First Merchants Corp (FRME) 2011 Q1 法說會逐字稿

Good afternoon and welcome to the First Merchants Corporation first-quarter 2011 earnings call and webcast. All participants will be in listen only mode.

(Operator Instructions).

Please note this event is being recorded. During the call Management may make forward-looking statements about the Companies 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. Special 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.

I would now like to turn the call over to Mr. Michael C. Rechin President and Chief Executive Officer. Please go ahead.

Thank you Valerie. Welcome everyone to our earnings conference call and webcast for the first-quarter ending March 31, 2011. Joining me today are Mark Hardwick, our Chief Financial Officer and John Martin, our Chief Credit Officer. For listeners with access to the webcast, my comments begin on page 4 on a slide titled First Quarter 2011 Highlights. Our press release, issued earlier today offered the directions to get you to that webcast, and the same press release reflects our results of operations and other significant activities, completed since December 31, 2010.

For the first quarter, First Merchants earned just under $4.5 million, or $0.17 per fully diluted share. Our current results, follow the second half of 2010, were declining credit cards and other successful initiatives, reduced stable revenues resulting in improved core bank earnings. Our most current quarter continues those trends. The environment we see remains challenging for the industry, but our adherence to our operating plan produced an improved set of results, through an expansion in our net interest margin and prudent expense control. The effects of the recession are still evident in all of our markets, but the management of our portfolio risk is thorough, and the investment in our reserve adequate for what we see ahead.

At this point I'll turn the call over to Mark Hardwick to provide more commentary on our release and our results. Mark?

Thanks Mike. During 2009 and '10 we communicated our strategic intention to protect and strengthen our Company to include the balance sheet. As a reminder, some of the key components during the first two years of our five year strategic plan were capital preservation, carter combination, data consolidation, expense reductions and the separation of loan origination and adjudication.

As we look forward to 2011 and '12, we have transitioned within our five year strategic plan from protecting and strengthening, to strengthening and growing the bank. On slide 6, the results of protecting and strengthening our bank is evident through the financials. Our loan to asset ratio, now totals 67%, and our loan to deposit ratio totals 88%, consistent with many high-performing peer banks.

During the quarter we did see $27 million of net loan growth in Indianapolis, but our larger established markets continue to decline, by dollar amounts, producing the declines reflected on line 2. The decreases in other assets includes a reduction of $98 million of short-term investments, and $19 million of the Corporation's deferred tax assets. The DTA now totals $38 million, and will be used as charge-offs exceed provision expense, and earnings continue to improve.

The composition of our loan portfolio on slide 7, continues to produce strong revenue with yields totaling 5.56%. The diversification is reflective of a strong community bank balance sheet. When combined with the investment portfolio on slide 8, earning assets have retained their favorable asset sensitive profile and duration. $1 billion, or 31% of our earning assets were priced daily, and another $947 million, or 30% of our earning assets, were priced during the remaining 12 months of the year. Just 39% of our earning assets are fixed beyond one year.

We remain comfortable with how the balance sheet is positioned for current rates, and we like how the balance sheet performs in a raising rate environment. Still on slide 8, our portfolio continues to perform well, producing a higher than average yields with moderately longer duration than peer. Our 4.14% yield compares favorably to peer averages of approximately 3.6%, and our duration is just a year longer, at 4.6 years versus 3.6 years.

Let's look at slide 9. As mentioned previously, our balance sheet is less leveraged in 2009. And the composition of our liabilities is predominately comprised of core deposits on line 1 and 2. The mix of our deposits, on slide 10, continues to improve as our year-to-date cost totals 1.05%. 66% of our deposits are comprised of demand and savings accounts, our least expenses categories.

Our regulatory capital ratios, on slide 11, are well above the OCC and Federal Reserve definition of well capitalized. We have added a new capital ratio to this slide, given the apparent regulatory focus that tier 1 common to risk weighted assets has received over the past couple of years. These much improved capital ratios are consistent with high-performing peer bank. Net interest income, on slide 12, is holding up well, considering our more conservative asset mix of loans and investments, totaling $36.9 million for the quarter.

