First Merchants Corp (FRMEP) 2016 Q1 法說會逐字稿

Good day and welcome to the First Merchants Corporation first-quarter 2016 earnings conference call.

(Operator Instructions)

We will be using user-control slides for our webcast today. Slides may be viewed by following the URL instructions noted in the First Merchants news release dated Tuesday, April 26, 2016 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 made 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, the economy and future growth of the balance sheet or income statement. Please refer to our press release and form 10-Q and 10-K concerning factors that could cause actual results to differ materially from any forward-looking statements.

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.

Thank you, Amy. Welcome, everyone, to our earnings conference call and webcast for the first quarter ending March 31, 2016. Joining me on the call today are Mark Hardwick, our Chief Financial Officer; and John Martin, our Chief Credit officer.

First Merchants released our earnings in a press release at approximately 10:00 AM Eastern Daylight Savings time earlier today and our presentation material speaks to material from that release. The directions that point to the webcast were also contained at the back end of that release and my comments begin on page 3, a slide titled First Merchants first-quarter 2016 highlights.

So, as the release covers, we reported first-quarter net income of $17.7 million compared to $16.2 million during the same period in 2015, a 9.4% increase. The earnings per share of $0.43 equaled the first quarter of last year, given the increased number of shares, mostly pursuant to the Ameriana transaction at year-end.

Our first-quarter results, also per the Ameriana acquisition, included $1.9 million of acquisition expenses or $0.03 a share. The primary parts of those $0.03 were comprised of employment-related expenses for those folks with us through April 1, for bankers that won't be remaining with the Company on a go-forward time period. Also would include core system expenses from Ameriana up through the March 15 date approximately, and some contract terminations that close out all of our Ameriana expense activity.

Our total assets grew to $6.8 billion or 15.7% over the first quarter of last year. And in Mark Hardwick's comments soon to follow, you'll hear how that grew as a component of organic growth, coupled with two acquisitions through the year. Our return on assets for the quarter was 1.05%, I think continuing a string of what we continue to be high level of performance aspiring to be higher still.

At the bottom of the page, a couple items of note. We concluded that integration technically on March 12, although we always keep folks on board for post-integration client service, given the change event. And it went really, really well for us. I referenced in the release that it was done in record time for us post legal closing and went without a real hitch.

Always a change event for our clients, so we're sensitive to them tasting our service and our products for the first time. This particular one went particularly well given the in-market nature of it which assists in the brand recognition as the signage, as an example, converts to First Merchants from the Ameriana signage prior. But a familiar Midwestern banking Company to their clients, probably offset by some of the difficulty that's attendant to the expense saves which have a higher employee turnover given some of the banking center consolidations that we've talked about from the date this opportunity was announced. All-in all, our expense targets are going to be met and I think speaks well to the planning that went in, both from the folks at Ameriana, as well as our core team experienced in that activity.

Last point on the page speaks to the completion of the conversion that took place effective April 15 and announced in an 8-K on April 1, regarding our transfer to a State charter bank whereby the DFI becomes our primary regulator and the FDIC our primary federal regulator. So we're excited about that. I think it adds some depth locally that's important, as well as a strong economic business case.

At this point I'm going to turn the conversation over to Mark to dig deeper into the financials.

Thanks, Mike. My comments will begin on slide 5. As Mike mentioned, total assets on line 8 reached $6.8 billion as of March 31 of 2016, an increase over the past 12 months by $921 million or 15.7%. Loans on line 3 increased year over year by 18.8%. Of the increase, $316 million or 8% was the result of organic culling efforts, and $428 million or 10.8% resulted from our acquisitions of Cooper State Bank in Columbus, Ohio in April of 2015 and Ameriana Bank in December of last year.

The allowance on line 4 in total dollars has declined by $1 million during the last 12 months and just $2 million since year-end 2014. The allowance now totals 1.32% of total loans and the allowance plus fair value marks totaled 2.29% of total loans. Consistent with the last couple of years' guidance, we're anticipating organic loan growth in the mid to high single-digits again in 2016.

