FIRST MERCHANTS
CORPORATION
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
4th Quarter 2016
Earnings Highlights
January 26, 2017
NASDAQ: FRME
Michael C. Rechin Mark K. Hardwick John J. Martin
President Executive Vice President Executive Vice President
Chief Executive Officer Chief Financial Officer Chief Credit Officer
Chief Operating Officer
®
Filed by First Merchants Corporation
pursuant to Rule 425 under the
Securities Act of 1933.
Subject Company: The Arlington Bank
Commission Securities Exchange Act File
No: 000-17071
1
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
2
This presentation contains forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements can often, but not always, be identified by the use of words like “believe”, “continue”, “pattern”,
“estimate”, “project”, “intend”, “anticipate”, “expect” and similar expressions or future or conditional verbs such as “will”, would”, “should”,
“could”, “might”, “can”, “may”, or similar expressions. These forward-looking statements include, but are not limited to, statements relating to
the expected timing and benefits of the proposed merger (the “Merger”) between First Merchants Corporation (“First Merchants”) and The
Arlington Bank, including future financial and operating results, cost savings, enhanced revenues, and accretion/dilution to reported earnings
that may be realized from the Merger, as well as other statements of expectations regarding the Merger, and other statements of First
Merchants’ goals, intentions and expectations; statements regarding the First Merchants’ business plan and growth strategies; statements
regarding the asset quality of First Merchants’ loan and investment portfolios; and estimates of First Merchants’ risks and future costs and
benefits, whether with respect to the Merger or otherwise. These forward-looking statements are subject to significant risks, assumptions and
uncertainties that may cause results to differ materially from those set forth in forward-looking statements, including, among other things: the
risk that the businesses of First Merchants and The Arlington Bank will not be integrated successfully or such integration may be more difficult,
time-consuming or costly than expected; expected revenue synergies and cost savings from the Merger may not be fully realized or realized
within the expected time frame; revenues following the Merger may be lower than expected; customer and employee relationships and
business operations may be disrupted by the Merger; the ability to obtain required governmental and shareholder approvals, and the ability to
complete the Merger on the expected timeframe; possible changes in economic and business conditions; the existence or exacerbation of
general geopolitical instability and uncertainty; the ability of First Merchants to integrate recent acquisitions and attract new customers;
possible changes in monetary and fiscal policies, and laws and regulations; the effects of easing restrictions on participants in the financial
services industry; the cost and other effects of legal and administrative cases; possible changes in the credit worthiness of customers and the
possible impairment of collectability of loans; fluctuations in market rates of interest; competitive factors in the banking industry; changes in the
banking legislation or regulatory requirements of federal and state agencies applicable to bank holding companies and banks like First
Merchants’ affiliate bank; continued availability of earnings and excess capital sufficient for the lawful and prudent declaration of dividends;
changes in market, economic, operational, liquidity, credit and interest rate risks associated with the First Merchants’ business; and other risks
and factors identified in each of First Merchants’ filings with the Securities and Exchange Commission. Neither First Merchants nor The Arlington
Bank undertake any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this
presentation or press release. In addition, First Merchants’ and The Arlington Bank’s past results of operations do not necessarily indicate either
of their anticipated future results, whether the Merger is effectuated or not.
®Forward-Looking Statements
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
3
®Forward-Looking Statements
ADDITIONAL INFORMATION
Communications in this press release do not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of
any proxy vote or approval. The proposed merger will be submitted to The Arlington Bank shareholders for their consideration. In connection
with the proposed merger, it is expected that The Arlington Bank will provide its shareholders with a Proxy Statement, as well as other relevant
documents concerning the proposed transaction. SHAREHOLDERS ARE URGED TO READ THE PROXY STATEMENT REGARDING THE MERGER
WHEN IT BECOMES AVAILABLE, AS WELL AS ANY OTHER RELEVANT DOCUMENTS CONCERNING THE PROPOSED TRANSACTION, TOGETHER
WITH ALL AMENDMENTS OR SUPPPLEMENTS TO THOSE DOCUMENTS, AS THEY WILL CONTAIN IMPORTANT INFORMATION.
The Arlington Bank and its directors and executive officers may be deemed to be participants in the solicitation of proxies from the
shareholders of The Arlington Bank in connection with the proposed Merger. Additional information regarding the interests of those
participants and other persons who may be deemed participants in the transaction may be obtained by reading the Proxy Statement regarding
the proposed merger when it becomes available.
