Participants

Mark Hardwick; Chief Executive Officer, Director; First Merchants Corp

Michael Stewart; President; First Merchants Corp

Michele Kawiecki; Chief Financial Officer, Executive Vice President; First Merchants Corp

John Martin; Executive Vice President, Chief Credit Officer; First Merchants Corp

Brandon Nosal; Analyst; Hovde Group, LLC

Terry McEvoy; Analyst; Stephens Inc.

Damon DelMonte; Analyst; Keefe, Bruyette & Woods, Inc.

Nathan Race; Analyst; Piper Sandler & Co.

Daniel Tamayo; Analyst; Raymond James & Associates, Inc.

Presentation

Operator

Thank you for standing by and welcome to the First Merchants Corporation's Fourth Quarter 2024 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 or 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 most directly comparable GAAP measures. The press release available on the website contains financial and other quantitative information to be discussed today, as well as reconciliation of GAAP to non-GAAP measures. As a reminder, today's call is being recorded.
And now, I'd like to hand the program over to Mr. Hardwick, CEO. Mr. Hardwick, you may begin.

Mark Hardwick

Good morning and welcome to the First Merchants Fourth Quarter 2024 Conference Call. Thanks for the introduction and for covering the forward-looking statement on page 2. We released our earnings today at approximately 8 AM Eastern Time. 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, including President, Mike Stewart; Chief Credit Officer, John Martin; and Chief Financial Officer, Michele Kawiecki.
Please turn to page 4. We're quite pleased with the fourth quarter results and the focused momentum that we're building. 2024 in many respects was a great year for the bank. We certainly had our challenges, but the team was resilient and stayed focused on the many tasks at hand.
During 2024 and in order, we completed our voluntary early retirement program, the upgrade to our in-branch account origination platform to Terafina, the upgrade of our online and mobile platform for both consumer and then commercial clients. We upgraded our private wealth platform to SS&C InnoTrust and Black Diamond. We completed the sale of five non-core Illinois branches and the corresponding restructure of a portion of our securities portfolio. And even though the work slipped into the first quarter of 2025, we just upgraded our wire platform to a real-time system powered by Finastra.
You will notice on the branch map that we are now down to 110 locations, and we're highly focused on delivering top quartile financial results in 2025 with minimal or no distractions. The tighter focus on our core markets, Indiana, Ohio, and Michigan will drive new and innovative customer acquisition strategies, which are proving to be rewarding and fun.
On slide 5, you can see our earnings per share for the quarter totaled $1.10, or $1 even per share after adjusting for a $20 million gain on the sale of the Chicago branches, offset by an $11.6 million bond loss related to security sales.
Loan growth totaled 6% for the quarter, consistent with our 2025 expectations. Net interest margin also improved by 5 basis points Q4 over Q3, and helped drive PPNR growth of 4% on a linked basis, and again supported a sub 54% efficiency ratio for the quarter.
Our tangible common equity ratio has continued to build and is now 8.81%. Fourth quarter tangible book value per share, which is reported on slide 10, was $26.78 per share, and it has increased by $5.33 per share or 25% over the last two years. Net income totaled $200 million for the full year of 2024, and earnings per share totaled $3.41.
Our Q3 and Q4 momentum is very satisfying, and we feel like we're now back to pre-Silicon Valley performance metric levels. Now, Mike Stewart will discuss our line of business momentum. Mike?