Our net interest margin totaled 3.95%. It's the highest level since the fourth quarter of 2005, when it totaled 4.03%. As evidenced in the chart above the graph, the decline in our interest expense from the first quarter of 2009, to the first quarter of 2011 has out paced decline and earning assets yields by 27 basis points. Given the historically low rate environment, including a flat yield curve, and a 325 prime rate during the entire cycle pictured on this slide, we are very encouraged by our 395 margin.

Total non-interest income, on slide 13, reflects some volatility, due to line 6, securities, gains and losses, yet when normalized for the bond portfolio activity, as reflected on line 9, it is incredibly stable despite Reg E and market volatility. Total non-interest expense, on slide 14, totaled $33.9 million for the first quarter of 2011, down from $34.7 million a year ago. Annualized quarter one expense levels, on line 11, show meaningful expense management improvements over the prior years.

If you annualized our $33.9 million, it totals $135.6 million for 2011, versus $142.3 million in 2010 and $151.6 million in 2009. We will continue to show line 12 until we achieve a more normalized run rate of OREO and credit related expenses, as we believe it's important in our future earnings forecast, it needs to be considered.

Please turn to slide 15. Our pre-tax, pre-provision run rate remains strong, totaling $18 million for the quarter. And by reducing our provision expense, we produced a $4.5 million bottom-line, or $0.17 per share for the quarter. As with the expense levels, our annualized net income and EPS numbers show significant improvements over 2009 and 2010. Based on our S&L database, or pure research, we believe our margin, our efficiency, our NPA levels, our allowance levels, our capital levels and gross market coverage, commands a much higher price to tangible book multiple than 95%.

Now John Martin, our Chief Credit Officer, will discuss our improving asset quality trends, allowance for loan loss totals and our coverage ratios.

Thanks Mark. I'll be covering slides 17 through 25 of the presentation. Starting with some of the highlights for the quarter, then moving through the details of the asset quality metrics. I'll finish by reconciling our non-performing assets, then conclude with charge-offs trends and provide an overview of the allowance position, before turning the call back over to Mike Rechin.

Beginning on slide 17, we continued to see improvement in our non-performing assets during the quarter, with non-performing assets and 90+ day delinquent loans declining $12.3 million, to $107.6 million at March 31, 2011. This change resulted from a $5 million decline in restructured loans, a $3.9 million restructure -- reduction rather, in other real estate owned, and a $578,000 reduction in 90+ days delinquent loans.

The improvement in restructured loans resulted from payment seasoning of previous period A note, B note restructured loans that have been performing under the newly restructured terms. New non-accruals were $11.7 million, down from $27.4 million in the fourth quarter of 2010. We continue to see fluctuations, both new non-accrual and the migration out of the non-accrual category, quarter to quarter, with the identification of probable loss in the resolution of individual borrower situations.

Both the 30 to 89 day delinquent loan category, and 90+ day delinquent category showed improvement for the quarter. As mentioned in last quarter, there were two large accounts impacting the 30 to 89 day past-due category that made up roughly $7.2 million of the December 31, 2010 increase. These accounts were renewed with the quarter bringing the 30 to 89 day delinquent category more in line with the third quarter 2010, while 90+ day delinquent loans were down $578,000 to $752,000 at March 31, 2011.

Finally, total criticized assets, which includes classified assets, declined to $383.7 million down from $393 million at December 31, 2010. We continue to see signs of improvement in the loan portfolio as our commercial borrowers have taken the steps necessary to improve their financial performance of their businesses. The resulting improvement has allowed roughly $9 million in classification upgrades during the quarter.

Now turning to slides 18 and 19. On slide 19, non-accrual loans continue to decline with commercial mortgage loans representing the most significant category by dollar amount. Largest non-accrual commercial mortgage relationship totaled approximately $5 million, and is being handled by our dedicated special assets area. The underlying collateral is a multi-family and multi-family retail mix. As a percentage of the category land and lot loans continue to pose a challenge with 14.6%, or $5.3 million of the portfolio on non-accrual. The top three names represent approximately 1/3 of the total loans in this category.

Then turning to slide 19, detailed is the migration of new non-accrual loans over $500,000 from previous quarters. Also provided, our first quarter new relationships and amounts. From quarter to quarter, we continue to see fluctuations in both the number and the amount of new names added to, and coming out, of the non-accrual category. For the quarter the number of names over $500,000 increased from 6 to 10, while the dollar amount declined from $14.5 million to $6.8 million of the total $11.7 million in new non-accrual loans for the quarter.

