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For First Merchants, a banner Q4 and a prized acquisition

Muncie, Ind.-based First Merchants Corp. executives touted the company's earnings power and said a bank acquisition announced this week in Ohio would further bolster its income generation in the year ahead.

First Merchants on Jan. 25 announced it would pay about $75.8 million to buy Upper Arlington, Ohio-based Arlington Bank, marking its first acquisition since 2015. The target operates in the Columbus metropolitan area, an economically vibrant market and home to Ohio's capital and the state's largest university. Assuming the deal closes mid-2017 as planned, Arlington will give the buyer three branches, adding to First Merchants' existing seven and creating a Columbus banking operation with nearly $1 billion in loans. Arlington has about $305 million in assets.

The acquisition "really adds some beef" to First Merchants' retail operation in central Ohio, President and CEO Michael Rechin told analysts a day after announcing the deal during a call to discuss the transaction and fourth-quarter 2016 earnings.

First Merchants said the deal should prove accretive to earnings in 2017, thanks in part to cost savings of about 35% of Arlington Bank's noninterest expense, or about $3.5 million. It expects to earn back initial dilution to tangible book value within three years. Investors have consistently favored deals with earnbacks of three years or less.

Rechin said Arlington is a clean bank with no notable credit issues and a proven lender in the Columbus area. The bank has a strong deposit base to fund a robust residential mortgage operation.

"This is a strong earnings company," he said.

First Merchants' Midwest footprint spans Indiana, Ohio and Illinois. Rechin said on the call that the bank is open to additional deals in 2017, with an eye on both Indiana and central Ohio.

Meanwhile, First Merchants reported fourth-quarter 2016 net income of $22.3 million, or 55 cents per share. That marked a company record and was up from $14.2 million, or 37 cents per share, a year earlier.

The bank also recorded its highest levels to date for total assets and total loans. Driven by strong organic growth, total assets reached $7.2 billion and total loans hit $5.1 billion at the close of 2016, up from $6.8 billion and $4.7 billion, respectively, a year earlier.

First Merchants' net interest margin reached 3.9% at the end of the fourth quarter, up from 3.75% a year earlier, bolstered by loan growth. Executives said on the call that they expect loan growth in 2017, on a percentage basis, to advance in the mid-to-high single digits. They are looking for the NIM to advance about 4 to 5 basis points during the first quarter, boosted by Federal Reserve policymakers' interest rate hike last month.

Credit quality, meanwhile, improved. Nonperforming assets and delinquent loans more than 90 days past due totaled $43.8 million at the end of 2016, down 15% from a year earlier.