First Merchants Corp (FRMEP) 2015 Q3 法說會逐字稿

Good day everyone and welcome to the First Merchants Corporation third-quarter 2015 earnings conference call.

(Operator Instructions)

We will be using user controlled slides for our webcast today. Slides may be viewed by followed the URL instructions noted in the First Merchants' news release dated Thursday, October 22, 2015, or by visiting the First Merchants Corporation Shareholder Relations website and clicking on the webcast URL hyperlink.

This presentation contains forward-looking statements based on our current expectations, reflecting various estimates and assumptions. These forward-looking statements include, but are not limited to, statements relating to our business outlook and the expected timing and benefits of the proposed merger between First Merchants Corporation and Ameriana Bancorp.

These forward-looking statements are subject to significant risks and uncertainties that may cause results to differ materially from those set forth in this presentation, examples of which are included in the written presentation materials filed with the Securities and Exchange Commission in connection with this call. Please refer to those materials for a more detailed discussion of the applicable risks. Please also note that today's event is being recorded.

I would now like to turn the conference call over to Mr. Michael C. Rechin, President and CEO. Sir, please go ahead.

Thank you, Jamie. And welcome to all of those that have chosen to join us today. Welcome to our earnings conference call and webcast for the third quarter ending September 30, 2015. Joining me are Mark Hardwick, our Chief Financial Officer; and John Martin, our Chief Credit Officer.

The Company released our earnings in a press release at approximately 10:00 this morning Eastern time, and remarks and presentations today speak to material included in that release. Directions that point to the webcast were also contained at the back end, and my comments will start on page 5 on a slide titled third-quarter 2015 highlights.

First Merchants reported earnings of $17.1 million of net income, a 5.9% increase over the third quarter of 2014's $16.1 million. The current-period earnings equate to $0.45 a share, and on an annualized, or on a year-to-date basis, $1.35, which is 9% over the year-to-date 2014 level of $1.24 per share. Some of the other performance characteristics are listed at the top of the page. A reference to the $4.26 billion in net loans are just under a 15% increase over September 30 of 2014 would be inclusive of the Community Bank acquisition closed in November of last year and the Cooper Bank acquisition closed earlier this year.

Mark and John are going to discuss with you several aspects of the results, but they would include the loan volumes cited above in combination with a strong margin that combined to provide a 3% net interest income growth. And as referenced John will cover the asset quality, which continues to work favorably in conjunction with our expectations.

The bottom of the page covers a couple of what we've shared in prior calls, as important opportunities for us. And in July of this year, following industry trends and consistent with our customer preferences, closed on an investment and an upgrade with a technology-change partner that brings our offerings to both consumer and commercial customers in line with how they would like to conduct their banking. I'll reference that a little bit later on as it relates to what I feel like we can achieve in terms of growth for end-customer count and in revenue for the Company.

Cooper State Bank that joined us a couple months back legally will integrate and rebrand through this weekend to open on Monday the 28th of October as First Merchants Bank. And so that would include the six retail banking centers as part of Cooper State Bank and our existing Columbus, Ohio operation known as Commerce. And so we're excited about that change. I think our clients are too.

And then lastly Ameriana Bank, which we announced on June 29 just ahead of last quarter's close, is seemingly on track for all that needs to get done to achieve our fourth-quarter closing. We're working through the process that would have that meet all of our expectations, and all the other actions that need to take place relative to shareholder actions and regulatory approvals to accomplish that closing.

So at this point, I was going to turn the call over to Mark, who will go a little bit deeper into the third-quarter's results.

Thanks, Mike. I'm starting my comments on slide 7, where total assets reached $6.2 billion, an increase of 10.7% over the third quarter of last year, and 6.3% over year-end 2014. The growth over the third quarter of last year includes organic growth of $187 million and the addition of Community Bank, totalling $281 million in November of 2014, and Cooper State Bank, totalling $142 million in April of 2015. Offset by the sale of the insurance of First Merchants insurance group in June of 2015.

Total loans on line 3 increased 10.1%. Since year end and year over year by 14.6%, or $549 million. Since September 30, 2014, organic loan growth totaled $293 million, or 7.8%. Community Bank accounted for $145 million and Cooper State Bank accounted for $111 million.

