First Merchants Corp
NASDAQ:FRME
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First Merchants Corp
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Good afternoon, and welcome to the First Merchants’ Fourth Quarter 2020 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions]
This presentation contains forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act. Such forward-looking statements can often be identified by the use of words like believes, continue, happen, estimate, project, intend, anticipate, expect and similar expressions or future or conditional verbs such as will, would, should, could, might, can, may or similar expressions. These forward-looking statements include but are not limited to statements relating to First Merchants’ goals, intentions and expectations, statements regarding the First Merchants business plan and growth strategies, statements regarding the asset quality of 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 in forward-looking statements, including among other things, possible changes in economic and business conditions; the existence or exacerbation of general geopolitical and stability and uncertainty, the effects of a pandemic or other unforeseeable events, the ability of 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 cases, possible changes in the creditworthiness of customers, and the possible impairment of collectability of loans, fluctuations and market rates of interest, competitive factors in the banking industry, changes in the banking registration or regulatory requirements of Federal and state agencies applicable to bank holding companies and banks like First Merchants affiliate bank; continued availability of earnings and excess capital sufficient for the lawful and prudent declaration of dividends; changes in market, economic, operational, liquidity, credit and interest rate 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, relating to the matters discussed in this presentation or press release. In addition, the company’s past results of operations do 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, CEO. Please go ahead.
Good afternoon, and welcome to the First Merchants’ yearend 2020 conference call. We released our earnings today at approximately 8:00 AM Eastern and hopefully you’ve 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.
Ms. Nabi, we thank you for the introduction and for covering a detailed forward-looking statement. We may have to find a way to shorten that up next time.
On Page 3, you’ll see today’s professors and a bio of those include Mike Stewart, our newly appointed President, John Martin, our Chief Credit Officer, and Michele Kawiecki, our newly appointed Chief Financial Officer.
On Page 4, we have a iPhone-based snapshot of First Merchants and a few highlights and accomplishments for your review.
If you turn to Slide 5, I’d really like to start today by introducing our new vision statement. It’s simple, yes, 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 of financial wellness into our daily work and I am thrilled to officially add diversity into our bank’s vision statement to principally reflect our values and increasing commitment. And I am pleased to officially bring 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 5 and Slide 6.
Okay, thanks, Mark and good afternoon to 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.
Our commercial banking team had continued to invest in our capabilities to match the needs within our markets. Leveraging the size of our balance sheet to build our segment capabilities within public finance, structured finance, which is working with our private equity sponsors, asset-based lending, and a syndication platform have complemented our investment real estate, middle market, treasury services and small business efforts.
Michele and 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 2021, our pipeline remains at a healthy level beyond even around to a PPP we are 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 environment. We have seen an acceleration of the usage of these products, and has announced last month we will further be investing in new and enhanced product capabilities.
Mark will talk more about these 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 platforms. John will review our consumer mortgage activities where 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, investing in talent across all the markets like Columbus and Indianapolis, Munster, assured we can grow in a balanced full-service banking approach. Michele will offer additional insights to the growth of this fee-generating line of business.
So you can see with the map on Page 6, it represents both the demographics of a growing economic environment, the heart of the Midwest that drives our growth and a stable source of talent to lead our business efforts. Our investments in our commercial, consumer, private wealth lines of businesses have been received well within all of our markets.
I am excited to listen to Michele’s comments about our balance sheet growth, our improving margins, and operating metrics. John will share the soundness of our portfolio and efforts around our deferral and current PPP activities and Mark will offer more insight to our planned investments in our digital journey.
Mark I will turn it back to you.
Great. Thanks, Mike. Now if you would turn to Slide 7, as my quote in the press release stated, we are really proud of our 2020 results given the headwinds the world and the country encountered during the year. Our frontline and back-office employees guided over 5,200 customers through the Paycheck Protection Program, and increased loans by 9.2% while growing deposits by 15.5%.
Our fourth quarter core loan growth of 11.2% and the announcement of a definitive agreement to acquire the Hoosier Trust Company will provide strong top-line momentum heading into 2021. We even opened a new banking center in the heart of Indianapolis during 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 our three year roadmap to digitize the bank.
