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Edited Transcript of FRME earnings conference call or presentation 31-Jan-19 7:30pm GMT

Q4 2018 First Merchants Corp Earnings Call

MUNCIE Feb 11, 2019 (Thomson StreetEvents) -- Edited Transcript of First Merchants Corp earnings conference call or presentation Thursday, January 31, 2019 at 7:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John J. Martin

First Merchants Corporation - Executive VP & Chief Credit Officer

* Mark K. Hardwick

First Merchants Corporation - Executive VP, CFO & COO

* Michael C. Rechin

First Merchants Corporation - President, CEO & Director

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Conference Call Participants

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* Damon Paul DelMonte

Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director

* Kevin Kennedy Reevey

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Nathan James Race

Piper Jaffray Companies, Research Division - VP & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the First Merchants Corporation Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions)

This presentation contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act. Such forward-looking statements can often be identified by the use of words like believe, expect, or may, and include statements relating to First Merchants' goals, business plan, growth strategies, loan and investment portfolio, asset quality, risks and future costs and benefits.

These statements are subject to significant uncertainties that may cause results to differ materially from those set forth in such statements, including changes in economic and business conditions; the ability of First Merchants to integrate recent acquisitions and attract new customers; changes in laws, regulations and requirements of the company's regulators; the cost and other effects of legal and administrative cases; changes in the creditworthiness of customers and the impairment of collectability of loans; fluctuations in market rates of interest and other risks and factors identified in First Merchants' filings with the Securities and Exchange Commission.

First Merchants undertakes no obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this presentation or press release.

In addition, the company's past results of operations do not necessarily indicate its anticipated future results.

Please note, this event is being recorded.

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

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Michael C. Rechin, First Merchants Corporation - President, CEO & Director [2]

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Thank you, Andrew. Welcome, everyone, to our earnings conference call and webcast for the fourth quarter ending December 31, 2018.

Joining me today for our call are Mark Hardwick, our Chief Operating Officer and Chief Financial Officer; and John Martin, our Chief Credit Officer.

We released our results in a press release this morning at approximately 8:00 a.m. Eastern Time, and our presentation speaks to material from that release. The directions that point to the webcast were also contained at the back end of the release, and my comments will begin on Page 4, a slide titled Full Year 2018 Performance.

First Merchants earned a record net income of $159.1 million, a 65.6% increase over 2017's total of just over $96 million. Earnings per share totaled $3.22, a 51.9% increase over 2019's earnings per share of $2.12. Our total assets grew to $9.9 billion, organically 5.5% over 2017's total.

Some of our performance measures are on the next bullet point line, a return on average assets of 1.64%, spearheaded by a strong fourth quarter; 11.84% return on equity. A 50.21% efficiency ratio partially drove that -- those earnings levels. Really nice, balanced growth organically, both in loans, a 7% growth rate for the year, $471 million in total; 8.1% for the full year in organic deposit growth, $582 million for the year.

Lastly, on this page, our tangible book value increased to $19.12 a share, 12.7% over year-end 2017. And in looking at some of our prior discussions with this group and associated with prior acquisitions, the growth in the tangible book value is either consistent with or ahead of levels forecasted at the timing of prior acquisitions relative to earn-back performance.

Moving to Page 5. A subset of 2018 overall is the fourth quarter, which is fresh information for today, where we have earnings per share in the fourth quarter of $0.85, a 73.5% increase over the fourth quarter of 2017's reported level of $0.49, a really strong quarter. It equates to $41.7 million of net income, a 71.1% increase over the fourth quarter of 2017's $24.4 million in net income.

I'll come back to organic growth, where the funding of the company is provided from our marketplace and our clients and winning in the marketplace through an everyday focus on marketplace activity. So in the fourth quarter, organic loan growth of $138 million or 7.8% annualized really rates similar to what we would have reported in the back half of 2017 and very similar to the first and second quarters of the year. A nice pickup for us after what was a slower level of growth rate in the third quarter, so we're happy to see the resumption of the prior level. And organic deposit growth, which was really strong throughout the year, a 6.4% annualized growth rate or $121 million.

At our earnings highlight call of the third quarter, we would've touched on what was very fresh information then, also a fourth quarter highlight in my mind, the announced definitive agreement signing with Monroe Bank & Trust, which I'll touch on at the back end of my comments.

