Michael C. Rechin – President and Chief Executive Officer Mark Hardwick – Chief Operating Officer and Chief Financial Officer John Martin – Chief Credit Officer.

Scott Siefers – Sandler O’Neill and Partners Nathan Race – Piper Jaffray Kevin Reevey – D.A. Davidson Damon Delmonte – KBW Erik Zwick – Stephens Inc. Brian Martin – FIG Partners.

Good day and welcome to the First Merchants Corporation Third Quarter 2017 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] We will be using user-controlled slides for our webcast today.

Slides may be viewed by following the URL instructions noted in the First Merchants news release dated Thursday, October 26, 2017 or by visiting the First Merchants Corporation shareholder relations website and clicking on the webcast URL hyperlink. The corporation may make forward-looking statements about its relative business outlook.

These forward-looking statements and all other statements made during this meeting that do not concern historical facts are subject to risk and uncertainties that may materially affect actual results.

Specific forward-looking statements include, but are not limited to, any indications regarding the financial services industry, the economy and future growth of the balance sheet or income statement.

Please refer to our press releases, Form 10-Qs and Form 10-Ks concerning factors that could cause actual results to differ materially from any forward-looking statements. Please note, this conference is being recorded. I would now like to turn the conference over to Mr. Michael C. Rechin, President and CEO. Please go ahead sir..

Thank you, Rachel. Welcome, everyone, to our earnings conference call and webcast for the third quarter ending September 30, 2017. Joining me today, as in the past, Mark Hardwick, our Chief Operating Officer and CFO; John Martin, our Chief Credit Officer.

We released our earnings in a press release approximately 10:30 this morning Eastern Daylight Savings Time, and the presentation that follows will speaks to material from that release.

As Rachel covered, the directions that point to the webcast were also contained at the back end of the release, and my comments begin on Page 3, titled Third Quarter 2017 Financial Highlights. First Merchants reported earnings per share of $0.50 or $24.4 million in net income, a 15.7% increase over the third quarter of 2016.

Our third quarter results of $0.50 include the $7.9 million of acquisition expenses that Mark will detail later or $0.11 per share. Our total assets grew to $9 billion, 28.9% over the third quarter of 2016, and our tangible book value per share of $16.62, a 6.5% annualized increase from last year-end.

The next slide, Slide 4, talks about some additional performance highlights, including just moving the ball forward with our organic growth strategy in the market where we had organic loan growth of $145 million, a 9.2% annualized growth rate and a similar growth in our deposits of $75 million, a 4.6% annualized growth rate for all deposits outside brokers.

Top line growth was strong. We had great volume on both sides, as I just covered; an increasing margin that Mark will get into. It produces a growing net interest income line of $74.4 million, a 29% increase over the third quarter of the prior year. I referenced in the press release we had a busy active quarter. We’re very pleased with it.

It included the integration of the Arlington Bank in August where we met our objectives and showed some of the experience in trying to keep our clients, newest clients, satisfied while keeping the rest of the company working really well.

And then also included the third quarter, the acquisition, the legal closing of Independent Alliance Bank on July 14. At the back end of this call and maybe throughout, you’ll hear a little bit of our most near-term planning, which includes the integration of Independent Alliance Bank into First Merchants’ mid-quarter, fourth quarter.

And so at this point, I’m going to turn the call over to Mark to go a little deeper into our financial results..

Thanks, Mike. I’ll be starting on Slide 6 where total assets reached $9 billion, an increase of $1.8 billion or an annualized 34% over year-end 2016.

Loans on line three increased $1.3 billion since year-end, which includes $225 million of loans from the acquisition of the Arlington Bank and $725 million from the acquisition of Independent Alliance Bank.

When normalized for acquisitions, organic growth – organic loan growth on line three totals 10.2% annualized for the first three quarters of the year.

The composition of our $6.5 billion loan portfolio on Slide 7 is relatively unchanged from last quarter as IAB’s acquired loan mix was consistent with ours and organic growth is still commercially weighted.

