First Merchants Corp
NASDAQ:FRME
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First Merchants Corp
Earnings Call Analysis
Q4-2023 Analysis
First Merchants Corp
In the midst of economic turbulence, First Merchants Corporation has emerged with robust results for 2023, concluding the year with an upbeat earnings call. Safeguarding stakeholders' interests through prioritizing cash, liquidity, and capital, the company reported a commendable annual loan growth at 6.6% for Q4 and a sound 5.1% for the year. With its core strength rooted in commercial lending which represented approximately 70% of loan growth, the institution achieved a notable 8.01% yield on new and renewed loans. Striving to move forward, the bank targets a mid to high single-digit loan growth for 2024.
First Merchants Corporation has demonstrated concrete growth, increasing its assets by $313 million during the quarter, largely driven by a $203 million surge in loans and a $98 million rise in investments. Furthermore, the institution reported a significant jump in equity growth, resonant of its strong profitability and financial resilience. Pertinently, tangible book value per share spiked by 11.7% last quarter, an indication of the firm's enduring earnings power.
Despite the headwinds faced, noninterest income saw only a modest decrease. Nevertheless, this sector was affected by several non-customer-related events, including a $2.3 million loss on available-for-sale securities. Keeping expenses in check remains a cornerstone of their strategy, with the core efficiency ratio holding at a competitive 55.56% for the quarter. Remarkably, management anticipates further streamlining of expenses while disclosing any one-time costs transparently.
Reflecting a decade-long compound annual growth rate (CAGR) of 12.9%, the company showcased its prowess in both organic growth and strategic acquisitions. Technological advancements, like the in-branch account opening process that slashes time by 80% and the introduction of new online and mobile platforms, bear testament to their commitment to innovation and efficiency. Nonetheless, investors must be cognizant of the one-time expenses expected in Q1 and Q2 due to overlapping system upgrades, approximating $3 million and $2 million respectively.
The strategic outlook for the upcoming year includes a preparedness for margin compression, especially in Q1, with a rebound foreseen in subsequent quarters. The bank's decisive actions, like the paydown of high-cost debt and prudent bond sales, are calibrated to counterbalance any potential interest rate cuts. Management foresees a second-half stabilize in net interest income, bolstered by expected loan growth, ensuring a sustainable trajectory for First Merchants as it navigates through 2024's uncertainties.
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Thank you for standing by, and welcome to the First Merchants Corporation's 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 Corporation that involves risks and uncertainties.Further information is contained within the press release, which we encourage you to review. Additionally, management would refer to non-GAAP measurements, 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/or other quantitative information to be discussed today, as well as reconciliation of GAAP to non-GAAP measures. As a reminder, 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 2. We released our earnings today at approximately 8:00 a.m. Eastern, and you can access today's slides by following the link on the third page of our earnings release.On Page 3 of our slides, you will see today's presenters and our bios to include our President, Mike Stewart, Chief Credit Officer, John Martin; and Chief Financial Officer, Michelle Kawiecki.On Page 4, we have 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 $7.3 billion of assets under advisement.On Slide 5, if you look at the bullet points under our fourth quarter results, we grew loans during the quarter by 6.6% annualized with a new and renewed loan yield of 8.01%. We also increased deposits by 4.8% during the same period, and we reported Q4 2023 EPS of $0.71 per share or $0.87 when adjusted for several onetime expense items incurred during the quarter.Those items include $12.7 million in onetime charges that include FDIC special assessment due to several bank failures in March of '23, severance expense related to a voluntary early retirement incentive plan that we offer to employees in the fourth quarter of 2023 and the write-off of a lease agreement due to our Indianapolis regional headquarter move.Moving down to the bottom half of the page, you will see year-to-date bullet points. We've delivered net income of $221.9 million and produced $3.73 of earnings per share for the year when adjusted for the same onetime expenditures that EPS totaled $3.89.During the year, where safety and soundness became the highest priority of stakeholders, we effectively repositioned our balance sheet to prioritize cash, liquidity and capital.The company's liquidity position improved by $585 million, as cash increased $300 million and borrowings declined $285 million. Our tangible common equity increased by $222 million during the year, driving our TCE ratio, up 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%. I'm proud of our team of 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 for delivering net deposit growth of 3% for the year.Before handing over the presentation, I would just like to thank our 2,000-plus colleagues for tackling a turbulent 2023 head-on and for delivering top quartile results that we can all be proud of. Mike?
