Q4 2023 First Merchants Corp Earnings Call
[music].
Thank you for standing by and welcome to the first merchants Corporation fourth quarter 2023 earnings Conference call 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 club.
That involves risks and uncertainties.
Further information is contained within the press release, which we encourage you to review.
Additionally, management will 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 on it.
Quantitative information to be discussed today as well as reconciliation of GAAP to non-GAAP measures.
To remind you today's call is being recorded I will now turn the conference over to Mr. Mark Hardwick, Chief Executive Officer, Mr. Hardwick, you may begin.
Good morning, and welcome to the first merchants full year 2023 conference call. Thanks for the introduction and for covering the forward looking statement on page two we released our earnings today at approximately eight a M eastern.
You can access today's slides by following the link on the third page of our earnings release.
Three of our slides you will see today's presenters on our buyers to include Mike <unk>, Our President Mike Stewart, Chief Credit Officer, John Martin, Our Chief Financial Officer, Michelle Caveats kit.
Page four.
We are a few highlights of the year to include final total assets of $18 3 billion $12 5 billion of total loans $14 8 billion of total deposits and seven 7.3 billion of assets under advisement.
On slide five if you look at the bullet points under our fourth quarter results. We grew loans during the quarter by six 6% annualized with a new and renewed loan yield of 8.0% to 1%. We also increased deposits by four 8% during the same period and we reported Q4 2023 EPS.
71 cents per share or <unk>, 81, or 87 cents when adjusted for several one time expense items incurred during the quarter.
Speaker Change: Those items include $12 7 million in one time.
Speaker Change: Charge offs.
Speaker Change: That include any of the FDIC special assessment due to several bank failures in March of 'twenty, three severance expense related to a voluntary early retirement incentive plan that we offered to employees in the fourth quarter of 2023, and the write off of a lease agreement due to our.
Speaker Change: Plus regional headquarter move.
Speaker Change: Moving down to the bottom half of the page you will see year to date both points.
Speaker Change: We delivered net income of $221 9 billion and produced $3 73 of earnings per share for the year when adjusted for the same one time expenditures that EPS totaled $383 89.
Speaker Change: During the year, where safety and soundness became the highest priority of stakeholders, we effectively reposition our.
Speaker Change: Our balance sheet to prioritize cash liquidity and capital.
Speaker Change: The company's liquidity position improved by $585 million as cash increased 300 million and borrowings declined $285 million.
Speaker Change: Our tangible common equity increased by $222 million during the year driving our TCE ratio up.
Speaker Change: From 7.37% one year ago to 8.44% at year end.
We maintained strong credit quality and top decile allowance for loan losses totaling 1.64%.
Speaker Change: I'm proud of our team I've, driven collaborative and high character employees for rising to the call to deliver an enhanced and resilient balance sheet, while also adding high quality risk aware loans at a clip of just over 5% and.
Speaker Change: And for delivering net deposit growth of 3% for the year.
Speaker Change: Before handing over the presentation I would just like to thank our 2000 plus colleagues for tackling a turbulent 2023 head on and for delivering top quartile results that we can all be proud of.
Speaker Change: Yeah. Thank you Mark and good morning to all our business strategy that is outlined on slide six remains unchanged and as a reminder, that the financial results. We deliver represent the durability of our business model within the primary markets of Indiana, Michigan, and Ohio, we serve diverse locations and boats.
Mark K. Hardwick: Stable rural markets, and even growing metro markets.
Mark K. Hardwick: We are a commercially focused organization across all of these business segments and collectively the first merchants team is actively engaged in all of our communities delivering the solutions listed on this page.
Mark K. Hardwick: Throughout 2023.
Mark K. Hardwick: We have remained committed to our business strategy of organic growth of loans deposits and fee income.
Mark K. Hardwick: Tracking retaining and building our team investing in technology platforms that enhance the client experience and.
Mark K. Hardwick: It ranked top tier financial metrics, let's turn to slide seven.
Mark K. Hardwick: This slide Bella that validates our ability to deliver organic growth of both loans and deposits.
Mark K. Hardwick: The annualized total loan growth for the fourth quarter was six 6%.
Mark K. Hardwick: Highlighted by the 8% growth in commercial portfolio.
Mark K. Hardwick: During our last quarter call I noted the strong commercial pipeline and that pipeline did materialize from our C&I focused regional bankers and from our investment real estate team.
John J. Martin: John has more detail to share around the portfolio mix and his detailed analysis showed that nearly 70% of our total loan growth of 2023 comes from the commercial segment, which is consistent with our global portfolio mix up 75% commercial and the rest consumer.
John J. Martin: Within the consumer portfolio, we have residential mortgage HELOC installment and private bank relationships and during the fourth quarter that portfolio grew at a 2.7% annualized rate.
John J. Martin: So again for 2023, the total loan portfolio grew at five 1%.
