First Merchants Corporation (FRME) Earnings Call Transcript & Summary

Welcome to the First Merchants Corporation 2020 Annual Shareholders' Meeting. The material reference during this meeting is located at the site you used to join today's meeting. At this time, I would like to turn the conference over to Charles Schalliol, Chairman of the Board of Directors at First Merchants. Please go ahead, sir.

Thank you, and good afternoon, everyone. On behalf of our entire Board, our officers and our employees, I would like to thank you for attending the first First Merchants Corporation's virtual annual meeting of shareholders. Conducting our annual meeting virtually allows us to be more inclusive to reach a greater number of our shareholders while, of course, improving safety for all concerned during these unprecedented times. Second slide here is the agenda. And at today's meeting, following the introduction of members of our Board of Directors, I will provide some comments on our 2019 performance. We will then conduct the formal portion of our annual meeting. Our President and Chief Executive Officer, Mike Rechin, will then introduce the company's executive officers, provide a brief update on our business and key strategic initiatives underway at the company. We'll then address any questions you have as shareholders. And you can submit them in the question box on the computer screen, any questions may have been submitted prior to the meeting. Going to the third slide. I would now like to introduce the other members of our Board of Directors, all of whom are in attendance at today's meeting. In addition to myself, the directors are Michael R. Becher, retired managing partner of Deloitte; H. Douglas Chaffin, retired President, Chief Executive Officer of Monroe Bank & Trust; Michael J. Fisher, President and Chief Operating Officer, Ball Brothers Foundation; F. Howard Halderman, President, Halderman Farm Management and First Merchants Bank East Muncie and East Region Board member; William L. Hoy, Chairman of the Board, Columbus Sign Company and First Merchants Bank Ohio Region Board member; Clark Kellogg, CBS Sports basketball commentator and First Merchants Bank Ohio Region Board member; Gary J. Lehman, Managing Director, The Cannelton Group and First Merchants Bank Lafayette Board -- a regional Board member; Michael C. Marhenke, retired President, Chief Executive Officer, Independent Alliance Banks; Michael C. Rechin, President and Chief Executive Officer of our bank, First Merchants Corporation; Patrick A. Sherman, CPA and partner, CompassPointe CPAs, LLP; and Jean L. Wojtowicz, President and Chief Executive Officer, Cambridge Capital Management Corp. One name you did not hear is that of Terry Walker. That is because effective as of this meeting, Terry is retiring from service on our Board. Terry has served with distinction for 14 years and most recently as Chairman of the Nominating and Governance Committee. He has been a trusted adviser throughout the years to me and our senior management. We all thank Terry for his many years of service and leadership and wish him the very best going forward. Turning now to, if you're following me, to Slide #4. Our historical performance is an important indicator of the shareholder value and the best measure of our progress. As you'll note on this graph, First Merchants has outperformed the Russell 2000 and SNL banks, over $10 billion in assets consistently since 2014. While we don't run the company worrying about the stock price in the short run, in the long run, our stock price is a measure of the progress we've made over the years. This progress is a function of continual investments in good times and bad to build our capabilities, our people, systems and products. These important investments drive the future prospects of our company and position it to grow and prosper for decades to come. On the fifth slide, in 2019, we extended our capital return to shareholders in the form of a common stock dividend increase from $0.23 a share per quarter to $0.26 per share in 2019. The strong performance of your company again provided us with the opportunity to continue to invest in strengthening the company and shareholder value. Given the uncertainty of our current environment and despite our strong financial and capital position, at this time, the Board did not vote to increase the common stock dividend this quarter. From early stock market indications, it's anticipated that as the company begins to reopen and employment and consumer confidence voice bolsters, stock values, including those in the financial sector, will strengthen. Our quarterly dividend yield in 2019 was 2.5%, which equaled a 31.4% dividend payout ratio. Our 2019 tangible book value was $21.94, which equals a compound rate of growth of 10.13%. As of this morning, our dividend yield was over 4%. And although our stock is now at $23 versus $37, we have fared better than many of our peers and expect to benefit in the upcoming recovery. Being a First Merchants shareholder has provided and we believe, will continue to provide solid value. Now transitioning into our business meeting, I would like to introduce Brian Hunt, our General Counsel and Corporate Secretary, who will cover the business portion of today's meeting. Brian?

