Good afternoon and welcome to the First Merchants Corporation Second Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded. We will be using user controlled slides for our webcast today. Slides maybe viewed by following the URL instructions noted in the First Merchants news release dated Thursday, July 24, 2014 or by visiting the First Merchants Corporation shareholder relations website and clicking on the webcast URL hyperlink. During the call, management may make forward-looking statements about the company’s relative business outlook. These forward-looking statements and all other statements made during the call 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. I would now like to turn the conference over to Michael Rechin, President and CEO. Please go ahead, sir.

Thank you, Chad. Thank you all for joining this afternoon. Welcome to the earnings call and our webcast for the second quarter ending June 30, 2014. Joining me today as in the past are Mark Hardwick, our Chief Financial Officer, and John Martin, our Chief Credit Officer. We released our second quarter results in a press release earlier today by 10 o'clock Eastern Standard Time. And our presentation speaks to material from that release. The directions that point to the webcast were also contained in the back end of that release and my comments begin on the page titled First Merchants Second Quarter 2014 Highlights at Page 4. If you look at the top of the page, we are really pleased with progress in many areas of the company. We look forward to sharing our views of them and taking questions at the back end of the call. As contained at the top of the release, we reported earnings per share of $0.41, a 21% increase from prior period on a quarter-over-quarter basis and net income attributable to that EPS of $15.2 million. I know that our Treasurer was referencing to me earlier that absent the first quarter of 2012, it was the quarter that we had the FDIC assumption of Shelby County Bank and recognized a $9 million one-time gain. The $15.2 million in net income is the highest level ever in the history of the corporation. So, we are pleased with that. And as indicated in the last bullet point represents a return on average assets of 1.1%. So, we are gaining and hitting some of the progress targets that we had set for ourselves towards becoming a higher performing company. Some of the income statement progress driven by loan growth, where we had nearly 3% of organic…

Great. Thank you, Mike. If you turn to Page 6 or Slide 6, I will begin my comments there. I wanted to point out that most of my discussion is going to be a comparison between the first quarter of 2014 and the second quarter 2014. Now that we had two full months with Citizens – two full quarters with Citizens, because of the second quarter of 2013 did not include Citizens or Lakeshore Region, I think it’s difficult to try to compare the two. So if you look on Slide 6, on line 3 loans have increased on a linked basis by $106 million or nearly 3% just in end of the quarter on an annualized basis closer to 12. Through the first six months – I am sorry the investment portfolio then on line 1 increased during the quarter by $64 million as well. So we are doing a nice job of growing overall earning assets when you combine the loan totals and the investment portfolio totals. We believe our liquidity is optimally deployed and given the current pace of loan growth we are not anticipating further increases in our bond portfolio. The allowance on line 4 totaled $68 million or 1.83% of loans and 133% of non-accrual loans. Net charge-offs totaled $1.2 million for the quarter, but we are still in a net recovery position of $497,000 year-to-date. The composition of our loan portfolio on Slide 7 is a reflective of a commercial bank balance sheet as the commercial loan categories comprised 73.5% of our portfolio. The portfolio yield for the second quarter of 2014 totaled 4.57%, down from 4.66% in the second quarter of 2013. And the two quarters obviously the Lakeshore or Citizens was not included a year ago, but we are seeing a decline…

Alright. Thanks Mark and good afternoon. I will be updating you on the trends in the loan portfolio on Slide 18 and then cover second quarter asset quality with an update on the progress of the work on the Citizens portfolio before closing with a look at the allowance and our fair value coverage. So please turn to Slide 18. In the second quarter we experienced strong portfolio growth on lines 1, 2, 3 in commercial and industrial, commercial real estate construction and investment real estate lending. The growth in the portfolio, the portfolio was a blended mix of new relationships what drives on existing lines and the financing of capital investments. Running out the portfolio on lines 4 through 8 we saw seasonal increases in agricultural production lending, Ag land acquisition while experiencing an uptick in residential and home equity lending. This growth combined with the strength in the commercial portfolio led to an increase of – as Mark had mentioned before $106 million or 2.9% in total loans in the quarter. Flipping to Slide 19, on lines 1 and 2 in the Q2 2014 column we saw improvement in non-accrual loans and ORE. Non-accrual loans were down $4.4 million in the quarter and $5.1 million since the beginning of the year. This was really led by the resolution of a single loan of roughly $4 million in the quarter dropping. Then down to line 6 and 7 classified and criticized assets declined in the quarter as we continued to see improvement in the portfolio with overall levels elevated somewhat from year end inclusion of the Citizens portfolio. So on lines 9 and 10 the allowance was mostly unchanged declining by $1.2 million with the non-accrual allowance coverage which increased to 133% with the improvement in non-accruals. And then…

Thank you, John. It’s hard for me not to offer a thought on John’s detailed coverage of the credit profile. And I think back to this time last year when we were excited about moving towards the close of Citizens now called the Lakeshore Region within our companies, it had elevated level of criticized and classifieds and non-accrual and yet when I look when I stand here in the middle of July just see that our non-performing assets as a percent of assets is identical to the level it was at June 30 of ‘13. Very pleased it not only tells me that our due diligence work was on point, it tells me equally that the management at the Lakeshore level, the Citizens Bank that have joined us knew what was going on in their profile and in a steady state economy we are able to demonstrate some ability to know what happens next with their clientele, all of that has worked our favor. And then so when I see over a similar time period our NPAs go from $51 million in September last year to $83 million immediately post-closing and then come down 13% as they have at June 30 reflective of a safety and soundness program that runs past loan origination. So I am going to pick up with some comments that start on Page 24 and hold off on my comments about Community Bancshares for just a couple of moments. The organic growth throughout the franchise that’s refreshing for us to actually see it materialize, the commercial side we have been kind of good at. It’s the strong suit for the company that see it come across all of our franchise and in multiple lines of business particularly refreshing and a little bit of adjustment between our…

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes today from Scott Siefers of Sandler O’Neill & Partners. Scott Siefers - Sandler O’Neill & Partners: Good afternoon guys.

Hi, Scott. Scott Siefers - Sandler O’Neill & Partners: Mark, first question is probably best for you, I was just curious if you could go into sort of the puts and takes of the adjusted margin in the second quarter it declined a little more abruptly than has been the case recently. So, just curious what caused the sequential compression that might have been a little worse than anticipated? And then I believe within your prepared remarks, you had suggested that NII should still be expected to increase quarter-over-quarter, I guess one did I hear that right? And then two, what is your outlook for the adjusted margin? So, will it be mostly kind of loan growth driven NII growth or what factored us the margin play there?

Yes, thanks Scott. The quarter-over-quarter comparison, first quarter to second is really about loan yield compression and we have been able to keep up at least so far or most recently with the loan yield compression on the deposit side and we are down to 34 basis points and it’s hard to move further. The comments that I had our net interest income simulation, we do. I think of a very thorough job of modeling out net interest income over the next 12 months every quarter. And we use all of our new loan spreads to identify what’s actually happening in terms of once you have roll-offs and then you put new loans on the books how they are priced. And the simulation is suggesting that we don’t see further compression. I mean, it’s a model and they don’t have their flaws, but it is not showing a significant level of compression. Frankly, it’s not showing any. And I guess my confidence in terms of next quarter I believe that we will be able to continue to grow net interest income even if we have some modest net interest margin compression. So, I don’t have an exact number for you, but I feel like those are the directions, the modeling suggesting that our margin should remain fairly stable trends showing that we are having some compression and confidence that based on our asset growth that we will be able to continue to grow net interest income. Scott Siefers - Sandler O’Neill & Partners: Okay, that’s perfect. I appreciate that. And then maybe Mike and John just curious on specifically the OREO cost in the quarter, a little more elevated. I think if I heard your comments correctly, it might have been more an isolated incident than anything more broader base. So, we keep these OREO costs elevated, but one is that the case, so can we assume that those will normalize a bit more I think you said something around $800,000 from kind of elevated OREO cost differential in the second quarter? And then the part for Mike, what’s your thought on your ability to keep the core cost base around where it is as you look forward?

