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First Merchants Corp (NASDAQ:FRME)
Q4 2020 Earnings Call
Jan 28, 2021, 2:31 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the First Merchants' Fourth Quarter 2020 Earnings Call. [Operator Instructions] This presentation contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements can often, but not always be identified by the use of words like believe, continue, pattern, estimate, project, intend, anticipate, expect and similar expressions or future or conditional words 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: Plausible changes in economic and business conditions; the existence or exacerbation of general geopolitical instability and uncertainty; the effects of a pandemic or other unforeseeable event; the ability of First Merchants to integrate recent acquisitions and attract new customers; possible changes in monetary and fiscal policies; and loss 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 in market rates of interest competitive factors in the banking industry; changes in the banking legislation 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 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.

Mark K. Hardwick -- Chief Executive And Operating Officer

Good afternoon, and welcome to the First Merchants year-end 2020 conference call. We released our earnings today at approximately eight a.m. 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. Miss Navi, we thank you for the introduction and for covering in detail that forward-looking statement. We may have to find a way to shorten that up next time. On page three, you'll see today's presenters and our bios include Mike Stewart, our newly appointed President; John Martin, our Chief Credit Officer; and Michele Kawiecki, our newly appointed Chief Financial Officer. On page four, we have nice one-page snapshot at First Merchants and a few highlights and accomplishments for your review.

If you turn to slide five, I'd really like to start today by introducing our new vision statement. It's simple, yet 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'm thrilled to officially add diversity into our bank's vision statement to appropriately reflect our values and increasing commitment, and I'm 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 five and Slide six.

Michael J. Stewart -- President

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 teams have continued to invest in our capabilities to match the needs within our markets, leveraging the size of our balance sheet to build out 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 the round two of PPP, we're 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 as 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 platform. 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, assures we can grow in a balanced and 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 six, 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'm excited for you 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 investment in our digital journey.

Mark, I'll turn it back to you.

Mark K. Hardwick -- Chief Executive And Operating Officer

Great. Thanks, Mike. Now if you turn to Slide seven. As Mike quoted and 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 hire -- to acquire the Hoosier Trust company will provide strong topline 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 announce the consolidation of 17 banking centers, but we also laid out a three-year road map to digitize the bank.

We are making significant investments in people and technology to meet the ever-changing demands of our customer base, and it's 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 toward driving top quartile returns on equity. Throughout today's presentation, you will see strong financial results that ultimately produced $149 million of net income, $2.74 of earnings per share and a 1.7% pre-tax preprovision return on assets. Michele will highlight the health of our capital, liquidity and reserve position while sharing our 2020 financial results.

Michele M. Kawiecki -- Chief Financial Officer

Thanks, Mark. My comments will begin on Slide eight. 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 announcement in his remarks, charges of $4.5 million were recorded this quarter related to the disposition of assets and other costs 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 in 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 nine 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 remained 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 of 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 the fourth quarter loan yield was a strong 4.2%. Excluding the impact of PPP loans, the 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 that 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 the 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 was signed 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. This 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 the 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 reported 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 this robust allowance coverage, reflecting a cautious posture will position us very well heading into the new year, and we're 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 continued to see dollars and time deposits shift to money market and other nontimed 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 nine 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 six totaled 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, noninterest income totaled $27.5 million with total customer-related fees of $23.3 million. Service charges on deposits continued 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 at a quarterly high of $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 Durbin 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. We're 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 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 at $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 the 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.

John J. Martin -- Chief Credit Officer And Executive Vice President

Thanks, Michele, and good afternoon. I'll begin my comments on Slide 18 by reviewing the loan portfolio, including industry concentrations, provided an update on loan modifications, touch a little on the COVID sensitive industries and portfolios with a brief update on the PPP loan program, 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 remained strong in the quarter as well as the gain on sale, as Michele had 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 and working capital demands return to historical levels. Now 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, it 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 toward 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 on this portfolio and stay 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 our -- changes that have come out, should help to ease the process going forward, and we are adjusting our processing software accordingly. We have also begun taking applications for the second draw PPP loans with fairly strong demand, but not at the same level as the initial first draw program. So turning to Slide 23, where I cover asset quality. Overall, asset quality remained stable in the quarter with a $4.8 million increase in nonaccruals, with a $13 million loan for a senior living facility moving to nonaccrual in the quarter.

While Line two, 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 seven were stable at 2.7% of loans, down $2.8 million. Charge-offs were $600,000 or three basis points of total loans for the quarter and $8.3 million or nine basis points for the year. Now on this slide is a point of clarification I'd like to make on line nine, the $3.1 million in 4Q '19 and the $8.3 million that I just mentioned in 4Q '20 represent full year charge-offs while the 3Q '20 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 have remained low for the quarter and for the year. Asset quality is stabilized at year-end with classified assets leveling out.

