Q4 2020 First Merchants Corp Earnings Call
Yeah.
Good afternoon, and welcome to the first merchants fourth quarter 'twenty 'twenty earnings call on.
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<unk> first merchants loan and investment portfolios and estimates of first merchants risks and future costs and benefits. These forward looking statements are subject to significant risks assumptions and uncertainties that may cause results to differ materially from those set forth for fall.
We're looking statements, including among other things possible changes in economic and business conditions, the existence or exacerbation of generally to your politic instability and uncertainty.
First off a pandemic or other unforeseeable event day.
For the first merchants to integrate recent acquisitions and attract new customers possible changes in monetary and fiscal policies and laws and regulations the effects of easing restrictions on participants in the financial services industry, the cost and other effects of legal and administrative.
Of cases possible changes in the credit worthiness of customers and the possible impairment of collectability of loans fluctuations in market rates of interest comfort that the factors in the banking industry changes, Cindy banking legislation or regulatory requirement of federal and state.
You didn't see as applicable to bank holding companies and banks like first merchants, a food bank continued availability of earnings and excess capital for fishing for the lawful and prudent declaration of dividends changes in market economic operational liquidity credit and interest free.
Risks associated with the first merchants business and other risks and factors identified in each of first merchants filings with the Securities and Exchange Commission first merchants undertakes no obligation to update any forward looking statement, whether written or oral related.
Going to the matters discussed in this presentation on our press release. In addition, the company's past results of operations did not necessarily indicate its anticipated future results. Please note. This event is being recorded I would now like to turn the conference over to Mark Hardwick see Oh. Please go ahead.
Mhm.
Oh, good afternoon, and welcome to the first merchants here in 2020 conference call.
We released our earnings today at approximately eight a M. Eastern and hopefully you have all found your way to the slide presentation, but if not you can access the slides by following the link on the second page of our earnings release.
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Thank you for the introduction and for covering in detail on forward looking statement, we may have to find a way to shorten that up next time.
On page three you'll see today's presenters and are buying.
Mike Stewart, our newly appointed President John Martin, Our Chief Credit Officer, Michelle caveat being our newly appointed Chief Financial Officer.
On page four we have a nice one day snapshot on our first merchants and a few highlights and accomplishments for your review.
Okay.
Starting on slide five I'd really like to start today by introducing our new with our new vision statement.
Yeah, We believe impactful simply stated our vision is to enhance the financial wellness of the diverse communities we serve.
I love the way it introduces a higher calling on financial wellness into our daily work.
And I'm thrilled to officially add diversity into our banks for vision statement.
To appropriately reflect our values and increasing commitment.
And I'm pleased to officially bring community the community back into this community bank.
This vision will influence how we hire the markets, we serve and how each line of business strives to meet the needs of our client base not to mention driving our philanthropic efforts.
It's exciting to offer our employees a vision statement that improves the lives of our customers through the value proposition that we have to offer now Mike Stewart will cover the remainder of slide five and slide six.
Hey, Thanks, Mark and good afternoon for all I do want to spend my time on this slide and the next updating you on the maturation of our go to market strategies and offer insights to the markets we serve.
We'll start with commercial banking or commercial banking teams have continued to invest in our capabilities to match the needs within our markets.
Leveraging the size of our balance sheet to build out segment capabilities within public finance structured finance, which is working with our private equity sponsors asset base lending and a syndication platform have complemented our industrial real estate middle market Treasury services and small business efforts Miss.
John will offer additional insights to our core organic growth, but achieving a 10% annual loan growth rate in the fourth quarter is directly attributed to our bankers our markets and our expanded commercial bank product capabilities.
As we move into 'twenty and 'twenty, one our pipeline remains at a healthy level.
And even the round two of P. P. P. We're engaged in now and we can discuss that further later.
Our consumer banking team has been leveraging our personal service approach to further educate and activate our digital and online banking products throughout this COVID-19 environment, we have seen an acceleration of the usage of these products and as announced last month, we will further be investing a new and any.
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Mark will talk more about the specifics, but the banking center consolidations announced in December clears, our focus to rebuild our employee client engagement efforts that will be supported by the additional investment in platform.
John will review, our consumer mortgage activities were refinancings, and new purchases remain robust in the Midwest and for first merchants.
Our private wealth team is now fully integrated into each of our markets and bad.
Damian talent across all of the markets like Columbus, and Indianapolis Monster.