Thank you, Chuck, and good afternoon. We will now conduct the formal business as set forth in the Notice of Meeting and proxy statement. Those documents, as certified by Broadridge Financial Solutions, were mailed to all shareholders of record as of March 5, 2020. The minutes of last year's annual meeting have been prepared by the secretary and are available for shareholder review. I'm pleased to announce that there are present by proxy a sufficient number of the voting shares of the company to constitute a quorum. Accordingly, this meeting is duly called to order. At this time, any shareholders who have not already submitted a proxy and wish to vote their shares online now may get ready to do so by clicking on the vote here button on your screen. As referenced on Slide 6, the 3 proposals to be considered at this meeting are as follows. The first item of business is to elect 4 directors to hold office for terms of 3 years, 1 director to hold office for a term of 2 years and 1 director to hold office for a term of 1 year, all to serve until their successors are duly elected and qualified. The names of the nominees are shown on Slide 6. The second item of business is to vote on an advisory nonbinding resolution to approve the compensation of the company's named executive officers. The final item of business is to ratify the appointment of the accounting firm of BKD, LLP as the independent auditor for 2020. Steve Moore, a partner with BKD is in attendance at this meeting. While we allow time for shareholders who haven't already done so to complete their voting, I'd like to remind you that, as shown on Slide 7, some of the statements made at this meeting may be considered forward looking. The company cautions investors that results in future operations may differ from those anticipated. We urge you to review the cautionary statements and other information contained in the company's filings with the SEC, including our annual report on Form 10-K, which identifies certain factors that could cause actual results to differ materially from those projected in any forward-looking statements. Copies of the 10-K and other filings are available through the company or online. At this point, the voting polls are closed, and I will now report the preliminary results of the voting. First, I'm pleased to report that each of the directors standing for election at today's annual meeting has received more than a majority of the shares voted and are hereby elected. The second proposal relates to the nonbinding advisory vote on the company's executive compensation programs. A majority of the shares being voted by proxy have voted in favor of this proposal. The final proposal relates to the ratification of the appointment of BKD to serve as the company's independent public accounting firm for the company's 2020 fiscal year. A majority of the shares voted by proxy have voted in favor of this proposal. The final tabulation of the votes will appear in our Form 8-K to be filed with the Securities and Exchange Commission later this week. This concludes the formal portion of our 2020 Annual Shareholders' Meeting. I would now like to turn the meeting over to Mike Rechin, our President and CEO.

Thank you, Brian. Before I provide you with some additional comments related to 2019 and a brief look at 2020, I'd like to recognize the First Merchants executive team on our call today. I'm on Slide 8. Mark Hardwick, Executive Vice President and Chief Financial Officer as well as Chief Operating Officer; Mike Stewart, Executive Vice President and Chief Banking Officer; John Martin, Executive Vice President and Chief Credit Officer; Stephan Fluhler, Senior Vice President, Chief Information Officer; Steve Harris, Senior Vice President and Director of Human Resources; Michele Kawiecki, Senior Vice President and Director of Finance; and Jeff Lorentson, Senior Vice President and Chief Risk Officer. This veteran group of dedicated executives has more than 70 years of experience at First Merchants Bank and experience in this environment is important, complementing this roster of senior managers is a large and capable group of leaders. I'm moving to Slide 9, 2019 results. And as I begin today's discussion, highlighting the results, my introductory comments will at least acknowledge that our world is confronting the greatest health threat of this generation. First Merchants entered this crisis in a position of strength. 