First Merchants Corporation

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the first Merchants Corporation second quarter earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a Q&A session. To ask a question during the session, you will need to press star 1-1 on your telephone keypad. Again, that is star 1-1. 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 GAAP measures. The press release available on the website contains financial and other quantitative information to be discussed today, as well as a reconciliation of GAAP to non-GAAP measures. At this time, I would like to turn the conference over to Mr. Mark Hardwick, CEO. Thank you. Sir, please begin.

Good morning, and welcome to the First Merchant Second Quarter 2022 Conference Call. Howard, thank you for the introduction and for covering the forward-looking statement on page two. We released our earnings today at approximately 8 a.m. Eastern. Hopefully you have the slide presentation, but if you don't, you can access those slides by following the link on the second page of our earnings release. On page three, you will see today's presenters and our bios to include President Mike Stewart, Chief Credit Officer John Martin, and Chief Financial Officer Michelle Kaviaski. Page four is a snapshot of the first merchant's geographic footprint and some relevant financial highlights for your review Given the close of Level 1 Bancorp on April the 1st, to start off our second quarter, we have updated the Banking Center map and included our new asset totals of nearly $18 billion. We also continue to receive meaningful awards for customer service, leadership, and performance from publications like Forbes, Newsweek, S&P, and Comparably, and we've updated a few of those for you at the bottom of this slide. Now, if you would turn to slide five, Reported earnings per share for the quarter totaled 63 cents compared to linked Q1 2022 total of 91 cents. When adjusted for PPP income and level one acquisition expenses, our Q2 2022 earnings per share totaled $1.01, an increase of 13 cents per share or 15% over the linked Q1 2022's adjusted total of 88 cents. Growth in loans of 20% and margin improvements of 22 basis points account for most of our EPS improvements linked quarter over quarter. And that 22 basis points is when adjusted for fair value and also PPP, which Michelle will cover in a few moments. Our system integration of level one is scheduled for the third quarter, and the teams are working diligently to ensure a successful conversion. We also continue to streamline the branch network as evidenced by three additional consolidations in Q2 of 2022 and another announced two consolidations planned for the third quarter of this year. The year-to-date earnings per share story is similar to our quarterly results with similar PPP and M&A related adjustments required to see our core performance. When adjusted, our year-to-date 2022 earnings per share total $1.89, and that's 13% better than our 2021 results of $1.67. The ratios on page 5 are not adjusted for one-time expenses, but they obviously have a negative impact. based on the consolidation rules that we had to apply to Level 1. Michelle will highlight a few adjusted ratios, like pre-tax, pre-provision earnings, and the efficiency ratio later in the materials. Mike Stewart will now provide color on our lines of business and Level 1 before Michelle and John review our financial data and credit statistics.

