Good day, ladies and gentlemen. Welcome to First Merchants Corporation First Quarter Earnings. Before we begin, management would like to remind you that today's call contains forward-looking statements with respect to the future performance and financial condition of First Merchants Corporation that involve risks and uncertainties. Further information is contained within the press release which we encourage you to review. Additionally, management may refer to non-GAAP measures which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains financial and other quantitative information to be discussed today as well as a reconciliation of GAAP to non-GAAP measures. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions would follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mark Hardwick, Chief Executive Officer. Thank you. Please go ahead.

Good morning and welcome to the First Merchants first quarter 2022 conference call. Thanks for the introduction and for covering the forward-looking statement on Page 2. We released our earnings this morning at approximately 8 A.M. Eastern Standard Time. And hopefully, you have the slide presentation. If not, you can access the slides by following the link on the second page of the earnings release. On Page 3, you'll see today's presenters and our bios to include President, Mike Stewart, Chief Credit Officer, John Martin, and Chief Financial Officer, Michele Kawiecki. Page 4 is a snapshot of the First Merchants geographic footprint and some relevant financial highlights for your review. Our Q1 return on assets of 1.26% and return on tangible common equity of 15% continue to be reflective of a high-performing and sustainable business model. Now, if you would turn to Slide 5. Net income totaled $48.6 million or $0.91 per share equaling the same total as Q1 of 2021. However, excluding PPP income, our Q1 2022 earnings per share totaled $0.88 compared to $0.78 from last year, an increase of nearly 13%. Loan growth, excluding PPP, totaled 7.2% and deposit growth totaled 5.4% for the quarter. Our acquisition of Level One closed on April 1, 2022, and our system integration is planned for the third quarter of this year. Consistent with our vision statement of enhancing the financial wellness of the diverse communities we serve, we introduced a new tagline, helping you prosper. Our testing of various options resulted in this final version due to the primary emotion of curiosity that it sparked in our test audience. So we're excited to have rolled that out and to start using it consistently throughout the footprint. Now, Mike Stewart will provide some color on our lines of business and Level One before Michele and John review our financial and credit data.

