First Merchants Q4 2024 Earnings Report

First Merchants EPS Results

• Actual EPS: $1.00
• Consensus EPS: $0.90
• Beat/Miss: Beat by +$0.10
• One Year Ago EPS: N/A

First Merchants Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $167.84 million
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

First Merchants Announcement Details

• Quarter: Q4 2024
• Date: 1/30/2025
• Time: Before Market Opens
• Conference Call Date: Thursday, January 30, 2025
• Conference Call Time: 11:30AM ET

First Merchants (NASDAQ:FRME) operates as the financial holding company for First Merchants Bank that provides community banking services. The company offers a range of financial services, including time, savings, and demand deposits; and consumer, commercial, agri-business, public finance, and real estate mortgage loans. It also provides personal and corporate trust; brokerage and private wealth management; and letters of credit, repurchase agreements, and other corporate services. The company operates banking locations in Indiana, Illinois, Ohio, and Michigan counties. It also offers its services through electronic and mobile delivery channels. First Merchants Corporation was founded in 1893 and is headquartered in Muncie, Indiana.

First Merchants Q4 2024 Earnings Call Transcript

Presentation

[Operator]

you for standing by, and welcome to the First Merchants Corporation's 4th 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 of financial condition of First Merchants Corporation that involve risks and uncertainties. Further information is contained within the press release, which we encourage you to review. Additionally, management may refer to non GAAP measures, which are intended to supplement, but not substitute for most directly comparable GAAP measures. The press release available on the website contains financial and other quantitative information to be discussed today as well as reconciliation of GAAP to non GAAP measures.

[Operator]

As a reminder, today's call is being recorded. And now I'd like to hand the program over to Mr. Hardwick, CEO. Mr. Hardwick, you may begin.

[Mark Hardwick, Chief Executive Officer at First Merchants]

Good morning, and welcome to the First Merchants' Q4 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 am Eastern Time. 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, including President, Mike Stewart Chief Credit Officer, John Martin and Chief Financial Officer, Michelle Kebiasky.

[Mark Hardwick, Chief Executive Officer at First Merchants]

Please turn to Page 4. We're quite pleased with our 4th quarter results and the focused momentum that we're building. 2024 in many respects was a great year for the bank. We certainly had our challenges, but the team was resilient and stayed focused on the many tasks at hand. During 2024 and in order, we completed our voluntary early retirement program, the upgrade to our in branch account origination platform to Terafina, the upgrade of our online and mobile platform for both consumer and then commercial clients.

[Mark Hardwick, Chief Executive Officer at First Merchants]

We upgraded our private wealth platform to SS and C, InterTrust and Black Diamond. We completed the sale of 5 non core Illinois branches and the corresponding restructure of our of a portion of our securities portfolio. And even though the work slipped into the Q1 of 2025, we just upgraded our wire platform to a real time system powered by Finastra. You will notice on the branch map that we are now down to 110 locations and we are highly focused on delivering top quartile financial results in 2025 with minimal or no distractions. The tighter focus on our core markets, Indiana, Ohio and Michigan will drive new and innovative customer acquisition strategies, which are proving to be rewarding and fun.

[Mark Hardwick, Chief Executive Officer at First Merchants]

On Slide 5, you can see our earnings per share for the quarter totaled $1.10 or $1 even per share after adjusting for $20,000,000 gain on the sale of the Chicago branches, offset by an $11,600,000 bond loss related to security sales. Loan growth totaled 6% for the quarter, consistent with our 2025 expectations. Net interest margin also improved by 5 basis points Q4 over Q3 and helped drive PPNR growth of 4% on a linked basis and again supported a sub-fifty percent efficiency ratio for the quarter. Our tangible common equity ratio has continued to build and is now 8.81%. 4th quarter tangible book value per share, which is reported on Slide 10, was $26.78 per share and has increased by $5.33 per share or 25% over the last 2 years.

[Mark Hardwick, Chief Executive Officer at First Merchants]

Net income totaled $200,000,000 for the full year of 2024 and earnings per share totaled $3.41 Our Q3 and Q4 momentum is very satisfying and we feel like we are now back to pre Silicon Valley performance metric levels. Now Mike Stewart will discuss our line of business momentum. Mike?

[Mike Stewart, President at First Merchants]

Yes. Thank you, Mark, and good morning to all. Our business strategy, which is summarized on Slide 6, remains unchanged. We're a commercially focused organization across all these business segments and our primary markets of Indiana, Michigan and Ohio. And throughout 2024, we remained focused on building earnings momentum by executing our strategic imperatives of organic loan deposit, fee income growth and taking market share by engaging and rewarding and retaining our teammates and by implementing the new technology platforms that Mark talked about that have enhanced our client experience.

