First Merchants Corporation

Thank you for standing by, and welcome to the First Merchants Corporation first quarter 2025 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 risk 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 gap measures. The press release available on the website contains financial and other quantitative information to be discussed today, as well as a reconciliation of gap to non-gap measures. As a reminder, today's call is being recorded. I will now turn the conference over to Mr. Mark Hardwick, CEO. Mr. Hardwick, you may begin.

Good morning and welcome to First Merchant's first quarter 2025 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, including President Mike Stewart, Chief Credit Officer John Martin, and Chief Financial Officer Michelle Kaviaski. Slide four has a map with all 111 banking centers, some Q1 financial highlights, and a number of the awards we've received recently. The first quarter was a strong start for the year as we delivered 4.8% annualized loan growth and a 23 basis point increase in our return on assets. First quarter total assets were $18.4 billion with $13 billion in total loans 14.5 billion in total deposits, and 5.8 billion of assets under advisement. First quarter net income, which you can see on slide five, was 54.9 million, an increase of 7.4 million, or 15.6% from one year ago. Gap earnings per share increased to 94 cents from 80 cents a year ago, or a 17.5% increase due to balance sheet growth, margin improvement, fee income growth, expense reductions, and share repurchase activity. Core earnings per share grew by 10.6% from one year ago after adjusting for last year's technology integration expenses, which temporarily elevated those levels. While we are very pleased with the progress we've made Increasing earnings and profitability over last year, the volatility in the market has clearly had an impact on our share price. While it's frustrating, it's not something that we can directly control. But we can take advantage of it by buying back our shares. Our board recently approved a new $100 million share repurchase program, and we've already repurchased $10 million in shares. We also redeemed through additional capital activities another $30 million of sub-debt. Our tangible common equity of 8.9% is above our target levels and provides optimal capital flexibility given the minimal reliance that we have on hybrid equities that are always available to us if we would happen to need them. Now, Mike Stewart will discuss our line of business momentum.

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 our primary markets of Indiana, Michigan, and Ohio. So let's turn to slide seven. I like this slide. As Mark stated earlier, loans grew nearly $155 million or at a 4.8% annualized rate, which follows the strong 6% loan growth we saw last quarter. The $9.8 billion commercial segment was the primary driver of the growth increase in $169 million or a 7% annualized growth rate. Within the commercial segment, CNI grew by $248 million, which offset the $96 million decline in our investment real estate portfolio. We saw the CNI loan growth in all of our markets as the M&A and CapEx pipelines we discussed last quarter were funded and closed. Our commercial bankers continue to win new client relationships across our footprints, and revolver usage increased during the quarter due to reduction in client cash balances, which we'll talk about on the next page, and inflationary effects on inventory and receivables, which might be early impacts of tariffs. Another pleasing bullet point on this page is the quarter ending pipeline. which is consistent from prior quarter end and gives us optimism that we will be able to maintain our loan growth. A few comments on the consumer portfolio. We have a very strong team of mortgage bankers that are driving the growth of both non-interest income and the $24 million of balance sheet growth referenced on this slide. We utilize our balance sheet for variable rate, short-term, fixed rates, or construction loans. on a quarter over prior year quarter basis, our mortgage unit volume is up over 15% and our dollar volume is up over 30%. And as you can see on the bottom of the page, our mortgage pipeline remains strong. So let's turn to slide eight, talk about deposits. The story of this slide continues to be the mix of our product set and our goal of managing deposit costs. Michelle will be reviewing our net interest margin, but this slide represents the great work our teams have done in managing and building core deposit relationships while reducing deposit costs on the public funds and maturity deposit categories in particular. For the quarter, total deposits declined 1.6% on an annualized basis. The commercial deposit balance decline is almost solely the result of the activities within the public funds portfolio, or $208 million of the $228 million total decline. Public funds are an important segment, yet one of our highest cost depository categories. What I have labeled core relationship balances decline by $20 million, which is primarily attributed to companies managing their working capital levels. We also continued our pricing discipline within our consumer segment, specifically maturity deposits. Consumer deposit balance declined during the quarter by $9 million, but core consumer relationship balances grew by $188 million, but was offset by the decline of maturity deposits of $197 million. The mix of deposit core categories has been the focus of our teams for the past year, It has been a focus on primary focused accounts and deposit costs. And overall, I am pleased with the active management our teams are having with their clients to manage mix and deposit costs. So let me turn the call over to Michelle to review in more detail the composition of our balance sheet and the drivers of our income statement. Michelle.