Sure we can grow in a balanced and serve.
Banking approach Michel will offer additional insights to the growth of the speed generating line of business.
So you can see with the map on page six it represents both the demographics of the growing economic environment. The heart of the Midwest that drives our growth and a stable source of talent to lead our business efforts are.
Our investments in our commercial consumer private wealth lines of businesses have been received well within all of our markets.
I'm excited for you to listen to Michel's comments about our balance sheet growth or improving margins and operating metrics John will share the soundness of our portfolio on efforts around our deferral on current P. P. P activities and Mark will offer more insight to our planned investment in our digital journey, Mark I'll turn it back to you Greg.
Thanks, Mike.
Now if you would turn to slide seven.
The press release stated we are really proud of our 2020 results given the headwinds the world and the country encountered during the year on our frontline and back office employees guided over 5200 customers through the Paycheck protection program and increased loans by nine 2% more growing deposits by 15.
A half per se.
Our fourth quarter core loan growth of 11, 2% and the announcement of a definitive agreement.
Higher net to acquire those you Trust company will provide strong topline momentum heading into 2021, we even opened a new banking center in the heart of Indianapolis starting 2020.
As we finalized our financial plan for 2021.
Not only did we announced the consolidation of 17 banking centers, but we also laid out a three year roadmap to digitize the bank, we're making significant investments in people and technology to meet the ever changing demands of our customer base and its exciting work.
We also filed an 8-K at the end of business yesterday, highlighting our receipt of Federal reserve and first merchants board approval of a new $100 million share repurchase program with an eye towards driving top quartile returns on equity.
Throughout today's presentation, you'll see strong financial results that ultimately produced $149 million from net income $2.74 of earnings per share and a 1.7% pretax pre provision return on assets Michel will highlight the health of our capital liquidity and reserve position, while sharing our too.
And in 'twenty financial results.
Thanks, Mark My comments will begin on slide eight we are pleased to report earnings per share for the fourth quarter totaling 83 cents, which is shown on line 22, an increase of 16 cents over the prior quarter Mark mentioned the branch consolidation announcements in his remarks charges of $4 5 million well reported this quarter.
Related to the disposition of assets another cost associated with that announcement, excluding those one time charges the efficiency ratio for the quarter was a low 51 six per cent.
Net interest income on line 11 totaled $102 3 million for the quarter, increasing $9 4 million on a linked quarter basis P. P. P long fees accounted for $5 5 million of the quarter over quarter increase is 240 million in P. P. Pes on square forgiven, causing deferred fee income.
As stated with those loans to be recognized in earnings. So $3 9 million of the increase was core net interest income growth, reflecting strong commercial loan production.
Slide nine shows highlights of our investment portfolio for total portfolio grid on the $213 5 million in the fourth quarter or 29% annualized as we continue to put excess liquidity from growing deposits to work the yield on the portfolio remains stable quarter over quarter, earning 2.7.
Eight per cent, which continues to be above peer yield cash flow roll off for the next 12 months totaled $488 million at 1.78% yield. The current purchase yield is 165%. So the overall portfolio yield could decline a couple of basis points over the course of the year, depending on whether investment conditions for.
The same.
On slide 10 in the bottom left corner, you will see that fourth quarter loan yield was a strong for 0.2% excluding the impact of P. P. P loans for the bond yield was $3 96 per cent.
Yields on new and renewed loans in the fourth quarter averaged three point for 2% on.
On the bottom right just alone right next with shows that 62 per cent of our loan portfolio is variable and 38 per cent is fixed with 7% of the fixed rate loans been P. P. P M.
Slide 11 shows the roll forward of our allowance for loan losses balance throughout the year. Our intention was to adopt Cecil on December 31st 2020, with the day one adjustment measured on January one 2020, and the amount of 52.2 million recorded through equity on December 27, 2021 consolidation appropriations.
For signed into law, which prompted the S E T to reach and sit or the day to things could adopt ultimately on January 15th the S. E T announced the banks could adopt on December 31st 2020 or January 1st 2021. However at the time, we closed our books January one 2021, what's the date being considered for FCC.
Therefore, the fourth quarter's allowance and provision expense was measured using the incurred loss method on the top right. You can see that we had the beginning balance of $126 7 million, we incurred net charge offs of 600000 during the fourth quarter and recorded $4 5 million in provision expense, bringing the ending allowance for loan book.
