First Merchants Corporation (NASDAQ:FRME), a financial services company, has reported its financial results for the first quarter of 2024. The company announced earnings per share (EPS) of $0.80, or $0.85 when adjusted for non-core items. First Merchants Corporation recorded total assets of $18.3 billion, with total loans at $12.5 billion and total deposits reaching $14.9 billion. Assets under advisement stood at $8.3 billion. The company's net interest margin experienced a slight decline from the previous quarter, but they maintained a strong capital position with a common equity Tier 1 ratio of 11.25%. First Merchants Corporation also highlighted the deployment of three major technology initiatives aimed at enhancing customer experience and operational efficiency.
Key Takeaways
- First Merchants Corporation reported $18.3 billion in total assets and an EPS of $0.80, or $0.85 adjusted for non-core items.
- The company's total loans were $12.5 billion, and total deposits were $14.9 billion, with $8.3 billion in assets under advisement.
- Three major technology initiatives were launched, including a new in-branch account opening platform, an online and mobile platform for consumer customers, and a new private wealth platform.
- The net interest margin declined by 6 basis points from the previous quarter, while non-interest income saw a slight increase.
- The company redeemed $40 million of subordinated debt and conducted $30 million in stock buybacks.
- Expectations for loan growth are optimistic, with projections of mid to high single-digit growth for the year.
Company Outlook
- First Merchants Corporation expects loan growth to be in the mid to high single digits and deposit growth in the mid to low single digits.
- The company plans to increase the loan-to-deposit ratio slightly for a more efficient operating model.
- Net interest income is anticipated to stabilize in the second quarter and grow in the second half of the year.
Bearish Highlights
- Customer-related fees declined by $1.2 million due to lower gains on sales of mortgage loans and derivative hedge fees.
- Non-interesting deposits are expected to decline but should stabilize thereafter.
Bullish Highlights
- The company remains optimistic about the sustainability of strength in C&I due to investments in Michigan markets.
- Michele Kawiecki indicated that there will be $1 billion of repricing, mostly from loans, over the next three quarters, which could positively impact earnings.
Misses
- Income is expected to be slightly lower than previously provided guidance due to fewer expected rate cuts.
- There was an increase in non-performing assets and classified loans, albeit slight.
Q&A Highlights
- The margin impact considers the redeployment of excess liquidity into earning assets.
- Expenses are projected to be lower than previously guided, despite additional costs from digital platform conversion.
- The increase in classified assets is seen as a return to a normalized credit environment, and the coverage ratio is expected to remain stable.
- The company is managing funding costs by making modest rate reductions on the deposit side.
First Merchants Corporation's latest earnings call reflects a company navigating a complex financial landscape with strategic initiatives and cautious optimism. With a strong capital position and a series of technology investments, the company is poised to adapt to changing market conditions while striving to achieve growth in its loan and deposit portfolios. Investors will be watching closely as First Merchants Corporation continues to execute its business strategy in the coming quarters.
InvestingPro Insights
First Merchants Corporation (FRME) stands out with a notable track record of rewarding its shareholders. An InvestingPro Tip highlights the company's achievement of raising its dividend for 12 consecutive years, demonstrating a consistent commitment to shareholder returns. Furthermore, First Merchants has maintained dividend payments for an impressive 36 consecutive years, underscoring its financial stability and reliability as an income-generating investment.
The company's financial health is reflected in key metrics from InvestingPro Data. With a market capitalization of $2.01 billion and a P/E ratio that has slightly decreased to 9.8 in the last twelve months as of Q1 2024, investors may find the company's valuation attractive. The dividend yield stands at a compelling 3.98%, which is particularly noteworthy for income-focused investors. Additionally, the company has experienced a large price uptick of nearly 30% over the last six months, signaling strong market confidence in its performance.
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Full transcript - First Merchants Corp (FRME) Q1 2024:
Operator: Thank you for standing by, and welcome to First Merchants Corporation's First 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's 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 direct comparable GAAP measures. The press release available on the website contains financial or other quantitative information to be discussed today, as well as a reconciliation of GAAP to non-GAAP measures. As a reminder, today's call is being recorded. I would now like to turn the conference over to Mr. Mark Hardwick, Chief Executive Officer. Mr. Hardwick, you may begin.
