First Merchants' (FRME) CEO Michael Rechin on Q4 2015 Results - Earnings Call Transcript

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First Merchants Corporation (NASDAQ:FRME)

Q4 2015 Earnings Conference Call

January 28, 2016 02:30 PM ET

Executives

Michael Rechin - President and Chief Executive Officer

Mark Hardwick - Chief Financial Officer

John Martin - Senior Vice President and Chief Credit Officer

Analysts

Scott Siefers - Sandler O’Neill & Partners

Erik Zwick - Stephens Inc.

Damon DelMonte - KBW

Brian Martin - FIG Partners

Operator

Good day everyone and welcome to the First Merchants Corporation Fourth Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]

This presentation contains forward looking statements based on our current expectations reflecting various estimates and assumptions. These forward-looking statements include, but are not limited to statements relating to our business outlook. These forward-looking statements are subject to significant risk and uncertainties that may cause results to differ materially from the set forth in this presentation examples of which are included in the written presentation materials filed with the Securities and Exchange Commission in connection with this call. Please refer to those materials for a more detailed discussion of the applicable risks. Please also note today's event is being recorded.

At this time, I’d like to turn the conference call over to Mr. Michael Rechin, President and CEO. Sir, please go ahead.

Michael Rechin

Thank you, Jamie. And welcome everyone to our First Merchants earnings call and webcast for the fourth quarter ending December 31st, 2015. Joining me on the call today, as this is our tradition, our Chief Financial Officer, Mark Hardwick; and our Chief Credit Officer, John Martin.

The company released our earnings in a press release about 10 o'clock a.m. Eastern Day Light savings time and our presentation webcast speaks to material from that release. The direction that point to the webcast were also contained at the back end of that release and my comments begin on Page 3 on a Slide titled Fourth Quarter 2015 Highlights. Take that back, it’s actually titled ‘15 Performance and Full Year Highlights, its top of the page.

And we announced record 2015 income, net income of $65.4 million, an increase of 5.2 million over 2014’s net income of 60.2 million. Earnings per share totaling $1.72, an increase of $0.07 or 4.2% over 2014’s earnings per share of $1.65.

In that top section on Slide 3, a couple of other what I think of is signature events summarizing our performance for the year including a 20% increase in net loans which is inclusive of two acquisition closings that incorporated organic loan growth at the high end of the range that we’ve talked about on these calls throughout the year and an overall really satisfying acclamation of new franchises into ours at First Merchants.

The successful integration of Community Bank and Cooper State Bank I referenced just a moment ago, two acquisitions those would be have Cooper State Bank earlier in the year and Ameriana which closed at end year. We also completed two integrations, one of them for Cooper all of that work been completed in the last 12 months. And then November of 2014’s legal closing of Community Bank actually integrated in the first - early in the second quarter of 2015.

And when I talk about successful integration, it might suggest technology overlap and data integration it does, it does include those. It means more to us it’s an integration effort that we work on calls for a smooth changeover event or retention of clients, retention of talent. And each of those two events would fit that definition as have the acquisitions that we’ve earned from and integrations we’ve earned from in prior years.

Next bullet point down speaks about technology investment that we made, really excited about, that also went well probably a larger scale effort in either of the bank acquisition integrations and that one offset as factor really was kind of a functionality, investment that our clients want, drives greater client satisfaction and then 2016 provides a revenue lift opportunity we intend to take advantage of.

Bottom of bullet points there, talk to some performance ratios that we feel like are strong and we look forward to improving them. And ROA above 1 at 1.07, return on tangible common equity at 12.47 and efficiency ratio down 50 basis points from 2014, despite a really significant amount of one time numbers that Mark is going to dig into here in a little bit.

So our fourth quarter is highlighted briefly on the bottom earnings per share of $0.37 that we think normalizes as Mark will discuss it, $0.07 higher when you add in the onetime events that he is going to speak too in some detail. The first half of successful addition to your franchise by way of a legal closing of Ameriana Bank on the last day the calendar year as we plan for that company’s integration about two months now. And as I mentioned earlier, when I think about the net income earnings per share of $0.37 that would be after recognizing $4.1 million of combined acquisition expenses that Mark will touch on.

The last highlight that kind of spreads across the fourth quarter and the entire year and John Martin will spend on it later, but just I am really consistent improvement in our overall asset quality both in our legacy portfolios and those companies who loan portfolios have joined us. As we look forward, John might have some thoughts on how we are scanning the local economy, the state’s economy here in Indiana as well as Ohio and Illinois, impacts that we see down the road from items like energy, but overall looking backwards asset quality improvement that have aid our income results.

So at this point, I’m going to turn the call over to Mark.

Mark Hardwick

Thanks Mike. My comments will begin on Slide 5. Total assets on Line 8 increased in 2015 by $937 million or 16.1%, following a 7.1% increase in '14 and 26.3% increase in 2013. On Line 3, good organic growth of 4% in 2014 and 9% in 2015 was further improved by healthy acquisition strategy. Our Cooper State Bank acquisition in April and our Ameriana Bank acquisition in December added $430 million or 11% in loans. So on a combined basis as Mike mentioned, total loans increased 20% this year.

Consistent with the last couple of year’s guidance, we are anticipating organic loan growth in the mid to high single digits again in 2016.

