Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

First Merchants Corporation (NASDAQ:FRME)

Q3 2013 Earnings Conference Call

October 24, 2013 14:30 ET

Executives

Michael Rechin - President and Chief Executive Officer

Mark Hardwick - Chief Financial Officer

John Martin - Chief Credit Officer

Analysts

Scott Siefers - Sandler O’Neill

John Barber - KBW

Stephen Geyen - D.A. Davidson

Brian Martin - FIG Partners

Daniel Cardenas - Raymond James

Operator

Good afternoon, and welcome to the First Merchants Corporation Third Quarter 2013 Earnings Conference Call. All participants will be in listen-only mode (Operator Instructions) Please note, this event is being recorded. We will be using user-controlled slides for our webcast today slides may be viewed by the following URL instructions noted in the First Merchants news release stated Thursday, October, 24, 2013 or by visiting the First Merchants Corporation shareholder relations website and clicking on the webcast URL hyperlink.

During the call, management may make forward-looking statements about the company’s relative business outlook. These forward-looking statements and all other statements made during the call that do not concern historical facts or 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.

I would now like to turn the conference over to Michael Rechin, President and CEO. Please go ahead.

Michael Rechin - President and Chief Executive Officer

Thank you, Emily and welcome everyone to our earnings conference call for the – and webcast for the third quarter ending September 30, 2013. Joining me today as in the past are Mark Hardwick, our Chief Financial Officer; and John Martin, our Chief Credit Officer. We released First Merchants earnings and our press release at around noon today Eastern Daylight Savings Time and our presentation speaks to material from that release. The directions that point to the webcast are also contained at the back end of that release and my comments begin on Page 4 on a slide titled 2013 performance highlights.

With top of the page you see we earned $10 million net income available to our common shareholders that equates to $0.35 a share in what I believe to be a strong easy to digest quarter that my colleagues will describe in fuller detail here over the next couple of minutes. We had some pickup both in net interest income and net interest margin from the second quarter of really pleasing to us as we think the heart of the margin issues are mix of loans and deposits. Highly competitive environment and we find ourselves as working in both from financial institutions with whom we share our markets and a challenging interest rate environment and so, our focus and our plan on our market segments, our clients seems to be producing progress/

Our loan composition calls for very balanced plan, our loans are up just under 3.2% year-over-year with C&I loans actually demonstrating the largest growth over the last 12 months at 10%. Our overall real estate exposure our single largest segment up over 3% in the third quarter as John and Mark may allude to, the real estate grew faster as we see many of the construction projects we financed get further along towards their completion.

Deposit profile is still attractive, heavily weighted in transaction accounts and then markets where we have pricing power. Our deposit cost for the quarter actually decreased 5 basis points from the second quarter as a component of our margin increase. Later in the call John will provide commentary on our credit profile which is alluded to here at the start of the page where the profile improvement of how is progressive provisioning even while our non-accrual coverage reaching new high over the last five years.

The bottom of the Slide 4 summarizes our upcoming acquisitions of CFS Bancorp. The bullet points cover three different perspectives. From a legal perspective, we’re in the late innings of gathering our approvals, two shareholder meetings will be hosted next week where the voting enhance suggests approval, our work with the regulators involved also suggests an ability to meet our original closing timeline of mid November.

From an operating perspective our efforts have been on leadership, products, processes and the needs of the clients. We have at this point nearly two dozen teams working in the specific area of expertise to achieve effective messaging after the legal clause in an efficient integration in February. As First Merchants enters months during the adjacent communities or position to leverage Citizens leadership today Daryl Pomranke and Dale Clapp working in combination with First Merchants Chief Banking Officer, Mike Stewart.

Lastly, from a financial perspective we’re horning the expense synergies we’ve identified in our work from the spring in addition, we’re continuing the asset quality improvement strategies begun two years ago by the Citizens’ team. Our view is that the assessment of loan quality and likely credit cost to the portfolio going forward are very consistent with our work during due diligence. The result in acquisition in into an attractive contiguous market offering in 2014, earnings per share accretion.