Mark Hardwick: Good morning, and welcome to the First Merchants first quarter 2024 conference call. Thanks for the introduction and for covering the forward-looking statement on Page 2. We released our earnings today at approximately 8 AM Eastern time. You can access today's slides by following the link on the third page of our earnings release. On Page 3 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, Michele Kawiecki. On Page 4, we have a few financial highlights for the quarter to include total assets of $18.3 billion, $12.5 billion of total loans, $14.9 billion of total deposits, and $8.3 billion of assets under advisement. On Slide 5, if you look at bullet point 1 under our first quarter results, you will note that margin is stabilizing, and new and renewed loan yields for the quarter totaled 8.15%. You will also notice on bullet point 5 that we were active during the quarter. We're purchasing 30 million of shares in First Merchants and redeeming $40 million of sub-debt, which recently repriced to just over 9%. On bullet point 6, we reported first quarter 2024 earnings per share of $0.80 or $0.85 when adjusted for $3.5 million of non-core items incurred during the quarter. On the last bullet point, I would also note that three of our four major technology initiatives were deployed during the first four months of the year to include the rollout of a new in-branch account opening platform called Terafina, our new online and mobile platform for more than 150,000 consumer customers that converted to Q2, and our new private wealth platform converted to SS&C's InnoTrust platform. As you can imagine, these projects require a significant amount of time and resources and require heightened customer focus during implementation. Now, Mike Stewart will discuss our line of business momentum.
Michael Stewart: Thank you, Mark. And good morning to all. I'm on Page 6, and our business strategy remains unchanged. We are a commercially focused organization across all these business segments and across our primary markets of Indiana, Michigan, and Ohio. And as we enter 2024, we have remained focused on executing our strategic imperatives, organic loan growth, deposit growth, fee growth, attracting, retaining, and engaging our team, investing in the digitization of our delivery channels, and delivering top-tier financial and risk metrics. If you go to Slide 7, the first quarter continues a choppy trend of loan growth from quarter-to-quarter. I highlighted the 8% annualized loan growth during the fourth quarter of 2023, which followed a relatively flat third quarter of less than one half of 1%. The first quarter balance decline in the commercial portfolio was attributed to the seasoning of numerous real estate projects that had stabilized and were refinanced into the secondary market. This is normal course for most construction projects. And with the current inverted yield curve, it is advantageous for the client to take advantage of lower long-term fixed interest rates. Commercial balances were also affected by the seasonal nature of our agri-business clients. John Martin has more detailed information within his portfolio summary, which also highlights the growth within the commercial and industrial portfolio of over 5.5% on an annualized basis during the first quarter. So short-term interest rates have affected the velocity of new investment real estate projects, but we have remained active with well-capitalized projects. The commercial and industrial growth is building as existing clients continue to finance normal course capital expenditures, complete strategic acquisition, or as we add, market share. Our Michigan commercial banking team has built very good momentum. That's the former level 1 in Monroe Bank entities and was our strongest region of C&I growth. Our investment in people and our brand are building in Michigan. The third bullet point further emphasizes the future growth potential within our C&I portfolio. The pipeline into the quarter is strong, and the commercial segment will continue to be the primary driver of our asset growth. The consumer portfolio is comprised of residential mortgage, HELOC, installment, and private banking relationships. And during the first quarter, that portfolio declined 0.8%, and in dollars, that represented less than $6 million. Our private banking portfolio was the primary driver of that decline, as high net worth clients reduced higher cost borrowings with excess liquidity. The overall economic environment in the Midwest, inclusive of the competitive landscape, affirms my expectations of mid-to-single digit growth for the balance of the year with improving loan yields. Mark highlighted that our new loan yields exceeded 8% during the quarter, and Michelle has more detail to share on those trends. On the bottom half of that page, the quarter saw total deposits growing by 1.7% on an annualized basis. The consumer portfolio grew over $155 million during the quarter and is inclusive of both the branch network and our private banking team's efforts. The branch network continues to deliver the consistent, granular, low cost deposit space that we enjoy. The commercial deposit decline during the quarter was primarily from the public funds portfolio, as the C&I relationship showed growth. Like we discussed during last earnings call, both our consumer and commercial teams have been actively managing our interest expense. As we now have separation from the Silicon Valley Bank event last year, our bank's liquidity remains ample, so our 2024 efforts will be focused on our margin through interest expense management. As Mark stated in the press release, we are pleased to see our net interest margin stabilizing. And again, as we enter 2024, we're positioned for that continued organic growth. Our team is positioned for that growth, and our underwriting remains supportive, consistent, and disciplined. I'm going to turn the call over to Michelle so she can review in more detail the composition of our balance sheet and the drivers on our income statement. Michelle?
