First Merchants Corporation (FRME) Q3 2014 Earnings Report, Transcript and Summary

Good afternoon and welcome to the First Merchants Corporation Third Quarter 2014 Earnings Conference Call and Webcast. 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 maybe viewed by following the URL instructions noted in the First Merchants news release dated Thursday, October 23, 2014 or by visiting the First Merchants Corporation shareholder relations website and clicking on the webcast URL hyperlink. This presentation contains forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements can often, but not always, be identified by the use of words like believe, continue, pattern, estimate, project, intend, anticipate, expect and similar expressions or future or conditional verbs such as will, would, should, could, might, can, may, or similar expressions. These 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, statements relating to the expected timing and benefits of the proposed merger between First Merchants Corporation and Community Bancshares, Inc. including future financial and operating results, cost savings, enhanced revenues, and accretion/dilution to reported earnings that may be realized from the Merger, as well as other statements of expectations regarding the Merger, and other statements of First Merchants’ goals, intentions and expectations; statements regarding the First Merchants’ business plan and growth strategies; statements regarding the asset quality of First Merchants’ loan and investment portfolios; and estimates of First Merchants’ risks and future costs and benefits, whether with respect to the Merger or otherwise. These forward-looking statements are subject to significant risks, assumptions and uncertainties that may cause results to differ materially from those set forth in forward-looking statements, including, among other things: the risk that the businesses of the First Merchants and Community Bancshares will not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; expected revenue synergies and cost savings from the Merger may not be fully realized or realized within the expected time frame; revenues following the Merger may be lower than expected; customer and employee relationships and business operations may be disrupted by the Merger; the ability to obtain required governmental and shareholder approvals, and the ability to complete the Merger on the expected timeframe; possible changes in economic and business conditions; the existence or exacerbation of general geopolitical instability and uncertainty; the ability of First Merchants to integrate recent acquisitions and attract new customers; possible changes in monetary and fiscal policies, and laws and regulations; the effects of easing restrictions on participants in the financial services industry; the cost and other effects of legal and administrative cases; possible changes in the credit worthiness of customers and the possible impairment of collectability of loans; fluctuations in market rates of interest; competitive factors in the banking industry; changes in the banking legislation or regulatory requirements of federal and state agencies applicable to bank holding companies and banks like First Merchants’ affiliate bank; continued availability of earnings and excess capital sufficient for the lawful and prudent declaration of dividends; changes in market, economic, operational, liquidity, credit and interest rate risks associated with the First Merchants’ business; and other risks and factors identified in First Merchants’ filings with the Securities and Exchange Commission. First Merchants does not undertake any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this presentation. In addition, First Merchants’ and Community Bancshares’ past results of operations do not necessarily indicate either of their anticipated future results, whether the Merger is effectuated or not. This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any proxy vote or approval. The proposed merger will be submitted to Community Bancshares’ shareholders for their consideration. In connection with the proposed merger, First Merchants Corporation has filed with the Securities and Exchange Commission a Registration Statement on Form S-4 Registration No. 333-198661 that includes a Proxy Statement for Community Bancshares, Inc. and a Prospectus of First Merchants, as well as other relevant documents concerning the proposed transaction. The SEC declared the Form S-4 Registration Statement effective on October 2, 2014. A definitive Proxy Statement and Prospectus was mailed to Community Bancshares shareholders on or about October 2, 2014. Community Bancshares shareholders are urged to read the registration statement and the corresponding proxy statement and prospectus regarding the merger, as well as any other relevant documents filed with the SEC, together with all amendments or supplements to those documents, as they will contain important information. A free copy of the Proxy Statement and Prospectus, as well as other filings containing information about First Merchants, may be obtained at the SEC’s Web Site https://www.sec.gov. You may also obtain these documents, free of charge, by accessing First Merchants’ Web site https://www.firstmerchants.com under the tab Investors, then under the heading Financial Information, and finally under the link to SEC Filings. Community Bancshares and its directors and executive officers may be deemed to be participants in the solicitation of proxies from the shareholders of Community Bancshares in connection with the proposed Merger. Additional information regarding the interests of those participants and other persons who may be deemed participants in the transaction may be obtained by reading the Proxy Statement and Prospectus regarding the proposed merger when they become available. Free copies of this document may be obtained as described in the preceding paragraph. These slides contain non-GAAP financial measures. For purposes of Regulation G, a non-GAAP financial measure is a numerical measure of the registrant’s historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of income, balance sheet or statement of cash flows or equivalent statements of the issuer; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented. In this regard, GAAP refers to generally accepted accounting principles in the United States. Pursuant to the requirements of Regulation G, First Merchants Corporation has provided reconciliations within the slides, as necessary, of the non-GAAP financial measure to the most directly comparable GAAP financial measure. Please note this conference is being recorded. I would now like to turn the conference to Michael C. Rechin, President and CEO. Please go ahead.