[Mike Stewart, President at First Merchants]

So as you heard Mark summarize on Slide 4, we delivered on this earnings momentum throughout the year. Let's turn to Slide 7. Loan growth was strong for the 4th quarter across both the commercial and consumer segments, reaching nearly 6% on an annualized basis and bringing the full year growth to 3%. The $9,700,000,000 commercial segment was the primary driver of the growth by increasing $148,000,000 during the quarter with the C and I portfolio growing $66,000,000 or 3% and the investment real estate portfolio growing over $80,000,000 For the full year, our Commercial segment grew over $250,000,000 or 3% with the C and I portfolio growing over $300,000,000 offsetting the decline that we've talked about throughout the year in the investment real estate portfolio. Another pleasing bullet point on this page is the year end pipeline.

[Mike Stewart, President at First Merchants]

It's at a consistent level from the prior quarter after such a strong balance sheet growth. The growth has been shared across all the regions with Indiana, Michigan and the sponsor teams driving the bulk of the increase. Some of the consistent trends across the C and I spectrum are generally evident like the M and A and CapEx spending, which was slow during the 1st 3 quarters of 2024, but has begun to thaw, particularly as it relates to acquisition and or ownership transitions. That activity drove quite a bit of commercial lending during the last 2 months of the year and carried into the pipelines. Fed rate reductions have had a positive impact on loan demand, specifically with investment real estate projects.

[Mike Stewart, President at First Merchants]

New production for our investment real estate team has been strong and the end of the year pipeline demonstrates some of that as well. All of these are positive indicators for future balance sheet growth. What about the benefits of easing inflationary pressures are also benefiting our clients, in particular the stability of auto trends and orders along with solid demand for workers in construction and infrastructure industries. So far, the response to proposed tariffs hasn't had a significant impact on inventory or margins. Having said that, revolver usage is up across most industries along with the use of cash reserves.

[Mike Stewart, President at First Merchants]

The Agribusiness segment remains a little challenged. While commodity prices have reverted to more historic levels over the past 4 years, input costs have not declined as much and equipment purchase remains soft. FMB carries almost no exposure to the impacts of the bird flu as the bulk of our focus has been on crop production. Our commercial focus has always been the primary driver of our balance sheet growth and the Commercial and Industrial segment is the largest part of our portfolio. C and I comprises 50% of the total first merchants loan portfolio and 2 thirds of the commercial.

[Mike Stewart, President at First Merchants]

A few comments on the consumer portfolio loan portfolio. Year to date growth reached $125,000,000 with the on balance sheet residential portfolio driving over 50% of that increase or 65,000,000 dollars We utilize our balance sheet for variable rate, short term fixed rate or construction loans. As the 10 year treasury has continued to decline during the quarter, our mortgage production has remained strong throughout. Michelle will review the year over year growth our mortgage team delivered through the gain on sale activities. We have a really strong team of mortgage bankers throughout our footprint helping us continue that growth.

[Mike Stewart, President at First Merchants]

Let's turn to Slide 8, deposits. The story of this slide is mix, mix of our product set and our goal of managing deposit cost. Michelle will be reviewing the improvement of our net interest margin and this slide represents the work our teams have accomplished in managing and building core deposit relationships while reducing deposit cost on public funds and maturity deposit categories. So for the quarter, total deposits grew at a 4.4 percent annualized rate and for the full year, our total deposit balances were essentially flat. The commercial segment grew deposits during the quarter by $50,000,000 with the non public fund balances, what we would call operating accounts, growing $27,000,000 Year to date, commercial deposit balances declined 1%, but the non public fund account balances or operating accounts grew by 1% or $87,000,000 Public fund balances declined 6% throughout 2024.

[Mike Stewart, President at First Merchants]

Public funds are an important segment, yet one of our highest cost of depository categories. The overall story is we improved our mix of commercial deposits throughout the year by growing operating accounts. We also continued our pricing discipline within our consumer segment, specifically maturity deposits or CDs. The chart at the top states that consumer deposit balances declined during the quarter 22% on an annualized basis, which they did. But the maturity deposit balance decline was essentially the entirety of it at 346,000,000 dollars So core or primary consumer account deposit balances were flat during the quarter, but grew $127,000,000 in 2024 or roughly 2%.

[Mike Stewart, President at First Merchants]

Maturity deposits, CD balances, declined over $430,000,000 through 2024. The mix of deposit categories has been a focus of our teams, a focus on primary accounts and a focus on deposit cost. So overall, I'm pleased with the active engagement our teams are having with their clients as we manage the mix and deposit costs. So I'm going to turn the call over to Michelle, so she can review in more detail the composition of our balance sheet and the drivers of our income statement. Michelle?

