Michael Rechin - President & CEO Mark Hardwick - EVP & CFO John Martin - EVP & CCO.

Scott Siefers - Sandler O’Neill Will Curtiss - SunTrust Robinson Humphrey Erik Zwick - Stephens Damon DelMonte - KBW Brian Martin - FIG Partners.

Good day everyone and welcome to the First Merchants Corporation First Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] We'll be using user controlled slides for our webcast today.

Slides may be viewed by following URL instructions noted in the First Merchants’ news release dated Tuesday April 26, 2016, or by visiting the First Merchants Corporation’s shareholder relations Web site and clicking on the webcast URL hyperlink. The Corporation may make forward-looking statements about its relative business outlook.

These forward-looking statements and all other statements made during this meeting 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 refer to our press release and Form 10-Q and 10-K containing factors that could cause actual results to differ materially from any forward-looking statement. Please note this event is being recorded. So I’d now like to turn the conference over to Mr. Michael Rechin, President and CEO, please go ahead..

Thank you, Anne. Welcome everyone to our earnings conference call and webcast for the first quarter ending March 31, 2016. Joining me on the call today are Mark Hardwick; our Chief Financial Officer, and John Martin our Chief Credit Officer.

First Merchants released our earnings in a press release at approximately 10 AM Eastern Day Light Saving Time earlier today and our presentation material speaks to material from that release.

The directions that point to the webcast are also contained at the back end of that release and my comments begin on Page 3, the slide titled First Merchants’ first quarter 2016 highlights.

So as the release covers we reported first quarter net income of $17.7 million compared to $16.2 million during the same period in 2015, a 9.4% increase in earnings per share of $0.43 equaled the first quarter last year given the increased number of shares mostly pursuant to the Ameriana transaction at year end.

Our first quarter results also for the Ameriana acquisition included $1.9 million of acquisition expenses or $0.03 a share, the primarily parts of those $0.03 were comprised of employment related expenses for those folks with us through April the 1st for bankers that won't be remaining with the Company on a go forward time period, also would include core system expenses from Ameriana up through the March 15th date approximately and some contract terminations that kind of close out all of our Ameriana expense activity.

Our total assets grew to $6.8 billion or 15.7% over the first quarter last year and in Mark Hardwick’s comments soon to follow, you will hear how that grew as a component of organic growth coupled with two acquisitions through the year.

Our return on assets for the quarter was 1.05, I think continuing a string of while we continue to be high level of performance aspiring to be higher still.

At the bottom of the page, just a couple items of note that we concluded that integration technically on March the 12th, although we always keep folks on board for post integration client service given the change event and it ramped really-really well for us.

I referenced in the release that it was done in record time for us post legal closing and went well on a real hitch always a change event for our clients so we are sensitive to them tasting our service and our products for the first time this particular one went particularly well given the in-market nature of it, which assists in the brand recognition as the signage as an example converts to First Merchants from the Ameriana signage prior but a familiar Midwestern banking company to their clients, probably offset by some of the difficulty this attendant to the expense saves which have a higher employee turnover given some of the banking center consolidations that we have talked about from the date this opportunity was announced.

All in all our expense targets are going to be met and I think speaks well to the planning that went in both from the folks at Ameriana as well as our core team experience in that activity.

Last point on the page, speaks to the completion of the conversion that took place effective April the 15th, and announced in an 8-K on April the 1st, regarding our transfer to a State-Chartered bank, whereby the DFI becomes our primary regulator and the FDIC our primary Federal regulator.

So we are excited about that, I think it adds some depth locally that is important as well as a strong economic business case. So at this point I am going to turn the conversation over to Mark to dig deeper into the financials..

Thanks Mike. My comments will begin on Slide 5, and as Mike mentioned total assets on Line 8 reached 6.8 billion as of March 31, 2016 an increase over the past 12 months by 921 million or 15.7%.

Loans on Line 3, increased year-over-year by 18.8% and of the increase 316 million or 8% was the result of organic calling efforts and 428 million or 10.8% resulted from our acquisitions of Cooper State Bank in Columbus Ohio in April of 2015 and Ameriana Bank in December of last year.

