Good day and thank you for standing by. Welcome to the First Merchants Corporation Fourth Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that this conference call 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 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 reconciliation of GAAP to non-GAAP measures. I would now like to turn the call over to Mark Hardwick, CEO. Please go ahead.

Well, good morning, and welcome to the First Merchants' fourth quarter 2022 conference call. Lisa, thanks for the introduction and for covering the forward-looking statement on Page 2. We released earnings today at approximately 8:00 a.m. Eastern Time. You can access today's slide by following the link on the second page of our earnings release. 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 snapshot of the First Merchants' geographic footprint and some relevant financial highlights for your review. I'm excited to share our results with you today, given our strong performance in 2022 to include a clean fourth quarter that requires no adjustments related to our April 1st acquisition of Level One. Our message should reflect my appreciation towards our clients and our teammates for delivering a very good year. We also hope to establish a baseline through our Q4 results that allows for effective modeling around an optimistic 2023 inclusive of the realism required given the industry headwinds. Now, if you turn to Slide 5, net income totaled $70.3 million for the quarter compared to $47.7 million in the fourth quarter of 2021. Reported EPS for the fourth quarter totaled $1.19 without any required adjustments compared to Q4 2021 of $0.89, a 33% increase. Organic growth in loans of 11.8% for the quarter and another 18 basis points of core margin expansion over Q3 of 2022 are the drivers of our EPS improvements. This performance resulted in a 1.59% return on assets and a 24.2% return on tangible common equity for the quarter. The year-to-date results, our EPS totaled $3.81, which equaled last year's total of $3.81. However, this year's results had $27.7 million less PPP income than last year and $33.3 million more acquisition expense than last year's earnings per share. When adjusted for those two items, which totaled $60 million, our year-to-date 2022 EPS totaled $4.20, which is 24.3% better than 2021's total of $3.38. Fueling the improvements for the full year were once again loan growth, excluding our acquisition totaling 13.9% and core net interest margin expansion of 34 basis points. Mike, Michele, and John will provide some color on the loan portfolio, its makeup, pricing and areas of growth later in the presentation. Now Mike will cover Pages 6 and 7.

Yes, thank you, Mark, and good morning to all. As you look at the next two slides, I will provide an update on our line of business results and their contributions within the quarter. Since our business strategy on Page 6 remains unchanged, I want to focus on Page 7 titled business highlights. The top of the page offers a breakdown of the core loan growth by our business units. The fourth quarter represented another excellent quarter of organic growth, nearly 12% in aggregate with the commercial segment growing over 10.5%. The results continue to demonstrate the close working relationship between our team and our markets. As discussed in prior calls, we strive for high single digit growth rates, and as noted on the right-hand side of this chart, we achieved those levels for all of 2022, the commercial segment over 8.5%, the consumer segment over 9.5%, the mortgage segment close to 60%. As footnoted, these are organic results adjusted for PPP and the day one balances of the Level One acquisition. But I do want to spend more time on the global loan results, specifically the dollar increases behind the percentages on this page. As noted on Slide 11, the commercial segment represents 75% of our total loan portfolio. The 10.6% fourth quarter growth rate in commercial was approximately $240 million or 70% of the total fourth quarter loan growth of $345 million. While the consumer segment contracted this quarter by 3.1%, that dollar amount is less than $7 million. The mortgage portfolio growth during the quarter was approximately $100 million versus the prior quarter growth of $190 million. My point is the commercial segment continues to be the loan growth engine of the bank. All segments can demonstrated solid growth rates and John Martin is going to talk…