At this point Mark will walk us through more of the details from the current quarter.

Mark Hardwick - Chief Financial Officer

Thank you, Mike. My comments will begin on slide – on Slide 6. Our portfolio loans on line three increase year-over-year by $90 million and now totals $2,926 million. The allowance on line four totals $66 million or 2.26% of loans and 189% of non-accrual loans which what we believe are healthy levels. Our net charge offs totaled $3.5 million for the quarter and $8.8 million year-to-date. The composition of our loan portfolio on slide seven is reflective of a commercial bank balance sheet and continue to produce very good loans yields. The portfolio yield for the third quarter totaled 4.52% and 4.47% without fair value compared to a 4.93% during the third quarter of 2012. The decline in yields totaled 46 basis points year-over-year at which I guess gives light to the – to the quality of our net interest margin in the phase of some of the yield declines in the portfolio.

On Slide 8, our $909 million bond portfolio continues to perform well producing higher than average yields with moderately longer duration than our peer group. Our 3.81% yield compares favorably to the peer average of 2.63% and our durations remains just eight months totaling 4.5 years.

At this time last year our portfolio yield was at 3.66% with the duration of 3.8 years so we’ve improved the overall portfolio yield and we’ve extended the duration. Well most of that has come just from the decline of the overall portfolio we are down $20 million from where we were a year ago and most of that are short-term maturities and then we have reinvested some of the cash flows a little father out in the portfolio to the municipal sector which now totals 33% of the total portfolio. And we do continue to have a net gain in the portfolio of 9.2 million as of quarter end.

Now on Slide 9, our non-maturity deposits on line one are up a 11.1% year-over-year and represents 78% of total deposits. Our tangible book value per share now totals $11.56, an $0.81 improvement from this period last year or 7.5% increase.

As previously mentioned the mix of our deposits on Slide 10 continues to improve and our total interest expense is now just 35 basis points, down from 54 basis points at the end of the third quarter and down 5 basis points for the last quarter. Our – all of our regulatory capital ratios on Slide 11 are well above the OCC and Federal Reserves definitions of well capitalized and all Basel III minimums and the decline in our total risk-based capital ratio on line one is due to the January and July SPLF preferred stock redemptions that totaled $57 million. Our tangible common equity on line five is now 7.97% as the quarter end and we’re just 3 basis points away from our target level of 8%.

The corporation’s net interest margin on Slide 12 did rebound as expected during the quarter totaling 3.97% as public funds declined by nearly $100 million during the quarter. But we picked up an additional 2 points on our core margin as our cost to funds continue to downward trend. Net interest income increased on a fully taxable equivalent basis, by – just over a $0.5 million linked quarter-over-quarter and fair value accretion was not a factor that equaled the second quarter of 2013.

Total non-interest income on Slide 13 does have volatility due to line six securities gains and losses, but the overall category was disappointing to us and as you look at line 11 we didn’t – did have a decline from last – last quarter’s total of $13.9 million. The increase in our long-term rates have slowed our mortgage sale activity resulting in $754,000 less fee income on line nine of fee income. And then if you look at line nine, other income declined by $1 million due to fewer gains from the sale of OREO property and the loan cum housing tax credit transaction loss totaling $554,000 that we detailed pretty extensively in our press release. The result of the loss which is tax deductible and the tax credit that we receive produced a bottom line improvement of $431,000 for the quarter and improved our allowed for reduction of tax expenses of $984,000.

Non-interest expense on Slide 14 totaled $34.2 million for the quarter, up from the linked quarter totaling $33.7 million, and on annualized basis our year-to-date expenses of tax to be less than our 2012 expenses driven primarily by the reduction of OREO and credit related cost.

Please turn to Slide 15, our pre-tax pre-provision numbers are not as strong as last quarter, but several items below the pre-tax pre-provision line helps make the difference as our net income still totaled $10 million. Our ROE reduced the provision expense on line five by $0.5 million and we have a lower tax rate on line seven that added 1.3 million and as we’ve repaid SPLF the dividend expense continues to decline on line nine adding another $0.5 million to the bottom line net income.

