First Merchants Corp (FRME) 2014 Q3 法說會逐字稿

Good afternoon and welcome to the First Merchants Corporation Third Quarter 2014 Earnings Call and Webcast. All participants will be in 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 may be viewed by following the URL instructions noted in the First Merchants news release dated Thursday, October 23, 2014 or by visiting the First Merchants Corporation shareholder relations website and clicking on the webcast URL hyperlink.

This presentation contains forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements can often, but not always, be identified by the use of words like believe, continue, pattern, estimate, project, intend, anticipate, expect and similar expressions or future or conditional verbs such as will, would, should, could, might, can, may or similar expressions. These 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, statements relating to the expected timing and benefits of the proposed merger between First Merchants Corporation and Community Bancshares, Inc. including future financial and operating results, cost savings, enhanced revenues and accretion/dilution to the reported earnings that may be realized from the merger as well as other statements of expectations regarding the merger and other statements of First Merchants' goals, intentions and expectations, statements regarding the First Merchants' business plan and growth strategies, statements regarding the asset quality of First Merchants' loan and investment portfolios and estimates of First Merchants' risks and future costs and benefits whether with respect to the merger or otherwise.

These forward-looking statements are subject to significant risks, assumptions and uncertainties that may cause results to differ materially from those set forth in forward-looking statements, including, among other things, the risks that the businesses of the First Merchants and Community Bancshares will not be integrating successfully or such integration may be more difficult, time consuming or costly than expected, expected revenue synergies and cost savings from the merger may not be fully realized or realized within the expected time frame, revenues following the merger may be lower than expected, customer and employee relationships and business operations may be disrupted by the merger, the ability to obtain required governmental and shareholder approvals and the ability to complete the Merger on the expected time frame, possible changes in economic and business conditions, the existence or exacerbation of general geopolitical instability and uncertainty, the ability of First Merchants to integrate recent acquisitions and attract new customers, possible changes in monetary and fiscal policies, and laws and regulations, the effects of easing restrictions on participants in the financial service industry, the cost and other effects of legal and administrative cases, possible changes in the credit worthiness of customers and the possible impairment of collectability of loans, fluctuations in market rates of interest, competitive factors in the banking industry, changes in the banking legislation or regulatory requirements of federal and state agencies applicable to bank holding companies and banks like First Merchants' affiliate bank, continued availability of earnings and excess capital sufficient for the lawful and prudent declaration of dividend, changes in market, economic, operational, liquidity, credit and interest rate risks associated with the First Merchants' business, and other risks and factors identified in First Merchants' filings with the Securities and Exchange Commission.

First Merchants does not undertake any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this presentation. In addition, First Merchants' and Community Bancshares' past results of operations do not necessarily indicate either of their anticipated future results, whether the merger is effectuated or not.

This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any proxy vote or approval. The proposed merger will be submitted to Community Bancshares' shareholders for their consideration. In connection with the proposed merger, First Merchants Corporation has filed with the Securities and Exchange Commission a registration statement on Form S-4, registration number 333-198661, that includes a proxy statement for Community Bancshares, Inc. and a prospectus of First Merchants, as well as other relevant documents concerning the proposed transaction.

The SEC declared the Form S-4 Registration Statement effective on October 2, 2014. A definitive proxy statement and prospectus was mailed to Community Bancshares' shareholders on or about October 2, 2014. Community Bancshares' shareholders are urged to read the registration statement and the corresponding proxy statement and prospectus regarding the merger as well as any other relevant documents filed with the SEC, together with all amendments or supplements to those documents, as they will contain important information. A free copy of the proxy statement and prospectus, as well as other filings containing information about first merchants, may be obtained at the SEC's web site http://www.sec.gov. You may also obtain these documents, free of charge by accessing First Merchants' web site http://www.firstmerchants.com under the tab Investors, then under the heading Financial Information, and finally under the link to SEC filings.

