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spk00: Thank you for standing by, and welcome to the First Merchants Corporation's second quarter 2024 earnings conference call. Before we begin, management would like to remind you that today's call contains forward-looking statements with respect to the future performance and financial condition of First Merchants Corporation that involve risks and uncertainties. Further information is contained within the press release, which we encourage you to review. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains financial and other quantitative information to be discussed today as well as the reconciliation of GAAP to non-GAAP measures. As a reminder, today's call is being recorded. I will now turn the call. over to Mr. Mark Hardwick, CEO. Mr. Hardwick, you may begin.
spk05: Good morning and welcome to the First Merchant Second Quarter 2024 conference call. Thanks for the introduction and for covering the forward-looking statement on page two. We released our earnings today at approximately 8 a.m. Eastern Time. You can access today's slides by following the link on the third page of our earnings release. On page three of our slides, you will see today's presenters and our bios to include President Mike Stewart, Chief Credit Officer John Martin, and Chief Financial Officer Michelle Kaviesky. On page four, we have a few financial highlights for the quarter to include total assets of $18.3 billion, $12.7 billion of total loans, $14.6 billion of total deposits, and $9.3 billion of assets under advisement. On slide five, net interest margin and net interest income increased during the quarter. Net interest margin increased by six basis points and net interest income increased by $1.5 million. We also had meaningful improvements to non-interest income and non-interest expense that when coupled with net interest margin improvements helped push our efficiency ratio below our key performance indicator of 55%, totaling 53.84% during the quarter. Loan growth totaled 6.1% for the quarter, and we have now substantially completed all four of our major technology initiatives for the year. On a less positive note, our provision expense totaled $24.5 million for the quarter. We previously financed the sale of a business from one long-time owner to his second in command based on a substantial and consistent EBITDA. Due to competition and the renegotiation of material contracts, the business has experienced significant deterioration and its performance, which ultimately resulted in our 10Q subsequent event footnote on May 1st and this quarter's charge-off. Despite the heightened level of provision expense this quarter, our earnings power produced growth of capital and took tangible book value per share. Our capital position allowed for the repurchase of another $20 million of stock and the redemption of $25 million in expensive sub-debt. Earnings per share totaled 68 cents Per share in Q2 and through six months, EPS totaled $1.48 per share. Now, Mike Stewart will discuss our line of business momentum.
spk07: Thank you, Mark, and good morning to all. Our business strategy summarized on slide six remains unchanged. We are a commercially focused organization across all these business segments and across our primary markets of Indiana, Michigan, and Ohio. As we enter 2024, we remain focused on executing our strategic imperatives, specifically organic growth of clients through loans, deposits, and fees, engaging, rewarding, and retaining our teammates, and investing in the digitization of our delivery channels. These remain the focus for the balance of 2024. So let's turn to slide seven. The second quarter continues the choppy trend of loan growth from quarter to quarter. We experienced over 6% growth on an annualized basis during Q2. This followed the flat first quarter and the 8% growth we experienced in the fourth quarter 2023. During this quarter, the commercial portfolio experienced very strong CNI growth, more than 13%. The growth was shared across the regions with Indiana and Ohio joining Michigan and the sponsor teams in driving year-to-date growth to the high single digits. Our commercial focus has always been the primary driver of our balance sheet growth, and the commercial and industrial sector is our largest portfolio. CNI comprises 50% of the total first merchant's loan portfolio and two-thirds of the commercial. Business