First Merchants’ Earnings Call Highlights Record Growth Momentum

First Merchants ((FRME)) has held its Q4 earnings call. Read on for the main highlights of the call.

First Merchants Signals Strong Momentum With Record Results and Accretive Deal on Horizon

Management’s tone on First Merchants’ latest earnings call was notably upbeat, underscored by record performance across key financial metrics, solid loan and deposit growth, and a confident outlook heading into 2026. While executives acknowledged manageable headwinds—such as mild margin pressure from rate cuts, some credit charge-offs, and higher-cost deposits in certain segments—the overarching message was one of strength and momentum. The pending First Savings acquisition is expected to add scale and deliver meaningful cost synergies, reinforcing management’s view that the bank is well positioned for continued growth, solid returns, and ongoing shareholder distributions.

Record Financial Results Underscore Earnings Power

First Merchants closed the year with record levels of assets, loans and deposits, highlighting the bank’s expanding franchise and earnings capacity. Total assets reached $19.0 billion, total loans climbed to $13.8 billion, and total deposits hit $15.3 billion. Full-year net income came in at $224.1 million, driving a record diluted EPS of $3.88, up roughly 13.8% year over year. Profitability metrics remained solid, with return on assets at 1.21% and return on tangible common equity at 14.08%, reinforcing the bank’s ability to convert balance sheet growth into strong bottom-line results.

Broad-Based Loan Growth Led by Commercial Activity

Loan growth remained a key pillar of performance, with linked-quarter loan balances increasing by $197 million, or 5.8% annualized, and year-to-date loan growth reaching $939 million, equating to about 7.3% for 2025. Commercial lending was the standout driver: commercial loan balances rose $153 million in the fourth quarter alone, an annualized growth rate of 6%, while commercial and industrial (C&I) loans expanded by nearly $700 million over the year. Management emphasized that commercial pipelines remain healthy, positioning the bank for continued lending expansion.

Deposit Growth Paired With Improved Funding Costs

Deposits also showed strong momentum, with total balances up $424.9 million in the fourth quarter, an 11.4% annualized increase. Importantly, the funding mix improved as non‑maturity deposits grew by more than $250 million, supporting a lower overall cost of deposits. The average rate paid on deposits fell 12 basis points to 2.32%, resulting in a $3 million reduction in quarterly interest expense. Management highlighted this as evidence that deposit pricing discipline and mix management are contributing meaningfully to earnings, even in a shifting rate environment.

Net Interest Income Growth and Margin Expansion

Net interest income (NII) continued to trend higher, benefiting from both volume growth and selective repricing. Fully tax-equivalent NII reached $145.3 million in the fourth quarter, up $5.4 million from the prior quarter and $5.1 million year over year. The net interest margin (NIM) expanded by 5 basis points to 3.29%, supported by new and renewed loan yields of 6.51%. While management anticipates some modest margin compression ahead if rate cuts persist, the latest quarter showed that the franchise can still grow NII despite rate headwinds.

Fee Income Showing Momentum With Ambitious Growth Targets

Noninterest income provided a meaningful complement to spread revenue. Fourth-quarter noninterest income totaled $33.1 million, with customer-related fees contributing $30 million. Sequentially, fee categories such as wealth management, card payment services, and mortgage gains all improved, each adding roughly $0.3–0.4 million. The bank is targeting about 10% growth in noninterest income in 2026 on a stand-alone basis, signaling a strategic emphasis on diversifying revenue streams beyond traditional lending.

Capital Strength Fuels Shareholder-Friendly Actions

First Merchants entered the acquisition phase with robust capital ratios, giving management flexibility to pursue both growth and shareholder returns. The common equity Tier 1 ratio stood at 11.7%, while the tangible common equity ratio improved to 9.38%, up 20 basis points. Capital strength supported an active share repurchase program: the bank bought back roughly 1.2 million shares during 2025 for $46.9 million, including 272,000 shares for $10.4 million in the fourth quarter. Management reiterated its intention to remain opportunistic and even aggressive with buybacks while the stock’s valuation is viewed as attractive.

Strategic Expansion via First Savings Acquisition

The bank’s growth ambitions are set to accelerate with the acquisition of First Savings Group, which will add approximately $2.4 billion in assets and extend First Merchants’ footprint into Southern Indiana and the Louisville metropolitan area. Regulatory and shareholder approvals have been secured, with legal close scheduled for February 1, 2026. Integration work is underway, and management expects significant cost synergies, targeting roughly 27.5% annualized expense savings following integration. This combination is projected to be accretive and to enhance the bank’s scale and market presence.

Improved Investment Portfolio Valuation Supports Flexibility

The bank’s securities portfolio also contributed to a stronger balance sheet position. Unrealized losses on the available-for-sale investment book declined by $30 million, or about 15%, as interest rates moved favorably. First Merchants expects around $282 million of cash flows from this portfolio over the next 12 months, at a relatively low roll-off yield of roughly 2.09%. That cash can be redeployed into higher-yielding loans, supporting margin resilience and earnings growth despite the broader rate-cut environment.

