Good day and welcome to the First Merchants Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] This presentation contains forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act. Such forward-looking statements can often be identified by the use of words like belief, intend, anticipate, expect, should, could ,might or may. These forward-looking statements include statements relating to First Merchants goals, intentions and expectations, business, plan and growth strategies, asset quality of First Merchants loan and investment portfolios and estimates of First Merchants risks and future costs and benefits. These statements are subject to significant risks, assumptions and uncertainties that may cause results to differ materially from those set forth in such statements, including changes in economic and business conditions, the ability of First Merchant to integration recent acquisitions and attract new customers, changes in laws, regulations and requirements of the Company’s regulators , the effects of easy restrictions on participants in the financial services industry. The cost and other effects of legal and administrative cases, changes in the credit worthiness of customers and the impairment of collectability of loans, fluctuations in market rates of interest, competitive factors in the banking industry, changes in market, economic, operational, liquidity, credit and interest rate risk associated with the First Merchants business, and other risks and factors identified in First Merchants fillings 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. Please note this event is being recorded. I would now like to turn the conference over to Mr. Michael C. Rechin, President and Chief Executive Officer. Please go ahead, sir.

Hey, thanks, Chad. Welcome, everyone, to our earnings conference call and webcast for the third quarter ending September 30, 2018. Joining me today are Mark Hardwick, our Chief Operating Officer and CFO; as well as John Martin, our Chief Credit Officer. First Merchants released our earnings and a press release this morning at approximately 8 o’clock am Eastern Time and our presentation today speaks to material from that release. The directions that point to the webcast are also contained at the back end of that release, and my comments will begin on page four, a slide titled Third Quarter 2018 Highlights. So, captured right in the top of the release were First Merchants’ announcement of earning $41.1 million in net income, a 68.8% increase over the third quarter of 2017; earnings per share after the period of $0.83, a 66% increase over the third quarter of 2017. Total assets grew organically to $9.8 billion, an 8.2% increase over the third quarter with really similar growth rates in both loans and deposits kind of reflecting the balance of the way we approach the marketplace. Next bullet point down some high performance return metrics with a 1.69% return on average assets and 12.10% return on average equity, driven by -- results driven by a really low and stable 49.25% efficiency ratio. And we’re excited today to talk a little bit later about the definitive agreement that we discussed two weeks ago on October the 10th, about our upcoming combination and merger with MBT Financial Corp. in Monroe, Michigan. At this point, we’re going to cover the balance of the release led off by Mark.

Thanks, Mike. My comments will begin on slide six where total assets on line seven increased by $420 million or 6% since year-end 2017. Organic growth in total loans on line two equaled $333 million or 6.6% annualized since year-end 2017. The composition of our $7.1 billion loan portfolio shown on the left side of slide seven continues to produce strong loan yields. The loan portfolio yield for the third quarter of 2018 totaled 5.25%, up from the first quarter of ‘18, total of 4.86% and a second quarter total of 5.12%. The prime rate has increased by 125 basis points over the past six quarters. And our loan yields, when normalized for fair value accretion, have improved 77 basis points. As the graph on the right illustrates, 68% of our loans are variable, with half repricing daily demonstrating the asset sensitivity of our bank. On slide eight, our $1.6 billion bond portfolio continues to be high-performing. Our portfolio yield of 3.48% is 1 basis-point better than our 3.47 yield that we reported in both the first quarter and second quarter, while the unrealized loss increased by $18.2 million during the quarter to $34.6 million. Now on slide nine, non-maturity deposits on line one, represent 83% of total customer deposits. Non-maturity deposit growth over year-end 2017 totaled $343 million or 80% annualized. Customer time deposits on line two, represents remaining 17% of total customer deposits and increased by $176 million from year-end or an annualized 22.3%. Capital and liquidity are positioned very well for the future, and management is pleased with the structure of our balance sheet. Our loan to deposit ratio totals 93% and our loan to asset ratio totals 72%, while the tangible common equity ratio totals 9.55%. As previously mentioned, the mix of our deposits, on slide…

Thanks, Mark, and good afternoon. Beginning on slide 19, I’ll provide an update on the loan portfolio, then review asset quality and the asset quality role forward, cover the allowance and provisioning, and then close with a few remarks on the portfolio on market conditions. So, starting on slide 19. Total loans grew slower in the quarter as compared to the first half of the year. We experienced payoffs and momentum in construction loans in the quarter -- excuse me, movement in construction loans in the quarter, which were lower by $46 million and CRE non-owner occupied or investment real estate on line three, which increased by $61 million. We continue to manage a dynamic and transient construction investment real estate portfolio where loans move from construction to mini-perm and then refinance out to the permanent market. In the first half of the year where construction in CRE, owner occupied loans on line two and three grew at a roughly 17% annualized rate, those same categories netted nominal growth in the third quarter. The same thing can be said for C&I loans which grew at a 22% annualized growth rate in the first half of the year and were flat for the quarter. Moving down the residential mortgage and consumer lending, there was a similar slow down in the quarter with residential mortgage and consumer loans growing $5 million. Although looking forward, it appears we are heading into the fourth quarter with a good consumer and commercial pipeline, tampered by the reality of higher interest rates and their effect on mortgage lending. Turning to asset quality on slide 20. Asset quality was solid for the quarter. On line one, nonaccrual loans were up $300,000; on line two, other real estate owned declined $200,000; and on lines three and four renegotiated…

