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

Explicit Guidance:

• Credit Costs/Provisioning: Full-year net charge-offs expected to be 38–40 basis points (downgraded from 40–45 bps prior guidance); normalized future charge-off run rate expected in the 20–25 basis point range. Allowance coverage ratio projected to stabilize in the low-to-mid 130s once Q4 problem credits are resolved.
• Loan Growth: Full-year loan growth expected to remain in the mid-single digits (approx. 6–8% annualized target), driven by Q4 pipeline strength and disciplined portfolio management.
• Expenses: Q4 expense run rate expected to align with Q3 elevated levels (due to strategic marketing investments); full-year 2027 non-interest expense projected to increase 3%–5% year-over-year to cover tech and talent investments.
• Fee Income Growth: Client-related fee categories (service charges, wealth management, card payments) expected to grow at an 8%–10% rate in 2027.
• Capital Returns: Share buybacks expected to be elevated in Q4 and potentially Q1 2027 utilizing proceeds from the recent $100 million subordinated debt issuance.
• Tax Rate: Management intends to provide an effective tax rate estimate for 2027 modeling in future communications (rate not explicitly quantified in this call).

Business-Segment Outlook:

• Loan Portfolio: Expected to grow in the mid-single digits in Q4; commercial production (community/corporate banking, asset-based lending) is strong, while mortgage loan growth faces softness due to high rates.
• Deposit Strategy: Core consumer non-maturity deposits growing 3% annually; commercial deposit growth expected to stabilize as temporary balance sheet repositioning concludes.
• Investment Portfolio: Expected cash flow from bonds over the next 12 months is $271.4 million; proceeds intended to fund higher-yielding loan growth. Approximately $350 million in fixed-rate loans at ~4.9% will reprice over the next 12 months.
• Asset Quality: Two specific non-accrual relationships ($18.4M auto parts, $4.3M digital marketing) expected to be resolved in Q4; no significant new specific reserves anticipated outside of previously reserved credits.
• Wealth Management: Private wealth team driving deposit increases; high single-digit growth expected in wealth management fee lines.

Market and Competitive Outlook:

• Demand Trends: Commercial demand remains resilient in Midwest markets; construction and mortgage loan portfolios showing growth. Consumer mortgage pipelines showing softness with refinancing activity at "nil" levels due to rates near 7%.
• Pricing: Loan yields increased 12 bps to 6.23% in Q3; new loan production yielding 6.34%. Net Interest Margin (NIM) expected to be stable in Q4 and see slight listed expansion in 2027 as asset repricing offsets sub-debt interest costs.
• Competition: Selective portfolio management in the "Shared National Credit" and "Sponsor Finance" sectors; actively "outworking competition" in core community banking relationships.
• Strategic Shift: Continuing to optimize the investment real estate and shared national credit portfolios on a transaction-by-transaction basis to ensure capital hurdles are met.

Macro / Industry Outlook:

• Interest Rates: NIM expected to increase 1–2 bps for every 25 bps rate hike, though sub-debt costs will partially offset this. Q4 may see margin stabilization.
• Economic Environment: Business sentiment tempered by uncertainty regarding tariffs and general economic temperature; some business owners delaying capital expenditures.
• Regulatory/Compliance: No immediate changes in regulatory guidance; capital ratios well above targets (TCE 8.83%, CET1 11.22%).

Strategic Initiatives:

• Leadership Transition: Mark Hardwick retiring end of 2026; President Mike Stewart succeeding as CEO. Focus remains on consistency and executing existing strategy.
• Organic Growth Engine: Continuing investment in marketing, branding, and team capabilities to win deposit and loan growth organically.
• Talent Acquisition: Opportunistic hiring planned for the Michigan market (post-integration of Fifth Third/ProAmerica) to add high-value bankers; other areas maintaining core team levels.
• Strategic Planning: Deep into a 2027 strategic plan analysis to resource teams effectively and improve valuation; aims to enhance earnings power and tangible book value.
• Capital Deployment: Completed $100M sub-debt issuance to boost capital ratio and flexibility for share repurchases.

Risks and Headwinds to Outlook:

• Consumer Mortgage Softness: High interest rates (near 7%) causing significant pipeline reduction in consumer mortgage banking, impacting gain-on-sale income.
• Interest Rate Sensitivity: While asset-sensitive, the full Q4 absorption of sub-debt interest expense may compress NIM expansion.
• Portfolio Concentration: Selective reduction in shared national credit and sponsor finance portfolios; potential for further normalization of these books.
• Expense Inflation: Higher employee health insurance costs and marketing investments contributing to elevated Q4 run rates.
• Credit Cycle: While current non-accruals were reserved for in prior quarters, ongoing monitoring required for "criticized" and "classified" credits migration.

Management Tone on the Future:

• Confidence: High confidence in the "Midwestern strength" and the ability to deliver sustainable earnings growth under new CEO Mike Stewart.
• Strategic Discipline: Emphasis on "disciplined organic growth," "deep client relationships," and "value accretive acquisitions."
• Continuity: CEO transition framed as a continuation of strategy rather than a pivot; focus on maintaining stakeholder confidence.
• Optimism on Valuation: Belief that the current strategic plan will lead to improved valuation metrics over the long term.

Miscellaneous:

• Q1 2027 Outlook: Management expects 2027 to feature continued normalized credit costs, steady margin expansion, and single-digit fee income growth.
• Acquisition Status: First Savings acquisition integration deemed "fully behind us," contributing to 13% of normalized revenue growth YTD.
• Retirement: Mark Hardwick notes this is his final earnings call; transition to Mike Stewart is immediate upon end of year.