Good afternoon, and welcome to the First Merchants Corporation First Quarter 2021 Earnings Call. All participants will be in a listen-only mode. This presentation contains forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act. Such forward-looking statements can often be identified by the use of words like believes, expect or may and include statements relating to First Merchants business plan, growth strategies, loan and investment portfolio; asset quality, risk and future costs.

Good morning, everyone, and welcome to First Merchants first quarter 2021 conference call. We released our earnings today at approximately 8:00 AM Eastern Standard Time. Hopefully, you've all found your way to our slide presentation. But if not, you can access the slides by following the link on the second page of our earnings release. Betsy, thanks for the introduction and for covering the forward-looking statement on Page 2. On Page 3, you will see today's presenters and our bios to include President, Mike Stewart; Chief Credit Officer, John Martin; and Chief Financial Officer, Michele Kawiecki. Page 4 is a nice one page snapshot of the First Merchants geographic footprint and a few relevant financial highlights for your review. We feel the first quarter return on assets of 1.39% and return on tangible equity of 15.87%, reflect the strength of First Merchants overall balance sheet and our earnings model. We're also pleased to see that our stock price return to the levels that we -- that are more reflective of a top quartile performing bank with a price tangible book multiple as of March 31 of just over 2x of tangible book. Now, Mike Stewart Stuart will cover Slide 5 and 6 and provide some line of business commentary.

Thank you, Mark and good afternoon. As you look at the next two slides, I want to provide an update on our line of business activities and their contribution to the quarterly results that Michele and John will review in detail and provide insight into the geographic markets we serve. I'll start with our Private Wealth Advisory business. We closed on the previously announced acquisition of Hoosier Trust Company on April 1. Their business of trust and investment services will integrate with our existing businesses in the Indianapolis market. We welcome the team from Hoosier Trust and their clients as part of the First Merchants family.

Yes, thanks, Mike. Now, if you turn to Page 7, we just have a few more highlights before Michele covers the details of the financials. As my quote mentioned in the press release and consistent with Mike's comments, we're really pleased to be back in the office and serving our customers in a more personal way again, as the vaccination rollout progresses nicely in our entire footprint. Michael Joyce, the President of our First Merchants Private Wealth Advisors, his team is very excited about the acquisition of Hoosier Trust, and the addition of $1.5 million of annual revenue that now is part of his business. Mike mentioned some of the brands consolidations. And I would just point out that, at least to date through our earnings day today, we've consolidated 13 of the 17 announced locations. And we continue to reinvest the savings into the digitization initiatives that we discussed on previous calls. Our initial digital investment is being channeled into Terafina. As Mike mentioned, it's a new online account origination platform and along with that investment in technology, we've also made significant investment in IT talent in order to optimize our investment and to create a real state-of-the-art user experience. The PPP program dominated our lending efforts in Q1, at least as you look at the details of the numbers, and we realized fee income from that program of about $7.5 million dollars to the amortization and -- or through just the forgiveness process. Michele will discuss our CECL adoption, that’s now complete and we combined with capital and financial metrics, the bank is positioned to maximize future growth opportunities.

Thanks, Mark. My comments will begin on Slide 8. We experienced significant balance sheet growth during the quarter, which you can see on Lines 1 through 4, its total assets increased by $562 million or 16%. We had $590 million of deposit growth during the quarter, reflecting an influx of stimulus payments, coupled with organic growth. This liquidity funded $76 million of loan growth and an investment of $554 million in the bond portfolio. We are pleased to report net income on Line 17, increased $4.3 million or 38.5% over the fourth quarter, leading us to earnings per share of $0.91 which is shown on Line 22, which is an $0.08 increase over prior quarter. I will walk through the income and expense components in more detail on later slides. On Line 23, you will see that tangible book value per share declined $1.29 this quarter. As Mark mentioned, we adopted the CECL standard at the beginning of the year, which caused tangible book value per share to decline by $1.26. Additionally, the increasing yield curve caused a reduction in the unrealized gain on the investment portfolio, which is reflected in the accumulated other comprehensive income component of equity. So that also caused a reduction in tangible book value this quarter as well. Moving up to Line 19, return on average equity increased over 1% to a strong -- I'm sorry, 10.75%. In the highlights, an increase in pre-tax, pre-provision earnings of $1.2 million over Q4 2020 is noted, which brings the pre-tax, pre-provision return on average equity to a strong 12.7%. The efficiency ratio shown on Line 21 was a low 50.23%. We feel all these ratios reflect a strong and efficient core business that will produce greater needs in the future. On Slide 9, shows the highlights of our investment portfolio. The top right graph shows the trend in the portfolio yield. The yield on the portfolio declined 8 basis points during the quarter, which was more than we anticipated. That was the result of significant portfolio growth invested in yields that were lower than where the portfolio was averaging. However, the portfolio contributed $19 million of interest income this quarter, an increase of $1.8 million over the prior quarter, and the overall portfolio yield continues to outpace that of peers. On the bottom left are some investment highlights. We are pleased to see the current purchase yield increase to 2.7%, up from the purchase yield of 1.65% at the beginning of the quarter. The roll off yield for the remaining year is 2.54%, so we could see a bit more compression in overall portfolio yield over the course of the year depending on how the rate environment shapes.