Thanks, John. I’m going to move to page 25 and 26, cover two of the slides that we used in our October the 10th investor call. As quick reminder about the profile of MBT Financial or Monroe Bank and Trust, and what that could bring to our company. And so on page 25 in particular, little bit of pro forma work on what combined balance sheet might look like. We talked on that day and I’ll repeat again that one of the strengths of the company was the quality and richness and the cost of their deposit base,. and so on an overall basis provides First Merchants on a pro forma basis with some liquidity, reduces our loan to deposit ratio right around the 90%. So, we’re excited about that. You can see that there’s no overlap. And so, it serves as a very real extension of the First Merchants franchise. Page 26, some additional glimpse of MBT on a standalone basis. Some of the balance sheet and income statement were kind of a -- reflect some of the positives of the First Merchants in my mind. Deposits denominated by quality, transaction based, low cost deposits, granular community bank credit extension, mix for a powerful earnings, as you can see here in Monroe on a standalone basis. The attraction, as you can gather then is somewhat of a performance history of the Company, the market composition that they pull together and then the leadership that they have inside the bank and inside their community. So, we’re excited about what it can do for us. Flip to page 27, make some summary comments and then take questions. Finishing up our planning for 2019, and look forward to more of the disciplined, fast-paced market coverage that is our core banking business. John…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Scott Siefers with Sandler O’Neill and Partners. Please go ahead.

Good afternoon, guys.

Hi. Good afternoon, Scott.

Hey. Mike, I guess, first question is for you. So, a little bit of a slowdown in loan growth in the third quarter, which I appreciate the color on, and it’s pretty symptomatic of what we’ve seen at others. But regardless, it looks like you guys are still on pace to hit the 7% to 9% organic growth that you called for the full year. So, I guess one, does that still feel doable to you? And then, more importantly, I guess, what’s your best guess for how annualized growth will trend from here into the fourth quarter and into ‘19 as well?

Well, for the fourth quarter, which is we’re kind of living in right now, we have a pretty close-up look at it, Scott. It looks to me like it’s going to be stronger than the last quarter, which was effectively flat, and yes, probably not as robust as the first two quarters of the year that we’re growing kind of it, 9% or 9.5% annualized kind of rate. So, I think if you were to take a four-quarter composite with three of the quarters completed, and our best look at the fourth quarter is that this 7%, 8%, 9% annualized rate ought to occur. John referred to the pipeline, and I’ve got some information on that that would bear out. Actually, our originations in the third quarter were at a level that absent some construction, reductions and some line utilization reduction would have probably had us been in that 1% raw growth rate, kind of 4% annualized that didn’t take place because of what John referred to. But, we clearly see, absent changes that we can’t forecast, the ability to convert some of our commercial pipeline, which is about $0.5 billion into originations through the fourth quarter and into the first quarter. And our plan -- the back half of your question was, a little further out into ‘19. We feel like the local economies from the -- all of the state of Indiana, Central Ohio, and what we know of Michigan are going to allow us to grow at similar levels.

Okay. That’s perfect. Thank you. And then, just separately, Mark. So, I was a little surprised to see the pace of expansion in the core margin actually accelerate in the third quarter. It looks like the core exclusive of PAAs was up about 9 basis points to 3.90? I guess, the first question is, was there anything unusual in there like, were there any interest recoveries or anything we should be aware of? And then, where does that core margin go from the third quarters to turn 3.90 level, at least in your view?

Well, in terms of something extraordinary, we always have some recoveries but nothing that was really a needle mover for this quarter in terms of overall basis points and spread. We had a rate increase in June that helped to carry us through the third quarter, and we have another rate increase at the very end of September that we think will help carry us through the fourth quarter, even though were making increases to our deposit rates and being very aware, especially of our most sensitive deposit customers. I feel like, our fourth quarter, we end up probably with another basis-point or 2 in margin expansion. Our plan for next year, obviously based on what’s happening in the economy today, rate forecasts are moving around. We currently have one increase built into our plan next year, and we’re seeing forecasts that suggest just the December rate hike, and we’ve had others that suggest it maybe go as high as 3 or 3 in a quarter. So, today, we only have one built into our plan. And we feel like with December rate hike and one in June or likely June, the way we are modeling that our margin is very stable throughout, call it ‘19. So, I guess, if the Fed stops moving and the yield curve stays flat and we start to see some repricing pressure on the deposit side where we’re not getting the lift on the assets.