owners within our markets continue to execute their operating plans with growing working capital, equipment, and acquisition needs. Our commercial bankers continue to support those companies, not only with capital solutions, but also with treasury solutions. Overall, we continue to gain market share through our clients and with prospect conversions. Those two attributes, economic growth and market share growth, are the primary drivers of the continued growth of CNI. The strong CNI growth was muted by the contraction within the investment real estate portfolio. The stabilization of construction projects has continued, and our clients have chosen to either sell their projects, taking advantage of attractive cap rates, or refinance their projects into the permanent market, taking advantage of low long-term interest rates. We have experienced a higher than normal runoff in 2024, primarily with the multifamily asset class. The backlog of projects reaching stabilization this year is simply one of timing. A preponderance of projects that started post the pandemic needed to absorb the higher interest rates while achieving higher rents. All these payoffs are normal course for construction projects with 2024 reflecting higher activity. New project volumes are at healthy levels. With consistent underwriting and strong syndication efforts, our investment real estate team has earned mandates for future projects. Our clients appreciate our consistent approach to underwriting through cycles, and the newly awarded construction projects are primarily within the multifamily, industrial, and warehouse asset classes. This new volume will begin to set the floor on investment real estate footings for the balance of this year with growth expected into 2025. The second bullet point further emphasizes the future growth potential within the commercial portfolio. Both the CNI and IRE pipelines ended the quarter at higher levels than at the end of March and at the end of June of 2023. I wanted to reference our fee income businesses within the commercial line, specifically treasury management fees. Treasury fee income grew more than 10% during the quarter and over the prior year. Several factors are driving that growth. New client conversion and the successful rollout of the new treasury platform, the 2Q that Mark just referenced. So we've got the enhanced fee structures moving through the enhanced product platform set. and we'll complete the phase rollouts of this platform and the periphery products in the third quarter. The loan outlook for the balance of the year remains at a high single-digit rate, with fee income growing at a double-digit level. The consumer portfolio is comprised of residential mortgage, HELOC, installment, and private banking relationships. During the second quarter, the consumer portfolio grew more than 10%. In dollars, that represented a $75 million increase. The private banking portfolio was the primary driver of the increase, joining the consumer mortgage and small business growth as well. As noted, the consumer loan pipeline remained strong heading into the third quarter. A few comments on deposit balances during the quarter. Total deposit decline was a mix of normal seasonality and interest rate management. Historically, the second quarter is the lowest level of deposit balances with a build that continues through the end of the year. I stated last quarter that now that we've had separation from the Silicon Valley event and as our bank's liquidity remains ample, we will focus on margin with interest expense being the key driver. With higher expectations of a Fed rate cut in the back half of 2024, we began to reduce our money market and CD specials while also reducing the tenor of new CDs. The largest balance decline was within the time deposit category. Further, with the shortened maturities, we can continue to reprice the time deposit book in sync with any Fed rate reduction. Noted on the first sub-bullet point, consumer deposits continue to grow on a year-over-year basis, greater than 4%. Total deposit balances from prior year are flat. I also want to note that deposit balance have shown strong growth through the month of July as the seasonal build occurs and organic growth in units continue. So I'm going to turn the call over to Michelle now to review in more detail the composition of our balance sheet and the drivers of our income statement. Michelle?