The allowance on line 4 in total dollars has remained very steady, declining as a percentage of nonperforming loans to 1.7%. I'm sorry. Non-purchase loans to 1.7% from 2.04% at September 30, 2014. However, our decline in total nonperforming loans and especially non-covered of nonperformers provide sound justification for all ALL levels. And actually, if you go all the way back to December 31 of 2012, our allowance was just $69 million. So we feel like it's at a very healthy level given the state of the economy.

The composition of our $4.3 billion loan portfolio on slide 8 continues to be reflective of a commercial bank and it continues to produce strong loan yields. The portfolio yield for the third quarter totaled 4.41%, compared to a third quarter of 2014 total of 4.62%. On slide 9 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 3.97% yield is actually 10 basis points better than one year ago and continues to compare favorably to peer averages of approximately 2.53%. Our duration is just five months longer than peer averages and the average life is right at five years.

The net unrealized gain in the portfolio totals $40 million, up from $34 million twelve months ago. Maturities for the remainder of 2015 total $44 million with a yield of $354 million, and in 2016 we have $187 million maturing with a yield of $358 million. And in 2017, we have $125 million of maturities with the yield of $323 million, all of which we think we can replace with a fairly consistent -- at a fairly consistent level as to what is maturing.

The strengths of our investment yields has helped us maintain our net interest margin. The variable nature of our loan portfolio with $1.9 billion of assets we're pricing 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. In an effort to protect tangible capital, tangible common equity in a rising-rate environment, 50% of the portfolio is categorized as held-to-maturity.

Now on slide 10, our non-maturity deposits on line 1 represent 77% of total deposits and grew by $476 million, or 14.7% over the third quarter of 2014. Of the increase, $206 million, or 6.4% is a result of organic growth and the remainder is a result of acquisition. Hybrid capital on line 6 declined by $5 million this quarter, as we leveraged an opportunity to retire a portion of our trust preferred securities -- our trust preferred debt obligations at $0.75 on the dollar. And I'll talk about that a little bit more in the income statement.

At the bottom of the slide on line 9, tangible common book value per share increased by $0.94 -- or increased by $0.94, or 6.9% over the past nine months. While not highlighted on the page, tangible common book value per share increased by $1.06 over the past 12 months and includes all acquisition and divestiture activity and $0.38 of dividend payments.

As I previously mentioned, the mix of our deposits on slide 11 continues to improve and our total deposit expense is just 40 basis points. All regulatory capital ratios on slide 12 are above OCC and federal reserve definitions well capitalized under Basel III, and above all of our internal targets. Due to the cash purchase of Cooper State Bank, strong organic loan growth, the implementation of Basel III and the $5 million redemption of trust preferred debt, our total risk-based capital level declined from 15.34% at year end to 14.85% as of September 30, 2015.

The Corporation's net interest margin on slide 13 totaled $385 million for the quarter, and when adjusted for fair value accretion of $2 million, totaled 3.71%. Net interest income on a fully taxable equivalent basis totaled $53.3 million during the quarter and continues to be the driver of our operating income. We're pleased that our core margin is the same, 3.71% as we reported 12 months ago. So we saw a slight decline and then a rebound in our numbers over the last four quarters.

Our plan for the rest of 2015 and 2016 calls for growth in net interest income, driven by growth in earning assets and modest declines in 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. And just for reference, 100 basis point move in the fed funds rate adds approximately 10 basis points to our net interest margin, or just under $6 million in net interest income on an annualized basis.

Total non-interest income on slide 14 reached $16.9 million. This category includes several extraordinary events, especially if you look at the past three quarters, with the gain on sale of the First Merchants Insurance Group, highlighted in the second quarter of 2015, and the absence of insurance commission income highlighted on line 3. And this is where you can see, if you look at line 10, other income is where we recorded the $1.250 million gain on the extinguishment of our trust preferred debt, which I discussed earlier when looking at the liability side of the balance sheet. And again, we were able to buy that at $0.75 on the dollar.

Non-interest expense on slide 15 totaled $43.6 million for the quarter and included $1.4 million of non-core operating expenses that are detailed on the next page.