Michael Stewart

Yeah, thank you, Mark, and good morning to all. Our business strategy, which is summarized on slide 6, remains unchanged. We're a commercially focused organization across all these business segments and our primary markets of Indiana, Michigan and Ohio.
And throughout 2024, we remained focused on building earnings momentum by executing our strategic imperatives of organic loan deposit, fee income growth, and taking market share by engaging and rewarding and retaining our teammates and by implementing the new technology platforms that Mark talked about that have enhanced our client experience. So you heard Mark summarize on slide 4, we delivered on this earnings momentum throughout the year.
Let's turn to slide 7. Loan growth was strong for the fourth quarter across both the commercial and consumer segments, reaching nearly 6% on an annualized basis and bringing the full year growth to 3%. The $9.7 billion commercial segment was the primary driver of the growth by increasing $148 million during the quarter, with the C&I portfolio growing 66 million or 3%, and the investment real estate portfolio growing over $80 million. For the full year, our commercial segment grew over $250 million or 3%, with the C&I portfolio growing over 300 million, offsetting the decline that we've talked about throughout the year in the investment real estate portfolio.
Another pleasing bullet point on this page is the year end pipeline. It's at a consistent level from the prior quarter after such a strong balance sheet growth. The growth has been shared across all the regions, with Indiana, Michigan, and the sponsor teams driving the bulk of the increase.
Some of the consistent trends across the C&I spectrum are generally evident, like the M&A and CapEx spending, which was slow during the first three quarters of 2024, but has begun to thaw, particularly as it relates to acquisition and/or ownership transitions. That activity drove quite a bit of commercial lending during the last two months of the year and carried into the pipelines.
Fed rate reductions have had a positive impact on loan demand, specifically with investment real estate projects. New production for our investment real estate team has been strong, and the end of the year pipeline demonstrates some of that as well. All of these are positive indicators for future balance sheet growth.
What about the benefits of easing inflationary pressures are also benefiting our clients. In particular, the stability of auto trends and orders, along with solid demand for workers in construction and infrastructure industries. So far, the response to proposed tariffs hasn't had a significant impact on inventory margins. Having said that, revolver usage is up across most industries, along with the use of cash reserves.
The agribusiness segment remains a little challenged. While commodity prices have reverted to more historic levels over the past four years, input costs have not declined as much, and equipment purchase remain soft. FMB carries almost no exposure to the impacts of the bird flu as the bulk of our focus has been on crop production.
Our commercial focus has always been the primary driver of our balance sheet growth, and the commercial and industrial segment is the largest part of our portfolio. C&I comprises 50% of the total First Merchants loan portfolio, and two-thirds of the commercial.
A few comments on the consumer portfolio, loan portfolio. Year-to-date growth reached $125 million, with the on-balance sheet residential portfolio driving over 50% of that increase or $65 million. We utilize our balance sheet for variable rate, short term fixed rate, or construction loans. As the 10-year treasury has continued to decline during the quarter, our mortgage production has remained strong throughout. Michele will review the year-over-year growth our mortgage team delivered through the gain on sale activities. We have a really strong team of mortgage bankers throughout our footprint helping us continue that growth.
Let's turn to slide 8, deposits. The story of this slide is mix, mix of our product set and our goal of managing deposit cost. Michele will be reviewing the improvement of our net interest margin, and this slide represents the work our teams have accomplished in managing and building core deposit relationships while reducing deposit cost on public funds and maturity deposit categories.
So for the quarter, total deposits grew at a 4.4% annualized rate. And for the full year, our total deposit balances were essentially flat. Excuse me. The commercial segment grew deposits during the quarter by $50 million, with the non-public fund balances, what we would call operating accounts, growing $27 million. Year-to-date, commercial deposit balances declined 1%, but the non-public fund account balances or operating accounts grew by 1% or $87 million. Public fund balances declined 6% throughout 2024.
Public funds are an important segment, yet one of our highest cost of depository categories. The overall story is we improved our mix of commercial deposits throughout the year by growing operating accounts.
We also continued our pricing discipline within our consumer segment, specifically maturity deposits or CDs. The chart at top states that consumer deposit balances declined during the quarter 22% on an annualized basis, which they did, but the maturity deposit balance decline was essentially the entirety of it at $346 million. So core or primary consumer account deposit balances were flat during the quarter, but grew $127 million in 2024 or roughly 2%. Maturity deposits, CD balances, declined over $430 million through 2024.
The mix of deposit categories has been a focus of our teams, a focus on primary accounts, and a focus on deposit cost. So overall, I'm pleased with the active engagement our teams are having with their clients as we manage the mix and deposit costs.
So I'm going to turn the call over to Michele so she can review in more detail the composition of our balance sheet and the drivers of our income statement. Michele.

