First Merchants Corp (FRMEP) 2018 Q1 法說會逐字稿

Good day, and welcome to the First Merchants Corporation First Quarter 2018 Earnings Call and Webcast. (Operator Instructions) Please note, 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 Thursday, April 26, 2018, 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 releases, Form 10-Qs and 10-Ks concerning factors that could cause actual results to differ materially from any forward-looking statements.

Please also note that today's call is being recorded. I would now like to turn the conference over to Mr. Michael C. Rechin, President and CEO. Please go ahead.

Thank you, Austin, and welcome to our earnings conference call and webcast for the first quarter ending March 31, 2018. Joining me today are Mark Hardwick, our Chief Operating Officer; and John Martin, our Chief Credit Officer.

We released our earnings in a press release yesterday evening at approximately 5 p.m., and our presentation, as Austin shared, speaks to material from that release. The directions that point to the webcast were also contained at the back of that release, and my comments begin on Page 3, a slide titled First Quarter 2018 Highlights.

So we're happy to join you today, talk about a strong quarter where our earnings per share of $0.74 were a 32.1% increase over the same period, first quarter of 2017.

We reported $36.7 million of net income, a 58.1% increase over the first quarter of 2017.

Total assets of $9.5 billion grew 29.3% over the first quarter of 2017. And during the quarter, on an annualized basis, our organic loan and deposit growth was nearly 9% each.

Couple of high performance metrics in terms of a 1.57% return on average assets, 11.21% return on average equity, all of it through a 51.33% efficiency ratio. So the balance sheet benefiting, as the release talks about, a growing Midwestern economy that we're taking advantage of, strong execution on First Merchants' part and a couple of 2017 acquisitions that are off to a good second year beginning.

Income statement performance I would attribute to the same items, coupled with the benefit of tax reform that Mark's going to cover right now with a more thorough review of the results.

Thanks, Mike. My comments will begin on Slide 5 where total assets on Line 7 increased by $2,147,000,000, or 29%, since the first quarter of '17. However, the majority of my balance sheet comments will focus on the growth since year-end 2017, which you can see on this slide totaled 4.5% as highlighted in the gray bar at the bottom. Mike has already mentioned organic growth, and total loans on Line 2 totaled $148 million since year-end, an annualized 8.7% increase.

Our 2017 M&A activity is highlighted in the footnotes below on this page. The information is identical to the fourth quarter of '17's presentation, and it bridges the difference between the high single-digit organic loan and deposit growth that we had this quarter compared to the 29% increase year-over-year.

The composition of our $6.9 billion loan portfolio on Slide 6 continues to be reflective of an asset-sensitive commercial bank and it continues to produce strong loan yields. The loan portfolio yield for the first quarter of 2018 totaled 4.86%. When normalized for fair value accretion and tax reform, our yield in the loan portfolio totaled 4.77% compared to 4.73% last quarter and 4.37% in the first quarter of 2017.

On Slide 7, our $1.5 billion bond portfolio continues to be high-performing. But as interest rates have risen and tax rates declined, our portfolio experienced both a decline in valuation and yield. Tax reform impacted the yield by 43 basis points. So on an adjusted basis, the yield of 3.90% compares favorably to really all of last year, all 4 quarters, which averaged between 3.88% and 3.90%.

Now on Slide 8. Our nonmaturity deposits on Line 1 represent 84% of the total customer deposits. Nonmaturity deposit growth over year-end 2017 totaled $109 million or 7.6% annualized.

Customer time deposits on Line 2 represent the remaining 16% of total customer deposits, an increase by $86 million, or an annualized 33%. Again, all M&A growth from 2017 is detailed in the footnotes at the bottom of the page.

As I previously mentioned, the mix of our deposits on Slide 9 is the strength of our company. First quarter 2018 deposit cost totaled 65 basis points between March 15, 2017 and March 21, 2018, the Fed funds rate has increased 3x or a total of 75 basis points.

