First Merchants Q2 2025 Earnings Report

First Merchants EPS Results

• Actual EPS: $0.98
• Consensus EPS: $0.94
• Beat/Miss: Beat by +$0.04
• One Year Ago EPS: $0.68

First Merchants Revenue Results

• Actual Revenue: $170.52 million
• Expected Revenue: $172.13 million
• Beat/Miss: Missed by -$1.61 million
• YoY Revenue Growth: N/A

First Merchants Announcement Details

• Quarter: Q2 2025
• Date: 7/23/2025
• Time: After Market Closes
• Conference Call Date: Thursday, July 24, 2025
• Conference Call Time: 9:00AM ET

First Merchants (NASDAQ:FRME) operates as the financial holding company for First Merchants Bank that provides community banking services. The company offers a range of financial services, including time, savings, and demand deposits; and consumer, commercial, agri-business, public finance, and real estate mortgage loans. It also provides personal and corporate trust; brokerage and private wealth management; and letters of credit, repurchase agreements, and other corporate services. The company operates banking locations in Indiana, Illinois, Ohio, and Michigan counties. It also offers its services through electronic and mobile delivery channels. First Merchants Corporation was founded in 1893 and is headquartered in Muncie, Indiana.

First Merchants Q2 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Strong Q2 results with 9.1% annualized loan growth and $0.98 EPS, driving net income up 43% year-over-year to $56.4 million.
• Positive Sentiment: Balance sheet reshaped by reducing lower-yield bonds by $372 million and adding $654 million in higher-yield loans, boosting net interest margin to 3.25% and pre-tax pre-provision earnings to $70.7 million.
• Neutral Sentiment: Deposit costs rose 7 basis points to 2.30%, with commercial deposit growth offsetting consumer declines, and management expects modest margin compression in H2 2025 amid competitive funding pressures.
• Positive Sentiment: Shareholder returns remain robust with $22.1 million of share repurchases in Q2 ($31.7 million YTD) at an average price of $38.68, while tangible common equity of 8.92% and a CET1 ratio of 11.35% exceed targets.
• Neutral Sentiment: Asset quality stabilized as net charge-offs stayed low at 0.07%, provisions dropped to $5.6 million from $24.5 million last year, and the allowance coverage ratio held steady at 1.47%.

Presentation

[Operator]

Thank you for standing by, and welcome to the First Merchants Corporation Second Quarter twenty twenty five Earnings Conference Call. Before we begin, management would like to remind you that today's call contains forward looking statements with respect to future performance and financial condition of First Merchants Corporation that involve risks and uncertainties. Further information is contained within the press release, which we encourage you to review. Additionally, management may refer to non GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. The press release available on the website contains financial and other quantitative information to be discussed today as well as reconciliation of GAAP to non GAAP measures.

[Operator]

As a reminder, today's call is being recorded. I will now turn the conference over to Mr. Mark Hardwick, CEO. Mr. Hardwick, you may begin.

[Mark Hardwick, CEO & Director at First Merchants]

Good morning, and welcome to First Merchants' second quarter twenty twenty five conference call. Thanks for the introduction and for covering the forward looking statement on page two. We released our earnings yesterday after the close of the market, and you can access today's slides by following the link on the third page of our earnings release. On page three of our slides, you will see today's presenters and our bios, including President Mike Stewart, Chief Credit Officer John Martin, and Chief Financial Officer Michelle Kebieski. On slide four, we have a map of all 111 of our banking centers and some second quarter financial highlights with a few of the awards that we've received recently.

[Mark Hardwick, CEO & Director at First Merchants]

On slide five, our strong balance sheet and earnings results reflect the type of performance First Merchants shareholders have come to expect. We delivered 9.1% annualized loan growth and $0.98 of earnings per share. Return on assets totaled 1.23% and our efficiency ratio was 54%, which is consistent with the high performance company we strive to be. Second quarter net income was $56,400,000 an increase of $17,000,000 or 43 percent from a year ago as credit quality returned to our normal healthy levels. This improvement supported a significantly lower provision for credit losses of $5,600,000 compared to $24,500,000 in the second quarter of twenty twenty four.

[Mark Hardwick, CEO & Director at First Merchants]

Year to date net income totaled $111,200,000 an increase of $24,300,000 or 28% from the first half of twenty twenty four, while earnings per share totaling $1.92 or $1.92 increased zero four four dollars or 30% during the same period. We also repurchased an additional 22,100,000.0 worth of shares this quarter and year to date we've repurchased 31,700,000.0 with an average price of $38.68 Our tangible common equity of 8.92% is above our target level and provides optimal capital flexibility given the minimal reliance on hybrid equity that's available to us if needed. Now Mike Stewart will discuss our line of business momentum.