Michele Kawiecki

Thanks, Mike. Slide 9 covers our fourth quarter performance. Line 1 shows a small decline in total assets. Below that, you can see it was derived from the decline in investments, reflecting the sale of bonds as we continue to reposition the portfolio. That was offset by the loan growth of $185 million that Mike discussed in his remarks.
Moving down to the income statement in the middle of the page, net interest income on line 11 continued its growth trajectory, with an increase of $3.3 million sequentially. Non-interest income on line 13 increased by $17.9 million, which reflected the gain on the sale of our Illinois branches of $20 million, offset by an increase in realized losses on the sale of bonds over the prior quarter of $2.5 million.
When normalized for those non-core items, non-interest income remained strong, totaling $34.4 million. As a result, pre-tax pre-provision earnings grew linked quarter by nearly $2.7 million and totaled $73.2 million, reflecting strong core franchise performance. That performance fueled tangible book value growth during the quarter, despite higher interest rates negatively impacting AOCI.
Slide 10 shows our annual results. You can see at the top the balance sheet lines show the favorable change in earning asset mix, reflecting a decrease of $350 million in the lower-yielding investment portfolio, and an increase of $368 million in higher-yielding loans. The decline in deposits on line 4 was due to the sale of the five Illinois branches that was closed in early December.
Operating earnings for the year were strong, with pre-tax pre-provision earnings totaling $272.4 million. Tangible book value per share benefited from the strong earnings, increasing $1.72 or 7% to $26.78 at year end. We achieved strong tangible book value growth while returning value to shareholders through dividend payments and share buybacks totaling $138 million during the year.
Slide 11 shows details of our investment portfolio. The security sold during the fourth quarter had a book value of $109.6 million and were sold for a loss of $11.6 million. The bonds had a weighted average yield of 2.31% and an average life of 6.88 years. The total bond portfolio repositioning, including the bonds sold in the third quarter, resulted in a year-to-date total of $268.5 million sold for a loss of $20.8 million. Expected cash flows from scheduled principal and interest payments and bond maturities in the next 12 months totaled $270 million, with the roll-off yield of approximately 2.22%, which will have a positive impact on the overall portfolio yield through next year.
Slide 12 shows some details on our loan portfolio. The total loan portfolio yield decreased by 31 basis points to 6.55%, as our variable rate portfolio repriced in response to lower short-term rates. New and renewed loans were priced with a 7.12% yield. These strong new loan yields, along with the benefit of fixed rate loan repricing, helped to offset the variable rate loan repricing, and will continue to do so going forward in 2025.
The allowance for credit losses is shown on slide 13. This quarter, we had net charge offs of only $800,000. We recorded $5.7 million of provision for credit losses on loans, which was offset by a reduction of reserves for unfunded commitment balances of $1.5 million. The result was net provision expense of $4.2 million recorded in the income statement.
The reserve at quarter end was $192.8 million, and the coverage ratio was 1.5%. In addition to the ACL, we have $17.4 million of remaining fair value marks on acquired loans. When including those marks, our coverage ratio is 1.64%. Overall, we are still more than adequately reserved, as our allowance remains well above peer levels.
Slide 14 shows details of our deposit portfolio. The total cost of deposits declined meaningfully by 26 basis points to 2.43% this quarter. Our interest-bearing deposit costs declined 31 basis points, reflecting a downward deposit beta of 46%.
As a reminder, deposits included in the sale of the Illinois branches of $267.4 million were reclassed to held for sale in the third quarter and were not reflected in the total deposit balance at the end of the third quarter. Therefore, deposits grew $156.5 million or 4.4% annualized linked quarter.
On slide 15, net interest income on a fully tax equivalent basis of $140.2 million increased $3.2 million from prior quarter. Although yield on earning assets declined 19 basis points linked quarter, it was outpaced by the decline in funding costs of 24 basis points, shown on line 5. The result was a meaningful expansion of stated net interest margin of 5 basis points and an increase of 18 basis points from the first quarter of the year.
Next, slide 16 shows the details of non-interest income. Non-interest income totaled $42.7 million, and when normalized for the gain on the sale of the Illinois branches and realized loss on securities, was $34.4 million, an increase of $0.4 million over prior quarter. Customer-related fees remained robust at $29.4 million, reflecting strong wealth management fees and gains on sales of mortgage loans, along with higher customer loan level hedge fees.
Moving to slide 17, non-interest expense for the quarter totaled $96.3 million, an increase of $1.7 million over prior quarter due to higher marketing costs and other one-time operating expenses. We maintained our expense discipline and achieved positive operating leverage again this quarter and adjusting for non-core items and delivered a 53.6% core efficiency ratio.
Slide 18 shows our capital ratios. We continue to grow capital this quarter with Common Equity Tier 1 climbing to 11.43%. The tangible common equity ratio ended the year at 8.81%. These strong capital ratios provide us with strategic flexibility going into 2025.
That concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin, to discuss asset quality.

