Good afternoon and welcome to the First Merchants Corporation Second Quarter 2015 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 23, 2015 or by visiting the First Merchants Corporation shareholder relations website and clicking on the webcast URL hyperlink. This presentation contains forward-looking statements based on our current expectations reflecting various estimates and assumptions. These forward-looking statements include but are not limited to statements relating to our business outlook and the expected timing and benefits of the proposed merger between First Merchants Corporation and Ameriana Bancorp. These forward-looking statements are subject to significant risks and uncertainties that may cause results to differ materially from those set forth in this presentation, examples of which are included in the written presentation materials filed with the Securities and Exchange Commission in connection with this call. Please refer to those materials for a more detailed discussion of the applicable risks. Please also note today’s event is being recorded. At this time, I’d like to turn the conference call over to Mr. Michael C. Rechin, President and CEO. Sir, please go ahead.

Thank you Jamie. And welcome to everyone to our earnings conference call and webcast for the second quarter ending June 30, 2015. Joining me today are Mark Hardwick, our Chief Financial Officer; and John Martin, our Chief Credit Officer. As Jamie covered, we released our earnings and a press release approximately 10 o’clock Eastern Daylight Savings Time this morning and the presentation we’re about to work thorough, speaks to material from that release. The directions that point to the webcast were also contained at the back of that release and my comments will begin on page four, a slide titled Second Quarter 2015 Highlights. So, at the top of page, some of the key financial result items at frontend loaded in the press release. Our earnings per share for the period totaled $0.47, an increase of $0.06 per share or 15% over the same period of 2014. We reported second 2015 net income of $18 million compared to $15.2 million earned during the second quarter of 2014. Not on the slide but within the release is the year-to-date net income which totaled $34.1 million in comparison to $28.8 million earned during the same first six-month period of 2014. So as the bullet points beneath the second quarter highlights, go on to say we had healthy metric returns in terms of average asset return at 1.19% and a 9.63% return on average shareholders’ equity. The release in a quote attributed to me speaks to the activity in the quarter which was exciting for the whole company and I think helpful to our shareholders and several of the items of note are listed by bullet points at the bottom of page four. I’m going to touch on all of them not necessarily in the order that they are listed, but I will…

Thank you, Mike. Good afternoon everyone. I am starting on slide six of the slide deck that was delivered along with the press release where total assets reached $6.1 billion, an increase of 9.4% over the second quarter of last year and 5.4% increase over year-end 2014. The growth over the second quarter of last year totaling $525 million includes organic growth of $113 million, the addition of Community Bank totaling $281 million in November 2014, Cooper State Bank, the addition of Cooper State Bank which is totaled $142 million in April of ‘15 offset by the small asset reductions and the sale First Merchants Insurance Group in June of 2015. Total loans, on line three, increased 8% since year-end and year-over-year by 13.8% or $515 million. And since June 30, 2014 the organic loan growth totaled $260 million or 7% and Community Bank accounted for $145 million, while Cooper State Bank accounted for $111 million. The allowance on line four in total dollars has remained very steady, declining as a percent of non-purchase loans to 1.76%, down from 2.18% at June 30, 2014. However, our decline in our total NPAs in especially non-covered NPAs provide sound justification for our ALL levels. The composition of our $$4.2 billion of loan portfolio on slide seven continues to be reflective of a commercial bank and it continues to produce strong loan yields. The portfolio yield for the second quarter totaled 4.46% compared to second quarter of last year yields of 4.57%. On slide eight, our $1.2 billion bond portfolio continues to perform well, producing higher than average yield with a moderately longer duration than our peer group. Our 3.93% yield is actually 9 basis points better than a year ago and continues to compare favorably to peer averages which are approximately 2.54%.…