Michele Kawiecki: Thanks, Mike. Slide 8 covers our first quarter results. Pre-tax, pre-provision earnings, when adjusted for the non-core charges of $3.5 million that were incurred during the quarter, totaled $60.2 million. Adjusted pre-tax, pre-provision return on assets was 1.31%. And adjusted pre-tax, pre-provision return on equity was 10.75%, all of which continue to reflect strong profitability metrics. To arrive at our core operating results, we excluded charges recorded this quarter, which included $1.1 million for the increased FDIC special assessment and $2.4 million in digital platform conversion costs incurred from the projects Mark covered in his opening remarks. Tangible book value per share increased to $25.07 at March 31, an increase of $2.14, or 9.3%, compared to the same period of prior year. Details of our investment portfolio are disclosed on Slide 9. Securities yield increased 2 basis points to 2.58% as lower-yielding securities continue to run off. Expected cash flows from scheduled principal and interest payments and bond maturities in the remaining nine months of 2024 total $217 million, with a roll-off yield of 2.22%. Slide 10 shows some details on our loan portfolio. The total loan portfolio yield declined 3 basis points quarter-over-quarter, which was simply due to a lower day count. Yield on new and renewed loans continues to increase. That yield climbed 14 basis points to 8.15% this quarter, compared to 8.01% last quarter. The bottom right shows that two-thirds of our loan portfolio is variable rate. Although some of that is priced at or near our new loan yield, we still have over $1 billion of average earning assets that we'll reprice from a current weighted average rate of just 5%, which will create some good incremental interest income throughout the remainder of the year. The allowance for credit losses on Slide 11 remains stable compared to last quarter at 1.64% of total loan. We recorded net charge-offs of $2.3 million, which was offset by provision for credit losses on loans of $2 million, resulting in a reserve at quarter end of $204.7 million. In addition to that, we have $21.8 million of remaining fair value marks on acquired loans. Our coverage ratio, when including those marks, is 1.82%. Slide 12 shows details of our deposit portfolio. We continue to have a diversified core deposit franchise with a low uninsured deposit percentage. 36% of our deposits yield 5 basis points or less. Our total cost of deposits only increased 6 basis points to 2.64% this quarter, slowing dramatically compared to last quarter where we had experienced an increase of 26 basis points. Our total cost of deposits increased to 2.69% in February and then declined 1 basis point to 2.68% in March due to some deposit pricing actions that we took during the quarter, which Mike mentioned in his remarks, to reduce deposit costs ahead of the Fed rate cuts. We expect those actions to ensure stability in the cost of deposits next quarter as well as margin. Although, we did see a slight decline in non-interest-bearing deposits this quarter, our overall funding mix continued to improve as we reduced broker deposits, wholesale funding, and sub-debt and grew core consumer and commercial deposits. We paid down $40 million of sub-debt at the end of January and will pay down an additional $25 million of sub-debt at the end of April. Overall, liquidity is very well positioned to support growth in the coming quarters. On Slide 13, net interest income on a fully tax-equivalent basis of $132.9 million declined $3 million from prior quarter. As I mentioned earlier, yield on average earning assets on line 4 was impacted by the number of days in the quarter, yet still increased by 1 basis point. That increase was offset by the increase in funding costs on line 5, reflecting stated net interest margin on line 6 of 3.10%, a decline of 6 basis points from prior quarter. Next Slide 14 shows the details of non-interest income. Overall, non-interest income increased by 200,000 on a linked quarter basis. Customer-related fees declined $1.2 million, reflecting a $900,000 decline on the gain on sales of mortgage loans and lower derivative hedge fees. The first quarter is always a seasonal low for our mortgage business, yet we were encouraged by this quarter's activity because the $3.3 million of gains this quarter included a $500,000 loss on the sale of some non-accrual loans. Excluding that loss, gains on the sales of mortgage loans would have been $3.7 million, which is a $1.3 million increase over the first quarter of last year. This increase in year-over-year production is what gives us confidence that we will see an increase in non-interest income in the coming quarters. Moving to Slide 15, non-interest expense for the quarter totaled $96.9 million and as previously mentioned included $3.5 million in non-core charges. Core non-interest expense beat expectations and totaled $93.4 million, a decrease of $2 million from last quarter's core non-interest expense of $95.4 million. Managing expenses continues to be a point of emphasis for us this year and the results of Q1 demonstrate that commitment. Slide 16 shows our capital ratios. We continue to have a strong capital position with common equity Tier 1 at a robust 11.25%, coupled with a dividend payout ratio of over 40% over the last 12 months. A slight decline in each of the ratios shown reflects the $40 million redemption of sub-debt and $30 million of stock buybacks in the quarter. These stock buybacks coupled with $20 million in dividends paid this quarter provided a great return to our shareholders. These actions reflect our prudent management of excess capital ensuring top quartile profitability metrics. That concludes my remarks and I will now turn it over to our Chief Credit Officer, John Martin, to discuss asset quality.
