Good day, and thank you for standing by. Welcome to the First Merchants Corporation First Quarter 2023 Earnings. 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 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 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 hand the conference over to your speaker today, Mark Hardwick, CEO. Please go ahead.

Good morning, and welcome to First Merchants first quarter 2023 conference call. Victor, thanks for the introduction and for covering the forward-looking statement on Page 2. We released our earnings today at approximately 8 a.m. Eastern Time. You can access today's slides by following the link on the second page of our earnings release. On Page 3 of the presentation, you'll see today's presenters and our bios to include President, Mike Stewart; Chief Credit Officer, John Martin; and Chief Financial Officer, Michele Kawiecki. On Page 4, you will see the geographic locations of our 121 banking centers that serve as the physical location where approximately 400,000 customers periodically stop in to visit a trusted First Merchants banker for advice and consultation. It's also where a little over 2,100 First Merchants employees work face-to-face with their colleagues to grow their careers, while attending to the financial needs of our customers and our communities. It's where the culture comes to life and why some of the awards at the bottom right of this page were received. Given the turbulence of the past quarter, I'm glad we have such a grassroots community banking model. Honestly, I love our business model, and I love being a community banker. And since we last talked, the environment has provided tremendous opportunities to have thoughtful and thorough conversations with our clients. Turning to Slide 5. I'm pleased to report that loans, deposits, on-hand liquidity and capital are all higher, better or stronger than at year-end 2022. We reported earnings per share of $1.07, an increase of 17.6% over the first quarter of 2022 and earnings per share total of $0.91 per share. Net income was nearly $64 million. Return on tangible common equity totaled 19.82% and return on assets totaled 1.42% for the quarter. Our balance sheet, including capital is strong. Deposits and on-hand liquidity are higher than year-end. Loan growth continued for the quarter totaling 7.9% and loan yields continue to grow as well. Our efficiency ratio is at our target levels in the low 50s, and our credit quality remains healthy. No provision expense was recorded during the quarter. We continue our focus on delivering high performance results to meet the needs of our stakeholders, including projects like our digital modernization efforts. We even signed new contracts with both Q2 and SS&C and our hard at work to deliver on our time lines for deployment. Now Mike Stewart will provide more insight on our balance sheet growth perform sell and John dive into the details. You're all looking forward to hearing regarding our liquidity and credit.

Yeah. Thank you, Mark, and good morning to all. The past two years, I haven't spent any time on Slide 6, and that's where I want to start, as our strategy has not changed. But considering the recent turmoil in the banking industry, it's worth reminding ourselves that our results represent the durability of our business model and the markets we serve visualize the map mark reviewed on Slide 4, where we primarily operate within these three states. It's the heart of the Midwest. Our markets include growing metropolitan cities like Indianapolis, Columbus and Detroit, midsized cities like Fort Wayne, Ann Arbor, Lafayette, Muncie and Munster, along with many small towns in between. As the last bullet point under the consumer banking header states, we serve diverse locations in stable rural and metro markets. It's a granular and diverse customer base with deposits from all banking segments, consumer, high net worth, small business, large corporate, government agency, commercial real estate clients. For the first quarter of 2023, these markets have remained resilient in the face of the industry turmoil and an uncertain macroeconomic environment. Unemployment rates remain stable. The consumer remains healthy, and our business customers continue to seek ways to expand and optimize their operations. Our private clients continue to trust our advice 10 counsel. We remain committed to our business strategy and remain committed to our strategic direction of organic growth, investing in our team, investing in our digital products and platform and top-tier financial metrics. So let's turn to Page 7. The top of the page offers a breakdown of the core loan growth by our business units. We guided last quarter that we would expect loan growth to be in the mid single-digits and for the first quarter, loan growth was 7.9%. The Commercial segment growth…

Thanks, Mike. My comments will begin on slide eight. During the quarter, we had deposit growth of $321 million shown on line four, cash flows from the sales of securities of $213 million, which is reflected in investments on line three, coupled with runoff cash flow from the investment portfolio of $72 million, creating total liquidity of over $600 million during the quarter. The liquidity was used to fund the loan growth that Mike just discussed in his remarks, of $238 million shown on line two, paid down borrowings of $160 million and retained cash in excess of $200 million, which we chose to do as a matter of prudence, given the recent disruptions in the banking environment. Our loan-to-deposit ratio this quarter remained relatively stable and low at 83.3% compared to 83.5% in the prior quarter. Our earning asset mix continues to trend in a favorable direction, and we feel our balance sheet is well positioned heading into the second quarter to support growth. Pre-tax pre-provision earnings totaled $75.4 million this quarter. PTPP return on assets was 1.67% and PTPP return on equity was 14.48%. Interest-earning asset volumes and yields were up, but was offset by a lower earning day count this quarter as well as higher deposit costs, resulting in net interest income of $144.1 million shown on line 11, a decline of $4.9 million from prior quarter. Net income on line 17 totaled $64.1 million, and our efficiency ratio remained low at 51.72%, demonstrating excellent operating leverage. The tangible common equity ratio on line 6 increased 41 basis points, totaling 7.75% and tangible book value per share on line 26 increased 1.48% -- I'm sorry, $1.48 or 7% to $22.93, reflecting the strong earnings from the quarter as well as a meaningful recovery in the unrealized loss…

