Q4 2022 First Merchants Corp Earnings Call
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
[music].
Yeah.
Good day.
And thank you for standing by welcome to the first merchants Corporation first excuse me fourth quarter earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question answer session.
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Please be advised that this conference call is being recorded.
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 it.
Issuing 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 reconciliation of GAAP to non-GAAP measures.
I would now like to turn the call over to Mark <unk> CEO . Please go ahead.
Well good morning, and welcome to the first merchants fourth quarter 2022 conference call.
Lisa Thanks for the introduction and for covering our forward looking statement on page two.
We released earnings today at approximately eight a M eastern time.
To access todays slides by following the link on the second page of our earnings release.
On page three you will see today's printers.
<unk> and our buyers to include President, Mike Stoehr, Chief Credit Officer, John Martin Chief Financial Officer, Michele Caveats kit.
Page four is a snapshot of the first merchants geographic footprint and some relevant financial highlights for your review.
I'm excited to share our results with you today, given our strong performance in 2022 to include a clean fourth quarter that requires no adjustments related to our April 1st acquisition of level one arm.
Our message should reflect my appreciation towards.
Our clients and our teammates for delivering a very good year.
We also hope to establish a baseline through our Q4 results that allows for effective modeling around an optimistic 2023 inclusive of the realism required given the industry headwinds.
Now if you turn to slide five.
Net income totaled $70 3 million for the quarter.
Baird to $47 7 million in the fourth quarter of 2021, our reported EPS for the fourth quarter totaled $1 19, without any required adjustments compared to Q4 2021 of 89.
A 33% increase.
Organic growth in loans of 11, 8% for the quarter and another 18 basis points of core margin expansion over Q3 of 22, but the drivers of our EPS improvements.
This performance resulted in a 159% return on assets and a 24, 2% return on tangible common equity for the quarter.
The year to date results.
Our EPS totaled $3 eight one switch equaled last year's total of 381. However, this yours.
Results had $27 7 million less PPP income.
Then last year and $33 3 million more acquisition expense than last year's.
Earnings per share when adjusted for those two items, which totaled $60 million.
Our year to date 2022, EPS totaled $4 in 'twenty, which is 24, 3% better than 2021 was total of $3 38.
Fueling the improvements for the full year for once again loan growth, excluding our acquisition totaling 13, 9% and core net interest margin expansion of 34 basis points, Mike Michele and John will provide some color on the loan portfolio. Its makeup pricing and <unk>.
Areas of growth later in the presentation now Mike will cover pages six and seven.
Thank you Mark and good morning to all.
As you look at the next two slides I will provide an update on our line of business results and their contributions within the quarter.
Since our business strategy on page six remains unchanged I want to focus on page seven titled business highlights.
The top of the page offers a breakdown of the core loan growth by our business units. The fourth quarter represented another excellent quarter of organic growth nearly 12% in aggregate with the commercial segment growing over 10, 5% the.
The results continue to demonstrate the close working relationship between our team and our markets.
As discussed in prior calls.
We strive for high single digit growth rates and as noted on the right hand side of this chart. We achieved those levels for all of 2022, the commercial segment over eight 5% the consumer segment over 95% the mortgage segment close to 60%.
As footnoted.
These are organic results adjusted for PPP and the day, one balances of the level one acquisition.
But I do want to spend more time on the global loan results specifically the dollar increases behind the percentages on this page.
As noted on slide 11, the commercial segment represents 75% of our total loan portfolio.
The 10, 6% fourth quarter growth rate in commercial was approximately $240 million or 70% of the total fourth quarter loan growth of $345 million.
While the consumer segment contracted this quarter by three 1% that dollar amount is less than $7 million.
The mortgage portfolio growth during the quarter was approximately $100 million versus the prior quarter growth of $190 million. My point is the commercial segment continued to be the loan growth engine of the bank.
All segments demonstrated solid growth rates and John Mark is going to talk more about the detail of our portfolio later in the presentation.
Let me go into the drivers of commercial loan growth in the fourth quarter there are threefold.
New business activity is first and foremost our teams continue to win new relationships across the geographies and across all segments up focus.
