Good afternoon, and welcome to the First Merchants First Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note today's event is being recorded.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 be identified by the use of words like believe, expect, or may and include statements relating to First Merchants' business plans, growth strategies loan and investment portfolio, asset, quality risks and future costs.These statements are subject to significant uncertainties that may cause results to differ materially from those set forth in such statements, including changes in economic conditions, the ability of First Merchants to integrate recent acquisitions, changes in regulations and requirements of the company's regulators, litigation, changes in the creditworthiness of customers, fluctuations in market rates of interest and other risks and factors identified in First Merchants' filings with the Securities and Exchange Commission. First Merchants undertakes no obligation to update any forward-looking statement whether written or oral relating to the matters discussed in this presentation or press release. In addition the company's past results of operations do not necessarily indicate its anticipated future results.I would now like to turn the conference over to Mike Rechin, President and CEO. Please go ahead.

Thank you, Andrea, and good afternoon, everyone. Welcome to our earnings conference call and webcast for the first quarter ending March 31, 2020.Joining me today are Mark Hardwick, our Chief Financial Officer and Chief Operating Officer; as well as John Martin, our Chief Credit Officer. Also joining me today is, Michele Kawiecki, our Senior Vice President and Director of Finance, who'll actually be presenting material later in the presentation; and Mike Stewart, our Chief Banking Officer is also with us in the event that he can add thoughts to questions later in the presentation.Given the rapidly changing environment our goal is to provide a thorough review of 2020's first quarter coupled with an eye towards First Merchants' positioning for the balance of the year and into 2021. We released our earnings in a press release this morning at approximately 8 a.m. Eastern Time and our presentation speaks to material from that release. The directions that point to the webcast were also contained at the back end of that release and my comments begin on page 4 a slide titled First Quarter 2020 Highlights.First Merchants earned earnings per share of $0.62, net income of $34.3 million, a return on assets of 1.09%, the earnings per share and net income compared with last year's first quarter of $0.78 and net income of $38.8 million.Total assets grew to $12.7 billion, 24.3% over the first quarter of 2019 and the growth was a function of our third quarter 2019 acquisition of Monroe Bank & Trust coupled with the organic growth on the next line down loan growth of 7.9% deposit growth of 8.9% respectively from last year's first quarter.Through the course of John Martin's discussions, you'll hear about loan demand as we see it through the first quarter and a little bit of our…

Thank you, Mike. My comments will begin on slide nine9 where total assets on Line 7 increased by $2.5 billion or 24.3% since the first quarter of 2019. Investments on Line 1 increased by $835 million or nearly 45% during the same period due to strong deposit growth and acquired liquidity, while loans on Line 2 increased by $1.3 billion or 17.9%. Acquired loans accounted for $733 million of the $1.3 billion in loan growth leaving organic growth to account for $577 million or 7.9% of our growth.Additionally on Line 3 the allowance for loan losses increased by $18 million or 22.2% over the first quarter of 2019, primarily due to COVID-related provisions during the first quarter of 2020.The composition of our $8.6 billion loan portfolio shown on the upper right of Slide 10 produced a yield for the quarter of 4.85%. Loan yields are under pressure given the 150 basis point decrease in the prime lending rate during the quarter and the trailing impact that it's had on LIBOR as well. As the graph on the right illustrates 67% of our loans are variable with half for pricing daily. Our loan yield of 4.85% is down from last year's peak of 5.32%.On slide 11 our investment portfolio has a longer duration than peer which is a good offset to our variable rate loan portfolio. And as of March 31, 2020, our unrealized gain totaled $121.7 million a $95.6 million increase since this time last year. You will also see meaningful realized gains on the sale of securities when I cover slide 16 due to strategic movements within sectors of our investment portfolio to both take advantage of gains and improved yields.On slide 12, total deposits increased by $1.8 billion or 22.6% over the first quarter of 2019. Monroe Bank…

Thanks, Mark. On Slide 22, the first item I want to discuss is our deferral of CECL adoption. We used the incurred loss method of calculating our allowance this quarter and increased our qualitative factor for current economic conditions to arrive at a provision of $19.8 million. We were prepared to adopt CECL as of January 1. The validation work on our models was performed in 2019 and we're ready to go.In our 10-K, we disclosed that our day one adjustment for a January 1 adoption was an increase of 55% to 65% from the allowance of $80.3 million at December 31 and the reserve and other liabilities to cover unfunded commitments of approximately $18 million.We used Moody's forecast scenarios in our CECL models and had selected a few different scenarios to develop an acceptable allowance range. Our models are primarily driven by the unemployment rate. There are other economic indicators in our equations too but unemployment rate is the most significant.In the last two weeks of March, Moody's was rapidly reforecasting established scenarios and created new COVID scenarios, which led us to question the reliability of the forecast. When presented with the choice of adopting, we decided to stay under the incurred loss method until the forecast risk was lower and there was a bit more certainty with a clear view forward. With the hope that the FASB and SEC would allow for interim period implementation, such as April 1 or July 1.Now subsequent to us making that decision, the transition conditions indicated by the SEC turned out to be less desirable than we anticipated yet they still haven't issued written guidance. But we decided to stay the course and keep our teams moving on the review and analysis of our results for the quarter.I think the benefit of…

