Q4 2021 First Merchants Corp Earnings Call

January 27, 2022

Today's conference is scheduled to begin shortly please continue to stand.

Hi, and thank you for yet.

[music].

Good day and welcome to the first quarter.

Corporation fourth quarter earnings Conference call.

At this time all participants are in a listen only mode.

Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero when you touch tone telephone.

I'll remind you this conference call is being recorded and.

And before we begin management would like to remind you that today's call contains forward looking statements with respect to the future and financial condition of first merchants corporation that involve risks and uncertainties.

Further information.

Can be contained within the press release, which we kind of a Q2, leaving.

Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measure.

The press release available on the website contains financial and other quantitative information to be discussed today as well as the <unk>.

Celebration of GAAP to non-GAAP measures.

I would now like to turn the conference over to Mark Hardwick CEO . Sir. Please go ahead.

Thank you, Chris and thanks for the introduction and for covering the forward looking statements.

Hey, good morning, everyone or good afternoon, everyone to our fourth quarter 2021 Conference call, We released our earnings.

Earlier today at approximately eight am eastern time.

Hopefully you have all found your way to our slide presentation, but if you haven't you can access the slides by following the link on the second page of our earnings release.

On page three you will see today's presenters and buyers to include President Mike Stewart.

Credit Officer, John Martin.

Then chief Financial Officer, Michelle Caveats ski.

Page four is the one page snapshot of the first merchants geographic footprint and a few relevant financial highlights for your review.

Year to date return on assets of 139%.

Return on tangible equity of $16, one, 7% and our Moody's investment grade.

<unk> III baseline credit rating are reflective of our high performing and sustainable business model.

Now if you turn to slide five as my quote in the press release States, we delivered a record year on many fronts.

We reached record levels for loans deposits total assets and we produced record net income by earning more than $200 million for the first time and first merchants history.

EPS totaled a record $3 81 per share.

While investing in the future of our business, both culturally and digitally at record levels.

Stuart will now provide some color on our lines of business before Michel and John will review, the financials and credit credit data. Thank.

Thank you Mark and good afternoon to all as you look at the next two slides I want 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 lines of business, which is page six I would ask us to turn to page seven we can focus on the region and line of business.

Highlights.

The top of the page offers a breakdown of the Caldwell growth by our business units during the fourth quarter. We grew our total loan portfolio by an annualized rate in excess of 13%.

With each business group contributing to that growth for the full year. We grew our loan balances at our expected mid single digit growth rate up nearly 7%.

The private wealth consumer and mortgage groups all grew in the quarter at low single digit annualized percentages.

On the first merchants consumer portfolio growth has steadily increased throughout the year from both in branch and online originations, our HELOC product along with the increased utilization rates on existing home equity loans are the drivers of the fourth quarter increases our consumer clients have strong credit profiles. Good luck.

Quiddity in a put strong home values to work by using their home equity and.

And in the quarter the consumer loan pipeline is up over 30% from the prior year end.

For our mortgage portfolio, we continued to experience increases in construction and purchase volumes, which drove the fourth quarter balance sheet of more than 5%.

For the second consecutive year, our mortgage team worked with over 3000 clients and assisted with first time homebuyers, new home purchases or refinancing debt in total reached $750 million for the full year of 2021.

The pipeline for mortgage originations ended the quarter strong up over 20% from the end of 2020.

Our total non PPP commercial loan portfolio growth was the highlight within the quarter growing more than 16% on an annualized rate for.

For the full year, the commercial growth approached 10%.

Within the commercial line of business, we have several segments one of which is commercial real estate, we spoke last quarter about the decline in the commercial real estate balances in Q3, and the strong new origination volumes during.

During the fourth quarter, the commercial real estate footings grew at an annualized rate of more than 2% with continued strong originations through the end of the year.

The end of quarter pipeline for the investment real estate group continue to grow and is that a two year high.

The commercial and industrial segment remains the key leader in both the fourth quarter and full year commercial growth.

The primary drivers continue to be our team and our markets.

Our team is active and engaged in winning new clients market share along with providing additional senior debt and treasury services to our existing clients. This team has been augmented with 11, new relationship managers that have joined the first merchants commercial team the new teammates have an expertise in middle market asset based investment.

Real estate or sponsored finance and have contributed to the state of growth.

Within the markets, we serve businesses are expanding plant and equipment to meet growing demand. We have continued to see financing plans for new equipment and expanded manufacturing sites to meet their growth or to onshore more of their production capabilities.

Increases to the working capital cycle is driving larger line of credit commitments and increases in utilization of these lines.

Additionally, succession planning events within the ownership of middle market companies continue to be a driver for our sponsor finance team or through dividend recaps and Aesop transactions, we have expertise within any of these strategic capital events.

The economic and business climate across all our markets is very good we see the resiliency and the management teams of the companies they have solid business plans and solid balance sheets.

We're positioned for growth and they continue to effectively navigate supply chain and labor issues. Our commercial team remains active and engaged with and prepared for their capital needs and the commercial pipeline remains strong at the end of the year.

The map you see on the top left portion of page seven.

Representing the demographics of a growing economic environment, the heart of the Midwest that drive that growth and a stable source of talent to lead our business efforts across all of our lines of business.

I want to offer a few comments about level one.

<unk> been able to spend much time in their market and with their teams. They have a strong culture and a demonstrated track record of delivering growth.

Our mortgage team is building early synergies with the F&B team that will drive.

<unk> doubled the size of our mortgage originations the consumer team is eager to gain access to the enhanced product set first merchants currently offers.

And I have witnessed their commercial bankers in action meeting with their clients and prospective clients their commercial team like first merchants merchants is active and engaged within their communities and ready to leverage the larger balance sheet offered post close.

We have much work to do between now and the integration, but we are poised for continued winning in the southeast Michigan marketplace.

I will now turn the call over to Michelle who will provide more complete review of the quarter results and operating metrics before John shares the soundness of our portfolio.

Thanks, Mike My comments will begin on slide eight covering fourth quarter results.

We are pleased to report another quarter of strong balance sheet growth, which you can see on lines 125.

So reflective of the exceptional core loan and deposit growth that Mike Stewart, just covered leading to double digit earning asset growth and total asset growth total assets grew $392 million during the quarter or 10, 4% on an annualized basis.

You will see on line 17, but net income totaled $47 7 million a decline of $5 million from the third quarter, where the declines in PPP fee income and securities gains created a meaningful variance.

Tax pre provision earnings remained strong at $55 2 million, bringing pre tax pre provision return on assets to one 4% and return on equity to 11 six 8%.

Earnings per share of mind twenty-three totaled 89 for the fourth quarter. This represented a decline on a linked quarter basis of nine all of which was due to less PPP fee income less securities gains and level one acquisition expenses there.

Core earnings for the quarter continued to be strong.

Slide nine shows our year to date results.

Slide 23 shows year to date earnings per share of $3 81.

Which is the $1 seven increased over the prior year.

Patiency ratio for the year was a strong 59, 4% representing exceptional operating performance.

The headwinds of margin compression pre tax pre provision earnings of $241 3 million, an increase of $12 8 million or 6%.

In 2018 through 20 show the returns on our performance with return on tangible common equity, reaching a high $16 17, an increase of 32% over the prior year.

Slide 10 shows highlights of our investment portfolio.

The top right graph shows the trend in the portfolio yield.

The yield on the portfolio declined five basis points during the quarter as the result of deploying excess liquidity into the bond portfolio and buying bonds at a lower yield than the overall portfolio yield.

The new by yield is currently at $2 30, and rising given the recent market movements for the mix of bonds that we buy because we proactively invested excess liquidity in the bond portfolio throughout 2021 interest income on securities increased to $18 million to over 2021 from prior year.

Realized gains disclosed at the bottom right, we're only <unk> 4 million this quarter.

Slide 11 contains highlights for our loan portfolio.

In the bottom left corner you will see the stated fourth quarter loan yield declined 20 basis points from last quarter to $3 87.

Excluding the impact of PPP loans loan yields were $3 70, a decline of only seven basis points compared to prior quarter.

Yields on new and renewed loans this quarter averaged $3, one 4% yield compression during the quarter came from the mortgage and installment loan portfolios due to the impact of pay downs on higher rate loans and refinancing.

We're pleased to see the yield on commercial loans were stable showing no signs of compression, we believe that any future yield compression that we experience will be offset from strong core loan growth as was the case this quarter.

On the bottom right you will see $6 3 billion of loans or 68% of our portfolio are variable rate.

Sensitivity of our balance sheet will be of great benefit given the expectations of the rising rate environment. This year.

Slide 12 shows the details related to our allowance for credit losses on loans.

On the bottom left of the slide is a roll forward of our allowance balance during the quarter, we had charge offs of $5 3 million in recoveries of 700000, which on a net basis decrease to the allowance balance modestly and we did not book any provision expense for the quarter. Therefore, the ending allowance for credit losses.

On loans was $195 4 million.

The coverage ratio trend as shown in the graph on the top left our coverage ratio at the end of Q4 is 211 down from $2 21 from prior quarter, excluding the PPP loans. The coverage ratio is $2 14 down from $2 26 last quarter.

Now I will move on to slide 13.

Average deposits increased $297 million. However, total interest expense on deposits continued to decline at the bottom left you will see our company's cost of deposits remained a low average of 18 basis points.

Looking forward, we have a large deposit relationship that repriced during the month of January that will create some meaningful interest expense savings. So I expect the cost of deposits to decline another five basis points in Q1 2022, assuming average balances stay the same.

Slide 14 shows the trending of our net interest margin.

Slide one shows net interest income on a fully tax equivalent basis of $106 9 million.

When you back out non core interest income items, such as fair value accretion on line two and the impact of PPP loans on line three our core net interest income totaled $101 7 million compared to the prior quarter total of $100 3 million the increase in core net interest income.

Was one 4 million.

Stated net interest margin online six totaled $3 or 4% for the quarter adjusting for fair value accretion and PPP loans brings us to core net interest margin of $2 92, a decline of seven basis points from last quarter's coordinates of $2 99 margin was under pressure.

From excess liquidity as investments in cash continue to represent an elevated level of earning assets. However, the increase in core net interest income shows that yield compression is more than offset by strong earning asset growth.

On slide 15, noninterest income totaled $25 8 million for the quarter with total customer related fees of $22 8 million, which were just 300000 less than last quarter.

Customer related fees for the year totaled $93 6 million, an increase of $2 6 million or 3%.

The increase was led by robust growth in fiduciary and wealth management fees stemming from inflows from new money market appreciation and the acquisition of Hershey Trust company.

Service charges on deposits continue to recover adding $2 6 million in fee income growth in.

In 2022, we plan to make enhancements to our customer overdraft program that is expected to lower overdraft fees by approximately 500000 in 2022 and $1 million on an annualized basis.

As Mike Stewart mentioned earlier mortgage loan production for the year was as strong as 2020 and those loans are generated gains of $19 7 million, a $1 4 million increased over prior year.

Offsetting those fee income increases was a decline in card payment fees of $2 9 million.

Debit card swipes were up 11% over prior year, but the impact of Durbin adoption in July of 2020 caused an annualized decline in interchange fees of $9 million based on the volume at the time of adoption.

Derivative hedge fees were also lower in 2021 compared to 2020, but we expect these to increase in 2022 as customers look to lock in low rates.

Looking to non customer related fee categories and increase in bullet gains of $1 9 million offset by a decline of $6 2 million in gains on the sale of Securities brought total noninterest income for the year to $109 3 million, which is in line with prior year.

Moving to slide 16.

