Mike Rechin - President & CEO Mark Hardwick - EVP, COO & CFO John Martin - EVP & CCO.

Scott Siefers - Sandler O'Neill Erik Zwick - Stephens Kevin Reevey - D.A. Davidson Damon DelMonte - Keefe, Bruyette & Woods Peyton Green - Piper Jaffray Brian Martin - FIG Partners.

Good afternoon, and welcome to the First Merchants Corporation Second Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [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 Tuesday July 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 releases Form 10-Qs and 10-Ks concerning factors that could cause actual results to differ materially from any forward-looking statements. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note that this event is being recorded.

I would now like to turn the conference over to Mike Rechin. Please go ahead..

Thank you, Andrea. And thanks for all of you on the call. Welcome to our earnings conference call and webcast for the second quarter ending June 30, 2016. Joining me for the call today are Mark Hardwick, our Chief Operating Officer, and John Martin, our Chief Credit Officer.

We released our earnings in a press release earlier approximately 10 AM Eastern Day Light Savings Time and a presentation we’re about to conduct speaks to the material included in that release.

The directions that point to the webcast were also contained at the back-end and my comments begin on Page 3, the slide titled First Merchants’ second quarter 2016 highlights. So on Page 3 several of the key items that we would headline in our results.

The Company earned $20 million of net income and 11.3% increase over the $18 million we earned in the second quarter of 2015. Earnings per share of $0.49, a 4.3% over the second quarter of 2015 reflecting both strong earnings in the current period, as well as the new shares issued at year-end for the acquisition of Ameriana Bancorp.

We delivered a strong net interest margin 386, Mark will break that into pieces a little bit earlier in his remarks to show our core run rate, which we think is terrific and then some fair value levels associated with acquisitions in periods in the past.

Balance sheet totaled $6.9 billion grew by 12.5% over the second period, or second quarter of 2015 reflecting kind of consistent levels of organic growth coupled with two acquisitions since that period of time.

A strong ROA of 117, a really satisfying efficiency ratio of 57.3% where some of our primary strength is included in a net interest number that's growing well coupled with effective expense control. And as the entire release says and is included in the press release, three of extraordinary non-core items for the first time in several quarters.

And then the last item on the page was mentioned on our last call, the completion of our charter conversion to the DFI completed early in the second quarter April the 15th.

So as the release states several times I haven't said it yet, but we're pleased to produce record level performance metrics in net income, in earnings per share, the size of the balance sheet, and getting our efficiency ratio down to levels that we've talked about both internally and then on this call in prior periods.

Mark's going to walk you through some of the more detailed slides that get to these highlighted results..

Thanks Mike. My comments will begin on Slide 5. Our total assets as Mike mentioned on line eight reached a record 6.9 billion as of June 30, 2016 an increase over year-end of 145 million or 4.3%.

Loans on line three increased over year-end by $97million or an annualized 4.1% with actually all of the growth coming in the second quarter which when annualized to more like 6.9%. The allowance on line four in total dollars, declined by 267,000 since year-end 2015 and total 1.29% of total loans.

Consistent with the last couple of year's guidance growth in the second half of 2016 really and why I say that I am talking about the loan portfolio should be in the mid to high single-digits. The composition of our $4.8 billion loan portfolio on Slide 6 continues to be reflective of a Commercial Bank and it continues to produce strong loan yields.

The portfolio yield for the second quarter of 2016 totaled 4.59% you can see that's slightly up from the year-to-date yield given some of the fair value accretion that we had in the second quarter which I’ll cover in the margin slides.

On Slide 7, our $1.3 billion bond portfolio continues to perform very well, producing higher than average yields with a moderately longer duration than our peer group. Our 3.77% yield compares favorably to peer averages of approximately 2.5%, while our modified duration totals four years.

The net unrealized gain in the portfolio just continues to grow and totaled 62.9 million and maturities are really manageable in the near future.

Remaining 2016 maturities or cash flow from the mortgage products total 140 million with a yield of 2.95% in 2017 total cash flow is estimated to be 198 million with a yield of 2.85 and in 2018 maturities total 143 million with a yield of 3.29.

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

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

Now on Slide 8, total deposits on line -- you've to combine lines one, two and three they grew by $118 million or an annualize 4.5% since year-end and on line seven common equity has also increased since year-end 2015 by 37 million, reflecting growth and earnings, growth in other comprehensive income, which is primarily some of the unrealized gain improvements in the bond portfolio and then less dividends.

