First Merchants NASDAQ: FRME executives highlighted first quarter momentum in margin improvement, fee income growth, and progress integrating the recently acquired First Savings Bank, while also acknowledging the quarter’s results were affected by sizable one-time acquisition and balance sheet repositioning charges.
Quarter results included acquisition costs and mortgage repositioning
CEO Mark Hardwick said first quarter reported net income was $27.7 million, or $0.45 per diluted share. Results included “two notable non-core items,” including $17 million of one-time acquisition-related expenses tied to the Feb. 1 legal close of the First Savings acquisition.
Hardwick also said the company “strategically repositioned $357 million of mortgage loans from held for investment to held for sale,” and expects to complete the sale by the end of the second quarter. The loans carry a weighted average coupon of 3.46%, and Hardwick said the liquidity will be used to “immediately pay down higher cost deposits,” with redeployment over time into commercial loans yielding “6%+.” The move resulted in a $29.8 million mark-to-market charge, which management framed as having a tangible book value earnback period of roughly four years.
Excluding the non-core items, Hardwick said adjusted earnings per share totaled $1.03, up from $0.94 a year ago, representing 9.6% growth, which he attributed primarily to net interest margin expansion and “solid fee income growth.”
Revenue growth and margin expansion supported results
CFO Michele Kawiecki said the quarter included two months of operating results from First Savings and delivered “meaningful growth in total revenues.” She reported net interest income increased $12.2 million linked quarter and non-interest income rose $2.5 million linked quarter, driving a $6.3 million increase in pre-tax, pre-provision earnings to $78.7 million.
On a fully tax-equivalent basis, Kawiecki said net interest income was $157.7 million, up $12.4 million linked quarter and $21.3 million from the prior-year period. She noted net interest income benefited from a $1.2 million recovery tied to the successful resolution of a nonaccrual loan. Net interest margin was 3.35%, up six basis points from the prior quarter, despite a five-basis-point headwind from the quarter’s lower day count.
Looking ahead, Kawiecki said margin should improve modestly through the year. Regarding the planned mortgage loan sale, she said the near-term impact would be “a little more neutral right out of the gate” as proceeds are used to pay down higher-cost deposits (which she suggested were averaging about 3.80%), while redeployment into higher-yielding loans will occur over the next 18 to 24 months. She added that, excluding the first-quarter day count effect, she expects the margin to “tick up a few basis points” through the remainder of the year.
Loan and deposit trends: flat organic growth, remixing deposits
President Mike Stewart said the quarter was “busy with the closing of First Savings Bank and the preparation for the May integration date.” He said the legal close increased the loan portfolio size, but organic growth was “relatively flat” as declines in sponsor finance and investment real estate outpaced C&I growth in regional banking markets.
Stewart described the declines as normal-course payoffs—such as sponsors selling portfolio companies or real estate projects taking out financing in the secondary market—and said he expects growth in those portfolios to resume in the second quarter. He reaffirmed expectations for “mid-single-digit” loan growth through 2026 and told analysts the commercial pipelines are “as strong as they have been historically.” Hardwick added that the paydowns occurred in the ways the company would “hope they would come,” even if the timing was more first-quarter heavy than expected.
On deposits, Stewart said the core relationship-focused franchise showed growth across commercial, consumer, and Southern Indiana, while declines came from public funds, consumer CDs, and repayment of First Savings broker deposits—categories he characterized as higher cost than operating accounts. Kawiecki reported the average rate paid on deposits declined 23 basis points to 2.09%, driven by strategic deposit rate reductions following late-2025 Fed rate cuts. She also said non-interest-bearing deposits increased to 23% from 16% in the prior quarter, which she tied to a redesign of consumer checking account products.
In response to questions about sustainability, Kawiecki said the checking account migration has been stable with no anticipated runoff, and she expects non-interest-bearing deposits to remain in the 22% to 23% range. She said deposit pricing remains competitive and she does not anticipate meaningfully lowering deposit rates further, expecting overall costs to be “more steady.”