The only percentage changes of note is an increase in agricultural land, up from 2.6% of loans to 3.8% and a modest decrease in C&I from 23% to 22.1%, and that was just comparing the June 30 numbers to 9/30 with the addition of IAB. The portfolio yield continues to increase and totaled 4.81% for the third quarter of 2017.

For comparison, annual loan yields for all of 2016 totaled 4.58%. The improvement in yields is fully attributable to the variable nature of our loan portfolio, which has benefited from rising rates throughout the year.

On Slide 8, our now $1.5 billion bond portfolio, up $126 million from last quarter, continues to perform very well, producing higher than average yields with a moderately longer duration than our peer group. Our 3.88% yield is actually 19 basis points better than a year ago and continues to compare favorably to those peer averages of about 2.60%.

The net unrealized gain in the portfolio totals $23.4 million, and maturities for the remainder of 2017 totaled $36 million with the year – yield of 3.25%. 2018 maturities totaled $144 million with a yield of 3.38% and 2019 maturities totaled $161 million with a yield of 3.89%.

Now on Slide 9, our non-maturity deposits on line one represents 79% of total deposits and grew by $1 billion or an annualized 31% over year-end 2016. Customer time deposits also increased $341 million or an annualized 61% over year-end.

On a combined basis, when adjusted for the Arlington Bank totals of $253 million and IAB totals of $862 million, lines one and two, our true customer deposits, they grew by $246 million or 6.3% annualized since year-end.

Also on line seven, common equity increased $381 million over year-end 2016, inclusive of both the Arlington Bank acquisition and the Independent Alliance Bank. Both of these transactions were 100% stock transactions, and we added 8 million shares that accounted for approximately $321 million of the $381 million increase.

As previously mentioned, the mix of our deposits on Slide 10 represents a strong core deposit funding base, and our total deposit expense remains low at 52 basis points, up from 38 basis points for all of 2016.

The increase in deposit rates is predominantly concentrated in public funds, money market specials and longer-term CD specials where we’ve experienced some pricing pressure. Nonetheless, we are proud that we’ve been able to generate significant core deposit growth, while keeping funding costs low in this increasing rate environment.

All regulatory capital ratios on Slide 11 are above the regulatory definition of well capitalized and our internal targets. We believe the strength of our 9.39% tangible common equity ratio and our 13.76% total risk-based capital ratio will continue to provide optimal capital flexibility into the future.

The Corporation’s net interest margin on Slide 12 totaled 4.03% for the quarter. Its fair value accretion totaled $3.2 million, and added 17 basis points to net interest margin. Net interest income on a fully taxable equivalent basis totaled $78.9 million during the quarter and continues to be the driver of our operating income.

The impact of fair value accretion totaled 20 basis points for all of 2016 and has averaged 19 basis points for the first three quarters of 2017. So as mentioned earlier, during the loan discussion, our assets since the balance sheet is the driver of our margin expansion during the year.

Total non-interest income on Slide 13 increased to $18.7 million during the quarter and represents steady and consistent fee income growth without any one-time items included in the results.

Non-interest expense on Slide 14 totaled $58.7 million for the quarter and included $7.9 million of acquisition expense, as you can see in the footnote at the bottom of this slide.

Of the $7.9 million, $2.9 million is in line one, salary and benefits; $4.2 million is in line four, professional, professionals and other outside services; and then if you go back to line two, premises and equipment, it totaled $290,000.

Synergies from the IAB acquisition will not be fully realized until after the integration, which is to occur in November over Veterans Day weekend. Q4 should include another $2 million of merger-related costs. However, we actually feel like the adjusted 3Q expense number is a pretty good proxy for core expense levels as we move into 2018.

Now on Slide 15, net income for the third quarter of 2017 totaled $24.4 million and EPS totaled $0.50 per share; and year-to-date net income totaled $71.7 million and – while EPS totaled $1.63 per share.

Our 2017 efficiency ratio now totals 55% if you look at it for the entire three quarters inclusive and that is inclusive of the $10.8 million of merger-related expense.

