Good afternoon and welcome to the First Merchants Corporation 3Q 2021 Earnings Conference Call. All participants will be in a listen-only mode. 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. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mark Hardwick, CEO. Please go ahead.

Anthony, thank you for your diligence, the introduction, and for covering the forward-looking statement on page two. Good afternoon and welcome to First Merchants third quarter 2021 conference call. We released our earnings today at approximately 8 A.M. Eastern Standard Time. Hopefully, you have 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. On page three, 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. Page four is a one-page snapshot of the First Merchants' geographic footprint and a few relevant financial highlights for your review. We feel our year-to-date return on assets of 1.43% and return on tangible common equity of 16.35% reflect the strength of First Merchants' overall balance sheet and earnings model. Our Moody's investment grade of A3 was reaffirmed during the quarter on September 24th, 2021. This investment grade is important to us as we focus on the level of process, formality, and sustainability that exists within our company. Now, if you would turn to slide 5. As my quote in the press release states we are having a record year, powered by strong balance sheet growth and high levels of profitability. Net income for the quarter totaled $52.8 million or $0.98 per share. In addition year-to-date earnings totaled $157.8 million or $2.92 per share during the first nine months of the year. Typically -- or tactically I should say we had a busy quarter represented by three bullet points on the top half of page five. We are pleased with our quarter-to-date and year-to-date loan growth and you'll hear more about that later in the call. And we also completed the successful rollout of our new Online Account Origination platform powered by Terafina and NCR product. And we opportunistically repurchased nearly $21 million of First Merchant stock in the open market during Q3. Now, Mike Stewart will provide some color on our lines of business before Michele and John review the financials and our credit statistics.

Thank you, Mark and good afternoon to all. As you look at the next two slides, I plan to provide an update on our line of business results and their contributions within the quarter. Since nothing has changed within our strategy and key line of businesses which is on page six, I want to focus on page seven titled Region and Line of Business Third Quarter Results Highlights. The top of the page offers a breakdown of the core loan growth by our business units. Overall, we grew total loan portfolio by an annualized rate of 6% with each business group contributing to the growth. All these percentages exclude the balances of PPP loans and have been annualized. The private wealth and consumer groups grew at an 11% and 28% rate, respectively. This compared to a 4% and 5% growth rate in the second quarter. And as we talked about last quarter, our private wealth team is now fully integrated into each of our markets and their connectivity with the commercial team continues to drive our growth in PWA relations and that loan activity. Our consumer loan balances grew in the quarter based on increases of in-branch originations of around 5% and that's from both units, dollars, and increases in utilization rates. Augmenting this growth was a small consumer HELOC purchase of nearly $40 million. All combined the annualized growth rate was at 28%, which is a little higher than normal. This is the second consecutive quarter of organic growth as our consumer spending remains robust – as the consumer spending remains robust and stimulus deposits are being spent. For our mortgage portfolio, we continued to experience increases in construction and purchase volumes, which drove the balance sheet growth of 2%. The pipeline for mortgage originations remained strong at the…

Thank you, Mike. My comments will begin on slide 8. We had another quarter of meaningful balance sheet growth, which you can see on lines one through four as total assets increased $137.6 million or 3.7%. The deposit growth of $145 million coupled with PPP loan forgiveness created liquidity of $370 million, of which $125 million was used to fund loan originations and the remaining liquidity was invested in the bond portfolio. You will see on Line 17 that net income declined $2.8 million from the second quarter. You will recall that the second quarter included onetime gains on a large sale of mortgage loans that totaled $2.9 million. Taking that into consideration along with the PPP fee income decline from last quarter reveals another good quarter of core incremental earnings growth. This result led to a strong efficiency ratio for the quarter of 51.18%. Lines 18 through 20 show our profitability ratios, which are showing a nice upward trend starting from the third quarter of last year, with the return on tangible common equity this quarter at 16.33%. Slide nine shows our year-to-date results. Line 23 shows year-to-date earnings per share of $2.92, a $1.01 increase over the same period in the prior year. The efficiency ratio for the first three quarters of 2021 was a low 50.10%. Now I'll move on to slide 10, which shows highlights of our investment portfolio. The top right graph shows the trend in the portfolio yield. The yield on the portfolio declined only 3 basis points during the quarter, so yield compression has slowed. The portfolio contributed $26.3 million of interest income on a fully tax equivalent basis this quarter, an increase of $2.2 million over prior quarter. The current tax equivalent purchase yield noted in the bottom left is approximately 2.2%.…