The allowance on Line 4, in total dollars has declined very modestly in 2014 and ‘15. However as a percentage of loans, the allowance has declined from 1.87% in 2013 to 1.63 in ‘14 and now totals 1.33% of total loans. Most of the decline is due to the purchased loans that are embedded - that have embedded credit marks that do not require an allowance that are included in the denominator of that calculation.

So the best overall analysis of our loan loss coverage will be presented by John a little later on Slide 21.

Goodwill and core deposit intangibles increased $16 million in 2014, due to intangibles created in our Community Bank of Noblesville acquisition, while increasing by $41 million in 2015 due to our Cooper State Bank acquisition and Ameriana Bank acquisitions, which have been positively offset by a pickup for a reduction of intangibles of 8.5 million due to the sale of First Merchants Insurance Group in 2015.

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 yields. And the portfolio yield for 2015 totaled 4.2% compared to 4.58% in 2014. And the fourth quarter loan yields were 4.32 compared to 4.46 in the fourth quarter of ‘14.

Fair market accretion has opt to minimize loan yield compression and is identified pretty clearly in the net interest margin slides later in the presentation.

On Slide 7, our $1.3 billion bond portfolio continues to perform well, producing higher than average yields with moderately longer duration than our peer group. Our 3.97% yield is actually 8 basis points better than year ago and continues to compare favorably to peer, averages of approximately 2.56%. Our duration is just five months longer than the peer and the average life is five years.

The net unrealized gain in the portfolio still totaled $36 million and maturities are manageable into the near future. 2016 maturities totaled $168 million with a yield of 3.69. 2017 maturities totaled 169 million with a yield of 3.30. And 2018 maturities totaled 118 - sorry - 112 million with a yield of 3.68.

The strengths in our investment yield is self-maintained our net interest margin in this low flat rate environment. And the variable nature of our loan portfolio with $2.1 billion repricing daily allows us to take on the little more interest rate risk than our peer banks and we feel the return is worth the risk.

And in effort to protect tangible common equity in a rising rate environment 48% of the portfolio is categorizes held the maturity.

On Slide 8, non-maturity deposits on Line 1 represent 77% of total deposits and grew by 247 million or 7.5% in 2014 and 573 million or 16.3% in 2015. Those two include our acquisition. So of the increase, 54 million or 1.6% was organic in 2014 and a much stronger number 241 million or 6.8% was the result of organic growth in 2015.

Now if you look at the bottom of the slide on Line 9, our tangible book value per share increased by $1.3 or 7.5% following a 12.2% increase in ‘14 and 11.1% increase in ‘13. Well not detailed on page, the tangible common book value per share increased by $1.3 and includes $1.72 increase from EPS, offset by M&A dilution of $0.28 per share and $0.41 per share in dividend payments.

We announced our acquisitions and talk about our earn back, but I just wanted to give you some of the specifics related to those announcements. We modeled day one dilution of $0.24 per share for Cooper State Bank as up on announcement and $0.29 for Ameriana. And we expected a $0.16 per share pickup or positive offset when we sold the Insurance Group and eliminated those intangibles. And so our target if you combine those three the $0.24 plus $0.29 minus $0.16 is $.0.37 per share and the actual result as of 12/31/2015 was $0.28 per share, a pickup or better numbers by $0.09 compared to our original models. So pretty pleased with our ability to continue delivering on the commitments we make in acquisitions.

As previously mentioned, the mix for deposits on Slide 9 continues to improve and our total 2015 deposit expense was just 40 basis points.

Our regulatory capital ratios on Slide 10 are above in the OCC in the Federal Reserve definition is well capitalized and our internal target. Organic loan growth, the implementation of Basel III, a $5 million redemption of trust preferred debt, the cash purchase of Cooper State Bank and our stock purchase of Ameriana resulted in a decline of 40 basis points in our total risk based capital numbers from 15.34 year end 2014 to 14.94 as of December 31, 2015.

During our strategic planning, meetings in December of 2015, management recommended a modification to First Merchants internal capital targets. After extensive peer analysis and stress testing, the Board approved a modest increase in our tangible common equity from 8% to 8.5% and a more meaningful decrease in total risk based capital targets from 14.5% to 13.5%.

While management doesn’t have immediate plans to reduce hybrid equity in the near term really or the long term, we shouldn’t be adding any additional hybrid capital as we grow the balance sheet.

The corporation’s net interest income on a fully taxable equivalent basis on Slide 11, totaled $207 million from $195 million in 2014. Our acquisitions for ‘14 and ‘15 positively effects total net interest income, so looking at margin as a great way to normalize performance. Our net interest margin totaled 391 in 2014 and declined to 280 in 2015.

And given the interest rate environment and the facts that Community Bank of Noblesville’s net interest margin and Cooper State Bank’s net interest margins were in the low threes, we feel great about our 3.80 net interest for the full year 2015.

Our 2016 plan calls for 1 December of 2015 rate increase equaling the fed’s actual decision but does not include any additional increases in 2016. We are anticipating that our net interest income will essentially mirror organic loan growth on a core basis, so we’re expecting our net interest income to grow at a very similar rate as organic loan growth in the mid to high single digits plus approximately an additional $15 million that will be the result of the addition of Ameriana Bank into our company for a full 12 months in 2016.

Total non-interest income on Slide 12 normalized for Line 7, 8 and 9 declined by $2.6 million for the year. However loss revenue in the second, third and fourth quarters from the sale of the insurance business created a $3.3 million negative variance for the year and accounts for more than a 100% of the decline as various other categories improved modestly throughout 2015.

Non-interest expense on Slide 13 totaled about 177.5 million for the year, up from the prior year total of 168.5 million. Community Bank was included in the results for full year in 2015 and Copper State Bank was included for half year in addition to $9.8 million of onetime merger integration and system conversion expenses. When normalized for onetime expenses, our 2014 - when normalizing our onetime expenses for ‘14 and ‘15, non-interest expenses increased by 3 million are just under 2% for the year.

We feel very good about our growth rate of expenses considering all new investments in people and facilities related to our acquisition expansion in Indianapolis and the Columbus, Ohio MSA.

Of the onetime items on Slide 14, Cooper, Community, FMIG and Ameriana are all M&A related items, specifically we included items like core processing expenses prior to conversion where we are carrying their system cost on an ongoing basis. The severance and retention expenses of employees that do not stay with the company, post integration, contract termination expense related to the acquired bank’s technology or core system, physical infrastructure and investment banker fees are those are some of the times that we’ve highlighted as being onetime of extraordinary.

And in the yellow item on this chart, labeled online banking and other, it includes our online banking conversion from S1 or ACI that Mike mentioned to FIS for both consumer and commercial online banking users which consisted - and the cost really consisted of some technology expense but primarily all of the temporary human resource expenses related to adding about 80 additional call agents during the time of conversion to assist our customers, our customers and customer service during this significant access channel enhancement.

And additionally highlighted in the yellow column are our branch write downs resulting from consolidation activities where - which those are the largest item in the other category.

Now on Slide 15, net income totaled 65.4 million and EPS totaled 1.72% for the year. Higher net interest income on Line 1, reductions and provision expense on Line 2 and improved operating leverage throughout offset by an increase in taxes of onetime increase in taxes of $2 million related to the sales insurance agency produced an 8.6% increase in net income on Line 9 and a 4.2% reported EPS increase on Line 10, while continuing to improve our efficiency ratio for the last two years consecutively.

Now on Slide 16, you’ll notice our quarterly run rate from 2014 and ‘15 and just as a reminder the fourth quarter included $0.07 of onetime M&A expense related to Ameriana’s closing on December 31st of 2015.

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

John Martin

Alright, thanks Mark and good afternoon everyone. I’m going to be updating the trends and the long portfolio starting on Slide 18 then review the asset quality summary and reconciliation. Going to the fair value and allowance coverage and then close with a few thoughts in the portfolio.

So if you please turn to Slide 18. I am going to start in the first columns, a fairly busy slide of the change linked quarter box which represents organic loan portfolio growth and which excludes the acquired Ameriana loans. So for the third quarter, total - on Line 11, total loans grew organically by $52 million. The organic growth for the quarter was driven by increases in the commercial portfolio where on Line 1, commercial loans grew by $36.6 million and on Line 2, commercial real estate construction grew by $45.5 million. Also note on Line 8 was a 15.5 increase in home equity lines driven by increases in new originations while overall utilization declined modestly.

Moving over a box labeled change year-over-year, we organically grew 339, call $340 million or roughly 9% for the year. The growth was in similar categories as the linked quarter with C&I and CRE construction growing organically by $139 million and $130 million respectively. Also on Line 9, public finance grew year-over-year by $122 million. So all in all with Cooper, Ameriana and the organic growth, total loans grew roughly 20% or $770 million.

Turning to asset quality on Slide 19, improvement in asset quality continues to be good, to be good story, where year-over-year total NPAs in 90 days plus to decline $32 million or roughly 43% prior to the addition of Ameriana and Cooper State Bank. And $23.2 million or 31% with the NPA and 90 plus days loans - delinquent loans from the merged companies. In this category, asset quality has improved both before and after the merged portfolios.

Dropping down to Line 7 and 8, classified assets on Line 7 were down 17% for the year from 192 million to 159.8 million before adding $12 million in additional classified assets from Ameriana.

Then to see the quarterly change in the asset quality, let’s turn to Slide 20. This reconciles the migration of asset quality for the quarter, year-to-date and shows the effect of the inclusion of the Ameriana portfolio and asset quality. I’ve highlighted in the first quality, the first column rather, the year-end starting 2014 reference point were ending MPAs in 90 days past due start at roughly $75 million.

Then moving from left to right on Line 14, you can see this steady reduction in non-performing assets during the year declining to $53 million through the first three quarters of the year. And then in the fourth quarter, down to $43 million or roughly 43% year-to-date before we added $8.6 million from Ameriana and ended the year at $52. So overall a solid performance, saw some increase in OREO with the addition in Ameriana portfolio but through our own core portfolio has a solid overall improvement asset quality.

Now turning to Slide 21, I’d like to turn your attention to the allowance and credit marks on our acquired portfolios. Highlighted in the far right column is the most recent quarters allowance in fair value position. The allowance on Line 1 has been most flat for the past year and has remained around $63 million for the year finishing the quarter at $62.5 million. Again for the year we had 1.9 call it $2 million in net charge offs with $408,000 in the fourth quarter and no provision expense.

With the continued improvement in the asset quality, I would expect provision expense to closely follow net charge offs in the near term with some marginal provision associated with portfolio growth. You know running at around 10 basis points or less of net charge offs on an annualize basis which would quite roughly a million maybe a little bit more than a million a quarter provision borrowing recoveries or you know other events in either direction.

So dropping down to Line 6, the allowance coverage to non-accrual loans improved and is being driven by the improvement and asset quality I just mentioned it, that’s increased from 193% to 199%, which continues to improve the coverage to recent historical highs. As a comparative measure, on Line 7 the allowance to non-purchased loans, these are just non-purchased loans was 1.65%. And on Line 9, the allowance plus the fair value adjustment to loans and fair value adjustment remained at 2.31% with the addition of the call $11.3 million of Ameriana credit marks. I think both of these numbers continue to highlight relative strength, their credit leverage remaining to cover charge offs from both purchased and core portfolios.

So a couple of thoughts just quickly on Slide 22 as I conclude my remarks, I feel good about the loan activity in the quarter across - really across the commercial spectrum seeing good growth in the construction development and C&I portfolios. Asset quality trends continue to improve providing sound allowance coverage without really a current quarter provision and we continue to have credit leverage with allowance and mark coverage exceeding 2.3%.

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

Michael Rechin

Thanks John. I am on Slide 24, a little overview of a couple of items I’d like to hit on again if we haven’t covered them in either of my colleague’s remarks. The first word on the page is focus, Mark referenced, we start with the year with a more narrow business scope having exited the insurance business mid last year, so we’re going to really concentrate on areas where we are particularly proficient in terms of extending credit across all the markets we cover, industries, verticals within commercial banking and then gathering deposits from those same commercial borrowers and then through our in excess of 110 banking centers. I feel good about that straightforward approach, I think it’s pretty consistent with where we’re having our greatest success.

Referenced earlier this third quarter upgrade, we feel like between personal fee use, commercial fee use, we’re going to have a lift in those combined categories in excess of $0.5 million largely comes from new clients, comes from a little bit from the acquisition and it comes from comprising power for a better product that we’re offering that customer mix.

The next bullet point down organic growth, our primary path to growing this company as success in the marketplace and that calls for great execution on organic growth, it’s difficult because it’s an everyday deal. But between winning new clients, selling deeper into our clients you know retail is working on this net new accounts, paradigm throughout our banking centers which is proving successful as we try and make sure we are getting paid for accounts and sometimes leaving legacy product offerings from our retail concepts that have joined us through these acquisition. So we feel good about that. Our Chief Banking Officer has a sales management protocol in all of our lines of business. That gives me confidence that if our markets have a reasonable economy that operating that we are going to get our share in more.

Probably always looking at our talent level to make sure that in these new portions of our company, we’re getting people that grasp our value proposition in the marketplace and can adopt to the cadence that we expect to operate. It’s kind of an everyday opportunity for us. And then a couple of bullet points that are paired this last one in the top section proving our operating performance progress and then slightly down the page continuing with some banking center optimization and fuller implementation of some workflow technology, the efficiency is the link between those two thoughts and it’s real for us. The efforts are real and the results are real.

Mark covered Page 13 - I am sorry - 15, it had a three year trend of efficiency from 62.5 to 60.13 to 60.8. And the 60.8 as he covered included several million dollars of onetime expenses. So we would expect a fourth year of improvement with expected decline.

The top bullet point under the middle of the page realizing acquisition synergies, it references Cooper State Bank in terms of fuller stimulation but quite frankly we on our an important year three for our Lakeshore franchise with growth kind of metric expectations, year two for Community Bank and Coopers you know you might recall Community and Coopers pair with existing growth markets of our Community Bank as part of our Indianapolis business, Cooper State Bank is part of our Central Ohio, Ohio region business and so we near two, we feel like we begin to get to the run rate that gets us the kind of production on an overall market that we would expect.

We look forward to utilizing our integration techniques again here about eight weeks from now really. So the planning is well on place and we look forward to think our customers enjoy getting through the - of change and seeing what our full time branding, full time service same faces in many cases from those companies can provide.

Then the last point, Mark kind of demonstrated when he went through some of the math on tangible book value we’re in back but we’re trying to maintain a track record of delivering on several announced acquisition attribute, some of them very financial like earnings per share, accretion of tangible book back, it goes towards items like getting the net interest margin and then acquired institution closer to our coordinate interest margin which is tough typically comes from the liability side more than anything it comes from things like talent retention and then getting the expense saves which is really the dominant year one activity typically.

So we’re going to open up the phone here Jamie for questions here in a moment but draw some confidence from on our ability to stay consistent in our ‘15 performance look forward to the New Year. So Jamie if there are folks with question, we are prepared for them I believe.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from Scott Siefers from Sandler O’Neill & Partners. Please go ahead with your question

Scott Siefers

Good afternoon, guys.

Michael Rechin

Hey Scott, good afternoon to you.

Scott Siefers

Thank you. Hey Mark first couple of questions for you just on the expense side and there you start out sort of ticky tack. So just you gave the expense detail on 5.13 just you know the major line items. I am wondering if you can look at 4.1 million in unusual charges from the fourth quarter and just maybe let me know who they break out among the various expense categories?

And then the follow-on question on expense is, if we break those out, you are sort of 42 million or so in total costs for the four quarter, I think Ameriana as I am recalling correction would add somewhere around 4.5 million or so per quarter all of equal. So if were to look at sort of a $46 million-$47 million quarterly run rate, would that be a good number to go off of as the starting point cost saves from Ameriana?

Mark Hardwick

Well, see pulling up a couple of different items to make sure I’ll give you - I am going to answer. The total obviously the 4.1 it looks like - I apologize, just a moment, looks like most everything related to the fourth quarter, 4.1 was really in the contract kind of termination area. And then the other I should say split evenly, looks like about half of it was severance and retention bonus, severance and retention expense that we had and then the other half were all contract write down.

So if you look at Slide 13, it looks like a couple of million dollars of that expense about - was in that - about 1.8 was in the salary and benefits and then the rest was kind of split in the other - outside - not outside, it was all in item 9 other to make up the 4.1. I apologize I didn’t spend as much time just on the quarter but that’s the breakdown of 4.1.

Scott Siefers

Okay, so that’s perfect. And I am sorry to touch off, but just to sort of expense run rate when we get Ameriana in?

Mark Hardwick

Yeah in Ameriana, their ongoing expense for us is, it’s going to be somewhere around $10 million for the full year of fiscal ‘16. So we didn’t have any expenses in 2016 with exception the onetime, nothing from a pure operating standpoint. And then your question on the quarterly run rate, we’re estimating that it’s going to be somewhere between $45 million to $46 million for quarter, which I think is about what you mentioned.

Scott Siefers

Okay. Okay, perfect, thank you. And then maybe just one follow-up on the margin, if you could maybe go into what in your view cause the core compression in the fourth quarter? And then if I understood your guidance correctly, it sounds like the reported margin should be pretty much stable with the fourth quarter level going forward such that virtually all NII growth is driven then from balance sheet expansion, is that a correct way to think about it?

Mark Hardwick

Yeah, we may see a little bit of compression but the way I describe that I think having we’ll pick up a little bit from Cooper that will help makeup the net interest income difference because we only Cooper for about a half year in ‘14. And then when you just look at the fourth quarter, we had $233,000 less in fee income that went through the margin numbers and we actually had a $111,000 expense related to refinance of one of our broker deposit. So for the quarter, we were about 340 less than normal and net interest margin that were related to fee income becoming a little weaker than the prior quarter and that onetime extraordinary broker deposit refinance.

And then the other item is we had about $85 million of additional earnings assets that were all related to public money that because we have a lot of public deposits when it’s tax receive time, the average earning assets increases by about in this quarter increased by an average of 85 million. And those are deposits where we can only really invest them in fed fund. And so it’s an increase in earnings assets but it really doesn’t add anything to our net interest income. So those two items combined are the reason that the core margin looks well this quarter, but we should see a nice return in the first quarter because we don’t anticipate having the same weakness in the fee income, we won’t have the broker deposits in our earning asset should stabilize with a lesser amount of public money.

Scott Siefers

Okay, alright, that’s perfect, thank you for that color.

Mark Hardwick

You’re welcome.

Operator

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

Erik Zwick

Hi, good afternoon, guys.

Michael Rechin

Hi Erik, how are you?

Erik Zwick

Good thanks. Maybe I’ll start with regard to the mobile and online banking update, you know which non-interest income categories present maybe the best opportunities for revenue improvement and you able to kind of quantify that at all?

Michael Rechin

Yeah, I tried to offer a little bit a moment ago, I go back over. They would be in our service charge category. Mark referred to fees just a moment ago and the fees that he was relating to as a portion of net interest margin are actually commercial loan oriented fees that come back in the market should be a prepayment. They had a maturity in accruing those fees. Different than your question where you’re talking about our technology fees that come through service charge, so the largest individual line item within there has historically been overdraft charges and that it’s still is. But that general overall caption includes all of our business related cash management fees that will have our personal fee income.

And what I alluded to earlier was about our $1.3 million 2015 level for personal that we expect to grow about 15%. And on the commercial side it’s about three times that number in gross dollars just around just under $4 million that’s also going to grow in our own view about double digits 10% or 11%. And I - when you dig deeper into it, all of it comes from existing customers, taking advantage of better products for which are repriced on top of our normal in the market and the gathering of new clients.

Erik Zwick

Great, thank you for the color there. And then obviously within credit the trends in non-accruals and early delinquencies are all positive, is there anything that you are seeing that causes you concerned with regard to future credit trends either from a loan structure, economic or kind of borrower health perspective?

Michael Rechin

You know Erik when I think about kind of what’s happening in the world today and there’s been a lot of conversation around oil and gas and Ag and Ag slowdown. You I look at our portfolio and think you know we don’t have a lot of direct exposure to those areas. And I think we’re potentially have some impact will be kind of second tier, third tier as it works through the economy in the manufacturing side as lot of production in Indiana, Northern Indiana. Around the state that you know is impacted by slowdowns in those areas. We do have some exposure in the Ag production the Ag land space. But nothing that you know is that significant.

So it’s really more the global economy level you know we still continue to see strong construction activity in the multifamily space and senior space. And we continue to originate new opportunities there. But from an economic standpoint that’s kind of where I see things today.

Erik Zwick

Great and then kind of moving on mortgage gain on mortgage sell revenue had a rebound in 2015. I guess any comments on your outlook for 2016 and how much maybe Ameriana could contribute?

Michael Rechin

Well if you look at the way we ended the year Erik, we had to your point strong fourth quarter closing about $68 million in closing. We actually take a pretty good sized pipeline into 2016 and that would not reflect any of the Ameriana additions. They’ve been in the mortgage origination business, they were probably not as fully staffed in the origination function relative to their retail base. And by given the overlap in our retail base, it’s one of the synergies we expect. So I think they had six folks in that business and $600,000 in as a revenue line item. So we would clearly expect to bring that over. And then if we add our origination coverage on top of their physical franchise, there is some upside there. But we’re kind of early in.

Yeah to be honest you know until that integration takes place, Ameriana runs well under our ownership someone in this interim space prior to rebranding and such.

Erik Zwick

Got it that makes sense. And one more if I could, just thinking about the size of the investment security or security portfolio of relative to average earning asset, so you kind of comfortable with that level today and would you expect it to growth kind of commence it with loan growth in the rest of the balance sheet?

Mark Hardwick

You know we might be willing to see our kind of loan to deposit - our loan to asset ratio I am sorry, move up slightly. But this is right within our target range where we would like to see the bond portfolio, so since fairly steady for the last couple of years and I wouldn’t anticipate seeing the number of grow in 2016 we’re primarily focused on having our deposit funding increase the loan portfolio throughout the year.

Erik Zwick

Great, thanks for taking my questions.

Mark Hardwick

You’re welcome Erik, thank you.

Operator

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

Damon DelMonte

Hey, good afternoon, guys, how you are doing today?

Michael Rechin

Good Damon. Yourself?

Damon DelMonte

Great, thanks. My question relates to the loan portfolio, could you give a little color on some of the quarter-over-quarter decline specifically with commercial real estate and residential mortgages?

Mark Hardwick

Sure. I think I would address those as - you know as come into the end of the year, we do have a portfolio, construction portfolio that is really designed to build, stabilize and move to the secondary market. So there was some of that in the quarter as well as just the loan amortization in the CRE portfolio, so as you cut that going on.

And similarly in the residential mortgage space, you know you’ve got again normal amortization out of that portfolio that without incremental originations into the portfolio. Again our residential mortgage is really originating itself, so we are not actively looking to growth that portfolio, it wasn’t be there, two primary drives that I would point to in those portfolios.

Damon DelMonte

Okay, the residential mortgage was down like you know $75 million or 11% on the quarter, it seems like that might be more than just normal amortization of those, I mean did you guys - did you hold maybe more loans for sale last quarter or something and/or maybe reclassified some loans and sell them this quarter?

Mark Hardwick

You know I am working at my residential mortgage portfolio year-over-year down 44.9 the linked quarter down 12.1 and we acquired with Ameriana in the portfolio. The linked quarter, we’re up 108. So I am not sure.

Damon DelMonte

I was looking at that Slide number 18 where it says Q3 ‘15, 677.8 and then the next column says 602.4, is that the fourth quarter?

Mark Hardwick

Backup slow down for me, one more time.

Damon DelMonte

So Slide 18, the column heading Q3 ‘15, it shows residential mortgage is 677.8 and then next column over shows 602.4?

Mark Hardwick

That excludes the Cooper State loans which if you now look at the foot note, I apologize, the foot note at the top of that has we backed out the Cooper Loans just to show you the effect of Ameriana, so.

Damon DelMonte

Okay, so the 677 includes the Cooper?

Mark Hardwick

Yes.

Damon DelMonte

Okay, I got you. Okay, I thought they are both organic like.

Mark Hardwick

No, that - but I see where that be confusing.

Damon DelMonte

Then that totally answers my question. That makes sense. Okay, thank you. I guess my next question, you know Mike you mentioned in your final slide about you know ongoing banking optimization, is anything kind of create with that, do you have any plans to maybe trip some branches or is that just part of the you know ongoing everyday philosophy if just trying around the bank as officially as possible?

Michael Rechin

Well it is kind of ongoing but it does get identified if that’s kind of your question. And typically when you are integrating the acquisitions, we more first to the easiest ones and try and take advantage of franchise change first. And so while we have some legacy First Merchants banking centers that are struggling with the ability to grow based on transacting company with our pursuit of those efficiencies typically fall behind integration oriented ones with Ameriana upcoming in front of us here. I think we talked about 13 banking centers in Ameriana becoming eight, closing eight actually with a five that we’ll remain autonomous, the balance of them being combined in our store, so that’s kind of front and center for us between now and May.

Damon DelMonte

Okay, perfect. And then just kind of broader picture here with you know two deals completed during 2015 obviously you have conversion coming up from Ameriana, you know how does that change your approach to that as M&A in ‘16, do you feel like you need to wait until you fully integrate Ameriana before you look for another potential opportunity or do you feel that you are in a good enough place where if something came along in the next month or two you could pursue that?