On slide 16, the extraordinary expenses highlighted in the middle three columns, they are highlighted in the middle three columns. As we fully integrate our Cooper acquisition this weekend, we will be reducing expense levels by approximately $500,000 per quarter, helping us realize the optimal value in the acquisition. And then online banking expenses have already returned to normal as we completed this key conversion in mid July.

The middle column, Ameriana, will close -- the bank acquisition will close near the end of the year and will be integrated in mid March of 2016. Our expenses for the fourth quarter should total approximately $42.5 million prior to any one-time Ameriana acquisition expenses as we close that transaction at the end of the year.

Now, on slide 17, our tax rate returned to normal on line 7 and net income on line 9 totaled $17.1 million for the quarter, or $0.45 per share. And then if you look at the next slide, you can see just the continuation of a strong run rate over the last seven quarters, and we're pleased with our performance in all of these results and we feel like they also include a lot of work on our end to really position the franchise to deliver results in 2016. John Martin will now discuss our progressing asset quality trends.

All right. Thanks, Mark. And good afternoon. I'll be updating the trends in the loan portfolio starting on slide 20, review the asset quality summary and reconciliation, discuss fair value and allowance a little further, and then close with a few thoughts on the portfolio.

So turning to slide 20, for the third quarter, the loan portfolio grew by roughly $84 million or 2% for the linked quarter, 8% annualized on the linked quarter, and 10% year to date annualized. The growth in the portfolio is driven by increases in construction and development lending on line 2, public finance on line 9, home equity loans on line 8, and commercial industrial lending on line 1.

We saw construction lines continuing to be drawn again this quarter and commitments level out. While in public finance space we adjusted our return targets, which somewhat slowed the growth in municipal and nonprofit lending from the prior quarter, but nonetheless, resulted in solid growth with a more attractive risk-adjusted return.

So turning to asset quality on slide 21, we had another positive quarter of asset quality improvement. Total NPAs and 90 days past due declined $5.3 million, or roughly 9%. Nonaccrual loans came down $5.1 million, shown on line 1, and other real estate on line 2 came down $4.4 million after several quarters of holding around $19 million. We continue to make progress working through some of the more challenged portfolios associated with recent acquisitions, while continuing to broaden the overall mix of assets in the portfolio.

Dropping down to lines 7 and 8, classified assets on line 7 were down 8% in the linked quarter, with overall criticized assets on line 8 declining $10 million, or 4.3%. The economy continues to help this number as some borrowers see better results in addition to strategic assets of other relationships, where long-term improvement is best handled by other capital sources. Looking forward, I see the trend flattening in the near term as we add the Ameriana portfolio. Additionally, I've seen some modest stress coming out of the agricultural portfolio, though most farmers continue to remain well capitalized and fairly well positioned for lower commodity prices.

Turning to slide 22, as we -- as was the case in prior quarters, this slide reconciles the migration of asset quality and helps to explain how improvements in asset quality are accomplished. I've highlighted the year-over-year migration decline of 26.5% as a way of showing our ability to -- ability and the rate of digestion of asset quality issues of recent acquisitions and our continued focus on managing the portfolio as we grow the balance sheet.

If you direct your attention to the far right column labeled Q3 2015 and beginning on line 1, we started the quarter with roughly $55.5 million in nonperforming assets and 90-day delinquent loans. New nonaccrual loans this quarter were down $3.9 million, continuing a trend of fewer new nonaccrual loans, while on lines 3, 4 and 5 we resolved $6.8 million of nonaccrual loans, took in virtually no OREO and had gross charge-offs of roughly $2.1 million, respectively.

Then on lines 7 through 9, we had $3.4 million in OREO sales and $1.1 million in write-downs for a decrease in OREO, $4.4 million on line 10. While 90-day delinquent loans and restructured loans on lines 11 and 12 were up, overall NPAs and 90-day delinquent loans were down $5.3 million on line 13 to $53.2 million. So once again, overall NPAs and 90-day delinquent loans were down 9%.

Turning to slide 23, this slide highlights where we stand with respect to the allowance and the remaining credit marks. While in the far right column is the most recent quarter's allowance and fair-value position. The allowance on line 1 was mostly flat for the quarter at $62.9 million, up roughly $300 from the prior quarter, with net recoveries of $300,000 and no provision expense. I would expect provision expense to closely follow net charge-offs in the near term with some marginal provision associated with poor portfolio growth.

