First Merchants Corp
NASDAQ:FRME
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First Merchants Corp
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00:05 Good day and welcome to the First Merchants Corporation Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.
00:31 And 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 can be contained within the press release, which we encourage you to review.
00:52 Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. The press release available on the website contains financial and other quantitative information to be discussed today, as well as a reconciliation of GAAP to non-GAAP measures.
01:17 I would now like to turn the conference over to Mark Hardwick, CEO. Sir, please go ahead.
01:25 Thank you, Chris. And thanks for the introduction and for covering the forward-looking statements. Hey, good morning, everyone, or good afternoon, everyone, to our fourth quarter 2021 conference call. We released our earnings earlier today at approximately 8:00 AM Eastern Time. Hopefully, you have all found your way to our slide presentation. But if you haven't, you can access the slides by following the link on the second page of our earnings release.
01:54 On Page 3, you will see today's presenters and bios to include President, Mike Stewart; Chief Credit Officer, John Martin; and Chief Financial Officer, Michele Kawiecki. Page 4 is a one-page snapshot of the First Merchants' geographic footprint and a few relevant financial highlights for your review.
02:15 Year-to-date, return on assets of 1.39%, return on tangible equity of 16.17% and our Moody's investment grade [A3] (ph) Baseline Credit rating are reflective of our high performing and sustainable business model.
2:33 Now if you turn to Slide 5. As my quote in the press release states, we delivered a record year on many fronts. We've reached record levels for loans, deposits, total assets and we produced record net income by earning more than $200 million for the first time in First Merchants' history. EPS totaled a record $3.81 per share, while investing in the future of our business, both culturally and digitally at record levels.
03:04 Mike Stewart will now provide some color on our lines of business before Michele and John review the financials and credit data.
03:11 Thank you, Mark, and good afternoon to all. As you look at the next two slides, I want to provide an update on a lot of business results and their contributions within the quarter. Since nothing's changed within our strategy and key lines of business, which is Page 6. I'd ask just to turn to Page 7, we can focus on the region and line of business highlights.
03:34 The top of the page offers a breakdown of the core loan growth by our business units. During the fourth quarter, we grew our total loan portfolio by an annualized rate in excess of 13%, with each business group contributing to that growth. For the full year, we grew our loan balances at our expected mid-single-digit growth rate, up nearly 7%. The Private Wealth Consumer and Mortgage Groups, all grew in the quarter at low-single-digit annualized percentages and the First Merchants' consumer portfolio growth has steadily increased throughout the year from both in-branch and online originations.
04:14 Our HELOC product along with the increased utilization rates on existing home equity loans are the drivers of the fourth quarter increases. Our consumer clients have strong credit profiles, good liquidity and have put strong home values to work by using their home equity. And in the quarter, the consumer loan pipeline is up over 30% from the prior year-end.
04:38 For our mortgage portfolio, we continue to experience increases in construction and purchase volumes, which drove the fourth quarter balance sheet of more than 5%. For the second consecutive year, our mortgage team worked with over 3,000 clients and assisted with first-time homebuyers, new home purchases or refinancing, that in total reached $750 million for the full year of 2021. The pipeline for mortgage originations ended the quarter strong, up over 20% from the end of 2020.
05:10 Our total non-PPP commercial loan portfolio growth was the highlight within the quarter, growing more than 16% on an annualized rate. For the full year, the commercial growth approach 10%. Within the commercial line of business, we have several segments. One of which is commercial real estate. We spoke last quarter about the decline in the commercial real estate balances in Q3 and the strong new origination volumes.
05:37 During the fourth quarter, the commercial real estate footings grew at an annualized rate of more than 2% with continued strong originations through the end of the year. The end of quarter pipeline for the investment real estate group continue to grow and is at a two-year high.
05:53 The commercial and industrial segment remains the key leader in both the fourth quarter and full year commercial growth. The primary drivers continue to be our team and our markets. Our team is active and engaged in winning new clients' market share along with providing additional senior debt and treasury services to our existing clients. This team has been augmented with 11 new relationship managers that have joined the First Merchants' commercial team. The new teammates have an expertise in middle-market, asset-base, investment real estate or sponsor finance and have contributed to the stated growth.