Thanks, Mike, and good morning, everyone. Slide 9 covers our first quarter performance. Looking at the summary income statement, in the middle of the page, you will see total revenues were down slightly from Q4 after normalizing for the one-time events that occurred in Q4. I would remind you that we recorded a gain on the sale of our Illinois branches, offset by a loss on securities repositioning, which resulted in a one-time $8.4 million increase to non-interest income on line 13 in the fourth quarter. Total revenues in Q1 were quite strong despite being impacted by day count and seasonality. Solid expense management during the quarter also added to the performance with an overall result of pre-tax, pre-provision earnings of 67.4 million. Those earnings fueled a 56 cent increase in tangible book value over prior quarter after returning value to shareholders through dividend payments and share repurchases, bringing tangible book value per share up to $27.34, which is an increase of 9.1% when compared to the same quarter last year. Slide 10 shows details of our investment portfolio. Expecting cash flows from scheduled principal and interest payments and bond maturities through the remainder of 2025 total $214 million with a roll-off yield of approximately 2.16%. Slide 11 shows some details of our loan portfolio. The total loan portfolio yield decreased by 34 basis points to 6.21% as our variable rate portfolio repriced down due to lower short-term rates. New and renewed loans were priced with a 6.96% yield and continue to positively impact the overall portfolio yield. The allowance for credit losses is shown on slide 12. This quarter, we had net charge-offs of $4.9 million and recorded $4.2 million of provision. The reserve at quarter end was $192 million and the coverage ratio was 1.47%. In addition to the ACL, we have 16.3 million of remaining fair value marks on acquired loans. When including those marks, our coverage ratio is 1.6%. Overall, we remain well reserved as our allowance is well above peer levels. Slide 13 shows details of our deposit portfolio. The total cost of deposits declined meaningfully by 20 basis points to 2.23% this quarter. Our interest-bearing deposit costs declined 25 basis points, reflecting a downward cumulative interest-bearing deposit beta of 56% and good deposit pricing discipline. On slide 14, net interest income on a fully tax-equivalent basis of $136.4 million decreased 3.8 million from prior quarter. Net interest margin on line six totaled 3.22% and declined six basis points this quarter. When normalizing, for the lower day count in the quarter, margin was stable on a linked quarter basis. Next, slide 15 shows the details of non-interest income. Non-interest income totaled $30 million with customer-related fees of $27.1 million. Customer-related fees declined from last quarter, reflecting lower derivative hedge fees, hard payment fees, and gains on sales of mortgage loans. The first quarter is always seasonally lower for our mortgage business, but we still had a strong start to the year, given gains this quarter were over 50% higher than the first quarter of last year. Moving to slide 16, non-interest expense for the quarter totaled 92.9 million, a decrease of 3.4 million from prior quarter. We completed a voluntary early retirement program in the first quarter of 2024, and as you can see on the bar chart on the bottom right, salaries and benefits have been lower in all subsequent quarters. We continue to demonstrate effective expense discipline to maintain our efficiency ratio, which was 54.54% for the quarter. Slide 17 shows our capital ratios. We continued to grow capital this quarter, with common equity Tier 1 climbing to 11.5%. These strong capital ratios, along with our ample loan loss reserves, provide immense balance sheet strength against any economic uncertainty we may face this year, and also provides great strategic flexibility. That concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin, to discuss asset quality.