Michael Rechin

Well we feel if the great opportunities come out, we’d absolutely be read to pursue at the mean. Having the work as you know as it kind of in your question is embedded the idea that all of the work associated with an acquisition is not the same whether you are on the front-end discovery stage goring through legal, working through integration. And so the ability for us to look at another opportunity between now and integration which will come really quick would take place.

I think of it much like the question to John about extending loans and trying to find the balance with that’s a fair opportunity whether it’s a commercial banking client or retail banking client or an acquisition where the valued us has to be strong and easy to see and negotiated at a fair price for both parties. But in terms of their core of your question, would we be ready to continue. The answer is, yes.

Damon DelMonte

Okay, that’s I had it for now, thanks a lot.

Mark Hardwick

I appreciate it.

Michael Rechin

Thank you. Thanks Damon.

Operator

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

Brian Martin

Hey guys.

Michael Rechin

Good afternoon, Brian.

Brian Martin

And Mike just a follow-up that last question just on M&A, I mean just given the conditions in the market lately and then I guess how would gauge the temperature of the M&A market today. I mean that obviously it sounds like you are ready but an I guess any apprehensive in the part of sellers today or is anything different than it was the last couple of months?

Michael Rechin

I’d say it’s very consistent with the last couple of months. I think the number of institutions that were having dialog with the same arguably slightly higher. I think that you the marketplace, the stock market valuations give everybody reason to think things, getting to that fair what’s right for our shareholders’ value equation I think is credit going and we are at a fairly steady state valuation there for a long time, it seem we are at temporary blip here.

But I think that the number of Boards of Directors looking forward as to companies that they are consider being a part of, I think that number is increasing.

Brian Martin

Okay and as far as - go ahead mark.

Mark Hardwick

Just going to say, we’ll stick to our identical discipline which is evaluation our cost save. You know as you come up with the price based on the number of shares that you can afford issue and the headline number based on recent changes in the stock price, it’s a lower headline number. So we’re continuing to work our way through opportunity and manage kind of a different headline numbers. And I think that’s the case throughout the M&A environment.

Brian Martin

Okay, and just a size of the target you guys look at change or can you just remind me I guess what’s kind of sweet spot as far as where you would look?

Michael Rechin

Yeah, I really think of Cooper is being an aberration, so Cooper State Bank at a $130 million at this point would be an aberration for us look at on a go forward basis because of the effort that it takes. The real attraction to that bank was its absolute geographic overlap with our existing Columbus operation and it’s kind of unique delivery of retail traditional retail to our Ohio operation which was exclusively commercial.

So 100 - you something less than a quarter of a billion dollars would be tough for us and it wouldn’t have an attraction to go to a new marketplace where we don’t operate for that size. So I think half a billion dollars is kind of a number that we think make sense where you can really dedicate all of your integration resources and produce income that’s benefits our shareholders.

Brian Martin

Perfect, okay. And then maybe just one other question, maybe Mark just on the margin, after the rate increase I mean any sense on - I mean I assume no change from your commentary, deposit pricing pressure, anything you are seeing differently with all of a bumping rights here?

Mark Hardwick

We’re not feeling that pressure on the deposit side at this point and we have $2.1 billion that they prices daily, so we were - we have seen an uplift in our prime based categories in our LIBOR base categories with December rate increase.

Brian Martin

Okay. And Mike sometimes you’ll give some details on the commercial portfolio and just kind of the pipelines and kind of where they stand just in general you know I guess how do they look today versus whether it be last quarter or how do you guys track those?

Michael Rechin

Yeah, I’ll make offer a similar thoughts I did a moment ago on mortgage. On the commercial side, we had a very strong fourth quarter of closings, a lot of it was actually wait in the year, so while John was referring to that some of the commercial real estate categories being paid off that’s our kind of a normal expectation. Our originations were strong. It actually process a smaller pipeline on the first of this year beneath $200 million, lower than $200 million which is down a fair amount from the end of the third quarter.

And those for that pipeline measure that I give often is for those opportunities where we have commitments that are in documentation on the way to closing. Right behind that would be opportunities where we think our ideas win with the client that haven’t gone to being chosen yet. And there is ample opportunity in the market, that pipeline numbers up a $100 million over the third quarter. So while the immediate pipeline is lower than it was at the end of the third quarter are kind of combined to look at activity is strong.

Brian Martin

Got it. Okay.

Michael Rechin

And let me just add then to be more clear. I think we’ve been giving a pretty consistent 6% to 8% loan growth guidance for all throughout 2015. We wind up a little bit higher than that at 9% organically. I’d like that 6% to 8% number. That net interest margin we’re trying to protect as much as possible, we could clearly increase our loan growth number if we wanted to compromise on the coupon on our commercial lending and that’s not a trade we really like. So I think I like the 6% to 8% number.

Brian Martin

Okay, perfect, that’s helpful. Thanks Mike. And maybe just a last one, I’ll step back and listen is for John. Just two think John, it look like your organic classified number was up a little bit from third to fourth quarter, maybe 5 million or 6 million. Just kind of wondering if there is anything in there and just kind of what that was driving that? And then maybe I did the math wrong on that but the non-performing look like even with the addition of Ameriana and the quarter they declined from third quarter to fourth quarter just kind of what the improvement was. I think Ameriana maybe added 8 million or 9 million to the non-performing number but still you could give more color on that would be perfect. Thanks.

