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

Financial Performance:

• Net income for Q3 2026 totaled $67.8 million ($1.09 diluted EPS), an 11% increase year-over-year; adjusted EPS was $1.10.
• Net interest margin (NIM) expanded 6 basis points sequentially to 3.44%, its highest level in over two years; year-to-date NIM was 3.39%.
• Fully taxable equivalent net interest income grew 20% year-over-year.
• Adjusted pre-tax, pre-provision earnings were $83.7 million (up 19% YoY), yielding an adjusted ROA of 1.59%.
• Return on tangible common equity stood at 15.09%; tangible book value per share declined 3.2% sequentially to $28.86 due to AOCI impacts from interest rate changes.
• Total revenues grew 19% on a normalized basis, driven by a 13% contribution from the First Savings acquisition.
• Non-interest expense was $116.3 million, including $900,000 in acquisition costs; organic expense growth was driven by marketing, health insurance, and lease impairment.
• Capital ratios remain strong with a total risk-based capital ratio of 13.58%, Common Equity Tier 1 (CET1) at 11.22%, and tangible common equity at 8.83%.
• Completed a $100 million subordinated debt issuance in late September; repurchased $50.3 million of common stock year-to-date.
• Allowance for credit losses totaled $215.5 million (1.38% coverage ratio); provision expense was a modest $3.3 million.

Guidance and Future Outlook:

• Full-year net charge-off guidance lowered to the 38–40 basis point range from the previous 40–45 bp outlook.
• Loan growth expected to return to a mid-single-digit annualized rate in Q4, following a 1.8% annualized pace in Q3.
• NIM projected to remain stable in Q4, absorbing the full quarter of sub-debt interest expense, with expectations for continued margin expansion in 2027.
• Expense growth guidance for 2027 set at 3% to 5%, contingent on continued investment in technology, talent, and marketing.
• Fee income growth, particularly in card payments and wealth management, targeted at high single-digit growth (8%–10%) in 2027.
• Share buyback activity is expected to elevate in Q4 and potentially Q1, supported by the new sub-debt issuance.

Business Segments and Product Lines:

• Loans: Total loans at $15.6 billion; organic loan growth of $473.7 million (3.5%) over the past 12 months excluding acquisitions. Strong growth in construction and mortgage portfolios; commercial loans relatively flat due to payoffs offsetting production.
• Deposits: Total deposits grew 4.2% annualized in Q3 to $16.9 billion; non-interest-bearing deposits represent 22% of the base. Consumer non-maturity deposits grew 3% year-to-date.
• Commercial Banking: Solid production in community, corporate banking, asset-based lending (ABL), and investment real estate.
• Wealth Management: Private wealth team drove deposit growth following a client's business sale transaction.
• Mortgage Banking: Pipeline softness noted in Q3 due to elevated mortgage rates; gain on sales income expected to be slightly softer in Q4.
• New Verticals: Emerging revenue streams in SBA lending and first-lien HELOCs contributing to non-interest income growth.

Market and Competitive Landscape:

• Operating 126 banking centers across Indiana, Michigan, and Ohio; assets under advisement stand at $7.1 billion.
• Midwestern markets remain resilient; core Commercial & Industrial (C&I) and ABL portfolios showing strong pipeline momentum.
• Competitive deposit pricing led to a 9 basis point increase in the rate paid on deposits to 2.16%.
• Shared National Credit (SNC) exposure reduced to $936 million (down from $1.1 billion) as the bank selectively exited or did not renew lower-returning relationships.
• Construction and mortgage loan portfolios are the primary drivers of recent loan growth volume.

Risks and Challenges:

• Credit Quality: Two specific credits (auto parts distributor and digital marketing firm) moved to non-accrual; however, expected losses were previously reserved. Net charge-offs tied to these and prior reserves are expected to be resolved in Q4.
• Interest Rate Sensitivity: Higher rates are impacting consumer mortgage pipelines and causing some commercial real estate borrowers to delay capital expenditures or acquisitions.
• Balance Sheet Optimization: Ongoing management of the Shared National Credit and Sponsor Finance portfolios to ensure alignment with risk-return thresholds.
• Expense Inflation: Increased costs in marketing and employee health insurance driving higher-than-guided operating expenses in Q3.
• Market Uncertainty: General business sentiment regarding tariffs and interest rates is influencing end-of-year capital expenditure decisions.

Management Commentary and Tone:

• CEO Mark Hardwick announced his retirement effective year-end, with President Mike Stewart succeeding him; tone was confident regarding the leadership transition and company stability.
• Management emphasized a "disciplined organic growth" strategy and deepening client relationships in core Midwest markets.
• Confidence expressed in the "relationship-based model" to drive growth despite macroeconomic headwinds.
• Executive team highlighted the successful integration of First Savings and the shift toward higher-yielding loan assets.
• Overall tone was steady and transparent regarding credit resolution and balance sheet optimization efforts.

Analyst Questions and Answers:

• Credit Costs: Confirmed that the 22+ million in new non-accruals will be charged off in Q4; provision is expected to normalize to a 20–25 basis point range post-resolution.
• Loan Growth Drivers: Attribute muted Q3 growth to portfolio management in SNC/Sponsor lines; Q4 growth expected to resume via community/corporate banks and ABL.
• Expense Guidance: Q3 expense run rate considered indicative for Q4; 2027 expense increase of 3–5% deemed appropriate to fund strategic investments.
• Non-Interest Income: Fee income expected to remain consistent in Q4; SBA and HELOC verticals driving incremental gains in 2027.
• Margin Outlook: Q4 margin stable due to sub-debt offsetting asset-side repricing; 2027 margin expansion expected with potential rate hikes.
• Capital Allocation: Sub-debt proceeds will be utilized for share repurchases; buyback activity expected to increase in Q4.

Other Key Points:

• Mark Hardwick served as CEO for 24 years and CFO/COO prior; this was his final earnings call.
• The company operates with a 12.2% total asset CAGR over the past decade.
• Non-performing assets remained stable at 57 basis points of total assets.
• Year-to-date, the bank excluded acquisition expenses to highlight adjusted earnings power of the combined entity.
• AOCI volatility due to interest rate changes negatively impacted tangible book value but did not reflect underlying operating performance.