All right. 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 expanded portfolio insight slides, review asset quality and finish up with the non-performing asset roll forward. On Slide 18, we grew total loans by $161 million. Total commercial loans by $161 million on line 8, with increases in regional and middle market C&I, as shown on line 1 and stronger C&I sponsor finance growth on line 2. These came after a strong fourth quarter in regional and middle market C&I and a decline in C&I sponsor finance balances. Dropping to Slide 4, we had construction growth of $125 million, while utilization increased from 61.8% to 63.2% from the linked quarter and up from 50.4% at the end of the first quarter of 2022. This increase in construction was partially offset by pay-offs in the investment CRE, investment CRE of roughly $30 million on line 5. We continue to hold our underwriting standards as we discussed in previous calls, which is driving more equity into projects to make them work. And as Stu mentioned earlier, we are beginning to see wider loan spreads. Moving down to line 9, we maintained roughly the same pace of growth in the residential mortgage portfolio in the first quarter, while we are currently in the process of adjusting rates to drive higher originate and sell levels moving forward, prior to the move in rates in 2022, we had historically had a sold two portfolio ratio of roughly 70% to 30%. Over the last year, that proportion flipped to 30% -- 70% portfolio to sold, and we are in the process of adjusting pricing on new pipeline to return to more historical levels. Turning to Slide 19. I've…

Thanks, John. Michelle and Mike, I hope the level of detail provided demonstrates our desire to just create transparency into our business. I hope it's helpful to our current and our future investors. Slide 23 and 24 are provided just to share the highlights of our 10-year combined annual growth rates, and for both assets and total returns. And then if you look at slide 25, it's just -- it's a reminder of our vision, mission and our team statements, and the strategic imperatives that guide our decision making. I just thought I would point out given the environment we're in 0.4, that we're very much focused on maintaining top quartile financial results supported by industry-leading governance risk and compliance practices to ensure long-term sustainability of the enterprise. So we really appreciate your attention, and we're happy to take questions at this time, Victor.

[Operator Instructions] And our first question will come from the line of Brian Martin from Janney. Your line is open.

Hey good morning, guys.

Good morning, Brian.

I just wanted to -- I appreciate the color on the -- all the disclosures on the commercial real estate and the construction and different office portfolios. Just one question, John, just on, I think you showed the classified loans out there this quarter. Can you just talk about any changes you've seen in the criticized loans, I guess that maybe you didn't have data's? Just trying to understand if you're seeing any changes underneath what we're seeing what’s on the press release. It sounds like credit is really performing well. So just want to just confirm that?

Yeah. Hi, Brian. The substandard loans moved at a similar -- excuse me, criticized loans moved at a similar rate to the substandard loans. The migration was pretty even within the portfolio. The criticized loans, obviously, with a potential weakness are a higher proportion of the total. So it's a larger dollar amount, but the rate at which it moved is about the same.

Okay. So pretty close. And then maybe just jumping to the -- just two other things. Just on the expense, just the increase this quarter was the normal seasonality. I'm just wondering if -- I don't know if Michele, if you can give any color on just, kind of, what the base rate going forward is? I know you talked about the FDIC that maybe sounds like a one-time event, but just getting the right place for think about expenses going forward?

Yeah, sure. So I would look for our expense run rate to around about $95 million to $96 million on a quarterly basis through the rest of the year. We did have that one-time credit, but then we also offsetting that, we had some employee benefit expense that incurs in January, or I'm sorry, in Q1 each year, so that will not recur in the later quarters. And then there was also some incentive cost in there as well that's a little more seasonal. But so I would look for $95 million to $96 million as a normal run rate, Brian.

Got you. Okay. And then just maybe one other one, and I'll jump out and jump back in the queue. Just the margin, can you just talk about what was the margin in the month of March relative to what it was for the quarter? I'm just kind of trying to understand the baseline what we start at heading into 2Q here?

Sure. Give me one second here. So in March, our margin was 3.55%.