[Michael Stewart, President at First Merchants]

Thank you, Mark, and good morning to all. Our business strategy summarized on slide six remains unchanged. We are a commercially focused organization across all these business segments and our primary markets of Indiana, Michigan, and Ohio. So let's turn to page seven. And as Mark stated earlier, this was a great quarter of loan growth across all those segments and across all the markets.

[Michael Stewart, President at First Merchants]

It's very pleasing to see our Midwest economies continue to expand, our clients businesses continue to grow, and see our bankers continuing to win new relationships. $262,000,000 of commercial loan growth for the quarter. That's over 10% annualized. $430,000,000 of loan growth year to date, that's 9% annualized. CapEx financing, increased usage of revolvers, M and A financings and new business conversion are the primary drivers of all this growth.

[Michael Stewart, President at First Merchants]

Another pleasing bullet point on this page is the quarter ending pipeline, which is consistent with prior quarter end and gives me optimism that we will be able to maintain loan growth and increasing market share activities through the third quarter. The consumer segment also shared in the balance sheet growth with residential mortgage, HELOC and private banking relationships driving the 36,000,000 of loan growth for the quarter. Pipelines for these segments also ended consistent levels to the March. So we can turn to slide eight and review some deposit activity. The commercial segment was the driver of our deposit growth during the quarter, $347,000,000 in total.

[Michael Stewart, President at First Merchants]

Commercial businesses have been using their cash to support their working capital needs, which reduced the core or operating account balances noted under the second bullet point. Increasing revolver usage is the corollary of lower operating account balances. Tax receipt collections were the primary driver of the public fund balance increases noted under the third bullet point. For the quarter, our consumer segment experienced declines in both the non maturity and maturity categories. We have continued our pricing discipline within our consumer segment, specifically maturity deposits, and remain hyper focused on relationships versus single product users.

[Michael Stewart, President at First Merchants]

Households continue to grow, both during the quarter and year to date. And as the next to the last bullet point on the page says, non maturity deposit balances have increased $108,000,000 year to date. This is our lowest cost deposit category. The mix of deposit categories has been the focus of our teams for the past year. It is the focus on primary core accounts and the focus of deposit cost in general.

[Michael Stewart, President at First Merchants]

So overall, I'm really pleased with the active engagement our teams are having with their clients as we manage the mix and deposit costs. So I'll turn the call over to Michelle, and she can review in much more detail the composition of our balance sheet and the drivers on our income statement. Michelle?

[Michele Kawiecki, EVP & CFO at First Merchants]

Thanks, Mike, and good morning, everyone. Slide nine covers our second quarter performance. Total revenues in Q2 were strong with meaningful growth in both net interest income of $2,700,000 and non interest income of $1,300,000 We continue to demonstrate exceptional discipline and expense management, which added to the performance this quarter with an overall result of pretax pre provision earnings of $70,700,000 Slide 10 shows our year to date results. Lines one through three at the top of the page show that we continue to grow the balance sheet towards a more favorable earning asset mix, reducing the lower yielding bond portfolio by $372,000,000 during the last twelve months and growing higher yielding loans by $654,000,000. Looking at lines 11 through 14, total revenue grew nearly 4% when comparing year to date 2025 to the same period in 2024, while expenses declined creating meaningful operating leverage.

[Michele Kawiecki, EVP & CFO at First Merchants]

Pretax pre provision earnings totaled $138,100,000 reflecting growth of 7.3%. Those earnings fueled a $2.8 increase in tangible book value to $27.9 which is an increase of 11.2% when compared to the same quarter last year. Slide 11 shows details of our business portfolio. Expected cash flows from scheduled principal and interest payments and bond maturities through the remainder of 2025 total $141,000,000 and $282,000,000 for the next twelve months with a roll off yield of approximately 2.17%. We plan to continue to use this cash flow to fund loan growth rather than reinvest in bonds given the loan pipeline is strong, as Mike mentioned in his remarks.

[Michele Kawiecki, EVP & CFO at First Merchants]

Slide 12 covers our loan portfolio. The total loan portfolio yield increased by 11 basis points to 6.32%. This increase was primarily driven by loan originations and refis this quarter at an average yield of 7.04%, which was up eight basis points from last quarter. The allowance for credit losses is shown on slide 13. This quarter we had net charge offs of 2,300,000.0 and recorded a $5,600,000 provision.

[Michele Kawiecki, EVP & CFO at First Merchants]

The reserve at quarter end was $195,300,000 and the coverage ratio was 1.47 consistent with last quarter. In addition to the ACL, we have $15,400,000 of remaining fair value marks on acquired loans. When including those marks, our coverage ratio is 1.58%. The level of provision was driven by improvement in non performing loans, changes in the macroeconomic forecast, and robust loan growth. Slide 14 shows details of our deposit portfolio.