Our team alignment puts them in the best position to win we.
We have alignment with our credit partners and we have alignment on market coverage.
I shared several quarters ago, we added key staff within certain markets to augment our existing teams.
This people investment was within asset based lending upper middle market and syndications and all are contributing alongside our existing team.
The second driver of growth was from our existing clients capital for expanded plant and equipment working capital growth and acquisition financing remained active through the end of the year.
And the final driver is line utilization, specifically within investment real estate, which is construction draws and the C&I line utilization inched up 1%.
Overall, we have maintained a consistent and disciplined approach towards underwriting with all of these segments.
And the commercial pipeline ended the quarter consistent to prior quarters.
Moving on to the consumer segment loan balances contracted by 3% as the second bullet point notes. The 7 million dollar decline is attributed to the private banking footings with.
With the rise in interest rate certain clients reduce balances with excess investments or lower earning deposits.
On the contrary home equity balances continued to increase during the quarter, which is correlated with increasing home values average utilization on that portfolio has not changed.
And across all our consumer our underwriting approach remains unchanged.
Additionally, the consumer loan pipeline remains consistent with prior quarters.
So let me touch on the mortgage segment. The 24, 2% growth rate was approximately $100 million. The aggregate mortgage portfolio is now just over $1 8 billion or 15% of the total $12 billion loan portfolio.
Again trying to highlight the emphasis on commercial the driver of the quarter and year to date increases in mortgage comes from the continued strength in purchase volumes with more of our clients choosing our five and seven year adjustable rate product offerings.
Our underwriting standards remain unchanged here prime borrowers.
With how low housing inventory high oil prices and higher mortgage rates the mortgage pipeline ended lower for the fifth consecutive quarter.
I want to speak to the deposit section on the bottom half of this page.
The quarterly decline of one 4% continues an improving trend.
Last quarter, we reported a three 7% deposit contraction, which was less than the eight 2% deposit contraction reported in the second quarter.
Consumer deposit balances increased for the quarter at a four 1% annualized rate.
The consumer team continued to gain new accounts through both in branch and digital online activities.
Additionally, our consumer relationships have responded favorably to our new money C D and new money market promotions.
As noted in the first bullet point the commercial deposit decline is primarily from the public funds sector. The decline in this segment is simply from municipalities or School Corporation looking for the highest marginal deposit rates across the competitive landscape.
Additionally, many business clients continue to utilize excess liquidity on their balance sheets for higher returning activities like acquisitions plant expansions or dividends.
Michele has more details to share about our balance sheet, our expanding margin along with greater details of our other key performance metrics to Michele Thank you Mike.
Comments will begin on slide eight covering fourth quarter results.
You can see on our balance sheet on lines, one through five that we continue our trend towards a more favorable earning asset mix.
Total loans on line, two which Mike covered in his remarks increased $344 1 million or 11, 8% through organic growth during the quarter, which was offset by PPP loan forgiveness of $6 5 million to arrive at the $337 6 million you see it in the variance column.
Deposits decreased $52 1 million during the quarter and investments online three decreased $31 million I will add some additional color on our investment balance later in my comments.
Our loan to deposit ratio continued to trend up and was approximately 83, 5% this quarter compared to 81% on a linked quarter basis and 72, 7% in prior year.
Earnings per share for the quarter totaled $1 19, which reflects our bank strong performance pre.
Pre tax pre provision earnings totaled $83 8 million this quarter, a 9% increase over last quarter, when excluding acquisition costs.
Rising yields on earning assets offset somewhat by higher deposit costs drove higher profitability. This quarter, which is reflected in the increase in net interest income on line 11.
Of $8 6 million over prior quarter.
Non interest income on line 14.
Climbed by $5 5 million due to a large bully gain recorded in the third quarter.
Adding to the quarter over quarter profitability was lower noninterest expense, which declined $6 $7 million, bringing our net income on line 17 to $70 8 million, an increase of nearly 7 million over Q3 or 11%.
