Michael Rechin - CEO Mark Hardwick - COO John Martin - Chief Credit Officer.

Scott Siefers - Sandler O'Neill Damon DelMonte - KBW Terry McEvoy - Stephens Nathan Race - Piper Jaffray Brian Martin - FIG Partners.

Good day and welcome to the First Merchants Corporation First Quarter 2018 Earnings Call and Webcast. [Operator Instructions] Please note, we will be using user-controlled slides for our webcast today.

Slides may be viewed by following the URL instructions noted in the First Merchants News Release dated Thursday, April 26, 2018 or by visiting the First Merchants Corporation shareholder relations website and clicking on the webcast URL hyperlink. The Corporation may make forward-looking statements about its relative business outlook.

These forward-looking statements and all other statements made during this meeting that do not concern historical facts are subject to 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 10-Ks concerning factors that could cause actual results to differ materially from any forward-looking statements. Please also note that today's call is being recorded. I would now like to turn the conference over to Mr. Michael C. Rechin, President and CEO. Please go ahead..

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

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

So we’re happy to join you today, talk about a strong quarter where our earnings per share of $0.74 were a 32.1% increase over the same period first quarter 2017. We reported $36.7 million of net income of 58.1% increase over the first quarter of 2017.

Total assets of $9.5 billion grew 29.3% over the first quarter of 2017 and during the quarter on an annualized basis, our organic loan and deposit growth was nearly 9% each. Couple of high performance metrics in terms of 1.57% return on average assets, 11.21% return on average equity, all of it through a 51.33% efficiency ratio.

So the balance sheet benefiting as the release talks about a growing Midwestern economy that we're taking advantage of strong execution on First Merchants part, and a couple of 2017 acquisitions that are off to a good second year beginning.

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

Thanks Mike. My comments will begin on Slide 6 where out total assets on line seven increased by $2,147,000,000 or 29% since the first quarter of 2017. However, the majority of my balance sheet comments will focus on the growth since year end 2017 which you can see on this slide total 4.5% as highlighted in the gray bar at the bottom.

Mike has already mentioned organic growth and total loans on line two, totaled $148 million since year-end and annualized 8.7% increase. Our 2017 M&A activity is highlighted in the footnotes below.

On this page the information is identical to the fourth quarter of 2017s presentation and it bridges the difference between the high single digit organic loan and deposit growth and that we had this quarter compared to the 29% increase year-over-year.

The composition of our $6.9 billion loan portfolio on Slide 6 continues to be reflective of an asset sensitive commercial bank and it continues to produce strong loan yields. The loan portfolio yield for the first quarter of 2018 totaled 4.86%.

When normalized for a fair value accretion and tax reform are yield in the loan portfolio totaled 4.77% compared to 4.73% last quarter and 4.37% in the first quarter of 2017.

On Slide 7, our $1.5 billion bond portfolio continues to be high performing but as interest rates have risen and tax rates declined, our portfolio experienced both the decline in valuation and yield.

Tax reform impacted the yield by 43 basis point so on an adjusted basis the yield of 390 compares favorably to really all of last year all four quarters which are average between 380 and 390. Now on Slide 8, our non-maturity on line one represent 84% of total customer deposits.

Non-maturity deposit growth over year in 2017 totaled $109 million or 7.6% annualized. Customer timing deposits on line two represents to remaining 16% of total customer deposits and increased by 86 million on annualized 33%. Again all M&A growth from 2017 is detailed in the footnotes at the bottom of the page.

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

Our cost of funds has increased by 26 basis points during that same one year timeframe. The 26 basis point increase over 75 basis point had fund rate increase reflects our deposit data of roughly one-third. On a regulatory capital ratios on Slide 10, our above regulatory definition well-capitalized and our internal targets.

We believe the strength of our 9.32% tangible common equity and 1369 total risk-based capital ratio will continue to provide optimal flexibility into the future. The Corporations net interest margin on Slide 11 reflects a decline from 4.10% in the fourth quarter of 2017 to 3.92% in the first quarter of 2018.

Federal tax reform negatively impacted net interest margins by 13 basis point and fair value accretion declined by five basis points during the quarter. When both our items are normalized, our net interest margin remained flat when compared to the fourth quarter of 2017 and is 18 basis points better than the first quarter of 2017.

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

I am happy to discuss all the normalization when we get into the Q&A session as well. Total noninterest income on Slide 12 and total noninterest expense on Slide 13 are now at post integration run rates and the majority of the increases are do really primarily to being a larger banks given all of our M&A activity in 2017.

Our expense levels were above our plan and our guidance by approximately $725,000 and the increases are really attributable to several nonrecurring items during the quarter. Now let's go to Slide 14 and we can talk about where really the place for M&A tax rates margins all culminate into bottom line results which we think are pretty strong.

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

And you can see on line seven, that our effective tax rate declined from roughly 24% a year ago in the first quarter to just over 15% in the first quarter of 2018. Despite the 1.3 percentage point negative impact, the tax reform had only efficiency ratio. We are also pleased with our 51.33 run rate on line 10.

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

On Slide 16 you’ll notice that our annual dividend modifications typically occurred during the annual shareholders meeting which is scheduled for May 10, 2018 this year and we continue to be pleased with our compound annual growth rate of tangible book value per share this roughly at 10% while paying dividends of 4.2% and completing two meaningful acquisitions in 2017.

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

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

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

Growth is being driven by robust commercial real estate activity and commercial and industrial lending. Moving up to the top of this slide and working down quarterly construction industrial loans grew on line one by $60 million and CRE and non-owner occupied loans on line three grew by $142 million.

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

During the quarter we saw construction commitments moderate with the reduction in construction balances as we move projects from the construction to non-owner occupied portfolio.

Then briefly finishing out the slides on lines 12 and 13, we continue to remain below the regulatory real estate concentration guidelines for 100% of construction loans and 300% for investment real estate to capital. Turning to asset quality on Slide 19, asset quality remains in check for the quarter.

On line one nonaccrual loans declined $1.2 million, on line two ORE declined 700,000 and on lines three and four renegotiated and 90 days delinquent loans declined 400 and $200,000 respectively.

This resulted in NPAs in 90 days delinquent on line five declining in the linked quarter by $2.5 million to $38.5 million or 55 basis point of total loans and 40 basis points of assets. Finishing out this slide and moving down to line seven classified assets increased $25.3 million after declining in the fourth quarter by $16.5 million.

This was a 16.5% increase while as a percentage of capital it increased marginally from 15.1% to 17.2%. Turning to Slide 20 which reconciles the migration of nonperforming assets. We started the year in the far right column titled Q1 '18 with $41 million in NPAs and 90 day delinquencies.

From there, we added $4.8 million of new non-accruals resolve $4.1 million on line three with $1.8 million of gross charge-offs on line five. This netted to a $1.2 million decrease in nonaccrual loans on line six, and dropping down to line seven we added $100,000 in new ORE, while on lines eight and nine we sold $700,000 for writing up $100,000.

So after the changes in restructured 90 days past due we ended the quarter $2.5 million better than we started. Turning to Slide 21, provision expense in the quarter of $2.5 million and line three coverage charge-offs of $1.1 million which allowed the allowance on line four to grow with the increase in the loan portfolio.

The allowance remained at 1.1% of total loans and 1.32% of non-purchased loans. For value adjustments on line eight decreased $3.2 from $46.3 million to $43.1 million with $3.2 million in accretion and no offset charge-off. So summarizing on Slide 22, loan growth was in the mid-to-upper single digits with increases in CRE and C&I lending.

Providing a little color on the construction portfolio, our construction lending activity remains largely in Indiana and Ohio comprising up two-thirds of our commitments.

Of the total we have projects in most all of our communities from Fort Wayne to Mishawaka, the Bloomington to Indianapolis and Ohio from Cleveland to Toledo down to Cincinnati to Columbus. In both states the highest concentrations are in our growth markets of Indianapolis and Columbus.

Outside of Indiana and Ohio, we generally extended our portfolio to in-market developers who have a more national reach and those state outside of Indiana and Ohio comprises more than 5% of the total construction book.

We continue to have good non-student housing apartment in mixed-use construction activity which comprises roughly 50% of the commitments and student housing as a standalone of roughly 10% of commitments. Senior housing demand has also been healthy and now comprises roughly 15% of commitments.

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

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

I’ll turn the call back over to Mike Rechin..

Thanks John. I’m going to have the balance of my remarks on Page 24 and we’re looking forward to page. As we start out with - really our most important tactic for the year which is do a great job in year two following the two acquisitions in 2017.

So the former Arlington Bank franchise which was kind of mortgage heavy retail, heavy strong performing bank as part of our Ohio business and John talked about some of the strengths that we're seeing there, commercially oriented in particular.

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

Our similar thoughts in the next couple of bullet points that speak to feeding or growing business, we've had some neat recognition over the last couple of months that are either around quantitative performance or around best places to work.

We actually had our first recent world three of our states of operations Indiana, Ohio and Illinois all attracted and earned places best places to work kind of employer recognitions which as you might know what to help us not in branding for talent, attraction and retention and it certainly doesn't hurt and assisting, winning and servicing new client.

So we’re pleased with that. John referred to some of the growth in our specialty businesses and Mark actually talked to our expense levels and I would tell you that apart from nonrecurring items that Mark sized in his remarks, we're adding people as appropriate.

So whether it's production folks or associates in the specialty finance business, we've also made important ads in Fort Wayne as our market presence there rounds about what he needs to win and as we've talked about in prior calls adding to our wealth business through a more - full geographic franchise coverage and private banking which we’re moving in on completion of here probably by the end of this summer.

I’ll reference a specific project that’s been in our notes from the last couple of quarter ends and it relates to a really a complete redo our restructure rebuild of our checking account options through several acquisitions that we've had over the last half of dozen years.

We had grandfathered a lot of products that are sold out of the retail banking centers and we took the opportunity in 2017 to plan for not only the consolidation of them and eliminating some of the grandfathered product types but to refresh then all in a way that mirrors the client preference that we have around the way they like to use the retail bank.

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

One of the underlying factors, I don't know that Mark covered, but when he talked about our cost of liabilities, it's been several quarters now where it's apparent to us that our organic loan growth rate is at the high end of our range and so we've tried to be a little bit more proactive in finding the funding for what no longer appears to be a 6% kind of loan growth but something a couple of percent higher to make sure that we have the liquidity for that.

And I think the balance sheet would reflect that.

You might see some - what has taken place of deposits actually replacing borrowings as we've spent a higher priority on what we would call institutional sources of funding and those could be in the public funds arena with governmental entities, primarily states, universities, clients such as HSA providers, foundations, there is a lot of larger sources of funding that we've been successful with, they do command market pricing for the bulk deposits that they offer us.

So that would be included in some of the metrics that Mark highlighted. Next bullet point just speaks to our continued appetite to use our track record in producing franchise expansion and shareholder value through well-thought out M&A activity.

So I don’t know where that will take us absent that either with or without M&A at a $9.5 billion level for total assets its 331 its clear to us that 2019 likely takes us over $10 billion.

And so all of the responsibilities and expectations around that are well underway to include even the DFAST preparation which is well underway not having real great clarity as to whether or not the Senate bill gets approved or not. So we’re trying to give ourselves as much optionality and preparedness as possible.

Company is excited about celebrating a 125th anniversary in 2018 and as we move into the midpoint of the year we take momentum with us and so we feel bullish about the rest of the year and yet as John Martin kind of closed with the ability to adapt the conditions as they approved themselves.

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

[Operator Instructions] And our first question will come from Scott Siefers with Sandler O'Neill. Please go ahead..

Mike and Mark, I think you guys both sort of touched on the margin just hoping you can expand upon your thoughts. I guess I might have anticipated slightly higher core margin ex purchase accounting accretion this quarter.

I think we know about the FTE chains with the tax law but just curious to hear your thoughts on kind of how things came about in the first quarter relative to your expectations.

And then you noted still asset sensitive maybe the benefits won’t be as great and then Mike you had chatted about the kind of focus on deposits that might kind of have sort of negative mix ramification at least from a cost of fund standpoint.

So just hoping you could spend a moment talking about the major puts and takes you see on the margin from here the core margin that is?.

Well one of the comments that you made was the tax reform, 13 basis points and then I think on the second item all around fair value accretion that normalize fourth quarter to first quarter.

And we had a similar discussion in the first quarter of last year just where we had a kind of modest dip in the core from maybe what we expected and it rebounded in the second quarter. And some of that we love the extra couple of days we get of the commercial portfolio in the second quarter.

But I think at this point if there aren’t additional Fed fund's increases which I think they’re likely will be, but if you think about the current environment, it’s going to be - we’re actively managing what happens with investment yields on the longer end of the curve as it flattens compared to what - how much we have to get back on the depository side.

So, I think we’re at a good level here that we can maintain, but not really expecting expansion unless we see more movements in the Fed funds rate..

The other part of your question Scott that I touched on is not only they’re looking backwards handful of quarters to look at the level of loan growth rate but our pipeline and we typically talk a little bit about that. It would appear to me that it’s going to hold off well through the balance of 2018.

I don't know that in what particular quarter it will happen, but our near term outlook for the next couple of quarters would appear to be at a similar level which then prompts all of us to think about how we fund that in the best way.

And so we’re doing it in our franchise with the kind of clients that I referenced in my remarks earlier, a retail execution for what you would call retail deposit as you know are really methodical business and with 115 stores plus or minus, you count on $1 million or $1.5 million of true traditional really low cost sticky deposits.

We just need to do a little bit better than that to offset the loan growth that we benefited from. So that's what the strategy and that's why a little bit of blip up to attract deposits in a larger measure..

And then maybe just ticky-tack one for you Mark.

I think last quarter you’ve been saying probably somewhere in the neighborhood of $12 million first coming accretion for the full year is that still a number you think looks reasonable?.

Just a moment, we were 3.2 this quarter which was a little bit behind our plan. Yes, I mean I think that's still the right estimate moving forward..

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

My first question, Mike I was wondering if you could just kind circle back on the noninterest income and some of the components in there that maybe your one-time this quarter that wouldn't be repeated next quarter?.

The non-interest expense?.

No interest income - sorry, aside from obviously security gains but there was anything in the other noninterest income line or any other category?.

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

Could you revisit those as well, please?.

Yes, we had about $725,000 - a couple hundred thousand that was really M&A carryover type items where we try to get everything in related to acquisitions that we possibly could by year-end we had few things carryover into the first quarter, didn't think it made sense to call it out as M&A expense necessarily.

But we don't expect to have that going forward. We had about 400,000 related to benefits and incentive activity from the end of the year all paid out and expense during the first quarter and even something as simple as a like 401(k) matching gets a little bit accelerated when incentives are paid.

So we recognize that costs in the first quarter versus coming in slower throughout the rest of the year. And then we had us a little over $100,000 tax payment related to our REIT that showed up this quarter that won’t repeat going forward.

So those are the items that feel nonrecurring to us or at least accelerated as we look at the run rate going forward..

And then I guess, as you guys get closer to the 10 billion and as a threshold, do you feel like you’ve incurred all the expenses that you need in order to be compliance to go over that level?.

From an expense investment as you know the cost of it if you will is part income part of expense - your question is on expense. Yes, we’re pretty much good to go there. We aren't producing the DFAST stress test at this point. We’re prepared to do so. The data has been compiled.

I'm still hopeful that that it proves out to be a net benefit to us in terms of methodology while actually having to provide it should the 2155 bill prevail. The other parts around the derivatives clearing process and internal audit work, so far in good shape on yes..

And then just lastly just to confirm your outlook for loan growth for the remainder of the year the upper single-digit range is still a bit target?.

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

Our next question comes from Terry McEvoy with Stephens. Please go ahead..

Starting on Slide 6, thanks for the year-to-date yield and adjusting forward on the call. I guess where you’re seeing the best opportunities when you think your pricing pressure within that loan portfolio and then on the flipside areas that maybe standout is being competitive today from a pricing standpoint..

I see John Martin looking for a slide so as he gets it, I'm kind of looking as a component of an answer to you around our pipeline and it’s a less balance than it had been over the last couple of quarters. And this is what I mean.

John referred to commercial real estate and C&I lending as strong kind of throughout the company and it kind of manifests itself in the pipeline as well.

The mortgage business which is mostly for sale business for us it’s a little bit soft and even though the pipeline numbers dramatically higher than that of the end of the first quarter of 2017, we did not have the Arlington Bank as part of our company which had a powerful mortgage origination unit.

In terms of other on balance sheet lending, within that specialty finance group that John speaks to is a sponsor finance group that is growing at the rate that John described it’s over $210 million and overall outstanding and up a 100 since late last year.

And however, the public finance in terms of getting back to your vulnerabilities question with the tax change finding the kind of opportunities in public finance that meet our target return is obviously going to be more difficult. And so I think we’re scaling back our expectations for at least the loan side of that business.

And the great part about is the relationship aspect business it has both deposit and credit aspects, but we do expect the credit, the book of credit side of that business to slow..

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

We see some shift our retail product team is watching us very, very closely and looking for trends and patterns to see if there are modifications that we need to make.

And so far it's been very manageable we have some special offerings in the money market space and also in the CD space that we’ve been able to use to retain customers that are highly sensitive to the rate move. I don't know that we expected to change dramatically.

We continue to watch the long end of the curve and just looking for a sense as to whether all rates are going to move upward which I think changes the strategy. And if the long end of the curve stays where it is I think we have to be incredibly diligent about how much we put back into deposit interest rate calculate or interest expenses.

So that’s how we’re thinking about it internally..

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

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

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

Mark going back to the discussion around the expenses I appreciate your comments in terms of some of non-recurring items in the quarter and that you guys feel like you’re pretty much there in terms of the expenses that you need to incur to be at $10 billion asset thing.

So just curious as we kind of look at the run rate as it sits at 1Q do we expect kind of just closing up physics growth from here or kind of you guys thinking about naturally inflationary pressures on expense base going forward?.

Well I mean when I think about just the remainder of this year we think that 53 to 53.5 million is the range that will be operating within.

And what we've done really nice job of over the years as we are definitely increasing expenses in categories that demanded the most like technology, human capital, those types of things we’re finding way to offset it by becoming more efficient in other.

And so that's always our focus in trying to keep the expense growth rates at really low single-digit level. And at least for the foreseeable future the rest of 2018 and end of 2019 I think that’s possible..

And then just think about the securities portfolio from here as you guys kind of continue on growth trajectory, do you expect the security book to kind of remain on its current relative level as a percent of an asset.

So do you expect it kind of shrink as you guys grow to loans more so or just any thoughts on that and those dynamics?.

We really like the percentage makeup right now between loans and investments out of our total asset mix. And so our goal is that you keep it at that level on go forward basis which is part of the reason we have heightened our efforts on the depositary side..

I apologize if you already touch on this but I think you mentioned the FTE adjustments from tax reform and securities was 12 to 13 basis points this quarter, how much was that on loans?.

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

And then if I could just speak one last one in for Mike, on the capital front you guys are going to be accretive to capital at pretty healthy flips. I’d say there is potentially raise of dividend later this month.

So just curious what you're seeing on the M&A front if you’re feeling more optimistic about your opportunities to deploy capital via M&A over the course of this year and into 2019?.

Yes.

In terms of trying to balance all three of those uses whether its loan growth or deposits or M&A we have done our last two transactions 100% stock and if we were to find an opportunity next that we would probably look to put some cash in it, and I don’t that crowds the idea that in a month when we look at our kind of - annually look at dividend level that doesn’t give us flexibility to recognize the level of cash flow and earnings that were likely to have both in this current quarter actually going forward.

So I think we’re able to achieve all those ends..

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

So just a couple things, I think lot if it has been covered but just Mark you didn’t I guess talk about the tax rate just kind of where you think it unfolds here the next couple of quarters, is it kind of – little bit higher rate than what it was at this quarter, I think the effective was about 15.25 in the first quarter here.

So just how you’re thinking about the balance of the year?.

Yes, we think that this level of sort of 15 to 15.75 in that ballpark is what we expect. So nice savings if you go all the way back to last quarter was - first quarter of 2017 was 24, all of 16 was 25 and 2017 was high at 28 based on the DTA expense of 5.1 million.

So, that’s kind of the levels where we are expecting it to be for the rest of the year that 15.25% to 15.75% range..

I did not know if there was any option benefits this quarter that would take a little higher next quarter, so that’s helpful?.

There was some that’s why we see a little bit of a bump up..

And hey Mark just on the rate on the margin and just kind of going back to that discussion for a minute, I guess if you talk about - you guys kind of elaborated to it that may be the future benefits of rate hikes wouldn’t be as much but still positive.

When you look at the next rate increase given that and Mike can you just talk a little bit about how much of a benefit you think you get from the next rate hike here at least in the near-term given kind of some of the changes we are making on the funding side, kind of going after some of these larger institutional type of funding.

I guess is that the biggest changes from what you’re seeing before it didn’t sound like the data was changing all that much other than for that reason?.

Yes, I think if you look we expanded core margin 18 basis points where it was 75 basis point increase in the Fed funds rate. And so that’s, call it six basis points, six basis points each move and we’ve been giving guidance of around 5 and I do think it's going to be less than going forward for a couple reasons.

One is, just some of depository reasons but the others were just getting - the yield curve is getting flatter and flatter each move which makes it tougher to capture. So the 5 to 6 basis points we have in the past. So we’re modeling less than that but still some improvement in margin..

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

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

And you mentioned the one part about the - maybe I misunderstood when you talked about the expenses, the total nonrecurring piece that was in this quarter was it about 700 grand or million?.

No, it was 7.25 was the number that I gave?.

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

If you tackle the organic portion of your question first, is that I do think even taking full advantage of the organic opportunities in front of us and just kind of running the company with the cadence that our marketplace allows us to that I do think will be able to manage the balance sheet to stay beneath $10 billion absent in acquisition this year.

So that’s kind of our plan, everybody knows that the managers are running their business with that in mind. As it relates to frequency conversation, I would say it's about the same.

It seems to me though maybe you would hear other people say that everyone wanted to see what tax reform really does to their results to get a sense for what the future could be, what their value is. It’s a lot of change in the overall environment whether it's regulation, tax rates and such so we’re planning a lot.

The conversations we’re having and the interest we have are pretty consistent with what have been in prior quarters. We focus on day one really striking something that from a pricing standpoint make sense.

And then immediately behind that a leadership affirmation and execution around integration and culture so, that the ingredients for that are identical. And I think the conversations are ongoing and it has to be win-win for two parties..

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

Well I think the only thing that would change from prior period Brian is that a $0.25 billion transaction, in other words of a $250 million asset bank would have to really be in a marketplace with great synergies to kind of roll it into a franchise. To go into a new market at that size doesn't seem to make a lot of sense to us.

I don't think on the higher end, I don't think that we feel like we have to look at larger entities to get us over $10 billion, but on the lower end knowing that the magnitude of work and effort in some regards expense is identical for $0.25 billion bank or $1 billion bank it would have you looking at something that has more substance and more market presence..

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

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

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