First Merchants Corporation
Q4 2014 Earnings Call Transcript

Published: 28 Jan 2015

[Operator:]

Good day and welcome to the First Merchants Corporation Fourth Quarter 2014 Earnings Call on Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] We will be using user controlled slides for our webcast today. Slides maybe viewed by following the URL instructions noted in the First Merchants news release dated Tuesday, January 27, 2015 or by visiting the First Merchants Corporation shareholder relations website and clicking on the webcast URL hyperlink. During the call management may make forward-looking statements about the Company’s relative business outlook. These forward-looking statements and all other statements made during the call that do not concern historical facts are subject to risks and uncertainties that may materially affect actual results. Specific forward-looking statements include, but are not limited to, any indications regarding the financial services industry, the economy and future growth of the balance sheet or income statement. Please note this conference is being recorded. I would now like to turn the conference over to Mr. Michael Rechin, President and CEO. Please go ahead sir.

[Michael Rechin:]

Great, thank you Dan and thanks everyone for taking time out this afternoon to get caught up on our progress at First Merchants. The comments I’ll be making are from our press release issued earlier today January 27th, released about 09

[Mark Hardwick:]

Thanks Mike. My comments will begin on Slide 8. Our total assets on line 8 increased in 2014 by 387 million or 7.1%, following a 26% increase in 2013. On line 3, we had good organic growth of 4.6% and 4.1% in 2013 and ’14 respectively and it’s been assisted additionally by healthy acquisition strategy. Our Citizens Financial Bank merger in November of 2013 added 597 million in total loans just at the end of 2013 and our Community Bank of Noblesville acquisition in November of ’14 added a $145 million to our loan total. Acquired deposits exceeded loans in both acquisitions and are primarily responsible for the growth in our investment portfolio on line 1, this earning asset category increased by 222 million or 25% in 2013 and another 85 million or 7.8% in 2014, and that really is all related to the addition of Citizens Financial. In our Community Bank of Noblesville acquisition we actually have sold the investments at the data of close and we’ve used all of their investment portfolio to kind of replenish our liquidity position. The allowance on line 4 in total dollars has declined very modestly in ’13 and ’14 however as a percentage of loans, the allowances declined from 237 in 2012 to 187 in ’13 and 163 in ’14, and that really is just a result of all of the loans that we have that are now marked with fair value marks where the allowance really isn’t covering the potential loss. And so John will cover that in more detail in his slides later on Slide 23. Goodwill & CD&I increased the line 5 by 53 million during 2013 due to the purchase of Citizens Financial Bank while the increase of 16 million in 2014 is reflective of the intangibles created by our Community Bank of Noblesville acquisition. The composition of our $3.9 billion loan portfolio on Slide 9 continues to be reflective of a Commercial Bank and it continues to produce strong loan yield, the portfolio yield to over 458 compared to a 2013 yield of 471. Fourth quarter loan yields totaled 446 compared to 455 in the fourth quarter of ’13. Fair value accretion has helped minimize loan yield compression and can be seen pretty easily the impact of that fair value accretion can be seen pretty easily when we get to the net interest margin slides later in the presentation. On Slide 10 our $1.2 billion bond portfolio continues to perform well producing higher than average yields with a moderately longer duration than our peer group. Our 3.89% yield compares favorably to peers of approximately 2.52% and our duration remains one year longer totaling 4.2 