Yes. Thank you, Mark, and good morning to all. Our business strategy that is outlined on slide 6 remains unchanged and is 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 in both stable, rural markets and in growing, metro markets. We are a commercially focused organization across all these business segments. And collectively, the First Merchants team is actively engaged in all of our communities, delivering the solutions listed on this page.Throughout 2023, we have remained committed to our business strategy of organic growth of loans, deposits and fee income, attracting, retaining and building our team, investing in technology platforms that enhance the client experience and delivering top-tier financial metrics.Let's turn to Slide 7. This slide validates our ability to deliver organic growth of both loans and deposits. The annualized total loan growth for the fourth quarter was 6.6%, highlighted by the 8% growth in commercial portfolio.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 has more detail to share around the portfolio mix and his detailed analysis show that nearly 70% of our total loan growth of 2023 comes from the commercial segment, which is consistent with our global portfolio mix of 75% commercial and the rest consumer.Within the consumer portfolio, we have residential mortgage, HELOC, installment and private banking relationships. And during the fourth quarter, that portfolio grew at a 2.7% annualized rate.So again, for 2023, the total loan portfolio grew at 5.1%. Mid to high single-digit loan growth is the expectation moving forward into 2024, while the commercial loan pipeline ended the year lower than the third quarter, the current pipeline is sufficient to achieve our expected organic growth goals. As you know, loan growth can be choppy throughout any given period.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 bank through those uncertain times on the loan portfolio sale and liquidity management, are some examples, but the commercial loan growth improved each quarter since March with the fourth quarter at its high watermark for the year.The overall economic environment in the Midwest, inclusive of the competitive landscape affirms my expectation of mid to high single-digit loan growth with improving loan yields. Mark highlighted that our new loan yields exceeded 8% during the quarter, which is an increase of 13 basis points from the prior.And Michelle has more detail to share on the positive trends in loan yields and loan types.The quarter saw total deposits growing 4.8% annualized and 3.1% for the full year 2023. The consumer deposit portfolio showed continued strong growth at over 11% annualized. This growth is inclusive of both the branch network and our private banking team.The consumer team continues to deliver consistent low-cost depository base. The commercial deposit growth during the quarter was also strong. This was the only quarter throughout 2023 that commercial deposits grew. But both teams are focused on relationship banking and building market share.And again, this page demonstrates that the fourth quarter delivered balance sheet growth. As Mark stated in the press release, our bank's liquidity improved throughout 2023. We have a strong capital position.Our team built a resilient balance sheet. So, we enter 2024 position 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 Michele to review in more detail the composition of our balance sheet and the drivers of our income statement. Michele?
