First Merchants Corporation

Good day and thank you for standing by. Welcome to the First Merchants Corporation Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. 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 conditions of First Merchants Corporation that involve risk and uncertainty. 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 relatively comparable GAP measures. The press release available on the website contains financial and other quantitative information to be discussed today, as well as a reconciliation of GAP to non-GAP measures. I would now like to hand the conference over to your speaker today, Mark Hardwick, Chief Executive Officer. Please go ahead.

Well, good morning and welcome to the First Merchants Third Quarter 2022 conference call. Michelle, thank you for the introduction and for covering the forward-looking statement on page 2. We released our earnings today at approximately 8 a.m. Eastern. You can access today's slide by following the link on the second page of our earnings release. On page 3, you'll see today's presenters and our bios to include President Mike Stewart, Chief Credit Officer John Martin and Chief Financial Officer Michelle Kaviesky. Page 4 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 1st of this year, you will notice an updated banking center map highlighting our now 122 locations across four states. We also continue to receive meaningful awards for customer service, leadership, work-life balance, and performance from publications like Forbes, Newsweek, S&P, and Comparably. Now, if you return to slide five, reported earnings per share for the third quarter totaled $1.08 compared to Q3 2021 results of 98 cents. When adjusted for PPP income, And level 1 acquisition expenses are Q3 2022 EPS totaled $1.12, an increase of 25 cents per share or 29 cents over Q3 2021's adjusted total of 87 cents per share. Organic growth in loans of 10% for the quarter and 13.5% year-to-date. when combined with core margin improvements of 28 basis points for the quarter and 23 basis points year to date, are the drivers to our EPS improvements. Our system integration of level one is complete and was exceptional in many areas and more challenging than anticipated in others. Our teams in both Michigan and our legacy markets quickly resolved issues with professionalism and customer service mindset that makes me proud. We also continue to streamline the branch network as evidenced by five completed consolidations in 2022. The year-to-date earnings per share story when normalized for PPP income and acquisition accounting resulted in year-to-date 2022 earnings per share of $3.01, which is 18.5% better than our 2021 total of $2.54. Third quarter return on assets of 143 and return on tangible common equity of 20.85 evidence the strength of our combined companies post-acquisition and still includes some acquisition costs. Michelle will highlight a few additional adjusted ratios like the pre-tax pre-provision earnings and our efficiency ratio later in the material. Mike Stewart will now provide color on our lines of business. His continued presence in the Michigan market with employees and customers has been valuable. And I'll just add that our 150 employees strong appreciation dinner this past Thursday was full of energy and excitement. I can't really express just how encouraged I am by the talent of our new level 1 colleagues.

Yeah, thanks, Mark. I agree with that statement. Spending time in the Michigan market, as I do in many markets, is exciting. And being able to meet our clients, work with the teammates, continue to see the opportunity is really a wonderful thing for First Merchants Bank. I'll have us focus on page seven, right, business highlights. The top of the page offers the breakdown of the core loan growth by our business units. The third quarter represented another solid quarter of working with our clients and prospects borrowing needs that delivered the annualized growth rate of more than 10%, excluding the PPP loans. As discussed in our prior calls, we strive for high single-digit annualized growth rates, and these results achieve those targets. As this morning's news release noted, total organic loan growth for the past 12 months has been over 13%, and last quarter the growth rate was over 20%. The commercial segment loan balances now total $9 billion of the $11.5 billion loan portfolio. The 2.3% rate of growth for the quarter was at a slower pace than the prior quarter of 13%. New business activity was solid as measured by new name generation growth. but line of credit usage declined this quarter as many clients are now highly focused on loan balances given continued steep rise in interest rates. That behavior is also a primary driver of the decline in commercial deposits that you can see on the bottom section of this slide. The commercial pipeline ended the quarter at a highest level this year. We measure pipeline by both credit that is currently within our approval channel and credit within a proposal phase. Both are at the highest levels. The drivers of the commercial growth in the C&I segment continues to be the expansion of plant and equipment to meet growing demand of products and services for our clients. While line of credit utilization rates declined, our revolver commitments increased due to the continued inflationary pressures pushing up the values of working capital assets. Working capital cycles, on the other hand, are not necessarily slower than the prior periods as the supply chain issues have not been further constrained. The second driver continues to be succession planning events within the ownership of middle market companies. Our sponsor finance team and ESOP transactions benefit from these sell-side events. We have maintained a consistent and disciplined approach towards underwriting within these segments. The last driver is the increase this quarter in investment real estate footings. Construction projects have continued to fund throughout the summer, and there have been a slower pace of project refinancing into the secondary market. Our underwriting approach has remained consistent within the primary asset classes we focus, which is multifamily, industrial, warehouse, student housing, medical office, and self-storage. Let's see, let's move on to the consumer segment, where loan growth picked up the pace in the quarter reflected by the 21% annualized growth as compared to the 14% growth year-to-date. The quarterly increases can be attributed to home equity loans, private wealth relationships, and small business activity. The home equity activity is correlated to the continued increases in home values, and our average utilization of the portfolio has remained the same through quarters. Our underwriting approach remains unchanged in all of these categories as well. At the end of September, the consumer loan pipeline remains solid but lower than the prior quarter. Consumer deposit balances declined for the quarter you can see on the bottom. We have brought the former level one franchise deposit base in alignment with our pricing disciplines post our integration at the end of August. This effort is now complete. And we look to drive deposit balances through our relationship model and connectivity to our whole bank efforts. The consumer team continued to gain new accounts through both in-branch and digital online activities. Our investment last year in a new digital account opening process hit a high point last month with over 18% of new consumer DDA accounts being opened through the digital channel. So let's discuss the loan growth within the mortgage portfolio, which increased roughly $187 million in the quarter. The on-balance sheet residential portfolio now totals $1.7 billion. The driver of the quarter and year-to-date increases come from continued strength in purchase volumes with more of our clients choosing five- and seven-year adjustable rate product offerings. Our underwriting standards remain unchanged, prime borrowers. With the continued increases in 15- and 30-year fixed rate options, our clients have chosen our shorter-term adjustables. Michelle reviewed a non-interest income detail where mortgage gain on sale remained muted as refinancing volumes are still at historical low levels. The pipeline for our mortgage team ended the quarter higher than prior year but less than the end of June. Purchase and rehab volumes now exceed 70% of both the originated and pipeline units. On an overall comment, the economic and business climate across all of our markets remain stable. We continue to see the resiliency in the management teams of our companies and households we serve. Our team remains responsive and ready to support our growth plans of high single-digit growth to close out the full year 2022. A few more comments about our expanded Michigan market and to continue Mark's earlier statements. The Level 1 system integration was completed at the end of August. Our new teammates, along with many legacy First Merchants folks, have worked tirelessly through this change event. Collectively, they have worked with our clients and have built the foundation for future growth in Southeast Michigan, Ann Arbor, and Grand Rapids. I remain impressed and quite frankly optimistic that their strong growth culture and demonstrated track record of winning will continue. I'm going to turn it over to you, Michelle, to provide more review of the quarter results, and we can then get to John for the status of our portfolio.