First Merchants Corp
NASDAQ:FRME
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First Merchants Corp
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Good day, and thank you for standing by. Welcome to the First Merchants Corporation First Quarter 2023 Earnings. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.
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 reconciliation of GAAP to non-GAAP measures.
I would now like to hand the conference over to your speaker today, Mark Hardwick, CEO. Please go ahead.
Good morning, and welcome to First Merchants first quarter 2023 conference call. Victor, thanks for the introduction and for covering the forward-looking statement on Page 2. We released our earnings today at approximately 8 a.m. Eastern Time. You can access today's slides by following the link on the second page of our earnings release.
On Page 3 of the presentation, you'll 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, you will see the geographic locations of our 121 banking centers that serve as the physical location where approximately 400,000 customers periodically stop in to visit a trusted First Merchants banker for advice and consultation. It's also where a little over 2,100 First Merchants employees work face-to-face with their colleagues to grow their careers, while attending to the financial needs of our customers and our communities. It's where the culture comes to life and why some of the awards at the bottom right of this page were received.
Given the turbulence of the past quarter, I'm glad we have such a grassroots community banking model. Honestly, I love our business model, and I love being a community banker. And since we last talked, the environment has provided tremendous opportunities to have thoughtful and thorough conversations with our clients.
Turning to Slide 5. I'm pleased to report that loans, deposits, on-hand liquidity and capital are all higher, better or stronger than at year-end 2022. We reported earnings per share of $1.07, an increase of 17.6% over the first quarter of 2022 and earnings per share total of $0.91 per share. Net income was nearly $64 million. Return on tangible common equity totaled 19.82% and return on assets totaled 1.42% for the quarter.
Our balance sheet, including capital is strong. Deposits and on-hand liquidity are higher than year-end. Loan growth continued for the quarter totaling 7.9% and loan yields continue to grow as well. Our efficiency ratio is at our target levels in the low 50s, and our credit quality remains healthy. No provision expense was recorded during the quarter.
We continue our focus on delivering high performance results to meet the needs of our stakeholders, including projects like our digital modernization efforts. We even signed new contracts with both Q2 and SS&C and our hard at work to deliver on our time lines for deployment.
Now Mike Stewart will provide more insight on our balance sheet growth perform sell and John dive into the details. You're all looking forward to hearing regarding our liquidity and credit.
Yeah. Thank you, Mark, and good morning to all. The past two years, I haven't spent any time on Slide 6, and that's where I want to start, as our strategy has not changed. But considering the recent turmoil in the banking industry, it's worth reminding ourselves that our results represent the durability of our business model and the markets we serve visualize the map mark reviewed on Slide 4, where we primarily operate within these three states. It's the heart of the Midwest.
Our markets include growing metropolitan cities like Indianapolis, Columbus and Detroit, midsized cities like Fort Wayne, Ann Arbor, Lafayette, Muncie and Munster, along with many small towns in between. As the last bullet point under the consumer banking header states, we serve diverse locations in stable rural and metro markets. It's a granular and diverse customer base with deposits from all banking segments, consumer, high net worth, small business, large corporate, government agency, commercial real estate clients.
For the first quarter of 2023, these markets have remained resilient in the face of the industry turmoil and an uncertain macroeconomic environment. Unemployment rates remain stable. The consumer remains healthy, and our business customers continue to seek ways to expand and optimize their operations. Our private clients continue to trust our advice 10 counsel. We remain committed to our business strategy and remain committed to our strategic direction of organic growth, investing in our team, investing in our digital products and platform and top-tier financial metrics.
So let's turn to Page 7. The top of the page offers a breakdown of the core loan growth by our business units. We guided last quarter that we would expect loan growth to be in the mid single-digits and for the first quarter, loan growth was 7.9%. The Commercial segment growth was a blend of the commercial industrial and investment real estate sectors growing across all the markets we serve. As John Martin will further detail, our C&I business is granular with a stable credit profile, and our investment real estate focus is not on the office sector.