Next, on slide 20, other real estate owned declined from $20.9 million to $17.1 million. The primary driver for the $3.8 million change was the $2 million write down of land previously and other real estate, that was re-appraised in the first quarter. The next largest ORE property within the portfolio is valued at $2 million and was reappraised in the fourth quarter in 2010.

Turning then to slide 21, as mentioned in the highlights slide, 90+ days past due improved with the resolution of two large past due relationships from quarter-to-quarter, or from the prior quarter. As the trend shows, we continue to see improvement in the category for both 90+ and 30+ days past due, as delinquency reaches more normalized levels.

Now turning to slide 22, which shows our current quarters annualized charge-off. We continue to see results -- losses resulting from our land and lot portfolio, related to the impact of the housing market. For the quarter, one individual charge-off of approximately $500,000 was taken part -- which was partially account -- which partially, excuse me, accounts for the spike in the annualized land and lot charge off increase. Excluding this charge, in this land and lot account, quarterly results are more in line with previous quarters and continues to materially improve for both commercial and consumer loans overall.

I will now walk through the non-performing asset reconciliation, if you would please turn to slide 23. We started the quarter with $120 million in non-performing assets, and 90+ days past due. We reduced non-accrual loans for $2.9 million. We had a net decrease in ORE of $3.9 million by adding $2.2 million in new ORE, selling $3.6 million, and we wrote down $2.5 million in ORE. We decreased 90+ days past due approximately $578,000, and reduced restructured loans by $5 million as those loans seasoned. The net decrease then for the quarter in non-performing assets and 90+ days past due was $12.4 million and shows continued improvement for the quarter.

Now turning to slide 25 and 26. Highlighted on slide 25 are key asset quality metrics. The allowance declined from $83 million to $80.9 million, coverage of non-accrual loans was stable at 92%. Compared loans remain stable, while classified and criticized assets continue to improve. On balance we continue to have stable coverage and improving trends while allocating specific reserves on impaired relationships, where we do not believe we are going to be paid in accordance with the original contractual terms.

Then finally, on slide 26, highlighted is continued strength of the allowance vis-a-vis charge-offs in the provision. 25. Excuse me. As we follow our allowance methodology, we reduced the allowance by $2.1 million in light of the improvement in the portfolio and the reduction in historical losses. Despite the reduction we continue to maintain a 92% coverage of non-accrual loans, and believe that our methodology adequately provides for potential future losses.

I will now turn the presentation back over to Mike Rechin for his remarks.

Thanks John. Before we take questions, Valerie, I would like to make a few additional comments. And I'm speaking while I look at slide 27. In Mark's comments, earlier, he referred to our plan and the actions we took in reshaping the Company over the past two years. We are trying to take full advantage of that, I think it was prudent to do and I think our clients, our employees and perhaps those of you on the phone, find it to be an easier Company and easier profile to digest. It is on the front office, is in the back office as well.

As we look forward to 2011 and 2012, we have transitioned within that strategic plan from protect and strengthen, to strengthen and grow our franchise. Going forward, we are going to look to drive our core organic growth, optimize some of the processes we put in place to maximize our efficiency, and to assess acquisition opportunities as they come about.

I wanted to spend a minute or two on the organic growth because it has been difficult. Three components really non-interest income, our deposit gathering business and our loan business. I will cover them in that order. In regard to non-interest income, I am really pleased with our first quarter, despite its lesser comparative totals to the prior quarter, or to the first quarter of 2010. Where each of those comparative periods, had seven figures, low seven-figure amounts of security gains in them that the current quarter was without. While still incurring a modest amount of $400,000 of OTTI.

Overall, relatively pleased with what I consider the relationship portions of the non-interest income. And to be more specific, our non-banking businesses are really kind of right on plan. Our trust Company had a solid 2010. A little bit of a seasonal business in terms of the way that they build their customers and so it had an up quarter relative to the third and fourth quarters of 2010. Relatively flat to the first quarter of 2010. Growing at a low single-digit clip with a lot of resources dedicated towards the markets of Indianapolis and the surrounding area.

