First Merchants Corp (FRME) 2012 Q4 法說會逐字稿

Good afternoon, and welcome to the First Merchants Corporation fourth-quarter 2012 earnings conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions)

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 event is being recorded.

I would now like to turn the conference over to Mike Rechin, Chief Executive Officer. Please go ahead, sir.

Thank you, Rocco. Welcome, everyone, to our earnings conference call and webcast for the fourth quarter ending December 31, 2012. Mark Hardwick, our Chief Financial Officer, and John Martin, our Chief Credit Officer, are joining me here today and will make their remarks here in a moment.

We released our earnings in a press release at 10.30 a.m. Eastern Daylight Savings Time this morning, and our presentation speaks to material from that release. The directions that point to the Webcast are also contained at the back end of the release, and my comments begin on page 4, a slide titled 2012 Highlights.

So, the majority of this first slide covers full-year results, whereas the press release provides detailed fourth-quarter activity in addition to full-year results. Mark and John's comments speak to the most recent quarter with greater specificity.

We're really pleased with the year; saw a lot of things come together for us. Our full-year 2012 earnings per share of $1.41 is greater than four times our 2011 earnings per share of $0.34. We finished the year well, earning $0.32 per share in the fourth quarter, a 33% increase over 2011's fourth-quarter.

Considered as a whole, First Merchants produced record net income of $40.6 million. The driver of the earnings are in the bottom half of the slide -- organic loan growth that grew in strength through the year, coupled with strong execution of an accretive in-market acquisition in the first quarter.

I'm very pleased with our active margin management activities, outside of the positive aspect of the discount accretion associated with the Shelby County Bank purchase transaction. Growing net interest income and growing non-interest income from several sources produced higher revenue and greater pre-tax provision income.

At this point, Mark is going to join the call and add his thoughts more specifically on the quarter's results.

Thank you, Mike. Good afternoon, everyone. We were again satisfied with our quarter, and we were very pleased to have set a new net income record in 2012. You'll notice on slide 6, where my comments will begin, that our loans now exceed the 2010 levels by $66 million after a decline in 2011. The addition of $189 million in loan outstandings during 2012 pushed our loan to asset ratio to a healthy 67%, and positions us well for 2013.

The composition of our loan portfolio on slide 7 allows for pricing power and continues to produce nearly a 5% yield. Without Shelby County's fair value accretion this quarter of $1.3 million, the loan yields totaled 4.79%. Last quarter's adjusted yield was 14 basis points higher, totaling 4.93%. We're particularly pleased with the growth in the commercial and industrial loan category, as this now totals 22.9% of total loans, and has increased from this time last year by $97 million, per John Martin's detail on page 21 of the presentation, which he'll get to a little later.

On slide 8, our bond portfolio continues to perform well, producing higher than average yield with a moderately longer duration than peer. Our 3.7% yield compares favorably to peer averages of approximately 2.85%, and our duration is just eight months longer, totaling 3.7 years.

Our bond portfolio balances peaked in the first quarter of 2012, totaling $960 million, and has declined each of the last three quarters. We anticipate having a slightly smaller bond portfolio throughout 2013. However, like this quarter, the yield should rise, as our run-off includes lesser yielding bonds than our core portfolio.

2013 maturities are estimated to total $154 million, with an average yield of 3.13%. And we do plan to shift those earning assets from bonds into higher yielding loans as we progress throughout 2013. The net unrealized gain in the portfolio totals $39.6 million, still at healthy levels creating flexibility as we move through the year.

Now turn to slide 9. Non-maturity deposits on line 1 increased during the year by $283 million, as we continue to focus our deposit growth efforts on core operating accounts as commercial and retail customers. Our borrowings declined by $118 million during the year. And we are really only using those inexpensive liabilities as ways to lengthen liabilities for ALCO reasons where appropriate.

Tangible common equity continues to grow nicely. Our tangible book value now totals $10.95, and our stock is trading at approximately 130% of tangible book value.

The mix of our deposits on slide 10 continues to improve, and our total deposit expense is now just 50 basis points. Our year-to-date 2012 cost of 57 basis points is 30 basis points better than 2011.