Thanks, Michele and good afternoon. My comments start with Slide 18, where I will review the loan portfolio including the industry concentrations and the PPP loan program. I'll provide an asset quality update and then close with an asset quality roll forward before turning the call back over to Mark. Turning to Slide 18. For the quarter, the portfolio experienced continued loan growth as Mike Stewart mentioned in his earlier remarks. Total loans grew $126 million when factoring in the $218 million in PPP loan forgiveness in the quarter. Excluding the changes in PPP loans grew at a 6% annualized pace led by the C&I portfolio, which encompasses on this slide lines one through three, CRE construction and home equity loans. Driving C&I growth was a number of new relationships for the quarter as well as an increase in C&I line utilization from 38.4% to 39.7% or an increase of roughly $115 million. Line utilization continues to remain lower compared to pre-pandemic levels, where utilization was in the mid-40% range. We did feel some headwinds in the investment real estate portfolio as Mike mentioned, as the demand from the permanent market was strong and resulted in a number of our mini-perm loans being taken out early. On lines nine through 12, we had growth in our consumer and mortgage portfolio, up $60 million in both first lien and HELOCs as both the purchase and refinance market remained strong. And then on line 14, we ended the quarter with $198 million or roughly 1600 of the PPP loans remaining, that represent either loans that have been converted to amortization or await a forgiveness request or processing. Slide 19 highlights our asset quality. Our trends continue to be stable to improving with NPAs plus 90 days past due on line five, down…

Great. Thanks John. You'll see in the deck slides 21 and 22 are consistent with prior quarters. And they just show a nice track record going back a little over 10 years of First Merchants' performance. And then if you look at slide 23, it's a document that highlights some of our priorities. As you think about having a vision and a mission and kind of strategic imperatives this is a good list of the things that we're focused on that should carry us through the next several years. And at year-end I'll cover these in more detail. So at this point, we're really ready to take questions. And Anthony you can open up the line for us.

We will now begin the question-and-answer session. Our first question comes from Daniel Tamayo of Raymond James. You may go ahead.

Hi, good afternoon, everyone. Maybe I will start on expenses. We're seeing a lot of, obviously, wage inflation hearing a lot about that impacting hiring practices and dollars. What are you seeing there? And how do you think that's going to impact your expense growth next year without maybe talking about guidance but just kind of high level? Thanks.

Yeah. Thank you Daniel. Look wage inflation and the pressure related is real. We are definitely feeling it in more of our entry level positions. There's increased vacancy rates and we've increased our minimum wage to $15. We have some insurance adjustments that are going to take effect to the 1st of next year that are trying to provide some relief and will allow us to attract talent at some of the entry level position. So it's real and we're feeling it. But I would say as we forecast into next year, we still have in mind kind of a 2% to 4% growth rate for expenses in 2022. And we're finding ways to be more efficient in other areas as we just adjust and adapt to this new environment. That also includes increased digital transactions et cetera. So it's a good question. It's real and I just think it's part of the job that we have to manage the company in the most efficient way possible.

Thanks Mark. And as a follow-up to that assuming in 2022 that we do have some -- you mentioned finding other ways to cut cost but assuming that that might run a little bit higher than normal and that we do not get an increase in interest rates, do you think you can still maintain an efficiency ratio in the low 50s as you've done in the past?

Yeah, we do. We're pretty far along in the budget process this year. We've met with every line of business and every administrative unit to review their strategies or tactics for the year. We've drafted our plan and -- I mean, we feel like our efficiency ratio consistent with our strategy is going to stay in the low 50s.

Great. I’ll stay back. Thanks for answering my questions.

Yeah. Thank you.

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

Good afternoon everyone.

Hi Terry.

Maybe a question for Michele. How should we think about the size of the securities portfolio and overall your thoughts on managing excess liquidity?

Well, this quarter we saw the liquidity growth slowing some and so although we -- as Mike Stewart said we are seeing some stimulus money still come into public entities, we think overall that's going to slow and our growth on deposits is going to normalize. And when that happens, that excess liquidity that we have will be plowed right back into loan growth and so we don't anticipate a whole lot more growth in the investment portfolio from excess liquidity going forward.

And then as a follow-up maybe just -- as a follow-up on that last question on expenses. In the third quarter, they came in call it $1.5 million above kind of the high end of the range that was talked about three months ago. And Michele I think you said something about marketing and maybe some other items that drove the third quarter increase. I guess what are your thoughts specifically on the fourth quarter? Is $68 million to $70 million the right way to think about that, or has there been a bump up in the third quarter that will trend -- or continue into the fourth quarter?