Now on Slide 16, you’ll notice our adjusted nine-month of EPS totals $1.03 and it compares very favorably to last year’s adjust number of $0.80 per share. Now John will discuss our loan portfolio composition and its related asset quality trends.

John Martin - Chief Credit Officer

Thanks Mark. I will be covering asset quality starting on Page 18 followed by allowance coverage in non-performing asset migration before concluding with some several high-level thoughts in the portfolio.

Please turn to Page 18. Asset quality continues at favorable trend both year-to-date and in the linked quarter. For the linked quarter, non-accruals on line one declined $4 million and were down $18.4 million since the start of the year. We have and we continue to expect to see that this number begin to level up in the core portfolio as the dollar amount of non-accruals is now down to $35 million or roughly 1.2% of total loans as compared to the 1.8% of total loans at the end of 2012. Then on line two, ORE was $12.1 million for the quarter rising somewhat from the $11.8 million and at the end of the last quarters our inflows modestly outpaced or outflowed and write-downs and there was no large ORE property skewing the category amounted to the inflow or outflow of this quarter. Our largest property sale for the quarter was $460,000 and the largest transfer in the OREO or ORE was $626,000. With continued improvement real estate values we would expect to see some meaningful reductions in the coming quarters in ORE from the core portfolios interest, contracts and sales in the bank-held property continue to materialize.

On line three and four both renegotiated loans in 90 days delinquent improved as overall credit quality remains in check skipping a lot down to line eight and nine we continue to see improvement in classified in criticized assets down 9.3% and 12.3% respectively in the linked quarter. Classified assets include roughly $6 million of the investments in the periods presented. With respect to specific reserves within the allowance on line five we charged off a $1.6 million specific reserve that was established in the prior quarter on a C&I name as well as the number of smaller specific reserves on a number of real estate secured loans. So all in all, the message continues to be the same, our direction has been communicated in more recent quarters asset quality continues on an improving trend in the third quarter highlighted by lower and declining criticized and classified assets reflecting stronger portfolio performance and the resolution of non-performing loans through restructures.

Moving on to Slide 19, allowance coverage to non-accrual loans as mark – excuse me, as Mike had mentioned earlier continues its quarterly trend upwards from 175% to 189%. The improved coverage highlighted on the top graph resulted from the decline in non-accrual balances which outpaced the reduction in the allowance. With strong allowance coverage to non-accrual loans combined with reducing levels of criticized and classified assets should lead to further reductions in the allowance over coming quarters, from this point in moving forward, the pace of the allowance decline were more closely tracked improvements in criticized and classified assets as well as improvements in the overall general economic environment. As you can see on the bottom bar chart, the allowance remains strong. Net charge offs were up for the quarter by $1.2 million as in the charge off of the $1.6 million specific reserve the charge off trend continues to lower. Recoveries in the quarter totaled $2.1 million and were mostly associated with the number of smaller recoveries.

Turning to Slide 20, also as presented in previous calls the non-performing asset reconciliation highlights the progression of problem loans and other assets during the quarter. A high level – at a high level in the far right column Q3 and starting on line number one we saw decline in the total NPA shown on line 13 of $5 million reducing NPAs and 90-day delinquent from $66.3 million down to an ending balance of $56.2 million.

On a more granular basis just to highlight a couple of lines here, on line two of column Q3, 2013 the level of new non-accruals loans increased from the previous quarter from $4.2 million to $7.7 million, the increase was largely due to a $2.2 million previously restructured A note of a commercial real estate loan that could not be rehabilitated well any additional loss is projected to be small the fall out or non-existent the fall out did impact the category for the quarter. Despite the overall migration out of non-accruals is a progression on lines three and four result in a net reduction in non-accruals of $4 million on line six. So overall migration continues to move in the right direction with lower non-accrual loans, positive activity in ORE and lower restructured loans resulting in a 9% decline in NPAs and 90-day past due for the quarter and a 35.7% change year-over-year.

