioned .
Speaker #3: Being able to meet their SBL team and other verticals is also a priority for me , as these businesses drive a solid fee generating revenue stream for the bank .
Speaker #3: So , Michelle , I'll let you take it from here . Thanks , Mike .
Speaker #4: Good morning everybody . Slide ten covers our third quarter performance , which reflects positive trends in all categories . Total revenues in Q3 were strong with meaningful growth in both net interest income of 0.7 million and non-interest income of 1.2 million .
Speaker #4: This resulted in overall pre-tax pre-provision earnings of 70.5 million , tangible book value increased 4% , linked quarter and 9% when compared to the same period in the prior year .
Speaker #4: Slide 11 shows our year to date results . The first three lines highlight continued balance sheet growth alongside an improved earning asset mix over the past 12 months .
Speaker #4: We reduced the lower yielding bond portfolio by 280 million . In increased higher yielding loans by 927 million . Reviewing lines 11 through 14 , total revenue increased by 4.5% when comparing year to date 2025 , with the corresponding period in 2024 , while expenses remain unchanged , demonstrating positive operating leverage .
Speaker #4: Adjusted pre-tax pre-provision earnings increased by 4.7% and totaled 208.6 million . Year to date , 2025 . Slide 12 shows details of our investment portfolio .
Speaker #4: Expected cash flows from scheduled principal and interest payments , and bond maturities over the next 12 months . Total 283 million , with a roll off yield of approximately 2.18% .
Speaker #4: We plan to continue to use this cash flow to fund higher yielding loan growth in the near term . Slide 13 covers our loan portfolio .
Speaker #4: The total loan portfolio yield continued to expand , increasing eight basis points from the prior 5:45 point 4% . This increase was primarily driven by loan originations and refis during the quarter had an average yield of 6.84% .
Speaker #4: The allowance for credit losses is shown on slide 14 . This quarter , we had net charge offs of 5.1 million and recorded a 4.3 million provision .
Speaker #4: The reserve at quarter end was 194.5 million , and the coverage ratio of 1.43% remained robust . In addition to the ACL , we have 14.4 million of remaining fair value marks on acquired loans when excluding those marks , our coverage ratio is 1.54% .
Speaker #4: Slide 15 shows details of our deposit portfolio . The total cost of deposits increased 14 basis points to 2.44% this quarter , reflecting the competitive deposit dynamics in our markets .
Speaker #4: We expect the rate paid on deposits to decline as a result of the September rate cut and plan to reduce rates more . Assuming there are cuts in October and December .
Speaker #4: On slide 16 , net interest income on a fully tax equivalent basis of 139.9 million . Increased 0.7 million linked quarter and was up 2.9 million from the same period in prior year .
Speaker #4: Our quarterly net interest margin of 3.24% was stable linked quarter and continues to be resilient . Next slide 17 shows the details of noninterest income , noninterest income totaled 32.5 million , with customer related fees of 29.3 million .
Speaker #4: Customer related fees were strong in all categories , reflecting continued momentum . Moving to slide 18 , noninterest expense for the quarter totaled 96.6 million .
Speaker #4: And 0.9 million of severance and acquisition costs when excluding those one time charges . Core expenses were 95.7 million , and in line with our guidance from last quarter , the core efficiency ratio remains low at 54.56% for the quarter .
Speaker #4: Slide 19 shows our capital ratios . The tangible common equity ratio benefited from strong earnings and aoci recapture , increasing 26 basis points to 9.18% , while returning capital to shareholders through share repurchases and dividends .
Speaker #4: During the quarter , we repurchased 162,474 shares , totaling 6.5 . Million , bringing total share repurchases . Year to date to 939,271 , totaling 36.5 million .
Speaker #4: We remain well capitalized with the common equity tier one ratio at 11.34% and are well positioned to support continued balance sheet growth . That concludes my remarks , and I will now turn it over to our Chief Credit officer , John Martin , to discuss asset quality .
Speaker #3: Thanks , Michelle .
Speaker #5: And good morning , everyone . I'll begin with an overview of our loan portfolio on slide 20 . In Q3 , we saw robust loan growth across the portfolio with a $289 million increase in total balances quarter over quarter , or 8.7% annualized .