2019 was a strong year as we generated record net income for the year totaling $164.5 million, reflecting strong underlying performance across all of our businesses. We've delivered consistently strong results and are confident we'll continue to do so in the future, though it should be expected that our earnings will continue to be impacted by current events in 2020. Other key performance highlights in 2019 include: we achieved earnings per share of $3.19; total assets grew by 26% to -- over 2018 to $12.5 billion. Each of our lines of business grew revenue and net income for the year with organic loan growth of $507 million, a 7% increase over 2018. Organic deposit growth increased by $979 million, representing a 12.6% growth rate. In addition, we expanded our midwestern marketplace, all while maintaining credit discipline and a strong balance sheet. Our performance was once again recognized and ranked within the top 5 by Forbes on their 2020 list of America's best banks. Forbes ranks the top 100 largest banks based on 10 metrics related to growth, profitability, capital adequacy and asset quality. We'll take a more complete look at our balance sheet and income statement in a few moments. On Slide 10, we completed the acquisition and integration of Monroe Bank & Trust during the second half of last year, expanding our customer delivery into Michigan through 20 banking center locations in 2 counties. The Monroe Bank & Trust franchise is a leading market share institution in Monroe County, adding $1.1 billion in deposits, $733 million in loans within their $1.3 billion balance sheet. Their strong leadership team and our shared focus on relationship banking mirrors the First Merchants culture. The positives: a contiguous geography, market share leader, strong wealth business, deep wealth team, consistent senior leadership led by Tom Myers, a Monroe Bank & Trust veteran now working at First Merchants through our Chief Banking Officer, Mike Stewart. Advancing to Slide 11. Now as First Merchants Bank, former Monroe Bank & Trust, customers are enjoying expanded product and service offerings, network and access to capital. You're looking at a sample of our external messaging, which features the message, "Same great people, same great service." And I move back to the financials on Page 12 with our assets, and Slide 12 highlights our year-end 2019 assets. We ended the year with $12.5 billion in total assets, an increase of 26% over '18. As I highlighted earlier, the increase includes organic growth in loans of $507 million to a total of $8.5 billion loan portfolio that's well diversified and continues to produce strong loan yields. Monroe Bank & Trust, as mentioned earlier, accounted for $733 million of loan growth. Investments increased by $963 million or 59% and totaled $2.6 billion at year-end, strengthening our liquidity position and providing a portfolio yield of 3.23%. On Slide 13, total deposits equaled $9.8 billion as of year-end, increasing by $2.1 billion or 26.9% during 2019. Of the deposit growth total, Monroe Bank & Trust added $1.1 billion. The corporation's loan-to-deposit ratio now totals 86% and loan-to-asset ratio of 68% provides us with fortress levels of liquidity. Slide 14. The corporation's total risk-based capital ratio equaled 14.29%. Common equity Tier 1 capital equaled 12.13%, and tangible common equity ratio totaled 10.16%. All capital ratios are above both the regulatory definition of well capitalized as well as our internal targets, which are providing capital strength and flexibility. Slide 15 highlights that net income in 2019 grew to $164.5 million, which included $13.7 million or $0.21 per share of onetime charges related to the acquisition of Monroe Bank & Trust. Net interest income totaled $356.7 million for the year, an increase of $17.8 million or 5.3% in the face of net interest margin decline of 31 basis points to 3.69%. Yield on earning assets declined by 1 point totaling 4.78%, and the cost of supporting liabilities increased by 30 basis points and totaled 1.09%. The impact of fair value accretion on margin declined from 16 basis points in 2018 to 12 basis points in 2019. Noninterest income totaled $86.7 million for the year, a $10.2 million, 13.4% increase from 2018. Customer-specific line items accounted for $10.4 million of the increase in total noninterest income. Customer-specific line items drove the improved revenue include growth in derivative hedge fees of $2.9 million, fiduciary and wealth management fees of $2.7 million, card payment fees of $2.2 million and service charges of $2 million. Noninterest expense totaled $246.8 million for 2019, a $26.8 million increase from 2018. Of the increase, merger-related expenses totaled $13.7 million. Our team completed 2019 producing strong financial results that reflect aggressive market coverage as well as our entry into the state of Michigan. As shown on Slide 16, our first quarter 2020 results were reported on April 23, included net income of $34.3 million, 2 strong months followed by March, heavily impacted at the beginning of the COVID crisis. Total deposits equaled $9.9 billion as of quarter end, an increase by $1.8 billion or 22.8% over the same period in 2019. The corporation's provision for loan losses totaled $19.8 million, while net charge-offs for the quarter totaled just $582,000. The allowance for loan losses totaled $99.5 million as of March 31, 2020, up from $80.9 million as of March 31, 2019. The provision