First Merchants Earnings Call Highlights Margin Rebound

First Merchants ((FRME)) has held its Q1 earnings call. Read on for the main highlights of the call.

First Merchants’ latest earnings call struck a notably upbeat tone, as management highlighted improving core profitability, a stronger deposit mix, and disciplined credit despite a handful of one-time hits. Executives framed acquisition-related costs and a sizable mortgage mark-to-market charge as transitional, arguing that capital levels, integration progress, and redeployment plans position the bank for better earnings power ahead.

Size and Scale Expansion

First Merchants underscored its expanded footprint following the February 1 acquisition of First Savings, which pushed total assets to $21.1 billion, loans to $15.3 billion, and deposits to $16.5 billion. The combined network now spans 127 banking centers, giving the bank greater operating scale and a broader platform to drive organic growth.

Adjusted Earnings and Profitability

On an adjusted basis, performance moved in the right direction with EPS rising to $1.03 from $0.94 a year earlier, a 9.6% year-over-year gain. Management emphasized healthy profitability metrics, citing an adjusted return on assets of 1.25% and adjusted return on tangible common equity above 14%, signaling solid earnings power even amid integration work.

Net Interest Income and Margin Improvement

Net interest income on a fully tax-equivalent basis climbed to $157.7 million, up $12.4 million from the prior quarter and $21.3 million year over year. The net interest margin improved to 3.35%, gaining six basis points despite a calendar headwind of about five basis points, indicating underlying spread performance is firming.

Deposit Cost Reduction and Mix Improvement

Funding costs moved lower as the rate paid on deposits dropped 23 basis points to 2.09% in the first quarter, trimming deposit interest expense by $4.6 million. A redesigned checking lineup helped lift noninterest-bearing deposits to 23% of the mix from 16% last quarter, bolstering balance sheet efficiency even in a competitive deposit market.

Revenue and Pre-Tax Earnings Growth

Total revenue showed broad-based momentum, with net interest income rising by $12.2 million and noninterest income increasing by $2.5 million from the prior quarter. This revenue lift pushed pre-tax, pre-provision earnings up by $6.3 million to $78.7 million, underscoring that core operations are strengthening despite temporary drags from one-off items.

Successful Acquisition Integration Progress

Management reported that the First Savings integration is tracking ahead of expectations, particularly on capital impact. Tangible book value dilution landed at 2.4%, roughly half the 4.8% initially projected, and the earn-back period is now estimated at about 2.4 years, suggesting the deal is more accretive than originally modeled.

Strategic Balance Sheet Repositioning

To unlock liquidity and improve yields, the bank repositioned $357 million of mortgage loans with a 3.46% average rate into held-for-sale status. The plan is to use proceeds to retire higher-cost deposits and gradually redeploy funds into commercial loans targeting yields above 6%, aiming to enhance long-term margin and returns.

Capital Strength and Shareholder Returns

Capital levels remain solid with a common equity tier 1 ratio of 11.22% and tangible common equity of 9% even after the acquisition. The bank has repurchased more than 700,000 shares year to date for $27.6 million and expects proposed Basel III changes to potentially boost capital ratios by 50 to 80 basis points, supporting continued shareholder payouts.

Noninterest Income Momentum

Fee-based revenue held up well with normalized noninterest income at $35.6 million, supported by customer fees, wealth management, and loan sale gains. Management signaled further upside, indicating they expect noninterest income in the second quarter to rise roughly 3% to 4% from the first quarter’s normalized level.

Asset Quality Remains Contained

Credit trends were characterized as stable, with an allowance for credit losses of $212.5 million and coverage around 1.39%. Nonaccrual exposures were described as idiosyncratic and manageable, and shared national and sponsor finance positions are diversified and closely monitored, helping contain broader credit risk.

Reported Earnings Impacted by One-Time Items

Headline results were pressured by transitory factors, with reported net income at $27.7 million, or $0.45 per diluted share. The quarter absorbed $17 million in acquisition-related expenses and a $29.8 million mark-to-market loss tied to the mortgage repositioning, masking otherwise stronger underlying performance.

Mortgage Repositioning Mark-to-Market Charge

The move to reclassify $357 million of mortgages to held for sale triggered the $29.8 million mark-to-market charge in the quarter. Management framed this as an investment in future earnings, suggesting that while the earn-back on this specific repositioning could run several years, it aligns with a broader 2.4-year earn-back on the acquisition strategy.

Net Charge-Offs and Modest Provision

Net charge-offs totaled $10.3 million, elevated by a few legacy credits that were resolved during the quarter, while the provision came in at $4.9 million. The lower provision partly reflects loans moved to held for sale, and management implied that credit costs remain manageable despite these isolated write-offs.

Loan Yield Pressure

Loan yields saw some slippage, with the portfolio yield declining 23 basis points quarter over quarter to 6.09%. Management cited fewer interest days in the quarter and repricing effects following rate moves as near-term headwinds, though they anticipate a modest yield pickup in coming quarters as new production comes on at higher rates.

Tangible Book Value and Expense Impact

Tangible book value per share dipped 2.8% from the prior quarter, although it remains up 7.3% from a year ago, reflecting cumulative capital build. Noninterest expense reached $125.1 million, including $17 million of acquisition charges and other one-time hits such as a $0.9 million building write-down, which are not expected to recur at the same level.

Addition of Nonperforming Loans

The bank added a roughly $12 million nonaccrual office loan in the quarter, though this was offset by a $12.9 million payoff elsewhere in the portfolio. Areas of stress remain concentrated in income-producing real estate, particularly multifamily construction and office, but management stressed that these exposures are contained and closely managed.

Delayed Margin Benefit from Mortgage Sale

Investors were cautioned that the margin benefit from the mortgage sale will not be immediate, even though proceeds will promptly retire higher-cost deposits. Redeployment into higher-yielding commercial loans is expected to unfold over 18 to 24 months, so the uplift to net interest margin should build gradually rather than show up in one big step.

Repricing Uncertainty and Competitive Deposit Markets

Management acknowledged ongoing uncertainty around repricing as deposit competition remains intense, limiting room to cut funding costs further this year. While the improved mix toward noninterest-bearing balances is helpful, leadership suggested that this environment could cap the pace of margin expansion despite other positive levers.

Forward-Looking Guidance and Outlook

Looking ahead, First Merchants reiterated expectations for mid-single-digit loan growth in 2026 and aims to complete the $357 million mortgage sale by the end of the second quarter, redeploying into loans yielding above 6% over 18 to 24 months. Guidance calls for a slight uptick in net interest margin from the current 3.35%, noninterest income growth of 3% to 4% in the second quarter, disciplined expense growth with a post-synergy run-rate of $111 million to $114 million, and continued buybacks while keeping capital ratios around current levels.

First Merchants’ call painted a picture of a bank in transition but on firmer footing, with core earnings and capital strengthening even as one-time items drag on reported results. For investors, the key takeaways are disciplined integration of the First Savings deal, a deliberate balance sheet repositioning aimed at higher long-term yields, and a management team confident that near-term noise will give way to steadier margin and earnings improvement.