Our cost of funds has increased by 26 basis points during that same 1-year time frame. The 26 basis point increase over 75 basis point Fed fund rate increase reflects our deposit base of roughly 1/3.

All regulatory capital ratios on Slide 10, our above regulatory -- the regulatory definition of well capitalized and our internal targets. We believe the strength of our 9.32% tangible common equity and 13.69% total risk-based capital ratio will continue to provide optimal flexibility into the future.

The corporation's net interest margin on Slide 11 reflects a decline from 4.10% in the fourth quarter of 2017 to 3.92% in the first quarter of 2018. Federal tax reform negatively impacted net interest margins by 13 basis points, and fair value accretion declined by 5 basis points during the quarter.

When both items are normalized, our net interest margin remained flat when compared to the fourth quarter of 2017 and is 18 basis points better than the first quarter of 2017.

Tax reform is a real bottom-line benefit for our company, but it does negatively impact tax exempt loan yields, tax exempt bond yields, which, in turn, negatively impact the calculations for the yield on earning assets, and overall, net interest margin and our efficiency ratio calculations. But as you'll see later in the deck, how much it benefits our bottom line.

I'm happy to discuss all the normalization when we get into the Q&A session as well. Total noninterest income on Slide 12 and total noninterest expense on Slide 13 are now at post integration run rates, and the majority of the increases are due, really, primarily to being a larger bank, given all of our M&A activity in 2017. Our expense levels were above our plan and our guidance by approximately $725,000. And the increases are really attributable to several nonrecurring items during the quarter.

Now let's go to Slide 14, and we can talk about where -- really the place where M&A tax rates, margins, all culminate into bottom-line results, which we think are pretty strong.

On Line 8, net income grew 58% from $23.2 million in the first quarter of 2017 to $36.7 million in the first quarter of 2018. And on Line 9, earnings per share increased by 32% during the same period from $0.56 per share to $0.74 per share.

And you can see on Line 7 that our effective tax rate declined from roughly 24% a year ago in the first quarter to just over 15% in the first quarter of 2018.

Despite the 1.3 percentage point negative impact the tax reform had on the efficiency ratio, we're also pleased with our 51.33% run rate on Line 10.

On Slide 15, you can see that post M&A and post tax reform, our new EPS results are materially stronger than any of our quarterly results in 2017. And we feel like the first quarter of 2018 is a very clean reflection of First Merchants' earnings power and what you should expect on a go-forward basis, absent growth.

On Slide 16, you'll notice that our annual dividend modifications typically occur during the Annual Shareholders Meeting, which is scheduled for May 10, 2018, this year. And we continue to be pleased with our compound annual growth rate of tangible book value per share, that's roughly 10%, while paying dividends of 4.2% and completing 2 meaningful acquisitions in 2017.

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

All right. Thanks, Mark, and good afternoon. Beginning on Slide 18, I'll be updating trends in the loan portfolio, review a summary and reconciliation of asset quality, discuss provisioning, fair value and allowance coverage and then end with a little color on the construction portfolio.

So on Slide 18, total loans on Line 11 grew in the linked quarter by $148 million or 2.2%. Comparable quarter year-over-year loans were up $1.6 billion, which includes both the Arlington Bank and IAB portfolios. Excluding this, loans grew year-over-year organically by $677 million or 13%.

Growth is being driven by robust commercial real estate activity and commercial and industrial lending.

Moving up to the top of the slide and working down, quarterly construction and industrial loans grew on Line 1 by $60 million, and CRE and nonowner occupied loans on Line 3 grew by $142 million.

As I've mentioned on prior calls, the dynamics of the construction and nonowner occupied real estate portfolios are driven by project funding during the construction phase, while moving to either the permanent market or into the bank's loan portfolio at completion.

During the quarter, we saw construction commitments moderate with reduction in construction balances as we moved projects from the construction to nonowner occupied portfolio.