John Martin

Thanks, Michelle, and good morning. My remarks start on slide 19. I'll begin by highlighting loan portfolio growth, touch on the updated insight slides, review asset quality and the non-performing asset roll forward, before turning the call back over to Mark.
Turning to slide 19, we had continued strong mid-single-digit commercial and industrial loan growth, shown on line 4, which includes owner-occupied commercial real estate and sponsor finance. Regional C&I, which you can see on line 1, grew the most, while the sponsor finance portfolio on line 2 declined. As the sponsor finance portfolio matures, we would expect to see periodic payoffs as portfolio companies are sold and sponsor funds mature.
Total investment real estate or CRE non-owner occupied on line 7 includes both stabilized or stabilizing properties and construction, land, and land development, which was mostly unchanged. We continue to have ample room to grow this portfolio, and view this as an opportunity for future growth, depending on market conditions.
Moving down to line 9, there was strong quarter-over-quarter growth in public finance, which was up $77 million. Part of this growth was due to our willingness and ability to move quickly in the fourth quarter, which resulted in some very attractive and less competitive lending opportunities. The originations were all high-quality municipal transactions geographically concentrated in Indiana.
The loan portfolio insights, slides on pages 20 and 21, are intended to provide transparency into the portfolio. As mentioned on prior calls, the C&I classification shown on slide 20 includes sponsor finance as well as owner-occupied CRE. 21% of our C&I loans support manufacturing businesses.
Our current line utilization increased again for the quarter. Line utilization rose by 1% to 46%, contributing roughly $90 million to C&I growth, with total C&I commitments rising roughly $91 million this quarter. We participate in roughly $890 million of shared national credits across various industries. These are generally relationships where we have access to management and revenue opportunities that go beyond the credit exposure.
In the sponsor finance portfolio, I've highlighted key credit portfolio metrics. There are 85 platform companies with active sponsors in an assortment of industries. 66% have a fixed charge coverage ratio of greater than 1.5 times based on Q3 borrower information. This portfolio generally consists of single bank deals for platform companies or private equity firms, as opposed to large, widely syndicated leverage loans from money center bank trading desks. We review the individual relationships quarterly for changes in borrower condition, including leverage and cash flow coverage.
On slide 21, we break out the investment or non-owner occupied commercial real estate portfolio. Our office portfolio, our office loans are detailed on the bottom half of the slide and represent 1.9% of total loans, with the highest concentration outside of general office in the medical office space.
The wheel chart on the bottom right details office portfolio maturities. Loans maturing in less than a year represent 25% of the portfolio or $60.7 million, up from 15% last quarter. The office portfolio is well diversified by tenant type and geographic mix. We continue to periodically review our larger office borrowers and view the exposure as reasonably mitigated through a combination of loan-to-value guarantees, tenant mix, and other consideration.
Our largest less-than-a-year maturing office loan is roughly $25 million, has a credit tenant, and is under a long-term lease. We expect this loan to be renewed in due course later this year.
On slide 22, we highlight this quarter's asset quality trends and position. Our non-accrual loans were up $14.7 million, while 90-day past due loans declined to $5.9 million after the renewal of the $13 million matured relationship discussed during last quarter's call. The increase in non-accruals resulted largely from a $22 million multifamily housing loan to a developer that is involved in a dispute unrelated to our project. Our project is headed to a sale, and we expect to be paid out later in the first quarter or early in the second quarter with no anticipated loss. Finishing out, classified loans leveled for the quarter, while net charge offs were roughly $800,000.
Then moving to slide 23, we've again rolled forward the migration of non-performing loans, charge offs, ORE, and 90-days past due. In the column 4Q24, we had more movement than in recent quarters with inflows of non-accrual loans on line 2 of $42.9 million, the largest of which was the $22 million multifamily project I just mentioned.
We had a reduction from payoffs or changes in accrual status on line 3 of $25.5 million, with the largest outflow from the exit of a $13 million hospitality credit taken to non-accrual in Q1 2024, and a reduction from gross charge offs of $2.6 million.
Dropping down to line 11, 90-day delinquent loans decreased by $8.2 million, with the renewal of the relationship from last quarter resulting in NPAs plus 90-day delinquent loans ending the quarter at $84.6 million.
So to summarize, asset quality remains stable, classified loan balances have leveled with nominal charge offs, we had a solid quarter of C&I loan growth combined with robust public finance activity. And with the refinance and sale activity in commercial real estate abating, we hope to see traction and growth in the construction loan portfolio.
I appreciate your attention, and now we'll turn the call back over to Mark Hardwick.

