First Merchants Q1 2024 Earnings Call Transcript

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April 25, 2024

There are 11 speakers on the call.

Operator

Thank you for standing by, and welcome to First Merchants Corporation's First 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 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 direct comparable GAAP measures. The press release available on the website contains financial or other quantitative information to be discussed today as well as a reconciliation of GAAP to non GAAP measures.

Operator

As a reminder, today's call is being recorded. I would now like to turn the conference over to Mr. Mark Hardwick, Chief Executive Officer. Mr. Hardwick, you may begin.

Speaker 1

Good morning, and welcome to the First Merchants' Q1 2024 Conference Call. Thanks for the introduction and for covering the forward looking statement on Page 2. We released our earnings today at approximately 8 a. M. Eastern Time.

Speaker 1

You can access today's slides by following the link on the 3rd page of our earnings release. On Page 3 of our slides, you will see today's presenters and our bios to include President, Mike Stewart Chief Credit Officer, John Martin and Chief Financial Officer, Michelle Kabiaski. On Page 4, we have a few financial highlights for the quarter to include total assets of $18,300,000,000 $12,500,000,000 of total loans, dollars 14,900,000,000 of total deposits and $8,300,000,000 of assets under advisement. On Slide 5, if you look at bullet point 1 under our Q1 results, you will note that margin is stabilizing and new and renewed loan yields for the quarter totaled 8.15 percent. You will also notice on repurchasing $30,000,000 of shares in First Merchants and redeeming $40,000,000 of sub debt, which recently repriced to just over 9%.

Speaker 1

On bullet point 6, we reported Q1 2024 earnings per share of $0.80 or $0.85 when adjusted for $3,500,000 of non core items incurred during the quarter. On the last bullet point, I would also note that 3 of our 4 major technology initiatives were deployed during the 1st 4 months of the year to include the rollout of a new in branch account opening platform called Terafina, our new online and mobile platform for more than 150,000 consumer customers that converted to Q2 and our new private wealth platform converted to SS and C's NO Trust platform. As you can imagine, these projects require a significant amount of time and resources and require heightened customer focus during implementation. Now Mike Stewart will discuss our line of business momentum.

Speaker 2

Thank you, Mark, and good morning to all. I'm on Page 6 and our business strategy remains unchanged. We are a commercially focused organization across all these business segments and across our primary markets of Indiana, Michigan and Ohio. And as we enter 2024, we have remained focused on executing our strategic imperatives, organic loan growth, deposit growth, fee growth, attracting, retaining and engaging our team, investing in the digitization of our delivery channels and delivering top tier financial and risk metrics. So if you go to Slide 7, the Q1 continues a choppy trend of loan growth from quarter to quarter.

Speaker 2

I highlighted the 8% annualized loan growth during the Q4 of 2023, which followed a relatively flat third quarter of less than 0.5 percent. The 1st quarter balance decline in the commercial portfolio was attributed to the seasoning of numerous real estate projects that had stabilized and were refinanced into the secondary market. This is normal course for most construction projects and with the current inverted yield curve, it is advantageous for the client to take advantage of lower long term fixed interest rates. Commercial balances were also affected by the seasonal nature of our agribusiness clients. John Martin has more detailed information within his portfolio summary, which also highlights the growth within the commercial and industrial portfolio of over 5.5% on an annualized basis during the Q1.

Speaker 2

So short term interest rates have affected the velocity of new investment real estate projects, but we have remained active with well capitalized projects. The commercial and industrial growth is building as existing clients continue to finance normal course capital expenditures, complete strategic acquisition or as we add market share. Our Michigan commercial banking team has built very good momentum. That's the former Level 1 and Monroe Bank entities and was our strongest region of C and I growth. Our investment in people and our brand are building in Michigan.

