First Merchants (FRME) Q4 2025 Earnings Transcript

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DATE

Jan. 27, 2026 at 9 a.m. ET

CALL PARTICIPANTS

- Chief Executive Officer — Mark Hardwick

- President — Michael Stewart

- Chief Credit Officer — John Martin

- Chief Financial Officer — Michele Kawiecki

Full Conference Call Transcript

Mark Hardwick: Good morning, and welcome to First Merchants' Fourth Quarter 2025 Earnings Call. Thanks for the introduction and for covering the forward-looking statements. We released our earnings yesterday after the market closed, you can access today's slides by following the link on the third page of our earnings release. Joining me today are President, Mike Stewart; Chief Credit Officer, John Martin; and Chief Financial Officer, Michele Kawiecki. On Slide 4, you'll see our 111 banking centers across Indiana, Ohio and Michigan, along with several recent awards recognizing our culture and performance. We ended the year with record total assets of $19 billion, record total loans of $13.8 billion and record total deposits of $15.3 billion.

On Slides 5 and 6, our strong balance sheet and earnings performance reflect the quality of the First Merchants team, our customer base and our community-oriented business model. For the full year, we delivered record net income of $224.1 million and record diluted earnings per share of $3.88, an increase of 13.8% from the previous year. Fourth quarter net income totaled $56.6 million or $0.99 per share. Annual return on assets was 1.21% and annual return on tangible common equity was 14.08%. Loan growth remained robust with $197 million of linked quarter growth or 5.8% annualized and nearly $1 billion or $939 million of growth for the year, representing 7.3%.

Our efficiency ratio was 54.5% for the year, and we achieved significant operating leverage with revenues growing almost 5x faster than expenses. We have now received all regulatory and shareholder approval to proceed with the acquisition of First Savings Group, which adds approximately $2.4 billion of assets and expands our presence into Southern Indiana and the Louisville MSA. We remain confident in our strategic and financial benefits of the merger, and we will actually close this weekend on February 1, 2026. Now Mike Stewart will cover some of our line of business metrics.

Michael Stewart: Thank you, Mark, and good morning to all. The business strategy summarized on Slide 7 has been updated to reflect the collective work of our lines of business leadership teams. Each of these business units refined and updated their strategy in alignment with our primary focus of building on our Midwestern strength, growing organically through deeper relationships and smarter use of technology for enhanced client relationship and internal efficiencies. 2025 was a year of momentum and record results. This slide summarizes how our teams have been winning and capturing market share. We remain a commercially focused organization across all these business segments with an eye on growing within the markets pictured on the next slide.

So let's go to Slide 8. As Mark stated earlier, this was another great quarter of loan growth across all segments and across all markets. It is 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. $153 million in commercial loan growth for the quarter or 6% annualized, $852 million of increased commercial loan balances year-to-date, nearly 7% growth rate for all 2025. CapEx financing, increased usage of revolvers, M&A financing and new business conversion are the drivers of this growth.

Another encouraging bullet point on this page is the quarter ending pipeline, which is stable from prior quarter and gives me optimism that we will be able to maintain our loan growth into the first quarter. The Consumer segment also shared in balance sheet growth with the residential mortgage, HELOC and private banking relationships driving the $44 million of loan growth for the quarter and the $87 million for all 2025. Pipelines in this segment also consistent from our end of quarter prior. So we can turn to Slide 9 and talk about deposits. The fourth quarter was our strongest quarter of deposit growth with the consumer segment driving increases in new households and balances.

Enhanced digital platforms are deepening our client relationships. Our marketing efforts are leveraging the strength of our local brand and the reputation that we have and driving new relationships. The bottom section of this page summarizes the fourth quarter growth of $155 million of total consumer deposit increases with over $250 million in non-maturity balance growth. The full year's results also reflect the growth in the mix of non-maturity and maturity balances assisting in the margin improvement Michele will review next. Commercial business segment is summarized on the top of the page. While deposits have increased in both the quarter and year-to-date, the primary driver has come through our public fund depository relationships. It is a higher cost of deposit, but they are local government and public relationships that utilize many other treasury services we offer. Part of the increase in loan balances come from higher line of credit utilization, which typically reduces operating deposit account balances. Improving the mix of all deposit categories has been the focus of our teams for the past year and has been accomplished by focusing on primary core accounts and deposit cost. Overall, I'm pleased with the active engagement our teams are having with their clients as we've continued our pricing discipline, specifically with maturity deposits and public funds and remain hyper focused on relationships and converting single product users.

