Good afternoon, and welcome to the First Merchants Second Quarter 2013 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to David Ortega, Director of Investor Relations. Please go ahead.

Thank you for joining us this afternoon. I will read the forward-looking statement. 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 or subject to risks 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. Now, I would like to introduce you to Mike Rechin, President and CEO of First Merchants.

Thank you, David. Welcome everyone to our earnings conference call and webcast for the second quarter ending June 30, 2013. Joining me today on the call are Mark Hardwick, our Chief Financial Officer; and John Martin, our Chief Credit Officer. We’ve released our earnings and our press release at 10.30 AM Eastern Daylight Savings Time and our presentation speaks to material from that release. The directions that point to the webcast are also contained at the back end of the release and my comments begin on page 4 in a slide titled 2013 performance highlights. Earlier today, First Merchants Corporation reported second quarter 2013 earnings per share of $0.34 compared to $0.28 during the same period in 2012. Net income available to common shareholders totaling $10 million compares to $8.1 million earned during the same period in 2012. Year-to-date earnings per share totaling $0.72 compared to core earnings of $0.53 in the first half of 2012. Reported earnings for the first half of 2012 totaled $0.74 as the corporation recorded a gain on our FDIC purchase of Shelby County Bank in Shelbyville, Indiana of $0.21 per share in last year’s first quarter. As I look at the results, virtually all operating areas in our company in the second quarter reflect nice progress offset by 7 to 8 basis points of core net interest margin compression that Mark will discuss later as we get deeper into the financials. The volumes, the expense control, the credit improvement that John will discuss combined it produce a significant amount of profitability. Year-to-date combined with last year is that it provided us the capability at the Bank and as such through up-streaming to the parent, the ability to make partial repayments of our small business lending fund obligations. And so on page four you can see that cumulatively, we have redeemed nearly $57 million of SPLF preferred shares. This year, the first piece in January and then more recently just after the end of the quarter, we are discussing in early June when we redeemed an additional $34 million. Another highlight for the first half of the year is on the bottom half of this page, where we will discuss throughout this presentation the May 13, 2013 definitive agreement we reached to acquire CFS Bancorp in Munster, Indiana, and a couple of the attributes of that company are listed on these bullet points. We hosted an investor teleconference also on May 13, where we discussed our view of an attractive opportunity to build our franchise. And among those attributes with our market demographics, the management team and that management team in progress and reshaping their business model and winning market share that now will become part of our company post close, lastly the opportunities accretive immediately in 2014 for the benefit of our investors. So, at this point I am going to turn the presentation to Mark to do a deeper look into our second quarter results.

Thank you, Mike. My comments will begin on slide six. Our loans increased year-over-year by a little over 4% and they will now total $2.920 billion. And John will present portfolio segmentation numbers later on the call, but you will notice that consistent with the last page of our press release where we show the detailed loan portfolio that our commercial and industrial loans plus commercial real estate loans increased by nearly 9% year-over-year. The allowance on line three totaled $68 million or 2.32% of loans and represents 175% coverage of our non-accrual loans. Net charge offs totaled $2.3 million for the quarter and $5.3 million year-to-date, slightly less than our provision expense of $2 million and $4.1 million respectively. The composition of our loan portfolio on slide seven is reflective of a commercial bank balance sheet with community bank for again granularity and it continues to produce very good loan yields. The portfolio yield for the second quarter totaled 4.66% and our adjusted year-to-date yield totaled 4.73% after backing out a $2.5 million interest recapture in the first quarter of 2013 which we’ve I think highlighted well in last quarter’s call and you will see then it’s consistently taking out of a number of the comparisons, so that you can see the core run rate of First Merchants. The composition of – I am sorry on slide eight our $909 million bond portfolio continues to perform well producing higher than average yields with moderately longer duration than our peer group. Our 3.67% yield compares favorably to the peer averages of approximately 2.6% and our durations remains longer by about eight months totaling 4.3 years. The net gain in our portfolio decreased during the quarter from $33.8 million to $11.6 million. And during the quarter we did increase purchases to…