Thank you Gary I appreciate your peripheral treatment of the forward-looking statement commentary particularly important as we embark on this closure of an acquisition opportunity in the near terms I appreciate your thoroughness there. I welcome everyone to our earnings conference call and webcast for the third quarter ending September 30, 2014. Joining me today as has been our practice are Mark Hardwick, our Chief Financial Officer, and John Martin, our Chief Credit Officer. Our earnings we released in a press release approximately 10 AM this morning Eastern Day Light savings time. And the presentation that Gary eluded too and that we intend to use speaks to material from that release. The directions that point back to the webcast were also contained in the back end of that release and my comments I’m going to begin on the page four on a slide titled Third Quarter 2014 Highlights. Well, we feel like we completed a successful quarter in terms of bottom line results earnings per share of $0.45 a 29% increase over the third quarter of 2013 with net income from net period of $16.1 million a 60% increase over the $10 million that we earned in the third quarter of last year. Overall over year-to-date earnings per share up 16% from the prior period, prior year. And then on the bottom section of that earnings portion of the slide four, a couple of key ratios that describe our performance B2B the industry with what we considered to be great progress and consistent with our plan to deliver high performance results with a return on average assets of 1.16%, return on tangible equity 13.64 and efficiency ratio under 60% at 58.52. Really strong core performance in there in Mark’s comments and John’s comments which will follow you’ll hear some of the particulars that drill those a couple of unusual positive for us that we can cover and what we think of is a really fine quarter and our continued priority to deliver results towards greater share value. Middle of the page we have consistent loan growth at this point and I think whether you look at it on a year-over-year basis around the third quarter from second quarter basis kind of meeting the objectives as we’ve laid out in prior calls of having mid to high single digit growth rates and 8.5% organically as the bullet point in the middle of side four shows. The tangible book value increase to $13.53 and the resultant 17% increase over this period last year very satisfying towards making good on our acquisition modeling and the expectations for our sales we’ve shared as we participate strategically in the consolidation of the industry. Bottom of the page also what we had hoped to see which was a core margin flat with the second quarter as we continue to work through this extremely competitive in low interest rate environment to work through 3.71% core net interest margin without any accretion and then a stronger margin when factoring in the accretion at 3.98%. So I want to get you quickly to the detail behind those numbers we join you later but Mark is going to speak to our results.