Before turning the call over to Michele, one last comment regarding First Savings Bank. As Mark said, our integration efforts are on track. The engagement of their team has been strong. We have completed our product and process mapping. So post legal close, we will begin the on-site training and preparation for the May integration. Their community bank model and specialty verticals have a solid reputation and continuing their growth within Southern Indiana in these verticals will be our priority. So I'm going to turn the call over to Michele now, and she can review in more detail the drivers of our balance sheet and income statement. Michele?

Michele Kawiecki: Thanks, Mike, and good morning, everyone. Slide 10 covers our fourth quarter performance, which reflects a continuation of positive financial trends we had throughout 2025. Total revenues in Q4 were strong with meaningful growth in both net interest income of $5.4 million and noninterest income of $0.6 million. This resulted in overall pretax pre-provision earnings of $72.4 million, up $1.9 million from prior quarter. Strong earnings drove a 4% increase in tangible book value per share on a linked-quarter basis. Turning to annual results on Slide 11. We delivered record diluted EPS and achieved an all-time high tangible book value per share in 2025. Year-over-year positive trends include double-digit net income growth of 12.2% and positive operating leverage.

Tangible book value per share ended the year at $30.18, which is an increase of $3.40 or 12.7% from prior year. Slide 12 shows details of our investment portfolio. On the bottom right, you will see the valuation of the portfolio improved meaningfully during the quarter due to changes in interest rates. The unrealized loss on the available-for-sale portfolio declined $30 million or 15%. Expected cash flows from scheduled principal and interest payments and bond maturities over the next 12 months totaled $282 million with a roll-off yield of approximately 2.09%. 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 total loan portfolio yield declined by 8 basis points from the prior quarter to 6.32% due to the impact of recent Fed rate cuts. This quarter, new and renewed loans were originated with a yield of 6.51%, which remains a tailwind for the overall portfolio yield. The allowance for credit losses is shown on Slide 14. This quarter, we had net charge-offs of $6 million and recorded a $7.2 million provision. The reserve at quarter end was $195.6 million and the coverage ratio of 1.42% remained robust. In addition to the ACL, we have $13.4 million of remaining fair value marks on acquired loans, providing additional coverage for potential losses. Slide 15 shows details of our deposit portfolio.

The rate paid on deposits declined meaningfully by 12 basis points to 2.32% this quarter. Our team strategically reduced deposit rates following the Fed's rate cuts, resulting in a $3 million reduction in interest expense even as deposits grew $424.9 million or 11.4% annualized in the fourth quarter. On Slide 16, net interest income on a fully tax equivalent basis of $145.3 million increased $5.4 million linked quarter and was up $5.1 million from the same period in prior year. Net interest income was positively impacted by a $3.3 million recovery from a successful resolution of a nonaccrual loan. Our quarterly net interest margin of 3.29% increased 5 basis points from prior quarter.

Our teams continue to stay focused on growing loans and deposits using disciplined pricing and our net interest income growth trend throughout 2025 is evidence of their success. Next, Slide 17 shows the details of noninterest income, which totaled $33.1 million with customer-related fees of $30 million. Customer-related fees were strong in all categories with notable quarter-over-quarter growth in wealth management fees of approximately $300,000, card payment fees of $300,000 and gains on sales of mortgage loans of $400,000. Moving to Slide 18. Noninterest expense for the quarter totaled $99.5 million, an increase of $3 million or 3% linked quarter.