We are 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 of net income, $2.74 of earnings per share, and a 1.7% pretax, pre-provision, return on assets. Michele will highlight the health of our capital, liquidity and reserve position while sharing our 2020 financial results.
Thanks, Mark. My comments will begin on Slide 8. We are pleased to report earnings per share for the fourth quarter totaling $0.83, which is shown on line 22, an increase of $0.16 over the prior quarter. Mark mentioned the branch consolidation announcements in his remarks, charges of $4.5 million were reported this quarter related to the disposition of assets and other cost associated with that announcement.
Excluding those one-time charges, the efficiency ratio for the quarter was a low 51.6%. Net interest income on line 11 totaled $102.3 million for the quarter increasing $9.4 million on a linked-quarter basis. PPP loan fees accounted for $5.5 million of the quarter-over-quarter increase as $240 million PPP loans were forgiven causing deferred fee income associated 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 9 shows highlights of our investment portfolio. The total portfolio grew $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 2.78%, which continues to be above peer yield.
Cash flow roll-off for the next 12 months totaled $488 million at a 1.78% yield. The current purchase yield is 1.65%. So the overall portfolio yield could decline a couple basis points over the course of the year depending on whether investment conditions remain the same.
On Slide 10, in the bottom left corner, you will see that the fourth quarter loan yield was a strong 4.2% excluding the impact of PPP loans, loan yield was 3.96%. Yield on new and renewed loans in the fourth quarter averaged 3.42%.
On the bottom right is the loan rate mix which shows the 62% of our loan portfolio is variable and 38% is fixed with 7% of the fixed rate loans being PPP loans.
Slide 11 shows a roll forward of our allowance for loan losses balance. Throughout the year, our intention was to adopt CECL on December 31, 2020 with a day one adjustment measured on January 1, 2020 in the amount of $52.2 million recorded through equity.
On December 27, the 2021 Consolidation Appropriations Act refines into law which prompted the SEC to reconsider the dates banks could adopt. Ultimately, on January 15, the SEC announced that banks could adopt on December 31, 2020 or January 1, 2021. However, at the time we closed our books, January 1, 2021 was the date being considered for SEC approval.
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 a beginning balance of $126.7 million, we incurred net charge-offs of $600,000 during the fourth quarter and recorded $4.5 million in provision expense bringing the ending allowance for loan losses balance to $130.6 million. The resulting allowance to coverage ratio is 1.41% or 1.52% when excluding PPP loans.
On the bottom half of the slide I’d like to walk you through our revised CECL day one adoption impact. Interestingly, the SEC indicated that when adopting CECL on January 1, 2021, the day one adoption entry recorded through equity should be measured as of January 1, 2021 as opposed to 2020, because the current economic forecast has the impact of the pandemic in it and is not as optimistic as to forecast that we used on January 1, 2020, which was pre-pandemic, our day one impact increased from $52.2 million to $74.3 million, which is a 57% increase over the year end allowance balance.
This will bring the allowance to loans coverage ratio to 2.22%, a reserve for unfunded commitments in the amount of $20.5 million will also be recorded in other liabilities. The impact to 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 and we are eager to get the CECL 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 continue to see dollars and 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 basis points in the fourth quarter. This is a 9 basis point decline from the third quarter and a 70 basis point decline from the fourth quarter of 2019. Deposit balances grew on an annualized basis over the third quarter contributing to our exceptionally strong liquidity position.
Line one on Slide 13 shows fourth quarter net interest income on a fully tax equivalent basis of $107 million growing $9.7 million over last quarter. Stated net interest margin on line 6 total 3.38% for the quarter adjusting for fair value accretion and the impact of PPP loans brings us to a core net interest margin of 3.13% which is one basis point higher than the third quarter core margin of 3.12%. Looking forward to 2021, we expect core margin to remain stable and in line with Q3 and Q4 results.
