Good day. Thank you for standing by. Welcome to the First Merchants Corporation first, excuse me, Q4 earnings conference call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question answer session. To ask the question during the session, you will need to press star one one on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that this conference call is being recorded. 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 is contained within the press release, which we encourage you to review.
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 discussed today, as well as reconciliation of GAAP to non-GAAP measures. I would now like to turn the call over to Mark Hardwick, CEO. Please go ahead.
Well, good morning and welcome to the First Merchants Q4 2022 conference call. Lisa, thanks for the introduction and for covering the forward-looking statement on page two. We released earnings today at approximately 8:00 A.M. Eastern Time. You can access today's slides by following the link on the second page of our earnings release. On page three, you will see today's printers, or presenters and our bios to include President Mike Stewart, Chief Credit Officer John Martin, and Chief Financial Officer Michele Kawiecki. Page four is a snapshot of the First Merchants geographic footprint and some relevant financial highlights for your review. You know, I'm excited to share our results with you today, given our strong performance in 2022, to include a clean Q4 that requires no adjustments related to our April 1st acquisition of Level One.
Our message should reflect my appreciation towards our clients and our teammates for delivering a very good year. We also hope to establish a baseline through our Q4 results that allows for effective modeling around an optimistic 2023 inclusive of the realism required given the industry headwinds. If you turn to slide five. Net income totaled $70.3 million for the quarter compared to $47.7 million in the Q4 of 2021. Reported EPS for the Q4 totaled $1.19 without any required adjustments compared to Q4 2021 of $0.89, a 33% increase. Organic growth in loans of 11.8% for the quarter and another 18 basis points of core margin expansion over Q3 2022 are the drivers of our EPS improvements.
This performance resulted in a 1.59% return on assets and a 24.2% return on tangible common equity for the quarter. The year-to-date results, or EPS totaled $0.0381, which equaled last year's total of $3.81. This year's results had $27.7 million less PPP income than last year and $33.3 million more acquisition expense than last year's earnings per share. When adjusted for those two items, which total $60 million, our year-to-date 2022 EPS totaled $4.20, which is 24.3% better than 2021's total of $3.38. Fueling the improvements for the full year were once again loan growth, excluding our acquisition totaling 13.9% and core net interest margin expansion of 34 basis points. Mike, Michelle, and John will provide some color on the loan portfolio, its makeup, pricing, and areas of growth later in the presentation. Mike will cover pages six and seven.
Yeah. Thank you, Mark, and good morning to all. As you look at the next two slides, I will provide an update on our line of business results and their contributions within the quarter. Since our business strategy on page six remains unchanged, I want to focus on page seven titled Business Highlights. The top of the page offers a breakdown of the core loan growth by our business units. The Q4 represented another excellent quarter of organic growth, nearly 12% in aggregate, with the commercial segment growing over 10.5%. The results continue to just demonstrate the close working relationship between our team and our markets. As discussed in prior calls, we strive for high single-digit growth rates, and as noted on the right-hand side of this chart, we achieved those levels for all of 2022.
The commercial segment, over 8.5%. The consumer segment, over 9.5%. The mortgage segment, close to 60%. As footnoted, these are organic results adjusted for PPP and the day one balances of the Level One acquisition. I do want to spend more time on the global loan results, specifically the dollar increases behind the percentages on this page. As noted on slide 11, the commercial segment represents 75% of our total loan portfolio. The 10.6% Q4 growth rate in commercial was approximately $240 million or 70% of the total Q4 loan growth of $345 million. While the consumer segment contracted this quarter by 3.1%, that dollar amount is less than $7 million.
The mortgage portfolio growth during the quarter was approximately $100 million versus the prior quarter growth of $190 million. My point is, the commercial segment continues to be the loan growth engine of the bank. All segments demonstrated solid growth rates, and John Martin's gonna talk more about the detail of our portfolio later in the presentation. Let me go into the drivers of commercial loan growth in the Q4 . They are threefold. New business activity is first and foremost. Our teams continue to win new relationships across the geographies and across all segments of focus. Our team alignment puts them in the best position to win. We have alignment with our credit partners, and we have alignment on market coverage. I shared several quarters ago we added key staff within certain markets to augment our existing teams.
