Good afternoon and welcome to the First Merchants Corporation First Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. We will be using user control slides for our webcast today. Slides maybe viewed by following the URL instructions noted in the First Merchants’ news release dated Thursday, April 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. Please also note that today’s presentation is being recorded. I would now like to turn the conference over to Mr. Michael Rechin, President and CEO. Mr. Rechin, the floor is yours, sir.

Thank you, Mike. Welcome everyone and all our listeners today, welcome to our earnings conference call and webcast for the first quarter ended March 31, 2014. Joining me today are Mark Hardwick, our Chief Financial Officer, and John Martin, our Chief Credit Officer. Our remarks will be focused on our earnings release, which came out earlier today about 10 o'clock Eastern Daylight Savings time and our presentation speaks to material from that release. The direction that point to the webcast are also contained at the backend of that release and my comments will begin on page three, the slide titled First Merchants 2014 Highlights. So, the top bullet point covers the release. First Merchants Corporation reporting first quarter 2014 net income of $13.6 million, compared to $11 million during the same period of 2013. The earnings net income increased 24%, a like number to the number of shares increase such that earnings per share totaled 38% equaling the first quarter of 2013. The busy quarter for us, we're pleased to talk about it today. And on the second bullet point of the slide, somewhat the signature accomplishment was the successful completion of our integration of CFS Bancorp. And from a vocabulary point of view, you may hear through the comments today from my colleagues and myself terms at Citizens, CFS or the Lakeshore region and we just ask at this point to recall that they all are effectively the same thing as we've renamed Citizens within First Merchants the Lakeshore region. So, the best and quickest integration of a company in the First Merchants in acquisitive history that we've had roughly a 100 days from legal close on November 13th, we move to bring that franchise, their clients and employees fully onto our systems the week of February 24th, went…

Thank you, Mike. I am starting on slide five, where loans on line three increased by year-over-year by 26%, a $140 million or 5% of the increase was the result of organic calling efforts and $597 million or 21% of the increase are resulted from our acquisition of CFS Bancorp in November of last year. The investment portfolio on line one, increased by $280 million now totaling $1.2 billion as deposits exceeded loans in our merger by approximately $350 million. The allowance on line 4 totaled $70 million, up from year-end and first quarter of 2013 as we experienced net recoveries in the quarter of $1.7 million. And the allowance now totals 1.92% of total loans and 125% of non-accrual loans. The composition of our loan portfolio on slide 6 is reflective of the commercial bank balance sheet with community bank granularity and it continues to produce very good loan yields. The portfolio yield for the first quarter of 2014 was 4.67%. On slide 7, our $1.2 billion bond portfolio continues to perform well, producing higher than average yields with the moderately longer duration than our peer group, our 3.87% yield compares favorably to peers of 2.6%, and our duration remains just under a year longer at 4.4 years. The net unrealized gain in the portfolio totals $20.8 million and maturities for the remainder of the year total $114 million with the yield of 3.45% and in 2015, our maturities are $128 million with the yield of 3.07%. Now on slide 8, non-maturity deposits on line one increased by 31% year-over-year and represent 76% of total deposits. Of the year-over-year increase, $45 million originated through organic growth initiatives and $722 million was due to the acquisition of CFS. And our tangible common equity continues to grow nicely, on the bottom…

Thanks Mark, and good afternoon. I'll be updating you on the trends in loan portfolio starting on slide 17, and then cover first quarter asset quality with an update on the progress of the Citizens portfolio before closing with a look at the allowance and fair value coverage. So please turn to slide 17. In the first quarter, we experienced mixed trends in the portfolio, resulting from three primary drivers. First on line one, there was an uptick in demand for C&I lending in the first quarter which resulted in roughly $26 million increase in C&I loans. Second on line two, there were several larger construction projects that paid off and were placed in the secondary market after construction. These expected payoffs were fueled by borrowers taking advantage of less restricted secondary market underwriting and conditions for loans coming out of construction. And third, the seasonal timing of payoffs of 2013 agriculture production lines prior to draws on 2014 production lines. So then, looking forward, I am encouraged by the C&I production and pipeline that Mike will highlight in his remarks, as well as the unfunded commitments for new construction projects headed into the spring and the coming seasonal draws on agricultural production lines. So overall, while the portfolio was down somewhat in the quarter, the above factors should help grow or help to grow the portfolio for the remainder of the year. Now turning to slide 18, on lines 1 through 3 in the linked quarter, we saw improvement in non-accruals, ORE and renegotiated loans. Note that on line 5 the percentage of NPAs to loans in ORE stands at 2.1% which is below year end 2012 having absorbed the CFS portfolio with markedly higher levels of non-performing assets. On line 6 and 7 we saw an increase in…

Thank you, John Martin. Now, I’m on page 23, kind of briefly revisit our First Merchants strategy, it’s a consistent strategy, we’ve used it in these sides in the past. Coverage of the market segments, most important to us in the lines of business that our management runs through. The only other comment I have on the page would be that with the Lakeshore or Citizens business being fairly new to us, we look to introduce the trust business and the insurance business through the bottom, two bullet points on slide 23; capabilities that we’ve had in the First Merchants that Citizens previously had not offered. And so at this stage, we're making sure that our bankers that are the glue to the clients understand the needs for those product lines. And then we're going to train the product knowledge and with the full intention of growing the run rate of those two important fee lines within the overall mix of our revenue streams. Also mentioned within our trust company, we have great leadership over there for that and better part of the last decade and a retirement of that leader where we've replaced Terry that leader with a new executive from inside the company. So, we fully anticipate our speed of that business to stay the same or accelerate. Moving to page 24 on a tactical overview. As I think forward, we're optimistic. One top bullet point about intensifying revenue generating, we're going to do what we do which is stick to our sales management protocol, win new clients, take care of our existing clients, but primarily what it means is taking pipelines particularly on the earning asset side and moving them on to the balance sheet. And I think we've got some history that shows that it's not…

Yes, sir. We will now begin the question-and-answer session. [Operator Instructions]. And the first question we have comes from Scott Siefers of Sandler O'Neill & Partners. Please go ahead.

Good afternoon guys.

Hi. Good afternoon Scott.

So Mark maybe first question, most appropriate for you just on cost, so if you back out the direct one-time cost and then some of the noise like the snow removal, HSA seeding et cetera, it looks like you had run rate expense base of about $40.3 million. Just given that you now have the CFS cost savings officially in the numbers from March, do you think that $40.3 number is one that you can improve upon in the second quarter or whether it’d be just normal investments that will kind of keep it flattish how are you thinking about that dynamic?

Well, I think that’s the right number to look at going forward, to think that we’re going to push it lower than that through the quarters really isn’t an expectation, we’re obviously looking for opportunities around every corner, but I think that assessment of 40.3 is good for the quarter.

Okay, great. And then just on the margin, you held the core number in their very well, so I would be curious to hear about your thoughts on how well you can hold core going forward? And then you guys kind of reintroduced PAAs or purchase accounting adjustments into the equation with the CFS deal now closing, is what we saw this quarter a good proxy for what we can expect going forward in term of the fair value contribution?

The overall question the margin numbers, we felt great about the quarter that’s two quarters in a row where we’ve been at 383 margin if you check out fair value accounting. The volatility of the number related to the accretion going forward is one that we are still trying to get our arms around. We had early kind of, I guess adds to interest income when we purchase the Shelby County portfolio and we are not seeing that kind of movement through interest income to-date. Although you can tell by the charts that John has in his presentation just how much is still pent-up in the portfolio that we expect to see some of that come through the income statement on a go forward basis. The bond portfolio will continue to perform in its current levels, the loan yields, the small amount of attrition that we're seeing in the core portfolio in terms of, attrition in terms of yield really has leveled out. And I think is very manageable. So, net-net if you check out the fair value accretion, I would think that we see a modest amount of compression 1 basis points or 2 basis points but nothing more than that.

Okay, that’s perfect and helpful. I appreciate that. And then Mike just wanted to ask you about loan growth, just to make sure I understand the way you are characterizing things correctly. So, point to point this quarter was perhaps a little weaker, but your comment on the pipelines including what John had added as well, it all sounds very, very optimistic about the remainder of the year. So, and I think in the past you've talked about kind of a mid-single digit organic type of growth rate, correct me if I am wrong, but is that something you still feel will hold through in other words do you get some catchup from the softness in the first quarter or does the softer first quarter impact, which you think you guys are going to be capable of doing for the full year.

No, our expectation Scott, thanks for the question. No, our expectation is that there is no give up. And that we would expect overall growth in the second quarter and that mid-single digit growth rate on a year-over-year basis from the fourth quarter of last year through the end of 2014 hold, we are kind of encouraged and would like to see that increase that I sighted earlier, just to carry through as it has earlier quarter. So, no, our expectations would remain the same.

Okay, that's perfect. I think, that does it from me. So thank you.

Thank you Scott.

The next question we have comes from Stephen Geyen of D.A. Davidson.

Hey, good afternoon. Maybe just a couple of questions on the securities portfolio, just curious what kind of cash flows you’re expecting there, if there is any kind of readjustments ahead or if that’s behind you know and what the reimbursement rate and if you think that the majority of the cash flows are going to be generating or are going to be able to put to work in growing loans?

As I mentioned in my comments, we have in the bond portfolio looking forward again real quickly. We have maybe $114 million that will mature this year to 345. We are not getting quite 345 on the reinvestment rate, but given the size of the portfolio at 1.2 we feel really good about being able to maintain current levels. And then next year we have $128 million that will mature to at a 307, and we are definitely replacing the 307, so we shouldn’t see any decline. The 345 we are not quite getting 345 with current reinvestment rates. We did do a $50 million small leverage transaction that may have been noticeable by using broker deposits and putting some balance in the portfolio and we are in the process of doing another one of about the same size. Where we have about a little over 200 basis points spread and if you ask about the liquidity or any maneuvering related to CFS and we did sell their entire portfolio prior calls or they did technically. And so they were sitting in cash at closing and then we reinvested those dollars. That has all happened and we had that completed by the end of the quarter. And then because of the added liquidity from the acquisitions, we decided to add another $100 million into the bond portfolio that we felt was prudent and made sense based on the overall structure of the balance sheet.

Okay. And maybe a question for you Mark, you kind of gave us some really nice color on the pipeline and just kind of outlook of what you are seeing maybe for the second quarter and the rest of 2014, do you see is it across the geography or is it weighted in any particular area?

Yes. Steve it’s Mike. For this particular point in time it’s heaviest in our greater Indianapolis business maybe even a little bit more pronounced than it has been in a couple periods before. I referenced that the Lakeshore begins to pitch in and given the size and depth of that marketplace, we would have looked for not only some contribution from there which I am pleased by because there is a lot of transition there and there have been some assets there from the legacy loan quality issues that we will be curious to see what kind of net growth we can achieve there knowing that we’ve got a little bit improvement we need to effect through the balance of the year. But the sales force up there is in tune and led. And so I would expect them to be a net contributor, but no outside of that we are getting it somewhat from everywhere John Martin referenced that agro business has been a little bit off of its normal seasonality so we expect that to pitch in as well.

Okay. And maybe just a couple of questions for John. John on page 21 you noted the reserves and fair value adjustment to gross and just can you give, real quick, maybe quickly just give me what the numbers were that went into that 3.19%?

It’s just the math above, it’s the allowance, it’s the 69.6 and the fair value adjustments in total divided by gross line loan balance.

Okay. Just wanted to make sure I didn’t do the number as well you are talking. And then second question is on page 19, you had mentioned that consumers contributed to new non-accrual, just curious if there is any -- were there any seasonality to that or any commonality in the type of credits?

No, I went back actually and did a little bit of analysis of what was driving that. We have taken a slightly different approach in the consumer portfolio, as it related to what would be bankrupt fraud deceased [ph] and it drove a couple of million dollars' worth of increase non-accruals for the quarter. Essentially yes taking them to and letting them stay a non-accrual particularly in the deceased category and we have a deceased borrower until we have the, I am not going to use the term right, but the seasons family reaffirm on the property and we had a number of those that we backed up and made adjustments to in the quarter. So that did impact the number somewhat.

Okay, great. Thanks for the time today.

Thank you Steve.

The next question we have comes from Michael Perito location of KBW.

Hey good morning guys, good afternoon guys rather, I am sorry.

Good afternoon Michael.

I thought I would start just on the provision expense, it’s come down quite a bit the last couple of years and you guys posted the zero dollar provision this quarter. Is that more of a function just of the slower ELP loan growth this quarter or is that a rate that you guys think you can replicate going forward over the balance of the year?

Well I think the way I’d respond to that is obviously the provision is going to be driven by your charge-offs and the asset quality of the portfolio. I think in the quarter we had net recovery position and we booked a zero provision. I don’t know is that -- we will have net recoveries every quarter to be able to do that, but I think that’s what you are seeing in the current quarter. So it certainly is down from other years, but then on the hand our asset qualities improved significant, so.

Michael this is Mark. We want to reserve to be directionally consistent with all of the trends in the portfolio and this particular quarter we had a little bit of mix in a lot of the numbers improving and our classifieds were up slightly. And the fact that we had a net recovery just as you know that it’s taking a zero provision at least for this quarter was the right answer. So we will evaluate in next quarter and see where we stand.

All right thanks. And then on the dividend raise can you, I can’t remember if you guys have ever said publicly about this, but can you remind us about how you are thinking about the dividend just in the context of payout and if you guys have a target payout ratio that you guys are hoping to reach or if you think about it in a different way like on yield or anything like that?

Well, in terms of what they equate to today Michael you can do the math and you know it gets us closer to based on today’s stock price roughly 1.5% dividend yield and our payout ratio just over 20%. I think that we don’t have a stated dividend policy, but we're clearly mindful of what the investment community looks for out of a bank such as First Merchants. And I think then something in the mid to high 20s over some period of time, should our earnings continue and grow at a rate that they have over the last several quarters would certainly be something that’s off board, we try and balance where our capital levels are with cash at the parent company for M&A use should that be the case. It’s multiple variables that go into it, but pleased to have the flexibility to consider increases as our earnings sustain themselves.

Okay. All right thanks. And then just one last one from me with the Citizens still now integrated, can you guys just update us on how are you got chances to see what the balance sheet looks like combined and just on how do you guys view rate sensitivity within your balance sheet and whether you are positioned as you would like to be today or working to reposition yourselves or something else and any color there would be great? Thanks.

Yes, we've gone through that entire analysis and part of selling our bond portfolio and reinvesting we had looked at exactly where we stood from interest sensitivity perspective. And we're still extremely asset sensitive, we have $1.6 billion that reprices every month and almost all of the daily because it's the loan portfolio that’s primarily driving it. And with that much in variable rate loans it allows us to be, well on the other side when we say with that much in variable rate loans and the amount of transaction for non-maturity deposits that we have, the strength of that deposit base in a rising rate environment is a good formula for growing net interest income. So, that is the reason that when we reinvest their bond portfolio and then also with this small leverage transaction, the two that we've done, we thought we could go out a little further on the curve in the bond portfolio, because in a rising rate environment, the loans perform so well.

And how much of your loan portfolio is variable again? Sorry if you have disclosed that already, I must have missed it.

Yes, I have it here $1.6 billion of our total assets repriced on a monthly basis. And most of that is daily because it's driven by the loan portfolio.

Alright. That's it…

Pretty evenly between LIBOR and prime base.

Okay, perfect. Thank you very much guys.

Welcome.

The next question we have comes from Brian Martin of FIG Partners. Please go ahead.

Hey, guys.

Hey, Brian.

Most, two of my questions already answered but one, maybe John already covered this but just the classified assets in the quarter that increased from year end to first quarter. Can you just, if you already mentioned it John, what was driving that and any I guess trends you’re seeing there?

Yes. So, as I mentioned a little bit earlier, there was one large name there that was $17.5 million that went to substandard and that made up a large portion. The rest of it came out of just new information that we got of the CFS portfolio. So it’s not a trend, it’s just kind of what came out in the first quarter.

Okay. What’s type of credit was that; I mean was that a real estate, was it C&I?

Sure, it was an Ag production, Ag related credit.

Okay. All right. That’s all I have then. Thanks very much, nice quarter you guys.

Thank you, Brain.

Next we have Daniel Cardenas of Raymond James.

Hey, guys. How are you?

Good afternoon, Dan.

Just a couple of quick questions here. On the second leverage transaction that you guys are talking about, has that accrued already or is that expected to take place sometime in the near future?

We’re working on it; the funding actually should be finalized this week and then we’ll put the dollars to work.

Okay, that’s roughly the same size as the first?

Yes, it's right at $50 million.

Okay.

It’s not a big needle mover but it’s more about optimizing the balance sheet.

Got you. And then as I look at the tax rate this quarter, is that a good -- I mean it looks like it was up on a sequential quarter basis, is that a good run rate to use going forward?

Yes, I mean that’s our -- there wasn’t anything extraordinary in the number this quarter, so I think it’s a good estimate.

And then last question, just given your size at roughly $5.5 billion and I have to imagine you are probably getting a lot of folks wanting to talk to you, I mean how much bigger can you grow without having to make significant infrastructure investments?

Well, that’s a good question, it covers a lot of asset classes, management being one, technology being another one, physical capacity for our operation center. So in inverse order that our operation center could allow us to grow probably another 20% from where we are now without a significant investment. We were fortunate managerially at the Lakeshore opportunity to be able to take advantage of an incumbent management team that was already changing a thrift culture into a commercial bank. So, we are just trying to fortify that and accelerate what we are doing. And then technology, we are, I think we have been fortunate to have chosen handful of key vendors that serve our asset size kind of $5 billion to $20 billion and have plenty of products wherewithal that our customer mix uses. So, I don’t see in the near-term certainly between $5 billion and $10 billion in material need for infrastructure or overhead expansion.

Okay, great. All right. Thanks a lot guys. Good quarter.

Thank you.

Well at this time, we’re showing no further questions. We’ll go ahead and conclude our question-and-answer session. At this time, I’d like to hand the conference back over to management for any closing remarks. Gentlemen?

Thank you Mike. This is Mike Rechin. I have no remaining remarks. Flattered by the questions and the attendance today, look forward to talking to you mid-summer about our second quarter ended June, talk to you then. Have a great day.

And we thank you sir and to the rest of the management team for your time. The conference call is now concluded. We thank you all for attending today’s presentation. At this time, you may disconnect your lines. Thank you and take care everyone.