Thanks, Michelle. My remarks start on slide 18. We had strong mid-single-digit commercial loan growth led by commercial industrial loans shown on line 4. Total investment real estate, or CRE, Non-owner occupied on Line 7 includes both stabilized or stabilizing properties and construction, land, and land development. We originate construction loans that meet secondary market underwriting standards, allowing properties to stabilize post-construction. Our expectation is that borrowers will either transition to the secondary market or proceed with a property sale. We continue to have ample room for new originations given our concentration levels and are well below any regulatory threshold of concern. On slides 19 and 20, we provide more details on the loan portfolio. On slide 19, the CNI classification includes sponsor financed as well as owner occupied CRE. I would highlight that our current line utilization increased again for the quarter from 46% to 49%, contributing to roughly $71 million in growth in CNI loans. We saw some firms purchasing additional inventory in anticipation of the tariffs, while others were unfazed by the tariffs and continued to make inventory purchases at planned or increased levels. In the sponsor finance portfolio, we have key credit metrics for the 90 platform companies. We underwrite to higher origination underwriting standards as compared to regular CNI loans and track the portfolio quarterly. This portfolio almost exclusively consists of single bank deals for platform companies or private equity firms. as opposed to large, widely syndicated leverage loans from money center bank trading desks. On slide 20, we break out the investment or non-owner occupied commercial real estate portfolio. Our office loans are detailed on the bottom half of the slide and represent only 1.8% of total loans and potential issues are easily managed. The wheel chart on the bottom right details office portfolio maturities. Loans maturing in less than a year represent 25.2% of the portfolio or roughly $60 million. On slide 21, I highlight this quarter's asset quality trends and position. Non-accrual loans were up $8.1 million with 90 days past due declining to $4.3 million. NPAs and 90-day past due loans represent only 0.7% of total loans. The planned sale of the collateral for the $22 million non-performing multi-family property mentioned last quarter was delayed for several weeks, although the sale is scheduled to occur within the next 30 days without principal loss. Finishing out the slide, classified loans leveled and declined to end the quarter at 2.78% of loans, while net charge-offs were roughly $5 million for the quarter or 15 basis points annualized. Then moving to the asset quality roll forward on slide 22, in column 1Q25, new non-accruals on line two totaled $19.6 million, the largest of which was a $6.8 million CNI loan We had a reduction from payoffs or changes in accrual status on line three of $5 million. Then dropping down to line 11, 90-day delinquent loans decreased $1.6 million with NPAs ending the quarter at $91.2 million. To summarize, asset quality remains stable, classified loan balances have leveled and declined with 15 basis points of annualized charge off. We have a solid quarter of CNI loan growth and have begun analyzing the impact of tariffs on new originations through relationship management discussions and quarterly portfolio reviews. I appreciate your attention and I'll turn the call back over to Mark Hardwick.

Yeah, thanks, John. Turning to slide 23, tangible book value per share, the compound annual growth rate on the bottom left continues to grow at a healthy 7% post-dividend, post-buyback, and post-acquisition rate. As Michelle mentioned earlier in the call, tangible book value per share has also increased 9.1% in the last 12 months. Slide 24. represents our total asset CAGR of 11.9% during the last 10 years and highlights meaningful acquisitions that have materially added to our demographic footprint, fueling growth. We do believe in a creative M&A, but it's important to note that we focus on organic growth and high performance first. We are comfortable being selective in the M&A process, and April 1st marked the three-year anniversary of our last acquisition. As we look forward to the remainder of 2025, there has been an increase in volatility and uncertainty regarding the impacts of tariffs. Growth in credit may prove to be challenging, and our team maintains active and intensive discussions with our customer base to identify any early signs of stress. However, so far, we haven't identified any specific credit problems, and our loan pipeline remains very strong. So at this point, we're sticking to our mid to high single-digit loan growth guidance for the year. Thanks for your attention and your investment in First Merchants. Now we are happy to take questions.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment for questions. Our first question comes from Daniel Tamayo with Raymond James. You may proceed.

Thank you. Good morning, everybody. Maybe just starting on the credit side. So you were saying the multifamily NPA that was scheduled to pay off in the first quarter will now pay off in the second quarter. Given that, do you think the... Well, first of all, do you expect any kind of additional charge-offs related to that? It sounded like the answer was no, but just for clarity. And then second, with that coming down, do you think you may have reached the peak in non-performing loans in the first quarter? I guess assuming that we don't go into a meaningful recession here.

Yeah. Hey, Daniel. It's Sean Martin. Yeah, so to answer your questions in the order... We don't expect any additional loss and have a closing date set on that in a fairly short period of time here. So I'm pretty optimistic at this moment about that closing in a fairly short order. As it relates to what would happen in the second quarter, that's going to be clearly one of the larger non-performers we have. And we on any given quarter have things moving in and out, but there's not something that I see lined up behind it that would push that number in a material way any higher than it would be that of the $22 million coming out.

Okay, terrific. And then I guess another kind of smaller one, but kind of zooming in on the fee income, Michelle, I'm not sure if you gave an expectation, but just curious on your thoughts on where that could land in the second quarter and beyond and kind of your underlying assumptions included in that in relation to mortgage banking, if you think that is going to be kind of softer or you are expecting more of a typical seasonal bounce here in the middle of the year.

