Good day, and welcome to the First Merchants Corporation Fourth Quarter 2014 Earnings Call and Webcast. [Operator Instructions] We will be using the user-controlled slides for our webcast today. Slides may be viewed by following the URL instructions noted in the First Merchants news release dated Tuesday, January 27, 2015, or by visiting the First Merchants Corporation Shareholders 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 note this conference is being recorded. I would now like to turn the conference over to Mr. Michael Rechin, President and CEO. Please go ahead, sir.

Great. Thank you, Dan, and thanks to everyone for taking time out of their afternoon to get caught up on our progress at First Merchants. The comments I'll be making are from our press release issued earlier today, January 27, released about 9:45 a.m., and directions in that press release point you to a webcast that will contain the slides that my co-host John Martin, our Chief Credit Officer, and Mark Hardwick, our Chief Financial Officer will cite in their remarks. So the press release covered what I feel is a very strong year of progress for the company in many regards, as you'll hear from other management today. And Slide 4 starts out with full year highlights at the top where we talk about record net income of $60.2 million, $18 million of net income in excess of our 2013 full year results of $42 million, translates to a 17% increase in earnings per share of $1.65 over the level achieved in 2013 of $1.41. And the results then produced, on the bullet points directly beneath it, an elevation in our returns in average assets to 1.08%, in return on tangible common equity of 12.94%. So we like our ascent towards truly high performing returns and feel it's indicative of the progress we've been making for several years now. The last full year highlight is around Citizens Financial. And throughout this call, I know we're going to get a chance to talk about Community Bank of Noblesville and towards the end of the call about Cooper State Bank. But when I think about actual accomplishment, what's forefront for me is the progress we made with Citizens Financial, which we refer at this point as our Lakeshore division. And the progress there for a $1.1 billion bank that closed in…

Thanks, Mike. My comments will begin on Slide 8. Our total assets on line 8 increased in 2014 by $387 million or 7.1%, following a 26% increase in 2013. On line 3, we had good organic growth of 4.6% and 4.1% in 2013 and '14, respectively, and it's been assisted additionally by a healthy acquisition strategy. Our Citizens Financial Bank merger in November of 2013 added $597 million in total loans just at the end of 2013. And our Community Bank of Noblesville acquisition in November of '14 added a $145 million to our loan totals. Acquired deposits exceeded loans in both acquisitions and are primarily responsible for the growth in our investment portfolio on line 1. This earning asset category increased by $222 million or 25% in 2013 and another $85 million or 7.8% in 2014. And that really is all related to the addition of Citizens Financial. In our Community Bank of Noblesville acquisition, we actually have sold the investments at the date of close, and we've used all of their investment portfolio to kind of replenish our liquidity position. The allowance on line 4 in total dollars has declined very modestly in '13 and '14. However, as a percentage of loans, the allowance has declined from $237 million in 2012 to $187 million in '13 and $163 million in '14 and that really is just a result of all of the loans that we have that are now marked with fair value marks where the allowance really isn't covering the potential loss. And so John will cover that in more detail in his slides later on Slide 23. Goodwill and CDI increased on line 5 by $53 million during 2013 due to the purchase of Citizens Financial Bank, while the increase of $16 million in 2014 is…

All right. Thanks, Mark, and good afternoon. I'll be updating you on the trends in the loan portfolio starting on Slide 20, review our third quarter asset quality position and then close with a look at where we stand with respect to the allowance and fair value coverage and make a few comments about Cooper and then -- so turning to Slide 20. I present a lot of information on this slide, highlighting the changes in the loan portfolio. It's broken out on both a quarterly and annual basis and both before and after the addition of Community Bank of Noblesville. I think this presentation helps to demonstrate the dynamics of the portfolio. So I'll start by highlighting the year-over-year organic growth shown in the middle of the far right box, which excluded Community Bank of Noblesville. On line 1, C&I loans grew by $16.6 million last year. This is in addition to line 4. CRE owner occupied, which grew last quarter 4.1%, was up for the year 2.4%. There is not a concentrated industry that's driving the growth in C&I, but rather continued success in winning new business and growing our market share. On line 2, that same column, the 5.1% year-over-year organic growth in the construction development portfolio continues to be dynamic. We grew both loan balances and commitments this year, while seeing planned and early mini-perm payoffs as projects were refinanced into the secondary market. This strategy has helped to provide income for the quarter, while loan losses and commitments continue to grow in both the linked-quarter and year-over-year. I would expect to see continued growth in balances as construction commitments are drawn into the spring. Turning to asset quality on Slide 21. Lines 1, 2 and 3 show significant improvement in asset quality for the year.…