NON-GAAP FINANCIAL MEASURES
These slides contain non-GAAP financial measures. For purposes of Regulation G, a non-GAAP financial measure is a numerical measure of the
registrant’s historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that
have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with
GAAP in the statement of income, balance sheet or statement of cash flows (or equivalent statements) of the issuer; or includes amounts, or is
subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated
and presented. In this regard, GAAP refers to generally accepted accounting principles in the United States. Pursuant to the requirements of
Regulation G, First Merchants Corporation has provided reconciliations within the slides, as necessary, of the non-GAAP financial measure to
the most directly comparable GAAP financial measure.
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
4
First Merchants 2016 Performance
Full-Year Highlights
• Record Net Income of $81.1 Million, a 24% Increase over 2015
• Earnings Per Share of $1.98, a 15.1% Increase over 2015; Highest in Company’s History
• Total Assets of $7.2 Billion; Grew by 6.7% over 2015
• $446 Million of Organic Loan Growth for the Year Reflects a 9.5% Growth Rate
4th Quarter Highlights
• Net Interest Margin Stays Strong at 3.90%
• 1.26% Return on Average Assets
• Efficiency Ratio of 52.18%
®
“Record Level Results”
Mark K. Hardwick
Executive Vice President
Chief Financial Officer
and Chief Operating Officer
®
5
6
Total Assets
($ in Millions)
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
®
2014 2015 2016
1. Investments $1,181 $1,277 $1,305
2. Loans Held for Sale 7 10 3
3. Loans 3,925 4,694 5,140
4. Allowance (64) (62) (66)
5. CD&I & Goodwill 219 260 259
6. BOLI 169 201 202
7. Other 387 381 369
8. Total Assets $5,824 $6,761 $7,212
9. Annualized Asset Growth 7.1% 16.1% 6.7%
®
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
Commercial &
Industrial
23.2%
Commercial
Real Estate
Owner-Occupied
10.3%
Commercial
Real Estate
Non-Owner
Occupied
24.8%
Construction Land
& Land
Development
8.1%
Agricultural
Land
2.9%
Agricultural
Production
1.6%
Public
Finance/Other
Commercial
5.0%
Residential
Mortgage
14.4%
Home
Equity
8.2%
Other
Consumer
1.5%
QTD Yield = 4.56%
YTD Yield = 4.58%
Total Loans = $5.1 Billion
Loan and Yield Detail
(as of 12/31/2016)
77
®
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
Mortgage-
Backed
Securities
32%
Collateralized
Mortgage
Obligations
19%
U. S. Agencies
2%
Corporate
Obligations
1%
Corporate
Equities
1%
Tax-Exempt
Municipals
45%
Investment Portfolio
(as of 12/31/2016)
$1.3 Billion Portfolio
Modified duration of 4.9 years
Tax equivalent yield of 3.78%
Net unrealized gain of $9.1 Million
88
2014 2015 2016
1. Customer Non-Maturity Deposits $3,523 $4,096 $4,428
2. Customer Time Deposits 784 880 747
3. Brokered Deposits 334 314 381
4. Borrowings 290 446 572
5. Other Liabilities 44 51 60
6. Hybrid Capital 122 123 122
7. Common Equity 727 851 902
8. Total Liabilities and Capital $5,824 $6,761 $7,212
Total Liabilities and Capital
($ in Millions)
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
®
99
®
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
Deposit Detail
(as of 12/31/2016)
QTD Cost = .37%
YTD Cost = .38%
Total = $5.6 Billion
10
Demand Deposits
52%
Savings Deposits
28%
Certificates &
Time Deposits of
>$100,000
5%
Certificates &
Time Deposits of
<$100,000
8% Brokered
Deposits
7%
10
11.40%
11.37%
11.22% 11.31%
11.49%
11.42% 11.39%
11.05% 11.10%
9.06%
9.21%
8.95% 9.17% 9.08%
9.26% 9.43% 9.48% 9.24%
15.34% 15.12%
14.92% 14.85% 14.94% 14.79% 14.67%
14.18% 14.21%
6.00%
7.00%
8.00%
9.00%
10.00%
11.00%
12.00%
13.00%
14.00%
15.00%
16.00%
17.00%
18.00%
4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
Total Risk-Based Capital Ratio (Target = 13.50%)
Common Equity Tier 1 Capital Ratio (Target = 10.00%)