06:29 Within the markets we serve, businesses are expanding plant and equipment to meet growing demand. We have continued to see financing plans for new equipment and expanded manufacturing sites to meet their growth or to onshore more of their production capabilities. Increases to the working capital cycle is driving larger line of credit commitments and increases in utilization of these lines.
06:54 Additionally, succession planning events within the ownership of middle-market companies continue to be a driver for our sponsor finance team or through dividend recaps and ESOP transactions. We have expertise within any of these strategic capital events.
07:09 The economic and business climate across all our markets is very good. We see the resiliency in the management teams of the companies. They have solid business plans and solid balance sheets, they are positioned for growth and they continue to effectively navigate supply chain and labor issues. Our commercial team remains active and engaged with and prepared for their capital needs, and the commercial pipeline remains strong at the end of the year.
07:35 The map you see on the top left portion of Page 7 represents 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 across all of our lines of business.
07:51 I want to offer a few comments about Level One. I've been able to spend much time in their market and with their teams. They have a strong culture and a demonstrated track record of delivering growth. The mortgage team is building early synergies with the FMB team that will drive or double the size of our mortgage originations.
08:10 The consumer team is eager to gain access to the enhanced product sets First Merchants currently offers. And I have witnessed their commercial bankers in action, meeting with their clients and prospective clients. Their commercial team like First Merchants is active and engaged within their communities and ready to leverage the larger balance sheet offered post-close. We have much work to do between now and integration, but we are poised for continued winning in the Southeast Michigan marketplace.
08:40 I will now turn the call over to Michele, who'll provide more complete review of the quarter results and operating metrics before John shares the soundness of our portfolio.
08:50 Thanks, Mike. My comments will begin on Slide 8, covering fourth quarter results. We are pleased to report another quarter of strong balance sheet growth, which you can see on lines 1 through 5. The numbers are reflective of the exceptional core loan and deposit growth that Mike Stewart just covered, leading to double-digit earning asset growth and total asset growth. Total assets grew $392 million during the quarter or 10.4% on an annualized basis.
09:18 You will see on line 17, that net income totaled $47.7 million, a decline of $5 million from the third quarter where the declines in PPP fee income and securities gains created a meaningful variance. Pre-tax, pre-provision earnings remain strong at $55.2 million, bringing pre-tax pre-provision return on assets to 1.44% and return on equity to 11.68%.
09:46 Earnings per share on line 23 totaled $0.89 for the fourth quarter. This represented a decline on a linked quarter basis of $0.09, all of which was due to less PPP fee income, less securities gains and Level One acquisition expenses. Therefore core earnings for the quarter continued to be strong.
10:09 Slide 9 shows our year-to-date results. Line 23 shows year-to-date earnings per share of $3.81, which is a $1.07 increase over the prior year. The efficiency ratio for the year was a strong 50.94%, representing exceptional operating performance. Despite the headwinds of margin compression, pre-tax pre-provision earnings of $241.3 million, an increase of $12.8 million or 6%. Lines 18 through 20 show the returns on our performance with return on tangible common equity reaching a high 16.17%, an increase of 32% over the prior year.
10:55 Slide 10 shows highlights of our investment portfolio. The top right graph shows the trend in the portfolio yield. The yield on the portfolio declined 5 basis points during the quarter as a result of deploying excess liquidity into the bond portfolio and buying bonds at a lower yield than the overall portfolio yield. The new buy yield is currently at 2.30% and rising, given the recent market movement for the mix of bonds that we buy. Because we proactively invested excess liquidity in the bond portfolio throughout 2021, interest income on securities increased $18 million over 2021 from prior year. Realized gains disclosed at the bottom right were only $0.4 million this quarter.
11:45 Slide 11 contains highlights of our loan portfolio. In the bottom-left corner, you will see the stated fourth quarter loan yield declined 20 basis points from last quarter to 3.87%. Excluding the impact of PPP loans, loan yields were 3.70%, a decline of only 7 basis points compared to prior quarter. Yield on new and renewed loans this quarter averaged 3.14%.