years with a $42.4 million unrealized gain still in the portfolio as of 12-31. Since rates have moved just -- since yearend the unrealized gain position has increased by another $10 million, so this portfolio is proving to help our performance and especially as it relates to net interest income. And the strength in these investment yields -- they clearly help net interest margin and it’s really the fact that our loan portfolio is so variable and it allows us to take on a little bit more duration risk in the portfolio and maybe some others would as we have 1.7 billion in loans reprised daily. Now on Slide 11, our non-maturity deposits on line 1 represents 76% of total deposits and grew by 797 million or 32% in 13 and another 247 million or 7.5% in 2014, of the increase 126 million or 5% was organic in 2013 and 54 million or 1.6% was organic in 2014. Now if you look at the bottom of the slide on line 10, tangible common book value per share increased by $1.48 or 12.2% in 2014 following an 11% increase in 2013 and a 13.6% increase in 2012. Those are results that we are frankly very proud of. In our last three years of performance compares favorably to the highest performing peer banks in the country and the average of those 20 banks or so trade above 200% of tangible book value which is where First Merchants aspire to be. As previously mentioned the mix of our deposits on Slide 12 is comprised of 46% demand deposits and 30% savings deposits. Our two least expense categories and total interest expense on deposits is just 34 basis points down from 38 basis points in 2013. Slide 13 highlights the results of our capital levels overtime 2014 strong earnings and low dividend payout ratio allows us to use cash for acquisition like the 14.2 million, we just used for Community Bank of Noblesville in the fourth quarter of 2014 and the 14.5 million we are planning to use as a 100% of the currency related to our recently announced purchase of C Financial or Cooper State Bank in Columbus, Ohio. The corporation’s net interest income on a fully taxable equivalent basis on Slide 14 totaled 195 million up from 160.3 million in 2013 and the acquisition of Citizens Financial Bank affected the totals in a meaningful way so looking at margin is a great way to normalize performance. Our net interest margin totaled 399 in 2013 and 391 in 2014. And given the interest rate environment and the fact that our last two acquisitions Citizens had a net interest margin of 332 and Community Bank of Noblesville their margin was 330 on the fact that we came in at 391 for 2014 we were pretty proud of those results as well. Our total non-interest income on Slide 15 when normalized for line 7 and 8 improved by 7.8 million during the year and does include the impact of the Citizens Financial for the entire year versus 45 days in 2013. And our non-interest expense on Slide 16 totaled of a 168.5 million for the year up from the prior year totaled 143.2. Included in our 2014 results was a full year of Citizens Financial Bank and 55 days of Community Bank Noblesville and $2.2 million of onetime charges of related to the acquisition expense for Community Bank of Noblesville. Now on Slide 17, net-interest income totaled 60.2 million and EPS totaled to $1.65 per share, higher net-interest income on line 1 reductions and provision expense on line 2 and lower SBLF dividends on line 8 led to a 43% increase in net income and a 17% increase in EPS given the increase in shares outstanding related to the acquisitions. Now on Slide 18, you’ll notice our quarterly run rate from 2012 through 2014 and just to help the reader understand the all of kind of the extraordinary to come back to a real core number we’ve provided some additional information that includes our gains related to our FDIC acquisition in the first quarter of 2012 and the fair value accretion impact throughout all three of those years. Thanks for your attention and now John Martin will discuss our loan portfolio composition and related asset quality trends.