[Michele Kawiecki, EVP & CFO at First Merchants]

The total cost of deposits increased seven basis points to 2.3% this quarter, reflecting increasing competitive deposit dynamics that we experienced in our markets. On slide 15, net interest income on a fully tax equivalent basis of $139,200,000 increased $2,800,000 from prior quarter. Net interest margin on line six totaled 3.25%, an increase of three basis points this quarter. The yield on earning assets increased meaningfully by 11 basis points and was partially offset by the increase in funding costs. Next, slide 16 shows the details of non interest income.

[Michele Kawiecki, EVP & CFO at First Merchants]

Non interest income totaled $31,300,000 with customer related fees of 29,400,000.0 Customer related fees increased on a linked quarter basis in all categories with the largest increase from gains on the sale of mortgages followed by treasury management fees. These fee categories were also $1,600,000 higher than the second quarter of last year, reflecting great momentum from our fee based businesses. Moving to slide 17, non interest expense for the quarter totaled $93,600,000 a very modest increase over prior quarter of only $700,000 primarily from higher marketing spend and higher data processing costs, which was driven by increased loan origination expense. Our expense discipline has allowed us to maintain our low efficiency ratio, which was 53.99% for the quarter. Slide 18 shows our capital ratios.

[Michele Kawiecki, EVP & CFO at First Merchants]

Over the last twelve months, the tangible common equity ratio has grown 65 basis points to 8.92% while returning capital to shareholders through $36,200,000 in share repurchases and dividends paid of $82,300,000 We remain well capitalized with the common equity tier one ratio at 11.35%. These capital levels, along with our robust allowance for credit losses coverage, continue to reflect the safety and soundness of our financial position. That concludes my remarks and I will now turn it over to our Chief Credit Officer, John Martin to discuss asset quality.

[John Martin, Executive VP & Chief Credit Officer at First Merchants]

Thanks, Michelle, and good morning everyone. I'll begin with an overview of our loan portfolio performance for the second quarter on Slide 19. In Q2, we saw balanced loan growth across the portfolio with a $298,000,000 increase quarter over quarter or 9.2% annualized and $654,000,000 year over year or 5.2%. C and I lending grew by $147,000,000 this quarter, continuing at strong momentum. Commercial real estate added $36,000,000 reflecting steady demand and disciplined execution.

[John Martin, Executive VP & Chief Credit Officer at First Merchants]

Our Midwest footprint remains core with 82.7% of borrowers located in our four state region, and we continue to manage CRE exposure well within regulatory limits, preserving capacity for selective high quality opportunities. Turning to slide 20, our sponsor finance portfolio continues to perform well with $867,000,000 in outstandings across 95 companies in diverse industries. Credit metrics remain solid. Nearly 80% of borrowers have senior leverage under three times and 70% maintain fixed charge coverage ratios above one and a half times. Losses remain minimal with just $15,300,000 over a ten year history on $1,900,000,000 in funded loans through Q2.

[John Martin, Executive VP & Chief Credit Officer at First Merchants]

We also continue to manage our shared national credit exposure prudently with $1,100,000,000 across 88 borrowers, primarily in wholesale trade, agriculture, and manufacturing. On the consumer side, underwriting and credit quality remained solid. Over 95% of our $710,000,000 in consumer loans had credit scores above six sixty nine at origination. Similarly, 91% of our $1,900,000,000 residential mortgage portfolio met that same threshold. Turning to slide '21, our investment real estate portfolio now stands at roughly $3,000,000,000 Within the non owner occupied office, we continue to monitor our exposures closely.

[John Martin, Executive VP & Chief Credit Officer at First Merchants]

The top 10 loans represent 53% of total ex office exposure with a weighted average loan to value of 63.6% at origination. The largest office loan is $25,000,000 secured by a single tenant mixed use property at 67.2% loan to value, with the second largest being $24,400,000 in a medical office facility. Turning to slide 22, asset quality remained stable. Our net charge offs were just point zero seven percent of average loans annualized. The largest non accruals this quarter include a $12,900,000 multi family construction loan, $6,800,000 brewery, and a $6,000,000 nursing home.

[John Martin, Executive VP & Chief Credit Officer at First Merchants]

These are isolated cases and we are actively working through resolution strategies. Then finally turning to slide 23, our non performing assets. We saw a $22,000,000 payoff of our previously non accrual construction loan. The largest new non accrual was the $12,900,000 multifamily construction loan mentioned earlier. ORE declined by $4,800,000 reflecting continued progress in non performing asset resolution.

[John Martin, Executive VP & Chief Credit Officer at First Merchants]

And then overall, our credit portfolio continues to perform well with strong underwriting discipline and proactive risk management. I appreciate your attention. I'll now turn the call over to Mark Hardway.

[Mark Hardwick, CEO & Director at First Merchants]

Thanks, John. Turning to Slide 24, the compound annual growth rate of tangible book value per share on the bottom left continues to grow at a healthy 7% level, post dividends, post buyback and post acquisitions. Tangible book value per share also increased by 8.5% when adjusting for the impact of unrealized gains and losses of the available for sale securities portfolio. Slide 25 represents our total asset CAGR of 11.7% during the last ten years and highlights how acquisitions have improved our footprint and fuel growth. We believe in accretive M and A, but it's important to note that we focus on organic growth first.