Our regulatory capital ratios on slide 11 are well above the OCC and the Federal Reserve's definition of well-capitalized, and all Basel III proposed minimums. We are pleased that Tier 1 common equity on line 4 now totals 9.6%, and tangible common equity on line 5 now totals 7.5%. We also stated in last quarter's call that it was our desire to begin paying down our SBLF capital as we move into 2013, given the strength of our common equity and the high coupon that SBLF requires.

In an 8-K filed on January the 8th of this year, we announced the redemption of 25% of our outstanding SBLF shares totaling $22,695,000. The pace of future redemptions will be primarily governed by the strength of our earnings, but we're anticipating another like payment in the second half of 2013.

The Corporation's net interest margin on slide 12 totaled 4.1% for the quarter; but more importantly, our net interest income improved by $9 million year-over-year. Fair market value accretion resulting from our Shelby County acquisition accounted for $4.6 million of the $9 million annual increase, as various substandard SCB credits were paid in full. We are very pleased that our net interest margin, when adjusted for fair value accounting, remained strong all year and averaged 4%.

Total non-interest income on slide 13 continues to improve and remains additive to operating income. The improvements were primarily fueled by mortgage gains on line 6, which increased by $3.2 million or 43%. Additionally, the Corporation experienced significant improvements in insurance commission income, electronic card fee income, cash surrender value of life insurance, and our derivative income from loan level hedge activities, which is highlighted in the Other category on line 9. Non-interest expense totaled $137.1 million for the year, an increase of less than 1%.

Various categories on slide 14 were mixed, as line items like Other Real Estate and FDIC Expenses declined by $4.4 million; yet salary and benefit expenses increased by $4.7 million. Overall, especially given the $1 million increase in commission expense paid to mortgage originators for an exceptional year, and the $1.8 million increase in benefit expense, due to changes in the discount rate on our frozen pension plan, and increased health insurance claims expense, we are pleased with the expense management for 2012.

Please turn to slide 15. Our pre-tax, pre-provision run rate on line 4, as presented without fair market value accounting gains on line 6, totaled $69.2 million for the year. The $8.9 million increase follows a $6.6 million increase from the prior year. These double-digit percentage increases are also finding their way to our bottom line, as provision expense continues to decline on a year-over-year basis.

As Mike mentioned, in 2007, our net income totaled $31.6 million, which until this year, represented the best net income year in the Corporation's 119-year history. So, as Mike mentioned, we're very pleased to have established a new high of over $40 million on line 10 in 2012. Our employees and management teams are very pleased with our core EPS trend lines on slide 16, and we hope that as shareholders, you are as well.

Now John Martin, our Chief Credit Officer, will discuss why our provision expense and OREO expense continued to decline. And he will discuss the improvements in classified assets, which provide renewed capital management flexibility.

Thanks, Mark. And good afternoon, everyone. I'll be covering asset quality, as Mark mentioned, starting on page 18, followed by allowance coverage and nonperforming asset migration, before concluding with portfolio trends and some -- several higher-level thoughts on the portfolio.

So if you'd please turn to page 18. Overall asset quality continues to show improvement in the fourth quarter and concluded a year of positive asset quality trends. For the linked quarter, nonaccrual loans on line 1 declined $3.6 million and were down $16.2 million year-over-year, or approximately 23%. Other real estate continues to be an area of focus. ORE was essentially flat for the quarter falling, from $13.8 million to $13.3 million.

In total, there are roughly 50 properties in ORE. And while we sold roughly 20 properties during the quarter, we also repossessed or otherwise foreclosed roughly the same amount, with the $500,000 decline that you see resulting primarily from lower dollar inflows over a modestly higher dollar outflow. The largest three ORE relationships still represent more than half of the total $13.3 million in ORE, and consist of both raw land and developed residential and commercial parcels.

Jumping to line 3, as mentioned during prior calls, we continue to actively restructure loans as a way to resolve borrower overleverage and favor the AB note restructure. This approach accelerates charges in the current quarter with the charge-off of a B note, and serves to quickly define the path to performing loans.

You can see the effect on line 3, where, during the fourth quarter, we restructured a $5.5 million relationship secured by multiple pieces of commercial real estate, while charging off a $1.7 million B note that had been reserved in a prior quarter. While seasoning in performance of the A note, the loan will be excluded from restructured category in the future. All other concessionary interest rate and term restructures that are not A/B continue to remain in the category until paid -- repaid.

Skipping down to lines 8 and 9, we continue to experience improvement in year-over-year levels of classified and criticized assets, as Mark mentioned, down 18.8% and 21.6%; and in the linked quarter, were down 6.3% and 9.2%, respectively. This includes roughly $6 million of classified investments which have existed for the last four quarters or so.

So, all in all, asset quality continues to improve in the quarter. This is highlighted by lower criticized and classified assets, reflecting stronger customer performance and the resolution of nonperforming loans through restructures.

Moving on to slide 19, allowance coverage to nonaccrual loans continued its quarterly trend upward from 122% to 130%. The improved coverage highlighted on the top graph resulted from the decline in nonaccrual balances, which outpaced the reduction in the allowance. As you can see in the bottom bar chart, the allowance as a multiple of charge-offs continues to increase.

The continued reduction in nonaccrual loans and classified assets -- criticized and classified assets -- should allow us to further -- to experience further reductions in the allowance in future quarters. As further improvement continues, our modeling shows the allowance continuing a trend down towards the 2% level.

Now, turning to slide 20. As in previous -- as presented in previous calls, the nonperforming asset reconciliation highlights progression of problem loans and other assets during the quarter. Boxed in green at the top of the column labeled Q3 2011, and moving down to the bottom right side of the slide, I've highlighted the improvements in nonperforming assets over the last six quarters.

I would at first draw your attention to line 2, where the level of new nonaccruals is down from the previous quarter, and remains at a more normalized level. This has really allowed us to continue to make improvement in overall asset quality. For the quarter, ending balance NPAs and 90-plus days delinquent were up modestly. Line 12 highlights the effect of our restructuring efforts for the quarter. While impacting the overall NPA results, I view this as a positive, as we've moved troubled borrowers out of the nonperforming asset category, as these A notes season.

Now, please turn to slide 21. As Mike highlights in his comments, we experienced strong growth in the core loan portfolio. Loan demand for the quarter was influenced by a number of factors, including the uncertainty over taxes, demand for multi-family and student housing projects, net seasonal aggregate input financing, and new C&I customer opportunities. While we see measured growth in future quarters that gives reason for optimism, not all of the influence just mentioned will carry into 2013.

Then, turning finally to slide 22, I would summarize by saying that we continue to see positive trends in asset quality both year-over-year and in the fourth quarter. Our renegotiation strategy continues to accelerate asset quality, which, with seasoning, should lead to improvement and restructured and overall NPA reductions. And we continue to work to grow the portfolio in a balanced way.

Finally, while having managed our OREO and credit-related expenses lower during 2012, we would expect that with continued improvement in asset quality, these expenses will decline commensurately.

Thanks for your attention. And I'll now turn the call back over to Mike Rechin.

Thank you, John. I'm going to make a few summary comments on 2012 before looking forward to the current year, and then taking questions.

So, I'm on slide 24. And as you've heard in this call from my colleagues, we're pleased to show progress on several fronts. Our loan pipelines, which had been building, have been moving on to the balance sheet, becoming earning assets. The slide itself references commercial loans, but our mortgage, business banking, and the consumer efforts all contributed to the fourth quarter's greater than 2.25% growth.

John's slide earlier showed the diversification of the growth in different types of balances, which really reflects our balanced sales effort. Mark covered a consolidating slide on non-interest income sources that reflects growing revenue in trust, insurance, and record results in our mortgage business.

While the mortgage volumes are likely to moderate at some point, the investments we've made in proven originators and fulfillment folks to support them have proven to be quite timely. Our originator's production is in our footprint and well-situated to capture the growth in the home purchase market that has begun to gain strength here in the second half of 2012.

Our gains in insurance and trust are equally pleasing to me. While the growth rates are not as impressive, the businesses are less cyclical, and strongly, but not exclusively, linked to our progress in the banking business.

We've mentioned enough, perhaps, the impact of Shelby County Bank acquisition on our earnings. Our ability to assimilate a franchise addition is critical to achieve any financial upside. Our management experience shone bright, in my view, in our execution earlier in the year. Our senior line management, managers who joined us from Shelby County Bank, our IT and Operations teams, Finance, Marketing, Human Resources, performed at the high-level we expect.