Now, turning to Slide 21, in both the linked quarter and year-to-date, we’ve seen growth in areas of our loan portfolio as we continue to see strong demand in multi-family and single-family construction while experiencing increasing competition in the C&I’s lend. On line two, construction lending was up $48 million in the linked quarter, $11 million the total was comprised of 1 to 4 family construction activity with the balance in multi-family and CRE construction. We continued to build the balance construction lending pipeline as we have seen strong demand for multi-family housing this is helping to supplement the roll off and stabilize properties refinancing out of mini-perm on the effect of which can be seen on line three. While construction lending on line two is up $48 million in the linked quarter and non-owner occupied CRE is down $6 million, the two categories are being driven by projects funding and moving both in and out of the construction phase to both the permanent market and into the bank’s loan portfolio. We expect to see the CRE portfolio trend positively with the construction in non-owner occupied categories changing as projects continue to fund, stabilize, and move to permanent market.

So, then quickly before I turn the call back over to Mike, I would just say that the portfolio continues to trend favorably in asset quality. Our construction pipe – port – our construction pipeline remains strong and I believe we are well positioned for the patenting merger with Citizens.

Thanks for your attention. And I will turn the call back over to you Mike.

Michael Rechin - President and Chief Executive Officer

Thanks, John. Before we take questions I’d like to move the Slide 23 titled First Merchants Corporation priority overview and just share some comments. We are fully in the planning period of the year as we look forward to the closure of this year and getting out and fund 2014 so the bullet points here are in the forefront of our work, and many of them were consistent in all other remarks we put from our current with John Martin and myself.

Don’t want to take anything for granted, so we are going to spend hard to get this acquisition closed here in the next couple of weeks as I mentioned earlier I think the ingredients for that are in place we will see that through the integration as I said in the middle of the first quarter or next year well thought out the plan should work like it has in prior acquisition.

Before the end of the year of current market conditions remain available to us we would look to complete the refinancing of our remaining SPLF balance and potentially our existing subordinated debt and we think that there is a chance which rates further at to create a intermediate if not longer-term optimization of our capital structure and if that allows as our view seems to suggest it would we would take advantage of that.

Third bullet point speaks to the actual balance sheets coming together and so we will have a thorough assessment of the liquidity that Citizens has in combination with our own so when I reference reshaping and refining the post-acquisition balance sheet if the used purchase accounting were applicable, take advantage of the investment portfolio on combination with ours right-size it for the respective loan portfolios and trying to build the highest earning balance sheet we can.

Next bullet point down on attaining the expense targets I referenced they’ve been identified in a very, very consistent with the 30% total expense number that we identified in announcing May have to harvest those but they’ve been identified by line item and the service level of the clients and their franchise go get terrific service from the same people that are providing it today as part of our planning.

The last bullet point is more for the entire company, and we’ll have a year-over-year growth plan and absinthe our mortgage business which I think will continue to exhibit some of the softness that the entire industry is seeing we look for every lending business and fee business to grow.

Block and tackle plan that we have, takes the momentum we’ve earned through the year into the end of the year and into 2014. Our loan totals at 3% call it year-over-year or little bit shy of what we had talked about in terms of our middle, single digit number. But some of the component that ultimately go into loan outstanding that we feel very good about new names in terms of new clients from our business banking, commercial banking businesses on track right at our high level its worth 75% of our plan through the year with a quarter to go we feel great about that.

Credit quality John covered completely our treasury management, cash management fee line item has changed direction from the negative weight of overdraft fees going back a couple of years. The deployment of our technology and ultimate sell through to our client base of the treasury management as reverse the direction of that item. Our internal referrals all going the right way, we think the loan balances will fall off. Not in a dramatically more robust way than what we call for in the past in the middle, single digit but that’s kind of where we’re targeting is we look at next year with the area that needs more inspection on our parties to what actually takes place within the Citizens portfolio where we know we have some modifications and probably some exits to execute on.

So, we’re encouraged by what we’ve seen in the back half of this year for the remainder of this year and through the closing of the acquisition. At this point the three of us will take questions from anyone on the phone.