Expenses, integration timeline, and First Savings verticals
Non-interest expense totaled $125.1 million, including $17 million of acquisition-related costs, according to Kawiecki. She also cited $1.1 million of annual benefit plan expense and a one-time $900,000 building write-down. She said cost synergies from the First Savings acquisition are “on track” and that legacy First Merchants expenses are in line with prior guidance.
For the combined company, Kawiecki provided a quarterly expense run-rate expectation of roughly $111 million to $114 million as synergies are realized, and reiterated that legacy First Merchants expenses were guided to a 3% to 5% year-over-year increase.
Management repeatedly emphasized integration progress, with Stewart saying efforts are on track for the mid-May integration date, with minimal frontline turnover and “clients continue to be patient during the transition.”
Stewart and Hardwick also discussed First Savings’ specialty verticals—triple net lease, first-lien HELOC, and SBA—as contributors to growth and fee income. Stewart said production in the triple net lease and first-lien HELOC businesses has remained stable through the closing and integration period. He described first-lien HELOC primarily as an “originate and sell” model with established buyers and secondary servicers, generating fee income. On SBA, Stewart said First Savings produced around $100 million of SBA transactions last year and that first quarter production was higher than that pace, while First Merchants’ SBA production last year was less than $10 million. He said the SBA team will serve as a fulfillment resource for existing small business and community banking teams.
On non-interest income, Kawiecki said normalized non-interest income was $35.6 million in the first quarter and she expects a lift of about 3% to 4% in coming quarters as First Merchants realizes a full quarter of First Savings results and gains on loan sales from the verticals and the mortgage business.
Credit quality stable; capital supports buybacks
Chief Credit Officer John Martin said overall credit performance remained solid, with C&I line utilization rising modestly to 51%, which he characterized as healthy borrower activity rather than stress. He said the shared national credit portfolio totals about $1 billion across 90 diversified borrowers, sponsor finance outstandings are approximately $832 million, and retail CRE exposure is $859 million, largely credit-tenant and triple net leased.
Martin said asset quality remained stable and nonaccruals were manageable, with the largest relationship tied to income-producing real estate, including a $9.9 million multifamily construction credit and two office-related exposures totaling roughly $12 million. He said credit issues remain “idiosyncratic rather than systemic.” During the quarter, he said the company added a $12 million nonaccrual office relationship, largely offset by a payoff of a $12.9 million multifamily construction credit.
Kawiecki reported net charge-offs of $10.3 million and a $4.9 million provision, noting the transfer of $357 million of loans to held for sale reduced reserve needs and contributed to a lower provision than the prior quarter. She said the allowance for credit losses totaled $212.5 million at quarter-end, representing a 1.39% coverage ratio.
On capital, Hardwick said tangible common equity remained strong at 9% even after the acquisition and share repurchases. Kawiecki said the company repurchased more than 700,000 shares for $27.6 million year to date, and told analysts the company expects to remain active in buybacks given its valuation. She also said the company estimates pending Basel capital proposals could benefit First Merchants by roughly 50 to 80 basis points, driven largely by risk-weighted asset relief on mortgage products.
In closing remarks, Hardwick said management remains “incredibly optimistic about the remainder of the year,” citing expectations for stronger balance sheet growth after a flat first quarter, improving margin dynamics, double-digit fee income growth trends, and ongoing expense discipline, alongside continued focus on completing the First Savings integration.
About First Merchants NASDAQ: FRME
First Merchants Corporation, through its subsidiary First Merchants Bank, offers a comprehensive suite of banking and financial services to individuals, businesses and public sector clients. The company's core business activities include retail and commercial banking, lending, treasury and cash management, and wealth advisory services. With a focus on relationship banking, First Merchants seeks to deliver tailored solutions for deposit accounts, loan financing and other credit products.
On the consumer side, First Merchants provides checking and savings accounts, certificates of deposit, personal and mortgage loans, and electronic banking conveniences.
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