Mark Hardwick

Thanks, John. Turning to slide 24, the 10-year compound annual growth rate of earnings per share is 7.5%, and it's helped support the 7% growth rate we've seen in tangible book value per share. As you know, those numbers are post dividends, post M&A activity, or the dilution from those acquisitions. And it also includes the AOCI impact that is in our total equity calculation.
Slide 25 shows our total asset CAGR of 12% during the last 10 years and highlights meaningful acquisitions that have materially added to our footprint and help fuel our growth. There are no changes to slide 27, as we continue to live both our vision and our strategic imperatives.
So in summary, I'm proud of this team. I'm proud of all 2,000-plus employees that we have. And I'm really proud of the accomplishments that we delivered in 2024. And yet, I'm very happy to turn the page on a year of repositioning. Our teams worked very hard last year to put the bank in a position to grow, and we have never been positioned better to meet the financial needs of the clients that we serve.
Thanks for your attention and your investment, and I hope you share the same optimism that all of us around this table share. So at this point, we're happy to take questions.

Question and Answer Session

Operator

Certainly. And our first question for today comes from the line of Brandon NASA from Hobi Group. Your question, please.

Brandon Nosal

Hey, good morning, everybody. I hope you're doing well. Funny, but maybe starting off here on kind of asset repricing dynamics as we move through the year. I think 60% of your book floats on either so or prime. But for the other 40% of the loan book, can you remind us how much that book asset repricing you have across the year and how much you'll pick up. You're, you're looking to achieve on that paper. Thanks.

Michele Kawiecki

I think our fixed.Rate securities, we probably have about 250 million in fixed rate securities. They're going to be repricing in the next 12 months and I believe they're at like maybe about a 4.5% yield. So we've got some good pick up there. I think that'll be a nice tail one for us.

Brandon Nosal

And then what about the loan side? I think you said that was securities.

Michele Kawiecki

Oh, I'm sorry. And that was the long book. I apologize.

Brandon Nosal

Oh, okay. Okay. That, that makes a great deal of sense. Okay. Perhaps one more from me just kind of on the pace of investments and expenses overall. I mean, you did a ton of work in 2024 investment spend on your four major initiatives. Any early thoughts on the project slate for 2025 you know, where dollars need to be allocated or, or whether you kind of pull that forward into, into 24 and then tie that commentary into overall thoughts on the cost base for this year. Thanks.