Then briefly finishing out the slides on Lines 12 and 13, we continue to remain below the regulatory real estate concentration guidelines for 100% of construction loans and 300% for investment real estate to capital.

Turning to asset quality on Slide 19. Asset quality remains in check for the quarter. On Line 1, nonaccrual loans declined $1.2 million. On Line 2, ORE declined $700,000, and on Lines 3 and 4, renegotiated and 90-day delinquent loans declined $400,000 and $200,000, respectively. This resulted in NPAs and 90-day delinquent loans on Line 5 declining in the linked quarter by $2.5 million to $38.5 million or 55 basis points of total loans and 40 basis points of assets.

Finishing out this slide and moving down to Line 7, classified assets increased $25.3 million after declining in the fourth quarter by $16.5 million. This was a 16.5% increase, while as a percentage of capital, it increased marginally from 15.1% to 17.2%.

Turning to Slide 20, which reconciles the migration of nonperforming assets. We started the quarter -- excuse me, started the year in the far right column titled Q1 '18 with $41 million in NPAs and 90-day delinquencies. From there, we added $4.8 million of new nonaccruals, resolved $4.1 million on Line 3 with $1.8 million of gross charge-offs on Line 5.

This netted to a $1.2 million decrease in nonaccrual loans on Line 6. Then dropping down to Line 7, we added $100,000 in new ORE, while on Lines 8 and 9, we sold $700,000 for writing up $100,000.

So after the changes in restructured 90 days past due, we ended the quarter $2.5 million better than we started.

Turning to Slide 21. Provision expense in the quarter of $2.5 million on Line 3 covered charge-offs of $1.1 million, which allowed the allowance on Line 4 to grow with the increase in the loan portfolio. The allowance remained at 1.1% of total loans and 1.32% of nonpurchased loans. Fair value adjustments on Line 8 decreased $3.2 million from $46.3 million to $43.1 million with $3.2 million in accretion and no offset charge-off.

So summarizing on Slide 22, loan growth was in the mid- to upper single digits with increases in CRE and C&I lending. Providing a little color on the construction portfolio, our construction lending activity remains largely in Indiana and Ohio comprising of 2/3 of our commitments. Of the total, we have projects in most all of our communities from Fort Wayne to Mishawaka to Bloomington to Indianapolis. In Ohio, from Cleveland to Toledo, down to Cincinnati to Columbus. In both states, the highest concentrations are in our growth markets of Indianapolis and Columbus.

Outside of Indiana and Ohio, we generally extend our portfolio to in-market developers who have a more national reach. And no state outside of Indiana and Ohio comprises more than 5% of the total construction book.

We continue to have good nonstudent housing apartment in mixed-use construction activity, which comprises roughly 50% of the commitments in student housing as a stand-alone of roughly 10% of commitments.

Senior housing demand has also been healthy and now comprises roughly 15% of commitments.

In the C&I space, our specialty loan business continues to gain traction as well with sponsored finance balances growing to over $100 million this quarter. Transaction volume continues to be strong, although we are being selective in the opportunities we actively pursue.

Moving on, credit quality is stable with 7 basis points of annualized net charge-offs and loan growth driving the provision. It's a good part of the cycle, although we're always ready for changes -- positioned for changes as we continue to take advantages of the opportunities at hand.

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

Thanks, John. I have the balance of my remarks on Page 24 on the looking forward page. Since we start out with really our important tactic for the year, which is to do a great job in year 2 following the 2 acquisitions in 2017. So the former Arlington Bank franchise, which was kind of a mortgage-heavy retail-heavy strong performing bank as part of our Ohio business, and John talked about some of the strengths that we're seeing there commercially oriented in particular.

And then at Independent Alliance Bank, Grabill and Marklebank, as the clients would have seen them. And in each of those cases, we're virtually complete with the facilities changes other than the one we're excited about, the near-term move into an announcement we made a handful of months ago about a new regional headquarters in right downtown Fort Wayne to take advantage of the growth of that marketplace. That's -- that will be completed here before the end of the second quarter, and our folks are excited about it.