Considered as a whole, the integration effort completed four months ago is an important capability that we refreshed. The customer, as a primary constituent in that work, appears to be very satisfied with their new bank.

Still speaking to the recap slide are references to our growing tangible common equity Mark referenced. It was 4.5%, just over 4.5% in mid-2009, growing to its current 7.55% level at year-end. The earnings which contribute to that increase have not, in my opinion, come from any early release of reserves. John's coverage of our asset quality suggests to me that we're well-positioned for whatever direction the economy takes later this year.

Mark also highlighted the growth in our deposit accounts at year-end -- very pleasing. Liquidity of our customers is largely responsible for that large fourth-quarter balance increase. The year-end spike was not driven by the altering of our rate structures, as you can see, as our liability costs, deposit costs, continue to come down in the quarter.

The last point on this page 24 speaks to the maturity, in my mind, of our one bank/one culture mindset. Three years removed from our charter combinations and simplifying the way we run the Company, we're able to decide more quickly and change more efficiently.

I'm going to move to slide 25 and finish up here. The bottom of the slide that speaks to the point I just made about our ability to decide quickly and change more efficiently. So the bottom of the slide 25 summarizes several projects that are customer-friendly, intended to add speed and consistency. We see room for improvement in identifiable product and service processes. We intend to get after them this year.

In addition, we understand the changing nature of regulation, the movement of CFPB requirements, and the rollout of the balance of the Dodd-Frank implementation. So, that's a lot of forefront for us.

But our go-to-market strategy now kind of speaking to the top of that last slide, for the current year, calls for more of the same of what we have produced in 2012. We had 7% year-over-year loan growth in '12, just over 4% without Shelby County Bank at all. We see a similar opportunity in 2013.

I like the traction we've gained in our growth markets in selling the entire Company. So I feel good about the growth in some of those non-core banking businesses. So we've added, and will continue to add selectively, resources in all of our market segments and all of our fee businesses.

I think, lastly, we use a disciplined approach to evaluating acquisitions, and are hopeful that we can be successful in finding additional shareholder-friendly acquisition candidates.

So, at this point, Rocco, I'm going to turn the call back over to yourself, should there be any questions.

(Operator Instructions) Stephen Geyen, Stifel Nicolaus.

Appreciate the commentary and thoughts on loan growth, and your thoughts on margin. But just curious about the potential 7% loan growth, where you think that might come in. Will it be more oriented toward commercial? Or do you think there will be some mix change in the type of loans that you add to the balance sheet?

Well, on the balance sheet, yes, I would think it would be dominated by commercial. And the 7% or 7.5%, I think, was a more actual reference year-over-year. But I do see when I might have said that we see similar opportunity in 2013, I think a mid-single digit number is clearly achievable for us. We kind of plan around something like that.

And so -- but the on-balance sheet aspect of that will be dominated by commercial loans from the business banking sector that's somewhat branch-centric, right up through the middle market coverage that's a core of our business. The mortgage volume, at whatever level it comes in at, will likely continue to look like 85% to 90% of it being sold off, and with a real modest amount of it showing up on the balance sheet.

Okay. Mark, you talked about the capital, and then the additional comment about classified and criticized. And I'm just curious if the repayment of the SBLF and the potential -- if there is a potential for that to be accelerated. You mentioned the second half of 2013 as a next possible tranche. Could that be accelerated if you see a little bit more improvement in classified and criticized loans than what you're currently projecting? And is that likely the real driver of the prepayment?

Well, it's one of the significant variables. I mean, the ability to upstream capital from the Bank to the Holding Company provides the flexibility that we're looking for. And our plans really incorporate upstreaming the earnings of the Bank to allow for the next payment. And so, a like amount in the second half.

If classifieds just continue to improve at this pace, it could allow you to upstream more. And then we're also evaluating the possible refinance alternatives, which are fairly attractive. But I would say we're evaluating all of the different possibilities, but at this point, primarily, considering just using Bank earnings to make future payments, and keeping the capital level at the Bank constant to support future loan growth.

Okay, great. And then, the deposit costs, I think they were right around 50 basis points or end of the year, right around 50 basis points. What's the potential for that to come down? And do you see -- we had talked in the past about some margin pressure in 2013. Is it kind of trending out how you expected it and how we had discussed in the past?

Yes, it is. We're -- as we moved through the latter half of 2012, I was pleased that we were still making the progress in the deposit costs that we were anticipating, just given how low the rate environment is or the overall expense.

And -- but we're continuing to see CDs mature and reprice at lesser rates, albeit much smaller differences from 70, 75 basis points down to 45 or 50. And then, the non-maturity deposits, they are at the lowest level where we -- well, they're as low as we think they'll ever be. So, maybe some modest decreases in interest expense in that category, but it's not the driver for our year in 2013.

Okay. All right. And then last question, related to mortgage banking. You've added some producers. Just curious if you could give us a little bit of update as far as the number of producers added recently in the last quarter or two? And kind of what your outlook might be for 2013 for that group?

And then just maybe one add-on question to that related to the expense associated or variable expense associated with mortgage banking activity. If I kind of do some back-of-the-envelope calculations, I come up with maybe a variable expense of maybe 35% or so, tied to mortgage banking. And just curious if that might be a kind of a good starting point?

Steve, it's Mike. Yes, I'll refer to the front half of your question. Most of our addition in the mortgage business really took place in the second half of 2011. And so, the portion of their -- well, their expense overall, and clearly the fixed portion of it, we've had with us for several quarters.

That, as you know, when you move mortgage folks around, we had did a -- effectively, a lift-out in Indianapolis under the management of our overall line of business leader, but a manager that brought over what has turned out to be eight originators and the fulfillment people that support that team. And so that expense and their production has been with us since late 2011.

But when you get acclimated to a new environment, find out who your colleagues are, you know, just really get up to speed, it's really what put a little wind at our back on top of a healthy market to begin with. And so, relative to the fixed cost component of that --?

Yes, I'm just curious about -- or yes, so the fixed cost. And then about the variable cost, if you could provide some thoughts.

(multiple speakers) I think you said [35] -- I think we think of the fixed component being more like 30.

The fixed component? Okay.

And then I think you made another forward-looking request relative to the mortgage business. And it ended the year strong in the fourth quarter. It even moves into the first quarter with a materially larger pipeline than what it had moving into 2012 -- about $50 million greater. We tracked that pretty close.

Okay. Thanks for your time.

Scott Siefers, Sandler O'Neill.

I guess, Mike, first question probably most appropriate for you. You guys gave some color on the potential for additional SBLF repayments, which I certainly appreciate. I'm wondering if you can speak to capital management more broadly as well?

You know, you guys, for example, began the process of restoring the dividend earlier in, I guess, last year, you know, 2012. And you're building capital and still going to have a pretty low payout ratio on the $0.03 quarterly dividend. What's your sense for bumping that up? Or do you really just want to take care of the SBLF stuff before you look again at some of those internal capital management opportunities? Or how are you thinking about capital management, broadly?

Well, I'll let Mark add on, but in my view, the common dividend level, you know, competes with all those other alternatives that you referenced. As I think when we got into SBLF, we didn't feel like, based on the starting point, that we had the ability to drive that coupon lower. And so where it fits is the highest cost capital we have. So anything we can do to accelerate the repayment of that is a priority for management.

The Board looks at that payout level, knowing the preferences of a good number of our shareholders. And that payout ratio that you referenced at $0.03 out of $0.32 is pretty low. I suspect -- well, it gets addressed at every single meeting. And I'm sure that if you look at the like time in 2013, per the timing of our change in 2012, it does suggest that there's some room to re-look at that. I know it will be reviewed.

Okay, perfect. Thank you. And then I guess, John, I had a question for you. You referred to potentially drawing down the reserve over time toward kind of a 2% ratio. And I guess, given the current pace, you've been nearly matching charge-offs in the provision for the last few quarters here, which suggest it could take -- at least in the current base, would take a while to get you down to that 2% level.

I mean, how are you thinking about things in terms of timing? Is it loan growth that will get the reserve to loan ratio down farther? In other words, just a more rapid build in the denominator? Or would you potentially start drawing down the reserve a little more aggressively in the coming quarters, say, this year?

Yes. Well, I think that it's going to be a combination really of a couple of things. The first is, as you explained, what is going to happen to the loan portfolio with the increase in the denominator? And I think, based on our estimates, you're going to see that level decline as a result of increases in the portfolio.

I think the second component to it is going to be a relative confidence in the economy, as well as combined with really what we're seeing in terms of the progression of those criticized and classified assets continuing their slope downward. But based on the trend that we're seeing, I would expect over the course of next number of quarters, call it four quarters, I guess, you're going to start to see us begin to release some of the allowance as we continue to see that trend continue downward.

Okay, that's perfect. I appreciate the color.

John Barber, KBW.

Just building off of Scott's question, in the slide deck, you listed allowance for loan loss as a percentage of your net charge-offs, and a look-back of a couple of different periods. Could you just provide some context of maybe why you presented that ratio and what you think it should look like?

Yes. The purpose of that ratio, John, is to get at our look-back within the allowance. We use a look-back period that we consider to be -- it's varied from two to three years. But on balance, that measure is a good indicator of the adequacy of the coverage of that allowance to expected charge-offs going forward. So it's really just to show the adequacy of the allowance over the charge-offs, and the degree of flexibility we have within it, given the coverage looking back.

Thanks, John. And just one more on credit. You know, you guys talked about the A/B restructurings. How long do you have to wait until you can -- those restructured loans can return to accruent status?

Well, we'll make a distinction between the accruing status of a loan and it -- coming out of the restructured bucket. What we generally do is, after a period of seasoning, generally, we look at around six months or so; after the A note's been in the pool performing as we originally structured it and modeled it, we'll take it out of the category.

Thanks, John. And Mark, just on the margin, in the last quarter, you talked about a [three -- in the mid-nine's] core margins that ex- the discount accretion. It sounded like you're still comfortable with that guidance. Can you talk about NII, what the expectation is there?

Could you repeat that question? I didn't hear your first sentence.

Oh, sure. Sorry, Mark. Just the last quarter when we spoke, you talked about the core margins being in the 3.95%, around that range. And it sounds like you're still comfortable with that. But I was also wondering if you could talk about NII growth, and what the plan is there, if you think you can sustain where it is right now?

Yes. Well, I do think we can maintain the level, if not grow it slightly in the overall net interest income category, based on the plan that we've developed. And our -- the basic premise is to back out the fair value accounting, which was 2.6% last quarter and 1.3% this quarter.

We've run our model as if we had a static balance sheet, and then we evaluate the loan growth that we anticipate for the year. And really shifting out of lower yielding bonds into higher yielding loans is where the ability to keep margin from declining or to keep our net interest margin from declining, and to allow it to grow slightly, is the way we put together our plan and the way we think about 2013.

So, there clearly is pressure on bank balance sheets for net interest income if you're not growing the loan portfolio. And so, I mentioned that I expect our bond portfolio to decline slightly. We have $154 million that will mature over a 12-month period, and we'd like to take a large percentage of that and deploy it into the loan portfolio.

Yes, thanks. John, this is Mike. I think to complement Mark's answer, we had a lot of liquidity ourselves at year-end that was not returning at a high level. And the loan growth we had -- it was our largest loan growth quarter of the year, but a lot of that was back-half of the quarter.

John Martin referenced some of the impetus for the volume that we enjoyed. And much of it was, I'll call it, capital gains-driven closings that had December be pretty robust. And so, if that's the case, then we didn't have the current balance sheet levels accruing through a lot of the quarter.

Thanks for that color. My last question -- Mike, this was on your last slide that you reviewed, achieved top-tier performance. I just wondered how you measure that, where you are right now and where your top peers are?

Oh, that's a great question. We use that term and it's tough to provide you all the detail your question implies. We use top tier relative to a peer group that we build for Board comparisons. It's 24 banks, $2 billion to $10 billion, and would imagine, as you can think that many different performance levels. And so we -- that top tier speaks to being in the top quartile of that group.

And so depending on what ratio you're looking at, it can mean different folks, whether it be -- but the two primary ones that we use are our own stock price relative to tangible book value, and earnings per share multiples in terms of valuation top tier. And then we have a whole -- of series of bank performance levels as well.

Great. Thank you very much.

Sure, John.

Brian Martin, FIG Partners.