All right. Thanks, Michele and good afternoon. I'll begin my comments on Slide 25 with a detailed presentation of the portfolio, overlay quarter end modifications, review line utilization, discuss some specific portfolios in mortgage lending. I'm going to quickly review the first quarter asset quality and then wrap up with my comments and observations from recent activities.Turning to Slide 25. This slide presents the portfolio from a collateral-based perspective and loans have been grouped based on FDIC reporting, which is more closely tied to collateral. In the first quarter the loan portfolio grew $144 million or 6.8% annualized. Commercial loans grew $194 million.Of note was a move of roughly $230 million from Line four to Line five as projects were moved from construction to multifamily and CRE, non-owner-occupied categories. Basically, the first quarter was more of the same steady growth with a stable portfolio growing in the mid- to upper single-digits.Turning to Slide 26, which is the new quarter -- which is new this quarter. I've grouped the commercial assets by NAICS segmentation -- segments or the North American Industry Classification System to show the detailed composition of the loan portfolio by primary -- by borrower primary industry.I draw your attention to the roughly $44 million of restaurant exposure that was moved from lessors of real estate NAICS from below to the restaurant and food services segment to help provide a clear illustration of the concentration.This supports statements we've made on prior earnings call that First Merchants has built a diversified commercial portfolio across industries. And in a state that has a robust manufacturing base, our largest exposure is well manufacturing followed by public administration from our public finance business and agriculture.Along those same lines with little energy production we have little or no oil and gas exposure. Other portfolios…

Thank you, John. I really like your last slide in the top bullet point of it: proactively engaging clients and customers to chart the path forward. While, I seem to be on a schedule of record Zoom calls and webinars, the balance of this company is out in front talking to their clients, listening to their concerns here and how we can solve for them. I share John's appreciation for the teamwork that the company is performing.So I'm on Page 38. My eyes are tempted to get to the bottom where it talks about being well positioned for this challenge and for the future strength and stability that lines under that. But I don't want to cheat and skip some summarizing from earlier comments.We're going to go into the second quarter midway through April with a strong foundation of pretax pre-provision earnings a better part of $58 million; tangible common equity nearly 10%; a deferral CECL implementation; protection of an allowance and fair value marks of 1.54% of loans; a lot of liquidity from an 87% loan-to-deposit ratio.What John just covered is a really well diversified portfolio with sharp underwriting and portfolio management and it produces a high-performance execution results profitability return on assets and efficiency ratios.While, we maintain a valuation above tangible book value, we also know that it's 50% of our historical average. So I do think we're well positioned. We're optimistic. And our goal with our material today was to evidence our mindfulness of today's recessionary environment. I think we know what we're up against and we're evaluating virtually all variables in our business. We're optimistic about navigating this company and our clients for what's ahead.So at this point, Andrea, we are open for questions.

[Operator Instructions] And our first question comes from Scott Siefers of Piper Sandler. Please go ahead.

Good afternoon guys. Thanks for taking the question.

Thanks, Scott. Good afternoon.

Hi. So first question is just on CECL and the decision to delay and definitely appreciate the rationale. I guess, I'm just wondering, you did take a big provision despite not being -- not adopting CECL, which took advantage of sort of the qualitative factors under the incurred method. So in a sense you did a CECL like provision I guess in the sense that it's similar to the large ones we've seen so far this quarter. What would have been the difference between your provisioning levels this quarter and what they would have been under CECL?

We use the Moody's forecast on our CECL models to help inform that qualitative adjustment for the provision that we booked. I mean, I think even under the incurred loss model you can't ignore what's going on in the economy, so I don't think the difference between the incurred loss provision versus the CECL provision would have been materially different.

Okay. And will that be the way it goes going forward? In other words enough flexibility under the qualitative that you could prep and really continue to build the reserve substantially if needed given eventual clarity on the forecast?

Yes. I think there's room for that.