These are our fourth quarter results. On Line 1, you will see we grew assets by $313 million during the quarter, representing a very productive quarter for the company. $203 million was from loans, which Mike just covered and $98 million was an increase in investments, reflecting an increase in value of available-for-sale securities.Deposits on Line 4 grew $175 million, leading to strong equity growth of $155 million, which you can see on Line 5. Pretax pre-provision earnings when adjusted for the onetime charges, Mark described of $12.7 million, totaled $61.1 million for the quarter.Adjusted pretax pre-provision return on assets was 1.33% and adjusted pretax pre-provision return on equity was 11.47%, all of which continue to reflect strong profitability metrics.Tangible book value per share increased 11.7% from last quarter, totaling $25.06 at year-end. Slide 9 shows the year-to-date results. The variances on balance sheet Lines 1 through 5 display the work the team has done in shifting the earning asset mix through the year, which resulted in a robust increase in yield on earning assets of 1.46% year-over-year.Year-to-date pretax pre-provision earnings, excluding the onetime charges I mentioned previously, totaled $275.4 million. Adjusted pretax pre-provision return on assets was 1.51%, and adjusted pretax pre-provision return on equity was 12.95%.Tangible book value per share increased $3.61 or 17% over prior year, reflecting strong year-to-date earnings. 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. A graph of this is included on Slide 23.Details of our investment portfolio are disclosed on slide 10. We sold $43 million in bonds this quarter, resulting in a loss of $2.3 million. We have sold nearly $400 million in 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 liquidity to put to work in the loan portfolio, pay down higher rate wholesale funding and to ensure we have a solid cash position. Expected cash flows from scheduled principal and interest payments and bond maturities in 2024, totaled $282 million.Slide 11 shows some details on our loan portfolio. The total loan portfolio yield continues to increase, climbing 13 basis points to 6.71% from 6.58% last quarter. You will see the delineation of our portfolio between VIX versus variable on the bottom right, 2/3 of our loan portfolio is variable rate and half of the portfolio reprices 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.As I mentioned last quarter, we have $900,000 of fixed rate loans repricing during 2024 with a weighted average maturity rate of approximately 4.7%, which will provide some incremental interest income given new loans or repricing at 8.01% currently.The allowance for credit losses on slide 12, declined just slightly from 1.67% to 1.64% 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 $800,000 due to the decline in unfunded commitment balances.The result was net provision expense of $1.5 million recognized in the income statement. Note that we have $23.2 million of remaining fair value marks on acquired loans, our coverage ratio, including those marks is 1.82%, which it provides exceptional coverage of credit losses were to materialize.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 and a low average account balance, reflecting a diverse deposit franchise.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. 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 2, we expect the pace will be even slower than what we've experienced this quarter.We were pleased to be able to grow deposits during the year by 3.1% given deposits across the industry declined meaningfully in 2023. That growth was achieved while improving funding mix. We reduced brokered deposits and wholesale funding during the year and grew consumer and commercial deposits through customer acquisition and gaining a larger share of wallet.On slide 14, net interest income on a fully tax equivalent basis of $135.9 million declined $3.4 million from prior quarter. Earning asset yields increased 9 basis points this quarter as shown on Line 5 and was offset by the increase in funding costs on Line 6, reflecting stated net interest margin on Line 7 of 3.16%, a decline of 13 basis points from prior quarter.Next, slide 15 shows the details of noninterest income. Overall, noninterest income decreased by $1.4 million on a linked-quarter basis. As noted on the highlights on the slide, there were some noncustomer-related items impacting noninterest income this quarter, which included a $1.5 million BOLI gain, a $2.3 million loss on available-for-sale securities and a $1 million write-down of CRA investments.Customer-related items declined a modest $800,000, which reflected a $1.4 million decline on the sale of mortgage loans, offset by an increase in fiduciary and wealth management fees.Moving to slide 16. Noninterest expense for the quarter totaled $108.1 million, and as previously mentioned, included $12.7 million in onetime charges. Core noninterest expense was in line with expectations and totaled $95.4 million, an increase of $1.6 million over last quarter, driven primarily by seasonal incentive accruals. Our adjusted core efficiency ratio shown at the top right continues to be low, coming in at 55.56% for the quarter and 53.31% year-to-date.Slide 17 shows our capital ratios. Our 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 unrealized losses in AOCI. We are very pleased with the strength of our balance sheet and strong earnings, reflecting a successful year amid real disruption in the industry.That concludes my remarks, and I will now turn it over to Chief Credit Officer, John Martin to discuss asset quality.