This balance to $130 6 million and the resulting allowance coverage ratio is one point for 1% from 152, when excluding P. P. P loans on the bottom half on the slide I'd like to walk you through our revised cease on day, one adoption impact interestingly the SEC indicated that when adopting Cecil on January one two.
21, the day, one adoption entry recorded through equity should be measured as of January one 2021 as opposed to 2020 because of the current economic forecast has the impact of the pandemic in it and it's not as optimistic as the forecast that we used on January one 2020, which was pre pandemic our day one impact.
<unk> increased from 52.2 million to $74 3 million, which is up 57 per cent increase over the year end allowance balance.
This will bring the allowance for loans coverage ratio to 2.22% our reserve for unfunded commitments in the amount of $20 5 million will also be recorded in other liabilities.
The impact of the capital of the adoption will be a decline of approximately 70 basis points to total risk based capital and 50 basis points to tangible common equity we feel that's robust allowance coverage, reflecting a cautious posture will position us very well heading into the new year on were equal to get the Cecil adoption behind us.
On Slide 12, you will see the favorable deposit mix shown in the graph on the top left with very low levels of time deposits and broker deposits in the fourth quarter. We continued to see dollars on time deposits shift to money market and other non time deposit products on the bottom left you will see the cost of deposits continues its downward trend to 27 base.
At this point in the fourth quarter.
This is a nine basis point decline from the third quarter and a 70 basis point decline from the fourth quarter of 2019 deposit balances grew on an on on an annualized basis over the third quarter contributing to our exceptionally strong liquidity position.
Well I'm one on slide 13 shows fourth quarter net interest income on a fully tax equivalent basis of 100, and 707 million growing $9 7 million over last quarter stated net interest margin on line six totaled $3 three per cent for the quarter.
Justin for fair value accretion and the impact of P. P. P loans brings us to a core net interest margin of $3 13 per cent, which is one basis point higher than the third quarter core margin of $3 12 per cent looking forward to 2021, we expect core margin to remain stable and in line with Q3 and Q4 results.
On slide 14, noninterest income totaled $27 5 million with total customer related fees of $23 3 million service charges on deposits continue to recover incrementally totaling $5 5 million in Q4 compared to the LOE of $4 3 million in the second quarter derivative.
Hedge fees for in a quarterly high of $2 3 million in Q4 gains on the sale of mortgage loans totaled a record $18 3 million for the year with production of 757 million in loans wealth management fees were also exceptionally strong for the year at $23 7 million offsetting the growth in these fees was the impact.
<unk> of Durbin in the back half of 2020, which reduced card payment fees by two to two and a half million per quarter. However card swipes increased more than 10% in the back half of 2020 compared to the first half for the year. So we're optimistic about card usage going into 2021.
On slide 15 total expenses for the quarter totaled $72 5 million, which included branch consolidation charges of $4 5 million, which I mentioned earlier salaries and benefits for elevated in the fourth quarter due to incentive accruals and an increase in health insurance costs.
Setting. These increases was an Oreo gain of $1 7 million on a senior living facility that John Martin will discuss further in his remarks.
Slide 16 shows the strength of our capital portfolio, our capital ratios with the tangible common equity stated at $9 six 5%, but as $9, 99% without the impact of the P. P. P loans, we feel the combination of strong capital ratios, along with robust allowance coverage to loans demonstrates outstand.
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Slide 17 summarizes the financial results for the full year of 2020 as well as prior years.
Asset growth shown on line one was exceptional at 1.6 billion for 12, 9% over 2019, a reflection of the great momentum, we had in loan and deposit production through the end of the year.
The stated efficiency ratio was 51.71 for the year and a low 50.8, excluding the branch consolidation charges exhibiting sound operating leverage.
Finally, I'd like to point out the tangible book value per share growth, a mine twenty-three, which increased a healthy 11% until for prior year that concludes my remarks, I will now turn it over to our Chief Credit Officer, John Martin.
Thanks, Michele and good afternoon, I'll begin my comments on slide 18 by reviewing the loan portfolio and including industry concentrations provided an update on loan modifications.
Touch a little on the Covid sensitive industries in portfolios with a brief update on the PPP loan program, then close by highlighting our year end asset quality position.
So turning to slide 18.
In the quarter, we had $234 million of loan growth led by a roughly $110 million increase in commercial industrial loans.