Okay, perfect. And then you mentioned in your comments about the hopes to do an interim adoption of CECL but then mentioned that some of the transition stuff was not as favorable. Can you go into just a bit more detail on how and when you might be able to do an interim adoption?

Well, when the Cares Act was passed it said that we either adopt at December 31st at the end of this year or when the emergency act is canceled and so that was the provision that was written in the Cares Act. But in the CECL guidance initially that allowed for interim adoption and we didn't know if that was still going to be in play or not and we're waiting to hear from the SEC on their official guidance. They still haven't issued it, although the SEC accountant did make a statement that said that we would have to restate back to January 1, but we're still waiting on guidance around that.

Okay, all right. Perfect. Thank you very much.

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

Good afternoon, guys. Thanks for taking my question.

Hi, Daniel. How are you?

I’m doing well. Thank you. So I guess first given -- I'll get right into a meaty question here. On the tax rate given the usage of the NOLs in the first quarter, is that something that you expect that could be used again going forward or is that -- I think I heard it one time in the comment. So any comment around what the tax rate might be going forward would be great?

That's a one-time item and we would anticipate if we have similar levels of provision that the tax rate would go to about 12.5%. And if we didn't have a provision at all, if you just run through that math it gets to a tax rate of 15.5%. So the NOL was pretty significant and the fact that we had a large provision this quarter pushed the tax rate even lower.

Got it. That makes sense. And then I guess on the margin, you mentioned an expectation for that to contract in the second quarter. And then just stepping out into the third quarter and beyond, do you think given similar type of rate scenarios that you might see stability there going forward?

Yes, I do. I kind of anticipated a second quarter pressure on the margin that was similar to the first quarter and then stabilization. So -- and that's just because the rate cuts happened late in the quarter and then they'll be fully recognized in the second quarter. And by then we'll have the majority of our deposit reductions completed.We do still have about $1.1 billion of CDs that were amortized over the next 12 months -- however, priced over the next 12 months I should say and they're at about $185 million and we repriced it down by at least a four percentage point, which takes some of the remaining pressure off. But we think we're going to be challenged in the second quarter in a way that's similar to the first.

All right. That’s terrific. Thanks for answering my questions.

Thank you.

Thanks, Daniel.

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

Hey, good afternoon, everyone. I hope everybody is doing okay during these challenging times. First question, just regarding the PPP participation, pretty active originations I think you said around $750 million. What was the average rate on those? Like do you have…

Like average size?

No other fee?

3%.

3%?

They're about 3%.

3%? Okay. And what is your expectation for when you'll probably begin the forgiveness process? Like were these booked mostly in March or first part of April? What can we expect for when some of these loans can be paid off?

Yes. Damon, this is John. The PPP program, it has a forgiveness after eight weeks. So it will be actually after or before the quarter even ends they should begin to have a -- they start to see those loans forgiven.

I think it really -- this is Mike, Damon. The process for forgiveness has not been fully offered yet. And so, with John's point, we're actively funding now and so some of the metrics that were provided speak to that. So we're actually funding towards the back end of the initial wave. And if you think about eight weeks of usage to demonstrate appropriate use for forgiveness through payroll, it really gets pretty close to the end of the quarter before the forgiveness process could even get started. So it will be interesting to see.

And I'd add too, with the second round of funding here, we'll be putting on another wave. So it's eight weeks and then the forgiveness starts and then we're going to be actively any of the customers that we have that weren't able to get through the first round will be, obviously, queued up for the second round. And that eight-week clock will start to tick.

Got it. Okay. And then just another question on the margin. Mark, I think, you noted that the fair value accretion was 12 basis points to $3.5 million this quarter. How does the schedule look for the remaining quarters of the year?

We'd expect a like amount for the remainder of the year.

Okay. Okay. That’s all I have for now. Thank you very much.

Thanks, Damon.

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

Hi. Thanks for taking my questions.

Sure, Terry.

John, thanks for all the modification data and the way it was presented and broken out. I guess, I'll start there with a few questions. When you were getting the customer request for modifications, was it kind of yes to all your customers? Or were you -- was there a level of selectivity where you went through each borrower and really reviewed the situation?

What I'd say is that, we had all of our borrowers complete a business relief assessment questionnaire where we ask them a series of questions about their current business situation financial situation how they plan to navigate the business and their access to liquidity, checking savings, investments accounts, et cetera, to try and get a forward look on what they might be facing.The first 90 days, obviously, they had financial statements that were backwards looking and those all looked strong from prior periods. And so we're really, I would say, looking at their questionnaire and trying to make an assessment. But on balance it was fairly accommodating to the customers as they request the relief.

And let's say it was a 90-day request and fast forward 90 days and we haven't changed in terms of the economic outlook. Do you have the flexibility to continue to work with that borrower for another 90 days?

Yes. The guidance that came out, Terry, actually provided up to two 90-day periods or basically six months without running into TDR as a classification. You couldn't be delinquent at the end of the year in order for it not to be a TDR. So you couldn't have granted an extension for a borrower who was delinquent.But the idea, plan, the strategy is to reassess after 90 days and ask even more questions about what are their plans. So that as we get closer to the end of that six-month period we have a better understanding of what the borrowers and the bank's strategy will be going forward.

And then maybe a quick question for Mark. Just looking at fee income, as we try to think about the second quarter, certain areas are down more. Maybe the best way for us to model it out is to think about what happened in March. So is there any way you could give us a sense for those fee areas that are down because of the situation and the level of decline that you saw late in the first quarter? I'm thinking card payments service charges, et cetera.

Yes. When I look through this, the wealth management fees with a decline in the market will have an impact. Card activity is less than normal as everyone is staying at home and not going out as often. Everything else is really strong. I would expect to have another great quarter in gains on the sale of mortgages, another great quarter in derivative hedge income.And the securities gains probably won't be as much. We've had some great opportunities in the first quarter to take advantage of the municipal market vis-à-vis the mortgage-backed market and I don't anticipate the same kind of opportunity, but the quarter is still young. So if we see them we'll definitely take advantage. There's a little bit of service charge related to the EIC, is that the right term the payments?

The fee integration we're still in some fee waivers or omission of business that will release itself.

Yes. And then we -- well that is positive. And then there's a slight offset as we look at all the tax payments and trying to be accommodative and make sure that the -- not the tax payments the stimulus payments to consumers to be sure that they fully recognize that benefit and not use it to cover all overdrafts. So, there may be a little bit of pressure there, but Mike do you have any other thoughts?

Well yes. Terry this is Mike Rechin. Two other thoughts on top of what you've already heard. The hedge business as you know on Line Item five on Mark's noninterest income slide is a customer hedge and that -- the demand for that has been great. It is premised on commercial loan closings, which might slow down a little bit but I've already seen early in the month of April that that volume is going to be high and that's a lucrative business for both the bank and for its clients.And Mark already spoke to the mortgage volume, but it's particularly strong. We had $140 million of closings in the first quarter. We have a pipeline of $180 million in the second quarter. So that gain on sale which is predominantly an 80% or more sale business ought to stay relatively high as well.

Great. Thank you for that. And thanks for all the extra slides in today's presentation. Appreciate it.

You’re welcome.

Our next question is a follow-up from Daniel Tamayo of Raymond James. Please go ahead.

Thanks for taking my follow-up. This is just kind of a follow-up on the CECL guidance. So, now that you've taken this part to preserve -- reserve provision excuse me in the first quarter and the reserves are larger, how does that impact what the CECL Day one impact will be when you do implement it?

Well assuming that January one is the implementation date that what we disclosed in our 10-K would be our adjustment.

So the 55% is -- I mean that would -- it will still be the same percentage basis off of whatever the reserves are as of that previous end point?

I think the one -- if January one remains the implementation date and so for instance, if we're allowed to implement CECL as of a different day of the year, we would have to take a fresh look at that number. But as of right now, with what the SEC at least has said verbally, it sounds like they will have us restate back to the January 1 date and the guidance that we've provided would still be in play.

I see. Okay. And then, this is a separate question. Just on the wealth management revenues, it looks like they came up a little bit in the first quarter. Are those based off of like an average market value or some kind of intra-quarter value that you would expect that revenue number to come down in the second quarter?

Well, I think the dominant -- you're asking a billing question. I think the larger impact in terms of the magnitude of those fees is the year-over-year comparison of Monroe. You might recall Monroe had for a $1.3 billion bank kind of an outsized private wealth business and actually a good percentage of the size our -- the specific question you asked about the derivation of our fee structure, I can't answer off the top of my head. I think it's off of -- I think his question is off of what date is it over an average period of time or a month end or quarter end period of time? I should know that, but I don't.

We can follow up offline. That's fine.

I appreciate the question.

Thanks for taking my follow-ups.

Sure.

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

Andrea, thank you for hosting. I have no other comments other than thankfulness. I hope everyone listening has had the same good luck with health that our company has had. We've had been particularly fortunate that our associates have stayed in good shape which has allowed us to have the service level we have and the esprit de corps that we've enjoyed. I hope the same goes for everyone on the call. Talk to you soon.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.