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

Thanks, Mike. Slide 9 covers our 4th quarter performance. Line 1 shows a small decline in total assets. Below that, you can see it was derived from the decline in investments, reflecting the sale of bonds as we continue to reposition the portfolio. That was offset by the loan growth of $185,000,000 that Mike discussed in his remarks.

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

Moving down to the income statement in the middle of the page. Net interest income on line 11 continued its growth trajectory with an increase of $3,300,000 sequentially. Non interest income on line 13 increased by $17,900,000 which reflected the gain on the sale of our Illinois branches of $20,000,000 offset by an increase in realized losses on the sale of bonds over the prior quarter of 2,500,000 dollars When normalized for those non core items, non interest income remained strong totaling $34,400,000 As a result, pre tax pre provision earnings grew linked quarter by nearly $2,700,000 and totaled $73,200,000 reflecting strong core franchise performance. That performance fueled tangible book value growth during the quarter despite higher interest rates negatively impacting AOCI. Slide 10 shows our annual results.

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

You can see at the top the balance sheet lines show the favorable change in earning asset mix, reflecting a decrease of $350,000,000 in the lower yielding investment portfolio and an increase of $368,000,000 in higher yielding loans. The decline in deposits on Line 4 was due to the sale of the 5 Illinois branches that was closed in early December. Operating earnings for the year were strong with pretax pre provision earnings totaling 272,400,000 dollars Tangible book value per share benefited from those strong earnings, increasing $1.72 or 7 percent to $26.78 at year end. We achieved strong tangible book value growth while returning value to shareholders through dividend payments and share buybacks totaling $138,000,000 during the year. Slide 11 shows details of our investment portfolio.

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

The securities sold during the 4th quarter had a book value of $109,600,000 and were sold for a loss of 11,600,000 dollars The bonds had a weighted average yield of 2.31 percent and an average life of 6.88 years. The total bond portfolio repositioning, including the bonds sold in the 3rd quarter, resulted in a year to date total of $268,500,000 sold for a loss of $20,800,000 Expected cash flows from scheduled principal and interest payments and bond maturities in the next 12 months totaled $270,000,000 with a roll off yield of approximately 2.22%, which will have a positive impact on the overall portfolio yield through next year. Slide 12 shows some details on our loan portfolio. The total loan portfolio yield decreased by 31 basis points to 6.55 percent as our variable rate portfolio repriced in response to lower short term rates. New and renewed loans were priced with a 7.12 percent yield.

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

These strong new loan yields along with the benefit of fixed rate loan repricing helped to offset the variable rate loan repricing and will continue to do so going forward in 2025. The allowance for credit losses is shown on Slide 13. This quarter, we had net charge offs of only $800,000 We recorded $5,700,000 of provision for credit losses on loans, which was offset by a reduction of reserves for unfunded commitment balances of 1,500,000 The result was net provision expense of $4,200,000 recorded in the income statement. The reserve at quarter end was $192,800,000 and the coverage ratio was 1.5%. In addition to the ACL, we have $17,400,000 of remaining fair value marks on acquired loans.

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

When including those marks, our coverage ratio is 1.64%. Overall, we are still more than adequately reserved as our allowance remains well above peer levels. Slide 14 shows details of our deposit portfolio. The total cost of deposits declined meaningfully by 26 basis points to 2.43 percent this quarter. Our interest bearing deposit cost declined 31 basis points, reflecting a downward deposit beta of 46%.

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

As a reminder, deposits included in the sale of the Illinois branches of $267,400,000 were reclassed to held for sale in the Q3 and were not reflected in the total deposit balance at the end of the Q3. Therefore, deposits grew $156,500,000 or 4.4 percent annualized linked quarter. On Slide 15, net interest income on a fully tax equivalent basis of $140,200,000 increased $3,200,000 from prior quarter. Although yield on earning assets declined 19 basis points linked quarter, it was outpaced by the decline in funding costs of 24 basis points shown on line 5. The result was a meaningful expansion of stated net interest margin of 5 basis points and an increase of 18 basis points from the Q1 of the year.