Thanks Mark, and good afternoon. As Mark and Mike mentioned, I will be updating the trends in the loan portfolio, starting on slide 19, then review our second quarter asset quality position, turn my attention to discussing the fair value and allowance coverage before closing with a few high level thoughts on the portfolio. So please turn to slide 19. For the quarter, the loan portfolio experienced broad-based organic growth as well as the impact of the addition of the Cooper State Bank loan portfolio. The Cooper State portfolio added roughly $110 million in mostly commercial real estate, consumer and home equity loans while in the core portfolio, C&I loans on line one, commercial construction and non-owner occupied commercial real estate on lines two and three, and public finance lending as the most significant portion of line nine, titled Other Commercial, all saw meaningful gains for the quarter. As you would expect, we saw construction lines continue to be drawn this quarter and I mentioned that last quarter as well and would expect that to continue as the construction season progresses into the fall. In the public finance arena, we saw significant growth as we increased our efforts to grow our municipal and non-profit portfolio. We had success originating opportunities in Indiana and Ohio primarily almost exclusive that met our targeted thresholds and plan to continue selectively originating opportunities as we move forward. Turning to asset quality then on slide 20. We had another positive quarter in the management of asset quality. Top NPAs is 90 days -- total NPAs in 90 days past due, declined roughly $8 million or approximately 12% which is down from 1.7% of total loans to 1.4% of total loans. We continue to make progress working through some of the more challenged portfolios associated with…

Thank you, John. John closed in his discussion of the work that he participated in around Ameriana Bank and so I thought I would start on there; I am on page 25 and with an overview of Ameriana and the transaction itself. So, you can see the value which was derived at the point of announcement, June the 29th at 0.9037 fixed exchange ratio drove a deal value of nearly $69 million which would be a modest amount higher today based on the growth in First Merchants share price since the date of that announcement. It would be a 100% stock transaction, subject to the approvals that are listed immediately below from the Ameriana shareholders and all the regulatory bodies. Several of the key assumptions that are listed beneath there, derive what will be our modeled return to our shareholders which is accretion in earnings per share in the first full year post closing, a tangible book value earn back based on all of the activity in those assumptions, and the earnings forecast within four years, and very minimal impact to the capital ratios. We would anticipate closing subject all of the approvals I just referenced in the fourth quarter of this year, probably in the December time period and have an integration planned for early April of 2016 for Ameriana Bank to join First Merchants including the rebranding. Jump to page 26 to go little bit more for depth to see what we think of as really compelling logic of these two companies coming together. So headquartered in New Castle, just east of the Indiana MSA and with Jerry Gassen and his management team executing a very similar strategy to First Merchants and that they have a well established, rich, tenured, respected deposit franchise that then look to the…

[Operator Instructions]. Our first question today comes from Scott Siefers from Sandler O’Neill. Please go ahead with your question.

Mark, you gave some good detail on the non-recurring $4.4 million in expenses. Did you give where geographically those were within the income statement or the specific expense line item?

No, I did not go through that page. If you look at the slide 14, the majority of that expense, we had -- or maybe around $700,000 that was in salary and benefits, all of -- really the increase professional and other outside services on line four, was related to Cooper termination of their core contract and investment banking fees and then you get down into the other categories. And let’s say we had the 4.8 million compared to the 3.5 million is another stat; actually let me look for real quickly and I can let you know what those two items were. Why don’t we move on to the next question and then I’ll come back to that in a moment.

It was just on -- so the core margin increased nicely for the first time in a while. It sounds though like Mark you suggested maybe some revert to a little compression through the remainder of the year which is understandable. But just was curious if you could expand upon your thoughts about what drove the higher sequential core margin and what you see is the main puts and takes through the remainder of the year?

Last quarter we were lower than normal just because of the number of days, so that what happens in February, so that was about 5 basis points. So, we had a nice return back to kind of expected margins and with maybe 1 basis point of compression on our fewer number of days normalized basis. So, I expect to see maybe a point or two each quarter as we finish the rest of the year that’s why -- that is the main reason why and without a Fed move up, I think that we might see really modest compression in the third and fourth quarters.

And then Mike, just a question for you at top level. So, you’ve been pretty active on the M&A front, just curious about how you see things stemming out going forward if you’d sort of take a step back to do kind of digesting of what you’ve got currently or if you’re still interested in looking at additional transactions?

I think we’re definitely interested in assessing every opportunity that becomes available to us whether we choose to pursue them or not. But our view is that it’s going to at least for the next current period in the next couple of years, lot of banks less than $1 billion trying to come to grips with the environment and figuring out if they would be more successful as part of another company. And so we clearly have a geography that we’re comfortable with if you look at. You’ve been following us for a long time. So, if you see Scott any of the last half a dozen opportunities we’ve been successful, there are other companies that look like that that would be either new markets to us that might be contiguous to First Merchants as we know it today or add in like the last couple have been. I don’t think we need an extended period of time to digest if that was part of the spirit of your question. As you know, there is between a couple of months to get things approved and closed and then a couple of months to integrate, they are about eight months commitment to do a nice job on them. So that does have some amount of patients to do a great job but as quarters go by quickly as well.

[Operator Instructions] Our next question comes from Damon DelMonte from KBW.

My first question, just to kind of circle back on expenses, Mark, if we ship out those the non-recurring one-time items, is something in the 42ish or so million dollar range a good quarterly run rate to consider?

It is, it will be around 42.5 because we’ll have that extra 500,000 for Cooper prior to integration. And once the integration is finished in October, then we’ll have that nice reduction going forward. But 42.5 I think is a good number for the third and fourth quarters. And then after that we’ll have completely recognized that savings. And then just going back to the pieces, the Cooper, like I said online for professional and other outside services, the write-down of their core contracts is $1.1 million total and we had $600,000 of investment banking fees, it showed up on that line and then you get to branch write-downs of around $700,000 in other and a handful of really miscellaneous things where we, given the size of the gain, we were trying to make sure we were positioned to perform as well as possible in the future. So we went through in detail and developed strategies around all of those additional expenses.

The next question. Mike, you’re talking through the loan growth numbers that you guys have seen in the first-half of this year. Did you say that the organic growth in the second quarter was $163 million; did I hear you correctly?

You did. And I think that’s easy to see Damon, if you look at the -- I think we ended June with 4,238 million that’s March the number of 3,965 million; it’s a $273 million Delta less, Cooper at a 110 is 163.

And then I guess kind of just building on that you see -- you’re still comfortable with that 6% to 8% range and although you might be tracking little bit on the higher end are you still comfortable keeping that range?

I think so. I’d be disappointed if we weren’t really at the high end of that range because as I mentioned that we just held steady with where we are, it’d be a 5% organically. And so I feel like there is no reason to think with the pipeline that I detailed that we’re not going to grow the timing of that and a run off of existing portfolio are really hard to predict. John referenced earlier our utilization rates have ticked up about 3%. So there is some -- fairly some measures that would suggest that loans are going to continue to grow. I thought that the second quarter was particularly strong.

[Operator Instructions] Our next question comes from Daniel Cardenas from Raymond James. Please go ahead with your question.

Just following up on the utilization rate, can you give us the actual number as to what it was this quarter, say versus the first quarter?

Yes, I can actually. Hang on. I have a report for that. Our overall utilization was up actually just here over 2% from 49% to 51%, that’s all commercial revolving credit. And then C&I commercial revolving credit as a subset of that, Dan, grew 3%; 46% to 49% that’s all on commercial approved commitments. So yes, we had 3% at the C&I and I think 2.5% on overall.

And then given the good performance that we’ve seen on the credit quality side, maybe just a quick update as to the size of your workout team and where you see that team going over the next year or so in terms of -- are we going to have some people come back into production or other areas of the bank?

Yes, currently I have a centralized workout team and the way it structured really is when you look at the criticizing classified, it’s truly a workout team. We leave things in the line and then transition them over to that group. And there is a total of six individuals in that team. And there are individuals in that team that could transition over but it’s really just a question of what we pull out of Ameriana and continue to see in terms of asset quality.

And then the last question on the margin, Mark, I believe you said that if rates were to go up 100 basis points, you would see -- was it 11% increase or 11 basis-point increase in the margin?

Dan, we just don’t model it in smaller increments but the 100 basis-point move in prime and everything else kind of follows off of that is 11 basis points of margin or about $6 million a year in net interest income additions.

And how do you look at funding cost in a rising rate environment; are you modeling that into the equation as well?

Yes, absolutely. We model lags in the deposit rates and then there are certain categories where you can lag kind of permanently and then others where the lag is fairly temporary. But we have all the models going all the way back to the last rate where prime moved over 400 basis points and we were adding to net interest income. And even through all the acquisitions and the organic growth, the strategy and the structure of our balance sheet remains very similar, it’s just larger. And yet I would say we’ve modeled that in this next movement up that we won’t able to lag as much as we were able to all the way back in whenever that was, was it ‘03 or ‘04.