[John Martin:]

Alright. Thanks Mark and good afternoon. I’ll be updating you on the trends in the loan portfolio starting on Slide 20, review our third quarter asset quality position and then close with a look at where we stand with respect to the allowance in fair value coverage and make a few comments about Cooper and then --. So turning to slide 20, I present a lot of information in this slide highlighting the changes in the loan portfolio is broken out on both the quarterly and annual basis in both core and after the addition of Community Bank of Noblesville. I think this presentation helps to demonstrate the dynamics of the portfolio. So, I’ll start by highlighting the year-over-year organic growth shown in the middle of the far right box which excluded Community Bank of Noblesville. On line 1C&I loans grew by $16.6 million last year, this is in addition to line 4, CRE owner occupied which grew last quarter 4.1% was up for the year 2.4%. There is not a concentrated industry that’s driving the growth in C&I but rather continued success in winning new business and growing our market-share. On line 2 that same column, the 5.1% year-over-year organic growth in the construction and development portfolio continues to be dynamic. We grew both loan balances and commitments this year while seeing planned and early many upfront pay-offs as projects were refinanced into the secondary market. This strategy has helped provide the income for the quarter, while loan losses and commitments continue to grow in both the linked quarter and year-over-year would expect to see continued growth in balances as construction commitments are drawn into the spring. Turning to asset quality on Slide 21. Line 1, 2 and 3 show significant improvement in asset quality for the year, non-accruals decline 23.6% excluding and 13.5% including Community Bank of Noblesville. Other real estate decline 43.2% excluding and 13.1% including Community Bank of Noblesville and on line 3 renegotiated loans decline 33.3%. 90 days past due increased to $4.7 million and contained two relationships totaling $3.8 million that were held accruing at the end of the quarter as they were -- are well secured and have been renewed since the end of the quarter. Suffice to say the improving economy and continued efforts to manage our non-performing assets in both our criticized and classified assets on line 6 and 7 below resulted in stronger asset quality at year-end. Then briefly touching on lines 8 through 10, the allowance coverage to non-accrual loans continues to improve reaching a 148% excluding or 131% including the acquired Community Bank of Noblesville portfolio. I will speak to the allowance and fair value coverage in more detail shortly, but this year’s gains in asset quality have resulted and allowance coverage to non-accrual loans returning to pre-2013 levels when we acquired the Citizen’s Financial portfolio that had a higher level of non-accrual loans. Turning to Slide 22, in the column labeled Q - Q3 2014 and starting on line 1, we started the year with $83 million in non-performing assets in 90 days past due. Following the line down and over to the column Q4 - ’14 and on line 14, we finished the year at 62.2 million or down roughly $20.8 million without Community Bank of Noblesville and with the inclusion of Community Bank of Noblesville NPAs. We ended the year down $8.3 million to roughly $75 million. Touching on the quarterly data in a bit more detail and starting back up on line 1 at the top of the column Q4 2014, we had a more normalize $5.4 million in new non-accruals, we return to accrual over paid-off of $5.7 million and charged of $5 million. Dropping down to line 8, we sold $2.3 million rode-off $300,000 and other real estate owned on line 9 which resulted in a net NPA decrease on line 13 for the quarter of $3.4 million. So now turning to Slide 23, I’ve included a new slide this quarter that I think helps highlight where we stand with respect to the allowance and the remaining credit marks. In the chart above and in the two far columns on the right and starting on line one and moving from quarter three to quarter four, the allowance declined from 65.6 million to 64 million which resulted from -- which was a result of $2.6 million in net charge-offs in the quarter and roughly $1 million of provision. Likewise on line two, our credit marks increased $7.7 million with the addition of $8.8 million of marks that were made to the Community Bank of Noblesville loan portfolio. The $107 million on line three helps to highlight the overall strength remaining in the combined marks and allowance which results in the allowance coverage of 1.63% and from a combined mark and allowance percentage 2.7%. I further highlight this in the chart below the bars represent a 100% of the cumulative fair value adjustment broken down by the percentage of the total fair value remaining 62.7% the percentage of total fair value that’s been accreted to income 24.3% and the percentage of the total fair value outstanding charge-offs or 14%. I think this really helps to show the remaining credit leverage in the portfolio. Then briefly touching on the Cooper State Bank announcement unlike some of the more announcements, Cooper State Bank portfolio consists of mostly residential real estate with $67 million of the roughly $115 million loan portfolio in owner occupied one to four family real estate with $36 million in commercial real estate. The portfolio has limited apparent asset quality concerns and will be mostly marked based on FASB 91 interest rate and other factors. So then to wrap it up, I would just say that all in all a good year for asset quality and a core portfolio with a balanced organic growth. We remain focused on both the macroeconomic picture with respect to oil and the changing dynamics it might have on ethanol and corn prices as well as the regional economy with respect to multifamily and homebuilding. While we have no direct exposure to oil and gas production the impact on ethanol and its long term impact on farmers and corn prices is somewhat less clear. Likewise further slowdowns in the international economy and how it might spill over into our regional economy is something we will be watching for as well. So on balance I think we are well positioned headed into 2015 with commercial construction loans approved and in place, a strengthening C&I pipeline and growing consumer loan demand driving increased consumer borrowings. I’ll turn the call over to Mike Rechin, go ahead Mike.