Community Bancshares and its directors and executive officers may be deemed to be participants in the solicitation of proxies from the shareholders of Community Bancshares in connection with the proposed merger. Additional information regarding the interest of those participants and other persons who may be deemed participants in the transaction may be obtained by reading the proxy statement and prospectus regarding the proposed merger when they become available. Free copies of this document may be obtained as described in the preceding paragraph.

These slides contain non-GAAP financial measures for purposes of Regulation G and non-GAAP financial measure is a numerical measure of the registrant's historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of income, balance sheet or statement of cash flows or equivalent statements of the issuer or includes amounts, or is subject to adjustments that have the effect of including amounts that are excluded from the most directly comparable measure so calculated and presented. In this regard, GAAP refers to Generally Accepted Accounting Principles in the United States. Pursuant to the requirements of Regulation G, First Merchants Corporation has provided reconciliations within the slides, as necessary, of the non-GAAP financial measure to the most directly comparable GAAP financial measure.

Please note, this conference is being recorded. I would now like to turn the conference over to Michael C. Rechin, President and CEO. Please go ahead.

Thank you, Gary. I appreciate your very thorough treatment of the forward-looking statement commentary, particularly important as we embark on this closure of an acquisition opportunity in the near term. So I appreciate your thoroughness there.

Welcome everyone to our earnings conference call and webcast for the third quarter ending September 30, 2014. Joining me today, as has been our practice, are Mark Hardwick, our Chief Financial Officer and John Martin, our Chief Credit Officer.

Our earnings were released in a press release approximately 10 AM this morning Eastern Daylight Savings Time and the presentation that Gary alluded to and that we intend to use speaks to material from that release, the directions that point back to this webcast were also contained at the back end of the release. And my comments are going to begin on page 4 in a slide titled Third Quarter 2014 Highlights.

Well, we feel like we completed a successful quarter in terms of our bottom line results, earnings per share of $0.45, a 29% increase over the third quarter of 2013, with net income from that period of $16.1 million, a 60% increase over the $10 million that we earned in the third quarter of last year. Overall, our year-to-date earnings per share up 16% from the prior period -- prior year.

And then on the bottom section of that earnings portion on slide 4, a couple of key ratios that describe our performance vis-a-vis the industry with what we consider to be great progress and consistent with our plans to deliver high-performance results with a return on average assets of 1.16%, return on tangible equity of 13.64% and efficiency ratio under 60% at 58.52%. Really strong core performance in there. In Mark's comments and John's comments, which will follow, you will hear some of the particulars that drove those, a couple of unusual positives for us that we can cover in what we think of is a really fine quarter and our continued priority to deliver results towards greater share value.

Middle of the page, we've had consistent loan growth at this point. And I think whether you look at it on a year-over-year basis or on the third quarter from second quarter basis, kind of meeting the objectives as we've laid out in prior calls of having mid to high single-digit growth rates in 8.5% organically as the bullet point in the middle of slide 4 shows. The tangible book value increase at $13.53 and the resultant 17% increase over this period last year, very satisfying towards that making good on our acquisition modeling and the expectations for ourselves we've shared as we participate strategically in the consolidation of the industry.

Bottom of the page, also what we had hoped to see, which was a core margin flat with the second quarter as we continue to work through this extremely competitive and low interest rate environment to work through a 3.71% core net interest margin without any accretion and then a stronger margin yet when factoring in the accretion at 3.98%.

So I want to get you quickly to the detail behind those numbers. I'll rejoin you later but Mark is going to speak to our results.

Thanks, Mike. My comments will begin on slide 6. Loans on line three, increased on a linked basis by $50 million or 5.4% annualized and through the first nine months of 2014 we are on a 5.1% annualized pace of growth. The investment portfolio, on line one, declined modestly from the second quarter of 2014, but remains up by $94 million since year-end.

The allowance, on line four, totaled $66 million or 1.74% of loans and 134% of non-accruals. Net charge-offs totaled $4.4 million during the quarter and just $3.9 million year-to-date. Due to the increase in net charge-offs and continued loan growth during the quarter, we recorded a provision of $1.6 million for the first time this year and you'll see that in more detail when we go through the full income statement at the back of my presentation. The composition of our loan portfolio on slide 7 is reflective of a commercial bank balance sheet as the commercial loan categories comprised 74.2% of our portfolio. The portfolio yield for the third quarter of 2014 totaled 4.62% equaling the year-to-date yield.