Thanks Mike. My comments will begin on slide six. Loans in line three increased on link basis by $50 million or 5.4% annualize and through the first nine months of 2014 we are on a 5.1% annualized pace of growth. The investment portfolio in line one declined modestly from the second quarter of 2014 but remains by $94 million since year end. The allowance in line four totaled $66 million or 1.74% of allowance and 134% non-accruals. Net charge-offs totaled $4.4 million during the quarter and just $3.9 million year-to-date due to increase and net charge offs and continued loan growth during the quarter we recorded a provision of $1.6 million for the first time this year and you’ll see that in more detail when we go to the full income statement at the back of my presentation. The composition of our loan portfolio on slide 7 is reflective of a commercial bank balance sheet as the commercial loan categories comprised 74.2% of our portfolio. The portfolio yield for the third quarter of 2014 totaled 4.62% equaling the year-to-date yield. On slide 8, our $1.2 billion bond portfolio continues to perform well, producing higher than average yield for the moderately longer duration than our peer group. Our 3.87% yield compares favorably to the peer group of approximately 2.57%. And our duration totals 4.3 years which is about a year longer than the peer group. The net gain in the portfolio totals 34.3 million as of quarter end and on maturities for the remainder of the year totaled just $42 million with a rollout yield of 3.45 and in 2015 we have maturities of $142 million with the yield of 3.17. On slide 9, our non-maturity deposits are down $47 million from yearend that continue to represent 75% of total deposits. Our borrowings and broker deposits have increased during the year by $289 million as we extend maturities by using the least expenses alternative possible. The rate differential and terms expected from our actual customers in the branches for CDs compare to the wholesale market just still pushes us into the wholesale categories as our most efficient way to fund the loan growth that we had year-to-date. Our tangible book value per share on line 10 now totals 15 or $13.53, an increase of $1.97 or 17% year-over-year. EPS added a $1.58 during that time frame and our dividends reduced our tangible book value per share by $0.26. And the remaining improvement came from growth and other comprehensive income of $20 million. As I previously mentioned the mix of our deposits on slide 10, continue to be strong and our total deposit expenses just 34 basis points for the quarter. Those broker deposits that I mentioned in the previous slide we are extending and going out relatively long and occur and the broker CD interest expense is 100% accountable for the modest increase in our basis and our cost of funding for the quarter compared to the year-to-date number. All regulatory capital ratios on slide 11, are well above the OCC, in the Federal Reserve’s definition of well capitalized and Basel III minimums. The completion of our Community Bancorp acquisition in the fourth quarter will temper the growth rate of capital as we had purchased assets and use as much as 15 million in cash it’s consideration for the merger. The corporation’s net interest margin on slide 12 totaled 3.98% for the quarter and when adjusted for fair value accretion of 3.5 million totaled 3.71%, which is the identical performance over the second quarter of 2014. Including fair market value accretion our net interest income reached nearly $50 million for the quarter. We remain asset sensitive with $1.9 billion in assets we’re pricing daily and our net interest income simulation suggest that our net interest income will remain stable over the coming quarters and would rise in a rising rate environment. Total non-interest income on slide 13, does have volatility of times due to securities gains and losses. Our portfolio gains this quarter were all related to the liquidation of several municipal bonds with less than optimal credit quality. We did a pretty extensive review of every municipal in the portfolio and there were a handful of securities where the general fund balances were deteriorating from our preferred levels or the expense ratios were increasing that warrants of liquidation and it was nice we are able to liquidate those bonds, improve the credit quality of the portfolio and still achieve a $910,000 gain in the process. Additionally, our bank on life insurance increased as our cash vendor value increased by $871,000 due to claims that were incurred during the quarter and several of back to back swaps also resulted in the quarter creating $656,000 of additional derivative income over the prior quarter. Our non-interest expense on slide 14, totaled $42.6 million for the quarter up from the second quarter of 2014 by $1.4 million, among one, salaries and benefits grew $743,000 as incentives and benefits accruals accounted for 100% of the increase. We also had a property that we decided to write down in the quarter we wrote down $305,000 on a bank owned premises which we intend to disclose in the coming quarters. And on line eight our marketing expense increased $281,000 to support additional branding efforts in our Lakeshore region. On slide 15 net income on line nine totaled $16.1 million and despite $1.6 million of provision expense of line two. And then on slide 16 you will notice that EPS improved by $0.10 over the third quarter of 2013 and $0.04 over the second quarter of 2014. Now John Martin will discuss our loan portfolio trends.