Hey Danny, thanks for joining the call. So for non-interest income, really, I think for all of our income statement categories, I'd probably reiterate the guidance that we provided in January is we still think those are the levels that we'll hit. And so, you know, on fee income, the guidance that we provided was we thought that we would have year over year, mid to high single digit growth. And when you look at our mortgage team, they had a great quarter. When you look at this Q1's performance this year compared to last year, And they'll pick up steam in the remaining quarters, given the seasonality of the business. And so we expect double-digit growth in mortgage. And even looking at wealth management, although market volatility can be a bit of a headwind for the wealth business, we believe that team has the ability to grow in double digits as well. And so when you put all of the non-interest income categories together, like BOLI, et cetera, we expect that mid to high single-digit growth year over year.

I point out that the pipeline that I referenced on my slide is very strong for the mortgage group going into the second quarter.

That's great. Okay. Well, I will step back. I appreciate you taking my questions.

Thanks, Danny. Thank you. Our next question comes from Terry McElroy with Stevens. You may proceed.

Hi, good morning, everybody. First off, love the new updated pictures in the presentation, and it looks like John elected to not wear a tie this time, so I just wanted to note that. It's a lot, Barry. It's a lot. I like the beard as well. In terms of questions, on the loan yields, they were down more than we had modeled, and it impacted the margin. So could you maybe talk about the amount of fixed-rate loans that that will be repricing over the next three quarters where you would have some pickup on the loans for, on the yields for those loans.

Yeah, we've got 190 million of fixed rate loans that, you know, through the end of 2025. And just as a reminder, the rate on those is about 465.

Okay. And then John, since I mentioned your name, just a question on the sponsor finance. A good quarter of growth, though classified, ticked a little bit higher. And if my math is correct, I think that charge-off in the professional services came out of that portfolio. So I know you provide great data, but are you seeing any concerns there, just given the size and what I think was a charge-off last quarter?

Yeah, you spotted that correctly. It did actually come out of that book. It was roughly $2.5 million. And, you know, I would say given, you know, what that portfolio is, how we underwrite it, I'm balanced. I'm pretty pleased with how it's performed from a historical standpoint. You know, that portfolio has, you know, somewhat elevated level of classifieds because, quite frankly, we also grade more aggressively in that portfolio than we do in the rest of the book, just because of the nature of the underwriting and the nature of the type of asset there. But it's performed pretty well, and it continues to perform pretty well. But any given quarter, it can kind of bump up and down. So there's not some underlying concern there. There are names in there that we continue to monitor and make sure that we're in touch with the sponsors. And there's really good communication in that group with the sponsors. Again, I would expect, given the higher spread and the higher underwriting that we put to it, that that helps.

It does. I appreciate that, and thanks for taking my questions.

Thank you, Derek. Thank you. Our next question comes from Damon Del Monte with KBW. He may proceed.

Hey, good morning, everyone. Hope everybody's doing well today. Michelle, just wondering if you could just give us a little updated outlook on the expenses. Obviously, a very strong quarter to start the year. And just curious if your guidance from last quarter kind of still holds and kind of what your thoughts are around that.

Yeah, I think our guidance from last quarter does still hold. I mean, I think the guidance that we provided was that we thought we would have like one to three percent expense growth over to the 2024 expense base. We're running ahead of that. Probably will all year, but I would probably still reiterate that level.

Okay, great. And then as far as the cash flows that are rolling off the securities portfolio, can you just remind us of the strategy there? Are you reinvesting some of that into higher yielding securities, or are you kind of reallocating that to support loan growth?

Yeah, we're reallocating that to support loan growth, so we're not reinvesting yet. And so we'll continue to use that cash for loan growth. probably through the next couple quarters.

Okay, great. And then I guess just lastly, you know, given the strong capital, it's nice to see that you guys are executing on the buyback. You know, Mark, just kind of curious on your thoughts on M&A. You kind of look across your footprint and potentially into other footprints. You know, any updated thoughts on, you know, conversations or, you know, changing strategy there?

Yeah, no change in strategy. Just continue to stay close to the partners that we're most interested in. And they're all, anyone we're talking to is in Indiana, Ohio, or Michigan. And just given the volatility of stock prices, it's hard to create any real momentum.

Got it. Okay. That's all that I had. Thank you very much. Thanks, Damon.

Thank you. Thank you. Our next question comes from Nathan Race with Piper Sandler. You may proceed.