Loan Yield Pressure and Emerging Margin Headwinds

Even as NIM rose in the latest quarter, management acknowledged growing pressure on loan yields as the Federal Reserve’s rate cuts filter through the portfolio. Total loan yield declined 8 basis points quarter over quarter to 6.32%. The bank expects modest core margin compression of only a few basis points in 2026 if the rate-cut cycle continues, with deposit repricing and balance sheet actions helping to offset some of the pressure. This suggests earnings growth will rely more heavily on volume growth and mix optimization than on further spread expansion.

Contained Credit Losses Amid Select Problem Credits

Credit costs ticked higher but remained at levels management views as manageable. Net charge-offs were $6.0 million in the quarter, driven by $7.3 million in gross charge-offs, including a $4.4 million loss on a sponsor finance C&I borrower. New nonaccrual loans totaled $22.8 million, with the largest exposure—a roughly $9.6 million multifamily construction project—reflecting pockets of pressure in higher-rate, construction-heavy segments. Looking ahead, management is guiding to a normalized charge-off run rate in the 15–20 basis-point range, consistent with sound but not risk-free credit conditions.

Rising NPAs but Still Manageable Asset Quality Metrics

Nonperforming assets and loans 90 days past due increased by $5.6 million during the quarter, ending at $74.5 million. Management noted that a subsequent $12.9 million payoff would have improved these metrics, indicating that some of the quarter-end uptick may already be reversing. Classified loans stand at about 2.56% of total loans, a level that the bank views as acceptable in the current environment. Overall asset quality remains a focus area but does not appear to pose a significant threat to capital or earnings at this stage.

Higher-Cost Public Fund Deposits Add Expense but Deepen Relationships

While overall deposit costs fell, the bank’s commercial deposit growth was partly driven by public fund depository relationships, which carry higher rates. Management underscored that these public fund balances represent important relationships with local governments and municipalities, even though they lift the average cost of deposits. The strategy appears to balance earnings considerations with broader franchise value and market positioning.

Short-Term Expense Uptick From Hiring and Integration

Operating expenses moved higher in the quarter as the bank invested in growth and prepared for the pending acquisition. Noninterest expense rose to $99.5 million, up $3.0 million sequentially, or about 3%. For 2026, core noninterest expense is budgeted to increase roughly 3–5%, reflecting planned hiring of around 10 additional full-time employees and the inclusion of First Savings operating expense for 11 months. Management expects the bulk of the projected 27.5% cost savings from the acquisition to emerge in the back half of 2026, helping to counteract the near-term cost build.

Managing CRE and Office Exposures in a Challenging Segment

The bank provided detail on its commercial real estate (CRE) and office loan exposures, which remain a key area of scrutiny for investors across the sector. Office loans represent 1.9% of total loans, with 28.1% of this office portfolio—about $73 million—maturing in less than a year. Management also pointed to pressure in certain multifamily construction credits, driven by higher interest rates and disputes among project sponsors. While these pockets of risk bear watching, the overall concentration levels appear contained and actively monitored.

Planned Portfolio Sales and Balance Sheet Repositioning

To further optimize its balance sheet and support future loan growth, First Merchants plans to sell the bond portfolio obtained with First Savings, estimated at about $250 million at close. Management is also considering the sale of smaller portions of the bank’s lowest-yielding bonds and loans to ease liquidity pressures and enhance asset yields. These moves signal a willingness to reposition the balance sheet proactively to support profitability and capital flexibility in a changing rate environment.

Constructive Guidance: Growth, Synergies and Continued Buybacks

Looking ahead, management laid out a constructive outlook for 2026, anchored by steady loan growth, expanding fee income, and disciplined expense management. The bank is guiding to mid-single-digit loan growth in the first quarter and mid- to high-single-digit expansion for 2026 overall—roughly 6–8%—driven largely by commercial C&I and consumer pipelines. Net interest income is expected to increase even as the core margin compresses modestly by a few basis points and experiences a roughly 5-basis-point seasonal dip in the first quarter. On the funding side, the bank anticipates continued deposit cost relief, aided by maturing certificates of deposit at higher rates and potential repricing opportunities. Noninterest income is targeted to grow about 10%, while core noninterest expense is budgeted to rise 3–5%, plus the impact of First Savings for most of the year. Management aims to keep the efficiency ratio below 55% and expects to realize around 27.5% annualized cost savings from the acquisition, primarily in the back half of 2026. Capital ratios are expected to remain strong, even after the deal closes, and the bank plans to continue opportunistic share repurchases. Asset quality guidance remains stable, with charge-offs expected in the mid-teens to 20-basis-point range, and the First Savings acquisition is expected to be EPS-accretive as net interest income and fee revenues grow.

In summary, First Merchants’ latest earnings call painted a picture of a bank firing on multiple cylinders: record earnings, healthy growth in loans and deposits, and a strong capital base that supports both acquisitions and buybacks. While investors will need to monitor margin pressure, pockets of credit risk, and integration execution, management’s confidence in the 2026 outlook—combined with clear plans for cost synergies and revenue growth—suggests the franchise is well positioned to deliver attractive returns in the coming years.