All right, thanks Mark and good afternoon. My remarks will begin on slide 18 I’ll be updating trends in the loan portfolio then review the third quarter asset quality before closing to look at where we stand on the allowance in the fair value coverage. So turning to slide 18, in the highlighted column Q3, 2014 I’ll focus your attention on lines one to three where we get strong C&I growth as Mike and Mark mentioned before and we’re successfully executing our CRE strategy of construct stabilize and transition. Speaking to C&I specifically on line on the market is where employing as well as general improvement in the regional economic continues to drive C&I demand in the portfolio. Lines two and three highlight our construction program which is seeing strong multifamily activity the portfolio as I’ve mentioned on previous calls ebbs and flows on lines two, growth during construction of line three includes the stabilization many term prior to moving to the secondary market. And while there is choppy improvement on a macro basis being reported in various markets in the single-family housing we continues to see a strong demand and at least operates in our markets department senior and junior housing. I would then draw your attention to lines eight and 10 where increases in home equity and direct lending show incremental growth, gain some regional employment coupled with improving home prices and a focus on increase from equity lending are helping to drive demand. Turning to asset quality, on slide 19 on lines one to five NPAs decline for the quarter to 1.7% resulting from a $2.2 million reduction in non-accrual loans, and a $4.1 million reduction in other real estate loan. Dropping to line six to ten you can see the improvement in asset quality with reductions in classified and criticized loans on line six and seven respectively. On line eight specific impairment reserves increased $1.7 million which included a $1.1 million reserve on an individual relationship that I’ll address more thoroughly little later on. The allowance declined by $2.8 million while the non-accrual allowance covered was mostly unchanged on line 9 improving to roughly a 134%. Let’s turn to slide 20. In the far right column I would first focus your attention starting on line two where new non-accruals increased by $18.3 million. At the end of the quarter -- in the quarter an agriculturally related relationship which I mentioned was downgraded in the first quarter of 2014 was partially charged off taking the non-accrual with the estimated remaining loss specifically reserve for this quarter and that’s takes back to the 1.1 million as I mentioned. The increase non-accruals on line two by $11 million increased gross charge-offs on line six by $3.7 million. Despite this relationship I’m encouraged in the overall asset quality improvement resulting from problem asset resolution tactics during the quarter and view this as being contained to this relationship primarily. These tactics resulted in a reduction in non-accruals of $2.2 million on line seven and down on line 16 ending non-performing asset and 90 day delinquent loans failed from 72.4 million at the start of the quarter to 65.6 million at the end of the quarter. Turning to slide 21. On the top of the slide in the first graph our allowance coverage on a fair value adjusted basis has improved. Non-accruals have declined and we continue to have remaining credit leverage in our marked portfolio. If non-accrual loans were grossed up for their credit mark and fair value considered the resulting coverage would just for illustrative purposes be roughly a 184%. So turning no to slide 22. This slide continues the presentation from previous quarter and helps to illustrate the continued strength of the overall allowance and mark coverage. On line one the allowance of roughly $66 million in the far right column includes $500,000 in specific reserve allocated to purchase portfolios. On line two, total fair value adjustments are $35.5 million split between the FDIC purchase Shelby County Bank acquired portfolio and the Citizens Bank portfolio. Moving down to line 6 and 7 out to the highlighted total in the far right column. The allowances of percentage of net loan balance is 1.74% on line 6. We are considering the marks 2.65% on line 7. As communicated on previous calls ALLL sequel, we would expect to see this over just continue to move lower as these portfolio transition from purchase loans to allowance coverage loans. So to wrap up I would say that we continue to drive the loan growth while keeping our focus on asset quality to the resolution and reduction in problem loans. And timely just a brief comment on the Community Bank acquisition before turning the call back over to Mike, I would simply add that thus far our credit related closing activities are on track and are in support of our original due diligence assumptions. Thanks for your attention, let me turn the call back over to Mike.

Thanks John. I’ll start with a couple of remarks on slide 24, speaking specifically to the Community Bank acquisition that John referenced. So yesterday we filed a 8-K but some of the detail around the couple of bullet points on here specifically laying out the fact that we receive the regulatory approvals that are necessary for closing and that our closing is not just targeted for the fourth quarter but we really anticipated to take place on November 07, subject to a successful shareholder vote with the Community folks and everything is on track for that so we feel pretty good about the detail provided in yesterday’s 8-K. As I think about the fourth quarter then we would have an incur a recognized the remainder of the expenses associated with the transaction which we guesstimate between $1.5 million and $2 million and then about 50 days of revenue if we would have close on the 7th we will have that company as part of our fourth quarter income statement for about 50 days. So we’re excited about that we’re excited about the leadership that’s joining our company from Community Bank and if you think about configuration of our company Community on the North side of Hamilton County fits into our Central region or our Indianapolis business and so our market President there looks forward to adding a cadre of folks including 2 very senior people on a day-to-day basis that will be joining us for the future. Excited about that and as I drop down into the next section and talk about increasing our intensity on revenue generating activity for the benefit of our clients my hope would be is that Community has the same kind of a first year as Citizens Financial rebranded as the Lakeshore Region does for us at the last call I spoke about the strong first couple of quarters coming out of that which were heavy in asset quality remediation and entering a market with a new name into that newer marketplace for us Mark Hardwick highlighted in his comments a couple of hundred thousand dollars of marketing expense meant to reinforce the efforts of the senior leadership in that market, that have done a great job transitioning in the First Merchants’ picking up the cadence of our company and then more recently adding bankers I think I mentioned during the last call that the only area I could think that we might have been miles behind our plan on was getting the team of commercial bankers that we thought could use our balance sheet to win in that marketplace where we make great strides there, our market president in the Lakeshore Region and so we feel pretty well equipped going into 2015 with the troops that we have. That same region participated in the very even loan growth that we had around the company in the third quarter. John referenced it as it related to type within the commercial category can evade by C&I which is consistent with our market tactics and to be in and out of the investment real estate category particularly construction loans taking full advantage of permanent solutions post normalizing and occupancy. So everything is kind of going well there, I was pleased as you might have picked up and release that we had both in terms of the on balance sheet mortgage loans and the fee component that’s in non-interest income kind of a nice bounce back up from the bottom going back to the second, third, fourth quarter of 2013 the levels that have been picking up all throughout 2014 that’s pleasing to see as there is some on balance sheet growth on the consumer side where we make the people investments throughout the year that are beginning to manifest themselves in that couple of consumer lending categories that are beginning to show some life - and reflect the effort that we’re putting into it. So, pleased in all those regards. The pipeline that we take into the fourth quarter that will probably trickle into 2015 pretty much even with where we’ve had it which is at a healthier level and when you realize on that pipeline level that is about $255 million commercially going into the fourth quarter it’s very consistent with that kind of 5%, 6%, 7% annualized growth rate in overall loans given the commercial bank orientation of our balance sheet. So kind of a look towards the last part of 2014 to maintain the momentum that we’ve had trying to acclimate and simulate Community Bank in in every regard towards integration of that company and from a technology standpoint scheduled for April 2015. Mark referenced another expense relative towards existing bank properties and so at the bottom of the page when I reference optimizing our branch system we’ve always been looking at that and as we look towards 2015 the primary area will likely be Community Bank coming into our Indianapolis region where we feel like we have enough brick and mortar to service some of the communities and in our couple of overlapping geographies we’re preparing for that and as such getting appraisals that Mark referenced about making sure that we have everything on the books with appropriate values as we move forward. Excited about 2015 the last couple of thoughts on the page talk about this investment in mobile banking which where we’re finalizing our overall plan for an online banking upgrade across the whole company to add some of the future functionality that our clients need going forward. So Gary at this point I believe my colleagues and myself are ready for any questions that might have gathered in your queue.