John J. Martin: Mid to high single digit loan growth is the expectation moving forward in the 'twenty 'twenty four while the commercial loan pipeline ended the year lower than the third quarter. The current pipeline is it is sufficient to achieve our expected organic growth goals.
John J. Martin: As you know loan growth can be choppy throughout any given period.
John J. Martin: The quarterly commercial loan growth trends have gained momentum since April post the Silicon Valley Bank crisis, we were purposeful in how we navigated our banks to those uncertain times in a loan portfolio of cell and liquidity management or some examples but the commercial loan growth improved each quarter since March.
John J. Martin: With the fourth quarter at its high watermark for the year.
John J. Martin: The overall economic environment in the Midwest.
John J. Martin: Inclusive of the competitive landscape.
John J. Martin: <unk> my expectation of mid to high single digit loan growth with improving loan yields.
John J. Martin: Mark highlighted that our new loan yields exceeded 8% during the quarter, which is an increase of 13 basis point points from the prior.
Michelle: Michelle has more detail to share on the positive trends in loan yields and loan types.
Michelle: The quarter saw total deposits growing four 8% annualized and three 1% for the full year 2023.
Michelle: The consumer deposit portfolio showed continued strong growth at over 11% annualized.
Michelle Smith: This growth is inclusive of both the branch network and our private banking team.
Michelle Smith: The consumer team continues to deliver consistent low cost depository base.
Michelle Smith: The commercial deposit growth during the quarter was also strong this was the only quarter throughout 2023 that commercial deposits grew.
Michelle Smith: So both teams are focused on relationship banking and building market share and again this page demonstrates that the fourth quarter delivered balance sheet growth.
Michelle Smith: As Mark stated in the press release, our bank's liquidity improved throughout 2023, we.
Michelle Smith: We have a strong capital position our team built a resilient balance sheet.
Michelle Smith: So we enter 2024 positioned for continued growth our team is positioned for that growth and our underwriting remains supportive consistent and disciplined so I'll turn the call over to Michelle to review in more detail the composition of our balance sheet and the drivers of our income statement Michelle.
Michelle Smith: First our fourth quarter results on line, one you will see regroup assets by $313 million during the quarter, representing a very productive quarter for the company 203 million was from loans, which Mike just covered the 98 million was an increase in investments, reflecting an increase in value of available for sale securities.
Michelle Smith: Deposits on line four grew 175 million leading to strong equity growth of 155 million, which you can see on line five.
Michelle Smith: Pre tax pre provision earnings when adjusted for the one time charges Mark described a $12 7 million totaled $61 1 million for the quarter.
Michelle Smith: Adjusted pre tax pre provision return on assets was 133% and adjusted pre tax pre provision return on equity was 11.47% all of which continue to reflect strong profitability metrics.
Michelle Smith: Tangible book value per share increased 11, 7% from last quarter totaling $25.06 at year end.
Michelle Smith: Slide nine shows the year to date results.
Michelle Smith: Their answers on balance sheet lines, one through five display the work the team has done and shifting the earning asset mix through the year, which resulted in a robust increase in yield on earning assets of 146% year over year.
Michelle Smith: Year to date pretax pre provision earnings excluding the one time charges I mentioned previously totaled $275 4 million adjusted pretax pre provision return on assets was 151% and adjusted pretax pre provision return on equity was $12 95%.
Michelle Smith: Tangible book value per share increased $3, and 61 or 17% over prior year, reflecting strong year to date earnings.
Michelle Smith: Excluding the noise from Mark to market adjustments on the Securities. The company has experienced tangible book value growth every year for the last 10 years and we are pleased to deliver another year of growth in 2023.
Michelle Smith: This is included on slide 23.
Michelle Smith: Details of our investment portfolio are disclosed on slide 10.
Michelle Smith: We sold 43 million in bonds this quarter, resulting in a loss of $2 3 million, we have sold nearly $400 million of bonds throughout the year total cash flow generated from the bond portfolio in 2023, including sales principal paydowns and interest totaled approximately $660 million creating.
Michelle Smith: Quiddity to put to work in a loan portfolio pay down higher rate wholesale funding and to ensure we have a solid cash position.
The expected cash flows from scheduled principal and interest payments and bond maturities in 2024 totaled 282 million.
Michelle Smith: Slide 11 shows some details on our loan portfolio. The total loan portfolio yield continues to increase climbing 13 basis points to 671% from $6 five 8% last quarter.
Michelle Smith: You will see the delineation of our portfolio between fixed versus variable on the bottom right.
Michelle Smith: Two thirds of our loan portfolio is variable rate and half of the portfolio re prices within three months that structure has allowed us to increase our interest income very quickly in response to the rising rate environment over the last two years and build capital.
Michelle Smith: As I mentioned last quarter, we have 900000 of fixed rate loans repricing during 2024 with a weighted average maturity rate of approximately four 7%, which will provide some incremental interest income given new loans are repricing that 8.01% currently.