Thank you, Mike. My comments will begin on Slide 8, covering fourth quarter results. You can see on our balance sheet on lines one through five that we continue our trend towards a more favorable earning asset mix. Total loans on line 2, which Mike covered in his remarks, increased $344.1 million, or 11.8% through organic growth during the quarter, which was offset by PPP loan forgiveness of $6.5 million to arrive at the $337.6 million you see in the variance column. Deposits decreased $52.1 million during the quarter and investments on line 3 decreased $31 million. I will add some additional color on our investment balance later in my comments. Our loan-to-deposit ratio continued to trend up and was approximately 83.5% this quarter compared to 81% on a linked quarter basis, and 72.7% in prior year. Earnings per share for the quarter totaled $1.19, which reflects our bank's strong performance. Pre-tax pre-provision earnings totaled $83.8 million this quarter, a 9% increase over last quarter when excluding acquisition costs. Rising yields on earning assets offset somewhat by higher deposit costs drove higher profitability this quarter, which is reflected in the increase in net interest income on Line 11 of $8.6 million over prior quarter. Non-interest income on Line 14 declined by $5.5 million due to a large BOLI gain recorded in the third quarter. Adding to the quarter-over-quarter profitability was lower non-interest expense, which declined $6.7 million, bringing our net income on Line 17 to $70.8 million, an increase of nearly $7 million over Q3 or 11%. Our stated efficiency ratio was 48.6%, but excluding the lingering acquisition costs of $400,000 that were recorded in the fourth quarter, the efficiency ratio was 48.37%, reflecting excellent operating leverage. The tangible common equity ratio on Line 6 increased 68 basis points. Intangible…

All right, excuse me. Thanks, Michele, and good morning. My remarks start on Slide 18 where I highlight the loan portfolio including segmentation, growth and composition. I'll comment on the updated portfolio insight slide, then review asset quality and the non-performing asset roll forward before ending with a couple of high level comments on the environment. So, turning to Slide 18. In the quarter, we experienced strong commercial loan growth, as Stu mentioned a moment ago, originated by our middle market lending team, which for us, our companies with revenue generally between $10 million and $500 million. Within the space, the greatest growth occurred in the manufacturing and wholesale trade sectors. Investment real estate increased $108 million on Line 5, bringing our balances back closer to where they were in the second quarter. And finally, we moderated the pace of portfolio, residential mortgage growth as we shifted back to a more originate and sell model, adding $89 million after several very strong quarters of portfolio growth. So after a quarter of 11.8% loan growth and combined annual organic loan growth of 13.9% or $1.3 billion for the year, the composition between C&I, non-owner occupied CRE and investment -- excuse me, and residential mortgage loans remains in balance and substantially similar to what it was at the beginning of the year. So turning to Slide 19, I've updated the portfolio insight slide here where we sliced the portfolio several different ways to provide additional transparency into its composition. Starting with C&I, the classification here includes sponsor finance as well as other -- excuse me, as well as other owner-occupied CRE associated with the business. Our C&I portfolio is representative of our markets and thus has a concentration in manufacturing of 18% of the portfolio. Our current line utilization as Stu mentioned…

Well, thanks John. Slide 22, you can see we made some adjustments to the CAGRs. We’re just looking back 10 years, probably a more relevant post-recession timeframe, which reflects really strong performance as evidenced by a number of the graphs. You can see earnings per share. The CAGR during that period is 10.5%. Adjusted CAGR for the AOCI on tangible book value per share is 9.3% and the return on tangible common equity across the board in the double digits. If you turn to Slide 23, again, we adjusted for 10 year timeframe. In our 10 year asset CAGR, which does include acquisitions as 15.3% inclusive of the eight acquisitions you see over to the right. Shelby County was included in the year end $4.3 billion. So strong growth and the best thing about our growth rate and moving from $4 billion to $18 billion, we love the fact that we have the ability to take care of more customers with a larger balance sheet. I think we’re an even greater attraction point for talent and there’s opportunity for growth in this company. We’re a growing organization and we continue to create new and unique ways for people to expand their career. It’s been fun. If you look on the next Slide 24, it’s just a reminder of the vision, the mission statements, our team statement and our strategic imperatives of which we use to guide our decision making. Lisa, we’re happy to take questions at this time and just thank everyone for their attention.

Okay. Thank you. [Operator Instructions] The first question I have is coming from Scott Siefers of Piper. Please go ahead. Your line is open.