Hi, everyone. Appreciate you taking the questions. Circling back to the margin, Michelle, you know, just curious to kind of get your expectations for the second quarter, assuming the Fed remains on pause. You know, it seems like you still have some deposit cost leverage, some repricing within the loan book as well, and kind of redeployment of excess liquidity of the loan. So just Kind of curious to get your expectations in terms of what we can expect in terms of the magnitude of potential expansion here in 2Q.

I mean, we would expect margin to remain relatively stable, and I guess I should clarify stable excluding the day count impact because, you know, our stated margin was 3.22% for Q1, but we had five basis points of decline that was due to the day count. So if you add that back in to normalize it, I think that level seems like a good level to look forward to in the next coming quarters.

Okay. And in the back half of this year, I imagine it's still probably a safe assumption that you guys can kind of offset some of the headwinds on the floating rate book if we do get some Fed cuts, maybe one or two cuts in the back half of the year, just given some of the loan growth prospects that you have without being funded partially by the cash flow coming off the securities book. Is that still a fair assumption? It is.

Yeah. And the other thing we've been pretty successful at is repricing deposits. We've got a pretty strong downward beta. And so if we get a couple more Fed cuts in the back half of the year, I think that gives us some opportunity to reduce some costs again there as well that will help offset some of the repricing on the asset side.

okay great and i think mark you reiterated that you know you still expect mid to high school digital loan growth this year you know just curious you know how volumes you're tracking so far here in the second quarter if you're seeing kind of any unusual activity in light of all the volatility of late um and just kind of any other commentary in terms of kind of the loan pipeline head into the uh second quarter here

Yeah, I think Mike did a nice job covering it in the call. Just, you know, we were 5%, 4.8, 5% this quarter, 6% last quarter. And, um, for the second quarter, the pipelines were really strong, um, you know, throughout the regional bank and, and investment real estate, um, categories. And so we're pretty optimistic, um, about how we should at least continue through the remainder of the second quarter. And then we'll continue to assess the impact of tariffs, um, on the customer base and whether or not it causes them to kind of start to pull back. Mike, anything you want to add? He pulls off to a good start.

Yeah. Okay, great. If I could sneak one last one in for John. Just maybe on the reserve and thinking about provisioning going forward, you know, you guys obviously still have a really strong reserve level. So just curious, you know, if we, you know, exclude any major CECL impacts tied to the environment and assuming, you know, credit remains, you know, fairly stable going forward, do you see much need to provide for growth or can you kind of just kind of grow into kind of the unallocated excess reserves that exist?

Yeah, I, you know, I think we generally have targeted the one and a half percent range and I think, you know, Depending on what growth does, Nate, and what happens with credit is going to ultimately, of course, drive whether we need to provide more. But I think right now we've basically been providing for any incremental credit issues with some incremental amount for growth. And really, it's kind of wound up being at that 1.5% range. Michelle, if you want to.

No, I think that covers it.

Okay, so it sounds like you're still targeting kind of staying kind of near the 1Q reserve level?

Yeah.

Okay, great. I appreciate all the color. Thanks, everyone.

Thanks, Nate.

Thank you. Our next question comes from Brian Martin with Janie. You may proceed.

Hey, good morning.

Good morning.

Michelle, just wondering, can you just remind us what on the margin, just the impact, I guess depending on how the Fed plays out here, the impact if we do see cuts on the margin, just kind of each 25 basis point cut, what do you expect the impact to be on that?

Well, our ALCO models would tell us that with each 25 basis point cut that we would have maybe about two to three basis points of margin compression. But when we did our plan, we had two cuts that we had originally built into the plan, and we did have a bit of modest margin expansion. And some of that is due to the fact that we felt like we had some runway on being able to cut deposit costs to offset some of the asset repricing. And so far, I think we've been, like I said, we've been successful with that. I think we did see some increased competition on deposits, I think more towards the middle of this quarter and the back half of this quarter. And so that's the reason why at this point, I'd say we look for margin to be stable.

Gotcha. Okay. No, that's helpful. And how about maybe just for John, I guess the reserves are, just to ask the question about that, and it feels like credit's pretty healthy at this point and the reserves are high. And I guess what areas, I know it's early on with the tariffs, but as you kind of look at the book today, what do you see the most exposure or the most risk due to the tariffs that could creep into the credit side of the equation here as we get into the back half of the year? And just trying to identify the areas that you're focused on.