12:13 Yield compression during the quarter came from the mortgage and installment loan portfolios due to the impact of pay-downs on higher rate loans and refinancing. We were pleased to see the yield on the commercial loans were stable showing no signs of compression. We believe that any future yield compression that we experience will be offset from strong core loan growth as was the case this quarter.
12:36 On the bottom right, you will see $6.3 billion of loans, or 68% of our portfolio are variable rate. The asset sensitivity of our balance sheet will be of great benefit, given the expectations of the rising rate environment this year.
12:51 Slide 12 shows the details related to our allowance for credit losses on loans. On the bottom left of the slide is a roll forward of our allowance balance. During the quarter, we had charge-offs of $5.3 million and recoveries of $700,000, which on a net basis decreased to the allowance balance modestly and we did not book any provision expense for the quarter. Therefore, the ending allowance for credit losses on loans was $195.4 million.
13:22 The coverage ratio trend is shown in the graph on the top left. Our coverage ratio at the end of Q4 is 2.11%, down from 2.21% from prior quarter. Excluding the PPP loans, the coverage ratio is 2.14% down from 2.26% last quarter.
13:40 Now I will move on to Slide 13. Average deposits increased $297 million. However, total interest expense on deposits continued to decline. At the bottom left, you will see our company's cost of deposits remained at low average of 18 basis points. Looking forward, we have a large deposit relationship that repriced during the month of January that will create some meaningful interest expense savings. So I expect cost of deposits to decline another 5 basis points in Q1 2022 assuming average balances stay the same.
14:18 Slide 14 shows the trending of our net interest margin. Line one shows net interest income on a fully tax equivalent basis of $106.9 million. When you back out non-core interest income items, such as fair value accretion on line two and the impact of PPP loans on line three, our core net interest income totals $101.7 million, compared to the prior quarter total of $100.3 million, the increase in core net interest income was $1.4 million.
14:55 Stated net interest margin on line six totaled 3.04% for the quarter. Adjusting for fair value accretion and PPP loans brings us to core net interest margin of 2.92%, a decline of 7 basis points from last quarter's core NIM of 2.99%. Margin was under pressure from excess liquidity, as investments in cash continue to represent an elevated level of earning assets. However, the increase in core net interest income shows that yield compression is more than offset by strong earning asset growth.
15:30 On Slide 15, non-interest income totals $25.8 million for the quarter with total customer-related fees of $22.8 million, which were just $300,000 less than last quarter. Customer-related fees for the year totaled $93.6 million, an increase of $2.6 million or 3%. The increase was led by robust growth in fiduciary and wealth management fees stemming from inflows from new money, market appreciation and the acquisition of Hoosier Trust Company.
16:07 Service charges on deposits continue to recover adding $2.6 million in fee income growth. In 2022, we plan to make enhancements to our customer overdraft program that is expected to lower overdraft fees by approximately $500,000 in 2022 and $1 million on an annualized basis.
16:29 As Mike Stewart mentioned earlier, mortgage loan production for the year was as strong as 2020 and those loans generated gains of $19.7 million, a $1.4 million increase over prior year. Offsetting those fee income increases was a decline in card payment fees of $2.9 million. Debit card swipes were up 11% over prior year, but the impact of Durbin adoption in July of 2020 caused an annualized decline in interchange fees of $9 million based on the volume at the time of adoption.
17:05 Derivative hedge fees were also lower in 2021 compared to 2020, but we expect these to increase in 2022 as customers look to lock in low rates. Looking to non-customer-related fee categories, an increase in BOLI gains of $1.9 million offset by a decline of $6.2 million in gains on the sale of securities brought total non-interest income for the year to $109.3 million, which is in line with prior year.
17:38 Moving to Slide 16. Total expenses for the quarter totaled $72.4 million, which is $1 million more than Q3 expenses and included $0.5 million of Level One acquisition costs. Total expenses for the year were $279.2 million, a 6% increase over prior year, due mostly to higher salaries and employee benefits, reflecting wage inflation and the competitive hiring in market.
18:08 Slide 17 shows the strength of our capital ratios. The tangible common equity ratio at the top of the page is 9.01% and in line with our TCE target. In addition to having $1.3 billion in tangible common equity, we have $195 million in allowance for credit losses. Coupling those numbers with the strong common equity Tier 1 ratio and total risk-based capital ratio at the bottom of the page reflects the safety and soundness of our company. Overall, our financial results reflect strong fundamentals for the year and we are pleased with the results.
18:45 That concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin to discuss asset quality.
18:52 Thanks, Michele, and good afternoon. My remarks start on Slide 18 where I'll highlight the loan portfolio, including segment growth and industry concentrations, then provide a loan growth bridge, including PPP loan program and finish with a review of asset quality and the asset quality roll forward before turning the call back over to Mark.
19:16 So then turning to Slide 18, the loan portfolio consists of a diversified commercially oriented portfolio with concentrations consistent with those segments of the economy found in our geographies. In the quarter, the loan portfolio grew $296 million, excluding $91 million of PPP forgiveness or 13.4%, and for the year, $566 million, excluding $560 million of loan forgiveness or 6.6%. I provided loan growth bridges for both the quarter and the year on the right side of the slide.
19:53 The PPP program is winding down with $107 million of loans remaining. Of those, roughly $4 million were in active repayment at the end of the year, leaving roughly $103 million left to forgive or otherwise repay. Given the timing of the applications and our historical experience with borrower forgiveness, we would expect that the remaining PPP loans would be substantially forgiven or converted to P&I by the end of the second quarter. The SBA has been responsive for the reimbursement of defaulted SBA loans and the forgiveness and repayment processes operated smoothly.
20:30 So turning to Slide 19. This slide highlights our asset quality. Our trends continue to be positive with NPAs and 90-day past due loans on line five, down $8 million. This left NPAs and 90-day past due to loans and ORE lower at 49 basis points. Classified loans on line 7 are those with a well-defined weakness, continued to decline this quarter, down $21.9 million ending the quarter at 1.3% of loans. This is the fourth consecutive quarterly decline in classified assets with credit quality improving across the spectrum of loan types.
21:16 And finally, net charge-offs on line 9 were $4.6 million as we charged off $4.7 million on a commercial contractor moved to non-accrual that we discussed last quarter. Absent that relationship, we had a net recovery for the quarter of $100,000.
21:34 Then finishing up on Slide 20, I've again provided the asset quality roll forward which reconciles the changes in asset quality. On line two, we added $6.4 million in new non-accrual credits in the quarter after adding $22.6 million last quarter, including the commercial contract that I just mentioned. On line three, we resolved $9.5 million in non-accruals, including $5.3 million reduction to an agribusiness related relationship, we added to non-accrual last quarter as well. On line five, we had gross charge-offs of $5.3 million, including the $4.7 million charge-off. And finally, dropping down to line 13, these changes left 9 NPAs and 90 days past due, down $7.9 million the quarter and $21.5 million for the year.
22:30 In summary, asset quality remains stable and improving during the quarter and the year. And while the operating environment remains challenging with the residual effects of supply chain issues and labor and hiring challenges, we continue to see our customers quickly adjust and grow their businesses.
22:47 Thank you for your attention, and I'll now turn the call back over to Mark Hardwick. Mark?
22:52 Thanks, John. On Slide 21, it's a great highlight of our track record of performance, which I'm really proud of. We have a 10-year total return of nearly 400% versus the SNL Bank index of 192%. Our EPS combined annual growth rate is 27.3% for the past 10 years and 11.7% since 2012 after returning back to more normal numbers post-crisis.
23:23 Our CAGR for tangible book value per share is 10.1% which, as you know, was calculated post dividends, post share repurchases and post M&A activity, which we think is a really strong result.
23:37 Slide 22 highlights our CAGR for asset growth including organic and M&A activity, which totals nearly 12% dating all the way back to 2000. Over the last 10 years, the combined annual growth rate is 14%. We're excited to close our Level One acquisition in the first half of 2022 and we're -- as Mike mentioned, we're growing increasingly optimistic about the opportunity that exists in the Detroit MSA. Our connectivity is high with all of our Level One teams and our folks and theirs are working really hard to bring this acquisition to life.
24:19 Regarding our needed approvals, this was kind of a cool thing. You have the open comment period and we received 6 letters during that period from community groups and all 6 were in support of the acquisition. So, a nice kind of turn of events, so to speak, of having community groups really advocating for First Merchants and the impact that we have in our markets.
24:47 Now on Slide 23, I'm going to go through this slide a little -- in more detail, given that it's the end of the year. And I'm really excited about it. We had great success in all 6 of our strategic imperatives in 2021 and they will be guiding our 2022 plan. Our vision statement was introduced in January of 2021. It's simple, to the point, and my First Merchants' colleagues are embracing the impact we can have by focusing on the financial wellness of the diverse communities that we serve.
25:24 We have superstar self-sacrificing employees, and in my opinion, we serve communities that are like-minded and highly resourceful. Our customers are open for business and they're getting after it, not only are they using traditional methods to deliver results, but they're also using new and unique ways to meet the needs of their friends and their neighbors.
25:47 The performance of our customers and the markets that we serve are clearly visible in our results. We introduced a new team statement as a way to more officially and on paper and in writing welcome diversity into the bank. I'd like to say that, if you believe in our vision and you love to help people and you enjoy being part of a winning team, then you're welcome at First Merchants and you should bring your whole self to work.
26:14 We've convinced our 10 goals from 2021 into 6 strategic imperatives and our actions follow these imperatives. In 2021, our cultural transformation made meaningful headway in many fronts. We introduced an official hybrid work standard with added flexibility. Our employees earned that trust by delivering in a partially hybrid environment over the last couple of years dealing with issues of the pandemic.
26:47 We've tackled wage inflation, vacancy challenges and we'll continue to address these to maintain strong teams during this volatile period. We've made notable strides in both diversity, equity and inclusion, and corporate social responsibility during 2021. We published our first CSR document called Elevating Communities. It's on our website, and if you're interested, you should check it out.
27:14 Our community home lending team delivered superior results in 2021. We hired new diverse employees with unique skill sets. We delivered nearly $2 million of down payment assistance grants. We achieved our statistical goal in the community development lending space and we're gaining momentum while having a huge impact in the majority, minority communities throughout our footprint
27:39 We are setting an example of how to partner with groups like the NCRC and other community groups evidenced by our Level One public comment period that produced letters of recommendation versus challenges. Even Al Pina, he leads the National Minority Community Reinvestment Co-Operative. For the first time in his career endorsed a merger, ours with Level One. As you know, Al was the individual who has recently been very public in his challenges of the merger of Huntington and TCF. So we're just thrilled with the relationship we've been able to build with him.
28:16 On the DE&I front, we've introduced the -- our team's statement above. We've recognized [indiscernible] in 2021 for the first time. We formalized our people of color, employee resource group, and we have a formal DE&I employee community that's helping set our direction for the future.
28:35 Our organic growth efforts produced results throughout all of our lines of business as evidenced on the prior pages. And more specifically, in Mike Stewart's comments earlier. I'm enthusiastic about our 20 FTE additions, our sales folks that have been added to the companies that are spread throughout the commercial bank, treasury management, private wealth and our community lending space.
28:59 Our digital transformation includes the addition of specialized talent and IT and consumer banking. We greatly enhanced our IT team and our knowledge of Force.com and Agile Technologies to include a new digital banking team. This group delivered a new state-of-the-art online account opening technology platform, and we're seeing the results of that investment as we build new muscles for the future.
29:26 Our top quartile financial results are supported by industry-leading governance and risk management practices with long-term sustainability at the core. We hired a new Chief Risk Officer in 2021 with big bank experience and the ability to lead a risk team that runs as fast -- at the same pace as fast as our IT, our finance, our credit and lines of business are running. And we're excited about the connectivity and coalescing of those groups.
29:55 We continue to leverage M&A as a core competency, evidenced by our Level One bank announcement on November 4. And Level One, just as a reminder, will be the largest acquisition in the Company's history, and we're taking a market that was modest in terms of coverage of an entire MSA and turning it into a full-scale market that can grow by 10% to 15% for the foreseeable future.