Tangible Common Equity Ratio (TCE) (Target = 8.50%) 11
Capital Ratios
(Target)
(Target)
(Target)
®
3.80% 3.78% 3.81%
3.85%
3.75%
3.83%
3.86%
3.94%
3.90%
3.69%
3.61%
3.65%
3.71%
3.62% 3.66% 3.65%
3.70%
3.72%
2.80%
3.00%
3.20%
3.40%
3.60%
3.80%
4.00%
4.20%
$36
$40
$44
$48
$52
$56
$60
$64
Q4 - '14 Q1 - '15 Q2 - '15 Q3 - '15 Q4 - '15 Q1 - '16 Q2 - '16 Q3 - '16 Q4 - '16
Net Interest Income - FTE ($millions) Net Interest Margin Net Interest Margin - Adjusted for Fair Value Accretion
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
12
Net Interest Margin
®
($ in Millions)
Q4 - '14 Q1 - '15 Q2 - '15 Q3 - '15 Q4 - '15 Q1 - '16 Q2 - '16 Q3 - '16 Q4 - '16
Net Interest Income - FTE ($millions) $ 49.2 $ 49.2 $ 51.7 $ 53.3 $ 53.2 $ 57.6 $ 59.2 $ 61.1 $ 62.1
Fair Value Accretion $ 1.4 $ 2.2 $ 2.2 $ 2.0 $ 1.9 $ 2.5 $ 3.2 $ 3.8 $ 2.9
Tax Equivalent Yield on Earning Assets 4.26% 4.24% 4.26% 4.30% 4.20% 4.28% 4.30% 4.37% 4.32%
Cost of Supporting Liabilities 0.46% 0.46% 0.45% 0.45% 0.45% 0.45% 0.44% 0.43% 0.42%
Net Interest Margin 3.80% 3.78% 3.81% 3.85% 3.75% 3.83% 3.86% 3.94% 3.90%
2014 2015 2016
1. Service Charges on Deposit Accounts $15.7 $16.2 $17.8
2. Wealth Management Fees 11.7 11.3 12.6
3. Insurance Commission Income 7.4 4.1
4. Card Payment Fees 11.8 13.4 15.0
5. Cash Surrender Value of Life Ins 3.7 2.9 4.3
6. Gains on Sales Mortgage Loans 4.9 6.5 7.1
7. Securities Gains/Losses 3.6 2.7 3.4
8. Gain on Sale of Insurance Subsidiary 8.3
9. Gain on Cancellation of Trust Preferred Debt 1.3
10. Other 3.0 3.1 5.0
11. Total $61.8 $69.8 $65.2
($ in Millions)
13
Non-Interest Income
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
®
–
–
–
–
–
14
Non-Interest Expense
2014 2015 2016
1. Salary & Benefits $ 96.5 $101.9 $102.6
2. Premises & Equipment 23.2 25.5 29.5
3. Core Deposit Intangible Amortization 2.4 2.8 3.9
4. Professional & Other Outside Services 8.1 9.9 6.5
5. OREO/Credit-Related Expense 3.4 3.9 2.9
6. FDIC Expense 3.7 3.7 3.0
7. Outside Data Processing 7.3 7.1 9.2
8. Marketing 3.5 3.5 3.0
9. Other 15.8 16.5 16.7
10. Non-Interest Expense $163.9 $174.8 $177.3
($ in Millions)
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
®
15
2014 2015 2016
1. Net Interest Income $ 187.0 $ 196.4 $ 226.5
2. Provision for Loan Losses (2.6) (0.4) (5.7)
3. Net Interest Income after Provision 184.4 196.0 220.8
4. Non-Interest Income 61.8 69.8 65.2
5. Non-Interest Expense (163.9) (174.8) (177.3)
6. Income before Income Taxes 82.3 91.0 108.7
7. Income Tax Expense (22.1) (25.6) (27.6)
8. Net Income Avail. for Distribution $ 60.2 $ 65.4 $ 81.1
9. EPS $ 1.65 $ 1.72 $ 1.98
10. Efficiency Ratio 62.44% 61.19% 56.51%
Earnings
($ in Millions)
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
®
16
Q1-’16 Q2-’16 Q3-’16 Q4-’16
1. Net Interest Income $ 54.5 $ 56.0 $ 57.7 $ 58.3
2. Provision for Loan Losses (0.6) (0.8) (1.9) (2.4)
3. Net Interest Income after Provision 53.9 55.2 55.8 55.9
4. Non-Interest Income 15.8 16.4 16.9 16.1
5. Non-Interest Expense (46.4) (44.9) (44.1) (41.9)
6. Income before Income Taxes 23.3 26.7 28.6 30.1
7. Income Tax Expense (5.6) (6.7) (7.5) (7.8)
8. Net Income Avail. for Distribution $ 17.7 $ 20.0 $ 21.1 $ 22.3
9. EPS $ 0.43 $ 0.49 $ 0.51 $ 0.55
10. Efficiency Ratio 61.78% 57.33% 55.12% 52.18%
Quarterly Earnings
($ in Millions)
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
®
17
Per Share Results
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
®
2015 Q1 Q2 Q3 Q4 Total
1. Earnings Per Share $ .43 $ .47 $ .45 $ .37 $ 1.72
2. Dividends $ .08 $ .11 $ .11 $ .11 $ .41
3. Tangible Book Value $13.96 $14.15 $14.59 $ 14.68
2016 Q1 Q2 Q3 Q4 Total
1. Earnings Per Share $ .43 $ .49 $ .51 $ .55 $ 1.98
2. Dividends $ .11 $ .14 $ .14 $ .15 $ .54
2. Tangible Book Value $15.02 $15.53 $15.86 $15.85
$9.21 $9.64
$10.95
$12.17
$13.65
$14.68
$15.85
THE STRENGTH OF BIG. THE SERVICE OF SMALL.