John J. Martin: The allowance for credit losses on Slide 12 declined just slightly from 1.67% to 164% of total loans due to net charge offs incurred during the quarter of $3 1 million, which John will provide details on in his remarks.
We recorded $2 3 million of provision for credit losses on loans, which was offset by a reduction of reserves for unfunded commitments of 800000 due to the decline in unfunded commitment balances.
John J. Martin: The result was net provision expense of $1 5 million recognized in the income statement.
John J. Martin: Note that we have $23 2 million of remaining fair value marks on acquired loans, our coverage ratio, including those marks there's 1.82%, which it provides exceptional coverage at credit losses were to materialize.
John J. Martin: Slide 13 shows details of our deposit portfolio. We continue to have a strong core deposit base with 39% of deposits, yielding five basis points or less with a low uninsured deposit percentage in the low average account balance reflecting a diverse deposit franchise.
John J. Martin: Our noninterest bearing deposits were 16, 9% of total deposits at the end of the quarter, which was down very modestly from 17, 4% in the prior quarter.
John J. Martin: Our total cost of deposits increased 26 basis points to 2.58% this quarter showing signs of slowing compared to last quarter. Although we expect the cost of deposits to continue to increase somewhat over the next quarter or two we expect the pace will be even slower than what we've experienced this quarter.
John J. Martin: We were pleased to be able to grow deposits during the year by three 1% given deposits across the industry declined meaningfully in 2023.
Growth was achieved while improving funding mix, we reduced broker deposits and wholesale funding during the year and grew consumer and commercial deposits through customer acquisition and gaining a larger share of wallet.
John J. Martin: On slide 14, net interest income on a fully tax equivalent basis of $135 9 million declined $3 4 million from prior quarter.
John J. Martin: Earning asset yields increased nine basis points this quarter as shown on line five and was offset by the increase in funding costs on line six reflecting stated net interest margin on line seven of 3.16% a decline of 13 basis points from prior quarter.
John J. Martin: Next slide 15 shows the details of noninterest income.
Overall noninterest income decreased by $1 4 million on a linked quarter basis.
John J. Martin: As noted on the highlights on the slide there were some non customer related items impacting noninterest income this quarter, which included a $1 5 million dollar Bill again.
John J. Martin: $2 $3 million loss on available for sale securities and a $1 million write down of CRA investments.
John J. Martin: Customer related items declined a modest 800000, which reflected a $1 $4 million decline on the sale of mortgage loans offset by an increase in fiduciary and wealth management fees.
John J. Martin: Moving to slide 16, noninterest expense for the quarter totaled $108 1 million and as previously mentioned included $12 7 million in one time charges.
John J. Martin: Core noninterest expense was in line with expectations until the $95 4 million, an increase of $1 6 million over last quarter, driven primarily by seasonal incentive accruals.
John J. Martin: Adjusted core efficiency ratio shown at the top rate continues to be low coming in at 50, 556% for the quarter and 53.31% year to date.
John J. Martin: Slide 17 shows our capital ratios are strong earnings this quarter drove capital expansion in all ratios. The significant growth you see on the top chart and the tangible common equity ratio reflects solid earnings and recapture of an unrealized losses and Aoc I. We are very pleased with the strength of our balance sheet.
And strong earnings, reflecting a successful year amid a real disruption in the industry.
John J. Martin: That concludes my remarks, and I will now turn it over to Chief Credit Officer, John Martin to discuss asset quality.
John J. Martin: Thanks, Michelle and good morning, My remarks start on slide 18.
John J. Martin: The loan portfolio touch on the updated insight slide review asset quality, and our nonperforming asset roll forward before turning the call back over to Mark.
John J. Martin: Turning to slide 18 online to where I highlight the various portfolio segments commercial industrial loans originated by our regional middle market banking teams grew the portfolio by $214 million.
John J. Martin: We came off a strong backlog in the third quarter as Mike mentioned.
Mark K. Hardwick: With good pull through investment real estate on line five also had good movement in the quarter from both new originations and with properties moving out of the construction portfolio and to mini Perm.
Mark K. Hardwick: As a sponsor portfolio seasons, we continue to see exits from the portfolio as firms reached their time horizon.
Mark K. Hardwick: Resulting in periodic exits and Paydowns as mentioned on prior calls fire interest rates have driven additional capital investment into platform companies in order to meet our underwriting and stress criteria.
Mark K. Hardwick: Turning to slide 19, I have updated the portfolio insight insights slide.
Mark K. Hardwick: To provide additional transparency and the commercial space. The CNI classification includes sponsor finance as well as owner occupied CRE associated with the business.
Mark K. Hardwick: Our C&I portfolio has a 20% concentration in manufacturing our current line utilization has remained fairly consistent at around 41% with line commitments, increasing roughly $89 million for the quarter, we participate in roughly $740 million of shared national credits across.