We're running roughly 10 basis points, 10 to 15 basis points of net charge-offs on an annualized basis, which would equate to roughly $1 million and a quarterly provision, barring events in either direction. Dropping down to line 6, the allowance coverage to nonaccrual loans improved, driven by the improvement in asset quality mentioned earlier, increased from 165.9% to 192.8%, which represents a recent historical high.

As a comparative measure, on line 7, the allowance to non-purchase loans was 1.7%, and then on line 9, the allowance plus fair-value adjustments to loans and fair-value adjustments is 2.31%. I think both of these numbers continue to highlight the relative strength or credit leverage remaining to cover charge-offs from both the purchased and core portfolios.

So a couple of thoughts on slide 24 as I conclude my prepared remarks and turn the call over to Mike Rechin, the loan activity in the quarter across the commercial spectrum was good and our loan pipeline remains stable. This is allowing for continued net asset growth. We continue to focus on risk-adjusted returns as we look at new opportunities and continue to grow the portfolio. Asset quality trends continue to improve, providing sound allowance coverage without current quarter provision, and then we continue to have credit leverage with the allowance and mark coverage exceeding 2.3%.

So thanks for your attention. And now let me turn the call back over to Mike Rechin for his comments.

Thanks, John. We're going to take questions here in a few moments. I wanted to cover some of the material on page 26 and a couple of these topics I highlighted right at the front end of the call. Specifically, our third-quarter completion of extending our relationship with our core processor.

We had been using a really dependable deposit and loan platform. We extended our work with that vendor to add their capabilities to our mobile and online banking product offerings. And we've been pleased with it. It's roughly 90 days old. I think our clients are adjusting to the new technology very well.

We're adjusting to servicing that transition for our clients. We're really pleased with the decision we made. We like our near-term ROI and we like our long-term ROI and following a path that our clients have clearly led for the way they would like to use our Company.

Referenced on the last call and I'll repeat it again, our primary focus is on building share in our existing franchise, through our existing lines of business in what is a very competitive environment. And so the bullet point beneath that, talking about organic growth, reflects exactly that energized team effort out of our Company. We are pleased. We talk about loans a lot and I'll reference deposits and fees.

But in the third quarter, we had 2% raw loan growth, all of which would have been organic, absent any acquisition closings in that time period. So we feel good about it. I continue -- I would affirm for you that kind of 6% to 8% organic ability to grow in our own marketplace. And while the last couple of quarters have been on the high end of that, we still see the marketplace is competitive, but would push to exceed -- I'm sorry, to accomplish at least that level.

When I look at the pipeline, it gives me reason to affirm it one more time. Our closed loans in the quarter were $340 million. It was beneath our June 30 quarter and yet our second strongest quarter over the last five, and pretty well balanced. It was actually our highest quarter in terms of retail or consumer loan closings, which we're pleased by.

Our depository activity is of a mix that we're very consistent with our plans. The consumer lending picking up, as I referenced and the overall quarter pretty strong, so that's closed activity. When you look forward at near-term pipeline, pretty strong story as well. Our pipeline overall, $425 million, not as strong as it was by about 5% from that which we took into the third quarter and yet it's only behind the June 30 quarter in terms of strength going back five quarters. So when I talk about that range, I feel like we have the customer connectivity that will allow our left-hand side of the balance sheet through loans to continue to grow.

Mortgage, a real strong spot for us through 2015 continues even into the fourth quarter. I referenced the overall backlog being modestly behind the June 30 level on a consolidated basis. The mortgage level is really at its annual high and retail, which had a strong third quarter as I noted, takes a pretty strong backlog in as well. Commercial, a little bit softer. The whole Company really doing well. It gives me confidence that when I think about our primary mission of winning market share in this marketplace that we have the ingredients and the talent level to do it.

Couple of highlights on the bottom and then we'll open up for questions. I mentioned the rebranding, all of the data loading that will take place and data transition for the Cooper customers joining us. We've closed that acquisition roughly six months ago and so we've had extensive employee training, extensive client communication that should lead to a really successful integration come the first of next week.