Dividends and Tangible Book Value
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
.11
www.firstmerchants.com
®
.01
.03
.05
.14
.15
1.59%
Forward
Dividend
Yield
27.3%
Dividend
Payout Ratio
=
Quarterly Dividends Tangible Book Value
18
.08
18
John J. Martin
Executive Vice President
and Chief Credit Officer
®
19
20
Loan Portfolio Trends
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
®
($ in Millions)
2014 2015 Q3-'16 2016 $ % $ % 186.1 186.1
1. Commercial & Industrial 897$ 1,057$ 1,147$ 1,195$ 48$ 4.2% 138$ 13.1%
2. Construction, Land and
Land Development 207 367 368 419 51 13.9% 52 14.2%
3. CRE Non-Owner Occupied 976 1,090 1,264 1,272 8 0.6% 182 16.7%
4. CRE Owner Occupied 535 554 524 531 7 1.3% (23) (4.2%)
5. Agricultural Production 105 98 93 80 (13) (14.0%) (18) (18.4%)
6. Agricultural Land 162 158 153 149 (4) (2.6%) (9) (5.7%)
7. Residential Mortgage 647 786 740 739 (1) (0.1%) (47) (6.0%)
8. Home Equity 287 349 399 419 20 5.0% 70 20.1%
9. Public Finance/Other
Commercial 36 160 209 258 49 23.4% 98 61.3%
10. Other Consumer 73 75 77 78 1 1.3% 3 4.0%
11. Total Loans 3,925$ 4,694$ 4,974$ 5,140$ 166$ 3.3% 446$ 9.5%
12. Construction Concentration
1
49.6% 47.3% 52.3%
13. Investment RE Concentration
1
197.0% 209.9% 211.2%
1As a % of Risk Based Capital
Change From Change From
Q3-'16 2015
21
Asset Quality Summary
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
®
($ in Millions)
2014 2015 Q3-'16 2016 $ % $ %
1. Non-Accrual Loans 48.8$ 31.4$ 34.1$ 30.0$ (4.1)$ (12.0%) (1.4)$ (4.5%)
2. Other Real Estate 19.3 17.3 10.2 9.0 (1.2) (11.8%) (8.3) (48.0%)
3. Renegotiated Loans 2.0 1.9 4.0 4.7 0.7 17.5% 2.8 147.4%
4. 90+ Days Delinquent Loans 4.6 0.9 1.6 0.1 (1.5) (93.8%) (0.8) (88.9%)
5. Total NPAs & 90+ Days
Delinquent
74.7$ 51.5$ 49.9$ 43.8$ (6.1)$ (12.2%) (7.7)$ (15.0%)
6. Total NPAs & 90+ Days/Loans &
ORE 1.9% 1.1% 1.0% 0.9%
7. Classified Assets 191.8$ 171.8$ 173.4$ 174.1$ 0.7$ 0.4% 2.3$ 1.3%
8. Criticized Assets (includes
Classified) 253.6$ 275.0$ 305.8$ 292.6$ (13.2)$ (4.3%) 17.6$ 6.4%
Change From Change From
Q3-'16 2015
22
Non-Performing Asset Reconciliation
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
®
($ in Millions)
2014 2015 2016
1. Beginning Balance NPAs & 90+ Days Delinquent 83.0$ 74.7$ 51.5$
Non-Accrual
2. Add: New Non-Accruals 46.8 20.0 24.6
3. Less: To Accrual/Payoff/Renegotiated (32.4) (24.1) (17.0)
4. Less: To OREO (4.6) (5.0) (1.6)
5. Less: Charge-offs (17.4) (8.3) (7.4)
6. Increase / (Decrease): Non-Accrual Loans (7.6) (17.4) (1.4)
Other Real Estate Owned (ORE)
7. Add: New ORE Properties 11.3 10.7 1.6
8. Less: ORE Sold (10.2) (10.3) (8.2)
9. Less: ORE Losses (write-downs) (4.0) (2.4) (1.7)
10. Increase / (Decrease): ORE (2.9) (2.0) (8.3)
11. Increase / (Decrease): 90+ Days Delinquent 3.3 (3.7) (0.8)
12. Increase / (Decrease): Renegotiated Loans (1.1) (0.1) 2.8
13. Total NPAs & 90+ Days Delinquent Change (8.3) (23.2) (7.7)
14. Ending Balance NPAs & 90+ Days Delinquent 74.7$ 51.5$ 43.8$
23
ALLL and Fair Value Summary
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
®
($ in Millions) Q4-'15 Q1-'16 Q2-'16 Q3-'16 Q4-'16
1. Allowance for Loan Losses (ALLL) 62.5$ 62.1$ 62.2$ 63.5$ 66.0$
2. Fair Value Adjustment (FVA) 47.0 47.1 42.3 37.9 34.9
3. Total ALLL plus FVA 109.5$ 109.2$ 104.5$ 101.4$ 100.9$
4. Specific Reserves 1.8$ 1.4$ 2.1$ 1.6$ 0.9$
5. Purchased Loans plus FVA 965.4 917.6 863.4 771.6 700.4
6. ALLL/Non-Accrual Loans 199.0% 169.1% 185.3% 186.1% 220.1%
7. ALLL/Non-purchased Loans 1.65% 1.62% 1.56% 1.50% 1.47%
8. ALLL/Loans 1.33% 1.32% 1.29% 1.28% 1.28%
9. ALLL & FVA/Total Loan Balances plus FVA1 2.31% 2.29% 2.15% 2.02% 1.95%