When you exclude those merger-related expense, the efficiency ratio declines by a little over four points, so we feel really great about having an efficiency ratio around 51% for the year. Now on Slide 16. As previously mentioned, acquisition expenses totaled $0.11 for the quarter and $0.16 year-to-date.

And more importantly, the Day 1 dilution from our two acquisitions came in as expected, and our tangible book value per share now totals $16.62 per share. Slide 17 highlights our historical growth and tangible book value per share and dividends. Our forward dividend yield now totals 1.68% and our price-to-tangible book value is 2.61.

The compound annual growth rate in tangible book value per share since 2010 is just over 9%. And those are all my comments, so I’ll pass it over to John..

All right. Thanks, Mark and good afternoon. Beginning on Slide 19, I’ll be updating the trends in the loan portfolio, review a summary and reconciliation of our asset quality, discuss provisioning, fair value allowance – fair value and allowance coverage and then end with a few portfolio comments. So on Slide 19, moving down to line 11.

Before the addition of the IAB portfolio in the third quarter, loans grew, as Mike had mentioned, $145 million. The increase represents organic quarterly growth of 2.58% or 10.33% annualized.

Starting at the top and working down the slide, the growth came from increases in commercial and industrial loans on line one of $35 million; construction loans on line two of $16 million; CRE loans on line three of $63 million; home equity of $28 million on line eight; and finally, public finance on $36 million on line nine.

As mentioned on prior calls, we continue to build a dynamic lending – construction lending pipeline where the construction lending on line two and non-owner occupied real estate on line three are driven by project funding during the construction phase, while moving to either permanent – the permanent market or into the bank’s loan portfolio at completion.

We continue to see the CRE portfolio trending positively as projects funds stabilize and move both to the permanent market and into the bank’s portfolio.

Finishing out this slide, on lines 12 and 13, we continue to remain below the regulatory real estate concentration guidelines of 100% of construction loans and three – excuse me, 100% of capital for construction loans and 300% of capital for investment real estate. Turning to asset quality on Slide 20.

Overall asset quality remains stable in the quarter. On line one, in the linked quarter, excluding the IAB loan portfolio, non-accrual loans declined $600,000, while other real estate was unchanged. Renegotiated loans were up $200,000 and 90 days past due declined $300,000.

These changes resulted in a decline before the IAB portfolio in total NPAs and 90-day delinquent loans on line five of $700,000. Then with the addition of the IAB portfolio, the total NPAs 90-day delinquent loans increased $4.9 million.

The result continues to remain stable – the results continue to remain stable with around 75 basis points of non-performing assets for the quarter and thus far this year. Moving down to line seven.

Classified assets declined $21.6 million before including the IAB portfolio, which included roughly 20 – or, excuse me, $42.4 million of new classified assets. As a result of – excuse me, as a percentage of loans plus ORE, classified assets were flat at 2.6% for the linked quarter.

Turning to Slide 21, which reconciles the quarterly migration of non-performing assets. In the fourth column to the right of this slide titled Q3 2017, that excludes IAB, we began the quarter with $40.3 million and added $7.2 million of new non-accruals.

We had gross charge-offs of $1.1 million in the quarter on line five, which netted to the $600,000 decrease in non-accrual loans on line six. Dropping down to line seven, we added $600,000 in new ORE, while on lines eight and nine, we wrote off $300,000 and also sold $300,000, resulting in no change in ORE for the quarter.

So then to recap, total restructured and loans 90 days past due decreased $700,000 before the addition of the IAB portfolio. Now turning to Slide 22. The allowance on line one grew with the growth of loans and the non-purchased portfolio, which for the quarter, now stands at 1.13% of total loans and 1.44% of non-purchased loans.

The fair value adjustments on line eight increased $20.7 million from $29.7 million to $50.4 million. The increase included the additional $24 million of new fair value adjustments for the IAB portfolio, offset by accretion of $3.2 million for the quarter. Summarizing on Slide 23.

I think I’d just say good quarterly loan growth that annualizes to 10.3%. While this is at the high end of the expected loan growth rate, it’s reflective of some seasonal construction activity that moderates.

I’d also add that we continue to find opportunities in both the C&I and investment real estate areas, with, as I mentioned earlier, continued real estate regulatory concentration headroom.

We experienced a reduction in pre-IAB classified loans in the quarter, and asset quality remains stable with non-performing assets holding at the 70 basis points of loans in ORE. Provision expense at this point is just keeping pace or it’s keeping pace with loan growth, keeping the allowance at around 1.45% of non-purchased loans.

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

Thanks, John. I’m going to finish my comments before questions on Page 25. And the very first bullet point bundles a few thoughts that bridge 2017 and 2018, and right in front of us is this two-week out integration of Independent Alliance Bank.

So we look forward to executing on our experience in that, helping our clients and teammates through the change event. Look forward to it. A lot lessons learned that’ll help us in the next couple of weeks.

Look forward to getting to a normalized rate and have a full benefit of 2018 with the market leadership up in Fort Wayne, making it a meaningful addition to our overall company. The rest of that top bullet point talks about continuing to be on the evaluate outside opportunities.

But really, as our 2018 plan is coming together, it’s all about taking care of the market opportunity we have. We feel fortunate to be in a very pro-business part of the Midwest, Indiana in particular. And yet, I look over and recognize that Columbus, Ohio offers an equally strong local economy for us to continue to operate.

Second bullet point just talks about some of the actual lines of business where Mark’s and John’s comment about strengthen them, we look to take full advantage of. Based on our 2018 planning, we look for a year that feels like this, maybe even a little bit better.

And yet, if the thing were to turn and the economy not cooperate quite as much, I think John just walked you through why I feel like we’re really well reserved for whenever that next step in the overall growth turns against us, so I’d like our defense on that front.

A couple of bullet points down, we’re going to put some investment as we’re finalizing our plans for the year to add capability in our specialty finance area, which, today, is really two businesses. It’s a public finance business that is equal parts loans and deposits and then a sponsor finance business.

Invested in some systems that run the box office of asset-based lending and a syndications function.

One of the tactics we have listed down there is to really get some kind of following the behaviors of our clients to move our checking account line up a little bit simpler and migrate our existing households onto a new checking program, which has already begun. We have room to go on efficiency. We feel like Mark was highlighting that.

We’re in the low 50s. I think we’re going to stay in the low 50s into next year despite making, I think, really important investments in talent and brand investment up in Fort Wayne, which is a terrific market where we really haven’t had a lot of presence here before.

And incremental investment in risk management, we feel that we have a very good handle through our dialogue with the regulators as to what the regulatory expectations are.

And without a really noticeable increase in our overall operating expenses, we’re going to continue to move, as we did through the last half of 2016, all the way through 2017 and into 2018, readying ourselves for the ability to provide the kind of information, with the adequate backdrop of detail, to meet the thresholds that’ll be required at when we were to pass.

So we feel pretty good about where we’re at, and all that work in getting that efficiency ratio down that Mark highlighted, I think is going to keep up with this a little bit.

We do feel like if the economy cooperates, we’ll even see more evidence of the asset orientation that we have, including our current plan calls for just one rate increase throughout the planning period. So at this point, Rachel, I would open up the phones for questions..

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Scott Siefers with Sandler O’Neill and Partners. Please go ahead..

Good afternoon, guys..

Good afternoon, Scott..

Mark, maybe first question for you. I actually have two questions, both kind of rate based. Can you walk through your thoughts on what happens to the core margin without additional Fed moves? In other words, in the third quarter, we have the benefit from – or the full quarter’s benefit from the June hike.

Now that we’ve had a little bit of a pause, can you sustain the margin at the current rate? Or is there still some additional asset repricing that would help lift it a couple basis points? And then, conversely, can you spend the second talking about the deposit strategy? You’ve got good core deposit growth unquestionably, but loans, on an organic basis, seem to be growing a bit more rapidly than the deposit base.

So just curious how you’re thinking about that dynamic..

As Mike mentioned, we’re only visiting one Fed increase at this point that we expect to happen in December. And, obviously, there could be more, but we’re putting one in the plan.

And the way the margin plays out is if that rate hike happens, which we – I think everyone expects to happen, we’ll get another maybe around 4 or 5 basis points of expansion.

Once the rate hikes do stop and if we stay at a level – kind of a level position for a period of time, deposit expense will catch up some, and we’ll get back a little bit of that margin. So we feel right now we’re kind of budgeting that our 2018 margins should come in really right on top of 2017, just because we’re only putting one in the plan.

So I think it does depend what the Fed does and which rate environment we’re really participating in. On the deposit side, because the yield curve is so flat, if the Fed continues to move, the curve flattens even more, we aren’t expecting the long end of the curve to increase.

And so we are really focused on the deposit side of the areas that will have pricing flexibility if rates were to ever come back down. So feel like we’re focused on some of the non-maturity deposit areas being aggressive with money market rates, which have some optimal pricing flexibility.

Trying to be a little bit longer on the curve on the CD side, but not overpaying dramatically in a way that where we think we can win today. But if – regardless of which direction rates move, that our balance sheet will continue to perform..

Okay, perfect. Thank you. And just one I just want to clarify, make sure I heard you correctly, Mark. On the expense base, you’re suggesting this quarter’s 58 and it’s going to be $50.5 million to $51 million sort of core run rate.

That’s a good base to – sort of on top as we move into 2018?.

We think that around 51 for 2018 is a good number. As I mentioned, fourth quarter will still be a little higher because the integration is not completed. So it hasn’t been completed, so we’re expecting a couple of million dollars of additional expense in the fourth quarter.

And then fully recognizing all kind of integration expenses as we start the first quarter of 2018..

Okay, perfect.

And when you say – just so I’m clear, when you say another couple of million of expenses in the fourth quarter, are those like one-time merger costs? Or that’s just the full run rate of the recent deal?.

No, it’s salary and benefits expense and technology cost of continuing to run on their current systems with their current teams. So post integration, we’ll have a reduction in those two areas..

Perfect. All right, thank you guys very much..

Thank you, Scott..

The next question comes from Nathan Race with Piper Jaffray. Please go ahead..

Hi, guys, good afternoon..

Good afternoon.

How you doing?.

Thank you. Just wanted to touch base on the loan growth. Obviously, a very strong quarter on an organic basis and it seems like you had good momentum come out of Fort Wayne. And it looks they contribute in the quarter.

So we’re just trying to get a sense of how much the larger lending limit that you guys have has helped the folks at IAB drive some additional incremental growth and just help pipelines back up heading into 4Q. It sounds like you’re investing in some verticals currently and I’m just curious how we kind of frame growth expectations into 2018 as well..

Sure. The – I think it’s a little early. I wouldn’t attribute a lot of volume lift that you would have seen in our third quarter numbers to IAB. The closing was mid-month.

And really, our game plan for any company joining us, whether it’s Arlington, IAB, or anyone else is to over-communicate the change events both to our talented folks and then to the clients, with retention really being critical.

And so the expanded capabilities that we’ll be able to take in to Fort Wayne ought to help us all throughout 2018, but I really wouldn’t attribute any of the strength in the third quarter to that, although our attention of it has been great and I’m very – really, really pleased heading into this integration.

The larger credit capabilities relative to the balance sheet, I also really don’t look at as being pertinent to it. It’s just really kind of working the sales cycle. As John mentioned, some seasonality in the construction business that plays out in investment real estate..

Got it.

And then can you guys just kind of speak to growth expectations in 2018 and just kind of how the pipelines stack up heading to the fourth quarter as well?.

I’m going to offer again. In the last several calls, we’ve talked about a 6% to 8% growth rate. I think we’re going to go more towards the 8% and just kind of target off that. We’ve obviously been fortunate to exceed that, but it does present the kind of funding needs that the prior question included. And so I think 8% is how we’re sizing it up.

We do expect Fort Wayne to kind of be at – to meet its potential, which is in that same growth rate. So that’s where we see it..

Okay, got it. And it looks like you guys had some success on the income side of things this quarter, just in terms of layering on your expanded product set in Fort Wayne as well. So just curious how you kind of think about the growth opportunities in fees into 2018 as well..

Well, it’s a competitive marketplace. But we do feel like based on the local economy in that area and the veterans that we have, the continuity in leadership that we all have, we’ve been fortunate. 2017, the two companies that joined us were both performing well on their own.

And so after this short hiatus to get the integration completed, we would expect them to kind of perform like they had in the past and maybe even then some because they are going to have some additional capabilities and overall branding support..

Got it. I appreciate all the color, guys..

Thank you very much..

The next question comes from Kevin Reevey with D.A. Davidson. Please go ahead..

Good afternoon, gentlemen..

Good afternoon, Kevin..

Can you give us some update as far as how you’re thinking about growth in terms of approaching the $10 billion asset mark?.

Sure. Let’s talk about our plan without any additional acquisitions. And if you lay that out, it feels to me like a 2019 event because we’re pretty confident in the kind of growth numbers from the prior question.

And so that would have us not having to really make any material modification to the business and just kind of naturally move towards $10 billion, which is the way our plan is written. And I like the way that plays out. It really take full advantage of all of this second half of 2017 work and have it show itself in the income statement.

If there were to be opportunities, we’re going to obviously, have to approach them a little bit differently. We’re very mindful of both the required work and the time frames for the compromise and interchange income. And so that does go into our planning.

We still like a kind of moderate risk approach to considering geographies that would feel like the kind of marketplaces that we serve very well, and so that would likely be somewhat contiguous to where we’re at. But unlike the years gone by, we are mindful in considering targets that play into the requirements of the $10 billion threshold..

And then moving along to capital. It looks like your TCE is around 9.93 at the end of the most recent quarter.

How should we kind of think about where kind of your target and how you expected to manage that going forward? Obviously, ex any type of deal?.

use 1/3 for dividends; 1/3 to grow the balance sheet; and the remaining 1/3 for cash and acquisitions. Although our last three transactions, our last three acquisitions were 100% stock where we’ve taken advantage of what we view to be a strong stock price versus putting cash in the transaction.

I would anticipate going forward that the size of our acquisitions would likely be a little larger, as – especially if it’s the transaction that takes us over 10.

And our intention would be to try to use a little bit more cash because our capital ratios are – have been and continue to be a little ahead of our target that we – as we publish in the slides. So that’s kind of how we’re thinking about it at this point..

Great, thank you..

Thank you, Kevin..

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

Hey, good afternoon guys. How’s going today..

Well, Damon, hello..

So my first question, just could you provide a little color, Mike, about – around the construction land and development loans? And what’s driving that growth? And commercial real estate, non-owner occupied, just a little bit color on the types of products – projects that you’re dealing with and the size of those loans?.

Yes, I see John has a report in front of him, but I’ll – it really hasn’t changed at all, Damon, from kind of in the past. We’ve had our growth markets, Columbus, Ohio, the Lakeshore area in Indianapolis, nice demand from multifamily.

And as you pointed out, it really isn’t permanently on our balance sheet, and so the kind of pipeline for that continues to be executed and the market’s accepted it really well at rents that seem to be market accepted. We also have some student housing outside of those markets.

John, do you have any additional comment on Damon’s question?.

Yes. I think the only thing that I might add, there’s a component to it that’s senior housing as well. We’ve got the multifamily is clearly an area that we’ve seen a lot of growth, and we continue to fund up through the completion of projects and the student and the multifamily. We’ve seen some signs of industrial construction as well.

It’s probably the last category I’d add..

Okay, great.

And then, Mark, are you able to kind of frame what the expected fair value accretion is on a quarterly basis, given the combination of the two deals that just closed?.

Well, we came in a little stronger this quarter than anticipated. So I think we were at $3.2 million and I feel like we’re very comfortable just under $3 million. We’ve – we’re communicating that we thought it was going to be about $2.8 million on a go-forward basis and we had a little stronger start than we had anticipated..

Okay, great. I have another questions have been asked and answered. Thanks a lot guys. Appreciate it..

Thank you, Damon..

The next question comes from Erik Zwick with Stephens Inc., please go ahead..

Good afternoon, guys..

Hi, Erik..

Maybe just thinking about kind of the $10 billion threshold again. And I appreciate the commentary on kind of the expectation for organic growth that would get you there in 2019.

I guess, can you just remind me where you are in your expense bill of process, relative to that threshold? Would you anticipate needing to invest an additional personnel or infrastructure to build across that level?.

I will. And we kind of think of it in three pieces.

The first being the Durbin Amendment loss of income; second being the large bank FDIC pricing; and then the third one, kind of a catch all for what I tend to shortcut as all other risk management, which would include the DFAST testing and then incremental investments in BSA, AML and all other kind of process clearing and modeling that we have to provide.

And so of those three, two of them we obviously haven’t incurred any of, the large bank insurance or the Durbin Amendment loss. And so the balance, the other categories, we kind of bundle up at just under $2 million.

And about $800,000 of that $2 million is already in our revenue run rate from people investments and a little bit of technology investment that we already brought in over the last six quarters. And so we would have an incremental $1 million on those, some of which, when we sign off on our 2018 budget, will be included.

Did that help?.

Yes, that’s great color. And then circling back to the commentary on expanding the specialty finance businesses. It sounds like you’re making some internal investments there to grow those organically. Mike, just maybe a little bit more color on exactly what’s happening there.

And additionally, would you consider any purchases of businesses or portfolios to help those businesses as well?.

We would consider those although we have not evaluated any at length. They’ve typically been – the couple that have been brought to our attention are in those categories asset- based lending, for instance. But they’re so far out of market that – or of a scale that would be a bad entry point for us, so we really haven’t looked at it.

The investments I referred to are really kind of in-house grow your own business, whether it’s a stocky system for the asset-based business and the individual responsible for our specialty business knows that that particular business is probably best suited for a downturn in the economy, when a wider swathe of C&I names kind of need that back office.

And so those are the two that we’re primarily looking at. I referenced in my earlier remarks having a syndication function just for the amount of originating we’re doing. It speaks somewhat to the questions about the overage of organic loan growth above our ability to gather deposits.

And so we feel like we have great distribution capabilities to continue serving our clients without putting too much liquidity pressure on ourselves..

Got it.

And then finally, maybe just a housekeeping-type of question is, on the tax rate, 26%, is that still a good run rate for modeling purposes?.

It is. That’s exactly what we’re using. It’s 25% of all taxable items. About 26% ends up being kind of the average going forward, the effective rate, I should say..

Thanks for taking my questions..

You’re welcome. Have a great day..

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

Hi, guys..

Hi, Brian, good afternoon..

Maybe just one – a couple for Mark, or you as well, Mike. Mark, you talked about maybe just kind of the deal size, and I guess, this is, I guess, for you as well, Mike. I mean just the deal size now that you’re getting near the – I guess, as you kind of approach that $10 billion level. I guess if you can just talk a bit.

Mark said you kind of think it goes a little bit bigger. And maybe just kind of put a frame around that. And then just maybe where the dialogue’s at today as far as M&A in the marketplace.

Just kind of how – what’s – how are things on that front?.

I think – this is Mike, Brian. I think that the active discussions, call it availability if you will, is maybe a little stronger in the second half of 2017 than the first half, but somewhat constant.

And I feel like when we realize some of these efficiency gains that are kind of equal parts, revenue growth and expense management, that we can continue to replicate that either on our own or with companies coming in. One of the things that I’m really pleased about, no one’s pays as much attention to the credit cycle where we are today.

But for our credit administration team to really understand the risk that joins a company is impressive to me, as is our ability to take lower net interest margin companies and kind of have them rapidly build in without really noticing in our run rate.

And so when I feel like those two things happen, and I know we can do that organically, I feel like our options moving forward, whether it’s smallish banks in a $0.5 billion range or something much harder, I think they’re all things that we can consider in a really moderate risk approach way and that’s kind of our game plan..

Okay.

So you’re not looking bigger, just to cross the threshold bigger on the $10 billion side? Or I guess is that not a fair assessment?.

I don’t think we have to really widen our risk tolerances just to – in consideration of a particular, for the time being, regulatory threshold..

Okay. Fair enough. And just as far as – you talked a little bit about the efficiency ratio and just kind of how you’re thinking about that, Mike, as you go into next year, that maybe there’s just some modest improvements I guess, maybe around the 50% type of level.

Does that seem like a sustainable level once you get the synergies behind you from IALB? Maybe trending lower after that, but that’s kind of the starting point and can be distinguished?.

I think 2018 whether it – I think 2018, whether it includes acquisition or not, will be right around the kind of lower 50s number that Mark got to when he was normalizing the 55% published number, absent for the third quarter acquisition costs, which got him closer to 51%.

I think that’s a good number because as we approve tactics to put into our 2018 plan, we’re going to have some marketing expense, particularly in Fort Wayne for branding purposes where it’s not just getting the expenses up but trying to put some reinvestment back in.

And the same would apply with some of the talent we’ll need to comply with the risk management function, post $10 billion. So I think we’re going to continue on a core basis to move modestly lower, and then probably give a little of it back to position the company well for the longer term..

Right. Got you. Okay. And you talked about – I don’t know if you can answer the question on pipelines. But just the pipelines are a little softer today than they were just given the strength in the third quarter.

Are they about flat with where they were last quarter?.

No, they’re – no, you must be looking in my reports. They are a little bit softer, actually, not so much in mortgage and consumer lending, which are, from a balance sheet perspective, not our biggest businesses. As you know, we sell the vast majority of the mortgage closed volume so it really never quite finds its way to the balance sheet.

But in the commercial businesses, just a little bit softer, really. Not much coming out of the regions. I like the balance in it, but it is lower in absolute dollars. I’ll just tell you. It’s just over $0.5 billion total, $390 million in commercial, down from $460 million at prior quarter. So I like it.

I think it correlates really well when we think about our capture rate to that kind of 8% number that I referenced..

Yes. Okay, that’s helpful. And just the last one or two was just with regard to deposit pricing. Mark, you talked about the margin and the benefit you get for one more rate increase.

I guess, is deposit gathering getting more difficult today? Or just is that kind of baked into your outlook as far as funding cost continue to trend up?.

I don’t know that deposit gathering is any more challenging. If you think about just the core retail base, it grows 3% to 4%, almost regardless of what the rates happen to be. It’s more the more volatile categories. All public money is a little bit more expensive. Large commercial deposits are a little more expensive.

They have a little more pricing power. But with the long end of the curb not moving up, I don’t feel like there’s as much pressure to be aggressive..

Okay. All right. And last one was for John.

Just as far as I think about reserving, next year, John, I guess is it still kind of what you’ve been kind of talking about the last couple of calls as far as how to think about the reserve levels? Just covering charge-offs in growth? Is that how you’re thinking about it today?.

It is. It is. I mean, we’re – we’ve done that the last several quarters. This quarter, obviously, had the recovery in it and with the loan growth, we just put enough in there to keep up with the increase in the balances..

Okay. All right. That’s all I had guys. Thanks so much..

Thank you very much, Brian..

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

Thanks, Rachel. I really have an appreciation for the participants on the call, the listeners and the questions. Pleased with our quarter. We like our momentum heading into next year and look forward to talking to you at the completion of our fourth quarter. Have a great day..

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