Mark Hardwick

I'll let Michelle speak to the overall cost base. But the pull forward of those projects, it's amazing. We were able to upgrade the quality of our technology really without any increased expense. The where it really showed up in our income statement for the actual conversion charges, the one time kind of expense related to to changing platforms and even carrying technology over where we were maybe duplicating expense for a short amount of time. But the 2025 numbers related to all those technology projects really is not an increase. So it comes back to just what's the core increase in our investment really in people as we move forward.

Michele Kawiecki

And then Brendan, maybe I'll kind of answer the second part of that. When you look at just our total expenses for 2024 looking to 2025 we think we can keep expense growth pretty minimal. Really, I would say somewhere in the 1 to 3% probably leaning more towards the low end of that range. Our efficiency ratio continues to be low and we do have no doubt that we'll continue to maintain that expense discipline and, and deliver a sub 55 efficiency ratio in 2025 as well.

Brandon Nosal

All right, fantastic. That's to color. Thanks for taking the questions.

Operator

Thank you. Thank you. And our next question comes from the line of Terry mcevoy from Stephens Inc, your question, please.

Terry McEvoy

Hi, thanks. Good morning everybody. Maybe the cost of total deposits in Q42.43%. I'm just wondering maybe where was that the end of the end of December? Or, or if you don't have that handy, where do you see those deposit costs heading over the next couple quarters.

Michele Kawiecki

Our December, deposit costs were 2.33. So we'd actually made quite a bit of progress, in the fourth quarter through the end of the fourth quarter, really cutting those deposit costs. And you know, overall, we believe that we can continue that momentum. As I said in my remarks, we had a down deposit data of 46%. So, our commitment is to continue to move forward if the fed cuts rates in 2025 we're going to go grab more of our share. You know, it'll all be dependent on competition as it always is. And so we'll make adjustments as needed.

Terry McEvoy

Thanks Michelle and then Mike, it sounds like the momentum in the C&I area will continue in the first half of the year just based on the conversations and some of your comments. There's certain sectors, industries you think are better positioned to support that growth. And, and then as a as a follow up, just since I'm asking the loan portfolio, you highlight the ample opportunities to for ample real estate capacity. What's your desire to, to build out commercial real estate? Given that comment in your low relative exposure.

Michael Stewart

On the that CN I outlook, it's a, it's a couple of things inside the manufacturing segment. You know, we're sitting here as you know, in these three states, manufacturing is a big part of what we're doing. And, and, and that outlook inside the business plans of those companies is what gives me the in addition to what we see in the pipeline today gives me that Polish outlook for the next quarter, maybe even two.
Also, I would just remind, we're really gaining our momentum in a Michigan market. You know, we're, I can't say we're new there anymore. But when you think about what we've done the last three years to build our personal brand up there and our approach of that team is making really great strides and growth. So we're trying to get our fair share of that marketplace so that in and of itself is taking market share offers that some of that additional runway of growth, what job points out. And, and what I point out with that with this, the real state portfolio is just really, it's just to say we're balanced. We have really strong core developers, we work with, they're doing a lot inside the projects that we asset classes that we like could still be in the multi family segment, the Industrial Warehouse. You hear us talking about things we might be doing in the student housing even though that's gotten cool a little bit.
But what the word it's really saying is that we've got capacity to continue to grow and we're just trying to differentiate ourselves from other banks that might already be more full with real estate assets. And as we build out and as we continue to earn our reputation with syndications, and we've got the ability to continue to do more in that space with developers that like our underwriting our approach and our consistency into the close process. So we just have the ability to take advantage of that if the project pencil out and if we like the underwriting.

Terry McEvoy

Perfect, appreciate all the color. Thank you.

Operator

Thank you. And our next question comes from the line of Damon Delmonte from KBW your question, please.

Damon DelMonte

Hey, good morning everyone. I hope you're all doing well today. Just wanted to to get a little bit more color on the margin outlook. Michelle, I think you guys noted about 270 million of cash flows coming off the securities portfolio is the intent to, to reinvest that the higher rates or are you going to maybe kind of split that with some reinvestment and some funding of, of loan growth?