Our stated efficiency ratio was 48, 6%, but excluding the lingering acquisition cost of 400000 that were recorded in the fourth quarter. The efficiency ratio was $48 three 7%, reflecting excellent operating leverage.
The tangible common equity ratio on line six.
Increased 68 basis points.
And tangible book value per share online 26 increased $2, a 19% or 11%, reflecting the strong earnings from the quarter as well as a meaningful recovery in the unrealized loss valuation of the available for sale securities portfolio.
Slide nine shows our year to date results.
Slide 25 shows year to date earnings per share of $3 81.
Which on a stated basis equals earnings per share for 2021, as Mark mentioned nonrecurring items had a meaningful impact on earnings so when excluding acquisition costs.
<unk> provision and PPP loan income EPS for 2022 totaled $4 in 'twenty.
And 2021 totaled $3.38 for an increase of 24%, reflecting strong core organic growth and profitability and the contributions of the level one acquisition.
Pre tax pre provision income year to date was $289 million, an increase of $47 6 million or 20% over prior year.
Keep in mind that the prior year pretax provision income included $31 million of PPP fee income compared to just $3 2 million in 2022, so year over year the core growth in P. T. P. P was significant.
Slide 10 shows highlights from our investment portfolio.
Okay.
On the top right you can see the yield on the portfolio remains stable given we arent reinvesting in bonds, although the total portfolio balance only declined $31 million from last quarter. The portfolio actually declined $130 million from Paydowns maturities and sales of bonds bond sales during the quarter.
Totaled 82 million, which netted to a very small gain of less than 100000 is our portfolio manager continues to find opportunities to sell bonds without realizing any meaningful losses.
$130 million decline was offset by an increase in the valuation of our bond portfolio of $96 million.
On the bottom right you can see we had a net unrealized loss on the mark to market of the available for sale securities portfolio of $296 7 million at year end, which compared to $392 5 million in Q3, which reflected a nice recovery.
On the bottom left you will see the cash flow, we expect to receive in 2023 of 360 million, which includes cash from principal and interest payments maturities and expected bond sales. The bond portfolio will continue to be a strong source of liquidity to fund our loan growth through the year.
Slide 11 contains the highlights of our loan portfolio.
In the bottom left corner, you will see the stated fourth quarter loan yield increasing substantially up to 80 to up 82 basis points to 558% from last quarters yield of 476%.
On the top right I noted the yield on new and renewed loans, which also increased significantly from 496% last quarter up to 610% this quarter, an increase of 114 basis points.
On the bottom right you will see 8 billion of loans or 67% of our portfolio are variable rate with 40% of the portfolio repricing in one month and 50% repricing in three months. So we will continue to see meaningful increases in interest income from the loan portfolio as the fed continues to.
Kris rates.
Slide 12 shows the details related to our allowance for credit losses on loans.
We did not record any provision expense during the fourth quarter. As a reminder, the provision expense recorded year to date was to establish the day, one Cecil allowance associated with the acquisition of level one.
During the fourth quarter, we had net charge offs of $3 4 million, which brought the ending allowance for credit losses on loans to $223 3 million.
The coverage ratio trend is shown in the graph on the top left our coverage ratio at the end of Q4, and this is 1.86% down from 194% at the end of Q3 due to strong loan growth.
This reserve coupled with the remaining fair value accretion of $31 million, which gives us some additional coverage for acquired loans provides great credit protection given the uncertainty of the economic environment.
Now I will move on to slide 13.
The total cost of deposits in the bottom chart shows costs increased by 46 basis points up to a total cost of 92 basis points, reflecting the competitive pricing environment.
Our interest bearing deposit cycle to date beta at year end was 29%, which was up from 20% last quarter competition for deposits continues to increase and we expect our deposit beta to increase in response.
Slide 14 shows the trending of our net interest margin.
Line, one shows net interest income on a fully tax equivalent basis.
$155 3 million.
When you back out non core interest income items, such as fair value accretion on line two and the impact of PPP loans shown on line three our core net interest income totaled $152 5 million, which is shown on line four.
Compared to the prior quarter total of $143 1 million the increase in core net interest income was $9 4 million, reflecting our higher loan yields.