30:23 Lastly, we continue to cultivate and maintain high-quality investors who value ESG, our stakeholder-centric business model and high-performance results. And my last statement, I guess, we're just optimistic about 2022. We had a great 2021. We remain very comfortable with our consensus estimates, both pre and post-Level One. And it's early in the year, but our teams are running at full speed ahead and making this plan happen that we've laid out.
30:55 So, thanks for your attention and your investment. And Chris, at this time, we're happy to take questions.
31:01 Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Scott Siefers of Piper Sandler. Your line is open.
31:27 Good afternoon, everybody. Thank you for taking the question. I guess, Michele, first question is probably for you. So the underlying margin ex-PPP and purchase accounting benefits, it's compressed to just over -- or just around 2.92% or so. Maybe some thoughts on where it goes from here? I know you discussed the expected 5 basis points improvement in the cost of funds, but you still have a lot of excess liquidity. So I would be curious to hear your thoughts on the go-forward expectation?
31:54 Yeah. Well, aside from any Fed rate hikes, we are expecting to see margin improve this next quarter from the funding savings -- the funding cost savings that you just mentioned. And we're growing commercial loans at double digits with stable yields. So although there is pressure on core margin this quarter because of excess liquidity, we feel great about our pricing discipline.
32:16 We're probably a little surprised to see how robust our deposit growth was, but it was core, so we're very happy to have it. And when that normalizes, we don't know, in our plan, we do expect it to normalize around that 3% to 4% deposit growth. So that's what we're expecting today.
32:34 With the four rate hikes in the forecast, we do expect net interest income to increase 3% to 4% as a result of those rate hikes. That's what our models are telling us today.
32:45 Okay. Perfect. And I guess, along those lines, maybe, I guess I can sort of back into it, but do you guys have sort of a best guess as to how the margin and NII benefit from each 25 basis points, I guess, somewhere around 1% or so. Is that sort of the way the easy math would work?
33:05 Well, we do have some loan floors. And so the sensitivity or like in the first 25 basis point rate hike, about 60% of our variable rate loans will reprice in that first rate hike, 50 basis points. There's some more that we will reprice. 75 basis points is probably were the most asset sensitive. That's where we start to kind of move beyond our loan floors. Does that help?
33:31 It does, it does. So basically, sort of that third and fourth hikes are where you get sort of the most bang for your buck then?
33:39 Right.
33:40 Okay. Great. Thank you guys very much.
33:43 You're welcome.
33:43 Thanks, Scott.
33:47 Thank you. Our next question comes from Terry McEvoy of Stephens. Your line is open.
33:53 Hi, good afternoon, everyone.
33:56 Hi, Terry.
33:57 Hi. I was hoping maybe you could just talk about your big picture thoughts on loan growth in 2022 on a standalone basis. You talked about the new hires that occurred in 2021, and you can see the momentum that was building throughout the fourth quarter in terms of just loan growth.
34:18 Hi, Terry. Its Mike Stewart. I think we'll stay really confident with that mid to high single-digit loan growth, probably -- primarily driven through the Commercial segment. We're starting to see some pick-up like I noted it on the consumer side as well. So that's where we're going to keep our plan.
34:40 And then maybe a follow-up on fee income. A couple of areas were a little bit weaker than I was expecting and down quarter-over-quarter. And I know that the interchange fees kind of came into play in the second half of this year. Again, as a standalone company, what are your thoughts on kind of overall fee income growth, some areas of strength and maybe some areas that could be a bit weaker in 2022?
35:03 Yeah. I would say, Terry, that we're probably expecting our quarterly run rate on fee income to be $27.5 million. We do expect a meaningful decline in mortgage gains in 2022, not so much because of production volume, but more because of just pricing. We think pricing was pretty healthy in 2021, and we think it will normalize this coming year. But we do think growth in our wealth management business and the demand for loan level hedges and interchange income will all offset that headwind.
35:35 Great. Thanks for taking my questions.
35:38 Thank you, Terry.
35:41 Thank you. And next we have Daniel Tamayo of Raymond James. Your line is open.
35:49 Good afternoon, everybody. Thanks for taking the call. Maybe if we could just touch on the thoughts on the operating expense base. We were at kind of in line with expectations in this quarter, just in terms of what you're thinking for the coming year given wage inflation pressures and anything else would be helpful. Thanks.
