First Merchants Corporation

Thank you for standing by and welcome to the First Merchants Corporation third quarter 2023 earnings conference call. Before we begin, management would like to remind you that today's call contains forward-looking statements with respect to future performances and financial conditions of First Merchants Corporations that involves 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 most directly comparable GAAP measures. The press release available on the website contains financial and unquantitative information to be discussed today, as well as reconciliation of GAAP to non-GAAP measures. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question at that time, please press star 11 on your telephone. As a reminder, today's call is being recorded. I will now turn the conference over to your host, Mr. Mark Hardwick, CEO. Mr. Hardwick, you may begin.

Good morning and welcome to First Merchant's third quarter 2023 conference call. Valerie, thanks for the introduction and for covering the forward-looking statement on page two. We released our earnings today at approximately 8 a.m. Eastern Standard Time. You can access today's slides by following the link on the third page of our earnings release. On page three, 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 a map representing the geographic locations of our 118 banking centers, as well as a few financial highlights as of 9-30-2023. We also received two more comparably awards during the quarter, including Best Places to Work for Career Growth and best places to work for women, which I'm really proud of, so we did include those on page four. Turning to slide five, I'm pleased 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 Q3 2023 earnings per share of 94 cents per share compared to $1.08 per share in the third quarter of 2022. Net income totaled $55.9 million for the quarter, producing a return on tangible common equity of 16.54% and a return on assets of 1.24% for the quarter. During the quarter, our deposits increased by 65.4 million or 1.8%. The core results were even better as we decreased brokered deposits by $133.6 million and municipal deposits by $128.8 million. The adjusted growth of $327.8 million in traditional, commercial, and consumer deposits was very strong in positions as well for the coming quarters and expected growth. Loan yields remain strong, reflecting a highly variable portfolio. increasing to 6.58%. New and renewed loan yields totaled 7.88%, up 58 basis points over the second quarter of this year. Our efficiency ratio remains strong in the low 50s, and our allowance for credit losses is still 1.67%, despite the meaningful charge-off due to a customer fraud that we will discuss later in the call. Year-to-date, we've earned $179.9 million, or $3.03 per share, and we remain committed to our guidance of mid- to high-single-digit loan growth and top quartile performance metrics. Now, Mike Stewart will provide more insight on loans and deposits. Yeah, thank you, Mark, and good morning to everybody.

Our business strategy that's outlined on slide six remains unchanged. and is a reminder that the financial results we deliver represent the durability of our business model within the primary markets of Indiana, Michigan, and Ohio. We serve the diverse locations that are both in stable rural markets and in growing metro markets, and we're a commercially focused organization across all these business segments. The Collective First Merchants team is actively engaged within all of our business communities, and the offerings listed on this page represent the solutions we deliver. Throughout 2023, we've remained committed to our business strategy, organic growth of loans and deposits and fee income, attracting, retaining, and building our team, investing in technology platforms that enhance service, and delivering top-tier financial metrics. If you turn to slide seven, The map on the left side of the page offers a breakdown of the third quarter loan and deposit portfolio by state, with the right side highlighting loan and deposits by our primary business segments. The annualized total loan growth for the third quarter was on the lower end of my expectations as our commercial clients aggressively manage their working capital positions. Line of credit utilization actually reduced in the quarter, And clients slowed or delayed some of their capital outlays or projects as they continued to evaluate the current interest rate environment. Year to date, our total loan portfolio has grown on an annualized rate of 4.6% when adjusting for the second quarter loan sale we talked about last quarter. And as the earnings release stated, our loan portfolio is growing 6.4% over the last 12 months. As Mark said, Mid single-digit growth rate remains the expectations moving forward as the commercial loan pipeline ended September at the highest level we've seen in the past year. Moreover, October has already shown the benefits from the third quarter pipeline delays that have now closed. John Martin has a slide, page 18, that highlights the year-over-year growth within the portfolio. And that slide reflects that nearly 65% of our loan growth comes from the commercial segment. And overall, our commercial represents over 75% of our total loan portfolio with the balance coming from the consumer segment. That segment's comprised of residential mortgage, HELOC installment, and the private banking relationships. And as you can see, during the third quarter, that segment grew at a 7.3% annualized rate. Overall, the commercial segment continues to be the loan growth engine of the bank, and we continue to get higher spreads on the new loan generation. Michelle will highlight loan yields next, but within the investment real estate segment, spreads continue to widen up to 75 basis points on similar risk profiles from the second half of 2022, and the CNI space spreads are widening up to 25 basis points from with a strong emphasis on relationship strategies, both deposits and fees. You know, the overall economic environment, inclusive of the competitive landscape, the competitive landscape with super regional banks in particular, affirms my expectation of single-digit loan growth with improving loan yields through the balance of 2023 and into 2024 with the commercial group driving the bulk of that. Our balance sheet is positioned for that growth. Our team is positioned for that growth. And our underwriting remains consistent and disciplined across all those segments. So if you think about the deposits that you see on that page, deposits grew 1.8% on an annualized rate during the third quarter and 2.4% year-to-date. As you heard Mark discuss from slide five, the commercial deposits were actually muted. The growth was actually muted by the seasonal decline of the municipal fund space seasonally paying down about $128 million. So said differently, the rest of the commercial-related deposit base grew 5% during the quarter when adjusting for those municipal fund declines. The consumer deposit segment showed strong growth at over 9% annualized for the quarter, and this growth includes the activity through both the branch network and through our private banking team. But the continued deposit growth throughout 2023, throughout the bank failures earlier this year, throughout the continued Fed rate increases, supports our ability to remain focused on growth. So I'm going to turn the call over to Michelle, and she can review more of the detail of the balance sheet and the income statement drivers.