FRME - Earnings call transcript Q3 2018 | First Merchants Corporation

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Operator

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

to oral, forward-looking release. discussed update no whether written statement or First undertakes this presentation Merchants relating obligation matters the press to any in or

turn this Officer. addition, Company’s is Please to recorded. over event conference sir. note anticipated being of Executive like past results. operations results future do would to In President go Please the C. and the Rechin, its not necessarily Mr. indicate I Chief Michael ahead, now

Michael C. Rechin

ending third and everyone, webcast thanks, conference the earnings XXXX. XX, Welcome, call Chad. Hey, September quarter to our for

Operating John our are Officer. Chief Martin, well CFO; Mark as and today Officer me Hardwick, Credit our Chief Joining as

Quarter point our Highlights. and that the our page also today that begin this my earnings a release. First the and end on to o’clock X Third at morning of slide webcast release, am back Merchants four, will The contained speaks material directions presentation at Eastern to that are XXXX a Time release from approximately press titled comments released and

in the way grew announcement billion, third share million captured and Total $X.XX, quarter XX% X.X% XXXX. the net really increase growth of the of top increase third per the earnings to rates release period over assets the $XX.X XX.X% we in income, earning over of First a $X.X Merchants’ quarter marketplace. So, the a of the deposits XXXX; an reflecting approach organically of kind in after right similar the loans third over balance the both of were quarter of increase with

discussed that off we’re about led of merger later high Next and driven Corp. ago weeks a return assets -- combination we’re point, today two average to upcoming and bullet balance XXth, this on in performance stable XX.XX% definitive agreement with the Financial Mark. equity, X.XX% Michigan. the average by return point little talk a some to down ratio. bit by a on really with excited low driven At return XX.XX% efficiency October our Monroe, the results and by And release metrics on the we cover going about MBT

Mark Hardwick

accretion, portfolio on of seven comments My have to prime since basis total normalized quarters. past of third loan by slide growth X.XX%. totaled value the will second of annualized loan year-end quarter line our our six The Mike. XX the X.X% million million since produce has portfolio XXXX year-end $X.X X% $XXX points or slide assets quarter The a side total when six left X.XX% on of billion up increased total and shown the increased improved XXXX. yield for seven Thanks, from on by strong basis begin the in rate yields, on X.XX%, or loans ‘XX, XXX XXXX. total continues loan first And The $XXX of two loan yields. composition for of where Organic points. equaled over fair quarter line

As loans On with variable, the the repricing of slide right demonstrating sensitivity be our daily high-performing. $X.X bank. XX% bond graph are continues asset illustrates, half of eight, the billion our on our to portfolio

second portfolio better the loss X.XX% of the both yield million is during by first Our our X.XX that quarter unrealized quarter in $XX.X basis-point the million. we increased X yield than $XX.X reported while and to quarter,

represents of two, on deposits customer and Capital XXXX is time line XX.X%. line year-end Non-maturity the management deposits pleased deposits. XX% on on year-end of of growth $XXX structure annualized. slide million increased Now one, totaled million XX% deposits over Customer total deposit total nine, sheet. the $XXX remaining XX% non-maturity represent from and positioned liquidity very are future, and balance with annualized by customer for our or an or well

loan to our asset the totals and loan Our ratio XX% deposit tangible XX%, ratio to totals X.XX%. ratio common equity totals while

our of mix the XX, strength of is Company. mentioned, true a our on slide previously deposits, As

XX basis costs Third quarter XX quarter deposit points, the basis XX total from the points. second quarter, first basis of and up points totaled totaled

past Over and of of our XXX deposit rate increased cost for the funds six points, deposits quarters, XX%. Fed XX basis beta basis the again has points increased,

the strength regulatory net providing well-capitalized The target into flexibility capital internal definition capital regulatory ratios from QX and reflects of slide rates ‘XX corporation’s third and points improvement are on the of Our X quarter and from on of ‘XX. improvement of margin to XX -- another XX strength ‘XX future. the slide of interest the above to our second QX basis quarter basis-point an X

positive third amount points negatively in margin first of to in we’re those our the attempting in page, And current basis As basis are points of led totaled XX federal XX, XXXX on by one. Non-interest interest to quarter, basis categories, tax slide to due $XX.X for charges the reflecting slide the second giving line quarter incentive you income, several quarter to on accruals, increases expense service XX the reform million, on our non-interest due on deposits were noted up and XX, Total quarter returning margins is net for to slightly impacted The to points income bottom performance year. the have. year. if the numbers QX by Company XX the at of of small due XXXX we exempt improvements of the the you just back prior compare to levels. and across tax expense

Our Monroe acquisition well XXXX. and current levels Trust us approaching in Bank growth position continued the expense for of organic and

Now on XX. slide

the his in on to remarks, EPS two for on totaled $X.XX, several XX, about growth absence improvement your organic listed. And And mentioned loan will of and period line year. last our portfolio income grew in John totaled the notice the XX.X% the line third related XX% over factors, quarters second of efficiency charges XX% expansion, looking discuss were slide previously of over increase a will remains for On the composition earnings the below and XX.XX%. XX, our XX net the XX%. growth future. loan one-time Mike including completion nine, now, As million. just very first earnings and to reflective an were of year attention. little to On the ‘XX Merchants We both strong in you quarter into and Thanks and continued over acquisitions income The reform. opening color ratio now, talking related I improved in acquisitions $XX.X trends. bit quality and EPS the are quarter that. same ‘XX margin and ‘XX, feel wanted substantial core with of we categories net strong bring of all First the attribute you increases when XXXX, And XX% of power XX, you XXXX year-over-year totaling tax what Martin to can from and slide clean expect And in and to three asset

John Martin

loan and portfolio Thanks, Mark, Beginning quality on allowance and an portfolio, few asset afternoon. provide market update I’ll slide the close then forward, asset on the then XX, conditions. role the on quality remarks and provisioning, with a the review good and cover on

$XX half Total experienced the to quarter So, loans starting payoffs in loans of or lower in $XX occupied in by which -- on three, line on movement the by increased the non-owner construction momentum million. We CRE slower quarter, year. and estate and slide XX. as compared in the excuse in real construction grew million the me, quarter investment which first loans were

transient half of the those on CRE, owner real portfolio XX% the We which rate growth netted a categories investment and construction same a third estate quarter. refinance and dynamic flat then grew be year growth and construction three were said at construction the line In to loans move same the where from continue XX% to the a can roughly first quarter. permanent loans annualized in the in out half grew annualized to The in of the occupied for manage C&I loans rate, where mini-perm and thing two market. at for year nominal first

Moving residential mortgage and down in similar growing with was consumer mortgage lending, consumer a residential slow and there quarter million. the $X down the loans

the pipeline, Although effect by with a and we consumer lending. their into mortgage are looking on tampered rates higher heading of fourth quarter appears forward, reality it commercial good the interest and

on quality slide XX. Turning to asset

words, at line loans and seven, flow, million solid really, is a real quarter. by second XX-day and is grading occurs there slide declined loans other Finishing $XXX,XXX; portfolio $XX.X to and by increased two, delinquent million no resulted the was This four XX-day the changes we the This in line in on and declining NPAs quarter. declined loans owned. were lines in the normal assets and of nonaccrual estate On respectively. general renegotiated quality increased quarter. and from remaining estate $XXX,XXX; real In asset three review one, on loan that for and points solid and ebb the loans owned see. slide other $XXX,XXX, Asset basis by other out significant delinquent $X on just up quality $XXX,XXX which the after classified XX remaining

in reconciles X million $XXX,XXX resolved on million new million added a six. And nonaccrual migration with million of gross dropping to to on lines right line seven, $XXX,XXX in $XXX,XXX and NPAs in which and nonaccruals, ORE, Turning million in $X.X XX, loans added down with we while to slide five. we line QX three, line of to on $X.X charge-offs, of while on rebalances. delinquencies. the $XX.X This we same, titled increase quarter nonperforming started $X ORE $X.X We sold $X the X, writing netted the ‘XX far the column, XX-day in line new of down million assets,

after past up the and $XXX,XXX. restructured quarter changes due, ended we XX So, days

to increased migration move of portfolio non-purchased the Let’s roughly in was by allowance $XXX,XXX of XX. of quarter net flat total million the was points million of million, $X.X purchase at and charge-off. mostly X.XX%. on with $XX $XX.X adjustments Fair only loans of the driven coverage basis to onto loans eight, X.XX% the non-purchased X expense value $XX.X charge-offs. $X.X accretion slide from million in $XX,XXX Provision and to line in from $X.X loans decreased offset The to million in plus million

to work our CECL on modeling. We continue

to internally discussion a there At be this Then, CECL, we ultimately on on lot and methods to As continues conclusion if from summarizing XX. or point, not will of impact, slide approaches. come industry around CECL. the really what a be have the any, and in a on point,