Various industries. These are generally relationships, where we have access to management and revenue opportunities beyond the credit exposure in.
Michelle Smith: And the sponsor finance portfolio I've highlighted key credit portfolio metrics. There are 86 platform companies with 53 active sponsors and an assortment of industries roughly 65% have effect a fixed charge coverage ratio of one five times based on September information.
Michelle Smith: This portfolio consists of a single bank deals for for platform companies of private equity firms as opposed to large widely syndicated leverage loans. We review the individual relationships quarterly for changes in borrower condition, including leverage and cash flow coverage turning to slide 20.
Michelle Smith: We continue to provide the breakout of our non owner occupied commercial real estate portfolio with additional detail around our office exposure.
Michelle Smith: Office exposure is broke it out on the bottom half of the chart and represents 2% of total loans slightly down from last quarter with the highest concentration outside of general office and medical.
Michelle Smith: I've added a chart to the bottom right with office portfolio maturities refinance risk appears to be low with $18 million or 7% of total office loans maturing within the next year.
Michelle Smith: The office portfolio is well diversified by tenant type and geographic mix. We continue to periodically review our larger office exposure in view of the exposure is reasonably mitigated through a combination of loan to value guarantors tenant mix and other considerations.
Michelle Smith: On slide 21, I've highlighted our asset quality trends and current position NPA and 90 days past due loans decreased $1 1 million to 47 basis points of loans and <unk>. We continue to experience consistent portfolio performance, despite higher rates with relatively consistent levels.
Michelle Smith: As of classifieds at one 9% 94% of loans.
Michelle Smith: We've moved past last quarters last charge offs with $3 $1 million of net charge offs or 10 basis points of average annualized.
Michelle Smith: Of.
Michelle Smith: <unk> average loans for the quarter.
Michelle Smith: Then moving on to slide 22, where I've again roll forward, the migration of nonperforming loans charge offs or hurry at 90 days past due for the quarter. We added nonaccrual loans on line two of $10.3 million a reduction from payoffs or changes in accrual status of $6 1 million.
Michelle Smith: On line, three and our objection from gross charge offs of $3 7 million dropping down to line nine we wrote down <unk> by $1 $1 million, which resulted in NPA is plus 90 days past due ending at $58 6 million for the quarter.
Michelle Smith: So to summarize asset quality remains good net charge offs for the quarter were 10 basis points and for the year 21 basis points and for the quarter. The portfolio grew at a six 6% annualized growth rate and both criticized and classified loans remain in check with stable delinquency.
Michelle Smith: I appreciate your attention and I'll now turn the call back over to Mark Hardwick.
Mark K. Hardwick: Turning to slide 23, I'm going to review a few of my favorite charts as I take a more long term perspective.
Mark K. Hardwick: Look at our performance.
Mark K. Hardwick: On the top right, our 10 year earnings per share of care totaled 10, 2%.
Mark K. Hardwick: And looking at both the growth in tangible book value per share and dividends paid during 2023 total book value return equal 23%.
Mark K. Hardwick: Or if you prefer to look at tangible book value per share excluding <unk>, our total book value, excluding OCI return for the year equal just over 15%.
Mark K. Hardwick: Slide 24 represents our total asset CAGR of 12, 9% during the last 10 years and highlights meaningful acquisitions that have materially added to our demographic footprint.
Mark K. Hardwick: The fuels our growth.
Michelle Smith: Slide 25, I've made a few edits to include replacing the word digital transformation with a continued.
Michelle Smith: Continued investment and.
Michelle Smith: During the during the last three years, we have delivered a new online account origination platform and the <unk>.
Michelle Smith: <unk> to our commercial loan automation system, and we're just days and months away from completing four big enhancements.
Michelle Smith: This week, we completed the rollout of our personal and branch account opening process, which reduces account opening times from an average of 45 minutes to less than 10 minutes, while eliminating error rate by nearly 75%.
Michelle Smith: It's also connected with our online account opening process that can be delivered similar seamlessly through either.
Michelle Smith: Panel or both channels.
Michelle Smith: We're also live or in beta with our new online and mobile platform for consumer customers and plan to be fully live with 160000 customers by the end of February.
Michelle Smith: The first half of 2024 also includes the completion of our new wire platform, our new online platform for commercial or Treasury management customers and upgrading the private wealth platform.
Michelle Smith: I should also remind all of you that we have a handful of onetime expenses related to temporarily overlapping systems and customer service center augmentation to handle these these upgrades.
We expect our first quarter charge of approximately $3 million in the second quarter charge of approximately $2 million.
Michelle Smith: Through these projects, we have truly streamlined and simplified the client experience and we will continue to focus on modest.
Michelle Smith: Relevant enhancements in the future.
Michelle Smith: Thanks for your attention and your investment in first merchants and at this time, we're happy to take questions.
Thank you.
Michelle Smith: To ask a question you will need to press star one on your telephone to withdraw your question. Please press star one again.
Michelle Smith: Please standby will be compile the Q&A roster and please wait for your name to be announced one moment for your first question.
Michelle Smith: Our first question comes from the line of Daniel Tamayo with Raymond James Your line is now open.
Michelle Smith: Hey, good morning.
Daniel Tamayo: So we're taking my question.
Daniel Tamayo: Hum.
Michelle Smith: Maybe Michel just first on the on the margin and the NII outlook I. Appreciate all the detail you gave on the funding side as well as the asset side repricing.
Michelle Smith: And I apologize if I missed it but did you have kind of a baseline assumption for how the the the NIM trends.
Michelle Smith: Through 2024, and what NII might look like.
Daniel Tamayo: Sure. Good morning, So for Q1, we do expect to see a bit more compression in 2024, our December margin was 312 so.
Michelle Smith: So that can give you a bit of a data point and then I would also remind you that because we're still commercially oriented margin is always seasonally low in Q1 simply due to day count. So just another item, but assuming a flat rate environment, we are expecting margin to stabilize in the quarters thereafter.
Michelle Smith: Now if there are rate cuts our model tells us that for each 25 basis point rate cut margin declines about four basis points.
Michelle Smith: We're taking a very proactive approach in managing our deposit costs down in anticipation of the rate cuts, which could perhaps lessen that impact in a couple of other items will be paying down about $40 million of sub debt at the end of this month that had a rate near 10%, which will offer some meaningful savings.
Michelle Smith: You know, we continue to sell bonds, which creates some spread when we put that cash back to work and loans and higher cost funding and then the other thing that I would mention too is typically in a declining rate environment, we tend to see an opportunity for higher mortgage loan gains sales. So.
Michelle Smith: Although we think that there are definitely some tail some headwinds when we have the right and went to a declining rate environment, we think that there's some tailwind as well.
Daniel Tamayo: I appreciate all that detail is there.
Michelle Smith: A kind of an all in NII outlook. You. Obviously, you have an expectation for continued strong loan growth in the year I'm. Just curious how you think and I might might end up for the year.
Michelle Smith: Yes, I think in Q1, we will see some compression in net interest income, but then we're expecting stability in growth thereafter, particularly in the second half due to our expected growth.
Michelle Smith: Okay terrific.
Michelle Smith: And then lastly, just following up on your comment on mortgage banking.
Michelle Smith: You've maybe.
Michelle Smith: Maybe not not bottomed is as low as some other banks are doing quite well actually last year I'm, just curious where you think that number could end up.
Once rates start coming down I mean, you are.
Michelle Smith: Thank you.
Michelle Smith: Doing about $20 million a year during some pretty good times in 2020 in 2021 do you think youll.
Michelle Smith: To be able to get above that given the investments you've made.
Mark K. Hardwick: Daniel It's Mark Hardwick.
Mark K. Hardwick: That's a good question.
Mark K. Hardwick: We're really pleased by the enhancements we've made with the team post level, one and so we kind of doubled the size of the business before the downturn in rates.
Mark K. Hardwick: And when I say doubled it.
Mark K. Hardwick: Our portfolio.
Mark K. Hardwick: Our first merchants originations were almost identical to level ones.
Mark K. Hardwick: And so by putting the two organizations together, we feel like we have materially strengthened.
Mark K. Hardwick: The outlook, how do you think asked a lot to do with rates, but I'm confident that we have potential and capacity and the and the core first merchants franchise base.
Mark K. Hardwick: Based on this change that we've had in our strategy around mortgage so yeah, I mean, I'm confident that if we if we have.
Michelle Smith: A decline in rates that we should be able to exceed our historical performance. When you look at the two on a combined basis.
Michelle Smith: Terrific. Thanks for all the color I'll step back.
Michelle Smith: Thank you Danny one moment for our next question.
Speaker Change: Our next question comes from the line of Damon Delmonte with <unk>. Your line is now open.
Speaker Change: Hey, good morning, everyone hope, you're all doing well today.
Speaker Change: Just wanted to start off with.
Damon Delmonte: Some questions on expenses Michel looking for a little bit more guidance here as we go into 'twenty four.
Damon Delmonte: Actually there are some one time items this quarter.
Michel: Kind of what are you thinking about for a good core run rate.
Michel: Yes, good morning, Damon So this quarter our core expense total when you back out those one time costs was $95 4 million. So on a core basis, we expect the quarterly expense run rate to be flat to maybe up 2% on the high side in 2024 compared to this quarter.
Michel: As Mark mentioned, we will incur some one time charges on top of our core expense run rate in Q1, and Q2 due to the online banking conversion in our private wealth platform conversion of a few million dollars each quarter, but we will disclose that impact and make sure that that's transparent to you, but like I said I think we are very.