Thanks, John. John referenced our credit improvement in 2014, really necessary for us to continue to assess acquisition opportunities. We know that job one is having our own book of business be clean and improving. So I'm pleased to see the core trends that John just highlighted. I'm going to move to Slide 25. We're heading obviously into 2015. We're going to continue our core revenue momentum. We're going to exercise great expense discipline and then try and find that balance of cost reduction opportunities, while we grow the topline. And so on top of Slide 25, a couple of our key objectives and then that top segment focused on the customer experience, the point I really wanted to touch on was that we will have and look forward to a major platform enhancement mid- to late-summer after the Community Bank integration. It'll touch all of our customers, that's going to bring some great capability to our commercial client base. I think it's going to be great for our consumers as well. It kind of touches the entire company. It's been planned for more than a year. We're excited to get after it. We kind of put it on hold there for a short period of time to make sure we did a great job, satisfied ourselves that Citizens had gone well and our planning for Community well underway. On the middle part of the page, in terms of revenue generating activities, is the guts of our business and so it gets the majority of our attention. Mark referenced earlier having an organic growth results and that's critical for us. Our deposit growth without Community Bank for the year was 4.3%, which was really encouraging to us. We put a lot of activity around retail deposit gathering that captures not…

[Operator Instructions] And our first question is coming from Scott Siefers of Sandler O'Neill.

Actually, I guess, Mark, probably first question is for you is just on the margins. I apologize, if I missed it in your remarks. But could you go through what the core margin was for the fourth quarter, x-ing out the fair value adjustments. And then just what, given the sort of the shape of yield curve combined with some of the purchase accounting benefits you would continue to get, what's the outlook for the reported in the core margins?

Yes. In our press release we didn't -- in the slide deck, we did not show the quarterly number. So in this -- but in our press release, we do. And I'm just, give me just a minute. We are -- for the 3 months ended, we were at 3.80% on our core margin. And we declined 2 basis points on an adjusted basis. If you back out the fair value accretion. It was -- we were 3.70% -- 3.73% in the third quarter, 3.71% this quarter. So yes, the fair value was, clearly, a lighter number for us this year, or in the fourth quarter, we're anticipating seeing that increase as we move into 2015. And again, it's really the volatility comes out of the larger credits where we have fair value adjustments that we're able to work them out. And allow for repayment versus just the normal accretion. Is that -- does that answer what you're looking for, Scott?

Yes. And then, just sort of the puts and takes in the core margin as you see it looking throughout the year?

Well, we've said for a while now we feel each quarter having some compression of 1 or 2 basis points is what we're anticipating. We still feel the same way. I think, as we work our way through 2015, that we'll see some pressure, as assets repriced faster than we can push down our liability costs. And we'll see 1 or 2 basis of compression each quarter throughout 2015.

Okay. Perfect. And then Mike, you gave some -- between you and John, you guys gave some good color on overall lending. But just as you look at the sort of the outlook for the year it kind of seems like the commercial pipeline is strengthening, maybe some better at consumer demand but by the same token you know how competitive it is. So are you able to kind of quantify your expectations for aggregate loan growth throughout '15?

Yes. 5% to 7% loan growth is what we think is really achievable on an organic basis, absent Cooper State Bank's closing. And I'll tell you what, we had -- we took a relatively healthy pipeline, Scott, into the fourth quarter of the year. And that pipeline, as it often does, translates into a lot of originations. So our originations in the fourth quarter were much stronger than what the net result was, because of some of the dispositions that John Martin covered, either healthy construction loans going permanent or some asset-quality driven exits. And so we take that momentum into this year, I feel good about that 5% to 7% total. And with the -- even with a little lift out of the consumer side, we've added a lot to the consumer lending side in our footprint and saw some lift in that in 2014. So we would expect that to continue in '15 as well.

Okay, perfect. And then, final question is just on M&A. I think there's a perception that you guys are increasingly active or interested in M&A. Just curious sort of your thoughts on where you guys are, given what you've done and still have pending and what the appetite or desire is for additional transactions?

Well, I think, we've got a track record now of executing on in-market transactions. And so I feel like there will be continued consolidation in the Ohio, Indiana, Kentucky and Illinois markets. And for those markets that we already operate in, we feel like we're a logical consolidator, where we can not only identify where expenses can be harvested, but then go get them. And take advantage of a really understood operating philosophy in the market, for Commercial Banking in particular, but increasingly for retail as well. Our mortgage business feeds off each of those business lines. And so I feel like moving into markets that First Merchants has some experience with is a logical one. And so we would look to continue to assess those, and we think 2015 as I talked about with the work in front of us will be busy. But we're -- have proven to draw a lot of interest from other folks, and so we're going to fit in the continued assessment of new things. Our '15 is, as I referenced earlier from a calendar standpoint, Community integration is kind of job 1. This is online banking investment in the July-August time frame, really important to us. And then Cooper State Bank in the fourth quarter. But if additional great opportunities present themselves we'll pursue them.

Our next question comes from the position of Damon DelMonte of KBW.

I just had a quick follow-up question on the margin and I apologize if I missed this. But I think, last quarter's reported margin was 3.98% and this quarter's was close to, I guess, 3.80%. Mark, what -- did you disclose what kind of drove that 18 or so basis point decline?

Yes, we had a 2 basis point decline in our core numbers. It was all from the fair value accretion. We had -- let's see -- our fourth quarter total fair value accretion was $1.456 million down from $3.484 million in the third quarter. And we typically, when we lay out the margin slide by quarter those are pretty easy numbers to see, but the way we presented it this time, it wasn’t quite as obvious.

Got you. Okay. That's helpful. And then, kind of with respect to expenses, I think you had mentioned there is, I know on the slide it showed, was it $1.9 million of merger-related charges? In your prepared remarks, did you mention any other additional merger-related charges or is it just that $1.9 million?

Yes, I did. We had about $300,000 in the third quarter related to some legal works that we had already expensed.

Okay. So that was in the third quarter. Okay. And kind of how do you look at the expense base going forward? Do you feel that something in the $41 million to $42 million range is conceivable? Obviously, not including the pending acquisition, but just based on where you are at right now.

Well, yes, it should be. I think as I look at our actual -- I think, we had a $41 million quarter inclusive of that $1.8 million. And so I think, we are marginally beneath $40 million. And so we got a couple of items, but we also have some savings that I'm counting on, on a go-forward basis. We have -- and we need to meet increasing regulatory expectations. But really and what we will support new growth where we've got evidence that it pays for itself. I got a little bit of that IT investment that I referenced. But all of that will be within the kind of numbers that you laid out on a $40 million to $41 million a quarter level.

Okay, that's helpful. And then, I'm just going to kind of, I guess, circle back on the loan growth outlook. So 5% to 7% organic growth you think is reasonable this year. Can you maybe talk a little bit more about which categories you think are going to be the primary drivers of that?

Well, you can see how heavily oriented we are towards Commercial Banking. And so, I feel like the most valuable growth for us is in C&I lending, because of the number of products we can sell to those business owners. And so that's where the highest number of our relationship manager are occupied. Yet as the Midwest has rebounded well in investment real estate, we've been an active participant there and are really well-skilled in it. The last couple of acquisitions that have joined us, the 2 that have closed and the 1 ahead of us, tend to be a little bit more real estate. So it would stand to reason that, that level would balance out a little bit. But if you look at the pie chart in the slides, I don't expect that mix to change much throughout the year.

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

Mike, maybe do you have any thoughts on, or John, do you have any thoughts on reserves heading into 2015, where that might shake out as the year progresses?

Well, I think that's a good question. As we progress the year, I would imagine that, as we transition the fair value portfolio into the allowance portfolio as loans mature and we renew and otherwise bring them on. I would imagine that, that the allowance would come down somewhat. But pretty much hover where it's at today, at the 163. But I don't know if that provides you any guidance. I would probably be keeping it about where it's at to coming down somewhat.

This is Mike. Mark referenced in his first comments about our income statement performance targeted and directed towards the highest performing Community Banks. And so we feel like asset quality is an area where we still have some upside there to improve. And so we think that the reserve, which is at a really healthy level, might prove to allow us to continue to improve our asset quality mix and take advantage. John used the term credit leverage. It clearly has an income statement opportunity for us. And also from a balance sheet quality as well to try and continue the overall improvement of our criticized classified profile.

I think I might just add that, I guess, what I'm trying to drive at is, you've got the marks that are available to accrete entity income and I make that distinction between the allowance itself. So I think, we're -- there's probably as much opportunity it is on the marks side as it is on the allowance.

Okay. Okay. And you, Mike, I appreciate all the commentary and color around the loan growth, maybe just one additional question on that. Maybe just some thoughts on what do you think may be the biggest impediment to, I understand the growth that you gave of 5% to 7% and -- which is a decent number, but if you get at maybe 7% to 9%, what do you think might be the biggest impediment to doing that? Is it potential paydowns? Work out of existing loans? Just opportunities in the market? What do you think is what could change that could potentially boost that number?

Well, I think winning the opportunities we're in front of. So our Chief Banking Officer tracks all of our proposals and then, pipeline by marketplace. And these are all competitive situations. So I think speed and execution, there is a point in one of my slides that talks about continuing to advance our loan process with speed and accuracy. That's really not so much for us as it is for our client and to remain competitive. I feel like our market coverage is at a point that really supports that 5% to 7% and could get, yes, to 8% and 9%. It's really execution in the field. And yet, at the credit level, to permeate all of our front-line people, we have a discipline about what is a fair return for our shareholders. So striking that balance is difficult, but I think our market opportunity supports that mid-single-digit growth level.

Okay. Okay. And just one final question, the expenses for Noblesville. Do you expect anything additional in 2015? Onetime expense.

No. We have all of our onetime expenditures behind us. And now it's about getting to the integration date of April, and harvesting the remaining amount of cost savings that we highlighted of 40%.

Our next question comes from Brian Martin of FIG Partners.

Mike, maybe can you just circling back kind of on the loan comments. Just the pricing you talked about, the fourth quarter. I mean is that, can you give a little bit more color on that? And I mean was it certain markets that were more competitive or just kind of across the board? Or what were you seeing there. Is that one of the -- it sounds like you kind of dampered things a little bit in the fourth quarter, I guess. In your forecast for 2015, I guess are you assuming similar type of conditions to what we saw in the fourth quarter?

Yes, I certainly don't think it's going to get less competitive. I have listened to enough of these calls and read enough of people's look forward as you have to see that loan growth is a top-end priority for everybody. It's -- I don't feel like our company feels the stress of that as much, because we've always been a commercially-oriented bank. And so if the process for us work and we get the opportunity touches that we're really capable of, I think it can happen. I think the general decline in pricing is a little frustrating. But it's -- the pendulum has swung back in the favor of the really strong operating company. And that's the way it's going to be for 2015. Mark referenced our balance sheet continuing to be asset-sensitive and it is. But our goal is, everybody in this company knows we're going to try and build, take advantage of operating leverage and build net interest income independent of the interest rate environment, just out in the market.

Okay. And, look, the loan -- the new loan pricing in the fourth quarter kind of what business was coming out at. Can you just talk a little bit about where that's at?

Yes. It's -- looking for a report here real quick. I'm looking to quantify the answer, it's the floating -- the floating rate loans are clearly beneath our average coupon, as it would be for most banks. We're trying to take advantage on the fixed rate side. With the fall in the yield curve as companies are bracing for ultimately rising rates. On the floating rate side, it's kind of 3% over the respective index.

Okay, Perfect. Okay. And then, maybe just a question for Mark and kind of the accretion income, it sounds like the level trends back up in the -- with the transaction in the first quarter. Maybe just kind of a -- when we think about it kind of year-over-year Mark, I mean, how much of a -- I guess, a decline would you expect in the kind of the full year accretion income from '14 to '13?

Really not anticipating a decline. We are expecting to see a similar dollar amount in 2015.

Okay. And that was similar, I mean, $9 million range, is that right?

Yes.

Okay. All right. And then maybe just to clarify Mike's comments earlier. I guess, the expense number you talked about earlier, Mike, kind of the $40 million to $41 million. Was that number, I guess, was that run rate kind of suggestive of the Noblesville deal in the numbers for next year? Is that kind of how what you're suggesting?

Yes, it is. Because we have the Noblesville -- the full Noblesville expense base in for the last 50 days of the year. And so you have to normalize that on a full quarterly basis, offset by a couple of expenses that will come down. Mark referenced the integration time line, we got a retention of many, many of the folks in the company through integration period of time. So we'll a have full first quarter level that might be on the high-end of that range. And then, it'll come down quickly thereafter.

Okay. Perfect. And just last thing from an M&A perspective. Would you think that at this point, based on your earlier commentary, that if you look at continued M&A, and I guess, would you see it's more likely to do in-market or do you see it's more likely you might enter actually a new market or fill in somewhere between the existing markets. Is one more likely than another at this point?

No. I don't think one is more likely. I know that from a preference standpoint, this ability to take people -- let's look at Cooper State Bank as an example. To bring veteran Columbus area bankers into a marketplace where we have veteran Columbus area professionals, is just illogical, just as Community Bank was a relatively easy transition. But as you know, we don't get to control the target. For us to pursue an M&A opportunity outside the 4 states, that I mentioned earlier, would be a real surprise to me, I don't think that would happen. The real key for me when I assess it, and I listen to our colleagues at the bank, is to have it not be a distraction to be in -- great in the marketplace every day for every other customer and every other banker we have serving our customers.

Our next question comes from Daniel Cárdenas of Raymond James.

Just kind of going back to growth and really more funding of your loan growth. Of that expected 5% to 7%, how much cash flow from the securities -- how much of that growth can be supported by cash flow from the securities portfolio, as opposed to you guys going out and needing to grow your deposit base?

Well, our -- we could rundown the portfolio, if we wanted. I don't think that's really the strategy at this point. We're anticipating having half of our funding covered by growth in deposits and being able to cover the rest with some of our additional sources of liquidity, our Federal Home Loan Bank advances are only $145 million with a borrowing base of $560 million. Our broker deposits are about 6% of total funding and we feel like we could push that a little higher as well, and the pricing is great. There are no -- they don't have the ability to prepay. So that's -- those are a couple of areas where we can extend funding and protect ourselves for future rising rates at a really nominal cost. And so those are, I think, at least for 2015, that's how we think about funding the growth versus needing to use the bond portfolio.

Okay. And then, as you look out into 2015, are you guys projecting a rate increase sometime in the second half of this year?

Yes, our internal models, we're assuming one increase in 2015 that would happen in the third quarter. I -- obviously, if you look at the market, I'm not sure the financial markets 6 [ph] are -- feel like it's deserved. But clearly, it looks like the Fed, they're sending messages so that's likely to happen.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thanks, Dan. I would thank everyone for their attention. I feel like the questions were excellent today. And as I digest the call, I think about the cumulative effect of a couple of years of solid performance on the part of the company has provided us some flexibility as it relates to capital levels, as it relates to funding as Mark just answered, as it relates to the asset quality. And then, the ability to kind of pick acquisition opportunities that perfectly fit our company, that have a lower risk profile, that don't catch anyone by surprise, and welcome a company like ours into their marketplace. So appreciate all of your attention. Look forward to talking to you about our first quarter results here in a couple of months. And wish you all a good day.

The conferences has now concluded. Thank you for attending today's presentation. You may now disconnect.