First Merchants Corporation

Good day, and thank you for standing by. Welcome to First Merchants Corporation, second quarter 2023 earnings. 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 the question during the session, you will need to press star 11 on your telephone. You will then hear a message advising that your hand is raised. To withdraw the question, simply press star 11 again. 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 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 reconciliation of GAAP to non-GAAP measures. I would now like to hand the conference over to the Chief Executive Officer, Mark Hardwick. Please proceed.

Well, good morning and welcome to the first March and second quarter 2023 conference call. Carmen, 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, and you can access today's slides by following the link on the second page of our earnings release or by going to our website through the investor relations section. 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. On page four, you will see a map representing the geographic locations of our 119 banking centers, as well as a few financial highlights as of 6-30, June 30 of 2023. Turning to slide five, I'm happy to report that our performance remains healthy and strong and our teams continue to meet the demands of our communities and our client base. We reported second quarter 2023 earnings per share of $1.02 compared to 63 cents per share in the second quarter of 2022. or $1.01 when adjusted for a couple of extraordinary items last year to include our acquisition of Level 1. Net income was just over $60 million for the quarter. Our return on tangible common equity totaled 18.04% and return on assets totaled 1.34% for the quarter. Year-to-date, we've earned $124 million, or $2.09 per share. We remain committed to mid-single-digit loan growth and our continued low 50s efficiency ratio through the remainder of 2023 as we manage through what's left of continued modest margin compression. Now, Mike Stewart will provide more insight on our balance sheet to include a small non-core loan sale, and Michelle and John will cover their respective areas. We did see an uptick in non-accruals that I know John will be covering in detail.

Mike? Yeah, thank you, Mark, and good morning to all. Slide six remains unchanged and is a reminder that our financial results represent the durability of our business model within these markets we serve. And if you visualize the map on slide four, we primarily operate within these three states, the heart of the Midwest. Our markets include growing metropolitan cities like Indianapolis, Columbus, and Detroit, with many mid-sized cities and communities in between. As the last bullet point under the consumer banking header states, we serve diverse locations in stable rural metro markets. First Merchants has a granular and diverse customer base of deposits and loans derived from these four listed banking segments. Through the second quarter of 2023, these markets have remained resilient to the broad economic environment with stable unemployment rates and with businesses continuing to seek ways to expand and optimize their operations. We remain committed to our business strategy, and we remain committed to our strategic direction of organic growth. continuing to invest in our team, continuing to invest in our technology platforms and top tier financial metrics. So if we turn to page seven, the top of the page offers a breakdown of our core loan growth by business units. The total annualized loan growth for the second quarter was 1.5% and 4.7% for the first six months of 2023. As noted on the page, we chose to sell a $116 million commercial loan portfolio that was not core to our relationship banking expectations, as there was no ability to cross-sell or gain depository balances from those clients. That portfolio had been aggregated over the years through bank acquisitions and through direct origination. The portfolio was managed centrally and had a secondary market valuation that allowed for an effective sell. So, as the footnote states, when adjusting for that $116 million sell, our annualized second quarter loan growth was 4.7% and 6.9% for the first six months of 2023. Moreover, when adjusting for the sell, the commercial segment loan growth for the quarter was 4.1% versus the 0.9% decline on the top right-hand side of the slide. All the commercial loan growth during the quarter was within the commercial industrial sector, as our investment real estate portfolio showed a small decline. The commercial segment, as we've talked about before, represents over 75% of our total loan portfolio, and the new loan generation during the quarter was approximately $142 million when adjusting for that non-relationship loan sale, and over $300 million year-to-date. While the consumer segment on this page contracted this quarter by 0.6%, that dollar amount was less than $2 million. And all that decline was within our private banking clientele. The mortgage portfolio growth during the quarter was approximately $80 million in adjustable rate loans. And as we discussed last quarter, we have modified our mortgage approach and have pivoted back to an originating sell model with a target of 70% of originations to be sold. Page 15, the non-interest income highlights page, reflects that continued growth in gain on self-fee income. So overall, the commercial segment continues to be the loan growth engine of the bank, and we continue to get higher spreads on our new loan generation. Within investment real estate segment, the spreads continue to widen up to 50 basis points on a similar risk profile from the second half of 2022. And within the CNI space, the spreads have widened up to 25 basis points with a strong emphasis on relationship strategies, deposits, and fees. The commercial and consumer loan pipelines ended the quarter at consistent levels to prior quarters. So like I said before, we are committed to continued organic loan growth with our clients and with prospective clients. Our balance sheet is positioned for that growth and our underwriting remains consistent and disciplined across all of our markets. The overall economic environment coupled with our current loan pipelines affirms my expectation of single-digit loan growth moving forward through 2023 with commercial driving the bulk of that growth. Let me talk a little bit about deposits, which is the bottom half of that page. Deposit balance contracted roughly 3% on an annualized rate for the second quarter, but through the first six months of 2023, total deposits have grown nearly 3%. The commercial and consumer decline is primarily due to clients using their excess liquidity within their working capital cycles or their capital plans to minimize debt usage or to optimize their capital structures. These clients with the clients that have excess deposits have been active in taking advantage of money market and CD rates, specifically municipalities and private wealth clients. On a unit basis, we continued to grow our commercial and consumer households throughout the quarter and year-to-date. I'll turn the call over to Michelle to review more detail the composition of our balance sheet and the drivers of our income statement. Michelle.