Good morning, everyone. Thank you for taking the question. Just the first question was on expectations around the margin. Maybe Michele just thoughts on where we go from here. Maybe best to think about it in terms of the 3.65% core margin, I guess. And then as a follow on more broadly on NII, do you feel like you can continue to grow NII sequentially from here as we look throughout 2023?

Yes. Good morning, Scott. I think looking at net interest margin, particularly for Q1, we have assumed that we get two additional 25 basis point increases, one in February and one in March. And so looking for Q1, I think we would expect to see another 6 or so basis points of net interest margin growth. You had mentioned, looking at a 3.60%, the one thing that I do want to remind everybody of is that given there are a couple less days in Q1, there’s always a seasonal headwind on margin for us given our commercial orientation. And so that always ends up reducing our margin a few basis points. And so we would still expect to see net interest margin increase, even netting that impact out of a few basis points in Q1.

Perfect. Thank you. And then your thoughts on the ability -- the company’s ability to continue to grow NII sequentially. I imagine at least with some margin expansion that should give you a little lift, but just overall thoughts would be welcome.

Yes, sure. So for our net interest income for Q4, looking at like $149 million stated, $155 million on a fully tax equivalent basis, I would expect Q4 2023 net interest income to be a good run rate on average for 2023. We revisited our deposit beta assumptions and as a reminder, our historical deposit beta was 41%. Our assumption is that we will get up to a 40% deposit beta in Q1 and get up to 50% deposit betas later in the year. And so we’re being fairly conservative, I think in our outlook, but we think that it is going to be competitive and we want to be prepared for it.

Okay, perfect. And just to make sure I heard correctly, so it sounds like what you just posted the fourth quarter 2022 NII, we should sort of average that for 2023, and that’s where you think things will flush out?

Yes, that’s correct. I mean, I do think we will see net interest margin compression later in the year because of the deposit betas increasing, but I think we can offset that with our loan growth.

Perfect. Okay, wonderful. Thank you very much.

Thank you. One moment while we prepare for the next question. The next question is coming from Daniel Tamayo of -- excuse me, Raymond James. I’m sorry.

Thank you. Good morning, everyone. Maybe just following on the net interest income discussion and the expectation that we may get a decline in rates at some point possibly at the end of the year. Have you been making any changes to the sensitivity of the balance sheet to perhaps mitigate that? Or is the asset sensitivity kind of the same as or similar to what it’s been prior?

Yes. We’re not making any real -- any, I guess, meaningful change. We continue to look at protections in the bond portfolio against future falling interest rates, but more of the liquidity to fund loans. There’s not a lot of flexibility to make adjustments. If we didn’t need that liquidity, you could probably move in and out of some sectors and make some changes. But we feel like we have a model that works in both interest rate environments. And as we’ve assessed things like macro hedges, et cetera, the cost just seems prohibitive to us.

Understood. Yes. And then I guess just switching gears here to reserves. Obviously you’ve been having a provision of zero here for quite a while now. Just interested in your thoughts on when you think you may have to start providing for loan growth or maybe where that reserve ratio stabilizes here?

Yeah. We don’t expect to have to take provision in the near-term. We are modeling a mild recession in our CECL models currently. But each quarter will continue to evaluate coverage with our loan growth, and particularly if we see any credit events occur during the quarter, but no plans in the near-term.

Okay. Thanks, Michele. I’ll step back. Thanks for answering my question.

Thanks, Daniel.

Thank you. One moment while we prepare for the next question. The next question is coming from Terry McEvoy of Stephens. Your line is open.

Hi. Thanks. Good morning, everyone.

Good morning, Terry.

Hi. Maybe just start with your outlook for expenses as you think about overall wage inflation and then the uptick in FDIC costs as well.

Yes, I’d be happy to. Using the Q4 stated expense level as a base, we would expect probably mid-single digit growth and expenses, say 5% or 6%. I think that would accurately capture the inflation that we’re all experiencing and also some investments in technology and people as well as that FDIC increase that you mentioned.

Okay. And any comments on banker or customer attention at level?