Expenses for the quarter included $500,000 of acquisition costs, which were offset by a reduction of the FDIC special assessment accrual of $700,000. Full year noninterest expense increased only $3.2 million or less than 1%, demonstrating significant operating leverage. Slide 19 shows our capital ratios. The tangible common equity ratio benefited from strong earnings and AOCI recapture, increasing 20 basis points to 9.38% while returning capital to shareholders through share repurchases and dividends. During the quarter, we repurchased 272,000 of shares for $10.4 million, bringing total share repurchases in 2025 to just over 1.2 million shares for $46.9 million.

We remain well capitalized with a common equity Tier 1 ratio at 11.7% and are well positioned to support continued balance sheet growth. That concludes my remarks, and I will now turn it over to Chief Credit Officer, John Martin, to discuss asset quality.

John Martin: Thanks, Michele, and good morning. My remarks begin on Slide 20. We had strong loan growth for both the year and the quarter of 7.3% and 5.8%, respectively, led by C&I loans shown on line 4, which grew nearly $700 million for the year. While we experienced strong C&I loan demand, we saw more moderate growth in investment real estate for the year and quarter on Line 7 as higher rates slow demand and assets moved into the permanent financing market. The diversity of lending types our teams continue to originate has allowed us to grow as demand varies across various asset classes. On Slide 21 and Slide 22, we again provided more detail of the loan portfolio.

On Slide 21, the C&I classification includes sponsor finance as well as owner-occupied CRE. Current line utilization leveled off during the quarter, declining slightly from 50% to 49.8% after climbing in the first half of 2025. In the sponsor finance portfolio, we track key credit metrics across 90 platform companies. We took a $4.4 million charge in the quarter to an individual borrower. We underwrite to higher origination standards compared to traditional C&I loans and track the portfolio quarterly. The portfolio almost exclusively consists of single bank credits for private equity-backed platform companies as opposed to large, widely syndicated leveraged loans from money center banks trading desks.

On Slide 22, we break out the investment or nonowner-occupied commercial real estate portfolio. Our office loans are detailed on the bottom half of the slide, represent only 1.9% of total loans and any potential issues are easily managed. The wheel chart on the bottom right details the office portfolio maturities, loans maturing in less than a year represent 28.1% of the portfolio or roughly $73 million. On Slide 23, I highlight this quarter's asset quality trends and position. Asset quality remains strong. NPAs and 90-day past due loans on line 4 were up $5.6 million or 2.54%. The largest nonaccrual, a $12.9 million investment real estate multifamily construction project paid off without loss of principal shortly after quarter end.

Adjusting for this payoff, NPAs and 90-day past due loans would have fallen to 0.45%, down year-over-year from 0.66%. Turning to the asset quality migration roll forward on Slide 24 in column 4Q '25, there were new nonaccruals of $22.8 million on Line 2, the largest of which was a $9.6 million investment real estate multifamily construction project. We had a $9.1 million reduction on Line 3 from payoffs or changes in accrual status primarily related to a nursing facility that had been one of the prior quarter's largest nonaccruals that paid off.

During dropping down to Line 5, there were $7.3 million in gross charge-offs, the largest of which was the $4.4 million sponsor finance C&I borrower I mentioned earlier. Then dropping down to Lines 12 and 13, we ended the quarter up $5.6 million, excluding the early quarter payoff with NPAs and 90-day past due loans totaling $74.5 million. To summarize, asset quality remains stable and improving. Classified loan balances are largely unchanged at 2.56% of loans with 18 basis points of annualized net charge-offs. We continue to grow C&I loans with our commercially oriented teams. And finally, we are excited about the local opportunities and new business verticals First Savings Bank brings as we head into 2026.

I appreciate your attention, and I'll turn the call back over to Mark Hardwick.

Mark Hardwick: Thanks, John. Slides 25 and 26 have been updated, along with our 10-year combined aggregate growth rates. As we look forward to '26, we're committed to supporting our world-class teammates and serving the needs of our clients, which will deliver the high-quality results our shareholders have come to expect. We appreciate your interest and your investment in First Merchants. And at this point, we're happy to take questions. Thank you.

Operator: [Operator Instructions] Our first question is going to come from the line of Brendan Nosal w