This people investment was within asset-based lending, upper middle market, and syndications, all are contributing alongside our existing team. The second driver of growth was from our existing clients. Capital for expanded plant and equipment, working capital growth, and acquisition financing remained active through the end of the year. The final driver is line utilization, specifically within investment real estate, which is construction draws and the C&I line utilization inched up 1%. Overall, we have maintained a consistent and disciplined approach towards underwriting with all these segments, the commercial pipeline ended the quarter consistent to prior quarters. Moving on to the consumer segment, loan balances contracted by 3%. As the second bullet point notes, the $7 million decline is attributed to the private banking footings. With the rise in interest rates, certain clients reduced balances with excess investments or lower-earning deposits.
Home equity balances continued to increase during the quarter, which is correlated with increasing home values. Average utilization on that portfolio has not changed. Across all of consumer, our underwriting re-approach remains unchanged. Additionally, the consumer loan pipeline remains consistent with prior quarters. Let me touch on the mortgage segment. The 24.2% growth rate was approximately $100 million. The aggregate mortgage portfolio is now just over $1.8 billion or 15% of the total $12 billion loan portfolio. Again, trying to highlight the emphasis on commercial. The driver of the quarter and year-to-date increases in mortgage comes from the continued strength in purchase volumes, with more of our clients choosing our five-and-seven-year adjustable rate product offerings. Our underwriting standards remain unchanged here, prime borrowers.
With how low housing inventory, high home prices, and higher mortgage rates, the mortgage pipeline ended lower for the fifth consecutive quarter. I want to speak to the deposit section on the bottom half of this page. We are actively managing the deposit rates to maximize our margin. The quarterly decline of 1.4% continues an improving trend. Last quarter, we reported a 3.7% deposit contraction, which was less than the 8.2% deposit contraction reported in the Q2 . Consumer deposit balances increased for the quarter at a 4.1% annualized rate. The consumer team continued to gain new accounts through both in-branch and digital online activities. Additionally, our consumer relationships have responded favorably to our new money CD and new money market promotions.
As noted in the first bullet point, the commercial deposit decline is primarily from the public funds sector. The decline in this segment is simply from municipalities or school corporations looking for the highest marginal deposit rates across the competitive landscape. Additionally, many business clients continue to utilize excess liquidity on their balance sheets for higher-returning activities like acquisitions, plant expansions, or dividends. Michele has more details to share about our balance sheet, our expanding margin, along with greater details of our other key performance metrics. Michele?
Thank you, Mike. My comments will begin on slide eight, covering Q4 results. You can see on our balance sheet on lines one through five that we continue our trend towards a more favorable earning asset mix. Total loans on line two, which Mike covered in his remarks, increased $344.1 million or 11.8% through organic growth during the quarter, which was offset by PPP loan forgiveness of six and a half million to arrive at the $337.6 million you see in the variance column. Deposits decreased $52.1 million during the quarter, and investments on line three decreased $31 million. I will add some additional color on our investment balance later in my comments.
Our loan-to-deposit ratio continued to trend up and was approximately 83.5% this quarter compared to 81% on a linked-quarter basis and 72.7% in prior year. Earnings per share for the quarter totaled $1.19, which reflects our bank's strong performance. Pre-tax, pre-provision earnings totaled $83.8 million this quarter, a 9% increase over last quarter when excluding acquisition costs. Rising yields on earning assets offset somewhat by higher deposit costs drove higher profitability this quarter, which is reflected in the increase in net interest income on line 11 of $8.6 million over prior quarter. Non-interest income on line 14 declined by $5.5 million due to a large BOLI gain recorded in the Q3 .
Adding to the quarter-over-quarter profitability was lower non-interest expense, which declined $6.7 million, bringing our net income on line 17 to $70.8 million, an increase of nearly $7 million over Q3 or 11%. Our stated efficiency ratio was 48.6%, but excluding the lingering acquisition costs of $400,000 that were recorded in the Q4 , the efficiency ratio was 48.37%, reflecting excellent operating leverage. The tangible common equity ratio on line six increased 68 basis points, and tangible book value per share on line 26 increased $2.19 or 11%, reflecting the strong earnings from the quarter as well as a meaningful recovery in the unrealized loss valuation of the available for sale securities portfolio. Slide nine shows our year-to-date results.