Michele Kawiecki

Our intention is to use it to fund the loan growth for our 2025 plan. So we'll see where the growth, where growth goes. But, just looking for margin for 2025. Our plan is to grow margin. We do have two rate cuts that are in our plan both in the early half of the year. I should say one in March and one in June is what we, when we have them built in and, and so, although we do have, we are asset sensitive and we'll have loans to reprice down. We've been very proactive in managing our deposit costs in 24. We think we can do it in 25. And also we've got really strong loan yields, our new loan yields. And so that coupled with the fixed rate loans that Brendan asked about, we feel that we'll be able to achieve the margin growth at the at the very minimum stability, but we believe we can grow it.

Damon DelMonte

Great. Okay, I appreciate that color. And then just to circle back on the loan commentary. So, Mike, do you feel kind of a low, mid single digit net growth is, is doable or do you think you could actually get to a more solid middle, single digit growth footing?

Michael Stewart

Yeah, I'm feeling middle single digits. We used to talk about high single digit might not be in the high, but I'm I'm on the B side of that.

Mark Hardwick

And I made a comment just in my opening that the 6% this quarter is a, is a really good number to think about 4.5.

Damon DelMonte

Got it. Okay, great. And then just lastly, any updated thoughts on capital management, you your capital levels are obviously very strong. There's been a, a thaw in the M&A market and there's been some activities across your footprint. Just kind of wondering what your priorities are for deploying capital. Is it just to support organic growth? Do you think there's M&A opportunities and if so kind of geographically, do you feel the need to expand out of your core markets or do you see opportunities to maybe enhance your positions in your, in your core markets? Thanks.

Mark Hardwick

Thanks. Yeah, we love our capital base, but I'm really happy with the levels where we are today. It provides a lot of flexibility that the power of our earnings stream into 2025. I would love to use as much of it as possible to, to grow the balance sheet. As I mentioned, I kind of gave a mid to high single digit number is kind of where I think we'll come in with loans. So arguably we need about a third of our capital base for the balance sheet growth.
And we use about a third for dividends and, and the rest will continue to accumulate. Our M&A focus is just in the, like it has been for a long time. It's in the three states where we currently do business. Indiana, Ohio and Michigan. And, if something makes sense, we'll, we'll, we're, we're certainly in communication with banks. I don't know what their real appetite is going to be but there's something that makes sense where we feel like if we were to acquire an institution or two in that footprint over time that it would give us a nice new organic market where we may be able to grow into the future, but it's a, it's not a priority. Our focus is the prioritization of performing organically.

Damon DelMonte

Got it. Great. Appreciate that color. That's all that I had. Thank you very much.

Operator

Thank you. And our next question comes from the line of Nathan race from Piper Sandler. Your question, please.

Nathan Race

Yes. Hi, everyone. Thanks for taking the questions. Just going back to the last line of questioning on capital. You know, look like you guys are active on share purchases in the quarter. So just curious, if that appetite remains heading into this year, just given some of the M&A commentary.

Mark Hardwick

Yeah, I'm, I'm.Interested in share purchases where we're trading below historical averages. And when I say that I just think about what, what are our earnings apply multiple and if we're trading below the historical averages that are closer to, 12.5 or 13. Then, then I have an interest in being active where we're trading at, our historical averages and we believe that if we, if the estimates et cetera are appropriate, then we're likely to stay out of share repurchase and, and just accumulate capital for future use.

Nathan Race

Okay, great. That's really helpful. And then, Michelle, I think last quarter, we were talking about a run rate for fee income around 30 to 32. Going for you guys, you guys obviously exceeded that here in the fourth quarter, but just kind of any thoughts on kind of the fee income growth run rate or trajectory to 2025.

Michele Kawiecki

No, I mean we expect 2025 non interest income to grow year over year probably in the mid to high single digits. And you know the drivers of that growth that we're expecting to come from our wealth management and our mortgage team, they delivered exceptional performance in 24 and we think they can grow at a double digit pace in 25. And so when you kind of couple that with the other components of the income growth, we think that'll bring our overall non interest income growth to that mid to high single digits when you look at it year over year.