[Mark Hardwick, CEO & Director at First Merchants]

We are very selective when it comes to mergers and acquisitions, and April 1 marks the three year anniversary of our last acquisition. As we look forward to the remainder of 2025, we expect more of the same strong performance. Thanks for your attention and investment in First Merchants and we are happy to take questions at this time.

[Operator]

Thank you. Our first question comes from Daniel Tamayo with Raymond James. Your line is open.

[Daniel Tamayo, Vice President at Raymond James Financial]

Thank you. Good morning. I guess maybe we can start on the margin, if you don't mind. Maybe for you, Michelle, I think you talked about it a little bit, but the funding cost pressure seemed like it was pretty steep in the quarter, driving some increase in funding costs. Wondering if you could talk a little bit about that, what you're seeing going forward there in terms of competition and expectation on the funding costs?

[Daniel Tamayo, Vice President at Raymond James Financial]

And then any color or guidance you might have on margin overall?

[Michele Kawiecki, EVP & CFO at First Merchants]

Yes, good morning. As Mike mentioned in his remarks, we saw our customers utilizing their cash this quarter, and we had really strong loan growth to fund. So we did see deposit costs rise a little bit, I do think that that will put some modest compression in margin in the back half of the year compared to this quarter.

[Daniel Tamayo, Vice President at Raymond James Financial]

Okay.

[Daniel Tamayo, Vice President at Raymond James Financial]

All right. Thank you. And then you talked a lot about the strong loan growth and the expectations for that to continue. I guess I'm just curious, is that in your opinion, is a lot of that just kind of core we're back in the environment where these businesses are investing. It sounds like that's the case, but just want to kind of make sure that that's not pull through from earlier in the year where some of the borrowers on hold?

[Michael Stewart, President at First Merchants]

That's a good question. I view it as core, working right through direct client growth in their plans, meeting their expectations. When I think about your say, is there a pull through? We did talk about what did potentially like the tariffs mean with people being calculated in how they wanted to proceed as they move forward. Maybe there's a little bit of pull through in that, but really when you look at the activity, as I looked at the activity across the board, it just seemed very normal course.

[John Martin, Executive VP & Chief Credit Officer at First Merchants]

Yeah, and I think, Daniel, the only other place when I think about pull through might have we saw a little bit higher line utilization where people might have been drawing down on revolvers or credit facilities to kind of front end the expected tariffs, but that has added a little bit to child standings in the quarter.

[Daniel Tamayo, Vice President at Raymond James Financial]

Great. Okay. Well, I will step back. I appreciate the color.

[Michele Kawiecki, EVP & CFO at First Merchants]

Thanks, Danny.

[Operator]

One moment for our next question. Our next question comes from Terry McEvoy with Stephens. Your line is open.

[Terry Mcevoy, Managing Director at Stephens Inc]

Hi. Good morning, everybody.

[Mark Hardwick, CEO & Director at First Merchants]

Good morning.

[Michael Stewart, President at First Merchants]

Good morning, Terry.

[Terry Mcevoy, Managing Director at Stephens Inc]

Maybe just a question on fees. One, I noticed just wealth management fees kind of flat year over year and S and P is up, call it, what, 15%, 16%. And wonder what the outlook was for wealth management. And overall, Michelle, what are your thoughts on total fee income in the back half of the year?

[Michele Kawiecki, EVP & CFO at First Merchants]

Well, I'll address our expectations on total fee income and maybe let Mike jump in and talk more specifically on wealth management. But I would expect to see noninterest income grow into the mid single digits in the back half of the year. You know, at the beginning of the year, we thought that we might have a bit more of a favorable rate environment for mortgage borrowers, but frankly, the decline in mortgage rates has been so modest so far this year, and so it hasn't spurred as much activity as we had expected. But, you know, that being said, we do expect to see growth in fees through the remainder of the year. And Mike, do you wanna

[Michael Stewart, President at First Merchants]

talk about point, you know, there's there's four primary categories that are private the fee categories that our private wealth team works through. And when I think about the investment management and wealth management, which to your point is tied to that, it's all the growth. But when you think about some of the other categories, retirement retirement plan services as an example or private banking, those fees, were relatively flat to your point. So it just muted, some of those corollary into the market. But like Michelle said, view that as still a primary driver of our fee income growth in that category going forward.

[Terry Mcevoy, Managing Director at Stephens Inc]

Thanks for that. And then maybe just taking a step back, Mark, I think last year you completed five technology upgrades. Are there any examples or data points you could point to in the first half of the year where the Bank benefited from those actions? Just kind of remind us longer term, what are the benefits of those tech initiatives?