Stated net interest margin on line seven totaled $3 seven 2% for the quarter.
Adjusting for fair value accretion and the impact of PPP loans brings us to a core net interest margin of 365%, which is shown on line 10, which is an increase of 18 basis points from last quarters core NIM of 347%.
The tax equivalent yield on earning assets increased 62 basis points and cost of funding only increased 45 basis points.
On slide 15.
Noninterest income totaled $24 1 million for the quarter, which was down $5 5 million from last quarter recall that we recorded a $5 3 million bullet gain in the third quarter that elevated our total noninterest income in Q3.
Customer related fees this quarter totaled $21 9 million, which was relatively stable in all categories from prior quarter, although gains on the sale of mortgage loans remained at a modest level. This quarter mortgage loan production is still strong despite fourth quarter lower seasonal purchase trends.
Is 217 million in loans were originated this quarter.
We retained approximately 80% to 85% of these loans in the portfolio and sold the remainder in the secondary market.
Moving to slide 16.
Total expenses for the quarter totaled $89 7 million Q4 included just 400000 of lingering acquisition cost. So this is our first quarter with a normalized expense run rate and reflects the achievement of our cost savings goals associated with the acquisition of level one.
This was $6 7 million lower than third quarter. His third quarter included $4 million of acquisition and severance costs.
Core compensation related expenses were a bit lower than last quarter as we refined our incentive accruals and we recorded 700000 of gains on sales of property, which offset expenses.
Our low core efficiency ratio reflected on the top right shows that we continue to achieve strong operating leverage even while we invest in technology and talent to grow the business.
Slide 17 shows our capital ratios.
Although the tangible common equity ratio remains below our target we saw great improvement this quarter.
The declines in tangible common equity that occurred during the year were due to accumulated other comprehensive income changes from the market valuation of the available for sale investment portfolio can be use of cash in the acquisition of level. One as I mentioned earlier, we recovered $96 million in other comprehensive income from the bond portfolio valuation.
Quarter that along with strong organic earnings created nice capital build.
Considering these capital levels, along with 223 million in allowance for credit losses, we feel great about the safety and soundness of our balance sheet moving into 2023.
Overall, our financial results were exceptionally strong this quarter and for the year 2022, reflecting the hard work and dedication of our first merchants teammates.
That concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin to discuss asset quality.
Alright.
Excuse me, Thanks, Michele and good morning, My remarks start on slide 18, where I highlight the loan portfolio, including segmentation growth and composition I'll comment on the updated portfolio insight Slide then review asset quality and the nonperforming asset roll forward before ending with a couple of.
High level comments on the environment.
So turning to slide 18 in the quarter, we experienced strong commercial loan growth as stew mentioned, a moment ago originated by our middle market lending team, which for US are companies with revenue generally between 10 and $500 million within this space the greatest growth occurred in the manufacturer.
And wholesale trade sectors.
<unk> real estate increased to $108 million on line five bringing our balances back closer to where they were in the second quarter and finally, we moderated the pace of portfolio residential mortgage growth as we shifted back to a more originate and sell model adding.
Adding $89 million after several very strong quarters of portfolio growth.
So after quarter of 11, 8% loan growth.
And combined annual organic loan growth of 13, 9% or $1 $3 billion for the year the composition between CNI non owner occupied CRE at investment or excuse me and residential mortgage loans remains in balance and substantially similar to what it was.
At the beginning of the year.
So turning to slide 19.
I have updated the portfolio inside slide here, where we slice the portfolio of several different ways to provide additional transparency into its composition.
Starting with C&I. The classification here includes sponsor finance as well as other excuse me as well as other owner occupied CRE associated with the business.
Our C&I portfolio is represented of our markets and thus has a concentration in manufacturing of 18% of the portfolio. Our current line utilization as stew mentioned, a moment ago remained relatively stable at 41% up from roughly 42% that provided historical utilization.
Levels for reference.
We participate in roughly $700 million of shared national credit balances across various industries with an average exposure of roughly $10 million. We also have $70 million of SBA guaranteed loans, which includes $5 million of remaining PPP loans.