Mike Stewart here. I’d say overall it’s been pretty stable. Banker stability, there’s been some moving in, some moving out. Banking stability, we’re starting to see new business activities in some of the portfolios. So I call it overall pretty stable meaning, or I’ll interpret it, Mike Stewart’s way, which is kind of where I would expect to be less than two quarters posting integration with an outlook that I think we’re in a good position to take advantage of.

Maybe one more, if I could squeeze it in. Mark, your comment in the press release caught my eye that the earnings power is pretty easy to digest when you look at the quarterly results. And as a former CFO, I can ask you the question, what exactly really stands out to you as being that kind of source of power. There’s a lot of things that go into earnings power, and we’d love to just get your view as we kind of think about 2023?

Yes, happy to do it. I was really pleased to have -- I would look forward to. I guess I should say, and I was pleased by this quarter’s result where we have fully digested our last acquisition. And I think you can see the earnings power in our numbers and really it’s just the fact that historically, I mean, we gave guidance of mid to high single digit growth rate. And I feel like we always achieve those objectives. And you can go back a number of years and we’ve had good success. I love the team that we have in place. I love how hard they work and the impact they try to make with our customers. I think our balance sheet is well hedged. I didn’t mention if rates come down, we end up just with a nice natural hedge with our mortgage portfolio a little bit with our derivatives, the loan level hedges that we sell to our customers. So I look at our income statement and our balance sheet. I think we have a growing balance sheet on the asset side. We have an awesome core deposit base on the consumer side. I feel like our margins are fairly easy to understand and fairly predictable. And I feel like even though we’re investing in the business, which is exciting to everyone here, we continue to add talent. We continue to invest in technology that we’re able to do in a way that still produces a 50, a low 50s efficiency ratio. And this quarter was 48%. So, there are always headwinds in the business or tailwinds, and they migrate back and forth and my view is this is a bank that has consistent performance over time. And some of those things are a little bit like the weather. You wake up and see, is it snowing? Is it raining? Is the sun out? But I’ll tell you what everybody on our team, they get after it regardless of what the day looks like. And so I just feel like we have a team that works hard, produces results, and it’s pretty easy to see I think in our financials, especially in a quarter like Q4.

Appreciate that. Thanks, everyone. Have a nice day.

Thanks, Terry.

Thanks, Terry.

Thank you. One moment while we prepare for the next question. Our next question comes from Damon DelMonte of KBW. Your line is open.

Hey, good morning, everyone. Hope you’re all doing well today.

Good morning, Damon.

Just wanted to -- good morning. Just wanted to circle back on the provision outlook commentary, Michele. Obviously, the reserve is quite healthy and you guys have been quite clear on your desire to kind of grow into a normalized reserve level. If you could ballpark that like ultimate level that would -- that might be helpful. Is there a way you could kind of quantify that?

Well, I think that what I do is probably go back and think about like our Day 1 CECL adjustment that we would’ve had before the pandemic hit. And that would’ve been around, I think it was a coverage ratio of maybe 1.5%, if I recall.

Okay.

So you’re modeling that without a mild recession, you get to a more normalized level [indiscernible].

And that may have been a little high, maybe 1.3% to 1.5% would’ve been about in a more normalized range.

Okay, got it. And then obviously if you factor in a mild recession, you want to have a little bit more cushion for that?

Yes.

Yes. And since we’ve adopted CECL, it’s been pretty turbulent.

Yes, that’s an understatement over the last couple years, Mark. And then I guess my next question, just kind of from a modeling standpoint, how should we think about fair value accretion going forward Michele?

I think fair value accretion -- looking at this quarter’s fair value accretion, which we do try to give you transparency to that. I think that’s probably a pretty good run rate.

Okay. Great. And then just lastly, kind of bigger picture Mark. Now that you’ve digested Level One you kind of look at your competitive landscape across the upper Midwest there. How do you guys feel about M&A at this point? Do you feel like it’s something that you would look to engage in again? Or do you feel that the organic opportunities throughout your footprint are so strong that your content with just kind of focusing internally?

