First Merchants Corp (FRMEP) 2015 Q1 法說會逐字稿

Good day, and welcome to the First Merchants Corporation first quarter 2015 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. We will be using user controlled slides for our webcast today. Slides may be viewed by following the instructions noted in the First Merchants news release dated Thursday, April 23rd, 2015. Or by visiting the First Merchants Corporation Shareholder Relations website and clicking on the webcast URL hyperlink.

The Corporation may make forward-looking statements about its relative business outlook, these forward-looking statements and all other statements during this meeting 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, economy and future growth and the balance sheet or income statement. Please refer to our press releases, Form 10-Qs and 10,-Ks concerning factors that could cause actual results to differ materially from any forward-looking statement.

These slides contain non-GAAP financial measures. For purposes of Regulation G, a non-GAAP financial measure is a numerical measure of the registered historical or future financial performance, financial position or cash flows that excludes amounts, are 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, still 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 with the non-GAAP financial measures to the most directly comparable GAAP financial measure. Please note this event is being recorded. I would now like to turn the conference over to Mr. Michael Rechin, President and CEO. Please go ahead.

Great. Thank you Amy. Thanks everyone for tuning in today, listening in on our conference call. We're going to cover, along with the press release issued earlier in our webcast, results for our first quarter ending March 31st, 2015. Joining me today are Mark Hardwick, our Chief Financial Officer, and John Martin, our Chief Credit Officer. As referenced earlier, we released our earnings in a press release at approximately 10 o'clock AM Eastern Daylight Savings time. Our presentation speaks to material from that release. The directions that Amy covered, that point to the webcast are also contained in the back of that release, and my comments will begin on page three. The slide titled, First Quarter 2015 results.

So we're happy to be with you, talk about our earnings per share which totaled $0.43 for the quarter, a 13% increase over the first quarter of 2014's results of $0.38. Looking at it otherwise, $16.2 million of net income, a 19% increase over the first quarter of 2014's total of $13.6 million. Our non-interest income totaled $16.2 million also, 5% over the first quarter of last year, mixed details within that caption that Mark will cover a little bit later, a really nice result in our mortgage business and our trust company. We look forward to having a little bit more growth in our service charges. One of the components of that non-interest income is our OREO gains in income which while it's down, I think it's somewhat near what we would hope to take place in OREO assets, as that category along with all nonperformers we look to continue to come down over time. Non-interest expense, really pleased to see it come down to $41.2 million, down 4% from last year's first quarter, down more than 1% from the fourth quarter of 2014.

And there's a bullet point in the bottom half of slide three that shows, our first quarter results included acquisition expenses of greater than $0.5 million. So all-in, we produced a return on average assets of 1.11%, which we think is a nice add to the progress we've made over the last couple of years, and sets us up for what we hope is a really successful 2015 in whole. Looking at the bottom of the page just for a moment, the Company is continuing to work through some really important milestones for us. Namely, the first quarter of 2015 was our first full quarter of Community Bank's operations and our results, and as we recognize the contribution that bank is making with inside First Merchants' at this point, we look forward to this weekend where the back office integration of Community Bank will take place, and that is folks on deck for that important client effort that starts this weekend. In a press release that came out earlier this month, you might have seen that we completed our acquisition of Cooper State Bank in Columbus, Ohio, to add to our commerce franchise, so we're really excited about the early results and management contribution we're getting from those folks. John will be on to talk about the overall asset quality, not only from our core business but from what either community or Cooper look to do for us. I will let me colleagues jump into it. So I'm going to Mark first, who is going to get into greater detail on the financials themselves.

Thanks Mike. I appreciate everyone joining the call. I'm starting on slide five, where loans on line 3 increased year-over-year by 9.6%. Of the increase $204 million, or 5.6% was the result of organic culling efforts, and $145 million, or 4% resulted from our acquisition of Community Bank of Noblesville in November of last year. The allowance on Line 4 in total dollars has declined $7 million during the last 12 months, and $1.2 million since year-end 2014. The allowance now totals 1.58% of total loans, and 187% of nonpurchased loans. Or loans without a fair value credit mark from acquisition accounting.