mentioned I moving and CRE was Growth payoffs loans strong impacted two quarters. and earlier, portfolio. the through C&I after by As loans construction slowed

see. new around trends increases loan remained the and loans don’t Our current bumping low any stable rate healthy, and see and coverage heading have the classified stable. say loan is commercial pipelines volume. quarter, Charge-offs with I mortgage fourth this appear allowance data and Credit affecting in increase metrics remain and remained that solid interest Regulatory just would with $X.X are the into with quarter housing I really headwinds million that consumer provisioning. the I

level, we the while report the to And Rechin. turn the micro over pay portfolio to economy, national call of you. the abreast for macro to for your so, attention. level, really I’ll attention Mike from back at trends a staying Thanks

Michael C. Rechin

slides our the to we October page that John. XX going the and two XXth call. Thanks, I’m used cover move investor XX, of in to

profile reminder Bank that Financial MBT about could bring the of Monroe As our Trust, to company. and quick and what or

of repeat and an on XX%. that and First pro of quality deposit loan around and the overall strengths was deposit so that on And basis the of might pro so a the cost on with liquidity, what on I’ll their richness forma some and reduces Merchants provides basis our the the ratio base,. bit on work page combined balance like. talked particular, XX little look forma one again day We of company sheet in right to

So, we’re excited about that.

You can see that there’s no overlap.

real Merchants on it additional serves of Page standalone as glimpse of some First XX, so, extension a basis. a MBT And very the franchise.

in kind as -- you and can Company, Deposits The leadership reflect statement mix low can mind. positives deposits, the basis. cost the they together see and the earnings, on attraction, extension, have here balance the that denominated the of bank in as quality, they that some standalone a credit pull of is were community sheet of then based, Monroe somewhat Some community. gather transaction granular the income of for powerful my Merchants and bank First a then of a a performance their composition the history of market inside inside you by

the loan our part look nice is XXXX, do to important referenced quarter summary fast-paced forward. then had our rate and about what moving quarter that the for we make the slower is comments nice core it third questions. to gathering forward disciplined, business. deposit of up and more planning what last an and of the uniquely a company. yet that growth Finishing for banking excited rate Flip our some we’re We portfolio coverage in can take So, be going XX, us. in of which page forward market to reaffirmed in our kind in growth view growth John

our prominent in that’s XXXX So, plan.

preference our for that of some account of It’s referenced before migration, the products for is the will to completion calendar client and new big end our completed checking each think last reshape be absolute of two it on of our project the I As year. us time in a quarters. of the kind primary I

asset all items capability, businesses, our XXXX. the about which here of banking of to place nice investment syndication crossing will Third strength. finance $XX threshold, specialty preparedness include of first and bullet three for or in the our growth Talked and extensions Midwestern just of our to by driven speaks kind in commercial of the take loan our finance the billion our growth quarter sponsor business

of utilize Mark model the to carries none in increases the it to run But really So, support rate about them some comfortable talked we investments of non-interest our staffing tremendously base, with point, like day basis, the the on in in to day this of pronounced. ahead while our lastly, build, of our to kind of that, the level of expense our led technology competences feel and feel our quarter at the is year. expense exciting you integration professionals this at and work into the us one to and which introduce that into Michigan third saw And marketplace. by next mindful the MBT in of design and schedule, a brand

the through. So, execute Monroe change their level the that professionals we of service highest event to while all been clients maintaining look that providing have client

of with it like existing very to our third to So, all coupled strong of us quarter acquisition. rate really state told, proven, told, the highlighted, as run has a combination with company. optimistic Michigan XXXX. All continuing about the between opportunity the with Mark be and a We the banking into grow high-performing really business

take So, any have Chad, at questions. point, this Should in we’ll the you queue?

Operator

Thank you.

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

Scott Siefers

afternoon, Good guys.