Diving into the sponsor finance portfolio, there are 65 relationships roughly with 76% of the borrowers having a senior cash flow leverage of less than three times and 79%, having a total debt to cash flow leverage of less than four times.
76% had a fixed charge coverage ratio of greater than 1.5 times, which resulted in our current portfolio classified loan ratio of only four 2%. We review the individual names in this portfolio quarterly for changes, including leverage cash flow and <unk>.
<unk> condition.
Moving to construction finance, we have limited exposure to residential development and are primarily focused on one to four family non tracked individual build residential construction loans, it's a mouthful.
For commercial constructions, we continue to have a bias towards multifamily construction with a sub concentration of student housing.
Moving down to consumer residential mortgage the portfolio consists of primarily prime originated residential and consumer loans. These include HELOC and he loans.
And to a much lesser extent <unk>.
<unk> branch originated auto secured and miscellaneous other consumer loans.
In summary, the portfolio has a balanced mix of what one might expect from a Midwest bank with mortgage consumer a sponsored finance and investment real estate businesses.
Turning to slide 20.
As in previous quarters. This slide highlights our asset quality 10 trends and current position. We continue to have a favorable asset quality profile with nonperforming loans on line six at 42 basis points of loans down from 44 basis points. The prior quarter classified loans on line seven or.
Those loans with a well defined weakness increased roughly $8 billion to $215 million or $1, 79% of loans, which remains comparable to pre pandemic levels.
Then finally, we had net charge offs of $3 $4 million in the quarter in the fourth quarter, we had a single borrower charge offs of $2 $8 million related to a third quarter 2021 non accrual loan.
We continue to pursue potential recovery strategies strategies. The account is now fully charged off.
Then finishing up on slide 21, where we roll forward the migration of nonperforming loans charge offs already in 90 days past due.
For the quarter non accrual loans went down $1 $2 million on line six with the charge off just mentioned and the resolution of $4 $8 million of other non accruals this quarter.
This included the demonstrated performance and consistent payments from a prior year non accrual account the amount of $1 2 million and the resolution of various other non accrual accounts all under $500000 individually.
Given the continued strong environment, we've been able to balance the migration of new nonperforming loans against the resolution of existing nonperforming loans, making.
$200000 of improvement in the quarter on line 13, and only an increase of five $8 million for the year. After we added $9.4 million of level, one non accrual loans.
So overall borrower results have continued to remain stable despite higher prices and interest rates I would say that while higher interest rates have had an impact interest rate stress is built into our underwriting and the borrower's ability to.
<unk> excuse me adjust either or both pricing and expenses has thus far buffered much of the impact.
As one might expect it is financially weakest customers consumers and commercial borrowers who are being affected most and as always we mitigate the environment by making sure. We continue to monitor the portfolio for timely issue identification.
The implementation of risk mitigation strategies I appreciate your attention and I'll turn the call back over to Mark for his remarks.
Well thanks John .
22, you can see we've made some adjustments to the CAGR.
We are just looking back 10 years, probably a more relevant post recession timeframe, which reflects really strong performance as evidenced by a number of the graphs you can see earnings per share CAGR during that period is 10, 5%.
Adjusted CAGR for the Aoc eye on tangible book value per share is nine 3%.
And the return on tangible common equity across the board in the double digits.
If you turn to slide 23, again, we adjusted for a 10 year time frame.
Our 10 year asset CAGR, which does include acquisitions is 15.3% inclusive of the eight acquisitions, you'll see you or to the right.
Shelby County was included in the rest of the year and four three so.
<unk>.
Strong growth in AR.
The best thing about our growth rate and improving from 4 billion to $18 billion, we love that.
Fact that we have the ability to take care of more customers with a larger balance sheet I think we're an even greater attraction point for talent and.
There is opportunity for growth in this company.
We're growing organization and we continue to.
To create.
If you look on the next slide.
24, it's just a reminder, the vision.
The mission statement, the our team statement and our strategic imperatives of which we use to guide our decision making.
Lisa.
Yes.
We're happy to take questions at this time and just thank everyone for their attention.