Our insurance business is also doing well, and better than what the numbers might indicate here. It's a business we really like. It is highly complementary to our small and middle markets clients needs. Really fits well with our prospect calling program, with some great aggression out of that unit. As you look at other banking companies that have insurance agencies, the pricing is extremely soft, continues to be soft for the last year and a half. That is reflected in the revenue run rate with the clients, the premiums in for us all, really doing pretty well.

In actuality, our first quarter on a -- always consistent basis, is the highest because it includes contingency income that we get from the carriers that we represent. And they had a particularly difficult loss year last year in claims, as such, our contingencies income in 2011 was light, and we knew that it would be. Our income out of the insurance agency on a like-dollar basis , absent contingency incomes, which are only paid once a year, was actually up 7.5% in the first quarter so we are pleased with that.

Bank fees, not as much, a little bit disappointing. Our service charges, we are still trying to get our arms around what the net result of Reg E is. It is looks like a 15% number to us. Within that, the service charges were softer than that actually in the first quarter, and when we look at it and we drill into it, you see that the higher balances that were benefiting from, particularly on the commercial side, have that unfortunate offset of reducing the fees we collect. So our fee dollars generated through service charges are being offset to a greater degree from the balances that our clients are keeping in the bank. But we kind of win on either side of that if we grow the volume, which we are putting concerted effort towards.

The other big line item in our non-interest income is the mortgage business. Very strong first quarter, taking advantage of a record fourth quarter. We took more business, we closed more loans, more dollars, more everything in the mortgage business in the fourth quarter than ever before in First Merchant's history. We had some of that carry over into the first quarter. The refi boom keeps coming back. But we know that we will see some of that same peak period fourth quarter probably not recur at the same level through the balance of 2011.

The other thing in the mortgage business, the margin has expanded. Now if there is any positive ramification of the higher scrutiny of the underwriting, is that if you can meet investments requirements, we've managed to find more margin in the business, which is been helpful. And our approach is always been originate and sale, and it's been even more that way in the last couple of quarters.

One of the offsets, positive we hope, is the $1.1 million investment we've made in on-line banking. It's a three stage introduction to our customers. Runs through our website, obviously it's our latest, it's our dominant technology project for 2011. The launch of it, which took place in May, went exceedingly well. We have a second and third component for late in the second quarter, and early in the third quarter, that are more revenue centric and will allow us to take greater advantage of e-commerce, but more so e-statement, reaps some savings on the paper side and drive revenues at the same time. That is hopefully going to be at great mitigate to the pressure we have felt in the non-interest income service charge category.

Deposit growth. I wanted to un-bundle it. There's a page in our press release, the last page actually, that unbundled the deposit categories. It's worth a comment in my mind. Our deposit strategy has been successful for us, in that interest margins for certain strategies overall combined maximizing the franchises opportunity we have, which often is a one or a two position in the communities, with a productive and profitable ELCO strategy. Mark highlighted that earlier. It's the reason that our liability costs was reduced to that magnitude that it was. It's a live, dynamic balance executed by our retail banking team every day.

Then last, loan growth and the management of our loan activities. At this point receiving the most effort, and unfortunately the least able to accurately forecast. I mentioned the most effort, not that we are loan centric in our relationship strategy, but with a clear understanding that the bank providing credit, provides the majority of the non-credit services. We're working on it extensively. We are adding people to it and if you look at our expense levels I think what you'll see is our FTE count stay the same. But our salesperson count grow within that.

We have been adding people into this small business, if you think of First Merchant as a small business entity, that would be accurate in my mind. We are middle market and small business lender. But the small business piece that kind of touches both the retail banking system and the commercial banking business, is going to be the recipient of technology dollars and more people on the street.

The results haven't been there. We've been fortunate in that the ELCO strategy and the execution by our bankers has reduced a net interest income in dollars, that have been flat while the loan side has not been. And we are looking to right that as quickly as we can. We think we are near the bottom, but I may have said that before. Our pipelines are really just okay. Mark referenced a high spot in that we have dedicated more resources in Indianapolis, and that is showing up in new clients and new activity of all sorts, including loan balances.

Haven't been that fortunate elsewhere. Our consumer loan totals, as you can also see on that last page of the press release, are soft, on a percentage basis. The place that we are struggling the most, it is not the dominant piece of our balance sheet, but a critical component to retail success, in our minds. So it's going to continue to get the attention it needs until we see it.

I referenced a moment ago that it was most difficult to forecast because all of John Martin's efforts towards ensuring a safe and sound balance sheet, understanding where we were two years ago, needs to take place. And so we are actively churning, if you will, the credit side of the portfolio, which sometimes fights against the desire to have a larger loan total.

I'm going to turn the call over for questions. Our management team is pleased with our progress on many fronts. We understand the imperative to grow the Company in revenue and in balance sheet. We are not going to do it recklessly. We feel like we've got the components in place to move. I think the Company, as I referenced earlier, is easier to understand. I think we have a stronger bank. Within an uncertain environment, we look forward to moving forward through 2011.

Valerie could you open the microphone for questions?

Certainly. We will now begin the question and answer session. (Operator Instructions). Our first question comes from Scott Siefers of Sandler O'Neill.

Good afternoon guys.

Hi Scott. Good Afternoon.

I just had a couple of specific questions and Mike, I think you sort of touched on these in your outlook comment at the end. But just specifically on both the margin which expanded to 395 and then costs you know, those were kind of the big two big deltas relative to what I was looking for. They both came in better then expected. Can you just speak to the sustainability specifically of a margin rate up here at the 395 level and then the dollar base of the non-interest expenses. Is that something you think can keep this low or even drive even lower? In the absence of a better revenue growth environment, how are you thinking about those dynamics?

Sure. On the net interest margin side, the liability costs especially based on the way we read the forecast of rates, I feel pretty good about. If you look at the some of the categories in the deposit detail. Specifically, the brokers I guess and the CDs, the CDs is the part that our banking officers manage day to day. The broker part is just going to be an ongoing shrink of that category and the high cost attendance to that liability class. So I feel pretty good about that. You know on a -- certainly as we look forward to the next couple of quarters there's nothing in there that we feel threatened by. One of the things that might threaten it on an incremental basis that I would welcome, as great success in the marketplace around loan opportunity.

The market, I do think all of our markets established markets, Columbus, Ohio, Indianapolis all more competitive on price because I think our strategy and tactics are probably not demonstrably different than good competitors. But I like our ability to attract and address those opportunities. I guess what I am saying is that we are going to flex on loan pricing. With the market to keep and grow share on a prudent basis. In regard to the expenses, the second half of your question. Really pretty good shape - there's nothing -- there's no artificial or hard-to-find offset to the expense dollars that you see in a respective categories. And the income statement. There's a little bit of seasonality around accruals for things like incentive and such but there's not that dramatic.

Okay perfect. That's very helpful air appreciate the color.

Thanks Scott.

Our next question comes from Steve Scinicariello, from Macquarie

Good afternoon guys.

Hi Steve.

Just wanted to check in with you in terms of your thoughts on the SPLF fund and if you have applied to that and what you kind of think of that program given kind of your sweet spot and kind of the small business type lending?

We do like the design of the program and we are trying to assess post application because we did apply by the original submission date of the end of March, haven't heard anything and don't believe that any of the applicants have. The benefit to us, we are still trying to get a clear view on, given the benchmarking that the program currently calls for. The magnitude of growth that would you would have to put on your balance sheet to really take full advantage of the 1, 2, 3 percent kind of rates are probably a stretch relative to where we have been. Having said that, you hit on the point that is our primary attraction to it and that is it speaks 100 percent to the marketplace that we feel like we primarily target. And so in that regard, as well as the -- the recognition that we do have CPP in our balance sheet today, it's hard not to want to more fully investigate it so we are going to give it a good hard look.

Great think so much really appreciated.

Our next question comes from Daniel Cardenas with Raymond James.

Good afternoon guys.

Hi Dan.

A couple of questions. Can you talk a little bit about what we can expect to see on the FDIC expense side going forward?

Well, let me flip back to that quarterly results. My expectation would be the amounts that you saw this quarter will be consistent through the remainder of the year. We don't have any reason to believe that that would be different.

Okay. Then, question on the loan side you said you saw about - was it $27 million worth of loan growth coming out of the Indianapolis market? Can you talk about what competition is looking like there. Are seeing more community banks trying to enter into that market and the growth that you did see, exactly how sustainable do you think or how buildable do you think that number is?

Sure Dan. On the competition front, I don't see -- while there are other community banks that are clearly adding resources there, the -- incumbent that hold the clients that we think are most desirable are you know - the regional banks. The ones that have had their share historically. I continue to feel like clients are willing to listen to great ideas. We have very low share there and we have more people and when you combine those two elements - a relatively modest incumbent share coupled with experience to the market people, we just feel like it's a winning combination. And as you know some of our senior manager including our chief banking officer and a whole slew of folks have really pertinent experience in that market. That's kind of what we view.

Okay then the growth you saw that was more taking market share away for others?

It is. I wish I could give you better line utilization. If you look at the last page that dissects the loan by type, I was really pleased to see that our commercial industrial lending was flat quarter to quarter, because that really should be our sweet spot particularly in a market like Columbus or Indianapolis. And the dollars of growth that Mark spoke to, I really don't think of as outstanding. I think of it as healthy within the construct of the franchise that we have. But I think it is just the beginnings of what could happen and I know from years gone by that market is sizable enough that it offers plenty of opportunity for good healthy new clients with reasonable margin in them.

Great, all right. Thank you.

Our next question comes from Brian Martin of FIG.

Hi guys.

Good afternoon, Brian.

Maybe - this is maybe more for John. Can you just talk about the upgrades you saw the quarter? John? What was kind of the underlying trends you saw, what led you to upgrade some of those credits what type of credits were they that you were upgrading?

Yes. Brian, we, as you would imagine, we go through and analyze and continually review the portfolio. As cash flow has improved on the individual borrowers and we see improved financial importance. And we review those credits. We move the classification up.

Okay in general, was there any big ones in there that moved up this quarter, the CNI related, CRE related, or are they just kind of across the board?

I think it was more across the board. There was no one name that made up that $9 million that you are seeing. We see, as you can imagine, we get the financial results, we get some in and some out but there is no one name that drove that $9 million.

Okay. And as far as just kind of when you look out over the next 12 to 18 months, with credit feeling better here, what is your expectation on just kind of the pace of resolution? As you wind through the remainder of the cycle here. I need is there -- is there kind of a gradual decline down? How are you guys feeling about it and maybe kind of the movements OREO, from non-accural at this point.

I think when you look at the non-accruals category in particular, there are two things that you can do , or three ways that those can line up, Brian. One is that the financial performance improves and the credit would move back out of nonaccrual. The other is that we restructured into TDR and do an A note and charge-off the B note. Or we can liquidate those. But it's a gradual grind, it's kind of a lumpy progress as we work through the -- work through the non accruals.

I would add to John answer, is that you know, our strategy all through the cycle has been to kind of work with our own assets. We haven't had bulk sales. And I don't know that's the right strategy or not we've never liked, we investigated them a couple times, and I'd say bulk for us is $10 million and $20 million, not $100 million, Brian. But when we've investigated that, the process has not seemed efficient. And the pricing that we've gotten back has never met our expectations relative to what we think of the ultimate resolution if we worked with it ourselves and sometimes there's costs. You know, our first quarter, we still had $9 million of credit costs. Our provision was down you know, less then $6 million. But some of that strategy of working out your own assets is you hold them longer then a quicker sale, auction king of resolution would produce. And so our OREO is, you know, $3 million, north of $3 million. And I don't think the credit cycle is done yet. I like the way John and his team work with these because they migrate a lot. But I think that our strategy, the other thing that we begin associated with that strategy of having qualified people work on them, is that the borrowers are all in our franchise. We don't have a bucket of assets from a distant geography that we can kind of roughly exit from the bank and take our medicine and move on. The within a footprint name and so we just feel like we know them best.

Okay. Just as far as the appraisals on OREO, you took the one hit this quarter. Do you feel like the appraisals have begun to stabilize, or they are stabilizing?

Brian I think I'd say that we've seen some flattening out stabilization in the pricing for real estate. I think Mike just pointed out they are concentrated, well they are in our markets and as a result we are getting the appraisals today and as much as we can see the real estate market changing. It -- it has leveled out and so it's reflected in the appraisals we were getting back.

Okay, alright. Just the last two things more housekeeping maybe for Mark. The service charge income and kind of the interchange fees, Mike talked about the service charges. Do you see those it sounds like the service charges are probably not up a lot in the current levels. Maybe a little bit and just maybe -- Mike talked about 15% decline just trying to understand if that is in the number or is there still more to come and just on the impact on the interchange fees, if anything?

Yes. We think that the majority of the Reg E impact is already in the number. You know, returned check, and OD fees and our personal demand deposits is where we have seen some decline relative to Reg E and just customer behavior in terms of managing their own financial condition. On the non-personal side which we mentioned higher balances, are changing the account analysis charges, they're using balances to pay for what otherwise would be fees. And so we've seen some reduction there. So it's a combination we are working diligently on making sure that we are charging for all services that we provide and we are getting paid for them. And continuing to look for opportunities.

Okay. And just the last one, just the OTTI in the quarter where are the balances of that and how much more exposure do you have on that?

Yes, you know, we are right at $5 million left. We started somewhere I think around 13 or 14 after the acquisition of Lincoln. They had a number of trust prefers as well, so we had ours and theirs. Ultimately we have written them down through OTTI. We think our cash flow projections are at default expectations. The deferral and default assumption that we built-in are really conservative. But we are just continuing to get more and more of it behind us as we go. You noticed we had some gains they were almost identically offset. We are just trying to ensure that whatever OTTI we have doesn't create volatility through the income statement.

Okay. All right, thanks a lot.

Thanks Brian.

Our next question comes from Stephen Geyen of Stifel Nicolaus.

Good afternoon guys, how are you today?

Good Steve. How are you?

I'm well, thank you. Maybe just a question to expand on Dan's question about the loans. Just wondering if you are seeing opportunities at the activity or at the activities way down you know, a lot of times you get the tree kind of shakes a bit up and some fruit falls down and then there's kind of a grab for what is down there. Are you seeing activity like that? Are you seeing opportunities to pick some loans up?

Yes, we kind of track without you know, expert precision but track in a consistent definitional way , Steve. A closed loan pipeline meaning ready to close. Approved by the client as well as the bank, ready to close and then what we call an earlier stage, where we think we have legitimate opportunities with borrowers that we would like to bank. And that second category, what I'll call the earlier stage, is really quite ripe right now. It's encouraging in that it speaks to, you know, business owners desire to either grow their company or consider another bank. The part that is closer to being on your balance sheet, the portion that are in documentation is flat. It hasn't been as great, so it's kind of a mix bag there. I do know that with the qualified bankers, with greater market coverage, you see more opportunities as I said earlier the one that has us scratching our heads is the consumer behavior.

Okay. And mortgage banking the gain on sales. Maybe if you've you give us your thoughts on kind of the flow month to month in the first quarter and then kind of more important or what I'm really interested in, is what you're seeing this month so far.

Let me see if I have any good quantitative information on it. I know that in units, this is year-over-year. I talked about the quarter as you can think of the flow the cycle. The first quarter was well beneath the record fourth quarter. Stronger than the first quarter of the prior year. I will tell you what. I will have to follow up with you. I don't have the kind of numbers I feel good about answering with that question, if you don't mind.

Okay, no problem. Last question for Mark --

I know that it is likely to be softer than the run rate we saw in the first quarter.

Okay. Last question for Mark. Can you just give us your thoughts, maybe a bit more information on the tax rate and what you expect?

Yes. You know - what we have -- the best way to model our tax rate and look at it on a go forward basis is, if you look at our municipal income it is tax-free. If you look at our [bully] that is tax-free as well. And everything else, you know, the remainder of our income is essentially taxed at 35%. And so as you -- as the core grows, what is growing from here is income that is taxable. We are not growing a municipal on the bully income. So what starts out when you're near breakeven profitability, as a really low tax rate as we continue to make more money, the tax rate grows. It finds a cap around -- well 35% is the cap. Excluding you know, the 0% rate that we pay on our muni and bully income.

Okay thank you.

Thank you.

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

Valerie, I don't have any. I'm appreciative of everyone's time this afternoon. We look forward to talking again middle of the summer in regard to our second quarter results.

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