Speaker #5: CNI lending grew by $169 million this quarter , continuing its strong momentum from last quarter . Commercial real estate added $87 million , reflecting steady demand and disciplined execution .
Speaker #5: We continue to be well below the CRE regulatory concentration , guidance and with the pending FSB merger , we have ample room for new originations in the portfolio .
Speaker #5: Our Midwest footprint remains the core of our portfolio, with 82% of borrowers located in our four-state region. Turning to slide 21.
Speaker #5: Our sponsor finance portfolio continues to perform well, with $911 million in outstandings across 100 companies in diverse industries. The credit metrics in this portfolio remain solid, with 85% of the borrowers having a senior leverage under three times and 63% maintaining a fixed charge coverage ratio above 1.5 times.
Speaker #5: Losses have remained nominal over the life of the portfolio, with only $15.1 million in losses over a ten-year history, with nearly $2 billion in funded loans.
Speaker #5: We also continue to manage our shared national credit exposure prudently , with $1.1 billion across 94 borrowers , primarily in wholesale trade , agriculture and manufacturing , underwriting and credit quality remain strong across consumer and residential mortgage portfolios , with over 96% of our $727 million in consumer loans and more than 91% of $1.9 billion in residential mortgage loans originated with credit scores above 669 .
Speaker #5: Turning to slide 22 . Our investment real estate portfolio now stands at roughly $3.1 billion , as shown above , with the more significant concentrations highlighted here on slide 22 .
Speaker #5: Within non or owner occupied office , we continue to monitor our exposures with the top ten loans representing 53% of total office exposure , with a weighted average LTV of 62.8% at origination .
Speaker #5: The largest individual office loan is $25 million , secured by a single tenant . Mixed use property at 67.2% . Loan to value .
Speaker #5: The second largest is a $24.1 million medical office facility . Turning to slide 23 , asset quality remains solid , with non-performing loans declining three basis points from 72 million to $68.9 million .
Speaker #5: Our Non-accrual loans tend to be small and granular , with the largest being $12.9 million to a multifamily secured loan . Classified loans finished the quarter lower , with improvements across the CNI portfolio .
Speaker #5: Our charge off , our net charge off for the quarter were 15 basis points of average annualized loans . Performance was strong coming out of the second quarter and resulted in a solid performance for the portfolio in the third quarter .
Speaker #5: Then, turning to slide 24, closing out the non-performing asset roll forward highlights the strong performance just mentioned. We added $15.5 million on line three and various non-accrual loans.
Speaker #5: The largest was a $4.3 million contractor . We resolved the $6.8 million brewery relationship from last quarter , which is included in the $9.4 million on line three with a $6.5 million , or with $6.5 million in gross charge offs on line five .
Speaker #5: We added $1.3 million in Oreo from the mortgage portfolio and had a $2.5 million decline in 90 days past due . Overall , our credit portfolio continues to perform well as we continue to use consistent underwriting and proactive credit risk management .
Speaker #5: I appreciate your attention , and I'll now turn the call back over to Mark Hardwick .
Speaker #3: Thanks , John . Turning to slide 25 , the compound annual growth rate of tangible book value per share on the bottom left continues to grow at a healthy 7% level .
Speaker #3: Post dividends , post buybacks , and post acquisitions . When adjusted for the AFS , Aoci volatility , which is now $2.72 , the combined annual growth rate is actually 88.
Speaker #3: 5% , and that differential back in 2002 was nearly $4 per share . So we've made up some ground as the portfolio has matured and as rates have changed slightly .
Speaker #3: Slide 26 represents our total asset kegger of 11.5% during the last ten years . And highlights how acquisitions have improved our footprint and helped fuel our growth .
Speaker #3: As we look forward to the last couple of months in 2025 , we we expect more of the same strong performance . Thank you for your attention and your investment in First Merchants .
Speaker #3: And at this point, we're happy to take questions.
Speaker #2: Thank you . As a reminder to ask a question , please press star one one on your telephone and wait for your name to be announced .
Speaker #2: To withdraw your question , please press star one one again . One moment for questions . Our first question comes from Damon Del with KBW .
Speaker #2: You may proceed .
Speaker #6: Hey , good morning everyone . Hope you're all doing well today . Just wanted to start off with kind of the . Expense outlook .