Okay. Thank you if you like to ask a question. Please press star one on your telephone.
While we compile the Q&A roster.
The first question I have is coming from Scott cyphers of pipe.
Please go ahead your line is open.
Good morning, everyone. Thank you for taking the question.
Just the first question was on expectations around the margin maybe Michele.
Just thoughts on where we go from here, maybe best to think about it in terms of the $3 65 core margin I guess.
And then as a follow on more broadly on NII do you feel like you can continue to grow NII sequentially from here as we look throughout 2023.
Yes, good morning, Scott.
I think looking at net interest margin, particularly for Q1, we.
Has assumed that we get two additional 25 basis point increases one in February and one in March and so looking for Q1.
I think we would expect to see another six or so basis points of net interest margin growth.
You had mentioned looking at a 360 you know the one thing that I do want to remind everybody of is that given there are a couple less days in Q1, there is always a seasonal headwind on margin for us given our commercial orientation and so that always ends up reducing our margin a couple a few basis points and so we would still expect to see net interest margin increase even.
Netting that impact out of a few basis points in Q1.
Perfect.
Thank you and then.
Thoughts on.
Ability the company's ability to continue to grow NII sequentially.
At least with some margin expansion.
It should give you a little lift, but just overall thoughts would be would be welcome.
Yeah sure. So for our net interest income for Q4 looking at like 149 million stated $155 million on a fully tax equivalent basis I would expect Q4 23 net interest income to be a good run rate on average for 2023.
Where are we revisited our deposit beta assumptions and as a reminder, our historical deposit beta was 41%.
Our assumption is that we will get up to a 40% deposit beta in Q1 and get up to 50% deposit betas later in the year and so we're being fairly conservative I think in our outlook, but we think that it is going to be competitive and we want to be prepared for it.
Okay, perfect and just to make sure I heard correctly, so it sounds like.
What you just posted the fourth quarter 'twenty to NII, we should sort of average that.
For 2023, and that's where you think things will flush out.
Yeah, that's correct I mean, I do think we will see net interest margin compression later in the year because of the deposit betas, increasing but I think we can offset that with our loan growth.
Perfect. Okay wonderful thank you very much.
Thank you one moment, while we prepare for the next question.
The next question is coming from Daniel Tamayo of.
Excuse me Raymond James I'm, sorry.
Hi.
Thank you good morning, everyone.
Maybe.
Just following on the net interest income discussion.
The.
Expectation do we may get a decline in rates at some point, possibly at the end of the year have you been making any changes to the.
Sensitivity of the balance sheet to perhaps mitigate that or is the asset sensitivity kind of the same as or.
Similar to what it's been prior.
Yes, we're not.
Making any real any I guess.
Meaningful change, where we continue to look at protection.
Protections in the bond portfolio.
Against future falling interest rates, but.
Or have the liquidity to fund loans, there's not a lot of flexibility to make adjustments.
If we didn't need that liquidity, you could probably move in and out of some sectors and make some changes, but we feel like we have a model that works and.
In both interest rate environments.
And as we've assessed things like macro hedges et cetera.
It just seems prohibitive to us.
Understood Yep.
And then I guess just.
Switching gears here to to reserves, obviously you've been.
Having a provision of zero here for quite a while now just interested in your thoughts on on when you think you may have to start providing for loan growth or maybe where the that reserve ratio stabilizes here.
Yeah, we don't expect to have to take provision in the near term we are modeling a mild recession and our see some models currently.
But each quarter, we will continue to evaluate coverage with our loan growth and particularly if we see any credit events occurred during the quarter, but.
No plans in the near term.
Okay. Thanks Michele.
I'll step back thanks for answering my questions.
Thanks, Dan.
Thank you one moment, while we prepare for the next question.
The next question is coming from Terry <unk> of Stephens. Your line is open.
Hi, Thanks, good morning, everyone.
Good morning, Terry Hi.
Hi, maybe just start with your outlook for expenses as you think about overall wage inflation and then the.
The uptick in FDIC costs as well.
Yes, I'd be happy to do using the Q4 stated expense level as a base.