spk01: Thanks, Mike. Slide 8 covers our second quarter results. Pre-tax, pre-provision earnings totaled 68.5 million. Pre-tax, pre-provision return on assets was 1.49%, and pre-tax, pre-provision return on equity was 12.43%, all of which reflects strong profitability metrics. We continue to grow tangible book value per share, which increased to $25.10 at June 30th. Slide 9 shows the year-to-date results. With pre-tax pre-provision earnings totaling $128.7 million, pre-tax pre-provision return on assets of 1.4% and pre-tax pre-provision return on equity at 11.58% year-to-date. Tangible book value per share increased $1.76 or 7.5% compared to the same period of prior year. Lines one through three at the top of the page show that we continue to grow the balance sheet and remix earning assets, reducing the lower yielding bond portfolio by $138 million since June 30th of last year and growing higher yielding loans by $374 million. Details of our investment portfolio are disclosed on slide 10. The securities yield increased three basis points to 2.61% as lower-yielding securities continue to run off. Expected cash flows from scheduled principal and interest payments and bond maturities in the next 12 months totals $286 million, with a roll-off yield of approximately 2.14%. Slide 11 shows some details on our loan portfolio. The total loan portfolio yield increased by four basis points to 6.72%. We've been able to maintain a high yield on new and renewed loans at 8.13%. That yield was 8.15% last quarter. The bottom right shows that two-thirds of our loan portfolio's variable rate Although some of those loans are priced at or near our new loan yield currently, we still have loans continuing to reprice up, creating good incremental interest income throughout the remainder of the year. The allowance for credit losses is shown on slide 12. This quarter, we recorded net charge-offs of 39.6 million, which was offset by provision for credit losses on loans of 24.5 million, resulting in a reserve at quarter end of 189.5 million. In addition to that, we have 20.3 million of remaining fair value marks on acquired loans. Our coverage ratio declined from 1.64% in prior quarter to 1.5% this quarter, and is 1.66% when including those loan marks. Although the coverage ratio declines some, we are still more than adequately reserved as our allowance remains well above peer levels. Slide 13 shows details of our deposit portfolio. We continue to have a diversified core deposit franchise with a low uninsured deposit percentage. Notably this quarter, our yield on interest-bearing deposits was flat compared to prior quarter at 3.16%, and the cost of total deposits only increased two basis points to 2.66% this quarter, reflecting the pricing actions we took in the last six months that Mike Stewart mentioned earlier. Additionally, non-interest-bearing deposit balances and deposit mix were stable quarter over quarter. Although we did leverage some wholesale borrowing, we paid down another $25 million of high-cost subdebt at the end of April, which helped reduce the overall funding cost of the company. On slide 14, net interest income on a fully tax-equivalent basis of $134.4 million is an increase of $1.5 million from prior quarter, which was the result of growth in interest income and a decline in interest expense. Yield on average earning assets on line four increased four basis points. Funding costs on line five declined two basis points, resulting in the expansion of stated net interest margin of six basis points. Next, slide 15 shows the details of non-interest income. Overall, non-interest income increased by 4.7 million on a linked quarter basis. Customer-related fees increased $3.3 million, reflecting higher gains on sales of mortgage loans and private wealth fees. The first quarter of each year is always seasonally low for our mortgage business, and the production rebounded in the second quarter as expected. We believe the second quarter mortgage production levels will continue throughout the coming quarters. Included in non-interest income was a $1.4 million increase in the valuation of CRA investments that were recorded in other income. Even when excluding that valuation adjustment, our core non-interest income results were slightly above the guidance we provided last quarter. Moving to slide 16, non-interest expense for the quarter totaled $91.4 million, beating expectations and improving operating leverage. Workforce costs declined 6.1 million, which was driven by savings generated from the voluntary early retirement program that we announced in the fourth quarter of last year, as well as lower incentive accruals. FDIC assessments were also lower this quarter due to the inclusion of an increase to the FDIC special assessment accrual booked in the prior quarter. Slide 16 shows our capital ratios. We continue to have a strong capital position with common equity tier one at 11.02%, which included a dividend increase to shareholders declared in the second quarter and a dividend payout ratio of over 40%. The slight decline in each of our ratios since year end reflects the $65 million redemption of sub debt and 50 million of stock buyback since the beginning of the year. These capital actions demonstrate prudent capital management and provide a good return for shareholders. That concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin, to discuss asset quality.
spk06: Thanks, Michelle, and good morning. My remarks start on slide 18. I'll begin by highlighting loan portfolio growth, touch on the updated insight slide, review asset quality and the non-performing asset roll forward before turning the call back over to Mark. Turning to slide 18, we had a strong quarter of growth in commercial and industrial loans, including owner-occupied CRE on lines 1, 2, and 3, that more than offset the decline in construction and CRE non-owner-occupied or investment real estate on lines 4 and 5. Our CNI growth was aided by new loan requests as well as higher line utilization. Our investment real estate strategy, as mentioned on prior calls, is one where we provide construction finance through stabilization with mini-firm financing options. We continue to remain well below the regulatory CRE concentration levels and remain active in new originations. This quarter, we saw Greater movement out of the construction on line four and into our portfolio on line five. Roughly 75% of the decline in the construction and non-owner occupied categories resulted from refinances into bridge or agency products. And I think this speaks favorably to continued market demand for our underwriting. Then moving to slide 19. The loan portfolio insight slide is intended to provide transparency into the portfolio. As mentioned on prior calls, the CNI classification includes sponsor finance as well as owner-occupied CRE associated with the business. Our CNI portfolio has a 20% concentration in manufacturing. Our current line utilization increased for the quarter from 42% to 45.3%, or roughly $236 million in new balances, with line commitments higher by roughly $200 million. We participate in roughly $830 million of shared national credits across various industries. These are generally relationships where we have access to management and revenue opportunities that go beyond the credit exposure. In the sponsor finance portfolio, I've highlighted key credit portfolio metrics. There are 84 platform companies with 52 active sponsors and an assortment of industries. 65% have a fixed charge coverage ratio of greater than 1.5 times based on Q1 borrower information. This portfolio generally consists of single bank deals for platform companies, private equity firms, as opposed to large, widely syndicated leverage loans for money center bank trading desks. We review the individual relationships quarterly for changes in borrower condition, including leverage and cash flow. These are merely C&I customers owned by private equity firms. Turning to slide 20, where we break out the investment or non owner occupied commercial real estate portfolio. Our office exposure is detail on the bottom half of the slide and represents 1.9% of total loans down slightly from 2% last quarter with the highest concentration outside of general office in medical office space. The wheel chart on the bottom right details office portfolio maturities. Loans maturing in less than a year represent 16.3% of the portfolio or $39.6 million. The office portfolio is well diversified by tenant type and geographic mix. We continue to periodically review our larger office borrowers and view the exposure as reasonably mitigated through a combination of LTV, guarantees, tenant mix, and other considerations. On slide 21 are the quarter's asset quality trends and position. Non-accrual loans, other real estate owned, and 90 days past due loans all decreased for the quarter, down in total from $70.2 million to $68.4 million. This represented a decline for the quarter, resulting from significant charge-offs. Net charge-offs were $39.9 million in the quarter, primarily resulting from two relationships. The first was related to last quarter's subsequently disclosed event. The loan was a part of a larger two-bank club deal where First Merchants, as lead bank, financed the management buyout of the business. We had been monitoring the borrower's progress over the last several quarters to renegotiate and renew various freight hauling contracts with the U.S. government. As a result of unexpectedly lower contract renewal rates and contract cancellations, we were informed by the borrower after last quarter's call that they plan to discontinue repayment of principal and interest. This event triggered the disclosure and our analysis of loss. While the loan had some collateral, underwriting was based on historically consistent cash flow and the enterprise value of the organization. With the sudden change in revenue resulting from the cancellation and renegotiation of the contracts, the company's value was negatively impacted, resulting in the $27.5 million charge. The second borrower, a CNI home decor manufacturing company, had been struggling since the pandemic and notified of its plans to cease operations. We had previously reserved for the potential loss and took the $8.6 million charge off this quarter when notified of the borrower situation. Then moving to slide 22, where I've again rolled forward the migration of the non-performing loans, charge-offs, ORE, and 90 days past due. For the quarter, we added non-accrual loans on line two of $51.6 million, driven by the transportation manufacturing company I just mentioned. There was a reduction from payoffs or changes in accrual status of $11.2 million on line three, and a reduction from gross charge-offs of $40.9 million. Then dropping down to line 11, 90-day delinquent loans decreased by $1.1 million, which resulted in NPAs plus 90-day delinquent loans ending at $68.4 million. So to summarize, C&I loan growth was good for the quarter. Commercial real estate is feeling some effect from higher interest rates, although our underwriting continues to positively cycle construction loans to the portfolio and the permanent market. And finally, we experienced idiosyncratic net charge-offs in the quarter that don't appear to be part of a larger trend. I appreciate your attention, and I'll turn the call back over to Mark Hardwick.
spk05: Thanks, John. Turning to slide 23, on the top right, you can see our 10-year Earnings per share compound annual growth rate totals 10.2%. And on the bottom left, our tangible book value per share, excluding accumulated other comprehensive loss, now totals $28.71. Slide 24 represents our total asset CAGR of 12.3% during the last 10 years and highlights meaningful acquisitions that have materially added to our demographic footprint that fuel our growth. There are no edits to slide 25 as we continue to live both our vision and our strategic imperatives. We're looking forward to a stronger third quarter led by balance sheet and net interest income growth and normalized levels of provision expense. Thank you for your attention and your investment in First Merchants, and now we're happy to take questions.
spk00: As a reminder, to ask a question, please press star 11 on your telephone. and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from the line of Daniel Tomeo from Raymond James.
spk02: Thank you. Good afternoon, guys. Maybe actually I'll leave the credit questions for others, but... Just starting on the margin, Michelle, 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, and then follow on that one and just Curious, like the fixed rate book versus new yields, what may be the potential opportunity for loan yields as a whole to increase over time? Thanks.
spk01: Yeah, it's good to hear from you, Danny. So for our loan yields, you know, our new and renewed loan yields this quarter was 813. So we've kind of reached some stabilization at a really nice high yielding place, I think. We do have, I think, some opportunity for the book to reprice up just a bit. We've got probably about $450 million of fixed-rate loans yet that would reprice in 2024, and they're averaging somewhere in between 5% and 6%. And so I still think there's some opportunity to gain some interest income on that repricing and potentially push the overall portfolio yield up a bit.
spk02: Okay, great. And then I guess on the other side of the balance sheet, so I'm curious for any opportunity to reduce borrowings further and then your deposit costs basically stabilized in the quarter, which is great. You talked through the reductions that you had in the money market book, but just curious kind of how you're thinking about funding costs going forward and I guess overall, then, if you have thoughts on where the margin can move, I guess independent of rate cuts and then what the impact from rate cuts would be.
spk01: Yeah, we were really pleased with the results on deposit costs this quarter, even seeing deposit costs go down, which is just, like you said, the result of some of the interest rate management that we've been doing with our deposit customers. I feel like that work that we've done has kind of been done. I feel like, you know, now it's just a matter of looking at what competition does from here until the end of the year. And so I think our deposit costs should be stable. Looking at margin through the end of the year, assuming a flat rate environment, I would expect that we would still see some margin expansion. It'll be stable at the minimum, but perhaps some expansion as well. We do have CDs that are repricing, but the rate at which they're repricing is actually either similar or even just a slightly bit higher than our promos today. And so, you know, it's not that we really have a headwind there or a tailwind there, but we certainly don't have a headwind on that book. And so that's good news. And so I think margin, assuming a flat rate environment, ought to be stable to up.
spk02: Great. And just remind us, if you will, on how you think rate cuts would impact that forecast.
spk01: Yeah. So our models tell us that with each 25 basis point rate cut, we would have a decline of about three basis points in margin. Okay.
spk02: All right. Terrific. Thanks for all the color, Michelle.
spk00: Welcome. Thank you. One moment for our next question. Our next question comes from the line of Damon Delmont from KBW.
spk08: Hey, good morning, everyone. I hope you're all doing well, and thanks for taking my questions. I just wanted to start off on expenses, Michelle. You noted the decline in the salary benefits line item reflected the impact of some voluntary retirement and other items. Do you think that this kind of low $52 million range is possible? sustainable, or would you expect some normalization there and see that creep back up to maybe the $55 million range?
spk01: No, I would expect the expenses to be somewhere between where we landed this quarter to maybe up 2%, somewhere in that range. And we had great expense discipline this quarter, and I think we'll continue to do so through the remainder of the year.
spk08: Okay, and that's for total expenses, not just the salary and benefits line? Correct. Okay, great. And then with regards to fee income, you know, if you back out the CRA adjustment that you had or realized gain there, you know, do you think you can kind of keep the fee income in the low, you know, $31 million to $32 million range kind of in the back half of the year?
spk01: Yeah, I do think that's a good run rate.
spk08: Okay. Great. And then just lastly, just more on the provision versus the overall credit. you know, do you feel comfortable with the reserve? Obviously, 150 is pretty healthy. You know, do you think that you're kind of going to see some natural drift there over the back half of the year and that the provisioning would kind of go back to what we've seen, you know, the last couple quarters, this quarter?
spk01: Yeah, I think we'll definitely be providing for loan growth to make sure that we've got good coverage with any growth that we have. And then, We'll just have to see how the forecasts impact our model. But we're expecting provision to normalize this quarter, obviously, was very unique.
spk08: Got it.
spk07: OK, that's all that I had. Thank you.
spk00: Thanks, Damon. Thank you. Our next question comes from the line of Terry McVoy from Stevens, Inc.
spk04: Hi, good morning, everyone. John, I know you used the word idiosyncratic to talk about the credit events last quarter, though transportation is your third largest non-accrual and was behind the charge off. So could you talk about a recent review of the portfolio? I think it's about 4% of C&I loans or transportation warehouse and what your thoughts are going forward in terms of the underlying risk.
spk06: Yeah, I pulled out the transportation concentration. As you point out, it's 4%. You know, the transportation portfolio in general, I don't have the specific criticized or classifieds within that book. But what I would say is that absent this one rather large credit, most of our lending within that space is secured, non-transactional, leveraged, or buyout finance. And The remaining balances in that book are generally trailers and PTOs related to trucking operations. You know, the general freight hauling industry in general, you know, it has experienced some stress with lower rates over the more recent past. But this particular and why I say it's idiosyncratic is because of the unique nature of this hauler in Europe. In particular, this is a freight hauler that had contracts with the government versus the general freight hauling industry. The customer was, I think, as it was proposed, had the renewal of the contracts was somewhat, well, it was definitely unexpected from the borrower's perspective. So this being idiosyncratic compared to what, you know, my evaluation would be of the general transportation segment within our portfolio.
spk04: Thanks. And then, Mike, just slide 18, just so I'm clear, line four and five, the decline and construction land development and non-owner occupied CRE. That's more of a reflection of kind of market conditions versus a strategic decision to reduce those portfolios. And did you say you'd expect some growth to balances to move higher in the back half of 2024?
spk07: You're correct. There was no strategic change in how we're managing an investment real estate book. It was just all the way that the normal process went for us and, where the concentrations were with, or the maturities were inside that portfolio. Our IRE activity, quite frankly, for the first six months of the year has been very, very strong with good sound projects in those spaces. And you're just not seeing that come through footings yet. And that's what I was saying. I think that we were probably at putting that floor in on IRE footings that will then put in growth in the next year in that sector. But it's not a strategic change, consistent underwriting. Our Key clients continue to come to us with their projects and capitalize them well, and we like the underwriting.
spk04: Maybe one last question for Mark. I don't want to overlook the last major technology initiative of the year was completed last quarter. Could you maybe talk about how much of that was self-funded through a reduction in real estate and employees, et cetera? And I guess strategically, how did that better position first merchants in the marketplace to grow organically and service customers?
spk05: Yeah, the last item is the conversion or has been the conversion of our online and mobile platform for commercial customers. And so it's an area where we're really excited to finally have more state-of-the-art technology. We were using FIS and had continuously kind of waited on an upgrade of their core system in that space and ultimately kind of gave up and decided to go hire a third party vendor Q2 to help us with that work. And so, you know, as much of a commercial bank as we are, we had a bit of an inferior treasury management product. And so, as Mike said in his remarks, which I thought was really well put, We've enhanced our fees, increased our fees, and we've enhanced the product and really feel like we have an opportunity to win in that space at a level that we've never really experienced, which is exciting for us. And then the way it was funded really was just from the elimination of the cost we were spending with FIS. There was virtually no difference in the expense from using our core provider and kind of the old bank-in-the-box mindset of the core platform, online and mobile platform with FIS and moving to Q2, where we did have some expenses just around the conversion itself, which we've called out as one time last quarter and had a modest amount of it in this quarter, didn't think it was worth really covering. But really excited to be on the back end of four major technology initiatives. I think Mike has a little more to add as well. That's a good question. I'm glad you asked.
spk07: Mark talked about the commercial side, which we talked about. On the consumer side, the platform investments and bringing the technology into a new place has enabled us to continue to, as we monitor where our clients are utilizing our physical infrastructures, our banking centers, you know, we do consolidate banking center locations, and this technology and these enhancements continue to allow us to open new accounts and serve their needs and we continue to analyze that infrastructure. And then on the private wealth side, that new technology platform built some synergies in, and there were some people eliminations along the way. So to Mark's point, they were self-funded on a technology point of view. Some of them turned into true revenue generation, and some of them also had expense reductions associated with them, and we're on the back half of that, or the back side of that.
spk04: Perfect. Thanks for taking my questions. Thank you, Jerry.
spk00: Thank you. Our next question comes from the line of Nathan Race from Piper Sandler.
spk03: Yeah. Hi, everyone. Thanks for taking the questions. Just want to clarify on Michelle's comments on the margin following each Fed cut. I think you said three basis points, but we're just curious if that's under a static scenario, or does that kind of contemplate some improvement and mix just as you redeploy securities portfolio cash flow into loan growth?
spk01: Yeah, that's actually assuming a static balance sheet.
spk03: Okay, great. So theoretically, the pressure should be less. Isn't that three basis points for what it sounds like?
spk01: Yeah, that would be what we would expect.
spk05: Yeah, internally we've talked about, you know, how that remix could happen or also just what does competition do? You know, we've been living in an inverted yield curve environment for a couple of years, and I'd like to think if we have a rate reduction that across the industry we're making deposit rate reductions.
spk03: Gotcha. And, John, can you just clarify just in terms of the $51.6 million in new amount accruals in the quarter? It sounds like the bulk of that came from the transportation C&I loan that we talked about. Is there anything else worth calling out that drove that increase?
spk06: No, the $51.6, yeah, it was a combination of that and the other manufacturer that I mentioned that those are the two biggest drivers of that number.
spk03: Okay. Got it. And then just maybe lastly, just thinking about the opportunity or appetite for additional repurchases in the back half of the year. Obviously, activity stepped up nicely here in the second quarter, and you guys are still sitting with really strong capital levels and have a nice organic growth runway in front of you, but just curious on how you guys are thinking about that appetite going forward.
spk05: Yeah, we were active early in this quarter. I think we'll probably wait to see how the market stabilizes. We were active late first quarter, early second quarter, and I guess we'll just kind of see how the quarter plays out. But we don't intend to be – we aren't active right now, I guess, is maybe the best way to put it.
spk03: Okay, got it. And then actually just one last one. You know, obviously there's been some increased chatter on the M&A front recently. There was a deal announced in Michigan earlier today, and so just curious kind of what the appetite and interest is in acquisitions going forward.
spk05: Yeah, I looked at that this morning. That's a meaningful franchise now when you put those two together in Michigan. And I would just say conversations are up. There is clearly a little more interest in terms of seller appetite. And I think given the stock prices are up slightly, the view that rates may be coming down or we're not going to continue to see increases has caused a little more, has created a few more conversations, but You know, we have a handful of banks that we're very interested in. When I say handful, maybe three or four. And, you know, timing is everything. We'll see if anything happens with those banks in the near term. Otherwise, we're focused on just running the company and leveraging organic growth, continuing to be efficient and optimizing our capital.
spk03: Okay, that sounds great. I appreciate all the color.