The allowance on Line 4, in total dollars has declined by $1 million during the last 12 months and just 2 million since yearend 2014. The allowance now totals 1.32% of total loans. And the allowance plus fair value marks total 2.29% of total loans.

Consistent with the last couple of year's guidance we are anticipating our organic loan growth in the mid to high single-digits again in 2016. Investments on Line 1 increased by 82 million or 6.9% during the past 12 month due to a strong funding base of low cost deposits, loans to assets totaled 69% and our loan to deposit ratio totals 89%.

The composition of our $4.7 billion loan portfolio on Slide 6 continues to be reflective of the Commercial Bank and it continues to produce strong loan yields. The portfolio yield for the first quarter of 2016 totaled 4.5% compared to a 4.45% yield in all of 2015 and a linked Q4 2015 yield of 4.40.

It was nice to get at least one small 25 basis point increase in the prime lending rate in December of '15 and we are pleased that our 2016 loan yields improved as expected and as communicated. On Slide 7, our $1.3 billion bond portfolio continues to perform well, producing higher than average yields with moderately longer durations than our peer.

Our 3.95% yield is 1 basis point better than this time a year ago and continues to compare favorably to peer averages of approximately 2.51%. Our duration is just six months longer than peer and the modified duration is 4.2. The net unrealized gain in the portfolio now totals $50 million and maturities are manageable into the near future.

2016 maturities total 172 million with a yield of 3.53. 2017 maturities total 152 million with a yield of 3.08. And 2018 maturities total 126 with a yield of 3.50.

The strength in our investment yield has helped maintain our net interest margin in this low flat rate environment, the variable nature of our loan portfolio was 2.3 billion re-pricing daily allows us to take a little more interest rate risk than our peer banks and we feel like the returns is worth the risk.

And in an effort to protect tangible common equity in a rising rate environment 50% of our portfolio is categorized as held to maturity.

Now on Slide 8, total deposits on Lines 1, 2 and 3 grew by 633 million or 14.3% over the last 12 months of the increase 174 million or 3.7% resulted from organic growth and 489 million or 10.6% resulted from acquisition activity.

You will also notice 100% of our growth is reflected on Line 1 non-maturity deposits as time deposits and broker deposits remain flat. On Slide 9, demand deposits are nearly 50% of total deposits and savings deposits are nearly 30% which helps us maintain our low funding cost of 40 basis points.

On Slide 10, total risk based capital equaled 14.79% as of March 31, 2016 it remains above our target of 13.5% while tangible capital totaled 9.35% versus our internal target of 8.5%. Our strong capital levels protect tangible book value per share and allow for organic and M&A growth in the future.

The Corporation’s net interest margin on Slide 11 totaled 3.83% for the quarter and when adjusted for fair value accretion of $2.5 million totaled 3.66%. Net interest income totaled a record 57.6 million during the quarter and continues to be the driver of our operating income.

Both the actual net interest margin and adjusted net interest margin improved 5 basis points from the first quarter of 2015 to the first quarter 2016 and fair value accretion accounted for 17 basis points in each quarter, so it’s a nice quarter-over-quarter comparison to evaluate.

Total non-interest income on Slide 12 improved $89,000 million in the first quarter of 2016 versus the first quarter of 2015, despite the sale of our insurance business in ’15 and now reflects our core banking and private wealth advisory businesses.

Non-interest expense on Slide 13 totaled 46.9 million for the quarter and included 1.9 million of acquisition related expenses that will not repeat in the second quarter of 2016.

Of the 1.9 million, 983,000 as reported in Line 1 under salary and benefits, 211,000 is in Line 2 premises and equipment, 416,000, including a 350,000 of contract termination expense is reported in Line 4, and 143,000 was in marketing expense on Line 8 related to rebranding.

We’re expecting the second quarter total non-interest expense to be a clean $45 million type number.