We would expect probably mid single digit growth in expenses say, five or 6% I think that would accurately capture the inflation that we're all experiencing and also some investments in technology and people as well as that FDIC increase that you mentioned.
Okay.
And any comments on banker or customer retention at <unk>.
Level.
Mike Stewart here I'd.
I'd say overall has been pretty stable.
Banker stability, there's been some moving in some moving out banking.
Banking centers stability.
Starting to see.
New business activities in some of the portfolios. So I call. It overall pretty stable, meaning or attributed Mike Stuart's way, which is kind of where I would expect to be.
Less than two quarters post integration with an outlook that I think we're in a good position to take advantage of.
Maybe one more if I could squeeze it in Mark your comment in the press release caught my eye that the earnings power is pretty easy to Digest. When you look at the quarterly results and as a former CFO I can ask you. The question was what exactly really stands out to you as being that kind of a source of power. There's a lot of things that go into earnings power.
Love to just get your view as we kind of think about 2023.
Yes happy to do what I was really pleased to have.
I would look forward to I guess I should say and I was pleased by this quarter's result, where we have fully digested.
Our last acquisition and I think you can see the earnings power in our numbers and really it's just the fact that historically, maybe we give guidance of mid to high single digit growth rate.
Like we always achieve those objectives and you can go back a number of years and we've had good success I love. The team that we have in place I love, how hard they work and the impact they tried it.
To make with our customers.
I think our balance sheet is well hedged.
Yeah.
I didn't mention if rates come down we end up just with a nice natural hedge.
Our mortgage portfolio, a little bit with our derivatives.
The loan level hedges that we sell to our customers.
So I look at our income statement.
Our balance sheet I think we have a growing balance sheet on the asset side, we have an awesome core deposit base on the consumer side.
Feel like our margins are fairly easy to understand.
And fairly predictable.
And I feel like even though we are investing in the business, which is exciting to everyone. Here, we continue to add talent.
We continue to invest in technology.
Net we're able to do it in a way that still produces 50 low 50% efficiency ratio and this quarter was 48% so.
There are always headwinds in the business or <unk>, they migrate back and forth and my view is.
This is a bank that has consistent consistent performance over time.
Some of those things are a little bit like the weather you wake up and see it snowing is raining sought out but I'll tell you what everybody on our team they get after it regardless of what today it looks like and so I just feel like we have a team that works are producing results and it's pretty easy to see.
And our and our financials, especially in a quarter like Q4.
Appreciate that thanks, everyone have a nice day.
Thanks, Terry Thanks Derek.
Thank you one moment, while we prepare for the next question.
Our next question comes from Damon Delmonte of Kate.
Debbie Your line is open.
Hey, good morning, everyone I hope, you're all doing well today.
Just wanted to.
Just wanted to circle back on the provision outlook commentary Michele.
Obviously, the reserve is quite healthy and you guys have.
<unk> been quite clear on on your desire to kind of grow into a normalized reserve level.
If you could ballpark that like ultimate level that would that might be helpful is there a way you could kind of quantify that.
Well I think what I would do is probably go back and think about like our day one.
Seasonal adjustment that we would have had before the pandemic hit and that would've been around I think it was a coverage ratio of maybe one 5% if I recall.
For your modeling that without a mild recession, you get to a more normalized level.
And that May have been a little higher maybe one three to one 5% would have been about a more normalized range.
Okay got it and then obviously if you factor in a mild recession and you want to have a little bit more cushion for that.
Yeah, Yes, and since we've adopted so it's been pretty turbulent.
Yes.
Statement over the last couple of years Mark.
Yes.
Sure.
And then I guess my next question just kind of from a modeling standpoint, how should we think about fair value accretion going forward Michele.
I think fair value accretion looking at this quarters for value accretion, which we do try to give you transparency to that I think that's probably a pretty good run rate.
Okay, Great and then just lastly kind of bigger picture Mark.
Now that you've digested level one.
Look at your competitive landscape across the upper Midwest there.
How do you guys feel about M&A at this point do you feel like it's.
Something that you would look to engage in again or do you feel that the organic opportunities throughout your footprint are so strong that you're content with just kind of focusing internally.
Yes, we're really excited about having a year, where the focus is all internal.
And there.
We will continue to call on the banks that we think might fit first merchants swell and enhance our growth rates in the future, but at least in 2023.
It feels like.
This team is really focused on just an internal year I have some of our folks that I talk about Hayes.
Hard to get bigger.
And M&A perspective and better.
And this is and we'd love to be able to do both all the time, but I think the reality is after absorbing a bank the size of level one.
Focus needs to be on internal enhancements and getting better every day. So we've got a couple of key initiatives, we're working on including.
An upgrade in our online banking and mobile platform.
And a number of other things I won't get into them all but we just think it makes the bank better and prepares us for the next acquisition.
Great. Thanks for all the color today guys.
With all that I had.
Thank you Dana and thanks Damon.
Thank you one moment, while we prepare for our next question.
Our next question will come from Brian Martin of Janney. Your line is open.
Okay.
Brian are you may be on mute, we can't hear you.
Alright, Thanks, Mark I apologize good morning, everyone. So just wanted to touch base on the funding side as funding loan growth. This year just wondering what your thought is there. It sounds like there is still some utilization from the bond book can you just kind of as it pertains to deposits and the loan to deposit ratio as you kind of go through the year.
Yes.
I think we're going to see some deposit growth as I said, we have revisited our deposit betas, and we will get competitive even more competitive.
To help fund that loan growth and I think that coupled with the cash flow from our bond portfolio I think that should those those two funding sources.
Zinc will cover us.
Okay, and as far as what you're kind of targeting on the loan to deposit ratio, where where do you kind of see that as well.
Work through the year.
Joe I don't recall or the budget number is.
Yes, it's moving up.
We kind of have long term targets, we'd like to see it around 93% 94%.
We don't get there this year I think it I think maybe we were at 88% if I recall.
Hi, just a general trend.
I can always followed back up but in general you expect it to move up from where we are here and just see that combination.
Yes, yes, okay perfect and then just the other two for me was Michele it sounds like the margin.
From your commentary prior peaks, maybe second quarter and then <unk>.
Given kind of what Youre talking about maybe the margin may be slipped a little bit there are certain third quarter that in general fair how to think about it.
I actually think will peak in the first quarter and then I do think that we could see some compression in the quarters thereafter.
Gotcha. Okay. This is debate is picking up okay.
It's helpful and then just.
The run rate or just kind of the level of fee income today, it seems like pretty good level and it just builds off of this is that yes.
I know the ins and outs every quarter, but just in general how are you feeling about where that's at today or just how we should think about that.
Yes.
We have a couple of positive.
<unk> in that space, our private wealth business continues to grow around 10%.
We have for the year.
And then the mortgage business, we expect to originate over $1 billion in mortgages. This year and I think the numbers are we portfolio at about 85% of that in 2022.
And we'd like to get back to our more traditional model.
Which would be call. It 60, 40, or even 70 30 and that 60%, 70%. We're talking about is sold into the secondary market. So we felt like in 'twenty. Two we took advantage of an opportunity to use our balance sheet, we have the liquidity to do it.
The customers or or kind of I think in shocked by how high the 30 year rate went and it allowed us to use our balance sheet, but now that's moderated from as high as 7% to slightly under six.
I think it gives us the ability to move back into a fee for fee for service model.
And that should give us a little positive push on our noninterest income.
Got you. Okay. That's helpful. Okay, perfect well, thank you for taking the questions and congrats on a nice quarter nice year.
Thank you Brian Thanks, Brian .
Thank you.
That concludes the Q&A session for today I would like to talk turn the call over to Mark hardwood CEO for closing remarks go ahead. Please.
Thank you Lisa I, just wanted to say thanks to everyone for tuning into the call our employees our customers our.
Shareholders or analysts.
We appreciate your interest and your investment and we will.
So you can count on this team to continue to work hard to deliver results for our for all of those critical stakeholders. Thank you.
That concludes today's conference call everyone may disconnect you all have a great rest of your day.
Okay.
Okay.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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Okay.
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Okay.