At this point relative to Ameriana, we talked about the legal closing. Behind the ingredients necessary for a legal closing prior to year end is just a lot of planning of how you take the best of what Ameriana did in their marketplace, coupled with what Community Bank did independently prior to joining us a year ago and you mix in what we've always done. In the greater Indianapolis marketplace, which is dense and target-rich environment for us, we're coordinating our resources and coverage expectations not only in the greater Indianapolis marketplace, but in the Muncie marketplace and Newcastle, where we also have some common footprint. I like the way that's coming together, some really clear roles and responsibilities emerging.

I noticed there was a press release that came out of the leadership, Jerry Gaston at Ameriana today relative to their announcement to have a definitive agreement to sell their insurance company, which is [their] parallel and consistent with the way we've moved out of the insurance business earlier this year.

The banking center optimization continues. I referenced Community Bank. I really don't need to discuss it anymore. At its 12-month mark, our retail reconfiguring of their banking centers is complete and that takes our attention to the Ameriana opportunity, where we'll go roughly from 13 of their banking centers to 7 by this time -- I'm sorry, by mid Spring of 2016. All of those combinations are planned and we're working through whether it's excess real estate or other changes we need to make attendant to those changes.

The banking center optimization and the bullet point extends to our own legacy banking centers. So we have four existing First Merchants combinations planned that will take place before year-end 2015 that should provide us some of the synergies as part of an overall desire to get even more efficient. The Cooper stores, while they will be rebranded, have no redundancy, and so I think consistent with prior discussions we'll be retaining all of the retail locations of Cooper as they join First Merchants.

Those are my prepared comments, Jamie. And we're available for questions should there be any.

(Operator Instructions)

Our first question comes from Scott Siefers with Sandler O'Neill. Please proceed with your question.

Good afternoon, everybody.

Good afternoon, Scott.

Mike, you gave a lot of good color around your thoughts on loan growth, which I appreciate. Wonder if you could spend just a moment or so talking about the competitive dynamic as you see it? Things are, are things getting more or less intense or are they kind of level?

Then John, I think you in your prepared remarks had noted at one point you guys had made some adjustments to your return targets. I wonder if you could expand upon, one, I want to make sure I heard that correctly. And then two, just if you can expand upon the rationale and background of that division.

Scott, it's Mike. I'll cover my portion of the question and let John speak to the second half. As it relates to the marketplace and our expected levels, the market's -- I don't think any more competitive here in the fourth quarter of the year than it was earlier in the year. It's, if anything, the number of opportunities that go into the pipeline might not flow through as concretely as they have in times past, but we really haven't had to compromise much or will not compromise much on either structure, price and I think the net interest margin reflects that.

But it's an active, it's a great time to be a customer evaluating bank ideas. That's the way I would characterize it. We're trying to match that expectation on the part of business-owning decision-makers and consumers with answers and solutions that meet their expectations. But it's, it's difficult out there.

Okay, thanks.

Scott, this is John.

Hi, John.

How are you? The target, the risk target that I was referring to, excuse me, the return target that I was referring to was a model that we use for any of the municipal financing opportunities that we look at. We set that based on some expected target and adjust that upwards and downwards depending on how opportunistic we wish to be on any bid situation. But that's -- it's just a model that we use.

Okay. Good. I think I misheard you, so I appreciate that clarification. Good. All right. Thanks, guys.

Thanks, Scott.

Our next question comes from Damon DelMonte from KBW. Please go ahead with your question.

Hi, good afternoon, guys. How are you doing?

Good, Damon. How are you?

Great, Mike. Thanks. My first question relates to the margin. Could you talk a little bit about the dynamic of quarter over quarter as to what led to the higher, higher result this quarter?

Damon, it's Mark Hardwick.

Hi, Mark.

Thanks for being on the call. The -- what actually last quarter, I should say the second quarter was just kind of a return to normalized average days, where in the first quarter we had a decline primarily based on February being a short month and the fact we get between $400,000 and $500,000 a day in commercial income.