3.55%. Okay. Perfect. That's all I had for now. Let me step out, and I'll let someone else step-in.

Okay. Thank you.

Thanks.

One moment for our next question. Our next question will come from the line of Damon DelMonte from KBW. Your line is open.

Hey, good morning. Hope everybody is doing well today, and thanks for taking my questions. I guess just to kind of continue on the margin discussion there, Michele. As you look at like your deposit betas over the upcoming quarters and if you kind of call the end of the cycle being at the end of this year, how do you kind of see that tracking based on where you are today?

Yeah. We've modeled out -- there's so many assumptions that go into figuring out what your margin is. And I think after we kind of thought through what we think could play out through the remainder of the year, we're assuming that our Q4 margin would be 3.43%, which is still 40 basis points above Q1 of 2022. And so we're expecting maybe another decline of maybe 15 basis points through the remainder of the year.

Okay. That's helpful. Thank you. And then with respect to fee income, strong quarter this quarter, what are some of the puts and takes we should consider as we look at the remainder of the year?

I think this quarter's fee income level is a really good run rate for the remainder of the year. We do plan to sell more mortgage loans than we have in the last few quarters, and so we do think that could generate some gains. And so that's really kind of what is generating our confidence and stability.

Okay. Great. And then I guess, lastly, your approach to kind of dealing with the loan loss reserve has been to grow into it over the last couple of years here. Do you feel like you're getting to a point where you need to start to start providing for the growth that you're expecting, or do you think that there's still more room to grow into that?

I think there's more room to grow into it. We don't expect to have to take provision in the near term. We are modeling a mild recession in our models currently, but we'll continue to evaluate it each quarter with loan growth and particularly if we see any credit events that occurred during the year.

Okay. Great. That's all that I had. Thank you very much.

Thanks, Damon.

One moment for our next question. Our next question comes from the line of Scott Siefers from Piper Sandler. Your line is open.

Good morning, everyone. Thank you for taking the question. I was just curious, just given all the sort of the heightened visibility or, I guess, certainly on securities portfolios generally. Any thoughts on whether you guys would manage any of the securities portfolio even differently just given sort of all the unrealized loss issues both in AFS and health maturity as well?

I don't think there will be anything different in the way that we'll manage it. One of the things that I mentioned this quarter we were able to get $213 million in bond sales. In Q1, we've had $69 million in Q2. I think we'll continue to look for opportunities to try to harvest some of those bonds. And the loss that we've taken is pretty negligible. So we think that, that will continue through the remainder of the year, and that will provide some good liquidity for us, and we'll get back to a more normalized level of investments to assets.

Okay. Perfect. And then I wanted to switch gears to the deposit base for just a second. I think just on non-interest-bearing to total you're at about 20%. And then I appreciated the discussion of sort of those lower-yielding kind of operational accounts that you have as well. So, in response to -- what I'm going to ask if you want to layer those in that be certainly fine as well. But how do you think the deposit mix, particularly your non-interest-bearing or low-yielding -- pardon me, low-interest cost balances will sort of traject within the scheme of the total deposit portfolio through the rest of this cycle?

I think we're still -- we're going to continue to see a little bit more of a negative mix shift. And so if we just stick with just the pure non-interest-bearing, since I know we do put that in our press release, the non-interest-bearing is currently at 20% of total deposits. And so I would expect that that would probably come down maybe another two basis points maybe through the remainder of the year.

Two percentage points or basis points?

2%, yes, sorry.

No problem. Okay. Perfect. That's good color. Thank you very much.

Thanks Scott.

Our next question comes from the line of Ben Gerlinger from Hovde Group. Your line is open.

Hey, good morning guys. It seems like you guys are still in a market share expansion, i.e., kind of in growth mode still. Have you seen any opportunities or any lending segments that people are stepping away from, or kind of more broadly speaking, are you seeing shots on goal now because of a bigger size and where pricing is kind of more in the bank shape is there less competition?

Well, it's Mike Stewart here. Yes, as our bank has grown, we have invested in a group of people that I would say focus on what we call upper middle market, the broader market, might just call it in middle market, but we have the ability to work with larger companies, and therefore, control their entire operational accounts at the same time. And then our expansion into the Greater Detroit marketplace or Michigan, in particular, over the last year, gives us opportunity in that space as well. So, I do think that the organic growth in the commercial side in the middle market space is a good place for us to be, and that's where we're seeing most of our growth.

Got it. And then I have a two-part question here. Any of the -- because I mean deposits were pretty solid. The growth was, was anything within that, that is purely a seasonality factor that might outflow? I mean, kind of boosting 1Q results?