Thanks, Michele, and good morning. My remarks start on slide 18. I'll highlight the loan portfolio, touch on the updated insight slide, review asset quality and the nonperforming asset roll forward before turning the call back over to Mark.Turning to Slide 18 on Line 2, where I highlight the various portfolio segments, commercial industrial loans originated by our regional and middle market banking teams grew the portfolio by $214 million. We came off a strong backlog in the third quarter, as Mike mentioned, with good pull-through. Investment real estate on Line 5 also had good movement in the quarter from both new originations and with properties moving out of the construction portfolio and to mini-perm.As the sponsor portfolio seasons, we continue to see exits from the portfolio as firms reach their time horizon resulting in periodic exits and paydowns. As mentioned on prior calls, higher interest rates have driven additional capital investment into platform companies in order to meet our underwriting and stress criteria.Turning to slide 19. I've updated the portfolio insights slide to provide additional transparency in the commercial space. The C&I classification includes sponsor finance as well as owner-occupied CRE associated with the business. 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 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 a fixed charge coverage ratio of 1.5x based on September information.This portfolio consists of single bank deals for platform companies and 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. We continue to provide the breakout of our nonowner-occupied commercial real estate portfolio with additional detail around our office exposure. Office exposure is broken 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 in medical.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. The office portfolio is well diversified by tenant type and geographic mix. We continue to periodically review our larger office exposure and view the exposure is reasonably mitigated through a combination of loan to value, guarantors, tenant mix and other considerations.On slide 21, I've highlighted our asset quality trends and current position. NPAs and 90 days past due loans decreased $1.1 million to 47 basis points of loans and ORE. We continue to experience consistent portfolio performance despite higher rates with relatively consistent levels of classifieds at 1.94% of loans. We moved past last quarter's last charge-offs with $3.1 million of net charge-offs or 10 basis points of annualized average loans for the quarter.Then moving on to slide 22, where I began to roll forward the migration of nonperforming loans, charge-offs, ORE and 90 days past due. For the quarter, we added nonaccrual loans on Line 2 of $10.3 million, a reduction from payoffs or changes in accrual status of $6.1 million on Line 3 and a reduction from gross charge-offs of $3.7 million. Dropping down to Line 9, we wrote down ORE by $1.1 million, which resulted in NPAs plus 90 days past due, ending at $58.6 million for the quarter.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 6.6% annualized growth rate, and both criticized and classified loans remain in check with stable delinquency.I appreciate your attention, and I'll now turn the call back over to Mark Hardwick.
Turning to slide 23. I'm going to review a few of my favorite charts as they take a more long-term perspective to look at our performance. On the top right, our 10-year earnings per share CAGR totaled 10.2%. And looking at both the growth and tangible book value per share and dividends paid during 2023, total book value returned equaled 23%. Or if you prefer to look at tangible book value per share, excluding AOCI, our total book value excluding AOCI return for the year equaled just over 15%.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 that fuels our growth.Slide 25, I've made a few edits to include replacing the word digital transformation with continued investment in. During the last three years, we have delivered a new online account origination platform, enhancements to our commercial loan automation system, and we are just days and months away from completing four big enhancements.This week, we completed the rollout of our personal in-branch account opening process, which reduces account opening times from an average of 45 minutes to less than 10 minutes, while eliminating air rates by nearly 75%. It's also connected with our online account opening process that can be delivered seamlessly through either channel or both channels.We're also live or in beta with our new online and mobile platform for consumer, customers and plan to be fully live with 160,000 customers by the end of February. 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.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 upgrades. We expect a first quarter charge of approximately $3 million and the second quarter charge of approximately $2 million. Through these projects, we have truly streamlined and simplified the client experience, and we will continue to focus on modest relevant enhancements in the future.Thanks for your attention and your investment in First Merchants. And at this time, we're happy to take questions.
Thank you. [Operator Instructions]. Our first question comes from the line of Daniel Tamayo with Raymond James.
Maybe, Michelle, just first 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. And I apologize if I missed it, but did you have kind of a baseline assumption for how the NIM trends through 2024 and what NII might look like?
