Release Date: October 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- First Merchants Corp (FRME, Financial) reported strong third-quarter results with a focus on building momentum through strategic initiatives, including the sale of noncore Illinois branches and technology upgrades.
- The company is well-positioned for organic growth in 2025, with a strong pipeline for commercial and industrial (C&I) loans and investment real estate projects.
- Net interest margin improved by seven basis points quarter-over-quarter, driven by effective deposit pricing and loan yield management.
- The tangible book value per share increased by 19% over the last 12 months, reflecting strong earnings and asset recapture.
- First Merchants Corp (FRME) completed four major technology initiatives, enhancing digital channels and improving client experiences across consumer, commercial, and private wealth segments.
Negative Points
- The company recorded a $9.1 million loss from the sale of securities in the third quarter, impacting noninterest income.
- Loan growth was choppy, with total loans growing only 0.5% on an annualized basis during the quarter.
- The investment real estate portfolio declined by over 11% throughout 2024, with a continued slowdown in the third quarter.
- Net charge-offs for the quarter were $6.7 million, primarily due to a $5.6 million charge-off related to a trucking company loss.
- The allowance for credit losses remains high, with a coverage ratio of 1.48%, indicating ongoing credit risk concerns.
Q & A Highlights
Q: How will the recent securities sales impact net interest income in 2025, considering potential lower interest rates?
A: Michele Kawiecki, CFO, stated that while they are still budgeting for 2025, the bond restructuring should help the margin. However, they expect some margin compression in a declining rate environment. The sale of lower-yielding bonds will positively impact the margin, but overall, the sale is financially neutral. The focus remains on growing net interest income despite potential margin declines.
Q: Can you expand on the completion of technology initiatives and new customer acquisition strategies?
A: Mark Hardwick, CEO, explained that the completion of technology initiatives like Terrain and Q2 has improved account opening times and digital channels. The focus is now on growing core deposit accounts, which are typically less expensive. The bank is also enhancing its private wealth business with new technology platforms, aiming for growth in fee income and market share.
Q: What are the expectations for loan growth in the fourth quarter and 2025?
A: Michael Stewart, President, indicated that C&I loan growth is expected to be solid, with strong pipelines for both C&I and investment real estate. However, investment real estate might see some decline due to payoffs. Overall, they anticipate mid-single-digit growth in 2025.
Q: How is the bank managing deposit costs amid potential Fed rate cuts?
A: Michele Kawiecki, CFO, mentioned that they plan to proactively manage deposit costs to drive stability in the net interest margin. The bond sale will support this stability, and they aim to maintain a stable margin despite potential rate cuts.
Q: What is the outlook for M&A activity, and what are the criteria for potential acquisitions?
A: Mark Hardwick, CEO, expressed interest in banks within Indiana, Ohio, and Michigan that are less than 25% of First Merchants' assets. The focus is on banks that face growth and efficiency challenges, with leadership looking towards retirement. The bank is prepared for acquisitions but is also focused on organic growth if M&A opportunities do not materialize.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