The composition of our $4 billion loan portfolio on slide six continues to be reflective of a commercial bank, and continues to produce strong loan yields. The portfolio yield for the first quarter of 4.48% is compared to the first quarter of 2014 yields of 4.67%. So we are seeing some compression in total loan yields. On slide seven, 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 3.94% yield is actually 7 basis points better than a year ago, and continues to compare favorably to peer averages of approximately 2.5%. Our effective duration is just 2.5 months longer than our peer, and totals 3.1 years, and our average life is 4.7 years. The net unrealized gain in the portfolio totals $45.1 million, up from $20.8 million a year ago. Maturities for the remainder of 2015, total $127 million with a yield of 3.13%. And our 2016 maturities total $181 million with a yield of 3.54%, and 2017 maturities total $127 million with a yield of 3.40%. The strength in our investment yields has helped us maintain our net interest margin. The variable nature of our loan portfolio with $1.8 billion repricing daily, allows us to take on a little more interest rate risk than our peer banks, and we feel like the return is worth the risk.

Now on slide eight, non maturity deposits on line 1 represent 76% of total deposits, and grew by $269 million, or 8.3% over the first quarter of 2014. Of the increase, $76 million, or 2.3% resulted from core organic growth. If you look at the bottom of the slide line 9, tangible common book value per share increased by $1.33, or 10.5% over the last 12 months. A number that we're very pleased with. As I previously mentioned, the mix of our deposits on slide nine continues to improve, and our total deposit expense is now 40 basis points. All regulatory capital ratios on slide ten are well above the OCC and Federal Reserve's definition of well capitalized. Under BASEL III, and including all of the BASEL III calculations and our internal targets. Due to the implementation of BASEL III this quarter, our total risk based capital declined from 15.34% at year-end to 15.12% as of March 31st of 2015. Pretty modest impact, all things considered.

The Corporation's net interest margin on slide 11 totaled 3.78% for the quarter, and when adjusted for fair value accretion of $2.2 million, totaled 3.61%. Net interest income totaled $49.2 million for the quarter, and continues to be the driver of our operating income. On a linked basis, when comparing the fourth quarter of 2014 to the first quarter of 2015, the loss of two days of interest income accounted for 5 basis points in our margin compression, and those 2 days is just the way we calculate yields on commercial loans, losing a couple of days impacts us by about $375,000 a day. Our plan for 2015 does include growth in net interest income driven by growth in earning assets, and stabilization in our net interest margin. As you already know, despite our longer than peer duration in the bond portfolio, the bank as a whole remains asset sensitive. We budgeted for a prime rate increase in the second quarter, but it looks like it's moved out to probably the fourth quarter at the earliest. Just as a reference, if you were to have 100 basis point move in interest rates up, it adds about 14 basis points to our net interest margin, or a little over $7 million in net interest income on an annualized basis, and as I mentioned, we're asset-sensitive, and so it gives you some baseline to understand how much of an increase we would see with a rise in rates.

Total non-interest income on slide 12 improved by $400,000, as Line 6 gains from sale of mortgage loans accounted for all of the growth in the quarter. The $766,000 improvement was a result of lower mortgage rates, and a little bit higher percentage of sales out of our total originations during the quarter. Non-interest expense on slide 13 totaled $41.2 million for the quarter, a decrease of $1.9 million over the prior year. Of the decline, $760,000 was a reduction in salary and benefit expense, and $528,000 was the result of reductions in OREO and foreclosure expense. Post-integration of our Community Bank of Noblesville, our run rate and expenses should improve by about $0.5 million per quarter. And that is consistent with Mike's comments on the first slide, where he highlighted the expenses related to acquisition activity in the first quarter of 2015. So now if you'd turn to slide 14, net interest income totaled $16.2 million for the quarter, or $0.43 per share, a $0.05 increase, and 13% improvement over the first quarter of 2014. And then you can also see the results of our most recent five quarter run rate on slide 15. Now John will discuss our satisfying asset quality trends.