Sure. Good morning. So, for Q1, we do expect to see a bit more compression in 2024. Our December margin was 3.12%. So that can give you a bit of a data point. And then I would also remind you that because we're so 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.Now, if there are rate cuts, our model tells us that for each 25 basis point rate cut, margin declines about four basis points. 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. And 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. We continue to sell bonds, which creates some spread when we put that cash back to work in loans and higher cost funding.And the other thing that I mentioned, too, is typically in a declining rate environment, we tend to see an opportunity for higher mortgage loan gain sales. So, although we think that there are definitely some headwinds when we have a declining rate environment, we think that there's some tailwinds as well.
Is there kind of an all-in NII outlook? You obviously have an expectation for continued strong loan growth in the year? Just curious how you think NII might end up for the year.
Yes. I think in Q1, we will see some compression in net interest income, but then we're expecting stability and growth thereafter, particularly in the second half due to our expected growth.
And then lastly, just following up on your comment on mortgage banking. You've maybe not bottomed as low as some other banks doing quite well actually last year. Just curious, where you think that number could end up once rates start coming down? I think you were doing about $20 million a year doing some pretty good times in 2020 and 2021. Do you think you'll be able to get above that given the investments you've made?
Daniel, it's Mark Hardwick. That's a good question. We're really pleased by the enhancements we've made with the team post level 1. So, we kind of doubled the size of the business before the downturn in rates. And when I say doubled, it was our portfolio or First Merchants originations were almost identical or level 1.And so, by putting the two organizations together, we feel like we've materially strengthened the outlook. And I think it has a lot to do with rates, but I'm confident that we had potential and capacity in the core First Merchants franchise based on this change that we've had in our strategy around mortgage. So, yes, I mean I'm confident that if we have a decline in rates that we should be able to exceed our historical performance when you look at the two on a combined basis.
Thank you. Our next question comes from the line of Damon DelMonte with KBW.
Just wanted to start off with some questions on expenses. Michelle, looking for a little bit more guidance here as you go into '24. Obviously, there are some onetime items this quarter. But kind of what are you thinking about for a good core run rate?
Yes, good morning, Damon. So this quarter, our core expense total, when you back out those onetime 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.DelMonte, as Mark mentioned, we will incur some onetime charges on top of our core expense run rate in Q1 and Q2 due to the online banking conversion and 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're very focused on good expense management for 2024 and feel that strongly that we can achieve that.
And then on the fee income side, you called out a few items to kind of net, those three items together, you're probably closer to like a $28 million operating noninterest income result this quarter. I know there's some volatility around potential for mortgage banking income that we just spoke about. But as you look at your other drivers of fee income, how should we kind of look at the quarterly level going forward?
Yes. This quarter, I think 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.
And then just lastly, obviously, some good recapture on the AOCI, which boosted tangible book value and tangible common equity. I think the TCE ratio ended around 8.5%. Just kind of wondering what your thoughts are on capital management and a buyback in particular.
Yes. Thanks, Damon. Yes, we were really thrilled to see the return to the TCE ratio over 8%. And it was the catalyst to paying down $40 million of our sub debt. We decided to tackle it first. We've got a remaining $25 million, which we're likely to pay down next quarter and just feel good about managing the bank based on a TCE and total risk-based capital level primarily off of common equity.So, thinking about that first, there may be a time assuming that we have stabilization in rates where as we continue to add capital through earnings, we have the capacity to be active in the market. But these prices, I'm inclined to do that, but we have not started that process.
Thank you. Our next question comes from the line of Terry McEvoy from Stephens.
The $214 million of C&I regional banking loans caught my eye, and I think you also mention in 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 big part of the portfolio?