Now, on Slide 14 net income on Line 8 totaled 17.7 million in the first quarter of 2016 an increase of 9.3% and EPS on Line 9 equaled the first quarter of 2015 a total of $0.43 per share including $0.03 of M&A related expenses as discussed previously on Slide 13.

Management is reporting our efficiency ratio on Line 10 of 61.37% but we’re more pleased with the core or M&A expense adjusted efficiency ratio of 58.76%. Now, on Slide 15 you will notice our quarterly per share run rates from 2015 and ’16.

Our payout ratio totaled 26% for the quarter and the tangible book value increased over the past 12 months is reflective of $1.72 in earnings, offset by a $0.44 in dividends and another $0.22 of M&A dilution from our acquisitions netted against the sale of our insurance business and OCI adjustments.

The good news in the story is the fact that our earn backs are coming in slightly better than originally announced. Thanks for your attention. And now John Martin will discuss the loan portfolio composition and related asset quality trends..

All right, thanks Mark and good afternoon. I’ll be updated trends in the loan portfolio starting on Line 17 to review the asset quality summary and reconciliation and discuss fair value and allowance coverage and then close with a few thoughts on the portfolio. So please turn to Slide 17.

This quarter’s organic loan growth is highlighted in the column labeled change linked quarter. We continue to experience loan growth in commercial lending on Lines 1 through 3 led by CRE construction on Line 2, investment real estate on Line 3, and commercial and industrial on Line 4.

This was offset somewhat by paydowns and amortization on Lines 4 through 7 in owner occupied real estate, Ag and residential mortgage.

Construction lending continuous to be strong as we pursue a strategy of construct, stabilize and either refinance a portfolio for the most part we are underwriting construction loans in such a way that these loans either conform to portfolio standards or meet terms of a secondary market program.

This leads to quarterly portfolio fluctuations between construction and the portfolio of category on Line 3.

While there was modest growth for the quarter we booked roughly $70 million in incremental commitments for the quarter with a strong commercial pipeline that Mike will speak to headed into the second quarter and that’s construction commitments.

As far as mortgage loans are concerned, we generally pursue and originate in sales strategy using the mortgage portfolio for non-salable mortgage secured loans. Turning to asset quality on Slide 18, asset quality remained stable in the quarter.

Non-accrual loans increased $5.3 million largely impacted by a $4.6 million commercial real estate relationship that was moved to non-accrual.

We accounted for the anticipated loss in the quarter in that relationship and have begun the process of liquidation other real estate declined $1.7 million renegotiated loans and 90 plus days delinquent were down $900,000 and up $100,000 respectively with total NPAs and 90 plus days delinquent mostly unchanged for the quarter rising $2.8 million.

Dropping down to criticized and classified assets, there are a couple of items influence these numbers that I’d want to point out. First the C&I upgrades that I anticipated last year did materialize as expected.

On the other hand as we performed the annual reviews and renewals of the agriculture portfolio in the first quarter, we saw some softness coming out of last year’s results and have taken a conservative grading stance to ensure that we are properly recognizing both potential and well-defined weakness in the portfolio.

Well, I don’t expect downgrades to result in systemic losses in the portfolio the grading approach did increase the criticized results. I should also point out that the Ag segment is relatively small portion of the overall portfolio comprising roughly $250 million as shown on the previous slide.

Then turning to Slide 19, this slide reconciles the quarterly migration of asset quality and provide detailed transparency behind the movement in the loan portfolio. Starting in the far right column, Q1 2016 and moving top to bottom on Line 2, we had $10.7 million in new non-accrual loans.

We moved $2.7 million in non-accrual loans moved them out and refinanced. Transferred $100,000 to ORE and had gross charge-offs of $2.6 million. Moving down to ORE from above we took in the $100,000 just mentioned in ORE, we sold $1.5 million and wrote down $300,000 from Line 9.

So this with the changes in ORE and renegotiated loans resulted in the $2.8 million increase in total NPAs and 90 plus days delinquent. I feel good about where we stand with respect to asset quality, although there was some incremental increase in non-accrual loans.