But at this point, I'd like to turn the call over to Mark Hardwick to get into our results a little bit more deeply.

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Mark K. Hardwick, First Merchants Corporation - Executive VP, CFO & COO [3]

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Thanks, Mike.

My comments will begin on Slide 7. Total assets on Line 7, as Mike mentioned, increased $518 million or 5.5% since year-end 2017. Organic growth in total loans on Line 2 increased $471 million or 7% since year-end '17, and our bond portfolio on Line 1 also increased 4.6% or $72 million during the year, really improving our liquidity position.

The composition of our $7.2 billion loan portfolio, on Slide 8, continues to produce very strong loan yields. The loan portfolio yield for the fourth quarter of '18 totaled 5.41%, up from the first quarter of '18 total of 4.86%, the second quarter '18 total of 5.12%, and the third quarter total of 5.25%. The prime rate has increased by 150 basis points over the past 7 quarters, and our loan yields when normalized for fair value accretion, have improved by 89 basis points for a beta of approximately 60%. As the graph on the right illustrates, 68% of our loans are variable, with half repricing daily, demonstrating the asset sensitivity of our bank.

On Slide 9, our $1.6 billion bond portfolio continues to be high performing. Our portfolio yield of 3.54% is marginally higher than the previous 3 quarters of the year, while the unrealized loss is now just $8 million.

Now on Slide 10, nonmaturity deposits on Line 1 represent 83.5% of total customer deposits, and those nonmaturity deposits for 2018 grew by $527 million or 9.2%. Customer time deposits on Line 2 represent the remaining 16.5% of total customer deposits and increased by $190 million since 2017 or 18.1%.

Now as I mentioned, our liquidity is quite a bit stronger, and you can see on Lines 3 and 4 where we had declines in brokered deposits of $135 million and declines in borrowings of $163 million. So our capital and liquidity are positioned well for the future, and management's pleased with the structure of our balance sheet. Our loan-to-deposit ratio now totals 93%, and our loan-to-asset ratio totals 73%, while tangible common equity is nearly 10% at 9.97%.

As I previously mentioned, the mix of our deposits on Slide 11 is the true strength for our company. Fourth deposit cost totaled 104 basis points, up from the first quarter of '18 of 65, second quarter totaled 81 and the third quarter totaled 90 basis points. Over the past 7 quarters, the Fed funds rate again has increased by 150 basis points, and the cost of our deposits has increased 65 basis points for a deposit beta of 43%.

Our regulatory capital ratios, on Slide 12, are above the regulatory definition of well-capitalized and all of our internal targets, providing capital strength and flexibility into the future.

The net interest margin, on Slide 13, reflects a growing net interest income line, driven by both balance sheet growth and margin expansion during the year. 2018 full year net interest margin totaled 4%, down from 2017's total of 4.02%. However, when adjusted for Federal tax reform, the margin actually expanded by 11 basis points during the year.

Total noninterest income, on Slide 14, reached $76.5 million for the year, an increase of 7.8%, the improvements were aided by full year results from 2 acquisitions that closed in May and July of 2017 and now reflect a full 12 months of fee income.

The same holds true on noninterest expenses on Slide 15, which totaled $220 million for 2018. And so given the addition of those 2 acquisitions and the relatively marginal increase in our total expense base, management's really pleased with just a 7% increase year-over-year.

On Slide 16, as Mike mentioned in his opening remarks, net income grew 65.6% during the year and now total a record $159.1 million. On Line 9, EPS totaled 3.22 -- $3.22 for the year ended December 31, 2018, an increase of 52% over 2017. On Line 10, the efficiency ratio for the year totaled 50.21% and improved over 2017 by 4.35 percentage points.

As mentioned in the press release and highlighted on Slides 16 and 17, income tax expense for the fourth quarter and the full year of 2018 came in lower than anticipated by $1.8 million due to an increase in state tax liability, offset by the release of a valuation allowance on state deferred tax assets. The impact of earnings per share totaled a positive $0.035 for the year of 2018.

So if you remember, a year ago, DTAs related to federal income tax, when rates dropped a year ago from the Tax Cut and Jobs Act, we recorded $5.1 million of expense. This year, related to state tax adjustments, it actually helped those same DTAs on the state tax side, actually improved earnings by $1.8 million in 2018.

So on Slide 18, we're very pleased that we can celebrate the company's 125th year anniversary by following a record 2017 with a 52% improvement in earnings per share.

Thanks again to our many stakeholders who contributed to this success.

On Slide 19, inclusive of M&A dilution and the resulting earn-back metrics, our total compound annual growth rate of tangible book value per share is nearly 10%. And if you look at that, that goes all the way back to 2010, so results that we're really proud of, and it also includes a 2.5% dividend yield as of this most recent quarter.

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

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John J. Martin, First Merchants Corporation - Executive VP & Chief Credit Officer [4]

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All right. Thanks, Mark, and good afternoon.

I'm going to begin on Slide 20 -- 21, provide a year-end and quarterly update on the loan portfolio, then review asset quality and the asset quality roll-forward to cover the allowance and provisioning, then close with a few remarks on the portfolio.

So turning to Slide 21. The pace of loan growth picked back up in the quarter, growing $138 million or 7.8% annually. The growth came from commercial and industrial loans, combined with commercial owner-occupied real estate on Lines 1 and 4, which grew by $71 million and $25 million, respectively. Strong C&I activity that spilled over from the third quarter, along with robust quarterly closings, resulted in the combined $96 million of C&I-related loan growth.

Construction loans were down $123 million on Line 2 as they moved into the portfolio on Line 3, resulting in CRE nonowner-occupied or investment real estate increasing $104 million. Then rounding out the slide, public finance and other commercial loans on Line 7 increased by $39 million, while consumer mortgage -- consumer and mortgage added an additional $15 million on Line 2. All combined, this led to loan growth of 1.9% for the quarter and 7% for the full year.

Let's turn to Slide 22. Asset quality remained solid for the quarter. On Line 1, nonaccrual loans were up $5.7 million. And to provide a little color here, behind the increase, there was a local skilled nursing home developer in the Central Indiana region that had a national presence, experienced some problems that resulted in our having to move roughly an $8 million project to nonaccrual. In contrast, though, moving down the slide to other real estate owned or ORE, it declined $6.7 million in the quarter with $6.3 million coming from the sale of one property. This was a long-term, multiyear resolution that was resolved in the quarter.

Moving on, renegotiated loans were flat on Line 3, while 90-day delinquent loans increased as a result of 2 matured consumer loans that were subsequently moved to perm after the end of the quarter. They were consumer construction loans. So in total, NPAs and 90-day delinquent were mostly unchanged, up $1 million, with classified assets on Line 7 declining a $1 million. Then finishing out the slide, specific reserves increased $1.5 million, mostly resulting from a $1.4 million specific reserve for the developer situation I just described.

Turning to Slide 23, which reconciles the migration of nonperforming assets. We started the quarter in the far-right column titled 2018 with $41 million in NPAs and 90-day delinquencies.

For the year, we added $24 million of new nonaccrual loans, resolved $18.2 million of the same on Line 3, with only $600,000 of new ORE on Line 4 and $8 million of gross charge-offs on Line 5. This netted to a $2.6 million decrease in nonaccruals on Line 6. Then dropping down to Line 8, you can see the effect of the sale of the $6.3 million property I mentioned a minute ago, in the $8.2 million annual reduction. So with the pieces above, we net on Line 13 to an annual reduction of $9.7 million, with total NPAs and 90-day delinquent loans to $31.3 million on line 14 or roughly a 24% decline in nonperforming assets.

Moving then to Slide 24, which highlights the allowance and fair value summary. Despite the net $500 -- $500,000 recovery position for the quarter, we had provision expense of $1.4 million, as shown on Line 3. The provision expense, along with the charge-offs, was driven by new loan growth of $138 million as the migration of loans from the purchased to nonpurchased portfolio. This left the allowance coverage unchanged at 1.11% of total loans, down 2 basis points to 1.26% of nonpurchased loans.

Dropping down to fair value adjustments on Line 8, which decreased $3.9 million from $33.9 million to $30 million. Also during the quarter, there was 1 relationship that had an individual credit mark that resulted in accretion of $1 million that was refinanced outside the bank. While positive for asset quality and income, this contributed to the slight reduction in fair value adjustments, resulting in a 2 basis point decline in fair value adjustments to FVAs and purchased loans.