Speaker 2

The 3rd bullet point further emphasizes the future growth potential within our C and I portfolio. The pipeline ended the quarter strong with and the commercial segment will continue to be the primary driver of our asset growth. The consumer portfolio is comprised of residential mortgage, HELOC, installment and private banking relationships and during the Q1 that portfolio declined 0.8% and in dollars that represented less than $6,000,000 Our private banking portfolio was the primary driver of that decline as high net worth clients reduced higher cost borrowings with excess liquidity. The overall economic environment in the Midwest inclusive of the competitive landscape affirms my expectations of mid to single digit growth for the balance of the year improving loan yields. Mark highlighted that our new loan yields exceeded 8% during the quarter and Michelle has more detail to share on those trends.

Speaker 2

On the bottom half of that page, the quarter saw total deposits growing by 1.7% on an annualized basis. The consumer portfolio grew over $155,000,000 during the quarter and is inclusive of both the branch network and our private banking team's efforts. The branch network continues to deliver the consistent granular low cost deposit base that we enjoy. The commercial deposit decline during the quarter was primarily from the public funds portfolio as the C and I relationship showed growth. Like we discussed during last earnings call, both our consumer and commercial teams have been actively managing our interest expense.

Speaker 2

As we now have separation from the Silicon Valley Bank event last year, our bank's liquidity remains ample, so our 2024 efforts will be focused on our margin through interest expense management. As Mark stated in the press release, we are pleased to see our net interest margin stabilizing. And again, as we enter 2024, we're positioned for that continued organic growth. Our team is positioned for that growth and our underwriting remains supportive, consistent and disciplined. 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 on our income statement.

Speaker 2

Michelle?

Speaker 3

Thanks, Mike. Slide 8 covers our Q1 results. Pretax pre provision earnings when adjusted for the non core charges of 3 $500,000 that were incurred during the quarter totaled $60,200,000 Adjusted pretaxpre provision return on assets was 1.31% and adjusted pretaxpreprovision return on equity was 10.75%, all of which continue to reflect strong profitability metrics. To arrive at our core operating results, we excluded charges recorded this quarter, which included $1,100,000 for the increased FDIC special assessment and $2,400,000 in digital platform conversion costs incurred from the projects Mark covered in his opening remarks. Tangible book value per share increased to $25.07 at March 31, an increase of $2.14 or 9.3% compared to the same period of prior year.

Speaker 3

Details of our investment portfolio are disclosed on Slide 9. Securities yield increased 2 basis points to 2.58 percent as lower yielding securities continue to run off. Expected cash flows from scheduled principal and interest payments and bond maturities in the remaining 9 months of 2024 totaled $217,000,000 with a roll off yield of 2.22%. Slide 10 shows some details on our loan portfolio. The total loan portfolio yield declined 3 basis points quarter over quarter, which was simply due to a lower day count.

Speaker 3

Yield on new and renewed loans continues to increase. That yield climbed 14 basis points to 8.15% this quarter compared to 8.01% last quarter. The bottom right shows that 2 thirds of our loan portfolio is variable rate. Although some of that is priced at or near our new loan yield, we still have over $1,000,000,000 of average earning assets that will reprice from a current weighted average rate of just 5%, which will create some good incremental interest income throughout the remainder of the year. The allowance for credit losses on Slide 11 remained stable compared to last quarter at 1.64% of total loans.

Speaker 3

We recorded net charge offs of $2,300,000 which was offset by provision for credit losses on loans of $2,000,000 resulting in a reserve at quarter end of $204,700,000 In addition to that, we have 21 point $8,000,000 of remaining fair value marks on acquired loans. Our coverage ratio when including those marks is 1.82%. Slide 12 shows details of our deposit portfolio. We continue to have a diversified core deposit franchise with a low uninsured deposit percentage. 36% of our deposits yield 5 basis points or less.

Speaker 3

Our total cost of deposits only increased 6 basis points to 2.64% this quarter, slowing dramatically compared to last quarter where we had experienced an increase of 26 basis points. Our total cost of deposits increased to 2.69 percent in February and then declined 1 basis point to 2.68 percent in March due to some deposit pricing actions that we took during the quarter, which Mike mentioned in his remarks to reduce deposit costs ahead of the Fed rate cuts. We expect those actions to ensure stability in the cost of deposits next quarter as well as margin. Although we did see a slight decline in non interest bearing deposits this quarter, our overall funding mix continued to improve as we reduced broker deposits, wholesale funding and sub debt and grew core consumer and commercial deposits. We paid down $40,000,000 of sub debt at the end of January and will pay down an additional $25,000,000 of sub debt at the end of April.

