First Merchants Corporation

Good day, and thank you for standing by. Welcome to the First Merchants Corporation fourth 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that this conference call 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 turn the call over to Mark Hartwood, CEO. Please go ahead.

Well, good morning and welcome to the First Merchants Fourth Quarter 2022 conference call. Lisa, thanks for the introduction and for covering the forward-looking statement on page two. We released 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 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 Kaviesky. Page four is a snapshot of the First Merchant's geographic footprint and some relevant financial highlights for your review. You know, I'm excited to share our results with you today given our strong performance in 2022 to include a clean fourth quarter that requires no adjustments related to our April 1st acquisition of Level 1. Our message should reflect my appreciation towards our clients and our teammates for delivering a very good year. We also hope to establish a baseline through our Q4 results that allows for effective modeling around an optimistic 2023 inclusive of the realism required given the industry headwinds. Now, if you turn to slide five, Net income totaled $70.3 million for the quarter compared to $47.7 million in the fourth quarter of 2021. Reported EPS for the fourth quarter totaled $1.19 without any required adjustments compared to Q4 2021 of $0.89, a 33% increase. organic growth in loans of 11.8% for the quarter, and another 18 basis points of core margin expansion over Q3 of 22 are the drivers of our EPS improvements. This performance resulted in a 1.59% return on assets and a 24.2% return on tangible common equity for the quarter. The year-to-date results or EPS totaled three which equaled last year's total of 381. However, this year's results had 27.7 million less PPP income than last year and 33.3 million more acquisition expense than last year's earnings per share. When adjusted for those two items, which total $60 million, our year-to-date 2022 EPS totaled $4.20 which is 24.3% better than 2021's total of $3.38. Fueling the improvements for the full year were once again loan growth, excluding our acquisition, totaling 13.9%, and core net interest margin expansion of 34 basis points. Mike, Michelle, and John will provide some color on the loan portfolio, its makeup, pricing, and areas of growth later in the presentation. Now, Mike will cover pages six and seven.

Yeah, thank you, Mark, and good morning to all. As you look at the next two slides, I will provide an update on our line of business results and their contributions within the quarter. Since our business strategy on page six 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. The fourth quarter represented another excellent quarter of organic growth, nearly 12% in aggregate, with the commercial segment growing over 10.5%. The results continue to demonstrate the close working relationship between our team and our markets. As discussed in prior calls, we strive for high single-digit growth rates, and as noted on the right-hand side of this chart, we achieved those levels for all of 2022. The commercial segment, over 8.5%. The consumer segment, over 9.5%. The mortgage segment, close to 60%. As footnoted, these are organic results adjusted for PPP and the day-one balances of the level one acquisition. But I do want to spend some more time on the global loan results, specifically the dollar increases behind the percentages on this page. As noted on slide 11, the commercial segment represents 75% of our total loan portfolio. The 10.6% fourth quarter growth rate in commercial was approximately $240 million, or 70% of the total fourth quarter loan growth of $345 million. While the consumer segment contracted this quarter by 3.1%, that dollar amount is less than $7 million. The mortgage portfolio growth during the quarter was approximately $100 million versus the prior quarter growth of $190 million. My point is, the commercial segment continues to be the lone growth engine of the bank. All segments demonstrated solid growth rates, and John Martin is going to talk more about the detail of our portfolio later in the presentation. Let me go into the drivers of commercial home growth in the fourth quarter. There are threefold. New business activities first and foremost. Our teams continue to win new relationships across the geographies and across all segments of focus. Our team alignment puts them in the best position to win. We have alignment with our credit partners and we have alignment on market coverage. I shared several quarters ago we added key staff within certain markets to augment our existing teams. This people investment was within asset-based lending, upper middle market, and syndications, and all are contributing alongside our existing team. The second driver of growth was from our existing clients. Capital for expanded plant and equipment, working capital growth, and acquisition financing remained active through the end of the year. And the final driver is line utilization, specifically within investment real estate, which is construction draws, and the CNI line utilization inched up 1%. Overall, we have maintained a consistent and disciplined approach towards underwriting with all these segments, and the commercial pipeline ended the quarter consistent to prior quarters. Moving on to the consumer segment, loan balance is contracted by 3%. As the second bullet point notes, the $7 million decline is attributed to the private banking footings. With the rise in interest rate, certain clients reduce balances with excess investments or lower earning deposits. On the contrary, home equity balances continue to increase during the quarter, which is correlated with increasing home values. Average utilization on that portfolio has not changed. And across all of consumer, our underwriting approach remains unchanged. Additionally, the consumer loan pipeline remains consistent with prior quarters. So let me touch on the mortgage segment. The 24.2% growth rate was approximately $100 million. The aggregate mortgage portfolio is now just over $1.8 billion, or 15% of the total $12 billion loan portfolio. Again, trying to highlight the emphasis on commercial. The driver of the quarter and year-to-date increases in mortgage comes from the continued strength in purchase volumes, with more of our clients choosing our five- and seven-year adjustable rate product offerings. Our underwriting standards remain unchanged here, prime borrowers. With low housing inventory, high home prices, and higher mortgage rates, the mortgage pipeline ended lower for the fifth consecutive quarter. I want to speak to the deposit section on the bottom half of this page. We are actively managing the deposit rates to maximize our margin. The quarterly decline of 1.4% continues an improving trend. Last quarter, we reported a 3.7% deposit contraction. which was less than the 8.2% deposit contraction reported in the second quarter. Consumer deposit balances increased for the quarter at a 4.1% annualized rate. The consumer team continued to gain new accounts through both in-branch and digital online activities. Additionally, our consumer relationships have responded favorably to our new money CD and new money market promotions. As noted in the first bullet point, the commercial deposit decline is primarily from the public fund sector. The decline in this segment is simply from municipalities or school corporations looking for the highest marginal deposit rates across the competitive landscape. Additionally, many business clients continue to utilize excess liquidity on their balance sheets for higher returning activities like acquisitions, plant expansions, or dividends. Michelle has more details to share about our balance sheet, our expanding margin, along with greater details of our other key performance metrics. Michelle?