On Slide 9, demand deposits are nearly 50% of total deposits and savings deposits are nearly 30%, which helps us maintain low funding cost of just 39 basis points. On Slide 10, our total risk based capital equaled 14.67% as of June 30, 2016 and remains above our 13.5% target, while tangible capital totals 9.52% versus our internal target of 8.5%.

Strong capital levels protect tangible book value while allowing for both organic and M&A growth in the future. That excess tangible capital level is somewhere in excess of about $60 million and so we’re continuing to look for ways to put it to work.

The corporation’s stable net interest margin on Slide 11, totaled 3.86% for the second quarter of 2016 and when adjusted for fair value accretion of 3.2 million totaled 3.65%, which is equal to our net interest margin exactly one year ago, so we feel great about being able to maintain that much stability in our net interest income.

And net interest income totaled a record 59.2 million during the quarter and continues to be the driver of our operating income. Total non-interest income on Slide 12 improved from the first quarter of 2016 by 548,000 due to stronger derivatives income included in line 10.

You can also see in the press release, the detail is not as easy to see here, but you can see in the press release that all of the gains from the disposition of our Insurance business took place in the second quarter of 2015 positively impacting earnings per share in the second quarter of 2015 by $0.09 per share.

So when you’re doing period-over-period results, that’s an important factor to look at. We were very pleased to beat last year’s result given that much sizeable gain for the second quarter of 2016 with just pure core earnings and no extraordinary activity. Our non-interest expense on Slide 13, totals 44.9 million for the quarter.

The result was in line with expense guidance provided on last quarter’s call and is reflective of our future core run rates. Now on Slide 14, net income on line 8 totaled 20 million for the first time in the Company’s history and earnings per share on Line 9 totaled record $0.49 per share.

As Mike mentioned, we are also pleased with our efficiency ratio for the quarter of 57.3%. As we prove our progress, we’re becoming a highly efficient banking company as reflective on Line 10 with very good organic growth which we believe commands higher trading multiples and a stronger currency for M&A.

Now on Slide 15, you’ll notice our per share run rates for 2015 and 2016, our dividend levels and our tangible book value per share totals, which ended as of June 30, 2016 at $15.53 per share.

On Slide 16, these increasing trends reflect a 10% annual compound growth rate in tangible book value per share over the last 5.5 years and a very competitive dividend yield. As of a few months ago our stock price to tangible book value is just 1.65% and we think it represents great value.

Thanks for your attention and now John will discuss our loan portfolio composition and related asset quality trends..

All right, thanks Mark and good afternoon. I’ll be updating the trends in the loan portfolio starting on Slide 18 review the asset quality summary and reconciliation, discuss fair value and allowance coverage and then close with a few thoughts on the portfolio. So please turn to Slide 18.

As I would describe discussed there was a balanced portfolio growth in the quarter with the most significant changes coming from commercial and industrial on line one, investment, real estate on line three, home equity on line eight and other commercial or public finance on line nine.

The $39 million decline in construction loans on line two resulted from movements between construction and the investment real estate portfolio on line three which increased by $73 million.

We continue to underwrite construction loans to conform to the portfolio standards or to meet the terms of a secondary market program, this leads to fluctuations between construction and the portfolio category. Construction commitments did increase $55 million in the quarter with a strong pipeline.

Turning to asset quality on Slide 19, asset quality was strong for the quarter. Non-accrual loans, other real estate and 90 day delinquent loans declined by $3.1 million, $2.4 million and $600,000 respectively.

Renegotiated loans on line three increased for the quarter by $3.3 million this was almost entirely related to a $3.2 million acquired loan associated with a pre-acquisition trouble debt restructure which required further AB restructuring.

The relationship was identified during due diligence and marked accordingly, as a result the charge-off associated with the restructure was completely offset by the credit mark which had been established at acquisition. Dropping down to line seven and eight, classified assets were up $2.3 million while criticized assets declined by $8.2 million.

As a result, on the, as mentioned rather on the first quarter call these levels are impacted by the grading of our ag portfolio and while I don't expect the stress in the ag segment to result in systemic losses in the portfolio criticizing classified assets did increase.

So turning to Slide 20, this slide reconciles the quarterly migration of asset quality and provides detailed transparency behind the movement in the portfolio. I'm going to start in the far right corner or column rather labeled Q2 2016 and move from top to bottom. On line two, we had $3.6 million in new non-accrual loans.

We moved $4.5 million out of non-accrual loans on line three and transferred $200,000 to OREO with $2 million of gross charge-offs.