[Mark Hardwick, CEO & Director at First Merchants]

Yeah, thanks, Jerry. We had a big year last year from the completion of a voluntary early retirement all the way through the tech projects and even a restructuring of the commercial bank at the end of the year. And this year from a tech standpoint, we've deployed some internal technology. So last year was more about customer facing tech, this year is more internal. You think about like a customer three sixty view and having dashboards in the hands of our bankers, etcetera.

[Mark Hardwick, CEO & Director at First Merchants]

And the investment was around making sure we could open accounts faster in the branch network, our teams to be more active calling than just spending forty five minutes trying to open one account. And that's down to five or ten minutes. Our treasury management platform was a significant upgrade. And so our calling efforts on the commercial side and the treasury space have been increased. We have a better product to sell.

[Mark Hardwick, CEO & Director at First Merchants]

And then on the private wealth side, we invested in a new PWA platform or private wealth platform. And it's given that team a much better product to sell. And so I think we're having success. We're continuing to highlight the products and we're also doing modest improvement. So we converted all those where it was kind of whatever we had before is kind of how it transitioned over.

[Mark Hardwick, CEO & Director at First Merchants]

And I would say there were some enhancements, but now we're going through a checklist of just saying what other feature functionality can we turn on. And as we turn the feature functionality on, it just gives us even a better product to sell. Think our teams are armed with customer platforms that our customers love and it gives our bankers product to sell. And there really are nothing is inferior at this point where we have to go to market and kind of sell through an inferior product. We're selling with a product that's at least on par with everyone else we compete with.

[Mark Hardwick, CEO & Director at First Merchants]

So, that was part of how we built the plan and why we still remain bullish across all the segments.

[Terry Mcevoy, Managing Director at Stephens Inc]

Appreciate that, Mark. Thank you. And just one for John. The decline in classified sponsored finance loans was noted on my end. Just wanted to make that observation, and thanks for providing those details. And thanks for taking my questions.

[Mark Hardwick, CEO & Director at First Merchants]

Thanks, Jerry.

[Operator]

One moment for our next question. Our next question comes from Brandon Nussol with Hovde Group. Your line is open.

[Brendan Nosal, Director at Hovde Group]

Hey, good morning everybody. Hope you're doing well. Good morning. Maybe just starting off here on capital. You folks have been really active on the capital front over the past two years between almost 100,000,000 of sub debt redemptions and very active use of the buy back.

[Brendan Nosal, Director at Hovde Group]

Just to the extent that you continue to generate excess capital even after supporting loan growth, what are your latest thoughts on deployment?

[Mark Hardwick, CEO & Director at First Merchants]

Yes. We still kind of have the same mindset. We use a third of our earnings to support balance sheet growth, about a third for dividends and the other third are for kind of other capital activities and it might be redemption of sub debt, repurchase of shares, cash and acquisitions, etcetera. So, yes, you're right. We've redeemed all the sub debt that we really have available to us at this point.

[Mark Hardwick, CEO & Director at First Merchants]

And given where the stock was trading early this year, we've been pretty active in buybacks and we're not opposed to accumulating some additional capital. We'll put to use in an acquisition at a later date, but at least so far we feel like there have been great uses for that capital. As our stock price works its way further north, I think we'll be less aggressive with buybacks.

[Brendan Nosal, Director at Hovde Group]

Okay. All right. Thank you for the thoughts there, Mark. Maybe just turning to the funding base and just looking specifically at brokered funding. I think the total is up to $1,000,000,000 now or like 8% of the base.

[Brendan Nosal, Director at Hovde Group]

Just kind of curious how high you're comfortable taking use of that funding source? Is there any point at which that starts to become a bit of constraint on the balance sheet?

[Michele Kawiecki, EVP & CFO at First Merchants]

Yeah. Typically, we we kinda have an internal threshold of about 10%, and we typically won't go above that on brokerage. And so, there's probably a little room there, but, you know, looking at brokerage quarter over quarter, we really didn't have much growth. And, you know, we look to our teams to make sure that they're getting that core funding that Mike mentioned in his remarks.

[Brendan Nosal, Director at Hovde Group]

Okay, perfect. I'm going to sneak one more in there. Just maybe going back to capital. I know you get the M and A question all the time, but I think it's worth asking again, just given the pickup in deal activity we've seen over the past few weeks. So Mark, I would just love your read on the environment and how much price discovery you think there is between buyer and seller and whether you think the banks of the target size you desire are any closer to raising their hands?

[Mark Hardwick, CEO & Director at First Merchants]

Well, there's clearly been movement and even some speculation across the industry around M and A. The conversations have been robust for a period of time. They're a little easier now because some of the modeling does produce meaningful gains or premiums, I guess I should say for the sellers. And so I think the environment is good for M and A and we continue to just stay close to the ones that we're most interested in. And like I said in my previous comments, day job is 100% focused on organic growth and then the inorganic process is there's a lot of one on one time with the executive teams of the banks that we're interested in and just trying to stay close that if they're ready that know, trying to figure out if there's a price that makes sense that that works for both parties.