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 : Mark I think first question just on rate sensitivity in the margin outlook. You have mentioned in your prep remarks that you’re modeling to guess and I would be stable in coming quarters. Now is that static balance sheet or does that incorporate the kind of loan growth that you guys have seen? And I guess kind of a crux to that question is what’s your best guess for what happens with core margin from here and out?

I think the core margin will have a little pressure but we’ve been working pretty diligently through our net interest income stimulations believe in our all of the forecasting and budgeting process for 2015 in. And I know last quarter when we went from 3.83 in the 3.71 I didn’t think that we will see further deterioration at least not at that pace and so I’m going to see that it stabilize 3.71. And I think that’s a really good number for us. We’ll some modest compression from this point but I think it’s small I don’t think we see the type of quarters like we had over the last 12 basis points in the given quarter to expect to see one or two basis points I think it likely. Scott Siefers - Sandler O’Neill : Okay. That's perfect. Thank you. Then wanted to jump down to just the book to fees and expenses, you'd called out a few of those items in the release, but just curious as we look forward and try to kind of base off of expectations in the fourth quarter and beyond, how much of kind of the elevated items, both income and expense, that went through fees and expenses, do you think is going to repeat? In other words, what's kind of the best base to go off of going forward for fees and expenses?

We just have strong fee income quarter, they have $800,000 almost $900,000 in bank on life \insurance, for us to have a couple of claims in those policies is something that you wouldn’t expect obviously will occur but that something that you can expect or predict on any given quarterly basis. So that one I would say kind of normalize back to given run rate. The gains in the bond portfolio we just look the other day and our gains that improved over $45 million in the bond portfolio. And so we’re continuing to look for the ways just to strengthen the credit quality and potentially take some gains. I would expect some again in the fourth quarter as we move forward for this more about repositioning and it is gain taking. The derivative income is just part of our core business, it’s something that it is relatively unpredictable quarter-by-quarter and this was a strong quarter but I wouldn’t think that the entire amount, check amount in this rate environment or selling that product pretty effectively. So enthusiastic about what we can do into the future from that category. So when I think of write downs in the expense category of some facility some one-time increases in incentive and benefit areas, when you net all of that out what my thought is that there was a couple of share and before I continue to press forward when you get fee income at that level you can’t help of buy it and we were looking for opportunities to make sure we put some expenses behind us.