1 Management uses this Non-GAAP measure to demonstrate coverage and credit risk
24
Asset Quality & Portfolio Summary
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
®
Strong quarterly and YOY loan growth led by C&I, Public Finance, CRE and
Home Equity.
Construction and CRE portfolios are 52% and 211% of risk-based capital,
respectively; well beneath regulatory guidelines.
Total NPAs & 90 days decreased $39.2 million over the last three years
dropping to .9% of loans and ORE.
Provision expense of $5.7 million exceeded net charge-offs of $2.1 million in
order to support loan growth.
ALLL to non-purchased loans of 1.47%. With fair value adjustments
included, the ratio increases to 1.95% on loans.
Michael C. Rechin
President and Chief Executive Officer
®
25
26
FMC Strategy and Tactics Overview
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
Looking Forward . . .
®
Continue to Win in our Markets – Geographic Community-Based Banking Model
Increase Focus on Treasury Management Services for Deposit and Fee Generation
Exploit Back-Office Infrastructure for Efficiency and Operating Leverage
Build Out Specialty Finance Businesses and Lending Verticals
Persistent Focus on Banking Center Optimization in Alignment with Digital
Channels Migration
Mergers and Acquisitions Continuous Opportunity
27
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
®
28
The Arlington Bank Summary
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
®
Definitive Agreement Signed January 24, 2017
Headquartered in Columbus, Ohio
Founded in 1998
Balance Sheet as of September 30, 2016
• $305 Million in Assets
• $244 Million in Loans
• $260 Million in Deposits
Income Statement for Nine Months Ending
September 30, 2016
• Net Income of $3.1 Million
• Net Interest Margin of 3.80%
Excellent Credit Quality and Highly Profitable
• NPAs / Assets of 0.67%
• 1.35% ROAA LTM and 11.93% ROAE LTM
29
Financial Overview
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
®
Transaction Value: $75.8 Million*
Consideration: 100% Stock with Fixed Exchange Ratio of 2.7245
Required Approvals:
Regulatory and The Arlington Bank Shareholders
Voting Agreements for 36.40% of Shares Outstanding
Key Assumptions:
Cost Savings Estimated to be 35%, or $3.5 Million
Estimated One-Time Transaction Costs of $6.8 Million
Credit and Interest Rate Marks of $7.8 Million
Financial Impact:
Accretive to EPS During 2017
Tangible Book Value Earn-Back in Three Years
Minimal Impact to Capital Ratios
Termination Fee: $3.0 Million
Anticipated Closing: Mid-Year 2017
*Based on First Merchants’ January 24, 2017 closing price of $36.46 Per Share
30
Transaction Rationale
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
®
Columbus Ohio Market Expansion
• Adds Three, Full-Service Banking Centers to our Seven; Creating a Columbus
Banking Presence with Nearly $1 Billion in Loans
• Banking Centers Average More than $80 Million in Deposits Per Location of which
92% are Core
• Improves First Merchants’ Deposit Market Position from #12 to #8
• Columbus is One of the Fastest Growing Cities in the Midwest
• Arlington Bank is the 9th Largest Originator of Residential Mortgages in the
Columbus, Ohio Area
Strategic
Opportunity
Financially
Attractive
Accretive to EPS During 2017
Tangible Book Value Earn-Back in Three Years
Significant Operating Efficiencies – Approximately 35% in Cost Savings
Attractive
Risk Profile
Cultural Fit, Retention of Key Management Members
Due Diligence Process Completed
Experienced Acquirer, Core Competency in Integration Processes
31
Contact Information
First Merchants Corporation common stock is
traded on the NASDAQ Global Select Market
under the symbol FRME.