The next question will come from Nathan Race with Piper Jaffrey. Please go ahead.

Mark, just going back to the last question line of question around the core margin in 2019. With MBTF coming onboard in the first half of the year, obviously their margins were little below yours. So, I guess how should we think about the timing of some of their access liquidity deployment, how that may impact the margin, perhaps kind of maybe you settling into the maybe the high 3.80s as that balance sheet comes on board, is that kind of a fair assumption?

Yes. I think Mike’s comment about loan growth for next year does include some of the deployment of that liquidity. And then, on the margin side, we’re really anticipating just the bond portfolio shift. We know that we’re likely to sell their bond portfolio around close and that we can get a nice pick-up in yield on those bonds going into 2019. That’s the only I guess real item that I think you should consider when you’re trying to put the two banks together in your modeling assumptions.

And changing the gears a little bit and thinking about expenses, I appreciate your comments in terms of the higher incentive accruals in the quarter that drove up the personnel costs. It also looks like other expenses were also up sequentially. Was there any driver there that may come out and is that kind of a good number to plugging going forward?

I think it’s a good number going forward.

And just one last…

And I always say, we do have some real estate activity in our branch network or where we’re moving some assets. And you see a little bit of that volatility quarter-by-quarter. So, this was a really clean quarter.

Okay, got it, helpful. And then just maybe one last question for John, just thinking about your commercial real estate exposure, can you remind us what type of retail CRE exposure you have and any potential exposure that you guys may have through some of these larger retailers as well the Sears, Kmart and the like?

Yes. I went through the portfolio and looked at -- and looked for potential Sears exposure, actually JCPenney as well. And it’s fairly nominal. We do have a couple of properties that -- one, in particularly, it’s anchored by JCPenney kind of like $10 million worth of exposure there. But, so far, it continues to perform. And the Sears exposure, actually, I didn’t see any there at all outside of kind of almost tangentially we’ve got a participation in a shared national credit that has some de minimis level of exposure to it. But outside of that, there’s not anything material that I saw.

[Operator Instructions] The next question will be from Damon DelMonte with KBW. Please go ahead.

Just to kind of follow-up on the loan growth. Mike, can you kind of attribute what maybe led to some of the slowdown in the C&I portfolio this quarter? I mean, is it -- and I know you touched on some commercial real estate paydowns and what not. But, are you seeing commercial -- C&I loans seeing accelerated pay-downs as well?

We actually had a couple of clients that were sold which accounts for some -- none of these by the way in aggregate -- I’ll give you a couple of views of it Damon. None of them are particularly dramatic but in aggregate they kind of result in the flat C&I number that you see. A couple of clients that were sold. I referenced in an earlier question just a moment ago, work that John Martin provides me on our line -- C&I line commitments and the utilization against those commitments. And I think in last quarter’s call, I had mentioned that our utilization was up 2% on roughly $1.8 billion commitment, from the first quarter to the end of the second quarter. We gave half of that back. So, we were actually down 1% in utilization on that $1.8 billion in C&I commitments. So, not really a meaningful change where we like C&I lending, it’s a strength of ours because it’s a typically accompanied by deposits, but would look for that to rebound as the balance of the portfolio as well?

And then with respect to your exposure to the ag market, ag sector, have you seen any impact on your borrowers with the tariffs or just general market conditions?

I would say that probably the portfolio that’s seeing the most in terms of downgrades, you look at that classified as a percentage of the total portfolio are some of our ag land and production portfolios. Is it directly related to? It’s really coming off of a couple years quite frankly in that market where we’ve graded it. And it’s just a reflection of the challenges in that space right now. And I am not sure that I would attribute it necessarily to the tariffs though.

And then, I guess just lastly, with respect to capital management, there’s a lot of volatility in the fin sector the last three, four weeks, six weeks or so. Just wondering what your thoughts are on buying back shares with the decrease in stock price.

It’s something that we do talk about almost every Board meeting. It’s a great topic of conversation that I know we will be having in November. But, I don’t have really guidance or direction for you. Always just trying to make sure that we maximize our capital and we typically think of it is in thirds that we have a third for growth and we use a third for dividend payments and the other third typically is used for other uses like cash and acquisition or potentially buybacks. But, it’s a good question, especially given where stock prices are today.

And can you just remind us, do you guys currently have an authorization outstanding or do you need to have one approved by the Board?

We would need to approve one by the Board.

Ladies and gentlemen, this concludes our question-and-answer session. I'm sorry, we do have one more question that has just come in. Apparently, it jumped out of the queue as well. Sorry about that. So, this does conclude our question-and-answer session. So, Mr. Rechin, I'll turn it back to you for any closing remarks.

Chad, and I have none. I appreciate the attendees today by conference call. Look forward to talking about our full year 2018 results in about 90 days. Have a great afternoon.

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