On slide 8, 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 3.87% yield compares favorably to the peer group of approximately 2.57% and our duration totals 4.3 years, which is about a year longer than the peer group.

The net gain in the portfolio totals $34.3 million as of quarter-end and our maturities for the remainder of the year totaled just $42 million with a roll-off yield of 3.45%, and in 2015 we have maturities of $142 million a yield of 3.17%.

On slide 9, our non-maturity deposits are down $47 million from year-end, but continue to represent 75% of total deposits. Our borrowings and brokered deposits have increased during the year by $289 million as we extend maturities by using the least expensive alternative possible. The rate differential and terms expected from our actual customers in the branches for CDs compared to the wholesale market just still pushes us into the wholesale categories as our most efficient way to fund the loan growth that we've had year to date.

Our tangible book value per share on line 10 now totals $13.53, an increase of $1.97 or 17% year over year. EPS added $1.58 during that time frame and our dividends reduced our tangible book value per share by $0.26 and the remaining improvement came from growth in other comprehensive income of $20 million.

As I previously mentioned, the mix of our deposits, on slide 10, continues to be strong and our total deposit expense is just 34 basis points for the quarter. Those brokered deposits that I mentioned in the previous slide, we are extending and going out relatively long on the curve and the brokered CD interest expense is 100% accountable for the modest increase in our basis -- in our cost of funding for the quarter compared to the year-to-date number.

All regulatory capital ratios on slide 11 are well above the OCC and the Federal Reserve's definition of well capitalized and Basel III minimums. The completion of our [Community Bank Corp.] acquisition in the fourth quarter will tamper the growth rate of capital as we had purchased assets and used as much as $15 million in cash as consideration for the merger.

The Corporation's net interest margin, on slide 12, totaled 3.98% for the quarter and when adjusted for fair value accretion of $3.5 million totaled 3.71% which is the identical performance as the second quarter of 2014. Including fair market value accretion, our net interest income reached nearly $50 million for the quarter.

We remain asset sensitive with $1.9 billion in assets. We're pricing daily and our net interest income simulation suggests that our net interest income will remain stable over the coming quarters and would rise in a rising rate environment.

Total non-interest income, on slide 13, does have volatility at times due to securities gains and losses. Our portfolio gains this quarter were all related to the liquidation of several municipal bonds with a less than optimal credit quality. We did a pretty extensive review of every municipal in the portfolio. And there were a handful of securities where the general fund balances were deteriorating from our preferred levels or the expense ratios were increasing. The warrants of liquidation, when it was nice, we were able to liquidate those bonds, improve the credit quality of the portfolio and still achieve a $910,000 gain in the process.

Additionally, our bank owned life insurance increased as our cash surrender value increased by $871,000 due to claims that were incurred during the quarter. And several of back-to-back swaps also resulted in the quarter creating $656,000 of additional derivative income over the prior quarter.

Our non-interest expense, on slide 14, totaled $42.6 million for the quarter, up from the second quarter of 2014 by $1.4 million. On line one, salaries and benefits grew $743,000 as incentives and benefit accruals accounted for 100% of the increase. We had a property that we decided to write down in the quarter. We wrote down $305,000 on a bank owned premises which we intend to dispose of in the coming quarters. And on line eight, our marketing expense increased $281,000 to support additional branding efforts in our Lakeshore Region.

On slide 15, net income, on line nine, totaled $16.1 million and this was despite $1.6 million of provision expense on line two. And then on slide 16, you will notice that EPS improved by $0.10 over the third quarter of 2013 and $0.04 over the second quarter of 2014.

Now, John Martin will discuss our loan portfolio trends.

All right. Thanks, Mark and good afternoon. My remarks will begin on slide 18. I'll be updating you the trends in the loan portfolio, then review the third quarter asset quality before closing with a look at where we stand on the allowance and the fair value coverage.