Additional information can be found at
www.FIRSTMERCHANTS.COM
Investor inquiries:
David L. Ortega
Investor Relations
Telephone: 765.378.8937
dortega@firstmerchants.com
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
®
Appendix
®
32
33
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
Appendix – Non-GAAP Reconciliation ®
CAPITAL RATIOS (dollars in thousands):
4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
Total Risk-Based Capital Ratio
Total Stockholders' Equity (GAAP) 726,827 739,658 749,955 766,984 850,509 867,263 887,550 900,865 901,657
Adjust for Accumulated Other Comprehensive (Income) Loss a 1,630 1,915 6,490 3,614 1,362 (2,066) (7,035) (3,924) 13,581
Less: Preferred Stock (125) (125) (125) (125) (125) (125) (125) (125)
Add: Qualifying Capital Securities 55,000 56,827 56,827 51,827 55,776 55,236 55,296 55,355 55,415
Less: Tier 1 Capital Deductions (4,381) (2,371) (3,418) (2,516) (1,999) (1,828) (1,440) (376)
Less: Disallowed Goodwill and Intangible Assets (218,755) (205,818) (208,980) (208,749) (247,006) (250,367) (249,932) (249,541) (249,104)
Less: Disallowed Servicing Assets (167)
Less: Disallowed Deferred Tax Assets (1,786) (1,581) (1,144) (1,677) (2,998) (2,743) (2,161) (564)
Total Tier 1 Capital (Regulatory) 564,535$ 586,290$ 600,215$ 608,989$ 656,323$ 664,944$ 681,183$ 699,029$ 720,484$
Qualifying Subordinated Debentures 65,000 65,000 65,000 65,000 65,000 65,000 65,000 65,000 65,000
Allowance for Loan Losses includible in Tier 2 Capital 55,972 58,688 60,865 62,012 62,453 62,086 62,186 63,456 66,037
Total Risk-Based Capital (Regulatory) 685,507$ 709,978$ 726,080$ 736,001$ 783,776$ 792,030$ 808,369$ 827,485$ 851,521$
Net Risk-Weighted Assets (Regulatory) 4,469,765$ 4,695,073$ 4,865,157$ 4,956,737$ 5,247,617$ 5,355,827$ 5,511,557$ 5,836,806$ 5,993,381$
Total Risk-Based Capital Ratio (Regulatory) 15.34% 15.12% 14.92% 14.85% 14.94% 14.79% 14.67% 14.18% 14.21%
Common Equity Tier 1 Capital Ratio
Total Tier 1 Capital (Regulatory) 564,535$ 586,290$ 600,215$ 608,989$ 656,323$ 664,944$ 681,183$ 699,029$ 720,484$
Less: Qualified Capital Securities (55,000) (56,827) (56,827) (51,827) (55,776) (55,236) (55,296) (55,355) (55,415)
Add: Additional Tier 1 Capital Deductions 4,381 2,371 3,418 2,516 1,999 1,828 1,440 376
Less: Preferred Stock (125)
Common Equity Tier 1 Capital (Regulatory) 509,410$ 533,844$ 545,759$ 560,580$ 603,063$ 611,707$ 627,715$ 645,114$ 665,445$
Net Risk-Weighted Assets (Regulatory) 4,469,765$ 4,695,073$ 4,865,157$ 4,956,737$ 5,247,617$ 5,355,827$ 5,511,557$ 5,836,806$ 5,993,381$
Common Equity Tier 1 Capital Ratio (Regulatory) 11.40% 11.37% 11.22% 11.31% 11.49% 11.42% 11.39% 11.05% 11.10%
a Includes net unrealized gains or losses on securities available for sale, net gains or losses on cash flow hedges, and amounts resulting from the application of the applicable accounting guidance
for defined benefit and other postretirement plans.