Speaker #6: I know you know , going into 26 it gets a little confusing because of the merger closing . You know , at the beginning part of the year , but just kind of wondering Michelle , your thoughts on kind of core expenses here in the fourth quarter and kind of what you anticipate for core growth as we look through 26 ?
Speaker #7: Yeah . Well , I'll start with the fourth quarter . We would expect Q4 to be relatively in line with Q3 , and that is , I would say , after you back out those one time expenses .
Speaker #7: And so really looking at Q3 core expenses , you know , we always use Q4 to troop incentive accruals and such , but not expecting any meaningful increase .
Speaker #7: So we should have a pretty disciplined finish to the year . And we're going through our planning process for 26 right now . And so we'll be more prepared to give guidance , I think , on our next call for 2026 .
Speaker #6: Got it . Okay . And then with regards to the margin , you know , nice to to see it hold up . You know pretty pretty steady quarter over quarter you know can you help us think a little bit about the impact .
Speaker #6: If we do have two rate cuts here in the in the fourth quarter . And kind of remind us how the margins kind of positioned for future cuts .
Speaker #7: Yeah , I mean , assuming we get rate cuts in October and December , I would expect to see a few basis points of margin compression in Q4 .
Speaker #7: You know , as I've shared before , if there are rate cuts , our Alco model predicts that for each 25 basis point cut , our margin declines about two basis points .
Speaker #7: And , you know , of course , that's because two thirds of our loan portfolio is variable rate . So it will the loan yields will decline .
Speaker #7: But we're actively moving rates paid on deposits down in response. And if you look back at last year, we were really successful in doing so at that time.
Speaker #7: And so we'll have to see what the deposit dynamics in the market are like . But we're hopeful that we'll be able to try to minimize the compression as much as we can .
Speaker #6: Okay . And just kind of along those lines , it looked like did the posit costs were up this quarter . Any any color on kind of what what occurred during the quarter .
Speaker #7: Yeah . We we really had to juice up some of our specials in order to stay competitive . And so I feel like that's the primary driver .
Speaker #6: Got it . Okay . Well , that's all that I had for now . So hey .
Speaker #8: Damon , I would just add we had such strong loan growth . That we needed to make sure that we had the funding on the other side and decided that it was worth being a little more aggressive with specials this quarter .
Speaker #6: Yeah . Got it . Yeah , it makes sense . Makes sense . Okay , I'll step back . Thank you very much for taking my questions .
Speaker #7: Thanks , Damon .
Speaker #2: Thank you. Our next question comes from Nathan Rice with Piper Sandler. You may proceed.
Speaker #8: Hi , everyone . Good morning . Thanks for taking the questions . Just going back to the deposit pricing and cost increase in the quarter .
Speaker #8: Just curious if you're seeing any rationality or improvement from a competitive pricing perspective these days . Now that we have the fed cut from last month , and likely 1 or 2 more in the fourth quarter and just can you remind us how much in the way of kind of managed or exception rate deposits you guys have that can reprice following those cuts in the future as well ?
Speaker #7: Yeah , you know , with the September rate cut , we've been watching the market closely , and I wish I could tell you that we see some of our competitors backing off of rate .
Speaker #7: But I got to tell you, it still feels pretty high. So we're hopeful that with this next one, we'll start to see competition get a little more rational.
Speaker #7: We have probably about 2.5 billion in deposits that are indexed . But , you know , as Mike Stewart covered in his remarks , even on our consumer portfolio , we're a little more variable than we were even at this time last year .
Speaker #7: And so we'll be able to to we'll have the ability to move pricing on a pretty good chunk of deposits down . We already have with the September rate cut .
Speaker #7: And we think we'll have the ability to do more over the next two , assuming we get those before the end of the year .
Speaker #8: Okay . That's helpful . And then just thinking about the impact from for savings , I believe you're picking up around a 700 million or $800 million portfolio of kind of lower yielding single tenant lease financed loans .
Speaker #8: So just curious , you know , how you feel about that asset class , is that a portfolio you want to grow in the future , or do you think , you know , there's an optionality to maybe , you know , sell that book to to maybe reduce the rate accretion that would be associated with marking that portfolio to market closing and just any other thoughts on maybe repositioning ?
Speaker #8: You know , part of the legacy first Merchant securities portfolio with the cover of the deal closing in one Q . Yeah , good question .
Speaker #8: I think what I love about the triple net lease portfolio is , is we have optionality . So if we continue to feel bullish about loan growth in the core bank or in the legacy bank , First Merchants at a 684 kind of yield , like we had this quarter .
Speaker #8: And if there are rate cuts , obviously that'll come down . But the the triple net lease portfolio is marked to about six and a quarter .
Speaker #8: And it sticks straight . So it kind of just depends what our loan growth looks like in the variable rate portfolio . And the yield differential .
Speaker #8: And and we know that we have outlets . If we wanted to sell a portion of it . And yeah we're always looking at the rest of our balance sheet .
Speaker #8: You know we have some mortgage loans that are yielding , you know , a little over four and a half and some public finance loans that are in the same place .
Speaker #8: And then the bond book . And so we're always just trying to look for opportunities to take advantage of , of shifting that liquidity into a higher yielding asset .
Speaker #8: Gotcha . And it seemed like , you know , pretty opportunistic addition to adverse savings . But maybe Mark , just curious if you can touch on future M&A ambitions into next year .
Speaker #8: You know , you've seen more opportunities to maybe consolidate some subscale banks across your footprint . Or are you just going to be more focused on kind of the organic runway that you have in front of yourselves ?
Speaker #8: Yeah , I would say we're busy . I mean , when I look at at the talent that I have within our organization and just performing organically and then throwing on top of that , the acquisition that that will require time and energy to do it .
Speaker #8: Right . And the opportunity that exists still in our Detroit MSA as as well as now , the Louisville MSA , I don't feel like M&A is the is a priority .
Speaker #8: We're in a position where we have the one we were looking for and the one we were most interested in. We love our geographies, and at least for now, it's 100% of our focus.
Speaker #8: And I would just add that the Comerica fifth , third announcement just is an opportunity for us . And we're actively looking at how we take advantage of that .
Speaker #8: And so I know every time we have an acquisition , competitors do the same thing . And the markets that we're moving into , but you know , we're very aware of the 50 plus commercial bankers in that marketplace .
Speaker #8: We're very aware of the 24 locations that are within a mile where there's overlap and would love to find a way to turn First Merchants into a more meaningful franchise than it already is in the Detroit MSA is fifth , third , and Comerica come together .
Speaker #8: Yep , my follow up question on Detroit specifically , and it seems like you're really well positioned there , particularly given that I think a lot of the level one commercial bankers came out of America way back when .
Speaker #8: So I appreciate all the color . Thank you . Yeah , it's interesting . I was talking to Pat Fehring , who was the CEO of level one , and he said his phone's been ringing off the hook .
Speaker #8: Yeah . And so he's he's been helpful and helping us figure out the best way to approach the disruption . So thank you .
Speaker #2: Thank you . Our next question comes from Daniel Tamayo with Raymond James . You may proceed .
Speaker #9: Thank you . Good morning everyone . Let's see . I you know , the loan growth was was very strong this quarter . You've talked about it particularly in the CNI side .
Speaker #9: You've had significant momentum there over the last few quarters . I think you said pipelines are pretty stable . Does this feel like I mean , I'm looking at 14% loan growth on a year over year basis in the CNI space .
Speaker #9: Is this does this feel relatively sustainable to you guys for the next few quarters ? Is there anything that is unusual about about the strength of the pipelines ?
Speaker #3: I'll jump in on this if you don't mind . I do think it's just good , normal activity . I don't think there's anything unique about it .
Speaker #3: Businesses in the Midwest , like I referenced before , still have good outlooks themselves . They've taken a deep breath on what does tariff mean .
Speaker #3: So to speak , and their navigating that we've got a really focused , segmented group of bankers that have great reputations in the market , and we haven't even got into that disruption , that Mark talked about potentially in Michigan .
Speaker #3: I think that will add to the potential there . So what I'm saying is , is it is just core bread and butter , if you will .
Speaker #3: CNI activity that we really like . And then the investment real estate side , which I , I think we stayed to our knitting there .
Speaker #3: But lower interest rates , capital stacks , understanding of cap rates , those have become better understood . So developers are able to push projects to a faster pace .
Speaker #3: And the way we underwrite fits that really well too . So I do feel good about the fourth quarter , and there's nothing typically at the end of the fourth quarter , there's like something with taxes or year end closings and there's not any crazy activity like that .
Speaker #3: This is just I feel like normal run rate . It'll be see what happens with rate cuts and how businesses want to start out 2026 .
Speaker #10: I might add , contributing to what I agree with . Everything you just said with the asset based lending team coming online actually gives even more optionality and momentum to the CNI team .
Speaker #3: Well , John , I'm glad you brought that up .
Speaker #9: That's so true .
Speaker #3: Absolutely .
Speaker #9: Terrific color guys . Thank you . And I apologize if I missed it , but did you did you give the impact that Paydowns had on the CRA book ?
Speaker #9: You you did have significant growth in in the Non-owner-occupied bucket in the quarter . And kind of across the industry , we saw a pretty sizable paydowns .
Speaker #8: Do you mean the did you say CRE book or . Yes , yes , yeah .
Speaker #10: I mean , our non-owner-occupied for the quarter was , as I mentioned earlier , was up $87 million , right . So you know what ?
Speaker #10: What we're booking primarily , we've got a concentration , as you can see in the real estate side is in multifamily . And then obviously we've got .
Speaker #10: You know we continue to look at opportunities there and what we're seeing .
Speaker #5: This year is largely driven by the commitments , particularly in the construction side by what we booked last year .
Speaker #2: Please stand by . Your conference will resume momentarily . Please stand by . Your line is now open .
Speaker #9: Can you guys hear me now ?
Speaker #3: Hey . Yeah , John , we lost you when you were talking a little bit about last year's production , and I multifamily and and how the construction draws are funding out through this summer .
Speaker #3: So . And then we lost you , right .
Speaker #5: Okay . Thanks for for getting me in there , Stu . And so what we're seeing , obviously last year yields itself into this year produces what we're seeing this year .
Speaker #5: But you know , there's no question that higher rates I was just standing with what higher rates obviously have reduced the rate at which that portfolio has grown .
Speaker #5: So still feel good about it . But it's you know , it's not two years ago , three years ago .
Speaker #9: Yeah . No , I appreciate that color . Hey , I recognize it grew significantly . I guess it was I was more curious kind of how that was able to to happen despite paydowns .
Speaker #9: So that's terrific . And then I guess the last one , just maybe for John on the on the credit side , classified loans came down in the quarter , which was nice to see .
Speaker #9: Just curious . You know , pace of that . Those balances going forward . If you have any color .
Speaker #5: Yeah . You know when I look at classified loans in the quarter , we've been able to address , you know , in the really it was in the commercial real estate side when rates jumped .
Speaker #5: We had , you know , interest reserves that needed to be addressed . And we've done that really over the last year and a half , which , you know , we're on the grading .
Speaker #5: And so that will drive potentially drive those higher . And we've addressed a lot of those issues . We've resolved , you know some non-performers which has helped as well .
Speaker #5: But you know , as I look forward and we're kind of I feel like we're in a place right now where we're kind of just trading dollars in the classified buckets to maybe seeing some improvement .
Speaker #5: There are a couple of segments that , you know , are maybe a little bit more challenged than others , but we're kind of just , I'd say trading dollars at this point .
Speaker #9: Okay. Awesome. Well, thanks very much for the color. I appreciate you taking my questions.
Speaker #8: Thanks .
Speaker #2: Our next question comes from Brian Martin with Janney . You may proceed .
Speaker #11: Hey good morning .
Speaker #8: Good morning .
Speaker #11: Hey , just maybe , just maybe one for you or two on the margin . Just can you remind us the fixed rate loan repricing that you've kind of got coming up here and then also , I think just on the securities portfolio , I think someone asked about optimization and or just run off in that portfolio to fund loan growth .
Speaker #11: I guess . How how are you thinking about that kind of the legacy First Merchants bond book ? Is there more room to use cash flows to redeploy the loans , or is some optimization possible ?
Speaker #7: Okay . Well , I'll start with your first question on fixed rate loans . And so in the fourth quarter , we have about 130 million of fixed rate loans that will mature .
Speaker #7: And those are sitting at about a yield at about 5% . If we look into 2026 , we've got about 350 million that have a yield of about 450 .
Speaker #7: That will mature in 2026 . And so hopefully that answers your first question on the securities portfolio . You know , our plan is to continue to use that roll off the cash flow to fund loans on a go forward basis .
Speaker #7: And as Mark said , you know , particularly when we close with first savings , you know , we'll continue to evaluate options to , you know , to optimize our earning asset mix , looking at their portfolios , our portfolios , etc.
Speaker #7: . You know , in the in the first savings deal , we did assume that we would sell their bond portfolio , which had about 240 million , but we'll also continue to evaluate our own .
Speaker #11: Gotcha . And the roll off of the securities portfolio . If you don't do anything with the legacy book , Michelle , what does that look like in the next , next 12 months ?
Speaker #7: We have about 280 million of cash flow that will be generated from the the bond portfolio over the next 12 months . Now , that includes interest .
Speaker #7: And so , you know , about a 100 million of that will have will be interest . And so and then the rest is pay and maturities .
Speaker #7: And that will be rolling off at a 218% yield .
Speaker #11: Great okay . Perfect . And then just just on the sensitivity how does for savings impact the the you know , your asset sensitivity I guess if you kind of look at you know , once we get the combined company .
Speaker #7: , it actually reduces our asset sensitivity a bit . So we actually land in a really nice place . We're still going to be a little asset sensitive , but less so than we were on a standalone basis .
Speaker #11: Gotcha . Okay . And then you talked about I'm not sure if it's you or somebody else just on the , the competition , on the deposit side .
Speaker #11: Are you seeing similar competition on the loan side in terms of where yields are coming on , given I guess , some of the repricing we've got to look at in terms of the fixed rate .
Speaker #11: But you know , what is competition on the loan side look like today .
Speaker #3: If I can add .
Speaker #8: A little bit .
Speaker #3: I'll go .
Speaker #8: Ahead . If I go back to Danny's comment just about loan growth . What what we're having fun with now because we're growing at a , at a , you know , pretty strong clip .
Speaker #8: Is just looking at the yield of everything we put on the balance sheet and trying to make sure that we're prioritizing the highest yielding products given the credit constraints as well .
Speaker #8: But , you know , it's it's been fun for us to have this kind of growth success to feel like we're winning . Despite competition in the marketplace .
Speaker #8: And then just being smart about which loans we're putting on the books and at what yield , which is , you know , it's a it's a good place to be .
Speaker #8: I'd rather be here than the alternative .
Speaker #11: Yeah . Okay . And then last one , Mark , I guess just the opportunity . It sounds like the loan growth , I think maybe one of the other people mentioned , you know , just a strong loan growth .
Speaker #11: You've had , particularly in the CNI side . But , you know , is some of that I know you've talked about recently about maybe a couple quarters ago about some pretty good hires you had brought on board and kind of if they're contributing and just , you know , it sounds like that's something you're thinking about with the , you know , if you're not looking at M&A next year , that do you see opportunities to kind of lift out some more talent to kind of sustain the good momentum you've got here ?
Speaker #8: Yeah , that is the reason that you saw a little uptick in our non-interest expense . And it was in salaries . It's the talent that we've added to the team .
Speaker #8: The and I would think next year there's going to be an opportunity , especially in the in the Detroit marketplace , to take advantage of some additional recruiting that just strengthens our franchise .
Speaker #11: Gotcha . Okay . Well , thanks for taking the questions . I appreciate it .
Speaker #7: Thanks , Brian .
Speaker #2: Our next question comes from Terry McEvoy with Stephens . You may proceed .
Speaker #12: Hi . Thanks . Good morning . Maybe just start with a question for you , Michelle . We're deposit costs at the end of the quarter below that 2.44% average .
Speaker #12: And what are your thoughts on where that could go in the fourth quarter ? I know you talked about a decline , but just to frame some expectations , where do you where do you see that trending in Q4 ?
Speaker #7: Yeah . Good question . Yeah , we did see them come down a few basis points at the end of the quarter . And that was just because we were anticipating that September rate cut and made some adjustments really quickly that we were able to get pushed in even before the end of the quarter .
Speaker #7: And so with anticipated rate cuts in October and December , we're going to keep pushing those rates down .
Speaker #12: Thanks . And then just a small question , when I look at the first savings presentation , and I think , Mike Stewart was was with that group today , the SBA lending those that are on the balance sheet are those guaranteed or Unguaranteed loans .