Alright, thanks Mark and good afternoon everyone. I will be covering asset quality starting on page 18 followed by the allowance coverage in non-performing asset migration before concluding with portfolio trends and some several high-level thoughts in the portfolio. Please turn to page 18 now. Asset quality continues to trend favorably both year-to-date and in the linked quarter. For the linked quarter, non-accruals on line 1 declined $7.8 million and were down $14.4 million since the start of the year. And that’s $24.1 million over the last four quarters averaging roughly $6 million. On line 2, ORE also declined following the $1.3 million from $13.1 million to $11.8 million. This quarter we did not have a single large ORE property skewed the results instead we saw more granular activity in ORE with the largest transfer into the category being a single family residents of approximately $550,000 with the next largest transfer being less than 200,000. So, there is good migration there offsetting the transfers were the three largest ORE sales totaling approximately $1.4 million. These transfers in sales combined with the other smaller in and outflows comprised the $1.4 million that changed in ORE a suspension. From a portfolio perspective we are carrying our two largest ORE properties between $2 million and $3 million, so beyond those properties the ORE portfolio becomes granular. On line three renegotiated loans declined $1 million driven primarily by AE notes form the prior periods seasoning and paying as agreed for at least six months. The AB note troubled that restructure is a continuation of a strategy mentioned only throughout the credit cycle where we resolved borrower over-leverage by creating a performing A note while recognizing a loss in the current quarter through the charge off of the B note. Skipping down to lines eight…

Thank you, John. I think you heard from my colleagues why we feel we had another very productive quarter in the current period results while we continue to build for the future. In light of John’s comments about the portfolio of composition, I will spend a quick moment on page 23. Just reiterating some of the way I look at our First Merchants Corporation’s strategy, which in short is to create a preference for choosing our community bank through superior delivery of service. Our retail bank at the top of the slide with just under 80 banking centers, primarily has served our consumer customers and business banking clients. The balance of the slide speaks to the commercial orientation of our business. And so in any of the segments listed under commercial banking, I just wanted to reiterate the point that the extension or the use of our balance sheet for the benefit of our clients is almost exclusively in market, our markets in a relationship bank model with access to CEOs and decision-makers trying to emphasize creativity and speed in a market that overall remains certainly better than it was two years ago and probably modestly better than a year ago, but still little cautionary on the part of middle market business owners assessing the factors that drive their consumption of capital. But all of the bullet points on here speaking to those business owners have some momentum as we move forward and our business banking unit has seen probably the greatest investment of salespeople and support folks over the last couple of years, we are beginning to get dividends there. Our cash management business, which services both business banking and the core of our commercial side 15% or better growth each of the last six quarters going all the…

Certainly, we’ll now begin the question-and-answer session. (Operator Instructions) Our first question comes today from Scott Siefers with Sandler O'Neill. Please go ahead.

Good afternoon guys.

Hi, Scott, good afternoon.

Let’s say I guess Mark, first question is for you, it sounds like the margin maybe coming under a little more pressure than anticipated I would just be curious to hear your thoughts on the trajectory there. And I guess the related follow-up it sounds like particularly based on what we can see in end of period balances. And then Mike based on kind of your comments on the pipeline. It seems like you will pretty constructive on the overall loan growth trajectory. So, with that in brain or that in mind do you think you can grow net income sequentially off of this quarter’s base or would you see any additional pressure depending on high feel about the margin?

Thanks Scott. If you go to slide 12, I want to start there. I believe it’s the best place to start as an answer to the question. Our first quarter of 2013 net interest income was $40.8 million. And if you back out the $2.5 million of the interest recapture and if you back out the 800,000 or 771,000 of the fair value accretion, the total for the first quarter of ’13 was $37.2 million. And then if you do of the same exercise in the second quarter the 38.1 plus the $400,000 of fair value its 37.7, which is a $500,000 increase and just the core operating margin. When you look at the actual reported numbers that 390 margin on an adjusted basis to the 384, it suggest downward trend, when the core net interest income number is up 500,000. And it’s really related to on something that we have happen – once it was generally twice per year in the second quarter and the third – and the fourth quarter as we have a lot of public money. And we have lot of – we are the primary depositary for many of the municipalities throughout all of that we serve and we had a little over $90 million of increased public money throughout on average, throughout the entire second quarter. Most of that is very temporary and its not money that we can invest in the investment portfolio. So, it tends to just said on the balance sheet and we are able to – we’ll really increase our Fed Funds position, its fore tax receipts in May and November. And is that this quarter rationally was 7 basis points negative drag to our reported net interest margin and adjusted net interest margin? So, the 384 would have been more like 391 reflective of the modest increase that we saw in the core net interest income number. And then as it relates to moving forward, so I don’t want to offer that we expect margins to be increasing but we do believe that we can continue to grow net interest income and if you look at our loan growth at 4% to 160 from this base. If we continued that base which you think is reasonable, whether 2% to 3% spread that allows for quarterly improvement and interest income of $600,000 to $900,000 and that just gives us room for 69 basis points of overall margins compression to at least maintain our net interest income levels and potentially growth on and then were on last note. We are modestly increasing the bond portfolio to pick up some additional spread based on the strength our deposit growth. So, hopefully that answers or give you a little more detail on inside as to where we think are net interest income and margin will be going in the future.

