Good day and welcome to the First Merchants Corporation Second Quarter 2017 Earnings Conference Call. All participants will be in a listen only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] We will be using user-controlled slides for our webcast today. Slides may be viewed by following the URL instructions noted in the First Merchants news release dated Thursday, July 27, 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 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 release, Form 10-Qs and Form 10-Ks concerning factors that could cause actual results to differ materially from any forward-looking statements. Please note, this event is being recorded. I would now like to turn the conference over to Michael Rechin, President and CEO. Please go ahead.

Great. Hey, thanks Alison. Welcome everyone to our earnings conference call and webcast for the second quarter ending July 30, 2017. Joining me in the room today are Mark Hardwick, our Chief Operating Officer and CFO; and John Martin, our Chief Credit Officer. We released our earnings and a press release approximately 10:00 AM Eastern daylight savings time this morning and the presentation you're about to hear speaks to the material from that release. The directions as Alison pointed out that point to webcast were also contained at the back end of that release and my comments begin on Page 3, a slide titled Second Quarter 2017 Financial Highlights. So I feel like we really posted a strong quarter and a couple of the bullet points cover that including earnings per share of $0.57, a 16.3% increase over the second quarter of last year, or $24.1 million a net income, a 20.6% increase over the second quarter of 2016. The earnings composition as Mark will cover later would be inclusive of approximately 50 days of operations of the Arlington Bank within the First Merchant's numbers and then the expenses associated that Mark will detail on a little bit. A mix of organic growth and mergers and acquisition working well for us as our total assets of 7.8 billion grew by 13% over second quarter of 2016. Our organic loan growth in the quarter of $114 million annualizes at 8.6% growth rate, whereas our similar deposit growth of a 129 million, a 9.2% annualized growth rate with a great similarity there, the current yields and deposit costs we've had are proven to be net positive to our core net interest margin producing new highs in net increase income. Mark will elaborate on each of those in the couple of minutes. Page 4, some of the performance highlights that come out of those results that will included high performance ratios relative to our return on average assets and return on average equity. A 9.3% increase over year's second quarter intangible book value per share up to $16.97. And efficiency ratio are now for a couple of quarters consecutively well beneath 55%. And then some of the non-specific financial highlights would include two closing roughly 60 days apart to successful completion of the Arlington Bank acquisition on May 19th of this year and then roughly two months later, much more recently July 14th closing of the acquisition of Independent Alliance Banks. So we are really pleased on a bunch of fronts and hope to cover some of the material behind that deeper in this morning's press release. I am going to start with from the Mark's comments.

If you turn to Slide 6, I'll start my comments there. Our total assets reached 7.8 billion, an increase of $593 million on annualized 16.4% over year end 2016. Really line three loans as where most of the growth came from and it increased $473 million since year end, which includes $224 million of loans from the acquisition of the Arlington Bank. When normalized for acquisitions, organic loan growth totaled 9.4% year-to-date, or 10.5% in the first quarter and 8.9% in the second quarter of 2017. We've got a couple of different numbers that you'll hear, 224 was the number I used for loans related to the Arlington Bank and the press release says 232 and the difference is really $8 million of loans held for sale that came over at the time of purchase that have since been sold into the secondary market. The composition of our $5.6 billion loan portfolio on Slide 7 continuous to be reflected of a commercial bank and it continuous to produce strong loan yields. The portfolio yield for the second quarter of 2017 totaled 4.65% compared to an annual loan yield of 2016 of 4.58%. On Slide 8, our $1.3 billion bond portfolio continuous to perform well producing higher than average yields with a moderately longer duration than our peer group. Our 3.85% yield is actually about 8 basis points better than a year ago and continuous to compare favorably to peer averages of approximately 2.61%. Our average life continuous to be 5.3 years. The net unrealized gain in the portfolio totals 35.2 and maturities for the remainder of 2017 totaled 72 million with a yield of 329, and 2018 maturities totaled 136 million with a yield of 331 and 2019 maturities totaled 162 with a yield of 381. Now on Slide 9,…

Alright, thanks Mark and good afternoon. Beginning on Slide 19 of the updating the trends and the loan portfolio, review a summary and reconciliation of our asset quality, discuss provisioning, fair value and allowance coverage and then end with the few portfolio highlights. So on Slide 19, for the quarter, we grew loans before the addition of the Arlington portfolio by $114 million. The start on the 3rd column from the right and looking away the increase in line 11 represents the organic quarterly growth of 2.16% for the quarter. Starting at the top and working down the slide, the growth was driven by increases in commercial, industrial loans on line 1 of $28 million, construction loans of line 2 of $81 million, residential mortgage loans of $11 million on line 7 and public finance of $30 million on line 9. As mentioned on prior calls, we continue to build the dynamic construction lending pipeline. Our construction lending on line 2 and non-owner occupied real estate on line 3 are driven by project funding during the construction phase are moving to either the permanent market or into the bank's portfolio are completion. We expect to see the CRE portfolio continue to have inflow as we have in the past, while trending positively as projects fund stabilize and move to the permanent market and into the bank's portfolio. So finishing out on lines 12 and 13, we continue to remain below the regulatory real estate concentration guidelines of 100% of construction loans and 300% of investment real estate loans capital. Turning to asset quality on Slide 20. Overall, asset quality remains stable in the quarter on line 1 and the linked quarter excluding the Arlington portfolio, non-accrual loans declined 1.8 million, while other real estate loans - other real estate increased…

Thanks John. I'm going to have some closing comments on Page 25, then we'll open up phones for questions. On 25 with underneath the caption I'm looking forward are several bodies of thought and starting with driving to gain the synergies and market expansion that the Arlington Bank an Independent Alliance Bank acquisitions bring to us. Let's start with what's right in front of us, which are integrations plan for the third quarter and then the fourth quarter for a iAB. And so Mark made some comments relative towards Arlington and so at this point we are finding the acquisition assumptions from a financial standpoint to be holding up really well we're finding exactly what our work had identified. We're also finding that the human capital in terms of community, understanding and expertise is what we thought it to be Arlington as an example really in a tight geography that brings further penetration for the First Merchants brand along with the mortgage origination expertise that we're already seeing show up in our short results in the second quarter during the time of Arlington and then our pipeline as well. Lastly, the press release in regard to both companies Arlington Bank and Independent Alliance Bank providing some of what I call the leadership team additions as we look for senior people from each of those companies to bring their managerial strength and decide First Merchants and our results are really been off to a great start. But the technical integration, which includes a lot of people as well underway and or broadcasting internally is to have that be a clear focus to produce again what have been successful integrations over the last several companies that have joined us kind of job one here while we're taking care of our client base.…

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

Good afternoon guys.

Good afternoon Scott.

Mark, something you could talk about the core margin progression for just a moment up nine basis points was really good performance and better than I was expecting, I think in the past you've suggested that each rate hike might be I think three or four, three to five worse three to five basis points the margin, what where that sort of puts and takes that you saw and where there are any nuances in Arlington's portfolio that would have caused that core to drift up in there?

There's really nothing related to Arlington, we had a nice increase in the fed funds rate that happened in December that we were anticipating seeing flow all the way through our income statement in the first quarter. And I know I mentioned that February always going to holds down the quarter. So we saw nice increases in January and March. And so I was pretty confident the second quarter would be strong, especially with another fed funds increase happen in March. So it was good to see it come to fruition and be able to prove what we thought would happen all the way through the end of the quarter. So we have such a variable rate balance sheet that we expect to be asset sensitive, and that's proving to be the case. I know just listening to other calls where folks are talking about deposit pricing and we see some pressure on the higher end, the larger the balance the kind of more pricing power they have, and so we're seeing some increases there, but not outside of our models or what we've been anticipating as we've looked at interest rates simulations in the past.

Okay, that's helpful thank you. And just as we look forward if the fed deposits for just a little while here what be your expectation for the core margins, there still more follow through that could take place and allow to expand in the absence of further rate hikes are would we just sort of hold steady at this quarter's three one-ish level?

Yeah, well I think the core with the June increase gives us a little bit of maybe a little bit of expansion. Like I said, there's a little bit of pressure on deposits on larger end of the balance spectrum, and the more the curve inverts the more difficult it will be to closer comes inversion the harder it is to play the yield curve game. But I would think that this June increase, that we can expect to see a few basis points end of the quarter.

Okay, perfect, thank you very much.

You're welcome, thanks.

Our next question will come from Kevin Reevey of D.A. Davidson. Please go ahead.

Good afternoon guys.

Good afternoon Kevin.

So first question just again on the margin, how asset sensitive is iAB relative to your balance sheet and do you think would be addition of iAB would that change your asset sensitive be meaningfully in any way?

You know we're not really anticipating any meaningful change, their balance sheet is very similar commercially oriented with an incredibly strong low cost deposit base. So I think the deposit base is where the strength the margin comes from and then they worked hard to stay asset sensitive, so I don't know that it improves our position we're not expecting it to hurt it either.

And then on the organic loan growth on the C&I and commercial real estate, where was the growth coming from geographically, was it more from Muncie or what was it Indianapolis?

Yeah I can fill that question Kevin, much of the growth was coming from Indianapolis, and the Ohio region. While the other markets get experienced some expansion and those were really the two most significant drivers.

And then my last question if you think about crossing the $10 billion threshold, I guess first, what's your timing and how far along are you in the planning process to actually eventually cross that threshold?

Well the planning process, Kevin its Mike answering. The planning process around the actual proactive activities that a bank would be required whether it's defast or AML, BSA, procedure, cyber security, vendor management such, we're pretty far along obviously defast and making sure the stress testing protocol is an extension of what we're already doing. The timing which speaks to the rest your question on an organic basis would probably be at 2019 event. And so absent meaningful acquisition it's a 2019 we want to be prepared to meet expectations well short of that we obviously from a calendar standpoint could accelerate our work on any of these. But we'll be ready for it when it comes, I feel like the work has been divided and the managerial task assigned. But on an organic basis to answer your question would be 2019.

Great, thanks. And congratulations on a nice quarter guys.

Thank you very much.

Our next question will come from Erik Zwick of Stephens Inc. Please go ahead.

Hey, good afternoon guys.

Hi Erik.

Maybe you first just looking at the increase in C&I loans in the quarter, I'm curious if you could provide any color whether you're seeing on new customer growth or that's higher lines utilization or what's driving the growth there?

I would be - this one I guess, I think the most significant driver is coming from both. It's really not additional draws on existing lines as much as it is new name is that we're seeing across our specialty finance as well as new credit extended to existing borrowers. So new projects would be the two areas that I think as I'm sitting and seeing your loan committees seem to be the areas where the most expansions occur.

And then can you provide an update on the schedule timeline for the integrations and system conversions of the two deals that have recently closed as well as related costs that are still to be incurred?

I mentioned earlier the quarter is the Arlington acquisitions integration will be this quarter. And Independent Alliance Bank middle of the fourth quarter as we currently have them scheduled and all of our routine leading up to that in terms of preparedness would signify that those timelines are going to hold in place.

It is far as costs remaining for those actions and activities?

The onetime costs related to the Arlington Bank have really already been accrued. But because the iAB closed in July those are all expenses that will be recognized in the third quarter.

Okay, finally just on M&A activity we've seen a few deals in the region in the past couple of weeks, I'm just curious for an update on the pace of your discussions today what sellers are and how you gauge sellers asking prices your appetite to take on deal at this point?

Well I think a quarter or two ago we had talked about needing to make sure all of our resources were aligned against the two that we had announced in this somewhat same similar feeling on my part is integration that need to go well and to get the returns we expect out of them that speaks to the value we transacted. Having said that it will be in 2018 quickly and we're obviously have the ability to look at new opportunities, I feel like the pricing even on the most recent ones is within a fairly tight band for what we've seen for a year and a half now. So we'll be looking to grow the company probably in consistent in the manner that we've talked about on all prior calls.

Great. Thanks for taking my questions today.

You're welcome.

Our next question will come from Damon DelMonte with KBW. Please go ahead.

Hey, good afternoon guys, how is going today?

Good Damon.

Great. So my first question it's relating to the margin thanks for the good color on that earlier mark, you guys have an approximation on fair value accretion and given that you know Arlington deal disclosed during last quarter and the iAB deal disclosed early in the third quarter?

I have to go back and look at the iAB impact. But kind of a core run rate that we see right now even with the addition of Arlington is two and three quarter million dollars. So that's what we're anticipating, pick my notes and make sure I can get back to you on what I'm anticipating with Arlington - Independent Alliance sorry.

Okay, that would be helpful. And then as it relates to kind of the organic growth outlook for the back half of the year, you know pretty decent growth this quarter, do you think that based on your pipeline something in the high single digit range is achievable?

I do think that Damon, we've got two quarters in a row now that are both at the really high end of the previously articulated 6% to 8% range, so we're really at the high end of that each of the first two quarters. In that pipeline would suggest we're going to be at the high end of that at least through the balance of this quarter maybe in the next. The pipeline in our mortgage business is up, because it's a little stronger right now, coupled with Arlington's strength in it. Retail consumer lending which is not a big part of our growth is also up and then the driver of our organic growth from a total loan perspective is commercial in between the other structured finance business that John spoke to sponsor finance and the traditional C&I and real estate, it's kind of up throughout the company our pipeline is $470 million a little north of that, which is about 10% higher than it was at our last call and it's also considerably up over last year. So the economy is really doing relatively well and where the beneficiary of that.

Okay, great. And then just lastly and I apologize if I missed this part, but construction and development loan growth this quarter any color and what to roll that some $337 million to $418 million?

I missed - I couldn't hear your question.

Composition of that construction increases.

Yes.

Yeah I would say that you know the where the growth is coming as out of the multifamily and multifamily student, how does in section and as well as senior living, we continue to see strong demand for those projects and that is a lot of where the growth is coming from.

Okay, great. That's all that I had. Thank you very much.

Thank you.

Our next question will come from Peyton Green with Piper Jaffray. Please go ahead.

Yes good afternoon, my question was also on the construction and development, and I was wondered Mike it's been certainly a good part of growth over the first couple quarters, but I was wondering in your kind of pipeline outlook, is it expected that that continues to grow or is do you start to see payoffs and paid downs that might limit that growth and you have to get the growth from other areas?

Well they are offset and this is the seasonal part of the year when the construction activity is at its peak, and so we would expect it to remain fairly strong throughout the third quarter for certain John referenced earlier that the stabilized properties find the way of the secondary markets, and so those typically are the offsets to either new projects or funding of existing projects. I still view it as a growth category probably more pronounced in this quarter than it would be going forward, but it will continue to grow.

And I think I would just add this is John, that when you look at the availability under existing construction loans and other projects as Mike points out still through the balance of the season will continue to draw, so between that and even as they do draw and move into the portfolio for many like many perm it's reasonable to expect that will continue to see some growth there.

Okay. Great. Thank you very much.

You're welcome.

Our next question will come from Brian Martin with FIG Partners. Please go ahead.

Hey guys.

Good afternoon, Brian.

Hey, just a couple things for me, two housekeeping and that was the tax rate was a little bit lower this quarter, Mark just kind of wondering any thoughts on that or just how to think about that going forward?

Yeah, you know we had a higher than normal bully income during the quarter. Our average like I said over the last six quarters has been about 1.4 million and net income is all tax free. So if you apply a 35% tax rate that's kind of a more 35% tax rate to the difference, so it's a more normalized level for us.

Okay. And I guess is that kind of the run rate I guess you think about using that last you know the 1.4, I guess would be able to lower than that?

Yeah, I think that's a good number. We had similar amount last quarter of extraordinary tax savings related to our RSAs and the new accounting announcement around RSAs. So the two quarters in a row with a really kind of the unique tax position, but last quarter was 770,000 and this quarter was a little bit less than that.

Okay. Perfect. And then just on the expense front, can you just remind us how much the contribution from in the expense this quarter was from Arlington and then just kind of any outlook on the kind of how the expenses play out here?

Well, we closed Arlington in mid-July so - sorry, mid-June, we got right mid-May and we're right eventually - and so we had 326,000 of expense for the quarter related to Arlington Bank.

Okay. All right and then just comment you made Mark on the funding cost kind of being just at the upper end right now. I guess is there any indications that you starting to see any pressure beyond that or is it still I mean it gets more - we've heard more consumers are looking for higher rates, I mean that's unusual but the - is it getting more prevalent or not necessarily, doesn't sound like that's the case?

No, not on the non-maturity deposits side. There's a little bit of pressure with CD rates as you would expect and as we've modeled and a little bit of pressure on with larger balances, we've got balances fall out between $50 million or $100 million, there is some pricing power that the depositor have. And so those are more volatile deposits, so we are having to be more aggressive. But the deposit made is on all of just the core retail customer base are incredibly low.

Okay. All right. That's all I have thanks guys.

Thank you, Brian.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Michael Rechin for any closing remarks.

Thanks, Alison. My only remark would be to share appreciation from the management for people's interest in questions. Look forward to continuing our strong performance into the next quarter and speaking about in about 90 days. So have a great day.

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