Similar thoughts in the next couple of bullet points that speak defeating a growing business. We've had some neat recognitions over the last couple of months that are either around quantitative performance or around best places to work. We actually had a first recently, where all 3 of our states of operations, Indiana, Ohio and Illinois, all attracted and earned best places to work kind of employer recognitions, which, as you might know, would help us not in branding for talent attraction and retention and it certainly doesn't hurt in assisting, winning and servicing your clients. So we're pleased with that.

John referred to some of the growth in our specialty businesses, and Mark actually talked to our expense levels that -- and I would tell you that apart from nonrecurring items that Mark sized in his remarks, we're adding people as appropriate. So whether it's production folks or associates in the Specialty Finance business, we've also made important ads in Fort Wayne, as our market president there rounds out what he needs to win. And as we've talked about in prior calls, adding to our wealth business through a more full geographic franchise coverage in Private Banking, which we're moving in on completion of here probably by the end of this summer.

I referenced a specific project that's been in our notes from the last couple of quarter-ends, and it relates to a really a complete redo, a restructure, a rebuild of our checking account options through several acquisitions that we've had over the last half a dozen years. We had grandfathered a lot of product sets that sold out of the retail banking centers, and we took the opportunity in 2017 to plan for not only the consolidation of them and eliminating some of the grandfathered product types, but to refresh them all in a way that mirrors the client preference that we have around the way they like to use the retail bank.

Now I know we'll get some questions about the asset-sensitive nature of our balance sheet, and we feel good about whatever the Fed's next action steps would be. It would appear that the highest probability is that we might have a next couple of interest rate moves, and we would benefit from that, maybe not like we did through the earlier moves in '16 and '17, but clearly evidenced that we will benefit from that on a core margin basis that may come up in our discussion here.

One of the underlying factors, I don't know that Mark covered, but when he talked about our cost of liabilities, it's been several quarters now where it's apparent to us that our organic loan growth rate is at the high end of our range. And so we've tried to be a little bit more proactive in finding the funding for what no longer appears to be a 6% kind of loan growth, but something a couple of percent higher to make sure that we have the liquidity for that. And I think the balance sheet would reflect that. You might see some -- what has taken place of deposits actually replacing borrowings as we've spent a higher priority on, what we would call, institutional sources of funding, and those could be in the public funds arena with governmental entities, primarily states, universities, clients such as HSA providers, foundations. There's a lot of larger sources of funding that we've been successful with. They do command market pricing for the bulk deposits that they offer us. So that would be included in some of the metrics that Mark highlighted.

Last bullet point just speaks to our continued appetite to use our track record in producing franchise expansion and shareholder value through well thought-out M&A activity. So I don't know where that will take us. Absent that, either with or without M&A at a $9.5 billion level for total assets at [3 31]. It's clear to us that 2019 likely takes us over $10 billion. And so all of the responsibilities and expectations around that are well underway to include even the DFAST preparation, which is well underway not having real great clarity as to whether or not the Senate bill gets approved or not.

So we're trying to give ourselves as much optionality and preparedness as possible. Company is excited about celebrating our 125th year anniversary in 2018. And as we move into the midpoint of the year, we take momentum with us. And so we feel bullish about the rest of the year. And yet, as John Martin kind of closed with, the ability to adapt to conditions as they prove themselves.

So at this point, Austin, I think our team is ready for questions if you have anyone in the pipeline.

(Operator Instructions) And our first question will come from Scott Siefers with Sandler O'Neill.

Mike and Mark, I think you guys both sort of touched on the margin. Just hoping you can expand upon your thoughts. I guess I might have anticipated a slightly higher core margin ex the purchase accounting accretion this quarter. I think we knew about the FTE change with the tax law, but just curious to hear your thoughts on kind of how things panned out in the first quarter relative to your expectations? And then you noted still asset-sensitive maybe the benefits won't be as great. And then, Mike, you had chatted about the kind of focus on deposits that might kind of have sort of a negative mix ramification, at least, from a cost of funds standpoint. So just hoping you could spend a moment talking about the major puts and takes you see on the margin from here, the core margin that is.

