Good day, and welcome to the First Merchants Corporation Fourth Quarter 2019 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. Please note that this event is being recorded.This release 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 plan 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, and credit worthiness of customers, fluctuation in the markets, 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 Michael Rechin, President and CEO. Please go ahead.

Thanks [indiscernible]. And thanks to everyone in advance for the joining us for our call. Welcome to the earnings conference call and webcast for the fourth quarter ending December 31, 2019. Joining me this afternoon are Mark Hardwick, our Chief Operating Officer and Chief Financial Officer as well as John Martin, our Chief Credit Officer. First Merchants released our earnings in a press release this morning at approximately 8:00 AM Eastern Time, and our presentation today speaks to material from that release. The directions that point to the webcast were also contained at the back end of the release, and my comments will begin on page 4, a slide titled, Fourth Quarter 2019 Highlights.First Merchants posted $47.8 million in net income or $0.87 a share by comparison with $41.7 million earned in the fourth quarter of 2018 or $0.85 a share. In November we were pleased to complete a well-executed systems conversion of Monroe Bank & Trust Financial in the First Merchants very satisfying for our clients and our team mates to get off to a great run rate and we think we've accomplished that. Included in the results for the quarter were integration expense totaling $1.9 million or $0.03 per share.We had a strong fourth quarter with marketplace execution delivering some of the growth that we were looking for. You might recall in late October we talked about having a full pipeline gone into the quarter. Much of that found its way through closings onto our balance sheet and virtually every credit and loan category including our deposit gathering and so what we saw was organic loan growth of $161 million a 7.8% annualized growth rate and organic non-maturity deposit growth of $154 million a 7.7% annualized growth rate.Our third quarter also strong in my view and included $0.17…

Thanks Mike. My comments will start on slide 7 where total assets on line 7 increased by $2.6 billion or 26% since were in 2018. Total loans on line 2 have increased by $1.2 billion this year or 17.1%. Acquired loans totaled $733 million as organic growth totaled $507 million or 7% as Mike mentioned. Investments on line 1 increased by $963 million or nearly 59% from year-end due to strong deposit growth and acquired liquidity.And additionally on line 4 goodwill and intangibles increased by $109 million net of amortization due to the purchase of Monroe Bank & Trust on September 01, 2019.The composition of our $8.5 billion loan portfolio shown on slide 8 continues to produce strong loan yields of the loan portfolio yield for the fourth quarter of 2019 totaled 5.19% down from the year-to-date average of 5.27%. As the graph on the right illustrate 66% of our loans are variable with half for pricing daily demonstrating the asset sensitivity of our bank.On slide 9, our investment portfolio has a longer than peer duration which is a good offset to our variable rate loan portfolio and during the year we've increased the portfolio to $2.6 billion from $1.6 billion at year-end to deploy excess liquidity and protect the bank against falling interest rates.As of December 31, 2019 our annualized gain totaled $71.5 million and the portfolio yield totaled 3.23%.On slide 10, total deposits increased by $2.1 billion or 26.9%. Monroe Bank & Trust accounted for $1.1 billion of the growth while organic deposit growth totaled $979 million on an annualized 12.6%.Common equity on line 7 is increased by $378 million during 2019 beyond normal earnings dividends and other comprehensive income fluctuations. The all stock purchase of Monroe Bank & Trust increased equity by $230 million. Additionally, we repurchased…

All right. Thanks Mark and good afternoon. I'll provide a year-end and quarterly summary of the loan portfolio as Mark mentioned review the asset quality and the asset call roll forward, cover the allowance and provisioning and closed with few remarks on CECIL in the credit environment.Turning to slide 21 the pace of loan growth picked up in the quarter growing $161 million or 7.8% annualized. For the quarter growth came from commercial and industrial lending on line 1, construction lending on line 3 and public finance on line 7.Our sponsor finance business is now roughly $320 million in outstandings and $420 million in commitments and that's a part of is included in the CNI loans on line 1. These balances are in commercial industrial loans on line 1 and I am highlighting it due to our growing activity in the unit over the last several quarters and years. A little more color construction loans were up $117 million on line 3 as fundings drove growth in the quarter while our originate stabilized and move to the permanent market model. So our reduction in CRE non-owner occupied on line 4 with net reductions of $109 million for the quarter from projects moving to the secondary market and the sale of properties.On line 7 public finance grew by $75 million where we saw several larger opportunities in the public finance book where we generally take more interest rate risk with longer-term fixed assets while credit risk is mitigated by the taxing abilities of the various governments in their agencies.Turning to asset quality on slide 22, the loan portfolio’s asset quality remains strong on line 1 non-accrual loans were down $6.7 million for the quarter and $10.1 million for the year even after adding roughly $5 million from the acquired Michigan portfolio…