Damon Delmonte: Focused on good expense management for 2024, I feel strongly that we can achieve that.
Damon Delmonte: Got it Okay. That's helpful. Thank you and then the fee income side, you called out a few items.
Damon Delmonte: Net.
Damon Delmonte: You know the.
Damon Delmonte: Those three items together, you're probably closer to like a $28 million.
Damon Delmonte: Operating non interest income result, this quarter.
Damon Delmonte: There's some volatility around potential for our mortgage banking income that we just spoke about but if you look at your other.
Damon Delmonte: The drivers of fee income how should we kind of look at the quarterly level going forward.
Yes. This quarter I think it's the total was a little light for a run rate in 2024, we're expecting that probably to average more around the $30 million to $31 million per quarter next year.
Damon Delmonte: Got it.
Damon Delmonte: And then just lastly.
Damon Delmonte: Obviously, you had some good recapture on the OCI, which boosted tangible book value and tangible common equity I think the key.
Michelle Smith: <unk> ratio ended at around eight 5% just kind of wondering what your thoughts are on capital management.
Michelle Smith: And then a buyback in particular.
David: Yeah. Thanks, David Yeah, we were really thrilled to see the return.
David Smith: TCE ratio over 8%.
David Smith: And it was the catalyst to paying down $40 million of our sub debt, we decided to tackle that first we've got a remaining 25 million, which were likely to pay down next quarter.
David Smith: And just feel good about.
David Smith: Managing the bank based on a TCE and total risk based capital level primarily off of.
David Smith: Of.
David Smith: Common equity so.
David Smith: Thinking about that first there may be a time, assuming that we have stabilization in rates, where we are.
David Smith: As we continue to add capital through earnings.
David Smith: The capacity to be active in the market.
David Smith: But at these prices.
David Smith: Inclined to do that but we have not.
David Smith: That process.
David Smith: Got it okay.
David Smith: That's all I had thanks, a lot appreciate the color and commentary.
David Smith: Alright, Thanks, Damon. Thank you one moment for our next question.
David Smith: Our next question comes from the line of Terry Mcevoy.
David Smith: From.
David Smith: Yeah.
David Smith: Stephens Your line is now open.
David Smith: Thanks, Good morning, everyone.
Terry Mcevoy: Good morning, Terry.
Terry Mcevoy: Idea of the $240 million of C&I regional banking loans caught my eye and I think there was some mention for prepared remarks about pipelines being healthy kind of starting the quarter any specific industries markets that contributed to the outside growth last quarter and what are your outlooks kind of specifically for the C&I business, which is a.
Terry Mcevoy: A big part of the portfolio.
Terry Mcevoy: Yes, good question, Mike Stewart.
Mike Stewart: The muted growth that we saw the prior quarter was simply because a lot of the C&I transactions really hadn't closer to that point. So we ended the quarter with a really strong high pipeline that didn't materialize that Johnny pointed that out and it really was do that whole region Bank model, which is traditionally the commercial industrial space.
Mike Stewart: And that's the space that I think that we still have good outlooks as we turn the year into 2024 fully staffed in our marketplace taken advantage of competitive disruption strong economic factors, when you think about Michigan, Indiana and Ohio.
John J. Martin: So that's what's driving a stable pipeline to that.
John J. Martin: We saw some nice growth in the investment real estate portfolio.
John J. Martin: Solid transaction some of it could be the growth underneath construction draws but more of it is just the origination has been good in the asset classes that we play in.
John J. Martin: In addition to some fully funded term loans that we are focused on so just a nice balanced mix across the Midwest here.
And Terry I might just add in terms of the industry.
John J. Martin: It's pretty much across the board.
Terry Mcevoy: Midwest C&I Bank, a commercial bank and when we pick up C&I. It's just what's in our footprint and that's not a vertical that we're in any particular areas. So it comes in kind of a.
Terry Mcevoy: On a broad base as to what happens to be.
Michelle Smith: Thanks for that and Michelle.
Michelle Smith: The level of index deposits that we I'll attempt to potentially model out lower rates and how that could impact your funding costs.
Michelle Smith: Yeah, we have $2 5 billion of deposits that are tied to an index that won't be able to reprice along with rate cuts if those occur.
Michelle Smith: And then just a last question is I'm trying to expenses.
Michelle Smith: Retire early retirement severance lease.
Are those connected to kind of broader expense management.
Michelle Smith: <unk> to manage expenses in 2024, and I'm trying to think of the they're real numbers and how do you think about the earn back on on the call. It eight $8 4 million.
Michelle Smith: Okay.
David Smith: Our back as quick.
David Smith: It's less than a year so were.
David Smith: Yes, we're really pleased with the way the voluntary early retirement played out and as much as anything just excited about the opportunity that it creates for.
David Smith: Hungary.
David Smith: <unk> that are ready for the next stage of their career.
David Smith: Great. Thanks, again for taking my questions have a good day.
Gary: Thanks, Gary.
Gary: One moment for our next questions.
Gary: Our next question comes from the line of Nathan race with Piper Sandler Your line is now open.
Yes, hi, everyone.
Gary: I appreciate it.
Gary:
Nathan J. Race: Jumped on a little late but I think I heard kind of a mid to high single digit loan growth outlook for this year and I'm. Just curious how you guys are thinking about the opportunities to grow the core deposit franchise.
Nathan J. Race: 2024, obviously it was a difficult year to grow core deposits and 23. So just curious how you guys are thinking about those opportunities, particularly in light of some of that.
Nathan J. Race: <unk> or enhancements on the.
Nathan J. Race: Technology side of things.
Nathan J. Race: Yeah, I would just say that we feel great about our liquidity position, which is.
Nathan J. Race: You saw us lead with that in the press release in early in the call, we talked about that $585 million change three.
David Smith: $300 million of new cash.
A reduction in borrowings of $285 million and so I think it allows us to be smart around our deposit pricing, maybe a little more conservative than what we were in 2023, but I still think.
David Smith: Our expectations are always mid to low single digit deposit growth. So do you think about it.
David Smith: Three 4% is.
Michelle Smith: As our target kind of year after year.
Michelle Smith: If you think about normal environment, So obviously COVID-19 and all the stimulus has kind of changed those things, but it does feel like we're starting to settle in.
Michelle Smith: Our banking environment that feels more like it used to.
Michelle Smith: Yes.
Michelle Smith: Okay great.
Just thinking about the size of the securities portfolio going forward I appreciate the disclosure around how much cash flow coming off this year.
Michelle Smith: Is the expectation that just the portfolio shrinks by that amount or.
Michelle Smith: And you are able to redeploy that cash flow and incremental deposit growth into new loans or do you guys see you need to maybe grow the securities book to some extent.
Michelle Smith: You know, we're not planning to grow the Securities book, we are planning to use that liquidity for loan growth.
Michelle Smith: Okay, Great and then just one last question on credit.
John J. Martin: Maybe for John I think in the past, we've talked about a normalized charge off range between 15, and 20 basis points is there anything that youre seeing on the horizon that would cause you to deviate from that kind of historical trajectory into this year and next obviously nice improvement.
John J. Martin: Most credit.
John J. Martin: Metrics here in the fourth quarter budgets, just any thoughts on that kind of historical range as we kind of enter is still somewhat uncertain environment. This year.
John J. Martin: Yeah.
John J. Martin: Well no I don't actually I wait for the question of what the run rate on charge offs, but I think it would be and I think of it really between that 10 to 20 basis point range.
Absent any individual name that might pop up and you know the.
John J. Martin: You go through and you continue your portfolio reviews in your analysis of individual credits.
John J. Martin: That still seems like it's reasonable to me given the level of classifieds our level of criticized.
John J. Martin: Yeah.
John J. Martin: To pencil in.
John J. Martin: Okay great.
John J. Martin: Obviously, you guys are still operating with a very healthy reserves.
John J. Martin: As a percentage of loans.
John J. Martin: And then npls for that matter any thoughts on just kind of where the reserve maybe bottoms over the next year or two as a percentage of loans in terms of kind of how you guys need to provide for that.
John J. Martin: Mid to high single digit loan growth outlook.
John J. Martin: Well I mean, it'll be likely that will take some provision to cover at least our loan growth. During the year. We will have to look at the changes in the economic scenarios, obviously that'll play a part in that determination.
John J. Martin: It might still tick down a little bit.
John J. Martin: 164 coverage ratio now.
John J. Martin: We will just have to kind of see how the how the year plays out with weather.
John J. Martin: We get a soft landing or we get a recession I think that's going to make a big difference.
John J. Martin: Got it makes sense and then just one last housekeeping question does the tax rate go back up to around.
John J. Martin:
15% for the first quarter next year or 24 excuse me.
John J. Martin: Yeah, Yeah, typically our effective tax rate is around 15% to 15, 5%. So I think that's what you should expect in 2024.
John J. Martin: Okay great.
John J. Martin: Appreciate you guys answering my questions and all the color. Thank you Nate.
John J. Martin: Thank you.
John J. Martin: Thank you.
John J. Martin: <unk>.
John J. Martin: Our next question comes from the line of Brian Martin with Janney. Your line is now open.
John J. Martin: Hey, good morning, everyone and thanks for taking the questions.
Maybe just one for John or to just I joined late.
John J. Martin: John did you talk about what the special mentioned credits did in the quarter, just I know that you've got the classifieds in the deck just curious with the leading indicator there it looks like it sounds like everything is just it's very strong on the credit front, just trying to look a little bit deeper at that number.
John J. Martin: Yes.
John J. Martin: I'll have a slide.
John J. Martin: Alright, Brian, Yes, and then my and my voice.