[Operator Instructions] Our next question comes from Brian Martin from FIG Partners. Please go ahead with your question.

Maybe just a question for John and that is just as it relates to kind of credit leverage that still exits and you’ve talked the $10 million to kind of maybe cover the charge-off levels. So, you’re ultimately looking to as far as kind of reserve coverage, how you’re thinking about that longer term, I mean what number are you kind of at least targeting as far as the reserve coverage goes?

Brian, when you look at where we’re at and I think I’d turn to slide 22 and the channel markers that you’ve got there are lines seven which is your traditional allowance coverage to loans at 176. We’ve said 2% in the past. If we track closely to charge-offs, it would stay at about that 176 level. But back to it I think -- I can’t remember who asked the question but as asset quality improves, the need to be at 2% is probably less. And I think if we’re in that 176 level in that range and just continue to track along with charge-offs and maybe even see a little bit additional release that makes sense. I think the real cushion that we see is that 241 with the fair value adjustment, and that’s going to depend on what the portfolio does and what the allowance model drives ultimately.

And just maybe for Mark, the accretion income and just kind of how it plays out here over the two quarters to six quarters. And what -- any big changes in the run rate and what was the number this quarter on the benefit?

If you look at margin slide on 12, we show the fair value accretion has been $2.2 million each of the last two quarters. And we were expecting somewhere between $10 million and $12 million for the year, and it’s running a little bit less than that, but I would say, the extra ordinaries that if you look at this chart we have 3.5 million in the third quarter and then it dropped to 1.4. We expect it to be a little bit volatile but some of the larger marks that we’re continuing to manage through workout have not come to fruition yet this year and likelihood of that is somewhat unpredictable. But we’re anticipating kind of that run rate around $2.5 million per quarter, at least through the rest of this year and part of next year.

I mean it sounds like the margin is down a bit like you talked about the second half of the year. I mean with no rate increases in your forecast but just kind of the loan growth you are expecting, I guess the margin is there an inflection point in 2016, you start to see go up even without a rate increase or do you think it generally continues to track lower in 2016 with no rate increase?

I feel like it’s stabilizing. I feel like we’re going to have some compression but not at the pace that we had the last couple of years on the core number. And so, it seems to be stabilizing in this range. And with 4 basis points to 8 basis points of margin compression, we absolutely are outrunning that in terms of total loan growth. And if you just run the math of the 6 billion of earnings assets and -- sorry, $5 billion of earning assets, margin compression of 10 points, whether to take in to your earning of 3% spread on loans, the growth rates that we’re experiencing even at 6%, so there is a higher net interest income. So we’re very much focused on higher net interest income. Growth of earning assets and we think that we can more than outpace the margin compression that may occur. And if we get any rate movement up in the Fed funds rate or primary -- I don’t think we’ll see any compression. And if it doesn’t happen, then we feel like we’re stabilizing with a little, really modest slight downward pressure.

As far as the loan yields go, what are you putting on new business at today, I guess what type of rates are you guys looking at?

Well we’re getting about 3% spread over the index, that’s kind of where we’ve been for a number of months now. And now it depends what type of credit it is but the average replacement rate, renewal rate across the portfolio is 3% spread to the index.

The last thing I was just going to ask is the integration of these transactions you got out there. It sounds like the one is the fourth quarter and one is in the first quarter, is that right? It’s hard to trying to get to an idea when we actually get to a real clean run rate on the expense side with following integration.

October of Cooper and then the larger transaction with much more meaningful cost savings is the Ameriana that will happen in April of 2016. So, we’re -- first quarter will have Ameriana as part of our company at their full expense level and then moving forward the last couple of months it’s a little stronger how we see the savings. Third quarter, completely clean post integration.

And at this time I’m showing now additional questions. I would like to turn the conference back over to management for any closing remarks.

Just thank you to Jamie and thank for everyone that took time this afternoon to listen to our progress in the second quarter. We look forward to visiting with you again in this form after the end of the third quarter, probably be it late October. Thank you very much.

Ladies and gentlemen that does conclude today’s conference. We do thank you for attending. You may now disconnect your telephone lines.