Michael C. Rechin - President and CEO Mark Hardwick - Chief Financial Officer John Martin - Chief Credit Officer.

Scott Siefers - Sandler O’Neill Damon DelMonte - KBW Daniel Cardenas - Raymond James Brian Martin - FIG Partners.

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 start with the April 17th announcement of the closing of the acquisition of Cooper State Bank.

And so my colleagues who work for the Cooper in a couple of different context, their results are in our second quarter profit and loss statement as well as the balance sheet. I would tell you that we’re excited with the early work that’s been taking place pre-integration of that bank which is scheduled for October of 2015.

Things are really going pretty well and it’s going to be the add to our Central Ohio franchise that we thought it would be. Jumping down a couple of points, we’ve signed a definitive agreement on June the 29th to acquire Ameriana Bancorp.

And there will be some slides at the end of today’s presentations that revisit some of the rationale for that and some of the additive nature of Ameriana in the First Merchants given the franchise that they have built unique from us and then some of the overlapping markets which add to our mark [ph] in the marketplace.

Our net interest margin came in at a really healthy level for the second quarter, both on a reported basis at 3.81% and on a normalized basis absent fair value our core net interest margin that Mark will touch on in his remarks here in a moment or two.

John will give an overall view of the portfolio including asset quality with one of the items mentioned here are really pleasing, continued decrease in our non-performing loans during the quarter despite it having franchises added to us over the last couple of quarters. So, I am excited about that.

The bullet point that I wanted to end on before turning the program over to Mark was the second bullet point under that section called the Sale of First Merchants Insurance Group. We had a gain in there and most of the reference is the First Merchants through the balance of today’s discussion will speak to the financial ramifications.

But I just wanted to share a moment that the purpose of that working with our Board and working with senior management was to keep an unrelenting focus on being a great banking company. And we are trying to offer those services through the bank and it was working out quite well.

But the reality is the needs of that business were growing and we found in USI a company with significant market presence, 140 offices throughout North America and a really advanced industry specific technology and the ability to add expanded products and services to our agents.

And so we thought for many reasons, it was a smart move for our company; it’s been right for our clients; it’s right for the employees of First Merchants Insurance services, having gotten USI and seen a geographic all in their coverage, our company fits nicely into theirs.

And so it was right for many of the constituencies that we thought most critical as well as the ability to have an ongoing relationship with them. As you know, we’ve cross-sold insurance and risk needs to many First Merchants Bank clients.

And so having a company that we thought would not only retain a great employee base, but maintain existing relationships that spread between what will now be USI and First Merchants Bank very, very important. That’s somewhat of a backdrop to the insurance sale beyond the financial metrics that Mark will cover.

At this point, I am going to turn the program over to Mark to dig deeper into the results themselves..

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%.

Our effective duration is just about 2.5 months longer than peer and totals 3.4 years and our average life is 5.3 years. The net unrealized gain in the portfolio totaled $28.1 million, down from $35.6 million 12 months ago. The maturities for the remainder of 2015 totaled $74 million with a yield of 3.25$ which we think we replace.

And in 2016 the maturities are $163 million with a yield of 3.72%, and in 2017 maturities totaled $115 million with a yield of 3.48%. The strength in our investment yields has helped us maintain our net interest margin.

The variable nature of our loan portfolio was $1.9 billion where pricing daily allows us to take on a little more interest rate risks than our peer banks and we feel like the return is worth the risk. In an effort to protect tangible common equity in a rising rate environment, 53% of our portfolio is currently categorized as held to maturity.

Now on slide nine, non-maturity deposits on line one represent 76% of total deposits and grew by $359 million or 10.9% over the second quarter of 2014. Of the increase, $89 million or 2.7% was a result of core organic deposit growth.

At the bottom of the slide on line nine, tangible common book value per share increased by $0.50 over the last six months while not highlighted on this page, tangible common book value per share increased to $1.01 over the past 12 months and includes all acquisitions and divestiture activity and $0.35 per share in dividend payments.

So we’re pleased with the growth of tangible book value as you can see from ‘13 to ‘14 and we think a strong number through the first six months of the year. As I have previously mentioned, the mix of our deposits on slide 10, continues to improve and our total deposits expense is now just 40 basis points.

Our regulatory capital ratios on slide 11 are above the OCC and the Federal Reserve’s definition of well-capitalized under Basel III calculations, and they remain above our internal targets.

Due to the cash purchase of Cooper State Bank, organic loan growth and the implementation of Basel III, our total risk-based capital declined from 15.34% at year-end to 14.92% as of June 30, 2015. The Corporation’s net interest margin on slide 12 totaled 3.81% for the quarter and when adjusted for fair value accretion of $2.2 million, totaled 3.65%.

Net interest income on a fully taxable equivalent basis totaled $51.7 million during the quarter and continues to be the driver of our operating income.

On a linked basis, when compared to the first quarter of 2014, we recognized a slight reversal of our trend line by adding three basis points to reported margin and four basis points to our core margin. Our plan for 2015 continues to call for growth in net interest income driven by growth in earning assets and modest declines in net interest margin.

As you already know, despite our longer than peer duration in the bond portfolio, the bank as a whole remains asset sensitive. And we did budget for second quarter prime rate increase that appears to have moved out to at least September of 2015 or maybe beyond.

So, we’re managing as if it’s not going to happen but we continue to be very asset sensitive, for reference 100 basis-point move in the primary add to 11 basis points to a net interest margin over a one year time frame and just under $6 million on an annualized basis to net interest income.

Total non-interest income on slide 13 improved by $8.4 million on both the linked basis and when compared to the second quarter of 2014. Despite movements within various categories and new acquisition activity, line eight gains from the sale of our insurance subsidiary accounted for virtually all of the net growth in the quarter.

And just as a reminder on line three, insurance commission income will be zero in the third and fourth quarters in years to come based on the sale of the business.

And also the insurance business at the bottom line, we made about $1.2 million, a bottom line net income annually in the insurance business and it added about $0.032 a share to our EPS annually.

Non-interest expense on slide 14 totaled $46.4 million for the quarter, an increase of $5.2 million on a linked basis and also when compared to the second quarter of 2014.

We added a slide on the next page which I think is probably the best place to go next and it is slide 15 that will help compare our run rate for this quarter, actual results for the quarter to what we think is more reflective of our run rate in the future.

On slide 15, we highlighted all expenses related to management and the sale of First Merchants Insurance Group. So actual operating cost of First Merchants Insurance Group and the banker fees we paid [ph] when we sold and divested the business, totaled $2.3 million for the quarter.

We completed the integration of Community Bank on April 24th and experienced about $2,000 of non-recurring pre-integration expenses in the second quarter which we will not experience next quarter as well.

And then Cooper State Bank was acquired on April 17th and will not be integrated until October of this year and includes non-core expenses of $1.1 million. We expect to have an additional $5,000 in the third quarter related to Cooper State Bank prior to our integration.

And then we also experienced $8,000 of expenses related to our announced acquisition of Ameriana online banking and mobile upgraded which just occurred this week on July of 20th that we’re extremely excited to have in place for nearly 80,000 users.

And we also had some expenses related to branch write-downs as we continue to optimize our branch configuration. Now, please turn to slide 16. Our tax rate and expenses on line seven were higher than normal due to the sale of First Merchants Insurance Group and just the overall treatment of the underlying basis of that book of business.

Our net income on line nine totaled $18 million for the quarter or $0.47 per share, a $0.06 or 15% improvement over the second quarter of 2014. You can also see in our run rate for the last six quarters on slide 17.

We believe all of the activity that has occurred over the past 12 months and especially the last 90 days has really positioned First Merchants to continue its positive trend line of earnings growth into the future. Now John Martin will discuss our impressive asset quality trends..

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 recent acquisitions.

And I’m working to broaden the overall mix of assets in the portfolio. Dropping down to lines seven and eight, classified assets on line seven were flat for the quarter with overall criticized assets declining $10.7 million or roughly 4.3% on line eight.

This further represents a decline of classified assets to loans from 4.2% to 3.9% as the portfolio has come up underneath it and grown. Turning to slide 21. As in prior quarters, this slide reconciles the migration of asset quality and helps to explain the how -- helps to explain how improvements in asset quality were accomplished.

If you direct your attention to the far right column, labeled ‘Q2 2015’ and beginning on line one.

We started the quarter with roughly $66.4 million, and NPAs and 90-plus-day delinquent loans, the new non-accrual loans this quarter were at a recent historical low at $4.4 million while on lines three, four and five, we’ve resolved roughly $7 million of non-accrual loans moved $2 million to OREO, other real estate owned, and had gross charge-offs of roughly $2.1 million respectively.

Then on line seven through nine, our inflows and write-offs were essentially matched with the $200,000 increase for the quarter on line 10, while 90-day delinquent and restructured loans on lines 11 and 12 declined on a combined basis of $1.5 million.

So again, overall, solid improvement in the quarter and asset quality with total NPAs and 90 days delinquent, down roughly 12%. So turning to slide 22, I’ve once again included this slide that highlights where we stand with respect to the allowance and the remaining credit marks.

In the far right column is the most recent quarter’s allowance and fair value position. The allowance on line one was mostly flat for the quarter as Mark mentioned at $62.6 million, down roughly $200,000 from the prior quarter with $600,000 of net charge-offs and $400,000 of provision expense.

As we look forward, provision expense should closely follow the net charge-offs in the near-term with some marginal provision associated for portfolio growth. If you were to average the last five quarters of annualized charge-offs down in the press release and I have excluded the blip in the third quarter of the last year.

We are running between roughly 10 basis points and 15 basis points on an annualized basis which would equate to roughly plus or minus $1 million of quarterly provision, borrowing events in either direction.

Then dropping down the line six, the allowance coverage continues to improve, in line with asset quality, directionally consistent as mentioned earlier. The ALLL to non-accrual loans improved from 141.7% to 165.9% as non-accrual loans declined.

While as a comparative measure on line seven, the allowance to non-purchase loans was 1.76% with line nine at 2.41%, demonstrating the relative strength or as I have referred previously, on previous calls, the credit leverage remaining, the coverage charge-offs from both the purchased and core portfolios.

So, a couple of thoughts on slide 23, as I conclude my prepared remarks. The due-diligence team performed a really deep dive on Ameriana portfolio. We reviewed 80% of the commercial portfolio loan dollars, while modeling the credit marks.

Mike will speak to Ameriana in more detail, but I would just say that the portfolio is really in line and lines up nicely -- lines up closely with our own. Then a quick update on the Cooper planning and training activities.

There is a lot of activity occurring the quarter and working happening as we began transitioning process in advance of the data conversion in the fourth quarter. All work is progressing really as scheduled. And then finally, I am encouraged by the pipeline that Mike is going to speak to in more detail around our organic loan growth.

We continue to see improvement in backlog and really seeing our share of opportunities. So now with that let me turn the call over to Mike Rechin for your comments..

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 east to take advantage of a growth market much like First Merchants has not only coming from Muncie and Indianapolis but then expanding in the Columbus, Ohio into the Northwest part of the state through the Citizens acquisition a couple of years ago.

So, we thought from a high level standpoint the ease of understanding their strategic plan fit well with ours.

You can see the overlap in the retail franchise which is what drives a higher than normal level of expense opportunity and some of the balance sheet metrics beneath came out in Mark’s in commentary and it’s a profitable company with a healthy net interest margin that we think can be aided as the companies combine into one.

A couple of those thoughts extend into page 27, labeled the Ameriana Bank Transaction Rationale. And so if you look at it, I talked about the redundancy or the common community served and that’s how you move from the prior page of operating 13 banking centers to the net of adding six full service deposit gathering banking centers on page 27.

The overlaps where we’re going to muffle up if you will or in the counties in that top bullet point Henry, Hamilton, Shelby County, Madison County, Hendricks County really nice additions and the map doesn’t do full service as awesome service we will be able to provide those communities.

As you know, Hamilton County that we added to significantly when community joined us, one of the fasted growing markets in state if not in the nation. All of our due diligence is complete. John referenced it. Pretty much what you would expect out of a commercial banking company making loans in central Indiana.

And so we liked the overall risk profile, a Midwestern culture fit, really common key constituents, the community served great overlap, the type of the business owner that a commercial bank would be able to serve obviously identical, and lots of employees are going to be able to join our company as we take the best of these integration opportunities to put the best anchors on the field for us on a combined basis.

The bottom of the page, for the first time you see a little bit of what our pro forma balance sheet would look like post-closing with a balance sheet with over $6.5 billion, loans over $4.5 billion in excess of $5.2 billion of deposits.

On a net basis, post all of the market consolidations, we would have 41 Indianapolis MSA banking centers including new markets. I referenced the overlap a couple of different times but the opportunity for First Merchants to work in communities like Greenfield, New Palestine, New Castle which is Ameriana’s headquarters, Knightstown and Morristown.

Overall the franchise either Ameriana is considered separately or First Merchants considered on our pro forma basis really attractive core funding that Mark referenced earlier when talking about the heavy concentration of the nature of our deposit liabilities.

Building these companies into ours has become a competency of ours that makes First Merchants I believe an experienced acquirer.

I look back over the not too distant past to see the kind of talent and clients that have joined us from Citizens Bank nearly two years ago, Community Bank about a year ago, Copper State Bank just in the couple of months where we’re very early and all of our work there.

And so we have that same hope as Jerry Gassen and the entire Ameriana team looks forward to joining us. And if I go to page 28, take on some overarching topics before we have time for questions.

On 28, at the top of the page, really focused on growing our business, job one the organic way, taking care on a week-by-week, month-by-month basis, doing what’s right around what our customers need. It is job one for us. And Mark referenced a significant recent investment for us.