34
Appendix – Non-GAAP Reconciliation
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
®
TANGIBLE COMMON EQUITY RATIO (dollars in thousands):
4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
Total Stockholders ' Equity (GAAP) 726,827$ 739,658$ 749,955$ 766,984$ 850,509$ 867,263$ 887,550$ 900,865$ 901,657$
Less : Preferred Stock (125) (125) (125) (125) (125) (125) (125) (125) (125)
Less : Intangible Assets (218,755) (218,033) (220,196) (219,503) (259,764) (261,799) (260,822) (259,844) (258,866)
Tangible Common Equity (non-GAAP) 507,947$ 521,500$ 529,634$ 547,356$ 590,620$ 605,339$ 626,603$ 640,896$ 642,666$
Tota l Assets (GAAP) 5,824,127$ 5,877,521$ 6,140,308$ 6,189,797$ 6,761,003$ 6,798,539$ 6,906,418$ 7,022,352$ 7,211,611$
Less : Intangibles Assets (218,755) (218,033) (220,196) (219,503) (259,764) (261,799) (260,822) (259,844) (258,866)
Tangible Assets (non-GAAP) 5,605,372$ 5,659,488$ 5,920,112$ 5,970,294$ 6,501,239$ 6,536,740$ 6,645,596$ 6,762,508$ 6,952,745$
Tangible Common Equity Ratio (non-GAAP) 9.06% 9.21% 8.95% 9.17% 9.08% 9.26% 9.43% 9.48% 9.24%ANGIBLE COMMON EQUITY PER SHARE (dollars in thousands):
4Q10 4Q11 4Q12 4Q13 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
Total Stockholders ' Equity (GAAP) 454,408$ 514,467$ 552,236$ 634,923$ 726,827$ 739,658$ 749,955$ 766,984$ 850,509$ 867,263$ 887,550$ 900,865$ 901,657$
Less : Preferred Stock (67,880) (90,783) (90,908) (125) (125) (125) (125) (125) (125) (125) (125) (125) (125)
Less : Intangible Assets (154,019) (150,471) (149,529) (202,767) (218,755) (218,033) (220,196) (219,503) (259,764) (261,799) (260,822) (259,844) (258,866)
Tax Benefi t 2,907 2,224 2,249 4,973 6,085 5,849 5,619 5,388 6,278 6,753 6,453 6,204 5,930
Tangible Common Equity, Net of Tax (non-GAAP) 235,416$ 275,437$ 314,048$ 437,004$ 514,032$ 527,349$ 535,253$ 552,744$ 596,898$ 612,092$ 633,056$ 647,100$ 648,596$
Shares Outstanding 25,574,251 28,559,707 28,692,616 35,921,761 37,669,948 37,781,488 37,824,649 37,873,921 40,664,258 40,749,340 40,772,896 40,799,025 40,912,697
Tangible Common Equity per Share (non-GAAP) 9.21$ 9.64$ 10.95$ 12.17$ 13.65$ 13.96$ 14.15$ 14.59$ 14.68$ 15.02$ 15.53$ 15.86$ 15.85$
35
Appendix – Non-GAAP Reconciliation
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
®
EFFICIENCY RATIO (dollars in thousands):
2014 2015 1Q16 2Q16 3Q16 4Q16 2016
Non Interest Expense (GAAP) $ 164,008 $ 174,806 $ 46,475 $ 44,835 $ 44,115 $ 41,934 $ 177,359
Less: Core Deposit Intangible Amortization (2,445) (2,835) (978) (977) (978) (977) (3,910)
Less: OREO and Foreclosure Expenses (3,462) (3,956) (751) (915) (637) (574) (2,877)
Adjusted Non Interest Expense (non-GAAP) 158,101 168,015 44,746 42,943 42,500 40,383 170,572
Net Interest Income (GAAP) 187,037 196,404 54,455 55,962 57,682 58,374 226,473
Plus: Fully Taxable Equivalent Adjustment 7,921 10,975 3,136 3,256 3,402 3,747 13,541
Net Interest Income on a Fully Taxable Equivalent Basis
(non-GAAP) 194,958 207,379 57,591 59,218 61,084 62,121 240,014
Non Interest Income (GAAP) 61,816 69,868 15,837 16,385 16,861 16,120 65,203
Less: Investment Securities Gains (Losses) (3,581) (2,670) (997) (706) (839) (847) (3,389)
Adjusted Non Interest Income (non-GAAP) 58,235 67,198 14,840 15,679 16,022 15,273 61,814
Adjusted Revenue (non-GAAP) 253,193 274,577 72,431 74,897 77,106 77,394 301,828
Efficiency Ratio (non-GAAP) 62.44% 61.19% 61.78% 57.33% 55.12% 52.18% 56.51%
FORWARD DIVIDEND YIELD
4Q16
Most recent quarter's dividend per share $ 0.15
Most recent quarter's dividend per share - Annualized 0.60
Stock Price at 12/31/16 37.65
Forward Dividend Yield 1.59%
DIVIDEND PAYOUT RATIO
2016
Dividends per share $ 0.54
Earnings Per Share 1.98
Dividend Payout Ratio 27.3%
36
Appendix – Non-GAAP Reconciliation
THE STRENGTH OF BIG. THE SERVICE OF SMALL.www.firstmerchants.com
®
ALLOWANCE AS A PERCENTAGE OF NON-PURCHASED LOANS (dollars in thousands):
4Q15 1Q16 2Q16 3Q16 4Q16
Loans Held for Sale (GAAP) 9,894$ 3,628$ 18,854$ 1,482$ 2,929$
Loans (GAAP) 4,693,822 4,709,907 4,791,429 4,973,844 5,139,645
Total Loans 4,703,716 4,713,535 4,810,283 4,975,326 5,142,574
Less: Purchased Loans (917,589) (870,507) (821,158) (733,715) (665,417)
Non-Purchased Loans (non-GAAP) 3,786,127$ 3,843,028$ 3,989,125$ 4,241,611$ 4,477,157$
Allowance for Loan Losses (GAAP) 62,453$ 62,086$ 62,186$ 63,456$ 66,037$
Fair Value Adjustment (FVA) (GAAP) 47,057 47,104 42,291 37,898 34,936
Allowance plus FVA (non-GAAP) 109,510$ 109,190$ 104,477$ 101,354$ 100,973$
Total Loans 4,703,716$ 4,713,535$ 4,810,283$ 4,975,326$ 5,142,574$
Fair Value Adjustment (FVA) (GAAP) 47,057 47,104 42,291 37,898 34,936
Total Loans plus FVA (non-GAAP) 4,750,773$ 4,760,639$ 4,852,574$ 5,013,224$ 5,177,510$
Allowance as a Percentage of Non-Purchased Loans (non-GAAP) 1.65% 1.62% 1.56% 1.50% 1.47%
Allowance plus FVA as a Percentage of Total Loans plus FVA (non-GAAP) 2.31% 2.29% 2.15% 2.02% 1.95%
CONSTRUCTION AND INVESTMENT REAL ESTATE CONCENTRATIONS (dollars in thousands):
2015 3Q16 2016
Tot l Ri k-Based Capital (Subsidiary Bank Only)
Tot l Stockholders' Equity (GAAP) 927,774$ 972,182$ 973,641$
Adjust for Accumul ted Other Comprehensive (Income) Loss 1 (579) (6,332) 9,701
Less: Preferred Stock (125) (125) (125)
Less: Tier 1 Capital Deductions (1,903) (889) -
Less: Disallowed Goodwill and Intangible Assets (246,558) (249,093) (248,656)
Less: Disallowed Deferred Tax Assets (1,269) (1,334) -
Total Tier 1 Capital (Regulatory) 677,340 714,409 734,561
Allowance for Loan Losses includible in Tier 2 Capital 62,453 63,456 66,037
Total Risk-Based Capital (Regulatory) 739,793$ 777,865$ 800,598$
Construction, Land a d Land Developme t Loans 366,704$ 368,241$ 418,703$
Concentration s a % of the Bank's Risk-Based Capital 49.6% 47.3% 52.3%
Construction, Land and Land Development Loans 366,704$ 368,241$ 418,703$
Investment Real Estate Loans 1,090,573 1,264,304 1,272,415
Total Construction and Investment RE Loans 1,457,277$ 1,632,545$ 1,691,118$
Concentration as a % of the Bank's Risk-Based Capital 197.0% 209.9% 211.2%
1 Includes net unrealized gains or losses on securities available for sale, net gains or losses on cash flow hedges, and amounts
resulting from the application of the applicable accounting guidance for defined benefit and other postretirement plans.