Investments on line 1 increased by $82 million or 6.9% during the past 12 months due to a strong funding base of low-cost deposits. Loans to assets total 69% and our loan-to-deposit ratio totals 89%.

The composition of our $4.7 billion loan portfolio on slide 6 continues to be reflective of a commercial bank and it continues to produce strong loan yields. The portfolio yield for the first quarter of 2016 totaled 4.5% compared to a 4.45% yield in all of 2015 and a linked-Q4 2015 yield of 4.4%. It was nice to get at least one small 25 basis point increase in the prime lending rate in December of 2015 and we're pleased that our 2016 loan yields improved as expected and as communicated.

On slide 7 our $1.3 billion bond portfolio continues to perform well, producing higher than average yields with moderately longer durations than our peer. Our 3.95% yield is 1 basis point better than this time a year ago and continues to compare favorably to peer averages of approximately 2.51%. Our duration is just six months longer than peer and the modified duration is 4.2.

The net unrealized gain in the portfolio now totals $50 million and maturities are manageable into the near future. 2016 maturities total $172 million with a yield of 3.53%. 2017 maturities total $152 million with a yield of 3.08% and 2018 maturities total $126 million with a yield of 3.5%.

The strength in our investment yield has helped maintain our net interest margin in this low flat-rate environment. The variable nature of our loan portfolio with $2.3 billion we're pricing daily allows us to take 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 common equity in a rising rate environment, 50% of our portfolio is categorized as held to maturity.

Now on slide 8, total deposits on lines 1, 2 and 3 grew by $633 million, or 14.3%, over the last 12 months. Of the increase, $174 million or 3.7% resulted from organic growth, and $489 million or 10.6% resulted from acquisition activity. You'll also notice 100% of our growth is reflected on line 1, non-maturity deposits, as time deposits and broker deposits remained flat.

On slide 9, demand deposits are nearly 50% of total deposits and savings deposits are nearly 30%, which helps us maintain our low funding cost of 40 basis points. On slide 10, total risk-based capital equaled 14.79% as of March 31, 2016 and remains above our target of 13.5%, while tangible capital totaled 9.35% versus our internal target of 8.5%. Our strong capital levels protect tangible book value per share and allow for organic and M&A growth in the future.

The Corporation's net interest margin on slide 11 totaled 3.83% for the quarter, and when adjusted for fair value accretion of $2.5 million totaled 3.66%. Net interest income totaled a record $57.6 million during the quarter and continues to be the driver of our operating income. Both the actual net interest margin and adjusted net interest margin improved 5 basis points from the first quarter of 2015 to the first quarter 2016 and fair value accretion accounted for 17 basis points in each quarter, so it's a nice quarter-over-quarter comparison to evaluate.

Total non-interest income on slide 12 improved $89,000 in the first quarter of 2016 versus the first quarter of 2015, despite the sale of our insurance business in 2015, and now reflects our core banking and private wealth advisory businesses. Non-interest expense on slide 13 totaled $46.9 million for the quarter and included $1.9 million of acquisition-related expenses that will not repeat in the second quarter of 2016. Of the $1.9 million, $983,000 is recorded in line 1 under salary and benefits, $211,000 is in line 2 premises and equipment, $416,000 including $350,000 of contract termination expenses recorded in line 4, and $143,000 was in marketing expense on line 8 related to rebranding. We're expecting the second quarter total non-interest expense to be a clean $45 million-type number.

Now on slide 14, net income on line 8 totaled $17.7 million in the first quarter of 2016, an increase of 9.3%. And EPS on line 9 equaled the first quarter of 2015 total of $0.43 per share, including $0.03 of M&A-related expenses as discussed previously on slide 13. Management is reporting our efficiency ratio on line 10 of 61.37% but we're more pleased with the core, or M&A expense adjusted efficiency ratio of 58.76%.

Now on slide 15 you'll notice our quarterly per share run rates from 2015 and 2016. Our pay-out ratio totaled 26% for the quarter and the tangible book value increase over the past 12 months is reflective of $1.72 in earnings, offset by $0.44 in dividends and another $0.22 of M&A dilution from our acquisitions, netted against the sale of our insurance business and OCI adjustments. The good news in this story is the fact that our earn-backs are coming in slightly better than originally announced.