All right. Thanks Mark, and good afternoon. I'll be updating you on the trends in loan portfolio starting on slide 17, review our third quarter asset quality position, and then close with a look at where we stand with respect to the allowance in fair value coverage, and some general comments. So turning to slide 17, for the quarter C&I on Line 1, CRE construction on Line 2, and public finance on Line 9, as a part of the other commercial category, all saw meaningful gains for the quarter, increasing 4.7%, 14.3%, and 38.2% respectively. Also as foreshadowed last quarter, we saw construction lines more heavily drawn this quarter, and would expect to see that trend continue in through the second quarter. In the public finance area, we have increased our efforts to grow our municipal nonprofit portfolio, we continue to seek out and bid opportunities in our market area, and I would expect to see continued growth in this area as we move forward. In contrast, CRE nonowner occupied on Line 3, agricultural on Line 5 and 6, and resi mortgage on Line 7, saw declines of between 1% and 9% for the quarter.

As I just mentioned, the construction volume on Line 2 ultimately results in current marketed takeout, which is driving the $15.5 million reduction in nonowner occupied CRE on Line 3. Our strategy continues to be construct, stabilize and transition to permanent market. We continue to see strong demand for multifamily product moving through the construction portfolio, with accelerating takeouts from the permanent market. Wrapping up this slide, in the quarter we stopped adding additional 15-year conforming first position residential mortgages to the portfolio, which contributed to the $7 million runoff on line 7. Turning to asset quality on slide 18, non-accrual loans, other real estate owned, renegotiated loans, and 90 plus day delinquent loans were all improved in the quarter, down $8.3 million in aggregate, or 11% as highlighted on line 5. We continue to make progress working through the initial downward spike in asset quality associated with recent acquisitions. Dropping down to lines 7 and 8, classified assets declined 13%, driving overall criticized assets, which includes the classified total, lower in the quarter. We saw improvement in several larger real estate relationships which allowed for the upgraded asset quality in both categories.

Turning to Slide 19, similar to prior quarters, this slide reconciles the migration of the asset quality. In the far right column labeled Q1 2015, on Line 1 we started the quarter with roughly $75 million in NPA, 90 day delinquent. The nonaccrual ins and outs on lines two and three and OREO ins and outs on lines 4 and 8 were essentially offset this quarter. The improvement in asset quality result from the resolution of the larger 90 day past due lines on Line 11 as discussed last quarter. Also, impacting the quarterly migration was a reduction in restructured loans on Line 12 of $700,000, and $2 million of gross charge-offs for the quarter. Now turning to slide 20, I included this slide last quarter that highlights where we stand with respect to the allowance and the remaining credit marks. In the far right column is the most recent quarter's allowance and fair value position. The allowance on Line 1 decreased to $62.8 million, resulting from net charge-offs of $1.2 million in the quarter, and a zero provision. Dropping down to Line 4, specific reserves increased by $1.8 million, resulting primarily from an individual relationship with a $1.5 million specific reserve.

On Line 6, our allowance coverage to nonaccrual loans increased from 131% to 142% as the reduction in nonaccrual loans outpaced the reduction in the allowance. And then finally, allowance and fair value coverage on Lines 7, 8 and 9 are showed in multiple ways. One, nonpurchased loans, two, purchased and nonpurchased loans, and then on Line 9, the combination of the allowance and fair value adjustments as a percentage of loan balances and fair value adjustments. The final measure on the bold line 9, at 2.58%, really I think demonstrates the relative strength or credit leverage remaining to cover charge-offs from both the purchased and core portfolios.

So wrapping up, on Slide 21, just a few comments here. As the economy continues to expand and with continued low interest and cap rates, we have been able to feed the construction pipeline with little compromise to desired credit structure. We continue to develop and build our public finance area with strong deal flow and new originations. We continue to build our consumer loan capabilities, and are seeing solid growth in the consumer lending pipeline. And then just briefly, given the size and complexion of the Cooper State Bank portfolio, not really expecting a material change in the credit port file related to the acquisition. So with that, I'll turn the call back over to Mike Rechin.