Yes, we’re really excited about having a year where the focus is all internal. And there are -- we will continue to call on the banks that we think might fit First Merchants well and enhance our growth rates in the future. But at least in 2023, it feels like, well, this team is really focused on just an internal year. I have some of our folks, they talk about, hey, is it -- it’s hard to get bigger from an M&A perspective and better. And this is and we’d love to be able to do both all the time. But I think the reality is after absorbing a bank, the size of Level One, the focus needs to be on internal enhancements and getting better every day. So we’ve got a couple key initiatives. We’re working on including an upgrade in our online banking and mobile platform and a number of other things. I won’t get into them all, but we just think it makes the bank better and prepares us for the next acquisition.

Great. Thanks for all the colors today, guys. That’s all that I had.

Thank you, Damon.

Thanks, Damon.

Thank you. One moment while we prepare for our next question. Our next question will come from Brian Martin of Janney. Your line is open.

Hey, Brian, you may be on mute, we can’t hear you.

Yes, I’m sorry. Thanks, Mark. I apologize. Good morning, everyone. So just wanted to touch base on the funding side just is funding loan growth this year. Just wondering what your thought is there? It sounds like there’s still some utilization from the bond books and just kind of as it pertains to deposits in the loan-to-deposit ratio as you kind of go through the year?

Yes, I mean, but I think we’re going to see some deposit growth. As I said, we had revisited our deposit betas and we’ll get competitive, even more competitive to help fund that loan growth. And I think that coupled with the cash flow from our bond portfolio, I think that -- those two funding sources we think will cover us.

Okay. And as far as what you’re kind of targeting on the loan-to-deposit ratio, where do you kind of see that as you work through the year?

I don’t recall where that budget number is. Yes, it’s moving up. We kind of have long-term targets. We’d like to see it around 93% or 94%. We don’t get there this year. I think it -- I think maybe we were at 88%, if I recall.

That’s fine. Just a general trend if I can always follow back up, but in general, you expect it to move up from where we are here, just through that combination?

Yes.

Yes. Okay. Perfect. And then just the other two for me was Michele, it sounds like the margin just from your commentary, probably peaks maybe second quarter and then given kind of what you’re talking about, maybe the margin maybe slips a little bit, there are certain third quarters that in general fair how to think about it?

I actually think we’ll peak in the first quarter, and then I do think that we could see some compression in the quarters thereafter.

Got you. Okay. Just a debate is picking up. Okay.

Yes.

That is helpful. And then just the run rate or just kind of the level of fee income today seems like pretty good level and it just builds off of this, is that, I know there’s ins and outs every quarter. But just in general, how are you feeling about where that’s at today or just how we should think about that?

Yes, we have a couple of positive tailwinds in that space. Our private wealth business continues to grow around 10%, and that’s the target we have for the year. And then the mortgage business, we expect to originate over $1 billion in mortgages this year. And I think the numbers are, portfolio at about 85% of that in 2022. And we’d like to get back to our more traditional model which would be, call it, 60:40 or even 70:30. And that 60% and 70% we’re talking about is sold into the secondary market. So I felt like in 2022, we took advantage of an opportunity to use our balance sheet. We had the liquidity to do it. The customers were kind of, I think, in shock by how high the 30-year rate went and it allowed us to use our balance sheet. But now that’s moderated from as high as 7% to slightly under 6%. And I think it gives us the ability to move back into a fee-for-service model. And that should give us a little positive push on our non-interest income.

Got you. Okay. That’s helpful. Okay, perfect. Well, thank you for taking the questions and congrats on a nice quarter and a nice year.

Thank you, Brian.

Thanks, Brian.

Thank you. That concludes the Q&A session for today. I would like to turn the call over to Mark Hardwick, CEO for closing remarks. Go ahead, please.

Thank you, Lisa. Just wanted to say thanks to everyone for tuning into the call, our employees, customers, our shareholders, our analysts. And we appreciate your interest in your investment. And we will -- I guess you can count on this team to continue to work hard to deliver results for all of those critical stakeholders. Thank you.

That concludes today’s conference call. Everyone may disconnect. You all have a great rest of your day.