Line 25 shows year-to-date earnings per share of $3.81, which on a stated basis equals earnings per share for 2021. As Mark mentioned, non-recurring items had a meaningful impact on earnings. When excluding acquisition costs, day one CECL provision, and PPP loan income, EPS for 2022 totaled $4.20, and 2021 totaled $3.38 for an increase of 24%, reflecting strong core organic growth and profitability and the contributions of the Level One acquisition. Pre-tax, pre-provision income year-to-date was $289 million, an increase of $47.6 million or 20% over prior year. Keep in mind that the prior year pre-tax, pre-provision income included $31 million of PPP fee income compared to just $3.2 million in 2022.
Year-over-year, the core growth in PTPP was significant. Slide 10 shows highlights from our investment portfolio. On the top right, you can see the yield on the portfolio remains stable given we aren't reinvesting in bonds. Although the total portfolio balance only declined $31 million from last quarter, the portfolio actually declined $130 million from pay downs, maturities, and sales of bonds. Bond sales during the quarter totaled $82 million, which netted to a very small gain of less than $100,000 as our portfolio manager continues to find opportunities to sell bonds without realizing any meaningful losses. This $130 million decline was offset by an increase in the valuation of our bond portfolio of $96 million.
On the bottom right, you can see we had a net unrealized loss on the mark-to-market of the available for sale securities portfolio of $296.7 million at year-end, which compared to $392.5 million in Q3, which reflected a nice recovery. On the bottom left, you will see the cash flow we expect to receive in 2023 of $360 million, which includes cash from principal and interest payments, maturities, and expected bond sales. The bond portfolio will continue to be a strong source of liquidity to fund our loan growth through the year. Slide 11 contains the highlights of our loan portfolio.
In the bottom left corner, you will see the stated Q4 loan yield increasing substantially 82 basis points to 5.58% from last quarter's yield of 4.76%. On the top right, I noted the yield on new and renewed loans, which also increased significantly from 4.96% last quarter up to 6.10% this quarter, an increase of 114 basis points. On the bottom right, you will see $8 billion of loans, or 67% of our portfolio are variable rate with 40% of the portfolio repricing in one month and 50% repricing in three months. We will continue to see meaningful increases in interest income from the loan portfolio as the Fed continues to increase rates.
Slide 12 shows the details related to our allowance for credit losses on loans. We did not record any provision expense during the Q4 . As a reminder, the provision expense recorded year to date was to establish the day one CECL allowance associated with the acquisition of Level One. During the Q4 , we had net charge offs of $3.4 million, which brought the ending allowance for credit losses on loans to $223.3 million. The coverage ratio trend is shown in the graph on the top left.
Our coverage ratio at the end of Q4 is 1.86%, down from 1.94% at the end of Q3 due to strong loan growth. This reserve, coupled with the remaining fair value accretion of $31 million, which gives us some additional coverage for acquired loans, provides great credit protection given the uncertainty of the economic environment. I will move on to slide 13. The total cost of deposits in the bottom chart shows costs increased by 46 basis points, up to a total cost of 92 basis points, reflecting the competitive pricing environment. Our interest-bearing deposit cycle to date beta at year-end was 29%, which was up from 20% last quarter. Competition for deposits continues to increase, we expect our deposit beta to increase in response. Slide 14 shows the trending of our net interest margin.
Line one shows net interest income on a fully tax equivalent basis of $155.3 million. When you back out non-core interest income items such as fair value accretion on line two and the impact of PPP loans shown on line three, our core net interest income totals $152.5 million, which is shown on line four. Compared to the prior quarter total of $143.1 million, the increase in core net interest income was $9.4 million, reflecting our higher loan yields. Stated net interest margin on line seven totaled 3.72% for the quarter.