And then moving down to the ORE starting on Line 7 from the above we took in the $200,000 we just mentioned, sold $2.1 million, which I’m pleased with, down $500,000 on Line 9, which resulted in a decrease in ORE for the quarter of $2.4 million.

So with the changes in non-accrual loans and ORE and the $3.3 million increase in renegotiated loans I just mentioned total NPAs and 90 day delinquent declined by $2.8 million for the quarter. I am going to have you turn to Slide 21. I’d turn attention to the allowance and credit marks on our 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 stable and flat ending the quarter at around $62 million. During the quarter, we had $690,000 in net charge-offs and $790,000 in 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 2 basis points of net charge-offs or under 2 basis points really for net charge-offs which continues to run at historical lows.

I would expect charge-offs and provisions to remain stable for the near future at around 10 basis points plus or minus barring any unexpected change. Dropping down to Line 6, the allowance coverage to non-accrual loans increased year-over-year from 166% to 185%.

This is a result of the $3.1 million decrease in non-accrual loans having mostly digested the Ameriana non-accrual increase in the fourth quarter of 2016. Finally, as a comparative measure on Line 9, the allowance plus fair value adjustment to loans and fair value adjustment declined 14 basis points. All-in-all the portfolio is performing well.

So then to summarize rather on Slide 22, loans grew for the quarter by $81 million, excluding held for sale roughly 7%. Our criticized and classified assets continue to show improvement, while quarterly net charges-offs were in line and our allowance and fair value levels remained stable.

As mentioned last quarter, we have very little direct exposure I know that is an area of focus for the industry to oil and gas with our primary direct exposure to energy being a small amount of coal.

The related impact overtime really has been through changes in oil and gas prices that have arguably lowered commodity and corn prices in recent years and indirectly impacted agricultural profitability. Thank you for your attention. And I’ll turn the call back over now to Mike Rechin for his comments..

Thanks John. I’m going to finish prior to questions on Page 24 that talks about looking forward items of note for First Merchants and the top one talks about job one for us, continuing to win in the marketplace, compete in our natural franchise, and serve the community as well that depend on our Company.

In the geographic orientation that we run for the majority of the bank, our bankers really executing on a high contact service business across all of our lines of business.

Now we’ve been fortunate the economy from Chicagoland to the Northwest all the way through Indiana, in the Central Ohio doing well as an economy and that produces the pipeline consistent with both our planning internally and consistent with prior references that we've made on calls like these where we would expect loans to grow in the 6% to 8% level.

While striking that balance where we continue to get paid for the value, so we kind of look both at the rate at which loans can grow, coupled with how we can get adequate pricing that produces the valuable net-interest margin I think we've attained. The second bullet points and other revenue point.

We're entering the fourth quarter of enhanced functionality through the July investment and upgrade we did in mobile baking and digital services in mid-2015 fourth quarter of having it in our customers’ hands and the second quarter of having putting through some price increases across several services in that product mix.

Another revenue point, we are continuing to look at the opportunity to acquire specialty finance businesses or build them ourselves and the last several quarters we've added resources and leadership to sponsor finance business, municipal finance business and we're just finishing some internal work to be able to launch some asset based offerings to our marketplace.

So, the policy for the technology that would drive it is towards the completion, knowing that in a cyclical business it would be an important opportunity to continue to grow our balance sheet regardless of which where the economy turns. We feel good about that.

On a more broad based basis the next point, we feel like we've realized on many of the assumptions and many results after the fact of acquisitions that have had in our understandable execution risk and additive as with measurables whether it be tangible book value, earn back or earnings accretion.

And so with some realization, strong realization of what our assumptions have been we'll continue to take a really disciplined look at future opportunities most of which will be bank hike some of which to my prior point could be something slightly different where we understand both the upside and the risk in any of them.

The next bullet point down talks about exporting back office infrastructure, it applies to our day-to-day business and it applies to the M&A.

You might recall that Mark Hardwick took on some additional responsibilities by adding a Chief Operating Officer title which really formalizes what we're trying to do to make sure that we're running an efficient back office and some of the points that we spend a lot of time on are workflow processes that just make us better moving data, understanding the data we have to our business intelligence unit that help our clients get smart and help us offer the right products to them.

A culture that encourages better ideas, I think we get a lot of bubble up as to ways we can be a better company. And then in tandem with that maximizing the key vendors that help us look good for our clients and compete in a really tough marketplace.

We feel like we still have some optimization goal in retail and some of the same points as I made on the prior point which is understanding our results through the data that we've access to we produce internally and then listening closely to our clients’ needs and how they want to use us whether that's through our traditional banking centers or in some combination with the digital channels that have gotten so much investment from us the last couple of years.

Last bullet point is to try and through earnings our capital building to maintain maximum flexibility and at this point I think we feel like we have ample capital for not only funding future loan growth or for use in acquisitions should those opportunities present themselves.

Hopefully that looking forward strategy is very consistent what the company you have come to know. And at this point Andrea, if we have got folks on the phone to take questions. My colleagues and I are ready..

All right. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Scott Siefers from Sandler O’Neill. Please go ahead..

Just a couple questions, maybe Mark, first one's for you. You guys have done a remarkably nice job on holding the margin, particularly the core margin flat. Just curious as to your thoughts on the forward look on the core margin, just given the seemingly possibility of rates staying low for longer than many of us would have envisioned..

Well, the low kind of rate environment especially further out in the curve that we’re operating in definitely overtime challenges net interest income and net interest margin specifically. We’ve been saying, we think that it puts pressure on the margin by 1 or 2 basis points a quarter and I still kind of feel that way.

The second quarter had about 4 to 5 basis points of extra net interest or net interest margin and it was a little higher level of fair value than what we were anticipating.

So I guess you’ll see, I would think although we would see some normalization of that fair value component through the rest of the year and then the actual core which was 3.65, and 1 or 2 basis points of pressure as we progress quarter-by-quarter..

Okay. Perfect. Thank you.

And then Mike, maybe a question for you, so the asset base is now nearing $7 billion even though I imagine it's still pretty early, just curious if you're beginning to think about preparations for the $10 billion mark and changes that would come with that, I guess even perhaps more importantly, what role would that $10 billion level play in the way you guys are thinking about M&A at this point?.

Internally, I mean the work that we’re doing to prepare for 10 billion is I think fairly extensive. We have quantified a lot of the costs that we think that we’ll have to manage our way through.

And internally we’ve just, this has been a good year for us to really do some restructuring to make sure that we have the infrastructure in place, the people, the processes to really have the proper governance structure in place to go over 10 billion.

And then as it relates to M&A, we think of 10 billion as probably being a hurdle that we will across within the next three years, depending on how M&A goes, if you just look at our core run rate of organic growth. And then add one or two acquisitions and it’s probably sometime in ’18 or ’19 that we would be crossing the 10 billion mark.

And so we’re just making sure that we’re prepared to go over with a great control environment and an infrastructure that’s ready to make up for some of the challenges that would be coming at us from a fee income perspective as Durbin amendment hits really hard..

We've had at this point this is Mike, Scott. We've had a lot of active regulator dialogue around it as well as some of our peers both that are closer to 10 billion or recently on the other side.

And many of our risk practices to Mark's point are in place I think we've to document some of our processes better and then interchange income obviously is sizable enough for us that when we get to the point going over I’d like to go over with enough balance sheet benefit above $10 billion to defray some of the loss..

Our next question comes from Erik Zwick from Stephens & Company. Go ahead..

Maybe if I just start with the expenses, it was nice to see the expense rate kind of in the range that you had talked about before, that $45 million range.

Anything that you'd see on the horizon that would cause that to move materially in one direction or the other, is that a pretty good run rate going forward for the next couple quarters?.

I think for the balance of 2016 we think that number is going to stay pretty close to all of the realizations that we were hoping to get through the income statement from prior period activities have pretty much taken place and so Mark I don't know if you've any additional thoughts on that.

But the biggest run rate expenses in there ought to be pretty steady through the balance of the year..

Yes, the only comment I would make is as we think about 2017 some of those efficiency items that we talk about we’re really trying to find ways to pay for the growth that -- and the demands that are coming in other areas.

So we're trying to find ways to be more efficient in the back office and in the retail infrastructure to allow us to invest where we need to invest without having a big increase in expenses..

Okay. And maybe a quick, another one on the expenses, it looks like the FDIC's deposit insurance fund may have hit that key 1.15% level in the second quarter, which could trigger a lower assessment rate potentially as early as the third for those deposit assessment fees.

Are you able to quantify what the magnitude of savings might be and is that kind of included in the comments you just made?.

No, we haven't gone through that math we're paying at least in this quarter we did have a little bit of double dipping in terms of fees. We were still, we had some OCC fees that still had to be expensed and we were also paying the DFI fees given the conversion that occurred in the second quarter.

And so the level should come down, but I haven't run through the math on the specific item you just mentioned..