There have been increases in nonperforming 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.

Mark K. Hardwick -- Chief Executive And Operating Officer

Great. Thanks, John. If you turn to Slide 25, it highlights 10 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 Reckon is tuned in to today's call, and he should be really proud of this scoreboard and his leadership. It was a heck of a year that we had and a heck of a 10-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're 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'm 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're 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'm 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're happy to take questions from the analysts as well. But first, I would just say, I'm enthusiastic about our team of professionals, our ability to deliver results and the future it offers all of our stakeholders. So thank you for your attention today, your investment in First Merchants.

And at this point, we're happy to take questions.

Questions and Answers:

Operator

The first question comes from Scott Siefers with Piper Sandler. Please go ahead.

Scott Siefers -- Piper Sandler -- Analyst

Good afternoon. Thanks for taking my question. I think the first one that I wanted to ask was around PPP. I think you've got somewhere around $650 million of the 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 had this quarter?

Mark K. Hardwick -- Chief Executive And Operating Officer

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 or the forgiveness process, and then we'll have Mike Stewart talk about the growth on top of that.

John J. Martin -- Chief Credit Officer And Executive Vice President

Scott, I'll take the PPP part, as Mark just mentioned. We really, in the fourth quarter, saw a significant pickup in the forgiveness. And kind of at the rate we're 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 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.

Michael J. Stewart -- President

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 talked about, and we've talked about for a long time that mid- single-digit growth rate, that I do believe, over 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 makes me feel confident that the first quarter economic activity, engagement level 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 of the under $150,000, which has just happened last week. So that's where I think we can see a speed up of that.

Mark K. Hardwick -- Chief Executive And Operating Officer

The other part of it, too, is we're going to have the next wave of PPP, that second draw PPP kind of coming on as well. We've seen about, to date, a couple hundred million dollars, $190 million of second draw PPP activity thus far.

Scott Siefers -- Piper Sandler -- Analyst

Okay. Perfect. Thank you for that color. And then just a separate question just on the expense base. What's your expectation for where things go from this quarter's roughly $68 million or so in core expenses?

Michele M. Kawiecki -- Chief Financial Officer

Yes. I think -- Scott, this is Michele. I think the run rate that we're looking at for 2021 is probably somewhere between $68 million to $70 million a quarter. They're going to run a little bit higher than our 2020 quarterly average because we're investing more in corporate social responsibility items such as expanding our down payment 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 run rate I would use.

Scott Siefers -- Piper Sandler -- Analyst

Okay. Thank you very much.

Mark K. Hardwick -- Chief Executive And Operating Officer

Yes. And Scott, just on the digital run rate, we're really excited about what we're investing in. We have several technologies. I know that wasn't specific to your question, but we are taking a recommendation to our Board on February nine for a new online account origination platform that we're excited about. On the heels of that, we're 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 toward automating, 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 system. So a number of dollars that people investments and technology investments that are the reason we're not allowing this latest branch consolidation announcement to just drop straight to the bottom line.

Scott Siefers -- Piper Sandler -- Analyst

Yeah. Okay. That's perfect. Thank you.

Operator

The next question comes from Daniel Tamayo with Raymond James. Please go ahead.

Daniel Tamayo -- Raymond James -- Analyst

Hello, everyone. Good afternoon. First, maybe if we start on the CECL adoption and kind of what that does to the reserves? We'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 a more normalized level over time?

Michele M. Kawiecki -- Chief Financial Officer

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 and our allowance range. And so it would depend on what Moody's does with their 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. 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.

Daniel Tamayo -- Raymond James -- Analyst

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?

Mark K. Hardwick -- Chief Executive And Operating Officer

Yes. Our intention is to be opportunistic. We're glad that we have it available. We want to use it wisely. And our view generally is when -- as long as we're trading below our historical averages of price to earnings or price to book, it's a good time to be in the market. And when we're trading above those levels, then 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're glad to have another one in place, and that's at least how we're 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.

Daniel Tamayo -- Raymond James -- Analyst

Okay great. I appreciate the comment.

Mark K. Hardwick -- Chief Executive And Operating Officer

Thank you, Daniel.

Operator

The next question comes from Terry McEvoy with Stephens. Please go ahead.

Terry McEvoy -- Stephens -- Analyst

Hi. Good afternoon everyone.

John J. Martin -- Chief Credit Officer And Executive Vice President

Hi Terrence.

Terry McEvoy -- Stephens -- Analyst

Maybe just start with John. We're really not seeing much, if 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.

John J. Martin -- Chief Credit Officer And Executive Vice President

Yes. I'm going to actually point to 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 Stew, I don't know if you want to contribute kind of the names of that.