I want to spend more time on the global loan results, specifically the dollar increases behind the percentages on this page. As noted on Slide 10, the Commercial segment represents 75% of our total loan portfolio. The 5.6% of first quarter growth is approximately $161 million or 68% of the total growth in the quarter of $238 million. While the consumer segment contracted this quarter by 4.1%, the dollar amount was less than $5 million.
The mortgage portfolio growth during the quarter was approximately $80 million versus the prior quarter mortgage growth of $105 million. My point is the commercial segment continues to be the loan growth engine of the bank, and within the commercial portfolio, we are starting to get higher spreads. Within the Investment Real Estate segment, spreads are widening by 25 to 40 basis points on a similar risk profile from the second half of 2022. And in the C&I space, spreads are slowly widening by 25 basis points, with a strong emphasis on relationship strategies like deposits and fees.
We have maintained a consistent and disciplined approach towards underwriting within all these segments. John Martin has more detail on the loan portfolio later. But, no, the commercial and consumer pipelines ended the quarter at consistent levels to prior quarters.
The mortgage pipeline ended lower for the sixth consecutive quarter. Moreover, at the start of the year, we strategically adjusted our approach towards loan mix and are pivoting back to an originate and sell model with 70% of originations to be sold in the secondary market and 30% portfolio. Overall, the outlook affirms my expectation of single-digit loan growth moving forward to 2023.
I now want to speak to the deposit section on the bottom half of the page. Deposit balances grew at nearly 9%. We have been in active dialogue with all of our clients discussing the safety of the deposits, the pricing options we provide and adding First Merchants context to the banking headlines.
Our commercial deposit showed less than a 1% decline. While we onboarded new relationships through the quarter, our operating balances across the network declined, as higher cost borrowings under line of credit was a better use or they were repaid or they were using for other strategic business investment opportunities. The average utilization rate of the commercial lines of credit and for consumer HELOC were flat to prior quarters.
As I've discussed previously, our consumer digital deposit acquisition initiatives began well over a year ago. Over that time frame, we've demonstrated an ability to execute as a company as we launched our new account -- online account origination platform, and we continue to grow our consumer deposit balances and households throughout the quarter and the online channel accounts for nearly 30% of the new account openings.
We also launched our interested in new [ph] brand campaign to support our customer acquisition strategy through radio, print, digital and in-branch advertising. The campaign demonstrates our interest in helping our customers and communities prosper and has supported the deposit growth we experienced in the Consumer segment, which was nearly 11% in the quarter.
The acquisition strategies have been supported by continued retention strategies that our personnel deliver, deepening the relationship with our solution-based customer service, enhanced online, mobile and ATM feature and convenience, along with our customer-friendly overdraft approach. All these efforts are positioning us to increase the number of customers we serve and drive positive and profitable deposit balance growth.
So, Michele has more details to share about our balance sheet, the granularity of our deposit mix and our income statement. So I'll turn it to you, Michele.
Thanks, Mike. My comments will begin on slide eight. During the quarter, we had deposit growth of $321 million shown on line four, cash flows from the sales of securities of $213 million, which is reflected in investments on line three, coupled with runoff cash flow from the investment portfolio of $72 million, creating total liquidity of over $600 million during the quarter.
The liquidity was used to fund the loan growth that Mike just discussed in his remarks, of $238 million shown on line two, paid down borrowings of $160 million and retained cash in excess of $200 million, which we chose to do as a matter of prudence, given the recent disruptions in the banking environment.
Our loan-to-deposit ratio this quarter remained relatively stable and low at 83.3% compared to 83.5% in the prior quarter. Our earning asset mix continues to trend in a favorable direction, and we feel our balance sheet is well positioned heading into the second quarter to support growth.
Pre-tax pre-provision earnings totaled $75.4 million this quarter. PTPP return on assets was 1.67% and PTPP return on equity was 14.48%. Interest-earning asset volumes and yields were up, but was offset by a lower earning day count this quarter as well as higher deposit costs, resulting in net interest income of $144.1 million shown on line 11, a decline of $4.9 million from prior quarter.