Now turning to Slide 20, I’d like to turn your attention to the allowance and credit marks on the acquired portfolios. Highlighted in the far right column is the most recent quarter’s allowance and fair value position. The allowance on Line 1 continues to be flat ending the quarter around $62 million.

During the quarter, we had $917,000 in net charge offs and $550,000 in first quarter provision expense. With stable or improving asset quality, I would expect provision expense to closely follow net charge offs in the near-term with some marginal provision associated for portfolio growth.

For the quarter, we had 8 basis points of net charge offs which is in the range of what I see going forward. I would expect charge off and provision to remain stable at around 10 basis points plus or minus barring unexpected changes.

Dropping down to Line 6, the allowance coverage to non-accrual loans declined for the reasons I mentioned above with the non-accruals earlier. Well allowance coverage to total non-purchased loans on Line 7 declined only 3 basis points.

And finally as a comparative measure on Line 9, the allowance plus fair value to loans and fair value adjustment declined 2 basis points. All-in-all on this slide, there is really not a lot of movement.

So to summarize on Slide 21, we continue to see increases in commercial loan growth and improved pipeline asset quality remained stable despite the relationship I mentioned earlier moving to non-accrual. Our quarterly net charge offs were in line and our allowance and fair value levels remain stable.

Finally, we have very little direct exposure to oil and gas with our primary exposure to energy being a small amount of coal. Where there has been some related impact overtime is through changes in oil and gas prices that have arguably lowered corn prices in recent years and impacted agricultural profitability.

But suffice it to say that our exposure to oil and gas is only related and not direct at most. Thanks for your attention. I’ll turn the call back over to Mike Rechin for his comments..

Thanks John. Now we are optimistic about our core markets. With the exception of that agricultural expect that John just covered. The local economies in which we operate are really holding up quite well. Our near-term outlook is healthy, which creates a really active competitive market where we can test ourselves we look forward to the challenge.

I am on Page 23, a couple of point references deeper penetration on Treasury Management and we made a significant investment there early in the third quarter of last year and the fruits of that are beginning to show themselves, better products for our customers growing revenue line, I think our commercial fees grew 3.5% in the first quarter from the fourth quarter of ’15 I think 8.5% first quarter of this year over the first quarter of 2015.

So we’re getting what we hoped our clients like to consume the technology that we’re now able to offer them.

We’re getting ready to kick off here in the next bullet point, rebranding of what have been our trust company into the First Merchants’ private wealth advisors, which reflects the changing business mix over really the last decade is the client if you will the perfect client for our trust solutions or in this case our private wealth solutions has changed.

Also would reflect our increased investment in our private banking business which kind of toggles back and forth between credit extension and investment of assets. So we are excited about that and the leadership we have in place.

Couple of other bullet points there on just key items for us that drive the top line, John referenced our mortgage business earlier with the low rate environment continuing, we are going to continue to look at what the perfect strategy is for sell versus whole, I wouldn’t anticipate a lot of change there.

But we feel like our balance sheet could in fact take more mortgages as the spring moves in with a higher level of activity that we anticipate. Down at the bottom of the page, we are past the technical part of Ameriana Bank we are trying to put the right people in the right places to maximize the opportunity with that company as part of ours.

We have normalized our expense levels as we have talked about and that will reflect itself here through the balance of the year. And yet we still have opportunity in our retail system.

We are real pleased, I saw the individual that’s responsible for our retail business was sharing with me that our deposit retention on store combination is greater than a year old exceed our targets it reinforces our idea that clients will use our technology if in fact physical stores aren’t as convenient as they might have been in the past.

And that statistic that I just referenced in terms of the retention rates being high would not include the Ameriana changes which are much more current as you might know.

So through mid-year at least we are going to benefit from fewer special projects such that we will be able to even increase our coverage of our markets and improve our operations in some ways we have been intending to get at outside of acquisition activity.

We are coming through our seasonal low as it relates to loan activity and which has us pointing to look for loan growth to increase consistent with what John referenced just a few moments ago relative to our pipelines. And I would offer a couple of thoughts on that.

Our commercial pipeline at $420 million is more than twice the level of where it was at the end of the fourth quarter and the highest in the last six quarters. Our total First Merchants’ loan pipeline to include commercial at $490 million up 80% over where it was at yearend and also the highest in the last six quarters.

On prior calls I have referenced another data capture that we have on an earlier stage pipeline whereby the clients haven't made their preferences as known to us but based on the complexion of the opportunity and our credit process that number has swelled to $780 million, 28% higher.

So when we look forward knowing that not every opportunity in those data piece is actually closed, we have demonstrated pull through that leads us to believe that mid single-digit loan growth number that we have talked about on these calls in the past 6% to 7% are to hold true as we look forward to the balance of 2016, barring any economic activity that we do not foresee.

So at this point Anne, I am going to turn the lines open for questions if you have some from the folks listening..

Thank you. [Operator Instructions] Our first question is from Scott Siefers of Sandler O’Neill..

Mike and Mark, I was hoping you could talk a little bit more about the nuance of just the core expenses excluding merger related items in the first quarter.

You gave the guidance for the 2Q the roughly 45 million so that renders this a little less relevant but just I am curious, how you got to that core expense number in the first quarter in that I would have expected it to be not quite a bit higher but certainly higher than it actually came in, so in another words core expenses were better than I thought -- did costings from Ameriana come in more quickly than I might have anticipated or what were perhaps some of the dynamic major dynamics at play?.

Some of it is the elimination of the insurance business that from the fourth quarter was gone but clearly when you compare first quarter of '15 to '16 that was a big driver of expense reduction. And we have had a number of branch consolidations that have occurred throughout the year and that we finally were able to realize the full savings.

Outside of that I can't think of anything in particular, the savings from Ameriana in total are a little better than our models, but that hasn’t been fully realized. So this was pretty close to our budgeted number and so we are feeling good about the progress we are making and good about where we should be for the remainder of the year..

And then Mike you gave the good color on that the pipelines both commercial and overall which I appreciated just curious, I mean it sounds like may be if I’m interpreting it correctly may be you got off to a little bit of a slow start on loan growth but you feel fine about the remainder the year, just curious as you sort of look back on the first 90 days of the year whether, are there any geographies or businesses or anything that didn’t get off to as quicker a start as you might have anticipated?.

Well it is kind of broad based believe us the 90 days that were slow for us Scott they are captured in the material you have, were really December, January and February.

We were really pleased to see us come out of February with a strong margin and it’s kind of flows right into the pipeline I described, if you saw in one of the schedules that Mark shares there is an average loan number for the quarter and you can see that the difference between the average and what our March 31 number wound up being is fairly significantly different, I think it’s $60 million or $65 million different, it kind of speaks to that, as it relates to that slower quarter if you will it wasn’t a calendar quarter but for that 90 days were I did feel like the economy is slowing or we weren’t as effective one of the two, it was really kind of broad based I mean our Chief Banking Officer provides me kind of a pull through of how our pipeline translates into earning assets on the balance sheet and I shared in this call at the end of the year that we had a lower backlog and in fact that certainly played out in the first two months of ’16 and we’re hopeful that the momentum that we regained in March continues and feel like the pipeline should parallel that..

The next question is from Will Curtiss at SunTrust Robinson Humphrey..

I thought may be just really quick on the fee income there is a drop in the other fees and specifically I’m looking at the press release it looks like that the other fees dropped around 700,000 from 1.2 and just wanted to see if you could provide a little additional color on may be what drove that decline?.

Well I’ll pull up that slide here, I know without having a specific answer our return check fees were mirrored the comment I answered a moment ago relative to November, December, January we had again we had a little of a pick there, I’m looking for the exact schedule to see if there is other specific fee line items that are worth noting..

You are referencing the other income?.

Yes and I guess there is -- you break it out I guess in more and more detail within the presentation and the press release so I was just looking at that decline from 1.2 to just under 700,000 for the, that is in the press release?.

Actually I don’t know what that is I -- for some reason I think it was the sale of a couple of our branches in the fourth quarter of last year but -- well if you don’t mind I’ll get back to you on that, don’t have the facts of that change in front of me..

Okay no problem, and may be shifting gears a little bit in terms of just kind of a high level credit question and so it sounds like Ag is taking a little bit of the attention right now but are you guys seeing anything else that I guess that represents kind of a significant concern right now while you’re keeping a watchful eye on?.

I mean the Ag it is really where you see it primarily coming out of, I don’t see anything coming out of C&I commercial real-estate, construction and that all seems to be holding firm and the monitoring and the big impact of just the lower crop prices have -- and higher inputs has cost a little bit of softness there but nothing else really no..

Your next question is from Erik Zwick at Stephens Inc..

First may be if I could start a little bit of a follow up on Scott’s question with regard to loan may be competition in your markets I guess anything that you were seeing in the first quarter or the first part of the second quarter in terms of changing in competition or pricing structure anything along those lines?.

No it’s been pretty consistent which isn’t necessary great news because it’s really highly competitive, it’s a borrowers’ market I think it has been through all of 2015, we expect that to continue, we’ve had a little bit lower M&A activity directly in our market so there is a relative stability of people put on the street serving the market, so we’re just a kind of doubling down on our sales management practices to make sure we get the coverage we need.

I think pricing if pricing is you know has been aggressive for a long time, I don’t think we’ve seen any detonation there..

Okay.

And with regard to that the comments regarding the increase in criticized assets it sounds like you’re taking a more conservative approach in evaluating some of the credits and I am just curious if that is driven by degradation in certain customer financials or just something more broad you are seeing may be with respect to the Ag portfolio or are you able to add any color to those comments?.

Yes I think in the Ag portfolio the approach we have taken the last couple of years farmers have been fairly well healed with a lot of equity in their land, the performance, the actual profitability from some of the farmers that we do business with hasn’t been stellar and as a result they have been able to take equity out of land and provide for additional financing in the next season.

And as you might imagine the Ag portfolio runs on a annual cycle and we get one opportunity really to see how they did year-over-year.

And that’s last year it wasn’t a great year for -- in the farm sector and as a result we went through and looked at those farmers and said while we took into account how much equity they have in their land we’re looking at their profitability and saying they had a tighter year so I look at it and just saying we're grading appropriately and it's just showing itself in that criticized and classified numbers..

And moving to the tax rate, it came in a little bit lower this quarter than I had anticipated curious -- I know the fees from the surrender value of life insurance is a little bit higher I am not sure that impacted or it was anything that affected the tax rate this quarter and I guess your outlook for the tax rate going forward?.

Yes, the BOLI income was a little stronger than prior quarters than our original plan so that's really the only adjustment. I think if you just run the tax rate off of the core income backing out BOLI it gets you through to our run rate.

And I want to go back to Will’s question for just a moment the big decline it isn’t an item in other income where we have quite a bit volatility but it's all around -- it's really derivative income where we have our back to back swaps and we are able to recognize fee income at the point of closing one of those transaction, we didn’t have any in the first quarter and we had quite a few in the fourth quarter of last year which was about a 588,000 swing..

And so I guess with that tax rate is something closer to the 28% level would be more appropriate going forward?.

Yes, I -- I mean we -- 26 to 28 is always kind of the range but yes..

And may be just one last one if I could, just curious on the thought process and your decision to switch to State-Chartered Bank?.

Yes, it’s two fold, economics were appealing and that’s a go forward that is an every year benefit and it actually grows if you look at that, if you look at the pricing grids off of those as our Company continue to grow and the balance sheet which is the thing that calibrates the fees, the difference between the two primary regulators only widens as the balance sheet emerges.

You know the one is, is that the team of folks that are going to be working with us from the Department of Financial Institution of State of Indiana are here and there in the dozen there a couple of dozen people that are extremely familiar with this market are competitors or borrowers in some regard in our community so the more we inspected that the more it felt right given where the majority of our growth comes from..

The next question is from Damon DelMonte at KBW..

Just a quick question on the margin, and I may have missed this in the prepared remarks but, how should we kind of think of the core margin absent any additional rate movements for the remainder of the year?.