36:13 Hey, Daniel. We think that our run rate next year will be around $73 million on average. Expense growth, we're expecting to be in the low to mid-single digits for new hires and digital infrastructure needs. So that's kind of what we're expecting.
36:30 Okay. All right. That's helpful. And there is a little nuance in this question, but was there any impact in the fourth quarter on margin from the difference in the period end loans and the average balances?
36:48 And maybe Mike Stewart can talk a little bit about some of the loan growth and whether the loan growth came in more towards the end of the quarter?
36:55 Right on. Well, a good question, nuanced. I'm sitting here thinking about that.
37:02 I mean, it was --
37:02 I'm going back to watching October, November.
37:05 It was later in the quarter, which means the dollars were sitting in lower earning assets for a period of time. And we just have had so much growth in liquidity. It's hard to get it deployed quickly. So we're putting in the bond portfolio or putting in the loan portfolio.
37:24 And the loan growth was a little bit heavier on the back end of the quarter.
37:28 Yeah.
37:30 So potential perhaps for a little bit of a benefit in the first quarter from that time?
37:37 Yeah. A little upside.
37:38 Yeah.
37:41 All right. That's all I had. Thanks for taking my questions.
37:44 Yeah. Thank you.
37:47 Thank you. Our next question comes from Damon DelMonte of KBW. Your line is open.
37:56 Hey, good afternoon, everyone. Hope everybody is doing well today. First question, just regarding the outlook on credit. I mean things are obviously humming along pretty well for you guys. Can you give a little perspective on the provision going forward? I know in the past, you kind of implied you'd rather grow into the reserve than to just release reserves. So just wondering if that still holds true and what we could expect for provision outlook?
38:22 Yeah. I can speak to -- hey, Damon, it's John Martin. I can speak to the outlook on the credit itself is, as you can see through the end of the year, it's been stable and improving. It's really been a positive story throughout 2021. And don't really look -- as I look into 2022, I don't really see a material change from just calling through the portfolio, doing portfolio reviews, et cetera.
38:48 In terms of the provision expense, given our coverage and where the allowance stands today, I think the plan is to grow in -- continues to be to grow into the allowance with minimal or no provision expense.
39:03 Got it. Okay. All right. That's helpful. And then with regards to the Level One deal. Mark, I think you mentioned, it's still scheduled to close kind of at the -- is it the end of the second quarter? Or is it during the second quarter? And I guess, along those lines, what additional approvals are outstanding?
39:21 Yeah. We're pretty far into the process with all of our regulatory approvals. I think the one key item is just whether or not the Fed decides to approve the merger through delegated authority in the regional office in Chicago. And at least all indications are that would happen, which would accelerate the timing. If it happens to go to DC, it's -- I think it's a 45-day additional time frame. So we still are anticipating late first quarter, but there is a chance that it carries over into the second quarter.
39:58 Got it. Okay. That's all that I had. Thank you very much.
40:02 Thank you.
40:04 Thank you. And next we have Brian Martin of Janney. Your line is open.
40:11 Hey, good afternoon everyone. Thank you for taking the questions. Just wanted to just touch on the people you guys hired, the recruiting you guys were successful with this year. Just kind of wondering how you're thinking about maybe areas that you still have yet to kind of bulk up on or I guess where you're still looking for added talent as you go into 2022 here. Certainly, I guess I'm assuming you'll be opportunistic, but just kind of any areas you're really targeting?
40:38 In 2021, we had about 20 sales folks. And as Mike mentioned, 11 of those were on the commercial side of the bank, the others were kind of scattered throughout our remaining lines of business. But we also had a meaningful increase of almost about the exact same amount in a combination of IT and the digital team that is helping drive the online account opening in the Force.com knowledge, Agile Investment, et cetera. So I expect a similar investment in talent additions in 2022 on the sales side and about half that number in the back office.
41:26 So the focus is still the same. Our intentions are to continue to grow our balance sheet, add bankers wherever we can and where we think we can move the needle and drive additional customer volume. And in the back office, we're just trying to make sure that we have the ability to upgrade our tech at a level that allows us to be competitive. And we're picking our spots where we're choosing to make investments that are outside of the traditional bank-in-a-box technologies like FIS and Pfizer and stepping up to more agile technology that is like we did with Terafina for the online account opening. So that's, I guess, the best way I could put what we're thinking for '22.