Thanks John. That's a good summary, I hope it's absorbed as I look at the numbers that John spoke to, as a declining risk business banking model that is positioned to grow well with a couple of smart acquisitions. So I'm looking at slide 23, which I think is a nice comprehensive look at the balance of our work, parallelling our 2015 plans. So at the top of the page, focusing on the customer experience, we have a big mid-summer event where we're going to bring significant more technology capabilities, through an upgraded and new online banking platform to our clients, scheduled for are the middle of the third quarter. We've been planning for that for more than a year now. We have to really attack it in earnest once the Community Bank integration work is completed. Second bullet point talks about organic growth through the franchise, which is really job one for us, talking about net growth, and in prior calls I have talked about having a mid to higher single-digit goal for net growth, and that continues to be our goal. I think 5% to 7%, 6% to 8%, we clearly have the opportunity to achieve, and so by virtue of reiterating that, you can see that our first quarter was just mildly beneath that target. And we'd love to talk about why I continue to feel that a marginally higher number will happen for us.

And then developing and retaining people. Cooper as an example. Great, great locations in the highest growth market in Ohio, and really without dedicated mortgage people, so as just one example, a line of business that we can fill out with some back half of the year recruitment, to provide that marketplace and their customers with a mortgage capability, especially given the success we've had over the last couple of months and year-to-date, and kind of a rejuvenated run rate of our mortgage business. Referenced a couple times as did my colleagues, the work right in front of us this weekend in fully integrating Community Bank of Noblesville, which will take place, has been planned significantly since the legal closing in November, and then the technology work that I referred to a moment ago on online banking scheduled for the summer, and then in the fall, in the October 1st timeframe, integrate Cooper State Bank, which legally closed with us earlier this month. I think we're confident in all of those exercises. We look forward and take some satisfaction in making those clients more pleased at choosing us as their bank.

Talked about organic growth a moment ago. That expanded platform that we talk about, sell more deeply into those acquired clients. First we have to earn their trust, getting through the conversion period, and then show them some ideas that have them put more of their wallet towards First Merchants Bank. We're looking at all of the distribution channels, not as a net investor in technology, looking at what that means for our branch configuration, and as we talked about with Community Bank as an example, by the end of the second quarter we will have reduced our banking center count by 3, just in some community redundancy that allowed us to look at community as such an attractive add for us. So task those three, I would expect us to continue to assess every market we're in for transaction counts and balance trends, knowing that so many of our clients are using different channels to access our product capabilities.

Looking at the bottom of the page, we still feel like there are opportunities for us to grow in the marketplaces we know best, so the two acquisitions we've referenced significantly in this call are in our most historical growth markets, and so they were negotiated opportunities, fairly straightforward, we just have to acclimate ourselves to their clients, and vice-versa. It's important work for us, we're excited about it. One of the neat things is, given that the markets we are in, we already have significant existing management strength, and then through community and Cooper add depth and experience from each of those companies. So I feel like if opportunities like that continue to be available, we will clearly be interested.

We're looking at other growth markets much like we did six quarters ago in northwest Indiana with Citizens Financial, now our Lakeshore business, that if something like that were to be in a risk profile where we could get in and execute, we would look at it, but I think our most recent actions kind of frame for you geographically where we think we operate the best. At this point, Amy, I was going to open up the line for calls for any of the three of us.

Thank you. (Operator Instructions). Our first question comes from Scott Siefers at Sandler O'Neill.

Good afternoon, guys.

Hey, good afternoon, Scott.

Mark, first question for you, just on the margins, so I think the core margin came down about 10 basis points, maybe a little more than you'd suggested last quarter. You gave, I think some color at suggesting that day count, if I caught that correctly, might have been about 5 basis points in the decline, but I guess the first question is, if you can just sort of review the puts and takes on the margin this quarter, and then two, just in terms of core compression going forward, what are you thinking, and then particularly in light perhaps a more conservative Fed rate outlook?

Yes, we did have a little more compression in the first quarter than anticipated. I know when we talked last, I thought 2 or 3 basis points per quarter is where we would probably land. The day count for commercial loans was about 5 basis points, when you just compare linked quarter over quarter. But when I talk about 2 or 3 per quarter, I was kind of anticipating that level as we made our way through the entire year. So you add up 2 or 3 across the board, that's kind of where we thought we would be by year-end. I still feel like we're going to be in a similar range, and we pick up a little bit just by the day count in the second quarter compared to the first quarter, and I wouldn't give much different guidance than even last quarter, although maybe from a little lower base. The pressure is all coming on the kind of loan yields, if you look at our bond yields, they're holding in, our deposit costs, or cost of funding is relatively flat. And so it's just competitive pressure across the board with renewals and new originations. So we were anticipating 25 basis points in the second quarter in our internal budget, then it does look like that's been pushed out for the fourth quarter, so just a little added pressure to maybe where we were the last presentation that we had, with the same 2 or 3 basis points off a little lower baseline.