Question-and-Answer Session

Operator

We will now begin the question and answer session (Operator Instructions) And our first question comes from Scott Siefers with Sandler O'Neill. Please go ahead.

Scott Siefers - Sandler O'Neill

Good afternoon guys.

Michael Rechin

Good afternoon Scott.

Scott Siefers - Sandler O'Neill

Let’s see, Mark maybe first question for you. I was hoping you could just speak a little to what you think you guys ability to hold the margin sort of near this quarter’s level is may be speaking specifically to the 393 or so adjusted margin. What do you see as the major puts and takes and how sustainable do you think that kind of a number is?

Mark Hardwick

Well we really didn’t anticipate an increase this quarter on a core basis but our deposits came down more than expected and our total cost of funding came down from 40 basis points to 35 which was certainly helpful. I think we’re going to see some squeeze in margin going forward as the loan portfolio pricings just continue to put some pressure on our net interest income or net interest margin.

But like I said last quarter I'm really optimistic that we can keep up with any margin compression that occurs as it relates to net interest income just the $90 million of loan growth that we had this quarter at a 3% spread, I'm sorry this, the last 12 months at a 3% spread produces about $2.7 million of net interest income. And if the basis point is just under $400,000 of expense that allows for 6.5% to 7% or 6.5 to 7 basis points of compression for us to maintain our net interest income level so. I don’t think that we’re going to fund ourselves in a position where the margin is getting squeezed by more than that and we feel good about our ability to continue growing the portfolio.

Scott Siefers - Sandler O'Neill

Okay good, that’s a good color I appreciate it. And then may be could you speak to maybe in a little more detail to that volatility in other income I guess if we just net out the tax related issue in the third quarter you got probably $12.5 million or so of core and then the big drop was in that other fee line item, I wonder if you could just maybe speak to what you think sort of a good run rate total fee income level for you guys?

Mark Hardwick

Yes the OREO gains are something that we’re experiencing kind of late really through 2012 and 2013 that we didn’t have much of in the past that was more working on our problem credits and continuing to make adjustments downward in those OREO balances through the expense side of the income statement. And I think we found a floor as it relates to those and as we’re working out credits we’re seeing some gains on the sale. We did have about $600,000 last quarter and that number was around $300 this quarter and it may be an item we just needed to breakout separately on our income statement going forward given the significance or the volatility that it’s beginning to create in other so. The third quarter a year ago was only $80,000 and so to have $80,000 move to $300 this quarter and a quarter ago $600,000 it does just create volatility in the numbers.

Scott Siefers - Sandler O'Neill

Yes okay.

Michael Rechin

Scott, it’s Mike. I'm looking at the slide that Mark covered earlier Slide 13 with all the components of non-interest income I think this is remainder of your question. The top four line items what we consider to be very customer behavior oriented service charges, trust fees, insurance and electronic card fees. We would expect all those to continue to be flat at worse or grow. In mortgage business which is significant write-down on there that was down 32% to fee business for us more than it is balance sheet business and it was down 32% third quarter from second. We think the fourth quarter is likely to be soft as well based on what we see but should rebound in the spring. And then you get into some of the lesser recurring items that Mark kind of spoke to so I hope that helps.

The first quarter I think in a long we haven’t had any, taken any gains out of the investment portfolio Mark talked about the continued presence of those that we would use, should opportunities be attractive to take advantage we didn’t feel like we had any of those this last quarter. And then the OREO, I do think could continue to have upside periodically because of the fact that many of the properties in there have been in there long enough to taken the brunt of their appraisal such as the book balance of anything John’s team is managing likely has upside if we were to be able to move it.

Scott Siefers - Sandler O'Neill

Yes, okay. Good I appreciate that color and then may be just last question continuing with you Mike. You gave some good color around kind of the trends you guys are seeing within the individual line items in the loan portfolio but still a little shy at that mid single digit overall growth. Just as you look at things in the next few quarters, do you think there is a reason to believe that the growth rate of that portfolio in aggregate will accelerate up to that mid single digit rate or will we kind of stay in this lower single digit kind of a number for a while?

Michael Rechin

I think that the First Merchants legacy piece the entire piece that you’re looking at now results will be in a single mid digit. I think that we would look for every bit of what we’ve seen plus a little bit if standalone basis. And then the one portfolio that comes over from Citizens we did not plan on that growing as you know that we’ve got an asset quality issue there that’s kind front in center that will call for some of the behavior we had in our own portfolio in 2009 and 2010 which is to ascertain the cleanest either retain or exit strategy and then to act on it to free up the entire company to move positively with the business segments we think we can move.

I know that’s a hard answer to get through. The purchase accounting will reduce the size of that balance sheet when it comes over given that the reserve doesn’t. But we would certainly think by the time we get to the second quarter next year our relationship manager teams will be not only in place because they’re in place today but acclimated to the way we run the business and we should begin to see growth in that portfolio from summer time next year forward as well.

Scott Siefers - Sandler O'Neill

Okay, perfect. Great I think that’s from me. Thank you guys.

Operator

(Operator Instructions) And our next question is from John Barber of KBW. Please go ahead.

John Barber - KBW

Good afternoon. Mike I just wanted to make I was interpreting your capital optimization comment correctly. You talked about potentially redeeming the SPLF as well as subordinated debt year end. Would that mostly likely with cash on hand or should we see you guys issue security such as preferred?

Michael Rechin

I’ll let Mark add to this but we think that the markets as they’re currently available have pricing and appetite for our name such that we would not pay it off from our existing cash on hand as we have the first two-thirds of the SPLF obligation and we’ve effectively taken it from 91 to 34 from cash on hand. If the markets aren’t available we would likely pay that off from cash on hand. We have target levels both for tangible common equity at 8% that Mark highlighted that we’ve somewhat achieved. We have a total capital target of about 14.5% that we feel like we can refine in a transaction that would involve the SPLF balance and our existing subordinated debt.

John Barber - KBW

Okay. Thanks for that comment. And the other one I just had was relate to the Citizens deal. You talked about having two dozen teams that are working on the integration. I'm just wondering has there been any surprise depositors or negative compared to your initial due diligence?

Michael Rechin

No, we really knock on wood John the quality of the information and communication we’ve gotten from the Citizens folks in tandem with ours have been terrific those 22 teams encompass all the lines of business all of the back office function IT. If anything we’ve had a positive surprise in the quality of the team work between the two companies and so execution is really the key so I don’t want to get overly confident. But the hurdles that we see needing to get over I think we have strong design for the nice one and John covered it, I covered it I’ll say it again. The asset quality does not appear to be different than what we assessed in our April and May timeframe.

John Barber - KBW

Thanks for those comments.

Operator

The next question is from Stephen Geyen of D.A. Davidson. Please go ahead.

Stephen Geyen - D.A. Davidson

Hey good afternoon. May be a question for John Martin, you talked about well in Slide 18 you had the classified criticized loans and then also you had I think mentioned that non-accrual loans are likely to start leveling up. And I'm trying to reconcile all that I guess with the change that we’re seeing classified and criticized and also the financial for the allowance for loan losses to come down. Are you seeing the classified, criticized pay off and the movement is really not going to non-accrual, there is lower non-accruals is that kind of what we take from that?

John Martin

Yes, I think Stephen what you’re seeing or what I'm seeing as we go through the portfolio is financial improvement and any point a borrower who was having difficulties getting refinanced before because of the improvement in the market is finding a home. So, we are seeing kind of both in that instance. The comments really the leveling off in the non-accruals what I'm trying to communicate there is just that the number is smaller so. To get through that last $30, $34 million is just a smaller number to get through so it’s more granular the individual names in it so. That’s kind of what we’re there and we are seeing just overall improvement in those criticized and classified numbers are equally doing better.

Stephen Geyen - D.A. Davidson

Okay. And may be just one additional question, could you go through again the comment on the tax rate and the impact there?