42:14 Yeah. That's helpful. Thanks, Mark. And just the -- maybe just on the capital side, you talked about -- you touched on M&A and kind of what you're doing there, but just with the buyback, I guess how are you thinking about that given the outlook for rate increases and the benefits it will accrue to you guys given your asset-sensitive balance sheet?
42:31 We're just -- on the buyback side, we're just going to be opportunistic. We have it. It's more of a defensive measure. And the cash that we're putting into our acquisition will make a meaningful difference in the overall TCE and our return on tangible common equity. And I feel like it maybe takes the pressure off of feeling like we have to be real aggressive with repurchases.
42:58 Okay. Perfect. And just the last one, just on the commercial utilization, I guess, what -- and I guess maybe Mike talked about it a little bit. Just kind of how are you thinking about where that unfolds kind of throughout the year?
43:12 Yeah. And John has got something. Do you want to start that?
43:15 No, go ahead. We'll compare notes in terms of what you provide when I've got here. Go ahead.
43:21 Yeah. So what we track from a pure revolver side in the commercial segment, we saw several basis point increases in that, but it's still -- when you go back, I would say, two to three years ago, it still subs into the under, what I would think about as normal average run rates of that. So there's still a lot of liquidity inside that.
43:44 But -- and then when I talk about the originations that happened in our commercial real estate group, those originations are primarily can sit inside construction, and that construction draw starts to move up to in early part of this past year, that secondary market was very active and lifting off assets off the balance sheet and our originations of new construction loans continue to grow. So we'll see those utilizations move up as well.
44:13 Yeah. Both nice headwinds. Go ahead, John.
44:15 Yeah. I was just going to kind of build on what Mike just said.
44:18 Or tailwinds, I should say.
44:20 Yeah. We had at the high pre-pandemic, we were looking at utilization of, call it, 48%. We get down to 38%, and now we're up to like 42%. What's running in the background, Brian, has been, and Mike mentioned it earlier, is a real growth in our commitments. Pre-pandemic, we had, call it, $2.4 billion in commitments. And we're now standing at $3.1 billion in commitments.
44:53 So we've seen not only rebound in our utilization, but we've also booked through the pandemic and even through today, $1 billion in additional commitments. So a couple of forces there back to Mark's and Mike's comments of the wind being at our back as we come out of the pandemic.
45:18 Got you. Okay. That's helpful. And just the last one, housekeeping. Maybe I missed it. When you said, Michele, on the benefit from the -- I guess, if you just did a 25 basis point rate hike, the margin benefit from just a one hike, I guess, assuming you get the full benefit rather than just the 60% maybe you get on the first raise or two? How much of an impact -- how much of a difference is there between the kind of that 60% level versus what the full impact would be once you kind of burn through those floors?
45:51 Well, we have $6.3 billion of loans that are variable. And so like I said, 60% of those will be repriced in the first 25 basis points.
46:00 And your comment of 100 basis point move, we had how much expansion, Michele [Multiple Speakers]
46:05 Yeah. I'm sorry. On a 100 basis point lift, our net interest income will increase 3% to 4%.
46:12 Okay. And that's also for the end of the year -- full year end of this year's number?
46:16 That's correct.
46:18 Yeah. Okay. [Multiple Speakers]
46:19 And so it's obviously more incremental each move.
46:22 Yeah. Okay. That's all I need. And thank you so much.
46:24 Thanks, Brian.
46:27 Thank you. And this concludes our question-and-answer session. I would now like to turn the conference back over to Mark Hardwick for any closing remarks.
46:40 Yeah. My only closing remarks are that, I appreciate your interest and your attention to First Merchants. We have a number of stakeholders that are listening today from shareholders to employees and customers and our regulators, and we just appreciate the continued commitment to our performance. So until the next call, have a great first quarter of the year.
47:09 Thank you. This conference has concluded. Thank you for attending today's presentation. You may now all disconnect and have a pleasant day.