On Slide 14, non-interest 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 low of $4.3 million in the second quarter. Derivative hedge fees were the quarterly high at $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 of Durban in the back half of 2020, which reduced card payment fees by $2 million to $2.5 million per quarter. However, card swipes increased more than 10% in the back half of 2020 compared to the first half of the year. So we are 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 were elevated in the fourth quarter due to incentive accruals and an increase in health insurance costs. Offsetting 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 9.65%, but it is 9.99% without the impact of the PPP loans. We feel the combination of strong capital ratios along with robust allowance coverage to loans, demonstrates outstanding balance sheet strength.
Slide 17 summarizes the financial results for the full year of 2020 as well as prior years. Total asset growth shown on line one was exceptional $1.6 billion or 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 on line 23, which increased a healthy 11% over 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 including industry concentrations, provide an update on loan modifications, and touch a little on the COVID-sensitive industries and portfolios with a brief update on the PPP loan program and 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 remains strong in the quarter, as well as the gain on sale as Michele has 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, I’ve broken out the C&I portfolio to highlight its diversified nature and relative granularity within the overall commercial loans. We continue to grow lines of credit relatively faster than balances 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-sensitive industries. Three areas that we are focused on include senior housing, hotels and to a lesser extent restaurant and food service. Senior living was an area heading into the pandemic that we were already focused on with some markets reaching saturation with the effects of the pandemic that led certain projects to experience occupancy and then payment difficulties.
The restaurant portfolio has thus far continued relatively well and I believe the 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 in 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 in this portfolio and stayed close to the operators. We have $83 million of hotel deferrals of some form.
This could be principal and 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 a 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, values have been 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, or other inherent sources of demand with a slowdown in economic activity related to the pandemic, these projects have understandably 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 PPP 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 or changes that have come out should help to ease the process going forward and we are adjusting our process in software accordingly.
We have also begun taking applications for the second draw of PPP loans with fairly strong demand, but not at the same level of the initial first draw program.
So turning to Slide 23, where I cover asset quality. Overall asset quality remains stable in the quarter with a $4.8 million increase in non-accruals with a $13 million loan for a senior living facility moving to non-accrual in the quarter. On line 2, we sold a senior living facility from other real estate owned which had a book balance of $5.9 million that resulted in the $1.7 million gain that Michele just mentioned a minute ago.
Classified loans on line 7 were stable at 2.7% of loans, down $2.8 million. Charge-offs were $600,000 or 3 basis points of total loans for the quarter and $8.3 million or 9 basis points for the year. On this slide, as a point of clarification I’d like to make on line 9, the $3.1 million in 4Q 2019 and the $8.3 million that I just mentioned in 4Q 2020 represent full year charge-offs, while the 3Q 2020 were charge-offs for the entire third quarter.
So then, moving forward, I show the asset quality roll forward on Slide 24 that connects to the asset quality slide I just discussed which reconciles these changes.
And I would end by just summarizing that, charge-offs had 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 – 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 would close by saying that we have our resources focused on delivering new business across regions and business lines that Mike just mentioned delivering PPP loans and working with our borrowers who have been affected by the pandemic.
So, thanks for your attention. I’ll turn the call back over to Mark.
Great. Thanks, John. If you turn to Slide 25, it highlights ten 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 Mike Rechin is tuned in to today’s call and he should be really proud of this scoreboard and his leadership. It’s a heck of year that we had and a heck of a ten year run plus for Mike.
All of us, all four of us presenting today are really pleased to have played a role in this success and we are excited about moving this company forward.
If you turn to Page 26, there is an item that I talk about on a regular basis that I am just going to continue to repeat. I think it will be helpful to understand our organization. And 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 an efficiency ratio in the low 50s. And we are 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 ones that you see on Page 26.
Slide 27, it highlights some priorities that will help guide us over the next three to five years. I am not going to walk through all these in detail. When we have an opportunity to see folks during investor calls and 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 can peruse through those and we are happy to take questions from analysts, as well. But, first, I would just say, I am enthusiastic about our team of professionals, our ability to deliver results and the future it offers to all of our stakeholders.
So, thank you for your attention today, your investment in First Merchants. And at this point, we are happy to take questions.
[Operator Instructions] The first question comes from Scott Siefers with Piper Sandler. Please go ahead.