Okay. All right. I appreciate that. And then can you also review what you're thinking about the expense outlook? I think you had suggested in your prepared remarks that cost might improve by about $500,000 per quarter, is that beyond the second quarter or I guess I want to make sure I understand it correctly, that there was roughly $500,000 of one-time costs related to the merger in the first quarter. So are you just suggesting that it will be flat with kind of a core base, or should we indeed expect another $0.5 million to come out per quarter through the remainder of the year?

No, to be clear, I think I said flat compared to the core, after backing out the one-time expenses, and effectively the costs of running that entity that we won't have post integration. We're just saying that our run rate should be less than on a go-forward basis than where we were in the first quarter of 2015.

Okay.

By around $500,000.

All right. Perfect. That's helpful. Thank you. And then could you speak to the service charge decline? I mean, the first quarter is of course seasonally weak, but I think the magnitude of the decline was a little bigger than I had anticipated, and I think probably the most significant you've had in a few years. Just curious about, one, what drove the sequential decline, and then two, your thoughts on magnitude of rebound?

Yes, I really view them as more flat, Scott, and yet at that level, a little disappointing to me, in many of our activities leading up to an integration, we allow for some free periods or discounted pricing for the clients that are about to change technologies old bank into our bank, but your point, the absolute level of overdraft activity has been down, and so it's something that we didn't plan to be a high growth item, but we do plan it as a low growth line item, and it's a big one within our mix. So I don't have a high count, I know that we will have some normalizing and actually post online banking conversion when we're offering our clients a materially better product, the service charge component for Treasury management should actually begin to grow, but I wouldn't anticipate modeling that in until the second half of the year.

And our NSF and ODC are generally light in the first quarter, just based on tax refunds.

Yes. Okay. All right. That's helpful. Thank you very much, guys.

Sure.

(Operator Instructions). We have a question from Damon DelMonte at KBW.

Hey, good afternoon guys. How are you doing today?

Good, Damon, how about yourself?

Not too bad. I'm just wondering if you could talk a little bit about your outlook for loan growth, and where throughout the footprint you're seeing the greatest opportunity, and maybe you could help frame a little bit about the full year growth expectation?

Sure. I referenced a moment ago, really consistent with our prior call even, that I think of 5%, 6%, 7%, 8% annualized rate is where we clearly have the opportunity, our sales forces targeted for that kind of a thing, but back then not only our knowledge of what's taken place in the market but also the asset quality that we want to attract. So when I think about why the remaining quarters of the year should be stronger than the first quarter, I look at the originations and the productivity that we had in the first quarter. And so our originations in every line of business were really quite strong. Our mortgage business I referenced, and you can see it in the press release, that our mortgage business first quarter over first quarter in units and in dollars closed really solid year-over-year results in the 15% to 20% up range. We made some people investments in retail banking about 18 months ago, that are beginning to rejuvenate what had been a really slow grow line for us, if not a shrinking line in the 2012-2013 time period.

So while it's not going to be a dominant source of our loan growth, the steadiness of it, and the yield on it helps to offset some of the commercial origination pressure that Mark referenced in the prior question. The commercial activity for obligations greater than a $0.25 million really delivered nice growth, same thing, about 20% up over both the first quarter last year and the fourth quarter of 2014. And so I look at that as a basic run rate about what we have done, and I look at our pipeline. And our pipeline is strong. Our commercial pipeline drives the left-hand side of the balance sheet for us, at least as it relates to the loans, is up 25% or 28%, about 28% from the end of the year, which I think is a better comparison point when you think about what is the most likely to hit your balance sheet in the upcoming periods.