Then summarizing on Slide 25. I would just say, really good loan growth with a balanced mix of new originations across the portfolio. Asset quality remains healthy and stable. 2018 looks to be at or near the bottom of the cycle, leaving us well positioned with good asset quality, well reserved and good asset quality metrics.

We finished the year with $500,000 in recoveries, with net charge-offs for the year of only $1.7 million on a $7.2 billion loan portfolio, with an allowance that represents 1.11% coverage of total loans and 1.26% coverage of nonpurchased loans, so good place to be.

That finishes my comments, and I'll turn the call back over to Mike Rechin.

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Michael C. Rechin, First Merchants Corporation - President, CEO & Director [5]

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Thank you, John.

I'm going to move to Page 27. Slide 27 gives us a refresher look at some pro forma information that we compiled and shared at the announcement of the Monroe Bank & Trust opportunity and the associated map that shows our retail configuration.

So you wind up with the company post-closing, and our work is proceeding as planned with the targeted late first quarter closing for what would be, on a combined basis, an $11.1 billion balance sheet, $7.8 million (sic) [$7.8 billion] in loans, $8.7 billion in deposits.

Next page, a little bit more on Monroe. Page 28 kind of gets to the strategic fit of the company in a vibrant marketplace with dominant hometown deposit market share. And overall, an exceedingly attractive low-cost deposit base, with a just under 70% loan-to-deposit rate, which is a great fit for our company and allows that portion of what will be First Merchants to exercise their commercial activity with the funding that they bring to the company.

Overall, really just a nice profile for us. We like the strategic fit. We like the cultural fit with the senior management of that company that'll look to begin their careers as part of First Merchants and as we prepare for the integration work, which is just ahead of us. As I might've mentioned earlier, we look forward to a close here before the end of the first quarter.

Moving on to Slide 29, and looking forward. Kind of our game plan remains similar to that in the past. That's a straightforward grow market share in markets that you're comfortable with in our core banking business. The second line talks about optimizing our retail and commercial deposit strategies. I'm particularly proud of the management of our funding costs through a commitment on all lines of business to take advantage of serving all of our clients' needs to include deposit needs.

In 2019, we're going to increase our investment in the payment space, both in the debit card and credit card space, which we look forward to as we cross $10 billion, both organically and then, to a greater extent, through the addition of Monroe, as I mentioned earlier. The integration, well in planning at this point. We would look to be in the middle of the third quarter. And all of our targets so far, on track.

Last bullet point before we get to questions would just be, I think, a gratifying recognition by a national organization like Forbes Magazine, ranking First Merchants second in this year's edition of America's best banks, up from the prior year's #4 rating. And we're proud with the competitiveness and the consistency that the company's demonstrated and really think that the criteria that they use that are appropriate, which includes earnings growth, capital strength, asset quality and efficiency ratios. So it's a great reaffirmation for our team that we're headed in the right direction.

At this point, Andrew, I'm done with my remarks and if there's any questions, our team is prepared to take them.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Kevin Reevey of D.A. Davidson.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [2]

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Congratulations on a great quarter and your anniversary. First question relates to the margin. If you could walk us through how you're thinking about the margin in 2019. MBT, they bring a lower cost of funding to the mix. They have a lower loan-to-deposit ratio. At the same time, in 2019, it looks -- you're going to pick up some PAA from them and then there's some PAA rolling off from your prior deals. So how should we think about the NIM in 2019?

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Mark K. Hardwick, First Merchants Corporation - Executive VP, CFO & COO [3]

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Well, I think maybe a little discussion about the fourth quarter is important before we go into the remainder of the year. We had about $97 million of excess public money on average for the quarter, and those dollars are typically higher-priced deposits. And because it's all related to tax receipts, property tax income in the State of Indiana increases the county deposits pretty aggressively.

So it muted our net interest margin for the quarter by about 3.5 basis points, so a little stronger net interest margin at the core level than what we reported. So I feel like we've continued to see marginal increases as rates have gone up. At this point, we're kind of anticipating no further increases for the remainder of 2019, which puts us in a little bit more of a defensive mode than where we have been over the last couple of years.

So if rates stabilize, we'll continue to see some pressure on the depository side of the balance sheet, as we have some lag effect of deposit rates, and we should be able to continue to see some nice, continued reinvestment rates that are strong in a bond portfolio. But our forecast for the year is generally a flat net interest margin year-over-year, and one that I think we're going to have to work diligently to make happen.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [4]

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And Mike, is it flat on a GAAP basis as well as on a core basis?

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Mark K. Hardwick, First Merchants Corporation - Executive VP, CFO & COO [5]

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Yes. I mean, I think we're expecting about $11 million of fair value absent Monroe, and that's modestly down from what we had this year. But as we build in Monroe, we think that we're going to end up with some additional fair value accretion and a really strong net interest income to bring into the -- into our company. Where deposit costs are really low, we have the ability to reprice their loan -- investment portfolio, and so we think net-net, it's -- that we should be able to maintain our current levels.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [6]

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And then moving along to the loan portfolio, how should we think about loan growth organically in 2019 and kind of the area that you anticipate will drive that growth?

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Michael C. Rechin, First Merchants Corporation - President, CEO & Director [7]

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Kevin, this is Mike. John might have an add-on thought to mine. I'm looking at some of the material that our Chief Banking Officer provides on pipeline, and I referenced in my earlier remarks that we kind of had 3 quarters out of 4 that really were at the high end of what we think of as annualized ranges. We've used the term mid-single digit -- mid-to-high single digit levels. We wound up at 7% for the year. We are kind of forecasting the same.

Now at some point, we're going to -- through the majority of the year, have Monroe as part of the company, and I know that they're going to bring their own momentum into ours, but I still feel like the pipeline suggests that, that 7% to 8% range looks very achievable. And so as we sit here today, finishing out November, December for '18, staring here early into the first parts of first quarter of 2019, feel good about the ability not only to provide that on the loan side but to fund it with our core deposits as well.

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Operator [8]

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The next question comes from Nathan Race of Piper Jaffray.

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Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [9]

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Just wanted to touch on capital. I know you guys want to keep some excess capital on board for some cash components of potential acquisitions down the road, but kind of just given where capital levels accreted to over the course of 2018, it seems like you guys will still have plenty. So just any updated thoughts on perhaps a buyback or any updated thoughts on kind of where the payout ratio could go, just given kind of the profitability outlook of the company?

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Mark K. Hardwick, First Merchants Corporation - Executive VP, CFO & COO [10]

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This is Mark again. I think our dividend expectations should be -- the increase should be in line with what we've done historically. The -- and then obviously, our balance sheet, we're continuing to have kind of mid to single digit -- mid-to-high single-digit growth rate, which requires about 1/3 of our earnings. So it really comes down to cash and acquisitions and whether or not we do anything with buybacks.

The acquisition that we have in front of us, there are a couple of PE firms that are part of this acquisition, and we're continuing to have dialogue to see how much -- how long they intend to stay in the stock, and we're also having some discussions at the board level about the logic of buybacks. So no decisions at this point, but something that we'll continue to keep the market apprised to as we move forward.

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Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [11]

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Got it. That's helpful. And then maybe just turn to credit. John, I'd just be interested to hear some additional color on the nonaccrual loan that you guys had in Indiana that was tied to -- I think you said it was a skilled labor facility or something like that. So just any additional color on kind of what happened there, if it was more of kind of just an operational issue, or if you're seeing anything within that space specifically that's causing some credit issues there, I suppose.

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John J. Martin, First Merchants Corporation - Executive VP & Chief Credit Officer [12]

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Yes. That comment, I was probably talking pretty fast, was actually skilled nursing. And I think the issues that befell this particular operator were specific to that operator. While the space itself continues to perform, and it has its own dynamics, what we saw in this particular borrower was specific to it.

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Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [13]

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Okay, got it. And then I'd just be curious to get an update on kind of where your guys' private equity sponsor finance portfolio stands in terms of both leverage loans and just that portfolio specifically.

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John J. Martin, First Merchants Corporation - Executive VP & Chief Credit Officer [14]

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Yes. Just a second here. So the leverage loan portfolio sits at -- quantitatively sits at about $310 million, while the sponsor finance business is like $250 million, plus or minus.

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Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [15]

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Got you. And John, while I got you, just any kind of internal thoughts on what you're seeing within those 2 portfolios?

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John J. Martin, First Merchants Corporation - Executive VP & Chief Credit Officer [16]

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You know what? For the most part, they performed -- well, they performed very well. I know and been reading a lot in the media and a lot of the -- some of the larger banks and the issues that they've been having. We really haven't seen that through the portfolio thus far. So we're normally at the lower end of the leverage spectrum, so it's not like we're leveraging it at 6x or to the hilt. We're generally playing it a little bit more conservative as we grow the book.

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Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [17]

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Congrats on an impressive 2018.

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Operator [18]

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The next question comes from Damon DelMonte of KBW.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [19]

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So my first question, just wanted to talk a little bit about expenses. First, on this quarter, it looked like the other noninterest expense item -- line item was up almost $1.5 million from last quarter. Mark, was there anything there that's kind of onetime or we should be excluding going forward?

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Mark K. Hardwick, First Merchants Corporation - Executive VP, CFO & COO [20]

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We had a few items that -- this year that -- in the fourth quarter that were extraordinary. Incentive compensation for the year was about $600,000 higher than what would be a normal run rate based on our performance. About $300,000 of that was expensed in the fourth quarter.

We had a little over $180,000 of expense that showed up -- that shows up in other related to a name change. If you recall, we bought Lafayette Bank & Trust all the way back in 2001, and we continued to run that as a -- that market as a DBA, and we made those changes in the fourth quarter, wrote off some of the signage expense and all the expenses to change the name in that marketplace, so that was a onetime event.

And then we had about $250,000 of M&A-related cost that are primarily a number of different things, but legal, it would probably lead the way of that $250,000, travel, et cetera. There are a lot of expenses related to the merger that we had in the fourth quarter that totaled $250,000. So about $0.75 million of onetime items in the fourth quarter of 2018. And we're anticipating that we return back to more normalized levels in 2019. And absent Monroe, we kind of were at about a $225 million plan level for all of 2019.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [21]

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Okay. Great. That's helpful. And then with regards to the loan growth opportunity that you're seeing in 2019, can you talk a little bit about the construction portfolio? Just wondering what the demand and appetite is for that type of borrower. Wondering if it still remains strong or you're seeing a bit of a pullback.

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John J. Martin, First Merchants Corporation - Executive VP & Chief Credit Officer [22]

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Yes, this is John. The -- we are seeing a little bit of a pullback. I didn't include it on this earnings slide, but from last quarter, I showed $1.2 million (sic) [$1.2 billion] in commitments. We're down about another $115 million in the fourth quarter. So it is seeing a little bit of a pullback.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [23]

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Okay. And then is that indicative of a slowing trend in the economy you think, or maybe just something to do with tariffs or any idea what's...?

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John J. Martin, First Merchants Corporation - Executive VP & Chief Credit Officer [24]

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Yes, so given where we are with our construction portfolio, we've taken, what I'd consider, a more conservative or disciplined approach for the next incremental opportunity. So it's us as much as it is anything.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [25]

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Got it. Okay, that's great. And then I guess the last question, Mark, on the tax rate. You still good at around 16.5% on a normalized basis?

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Mark K. Hardwick, First Merchants Corporation - Executive VP, CFO & COO [26]

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It's probably, on a go-forward basis, more like 17%, and some of that is related to the state income tax expense on a go-forward basis. We have a number of strategies that we've deployed and we've kind of outgrown some of our tax strategies relative to state income tax.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [27]

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Congrats on a nice quarter.

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Operator [28]

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

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Michael C. Rechin, First Merchants Corporation - President, CEO & Director [29]

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Thanks, Andrew. Very brief appreciation for all the folks that listen in to track the progress of First Merchants, to include those that provided the questions.

We move into 2019 excited about our core business, excited about the teammates, the clients and the momentum that we feel is going to come out of Monroe Bank & Trust. Culturally, the leadership of that company have spent hours and hours, outside of what I would call integration work, matching cadence with our company, and it feels very good to us at this point.

So we look forward to their contribution, knowing that some of the heavy lifting is yet in front of us. But with our experience in having companies join us, look optimistically about what the economy has for us throughout the Midwest to include that new market. Look forward to talking to you in a couple of months when our first quarter is completed. Thank you.

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Operator [30]

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