Well, the -- one of the comments that you made was the tax reform, 13 basis points. And then I think on the second item, all around fair value accretion that normalized fourth quarter to first quarter. And we had a similar discussion in the first quarter of last year just where we had a kind of modest dip in the core from maybe what we expected and it rebounded in the second quarter. And some of that we've loved the extra couple of days we get out of the commercial portfolio in the second quarter. But I think at this point, if there aren't additional Fed funds increases, which I think there likely will be, but if you think about the current environment, it's going to be -- we're actively managing what happens with investment yields on the longer end of the curve as it flattens compared to what -- how much we have to give back on the depository side. So I think we're at a good level here that we can maintain, but not really expecting expansion unless we see more movements in the Fed funds rate.

The other part of your question, Scott, that I touched on is not only the looking backwards handful of quarters to look at the level of loan growth rate, but our pipeline. And we typically talk a little bit about that. It would appear to me that it's going to hold up well through the balance of 2018. I don't know that -- in what particular quarter it'll happen, but our near-term outlook for the next couple of quarters would appear to be at a similar level, which then prompts all of us to think about how we fund that in best way. And so we're doing it in our franchise with the kind of clients that I referenced in my remarks earlier. Our retail execution for what you would call retail deposits is, as you know, a really methodical business. And with 115 stores, plus or minus, you count on $1 million or $1.5 million of true traditional really low cost sticky deposits. We just need to do a little bit better than that to offset the loan growth that we've benefited from. So that's what -- why the strategy, and that's why a little bit of a blip up to attract deposits in a larger measure.

Okay. That's perfect color. And then maybe just a ticky-tack one for you, Mark. I think last quarter, you've been saying probably somewhere in the neighborhood of $12 million of first coming accretion for the full year. Is that still a number you think looks reasonable?

Yes. Sorry, just a moment. We were 3.2, which -- this quarter, which was a little bit behind our plan. So yes, I mean, I think that's still the right estimate moving forward.

And our next question comes from Damon DelMonte with KBW.

My first question, Mark, I was wondering if you could just kind of just circle back on the noninterest income and some of the components in there that maybe are onetime this quarter that wouldn't be repeated next quarter?

Yes, noninterest expense.

Aside from -- no, noninterest income, I'm sorry. Aside from obviously securities gains, but was there anything in the other noninterest income line or any other categories?

No, nothing in the noninterest income. We have hedge -- our hedge income is -- does -- is difficult to predict, and you can see that in the other income line item. And we had a good quarter, but it's, on average, I don't think something to highlight. The extraordinaries that I mentioned in my call notes were really around other expense.

Okay. Could you revisit those as well, please?

Yes. We had about $725,000 -- a couple hundred thousand of it was really M&A carryover type items where we tried to get everything in related to acquisitions that we possibly could by year-end. We had a few things carry over into the first quarter. Didn't think it made sense to call it out as M&A expense necessarily, but we don't expect to have that going forward. We had about $400,000 related to kind of benefits and incentive activity from the end of the year all paid out and expensed during the first quarter. And even something as simple as like 401(k) matching gets a little bit accelerated when incentives are paid. So we recognized that cost in the first quarter versus coming in slower throughout the rest of the year. And then we had a little over $100,000 tax payment related to our REIT that showed up this quarter that won't repeat going forward. So those are the items that feel meliorated as we look at the run rate going forward.

Got you. Okay. I appreciate the color there. And then, I guess, as you guys get closer to the $10 billion in asset threshold, do you feel like you've incurred all the expenses that you need to in order to be compliant to go over that level?