And when you reference where it's coming from, our home Muncie market significantly stronger, probably higher than it's been, Muncie and the eastern half of the state of Indiana, higher than it has been in some period of time. And then we continue to see, as we should, the investment that we've made in central Indiana, Indianapolis primarily, show growth not only in new names, but in C&I new names as John referenced is the fastest growing part of the portfolio. But our expectation is, with work that we've been putting in and the market knowledge that we have and some of the fill in acquisitions that every market we grow, and so when I look at our pipeline that's kind of what these numbers lead me to expect in the next couple quarters.

Okay. That's great color. Thank you. And then I guess just kind of from a profitability standpoint, probably directed to Mark, when you look at your efficiency ratio, do you think it's reasonable for you guys to get that down to the 60% level, or possibly below by the end of the year?

Well, I think with some margin compression, it becomes challenging, but that's clearly the goal. We are looking for ways to continue to reduce expenses and grow revenue, and trying to maximize the efficiency ratio. So we have a handful of strategies that we're working through, with that goal in mind.

If I could just add, and this speaks to the question that we got from Scott earlier, I think a $41 million quarterly run rate, and we were just over that in the first quarter, when you back out the $0.5 million of expenses that Mark referenced you get to a number that's beneath that by a couple hundred thousand dollars, we will make some people investments in lines of business that can grow, but it should be pretty steady with a marginal reduction. I didn't factor into that some of the that branch consolidation that clearly didn't manifest itself in the first quarter, but we ought to see in the third quarter at the latest. So Damon, does that help?

It did, yes, that's great. Okay. Perfect. That's all that I had for now. Thanks a lot, guys.

Thank you.

Our next question comes from Brian Martin at FIG Partners.

Hi guys.

Good afternoon.

Could you just maybe talk about the yields that you're getting on new production, just given the pressure on the margins this quarter, what is the new volume coming on that, relative to kind of what the existing margin is?

Yes, so we look at that on a floating rate basis, we're still around 300 basis points above the index. Having said that, it's clearly 20 to 35 basis points beneath where we were a year ago. That's why the consumer lending comment that I made earlier, having some augmentation, being strategic with what we do and don't put on in the mortgage business makes a difference, even the public finance business that John cited a couple times is beneath the spread level and risk level, for that matter, of the C&I portfolio, so we're trying to play all of those levers, and then point finance in particular, if we're going to take less yield on extending credit, making sure we're picking up other products, funding in particular. Construction lending is a little bit higher in the paradigm, so when we have great developers, we want to make sure we take advantage of the opportunity there.

Okay. That's helpful. And then maybe just two other things. Any commentary, just any change in the outlook on M&A or just the level of activity you're seeing, maybe now versus a quarter or two ago? Has there been a pickup? Is it pretty steady or kind of status quo?

It seems very steady to me. It seems like there's a franchise or two per quarter that are just investigating their best future, and we typically get asked to evaluate them, so we try and do them in the context of execute risk and what it's done for us around some key criteria, whether that's earnings accretion or pricing relative to tangible book value earned back, I would expect us to continue to do that, and I would be hopeful, our most recent forays into having management teams and franchise join us, I look upon pretty favorably, so I would hope those opportunities come about.

Okay. And maybe just back to the expenses, just maybe I missed what Mark said earlier, can you just go back over one more time, Mark, what you said on the expense line? I think I just missed that or maybe I misunderstood, as far as the impact following the acquisition here?

Yes. I mean, we used the term one-time related to Community Bank in the first quarter, and a lot of that are the expenses related to the operation itself, that we won't have post-integration. And so we're anticipating that on a quarterly basis going forward, that we'll have about $500,000 less in expense than what we had to run the first quarter. And based on the integration that is occurring this weekend of Community Bank in Noblesville. So some streamlining of locations, reduction in back office costs, technology, et cetera, where we're leveraging the infrastructure of First Merchants Corporation to take care of those customers.

I got you. Okay. Thanks a lot. I appreciate it.

You're welcome, Brian.

The next question comes from Stephen Geyen at D.A. Davidson.

Hey, good afternoon. I'm just curious about maybe following a question to what Brian was asking, but you talk about the operational costs being taken out from the acquisition. Are there some other related costs, acquisition-related costs in there that might be kind of pulled into, not pulled into but similar in the second quarter related to Cooper, as they were from the prior acquisition?

There will be, at a more modest level. The company itself is half the size of Community Bank, and we've already incurred some of the expense. So if you think about the $0.5 million that Mark was sharing in the first quarter, it was about three-quarters Community Bank-related, one-quarter Cooper bank-related, and so the Cooper bank piece probably stays with us here for the next couple of quarters, as we approach their integration. And just about everything at Community will be gone. Absent the payroll piece, which runs through this month, which is obviously the first month of the second quarter. So the full realization of that really won't happen at the Community Bank overhead piece until the end of this quarter, but it will clearly be less than a full quarter, more like a third of the quarter. That would be my expectation. And then we will get some additional branch operation savings offset by some people investments in a modest way through the balance of the year. Does that help?

That does, thank you. And then last question, the comments on the Fed funds as far as you know anticipating, an increase in June maybe that being pushed out later in the year or into 2016, how do you run your business or has that impacted how you run your business as far as that rate expectation? Does it give you an opportunity to move to a more asset-sensitive position?

Not really. We've been very comfortable for five years, being extended in the bond portfolio, and with every signal that we seem to get that rates may be going up, we've stayed consistent and continued to invest longer term in the bond portfolio, and it seems like it's worked for five years, that every time there's an expectation of rates going up, it kind of moderates. And so we just try to keep ourselves in a position where, whenever rates do rise, that it's beneficial to us, but we're not trying to bet on rising rates. And even where we stand today, I guess I'm not willing or not recommending that we make a bet, and try to minimize the duration of the bond portfolio to bet on rising rates. So we think our current structure is adequate in a rising rate environment, and given the numbers that I mentioned previously, at 14 basis points of improvement in margin, if we're up 100, we think that's, I guess that's enough of a bet for rising rates.

Okay. Thank you.

Thank you, Stephen.

Our next question is from Daniel Cardenas at Raymond James.

Good afternoon, guys.

Hi, Dan.

Just a couple quick questions here. On the lending side I think it's very competitive pricing but are you seeing any structural gives by competitors in your footprint?

I think structure and pricing each are vulnerable in this environment, it's a great time to be a borrower. Our Chief Banking Officer and our troops are really disciplined about what we're doing. We have a great relationship between our credit process and our credit policy and what we're trying to do in the marketplace. I feel like there's still opportunity to grow at really reasonable tradeoffs, multi product revenues scenario to the Company, I think that's an attraction point, and kind of an imperative for us in the sales process. I think our business owners are upbeat. I think they're looking for new ideas. Central Ohio, central Indiana, both enjoying big job growth, meaningful decreases in unemployment year-over-year. Our customer base by and large are dominated by energy consumers, not energy producers, and so to the extent that is a phenomenon that sticks with us through the balance of 2015, that's positive for our business owners. And so I think it makes a fine environment for us to go out and execute.

Okay. Good. And then on the deposit side, maybe some comments on whether or not you're seeing any competitive pressures out there, and then how should we think about deposit growth looking forward?

We're really pleased with our core deposit origination. We kind of feel like you're always going to outpace your core deposit growth with loan growth, and that's why acquisitions make some sense, to pick up inexpensive core deposits with a trading multiple that's better than the selling bank. In terms of pricing, though, on deposits, it's been a little volatile, when rates looked like they were going up, everyone was kind of offering CDs that were just 1% or slightly higher, and in the late third quarter we went to kind of a 1% one-year CD rate, and we pulled that back in to 65 basis points, and something that looks more like the Federal Home Bank or the broker deposit yield curve, so I think it's a reflection of, kind of starts and stops in terms everywhere everyone thinks rates in the economy are going.

Okay. Great. Thanks, guys. Thank you, Dan.

At this time I show no further questions. Would you like to make any closing remarks?

Thank you, Amy, and I thank everyone that chose to listen in this afternoon. I like the momentum of the business. I appreciate the questions. Hopefully our strategy is clear, and the results continue to reflect our efforts towards trying to be a lead bank in our marketplace. I appreciate your attention, and look forward to talking to you again in a couple of months at the end of the second quarter. Have a great day.

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