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

Next, Slide 16 shows the details of non interest income. Non interest income totaled $42,700,000 and when normalized for the gain on the sale of the Illinois branches and realized loss on securities was $34,400,000 an increase of $400,000 over prior quarter. Customer related fees remained robust at $29,400,000 reflecting strong wealth management fees and gains on sales of mortgage loans along with higher customer loan level hedge fees. Moving to Slide 17, non interest expense for the quarter totaled $96,300,000 an increase of $1,700,000 over prior quarter due to higher marketing costs and other one time operating expenses. We maintained our expense discipline and achieved positive operating leverage again this quarter and adjusting for non core items and delivered a 53.6% core efficiency ratio.

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

Slide 18 shows our capital ratios. We continue to grow capital this quarter with common equity Tier 1 climbing to 11.43%. The tangible common equity ratio ended the year at 8.81%. These strong capital ratios provide us with strategic flexibility going into 2025. That concludes my remarks and I will now turn it over to our Chief Credit Officer, John Martin to discuss asset quality.

[John Martin, Executive VP & Chief Credit Officer at First Merchants]

Thanks, Michelle and good morning. My remarks start on Slide 19. I'll begin by highlighting loan portfolio growth, touch on the updated insight slides, review asset quality and the non performing asset roll forward before turning the call back over to Mark. Turning to Slide 19, we had continued strong mid single digit commercial and industrial loan growth shown on Line 4, which includes owner occupied commercial real estate and sponsor finance. Regional C and I, which you can see on line 1, grew the most, while the sponsor finance portfolio on line 2 declined.

[John Martin, Executive VP & Chief Credit Officer at First Merchants]

As the sponsor finance portfolio matures, we would expect to see periodic payoffs as portfolio companies are sold and sponsors funds mature. Total investment real estate or CRE, non owner occupied on line 7 includes both stabilized or stabilizing properties and construction, land and land development, which was mostly unchanged. We continue to have ample room to grow this portfolio and view this as an opportunity for future growth depending on market conditions. Moving down to line 9, there was strong quarter over quarter growth in public finance, which was up $77,000,000 Part of this growth was due to our willingness and ability to move quickly in the Q4, which resulted in some very attractive and less competitive lending opportunities. The originations were all high quality municipal transactions geographically concentrated in Indiana.

[John Martin, Executive VP & Chief Credit Officer at First Merchants]

The loan portfolio insights slides on Pages 20 21 are intended to provide transparency into the portfolio. As mentioned on prior calls, the C and I classification shown on Slide 20 includes sponsor finance as well as owner occupied CRE. 21% of our C and I loans support manufacturing businesses. Our current line utilization increased again for the quarter. Line utilization rose by 1% to 46%, contributing roughly $90,000,000 to C and I growth with total C and I commitments rising roughly $91,000,000 this quarter.

[John Martin, Executive VP & Chief Credit Officer at First Merchants]

We participate in roughly $890,000,000 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 85 platform companies with active sponsors in an assortment of industries. 66% have a fixed charge coverage ratio of greater than 1.5 times based on Q3 borrower information.

[John Martin, Executive VP & Chief Credit Officer at First Merchants]

This portfolio generally consists of single bank deals for platform companies of private equity firms as opposed to large widely syndicated leverage loans from Money Center Bank Trading desks. We review the individual relationships quarterly for changes in borrower condition, including leverage and cash flow coverage. On Slide 21, we break out the investment or non owner occupied commercial real estate portfolio. Our office portfolio our office loans are detailed on the bottom half of the slide and represent 1.9% of total loans with the highest concentration outside of general office in the medical office space. The wheel chart on the bottom right details office portfolio maturities.

[John Martin, Executive VP & Chief Credit Officer at First Merchants]

Loans maturing in less than a year represent 25% of the portfolio or $60,700,000 up from 15% last quarter. The office portfolio is well diversified by tenant type and geographic mix. We continue to periodically review our larger office borrowers and view the exposure as reasonably mitigated through a combination of loan to value guarantees, tenant mix and other consideration. Our largest less than a year maturing office loan is roughly $25,000,000 has a credit tenant and is under a long term lease. We expect this loan to be renewed in due course later this year.

[John Martin, Executive VP & Chief Credit Officer at First Merchants]

On Slide 22, we highlight this quarter's asset quality trends and position. Our non accrual loans were up $14,700,000 while 90 day past due loans declined to $5,900,000 after the renewal of the $13,000,000 matured relationship discussed during last quarter's call. The increase in non accruals resulted largely from a $22,000,000 multifamily housing loan to a developer that is involved in a dispute unrelated to our project. Our project is headed to a sale and we expect to be paid out later in the Q1 or early in the second quarter with no anticipated loss. Finishing out classified loans leveled for the quarter while net charge offs were roughly $800,000 Then moving to Slide 23, we've again rolled forward the migration of non performing loans, charge offs, ORE and 90 days past due.