I think the wage inflation will have it running more towards the third quarter levels of $71 million to $72 million.

Great. Thank you.

You're welcome.

Our next question comes from Damon DelMonte from KBW. You may now go ahead.

Hey good afternoon everyone. Hope that everybody is doing well today.

We are. Thanks Damon.

Good to hear. So, first question the commentary around the margin was pretty positive. Michele are you feeling comfortable that you guys can kind of hold this line here the 2.99% to 3% for the core margin level, or are you even maybe more a little bit more optimistic that you could see a little bit of a rise as we go through the end of 2021 and into 2022?

Our outlook is that the margin will be stable. A lot of the pressure that we saw on the previous quarters was due to all that excess liquidity and with that liquidity coming to more normalized levels, we think it will be stable. I'd probably be a little shy to say that I think that it could increase just because we're still seeing quite a bit of competition on loan pricing, but we feel good about where we're at.

Got it. Okay, great. And then I think John was giving the commentary on the commercial line utilization rate and I didn't quite catch all that. If you could just repeat the percentage of this quarter versus last quarter that would be great.

Sure. So, the line utilization so it's basically foray in the line utilization, it's 38.4% to 39.7%, which given our commitments resulted in a $115 million lift for the quarter in C&I alone.

Got it. In C&I alone, okay. Perfect. And then I guess just lastly kind of bigger picture Mark. I'd love to hear your updated thoughts on M&A, there's been some decent size deals across the Midwest in the last few months and kind of what your thoughts are on -- are you in a better position to try to capitalize from market disruption, or do you think there's other smaller community regional banks that you guys do partner with to make yourselves a larger entity? Thanks.

Yes, I don't think our opinion on it has really changed. Mike Stewart spends every day focused on organic growth. It seems like the rest of us spend every day making sure our efficiency ratio stays intact because we think those two things are ultimately what drive higher performance. And M&A is a part of what we've done historically. You see the track record. I would say maybe things are a little more active in the second half of the year like they normally are. I think if a banker went back and tried to plot M&A activity I think it's always heavier in the second half of the year. But my view and my opinion of it is really the same as it's always been. We focus on organic growth, efficiency, performance, and M&A is an organic strategy that has to be opportunistic and has to provide shareholder value. So, no real change in our view.

Okay, great. Thanks. Appreciate the color. Thank you.

Thank you, Damon.

Our next question comes from Scott Siefers with Piper Sandler. You may now go ahead.

Hey guys. Thanks for taking the question. I just wanted to go back to the loan growth commentary. I think in some of your earlier prepared remarks you noted, some hirings that had helped to generate some of that growth. How much of the growth would you say, is coming from that increased line utilization that you referred to a couple of times and how much from new hires? And what is the market in your view for attracting new talent?

It's Mike Stewart here. Good question. We – I'll start backwards. The market, I would say for us is pretty attractive. In some of our core markets, there are disruptions that still happen with some of the larger banks or some of the other M&A activity. And with our reputation and our – growth in our global commercial product set it's been a good place for those commercial bankers to lend. It could be asset-based lenders investor real estate lenders, upper middle market lenders, taking advantage of our syndication capabilities now. So we've been able to add those type of quality bankers in – like I referenced in each of our four states. They are contributing. Once they get on board, it usually takes I would say two quarters and they start to contribute in a pretty consistent manner. You asked specifically, how much would that growth come from that, or the organic growth from that versus the line utilization. And I think, if you take the line utilization out, but some of that line utilization comes from new names, which these bankers are contributing as well. It's a good question. I have to do a little bit more work to give you the percent.

And I can also provide a little bit of additional color. Our commitments for the quarter, which come from new names increased from $2.75 billion to $2.98 billion. So call it a couple of hundred million dollar increase in our line commitments. So that's being generated by new names new commitments to existing customers generated by bankers. It's not just purely existing lines existing draws.

Perfect. Okay. Thank you very much for the – yeah, that's great. And then Michele, you had made a comment a moment or two ago regarding loan price and competition in response to a question on the margin. I was hoping that, you guys might be able to speak to in just a bit more detail to sort of the intensity of pricing competition and what your bankers are telling you about pricing versus competition on structure and stuff like that?