Adjusting for fair value accretion and the impact of PPP loans brings us to a core net interest margin of 3.65%, which is shown on line 10, which is an increase of 18 basis points from last quarter's core NIM of 3.47%. The tax equivalent yield on earning assets increased 62 basis points. Cost of funding only increased 45 basis points. On slide 15, non-interest income totaled $24.1 million for the quarter, which was down $5.5 million from last quarter. Recall that we recorded a $5.3 million BOLI gain in the Q3 that elevated our total non-interest income in Q3. Customer-related fees this quarter totaled $21.9 million, which was relatively stable in all categories from prior quarter.
Although gains on the sale of mortgage loans remained at a modest level this quarter, mortgage loan production is still strong despite Q4 lower seasonal purchase trends as $217 million in loans were originated this quarter. We retained approximately 80%-85% of these loans in the portfolio and sold the remainder in the secondary market. Moving to slide 16. Total expenses for the quarter totaled $89.7 million. Q4 included just $400,000 of lingering acquisition costs, so this is our Q1 with a normalized expense run rate and reflects the achievement of our cost savings goals associated with the acquisition of Level One. This was $6.7 million lower than Q3 , as Q3 included $4 million of acquisition and severance costs.
Core compensation related expenses were a bit lower than last quarter as we refined our incentive accruals. We recorded $700,000 of gains on sales of property which offset expenses. Our low core efficiency ratio reflected on the top right shows that we continue to achieve strong operating leverage even while we invest in technology and talent to grow the business. Slide 17 shows our capital ratios. Although the tangible common equity ratio remains below our target, we saw great improvement this quarter. The declines in tangible common equity that occurred during the year were due to accumulated other comprehensive income changes from the market valuation of the available for sale investment portfolio and the use of cash in the acquisition of Level One. As I mentioned earlier, we recovered $96 million in other comprehensive income from the bond portfolio valuation this quarter.
That, along with strong organic earnings, created nice capital build. Considering these capital levels, along with $223 million in allowance for credit losses, we feel great about the safety and soundness of our balance sheet moving into 2023. Overall, our financial results were exceptionally strong this quarter and for the year 2022, reflecting the hard work and dedication of our First Merchants teammates. That concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin, to discuss asset quality.
All right. Excuse me. Thanks, Michele, and good morning. My remarks start on slide 18, where I highlight the loan portfolio, including segmentation, growth, and composition. I'll comment on the updated portfolio insight slide, then review asset quality and the non-performing asset roll forward before ending with a couple of high-level comments on the environment. Turning to slide 18. In the quarter, we experienced strong commercial loan growth, as Mike Stewart mentioned a moment ago, originated by our middle market lending team, which for us are companies with revenue generally between $10 million and $500 million. Within the space, the greatest growth occurred in the manufacturing and wholesale trade sectors. Investment real estate increased $108 million on line five, bringing our balances back closer to where they were in the Q2 .
Finally, we moderated the pace of portfolio residential mortgage growth as we shifted back to a more originate and sell model, adding $89 million after several very strong quarters of portfolio growth. After a quarter of 11.8% loan growth and combined annual organic loan growth of 13.9% or $1.3 billion for the year, the composition between C&I, non-owner occupied CRE and investment or, excuse me, and residential mortgage loans remains in balance and substantially similar to what it was at the beginning of the year. Turning to slide 19. I've updated the portfolio insight slide here where we slice the portfolio several different ways to provide additional transparency into its composition. Starting with C&I, the classification here includes sponsor finance as well as other, excuse me, as well as other owner-occupied CRE associated with the business.
Our C&I portfolio is representative of our markets and thus has a concentration in manufacturing of 18% of the portfolio. Our current line utilization, as Stu mentioned a moment ago, remained relatively stable at 41%, up from roughly 40.2%. I've provided historical utilization levels for reference. We participate in roughly $700 million of Shared National Credit balances across various industries with an average exposure of roughly $10 million. We also have $70 million of SBA guaranteed loans, which includes $5 million of remaining PPP loans. Diving into the sponsor finance portfolio, there are 65 relationships roughly with 76% of the borrowers having a senior cash flow leverage of less than 3x and 79% having a total debt to cash flow leverage of less than 4x.
76% had a fixed charge coverage ratio of greater than 1.5 x, which resulted in a current portfolio classified loan ratio of only 4.2%. We review the individual names in this portfolio quarterly for changes including leverage, cash flow, and borrower condition. Moving to construction finance, we have limited exposure to residential development and are primarily focused on one to four family non-tracked individual build residential construction loans. It's a mouthful. For commercial constructions, we continue to have a bias towards multifamily construction with a sub-concentration of student housing. Moving down to consumer residential mortgage, the portfolio consists of primarily prime originated residential and consumer loans. These include HELOC and HELOAN, and to a much lesser extent, branch originated auto secured and miscellaneous other consumer loans.
In summary, the portfolio is a balanced mix of what one might expect from a Midwest bank with mortgage, consumer, sponsor finance, and investment real estate businesses. Turning to slide 20. As in previous quarters, this slide highlights our asset quality trends and current position. We continue to have a favorable asset quality profile with non-performing loans on line six at 42 basis points of loans down from 44 basis points the prior quarter. Classified loans on line seven or those loans with a well-defined weakness increased roughly $8 million to $215 million or 1.79% of loans, which remains comparable to pre-pandemic levels. Finally, we had net charge-offs of $3.4 million in the quarter.
In the Q4 , we had a single borrower charge-off of $2.8 million related to a Q3 2021 non-accrual loan. While we continue to pursue potential recovery strategies, the account is now fully charged off. Finishing up on slide 21, where we roll forward the migration of non-performing loans, charge-offs, ORE, and 90 days past due. For the quarter, non-accrual loans went down $1.2 million on line six with the charge-off just mentioned and the resolution of $4.8 million of other non-accruals this quarter. This included the demonstrated performance and consistent payments from a prior year non-accrual account in the amount of $1.2 million, and the resolution of various other non-accrual accounts, all under $500,000 individually.
Given the continued strong environment, we've been able to balance the migration of new non-performing loans against the resolution of existing non-performing loans, making $200,000 of improvement in the quarter on line 13 and only an increase of $5.8 million for the year after we added $9.4 million of level one non-accrual loans. Overall, borrower results have continued to remain stable despite higher prices and interest rates. I would say that while higher interest rates have had an impact, interest rate stress is built into our underwriting and the borrower's ability to adopt, excuse me, adjust either or both pricing and expenses has thus far buffered much of the impact. As one might expect, it is the financially weakest customers, consumers and commercial borrowers who are being affected most.
As always, we mitigate the environment by making sure we continue to monitor the portfolio for timely issue identification and the implementation of risk mitigation strategies. I appreciate your attention. I'll turn the call back over to Mark for his remarks.
Well, thanks, John. Slide 22, you can see we made some adjustments to the CAGRs. We're just looking back 10 years, probably a more relevant post-recession time frame, which reflects really strong performance, as evidenced by a number of the graphs. You can see earnings per share. The CAGR during that period is 10.5%. Just adjusted CAGR for the AOCI on tangible book value per share is 9.3%. The return on tangible common equity across the board in the double digits. If you turn to slide 23, again, we adjusted for a 10 year time frame. Our 10 year asset CAGR, which does include acquisitions, is 15.3%, inclusive of the eight acquisitions you see over to the right. Shelby County Bank was included in the year-end 4.3%.
Strong growth, the best thing about our growth rate and moving from $4 billion to $18 billion, we love the fact that we have the ability to take care of more customers with a larger balance sheet. I think we're an even greater attraction point for talent. There's opportunity for growth in this company. We're a growing organization, and we continue to create new and unique ways for people to expand their career. It's been fun. If you look on the next slide, 24, it's just a reminder of the vision, the mission statement, our team statement, and our strategic imperatives of which we use to guide our decision-making. Lisa, you know, it's, we're happy to take questions at this time and just thank everyone for their attention.
Okay, thank you. If you would like to ask a question, please press star one one on your telephone. One moment while we compile the Q&A roster. The first question I have is coming from Scott Siefers of Piper. Please go ahead. Your line is open.