Okay.

And then maybe one for John, given the comments about the classified assets, increase related to the ag portfolio, can you maybe just talk about what characteristics you saw either in the market or specific borrowers that prompted those downgrades, and what gives you confidence that you would not see an increase in the losses related to those credits?.

Yes. So, Erik when I look at what's migrated into the criticized and classified buckets it's really been farmers who over the last three years have experienced just losses from, they plant and they harvest and they lose money.

The benefit that they have and what gives me a degree of confidence is the amount of equity that they have in the land and the working capital that I see in their balance sheets that gives me confidence in their ability to farm for another year until commodity prices recover and also their inputs come down.

Now we’re not renewing any of the poor performers necessarily and those are finding another home either government programs or otherwise. And so when I look at the bucket we’re appropriately grading them, but there is that classification there..

Our next question is from Kevin Reevey of D.A. Davidson. Go ahead..

So just looking at your M&A strategy, can you talk about the opportunities in the market for depository institutions and specifically what geographies would you focus on and would you look to do more of a cash deal or combination cash and stock or just stock?.

Sure. I’ll tackle the first part first and then we can talk about the consideration mix. It’s going to -- I hate to be repetitive from prior calls. But our outlook for where we would execute the best for the First Merchants’ service level, I know would be really competitive is in the Mid-West.

And so we think the Southern two-thirds of Ohio and the entire State of Indiana we will do really well. And then there is selected other areas where it be some of the metropolitan areas of Kentucky, certain middle parts of Illinois, all would get our consideration.

But Indiana and Ohio have just been good to us and we have a depth of talent for we got people that could take on more responsibility, we feel like we know many of the franchises that could be good fits and then if you were to extent your question on the profile.

$1.5 billion in asset size and down would be preferable, I think on the last call we might have talked about what is too small at this point and entering new markets, brand new markets at $200 million would seem to be difficult.

When you leave the realm of depository institutions, which was your primary question we do think that specialty finance businesses as I referenced and then on the last slide I covered could be an interesting way to augment margin for risk that we could understand based on the, again some of the management we have in this company.

The mix question, which was the back half of your question and we are beginning to accumulate capital, so having more cash than we would have had a year ago, would clearly have us biased towards using some of that, if that was flexible enough in the negotiation of a transaction..

And on the banking side, we assume that most sellers want a tax free exchange. And so we would try to push the cash component as far as we could and still maintain the tax free exchange status of the transaction. And specialty finance is generally all cash..

And then as far as loan growth, where and when did you see the most growth coming from as far as a geographic standpoint this quarter?.

Sure. Mark covered some of the loan detail in his remarks. But we’re really pleased we had a really significant amount of loan closings during the second quarter and not only was the total pleasing to me but the number of markets that contributed to that we got a really balanced contribution.

From out all of our places the Citizens acquisition which we refer to the Lakeshore Group it's the Northwest corner of Indiana stretching slightly over into Illinois. Really I think it might have their strongest quarter in the time they've been part of First Merchants.

And then Ohio has great potential for us we are roughly five quarters post closing from Coopers which while it was a retail add to our Ohio operation has just sparked some momentum there across all of our folks. We look for Central Indiana to lead the way in terms of growth rate and it has done well also.

It houses some of our specialty businesses I referenced some of the non-middle market businesses that we're invested in I didn't mention private banking.

So within our wealth unit we have a private banking business we're making some incremental investments and with the idea that we're going to spread some of that knowledge throughout the rest of the company.

If I can Kevin I might just speak to the pipeline because it would tell me that we're going to continue to operate in that 6% to 8% annualized rate. I look at the loans that we just closed which I just spoke to and I look at the pipeline looking forward across our middle market and investment real estate businesses they remain strong.

Our retail pipeline is up materially over the first quarter of the year. Our mortgage business in the post Brexit time is benefitting from the lower rates and so we look for a strong mortgage quarter coming up. So, we're optimistic about staying in that range that we've talked about before while keeping some margin stability..

Our next question comes from Damon DelMonte from KBW. Please go ahead..

So I guess a couple questions on loan growth.

Could you just maybe describe kind of the competitive environment that you guys are facing against right now? Is it -- are you finding competitors being overly aggressive on rate or on structure or on underlying collateral or what are some of the challenges you guys have to deal with when you're going at it for a loan?.

Well any of the combination of all there is you can -- we internally talk about the profiles of some of the people with whom we compete most frequently and they all have their sweet spot on any of the ingredients you referenced Damon whether it happen to be the really hold disciplined structure, but are more willing to acquiesce on price.

I think in some combination so our best solution for that is speed and engaging the decision maker.

We're fortunate that we've got senior people in every market in which we compete that we can get in front of these decision makers because the small number of markets six or less that I described in the answer to Kevin are the only places we conduct business and so we feel like we have to maximize our ability to get in front of the decision makers on a deep basis with speed..

And then I apologize if this was already asked and answered.

But the construction balances this quarter were down pretty significantly quarter-over-quarter is that just a function of loans going to permanent financing?.

Yes Damon this is John. If you look at the investment real estate portfolio it went up by $73 million. So you have them rolling out of construction into perm. And as I mentioned, it’s not in the material anywhere, but our commitments went up $55 million.

So we continue to see our growth and commitments things are moving from construction at this point in the year into the, into the permanent portfolio?.

Our next question comes from Peyton Green from Piper Jaffray. Go ahead..

I was just wondering how much higher the capital levels have grown over the last couple of years, and just wondering how high you would let it go before you might draw capital down, either through higher payout ratio or through a more active share buyback program?.

Right now, we don’t have any intensions of doing it through aggressive dividend increases or buybacks. We are really intending to use it for acquisitions and last year we were looking at a specialty finance company at the same time we were looking at Ameriana.

And so we did 100% stock deal with Ameriana and ultimately those specialty finance didn’t happen. So we didn’t anticipate within our next acquisition, the next form two or three are going to see those include a large component of cash..

Okay.

And then just maybe the M&A pipeline, how does the M&A pipeline look today versus you how it would have looked a year ago or at the beginning of the year? And are there any expectations issues that are just too difficult to get over?.

I think the pipeline in this context really talks about how many live opportunities you get to engage in and it’s been about one a quarter, which would be different patent then measuring the number of institutions, where we have frequent contact. That number is pretty steady it is a dozen that might be 18 depending on what you call frequent contact.

But a dozen or more institutions where we feel like franchise that they have built would be additive to ours. In terms of the actual pipeline where something can take place where our Board of Directors other than ours has decided to move forward with a transaction is about one a quarter, as I think back three or four quarters including 2016..

The pressure hasn’t been relieved for some of the, well really for all of us. Margin is challenging, the regulatory environment is challenging. The GDP, just core growth is challenging. And so I think you’re going to see those that are the winners in those transaction and those have to look another direction.

So we’re trying to stay as close as possible to all of our potential partners..

Our next question is from Brian Martin from FIG Partners. Go ahead..

Most of my stuff was answered, Mike. Maybe just one last thing, there's been a lot of talk, or a lot of discussion from the regulators on the CRE concentration levels and just kind of wondering how you guys are thinking about managing them.

You guys are well below kind of the threshold, but just in general how you're thinking about that, especially as you look at kind of potentially more M&A going forward and how that I guess kind of goes into that number?.

Yes, well our Chief Banking Officer in tandem with John track that pretty completely both in terms of some of the vocabulary John used earlier.

Booking our commitments, tracking of the usage, watching the pipeline go through to some kind of a permanent financing that typically has it exiting our balance sheet, so that we use what we think of is a great competitive advantage, meaning we have availability we are open for business and investment real estate.

So trying to pick our absolute best clients, use our disciplined underwriting when we feel any pressure at all around where our best clients are likely to go. We would limit our participations purchase which has not been a big category.

But, we also can offensively use other banks to buy participations from us when in fact that some developers set is taking advantage of opportunities that they see. So we feel like we have some levers to pull.

We want to stay open for business because we also know to the second half of your question that most of the acquisition targets out there have more of a real estate concentration than we do. So was that early pro forma work on any potential target takes those factors into consideration..

Okay. And as far as kind of where you guys like to manage to, on that number I guess you're comfortable going higher, I guess higher than lower. I think right now I thought you guys were around, maybe around 200% type of level.

Do you guys kind of have internal targets on where you'd get to?.

We do and they are beneath the guidelines of the regulators at this point but as you know they are just guidelines and so what they ask in any given bank should you begin to approach them as what you are you going to use for risk management practices, and so we are kind of deploying a lot of that now when we are well beneath those guidelines, it's really set us up well it obviously has a benefit to us in terms of managing your hard credit costs.

But it gets monthly review on our from a governance standpoint out of our risk committee..

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

Just one of appreciation Andrea, great questions, I appreciate the consistency of the following and look forward to talking to you on a couple of months after our third quarter is completed..

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