Total expenses for the quarter totaled $72 4 million.

There's $1 million more than Q3 expenses included half a million dollars of level one.

<unk> costs.

Total expenses for the year were $279 2 million, a 6% increase over prior year, due mostly to higher salaries and employee benefits, reflecting wage inflation and the competitive hiring market.

Slide 17 shows the strength of our capital ratios.

The tangible common equity ratio at the top of the pages nine 1% and in line with our TCE target in.

In addition to having $1 3 billion and tangible common equity we have $195 million in allowance for credit losses coupling those numbers with the strong common equity tier one ratio and total risk based capital ratio at the bottom of the page reflects the safety and soundness of our company.

Overall, our financial results reflect strong fundamentals for the year and we are pleased with the results that concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin to discuss asset quality.

Thanks Michelle.

Good afternoon, My remarks start on slide 18, where I'll highlight the loan portfolio, including segment growth and industry concentrations then provide a loan growth.

Bridge, including PPP loan program and finish with a review of asset quality and the asset quality roll forward before turning the call back over to Mark.

So then turning to slide 18, the loan portfolio consists of a dearth of diversified commercially oriented portfolio with concentrations consistent with those segments of the economy founded our geographies in the quarter at the loan portfolio grew $296 million, excluding $91 million of PPP forgiveness or 13 four.

<unk> percent and for the year of 566 million, excluding $560 million of loan forgiveness or six 6% I provided loan growth bridges for both the quarter and the year on the right side of the slide.

The PPP program is winding down with $107 million of loans remaining of those roughly $4 million.

We're in active repayment at the end of the year, leaving roughly $303 million left to forgive or otherwise repay.

The SBA has been responsive for the reimbursement of defaulted SBA loans and the forgiveness of repayment processes operated smoothly.

So turning to slide 19.

This slide highlights our asset quality trends continue to be positive with NPA and 90 day past due loans on line five down $8 million.

This left NPA, and 90 day past due to loans and or lower.

Lower at 49 basis points.

Classified loans on line seven or those with a well defined weakness continued ticket continued to decline this quarter down $21 $9 million ending the quarter at one 3% of loans. This is the fourth consecutive quarterly decline in classified assets with credit quality improving across the.

<unk> of loan types.

And finally net charge offs on line nine were $4 $6 million as we charged off $4 $7 million on a commercial contractor moved to non accrual that we discussed last quarter absent that relationship we had a net.

Coverage for the quarter of $100000.

Then finishing up on slide 20, Ive again provided the asset quality roll forward, which reconciles the changes in asset quality online two we added $6 $4 million in new non accrual credits in the quarter after adding $22 6 million last quarter, including the commercial contractor I just mentioned.

Three we resolved nine 5 million nine non accruals, including a five point are including $5 3 million dollar reduction to an agribusiness related relationship we added to non accrual last quarter as well.

On line five we had gross charge offs of $5 $3 million, including the $4 $7 million charge off.

And finally dropping down to line 13.

These changes last night, NPA, and 90 days past due down $7 $9 million for the quarter and 21 $5 million for the year.

In summary asset quality remained stable and improving during the quarter and the year and while the operating environment remains challenging with the residual effects of supply chain issues and labor and hiring challenges, we continue to see our customers quickly adjust and grow their businesses.

You for your attention and I'll now turn the call back over to Mark Hardwick Mark Thanks, John .

On slide 21, it is a great highlight of our track record of performance, which I'm really proud of.

We have a 10 year total return of nearly 400% versus the SNL Bank index of 192, our EPS combined annual growth rate.

Is 27, 3%.

For the past 10 years and 11, 7% since 2012.

After returning back to more normal numbers post crisis.

Our CAGR for tangible book value per share is 10, 1%, which as you know is calculated post dividends.

Post share repurchases and post M&A activity, which we think is a really strong result, slide 22 highlights our our CAGR for asset growth, including organic and M&A activity, which totals nearly 12% dating all the way back to 2000 over the last 10 years.

Combined annual growth rate is 14%.

We're excited to close our level one acquisition in the first half of 2022, and we're as Mike mentioned, we are growing increasingly optimistic about the opportunities that exist.

Freud MSA.

Our connectivity is high.

With all of our level, one teams and our folks and theirs are working really hard.

To bring this acquisition to life.

Regarding our needed approvals.

This was kind of a cool thing you know you have the open comment period.

We received six letters during that period from community groups and all six were in support of the acquisition. So.

A nice kind of.

Turn of events, so to speak of having community groups really advocating for first merchants and the impact that we have in our markets.

Now on slide 23.

I'm going to go through this slide in more detail.

Given that it's the end of the year.

And I'm really excited about it.

We had great success.

All six of our strategic imperatives in 2021, and they will be guiding our 2022 plan or.

Our vision statement was introduced in January of 2021.

Simple dude.

To the point and my first Kurt first merchants colleagues are embracing the impact we can have by focusing on the financial wellness of the diverse communities that we serve.

We have a superstar self sacrificing employees and in my opinion, we serve communities that are like minded and highly resourceful.

Our customers are open for business and they're getting after it not only are they using traditional methods to deliver results, but theyre also using new and unique ways to meet the needs of their friends and their neighbors.

The performance of our customers and the markets that we serve are clearly visible in our results.

We introduced a new team statement.

As a way to more officially and on paper and writing welcome diversity into the bank.

I'd like to say that if you believe in our vision and you love to help people and you enjoy being part of a winning team then you're welcome at first merchants.

And you should bring your whole self to work.

We are convinced our 10 goals from 2021, and just six strategic imperatives and our actions follow the these imperatives.

In 2021 of our cultural transformation transformation made meaningful headway in many fronts.

We introduced an official hybrid work standard with added flexibility our employees earned that trust by delivering and in a partially hybrid environment over the last couple of years dealing with issues of the pandemic.

We've tackled wage inflation vacancy challenges and we'll continue to address these to maintain strong strong strong teams during this volatile period.

We've made notable strides in both diversity equity and inclusion and corporate social responsibility. During 2021, we published our first CSR document called elevating communities on our website and if you're interested you should check it out.

Our community home lending team delivered superior results in 2021, we hired new diverse employees with unique skill sets, we delivered nearly $2 million of down payment assistance grants, we achieved our statistical goal and the community development lending space and we're gaining momentum while having a.

Huge impact in the majority or minority communities throughout our footprint.

We are setting an example of how to partner with groups like the NCR C and other community groups evidenced by our level one public comment period that produce letters of recommendation versus challenges.

Even our pain pena.

He leads the national minority community reinvestment cooperative for the first time in his career endorsed a merger hours with level one.

Ours was the individuals who has recently been very public.

And his challenges of the merger of Huntington and Tcf. So we're just thrilled with the relationship we've been able to build with him.

On the D. Eni front, we've introduced the our team statement above we recognize June 10th in 2021 for the first time.

Formalized our people of color.

Resource group and we have a formal D. Eni employee community, that's helping set our direction for the future.

Our organic growth efforts produce results throughout all of our lines of business as evidenced on the prior pages and more specifically and Mike Stuart's comments earlier.

I'm enthusiastic about our 20 FTE additions our sales folks that have been added to the companies that are spread throughout the commercial bank Treasury management private wealth and our community lending space.

Our digital transformation includes the addition of specialized talent.

In consumer banking.

We greatly enhanced our team.

<unk> team and our knowledge of force Dot Com and agile technologies to include a new digital banking team.

This group delivered a new state of the art online account opening technology platform and we're seeing the results of that investment as we as we build new muscles for the future.

Our top quartile financial results.

Our supported by industry, leading governance and risk management practices with long term sustainability at the core we hired a new chief risk officer in 2021, with Big Bank experience and the ability to lead our risk team that runs as fast at the same pace as fast as our I T. Our finance, our credit and lines of business are running.

And we're excited about the connectivity and coalescing of those groups.

We continue to leverage M&A as a core competence competency evidenced by our level one bank announcement on November the fourth and level. One just as a reminder reminder will be the largest acquisition in the company's history and we are taking.

A market that was modest.

In terms of coverage of an entire MSA and turning it into a full scale market that can grow by 10% to 15% for the foreseeable future.

Lastly, we continue to cultivate and maintain high quality investors.

Who value ESG.

Our stakeholder centric business model and high performance results and.

And my last statement I guess, we're just optimistic about 2022, we had a great 2021.

We remain very comfortable with our consensus estimates, both pre and post level one.

And it's early in the year, but but our teams are running full speed ahead, and making this plan happen that we've laid out so thanks for your attention and your investment and Chris at this time, we're happy to take questions.

Thank you.

We will now begin the question and answer session.

Ask a question. Please press the Star then the one key on your Touchtone telephone to withdraw your question. Please press the pound key and if you are using a speaker phone please lift the handset.

Our first question comes from Scott <unk> of Piper Sandler Your line is open.

Afternoon, everybody. Thank you for taking the question.

Yes.

Well first question is probably for you so the underlying margin ex PPP in purchase accounting benefits. It's compressed at just over just around 292 or so maybe some thoughts on where it goes from here I know you discussed the expected five basis points improvement in the cost of funds, but you still have a lot of excess liquidity. So it would be curious to hear your thoughts on the go forward XP.

Patients.

Yeah, well aside from any fed rate hikes, we are expecting to see margin improve this next quarter from the funding savings the funding cost savings that you had just mentioned.

And we're growing commercial loans at double digits with stable yield. So all of those there is pressure on core margin this quarter because of excess liquidity, we feel great about our pricing discipline.

We were probably a little surprised to see how robust our deposit growth was but it was core so we're very happy to have it and you know when that normalizes, we don't know and our planned we do expect it to normalize around that 3% to 4% deposit growth. So that's that's what we're expecting today.

With the four rate hikes in the forecast.

Do expect net interest income to increase 3% to 4% as a result of those rate hikes thats, what our models are telling us today.

Okay, perfect and I guess, along those lines, maybe I guess I can sort of back into it but do you guys have sort of a.

Our best guess as to how the.

Margin and NII benefit from each 25 basis point hike I guess somewhere.

Somewhere around a percent or so.

Is that sort of the way the easy math would work.

Well, we do have some loan floors and so the sensitivity I would like to open. The first 25 basis point rate hike about 60% of our variable rate loans.

We'll reprice.

At first rate hike.

50 basis points. There is some more that will reprice 75 basis points is probably where the where the most asset sensitive that's where we start to kind of move beyond our loan floors does that help.

It does it does so basically sort of that.

Third and fourth hikes, or where you get sort of the most bang for your Buck.

Alright.

Perfect. Okay, great. Thank you guys very much.

Youre welcome Thanks, Scott.

Thank you.

Our next question comes from Terry Mcevoy Stephens. Your line is open.

Hi, good afternoon, everyone.

Hi, Terry.

I was hoping maybe you could just talk about your big picture thoughts on loan growth in 2022 on a standalone basis.

You talked about.

New hires that occurred in 2021, and you can see the momentum that was building throughout the fourth quarter in terms of just loan growth.

Hi, Terry It's Mike Stewart, I think will stay really confident with that mid <unk> mid <unk>.

High single digit.

Our loan growth.

Probably primarily driven through the commercial segment, we are starting to see some pick up like I noted in the consumer side as well.

We're going to keep our plan.

And then maybe a follow up on fee income a couple of areas, where a little bit weaker than I was expecting a down quarter over quarter.

And I know that the interchange fees kind of came into play in the second half of this year.

Again as a Standalone company what are your thoughts on kind of overall fee income growth some areas of strength and maybe some areas that could be a bit weaker in 2022.