This quarter it was actually really driven more off an improvement in our fee income, and we've gone through that in detail and just trying to make sure that there wasn't a real significant increase in fee income based on a prepayment of some sort. And the largest dollar amount that we could identify, we had about an $80,000 increase in fee income in the month from one large paydown. But so it looks relatively stable and improving and as a company, we've been focused on making sure that we're getting fees where appropriate and it seems to be finding its way into the income statement.

On a go-forward basis, in this rate environment until the fed decides to make some kind of a move, I think we still feel like, it's appropriate to assume that we're going to have 1 basis point or 2 reduction in the core numbers moving forward. But the results show that we're doing everything we possibly can to sustain a strong and improving margin, despite the environment that we're in.

Okay. So the 4 basis point increase from last quarter to this quarter, just so I understand, in part had to do with some commercial loan prepayment income. Does it also have to do anything with accretable yield, possibly?

No, the accretable yield is taken out of the core. So I guess what I'm saying, we were -- our core number was 3.71% a year ago. We saw a decline. And then we've rebounded back to 3.71% this quarter.

And if you look, make sure I get -- it's on slide 13, we've gone 3.71% in the third quarter a year ago, 3.69%, 3.61%, and then it came back up to 3.65%, and now we're at 3.71%. And the only other really item of note, we get a little bit of interest savings from the $5 million paydown of the trust preferred debt, and we also have restructured some of our Federal Home Loan Bank advances, where we're just finding opportunities to reduce expense.

Okay. And then with regards to fee income and specifically the gain on sale of loans, could you talk a little more about the mortgage banking activity? I'm assuming that's what is driving those numbers. Just talk about what you're seeing this quarter. Think with most other banks, we're seeing a decline quarter over quarter on gain on sale income. So I'm just wondering what you guys are seeing and what's driving it up for you guys?

I don't think we've had much shift in the spread on the sales. It's really just been our flow-through has been good. I referenced the closed loans and in the quarter we closed 431 loans, down a little bit from 500 in the prior quarter. And we take a nice backlog in dollars into the fourth. But it hasn't really been a gain on sale expansion.

Okay. And the pipeline remains strong, so we should see something similar to this quarter, next quarter?

Yes, it is. Fourth quarter is typically slows down for us a fair amount, but at least here at the front end of the quarter it kind of shows the strength that we saw in the second and third quarters for the time being.

And some of the improvement, if you just look year over year does have to do with the addition of the acquisitions, and making sure that we're maximizing Indianapolis through the Community acquisition, maximizing Columbus through our Cooper State acquisition.

We're planning for 2016 in all lines of business, but relative to that one, Cooper is relatively underpenetrated from a talent standpoint on mortgage origination. I would probably say the same thing about Ameriana. So I think we'll probably have better per store coverage of our retail configuration through mortgage origination to take advantage of whatever the condition of the market proves to be.

Okay, great. And then just my last question on the tax rate, a good effective tax rate to use would be something in the 27%, 28% range, is that correct?

Yes, it would be.

Okay. Was there anything unique to this quarter's tax rate? It was a little bit different than what we were looking for, so I didn't wondering if there was something that I may have missed.

Not really.

No? Okay.

Maybe we can talk afterwards, but no. I--

Okay.

The last quarter was definitely unique, but this quarter should represent a return back to normalized levels.

Okay. Perfect. That's all that I had, guys. Thanks a lot.

Thanks, Damon.

Our next question comes from Erik Zwick from Stephens. Please go ahead with your question.

Good afternoon, guys.

Good afternoon, Erik.

One more quick question on the margin, if I could. It sounds like the kind of guidance for the modest declines and the net interest margin is for the core margin. Is it safe to assume that the reported margin can continue to be a little bit more variable, especially as you bring on Ameriana and kind of refill the accretion bucket to some extent?

If you look at page 13, it's been fairly steady the last three quarters, $2.2 million, $2.2 million, and $2 million. But, yes, we shouldn't have any spike in those numbers in the fourth quarter from Ameriana, as we expect to close that towards the end of the quarter. But as we look -- as you forecast and as we forecast into 2016, we should have some additional accretive yield coming off of that acquisition.

And then moving to the loan growth, I appreciate the comments on the segments of the portfolio that drove the growth in the third quarter. Could you talk a little bit about which markets were the strongest, and also where you expect the best growth opportunities going forward?

Sure. We really have two sets of expectations for our core growth markets, which are Columbus and central Ohio, Indianapolis, and northwest Indiana. They are really high single-digit, if not close to 10% on an annualized basis.

And then the remainder of the company, our Lafayette business and our Muncie business, slightly beneath that, which reflects the economic dynamics of the marketplace. And so when you look at the actual results, which speak to your question, the Indianapolis has been and continues to be year to date to include the third quarter where we've had the most activity -- most activity, most growth.

Thanks. I appreciate the color.

You're welcome.

(Operator Instructions)

Our next question comes from Brian Martin from FIG partners. Please go ahead with your question.

Hi, guys.

Good afternoon, Brian.

Mark, I just wondered if you could give a little color on the core level of fee income in the quarter. I guess I just assume it's the two nonrecurring gains, if you will, the securities gains and then the gain on the redemption of the hybrid piece. So a $14.5 million maybe is a decent run rate, and just expectations to layer in the deals on top of that.

I do think that's the best way to look at it. The only extraordinary can be really around some of our hedging activities. And that shows up in other income. That's variable. It depends. We will do anywhere from one hedge in a quarter to as many as four or five. And if the income off of those is somewhere between maybe $50,000 to $0.25 million, so it just depends how much activity we have on that front.

Okay. Perfect. And then just as far as the accretable yield benefit from Ameriana, can you give any color on how we should think about that maybe just on an annual basis, what you're thinking the add could be on that piece?

I think we've announced that we're -- that we are going to have marks of around $11 million. And then I think if you look at our slides, and especially in John Martin's section, where you're just -- where we identify those marks, slide 23, and you can see that we still have almost $38 million remaining of our prior marks from prior transactions, and then we've had the other 49% either find its way into the income statement or offsetting losses. And about two-thirds of that, you can see the 33% is coming through in terms of income.

So, I don't feel like we're aggressive in those marks, that we feel like we're taking a current conservative stance that it's not -- we're not putting, overloading the fair value marks to produce future income, and so in this case, we'll have $11 million. It will come in over time and if you assume that over a three-year period, we're going to use maybe half of it and if two-thirds gets used for income and a third to offset losses, that's a reasonable way to model it. But beyond that, I can't give you great, a great answer to what to expect for next year.

Okay. All right. That's helpful. And then maybe just back to John for a minute, I think you mentioned some potential weakness, if you will, in the ag portfolio, just what you're seeing there? Obviously you have a minimal exposure, but what you're seeing with regard to the ag, that would be helpful.

Hi, Brian. The -- really what I'm seeing is it's kind of hit or miss, depending on the farmer. But in Indiana right now, we're right in the middle of harvest and we're getting kind of mixed results back. Some of the farmers, depending on how they hedged, are fine and doing -- their production is fine. Others, because of an earlier, wetter spring, are seeing somewhat weaker results and depending on their crop insurance, how that's going to actually play out. So it's that component of it.

Some of those are getting criticized, depending on their current year results and how liquid they are. That's the reference I'm making back to the criticizing classified numbers and why there might be a little bit of impact from that. Again, there's roughly $91 million in ag production loans. We have more, $150 million, $160 million in land loans and that, that's being impacted by commodity prices as well. As the prices come down, economic value of the land has a tendency to be impacted.

So more than anything, we're just kind of looking at that portfolio and continuing to evaluate it through the fall and look to the future. The, a lot of the farmers are in great shape through years of really strong crop prices, recent years of strong crop prices and are well positioned. So not a large concern there, but it's just something that we're watching as we head into the fall and into the spring.

Okay. All right. I appreciate the color. Thanks, guys.

Thank you very much, Brian.

And ladies and gentlemen, at this time, I'm showing no additional questions. I would like to turn the conference call back over to Mr. Rechin for any closing remarks.

Thanks, Jamie. Appreciate the participation. Appreciate the interest and the questions.

Thought we had a pretty solid quarter. We're pleased with the momentum we take into the end of the year and as we're really pretty far through our 2016 planning. I hope our plan is easy to digest and we look forward to talking about our fourth-quarter results towards the end of January. We'll talk to you then. Thank you.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.