First Merchants Corporation

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 the 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 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 Merchant Corporation. That involves 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 direct 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. I will now attend the conference. Over to your speaker today, Mark Hardwick, CEO. Please go ahead.

Good morning and welcome to First Merchant's first quarter 2023 conference call. Victor, thanks for the introduction and for covering the forward-looking statement on page two. We release 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 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 Michelle Kaviesky. On page four, 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. You know, given the turbulence of the past quarter, I'm glad we have such a grassroots community banking model. You know, 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 five. 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've reported earnings per share of $1.07, an increase of 17.6% over the first quarter of 2022's 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 are hard at work to deliver on our timelines for deployment. Now, Mike Stewart will provide more insight on our balance sheet growth before Michelle 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. You know, the past two years, I haven't spent any time on slide six, 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 four, 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, mid-sized 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 and 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 seven. 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 CNI 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 note, 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% portfolioed. Overall, the outlook affirms my expectation of single-digit loan growth moving forward through 2023. And I 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 deposits 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 the 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 timeframe, we've demonstrated an ability to execute as a company as we launched our new 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 You 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 features 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 Michelle 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, Michelle.