[Brendan Nosal, Director at Hovde Group]

Okay. Fantastic. Thanks for taking the questions this morning.

[Mark Hardwick, CEO & Director at First Merchants]

Thank you.

[Operator]

One moment for our next question. Our next question comes from Nathan Race with Piper Sandler. Your line is open.

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

Hi, everyone. Good morning. Apologies for that. Michelle, going back to your margin commentary, think you mentioned that you expect some pressure in the back half of this year just given some further expected increases in deposit costs. I guess I was a little surprised just given how much cash flow is coming off the bond book to redeploy into loans.

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

Sounds like you're still growing loans at a pretty good clip, and it seems like those loans are coming on 70 basis points above your portfolio yield. So we're just curious if you can maybe elaborate a little bit more on that margin commentary and just how you see the sensitivity of the balance sheet to any Fed cuts in the back half of this year.

[Michele Kawiecki, EVP & CFO at First Merchants]

Yeah. I don't assuming that we have a flat rate environment, maybe I'll start there. Assuming we have a flat rate environment, I wouldn't think that the margin compression, I think it would be fairly modest. You know, it really depends on our deposit competition. We've seen deposit competition really heat up.

[Michele Kawiecki, EVP & CFO at First Merchants]

Specials are getting higher, and we have to compete with that, especially if we have 9% loan growth like we did this quarter. We do need to fund it. And so I think it kind of depends a little bit on those market dynamics in terms of the amount of compression just based on growth alone. Now, if the Fed does cut rates, you know, we do have still have a bit of an asset sensitive balance sheet. And so I think if with each rate cut on an annualized basis, would expect about two basis points of compression for each 25 basis point rate cut.

[Michele Kawiecki, EVP & CFO at First Merchants]

And so, you know, if we get a couple rate cuts in the back half of the year from the Fed, there will be a little bit of compression just due to asset repricing a little faster than our deposits as well.

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

Okay. Got it. I apologize. I jumped on a little late, just curious to get some updated thoughts on just where the pipeline stands and kind of just overall production levels. And I know it's difficult to predict payoffs, but just any thoughts or visibility in terms of how you're thinking about payoffs relative to production levels in the back half of this year?

[Michael Stewart, President at First Merchants]

Yeah, we did talk about that a little bit earlier, which the pipeline results in the commercial book of business is consistent with prior quarters. So that's an outlook where I would think that we would continue to grow with our clients as their needs grow or if we're taking market share, in that respect. If you break that down a little further, core C and I has really been kind of a driver of that. Most recently. Real estate production is really good too.

[Michael Stewart, President at First Merchants]

It's just that's what's getting offset with the normal course payoffs of the portfolio isn't necessarily growing on investment real estate like the C and I is, but the production level is really good there. The pipelines inside, you know, consumer mortgage and private wealth, that's a they're strong, but that's really not a balance sheet growth driver. That's really more of a fee income, but we'll see some good activity there as well.

[Mark Hardwick, CEO & Director at First Merchants]

Yeah, can I just jump in for a second? I love what's happening with our balance sheet. We're seeing really nice growth. And even from a margin standpoint, it's like, let's just maintain where we are. And I was thrilled that loan yields were even higher this quarter than they were last quarter.

[Mark Hardwick, CEO & Director at First Merchants]

Deposit pressure is real and our focus is on making sure we're growing our least expensive categories, which is challenging, but it's clearly a focus of our teams. And as we move forward, I feel like whatever happens on the margin front is going to be modest relative to where we are this quarter. I feel like the loan growth and deposit growth that's occurring just allows us to continue to grow net interest income. So at least that's how we're thinking about it internally. It's kind of how it's in our plan. And the message, I guess, that I would hope would get across to investors.

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

Got it. That's very helpful. And I appreciate that, Mark and John. Maybe one last one for me. I think you touched on kind of the income growth outlook going forward, but just curious within that how we should think about that other line.

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

I know there's some CRA investment impacts this quarter, but just any thoughts on kind of that other fee income line just given how much it's fluctuated over the last several quarters?

[Michele Kawiecki, EVP & CFO at First Merchants]

If you're referring to the non client related fees, is that what you're looking at, Nate?

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

Yeah, I just want to look at the income statement. It was pretty much zero for other fee income this quarter, so just any thoughts on that revenue line in particular?

[Michele Kawiecki, EVP & CFO at First Merchants]

Yeah, I mean, would probably back out the valuation adjustment we had, which was about $900,000 That's fairly unusual for us to have something like that on a CRA investment. And then, a go forward basis, I feel like this quarter, with an absence of that, would be a decent run rate to use.