Speaker 3

Overall, liquidity is very well positioned to support growth in the coming quarters. On Slide 13, net interest income on a fully tax equivalent basis of $132,900,000 declined $3,000,000 from prior quarter. As I mentioned earlier, yield on average earning assets on Line 4 was impacted by the number of days in the quarter, yet still increased by 1 basis point. That increase was offset by the increase in funding costs on Line 5, reflecting stated net interest margin on Line 6 of 3.10 percent, a decline of 6 basis points from prior quarter. Next, Slide 14 shows the details of noninterest income.

Speaker 3

Overall, noninterest income increased by $200,000 on a linked quarter basis. Customer related fees declined $1,200,000 reflecting a $900,000 decline on the gain on sales of mortgage loans and lower derivative hedge fees. The Q1 is always a seasonal low for our mortgage business, yet we were encouraged by this quarter's activity because the $3,300,000 of gains this quarter included a $500,000 loss on the sale of some non accrual loans. Excluding that loss, gains on the sales of mortgage loans would have been $3,700,000 which is a $1,300,000 increase over the Q1 of last year. This increase in year over year production is what gives us confidence that we will see an increase in non interest income in the coming quarters.

Speaker 3

Moving to Slide 15, non interest expense for the quarter totaled $96,900,000 and as previously mentioned included 3 point $5,000,000 in non core charges. Core non interest expense beat expectations and totaled $93,400,000 a decrease of $2,000,000 from last quarter's core non interest expense of $95,400,000 Managing expenses continues to be a point of emphasis for us this year and the results of Q1 demonstrate that commitment. Slide 16 shows our capital ratios. We continue to have a strong capital position with common equity Tier 1 at a robust 11.25 percent, coupled with a dividend payout ratio of over 40% over the last 12 months. The slight decline in each of the ratios shown reflects the $40,000,000 redemption of sub debt and $30,000,000 of stock buybacks in the quarter.

Speaker 3

These stock buybacks coupled with $20,000,000 in dividends paid this quarter provided a great return to our shareholders. These actions reflect our prudent management of excess capital ensuring top quartile profitability metrics. That concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin, to discuss asset quality.

Speaker 4

Thanks, Michelle, and good morning. My remarks start on Slide 17. I'll highlight the loan portfolio, touch on the updated insight slides, review asset quality and the non performing asset roll forward before turning the call back over to Mark. Turning to Slide 17, where I've highlighted the various portfolio segments. Growth in the commercial and industrial loans on lines 12 was offset by cooling investment real estate activity.

Speaker 4

We came off a strong origination quarter at the end of the year, as Mike mentioned, with modest growth in the Q1, while Investment Real Estate and Construction on lines 45 slowed for the quarter. We continue to hold underwriting standards for new construction opportunities, which is resulting in higher levels of capital required contribution. This combined with higher borrowing costs has slowed new growth in this segment. Then on Slide 18, the portfolio insights slide helps to provide transparency into the portfolio. As mentioned on prior calls, the C and I classification includes sponsor finance as well as owner occupied CRE associated with the business.

Speaker 4

Our C and I portfolio has a 20% concentration in manufacturing. Our current line utilization has remained consistent and was up for the quarter to 42% with line commitments lower by $68,000,000 We participate in roughly $755,000,000 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. In the sponsor finance portfolio, I've highlighted key credit portfolio metrics. There are 86 platform companies with 53 active sponsors in an assortment of industries.

Speaker 4

68 percent of those have a fixed charge coverage ratio greater than 1.5 times based on year end borrower information. This portfolio generally consists of single bank deals for platform companies of private equity firms as opposed to large widely syndicated leveraged loans traded across banks. We review this in we review the individual relationships quarterly for changes in borrower condition, including leverage and cash flow coverage. Turning to Slide 19, where we break out our investment or non owner occupied commercial real estate. Our office exposure is detailed on the bottom half of this slide and represents 2% of total loans with the highest concentration outside of general office and medical office space.

