First Merchants Corp 2026 Q3 Earnings Call

Good morning, and welcome to First Merchants' third quarter 2026 conference call. Thanks for the introduction and for covering the forward-looking statement on page 2. We released our earnings yesterday after markets closed, and today's presentation materials are available via the link on page 3 of the earnings release. Turning to slide 3, you will see today's presenters and members of the executive management team. Joining me on today's call are Mike Stewart, our president, John Martin, our chief credit officer, and Michele Kawiecki, our chief financial officer. Slide 4 highlights our footprint and financial scale. We operate 126 banking centers across Indiana, Michigan, and Ohio. Total assets stand at $21.1 billion, with $15.6 billion in loans, $16.9 billion in deposits, and $7.1 billion in assets under advisement. Turning to slide 5, third quarter net income totaled $67.8 million, or $1.09 per diluted share.

Earnings per share are up 11% from the third quarter of last year and up nearly 30% from the third quarter of 2024. Excluding a small amount of remaining acquisition-related expenses, adjusted earnings per share for the quarter totaled $1.10. Last quarter, we said that we believe the key factors were in place for improved performance in the second half of the year. The third quarter delivered on that belief. Net interest margin expanded 6 basis points to 3.44%, our highest margin in more than two years, and 20 basis points higher than the third quarter of 2025. Fully taxable equivalent net interest income has grown 20% over the past year. Adjusted pre-tax, pre-provision earnings totaled $83.7 million, up 19% from a year ago, and an adjusted pre-tax, pre-provision ROA totaling 1.59%. Return on assets was 1.30%, and return on tangible common equity was 15.09%.

We also made meaningful progress with the two commercial credits we discussed last quarter. Net charge-offs on those two loans were in line with the specific reserves we established in the second quarter. Non-performing assets were stable at 57 basis points of total assets. Credit costs for new non-accrual loans were recognized in prior quarters, keeping this quarter's provision expense to a modest $3.3 million. Year-to-date net charge-offs of 38 basis points remains consistent with the full-year outlook we provided last quarter. Deposits grew $175.6 million, or 4.2% annualized, and non-interest-bearing deposits now represent 22% of total deposits. Loan growth was more modest at 1.8% annualized. Year-to-date results on slide 6 reflect the earnings power of a combined company now that First Savings acquisition and integration are fully behind us.

Excluding acquisition-related expenses and the first quarter mortgage loan sale adjustment, adjusted EPS totaled $2.87, up nearly 16% from the same period two years ago. Adjusted pre-tax, pre-provision earnings totaled $247 million, up 18% from last year and 24% from two years ago, and our adjusted efficiency ratio improved to 53.85%. Our capital position remains strong. We completed a $100 million subordinated debt issuance in late September. Our total risk-based capital ratio increased to 13.58%, and we repurchased $50.3 million of common stock year to date, including $12 million in the third quarter. Tangible common equity was 8.83%, with the decline in tangible book value this quarter driven by the impact of higher interest rates on AOCI rather than our operating performance. Mike Stewart will discuss our line of business momentum.

Thanks, Mark. Start on slide 7, business strategy. Our primary business strategy is to build on our Midwestern strength through disciplined organic growth. Our goal is to be the bank of choice across the Midwest, earned through trusted relationships. Our four core business lines continue to work together to deliver financial solutions for businesses and consumers across the markets we serve. We are focused on driving organic growth by concentrating on the client segments in the markets where we hold a competitive advantage and by deepening relationships across our commercial and consumer banking lines of business. We have made meaningful progress building a stronger, more focused growth engine that is supported by deep client relationships, disciplined capital deployment, and continued investment in the capabilities needed to serve our clients and communities. Our Midwest markets remain resilient, and our relationship-based model continues to create opportunities for growth.