Mark Hardwick

Yes, if you look at the face of the incomes or I'm sorry the press release, only one paragraph that speaks to it. But we had $554,000 loss that ran through other income. So, we would generally – its an investment in low income housing tax credit and so as we’re writing off that investment overtime the loss accumulates in that category. And this particular credit was waiting for approval by the state and so we had a number of months that we’re kind of, but we had to catch up once the approval occurred and so we have, we’ve written off the $554 and that loss is tax deductible and creates $194,000 of reduced tax expense. And then on top of that we had a tax credit that’s associated with the same low income housing project that came through our income tax line item as a benefit of $791,000. So, those two items together reduced our tax expense by $985,000 and…

Stephen Geyen - D.A. Davidson

So, go ahead, I'm sorry.

Michael Rechin

It was a $985,000 benefit just in the tax line item and net-net that creates a $431,000 bottom line improvement. So, I was just trying to get back to our tax rate that if you, if we didn’t have the both the loan come housing tax credit and the – the loss the tax deductible in the loans or the loss that are taxes would have been by $985,000 and it would have fallen more in line with historical tax rates of 26.8% of free tax earnings.

Stephen Geyen - D.A. Davidson

Okay. So, a good effect of tax rate going forward still in the upper 20s?

Michael Rechin

Yes, yes it was a, we’ll have this loan come housing tax credit going forward but at a much lower level.

Stephen Geyen - D.A. Davidson

Got it. Thank you.

Operator

And our next question is from Brian Martin of FIG Partners. Please go ahead.

Brian Martin - FIG Partners

Hey guys.

Michael Rechin

Hey Brian, good afternoon.

Brian Martin - FIG Partners

Mike if I understood it right kind of on the loan outlook as far as maybe being cuts better in the next couple of quarters and guess what, if I heard that right what’s, what leads you to you to be somewhat optimistic that it gets to the other the pace is going to pick up I mean is it certain markets are behaving better or is it just you guys doing a better job are there certain areas that are in – within that loan buckets that are picking up?

Michael Rechin

Well couple of things. I clearly felt in the feedback I get from all of our market leaders at the last 10 to 12 weeks are fairly subdued based on either the economies quantitative result softening a little bit the inertia out of Washington D.C, but for whatever reason our usage was down. The last question I answered a moment ago included a reference to what I call new names, new commercial clients from the lowest end of our spectrum.

In business banking to the highest end of the middle market and so we set targets by market for that to aggregate into a new name goal for the year and we had a strong third quarter in that regard. It just didn’t manifest itself in the loan outstanding that we estimate when we’re bringing those clients on. And so that’s why it feels like well utilization is not one of our strongest most accurate measures based on the way we mange the business that we would expect more organic usage out of clients that we currently have coupled with our kind of run rate on new client acquisition makes me feel like that mid single digit number works for the legacy First Merchant’s portfolio.

Our pipelines which are quantified in this group for several calls remain fairly robust absinthe the mortgage business and as I alluded to earlier the mortgage business for us is not a strong on balance sheet business, it’s much more of a fee business. So, while the fees from there will clearly stay at much more third quarter looking type of number. The units and the number that we actually put on the balance sheet if you are non-confirming for one reason or another would probably remain a little bit more constant but the balance sheet outstandings are driven by the commercial activity and I think you heard my thoughts as to where that’s likely to go.

Brian Martin - FIG Partners

Okay that’s helpful. And then may be just earlier question kind of going back to the margin. Mark, when you look at the margin relative with – the addition Citizens, can you give some color on kind of the outlook there, how much of an impact that will have?

Mark Hardwick

Well we, I don’t know that I’ve been specific as the margin itself as much as we have been in the earnings improvement overall that we’re going to recognize. They do operate with a lower margin, we do have specific tactics and plans in place. And I go back to our Lincoln acquisition that was operating at about 3.10 margin and we were able to take our company and combine it with theirs and based on the balance sheet strategies that we have really lived with on a combined basis or so 3.97 and so. We think there are some opportunities to improve their spread but the, lets say that’s not part of the modeling we have been focused on the expense reductions that are necessary to achieve the accretion that we’ll believe as attainable. And we’re working diligently to ensure a smooth customer transition. So, I – I don't have a specific number to give you when you tried to merge the two banks together as to what the spread and what margin will look like on post-integration.