Speaker 4

The wheel chart on the bottom right details office portfolio maturities. Loans maturing in less than a year represent 11.3 percent of the portfolio or $28,000,000 The office portfolio is well diversified by tenant type and geographic mix. We continue to periodically review our larger office exposures and view the exposure as reasonably mitigated through a combination of loan to value guarantees, tenant mix and other considerations. On Slide 20 are the asset quality trends and current position. NPAs and 90 days past due loans increased $11,600,000 to 56 basis points of loans in ORE.

Speaker 4

While up for the quarter, the change was largely driven by a single $12,000,000 new hospitality related credit, which we expect to resolve in the 3rd quarter. On line 3, 90 day delinquent loans were up $2,800,000 with 1 borrower comprising $1,200,000 of the increase. We view this relationship as well as secured in the process of collection. Classified loans ended the quarter at 2.24% of loans, up from 1.94 percent from the prior quarter. Then down on line 9, net charge offs were 7 basis points of annualized average loans.

Speaker 4

Moving to Slide 21, where I've again rolled forward the migration of non performing loans, charge offs, ORE and 90 days past due. For the quarter, we added non accrual loans on line 2 of $17,700,000 driven by the hospitality credit I just mentioned previously, a reduction from payoffs or changes in accrual status of $5,600,000 on Line 3 aided by a $2,100,000 non performing mortgage loan sale and a reduction from gross charge offs of $3,200,000 Dropping down to line 11, 90 day delinquent loans increased by 2 point $6,000,000 which resulted in NPAs plus 90 days past due ending at $70,200,000 for the quarter. So summarizing, asset quality was marginally down in the quarter. Net charge offs for the quarter were 7 basis points, while not accruals and classified loans were marginally higher. I appreciate your attention and I'll now turn the call back over to Mark Hartwig.

Speaker 1

Thanks, John. Turning to Slide 22, we show our track record of shareholder value and there are a number of really positive trends, but I would just highlight one in particular. If you look at the top right hand portion of the page, we show our 10 year earnings per share CAGR and it totals 10.2%. And also, we just have a continued focus on growth of tangible book value per share and we're proud of these numbers. On Slide 23, it represents our total asset CAGR of 12.6% during the last 10 years and highlights meaningful acquisitions that have materially added to our demographic footprint that help fuel our growth.

Speaker 1

There are no edits to Slide 24. So at this time, I'd like to thank you for your attention and your investment, and we are happy to take questions.

Operator

Thank you. Our first question comes from the line of Damon DelMonte with KBW. Your line is now open.

Speaker 5

Hey, good morning, everyone. Hope you're all doing well today. Just wanted to start off with a question on margin for Michelle. Can you just give us a little insight as to kind of how you're seeing the cadence over the next few quarters? It sounds like you guys are intently focused on reducing the funding component of it, the cost of funding related to the margin and kind of with new loan production coming on at rates that are over 8%.

Speaker 5

Just kind of wondering how you're thinking about the margin at this point?

Speaker 6

Yes. Well, so our quarterly margin for Q1 was 3.10%. And in March, our margin was 3.11%. So it actually picked up a basis point when you just isolate March. And the reason why we have some optimism around it, I think it's for the things that you just stated.

Speaker 6

And so we do believe that margin will be stable next quarter and then potentially even growing depending on how the market fares through the remainder of the year.

Speaker 5

And can you just remind us if there are rate cuts in the back half of the year, what your anticipation is for a 25 basis point cut?

Speaker 6

Yes. Our models tell us that for each 25 basis point cut that our margin declined 3 basis points. And so the actions that we're taking to try to manage our funding costs can hopefully reduce some of that impact, but that is what our model tells us given that we have asset sensitivity.

Speaker 5

Got it. Okay, great. Thank you. And then with regards to the outlook for loan growth, I think Mike said that he's still optimistic in the was it mid single or mid to high single digits after first quarter's results?