Yes. Good question, Terry. It's Mike Stewart. The muted growth that we saw in the prior quarter was simply because a lot of the C&I transactions really hadn't closed at that point. So, we ended the quarter with a really strong high pipeline that did materialize. I think John even pointed that out. And it really was to that whole region bank model, which is traditionally the commercial industrial space.And that's the space that I think that we still have good outlooks as we turn the year to 2024 fully staffed in our marketplace, taking advantage of competitive disruptions, strong economic factors.When you think about Michigan, Indiana, Ohio, so that's what's driving a stable pipeline of that. We saw nice growth in the investment real estate portfolio, solid transactions. Some of it could be growth underneath construction growth, but more of it's just the origination has been good in the asset classes that we do play in, in addition to some fully funded term loans that we were focused on. So, just a nice balanced mix across the Midwest here.
And, Terry, I might just add, in terms of the industry, it's pretty much across the board. I mean we're a Midwest C&I bank or commercial bank. And when we pick up C&I, it's just what's in our footprint. It's not a vertical that we're in any particular area. So, it comes in kind of a broad base as to what happens to be.
And Michelle, do you have the level of index deposits as we all attempt to potentially model out lower rates and how that could impact your funding costs?
Yes. We have $2.5 billion of deposits that are tied to an index that we'll be able to reprice along with rate cuts if those occur.
And then just a last question is trying the expenses, early retirement severance lease. Are those connected to kind of broader expense management actions to manage expenses in 2024? And I'm trying to think of the real numbers and how do you think about the earn back on the, call it, $8.4 million?
Yes, our bank is quick. It's less than a year. So, we're really pleased with the way the voluntary retirement played out. And as much as anything, just excited about the opportunity that it creates for hungry employees that are ready for the next stage of their career.
Thank you. Our next question comes from the line of Nathan Race with Piper Sandler.
I jumped on a little late, but I think I heard kind of a mid to high single-digit loan growth outlook for this year. I'm just curious how you guys are thinking about the opportunities to grow the core deposit franchise in 2024. Obviously, it was a difficult year ago core deposits in '23. So, just curious how you guys are thinking about those opportunities, particularly in light of some of the improvements or enhancements on the technology side of things.
Yes. I would just say that we feel great about our liquidity position, which you saw us lead with that in the press release. And early in the call, we talked about that $585 million change, $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 our expectations are always mid to low single-digit deposit growth. So if you think about 3%, 4% is our target kind of year after year. If you think about normal environment, it's obviously COVID and all the stimulus kind of changed those things. But it does feel like we're starting to settle in to a banking environment that feels more like it used to.
And just thinking about the size of the securities portfolio going forward, I appreciate the disclosure around how much cash flow we have coming off this year. Is there expectation that just the portfolio shrinks by that amount? Or you are able to just redeploy that cash flow and incremental deposit growth into new loans? Or do you guys see a need to maybe grow the securities book to some extent?
We're not planning to grow the securities book. We are planning to use that liquidity for loan growth.
And then just one last question on credit, maybe for John. I think in the past, you've talked about a normalized charge-off range between 15 to 20 basis points. Is there anything that you're seeing on the horizon that would cause you to deviate from that kind of historical trajectory into this year and next? Obviously, nice improvement in most credit metrics here in the fourth quarter, but just any thoughts on that kind of historical range as we kind of enter still somewhat uncertain environment this year?
Yes. Well, no, I don't. Actually, I wait for the question of what the run rate on charge-offs, what 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 go through and you continue your portfolio reviews and your analysis of individual credits. And that still seems like it's reasonable to me given the level of classified, the level of criticized to pencil in.
And obviously, you guys are still operating with a very healthy reserve as a percentage of loans and the NPLs for that matter. Any thoughts on just kind of where the reserve may be bottoms over the next year or two as a percentage of loans in terms of kind of how you guys need to provide for kind of that mid to high single-digit loan growth outlook?
Well, I mean it will be likely that we'll take some provision to cover at least our loan growth during the year. We'll have to look at the changes in the economic scenarios. Obviously, that will play a part in that determination. It might still tick down a little bit. We're at 1.64 for a coverage ratio now. We'll just have to kind of see how the year plays out with whether we get a soft play or we get a recession. I think that's going to make a big difference.