So turning to slide 18, in the highlighted column, Q3 2014, I would focus your attention on lines one through three where we get strong C&I growth, as Mike and Mark mentioned before, and where we are successfully executing on our CRE strategy of construct, stabilize and transition. Speaking to C&I specifically on line one, the market tactics we are employing as well as general improvement in the regional economy continues to drive C&I demand in the portfolio. Lines two and three highlight our construction program, which is seeing strong multi-family activity. The portfolio, as I've mentioned on previous calls, ebbs and flows on lines two, [grows] during construction whilst line three includes the stabilization mini perm prior to moving to the secondary market.

And while there is choppy improvement on a macro basis being reported in various markets in the single-family housing, we continue to see strong demand and lease-up rates in our markets for apartment, senior and student housing. I would then draw your attention to lines 8 and 10 where increases in home equity and direct lending show incremental growth. Gains in regional employment coupled with improving home prices and a focus on increased home equity lending are helping to drive demand.

Turning to asset quality on slide 19, on lines one through five, NPAs declined for the quarter to 1.7% resulting from a $2.2 million reduction in non-accrual loans and a $4.1 million reduction in other real estate owned.

Dropping to line 6 through 10, you can see the improvement in asset quality with reductions in classified and criticized loans on line six and seven respectively. On line eight, specific impairment reserves increased by $1.7 million which included a $1.1 million reserve on an individual relationship that I'll address more thoroughly a little later on. The allowance declined by $2.8 million while the non-accrual allowance coverage was mostly unchanged on line nine improving to roughly 134%.

Let's turn to slide 20. In the far right column, I would first focus your attention starting on line two where new non-accruals increased by $18.3 million. At the end of the quarter -- in the quarter, an agriculturally related relationship, which I mentioned was downgraded in the first quarter of 2014 was partially charged off taking the non-accrual, but the estimated remaining loss specifically reserved for this quarter and that speaks back to the $1.1 million I just mentioned. The move increased non-accruals on line two by $11 million, increased gross charge-offs on line six by $3.7 million.

Despite this relationship I am encouraged in the overall asset quality improvement resulting from problem asset resolution tactics during the quarter and view this as being contained to this relationship primarily. These tactics resulted in a reduction in non-accruals of $2.2 million on line seven, and down on line 16 ending non-performing assets and 90 days delinquent loans fell from $72.4 million at the start of the quarter to $65.6 million at the end of the quarter.

Turning to slide 21, on the top of the slide, in the first graph, our allowance coverage on a fair value adjusted basis has improved. Non-accruals have declined and we continue to have remaining credit leverage in our marked portfolio. If non-accrual loans were grossed up for the credit mark and fair value considered, the resulting coverage would, just for illustrative purposes, be roughly 184%.

So turning now to slide 22, this slide continues the presentation from previous quarter and helps to illustrate the continued strength of the overall allowance and mark coverage. On line 1, the allowance of roughly $66 million in the far right column includes $500,000 of specific reserves allocated to purchase portfolios. On line two, total fair value adjustments are $35.5 million, split between the FDIC purchased Shelby County Bank, acquired portfolio and the Citizens Bank portfolio.

Moving down to lines six and seven, out to the highlighted total in the far right column, the allowance as a percentage of net loan balance is 1.74% on line six, where considering the marks 2.65% on line seven. As communicated on previous calls, all else equal, we would expect to see these overages continue to move lower as these portfolios transition from purchase loans to allowance coverage loans.

So just to wrap up, I would say that we continue to drive for loan growth while keeping a focus on asset quality through the resolution or reduction of problem loans.

And then finally just a brief comment on the Community Bank acquisition, before turning the call back over to Mark or Mike, I would simply add that thus far, our credit related closing activities are on track and are in support of our original due diligence assumptions.

Thanks for your attention. Let me turn the call back over to Mike.