Brian Martin - FIG Partners

Okay, alright. How about just may be one last one question and that is, from an M&A perspective with the conversion of Citizens what – when did that occur and I guess are I guess if you have already said that in may be I missed it and here secondly just kind of when you guys are you continuing to look at opportunity on the M&A front, are you kind of off the – are they off the table for business that you kind of get this the current one integrated?

Michael Rechin

Well, on the integration again our time – our timing would be to have that complete by the end of the first quarter next year and, as it relates to our continued interest in growing the company through acquisition we have one and we have a list of companies that we think like Citizens have a profile that would fit well under ours, the geography and a marketplace that we would understand. And so I don't think that there were definition I need to be a several quarter period to time before we could act on that again, but our priority at this point is really doing a terrific job with the Citizens franchise.

Brian Martin - FIG Partners

Okay. That’s helpful thanks for taken the questions.

Michael Rechin

Sure. Thanks Brian.

Operator

And the next question is from Daniel Cardenas of Raymond James. Please go ahead.

Daniel Cardenas - Raymond James

Good afternoon guys.

Mark Hardwick

Hey, Dan

Michael Rechin

Good afternoon.

Daniel Cardenas - Raymond James

Good afternoon. Just as I look at the margin I know things are pricing as competitive on the lending side, but are you seeing any pricing pressure on the deposit gathering side right now?

Michael Rechin

You know we haven’t yet, the minute rate started to rise and we saw a decline in the mortgage volumes we were looking at strategies to retain CDs and whether you know there were was activity that we should you know changes in our pricing models so we should deploy and we ultimately haven’t made any adjustments and we don't feel like our competitors are making adjustments to CD pricing. So, and right now there is no upward pressure on interest expense based on – based on the rate movement that occurred from the long end of the curve.

Daniel Cardenas - Raymond James

Okay, good, good. And then, in terms of the reshaping exercise that you guys planned to go through post-acquisition, can you perhaps give some guidance as to I guess in a perfect world how long you think this exercise will take?

Mark Hardwick

Could you repeat that I'm sorry.

Michael Rechin

It was Mark, I think Dan’s question was, as we pulled the balance sheets together and the term on the slide reshaping, how long would that take?

Mark Hardwick

Well there are – the bond portfolio we’re that actually anticipating making some pretty quick changes to the overall bond portfolio and some of the borrowings you know as we have fair value adjustments looking at making fairly quick moves before the fair value definitely would move away from you that minimize the income statement impact. So, and even some of the capital thing activities that we’re up to we’d love to have some of those complete between now and in the end of the quarter so that when we close our new acquisition that we would have kind of the optimal capital structure in place. So there are a lot of plans in place for our capital borrowings, the bond portfolio but I would say that customer aspects will certainly take more time or we have where it is that we want to make adjustments.

Daniel Cardenas - Raymond James

Okay, okay great and then just one last question I mean any thoughts about the Chicago portion of Citizens franchise you guys planning to keep that or is that something that would eventually get sold off?

Michael Rechin

But that, that was not our contemplation at the front end and nor is that now. They, the business is managed in kind of three regions now and the Illinois region which is how, how we deem it is really not mainstream Chicago per say, and the community there we feel like are going to fit with us really, really well obviously we’re going to have a lot of Chicago bank competition for our best customers, we’re going to find that off. But the idea that a portion of it doesn’t fit with us is not our strategy at this point.

Daniel Cardenas - Raymond James

Alright, great. Thanks guys.

Michael Rechin

Thank you Dan.

Operator

And this concludes our question and answer session. I’d like to turn the conference back over to Mr. Rechin for any closing remarks

Michael Rechin - President and Chief Executive Officer

Emily, I have no another than our shared appreciation for the listening and the questions on the call. We look forward to conclude this acquisition and have good results to talk about following the end of the fourth quarter. Thank you.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: First Merchants' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts