First Merchants Corporation 3rd Quarter 2026 Earnings - FIRST MERCHANTS CORP

Financial Performance:

• Q3 2026 Net Income: $67.8 million ($1.09/share), up 11% YoY and ~30% vs Q3 2024; Adjusted EPS $1.10.
• Net Interest Margin (NIM): Expanded 6 bps to 3.44%, a two-year high and 20 bps higher YoY; Fully taxable equivalent NII grew 20% YoY.
• Adjusted Pre-Tax Pre-Provision Earnings (PTPPE): $83.7 million, up 19% YoY; Adjusted PTPPE ROA 1.59%.
• Profitability Metrics: Return on Assets (ROA) 1.30%; Return on Tangible Common Equity (ROTE) 15.09%; Efficiency ratio improved to 53.85% YTD.
• Revenue: Total revenues grew ~19% on a normalized basis; Net interest income +1.3% QoQ; Non-interest income +$800k QoQ.
• Cash Flow & Capital: Completed $100 million subordinated debt issuance; Repurchased $12 million common stock in Q3 ($50.3 million YTD); Total risk-based capital ratio 13.58%.
• Deposits & Loans: Deposits grew $175.6 million (4.2% annualized); Non-interest-bearing deposits 22%; Loans grew 1.8% annualized; Organic loan growth $473.7 million (3.5%) YTD excluding acquisitions.
• Credit Quality: Net charge-offs $29.4 million (aligned with prior specific reserves); Provision expense $3.3 million; Non-performing assets stable at 57 bps of total assets; Allowance for credit losses coverage ratio 1.38%.

Guidance and Future Outlook:

• Loan Growth: Expected to accelerate to mid-single digits in Q4 2026; YTD organic growth driven by demand.
• Net Interest Margin: Expected to remain stable in Q4 despite sub-debt interest expense absorbing some asset-sensitive gains; Potential for expansion in 2027 if rates rise.
• Credit Costs: Full-year 2026 net charge-off rate guidance lowered to 38-40 bps (from 40-45 bps); Normalized charge-off run rate projected at 20-25 bps; Specific reserves expected to resolve around $10 million by Q4 end.
• Expense Growth: Q3 run rate expected to persist into Q4; 2027 expense growth projected at 3-5% to support tech and talent investments, targeting positive operating leverage.
• Fee Income: Client-related fees (card payments, wealth management) expected to grow 8-10% in 2027; Gain on sale income expected to remain consistent.
• Share Repurchases: Committed to continuing buybacks, with potential for elevated levels in Q4 and Q1 2027 funded by sub-debt issuance.

Business Segments and Product Lines:

• Commercial Banking: Strong production in Community/Corporate Banking and Asset-Based Lending (ABL); Investment Real Estate and CRE stable but impacted by rate uncertainty; SBA and HELOC lending driving new gain-on-sale opportunities.
• Consumer Banking: Consumer non-maturity deposits grew 3% YTD; Private Wealth team drove significant deposit inflows; Consumer mortgage pipeline showing softness due to high rates.
• Investment Portfolio: Bond portfolio declined $168 million QoQ due to paydowns and valuation changes; Expected cash flow $271.4 million over next 12 months to fund loan growth.
• Integration Status: First Savings acquisition integration complete; synergy benefits realized with no further acquisition-related integration costs anticipated beyond current expenses.

Market and Competitive Landscape:

• Geographic Focus: Operating 126 centers across Indiana, Michigan, and Ohio; leveraging "Midwestern strength" and relationship-based model.
• Competition: Active pursuit of market share in local markets; ABL and community banking teams outperforming competition in specific segments.
• Market Trends: Commercial clients investing and expanding despite rate uncertainty; Consumer mortgage demand suppressed by rates near 7%; Real estate projects facing re-evaluation.
• Market Share: Maintaining focused exposure to Shared National Credit (decreased to $936 million) and Sponsor Finance ($811 million) with disciplined exit from lower-return relationships.

Risks and Challenges:

• Credit Risk: Specific resolution of two commercial credits (wireless retailer, roofing contractor) and migration of two new non-accruals ($22.7 million total) to non-performing; no broad-based deterioration.
• Interest Rate Risk: Margin pressure from sub-debt interest expense offsetting asset-side repricing; potential demand destruction in commercial capital expenditures and consumer mortgages if rates remain high.
• Economic Factors: Tariff uncertainty and business sentiment affecting end-of-year capital expenditure decisions.
• Operational Risks: Higher marketing and health insurance costs driving expense increases; potential impairment charges on real estate assets.

Management Commentary and Tone:

• CEO Transition: Mark Hardwick announced retirement at year-end; Mike Stewart succeeding as CEO on Jan 1, 2027.
• Confidence Level: High confidence in the strategy, client relationships, and team; "Company is in excellent hands."
• Strategic Focus: Continuation of disciplined organic growth, deepening client relationships, and value-accretive acquisitions; emphasis on "Midwestern strength."
• Tone: Professional, transparent regarding credit issues, and optimistic about long-term earnings power and shareholder value creation.

Analyst Questions and Answers:

• Credit Outlook (Raymond James): Confirmed 2026 charge-off rate closer to 38-40 bps; reserve levels stable with low-mid 130s coverage expected post-resolution; criticized loans migration is normal, not specific to large names.
• Loan Growth Drivers (Stevens): Muted Q3 growth due to selective management of Shared National Credit/Sponsor Finance; strong production in Community/CORP/Investment Real Estate/ABL; pipelines stable for mid-single digit Q4 growth.
• Margin & Expenses (Stevens/KBW): Q4 margin stable due to sub-debt offset; 2027 expense growth 3-5%; fee income growth driven by new verticals (SBA/HELOC) and wealth management.
• Share Buybacks (KBW): Committed to elevated buybacks in Q4/Q1 2027; sub-debt proceeds will support capital return.
• Hiring & Strategy (Piper Jaffray): Opportunistic hiring in Michigan post-Fifth Third/pro-America integration; strategic plan in development to optimize resource allocation.
• Commercial Focus (Breen Capital): Best momentum in Community/CORP banking and ABL; investment real estate opportunities exist for projects meeting capital hurdles.

Other Key Points:

• Leadership Change: This is Mark Hardwick's final earnings call; he served as CEO for 24 years.
• Dividend & Shareholder Returns: Dividend growth CAGR 13.3% over the past decade; tangible book value CAGR 8.5% (excluding AOCI impact).
• Regulatory Capital: Tangible Common Equity (TCE) ratio 8.83%, well above 8% target; CET1 ratio 11.22%.
• Balance Sheet Repricing: Approximately $350 million of fixed-rate loans (avg 4.90%) scheduled to reprice over the next 12 months.
• Deposit Mix: Core commercial loans grew; consumer non-maturity deposits up 3% YTD; commercial deposit base stabilized after a client moved funds to investment services.