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

Okay, great. I appreciate all the color. Thank you, everyone.

[Operator]

One moment for our next question. Our next question comes from Damon DelMonte with KBW. Your line is open.

[Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)]

Hey, good morning, everyone. Hope everybody's doing well, and thanks for taking my question. First question on the outlook for expenses. Good job of keeping them in check here in second quarter compared to the first quarter. Michelle, just kind of wondering what your thoughts are here on the back half of the year as far as kind of a quarterly run rate.

[Michele Kawiecki, EVP & CFO at First Merchants]

Yeah, our expense levels have been really well managed this year, and I think we'll continue to manage them well through the back half of the year. There may be a very modest increase in expenses in Q3, Q4, I would say maybe 1% to 2%, as we refine our incentive accruals and, carry out some of our marketing initiatives, things like that. But the levels of expense management are going to continue.

[Mark Hardwick, CEO & Director at First Merchants]

Yeah, we've really some of our optimism in the loan growth of the loan book going forward has you know, a lot to do with just the addition of of bankers. I mean, we Mike, you didn't mention it, but we we brought in what, four people out of JPMorgan's asset based lending group.

[Michael Stewart, President at First Merchants]

Yes.

[Mark Hardwick, CEO & Director at First Merchants]

And they've all started well, three of the four started this quarter. And we were anticipating an additional hire in the second half of the year. We're kind of at the offer point with someone in our Ohio market. And we just continue to add talent. Think about the folks that we brought in on the private wealth side in Fort Wayne, the individual we hired to run our small business lending function across the entire franchise.

[Mark Hardwick, CEO & Director at First Merchants]

And most of those expenses are embedded, but we've got some that will increase. As Michelle talks about the expense run rate, those are the only areas where I feel like it puts some pressure on us. The return of some of that is in the future as loan growth occurs after these folks work through non competes, etcetera. But I feel like that's investment that just gives us incredible confidence about our ability to maintain the growth rates like mid to high single digits we talk about all the time, not only the second half of this year, but into the future.

[Michael Stewart, President at First Merchants]

I'm glad you brought that up, Mark. Some really smart key people additions across many different business units.

[Mark Hardwick, CEO & Director at First Merchants]

Right.

[Michael Stewart, President at First Merchants]

Which is normal for us, but this year's been kind of exceptionally positive in some key areas, and the small business one you referenced is really as much a deposit play as anything, so we're retooling some of our approach on the low end. It's a wonderful mix across the way of fee income and balance sheet.

[Mark Hardwick, CEO & Director at First Merchants]

Yeah, that small business, we moved it into the consumer bank, and it was, what, dollars $875,000,000 of deposits and only $30,000,000 or so of loans. I may have the number wrong.

[John Martin, Executive VP & Chief Credit Officer at First Merchants]

That's right.

[Mark Hardwick, CEO & Director at First Merchants]

That's about right. And we're excited about what we think the future can be and to truly optimize it. We just thought that it made sense for us to bring someone in from one of the big regionals. We're thrilled with the momentum and that's kind of the case in all of the different ones that I mentioned. Probably shouldn't have highlighted JPMorgan specifically, but we picked up those four bankers.

[Mark Hardwick, CEO & Director at First Merchants]

It was a huge win for us, and we're excited about what it can do for the future.

[Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)]

Got it. I appreciate all that color. And then I guess just a second question here on kind of the credit and provision outlook. With the expected growth that you're anticipating here in the back half of the year, do you feel like this quarter's provision level is kind of a good bogey for the next couple of quarters? Or do you think this quarter was a little bit higher?

[Michele Kawiecki, EVP & CFO at First Merchants]

I don't know if this quarter is a little bit higher. You know, we had, certainly we're providing for growth as we've always said, and we'll continue to do that probably at the level of the coverage ratio that we have today. You know, it just kinda depends on whether the we've gotta make adjustments for the macroeconomic outlook. And so in q two, of course, the unemployment rate forecast, know, required more provision, but then that also got offset with, some of the asset quality improvement that we saw. And so I think going forward, I presume presuming that the macroeconomic forecasts are pretty stable, I think we'll just continue to provide for the growth that we see in our balance sheet.

[Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)]

Got it. Okay, great. That's all that I had. Thanks for all the color.

[Michele Kawiecki, EVP & CFO at First Merchants]

Thanks, Damon.

[Operator]

One moment for our next question. Our next question comes from Brian Martin with Janney. Your line is open.

[Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott]

Hey, good morning, everyone.

[Mark Hardwick, CEO & Director at First Merchants]

Good morning.

[Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott]

Hey, just a couple. Michelle, you answered most everything on the margin, but just in terms of the cost of deposits, I guess your expectation is that trends up from here. And I guess I understand it may be incremental based on, and that's kind of assuming, as you said, to your point earlier about no changes from the Fed right now, kind of a stable rate environment, given the loan growth, the competitive factors, that should just drift a bit higher in the back half of the year?

