Welcome to the First Merchants Corporation Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions]. We will be using user controlled slides for our Webcast today. Slides may be viewed by following the URL instructions noted in the First Merchants news release dated Thursday, January 26, 2017 or by visiting the First Merchants Corporation shareholder relations website and clicking on the webcast URL hyperlink. The Corporation may make forward-looking statements about its relative business outlook. These forward-looking statements and all other statements made during this meeting that do not concern historical facts are subject to risks and uncertainties that may materially affect actual results. Specific forward-looking statements include but are not limited 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 10K concerning factors that could cause actual results to differ materially from any forward-looking statements. Please note this event is being recorded. I would now like to turn the conference over to Mike Rechin, President and CEO. Please go ahead.

Thank you, Gary. Welcome to our earnings Conference Call and Webcast for the Fourth Quarter ending December 31, 2016. Joining me today are Mark Hardwick, our Chief Financial Officer and John Martin our Chief Credit Officer. First Merchants released our earnings in a Press Release approximately 10:45 this morning Eastern Daylight savings time and our presentation speaks the material from that release. The directions as Gary covered that point to the Webcast were also contained at the backend of the release and my comments begin on page 4a slide titled First Merchants 2016 performance. And so between this slide on page 4 and the earnings release itself we're going to talk to you about our results both for the fourth quarter comment where we recorded and reported fourth quarter 2016 net income of $22.3 million at 57% increase over the 14.2 million earned in fourth quarter 2015. Earnings per share for the period totaled a record $0.55 per share an increase of $0.18 or 48.6% over the same period in 2015. Full year results were impressive as well. Record net income of 81.1 million, a 24% over all of 2015. Earnings per share of $1.98, a 15.1% increase over 2015, the highest in our company's history. Assets totaled 7.2 billion and grew 6.7% over 2015. We're really pleased that our primary way of building this business through organic loan growth had us grow $446 million in loans reflecting a 9.5% growth rate. Included in that a 56.5% efficiency rate down more than 4% from the prior year. Jumping back to the bottom of page 4, a couple of other thoughts on the fourth quarter that you'll hear more about through the balance of this call. A strong net interest margin actually bumped up a little bit in a core level to 3.90%, 1.26% return on average assets and an efficiency ratio contributing to that overall lower level for the entire year of a low for the year of 52.18%. I think the Company and I hope you'll pick it up in our remarks really benefited from a clean series of four consecutive quarters that didn't have any acquisitions in them and allowed for us to move forward and complete several initiatives driving profitability and efficiency. I think you'll enjoy the rest of the remarks. So I think we're going to have Mark cover his material and then move to John and then at the backend beyond some forward-looking comments wanted to speak to the press release that we issued yesterday and with a couple other slides relative to Arlington Bank joining us towards the back end of our comments and then time for questions. Mark?

Thanks, Mike. My comments will start on slide 6. Total assets on line 8 increased in 2016 by 451 million or 6.7% as Mike had previously mentioned, following a 16.1% increase in '15 and a 7.1% increase in '14. On line 3, strong organic loan growth again at 9.5% is slightly stronger than our 2015 9% organic growth along with the 11% M&A activity or M&A growth that we had in 2015 resulting from the acquisition of Cooper State Bank in April of '15 and our Mariana Bank acquisition in December of 2015. Consistent with the last couple of years guidance we're anticipating loan growth in the mid to high single-digits again in 2017. The allowance on line 4 and total dollars increased by 4 million to 66 million in 2016 due to loan growth and a decline in loans covered by fair value as they move out of the covered portfolio into the core portfolio. The composition of our $5.1 billion loan portfolio on slide 7 continues to be reflective of a commercial bank and it continues to produce strong loan yields. The portfolio yield for 2016 totaled 4.58% compared to 2015 yields of 4.45%. On slide 8, our $1.3 billion bond portfolio continues to be high performing. Our 3.78% yield is slightly better than current investment rates and despite meaningful rise in rates our unrealized gain is still 9.1 million. The strength in our investment portfolio since the last recession helped maintain our net interest margin during a very low and flat rate cycle and has been an earnings driver for First Merchants. In '17, investment maturities total 118 million with a yield of 346 and 2018 maturities total 124 million with a yield of 340. For the first time in a number of years our reinvestment rates…

Thanks, Mark and good afternoon. I'll be updating the trends in the loan portfolio starting on Slide 20, review the asset quality summary and reconciliation, discuss the fair value and allowance coverage and then end with a few thoughts on the portfolio. So please turn to slide 20. For the fourth quarter and full year 2016, we saw continuation of the strong organic loan growth experienced in the third quarter. The growth was driven by commercial and industrial loans which on line one grew by $48 million for the quarter and $138 million for the year. Our construction loan pipeline on line 2 generated $51 million in new loan balances while total construction loans for the year grew by roughly the same amount. Much of our construction funding is ultimately moved to the secondary market upon stabilization. So dropping down to line 3. Investment Real Estate loans grew by $8 million for the quarter and $182 million for the year representing a 16.7% increase over 2015. So total loans on line 11 increased in the quarter by $166 million or 3.3% and $446 million as Mike mentioned or 9.5% for 2016. Turning to asset quality on slide 21. Asset quality continued to improve for the quarter with total NPAs and 90 day delinquent loans declining by $6.1 million on line 5 or roughly 12%. We continue to see improvement in demand and velocity for Real Estate which has led to a $1.2 million decline in other Real Estate in the quarter and $8.3 million or 48% decline year-over-year. Also of note is a reduction in the 90 days past due of $1.5 million from the prior quarter which with the improvement in ORE lead to a stronger asset quality for all of 2016. Then turning to slide 22 which reconciles…

Thanks, John. I'm on page 26. Looking forward slide and kind of functions as a high level road map for where we're going to go in 2017 and there should be some consistency in our plans and there is, if some of our highlights here look familiar it's because they are identical. Marketplace continues to be healthy. John referenced some economic health. I feel like our marketplace is strong, our clients are doing well and it's been an area of opportunity for us with organic growth being our primary growth engine which starts with our existing clients growing and the bank listening to their needs and offering solutions and then earning new clients by way of service. So this page should look familiar. The bottom end of the page talks about mergers and acquisition remain a continuing opportunity for us which kind of bridges me into the next couple of pages, so the following page, page 27 is a picture of our two companies coming together, characterizing the press release we put out yesterday, covering the definitive agreement between First Merchants bank and Arlington Bank to come together mid-summer and so on page 28 in the next couple of pages some of the details. On 28, you can see two days ago we signed on the 24th a Definitive Agreement as a really we think strategic add-on to our Ohio business which is effectively Columbus. Nearly a 20 year old Company, $244 million in loans, $305 million in assets, 260 million in deposits and this is a strong earning Company, has been it's a young Company, 19 years old, been a consistent earner with a strong net interest margin of 3.8% and you can see the return on assets through nine months of this year 1.35% and our indications of…

[Operator Instructions]. Our first question comes from Kevin Reevey with D.A. Davidson. Please go ahead.

So I just had a couple of housekeeping items with respect to the transaction. As far as the -- how much of the goodwill are you assigning to core deposit and tangible and how should we model that as far as we amortize the CDI?

Here let me it may take me a second to find that in our notes. But our traditional way of doing that is about 150% double declining and we usually do it over typically seven years, and it's 3.6 million that we've added to CDI.

Okay and then just for modeling purposes can you tell us what the share count outstanding was for Arlington Bank?

I can tell you the additional shares and I guess I could back into it our 2.74783 million and so they were 761,528.

And then my last question and I'll just let somebody else hop on, I know it was Arlington they have about 10 million of some borrowings. Is there any intention to use some of their deposits to pay off some of those borrowings or is it something you haven't really thought about?

In this case we really didn't model a pay-off of borrowings or the reinvestment rate on investments. We didn't feel like it was going to be real meaningful number to the model so we'll continue to look at it and we'll make the smart decision where we see it but that was not part of the model.

The next question comes from Erik Zwick with Stephens Incorporated. Please go ahead.

Maybe just first another question on Arlington Bank with regard to the 35% targeted cost saves. Can you just talk about where those will be coming from?

Yes it's really heavy. Mark might have detail for me in a couple seconds but it's very heavily in contracts and technology and a little bit well very little from customer facing folks, because while we already have a sizeable effort in Columbus, the banking centers that they operate are terrifically efficient and profitable and the mortgage line is just a pure augmentation to our revenue opportunity there. So I think some of the traditional back office areas will provide some, the technology does. It looks to me like we do have a one map Erik on one of the pages that I covered and you can see that while that covers in a smallish map, a large market area we do have two banking centers that are pretty darn close to one another and given the productivity of the Arlington bank branch and its location we're likely to consolidate into that one. So we have a little bit of facility savings.

We have facility savings that are I'll just under a million dollars and then wages and benefits are definitely the primary item that if you include all of the benefits are around a 1.7 million.

Okay and turning to fourth quarter expenses the salaries and employees benefits line was lower than I guess I'd expected and some nice improvement there. Can you talk about what drove that lower and whether that's a good run rate heading into 2017?

The run rate question is a great one. I didn't cover it in my notes I was hoping someone would ask. We think the run rate is more like $43 million. We did have a one-time benefit that was related to a curtailment of a benefit plan and then the reason I didn't highlight it is we had a handful of additional expenses that were one-time so the net benefit for the quarter was really $1.1 million so a little bit under $0.02 a share about 1.75 cents a share.

And then turning the focus to loan growth looking at the organic growth over the past two years, 9% to 9.5% in '15 and '16. Anything as you look out over the horizon to change that expectation for 2017?

No not really. It's a 9.5% is obviously above the 6% to 8% rate that we've talked about on these calls over the past and yet as I think about our 2017 plan, we're back in that kind of 6% to 8% range. We've watched our business really closely for a couple years now and it seems like there's some repeating seasonality that has the first quarter be most mild and then a stronger second half of the year and so we had a particularly strong last four months of 2016 that kind of drove that number up in a really pleasing way in the manner that I spoke about earlier Erik about utilization, increased needs from our growing clients along with some earning of market share.

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

Just to build on Erik's question on loan growth could you talk a little bit about where are you seeing best opportunities for the growth in 2017?

Sure. So that will be on a looking forward basis and I'll just extrapolate what we saw in the second half of 2016 to speak to where I see execution at a high level coupled with vibrant economics and pipeline quite frankly. So 2016 was the third year of First Merchants having a business up in what we call the lake shore region. It was the acquisition of Citizens Financial at the end of 2013, so 2016 and that marketplace we really hit our stride leadership execution and so whereas in periods prior where we got the lions' share of our growth out of the Greater Indianapolis area and Greater Columbus area all of a sudden we have a third engine producing results similar to those other two, it's somewhat the balance we were striving for when we were first drawn up there. Our headquarters market in Muncie really had a nice year. I mean other than our Lafayette market which has such a heavy component of agriculture in it, which is soft through the nature of the industry we got a pretty balanced return but if I had to pick a pleasant surprise for us, it would be the real strength we're getting out of our folks up North in the lake shore region.

So you think that's going to continue to be a key driver of what you're going to see in '17?

I do. Mike Stuart, our Chief Banking Officer has similar expectations for all of our larger markets we've invested a lot in the people, we feel like we have a brand that now has some identification and we also have a nice balance of C&I lending along with investment real estate. So our resources are spread well, the go to market strategy that we've deployed is pretty common at this point, I love the way our cultures come together and so we look for certainly based on a lot of moving parts outside of our control so we're focusing on what we can control and it's a positive feel for us.

And then kind of a modeling question here for Mark. When we look at noninterest income, do you think something in the low to mid $15 million range is a decent quarterly run rate?

This quarter we've had volatility from I think it was zero derivative hedge income in the second quarter to a really meaningful $1.3 million in the third quarter and then only 600,000 in the fourth quarter and that is I think that will be the wildcard. The rest of our fee income line items are fairly predictable and consistent. For the hedge income it depends on the loan volumes that really fit into that product well, so we've been in the 16.3-16.9 range for the last three quarters that includes all that volatility. Damon, what was the figure that you offered when you were asking if it would sustain itself at a certain level what was your number?

I was looking on an operating basis I took out the call it 847,000 securities gains so I was at 15.3 million so I guess I was saying is that a decent baseline to build growth into 2017?

Yes, I do think it is. I was listening to Mark's answer adjusting my eyes for the calculation you made so if you take our 16.1 less the fourth quarter gains to the 15.3 number, I do think that’s a good number to start from and quite frankly we should be on the high end of that.

Just lastly on the margin Mark you commented you should see four to five basis points in the first quarter because of the rate hike we had in December. What are you expecting for the remainder of 2017 for additional rate hikes?

We didn't build anything into our budget but obviously the Fed funds futures market is starting to anticipate another move mid-year, but right now our plan is only included the rate bump in December of '16.

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

Just maybe one more question just going the M&A for a minute obviously with the transaction you got put on the tape here with going to Columbus Mike and then I guess where do you stand from an M&A standpoint today, I guess my assumption is you're still looking at opportunities and will be look to be opportunistic in '17, I guess maybe just if the answer is yes maybe just talk about the temperature of conversations today especially given the change in valuations we've seen here since the election.

It seems like an interesting year based on all of the things you just mentioned and I would affirm your comment that would suggest that we would be able to do more. I think about 2015 where we were able to secure two opportunities and not only bring two great management teams but two successful integrations in a relatively tight time period so I know we've proven the ability to do that. Some of your questions I'd call our interest very consistent so I think on this call all the way through 2016, we were looking at markets like Columbus, we're very, very pleased to have something as attractive as Arlington show up in this time period in a market we like so much but Dayton, we like I've talked about Fort Wayne being very attractive. So most of the State of Indiana obviously I think we would do great in, all of Central Ohio continues to look attractive. I kind of bucket Dayton in there, add-ons in any of these markets would be attractive but with the pricing discipline and earn back expectations that we've expressed in the past and I think we kind of lived by.

Maybe one for Mark on the margin. Remind me Mark just what is the assets that we price with full prime and LIBOR what's the break down, what assets are rate sensitive if you'll remind me?

We have 2.6 billion that were priced immediately and just looking at it here, I've got if you'll give me a second I can give you the exact number, I think we’re split equally between prime and LIBOR and we've actually edged where LIBOR is a little bit higher, so here it is. We have 1 billion exactly tied to prime and then our LIBOR based loans are actually almost a 1.465 billion and then the rest are tied to treasuries that have rolled down the curve into that bucket.

Okay. And then maybe just one more kind of bigger picture question. Mike you alluded to not doing much in the way of M&A last year allowing you to I guess get the bank a bit more profitable just doing things internally. Are there initiatives that are something you are really focused on in 2017, outside of the M&A which may or may not come anything specific you're focused on seeing get accomplished in '17 is kind of the big picture priorities?

Well there's none that I would call a signature item but what we found in '16 Brian is there is several projects that make us faster, better, smarter. Mark referenced the term responsive and knowledge rich. That's what our clients want so the lines of business have things that think make them better whether it's retail or commercial bank. Our back office looking forward to protect our clients obviously and all the ways that you need to these days but also to make their lives easier so no, there's no one area. I know we made a big investment in 2015 the Summer of 2015 and our Treasury Management technology and we haven't taken nearly full advantage of that yet and we need to get all of our internal people really fluent with as such that our clients can take full advantage of it. So none of them are really jump off a page at me but as I saw in '16 when you knock down six or eight of these projects that you can achieve in a couple months it shows up in the numbers. So we were pleased with it.

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

Gary I have none other than one of gratitude for the folks that took time out to listen to our results for the year as you can tell all my colleagues are excited about it and I share that and we look forward to continuing with consistency through the next year and look forward to having a call like this at the conclusion of the first quarter. Thank you.

The conference has now concluded. Thank you for attending todays presentation. You may now disconnect.