Net income on line 17 totaled $64.1 million, and our efficiency ratio remained low at 51.72%, demonstrating excellent operating leverage. The tangible common equity ratio on line 6 increased 41 basis points, totaling 7.75% and tangible book value per share on line 26 increased 1.48% -- I'm sorry, $1.48 or 7% to $22.93, reflecting the strong earnings from the quarter as well as a meaningful recovery in the unrealized loss valuation of the available for sales securities portfolio.
Slide 9 shows highlights of our investment portfolio. On the top right, you can see the yield on the portfolio remained relatively stable given we weren't reinvesting cash flows and bonds. The total portfolio balance declined approximately $200 million from last quarter due to $213 million in the sales of bonds, resulting in a modest realized loss of $1.68 million or 0.8%. Those sales, coupled with scheduled paydowns and maturities were offset by an improvement in the overall valuation of the portfolio of $51 million to arrive at the net decline of $200 million.
On the bottom right, you can see we had a net unrealized loss on the mark-to-market of the available-for-sale securities portfolio of $245.7 million at quarter end compared to $296.7 million in Q4, which reflected a nice recovery. We also note the unrealized loss on the held-to-maturity portfolio of $328.8 million, which was also improved by $51 million. The effective duration of the portfolio was unchanged quarter-over-quarter, remaining at 6.4 years.
The investment portfolio as a percentage of total assets is currently around 22%. This is down from a peak of 29% at the end of 2021, demonstrating the progress of a return to a more normalized earning asset mix. In the bottom left, you will see the cash flow we expect to receive in the remainder of 2023 of $220 million, which includes cash from principal and interest payments as well as maturities.
We will also continue to sell bonds where we see opportunity creating additional cash flow. Since quarter end, we have sold approximately $69 million in bonds, taking a very minor loss of $300,000. So the bond portfolio will continue to be a strong source of liquidity to fund our loan growth through the year.
Slide 10 contains highlights of our loan portfolio. In the bottom left corner, you will see the stated first quarter loan yield increased meaningfully, up 42 basis points to 6% from last quarter's yield of 5.8%. On the top right, I noted the yield on new and renewed loans, which also increased substantially from 6.1% last quarter to 7.08% this quarter, an increase of 98 basis points. We are pleased with the progress we have made in pricing and feel confident in our ability to maintain that discipline going forward.
On the bottom right, you will see $8.2 billion of loans, or 67% of our portfolio, our variable rate with 38% of the portfolio re-pricing in one month and 51% repricing in three months. So we will see an increase in interest income from the loan portfolio, if the Fed increases rates another 25 basis points.
Slide 11 shows the details related to our allowance for credit losses on loans. We did not record any provision expense during the first quarter and had net charge-offs of only $225,000, which brought the ending allowance for credit losses on loans to $223.1 million. The coverage ratio trend is shown in the graph on the top left.
Our coverage ratio at the end of Q1 is 1.82% and down from 1.86% at the end of Q4 due to loan growth, which is ample compared to peer averages of 1.2%. This reserve, coupled with the remaining fair value accretion of $29 million, which gives us some additional coverage for acquired loans provides great credit protection given the uncertainty of the economic environment.
Now I will move to slide 12. We continue to have a strong core deposit base. Our noninterest-bearing deposits were 20% of total deposits at the end of the quarter which is down from the peak of 23.6% in the second quarter of last year. This decline is the result of runoff of stimulus dollars, but more recent activity represents the mix shift felt across the industry as our new and existing clients move into higher-yielding deposit products. Due to the design of our checking accounts, we pay interest on those products, which might make our percentage of noninterest-bearing deposits appear lower compared to some other banks, but the interest we pay on a substantial number of those balances is very low.
I noted in the highlights that 47% of our total deposit balances earn only 5 basis points or less. These balances declined 23.2% quarter-over-quarter. These accounts mostly represent accounts where customers utilize direct deposit or electronic payment services and are operating in nature and therefore less yield sensitive.
Our total cost of deposits increased 49 basis points to 1.41% this quarter, reflecting the competitive pricing environment. Our interest-bearing deposit cycle-to-date beta at quarter end was 37%, which was up from 29% last year.
Note that, our deposit betas do include time deposits. I disclosed the total deposit costs for March, which were 1.6%, demonstrating the ongoing upward pricing pressure we're experiencing.
Slide 13, includes some additional disclosures we added this quarter about our deposit base and funding sources. Our deposit base remains very granular with the average deposit account totaling only $35,000 and having great diversification by commercial industry as is demonstrated in the top left graph where we have disclosed the top 10 next categories.
FDIC insured deposits totaled 57.2% of total deposits, in addition, the State of Indiana has a public deposit insurance fund that ensures public deposits providing insurance to an additional 14.8% of our deposit base, Therefore, only 28.1% of deposits are uninsured, and we have ample liquidity to cover those deposits as is disclosed in the bottom right. Overall, we feel these disclosures illustrate the attractiveness of the granular, diverse deposit franchise we enjoy and our strong liquidity position.
Slide 14 shows the trending of our net interest margin. Line 1, shows net interest income on a fully tax equivalent basis of $150.4 million. When you back out non-core interest income items such as fair value accretion on Line 2, our core net interest income totals $148 million, which is shown on Line 4. This is an increase of $42.9 million over the first quarter of 2022 and a decline of just $4.5 million compared to prior quarter.
Stated net interest margin on Line 7 totals 3.58% for the quarter. Adjusting for fair value accretion brings us to core net interest margin of 3.52%, which is shown on Line 10, an increase of 55 basis points over the first quarter of 2022 and a decline of 13 basis points from last quarter's core NIM of $365. The lower day count in the quarter caused a five basis point decline on a linked-quarter basis, leaving an operating decline of just 8 basis points.
On slide 15, non-interest income came in as expected and totaled $25 million for the quarter, which increased $0.9 million on a linked quarter basis. Customer-related fees this quarter totaled $24.5 million, increasing $2.6 million from the prior quarter. The increase was driven by higher card payment fees as well as higher client interest rate loan level hedging activity, offsetting this customer-related income, we recognized a $1.6 million loss on the sale of $213 million of available-for-sale securities, as I mentioned earlier.
Moving to slide 16. Total expenses for the quarter totaled $93.7 million. Salaries and benefits expense increased $5.1 million, $1.3 million of that increase was due to annual benefit plan expenses incurred in Q1 and the remainder was due to merit increases in incentives.
FDIC assessment costs increased as a result of the two basis point increase, but were offset with onetime FDIC credits of $2 million recorded in Q1, resulting in a quarter-over-quarter decrease of $900,000.
We also experienced reduced marketing costs of $1.8 million over last quarter and other expenses increased significantly because we recorded $700,000 of gains on the sales of property in Q4, which didn't recur. Our low core efficiency ratio reflected in the top right shows that we continue to achieve strong operating leverage even while we invest in technology and talent to grow the business.
Slide 17 shows our capital ratios. Our earnings growth this quarter drove capital expansion in all ratios. The comments and the highlights draw attention to the impact of investment security marks on capital ratios.
You will see the tangible common equity ratio is 6.36%, including the held-to-maturity marks and the common equity Tier 1 ratio is 9.61% after incorporating the unrealized loss on available-for-sale securities reflected in accumulated other comprehensive income, reflecting great capital strength. It is important to note that all regulatory capital ratios remain well capitalized after incorporating the available for sale and held to maturity investment marks.
Overall, we are pleased with the balance sheet strength and resiliency of our business reflected in these Q1 results.
That concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin, to discuss asset quality.
All right. Thanks, Michele, and good morning. My remarks start on Slide 18, where I highlight the loan portfolio, including segmentation growth and composition. I'll comment on the expanded portfolio insight slides, review asset quality and finish up with the non-performing asset roll forward.
On Slide 18, we grew total loans by $161 million. Total commercial loans by $161 million on line 8, with increases in regional and middle market C&I, as shown on line 1 and stronger C&I sponsor finance growth on line 2. These came after a strong fourth quarter in regional and middle market C&I and a decline in C&I sponsor finance balances.
Dropping to Slide 4, we had construction growth of $125 million, while utilization increased from 61.8% to 63.2% from the linked quarter and up from 50.4% at the end of the first quarter of 2022. This increase in construction was partially offset by pay-offs in the investment CRE, investment CRE of roughly $30 million on line 5.
We continue to hold our underwriting standards as we discussed in previous calls, which is driving more equity into projects to make them work. And as Stu mentioned earlier, we are beginning to see wider loan spreads.
Moving down to line 9, we maintained roughly the same pace of growth in the residential mortgage portfolio in the first quarter, while we are currently in the process of adjusting rates to drive higher originate and sell levels moving forward, prior to the move in rates in 2022, we had historically had a sold two portfolio ratio of roughly 70% to 30%. Over the last year, that proportion flipped to 30% -- 70% portfolio to sold, and we are in the process of adjusting pricing on new pipeline to return to more historical levels.
Turning to Slide 19. I've updated the portfolio insights slide, where we slice the portfolio several different ways to provide additional transparency into its composition. In the commercial space, the C&I classification includes sponsor finance as well as owner-occupied CRE associated with the business.
Our C&I portfolio is representative of our markets and has a 19.1% concentration in manufacturing. Our current line utilization remained consistent at 41.6%, up from roughly 41% at the -- at year-end with line commitments increasing $126 million.
We participate in roughly $780 million of shared national credits across various industries with an average balance of roughly $11 million. These are general relationships where we have taken a position and there is access to management and revenue opportunities beyond the credit exposure. We also have roughly $67 million of SBA guaranteed loans.
Diving into the sponsor finance, diving into sponsor finance, borrowers in this portfolio are platform companies owned by private equity firms with an eventual expectation of sale. We review the individual relationships quarterly for changes in performance, including leverage, cash flow coverage and borrower condition. I presented some of the key underwriting metrics, including cash flow leverage and fixed charge coverage. Classified loans improved, ending the quarter at 3.5%, down from 4.2% in the prior quarter.
Moving to construction finance. We have limited exposure to residential development, and we are primarily focused on one to four family non-tracked individual build residential construction loans through our mortgage department. For commercial construction, we continue to have a bias towards multifamily construction.
Moving down to consumer residential mortgage. The portfolio consists of primarily prime originated residential and consumer loans. These include HELOC and HE loans and to a much lesser extent, branch originated auto secured loans and miscellaneous other consumer loans. In summary, the portfolio is a balanced mix of what one might expect from a Midwest bank.
Turning to slide 20. I've added this slide to give further detail into our non-owner-occupied commercial real estate portfolio. The breakout is sorted based on our level of exposure from left to right. Since the great recession, we are focused on multifamily CRE lending, while selectively adding project and other segments, office exposure is broken out below the chart and represents 2.1% of total loans, with the highest concentration outside of general office in Medical.
From a historical standpoint, the portfolio has performed well, much like the rest of the portfolio. 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 being mitigated and acceptable, given our current market conditions.
Turning to slide 21. As in prior quarters, this slide highlights our asset quality trends and current position. We continue to maintain our asset quality profile with nonperforming loans on line six at 50 basis points of loans, up from 42 basis points to the prior quarter. We had an increase in 90 days past due as a result of two unrelated loans, where the resolution occurred after quarter end. The first related to the settlement of a participation, which increased the category $4.5 million and a second from the renewal of a $1.6 million loan, both have since been resolved.
Moving down to line 7. Classified loans or loans with a well-defined weakness increased $35 million to $250.5 million or 2.04% of total loans, which continues to remain comparable to pre-pandemic levels. In finishing out the slide, we had net charge-offs of $200,000 for the quarter, resulting in another quarter of strong portfolio performance.
Then moving on to slide 22, we once again roll forward the migration of nonperforming loans, charge-offs, ORE and 90 days past due. For the quarter, non-accrual loans went up by $4.3 million on line six, resulting from new non-accruals of $15.4 million on line two, a reduction from payoffs or changes in accrual status of $8.6 million on line three and a reduction of $1.4 million of loans moving to ORE with gross charge-offs of $1.1 million.
Dropping down to line 11, 90 days past due increased $5.3 million as a result of the issues just mentioned related to the $6.1 million in 90 days past due on the last slide. So net-net, 90-day NPAs plus net-net, NPAs 90 days past due were up $10.7 million, leaving us with favorable credit metrics. Overall, borrowers continue to perform well despite labor challenges, material shortage and higher interest rates.
Mark, I'll turn the call back over to you.
Thanks, John. Michelle and Mike, I hope the level of detail provided demonstrates our desire to just create transparency into our business. I hope it's helpful to our current and our future investors. Slide 23 and 24 are provided just to share the highlights of our 10-year combined annual growth rates, and for both assets and total returns.
And then if you look at slide 25, it's just -- it's a reminder of our vision, mission and our team statements, and the strategic imperatives that guide our decision making. I just thought I would point out given the environment we're in 0.4, that we're very much focused on maintaining top quartile financial results supported by industry-leading governance risk and compliance practices to ensure long-term sustainability of the enterprise.
So we really appreciate your attention, and we're happy to take questions at this time, Victor.
[Operator Instructions] And our first question will come from the line of Brian Martin from Janney. Your line is open.
Hey good morning, guys.
Good morning, Brian.
I just wanted to -- I appreciate the color on the -- all the disclosures on the commercial real estate and the construction and different office portfolios. Just one question, John, just on, I think you showed the classified loans out there this quarter. Can you just talk about any changes you've seen in the criticized loans, I guess that maybe you didn't have data's? Just trying to understand if you're seeing any changes underneath what we're seeing what’s on the press release. It sounds like credit is really performing well. So just want to just confirm that?
Yeah. Hi, Brian. The substandard loans moved at a similar -- excuse me, criticized loans moved at a similar rate to the substandard loans. The migration was pretty even within the portfolio. The criticized loans, obviously, with a potential weakness are a higher proportion of the total. So it's a larger dollar amount, but the rate at which it moved is about the same.
Okay. So pretty close. And then maybe just jumping to the -- just two other things. Just on the expense, just the increase this quarter was the normal seasonality. I'm just wondering if -- I don't know if Michele, if you can give any color on just, kind of, what the base rate going forward is? I know you talked about the FDIC that maybe sounds like a one-time event, but just getting the right place for think about expenses going forward?
Yeah, sure. So I would look for our expense run rate to around about $95 million to $96 million on a quarterly basis through the rest of the year. We did have that one-time credit, but then we also offsetting that, we had some employee benefit expense that incurs in January, or I'm sorry, in Q1 each year, so that will not recur in the later quarters. And then there was also some incentive cost in there as well that's a little more seasonal. But so I would look for $95 million to $96 million as a normal run rate, Brian.
Got you. Okay. And then just maybe one other one, and I'll jump out and jump back in the queue. Just the margin, can you just talk about what was the margin in the month of March relative to what it was for the quarter? I'm just kind of trying to understand the baseline what we start at heading into 2Q here?
Sure. Give me one second here. So in March, our margin was 3.55%.
3.55%. Okay. Perfect. That's all I had for now. Let me step out, and I'll let someone else step-in.
Okay. Thank you.
Thanks.
One moment for our next question. Our next question will come from the line of Damon DelMonte from KBW. Your line is open.
Hey, good morning. Hope everybody is doing well today, and thanks for taking my questions. I guess just to kind of continue on the margin discussion there, Michele. As you look at like your deposit betas over the upcoming quarters and if you kind of call the end of the cycle being at the end of this year, how do you kind of see that tracking based on where you are today?
Yeah. We've modeled out -- there's so many assumptions that go into figuring out what your margin is. And I think after we kind of thought through what we think could play out through the remainder of the year, we're assuming that our Q4 margin would be 3.43%, which is still 40 basis points above Q1 of 2022. And so we're expecting maybe another decline of maybe 15 basis points through the remainder of the year.
Okay. That's helpful. Thank you. And then with respect to fee income, strong quarter this quarter, what are some of the puts and takes we should consider as we look at the remainder of the year?
I think this quarter's fee income level is a really good run rate for the remainder of the year. We do plan to sell more mortgage loans than we have in the last few quarters, and so we do think that could generate some gains. And so that's really kind of what is generating our confidence and stability.
Okay. Great. And then I guess, lastly, your approach to kind of dealing with the loan loss reserve has been to grow into it over the last couple of years here. Do you feel like you're getting to a point where you need to start to start providing for the growth that you're expecting, or do you think that there's still more room to grow into that?
I think there's more room to grow into it. We don't expect to have to take provision in the near term. We are modeling a mild recession in our models currently, but we'll continue to evaluate it each quarter with loan growth and particularly if we see any credit events that occurred during the year.
Okay. Great. That's all that I had. Thank you very much.
Thanks, Damon.
One moment for our next question. Our next question comes from the line of Scott Siefers from Piper Sandler. Your line is open.
Good morning, everyone. Thank you for taking the question. I was just curious, just given all the sort of the heightened visibility or, I guess, certainly on securities portfolios generally. Any thoughts on whether you guys would manage any of the securities portfolio even differently just given sort of all the unrealized loss issues both in AFS and health maturity as well?
I don't think there will be anything different in the way that we'll manage it. One of the things that I mentioned this quarter we were able to get $213 million in bond sales. In Q1, we've had $69 million in Q2. I think we'll continue to look for opportunities to try to harvest some of those bonds. And the loss that we've taken is pretty negligible. So we think that, that will continue through the remainder of the year, and that will provide some good liquidity for us, and we'll get back to a more normalized level of investments to assets.
Okay. Perfect. And then I wanted to switch gears to the deposit base for just a second. I think just on non-interest-bearing to total you're at about 20%. And then I appreciated the discussion of sort of those lower-yielding kind of operational accounts that you have as well. So, in response to -- what I'm going to ask if you want to layer those in that be certainly fine as well. But how do you think the deposit mix, particularly your non-interest-bearing or low-yielding -- pardon me, low-interest cost balances will sort of traject within the scheme of the total deposit portfolio through the rest of this cycle?
I think we're still -- we're going to continue to see a little bit more of a negative mix shift. And so if we just stick with just the pure non-interest-bearing, since I know we do put that in our press release, the non-interest-bearing is currently at 20% of total deposits. And so I would expect that that would probably come down maybe another two basis points maybe through the remainder of the year.
Two percentage points or basis points?
2%, yes, sorry.
No problem. Okay. Perfect. That's good color. Thank you very much.
Thanks Scott.
Our next question comes from the line of Ben Gerlinger from Hovde Group. Your line is open.
Hey, good morning guys. It seems like you guys are still in a market share expansion, i.e., kind of in growth mode still. Have you seen any opportunities or any lending segments that people are stepping away from, or kind of more broadly speaking, are you seeing shots on goal now because of a bigger size and where pricing is kind of more in the bank shape is there less competition?
Well, it's Mike Stewart here. Yes, as our bank has grown, we have invested in a group of people that I would say focus on what we call upper middle market, the broader market, might just call it in middle market, but we have the ability to work with larger companies, and therefore, control their entire operational accounts at the same time.
And then our expansion into the Greater Detroit marketplace or Michigan, in particular, over the last year, gives us opportunity in that space as well. So, I do think that the organic growth in the commercial side in the middle market space is a good place for us to be, and that's where we're seeing most of our growth.
Got it. And then I have a two-part question here. Any of the -- because I mean deposits were pretty solid. The growth was, was anything within that, that is purely a seasonality factor that might outflow? I mean, kind of boosting 1Q results?
No, we don't really have much seasonality in our deposits. I mean the only seasonality that we incur is intra-quarter with public funds where we see taxes come in. And that occurs typically in May and in November. But then by the time we get to the end of the reporting quarter, it kind of flows back out. And so when you look at quarter end, there's really nothing there, I think, to know Ben.
Got you. I suppose thing, but when you just think kind of your deposit growth was pretty healthy relative to what we've seen in the industry. So, I'm just kind of -- maybe I'm thinking out loud here, but it seems like you might be pulling forward some of your positive beta pressure.
And if loan growth doesn't materialize, I think your -- is it safe to assume your margin could actually be higher than what you stated Q4, or is that kind of really embedding in a mosaic of theories that feels pretty comfortable with your 4Q guidance?
Yes. Ben, it's a great point. We were -- we became much more aggressive, as Mike Stewart mentioned, in early February, in March with the specials on the consumer side and individual conversations on the commercial side.
At Michele's guidance, we feel good about in terms of overall margin and where it takes deposit betas. And just given the environment be like putting a -- having a conservative estimate makes sense and given all the uncertainty.
So we feel good about where we stand, and we're optimistic about the remainder of the year and our ability to continue to grow. And funding is critical to growth, so we definitely kind of shift the gears in early February and started being more aggressive with deposit rates.
Got you. Appreciate the color and the extra insight on the slide deck. I appreciate it. I’ll step back. Thanks, guys.
Thank you.
Thank you. One moment for our next question. Our next question comes from the line of Terry McEvoy from Stephens. Your line is open.
Hi. Good morning, everyone.
Good morning, Terry.
Maybe, Mark, I’ll start with a question for you, kind of a non-modeling question. When I look at slide 24, First Merchants has had kind of steady organic and bank acquisition growth over the years. So, I guess, my question is, if bank M&A is on hold for a while, how are you thinking about accelerating organic growth?
Are there hiring plans you're contemplating? And any new markets that you think can provide some incremental growth. I think, a few calls ago you mentioned expanding into Cincinnati, if my memory is correct. But if you have any comments there, that would be helpful.
Our guidance of mid to high single digits over time of organic growth, we still feel great about. In this environment, we think, a little lower estimate, maybe 5 or 6, 7 makes more sense. But that's what we're focused on for now.
The M&A activity, we have -- there are a handful of markets we like. We're focused on deposit-rich institutions, but don't anticipate really doing anything until at least 2024. And I feel like we can produce the same type of results, just on a core basis for a given period of time.
Ultimately, we tend to like M&A for a couple of reasons that it provides additional funding to support continued loan growth and it introduces new markets where we can build a commercial bank and typically results in improved efficiencies and economies of scale, our operating leverage over time.
But we're looking in the four states that we're currently in Indiana, Ohio, Michigan, maybe Illinois, but focus on the other three primarily. And in this environment, we're just spending time continuing to build relationships versus really thinking about kind of putting a price out on the table.
We also I mentioned those two agreements that we signed this year with Q2 and SS&C to replace our online and mobile platform as well as our private wealth platform. And we're very focused on completing those projects and getting all that work done by the end of the second quarter of next year. So -- it's all internal at this point, and I would expect it to stay that way at least into 2024.
Thanks for that Mark. And maybe a follow-up for John. The Shared National Credit Portfolio, the 782, are there any leverage loans in there? And maybe give us a profile of what's in that portfolio in terms of who are the lead banks and some kind of concentration or geographic color would be helpful as well.
Yes. So the – it kind of fits into a categories, Terry, with the preponderance of the loans being middle market companies that we participate with partners in our geographic footprint. It's that statement I made earlier about having access to management and cross-selling into other non-credit-related services to those companies. There's a small less than, I think, around $100 million of, I'll call it, leverage loans credit graded BBB or better -- BBB minus or better. And those are more national companies, but it's a small portion. A portion of those were picked up through some of the mergers that we've completed.
Hey, Terry, its Mike Stewart. The typical banks that we partner with would be the names like Huntington and Key and Fifth Third and banks that are leading transactions that are on our market. And we're partnering there, because remember we also have a full syndication desk and capability. So it offsets what we're also selling to diversify portfolios on the other end, and those very banks also bind our transactions as well as selling downstream.
Perfect. Appreciate the color, guys, and Michele from you as well. Thank you.
Thank you, Terry.
Thank you. And that concludes our Q&A session for today. I would now like to turn the conference back to Mark for any closing marks.
Yes. Just again, thanks for your interest and your investment in First Merchants. And again, I hope all the color we tried to provide helps you have great insight into our operating model. And hopefully, you can also tell from the comments that we're optimistic about the future of First Merchants and our performance. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.