Good afternoon. Thanks for taking the questions. I think the first one that I wanted to ask was, around PPP. I think you’ve got somewhere around $615 million of first round of PPP loans left. How long – what’s your expectation for how long it will take to work that balance down to just – like a negligible level?
In other words, when, I guess, would we expect to see net loan growth again? And how sustainable is that double-digit annualized growth ex PPP that you have this quarter?
Yes, Scott. Thanks for the questions. And I think John is going to – will answer the first question about what we think the 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. I’ll take the PPP part as Mark just mentioned. We really, in the fourth quarter saw a significant pick up in the forgiveness and kind of the rate we are looking now, I would expect it to be in the first half of the year, probably more weighted to the second quarter than the first 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, not a handful, we’ve got a number, probably about half of the remaining number that kind of haven’t even begun. So there is 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.
Thank you.
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 on 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 that even with the robust commercial closings in the fourth quarter, our pipeline sits today at a nice level that should make me feel confident that the first quarter economic activity engage with levels of our bankers and the interest in our capital solutions will guide us into those levels.
And to John’s point, the SBA has to get the applications finalized for forgiveness on the 100,000, 150,000 which just happened last week. So, that’s why I think we can see a speed up of that.
There were part of it too is we are going to have the next wave of PPP. That second draw of PPP kind of coming on as well. We’ve seen about to-date, couple hundred million dollars, $190 million of second draw of PPP activity thus far.
Okay. Perfect. And thank you for all that color. And then, just a separate question just on the expense save, what’s your expectations for where things go from this quarter’s roughly $68 million or so in core expenses?
Yes. I think, Scott, this is Michele. I think the runrate that we are looking now for 2021 is probably somewhere between $68 million to $70 million a quarter. Thinking around a little bit higher than our 2020 quarterly average, because we are investing more in corporate social responsibility items such as, expanding our downpayment assistance and expanding our team to increase our service to, like the 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 runrate I would use.
Perfect. All right. Thank you.
Yes. And Scott, just on the digital runrate, we are really excited about what we are investing in several technologies. I know that wasn’t specific to your question, but we are taking a recommendation to our Board on February 9th for a new online account origination platform that we are excited about.
On the heels of that, we are updating our in-branch platform and following as part of this three year journey that we talked about will be a complete upgrade of our online and mobile banking systems while the entire time, we’ll be working towards coordinating, not only the front-end customer experience, but also the back-office experience trying to get the throughput all the way from the customers’ fingers into the core systems.
So, a number of dollar – people investments and technology investments that are the reason we are not allowing this latest branch consolidation announcement to disrupt straight to the bottom-line.
Yes. Okay. That’s perfect. Thank you again for the answers.
Yes. Thanks, Scott.
The next question comes from Daniel Tamayo with Raymond James. Please go ahead.
Hello everyone. Good afternoon. First maybe if we start on the CECL adoption and kind of what that does to sort of reserves. You’ll have very strong reserves 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 and the path of that back to the more normalized level over time?
Yes. Good question. We’ll be at 2.22% 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 use our Moody’s forecast in order to develop our models in our allowance range.
And so, it will depend on what Moody’s does with our forecast and how much improvement they see through the year. I think loan growth will grow into that as well. I think our actual loan growth will kind of naturally bring that percentage down also, but I mean, I’d probably share with you, I mean, our bias is not to book negative provision in our model, if our model dictates 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.
Yes. That’s helpful. Thanks. And then, switching gears a little bit here. The buyback that you announced yesterday, how are you thinking about utilization of that in terms of timing and/or kind of priority?
Yes. Our intention is to be opportunistic. We are glad that we have it available. We want to use it widely and in our view, generally as long as we are trading below our historical averages of freight earnings or freight to book, it’s like a time to be in the market. And when we are trading above those levels that it’s probably a good time for us to stand back and be more opportunistic.
So, it’s a good number for us. It’s on the heels of a $75 million repurchase program that we completed in the first quarter of last year. So, we are glad to have another one in place and that’s at least how we are 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.
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 just start with John, we are really not seeing much of any C&I loan growth out of your peers. And I know, you kind of said it was broad based last quarter, but I was hoping you could expand any markets that stand out or any specific industries stand out in terms of what was behind the growth in the fourth quarter?