Speaker 7

Yes, I kind of stuttered over that, didn't I, Bill? Mid to high single, didn't feel good, especially given where we are already through April. I try to highlight that the C and I growth is really strong right now, but the continued maturity of the real estate project. But overall, yes, mid single high for the year.

Speaker 5

Got it. Okay, helpful. Thank you. And then just lastly on capital management, I think you guys did $30,000,000 of buybacks this quarter. I guess first, how much buyback is remaining under the current authorization?

Speaker 5

And what's your thoughts on additional appetite going forward?

Speaker 1

We're around $45,000,000 remaining and continue to be active. It's going to be a meaningful part of our May 7 Board meeting, just sharing capital planning and thinking about the future. So we're convinced that if our stock price is going to continue to trade at, I guess, multiples that are sub-ten when we historically have traded 12 to 13, we feel like it's prudent to be active with buybacks. So and our tangible common equity continues to be above 8% and all of the other capital ratios are well above our target. So, in this environment, we feel like it's the right prudent call to make.

Speaker 5

Great. Thanks for the color and I'll step back.

Operator

Thank you. Thank you. One moment for our next question, please. Our next question will come from the line of Nathan Race with Piper Sandler. Your line is now open.

Speaker 8

Yes. Hi, everyone. Good morning. Thanks for taking the questions.

Speaker 1

Just wanted

Speaker 8

to clarify on the margin commentary to the earlier question. That 3 basis points or so of impact to the downside, that's not under a static rate environment, that doesn't necessarily contemplate continued redeployment of excess liquidity coming off the bond book into loans. Is that correct?

Speaker 6

It does contemplate us using that excess liquidity into earning assets.

Speaker 8

Okay. Got it. Thank you. And then just on fee income, I think last quarter we were talking about a run rate around 30 or so per quarter. Is that still a reasonable expectation going forward?

Speaker 6

Yes. We're actually expecting it to maybe just a touch lower, maybe more like 20%, 29% per quarter. Last quarter when we provided that guidance that was largely based on the fact that we expected more rate cuts during the year. And whenever we do get rate cuts, it really invigorates our mortgage business. And so being on sale of mortgage loans, it goes higher.

Speaker 6

And so given that we're expecting less rate cuts at this point, that probably adjusts that down slightly.

Speaker 8

Got you. Okay, great. And then just turning to expenses, I think last quarter we were talking about 0% to 2% growth off the 4Q annualized level. Is that still a good proxy to use going forward for 2024?

Speaker 6

I think our expenses can offset a little bit of the reduction of non interest income that I just talked about. We had really good expense discipline this quarter. And so I would expect it to run a little lower than the guidance that we provided. I would add, Nate, that we will have some additional digital platform conversion costs in Q2, just as a reminder. That should run about $2,500,000 So that will be on top of that core run rate.

Speaker 8

Okay, got it. And then just turning to credit quality, it doesn't sound like there was any major surprises necessarily in terms of the rise in classified and non accrual. So, John, is it fair to assume that you're not seeing anything systemic across the portfolio? It's more so just ongoing normalization that the broader industry is encountering these days and just generally kind of how you think about charge off levels going forward?

Speaker 4

Yes. Excuse me. Hey, Nate. Yes. So I do look at it as more of a normal return to more of a normalized credit environment.

Speaker 4

The charge off rate, I think you said last quarter, we've come under it in the last couple of quarters. But it's I think about it in that 15 to 20 basis basis point range.

Speaker 8

Got you. And then assuming a stable macro environment, I know it's a kind of fluid situation under CECL. But to what extent do you guys see a need to provide for mid to high single digit growth just given that your reserve is still solidly above peers?

Speaker 6

Well, I think where our coverage ratio is today is largely where we would, assuming that the economic scenarios don't change again. I think we would want to keep our coverage ratio somewhere within the vicinity where it's at today to cover for any new growth and any charge offs.

Speaker 8

Okay, great. I appreciate all the color. Thank you.

