Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Net interest margin increased by 6 basis points, and net interest income rose by $1.5 million.
- Loan growth totaled 6.1% for the quarter, with strong commercial and industrial (C&I) growth of over 13%.
- Efficiency ratio improved to 53.84%, below the key performance indicator of 55%.
- Treasury Management fees grew more than 10% during the quarter.
- Earnings per share totaled $0.68 in Q2, with a year-to-date EPS of $1.48.
Negative Points
- Provision expense totaled $24.5 million for the quarter due to significant deterioration in a financed business.
- Net charge-offs were $39.6 million, primarily from two relationships, including a $27.5 million charge-off from a transportation company.
- Total deposit balances declined due to normal seasonality and interest rate management.
- The allowance for credit losses coverage ratio declined from 1.64% to 1.5% this quarter.
- Investment real estate portfolio experienced higher-than-normal runoff in 2024, particularly in the multifamily asset class.
Q & A Highlights
Q: Michele, I'm looking at the commercial loan yields being relatively stable over the last couple of quarters. Just curious where the new loan yields are in that book? And then, if you see any kind of incremental increase going forward absent rate cuts?
A: Michele Kawiecki, Chief Financial Officer: Our new and renewed loan yields this quarter were 8.13%. We have some opportunity for the book to reprice up a bit, with about $450 million of fixed rate loans averaging between 5% and 6% that would reprice in 2024.
Q: Any opportunity to reduce borrowings further? And how are you thinking about funding costs going forward?
A: Michele Kawiecki, Chief Financial Officer: We were pleased with the results on deposit costs this quarter. We expect deposit costs to be stable, and margin should be stable to up assuming a flat rate environment. Each 25 basis points rate cut would result in about a 3 basis points decline in margin.
Q: Do you think the current expense levels are sustainable, or would you expect some normalization?
A: Michele Kawiecki, Chief Financial Officer: I would expect expenses to be somewhere between where we landed this quarter to maybe up 2%. We had great expense discipline this quarter and will continue to do so through the remainder of the year.
Q: Do you feel comfortable with the reserve levels, and do you expect provisioning to normalize?
A: Michele Kawiecki, Chief Financial Officer: Yes, we feel comfortable with the reserve levels. We expect provision to normalize, and we'll be providing for loan growth to ensure good coverage.
Q: Can you talk about the recent review of the transportation portfolio and your thoughts on underlying risk?
A: John Mackenzie, Chief Credit Officer: The transportation portfolio is generally secured non-transactional leverage store buyout finance. The recent large credit issue was idiosyncratic due to its unique nature with government contracts. The general transportation segment within our portfolio remains stable.
Q: Is the decline in construction and nonowner-occupied CRE a reflection of market conditions or a strategic decision?
A: Michael Stewart, President: There was no strategic change. It was the normal process and maturities within the portfolio. We expect growth in investment real estate footings into next year.
Q: How does the completion of the major technology initiative better position First Merchants in the marketplace?
A: Mark Hardwick, Chief Executive Officer: The conversion of our online and mobile platform for commercial customers enhances our treasury management product, allowing us to win in that space. The initiative was self-funded through the elimination of costs with our previous provider.
Q: What is the appetite for additional repurchases in the back half of the year?
A: John Mackenzie, Chief Credit Officer: We were active early in the quarter but are not currently active. We'll see how the market stabilizes before making further decisions.
Q: What is the interest in acquisitions going forward?
A: Mark Hardwick, Chief Executive Officer: Conversations are up, and there is more interest from potential sellers. We are focused on Indiana, Ohio, and Michigan, with a handful of banks we are interested in. Timing is everything.
Q: Where do you expect the bond book to settle in terms of size?
A: Michele Kawiecki, Chief Financial Officer: Historically, our investments to assets ratio has been between 15% to 18%. We will continue to let it drift and look for opportunities to sell bonds.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