John Martin

Sure. Thanks Brain. Yeah, you know in the fourth quarter as I mentioned when I look at the Ag portfolio, we’re looking at farmers that are coming out of the field that have had some deterioration. We’re grading those appropriately. And you know there is some effect of borrowers who are related to Ag and manufacturing you know by extension and you know it is having an effect of driving that. That number on the criticized somewhat but on Slide 19, you look at 2015 hits down for classified even in the fourth quarter and then the criticized number is, you know it’s really kind of flat up a little bit and it’s you now it’s just a part of the ongoing grading in the portfolio.

So I don’t see it as you know a core trend necessarily. I think when I think about names that are in that bucket, there are names that are going to be in that bucket and come out of that bucket based on performance in a given couple of quarters. So I don’t have a high degree concern over that movement.

As it relates to the NPAs. If you want me to speak to those, I mean we continue to more ORE [ph], you look at that other real estate number in a 11.6 for First Merchants by itself that’s down you know prior to adding the Ameriana really it’s the 5.8, 5.7 is the Ameriana ORE and we just continue to make good improvement, our 90 days plus delinquent is down, our non-accruals down and I don’t really have it on the slide but it’s on the press release. We’re making progress as well on the overall delinquency somewhat. So overall that the trends are positive year-over-year and for the current quarter.

Brian Martin

Got it. Okay, thanks for taking the questions guys.

John Martin

You’re welcome.

Operator

And our next question comes from Justin Morrow from [indiscernible]. Please go ahead with your question.

Unidentified Analyst

Good afternoon, guys.

Michael Rechin

Good afternoon, Justin.

Unidentified Analyst

Just quick question on the Scott’s question on the expense run rate. So is that coming out of the gates or I presume that is it exiting ‘16 just as the Ameriana’s cost or just trying to think of the timing of the redundant cost and as you convert in a couple of month.

Michael Rechin

Yeah, Mark I can see is looking for report. So if you think about our fourth quarter of 2015 in the captions that Mark covered, it was the professional fees investment banking and such, it was the looking forward severance for those folks that won’t be joining us permanently, it was a recognition in the fourth quarter of those folks at Ameriana whose talents knead through the integrations. Well that was last year. If you think about the first quarter of this year, what all will really have is the ongoing salary expense of those folks that will be leaving the company post March, so we’ll have one more quarter of a normalized salary level distinct from that severance amount as you can read that as much lower than ongoing.

And then that will all kind of come to a close about the very first week of April and so the second quarter I made a comment in the press release you might have seen Justin the talks about looking forward to seeing our progress crystal clear in the second quarter freed up of all of those M&A related expenses. But I think that the heart of your question is, should you expect meaningfully lesser onetime number in the first quarter and the answer is yes.

Unidentified Analyst

Okay, well, I guess I’m little confused. I am looking at the slide relay of that, the onetime expenses for ‘15 and you have 4 million and 4 million that was more contractual write offs and such right, is that what you’re saying earlier is have to have in here?

Michael Rechin

Fourth quarter of ‘15.

Unidentified Analyst

Yes, correct.

Michael Rechin

Yes.

Mark Hardwick

So we’re anticipating to having higher level for ‘16 first of all will be our highest quarter, because we are carrying more expenses for Ameriana prior to integration.

Michael Rechin

Okay, so...

Mark Hardwick

That to be 47.5 million somewhere in that range and then it declines by almost $3 million that’s going in to the second, third and fourth quarters begin to spend the average of that I was talking about.

Unidentified Analyst

I got it, okay, that was my question. So it’s starts - you said 47.5 and then that’s the peak in there?

Mark Hardwick

Yeah.

Unidentified Analyst

Got it, okay. And then other one little quick, you laid out the tangible book, I appreciate. So you said it’s $0.09 better than you modeled and since there was a lot of mashing of teeth yesterday one of your larger peers about a static method versus a crossover method, earn back of dilution, where does that get you guys do you think you know when you look at Cooper, Ameriana and Insurance Group, so you are $0.20, you know now that you are going to be on the positive side, you are in that back, what is that gets it to, what you think ultimately in terms of your back?

Mark Hardwick

We think it moves the earn back you know close to a year shorter than what we are estimating. And we’ve - those two transactions were on the high end of three years to low end of four years. So it’s - we definitely get a nice pickup, that is almost disappears that basis where would we be …

Michael Rechin

Yeah, do you mike on?

Mark Hardwick

Hopefully I am using the term correctly but it on a static basis where would we be on our own compared to where are we with the acquisition.

Unidentified Analyst

Right, and that includes the earnings loss from insurance business, right?

Mark Hardwick

It does, yes.

Unidentified Analyst

Got it, okay. Thanks guys.

Mark Hardwick

Thank you.

Operator

And at this time it showing no additional questions, I’d like to turn the conference back over to management for any closing remarks.

Just an appreciating for folks for the quality of their questions and attention. And Jamie, thank you for the call. I look forward to talking to everyone at the conclusion of our first quarter’s call and results in a couple of months. Thank you.

Operator

Ladies and gentlemen that does conclude today’s conference. We thank for attending. You may now disconnect your telephone lines.

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