Michael C. Rechin

Hi. Scott. Good afternoon,

Scott Siefers

Hey. is Mike, for question I guess, you. first

of symptomatic quarter, for a like color a looks year. the you are X% of still that loan the little on, the organic to and at pace others. which hit it’s growth it full seen bit what slowdown in third regardless, the I guys growth X% on pretty But appreciate called to So, in you we’ve

will from well? fourth I one, doable more into So, you? for then, the into and I guess annualized guess feel ‘XX your guess, trend quarter how what’s still here best growth to as does importantly, that And

Michael C. Rechin

quarters kind have It Well, the in we like we’re kind fourth Scott. me which close-up a for of quarter, it’s robust X.X% to quarter, is flat, stronger it, look rate. first pretty effectively to going the or as we’re of annualized living be that growing and two X% right kind it, now, than looks of at last the which yes, as probably not of the year was

four-quarter rate, X%, we our the were would in out place back about are through annualized is Central that got been quarter you further growth X%, that what X% is similar construction, raw forecast, best some the I’ve billion We a to ought But, fourth And we had a to rate because in Actually, first of -- reduction what Michigan little that of referred into and some and some X% convert kind at if ability which local from think bear changes can’t quarters take at at pipeline, the of completed, to to take we have line our with fourth John absent pipeline, of I the the plan levels. Indiana, the into absent out. half probably going originations to on like the quarter third us were commercial some to. annualized see, John X% of level the that Ohio, originations occur. that of didn’t reductions that know your us the and the referred question utilization state would clearly three So, quarter. look quarter and all a our into was, of ‘XX. this composite the $X.X allow and information -- economies feel grow to of our that

Scott Siefers

Thank And just perfect. then, separately, That’s you. Okay. Mark.

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

Mark Hardwick

we most but have basis a June recoveries We had at this us spread. and nothing that that mover was really third quarter points another terms in I even basis-point in end another aware, quarter, with probably will carry the think very we sensitive our in we increases needle fourth of to terms quarter, Well, up the deposit quarter, rate deposit to expansion. increase have being help for in of overall we customers. the or fourth of that X some and very rates through our us increase of and though rate something our always were making extraordinary, carry end September feel margin through a like, helped especially

maybe economy plan Our the forecasts year, the currently seeing go next in on have around. obviously based next plan are moving a suggest increase had happening suggest our in we’re others and and high today, built rate for forecasts as that X X or what’s quarter. December just into rate it year, as We we’ve one that hike,

So, one plan. today, modeling is very only we it in that and stable one are hike December we margin June our June, rate feel or our ‘XX. have like we way the And built likely with into throughout, call

So, Fed on flat getting assets. we’re stays if lift side I not to the see repricing the and the moving curve the and we some pressure the deposit start on guess, yield stops where

Operator

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

Nathan Race

obviously With were in onboard in little first of question their question back below the margins around the XXXX. margin of the going MBTF yours. core last the to just coming line year, Mark, half

maybe their fair the the I about may some kind the how liquidity of deployment, impact of X.XXs of kind timing a So, into sheet as that should perhaps board, how balance maybe on that assumption? you guess high the comes we margin, settling of that think is access

Mark Hardwick

Yes.

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

Nathan Race

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

Mark Hardwick

going a it’s think I good forward. number

Nathan Race

last… one just And

Mark Hardwick

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

this clean really So, was a quarter.

Nathan Race

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

John Martin

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

Operator

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

Damon DelMonte

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

Michael C. Rechin

particularly a give -- that none for a in -- them these were couple it the couple of you some I’ll We number aggregate the those that of line way commitments None John C&I just commitments. against last were actually Damon. and I in that question of you me that I our utilization earlier but views I And think work Martin couple of an a on -- C&I clients moment provides ago, quarter’s call, by line had in $X.X X% mentioned flat referenced that the on of sold from utilization aggregate which was are the accounts roughly the they of quarter that end dramatic half second our of billion quarter. of of sold. had gave back. to kind commitment, clients We up the result in in see. A first

C&I So, were $X.X billion that X% we in utilization actually commitments. down on in

a lending, the deposits, like not So, for of because it’s look as a strength balance of the well? really but we by where portfolio to that would change typically ours a accompanied as meaningful rebound it’s C&I

Damon DelMonte

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

Michael C. Rechin

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

Damon DelMonte

so. in respect four lastly, guess to last I there’s capital then, with the or of three, management, fin sector a the weeks just weeks, six And volatility lot

in Just are wondering your shares price. the back what buying thoughts on stock decrease with

Michael C. Rechin

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

Damon DelMonte

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

Michael C. Rechin

need the would We Board. one by to approve

Operator

question-and-answer do the have and in. jumped sorry, this concludes of Ladies Apparently, we question just one queue has that come gentlemen, well. our out as I'm more it session.

Sorry about that.

this session. So, does conclude question-and-answer our

So, Rechin, closing to remarks. for Mr. it turn you I'll back any

Michael C. Rechin

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

Operator

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

You disconnect. care. Take may now

First Merchants (FRME) 24 Oct 182018 Q3 Earnings call transcript