[Michael Rechin:]

Thanks John. John referenced our credit improvement in 2014 really necessary for us to continue to assess acquisition opportunities. We know that job one is having our own book of business be clean and improving and so I am pleased to see the core trends that John just highlighted. I am going to move to slide 25, we’re heading obviously into 2015 we’re going to continue our core revenue momentum. We’re going to exercise great expense discipline and then try and find that balance of cost reduction opportunities while we grow the top line. And so on top of slide 25 a couple of our key objectives. And then that top segment focus on the customer experience. The point I really wanted to touch on was that we will have and look forward to a major platform enhancement mid to late summer after the Community Bank integration we’ll touch all of our customers that’s going to bring some great capability to our commercial client base. I think it’s going to be great for our consumers as well. It kind of touches the entire Company it’s been planned for more than a year we’re excited to get after it, we kind of put it on hold there for a short period of time to make sure we did a great job satisfied ourselves that Citizens had gone well and our planning for Community well underway. On the middle part of the page in terms of revenue generating activities is the guts of our business and so it gets the majority of our attention. Mark referenced earlier having a organic growth results and that’s critical for us. Our deposit growth without Community Bank for the year was 4.3% which was really encouraging to us. We put a lot of activity around retail deposit gathering that captures not only our consumers but our commercial balance sheet. Our net loan growth without Community Bank organically was just under 5%. It was about four and three quarter percent. And it’s a little bit shy of what we thought we could do. This marketplace has gotten extremely competitive. We’ve stressed to all of our team the importance of making profitable relationship oriented loans. We’ve provided them the tools and the training to get after it. We feel good about sustaining that rate if not a little bit higher organically in 2015 we do think that the pricing environment is a test of that perhaps a little dampening impact in the fourth quarter we had great originations in the fourth quarter and our pipeline overall. Going into the first quarter of this year is commercially -- on the commercial side of the bank about $70 million higher in current quarter than it was going into the forth -- I’m sorry, this time last year. So we feel good about the momentum that we take into. I referenced NI for additional efficiency I feel like we've made good on our quantitative targets for both Citizens Bank, I feel great about where we're going to be with Community Bank as that integration gets done in the next two quarters and we’ll take a similar type eye to any other opportunities as I’ll touch on in a minute with the Cooper State Bank. I referenced earlier a couple of branch rationalizations that will come out of market redundancy in the Community acquisition, we feel like across the entire Company we're going to look for a smart market coverage, profitable banking centers in the light of customer choice that is more reliant on technology than brick and mortar that it has. Likewise all of our lines of business we're going to continue to discern and seed our best opportunities. And so I think we're going to either invest in talent or product line should we determine that they are great fit for the company we've already built. At this point I am going to move to page 26, so I got a couple of slides that speak to add detail to what John mentioned earlier with Cooper State Bank. So on January the 5th of this year we signed the definitive agreement both with C Financial Corporation as the parent for Cooper State Bank. We view this as really attractively additive to our existing Columbus operation. So Cooper is the young company founded in 2004, it had the balance sheet complexion that John covered which is dominated by residential and one to four family assets. Really pleased with the track record of this young company, we watched if you look at the history than start with one banking center and ultimately moved to six and invest in technology and the people to drive it and then they through that growth and extended startup period became consistently profitable throughout 2014, so it's a great foundation for us to build on, we're really pleased that our dialogue with them reached a kind of win-win juncture that we currently feel that we're at. Like Community Bank it has the Sub S ownership which has at least to this point gotten us a smother set of discussions that have kept our pace of play up. Moving to page 27, some highlights of the financial transaction itself. John referenced the credit quality of Cooper and in fact the $2.8 million in the middle of the page which is the combination of interest rate marks and credits are really dominated by the interest rate marks because there are minimal credit issues after our full due diligence and review and it's consistent throughout their history. Page 28, a couple of additional highlights rationale of course. It just fits for us, it fits very well. We've talked on this call and in lots of people forms about our desire to be more in Central Ohio and from the time that Commerce National Bank joined us and Columbus in 2003 we've build up a really bonafide impact for commercial banking efforts and feel like Cooper in addition to that gives us a full service banking opportunity that we look forward as does our management. Like the last couple of Companies that have joined us they’ve got some seasoned professionals that are going to work with us on this team on a go forward basis that excites us brining the local market knowledge and the ten years of startup history that they have. Bit of repeating in the middle of the page about our expectations for cost saves out of their total non-interest expense base and a tangible book value earn back to begin at this point, a couple of months prior to closing we would also call it four years at the outside. So at this point Dan I am going to turn the call back to you and we can take questions from many of the folks on the phone.