Thank you, Mark and good morning to all. As you look at the next two slides, I'll provide an update on our line of business results and their contributions within the quarter, since our business strategy remains unchanged. On Page 6, let's focus on Page 7 business highlights. The top of that page offers a breakdown of the core loan growth by our business units. It was another solid quarter of active engagement with our clients and prospects that delivered an annualized growth rate of more than 7%, excluding the PPP loans. The growth rate was 8.5% over the past 12 months. Within that chart, you see the consumer portfolio contracted by 1% but has increased throughout the past year by 2.5%. The quarterly decline can be attributed to HELOC products with the increase in home values, coupled with first mortgage refinances, Fed repayments, and reduced utilization. Our consumer clients continue to have strong credit profiles and good liquidity. As shown in the bottom chart, deposit balances grew in the quarter by 7% as we continue to gain accounts through both traditional banking centers and digital capabilities. At the end of March, the consumer loan pipeline is up 6% from the end of 2021 and up over 25% from a year ago. Back on the top of that chart, the mortgage portfolio grew near a 20% annualized rate. The drivers of this increase come from continued strength in construction and purchase volumes with more of our clients choosing our on-balance sheet variable rate pricing options given the rise in the 10-year treasury and the resulting rise in fixed rate alternatives. Michele is going to review the noninterest income detail, where you will see the mortgage gain on sale was at a low point as overall mortgage originations are down. The pipeline for our mortgage team ended the quarter modestly higher than the end of December and slightly down from the prior year. Purchase and rehab volumes are nearly 60% of the current pipeline which is up 30% from a year ago, reinforcing that macro slowdown in refinance volumes. Our total non-PPP commercial loan portfolio grew at a 6% annualized rate within the quarter. As noted in those bullet points down below that chart, the C&I growth rate was 10% on an annualized rate. The total commercial growth was muted by refinancings within our investment real estate segment. Investor real estate footings have been choppy the past four quarters based on the current historically low cap rates and liquidity in the secondary market. Our real estate clients are taking advantage of these values and monetizing projects for their liquidity or taking the project to the secondary market to lock in those long-term fixed rates. Our team continues to deliver new project financing and with construction draws picking up pace during the spring and summer, growth in this segment is expected for the balance of the year. The C&I segment remains the growth engine in this quarter and for the past four quarters for that matter. The primary drivers in this segment continue to be our team and our markets. Our commercial team is actively engaged in winning new clients, taking market share, along with providing additional senior debt and treasury services to our existing clients across all the geographic markets you see represented on the map. Within those geographies, businesses are expanding plant and equipment to meet growing demand. We have continued to see capital plans for new equipment and expanded manufacturing sites to meet their growth plans or to onshore more of their production capabilities. Another driver of the C&I loan growth is the increased revolver commitments and utilization rates, both of which are growing to support the working capital associated with the increasing sales and inventory levels. During the quarter, revolver commitments increased over $125 million to new and existing clients and the utilization rates of the revolvers moved closer to 45%. This compares to line utilization of 38% in the first quarter of 2021. Revolver commitments have increased nearly $600 million over the past four quarters. So overall, businesses have deployed their PPP liquidity and therefore, their line usage and deposit levels are moving back towards normal levels. The quarterly decline in deposit which is noted on the bottom of the chart, decline yet the total commercial deposits over the prior year continue to increase. Last, for the Commercial Industrial segment, succession planning events within the ownership of middle market companies continue to be a driver for our sponsored finance teams or through dividend recaps and ESOP transactions. We have expertise with all these strategic capital events. The economic and business climate across those markets is very good. We continue to see the resiliency in the management teams of companies we serve. They have solid business plans and balance sheets, they are well positioned for growth and they can continue to effectively navigate supply chain and labor issues. Our teams remain poised to respond to their capital needs and the commercial pipeline remains stable from prior quarters and should be a harbinger for continued C&I loan growth. Overall, the map you see on the top left portion of the page also represents the demographic of a growing economic environment. It's the heart of the Midwest, that drives our continued growth and offers a stable source of talent to lead our business efforts across all of our lines of business. As Mark said earlier, I want to make a few comments about our new Level One teammates and the markets they serve across Southeast Michigan and Grand Rapids. I continue to spend time in their market with their teams and with their clients. I really get energized each time I go there, I was there last week. They have a strong culture and a demonstrated track record of winning. Terri Cable has moved to Farmington Hills to lead the integration efforts and build on the synergies between the Level One franchise and our existing Michigan franchise in Monroe. Terri is an accomplished executive who most recently led our Fort Wayne team post our IAB acquisition five years ago when she joined First Merchants from Chicago. Greg Wernette, who led Level One's commercial banking effort, will continue his leadership role as Region President of that geography and work directly with Terri. I have witnessed Greg and his commercial bankers in action, again, meeting with their clients and prospective clients and they are an impressive group. They're like many of First Merchants commercial team. They're smart, they're active, they're engaged. They want to win. They are connected in their communities and they're truly ready to leverage the larger balance sheet offered by our partnership. Their commercial loan business grew over 7% the past quarter and they have a healthy pipeline heading into the second. The Level One mortgage team is building early synergies with the legacy FMB mortgage team. If you remember, Level One's mortgage results were of similar size to First Merchants. Tim Mackay is now fully engaged as President of First Merchants Mortgage, the combined team. Tim served as Level One's President and offers the stability to the Level One mortgage team and brings the enhanced processes and platforms to the First Merchants team. Tim is off to a great start. The consumer team is eager to gain access to the enhanced product sets currently offered by First Merchants and are making headway towards the August integration event. Renee Marino will continue as the market leader of the 17 banking centers. She is well respected with their current Level One team and within the First Merchants consumer leadership teams. Renee is also off to a great start. So the collective organizations, we've got a lot of work to do between now and integration. But that said, we have a stable core of banking professionals leading our daily efforts and are poised to continue winning in Southeast Michigan. So with that, I'll turn it over to Michele, who can provide you with a more complete review of our quarter results. And John can share the soundness of our portfolio.

