FIRST MERCHANTS CORP Q2 FY2024 earnings call

• Net interest margin increased by six basis points and net interest income rose by $1.5 million. Efficiency ratio was 53.84%, below the key performance indicator of 55%.
• Loan growth totaled 6.1% for the quarter, and four major technology initiatives were substantially completed. Provision expense was $24.5 million due to business performance deterioration.
• Commercial portfolio: C&I had over 13% growth, with Indiana, Ohio, and Michigan regions contributing to year-to-date high single-digit growth. Investment real estate had runoff but new projects in multifamily, industrial, and warehouse; treasury fee income grew over 10%.
• Consumer portfolio: Grew over 10% in dollars, with private banking driving the increase. Deposit balances declined due to seasonality and interest rate management, but consumer deposits grew year-over-year by greater than 4%.

The commercial portfolio had strong C&I growth over 13%, with C&I comprising 50% of the total loan portfolio and two-thirds of the commercial. The consumer portfolio grew over 10% in dollars, with private banking being a key driver. Total loans grew 6.1% for the quarter. Deposits had a decline due to seasonality and interest rate management, but consumer deposits grew year-over-year by greater than 4%.

• Q3 expected to be stronger led by balance sheet and net interest income growth, with provision expense normalizing.
• Assuming a flat rate environment, margin expected to be stable to up.
• Models indicate a 3 basis point decline in margin per 25 basis point Fed cut.

• Provision expense due to business performance deterioration of a financed sale.
• Credit events like charge offs from a transportation company and a manufacturing company.
• Competition impacting business performance and contract renewals.

Q: Daniel Tamayo asked about margin, new loan yields, and funding costs.

A: Michele Kawiecki said new and renewed loan yields were 8.13%, there's opportunity for fixed rate loans to reprice, deposit costs are stable, margin expected stable to up, and 3 basis points decline per 25bp Fed cut under static balance sheet.

Q: Damon DelMonte inquired about expenses, fee income, and provision.

A: Michele stated expenses are sustainable, fee income has a good run rate, and provision is expected to normalize.

Q: Terry McEvoy asked about credit events, transportation portfolio, and technology initiatives.

A: John Martin said transportation credit events were idiosyncratic, Mike Stewart and Mark Hardwick discussed technology initiatives being self-funded.

Q: Nathan Race questioned margin impact of rate cuts, credit non-accruals, repurchases, and M&A.

A: Michele on 3bp per cut under static balance sheet, John on non-accruals from transportation and manufacturing, Mark on repurchases and M&A interest.

Q: Brian Martin asked about M&A footprint, credit classifieds, bond book, and loan pipelines.

A: Mark on M&A focus on IN, OH, MI, John on stable credit classifieds, Michele on bond book target ratio, Michael Stewart on loan pipelines higher than prior years.