increase of $18.6 million or 22.9% reflects our view of increased environmental credit risk related to the COVID-19 pandemic and its potential impacts. Nonaccrual loans totaled just $15.6 million as of quarter end, and so our allowance plus fair value marks on acquired loans totaled 1.54% of total loans. As of March 31, 2020, corporation's total risk-based capital ratio equaled 13.8%, the common equity Tier 1 capital ratio equaled 11.58%, and the tangible common equity ratio totaled 9.91%, a strong balance sheet that serves as the foundation for our balance sheet capital. Moving to Slide 17. First week of March brings change. And while our profitability levels were negatively impacted by margin compression and provision for loan losses, the strength of our fee income business has provided a positive contribution to earnings. We believe our pretax preprovision earnings remain best in class. First Merchants remains well positioned to weather the volatile storm. We are resolute in our focus on supporting our employees, customers and communities. I'm focusing my remaining comments on the issues that relate to the current crisis and in the year-to-date environment. We're taking excellent care of our employees. We're going to extraordinary lengths to help our consumers, our commercial clients and local governments. We're actively supporting our communities. We're developing our plan to get our teams safely back to the office and our banking center lobbies opened. On Slide 18, we're taking excellent care of our employees. Times like these reinforce that our employees are our most important asset. They're fundamental to the vibrancy and success of our company, excellence in everything we do from operations and technology to service, and reputation depends on the abilities and character of our employees. During the pandemic, we've taken extensive measures to protect and support our employees and their families. All employees received an additional 10 paid days off to help manage personal needs, which may include their own or household health issues, child care or other issues. Our HR team partnered with our health provider in providing information and assistance around full person health issues, including full coverage of COVID-related expenses. We quickly amended our service delivery model and closed our banking center lobbies with continued drive-through service and in-person meetings by appointment to support social distancing recommendations. Nearly 50% of our employees are working remotely, supporting client needs and administrative functions. They continue to operate at the highest standards with the tools required to effectively, safely and seamlessly serve their clients. We quickly implemented the degrees of separation model to support -- defining how we support employees and their teammates who may have been exposed to the COVID-19 virus. And we have -- and where we've had a potential employee exposure, we've developed tiered processes for enhanced deep cleaning efforts. For those employees working on site, we've reinforced both basic and enhanced personal and office hygiene measures to keep them, their colleagues and our clients safe. We've also intensified nightly and daily cleaning of all locations that remain open. And perhaps most importantly, we're regularly communicating with our employees via conference calls and emails. While conditions may sometimes be unusual and difficult, we're functioning smoothly. It's amazing how quickly we mobilize working remotely and other resiliency measures. There are great lessons to be learned from this experience. I'm going to move to Slide 19. First and foremost, we're prepared to operate under adverse circumstances. During this crisis, we've been utilizing our disaster recovery sites and plans to support alternative working environments and support. We acknowledge and appreciate the swift and supportive actions of the U.S. Department of the Treasury and the Federal Reserve have taken to mitigate the economic impact of the COVID-19 crisis. The Paycheck Protection Program included in the CARES Act, and generally referred to as the PPP, offers significant support for businesses and has demonstrated about the swift use of the appropriated funds. First Merchants has funded over 4,500 PPP loans, representing over $900 million to businesses. First Merchants is and has been a preferred SBA lender. Client demand for PPP loans required and received herculean efforts from a significant portion of our company from customer-facing sales teams through most of all areas of the company. First Merchants rose to the challenge. In addition, our commercial business bankers and banking center managers proactively talk with their customers to learn about their needs, and offer assistance through flexible offerings of financial support to include loan modifications. The corporation has received requests for over 1,700 modifications on commercial loans totaling over $800 