Thanks, John. I'll start with a couple of remarks off of slide 24 speaking specifically to the Community Bank acquisition that John referenced. So yesterday, we filed a 8-K, but some of the detail around the top couple of bullet points on here specifically laying out the fact that we've received the regulatory approvals that are necessary for closing and that our closing is not just targeted for the fourth quarter, but we really anticipate it to take place on November 7 subject to a successful shareholder vote with the Community folks and everything is on track for that. So we feel pretty good about the detail provided in yesterday's 8-K.

As I think about the fourth quarter then, we would have an incur or recognize the remainder of the expenses associated with the transaction which we guesstimate between $1.5 million and $2 million, and then about 50 days of revenue if we were to close on the (inaudible) have that company as part of our fourth quarter income statement for about 50 days. So we're excited about that.

We're excited about the leadership that's joining our Company from Community Bank. And if you think about configuration of our Company, Community on the north side of Hamilton County fits into our central region or our Indianapolis business and so our Market President there looks forward to adding a cadre of folks, including two very senior people on a day-to-day basis that will be joining us for the future. Excited about that.

And as I drop down into the next section and talk about increasing our intensity on revenue-generating activities for the benefit of our clients, my hope would be is that Community has the same kind of a first year as Citizens Financial re-branded as the Lakeshore Region does for us. At the last call, I spoke about a strong first couple of quarters coming out of that which were heavy in asset quality remediationess and entering a market with a new name into that newer marketplace for us. Mark Hardwick highlighted in his comments a couple of hundred thousand dollars of marketing expense meant to reinforce the efforts of the senior leadership in that market. They've done a great job of transitioning into First Merchants, picking up the cadence of our Company, and then more recently adding bankers. I think I mentioned during the last call that the only area I could think that we might have been mildly behind our plan on was getting the team of commercial bankers that we thought could use our balance sheet to win in that marketplace. Well, we've made great strides there, our market president in the Lakeshore Region, and so we feel pretty well equipped going into 2015 with the troops that we have.

That same region participated in the very even loan growth that we had around the Company in the third quarter. John referenced it as it relates to type within the commercial category kind of lead by C&I which is consistent with our market tactics and to be in and out of the investment real estate category, particularly construction loans taking full advantage of permanent solutions post normalizing in occupancy.

So everything is kind of going well there. I was pleased as you might have picked up in the release that we had both in terms of the on balance sheet mortgage loans and the fee component of it that's in non-interest income kind of a nice bounce back up from the bottom going back to the second, third, fourth quarters of 2013, the levels that have been picking up all throughout 2014 that's pleasing to see. As is some on-balance sheet growth on the consumer side where we've made some people investment throughout the year that are beginning to manifest themselves and a couple of consumer lending categories that are beginning to show some life (inaudible) and reflect the efforts that we're putting into it. So pleased in all those regards.

The pipeline that we take into the fourth quarter that will probably trickle into 2015, pretty much even with where we've had that which is at a healthy level and when you realize on that pipeline level that is about $255 million commercially going into the fourth quarter, it's very consistent with that kind of 5%, 6%, 7% annualized growth rate in overall loans given the Commercial Bank orientation of our balance sheet.

So kind of a look towards the last part of 2014, to maintain the momentum that we've had trying and acclimate and assimilate Community Bank in in every regard towards the integration of that company into ours from a technology standpoint scheduled for April 2015.

Mark referenced another expense relative towards existing bank properties and so at the bottom of the page when I reference optimizing our branch system we've always been looking at that and as we look towards 2015 the primary area will likely be Community Bank coming into our Indianapolis region where we feel like we have enough brick and mortar to service some of the communities and so in that couple of overlapping geographies. We're preparing for that and as such getting appraisals, as Mark referenced, about making sure that we have everything on the books at the appropriate values as we move forward.

Excited about 2015, last couple of thoughts on the page, talk about this investment in mobile banking which -- where we're kind of finalizing our overall plans for an online banking upgrade across the whole company to add some of the feature functionality that our clients need going forward.

So, Gary, at this point, I believe, my colleagues and myself are ready for any questions that might have gathered in your queue.

(Operator Instructions) Scott Siefers, Sandler O'Neill.

Good afternoon, guys.

Hi, Scott.

