First Merchants Corporation

Thank you for standing by, and welcome to the First Merchants Corporation's second quarter 2024 earnings conference call. 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 the reconciliation of GAAP to non-GAAP measures. As a reminder, today's call is being recorded. I will now turn the call. over to Mr. Mark Hardwick, CEO. Mr. Hardwick, you may begin.

Good morning and welcome to the First Merchant Second Quarter 2024 conference call. 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 Time. You can access today's slides by following the link on the third page of our earnings release. On page three of our slides, 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, we have a few financial highlights for the quarter to include total assets of $18.3 billion, $12.7 billion of total loans, $14.6 billion of total deposits, and $9.3 billion of assets under advisement. On slide five, net interest margin and net interest income increased during the quarter. Net interest margin increased by six basis points and net interest income increased by $1.5 million. We also had meaningful improvements to non-interest income and non-interest expense that when coupled with net interest margin improvements helped push our efficiency ratio below our key performance indicator of 55%, totaling 53.84% during the quarter. Loan growth totaled 6.1% for the quarter, and we have now substantially completed all four of our major technology initiatives for the year. On a less positive note, our provision expense totaled $24.5 million for the quarter. We previously financed the sale of a business from one long-time owner to his second in command based on a substantial and consistent EBITDA. Due to competition and the renegotiation of material contracts, the business has experienced significant deterioration and its performance, which ultimately resulted in our 10Q subsequent event footnote on May 1st and this quarter's charge-off. Despite the heightened level of provision expense this quarter, our earnings power produced growth of capital and took tangible book value per share. Our capital position allowed for the repurchase of another $20 million of stock and the redemption of $25 million in expensive sub-debt. Earnings per share totaled 68 cents Per share in Q2 and through six months, EPS totaled $1.48 per share. Now, Mike Stewart will discuss our line of business momentum.

Thank you, Mark, and good morning to all. Our business strategy summarized on slide six remains unchanged. We are a commercially focused organization across all these business segments and across our primary markets of Indiana, Michigan, and Ohio. As we enter 2024, we remain focused on executing our strategic imperatives, specifically organic growth of clients through loans, deposits, and fees, engaging, rewarding, and retaining our teammates, and investing in the digitization of our delivery channels. These remain the focus for the balance of 2024. So let's turn to slide seven. The second quarter continues the choppy trend of loan growth from quarter to quarter. We experienced over 6% growth on an annualized basis during Q2. This followed the flat first quarter and the 8% growth we experienced in the fourth quarter 2023. During this quarter, the commercial portfolio experienced very strong CNI growth, more than 13%. The growth was shared across the regions with Indiana and Ohio joining Michigan and the sponsor teams in driving year-to-date growth to the high single digits. Our commercial focus has always been the primary driver of our balance sheet growth, and the commercial and industrial sector is our largest portfolio. CNI comprises 50% of the total first merchant's loan portfolio and two-thirds of the commercial. Business owners within our markets continue to execute their operating plans with growing working capital, equipment, and acquisition needs. Our commercial bankers continue to support those companies, not only with capital solutions, but also with treasury solutions. Overall, we continue to gain market share through our clients and with prospect conversions. Those two attributes, economic growth and market share growth, are the primary drivers of the continued growth of CNI. The strong CNI growth was muted by the contraction within the investment real estate portfolio. The stabilization of construction projects has continued, and our clients have chosen to either sell their projects, taking advantage of attractive cap rates, or refinance their projects into the permanent market, taking advantage of low long-term interest rates. We have experienced a higher than normal runoff in 2024, primarily with the multifamily asset class. The backlog of projects reaching stabilization this year is simply one of timing. A preponderance of projects that started post the pandemic needed to absorb the higher interest rates while achieving higher rents. All these payoffs are normal course for construction projects with 2024 reflecting higher activity. New project volumes are at healthy levels. With consistent underwriting and strong syndication efforts, our investment real estate team has earned mandates for future projects. Our clients appreciate our consistent approach to underwriting through cycles, and the newly awarded construction projects are primarily within the multifamily, industrial, and warehouse asset classes. This new volume will begin to set the floor on investment real estate footings for the balance of this year with growth expected into 2025. The second bullet point further emphasizes the future growth potential within the commercial portfolio. Both the CNI and IRE pipelines ended the quarter at higher levels than at the end of March and at the end of June of 2023. I wanted to reference our fee income businesses within the commercial line, specifically treasury management fees. Treasury fee income grew more than 10% during the quarter and over the prior year. Several factors are driving that growth. New client conversion and the successful rollout of the new treasury platform, the 2Q that Mark just referenced. So we've got the enhanced fee structures moving through the enhanced product platform set. and we'll complete the phase rollouts of this platform and the periphery products in the third quarter. The loan outlook for the balance of the year remains at a high single-digit rate, with fee income growing at a double-digit level. The consumer portfolio is comprised of residential mortgage, HELOC, installment, and private banking relationships. During the second quarter, the consumer portfolio grew more than 10%. In dollars, that represented a $75 million increase. The private banking portfolio was the primary driver of the increase, joining the consumer mortgage and small business growth as well. As noted, the consumer loan pipeline remained strong heading into the third quarter. A few comments on deposit balances during the quarter. Total deposit decline was a mix of normal seasonality and interest rate management. Historically, the second quarter is the lowest level of deposit balances with a build that continues through the end of the year. I stated last quarter that now that we've had separation from the Silicon Valley event and as our bank's liquidity remains ample, we will focus on margin with interest expense being the key driver. With higher expectations of a Fed rate cut in the back half of 2024, we began to reduce our money market and CD specials while also reducing the tenor of new CDs. The largest balance decline was within the time deposit category. Further, with the shortened maturities, we can continue to reprice the time deposit book in sync with any Fed rate reduction. Noted on the first sub-bullet point, consumer deposits continue to grow on a year-over-year basis, greater than 4%. Total deposit balances from prior year are flat. I also want to note that deposit balance have shown strong growth through the month of July as the seasonal build occurs and organic growth in units continue. So I'm going to turn the call over to Michelle now to review in more detail the composition of our balance sheet and the drivers of our income statement. Michelle?