Yes. I am going to actually point out Mike Stewart who is really the driver of that business. I look at some of the originations that we had that came out across both the regions, public finance, the sponsor business, and Stewart, if you want to contribute kind of the names in that.
Yes, the broad based execution and some of that back to John’s Slide 19, when you see a couple hundred million dollars of lying commitment growth, even when utilization doesn’t increase, you are getting a pickup and that’s coming from core middle market, C&I revolving lines of credit. And we win that business often because of their comfort of what the future business model needs are.
Additionally, we were opportunistic with a winning on the backside of round one of PPP with some of the larger banks that stumbled on their execution of companies that chose First Merchants says they are next generation bank. We will need to put together the sponsor group structured finance that group was really slow this time last year as we went into the COVID environment. But access to their capital and their views 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 we – actually a while ago positioning ourselves without comparing to a market downturn and for those companies that need access to greater bank capital who might not have the traditional underwriting perspective, we 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 sound. But we have a lot of construction projects that are just funding us in that regard. So, it’s broad brush and across the board in our 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 the potential for market disruption, given the pending merger. Any plans on playing more offense in either southeast Michigan or maybe expand a bit more in the state?
Well, we definitely have plans to be in offense. We’ve acquired a really nice franchise in Munster, Indiana or I am sorry, Munster in Monroe, Michigan with over $1 billion of core deposits. But we think there is a great opportunity for us to continue the strategy that we really put in place at the time of the acquisition to grow the commercial management team.
And then, from an M&A perspective, we love to have our acquisitions be as 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. Well, the franchise that we’ve already acquired and are continuing to build in the Michigan market.
That’s great. Thanks everyone.
Thanks, Terry.
Thank you.
The next question comes from Damon DelMonte with KBW. Please go ahead.
Good afternoon, everyone. Hope everybody is doing well today. My first question, yes, my first question regarding the margin outlook again, Michele, I was wondering if you could just kind of revisit your comments and some of the puts and takes on the expectations on the core margin as we go forward?
Sure. Yes. So, I mean, while rates are challenging and we certainly have seen a margin drop in 2020 as a result, but I think core margin in 2021 should be stable assuming the competition continues to be rational with loan pricing. The stated margin, however you know will move around depending on the PPP fee income recognition and fair value accretion. But we ended at 3.13 for core margins this quarter and I feel like that’s something we should be able. We are going to work hard to defend in 2021.
Okay. And then, as you say that, your – the cash flow is coming off the securities portfolio, that was around the four hundred and something million?
Yes. $488 million is the cash flow we have locked over the next 12 months and that’s a pretty low yield fortunately at 178. And so, although we are not, we are buying at 1.65 today. We still won’t see much valuation there.
Got it. Okay. And then, with regard to your outlook on fee income, can you give a little perspective on your thoughts on that?
Yes. Certainly. I think Q4 fee income is a good runrate for 2021. The increase to it will be the acquisition of Hoosier Trust. And so, we think the Hoosier Trust acquisition will close, maybe at the beginning of the second quarter. And so, I think annualized fees from Hoosier Trust should be $1.5 million and so, obviously that will be a little bit lower in 2021 for a truncated year.
Got it. Okay. That’s all that I had. Thank you very much.
You are welcome.
Thanks, Damon.
Thanks.
The next question is a follow-up from Scott Siefers with Piper Sandler. Please go ahead.
Hey guys. Thanks for taking the follow-up. Maybe, Michele, I had lot of moving parts in the margin and I just want to make sure I am working towards the right place. Once you guys consider sort of a steady state reserve that we’ll be working back down towards, i.e. sort of a post-CECL, but pre-COVID type level.
In other words, once we get through the pandemic, where does that reserve sort of felt out as a percent of loans?
Yes. I mean, our reserve pre-pandemic and even pre-CECL, I think you know that historic runrate. Once we get past the pandemic, it’s probably what we would look to as being normalized. And so, I mean, I’d probably use that as a guide. Even with CECL, we have always looked at the economy and taken that into consideration in developing our reserves.