Mark, I think first question probably for you, just on rate sensitivity in the margin outlook. You had mentioned in your prep remarks that your modeling suggests that NII would be stable in coming quarters. Now is that on a static balance sheet or does that incorporate the kind of loan growth that you guys have seen? And I guess just kind of the [crux] to that question is what's your best guess for what happens with the core margin from here on out?

Yes, I think that core margin will have a little pressure. But we've been working pretty diligently normalized through our net interest income simulations but even our all of the forecasting and budgeting process for 2015 in. And I know last quarter when we went from 3.83% in the quarter to 3.71% I didn't think that we would see further deterioration, at least not at that pace. And so I was glad to see that it stabilized at 3.71% and I think that's a really good number for us. We will see some modest compression from this point, but I think it's small. I don't think we'll see the type of quarters like we had where we lost 12 basis points in a given quarter, to expect to see one or two basis points, I think is likely.

Okay. That's perfect. Thank you. Then wanted to jump down to just the book to fees and expenses, you'd called out a few of those items in the release, but just curious as we look forward and try to kind of base off of expectations in the fourth quarter and beyond, how much of kind of the elevated items, both income and expense, that went through fees and expenses, do you think is going to repeat? In other words, what's kind of the best base to go off of going forward for fees and expenses?

Well, we definitely had a strong fee income quarter. To have $800,000 almost $900,000 in bank owned life insurance, for us to have a couple of claims in those policies is something that you wouldn't expect. They obviously will occur, but not something that you can expect or predict on any given quarterly basis. So that one, I would say, kind of normalize back to a given run rate.

The gains in the bond portfolio, we just looked the other day and our gains had improved over $40 million, we were over $45 million in the bond portfolio. So we're continuing to look for ways just to strengthen the credit quality and potentially take some gains. I would expect some again in the fourth quarter as we move forward, but it's more about repositioning than it is gains taking.

The derivative income is just part of our core business. It's something that is relatively unpredictable quarter by quarter and this was a strong quarter, but I wouldn't think that the entire amount should come out in this rate environment. We're selling that product pretty effectively. So enthusiastic about what we can do into the future from that category.

So when I think of write-downs in the expense category of some facilities, some one-time increases in incentive and benefit areas, when you net all of that out, my thought is that it was a couple of pennies a share. And if we are going to continue to press forward when you get fee income at that level, you can't help but be pleased by it, and we were looking for opportunities to make sure we put some expenses behind us.

Scott, it's Mike. Just to add to Mark's comment. The derivative activity is absolutely customer related, so more is better and we would hope that as we advise our clients about how they take advantage of rates being where they are and when you get the dips that have taken place kind of throughout 2014 those ideas begin to take hold with our clients and we've been fortunate.

As it relates to OREO both on gains and expenses, I know that John's team, I think he highlighted in our comments, OREO was a good size. It's a part of any bank's special asset effort, but it was a big portion of the assets that needed remediation out of the Citizens and then again a little bit as we look forward into Community Bank joining us. And so John's team has just been trying to work through that category, knowing that it has each of those components to it, typically the cost associated with it and sometimes gains based on the quality and the marks (inaudible) work that we give.

Right. That's perfect color, I appreciate it guys. Thank you.

Sure.

Damon DelMonte, KBW.

Hey, good afternoon guys. How are you?

Good. Thanks. I just wanted to start off with the commentary regarding the large ag credit that went into non-accrual. Could you guys just go over those details again, like the size of it and how much of it was charged off?

Sure. There was roughly $3.5 million that was charge off, $3.7 million. It increased the overall non-accruals for the quarter by $11 million.

Okay, great. Thank you very much. And then you guys had alluded to your kind of evaluating your branches and getting updated appraisals on the properties and whatnot. Could we expect you guys to announce some sort of branch optimization strategy as you go into 2015 or maybe you look to scale back some of your properties?