And then just one last housekeeping question. Does the tax rate go back up to around 15% for the first quarter of '24?
Yes. Typically, our effective tax rate is around 15% to 15.5%. So, I think that's what you should expect in 2024.
Thank you. Our next question comes from the line of Brian Martin with Janney.
Maybe just one for John or two. I joined late. John, did you talk about what the special mention credits did in the quarter? I know that you got the classifieds in the deck. Just curious what the leading indicator there looks like. It sounds like everything is very strong on the credit front. Just trying to look a little bit deeper at that number.
Yes. We don't disclose our criticized assets on the slides. But they've kind of trended with the classifieds and we're, from a commitment standpoint, pretty much flat for the quarter.
I just wanted direction, just kind of how you how it's looking. It sounds pretty good. Just wanted to kind of confirm that. And then maybe just one for Michele on the deposit repricing, Michele, that $2.5 billion, is that pretty immediate on the deposit repricing? I guess, I don't know what that was tied to index-wise, but I assume it's pretty immediate.
It is, yes.
And then maybe just last two, just on the growth outlook, it still sounds very strong. And obviously, the focus is on the organic side. I mean, do you guys view or see opportunities out there on the M&A side? I mean there's a lot on your plate listening on the call and everything going on, but just trying to understand what the opportunities may be on the M&A side, I guess, in '24 and beyond.
Yes, we continue to have communication with a handful of banks that we think would be a great fit as part of our franchise. But I'm not sure the environment has really changed to make M&A really attractive yet.A reduction of interest rates helped some return of stock price has been helpful. And we're just going to continue to have conversations. And when sellers are ready and looking for partners, hopefully, it fits with all of the other initiatives that we have happening.Really pleased to get some of these tech projects behind us by midyear or by June 30. And when we're in the middle of that kind of activity, there's just no way to really even think about M&A. But the conversations are continuous, and we continue to build relationships.
I mean, the organic focus is where you guys have done that's been doing a great job. And like you said, all these initiatives, you don't want to drop the ball on those and get those done and timing is not perfect just yet. So, okay.And then maybe a last one for me, maybe for John or whomever, but just as you kind of look at the loan repricing this year of the renewals in the rate increases, I guess, have you taken a look at that portfolio I guess? Or can you just give any commentary about how much risk you see in those loans repricing is from a credit risk the renewal, absorbing the stress of the higher rates or have you got any type of color on that?
I missed the kind of the first part. Are you talking about investment real estate specifically?
Not just in general, in the loan book of repricing this year. And the credit just being able to absorb the impact of higher rates as they repricing just if you kind of look at that maybe on the chunkier credits?
So far, what I have seen across the portfolio is that customers have been able to either increase their prices previously, and they've been able to absorb the changes in interest rates pretty well, quite frankly.You do see it in cases where the higher interest rates have led to slightly higher debt service or higher debt service. But there's been a series of maneuvers either through increase of prices or reduction in expenses or something else in the income statement they've been able to compensate for. So, yes, I mean, you see it. You see it, but you've got good business owners there figuring it out.Yes. And Michelle mentioned we have $900 million at a rate of 4.7% that are fixed rates that will mature in '24. And when we look through those, we're optimistic about how that helps earnings versus feeling like somehow you move into a credit issue.
I'm currently showing no further questions at this time. I'd like to turn the call back to Mr. Mark Hardwick for closing remarks.
Thank you, Norma. Yes. Thanks, everyone, for your participation. We are, again, really pleased with the year that we had, especially in light of some of the challenges that occurred throughout the industry, what people are referring to it as 'March Madness'. And just it helped 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 in an incredibly strong position that sets us up for success in the future. So again, we appreciate your investment. We thank you for your time, and have a good rest of your day. Thanks.
This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.