From an expense investment, yes. As you know, the cost of it, if you will, is parts income, parts expense. Your question is on expense. And yes, we're pretty much good to go there. We aren't producing the DFAST stress test at this point, and yet we're prepared to do so. The data has been compiled. I'm still hopeful that it proves out to be a net benefit to us in terms of methodology without actually ever having to provide it should the 21 55 bill prevail. The other parts around the derivatives clearing process and internal audit work, and so far in good shape on, yes.

Okay. Great. And then just lastly just to confirm, your outlook for long growth for the remainder of the year, the upper single-digit range is still a good target?

It is. At this point, I know I've offered 6% to 8% for a long time and have been a little bit shy on what proven to be actual. So yes, I think, 7%, 8%, 9% seems appropriate.

And our next question comes from Terry McEvoy with Stephens.

Starting on Slide 6. Thanks for the year-to-date yield and adjusting for it on the call. I guess, where you are seeing the best opportunities when you think about pricing pressure within that loan portfolio? And then on the flip side, areas that maybe stand out as being competitive today from a pricing standpoint?

I see John Martin looking for slides. So as he gets it, I'm kind of looking as a component of an answer to you around our pipeline. And it's a little less balanced than it had been over the last couple quarters and this is what I mean. John referred to commercial real estate and C&I lending as strong kind of throughout the company and it kind of manifests itself in the pipeline as well. The mortgage business, which is mostly a for-sale business for us, is a little bit soft. And even though the pipeline number is dramatically higher than that of the end of the first quarter of 2017, we did not have the Arlington Bank as part of our company, which had a powerful mortgage origination unit. In terms of other on-balance sheet lending, within that Specialty Finance group that John speaks to is a sponsor finance group that is growing at the rate that John described. It's over $210 million in overall outstandings and up $100 million since late last year. And however, the public finance, in terms of getting back to your vulnerabilities question, with the tax change finding the kind of opportunities in public finance that meet our target return is obviously going to be more difficult. And so I think we're scaling back our expectations for at least the loan side of that business. And the great part about it is the relationship aspect business that has both deposit and credit aspects, but we do expect the credit -- the book credit side of that business to slow.

And then as a follow-up -- thanks for going through the deposit betas, I guess, how have your clients reacted to the most recent move by the Fed? Do you see betas accelerating from here? And then are you seeing a mix shift at all in deposits as interest rates rise?

We see some shift. Our retail product team is watching that very, very closely and looking for trends and patterns to see if there are modifications that we need to make. And so far, it's been very manageable. We have some special offerings in the money market space and also in the CD space that we've been able to use to retain customers that are highly sensitive to the rate move. I don't know that we expect it to change dramatically. We continue to watch the long end of the curve and just looking for a sense as to whether all rates are going to move upward, which, I think, changes the strategy. And if the long end of the curve stays where it is, I think we have to be incredibly diligent about how much we put back into the deposit interest rate calculation or interest expenses. So that's how we're thinking about it internally.

And then just one last question. The $25 million increase in classified assets, is that any sort of leading indicator of future charge-offs? Or does that number really bounce around month-to-month, quarter-to-quarter and you just happened to catch it at $178 million at the end of the first quarter?

Yes. I think that what you're seeing is at the end of the year, you saw that the number went down to $153 million. Now it's kind of at a low and it does bounce around quarter-to-quarter. So we hit kind of a low and a dip at year-end, and then we're back up to $25 million in the first quarter, yes.

Our next question comes from Nathan Race with Piper Jaffray.

Mark, going back to the discussion around expenses. I appreciate your comments in terms of some of the nonrecurring items in the quarter and that you guys feel like you're pretty much there in terms of the expenses that you need to incur to be at $10 billion asset bank. So just curious as we kind of look at the run rate as it sits at 1Q, do we expect kind of just low single-digit growth from here? Or kind of how you're guys thinking about natural inflationary pressures on the expense base going forward?

