Yahoo Finanzen First Merchants Corporation (NASDAQ:FRME) Q1 2024 Earnings Call Transcript
First Merchants Corporation (NASDAQ:FRME) Q1 2024 Earnings Call Transcript April 25, 2024
First Merchants Corporation beats earnings expectations. Reported EPS is $0.85, expectations were $0.82. First Merchants Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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's that involve risk 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. 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.
Mark Hardwick: Good morning, and welcome to the First Merchants first quarter 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 third 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, Michele Kawiecki. On Page 4, we have a few financial highlights for the quarter to include total assets of $18.3 billion, $12.5 billion of total loans, $14.9 billion of total deposits, and $8.3 billion of assets under advisement.
On Slide 5, if you look at bullet point 1 under our first quarter results, you will note that margin is stabilizing, and new and renewed loan yields for the quarter totaled 8.15%. You will also notice on bullet point 5 that we were active during the quarter. We're purchasing 30 million of shares in First Merchants and redeeming $40 million of sub-debt, which recently repriced to just over 9%. On bullet point 6, we reported first quarter 2024 earnings per share of $0.80 or $0.85 when adjusted for $3.5 million of non-core items incurred during the quarter. On the last bullet point, I would also note that three of our four major technology initiatives were deployed during the first four 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&C's InnoTrust 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.
Michael Stewart : 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. If you go to Slide 7, the first quarter continues a choppy trend of loan growth from quarter-to-quarter. I highlighted the 8% annualized loan growth during the fourth quarter of 2023, which followed a relatively flat third quarter of less than one half of 1%.
The first 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 agri-business 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 first quarter. 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 in Monroe Bank entities and was our strongest region of C&I growth. Our investment in people and our brand are building in Michigan. The third bullet point further emphasizes the future growth potential within our C&I portfolio. The pipeline into the quarter is strong, 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 first quarter, that portfolio declined 0.8%, and in dollars, that represented less than $6 million. 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 with 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. 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 million 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 space that we enjoy. The commercial deposit decline during the quarter was primarily from the public funds portfolio, as the C&I relationship showed growth. Like we discussed during last earnings call, both our consumer and commercial teams have been actively managing our interest expense. 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.
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. Michelle?
Michele Kawiecki: Thanks, Mike. Slide 8 covers our first quarter results. Pre-tax, pre-provision earnings, when adjusted for the non-core charges of $3.5 million that were incurred during the quarter, totaled $60.2 million. Adjusted pre-tax, pre-provision return on assets was 1.31%. And adjusted pre-tax, pre-provision 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 $1.1 million for the increased FDIC special assessment and $2.4 million 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.
Details of our investment portfolio are disclosed on Slide 9. Securities yield increased 2 basis points to 2.58% as lower-yielding securities continue to run off. Expected cash flows from scheduled principal and interest payments and bond maturities in the remaining nine months of 2024 total $217 million, 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. 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 two-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 billion of average earning assets that we'll 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 remains stable compared to last quarter at 1.64% of total loan. We recorded net charge-offs of $2.3 million, which was offset by provision for credit losses on loans of $2 million, resulting in a reserve at quarter end of $204.7 million. In addition to that, we have $21.8 million 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. 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% in February and then declined 1 basis point to 2.68% 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 million of sub-debt at the end of January and will pay down an additional $25 million of sub-debt at the end of April. 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 $132.9 million declined $3 million 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%, a decline of 6 basis points from prior quarter. Next Slide 14 shows the details of non-interest income. Overall, non-interest income increased by 200,000 on a linked quarter basis. Customer-related fees declined $1.2 million, reflecting a $900,000 decline on the gain on sales of mortgage loans and lower derivative hedge fees. The first quarter is always a seasonal low for our mortgage business, yet we were encouraged by this quarter's activity because the $3.3 million 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 $3.7 million, which is a $1.3 million increase over the first quarter 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. Moving to Slide 15, non-interest expense for the quarter totaled $96.9 million and as previously mentioned included $3.5 million in non-core charges. Core non-interest expense beat expectations and totaled $93.4 million, a decrease of $2 million from last quarter's core non-interest expense of $95.4 million. 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%, coupled with a dividend payout ratio of over 40% over the last 12 months. A slight decline in each of the ratios shown reflects the $40 million redemption of sub-debt and $30 million of stock buybacks in the quarter. These stock buybacks coupled with $20 million 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.
John Martin: 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 1 and lines 2 was offset by cooling investment real estate activity. We came off a strong origination quarter at the end of the year, as Mike mentioned, with modest growth in the first quarter while investment real estate and construction on lines 4 and lines 5 slowed for the quarter. We continued 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 insight slide helps to provide transparency into the portfolio. As mentioned on prior calls, the C&I classification includes sponsor finance as well as owner occupied CRE associated with the business. Our C&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 million. We participate in roughly $755 million of shared national credits across various industries. These are generally relationships where we have access to management and revenue opportunities that go beyond the credit exposure. 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. 68% 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 leverage loans traded across banks. 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 the slide and represents 2% of total loans with the highest concentration outside of general office and medical office space.
The wheel chart on the bottom right details office portfolio maturities. Loans maturing in less than a year represent 11.3% of the portfolio or $28 million. 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 $11.6 million to 56 basis points of loans and ORE. While up for the quarter, the change was largely driven by a single $12 million new hospitality related credit, which we expect to resolve in the third quarter. On line 3, 90-day delinquent loans were up $2.8 million with one borrower comprising $1.2 million of the increase.
We view this relationship as well secured in the process collection. Classified loans ended the quarter at 2.24% of loans up from 1.94% from the prior quarter. Then down on line 9, net charge us for 7 basis points of annualized average loans. 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 $17.7 million driven by the hospitality credit I just mentioned previously. A reduction from payoffs or changes in accrual status of $5.6 million on line 3, aided by a $2.1 million non-performing mortgage loan sale and a reduction from gross charge-offs of $3.2 million. Dropping down to line 11, 90-day delinquent loans increased by $2.6 million, which resulted in NPAs plus 90-days past due ending at $70.2 million for the quarter.
So summarizing asset quality was marginally down in the quarter. Net charge-offs for the quarter were 7 basis points while non-accruals and classified loans were marginally higher. I appreciate your attention and I'll now turn the call back over to Mark Hardwick.
Mark Hardwick: 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. There are no edits to Slide 24. At this time, I'd like to thank you for your attention and your investment and we are happy to take questions.
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