Activity was strong across the regions and lines of business mortgage loan demand and production remained strong in the quarter as well as the gain on sale as Michel had just mentioned and for the year with continued low rates and a stronger than historical gain on sale percentage.
For the year the payroll protection program was a driver of the C&I production early in the year with roughly $900 million originated and $234 million forgiven in the fourth quarter.
Turning to slide 19, our broken out the CNI portfolio to highlight yeah. Its diversified nature on relative granularity within the overall commercial loans, we continue to grow lines of credit relatively faster than balances with.
With lower line utilization rates compared to the prior year, we would expect to see increased outstanding balances as economic activity increases in working capital demands.
Return to historical levels.
Turning to slide 20, and touching on our relatively limited COVID-19 sensitive industries three.
Three areas that we're focused on include senior housing hotels and to a lesser extent restaurant and foodservice.
Senior living was an area heading into the pandemic debt, we were already focused on with some March markets, reaching saturation with the effects of the pandemic led to certain projects to experience occupancy and then payment difficulties.
On the restaurant portfolio has thus far continued relatively well I believe that PPP program combined with the industry's ability to adjust as well as the nature of our portfolio being skewed towards limited service restaurants.
Has enabled the portfolio to perform relatively well on a challenging environment.
As far as hospitality excuse me hospitality and accommodations are concerned please turn to slide 21, where I've drilled in further on the portfolio. We continue to perform quarterly portfolio reviews on this portfolio and stay close to the operators were $83 million of hotel deferrals of <unk>.
Some form.
This could be principal on interest or principal only depending on the individual situation. We continue to leverage the accounting treatment allowed for under the cares Act, which was extended through 2021 under the economic aid Act.
That said, we when we extend payment relief beyond the period of temporary delay we have been ordering updated appraisal to support values and the accrual accounting we've seen declines in values, but overall, our values have been whole by holding up reasonably well.
While hotel lending is not a significant portion of our portfolio. Our thesis prior to the pandemic had been to finance projects, where there were demand drivers for the project like universities convention centers for our other inherent sources of demand with the slowdown in economic activity related to the pandemic. These projects have.
<unk> been affected.
As a result, we have continued to work with borrowers as they employ a number of different strategies to generate revenue and build occupancy.
So turning to slide 22, you can see the disproportionate level of remaining deferrals concentrated in the hotel portfolio with other modifications spread across a variety of industries and portfolios.
Wrapping up my comments around the pandemic, we continue to participate in the P. P. P program that Mike just mentioned with roughly $240 million forgiven at year end.
With $667 million left to go.
The forgiveness application changes should help our changes that have come out should help to ease the process going forward and we are adjusting our processing software accordingly.
We have also began taking applications for the second drop the P. P loans with fairly strong demand.
Not at the same level as the initial first draw program.
So turning to slide 23, where I cover asset quality overall asset quality remained stable in the quarter, we'd have for $8 million increase in non accruals with a 13 million dollar loan for a senior living facility moving to non accrual on the quarter well aligned to we sold a senior living facility for.
Other real estate owned which had a book balance of $5 $9 million that resulted in the $1 $7 million gain that Michelle just mentioned a minute ago.
Classified loans on line seven were stable at 2.7% of loans down to $8 million charge offs were $600000 for three basis points of total loans for the quarter and $8 $3 million or nine basis points for the year on this slide as a point of clarification I'd like.
To make on line nine to $3 $1 million and for Q 19, and the $8 $3 million that I just mentioned in.
And for Q 'twenty represents full year charge offs, while the three Q 'twenty.
Where charge offs for the entire third quarter.
So then moving forward I show the asset quality roll forward on slide 20 for that connects to the asset quality slide I, just discussed which reconciles. These changes and I would end by just summarizing that charge offs have remained low for the quarter and for the year asset quality has stabilized.
At year end with classified assets leveling out.
There have been increases in non performers are performing loans related to senior housing, but believe for now and not saying that things can't change we have our arms around the magnitude of the issues.
And finally, I'll close by saying that we have our resources focused on delivering new business across regions and business lines that Mike just mentioned delivering P. P. P loans and working with our borrowers who have been affected by the pandemic.
So thanks for your attention and I'll turn the call back over to Mark Great. Thanks, John for you.
Turning to slide 25.
Lights 10 years of.
A number of measures compound annual growth rates.
And total returns representing what we feel are very high levels of performance.
And I know my cracking as tuned in to today's call.
And he should be really proud of the scoreboard and his leadership.