Morning, everyone. Thank you for taking the question. The first question was on expectations around the margin. Maybe Michele, thoughts on where we go from here, maybe best to think about it in terms of the 365 core margin, I guess. Then as a follow-on more broadly on NII, do you feel like you can continue to grow NII sequentially from here as we look throughout 2023?
Yeah. Good morning, Scott. I think looking at net interest margin, particularly for Q1, we have assumed that we get two additional 25 basis point increases, one in February and one in March. Looking for Q1, you know, I think we would expect to see another six or so basis points of net interest margin growth. You had mentioned, you know, looking at a 360. You know, the one thing that I do want to remind everybody of is that given there are a couple less days in Q1, there's always a seasonal headwind on margin for us, given our commercial orientation. That always ends up reducing our margin a few basis points. We would still expect to see net interest margin increase, even netting that impact out of a few basis points in Q1.
Perfect. Thank you. Then, your thoughts on the company's ability to continue to grow NII sequentially, I imagine at least with some, you know, some margin expansion, that should give you a little lift, just overall thoughts would be welcome.
Yeah, sure. For our net interest income for Q4, looking at, like, $149 million stated, $155 million on a fully tax equivalent basis, I would expect Q4 2023 net interest income to be a good run rate on average for 2023. You know, we revisited our deposit beta assumptions. As a reminder, our historical deposit beta was 41%. You know, Our assumption is that we will get up to a 40% deposit beta in Q1 and get up to 50% deposit betas later in the year. We're being fairly conservative, I think, in our outlook, but we think that it is gonna be competitive and we wanna be prepared for it.
Okay, perfect. Just to make sure I heard correctly, it sounds like what you just posted, the Q4 2022 NII, we should sort of average that for 2023, that's where you think things will flush out.
Yeah, that's correct. I mean, I do think we will see net interest margin compression later in the year because of the deposit betas increasing, but I think we can offset that with our loan growth.
Perfect. Okay, wonderful. Thank you very much.
Thank you. One moment while we prepare for the next question. The next question is coming from Daniel Tamayo. Excuse me, Raymond James. I'm sorry.
Thank you. Good morning, everyone. You know, maybe, just following on the net interest income discussion and the expectation that we may get a decline in rates at some point, possibly at the end of the year. Have you been making any changes to the sensitivity of the balance sheet to present, perhaps mitigate that? Or is the asset sensitivity kind of the same as or similar to what it's been prior?
Yeah, we're not making any real, any, I guess meaningful change. We continue to look at protections in the bond portfolio against future falling interest rates. More of the liquidity to fund loans. There's not a lot of flexibility to make adjustments. If we didn't need that liquidity, you could probably move in and out of some sectors and make some changes. You know, we feel like we have a model that works in both interest rate environments. As we've assessed things like macro hedges, et cetera, the cost just seems prohibitive to us.
Understood. Yep. I guess just switching gears here to reserves. Obviously, you've been, you know, having a provision of 0 here for quite a while now. Just interested in your thoughts on when you think you may have to start providing for loan growth or, you know, maybe where that reserve ratio stabilizes here.
Yeah. We don't expect to have to take provision in the near term. We are modeling a mild recession in our CECL models currently, but each quarter we'll continue to evaluate coverage with our loan growth, and particularly if we see any credit events occur during the quarter. No plans in the near term.
Okay. Thanks, Michele. I'll step back. Thanks for answering my question.
Thanks, Danny.
Thank you. One moment while we prepare for the next question. The next question is coming from Terry McEvoy of Stephens. Your line is open.
Hi. Thanks. Good morning, everyone.
Good morning, Terry.
Hi. Maybe just start with your outlook for expenses as you think about overall wage inflation and then the uptick in FDIC costs as well.
Yeah, I'd be happy to. Using the Q4 stated expense level as a base, we would expect probably mid-single digit growth in expenses, say 5% or 6%. I think that would accurately capture the inflation that we're all experiencing and also some investments in technology and people as well as that FDIC increase that you mentioned.
Great. Any comments on banker or customer retention at Level?