Yes. Scott, this is John. I will go first. Yes, it really when you look at our OREO expense, the ORE and other credit-related expenses may have been $1.6 million, $1.7 million pretty consistently quarter-over-quarter for the last four quarters and then we have the write-down of the one individual property. And it was one property and it was kind of a blip. I will say that when you look at what remains in ORE, it is granular. I mean, your next – I think your next largest ORE is just north of $1 million, $1.2 million, $1.3 million something like that. So, that was probably one of the largest properties in there which is the standalone and that resulted in the effect. Mike?

Well, I wasn’t going to speak to OREO if there was a follow-up question on that topic. John, I will let you take it, but I think the point directed towards me, Scott was about our overall expense levels, they stay exactly where they are at. As I said, there were $300,000 of I would consider to be not usual items in the other expense, (indiscernible) and on EEO and E&O settlement expense, but those are somewhat the knits and gnats that happened from time-to-time. I wouldn’t call them recurring. So, I would like our run rate on the largest dollar categories, the direct FTE expense, the direct premises expense, the absence of over time, those kind of things are kind of right where we want them. And yet while we are doing that, I will tell you to make sure we are going to get to where our 6/30 numbers were, we had an extensive number of profit center by profit center expense meetings that not only showed us that where our June 30 numbers will, but the level of inspection of them, I believe we’ll have some benefit as we get ready to start looking at 2015. Scott Siefers - Sandler O’Neill & Partners: Okay, that’s perfect. And then I just so I understand clearly, it sounds like for the most part it’s going to be flat expenses, but is it – would it be correct to assume that the absolute cost base could down a little just given that elevated OREO and then they kind of an unusual items in that other expense category and other words.

Yes. Scott Siefers - Sandler O’Neill & Partners: If we aggregate them all, it sounds like it’s about a $1 million, so, would a better run rate be sort of $40.5 million and the $41.3 million that we saw this quarter?

I would agree with that. Scott Siefers - Sandler O’Neill & Partners: Okay, alright, that’s perfect. I appreciate the clarity. That’s it from my side so, thanks.

Thank you.

Our next question is from Damon DelMonte of KBW.

Hey, good afternoon guys. How are you?

Hi, Damon. We are good. How are you?

Great, thanks. My first question I had to deal with the growth you guys saw this quarter, C&I balance has expanded quite nicely, could you talk a little bit about what was driving that increase this quarter?

I’d like to feel like our effort and our market coverage effort now processes for pushing opportunities along to include the credit process is similar all the time. And so the prognostication of closings and winning is difficult for us. I do know that the pipeline trend that our Chief Banking Offer started probably 9 or 10 quarters ago has gotten increasingly accurate in its ability to predict the direction of the commercial side of the balance sheet in particular, may be all parts of it, but commercial in particular given it size. And so when I look at the level that it has been back into this time last year and kind of well over what is the absorption of pipeline in new balance sheet, it’s been seeing with some positive correlation and so I think we’re going to grow this quarter, what I would say if the pipeline numbers that I referenced earlier are any indication of what they’ve been in the past. But in terms of the market coverage in the actual work, this – is this your question I think might really even to the net interest margin that’s Mark was talking about earlier in that. We do spend a lot of time looking at the next opportunity that creates the loan growth in accessing the return on it by way of interest rate. So, we’re going to try to stay even sharper on that in accessing new clients in particular, but feel like nothing, no magic in the current quarter’s results other than good ability to translate pipeline loans under the balance sheet.

Okay.

Take a little bit higher use of them from our clients.

And with regard to the pipelines, did you say that you had – could you just go over the number again for what you said for the pipeline?

Be happy too. On the retail side, I think I said it was nearly twice so that’s a $21.5 million number for us up from 12. On the commercial side which is the biggest line of business in terms of own production, $259 million down 4% from $274 million, but up – I know I said up 40% from a $185 million this time last year. So, the $274 million at the end of the first quarter was a highest that has ever been and so while it comes down slightly based on the last quarter and it’s still at a relatively high level for us.

Got it, okay, that’s helpful, thanks. And then I guess with regard to the outlook for the provision, can you give us a little direction as to what we could expect for quarterly provision rate going forward, I mean if the underlying trends of the credit remained strong, I mean, I was assuming that the people are looking some provision to account for the loan growth, is that a fair assessment?

Yes, I think that’s a fair assessment, John’s chart that shows the overall level of reserve including fair value mark. I think it’s really important or trying not to be just myopic on the allowance as a percent of total loans because of all of those additional marks but as long as our net charge-offs and what currently our net recoveries remained a stable with declining asset quality trends start to justify much more provision.

Great, okay. That’s all I have for now. I can go back into the queue if something else comes up. Thanks.

Thank you.

Our next question comes from Stephen Geyen of D.A. Davidson.

Good afternoon.

Hi Steve.

Maybe first question I know you guys can have a whole lot of accelerated accretion last quarter, was that kind of the case this quarter, I saw that I guess the fair value of accretion was $2.2 million versus $1.8 million last quarter is that right?

We were anticipating I think we gave you some guidance last quarter that we expected about $1.8 million for the quarter. And so we had a little acceleration from this pay down on the credit or two that where we added some additional, Steve.

Okay. So $1.8 million kind of a base level is kind of a good number to work with over near-term?

It seems like it, yes.

Okay. And the pipeline just maybe just one more question or a couple of questions on it. Approximately what percent or range are you comfortable with saying that those loans will be funded – fully funded?

Steve I don’t have a good answer for you on that because on the material that I have it has it by line of business and by geography, it doesn’t include structure whether it’s a term loan or evolving credit and so I am hesitant to take a shot at that one.

Okay. That understandable and let me see just a couple of more questions here. You had mentioned that the Lakeshore Region that the expense sales were real – are pretty much fully realized and I just wanted to make sure I understood in fact what you are saying were they realized early in 2Q or were they realized over the course of 2Q and they are fully realized are you fully in position now at the end of the quarter beginning of the third quarter moving forward?

I think they were pretty much fully realized by the end of May, so you could say that we had them through two quarters in some regards we are based on that unit alone, the Lakeshore Region alone even marginally beneath where we wanted to be because we are hoping to have a little bit of added investments into the commercial side of the bank which really hasn’t happened yet. But the absolute expense levels associated with the take outs that were part of our contemplation at the announcement were done by May.

Okay. Alright. Got it. And maybe last question for Mark, I think you had mentioned that you are pretty much on optimal liquidity kind of what ratios are you working with that we can kind of factor in – into our models?

Well, there are a few things but I think those – the comments that Mike made around loan to deposit ratio they are in our press release as well. Loan to asset ratios kind of guide those number for us, but it also comes back to dispositional our excess liquidity where do we stand with availability of Federal Home Loan Bank advances, our appetite I guess for broker deposits and we feel like the current levels of our balance sheet and the current mix between loans and investments is ideal. If we were to grow on the deposits side of the balance sheet faster than you can see the bond portfolio grow, but I think based on the environment that we are in and the ways the rate environment fuels I think we are going to be working hard to keep up on the deposits side with our loan growth.

Got it. Okay, that’s perfect. Thanks.

Thank you.

Our next question comes from Daniel Cardenas of Raymond James.

Good afternoon everybody.

Hi Dan.

Just a quick question on competition maybe what if competition looks like in Q2 is it slowing down a little bit and what impact is that having on loan pricing in the second quarter and as you have entered into the third quarter?

Well, I don’t think it’s levying up, I think that every competitor that we have in any market we are in is recognizing that loan growth has so many positive attributes to it in terms of associated revenues whether it would be treasury management or loan fees and the introduction of other services. And so I view it being extremely competitive and so we are trying to pick our spots, make sure that the profile of a client and our risk appetite are similar, take care of our existing clients which sometimes puts pressure on your loan margin, but no, I would say it’s kind of rough out there. I think it really adds to the art of the business, which is to know where to use your balance sheet and have the ability to provide as much banking product to any given client to feel good about the return the value proposition.

Okay. And so, when you look at then, I mean what is your – maybe product per household number now and where you see that trending over the next couple of years?

Well, that vocabulary to me seems most associated with retail banking and then you get into numbers that are like 5 and 6, but for our balance sheet which is commercial heavy, I really think of three, I think of loans, deposits and technology meaning treasury management. So, if we could get three out of all of our clients, then three would be a really magic number for us. The bonus would be the ability to use your insurance segment and your trust business to add to that, but if we were to get three with all of our commercial clients, we’d be way ahead of the game. So, it’s a smaller number than you might think, especially when you are related to the commercial side of the bank. I know I hear banks talk about 7 and 8, the great aspiration.

Yes, makes lot of sense. And just one quick question for Mike, as we think about the back half of 2014, what’s the good tax rate to assume for modeling purposes?

Yeah. We would 24 in the first quarter and 27 in the second. Of our growth in our pre-tax net income, all of that was taxed at 35. So, if you just run the same math that would have been a 26% rate and we came in at 27. I think we are a little high in the second quarter, I mean as you go through we are always trying to readjust our accruals to that time somewhere between 26% and 27%.

Okay, great. Thanks guys. Good quarter.

Thank you.

Our next question comes from Brian Martin of FIG Partners.

Hi, guys.

Good afternoon, Brian.

Just a couple of mostly as it been covered, but just John you mentioned the utilization rates sounds like they were up a little bit this quarter, was it material or was it just insignificant, what that did this quarter from a lending standpoint?

Yes. I went back and did a little digging and it was up from 45% to 49%. We did see an uptick from the end of March to the end of June, but dollars associated with it were let’s call it $75 million. There is a lot of moving pieces going on there. You have got pay downs and term loans and the new dollars coming on from the new opportunities, but it was pretty material for the quarter.

Okay, that’s helpful. And just maybe two other things, the number one I guess the cost saves on the Community deal, I guess it maybe from that getting as much personnel out of there is it seems like just wondering how you get to the 40% type of level kind of targeted? And then secondly just how that plays to your goal of getting a 60% efficiency ratio, what type of timetable you think is required to kind of match it down to that level?

Sure. We will revisit the overall efficiency target at 60% when we complete kind of all of our pro forma work. And we will talk about that the next quarter. I am sure our work will be even further along the 60% use that I referenced earlier was relative to the company as it stands today. And that’s kind of an immediate goal. If we were to get any help in the mortgage business, which is sizeable for us and remains a little bit soft or may continued headway as I have alluded to on our overall expense burden, it would get us close to that based on where we were in the second quarter. The front half of your question spoke to a little bit more dialogue around the expense targets at Community. And I will just kind of repeat some what I shared before. We have got a couple of markets, three in particular. 3 out of 10 of the banking centers at Community are extremely local two hours. And so we are going to assess where the customer gets serviced the best without any judgment about which store whether it’s a Community store or a First Merchants banking center is best situated and picked the best situated one, pick the best customer service folks for that and then enjoy a expense savings based on the disposition of the redundant property and so, there is an FTE impact to that, but when I can trust that volume to Citizens to where we had zero overlap either commercially or in retail banking, all of the cost saved their which was lesser than 40% was really dominated by operational FTE. This will be a little bit different and the other different not just the composition of the expense savings, but the timing of this one will be a little bit less immediate based on very tangible aspect to real estate and how quickly you can move in and out of it, real nonetheless.

The numbers – we have, we said 40% cost savings in our release, it’s about around $2.8 million, $1.8 million from the core bank, another $1 million of cost savings from optimizing the market coverage and of the 1.8 that would be from their core operations and there is a sizable component of that, that also comes just from the back office technology spend.

Thank you.

Hope that helps.

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

Thank you, Chad. I really have none. I appreciate your attention and the quality of the questions. I appreciate your support of the company. We look forward to talking to you in a couple of months. Have a great day.

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