[John Martin, Executive VP & Chief Credit Officer at First Merchants]

In the column 4Q 2024, we had more movement than in recent quarters with inflows of non accrual loans on line 2 of $42,900,000 the largest of which was the $22,000,000 multifamily project I just mentioned. We had a reduction from payouts or changes in accrual status on Line 3 of $25,500,000 with the largest outflow from the exit of a $13,000,000 hospitality credit taken to non accrual in Q1 2024 and a reduction from gross charge offs of $2,600,000 Dropping down to line 11, 90 day delinquent loans decreased by $8,200,000 with the renewal of the relationship from last quarter, resulting in NPAs plus 90 day delinquent loans ending the quarter at $84,600,000 So to summarize, asset quality remains stable, classified loan balances have leveled with nominal charge offs. We had a solid quarter of C and I loan growth combined with robust public finance activity. And with the refinance and sale activity in commercial real estate debating, we hope to see traction and growth in the construction loan portfolio. I appreciate your attention.

[John Martin, Executive VP & Chief Credit Officer at First Merchants]

And now we'll turn the call back over to Mark Karpnick.

[Mark Hardwick, Chief Executive Officer at First Merchants]

Thanks, John. Turning to Slide 24, the 10 year compound annual growth rate of earnings per share is 7.5% and it's helped support the 7% growth rate we've seen in tangible book value per share. As you know, those numbers are post dividends, post M and A activity or the dilution from those acquisitions, and it also includes the AOCI impact that is in our total equity calculation. Slide 25 shows our total asset CAGR of 12% during the last 10 years and highlights meaningful acquisitions that have materially added to our footprint and help fuel our growth. There are no changes to Slide 27 as we continue to live both our vision and our strategic imperatives.

[Mark Hardwick, Chief Executive Officer at First Merchants]

So in summary, I'm proud of this team. I'm proud of all 2,000 plus employees that we have and I'm really proud of the accomplishments that we delivered in 2024. And yet, I'm very happy to turn the page on a year of repositioning. Our teams worked very hard last year to put the bank in a position to grow and we have never been positioned better to meet the financial needs of the clients that we serve. Thanks for your attention and your investment and I hope you share the same optimism that all of us around this table share.

[Mark Hardwick, Chief Executive Officer at First Merchants]

So at this point, we're happy to take questions.

[Operator]

Certainly. And our first question for today comes from the line of Brendan Nossel from Hovde Group. Your question please.

[Brendan Nosal, Director - Equity Research at Hovde Group]

Hey, good morning everybody. Hope you're doing well. Good morning, Brendan. Maybe starting off here on kind of asset repricing dynamics as we move through the year. I think 60% of your book floats on either so for a prime.

[Brendan Nosal, Director - Equity Research at Hovde Group]

But for the other 40% of the loan book, can you remind us how much back book asset repricing you have across the year? And how much yield pickup you're looking to achieve on that paper? Thanks.

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

I think our fixed rate securities, we probably have about $250,000,000 in fixed rate securities. They're going to be repricing in the next 12 months. And I believe there is like maybe about a 4.5% yield. So we've got some good pickup there. I think that'll be a nice tailwind for us.

[Brendan Nosal, Director - Equity Research at Hovde Group]

And then what about the loans? I think you said that was securities.

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

I'm sorry. That was the loan book. I apologize.

[Brendan Nosal, Director - Equity Research at Hovde Group]

Okay. That makes a great deal.

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

I do ask.

[Brendan Nosal, Director - Equity Research at Hovde Group]

Okay. Perhaps one more from me, Just kind of on the pace of investments and expenses overall. I mean, you did a ton of work in 2024 investment spend on your 4 major initiatives. Any early thoughts on the project slate for 2025, where dollars need to be allocated whether you kind of pull that forward into 2024 and then tie that commentary into overall thoughts on the cost base for this year? Thanks.

[Mark Hardwick, Chief Executive Officer at First Merchants]

Yes. I'll let Michelle speak to the overall cost base, but the pull forward of those projects, it's amazing we were able to upgrade the quality of our technology really without any increased expense. The where it really showed up in our income statement for the actual conversion charges, the one time kind of expense related to changing platforms and even carrying technology over where we were maybe duplicating expense for a short amount of time. But the 2025 numbers related to all those technology projects really is not an increase. So it comes back to just what's the core increase in our investment really in people as we move forward.

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

Yes. And then Brendan, maybe I'll kind of answer the second part of that. When you look at just our total expenses for 2024, looking to 2025, we think we can keep expense growth pretty minimal. Really, I would say somewhere in the 1% to 3%, probably leaning more towards the low end of that range. Our efficiency ratio continues to be low and we do have no doubt that we'll continue to maintain that expense discipline and deliver a sub-fifty 5 efficiency ratio in 2025 as well.