I don't anticipate a [blanket] program for that. We're trying to doing a community by community. Damon, in 2012 we went into a couple of our existing legacy communities where we had great retail coverage, tried to assess what the FDIC statistics were talking about for market potential and where we stood and made the decision in that particular year to consolidate a couple of banking centers and then put some fresh investment dollars into whatever bank presence we thought optimized our opportunity. We're doing the same thing. We're just looking at a couple of communities. In this case, the only difference would be is that in the greater Indianapolis area where Community joined us. It's a very robust market environment. And so, when you overlay the 11 banking centers that come to us out of Community on top of our physical presence as it stands today, I think there's a chance to maybe add one or two sites in substitution for some locations that no longer give us the best market presence.

Got you. Okay.

And in that, Damon, if you think about it, you're just swapping in and out and when you're moving out of something to perhaps a newer a cleaner location, the exit oftentimes causes you to look at the book balance of the existing banking center and that's what we're doing.

Okay, got it. Okay, thank you. And then with regard to the provision kind of going forward, obviously this quarter was driven in part from that credit we just spoke about. Can you give a little guidance as to what you might be looking at for provision as we head into 2015?

As we have looked at our credit statistics, we expect non-performers to continue to come down. We expect to have asset growth and when you weigh those throughout, I think we are likely to continue to provide something each quarter versus zero where we were for the first few quarters of this year. But there hasn't been a scenario where we thought that the provision needs to grow from its current level this quarter.

Okay, that's all that I had for now. Thank you.

Thank you, Damon.

Daniel Cardenas, Raymond James.

Good afternoon guys.

Hi, Dan.

On the ag credit, don't want to beat a dead horse here, but on the ag credit, what was the underlying collateral for this, was it land or was it equipment?

Yes, Daniel, the underlying collateral is kind of a mix. It had some real estate land, it had some production grain as collateral -- it has, I should say, and some equipment, machinery because it's ag and ag-related.

Okay. And then was the charge-off of that related to any weakness in land values or equipment values?

Yes, I think it was -- well Daniel, it was related to both land value and the ultimate liquidation value of underlying grain.

Okay. And then how does the rest of your portfolio -- your ag portfolio look? Did this cause you to take a harder look at the ag portion of your portfolio?

It really doesn't because when I evaluate, this particular instance, I would say it's kind of isolate, it's contained to this borrower specifically, the situation around this particular borrower. It also included an implement dealership with it and as a result it had different components to it. So it's not just purely what you would typically think for land growing. It had that component, but it also had other components to it and the underlying issues again were specific to this.

Okay, right, good. And then just jumping over to the deposit side, right now are you seeing any pickup in competitive pressures for deposits?

Well, I think we're watching. We've had a strategy over the last several years that in a loan growth beneath the level of 2014 our commercial activity driving demand deposits has been satisfactory to fund our loan growth. And the only change there that I guess you could construe as competitive is that as other banks are having some pickup in their loan growth as we are, the need to revisit your CD strategy comes about. And so that's what we're doing kind of as we speak.

Uptil now we've been comfortable with the idea that we're going to hold firm on market leadership positions in terms of setting CD rates along with other transaction accounts. And as we look forward a little bit, we're just going to be a little bit more adamant that we want to retain as much of that is possible, especially for multi-product households. And so we have a CD strategy that I don't think dramatically drives up our funding costs and yet is intended to create a little bit more stickiness for some of the CD activity. We kind of look at that as we were talking about earlier as relative to branch locations on a market by market basis and wouldn't expect a dramatic rise at all in our funding costs.

Good. All right. I will step back. Thanks, guys.

Brian Martin, FIG Partners.

Hey, guys.

Good afternoon, Brian.

Maybe a question for Mark. If you can just talk a little bit about I mean the bump up in the accretion income this quarter and just kind of how it relates with the Community Bank and just kind of the outlook on that component going forward? Do you expect a lot more volatility or more normalization, if you will (inaudible)?

Yes, I think I heard your question. We had in our plan about $5.4 million of accretion through the Citizens acquisition and year-to-date we're $7.5 million. So it has been one of the factors that has allowed us to really feel good about the performance of the acquisition, just from a financial perspective. There are a lot of reasons, we feel good about it culturally.