Well, I mean, when I think about just the remainder of this year, we think that the $53 million to $53.5 million is the range that we'll be operating within. And what we have done a really nice job of over the years as we are definitely increasing expenses in categories that demanded the most like technology, human capital, those types of things. We're finding ways to offset it by becoming more efficient in other areas. And so that's always our focus in trying to keep the expense growth rates at really low single-digit levels. And at least for the foreseeable future, the rest of '18 and end of '19, I think that's possible.

Got it. And then just thinking about the securities portfolio from here, as you guys kind of continue on your growth trajectory, do you expect the securities book to kind of remain at its current relative level as a percentage of earning assets? Or do you expect it to kind of shrink as you guys grow into loans more or so? Or just any thoughts on that, on those dynamics.

Yes, we really like the percentage makeup right now between loans and investments out of our total asset mix. And so our goal is to kind of keep it at that level on a go-forward basis, which is part of the reason we've heightened our efforts on the depository side.

Got it. And I apologize if you already touched on this, but I think you mentioned the FTE adjustment from tax reform and securities was 12 to 13 basis points this quarter. How much was it on loans?

Yes. Actually, the -- on total net interest margin, it was 13 basis points. In the loan portfolio, it was 6 basis points. In the bond portfolio, it was 43 basis points. So we have -- nearly 50% of our bond portfolio is in tax exempt municipals, and so that's where we saw the biggest decline.

Got it. And then if I could just sneak one last one in for Mike. On the capital front, you guys are going to be accretive capital at pretty healthy clips. Obviously there's a potential to raise the dividend later this month, so just curious what you're seeing on the M&A front? If you're feeling more optimistic about your opportunities to deploy capital of your M&A over the course of this year and into 2019?

Yes. In terms of trying to balance all 3 of those uses, whether it's loan growth or deposits or M&A, we have done our last 2 transactions 100% stock. And if we were to find an opportunity next, we would probably look to put some cash in it. And I don't think that crowds out the idea that in a month, when we look at our -- kind of annually look at our dividend level, it doesn't give us flexibility to recognize the level of cash flow and earnings that we're likely to have, both in this current quarter [axle] and going forward. So I think we're going to be able to achieve all those ends.

And our next question comes from Brian Martin with FIG Partners.

Say just a couple things. I think a lot of it's been covered. But just, Mark, you didn't, I guess, talk about the tax rate. Just kind of where you think it unfolds here the next couple quarters? Is it kind of a little bit higher rate than where it was at this quarter? I think the effective was about 15.25% in the first quarter here, so just how you're thinking about the balance of the year?

Yes, we think that this level, kind of 15% to 15.75% in that ballpark is what we expect. So we have some nice savings if you go all the way back to last quarter was -- or first quarter of '17 was 24, all of '16 was 25 and 2017 was high at 28 based on the DTA expense of $5.1 million. So that's kind of the levels where we're expecting it to be for the rest of the year, that 15.25% to 15.75% range.

Okay. I didn't know if there's any option benefits this quarter that was -- would take it a little higher next quarter, so that's helpful. And...

But there was some, that's why we see a little bit of a bump up.

I got you. Okay. Mark, just on the rate on the margin and just kind of going back to that discussion for a minute, and I guess, if you talk about, you guys kind of elaborated to it that maybe the future benefits of rate hikes wouldn't be as much but still positive. When you look at the next rate increase, given that, I mean, I guess, can you just talk a little bit about how much of a benefit you think to get from the next rate hike here, at least in the near term, given kind of some of the changes you're making on the funding side kind of going after some of these larger institutional type of funding? I guess, is that the biggest change from what you're seeing before? Because it doesn't sound like the beta was changing all that much other than for that reason.

Yes. I think if you look, we've expanded core margin 18 basis points with a 75 basis point increase in the Fed funds rate. And so that's, call it, 6 basis points each move. And we've been giving guidance of around 5. And I do think it's going to be less than that going forward for a couple of reasons. One is just some of the depository reasons, but the other is we're just -- the yield curve is getting flatter and flatter each move, which makes it tougher to capture the full 5 basis -- 5 to 6 basis points we had in the past. So we're modeling less than that, but still some improvement in margin.