[Brendan Nosal, Director - Equity Research at Hovde Group]

All right, fantastic. That's helpful color. Thanks for taking the questions. Thank you.

[Operator]

Thank you. And our next question comes from the line of Terry McEvoy from Stephens Inc. Your question please.

[Terry Mcevoy, MD & Research Analyst at Stephens Inc]

Hi, thanks. Good morning everybody.

[Mark Hardwick, Chief Executive Officer at First Merchants]

Hi, Terry.

[Terry Mcevoy, MD & Research Analyst at Stephens Inc]

Maybe the cost of total deposits in Q4, 2.43%. I'm just wondering maybe where was that at the end of December or if you don't have that handy, where do you see those deposit costs heading over the next couple of quarters?

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

Our December deposit costs were 2.33. So we'd actually made quite a bit of progress in the Q4 through the end of Q4 really cutting those deposit costs. And overall, we believe that we can continue that momentum.

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

As I

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

said in my remarks, we had a down deposit beta of 46%. So, our commitment is to continue to move forward if the Fed cuts rates in 2025, we're going to go grab more of our share. It will all be dependent on competition as it always is. And so we'll make adjustments as needed.

[Terry Mcevoy, MD & Research Analyst at Stephens Inc]

Thanks, Vishal. And then Mike, it sounds like the momentum in the C and I area will continue in the first half of the year just based on the conversations and some of your comments. There are certain sectors, industries you think are better positioned to support that growth. And then as a follow-up, just since I'm asking on the loan portfolio, you highlight the ample opportunities for ample real estate capacity. What's your desire to build out commercial real estate given that comment in your low relative exposure?

[Mike Stewart, President at First Merchants]

On the C and I outlook, it's a couple of things inside the manufacturing segment. We're sitting here, as you know, in these 3 states, manufacturing is a big part of what we're doing. And that outlook inside the business plans of those companies is what gives me the in addition to what we see in the pipeline today, gives me that bullish outlook for the next quarter, maybe even 2. Also, I want to just remind you, we're really gaining our momentum in a Michigan market. I can't say we're new there anymore, but when you think about what we've done in the last 3 years to build our personal brand up there and our approach, that team is making some really great strides in growth.

[Mike Stewart, President at First Merchants]

So we're trying to get our fair share of that marketplace. So that in and of itself, we're taking market share offices that some of that additional runway of growth. What John points out and what

[Mike Stewart, President at First Merchants]

I point out with this,

[Mike Stewart, President at First Merchants]

the real estate portfolio is just really it's just to say we're balanced. We have really strong core developers that we work with. They're doing a lot inside the projects that we asset classes that we like, could still be in the multifamily segment. The industrial warehouse, you hear us talking about things we might be doing with student housing, even though that's gotten cool

[Mike Stewart, President at First Merchants]

a little bit. But the way

[Mike Stewart, President at First Merchants]

it's really saying is that we've got capacity to continue to grow and we're just trying to differentiate ourselves from other banks that might already be more full with real estate assets. And as we build out and as we continue to earn our reputation with syndications, we've got the ability to continue to do more in that space with developers that like our underwriting, our approach and our consistency into the close process. So we just have the ability to take advantage of that if the projects pencil out and if we like the underwriting attributes.

[Terry Mcevoy, MD & Research Analyst at Stephens Inc]

Perfect. Appreciate all the color. Thank you.

[Operator]

Thank you. And our next question comes from the line of Damon DelMonte from KBW. Your question please.

[Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)]

Hey, good morning everyone. Hope that you're all doing well today. Just wanted to get a little bit more color on the margin outlook. Michelle, I think you guys noted about $270,000,000 of cash flows coming off the securities portfolio. Is the intent to reinvest that at the higher rates?

[Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)]

Or are you going to maybe kind of split that with some reinvestment and some funding of loan growth?

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

Our intention is to use it to fund the loan growth for our 2025 plan. So we'll see where the growth goes. But just looking for margin for 2025, our plan is to grow margin. We do have 2 rate cuts that are in our plan, both in the early half of the year. I should say 1 in March and 1 in June is when we have them built in.

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

And so although we do have we are asset sensitive and we'll have loans to reprice down, we've been very proactive in managing our deposit costs in 2024. We think we can do it in 2025. And also we've got really strong loan yields, our new loan yields. And so that coupled with the fixed rate loans that Brendan asked about, we feel that we'll be able to achieve the margin growth at the very minimum stability, but we believe we can grow it.

[Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)]

Great. Okay. I appreciate that color. And then just to circle back on the loan commentary. So, Mike, do you feel kind of a low mid single digit net growth is doable or do you think you could actually get to a more solid middle single digit growth footing?

[Mike Stewart, President at First Merchants]

Yes, I'm feeling middle single digit. We used to talk about high single digit. It might not be in the high, but I'm on the bullish side of that.

[Mark Hardwick, Chief Executive Officer at First Merchants]

Yes. And I made a comment just in my opening that 6% this quarter is a really good number to think about for 25. Got it.

[Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)]

Okay, great. And then just lastly, any updated thoughts on capital management? Your capital levels are obviously very strong. There's been a thawing in the M and A market and there's been some activities across your footprint. Just kind of wondering what your priorities are for deploying capital.

[Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)]

Is it just to support organic growth? Do you think there's M and A opportunities? And if so, kind of geographically, do you feel the need to expand out of your core markets? Or do you see opportunities to maybe, enhance your positions in your core markets? Thanks.

[Mark Hardwick, Chief Executive Officer at First Merchants]

Thanks, Damon. Yes, we love our capital base. I'm really happy with the levels where we are today. It provides a lot of flexibility, the power of our earnings stream into 2025. We'd love to use as much of it as possible to grow the balance sheet.

[Mark Hardwick, Chief Executive Officer at First Merchants]

As I mentioned, I kind of gave a mid to high single digit number is kind of where I think we'll come in with loans. So arguably, we need about a third of our capital base to support the balance sheet growth. We use about a third for dividends and the rest we'll continue to accumulate. Our M and A focus is just in the like it has been for a long time. It's in the 3 states where we currently do business, Indiana, Ohio and Michigan.

[Mark Hardwick, Chief Executive Officer at First Merchants]

And if something makes sense, we can we're certainly in communication with banks. I don't know what their real appetite is going to be. But there are some that makes sense where we feel like if we were to acquire an institution or 2 in that footprint over time that it would give us a nice new organic market where we may be able to grow into the future. But it's not a priority. Our focus is the prioritization of performing organically.

[Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)]

Got it. Great. Appreciate that color. That's all that I had. Thank you very much.

[Operator]

Thank you. And our next question comes from the line of Nathan Race from Piper Sandler. Your question please.

[Nathan Race, Director & Senior Research Analyst at Piper Sandler Companies]

Yes. Hi, everyone. Thanks for taking the questions. Just going back to the last line of questioning on capital, it looks like you guys are active on share repurchases in the quarter. So just curious if that appetite remains heading into this year, just given some of the M and A commentary?

[Mark Hardwick, Chief Executive Officer at First Merchants]

Yes. I'm interested in share repurchase where we're trading below historical averages. And when I say that, I just think about what are our earnings, apply a multiple. And if we're trading below the historical averages that are closer to 12.5% or 13%, then I have an interest in being active where we're trading at our historical averages. And we believe that if we if the estimates etcetera are appropriate, then we're likely to stay out of share repurchase and just accumulate the capital for future years.

[Nathan Race, Director & Senior Research Analyst at Piper Sandler Companies]

Okay, great. That's really helpful. And then, Michelle, I think last quarter you're talking about a run rate for fee income around 30% to 32% going forward. You guys obviously exceeded that here in the Q4, but just kind of any thoughts on kind of the fee income growth run rate for trajectory to 2025?

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

Yes. I mean, we expect 2025 non interest income to grow year over year, probably in the mid to high single digits. And the drivers of that growth that we're expecting to come from our wealth management and our mortgage teams. They've delivered exceptional performance in 2024 and we think they can grow at a double digit pace in 2025. And so when when you kind of couple that with the other components of the income growth, we think that will bring our overall non interest income growth to that mid to high single digits when you look at it year over year.

[Mark Hardwick, Chief Executive Officer at First Merchants]

And even treasury management should be in a similar range where with the use of Q2 And when we think about our play in the private wealth, commercial or TM fees, the mortgage business, they're really strong drivers of performance. And I love the historical performance and

[Mark Hardwick, Chief Executive Officer at First Merchants]

we think it can continue.

[Nathan Race, Director & Senior Research Analyst at Piper Sandler Companies]

Okay. That's really helpful. And then, any thoughts on the tax rate going forward?

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

I would expect it to be maybe 13% to 14% for the year in 2025.