Yeah, it's Mike Stewart again. I'll speak to that too, because connected to it in a very intimate way. I would say, all of our banking competitors realize that asset growth is of utmost importance. So competition on pricing is real. And we see it in all different forms and functions. And I would say that, we've been able to in general not have to compete on structural aspects. At sometimes, I'm wondering on any certain deal specific, if that's true but on a global point of view, it is still from a competitive point of view pricing. That's why I think Michele would be hesitant to answer the other question with would we see margin increasing. I just think that we're going to stay very active and price accordingly. We like to use incentive-based pricing. So if risk profiles change over time the pricing would adjust accordingly. We try to stay relatively short on our types of tenor so we get to take a look at those, so we can rebalance when time goes on. But I think that's – it's just competitive.

Okay. Perfect. Thank you guys very much.

Thanks, Scott.

Our next question comes from Brian Martin of Janney Montgomery. You may now go ahead.

Hey, good afternoon, everyone. Just a couple for me. Just – Mark just going back to your M&A point or just capital maybe just kind of your appetite. You talked about the buyback maybe just the appetite for buyback. And then just on M&A, just separate – I guess, when you look at the opportunities that are out there today whether it be something like Hoosier or more of the bank side, is anyone more active on your front or – I guess on that front and then just on the buyback?

I would – well, we're active in buyback space opportunistically, and have a real kind of stated goal to keep tangible common equity at our target of 9% to drive higher returns on tangible common equity. So I think we've been successful there. And on the M&A front, I'm not sure, if I totally heard the question. But I would just say, if something were to progress we have interest in using cash in the transaction as part of the capital management. Maybe that's where you were headed.

Yes. I was just more -- just is it a whole bank deal, or are you more interested in doing something like you did with Hoosier Trust on that side?

Yes. No more traditional. I mean Hoosier Trust was a unique opportunity. But I don't think we'll see those types of opportunities as frequently as we might hold bank opportunities. So we're still focused on transactions that look really similar to what we've done in the past.

Yes. Okay. And then the last two for me or just maybe one for John. Just on PPP just the recognition of the remaining fees. Is it -- the bulk of that probably comes fourth quarter, or have you seen some of that slow down?

Yes. We would expect that the bulk of the remaining is going to come in the fourth quarter.

Got you. Okay. And then maybe just one for Michele was just on the outlook for margin just I guess can you remind us from an asset sensitivity standpoint how you guys would I guess just what your thoughts would be on how the margin dynamics might change from what you mentioned earlier?

Well, we look out over the next 12 months we're assuming that margin will be stable. I mean we are asset sensitive. Certainly, our balance sheet always has been. But we're still looking for stability with hope that there could be some increase.

Okay. And just remind me I mean the percentage of loans that are variable rate that would move?

Two-third.

Two-third. Okay. Perfect. Okay. Thank you for taking the questions.

You’re welcome.

Thank you, Brian.

Our next question comes from Daniel Tamayo of Raymond James. You may now go ahead.

Again just a couple of follow-ups for me. First on the deposit service charges had a nice little increase in the quarter obviously after they fell off during the pandemic. But how are you thinking about that line going forward with potential regulatory changes? And just what are your thoughts there would be great? Thank you.

Yes. I mean the component that is NSF and OD we just continue to make sure that we're kind of taking the lowest risk approach. And kind of every year looking for ways to make sure that we're as conservative as possible. So outside of that I think there are service charges that are clearly just connected with core deposits that we have. That is a focus of our organization. I mean we think -- we talk all the time about growing commercial loans and growing core deposits and core deposits come with some level of service charges. So -- but yes there's definitely some risk in the OD space and we're just trying to make sure every practice we have is at low risk as possible.

And inside that service charges there's a lot coming through the form of ATM usage as well. So they're both increasing.

All right. Great. And then last one for me for Michele here. So you've commented in the past of a bias to keep the loan loss provision at zero or above given the outlook for credit is very strong at this point and reserves still remain comfortably over 2%. Any update to that, or do you think that will remain the focus going forward? Thanks.

I think our bias remains the same. But we acknowledge that we could be under some pressure in the near-term depending on what the unemployment rate is and the Moody's outlook. But at this point we would still -- it would still be our bias just to grow into that number.

All right. I appreciate it.

Thanks, Daniel.

Thank you.

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

Anthony, thank you and to all of our participants. We always appreciate your interest your connectivity your willingness to listen to our performance and most of all your investment. So your engagement is appreciated. Look forward to talking to you next quarter. Thank you.

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