John Martin: Thanks, Michelle, and good morning. My remarks start on Slide 17. I'll highlight the loan portfolio, touch on the updated insight slides, review asset quality and the non-performing asset roll forward before turning the call back over to Mark. Turning to Slide 17, where I've highlighted the various portfolio segments, growth in the commercial and industrial loans on lines 1 and lines 2 was offset by cooling investment real estate activity. We came off a strong origination quarter at the end of the year, as Mike mentioned, with modest growth in the first quarter while investment real estate and construction on lines 4 and lines 5 slowed for the quarter. We continued to hold underwriting standards for new construction opportunities, which is resulting in higher levels of capital required contribution. This combined with higher borrowing costs has slowed new growth in this segment. Then on Slide 18, the portfolio insight slide helps to provide transparency into the portfolio. As mentioned on prior calls, the C&I classification includes sponsor finance as well as owner occupied CRE associated with the business. Our C&I portfolio has a 20% concentration in manufacturing. Our current line utilization has remained consistent and was up for the quarter to 42% with line commitments lower by $68 million. We participate in roughly $755 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 86 platform companies with 53 active sponsors in an assortment of industries. 68% of those have a fixed charge coverage ratio greater than 1.5 times based on year end borrower information. This portfolio generally consists of single bank deals for platform companies of private equity firms as opposed to large widely syndicated leverage loans traded across banks. We review the individual relationships quarterly for changes in borrower condition including leverage and cash flow coverage. Turning to Slide 19, where we break out our investment or non-owner occupied commercial real estate. Our office exposure is detailed on the bottom half of the slide and represents 2% of total loans with the highest concentration outside of general office and medical office space. The wheel chart on the bottom right details office portfolio maturities. Loans maturing in less than a year represent 11.3% of the portfolio or $28 million. The office portfolio is well diversified by tenant type and geographic mix. We continue to periodically review our larger office exposures and view the exposure as reasonably mitigated through a combination of loan to value guarantees, tenant mix and other considerations. On Slide 20 are the asset quality trends and current position. NPAs and 90 days past due, loans increased $11.6 million to 56 basis points of loans and ORE. While up for the quarter, the change was largely driven by a single $12 million new hospitality related credit, which we expect to resolve in the third quarter. On line 3, 90-day delinquent loans were up $2.8 million with one borrower comprising $1.2 million of the increase. We view this relationship as well secured in the process collection. Classified loans ended the quarter at 2.24% of loans up from 1.94% from the prior quarter. Then down on line 9, net charge us for 7 basis points of annualized average loans. Moving to Slide 21, where I've again rolled forward the migration of non-performing loans, charge-offs, ORE and 90-days past due. For the quarter we added non-accrual loans on line 2 of $17.7 million driven by the hospitality credit I just mentioned previously. A reduction from payoffs or changes in accrual status of $5.6 million on line 3, aided by a $2.1 million non-performing mortgage loan sale and a reduction from gross charge-offs of $3.2 million. Dropping down to line 11, 90-day delinquent loans increased by $2.6 million, which resulted in NPAs plus 90-days past due ending at $70.2 million for the quarter. So summarizing asset quality was marginally down in the quarter. Net charge-offs for the quarter were 7 basis points while non-accruals and classified loans were marginally higher. I appreciate your attention and I'll now turn the call back over to Mark Hardwick.