Thank you John. I'm going to speak to the bullet points on page 27 the slide is titled looking forward. It starts with a couple of highlight items from some of John's closing thoughts around Michigan Bank & Trust having joined us and First Merchants' presence now in the Michigan market. With our conversion and change event going smoothly we feel like we can get after 2020 opportunity strong. We like our leadership that's in place. Tom Meyers and executive with Monroe Bank & Trust will head up as regional president. Our effort there Doug Chaffin you might recall from an 8(NYSE:K) filed the end of last quarter. Former Monroe Bank & Trust CEOs join First Merchants corporate board. So we feel like we have a lot of the leadership from that company working on our behalf now and Tom's team is ready to go.The relationship management and growth point speaks to a clear desire to get our clients comfortable with the change event, retain and grow our client relationships and we're ready to compete for new ones.When I think about 2020 I think about the maturation of our expanded community lending model throughout our larger markets our primary metro markets. These are kind of a mortgage lead effort intended to initiate new bank relationships.So we start our 2020 optimistic coming off of a strong fourth quarter. John talked about the originations in the quarter. You can see that year quarter balances had kind of higher end of our range organic growth rates which we kind of thought would happen based on the pipeline knowing that it's an imperfect science. So when you start the year with the condition of our clients, the condition of our communities we looked at to grow net interest income at the top line, use pricing discipline Mark Hardwick spoke to it both in credit extension and in deposit gathering.Pipeline we have now supports our optimism I think. So we're looking at other strategic items our digital delivery I think we're very aware of the changing client preferences around how they use our company and so we're evaluating where our ongoing vendor partnerships go, our ongoing technology investment in service delivery is going to be made.I ended on a positive note our team was proud that our 2019 results affirm our culture of high performance as Forbes magazine lists First Merchants in its top five for achievement three years running. So we like the momentum that we have and [Eisley] we're open to take questions at this point.

[Operator Instructions] Our first question will come from the Scott Siefers with Piper Sandler.

Good afternoon guys. Thanks for taking the question. Mark first question for you just one regarding the core margin. If somebody is excited to hold a little better I guess just curious your thoughts as to how it compared to what you guys were hoping to see and then second question is do you think it can stabilize from here and when I refer to the core margin just pulling out [indiscernible].

Yes, we were pleased by the stated margin because fair value accretion was strong. Like I said in my comments I don't expect to see 18 basis points per quarter going forward and so we're going to have to rely on a continued reduction of our interest expense on deposits going forward. And we were really pleased to see the 15 basis point reduction in this quarter and we feel like those strategies still have some room as we continue to execute across the board on all of our deposits from a position of strength with great liquidity.

Okay. And I guess when you so if we look at the sort of 344 that you're at on a core basis is that given the opportunities on the deposit cost side is that something you think you can hold in that range going forward assuming no more rate move type effect.

Yes, I think that qualification is a good one assuming no more rate moves we feel great about the current level of our margin on a go-forward basis.

Okay. And then I know that purchase counting and benefits will be less than this quarter’s 18 basis points. Do you have a sense is it going to dip back down to sort of that prior 9 to 10 expectation we would have before Monroe or does it kind of meet somewhere in the middle and then start to come down radically over time?

Yes we were anticipating more like 12 basis points as you go through 2020 but I would say after every acquisition especially for the first 12 months it can be unpredictable as some payoffs tend to drive that number higher in the first 12 months of the year.

Okay. Thank you very much.

Thanks Scott.

Our next question comes from Terry McEvoy with Stephens.

Good afternoon.

Hi Terry how are you?

Great. Thank you. Capital ratios as you mentioned well above your targets. I was wondering if you just rank order capital priorities as you think about utilizing that excess capital going forward?

Well, organic growth is always the highest priority but it tends to use about a third of the earnings that we produce. Our payout ratio typically is about a third of earnings and so I would anticipate keeping it at that type of level and then the thing we added in 2019 was the ability to do some share repurchases that we've really been out of the market from a buyback perspective for quite some time. And so we're encouraged by our ability to use the remaining what we had about a remaining $52 million to use in 2020 on the stated program or $53 million on the stated program that we had of 75 and we feel like we've had some nice opportunities to put that to work at least in the first month of 2020.So our price has allowed for some good buying opportunities. And then we would always like to use some of our excess capital for cash and acquisitions and our history doesn't show that we have a preference for that. I think our last five acquisitions have been all stock but on a go-forward basis we would anticipate as long as the seller is interested we'd love to use cash for as much as up to 20% to 25% of the purchase price.

Good and then just add the follow up. John that $36.6 million fair value adjustment you said a portion of that moves into the ACL. I was wondering if you could quantify that as I just try to work through and think about the capital impact from CECL overall.

Yes. I'll take the first half of the question with the capital. I'll leave to Mark but what I would say Terry is that number is around $7 million that moves in, moves out.

And the range that we've communicated including the amount that goes to two other expense I guess for the first quarter all goes through other comprehensive income but if you take the entire amount that will be reserving and it's between 33 to 38 basis points on tangible common equity and it decreases a tangible book value per share by around somewhere between $0.76 and $0.87.

Thank you.

You are welcome.

Our next question will come from Damon DelMonte with KBW.

Hey good afternoon guys. How's it going?

Good Damon. How are you?

Good. Thanks. Just to kind of follow up on that the CECL question Mark how are you thinking about the provision level now going forward just given the work you guys have done on the implementation of this?

Well, the allowance as a percent of loans will be higher. So on a go-forward basis we would anticipate that we have some higher level of provisioning but it does depend on the categories that we grow. It's much more granular in terms of the calculation and we have different allocations for different asset categories.

And Damon this is John. I might add that going forward we will see some volatility just out of the economic model that the allowance is tied to and you can see today our allowance as a percentage of loans as Mark was just referencing is roughly 95 basis points. The model is it we just I described in my prepared remarks it's going to be closer to the 1.5%. So you'll see some change from that going forward. So between the economic model the change or the Delta in percentage of coverage or the percentage of total loans as well as just what happens to credit in general it's going to add some volatility to it or maybe not so much in the past.

Okay. Like this past year I think you guys averaged around 700,000 for provision expense which was probably on the lower side year before that maybe closer to 2 million. So when you say higher than what we've seen normally do you mean like off of this past year or are you talking if you look back over the last few years and take that average and then kind of go above that?

Well, I would say it's probably back the $2 million number is probably closer to if you just do the math if you took our last quarter and ran the $161 million and did a point 1.5% you can start it to see it get closer to that number as a real just lose way to think about it.

Yes, I think we're going to learn, this is Mike, I think we're going to learn like a lot of other institutions learn but based on the type of credit that we originate and a relatively steady quality of asset condition I think John's figure looks more like 18s quarterly numbers, yes.

Okay. That's helpful. Thank you. And then I guess with respect to the outlook for expenses here the conversion occurred in the end of the fourth quarter I believe right or no I'm sorry was it occurring the first quarter?

No, the conversion was in November.

Okay November. So as we look at the, if we take out the 1.9 million of integration charges this quarter kind of puts the core number around 63.3 million so Mark how do we think about that as we go through 2020?

Yes. Last quarter I mentioned that we thought that a good run rate was in the mid-60s and I would say if you take that at 63.3 that you just adjusted to we know after FDIC expense is going to be a million dollars higher next quarter and then we have a number of strategies that we've laid out for 2020 that is where we're going to invest some money mainly just in the growth of the business. And so it's pretty easy for us to look at that total and get closer to 65 million a quarter than the 63.

Okay. All right. That's great. Alright, that's all that I had for now. Thank you very much.

You are welcome.

Thanks Damon.

Our next question will come from Daniel Tamayo with Raymond James.

Good morning guys.

Hey Daniel how are you?

Just wanted to touch on kind of the same question as Damon but on the fee side. You have some gains in 2018 which will probably could subside in 2019. So what are you thinking about a kind of a good starting point for the fee base in 2020?

I'm looking at an itemized quarterly composition of our noninterest income. So maybe you're looking at the same thing. It's one of the pages now released. Our service charges well I look at the customer centric fees whether it's service charges which were $6.3 million in the fourth quarter. Our wealth business produced 5.3 almost 5.4. Card fees should be uninterrupted until we get to the third quarter when the Durbin compromise kicks in.Our mortgage business ought to stay strong. We like the pipeline there. Our hedges came down a little bit in the fourth quarter from a peak and all-time peak in the third quarter. We still expect it to be a seven-figure number because of the interest rate environment. I didn't mean to get that granular so it was $24.2 million. Last quarter I liked the number. Our other income which tends to capture miscellaneous items was really low in the fourth quarter, otherwise our fees that I can link back to customer value activities was high. So I like the number. I think it's $24 million, $25 million.

Okay. I mean the mortgage again on sale number of 2.6 you've been, you like that going forward even with a slowdown in volumes?A - John MartinAbout that neighborhood because so our history with Monroe is short. It's only four months but I think you have to factor in that some of the third quarter line items captured one month of Monroe activity in the fourth quarter captured three months and you have a little bit of seasonality in that line item but I think the full benefit of Monroe we're just getting our arms around ourselves in terms of the way it plays out seasonally but we're going to run phase.

Okay. Terrific. Thank you. I appreciate it.

Thank You Daniel.

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

It would just be one of appreciation for the listening but more of feeling on our part to get to continue the performance that we've been posting for a couple of years and certainly most recently through 2019 take all of that plus what [indiscernible] brings to us for a strong start for First Merchants in 2020. I appreciate your time. Talk to you in a couple of months.

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