Speaker #12: And then what are your thoughts on managing that business going forward in terms of retaining some of the Unguaranteed portion , which has a higher risk profile than the rest of your commercial portfolio ?
Speaker #12: I would assume .
Speaker #8: Yes .
Speaker #3: I do .
Speaker #8: Think the bulk .
Speaker #3: Of the oh , go ahead , Mark . Sorry , I can't see you .
Speaker #8: Yeah , we're in different locations . The the unguaranteed portion is what is on the balance sheet . And the spread is about 275 over prime .
Speaker #8: And so it's a pretty high yielding portfolio . And and we're really excited about just putting that entire team on top of our current footprint .
Speaker #8: And Mike , maybe you want to talk about the volume we think we can add just within the First Merchants franchise . And I know that's where you are today .
Speaker #3: Yeah. One last comment on the, you know, that the team, as I'm learning self-contained within their SBO group, are dedicated.
Speaker #3: I'll call the workout team. They've had a really good track record of low losses in that portfolio. They understand the process.
Speaker #3: They have a really nice documentation and relationship to the SBA flow . So they manage that portfolio . I think in a very positive manner .
Speaker #3: And then to Mark's point , what's on the balance sheet is their unguaranteed piece . My , you know , getting my arms around and working with the team is , you know , they've built a model and built an infrastructure that they feel really comfortable to generate .
Speaker #3: About 150 ish million dollars of SBA volume a year . You heard they probably did around 110 or so last year . Their fiscal year is in September .
Speaker #3: Their earnings release is next week . So you can pick up some of that information and then juxtapose that to what Mark said earlier .
Speaker #3: First Merchants originated 8 million of SBA volume seven eight , primarily in Cap . And that's what they do really well . So when you think about Indiana , Michigan and Ohio footprint and having an outlet , if you want to call it that , or an opportunity for our business banking teams or community banking teams to have a place to send SBA volume , I think it becomes really easy for us to fill in their capacity in a meaningful way and just use it as another wonderful fee opportunity and be more relevant in our local communities .
Speaker #3: So that's how I feel like the strategic fit is in place .
Speaker #12: Yeah , great .
Speaker #8: And you may already know , Terry , you may already know all this , but the SBA program loans can't exceed 5 million , which means in guaranteed portion can't exceed 1.25 or 1 million 250 .
Speaker #8: And then if you originate 150 million . And we kept all of the unguaranteed , it'd be 37.5 million for the year . And and obviously you have runoff as well .
Speaker #8: So it's , it's a portfolio that that has some higher risk . That's why the acl's are higher . And especially what we purchased will come on at more like 4 or 5% .
Speaker #8: And but the the yields are really nice . Like I said , with a spread of about 275 over prime or yield of 275 over prime .
Speaker #12: That's perfect . Thanks for the color and thank you . Thank you for taking my questions .
Speaker #2: Thank you. Our next question comes from Brendan Nosal with Hovda Group. You may proceed.
Speaker #13: Hey , good morning folks . Hope you're doing well .
Speaker #8: Good morning .
Speaker #13: Maybe just starting off here on on capital ratio . Back of about 9% for the first time since late 2021 . I know that you'll deploy some here with first savings soon , but , you know , ratios remain healthy .
Speaker #13: Pro forma even for the deal , and you'll be building , you know , pretty healthily off that base . Can you just walk us how you think about capital generation and uses of excess capital , particularly considering the near term lack of interest in additional M&A ?
Speaker #8: Yeah , I mean , we'll continue to use , you know , a third or more for our asset generation . It's been requiring a little bit more than that recently .
Speaker #8: A third for for dividends . And the remaining amount . We're just going to continue to look at at ways to to either take advantage of , you know , our current multiples .
Speaker #8: I it's pretty interesting if you just look at buybacks and this is , you know , if I think about next year , I think we're trading at 116 of our adjusted book value .
Speaker #8: If you make the adjustment for Aoci back in or 127 of stated book value , and if we make $4 a share , just where we are effectively today , we're trading at nine times earnings and nine and a quarter .
Speaker #8: And so I feel like it's smart to to to be active in the share buyback space . And then we're we're also just looking at ways we could optimize our balance sheet like I think Nate was asking us about earlier and whether or not it's smart use of the capital to optimize some of those loan categories that are underpriced , where we don't have a deposit relationship or maybe a little bit of of our of bond restructuring .