Thank you, Mark, and good morning to all. As you look at the next two slides, I'll provide an update on our line of business results and their contributions within the quarter. Since our business strategy remains unchanged, I want to focus on page seven, titled Business Highlights. The top of the page offers a breakdown of the core loan growth by our business units. It was another solid quarter of active engagement with our clients and prospects that delivered an annualized growth rate of more than 20%. Excluding the PPP loans and the day 1 balances of level 1, the growth rate was nearly 14% for the 1st, 6 months of 2022. The commercial segment remains the growth engine for the bank's balance sheet, with loans now exceeding $8.9 billion within this segment. We added $1.1 billion of level one commercial loans as of April 1st, and the first merchants team generated $360 million of organic loan growth this year. Within the commercial line of business, the commercial industrial segment, CNI, is the largest component of the total balances along with the year-to-date and second quarter growths. John Martin has metrics he will review later that highlights the CNI growth exceeding $150 million during the second quarter. Like I've mentioned before, our commercial team has remained engaged in winning new clients, taking market share, along with providing additional senior debt and treasury services to our clients across all the geographic markets you see represented on the map. Within those geographies, businesses continue to expand plant equipment to meet growing demand. These customers have effectively managed their income statements, and while inflationary pressures are present, price increases and expense management practices have kept margin and coverage ratios stable. Their balance sheets have also remained strong when looking at working capital, line of credit availability, and their leverage profile. Line of credit utilization rates remain constant from the first quarter at roughly 45%. Our revolver commitments have increased during this period of time due to the inflationary pressure pushing up values of working capital assets. Working capital cycles are not necessarily slower than prior periods as supply chain issues have not been further constrained. Succession planning events within the ownership of middle market companies continue to be a driver for our sponsored finance team or through ESOP transactions. We have maintained a consistent and disciplined approach towards underwriting within this segment. The growth comes from current relationships and from the extended geographic reach we added through the investment of new bankers in 2021. The investment real estate footings have been choppy the past four quarters, but grew 3% in the current quarter. That growth was attributed to new production and the construction loan advances primarily within the multifamily asset class. Based on the historically low cap rates and liquidity in the secondary market, our real estate clients continue to take advantage of monetizing projects for liquidity and taking projects to the secondary market. We expect the investment real estate balances to remain choppy the balance of the year. Our underwriting approach has not changed, remained consistent with the primary asset classes that we focus on, which is multifamily, industrial, warehouse, student housing, and self-storage. Overall, businesses have deployed their PPP liquidity. Therefore, commercial deposit balances have reduced, as noted on the bottom chart, an annualized reduction of 5%. Post-close of the Level 1 acquisition, we did reduce their depository pricing structure to align with ours. At the end of June, the aggregate commercial loan pipeline remains consistent from the prior quarter. The CNI pipeline has strengthened, and the IRE pipeline softened. Moving on to the consumer segment, the nearly 7% annualized loan growth was a nice reversal from prior quarters after adjusting for the Level 1 closing. The quarterly increases can be attributed to our HELOC and small business products. Both segments experienced increasing application volumes, utilization rates remained consistent, and our underwriting approach has remained unchanged. At the end of June, the consumer loan pipeline remained strong, up over 15% from a year ago. Deposit balances declined for the quarter within the consumer segment, as shown on the bottom of the page. We did bring the level one depository pricing in line with the first merchants, and most of the decline in the quarter was attributed to this strategic decision. The rest of the consumer network experienced the regular seasonal depository fluctuations post-tax season, therefore about a 2% decline. The consumer team continued to gain new accounts through both in-branch and digital online activities. Our investment last year in a digital account opening process hit a high point last month with over 15% of new consumer DDAs being opened through the new digital channel. Let's move on to the growth in the mortgage portfolio. With the close of Level 1, our on-balance sheet mortgages have exceeded $1.5 billion and grew organically in the quarter by $225 million. The driver of this increase comes from continued strength in purchase volumes with more of our clients choosing our on-balance sheet variable rate pricing options. Given alternative returns within the investment portfolio, the mortgage asset class offers better risk return. Our underwriting standards remain unchanged, prime borrowers. With the increase in 15- and 30-year fixed rates, our clients have chosen our short-term or variable-rate mortgage solutions. Michelle will review the non-interest income detail where mortgage gain on sales remain muted as refinancing volumes have stayed at historical levels, low levels. The pipeline for our mortgage team ended a quarter flat when adjusting for the Level 1 team. Purchase and rehab volumes are nearly 60% of the current pipeline, up from 30% a year ago, reinforcing the macro slowdown in refinancing volumes. Overall, the economic and business climate across our markets is stable. We continue to see the resiliency and management teams of the companies we serve. Like I stated last quarter, they have solid business plans, they have solid balance sheets, and they are well positioned to effectively navigate inflationary pressures, supply chain, and labor issues. Our team remains responsive and ready to support our clients' needs. Coupled with the current economic environment, we should continue to achieve our high single-digit loan growth objectives into the third quarter. A few comments about our new Level 1 teammates and the markets they serve across Southeast Michigan and Grand Rapids. I've continued to spend time in their markets with their teams and with their clients, and I remain impressed and optimistic that their strong growth culture and demonstrated track record of winning will continue. As a reminder from last call, Terry Cable has moved to Farmington Hills to lead Michigan's region and build on the synergies between Level 1 and our existing Michigan franchise in Monroe. Greg Wernette, who led Level 1's commercial banking effort, will continue his leadership role as region president of that geography and work directly with Terry. The commercial team is now preparing for the August integration date that Mark referenced earlier. As of July 1st, the mortgage business has been fully integrated and now operating under a common platform. Tim McKay, who was named president of the mortgage line of business, along with Brad Wise, Deborah Reinerson, Michelle Kirsten, and Dan Evans, did a terrific job of leading the integration effort, and the mortgage team now operates under the first merchant's banner. The consumer team is deep into their training regiments in preparation of the August integration. Renee Molino will continue as the market leader of the 17 banking centers. Her team will get the support of over 60 First Merchants consumer banking professionals who will be onsite within the banking centers for up to two weeks in support of the change event. The collective organizations We have a lot of work to do between now and integration, but that said, we have made steady progress and our project status is green. I will now turn the call over to Michelle, who will provide the complete review of the quarter results, and John Martin can share the soundness of our portfolio. Michelle?