We also closed that transaction. I think we had $13 million of mark that we didn't end up using on day one that went to capital. And as we look at Community we think that the marks that we have identified and communicated will clearly be adequate. Our kind of day one look at that so far suggest that a little of it may come back into capital.

And then I think we're likely to see a little volatility next year with that acquisition like we did on this one. As the dollar amounts are higher and you have workout of individual credits, [you get a] little volatility early on in the process. I would think that our accretion from our current acquisitions, our current transactions that are on the books start to sell back in into that [$1.8 million] range. We have $35 million on the books and if we settle back into [$1.8 million] that makes some sense in the near quarter -- per quarter and then you add in wherever we end up with Community Bank, which we'll be able to talk about in much more detail at the end of next quarter.

Okay. That's helpful. In the systems integration, the core conversion for Community, when does that occur, was that April, is that what Mike said?

Yes, April, 24 is the date that we have scheduled. And so that would be the actual time period of the integration itself, Brian and I made a comment about expenses associated with Community Bank as being fourth quarter and that is our desire is to deal with breakage costs of existing contracts that relate to the technology and ultimately the integration early as we have done in the past and so expects that brunt of one-time expenses would be this current quarter.

As we have a fourth quarter with one-time expenses. A first quarter where they've maintained our current run rate and then post integration, we have the improved run rate of the company on a go-forward basis.

Okay, perfect. That's helpful and then just, Mark, you talked about extending them on the borrowings and just kind of maybe just give me color on what you're doing there and I guess you continue to do things there?

Yes, we, probably were a little more aggressive than we need to be this last round that we actually took some brokered CDs and we had maturities of even 2019, 2020, 2021 so we were pretty aggressive in our extension there. We actually extended some Federal Home Loan Bank advances out into 2016, 2017, 2018 and 2019 and those rates are clearly higher than our core cost of 34 basis points and that's why the increase in some of the interest expense so the cost of our supporting liabilities across the Company were a little higher based on these kind of [alkyl plays] more than they were the core portfolio.

So those range anywhere from 68 basis points to around 2% where we are really extending out on the curve.

Okay. And do you expect to do much more of that at this point or is it kind of mostly done?

No, it wouldn't surprise me if we did a few more brokereds moving forward, but I am not going -- we're not going to go out as far. We've actually kind of built the ladder and we want to make sure for all kinds of safety and soundness reasons that we don't have too much maturing in a given period. So actually I think we have the capacity to fill in that ladder a little shorter-term now that won't be as expensive.

Okay, thank you very much.

Stephen Geyen, D.A. Davidson.

Hey, good afternoon. Hey, Mark, could you give us some thoughts on community and I'm just curious how much of a presence do they have in mortgage banking and the footprint that they're currently existing in and where you see opportunities there as well as if you have some additional thoughts on commercial lending?

Mortgage banking activity is really low. It's not the core focus of what they do and if you look at the structure of the balance sheet, it's more of a kind of consumer and commercial real estate orientation. Did that answer your question?

In mortgage, I'm just curious, can you kind of service that area with what you already have in the kind of (multiple speakers)?

Yes, we feel like we have great coverage and just the additional locations, the additional kind of presence, the lab in the Noblesville market we think that will help, but we don't -- we're not adding individuals to go after those loans.

No, we have from our [bank side] processing, Stephen, two fulfillment locations. One of them towards Monsanto and one that's in Indianapolis and so we do view on balance sheet and non-interest income upside of having a more robust mortgage origination platform throughout their franchise to be kind of a quick hitting opportunity. I mean the spring is typically a seasonal upside for that business and we will be in a position to take full advantage of that in the spring of 2015 without adding any fixed cost to the fulfillment side.

Okay. Right, that's all I have. Thank you.

This concludes our question-and-answer session. I'd like to turn the conference back over to Mike Rechin for any closing remarks.

I just want to thank everyone on the call for their attention and the quality of their questions and Gary thanking you for getting through that lengthy forward-looking comment. We look forward to talking to you after the completion of not only the Community Bank acquisition but our fourth quarter when we speak again in late January. Thank you.

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