Okay. Perfect. That's helpful. And just from a -- I think someone mentioned earlier, the -- that other income line being up a little bit this quarter. I guess, I mean without talking about that one in particular, I guess, it looked like it was a big jump this quarter, but it could have been something that was a one-off type of thing. But just the current run rate in fee income around this $18 million level or -- I guess, is that a fair way to think about the run rate as you look at the balance of the year? I mean, some seasonality with mortgage, or the service charges, but give or take, is that a pretty good baseline to think about?

Yes, mortgage should improve as we move forward. I mean, the first quarter is always the lowest. And then we did have a nice hedge income quarter, which is unpredictable. It's transaction by transaction. But you can see in other income the pickup from last quarter in our press release, so where we ended up this quarter is really due to the hedging activities.

Okay. All right. And the -- you mentioned the one part about the -- maybe I misunderstood you when you talked about the expenses. The total nonrecurring piece that was in this quarter, was it about $700,000 or $1 million?

No, it was $725,000 was the number that I gave.

Okay. I got you. Okay. I wrote it down then. And then maybe just the last one, and maybe you've covered it, Mike. I didn't hear the last question. But on M&A, just kind of the -- it seems like activity has been down a little bit for the industry. And just kind of how you're thinking about the -- how important is it to -- I guess, if you look at going over the $10 billion mark organically versus doing it through an acquisition, I guess, would you -- I guess, you're trying to manage the balance sheet, I guess, depending on how things play out here with the $10 billion threshold. Maybe if you can just give a little color on that. And just kind of the level of discussions, how would you characterize those today as you kind of approach that level?

Sure. If you tackle the organic portion of your question first is that I do think even taking full advantage of the organic opportunities in front of us and just kind of running the company with the cadence that our marketplace allows us to, that I do think we'll be able to manage the balance sheet to stay beneath $10 billion, absent an acquisition this year. So that's kind of our plan. Everybody knows it. The managers are running their business with that in mind. As it relates to frequency of conversations, I would say it's about the same. It seems to me though, maybe you would hear other people say this, that everyone wanted to see what tax reform really does to the results to get a sense for what their future could be, what their value is. It's a lot of change in the overall environment, whether it's regulation, tax rates and such. So we're planning it all out. The conversations we're having and the interest we have are pretty consistent with what have been in prior quarters. We focus on day 1 really striking something that from a pricing standpoint makes sense. And then immediately behind that, leadership affirmation and execution around integration and culture. So that the ingredients for that are identical. And I think the conversations are ongoing and that has to be win-win for 2 parties.

Okay. And just remind me, I mean, now that you're near that $10 billion level, I mean, the size of a transaction you guys would look at, I mean, I guess, is there an optimal size? Or I guess, a minimum size that you guys would entertain at this point? Is that -- has that changed? Or maybe just remind me what you've kind of articulated?

Well, the -- I think the only thing that would change from prior periods, Brian, is that a quarter of $1 billion transaction, in other words, a $250 million asset bank would have to really be in a marketplace with great synergies to kind of roll it into a franchise. To go into a new market at that size doesn't seem to make a lot of sense to us. So I don't think the -- on the higher end, I don't think that we feel like we have to look at larger entities to get us over $10 billion. But on the lower end, knowing that the magnitude of work and effort, in some regards expense is identical for $250 million bank or $1 billion bank, it would have you looking at something that has more substance and more market presence.

And at this time, I am showing no further questions. So I'd like to turn the conference back over to Mike Rechin for any closing remarks.

Austin, thank you very much. I have no closing remarks other than appreciation for the interest that you have. And if you have any follow-up questions that we can help with that we didn't get to today, feel free to call us. But thank you, and look forward to talking to you at the end of next quarter.

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