Speaker #8: But , you know , I've , I've looked at a couple of actually last night I was going through the releases of horizon Bank and Simmons Bank , and their major bond restructurings , and I would just tell you , that's not happening here .
Speaker #8: We're not interested in anything that would require a tangible common equity raise . If we were to do something smaller , that might require a piece of some debt and that that is interesting to , to us .
Speaker #8: But we're performing at a level despite some of those under yielding assets that we're really proud of . And we think we have the ability to just make incremental improvements .
Speaker #13: Okay , great . Thank you for the definitive answer . On a wholesale restructuring . There . Maybe turning to asset quality and the reserve , I'm just kind of curious why you're still carrying such a large reserve at 143 of loans before you even factor in remaining fair value marks like credit's been really healthy this year , and you're something like , I don't know , 20 or 30 basis points above your peer group when it comes to ACL coverage .
Speaker #7: Yeah , I mean , it has come down over the last couple of years . And , you know , some of it is just the methodology that you select when you build your model .
Speaker #7: And ours is the quantitative model . You know , produces a higher , more conservative number . You know , the good news is , is we had really positive credit migration this quarter .
Speaker #7: When you think about . And so you know , we always consider loan growth first and how much provision we want to take .
Speaker #7: And we have really strong loan growth this quarter . But we're really positive credit migration . And then even looking at the macroeconomic scenarios , some of the changes in a couple of the macroeconomic variables moved in a direction such that we were actually lowered the amount of provision that we required .
Speaker #7: And so, despite the high loan growth, that kind of landed us at the $4.3 million provision.
Speaker #8: And I would just add , that's the perfect GAAP answer . And it's the it's the right answer . I would say , if we tried to be more aggressive and put more in earnings , I don't have confidence that we would get paid for it .
Speaker #13: Yeah , yeah . No , that's that's totally fair . Better to have more than enough . The final one for me just thinking about like the progression of NII dollars from here , you know , even if we get the the rate cuts that are forecasted , which I think is two this quarter and then maybe two more in 2026 , do you think you can continue to grow dollars of NII even as the fed is cutting rates as expected ?
Speaker #7: Yeah , we do , and I say that because , you know , we've got confidence in our ability to manage deposit costs down .
Speaker #7: As I talked about earlier . And then even just if you look specifically at this quarter , our end of period loans is really quite a bit higher than our average for the quarter .
Speaker #7: Average loans for the quarter, and I think that will produce some good interest income coming into Q4 as well.
Speaker #13: Okay. Fantastic. I appreciate you taking my questions.
Speaker #8: Thank you .
Speaker #2: Our next question comes from Nathan Rice with Piper Sandler. You may proceed.
Speaker #8: Yes . Thanks for taking the follow up . Just wanted to clarify on the buyback appetite . It sounds like , you know , there's still interest there , just given the valuation disconnect that you discussed .
Speaker #8: Mark . And then just want to confirm that , you know , with FSG pending , you guys aren't precluded from additional share repurchases .
Speaker #8: Yeah , that's a . Thanks for the clarification . I wouldn't anticipate anything between now and closing . Just saying if when you think about capital deployment , if we stay at these higher levels and our price continues to be where it is , we would be active .
Speaker #8: Okay . But you're not necessarily precluded with the deal announcement pending . Yeah , we're not intending to do anything between now and close .
Speaker #8: Okay. Understood. Thank you for the clarification, Mark.
Speaker #2: Thank you .
Speaker #8: Thank you .
Speaker #2: I would now like to turn the call back over to Mark Hardwick for any closing remarks .
Speaker #8: Well , hey , thanks , everyone for the great questions . It was an exciting quarter for us . We're really proud of the performance .
Speaker #8: The core organic performance of the company . We're excited about our M&A announced M&A opportunity that we have . And as I mentioned , we're really , you know , kind of thrilled with the markets that we're in .
Speaker #8: And the future that it can provide for our company . So just thank you for your investment . And it was a fun call .
Speaker #8: Thanks . Have a great quarter .
Speaker #2: Thank you . This concludes today's conference . Thank you for your participation . And have a great day . You may now disconnect .