Hi Scott its Mike. Just to add Mark’s comment, the derivative activity is absolutely customer related so more is better and we would hope that we advise our clients about how they take advantage of rates being where they are and when you get the - that have taken place kind of throughout 2014 those ideas begin to take hold with our clients and we’ve been fortunate. As it relates to OREO both on gains and expenses I know the John’s team I think he highlighted in his comment OREO was a good size part of any bank special asset effort but that was a big portion of the assets that needed remediation of the Citizens and then again a little bit as we look forward into Community Bank joining us and so John’s team has just been trying to work through that category knowing that it has each of those components to a typically that cross associated with it and sometimes gains based on the quality and marks that - also refreshes the phrase of work that we get.

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

I just want to start up with the commentary regarding the large Ag credit that went into a non-accrual; could you guys just go over those details again like the size of it and how much really it was charged off?

Sure, there was $3.5 million charge off 3.7; it increased the overall non-accruals for the quarter by $11 million.

Okay, great. Thank you very much. And then you guys had alluded to your kind of evaluating your branches and getting updated appraisals on the properties and whatnot. Could we expect you guys to announce some sort of branch optimization strategy as you go into 2015 or maybe you look to scale back some of your properties?

I don’t anticipate a blanket program for that we’re trying to doing at Community statement and 2012 we went into a couple of our existing legacy communities where we had great retail coverage trying to assess where the FDIC statistics we’re talking about for market potential and where we stood and made the decision in that particular year to consolidate a couple of banking centers and then put some fresh investment dollars into whatever bank presence we though optimized our opportunity we’re doing the same thing we’re just looking at a couple of communities, in this case the only difference would be is that in a greater Indianapolis area where Community joins us it’s a very robust market environment and so when you overlay the 11 banking centers that come to us out of Community on top of our physical presence as it stands today I think there is a chance to maybe add one or two sides in substitution for some locations that no longer give us the best market presence.

Got it, okay.

And in that Dan if you think about it you’re just swapping in and out and when you’re moving out of something to perhaps a newer cleaner location we exit often times causes you to look at the book balance of the existing banking center and that’s what we’re doing.

And then with regard to the provision kind of going forward, obviously this quarter was driven in part from that credit we just spoke about. Can you give a little guidance as to what you might be looking at for provision as we head into 2015?

As we have looked to our credit statistics we expect non-performers to continue to come down. We expect to have asset growth and when you way those two out, I think we are likely to continue to provide something each quarter versus zero where we were for the first few quarters of this year but there hasn’t been a scenario where we thought the provision needs to grow from its current level to this quarter.

The next question comes from Daniel Cardenas with Raymond James. Please go ahead.

On the Ag credit, don't want to beat a dead horse here, but on the Ag credit, what was the underlying collateral for this, was it land or was it equipment?

Yes, Daniel, the underlying collateral is kind of a mix it has some real estate land, it has some production grain is collateral it has I should say and some equipment machinery so it’s Ag and Ag related.

Okay. And then was the charge-off of that related to any weakness in land values or equipment values?

Yes, I think it was well, Daniel, it’s related to both land value and the ultimate liquidation value of underlying grain.

Okay. And then how does the rest of your portfolio -- your Ag portfolio look? Did this cause you to take a harder look at the Ag portion of your portfolio?

It really doesn’t because when I evaluate this particular instance, I would say it’s kind of isolate contained of this borrower specifically the situation around this particular borrower it also included and implement dealership with that and as a result it has different components to it so it’s not just purely what you would typically think for land growing it had back in point but it also had other components to it and the underlying issues again were specific to this.

Okay, right, good. And then just jumping over to the deposit side, right now are you seeing any pickup in competitive pressures for deposits?

Well, I think we’re watching we’ve had a strategy over the last several years that in a loan growth beneath the level of 2014 are commercial activity driving demand deposit has been satisfactory to fund our loan growth. And the only change there that I guess you could construe as competitive is that as other banks they’re having some pick up in their loan growth as we are. The need to revisit your CD strategy comes about and that’s where going as we speak until now we’ve been comfortable with the idea that they’re going to held firm on market leadership positions in terms of setting CD rates along with other transaction account. And as we look forward a little bit we’re just going to be a little bit more add on it that we want to retain as much as that is possible especially for multi product households. So we have a CD strategy that I don’t think dramatically drives up our funding cost and that is intended to create a little bit more stickiness for some of the CD activity. We kind of look at that as we’re talking about earlier as relative to branch locations on a market-by-market basis and wouldn’t expect a dramatic rise at all in our funding cost.