So really this quarter and most recently this week, we’re in the process of completing a very heavy touch full attention upgrade to our online banking system with the hopes that we’re following what our clients want in terms of ease of doing business with us and having multiple channels in order to access their First Merchants Bank and the First Merchants bankers.

So, we’re excited about that; it’s going really well that will manifest itself in growing revenue rates into 2016 after a full acclamation to the next product functionality.

Talked about organic growth and that comes in lots of flavors within our company, comes in raw clients, deposits obviously, Mark covered that loans because it’s so centric to new relationships often times for a commercial oriented balance sheet is really what we pay a lot of attention to.

In the first quarter, you might recall and it’s in the press release, we have $40 million of net organic growth.

In the second quarter, if you piece through the information that was presented either in the press release itself or in some of Mark’s comments, we had $273 million of loan growth March 30th to June 30th, get back out the $110 million of Cooper related balance sheet loan addition, we had $163 million in the second quarter, so 40 in the first quarter, 163 in the second, 203 million of organic loan growth, six month year-to-date which is about 5% organic growth rate within and 8% overall growth rate, 5% annualizes the 10 which is a little bit above some of the prior calls where we’ve talked about this 6% to 8% number that I still think is valid while we’re clearly operating towards the top end of that range.

Probably a good time reference the pipeline. So John Martin in his closing comments referenced our tracking of what we think happens around loan pipeline across the whole company and I’d like to share that and some of it I’ll start with activity maybe just ahead of the pipeline itself.

Because when you look at how the growth came together for the June 30 period, it’s kind of spread throughout our categories and so I’ll go through some of those closings and dollars and then follow it up immediately with what we see next by virtue of the pipeline.

So, in the second quarter we had $590 million of loan closings against $324 million in the immediately prior quarter. 50% increase in commercial loan closings, actually little in excess of that little bit, 60% and retail 30% in closed loans and mortgage.

And you may recall that not all the mortgage loans go on to the balance sheet, some of them become fee revenue.

So, as you could hear there, really sizable numbers and they reflect similarly favorably to the second quarter of last year where our mortgage volume was 30% over last year, in the second quarter 15% in retail and 35% over commercial loan closings in the second quarter of last year. So kind of consistent positive there.

And given the investment we’ve made in retail banking and consumer lending is particularly pleasing to me while that’s not the largest caption in our balance sheet to see our clients relying on us more for their consumer needs because any of these that have been with us for couple of years and know that up until couple of years ago we really hadn’t had a lot of activity there and so it’s pleasing to see the investment take off by way of meeting customers’ needs.

Let’s go to pipeline. Pipeline sales is similarly tilted upward story. Our overall pipeline for the entire company about $390 million, up from $337 million at the end of March and we’re up commercially in every market. And by-the-way those summaries were commercial.

Our overall pipeline is actually $466 million against $420 million for the end of March, an 11% increase. The commercial sub-header, I mentioned a moment ago, comes from every one of our five major markets. So, we’re pleased to see that. Our retail pipeline is about 10% over where it was prior quarter, and mortgage pipeline is down just a tiny bit.

As you saw we had a particularly strong closing quarter. So, while it’s modestly down, $10 million down at $50 million from $60 million at June 30, it’s in excess of almost every prior quarter we had. And I think we’re going to have a strong year and may or may not be as strong as what the past showed.

So we feel good that absent bringing these new companies in the First Merchants, the business has to grow on its own and we’re configured in a way I think to continue to take advantage of the marketplace. Bottom half of page 28, right before we go to questions. We do have critical integration work to get done.

The Community Bank integration I think we touched on this the last time, went particularly well. Our plan for Cooper State Bank come October will be equally well thought out and some of the advance work on that John and Mark each referenced.

What will be interesting for us in October and exciting to me is that apart from the integration work of Cooper State Bank joining First Merchants, our current bank in Columbus, our Commerce Bank will both each be rebranding themselves to First Merchants. I think it will make for even stronger client service.

We think the opportunity of leveraging this technology investment I mentioned not only drives revenues we’re going to have the opportunity to introduce new services, trust and such into our new clients of these franchises joining us.

And Mark referenced on the last bullet point here that we had some churches in the second quarter associated with branch rationalization, almost all of that included in the second quarter, ones for the most recent acquisitions we’ve made. We’re also doing some of that proactively in our existing franchise just to optimize the channel.

We’re going to pay close attention to our transaction counts in the banking centers and that the overall concept of the channel management knowing that our client think about banking differently today than they did a decade ago.

I’m going to wrap at this point, and Jamie go back to you as our host to take questions from anyone that might be on the line..

[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..