Yes, I would say that we're probably expecting a quarterly run rate on fee income to be $27 5 million.

We do expect a meaningful decline in mortgage gains in 2022, not so much because the production volume, but more because of just pricing. We think pricing was pretty healthy in 2021, and we think it will normalize this coming year, but we do think growth in our wealth management business and the demand for loan level hedges and <unk>.

Interchange income will offset that headwind.

Great. Thanks for taking my questions.

Thank you Terry.

Thank you.

And next we have Dan.

<unk> of Raymond James Your line is open.

Good afternoon, everybody thanks for taking the call.

Maybe.

If we could just touch on the thoughts on the operating expense base.

We were at.

Kind of in line with expectations in this quarter.

Of.

What youre thinking for the coming year, given wage inflation pressures and everything else would be helpful. Thanks.

Hey, Daniel we think that our run rate next year will be around $73 million on average expense growth, we're expecting to be in the low to mid single digits for new hires and digital infrastructure needs. So thats kind of what we're expecting.

Okay, Alright thats helpful.

And there's a little nuance in the question, but was there any impact in the in the fourth quarter on margin from the difference in the period end loans and the average balances.

And maybe Mike Stewart can talk a little bit about some of the loan growth and whether it's loan growth came in more towards the end of the quarter right.

Good question, its new lifestyle sitting here thinking about that.

Hum.

Yes.

Back to watching October November .

Was later in the quarter, which means the dollars are sitting in.

Lower earning assets for a period of time.

And we've just had so much growth in liquidity, it's hard to get it deployed quickly so were.

Putting it in the bond portfolio or putting in the loan portfolio.

Hum.

A little bit heavier on the back end of the quarter.

Okay, so potential for October .

A little bit of.

A benefit in the first quarter from that.

And a little upside.

Alright, that's all I had thanks for taking my questions.

Okay. Thank you.

Yes.

Thank you.

Our next question comes from Damon Delmonte of <unk> W. Your line is open.

Hey, good afternoon, everyone I hope everybody is doing well today.

First question just regarding the outlook on credit I mean things are obviously.

Humming along pretty well for you guys could you give a little perspective on the provision going forward I know in the past you kind of implied you would rather grow into the reserve then xen suggest release reserves.

I'm just wondering if that still holds true and what we could expect for provision outlook.

Yes, I can speak to Hey, David It's John Martin I can speak to the.

The outlook on the credit itself is.

As you can see through the end of the year, it's been stable and improving has really been a positive story throughout 2021.

Don't really look as I look into 2022 don't really see.

Material change from just culling through the portfolio doing portfolio reviews et cetera in terms of the provision expense given our coverage and where the allowance stands today.

I think they are.

<unk> is to grow and continues to be to grow into the allowance with minimal or no provision expense.

Got it okay.

Alright, that's helpful and then.

With regards to the level one deal Mark.

Mark I think you mentioned, it's still scheduled to close kind of at that is at the end of the second quarter or is that during the second quarter and I guess along those lines. What are the additional approvals are are outstanding.

Yes, we're pretty far into the process with with all of our regulatory approvals.

I think the one.

Key item is just whether or not the fed decides to approve the merger through delegated authority.

And the regional office in Chicago, and at least all indications are that that would happen, which would accelerate the timing if it happens to go to D. C.

I think it's a 45 day additional timeframe so.

We still.

We're anticipating late first quarter, but there is a chance that it carries over into the second quarter.

Got it okay. That's all I had thank you very much.

Okay. Thank you.

Thank you.

And next we have Brian Martin with Janney. Your line is open.

Good afternoon, everyone and thank you for taking the questions I wanted to just touch on the.

The people that you guys hired recruiting you guys were successful with this year just kind of wondering how youre thinking about.

Maybe areas that you still have yet to kind of bulk up on or I guess, where you are still looking for added talent as you go into.

2022 here.

Certainly I guess I'm, assuming you'll be opportunistic, but just kind of any any areas youre really targeting.

In 2021, we had about 20 sales folks and as Mike mentioned, a 11 of those were on the commercial side of the bank.

The others were kind of scattered throughout.

Our remaining line.

Lines of business, but we also had a meaningful increase of almost the exact same amount and a combination of it.

And the digital.

The digital team that is helping drive the online account opening and the force dot com knowledge agile investment et cetera. So.

I expect a similar investment in talent additions in 2022 on the sales side and about half that.

Number in the back office so.

The focus is still the same our intentions are to continue to grow our balance sheet and add bankers.

Wherever we can and where we think we can move the needle and drive additional customer volume and in the back office.

We're just trying to make sure that we have the ability to.

Upgrade our tech.

At a level that allows us to be competitive.

We're picking our spots, where we're choosing to make investments that are outside of the traditional bank in a box technologies like Fas and Pfizer.

And stepping up to more agile technology that is like we did with tariffs for the online account opening so.

Thanks.

I guess, the best way I can put what we're thinking for 'twenty two.

That's helpful. Thanks, Mark and just maybe just on the capital side, you talked about you touched on M&A and kind of what youre doing there, but just with the buyback I guess, how are you thinking about that given the outlook for rate increases and the benefits that will accrue to you guys given your asset sensitive balance sheet.

We're just on the buyback side, we're just going to be opportunistic we have a it's more of a defensive measure.

And.

The cash that we're putting into our acquisition, we'll we'll make.

Meaningful difference in the overall.

TCE and our return on tangible common equity and I feel like maybe it takes the pressure off of feeling like we have to be real aggressive with repurchases.

Okay, perfect and just the last one was just on the commercial utilization I guess what.

Maybe Mike talked about it a little bit just kind of how are you thinking about where that unfolded kind of through.

About the year.

Yes.

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Go ahead more compare notes in terms of what you provide what I've got here go ahead.

Yes.

Speaker 1: Yeah, so what we track from a pure revolver side in the commercial segment, we saw several basis point increases in that. But it's still, when you go back, I'll say, two to three years ago, it's still substantively under what I would think about as normal average run rates of that. So there's still a lot of liquidity inside that. And then when I talk about the originations that happen.

Yes, so what we track from a pure revolver side and the commercial segment, we saw several basis points increases in that but it's still when you go back.

So I would say two to three years ago.

<unk> subs until the under what I would think about as normal average run rates of that so.

There's still a lot of liquidity inside that but and then I talk about the originations that happened.

Speaker 1: in our commercial real estate group, those originations are primarily considered site construction and that construction draw starts to move up too.

In our commercial real estate group those originations are primarily considered site construction and that construction draw starts to move up to.

Speaker 1: early part of this past year, that secondary market was very active in lifting assets off the balance sheet, and our origination of new construction loans continue to

Early part of this past year that secondary market was very active active of lifting off assets off the balance sheet and our originations of new construction loans continue.

Speaker 1: continue to grow, so we'll see those utilizations move up as well.

Continue to grow so we will see those utilizations move up as well.

Speaker 2: both nice headwinds. Go ahead, John . Yeah, I was just going to kind of build on what Mike just said. Or fair winds, I should say. Yeah. We had at the high, pre-pandemic, we were looking at a utilization of cost 48 percent.

Both nice headwinds go ahead, yes, I was just going to kind of build on what Mike just said Irwin.

Yeah.

We had at the high.

Pandemic, we were looking at utilization of call it 48%, we get down to.

Speaker 2: we get down to 38% and now we're up to like a 42%. What's running in the background, Brian , has been, and Mike mentioned it earlier, is a real growth in our commitment.

38% and now we're up to like a 42% what's running in the background, Brian has been and Mike mentioned it earlier is a real growth in our commitments pre pandemic, we had call. It $2 4 billion in commitments and we are now standing at three one.

Speaker 2: pre pandemic, we had call it $2.4 billion in commitments, and we're now standing at that 3.

Speaker 2: billion dollars in commitment. So, we've seen not only rebound in our utilization, but we've also booked through the pandemic and even through today, you know, a billion dollars in additional commitment. So, a couple of forces there, back to Mark's and Mike's comments of the wind being at our back as we come out of the pandemic.

One.

$1 billion in and commitment so we've seen not only rebound in our utilization, but we've also booked through the pandemic.

And even through today.

$1 billion in additional commitments. So a couple of horses there back to marks in Mike's comments of the wind being at our back as we come out of the pandemic.

Speaker 2: Gotcha. Okay, that's helpful. Just the last one housekeeping. Maybe I missed it when you said Michelle on the the benefit from the, you know, I guess if you just did a 25 basis point rate hike, but the margin benefit from just a one hike. You know, I guess, assuming you get the full benefit, rather than just the, you know, the 60% maybe you get on the first razor to how much of an impact, how much of a difference is there between, you know, the kind of that 60% level versus You know what the what the full impact would be once you kind of burn through those floors.

Got you Okay. That's helpful and just the last one housekeeping maybe I missed it when you said Michelle on the benefit.

Benefit from the I guess, if you just did 25 basis point rate hike.

The margin benefit from just the one hike I guess, assuming you get the full benefit rather than just the.

60%, maybe you could get the first raise or two how much of an impact how much of a difference is there between.

And of that 60% level versus.

Yes.

With the full impact would be once you kind of burn through those floors.

Speaker 3: Well, we have 6.3 billion of loans that are variable. And so, like I said, 60 percent of those will reprice in the first 25 basis points.

Well, we have $6 3 billion of loans that are variable and so like I said, 60% of those will reprice in the first 25 basis points.

Speaker 4: And your comment of a 100 basis point move, we had how much expansion, Michelle? Oh, yeah, I'm sorry. On a 100 basis point lift, our net interest income will increase 3 to 4 percent. Okay, and that's off the end of the year, full year end of this year's number.

And your comment of 100 basis point move we had how much expansion Michelle.

I'm, sorry, 100 basis point lift our net interest income will increase 3% to 4%, Okay and Thats also ended the year at full year entity and this year's number.

Speaker 5: That's correct. Yeah. Okay. It is. So it's obviously more incremental each move. Yeah. Okay. That's all I need. Thank you so much.

Correct, yes, okay.

Obviously more incremental each move.

Yeah, Okay. That's all I need thank you so much.

Thanks, Brian .

Thank you.

Speaker 6: And this concludes our question and answer session. I would now like to turn the conference back over to Mark Hardwick for any closing remarks.

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

Speaker 7: Yeah, my only closing remarks are that I appreciate your interest and your attention to First Merchants. You know, we have a number of stakeholders that are listening today, from shareholders to employees and customers and our regulators. And we just appreciate the continued commitment to our performance. So until the next call, have a great Friday.

Yes, my only closing remarks that I appreciate your interest and your attention to first merchants.

We have a number of stakeholders that are listening today from shareholders to employees and customers.

Our regulators.

We just appreciate the continued commitment to our performance so.

Until the next call.

Have a great.

First quarter of the year.

Speaker 6: Thank you. This conference has concluded. Thank you for attending today's presentation. You may now all disconnect and have a pleasant day.

Thank you.

Vince has concluded. Thank you for attending today's presentation. You may now all disconnect and have a pleasant day.

Okay.

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Speaker 8: .

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Speaker 6: Good day and welcome to the First Merchants Corporation Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone.

Good day and welcome to the first purchase Corporation fourth quarter earnings Conference call. At this time, all participants are in a listen only mode.

Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance during.

During the conference. Please press Star then zero on your touch tone telephone.

Speaker 6: As a reminder this conference call is being recorded and before we begin management would like to remind you that today's call contains forward-looking statements with respect to the future permits and financial condition of First Merchants Corporation that involves risk and uncertainty.