John J. Martin: Speaker muted.
John J. Martin: Getting waived down here.
John J. Martin: We don't disclose our criticized assets within on the slides, but they've kind of trended with.
John J. Martin: The classifieds and we're from a commitment standpoint pretty much flat for the quarter.
John J. Martin: Hey.
John J. Martin: Okay. Yeah. That's helpful. I just wanted direction, just kind of how youre looking it sounds pretty good just wanted to kind of confirm that.
Michelle Smith: And then maybe just one for Michelle on the deposit repricing, Michelle that $2 5 billion.
Michelle Smith: That pretty immediate on the deposit repricing I guess I don't know what that was tied to index wise, but assume it's pretty immediate.
Michelle Smith: It is yes.
Michelle Smith: Okay I got you on that front, Okay, and then maybe just last two just on the on the growth outlook. It still sounds very strong and obviously.
Michelle Smith: The focus is on the organic side I mean do.
Do you guys view or see opportunities out there on the M&A side I mean, there's a lot on your plate listening to the call and everything going on but just trying to understand what the opportunities may be.
Michelle Smith: On the on the M&A side I guess.
Michelle Smith: In 'twenty four and beyond.
Michelle Smith: Yeah, we continue to have communication with a handful of banks that we think will be great fits as part of our franchise.
Michelle Smith: Yes, I'm not sure the environment is really change to make M&A really attractive yet.
Michelle Smith: A reduction of interest rates helped some return of stock prices has been helpful.
Michelle Smith: We're just going to continue to have conversations.
Michelle Smith: When when sellers are already looking for partners or hopefully it fits.
Michelle Smith: With all of the other initiatives that we have happening really pleased to get some of these tech projects behind us.
Michelle Smith: By the by mid year by June 30.
Michelle Smith: And when we're in the middle of that kind of activity Theres, just no way to really even think about M&A. So.
But look.
Michelle Smith: The conversations are continuous soon and we continue to build relationships.
Michelle Smith: Yeah that makes sense I mean organic focus is where you guys have been it's been doing a great job and like you said all of these initiatives.
John J. Martin: When I dropped the ball on those and get those done so and timing is not perfect. Just yet so okay. And then maybe last one for me maybe for John or whomever, but just as you kind of look at the loan repricing. This year the renewals and the the rate increases I guess have you taken a look at that portfolio. I guess there can you just give any commentary about how much risk you see in those loans re pricing.
John J. Martin: From a credit risk.
John J. Martin: Fuel is getting absorbing the stress at the higher rates or is that any type of color on that.
John J. Martin: I missed the first part are you talking about investment real estate specifically.
John J. Martin: Just in general in the loan book the repricing this year, yeah, and a credit just being able to absorb the.
John J. Martin: Impact of higher rates as they reprice and just kind of look at that maybe on the chunkier credits.
John J. Martin: So far they've been out there.
John J. Martin: That's what I have seen across the portfolio is that customers have been able to either increase their prices.
John J. Martin: <unk> been able to absorb that.
John J. Martin: The changes in interest rates.
John J. Martin: I'm pretty well quite frankly.
John J. Martin: You do see it yes in some.
John J. Martin: Cases were the higher interest rates have led to slightly higher debt service or higher debt service.
John J. Martin: But there's been a series of maneuvers either through increased their prices or a reduction in expenses or something else in the income statement they've been able to compensate for so yeah.
John J. Martin: Yeah, I mean, just see at ESC it, but we've got good business owners, they're figuring it out.
Michelle mentioned, we have $900 million at a rate of four 7% that are fixed rates that will mature in 2004.
John J. Martin: When we when we look through those we're.
Michelle Smith: Talk about how that helps earnings versus feeling like somehow you move into a credit issue.
Michelle Smith: Yeah, I got you, okay, well, thanks for taking the questions and a nice finish to the year guys.
Brian: Thank you thanks, Brian.
Brian: I'm currently showing no further questions at this time I would like to turn the call back to Mr. Mark Hardwick for closing remarks.
Norma: Thank you Norma thanks.
Norma: Thanks, everyone for your participation.
Mark K. Hardwick: Again really pleased with the year that we had.
Mark K. Hardwick: Especially in light of some of the challenges that occurred throughout the industry.
Mark K. Hardwick: What people are referring to it as March madness and.
Mark K. Hardwick: Just it helps to validate the strength and the safety and soundness of our institution and I think we end the year with a balance sheet that really is an incredibly strong position.
Mark K. Hardwick: Sets us up for success in the future. So again, we appreciate your investment. Thank you for your time and have a good rest of your day.
Mark K. Hardwick: This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
Mark K. Hardwick: Yeah.
Mark K. Hardwick: Okay.
Mark K. Hardwick: [music].
Mark K. Hardwick: Okay.
Mark K. Hardwick: [music].
Mark K. Hardwick: Okay.
Mark K. Hardwick: Okay.