[Michele Kawiecki, EVP & CFO at First Merchants]

It could. You know, it really depends on, I think, the the deposit competition and, you know, how we compete in our markets. And that, you know, it's difficult for us to give you, like, a real

[Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott]

Yep.

[Michele Kawiecki, EVP & CFO at First Merchants]

A real prediction on that.

[Mark Hardwick, CEO & Director at First Merchants]

Yeah, and I thought this was unique, of our commercial balances declined and our line of credit usage went up, which meant we had to go find some funding that was a little more expensive than than what our commercial customers just carrying balances were were paying.

[Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott]

Gotcha. Okay. And then maybe how about just on the fixed rate loan repricing, Michelle, can you remind us what that is, whether, you know, I guess, the back half of the year or next twelve months, what what you may have on that front?

[Michele Kawiecki, EVP & CFO at First Merchants]

Yeah. Sorry. I'm just trying to

[Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott]

That's alright. I can ask one other question for for for someone else while you look at it if you want to. Just I was gonna ask John just from the, you know, the tax legislation being passed, some of your optimism on loan growth on the C and I side is does it stem, know, I guess you're hearing from your customers on the new tax legislation that it gives you more optimism on loan growth as well. And then just same point, the people you, the recent hires you've added, can you just comment if you said it kind of when these people were on board? It doesn't sound like they've contributed yet, but just to be clear on that.

[John Martin, Executive VP & Chief Credit Officer at First Merchants]

I'm gonna defer some of the kind of half and half, Brian. That was Mike Stu answering the questions about the hires, etcetera. I think from the optimism through the portfolio, with the incremental benefits to customers as a result of the bill, it should help to buffer some of the other policy things that have happened as it relates to tariffs and the other moves that have been proposed in the first half of the year. It creates a lot of, I'll say, lack of clarity as to exactly what's going to happen, And so it's it's hard to tell. There's no question that the bill itself, should be should help and provide optimism to our customers, though.

[Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott]

Mhmm. Yeah.

[Michael Stewart, President at First Merchants]

We're operating in the Midwest, and the Midwest right now has really good economic growth, and we're taking advantage of that. Our our businesses, client business models are growing, and they're doing all the right things. We get to review their income statements and their balance sheets and their margins, and they seem to be holding up well, and they're investing in their business. We take market share, so that helps the growth.

[Michael Stewart, President at First Merchants]

And to your last point on people, you're right. Strategic hires have been happening through the course of this year, and the expected inputs or the expected gains on what they can bring to our bank have yet to materialize. So, that helps us with mix and balance and keeping connected in the whole spectrum of what we think is opportunities for first merchants.

[Mark Hardwick, CEO & Director at First Merchants]

Yeah, and this isn't perfect, but we probably meaningful hires on the sales side in the first half, and we have five more in the second half.

[Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott]

Gotcha. Okay. I appreciate that. Thanks, Mark. And thanks, Mike.

[Michele Kawiecki, EVP & CFO at First Merchants]

Hey, Brian. I do have my notes now on the rate loans. And so in the back half of twenty twenty five, we've got about maybe about 200,000,000 of fixed rate loans that are gonna reprice that are currently sitting at about 5%.

[Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott]

Okay. And similar level as you look out 12 over the twelve months, maybe just double that is kind of what you'd be thinking?

[Michele Kawiecki, EVP & CFO at First Merchants]

Yeah. Yep.

[Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott]

Okay. Gotcha. And then just the last one for me was just on the tax rate, just housekeeping. If the current level is a good level to think about?

[Michele Kawiecki, EVP & CFO at First Merchants]

It might creep up a little bit. I'd say it more, I would plan for it to approach maybe 13% in the back half of the year.

[Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott]

Okay, perfect. Thank you for taking the questions, and congratulations on the successes.

[Michele Kawiecki, EVP & CFO at First Merchants]

Thanks, Fred.

[Mark Hardwick, CEO & Director at First Merchants]

Thank you.

[Operator]

And I'm not showing any further questions at this time. I'd like to turn the call back over to Mark Hartwick for any further remarks.

[Mark Hardwick, CEO & Director at First Merchants]

Yeah. Kevin, thank you for hosting today. We just appreciate all the participation by our analysts and investors and look forward to the second half of the year and talking to you in another ninety days.

[Operator]

Thank you. This concludes today's conference. Thank you for your participation and have a great day. You may now disconnect.

Participants

Executives

• Mark Hardwick, CEO & Director
• Michael Stewart, President
• Michele Kawiecki, EVP & CFO
• John Martin, Executive VP & Chief Credit Officer

Analysts

• Daniel Tamayo, Vice President at Raymond James Financial
• Terry Mcevoy, Managing Director at Stephens Inc
• Brendan Nosal, Director at Hovde Group
• Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies
• Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)
• Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott