Executive Summary / Key Takeaways

• Strategic Growth Trajectory: First Merchants Corporation is executing a multi-faceted growth strategy, combining robust organic loan and deposit expansion in its core Midwest markets with targeted, accretive acquisitions like First Savings Financial Group, Inc., which is set to expand its footprint into Southern Indiana and enhance specialized lending verticals.
• Robust Financial Performance: The company delivered strong third-quarter 2025 results, with diluted earnings per common share of $0.98 and a year-to-date net income of $167.5 million, marking a 23.5% increase from the prior year. This performance is underpinned by significant loan growth, stable net interest margin, and disciplined expense management.
• Technological Edge and Efficiency: Strategic investments in digital platforms for account origination, online/mobile banking, and wealth management have streamlined operations, enhanced client experience, and contributed to a low core efficiency ratio of 54.56% in Q3 2025.
• Solid Capital and Asset Quality: First Merchants maintains a strong capital position, with a tangible common equity ratio of 9.18% and a Common Equity Tier 1 ratio of 11.34%, providing ample flexibility for continued balance sheet growth and shareholder returns through dividends and opportunistic share repurchases. Asset quality remains robust, with a conservative allowance for credit losses.
• Positive Outlook Amidst Market Dynamics: Management anticipates continued net interest income growth, mid-to-high single-digit loan growth, and mid-single-digit noninterest income growth, driven by effective deposit cost management and strategic talent acquisition, even in a dynamic interest rate environment.

Setting the Scene: A Midwest Banking Force

First Merchants Corporation, a financial holding company headquartered in Muncie, Indiana, has established itself as a prominent community banking institution across Indiana, Ohio, and Michigan. Founded in 1893 as First Merchants Bank, the company's journey has been defined by a steadfast commitment to community banking, offering a comprehensive suite of commercial and consumer financial services. This includes everything from checking and savings accounts to diverse lending products and sophisticated wealth management solutions. The company's common stock trades on the Nasdaq Global Select Market System under the symbol FRME.

In a competitive landscape populated by larger regional players like Huntington Bancshares (HBAN), Fifth Third Bancorp (FITB), PNC Financial Services Group (PNC), and KeyCorp (KEY), First Merchants carves out its niche through a deeply localized, relationship-based approach. While larger banks often leverage scale for broader digital offerings, First Merchants emphasizes personalized service and local expertise, fostering strong community ties that enhance customer loyalty and retention. This strategy allows the company to maintain a competitive edge, particularly in serving small businesses and individual customers within its core Midwest footprint, where 82% of its borrowers are located.

The banking industry is currently shaped by several broad trends, including evolving digital demands, interest rate volatility, and ongoing consolidation. The rise of fintech companies and online banks also presents indirect competition, pushing traditional institutions to innovate. First Merchants has strategically responded to these dynamics by focusing on organic growth, disciplined financial management, and targeted acquisitions that expand its geographic reach and enhance its service offerings.

Strategic Evolution and Technological Advancement

First Merchants' history is a testament to its adaptive growth strategy. Organized in 1982, the corporation has consistently sought opportunities to strengthen its market position. A significant milestone was the acquisition of Level One Bancorp, Inc. (LEVL) on April 1, 2022, which expanded its presence and integrated new operational capabilities. The year 2024 marked a period of intense strategic refinement and technological investment. The company upgraded its in-branch account origination platform to Terafina, modernized its online and mobile banking platforms for both consumer and commercial clients, and enhanced its private wealth management platform with SS&C InnoTrust and Black Diamond. These initiatives were not merely cosmetic; they were designed to streamline operations, improve efficiency, and elevate the client experience. For instance, the new account opening process in branches was significantly reduced from 45 minutes to just 5-10 minutes, a tangible benefit for both customers and staff. The upgraded treasury management platform has also bolstered the commercial team's calling efforts and product offerings.

Further demonstrating its strategic agility, First Merchants divested five non-core branches in the suburban Chicago market to Old Second National Bank (OSBC) in December 2024, generating a $20 million gain. This move sharpened the company's focus on its core markets and allowed for a corresponding restructure of its securities portfolio. Entering 2025, capital management remained a priority, with the redemption of $30 million of Level One subordinated notes and $5 million of Senior Debt in the first quarter, followed by the remaining $5 million of Senior Debt by July 30, 2025. The company also initiated a new $100 million share repurchase program, actively leveraging market volatility to return value to shareholders.

A pivotal development in September 2025 was the definitive merger agreement to acquire First Savings Financial Group, Inc. (FSFG). This all-stock transaction, valued at approximately $225.60 million, is expected to close in the first quarter of 2026, with integration planned for the second quarter of 2026. This acquisition is strategically significant, expanding First Merchants' footprint into Southern Indiana (Louisville MSA) and introducing new "verticals" that enhance fee income. These include First Savings' specialized Small Business Administration (SBA) lending and triple net leasing businesses. The SBA lending team, comprising 45 dedicated professionals with a national footprint, generated over $100 million in originations for First Savings year-to-date in Q3 2025, compared to First Merchants' $8 million. This integration is expected to provide a more robust SBA offering across First Merchants' existing footprint, leveraging First Savings' proven originate-and-sell model. The triple net lease portfolio, with an implied yield of approximately 6.25% (fixed rate), offers additional loan growth and liquidity levers, providing optionality depending on market conditions and loan growth in the core bank.

Business Model and Segment Performance

First Merchants operates through its single reportable segment of community banking, delivering a diversified range of services across commercial, consumer, mortgage, and private wealth sectors.

Commercial Banking

The commercial segment is a cornerstone of First Merchants' operations, representing 76% of its loan portfolio and focusing on small and middle-market businesses. In Q3 2025, commercial loan growth was robust, increasing by $268 million for the quarter, an annualized rate exceeding 10%, and $699 million year-to-date, an annualized rate over 9%. This growth was primarily driven by CapEx financing, increased revolver usage, M&A financings, and new business conversions, reflecting the expanding Midwest economies. The commercial and industrial (C&I) and commercial real estate (non-owner occupied) loan classes constitute 33.80% and 16.90% of the total loan portfolio, respectively. The company's sponsor finance portfolio, with $911 million in outstandings across 100 diverse companies, continues to perform well, exhibiting solid credit metrics and nominal losses over a 10-year history.

Deposit trends in the commercial segment in Q3 2025 saw an aggregate decline of $23 million, but core relationship or operating account balances grew by 4.9%, or $56 million. This reflects management's focus on improving the mix of deposit categories by prioritizing primary core accounts and managing deposit costs.

Consumer Banking

The consumer segment also contributes significantly to balance sheet growth. In Q3 2025, it added $21 million in loan growth, fueled by residential mortgage, home equity lines of credit (HELOCs), and private banking relationships. Deposit growth in the consumer segment was a key driver for the quarter, increasing $96 million in total, with non-maturity categories growing at nearly 5% annualized. Management highlights that household growth and market share gains are the primary drivers of this increase in non-maturity balances, which represent the lowest-cost deposit category. The underwriting and credit quality in consumer and residential mortgage portfolios remain strong, with over 96% of consumer loans and more than 91% of residential mortgage loans originated with credit scores above 669.

Mortgage Banking and Private Wealth Advisors

First Merchants' mortgage banking team continues to be a strong contributor to noninterest income. In Q1 2025, mortgage unit volume increased over 15% year-over-year, with dollar volume up over 30%. Gains on sales of mortgage loans were more than 50% higher than in Q1 2024. The private wealth advisors division, operating as a division of First Merchants Bank, offers comprehensive wealth management, trust, and financial planning services. Fiduciary and wealth management fees for the nine months ended September 30, 2025, totaled $26.32 million. The company anticipates double-digit growth in both mortgage and wealth management fees, despite potential market volatility.

Financial Performance and Liquidity

First Merchants demonstrated robust financial performance in the third quarter of 2025, building on a strong year-to-date trend. Net income available to common stockholders for Q3 2025 was $56.3 million, translating to $0.98 per diluted share. Year-to-date, net income available to common stockholders reached $167.5 million, a significant 23.5% increase from the nine months ended September 30, 2024, with diluted earnings per common share rising 25.5% to $2.90.

Total revenues in Q3 2025 were strong, with net interest income increasing by $0.7 million and noninterest income growing by $1.2 million, leading to pretax pre-provision earnings of $70.5 million. Year-to-date, total revenue increased by 4.5% compared to the corresponding period in 2024, while expenses remained unchanged, demonstrating positive operating leverage.

The return on average assets (ROA) for the nine months ended September 30, 2025, stood at 1.22%, consistent with the company's high-performance aspirations. The core efficiency ratio remained low at 54.56% for the quarter, reflecting effective expense discipline.

Net interest income on a fully taxable equivalent (FTE) basis increased by 2.10% to $139.90 million for Q3 2025 compared to Q3 2024, with the FTE net interest margin slightly increasing to 3.24%. This improvement was primarily driven by a 34 basis point reduction in the cost of interest-bearing liabilities, which offset a 24 basis point decrease in asset yields. The total loan portfolio yield continued to expand, increasing 8 basis points from the prior quarter to 6.4%, with new and renewed loans yielding an average of 6.84% during the quarter. Approximately 70.10% of the loan portfolio is variable rate, making the company somewhat asset-sensitive to interest rate changes.

Noninterest income saw a notable increase, partly due to the absence of losses on sales of available-for-sale securities in Q3 2025, compared to $9.10 million in losses in Q3 2024. Customer-related fees, including service charges on deposit accounts, derivative hedge fees, and treasury management fees, also contributed to the growth. Noninterest expense increased by $1.9 million in Q3 2025, primarily due to higher salaries, incentives, and severance costs. However, for the nine months ended September 30, 2025, noninterest expense remained flat compared to the prior year, benefiting from offsetting decreases in outside data processing fees, other real estate owned (OREO) expenses, and intangible asset amortization.

First Merchants maintains a robust liquidity position. As of September 30, 2025, total deposits equaled $14.90 billion, an increase of $348.40 million from December 31, 2024. Insured deposits constitute 70% of the total, with ample available liquidity to cover the 30% uninsured portion. The loan-to-deposit ratio increased to 91.60% at period end from 88.60% at December 31, 2024. The company has significant borrowing capacity, with $781.20 million available from the Federal Home Loan Bank (FHLB) and $5.20 billion from the Federal Reserve. Expected cash flows from the investment portfolio, totaling $283 million over the next 12 months with a roll-off yield of approximately 2.18%, are earmarked to fund higher-yielding loan growth.

Asset Quality and Risk Management

First Merchants' asset quality remains strong, reflecting disciplined underwriting and proactive credit risk management. The Allowance for Credit Losses (ACL) on loans totaled $194.5 million as of September 30, 2025, representing 1.43% of total loans. Including $14.4 million in remaining fair value marks on acquired loans, the coverage ratio rises to 1.54%. This conservative reserve level is partly attributed to the company's quantitative CECL model, which tends to produce a higher, more conservative estimate.

Net charge-offs for Q3 2025 were $5.1 million, and the provision for credit losses was $4.3 million. Year-to-date, net charge-offs totaled $12.4 million, with a provision of $14.1 million. Nonaccrual loans decreased by $8 million from December 31, 2024, to $65.7 million at September 30, 2025, primarily due to declines in construction and commercial real estate (non-owner occupied) nonaccrual balances. The non-owner occupied office portfolio, representing 1.9% of total loans, is actively monitored, with the top 10 loans representing 53% of total office exposure and a weighted average loan-to-value (LTV) of 62.8% at origination. The largest individual office loan is $25 million, secured by a single-tenant mixed-use property at 67.2% LTV.

The company's exposure to credit risk from derivative counterparties is mitigated through quarterly financial reviews and collateral pledging. While the banking industry faces risks from interest rate fluctuations, economic downturns, and competitive pressures, First Merchants' diversified loan portfolio, strong underwriting standards, and proactive monitoring help manage these exposures.

Capital Strength and Allocation

First Merchants maintains a robust capital position, providing significant strategic flexibility. As of September 30, 2025, the tangible common equity (TCE) ratio stood at 9.18%, a 26 basis point increase linked quarter and 9% higher than the prior year. The Common Equity Tier 1 (CET1) ratio was 11.34%, well above regulatory requirements, signifying the bank's "well-capitalized" status under Basel III rules.

The company actively manages its capital, allocating approximately one-third of its earnings to support balance sheet growth and another third to dividends. The remaining capital is deployed opportunistically. In Q3 2025, First Merchants repurchased 162,474 shares totaling $6.5 million, bringing year-to-date repurchases to 939,271 shares for $36.5 million under its $100 million program. While share repurchases are considered when the stock trades below historical valuation averages, the company has indicated it would not anticipate further buybacks between the First Savings acquisition announcement and its closing. Management has also explicitly stated that it is not interested in major bond restructurings or any actions that would necessitate a tangible common equity raise.

Outlook and Guidance

First Merchants' management expresses optimism for continued strong performance through the remainder of 2025 and into 2026. The company anticipates mid-to-high single-digit loan growth for the year, supported by consistent pipelines in commercial and consumer segments. This growth is expected to be fueled by expanding Midwest economies and strategic talent acquisition, particularly in the Detroit market.

Net interest income is projected to continue growing, even with potential Federal Reserve rate cuts. Management's confidence stems from its proven ability to actively manage and reduce deposit costs, coupled with the benefit of higher end-of-period loan balances. While ALCO models suggest a modest 2 basis point margin compression for each 25 basis point Fed rate cut, the company expects to mitigate this through deposit repricing. Noninterest income is forecast to grow in the mid-single digits in the back half of 2025, with double-digit growth expected in mortgage and wealth management fees. The First Savings acquisition is also expected to significantly enhance fee income through its specialized lending verticals.

Expense management remains a core focus, with Q4 2025 core expenses expected to be in line with Q3, and a disciplined finish to the year anticipated. Management projects overall expense growth for 2025 to be minimal, in the 1-3% range, maintaining a sub-55% efficiency ratio. The effective tax rate is expected to approach 13% in the second half of 2025. The company targets a return on assets (ROA) in the 1.25%-1.30% range, which it views as indicative of top-quartile performance.

Conclusion

First Merchants Corporation stands as a resilient and strategically agile regional bank, effectively leveraging its community-centric model and recent technological enhancements to drive consistent financial performance. The company's disciplined approach to organic growth, coupled with value-accretive acquisitions like First Savings Financial Group, positions it for continued expansion into key Midwest and Southern Indiana markets. Its robust capital base, strong asset quality, and proactive expense and deposit management strategies provide a solid foundation to navigate dynamic market conditions.

The integration of specialized lending verticals from First Savings, particularly in SBA lending and triple net leasing, is poised to diversify revenue streams and enhance fee income, further strengthening its competitive moat against larger rivals. While the banking industry faces ongoing competitive pressures and interest rate uncertainties, First Merchants' commitment to operational efficiency, strategic talent acquisition, and opportunistic capital deployment underscores a compelling investment thesis focused on sustainable growth and shareholder value creation.

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Current time information in Morrow County, US.
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