Thanks for your attention and now John Martin will discuss the loan portfolio composition and related asset quality trends.

All right, thanks, Mark, and good afternoon. I'll be updating trends in the loan portfolio starting on line 17, review the asset quality summary and reconciliation, discuss fair value and allowance coverage and then close with a few thoughts on the portfolio.

So please turn to slide 17. This quarter's organic loan growth is highlighted in the column labeled change linked-quarter. We continued to experience loan growth in commercial lending on lines 1 through 3, led by CRE construction on line 2, investment real estate on line 3 and commercial industrial on line 4.

This was offset somewhat by pay-downs and amortization on lines 4 through 7 and owner-occupied real estate, ag and residential mortgage. Construction lending continues to be strong as we pursue a strategy of construct, stabilize in either refinance our portfolio. For the most part we are underwriting construction loans in such a way that these loans either conform to portfolio standards or meet terms of a secondary market program. This leads to quarterly portfolio fluctuations between construction and the portfolio category on line 3.

While there was modest growth for the quarter, we booked roughly $70 million in incremental commitments for the quarter with a strong commercial pipeline that Mike will speak to, headed into the second quarter and that's construction commitments. As far as mortgage loans are concerned, we generally pursue an originate and sell strategy, using the mortgage portfolio for non-saleable mortgage secured loans.

Turning to asset quality on slide 18. Asset quality remained stable in the quarter. Non-accrual loans increased $5.3 million, largely impacted by a $4.6 million commercial real estate relationship that was moved to non-accrual. We accounted for the anticipated loss in the quarter in that relationship and have begun the process of liquidation.

Other real estate declined $1.7 million. Renegotiated loans and 90-plus days delinquent were down $900,000 and up $100,000, respectively, with total NPAs and 90-plus days delinquent mostly unchanged for the quarter, rising $2.8 million.

Dropping down to criticized and classified assets, there are a couple items influencing these numbers that I'd want to point out. First, the C&I upgrades that I anticipated last quarter did materialize as expected. On the other hand, as we performed the annual reviews and renewals of the agriculture portfolio in the first quarter, we saw some softness coming out of last year's results and have taken a conservative grading stance to insure that we are properly recognizing both potential and well-defined weakness in the portfolio.

While I don't expect down-grades to result in systemic losses in the portfolio, the grading approach did increase the criticized results. I should also point out that the ag segment is a relatively small portion of the overall portfolio, comprising roughly $250 million, as shown on the previous side.

Turning to slide 19, this slide reconciles the quarterly migration of asset quality and provides detailed transparency behind the movement in the loan portfolio. Starting in the far right column, Q1 2016, and moving top to bottom on line 2, we had $10.7 million in new non-accrual loans. We moved $2.7 million in non-accrual loans, moved them out, refinanced, transferred $100,000 to ORE and had gross charge-offs of $2.6 million.

Moving down to ORE from above, we took in the $100,000 just mentioned in ORE. We sold $1.5 million and wrote down $300,000 on line 9. This, with the changes in ORE and renegotiated loans, resulted in the $2.8 million increase in total NPAs and 90-plus days delinquent. I feel good about where we stand with respect to asset quality, although there was some incremental increase in non-accrual loans.

Now turning to slide 20. I'd like to turn your attention to the allowance and credit marks on the acquired portfolios. Highlighted in the far right column is the most recent quarter's allowance and fair value position.

The allowance on line 1 continues to be flat, ending the quarter around $62 million. During quarter we had $917,000 in net charge-offs and $550,000 in first-quarter provision expense.

With stable or improving asset quality, I would expect provision expense to closely follow net charge-offs in the near term, with some marginal provision associated for portfolio growth. For the quarter, we had 8 basis points of net charge-off which is in the range of what I see going forward. I would expect charge-off and provision to remain stable at around 10 basis points, plus or minus, barring unexpected changes.