Most of my questions have been asked but just a couple of things. I guess, can you talk about -- I guess you talked a little bit about how quickly the reserves comes down. I guess, Mark, can you just give us what the -- at quarter-end, where the cash at the parent was and what you upstreamed this quarter?

Boy, yes, I have that here if you give me a moment.

Yes. I've got a question for John as well, Mark. So I guess, John, I guess I was wondering on the OREO, you talked about that OREO balance being $13 million or so, and half of that tied into a couple of properties. When were the reappraisals -- the most recent appraisals done on those properties? And I guess what are your -- I guess, is there risk in your mind that there's further declines there, as you guys maybe try and exit those in a more rapid pace than you are now? Or I guess how are you thinking about that?

Yes. Those properties -- Brian, I think a similar question came up last quarter around linked-in OREO. And they really range in time from 3.5 years to about a year-and-a-half, depending on each individual parcel.

The properties do get appraised annually and they're staggered throughout the year. Some of the things that are challenging around it are individual issues that we have with use of the property, from zoning or some other issues similar to that. And that just, frankly, is just slowing us down from getting to the end with an ultimate sale.

We do have -- and I think I've mentioned this on -- in other quarters -- we do have contracts on two of the three largest pieces in there. But they've got contingencies to them that we're literally trying to sort through quarter-after-quarter, trying to make sure that we can execute it. And the buyers are being patient as we continue to work through the issues.

Okay, perfect. I didn't know that. So, okay. And maybe one other question for you, Mark. Just on the FDIC assessments, I mean, those have been coming down pretty nicely throughout 2012. I guess, have you guys gotten to a point now where it ought to be a pretty good run rate as we look forward? Are there still things bouncing around in there?

I don't anticipate additional room from this point forward. We were -- we've been a little surprised with, I guess, the nice improvement that we saw this year in '12 over '11. And then, so I think you have a good run rate.

Going back to parent company liquidity, we tend to make sure that we always have at least two times parent company cash flow, two years' worth of annual cash flow. And so, we ended the year with that amount and excess, enough excess that we were comfortable making the $22 million paydown.

And then we're anticipating upstreaming about one-quarter of what the bank would make for the entire quarter's earnings up to the parent in March, before the end of the first quarter. And the Bank's earnings are, on an annualized basis, are well over $40 million. So, looking at making that a full upstream of Bank earnings throughout each quarter as we move through 2013.

And last year, in the -- each of the quarters, our standard dividend a year ago was about $2.5 million. And we did one excess dividend of about -- I think it was $10 million.

Okay. And then that annual number you talk about that you're covering twice, how much is that right now with the recent redemption?

It's right at $10 million for two years' worth of coverage.

Okay, perfect. Thanks a lot.

Thank you, Brian.

Dan Cardenas, Raymond James.

Asking a couple quick questions. A lot of good questions have been asked already. As I look at your mortgage banking activities this quarter, this past quarter, can you tell me how much of that was purchased versus refinance?

My coach here joining me, our Chief Banking Officer Dan, is telling me that it's about 65% refi, 35% purchase.

Okay. And then as you kind of look forward into 2013, I mean, are you expecting as robust a year on the mortgage banking side? Or are you looking for that to begin to subside sometime in the year?

Wow. It'd be tough for me to think we're going to have a bigger year than what we did. We aren't planning to have a bigger year than what we did, unless we were to add resources. We clearly think that what we've been able to do in Indianapolis, in terms of adding a lift-out of a led team is an opportunity that exists, at least in Columbus, Ohio, if not other places as well.

But from a steady-state in terms of originators, we would look at, in my mind, 2012's results as kind of the top of what we can do. I would just offset that, as I might have said the same comment a year ago speaking to 2011. So, I welcome the chance to be wrong. And as I mentioned to one of the first questions, we actually enter 2013 with $50 million more in-process pipeline approved mortgages than we had in January of 2012.

Great. Good quarter.

Thank you very much.

Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Mike Rechin and the rest of the management crew for any final remarks.

Rocco, I have no final remarks other than my appreciation for the questions and the interest in hearing what our Company is doing. And we'll have another call scheduled probably right around the 1st of May to talk about our first-quarter results this year.

Thank you very much for your time, sir. And thank you all for your attendance. The conference is now concluded and we thank you for attending the presentation. You may now disconnect and have a wonderful day.