[Operator:]

Okay. Great, we will now begin the question and answer Session. [Operator Instructions]. And our first question is coming from Scott Siefers of Sandler O’Neill. Please go ahead.

[Scott Siefers:]

So I guess Mark probably first question is for you just on the margin I apologize if I missed it in your remarks, but can you go through what the core margin was for the fourth quarter testing out the fair value adjustments and then just what given sort of shape of the up curve combined with some of the purchase timing benefits you would continue to get, what's the outlook for that’s reported in the core margins?

[Mark Hardwick:]

Yes, in our press release we didn’t -- in the slide deck we did not show the quarterly numbers, but in our press we do. And we’re for the three months ended we were at 380 on our core margin and we declined 2 basis points on an adjusted basis if you back out the fair value accretion and with that we were at 373 in the third quarter, at 371 this quarter. So yes, the fair value was clearly a lighter number for us this year or in the fourth quarter we’re anticipating seeing that increase as we move into 2015 and again it’s really -- the volatility comes out of the larger credits where we have fair value adjustments the way we’re able to work them out and allow for repayment versus just the normal accretion. Is that answers what you’re looking for Scott?

[Scott Siefers:]

Yes and then just sort of the puts and takes in the core margin that you see it -- drop here?

[Mark Hardwick:]

Well, we said for a while and now we feel like each quarter having some compression of one or two basis points is what we’re anticipating and we still feel the same way I think as we work our way through 2015 that we’ll see some pressure as assets reprise faster than we can push down our liability cost and we’ll see one or two basis points of compression each quarter throughout 2015.

[Scott Siefers:]

Okay, perfect thank you. And then Mike you gave some -- between you and John, you guys gave some good color on overall lending but just as you look at the sort of the outlook for the year kind of seems like there, the commercial pipeline is connecting maybe some better consumer demand but at the same time you know that how competitive it is. So, are you able to kind of quantify your expectations for aggregate loan growth dropped ’15?

[Michael Rechin:]

Yes, 5% to 7% loan growth is what we think is really achievable on an organic basis absent Cooper State Bank’s closing and I’ll tell you what, we took a relatively healthy pipeline Scott into the fourth quarter of the year and that pipeline as it often though translates into a lot of origination, so our originations in the fourth quarter are much stronger than what the net result was because of some of the dispositions that John Martin covered either healthy construction loans going permanent or some asset quality driven exits. And so we take that momentum into this year I feel good about that 5% to 7% total and even with the little lift out of the consumer side, we’ve added a lot to the consumer lending side in our footprint and saw some lift in that in 2014 so we would expect that to continue in ’15 as well.

[Scott Siefers:]

Okay, perfect and then final question just on M&A, I think there is perception that you guys are increasingly active or interested in M&A just being curious, share your thoughts on where you guys are given what you’ve done and so depending on what the appetite or desire is for additional transactions?

[Michael Rechin:]

Well, I think we’ve got a track record now of executing on end market transactions and so I feel like there will be continued consolidation in Ohio, Indiana, Kentucky and Illinois markets and for those market that we already operate in we feel like we’re a logical consolidator where we can not only identify where expenses can be harvested but then go get them and take advantage of really understood operating philosophy in the market for commercial banking in particular but increasingly for retail as well. Our mortgage business feeds of each of those business lines and so I feel like moving into markets that First Merchants has some experience which is a logical one and so we would look to continue to assess those and we think 2015 as I talked about with the work in front of us will be busy, but we’ve proven to draw a lot of interest from other folks and so we’re going to fit in the continued assessment of new things. In our ’15 is as I referenced earlier from a calendar standpoint, the community integration is kind of job one, there is online banking investment in July, August time frame really important us and then Cooper State Bank in the fourth quarter. But if additional great opportunity present themselves we will pursue them.

[Scott Siefers:]

Okay, that’s good color, thanks a lot.

[Operator:]

Our next question comes from the position of Damon DelMonte of KBW, please go ahead.

[Damon DelMonte:]

I just had a quick follow up question on the margin and I apologize if I miss this but I think last quarter’s reported margin was 398 and this quarter’s was I guess 380. Mark did you disclosed what kind of drove that 18 or so basis point decline?

[Mark Hardwick:]

We had a two basis point decline in our core numbers it was all from the fair value accretion. We have seen our fourth quarter total fair value accretion was a 1.456 million down from 3.484 million in the third quarter and typically when layout the margins slide by quarter those are pretty easy number to see, but the way we presented at that time wasn’t quite as obvious.

[Damon DelMonte:]

Okay, that’s helpful. Thank you. And then kind of with respect to expenses I think you’ve mentioned there is -- I know on the slide that shows it was 1.9 million of merger related charges, in your prepared remarks did you mention any other additional merger related charges or is it just that 1.9?

[Mark Hardwick:]

Yes, we had about 300,000 in the third quarter related to some of the legal works that we had already expensed.

[Damon DelMonte:]

Okay that’s in third quarter. Okay and kind of how do you view the expense going forward. Do you feel that something 41 to 42 range is conceivable, obviously not including the pending acquisition but just based on what you’re at right now?

[Mark Hardwick:]

Well yeah it should be. I think as I look at our actual -- I think we had a $41 million quarter inclusive at that $1.8 million and so I think we’re marginally beneath $40 million and so we’ve got a couple of items. But we also have some savings that I am counting on a go forward basis. We have and we need to meet the increasing regulatory expectation, but really and what we will support new growth where we’ve got evidence that it pays for itself. We’ve got a little bit of that IT investment that I referenced but all of that will be within the kind of number that you laid out on a $40 million to $41 million quarter level.

[Damon DelMonte:]

Okay that’s helpful. Thank you. And then -- I guess go back on the loan growth outlook, so 5% to 7% organic growth do you think is reasonable this year, can you make it little bit of which categories you think are going to be the primarily drives of that?

[Mark Hardwick:]

You can see how heavily oriented we are towards commercial banking and so I feel like the most valuable growth for us is in C&I lending because of the number of products we can sell to those business owners. And so that’s where the highest number of our relationship managers are occupied. Yet as the Midwest has rebounded well in investment real estate we’ve been an active participant there and are really well skilled in it. The last couple of acquisitions that have joined us the two that have closed and the one ahead of us tend to be a little bit more realistic, so it would stand the reason that level would balance out a little bit. But if you look at the pie chart in the slide I don’t expect that mix to change much throughout the year.

[Damon DelMonte:]

Okay these are all that I had for now, thank you very much.

[Operator:]

Our next question comes from Stephen Geyen of D.A. Davidson. Please go ahead.

[Stephen Geyen:]

Mike, maybe do you have any thoughts on or John, do you have any thoughts on the reserves heading into 2015 where that might shakeout as the year progresses?

[John Martin:]

Well, I think that’s a good question and as we progress the year I would imagine that as we transition the fair value portfolio into the allowance portfolio as loan insure we renew and otherwise bring them on, I would imagine that the allowance would come down somewhat. But pretty much hover where it’s at today at the 163, but if that provides any guidance. I would probably be keeping it about where it’s at to coming down somewhat.

[Mike Rechin:]

This is Mike, Mark referenced in his first comment about our income statement performance targeted and directed towards the highest performing community banks and so we feel like asset quality is an area where we have still have some upside there to improve and so we think that the reserve which is at a really healthy level might prove to allow us to continue to improve our asset quality mix and take advantage, John used to term credit leverage. It clearly has an income statement opportunity for us and also from a balance sheet quality as well as the trend to continue the overall improvement of our criticized classified profile.

[Mark Hardwick:]

I think I would just add that -- I guess I am trying to drive at it you’ve got the mark that are available to accrete in the income and I make that distinction between the allowance itself, so I think there is probably as much opportunity it is on the mark’s side as it is the allowance.

[Stephen Geyen:]

Mike, I appreciate all the commentary and color around the loan growth maybe just one additional question on that maybe just some thoughts on what do you think maybe the biggest impediment to I understand the growth that you gave of 5% to 7% and which is a descent number, but if you get at maybe 7% to 9% what do you think might be the biggest impediment to doing that? Is it potential pay downs, work out of existing loans, is it just opportunities in the market what do you think is -- what could change that could potentially boost that number?

[Mike Rechin:]

Well, I think winning the opportunities were in front of, so our Chief Banking Officer tracks all of our proposals and then pipeline by marketplace and these are competitive situation so I think speed and execution there is a point in one of my slides that talks about continuing to advance our loan process for speed and accuracy, there is really not so much for us as it is for our client and they remain competitive. I feel like our market coverage is at a point that really supports that 5% to 7% and could get to 8% and 9%. It's really execution in the field and yet at the credit level to permeate all of our front line people we have a discipline about what is a fair return for our shareholders. So striking that balance is difficult, but I think our market opportunity supports that’s mid-single-digit growth level.

[Stephen Geyen:]

And just one final question, the expenses for Noblesville do you expect anything additional in 2015 one-time expense?

[Mike Rechin:]

No, we have all of our one-time expenditures behind us and now getting to the integration date of April and all those things are remaining amount of cost savings that we highlighted in 40%.

[Operator:]

Our next question comes from Brian Martin of FIG Partners. Please go ahead.

[Brian Martin:]

Mike maybe can you just -- circling back kind of on the loan comments, just the pricing you talked about the fourth quarter, I mean is that -- can you give a little bit more color on that I mean was it certain markets that were more competitive or just kind of across the board or what were you seeing in and is that kind of one of the -- sounds like you kind of dampen things a little bit in the fourth quarter, I guess in your forecast for 2015 I guess are you assuming similar type of conditions that you say in the fourth quarter?

[Mike Rechin:]

I certainly don’t think it's going to get less competitive, I have listen do enough for these calls and read enough of people’s look forward as you have to see that, loan growth is a top end priority for everybody. It's a -- I don’t feel like our company feels the stress of that as much because we’ve always been a commercially oriented bank and so if the processes for us work and we get the opportunity touches that we’re really capable of, I think it can happen. I think the general decline in pricing is a little frustrating, but it's -- you know the pendulum just swing back in the favor of the really strong operating company and that’s the way it's going to be for 2015. Mark referenced our balance sheet continuing to be asset sensitive and it is, but our goal is and everybody in this company knows we’re going to try and build take advantage of operating leverage and build net-interest income independent of the interest rate environment just out in the market.

[Brian Martin:]

And the loans -- the new loan pricing in the fourth quarter kind of what business was coming on it and can you just talk a little bit about where that’s at?

[Mike Rechin:]

Yes, it's -- looking for a report here real quick, I am looking to quantify the answer. The floating rate loans are clearly beneath our average coupon is that would be for most banks. We’re trying to take advantage on the fix rate side with a following the yield curve as companies are bracing for our ultimately rising rate. On a floating rate side, it's kind of 3% over the respective index.

[Brian Martin:]

And then maybe just question for Mark and kind of the accretion income, it sounds like the level trends back up in the -- with the transaction on the -- in the first quarter maybe just kind of when we think about it tend to year-over-year Mark, I mean how much of the I guess a decline would you expect in the kind of full year accretion income from ’14 to ’13?