Yeah. It's interesting, Brian. That question is so difficult to answer, as you know, and it's so difficult to determine the impacts. You know, it can hit or be in any place in a supply chain, but it is way too early, I think, to try to draw any conclusions about the impact. The tariffs aren't, when you look at them, they're not even. And Where you might think or hear read a headline that a tariff is, you dig into it more and the customer has somehow been exempted out of it. So we're analyzing the impact of the tariffs on initial underwriting. And as we do our quarterly portfolio reviews on our larger and certain specific portfolios, sponsor finance is an example. We're asking the question what our borrowers might expect the impact to be and how they're dealing with it. But we're not really able to quantify it and feed it back into any kind of analysis that would push the allowance in one direction or another.

Yeah, Brian, I'm really pleased with the work we're doing internally. We've had a nice meeting internally and talked about trying to not regurgitate or not re-quote what we hear on the news. and just say, let's talk about what we're hearing directly from our borrowers. And so our credit teams, our commercial bankers, the RMs are actively communicating with customers and trying to find out exactly what they know and how they think it's going to impact their business. And to John's point, it's really early. I'm proud of our customer base for how close they are to the risk and uncertainties how smart they are. They're really capable business owners. But it's too early for us to really give you direct numbers until this settles in.

Gotcha. Okay. And Mark, just last one for me, just on the capital front, I know you talked about the buyback. And I guess that seems like the most likely path here. And you guys have been active last quarter, this quarter to date. And I guess the Is your plan, I guess, at this point to continue to be assertive on the buyback and kind of executing this plan given the focus on organic growth, the tough market in terms of M&A at the moment? I guess we should think about that being a pretty solid execution on that buyback. At current levels, certainly, I mean, opportunistic with the pricing.

Yeah, it is. Today's an interesting day. I thought we had a hell of an earnings announcement. and beat all analysts' expectations. Our teams are focused on the plan. You think about, there's lots of different ways you hear this, but it's let's develop the plan, know the plan, and work the plan, and that's what we're doing. As a team, and the stock's down 2% today, and it's an environment where the minute we're outside of our quiet period, we're going to be active. Gotcha.

Okay. And that's it for me. Just housekeeping, maybe, Michelle, the tax rate going forward, I guess, you know, keep it kind of where we're at today. Is that fair?

Yeah. Yeah, I think the range I would use would be between like 13 to 14% for the effective tax rate.

Gotcha. Okay. Thank you for taking the questions. You're welcome.

Thank you. Our next question comes from Daniel Tamayo with Raymond James. You may proceed.

Thanks, guys. Just a quick follow-up here. You've talked about the impact. You just recently talked about the impact from tariffs on credit, how it's tough to gauge. Totally understand that. I guess zooming in and looking more on the demand side, zooming in on the construction portfolio, which I think you saw nice growth in the first quarter and talked about maybe gaining some share there, and then the sponsor book, which came down a bit. Just curious how you think the tariffs are impacting demand on the construction side, maybe in terms of input costs and then on the sponsor book overall and how that might impact your growth guidance.

Yeah. So, Daniel, the feedback we've been receiving directly is that on any project that's already under construction, they've priced out or have already priced in any impact that might affect their building costs to completion. So they've already kind of hedged that out. Anything that's new that's coming in, they're pricing it into quotes for the construction of new opportunities. So anything that we have or we're underwriting today, we'll have those costs built into it. The contractors are out hedging that or at least pre-buying for a new construction. And anything that's already afoot, it's been accounted for. That's the feedback we're getting from the developer group. Stu?

No, I think that's well said on the construction side. And on the sponsor side, or just M&A activity in general, it's just part of the analysis process that individuals or executive teams are doing. They're doing the same thing, understanding the impact, what's it mean to the margins, what is it going to do to the valuation, if there is any change. So it might take them more time to do some analysis, but they're still active.

Great. So it sounds like on the construction side, the loans in process, you know, those projects in process, if you will, they're even able to pass through any increase in input costs to the direct consumer is what you're hearing.

Yep. Yeah, they've already bought forward or hedged out what the impact of the tariff would be on what they have planned to buy. On construction. Okay, great.

Appreciate the color. Thank you.

Thank you. I would now like to turn the call back over to Mark Hardwick for any closing remarks.

Yeah, just we appreciate all the attention, time that you're willing to give to understand our story the best you possibly can. And we look forward, like I said, to just continued execution of the plan and the guidance that we've provided in the past. So, again, thanks for your time, and we'll talk to you next quarter.

Thank you. This concludes today's conference. Thank you for your participation, and have a great day. You may now disconnect.