FIRST MERCHANTS CORPORATION 3RD QUARTER 2026 EARNINGS - FIRST MERCHANTS CORP

Financial Performance:

• Third quarter net income totaled $67.8 million ($1.09 per diluted share), up 11% year-over-year; adjusted EPS was $1.10.
• Net interest margin (NIM) expanded six basis points to 3.44%, the highest level in over two years; fully taxable equivalent NII grew 20% year-over-year.
• Adjusted pre-tax pre-provision earnings reached $83.7 million (up 19% year-over-year) with an adjusted pre-tax ROA of 1.59%.
• Year-to-date loans increased $2 billion (14.6%), while deposits grew $2.1 billion (13.8%); organic loan growth excluding acquisitions was $473.7 million (3.5%).
• Non-performing assets remained stable at 57 basis points of total assets; net charge-offs were $29.4 million with a coverage ratio of 1.38%.
• Year-to-date total revenue grew nearly 19% on a normalized basis; non-interest income increased $1.7 million excluding one-time mortgage sale losses.
• Total risk-based capital ratio rose to 13.58% following a $100 million subordinated debt issuance; tangible common equity is 8.83%.
• The company repurchased $50.3 million of common stock year-to-date, including $12 million in Q3.

Guidance and Future Outlook:

• Management expects loan growth to resume in the mid-single digits in the fourth quarter, driven by production in community banking, corporate banking, and investment real estate segments.
• Full-year credit loss guidance has been lowered from 40-45 basis points to approximately 38-40 basis points, excluding Q4 one-time resolution of previously reserved credits.
• Normalized credit loss run rate post-Q4 is projected at 20-25 basis points; the provision expense is expected to cover growth and new migration rather than specific new reserves.
• Expense growth for 2027 is guided at 3-5% above current levels to fund technology and talent investments, particularly in Michigan.
• Fee income, specifically client-related categories (card payments, wealth management), is expected to grow 8-10% in 2027.
• Share buybacks are anticipated to remain elevated in Q4 and Q1, utilizing proceeds from the sub-debt issuance.
• Net interest margin is expected to remain stable in Q4 as sub-debt interest expense offsets gains from asset repricing, with potential for expansion in 2027 if rates rise.

Business Segments and Product Lines:

• Commercial loan growth was flat due to payoffs in sponsor finance and shared national credit portfolios, despite strong production in community/corporate banking and asset-based lending.
• Construction and mortgage loan portfolios showed strong growth; however, consumer mortgage pipelines have softened due to high interest rates and reduced refinance activity.
• Deposits grew 4.2% annualized, driven by the consumer line of business and private wealth team; non-interest-bearing deposits now represent 22% of total deposits.
• The First Savings acquisition integration is complete, contributing approximately 13% of total revenue growth year-to-date.
• Strategic focus remains on deepening relationships in the Midwest, with specific opportunities identified in community and non-institutional (CNI) lending and asset-based lending (ABL).

Market and Competitive Landscape:

• The Midwest market remains resilient, with businesses continuing to invest and expand despite economic uncertainty.
• Competitive pressure exists in deposit pricing, with the average rate paid on deposits increasing 9 basis points to 2.16%.
• The company sees opportunities to outperform competitors in community banking through localized relationship banking strategies.
• Shared national credit exposure declined to $936 million, reflecting a strategic exit from lower-returning or higher-risk transactions.
• Consumer mortgage demand is currently soft due to 7% mortgage rates, dampening purchase and refinance activity.

Risks and Challenges:

• Credit risk is concentrated in a limited number of specific problem relationships (e.g., auto parts distributor, digital marketing firm) already provisioned in prior quarters.
• Commercial real estate and investment portfolios face pressure from higher interest rates, potentially leading to re-evaluation of capital expenditures and project feasibility.
• Operational expenses were higher than expected in Q3 due to strategic marketing investments and health insurance cost increases.
• Asset-backed and sponsor finance portfolios require careful monitoring to manage concentration risks and maintain capital efficiency.
• Economic uncertainty regarding tariffs and interest rates is influencing business owner sentiment on capital expenditure timing.

Management Commentary and Tone:

• CEO Mark Hardwick announced his retirement at the end of 2026, marking this as his final earnings call; he expressed high confidence in successor Mike Stewart, President.
• The tone was confident and forward-looking, emphasizing disciplined capital deployment and the successful completion of the First Savings integration.
• Management highlighted a strong balance sheet and the ability to generate organic growth through deep client relationships.
• The leadership transition is framed as a natural evolution, with the existing executive team continuing its strategic trajectory.
• Confidence in the mid-Western footprint and the relationship-based model was reiterated as a key differentiator against broader market volatility.

Analyst Questions and Answers:

• Credit Loss Outlook: Analysts questioned the reserve stability; John Martin clarified that Q4 charge-offs will be covered by existing reserves, with no significant new specific reserves expected beyond normal growth.
• Loan Growth Mix: Russell Gunther asked about growth drivers; Mike Stewart explained that muted growth was due to portfolio management in the shared national credit space, while pipelines for community banking remain strong.
• Expense Guidance: Daniel Tamera queried expense levels; Michelle Keviesky confirmed Q3's elevated run rate reflects strategic marketing spend and expects 3-5% growth for 2027.
• Fee Income: Damon Del Monte asked about mortgage banking and fee income; management expects consistent fee income with higher single-digit growth in 2027, offsetting potential softness in mortgage gains.
• Capital Management: Analysts confirmed intent to continue share repurchases using sub-debt proceeds, with elevated levels expected in Q4.
• Market Opportunities: Nathan Race and Brian Martin inquired about specific growth areas; management identified CNI banking, ABL, and low-income housing tax credits as key growth engines in 2027.
• Rate Sensitivity: Management noted that each 25bps rate hike typically adds 1-2bps to the margin, though sub-debt costs currently offset some immediate gains.

Other Key Points:

• Total assets stand at $21.1 billion with $15.6 billion in loans and $16.9 billion in deposits; assets under advisement are $7.1 trillion (note: likely typo in transcript, likely $7.1 billion given scale).
• The company operates 126 banking centers across Indiana, Michigan, and Ohio.
• TCE (Tangible Common Equity) ratio declined slightly due to AOCI impact from interest rate changes but remains well above the 8% target.
• The $100 million subordinated debt issuance increased the total risk-based capital ratio by 60 basis points.
• Management highlighted the successful resolution of two specific commercial credits discussed in the previous quarter.