[Mark Hardwick:]

Really not anticipating a decline, we are expecting to see a similar dollar amount in 2015.

[Brian Martin:]

And that was somewhere in the $9 million range is that right?

[Mark Hardwick:]

Yes.

[Brian Martin:]

And then maybe just to clarify Mike’s comments early, I guess the expense summary you talked about earlier Mike kind of 40 to 41 was that number -- I guess was that run rate kind of suggestive of the Noblesville deal in the numbers for next year is that kind of hope what you are suggesting?

[Mike Rechin:]

Yes it is because we have the Noblesville, the full Noblesville expense base in for over the last 50 days of the year and so you have to normalize that on a full quarterly basis offset by a couple of expenses that will come down. Mark reference the integration time, we got a retention of many, many of the folks in their company through integration period of time. So, we’ll have full first quarter level that might be on the high-end of that range and then it will come down quickly thereafter.

[Brian Martin:]

And just last thing from an M&A perspective, would you think at this point based on your earlier commentary that, do you look at continued M&A and then after just what you see it's more likely to do in market or would you see it's more likely you might enter actually a new market or fill in somewhere between existing markets, is one more likely than another at this point?

[Mike Rechin:]

No, I don’t think one is more likely, I know this from a preference standpoint visibility to take people -- let's look at Cooper State Bank as an example, to bring veteran Columbus area bankers into a marketplace where we have veteran Columbus area professional is just illogical, just as community bank was relatively easy transition. But as you know we don’t get to control the targets for us to pursue an M&A opportunity outside the four states that I mentioned earlier would be a real surprise to me. I don’t think that would happen. The real key for me when I assess and I listen to our colleagues that the bank is to have it not be a distraction to be in grade in the marketplace every day for every other customer and every other banker we have serving our customers.

[Operator:]

Our next question comes from Daniel Cardenas of Raymond James. Please go ahead.

[Daniel Cardenas:]

Just kind of going back to growth and really more funding of your loan growth of that expected 5% to 7%, how much cash flow from the securities -- how much of that growth can be supported by cash flow from the securities portfolio as opposed to you guys going out and needing to grow your deposit base?

[Michael Rechin:]

Well, we could run down the portfolio if we want to and I don’t think that’s really the strategy at this point. We’re anticipating having half of our funding covered by growth in deposits and being able to cover the rest with some of our additional sources of liquidity. Our Federal home loan bank advances are only 145 million with a borrowing base of 560 million. Our broker deposits are about 6% of total funding and we feel like we could push that a little higher as well and the pricing is great. There are no -- they don’t have the ability to prepay. So those are couple of areas where we can extend funding and protect ourselves for future rising rates at a really nominal cost. And so those are I think at least for 2015 that’s how we think about funding the growth versus needing to use the bond portfolio.

[Daniel Cardenas:]

Okay. And then as you look out into 2015 are you guys projecting a rate increase sometime in the second half of this year?

[Michael Rechin:]

Our internal model we’re assuming one increase in 2015 that would happen in the third quarter. Obviously, if you look at the market -- I am not sure the financial market six are be like it’s deserve but clearly looks like the Fed they’re sending messages so that’s likely to happen.

[Daniel Cardenas:]

Great, all my other questions have been asked and answered. Thank you.

[Operator:]

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

[Michael Rechin:]

Thanks Dan. I would thank everyone for their attention. I feel like the questions were excellent today. And as I digest the call I think about the cumulative effect of a couple of years of solid performance on the part of the company has provided us some flexibility as it relates to the capital levels, as it relates to funding as Mark just answered as it relates to the asset quality and then the ability to kind of pick acquisition opportunities that perfectly fit our Company, that have a lower risk profile, that don’t catch anyone by surprise and welcome a company like ours into their marketplace. So, appreciate all of your attention. Look forward to talking to you about our first quarter results here in a couple of months. And wish you all a good day.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.