Remind you that this conference call is being recorded and before we begin management would like to remind you that today's call contains forward looking statements with respect to the future and financial condition of first merchants Corporation that involve risks and uncertainties further information can be contained within there.

Press release, which we encourage you to review.

Speaker 6: Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly compatible GAAP measures.

Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measure.

Speaker 6: The press release available on the website contains financial and other quantitative information to be discussed today, as well as the conciliation of GAAP to non-GAAP measures.

The press release available on the website contains financial and other quantitative information to be discussed today as well as he he kind of affiliates filiation of GAAP to non-GAAP measures.

Speaker 6: I would now like to turn the conference over to Mark Hardwick, CEO . Sir, please go ahead.

I would now like to turn the conference over to Mark Hardwick CEO . Sir. Please go ahead.

Speaker 7: Thank you, Chris, and thanks for the introduction and for covering the forward-looking statements. Hey, good morning, everyone, or good afternoon, everyone, to our fourth quarter 2021 conference call. We released our earnings earlier today at approximately 8 a.m. Eastern time. Hopefully, you have all found your way to our slide presentation. But if you haven't, you can access the slides by following the link on the second page of our earnings release.

Thank you, Chris and thanks for the introduction and for covering our forward looking statements.

Hey, good morning, everyone or good afternoon, everyone to our fourth quarter 2021 Conference call. We released our earnings earlier today at approximately eight am eastern time.

Hopefully you have all found your way to our slide presentation.

But if you haven't you can access the slides by following the link on the second page of our earnings release.

Speaker 7: On page three, you will see today's presenters and bios to include President Mike Stewart, Chief Credit Officer John Martin, and Chief Financial Officer Michelle Kaviecki.

On page three you will see today's presenters and buyers to include President Mike Stewart.

Credit Officer, John Martin.

And Chief Financial Officer, Michelle Caveats King.

Speaker 7: Page four is a one-page snapshot of the first merchant's geographic footprint and a few relevant financial highlights for your review.

Page four is the one page snapshot of the first merchants geographic footprint and a few relevant financial highlights for your review.

Speaker 7: Year-to-date return on assets of 1.39%, return on tangible equity of 16.17%, and our Moody's investment grade

Year to date return on assets of 1.39%.

Our return on tangible equity of $16, one, 7% and our Moody's investment grade.

Speaker 7: A3 baseline credit rating are reflective of our high-performing and sustainable business model.

<unk> III baseline credit rating are reflective of our high performing and sustainable business model.

Speaker 7: Now, if you turn to slide five, there's my quote. In the press release states, we delivered a record year on many fronts.

Now if you turn to slide five as my quote in the press release States, we delivered a record year on many fronts.

Speaker 7: We reached record levels for loans, deposits, total assets, and we produced record net income by earning more than $200 million for the first time in First Merchants' history.

We reached record levels for loans deposits total assets and we produced record net income by earning more than $200 million for the first time and first merchants history.

Speaker 7: EPS total of a record $3.81 per share.

EPS totaled a record $3 81 per share.

Speaker 7: while investing in the future of our business, both culturally and digitally, at record levels.

While investing in the future of our business, both culturally and digitally at record levels.

Speaker 1: Mike Stewart will now provide some color on our lines of business before Michelle and John review the financials and credit data. Thank you, Mark, and good afternoon to all. As you look at the next two slides, I want to provide an update on our line of business results and their contributions within the quarter. Since nothing's changed within our strategy and key lines of business, which is page 6, I'd ask us to turn to page 7, and we can focus on the region and line of business highlights.

Stuart will now provide some color on our lines of business performed Michelle and John will review, the financials and credit credit data. Thank.

Thank you Mark and good afternoon to all as you look at the next two slides I want 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 lines of business, which is page six I'd ask is to turn to page seven we can focus on the region and line of business.

Highlights.

Speaker 1: The top of the page offers a breakdown of the core loan growth by our business units. During the fourth quarter, we grew our total loan portfolio by an annualized rate in excess of 13%.

The top of the page offers a breakdown of the Cornwall growth by our business units during the fourth quarter. We grew our total loan portfolio by an annualized rate in excess of 13%.

Speaker 1: with each business group contributing to that growth. For the full year, we grew our loan balances at our expected mid-single-digit growth rate of nearly 7%.

With each business group contributing to that growth for the full year. We grew our loan balances at our expected mid single digit growth rate up nearly 7%.

Speaker 1: The private wealth, consumer, and mortgage groups all grew in the quarter at low single-digit annualized percentages.

The private wealth consumer and mortgage groups all grew in the quarter at low single digit annualized percentages.

Speaker 1: And the first merchant's consumer portfolio growth has steadily increased throughout the year from both in-branch and online originations. Our HELOC product, along with the increased utilization rates on existing home equity loans, are the drivers of the fourth quarter increase.

And the first merchants consumer portfolio growth has steadily increased throughout the year from both in branch and online originations, our HELOC product along with the increased utilization rates on existing home equity loans are the drivers of the fourth quarter increases our consumer clients have strong credit profiles.

Speaker 1: Our consumer clients have strong credit profiles, good liquidity, and have put strong home values to work by using their home equity. Ending the quarter, the consumer loan pipeline is up over 30% from the prior year end.

Good liquidity and a put strong home values to work by using their home equity and.

And in the quarter the consumer loan pipeline is up over 30% from the prior year Ed.

Speaker 1: For our mortgage portfolio, we continue to experience increases in construction and purchase volumes, which drove the fourth quarter balance sheet of more than 5 percent.

For our mortgage portfolio, we continued to experience increases in construction and purchase volumes, which drove the fourth quarter balance sheet of more than 5%.

Speaker 1: For the second consecutive year, our mortgage team worked with over 3,000 clients and assisted with first-time home buyers, new home purchases, or refinancing that in total reached $750 million for the full year of 2021. The pipeline for mortgage originations ended the quarter strong, up over 20 percent from the end of 2020.

For the second consecutive year, our mortgage team worked with over 3000 clients and assisted with first time homebuyers, New home purchases are refinancing debt in total reached $750 million for the full year of 2021.

The pipeline for mortgage originations ended the quarter strong up over 20% from the end of 2020.

Speaker 1: Our total non-PPP commercial loan portfolio growth was the highlight within the quarter, growing more than 16% on an annualized rate. For the full year, the commercial growth approached 10%.

Our total non PPP commercial loan portfolio growth was the highlight within the quarter.

Growing more than 16% on an annualized rate for.

For the full year, the commercial growth approached 10%.

Speaker 1: Within the commercial line of business, we have several segments, one of which is commercial real estate. We spoke last quarter about the decline in the commercial real estate balances in Q3 and the strong new origination volume.

Speaker 1: During the fourth quarter, the commercial real estate footings grew at an annualized rate of more than 2% with continued strong originations through the end of the year. The end-of-quarter pipeline for the investment real estate group continued to grow and is at a two-year high.

During the fourth quarter, the commercial real estate footings grew at an annualized rate of more than 2% with continued strong originations through the end of the year.

The end of quarter pipeline for the investment real estate group continue to grow and is at a two year high.

Speaker 1: A commercial and industrial segment remains the key leader in both the fourth quarter and four-year commercial growth. The primary drivers continue to be our team.

Our commercial and industrial segment remains the key leader in both the fourth quarter and full year commercial growth.

The primary drivers continue to be our team and our markets.

Speaker 1: Our team is active and engaged in winning new clients' market share, along with providing additional senior debt and treasury services to our existing clients. This team has been augmented with 11 new relationship managers that have joined the First Merchants commercial team. The new teammates have an expertise in middle market, asset base, investment real estate, or sponsor finance, and have contributed to the stated growth.

Real estate or sponsor finance and have contributed to the stated growth.

Speaker 1: Within the markets we serve, businesses are expanding plant and equipment to meet growing demand. We have continued to see financing plans for new equipment and expanded manufacturing sites to meet their growth or to onshore more of their production capabilities.

Speaker 1: Increases to the working capital cycle is driving larger lines of credit commitments and increases in utilization of these lines.

Increases to the working capital cycle is driving larger line of credit commitments and increases in utilization up these lines.

Speaker 1: Additionally, succession planning events within the ownership of middle market companies continue to be a driver for our sponsor finance team or through dividend recaps and ESOP transactions. We have expertise within any of these strategic capital events.

Speaker 1: The economic and business climate across all our markets is very good. We see the resiliency in the management teams of the companies. They have solid business plans and solid balance sheets. They are positioned for growth and they continue to effectively navigate supply chain and labor issues. Our commercial team remains active and engaged with and prepared for their capital needs. And the commercial pipeline remains strong at the end of the year.

The economic and business climate across all our markets is very good we see the resiliency and the management teams of the companies they have solid business plan and solid balance sheets.

Speaker 7: The map you see on the top left portion of page 7 represents the demographics of a growing economic environment, the heart of the Midwest, that drives our growth and a stable source of talent to lead our business efforts across all of our lines of business. I want to offer a

The map you see on the top left portion of page seven represents the demographics of a growing economic environment. The heart of the Midwest that drives our growth and a stable source of talent to lead our business efforts across all of our lines of business.

I want to offer a few comments about level one.

Speaker 2: I've been able to spend much time in their market and with their teams. They have a strong culture and a demonstrated track record of delivering growth. The mortgage team is building early synergies with the F&B team that will drive or double the size of our mortgage originations. The consumer team is eager to gain access to the enhanced products that First Merchants currently offer.

<unk> been able to spend much time in their market and what their teams.

We have a strong culture and a demonstrated track record of delivering growth.

Our mortgage team is building early synergies with the FNB team that will drive.

<unk> doubled the size of our mortgage originations the consumer team is eager to gain access to the enhanced product set first merchants currently offers.

Speaker 1: and I have witnessed their commercial bankers in action, meeting with their clients and prospective clients. Their commercial team, like First Merchants, is active and engaged within their communities and ready to leverage the larger balance sheet offered post-close.

Speaker 1: We have much work to do between now and integration, but we are poised for continued winning in the Southeast Michigan market.

We have much work to do between now and the integration, but we are poised for continued winning in the southeast Michigan marketplace.

Speaker 7: I will now turn the call over to Michelle, who will provide more complete review of the quarter results and operating metrics before John shares the soundness of our portfolio.

I will now turn the call over to Michelle who will provide more complete review of the quarter results and operating metrics before John shares the soundness of our portfolio.

Speaker 3: Thanks, Mike. My comments will begin on slide 8 covering fourth quarter results.

Thanks, Mike My comments will begin on slide eight covering fourth quarter results.

Speaker 3: We are pleased to report another quarter of strong balance sheet growth, which you can see on lines 1 through 5. The numbers are reflective of the exceptional core loan and deposit growth that Mike Stewart just covered, leading to double-digit earning asset growth and total asset growth. Total assets grew $392 million during the quarter, or 10.4% on an annualized basis.

We are pleased to report another quarter of strong balance sheet growth, which you can see on lines 125. The numbers are reflective of the exceptional core loan and deposit growth that Mike Stewart, just covered leading to double digit earning asset growth and total asset growth total assets grew $392 million during the quarter or 10, 4%.

On an annualized basis.

Speaker 3: You will see on line 17 that net income totaled $47.7 million, a decline of $5 million from the third quarter, where the declines in PPP fee income and securities gains created a meaningful variance. Pre-tax pre-provision earnings remained strong at $55.2 million, bringing pre-tax pre-provision return on assets to 1.44% and return on equity to 11.68%.

You will see on line 17, but net income totaled $47 7 million a decline of $5 million from the third quarter, where the declines in PPP fee income and securities gains created a meaningful variance.