Operator

Thank you. One moment for our next question, please. Our next question will come from the line of Brian Martin with Janney Montgomery Scott. Your line is now open.

Speaker 9

Hey, good morning.

Speaker 1

Good morning,

Speaker 9

Brian. Hey, so, Michelle, I just wanted to ask you, you talked about taking some actions on the deposit side to help on the funding costs. Can you just elaborate on what you did or I guess is there more of that to come? Is that kind of done at this point or given the focus on managing the funding costs?

Speaker 1

Hey, Brian. Yes, we actually just had our asset and liability committee meeting yesterday and walked through every line of business, consumer, commercial, private wealth and are continuing to look at strategies really across the board where we can make modest rate productions that we think take some of the pressure off. And so we're not doing anything in a really big way, like we're not making 25 basis point reductions, but we're finding ways to pick up 5 basis points in a number of different places that we think kind of get ahead of a rate reduction and continue to allow us to have really healthy liquidity position at the right price.

Speaker 9

Got you. Okay. So there's a little bit more of that. It's ongoing. You're not lurching, just do an incremental along the way to pick that up?

Speaker 4

Yes, that's correct.

Speaker 9

Yes, okay. And then one maybe just for Mike. You talked about the particular strength in C and I this quarter. Anything special driving that that I guess you believe is sustainable or?

Speaker 7

Yes. I do believe it's sustainable. Kind of one of the drivers is the investments that we've done in the Michigan market, the new markets that we have added excuse me, Level 1 a couple of years ago. The team, the brand, reaching out to the market, taking advantage of the other competitive landscape there, it doesn't really pay dividends. Generally, C and I, corporate executives still feel good about their businesses.

Speaker 7

So they are investing again, whether it's plant and equipment or doing some strategic acquisition. We play really well into that space. And I just again, I attribute it to probably the fact that the Midwest still is pretty insular to the other headwinds that the coasts might have, and we're pretty active.

Speaker 9

Got you. Okay, that's helpful. And then just the last 2, I think the DDAs like I think you talked were down a little bit this quarter. I guess do those feel like they're beginning to stabilize? And then secondly, just I think you also talked about some further redemption of some sub debt, maybe another $25,000,000 Is it still the plan on that in 2Q or?

Speaker 1

Yes, Brian. Yes, we are paying down the remaining 25,000,000 dollars at the end of this month. I didn't catch the first part of your question.

Speaker 9

Just on the non interest bearing deposit trend, just kind of I know they were down a little bit this quarter, but just beginning to see those stabilize, is that kind of what you're seeing underneath?

Speaker 6

We would expect them to the decline in that to moderate. And so we may see a little bit more compression there, but it's largely going to start to tail off, I think.

Speaker 9

Yes. Okay. Perfect. Thank you for taking the question.

Operator

Thank you. One moment for our next question please. Our next question comes from the line of Daniel Tamayo with Raymond James. Your line is now open.

Speaker 10

Thank you. Good afternoon. I suppose where we are at now here. I guess most of my questions have been asked already, but a couple of cleanup questions. First, I guess, John, on the classifieds, if you can provide a little more detail on where the increase came from, if it was C and I or CRE or what you're seeing there?

Speaker 4

Yes, I'd say it was probably 2 thirds C and I, 1 third CRE combination of different types of asset classes within the CRE and across the industries within the C and I. I would describe it as kind of normal inflows and outflows with individual issues with C and I borrowers and just addressing issues as it relates to CRE, higher interest rates have had an impact on CRE and as much as those conversion tests that are more challenging, we're just kind of addressing those.

Speaker 10

Terrific. Thank you. And then I don't know if I missed this or not, but did you provide or do you have the amount of the office loans that are in central business districts?

Speaker 4

I don't have it by central business district. I've got it split within that slide about as granular as I have it.

Speaker 7

Okay.

Speaker 4

But I think it's on Slide 18 maybe. I don't have mine open. Hold on just a moment.

Speaker 6

Slide 19.

Speaker 4

Slide 19.

Speaker 1

Yes. With a breakdown of type, tenant and geography.