[Nathan Race, Director & Senior Research Analyst at Piper Sandler Companies]

Okay, great. And then maybe one last one for John. Obviously, it sounds like with some of the non performing increase in the quarter, that's kind of transitory, just given what's going on with that specific client. In the past, we've talked about kind of a normalized charge off range, south of 20 basis points. But it just seems like given some pretty benign credit trends in the Q4 that maybe we're going to kind of trend below that level here in 2025?

[John Martin, Executive VP & Chief Credit Officer at First Merchants]

Yes. I still think that the between 15 and 20 basis points is a good number. With classifieds being where they are, non performers being where they are, and it is sort of transitory, but I still see that as being a reasonable range of expectations for charge offs.

[Nathan Race, Director & Senior Research Analyst at Piper Sandler Companies]

Okay, great. I appreciate all the color. Congrats on a great quarter. Thank you.

[Mark Hardwick, Chief Executive Officer at First Merchants]

Thanks, Mike.

[Operator]

Thank you. And our next question comes from the line of Daniel Tamayo from Raymond James. Your question, please.

[Daniel Tamayo, Vice President at Raymond James Financial]

Thank you. Good afternoon, everyone. Maybe first just for Michelle on the details of the restructuring in the Q4. Just curious if those funds were reinvested in the securities? I know you talked about reinvesting cash flows into loan growth, but just as it relates to those in particular and then, if you expect any further benefit depending on timing when that transaction happened on the margin in the Q1?

[Michele Kawiecki, Executive Vice President & Chief Financial Officer at First Merchants]

Yes, we did not reinvest those cash flows. We actually used the cash flows from the bonds, the sale of the bonds to replace the deposits that we sold with those Illinois branches. And so when you look at the yield on the bonds that we sold versus the yield on the deposits, it will actually give us the margin pickup in 2025. I expect that to be maybe to the tune of 2 to 3 basis points of benefit.

[Daniel Tamayo, Vice President at Raymond James Financial]

Okay. So you'll see 2 to 3 basis points here in the Q1 related to that restructuring. Okay. I appreciate that. And then maybe one for Mark here, bigger picture.

[Daniel Tamayo, Vice President at Raymond James Financial]

You talked a lot about the investments you made last year. You guys talked about minimal expense growth here and sound pretty excited about 2025 and going forward. Curious kind of how you think about what would be a good type of ROA for the bank going forward, pretty strong in the Q4 on an operating basis, about 125. Is that an achievable number, longer term or just curious how you're thinking about now profitability given the investments you've made as we get into more normalized environment?

[Mark Hardwick, Chief Executive Officer at First Merchants]

Yes. It's a great question, Danny. And we have a whole series of key performance indicators that we use and we target around 130. I don't know whether we'll reach that in 2025, but the 125 number you just mentioned is a great place for us to be. You think about growth in mid to high single digits across the balance sheet, fee income growth, that's kind of 10% is sort of our goal, maintaining our expense level in the really low to low single digit range.

[Mark Hardwick, Chief Executive Officer at First Merchants]

We are really happy with the margin numbers, the rebound that we've seen.

[Mark Hardwick, Chief Executive Officer at First Merchants]

We're kind

[Mark Hardwick, Chief Executive Officer at First Merchants]

of finally back to pre Silicon Valley levels. And yes, that efficiency ratio is going to stay under 55%. And we think with the ROA numbers you just mentioned, that it's a strong place for us to perform that we believe starts to look like top quartile performance. And then if our stock trades at a top quartile level, it just gives us flexibility as we think about what's next.

[Daniel Tamayo, Vice President at Raymond James Financial]

Okay, terrific. Well, thanks for all the color. That's it for me. Appreciate it.

[Operator]

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Mark Hardwick for any further remarks.

[Mark Hardwick, Chief Executive Officer at First Merchants]

Well, I know we have a broad audience here. We have employees, shareholders, customers that listen at times. And I just want to say thank you to all of our stakeholders. We appreciate your interest in First Merchants, your partnership with First Merchants, and the commitment going forward. So again, pleased with the year.

[Mark Hardwick, Chief Executive Officer at First Merchants]

And clearly, from the call, you can tell there's a sense of optimism around where 2025 lands. So thank you for your time and have a great day. Thank you.

[Operator]

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Participants

Executives

• Mark Hardwick, Chief Executive Officer
• Mike Stewart, President
• Michele Kawiecki, Executive Vice President & Chief Financial Officer
• John Martin, Executive VP & Chief Credit Officer

Analysts

• Brendan Nosal, Director - Equity Research at Hovde Group
• Terry Mcevoy, MD & Research Analyst at Stephens Inc
• Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)
• Nathan Race, Director & Senior Research Analyst at Piper Sandler Companies
• Daniel Tamayo, Vice President at Raymond James Financial