FIRST MERCHANTS CORP Q3 FY2024 earnings call

• Financial Highlights: Q3 EPS was $0.84, adjusted to $0.95 after a $9.1 million securities loss. Anticipated $20-25 million gain from Chicagoland branch sale in Q4. Tangible common equity ratio was 8.76%, adjusted net interest margin improved 7 basis points.
• Technology Initiatives: Completed four major technology initiatives, including upgraded digital channels for consumer, commercial, and private wealth segments to enhance client experiences.
• Branch Sale: Pending sale of five Illinois branches to close in December, with regulatory approval. These branches are being sold to reprioritize core markets.
• Securities Portfolio: Restructured a small portion of the securities portfolio, expecting positive impact on portfolio yield from scheduled principal, interest payments, and bond maturities.
• Deposit Management: Managed deposit costs, with total deposits growing 2.3% annualized, focusing on core deposit accounts to reduce costs.

Total assets were $18.3 billion, total loans $12.7 billion, total deposits $14.4 billion, and assets under advisement $5.6 billion. The commercial segment: C&I portfolio grew 1% in Q3, comprising 50% of total loan portfolio and 2/3 of commercial portfolio. The consumer portfolio grew over 1.5% in Q3, with private banking and HELOC as primary drivers. Revenue contribution: C&I is a significant portion of the loan portfolio, and consumer segments contribute through various loan types.

• 2025 Outlook: Well positioned for organic growth, with expectations of growth in C&I and consumer portfolios. Proactive in managing deposit costs to maintain margin stability.
• Branch Sale Impact: Anticipated $20-25 million gain from Chicagoland branch sale in Q4, to be used for balance sheet restructuring to position for higher earnings.
• Technology and Expansion: Reprioritizing core markets and customer acquisition strategies using improved digital tools to grow core deposit accounts.

• Interest Rate Risks: Variable rate loan portfolio repricing as the Fed cuts rates could impact net interest margin.
• Commercial Real Estate Risks: Continued decline in construction and commercial real estate (CRE) due to elevated interest rates, affecting the investment real estate portfolio.
• Regulatory Risks: Compliance with CRE concentration levels and other regulatory requirements, as well as potential impacts from regulatory changes.

Q: Terry McEvoy asks about technology initiatives and metrics to track growth.

A: Mark Hardwick and Michael Stewart discuss technology initiatives like Terafina (in-branch account opening platform) and upgraded digital tools, focusing on growing core deposit accounts as a key metric for tracking progression.

Q: Nathan Race asks about loan growth and margin outlook.

A: Michael Stewart and Michele Kawiecki discuss C&I and investment real estate pipelines showing strength, and margin management considering Fed rate cuts and proactive deposit cost management.

Q: Damon DelMonte asks about expenses and fee income.

A: Michele Kawiecki and Mark Hardwick discuss expense planning for the fourth quarter and fee income expectations, with an emphasis on maintaining expense levels and driving results in 2025.

Q: Daniel Tamayo asks about capital deployment.

A: Mark Hardwick and Michele Kawiecki talk about capital optimization, including potential buybacks and M&A activity if suitable opportunities arise.

Q: Brendan Nosal asks about M&A.

A: Mark Hardwick discusses interest in acquiring banks in specific geographies (Indiana, Iowa, Michigan) with less than 25% of First Merchants' assets, focusing on financial metrics and post-consolidation efficiency.

Q: Brian Martin asks about M&A and stock price.

A: Mark Hardwick talks about M&A readiness, noting the importance of a willing seller and anticipating more M&A activity post-Fed rate reductions, and the impact of stock price on potential buybacks and acquisitions