You know it was a it was a heck of a year that we had in a heck of a 10 year run plus for Mike.
You know all of US all four of us presenting today I'm really pleased to have played a role on that success and we're excited about moving from the.
Moving this company forward.
If you turn to page 26.
You know, there's there's an item that I talk about on a regular basis debt that I'm just going to continue to repeat I think it'll be helpful to understand our organization and you know, it's it's really just as a management team. We believe our job is to grow organic loans in the mid to high single digits on an annual basis.
And it's also our job to deliver on efficiency ratio in the low fifties.
And we're convinced that if we make that happen. We believe the market will reward us with competitive trading multiples and those competitive multiples will afford us the currency premium that's required to augment organic growth with smart well priced acquisitions much like the one lump much like the ones that you see on page 20.
Six.
Okay.
Slide 27, and highlight some priorities that will help guide us over the next three to five years.
Not going to walk through all these in detail when we have an opportunity to see folks.
During investor calls on those types of things, maybe we can dig into those details and I look forward to doing that.
And introducing you to this entire management team a little more fully.
But.
You know you can peruse through those in and we're happy to take questions from analysts as well, but first I would just say I'm enthusiastic about our team of professionals our ability to deliver results in the future. It offers all of our stakeholders. So thank you for your attention to the day your investment in first merchants and at this point.
We're happy to take questions.
Yeah.
We will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing for peace.
But anytime Youre question has been interest and you would like to withdraw your question. Please press Star then two.
We will pause momentarily to assemble our roster.
Yes.
Yes.
Yeah.
The first question comes from Scott.
With Piper Sandler. Please go ahead.
Afternoon, guys. Thanks for taking the question.
Let's see I think the first one that I wanted to ask was around P. P. P. I think you've got somewhere around $650 million of the first of all on the PPP loans left how long what's your expectation for how long it'll take to work that balance down.
Just like a negligible level in other words, when I guess would we expect to see net loan growth again and how.
How sustainable is that double digit annualized.
Annualized growth ex PPP that you had this quarter.
Yes, Scott Thanks for the questions and I think John's going to will answer. The first question about what we think of payoffs will look like on the forgiveness process and then we'll have Mike Stewart talk about the growth on top of that.
Hey, Scott.
Yeah.
I'll take the PPP part as Mark just mentioned you know we are really in the fourth quarter saw a significant pickup in the forgiveness and kind of on the right. We're looking now I would expect it to be in the first half of the year.
Robley more weighted to the second quarter than the first.
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Would be my response, we've seen we've got a lot of the links out to the borrowers and we've got a handful right now on a handful we got a number of probably about half of the remaining number.
On that kind of haven't even begun so there's going to be some part that gets forgiven.
Probably again more loaded to the first half of the year and even.
Of those.
Probably.
It's going to probably actually be more likely split evenly between the two quarters.
As I think about it.
[noise] apartment and thank you.
Yes, Hey, Scott, Mike Stewart here, I'll talk a little bit about the organic growth perspective, as you remember from the third quarter, we really didn't show any organic growth.
And then you see a really robust fourth quarter.
So when mark talks about and we've talked about for a long time that mid.
Single digit growth rate that I do believe over a period of time not absolute quarter to quarter.
Is a very achievable perspective, and we've been able to do it and I referenced early on it.
Even with the robust commercial closings in the fourth quarter. Our pipeline sits today at a nice level that makes me feel confident that the first quarter economic activity and engagement level of our bankers and the interest in our capital solutions will guide us into those levels.
And so.
So John to John's point, the SBA has to get the application finalized for forgiveness on the under 150000, which would just happened last week. So that's where I think we can see a speed up on that day.
The other part of it too is we're going to have you know the next wave of P. P. P that second draw a P. P P kind of coming on as well we've seen about <unk>.
To date, a couple of hundred million dollars $190 million of second draw P. P. P activity thus far.
Okay.
Perfect and thank.
Thank you for all that color and then just separate question just on on the expense base.
And what what's your expectation for where things go for.
From this quarter's roughly $58 million or so in in core expenses.
Yeah, I think Scott this is Michel the I think the run rate that we're looking at for 2021 is probably somewhere between $68 million to $70 million a quarter, they're going to run a little bit higher than our 2020 quarterly average because we are investing more in corporate social responsibility items, such as expanding our down payment assistance.
And in expanding our team to increase our service too like the more low income mortgage lending space and.