Mark Hardwick: Thanks, John. Turning to Slide 22, we show our track record of shareholder value and there are a number of really positive trends, but I would just highlight one in particular. If you look at the top right-hand portion of the page, we show our 10-year earnings per share CAGR and it totals 10.2%. And also, we just have a continued focus on growth of tangible book value per share and we're proud of these numbers. On Slide 23, it represents our total asset CAGR of 12.6% during the last 10 years and highlights meaningful acquisitions that have materially added to our demographic footprint that help fuel our growth. There are no edits to Slide 24. At this time, I'd like to thank you for your attention and your investment and we are happy to take questions.
Operator: Thank you. [Operator Instructions]. Our first question comes from the line of Damon DelMonte with KBW. Your line is now open.
Damon DelMonte: Hey, good morning, everyone. Hope you're all doing well today. Just wanted to start off with a question on margin from Michelle. Can you just give us a little insight as to kind of how you're seeing the cadence over the next few quarters? It sounds like you guys are intently focused on reducing the funding component of it, the cost of funding related to the margin and kind of with new loan production coming on at rates that are over 8%. Just kind of wondering how you're thinking about the margin at this point?
Michele Kawiecki: Yes, well, so our quarterly margin for Q1 was 3.10%. And in March, our margin was 3.11%. So it actually picked up a basis point when you just isolate March. And the reason why we have some optimism around it, I think, it's sort of things that you just stated. And so, we do believe that margin will be stable next quarter and then potentially even growing depending on how the market fares through the remainder of the year.
Damon DelMonte: Can you just remind us if there are rate cuts in the back half of the year, what your anticipation is for a 25 basis point cut?
Michele Kawiecki: Yes, our models tell us that for each 25-basis point cut that our margin declines 3 basis points. And so the actions that we're taking to try to manage our funding costs can hopefully reduce some of that impact. But that is what our model tells us given that we have an asset sensitivity.
Damon DelMonte: Got it. Okay, great, thank you. And then with regards to the outlook for loan growth, I think Mike said that he's still optimistic in the, was it mid to mid-single or mid to high-single digits after first quarter's results?
Michael Stewart: Yes, I kind of stuttered over that, didn't I Dan? Mid to high single is still good, especially given where we are already through April. And I try to highlight that. The C&I growth is really strong right now, but the continued maturity of the real estate project. But overall, yes, mid-single high for the year.
Damon DelMonte: Got it, okay, helpful, thank you. And then just lastly on capital management, I think you guys did $30 million of buyback this quarter. I guess first, how much buyback is remaining under the current authorization and what's your thoughts on additional appetite going forward?
Mark Hardwick: We're around $40 million, $45 million remaining and continue to be active. It's going to be a meaningful part of our May 7th board meeting, just sharing capital planning and thinking about the future. We're convinced that if our stock price is going to continue to trade at, I guess multiples that are sub 10, when we historically have traded 12 to 13, we feel like it's prudent to be active with buyback. So, and our tangible common equity continues to be above 8% and all the other capital ratios are well above our target. In this environment, we feel like it's the right prudent call to make.
Damon DelMonte: Great, thanks for the caller and I'll step back.
Mark Hardwick: Thank you.
Operator: Thank you. One moment for our next question, please. Our next question will come from the line of Nathan Race with Piper Sandler. Your line is now open.
Nathan Race: Yes. Hi everyone. Good morning. Thanks for taking the questions. Just wanted to clarify on the margin commentary to the earlier question that 3 basis points or so of impact to the downside. That's not under a static rate environment that doesn't necessarily contemplate, continued redeployment of excess liquidity coming off the bond book into loans. Is that correct?
Michele Kawiecki: It does contemplate as using that excess liquidity into earning assets.
Nathan Race: Okay, got it. Thank you. And then just on the income, I think last quarter we're talking about a run rate around 30 or so per quarter. Is that still a reasonable expectation going forward?
Michele Kawiecki: Yes, we're actually expecting this maybe just a touch lower, maybe more like 28, 29 per quarter. Last quarter when we provided that guidance that was largely based on the fact that we expected more rate cuts during the year. Whenever we do get rate cuts, it really invigorates our mortgage business. And so being on sale of mortgage loans, it goes higher. Given that we're expecting less rate cuts at this point, then probably adjust that down slightly.
Nathan Race: Got you. Okay, great. And then just turn to expenses. I think last quarter we're talking about 0% to 2% growth off the 4Q annualized level. Is that still a good proxy to use going forward for 2024?