Dropping down to line 6, the allowance coverage to non-accrual loans declined for the reasons I mentioned above with the non-accruals earlier, while allowance coverage to total non-purchased loans on line 7 declined only 3 basis points. And finally, as a comparative measure on line 9, the allowance plus fair value to loans and fair value adjustment declined 2 basis points. All-in all on this slide, there's really not a lot of movement.

So to summarize, on slide 21, we continue to see increases in commercial loan growth and improved pipeline. Asset quality remains stable despite the relationship I mentioned earlier moving to non-accrual. Our quarterly net charge-offs were in line and our allowance and fair value levels remain stable.

Finally, we have very little direct exposure to oil and gas, with our primary exposure to energy being a small amount of coal. Where there has been some related impact over time is through changes in oil and gas prices that have arguably lowered corn prices in recent years and impacted agricultural profitability. But suffice it to say that our exposure to oil and gas is only related and not direct at most.

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

Thanks, John. We're optimistic about our core markets. With the exception of that agricultural aspect that John just covered, the local economies in which we operate are really holding up quite well. Our near-term outlook is healthy which creates a really active competitive market where we can test ourselves. We look forward to the challenge.

I'm on Page 23. Top bullet point reference is a deeper penetration on our new treasury management. We made a significant investment there early in the third quarter last year and the fruits of that are beginning to show themselves. Better products for our customers, growing revenue line.

I think our commercial fees grew 3.5% in the first quarter from the fourth quarter of 2015. I think 8.5% first quarter of this year over the first quarter of 2015. So we're getting what we hoped. Our clients like to consume the technology that we're now able to offer them.

We're getting ready to kick off here, in the next bullet point, a rebranding of what had been our Trust Company into the First Merchants Private Wealth Advisors, which reflects the changing business mix over really the last decade as the client, if you will, the perfect client for our trust solutions, or in this case our private wealth solutions, has changed. Also would reflect our increased investment in our private banking business which toggles back and fourth between credit extension and investment of assets. So we're excited about that and the leadership we have in place.

Couple of other bullet points there on key items for us to drive the top line. John referenced our mortgage business earlier with the low rate environment continuing. We're going to continue to look at what the perfect strategy is for sell versus hold, I wouldn't anticipate a lot of change there but we feel like our balance sheet could, in fact, take more mortgages as the spring moves in with a higher level of activity that we anticipate.

Down at the bottom of the page, we are past the technical part of Ameriana Bank. We're trying to put the right people in the right places to maximize the opportunity with that Company as part of ours. We've normalized our expense levels, as we've talked about, that will reflect itself through the balance of the year and yet we still have opportunity in our retail system.

We're real pleased. I saw the individual that's responsible for our retail business, was sharing with me that our deposit retention on store combinations greater than a year old exceed our targets. It reinforces our idea that clients will use our technology if, in fact, physical stores aren't as convenient as they might have been in the past. That statistic that I just referenced, in terms of the retention rates being high, would not include the Ameriana changes which are much more current, as you might know.

So through mid year at least, we're going to benefit from fewer special projects, such that we'll be able to even increase our coverage of our markets and improve our operations in some ways we've been intending to get at outside of acquisition activity. We're coming through our seasonal low, as it relates to loan activity, which has us pointing to look for loan growth to increase consistent with what John referenced a new moments ago relative to our pipelines.

I would offer a couple of thoughts on that. Our commercial pipeline, at $420 million, is more than twice the level of where it was at the end of the fourth quarter and the highest in the last six quarters. Our total First Merchants loan pipeline, to include commercial at $490 million, up 80% over where it was at year-end and also the highest in the last six quarters.

On prior calls I've referenced another data capture that we have on an earlier-stage pipeline whereby the clients haven't made their preferences as known to us. But based on the complexion of the opportunity and our credit process, that number has swelled to $780 million, 28% higher. So when we look forward, knowing that not every opportunity in those data pieces actually close, we have demonstrated pull-through that leads us to believe that that mid single-digit loan growth number that we've talked about on these calls in the past, 6% to 8%, ought to hold true as we look forward to the balance of 2016, barring any economic activity that we do not foresee.

So at this point, Amy I'm going to turn the lines open for questions, if you have some from the folks listening.

(Operator Instructions)

Scott Siefers, Sandler O'Neill.

Afternoon, guys.

Hi, Scott, good afternoon.

Either Mike or Mark, I was hoping you could talk a little bit more about the nuance of the core expenses, excluding merger-related items in the first quarter. You gave the guidance for the 2Q, the roughly $45 million. So that renders this a little less relevant, but I'm curious how you got to that core expense number in the first quarter. I would have expected it to be not quite a bit higher but certainly higher than it actually came in.

So in other words, core expenses were better than I thought. Did cost savings from Ameriana come in more quickly than I might have anticipated? Or what were perhaps some the major dynamics at play?

Some of it is the elimination of the insurance business from the fourth quarter was gone. But clearly when you compare first-quarter 2015 to 2016, that was a big driver of expense reduction. And we've had a number of branch consolidations that have occurred throughout the year, that we finally were able to realize the full savings.

Outside of that I can't think of anything in particular. The savings from a Ameriana in total are a little better than our models but that hasn't been fully realized. So this was pretty close to our budgeted number. We're feeling good about the progress we're making and good about where we should be for the remainder of the year.

Okay, perfect, thank you. And then, Mike, you gave good color on the pipelines, both commercial and overall which I appreciated. Just curious, it sounds like, if I'm interpreting it correctly, the year got off to a little bit of a slow start on loan growth but you feel fine about the remainder of the year.

Curious, as you look back on the first 90 days of the year, were there either any geographies or businesses or anything that didn't get off to as quick of a start as you might have anticipated?

Well, it's kind of broad-based but the 90 days that were slow for us, Scott, they're captured in the material that you have, were really December, January, and February. We were really pleased to see us come out of February with a strong margin and it flows right into the pipeline I described.

If you saw in one of the schedules that Mark shares, there's an average loan number for the quarter. And you can see that the difference between the average and what our March 31 number wound up being is fairly significantly different. I think it's $60 million or $65 million different. It speaks to that.

As it relates to that slower quarter, if you will, it wasn't a calendar quarter but for that 90 days where I did feel like the economy was slowing or we weren't as effective, one of the two, it was really broad-based. Our Chief Banking Officer provides me a pull-through of how our pipeline translates into earning assets on the balance sheet.

I shared in this call at the end of the year, that we had a lower backlog. And in fact, that certainly played out in the first two months of 2016. We're hopeful that the momentum that we regained in March continues and feel like the pipeline should parallel that.

Perfect, great. Thank you very much, guys.

You're welcome, thank you.

Will Curtis, SunTrust Robinson Humphrey.

Good afternoon, guys.

Hi, Will.

I thought maybe really quick on fee income, there's a drop in the other fees. Specifically I'm looking at the press release. It looks like the other fees dropped around $700,000 from $1.2 million. Wanted to see if you could provide additional color on maybe what drove that decline.

Well, I'll pull up that slide here. I know without having a specific answer, our returned check fees mirrored the comment I answered a moment ago, relative to November, December, January. Again, we had a little bit of a pick up there. I'm looking for the exact schedule to see if there's any other specific fee line items that are worth noting.

You're referencing the other income?

Yes, and I guess you break it out in more and more detail within the presentation than the press release. So I was just looking at that decline from $1.2 million to just under $700,000 for the -- that's in the press release.

Actually I don't know what that is. I think it was the sale of a couple of our branches in the fourth quarter of last year. Will, if you don't mind, I'll get back to you on that. Don't have the facts of that change in front of me.

Okay, no problem. Maybe shifting gears a little bit, in terms of just a high-level credit question, it sounds like ag is taking a little bit of the attention right now. But are you guys seeing anything else that represents a significant concern right now? Or you're keeping a watchful eye on?

Yes, the ag is really where you see it primarily coming out of. I don't see anything coming out of C&I, commercial real estate construction. That all seems to be holding firm. The monitoring and the impact of lower crop prices and higher inputs have caused a little bit of softness there, but nothing else really, no.

Okay, thanks, that's it for me. Appreciate it.

Thank you, Will.

Erik Zwick, Stephens, Inc.

Hi, good afternoon, guys.

Hi, Eric.

First, maybe if I could start a little bit of a follow-up on Scott's question with regard to loan, maybe competition in your markets, anything you were seeing in the first quarter or the first part of the second quarter in terms of changing in competition or pricing, structure or anything along those lines?

No, its been pretty consistent which isn't necessarily great news because it's really highly competitive. It is a borrower's market. I think it has been through all of 2015. We expect that to continue.

We've had a little bit lower M&A activity directly in our markets, so there's a relative stability of people out on the streets serving markets. So we're just doubling down on our sales management practices to make sure we get the coverage we need. I think pricing -- if pricing has been aggressive for a long time, I don't think we've seen any deterioration there.

Good, okay. And with regard to the comments regarding the increase in criticized assets, it sounds like you're taking a more conservative approach in evaluating some of the credits. I'm curious if that's driven by a degradation in certain customer financials or just something more broad you're seeing, maybe with respect to the ag portfolio? Are you able to add any color to those comments?

Yes, I think in the ag portfolio, the approach we've taken over the last couple of years farmers have been fairly well-heeled with a lot of equity in their land. The performance, the actual profitability, from some of the farmers that we do business with hasn't been stellar. As a result, they've been able to take equity out of land and provide for additional financing in the next season. And as you might imagine, the ag portfolio runs on an annual cycle. We get one opportunity, really, to see how they did year over year.

Last year wasn't a great year in the farm sector. As a result, we went through and looked at those farmers and said -- while we took into account how much equity they have in their land, we're looking at their profitability and seeing they had a tighter year. So I look at it and just saying we're grading appropriately and it's just showing itself in that criticized classified numbers.

That's helpful. And moving to the tax rate, it came in a little bit lower this quarter than I had anticipated. Curious, I know the fees from the surrender value of life insurance was a little bit higher. Not sure if that impacted it, or was there anything that affected the tax rate this quarter? And your outlook for the tax rate going forward?

You know, the BOLI income was a little stronger than prior quarters than our original plan, so that's really the only adjustment. I think if you just run the tax rate off of the core income, backing out BOLI, it will get you to our run rate.

And I wanted to go back to Will's question for just a moment. The big decline, it isn't an item in other income where we have quite a bit of volatility. But it's all around, it's really derivative income where we have our back-to-back swaps and we're able to recognize fee income at the point of closing, one of those transactions. We didn't have any in the first quarter and we had quite a few in the fourth quarter of last year which was about a $588,000 swing.

Okay, thanks, and I guess with that tax rate it's something closer to the 28% level would be more appropriate going forward?

Yes, 26% to 28% is always the range, but yes.

Okay, great, thanks. And one last one, if I could. Curious about the thought process in your decision to switch to a state-chartered bank.

Yes, it's twofold. Economics were appealing and that's a go-forward, that's an every year benefit, and it actually grows if you look at that. If you look at the pricing grids off of those, as our Company continued to grow in the balance sheet which is the thing that calibrates the fees, the difference between the two primary regulators only widens as the balance sheet enlarges.

The other one is that the team of folks that are going to be working with us from the Department of Financial institutions in the State of Indiana are here and they are in the dozens. They got a couple of dozen people that are extremely familiar with this market, our competitors, our borrowers and some regard in our community. So the more we inspected that, the more it felt right given where the majority of our growth comes from.

Thanks, I appreciate all the commentary.

You're welcome.

Damon DelMonte, KBW.

Hey, good afternoon, guys, how's it going?

Good, Damon, yourself?

Good, thanks, Mike. Just a quick question on the margin. I may have missed this in the prepared remarks, but how should we think of the core margin absent any additional rate movement for the remainder of the year?

Well, we'll get a little bit of lift in the second quarter based on the additional day of interest income. I know it sounds funny but it does add some. And I think that should be enough to offset any pressure that we see in repricing yields down. So we feel good about the second quarter maintaining the current levels.