Mike Stewart here. I'd say overall it's been pretty stable. Banker stability, there's been some moving in and some moving out. Banking center stability, we're starting to see new business activities in, some of the portfolios. I call it overall pretty stable, meaning or I'll interpret it Mike Stewart's way, which is kind of where I would expect to be, less than two quarters post an integration, with an outlook that I think we're in a good position to take advantage of.
Maybe one more, if I could squeeze it in. Mark, your comment in the press release caught my eye that the earnings power is pretty easy to digest when you look at the quarterly results. As a former CFO, I can ask you the question: What exactly really stands out to you as being that kinda source of power? There's a lot of things that go into earnings power. Would love to just get your view as we kinda think about 2023.
Yeah, happy to do it. I was really pleased to have, I always look forward to, I guess I should say, and I was pleased by this quarter's result, where we have fully digested our last acquisition. I think you can see the earnings power in our numbers. Really it's just the fact that historically, I mean, we give guidance of mid to high single digit growth rate, and I feel like we always achieve those objectives. You can go back a number of years and we've had good success. I love the team that we have in place. I love how hard they work and the impact they try to make with our customers. I think our balance sheet is well hedged.
you know, I didn't mention if rates come down, we end up just with a nice natural hedge, with our mortgage portfolio, a little bit with our derivatives, the loan level hedges that we sell to our customers. You know, I look at our income statement and our balance sheet. I think we have a growing balance sheet. On the asset side, we have an awesome core deposit base. On the consumer side, I feel like our margins are fairly easy to understand and fairly predictable.
I feel like even though we're investing in the business, which is exciting to everyone here, we continue to add talent, we continue to invest in technology, that we're able to do it in a way that still produces a 50, you know, a low 50s efficiency ratio, and this quarter was 48%. You know, there are always headwinds in the business or tailwinds, and they migrate back and forth. My view is, this is a bank that has consistent performance over time. Some of those things are a little bit like the weather. You know, you wake up and see, you know, is it snowing, is it raining, is the sun out?
I'll tell you what, everybody on our team, they get after it regardless of what the day looks like. I just feel like we have a team that works hard, produces results, and it's pretty easy to see, I think in our financials, especially in a quarter like Q4.
Appreciate that. Thanks, everyone. Have a nice day.
Thanks, Terry.
Thanks, Terry.
Thank you. One moment while we prepare for the next question. Our next question comes from Damon DelMonte of KBW. Your line is open.
Hey, good morning, everyone. Hope you're all doing well today. Just wanted to...
Morning.
Morning. Just wanted to circle back on the provision outlook, commentary, Michelle. You know, obviously the reserve is quite healthy and you guys have been quite clear on your desire to kind of grow into a normalized reserve level. If you could ballpark that, like, ultimate level that might be helpful. Is there a way you could kind of quantify that?
Well, I think what I'd do is probably go back and think about like our day one, CECL adjustment that we would've had before the pandemic hit. That would've been around, I think it was a coverage ratio of maybe 1.5%, if I recall.
Okay.
Yeah. you're modeling that without a mild recession, you get to a more normalized level and 150 feels-
Right. That may have been a little high. Maybe 1.3%-1.5% would've been about in a more normalized range.
Okay. Got it. Obviously if you factor in a mild recession, you wanna have a little bit more cushion for that.
Yeah.
Yes.
Yeah.
Since we've adopted CECL, it's been pretty turbulent.
Yeah, that's an understatement over the last couple of years, Mark. I guess my next question, just kind of from a modeling standpoint, how should we think about fair value accretion going forward, Michelle?
I think fair value accretion, looking at this quarter's fair value accretion, which we do try to give you transparency to that. I think that's probably a pretty good run rate.
Okay. Great. Just lastly, kind of bigger picture, Mark, you know, now that you've digested Level One, you kind of looked at your competitive landscape across the, the upper Midwest there. How do you guys feel about M&A at this point? Do you feel like it's something that you would look to engage in again? Or do you feel that the organic opportunities throughout your footprint are so strong that you're content with just kind of focusing internally?