Thank you, Mike. Good morning, everybody. My comments will begin on Slide 8, covering first quarter results. We are pleased to report another quarter of strong balance sheet growth, which you can see on lines 1 through 5. Deposit growth returned to a more normalized growth level, as you can see on line 4, once we get past the forgiveness of the remaining PPP loans, which had a period-end balance of $49 million. Liquidity management should normalize as well, where we are funding loan growth with our deposit growth and cash flow roll off from our investment portfolio. Reported earnings per share for the quarter on line 23 was $0.91, which was the same EPS in the first quarter of 2021. As Mark mentioned, excluding the income from PPP loans, earnings per share this quarter was $0.88 and $0.78 in Q1 of 2021, which is EPS growth of 13% year-over-year. EPS in the prior quarter, which was the fourth quarter of 2021, without PPP fee income was $0.84, so we had $0.04 of core earnings growth over the prior quarter. You will see on Line 17 that net income totaled $48.6 million, an increase of $800,000 from prior quarter despite declines of $1.7 million in PPP fee income which also demonstrates our strong operating leverage. Like many of our peers, we experienced a decline in the tangible common equity ratio which you can see on Line 6 and the tangible book value per share on Line 24 of $1.95 or 7.7% during the quarter due to changes in unrealized gain/loss on available-for-sale securities. This takes me to my next slide, Slide 9 which shows our investment portfolio highlights. On the bottom right, you can see we did shift to an unrealized loss on the mark-to-market of the available-for-sale securities portfolio of $101.3 million. For comparison, last quarter, we had a gain of $75.9 million. We designate half of our investment portfolio as held-to-maturity to provide quite a bit of capital protection from this mark-to-market adjustment. We mostly tend to hold our bonds to maturity, only selling select securities and we think there's an advantage to be gained. So we don't expect to realize what are currently unrealized losses in our income statement in the near future. The top right graph shows the trend in the portfolio yield. The yield on the portfolio increased by 4 basis points during the quarter and the purchase yield on new securities is approximately 3.5%. Slide 10 contains highlights of our loan portfolio. In the bottom left corner, you will see the stated first quarter loan yield declined 14 basis points from last quarter to 3.73%. Excluding the impact of PPP loans, loan yield was 3.64%, a decline of only 6 basis points compared to the prior quarter, which was driven by the consumer portfolio. Yield on new and renewed loans increased from 3.14% last quarter to 3.22% this quarter, an increase of 8 basis points. On the bottom right, you will see $6.4 billion of loans or 68% of our portfolio are variable rate. As of quarter-end, we had active loan floors on 24% of the total loan portfolio, so about $2 billion in loans and nearly all of those will grow out of those loan floors with the next 50 basis point increase, which we expect in May. The asset sensitivity of our balance sheet will create a meaningful increase in net interest income given the forward curve. Slide 11 shows the details related to our allowance for credit losses on loans. On the bottom of the slide is a roll forward of our allowance balance. During the quarter, we had charge-offs of $500,000 and recoveries of $1.1 million which on a net basis, increased the allowance balance modestly and we did not book any provision expense this quarter. Therefore, the ending allowance for credit losses on loans was $196 million. The coverage ratio trend is shown in the graph on the top left. Our coverage ratio at the end of Q1 is 2.09%, down from 2.11% from the prior quarter. Excluding PPP loans, the coverage ratio is 2.10%, down from 2.14% last quarter. So our coverage ratio continues trending down as our portfolio grows. Now, I will move to Slide 12. Although total deposits increased by $173 million during the quarter, total interest expense on deposits continued to decline and was down $1.3 million compared to prior quarter. On the bottom left, you will see our company's cost of deposits declined from 18 basis points to 13 basis points, mainly due to the repricing of a large deposit in January. Slide 13 shows the trending of our net interest margin. Line 1 shows net interest income on a fully tax-equivalent basis of $108 million. When you back out noncore interest income items such as fair value accretion, shown on Line 2, and the impact of PPP loans shown on Line 3, our core net interest income totaled $105.1 million, which is shown on Line 4. Compared to the prior quarter total of $101.7 million, the increase in core net interest income was $3.4 million. State and net interest margin on Line 7 totaled 3.03% for the quarter. Adjusted for fair value accretion and the impact of PPP loans brings us to core net interest margin of 2.97%, which is shown on line 10, an increase of 5 basis points from last quarter's core NIM of 2.92%. We had NIM growth of 9 basis points but it was offset by a reduction of 4 basis points from a lower day count during the quarter. Last quarter Q4, we hit our margin bottom and we saw a great increase this quarter and we'll see meaningful increases each quarter going forward, driven by the Fed rate increases. On Slide 14, noninterest income totaled $25.9 million for the quarter, with total customer-related fees of $23 million which was consistent with last quarter. Although there were two meaningful variances to note in the mix of revenue sources, mortgage banking revenue declined compared to last quarter due to lower origination volume. Offsetting that was an increase in card payment income. During the quarter, we recorded annual card volume incentives of $2 million. Card swipes in the first quarter of the calendar year are always a bit lower than the fourth quarter due to seasonality but tend to pick up in the second quarter. Moving to Slide 15. Total expenses for the quarter totaled $72.3 million which was $100,000 less than Q4 expenses. Although expenses were well managed this quarter, we do expect quarterly expense levels to trend a bit higher than this quarter, primarily due to increases in salaries and benefits, and we will also incur transaction costs from our Level One acquisition in the second quarter. Slide 16 shows the strength of our capital ratios. Tangible common equity ratio at the top of the page declined to 8.31% this quarter which is a bit below our internal target as a result of the mark-to-market unrealized loss flowing through accumulated other comprehensive income and equity that I mentioned in my earlier comments. Given we had $196 million in the allowance for credit losses which adds to our balance sheet safety and soundness, we feel comfortable with the current level of TCE. Regulatory capital ratios on the bottom of the page which exclude the impact of unrealized gain/loss on investments continue to remain at very strong levels and above our targets. Overall, our financial results reflect strong fundamentals for the quarter and we are very pleased. That concludes my remarks and I will now turn it over to our Chief Credit Officer, John Martin, to discuss asset quality.

Thanks, Michele and good morning. My remarks start on Slide 17, where I'll highlight the loan portfolio, including segmentation, growth and industry concentrations, provide a bridge for the PPP loan program and finish with a review of asset quality and the nonperforming asset quality roll forward before ending with a few high-level comments about the current environment. Turning to Slide 17. The loan portfolio consists of a diversified commercially oriented portfolio with concentrations consistent with those segments of the economy found in our geographies. I've provided loan growth bridges for both the quarter and year-over-year on the right side of the slide. In the quarter, when excluding the $58 million of PPP paydowns, the loan portfolio grew $165 million or 7.2% annualized. We've experienced broad growth in commercial and industrial loans, including our sponsor finance business, construction lending, public finance, and the residential mortgage portfolio, where there's been increased demand in portfolio jumbo mortgages for the reasons Stew had indicated earlier. The PPP program is winding down with $49 million remaining. Of those, roughly $4 million were in active repayment at the end of the quarter, leaving roughly $45 million to process for forgiveness or other ISP repaid. Given the timing of the applications and our historical experience with borrower forgiveness, we continue to expect that the remaining PPP loans will be substantially forgiven or converted to principal and interest payments this quarter with the trailing forgiveness applications through the end of the year and beyond. Turning to Slide 18; this slide highlights our asset quality trends and position. We continue to have a favorable asset quality profile with nonaccrual loans on Line 1, down slightly. Other real estate increased $5.8 million as we completed the foreclosure of a performing multifamily project. The project had become entangled in litigation and liens and continued to perform until foreclosure was completed and the property moved to ORE. The property is being positioned for sale and based on recent appraisals, a loss is not expected. This left NPAs in 90 days past due to loans and ORE at 55 basis points, dropping down to classified loans on Line 7 or loans with a well-defined weakness. We continue to see a decline in this quarter, down $20 million, and ending the quarter at 1.09% of loans. This is the fourth consecutive quarterly decline in classified loans with credit quality improving across a wide spectrum of loan types, including senior housing, manufacturing, agriculture, and residential investment real estate. Rounding out the slide, charge-off and recovery activity resulted in a net recovery of $600,000. We will look at the components on the following slide. Turning to Slide 19 then, I provided the nonperforming asset roll forward which reconciles the changes in NPAs. On Line 2, we added $4.4 million in new nonaccrual credits in the quarter, the largest was associated with a $2.9 million C&I borrower, including the related owner-occupied real estate. On Line 3, we resolved $4.3 million in nonaccruals. The largest new nonaccrual was a $1.4 million loan to a real estate developer. On Line 5, gross charge-offs were $500,000 and were more than offset by $1.1 million in recoveries. Finally, on Line 7, we added the $5.8 million property I just mentioned a moment ago. In summary, our asset quality position is strong, remains stable. Our commercial borrowers are deploying their liquidity and drawing down further their lines of credit as they navigate through a challenging operating environment, including the ongoing effects of supply chain issues, labor and hiring challenges, and higher commodity and other costs. None of these challenges are unique to First Merchants or its customers, but I believe our asset quality and allowance position us well to work through individual issues and situations as they may arise. Thanks for your attention and I'll turn the call back over to you, Mark.

Great. Thanks, team. On Slides 20, 21, and 22, we just show the trend lines of a number of key items. I'm not going to spend any time on those as we covered them pretty thoroughly last quarter. I will just say that I feel like we are really off to a great start in 2022. You heard all the comments from Mike Stewart and John, we have great loan growth. Michele highlighted the margin expansion and continued expense management as well as just the stability of our capital and credit levels. And then on top of all of that, it's just this exciting new acceleration of our balance sheet that we expect to come from Michigan in the Southeast Michigan market in Level One. Mike Stewart did a nice job of mentioning a handful of individuals that are helping drive our performance in that marketplace. I would just add administratively, they have a team of individuals like Eva Scurlock, who is our Chief Risk Officer, working closely with their Chief Risk Officer, that it's just working hand in hand with our teams. David Walker is helping us get to the finish line as it relates to the integration. Pat Fehring has just been outstanding through this process, and it's an exciting time here at First Merchants. You can hear from the tone and attitude of everyone in this room just the level of optimism that exists around the performance of First Merchants into the future. So with that, I'll stop and open it up for questions.

Your first question comes from the line of Scott Siefers from Piper Sandler. Your line is open.

Good morning. This is Ignacio Gonzalez on for Scott Siefers today. My first question is with underlying loan growth potential and the mix between commercial and consumer, where are your current commercial utilization rates?

Yes. Our current utilization rate is about 45%, as Stew mentioned earlier, up from approximately 37% in the first quarter of 2021. It is trending upward from that low point to pre-pandemic levels. The consumer HELOCs, which have a smaller balance, are currently in the upper 30s.

And then just hopping to my second question here. How many rate hikes do you assume we will get this year? And if you could also refresh our memory, how much would you expect NII on the NIM to expand for each 25 basis points in Fed rate hikes? And how do your assumptions change between the first few hikes in the next several?

Yes. In our modeling, we anticipated a 100 basis point rate hike in the second quarter, followed by two 50 basis point hikes in the third and fourth quarters, totaling $200 million left in 2022. Based on this assumption, our model indicates that net interest income will increase by 8% from last year, attributed solely to rate hikes. This estimate does not factor in any additional growth. Regarding our margin, as previously mentioned, we expect to outgrow some loan floors in the second quarter, resulting in modest margin expansion of about 2 basis points. However, we foresee more significant margin growth of roughly 7 to 9 basis points in the third and fourth quarters. Does this provide clarity?

Yes. And then just my final question here. Looking at expenses, is $73 million a quarter still the right number? And what kind of leverage do you have as pressure increases or if the overall revenue environment does not pan out as expected?

Yes, I would say it would probably be $73 million to $74 million per quarter. It's going to trend a little bit up because of increases in salaries. But we think that really with the growth that we have, particularly with Level One coming in as well that we're going to have great operating leverage and we're prepared to manage the expense levels if need be.

Your next question comes from the line of Daniel Tamayo from Raymond James. Your line is open.

So just a quick follow-up on the margin, Michele. Does that guidance include any kind of increase in accretion relative to the deal? And what would that be? What are you factoring in there?

Yes, it does not account for any growth or accretion from the deal. The accretion we projected when we announced is actually going to be slightly higher than expected. This accretion will contribute positively to our earnings per share, and we anticipate that the accretion from the deal in 2022 will likely be an increase of $0.12.

Maybe putting together the loan growth guidance that you gave on commercial work sounds like you're expecting something similar with the pipeline stable and then consumer perhaps a little bit better given the pipeline being up from year-end and a year ago. Is it fair to assume that the roughly 7% organic growth that you achieved in the first quarter is kind of a floor for what you're looking for going forward, or how are you feeling about kind of the total portfolio growth, I guess, excluding Level One and then if you wanted to bake in what Level One would look like as well?

It's Mike Stewart here, Daniel. I do think that our consistent mid-single-digit to high mid-single-digit loan growth is where we're really shooting for. The pipelines that you referenced do feel stable and good. We're still getting our arms around the quantification of actual pipelines that sit up there in Southeast Michigan but that being said, I get to see the volumes that go through that. I feel good about where the Level One team is already producing. The consumer portfolio in the pipeline, that's a really small book of business, right? Our consumer book of business is $0.5 billion compared to the commercial pipeline of our outstandings that is closer to that $5 billion. So it's a bigger relative growth we get from our commercial teams.

Daniel, C&I is $5 billion. Returning to the margin for a moment, Michele provided a clear update on our current position, which differs somewhat from last call. We are assuming a slightly higher interest rate than we suggested a quarter ago, significantly higher in fact. Additionally, we've reassessed our deposit beta, moving away from the previously established model to align with our current perspective. As Michele discussed the growth expectations, they are evidently more optimistic than what we mentioned last quarter. Regarding loan growth, our comfortable range is typically mid-to-high single digits, around 6% to 9%. We are optimistic that Level One can help us reach the higher end of that range. While I wouldn't necessarily label 7% as a minimum expectation, we are quite confident in our ability to consistently achieve mid-to-high single digit growth year after year.

Thanks for the information. I would like to hear your thoughts on the new securities yields being higher than what you currently have in the portfolio. Does that influence your decision on how quickly you plan to invest your remaining excess liquidity, particularly regarding the securities book?

I feel like we've been putting our liquidity to work consistently throughout this entire cycle and we'll continue to do that. We're thrilled that we're getting a little higher yield with that excess liquidity as well as runoff.

Your next question comes from the line of Damon DelMonte from KBW.

Hope you are doing well today. So first question, I just wanted to circle back on the expenses. Michele, I think you said the core expense base should be in the $73 million to $74 million range. Do you have like a pro forma combined company expectations with Level One getting folded into the mix?

Well, Level One's expense run rate was generally $15 million per quarter and we had modeled 30% cost savings, which we believe is achievable. Our system integration is scheduled through the end of the third quarter. The fourth quarter of 2022 will be the first quarter where you should be able to see that expense savings. If we're running about 74-ish million stand-alone and then add in another 11 or so for Level One, that would give you your run rate post integration.

Okay. So do you expect to have much in the way of savings here in the second quarter or is it all going to really come in the fourth?

Yes. We believe that the savings will primarily be realized in the fourth quarter.

And then when you kind of combine the two balance sheets and you look at your earning asset base, do you have a kind of a pro forma range for what the average earning assets would look like next quarter?

I don't have a pro forma earning asset.

Yes. They have $1.6 billion in loans. The real question is how much of the excess liquidity we've pushed through the bond portfolio.

We're still working through the process of looking to pick through their bonds and figuring out what we'll retain, what we might sell, keeping cash, that sort of thing. So I don't have a final number on that at the moment.

And then on the fee income side, I think, Michele, you noted there was like a $2 million annual bonus payment, the card payment fees. Is that correct?

Right. Yes, that's correct.

If we exclude that and also the gain on the sale of securities, the figure for the first quarter stands at approximately $23.3 million. How do you anticipate that trending throughout the year? What sort of growth could you expect from that?

Yes. I mean, I think that our current level of noninterest income this quarter is a good run rate for the year. We always experience card payment income that's a little bit seasonally lower in Q1 but we also think that we'll have some good growth with wealth management fees, loan level hedges, and so forth. Our current level is a good run rate to use.

Mortgage is seasonally low in Q1 and the card income helps offset that.

Got it. Okay, that’s all that I had for now. Thank you very much.

You’re welcome.

Thank you.

Your next question comes from the line of Daniel Thomas from Stephens, Inc. Your line is open.

Thank you. Good morning, everyone. I am on the line for Terry McEvoy today. My first question, I was curious what you guys are expecting for deposit growth throughout the year?

We're expecting our normalized deposit growth level of about 3% to 4%.

And I guess building off of the rate hike commentary, I appreciate all the info you guys gave on loan floors and asset sensitivity. So kind of building off of that and my previous question, what are you guys thinking for deposit betas this time around through the cycle?

Yes. And Mark had mentioned our models and how we had taken a fresh look at them. Historically, if we use our historic betas from our deposit studies, our betas would normally have been about 30% in the first 100 and then about 40% in the next 200. But given that there's so much liquidity in the system now, we really look at how we think deposit rates will perform competitively. We think that the deposit betas in the first up 100 will be more in the teens, like maybe 15% to 18%, and maybe more around 20%, up to 200. Whether we're on or whether it's a little bit higher or lower, we'll find out once we see how competition reacts and the rates actually come to fruition.

And I guess my final question, you guys gave a lot of great color about the Southeast Michigan market, Level One. It sounds like some really exciting stuff there. So I guess along those same lines, can you guys talk about what activity you're seeing there, what areas of activity or maybe what areas of opportunity that excites you guys the most? Thanks.

Yes. Mike Stewart here again. It really sits front and center with the commercial opportunities. Think about the density of businesses there and the relative size that Level One was in their limited ability to continue to move up market, if you will, or grow with their existing businesses. They were capped at their whole level. I've got to witness firsthand, those clients want to continue to be a part of the Level One infrastructure that the people are excited to be thinking that they can grow with the First Merchants. They've got an active group of bankers, great pedigree. There's a lot of market disruption that you might know about from the past several integrations that have happened there with other organizations, particularly larger institutions; it's been a good source of talent. Something I didn't talk about is Level One doesn't have a private wealth group at all. Our private wealth capabilities are also something that really excites the Level One bankers to be able to offer additional products and services around their relationships, both from a commercial point of view and then how we run through investment management capabilities through the consumer network. Those are the primary excitement points that sit up there.

Perfect, that’s great. I appreciate all the color, and that's it for my questions. So thanks for answering my questions, guys.

Your next question comes from the line of Brian Martin from Janney.

Good morning, everyone. Thank you. My question about deposit betas has already been addressed. However, Michele, regarding the variable rate loans at First Merchants and Level One, could you provide the total amount of variable rate loans? I believe you mentioned a percentage, but I'm looking for the total figure and how much of it is responsive to rate changes.

Yes, they have slightly fewer than us, but I don't believe we have that model aggregated yet. They have a few more fixed rate assets on their loan book compared to us, but I can provide that information to you, Brian.

Yes. I will say their asset sensitivity is really close to our level of asset sensitivity. I don't foresee adding Level One into that trend, that impacting that significantly from ours.

Yes, they were more leveraged than we were. They had a few more fixed rate assets in the loan portfolio. But from an asset sensitivity perspective, very similar to us.

Okay. So the comments, Michele, you made earlier were about kind of legacy First Merchants rather than the combined company on those on your expectations for the rate hikes but the sensitivity is close so it should be a net pretty similar to what you articulated.

Yes, that's correct.

Could you discuss your capital situation? You mentioned being slightly below your target, but that you have safeguarded some capital with your held-to-maturity assets. I would like your thoughts on capital deployment, the possibility of share repurchases, organic growth, and your upcoming transactions.

Yes. We are not actively repurchasing shares in the market. We want to get to the close, see exactly where capital levels land. Some of the noise around the AOCI adds to that assessment. We have incredibly strong capital and allowance numbers. Our expectation is to get through this integration, report our next quarter numbers and then provide a little more clarity as to what's next. We do have some sub-debt that is callable next year, and we're reassessing the hybrid instruments that we have on our balance sheet just to make sure we have the optimal capital stack. But I think we're in a really an incredibly strong position from a tangible common equity standpoint at a level that I really like that produces a higher return on tangible common equity than what we've had in the past. We suggested that, that was going to be one of the priorities going forward about a year ago.

Okay. And maybe just the last question for John. With discussions about concerns regarding a potential recession as we move into 2023, could you share your thoughts on where you anticipate stress might emerge, particularly when you evaluate the potential in the loan portfolio as you continue to monitor it?

Yes. It's interesting, Brian. When I think about potential downside within the portfolio, interest rates are going to impact our borrowers. But we stress and we underwrite so there should be room there. But that's one place. Then you think about higher commodity prices and input costs for anybody who's manufacturing, you're going to see that higher wages or we can start to see running through income statements. Those are the kinds of things. It's really if it unfolds at a rate that our borrowers can adjust and raise prices then it will mute some of the effects, but that's where I see it; it's just kind of early on. We'll see how it kind of all plays out. I think my comment about the allowance gives me and should give others confidence that we've certainly factored it in. Our classified levels are lower than the former history of the company. So right, we're in a great position. But that's not your question. Your question is, where would you see it? And that for me is are those points.

Yes. No, I agree. Guys, you’re in a great spot. So congrats on a nice quarter. Thank you for taking the questions.

Thanks, Brian.

There are no further questions at this time. I would now like to turn the conference back to Mark Hardwick, Chief Executive Officer.

Thank you for attending. We appreciate your investment in First Merchants, your continued interest. As we've said in the past, we're available for shareholder comments consistent with the color that's already been provided. I look forward to talking to you next quarter. Thank you.

This concludes today's conference call. Thank you for participating and have a wonderful day. You may all disconnect.