Michael J. Stewart -- President

It is a broad base execution and some of that back to John's Slide 19, when you see a couple hundred million dollars of line commitment growth, even when utilization doesn't increase, you're 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 their future business model needs are. Additionally, we were opportunistic with 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 as their next-generation bank. When we put together the sponsor group, structured finance, that group was really slow this time last year as we went into the COVID environment, but as capital and 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, however you want to phrase it actually a while ago, position ourselves a little contrarian to a market downturn. And for those companies that need access to greater of bank capital who might not have the traditional underwriting perspective, we've 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, really sound. So we have a lot of construction projects that are just funding up in that regard. So broad brushed and across the board in our markets.

Terry McEvoy -- Stephens -- Analyst

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?

Mark K. Hardwick -- Chief Executive And Operating Officer

We definitely have plans to be on offense. We acquired a really nice franchise in Munster, Indiana -- I'm sorry, I'm sorry. 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 what the franchise that we've already acquired and are continuing to build in the Michigan market.

Terry McEvoy -- Stephens -- Analyst

That's great. Thanks everyone.

Michael J. Stewart -- President

Thanks Terrence.

Mark K. Hardwick -- Chief Executive And Operating Officer

Thank you.

Operator

The next question comes from Damon DelMonte with KBW. Please go ahead.

Damon DelMonte -- KBW -- Analyst

Good afternoon, everyone. Hope everybody's doing well today. My first question is 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 around the expectations on the core margin as we go forward?

Michele M. Kawiecki -- Chief Financial Officer

Sure. Yes. So I mean, low rates are challenging, and we certainly have seen our 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. Stated margin, however, 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're going to work hard to defend in 2021.

Damon DelMonte -- KBW -- Analyst

Okay. And then did you say that you were -- the cash flows coming off the securities portfolio, that was around the $400-and-something million?

Michele M. Kawiecki -- Chief Financial Officer

Yes. $488 million is the cash flow roll-off over the next 12 months, and that's at a pretty low yield, fortunately at 1.78%. And so although we're not -- we're buying at 1.65% today, we still won't see much erosion there.

Damon DelMonte -- KBW -- Analyst

Got it. Okay. And then with regards to your outlook on fee income, can you give a little perspective on your thoughts on that?

Michele M. Kawiecki -- Chief Financial Officer

Yes, certainly. I think Q4 fee income is a good run rate for 2021. The increase to it will be the acquisition of Hoosier Trust. And so we think the Hoosier Trust acquisition will close maybe 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.

Damon DelMonte -- KBW -- Analyst

Got it. Okay. That's all that I had. Thank you very much.

Michele M. Kawiecki -- Chief Financial Officer

You're welcome.

Mark K. Hardwick -- Chief Executive And Operating Officer

Thanks, Damon.

Operator

The next question is a follow-up from Scott Siefers with Piper Sandler. Please go ahead.

Scott Siefers -- Piper Sandler -- Analyst

Hey guys. Thanks for taking the follow-up. Michele, a lot of moving parts in the margin, and I just want to make sure I'm working toward the right place. What do you guys consider sort of a steady state reserve that we'll be working back down toward, i.e. sort of post-CECL, but pre-COVID type level? In other words, once we get through the pandemic, where does the reserve sort of settle itself out as a percent of loans?

Michele M. Kawiecki -- Chief Financial Officer

Yes. I mean, our reserve pre pandemic and even pre-CECL, I think that historic run rate, once we get past the pandemic is 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 taking that into consideration in developing our reserves.

Scott Siefers -- Piper Sandler -- Analyst

Perfect. So then -- so I guess, you guys were down around like around 1% in the fourth quarter of '19. Would it go down that low? Or does CECL just structurally keep it higher?

Michele M. Kawiecki -- Chief Financial Officer

I think CECL will structurally keep it a bit higher, yes.

Mark K. Hardwick -- Chief Executive And Operating Officer

I do feel like we're entering 2021 or let's say, as of 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.

Michele M. Kawiecki -- Chief Financial Officer

And I will say one other just point of information. We use -- we run a number of the Moody's scenarios. And when we ran the baseline scenario, which is kind of what we anchor to, I mean we did -- when in developing our day one, we did lean a little heavier on a downside scenario to develop that day one just because of all the uncertainty. Moody's had factored in unpassed stimulus and different things 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.

Mark K. Hardwick -- Chief Executive And Operating Officer

Yes.

Scott Siefers -- Piper Sandler -- Analyst

Okay. And then where -- I know it certainly sounds like there's not a lot of need for provision almost period right now. But where do you see net charge-offs trusting? And when would that be -- is that sort of second half of 2020 peak? How are you guys thinking about that?