Michele Kawiecki: I think our expenses can offset a little bit of the reduction of non-interest income that I just talked about. We had really good expense this point in the quarter. And so, I would expect it to run a little lower than the guidance that we provided. I would add, Nate, that we will have some additional digital platform conversion costs in Q2, just as a reminder. That should run about 2.5 million. So that will be on top of that core run rate.
Nathan Race: Okay, got it. And then just turn to credit quality. It doesn't sound like there was any major surprises necessarily in terms of the rise in class size and non-accrual. So John, is it fair to assume that you're not seeing anything sustained across the portfolio? It's more so just ongoing normalization that the broader industry is encountering these days. And just generally kind of how you think about charge-off levels going forward?
John Martin: Yes, excuse me. Hey, Nate. Yes, so I do look at it as more of a normal, a return to more of a normalized credit environment. The charge-off rate, as we said last quarter, we've come under it in the last couple of quarters. But I think about it in that 15 basis point to 20 basis point range.
Nathan Race: Got you. And then, assuming a stable macro environment, I know it's a kind of fluid situation under CECL, but to what extent do you guys see a need to provide for mid to high-scale digit growth, just given that your reserve is still solidly above peers?
Michele Kawiecki: Well, I think where our coverage ratio is today is largely where we would, assuming that, the economic scenarios don't change again. I think we would wanted to keep our coverage ratio somewhere within the vicinity of where it's at today to cover for any new growth and any charge-offs.
Nathan Race: Okay, great. I appreciate all your color. Thank you.
Operator: Thank you. One moment for our next question, please. Our next question will come from the line of Brian Martin with Janney Montgomery Scott. Your line is now open.
Brian Martin: Hey, good morning.
Michael Stewart: Good morning, Brian.
Brian Martin: Hey, say, Michelle, I just wanted to ask you, you talked about taking some actions on the deposit side to help on the funding costs. Can you elaborate on what you did, or I guess, is there more of that to come? Is that kind of done at this point, or you're not giving the focus on managing the funding costs?
Mark Hardwick: Hey, Brian. Yes, we actually just had our Asset and Liability Committee meeting yesterday and walked through every line of business, consumer, commercial, private wealth, and are continuing to look at strategies really across the board where we can make modest rate reductions that we think take some of the pressure off. And so, we're not doing anything in a really big way, like we're not making 25 basis point reduction, but we're finding ways to pick up 5 basis points in a number of different places that we think kind of get ahead of a rate reduction and continue to allow us to have really healthy liquidity position at the right price.
Brian Martin: Got you. Okay, so there's a little bit more of that. It's ongoing. You're not lurching. Just do it incremental along the way to pick that up.
Mark Hardwick: Yes, that's correct.
Brian Martin: Yes, okay. And then one, maybe just for Mike, you talked about the particular strength in C&I this quarter. Anything special driving that? I guess you believe it's sustainable or…?
Michael Stewart: Yes, I do believe it's sustainable. One of the drivers is the investment that we've done in Michigan markets, the new markets that we have added level 1, a couple of years ago. The team, the brand, reaching out to the market, taking advantage of the other competitive landscape there is starting to really pay dividends. Generally, C&I, corporate executives still feel good about their businesses. They are investing, again, whether it's plant and equipment, or doing some strategic acquisition, we play really well into that space. I just, again, attribute it to probably the fact that the Midwest feels pretty insular to the other headwinds that the coasts might have, and we're pretty active.
Brian Martin: Got you. Okay, that's helpful. And then just the last two, I think the DDA [ph] liked, I think you talked down a little bit this quarter, I guess, do those feel like they're beginning to stabilize? And then secondly, I think you also talked about some further redemption of some sub-debt, maybe another $25 million. Is that still the plan on that?
Mark Hardwick: Yes, Brian, yes, we are paying down the remaining $25 million at the end of this month. I didn't catch the first part of your question.
Brian Martin: Just on the non-interfering deposit trend, just kind of, I know they're down a little bit this quarter, but just beginning to see those stabilize, is that kind of what you're seeing underneath?
Michele Kawiecki: We would expect them to decline in that to moderate. And so, we may see a little bit more compression there but it's largely going to start to scale off, I think.
Mark Hardwick: Yes.
Brian Martin: Okay, perfect. Thank you for taking the question.
Mark Hardwick: Thank you.