Speaker 4

I will say that anecdotally and when I think about that office portfolio, we're not a central district, business district type lender of in the downtown Indianapolis or Chicago or something. Ours is mostly suburban related to developers who have done projects away from the main business district.

Speaker 10

Okay. Well, I think that probably answers my question there. Yes. And then just quickly, on deposit expectations, obviously, there's a lot of moving parts there. But do you expect to kind of fill the gaps on the funding side to keep the loan deposit ratio similar to where it is now given your loan growth?

Speaker 1

Yes. I mean, we have a desire to see the loan to deposit ratio tick up slightly. And it's a fun time in the business. Honestly, we're actively pursuing new client relationships on the lending side. We expect to have mid to high single digit growth.

Speaker 1

And it feels like we're getting back to what would be more of a historical level where you tend to grow loans in the mid to high single digits and deposits in the mid to low single digits. And I think it creates a little more efficient and effective operating model.

Speaker 10

Okay, great. Thanks, Mark, and thanks, everyone else. Appreciate it.

Operator

Thank you. Thank you. Our next question comes from the line of Terry McEvoy

Speaker 7

with Hi, good morning everyone.

Operator

Your line is open.

Speaker 7

Hi, good morning everyone or good afternoon. Michelle, you mentioned the $1,000,000,000 of repricing. Was that specifically out of the loan portfolio over the next three quarters, coming out of the 34% of the portfolio that's fixed today?

Speaker 6

It's mostly out of the loan portfolio. Yes, it's a total earning asset number, so it will also include the securities that are going to be maturing as well, but it is largely loans. And it's a mix of those that are fixed as well as some variable that is recreating.

Speaker 7

Perfect. And then just taking into consideration your loan growth commentary, deposit costs and margin, it sounds like net interest income bottomed in the Q1 and should grow from here. Would you agree with that, Michelle?

Speaker 6

I would think so. The guidance that we gave on our outlook last quarter was that we thought by Q2 it would stabilize and then we see some growth in the back half of the year and I think that's largely what our expectation is.

Speaker 7

And then just one last question. When I look at the largest component of non owner occupied CRE, it's multifamily. So do you have any comments on kind of vacancy trends, new supply, rent growth, particularly within some of those larger metro markets in Indiana and Michigan?

Speaker 4

Yes. We're still seeing rent growth, but it has slowed. It's kind of tapered from what was a breakneck speed earlier in the cycle to a more modest level. Really that the multifamily that we've had has been, as Mike mentioned earlier, been able to stabilize and move to the permanent market. So we still feel pretty good about that space, although obviously new opportunities are going to get more challenging with higher rates.

Speaker 9

Thanks for taking my questions.

Operator

Thank you.

Speaker 2

Thanks, Derek.

Operator

I'm currently showing no further questions at this time. I'd like to turn the call back over to Mr. Mark Hardwick for closing comments.

Speaker 1

Yes, I really don't have much other than just, again, an expression of our appreciation for your interest in our company and the continued investment. And the teams are working hard to deliver our results for the remainder of the year. So thank you again for your attention.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.

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Key Takeaways

  • Q1 net interest margin stabilized at 3.10% with new and renewed loan yields averaging 8.15%, supporting robust net interest income trends.
  • Commercial and industrial loans grew over 5.5% annualized in Q1 despite seasonal construction refinancings, while the consumer portfolio dipped 0.8%, and management targets mid‐single‐digit loan growth for 2024.
  • Total deposits rose 1.7% annualized—driven by a $155 million increase in consumer balances—and the company reduced funding costs to 2.64% through targeted deposit repricing.
  • Asset quality remained sound with nonperforming assets at 56 bps of loans (up from one hospitality credit), an allowance for credit losses stable at 1.64% of loans, and a 1.82% coverage ratio including fair value marks.
  • Capital returns included $30 million in share repurchases, $40 million of sub‐debt redemption and $20 million in dividends, while tangible book value per share rose 9.3% YoY to $25.07 and CET1 remained a strong 11.25%.
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Earnings Conference Call
First Merchants Q1 2024
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