Mark Hardwick

And even treasury management should be in a similar range for with the use of Q2 when we think about our plan, the private wealth, commercial or TM fees, the mortgage business, they're, they're really strong drivers of performance and I love the historical performance and we think it can continue.

Nathan Race

Okay, that's really helpful. And then, any thoughts on the tax rate going forward.

Michele Kawiecki

I would expect it. To be maybe 13 to 14% for the year in 25.

Nathan Race

Okay, great. And then maybe one last one for John, obviously, it sounds like with some of the non performing increase in the core, that's kind of transitory just given what's going on with that specific client. You know, in the past, we've talked about kind of a normalized charge off range, south of 20 basis points, but it just seems like, given some pretty benign credit trends in the fourth quarter that, maybe we're going to kind of trend below that level here in 2025.

John Martin

You know, I. Still think that the between 15 and 20 basis points is a good number. You know, with classified being where they are non performers being where they are. And it is sort of trans sry, but I still see that as being a reasonable range of expectations for, for charge outs.

Nathan Race

Okay, great. I appreciate the color. Congrats on a great quarter. Thank you.

Operator

Thank you. And our next question comes from the line of Daniel Tamao from Raymond James. Your question, please.

Daniel Tamayo

Thank you. Good afternoon everyone. Maybe first just for Michelle on the details of the restructuring in the in the fourth quarter. Just curious if those funds were reinvested in securities, I know you talked about reinvesting cash flows into loan growth, but just as it relates to those in particular and then if you expect any, any further benefit depending on timing when that transaction happened on the margin the, in the first quarter.

Michele Kawiecki

Yeah, we did not reinvest those cash flows. We actually use the cash flows from the bonds, the sale of the bonds to replace the deposits that we sold with those Illinois branches. And so, you know, when you look at the yield on the bonds that we sold versus the yield on the deposits, it'll actually give us the margin pick up in 2025. I expect that to be maybe to the tune of 2 to 3 basis points of benefits.

Daniel Tamayo

Okay. So you'll, you'll see 2 to 3 basis points here in the, in the first quarter. Related to that restructuring sounds like, okay, appreciate that and then maybe one for mark here, bigger picture. You talked a lot about the investments you made last year. You guys talked about minimal expense growth here and, and sound pretty excited about 2025 and going forward curious kind of how you think about, what would be a good type of ROA for the bank going forward? Pretty strong in the, in the fourth quarter on an operating basis about 125. Is that an achievable number, longer term or? Just curious how you're, how you're thinking about that now, profitability, given the investments you've made as we get into more normalized environment.

Mark Hardwick

It's a, it's a great question. Danny and, and we have a whole series of key performance indicators that we use and, and, and we target around 130. I don't know whether we'll reach that in 2025 but the 125 number you just mentioned is, is a great place for us to be the, you think about growth and mid to high single digit across the balance sheet, the income growth that's kind of 10% is sort of our goal maintaining our expense level and the really low and low single digit range are, are, are we are really happy with the margin numbers, the rebound that we've seen kind of, we're, we're kind of finally back to pre Silicon Valley levels. And and yeah, that efficiency ratio is going to stay under 55. And, and we think with the ROA numbers, you just mentioned that it's a strong place for us to perform that, that we believe starts to look like for performance. And and then if our stock trades at a top quartile level just gives us flexibility as we think about what's next.

Daniel Tamayo

Okay, terrific. Well, thanks for all the color. That's it for me. Appreciate it.
Thank you.

Operator

This does conclude the question and answer session of today's program. I'd like to hand the program back to Mark Hardwick for any further remarks.

Mark Hardwick

Well, I know we have a broad audience here. We have employees, shareholders, customers that listen the times. And I just want to say thank you to all of our stakeholders. We appreciate your interest in first merchants, your partnership with first merchants, and the commitment going forward. So again, please with the year and clearly from the call, you can tell there's a sense of optimism around where 2025 lands. So thank you for your time and have a great day. Thank you.

Operator

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.