Operator: Thank you. One moment for our next question, please. Our next question comes from the line of Daniel Tamayo with Raymond James. Your line is now open.
Daniel Tamayo: Thank you. Good afternoon, I suppose, where we are at now here. I guess most of my questions have been asked already, but a couple of cleanup questions. First, I guess, John, on the classifieds, if you can provide a little more detail on where the increase came from, if it was C&I or CRE or what you're seeing there?
John Martin: Yes, I'd say, it was probably two-thirds C&I, one-third CRE combination of different types of asset classes within the CRE and across the industries within the C&I. I would describe it as kind of normal inflows and outflows with individual issues with C&I borrowers and just addressing issues as it relates to CRE. Higher interest rates have had an impact on CRE and as much as the subversion tests that are more challenging, we're just kind of addressing those.
Daniel Tamayo: Terrific, thank you. And then, I don't know if I missed this or not, but did you provide or do you have the amount of the office loans that are in central business districts?
John Martin: I don't have it by central business district. I've got it split within that slide about as granular as I have it.
Daniel Tamayo: Okay.
John Martin: I think it's on Slide 18, maybe. I don't have mine open for lunch at the moment.
Michele Kawiecki: It's slide 19.
John Martin: Slide 19, yes.
Mark Hardwick: With a breakdown of type, tenant, and geography.
John Martin: I will say that anecdotally, and when I think about that office portfolio, we're not a central business district type lender in the downtown Indianapolis or Chicago or something are mostly suburban related to developers who have done projects away from the main business district.
Daniel Tamayo: Okay. Well, I think that probably answers my question then, yes. And then, just quickly, on deposit expectations, obviously, there's a lot of moving parts there, but do you expect to kind of fill the gaps on the funding side to keep the loan deposit ratio similar to where it is now, given your loan growth?
Mark Hardwick: Yes, I mean, we have a desire to see the loan deposit ratio pick up slightly. And it's a fun time in the business, honestly. We're actively pursuing new client relationships on the lending side. We expect to have mid to high-single digit growth. And it feels like we're getting back to what would be more of a historical level where you tend to grow loans in the mid to high-single digits and deposits in the mid to low-single digits. And I think it creates a little more efficient and effective operating model.
Daniel Tamayo: Okay, great. Thanks, Mark. And thanks, everyone else. Appreciate it.
Mark Hardwick: Thank you.
Operator: Thank you. Our next question comes from the line of Terry McEvoy with -- your line is open.
Terry McEvoy: Hi, good morning, everyone, or good afternoon. Michelle, you mentioned the $1 billion of repricing. Was that specifically out of the loan portfolio over the next three quarters, coming out of the 34% of the portfolio that's fixed today?
Michele Kawiecki: It's mostly out of the loan portfolio, yes. It's a total earning asset number, so it'll also include the securities that are going to be maturing as well. But it is largely loans. And it's a mix of those that are fixed as well as some variable that is repricing.
Terry McEvoy: Perfect. And then just taking into consideration your loan growth commentary, deposit costs, and margin, it sounds like net interest income bottomed in the first quarter and should grow from here. Would you agree with that, Michelle?
Michele Kawiecki: I would think so. The guidance that we gave on our outlook last quarter was that we thought by second quarter it would stabilize, and then we see some growth in the back half of the year. And I think that's largely what our expectation is.
Terry McEvoy: And then just one last question. When I look at the largest component of non-owner-occupied CRE, it's multifamily. Do you have any comments on vacancy trends, new supply, rent growth, particularly within some of those larger metro markets in Indiana and Michigan?
John Martin: Yes, we're still seeing rent growth, but it has slowed. It's kind of tapered from what was a breakneck speed earlier in the cycle to a more modest level. Really, that multifamily that we've had has been, as Mike mentioned earlier, been able to stabilize and move to the permanent market. So we still feel pretty good about that space. Although, obviously, new opportunities are going to get more challenging with higher rates.
Terry McEvoy: Thanks for taking my questions.
John Martin: Thanks, Terry.
Operator: Thank you. I'm currently showing no further questions at this time. I'd like to turn the call back over to Mr. Mark Hardwick for closing comments.
Mark Hardwick: Yes, I really don't have much other than just, again, an expression of our appreciation for your interest in our company and the continued investment. And the teams are working hard to deliver our results for the remainder of the year. Thank you again for your attention.
Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.
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