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

Maybe a question for Mark. If you can just talk a little bit about I mean the bump up in the accretion income this quarter and just kind of how it relates with the Community Bank and just kind of the outlook on that component going forward? Do you expect a lot more volatility or more normalization, if you will [indiscernible]?

Yes I think I heard your question. We adding our plan about 5.4 million of accretion through the citizen acquisition and year-to-date we’re 7.5 million. So it has been one of the factors that has allowed us to really feel good about the performance of the acquisition from a financial perspective, there are lot of reasons we feel good about it culturally. We also pull that transaction I think we had $13 million Mark that we didn’t end up using on day one that went to capital and as we look at that Community we think that the mark that we have identified and communicated will clearly be adequate, day one look at that so far so just that a little of it may comeback in the capital. And then I think we’re likely to see a little volatility next year with that acquisition like we did on this one. As the dollar amounts are higher and we have workout of individual credit to go a little volatility early on in the process. I would think that our accretion from our current acquisitions, our current transactions that are on the books start to settle back in 1.8 million range we have 35 million on the books and if we settle back into 1.8 million that makes them sense in the near quarter, per quarter and then you add in whatever we end up with Community Bank which we’ll be able to talk about in much more detail in the next quarter.

Okay. That’s helpful. In the systems integration, core conversion for Community, when does that occur? Is that April? Is that what Mike said?

Yes, April 24th is the day that we have scheduled.

Okay.

And so that would be the actual time period of the integration itself Brian and I made a comment about expenses associated with Community Bank as being fourth quarter and that is our desire is to deal with breakage cost of existing contracts that relate to the technology and ultimately the integration early as we’ve done in the past. And so I would expect that the brunt of one-time expenses would be this current quarter.

As we have a fourth quarter with one-time expenses, a first quarter where they maintain their current run rate and then post integration we have the improved run rate of the company on a go forward basis.

Okay, perfect. That’s helpful. And then Mark you talked about extending them on the borrowings and just kind of maybe just give me color on what you're doing there and I guess you continue to do things there?

We probably were a little more aggressive than we needed to be this last round we specially took some broker CDs and we had maturities of even 2019, 2021. So we were pretty aggressive in our extension there, we actually extended some federal home loan bank advances out into ‘16, ‘17, ‘18 and ‘19 those rates are clearly higher than our core cost of 34 basis points and that’s why the increase and some of the interest expense so the cost of our supporting liability is across the company or a little higher based on these kind of [indiscernible] plays more than they were the core portfolio. So, those are range anywhere from 68 basis points to around 2% where we were really extending out on the curve.

Okay. And do you expect to do much of that at this point or is it kind of mostly done?

No, it wouldn’t surprise me if we did a few more brokers moving forward but we’re not going to go thus far we’ve actually kind of built a ladder and we want to make sure for all kinds of safety and found those reasons that we don’t have too much maturing in a given period. So, actually I think we have the capacity to fill in that ladder a little shorter term now that won’t be as expected.

The next question comes from Stephen Geyen with D.A. Davidson. Please go ahead.

Hey, good afternoon. Hey, Mark, could you give us some thoughts on Community and I'm just curious how much of a presence do they have in mortgage banking and the footprint that they're currently existing in and where you see opportunities there as well as if you have some additional thoughts on commercial lending?

Mortgage banking activity is are really low it’s not core focus of what they do and if you look at the structure of their balance sheet it’s a more of a kind of consumer and commercial oriented, commercial real estate orientation. Does that answer your question?

In mortgage just curious, can you kind of service area with what you already have in the kind of --?

There we feel like we have great coverage and just the additional locations the additional kind of presence that we’ll have in the noble market we think that will help but we’re not adding individuals to go after their loans.

We have from a backside processing fee Stephen. Two fulfillment locations one of them towards Monsanto and one that’s in Indianapolis and so we do view the on balance sheet and non-interest income upside of having a more robust mortgage origination platform throughout their franchise to be kind of a quick hitting opportunity I mean the spring is typically a seasonal upside to that business and we will be in position to take full advantage of that in the spring of ’15 without adding any fixed cost to the fulfillment side.

This concludes our question-and-answer session. I would like to turn the conference back over to Mike Rechin for any closing remarks.

I just want to thank everyone on the call for their attention and quality of their questions and Gary, thanking you for getting through that lengthy forward-looking comment. We look forward to talking to you after a completion of not only the Community Bank acquisition but our fourth quarter when we speak again in late January. Thank you.

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