Well, we'll get a little bit of uplift in the second quarter just based on the additional day of interest income, I know it sounds funny but it does add some, and I think that should be enough to offset any pressure that we see in re-pricing yields down, and so we feel good about second quarter of maintaining the current levels.

And then the yield curve is so flat that we are going to still see some pressure and I think that means you go back to the same statements we were making in prior years kind of just saying one or two basis points of compression quarterly and that’s at least the way we are looking at margin now if we get another increase then obviously as an asset sensitive bank we would see some lift from that, but it's not something we have in our plan now that we are anticipating..

Okay..

And I feel like I keep going back to part of your question, when we run the tax rate and I know I was gone through this in modeling and just to be clear if you take the 23.3 million that we made for the year and then you just simply takeout that all the tax free income as three line items tax exempt loans, tax exempt investments and BOLI and apply 35% that is our tax rate and I mean it came out 34.9% this quarter if you run that same exact math, so our state tax is zero and federal at 35% so if you take out those three tax exempt items you usually get back to the tax rate..

Okay, great.

My other question kind of a more detailed question here, so in the press release you have a category called other customer fees it was 5.59 million, is included in that electronic card fees as you bring that on Slide 12?.

Yes it's ATM and debit card fees and the increase is some organic and a lot through because of the acquisitions of Cooper and Ameriana where we are recognizing their income for the full quarter..

Okay.

And from an interchange income perspective have you guys changed vendors or are you still with whoever you have been using in the past?.

No, we are with FIS for debit card..

Which is not a change..

Which is our core vendor and we have been with them for a number of years..

Okay. And then I guess my last question kind of more broadly speaking Mike, now that Ameriana is done and you guys have done the conversion, you are obviously trying to leverage the new operations that they bring on board.

What are your updated thoughts on M&A? And has that changed at all do you feel that you have build enough scale or you can just work with what you have or do you still remain optimistic to looking to expand two additional deals?.

Well, we clearly like what we have and if either opportunities don’t present themselves or the pricing expectations of opportunities that can about don’t meet what we think is prudent then we are really comfortable with the franchise we have.

I do feel like the environment will continue to present opportunities that look a lot like those that we have been able to seize on over the past 36 months and anything that reduces execution risk by way of physical proximately or management that we know obviously would make it even that much more attractive.

But our posture on it hasn’t changed and we’d like to pursue those when they are available..

The next question is from Brian Martin with FIG Partners..

Just two questions, Mike I guess one most of them have been answered, but just maybe one for Mark, on just kind of the expense so just going back to that $45 million number in the second quarter Mark, that is a -- I guess is that I guess a clean quarter with all the cost savings in there now I guess would be your expectation?.

It is, we are looking forward to having the first clean quarter in a number of quarters given all the acquisition activity that we have had. And so take the current run rate and back out the 1.9 and that is what we expect at least the second quarter to be..

And then maybe just last thing Mike, on kind of the M&A topic, certainly it sounds like your interest, and can you just give any color on it? It seems like some of the activity has been slower across some markets just kind of what is the temperature today relative to M&A I mean when you look at the number of targets you guys have identified and do you like people are on the side lines are they I guess just kind of gauging how activity is, or calls are coming inbound, how is that going relative to the last 90 days [Multiple Speakers]..

No. The 2015, I thought it was particularly active and we were able to take advantage of that. Now the early part of 2016 just a tick below that, I think like First Merchants was anxious to see what interest rate increases might do to your income stream.

I think other people might be doing the same thing, we were pretty confident that a commercial balance sheet provide some net interest margin upside which it seems to have. And my guess is that other people are assessing their futures against their own skill sets and how their balance sheet sets up.

But I would hope that we see more opportunities that balances the year out, I would be surprised if we didn’t..

This concludes our question-and-answer session.

Would you like to make any closing remarks?.

Just one of gratitude Anne, thank you for hosting the call, and thanks for all the folks that participated this afternoon. All three of us are very reachable should any of the material upon further review create more questions. I look forward to talking to you a couple of months from now. Have a great day..

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