million and over 550 modifications in consumer loans totaling $50 million. In addition to which we've been active with economic injury disaster loans while introducing technology answers, such as enhanced new remote deposit capture and wire modules that have been provided to business clients for a specific duration without any monthly fees, emphasizing our digital banking access. Our consumer teams quickly rallied to develop programs for consumer customers by offering relief measures to support their financial struggles, such as offering deferral programs for personal, auto, home equity and mortgage loan payments up to 90 days without any impact to their credit report or incurring fees, emergency personal loans with delayed payments for 90 days, overdraft insufficient fund waivers and maintenance fee waivers, CARES Act and stimulus check resources for consumers. As the environment has quickly shifted, our need to protect our employees and customers through social distancing measures was quickly supported by reminding our customers about our digital capabilities to check their account balances, deposit checks and make payments, as we continue to provide cash and support through our vast network of over 25,000 fee-free ATMs through our partnership with MoneyPass. Since early March, we've been regularly communicating with our customers via e-mail and continue to provide regular updates and resources on our website to include education on new COVID-19 scams and fraud educations to protect and provide prevention measures. Moving to Slide 20. There's a tremendous amount we do day-to-day in addition to traditional banking to help the communities in which we operate. I'm proud to share that on April 24, the First Merchants Board of Directors supported and we announced a $1 million First Merchants community pledge beyond our traditional philanthropic support. The new and incremental investments we'll make communities throughout our footprint will be focused on human services organizations, emergency management services and local community foundations who provide frontline basic needs and food to those most impacted in our communities. Chief Banking Officer, Mike Stewart, along with our regional presidents are working side by side to identify these organizations and to quickly get funding into the hands to support those most impacted by COVID-19. Advancing to Slide 21. Banking industry was deemed to be an essential industry, and as such, we have not closed. So in most context, we really don't reopen. And yet as we seek normal delivery channels, we're looking forward with safety first and foremost. First Merchants, like most every business, is working hard to develop a back to the office plan that addresses a myriad of perspectives. Providing personalized and confidential service in a social distancing environment is just one of those challenges. Be assured that our goal is to ensure our employees are safe and our customers are safe. Their trust and confidence that we will do what's right will help us move forward positively and effectively. I'll end on our value proposition, which is the next slide, highlighting earnings strength, liquidity strength, capital strength, along with consistent execution. We're well positioned for this challenge and for the future. In closing, humbling to lead an organization that has such a positive impact on all of our communities. The resiliency of our employees and our customers is a testament to the strength of the human spirit. The transformation of our business to remote work drive up consumer business and serving our customers through the processing of loan modifications and Paycheck Protection Program loans in the thousands are spectacular. I'm very proud of First Merchants and our entire company. And now I'd like to turn the meeting back over to our Chairman for closing remarks.

Thanks very much, Mike. Now we will, as is customary, open things up for shareholder questions if any. Are there any?

Chuck, I do have a question. It came in during the call. It was how is the SBA lending with U.S. government support at First Merchants progressing. And I think I answered that in some regard. I shared a couple of volumes. As the caller might know, there continue to be funds available. And as such, we continue to take applications. I feel like our entire franchise and our entire client base has been given the education around the program, although the rules for it have changed through time. It's really been quite smooth, and I think it's going to provide a meaningful lift for those recipients of the loans to provide them payroll funding at least through 8 to 10 weeks.

Thank you. Well, to all the shareholders on the call, that concludes this year's Annual Meeting of Shareholders. It's my great pleasure to be the Chairman of your company. Thank you for your participation and investment in First Merchants. We very much appreciate your trust in us. Thank you, and good day.