Thanks, Michele, and good afternoon, folks. I'll begin my comments on Slide 17 by reviewing the loan portfolio and including industry concentrations that provide an update on loan modifications, touch on the residual pandemic impacted loan portfolios with an update on the PPP loan program, before closing with some asset quality updates. So turning to Slide 17, in the quarter, we had $76 million of loan growth led by the sponsor finance business, construction lending portfolio and public finance activities. This also included PPP loans, which grew by $75 million as we continued our participation as mentioned earlier in the program during the first quarter. Mortgage loan production remains strong as we head into the second quarter, as we operate a mostly originate and sell model. As Mike mentioned earlier, with some decline in home equity and consumer balances which are really related to home refinance. The core commercial portfolio remains diversified and balanced with a skew towards manufacturing, centered in our geographies with core scalable business lines leading our growth. Turning to Slide 18, on the left side of the slide have highlighted the PPP reduction, both in aggregate and by year to help provide a sense of the average dollar loan still outstanding by phase or year. I've also included the details for the $186 million and you want to make a note of this or 337 applications that have been submitted for forgiveness to the SBA and which are under review, or highlighting the loans eligible for the streamline forgiveness process for those loans under 150,000. Well, there are a number of factors at play as we contemplate forgiveness and fee recognition. I view the forgiveness peaking in the second quarter -- second and third quarters, while containing a tail as we head into '22 and beyond.…

Thanks, John. If you look at Slides, 22 and 23, they're just nice snapshots. I think highlight the track record of First Merchants from both a growth perspective and financial performance. And then Page 24 is really a listing of some of the priorities that we're focused on as an as a management team to really drive our performance over the next several years as we continue to grow the company. I feel like we're making great strides across the board, both in our lines of business and administratively. And as the year progresses, we'll be sharing even more detail about performance under each of these 10 items that we're listing. So, I feel like the quarter was pretty clean and easy to understand. If there's anything that feels extraordinary to us, it's just the impact of PPP in a number of different ways throughout the balance sheet and the income statement. But we've -- we clearly were appreciative of your investment. And we appreciate your attention today. And that's it this time, we are happy to open up the conference for Q&A.

Our first question comes from Scott Siefers from Piper Sandler. Please go ahead.

Good afternoon, everybody. Thank you for taking the question. First question is on the margin. So sort of the core margin excluding PAAs and PPP down only a couple of basis points, I think you suggested, Michele, once you account for day count. So where does it go from here relative to that 311 level?

Yes, I think our core net interest margin, I was just looking at even the month of March, which is always kind of a great jumping off point because of the February noise and our core margin for March was 310. So that's probably a good indicator of where we're going to be. I think if there's any compression at all, it would probably depend on how much incoming liquidity we have. This quarter, we had really great growth in deposits, and put it to work in the investment portfolio. And to the degree that we can get that invested in our loan portfolio, obviously, the yields are higher, and that that's a little more helpful for margin. So I think it's probably dependent on liquidity growth. Otherwise, I would still expect stability in our margin.

Okay, perfect. That's great. Thank you. And then let's see, just with the reserve, I guess the timing of when you guys adopted CECL makes it a bit more complicated than others. But maybe what's sort of the steady state reserve that we would be working down toward? In other words, in the CECL adjustment, presumably there was, I guess, like COVID adjustment in there as well. So what would you consider sort of a steady state reserve that we end up working back down toward?

It probably depends on what you consider -- what kind of economic environment you consider a steady state. One of the things that I have suggested to folks and granted back at the end of 2019, unemployment and so forth were at 50 year lows. So I don't know if that's the steady state. But if you go back to our disclosures at that time, we had a reserve of $80 million at the end of 2019. And that was before any of the pandemic hit. And so we had suggested that we would have like about a $55 million increase in reserve at that time. And so that would have brought our coverage ratio to somewhere around 150, I think of coverage. And so, that -- it kind of depends on what you're considering steady state, but that is at least a data point, that might be helpful.

All right. That's perfect. So it seems then like absent any real surprises, we'd be sort of working the reserve down the combination of loan growth and maybe just some credit leverage, meaning under providing relative to charge-offs over the next several quarters. Is that fair enough?

I think that's right, yes.

Okay, perfect. Thank you. And then I guess one final question. I think you guys have about $20.5 million in remaining PPP fees. Do you know how that breaks out roughly between rounds?

Yes. So Round, oh, sorry, I’ve to look through my notes. So our -- round one, we have unearned fees of $7.2 million. And then on round two, it is 13.3.

Okay, perfect. All right. That does it for me. Thank you very much.

Thanks, Scott.

Our next question comes from Terry McEvoy from Stephens. Please go ahead.

Hi. Thanks. Good afternoon, everybody.

Hi, Terry.

Maybe just was hoping to get your thoughts on future loan growth. There was real strength in the sponsor, finance book, construction was up and in a few areas, as you mentioned, like home equity were down. So maybe some comments on loan pipeline in ex PPP, what you'd expect over the coming quarters, where there could be some upside and where do you think there could continue to be some roll off? Thanks.

Sure. Mike Stewart here. I'll try to give you some more insight. Again, the activity levels that I look forward to continue to give us in that position that we talked about regularly in that mid to single high digit loan growth and I really feel like that's where our pipelines currently are. When you look across the segments that you'd asked about, our commercial industrial activity, businesses are performing well, absent supply chain issues and maybe some labor nuances. Their business volumes are growing and reinvesting back in businesses and the activity level that we see. Beyond just M&A activity with replenishment of equipment and real estate is just continuing to grow, the investment real estate has remained robust for us on the areas that we focus on. As John points out, we don't focus on hospitality as an example, or traditional retail, but we think about multifamily and what's going on in suburbian, what's going on with office -- no, it's not office, with industrial warehouse space, in particular, really good asset classes in this distribution model that continue to grow and we're very active in that space. And feel good about that. Yes, the sponsor activity is a nice part of our business are focused on that C&I. There's good equity sitting on the sidelines ready to put that money to work and M&A activity of the sponsors has went from a low point in the second quarter of last year and continue to build as they find good opportunities were positioned well in that space. So I look for that to go. And that's also augmented with some of our continued people. Focus that we talked about last quarter. Our commercial teams across all of our markets have invest -- invested in additional skill set capabilities to round out the size of organization we are, whether it's in our new Michigan marketplace, or back in our Ohio markets in Indiana. So new talent growing in our opportunities just gives us more looks across the way The consumer portfolio, we're just going to keep watching what focuses, what happens there when you think about the consumer at large, the use of their, look stimulus checks, the need of them to spend, we're starting to see the spend activity increase when you look at credit card and usage on that regard. So we very well might see an uptick in our consumer portfolios as the time goes on. But that's a relatively small piece of our overall loan book.

Appreciate that. Thank you. And maybe as my follow-up a question for Mark. Capital is high, the reserve is high. And I guess depending who you ask, and you mentioned it on Slide 4 here. The stock price is relatively high at 2x tangible book, I guess my question is, you're in a great position for to take advantage of this M&A window that might be open. What are your thoughts on M&A? And any specific markets kind of stand out? or specific bank sizes that you're kind of comfortable with today? Thank you.

Yes, thanks, Terry. Yes, we do feel like balance sheet is well positioned for growth in a number of different ways. With strong liquidity, we have a great team that I think is really actively engaged in growing our loan portfolio organically as well as our fee income sources. But M&A is something that, if you look at our history, it's clear that we usually have about one acquisition a year. And we'd love to stay on that pace. So we're more active. And our footprint, which we always talk about is just being Indiana and the four contiguous states. And we typically think of organizations that are less than 25% of our total asset range. So we're active and we're busy and continuing to have great communication with CEOs through our -- evaluating their options. So, we'll see if something happens this year, but we're certainly interested and would love to continue to put our capital to work.

Great. Thank you, Mark.

Thank you, Terry.

Our next question comes from Daniel Tamayo from Raymond James. Please go ahead.

Good afternoon, everybody. Maybe just we touch on the expense outlook. I think last quarter, you guys mentioned that the expectations were somewhere in the range of $68 million to $70 million per quarter. And we're running a little bit below that in the first quarter, obviously, good thing, but with the investments that you talked about, including the partnership with Terafina, how are you thinking about that quarterly run rate going forward?

Yes, I think I would reinforce the guidance that we gave last quarter with that expense run rate of $68 million to $70 million. Expense management this quarter was really outstanding, but I do think total expenses will creep up a little higher as we get further into the execution of our plans and our strategic initiatives.

Okay, terrific. And then maybe following up on the discussion Mark, that you were just having around M&A. Given we're at 2x tangible book, you do have the share repurchase authorization in place, but how do you -- how would you feel about share purchases at these current prices? Or if not, what would be a potential entry point to get back and involved in that? Thanks.

Dan, we have our next Board meeting, our annual shareholder meeting is announced as of May 11th. And we will have that discussion again at the -- in the boardroom. So it kind of depends on the outlook and we feel like for the next couple of years, at least, given the amount of stimulus and the vaccinations that are occurring, the economic outlook continue to be strong and improving. And if that's the case, that makes our stock prices look more attractive. So, I think my goal at the end of the day is to make sure that we maintain our tangible common equity around 11 -- oh, I’m sorry, around 9% because it just drives a much higher return on tangible equity and return on equity. So I was really thrilled with the 1587 return on tangible we had this quarter and I'd love to keep it in that range by managing the capital base to 9% TC versus letting it creep up to 9.5, or 9.75, or 10, like we've been in the past. So it's, I guess, as we're looking at our options, it's dividends, which will likely look at again at the May 11, Board meeting. The share repurchase activity, and just weighing that against actual cash and acquisitions, as we evaluate the opportunities that are in front of us.

Terrific. That's all I had. I appreciate the color.

Yes, thanks, Terry or Dan, yes.

Our next question comes from Bryce Rowe with Hovde Group.

Thanks. Good afternoon. Thanks for taking the question here. I wanted to ask about the bond portfolio and opportunities possibly to put more excess liquidity to work there. Obviously, we've seen a big jump in the bond portfolio in the first quarter. And was wondering with the level of excess liquidity continuing to look elevated and possibly be elevated for the foreseeable future here was wondering if you will continue to add to the bond portfolio in a meaningful way, like you've done here recently.

What we think volatile liquidity that came in, in the first quarter that -- although we had, we did have really good organic growth, probably about half of that was stimulus payment related, whether it was PPP money, or the EIP payments. And so I wouldn't expect that big of an increase in liquidity in next quarter. But to the degree that we do have it, of course, putting it in loan growth is always going to be our first choice. But as opposed to letting in cash, we probably will continue to buy securities and just take them as available for sale in case we wanted to use liquidity in the future for another purpose.

And this is Mark, I will just add, take time, and we're pretty selective in terms of the bonds that we like and you can see that interest bearing deposits that we're we have a sizable number, and we're always looking for opportunities for good investments with the right return profile. And we'll continue to do so this quarter.

Okay, that's helpful. And as a follow-up, and maybe you all touched on this here recently as well. But in terms of the FHLB advances on the balance sheet came down a little bit here in the first quarter. Just wondering if there are more opportunities to let those roll off with excess liquidity being what it is.

And I do believe we have some maturing yet this year. I actually don't have that schedule in front of me, but to the degree that we have any of those mature certainly we'll let those roll off. But I'll follow back up with you Bryce and I can get you that number once I did that up.

Okay. That would be great, Michele. Appreciate it. Thanks for taking the questions.

Yes, you're welcome.

Our next question comes from Damon DelMonte with KBW. Please go ahead.

Good afternoon, everyone. Hope everybody is doing well today.

Yes, we are. Thanks, Damon.

Great. Great to hear. So my first question is on fee income. I think you guys noted that there are some seasonal factors that kind of brought numbers down this quarter from last quarter. And you alluded to the fact that you get a bit of a rebound here in the second quarter. Michele, can you give a little bit of guidance on a range of what would be a reasonable expectation?

Yes, last quarter, I told you that I thought we could replicate Q4 levels and that was a good run rate. But we're really seeing some cooling in the derivatives, loan level hedges compared to Q4. And so if I look at the list that we'll get from Who's your trust and also some strong mortgage loan production, I will probably bring that range down a little bit to maybe $25 million to $26 million a quarter.

Okay. That's helpful. And then did you say before as for like a point of reference on the reserve level, that if you added where you were pre-pandemic, plus what you would have expected for CECL, you're talking about something on $150 million of a reserve. Is that what you had said?

Yes, $150 million coverage ratio, yes. I think it would have been like $130 million, maybe.

$130 million, okay. So if you're at $202 million today, or $201 million today, I mean, did you arguably not take a provision for the remainder of this year or next year? I mean, you still have more than $130 million, so.

Yes, and that's a possibility. Yes.

Okay. Okay. Take a look at the model then. Okay. That's all I had. Everything else was asked and answered. Thanks a lot. Appreciate it.

Thank you, Dan.

This concludes our question-and-answer session. I would like to turn the conference back over to Mark Hardwick for any closing remarks.

Thanks, Betsy. Thanks, everyone for your attendance. And we appreciate all the questions at the end of the call. And I look forward to talking to you again in another 90 days. So I guess, have a great spring. Thanks.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.