First Merchants Q2 Earnings Call Highlights

Key Points

• First Merchants beat on earnings in Q2 2026 with net income of $43.5 million, or $0.70 per share, as stronger net interest income and margin expansion helped offset credit costs.
• The bank’s net interest margin rose to 3.38%, aided by lower funding costs, improved loan yields, and the payoff from a mortgage loan sale that reduced higher-cost brokered and wholesale funding.
• Credit issues weighed on results after two commercial loans were moved to non-accrual, driving a $33 million provision for credit losses and pushing management to expect higher charge-offs in the second half of 2026.

First Merchants NASDAQ: FRME reported second-quarter 2026 net income of $43.5 million, or $0.70 per diluted share, as stronger revenue and margin expansion were offset by credit costs tied to two commercial loans moved to non-accrual status.

Chief Executive Officer Mark Hardwick said the company was “disappointed” by the two downgrades but said management does not view them as representative of the broader loan portfolio. The bank recorded adjusted pre-tax, pre-provision earnings of $84.6 million, up 7.5% from the prior quarter, while net interest margin expanded to 3.38%.

Hardwick said First Merchants ended the quarter with $21.3 billion in total assets, $15.5 billion in loans and $16.8 billion in deposits. The company now operates 126 banking centers, reflecting the addition of Southern Indiana locations following the First Savings acquisition.

Loan Growth Rebounds, Deposits Rise Seasonally

President Mike Stewart said loan growth returned to more typical levels after a flat first quarter. Commercial and consumer loans each grew at nearly a 6% annualized rate in the second quarter, with activity coming across the bank’s three-state footprint.

“Our Midwest economies continue to expand, our clients’ businesses continue to grow, and our bankers continue to win new relationships,” Stewart said. He said the company remains confident in its expectation for mid-single-digit loan growth through the end of 2026.

Deposits grew at a 6.5% annualized rate in the quarter. Stewart attributed commercial deposit growth primarily to seasonal public fund increases tied to tax collections and a large temporary deposit from a client’s business sale. He said consumer deposit declines were also seasonal, reflecting spending of tax refunds, and that the patterns should normalize through the rest of the year.

Margin Expands as Funding Costs Decline

Chief Financial Officer Michele Kawiecki said second-quarter total revenue increased meaningfully, with net interest income up $7.6 million from the prior quarter and non-interest income up $1.6 million after normalizing for a $29.8 million loss on mortgage loans sold in the first quarter.

Net interest income on a fully tax-equivalent basis totaled $165.3 million, up $7.6 million linked quarter and $26.1 million from the prior-year period. Kawiecki said the company’s pricing discipline on both loans and deposits helped drive margin expansion despite Federal Reserve rate cuts in the fourth quarter of 2025.

The rate paid on deposits declined to 2.07% in the quarter, and Kawiecki said the bank used $271 million in proceeds from the completed mortgage loan sale to reduce higher-cost brokered deposits and wholesale funding. She said the mortgage loan sale added liquidity to the balance sheet.

Loan yields also improved modestly. The held-for-investment loan portfolio yield rose two basis points from the prior quarter to 6.11%, while new and renewed loans were originated at an average yield of 6.28%, compared with 6.18% in the prior quarter.

Two Credits Drive Provision Increase

Chief Credit Officer John Martin said the bank recorded a $33 million provision for credit losses in the quarter, largely due to $29.7 million in specific reserves established on two commercial credits. Net charge-offs totaled $3.9 million, and the allowance for credit losses ended the quarter at $241.6 million, representing a coverage ratio of 1.56%.

The larger credit was a $28.1 million participation in a syndicated loan to an authorized wireless retailer. Martin said new company-specific information received after quarter-end led the bank to place the loan on non-accrual status. He said negotiations with the borrower remain active and that the company expects “substantially greater visibility” into the likely resolution by the end of the fourth quarter.

The second credit was a $13.7 million sponsor-financed loan to a commercial and residential roofing contractor. Martin said the loan had been on the watchlist for three quarters and was moved to non-accrual in July after the sponsor informed the bank it no longer intended to support the company.

Non-accrual loans increased to $118.2 million, while non-performing assets plus loans 90 days past due rose to $129.5 million, or 0.83% of loans. Classified loans increased to $393.3 million from $357.1 million in the prior quarter.

Martin said the increase was driven primarily by a limited number of borrower relationships rather than broad-based portfolio deterioration. He said First Merchants expects a meaningful portion of the loss content associated with the two non-accrual relationships to be realized through charge-offs in the third and fourth quarters. Full-year 2026 net charge-offs are expected to trend into the 40 to 45 basis point range, largely due to those known credits.

First Savings Integration Complete

Hardwick said First Merchants has completed the integration and related expense savings from the First Savings acquisition, positioning the company for the next quarter. Kawiecki said acquisition-related costs totaled $3.8 million in the second quarter, primarily in professional and outside services and equipment expense categories, and said expected cost synergies remain on track.

During the question-and-answer session, Stewart said the Southern Indiana commercial team is “off to a great start,” with commercial activity growing during the quarter. He said First Savings’ specialty verticals, including SBA lending, first-lien HELOCs and triple-net lease lending, are performing as expected.

Kawiecki reiterated expense guidance for the remainder of 2026, saying quarterly total expense run rate is expected to remain between $111 million and $114 million. She also said the company expects a normalized organic expense growth rate of roughly 3% to 5% going forward as it invests in talent and technology.

Capital and Outlook

Tangible book value per share increased $0.46, or 1.6%, from the prior quarter to $29.80. The tangible common equity ratio was 8.99%. Kawiecki said First Merchants repurchased just under 1 million shares for $38.3 million year to date.

Hardwick said the company expects to continue share repurchase activity through the remainder of the year if the stock price remains in a similar range. He said management continues to view buybacks as a good use of capital while also supporting loan growth and dividends.

On interest margin, Kawiecki said the company is assuming no Federal Reserve rate changes for the rest of the year. Under that scenario, she said First Merchants would expect margin to increase by “maybe a couple basis points” in the second half, though competitive deposit pricing remains a variable.

Hardwick said the first half of the year was “a little noisy,” citing both progress on integration and the completed mortgage loan sale as positives, while acknowledging the credit issues that pressured second-quarter results. He said he is “enthusiastic and excited” about what the second half of 2026 should represent for the company.

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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