And then the yield curve is so flat that we're going to still see some pressure. I think that means you go back to the same statements we were making in prior years. I was just saying one or two basis points of compression quarterly. That's at least the way we're looking at margin now. If we get another increase then obviously, as an asset-sensitive bank, we would see some lift from that. But it's not something we have in our plan or that we're anticipating.

Okay.

I keep going back to prior questions. When we run the tax rate, I know we've gone through this in modeling, just to be clear, if you take the $23.3 million that we made for the year and then you simply take out of that all of the tax-free income, there's three line items, tax-exempt loans, tax-exempt investments and BOLI, and apply 35%, that is our tax rate. It came out at 34.9% this quarter if you run that same exact math. So our state tax is zero and federal at 35%. So if you take out those three tax-exempt items, you usually get back to the tax rate.

Okay, great. My other question, a more detailed question here. In the press release you have a category called other customer fees that was $5.059 million. Is included in that electronic card fees that you break down on slide 12?

Yes, it's ATM and debit card fees. And the increase is some organic and a lot through -- because of the acquisitions of Cooper and Ameriana where we are recognizing their income for a full quarter.

Okay. And from an interchange income perspective, have you guys changed vendors? Or are you still with whoever you've been using in the past?

No, we're with FIS for debit card which is not a change, which is our core vendor and we've been with them for a number of years.

Got you. And my last question, more broadly speaking, Mike, now that Ameriana is done and you guys have done the conversion, you're obviously trying to leverage the new operations that they bring on board. What are your updated thoughts on M&A? Has that changed at all? Do you feel that you've built enough scale that you can just work with what you have? Or do you still remain optimistic to looking to expand through additional deals?

Well, we clearly like what we have and if either opportunities don't present themselves or the pricing expectations of opportunities that come about don't meet what we think is prudent, then we're really comfortable with the franchise we have. I do feel like the environment will continue to present opportunities that look a lot like those that we've been able to seize on over the past 36 months.

Anything that reduces execution risk by way of physical proximity or management that we know, obviously, would make it even that much more attractive. But our posture on it hasn't changed, Damon. We would like to pursue those when they are available.

Okay, that's all I had. All my other questions were asked and answered, so thank you very much.

You're welcome, thanks, Damon.

Brian Martin, FIG Partners.

Hey, guys.

Good afternoon, Brian, how are you?

Not too bad. Just two questions, Mike. Most of them have been answered but maybe one for Mark on the expense. Going back to that $45 million number from the second quarter, Mark, is that a clean quarter with all of the cost savings in there now will be your expectation?

It is. We're looking forward to having the first clean quarter in a number of quarters, given all of the acquisition activity that we've had. So take the current run rate and back out the $1.9 million and that is what we expect, at least the second quarter, to be.

Okay, perfect. And then lastly, Mike, on the M&A topic. Certainly sounds like you're interested. Can you give any color on it. It seems like some of the activity has been slower across the markets.

What's the temperature today relative to M&A? When you look at the number of targets you guys have identified, do you feel like people are on the sidelines? Are they gauging how activity is, or calls are coming inbound, how is that going relative to last 90 days or six months?

The 2015 I thought was particularly active and we were able to take advantage of that. Now the early part of 2016, just a tic below that.

I think, like First Merchants was, anxious to see what interest rate increases might do to your income stream. I think other people might be doing the same thing. We were pretty confident that a commercial balance sheet ought to provide net interest margin upside, which it seems to have.

My guess is that other people are assessing their futures against their own skill sets and how their balance sheet sets up. But I would hope that we see more opportunities to balance this year out. I'd be surprised if we didn't.

Okay, that's all I had, guys, thanks.

Thank you.

This concludes our question-and-answer session. Would you like to make any closing remarks?

Just one of gratitude, Amy. Thank you for hosting the call and thanks for all of the folks that participated this afternoon. All three of us are very reachable should any of the material, upon further review, create more questions. Look forward to talking to you a couple months from now. Have a great day.

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