FIRST MERCHANTS CORP Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Completed voluntary early retirement program, upgraded in-branch account origination platform to Terafina, upgraded online and mobile platforms for consumer and commercial clients, upgraded private wealth platform to SS&C InnoTrust and Black Diamond, sold five non-core Illinois branches, and upgraded wire platform to a real-time system.
• Achieved loan growth of 6% in Q4, net interest margin improved by five basis points Q4 over Q3, PP growth 4% linked basis, efficiency ratio sub 54%, tangible common equity ratio 8.81%, tangible book value per share $26.78 (up $5.33 per share or 25% over two years).
• Business strategy remains commercially focused in Indiana, Michigan, and Ohio, focusing on organic loan, deposit, fee income growth, and implementing new technology platforms to enhance client experience.

Segment Performance

• Commercial Segment: The $9.7 billion Commercial segment was a primary driver of growth. It increased $148 million during the fourth quarter, with the C&I portfolio growing $66 million (3%) and the Investment Real Estate portfolio growing over $80 million. Full-year growth for the Commercial segment was over $250 million (3%).
• Consumer Segment: Loan growth year-to-date reached $125 million, with the on-balance sheet residential portfolio driving over 50% of that increase ($65 million).
• Deposits: Total deposits grew at a 4.4% annualized rate in Q4. The Commercial segment grew deposits by $50 million, with non-public fund balances (operating accounts) growing $27 million. Consumer deposits had mix changes, with core deposit balances flat in Q4 but growing 2% in 2024, while maturity deposits (CDs) declined over $430 million in 2024.

Guidance

• Loan growth expected to be consistent with 2025 expectations, with mid to high-single-digit growth possible.
• Expect margin growth in 2025, driven by strong loan yields, fixed rate loan repricing, and managed deposit costs.
• Non-interest income expected to grow mid to high-single digits in 2025, driven by wealth management, mortgage fees, and other fee income components.
• Tangible book value per share expected to continue growth, with dividends and share buybacks returning value to shareholders.

Risks

• Credit Risks: Potential non-performing loans, though management noted some transitory increases in non-accrual loans, but expected charge-offs to remain in the 15-20 basis point range.
• Market Risks: Interest rate fluctuations impacting securities and loan portfolios.
• Operational Risks: Technology platform transitions and potential one-time expenses.

Question and Answer

• Q: Brendan Nosal asked about loan book repricing and yield pickup, and investment spend/expense cost base.

A: Michele Kawiecki discussed fixed rate securities repricing and loan book repricing, Mark Hardwick and Michele Kawiecki talked about minimal expense growth in 2025.

• Q: Terry McEvoy asked about C&I momentum, commercial real estate capacity.

A: Michael Stewart discussed C&I growth in manufacturing and Michigan market, and plans for commercial real estate expansion.

• Q: Damon DelMonte asked about margin outlook, loan growth, capital management.

A: Michele Kawiecki and Michael Stewart discussed margin growth, loan growth expectations, and capital management focusing on organic growth and M&A in core markets.

• Q: Nathan Race asked about fee income growth, cash flow, charge-offs.

A: Michele Kawiecki and John Martin discussed fee income growth expectations, cash flow projections, and charge-off expectations in the 15-20 basis point range.

• Q: Daniel Tamayo asked about securities restructuring, margin benefit, ROA.

A: Michele Kawiecki discussed securities restructuring and margin benefit, Mark Hardwick talked about ROA targets and top quartile performance.