Mark K. Hardwick -- Chief Executive And Operating Officer

Yes. Scott, I think we've got some probably coming with some of the nonaccrual senior facilities that we have. We've 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.

Scott Siefers -- Piper Sandler -- Analyst

Okay. Then -- I mean, I guess where -- given that your charge-offs are basically 0, what's...

Mark K. Hardwick -- Chief Executive And Operating Officer

Correct.

Scott Siefers -- Piper Sandler -- Analyst

Sort of a reasonable range to think about?

Mark K. Hardwick -- Chief Executive And Operating Officer

Well, I would say, based on what our current provisioning levels are, which I think we did what $5 million, $4 million -- $4.5 million in the fourth quarter, it's probably at that about that level, maybe higher maybe a little lower. But that's what I can see today.

Scott Siefers -- Piper Sandler -- Analyst

Okay. Great. Thank you.

Mark K. Hardwick -- Chief Executive And Operating Officer

Thanks, Scott.

Operator

The next question comes from Brian Martin with Janney. Please go ahead.

Brian Martin -- Janney -- Analyst

Hey, good afternoon. Just a couple easy ones for me. Just the -- 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?

Mark K. Hardwick -- Chief Executive And Operating Officer

Good afternoon, Brian.

John J. Martin -- Chief Credit Officer And Executive Vice President

Yes. We did see actually a couple of things. We did see an increase in the criticized levels as things moved out of the substandard category and actually upwards. And we did have some of the names that as we deferred it -- did some deferral, and we're actively moving grades downward as well. So have a fair amount that's kind of 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're seeing related to COVID.

Brian Martin -- Janney -- Analyst

Okay. Perfect. And then just last two. Just on -- maybe for Mark or whomever, but just on kind of the capital deployment, and I know you talked about the buyback. Just any commentary at all on your model being organic and M&A? Just kind of M&A discussions today or just how activity is on that front for you guys today?

Mark K. Hardwick -- Chief Executive And Operating Officer

Activity is OK. I mean, I -- there are a handful of things. I felt like it was important to reach out to, given the change in leadership that we've had, but they're 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 yes, we'd love to think that we could announce something in 2021. I have a hard time imagining that 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.

Brian Martin -- Janney -- Analyst

Got you. Okay. All right. And then just maybe lastly, just the kind of the loan pipeline today. I guess that may be -- maybe I missed that if you guys gave any comment there 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 the last quarter or two?

Michael J. Stewart -- President

Yes. It's Mike Stewart again. The consumer mortgage pipeline is -- remains at an all-time record. So that's a positive. Consumer is pretty darn flat to where it was this time last year, that's a 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 in some prior quarters. But -- so that's why I feel comfortable with where we will be heading into the first quarter. And we track a little bit earlier pipeline in the commercial business, too, just to give a more forward look, and that early pipeline remains at some really high levels for us. So we just got to get the pull-through rates and get the structures correct.

Brian Martin -- Janney -- Analyst

Got it. Okay. And line utilization, Mike, how is that today. I guess just maybe on the slides, if I missed it. I don't...

Michael J. Stewart -- President

Yes. You might want to look at line -- Page 19. You'll see in the bottom right-hand side, that's the commercial. Then on the consumer portfolio and our HELOCs, same thing there that the utilization on the consumer portfolio is down to 42%. It's been historically a high as 48%, but that's -- we're at some low marks.

Mark K. Hardwick -- Chief Executive And Operating Officer

I was just going to kind of build on that, though. I think when you look at the line utilization, and we've had a lot of internal discussion around it. We continue to see 19 in the bottom right-hand corner, the absolute increase in the lines that we're making available to the 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 '20 or the end of last year.

Brian Martin -- Janney -- Analyst

Yes. [Indecipherable]. Okay. Thank you for taking the questions.

Michael J. Stewart -- President

Thank you, Brian.

Mark K. Hardwick -- Chief Executive And Operating Officer

Thanks Brian.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mark Hardwick for any closing remarks.

Mark K. Hardwick -- Chief Executive And Operating Officer

Well, thank you. We appreciate everyone's participation. We look forward to another strong quarter and talking to you 90 days from now. So have a good rest of your day and evening. Thanks. [Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Mark K. Hardwick -- Chief Executive And Operating Officer

Michael J. Stewart -- President

Michele M. Kawiecki -- Chief Financial Officer

John J. Martin -- Chief Credit Officer And Executive Vice President

Scott Siefers -- Piper Sandler -- Analyst

Daniel Tamayo -- Raymond James -- Analyst

Terry McEvoy -- Stephens -- Analyst

Damon DelMonte -- KBW -- Analyst

Brian Martin -- Janney -- Analyst

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