No, we don't really have much seasonality in our deposits. I mean the only seasonality that we incur is intra-quarter with public funds where we see taxes come in. And that occurs typically in May and in November. But then by the time we get to the end of the reporting quarter, it kind of flows back out. And so when you look at quarter end, there's really nothing there, I think, to know Ben.

Got you. I suppose thing, but when you just think kind of your deposit growth was pretty healthy relative to what we've seen in the industry. So, I'm just kind of -- maybe I'm thinking out loud here, but it seems like you might be pulling forward some of your positive beta pressure. And if loan growth doesn't materialize, I think your -- is it safe to assume your margin could actually be higher than what you stated Q4, or is that kind of really embedding in a mosaic of theories that feels pretty comfortable with your 4Q guidance?

Yes. Ben, it's a great point. We were -- we became much more aggressive, as Mike Stewart mentioned, in early February, in March with the specials on the consumer side and individual conversations on the commercial side. At Michele's guidance, we feel good about in terms of overall margin and where it takes deposit betas. And just given the environment be like putting a -- having a conservative estimate makes sense and given all the uncertainty. So we feel good about where we stand, and we're optimistic about the remainder of the year and our ability to continue to grow. And funding is critical to growth, so we definitely kind of shift the gears in early February and started being more aggressive with deposit rates.

Got you. Appreciate the color and the extra insight on the slide deck. I appreciate it. I’ll step back. Thanks, guys.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Terry McEvoy from Stephens. Your line is open.

Hi. Good morning, everyone.

Good morning, Terry.

Maybe, Mark, I’ll start with a question for you, kind of a non-modeling question. When I look at slide 24, First Merchants has had kind of steady organic and bank acquisition growth over the years. So, I guess, my question is, if bank M&A is on hold for a while, how are you thinking about accelerating organic growth? Are there hiring plans you're contemplating? And any new markets that you think can provide some incremental growth. I think, a few calls ago you mentioned expanding into Cincinnati, if my memory is correct. But if you have any comments there, that would be helpful.

Our guidance of mid to high single digits over time of organic growth, we still feel great about. In this environment, we think, a little lower estimate, maybe 5 or 6, 7 makes more sense. But that's what we're focused on for now. The M&A activity, we have -- there are a handful of markets we like. We're focused on deposit-rich institutions, but don't anticipate really doing anything until at least 2024. And I feel like we can produce the same type of results, just on a core basis for a given period of time. Ultimately, we tend to like M&A for a couple of reasons that it provides additional funding to support continued loan growth and it introduces new markets where we can build a commercial bank and typically results in improved efficiencies and economies of scale, our operating leverage over time. But we're looking in the four states that we're currently in Indiana, Ohio, Michigan, maybe Illinois, but focus on the other three primarily. And in this environment, we're just spending time continuing to build relationships versus really thinking about kind of putting a price out on the table. We also I mentioned those two agreements that we signed this year with Q2 and SS&C to replace our online and mobile platform as well as our private wealth platform. And we're very focused on completing those projects and getting all that work done by the end of the second quarter of next year. So -- it's all internal at this point, and I would expect it to stay that way at least into 2024.

Thanks for that Mark. And maybe a follow-up for John. The Shared National Credit Portfolio, the 782, are there any leverage loans in there? And maybe give us a profile of what's in that portfolio in terms of who are the lead banks and some kind of concentration or geographic color would be helpful as well.

Yes. So the – it kind of fits into a categories, Terry, with the preponderance of the loans being middle market companies that we participate with partners in our geographic footprint. It's that statement I made earlier about having access to management and cross-selling into other non-credit-related services to those companies. There's a small less than, I think, around $100 million of, I'll call it, leverage loans credit graded BBB or better -- BBB minus or better. And those are more national companies, but it's a small portion. A portion of those were picked up through some of the mergers that we've completed.

Hey, Terry, its Mike Stewart. The typical banks that we partner with would be the names like Huntington and Key and Fifth Third and banks that are leading transactions that are on our market. And we're partnering there, because remember we also have a full syndication desk and capability. So it offsets what we're also selling to diversify portfolios on the other end, and those very banks also bind our transactions as well as selling downstream.

Perfect. Appreciate the color, guys, and Michele from you as well. Thank you.

Thank you, Terry.

Thank you. And that concludes our Q&A session for today. I would now like to turn the conference back to Mark for any closing marks.

Yes. Just again, thanks for your interest and your investment in First Merchants. And again, I hope all the color we tried to provide helps you have great insight into our operating model. And hopefully, you can also tell from the comments that we're optimistic about the future of First Merchants and our performance. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.