Tax pre provision earnings remained strong at $55 2 million, bringing pre tax pre provision return on assets to one 4% and return on equity to 11 six 8%.

Speaker 3: Earnings per share on line 23 totaled $0.89 for the fourth quarter. This represented a decline on a linked quarter basis of $0.09, all of which was due to less PPP fee income, less securities gains, and level one acquisition expenses. Therefore, core earnings for the quarter continued to be strong.

Earnings per share of mind 23 totaled 89 for the fourth quarter. This represented a decline on a linked quarter basis of nine.

All of which was due to less PPP fee income less securities gains and level one acquisition expenses there.

Core earnings for the quarter continued to be strong.

Slide nine shows our year to date results.

Speaker 3: Line 23 shows year-to-date earnings per share of $3.81, which is a $1.07 increase over the prior year. The efficiency ratio for the year was a strong 50.94%, representing exceptional operating performance. Despite the headwinds of margin compression, pre-tax pre-provision earnings of $241.3 million, an increase of $12.8 million, or 6%.

Slide 23 shows year to date earnings per share of $3 81.

Which is $1 seven increase over the prior year.

<unk> ratio for the year was a strong 59, 4% representing exceptional operating performance.

The headwinds of margin compression pre tax pre provision earnings of $241 3 million, an increase of $12 8 million or 6%.

Speaker 3: Lines 18 through 20 show the returns on our performance with return on tangible common equity reaching a high 16.17, an increase of 32% over the prior year.

In 2018 through 20 show the returns on our performance with return on tangible common equity, reaching a high $16 17, an increase of 32% over the prior year.

Speaker 3: Slide 10 shows highlights of our investment portfolio.

Slide 10 shows highlights of our investment portfolio.

Speaker 3: The top right graph shows the trend in the portfolio yield. The yield on the portfolio declined five basis points during the quarter as the result of deploying excess liquidity into the bond portfolio and buying bonds at a lower yield than the overall portfolio yield.

The top right graph shows the trend in the portfolio yield the yield on the portfolio declined five basis points during the quarter as the result of deploying excess liquidity into the bond portfolio and buying bonds at a lower yield than the overall portfolio yield.

Speaker 3: The new buy yield is currently at $2.30 and rising given the recent market movement for the mix of bonds that we buy. Because we proactively invested excess liquidity in the bond portfolio throughout 2021, interest income on securities increased $18 million over 2021 from prior year.

Speaker 3: Realized gains disclosed at the bottom right were only $0.4 million this quarter.

Realized gains disclosed at the bottom right, we're only $4 million this quarter.

Speaker 3: Slide 11 contains highlights of our loan portfolio.

Slide 11 contains highlights for our loan portfolio.

Speaker 3: In the bottom left corner, you will see the stated fourth quarter loan yield declined 20 basis points from last quarter to 387. Excluding the impact of PPP loans, loan yields were 370, a decline of only 7 basis points compared to prior quarter.

In the bottom left corner you will see the stated fourth quarter loan yield declined 20 basis points from last quarter to $3 87.

Excluding the impact of PPP loans loan yields were $3 70, a decline of only seven basis points compared to prior quarter.

Speaker 3: Yield on new and renewed loans this quarter averaged 3.14 percent. Yield compression during the quarter came from the mortgage and installment loan portfolios due to the impact of paydowns on higher rate loans and refinancing. We were pleased to see the yield on the commercial loans were stable, showing no signs of compression. We believe that any future yield compression that we experience will be offset from strong core loan growth, as was the case this quarter.

Yield on new and renewed loans this quarter averaged $3, one 4% yield compression during the quarter came from the mortgage and installment loan portfolios due to the impact of Paydowns on higher rate loans and refinancing we were pleased to see the yield on commercial loans were stable showing no signs of compression we believe that.

Any future yield compression that we experience will be offset from strong core loan growth as was the case this quarter.

Speaker 3: On the bottom right, you will see $6.3 billion of loans, or 68% of our portfolio, our variable rate. The asset sensitivity of our balance sheet will be of great benefit given the expectations of the rising rate environment this year.

On the bottom right you will see $6 3 billion of loans were 68% of our portfolio are variable rate.

Asset sensitivity of our balance sheet will be a great benefit given the expectations of the rising rate environment. This year.

Speaker 3: Slide 12 shows the details related to our allowance for credit losses on loans.

Slide 12 shows the details related to our allowance for credit losses on loans.

Speaker 3: On the bottom left of the slide is a roll forward of our allowance balance. During the quarter, we had charge-offs of $5.3 million and recoveries of $700,000, which on a net basis decreased the allowance balance modestly, and we did not book any provision expense for the quarter. Therefore, the ending allowance for credit losses on loans was $195.4 million.

Loans was $195 4 million.

The coverage ratio trend is shown in the graph on the top left. Our coverage ratio at the end of Q4 is 2.11, down from 2.21 from prior quarter. Excluding the PPP loans, the coverage ratio is 2.14, down from 2.26 last quarter. Now, I will move on.

Now I will move on to slide 13.

Average deposits increased $297 million, however, total interest expense on deposits continued to decline. At the bottom left, you will see our company's cost of deposits remained a low average of 18 basis points.

Looking forward, we have a large deposit relationship that repriced during the month of January that will create some meaningful interest expense savings. So I expect cost of deposits to decline another five basis points in Q1 2022, assuming average balances stay the same.

Slide 14 shows the trending of our net interest margin.

Line 1 shows net interest income on a fully tax-equivalent basis of $106.9 million. When you back out non-core interest income items, such as fair value accretion on Line 2, and the impact of PPP loans on Line 3, our core net interest income totals $101.7 million. Compared to the prior quarter total of $100.3 million, the increase in core net interest income was $1.4 million.

Slide one shows net interest income on a fully tax equivalent basis of $106 9 million. When you back out noncore interest income items, such as fair value accretion online too.

The impact of PPP loans on line three our core net interest income totaled $101 7 million compared to the prior quarter total of $100 3 million. The increase in core net interest income was one 4 million.

stated net interest margin on Line 6 totaled 3.04% for the quarter.

Stated net interest margin on line six totaled $3 or 4% for the quarter adjusting for fair value accretion and PPP loans brings us to core net interest margin of $2 92, a decline of seven basis points from last quarters core NIM of $2 99 margin was under pressure from.

Adjusting for fair value accretion and PPP loans brings us to core net interest margin of 292, a decline of seven basis points from last quarter's core NAM of 299.

Margin was under pressure from excess liquidity as investments in cash continue to represent an elevated level of earning assets. However, the increase in core net interest income shows that yield compression is more than offset by strong earning asset growth.

Excess liquidity as investments in cash continue to represent an elevated level of earning assets. However, the increase in core net interest income shows that yield compression is more than offset by strong earning asset growth.

On slide 15, non-interest income totals $25.8 million for the quarter, with total customer related fees of $22.8 million, which were just $300,000 less than last quarter.

On slide 15, noninterest income totaled $25 8 million for the quarter with total customer related fees of $22 8 million, which were just 300000 less than last quarter cut.

customer-related fees for the year totaled $93.6 million, an increase of 2.6 million or 3 percent.

Customer related fees for the year totaled $93 6 million, an increase of $2 6 million or 3%.

The increase was led by robust growth in fiduciary and wealth management fees stemming from inflows from new money, market appreciation, and the acquisition of Hoosier Trust Company.

The increase was led by robust growth in fiduciary and wealth management fees stemming from inflows from new money market appreciation and the acquisition of Hershey Trust company.

service charges on deposits continue to recover adding $2.6 million in fee income growth. In 2022, we plan to make enhancements to our customer overdraft program that is expected to lower overdraft fees by approximately $500,000 in 2022 and $1 million on an annualized basis.

Service charges on deposits continue to recover adding $2 6 million in fee income growth in.

In 2022, we plan to make enhancements to our customer overdraft program that is expected to lower overdraft fees by approximately 500000 in 2022 and $1 million on an annualized basis.

As Mike Stewart mentioned earlier, mortgage loan production for the year was as strong as 2020, and those loans generated gains of $19.7 million, a $1.4 million increase over prior year. Offsetting those fee income increases was a decline in card payment fees of $2.9 million.

As Mike Stewart mentioned earlier mortgage loan production for the year was as strong as 2020 and those loans are generated gains of $19 7 million, a $1 4 million increase over prior year.

Offsetting those fee income increases was a decline in card payment fees of $2 9 million.

Derivative hedge fees were also lower in 2021 compared to 2020, but we expect these to increase in 2022 as customers look to lock in low rates.

looking to non-customer related fee categories, an increase in BOLI gains of 1.9 million offset by a decline of 6.2 million in gains on the sale of securities, brought total non-interest income for the year to 109.3 million, which is in line with prior year.

Looking to non customer related fee categories, and increase and bully gains of $1 9 million offset by a decline of $6 2 million in gains on the sale of Securities brought total noninterest income for the year to $109 3 million, which is in line with prior year.

Moving to slide 16.

Total expenses for the quarter totaled $72.4 million which is $1 million more than Q3 expenses and included half a million of Level 1 acquisition costs.

Total expenses for the quarter totaled $72 4 million.

Just $1 million more than Q3 expenses included half a million dollars of level one.

<unk> costs.

total expenses for the year were $279.2 million, a 6% increase over prior year, due mostly to higher salaries and employee benefits, reflecting wage inflation and the competitive hiring market.

Total expenses for the year were $279 2 million, a 6% increase over prior year, due mostly to higher salaries and employee benefits, reflecting wage inflation and the competitive hiring market.

slide 17 shows the strength of our capital ratios.

Slide 17 shows the strength of our capital ratios.

The tangible common equity ratio at the top of the page is 9.01% and in line with our TCE target.

The tangible common equity ratio at the top of the page is nine 1% and in line with our TCE target.

In addition to having $1.3 billion in tangible common equity, we have $195 million in allowance for credit losses. Coupling those numbers with the strong common equity Tier 1 ratio and total risk-based capital ratio at the bottom of the page reflects the safety and soundness of our company.

Overall, our financial results reflect strong fundamentals for the year and we are pleased with the results. That concludes my remarks and I will now turn it over to our Chief Credit Officer, John Martin, to discuss asset quality.

Thanks, Michelle. And good afternoon. My remarks start on slide 18, where I'll highlight the loan portfolio, including segment growth and industry concentrations, then provide a loan growth bridge, including PPP loan program, and finish with a review of asset quality and the asset quality roll forward before turning the call back over to Mark.

Thanks, Michele and good afternoon, My remarks start on slide 18, where I'll highlight the loan portfolio, including segment growth and industry concentrations then provide a loan growth.

Bridge, including PPP loan program and finish with a review of asset quality and the asset quality roll forward before turning the call back over to Mark.

So then turning to slide 18, the loan portfolio consists of a diversified, commercially oriented portfolio with concentrations consistent with those segments of the economy found in our geographies.

Turning to slide 18, the loan portfolio consists of a dearth of diversified commercially oriented portfolio with concentrations consistent with those segments of the economy.

In our geographies in the quarter at the loan portfolio grew $296 million, excluding $91 million of PPP forgiveness, or 13, 4% and for the year of 566 million, excluding $560 million of loan forgiveness or six 6% I provided.

In the quarter, the loan portfolio grew $296 million, excluding $91 million of PPP forgiveness, or 13.4 percent, and for the year, $566 million, excluding $560 million of loan forgiveness, or 6.6 percent. I provided loan growth bridges for both the quarter and the year on the right side of the slide.

Loan growth bridges for both the quarter and the year on the right side of this slide.

The PPP program is winding down with $107 million of loans remaining. Of those, roughly $4 million were in active repayment at the end of the year, leaving roughly $103 million left to forgive or otherwise repay.

The PPP program is winding down with $107 million of loans remaining of those roughly $4 million. We're in active repayment at the end of the year, leaving roughly a $103 million left to forgive or otherwise repay.

Given the timing of the applications and our historical experience with borrower forgiveness, we would expect that the remaining PPP loans would be substantially forgiven or converted to P&I by the end of the second quarter. The SBA has been responsive for the reimbursement of defaulted SBA loans and the forgiveness and repayment processes operated smoothly.

Given the timing of the applications that our historical experience with borrower forgiveness, we would expect that the remaining PPP loans would be substantially forgiven or converted to P&I by the end of the second quarter. The SBA has been responsive for the reimbursement of defaulted SBA loans, and the forgiveness and repayment processes operated smoothly.

So turning to slide 19.

This slide highlights our asset quality. Our trends continue to be positive with NPAs and 90-day past-due loans on Line 5 down $8 million. This left NPAs and 90-day past-due loans and ORE lower at 49 basis points.

This slide highlights our asset quality trends continue to be positive with NPA and 90 day past due loans on line five down $8 million.

This left NPA, and 90 day past due to loans and or lower at 49 basis points.

Classified loans on Line 7, or those with a well-defined weakness, continued to decline this quarter, down $21.9 million, ending the quarter at 1.3 percent of loans. This is the fourth consecutive quarterly decline in classified assets, with credit quality improving across the spectrum of loan types.

Classified loans on line seven or those with a well defined weakness continued continued to decline this quarter down $21 $9 million ending the quarter at one 3% of loans. This is the fourth consecutive quarterly decline in classified assets with credit quality improving across.

The spectrum of loan types.

And finally, net charge-offs on Line 9 were $4.6 million, as we charged off $4.7 million on a commercial contractor moved to non-accrual that we discussed last quarter. Absent that relationship, we had a net recovery for the quarter of $100,000.

Then finishing up on slide 20, I've again provided the asset quality roll forward, which reconciles the changes in asset quality. On line two, we added $6.4 million in new non-accrual credits in the quarter after adding $22.6 million last quarter, including the commercial contractor I just mentioned.

Then finishing up on slide 20, Ive again provided the asset quality roll forward, which reconciles the changes in asset quality online two we added $6 4 million in new non accrual credits in the quarter after adding $22 $6 million last quarter, including the commercial contractor I just mentioned on line three we resolved.

On line three, we resolved $9.5 million in nonaccruals, including a $5.3 million reduction to an agribusiness-related relationship we added to nonaccrual last quarter as well.

$9 5 million nine non accruals, including a five point are including $5 3 million dollar reduction to an agribusiness related relationship we added to non accrual last quarter as well.

on line five we had gross charge off the five point three million dollars including the four point seven million dollar charge-off

On line five we had gross charge offs of $5 $3 million, including the $4 $7 million charge offs and.

And finally, dropping down to line 13.

And finally dropping down to line 13.

These changes left nine NPAs and 90 days past due down $7.9 million for the quarter and $21.5 million for the year.

These changes last nine NPA and 90 days past due down $7 9 million for the quarter and 21 $5 million for the year.

In summary, asset quality remains stable and improving during the quarter and the year. And while the operating environment remains challenging with the residual effects of supply chain issues and labor and hiring challenges, we continue to see our customers quickly adjust and grow their businesses.

In summary asset quality remained stable and improving during the quarter and the year and while the operating environment remains challenging with the residual effects of supply chain issues and labor and hiring challenges. We continue to see our customers quickly adjust and grow their businesses. Thank you for your attention and I'll now turn the call back over to Mark hardware.

Thank you for your attention. And I'll now turn the call back over to Mark Hardwick, Mark. Thanks, John . On slide 21, it's a great highlight of our track record of performance, which I'm, I'm really proud of.

Mark Thanks, John .

On slide 21, it's a great highlight of our track record of performance, which I'm really proud of.

We have a 10-year total return of nearly 400 percent versus the S&L Bank Index of 192. Our EPS, combined annual growth rate, is 27.3 percent.

We have a 10 year total return of nearly 400% versus the SNL Bank index of 192, our EPS combined annual growth rate.

Is 27, 3%.

for the past 10 years, and 11.7% since 2012 after returning back to more normal numbers post-crisis.

For the past 10 years and 11, 7% since 2012.

After returning back to more normal numbers post crisis.

Our CAGR for tangible book value per share is 10.1%, which as you know is calculated post-dividends.

Our CAGR for tangible book value per share is 10, 1%, which as you know is calculated post dividends.

post-share purchases and post-M&A activity, which we think is a really strong result. Slide 22 highlights our CAGR for asset growth, including organic and M&A activity, which totals nearly 12 percent, dating all the way back to 2000. Over the last 10 years, the combined annual growth rate is 14 percent.

<unk> share repurchases and post M&A activity, which we think is a really strong result, slide 22 highlights our our CAGR for asset growth, including organic and M&A activity, which totals nearly 12% dating all the way back to 2000 over the last 10 years.

Combined annual growth rate is 14%.

We're excited to close our level one acquisition in the first half of 2022. And as Mike mentioned, we're growing increasingly optimistic about the opportunity that exists in the Detroit MSA. Our connectivity is high with all of our level one teams and our folks and theirs are working really hard to bring this acquisition to life.

We're excited to close our level one acquisition in the first half of 2022, and we're as Mike mentioned, we are growing increasingly optimistic about the opportunity that exists in the Detroit MSA arc.

Our connectivity is high.

With all of our level, one teams and our folks and theirs are working really hard.

To bring this acquisition to life.

Regarding our needed approvals, this was kind of a cool thing. You know, you have the open comment period. And we received six letters during that period from community groups. And all six were in support of the acquisition. So a nice kind of turn of events, so to speak, of having community groups really advocating for First Merchants and the impact that we have in our markets.

Regarding our needed approvals.

This was kind of a cool thing you have the open comment period.

We received six letters during that period from community groups and all six were in support of the acquisition. So.

A nice kind of.

Turn of events, so to speak of having community groups really advocating for first merchants and the impact that we have in our markets.

Now on slide 23, I'm going to go through this slide in more detail given that it's the end of the year, and, you know, I'm really excited about it.

Now on slide 23.

I'm going to go through this slide in more detail.

Given that it's the end of the year.

And I'm really excited about it.

We had great success in all six of our strategic imperatives in 2021, and they will be guiding our 2022 plan. Our vision statement was introduced in January of 2021. It's simple.

We had great success in all six of our strategic imperatives in 2021, and they will be a guiding our 2020 to plan our.

Our vision statement was introduced in January of 2021, and it's simple dude.

To the point, and my First Merchants colleagues are embracing the impact we can have by focusing on the financial wellness of the diverse communities that we serve.

To the point in my first Kurt first merchants colleagues are embracing the impact we can have by focusing on the financial wellness of the diverse communities that we serve.

We have superstar self-sacrificing employees, and in my opinion, we serve communities that are like-minded and highly resourceful. Our customers are open for business, and they're getting after it. Not only are they using traditional methods to deliver results, but they're also using new and unique ways to meet the needs of their friends and their neighbors.

We have a superstar self sacrificing employees and in my opinion, we serve communities that are like minded and highly resourceful.

The performance of our customers and the markets that we serve are clearly visible in our results.

We introduced a new team statement.

as a way to more officially and on paper and in writing welcome diversity into the bank. I'd like to say that if you believe in our vision and you love to help people and you enjoy being part of a winning team, then you're welcome at First Merchants, and you should bring your heart.

As a way to more efficiently and on paper and writing welcome diversity into the bank.

I'd like to say that if you believe in our vision and you love to help people and you enjoy being part of a winning team then you're welcome at first merchants.

And you should bring your whole self to work.

We've condensed our 10 goals from 2021 into 6 strategic imperatives, and our actions follow these imperatives.

We are convinced our 10 goals from 2021, and just six strategic imperatives and our actions follow these imperatives.

In 2021, our cultural transformation made meaningful headway in many fronts.

In 2021 of our cultural transformation transformation made meaningful headway in many fronts.

We introduced an official hybrid work standard with added flexibility. Our employees earned that trust by delivering in a partially hybrid environment over the last couple of years dealing with issues of the pandemic.

We've tackled wage inflation, vacancy challenges, and will continue to address these to maintain strong teams during this volatile period.

We've tackled wage inflation vacancy challenges and we'll continue to address these to maintain strong strong strong teams during this volatile period.

We've made notable strides in both diversity, equity and inclusion, and corporate social responsibility during 2021. We published our first CSR document called Elevating Communities. It's on our website, and if you're interested, you should check it out.

Our community home lending team delivered superior results in 2021. We hired new diverse employees with unique skill sets. We delivered nearly two million dollars of down payment assistance grants. We achieved our statistical goal in the community development lending space and we're gaining momentum while having a huge impact in the majority minority communities throughout our footprint.

Huge impact in the majority minority communities throughout our footprint.

We are setting an example of how to partner with groups like the NCRC and other community groups evidenced by our Level 1 public comment period that produced letters of recommendation versus challenges.

Even Al Pena, he leads the National Minority Community Reinvestment Cooperative, for the first time in his career endorsed a merger, ours with Level One. As you know, Al was the individual who has recently been very public in his challenges of the merger of Huntington and TCF. So we're just thrilled with the relationship we've been able to build with him.

Even our paint pena.

He leads the national minority community reinvestment cooperative for the first time in his career endorsed a merger hours with level. One as you know al was was the individual who has recently been very public.

And his challenges of the merger of Huntington and Tcf. So we're just thrilled with the relationship we've been able to build with him.

On the DE&I front, we've introduced the our team statement above, we recognized Juneteenth in 2021 for the first time, we formalized our people of color employee resource group, and we have a formal DE&I employee community that's helping set our direction for the future.

On the <unk> front, we've introduced the our team statement above we recognize June teams in 2021 for the first time.

We formalized our people with color employee resource group and we have a formal D. Eni employee community, that's helping set our direction for the future.

Okay.

Our organic growth efforts produce results throughout all of the lines of business as evidenced on the prior pages, and more specifically in Mike Stewart's comments earlier. I'm enthusiastic about our 20 FTE additions, our sales folks that have been added to the companies that are spread throughout the commercial bank, treasury management, private wealth, and our community lending space.

Our organic growth efforts produce results throughout all of our lines of business as evidenced on the prior pages.

And more specifically and Mike Stuart's comments earlier.

Susie ASIC about our 20 FTE additions our sales folks that have been added to the companies that are spread throughout the commercial bank Treasury management private wealth and our community lending space.

Our digital transformation includes the addition of specialized talent in IT and consumer banking. We greatly enhanced our IT team and our knowledge of force.com and agile technologies to include a new digital banking team.

Our digital transformation includes the addition of specialized talent.

In consumer banking.

We greatly enhanced our it.

Team and our knowledge of <unk> Dot com and agile technologies to include a new digital banking team.

This group delivered a new state-of-the-art online account-opening technology platform, and we're seeing the results of that investment as we build new muscles for the future.

This group delivered a new state of the art online account opening technology platform and we're seeing the results of that investment as we as we build new muscles for the future.

Our top quartile financial results are supported by industry-leading governance and risk management practices with long-term sustainability at the core. We hired a new chief risk officer in 2021 with big bank experience and the ability to lead a risk team that runs at the same pace, as fast as our IT, our finance, our credit, and lines of business are running. And we're excited about the connectivity and coalescing of those groups.

Our top quartile financial results.

Our supported by industry, leading governance and risk management practices with long term sustainability at the core we hired a new chief risk officer in 2021, with Big Bank experience and the ability to lead our risk team that runs as fast at the same pace as fast as our our finance our credit and lines of business are running.

And we're excited about the connectivity and coalescing of those groups.

We continue to leverage M&A as a core competency, evidenced by our Level 1 bank announcement on November the 4th. And Level 1, just as a reminder, will be the largest acquisition in the company's history. And we're taking a market that was modest in terms of coverage of an entire MSA and turning it into a full-scale market that can grow by 10 to 15 percent for the foreseeable future.

A market that was modest.

In terms of coverage of an entire MSA and turning it into a full scale market that can grow by 10% to 15% for the foreseeable future.

Lastly, we continue to cultivate and maintain high-quality investors who value ESG, our stakeholder-centric business model, and high-performance results. And my last statement, I guess we're just optimistic about 2022. We had a great 2021. We remain very comfortable with our consensus estimates, both pre- and post-Level 1.

Lastly, we continue to cultivate and maintain high quality investors.

Who value ESG, our stakeholder centric business model and high performance results.

And my last statement I guess, we're just optimistic about 2022, we had a great 2021, we remain very comfortable with our consensus estimates both pre and post level one.

And it's early in the year, but our teams are running full speed ahead and making this plan happen that we've laid out. So thanks for your attention and your investment. And Chris, at this time, we're happy to take questions.

It's early in the year, but but our teams are running full speed ahead.

Making this plan happen that we've laid out so thanks for your attention and your investment and Chris at this time, we're happy to take questions.

Thank you.

We will now begin the question and answer session. To ask a question, please press the star, then the one key on your touch-tone telephone. To withdraw your question, please press the pound key. And if you are using a speakerphone, please lift the handset.

We will now begin the question and answer session to ask a question. Please press. The Star then the one key on your Touchtone telephone to withdraw your question. Please press the pound key.

And if you are using a speaker phone please lift the handset.

Our first question comes from Scott Seavers of Piper Sandler. Your line is open.

Our first question comes from Scott <unk> of Piper Sandler Your line is open.

Afternoon, everybody. Thank you for taking the question. I guess, Michelle, first question is probably for you. So, the underlying margin x PPP and purchase accounting benefits, it's compressed to just around 292 or so. Maybe some thoughts on where it goes from here. I know you discussed the expected five basis points improvement in the cost of funds, but you still have a lot of excess liquidity. So, we'd be curious to hear your thoughts on the go-forward expectation.

Afternoon, everybody. Thank you for taking the question.

Guess, Michelle first question is probably for you. So the underlying margin ex Pvp in purchase accounting benefits. It's compressed at just over just around 292 or so maybe some thoughts on where it goes from here I know you discussed the expected five basis points improvement in the cost of funds, but you still have a lot of excess liquidity so would be curious to hear.

Your thoughts on the go forward expectation.

Yeah.

Well, aside from any Fed rate hikes, we are expecting to see margin improve this next quarter, you know, from the funding savings, the funding cost savings that you just mentioned. You know, and we're growing commercial loans at double digits with stable yields. So although there is pressure on core margin this quarter because of excess liquidity, we feel great about our pricing discipline. We were probably a little surprised to see how robust our deposit growth was, but it was core, so we're very happy to have it. And, you know, when that normalizes, we don't know in our plan. We do expect it to normalize around that 3% to 4% deposit growth. So that's what we're expecting today.

Yeah, well aside from any fed rate hikes, we are expecting to see margin improve this next quarter from the funding savings the funding cost savings that you had just mentioned.

Probably a little surprised to see how robust our deposit growth was but it was core so we're very happy to have it and when that normalizes, we don't know and our plan. We do expect it to normalize around that 3% to 4% deposit growth. So that's that's what we're expecting today.

with the four rate hikes in the forecast.

With the four rate hikes in the forecast.

We do expect net interest income to increase 3 to 4 percent as a result of those rate hikes. That's what our models are telling us today. Okay. Perfect. And I guess along those lines, maybe I guess I can sort of back into it, but do you guys have sort of a best guess as to how the margin and NII benefit from each 25 basis point hike? I guess, you know, somewhere around a percent or so. Is that sort of the way that using math would work?

Do expect net interest income to increase 3% to 4% as a result of those rate hikes thats, what our models are telling us today.

Okay, perfect and I guess, along those lines, maybe I guess I can sort of back into it but do you guys have sort of a best guess as to how the <unk>.

Margin and NII benefit from each 25 basis point hike, I guess somewhere around a percent or so.

Sort of the way, they're using that to work.

Well we do have some loan floors and so the sensitivity of like in the first 25 basis point rate hike about 60% of our variable rate loans.

Well, we do have some loan floors.

So the sensitivity I would like to open the first 25 basis point rate hike about 60% of our variable rate loans will reprice when that first rate hike.

We'll reprice in that first rate hike, you know, 50 basis points. There's some some more that will reprice. Seventy five basis points is probably where the where the most asset sensitive. That's where we start to kind of move beyond our loan floors. Does that help?

50 basis points. There is some some more that will reprice 75 basis points is probably where the where the most asset sensitive that's where we start to kind of move beyond our loan floors does that help.

It does, it does. So basically, sort of that, you know, third and fourth hikes are where you get sort of the most bang for your buck then. Right. Perfect. Okay, great. Thank you guys.

It does it does so basically sort of that.

Third and fourth hikes, or where you get sort of the most bang for your Buck.

Right.

Okay, great. Thank you guys very much.

Youre welcome Thanks, Scott.

Thank you.

Our next question comes from Terry McEvoy of Stevens. Your line is open.

Our next question comes from Terry Mcevoy Stephens. Your line is open.

Hi, good afternoon, everyone.

Hi, Terry. I was hoping maybe you could just talk about your big picture thoughts on loan growth in 2022 on a standalone basis, you know, you talked about new hires that occurred in 2021. And you can see the momentum that was building throughout the fourth quarter in terms of just loan growth.

Hi, Terry.

I was hoping maybe you could just talk about your big picture thoughts on loan growth in 2022 on a standalone basis.

You talked about.

New hires that occurred in 2021, and you can see the momentum that was building throughout the fourth quarter in terms of just loan growth.

Hi, Terrence. Mike Stewart. I think we'll stay really confident with that mid to high single-digit loan growth, probably primarily driven through the commercial segment. We're starting to see some pickup, like I noted, in the consumer side as well. So that's where we're going to keep our plan.

Hi, Terence Mike Stewart.

Think will stay really confident with that mid <unk> mid to.

High single digit.

Loan growth.

Probably primarily driven through the commercial segment.

We're starting to see some pick up like I noted in the consumer side as well.

So that's where we're going to keep our plan.

There may be a follow up on fee income. A couple areas were a little bit weaker than I was expecting and down quarter over quarter. And I know that the interchange fees kind of came into play in the second half of this year. Again, as a standalone company, what are your thoughts on kind of overall fee income growth, some areas of strength and maybe some areas that could be a bit weaker in 2022?

And then maybe a follow up on fee income a couple of areas were a little bit weaker than I was expecting in down quarter over quarter.

And I know that the interchange fees kind of came into play in the second half of this year.

Again as a Standalone company what are your thoughts on kind of overall fee income growth some areas of strength and maybe some areas that could be a bit weaker in 2022.

Yeah, I would say, Terri, that we're probably expecting our quarterly run rate on fee income to be $27.5 million. We do expect a meaningful decline in mortgage gains in 2022, not so much because of production volume, but more because of just pricing. We think pricing was pretty healthy in 2021, and we think it'll normalize this coming year. But we do think growth in our wealth management business and the demand for loan level hedges and interchange income will all offset that headwind. Thank you.

Yes, I would say that we're probably expecting a quarterly run rate on fee income to be $27 5 million.

You expect a meaningful decline in mortgage gains in 2022, not so much because the production volume, but more because of just pricing. We think pricing was pretty healthy in 2021, and we think it will normalize this coming year, but we do think growth in our wealth management business and the demand for loan level hedges and <unk>.

Interchange income will offset that headwind.

Great. Thanks for taking my questions.

Thank you, Terry.

Thank you Terry.

Thank you.

And next we have Daniel Tamayo of Raymond James, your line is open.

And next we have Dan.

<unk> of Raymond James Your line is open.

Good afternoon, everybody. Thanks for taking the call maybe

Good afternoon, everybody thanks for taking the call.

Maybe if.

touch on the thoughts on the operating expense base and we were at

If we could just touch on the thoughts on the operating expense base.

We were at.

kind of in line with expectations in this quarter, just in terms of what you're thinking for the coming year given wage inflation pressure and everything else.

Kind of in line with expectations in this quarter just in terms of.

What youre thinking for the coming year, given wage inflation pressure than anything else.

Helpful. Thanks.

Yeah, Daniel, we think that our run rate next year will be around $73 million on average. Expense growth, we're expecting to be in the low to mid-single digits for new hires and digital infrastructure needs. So that's kind of what we're expecting. Okay. All right, that's helpful.

Daniel we think that our run rate next year will be around $73 million on average expense growth, we're expecting to be in the low to mid single digits for new hires and digital infrastructure needs. So thats kind of what we're expecting.

Okay, Alright thats helpful.

And there's.

A little nuance in the question, but was there any impact in the in the fourth quarter on margin from the the difference in the period end loans and the average balances.

in the fourth quarter on margin from the difference in the period and loans and the average balances.

And maybe Mike Stewart can talk a little bit about some of the loan growth and whether the loan growth came in more towards the end of the quarter. Right. Well, it's a good question. It's nuanced. I was sitting here thinking about that.

And maybe Mike Stewart can talk a little bit about some of the loan growth and whether the loan growth came in more towards the end of the quarter Greg.

Good question, it's nuanced.

And you're thinking about that.

I'm going back to watching October , November . It was later in the quarter, which means the dollars were sitting in lower-earning assets for a period of time. And we just have had so much growth in liquidity, it's hard to get it deployed quickly. So we're putting it in the bond portfolio or putting it in the loan portfolio? In the loan portfolio, it's a little bit heavier on the back end of the quarter. Yeah. So potential, perhaps.

Yes.

To watching October November .

Later in the quarter, which means the dollars are sitting in.

Lower earning assets for a period of time.

And we just have had so much growth in liquidity, it's hard to get it deployed quickly. So we're.

Putting it in the bond portfolio are putting into the loan portfolio.

And the loan growth was a little bit.

The year on the back end of this quarter.

Okay, so potential for October .

A little bit of.

A benefit in the first quarter from that.

And a little upside.

Okay.

Alright, that's all I had thanks for taking my questions.

Okay. Thank you.

Yes.

Thank you.

Our next question comes from Damon Del Monte of KBW, your line is open.

Next question comes from Damon Delmonte of K B W. Your line is open.

Hey, good afternoon, everyone. Hope everybody's doing well today. First question just regarding the outlook on credit. I mean, things are obviously humming along pretty well for you guys. Could you give a little perspective on the provision going forward? I know in the past you kind of implied you'd rather grow into the reserve than to just release reserves. So just wondering if that still holds true and what we could expect for a provision outlook.

Hey, good afternoon, everyone I hope everybody is doing well today.

First question just regarding the outlook on credit I mean things are obviously humming along pretty well for you guys can you give a little perspective on the provision going forward I know in the past you kind of implied you'd rather grow into the reserve then xen suggests release reserves.

I'm just wondering if that still holds true and what we could expect for provision outlook.

Yeah, I can speak to a name is John Martin. I can speak to the

Yes, I can speak to Hey, David It's John Martin I can speak to the.

you know, the outlook on the credit itself is, you know, as you can see through the end of the year, it's been stable and improving.

The outlook on that.

The credit itself is.

As you can see through the end of the year, it's been stable and improving has really been a positive story throughout 2021.

really been a positive story throughout 2021. And don't really look, as I look into 2022, don't really see, you know, material change from, you know, just calling through the portfolio, doing portfolio reviews, et cetera. In terms of the provision expense, given our coverage and where the allowance stands today, I think the plan is to grow in, continues to be to grow into the allowance with minimal or no provision expense.

Don't really look as I look into 2022 don't really see.

Material change from just culling through the portfolio doing portfolio reviews et cetera in terms of the provision expense given our coverage and where the allowance stands today.

I think that's.

The plan is to grow and continues to be to grow into the allowance with minimal or no provision expense.

Okay. All right. That's helpful. And then with regards to the Level 1 deal, Mark, I think you mentioned it's still scheduled to close kind of at the, is it the end of the second quarter or is it during the second quarter? And I guess along those lines, what additional approvals are outstanding?

Got it okay.

Alright, Thats helpful and then with regards to the level one deal.

Mark I think you mentioned is still scheduled to close kind of it is at the end of the second quarter or is that during the second quarter and I guess along those lines what are this.

Approvals are outstanding.

Yeah, we're pretty far into the process with all of our regulatory approvals. I think the one key item is just whether or not the Fed decides to approve the merger through delegated authority.

Yes, we're pretty far into the process with with all of our regulatory approvals.

I think the one.

Key item is just whether or not the fed decides to approve the merger through delegated authority.

I'm in the regional office in Chicago and at least all indications are that would that would happen, which would accelerate the timing if it happens to go to D. C. It's I think it's a 45 day additional time for

And the regional office in Chicago, and at least all indications are that that would happen, which would accelerate the timing if it happens to go to D. C.

I think it's a 45 day additional timeframe so.

You know, we we still are anticipating late first quarter, but there's a chance that it carries over into the second quarter. Got it. Okay, that's all that I had.

We still.

We're anticipating late first quarter, but there is a chance that it carries over into the second quarter.

Got it okay. That's all I had thank you very much.

Thank you.

And next we have Brian Martin of Gemini, your line is open.

And next we have Brian Martin with Janney. Your line is open.

Hey, good afternoon, everyone. Thank you for taking the questions. Wanted to just touch on the people you guys hired, you know, the recruiting you guys were successful with this year. Just kind of wondering how you're thinking about, you know, maybe areas that you still have yet to kind of bulk up on, or, you know, I guess where you're still looking for added talent as you go into, you know, 2020.

Good afternoon, everyone. Thank you for taking the questions I wanted to just touch on the people that you guys hired the recruiting you guys were successful with this year just kind of wondering how youre thinking about.

Maybe areas that you still have yet to kind of bulk up on or I guess, where you are still looking for added talent as you go into.

2022 here.

Certainly, I guess I'm assuming you'll be opportunistic, but just kind of any areas you're really targeting.

Certainly I guess I'm, assuming you'll be opportunistic, but just kind of any any areas youre really targeting.

You know, in 2021, we had about 20 sales folks. And as Mike mentioned, 11 of those were on the commercial side of the bank. The others were kind of scattered throughout.

In 2021, we had about 20 sales folks and as Mike mentioned, a 11 of those were on the commercial side of the bank.

The others were kind of scattered throughout.

our remaining lines of business, but we also had a meaningful increase of almost about the exact same amount in a combination of IT and the digital team that is helping drive the online account opening and the force.com knowledge, agile investment, et cetera. So I expect a similar investment in

Our remaining.

Lines of business, but we also had a meaningful increase of almost about the exact same amount.

Combination of it.

And the digital the digital team that is helping drive the online account opening and the force dot com knowledge agile investment et cetera. So.

I expect a similar investment in talent additions in 2022 on the sales side and about half that.

talent additions in 2022 on the sales side, and about half that number in the back office. So you know, the focus is still the same. Our intentions are to continue to grow our balance sheet and add bankers wherever we can and where we think we can move the needle and drive additional customer volume. And in the back office, we're just trying to make sure that we have the ability to upgrade our

Number in the back office so.

The focus is still the same our intentions are to continue to grow our balance sheet and add bankers.

Wherever we can and where we think we can move the needle and drive additional customer volume and then the back office, where we're just trying to make sure that we have the ability to to.

To upgrade our tech.

at a level that allows us to be competitive. And, you know, we're picking our spots where we're choosing to make investments that are outside of the traditional bank-in-a-box technologies like FIS and Pfizer.

At a level that allows us to be competitive and we're picking our spots where we're choosing to make investments that are outside of the traditional bank in a box technologies like Fas and Pfizer.

and stepping up to more agile technology that is like we did with Terafina for the online account opening. So that's, you know, I guess the best way I could put what we're thinking for 2022. Yeah. That's helpful. Thanks, Mark. And just the, maybe just on the capital side, you talked about, you touched on M&A and kind of what you're doing there, but just with the buyback, I guess, how are you thinking about that? You know, given, you know, the outlook for rate increases and the benefits that will accrue to you guys, given your asset-sensitive balance.

Stepping up to more agile technology that is like we did with tariff high enough for the online account opening so.

Thanks.

I guess, the best way I can put what we're thinking for 'twenty two yeah. That's helpful. Thanks, Mark and just maybe just on the capital side, you talked about you touched on M&A and kind of what youre doing there, but just with the buyback I guess, how are you thinking about that given the outlook for rate increases and the benefits that will accrue to you guys given your asset sensitive balance sheet.

We're just on the buyback side. We're just going to be opportunistic. We have it. It's more of a defensive measure

We're just on the buyback side, we're just going to be opportunistic we haven't it's more of a defensive measure.

And, you know, the cash that we're putting into our acquisition will make a meaningful difference in the overall.

And.

The cash that we're putting into our acquisition will will make a meaningful difference in the overall Ts.

TCE and our return on tangible common equity, and I feel like it maybe takes the pressure off of feeling like we have to be real aggressive with our purchases.

TCE and our return on tangible common equity and I feel like maybe it takes the pressure off of feeling like we have to be real aggressive with repurchases.

Okay, perfect. And just the last one was just on the commercial utilization, I guess what, and I guess maybe Mike talked about it a little bit, just kind of how are you thinking about, you know, where that unfolds or, you know, kind of throughout the year?

Okay, perfect and just the last one was just on the commercial utilization I guess, what and I guess, maybe Mike talked about a little bit just kind of how are you thinking about where that unfolds.

Kind of throughout the year.

Yeah. And John's got some. You want to start on that? Go ahead. Go ahead, and we'll compare notes in terms of what you provide, what I've got here. Go ahead. Yeah, so what we track from a pure revolver side in the commercial segment, we saw several basis point increases in that. But it's still, when you go back, I'll say two to three years ago, it's still substantively under what I would think about as normal average run rates of that.

Yes.

And John has got some you would start that.

Go ahead more compare notes in terms of what you provide what I've got here go ahead.

Okay.

Yes, so what we.

From a pure revolver side and the commercial segment, we saw several basis points increases in that but it's still when you go back.

So I would say two to three years ago, It's still substantively under what I would think about as normal average run rates of that so.

there's still a lot of liquidity inside that. But and then, you know, I talk about the originations that happen.

There's still a lot of liquidity inside and then talk about the originations that happened.

in our commercial real estate group, those originations are primarily considered site construction and that construction draw starts to move up too.

In our commercial real estate group those originations are primarily considered site construction and that construction draw starts to move up to.

early part of this past year, that secondary market was very active and lifting off assets off the balance sheet, and our origination of new construction loans continue to

Early part of this past year that secondary market was very active active lifting off assets off the balance sheet and our originations of new construction loans continue.

continue to grow. So we'll see those utilizations move up as well.

Continue to grow so we will see those utilizations move up as well.

Yeah, both nice headwinds. Go ahead. Yeah, I was just gonna kind of build on what Mike just said. Yeah, we had at the high pre pandemic, we were looking at a utilization of cost 48%. We get down to, you know, 38%. And now we're up to like a 42%. What's running in the background, Brian has been and Mike mentioned it earlier is a real growth in our commitment.

<unk> <unk> headwinds go ahead, yes, I was just going to kind of build on what Mike just said <unk> yeah.

We had at the high <unk>.

Pandemic, we were looking at a utilization of call it 48%, we get down to.

38% and now we're up to like a 42% what's running in the background, Brian has been and Mike mentioned it earlier as a real growth in our commitments pre pandemic, we had call it $2 4 billion in commitments.

pre pandemic, we had call it $2.4 billion in commitments. And we're now standing at that 3.

We are now standing at three one.

billion dollars in commitment. So we've seen not only rebound in our utilization, but we've also booked through the pandemic and even through today, you know, a billion dollars in additional commitment. So a couple of forces there, back to Mark's and Mike's comments of the wind being at our back as we come out of the pandemic.

<unk> one.

Billion dollars in.

In commitments, so we've seen not only rebound in our utilization, but we've also booked through the pandemic.

And even through today.

$1 billion in additional commitments. So a couple of forces there back to marks in Mike's comments of the wind being at our back as we come out of the pandemic.

Got you Okay. That's helpful and just the last one housekeeping maybe I missed it when you said Michelle on the benefit.

Benefit from the I guess, if you just did 25 basis point rate hike.

The margin benefit from just the one hike I guess, assuming you get the full benefit rather than just the.

60%, maybe you can get on the first raise or two how much of an impact how much of a differences here between.

And of that 60% level versus.

Yes.

With the full impact would be once you kind of burn through those floors.

Well, we have 6.3 billion of loans that are variable. And so, like I said, 60 percent of those will reprice in the first 25 basis points.

Well, we have $6 3 billion of loans that are variable and so like I said, 60% of those will reprice in the first 25 basis points.

And your comment of a 100 basis point move, we had how much expansion, Michelle, in the market? Oh, yeah, I'm sorry. On a 100 basis point lift, our net interest income will increase 3 to 4%. Okay, and that's off the end of the year, full year end of this year's number.

And your comment of 100 basis point move we had how much expansion Michelle.

I'm, sorry, 100 basis point lift our net interest income will increase 3% to 4%, Okay and Thats also ended the year at full year entity.

This year's number.

That's correct. Yeah. Okay. It is. So it's obviously more incremental each move. Yeah. Okay. That's all I need. Thank you so much.

Correct, yes, okay.

Obviously more incremental each move yes.

Okay. That's helpful. Thank you so much.

Thanks, Brian .

Thank you.

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

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

Yeah, my only closing remarks are that I appreciate your interest and your attention to First Merchants. You know, we have a number of stakeholders that are listening today, from shareholders to employees and customers and our regulators. And we just appreciate the continued commitment to our performance. So until the next call, have a great Friday.

Yes, my only closing remarks that I appreciate your interest and your attention to first merchants.

We have a number of stakeholders that are listening today from shareholders to employees and customers.

Our regulators.

And we just appreciate the continued commitment to our performance so.

Until the next call.

Have a great <unk>.

First quarter of the year.

Thank you. This conference has concluded. Thank you for attending today's presentation. You may now all disconnect and have a pleasant day.

Thank you.

This conference has concluded. Thank you for attending today's presentation. You may now all disconnect and have a pleasant day.

Q4 2021 First Merchants Corp Earnings Call

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