The savings that we will have from closing our branches is going to be reinvested back into the business for digital investments, which mark can talk a little bit more about but that's the run rate I would use.
Perfect.
Alright, Thank you for.
Yeah, and Scott just on the digital run rate work for really excited about what we're investing in.
Several technologies I know that wasn't specific to your question, but.
Where you are.
Taking a recommendation to our board on February nine for a new online account origination platform that we're excited about.
On the heels of that we're updating our branch platform.
And following as part of this three year journey that we've talked about will be a complete upgrade of our online and mobile banking systems well, while the entire time, we'll be working towards automating not only the front end customer experience, but also the back the back office experience trying to get the throughput.
But all the way from other customers fingers into the core system. So.
On a number of dollar.
People investments and technology investments that are the reason, we're not allowing the latest branch consolidation announcements had just dropped straight to the bottom line.
Yeah.
Okay. That's perfect. Thank you guys I appreciate it.
Yes, Thanks Scott.
The next question comes from Daniel Tamayo with Raymond James. Please go ahead.
Hello, everyone. Good afternoon.
First maybe if we can start on the on the diesel.
The option and kind of what that does to the reserves are you'll have very strong reserves you know as you mentioned around 2.5% or so or even higher depending on what all you include so how are you thinking about the eventual.
Decreasing of those reserves in the path of that back to a more normalized level over time.
Yeah. Good question you know, we'll be at two point, 22% with our day, one adjustment, which is healthy although we do acknowledge there is still quite a bit of uncertainty in the market and so it kind of reflects our cautious nature in terms of provision through the year I mean, that's really going to be dependent upon we.
We use our Moody's forecast in order to develop our models and our allowance range in total it depend on.
You know what Moodys does with their forecast and how much improvement they see through the year I think loan growth, we'll grow into that as well I think our actual loan growth for kind of naturally bring that percentage down also but I mean, I probably share with you mean, our bias is not to book negative provision you know our models if our model dictates that that's what.
We need to be doing we will but hopefully that gives you a little bit of color around how we see it for 2021.
Yeah.
Yeah. That's helpful. Thanks, and then.
Switching gears a little bit here.
Buyback that you announced yesterday.
How are you thinking about utilization of that in terms of timing and or kind of priority.
Yeah, our intention is to be opportunistic.
We're glad that we have available.
We want to use it.
Yeah wisely.
And our view generally is when as long as we're trading below our historical averages of price to earnings or price to book. It's a it's a good time to be in the market and when we're trading above those levels that it's probably a good time for us to stay on Bakken and.
And be more opportunistic so.
It's a good number for us.
On the heels on about $75 million.
For a purchase program that we completed in the first quarter of last year. So.
Glad to have another one in place and.
That's at least how we're thinking about using it at this time and our intention is to communicate with our board once a quarter and kind of reestablish our views going forward.
Yeah.
Okay, Great I appreciate the color.
Thank you Daniel.
The next question comes from Terry Mcevoy with Stephens. Please go ahead.
Hi, good afternoon, everyone.
Hi, Terry maybe.
Maybe just start with with John you know, we're really not seeing much if any C&I loan growth out of your peers and I know you've kind of said it was broad base last quarter, but I was hoping you could expand on any markets that stand out or any specific injuries industries stand out in terms of what was behind the growth from the fourth quarter.
Yeah.
I'm going to actually point out Mike Stewart, who as you know.
Were really the driver of that business.
Look at some of the originations that we had they came out across both the regions public finance the sponsor business.
And Steve I don't know if you want to contribute to kind of the names.
A broad base.
Execution and some of that back to John Slide 19, when you see a couple of hundred million dollars up line commitment growth, even when utilization doesn't increase youre getting a pickup and that's coming from core net.
Margin C&I revolving lines of credit and we win that business often because of their.
<unk>.
What their future business models needs are.
Additionally, we were opportunistic with a winning on the backside of round one of PPP was some of the larger banks that stumbled on their execution.
The company's debt shows first merchants as their next generation bank.
When we put together the sponsor group structured finance that group was really slow this time last year as we went into the COVID-19 environment, but as capital and access to their capital.
And their abuse inside acquisition strategies the execution on those really picked up in the fourth quarter in particular and still looks good.
We put that asset based lending.
Overlay capability, how even afraid that actually a while ago positioning ourselves a little can share into a market downturn and for those companies that need access to greater of bank capital who might not have the traditional underwriting perspective, we've got an ability to meet their needs as well investment.
Real estate.
We've been very focused and consistent in that underwriting of that market is really really sound.
So we have a lot of construction projects that are just funding up in that regard so.
Blockbuster broad brush across the board on all markets.
Thanks for that Mike and then maybe a question for Mark It seems like there could be a real opportunity for first merchants in Michigan given.
Given the potential for market disruption.
Given the pending merger you know any plans on playing more offense in either southeast, Michigan or maybe expand a bit more on the state.
Oh, we definitely have plans to.
For me on offense, we acquired a really nice franchise and Munster, Indiana Armstrong Monster in Monroe, Michigan.
With over $1 billion of core deposits, but we think there's a great opportunity for us to continue the strategy that we really put in place at the time on the acquisition to grow the commercial management team.
And then from an M&A perspective, we love to have our acquisitions.
It's close to home as possible, we think it allows for greater execution and so the Michigan market is one that we continue to look at for ways to augment the franchise that we've that we've already acquired and are continuing to build on the Michigan market.
That's great. Thanks, everyone.
Thanks, Jerry Thank you.
The next question comes from Damon Delmonte with <unk>. Please go ahead.
Good afternoon, everyone hope everybody's doing well today.
On my first question.
Yeah. My first question regarding the margin outlook again, Michel I was wondering if you could just kind of revisit your comments and some other puts and takes around the expectations on the core margin as we go forward.
Sure. Yeah. So you know I mean, low but rates are challenging and we certainly have seen a margin drop in 2020 as a result, but I think core margin in 'twenty 'twenty, one should be stable, assuming the competition continues to be rational with loan pricing.
He stated margin. However, you know will move around depending on the P. P. P fee income recognition and fair value accretion, but you know we ended at 313 for core margin this quarter in I feel like that's something we should be able we're working on work hard to defend in 'twenty and 'twenty one.
Okay.
And then did you say that you were.
The cash flow is coming off the securities portfolio that was around for the 400 and something million dollars.
Yeah $488 million is the cash flow roll off over the next 12 months and that's at a pretty low yield Fortunately at 178, and so although we're not we're buying at 165 to day, you know, we still won't see much erosion there.
Got it Okay, and then with regards to your outlook on fee income.
Can you give a little perspective on on your on your thoughts on that.
Yeah, certainly you know I think Q4 fee income is a good run rate for 'twenty 'twenty, one the increase to it will be the acquisition of Who's Your trust and so we think the Who's Your trust acquisition will close.
Maybe at the beginning of the second quarter.
So you know I think annualized fees from does your trust should be one and a half million in so obviously that'll be a little bit lower in 2021 for a truncated here.
Got it okay.
That's all I had thank you very much.
Youre welcome Thanks for everything.
The next question is a follow up from Scott Cyphers with Piper Sandler. Please go ahead.
Hey, guys. Thanks for taking the follow up maybe Michel a lot of moving parts in the margin I just want to make sure I'm working toward the right place what would you guys consider sort of a steady state reserve that will be working back down towards are you sort of a post diesel but.
Pre COVID-19 type level in other words once we get through the pandemic, where does the debt reserve sort of settle itself out as a percent of loans.
Yeah, you know I mean, our reserve pre pandemic and even pre C. So I think that historic run rate once we get past the pandemic is probably what we would look to as being normalized.
And so I mean, I'd, probably use that as a guide them even with sea. So you know we have always looked at the economy and and taken that into consideration.
In developing our reserves.
Perfect. So then.
And then I guess, you guys were down around like around 1% in fourth quarter of 19 would it go would go down that low or does seasonal just structurally keep it keep it higher.
I think seesaw will structurally keep it a bit higher yeah.
Okay.
Do you feel like we're entering.
Entering 2021, let's say as of one one for the really strong healthy reserve after the day one adjustment.
So our hope is that the economy continues to improve and that we have very little pressure for provisioning moving forward yeah.
I will say one other just point of information you know we use we've run a number of the Moody's scenarios and when we ran the baseline scenario, which is kind of what we anchor to your I mean, we did one in developing our day one we did lean a little heavier on a downside scenario to develop that day, one just because of all the uncertainty in a moody said.
Record in unpack stimulus and different things like that and so I think that's a good data point and as we see things clear up.
Think that will take some pressure off for us to feel like we have to maintain these levels.
Yeah.
Okay, and then where I I know it's.
Clearly it sounds like Theres, not a not a lot of.
Need for provision almost period, right, now, but where where do you see net charge offs trusting and when would that be is that sort of a second half of 2020 P.
Peak, how are you guys thinking about that.
Yes, Scott I think.
We've got some probably coming with some of the non accrual senior facilities that we have we've got.
Serves against.
Those names that I think will for.
Flow through so it's going to be right now as I see it it's probably going be concentrated in the first half of the year first quarter, we'll probably have a slightly elevated charge off and just from what I can see maybe.
Abating, a little bit more in the second quarter.
Okay, and then I mean, I guess, where given that your charge offs are basically zero, what's the correct.
So that.
Reasonable range to think about.
Well I would say based on what our current provisioning levels are which said we did what $5 million for.
For $5 million in the <unk>.
In the fourth quarter, its probably at that about that level, maybe higher weighted a little bit lower.
That's what I can see today.
Yes.
Makes sense, okay, great. Thank you.
Thanks Scott.
The next question comes from Brian Martin with Janney. Please go ahead.
Hey, good afternoon.
Good afternoon, Brian.
Hey, just a couple of easy ones for me just the just going back to credit for one.
For John I guess just on the.
They've criticized levels.
Are there any material change there in the quarter John on on there.
Net.
Yeah, we did see actually.
Couple of things, we did see an increase in the criticized levels as things moved out of the sub standard car category and actually upwards and we did have some other names that as we deferred it.
Did some deferral for actively moving grades downward as well so we have a fair amount of debt.
Kind of migrated into that category, but.
It's kind of just what you would expect out of appropriate grading with respect to deferrals and you know the activity, we're seeing related to COVID-19.
Okay Perfect and then just the last two just on maybe for Mark or whomever, but just on kind of the capital deployment and I know you talked about the buyback just any commentary at all on.
Your your model being organic and M&A, just kind of M&A discussions today or just how how activity is on that front for you guys today.
Alright activities is okay, I mean I.
There are a handful. Thanks I felt like it was important to us reach out to given the change in leadership that we've had.
But they're just relational.
I do I mean, obviously you can see there are more acquisitions being announced and so it feels like the market is beginning to open up and yes, we'd love to think that we could announce something in 2021 I have a hard time imagining that at whatever we find something that would close that quickly.
But.
No. It's always been part of our strategy and we will continue to be part of the strategy on a go forward basis.
Okay, Alright, and then just maybe lastly.
Loan pipelines today, I guess that maybe if you can maybe I missed it. If you guys gave any commentary on that but just kind of I know your goal I guess kind of a stated goal, but just kind of where the pipelines are today relative to where they have been here the last quarter or two.
Yes, Michael Jordan again.
Consumer mortgage pipeline is remains at an all time record. So that's that's a positive consumer is pretty darn flat.
To where it was this time last year, that's a seasonal approach the commercial side, while down from where we were at the end of the third quarter is up when you look at things on a year over year basis in some prior quarters, but so that's why I feel comfortable with where we would be heading into the first quarter.
And we track a little bit earlier pipeline in.
In the commercial business too just to give a more forward look on that early pipeline remains debt.
Some really high levels for us so.
We just got to get the pull through rates and get the structured credit.
Okay and line utilization, Mike how is that I guess.
The slides if I missed it I don't.
Yeah, you know you might want to look at line on page 19.
You'll see on the bottom right hand side, that's the commercial on.
And then on the consumer portfolio on our HELOC. Thanks, exactly net utilization on the consumer portfolio is down to 42% has been historically a highest 48.
Okay.
We had some low marks.
I was just kind of mad dog on build on that though I think when you look at the line utilization and we've had a lot of internal discussion around it we continue to see her 19 in the bottom right hand corner the absolute increase in the lines that we're making available to customers. So we continue to see strong request for those lines.
Back to the comments I don't know if you.
Had an opportunity to join us earlier, but day.
We would expect as economic activity picks up in working capital demand returns hopefully that gets back to where it was from say <unk> 'twenty or at the end of.
Last year.
Thanks for that.
Okay. Thank you for taking the question.
Yes, Thank you Brian Thanks, Brian.
This concludes our question and answer session I would like to turn the conference back over to Mark Hardwick for any closing remarks.
Thank you.
We appreciate everyone's participation and we look forward to another strong quarter in and.
Talking to you 90 days from now so have a good good rest of your day and evening. Thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
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