Yeah, that was perfect color, I think of it. So, I appreciate the color. Thank you.

Scott, it’s Mike. There was a second portion I think to your question that was speaking to either loan demand at the highest level or near term pipelines and maybe relative to the margin question the yields that we’re earning on those. And I mentioned that at a high level that kind of mid-single digit net growth rate. We would anticipated happen we still feel the same way and the pipeline seem to support that. In prior calls we’ve talked about our commercial pipelines in two contexts, one of them are kind of approved and moving towards closing and then another earlier stage one where we have proposals in front of either existing clients or prospective new ones. And so what we’re seeing is in a quarter like this past when where we did have some growth at quarter end, it was through the drawdown or the actual closing of some of that pipeline. So to be clear our closed I’m sorry - our approved pipeline ready to close at June 30 was beneath where it was on the end of the first quarter. And then that earlier stage pipeline our bankers (in front of) clients is they’ve actually grown by a like dollar amount. So when we look at both of them knowing that probability of closing is not a perfect, but we still feel very good about that mid single digit number.

Our next question comes from John Barber with KBW.

Good afternoon.

Hi, John.

John, I apologize if you already touched on this, but the $900,000 of specific reserves, there is an increase this quarter. Was that related to the $4.2 million of non-accrual inflows and if it is can you just give us a little bit of color on the inflows? Thanks.

Yeah, I think I have to actually backup John, I apologize. The specific reserve the increase in this specific reserve was related to the inflow for the quarter. It was obviously related to a collateral deficiency on the individual name that was associated, but it was a piece of individual commercial real estate not really have any additional color to provide other than we’re actively working it, where actually with their relationship is a two portions was commercial real estate and C&I. So if there is anything else…

That’s helpful. And then just switching over to the securities portfolio, I was wondering as this curve steepened and your duration extended it was 4.3 years versus 3.9 years last quarter. I guess how comfortable are you of letting that extend out I guess as the curve steepened even more you just naturally get a longer duration. How are you thinking about that and has it impacted what you are buying in the securities portfolio now? Thanks.

We have a policy limitation of five years and given the amount of earning assets that we have on our balance sheet that are variable over $1 billion I think it’s a $1 billion almost $1.2 billion of variable rate loans in the portfolio. We’re comfortable having a little longer duration maybe than it appear and we’re not necessarily managing more as a natural hedge against the rest of our balance sheet which drives our net interest income. And so we’re more comfortable with a little extension there most of what occurred from the first quarter to the second quarter was – as a result of our mortgage-backed portfolio, our CMO and MBS portfolio actually extending slightly as interest rates modified or increased that their prepayments fees slowed down a little and then extends the portfolio. So we’re monitoring it very closely and as it relates to what we’re buying we’re generally staying relatively short in the duration range less than five as it relates to all mortgage-related purchases. And we’re doing some municipal purchases where we think the spreads are attractive and those are longer term, those are more seven or eight years but we think that the improvement or the pickup in the yield is worth the additional duration. So that’s kind of the view that we have and it’s primarily set or driven off of our net interest income simulations or economic value of equity calculations. And the management of - really the net interest income on a go-forward basis.

Thanks Mark. And the last one I had was just related to the change in the state income tax rate in Indiana from 8.5 to 6.5, did that impact the tax rate at all this quarter.

On portfolio impact is…

So, I was under the impression that Indiana changed the state of income tax rate, they lowered it 200 basis points, and I was just wondering if that had an impact on your deferred tax asset and then your tax rate this quarter?

Not really. That was a function of our tax exempt income. I am not aware of anything specific that modified the rate this quarter.

Okay, thanks Mark.

Thank you, John.

There appears to be no further questions. So, I’d like to turn the conference back over to management for any closing remarks.

Great, Chad. I really don’t have any other than our collective appreciation for the attention today, your interest in First Merchants, and we look forward to talking to you in a couple of months as we have another quarter of results to speak to in greater progress towards our Citizens transaction? Thank you all.

Thank you. The conference is now concluded. Thank you for attending. You may now disconnect.