spk00: Thanks, Nate.
spk03: Thanks, Nate.
spk00: Thank you. Our next question comes from the line of Brian Martin from Janney.
spk09: Hey, good morning, everyone. That was well said, Mark. Just one last one on the M&A. Just if you think about where first merchants would consider, you know, opportunities kind of in footprint, out of footprint, just high level, you know, not saying anything's imminent by that front, but just understanding where, what geographies are important to you today.
spk05: Yeah, we're very focused on Indiana, Ohio, and Michigan. Those are the markets that have, where we're actively communicating with, with, you know, potential partners and, I think that kind of is the extent of it, to be honest. We've always had some interest in Kentucky. They're just the profile, the number of institutions, especially kind of in the Louisville market, are incredibly limited. So the majority of our communication and prioritization are in the states of Indiana, Ohio, and Michigan.
spk09: Gotcha. And is it more, I mean, preference-wise, Mark, more entering to a new market or just more scale or either one doesn't matter?
spk05: I mean, they both have – it depends. If we could create scale and really have a meaningful expense or cost takeout, it's interesting to us. And if there were a market where we could help accelerate our future growth rate, that's important as well. So I guess just trying to balance the two and –
spk09: much as anything make sure that it's the that it's the right market with the right culture and that we believe at the end of the day we can create real shareholder value yeah and right i guess timing is everything like you said so it could be what you want versus what's available so gotcha and then maybe just one for john on on credit john was there anything in terms i know you gave the classified number but it didn't sound like anything much but in terms of special mention any trends you know upward or downward are pretty stable in the quarter
spk06: You know, it's actually been pretty stable. And from a balance standpoint, from a commitment standpoint, it was down a little bit. You know, it feels like it is pretty stable at this point, absent, obviously, for us, those two names.
spk09: Yeah. Okay. And then just the last one or two is maybe for Michelle. Just on Michelle, the bond book, it sounds like that, you know, as far as where that bond book lands, as far as kind of using the cash flows to fund loan growth, where... Where do you expect to settle in on moving that portfolio down in size? Where do you want to see that trend to?
spk01: Well, typically our historical investments to assets ratio has been somewhere between 15% to 18%. And so for us, I think that still would be a more appropriate landing spot in terms of having a go-forward earning asset mix. And so we'll continue to let it drift forward. You know, last year we looked for opportunities to sell bonds. We'll continue to do that as well.
spk09: Gotcha. Okay. And you did say that, I mean, I was going to ask as well on that three basis points. I guess when you get to the outcuts, you know, after the first potential couple cuts, it seems like you've got more ability to, you know, work on that deposit beta and maybe lessen that up a little bit. That's kind of the way to view it. There are successive cuts. The later ones are less impactful in terms of the three basis points.
spk01: Yeah, well, I think in our deposit base, we do have about $2.5 billion of deposits that are indexed. And so certainly there's opportunity to reduce some cost with those first couple of cuts.
spk09: Yeah, I got you. Okay. And then the last one I have is just maybe, Mike, if you already gave this, I can go back and re-listen. But see, I joined late. So the loan pipelines, where they were at kind of coming out of the quarter, if you covered it already, I'll go back and listen. Or if you didn't, if you could cover that, that'd be great.
spk07: No, it's on that slide too, but I don't mind emphasizing it again, is that I noted that on the commercial pipeline, both the CNI and the IRE pipelines ended June at higher levels than March and over prior years. So just good momentum. And I feel like the maturity of our Michigan market in particular. And then on the consumer side, which includes our mortgage, our consumer mortgage portfolio, that too ended the quarter at a high watermark for us. And most of that is the seasonal build and the good trends inside consumer mortgage.
spk09: Gotcha. Okay. That's perfect. Thank you for covering that again. I appreciate it. And thanks for taking the question. Yeah.
spk00: Thanks, Brian. Thank you. This concludes today's conference. Thank you for your participation and have a great day. You may now disconnect.
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