As we engage with clients every day, we see businesses investing, expanding, and seeking trusted financial partners who can provide our broad range of solutions. Turn to slide 8, a few more comments on loans. After a strong second quarter, third quarter loans, like Mark said, increased at a 1.8% annualized rate, with strong growth coming from the construction and mortgage loan portfolio. Overall, commercial loans were relatively flat as solid production did occur within our community and corporate banking segments, our asset-based and investment real estate teams, but that could not outpace the normal course payoffs within the sponsor finance and the shared national credit portfolios. Pipelines overall are stable, so loan growth should continue through the fourth quarter in the mid-single digits. Slide 9, deposits. We continue to focus on our deposit gathering and deepening relationships across both the commercial and consumer side of the business.

Our objective is to support loan growth with strong core funding while maintaining a disciplined approach to balance sheet. Third quarter deposits grew at a 4.2% annualized rate with the consumer line of business and specifically the private wealth team driving the increase. We spoke last quarter about one of our clients selling a business which resulted in a large and temporary increase in the commercial deposit base. That client has now moved those balances to our private client team for investment services and distributed some of the cash they needed to along the way. The 0.5% annualized year-to-date decline in total deposits is primarily now the result of balance sheet repositioning from the first quarter, with First Savings Bank broker deposits being eliminated.

On a year-to-date basis, consumer non-maturity deposits continue to show growth of 3%, and net increases in households. As noted on this page, our core commercial loans also grew. I will turn it now over to Michele for her detailed summary of the balance sheet and income statement.

Michele? Thanks, Mike, and good morning, everyone.

Slide 10 covers our third quarter performance. Total revenues continued to grow in Q3 with net interest income increasing $2.1 million or 1.3%, and non-interest income increasing $800,000 linked quarter. This resulted in healthy pre-tax pre-provision earnings for the quarter. Tangible book value per share of $28.86 decreased $0.94 or 3.2% linked quarter due to the impact of AOCI from changes in interest rates during the quarter. Slide 11 shows our year-to-date results. Lines one through four at the top of the page show the growth of our balance sheet over the past 12 months, with loans increasing $2 billion, or 14.6%, and deposits increasing $2.1 billion or 13.8%. At the same time, the lower yielding investment portfolio declined $258 million as we continued to shift our earning asset mix toward higher yielding loans.

Of the $2 billion increase in loans, the majority came from the acquisition of First Savings in the first quarter. Excluding loans acquired from First Savings and the impact of the mortgage loan sale activity in the second quarter, we generated organic loan growth of $473.7 million or 3.5% over the past 12 months, reflecting continued demand across our markets. Looking at the income statement in the middle of the page, net interest income increased $74.3 million or 18.7%, benefiting from growth and lower funding costs. Our year-to-date net interest margin of 3.39% was 16 basis points higher than the same period in the prior year. Non-interest income increased $17 million when excluding the $29.8 million loss on mortgage loans sold in the second quarter. Altogether, total revenue grew nearly 19% on a normalized basis, with First Savings contributing approximately 13% of that growth.

Slide 12 shows the details of our investment portfolio. The bond portfolio declined $168 million linked quarter to $3.1 billion due to principal paydowns and maturities, as well as a decline in the portfolio valuation due to interest rate changes. Expected cash flows from scheduled principal and interest payments and bond maturities over the next 12 months total $271.4 million, with a roll-off yield of approximately 2.11%. We plan to continue to use this cash flow to fund higher yielding loan growth in the near term. Slide 13 covers our loan portfolio. The loan portfolio yield increased 12 basis points from the prior quarter to 6.23%. During the quarter, new and renewed loans originated at an average yield of 6.34%, compared to 6.28% in the prior quarter, which continues to be a tailwind for the overall portfolio yield and reflects the pricing discipline from our team.

The allowance for credit losses is shown on slide 14. This quarter, we recorded $3.3 million in provision and had net charge-offs of $29.4 million. As a result, the allowance for credit losses totaled $215.5 million at the end of the quarter, representing a coverage ratio of 1.38%. Slide 15 shows details of our deposit portfolio. Total deposits grew to $16.9 billion this quarter, and the rate paid on deposits increased 9 basis points to 2.16%, reflecting the competitive deposit pricing in our markets. Next, slide 16 shows a continued favorable net interest margin trend. Our net interest margin of 3.44% increased 6 basis points for prior quarter and 20 basis points over the past year.