Perfect. So, then, as I guess, you guys were down around, just like around 1% in the fourth quarter of 2019 would it go down that low or does CECL just structurally keep it higher?
I think, CECL will structurally keep it a bit higher, yes.
Okay.
We do feel like we are entering 2021, or I would say as at 1/1 with a really strong healthy reserve after the day one adjustment. And our hope is that the economy continues to improve and that we have very little pressure for provisioning moving forward.
Yes. And I will say, one other just point of information, we use – we run a number of the Moody’s scenarios and we ran the baseline scenario which is kind of what we anchored to, I mean, we did one in developing our day one, we did lean a little heavier on a downside scenario to develop at day one just because of all the uncertainty. Moody’s had factored in unpacked similar and different things of like that.
And so, I think that’s a good data point and as we see things clear up, I think that will take some pressure off of us to feel like we have to maintain these levels.
Yes. Okay. And then, where – I know, it sounds like there is not a lot of need for provision almost period, as of right now. But where do you see net charge-offs trusting and when would that be that sort of second half of 2020 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 got reserves against those names that I think will flow through. So, it’s going to be right now, as I see it’s probably going to 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 the –sort of a reasonable way to think about?
Well, I would say, based on what our current provisioning levels are, which as we did what, $5 million, $4.5 million in the fourth quarter. It’s probably at that - above that level, maybe higher or even lower. But that’s what I can see today, so.
Yes. It 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 from me. Just going back to credit for one, for John, I guess, just on the criticized levels, was there any material change there in the quarter, John, on that?
Yes, we did see actually a couple of things. We did see an increase in the criticized levels as things moved out us of the substandard category and actually upwards and we did have some of the names that as we deferred it – did some deferrals we are actively moving grades downward, as well. So, we have a fair amount that’s got migrated into that category. But it’s kind of just what you would expect out of appropriate grading with respect to deferrals and the activity we are seeing related to COVID.
Okay. Perfect. And then, just a last to, just on maybe for Mark or whomever. But just on kind of the capital deployment in – I know you talked about the buyback, just any commentary at all on your model being inorganic and M&A, just kind of M&A discussions today are just how activity is on that front for you guys today?
Activity is okay. I mean, I have – there are a handful banks I saw give us important to us reach out to given the change in leadership that we’ve had. But that’s 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 we’d love things the things that we could announce something in 2021. I have a hard timing imagining sort of whatever, we’d find something that would close that quickly. But it’s always been part of our strategy and will continue to be part of the strategy on a go forward basis.
That is okay. All right. And then, just maybe lastly, just the kind of loan pipelines today, I guess, maybe I missed this if you guys gave any comments on it, but just kind of – I know your goal, I guess, kind of the stated goal, but just kind of where the pipelines are today relative to where they have been here last quarter or two?
Yes. It’s Mike Stewart again. The similar mortgage pipeline is, it remains at an all-time record. So that’s a positive. Consumer is pretty darn just last, to where it was this time last year at the 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 and 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 the commercial business to just to get a more forward look in that early pipeline remains at some really high levels for us. So, we are just getting to pull some rates and get the structures correct.
Got you. Okay. And then, Mike how is that today? I guess, sorry, it is in the slides, if I missed it I don’t.
Yes. You might want to look at line, Page 19, you will see in the bottom right-hand side. That’s the commercial and then on the consumer portfolio at our – same things happen on the utilization on the consumer portfolio is down to 42% and historically high as 48%. But that’s we had some low marks.
So I was going to build on that. So, I think, when you look at the line utilization, we’ve had a lot of internal discussion around it. We continue to see a 19 in the bottom right-hand corner, the absolute increase in the lines that we are making available to customers.
So, we continue to see strong requests for those lines and back to the comments, I don’t know if you had an opportunity to join us earlier, but they – we would expect as economic activity picks up and working capital demand returns, hopefully that gets back to where it was, say, 1Q of 2020 or at the end of last year.
Yes. I continue to think of that. So, okay. Thank you for taking the questions.
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.
Mark Hardwick
So, thank you. Just, we appreciate the participation. We look forward to another strong quarter and I am talking to you in 90 days from now. So, have a good rest of good day and evening. Thanks.
This conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.