Yeah. We're really excited about having a year where the focus is all internal. We will continue to call on the banks that we think might fit First Merchants well and enhance our growth rates in the future. At least, in 2023, you know, it feels like all this team is really focused on just an internal year. I have some of our folks, they talk about, hey, is it, you know, it's hard to get bigger from an M&A perspective, and better. We'd love to be able to do both all the time, I think the reality is, after absorbing a bank the size of Level One, the focus needs to be on internal enhancements and getting better every day.
We've got a couple key initiatives we're working on, including an upgrade in our online banking and mobile platform, and a number of other things. I won't get into them all, but we just think it makes the bank better and prepares us for the next acquisition.
Great. Thanks for all the color today, guys. That's all that I had.
Thank you, Damon.
Thanks, Damon.
Thank you. One moment while we prepare for our next question. Our next question will come from Brian Martin of Janney. Your line is open.
Hey. Brian, you may be on mute. We can't hear you.
Yep. I'm sorry. Thanks, Mark. I apologize. Good morning, everyone. Just wanted to touch base on the funding side. Just as funding loan growth this year, just wondering what your thought is there. It sounds like there's still some utilization from the bond books and just kind of as it pertains to deposits and the loan to deposit ratio as you kind of go through the year.
I mean, I think we're gonna see some deposit growth. You know, as I said, we had revisited our deposit betas. We'll get competitive, even more competitive, to help fund that loan growth. I think that coupled with the cash flow from our bond portfolio, I think that those two funding sources we think will cover us.
Okay. As far as what you're kind of targeting on the loan to deposit ratio, where do you kinda see that as you work through the year?
Yeah. You know, I don't recall where that budget number is. It, you know, it's moving up. We kind of have long-term targets. We'd like to see it around 93% or 94%. We don't get there this year. I think maybe we were at 88%, if I recall.
That's fine. It's just a general trend. I can always follow back up, but in general, you expect it to move up from where we are here just through that combination.
Yes.
Yeah. Okay. Perfect. Just the other, two for me was, Michele, it sounds like the margin just from your commentary probably peaks maybe Q2 , and then given kind of what you're talking about, maybe the margin maybe slips a little bit there starting Q3 . Is that in general fair how to think about it?
I actually think we'll peak in the Q1 , and then I do think that we could see some compression in the quarters thereafter.
Gotcha. Okay. Just as the beta's picking up. Okay.
Yeah.
That is helpful. Then just the run rate or just kind of the level of fee income today seems like, you know, pretty good level and it just builds off of this. Is that, you know, I know there's ins and outs every quarter, but just in general, how are you feeling about where that's at today or just how we should think about that?
Yeah. We have a couple of positive, you know, tailwinds in that space. Our private wealth business continues to grow, around 10%, and that's the target we have for the year. The mortgage business, you know, we expect to originate, you know, over $1 billion in mortgages this year. I think the numbers are, we portfolioed about 85% of that in 2022, and we'd like to get back to our more traditional model, which would be, call it, you know, 60/40 or even 70/30. That 60% and 70% we're talking about is sold into the secondary market. I felt like in 2022 we took advantage of an opportunity to use our balance sheet.
We had the liquidity to do it. The customers were kind of I think in shock by how high the 30 year rate went, and it allowed us to use our balance sheet. Now that's moderated from as high as 7% to slightly under 6%, and I think it gives us the ability to move back into a fee for service model. That should give us a little positive push on our non-interest income.
Gotcha. Okay. That's helpful. Okay, perfect. Thank you for taking the questions and, congrats on a nice quarter and a nice year.
Thank you, Brian.
Thanks, Brian.
Thank you. That concludes the Q&A session for today. I would like to turn the call over to Mark Hardwick, CEO, for closing remarks. Go ahead, please.
Thank you, Lisa. Just wanted to say thanks to everyone for tuning into the call. Our employees, you know, our customers, our shareholders, our analysts. We appreciate your interest and your investment. We will, I guess you can count on this team to continue to work hard to deliver results for all of those critical stakeholders. Thank you.
That concludes today's conference call. Everyone may disconnect. You all have a great rest of your day.